CREDIT TRANSACTIONS DIGESTS

I. LOANS
1. SAURA IMPORT & EXPORT CO., INC.VS. DBP
GR No. L-24968, 27 April 972, 44 SCRA 445
FACTS: Saura applied to the Rehabilitation Finance Corporation (RFC), before its conversion into
DBP, for an industrial loan to be used for construction of factory building, for payment of the balance
of the purchase price of the jute machinery and equipment and as additional working capital. In
Resolution No.145, the loan application was approved to be secured first by mortgage on the factory
buildings, the land site, and machinery and equipment to be installed.
The mortgage was registered and documents for the promissory note were executed. The
cancellation of the mortgage was requested to make way for the registration of a mortgage contract
over the same property in favor of Prudential Bank and Trust Co., the latter having issued Saura letter
of credit for the release of the jute machinery. As security, Saura execute a trust receipt in favor of the
Prudential. For failure of Saura to pay said obligation, Prudential sued Saura.
After 9 years after the mortgage was cancelled, Saura sued RFC alleging failure to comply with tits
obligations to release the loan proceeds, thereby prevented it from paying the obligation to Prudential
Bank.
The trial court ruled in favor of Saura, ruling that there was a perfected contract between the parties
ad that the RFC was guilty of breach thereof.
ISSUE: Whether or not there was a perfected contract between the parties.
HELD: The Court held in the affirmative. Article 1934 provides: An accepted promise to deliver
something by way of commodatum or simple loan is binding upon the parties, but the commodatum
or simple loan itself shall not be perfected until delivery of the object of the contract.
There was undoubtedly offer and acceptance in the case. When an application for a loan of money
was approved by resolution of the respondent corporation and the responding mortgage was
executed and registered, there arises a perfected consensual contract.
2. BONNEVIE V. CA
GR No. L-49101 October 24, 1983
FACTS: Spouses Lozano mortgaged their property to secure the payment of a loan amounting to
75K with private respondent Philippine Bank of Communication (PBCom). The deed of mortgage was
executed on 12-6-66, but the loan proceeeds were received only on 12-12-66. Two days after the
execution of the deed of mortgage, the spouses sold the property to the petitioner Bonnevie for and in
consideration of 100k—25K of which payable to the spouses and 75K as payment to PBCom.
Afterwhich, Bonnevie defaulted payments to PBCom prompting the latter to auction the property after
Bonnivie failed to settle despite subsequent demands, in order to recover the amount loaned. The
latter now assails the validity of the mortgage between Lozano and Pbcom arguing that on the day
the deed was executed there was yet no principal obligation to secure as the loan of P75,000.00 was
not received by the Lozano spouses, 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.
ISSUE: Was there a perfected contract of loan?
HELD: Yes. 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

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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 mortgage was executed. The promissory note
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.
3. BPI INVESTMENT CORPORATION VS. CA
GR No. 133632, 15 February 2002, 377 SCRA 117
FACTS: Frank Roa obtained a loan from Ayala Investment and Development Corporation (AIDC), for
the construction of his house. Said house and lot were mortgaged to AIDC to secure the loan. Roa
sold the properties to ALS and Litonjua, the latter paid in cash and assumed the balance of Roa’s
indebtedness wit AIDC. AIDC was not willing to extend the old interest to private respondents and
proposed a grant of new loan of P500,000 with higher interest to be applied to Roa’s debt, secured by
the same property. Private respondents executed a mortgage deed containing the stipulation. The
loan contract was signed on 31 March 1981 and was perfected on 13 September 1982, when the full
loan was released to private respondents.
BPIIC, AIDC’s predecessor, released to private respondents P7,146.87, purporting to be what was
left of their loan after full payment of Roa’s loan. BPIIC filed for foreclosure proceedings on the
ground that private respondents failed to pay the mortgage indebtedness. Private respondents
maintained that they should not be made to pay amortization before the actual release of the
P500,000 loan. The suit was dismissed and affirmed by the CA.
ISSUE: Whether or not a contract of loan is a consensual contract.
HELD: The Court held in the negative. A loan contract is not a consensual contract but a real
contract. It is perfected only upon delivery of the object of the contract. A contract o loan involves a
reciprocal obligation, wherein the obligation or promise of each party is the consideration for that of
the other; it is a basic principle in reciprocal obligations that neither party incurs in delay, if the other
does not comply or is not ready to comply is a proper manner with what is incumbent upon him.
4. NAGUIAT VS CA AND QUEAÑO
GR No. 118375, 03 October 2003, 412 SCRA 591
FACTS: Queaño applied with Naguiat a loan for P200,000, which the latter granted. Naguiat indorsed
to Queaño Associated bank Check No. 090990 for the amount of P95,000 and issued also her own
Filmanbank Check to the order of Queaño for the amount of P95,000. The proceeds of these checks
were to constitute the loan granted by Naguiat to Queaño. To secure the loan, Queaño executed a
Deed of Real Estate Mortgage in favor of Naguiat, and surrendered the owner’s duplicates of titles of
the mortgaged properties. The deed was notarized and Queaño issued to Naguiat a promissory note
for the amount of P200,000. Queaño also issued a post-dated check amounting to P200,000 payable
to the order of Naguait. The check was dishonoured for insufficiency of funds. Demand was sent to
Queaño. Shortly, Queaño, and one Ruby Reubenfeldt met with Naguiat. Queaño told Naguiat that
she did not receive the loan proceeds, adding that the checks were retained by Reubenfeldt, who
purportedly was Naguiat’s agent.
Naguiat applied for extrajudicial foreclosure of the mortgage. RTC declared the Deed as null and void
and ordered Naguiat to return to Queaño the owner’s duplicates of titles of the mortgaged lots.
ISSUE: Whether or not the issuance of check resulted in the perfection of the loan contract.
HELD: The Court held in the negative. No evidence was submitted by Naguiat that the checks she
issued or endorsed were actually encashed or deposited. The mere issuance of the checks did not
result in the perfection of the contract of loan. The Civil Code provides that the delivery of bills of
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exchange and mercantile documents such as checks shall produce the effect of payment only when
they have been cashed. It is only after the checks have been produced the effect of payment that the
contract of loan may have been perfected.
Article 1934 of the Civil Code provides: An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itsel
shall not be perfected until the delivery of the object of the contract. A loan contract is a real contract,
not consensual, and as such, is perfected only upon the delivery of the objects of the contract.
5. CAROLYN M. GARCIA VS. RICA MARIE S. THIO
GR No. 154878, 16 March 2007
FACTS: Respondent Thio received from petitioner Garcia two crossed checks which amount to
US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago. According to
petitioner, respondent failed to pay the principal amounts of the loans when they fell due and so she
filed a complaint for sum of money and damages with the RTC. Respondent denied that she
contracted the two loans and countered that it was Marilou Satiago to whom petitioner lent the
money. She claimed she was merely asked y petitioner to give the checks to Santiago. She issued
the checks for P76,000 and P20,000 not as payment of interest but to accommodate petitioner’s
request that respondent use her own checks instead of Santiago’s.
RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no contract of loan
between the parties.
ISSUES:
(1) Whether or not there was a contract of loan between petitioner and respondent.
(2) Who borrowed money from petitioner, the respondent or Marilou Santiago?
HELD:
(1) The Court held in the affirmative. A loan is a real contract, not consensual, and as such I perfected
only upon the delivery of the object of the contract. Upon delivery of the contract of loan (in this case
the money received by the debtor when the checks were encashed) the debtor acquires ownership of
such money or loan proceeds and is bound to pay the creditor an equal amount. It is undisputed that
the checks were delivered to respondent.
(2) However, the checks were crossed and payable not to the order of the respondent but to the order
of a certain Marilou Santiago. Delivery is the act by which the res or substance is thereof placed
within the actual or constructive possession or control of another. Although respondent did not
physically receive the proceeds of the checks, these instruments were placed in her control and
possession under an arrangement whereby she actually re-lent the amount to Santiago.
Petition granted; judgment and resolution reversed and set aside.
6. POLO PANTALEON VS AMERICAN EXPRESS INTERNATIONAL INC.
G.R. No. 174269, May 8, 2009
FACTS: Polo Pantaleon went on a tour with his family in Europe. While they were in Amsterdam,
Mrs. Pantaleon decided to purchase some diamond pieces. Mr. Pantaleon used his AMEX credit card
to pay for the said diamonds. It took AMEX a total of 78 minutes to approve the purchase and to
transmit the approval to the jewelry store. The travel companions of the Pantaleon family got irritated
because they had to cancel the city tour due to the delay in the purchase of the diamonds. The same
thing also happened when the family was in the US.
ISSUE: Whether or not AMEX has committed a breach of its obligation to Pantaleon.
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RULING: Yes, AMEX committed a breach of its obligation. It is the obligation of the respondent, as a
debtor/obligor, to act on the purchase of the petitioner with timely dispatch. The culpable failure of the
respondent herein is not the failure to timely act on the same but the failure to promptly informed
petitioner the reason for the delay, and duly advised him that resolving the same could take some
time.
Fallo: Wherefore, the petition is granted. The assailed decision of the Court of Appeals is reversed
and set aside. The decision of the Regional Trial Court of Makati Branch 145 is hereby reinstated.
Costs against the respondent.
B. COMMODATUM
1. MINA V. PASCUAL, 25 PHIL 540
FACTS: Francisco is the owner of land and he allowed his brother, Andres, to erect a warehouse in
that lot. Both Francisco and Andres died and their children became their respective heirs: Mina for
Francisco and Pascual for Andres. Pascual sold his share of the warehouse and lot. Mina opposed
because the lot is hers because her predecessor (Francisco) never parted with its ownership when he
let Andres construct a warehouse, hence, it was a contract of commodatum.
ISSUE: What is the nature of the contract between Francisco and Andres?
RULING: The Supreme Court held that it was not a commodatum. It is an essential feature of
commodatum that the use of the thing belonging to another shall be for a certain period. The parties
never fixed a definite period during which Andres could use the lot and afterwards return it.
NOTA BENE: It would seem that the Supreme Court failed to consider the possibility of a contract of
precardium between Francisco and Andres. Precardium is a kind of commodatum wherein the bailor
may demand the object at will if the contract does not stipulate a period or use to which the thing is
devoted.
2. QUINTOS vs. BECK, 69 Phil 108
FACTS: Beck is a tenant of defendant Margarita Quintos. As such, Beck occupied Quintos’ house.
Quintos granted Beck the use of the furniture found on the leased house, among these were three
gas heaters and 4 electric lamps, subject to the condition that the defendant would return them to the
plaintiff upon the latter's demand. Quintos sold the pieces of furniture to Maria Lopez and Rosario
Lopez and thereafter notified Beck of the conveyance. Beck informed Quintos that the latter canget
the furniture at the ground floor of the house, however, at a later date, Beck told Quintos that he will
return only the other furniture but not the gas heaters and the electric lamps as he is to return them
only after the expiration of the lease contract. When the lease contract expires, Beck deposited the
furniture to the sheriff’s warehouse. Quintos refused to get the furniture in view of the fact that the
defendant had declined to make delivery of all of them. Consequently, Quintos brought an action to
compel Beck to return her certain furniture which she lent him for his use. The trial court ruled in
favour of Beck holding that Quintos failed to comply with her obligation to get the furniture when they
were offered to her. On appeal of the case, the Court of First Instance of Manila affirmed the lower
court’s decision. Hence, this petition.
ISSUE: Whether or not the trial court erred in ruling that Quintos failed to comply with her obligation
to get the furniture when they were offered to her.
HELD: The contract entered into between the parties is one of commodatum. Under it the plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the ownership
thereof. By this contract the defendant bound himself to return the furniture to the plaintiff, upon the
latter’s demand. The obligation voluntarily assumed by the defendant to return the furniture upon the
plaintiff's demand, means that he should return all of them to the plaintiff at the latter's residence or
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house. The defendant did not comply with this obligation when he merely placed them at the disposal
of the plaintiff, retaining for his benefit the three gas heaters and the four electric lamps. The trial
court, therefore, erred when it came to the legal conclusion that the plaintiff failed to comply with her
obligation to get the furniture when they were offered to her.
3. REPUBLIC VS CA
FACTS: The heirs of Domingo Baloy, represented by Ricardo Baloy, filed an application for land
registration with a possessory title acquired under the provisions of the Spanish Mortgage Law. The
Court of First Instance of Zambales, denied the application thus it was interposed on appeal to the
Court of Appeals. The appellate court, thru its Fifth Division reversed the decision and approved the
application for registration. The petitioners filed their Motion for reconsideration and was denied.
A communication/letter which contains an official statement, recognizes the fact that Domingo Baloy
and/or his heirs have been in continuous possession of the said land since 1894, as attested by an
“Informacion Possessoria” Title, which was granted by the Spanish Government. And was interrupted
only by the occupation of the land by the US Navy in 1945.
ISSUES:
(1) Whether or not there is a need for a court order for a private land to be deemed to have become
public land.
(2) Whether or not the private respondents’ rights by virtue of their possessory information title was
lost by prescription.
HELD: The appealed decision is AFFIRMED.
RULING:
(1) Under Sec 3 Act 827. Private land could be deemed to have become public land by virtue of a
judicial declaration after due process and hearing. Without a judgement or order declaring the land to
be public, its private character and the possessory information title over it must be respected.
(2) During the interim of 57 years from November 26, 1902 to December 17, 1959 the possessory
rights of Baloy or his heirs were merely suspended and not lost by prescription. The occupancy of the
US Navy was not in the concept of owner. It partakes of the character of a commodatum. One’s
ownership of a thing may be lost by prescription by reason of another’s possession if such
possession be under claim of ownership, not where the possession is only intended to be transient, in
which case the owner is not divested of his title, although it cannot be exercised in the meantime.
4. DELOS SANTOS V. JARRA
G.R. No. L-4150 February 10, 1910
FACTS: The Plaintiff Felix delos Santos filed this suit against Agustina Jarra. Jarra was the
administratix of the estate of Jimenea. Plaintiff alleged that he owned 10 1st class carabaos which he
lent to his father-in-law Jimenea to be used in the animal-power mill without compensation. This was
done on the condition of their return after the work at the latter’s mill is terminated. When delos
Santos demanded the return of the animals Jimenea refused, hence this suit.
ISSUE: W/N the contracts is one of a commodatum
RULING: YES. The carabaos were given on commodatum as these were delivered to be used by
defendant. Upon failure of defendant to return the cattle upon demand, he is under the obligation to
indemnify the plaintiff by paying him their value. Since the 6 carabaos were not the property of the
deceased or of any of his descendants, it is the duty of the administratrix of the estate to either return
them or indemnify the owner thereof of their value.

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5. CATHOLIC VICAR APOSTOLIC v. CA
G.R. No. L-80294-95 September 21, 1988
Doctrine: The bailees’ failure to return the subject matter of commodatum to the bailor does not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter of
commodatum.
FACTS: Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed an application for
registration of title over Lots 1, 2, 3, and 4, said Lots being the sites of the Catholic Church building,
convents, high school building, school gymnasium, school dormitories, social hall, stonewalls, etc.
The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano filed their Answer/Opposition on Lots
Nos. 2 and 3, respectively, asserting ownership and title thereto since their predecessors’ house was
borrowed by petitioner Vicar after the church and the convent were destroyed.. After trial on the
merits, the land registration court promulgated its Decision confirming the registrable title of VICAR to
Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez appealed the decision of the land registration court to the then Court of
Appeals, The Court of Appeals reversed the decision. Thereupon, the VICAR filed with the Supreme
Court a petition for review on certiorari of the decision of the Court of Appeals dismissing his
application for registration of Lots 2 and 3.
ISSUE: Whether or not the failure to return the subject matter of commodatum constitutes an adverse
possession on the part of the owner
HELD: No. The bailees’ failure to return the subject matter of commodatum to the bailor did not mean
adverse possession on the part of the borrower. The bailee held in trust the property subject matter of
commodatum.
Petitioner repudiated the trust by declaring the properties in its name for taxation purposes.
6. PAJUYO V. CA, G.R. NO. 146364, JUNE 3, 2004
FACTS: Pajuyo purchased the rights over a property from Pedro Perez. Thereafter, he constructed a
house and he and his family lived there. Later, Pajuyo agreed to let Guevarra live in the house for
free provided that Guevarra maintain cleanliness and orderliness of the house. They also agreed that
Guevarra should leave upon demand. But when Pajuyo later told Guevarra that he needed the house,
Guevarra refused, hence an ejectment case was filed.
ISSUE: Whether or not the contract is commodatum.
RULING: No.
Supreme Court held that the contract is not a commodatum. “In a contract of commodatum, one of
the parties delivers to another something not consumable so that the latter may use the same for a
certain time and return it. An essential feature of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for a certain period. Thus, the
bailor cannot demand the return of the thing loaned until after expiration of the period stipulated, or
after accomplishment of the use for which the commodatum is constituted. If the bailor should have
urgent need of the thing, he may demand its return for temporary use. If the use of the thing is merely
tolerated by the bailor, he can demand the return of the thing at will, in which case the contractual
relation is called a precarium. Under the Civil Code, precarium is a kind of commodatum.”
C. SIMPLE LOAN OR MUTUUM
1. PEOPLE V PUIG & PORRAS

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FACTS: A case of Qualified Theft was filed against the respondents. This was filed by the Iloilo
provincial prosecutor, for the private complainant, Rural Bank of Potoan. It was alleged in the
complaint that Puig was the cashier & Porras was the Bookkeeper in the said bank, and that they
took away money amounting to 15k without the consent of the bank owner, to the prejudice of the
bank. However, the RTC dismissed the complaint for insufficiency of the information ruling that the
real parties in interest are the depositors-clients and not the bank because the bank does not acquire
ownership of the money deposited in it. It also denied the MR.
ISSUE: WON the bank was the owner and thus, the real party in interest?
HELD & RATIONALE: Yes. Under Art 1980 of the CC, "fixed, savings, and current deposits of money
in banks shall be governed by the provisions concerning simple loans." And, Art 1953 provides that "a
person who receives a loan of money acquires the ownership thereof, and is bound to pay to the
creditor an equal amount of the same kind and quality." Thus, it posits that the depositors who place
their money with the bank are considered creditors of the bank. The bank acquires ownership of the
money deposited by its clients, making the money taken by respondents as belonging to the bank.
Allegations in the Information that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it as owner of the money deposits,
as sufficient to make out a case of Qualified Theft.
2. BPI FAMILY BANK v AMADO FRANCO and COURT OF APPEALS
GR No. 123498, November 23, 2007
FACTS: BPI-FB, petitioner filed a separate civil and criminal case against Franco, private respondent
for the alleged multi-million peso scam. In the criminal case, private respondent along with other
accused except the one who was still at large were acquitted of the crime Estafa. However, the civil
case remained under the litigation and the respective right and liabilities of the parties have yet to be
adjudicated. Private respondent demanded petitioner to unfreeze his account and release his deposit
herein but petitioner refused to heed with the request. Hence, he filed a complaint. Petitioner
traversed the complaint claiming that it had better right to the amounts because such spoke volumes
of respondents participation in the fraudulent transaction. The Manila RTC rendered judgment in favor
of petitioner. Unsatisfied with the decision, Private respondent appealed before CA and confined his
appeal to RTCs denial of his claim for moral and exemplary damages and diminutive award of
attorneys fees. CA rendered decision in favor of respondent. Hence, this petition.
ISSUE: Whether CA erred in ruling that petitioner cannot unilaterally freeze respondents account as
well as precluding him from withdrawing his deposits.
RULING: No. It bears emphasizing that money bears no earmarks of peculiar ownership, and this
characteristic is all the more manifest in the instant case which involves money in a banking
transaction gone awry. Its primary function is to pass from hand to hand as a medium of exchange,
without other evidence of its title. Money, which had passed through various transactions in the
general course of banking business, even if of traceable origin, bears no earmarks of peculiar
ownership. Further, deposit of money in the banks is governed by the Civil Code provisions on loan
and mutuum. As there is a debtor-creditor between a bank and its depositor, Petitioner ultimately
acquired ownership of respondents deposit, but such ownership is coupled with a corresponding
obligation to pay him an equal amount on demand. Thus, when respondent issued checks drawn
against his current account, he had every right as creditor to expect that those checks would be
honored by petitioner as debtor. WHEREFORE, the petition is PARTIALLY GRANTED. The CA
decision is AFFIRMED with the MODIFICATION that the award of unearned interest on the time
deposit and moral and exemplary damages is DELETED.
3. CEBU INTERNATIONAL V. CA

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316 SCRA 488
FACTS: Petitioner is a quasi-banking institution involved in money market transactions. Alegre
invested with petitioner P500,000. Petitioner issued then a promissory note, which would mature
approximately after a month. The note covered for Alegre’s placement plus interest. On the maturity
of the note, petitioner issued a check payable to Alegre, covering the whole amount due. It was drawn
from petitioner’s current account in BPI. When the wife of Alegre tried to deposit the check, the bank
dishonored the check. Petitioner was notified of this matter and Alegre demanded the immediate
payment in cash. In turn, petitioner promised to replace the check on the impossible premise that the
first issued be returned to them. This prompted Alegre to file a complaint against petitioner and
petitioner in turn, filed a case against BPI for allegedly unlawfully deducting from its account
counterfeit checks. The trial court decided in favor of Alegre.
ISSUE: Whether or not the Negotiable Instruments Law is applicable to the money market
transaction held between petitioner and Alegre?
HELD: No. A money market has been defined to be a market dealing in standardized short-term
credit instruments where lenders and borrowers don’t deal directly with each other but through a
middleman or dealer in the open market. In a money market transaction, the investor is the lender
who loans his money to a borrower through a middleman or dealer.
In the case at bar, the transaction is in the nature of a loan. Petitioner accepted the check but when
he tried to encash it, it was dishonored. The holder has an immediate recourse against the drawer,
and consequently could immediately file an action for the recovery of the value of the check.
Further, in a loan transaction, the obligation to pay a sum certain in money may be paid in money,
which is the legal tender or, by the use of a check. A check is not legal tender, and therefore cannot
constitute valid tender of payment.
4. COMMISSIONER OF PUBLIC HIGHWAYS VS HON. BURGOS
G.R. No. L-36706 March 31, 1980
FACTS: Plaintiff Victoria Amigable was the owner of a parcel of land in Cebu City with an area of
6,167 square meters taken by the Government in 1924 for road-right of way purpose. She filed a
complaint in 1959 for the recovery of the said lot to the CFI Cebu to which it rendered favorable
decision to the adverse party, the Commissioner of Public Highways. The plaintiff then appealed this
decision to the Supreme Court which reversed the lower court’s ruling. The Supreme Court also
directed that the determination of the just compensation of the plaintiff for the said lots should be
based on the price or value thereof at the time of taking. Respondent court in the capacity of Hon.
Burgos then rendered judgment on 1973 directing the Republic of the Philippines to pay Amigable a
total of P214,356.75 based on the dollar current dollar exchange rate causing the Solicitor General to
file a petition for review on certiorari.
ISSUE: WON the provision of Article 1250 of the New Civil Code regarding extra-ordinary inflation
applicable in determining the just compensation of Amigable.
HELD: No. Article 1250 provides that, “In case extra-ordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the contrary.” The Court
held that based on the import of the law, it is clear that the said provision applies only to cases where
a contract or agreement is involved. It does not apply where the obligation to pay arises from law,
independent of contract. The taking of private property by the Government in the exercise of its power
of eminent domain does not give rise to a contractual obligation. This was expressed in the case of
Velasco vs. Manila Electric Co. Moreover, the law clearly provides that the value of the currency at
the time of the establishment of the obligation shall be the basis of payment, which in cases of
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expropriation, would be the value of the peso at the time of the taking of the property when the
obligation of the Government to pay arises.
5. TELENGTAN BROTHERS and SONS vs. UNITED STATES LINES
G.R.No. 132284, February 28,2006
FACTS: Petitioner is a domestic corporation while US Lines is a foreign corporation engaged in
overseas shipping. It was made applicable that consignees who fail to take delivery of their
containerized cargo within the 10-day free period are liable to pay demurrage charges. On June 22,
1981, US Lines filed a suit against petitioner seeking payment of demurrage charges plus interest
and damages. Petitioner incurred P94,000 which the latter refused to pay despite repeated demands.
Petitioner disclaims liability alleging that it has never entered into a contract nor signed an agreement
to be bound by it. RTC ruled that petitioner is liable to respondent and all be computed as of the date
of payment in accordance with Article 1250 of the Civil Code. CA affirmed the decision.
ISSUE: Whether the re-computation of the judgment award in accordance with Article 1250 of the
Civil Code proper
RULING: The Supreme Court found as erroneous the trial court’s decision as affirmed by the Court of
Appeals. The Court holds that there has been an extraordinary inflation within the meaning of Article
1250 of the Civil Code. There is no reason for ordering the payment of an obligation in an amount
different from what has been agreed upon because of the purported supervention of an extraordinary
inflation.
The assailed decision is affirmed with modification that the order for re-computation as of the date of
payment in accordance with the provisions of Article 1250 of New Civil Code is deleted.
6. EQUITABLE PCI BANK, YU and APAS v. NG SHEUNG NGOR
G.R.NO. 171545, December 19, 2007
FACTS: On October 7, 2001, respondents Ngor and Go filed an action for amendment and/or
reformation of documents and contracts against Equitable and its employees. They claimed that they
were induced by the bank to avail of its peso and dollar credit facilities by offering low interests so
they accepted and signed Equitable’s proposal. They alleged that they were unaware that the
documents contained escalation clauses granting Equitable authority to increase interest without their
consent. These were rebutted by the bank. RTC ordered the use of the 1996 dollar exchange rate in
computing respondent’s dollar-denominated loans. CA granted the Bank’s application for injunction
but the properties were sold to public auction.
ISSUE: Whether or not there was an extraordinary deflation
RULING: Extraordinary inflation exists when there is an unusual decrease in the purchasing power of
currency and such decrease could not be reasonably foreseen or was beyond the contemplation of
the parties at the time of the obligation. Deflation is an inverse situation.
Despite the devaluation of the peso, BSP never declared a situation of extraordinary inflation.
Respondents should pay their dollar denominated loans at the exchange rate fixed by the BSP on the
date of maturity.
Decision of lower courts are reversed and set aside.
7. EUFEMIA and ROMEL ALMEDA v. BATHALA MARKETING
G.R.No. 150806, January 28, 2008
FACTS: In May 1997, Bathala Marketng, renewed its Contract of Lease with Ponciano Almeda.
Under the contract, Ponciano agreed to lease a porton of Almeda Compound for a monthly rental of
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P1,107,348.69 for four years. On January 26, 1998, petitioner informed respondent that its monthly
rental be increased by 73% pursuant to the condition No. 7 of the contract and Article 1250.
Respondent refused the demand and insisted that there was no extraordinary inflation to warrant
such application. Respondent refused to pay the VAT and adjusted rentals as demanded by the
petitioners but continually paid the stipulated amount. RTC ruled in favor of the respondent and
declared that plaintiff is not liable for the payment of VAT and the adjustment rental, there being no
extraordinary inflation or devaluation. CA affirmed the decision deleting the amounts representing
10% VAT and rental adjustment.
ISSUE: Whether the amount of rentals due the petitioners should be adjusted by reason of
extraordinary inflation or devaluation
RULING: Petitioners are stopped from shifting to respondent the burden of paying the VAT. 6th
Condition states that respondent can only be held liable for new taxes imposed after the effectivity of
the contract of lease, after 1977, VAT cannot be considered a “new tax”. Neither can petitioners
legitimately demand rental adjustment because of extraordinary inflation or devaluation. Absent an
official pronouncement or declaration by competent authorities of its existence, its effects are not to
be applied.
Petition is denied. CA decision is affirmed.
II. INTEREST AND THE USURY LAW
1. SEBASTIAN SIGA-AN, PETITIONER, VS. ALICIA VILLANUEVA, RESPONDENT.
FACTS: Respondent filed a complaint for sum of money against petitioner. Respondent claimed that
petitioner approached her inside the PNO and offered to loan her the amount of P540,000.00 of
which the loan agreement was not reduced in writing and there was no stipulation as to the payment
of interest for the loan. Respondent issued a check worth P500,000.00 to petitioner as partial
payment of the loan. She then issued another check in the amount of P200,000.00 to petitioner as
payment of the remaining balance of the loan of which the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest, petitioner pestered
her to pay additional interest and threatened to block or disapprove her transactions with the PNO if
she would not comply with his demand. Thus, she paid additional amounts in cash and checks as
interests for the loan. She asked petitioner for receipt for the payments but was told that it was not
necessary as there was mutual trust and confidence between them. According to her computation,
the total amount she paid to petitioner for the loan and interest accumulated to P1,200,000.00.
The RTC rendered a Decision holding that respondent made an overpayment of her loan obligation to
petitioner and that the latter should refund the excess amount to the former. It ratiocinated that
respondent’s obligation was only to pay the loaned amount of P540,000.00, and that the alleged
interests due should not be included in the computation of respondent’s total monetary debt because
there was no agreement between them regarding payment of interest. It concluded that since
respondent made an excess payment to petitioner in the amount of P660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the principle of solutio indebiti.
Also, petitioner should pay moral damages for the sleepless nights and wounded feelings
experienced by respondent. Further, petitioner should pay exemplary damages by way of example or
correction for the public good, plus attorney’s fees and costs of suit.
ISSUE: Whether or not interest was due to petitioner.
RULING: No. Compensatory interest is not chargeable in the instant case because it was not duly
proven that respondent defaulted in paying the loan and no interest was due on the loan because
there was no written agreement as regards payment of interest. Article 1956 of the Civil Code, which
refers to monetary interest, specifically mandates that no interest shall be due unless it has been
10
expressly stipulated in writing. As can be gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express stipulation for the payment of interest; and (2) the
agreement for the payment of interest was reduced in writing. The concurrence of the two conditions
is required for the payment of monetary interest. Thus, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law.
2. GSIS V COURT OF APPEALS | PARAS
FACTS: In 1961, private respondents spouses Nemencio Medina and Josefina Medina applied with
GSIS for a loan of P600,000.00. The GSIS first approved only the amount of P350,000.00 then
reduced the amount to P295,000.00. The Medinas accepted the amount, executed a promissory note
and a real estate mortgage in favor of GSIS. Then the amount of P350,000.00 was restored. The
Medinas then executed an Amendment of Real Estate Mortgage. In 1963, an additional loan of
P230,000.00 was approved on the security of the same mortgaged properties and additional
properties.
Beginning 1965, the Medinas defaulted in the payment of the monthly amortization of their loan. And
in 1967, they began defaulting in the payment of fire insurance premiums. GSIS then imposed
9%/12% interest on all installments due and unpaid and in 1975, they filed an Application of
Foreclosure of Mortgage and the properties were sold at a public auction in 1976.
Also in 1976, the Medinas filed an Amended Complaint praying for the declaration of nullity of the 2
real estate mortgage contracts as well as of the extra-judicial foreclosure proceedings and the refund
of excess payments, damages and attorney’s fees. The trial court ruled in the favor of the Medinas.
Both parties appealed with the Court of Appeals and the Court of Appeals affirmed the trial courts
decision.
ISSUES:
Whether or not the Court of Appeals erred in holding that the amendment of Real Estate Mortgage
dated July 6, 1962, superseded the Mortgage contract dated April 4, 1962, particularly with respect to
compounding of interest.
Whether or not the Court of Appeals erred in holding that the interest rates on the loan accounts are
usurious.
RULING: The Court of Appeals decision is REVERSED and SET ASIDE.
HELD:
A careful perusal of the title, preamble, and body of the Amendment Real Estate Mortgage taking into
account the prior, contemporaneous, and subsequent acts of the parties, ineluctably shows that said
Amendment was never intended to completely supersede the original mortgage contract. The title
recognizes the existence and effectivity of the previous mortgage contract. Nowhere in the
Amendment did the party manifest their intention to supersede the original contract and it does not
embody the act of conveyancing the subject properties by way of mortgage.
The Usury Law applies only to interest by way of compensation for the use of forbearance of money.
Interest by way of damages is governed by Art 2209 of the Civil Code. The Civil Code permits the
agreement upon a penalty apart from the interest. The penalty does not include the interest, and as
such the two are different and distinct things that may be demanded separately.
3. ADVOCATES FOR TRUTH IN LENDING, INC. VS. BSP, ET. AL.
G.R. No. 192986 / January 15, 2013
FACTS: Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim that they are
raising issues of transcendental importance to the public and so they filed Petition for Certiorari under
11
Rule 65 ROC seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB),
replacing the Central Bank Monetary Board (CB-MB) by virtue of R.A. No. 7653, has no authority to
continue enforcing Central Bank Circular No. 905, issued by the CB-MB in 1982, which "suspended"
the Usury Law of 1916 (Act No. 2655).
R.A. No. 265, which created the Central Bank (CB) of the Philippines, empowered the CB-MB to,
among others, set the maximum interest rates which banks may charge for all types of loans and
other credit operations, within limits prescribed by the Usury Law.
In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of 1982. Section 1 of the
Circular, under its General Provisions, removed the ceilings on interest rates on loans or forbearance
of any money, goods or credits.
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the Bangko
Sentral ng Pilipinas (BSP) to replace the CB.
ISSUE/S:
1. Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed all
interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates. NO
2. Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB Circular No. 905. YES
RULING:
1. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been
recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. CA,
citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but
simply suspended the latter’s effectivity;" that "a CB Circular cannot repeal a law, [for] only a law can
repeal another law;" that "by virtue of CB Circular No. 905, the Usury Law has been rendered
ineffective;" and "Usury has been legally non-existent in our jurisdiction. Interest can now be charged
as lender and borrower may agree upon."
By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of contract to
agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public
policy.
2. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that, "The rate of interest, including commissions,
premiums, fees and other charges, on a loan or forbearance of any money, goods, or credits,
regardless of maturity and whether secured or unsecured, that may be charged or collected by any
person, whether natural or juridical, shall not be subject to any ceiling prescribed under or pursuant to
the Usury Law, as amended." It does not purport to suspend the Usury Law only as it applies to
banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new BSP-
MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a
provision similar to Section 109 of R.A. No. 265.
A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum
rate or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or
12
credits, including those for loans of low priority such as consumer loans, as well as such loans made
by pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including deposits and
deposit substitutes, or loans of financial intermediaries. Act No. 2655, an earlier law, is much broader
in scope, whereas R.A. No. 265, now R.A. No. 7653, merely supplemented it as it concerns loans by
banks and other financial institutions. Had R.A. No. 7653 been intended to repeal Section 1-a of Act
No. 2655, it would have so stated in unequivocal terms.
Further, the lifting of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest. It is settled that nothing in CB Circular No. 905 grants lenders
a carte blanche authority to raise interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to morals, if not against the law.
4. ANTONIO TAN vs. CA, G.R. No. 116285. October 19, 2001
FACTS: On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained two loans each in the
principal amount of Two Million Pesos or in the total principal amount of from respondent Cultural
Center of the Philippines evidenced by two promissory notes with maturity dates on May 14, 1979
and July 6, 1979, respectively. Petitioner defaulted but after a few partial payments he had the loans
restructured by respondent CCP, and petitioner accordingly executed a promissory note on August
31, 1979 in the amount of P3,411,421.32 payable in five installments. Petitioner Tan failed to pay any
installment on the said restructured loan of P3,411,421.32. In a letter dated January 26, 1982,
petitioner requested and proposed to respondent CCP a mode of paying the restructured loan. On
October 20, 1983, petitioner again sent a letter to respondent CCP requesting for a moratorium on his
loan obligation until the following year allegedly due to a substantial deduction in the volume of his
business and on account of the peso devaluation. No favorable response was made to said
letters. Instead, respondent CCP, through counsel, wrote a letter dated May 30, 1984 to the petitioner
demanding full payment, within ten (10) days from receipt of said letter, of the petitioners restructured
loan which as of April 30, 1984 amounted to P6,088,735.03.
On August 29, 1984, respondent CCP filed in the RTC of Manila a complaint for collection of a sum of
money, against the petitioner after the latter failed to settle his said restructured loan obligation. The
petitioner interposed the defense that he merely accommodated a friend, Wilson Lucmen, who
allegedly asked for his help to obtain a loan from respondent CCP.Petitioner claimed that he has not
been able to locate Wilson Lucmen.
ISSUE: Whether or not he Honorable Court Of Appeals Committed A Mistake In Giving Its Imprimatur
To The Decision Of The Trial Court Which Compounded Interest On Surcharges.
RULING: We find no merit in the petitioner’s contention. Article 1226 of the New Civil Code provides
that: In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the
payment of interests in case of non-compliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of
fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code.
In the case at bar, the promissory note expressly provides for the imposition of both interest and
penalties in case of default on the part of the petitioner in the payment of the subjectrestructured
loan. The pertinent portion of the promissory note (Exhibit A) imposing interest and penalties provides
that:
The stipulated fourteen percent (14%) per annum interest charge until full payment of the loan
constitutes the monetary interest on the note and is allowed under Article 1956 of the New Civil Code.

13
On the other hand, the stipulated two percent (2%) per month penalty is in the form of penalty charge
which is separate and distinct from the monetary interest on the principal of the loan.
Penalty on delinquent loans may take different forms. In Government Service Insurance System v.
Court of Appeals, this Court has ruled that the New Civil Code permits an agreement upon a penalty
apart from the monetary interest. If the parties stipulate this kind of agreement, the penalty does not
include the monetary interest, and as such the two are different and distinct from each other and may
be demanded separately. Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to
state that such a stipulation about payment of an additional interest rate partakes of the nature of a
penalty clause which is sanctioned by law, more particularly under Article 2209 of the New Civil Code
which provides that: If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six
per cent per annum.
The penalty charge of two percent (2%) per month in the case at bar began to accrue from the time of
default by the petitioner. There is no doubt that the petitioner is liable for both the stipulated monetary
interest and the stipulated penalty charge. The penalty charge is also called penalty or compensatory
interest. Having clarified the same, the next issue to be resolved is whether interest may accrue on
the penalty or compensatory interest without violating the provisions of Article 1959 of the New Civil
Code, which provides that: “Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new interest.”
5. INTEGRATED REALTY CORPORATION VS. PHILIPPINE NATIONAL BANK, 174 SCRA
295(1989)
FACTS: Raul Santos made a time deposit with OBM in the amount of P500H and he was issued a
certificate of time deposits. On another date, Santos again made a time deposit with OBM in the
amount of P200H, he was again issued a CTD. IRC, thru its president Raul Santos, applied for a loan
and/or credit line (P700H) with PNB. To secure such, Santos executed a Deed of Assignment of the 2
time deposits. After due dates of the time deposit certificates, OBM did not pay PNB. PNB then
demanded payment from IRC and Santos, but they replied that the loan was deemed paid with the
irrevocable assignment of the time deposit certificates.
PB then filed with RTC to collect from IRC and Santos with interest. The trial court ruled in favor of
PNB ordering IRC and Santos to pay PNB the total amount of P700H plus interest of 9% PA, 2%
additional interest and 1& PA penalty interest. On appeal, the CA ordered OBM to pay IRC and
Santos whatever amts they will to PNB with interest.
IRC and Santos now claim that OBM should reimburse them for whatever amts they may be
adjudged to pay PNB by way of compensation for damages incurred.
ISSUE: Whether or not the claim of IRC and Santos will prosper.
HELD: The Court held in the affirmative. The 2 time deposits matured on 11 January 1968 and 6
February 1968, respectively. However, OBM was not allowed and suspended to operate only on 31
July 1968 and resolved on 2 August 1968. There was a yet no obstacle to the faithful compliance by
OBM of its liabilities. For having incurred in delay in the performance of its obligation, OBM should be
held for damages. OBM contends that it had agreed to pay interest only up to the dates of maturity of
the CTD and that Santos is not entitled to interest after maturity dates had expired.
While it is true that under Article 1956 of the CC, no interest shall be due unless it has been expressly
stipulated in writing, this applies only to interest for the use of money. It does not comprehend interest
paid as damages. OBM is being required to pay such interest, not as interest income stipulated in the
14
CTD, but as damages fro failure and delay in the payment of its obligations which thereby compelled
IRC and Santos to resort to the courts.
The applicable rule is that LI, in the nature of damages for non-compliance with an obligation to puy
sum of money, is recoverable from the date judicially or extra-judicially demand is made.
6. BATAAN SEEDLING VS REPUBLIC, GR NO. 141009, 2 JULY 2002, 383 SCRA 590
FACTS: Petitioner entered into a contract with respondent, represented by the DENR for the
reforestation of a forest land within a period of 3 years. Petitioner undertook to report to DENR any
event or condition which delays or may delay the project. With the contract was the release of
mobilization fund but the fund was to be returned upon completion or deducted from periodic release
of mhoneys to petitioner. Believing that petitioners failed to comply with their obligations, respondent
sent a notice of cancellation. Petitioners failed to respond to the notice, thus, respondent filed a
complaint for damages against petitioners. The RTC held that respondent had sufficient grounds to
cancel the contract but saw no reason why the mobilization fund and the cash advances should be
refunded or that petitioners are liable for liquidated damages. Both parties appealed to the CA, which
affirmed the trial court and that the balance of the fund should be returned with 12% interest.
ISSUE: Whether the order to refund the balance of the fund with 12% interest pa is proper.
HELD: No. Interest at the rate of 12% pa is impossible if there is no stipulation in the contract. Herein
subject contract does not contain any stipulation as to interest. However, the amount due to
respondent does not represent a loan or forbearance of money. The word “forbearance” is defined,
within, the context of usury law, as a contractual obligation of lender or creditor to refrain, during given
period of time, from requiring borrower or debtor to repay loan or debt then due and payable. In the
absence of stipulation, the legal interest is 6% pa on the amount finally adjudged by the Court.
7. BANCO FILIPINO VS CA
GR NO. 129227, 30 MAY 2000, 332 SCRA 241
FACTS: Elsa and Calvin Arcilla secured, on 3 occassions, loan from petitioner as evidenced by
promissory note. REM was also executed. Under said deeds, Banco Filipino may increase rate of
interest on said loans, within the limits allowed by law. at that time, under Usury Law, the maximum
rate of interest for loans secured by REM was 12% pa. later, the Central bank issued Circular No. 494
provinding for the maximum interest of 19%pa. meanwhile, Skyli Builders, thru President Calvin
Arcilla secured loans from BPI with FGU Insurance as surety. Banco Filipino issued an account
statement with 17% pa as interest. The Arcillas filed for annulment of the loan contracts because the
rate of interests charged were usurious.
ISSUE: Whether or not respondents are entitled to refund of the alleged interest overpayments.
HELD: Yes. Private respondents aver that they are entitled to the refund inasmuch as the escalation
clause incorporated in the loan contracts do not have a corresponding de-escalation clause and is
therefore, illegal.
In Banco Filipino Savings & Mortgage Bank vs Navarro, the Court ruled that Central Bank Circular
494, although it has the force and effect of law, is not a law and is not the law contemplated by the
parties which authorizes the petitioner to unilaterally raise the interest rate of loan. The reliance on
the circular was without any legal basis.
8. CONSOLIDATED BANK VS CA
GR No. 114286, 19 April 2001, 356 SCRA 671
FACTS: Continental Cement Corp obtained from Consolidated Bank letter of credit used to
purchased 500,000 liters of bunker fuel oil. Respondent Corporation made a marginal deposit to
15
petitioner. A trust receipt was executed by respondent corporation, with respondent Gregory Lim as
signatory. Claiming that respondents failed to turn over the goods or proceeds, petitioner filed a
complaint for sum of money before the RTC of Manila. In their answer, respondents aver that the
transaction was a simple loan and not a trust receipt one, and tht the amount claimed by petitioner did
not take into account payments already made by them. The court dismissed the complaint, CA
affirmed the same.
ISSUE: Whether or not the marginal deposit should not be deducted outright from the amount of the
letter of credit.
HELD: No. petitioner argues that the marginal deposit should be considered only after computing the
principal plus accrued interest and other charges. It could be onerous to compute interest and other
charges on the face value of the letter of credit which a bank issued, without first crediting or setting
off the marginal deposit which the borrower paid to it-compensation is proper and should take effect
by operation of law because the requisited in Art. 1279 are present and should extinguish both debts
to the concurrent amount. Unjust enrichment.
9. FIRST METRO VS ESTE DEL SOL
GR No. 141811, 15 November 2001, 369 SCRA 99
FACTS: FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal.
Under the agreement, the interest was 16% pa based on the diminishing balance. In case of default,
an acceleration clause was provided and the amount due is subject to 20% one-time penalty on the
amount due and such amount shall bear interest at the highest rate permitted by law. respondent
executed a REM, individual continuing suretyship and an underwriting agreement whereby FMIC
shall underwrite the public offering of one P120,000 common shares of respondent’s capital stock for
one-time underwriting fee of P200,000. For failure to pay its obligation, FMIC caused the foreclosure
of the REM. At the public auction, FIC was the highest bidder. Petitioner filed to collect for alleged
deficiency balance against respondents since it failed to collect from the sureties, plus interest at 21%
pa. the trial court ruled in favor of FMIC. Respondents appealed before the CA which held that the
fees provided for in the Underwriting and Consultacy Agreements were mere subterfuges to
camouflage the excessively usurious interest charged. The CA ordered FMIC to reimburse petitioner
representing what is ue to petitioner and what is due to respondent.
ISSUE: Whether or not the interests are lawful
HELD: No. An apparently lawful loan is usurious when it is intended that additional compensation for
the loan be disguised by an ostensibly unrelated contract for the payment by the borrower for the
lender’s services which re of little value or which are not in fact to be rendered. Article 1957 clearly
provides: contracts and stipulations, under any cloak or device whatever, intended to circumvent the
law against usury shall be void. The borrower may recover in accordance with the laws on usury.
10. CARPO VS. CHUA & DY NG
GR. NOS. 150773 & 153599, SEPTEMBER 30, 2005
FACTS: Herein petitioner spouses David Carpo and Rechilda Carpo contracted a loan from Eleanor
Chua and Elma Dy Ng for a certain sum of money payable within six (6) months with an interest rate
of six percent (6%) per month secured by a mortgaged of the spouses Carpo of their residential
house and lot. Petitioners failed to pay the loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed, mortgaged property sold at a public auction, and the house
and lot was awarded to respondents, who were the only bidders. Unable to exercise their right of
redemption by petitioners, a certificate of sale was issued in the name of respondents. However,
petitioners continued to occupy the said house and lot, thus respondents file a petition for writ of
possession which was granted by the Trial Court. Petitioners filed a complaint for annulment of real
16
estate mortgage and the consequent foreclosure proceedings claiming that the rate of interest
stipulated in the principal loan agreement is clearly null and void for being excessive, iniquitous,
unconscionable and exorbitant. Consequently, they also argue that the nullity of the agreed interest
rate affects the validity of the real estate mortgage.
ISSUE: Whether or not the agreed rate of interest of 6% per month or 72% per annum is so
excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and void.
HELD: In a long line of cases, the Supreme Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the codal
provision may be invoked to annul the excessive stipulated interest. In the case at bar, the stipulated
interest rate is 6% per month, or 72% per annum. By the standards set by jurisprudence, this
stipulation is similarly invalid.
11. LIGUTAN VS. COURT OF APPEALS,
GR. NO. 138677, FEBRUARY 12, 2002
FACTS: Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private
respondent Security Bank and Trust Company. Petitioners executed a promissory note to pay the
sum loaned with an interest of 15.189% per annum upon maturity and to pay a penalty of 5% every
month on the outstanding principal and interest in case of default. On maturity of the obligation,
petitioners failed to settle the debt despite several demands from the bank. Consequently, the bank
filed a complaint for recovery of the due amount. After trial of the case, the Trial court ruled in favour
of the Bank, ordering petitioners to pay the respondent the sum of P114,416.00 with interest thereon
at the rate of 15.189% per annum and 5% per month penalty charge among others. On appeal of the
case, petitioners prayed for the reduction of the 5% stipulated penalty for being unconscionable. The
Court of Appeals ruled that in the interest of justice and public policy, a penalty of 3% per month or
36% per annum would suffice. But still, petitioners dispute the said decision.
ISSUE: Whether or not the 15.189% interest and the penalty of three (3%) percent per month or
thirty-six (36%) percent per annum imposed by private respondent bank on petitioners’ loan obligation
are exorbitant, iniquitous and unconscionable.
HELD: The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined to, the
type, extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like, the
application of which, by and large, is addressed to the sound discretion of the court. The essence or
rationale for the payment of interest is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest. What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking business and the core
of a bank's existence. The Court of Appeals, exercising its good judgment in the instant case, has
rightly reduced the penalty interest from 5% a month to 3% a month.
12. EASTERN SHIPPING LINES, INC. VS. CA,
GR. NO. 97412, JULY 12, 1994
FACTS: Two fiber drums of riboflavin were shipped from Yokohama, Japan on board the vessel
owned by herein petitioner Eastern Shipping Lines. When it arrives in Manila, it was put unto the
17
custody of Metro Port Service, Inc. The latter excepted to one drum which is said to be in bad order
and which damage was unknown to Eastern Shipping Lines. Later, Allied Brokerage Corporation
received the shipment from Metro Port Service, Inc. With one drum damaged, Allied Brokerage
Corporation made deliveries to the consignee's warehouse. The latter excepted to one drum that is
damaged. Eastern Shipping Lines averred that due to the one drum that is damaged and due to the
fault and negligence of Metro Port Service, Inc. and Allied Brokerage Corporation, the consignee
suffered losses. The two failed and refused to pay the claims for damages. Consequently, Eastern
Shipping Lines was compelled to pay the consignee being subrogated to all the rights of action of
said consignee against Metro Port Service, Inc. and Allied Brokerage Corporation. Trial ensued and
on appeal of the case, the appellate court affirmed the decision of the trial court ordering Metro Port
Service and Allied Brokerage to pay Eastern Shipping Lines, jointly and severally, the amount of
P19,032.95, with the present legal interest of 12% per annum from the date of filing of the complaints,
until fully paid. Metro Port Service and Allied Brokerage opposed especially as to the payment of
interest contending that the legal interest on an award for loss or damage should be 6% in view of
Article 2209 of the Civil Code.
ISSUE: Whether or not the payment of legal interest on an award for loss or damage is twelve
percent (12%) or six percent (6%).
HELD: Article 2209 of the New Civil Code provides that if the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation
to the contrary, shall be the payment of interest agreed upon, and in the absence of stipulation, the
legal interest which is six percent per annum. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, the
interest due should be that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6%
per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
13. NACAR V. GALLERY FRAMES
G.R. No. 189871, August 13, 2013, 703 SCRA 439
FACTS: Dario Nacar filed a labor case against Gallery Frames and its owner Felipe Bordey, Jr.
Nacar alleged that he was dismissed without cause by Gallery Frames on January 24, 1997. On

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October 15, 1998, the Labor Arbiter (LA) found Gallery Frames guilty of illegal dismissal hence the
Arbiter awarded Nacar P158,919.92 in damages consisting of backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court (SC). The Supreme Court affirmed the
decision of the Labor Arbiter and the decision became final on May 27, 2002. After the finality of the
SC decision, Nacar filed a motion before the LA for recomputation as he alleged that his backwages
should be computed from the time of his illegal dismissal (January 24, 1997) until the finality of the
SC decision (May 27, 2002) with interest. The LA denied the motion as he ruled that the reckoning
point of the computation should only be from the time Nacar was illegally dismissed (January 24,
1997) until the decision of the LA (October 15, 1998). The LA reasoned that the said date should be
the reckoning point because Nacar did not appeal hence as to him, that decision became final and
executory.
ISSUE: Whether or not the Labor Arbiter is correct.
RULING: No. There are two parts of a decision when it comes to illegal dismissal cases (referring to
cases where the dismissed employee wins, or loses but wins on appeal). The first part is the ruling
that the employee was illegally dismissed. This is immediately final even if the employer appeals –
but will be reversed if employer wins on appeal. The second part is the ruling on the award of
backwages and/or separation pay. For backwages, it will be computed from the date of illegal
dismissal until the date of the decision of the Labor Arbiter. But if the employer appeals, then the end
date shall be extended until the day when the appellate court’s decision shall become final. Hence, as
a consequence, the liability of the employer, if he loses on appeal, will increase – this is just but a risk
that the employer cannot avoid when it continued to seek recourses against the Labor Arbiter’s
decision. This is also in accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or compensatory damages, the Supreme
Court ruled that the old case of Eastern Shipping Lines vs CA is already modified by the promulgation
of the Bangko Sentral ng Pilipinas Monetary Board Resolution No. 796 which lowered the legal rate of
interest from 12% to 6%. Specifically, the rules on interest are now as follows:
1. Monetary Obligations ex. Loans:
a. If stipulated in writing:
a.1. shall run from date of judicial demand (filing of the case)
a.2. rate of interest shall be that amount stipulated
b. If not stipulated in writing
b.1. shall run from date of default (either failure to pay upon extra-judicial demand or upon judicial
demand whichever is appropriate and subject to the provisions of Article 1169 of the Civil Code)
b.2. rate of interest shall be 6% per annum
2. Non-Monetary Obligations (such as the case at bar)
a. If already liquidated, rate of interest shall be 6% per annum, demandable from date of judicial or
extra-judicial demand (Art. 1169, Civil Code)
b. If unliquidated, no interest
Except: When later on established with certainty. Interest shall still be 6% per annum demandable
from the date of judgment because such on such date, it is already deemed that the amount of
damages is already ascertained.
3. Compounded Interest– This is applicable to both monetary and non-monetary obligations– 6% per
annum computed against award of damages (interest) granted by the court. To be computed from the
19
date when the court’s decision becomes final and executory until the award is fully satisfied by the
losing party.
4. The 6% per annum rate of legal interest shall be applied prospectively:– Final and executory
judgments awarding damages prior to July 1, 2013 shall apply the 12% rate;– Final and executory
judgments awarding damages on or after July 1, 2013 shall apply the 12% rate for unpaid obligations
until June 30, 2013; unpaid obligations with respect to said judgments on or after July 1, 2013 shall
still incur the 6% rate.
14. ESTORES VS SPOUSES SUPANGAN
FACTS: Petitioner Hermojina Estores and respondent-spouses Arturo and Laura Supangan entered
into a Conditional Deed of Sale... Whereby petitioner offered to sell, and respondent-spouses offered
to buy, a parcel of land
After almost seven years from the time of the execution of the contract and notwithstanding payment
of P3.5 million on the part of respondent-spouses, petitioner still failed to comply with her obligation
as expressly provided in... Contract.
Respondent-spouses demanded the return of the amount of P3.5 million within 15 days from receipt
of the letter... Petitioner acknowledged receipt of the
P3.5 million and promised to return the same within 120 days. Respondent-spouses were amenable
to the proposal provided an interest of 12% compounded annually shall be imposed on the P3.5
million.
When petitioner still failed to return the... Amount despite demand, respondent-spouses were
constrained to file a Complaint... Against herein petitioner... The RTC rendered its Decision... Finding
respondent-spouses entitled to interest but only at the rate of 6% per annum... The CA rendered the
assailed Decision affirming the ruling of the RTC finding the imposition of 6% interest proper.
However, the same shall start to run only from... When respondent-spouses formally demanded the...
Return of their money and not from... When the contract was executed as held by the RTC.
Petitioner insists that she is not bound to pay interest on the P3.5 million because the Conditional
Deed of Sale only provided for the return of the downpayment in case of failure to comply with her
obligations.
Respondent-spouses aver that it is only fair that interest be imposed on the amount they paid
considering that petitioner failed to return the amount upon demand and had been using the P3.5
million for her benefit.
ISSUES: Whether the imposition of interest and attorney's fees is proper
RULING: The petition lacks merit.
We sustain the ruling of both the RTC and the CA that it is proper to impose interest notwithstanding
the absence of stipulation in the contract. Article 2210 of the Civil Code expressly provides that
"[i]nterest may, in the discretion of the court, be allowed upon... Damages awarded for breach of
contract." In this case, there is no question that petitioner is legally obligated to return the P3.5 million
because of her failure to fulfill the obligation under the Conditional Deed of Sale, despite demand.
Anent the interest rate, the general rule is that the applicable rate of interest "shall be computed in
accordance with the stipulation of the parties.
Absent any stipulation, the applicable rate of interest shall be 12% per annum "when the... Obligation
arises out of a loan or a forbearance of money, goods or credits. In other cases, it shall be six percent
(6%)."

20
In this case, the parties did not stipulate as to the applicable rate of interest. The only question
remaining... Therefore is whether the 6% as provided under Article 2209 of the Civil Code, or 12%
under Central Bank Circular No. 416, is due.
The contract involved in this case is admittedly not a loan but a Conditional Deed of Sale. However,
the contract provides that the seller (petitioner) must return the payment made by the buyer
(respondent-spouses) if the conditions are not fulfilled. There is no... Question that they have in fact,
not been fulfilled as the seller (petitioner) has admitted this. Notwithstanding demand by the buyer
(respondent-spouses), the seller (petitioner) has failed to return the money and... Should be
considered in default from the time that demand was made
Even if the transaction involved a Conditional Deed of Sale, can the stipulation governing the return of
the money be considered as a forbearance of money which required payment of interest at the rate of
12%? We believe so.
We believe however, that the phrase
"Forbearance of money, goods or credits" is meant to have a separate meaning from a loan,
otherwise there would have been no need to add that phrase as a loan is already sufficiently defined
in the Civil Code.
Forbearance of money, goods or... Credits should therefore refer to arrangements other than loan
agreements, where a person acquiesces to the temporary use of his money, goods or credits pending
happening of certain events or fulfillment of certain conditions. In this case, the respondent-spouses
parted... With their money even before the conditions were fulfilled. They have therefore allowed or
granted forbearance to the seller (petitioner) to use their money pending fulfillment of the conditions.
They were deprived of the use of their money for the period pending... Fulfillment of the conditions
and when those conditions were breached, they are entitled not only to the return of the principal
amount paid, but also to compensation for the use of their money. And the compensation for the use
of their money, absent any stipulation,... Should be the same rate of legal interest applicable to a loan
since the use or deprivation of funds is similar to a loan.
Petitioner's unwarranted withholding of the money which rightfully pertains to respondent-spouses
amounts to forbearance of money which can be considered as an involuntary loan. Thus, the
applicable rate of interest is 12% per annum.
The Petition for Review is DENIED.
III. TRUTH IN LENDING ACT
1. UCPB V. BELUSO
FACTS: The UCPB granted the spouses Beluso a Promissory Note Line under a Credit Agreement.
The spouses Beluso constituted other than their promissory notes, a real estate mortgage over
parcels of land as additional security for the obligation. UCPB unilaterally applied interest rates on the
different promissory notes ranging from 18% to 34%:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL AND ODETTE
BELUSO (BORROWER), jointly and severally promise to pay to UNITED COCONUT PLANTERS
BANK (LENDER) or order at UCPB Bldg., Makati Avenue, Makati City, Philippines, the sum of
______________ PESOS, (P_____), Philippine Currency, with interest thereon at the rate indicative
of DBD retail rate or as determined by the Branch Head.
The spouses, however, failed to pay their obligations with the bank. Due to this, the bank foreclosed
the property which was under mortgage. Spouses Beluso filed a petition for the annulment,
accounting and damages against UCPB.

21
ISSUE: Is UCPB authorized to unilaterally fix the interest rates?
RULING: No. A promissory note which grants the creditor the power to unilaterally fix the interest rate
means that the promissory note does not contain a clear statement in writing of the finance charge.
Such provision is illegal because it violates the provisions of the Civil Code on mutuality of contracts
Ratio: Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
“We applied this provision in Philippine National Bank v. Court of Appeals, where we held:
In order that obligations arising from contracts may have the force of law between the parties, there
must be mutuality between the parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555).
Hence, even assuming that the loan agreement between the PNB and the private respondent gave
the PNB a license (although in fact there was none) to increase the interest rate at will during the term
of the loan, that license would have been null and void for being violative of the principle of mutuality
essential in contracts.
It would have invested the loan agreement with the character of a contract of adhesion, where the
parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to
the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil. 85). Such a
contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse
and imposition.”
Moral: Interest Agreements must always be mutually agreed upon by the parties!
IV. DEPOSITS
1. BPI vs. Intermediate Appellate Court
GR# L-66826, August 19, 1988
FACTS: Rizaldy T. Zshornack and his wife maintained in COMTRUST a dollar savings account and a
peso current account. An application for a dollar drat was accomplished by Virgillo Garcia branch
manager of COMTRUST payable to a certain Leovigilda Dizon. In the PPLICtion, Garcia indicated
that the amount was to be charged to the dolar savings account of the Zshornacks. There wasa no
indication of the name of the purchaser of the dollar draft. Comtrust issued a check payable to the
order of Dizon. When Zshornack noticed the withdrawal from his account, he demanded an
explainaiton from the bank. In its answer, Comtrust claimed that the peso value of the withdrawal was
given to Atty. Ernesto Zshornack, brother of Rizaldy. When he encashed with COMTRUST a cashiers
check for P8450 issued by the manila banking corporation payable to Ernesto.
ISSUE: Whether the contract between petitioner and respondent bank is a deposit?
HELD: The document which embodies the contract states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to return it to Zshornack at a later time. Thus,
Zshornack demanded the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing belonging to another,
with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no deposit but some other contract.

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2. THE ROMAN CATHOLIC BISHOP OF JARO VS. GREGORIO DE LA PEÑA, ADMINISTRATOR
OF THE ESTATE OF FATHER AGUSTIN DE LA PEÑA,
FACTS: In 1898 Fr. De la Peña assigned as trustee of the sum of P6,641, collected by him for the
charitable purposes he deposited in his personal account P19,000 in the Hongkong and Shanghai
Bank at Iloilo. During the war of the revolution, Father De la Peña was arrested by the military
authorities as a political prisoner. The arrest of Father De la Peña and the confiscation of the funds in
the bank were the result of the claim of the military authorities that he was an insurgent and that the
funds deposited had been collected by him is for revolutionary purposes. The money was taken from
the bank by the military authorities by virtue of such order, was confiscated and turned over to the
Government.
ISSUE: Whether or not Father De la Peña is liable for the loss of the funds?
RULING: No, he is not liable because there is no negligent act on the part of Fr. De la Peña. It was
so happened that during that time the money was taken from him by the U.S. military forces which is
unforeseen event. Although the Civil Code states that “a person obliged to give something is also
bound to preserve it with the diligence pertaining to a good father of a family”, it also provides,
following the principle of the Roman law that “no one shall be liable for events which could not be
foreseen, or which having been foreseen were inevitable, with the exception of the cases expressly
mentioned in the law or those in which the obligation so declares.”
3. CA-AGRO INDUSTRIAL DEVT CORP VS CA
219 SCRA 426
FACTS: On July 3, 1979, petitioner (through its President- Sergio Aguirre) and the Spouses Ramon
and Paula Pugao entered into an agreement whereby the former purchase two parcel of lands from
the latter. It was paid of downpayment while the balance was covered by there postdated checks.
Among the terms and conditions embodied in the agreement were the titles shall be transferred to the
petitioner upon full payment of the price and the owner's copies of the certificate of titles shall be
deposited in a safety deposit box of any bank. Petitioner and the Pugaos then rented Safety Deposit
box of private respondent Security Bank and Trust Company.
Thereafter, a certain Margarita Ramos offered to buy from the petitioner. Mrs Ramos demand the
execution of a deed of sale which necessarily entailed the production of the certificate of titles. In view
thereof, Aguirre, accompanied by the Pugaos, then proceed to the respondent Bank to open the
safety deposit box and get the certificate of titles. However, when opened in the presence of the
Bank's representative, the box yielded no such certificate. Because of the delay in the reconstitution
of the title, Mrs Ramos withdrew her earlier offer to purchase. Hence this petition.
ISSUE: Whether or not the contract of rent between a commercial bank and another party for the use
of safety deposit box can be considered alike to a lessor-lessee relationship.
RULING: The petitioner is correct in making the contention that the contract for the rent of the deposit
box is not a ordinary contract of lease as defined in Article 1643 of the Civil Code. However, the Court
do not really subscribe to its view that the same is a contract of deposit that is to be strictly governed
by the provisions in Civil Code on Deposit; the contract in the case at bar is a special kind of deposit.
It cannot be characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint renters- the
petitioner and the Pugaos. The guard key of the box remained with the respondent bank; without this
key, neither of the renters could open the box. On the other hand, the respondent bank could not
likewise open the box without the renter's key. The Court further assailed that the petitioner is correct
in applying American Jurisprudence. Herein, the prevailing view is that the relation between the a
bank renting out safe deposits boxes and its customer with respect to the contents of the box is that
23
of a bail or/ and bailee, the bailment being for hire and mutual benefits. That prevailing rule has been
adopted in Section 72 of the General Banking Act.
Section 72. In addition to the operations specifically authorized elsewhere in this Act, banking
institutions other that building and loan associations may perform the following services:
(a) Receive in custody funds, document and valuable objects and rents safety deposits taxes for the
safeguard of such effects.
xxx xxx xxx
The bank shall perform the services permitted under subsections (a) (b) and (c) of this section as
depositories or as agents.
4. YHT REALTY CORPORATION, ERLINDA LAINEZ AND ANICIA PAYAM VS. THE COURT OF
APPEALS AND MAURICE MCLOUGHLIN
G.R. No. 126780
FACTS: Respondent McLoughlin would always stay at Tropicana Hotel every time he is here in the
Philippines and would rent a safety deposit box. The safety deposit box could only be opened through
the use of 2 keys, one of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel. McLoughlin allegedly placed the following in his safety
deposit box – 2 envelopes containing US Dollars, one envelope containing Australian Dollars, Letters,
credit cards, bankbooks and a checkbook. On 12 December 1987, before leaving for a brief trip,
McLoughlin took some items from the safety box which includes the ff: envelope containing Five
Thousand US Dollars (US$5,000.00), the other envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards. The other items were left in the deposit box.
Upon arrival, he found out that a few dollars were missing and the jewelry he bought was likewise
missing. Eventually, he confronted Lainez and Paiyam who admitted that Tan opened the safety
deposit box with the key assigned to him. McLoughlin went up to his room where Tan was staying
and confronted her. Tan admitted that she had stolen McLouglin’s key and was able to open the
safety deposit box with the assistance of Lopez, Paiyam and Lainez. Lopez also told McLoughlin that
Tan stole the key assigned to McLouglin while the latter was asleep. McLoughlin insisted that it must
be the hotel who must assume responsibility for the loss he suffered. Lopez refused to accept
responsibility relying on the conditions for renting the safety deposit box entitled “Undertaking For the
Use of Safety Deposit Box”
ISSUE: WON the “Undertaking for the Use of Safety Deposit Box” admittedly executed by private
respondent is null and void.
HELD: YES Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business like the
common carrier’s business is imbued with public interest. Catering to the public, hotelkeepers are
bound to provide not only lodging for hotel guests and security to their persons and belongings. The
twin duty constitutes the essence of the business. The law in turn does not allow such duty to the
public to be negated or diluted by any contrary stipulation in so-called “undertakings” that ordinarily
appear in prepared forms imposed by hotel keepers on guests for their.
WAREHOUSE RECEIPTS LAW
1. PNB V. NOAH’S ARK SUGAR REFINERY
G.R. No. 107243 / 226 SCRA 36. 1 September 1993
FACTS: In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar Refinery
issued on several dates warehouse receipts to Rosa Sy, RNS
24
Merchandising, and St. Therese Merchandising. The receipts are substantially in the form, and
contain the terms, prescribed for negotiable warehouse receipts by Section 2 of the law. Zoleta and
Ramos, having used the receipts (quedans) as security for loans obtained by them from PNB in the
amounts of P23.5M and P15.6M, endorsed the quedans to the bank.
Both failed to pay their loans upon maturity. PNB wrote to Noah’s Ark demanding delivery of the
sugar covered by the said quedans. Noah’s Ark refused to comply with the demand; thus, PNB filed
with the RTC a complaint for specific performance against herein respondent which it denied. PNB’s
MR was denied by the RTC. Hence this petition.
ISSUES:
W/N the non-payment of the purchase price for the quedans by the srcinal vendees rendered the
negotiation by vendees/first indorsers and the subsequent negotiation of Ramos and Zoleta to PNB
invalid
W/N as indorsee/pledgee of quedans was entitled to delivery of sugar stocks from Noah’s Ark
HELD: Petition GRANTED. Decision of trial court REVERSED and SET ASIDE. Decision of CA
AFFIRMED.
RATIO DECIDENDI: Non-payment of the purchase price does not render the subsequent negotiation
invalid. The validity of the negotiation in favor of PNB cannot be impaired even if the negotiation
between Noah and its first vendees was in breach of faith on the part of the vendees or by the fact
that Noah was deprived of the possession of the same by fraud, mistake or conversion if PNB paid
value in good faith without notice of such breach of duty, fraud, mistake or conversion.
PNB is entitled to the delivery of the sugar covered by the quedans. PNB whose debtor was the
owner of the quedan shall be entitled to such aid from the court
of appropriate jurisdiction attaching such document or in satisfying the claim by means as is allowed
by law or in equity in regard to property which cannot be readily attached or levied upon by ordinary
process. If the quedans were negotiable in form and duly indorsed to PNB, the delivery of the
quedans to PNB makes PNB the owner of the property covered by said quedans and on deposit with
Noah, the warehouseman. PNB's right to enforce the obligation of Noah as a warehouseman, to
deliver the sugar stock to PNB as holder of the quedans, does not depend on the outcome of the
third-party complaint because the validity of the negotiation transferring title to the goods to PNB as
holder of the quedans is not affected by an act of RNS Merchandising and St. Therese Merchandising
in breach of trust, fraud or conversion against Noah's Ark. It is also held that the quedans were
negotiable documents and had been duly negotiated to the PNB which acquired the rights set out in
Article 1513 of the Civil Code.
2. PNB V. JUDGE BENITO C. SE, JR.
(256 SCRA 380)
FACTS: In accordance with Act No. 2137, the Warehouse Receipts Law, Noah’s Ark Sugar Refinery
issued on several dates, 5 Warehouse Receipts (Quedans).
They were endorsed and negotiated to Ramos and Zoleta. They failed to pay their loans upon
maturity. So, PNB wrote to Noah’s Ark Sugar Refinery demanding delivery of the sugar stocks
covered by the quedans endorsed to it by Zoleta and Ramos.
Noah’s Ark Sugar Refinery refused. So, PNB filed a complaint for “Specific Performance with
Damages and Application for Writ of Attachment”.
Respondent Judge Benito C. Se, Jr., in whose sala the case was raffled, denied the Application for
Preliminary Attachment.
25
HELD: Under the subject Warehouse Receipts provision, storage fees are chargeable. PNB is legally
bound to stand by the express terms and conditions on the face of the Warehouse Receipts as to the
payment of storage fees. Even in the absence of such a provision, law and equity dictate the payment
of the warehouseman’s lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law (R.A.
2137), to wit:
SECTION 27. What claims are included in the warehouseman’s lien. – Subject to the provisions of
section thirty, a warehouseman shall have lien on goods deposited or on the proceeds thereof in his
hands, for all lawful charges for storage and preservation of the goods; also for all lawful claims for
money advanced, interest, insurance, transportation, labor, weighing coopering and other charges
and expenses in relation to such goods; also for all reasonable charges and expenses for notice, and
advertisement of sale, and for sale of the goods where default has been made in satisfying the
warehouseman’s lien.
SECTION 31. Warehouseman need not deliver until lien is satisfied. – A warehouseman having a lien
valid against the person demanding the goods may refuse to deliver the goods to him until the lien is
satisfied.
After being declared as the warehouseman, PRs cannot legally be deprived of their right to enforce
their claim for warehouseman’s lien, for reasonable storage fees and preservation expenses.
Pursuant to Section 31 which we quote earlier, the goods under storage may not be delivered until
said lien is satisfied.
Considering that PNB does not deny the existence, validity and genuineness of the Warehouse
Receipts on which it anchors its claim for payment against PRs, it cannot disclaim liability for the
payment of the storage fees stipulated therein.
PNB is in estoppel in disclaiming liability for the payment of storage fees due the PRs as
warehouseman while claiming to be entitled to the sugar stocks covered by the subject Warehouse
Receipts on the basis of which it anchors its claim for payment or delivery of the sugar stocks. The
unconditional presentment of the receipts by PNB for payment against PRs on the strength of the
provisions of the Warehouse Receipts Law (R.A. 2137) carried with it the admission of the existence
and validity of the terms, conditions and stipulations written on the face of the Warehouse Receipts,
including the unqualified recognition of the payment of warehouseman’s lien for storage fees and
preservation expenses. PNB may not now retrieve the sugar stocks without paying the lien due PRs
as warehouseman.
RULE: While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery to it
shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because,
in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien
upon goods by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his lien,
because a warehouseman’s lien is possessory in nature.
WHEREFORE, the petition should be, as it is, hereby dismissed for lack of merit.
V. GUARANTY AND SURETYSHIP
1. ROMULO MACHETTI v s . HOSPICIO DE SAN JOSE and FIDELITY & SURETY COMPANY OF
THE PHILIPPINE ISLANDS
FACTS: Machetti undertook to construct a building for Hospicio. One of the agreement’s condition
was for the contractor to obtain the "guarantee" of the Fidelity and Surety Company. The guarantee
was for the compliance of Machetti to the contract’s terms and conditions.
26
Subsequently it was found that the work had not been carried out in accordance with the
specifications which formed part of the contract. Hospicio therefore refused to pay the balance of the
contract price.
Machetti thereupon brought an action to which Hospicio presented a counterclaim. After the issue
was joined, Machetti, on petition of his creditors declared insolvency. An order was then entered
suspending the proceeding in the case.
Hospicio filed a motion asking that the Fidelity be made cross-defendant which was granted. Hospicio
then filed a complaint against the Fidelity asking for a judgment against the company upon its
guaranty.
CFI rendered judgment against the Fidelity. The case is now before this court upon appeal by the
Fidelity from said judgment.
ISSUE: WON the contract is one of guaranty or surety.
JUDGMENT: The judgment appealed from is reversed.
HOLDING: The circumstances in the contract are distinguishing features of contracts of guaranty.
The contract is the guarantor's separate undertaking in which the principal does not join. It rests on a
separate consideration moving from the principal and that although it is written in continuation of the
contract for the construction of the building, it is a collateral undertaking separate and distinct from the
latter.
While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay
if the principal cannot pay. The one is the insurer of the debt, the other an insurer of the solvency of
the debtor.
The Fidelity having bound itself to pay only in the event its principal, Machetti, cannot pay it follows
that it cannot be compelled to pay until it is shown that Machetti is unable to pay. Such inability to pay
is not determined until the final liquidation of his estate and is not sufficiently established by the mere
fact that he has been declared insolvent in insolvency proceedings.
2. SEVERINO V SEVERINO
FACTS: Melecio Severino upon his death, left considerable properties. To end litigation among heirs,
a compromise was effected where defendant Guillermo (son of MS) took over the property of
deceased and agreed to pay installment of 100K to plaintiff (wife of MS) payable first in 40K cash
upon execution of document in 3 equal installments. Enrique Echauz became guarantor.
Upon failure to pay the balance, plaintiff filed and action against the defendant and Echauz. Enchauz
contends that he received nothing from affixing his signature in the document and the contract lacked
the consideration as to him.
ISSUE: WON there is a consideration for the guaranty?
HELD: The proof shows that the money claimed in this action has never been paid and is still owing
to the plaintiff; and the only defense worth noting in this decision is the assertion on the part of
Enrique Echaus that he received nothing for affixing his signature as guarantor to the contract which
is the subject of suit and that in effect the contract was lacking in consideration as to him.
The guarantor or surety is bound by the same consideration that makes the contract effective
between the principal parties thereto.
The compromise and dismissal of a lawsuit is recognized in law as a valuable consideration; and the
dismissal of the action which Felicitas Villanueva and Fabiola Severino had instituted against
Guillermo Severino was an adequate consideration to support the promise on the part of Guillermo

27
Severino to pay the sum of money stipulated in the contract which is the subject of this action. The
promise of the appellant Echaus as guarantor therefore binding.
It is neither necessary that guarantor or surety should receive any part of the benefit, if such there be
accruing to his principal.
Thus, judgment affirmed.
3. GATEWAY ELECTRONICS CORP V ASIANBANK CORP.
FACTS: In July 1996, Geronimo delos Reyes and Andrew delos Reyes executed separate but almost
identical deeds of suretyship for Gateway in favor of respondent Asianbank Corporation. Later
developments saw Asianbank extending to Gateway several export packing loans and secured by a
chattel mortgage over Gateway’s equipment. Gateway initially made payments on its loan obligations,
but later on defaulted. Asianbank extended the maturity dates of the loan several times. Gateway
issued two checks but was dishonored for insufficiency of funds. Asianbank’s demand for payment
upon Gateway and its sureties went unheeded.
In December 1999, Asianbank filed a complaint for a sum of money against Gateway, Geronimo and
Andrew. And in October 2003 the RTC rendered judgement in favor of Gateway. Gateway, Geronimo
and Andrew appealed to the CA and then Gateway filed a petition of insolvency in November 2004. In
October 2005 the CA affirmed the decision of the RTC. Gateway and Geronimo interposed a motion
for reconsideration and followed by a Supplemental Motion for Reconsideration on January 2006. On
December 2004, Gateway was declared insolvent by the RTC in Imus and directing all its creditor to
appear before the court for the purpose of choosing the assignee of Gateway’s estate.
In March 2006, the CA denied the motion for reconsideration.
ISSUE: Whether or not an action commenced by a creditor against a judicially declared insolvent for
the recovery of his claim should be dismissed and referred to the insolvency court.
Whether or not claims against a surety may proceed independently from that against the principal
debtor.
Whether or not the surety cannot be made to pay since the principal cannot, owing to the order of
insolvency, be made to pay its obligation.
Whether or not a deed of suretyship would secure a loan obligation contracted three years after the
execution of the surety deed.
HELD: The petition is DENIED and the CA resolution AFFIRMED with modifications that any claim
against Gateway, shall be pursued before the RTC in Cavite as the insolvency court.
RULING: The issuance of the insolvency order of December 2004 had the effect of automatically
staying the civil action for a sum of money filed by Asianbank against Gateway. No creditor whose
debt is provable under this Act shall be allowed, to prosecute to final judgement any action therefore
against the debtor until the question of the debtor’s discharge shall have been determined, and any
such suit proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be
stayed to await the determination of the court on the question of discharge. (Sec 60 of Act No. 1956)
A creditor’s right to proceed against the surety exists independently of his right to proceed against the
principal. Under Art 1216 of the Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. If the obligation is joint and several, the creditor has
the right to proceed even against the surety alone.
The rule that the obligation of a guarantor may be less, but cannot be more than the principal debtor.
The rule cannot plausibly be stretched to mean that a guarantor or surety is freed from liability as
such guarantor or surety in the event the principal debtor becomes insolvent or is unable to pay the
28
obligation. The essence of a suretyship contract refers to an agreement whereunder one person, the
surety, engages to be answerable for the debt, default, or miscarriages of another known as principal.
A continuing guaranty is one which is not limited to a single transaction, but which contemplates a
future course of dealing, covering a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended to provide security with respect to
future transactions within certain limits, and contemplates a succession of liabilities, for which, as they
accrue, the guarantor becomes liable.
4. E ZOBEL, INC. VS. CA
FACTS: Respondent spouses Raul and Elea Claveria applied for a loan with respondent
SOLIDBANK. The loan was granted subject to the condition that spouses execute a chattel mortgage
over the 3 vessels to be acquired by them and that a continuing guarantee be executed by petitioner
EZ, Inc. in favor of Solid Bank. The spouses defaulted in payment of the entire obligation
uponmaturity. SolidBank filed a complaint for the sum of money against EZ Zobel. Petitioner moved
to dismiss the complaint on the ground that its liability as guarantor of the loan was extinguished
pursuant to Article 2080.
ISSUE: WON, Art. 2080 is applicable to petitioner; WON, petitioner’s obligation to SOLIDBANK under
the continuing guaranty is that of a surety;
HELD: A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.[7] A
contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of another in case
the latter does not pay the debt.
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency
of the debtor and thus binds himself to pay if the principal is unable to pay while a surety is the insurer
of the debt, and he obligates himself to pay if the principal does not pay.
Based on the aforementioned definitions, it appears that the contract executed by petitioner in favor
of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of
the contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit to
respondent spouses. This can be seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a single
proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with business address x
x x (hereinafter called the Borrower), for the payment of which the undersigned is now obligated to
you as surety and in order to induce you, in your discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other manner to, or at the request or for the
account of the Borrower…”
Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied upon by
petitioner, finds no application to the case at bar. In Bicol Savings and Loan Association vs.
Guinhawa,[12] we have ruled that Article 2080 of the New Civil Code does not apply where the
liability is as a surety, not as a guarantor.
5. PHIL. EXPORT AND FOREIGN LOAN GUARANTEE CORP VS. VP EUSEBIO CONSTRUCTION
CORP
G.R. NO. 140047 MARCH 31, 2003
FACTS: This case is an offshoot of a service contract entered into by a Filipino construction firm with
the Iraqi Government for the construction of the Institute of Physical Therapy-Medical
Center(hereinafter the Project). The State Organization of Buildings (SOB), , awarded the
construction to Ajyal Trading and Contracting Company (hereinafter Ajyal). Respondent spouses
29
Eduardo and Iluminada Santos, in behalf of respondent 3-Plex International, Inc. (hereinafter 3-Plex),
entered into a joint venture agreement with Ajyal wherein the former undertook the execution of the
entire Project, while the latter would be entitled to a commission of 4% of the contract price. Later,
respondent 3-Plex, not being accredited by or registered with the Philippine Overseas Construction
Board (POCB), assigned and transferred all its rights and interests under the joint venture agreement
to VPECI, a construction and engineering firm duly registered with the POCB. However, on 2 May
1981, 3-Plex and VPECI entered into an agreement that the execution of the Project would be under
their joint management.5To comply with the requirements of performance bond and advance
payment bond, 3-Plex and VPECI applied for the issuance of a guarantee with Philguarantee, a
government financial institution empowered to issue guarantees for qualified Filipino contractors to
secure the performance of approved service contracts abroad.
Subsequently, letters of guarantee were issued by Philguarantee to the Rafidain Bank of Baghdad. Al
Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to Rafidain Bank, but it
required a similar counter-guarantee in its favor from the Philguarantee
SOB and the joint venture VPECI and Ajyal executed the service contract for the construction of the
Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad, Iraq. It
commenced only on the last week of August 1981 instead of the June 2 1981
Prior to the deadline, upon foreseeing the impossibility to meet it, the surety bond was also and the
Advance Payment Guarantee was extended three times more until it was cancelled for
reimbursement
Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of its performance
bond counter-guarantee
VPECI requested Iraq Trade and Economic Development Minister Mohammad Fadhi Hussein to
recall the telex call on the performance guarantee for being a drastic action in contravention of its
mutual agreement that (1) the imposition of penalty would be held in abeyance until the completion of
the project; and (2) the time extension would be open, depending on the developments on the
negotiations for a foreign loan to finance the completion of the project.
VPECI advised the Philguarantee not to pay yet Al Ahli Bank because efforts were being exerted for
the amicable settlement of the Project
VPECI received another telex message from Al Ahli Bank stating that it had already paid to Rafidain
Bank the sum of US$876,564 under its letter of guarantee, and demanding reimbursement by
Philguarantee
VPECI requested the Central Bank to hold in abeyance the payment by the Philguarantee "to allow
the diplomatic machinery to take its course, for otherwise, the Philippine government , through the
Philguarantee and the Central Bank, would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed against a Filipino contractor,
Central Bank authorized the remittance to Al Ahli Bank
Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank, and reiterated the joint
and solidary obligation of the respondents to reimburse the Philguarantee for the advances made on
its counter-guarantee but they failed to pay so a case was filed in the RTC
RTC and CA: Against Philguarantee since no cause of action since it was expired because VPECI.
Inequity to allow the Philguarantee to pass on its losses to the Filipino contractor VPECI which had
sternly warned against paying the Al Ahli Bank and constantly apprised it of the developments in the
Project implementation.

30
ISSUE: Whether the Philippine laws should be applied in determining VPECI's default in the
performance of its obligations under the service contract
HELD: YES. No conflicts rule on essential validity of contracts is expressly provided for in our laws
The rule followed by most legal systems, however, is that the intrinsic validity of a contract must be
governed by the lex contractus or "proper law of the contract." This is the law voluntarily agreed upon
by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex
loci intentionis) - none in this case
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties is
the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether respondent
VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that foreign
law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as
the processual presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is
not proved, the presumption is that foreign law is the same as ours
In the United States and Europe, the two rules that now seem to have emerged as "kings of the hill"
are (1) the parties may choose the governing law; and (2) in the absence of such a choice, the
applicable law is that of the State that "has the most significant relationship to the transaction and the
parties Another authority proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are determined by the law of the place of
performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the
contract in a significant way
In this case, however, the petitioner has clearly waived these rights and remedies by making the
payment of an obligation that was yet to be shown to be rightfully due the creditor and demandable of
the principal debtor.
6. ESCAÑO V. ORTIGAS, JR.
526 SCRA 26 (JUNE 29, 2007)
FACTS: On April 28, 1980, Private Development Corporation of the Philippines (PDCP) entered into
a loan agreement with Falcon Minerals, Inc. (Falcon) amounting to $320,000.00 subject to terms and
conditions. [“Nagpautang ang PDCP sa Falcon ng $320K]
On the same day, 3 stockholders-officers of Falcon: Ortigas Jr., George A. Scholey, and George T.
Scholey executed an Assumption of Solidary Liability “to assume in [their] individual capacity, solidary
liability with [Falcon] for due and punctual payment” of the loan contracted by Falcon with PDCP.
Two (2) separate guaranties were executed to guarantee payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities. One guaranty
was executed by Escaño, Silos, Silverio, Inductivo and Rodriguez.
Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Matti.
Contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the heirs of then
already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, Silos and
Matti. An Undertaking dated June 11, 1982 was executed by the concerned parties, namely: with
Escaño, Silos and Matti as “SURETIES” and Ortigas, Inductivo and Scholeys as “OBLIGORS”
Falcon eventually availed of the sum of $178,655.59 from the credit line extended by PDCP. It would
also execute a Deed of Chattel Mortgage over its personal properties to further secure the loan.
However, Falcon subsequently defaulted in its payments. After PDCP foreclosed on the chattel
mortgage, there remained a subsisting deficiency of Php 5,031,004.07 which falcon did not satisfy
despite demand.

31
ISSUE: Whether the obligation to repay is solidary, as contended by respondent and the lower courts,
or merely joint as argued by petitioners.
HELD/RULING: In case, there is a concurrence of two or more creditors or of two or more debtors in
one and the same obligation, Article 1207 of the Civil Code states that among them, “[t]here is a
solidary liability only when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.” Article 1210 supplies further caution against the broad interpretation of
solidarity by providing: “The indivisibility of an obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indivisibility.” These Civil Code provisions establish that in case of
concurrence of two or more creditors or of two or more debtors in one and the same obligation, and in
the absence of express and indubitable terms characterizing the obligation as solidary, the
presumption is that the obligation is only joint. It thus becomes incumbent upon the party alleging that
the obligation is indeed solidary in character to prove such fact with a preponderance of evidence.
Note that Article 2047 itself specifically calls for the application of the provisions on joint and solidary
obligations to suretyship contracts. Article 1217 of the Civil Code thus comes into play, recognizing
the right of reimbursement from a co-debtor (the principal debtor, in case of suretyship) in favor of the
one who paid (i.e., the surety).[However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor can compel any
one of the joint and several debtors or the surety alone to answer for the entirety of the principal debt.
The difference lies in the respective faculties of the joint and several debtor and the surety to seek
reimbursement for the sums they paid out to the creditor. In the case of joint and several debtors,
Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim
from his co-debtors only the share which corresponds to each, with the interest for the payment
already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount
already paid to the creditor, because the right to recovery extends only to the proportional share of
the other co-debtors, and not as to the particular proportional share of the solidary debtor who already
paid. In contrast, even as the surety is solidarily bound with the principal debtor to the creditor, the
surety who does pay the creditor has the right to recover the full amount paid, and not just any
proportional share, from the principal debtor or debtors. Such right to full reimbursement falls within
the other rights, actions and benefits which pertain to the surety by reason of the subsidiary obligation
assumed by the surety.
*Petitioners and Matti are jointly liable to Ortigas, Jr. in the amt. of P1.3M; Legal interest of 12% per
annum on P 1.3M computed from March 14, 1994. Assailed rulings are affirmed. Costs against
petitioners
7. RCBC V ARRO
FACTS: Residoro Chua and Enrique Go, Sr. executed a comprehensive surety agreements to
guaranty among others, any existing indebtedness of Davao Agricultural Industries Corporation (the
latter is referred to as Daicor).
A promissory note in the amount of P100,000 was issued in favor of petitioner RCBC payable on
June 13, 1977.
The note note was signed by Enrique Go, Sr. in his personal capacity and in behalf of Daicor.
The promissory note was not fully paid despite repeated demands; hence, petitioner filed a complaint
for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua.
Respondent Residoro Chua on the ground that the complaint states no cause of action as against
him.
He alleged that can not be held liable under the promissory note because it was only Enrique Go, Sr.
who signed the same in behalf of Daicor and in his own personal capacity.
32
Petitioner alleged that by virtue of the execution of the comprehensive surety agreement, respondent
is liable because said agreement is continuing; and it encompasses every other indebtedness the
Daicor may, from time to time incur with petitioner bank.
ISSUE: WON Respondent Chua is liable.
RULING: YES. The comprehensive surety agreement was jointly executed by respondent Residoro
Chua and Enrique Go, Sr., President and General Manager respectively, of Daicor, to cover existing
as well as future obligations which Daicor may incur with the petitioner bank, subject only to the
proviso that their liability shall not exceed P100,000.00.
The guaranty is a continuing one which shall remain in full force and effect until the bank is notified of
its termination.
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the purpose of having
an additional capital for buying and selling coco-shell charcoal and importation of activated carbon,
the comprehensive surety agreement was admittedly in full force and effect.
The loan was, therefore, covered by the said agreement, and private respondent, even if he did not
sign the promissory note, is liable by virtue of the surety agreement.
The only condition that would make him liable thereunder is that the Daicor "is or may become liable
as maker, endorser, acceptor or otherwise". There is no doubt that Daicor is liable on the promissory
note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a principal one which, in this case is the loan obtained
by Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to grant the loan was the surety agreement whereby Go and
Chua bound themselves solidarily to guaranty the punctual payment of the loan at maturity.
It can be clearly seen that the surety agreement was executed to guarantee future debts which Daicor
may incur with petitioner, as is legally allowable under the Civil Code.
Thus —Article 2053. — A guaranty may also be given as security for future debts, the amount of
which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.
8. WILLEX PLASTIC, INC. V. CA, INTERNATIONAL CORPORATE BANK (1996)
DOCTRINE: It is never necessary that a guarantor or surety should receive any part orbenefit, if such
there be, accruing to his principal
FACTS: 1978: Inter-Resin took out a loan from Manila Bank. As additional security,
Inter-Resin and Investment Underwriting (IUCP) executed a Continuing Surety Agreement stating that
they are liable to Manila Bank solidarily for the loan taken out by Inter-Resin
1979: Inter-Resin and Willex Plastic executed a Continuing Guarantee for the loan which Inter-Resin
obtained from Investment Underwriting to the extent of P5M.
1981: Investment Underwriting (IUCP) paid Manila Bank P4M to satisfy Inter-Resin’s 1978 Obligation
Investment Underwriting (IUCP) then demanded payment of the P4M from both Inter-Resin and
Willex
Inter-Resin paid IUCP P600K from the proceeds of its fire insurance

33
Willex denied obligation, it alleged that it is only a guarantor of the principal, hence its liability was
only secondary to the principal and that it did not receive consideration nor benefit from the contract
between the bank and Inter-Resin.
Willex insisted that IUCP should pursue Inter-Resin and apply to the loan the assets of the latter first
before going after it.
Willex further alleged that it is guarantor of a loan to Manila Bank and not to Interbank, hence the
Continuing Guaranty cannot be retroactive applied as contracts of suretyship contemplates future
dealing.
ISSUE: WON Willex is liable as guarantor for the loans obtained by Inter-Resin to IUCP?
HELD: Yes. Intent is controlling: clear from the evidence that the Continuing Guarantee executed by
Willex with Inter-Resin would cover sums obtained (in the past– retroactive) and/or to be obtained by
Inter-Resin Industrial from Interbank -
Although a contract of suretyship is ordinarily not to be construed as retrospective, in the end the
intention of the parties as revealed by the evidence is controlling– apply it to the 1978 loan.
Guarantor or surety is bound by the same consideration that makes the contract effective between
the principal parties thereto. . . . It is never necessary that a guarantor or surety should receive any
part or benefit, if such there be, accruing to his principal.
BETWEEN GUARANTOR AND CREDITOR
1. SOUTHERN MOTORS VS ELISEO BARBOSA
FACTS: Plaintiff Southern Motors brought an action against defendant Barbosa to foreclose a real
estate mortgage constituted by the latter in favor of the former, as security for the payment of a sum
extended by plaintiff to one Alfredo Brillantes, because the latter failed to settle his obligation in
accordance with the terms and conditions corresponding with the deed of mortgage.
Defendant filed an answer admitting the allegations of the complaint and alleging by way of special
and affirmative defense that he executed the deed of mortgage for the sole purpose of guaranteeing
the above mentioned debt of Brillantes and that therefore plaintiff cannot foreclose the mortgage
property without a prior exhaustion of the principal's properties
After the case transferred from one judge to another, the trial court rendered judgment on the
pleadings in favor of plaintiff that prompted respondent to appeal before the C&A who certified the
case to the SC in view of the fact that the appeal raises purely questions of law.
ISSUE: WON plaintiff is required to exhaust debtor-principal's property before he can proceed to
foreclose the mortgage.
HELD: No. Defendant's invocation of article 2058 of the Civil Code is misplaced because the right of
the guarantors to demand exhaustion of the property of the principal debtor under said provision
exists only when a pledge or mortgage has not been given as special security for the payment of the
principal obligation.
Under the given facts of the case, a mortgage was executed as security for brillantes' debt, hence,
defendant's reliance upon the aforementioned provision cannot be sustained, for what governs in this
case are the provisions under title XVI of the Civil Code concerning pledge and mortgages.
2. WISE & CO. VS. TANGLAO 62 PHIL. 372
FACTS: In the Court of First Instance of Manila, Wise & Co. instituted civil case No. 41129 against
Cornelio C. David for the recovery of a certain sum of money David was an agent of Wise & Co. and
the amount claimed from him was the result of a liquidation of accounts showing that he was indebted
34
in said amount. In said case Wise & Co. asked and obtained a preliminary attachment of David's
property. To avoid the execution of said attachment, David succeeded in having his Attorney Tanglao
execute on January 16, 1932, a power of attorney (Exhibit A) in his favor, with the following clause:
To sign for me as guarantor for himself in his indebtedness to Wise & Company of Manila, which
indebtedness appears in civil case No. 41129, of the Court of First Instance of Manila, and to
mortgage my lot (No. 517-F of the subdivision plan Psd-20, being a portion of lot No. 517 of the
cadastral survey of Angeles, G. L. R. O. Cad. Rec. No. 124), to guarantee the said obligations to the
Wise & Company, Inc., of Manila.
ISSUE:
RULING: There is no doubt that under Exhibit, A, Tanglao empowered David, in his name, to enter
into a contract of suretyship and a contract of mortgage of the property described in the document,
with Wise & Co. However, David used said power of attorney only to mortgage the property and did
not enter into contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao became
David's surety for the payment of the sum in question. Neither is this inferable from any of the clauses
thereof, and even if this inference might be made, it would be insufficient to create an obligation of
suretyship which, under the law, must be express and cannot be presumed.
It appears from the foregoing that defendant, Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640. The only obligation which Exhibit B, in connection
with Exhibit A, has created on the part of Tanglao, is that resulting from the mortgage of a property
belonging to him to secure the payment of said P640. However, a foreclosure suit is not instituted in
this case against Tanglao, but a purely personal action for the recovery of the amount still owed by
David.
3. PRUDENTIAL BANK V. IAC GR No. 748868
December 1992
FACTS: Philippine Rayon Mills, Inc. (PRMI) entered into a contract with Nissho Co., Ltd. of Japan for
the importation of textile machineries under a five-year deferred payment plan. To effect payment for
said machineries, PRMI applied for a commercial letter of credit with the petitioner Prudential Bank
and Trust Company in favor of Nissho. By virtue of said application, the Prudential Bank opened
Letter of Credit No. DPP-63762. Thereafter, Nissho drew and issued drafts against said letter of credit
which were all paid by the Prudential Bank.Upon the arrival of the machineries, the Prudential Bank
indorsed the shipping documents to PRMI, which accepted delivery of the same. As a condition
imposed by Prudential on PRMI to take delivery of the machineries, the latter executed a trust receipt
covering all machineries which was signed by private respondent Anacleto Chi in his capacity as
President of PRMI, in favor of Prudential. At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should PRMI fail to pay the total amount or any portion of the
drafts issued by Nissho and paid for by Prudential. Nonetheless, the form was signed only by
Chi.Subsequently, PRMI ceased business. However, its obligation arising from the letter of credit and
the trust receipt remained unpaid and unliquidated. Hence, the present action against PRMI and Chi.
ISSUES:
1. WON private respondent Chi may be considered a guarantor
2. WON Chi may be jointly and severally liable with the principal debtor PRMI for the obligation
sought to be enforced
3. WON the civil case against Chi should be dismissed since petitioner Prudential Bank has not
exhausted all legal remedies against the principal debtor PRMI
35
HELD:
1. YES. The obligation of Chi is that of a guarantor. This is bolstered by the last sentence in the trust
receipt which speaks of a waiver of the benefit of exhaustion (excussion).
2. NO. Chi is only secondarily liable. The solidary guaranty clause in the trust receipt would have
been effective if such trust receipt had been signed by two guarantors, however, only Chi signed
such. The clause "we jointly and severally agree and undertake" refers to the undertaking of the two
parties who are to sign it. It does not refer to the undertaking between either one or both of them on
the one hand and PRMI on the other with respect to the liability described under the trust receipt.
3. NO. Excussion is not a condition sine qua non for the institution of an action against a guarantor.
There is nothing procedurally objectionable in impleading Chi as a co-defendant in the civil case. The
provisions under the Rules of Court allow the permissive joinder of parties.
4. IMPERIAL INSURANCE V. DELOS ANGELES
(G.R. NO. L-28030, JANUARY 18, 1982)
FACTS: Private respondents are the plaintiffs in 2 separate cases where they obtained a writ of
preliminary attachment and, accordingly, levied upon all the properties of the defendant, Felicisimo V.
Reyes.
For the dissolution of the said attachments, The Imperial Insurance, Inc., as surety, and Felicisimo, as
principal, posted a bond of P60,000.00 in one case and P40,000.00 in another.
Both cases were tried jointly and a decision was rendered in favor of the plaintiffs. The records of the
cases were remanded to the CFI-Quezon, for execution of judgment. The lower Court, presided by
Judge Delos Angeles, issued the writs of execution of judgment in said cases. The Provincial Sheriff
of Bulacan returned the writs of execution' unsatisfied in whole or in part'.
Private respondents filed a 'motion for recovery on the surety bonds'. Thereafter, said private
respondents, thru counsel, sent a letter of demand upon petitioner asking the latter to pay them the
accounts on the counter-bonds. Respondent Judge, in his order, rendered judgment against the
counter-bonds.
Petitioner filed a petition for certiorari with prayer for for preliminary injunction with the Court of
Appeals to restrain the enforcement of the writ of execution.
During the pendency of the case, the defendant, Felicisimo died. He was duly substituted by his
surviving spouse, Emilia T. David, an administratrix of his intestate estate.
ISSUE:
W/N the CA erred in holding that Judge Delos Angeles could legally issue the writ of execution
against the petitioner as surety in a counterbond (bond to dissolve attachment) on the basis of an ex-
parte motion for execution which was neither served upon the surety nor set for hearing. NO.
W/N the counterbonds given by the defendant Felicisimo and its surety, The Imperial Insurance,
should me made liable after the execution was returned unsatisfied. YES.
HELD: Although the counterbond contemplated in the aforequoted Sec. 17, Rule 57, of the Rules of
Court is an ordinary guaranty where the sureties assume a subsidiary liability, the rule cannot apply to
a counterbond where the surety bound itself "jointly and severally" (in solidum) with the defendant as
in the present case.
The Imperial Insurance, Inc. had bound itself solidarily with the principal, the deceased defendant
Felicisimo V. Reyes. In accordance with Article 2059, par. 2 of the CC of the Phil., excussion

36
(previous exhaustion of the property of the debtor) shall not take place "if he (the guarantor) has
bound himself solidarily with the debtor."
The judgment having been rendered against the defendant, Felicisimo V. Reyes, the counter-bonds
given by him and the surety, The Imperial Insurance, Inc., under Sec. 12, Rule 57 are made liable
after execution was returned unsatisfied. Under the said rule, a demand shall be made upon the
surety to pay the plaintiff the amount due on the judgment, and if no payment is so made, the amount
may be recovered from such surety after notice and hearing in the same action. A separate action
against the sureties is not necessary.
In the present case, the demand upon the petitioner surety was made with due notice and hearing
thereon when the private respondents filed the motion for recovery on the surety bonds.
Therefore, all the requisites under Sec. 17, Rule 57, being present, namely: (1) the writ of execution
must be returned unsatisfied, in whole or in part; (2) the plaintiff must demand the amount due under
the judgment from the surety or sureties, and (3) notice and hearing of such demand although in a
summary manner, complied with, the liability of the petitioner automatically attaches.
As a solidary guarantor, the petitioner, the Imperial Insurance, Inc., is liable to pay the amount due on
such counter-bonds should the creditors, private respondents herein, choose to go directly after it.
5. MIRA HERMANOS, INC. VS. MANILA TOBACONISTS, INC.
FACTS: To secure the obligation of Manila Tobaconists up to the sum of 3,000 under contract with
Mira Hermanos who agreed to deliver to Manila Tobacconists' merchandise for sale on consignment
under certain specified terms, Provident Insurance Co. executed a bond of 3,000. Since the value of
merchandise exceeded 3,000 Manila Compania de Seguros executed a bond of 2,000 with the same
terms and conditions that the bonds would respond for the obligation of Manila Tobacconists. Mira
Hermanos sued the 2 insurance companies for the amount of 2,500
ISSUE: WON Provident Insurance Co. is entitled to the benefit of division.
HELD: No, The benefit of division is applicable only where there are several guarantors or sureties of
only one debtor for the same debt. In the instant case, although the 2 bonds on their face appear to
guarantee the same debt co-extensively up to 2K - that Provident Insurance Co. alone extending
beyond the sum up to 3K - in reality said bonds do not guarantee the same debt.
Art. 2065 should there be several guarantors of only one debtor and for the same debt, the obligation
to answer for the same is divided among all. The creditor cannot claim from the guarantors except
shares which they are respectively bound to pay, unless solidarily has been expressly stipulated. The
benefit of division against the co-guarantors ceased in the same cases and for the same reasons as
the benefit of excussion against the principal debtor.
6. SYQUIA V. JACINTO 1934
FACTS: BPI executed in favor of Perfecto and Felipe Jacinto and Palma a sum of P24,000 with a 9%
interest PA.
The defendants executed a promissory note in favor of BPI.
After 4 years, BPI, in consideration of one peso and other valuable considerations, assigned and
transferred said judgment to Gregorio Syquia.
After another 4 years, the widow of Gregorio Syquia, as administratrix of his estate, filed a suit
against the defendants reciting the aforementioned judgement and assignment and alleging that
since the date of said judgment, none of the defendants paid anything thereon and there remains due
the sum of 24,000 php with interest.

37
The defendants, on its answer, admitted the judgment and assailed the following defenses:
That the said judgment had lapsed and it was necessary to revive the same
They denied the assignment to Syquia
They denied the allegation that nothing had been paid on said judgment and that the full amount
thereof was still due.
They set-up a special defense that the judgment which the plaintiff was attempting to revive has been
fully paid
That at the time of making the assignment to Gregorio Syquia, the bank had no right or interest under
the said judgment, the same having been fully paid
The petition does not state the facts sufficient to constitute a cause of action.
Bank countered and said that an execution to be issued under said judgment and the sheriff on the
request of the bank sold at said public sale 3 properties belonging to the defendants which had been
previously attached.
BPI was the highest bidder crediting the amount of its bid to the said judgment.
Bank took control and possession of the said parcels of land and has been collecting revenues
thereof and that Gregorio Syquia has been receiving the same since that time withought any right.
Revenues amounting to 10k php was never applied as credit on said judgment.
Defendants pray that the be absolved from the demand and condemn the estate of G. Syquia to pat
the sum of 10k.
On the trial of this case, it was shown at the execution sale, the bank bought 2 of the properties of the
defendants Jacinto and 1 more property from Reyes which was not credited on the judgement debt
pentind the detedrmination of Reyes’ claim of priority.
Palma paid 100php leaving a net balance due of 13k php
TC: Plama did not file any separate answer nor special defenses available to him as guarantor but
merely joined in the answer of his codefendants pleading that the bank jad been fully paid.
It should be noted too that the execution which was issued under the judgment of Dec 1924 and
under which said parcels of land sold on April 1925, was directly solely against the principal debtors,
Jacintos and Palma not being mentioned therein.
Appellant argues that when the bank acquired said properties at the sheriff’s sale for the sum of 15k
php, it paid much less than they were worth, in view of the fact that they yielded an annual revenue of
10k php.
The bank on August 1928 sold and conveyed said parcels to Gregorio Syquia for the sum of 45kphp.
Syquia acquired nothing from by the assignment of the judgment to him by the bank (because it
appears that at the sale by the bank to Syquia, said account was marked as balanced and closed and
that the principal debtors and the guarantor was discharhed from further liability on the judgement)
Appellant invokes the equitable principle that no person should enrich himself unjustly at the expense
of another.
ISSUE:
WoN the property was sold fo greatly below its value?
WoN the defendants did not exercise any right of redemption?
38
HELD: Court held that there should be credited upon the judgement for the benefit of the guarantor
alone the sum of P10K, being the revenues collected and retained during the year of redemption by
G. Syquia.
Palma, as guarantor is entitled to benefits of Articles 1830, 1832 and 1852 of the Old CC.
Up to the present, the creditor has made no demand from Palma.
The demand can only be made only after judgment on the debt, for the “exhaustion of the principal’s
property’ – the benefit of which the guarantor claims – cannot even begingto take place before the
judgment has been obtained.
After judgement, only then can the liability of the creditor begin under article 1833.
It will be absurd and futile to point out “saleable property of the debtor” at the inception of the suit,
when it cannot be seized or sold and require the creditor to make a levy upon it,
There is no competent ecidence that the Jacintos are insolvent.
Even if they were now, there can be no certainty that they may not be in funds when an execution on
the revived judgement is issued
The judgment creditor has not exhausted his remedies against the principal debtors and he is still
looking to them for payment.
IT IS NOT FOR THE GUARANTOR to anticipate a demand on him and to offer defences thereto
which have not matured
The benefits are only available to the guarantor only after “demand for payment”
Defenses he presented, without the demand, is purely HYPOTHETICAL, which the courts does not
undertake to decide.
Palma contingently liable only in the sum of 3kphp.
7. JN DEVELOPMENT CORPORATION vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORPORATION
FACTS: Petitioner JN Development Corporation and Traders Royal Bank entered into an agreement
that the latter would extend to JN an Export Packing Credit Line for Two Million Pesos. The loan was
covered by several securities, including a real estate mortgage and a letter of guarantee from
respondent Philippine Export and Foreign Loan Guarantee Corporation, covering seventy percent
(70%) of the credit line. With PhilGuarantee issuing a guarantee in favor of TRB. For failure of
petitioner JN to pay upon maturity, PhilGuarantee was made to pay. When JN failed to reimburse the
latter, respondent PhilGuarantee filed a Complaint for collection of money and damages against
herein petitioners.
The RTC dismissed PhilGuarantee’s Complaint as well as the counterclaim of petitioners. It ruled that
petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB since the latter was able
to foreclose the real estate mortgage executed by JN, thus extinguishing petitioners’ obligation.
According to the RTC, the failure of TRB to sue JN for the recovery of the loan precludes
PhilGuarantee from seeking recoupment from what it paid to TRB. Thus, PhilGuarantee’s payment to
TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.
ISSUE: WON petitioner is still liable to indemnify the guarantor despite the latter seemingly waiving
its right to excussion?
HELD: Yes. The Court held that PhilGuarantee’s waiver of the right of excussion cannot prevent it
from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the
guarantor what the latter has paid.Under a contract of guarantee, the guarantor binds himself to the
39
creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. The
guarantor who pays for a debtor, in turn, must be indemnified by the latter.However, the guarantor
cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor
and resorted to all the legal remedies against the debtor. This is what is otherwise known as the
benefit of excussion.
8. BITANGA VS. PYRAMID CONST.
G.R. NO. 173526 AUGUST 28, 2008
FACTS: Pyramid filed with the RTC a Complaint for specific performance and damages with
application for the issuance of a writ of preliminary attachment against the petitioner and wife Marilyn.
Respondent alleged in its Complaint that, it entered into an agreement with Macrogen Realty, of
which Bitanga is the President, to construct for the latter the Shoppers Gold Building located in
Parañaque City. Respondent commenced civil, structural, and architectural works on the construction
project. However, Macrogen failed to settle respondent’s progress billings. Petitioner, through his
representatives and agents, assured respondent that the outstanding account of Macrogen would be
paid and relying on the assurances made by petitioner, respondent continued the construction
project.
Later, respondent suspended work on the construction project since the conditions that it imposed for
the continuation thereof, including payment of unsettled accounts, had not been complied with by
Macrogen. Respondent instituted with the Construction Industry Arbitration Commission (CIAC) a
case for arbitration against Macrogen Realty seeking payment by the latter of its unpaid billings and
project costs. Before the arbitration case could be set for trial, Pyramid and Macrogen entered into a
Compromise Agreement, with petitioner acting as signatory for and in behalf of Macrogen Realty.
Under the Compromise Agreement, Macrogen Realty agreed to pay respondent the total amount of
P6,000,000.00 by installments. Petitioner guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of Guaranty in favor of respondent, by virtue of
which he irrevocably and unconditionally guaranteed the full and complete payment of the principal
amount of liability of Macrogen. Upon joint motion of respondent and Macrogen Realty, the CIAC
approved the Compromise Agreement.
Macrogen Realty failed and refused to pay all the monthly installments agreed upon in the
Compromise Agreement. Hence respondent moved for the issuance of a writ of execution against
Macrogen, which CIAC granted.
The sheriff filed a return stating that he was unable to locate any property of Macrogen Realty, except
its bank deposit of P20,242.33, with the Planters Bank, Buendia Branch.
Respondent then made, a written demand on petitioner, as guarantor of Macrogen to pay the liability
or to point out available properties of the Macrogen within the Philippines sufficient to cover the
obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent’s demands were
left unheeded.
Petitioner filed with the RTC his Answer to respondent’s Complaint. As a special and affirmative
defense, petitioner argued that the benefit of excussion was still available to him as a guarantor since
he had set it up prior to any judgment against him. According to petitioner, respondent failed to
exhaust all legal remedies to collect from Macrogen the amount due under the Compromise
Agreement, considering that Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premise, petitioner could not be held liable as guarantor.
ISSUE: WON petitioner can avail of the benefit of excussion

40
HELD: petition denied for lack of merit; CA affirmed; Bitanga (alone; not including his wife who is not
a party to the compromise agreement) is liable as per Compromise Agreement or the contract of
guaranty.
NO. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail to do so. The guarantor who pays for a debtor, in
turn, must be indemnified by the latter. However, the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor. This is what is otherwise known as the benefit of excussion
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the benefit of excussion, he must set it up
against the creditor upon the latter’s demand for payment from him, and point out to the creditor
available property of the debtor within Philippine territory, sufficient to cover the amount of the debt
It must be stressed that despite having been served a demand letter at his office, petitioner still failed
to point out to the respondent properties of Macrogen Realty sufficient to cover its debt as required
under Article 2060 of the Civil Code. Such failure on petitioner’s part forecloses his right to set up the
defense of excussion.
Worthy of note as well is the Sheriff’s return stating that the only property of Macrogen Realty which
he found was its deposit of P20,242.23 with the Planters Bank.
Article 2059(5) of the Civil Code thus finds application and precludes petitioner from interposing the
defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution on the property of the principal debtor would not result in
the satisfaction of the obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the Bitanga cannot be compelled to pay Pyramid because the
Macrogen Realty has allegedly sufficient assets. Reason: The said [petitioner] had not genuinely
controverted the return made by Sheriff Bisnar, who affirmed that, after exerting diligent efforts, he
was not able to locate any property belonging to the Macrogen Realty, except for a bank deposit with
the Planter’s Bank at Buendia, in the amount of P20,242.23. It is axiomatic that the liability of the
guarantor arises when the insolvency or inability of the debtor to pay the amount of debt is proven by
the return of the writ of execution that had not been unsatisfied
BETWEEN DEBTOR AND GUARANTOR
1. SAENZ VS. YAP CHUAN, 1910
• Palanca, Saenz - guarantor for Gov't
• Yap Chuan (20k) & 4 other (5k) - guarantor for Saenz
Guarantor (Saenz) seeks reimbursement for P20,000.00, the amount of the bond executed by sub-
guarantors, notwithstanding that he paid only P8,000.00 of his bond.
FACTS: By order of the court, Palanca, as judicial administrator of an estate, gave a bond to
guarantee his administration. The judicial bond was executed by Palanca, Saenz and others jointly
and severally in favor of the Government for the sum of P60k. In turn, Palanca and five (5) others,
executed in favor of Saenz another bond as follows: Yap Chuan for P20k; and the 4 others, for P5k

41
each to guarantee the reimbursement of whatever amounts which Saenz might be required to pay by
reason of the judicial bond aforementioned.
Saenz was ordered by the court to pay to the estate the sum of P48k. Saenz only paid P8k. Applying
the terms of the bond executed by the guarantors of Saenz, the TC ordered his 4 guarantors to pay
the stipulated 5k each/ 20k.
ISSUE: Should the 4 guarantor reimburse Saenz P5,000.00 each or a total of P20,000.00
notwithstanding that Saenz had paid only P8,000.00 of his bond?
HELD: No. (1) Guarantor's right of reimbursement limited to amount paid. —The right of subrogation
cannot be interpreted in such absolute terms as to include more than the surety (guarantor) has paid,
for, though it is true that he puts himself in the place of the creditor and should have the same rights
as the latter in consequence of the subrogation, it is no less certain that there would be an unjust
enrichment to the prejudice of the debtor, if the surety who pays for him were permitted to claim more
than what he paid.
2. TUASON V. MACHUCA, 1924
a) Debtor bound himself to pay surety as soon as the latter may have become liable whether or
not he shall have actually paid creditor.
b) Debtor is being held liable by surety for expenses incurred by the latter in litigation between
him and creditor.
FACTS: Manila Compania de Seguros (surety) signed a note for P10k in favor of Tuason, Tuason
Inc. (creditor) to guarantee a liability of Universal Trading Co (debtor). In turn, Debtor and its
president, Machuca, bound themselves solidarily to reimburse surety all such sums as surety may
pay or become bound to pay, upon its obligation to Credtor, whether or not it shall have actually paid
such sums. Debtor was declared insolvent. Creditor brought action against surety to recover the
value of the note, and won in court. Later, surety filed a complaint against Machuca to recover the
amount which surety was sentenced to pay, plus litigation expenses, although surety had not, in fact,
paid the amount of the judgment.
ISSUE:
1. Is the surety entitled to reimbursement even if it (surety) has not paid yet? Yes
2. Does such reimbursement include litigation expenses initiated by Tuason? No
a. Does such reimbursement include litigation expenses initiated by it (surety)? Yes
HELD:
1. Yes. According to the document executed solidarily by Tuason and Machuca, Machuca bound
himself to pay Surety as soon as the Surety may have become bound and liable, whether or not it
shall have actually paid. Indeed, the Surety became bound in view of the judgement against it filed by
Tuason.
2. Machuca must not be held responsible for the expenses incurred by Surety in the litigation
between it and Tuason. That litigation was originated by Surety having failed to fulfill its surety
obligation with Tuason and it cannot charge Machuca with the expenses it was compelled to make by
reason of its own fault.
a. It is entitled, however, to the expenses incurred by it in the action brought by it against
Machua.
3. KUENZLE & STREIFF VS. SUNCO, 1909

42
FACTS: Kuenzle & Streiff (creditor) instituted an action against Chung Chu Sing (debtor) for the
recovery of indebtedness. Before Kuenzle & Streiff could secure judgment, Sunco (guarantor)
brought an action against Chung Chu Sing for the payment of another obligation for which Sunco
acted as guarantor. Chung Chu Sing confessed judgment in favor of Sunco. Immediately after
obtaining judgment, Sunco caused to be levied upon under execution all the properties of Chung Chu
Sing. Kuenzle & Streiff commenced an action to set aside said judgment, claiming it that Sunco had
not paid the debt for which he guarantees.
ISSUE: Is a guarantor, who won a judgement against his principal debtor, before paying the latter’s
debt himself, entitled to execute said judgment?
HELD: No, while the guarantor, even before he pays, has the right (under 2071) to obtain judgment
against his principal debtor, he will not be permitted to execute said judgment or collection, until he
has satisfied the payment of the obligation of which he guarantees.
4. COCHINGYAN & VILLANUEVA VS. R&B SURETY AND INSURANCE, 1987
2071 – guarantor, even before paying, can sue debtor
2079 –extension; theory of 2079; debtor may become insolvent during extended period, to the
prejudice of guarantor
FACTS: PAGRICO (debtor) obtained a P400k increase in its credit line from PNB (creditor). The
increased amount was secured by a surety bond executed by R&B (surety). In turn, Cochingyan and
Villanueva (surety’s indemnitors) executed separate Indemnity Agreements to answer for R&B’s
obligation under the surety bond. PAGRICO defaulted and R&B made partial payments to PNB. R&B
then filed a case demanding indemnification from Cochingyan and Villanueva. Then Cochingyan
entered into a trust agreement with PNB, where PNB agreed to refrain from suing PAGRICO’s
sureties.
ISSUE # 1: W/N the filing of the complaint by R&B was premature since PNB had not yet sued R&B
for the forfeiture of the surety bond. (NO) = 2071
RATIO: The indemnity agreements allow R&B to recover from the indemnitors even before R&B
shall have paid PNB. This is sanctioned by 2071.
ISSUE # 2: W/N the trust agreement extended the term of the surety bond so as to release
Villanueva from his obligation as indemnitor as he did not consent to the execution of the trust
agreement (NO) 2079
An extension granted to the debtor by the creditor without the consent of the guarantor(not
indemnitor) extinguishes the guaranty. The mere failure on the part of the creditor to demand
payment after the debt has become due does not of itself constitute any extension of time referred to
herein.
RATIO # 2:
• SC: Untenable, for two reasons:
• Applying 2nd sentence of 2079: PNB’s undertaking under the trust agreement to refrain from
enforcing its claim against R&B did not extend the maturity of R&B‘s surety obligation. In other words,
the undertaking of PNB to "hold in abeyance any action to enforce its claim" against R & B did not
amount to an "extension granted to the debtor" without Villanueva's consent so as to release CV from
their undertaking as indemnitors of R & B Surety under the Indemnity Agreements.
• Applying 1st sentence of 2079: Assuming there it was an extension, Cochingyan and
Villanueva remained bound only to R&B as its indemnitors and are not guarantors of PNB.

43
• The theory behind Article 2079 is that an extension of time given to the principal debtor by the
creditor without the surety's consent would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditor's remedies against the principal debtor upon the original
maturity date. The surety is said to be entitled to protect himself against the contingency of the
principal debtor becoming insolvent during the extended period.
5. MERCANTILE INSURANCE V. YSMAEL ET AL, 1989
2071 applies
• PNB = creditor
• Ysmael etl = debtor and indemnitors of Merc
• Merc = surety of PNB
FACTS: Merc as surety, issued 2 bonds in favor of PNB. Ysmael et al executed with the Mercantile
Insurance Co., Inc. an indemnity agreement binding to indemnify the Merc, from any payments which
said company as surety shall incur or become liable to pay pursuant to Paragraph 3 of the indemnity
agreement.
The Bonds were reduced by P40,000.00 so that the total liability of Merc to PNB.
Ysmael et al failed to pay PNB. PNB demanded from Mercantile.
Merc sued the Ysmael et al regarding the said demand of PNB.
Lower court dismissed case for lack of cause of action, as Merc has paid nothing in the surety bonds,
therefore, they have not suffered any actual loss.
ISSUE: Is Merc allowed indemnification from even before it has paid to the creditor? Yes = 2071
HELD: The defendants executed with Merc indemnity agreements which provide that payment of
indemnity may be claimed whether or not Merc has actually paid the same as provided in paragraph
3 of contract.
6. ESCAÑO, SILOS V. ORTIGAS, 2007
Ortigas - argues that a surety and solidary debtor are no different, hence, since Escano et al are
identified sureties, their liabilities are solidary
SC – No! Tolentino says they are different.
FACTS: Falcon Minerals, Inc. (Falcon/debtor) availed a credit line from PDCP (creditor).
Ortigas guaranteed this loan.
An additional separate guaranty in favor of Falcon were executed by other officers of Falcon; Escaño,
Silos and Matti
Falcon eventually availed of the credit line extended by PDCP. However, Falcon subsequently
defaulted in its payments.
Ortigas paid the obligation to PDCP and sued Escao, Silos and Matti.
RTC rulef for Ortigas and held defendants as solidary. CA affirms.
Issue: Is the obligation of Escano et al to repay 1.3M Ortigas solidary? No Joint only, Ortigas failed to
discharge burden of proving vis 1217 there is a solidary liability only when the obligation expressly so
states
Ruling: Surety solidary debtor

44
Right to reimbursement only
Article 1217 makes plain that the solidary debtor who effected the payment to the creditor “may claim
from his co-debtors only the share which corresponds to each. Such solidary debtor will not be able to
recover from the co-debtors the full amount already paid to the creditor, because the right to recovery
extends only to the proportional share of the other co-debtors
Right to indemnification 2066
In contrast, the surety who does pay the creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor or debtors.
Right to subrgation 2067
A. EXTINGUISHMENT
1. ASIATIC PETROLEUM CO. V. HIZON, 1923
Shorter Facts: the agency to sell of the debtor was extended to places other than that covered by the
original contract of agency w/o knowledge of surety
Shorter Ruling: SC applied 1143 OCC (1215 NCC – x x x Novation shall extinguish the old oblig.)
FACTS: A TC judgment was rendered in favor of the Asiatic to recover from David, as principal, the
sum P40k, and from Hizon, as surety, a portion of the same debt not to exceed the sum of P5,000. As
regards the liability declared by the trial court against Hizon, an appeal was taken both Hizon claiming
that he should have been wholly absolved.
RULING: Common law It is fundamental in the law of suretyship that any agreement between the
creditor and the principal debtor which essentially varies the terms of the principal contract, without
the consent of the surety, will release the surety from liability.
Though not specifically expressed in the Civil Code, it may be deduced, so far as its application to the
facts of this case is concerned, from the second paragraph of article 1822 in relation with article 1143
of the same Code. It requires no argument to show that the increase of liability incident to the
extension of the agency to other places was prejudicial to the interest of the appellant.
DISPOSITIVE: To reverse the appealed judgment as it awards the sum of P5,000 against the Hizon,
and he will be completely absolved from the complaint.
2. RADIO CORP. V. ROA, 1935
FACTS: Roa became indebted to PTE, in the sum of P28k payable in 71 equal monthly installments
with accelerating clause. PTE assigned all its right and interest in that contract to the Radio Corp.
Radio Corp gave Roa extension on an instalment due.
ISSUE: In view of the extension, which liability were guarantors released? (a) the one month
installment due, (b) or the whole amount of their obligation? The whole amount
Law applicable Articles 1851 OCC; An extension grated to the debtor by the creditor, without the
consent of the guarantor, extinguishes the latter's liability.
NCC Article 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any extension of time referred to herein.
(1851a)
RULING: In view of the acceleration clause, the act Radio Corp in extending the payment of one
installment, without the consent of the guarantors, constituted in fact an extension of the payment of
the whole amount of the indebtedness. Therefore the guarantors are discharged.
45
3. PEOPLE’S BANK V. TAMBUNTING, 1971
Waiver of 2080; The guarantors, even though they be solidary, are released from their obligation
whenever by some act of the creditor they cannot be subrogated to the rights, mortgages, and
preference of the latter.
FACTS: People’s bank approved Tambunting’s request for an extension of his payment and the
release of the pledge of 135 shares of stocks. Tambunting failed to pay and Santana (surety) along
with Tambunting was sued for the recovery of the sum of money. Santana contends that he was
released from his obligation because the Bank had extended the time of payment and released to the
Tambuntings without his consent, the 135 shares of stocks.
ISSUE: Can Article 2080 be waived?
RULING: Yes. The contract of guaranty expressly authorized the bank to extend the time of payment
and to release or surrender any security or part thereof held by it without notice to, the consent of,
Santana.
Such waiver is not contrary to public policy, because the right is purely personal.
4. PNB V. MANILA SURETY, 1965
Creditor (PNB) neglected to collect from principal debtor’s debtors, contrary to its duty as holder of
irrevocable power of attorney from debtor.
FACTS: ATACO, principal debtor of PNB (creditor), has a debt and constituted PNB as its assignee
and attorney-in-fact to collect from the Bureau of Public Works (ATACO’s debtor) the funds payable
to ATACO. PNB, for 8 months, faithfully collected the sums due from Bureau of Public Works.
Thereafter, for unexplained reasons, PNB stopped collecting before the debt was fully collected,
thereby allowing such funds to be taken and exhausted by other creditors.
PNB is now collecting from ATACO and Manila Surety to recover the balance of the indebtedness.
ISSUE: Is Manila Surety exonerated from liability to PNB?
HELD: Yes, even if the assignment with the power of attorney from the principal debtor was
considered as a mere additional security, still, by allowing the assigned funds to be taken and
exhausted without notifying Manila Surety, PNB deprived the Manila Surety of the possibility of taking
recourse against the security. PNB thereby exonerated Manila Surety, pursuant to 2080, the
guarantors, even though they be solidarily, are released from their obligation whenever by some act
of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter.
5. SPOUSES TOH V. SOLIDBANK, FBPC, & SPOUSES LI, 2003
There is a waiver by the sureties of the rights of notice on extension for the credit line, but for every
extension of 30 days, 25 % of the credit extended must be paid first.
FACTS: Spouses Toh and Li were among the stockholders of FBPC. FBPC obtained a credit line
with a Solidbank. It requires a Continuing Guaranty to be signed by both spouses Toh & Li. It contains
a waiver by the sureties of the rights of notice on extension for the credit line, but for every extension
of 30 days, 25 % of the credit extended must be paid first.
When the credit line expired, Solidbank extended them for ninety days without requiring FBPC to pay
at least 25 percent of the amount of the L/C extended.
About a month later, Solidbank received information that the spouses Li had fraudulently absconded.
So the bank sent a demand letter to FBPC and the spouses Toh invoking the acceleration clause and
demanding the total balance of the accommodation amounting to P10.5 million.

46
Sps Toh contended that the Continuing Surety Agreement has been extinguished by the extensions
of the due dates of the L/Cs without the required 25 percent payment per extension.
ISSUE: Are Sps Toh discharged as surety under 2079 vis 25% deposit?
RULING: Yes. While the bank may extend the due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the requirements that the L/Cs extension for a period of
thirty (30) days is subject to 25% partial payment. Any doubt on the terms and conditions of the surety
agreement should be resolved in favor of Sps Toh especially because they are only accommodation
sureties, i.e. they received nothing out of the security contract they signed.
Compliance with this requirement was not waived by Sps Toh. For this unwarranted exercise of
discretion, Solidbank should suffer the loss. And as a result of these illicit extensions, Sps Toh are
relived as sureties of FBPC under Art. 2079 - An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. The mere failure on the part of the
creditor to demand payment after the debt has become due does not of itself constitute any extension
of time referred to herein.
6. STRONGHOLD INSURANCE V. REPUBLIC-ASAHI, 2006
The death of the principal debtor does not, as a rule, extinguish the obligation and the solidary nature
of the surety
FACTS: Republic Asahi Glass contracts with JDS Construction. JDS files the required performance
bond with Stronghold Insurance acting as surety. JDS fell behind schedule on the construction,
prompting RAG to rescind the contract and demand the compliance bond. The owner of JDS died.
SHI refuses to pay the bond claiming that the death of JDS owner extinguishes the obligation.
ISSUE: Is SHI right?
RULING: No. Death will only extinguish an obligation if this is personal in nature or intransmissible
(pursuant to a law or contract). In the case bar, the liabilities of Santos under his contracts with SHI
were not intransmissible. Since his death did not result in the extinguishment of his liabilities, SHI as
surety cannot use his death to escape its obligation under its performance bond.
Moreover, his liability to RAG is direct, primary and absolute; in other words, he is directly and equally
bound with the principal debtor.
VI. PLEDGE, MORTGAGE AND ANTICHRESIS
A. COMMON PROVISIONS
1.UY TONG VS. CA (161 SCRA 383)
FACTS: Spouses Uy Tong purchased from BAYANIHAN 7 units of motor vehicles for P47,700.00
payable in 3 installments. The transaction was evidenced by a Written Agreement which provided that
if VENDEE should fail to pay the latter shall become automatically the owner of the former’s
apartment in Binondo, Manila, with the only obligation on its part to pay unto the VENDDE P3,535.00
and that VENDEE shall execute the corresponding Deed of Absolute Sale in favor of the Vendor
and/orAssignment of Leasehold Rights. This agreement, according to the petitioners is in the nature
of a pactum commissorium which is null and void.
ISSUE: WON the agreement is in the nature of pactum commisorium
HELD: No. A perusal of the terms of the questioned agreement evinces no basis for the application of
the pactum commissorium provision. First, there is no identification of any contract of mortgage
entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.

47
Second, there is no case of automatic appropriation of property because it took the intervention of the
trial courts to exact fulfillment of the obligation.
2. A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION V. COURT OF APPEALS AND
SPOUSES JAVILLONAR
FACTS: A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to the
spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the following
documents: (a) a promissory note stating an interest charge of 4% per month for six months; (b) a
deed of mortgage over realty; (c) an undated DEED OF SALE of the mortgaged property in favor of
the mortgagee A. Francisco Realty.
The promissory note expressly provided that when the spouses fail to pay the interest on the loan, the
property will be transferred to A.Francisco and the deed of sale will be registered.
On February 1992, A.Francisco claimed that Javillonar failed to pay the interest and thus registered
the land in its favor. On March 1992, Spouses loaned an additional P2.5M from A.Francisco in
exchange for another promissory note with a provision that upon failure to pay their loans, they would
immediately vacate the premises. On May 1992, A.Francisco demanded possession of the property.
The spouses refused. A.Francisco then filed an action for possession and payment of the interest
from the loan with the RTC. Spouses counterclaimed for the cancellation of the TCT of A.Francisco.
RTC ruled in favor of A.Francisco.
CA reversed the decision of the RTC.
ISSUE: W/N the contractual documents are constitutive of pactum commissorium.
HELD: YES. Thus the registration of A.Francisco is void.
In the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent
spouses to pay interest, ownership of the property would be automatically transferred to petitioner A.
Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum
commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v.
Court of Appeals, 20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security
for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.
3. REYES v. SIERRA
FACTS: VICENTE REYES SOUGHT TO REGISTER UNDER HIS NAME A PARCEL OF LAND
LOCATED IN ANTIPOLO, RIZAL, WHICH WAS OPPOSED BY SIERRA ET AL.
TC approved Reyes’ application, declaring him owner of said land owing to his and his predecessor-
in-interest’s constructive possession of the same, particularly because they had been paying the
realty taxes thereon since 1926 until 1961
Origin of the dispute over land was because in 1926, the Sierras’ predecessor, Basilia Beltran,
borrowed P100 from Vicente Reyes, Sr. and secured the loan with the said piece of land. In so doing,

48
Basilia’s children executed together with her a document (“katibayan ng papgpapahintulot sa aming
ina na ipananagutan kay Vicente Reyes sa inutang na halagang P100”)
Beltran, however, died in 1938 without being able to pay the loan and Vicente Reyes, Jr. continued in
possession thereof, believing that the document executed was a contract of sale and not of mortgage
Oppositors Sierra et al now claiming that the words “sangla”, “ipinanagutan sa halagang isangdaang
piso” manifest that the document was one of mortgage
ISSUE: Whether or not the contract was mortgage?
HELD: Yes.
The intention of the parties at the time it was executed must prevail, i.e., the borrowing and lending of
money with security. The terms indicate a debt and the creation of a creditor-debtor relationship,
where the land was used to secure repayment of the loan.
Following established doctrine, once a mortgage attaches to a transaction, its character as a
mortgage will always continue. The parties cannot by any stipulation deprive it of the essential
attributes of a mortgage in equity. Civil Code itself provides: The creditor cannot appropriate the
things given by way of mortgage
Act of Vicente Reyes in registering the property in his name after failure of mortgagor to redeem the
property constitutes a pactum commisorium which is against good morals and public policy.
Court also declared that possession by Reues has not been continuous (they had only used the
property to spend some vacation time there, but this was discontinued for the last 23 years).
Moreover, mere failure of owner to pay taxes does not necessarily imply abandonment of a right to
property; and on the other hand, payment of realty taxes by itself does not constitute sufficient
evidence of title.
Application by Reyes for registration should therefore be dismissed. Oppositors directed to pay back
the P100 debt plus interest (6% p.a.) from 1926 until paid.
4. OLEA VS. CA
FACTS: On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of
Sale Con Pacto de Retro over Lot No. 767 of the Passi Cadastre covered by Transfer Certificate of
Title No. 26424 in their name for a consideration of P950.00 in favor of Maura Palabrica, predecessor
in interest of petitioner, subject to the condition that “if we, the said spouses, Filoteo Pacardo and
Severa de Pacardo, our heirs, assigns, successors-in-interest, executors and administrators shall and
will truly repurchase the above-described parcel of land from the said Maura Palabrica, her heirs,
assigns, successors-in-interest after THREE YEARS counting from the date of the execution of this
instrument, to wit, on January 27, 1950 in cash payment in the sum of Five Hundred Pesos,
Philippine currency, plus Four Hundred and Fifty Pesos (P450), also lawful currency, in cash or
eighteen (18) cavans of palay (Provincial Measurement) at our option, then this sale shall become
null and void and of no force and effect whatsoever. On the contrary, the same will become
irrevocable, definite and final.”
The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public
Victorio Tagamolila on the same day the contract was executed in the Municipality of Passi, Province
of Iloilo.
After the execution of the sale, the Pacardo spouses as vendors remained in possession of the land
and continued the cultivation thereof. Since the sale on 27 January 1947 up to August 1987, or for a
period of about 40 years, the spouses delivered annually one-third (1/3) of the produce of the land to
Maura Palabrica and kept for themselves the remaining two-thirds (2/3).
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Despite the lapse of 3 years, the Sps. Pacardo failed to repurchase the property but still gave the 1/3
share of the produce to Maura Palabrica. Filoteo Sr. died and Filoteo Jr. continued to give the 1/3
share to Maura and eventually to Thelma Olea, daughter of Maura, to whom she eventually sold the
land. Maura caused the registration of the sale con pacto de retro on 22 Sept 1969.
Filoteo Jr. died and Sps. Jesus and Elizabeth Palencia took over but they gave the 1/3 share not to
Thelma but to Elena Pacardo, wife of Filoteo Jr.
Thelma filed a case against sps. Palencia and Elena for recovery of possession with damages.
Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth Palencia filed their answer
alleging that their parents intended the disputed transaction to be an equitable mortgage and not a
sale with right to repurchase. Respondent Monserrat Paciente, another daughter of the vendor-
spouses Filoteo and Severa Pacardo, filed an answer in intervention raising likewise as defense that
the Sale Con Pacto de Retro was indeed an equitable mortgage.
ISSUE: W/N the sale was a Sale Con Pacto de Retro?
HELD: No, Sale was an Equitable Mortgage.
We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with
right to repurchase shall be presumed to be an equitable mortgage in any of the following cases: (a)
when the price of the sale is unusually inadequate; (b) when the vendor remains in possession as
lessee or otherwise; (c) when upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is executed; (d) when the
purchaser retains for himself a part of the purchase price; (e) when the vendor binds himself to pay
the taxes on the thing sold; and, (f) in any other case where it may be fairly inferred that the real
intention of the parties is that the transaction shall secure the payment of a debt or the performance
of any other obligation. Being remedial in nature, Art. 1602 may be applied retroactively to cases prior
to the effectivity of the New Civil Code 3 Hence it may apply to the instant case where the deed of
sale with right to repurchase was executed on 27 January 1947. It has been held that a contract
should be construed as a mortgage or a loan instead of a pacto de retro sale when its terms are
ambiguous or the circumstances surrounding its execution or its performance are incompatible or
inconsistent with the theory that it is a sale.
Even when a document appears on its face to be a sale with pacto de retro the owner of the property
may prove that the contract is really a loan with mortgage by raising as an issue the fact that the
document does not express the true intent and agreement of the parties. In this case, parol evidence
then becomes competent and admissible to prove that the instrument was in truth and in fact given
merely as a security for the repayment of a loan.
In pacto de retro sale the payment of the repurchase price does not merely render the document null
and void but there is the obligation on the part of the vendee to sell back the property.
This is so because pacto de retro sales with the stringent and onerous effects that accompany them
are not favored. In case of doubt, a contract purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage.
Such stipulation that the ownership of the property would automatically pass to the vendee in case no
redemption was effected within the stipulated period is void for being a pactum commissorium which
enables the mortgagee to acquire ownership of the mortgaged property without need of foreclosure.
Its insertion in the contract is an avowal of the intention to mortgage rather than to sell the property.
Consequently, there was no valid sale to Maura Palabrica. Ownership over the property was not
transferred to her for she was merely a mortgagee. There being no title to the land that Palabrica
acquired from the spouses Filoteo and Severa Pacardo, it follows that Palabrica had no title to the
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same land which could be conveyed to petitioner. Hence there is no legal basis for petitioner to
recover possession of the property.
Sps. Pacardo still gave the 1/3 of the produce until 1987 which is equal to the interest on the rent.
Case for recovery was filed 39 years after, hence barred by estoppel by laches.
5. DAYRIT VS CA
FACTS: Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles entered into a contract with the
Mobil Oil Philippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT”. The agreement provided
among others that:
(1) Mobil grants a loan of P150,000 to borrowers,
(2) To secure the prompt repayment of such loan by defendants-borrowers to Mobil and the faithful
performance by Borrowers of that Sales Agreement, Defendants-Borrowers hereby transfer in favor
of Mobil by way of first mortgage lands together with the improvements
(3) In case of default in payment of any of the installments and/or their failure to purchase the quantity
of products stated therein Mobil shall have the right to foreclose this mortgage
(4) Mobil, in case of default and foreclosure, shall be entitled to attorney's fees and cost of collection
equivalent to not less than 25% of total indebtedness remaining unpaid
The defendants violated the Loan & Mortgage Agreement, they having paid but one installment in the
amount of P3,816. The defendants likewise failed to buy the quantities of products as required in the
Sales Agreement. The plaintiff made due demand which the defendant Dayrit answered,
acknowledging his liability in his letter.
After trial and after the parties had submitted their memoranda, the trial court rendered its decision:
“ordering them to pay to the plaintiff one-third each of the sum of P147,434.00 with interest of 10%
per annum from the time it fell due according to agreement, and in default of such payment, the
properties put up in collateral shall be sold in foreclosure sale in accordance with law, the proceeds to
be applied in payment of the amount due to the plaintiff from the defendants as claimed in the
complaint provided that, as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation”
No appeal having been interposed by the defendants, the above decision became final and
executory.
Dayrit filed his opposition to stay the execution of the decision, alleging that before the finality of the
aforesaid judgment, he and the plaintiff (Mobil) had agreed not to appeal and/or file any motion for
reconsideration, Dayrit offering to pay his one-third share with a reasonable discount, if possible, in so
far as the interests and the award for attorney's fees were concerned, with the corresponding release
of the mortgage on all his properties.
Mobil filed an opposition against the motion to stay execution alleging that it agreed to release the
mortgage or collateral for the entire judgment obligation only if “the whole principal mortgaged debt
plus the whole accrued interest were fully paid.”
After hearing the oral argument, the court denied the motion of Dayrit. Dayrit filed a petition for
certiorari with CA which the said court dismissed in a minute resolution. Dayrit elevated the case to
SC.
ISSUE: Whether or not the CFI and the CA erred in refusing to allow the alleged proposed deposit of
a sum equivalent to 1/3 of the loan agreed upon and in refusing to release forever the collaterals
owned by Dayrit, although the other 2/3 portion of the loan obligation had not been satisfied due to
insolvency of the other two co-defendants

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RULING: The complaint, in effect, is a collection suit with damages and foreclosure of mortgage
against the three defendants, Leonila Sumbillo, Reynaldo Angeles and Vincent Dayrit. Although the
Loan and Mortgage Agreement was signed by the three defendants as mortgagors, the properties
being foreclosed belong solely to, and are registered solely in the name of, the petitioner Vincent
Dayrit.
Dayrit contends that the said judgment is a simple money judgment and not a foreclosure judgment,
and that because the respondent Mobil resorted to the remedy of enforcing his right by a complaint
against Dayrit for collection of a sum of money, with the consequent simple money judgment, the
satisfaction of his 1/3 share of the joint obligation would release all the mortgaged properties put up
as collateral to secure the payment of the whole obligation.
This contention of the petitioner is clearly devoid of merit.
The decision which the petitioner describes as a simple money judgment orders the 3 to pay the
Mobil the sum of P147, 434, and in default of such payment, the properties put up in collateral shall
be sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of the
amount due to Mobil. While it is true that the obligation is merely joint and each of the defendants is
obliged to pay only his/her 1/3 share of the joint obligation, the undisputed fact remains that the intent
and purpose of the Loan and Mortgage Agreement was to secure, inter alia, the entire loan of
P150,000 that the respondent Mobil extended to the defendants. The defendants had violated the
Loan and Mortgage Agreement, they having paid but one installment.
Dayrit insists that the dispositive portion of the judgment declaring the obligation merely joint with the
proviso that "as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation," should be
construed in the light of the opinion of the lower court that "said collateral must answer in full but only
to the extent of Dayrit's liability which as above determined" is 1/3 of the obligation," thereby entitling
him to pay or deposit in court his corresponding share of the joint obligation in satisfaction thereof,
with the automatic release of all the mortgaged properties. SC held that such pronouncement is an
informal expression of the views of the court (CFI) and cannot prevail against its final order or
decision.
Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the
property upon which it is imposed, the same being indivisible even though the debt may be divided,
and such indivisibility likewise being unaffected by the fact that the debtors are not solidarily liable.
The decision unequivocally states that "in default of such payment, the properties put up in collateral
shall be sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of the
amount due to the plaintiff as claimed in the complaint." And the claim in the complaint was the full
satisfaction of the total indebtedness of P147, 434; therefore, the release of all the mortgaged
properties may be authorized only upon the full payment of the above-stated amount secured by the
said mortgage.
As Tolentino, in his Commentaries and Jurisprudence on the Civil Code of the Philippines, puts it —
“But when the several things are given to secure the same debt in its entirety, all of them are liable for
the debt, and the creditor does not have to divide his action by distributing the debt among the
various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things
are still liable for such balance.”
6. SPS BELO VS PNB & SPS ESLABON
FACTS: Eduarda Belo owned an agricultural land which she leased a portion to Sps Eslabon in
connection with the said spouses’ sugar plantation business.

52
To finance their business venture, respondents spouses Eslabon obtained a loan from PNB secured
by a real estate mortgage on their own four (4) residential houses located in Roxas City, as well as on
the land owned by Eduarda Belo. SPA was issued by Eduarda Belo as to the mortgage of her
property.
Sps Eslabon failed to pay mortgages and thereafter extrajudicial foreclosure proceedings against the
mortgaged properties were instituted by PNB. PNB was the highest bidder at the auction sale
(P447,632.00).
PNB appraised Eduarda Belo of the sale at public auction of her agricultural land. She had one-year
period to redeem the land.
Eduarda Belo sold her right of redemption to petitioner Sps Belo under a deed of absolute sale of
proprietary and redemption rights.
Sps Belo tendered payment for the redemption of the agricultural land for (P484,482.96), which
includes the bid price of respondent PNB, plus interest and expenses as provided under Act No.
3135.
PNB rejected payment contending that redemption price should be the total claim of the bank on the
date of the auction sale and custody of property plus charges accrued and interests (P2,779,978.72).
Sps Belo filed action to annul the mortgage, with an alternative cause of action to compel PNB to
accept offer of spouses Belo which is based on the winning bid price of PNB (P447,632.00) plus
interest and expenses.
RTC: Granted alternative cause of action of Sps Belo P447,632.00, plus interest and other charges
CA: Modified TC ruling that the petitioners should pay the entire amount due to PNB under the
mortgage deed at the time of the foreclosure sale plus interest, costs and expenses. As assignees of
Eduarda Belo’s right of redemption, the appellees succeed to the precise right of Eduarda including
all conditions attendant to such right. Moreover, the indivisible character of a contract of mortgage
(Article 2089, Civil Code) will extend to apply in the redemption stage of the mortgage.
ISSUES:
1. WON SPA, real estate mortgage contract, the foreclosure proceedings and the subsequent auction
sale involving Eduarda Belo’s property are valid. YES
2. WON the petitioners are required to pay, as redemption price, the entire claim of respondent PNB
(P2,779,978.72) NO
HELD:
1. YES.The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale of Eduarda Belo’s property are valid and legal.
The findings of trial courts which are factual in nature must not be disturbed.
It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon spouses
as her agents. The accommodation real estate mortgage over her property is merely an accessory
contract.
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor
did not benefit from the same. The validity of an accommodation mortgage is allowed under Article
2085 of the New Civil Code which provides that “(t)hird persons who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their own property.”
The letter of Eduarda Belo addressed to respondent PNB manifesting her intent to redeem the
property is a waiver of her right to question the validity of the SPA, etc.
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2. NO. This Court finds the petitioners’ position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor.
“Mortgagor” in Section 25 of P.D. No. 694 pertains only to a debtor-mortgagor and not to an
accommodation mortgagor.
B. PLEDGE
1. YULIONGSU VS. PNB
FACTS: Diosdado Yuliongsiu was the owner of two (2) vessels, namely The M/S Surigao (valued at
109K) and the M/S Don Dino (63K) and operated the FS-203, (210K) which he purchased from the
Philippine Shipping Commission, by installment or on account. As of January or February, 1948, he
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. He
obtained a loan of 50K from the PNB Cebu. To guarantee its payment, he pledged the M/S Surigao,
M/S Don Dino and its equity in the FS-203 to PNB, 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. Subsequently, he effected partial payment of the loan in the amount of 20K. The
remaining balance was renewed by the execution of two (2) promissory notes in the bank’s favor due
on April 16 and June 25, 1948 respectively. These two notes were never paid on their respective due
dates. PNB filed criminal charges against Yuliongsiu and two other accused for estafa thru
falsification of commercial documents, because Yuliungsiu had, as last indorsee, deposited with PNB,
from March 11 to March 31, 1948, seven BPI checks totalling 184K. They were convicted by the trial
court and sentenced to indemnify the PNB in the sum of 184K. CA affirmed. The corresponding writ
of execution issued to implement the order for indemnification was returned unsatisfied as Yuliongsiu
was totally insolvent. Meanwhile, together with the institution of the criminal action, PNB took physical
possession of the three pledged vessels while they were at the Port of Cebu, and after the first note
fell due and was not paid, the PNB Cebu Branch Manager, acting as attorney-in-fact of Yuliongsiu
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 PNB for 30K. The FS-203 was
subsequently surrendered by the PNB to the Philippine Shipping Commission which rescinded the
sale to Yuliongsiu for failure to pay the remaining installments. The other two boats, the M/S Surigao
and the M/S Don Dino were sold by PNB to third parties. Yuliongsiu commenced action in the Court
of First Instance of Cebu to recover the three vessels or their value and damages from PNB. The
lower court ruled that the bank’s taking of physical possession of the vessels 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 1K and 8K, as his
remaining account balance, or set-off these sums against the indemnity which he was ordered to pay
to it in the criminal cases. Yuliongsiu contended that the contract was a chatte mortgage and
constructive delivery is insufficient ti make the pledge effective.
ISSUE: Whether or not the contract was pledge
RULING: Yes. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract — "3.
That a credit line of 50K was extended to the him by PNB, and he obtained and received from the
said Bank the sum of 50K, 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;" This judicial admission binds the
plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization
can offset it. PNB as a pledgee was therefore entitled to the actual possession of the vessels. While it
is true that Yuliongsiu continued operating the vessels after the pledge contract was entered into, his
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possession was expressly made "subject to the order of the pledgee." There is 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. Yuliongsu contended that
constructive delivery is insufficient to make pledge effective. 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 PNB was, pursuant to the terms
of the 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.
In a contract of pledge, constructive delivery suffices. Hence, PNB's taking of the vessels therefore
was not unlawful.
2. CALTEX PHILS, INC VS CA
FACTS: On various dates, respondent bank issued 280 certificates of time deposits (CTDs) in favor
of one Angel dela Cruz. Sometime later, dela Cruz informed respondent bank of the loss of the CTDs,
which he actually delivered to petitioner in connection with his purchases of fuel products. After dela
Cruz executed and delivered the required Affidavit of Loss, respondent bank replaced the lost CTDs
which the former used to negotiate and obtain a loan. Respondent bank rejected petitioner's demand
and claim for payment of the value of the CTDs and later applied the time deposits to the payment of
dela Cruz' loan when it matured and fell due.
ISSUE: Whether or not the CTDs are negotiable instruments.
HELD: YES. The accepted rule is that the negotiability or non-negotiability of an instrument is
determined from the writing, that is, from the face of the instrument itself. In the construction of a bill
or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may
be read in the light of surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only outward and visible
expression of their meaning, no other words are to be added to it or substituted in its stead. The
documents provide that the amounts deposited shall be repayable to the depositor, who is the
"bearer" of the documents at the time of presentment.
3. CHU VS CA
FACTS: Victoria bought cement from CAMS and secured her payments with deeds of assignment
over her time deposits in Family Savings Bank. She assigned about P320K worth but her obligations
to CAMS came up to about P404K. CAMS requested the bank to encash the time deposit certificates,
which the bank did only after calling up and obtaining Victoria’s consent. Victoria then sued the bank
and CAMS for alleged pactum commissorium. The Court ruled against her, as the prohibition on
pactum commissorium was enacted in order to protect debtors from creditors who automatically
appropriate pledged or mortgaged property which might have a higher value than the debt. Where the
security for the debt is also money deposited in a bank, the amount of which is even less than the
debt, it is not illegal for the creditor to encash the time deposit certificates to pay the debtors’ overdue
obligation, with the latter’s consent.
ISSUE: Did the encashment of Victoria’s time deposit certificates amount to pactum commissorium?
HELD: NO. Since the collateral in this case was also money, there was no need to sell the thing
pledged at public auction in order to satisfy the pledgor’s obligation. All that had to be done to convert
the pledgor's time deposit certificates into cash was to present them to the bank for encashment after
due notice to the debtor.

55
The encashment of the deposit certificates was not a pactum commissorium as prohibited under
Article 2088 of the Civil Code. A pactum commissorium is a provision for the automatic appropriation
of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. This
prohibition is intended to protect the obligor, pledgor, or mortgagor against being overreached by his
creditor who holds a pledge or mortgage over property whose value is much more than the debt.
Where, as in this case, the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it is not illegal for the creditor to encash the time deposit certificates
to pay the debtors’ overdue obligation, with the latter’s consent.
4. SPS. PARAY VS DRA RODRIGUEZ
Facts: Respondents were the owners, in their respective personal capacities, of shares of stock in a
corporation known as the Quirino-Leonor-Rodriguez Realty Inc.Respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray (“Parays”) the
payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay their
loans, respondents filed complaints which sought the declaration of nullity of the pledge agreements.
Respondents consign to RTC which they interpreted as redemption.
Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal
Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares.
ISSUE: WON Petitioners were authorized to refuse as they did the tender of payment since they were
undertaking the auction sale pursuant to the final and executory decision in Civil Cases.
HELD: Yes. it must be clarified that the subject sale of pledged shares was an extrajudicial sale,
specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale.
Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by the
courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed
before a Notary Public to the sale of the thing pledged.[9]
C. REAL ESTATE MORTGAGE
1. CORNELIO M. ISAGUIRRE VS. FELICITAS DE LARA, G.R. NO. 138053, MAY 31, 2000
FACTS: Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Application
over a parcel of land identified as portion of Lot 502, Guianga Cadastre, filed with the Bureau of
Lands with an area of 2,342 square meters. Upon his death, his wife – respondent Felicitas de Lara,
as claimant, succeeded Alejandro de Lara. The Undersecretary of Agriculture and Natural Resources
amended the sales application to cover only 1,600 square meters. By virtue of a decision rendered by
the Secretary of Agriculture and Natural Resources, a subdivision survey was made and the area was
further reduced to 1,000 square meters. On this lot stands a two-story residential-commercial
apartment declared for taxation purposes in the name of respondent’s sons – Apolonio and Rodolfo,
both surnamed de Lara.
Respondent obtained several loans from the Philippine National Bank. When she encountered
financial difficulties, respondent approached petitioner Cornelio M. Isaguirre, who was married to her
niece, for assistance. A document denominated as “Deed of Sale and Special Cession of Rights and
Interests” was executed by respondent and petitioner, whereby the former sold a 250 square meter
portion of Lot No. 502, together with the two-story commercial and residential structure standing
thereon, in favor of petitioner, for and in consideration of the sum of P5,000.
Apolonio and Rodolfo de Lara filed a complaint against petitioner for recovery of ownership and
possession of the two-story building. However, the case was dismissed for lack of jurisdiction.
Petitioner filed a sales application over the subject property on the basis of the deed of sale. His
56
application was approved, resulting in the issuance of Original Certificate of Title, in the name of
petitioner. Meanwhile, the sales application of respondent over the entire1,000 square meters of
subject property (including the 250 square meter portion claimed by petitioner) was also given due
course, resulting in the issuance of Original Certificate of Title, in the name of respondent.
Due to the overlapping of titles, petitioner filed an action for quieting of title and damages with the
RTC of Davao City against respondent. After trial on the merits, the trial court rendered judgment, in
favor of petitioner, declaring him to be the lawful owner of the disputed property. However, the Court
of Appeals reversed the trial court’s decision, holding that the transaction entered into by the parties,
as evidenced by their contract, was an equitable mortgage, not a sale. The appellate court’s decision
was based on the inadequacy of the consideration agreed upon by the parties, on its finding that the
payment of a large portion of the “purchase price” was made after the execution of the deed of sale in
several installments of minimal amounts; and finally, on the fact that petitioner did not take steps to
confirm his rights or to obtain title over the property for several years after the execution of the deed
of sale. As a consequence of its decision, the appellate court also declared Original Certificate issued
in favor of petitioner to be null and void. This Court affirmed the decision of the Court of Appeals, we
denied petitioner’s motion for reconsideration.
Respondent filed a motion for execution with the trial court, praying for the immediate delivery of
possession of the subject property, which motion was granted. Respondent moved for a writ of
possession. Petitioner opposed the motion, asserting that he had the right of retention over the
property until payment of the loan and the value of the improvements he had introduced on the
property. The trial court granted respondent’s motion for writ of possession.The trial court denied
petitioner’s motion for reconsideration. Consequently, a writ of possession, together with the Sheriff’s
Notice to Vacate, was served upon petitioner.
ISSUE: Whether or not the mortgagee in an equitable mortgage has the right to retain possession of
the property pending actual payment to him of the amount of indebtedness by the mortgagor.
HELD: A mortgage is a contract entered into in order to secure the fulfillment of a principal obligation.
Recording the document, in which it appears with the proper Registry of Property, although, even if it
is not recorded, the mortgage is nevertheless binding between the parties, constitutes it. Thus, the
only right granted by law in favor of the mortgagee is to demand the execution and the recording of
the document in which the mortgage is formalized. As a general rule, the mortgagor retains
possession of the mortgaged property since a mortgage is merely a lien and title to the property does
not pass to the mortgagee. However, even though a mortgagee does not have possession of the
property, there is no impairment of his security since the mortgage directly and immediately subjects
the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the
obligation for whose security it was constituted. If the debtor is unable to pay his debt, the mortgage
creditor may institute an action to foreclose the mortgage, whether judicially or extrajudicially,
whereby the mortgaged property will then be sold at a public auction and the proceeds there from
given to the creditor to the extent necessary to discharge the mortgage loan. Apparently, petitioner’s
contention that “to require him to deliver possession of the Property to respondent prior to the full
payment of the latter’s mortgage loan would be equivalent to the cancellation of the mortgage is
without basis. Regardless of its possessor, the mortgaged property may still be sold, with the
prescribed formalities, in the event of the debtor’s default in the payment of his loan obligation.
A simple mortgage does not give the mortgagee a right to the possession of the property unless the
mortgage should contain some special provision to that effect. Regrettably for petitioner, he has not
presented any evidence, other than his own gratuitous statements, to prove that the real intention of
the parties was to allow him to enjoy possession of the mortgaged property until full payment of the
loan.

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The trial court correctly issued the writ of possession in favor of respondent. Such writ was but a
necessary consequence of affirming the validity of the original certificate of title in the name of
respondent Felicitas de Lara, while at the same time nullifying the original certificate of title in the
name of petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership; thus, it would
be redundant for respondent to go back to court simply to establish her right to possess subject
property.
2. MOBIL OIL PHILIPPINES, INC. V. DIOCARES (FERNANDO, 1969)
FACTS: In February 1965, Mobil Oil Philippines, Inc. (Mobil Oil) extended a PhP 45 000 loan to Ruth
Diocares and Lope Diocares (Diocares) in a condition that Diocares would buy on cash basis from
Mobil Oil a minimum of 50 000 liters of petroleum per month. Payment of the loan would be in
monthly installments of PhP 950 per month for a period of five years. As security, Diocares executed
a mortgage on two parcels of land. o In case of non-payment of any installment or/and non-
performance of the condition (to buy petroleum), Mobil Oil had the right to foreclose. Diocares
defaulted when the third installment was due. Only PhP 1900 was paid, leaving a balance of PhP 43
000. Diocares also failed to buy the minimum amount of petroleum per month. Mobil Oil filed a
complaint and prayed that they be paid PhP 43,000 with interest or, in default of payment, they be
allowed to sell the mortgaged properties. The Defense alleged there was no refusal of payment. They
only sought for an extension of time.
The LC ruled loan agreement created a personal obligation but it did not establish a real estate
mortgage because the mortgage was not registered. Hence, foreclosure cannot be ordered by the
LC.
ISSUE: W/N the mortgage contract, although unregistered, is binding between the same parties who
created it.
RULING: Yes. Article 2125 is clear and explicit Even if the instrument were not recorded, "the
mortgage is nevertheless binding between the parties." 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
To hold otherwise would defeat the clear codal provision that the mortgage subsists despite lack of
registration insofar as the parties thereto are concerned, and that the mortgagor is still liable thereon.
Furthermore, while the law says that registration is "indispensable" in order that the mortgage be
validly constituted, yet, what is indispensable may be dispensed with.
3. MEDIDA VS. COURT OF APPEALS AND SPS. DOLINO, 208 SCRA 887
FACTS: Private respondents, Spouses Dolino, alarmed of losing their right of redemption over the
subject parcel of land from Juan Gandiocho, purchaser of the aforesaid lot at a foreclosure sale of the
previous mortgage in favor of Cebu City Development Bank, went to Teotimo Abellana, President of
the City Savings Bank (formerly known as Cebu City Savings and Loan Association, Inc.), to obtain a
loan of P30, 000. Prior thereto, their son Teofredo filed a similar loan application and the subject lot
was offered as security. Subsequently they executed a promissory note in favor of CSB.
The loan became due and demandable without the spouses Dolino paying the same, petitioner
association caused the extrajudicial foreclosure of the mortgage. The land was sold at a public
auction to CSB being the highest bidder. A certificate of sale was subsequently issued which was
also registered. No redemption was being effected by Sps. Dolino, their title to the property was
cancelled and a new title was issued in favor of CSB.
Sps. Dolino then filed a case to annul the sale at public auction and for the cancellation of certificate
of sale issued pursuant thereto, alleging that the extrajudicial foreclosure sale was in violation of Act
3135, as amended. The trial court sustained the validity of the loan and the real estate mortgage, but

58
annulled the extrajudicial foreclosure on the ground that it failed to comply with the notice requirement
of Act 3135.
Not satisfied with the ruling of the trial court, Sps. Dolino interposed a partial appeal to the CA,
assailing the validity of the mortgage executed between them and City Savings Bank, among others.
The CA ruled in favor of private respondents declaring the said mortgage as void.
ISSUE: Whether or not a mortgage, whose property has been extrajudicially foreclosed and sold at a
corresponding foreclosure sale, may validly execute a mortgage contract over the same property in
favor of a third party during the period of redemption.
HELD: It is undisputed that the real estate mortgage in favor of petitioner bank was executed by
respondent spouses during the period of redemption. During the said period it cannot be said that the
mortgagor is no longer the owner of the foreclosed property since the rule up to now is the right of a
purchaser of a foreclosure sale is merely inchoate until after the period of redemption has expired
without the right being exercised. The title to the land sold under mortgage foreclosure remains in the
mortgagor or his grantee until the expiration of the redemption period and the conveyance of the
master deed.
The mortgagor remains as the absolute owner of the property during the redemption period and has
the free disposal of his property, there would be compliance with Article. 2085 of the Civil Code for
the constitution of another mortgage on the property. To hold otherwise would create an inequitable
situation wherein the mortgagor would be deprived of the opportunity, which may be his last recourse,
to raise funds to timely redeem his property through another mortgage.
4. DEVELOPMENT BANK OF THE PHILIPPINES vs. COURT OF APPEALS, G.R. No. 118367.
January 5, 1998
FACTS: Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated
May 13, 1974 from the Government; Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in
the Promissory Notes dated September 6, 1974; August 11, 1975; and April 4, 1977; As security for
said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her Leasehold Rights;
Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of the
Promissory Notes; Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the leasehold Rights of plaintiff Lydia Cuba over the fishpond in question; After
defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question, defendant DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in
favor of plaintiff Lydia Cuba over the same fishpond in question; In the negotiation for repurchase,
plaintiff Lydia Cuba addressed two letters to the Manager DBP, Dagupan City dated November 6,
1979 and December 20, 1979. DBP thereafter accepted the offer to repurchase in a letter addressed
to plaintiff dated February 1, 1982; After the Deed of Conditional Sale was executed in favor of
plaintiff Lydia Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued
by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband;
Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale; After
plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale, she entered
with the DBP a temporary arrangement whereby in consideration for the deferment of the Notarial
Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make certain payments as
stated in temporary Arrangement dated February 23, 1982; Defendant DBP thereafter sent a Notice
of Rescission thru Notarial Act dated March 13, 1984, and which was received by plaintiff Lydia Cuba;
After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the
fishpond in question; That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24,
59
1984, to dispose of the property; That the DBP thereafter executed a Deed of Conditional Sale in
favor of defendant Agripina Caperal on August 6, 1984; Thereafter, defendant Caperal was awarded
Fishpond Lease Agreement No. 2083-A on December 28, 1984 by the Ministry of Agriculture and
Food.
ISSUE: Whether the act of DBP in appropriating to itself CUBA's leasehold rights over the fishpond in
question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and,
therefore, invalid.
HELD: We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
Simultaneous with the execution of the notes was the execution "Assignments of Leasehold Rights"
where CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the
improvements thereon. As pointed out by CUBA, the deeds of assignment constantly referred to the
assignor (CUBA) as "borrower"; the assigned rights, as mortgaged properties; and the instrument
itself, as mortgage contract. Moreover, under condition No. 22 of the deed, it was provided that
"failure to comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed." And, condition No. 33 provided
that if "foreclosure is actually accomplished, the usual 10% attorney's fees and 10% liquidated
damages of the total obligation shall be imposed." There is, therefore, no shred of doubt that a
mortgage was intended. In People's Bank & Trust Co. vs. Odom, this Court had the occasion to rule
that an assignment to guarantee an obligation is in effect as mortgage.
5. PEOPLE'S BANK AND TRUST CO. AND ATLANTIC GULF AND PACIFIC CO. OF MANILA VS
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION AND
CONNELL BROS. CO.
FACTS: September 1948, Atlantic, a West Virginia corporation licensed to do business in the
Philippines sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber
Company. To fully paid and develop the concession, DALCO obtained a loan from the bank evidence
by 5 promissory notes of $50K maturing on different dates.
As security for the payment of loans, DALCO mortgage five lands in Camarines Norte together with
the buildings existing thereon and other personal properties located in its place of business. Another
mortgage on the same properties was made in favor of Atlantic to secure the payment of the unpaid
balance.
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. 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 heretofore
regarding "after acquired properties", the BANK requested DALCO to submit complete lists of said
properties but the latter failed to do so. 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.On January 23, 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.
ISSUES:

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(1) Whether acquired properties are covered by the subject of deeds of mortgage subject of
foreclosure (2) are the mortgages valid? what is the effect?
HELD:
(1) All property of every nature and description taken in exchange or replacement, as well as all
buildings, machineries, fixtures, tools, equipment, 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.
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".
(2) 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.
6. MOJICA VS CA
FACTS: Mojica contracted a loan of 20k with RB Kawit secured with REM. The REM states that it
secured the payment of 20k loan and such other loans or other advances already obtained or still to
be obtained, if the mortgagors fulfil their obligation then the mortgage shall become null and void.
The loan was fully paid.
A new loan was obtained by the plaintiff from RB Kawit. No formal deed of mortgage was constituted
over any property of borrowers. At the top of PN it contained the note that the PN is secured by REM
executed and guaranteed the previously paid 20k loan. The borrowers failed to pay their obligation.
RB Kawit foreclosed the real estate mortgage on the justification that it was adopted as a mortgage
for the new loan of 18K. The one year period for redemption elapses after June 1980 without plaintiffs
spouses having redeemed the foreclosure property.
The son of petitioner spouses made a partial payment which RB accepted and received,
acknowledged as partial payment of pastdue loan. Another partial payment was made, received by
RB however considered by the bank as deposit for the repurchase of the foreclosed property. The
son, Dionisio inquired for the balance, the RB issued a computation slip.
The bank registered for consolidation of owenership in the ROD acquiring new TCT. The bank
scheduled the property to be sold at public auction. The petitioners were notified. However no sale
was consummated and the property remains in the possession of the RB. The refusal of the same
bank to allow Dionisio Mojica to pay the unpaid balance of the loan as per the "Computation Slip"
amounting to P21,272.50, resulted in the filing of a complaint.

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ISSUES:
1. WON the foreclosure sale had for its basis, a valid and subsisting mortgage contract.
2. WON the RB is correct for not allowing the sales as per computation slip.
RULING:
1. It has long been settled by a long line of decisions that mortgages given to secure future
advancements are valid and legal contracts; that the amounts named as consideration in said
contract do not limit the amount for which the mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other indebtedness can be gathered.
A mortgage given to secure advancements is a continuing security and is not discharged by
repayment of the amount named in the mortgage, until the full amount of the advancements are paid
fact, it has also been held that where the annotation on the back of a certificate of title about a first
mortgage states "that the mortgage secured the payment of a certain amount of money plus interest
plus other obligations.
There was no necessity for any notation of the later loans on the mortgagors' title. It was incumbent
upon any subsequent mortgagee or encumbrances of the property in question to entry in the books
and records of the bank, as first mortgagee, regarding the credit standing of the debtors.
2.Yes. The property covered by the REM became the acquired asset of the bank. The petitioners
have lost its right of legal redemption after the lapse of one year the date of certificate of sale was
registered in the ROD. Conventional redemption was subject to be exercised up to March 3, 1982
and was extended up to April 19, 1982 for a fixed amount of P85,000.00. The respondent bank even
favored the petitioner by giving them the first preference to repurchase the property but they failed to
avail of this opportunity, although the bank "is certainly disposed to release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage property was auctioned on June 27,
1979. The only bidder was the respondent bank which bid for P26,387.04. As the highest bidder, the
respondent bank can rightfully consolidate its title over the property.
The petition is DISMISSED.
7.PRUDENTIAL BANK VS ALVIAR
Doctrine: The “dragnet clause” in the first security instrument constituted a continuing offer by the
borrower to secure further loans under the security of the first security instrument, and that when the
lender accepted a different security he did not accept the first offer.
FACTS: Spouses Alviar are the registered owners of a parcel of land in San Juan, Metro Manila
They executed a deed of real estate mortgage of the said property in favor of petitioner Prudential
Bank to secure the payment of a loan worth P250,000.00. (PN BD#75/C-252) was then issued
covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of
12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage as
aforementioned with a “blanket mortgage clause” or the “dragnet clause”.
The spouses thereafter issued other promissory notes (PN):
PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was
secured by a “hold-out” on the mortgagor’s foreign currency savings account with the bank under
Account No. 129
In the name of Donalco Trading, Inc., PN BD#76/C-430 covering P545,000.000 to be secured by
“Clean-Phase out TOD CA 3923. Bank also mentioned in their approval letter that additional

62
 securities for the loan were the deed of assignment on two PNs executed by Bancom Realty and
the chattel mortgage on various heavy and transportation equipment.
Spoused Alviar paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty
and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan
covering the two (2) lots in San Juan, Metro Manila. The payment was acknowledged by petitioner
who accordingly released the mortgage over the two properties
Prudential Bank moved for the extrajudicial foreclosure of the mortgage on the property since
respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes.
Respondents then filed a complaint for damages with a prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig,[11] claiming that they have paid their principal loan secured by the
mortgaged property, and thus the mortgage should not be foreclosed
RTC, on its final decision, favored respondents saying that the extrajudicial foreclosure was improper
for the mortgage only covers the first loan of P250,000
CA affirmed the decision of the RTC
Issue: WON real estate mortgage secures only the first loan of P250,000.
Held: Yes. While the existence and validity of the “dragnet clause” cannot be denied, there is a need
to respect the existence of the other securities given for the two other promissory notes. The
foreclosure of the mortgaged property should only then be for theP250,000.00 loan covered by PN
BD#75/C-252, and for any amount not covered by the security for the second promissory note.
Petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00
loan from the petitioner, but also future credit facilities and advancements that may be obtained by
the respondents. However, the subsequent loans obtained by respondents were secured by other
securities.
When the mortgagor takes another loan for which another security was given it could not be inferred
that such loan was made in reliance solely on the original security with the “dragnet clause,” but
rather, on the new security given. This is the “reliance on the security test.”
If the parties intended that the “blanket mortgage clause” shall cover subsequent advancement
secured by separate securities, then the same should have been indicated in the mortgage contract.
This ambiguity shall be interpreted strictly against petitioner for having drafted the same.
Petitioner, however, is not without recourse. Both the lower courts found that respondents have not
yet paid the P250,000.00. Thus, the mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course
to defenses which are available to respondents.
Petition is DENIED. CA affirmed.
8. PHILIPPINE NATIONAL BANK vs. SPOUSES CABATINGAN, G.R. No. 167058
FACTS: Respondent spouses Cabatingan obtained two loans, secured by a real estate mortgage, in
the total amount of P421, 200 from petitioner Philippine National Bank. However, they were unableto
fully pay their obligation despite having been granted more than enough time to do so. Thus, on
September 25, 1991, petitioner extrajudicially foreclosed on the mortgage pursuant to Act 3135.
Thereafter, a notice of extrajudicial sale was issued stating that the foreclosed properties would be
sold at public auction on November 5, 1991 between 9:00 a.m. and 4:00 p.m. at the main entrance of
the office of the Clerk of Court on San Pedro St., Ormoc City. Pursuant to the notice, the properties

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were sold at public auction on November 5, 1991. The auction began at 9:00 a.m. and was concluded
after 20 minutes with petitioner as the highest bidder.
On March 16, 1993, respondent spouses filed a complaint with the RTC of Ormoc for annulment of
extrajudicial foreclosure of real estate mortgage and the November 5, 1991 auction sale. They
invoked Section 4 of Act 3135 which provides:
Section 4. The sale shall be made at public auction, between the hours of nine in the morning and
four in the afternoon, and shall be under the direction of the sheriff of the province, the justice or
auxiliary justice of peace of the municipality in which such sale has to be made, or of a notary public
of said municipality, who shall be entitled to collect a fee of Five pesos for each day of actual work
performed, in addition to his expenses.
Petitioners claimed that the provision quoted above must be observed strictly. Thus, because the
public auction of the foreclosed properties was held for only 20 minutes (instead of seven hours as
required by law), the consequent sale was void. The RTC ruled in favor of Sps. Cabatingan and
annulled the sale of public auction.
Petitioner moved for reconsideration but it was denied. Hence, this petition. Petitioner contends that
the RTC erred in interpreting Section 4 of Act 3135. The law only prohibits the conduct of a sale at
any time before nine in the morning and after four in the afternoon. Thus, a sale held within the
intervening period (i.e., at any time between 9:00 a.m. and 4:00 p.m.), regardless of duration, is valid.
ISSUE: Whether a sale at public auction, to be valid, must be conducted the whole day from 9:00
a.m. until 4:00 p.m. of the scheduled auction day.
HELD: Statutes should be sensibly construed to give effect to the legislative intention. Act 3135
regulates the extrajudicial sale of mortgaged real properties by prescribing a procedure which
effectively safeguards the rights of both debtor and creditor. Thus, its construction must be equally
and mutually beneficial to both parties.
The word “between” ordinarily means “in the time interval that separates.” Thus, “between the hours
of nine in the morning and four in the afternoon” merely provides a time frame within which an auction
sale may be conducted. Therefore, a sale at public auction held within the intervening period provided
by law (i.e., at any time from 9:00 a.m. until 4:00 p.m.) is valid, without regard to the duration or length
of time it took the auctioneer to conduct the proceedings.
In this case, the November 5, 1991 sale at public auction took place from 9:00 a.m. to 9:20 a.m.
Since it was conducted within the time frame provided by law, the sale was valid.
9. METROPOLITAN BANK VS SLGT HOLDINGS, INC., G.R. NOS. 175181-82 I SEPTEMBER 14,
2007
FACTS: ASB Development Corporation is the defaulting developer of BSA Twin Towers Condo in
Ortigas. Respondent Dylanco and SLGT Holdings are unit buyers of the said project and Petitioners
Metrobank and UCPB are the lending-mortgagee banks. Dylanco and SLGT each entered into a
contract to sell with ASB for the purchase of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at
BSA Towers then being developed by the latter. As stipulated, ASB will deliver the units thus sold
upon completion of the construction or before December 1999. Relying on this and other
undertakings, Dylanco and SLGT each paid in full the contract price of their respective units. The
promised completion date came and went, but ASB failed to deliver, as the Project remained
unfinished at that time. To make matters worse, they learned that the lots on which the BSA Towers
were to be erected had been mortgaged to Metrobank and UCPB without the prior written approval of
the HLURB. SLGT and Dylanco filed with the HLURB a complaint for delivery of property and title and
for the declaration of nullity of mortgage. At this time ASB had already filed with SEC a petition for
rehabilitation and a rehabilitation receiver had in fact been appointed. According to ASB it
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encountered liquidity problems after Metrobank and UCPB simultaneously demanded payments of
their loans. On the other hand, Metrobank claims that complainants Dylanco and SLGT have no
personality to ask for the nullification of the mortgage because they are not parties to the mortgage
transaction. UCPB questioned the personality of SLGT to challenge the validity of the mortgage
reasoning that the latter is not party to the mortgage contract and maintains that the mortgage
transaction was done in good faith. HLURB ruled in favor of SLGT stating that the mortgage
constituted over the lots is invalid for lack of mortgage clearance from the HLURB. The Office of the
President and the Court of Appeals affirmed the decision.
ISSUE: Whether or not nullity extends to the entire mortgage contract
RULING: A mortgage contract is, by nature, indivisible. Consequent to this feature, a debtor cannot
ask for the release of any portion of the mortgaged property or of one or some of the several
properties mortgaged unless and until the loan thus secured has been fully paid, notwithstanding the
fact that there has been partial fulfillment of the obligation. Hence, it is provided that the debtor who
has paid a part of the debt cannot ask for the proportionate extinguishments of the mortgage as long
as the debt is not completely satisfied.
The situation obtaining in the case at bench is within the purview of the aforesaid rule on the
indivisibility of mortgage. It may be that Section 18 of PD 957 allows partial redemption of the
mortgage in the sense that the buyer is entitled to pay his installment for the lot or unit directly to the
mortgagee so as to enable him the said buyer to obtain title over the lot or unit after full payment
thereof. Such accommodation statutorily given to a unit/lot buyer does not, however, render the
mortgage contract also divisible. Generally, the divisibility of the principal obligation is not affected by
the indivisibility of the mortgage. The real estate mortgage voluntarily constituted by the debtor (ASB)
on the lots or units is one and indivisible. In this case, the mortgage contract executed between ASB
and the petitioner banks is considered indivisible, that is, it cannot be divided among the different
buildings or units of the Project. Necessarily, partial extinguishment of the mortgage cannot be
allowed. In the same token, the annulment of the mortgage is an all or nothing proposition. It cannot
be divided into valid or invalid parts. The mortgage is either valid in its entirety or not valid at all. In the
present case, there is doubtless only one mortgage to speak of. Ergo, a declaration of nullity for
violation of Section 18 of PD 957 should result to the mortgage being nullified wholly.
10. SPOUSES YAP VS SPOUSES DY, G.R. No. 171868, July 27, 2011
FACTS: The subject parcels of land designated as lot 1, 3, 4, 5, 6, 8 as well as lot 846 are originally
owned by spouses Tirambulos. They executed a REM over Lots 1,4, 5,6, and 8 in favour of the Rural
Bank of Dumaguete, predecessor of Dumaguete Rural Bank Inc. (DRBI). Later, Lots 3 and 8446
were also mortaged in favour of the same bank.
Subsequently, the Tirambulos sold all & mortgaged lots to spouse Dy without consent and knowledge
of DRBI. Tirambulos failed to pay their loans so DRBI foreclosed lots 1, 4, 5, 6, and 8 and sold at
public auction. DRBI was the highest bidder.
Later, DRBI sold lots 1, 3, and 6 to spouses Yap.
ISSUES: Is Lot 3 among the foreclosed properties?
May persons to whom several mortgaged lands were transferred without the knowledge and consent
of the creditor redeem only several parcels if all the lands were sold together for a single price at the
foreclosure sale?

RULING: We cannot subscribe to the Yaps' argument on the indivisibility of the mortgage. As held in
the case of Philippine National Bank v. De los Reyes, the doctrine of indivisibility of mortgage does

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not apply once the mortgage is extinguished by a complete foreclosure thereof as in the instant case.
The Court held:
The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending
positions. Yet, the rule on the indivisibility of mortgage finds no application to the case at bar. The
particular provision of the Civil Code referred to 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 long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of these 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.
From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of
the property or a number of the several properties mortgaged corresponding to the unpaid portion of
the debt where before foreclosure proceedings partial payment was made by the debtor on his total
outstanding loan or obligation. This also means that the debtor cannot ask for the release of any
portion of the mortgaged property or of one or some of the several lots mortgaged unless and until
the loan thus, secured has been fully paid, notwithstanding the fact that there has been a partial
fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the debt
cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not completely
satisfied.
That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on
indivisibility is obvious since the aggregate number of the lots which comprise the collaterals for the
mortgage had already been foreclosed and sold at public auction. There is no partial payment nor
partial extinguishment of the obligation to speak of. The aforesaid doctrine, which is actually intended
for the protection of the mortgagee, specifically refers to the release of the mortgage which secures
the satisfaction of the indebtedness and naturally presupposes that the mortgage is existing. Once
the mortgage is extinguished by a complete foreclosure thereof, said doctrine of indivisibility
ceases to apply since, with the full payment of the debt, there is nothing more to secure.
11. RABAT V. PHILIPPINE NATIONAL BANK, G.R. NO. 158755. JUNE 18, 2012.
FACTS: In 1980, the spouses Francisco and Merced Rabat (spouses Rabat) was granted a medium-
term loan by the Philippine National Bank (PNB) in the amount of P4M to mature three years from the
date of implementation. Subsequently, the spouses Rabat signed a Credit Agreement and executed a
Real Estate Mortgage over 12 parcels of land which stipulated that the loan would be subject to
interest at the rate of 17% per annum, plus the appropriate service charge and penalty charge of 3%
per annum on any amount remaining unpaid or not renewed when due. A few months later, the
spouses Rabat executed another document denominated as “Amendment to the Credit Agreement”
purposely to increase the interest rate from 17% to 21% per annum, inclusive of service charge and a
penalty charge of 3% per annum to be imposed on any amount remaining unpaid or not renewed
when due. They also executed another Real Estate Mortgage over 9 parcels of land as additional
security for their medium-term loan of P4 M. The several availments of the loan accommodation on
various dates by the spouses Rabat reached the aggregate amount of P3,517,380, as evidenced by
several promissory notes.

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The spouses RABATs failed to pay their outstanding balance on due date. Thus, the PNB filed a
petition for the extrajudicial foreclosure of the real estate mortgage executed by the spouses Rabat.
After due notice and publication, the mortgaged parcels of land were sold at a public auction held on
February 1987 and April 1987. The PNB was the lone and highest bidder with a bid of P3,874,800.
As the proceeds of the public auction were not enough to satisfy the entire obligation of the spouses
Rabat, the PNB sent demand letters. Upon failure of the spouses Rabat to comply with the demand to
settle their remaining outstanding obligation which then stood at P14,745,398.25, including interest,
penalties and other charges, PNB eventually filed a complaint for a sum of money before a Regional
Trial Court.
ISSUE: Whether or not PNB was entitled to recover any deficiency from the spouses Rabat?
HELD: Yes. It is settled that if the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of the mortgage, the mortgagee is entitled to claim the deficiency from the
debtor. For when the legislature intends to deny the right of a creditor to sue for any deficiency
resulting from foreclosure of security given to guarantee an obligation it expressly provides as in the
case of pledges and in chattel mortgages of a thing sold on installment basis. Act No. 3135, which
governs the extrajudicial foreclosure of mortgages, while silent as to the mortgagee’s right to recover,
does not, on the other hand, prohibit recovery of deficiency. Accordingly, it has been held that a
deficiency claim arising from the extrajudicial foreclosure is allowed.
There should be no question that PNB was legally entitled to recover the penalty charge of 3% per
annum and attorney’s fees equivalent to 10% of the total amount due. The documents relating to the
loan and the real estate mortgage showed that the spouses Rabat had expressly conformed to such
additional liabilities; hence, they could not now insist otherwise. To be sure, the law authorizes the
contracting parties to make any stipulations in their covenants provided the stipulations are not
contrary to law, morals, good customs, public order or public policy. Equally axiomatic are that a
contract is the law between the contracting parties, and that they have the autonomy to include
therein such stipulations, clauses, terms and conditions as they may want to include. Inasmuch as the
spouses Rabat did not challenge the legitimacy and efficacy of the additional liabilities being charged
by PNB, they could not now bar PNB from recovering the deficiency representing the additional
pecuniary liabilities that the proceeds of the forced sales did not cover.
12. GOLDENWAY MERCHANDISING CORPORATION VS. EQUITABLE PCI BANK, G.R. NO.
195540, MARCH 13, 2013
FACTS: On November 29, 1985, Goldenway Merchandising Corporation executed a Real Estate
Mortgage in favor of Equitable PCI Bank over three parcels of land. The mortgage secured the Two
Million Pesos (P2,000,000.00) loan granted to petitioner. Petitioner failed to settle its loan obligation,
so respondent extrajudicially foreclosed the mortgage on December 13, 2000. Accordingly, a
Certificate of Sale was issued to respondent on January 26, 2001. On February 16, 2001, the
Certificate of Sale was registered.
In a letter dated March 8, 2001, petitioner’s counsel offered to redeem the foreclosed properties by
tendering a check. However, petitioner was told that such redemption is no longer possible because
the certificate of sale had already been registered and consolidated in favor of respondent March 9,
2001.
Petitioner filed a complaint for specific performance and damages contending that the 1-year period
of redemption under Act 3135 should apply, and not the shorter redemption period under RA 8791 as
applying RA 8791 would result in the impairment of obligations of contracts and would violate the
equal protection clause under the constitution.

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The RTC dismissed the action of the petitioner ruling that redemption was made belatedly and that
there was no redemption made at all. The CA affirmed the RTC, thus this petition for review.
ISSUE: Whether or not the redemption period should be the 1-year period provided under Act 3135,
and not the shorter period under RA 8791 as the parties expressly agreed that foreclosure would be
in accordance with Act 3135.
HELD: No. The shorter period under RA 8791 should apply.
The one-year period of redemption is counted from the date of the registration of the certificate of
sale. In this case, the parties provided in their real estate mortgage contract that upon petitioner’s
default and the latter’s entire loan obligation becoming due, respondent may immediately foreclose
the mortgage judicially in accordance with the Rules of Court, or extrajudicially in accordance with Act
No. 3135, as amended.
Amending Act no. 3135 is Sec 47 of RA 8791, which stated an exception made in the case of juridical
persons which are allowed to exercise the right of redemption only “until, but not after, the registration
of the certificate of foreclosure sale” and in no case more than three (3) months after foreclosure,
whichever comes first.
The legislature clearly intended to shorten the period of redemption for juridical persons whose
properties were foreclosed and sold in accordance with the provisions of Act No. 3135
The right of redemption being statutory, it must be exercised in the manner prescribed by the statute,
and within the prescribed time limit, to make it effective.
Furthermore, the freedom to contract is not absolute; all contracts and all rights are subject to the
police power of the State and not only may regulations which affect them be established by the State,
but all such regulations must be subject to change from time to time, as the general well-being of the
community may require, or as the circumstances may change, or as experience may demonstrate the
necessity.
D. CHATTEL MORTGAGE
1. PCI LEASING AND FINANCE VS. TROJAN METAL INDUSTRIES, G.R. No. 176381: December
15, 2010
FACTS: Sometime in 1997, Trojan Metal Industries, Inc. (TMI) came to PCI Leasing and Finance,
Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy various equipment TMI
owned. Hard-pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of sale
evidencing TMIs sale to PCILF of the various equipment.
PCILF and TMI then entered into a lease agreement , whereby the latter leased from the former the
various equipment it previously owned. Pursuant to the lease agreement, TMI issued postdated
checks representing 24 monthly installments.
The lease agreement required TMI to give PCILF a guaranty deposit which would serve as security
for the timely performance of TMIs obligations under the lease agreement, to be automatically
forfeited should TMI return the leased equipment before the expiration of the lease agreement.
Further, spouses Dizon, as TMIs President and Vice-President, executed in favor of PCILF a
Continuing Guaranty of Lease Obligations. Under the continuing guaranty, the Dizon spouses agreed
to immediately pay whatever obligations would be due PCILF in case TMI failed to meet its
obligations under the lease agreement.
To obtain additional loan from another financing company, TMI used the leased equipment as
temporary collateral. PCILF considered the second mortgage a violation of the lease agreement.

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PCILF sent TMI a demand letter for the payment of the latters outstanding obligation. PCILFs
demand remained unheeded.
RTC ruled that the lease agreement must be presumed valid as the law between the parties even if
some of its provisions constituted unjust enrichment on the part of PCILF. On appeal, the CA
reversed the RTCs decision.
ISSUES:
I. Whether the sale with lease agreement the parties entered into was a financial lease or a loan
secured by chattel mortgage.
II. Whether PCILF should pay TMI, by way of refund
HELD:
I: In the present case, since the transaction between PCILF and TMI involved equipment already
owned by TMI, it cannot be considered as one of financial leasing, as defined by law, but simply a
loan secured by the various equipment owned by TMI.
Hence, had the true transaction between the parties been expressed in a proper instrument, it would
have been a simple loan secured by a chattel mortgage, instead of a simulated financial leasing.
Thus, upon TMIs default, PCILF was entitled to seize the mortgaged equipment, not as owner but as
creditor-mortgagee for the purpose of foreclosing the chattel mortgage. PCILFs sale to a third party of
the mortgaged equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.
II: Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of
the proceeds, upon satisfaction of the principal loan and costs. Prevailing jurisprudence also holds
that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale
proceeds.
TMIs right to the refund accrued from the time PCILF received the proceeds of the sale of the
mortgaged equipment. However, since TMI never made a counterclaim or demand for refund due on
the resulting overpayment after offsetting the proceeds of the sale against the remaining balance on
the principal loan plus applicable interest, no interest applies on the amount of refund due.
Nonetheless, in accord with prevailing jurisprudence, the excess amount PCILF must refund to TMI is
subject to interest at 12% per annum from finality of this Decision until fully paid.
Petition DENIED.
2. Makati Leasing vs. Wearever Textile
FACTS: Wearever Textile in order to obtain a financial accommodation from Makati Leasing,
discounted and assigned several receivables with the former under a Receivable Purchase
Agreement. To secure the collection of the receivables assigned, Waerever executed a Chattel
Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero
Dryer Stentering Range.
Upon Wearever's default, Makati Leasing filed a petition for extrajudicial foreclosure of the properties
mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to gain entry
into Wearever's premises and was not able to effect the seizure of the machinery. Makati Leasing
thereafter filed a complaint for judicial foreclosure with the CFI Rizal.
RTC then issued a writ of seizure, the enforcement of which was restrained upon Wearever's filing of
a motion for reconsideration. finally issued on 11 February 1981, an order to break open the premises
of Wearever to enforce said writ.

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The sheriff enforcing the seizure order, repaired to the premises of Wearever and removed the main
drive motor of the subject machinery.
CA set aside the orders of the RTC and ordered the return of the drive motor seized by the sheriff
after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the new Civil Code. CA also rejected
the argument that Wearever is estopped from claiming that the machine is real property by
constituting a chattel mortgage thereon. A motion for reconsideration was filed by Makati Leasing, but
it was denied. Hence this petition.
ISSUE: Whether the machinery in suit is real or personal property?
HELD: If a house of strong materials, like what was involved in the above Tumalad case, may be
considered as personal property for purposes of executing a chattel mortgage thereon as long as the
parties to the contract so agree and no innocent third party will be prejudiced thereby, there is
absolutely no reason why a machinery, which is movable in its nature and becomes immobilized only
by destination or purpose, may not be likewise treated as such. This is really because one who has
so agreed is estopped from denying the existence of the chattel mortgage.
It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined by the
parties. As stated in Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, it is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature would be real
property, as long as no interest of third parties would be prejudiced thereby.
3. TORRES ET. AL. VS. LIMJAP, G.R. No. 34385
FACTS: The plaintiffs alleged that the defendant, in his lifetime, executed in their favor a chattel
mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to
secure a loan of P7,000, although it was made to appear in the instrument that the loan was for
P20,000. The defendant denied generally and specifically the plaintiffs' allegations and set up the
defense that the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286)
are null and void for lack of sufficient particularity in the description of the property mortgaged. A
judgment was rendered in favor of the plaintiff and against the defendant, confirming the attachment
of said drug store by the sheriff of the City of Manila and the delivery thereof to the plaintiff.
The defendant appealed from the judgment and made the assignments of error, among others, that
the lower court erred in failing to make a finding on the question of the sufficiency of the description of
the chattels mortgaged and in failing to hold that the chattel mortgages were null and void for lack of
particularity in the description of the chattels mortgaged and in refusing to allow the defendant to
introduce evidence tending to show that the stock of merchandise found in the two drug stores was in
existence or owned by the mortgagor at the time of execution of the mortgages in question.
Defendant then insists that a stipulation authorizing the disposal and substitution of chattels mortgage
does not operate to extend the mortgage to after-acquired party, and that such stipulation is in
contravention of the express provision of the last paragraph of section 7 Act No. 1508, which provides
that “A chattel mortgage shall be deemed to cover only the property described therein and not like or
substituted property thereafter acquired by the mortgagor and placed in the same depository as the
property originally mortgaged, anything in the mortgage to the contrary notwithstanding”.
ISSUE: Whether or not the provision in the chattel mortgage law that extends coverage to after-
acquired property is valid and binding.
HELD: We are of the opinion that (a.) the provision of the last paragraph of section 7 of Act No. 1508
is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating
business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-
70
acquired property, is valid and binding; and (c) that the lower court committed no error in not
permitting the defendant-appellant to introduce evidence tending to show that the goods seized by
the sheriff were in the nature of after-acquired property.
In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act
No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed on our
statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that
law-making body was undoubtedly to promote business and trade in these Islands and to give
impetus to the economic development of the country. Bearing this in mind, it could not have been the
intention of the Philippine Commission to apply the provision of section 7 above quoted to stores
open to the public for retail business, where the goods are constantly sold and substituted with new
stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to
apply to this class of business, it would be practically impossible to constitute a mortgage on such
stores without closing them, contrary to the very spirit about a handicap to trade and business, would
restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit,
the promotion of business and the economic development of the country.
The judgment appealed from is in accordance with the facts and the law, and the same should be and
is hereby affirmed, with costs.
4. ACME SHOE, RUBBER AND PLASTIC CORPORATION V. CA, G.R. NO. 103576, AUG. 22,
1996
FACTS: Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation,
executed a chattel mortgage in favor of Producers Bank of the Philippines, as a security for a
corporate loan in the amount of P3M. The chattel mortgage contained a clause that provided for the
mortgage to stand as security for all other obligations contracted before, during and after the
constitution of the mortgage.
The P3M was paid. Subsequently, the corporation obtained additional financial accommodations
totalling P2.7M. This was also paid on the due date. Again, the bank extended another loan to the
corporation in the amount of P1M, covered by four promissory notes. However, the corporation was
unable to pay this at maturity. Thereupon, the bank applied for an extra-judicial foreclosure of
mortgage.
For its part, the corporation filed an action for injunction with prayer for damages. The lower court
ultimately dismissed the case and ordered the extra-judicial foreclosure of mortgage. Hence, this
appeal.
ISSUES:
• W/N extra-judicial foreclosure of the chattel mortgage is proper
• If not proper, W/N the corporation is entitled to damages as a result of the extra-judicial
foreclosure
HELD: Contracts of security are either personal or real. In contracts of personal security, such as a
guaranty or suretyship, the faithful performance of the obligation by the principal debtor is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property -- in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage by the
execution of the corresponding and substantially in teh form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real property covered thereby;
and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit -- upon the essential condition that if the obligation becomes
71
due and the debtor defaults, then the property encumbered can be alienated for the payment of the
obligation, but that should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character of the agreement. As the law so puts it, once the obligation
is complied with, then the contract of security becomes, ipso facto, null and void.
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred
obligations so long as these future debts are accurately described, a chattel mortgage, however, can
only cover obligations existing at the time the mortgage is constituted. Although a promise expressed
in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that
can be compelled upon, the security itself, however, does not come into existence or arise until after
a chattel mortgage agreement covered the newly contracted debt is executed either by concluding a
fresh chattel mortgage or by amending the old contract conformably with the Chattel Mortgage Law.
Refusal on the part of borrower to execute the agreement so as to cover the after-incurred obligation
can constitute as an act of default on the part of the borrower of the financing agreement wherein the
promise is written, but, of course, the remedy of foreclosure can only cover the debts extant at the
time of constitution and during the life of the chattel mortgage sought to be foreclosed.
In the case at bar, the chattel mortgage was terminated when payment for the P3M loan was made
so there was no chattel mortgage to even foreclose at the time the bank instituted the extra-judicial
foreclosure.
In its complaint, the corporation asked for moral damages sustained "as a result of the unlawful action
taken by the respondent bank against it." The court said --
"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.
A corporation, being an artificial person and having existence only in legal contemplation, has no
feelings, no emotions, no senses; therefore it cannot experience physical suffering and mental
anguish. Mental suffering can be experienced only by one having a nervous system and it flows from
real ills and sorrows and griefs of life -- all of which cannot be suffered by respondent bank as an
artificial person.
"Although Chua Pac was included in the case, he was only so named as a party in representation of
the corporation."
5. SERVICEWIDE SPECIALISTS, INC. V CA, G.R. No. 110048, November 19, 1999
FACTS: Leticia Laus purchased on credit a Colt Galant xxx from Fortune Motors (Phils.) Corporation
and executed a promissory note for the amount of P56,028.00, inclusive of 12% annual interest,
payable within a period of 48 months. In case of default in the payment of any installment, the total
principal sum, together with the interest, shall become immediately due and payable.
As a security for the promissory note, a chattel mortgage was constituted over the said motor vehicle,
with a deed of assignment incorporated therein such that the credit and mortgage rights were
assigned by Fortune Motors Corp. in favor of Filinvest Credit Corporation with the consent of the
mortgagor-debtor Laus.
Filinvest in turn assigned the credit in favor of Servicewide Specialists, Inc.
Laus failed to pay the monthly installment for April 1977 and the succeeding 17 months. Servicewide
demanded payment of the entire outstanding balance with interests but Laus failed to pay despite
formal demands.
As a result of Laus ’failure to settle her obligation, or at least to surrender possession of the motor
vehicle for foreclosure, Servicewide instituted a complaint for replevin, impleading Hilda Tee and John
Dee in whose custody the vehicle was believed to be at the time of the filing of the suit. Plaintiff
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alleged, among others, that it had superior lien over the mortgaged vehicle. The court approved the
replevin bond.
Alberto Villafranca filed a third party claim contending that he is the absolute owner of the subject
motor vehicle after purchasing it from a certain Remedios Yang free from all lien and emcumbrances;
and that on July 1984, the said automobile was taken from his residence by Deputy Sheriff Bernardo
Bernabe pursuant to the seizure order issued by the court a quo.
Upon motion of the plaintiff below, Villafranca was substituted as defendant and summons was
served upon him. Villafranca moved for the dismissal of the complaint on the ground that there is
another action pending between the same parties before the Makati RTC. The court granted the the
motion but subsequently set aside the order of dismissal. For failure to file his Answer as required by
the court a quo, Villafranca was declared in default and plaintiff’s evidence was received ex parte.
The lower court later on dismissed the complaint for insufficiency of evidence. Its motion for
reconsideration having been denied, petitioner appealed to CA on the ground that a suit for replevin
aimed at the foreclosure of a chattel is an action quasi in rem, and does not require the inclusion of
the principal obligor in the Complaint.
CA affirmed the RTC decision. It also denied petitioner’s MR, hence, the present petition for review
on certiorari under Rule 45.
ISSUE: W/N a case for replevin may be pursued against the defendant, Alberto Villafranca, without
impleading the absconding debtor-mortgagor.
HELD: No. Rule 60 of the Revised Rules of Court requires that an applicant for replevin must show
that he “is the owner of the property claimed, particularly describing it, or is entitled to the possession
thereof.” Where the right of the plaintiff to the possession of the specified property is so conceded or
evident, the action need only be maintained against him who so possesses the property. In rem
action est per quam rem nostram quae ab alio possidetur petimus, et semper adversus eum est qui
rem possidet.
However, in case the right of possession on the part of the plaintiff, or his authority to claim
such possession or that of his principal, is put to great doubt (a contending party may contest
the legal bases for plaintiff’s cause of action or an adverse and independent claim of
ownership or right of possession may be raised by that party), it could become essential to
have other persons involved and impleaded for a complete determination and resolution of
the controversy.
In a suit for replevin, a clear right of possession must be established. The conditions essential for
foreclosure of chattel mortgage would be to show, firstly, the existence of the chattel mortgage and,
secondly, the default of the mortgagor. Since the mortgagee’s right of possession is conditioned upon
the actual fact of default which itself may be controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination
of the case. Laus, being an indispensable party, should have been impleaded in the complaint for
replevin and damages. An indispensable party is one whose interest will be affected by the court’s
action in the litigation, and without whom no final determination of the case can be had. Petition
DENIED.
6. DY VS. CA, G.R. NO. 92989 JULY 8, 1991
FACTS: Wilfredo Dy purchased a truck and a farm tractor through LIBRA which was also mortgaged
with the latter, as a security to the loan.
Petitioner, expresses his desire to purchased his brother’s tractor in a letter to LIBRA which also
includes his intention to shoulder its mortgaged. LIBRA approved the request. At the time that
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Wilfredo Dy executed a deed of absolute sale in favor of petitioner, the tractor and truck were in the
possession of LIBRA for his failure to pay the amortization.
When petitioner finally fulfilled its obligation to pay the tractor, LIBRA would only release the same
only if he would also pay for the truck. In order to fulfill LIBRA’s condition, petitioner convinced his
sister to pay for the remaining truck, to which she released a check amounting to P22,000. LIBRA
however, insisted that the check must be first cleared before it delivers the truck and tractor.
Meanwhile, another case penned “Gelac Trading Inc vs. Wilfredo Dy” was pending in Cebu as a case
to recover for a sum of money (P12,269.80). By a writ of execution the court in Cebu ordered to seize
and levy the tractor which was in the premise of LIBRA, it was sold in a public auction to which it was
purchased by GELAC. The latter then sold the tractor to Antonio Gonzales.
RTC rendered in favor of petitioner.
CA dismissed the case, alleging that it still belongs to Wilfredo Dy.
ISSUE: Whether or not there was a consummated sale between Petitioner and LIBRA?
HELD: NO. The payment of the check was actually intended to extinguish the mortgage obligation so
that the tractor could be released to the petitioner. It was never intended nor could it be considered as
payment of the purchase price because the relationship between Libra and the petitioner is not one of
sale but still a mortgage. The clearing or encashment of the check which produced the effect of
payment determined the full payment of the money obligation and the release of the chattel
mortgage. It was not determinative of the consummation of the sale. The transaction between the
brothers is distinct and apart from the transaction between Libra and the petitioner. The contention,
therefore, that the consummation of the sale depended upon the encashment of the check is
untenable.
7. MAGNA FINANCIAL SERVICES GROUP VS. COLARINA, G.R. No. 158635, December 9, 2005
FACTS: Elias Colarina bought on installment from Magna Financial Services Group, Inc., one (1) unit
of Suzuki Multicab. After making a down payment, Colarina executed a promissory note for the
balance of P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly.
Colarina failed to pay the monthly amortization beginning January 1999, accumulating an unpaid
balance of P131,607.00.
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with
Replevin.
RTC ruled in favour of Magna Financial but CA reserved it.
ISSUE: WON Magna Financial can foreclose the mortgage at the same time exact specific
performance.
HELD: No. Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to
foreclose the chattel mortgage, “he shall have no further action against the purchaser to recover any
unpaid balance of the purchase price. Any agreement to the contrary shall be void.”
Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property
to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the
manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law. This rule governs
extrajudicial foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of
the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for
nor to ask for more.
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WHEREFORE, premises considered, the instant petition is DENIED for lack of merit and the decision
of the Court of Appeals dated 21 January 2003 is AFFIRMED. Costs against petitioner.
8. TA-OCTA VS. EGUIA AND TORRES, A.M. NO. P-02-1568. APRIL 25, 2002
FACTS: Complainant Ta-Octa charged respondents sheriffs Eguia and Torres with grave abuse of
authority in connection with a petition for foreclosure of chattel mortgage instituted by AC Lenders,
against the complainant for the latter’s failure to comply with the conditions of the chattel mortgage
and promissory note. The chattel mortgage covered a one unit motor vehicle. Ta-octa alleged among
others that the petition for foreclosure of chattel mortgage had been served by the respondents on the
same day it was filed with the Office of the Provincial/City Sherriff of Iloilo, without any raffle being first
conducted and without approval of the trial court.
Respondents averred that they had complied with the procedure for extrajudicial foreclosures of
mortgages. However, admitted that the petition was immediately served, without a raffle having first
been conducted because of the fear, entertained by AC Lenders, Inc., that complainant might
abscond.
The Executive Judge conducted an investigation pursuant to Administrative Order No. 6, and found
respondents Guilty for violation of Administrative Circular No. 3-98, and Administrative Order No. 3,
which mandates the raffling of extra-judicial foreclosure of mortgage shall be strictly enforced by the
Executive Judge among the deputy sheriffs in order to avoid an unequal distribution of cases and
fraternization between sheriffs and the applicant mortgagee."
ISSUE: Whether or not respondent sheriffs erred in conducting the extrajudicial foreclosure without
any raffle being first conducted and without approval of the trial court.
HELD: A.M. No. 99-10-05-0 provides among others: "The Executive Judge shall, with the assistance
of the Clerk of Court, raffle applications for extrajudicial foreclosure of mortgage under the direction of
the sheriff among all sheriffs, including those assigned to the Office of the Clerk of Court and Sheriffs
IV assigned in the branches.”
Respondent sheriffs have violated the procedure set forth in A.M. No. 99-10-05-0 in failing to conduct
a raffle of the petition for extrajudicial foreclosure of mortgage filed by AC Lenders, Inc., against
complainant before the office of the Clerk of Court. The raffling of cases is designed to avoid the
unequal distribution of cases and fraternization between the sheriff and the applicant-mortgagee.
While it might be true that petitioner (AC Iloilo Lenders Inc.) requested for the immediate enforcement
of the petition for foreclosure of chattel mortgage on the ground that complainant could likely flee and
abscond with his assets and that, in fact, the subject vehicle was recovered from the house of one of
his relatives, respondents, nevertheless, were not excused from observing the mandated procedure
therefor.
E. ANTICHRESIS
1. PANDO VS. GIMENEZ, G.R. NO. 31896, FEBRUARY 15, 1930
FACTS: Gimenez was indebted to Pando in the amount of P8000. To secure payment of such loan,
he executed and delivered a real estate mortgage over a building located in Sta. Mesa; and the
leasehold rights on the lot upon which the building was erected, Hacienda Tuason being the lessor.
When Gimenez was about to leave Manila to attend to his business in Cagayan, he gave Pando full
control, and complete and absolute administration over the property he mortgaged, on the condition
that Pando would:
(1) attend to the administration, care and preservation of the building and property
(2) pay the premium on the insurance of the building
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 (3) pay the taxes that might become due on the building
(4) pay the rents of the leased property
(5) collect the rents from the tenants of the building;
 to be applied to the payment of all expenses necessary for the preservation and maintenance
of the building and the rents of the leased property.
In the course of Pando’s administration over the property, he failed and neglected to pay the taxes
due for several years. He also failed and neglected to pay lessor Hacienda Tuason the rents due for
several years on the land leased. Because of this, the building was sold at a public auction to satisfy
the taxes due. Moreover, lessor Hacienda Tuason cancelled the contract of lease of Gimenez, and
brought a suit against him for desahucio in the municipal court of Manila.
Gimenez is now claiming that Pando, being in charge of the administration of the premises, had the
obligation to attend to the payment of taxes and rents. Pando denies that he had such obligation,
alleging that his duties were confined to the collection of rents on the house in order to apply them to
the payment of the interest on the mortgage.
ISSUE: Whether or not Pando, having full control and administration over the property of Gimenez,
was obliged to pay the taxes, charges and other necessary expenses.
HELD: Yes, Pando had such obligation.
The administration of the property assumed by Pando was antichretic in character. Article 2135 of
the Civil Code expressly states that the antichretic creditor is obliged to pay the taxes and charges
which burden the estate, in the absence of an agreement to the contrary. Such obligation arises from
the very nature of the covenant, and is correlated with the antichretic creditor’s acquired right to take
charge of the property and collect the fruits for himself.
Pando, having failed in his obligation to pay tax on the house and rent of the lot, is now required to
pay indemnity for damages.
VIII. CONCURRENCE AND PREFERENCE OF CREDITS
1. BARAYOGA V ASSET PRIVATIZATION TRUST
FACTS: Asset Privatization Trust (APT) is a public trust whose mandate is to provisionally manage
and dispose of non-performing assets of the government. When former President Aquino issued AO
No. 14, which identified certain assets of government institutions that were to be transferred to the
National government, among those transferred assets were the financial claim of PNB against
Bicolandia Sugar Development Corp. (BISUDECO) in a form of a secured loan. BISUDECO is a
sugar plantation mill located in Camarines Sur. Consequently, APT was constituted as trustee over
BISUDECO’s account with PNB by virtue of a trust agreement between the government and APT.
In August 1988, BISUDECO contacted the services of Philippine Sugar Corp (Philsucor) to take over
management of the sugar plantation and milling operation until August 1992. And because of the
continued failure of BISUDECO to pay its outstanding loan with PNB, its mortgage properties were
foreclosed and subsequently sold in a public auction to APT. In July 1992, APT accepted the offer of
Bicol-Agro-Industrial Coop (BAPCI) to buy the sugar plantation and mill. And in the event of the
company’s privatization, ATP authorized the payment of separation benefit’s to BISUDECO’s
employees. Then BAPCI purchased the foreclosed assets of BISUDECO and took over its sugar
milling operations under the trade name Peñafrancia Sugar Mill (Pensumil).
The Bisudeco-Philsucor Corfarm Workers Union filed a complaint for unfair labor practice, illegal
dismissal, illegal deduction and underpayment of wages and other labor standard benefits plus

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damages in 1991. The again they filed a similar complaint in 1992. Then in 1993, they filed an
amended complaint impleading as additional party respondents APT and Pensumil.
In 1998 Labor Arbiter ordered APT to pay complainants of the mandatory employment benefits. The
NLRC affirmed APT’s liability for petitioners ’money claims. Respondent sought relief from the CA
and they ruled that APT should not be held liable for petitioners ’claim.
ISSUES:
1. Whether or not the liabilities of the previous owners to their employees are enforceable against the
buyer or transferee who purchased the company’s assets.
2. Whether or not ordinary preferred credits is the first choice over special preferred credit.
HELD:
1. Any assumption of liability must be specifically and categorically agreed upon. Unless, expressly
assumed, labor contracts like collective bargaining agreements are not enforceable against the
transferee of an enterprise. Labor contracts are in personam and thus binding only between the
parties. The liabilities of the previous owner to its employees are not enforceable against the buyer or
transferee, unless (1) the latter unequivocally assumes them; or (2) the sale or transfer was made in
bad faith.
2. Under Art 2241 and 2242 of the Civil Code, a mortgage credit is a special preferred credit that
enjoys preference with respect to a specific/determinate property of a debtor. On the other hand, the
workers preference under Art 110 of the Labor code is an ordinary preferred credit. While this
provision raises the worker’s money claim to first priority in the order of preference established in Art
2244 of the Civil Code, the claim has no preference over special preferred credits. Being a mortgage
credit APT’s lien on BISUDECO’s mortgaged assets is a special preferred lien that must be satisfied
first before the claims of the workers.
Petition is DENIED and the assailed decision is AFFIRMED.
2. ATLANTIC ERECTORS, INC. VS. HERBAL COVE REALTY CORPORATION
FACTS: This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, challenging
the May 30, 2000 Decision of the Court of Appeals.
On June 20, 1996, [respondent] and [petitioner] entered into a Construction Contract whereby the
former agreed to construct four (4) units of [townhouses] and one (1) single detached unit for an
original contract price of P15,726,745.19 which was later adjusted to P16,726,745.19 as a result of
additional works. The contract period is 180 days commencing [on] July 7, 1996 and to terminate on
January 7, 1997. [Petitioner] claimed that the said period was not followed due to reasons attributable
to [respondent], namely: suspension orders, additional works, force majeure, and unjustifiable acts of
omission or delay on the part of said [respondent]. [Respondent], however, denied such claim and
instead pointed to [petitioner] as having exceeded the 180 day contract period aggravated by
defective workmanship and utilization of materials which are not in compliance with specifications.
"On November 21, 1997, [petitioner] filed a complaint for sum of money with damages with the
Regional Trial Court of Makati wherein the defendant, Herbal Cove Realty Corporation was ordered
to pay sums of money to the plaintiff.
On the same day, [petitioner] filed a notice of lis pendens for annotation of the pendency of Civil
Cases. RTC Judge Ranada] dismissed the Complaint as against [respondent] for [petitioner's] failure
to comply with a condition precedent to the filing of a court action. "[Petitioner] filed a Motion for
Reconsideration and Respondent] filed its Opposition thereto. Judge Ranada] granted [respondent's]

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Motion to Cancel Notice of Lis Pendens. "[Petitioner] filed a Motion for Reconsideration of the Order
to which [respondent] filed an Opposition.
But upon motion, [Judge Ranada,] reversed his previous Order and reinstated the notices of lis
pendens,
The CA reinstated the former's July 30, 1998 Order6 granting Herbal Cove's Motion to Cancel the
Notice of Lis Pendens. Hence this present petition.
ISSUE: Whether or not money claims representing cost of materials [for] and labor [on] the houses
constructed on a property [are] a proper lien for annotation of lis pendens on the property title[.]
RULING: NO. The annotation of the Notice of Lis Pendens would be unjustified, because a complaint
for collection and damages is not the proper mode for the enforcement of a contractor's lien.
In J.L. Bernardo Construction v. Court of Appeals, the Court explained the concept of a contractor's
lien under Article 2242 of the Civil Code and the proper mode for its enforcement as follows:
"Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy preference with
respect to specific personal or real property of the debtor. Specifically, the contractor's lien claimed by
the petitioners is granted under the third paragraph of Article 2242 which provides that the claims of
contractors engaged in the construction, reconstruction or repair of buildings or other works shall be
preferred with respect to the specific building or other immovable property constructed.
"However, Article 2242 finds application when there is a concurrence of credits, i.e., when the same
specific property of the debtor is subjected to the claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine which of the creditors will be paid
ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then
only be enforced in the context of some kind of a proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency proceedings.” (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code nor the enforcement of the lien thereunder is
applicable here, because petitioner's Complaint failed to satisfy the foregoing requirements. Nowhere
does it show that respondent's property was subject to the claims of other creditors or was insufficient
to pay for all concurring debts. Moreover, the Complaint did not pertain to insolvency proceedings or
to any other action in which the adjudication of claims of preferred creditors could be ascertained.
3. DBP V. COURT OF APPEALS, GR NO 126200 AUGUST 16, 2001
FACTS: Marinduque Mining Corporation (MMC) purchased construction materials fromRemington
Industrial Sales Corporation (RISC). MMC failed to pay, this prompted RISC to file an action for
collection with the court. In the meantime, MMC obtained various loan accommodations from the
PNB, as a security, the former (MMC) executed REMs and CMs over its properties in favour of the
bank. The Mortgage Agreement was amended it was agreed that Marinduque mortgaged in favour of
PNB all other real and personal properties and other real rights the latter may subsequently acquire.
For failure to settle the account, the bank extrajudicially foreclosed the mortgaged property. PNB and
DBP emerged as the highest bidders. PNB and DBP assigned and conveyed all their rights, interests
and participation over the foreclosed properties in favour of Nonoc Mining, Mariculum Mining, Island
Cement and APT. Sometime in 1987, PNB and DBP pursuant to Resolution No. 50 assigned,
transferred and conveyed to the National Government thru the Asset Privatization Trust (APT) all its
rights and interest over MMC which were earlier assigned to other corporations. Remington
impleaded as co defendants PNB, DBP and other assignee corporations on the ground that all of
them must be treated in law as one and the same entity by disregarding the veil of corporate fiction
since all of these corporations share the same or almost the same set of directors.

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ISSUE: Whether Remington, a third person, may raise the issue on interlocking directors.
HELD: NO. The rule pertaining to transactions between corporation with interlocking directors
resulting in prejudice to one of the corporation does not apply where the corporation allegedly
prejudiced is a third party, not one of the corporations with interlocking directors. Thus, when a
mortgage bank foreclosed the mortgage on the real and personal property of the debtor and
thereafter assigned and the properties to a corporation it formed to manage and thereafter assigned
the properties to a corporation it formed to manage the foreclosed assets, the unpaid seller of the
debtor can not complain that the assignment is invalid simply because the mortgagee and the
assignee have interlocking directors.
4. CORDOVA VS REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES
FACTS: Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine
Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity Sports Plaza
Incorporated (CSPI) and shares of stock of various other corporations. He was issued a confirmation
of sale. The CSPI shares were physically delivered by Philfinance to the former Filmanbank and
Philtrust Bank, as custodian banks, to hold these shares in behalf of and for the benefit of petitioner.
On June 18, 1981, Philfinance was placed under receivership by public respondent Securities and
Exchange Commission (SEC). Thereafter, private respondents Reyes Daway Lim Bernardo Lindo
Rosales Law Offices and Atty. Wendell Coronel (private respondents) were appointed as liquidators.
Sometime in 1991, without the knowledge and consent of petitioner and without authority from the
SEC, private respondents withdrew the CSPI shares from the custodian banks. On May 27, 1996,
they sold the shares to Northeast Corporation and included the proceeds thereof in the funds of
Philfinance. Petitioner learned about the unauthorized sale of his shares only on September 10, 1996.
He lodged a complaint with private respondents but the latter ignored it prompting him to file, on May
6, 1997, a formal complaint against private respondents in the receivership proceedings with the
SEC, for the return of the shares.
On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it reconsidered this
decision in a resolution dated September 24, 1999 and granted the claims of petitioner. It held that
petitioner was the owner of the CSPI shares by virtue of a confirmation of sale (which was considered
as a deed of assignment) issued to him by Philfinance. But since the shares had already been sold
and the proceeds commingled with the other assets of Philfinance, petitioners status was converted
into that of an ordinary creditor for the value of such shares. Thus, it ordered private respondents to
pay petitioner the amount of P5,062,500 representing 15% of the monetary value of his CSPI shares
plus interest at the legal rate from the time of their unauthorized sale.
The Civil Code provisions on concurrence and preference of credits are applicable to the liquidation
proceedings. The next question is, was petitioner a preferred or ordinary creditor under these
provisions?
Petitioner argues that he was a preferred creditor because private respondents illegally withdrew his
CSPI shares from the custodian banks and sold them without his knowledge and consent and without
authority from the SEC. He quotes Article 2241 (2) of the Civil Code: “With reference to specific
movable property of the debtor, the following claims or liens shall be preferred: Claims arising from
misappropriation, breach of trust, or malfeasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by them;”
ISSUE: Whether or not the petitioner was a preferred creditor.
RULING: No. Article 2241 refers only to specific movable property. His claim was for the payment of
money, which, as already discussed, is generic property and not specific or determinate.

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Considering that petitioner did not fall under any of the provisions applicable to preferred creditors, he
was deemed an ordinary creditor under Article 2245: Credits of any other kind or class, or by any
other right or title not comprised in the four preceding articles, shall enjoy no preference.
This being so, Article 2251 (2) states that: Common credits referred to in Article 2245 shall be paid
pro rata regardless of dates.

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