A.
Pledge (Articles 2093 – 2123) that plaintiff continued operating the vessels after the pledge contract
Yuliongsui v. PNB,
G.R. No. L-19227, February 17, 1968
FACTS:
Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao,
valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and
operated the FS-203, valued at P210,672.24, which was purchased by
him from the Philippine Shipping Commission (PSC), by installment or on
account. As of January or February, 1943, plaintiff had paid to the
Philippine Shipping Commission only the sum of P76,500 and the
balance of the purchase price was payable at P50,000 a year, due on or
before the end of the current year.
Yuliongsiu obtained a loan of P50,000 from PNB. To guarantee its
payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity
in the FS-203, as evidenced by the pledge contract, duly registered with
the office of the Collector of Customs for the Port of Cebu.
Yuliongsiu effected partial payment of the loan in the sum of P20,000.
The remaining balance was renewed by the execution of 2 promissory
notes in the bank's favor. These two notes were never paid at all by
Yuliongsiu on their respective due dates.
PNB filed criminal charges against Yuliongsiu and two other accused for
estafa thru falsification of commercial documents, and they were
convicted by the trial court and sentenced to indemnify PNB in the sum of
P184,000. CA affirmed conviction. 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 three pledged vessels while they were at the Port
of Cebu, and after the first note fell due and was not paid, the Manager of
PNB, acting as attorney-in-fact of Yuliongsiu pursuant to the terms of the
pledge contract, executed a document of sale, transferring the two
pledged vessels and Yuliongsiu's equity in FS-203, to PNB for
P30,042.72.
The FS-203 was subsequently surrendered by PNB to the Philippine
Shipping which rescinded the sale to Yuliongsiu, for failure to pay the
remaining installments on the purchase price.The other two boats were
sold by PNB to third parties.
Yuliongsiu commenced action in the CFI to recover the three vessels or
their value and damages from PNB.
The lower court rendered its decision ruling: (a) that the bank's taking of
physical possession of the vessels was justified by the pledge contract
and the law; (b) that the private sale of the pledged vessels by PNB to
itself without notice to the plaintiff-pledgor as stipulated in the pledge
contract was likewise valid; and (c) that the PNB should pay the sums of
P1,153.99 and P8,000, as his remaining account balance, or set-off
these sums against the indemnity which Yuliongsiu was ordered to pay to
it in the criminal cases.
ISSUES:
1. Whether or not the contract was a chattel mortgage contract so
that PNB cannot not take possession of the chattels until after
there has been default.
2. that constructive delivery is insufficient to make pledge
effective
HELD/RATIO:
1. NO, the contract was not a chattel mortgage but a contract of
pledge.
In the case at bar, the parties stipulated the contract as a pledge which
binds Yuliongsiu. Consquently, the defendant bank as pledgee was
therefore entitled to the actual possession of the vessels. While it is true
1
was entered into, his possession was expressly made "subject to the
order of the pledgee." 10 The provision of Art. 2110 of the present Civil
Code 11 being new — cannot apply to the pledge contract here which was
entered into on June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can temporarily entrust the
physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the pledgor is regarded as
holding the pledged property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is
insufficient to make pledge effective. He points to Betita v. Ganzon, 49
Phil. 87 which ruled that there has to be actual delivery of the chattels
pledged. But then there is also Banco Español-Filipino v. Peterson, 7
Phil. 409 ruling that symbolic delivery would suffice. An examination of
the peculiar nature of the things pledged in the two cases will readily
dispel the apparent contradiction between the two rulings. In Betita v.
Ganzon, the objects pledged — carabaos — were easily capable of
actual, manual delivery unto the pledgee. In Banco Español-Filipino v.
Peterson, the objects pledged — goods contained in a warehouse —
were hardly capable of actual, manual delivery in the sense that it was
impractical as a whole for the particular transaction and would have been
an unreasonable requirement. Thus, for purposes of showing the transfer
of control to the pledgee, delivery to him of the keys to the warehouse
sufficed. In other words, the type of delivery will depend upon the nature
and the peculiar circumstances of each case. The parties here agreed
that the vessels be delivered by the "pledgor to the pledgor who shall
hold said property subject to the order of the pledgee." Considering the
circumstances of this case and the nature of the objects pledged, i.e.,
vessels used in maritime business, such delivery is sufficient.
          Since the defendant bank was, pursuant to the terms of pledge
contract, in full control of the vessels thru the plaintiff, the former could
take actual possession at any time during the life of the pledge to make
more effective its security. Its taking of the vessels therefore on April 6,
1948, was not unlawful. Nor was it unjustified considering that plaintiff
had just defrauded the defendant bank in the huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court
of Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has
ruled: 14        
Que si bien la naturaleza del contrato de prenda consiste en pasar las
cosas a poder del acreedor o de un tercero y no quedar en la del deudor,
como ha sucedido en el caso de autos, es lo cierto que todas las partes
interesadas, o sean acreedor, deudor y Sociedad, convinieron que
continuaran los coches en poder del deudor para no suspender el trafico,
y el derecho de no uso de la prenda pertenence al deudor, y el de dejar
la cosa bajo su responsabilidad al acreedor, y ambos convinieron por
creerlo util para las partes contratantes, y estas no reclaman perjuicios
no se infringio, entre otros este articulo.    
In the second assignment of error imputed to the lower court plaintiff-
appellant attacks the validity of the private sale of the pledged vessels in
favor of the defendant bank itself. It is contended first, that the cases
holding that the statutory requirements as to public sales with prior notice
in connection with foreclosure proceedings are waivable, are no longer
authoritative in view of the passage of Act 3135, as amended; second,
that the charter of defendant bank does not allow it to buy the property
object of foreclosure in case of private sales; and third, that the price
obtained at the sale is unconscionable.       
There is no merit in the claims. The rulings in Philippine National Bank v.
De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are
still authoritative despite the passage of Act 3135. This law refers only,
and is limited, to foreclosure of real estate mortgages. 15 So, whatever
formalities there are in Act 3135 do not apply to pledge. Regarding the
bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of
Act 2612, as amended by Acts 2747 and 2938 only states that if the sale
is public, the bank could purchase the whole or part of the property sold "
free from any right of redemption on the part of the mortgagor or
pledgor." This even argues against plaintiff's case since the import
thereof is this if the sale were private and the bank became the
purchaser, the mortgagor or pledgor could redeem the property. Hence,
plaintiff could have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.

          Regarding the third contention, on the assumption that the
purchase price was unconscionable, plaintiff's remedy was to have set
aside the sale. He did not avail of this. Moreover, as pointed out by the
lower court, plaintiff had at the time an obligation to return the P184,000
fraudulently taken by him from defendant bank.
          The last assignment of error has to do with the damages allegedly
suffered by plaintiff-appellant by virtue of the taking of the vessels. But in
view of the results reached above, there is no more need to discuss the
same.
          On the whole, We cannot say the lower court erred in disposing of
the case as it did. Plaintiff-appellant was not all-too-innocent as he would
have Us believe. He did defraud the defendant bank first. If the latter
countered with the seizure and sale of the pledged vessels pursuant to
the pledge contract, it was only to protect its interests after plaintiff had
defaulted in the payment of the first promissory note. Plaintiff-appellant
did not come to court with clean hands.
          WHEREFORE, the appealed judgment is, as it is hereby, affirmed.
Costs against plaintiff-appellant. So ordered.
Evidence; Pledges; Judicial admission; Its probative weight.—The
parties stipulated as a fact that Exhibit "A" and "1-Bank" is a pledge
contract. Necessarily, this judicial admission binds the plaintiff. Without
any showing that this was made thru palpable mistake, no amount of
rationalization can offset it.
Pledges; Possession of pledged property by pledgor; Possession
as trustee.—The pledgee was therefore entitled to the actual
possession of the vessels. The plaintiff's continued operation of the
vessels after the pledge contract was entered into, places his possession
"subject to the order of the pledge". The pledgee can temporarily entrust
the physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In this case, the pledgor is regarded as holding
the pledged property merely as trustee for the pledgee.
Same; Validity of pledges; Constructive delivery sufficient.—
Appellant would want this Court to rule that constructive delivery is
insufficient to make pledge effective. He points to a case (Betita v.
Ganzon, 49 Phil. 87) which ruled that there has to be actual delivery of
the chattels pledged. In Banco Español-Filipino v. Peterson (7 Phil. 409)
where the goods therein were the objects of the pledge, for purposes of
showing the transfer of control to the pledgee, delivery to him of the keys
to the warehouse was sufficient. In other words, the type of delivery will
depend upon the nature and the pecu-liar circumstances of each case.
Since the defendant bank was, pursuant to the terms of the pledge
contract, in full control of the vessels thru plaintiff, the former could take
actual possession at any time during the life of the pledge to make more
effective its security. Its taking of the vessels therefore was not unlawful.
Pacific Commercial Company v. PNB,
G.R. No. 24893, August 23, 1926
Facts:
On August 24, 1918 Golf Plantation Co. (GPC) and PNB executed a
document, Exhibit A, where GPC was designated as “pledgor” and PNB
as “pledgee”, pledging the ff items:
a. Lease of 534 ha of land planted with hemp and coconut trees
b. 48 buildings situated on the said lease
c. 1,000 piculs of hemp
d. 23 carabaos, 38 bullocks, 18 horses
e. 3 launches Peril, Rigel and New Kirk, 1 auxiliary boat Manuela
2
PNB is authorized to dispose of the pledged property in accordance with
the Chattel Mortgage Law.
On March 25, 1922 insolvency petition was filed. On Sept. 16, GPC was
declared insolvent, and sheriff was ordered to take possession of the
assets of the insolvent estate. On Oct. 23, Hughes was appointed as
assignee, with PNB’s consent.
On Nov. 3, PNB filed a petition seeking to:
a. have Exhibit A declared effective and matured
b. have preference over other creditors in payment of the debts
i. if properties > P165T: balance shall be paid by GPC but PNB shall
be admitted as ordinary creditor
ii. if properties < P165T: PNB shall return the excess amount to
Hughes
Hughes filed a petition for authority to sell at public auction all the
properties of the insolvent estate.
Court rendered judgment in favor of PNB. It was entitled to possession of
all of the estate of GPC. Properties shall be sold and be applied to PNB’s
preferred claims.
The creditors of GPC contend that:
(a) Exhibit A or “agreement of pledge” is null and void because: (i) it was
not registered, (ii) it involved real property.
(b) PNB has renounced its preferred lien by consenting to the
appointment of an assignee, who took possession of said properties.
Issues/Held:
1. W/N Exhibit A was a pledge? YES
2. W/N Exhibit A is void for its defects? Not sure
Ratio
1. Exhibit A must be construed as a pledge in form and substance. It is
very apparent from the language used that it was prepared on the
customary blank form of a pledge for the taking of properties under a
pledge. However, it was never received or filed for any purpose until Feb.
24, 1921 or 2 1/2 years after it was executed. There was no evidence
that it was filed or recorded anywhere or by anyone, either as a chattel
mortgage or pledge of personal of property. Hence, the receiving of it in
the office of the register of deeds on February 24, 1921, is a nullity as to
both a pledge and a chattel mortgage.
2. Exhibit A can be valid as a pledge of personal property if PNB took
actual, physical possession of the property in 1918 and to make it valid
against creditors or the assignee, the bank must have remain in such
possession at the time GPC was declared insolvent. Without it, Exhibit A
is void as a pledge, and the bank would not have a preference, and
would not now be entitled to the possession of the property of the
Plantation Company, or to have it sold and the proceeds applied to the
satisfaction of its claim.
Art. 1863 and Sec. 4 of Act 1508 (mortgaging of personal property/chattel
mortgage) provides that the property pledged/mortgaged shall be placed
in/delivered to the possession of the creditor or of a 3rd person appointed
by common consent.
Article 1863 of the Civil Code provides: “In addition to the requisites
mentioned in article 1857, it shall be necessary, in order to constitute the
contract of pledge, that the pledge, be placed in the possession of the
creditor or, of a third person appointed by common consent.”
Under Act 1508, it will be noted that, in the absence of such delivery of
possession on the recording of the instrument in the office of the register
of deeds, a chattel mortgages is valid only as to the mortgagor, his
executors or administrators. Hence, it follows that, in the absence of such
record and the delivery of possession a chattel mortgage is void as
against the creditors or the assignee of an insolvent estate, and upon
that question, there is no evidence in the record.
If it was the purpose and intent of the bank to have Exhibit A received,
filed and recorded as a chattel mortgage, it was not only its duty to so
instruct the register of deeds, but it was its further duty to see that the
instrument was received, filed and recorded as a chattel mortgage. Upon
that point there is no evidence.
That is to say, if it be a fact that at time the pledge was executed the
bank took actual, physical possession of the property described in it, and
continued to remain in such possession up to the time the petition for
insolvency was filed, or that it was in such possession for more than thirty
days prior to the filing of the petition, the pledge would then be valid as to
the personal property, and the bank would then have a preference on
that property for the amount found due and owing upon its claim. If be a
fact that the bank was not in the actual, physical possession of the
property at the time the insolvency petition was filed, and that the
Plantation Company was in such possession as its own, then the bank
would not have a preference over any other unsecured creditor.
A pledge or chattel mortgage is limited to personal property and not real
property.
Dispositive: REVERSED and REMANDED to determine W/N the bank
took actual possession of the property described in Exhibit A at the time
of the execution of the pledge.
1. 1.PLEDGE is NOT VALID WITHOUT ACTUAL POSSESSION.
—To make a written instrument, which is in form and
substance a pledge of personal property, valid as to third
persons, it is necessary to take the actual, physical possession
of the property and to continue in such possession.
1. 2.WHEN CHATTEL MORTGAGE is VOID.—Without delivery
of the possession of the property therein described, a chattel
mortgage is void as to third persons unless the mortgage is
duly recorded and made a matter of record in the office of the
register of deeds of the province in which the property is
situated.
1. 3.NOT A LIEN ON REAL PROPERTY.—A pledge or chattel
mortgage is confined and limited to personal property, and
cannot be enlarged or made a lien on real property.
PNB v. Atendido,
G.R. No. L-6342, January 26, 1954
FACTS:
 Laureano Atendido obtained from PNB a loan of P3k and
pledged 2000 cavans of palay to guarantee payment which
were then deposited in the warehouse of Cheng Siong Lam &
Co and to that effect the borrower endorsed in favour of the
bank the corresponding warehouse receipt.
 Before the maturity of the loan, the 2000 cavans of palay
disappeared for unknown reasons in the warehouse. When the
loan matured, the borrower failed to pay obligation
 Defendant claimed that the warehouse receipt covering the
palay which was given as security having been endorsed in
blank in favour of the bank and the palay having been lost or
disappeared, he thereby became relieved of liability.
ISSUE:
Whether the surrender of the warehouse receipt covering 2000 cavans of
palay given as security, endorsed in blank, to PNB, has the effect of
transferring their title or ownership OR it should be considered merely as
a guarantee to secure the payment of the obligation of Defendant?
HELD:
3
 Nature of contract is Pledge supported by the stipulations
embodied in the contract signed by Defendant when he
secured the loan from PNB.
 The 2000 cavans of palay covered by the warehouse receipt
were given to PNB only as a guarantee to secure the fulfilment
by Defendant in his obligation. This clearly appears in the
contract wherein it is expressly stated that said 2000 cavanes
of palay were given as collateral security.
 It follows that by the very nature of the transaction its
ownership remains with the pledgor subject only to foreclosure
in case of non-fulfillment of the obligation.
 By this we mean that if the obligation is not paid upon maturity
the most that the pledge can do is to sell the property and
apply the proceeds to the payment of the obligation and to
return the balance, if any, to the pledgor. This is the essence of
the contract, for, according to law, a pledge cannot become the
owner of, nor appropriate to himself the thing given in pledge.
 If by the contract of pledge, the pledgor continues to be the
owner of the thing pledged during the pendency of the
obligation, it stands to reason that in case of loss of the
property, the loss should be borne by the pledgor.
 The fact that the warehouse receipt covering the palay was
delivered, endorsed in blank, to the bank does not alter the
situation, the purpose of such endorsement being merely to
transfer the juridical possession of the property to the pledge
and to forestall any possible disposition thereof on the part of
the pledgor.
 Where a warehouse receipt or quedan is transferred or
endorsed to a creditor only to secure the payment of a loan or
debt, the transferee or endorsee does not automatically
become the owner of the goods covered by the warehouse
receipt or quedan but he merely retains the right to keep and
with the consent of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale. This is for the simple
reason that the transaction involved is not a sale but only a
mortgage or pledge, and that if the property covered by the
quedans or warehouse receipts is lost without fault or
negligence of the mortgagee or pledge or the transferee or
endorsee of the warehouse receipt or quedan, then said goods
are to be regarded as lost on account of the real owner,
mortgagor or pledgor.
1. 1.WAREHOUSE RECEIPT; EFFECT OF SURRENDER OF
WAREHOUSE RECEIPT GIVEN AS SECURITY, ENDORSED
IN BANK.—Where a warehouse receipt or quedan is
transferred or endorsed to a creditor only to seCure the
payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the
quedan, but he merely retains the right to keep and with the
consent of the owner to sell them so as to satisfy the obligation
from the proceeds of the sale this for the simple reason that
the transaction involved is not a sale but only a mortgage or
pledge, and that if the property covered by the quedan or
warehouse receipt is lost without the fault or negligence of the
mortgagee or pledgee or the transferee or endorsee of the
quedan, then said goods are to be regarded as lost on account
of the real owner, mortgagor or pledgor. The fact that the
quedan is endorsed in blank, does not alter the situation, the
purpose of the endorsement being merely to transfer the
juridical possession of the property to the pledgee and to
forestall any possible disposition thereof on the part of the
pledgor. This is true notwithstanding the provisions to the
contrary of the Warehouse Receipts Law.
1. 2.ID.; CASE AT BAR.—LA obtained from the PNB a loan of
P3,000, payable in 120 days, with interest at 6% per annum
from the date of maturity. To guarantee its payment, LA
pledged to the bank 2,000 cavanes of palay which were
 deposited in a warehouse and to that effect endorsed in favor
of the bank the corresponding warehouse receipt. Before the
maturity of the loan, the cavanes of rice disappeared f from the
warehouse. LA failed to pay the loan upon maturity and so the
present action was instituted. LA set up the defense that the
quedan covering the palay which was given as security having
been endorsed in blank in favor of the bank and the palay
having been lost or disappeared, he thereby became relieved
of liability. Held: The surrender of the warehouse receipt given
as security, endorsed in blank was not that of a final transfer or
that warehouse receipt but merely as a guaranty to the
fulfillment of the obligation of P3,000. This being so, the
ownership remains with the pledgor subject only to foreclosure
in case of nonfulfillment of obligation. The pledgor, continuing
to be the owner of the goods pledged during the pendency of
the obligation in case of the loss of the property, the loss is
borne by him.
Caltex Phils. Inc. v. Court of Appeals,
G.R. No.97753, August 10, 1992
FACTS
1. Defendant, a commercial banking institution, issued 280
certificates of time deposit (CTDs) in favor of one Angel dela
Cruz who deposited with herein defendant the aggregate
amount of P1,120,000
2. Angel dela Cruz delivered the said certificates of time (CTDs)
to Caltex in connection with his purchased of fuel products
from the latter.
3. Sometime Angel dela Cruz informed the Branch Manger, that
he lost all the certificates of time deposit in dispute. Manager
advised said depositor to execute and submit a notarized
Affidavit of Loss, as required by defendant bank's procedure, if
he desired replacement of said lost CTDs
4. Angel dela Cruz executed and delivered to defendant bank the
required Affidavit of Loss. 280 replacement CTDs were issued
in favor of said depositor.
5. Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of (P875,000.00). On the same
date, said depositor executed a notarized Deed of Assignment
of Time Deposit which stated, among others, that he (de la
Cruz) surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and
"apply the said time deposits to the payment of whatever
amount or amounts may be due" on the loan upon its maturity
6. Sometime, Mr. Aranas, Credit Manager of Caltex, went to the
defendant bank's and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were
delivered to herein plaintiff "as security for purchases made
with Caltex" by said depositor
7. Defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7,
1983.
8. In April 1983, the loan of Angel dela Cruz with the defendant
bank matured and fell due, the latter set-off and applied the
time deposits in question to the payment of the matured loan.
9. In view of the foregoing, Caltex filed the instant complaint,
praying that defendant bank be ordered to pay it the aggregate
value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's
fees.
4
TC&CA RULING: Respondent court ruled that the CTDs in question are
non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in
the CTDs issued, it is important to note that after the word "BEARER"
stamped on the space provided supposedly for the name of the
depositor, the words "has deposited" a certain amount follows. The
document further provides that the amount deposited shall be "repayable
to said depositor" on the period indicated. Therefore, the text of the
instrument(s) themselves manifest with clarity that they are payable, not
to whoever purports to be the "bearer" but only to the specified person
indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date.
ISSUES:
1. WON the CTD’s are negotiable instruments. YES
2. WON CTD’s are delivered for payment or as security to
guarantee dela cruz purchase of fuel products. SECURITY
(pledge).
HELD:
SC: hold that the CTDs in question are negotiable instruments.
1. Yes they are negotiable instruments.
Section 1 Act No. 2031, otherwise known as the Negotiable Instruments
Law, enumerates the requisites for an instrument to become negotiable:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law
for negotiability.
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.
Contrary to what respondent court held, the CTDs are negotiable
instruments. The documents provide that the amounts deposited shall be
repayable to the depositor. And who, according to the document, is the
depositor? It is the "bearer." The documents do not say that the depositor
is Angel de la Cruz and that the amounts deposited are repayable
specifically to him. Rather, the amounts are to be repayable to the
bearer of the documents or, for that matter, whosoever may be the
bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to
Angel de la Cruz only, it could have with facility so expressed that fact in
clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor
in each CTD.
Angel de la Cruz is merely the depositor "insofar as the bank is
concerned."
2. Security. The next query is whether CALTEX can rightfully
recover on the CTDs. NO.
The records reveal that Angel de la Cruz, delivered the CTDs amounting
to P1,120,000.00 to Caltex without informing respondent bank thereof at
any time.
Unfortunately for Caltex, although the CTDs are bearer instruments, a
valid negotiation thereof for the true purpose and agreement between it
and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement.
For, although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a SECURITY for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as
payment for the fuel products or as a security has been dissipated and
resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security
Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These
certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.)
Had it produced the receipt prayed for, it could have proved, if such truly
was the fact, that the CTDs were delivered as payment and not as
security.
In Intergrated Realty Corporation, et al. vs. Philippine National Bank, et
al.:. . . Adverting again to the Court's pronouncements in Lopez, supra,
we quote therefrom: The character of the transaction between the parties
is to be determined by their intention, regardless of what language was
used or what the form of the transfer was. IF IT WAS INTENDED TO
SECURE THE PAYMENT OF MONEY, IT MUST BE CONSTRUED AS
A PLEDGE; but if there was some other intention, it is not a pledge.
However, even though a transfer, if regarded by itself, appears to have
been absolute, its object and character might still be qualified and
explained by contemporaneous writing declaring it to have been a
deposit of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if sufficient on
its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in inexistence and is not discharged by
the transfer, and that accordingly the use of the terms ordinarily
importing conveyance of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous language
or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof. In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at
the most constitute petitioner only as a holder for value by reason of his
lien. Accordingly, a negotiation for such purpose cannot be effected
by mere delivery of the instrument since, necessarily, the terms
thereof and the subsequent disposition of such security, in the event of
non-payment of the principal obligation, must be contractually provided
for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the
extent of his lien. As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being
provided for by the Negotiable Instruments Law, shall be governed by the
Civil Code provisions on pledge of incorporeal rights, which inceptively
provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . .
may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.
5
Art. 2096. A pledge shall not take effect against third persons if a
description of the thing pledged and the date of the pledge do not appear
in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed,
the factual findings of respondent court quoted at the start of this opinion
show that petitioner failed to produce any document evidencing any
contract of pledge or guarantee agreement between it and Angel de la
Cruz. Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank.
The requirement under Article 2096 aforementioned is not a mere rule of
adjective law prescribing the mode whereby proof may be made of the
date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect
third persons adversely.
On the other hand, the assignment of the CTDs made by Angel de la
Cruz in favor of respondent bank was embodied in a public instrument.
With regard to this other mode of transfer, the Civil Code specifically
declares:
Art. 1625. An assignment of credit, right or action shall produce no effect
as against third persons, unless it appears in a public instrument, or the
instrument is recorded in the Registry of Property in case the assignment
involves real property.
Respondent bank duly complied with this statutory requirement.
Contrarily, petitioner, whether as purchaser, assignee or lien holder of
the CTDs, neither proved the amount of its credit or the extent of its lien
nor the execution of any public instrument which could affect or bind
private respondent. Necessarily, therefore, as between petitioner and
respondent bank, the latter has definitely the better right over the CTDs
in question.
WHEREFORE, on the modified premises above set forth, the petition is
DENIED and the appealed decision is hereby AFFIRMED.
SO ORDERED.
Commercial Law; Negotiable Instruments Law; Requisites for an
instrument to become negotiable.—Section 1 of Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz: “(a) It must be in
writing and signed by the maker or drawer; (b) Must contain an
unconditional promise or order to pay a sum certain in money; (c) Must
be payable on demand, or at a fixed or determinable future time; (d) Must
be payable to order or to bearer; and (e) Where the instrument is
addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.”
Same; Same; Same; The negotiability or non-negotiability of an
instrument is determined from the writing that is from the face of
the instrument itself.—On this score, 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 duty of the court in such
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said.
Same; Same; Same; An instrument is negotiated when it is
transferred from one person to another in such a manner as to
constitute the transferee the holder thereof and a holder may be the
payee or indorsee of a bill or note who is in possession of it or the
bearer thereof.—Under the Negotiable Instruments Law, an instrument
is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof. In the present case, however, there was no
negotiation in the sense of a transfer of the legal title to the CTDs in favor
of petitioner in which situation, for obvious reasons, mere delivery of the
bearer CTDs would have sufficed. Here, the delivery thereof only as
security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of
the principal obligation, must be contractually provided for.
Same; Same; Same; Where the holder has a lien on the instrument
arising from contract, he is deemed a holder for value to the extent
of his lien.—The pertinent law on this point is that where the holder has
a lien on the instrument arising from contract, he is deemed a holder for
value to the extent of his lien. As such holder of collateral security, he
would be a pledgee but the requirements there-for and the effects
thereof, not being provided for by the Negotiable Instruments Law, shall
be governed by the Civil Code provisions on pledge of incorporeal rights.
Civil Law; Estoppel; Under the doctrine of estoppel, an admission
or representation is rendered conclusive upon the person making it
and cannot be denied or disproved as against the person relying
thereon.—In a letter dated November 26, 1982 addressed to respondent
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: “x x x
These certificates of deposit were negotiated to us by Mr. Angel dela
Cruz to guarantee his purchases of fuel products” (Italics ours.) This
admission is conclusive upon petitioner, its protestations notwithstanding.
Under the doctrine of estoppel, an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or
disproved as against the person relying thereon. A party may not go back
on his own acts and representations to the prejudice of the other party
who relied upon them. In the law of evidence, whenever a party has, by
his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission,
be permitted to falsify it.
Sarmiento and Villasenor v. Javellana,
43 Phil. 884
AVANCEÑA, J.:
On August 28, 1991, the defendant loaned the plaintiffs the sum of
P1,500 with interest at the rate of 25 per cent per annum for the term of
one year. To guarantee this loan, the plaintiffs pledged a large medal
with a diamond in the center and surrounded with ten diamonds, a pair of
diamond earrings, a small comb with twenty-two diamonds, and two
diamond rings, which the contracting parties appraised at P4,000. This
loan is evidenced by two documents (Exhibits A and 1) wherein the
amount appears to be P1,875, which includes the 25 per cent interest on
the sum of P1,500 for the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the
plaintiff Eusebio M. Villaseñor, being unable to pay the loan, obtained
from the defendant an extension, with the condition that the loan was to
continue, drawing interest at the rate of 25 per cent per annum, so long
as the security given was sufficient to cover the capital and the accrued
interest. In the month of August, 1919, the plaintiff Eusebio M. Villaseñor,
in company with Carlos M. Dreyfus, went to the house of the defendant
and offered to pay the loan and redeem the jewels, taking with him, for
this purpose, the sum of P11,000, but the defendant then informed them
that the time for the redemption had already elapsed. The plaintiffs
renewed their offer to redeem the jewelry by paying the loan, but met
with the same reply. These facts are proven by the testimony of the
plaintiffs, corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the
jewels pledged, or their value, upon the payment by them of the sum they
owe the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan,
August 31, 1912, he requested the plaintiff, Eusebio M. Villaseñor, to
secure the money, pay the loan and redeem the jewels, as he needed
money to purchase a certain piece of land; that one month thereafter, the
plaintiff, Filomena Sarmiento, went to his house and offered to sell him
6
the jewels pledged for P3,000; that the defendant then told her to come
back on the next day, as he was to see his brother, Catalino Javellana,
and ask him if he wanted to take the jewels for that sum; that on the next
day the plaintiff, Filomena Sarmiento, went back to the house of the
defendant who then paid her the sum of P1,125, which was the balance
remaining of the P3,000 after deducting the plaintiff's loan.
It appearing that the defendant possessed these jewels originally, as a
pledge to secure the payment of a loan stated in writing, the mere
testimony of the defendant to the effect that later they were sold to him
by the plaintiff, Filomena Sarmiento, against the positive testimony of the
latter that she did not make any such sale, requires a strong
corroboration to be accepted. We do not find the testimony of Jose Sison
to be of sufficient value as such corroboration. This witness testified to
having been in the house of the defendant when Filomena went there to
offer to sell the defendant the jewels, as well as on the third day when
she returned to receive the price. According to this witness, he happened
to be in the house of the defendant, having gone there to solicit a loan,
and also accidentally remained in the house of the defendant for three
days, and that that was how he happened to witness the offer to sell, as
well as the receipt of the price on the third day. But not only do we find
that the defendant has not sufficiently established, by his evidence, the
fact of the purchase of the jewels, but also that there is a circumstance
tending to show the contrary, which is the fact that up to the trial of this
cause the defendant continued in possession of the documents, Exhibits
A and 1, evidencing the loan and the pledge. If the defendant really
bought these jewels, its seems natural that Filomena would have
demanded the surrender of the documents evidencing the loan and the
pledge, and the defendant would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to
him afterwards.
Another point on which evidence was introduced by both parties is as to
the value of the jewels in the event that they were not returned by the
defendant. In view of the evidence of record, we accept the value of
P12,000 fixed by the trial court.
From the foregoing it follows that, as the jewels in question were in the
possession of the defendant to secure the payment of a loan of P1,500,
with interest thereon at the rate of 25 per cent per annum from Augusts
31, 1911, to August 31, 1912, and the defendant having subsequently
extended the term of the loan indefinitely, and so long as the value of the
jewels pledged was sufficient to secure the payment of the capital and
the accrued interest, the defendant is bound to return the jewels or their
value (P12,000) to plaintiffs, and the plaintiffs have the right to demand
the same upon the payment by them of the sum of P1,5000, plus the
interest thereon at the rate of 25 per cent per annum from August 28,
1911.
The judgment appealed from being in accordance with this findings, the
same is affirmed without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ.,
concur.
RESOLUTION
April 4, 1923          
AVANCEÑA, J.:
The defendant contends that the plaintiffs' action for the recovery of the
jewels pledged has prescribed. Without deciding whether or not the
action to recover the thing pledged may prescribe in any case, it not
being necessary for the purposes of this opinion, but supposing that it
may, still the defendant's contention is untenable. In the document
evidencing the loan in question there is stated: "I transfer by way of
pledge the following jewels." That this is a valid contract of pledge there
can be no question. As a matter of fact the defendant does not question
it, but take s it for granted. However, it is contended that the obligation of
the defendant to return the jewels pledged must be considered as not
stated in writing, for this obligation is not expressly mentioned in the
document. But if this contract of pledge is in writing, it must necessarily
be admitted that the action to enforce the right, which constitutes the
essence of this contract, is covered by a written contract. The duty of the
creditor to return the thing pledged in case the principal obligation is
fulfilled is essential in all contracts of pledge. This constitutes, precisely,
the consideration of the debtor in this accessory contract, so that if this
obligation of the creditor to return to thing pledged, and the right of the
debtor to demand the return thereof, are eliminated, the contract would
not be a contract of pledge. It would be a donation.
If the right of the plaintiffs to recover the thing pledged is covered by a
written contract, the time for the prescription of this action is ten years,
according to section 43 of the Code of Civil Procedure.
The defendant contends that the time of prescription of the action of the
plaintiffs to recover the thing pledged must be computed from August 28,
1911, the date of the making of the contract of loan secured by this
pledge. The term of this loan is one year. However, it is contended that
the action of the plaintiff to recover the thing pledged accrued on the very
date of the making of the contract, inasmuch as from that date they could
have recovered the same by paying the loan even before the expiration
of the period fixed for payment. This view is contrary to law. Whenever a
term for the performance of an obligation is fixed, it is presumed to have
been established for the benefit of the creditor as well as that of the
debtor, unless from its tenor or from other circumstances it should appear
that the term was established for the benefit of one or the other only (art.
1128 of the Civil Code.) In this case it does not appear, either from any
circumstance, or from the tenor of the contract, that the term of one year
allowed the plaintiffs to pay the debt was established in their favor only.
Hence it must be presumed to have been established for the benefit of
the defendant also. And it must be so, for this is a case of a loan, with
interest, wherein the term benefits the plaintiffs by the use of the money,
as well as the defendant by the interest. This being so, the plaintiffs had
no right to pay the loan before the lapse of one year, without the consent
of the defendant, because such a payment in advance would have
deprived the latter of the benefit of the stipulated interest. It follows from
this that appellant is in error when he contents that the plaintiffs could
have paid the loan and recovered the thing pledged from the date of the
execution of the contract and, therefore, his theory that the action of the
plaintiffs to recover the thing pledged accrued from the date of the
execution of the contract is not tenable. 1awph!l.net
It must, therefore, be admitted that the action of the plaintiffs for the
recovery of the thing pledged did not accrue until August 31, 1912, when
the term fixed for the loan expired. Computing the time from that date to
that of the filing of the complaint in this cause, October 9, 1920, it
appears that the ten years fixed by the law for the prescription of the
action have not yet elapsed.
On the other hand, the contract of loan with pledge is in writing and the
action of the defendant for the recovery of the loan does not prescribe
until after ten years. It is unjust to hold that the action of the plaintiffs for
the recovery of the thing pledged, after the payment of the loan, has
already prescribed while the action of the defendant for the recovery of
the loan has not yet prescribed. The result of this would be that the
defendant might have collected the loan and at the same time kept the
thing pledged.
The motion for reconsideration is denied.
Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.
Separate Opinions
STREET, J., concurring:
I agree, Prescription cannot become effective against the right of the
pledgor to redeem so long as the written contract evidencing the debt
remains in the hands of the pledgee as evidence of a valid and unbarred
debt. The pledgor may always claim at least as long a period within
which to redeem as is allowed to the creditor to enforce his debt. (Gilmer
vs. Morris, 80 Ala., 78; 60 Am. Rep., 85, 89.)
1. 1.ACTION TO RECOVER POSSESSION OF GOODS
PLEDGED; PERIOD OF PRESCRIPTION; WRITTEN
CONTRACT.—An action for the recovery of the goods which
were pledged to secure the payment of a loan evidenced by a
document is an action on a written contract, if the pledge
appears in the document evidencing the loan, although it is not
expressly stated therein that, upon the payment of the debt,
the debtor may demand their restitution, because it is essential
7
in the contract of pledge that upon the payment of the principal
obligation the pledgor shall have the right to demand the return
of the goods pledged. In such a case the period of prescription
of the action is ten years from the date on which the debtor
may have paid the debt and demanded the return of the goods
pledged.
1. 2.OBLIGATION WITH A TERM; PRESUMPTION; RIGHTS
OF PARTIES; CAUSE OF ACTION; PRESCRIPTION.—In a
contract of loan with interest wherein a term was fixed for the
payment thereof, it is presumed that said term was established
for the benefit of the creditor as well as that of the debtor,
unless from its tenor or other circumstances it appears to have
been stipulated for the benefit of one or the other only. (Article
1127, Civil Code.) In such a case the debtor has no right to pay
the debt before the lapse of said period, without the consent of
the creditor, and demand the devolution of the goods that were
pledged to secure the payment. Only after the expiration of
said period may the debtor make payment, and, therefore, the
action for the recovery of the goods pledged arises only after
the lapse of said period for the purposes of the computation of
the peSriod of prescription of said action.
Manila Surety & Fidelity Co. v. Velayo,
G.R. No. L-21069, October 26, 1967
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila
(Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay
appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with
interest at 12-½% per annum from July 13, 1954; P120.93 as premiums
with interest at the same rate from June 13, 1954: attorneys' fees in an
amount equivalent to 15% of the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article
2115 of the Civil Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co.,
upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the
dissolution of a writ of attachment obtained by one Jovita Granados in a
suit against Rodolfo Velayo in the Court of First Instance of Manila.
Velayo undertook to pay the surety company an annual premium of
P112.00; to indemnify the Company for any damage and loss of
whatsoever kind and nature that it shall or may suffer, as well as
reimburse the same for all money it should pay or become liable to pay
under the bond including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four
pieces of jewelry to the Surety Company "for the latter's further
protection", with power to sell the same in case the surety paid or
become obligated to pay any amount of money in connection with said
bond, applying the proceeds to the payment of any amounts it paid or will
be liable to pay, and turning the balance, if any, to the persons entitled
thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against
Rodolfo Velayo, and execution having been returned unsatisfied, the
surety company was forced to pay P2,800.00 that it later sought to
recoup from Velayo; and upon the latter's failure to do so, the surety
caused the pledged jewelry to be sold, realizing therefrom a net product
of P235.00 only. Thereafter and upon Velayo's failure to pay the balance,
the surety company brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged jewelry extinguished
any further liability on his part under Article 2115 of the 1950 Civil Code,
which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the
amount of the principal obligation, interest and expenses in a proper
case. If the price of the sale is more than said amount, the debtor shall
not be entitled to the excess, unless it is otherwise agreed. If the price of
the sale is less, neither shall the creditor be entitled to recover the
deficiency, notwithstanding any stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment
against him. Appealed to the Court of First Instance, the defense was
once more overruled, and the case decided in the terms set down at the
start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec.
Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the
Indemnity Agreement and if the pieces of jewelry mentioned by the
defendant were delivered to the plaintiff, it was merely as an added
protection to the latter. There was no understanding that, should the
same be sold at public auction and the value thereof should be short of
the undertaking, the defendant would have no further liability to the
plaintiff. On the contrary, the last portion of the said agreement specifies
that in case the said collateral should diminish in value, the plaintiff may
demand additional securities. This stipulation is incompatible with the
idea of pledge as a principal agreement. In this case, the status of the
pledge is nothing more nor less than that of a mortgage given as a
collateral for the principal obligation in which the creditor is entitled to a
deficiency judgment for the balance should the collateral not command
the price equal to the undertaking.
It appearing that the collateral given by the defendant in favor of the
plaintiff to secure this obligation has already been sold for only the
amount of P235.00, the liability of the defendant should be limited to the
difference between the amounts of P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the
appealed decision is unsound. The accessory character is of the essence
of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code,
an essential requisite of these contracts is that they be constituted to
secure the fulfillment of a principal obligation, which in the present case
is Velayo's undertaking to indemnify the surety company for any
disbursements made on account of its attachment counterbond. Hence,
the fact that the pledge is not the principal agreement is of no
significance nor is it an obstacle to the application of Article 2115 of the
Civil Code.
The reviewed decision further assumes that the extinctive effect of the
sale of the pledged chattels must be derived from stipulation. This is
incorrect, because Article 2115, in its last portion, clearly establishes that
the extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled to
recover the deficiency notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be
evaded. By electing to sell the articles pledged, instead of suing on the
principal obligation, the creditor has waived any other remedy, and must
abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is
but an extension of the legal prescription contained in Article 1484(3) of
the same Code, concerning the effect of a foreclosure of a chattel
mortgage constituted to secure the price of the personal property sold in
installments, and which originated in Act 4110 promulgated by the
Philippine Legislature in 1933.
WHEREFORE, the decision under appeal is modified and the defendant
absolved from the complaint, except as to his liability for the 1954
premium in the sum of P120.93, and interest at 12-1/2% per annum from
June 13, 1954. In this respect the decision of the Court below is affirmed.
No costs. So ordered.
Civil law; Pledge, accessory character of.—The accessory character is of
the essence of pledge and mortgage. Under Art. 2085 of the Civil Code
of 0195, an essential requisite of these contracts is that they be
constituted to secure the fulfillment of a principal obligation.
Same; Sale of thing pledged; Effect of; Waiver.—Where the pieces of
jewelry were delivered to a surety company “as collateral security and by
way of pledge” in a contract of guaranty security, and sold at a lower
price than the amount of the principal obligation, the principal obligation
8
was extinguished and the guarantor cannot recover the deficiency,
because Art. 2115 of the Civil Code, in its last portion, clearly establishes
that the extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override; “If the price of the sale is
less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.” The effect of
this provision cannot be evaded. By electing to sell the articles pledged,
instead of suing on the principal obligation, the creditor has waived any
other remedy, and must abide by the results of the sale.
B. Mortgage (Articles 2124 – 2131)
Isaguirre v. de Lara,
G.R. No. 138053, May 31, 2000
Facts: This is a petition for review on certiorari of a decision of the Court
of Appeals. Alejandro de Lara was the original applicant-claimant for a
Miscellaneous Sales
Application over a parcel of land identified as Lot 502, Guianga Cadastre,
filed with the Bureau of Lands on January 17, 1942. When Alejandro de
Lara died, he was succeeded by his wife, herein respondent, Felicitas de
Lara as claimant. The Undersecretary of Agriculture and Natural
Resources amended the sales application reducing it from 2,342 square
meters to only 1,600 square meters; which was further reduced to 1,000
square meters due to a subdivision survey made. On this lot stands a
two-story residential-commercial apartment declared for taxation
purposes in the name of respondent’s sons – Apolonio and Rodolfo.
Respondent had financial difficulties: she obtained loans from Philippine
National Bank and she also approached herein petitioner, Cornelio
Isaguirre (husband of her niece), for financial assistance. On February
10, 1960, a “Deed of Sale and Special Concession of Rights and
Interests” was executed by respondent and petitioner, whereby a 250
square meters of Lot 502 was sold in the amount of P5, 000. In May
1968, the de Lara sons filed a complaint against petitioner for recovery of
ownership and possession of the two-storey building but was dismissed
by the court for lack of jurisdiction. On August 21, 1969, petitioner filed a
sales application over the subject property on the basis of the deed of
sale. His application was approved on January 17, 1984, resulting in the
issuance of an Original Certificate of Title on February 13, 1984, in the
name of petitioner. Meanwhile, the sales application of respondent over
the entire 1,000 square meters of subject property (including the 250
square meter portion claimed by petitioner) was also given due course,
resulting in the issuance of another Original Certificate on June 19, 1989,
in the name of respondent. Due to the overlapping of titles, petitioner filed
an action for quieting of title and damages with the Regional Trial Court
of Davao City against respondent on May 17, 1990.
After trial on the merits, the trial court rendered judgment on October 19,
1992, 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. The Court of Appeals thereafter declared the Original
Certificate of Title issued to petitioner as null and void.
WHETHER 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?
No. The Court of Appeals held that petitioner was not entitled to retain
possession of the subject property. It said that - the mortgagee merely
has to annotate his claim at the back of the certificate of title in order to
protect his rights against third persons and thereby secure the debt.
There is therefore no necessity for him to actually possess the property.
Neither should a mortgagee in an equitable mortgage fear that the
contract relied upon is not registered and hence, may not operate as a
mortgage to justify its foreclosure. The decision of the appellate court,
which was affirmed by the Supreme Court on July 8, 1996, served as
more than adequate basis for the issuance of the writ of possession in
favor of respondent since these decisions affirmed respondent’s title over
the subject property. As the sole owner, respondent has the right to enjoy
her property, without any other limitations than those established by law.
Corollary to such right, respondent also has the right to exclude from the
possession of her property any other person to whom she has not
transmitted such property. It is true that, in some instances, the actual
possessor has some valid rights over the property enforceable even
against the owner thereof, such as in the case of a tenant or lessee.
Petitioner anchors his own claim to possession upon his declared status
as a mortgagee.
A mortgage is a contract entered into in order to secure the fulfillment of
a principal obligation. It is constituted by 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.
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 therefrom given to the creditor
to the extent necessary to discharge the mortgage loan. Apparently,
petitioner’s contention that "[t]o 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.
In Alvano v. Batoon, this Court held that "[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.
DECISION AFFIRMED
Land Registration; Writs of Possession; Ownership; The decision
of the Court of Appeals, which affirmed a party’s title over her
property, serves as more than adequate basis for the issuance of
the writ of possession; A sole owner has the right to enjoy her
property without any other limitations than those established by
law.— Petitioner argues that the abovementioned decision merely settled
the following matters: (1) that the transaction between petitioner and
respondent was not a sale but an equitable mortgage; (2) that OCT No.
P-13038 in the name of respondent is valid; and (3) that OCT No. P-
11566 in the name of petitioner is null and void. Since the
aforementioned decision did not direct the immediate ouster of petitioner
from the subject property and the delivery thereof to respondent, the
issuance of the writ of possession by the trial court on June 16, 1998
constituted an unwarranted modification or addition to the final and
9
executory decision of this Court in G.R. No. 120832. We do not agree
with petitioner’s contentions. On the contrary, the March 31, 1995
decision of the appellate court, which was affirmed by this Court on July
8, 1996, served as more than adequate basis for the issuance of the writ
of possession in favor of respondent since these decisions affirmed
respondent’s title over the subject property. As the sole owner,
respondent has the right to enjoy her property, without any other
limitations than those established by law. Corollary to such right,
respondent also has the right to exclude from the possession of her
property any other person to whom she has not transmitted such
property.
Mortgage; Possession; Words and Phrases; A mortgage is a
contract entered into in order to secure the fulfillment of a principal
obligation, and constituted by 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; As a general rule, a mortgagor retains possession of the
mort-gaged property since a mortgage is merely a lien and title to
the property does not pass to the mortgagee.—A mortgage is a
contract en tered into in order to secure the fulfillment of a principal
obligation. It is constituted by 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. 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
therefrom given to the creditor to the extent necessary to discharge the
mortgage loan. Apparently, petitioner’s contention that “[t]o 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.
Same; Same; 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.—In Alvano v. Batoon,
this Court held that “[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.
Same; Same; Judgments; Possession is an essential attribute of
ownership—it would be redundant for the mortgagor to go back to court
simply to establish her right to possess the property; A judgment is not
confined to what appears upon the face of the decision, but also those
necessarily included therein or necessary thereto.—We hold that the trial
court correctly issued the writ of possession in favor of respondent. Such
writ was but a necessary consequence of this Court’s ruling in G.R. No.
120832 affirming the validity of the original certificate of title (OCT No. P-
13038) in the name of respondent Felicitas de Lara, while at the same
time nullifying the original certificate of title (OCT No. P-11566) 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. Contrary
to petitioner’s claims, the issuance of the writ of possession by the trial
court did not constitute an unwarranted modification of our decision in
G.R. No. 120832, but rather, was a necessary complement thereto. It
bears stressing that a judgment is not confined to what appears upon the
face of the decision, but also those necessarily included therein or
necessary thereto.
Same; Same; Possessor in Bad Faith; As a possessor in bad faith,
the mortgagee may only claim reimbursement for necessary
expenses and not for any useful expenses which he may have
incurred.—With regard to the improvements made on the mortgaged
property, we confirm the Court of Appeals’ characterization of peti-. tioner
as a possessor in bad faith. Based on the factual findings of the appellate
court, it is evident that petitioner knew from the very beginning that there
was really no sale and that he held respondent’s property as mere
security for the payment of the loan obligation. Therefore, petitioner may
claim reimbursement only for necessary expenses; however, he is not
entitled to reimbursement for any useful expenses which he may have
incurred.
Canlas v. Court of Appeals,
G.R. No. 112160, February 28, 2000
Facts: In August 1982, Osmundo S. Canlas, and Vicente Mañosca,
decided to venture in business and to raise the capital needed therefor.
Canlas executed a Special Power of Attorney authorizing Mañosca to
mortgage two parcels of land situated in BF Homes, Paranaque. Each lot
has a semi-concrete residential house in the name of the Canlas and his
wife. Spouses Canlas agreed to sell the two lots to Mañosca, for and in
consideration of PhP 850,000.00, P500,000.00 of which payable within
one week, and the balance of PhP 350,000.00 shall serve as serve as
Canlas inves tment in the business. Canlas delivered to Mañosca the
transfer certificates of ti tle of the two lots sold. Mañosca, on his part,
issued two postdated checks in fav orof Osmundo Canlas in the amounts
of P40,000.00 and P460,000.00, respectively, but it turned out that the
check covering the bigger amount was not sufficiently funded. In sum,
the spouses Canlas received only PhP40,000.00, despite deliveri ng the
TCTs to the supposed vendee.
On September 1982, Mañosca, with the use of the SPA previously
issued by Canlas, w as able to secure a P100,000.00 loan from a certain
Atty. Manuel Magno by mortga ging the same parcels of land, with the
help of impostors who misrepresented the mselves as the spouses
Canlas. On September 29, 1982, Vicente Mañoscam, using the same
parcels of land as security and through the involvement of the same
imposto rs who again introduced themselves as the Canlas spouses,
applied and was approv ed of another loan by Asian Savings Bank (ASB)
in the amount of P500,000.00. Whe n the loan was not paid, the bank,
extra-judicially foreclosed the mortgage.
On January 1983, the spouses Canlas wrote a letter informing the bank
that the e xecution of subject mortgage over the two parcels of land was
without their auth ority. They requested that steps be taken to annul the
questioned mortgage.
Issues: Is the mortgage with the bank valid? And if the answer is in the
negativ e, should the bank bear the loss?
A contract of mortgage must be constituted only by the absolute owner
on the pro perty mortgaged; a mortgage, constituted by an impostor is
void. Considering tha t it was established that the contract of mortgage
was entered into and signed b y impostors who misrepresented
themselves as the spouses Canlas, the subject con tract of mortgage is a
complete nullity.
As to who shall bear the loss, The doctrine of last clear chance is
applicable, the respondent bank must suffer the resulting loss. In
essence, the doctrine of last clear chance is to the effect that where both
parties are negligent but the negligent act of one is appreciably later in
point of time than that of the oth er, or where it is impossible to determine
whose fault or negligence brought abo ut the occurrence of the incident,
the one who had the last clear opportunity to avoid the impending harm
but failed to do so, is chargeable with the consequenc es arising
therefrom. The respondent bank did not observe the required diligence in
verifying the real identity of the couple who introduced themselves as the
s pouses Osmundo Canlas and Angelina Canlas. Not a single
identification card was presented by the impostor-loan applicants to show
their true identity. And yet t he bank approved the loan on sheer finding
that the signatures affixed on a deed of mortgage previously executed in
favor of a certain Atty. Magno matched the s ignatures in the residence
certificates presented by the impostors. In fact the deed of mortgage
10
referred to did not bear the tax identification number of the s pouses, as
well as the Community Tax Certificate of Angelina Canlas.
Applying Art. 1173 It could be said that the degree of diligence required
of ban ks is more than that of a good father of a family in keeping with
their responsi bility to exercise the necessary care and prudence in
dealing even on a register ed or titled property. Under such principle, the
bank would be denied the protec tive mantle of the land registration law,
accorded to purchasers or mortgagees f or value and in good faith. Asian
Savings Bank has to bear the loss.
Civil Law; Negligence; Degree of diligence required of banks is
more than that of a good father of a family.—The degree of diligence
required of banks is more than that of a good father of a family; in
keeping with their responsibility to exercise the necessary care and
prudence in dealing even on a register or titled property. The business of
a bank is affected with public interest, holding in trust the money of the
depositors, which bank deposits the bank should guard against loss due
to negligence or bad faith, by reason of which the bank would be denied
the protective mantle of the land registration law, accorded only to
purchasers or mortgagees for value and in good faith.
Same; Same; Doctrine of Last Clear Chance; The rule is that the
antecedent negligence of a person does not preclude the recovery
of damages caused by the supervening negligence of the latter,
who had the last fair chance to prevent the impending harm by the
exercise of due diligence.—–Under the doctrine of last clear chance,
“which is applicable here, the respondent bank must suffer the resulting
loss. In essence, the doctrine of last clear chance is to the effect that
where both parties are negligent but the negligent act of one is
appreciably later in point of time than that of the other, or where it is
impossible to determine whose fault or negligence brought about the
occurrence of the incident, the one who had the last clear opportunity to
avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the
antecedent negligence of a person does not preclude the recovery of
damages caused by the supervening negligence of the latter, who had
the last fair chance to prevent the impending harm by the exercise of due
diligence.
Same; Mortgage; A contract of mortgage must be constituted only
by the absolute owner on the property mortgaged; A mortgage,
constituted by an impostor is void.—–Settled is the rule that a contract
of mortgage must be constituted only by the absolute owner on the
property mortgaged; a mortgage, constituted by an impostor is void.
Considering that it was established indubitably that the contract of
mortgage sued upon was entered into and signed by impostors who
misrepresented themselves as the spouses Osmundo Canlas and
Angelina Canlas, the Court is of the ineluctible conclusion and finding
that subject contract of mortgage is a complete nullity.
Samanilla v. Cajucom,
G.R. No. L-13683, March 28, 1960
Doctrine: “Once a mortgage has been signed in due form, the
mortgagee is entitled to its registration as a matter or right. By executing
the mortgage the mortgagor is understood to have given his consent to
its registration, and he cannot be permitted to revoke it unilaterally. The
validity and fulfilment of contract cannot be left to the will of one of the
contracting parties (Art. 1254 of the Civil Code)
Facts:
 Cajucom executed a real estate mortgage over their rights and
participation on a parcel of land in favour of Samanilla in order
to secure a loan of P10,000
 Cajucom subsequently borrowed the title from Samanilla on
the excuse that they needed it to segregate from the land the
portion claimed by other persons.
 Thereafter, Samanilla asked for the return of the title so she
could register the mortgage but Cajucom refused.
  Cajucom’s contentions:
o Cajucom claims that the mortgage is void ab initio for
want of consideration and that the issues
o They cannot be compelled to surrender their title for
registration of the mortgage in question until they are
given an opportunity to show its invalidity in an
ordinary civil action, because registration is an
essential element of a real estate mortgage and the
surrender of their title would complete this
requirement of registration.
Issue:
1. WON Samanilla can ask for the return of the title so she could
register the mortgage
2. WON the real estate mortgage is binding between the parties
even if it is not registered
3. WON the issues pertaining to the validity of the mortgage
should first be resolved before registration
Held:
1. Yes
2. Yes
3. No.
Ratio:
1. “Once a mortgage has been signed in due form, the mortgagee
is entitled to its registration as a matter or right. By executing
the mortgage the mortgagor is understood to have given his
consent to its registration, and he cannot be permitted to
revoke it unilaterally. The validity and fulfilment of contract
cannot be left to the will of one of the contracting parties (Art.
1254 of the Civil Code)
2. The argument is fallacious, for a mortgage, whether registered
Facts:
or not, is binding between the parties, registration being
necessary only to make the same valid against third persons
(Art. 2125, New Civil Code). In other words, registration only
operates as a notice of the mortgage to others, but neither
adds to its validity nor convert an invalid mortgage into a valid
one between the parties. Appellants still have the right to show
that the mortgage in question is invalid for lack of consideration
in an ordinary action and there ask for the avoidance of the
deed and the cancellation of its registration. But until such
action is filed and decided, it would be too dangerous to the
rights of the mortgagee to deny registration of her mortgage,
because her rights can so easily be defeated by a transfer or
conveyance of the mortgaged property to an innocent third
person. 
3. In Gurbax Singh Pabla & Co., et al. vs. Reyes, et al., 92 Phil.,
177; 48 Off. Gaz., 4365, this Court had the occasion to rule
that "if the purpose of registration is merely to give notice, the
questions regarding the effect or invalidity of instruments are
expected to be decided after, not before, registration. It must
follow as a necessary consequence that registration must first
be allowed and validity or effect litigated afterwards".
Dispositive Portion
The order appealed from is affirmed, without prejudice to appellants' right
to bring a separate action to question the validity of the mortgage in
question and ask for the cancellation of its registration. Costs against
appellants.
1. 1.CONTRACT; PRESUMPTION OF CAUSE OR
CONSIDERATION ; HOW OVERCOME.—There is a legal
presumption of sufficient cause or consideration supporting a
contract, even if such cause is not stated therein (Art. 1354,
New Civil Code; Rule 123, Sec. 69 (r), Rules of Court). This
11
presumption cannot be over come by a simple assertion of
lack of consideration, especially when the contract itself states
that consideration was given, and the same has been reduced
into a public instrument with all due formalities and solemnities.
To overcome the presumption of consideration, the alleged
lack of consideration must be shown by preponderance of
evidence in a proper action.
1. 2.MORTGAGES; REGISTRATION; RlGHT OF MORTGAGEE
TO REGISTER CONTRACT.—"Once a mortgage has been
signed in due form, the mortgagee is entitled to its
registration as a matter of right. By executing the mortgage the
mortgagor is understood to have given his consent to its
registration, and he cannot be permitted to revoke it
unilaterally. The validity and fulfillment of contracts cannot be
left to the will of one of the contracting parties (Article 1254 of
the -Civil Code)." (Gonzales vs. Basa, Jr., et al., 73 Phil., 704).
1. 3.ID.; ID.; VALIDITY BETWEEN PARTIES NOT AFFECTED
BY ABSENCE OF REGISTRATION.—A mortgage, whether
registered or not, is binding between the parties, registration
being necessary only to make the same valid against third
persons (Art. 2125, New Civil Code). In other words,
registration only operates as a notice of the mortgage to
others, but neither adds to its validity nor converts an invalid
mortgage into a valid one between the parties.
1. 4.REGISTRATION OF DOCUMENTS; DETERMINATION OF
VALIDITY AFTER REGISTRATION.—Since the purpose of
registration is merely to give notice, the questions regarding
the effect or invalidity of instruments are expected to be
decided after,not before registration. (Gurbax Singh Pabla &
Co. vs. Reyes, et al., 92 Phil., 177; 48 Off. Gaz., 4365).
 Mobil Oil Phils. v. Diocares,
 G.R. No. L-26371, September 30, 1969
 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.
o Payment of the loan would be in monthly
installments of PhP 950 per month for a period of
five years.
o 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.
o Only PhP 1900 was paid, leaving a balance of PhP
43 000.
o 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.
o Defense: There was no refusal of payment. They
only sought for an extension of time.
  LC: The 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/Held: W/N the mortgage contract, although unregistered, is binding
between the same parties who created it. Yes.
Ratio:
1. Article 21251 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.
2. 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.
Dispositive: GRANTED.
Civil law; Contracts; Real estate mortgage; Effect of
nonregistration on right of party to foreclose mortgage.—While
Article 2125, of the New Civil Code categorically states that "in order that
a mortgage may be validly constituted, that the document in which it
appears be recorded in the Registry of Property," even if the instrument
were not recorded, "the mortgage is nevertheless binding between the
parties," As between the parties, the mere fact that there is as yet no
compliance with the requirement that it be .recorded cannot be a bar to
foreclosure.
Same; Same; Same; Same; Reason.—To hold otherwise would defeat
the dear 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.
Cruz v. Bancom Finance
, G.R. No. 147788, March 19, 2002
Facts:
In 1978, Norma Sulit offered to purchase an agricultural land owned by
brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz. The asking price
was P700,000, but Sulit only had P25,000, which Fr. Cruz accepted as
earnest money. Sulit failed to pay the balance.
Capitalizing on the close relationship of a Candelaria Sanchez with the
brothers, Sulit succeeded in having Cruz execute a document of sale of
the land in favor of Sanchez for P150,000. Pursuant to the sale, Sulit was
able to transfer the title of the land in her name.
Evidence show that aside from the P150,000, Sanchez undertook to pay
the brothers the amount of P655,000, representing the balance of the
actual price of the land. Later, in a Special Agreement, Sulit assumed
Sanchez’s obligation to pay said amount. Unbeknownst to the Cruz
brothers, Sulit managed to obtain a loan from Bancom secured by a
mortgage over the land.
Upon failure on the part of Sulit to pay the balance, the Cruz brothers
filed this complaint for reconveyance of the land.
1 is not a recognized mode of acquiring ownership.
12
Meanwhile, Sulit defaulted in her payment to the bank so her mortgage
was foreclosed. Bancom was declared the highest bidder and was issued
a certificate of title over the land.
Issue: whether or not Bancom was a mortgagee in good faith.
Ruling: NO.
As a general rule, every person dealing with registered land may safely
rely on the correctness of the certificate of title and is no longer required
to look behind the certificate in order to determine the actual owner.
This rule is, however, subject to the right of a person deprived of land
through fraud to bring an action for reconveyance, provided the rights of
innocent purchasers for value and in good faith are not prejudiced. An
innocent purchaser for value or any equivalent phrase shall be deemed,
under Section 38 of the Act 496, to include an innocent lessee,
mortgagee or any other encumbrancer for value.
Bancom claims that, being an innocent mortgagee, it should not be
required to conduct an exhaustive investigation on the history of the
mortgagor’s title before it could extend a loan.
Bancom, however, is not an ordinary mortgagee; it is a mortgagee-bank. 
As such, unlike private individuals, it is expected to exercise greater care
and prudence in its dealings, including those involving registered lands. A
banking institution is expected to exercise due diligence before entering
into a mortgage contract. The ascertainment of the status or condition of
a property offered to it as security for a loan must be a standard and
indispensable part of its operations.
Jurisprudence provides that:
“The rule that persons dealing with registered lands can rely solely on
the certificate of title does not apply to banks.
“Banks, indeed, should exercise more care and prudence in dealing even
with registered lands, than private individuals, for their business is one
affected with public interest, keeping in trust money belonging to their
depositors, which they should guard against loss by not committing any
act of negligence which amounts to lack of good faith by which they
would be denied the protective mantle of the land registration statute, Act
[No.] 496, extended only to purchasers for value and in good faith, as
well as to mortgagees of the same character and description.”
Code distinguishes an absolute simulation from a relative one while
Article 1346 discusses their effects, as follows: “Art. 1345. Simulation of a
contract may be absolute or relative. The former takes place when the
parties do not intend to be bound at all; the latter when the parties
conceal their true agreement. “Art. 1346. An absolutely simulated
contract is void. A relative simulation, when it does not prejudice a third
person and is not intended for any purpose contrary to law, morals, good
customs, public order or public policy binds the parties to their
agreement.”
Same; Same; Sales; The execution of two Contracts of Sale on the
same day over the same property sustains the position that the said
contracts were absolutely simulated, and that there was no
consideration therefor.—The Deeds of Sale were executed merely to
facilitate the use of the property as collateral to secure a loan from a
bank. Being merely a subterfuge, these agreements could not have been
the source of any consideration for the supposed sales. Indeed, the
execution of the two documents on the same day sustains the position of
petitioners that the Contracts of Sale were absolutely simulated, and that
they received no consideration therefor.
Same; Same; Same; A simulated deed of sale has no legal effect—
consequently any transfer certificate of title (TCT) issued in
consequence thereof should be cancelled.—The failure of Sulit to
take possession of the property purportedly sold to her was a clear
badge of simulation that rendered the whole transaction void and without
force and effect, pursuant to Article 1409 of the Civil Code. The fact that
she was able to secure a Certificate of Title to the subject property in her
name did not vest her with ownership over it. A simulated deed of sale
has no legal effect; consequently any transfer certificate of title (TCT)
issued in consequence thereof should be cancelled. A simulated contract
Land Titles; Words and Phrases; “Innocent Purchaser for Value,”
Defined; The general rule that every person dealing with registered
land may safely rely on the correctness of the certificate of title and
is no longer required to look behind the certificate in order to
determine the actual owner is subject to the right of a person
deprived of land through fraud to bring an action for reconveyance,
provided the rights of innocent purchasers for value and in good
faith are not prejudiced.—As a general rule, every person dealing with
registered land may safely rely on the correctness of the certificate of title
and is no longer required to look behind the certificate in order to
determine the actual owner. To do so would be contrary to the evident
purpose of Section 39 of Act 496 x x x This rule is, however, subject to
the right of a person deprived of land through fraud to bring an action for
reconveyance, provided the rights of innocent purchasers for value and
in good faith are not prejudiced. An innocent purchaser for valueor any
equivalent phrase shall be deemed, under Section 38 of the same Act, to
include an innocent lessee, mortgagee or any other encumbrancer for
value.
Same; Banks and Banking; Mortgages; Unlike private individuals, a
mortgagee-bank is expected to exercise greater care and prudence
in its dealings, including those involving registered lands.—
Respondent claims that, being an innocent mortgagee, it should not be
required to conduct an exhaustive investigation on the history of the
mortgagor’s title before it could extend a loan. Respondent, however, is
not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike
private individuals, it is expected to exercise greater care and prudence
in its dealings, including those involving registered lands. A banking
institution is expected to exercise due diligence before entering into a
mortgage contract. The ascertainment of the status or condition of a
property offered to it as security for a loan must be a standard and
indispensable part of its operations.
Same; Same; Same; Judicial Notice; Judicial notice is taken of the
standard practice for banks before they approve a loan: to send
representatives to the premises of the land offered as collateral and
to investigate the ownership thereof.—The evidence before us
indicates that respondent bank was not a mortgagee in good
faith. First, at the time the property was mortgaged to it, it failed to
conduct an ocular inspection. Judicial notice is taken of the standard
practice for banks before they approve a loan: to send representatives to
the premises of the land offered as collateral and to investigate the
ownership thereof. As correctly observed by the RTC, respondent, before
constituting the mortgage over the subject property, should have taken
into consideration the following questions: “1) Was the price of
P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap
even in 1978? “2) Why did Candelaria Sanchez sell the property at the
same price of P150,000.00 to Norma Sulit on the same date, June 21,
1978 when she supposedly acquired it from the plaintiffs? “3) Being
agricultural land, didn’t it occur to the intervenors that there would be
tenants to be compensated or who might pose as obstacles to the
mortgagee’s exercise of acts of dominion? “4) In an area as big as that
property, [why] did they not verify if there were squatters? “5) What
benefits or prospects thereof could the ultimate owner expect out of the
property? “Verily, the foregoing circumstances should have been looked
into, for if either or both companies did, they could have discovered that
possession of the land was neither with Candelaria nor with Norma.”
Same; Same; Same; A bank should not simply rely on the face of
the Certificate of Title to the property, as its ancillary function of
investing funds requires a greater degree of diligence; A person
who deliberately ignores a significant fact that would create
suspicion in an otherwise reasonable person is not an innocent
purchaser for value.—Respondent was clearly wanting in the
observance of the necessary precautions to ascertain the flaws in the title
of Sulit and to examine the condition of the property she sought to
mortgage. It should not have simply relied on the face of the Certificate of
Title to the property, as its ancillary function of investing funds required a
greater degree of diligence. Considering the substantial loan involved at
the time, it should have exercised more caution. Moreover, the subject
property, being situated in Bulacan, could have been easily and
conveniently inspected by respondent. A person who deliberately ignores
a significant fact that would create suspicion in an otherwise reasonable
person is not an innocent purchaser for value.
13
Same; Same; Same; Unless duly registered, a mortgage does not
affect third parties.—Respondent was already aware that there was an
adverse claim and notice of lis pendens annotated on the Certificate of
Title when it registered the mortgage on March 14, 1980. Unless duly
registered, a mortgage does not affect third parties like herein petitioners,
as provided under Section 51 of PD NO. 1529.
Same; Same; Same; A prior registration of a lien creates a
preference.—True, registration is not the operative act for a mortgage to
be binding between the parties. But to third persons, it is indispensible. In
the present case, the adverse claim and the notice of lis pendens were
annotated on the title on October 30, 1979 and December 10, 1979,
respectively; the real estate mortgage over the subject property was
registered by respondent only on March 14, 1980. Settled in this
jurisdiction is the doctrine that a prior registration of a lien creates a
preference. Even a subsequent registration of the prior mortgage will not
diminish this preference, which retroacts to the date of the annotation of
the notice of lis pendens and the adverse claim. Thus, respondent’s
failure to register the real estate mortgage prior to these annotations,
resulted in the mortgage being binding only between it and the
mortgagor, Sulit. Petitioners, being third parties to the mortgage, were
not bound by it. Contrary to respondent’s claim that petitioners were in
bad faith because they already had knowledge of the existence of the
mortgage in favor of respondent when they caused the aforesaid
annotations, petitioner Edilberto Cruz said that they only knew of this
mortgage when respondent intervened in the RTC proceedings.
Same; Contracts; Sales; Mortgages; Where the Deeds of Absolute
Sale were absolutely simulated, hence null and void, they did not
convey any rights that could ripen into valid titles, and, necessarily,
any subsequent real estate mortgage constituted is also null and
void.—On the question of who has a preferential right over the property,
the long-standing rule, as provided by Article 2085 of the Civil Code, is
that only the absolute owner of the property can constitute a valid
mortgage on it. In case of foreclosure, a sale would result in the
transmission only of whatever rights the seller had over of the thing sold.
In the instant case, the two Deeds of Sale were absolutely simulated;
hence, null and void. Thus, they did not convey any rights that could
ripen into valid titles. Necesarily, the subsequent real estate mortgage
constituted by Sulit in favor of respondent was also null and void,
because the former was not the owner thereof. There being no valid real
estate mortgage, there could also be no valid foreclosure or valid auction
sale, either. At bottom, respondent cannot be considered either as a
mortgagee or as a purchaser in good faith. This being so, petitioners
would be in the same position as they were before they executed the
simulated Deed of Sale in favor of Sanchez. They are still the owners of
the property.
Spouses Flancia v. CA,
G.R. No. 146997, April 26, 2005
Facts:
Spouses Flancia allege that they purchased from Oakland Development
Resources Corp. a parcel of land and the spouses were authorized to
transport all their personal belongings to their house at the lot. On
December 24, 1992, Flancias received a copy of the execution
foreclosing the mortgage issued by the RTC, Branch 98 ordering
defendant Sheriff Sula to sell at public auction several lots of Oakland
including the land they purchased. They seek to nullify the foreclosed
mortgage and also seeks for payment of damages
Defendant William Ong claimed that on May 19, 1989, Oakland
mortgaged to him two (2) parcels of land (which includes the lot of the
Spouses Flancia) as security and guaranty for the payment of a loan in
the sum of P2,000,000.00 which was not paid by Oakland resulting to an
action for foreclosure of the said real estate mortgage which was already
affirmed by the CA. Genato alleges that the Contract to Sell between the
spouses and Oakland does not appear to have been registered with the
Register of Deeds of Quezon City to affect him and Oakland so they are
not bound by it making the registered mortgage superior to
to the Contract to Sell since ownership of the lot was not yet passed to
the spouses, not until full payment.
After trial, the assisting judge of the trial court rendered a decision dated
August 16, 1996, ordering Oakland to pay Spouses Flancia the payments
they made for the option to purchase, downpayment, amortizations plus
legal interest including moral and exemplary damages, and attorney’s
fees plus cost. Decision included dismissing Oakland counterclaim and
Genatos (dili ko sure kung si Genato jud or ang Spouses Flancia pero
Genato man ang naa sa decision, hehehe) counterclaim.
On motion for reconsideration, the regular presiding judge set aside the
judgment of the assisting judge and rendered a new one on November
27, 1996, favoring of the Spouses Flancia, declaring the mortgage and
the foreclosure null and void and ordered Oakland to pay the Spouses
Flancia litigation-related expenses, Sheriff Sula to desist from conducting
further proceedings in the foreclosure, and dismissing the counterclaims
of defendants Oakland and Genato (Oh, kani murag sakto Genato na
jud) and with costs against them.
On appeal, CA set aside the decision of the regular presiding judge and
reinstated the judgment of the assisting judge August 16, 1996.
Issues:
(1) whether or not the registered mortgage constituted over the property
was valid;
(2) whether or not the registered mortgage was superior to the contract to
sell; and
(3) whether or not the mortgagee was in good faith.
Held:
SC Affirmed the decision of the CA.
All the essential requisites of a contract of mortgage under the Article
2085 of the Civil Code are present.
FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID?
The contract between Spouses Flancia and Oakland, aside from the fact
that it was denominated as a contract to sell, the intention of Oakland not
to transfer ownership to petitioners until full payment of the purchase
price was very clear. Acts of ownership over the property were expressly
withheld by Oakland from petitioner. All that was granted to them by the
occupancy permit was the right to possess it.
Clearly, when the property was mortgaged to Genato in May 1989,
what was in effect between Oakland and Spouses Flancia was a
contract to sell, not a contract of sale. Oakland retained absolute
ownership over the property.
Ownership is the independent and general power of a person over a
thing for purposes recognized by law and within the limits established
thereby. According to Art. 428 of the Civil Code, this means that:
The owner has the right to enjoy and dispose of a thing, without
other limitations than those established by law. Aside from the jus
utendi and the jus abutendi inherent in the right to enjoy the thing, the
right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned.
Because Oakland retained all the foregoing rights as owner of the
property, it was entitled absolutely to mortgage it to Genato. Hence,
the mortgage was valid.
SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR
TO THE CONTRACT TO SELL?
An unregistered sale is preferred over a registered mortgage over the
same property yet this inapplicable to the case at bar. A contract of sale
and a contract to sell are worlds apart. In the case before us, Oakland
retained absolute ownership over the property under the contract to sell
and therefore had every right to mortgage it. Genatos registered
14
mortgage was superior to petitioners contract to sell, subject to any
liabilities Oakland may have incurred in favor of Spouses Flancia by
irresponsibly mortgaging the property to Genato despite its commitments
under their contract to sell.
THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH?
The third issue involves a factual matter which should not be raised in
this petition. Only questions of law may be raised in a Rule 45 petition.
This Court is not a trier of facts. Just as an innocent purchaser for value
may rightfully rely on what appears in the certificate of title, a mortgagee
has the right to rely on what appears in the title presented to him. In the
absence of anything to arouse suspicion, he is under no obligation to
look beyond the certificate and investigate the title of the mortgagor
appearing on the face of the said certificate.
Contracts; Mortgages; Essential Requisites.—Under the Art. 2085 of
the Civil Code, the essential requisites of a contract of mortgage are: (a)
that it be constituted to secure the fulfillment of a principal obligation; (b)
that the mortgagor be the absolute owner of the thing mortgaged; and (c)
that the persons constituting the mortgage have the free disposal of their
property, and in the absence thereof, that they be legally authorized for
the purpose.
Same; Sales; In a contract of sale, the vendor loses ownership over
the property and cannot recover it unless and until the contract is
resolved and rescinded; In a contract to sell, title is retained by the
vendor until full payment of the price.—In a contract of sale, title to the
property passes to the vendee upon the delivery of the thing sold; in a
contract to sell, ownership is, by agreement, reserved by the vendor and
is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over
the property and cannot recover it unless and until the contract is
resolved or rescinded; in a contract to sell, title is retained by the vendor
until full payment of the price.
Ownership; Words and Phrases; Ownership is the independent and
general power of a person over a thing for purposes recognized by
law and within the limits established thereby—aside from the jus
utendi and the jus abutendi inherent in the right to enjoy the thing, the
right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned.—
Ownership is the independent and general power of a person over a
thing for purposes recognized by law and within the limits established
thereby. According to Art. 428 of the Civil Code, this means that: The
owner has the right to enjoy and dispose of a thing, without other
limitations than those established by law. xxx xxx xxx Aside from the jus
utendi and the jus abutendi inherent in the right to enjoy the thing, the
right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned.
Because Oakland retained all the foregoing rights as owner of the
property, it was entitled absolutely to mortgage it to Genato. Hence, the
mortgage was valid.
Mortgages; Sales; A registered mortgage is superior to a contract
to sell, subject to any liabilities the owner may have incurred in
favor of the buyer by irresponsibly mortgaging the property despite
its commitments under the contract to sell.—State Investment
House is completely inapplicable to the case at bar. A contract of sale
and a contract to sell are worlds apart. State Investment House clearly
pertained to a contract of sale, not to a contract to sell which was what
Oakland and petitioners had. In State Investment House, ownership had
passed completely to the buyers and therefore, the former owner no
longer had any legal right to mortgage the property, notwithstanding the
fact that the new owner-buyers had not registered the sale. In the case
before us, Oakland retained absolute ownership over the property under
the contract to sell and therefore had every right to mortgage it. In sum,
we rule that Genato’s registered mortgage was superior to petitioner’s
contract to sell, subject to any liabilities Oakland may have incurred in
favor of petitioners by irresponsibly mortgaging the property to Genato
despite its commitments to petitioners under their contract to sell.
Same; Land Titles; Just as an innocent purchaser for value may
rightfully rely on what appears in the certificate of title, a mortgagee
has the right to rely on what appears in the title presented to him.—
Just as an innocent purchaser for value may rightfully rely on what
appears in the certificate of title, a mortgagee has the right to rely on
what appears in the title presented to him. In the absence of anything to
arouse suspicion, he is under no obligation to look beyond the certificate
and investigate the title of the mortgagor appearing on the face of the
said certificate.
PETITION for review on certiorari of a decision of the Cou
Medida v. Court of Appeals,
G.R. No. 98334, May 8, 1992
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 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
Civil Law; Mortgage; What is divested from the Mortgagor is only
his full right as owner thereof to dispose (of) and sell the lands.—
That is why the discussion in said case carefully and felicitously states
that what is divested from the mortgagor is only his “full right as owner
thereof to dispose (of) and sell the lands,” in effect, merely clarifying that
the mortgagor does not have the unconditional power to absolutely sell
the land since the same is encumbered by a lien of a third person which,
if unsatisfied, could result in a consolidation of ownership in the
lienholder but only after the lapse of the period of redemption. Even on
that score, it may plausibly be argued that what is delimited is not the
15
mortgagor’s jus dispodendi, as an attribute of ownership, but merely the
rights conferred by such act of disposal which may correspondingly be
restricted.
Same; Same; Redemption; A redemptioner is defined as a creditor
having a lien by attachment, judgment or mortgage on the property
sold, or on some part thereof subsequent to the judgment under
which the property was sold.—Thus, a redemptioner is defined as a
creditor having a lien by attachment, judgment or mortgage on the
property sold, or on some part thereof, subsequent to the judgment under
which the property was sold.
Same; Same; Same; 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 the
requisites of Article 2085 of the Civil Code for the constitution of
another mortgage on the property.—In either case, what bears
attention is that since 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 the requisites of Article
2085 of the Civil Code for the constitution of another mortgage on the
property. To hold otherwise would create the inequitable situation
wherein the mortgagor would be deprived of the opportunity, which may
be his last recourse, to raise funds wherewith to timely redeem his
property through another mortgage thereon.
Same; Same; Same; The rule has always been that it is only upon
the expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, that the
ownership of the land sold becomes consolidated in the purchaser.
—We reiterate that during 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 that the right of a purchaser at a foreclosure sale is
merely inchoate until after the period of redemption has expired without
the right being exercised. The title to land sold under mortgage
foreclosure remains in the mortgagor or his grantee until the expiration of
the redemption period and conveyance by the master’s deed. To repeat,
the rule has always been that it is only upon the expiration of the
redemption period, without the judgment debtor having made use of his
right of redemption, that the ownership of the land sold becomes
consolidated in the purchaser.
Same; Same; Same; What actually is effected where redemption is
seasonably exercised by the judgment or mortgage debtor is not
the recovery of ownership of his land, which ownership he never
lost, but the elimination from his title thereto of the lien created by
the levy on attachment or judgment or the registration of a
mortgage thereon.—Parenthetically, therefore, what actually is effected
where redemption is seasonably exercised by the judgment or mortgage
debtor is not the recovery of ownership of his land, which ownership he
never lost, but the elimination from his title thereto of the lien created by
the levy on attachment or judgment or the registration of a mortgage
thereon. The American rule is similarly to the effect that the redemption
of property sold under a foreclosure sale defeats the inchoate right of the
purchaser and restores the property to the same condition as if no sale
had been attempted. Further, it does not give to the mortgagor a new
title, but merely restores to him the title freed of the encumbrance of the
lien foreclosed.
DBP v. Court of Appeals,
G.R. No. 118342 & 118367, January 5, 1998
FACTS:
- Lydia Cuba is a grantee from the government of a Fishpond Lease
Agreement for a 44-ha fishpond in Bolinao, Pangasinan.
- Cuba obtained loans from DBP and as security for the loans, she
executed two Deeds of Assignment of her Leasehold Rights.
- Cuba failed to pay her loans on time so the DBP, without foreclosure
proceedings, appropriated the Leasehold Rights of Cuba over the
fishpond.
- After the appropriation, DBP executed a Deed of Conditional Sale of the
Leasehold Rights in favor of Cuba.
- DBP accepted Cuba’s offer to repurchase.
- After the Deed of Conditional Sale was executed in favor of Cuba, a
new Fishpond Lease Agreement was issued by the MAF in favor of Cuba
only, excluding her husband.
- Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale so she entered with the DBP a Temporary Arrangement
whereby in consideration for the deferment of the Notarial Rescission of
Deed of Conditional Sale, Cuba promised to make certain payments.
- DBP sent the Notice of Rescission through Notarial Act and took
possession of the Fishpond Leasehold Rights.
- DBP then conducted a public bidding to dispose of the property, which
Agripina Caperal won. DBP executed the Deed of Conditional Sale in
favor of Caperal and Caperal was awarded the Fishpond Lease
Agreement by the MAF.
- Cuba filed a complaint before the RTC of Pangasinan against DBP and
Caperal. It sought (1) the declaration of nullity of DBP’s appropriation of
CUBA’s rights, title, and interests over the fishpond, for violating Article
2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale
executed in her favor by DBP; (3) the annulment of DBP’s sale of the
subject fishpond to Caperal; (4) the restoration of her rights, title, and
interests over the fishpond; and (5) the recovery of damages, attorney’s
fees, and expenses of litigation.
- The principal issue before the TC was whether the act of DBP in
appropriating to itself CUBA’s leasehold rights over the fishpond without
foreclosure proceedings was contrary to Article 2088 of the Civil Code
and, therefore, invalid.
- CUBA insisted that it was.
- DBP stressed that it merely exercised its contractual right under the
Assignments of Leasehold Rights, which was not a contract of mortgage.
Caperal sided with DBP.
- The TC resolved the issue in favor of CUBA by declaring that DBP’s
taking possession and ownership of the property without foreclosure was
plainly violative of Article 2088, which states: “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.” It disagreed with
DBP’s stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans,
(2) although the “fishpond land” in question is still a public land, CUBA’s
leasehold rights and interest thereon are alienable rights which can be
the proper subject of a mortgage; and (3) the intention of the contracting
parties to treat the Assignment of Leasehold Rights as a mortgage was
obvious and unmistakable; hence, upon CUBA’s default, DBP’s only right
was to foreclose the Assignment in accordance with law.
- The TC also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium
expressly prohibited and declared null and void by Article 2088 of the
Civil Code. It then concluded that since DBP never acquired lawful
ownership of CUBA’s leasehold rights, all acts of ownership and
possession by the said bank were void.
- Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial
rescission of such sale, and the Deed of Conditional Sale in favor of
defendant Caperal, as well as the Assignment of Leasehold Rights
executed by Caperal in favor of DBP, were also void and ineffective.
- As to damages, the TC found “ample evidence on record” that in 1984
the representatives of DBP ejected CUBA and her caretakers not only
from the fishpond area but also from the adjoining big house; and that
when CUBA’s son and caretaker went there on 15 September 1985, they
found the said house unoccupied and destroyed and CUBA’s personal
belongings, machineries, equipment, tools, and other articles used in
fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when
CUBA and her men were ejected by DBP for the first time in 1979, CUBA
16
had stocked the fishpond with 250,000 pieces of bangus fish (milkfish),
all of which died because the DBP representatives prevented CUBA’s
men from feeding the fish. At the conservative price of P3.00 per fish, the
gross value would have been P690,000, and after deducting 25% of said
value as reasonable allowance for the cost of feeds, CUBA suffered a
loss of P517,500. It then set the aggregate of the actual damages
sustained by CUBA at P1,067,500.
- The TC further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its
mortgage on CUBA’s leasehold rights. Such representation induced the
said Bureau to terminate CUBA’s leasehold rights and to approve the
Deed of Conditional Sale in favor of CUBA. And considering that by
reason of her unlawful ejectment by DBP, CUBA “suffered moral shock,
degradation, social humiliation, and serious anxieties for which she
became sick and had to be hospitalized” the TC found her entitled to
moral and exemplary damages. The TC also held that CUBA was entitled
to P100,000 attorney’s fees in view of the considerable expenses she
incurred for lawyers’ fees and in view of the finding that she was entitled
to exemplary damages.
- CUBA and DBP appealed to the CA. CUBA sought an increase in the
amount of damages, while DBP questioned the findings of fact and law of
the lower court.
- The CA ruled that (1) the TC erred in declaring that the deed of
assignment was null and void and that defendant Caperal could not
validly acquire the leasehold rights from DBP; (2) contrary to the claim of
DBP, the assignment was not a cession under Article 1255 of the Civil
Code because DBP appeared to be the sole creditor to CUBA - cession
presupposes plurality of debts and creditors; (3) the deeds of assignment
represented the voluntary act of CUBA in assigning her property rights in
payment of her debts, which amounted to a novation of the promissory
notes executed by CUBA in favor of DBP; (4) CUBA was estopped from
questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5)
condition no. 12 of the deed of assignment was an express authority from
CUBA for DBP to sell whatever right she had over the fishpond. It also
ruled that CUBA was not entitled to loss of profits for lack of evidence,
but agreed with the TC as to the actual damages of P1,067,500. It,
however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorney’s fees,
from P100,000 to P50,000.
- The CA thus declared as valid the following: (1) the act of DBP in
appropriating Cuba’s leasehold rights and interest under Fishpond Lease
Agreement No. 2083; (2) the deeds of assignment executed by Cuba in
favor of DBP; (3) the deed of conditional sale between CUBA and DBP;
and (4) the deed of conditional sale between DBP and Caperal, the
Fishpond Lease Agreement in favor of Caperal, and the assignment of
leasehold rights executed by Caperal in favor of DBP. And, it ordered
DBP to turn over possession of the property to Caperal as lawful holder
of the leasehold rights.
- In its petition before the SC, DBP assails the award of actual and moral
damages and attorney’s fees in favor of CUBA. In her petition, CUBA
contends that the CA erred (1) in not holding that the questioned deed of
assignment was a pactum commissorium contrary to Article 2088 of the
Civil Code; (b) in holding that the deed of assignment effected a novation
of the promissory notes; (c) in holding that CUBA was estopped from
questioning the validity of the deed of assignment when she agreed to
repurchase her leasehold rights under a deed of conditional sale; and (d)
in reducing the amounts of moral damages and attorney’s fees, in
deleting the award of exemplary damages, and in not increasing the
amount of damages.
ISSUE/S:
 WoN the assignment of leasehold rights was a mortgage
contract (as contended by Cuba)
o YES. In all of the promissory notes, there is a
provision that “in the event of foreclosure of the
mortgage securing this note, I/We further bind
myself/ourselves, jointly and severally, to pay the
deficiency, if any.” Moreover, in 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.”
In the facts stipulated, it states that “As security for
loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her leasehold rights.”
o We find no merit in DBP’s contention that the
assignment novated the promissory notes in that the
obligation to pay a sum of money the loans (under
the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the
deed of assignment). The said assignment merely
complemented or supplemented the notes; both
could stand together. Significantly, both the deeds of
assignment and the promissory notes were executed
on the same dates the loans were granted. Also, the
last paragraph of the assignment stated: “The
assignor further reiterates and states all terms,
covenants, and conditions stipulated in the
promissory note or notes covering the proceeds of
this loan, making said promissory note or notes, to
all intent and purposes, an integral part hereof.”
 WoN the assignment amount to payment by cession under
Article 1255 of the Civil Code
o NO. There was only one creditor, the DBP. Article
1255 contemplates the existence of two or more
creditors and involves the assignment of all the
debtor’s property.
 WoN the assignment constitute dation in payment under Article
1245 of the civil Code
o NO. The assignment, being in its essence a
mortgage, was but a security and not a satisfaction
of indebtedness.
o Article 1245: “Dation in payment, whereby property
is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law on sales.”
 WoN condition no. 12 of the deed of assignment constituted
pactum commissorium
o NO. The elements of pactum commissorium are as
follows: (1) there should be a property mortgaged by
way of security for the payment of the principal
obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal
obligation within the stipulated period.
o Condition no. 12 did not provide that the ownership
over the leasehold rights would automatically pass to
DBP upon CUBA’s failure to pay the loan on time. It
merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to
sell or otherwise dispose of the said real rights, in
case of default by CUBA, and to apply the proceeds
to the payment of the loan. This provision is a
standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage
and alienate the mortgaged property for the payment
of the principal obligation.
 WoN DBP exceeded the authority vested by condition no. 12 of
the deed of assignment
o YES. As admitted by it during the pre-trial, it had
“[w]ithout foreclosure proceedings, whether judicial
or extrajudicial, … appropriated the [l]easehold
[r]ights of plaintiff Lydia Cuba over the fishpond in
question.” Its contention that it limited itself to mere
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administration by posting caretakers is further belied
by the deed of conditional sale it executed in favor of
CUBA.
o The fact that CUBA offered and agreed to
repurchase her leasehold rights from DBP did not
estop her from questioning DBP’s act of
appropriation. Estoppel cannot give validity to an act
that is prohibited by law or against public policy.
Hence, the appropriation of the leasehold rights,
being contrary to Article 2088 of the Civil Code and
to public policy, cannot be deemed validated by
estoppel.
 WoN the actual damages was not proved by clear evidence
o Other than the testimony of CUBA and her
caretaker, there was no proof as to the existence of
those items before DBP took over the fishpond. As
pointed out by DBP, there was not “inventory of the
alleged lost items before the loss which is normal in
a project which sometimes, if not most often, is left to
the care of other persons.” Neither was a single
receipt or record of acquisition presented.
o Curiously, in her complaint dated 17 May 1985,
CUBA included “losses of property” as among the
damages resulting from DBP’s take-over of the
fishpond. Yet, it was only in September 1985 when
her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the
alleged loss of several articles. Such claim for
“losses of property,” having been made before
knowledge of the alleged actual loss, was therefore
speculative.
o With regard to the award of P517,000 representing
the value of the alleged 230,000 pieces of bangus
which died when DBP took possession of the
fishpond in March 1979, the same was not called for.
Such loss was not duly proved; besides, the claim
therefor was delayed unreasonably.
o In view, however, of DBP’s act of appropriating
CUBA’s leasehold rights which was contrary to law
and public policy, as well as its false representation
to the then Ministry of Agriculture and Natural
Resources that it had “foreclosed the mortgage,” an
award of moral damages in the amount of P50,000 is
in order conformably with Article 2219(10), in relation
to Article 21, of the Civil Code. Exemplary or
corrective damages in the amount of P25,000 should
likewise be awarded by way of example or correction
for the public good. There being an award of
exemplary damages, attorney’s fees are also
recoverable.
Contracts; Loans; Mortgages; Assignments; An assignment to
guarantee an obligation is in effect a mortgage.—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 a mortgage.
Same; Same; Same; Same; Novations; There is no novation where
the obligation to pay a sum of money remained, and the assignment
merely served as security for the loans covered by the promissory
notes.—We find no merit in DBP’s contention that the assignment
novated the promissory notes in that the obligation to pay a sum of
money the loans (under the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the deed of
assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand
together. The former was only an accessory to the latter. Contrary to
DBP’s submission, the obligation to pay a sum of money remained, and
the assignment merely served as security for the loans covered by the
promissory notes. Significantly, both the deeds of assignment and the actual amount thereof. It must point out specific facts which could afford
promissory notes were executed on the same dates the loans were a basis for measuring whatever compensatory or actual damages are
granted. Also, the last paragraph of the assignment stated: “The assignor borne.
further reiterates and states all terms, covenants, and conditions
stipulated in the promissory note or notes covering the proceeds of this
loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof.”

Same; Same; Same; Same; Cession; There is no payment by
cession under Article 1255 of the Civil Code where there is only one
creditor.—Neither did the assignment amount to payment
by cession under Article 1255 of the Civil Code for the plain and simple
reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the
assignment of all the debtor’s property.

Same; Same; Same; Same; Dation; An assignment which is essentially

a mortgage cannot constitute dation in payment under Article 1245 of the
Civil Code.—Nor did the assignment constitute dation in payment under
Article 1245 of the Civil Code, which reads: “Dation in payment, whereby
property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales.” It bears stressing that the
assignment, being in its essence a mortgage, was but a security and not
a satisfaction of indebtedness.

Same; Same; Same; Same; Pactum Commissorium; Elements.—
The elements of pactum commissorium are as follows: (1) there should
be a property mortgaged by way of security for the payment of the
principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-
payment of the principal obligation within the stipulated period.

Same; Same; Same; Same; Same; A condition in a deed of

assignment providing for the appointment of the assignee as
attorney-in-fact with authority, among other things, to sell or
otherwise dispose of real rights, in case of default by the assignor,
and to apply the proceeds to the payment of the loan does not
constitute pactum commissorium.—Condition No. 12 did not provide
that the ownership over the leasehold rights would automatically pass to
DBP upon CUBA’s failure to pay the loan on time. It merely provided for
the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of
default by CUBA, and to apply the proceeds to the payment of the loan.
This provision is a standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which authorizes the
mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.

Same; Same; Same; Same; An assignment to guarantee an

obligation is virtually a mortgage and not an absolute conveyance
of title which confers ownership on the assignee.—DBP cannot take
refuge in condition No. 12 of the deed of assignment to justify its act of
appropriating the leasehold rights. As stated earlier, condition No. 12 did
not provide that CUBA’s default would operate to vest in DBP ownership
of the said rights. Besides, an assignment to guarantee an obligation, as
in the present case, is virtually a mortgage and not an absolute
conveyance of titlewhich confers ownership on the assignee.

Same; Same; Same; Same; Estoppel; Estoppel cannot give validity

to an act that is prohibited by law or against public policy.—The fact
that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBP’s act of appropriation.
Estoppel is unavailing in this case. As held by this Court in some cases,
estoppel cannot give validity to an act that is prohibited by law or against
public policy. Hence, the appropriation of the leasehold rights, being
contrary to Article 2088 of the Civil Code and to public policy, cannot be
deemed validated by estoppel.

Damages; A court cannot rely on speculations, conjectures, or

guesswork as to the fact and amount of damages, but must depend
upon competent proof that they have been suffered by the injured
party and on the best obtainable evidence of the actual amount
thereof.—Actual or compensatory damages cannot be presumed, but
must be proved with reasonable degree of certainty. A court cannot rely
on speculations, conjectures, or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have been
suffered by the injured party and on the best obtainable evidence of the
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