JAVERLE, CATTLEYA JADE A.

III – ARELLANO
CREDIT TRANSACTIONS

(a) Briefly state the case doctrines or case laws of each of the assigned cases.
1) In the case of Hechanova vs Adil, the Supreme Court ruled that the plaintiff has
no standing to question the validity of the deed of sale executed by the deceased
defendant Jose Servando in favor of his co-defendants Hechanova and Masa. No
valid mortgage has been constituted in plaintiff's favor, the alleged deed of
mortgage being a mere private document and not registered; moreover, it contains
a stipulation (pacto comisorio) which is null and void under Article 2088 of the
Civil Code. Even assuming that the property was validly mortgaged to the
plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the
sale. It is clear from the records of this case that the plaintiff has no cause of
action and therefore its complaint has been dismissed.
2) The Supreme Court ruled in the case of A. Francisco Realty and Development
Corp. vs. CA that the creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose by them. Any stipulation to the contrary is null
and void. The act of applicant in registering the property in his own name upon
mortgagor's failure to redeem the property would to a pactum
commissorium which is against good morals and public policy. Thus, 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. The
prohibition on pactum commissorium stipulations is provided for by Article 2088
of the Civil Code which states that, 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.
The subject transaction being void, the registration of the deed of sale, by virtue
of which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569
covering the subject lot, must also be declared void, as prayed for by respondents
in their counterclaim.
3) As to the case of Reyes vs. Sierra, the Supreme Court ruled that a mortgage does
not constitute just title on the part of the mortgagee since ownership is retained by
the mortgagor. When possession is asserted to convert itself into ownership, a
new right is sought to be created, and the law becomes more exacting and requires
positive proof of title. In the case at bar, the applicant failed to present sufficient
evidence to prove that he is entitled to register the property. The trial court's
finding that since applicant and his father had been continuously paying the realty
taxes, that fact "constitutes strong corroborating evidence of applicant's adverse
possession," does not carry much weight. Mere failure of the owner to pay the
taxes does not warrant a conclusion that there was abandonment of a right to the
property. The payment of taxes on property does not alone constitute sufficient
evidence of title. The belief of applicant that he owns the property in question
which he inherited from his father cannot overthrow the fact that the transaction is
a mortgage. The doctrine "once a mortgage always a mortgage" has been firmly
established whatever its form is. The parties cannot by any stipulation, however
express and positive, render it anything but a mortgage. No right passes to
applicant except that of a mortgage since one cannot acquire a right from another
who was not in possession thereof A derivative right cannot rise higher than its
source. Applicant having failed to show by sufficient evidence a registrable title
to the land in question, the application for registration should be dismissed.
4) In the case of Dayrit vs CA, the Supreme Court held that 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. As Tolentino, in his Commentaries and
 Jurisprudence on the Civil Code of the Philippines, puts it — "When several
things are pledged or mortgaged, each thing for a determinate portion of the debt,
the pledges or mortgages are considered separate from each other. But when the
several things are given to secure the same debt in its entirety, all of them are
liable for the debt, and the creditor does not have to divide his action by
distributing the debt among the various things pledged or mortgaged. Even when
only a part of the debt remains unpaid, all the things are still liable for such
balance. Hence, a mortgage voluntarily constituted by the debtor on two or more
parcels of land is one and indivisible, and the mortgagee has the right to have
either or both parcels, jointly or singly, sold to satisfy his claim. In case the
mortgaged properties are a house and lot, it cannot be claimed that the lot and the
house should be sold separately and not together." The petitioner conveniently
refuses to recognize the true import of the dispositive portion of the judgment.
The said portion 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.
5) The Supreme Court ruled in the case of PNB vs. Banatao, that the PNB cannot
claim that it is a mortgagee in good faith because it was declared void. The
proscription against alienation or encumbrance is unmistakable even on a cursory
reading of the OCTs. Thus, one who contracts with a homestead patentee is
charged with knowledge of the law's proscriptive provision that must necessarily
be read into the terms of any agreement involving the homestead. Under the
circumstances, the PNB simply failed to observe the diligence required in the
handling of its transactions and thus made the fatal error of approving the loans
secured by mortgages of properties that cannot, in the first place, be mortgaged.
Both the defendants-respondents and the bank are to be faulted for the invalidity
of the mortgages. We cannot, however, apply the doctrine of pari delicto in
 accordance with the ruling that the doctrine does not apply when the contract is
prohibited by law. A saving factor for the bank under the situation is that a
mortgage is merely an accessory agreement and does not affect the principal
contract of loan. The mortgages, while void, can still be considered as instruments
evidencing the indebtedness of defendants-respondents to the PNB in a proper
case for the collection of the defendants-respondents’ loans.
6) In the case of The Manila Banking Corporation vs. Teodoro, one of the major
issues of this case is whether or not the assignment of receivables has the effect of
payment of all the loans contracted by appellants from appellee bank. The
Supreme Court held that assignment of credit is an agreement by virtue of which
the owner of a credit, known as the assignor, by a legal cause, such as sale, dation
in payment, exchange or donation, and without the need of the consent of the
debtor, transfers his credit and its accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the assignor
could have enforced it against the debt. It may be in the form of a sale, but at
times it may constitute a dation in payment, such as when a debtor, in order to
obtain a release from his debt, assigns to his creditor a credit he has against a third
person, or it may constitute a donation as when it is by gratuitous title; or it may
even be merely by way of guaranty, as when the creditor gives as a collateral, to
secure his own debt in favor of the assignee, without transmitting ownership. The
character that it may assume determines its requisites and effects its regulation,
and the capacity of the parties to execute it; and in every case, the obligations
between assignor and assignee will depend upon the judicial relation which is the
basis of the assignment. In the case at bar, it is evident that the assignment of
receivables executed by appellants did not transfer the ownership of the
receivables to appellee bank and release appellants from their loans with the bank
incurred under the said promissory notes. The character of the transactions
between the parties is not, however, determined by the language used in the
document but by their intention. Therefore, the assignment of the receivables
definitely did not result from a sale transaction. It cannot be said to have been
constituted by virtue of a dation in payment for appellants' loans with the bank
 evidenced by promissory note. Obviously, the deed of assignment was intended as
collateral security for the bank loans of appellants, as a continuing guaranty for
whatever sums would owe by defendants to plaintiff. In case of doubt as to
whether a transaction is a pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser transmission of rights and interests. The
Court ruled that an assignment to guarantee an obligation is in effect a mortgage
and not an absolute conveyance of title which confers ownership on the assignee.

b) What are the common characteristics of pledge and mortgage?

The common characteristics of pledge and mortgage are laid down in the
provision of Article 2085 of the Civil Code which states that: The following are
essential to the contracts of pledge and mortgage: 1) that they be constituted to
secure the fulfillment of a principal obligation; 2) that the pledgor or mortgagor
be the absolute owner of the thing pledged or mortgaged; 3) that the persons
constituting the pledge or mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose.
Article 2087 also states that the essence of the contracts of pledge and
mortgage is when the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment of the creditor.
Thus, a mortgage executed before the mortgage executed before the mortgagor
became the owner of the property, such as before the issuance of a patent to the
mortgagor, is void and ineffective. In all these contracts, ownership of the thing
given as security is retained by the debtor.
A pledge or mortgage, being merely an accessory agreement, its invalidity
does not affect the principal contract of loan. While void, it can still be considered
as an instrument evidencing indebtedness. In addition, the thing pledged must be
delivered to the creditor or to a third person by common agreement. Without
agreement, there can be no pledge because, precisely, in this delivery lies the
security of pledge. In a contract of mortgage, the mortgagor, as a general rule,
retains the possession of the property mortgaged.
c) A borrowed money from B. As security A executed a contract of pledge over his
watch. A failed to pay upon due date. May B automatically be the owner of the
watch? Explain.

No, B cannot automatically be the owner of the watch pledged by A.

Article 2088 of the Civil Code states that, the creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void.
A stipulation whereby the thing pledged or mortgaged shall automatically
become the property of the creditor in the event of nonpayment of the debt within
the term fixed is known as pactum commisorium or pacto commisorio which is
forbidden by law and declared null and void. In the case at bar, the watch of A
which was pledged as a security of his debt to B cannot be owned automatically
by the latter in the event of nonpayment of its debt. By such stipulation, the
creditor would be able to acquire ownership of the property given as security
without need of public sale or foreclosure by law.
The forfeiture clause has traditionally been outlawed because it is contrary
to good morals and public policy. The reason for prohibition is that the amount of
the loan is ordinarily much less that the real value of the thing pledged or
mortgaged.