041. Yau Chu v.

Court of Appeals
G.R. No. L-78519/26 September 1989/First Division/Petition for Review on Certiorari
Victoria Yau Chu (assisted by her husband, Michael) – petitioners
Court of Appeals, Family Savings Bank, and/or CAMS Trading Enterprises, Inc. – respondents
Decision by J. Grino-Aquino, Digest by Pip

Short Version: Victoria bought cement from CAMS and secured her payments with deeds of assignment over
her time deposits in Family Savings Bank. She assigned about P320K worth but her obligations to CAMS
came up to about P404K. CAMS requested the bank to encash the time deposit certificates, which the bank did
only after calling up and obtaining Victoria’s consent. Victoria then sued the bank and CAMS for alleged
pactum commissorium. The Court ruled against her, as the prohibition on pactum commissorium was enacted
in order to protect debtors from creditors who automatically appropriate pledged or mortgaged property which
might have a higher value than the debt. Where the security for the debt is also money deposited in a bank, the
amount of which is even less than the debt, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtors’ overdue obligation, with the latter’s consent.

Facts: Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS. To guaranty
payment for her cement withdrawals, she executed in favor of CAMS deeds of assignment of her time deposits
in Family Savings Bank. The total amount came up to P320K. Except for serial numbers and the dates of the
time deposit certificates, the deeds of assignment prepared by Victoria’s lawyer uniformly read:

... That the assignment serves as a collateral or guarantee for the payment of my obligation with the said
CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company, per
separate contract executed between us.

In July 1980, CAMS notified the bank that Victoria had an unpaid account with it in the sum of about
P314K and requested the encashment of the time deposit certificates assigned to it by Victoria. As proof, it
submitted to the bank a letter from Victoria admitting her outstanding account with CAMS reaching P404.5K.
The bank verbally advised Victoria of CAMS’ request and after she verbally agreed, the bank encashed the
certificates and delivered about P283K because one time deposit lacked the proper signatures.

Victoria then turned around and demanded that the bank and CAMS restore her time deposit. When both
refused, she filed a complaint to recover the sum from them before the RTC of Makati. The RTC dismissed the
complaint for lack of merit. Court of Appeals affirmed. Before the Supreme Court she argued that the
encashment of her time deposit certificates was pactum commissorium.

Issue: Did the encashment of Victoria’s time deposit certificates amount to pactum commissorium? NO.

Ruling: Petition denied.

Ratio: Since the collateral in this case was also money, there was no need to sell the thing pledged at public
auction in order to satisfy the pledgor’s obligation. All that had to be done to convert the pledgor's time deposit
certificates into cash was to present them to the bank for encashment after due notice to the debtor.

The encashment of the deposit certificates was not a pactum commissorium as prohibited under
Article 2088 of the Civil Code. A pactum commissorium is a provision for the automatic appropriation of
the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. This
prohibition is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor
who holds a pledge or mortgage over property whose value is much more than the debt. Where, as in this
case, the security for the debt is also money deposited in a bank, the amount of which is even less than
the debt, it is not illegal for the creditor to encash the time deposit certificates to pay the debtors’
overdue obligation, with the latter’s consent.
Voting: Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., no part.

ERVICEWIDE SPECIALISTS, INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS,

JESUS PONCE, and ELIZABETH PONCE, respondents. G.R. No. 116363. December 10, 1999

Doctrine:

In case of assignment of credit, only notice to but not the consent of the debtor-mortgagor is necessary to
bind the latter.
The assignee’s consent is necessary in order to bind him of the alienation of the mortgaged thing by the
debtor- mortgagor.
Article Applicable:

Article 2141 states that the provisions concerning a contract of pledge shall be applicable to a chattel
mortgage, such as the one at bar, insofar as there is no conflict with Act No. 1508, the Chattel Mortgage
Law
Facts: - Respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden Torana
vehicle from C. R. Tecson Enterprises. - They executed a promissory note and a chattel mortgage on the
vehicle dated in favor of the C. R. Tecson Enterprises to secure payment of the note - The mortgage was
registered both in the Registry of Deeds and the Land Transportation Office - C. R. Tecson Enterprises,
in turn, executed a deed of assignment of said promissory note and chattel mortgage in favor of Filinvest
Credit Corporation with the conformity of respondent spouses - In 1976, respondent spouses transferred
and delivered the vehicle to Conrado R. Tecson by way of sale with assumption of mortgage -
Subsequently, in 1978, Filinvest assigned all its rights and interest over the same promissory note and
chattel mortgage to petitioner Servicewide Specialists Inc. without notice to respondent spouses - Due to
the failure of respondent spouses to pay the installments under the promissory note from October 1977 to
March 1978,
and despite demands to pay the same or to return the vehicle, petitioner was constrained to file before the
Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages against them.
Contention of the RESPONDENT/DEFENDANT (SPS. PONCE) - Respondent spouses denied any
liability claiming they had already returned the car to Conrado Tecson pursuant to the Deed of Sale with
Assumption of Mortgage - They filed a third party complaint against Conrado Tecson praying that in
case they are adjudged liable to petitioner, Conrado Tecson should reimburse them.
Ruling of Lower Court: Found respondent spouses jointly and solidarily liable to petitioner, however, the
third party defendant Conrado Tecson was ordered to reimburse the respondent spouses for the sum that
they would pay to petitioners.
Ruling of CA: The CA reversed and set aside the RTC’s decision on the principal ground that respondent
spouses were not notified of the assignment of the promissory note and chattel mortgage to petitioner.
Issue/s:

Whether the assignment of a credit requires notice to the debtor in order to bind him? –YES
Whether the consent of the creditor- mortgagee necessary when the debtor-mortgagor alienates the
property to a third person? - YES

Ruling:

In case of assignment of credit, only notice to but not the consent of the debtor-mortgagor is necessary to
bind the latter
When the credit was assigned to petitioner, only notice to but not the consent of the debtor-mortgagor was
necessary to bind the latter.

Applying Article 1627 of the Civil Code, the assignment made to petitioner includes the accessory rights
such as the mortgage. Article 2141, on the other hand, states that the provisions concerning a contract of
pledge shall be applicable to a chattel mortgage, such as the one at bar, insofar as there is no conflict with
Act No. 1508, the Chattel Mortgage Law. As provided in Article 2096 in relation to Article 2141 of the
Civil Code, a thing pledged may be alienated by the pledgor or owner with the consent of the pledgee.
This provision is in accordance with Act No. 1508 which provides that a mortgagor of personal property
shall not sell or pledge such property, or any part thereof, mortgaged by him without the consent of the
mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the office
where such mortgage is recorded.
Although this provision in the chattel mortgage has been expressly repealed by Article 367 of the Revised
Penal Code, yet under Article 319 (2) of the same Code, the sale of the thing mortgaged may be made
provided that the mortgagee gives his consent and that the same is recorded.
A mortgage credit may be alienated or assigned to a third person
The assignee’s consent is necessary in order to bind him of the alienation of the mortgaged thing by the
debtor- mortgagor
In any case, applying by analogy Article 2128 of the Civil Code to a chattel mortgage, it appears that a
mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into
the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignee’s
consent is necessary in order to bind him of the alienation of the mortgaged thing by the debtormortgagor.
This is tantamount to a novation. As the new assignee, petitioner’s consent is necessary before respondent
spouses’ alienation of the vehicle can be considered as binding against third persons. Petitioner is
considered a third person with respect to the sale with mortgage between respondent spouses and third
party defendant Conrado
Tecson.

DISPOSITIVE PORTION: WHEREFORE, the decision of the Court of Appeals is REVERSED and SET
ASIDE. The decision of the Regional Trial Court is AFFIRMED and REINSTATED