CRED TRANS Digest Pool | Atty.
Sarona SY 2015-2016 1
PART I: CONCEPT OF CREDIT TRANSACTIONS
PART II: LOAN (Articles 1933 – 1961)
I. Concept
II. Commodatum
PAJUYO VS. CA
FACTS: In June 1979, petitioner Pajuyo paid P400 to
a certain Perez for the rights over a 250-square
meter lot in Quezon City. Pajuyo then constructed a
house on the lot and he and his family lived in the house
from 1979 to 1985.
On 8 December 1985, Pajuyo and private respondent
Guevarra executed a Kasunduan or agreement.
Pajuyo, as owner of the house, allowed Guevarra to
live in the house for free provided Guevarra would
maintain the cleanliness and orderliness of the house.
Guevarra promised that he would voluntarily vacate
the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his
need of the house and demanded that Guevarra
vacate the house. Guevarra refused. Pajuyo filed an
ejectment case against Guevarra with the MTC.
Guevarra claimed that Pajuyo had no valid title or right
of possession over the lot because the lot is within the
150 hectares set aside by Proclamation No. 137 for
socialized housing. Guevarra pointed out that from
December 1985 to September 1994, Pajuyo did not
show up or communicate with him. Guevarra insisted
that neither he nor Pajuyo has valid title to the lot
(both were squatters).
MTC rendered its decision in favor of Pajuyo. Pajuyo
allowed Guevarra to use the house only by tolerance.
Thus, Guevarras refusal to vacate the house on
Pajuyos demand made Guevarras continued
possession of the house illegal. RTC affirmed the MTC
decision in toto.
CA reversed the MTC and RTC rulings and declared
that Pajuyo and Guevarra illegally occupied the
contested lot which the government owned. CA also
declared that Pajuyo and Guevarra are in pari delicto
or in equal fault. Moreover, the Kasunduan is not a
lease contract but a commodatum because
the agreement is not for a price certain.
ISSUE: Whether or not the contractual relationship
between Pajuyo and Guevarra was that of a
commodatum.
HELD: No. In a contract of commodatum, one of the
parties delivers to another something not consumable
so that the latter may use the same for a certain time
and return it.
Essential features of commodatum:
 it is gratuitous.
 the use of the thing belonging to
another is for a certain period
Thus, the bailor cannot demand the return of the
thing loaned until after expiration of the period
stipulated, or after accomplishment of the use for
which the commodatum is constituted.
If the bailor should have urgent need of the thing,
he may demand its return for temporary use. If the
use of the thing is merely tolerated by the bailor, he
can demand the return of the thing at will, in which
case the contractual relation is called a precarium,
which is a kind of commodatum.
The Kasunduan reveals that the accommodation
accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require
Guevarra to pay rent, it obligated him to maintain
the property in good condition. The imposition of
this obligation makes the Kasunduan a contract
different from a commodatum.
The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has
treated relationship based on tolerance as one that is
akin to a landlord- tenant relationship where the
withdrawal of permission would result in the
termination of the lease. The tenants withholding of
the property would then be unlawful.
Even assuming that the relationship between Pajuyo
and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over
possession of the property to Pajuyo, the bailor.
The obligation to deliver or to return the thing
received attaches to contracts for safekeeping,

or contracts of commission, administration and
commodatum.
Guevarra freely entered into the Kasunduan.
Guevarra cannot now impugn the Kasunduan after
he had benefited from it. The Kasunduan binds
Guevarra.
The Kasunduan is not void for purposes of
determining who between Pajuyo and Guevarra has
a right to physical possession of the contested
property. The Kasunduan is the undeniable evidence
of Guevarras recognition of Pajuyos better right of
physical possession. Guevarra is clearly a possessor in
bad faith. The absence of a contract would not yield
a different result, as there would still be an implied
promise to vacate.
PRODUCERS BANK VS. CA
FACTS: Sometime in 1979, private respondent Vives
was asked by his neighbor and friend Sanchez to
help her friend, Col. Doronilla, in incorporating his
business (Sterela). Sanchez asked Vives to deposit in a
bank a certain amount of money in the bank account
of Sterela for purposes of its incorporation. She
assured Vives that he could withdraw his money from
said account within a months time.
Vives, Sanchez, Doronilla and a certain Dumagpi,
Doronillas private secretary, met and discussed the
matter. Relying on the assurances and representations
of Sanchez and Doronilla, Vives issued a check in the
amount of P200k in favor of Sterela which was
subsequently deposited under Sterela's account.
Subsequently, Vives learned that Sterela was no
longer holding office in the address previously given to
him. He went to the Bank to verify if their money was
still intact. Atienza, the assistant manager, informed
them that part of the money had been withdrawn by
Doronilla, and that only P90k remained therein. He
likewise told them that they could not withdraw the
remaining amount because it had to answer for some
postdated checks issued by Doronilla.
Sterela, through Doronilla, obtained a loan of P175k
from the Bank. To cover payment,
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Doronilla issued 3 postdated checks, all of which were
dishonored.
Vives received a letter from Doronilla assuring him
that his money was intact and would be returned to
him. Doronilla issued a postdated check for P212k in
favor of Vives. However, upon presentment to the
drawee bank, the check was dishonored. Doronilla
requested Vives to present the same check on a
later date but it was again dishonored.
Vives referred the matter to a lawyer, who made a
written demand upon Doronilla for the return of his
clients money. Doronilla issued another check but
was again dishonored for insufficiency of funds.
Vives instituted an action for recovery of sum of
money in the RTC against Doronilla, Sanchez, Dumagpi
and Producers Bank. He also filed criminal actions
against Doronilla, Sanchez and Dumagpi in the RTC.
RTC rendered a decision in favor of Vives. CA affirmed
the decision of the RTC in Toto.
Petitioner contends that the transaction between
private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are
present: first, what was delivered by private
respondent to Doronilla was money, a consumable
thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest, as evidenced
by the check issued by Doronilla in the amount of
P212k, or P12k more than what Vives deposited in
Sterelas bank account.
ISSUE: Whether or not the transaction between
Doronilla and Vives was one of simple loan or
mutuum.
HELD: No, it was a commodatum.
Article 1933 of the Civil Code distinguishes between the
two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to
another, either something not consumable so that the
latter may use the same for a certain time and return
it, in which case the contract is called a commodatum;
or money or other consumable thing, upon the
condition that the same amount of the same kind
and quality shall be paid, in which case

the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous. Simple loan
may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of
the thing loaned, while in simple loan, ownership
passes to the borrower.
The foregoing provision seems to imply that if the
subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However,
there are some instances where a commodatum may
have for its object a consumable thing.
Article 1936 of the Civil Code provides:
Consumable goods may be the subject of
commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for
exhibition.
Thus, if consumable goods are loaned only for purposes
of exhibition, or when the intention of the parties is to
lend consumable goods and to have the very same
goods returned at the end of the period agreed
upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto
shall be accorded primordial consideration in
determining the actual character of a contract. The
evidence shows that Vives agreed to deposit his
money in the savings account of Sterela for the
purpose of making it appear that said firm had
sufficient capitalization for incorporation, with the
promise that the amount shall be returned within 30
days.
Vives merely accommodated Doronilla by lending his
money without consideration, as a favor to Sanchez. It
was however clear to the parties to the transaction
that the money would not be removed from Sterelas
savings account and would be returned to Vives after
30 days.
Doronillas attempts to return the amount did not
convert the transaction from a commodatum into a
mutuum because such was not the intent of the
parties and because the additional P12k corresponds
to the fruits of the lending of the P200k.
Article 1935 of the Civil Code expressly states
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that the bailee in commodatum acquires the use of
the thing loaned but not its fruits. Hence, it was only
proper for Doronilla to remit the interest.
Neither does the Court agree with petitioners
contention that it is not solidarily liable for the return
of private respondents money because it was not privy
to the transaction between Doronilla and Vives.
Under Article 2180 of the Civil Code, employers shall
be held primarily and solidarily liable for damages
caused by their employees acting within the scope of
their assigned tasks.
Atienzas acts of helping Doronilla, a customer of the
petitioner, were obviously done in furtherance of
petitioners interests. It was established that the
transfer of funds from Sterelas savings account to its
current account could not have been accomplished
by Doronilla without the invaluable assistance of
Atienza, and that it was their connivance which was the
cause of private respondents loss.
Under Article 2180 of the Civil Code, petitioner is liable
for private respondents loss and is solidarily liable with
Doronilla and Dumagpi for the return of the P200k
since it is clear that petitioner failed to prove that it
exercised due diligence to prevent the unauthorized
withdrawals from Sterela's savings account.
MINA VS. PASCUAL
FACTS: Francisco Fontanilla and Andres Fontanilla were
brothers. Francisco acquired a lot in Laoag, the property
having been awarded to him through its purchase at a
public auction. Andres, with the consent of his brother
Francisco, erected a warehouse on a part of the said
lot.
Francisco, the former owner of the lot, being dead,
the plaintiffs, Alejandro Mina, et al., were recognized as
his heirs. Andres, the former owner of the warehouse,
also having died, the children of Ruperta Pascual
were recognized (though it is not said how) and
consequently are entitled to the said building.
The plaintiffs and the defendants are the owners of
the warehouse, while the plaintiffs

are undoubtedly, the owners of the part of the lot
occupied by that building, as well as of the remainder
thereof.
This was the state of affairs when on May 6, 1909,
Ruperta Pascual, as the guardian of her minor children
(defendants), petitioned the CFI for authorization to
sell "the 6/7 of the one-half of the warehouse, of 14 by
11 meters, together with its lot."
The plaintiffs opposed the petition of Ruperta Pascual
for the reason that the latter had included the lot
occupied by the warehouse, which they claimed was
their exclusive property.
The plaintiffs requested the court to decide the
question of the ownership of the lot before it pass
upon the petition for the sale of the warehouse. But
the court before determining the matter of the
ownership of the lot occupied by the warehouse,
ordered the sale of the building.
The warehouse, together with the lot, was sold to Cu
Joco (P2890) at a public auction.
The plaintiffs insisted upon a decision of the
question of the ownership of the lot, and the court
decided it by holding that the land belonged to the
owner of the warehouse which had been built thereon
thirty years before.
The plaintiffs appealed and this court reversed the
judgment of the lower court and held that the
appellants were the owners of the lot in question.
When the judgment became final and executory, a
writ of execution was issued and the plaintiffs were
given possession of the lot; but soon thereafter the
trial court annulled this possession for the reason
that it affected Cu Joco, who had not been a party to
the suit in which that writ was served.
It was then that the plaintiffs commenced the
present action for the purpose of having the sale of
the said lot declared null and void and of no force and
effect.
An agreement was had add to the facts, the ninth
paragraph of which is as follows:
9. That the herein plaintiffs excepted to the judgment
and appealed therefrom to the
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Supreme Court which found for them by holding
that they are the owners of the lot in question,
although there existed and still exists a commodatum
by virtue of which the guardianship (meaning the
defendants) had and has the use, and the plaintiffs the
ownership, of the property, with no finding concerning
the decree of the lower court that ordered the sale.
ISSUE: Whether or not there is a contract of
commodatum.
HELD: No. Although both litigating parties may have
agreed in their idea of the commodatum, it is not, a
question of fact but of law. The denomination given by
them to the use of the lot granted by Francisco
Fontanilla to his brother, Andres Fontanilla, is not
acceptable.
Contracts are not to be interpreted in conformity
with the name that the parties thereto agree to give
them, but must be construed, duly considering their
constitutive elements, as they are defined and
denominated by law.
By the contract of loan, one of the parties delivers
to the other, either anything not perishable, in order
that the latter may use it during the certain period
and return it to the former, in which case it is
called commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the
commodatum that the use of the thing belonging to
another shall for a certain period.
Francisco Fontanilla did not fix any definite period or
time during which Andres Fontanilla could have the
use of the lot whereon the latter was to erect a stone
warehouse of considerable value, and so it is that for
the past
30 years of the lot has been used by both Andres and
his successors in interest.
The present contention of the plaintiffs that Cu Joco,
now in possession of the lot, should pay rent for it at
the rate of P5 a month, would destroy the theory
of the commodatum sustained by them, since,
according to the second paragraph of the aforecited
article 1740, "commodatum is essentially

gratuitous,"
With that expectation in view, it appears more likely
that Francisco intended to allow his brother Andres
a surface right; but this right supposes the payment
of an annual rent, and Andres had the gratuitous use of
the lot.
FELIX DE LOS SANTOS VS AGUSTINA JARRA (1910
CASE)
FACTS: Felix de los Santos brought suit against
Agusitina Jarra (the administratrix of the estate of
Magdaleno Jimenea, he alleges that Jimenea
borrowed and obtained from the plaintiff 10 first class
carabos, to be used at the animal power mill of
Jimenea’s hacienda, without recompense or
remuneration for the use of it and under the sole
condition that they should be returned to the owner as
soon as the work at the mill was terminated. Jimenea
however, did not return the carabaos even though de
los Santos claimed their return after the work at the
mill was finished.
Jimenea died in 1904 (before the suit) and Jarra was
appointed by the CFI as administratrix of his estate.
De los Santos presented his claim to the
commissioners of the estate of Jimenea for return of
the carabaos. (for the carabaos to be exluded from the
estate of Jimenea). The commissioners rejected his
claim, and thus a lawsuit ensued.
Jarra answered and said that it was true that the late
Jimenea asked the plaintiff to loan him ten carabaos,
but that he only obtained THREE (3) second-class
carabaos, which were afterwards sold by the Delos
Santos to Jimenea. (Basically Jarra denied all the
allegations in the complaint)
The case came up for trial and the court rendered
judgment against Jarra and ordering her to return to
de los Santos 6 second-class and third class carabaos.
The value of which was 120 each so 720 pesos. Jarra
moved for a new trial on the ground that the findings
of fact were openly and manifestly contrary to the
weight of the evidence.
The record however, discloses that it has been fully
proven from the testimonies of a number
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of witnesses that Santos, sent in charge of various
persons, the 10 carabaos requested by Jimenea (it was
revealed that Jimenea is the father in law of de los
Santos). Also, de los Santos produced 2 letters
proving that Jimenea received them in the presence of
said persons (brother of Jimenea) who saw the
animals arrive at the hacienda. FOUR of the
carabaos died of rinderpest and thus the judgment
appealed from only deals with 6 carabaos.
THE ALLEGED PURCHASE of 3 carabaos by Jimenea
from his son-in-law Santos is not evidenced by any
trustworthy evidence. Therefore, it is not true.
From the foregoing, it may be logically inferred that
the carabaos loaned or given on commodatum to
the deceased Jimenea were ten in number, that 6
survived and that these carabaos have not been
returned to the owner delos Santos, and lastly, that
the 6 carabaos were not the property of the deceased
nor any of his descendants, it is the duty of the
administratrix to return them or indemnify the owner
for the value.
ISSUE: W/N the contracts is one of a commodatum.
HELD: YES. The carabaos were given on commodatum
as these were delivered to be used by defendant.
Upon failure of defendant to return the cattle upon
demand, he is under the obligation to indemnify the
plaintiff by paying him their value. Since the 6
carabaos were not the property of the deceased or
of any of his descendants, it is the duty of the
administratrix of the estate to either return them or
indemnify the owner thereof of their value.
It was not part of Jimenea’s estate. Therefore
Agustina Jarra should exclude it or indemnify De los
Santos… “for the reasons above set forth, by which
the errors assigned to the judgment appealed from
have been refuted, and considering that the same is in
accordance with the law and the merits of the case, it is
our opinion that it should be affirmed and we do
hereby affirm it with the costs against appellant.
RATIO: The ratio differentiates a loan from a

commodatum. Art 1740. (Old civil code) By the contract
of loan, one of the parties delivers to the other,
either anything not perishable (in the new civil code
it’s consumable), in order that the latter may use it
during a certain period and return it to the former, in
which case it is called commodatum, or money or any
other perishable thing, under the condition to return an
equal amount of the same kind and quality, in which
case it is merely called a loan.
Commodatum is essentially gratuitous.
A simple loan may be gratuitous, or made under a
stipulation to pay interest.
Art 1741. The bailor retains ownership of the thing
loaned the bailee acquires the use thereof, but not its
fruits; if any compensation is involved, to be paid by
the person requiring the use, the agreement ceases
to be a commodatum.
Art 1742. The obligations and rights which arise from
the commodatum pass to the heirs of both contracting
parties, unless the loan has been made in
consideration for the person of the bailee, in which
case his heirs shall not have the right to continue
using the thing loaned.
The carabaos delivered to be used were not
returned by Jiminea upon demand. There is no doubt
that Jarra is under the obligation to indemnify delos
Santos.
Article 101. Those who in fulfilling their obligations are
guilty of fraud, negligence or delay….
The obligation of the bailee or of his successors to
return either the thing loaned or its value is sustained
by the tribunal of Spain, which said in its decision -
(Mentioned jurisprudence): legal doctrine touching
commodatum as follows:
Although it is true that in a contract of commodatum
the bailor retains the ownership of thing loaned at
the expiration of the period, or after the use for
which it was loaned has been accomplished, it is the
imperative duty of the bailee to return the thing
itself to its owner, or to pay him damages if
through the fault of the bailee
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the thing should have been lost or injured…
REPUBLIC OF THE PHILIPPINES VS. JOSE BAGTAS,
FELICIDAD BAGTAS, ADMINISTRATRIX OF THE
INTESTATE ESTATE LEFT BY JOSE BAGTAS
FACTS: On May 8, 1948, Jose Bagtas borrowed from
the Bureau of Animal Industry 3 bulls for 1 year for
breeding purposes, subject to breeding fee for 10% of
the book value of the bulls. Upon the expiration of
the contract, Bagtas asked for a renewal for another
year. The renewal granted was only for 1 bull. Bagtas
offered to buy the bulls at book value less
depreciation, but the Bureau told him that he should
either return the bulls or pay for their book value.
Bagtas failed to pay the book value, and so the
Republic commenced an action with the CFI Manila to
order the return of the bulls of the payment of book
value. Felicidad Bagtas, the surviving spouse and
administratrix of the decedent’s estate, stated that
the 2 bulls have already been returned in 1952, and
that the remaining one died of gunshot during a Huk
raid. As regards the two bulls, is was proven that
they were returned and thus, there is no more
obligation on the part of the appellant. As to the
bull not returned, Felicidad contends that the obligation
is extinguished since the contract is that of a
commodatum and that the loss through fortuitous
event should be borne by the owner.
ISSUE: Whether, depending on the nature of the
contract, the respondent is liable for the death of
the bull
HELD: A contract of commodatum is essentially
gratuitous. If the breeding fee be considered a
compensation, then the contract would be a lease of
the bull. Under article 1671 of the Civil Code the lessee
would be subject to the responsibilities of a
possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract.
And even if the contract be commodatum, still the
appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of
commodatum -
. . . is liable for loss of the things, even if it should
be through a fortuitous event:
(2) If he keeps it longer than the period
stipulated . . .

(3) If the thing loaned has been delivered with
appraisal of its value, unless there is a
stipulation exempting the bailee from
responsibility in case of a fortuitous event.
The loan of one bull was renewed for another period
of one year to end on 8 May 1950. But the appellant
kept and used the bull until November 1953 when
during a Huk raid it was killed by stray bullets.
Furthermore, when lent and delivered to the deceased
husband of the appellant the bulls had each an
appraised book value. It was not stipulated that in case
of loss of the bull due to fortuitous event the late
husband of the appellant would be exempt from
liability.
Special proceedings for the administration and
settlement of the estate of the deceased Jose
V. Bagtas having been instituted in the Court of First
Instance of Rizal (Q-200), the money judgment
rendered in favor of the appellee cannot be enforced
by means of a writ of execution but must be presented
to the probate court for payment by the appellant, the
administratrix appointed by the court.
CATHOLIC VICAR VS. CA
FACTS: 1962: Catholic Vicar Apostolic of the Mountain
Province (Vicar), petitioner, filed with the court an
application for the registration of title over lots 1, 2,
3 and 4 situated in Poblacion Central, Benguet, said
lots being used as sites of the Catholic Church,
building, convents, high school building, school
gymnasium, dormitories, social hall and stonewalls.
1963: Heirs of Juan Valdez and Heirs of Egmidio
Octaviano claimed that they have ownership over lots
1, 2 and 3. (2 separate civil cases)
1965: The land registration court confirmed the
registrable title of Vicar to lots 1, 2, 3 and 4. Upon
appeal by the private respondents (heirs), the decision
of the lower court was reversed. Title for lots 2 and 3
were cancelled.
VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of
Appeals dismissing his application for
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registration of Lots 2 and 3.
During trial, the Heirs of Octaviano presented one (1)
witness, who testified on the alleged ownership of
the land in question (Lot 3) by their predecessor-in-
interest, Egmidio Octaviano; his written demand to
Vicar for the return of the land to them; and the
reasonable rentals for the use of the land at P10,000
per month.
On the other hand, Vicar presented the Register of
Deeds for the Province of Benguet, Atty. Sison, who
testified that the land in question is not covered by
any title in the name of Egmidio Octaviano or any of the
heirs. Vicar dispensed with the testimony of Mons.
Brasseur when the heirs admitted that the witness if
called to the witness stand, would testify that Vicar
has been in possession of Lot 3, for 75 years
continuously and peacefully and has constructed
permanent structures thereon.
ISSUE: WON Vicar had been in possession of lots 2 and
3 merely as bailee borrower in commodatum, a
gratuitous loan for use.
HELD: YES. Private respondents were able to prove
that their predecessors' house was borrowed by
petitioner Vicar after the church and the convent
were destroyed. They never asked for the return of
the house, but when they allowed its free use, they
became bailors in commodatum and the petitioner the
bailee.
The bailees' failure to return the subject matter of
commodatum to the bailor did not mean adverse
possession on the part of the borrower. The bailee
held in trust the property subject matter of
commodatum. The adverse claim of petitioner came
only in 1951 when it declared the lots for taxation
purposes. The action of petitioner Vicar by such
adverse claim could not ripen into title by way of
ordinary acquisitive prescription because of the
absence of just title.
The Court of Appeals found that petitioner Vicar did
not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither
did it satisfy the requirement of 10 years possession
for ordinary acquisitive prescription because of the
absence of just title. The appellate court did not
believe the findings of the trial court that

Lot 2 was acquired from Juan Valdez by purchase
and Lot 3 was acquired also by purchase from Egmidio
Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the
same and the alleged purchases were never
mentioned in the application for registration.
MARGARITA QUINTOS and ANGEL A. ANSALDO vs.
BECK
FACTS: BECK was a tenant of the Quintos and as
such occupied the latter's house on M.
H. del Pilar street, No. 1175. On January 14,
1936, upon the novation of the contract of lease
between them, the former gratuitously granted to the
latter the use of the furniture subject to the
condition that the BECK would return them to the
Quintos upon the latter's demand. Quintos sold the
property to Maria Lopez and Rosario Lopez and on
September 14, 1936, these three notified BECK of the
conveyance, giving him sixty days to vacate the
premises under one of the clauses of the contract of
lease. There after Quintos required BECK to return all
the furniture transferred to him for them in the
house where they were found.
On November 5, 1936, BECK, through another person,
wrote to Quintos reiterating that she may call for
the furniture in the ground floor of the house. On the
7th of the same month, he wrote another letter to
Quintos informing her that he could not give up the
three gas heaters and the four electric lamps because
he would use them until the 15th of the same
month when the lease in due to expire. Quintos
refused to get the furniture in view of the fact that
BECK had declined to make delivery of all of them. On
November 15th, before vacating the house, the BECK
deposited with the Sheriff all the furniture belonging to
Quintos and they are now on deposit in the
warehouse situated at No. 1521, Rizal Avenue, in the
custody of the said sheriff.
ISSUE 1: WON BECK complied with his obligation to
return the furniture upon the Quintos’ demand. NO.
HELD 1: The contract entered into between the
parties is one of commadatum, because
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under it Quintos gratuitously granted the use of the
furniture to BECK, reserving for herself the ownership
thereof; by this contract he bound himself to return
the furniture to Quintos, upon the latter’s demand
(clause 7 of the contract, Exhibit A; articles 1740,
paragraph 1, and 1741 of the Civil Code). The
obligation voluntarily assumed by BECK to return the
furniture upon demand, means that he should
return all of them to Quintos at the latter's residence
or house. BECK did not comply with this obligation
when he merely placed them at the disposal of the
Quintos, retaining for his benefit the three gas heaters
and the four eletric lamps. The provisions of article
1169 of the Civil Code cited by counsel for the parties
are not squarely applicable. The trial court, therefore,
erred when it came to the legal conclusion that the
Quintos failed to comply with her obligation to get
the furniture when they were offered to her.
ISSUE 2: WON Quintos is bound to bear the deposit
fees. NO.
HELD 2: As BECK had voluntarily undertaken to return
all the furniture to the Quintos, upon the latter's
demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the
furniture at the BECK's behest. The latter, as bailee,
was not entitled to place the furniture on deposit;
nor was Quintos under a duty to accept the offer to
return the furniture, because he wanted to retain the
three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that
Quintos is entitled to the payment thereof by BECK in
case of his inability to return some of the furniture
because under paragraph 6 of the stipulation of facts,
BECK has neither agreed to nor admitted the
correctness of the said value. Should he fail to deliver
some of the furniture, the value thereof should be
later determined by the trial Court through evidence
which the parties may desire to present.
ISSUE 3: WON Quintos is entitled to the costs of
litigation. YES.
HELD 3: The costs in both instances should be borne by
BECK because the plaintiff is the prevailing party
(section 487 of the Code of

Civil Procedure). He was the one who breached the
contract of commodatum, and without any reason he
refused to return and deliver all the furniture upon
demand. In these circumstances, it is just and
equitable that he pay the legal expenses and other
judicial costs which the plaintiff would not have
otherwise defrayed.
POLICY: Commodatum is a contract where the bailor
delivers to the bailee a non- consumable thing so that
the latter may use it for a certain time and return the
identical thing.
III. Mutuum
BPI INVESTMENT CORPORATION vs. HON. COURT OF
APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION
FACTS: Frank Roa obtained a loan at an interest rate
of 16.25% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of
petitioner BPIIC, for the construction of a house on
his lot in New Alabang Village, Muntinlupa. Said
house and lot were mortgaged to AIDC to secure the
loan. Sometime in 1980, Roa sold the house and lot
to private respondents ALS and Antonio Litonjua for
P850,000. They paid P350,000 in cash and assumed
the P500,000 balance of Roa’s indebtedness with AIDC.
AIDC, however, was not willing to extend the old
interest rate to ALS and proposed to grant them a new
loan of P500,000 to be applied to Roa’s debt and
secured by the same property, at an interest rate of
20% per annum and service fee of 1% per annum on
the outstanding principal balance payable within ten
years in equal monthly amortization.
Consequently, on March 1981, ALS executed a
mortgage deed containing the above stipulations with
the provision that payment of the monthly
amortization shall commence on May 1, 1981.
On August 1982, ALS and Litonjua updated Roa’s
arrearages by paying BPIIC the sum of P190,601.35.
This reduced Roa’s principal balance to P457,204.90
which, in turn, was liquidated when BPIIC applied
thereto the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 9
proceeds of ALS’s loan of P500,000.
On September 13, 1982, BPIIC released to ALS
P7,146.87, purporting to be what was left of their loan
after full payment of Roa’s loan.
In June 1984, BPIIC instituted foreclosure proceedings
against ALS on the ground that they failed to pay
the mortgage indebtedness which from May 1, 1981
to June 30, 1984, amounted to P475,585.31.
ALS and Litonjua filed a civil case against BPIIC. They
alleged, among others, that they were not in arrears in
their payment, but in fact made an overpayment as
of June 30, 1984. They maintained that they should
not be made to pay amortization before the actual
release of the P500,000 loan in August and
September 1982. Further, out of the P500,000 loan,
only the total amount of P464,351.77 was released to
ALS.
RTC favored ALS and Litonjua. CA affirmed in toto.
CA reasoned that a simple loan is perfected only
upon the delivery of the object of the contract. The
contract of loan between BPIIC and ALS & Litonjua
was perfected only on September 13, 1982, the date
when BPIIC released the purported balance of the
P500,000 loan after deducting therefrom the value of
Roa’s indebtedness. Thus, payment of the monthly
amortization should commence only a month after
the said date, as can be inferred from the
stipulations in the contract. This, despite the express
agreement of the parties that payment shall
commence on May 1, 1981. From October 1982 to
June 1984, the total amortization due was only
P194,960.43. Evidence showed that ALS had an
overpayment. Therefore, there was no basis for
BPIIC to extrajudicially foreclose the mortgage.
BPIIC contends among others that CA erred in ruling
that because a simple loan is perfected upon the
delivery of the object of the contract, the loan
contract in this case was perfected only on
September 13, 1982. BPIIC claims that a contract of loan
is a consensual contract, and a loan contract is perfected
at the time the contract of mortgage is executed
conformably with SC’s ruling in Bonnevie v. CA, 125
SCRA

122.
ISSUE: WON a contract of loan is a consensual
contract. NO, A CONTRACT OF LOAN IS A REAL
CONTRACT.
HELD: A loan contract is not a consensual contract
but a real contract. It is perfected only upon the
DELIVERY of the object of the contract. BPIIC
misapplied Bonnevie. The contract in Bonnevie declared
by this Court as a perfected consensual contract falls
under the first clause of Article 1934, CC. It is an
accepted promise to deliver something by way of
simple loan. A perfected consensual contract, as
shown above, can give rise to an action for damages.
However, said contract does not constitute the real
contract of loan which requires the delivery of the
object of the contract for its perfection and which
gives rise to obligations only on the part of the
borrower.
In the present case, the loan contract between BPI, on
the one hand, and ALS and Litonjua, on the other, was
perfected only on September 13, 1982, the date of the
second release of the loan. Following the intentions of
the parties on the commencement of the monthly
amortization, as found by the CA, ALS’s obligation
to pay commenced only on October 13, 1982, a
month after the perfection of the contract. A
contract of loan involves a reciprocal obligation,
wherein the obligation or promise of each party is
the consideration for that of the other.
As averred by ALS, the promise of BPIIC to extend
and deliver the loan is upon the consideration that
ALS and Litonjua shall pay the monthly amortization
commencing on May 1, 1981, one month after the
supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay,
if the other does not comply or is not ready to
comply in a proper manner with what is incumbent
upon him. Only when a party has performed his part
of the contract can he demand that the other party
also fulfills his own obligation and if the latter fails,
default sets in.
Consequently, petitioner could only demand for the
payment of the monthly amortization after September
13, 1982 for it was only then when it complied with
its obligation under the loan contract. Therefore, in
computing the amount
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 10
due as of the date when BPIIC extrajudicially caused
the foreclosure of the mortgage, the starting date is
October 13, 1982 and not May 1, 1981.
Other points raised by BPIIC in connection with this
issue, such as the date of actual release of the loan and
whether ALS were the cause of the delay in the
release of the loan, are factual.
CA decision was affirmed but with modification as to
the award of damages.
YONG CHAN KIM vs. PEOPLE OF THE PHILIPPINES,
HON. EDGAR D. GUSTILO
Presiding Judge, RTC, 6th Judicial Region, Branch 28
Iloilo City and COURT OF APPEALS (13th Division),
SOUTHEAST ASIAN FISHERIES DEVELOPMENT CENTER
AQUACULTURE DEPARTMENT (SEAFDEC)
FACTS: Petitioner Yong Chan Kim was employed as a
Researcher at the Aquaculture Department of the
Southeast Asian Fisheries Development Center
(SEAFDEC) with head station at Tigbauan, Province of
Iloilo. As Head of the Economics Unit of the Research
Division, he conducted prawn surveys which
required him to travel to various selected provinces
in the country where there are potentials for prawn
culture.
On 15 June 1982, petitioner was issued Travel Order
No. 2222 which covered his travels to different
places in Luzon from 16 June to 21 July 1982, a
period of thirty five (35) days. Under this travel order,
he received P6,438.00 as cash advance to defray his
travel expenses.
Within the same period, petitioner was issued another
travel order, T.O. 2268, requiring him to travel from
the Head Station at Tigbauan, Iloilo to Roxas City
from 30 June to 4 July 1982, a period of five (5)
days. For this travel order, petitioner received a cash
advance of P495.00.
On 14 January 1983, petitioner presented both travel
orders for liquidation, submitting Travel Expense
Reports to the Accounting Section. When the Travel
Expense Reports were audited, it was discovered that
there was an overlap of four (4) days (30 June to
3 July

1982) in the two (2) travel orders for which
petitioner collected per diems twice. In sum, the total
amount in the form of per diems and allowances
charged and collected by petitioner under Travel Order
No. 2222, when he did not actually and physically
travel as represented by his liquidation papers, was
P1,230.00.
Petitioner was required to comment on the internal
auditor's report regarding the alleged anomalous
claim for per diems. In his reply, petitioner denied the
alleged anomaly, claiming that he made make-up trips
to compensate for the trips he failed to undertake
under T.O. 2222 because he was recalled to the head
office and given another assignment.
In September 1983, two (2) complaints for Estafa were
filed against the petitioner before the Municipal
Circuit Trial Court at Guimbal, Iloilo.
ISSUE: Whether or not petitioner can be held
criminally liable on the ground of failure to liquidate
her traveling expenses. NO.
RULING: It is undisputed that petitioner received a
cash advance from private respondent SEAFDEC to
defray his travel expenses under T.O. 2222. It is
likewise admitted that within the period covered by
T.O. 2222, petitioner was recalled to the head
station in Iloilo and given another assignment which
was covered by T.O. 2268. The dispute arose when
petitioner allegedly failed to return P1,230.00 out of
the cash advance which he received under T.O. 2222.
For the alleged failure of petitioner to return the
amount of P1,230.00, he was charged with the crime
of Estafa under Article 315, par. 1(b) of the Revised
Penal Code.
In order that a person can be convicted under the
above-quoted provision, it must be proven that he
had the obligation to deliver or return the same
money, good or personal property that he had
received. Was petitioner under obligation to return the
same money (cash advance) which he had received?
We believe not.
Liquidation simply means the settling of indebtedness.
An employee, such as herein petitioner, who liquidates
a cash advance is in fact paying back his debt in the
form of a loan
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 11
of money advanced to him by his employer, as
per diems and allowances.
Similarly, as stated in the assailed decision of the
lower court, "if the amount of the cash advance he
received is less than the amount he spent for actual
travel . . . he has the right to demand reimbursement
from his employer the amount he spent coming from
his personal funds.
In other words, the money advanced by either party is
actually a loan to the other. Hence, petitioner was
under no legal obligation to return the same cash or
money, i.e., the bills or coins, which he received from
the private respondent.
Article 1933 and Article 1953 of the Civil Code define
the nature of a simple loan.
Art. 1933. By the contract of loan, one of the
parties delivers to another, either something
not consumable so that the latter may use
the same for a certain time and return it, in
which case the contract is called a
commodatum; or money or other consumable
thing, upon the condition that the same
amount of the same kind and quality shall be
paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a
stipulation to pay interest.
In commodatum the bailor retains the
ownership of the thing loaned, while in
simple loan, ownership passes to the
borrower.
Art. 1953.— A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to
the creditor an equal amount of the same
kind and quality.
The ruling of the trial judge that ownership of the
cash advanced to the petitioner by private respondent
was not transferred to the latter is erroneous.
Ownership of the money was transferred to the
petitioner.

Since ownership of the money (cash advance) was
transferred to petitioner, no fiduciary relationship was
created. Absent this fiduciary relationship between
petitioner and private respondent, which is an
essential element of the crime of estafa by
misappropriation or conversion, petitioner could not
have committed estafa.
Additionally, it has been the policy of private
respondent that all cash advances not liquidated are
to be deducted correspondingly from the salary of the
employee concerned. The evidence shows that the
corresponding salary deduction was made in the case
of petitioner vis-a-vis the cash advance in question.
(Failure of bank to return the amount deposited, not a
case of estafa)
SPOUSES ANTONIO and LOLITA TAN vs.
CARMELITO VILLAPAZ
FACTS: On February 6, 1992, respondent Villapaz
issued a Philippine Bank of Communications (PBCom)
crossed check in the amount of P250,000.00, payable
to the order of petitioner Tony Tan. On that date, the
check was deposited at the drawee bank, PBCom
Davao City branch at Monteverde Avenue, to the
account of petitioner Antonio Tan also at said bank.
On November 7, 1994 respondent filed a Complaint
for sum of money against the spouses, alleging that
on February 6, 1992, the spouses went to his place of
business at Malita, Davao and obtained a loan of
P250,000.00, hence, his issuance of the February 6,
1992 PBCom crossed check which loan was to be
settled interest-free in six (6) months.
On the maturity date of the loan or on August 6,
1992, petitioner Antonio Tan failed to settle the same,
and despite repeated demands, petitioners never did,
drawing Villapaz to file the complaint; and on account
of the willful refusal of petitioners to honor their
obligation, he suffered moral damages in the amount
of P50,000.00, among other things.
The spouses denied having gone to Malita
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 12
and having obtained a loan from respondent, alleging
that the check was issued by respondent in Davao
City on February 6, 1992 "in exchange for equivalent
cash"; they never received from respondent any
demand for payment, be it verbal or written,
respecting the alleged loan; since the alleged loan
was one with a period payable in six months, it
should have been expressly stipulated upon in writing
by the parties but it was not, hence, the essential
requisite for the validity and enforceability of a loan is
wanting; and the check is inadmissible to prove the
existence of a loan for P250,000.00.
Petitioners maintain that they did not secure a loan
from respondent, insisting that they encashed in Davao
City respondent's February 6, 1992 crossed check; in
the ordinary course of business, prudence dictates
that a contract of loan must be in writing as in fact
the New Civil Code provides that to be enforceable
"contracts where the amount involved exceed[s]
P500.00 must appear in writing even a private one,"
hence, respondent's "self- serving" claim does not
suffice to prove the existence of a loan; respondent's
allegation that no memorandum in writing of the
transaction was executed because he and they are
"kumpadres" does not inspire belief for respondent,
being a businessman himself, was with more reason
expected to be more prudent; and the mere
encashment of the check is not a contractual
transaction such as a sale or a loan which ordinarily
requires a receipt and that explains why they did not
issue a receipt when they encashed the check of
respondent.
Petitioners furthermore maintain that they were
financially stable on February 6, 1992 as shown by
the entries of their bank passbook hence, there was
no reason for them to go to a distant place like Malita to
borrow money.
The lower Court gave four reasons for ruling out a
loan:
(a) the defense of spouses Tan that they did not go
to Villapaz's place on February 6, 1992, date the check
was given to them;
(b) Spouses Tan could not have borrowed money on
that date because from January to March, 1992, they
had an average daily deposit of P700,000 and on
February 6, 1992, they had P1,211,400.64 in the
bank, hence,

they had "surely no reason nor logic" to borrow money
from Villapaz;
(c) the alleged loan was not reduced in writing and
the check could not be a competent evidence of loan.
ISSUE: Whether or not the transaction in dispute was
a contract of loan and not a mere matter of check
encashment as found by the trial court. YES.
HELD: The four-fold reasoning cannot be sustained.
They are faulty and do not accord either with law or
ordinary conduct of men. For one thing, the first two
given reasons partake more of alibi and speculation,
hence, deserve scant consideration. For another, the
last two miss the applicable provisions of law.
The existence of a contract of loan cannot be denied
merely because it is not reduced in writing. Surely,
there can be a verbal loan. Contracts are binding
between the parties, whether oral or written. The law
is explicit that contracts shall be obligatory in
whatever form they may have been entered into,
provided all the essential requisites for their validity
are present. A loan (simple loan or mutuum) exists
when a person receives a loan of money or any
other fungible thing and acquires the ownership
thereof. He is bound to pay to the creditor the equal
amount of the same kind and quality.
Contracts are perfected by mere consent, and from
that moment the parties are bound not only to the
fulfillment of what has been expressly stipulated but
also to all the consequences which, according to their
nature, maybe in keeping with good faith, usage and
law.
The lower Court misplaced its reliance on Article 1358
of the Civil Code providing that to be enforceable,
contracts where the amount involved exceed five
hundred pesos, must appear in writing. Such
requirement, it has been held, is only for convenience,
not for validity. It bears emphasis that at the time
Villapaz delivered the crossed-check to the petitioner
spouses, Villapaz had no account whatsoever with
them. Spouses' contention that they did not obtain
any loan but merely exchanged the latter's check
for cash is not borne by any evidence.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 13
That apart from the check, no written proof of the
grant of the loan was executed was credibly
explained by respondent when he declared that
petitioners' son being his godson, he, out of trust and
respect, believed that the crossed check sufficed to
prove their transaction.
As for petitioners' reliance on Art. 1358[22] of the
Civil Code, the same is misplaced for the requirement
that contracts where the amount involved exceeds
P500.00 must appear in writing is only for
convenience.
At all events, a check, the entries of which are no
doubt in writing, could prove a loan transaction.
PNB VS. CA AND IBARROLA
FACTS: Province of Isabela issued several checks drawn
against its account with PNB (P) in favor of Lyndon
Pharmaceuticals Laboratories, a business operated by
Ibarrola (R), as payments for the purchase of
medicines.
The checks were delivered to R’s agents who turned
them over to R, except 23 checks amounting to
P98k. Due to failure to receive full amount, R filed
case against P.
Trial Court, CA and SC ordered PNB to pay; however,
all 3 courts failed to specify the legal rate of interest –
6% or 12%.
ISSUE: WoN the rate to be used is 6%.
HELD: YES. This case does not involve a loan,
forbearance of money or judgment involving a loan or
forbearance of money as it arose from a contract of
sale whereby R did not receive full payment for her
merchandise.
When an obligation arises “from a contract of
purchase and sale and not from a contract of loan or
mutuum,” the applicable rate is 6% per annum as
provided in Art. 2209 of the NCC and not the rate of
12% per annum as provided in (CB) Cir. No. 416.
The rate of 12% interest referred to in Cir. 416 applies
only to: Loan or forbearance of money,

or to cases where money is transferred from one
person to another and the obligation to return the
same or a portion thereof is adjudged.
Any other monetary judgment which does not involve
or which has nothing to do with loans or forbearance
of any money, goods or credit does not fall within its
coverage for such imposition is not within the ambit
of the authority granted to the Central Bank.
When an obligation not constituting a loan or
forbearance of money is breached then an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per
annum in accordance with Art. 2209 of the Civil
Code. Indeed, the monetary judgment in favor of
private respondent does not involve a loan or
forbearance of money, hence the proper imposable
rate of interest is six (6%) per cent.
Therefore, the proper rate of interest referred to in
the judgment under execution is only 6%. This interest
shall be computed from the time of the filing of the
complaint considering that the amount adjudged
(P98,691.90) can be established with reasonable
certainty. Said amount being merely the uncollected
balance of the purchase price covered by the 23
checks encashed and appropriated by Ibarrola's
agents. However, once the judgment becomes final
and executory, the "interim period from the finality of
judgment awarding a monetary claim and until
payment thereof, is deemed to be equivalent to a
forbearance of credit."
*6% from filing of complaint until full payment before
finality of judgment.
*12% from finality of judgment.
HERMOJINAESTORES VS. SPOUSES ARTURO AND
LAURASUPANGAN
FACTS: In Oct. 1993, Hermojina Estores and Spouses
Supangan entered into a Conditional Deed of Sale
where Estores offered to sell, and Spouses offered to
buy a parcel of land in Cavite for P4.7M.
After almost 7 years and despite the payment of
P3.5M by the Spouses, Estores still failed to comply
with her obligation to handle the peaceful transfer of
ownership as stated in 5
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 14
provisions in the contract.
In a letter in 2000, Spouses demanded the return of the
amount within 15 days from receipt. In reply, Estores
promised to return the same within 120 days. Spouses
agreed but imposed an interest of 12% annually.
Estores still failed despite demands.
Spouses filed a complaint with the RTC against Estores
and Roberto Arias (allegedly acted as Estores’ agent).
In Answer, Estores said they were willing to pay the
principal amount but without the interest as it was
not agreed upon. That since the Conditional Deed of
Sale provided only for the return of the downpayment
in case of breach, they cant be liable for legal interest
as well.
RTC ruled saying that the Spouses are entitled to the
interest but only at 6% per annum and also entitled
to atty’s fees. On appeal, CA said that the issue to
resolve is whether it is proper to impose interest for
an obligation that does not involve a loan or
forbearance of money in the absence of stipulation
of the parties. CA affirmed RTC.
That interest should start on date of formal demand by
Spouses to return the money not when contract was
executed as stated by the RTC; That Arias not be
solidarily liable as he acted as agent only and did not
expressly bind himself or exceeded his authority.
Estores contends: Not bound to pay interest
because the deed only provided for the return of the
downpayment in case of failure to comply with her
obligations; That atty fees not proper because both
RTC and CA sustained her contention that 12%
interest was uncalled for so it showed that Spouses did
not win.
Spouses contend: It is only fair that interest be
imposed because Estores failed to return the amount
upon demand and used the money for her benefit.
Estores failed to relocate the house outside the
perimeter of the subject lot and complete the
necessary documents.
As to the fees, they claim that they were forced

to litigate when Estores unjustly held the amount.
ISSUES: Is the imposition of interest and attorney’s fees is
proper? YES
Interest based on Art 2209 of CC (6%) or under Central
Bank Circular 416 (12%)? 12%
HELD: Interest may be imposed even in the absence of
stipulation in the contract.
Article 2210 of the Civil Code expressly provides that
“interest may, in the discretion of the court, be allowed
upon damages awarded for breach of contract.”
Estores failed on her obligations despite demand. She
admitted that the conditions were not fulfilled and
was willing to return the full amount of P3.5M but
hasn’t done so she is now in default.
The interest at the rate of 12% is applicable in the
instant case.
Gen Rule: the applicable interest rate shall be
computed in accordance with the stipulation of the
parties
Exc: if no stipulation, applicable rate of interest shall be
12% per annum when obligation arises out of a loan
or forbearance of money, goods or credits. In other
cases, it shall be 6%
In this case, no stipulation was made.
Contract involved in this case is not a loan but a
Conditional Deed of Sale.
No question that the obligations were not met and
the return of money not made
Even if transaction was a Conditional Deed of Sale,
the stipulation governing the return of the money
can be considered as a forbearance of money which
requires 12% interest
In Crismina Garments, Inc. v. Court of Appeals,
Forbearance-- “contractual obligation of lender or creditor
to refrain during a given period of time, from requiring
the borrower or debtor to repay a loan or debt then due
and payable.”
In such case, “forbearance of money, goods or credits”
will have no distinct definition from a loan. However, the
phrase “forbearance of money,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 15
goods or credits” is meant to have a separate meaning
from a loan, otherwise there would have been no need to
add that phrase as a loan is already sufficiently defined in
the Civil Code
Forbearance of money, goods or credits should therefore
refer to arrangements other than loan agreements,
where a person acquiesces to the temporary use of his
money, goods or credits pending happening of certain
events or fulfillment of certain conditions.
Estores’ unwarranted withholding of the money amounts
to forbearance of money which can be considered as an
involuntary loan so rate is 12% starting in Sept. 2000
The award of attorney’s fees is warranted. No doubt
that the Spouses were forced to litigate to protect their
interest, i.e., to recover their
money. The amount of P50,000.00 is more
appropriate.
PAN PACIFIC vs EQUITABLE PCI BANK
FACTS: Pan Pacific is engaged in contracting
mechanical works on airconditioning system. They
entered into a contract of mechanical works with
respondent for the total consideration for the
whole project was P23,311,410.30. The Contract
stipulated that Pan Pacific shall be entitled to a price
adjustment in case of increase in labor costs and
prices of materials under paragraphs 70.1 and 70.2 of
the General Conditions for the Construction of PCIB
Tower II Extension.
Pan Pacific commenced the mechanical works in the
project site. In 1990, labor costs and prices of
materials escalated. On 5 April 1991, in accordance
with the escalation clause, Pan Pacific claimed a
price adjustment of P5,165,945.52. Respondents
asked for a reduction in the price adjustment. To show
goodwill, Pan Pacific reduced the price adjustment
toP4,858,548.67.
On 28 April 1992, respondent asked that the price
adjustment should be pegged at P3,730,957.07,
based on the DOLE Labor Indices and the General
Conditions of their contract.
Due to the extraordinary increases in the costs of
labor and materials, Pan Pacific’s

operational capital was becoming inadequate for the
project. However, respondent withheld the payment
of the price adjustment under the escalation clause
despite Pan Pacifics repeated demands.
Instead, respondent offered Pan Pacific a loan of P1.8
million. Pan Pacific was constrained to execute a
promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a
surety bond. The P1.8 million was released directly to
laborers and suppliers and not a single centavo was
given to Pan Pacific.
Pan Pacific made several demands for payment on
the price adjustment but respondent merely kept on
promising to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded
payment plus interest and penalty. Pan Pacific refused
to pay the loan. Pan Pacific insisted that it would not
have incurred the loan if respondent released the
price adjustment on time. Pan Pacific alleged that
the promissory note did not express the true
agreement of the parties. Pan Pacific maintained that
the P1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there
was really no consideration for the promissory note;
hence, it is null and void from the beginning.
Respondent stood firm that it would not release any
amount of the price adjustment to Pan Pacific but it
would offset the price adjustment with Pan Pacifics
outstanding balance of P3,226,186.01, representing
the loan, interests, penalties and collection charges.
Pan Pacific refused the offsetting but agreed to receive
the reduced amount
of P3,730,957.07 as recommended by the TCGI
Engineers for the purpose of extrajudicial settlement,
less P1.8 million and P414,942 as advance payments.
On 6 May 1994, petitioners filed a complaint for
declaration of nullity/annulment of the promissory
note, sum of money, and damages against the
respondent with the RTC. On 12 April 1999, the RTC
declared the promissory note as null and void and
ordered Pan Pacific to pay P1,389,111.10
REPRESENTING UNPAID BALANCE OF THE
ADJUSTMENT
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 16
PRICE, AND INTEREST AT THE LEGAL RATE OF
TWELVE (12%) PERCENT PER ANNUM
The CA removed the deduction ofP126,903.97
because it represented the final payment on the basic
contract price. Hence, the CA ordered
respondent to pay P1,516,015.07 to petitioners,
with interest at the legal rate of 12% per annum
starting 6 May 1994.
On MR he CA increased the loan rate to 18%, rate of
equitable PCI.
ISSUE: Whether the CA, in awarding the unpaid
balance of the price adjustment, erred in fixing the
interest rate at 12% instead of the 18% bank lending
rate. YES
HELD: The CA went beyond the intent of the parties
by requiring respondent to give its consent to the
imposition of interest before petitioners can hold
respondent liable for interest at the current bank
lending rate. This is erroneous. A review of Section 2.6
of the Agreement and Section 60.10 of the General
Conditions shows that the consent of the respondent
is not needed for the imposition of interest at the
current bank lending rate, which occurs upon any delay
in payment.
Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that no
interest shall be due unless it has been expressly
stipulated in writing. Therefore, payment of monetary
interest is allowed only if:
(1) there was an express stipulation for the payment
of interest; and
(2) the agreement for the payment of interest was
reduced in writing. The concurrence of the two
conditions is required for the payment of monetary
interest.
The consent of the respondent is not needed in order
to impose interest at the current bank lending rate.
Under Article 2209 of the Civil Code, the appropriate
measure for damages in case of delay in discharging
an obligation consisting of the payment of a sum of
money is the payment of penalty interest at the rate
agreed upon in the contract of the parties. In the
absence of a stipulation of a particular rate of
penalty

interest, payment of additional interest at a rate equal
to the regular monetary interest becomes due and
payable. Finally, if no regular interest had been
agreed upon by the contracting parties, then the
damages payable will consist of payment of legal
interest which is 6%, or in the case of loans or
forbearances of money, 12% per annum. It is only
when the parties to a contract have failed to fix the
rate of interest or when such amount is unwarranted
that the Court will apply the 12% interest per annum
on a loan or forbearance of money.
The written agreement entered into between
petitioners and respondent provides for an interest at
the current bank lending rate in case of delay in
payment and the promissory note charged an interest
of 18%.
To prove petitioners entitlement to the 18% bank
lending rate of interest, petitioners presented the
promissory note prepared by respondent bank itself.
This promissory note, although declared void by the
lower courts because it did not express the real
intention of the parties, is substantial proof that the
bank lending rate at the time of default was 18% per
annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by
petitioners against the respondent, the interest rate
agreed upon is binding on them.
PRISMA CONSTRUCTION & DEVELOPMENT
CORPORATION and ROGELIO S. PANTALEON vs
ARTHUR F. MENCHAVEZ
FACTS: December 8, 1993, Pantaleon, President and
Chairman of the Board of PRISMA, obtained a P1M
loan from the respondent, with monthly interest of
P40,000.00 payable for 6 months, or a total
obligation of P1,240,000.00 payable within 6
months.
To secure the payment of the loan, Pantaleon issued a
promissory. Pantaleon signed the promissory note in
his personal capacity and as duly authorized by the
Board of Directors of PRISMA. The petitioners failed
to completely pay the loan within the 6-month period.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 17
As of January 4, 1997, respondent found that the
petitioners still had an outstanding balance of
P1,364,151.00, to which respondent applied a 4%
monthly interest.
On August 28, 1997, respondent filed a complaint for
sum of money to enforce the unpaid balance, plus 4%
monthly interest. The petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4%
monthly interest, arguing that the interest was not
provided in the promissory note. Pantaleon also
denied that he made himself personally liable and
that he made representations that the loan would be
repaid within six (6) months.
RTC found that the respondent issued a check for P1M
in favor of the petitioners for a loan that would
earn an interest of 4% or P40,000.00 per month, or a
total of P240,000.00 for a 6-month period. RTC
ordered the petitioners to jointly and severally pay
the respondent the amount of P3,526,117.00 plus 4%
per month interest from February 11, 1999 until fully
paid.
Petitioners appealed to CA insisting that there was no
express stipulation on the 4% monthly interest. CA
favored respondent but noted that the interest of 4%
per month, or 48% per annum, was unreasonable
and should be reduced to 12% per annum. MR denied
hence this petition.
ISSUE: Whether the parties agreed to the 4% monthly
interest on the loan. If so, does the rate of interest
apply to the 6-month payment period only or until full
payment of the loan?
RULING: Interest due should be stipulated in writing;
otherwise, 12% per annum APPLIES.
Obligations arising from contracts have the force of
law between the contracting parties and should be
complied with in good faith. When the terms of a
contract are clear and leave no doubt as to the
intention of the contracting parties, the literal
meaning of its stipulations governs. Courts have no
authority to alter the contract by construction or to
make a new contract for the parties; a court’s duty is
confined to the interpretation of the contract the
parties made for themselves without regard to its
wisdom or folly, as the court cannot supply material
stipulations or read into the

contract words the contract does not contain. It is only
when the contract is vague and ambiguous that courts
are permitted to resort to the interpretation of its
terms to determine the parties’ intent.
In the present case, the respondent issued a check
for P1M. In turn, Pantaleon, in his personal capacity
and as authorized by the Board, executed the
promissory note. Thus, the P1M loan shall be payable
within 6 months. The loan shall earn an interest of
P40,000.00 per month, for a total obligation of
P1,240,000.00 for the six-month period. We note that
this agreed sum can be computed at 4% interest per
month, but no such rate of interest was stipulated in
the promissory note; rather a fixed sum equivalent to
this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates
that “no interest shall be due unless it has been
expressly stipulated in writing.” The payment of
interest in loans or forbearance of money is allowed
only if: (1) there was an express stipulation for the
payment of interest; and (2) the agreement for the
payment of interest was reduced in writing. The
concurrence of the two conditions is required for the
payment of interest at a stipulated rate. The collection
of interest without any stipulation in writing is
prohibited by law.
The interest of P40,000.00 per month corresponds only
to the six-month period of the loan, or from January 8,
1994 to June 8, 1994, as agreed upon by the parties
in the promissory note. Thereafter, the interest on the
loan should be at the legal interest rate of 12% per
annum.
When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil
Code.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 18
The facts show that the parties agreed to the
payment of a specific sum of money of P40,000.00
per month for six months, not to a 4% rate of interest
payable within a 6-month period.
No issue on the excessiveness of the stipulated
amount of P40,000.00 per month was ever put in
issue by the petitioners; they only assailed the
application of a 4% interest rate, since it was not
agreed upon.
It is a familiar doctrine in obligations and contracts
that the parties are bound by the stipulations, clauses,
terms and conditions they have agreed to, which is the
law between them, the only limitation being that
these stipulations, clauses, terms and conditions are
not contrary to law, morals, public order or public
policy. The payment of the specific sum of money of
P40,000.00 per month was voluntarily agreed upon by
the petitioners and the respondent. There is nothing
from the records and, in fact, there is no allegation
showing that petitioners were victims of fraud when
they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1M
shall earn P40,000.00 per month for a period of 6
months, for a total principal and interest amount of
P1,240,000.00. Thereafter, interest at the rate of
12% per annum shall apply. The amounts already
paid by the petitioners during the pendency of the suit,
amounting toP1,228,772.00 as of February 12, 1999,
should be deducted from the total amount due,
computed as indicated above. We remand the case to
the trial court for the actual computation of the total
amount due.
EASTERN SHIPPING LINES, INC. vs. HON. COURT OF
APPEALS AND MERCANTILE INSURANCE COMPANY,
INC
FACTS: This is an action against defendants shipping
company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants'
custody, filed by the insurer-subrogee who paid the
consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin
were shipped from Yokohama, Japan for delivery vessel
"SS EASTERN COMET" owned by defendant Eastern
Shipping Lines. The shipment was insured under
plaintiff's Marine Insurance Policy No. 81/01177 for
P36,382,466.38.
Upon arrival of the shipment in Manila on December
12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter
excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage
Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and
without seal.
On January 8 and 14, 1982, defendant Allied
Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter
excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake.
Plaintiff contended that due to the losses/damage
sustained by said drum, the consignee suffered losses
totaling P19,032.95, due to the fault and negligence of
defendants. Claims were presented against
defendants who failed and refused to pay the same.
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under
the aforestated marine insurance policy, so that it
became subrogated to all the rights of action of said
consignee against defendants
The Court, among others, ordered defendants to pay
plaintiff, jointly and severally The amount of
P19,032.95, with the present legal interest of 12% per
annum from October 1, 1982, the date of filing of this
complaints, until fully paid (the liability of defendant
Eastern Shipping, Inc. shall not exceed US$500 per case
or the CIF value of the loss, whichever is lesser, while
the liability of defendant Metro Port Service, Inc. shall
be to the extent of the actual invoice value of each
package, crate box or container in no case to exceed
P5,000.00 each, pursuant to Section 6.01 of the
Management Contract)
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 19
ISSUE:
1. Whether or not a claim for damage sustained on
a shipment of goods can be a solidary, or joint and
several, liability of the common carrier, the arrastre
operator and the customs broker. YES
2. Whether the payment of legal interest on an award
for loss or damage is to be computed from the time
the complaint is filed or from the date the decision
appealed from is rendered.
3. Whether the applicable rate of interest, referred
to above, is twelve percent (12%) or six percent (6%).
6%
HELD:
1. Solidary. Since it is the duty of the ARRASTRE to
take good care of the goods that are in its custody
and to deliver them in good condition to the
consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are
therefore charged with the obligation to deliver the
goods in good condition to the consignee.
The common carrier's duty to observe the requisite
diligence in the shipment of goods lasts from the time
the articles are surrendered to or unconditionally
placed in the possession of, and received by, the
carrier for transportation until delivered to, or until the
lapse of a reasonable time for their acceptance by, the
person entitled to receive them (Arts. 1736-1738,
Civil Code; Ganzon vs. Court of Appeals, 161 SCRA
646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the
carrier of its failure to observe that diligence, and
there need not be an express finding of negligence to
hold it liable.
2. It may not be unwise, by way of clarification and
reconciliation, to suggest the following rules of thumb
for future guidance.
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in
the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that
which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages except when or until
the demand can be established with reasonable
certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin
to run only from the date the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum
of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.
3. The legal interest to be paid is SIX PERCENT (6%) on
the amount due computed from the decision, dated 03
February 1988, of the court a quo. A TWELVE PERCENT
(12%) interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this
decision until the payment thereof.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 20
NOTE: The Central Bank Circular imposing the 12%
interest per annum applies only to loans or
forbearance of money, goods or credits, as well as to
judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction
involves the payment of indemnities in the concept
of damage arising from the breach or a delay in the
performance of obligations in general. Observe, too,
that in these cases, a common time frame in the
computation of the 6% interest per annum has been
applied, i.e., from the time the complaint is filed until
the adjudged amount is fully paid.
PILIPINAS BANK vs. COURT OF APPEALS
FACTS: Private respondent Lilia Echaus filed a
complaint against petitioner and its president,
Constantino Bautista, for collection of a sum of money.
The complaint alleged: (1) that petitioner and
Greatland Realty Corporation executed a "Dacion en
Pago," wherein Greatland conveyed to petitioner
several parcels of land in consideration of the sum of
P7,776,335.69; (2) that Greatland assigned
P2,300,000.00 out of the total consideration of the
Dacion en Pago, in favor of private respondent; and
(3) that notwithstanding her demand for payment,
petitioner in bad faith, refused and failed to pay the
said amount assigned to her.
The trial court ordered petitioner and its co-
defendant, jointly and severally, to pay private
respondent P2,300,000.00 the total amount assigned
by Greatland in her favor out of the P2,300,000.00
liability of defendant Pilipinas to Greatland plus legal
interest from the dates of assignments until fully paid.
On March 22, 1985, petitioner appealed the
decision of the trial court to the Court of Appeals. On
the same day, private respondent filed a motion for
Immediate Execution Pending Appeal which the trial
court granted.
Petitioner complied with the writ of execution
pending appeal by issuing two manager's checks in
the total amount of P5,517,707.00 and which was
encashed by the private respondent.

On June 28, 1990, the Court of Appeals rendered a
decision in CA-G.R. No. CV-06017, which modified the
judgment and ordered Pilipinas Bank to pay
2,300,000,00 Pesos, representing the total amount
assigned by Greatland to her, with interest at the legal
rate starting July 24, 1981, date when demand was first
made.
On September 4, 1990, petitioner filed a motion in
the trial court praying that private respondent to
refund to her the excess payment of P1,898,623.67
with interests at 6%.
Private respondent opposed the motion of petitioner
with respect to the rate of interest to be charged on
the amount of P2,300,000.00. According to private
respondent, the legal interest on the principal amount
of P2,300,000.00 due her should be 12% per annum
pursuant to CB Circular No. 416 and not 6% per
annum as computed by petitioner.
On October 12, 1990, the trial court, while ordering the
refund to petitioner of the excess payment, fixed the
interest rate due on the amount of P2,300.000.00 at
12% per annum as proposed by private respondent,
instead of 6% per annum as proposed by petitioner.
The Court of Appeals was of the theory that the
action in Civil Case No. 239-A filed by private
respondent against petitioner "involves forbearance of
money, as the principal award to plaintiff-appellee
(private respondent) in the amount of P2,300.000.00
was the overdue debt of defendant-appellant to her
since July 1981. The case is, in effect, a simple
collection of the money due to plaintiff-appellee, as
the unpaid creditor from the defendant bank, the
debtor" (Resolution, p.3; Rollo, p. 33). Applying Central
Bank Circular No. 416, the Court of Appeals held
that the applicable rate of interest is 12% per annum.
Petitioner argues that the applicable law is Article 2209
of the Civil Code, not the Central Bank Circular No.
416. Said Article 2209 provides:
Art. 2209. If the obligation consists in the payment of
a sum of money, and the debtor incurs in delay, the
indemnity for damages,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 21
there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in
the absence of stipulation, the legal interest, which
is six per cent per annum.
ISSUE: Whether or not the legal rate of interest on
the amount of P2,300,000.00 adjudged to be paid by
petitioner to private respondent is 12% per annum.
RULING: Presidential Decree No. 116 authorized the
Monetary Board to prescribe the maximum rate or
rates of interest for the loan or renewal thereof or
the forbearance of any money, goods or credits and
amended the Usury Law (Act No. 2655) for that
purpose.
As amended, the Usury Law now provides: Sec. The
rate of interest for the loan or forbearance of
any money, goods, or credits and the rate
allowed in judgments, in the absence of express
contract as to such rate of interest, shall be
six per centum per annum or such rate as may be
prescribed by the Monetary Board of the
Central Bank of the Philippines for that
purpose in accordance with the authority
hereby granted.
Sec. 1-a. The Monetary Board is hereby
authorized to prescribe the maximum rate or
rates of interest for the loan or renewal thereof
or the forbearance of any money, goods or
credits, and to charge such rate or rates
whenever warranted by prevailing economic and
social conditions:Provided, That such changes
shall not be made oftener that once every twelve
months.
In the exercise of the authority herein granted,
the Monetary Board may prescribe higher
maximum rates for consumer loans or renewals
thereof as well as such loans made by
pawnshops, finance companies and other similar
credit institutions although the rates prescribed
for these institutions need not necessarily be
uniform.
Acting on the authority vested on it by the Usury Law,
as amended by P.D. No. 116, the Monetary Board of
Central Bank issued Central Bank Circular No. 416,
which provides:

By virtue of the authority granted to it under
Section 1 of Act 2655, as amended, otherwise
known as the "Usury Law" the Monetary Board
in its Resolution No. 1622 dated July 29, 1974,
has prescribed that the rate of interest for the
loan, or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the
absence of express contract as to such rate of
interest, shall be twelve (12%) per cent per
annum. This Circular shall take effect immediately.
Note that Circular No. 416, fixing the rate of
interest at 12% per annum, deals with (1) loans; (2)
forbearance of any money, goods or credit; and (3)
judgments.
What then is the nature of the judgment ordering
petitioner to pay private respondent the amount of
P2,300,000.00?
The said amount was a portion of the P7,776,335.69
which petitioner was obligated to pay Greatland as
consideration for the sale of several parcels of land by
Greatland to petitioner. The amount of P2,300,000.00
was assigned by Greatland in favor of private
respondent. The said obligation therefore arose from
a contract of purchase and sale and not from a
contract of loan or mutuum. Hence, what is
applicable is the rate of 6% per annum as provided in
Article 2209 of the Civil Code of the Philippines and
not the rate of 12% per annum as provided in
Circular No. 416.
Petitioner next contends that, consistent with its
thesis that Circular No. 416 applies only to judgments
involving the payment of loans or forbearance of
money, goods and credit, the Court of Appeals
should have ordered private respondent to pay
interest at the rate of 12% on the overpayment
collected by her pursuant to the advance execution of
the judgment.
We sustain petitioner's contention as correct. Private
respondent was paid in advance the amount of
P5,517,707.00 by petitioner to the order for the
execution pending appeal of the judgment of the trial
court. On appeal, the Court of Appeals reduced the
total damages to P3,619,083.33, leaving a balance of
P1,898,623.67 to be refunded by private respondent
to petitioner. In an execution
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 22
pending appeal, funds are advanced by the losing party
to the prevailing party with the implied obligation of
the latter to repay former, in case the appellate court
cancels or reduces the monetary award.
In the case before us, the excess amount ordered to
refunded by private respondent falls within the ruling in
Viloria and Buiser that Circular No. 416 applies to
cases where money is transferred from one person
to another and the obligation to return the same or a
portion thereof is subsequently adjudged.
CHUA vs. TIMAN
FACTS: In February and March 1999, petitioners
Salvador and Violeta Chua granted respondents
Rodrigo, Ma. Lynn and Lydia Timan the following
loans: a) P100,000; b) P200,000; c) P150,000; d)
P107,000;
e) P200,000; and f) P107,000. These loans were
evidenced by promissory notes with interest of 7%
per month, which was later reduced to 5% per month.
Respondents paid the loans initially at 7% interest
rate per month until September 1999 and then at
5% interest rate per month from October to
December 1999. Sometime in March 2000,
respondents offered to pay the principal amount of
the loans through a Philippine National Bank manager’s
check worth P764,000, but petitioners refused to
accept the same insisting that the principal amount of
the loans totalled P864,000.
On May 3, 2000, respondents deposited
P864,000 with the Clerk of Court of the RTC of
Quezon City. Later, they filed a case for consignation
and damages which was released to the petitioners.
The RTC rendered a decision in favor of respondents
which was affirmed by the CA. It ruled that the
original stipulated interest rates of 7% and 5% per
month were excessive. It further ordered petitioners
to refund to respondents all interest payments in
excess of the legal rate of 1% per month or 12%
per annum.
The Court of Appeals declared illegal the stipulated
interest rates of 7% and 5% per

month for being excessive, iniquitous, unconscionable
and exorbitant. Accordingly, the Court of Appeals
reduced the stipulated interest rates of 7% and 5%
per month (equivalent to 84% and 60% per annum,
respectively) to a fair and reasonable rate of 1% per
month or 12% per annum. The Court of Appeals also
ordered petitioners to refund to respondents all
interest payments in excess of 12% per annum.
Petitioners aver that the stipulated interest of 5%
monthly and higher cannot be considered
unconscionable because these rates are not usurious
by virtue of Central Bank (C.B.) Circular No. 905-82
which had expressly removed the interest ceilings
prescribed by the Usury Law. Petitioners add that
respondents were in pari delicto since they agreed on
the stipulated interest rates of 7% and 5% per month.
They further aver they honestly believed that the
interest rates they imposed on respondents’ loans
were not usurious.
ISSUE: Whether or not the original stipulated interest
rates of 7% and 5%, equivalent to 84% and 60% per
annum, are unconscionable
RULING: Yes. The stipulated interest rates of 7% and
5% per month imposed on respondents’ loans must be
equitably reduced to 1% per month or 12% per
annum. We need not unsettle the principle we had
affirmed in a plethora of cases that stipulated interest
rates of 3% per month and higher are excessive,
iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if
not against the law. While C.B. Circular No. 905-82,
which took effect on January 1, 1983, effectively
removed the ceiling on interest rates for both
secured and unsecured loans, regardless of maturity,
nothing in the said circular could possibly be read as
granting carte blanche authority to lenders to raise
interest rates to levels which would either enslave
their borrowers or lead to a hemorrhaging of their
assets.
Petitioners cannot also raise the defenses of in pari
delicto and good faith. The defense of in pari delicto
was not raised in the RTC, hence, such an issue
cannot be raised for the first time on appeal. The
defense of good faith must also fail because such an
issue is a question of fact which may not be properly
raised in a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 23
petition for review under Rule 45 of the Rules of Civil
Procedure which allows only questions of law.
As well set forth in Medel:
We agree … that the stipulated rate of interest at
5.5% per month on the P500,000.00 loan is
excessive, iniquitous, unconscionable and
exorbitant. However, we can not consider the rate
"usurious" because this Court has consistently
held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly
removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now "legally
inexistent."
In Security Bank and Trust Company vs. Regional Trial
Court of Makati, it was held that CB Circular No. 905
"did not repeal nor in any way amend the Usury Law
but simply suspended the latter’s effectivity." "Usury
has been legally non-existent in our jurisdiction.
Interest can now be charged as lender and
borrower may agree upon."
Nevertheless, we find the interest at 5.5% per month,
or 66% per annum, stipulated upon by the parties in
the promissory note iniquitous or unconscionable, and,
hence, contrary to morals ("contra bonos mores"), if
not against the law. The stipulation is void.
DIO vs. SPOUSES JAPOR
FACTS: Herein respondents Spouses Virgilio Japor and
Luz Roces Japor were the owners of an 845.5 square-
meter residential lot including its improvements.
Adjacent to the Japor’s lot is another lot owned by
respondent Marta Japor.
On August 23, 1982, the respondents obtained a loan
of P90,000 from the Quezon Development Bank
(QDB), and as security therefor, they mortgaged the
two lots as evidenced by a Deed of Real Estate
Mortgage duly executed by and between the
respondents and QDB.
On December 6, 1983, respondents and QDB amended
the Deed of Real Estate Mortgage increasing
respondents’ loan to P128,000.

The respondents failed to pay their aforesaid loans.
However, before the bank could foreclose on the
mortgage, respondents, thru their broker, one Lucia G.
Orian, offered to mortgage their properties to
petitioner Teresita Dio. Petitioner prepared a Deed of
Real Estate Mortgage, whereby respondents
mortgaged anew the two properties already mortgaged
with QDB to secure the timely payment of a
P350,000 loan that respondents had from petitioner
Dio.
Under the terms of the deed, respondents agreed to
pay the petitioner interest at the rate of five percent
(5%) a month, within a period of two months or until
April 14, 1989. In the event of default, an additional
interest equivalent to five percent (5%) of the
amount then due, for every month of delay, would
be charged on them.
The respondents failed to settle their obligation to
petitioner on April 14, 1989, the agreed deadline for
settlement.
On August 27, 1991, petitioner made written
demands upon the respondents to pay their debt.
Despite repeated demands, respondents did not pay,
hence petitioner applied for extrajudicial foreclosure of
the mortgage.
Meanwhile, on February 24, 1992, respondents filed an
action for Fixing of Contractual Obligation with Prayer
for Preliminary Mandatory Injunction/ Restraining
Order, praying that the Deed of Real Estate Mortgage
dated February 13, 1989 be declared null and void, and
the plea that the trial court fix the contractual
obligations of the Japors with Dio.
On May 8, 1996, the bidding invoving the properties
was conducted, with petitioner Dio as the sole
bidder, purchased the properties for P3,500,000.
The appellate court affirmed the decision of the trial
court with respect to the validity of the Deed of Real
Estate Mortgage, but modified the interest and
penalty rates for being unconscionable and exorbitant.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 24
ISSUE: Whether or not the stipulations on interest and
penalty in the Deed of Real Estate Mortgage is
contrary to morals, if not illegal and were
respondents entitled to any "surplus" on the auction
sale price
RULING: On the main issue, petitioner contends that
1
The Usury Law has been rendered ineffective by
Central Bank Circular No. 905, series of 1982 and
accordingly, usury has become legally non-existent in
this jurisdiction, thus, interest rates may accordingly
be pegged at such levels or rates as the lender and the
borrower may agree upon.
Respondents admit they owe
petitioner P350,000 and do not question any lawful
interest on their loan but they maintain that the Deed
of Real Estate Mortgage is null and void since it did
not state the true intent of the parties, which limited
the 5% interest rate to only two (2) months from
the date of the loan and which did not provide for
penalties and other charges in the event of default
or delay. Respondents vehemently contend that they
never consented to the said stipulations and hence,
should not be bound by them.
On the first issue, we are constrained to rule
against the petitioner’s contentions.
Central Bank Circular No. 905, which took effect on
January 1, 1983, effectively removed the ceiling on
interest rates for both secured and unsecured loans,
regardless of maturity. However, nothing in said
Circular grants lenders carte blanche authority to
impose interest rates, which would result in the
enslavement of their borrowers or to the
hemorrhaging of their assets. While a stipulated rate
of interest may not technically and necessarily be
usurious under Circular No. 905, usury now being
legally non-existent in our jurisdiction, nonetheless,
said rate may be equitably reduced should the same be
found to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra
bonos mores), if not against the law. What is
iniquitous, unconscionable, and exorbitant shall
depend upon the factual circumstances of each case.
In the instant case, the Court of Appeals found that the
5% interest rate per month and 5%

penalty rate per month for every month of default or
delay is in reality interest rate at 120% per annum. This
Court has held that a stipulated interest rate of
5.5% per month or 66% per annum is void for being
iniquitous or unconscionable. We have likewise ruled
that an interest rate of 6% per month or 72% per
annum is outrageous and inordinate. Conformably to
these precedent cases, a combined interest and
penalty rate at 10% per month or 120% per annum,
should be deemed iniquitous, unconscionable, and
inordinate. Hence, we sustain the appellate court
when it found the interest and penalty rates in the
Deed of Real Estate Mortgage in the present case
excessive, hence legally impermissible. Reduction is
legally called for now in rates of interest and penalty
stated in the mortgage contract.
What then should the interest and penalty rates be?
The evidence shows that it was indeed the respondents
who proposed the 5% interest rate per month for two
(2) months. Having agreed to said rate, the parties
are now estopped from claiming otherwise. For the
succeeding period after the two months, however, the
Court of Appeals correctly reduced the interest rate
to 12% per annumand the penalty rate to 1% per
month, in accordance with Article 2227 of the Civil Code.
But were respondents entitled to the "surplus" of
P2,247,326 as a result of the "overpricing" in the
auction?
We note that the "surplus" was the result of the
computation by the Court of Appeals of respondents’
outstanding liability based on a reduced interest
rate of 12% per annum and the reduced penalty rate
of 1% per month.
In the instant case, however, there is no "surplus" to
speak of. In adjusting the interest and penalty rates to
equitable and conscionable levels, what the Court
did was merely to reflect the true price of the land in
the foreclosure sale. The amount of the petitioner’s bid
merely represented the true amount of the mortgage
debt. No surplus in the purchase price was thus created
to which the respondents as the mortgagors have a
vested right.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 25
** The interest rate for the subject loan owing to QDB
is hereby fixed at five percent (5%) for the first two
(2) months following the date of execution of the
Deed of Real Estate Mortgage, and twelve percent
(12%) for the succeeding period. The penalty rate
thereafter shall be fixed at one percent (1%) per
month. Petitioner Teresita Dio is declared free of any
obligation to return to the respondents, the Spouses
Virgilio Japor and Luz Roces Japor and Marta Japor,
any surplus in the foreclosure sale price. There being
no surplus, after the court below had applied
our ruling in Sulit, respondents could not legally
claim any overprice from the petitioner, much less
the amount of P2,247,326.00.
DARIO NACAR vs GALLERY FRAMES AND/OR FELIPE
BORDEY, JR.
FACTS: Petitioner Dario Nacar filed a complaint for
constructive dismissal before the National Labor
Relations Commission (NLRC) against Gallery Frames
(GF) and/or Felipe Bordey, Jr.
On October 15, 1998, the Labor Arbiter rendered a
Decision in favor of petitioner and found that he was
dismissed from employment without a valid or just
cause and was never afforded due process. Thus,
petitioner was awarded backwages and separation pay
in lieu of reinstatement, in the amount of P158,919.92,
computed only up to promulgation of this decision.
Length of service was 8 yrs and 1 day.
On November 5, 2002, petitioner filed a Motion for
Correct Computation, praying that his backwages be
computed from the date of his dismissal on January
24, 1997 up to the finality of the Resolution of the
Supreme Court on May 27, 2002. Upon recomputation,
NLRC arrived at an updated amount in the sum of
P471,320.31.
Respondents filed a Motion to Quash Writ of
Execution, arguing that no more recomputation is
required after the decision becomes final and
executory, the same cannot be altered or amended
anymore. Denied. Reappealed and a recomputation
was granted but only in the amount of P147,560.19.

Nacar then filed a Motion praying for the re-
computation of the monetary award to include the
appropriate interests.
The Labor Arbiter granted the motion, but reasoned
that it is the October 15, 1998 Decision that should
be enforced considering that it was the one that
became final and executory. However, the Labor
Arbiter reasoned that since the decision states that the
separation pay and backwages are computed only up
to the promulgation of the said decision, it is the
amount of P158,919.92 that should be executed.
Thus, since petitioner already received P147,560.19, he
is only entitled to the balance of P11,459.73.
Nacar appealed to the CA. Denied. It opined that
since petitioner no longer appealed the October 15,
1998 Decision of the Labor Arbiter, which already
became final and executory, a belated correction
thereof is no longer allowed. The CA stated that there
is nothing left to be done except to enforce the said
judgment.
ISSUE: WON a re-computation in the course of
execution of the labor arbiter's original computation
of the awards made is legally proper. YES
HELD: Computation should start from the time Nacar
was illegally dismissed until judgment has become
final and executory on May 27, 2013. Moreover, a
recomputation is necessary and is not a violation of
the principle of immutability of final judgments. The
recomputation of the consequences of illegal
dismissal upon execution of the decision does not
constitute an alteration or amendment of the final
decision being implemented. The illegal dismissal
ruling stands; only the computation of monetary
consequences of the dismissal is affected.
As to the payment of legal interest, the guidelines
laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
“Damages” of the Civil
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 26
Code govern in determining the measure of
recoverable damages. II. With regard particularly to
an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as
the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 6% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages,
except when or until the demand can be
established with reasonable certainty. Accordingly,
where the demand is established with
reasonable certainty, the interest shall begin to
run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when
such certainty cannot be so reasonably
established at the time the demand is made, the
interest shall begin to run only from the date the
judgment of the court is made (at which time
the quantification of damages may be deemed
to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6%
per annum from such finality until its satisfaction,
this interim period being deemed to be by then
an equivalent to a forbearance of credit.

The Decision of the CA is reversed and set aside.
The case is remanded back to the LA for the proper
recomputation.
* The rate of interest starting July 1, 2013 is 6% per
annum (since the original case was decided in 2002,
12% int was still applied) and applies prospectively.
Computation of backwages and separation pay should
start from the time an employee is illegally dismissed
to the time judgment has become final and
executory. Interest of such amount acrrues until full
payment is made.
ECE REALTY AND DEVELOPMENT, INC., VS. HAYDYN
HERNANDEZ
FACTS: Haydn filed a complaint for specific
performance with damages against EMIR and ECE
Realty due to the failure of the respondents to
deliver a condominium unit which he purchased from
them. The respondents allegedly promised to turn over
to him the unit by December 31, 1999, but failed to
do so. Worse, he learned that the actual area was
only 26 square meters, not 30 square meters as
indicated in their contract to sell, and the company
refused to grant his corresponding reduction in the
purchase price; instead the companies told him to
settle his arrears in amortizations. He learned later
that that company sold Unit 808 to a third party.
In their defense, the respondent faulted complainant
for unjustifiably refusing to accept delivery of the
condominium unit; that they were forced to cancel
the contract to sell because of the refusal of the
complainant to settle his past arrears.
The HLURB ruled in favor of the complainant and
ordered the company to reimburse the respondent the
amount of P452,551.65, plus legal interest, from the
filing of the complaint, and to pay the respondent
P50,000.00 as moral damages, P50,000.00 as
attorney’s fees, and P50,000.00 as exemplary
damages.[11]
The company appealed the case all the way to the CA
and eventually to the Supreme Court.
ISSUE: W/N ECE should be liable to reimburse
Hernandez
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 27
RULING: YES. The Supreme Court affirmed the ruling
of the lower four and tribunals, with a slight
modification of the legal interest imposable:
“Article 2209 of the New Civil Code provides that “If
the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.” There is no
doubt that ECE incurred in delay in delivering the
subject condominium unit, for which reason the trial
court was justified in awarding interest to the
respondent from the filing of his complaint. There
being no stipulation as to interest, under Article 2209
the imposable rate is six percent (6%) by way of
damages, following the guidelines laid down in the
landmark case of Eastern Shipping Lines v. Court of
Appeals:
II. With regard particularly to an award of interest in
the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn
legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages
except when or until the demand can be
established with reasonable certainty. Accordingly,
where the demand is established with
reasonable certainty, the interest shall begin to
run from the time the

claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the
demand is made, the interest shall begin to run
only from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been
reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be
on the amount finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of
legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its
satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of
credit.”
“The term “forbearance,” within the context of usury
law, has been described as a contractual obligation of a
lender or creditor to refrain, during a given period of
time, from requiring the borrower or debtor to
repay the loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on
the imposition of interest, if proper, and the
applicable rate, as follows: The 12% per annum rate
under CB Circular No. 416 shall apply only to loans or
forbearance of money, goods, or credits, as well as
to judgments involving such loan or forbearance of
money, goods, or credit, while the 6% per annum
under Art. 2209 of the Civil Code applies “when the
transaction involves the payment of indemnities in
the concept of damage arising from the breach or a
delay in the performance of obligations in general,”
with the application of both rates reckoned “from
the time the complaint was filed until the [adjudged]
amount is fully paid.” In either instance, the
reckoning period for the commencement of the
running of the legal interest shall be subject to the
condition “that the courts are vested with discretion,
depending on the equities of each case, on the award of
interest.” (Emphasis ours)
Thus, from the finality of the judgment awarding a
sum of money until it is satisfied, the award shall be
considered a forbearance of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 28
credit, regardless of whether the award in fact
pertained to one. Pursuant to Central Bank Circular
No. 416 issued on July 29, 1974, in the absence of
written stipulation the interest rate to be imposed
in judgments involving a forbearance of credit was
twelve percent (12%) per annum, up from six percent
(6%) under Article 2209 of the Civil Code. This was
reiterated in Central Bank Circular No. 905, which
suspended the effectivity of the Usury Law beginning
on January 1, 1983.
But since July 1, 2013, the rate of twelve percent
(12%) per annum from finality of the judgment until
satisfaction has been brought back to six percent
(6%). Section 1 of Resolution No. 796 of the
Monetary Board of the Bangko Sentral ng Pilipinas
dated May 16, 2013 provides: “The rate of interest for
the loan or forbearance of any money, goods or credits
and the rate allowed in judgments, in the absence of
an express contract as to such rate of interest, shall be
six percent (6%) per annum.” Thus, the rate of
interest to be imposed from finality of judgments is
now back at six percent (6%), the rate provided in
Article 2209 of the Civil Code.”
ANTONIO TAN v. COURT OF APPEALS and the
CULTURAL CENTER OF THE PHILIPPINES
FACTS: On May 14, 1978 and July 6, 1978,
petitioner Antonio Tan obtained two (2) loans each in
the principal amount of (P2,000,000.00), or in the total
principal amount of Four Million Pesos (P4,000,000.00)
from respondent Cultural Center of the Philippines
(CCP) evidenced by two (2) promissory notes with
maturity dates on May 14, 1979 and July 6, 1979,
respectively. Petitioner defaulted but after a few
partial payments he had the loans restructured by
respondent CCP, and petitioner accordingly executed a
promissory note on August 31, 1979 in the amount of
(P3,411,421.32) payable in five (5) installments.
Petitioner Tan failed to pay any installment on the
said restructured loan of (P3,411,421.32), the last
installment falling due on December 31, 1980.
In a letter dated January 26, 1982, petitioner
requested and proposed to respondent CCP a mode of
paying the restructured loan, i.e., (a)

twenty percent (20%) of the principal amount of the
loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal
obligation payable in thirty-six
(36) equal monthly installments until fully paid.
On October 20, 1983, petitioner again sent a letter
to respondent CCP requesting for a moratorium on
his loan obligation until the following year allegedly
due to a substantial deduction in the volume of his
business and on account of the peso devaluation. No
favorable response was made to said letters.
Instead, respondent CCP, through counsel, wrote a
letter dated May 30, 1984 to the petitioner demanding
full payment, within ten (10) days from receipt of
said letter, of the petitioner’s restructured loan
which as of April 30, 1984 amounted to
(P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC
of Manila a complaint for collection of a sum of money
against the petitioner after the latter failed to settle
his said restructured loan obligation. The petitioner
interposed the defense that he merely
accommodated a friend, Wilson Lucmen, who allegedly
asked for his help to obtain a loan from respondent
CCP. Petitioner claimed that he has not been able to
locate Wilson Lucmen.
While the case was pending in the trial court, the
petitioner filed a Manifestation wherein he proposed
to settle his indebtedness to respondent CCP by
proposing to make a down payment of (P140,000.00)
and to issue twelve
(12) checks every beginning of the year to cover
installment payments for one year, and every year
thereafter until the balance is fully paid. However,
respondent CCP did not agree to the petitioner’s
proposals and so the trial of the case ensued.
TC: Ruled in favor of CCP. CA: Affirmed trial court’s
decision.
ISSUE (1): Whether there are contractual and legal
bases for the imposition of the penalty, interest on
the penalty and attorney’s fees. YES
HELD 1: The petitioner imputes error on the part of
the appellate court in not totally eliminating the award
of attorney’s fees and in not reducing the penalties
considering that the petitioner, contrary to the
appellate court’s
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 29
findings, has allegedly made partial payments on the
loan. And if penalty is to be awarded, the petitioner
is asking for the non- imposition of interest on the
surcharges inasmuch as the compounding of interest
on surcharges is not provided in the promissory note
marked Exhibit “A”. The petitioner takes exception to
the computation of the private respondent whereby the
interest, surcharge and the principal were added
together and that on the total sum interest was
imposed. Petitioner also claims that there is no basis in
law for the charging of interest on the surcharges for
the reason that the New Civil Code is devoid of any
provision allowing the imposition of interest on
surcharges.
We find no merit in the petitioner’s contention. Article
1226 of the New Civil Code provides that:
In obligations with a penal clause, the penalty shall
substitute the indemnity for damages and the payment
of interests in case of non- compliance, if there is no
stipulation to the contrary. Nevertheless, damages shall
be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is
demandable in accordance with the provisions of this
Code.
In the case at bar, the promissory note (Exhibit “A”)
expressly provides for the imposition of both interest
and penalties in case of default on the part of the
petitioner in the payment of the subject restructured
loan. The pertinent portion of the promissory note
(Exhibit “A”) imposing interest and penalties provides
that:
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%)
per annum from the date hereof until paid. PLUS
THREE PERCENT (3%) SERVICE CHARGE.
In case of non-payment of this note at maturity/on
demand or upon default of payment of any portion
of it when due, I/We jointly and severally agree to pay
additional penalty charges at the rate of TWO per
cent (2%) per month on the total amount due until
paid, payable and computed monthly. Default

of payment of this note or any portion thereof when
due shall render all other installments and all existing
promissory notes made by us in favor of the
CULTURAL CENTER OF THE PHILIPPINES immediately
due and demandable.
xxx xxx xxx
The stipulated fourteen percent (14%) per annum
interest charge until full payment of the loan
constitutes the monetary interest on the note and is
allowed under Article 1956 of the New Civil Code.
On the other hand, the stipulated two percent (2%)
per month penalty is in the form of penalty charge
which is separate and distinct from the monetary
interest on the principal of the loan.
Penalty on delinquent loans may take different forms.
In Government Service Insurance System v. Court of
Appeals, this Court has ruled that the New Civil Code
permits an agreement upon a penalty apart from the
monetary interest. If the parties stipulate this kind of
agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct
from each other and may be demanded separately.
The penalty charge of two percent (2%) per month
in the case at bar began to accrue from the time of
default by the petitioner. There is no doubt that the
petitioner is liable for both the stipulated monetary
interest and the stipulated penalty charge. The penalty
charge is also called penalty or compensatory interest.
ISSUE (2): whether interest may accrue on the penalty
or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code. YES
HELD 2: Art. 1959. Without prejudice to the
provisions of Article 2212, interest due and unpaid
shall not earn interest. However, the contracting
parties may by stipulation capitalize the interest due
and unpaid, which as added principal, shall earn new
interest.
According to the petitioner, there is no legal basis
for the imposition of interest on the penalty charge
for the reason that the law only allows imposition of
interest on monetary interest but not the charging
of interest on
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 30
penalty. He claims that since there is no law that
allows imposition of interest on penalties, the
penalties should notearn interest. But as we have
already explained, penalty clauses can be in the form
of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest
is sanctioned by and allowed pursuant to the above-
quoted provision of Article 1959 of the New Civil Code
considering that:
First, there is an express stipulation in the promissory
note (Exhibit “A”) permitting the compounding of
interest. The fifth paragraph of the said promissory
note provides that: “Any interest which may be due
if not paid shall be added to the total amount when
due and shall become part thereof, the whole amount
to bear interest at the maximum rate allowed by law.”
Therefore, any penalty interest not paid, when due,
shall earn the legal interest of twelve percent (12%)
per annum, in the absence of express stipulation on
the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides
that “Interest due shall earn legal interest from the
time it is judicially demanded, although the obligation
may be silent upon this point.” In the instant case,
interest likewise began to run on the penalty interest
upon the filing of the complaint in court by
respondent CCP on August 29, 1984. Hence, the courts
a quo did not err in ruling that the petitioner is
bound to pay the interest on the total amount of the
principal, the monetary interest and the penalty
interest.
In the case at bar, however, equity cannot be
considered inasmuch as there is a contractual
stipulation in the promissory note whereby the
petitioner expressly agreed to the compounding of
interest in case of failure on his part to pay the loan
at maturity. Inasmuch as the said stipulation on the
compounding of interest has the force of law
between the parties and does not appear to be
inequitable or unjust, the said written stipulation
should be respected.
The said statement of account also shows that the
amounts stated therein are net of the partial
payments amounting to a total of (P452,561.43) which
were made during the period from May 13, 1983 to
September 30,

1983. The petitioner now seeks the reduction of the
penalty due to the said partial payments. The principal
amount of the promissory note (Exhibit “A”) was
(P3,411,421.32) when the loan was restructured on
August 31, 1979. As of August 28, 1986, the principal
amount of the said restructured loan has been reduced
to (P2,838,454.68). Thus, petitioner contends that
reduction of the penalty is justifiable pursuant to
Article 1229 of the New Civil Code which provides
that: “The judge shall equitably reduce the penalty
when the principal obligation has been partly or
irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or
unconscionable.” Petitioner insists that the penalty
should be reduced to ten percent (10%) of the
unpaid debt in accordance with Bachrach Motor
Company v. Espiritu.
There appears to be a justification for a reduction of
the penalty charge but not necessarily to ten percent
(10%) of the unpaid balance of the loan as suggested
by petitioner. Inasmuch as petitioner has made partial
payments which showed his good faith, a reduction
of the penalty charge from two percent (2%) per
month on the total amount due, compounded
monthly, until paid can indeed be justified under the
said provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual
of the two percent (2%) penalty charge on the total
amount due to be unconscionable inasmuch as the
same appeared to have been compounded monthly.
Considering petitioner’s several partial payments and
the fact he is liable under the note for the two
percent (2%) penalty charge per month on the total
amount due, compounded monthly, for twenty-one
(21) years since his default in 1980, we find it fair
and equitable to reduce the penalty charge to a straight
twelve percent (12%) per annum on the total
amount due starting August 28, 1986, the date of the
last Statement of Account.
SEBASTIAN SIGA-AN vs ALICIA VILLANUEVA
FACTS: Respondent Alicia Villanueva filed a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 31
complaint for sum of money against petitioner
Sebastian Siga-an alleging that she was a
businesswoman engaged in supplying office materials
and equipment to the Philippine Navy Office (PNO)
while petitioner was a military officer and comptroller
of the PNO. Respondent claimed that petitioner
approached her inside the PNO and offered to loan her
the amount of P540,000.00. Since she needed capital
for her business transactions with the PNO, she
accepted petitioner’s proposal. The loan agreement
was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan.
Respondent issued a check worth P500,000.00 as
partial payment of the loan, another check of
P200,000.00 as payment of the remaining balance of
the loan. Petitioner told her that since she paid a
total amount of P700,000.00 for theP540,000.00 worth
of loan, the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with
the amount applied as interest, petitioner pestered
her to pay additional interest and threatened to block
or disapprove her transactions with the PNO if she
would not comply. Thus she paid additional amounts
for the loan. The total amount paid to petitioner for the
loan and interest accumulated toP1,200,000.00.
Respondent consulted a lawyer and her lawyer told her
that petitioner could not validly collect interest
because there was no agreement between her and
petitioner regarding payment of interest thus she
made overpayment to petitioner so she sent a
demand letter to petitioner asking for the return of
the excess amount of P660,000.00. But petitioner
ignored her claim for reimbursement.
ISSUE: WON respondent is entitled to
reimbursement? YES
HELD: Interest is a compensation fixed by the parties
for the use or forbearance of money. This is referred
to as monetary interest. Interest may also be
imposed by law or by courts as penalty or
indemnity for damages. This is called compensatory
interest. The right to interest arises only by virtue of a
contract or by virtue of damages for delay or failure to
pay the principal loan on which interest is

demanded.
Article 1956 of the Civil Code, which refers to
monetary interest, specifically mandates that no
interest shall be due unless it has been expressly
stipulated in writing. Payment of monetary interest is
allowed only if:
(1) there was an express stipulation for the payment
of interest; and
(2) the agreement for the payment of interest was
reduced in writing.
The concurrence of the two conditions is required.
Thus, we have held that collection of interest without
any stipulation therefor in writing is prohibited by law.
Petitioner and respondent did not agree on the
payment of interest for the loan. Neither was there
convincing proof of written agreement between the
two regarding the payment of interest.
As to the contention of petitioner that respondent
executed a promissory note: the presented
promissory note was in her handwriting because Siga-an
told her to copy it and she did because she feared the
threats of Sigaan to block her deals with the
PhilNavy. And as to the alleged admission in the BP
22 cases that they had agreed on the payment of
interest at the rate of 7%, respondent merely
testified that after paying the total amount of loan,
petitioner ordered her to pay interest. Respondent did
not categorically declare in the same case that she and
respondent made an express stipulation in writing as
regards payment of interest at the rate of 7%.
An interest may be imposed even in the absence of
express stipulation, verbal or written, regarding
payment of interest under Art 2209 of CC that if the
obligation consists in the payment of a sum of
money, and the debtor incurs delay, a legal interest of
12% per annum may be imposed as indemnity for
damages if no stipulation on the payment of interest
was agreed upon. It only applies to compensatory
interest and not to monetary interest. The case at bar
involves petitioner’s claim for monetary interest.
Further, said compensatory interest is not chargeable
in the instant case because it was not duly proven
that respondent defaulted in paying the loan.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 32
The principle of solutio indebiti applies where
(1) a payment is made when there exists no binding
relation between the payor, who has no duty to
pay, and the person who received the payment; and
(2) the payment is made through mistake, and not
through liberality or some other cause. Respondent
was under no duty to make such payment because
there was no express stipulation in writing to that
effect. There was no binding relation between
petitioner and respondent as regards the payment of
interest. The payment was clearly a mistake. Since
petitioner received something when there was no right
to demand it, he has an obligation to return it.
POLICY: No interest shall be due unless it has been
expressly stipulated in writing.
PART III: USURY LAW SOLIDBANK vs
PERMANENT HOMES
FACTS: PERMANENT HOMES is a real
estate development company, and to finance its
housing project known as the “Buena Vida
Townhomes” located within Merville Subdivision,
Parañaque City, it applied and was subsequently
granted by SOLIDBANK with an “Omnibus Line” credit
facility in the total amount of SIXTY MILLION PESOS.
Of the entire loan, FIFTY NINE MILLION as time loan
for a term of up to three hundred sixty
(360) days, with interest thereon at prevailing market
rates, and subject to monthly repricing. The
remaining ONE MILLION was available for domestic
bills purchase.
To secure the aforesaid loan, PERMANENT HOMES
initially mortgaged three (3) townhouse units within
the Buena Vida project in Parañaque. At the time,
however, the instant complaint was filed against
SOLIDBANK, a total of 36 townhouse units were
mortgaged with said bank.
Of the 60 million available to PERMANENT HOMES, it
availed of a total of 41.5 million pesos, covered by
three (3) promissory notes, which contain the following
provisions, thus:
“xxx 5. We/I irrevocably authorize Solidbank to increase
or decrease at any
time the interest rate agreed in this Note or

Loan on the basis of, among others, prevailing rates in
the local or international capital markets. For this
purpose, We/I authorize Solidbank to debit any
deposit or placement account with Solidbank
belonging to any one of us. The adjustment of the
interest rate shall be effective from the date indicated
in the written notice sent to us by the bank, or if no
date is indicated, from the time the notice was sent.
6. Should We/I disagree to the interest rate
adjustment, We/I shall prepay all amounts due under
this Note or Loan within thirty (30) days from the
receipt by anyone of us of the written notice.
Otherwise, We/I shall be deemed to have given our
consent to the interest rate adjustment.”
Contrary, however, to the specific provisions as
afore- quoted, there was a standing agreement by the
parties that any increase or decrease in interest rates
shall be subject to the mutual agreement of the
parties.
For the first loan availment of PERMANENT HOMES
on March 20, 1997, in the amount of
19.6 MILLION, from the initial interest rate of14.25%
per annum (p.a.), the rate was increased to 30%
p.a. on January 16, 1998. For the second loan
availment in the amount of
18 million, the rate was initially pegged at 15.75% p.a.
on June 24, 1997 increased 30% p.a.from January 22,
1998 to February 20, 1998.
For the third loan availment on July 15, 1997, in the
amount of 3.9 million, the interest rate was initially
pegged at 35% p.a., decreased at 29% p.a. for the
month of February.
It is Permanent’s stand that SOLIDBANK unilaterally
and arbitrarily accelerated the interest rates without
any declared basis of such increases, of which
PERMANENT HOMES had not agreed to, or at the very
least, been informed of. This is contrary to their
earlier agreement that any interest rate changes will
be subject to mutual agreement of the parties.
PERMANENT HOMES further admits that it was not able
to protest such arbitrary increases at the time they
were imposed by SOLIDBANK, for fear that
SOLIDBANK might cut off the credit facility it
extended to PERMANENT HOMES.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 33
Permanent filed a case before the trial court seeking
the following: (1) the annulment of the increases in
interest rates on the loans it obtained from
SOLIDBANK, on the ground that it was violative of the
principle of mutuality of agreement of the parties, as
enunciated in Article 1409 of the New Civil Code, (2)
the fixing of the interest rates at the applicable interest
rate, and (3) for the trial court to order SOLIDBANK to
make an accounting of the payments it made, so as to
determine the amount of refund PERMANENT is
entitled to, as well as to order SOLIDBANK to release
the remaining available balance of the loan it
extended to PERMANENT. In addition, Permanent
prays for the payment of compensatory, moral and
exemplary damages. SOLIDBANK, on the other hand,
avers that PERMANENT HOMES has no cause of action
against it, in view of the pertinent provisions of the
Omnibus Credit Line and the promissory notes
agreed to and signed by PERMANENT HOMES.
Thus,in accordance with said provisions,
SOLIDBANK was authorized to, upon due notice,
periodically adjust the interest rates on PERMANENT
HOMES’ loan availments during the monthly interest
repricing dates, depending on the changes in
prevailing interest rates in the local and international
capital markets.
SOLIDBANK, to establish its defense, presented its
lone witness, Mr. Cesar Lugtu, who testified to the
effect that, contrary to PERMANENT HOMES’
assertions that it was not promptly informed of the
repriced interest rates, SOLIDBANK’s officers verbally
advised PERMANENT HOMES of the repriced rates at
the start of the period, and even added that their
transaction[s] were based on trust. Aside from these
allegations, however, no written memorandum or note
was presented by SOLIDBANK to support their
assertion that PERMANENT HOMES was timely
advised of the repriced interests.
The trial court promulgated its Decision in favor of
Solidbank. Permanent filed an appeal before the
appellate court. The appellate court granted the
appeal, and set aside the trial court’s ruling. The
appellate court not only recognized the validity of
escalation clauses, but also underscored the necessity
of a basis

for the increase in interest rates and of the principle
of mutuality of contracts.
ISSUE: WON the increases in the interest rates on
Permanent’s loans are void for having been unilaterally
imposed without basis. YES.
HELD: The Usury Law had been rendered legally
ineffective by Resolution No. 224 dated 3 December
1982 of the Monetary Board of the Central Bank, and
later by Central Bank Circular No. 905 which took
effect on 1 January 1983. These circulars removed the
ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these
circulars is to allow the parties to agree on any
interest that may be charged on a loan. The virtual
repeal of the Usury Law is within the range of judicial
notice which courts are bound to take into account.
Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled
license to impose increased interest rates. The
lender and the borrower should agree on the
imposed rate, and such imposed rate should be in
writing.
The stipulations, contained in the 3 promissory notes
on interest rate repricing are valid because (1) the
parties mutually agreed on said stipulations; (2)
repricing takes effect only upon Solidbank’s written
notice to Permanent of the new interest rate; and
(3) Permanent has the option to prepay its loan if
Permanent and Solidbank do not agree on the new
interest rate. The phrases “irrevocably authorize,” “at
any time” and “adjustment of the interest rate shall
be effective from the date indicated in the written
notice sent to us by the bank, or if no date is
indicated, from the time the notice was sent,”
emphasize that Permanent should receive a written
notice from Solidbank as a condition for the
adjustment of the interest rates.
Solidbank’s range of lending rates were consistent
with “prevailing rates in the local or international
capital markets.” The interest rate repricing happened
at the height of the Asian financial crises in late
1997, when banks clamped down on lendings
because of higher credit risks across industries,
particularly the real estate industry.
The SC also recognize that Solidbank
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 34
admitted that it did not promptly send Permanent
written repriced rates, but rather verbally advised
Permanent’s officers over the phone at the start of the
period.
Solidbank did not present any written memorandum
to support its allegation that it promptly advised
Permanent of the change in interest rates. Solidbank
advised Permanent on the repriced interest rate
applicable for the 30-day interest period only after the
period had begun. Permanent presented a tabulation
which showed that Solidbank either did not send a
billing statement, or sent a billing statement 6 to 33
days late. Solidbank’s computation of the interest
due from Permanent should be adjusted to take
effect only upon Permanent’s receipt of the written
notice from Solidbank.
PART IV: DEPOSIT (Articles 1962 – 2009)
I. Deposit in General and its Different Kinds
BPI vs IAC
FACTS: The original parties to the case were
Zshornack and Commercial Bank and Trust Company of
the Phils (Comtrust). In 1980, BPI absorbed Comtrust
through a merger and was substituted as party to the
case.
Zshornack and his wife maintained in Comtrust a dollar
savings account and a peso current account. On Dec
8, 1975, Zshornack delivered to the bank $3000 for
safekeeping. When he requested the return of the
money, Comtrust explained that the sum was disposed
of in this manner: US$2,000.00 was sold on December
29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current
account per deposit slip accomplished by Garcia; the
remaining US$1,000.00 was sold on February 3, 1976
and the peso proceeds amounting to P8,350.00 were
deposited to his current account per deposit slip
also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly
credited to Zshornack's current account at prevailing
conversion rates, BPI now posits another ground to
defeat private

respondent's claim. It now argues that the contract
embodied in the document is the contract of
depositum (as defined in Article 1962, New Civil
Code), which banks do not enter into. The bank
alleges that Garcia exceeded his powers when he
entered into the transaction. Hence, it is claimed, the
bank cannot be liable under the contract, and the
obligation is purely personal to Garcia.
ISSUE: WON the contract between petitioner and
respondent bank is a deposit. YES.
HELD: The document which embodies the contract
states that the US$3,000.00 was received by the
bank for safekeeping. The subsequent acts of the
parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to
return it to Zshornack at a later time, Thus, Zshornack
demanded the return of the money on May 10, 1976,
or over five months later.
The above arrangement is that contract defined
under Article 1962, New Civil Code, which reads:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not
the principal purpose of the contract, there is no
deposit but some other contract.
Note that the object of the contract between
Zshornack and COMTRUST was foreign exchange.
Hence, the transaction was covered by Central Bank
Circular No. 20, Restrictions on Gold and Foreign
Exchange Transactions, promulgated on December 9,
1949, which was in force at the time the parties
entered into the transaction involved in this case.
Under the said circular, safekeeping of the greenbacks
without selling them to Central Bank within 1
business day from receipt, is a transaction which is not
authorized.
As earlier stated, the document and the subsequent
acts of the parties show that they intended the bank
to safekeep the foreign exchange, and return it later to
Zshornack, who alleged in his complaint that he is a
Philippine resident. The parties did not intended to
sell the US dollars to the Central Bank within one
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 35
business day from receipt. Otherwise, the contract of
depositum would never have been entered into at all.
Since the mere safekeeping of the greenbacks, without
selling them to the Central Bank within one business
day from receipt, is a transaction which is not
authorized by CB Circular No. 20, it must be considered
as one which falls under the general class of prohibited
transactions. Hence, pursuant to Article 5 of the Civil
Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause
of action against the other. "When the nullity proceeds
from the illegality of the cause or object of the contract,
and the act constitutes a criminal offense, both
parties being in pari delicto, they shall have no cause
of action against each other. . ." [Art. 1411, New
Civil Code.] The only remedy is one on behalf of the
State to prosecute the parties for violating the law.
Therefore, Zshornack cannot recover under this cause
of action.
II.Voluntary Deposit
CALIBO, JR. VS COURT OF APPEALS
FACTS: In 1985, Mike Abella rented a house owned
by Atty. Dionisio Calibo, Jr. Meanwhile, Dr. Pablo
Abella, Mike’s father, entrusted to Mike a tractor.
Pablo delivered the tractor to Mike in order for the
latter to safe-keep the same.
In November 1986, Mike defaulted in his rental
payments to Calibo. Calibo repeatedly demanded
payments but Mike failed to pay. However, Mike
assured Calibo that he will soon pay and Mike used his
father’s tractor as a security. Hence, Calibo took
possession of the tractor. Later, Mike advised Calibo
that he can sell the tractor as payment for his debts.
Pablo learned of the foregoing and so he contacted
Calibo. He offered to pay a portion of Mike’s debt and
in return Calibo must return the tractor. Calibo refused
and he wanted Pablo to guarantee all of Mike’s
debt which Pablo does not want. Eventually, to redeem
his tractor, Pablo filed a replevin suit against

Calibo, which Pablo won.
On appeal, Calibo invoked that the replevin should not
have been granted as there was a valid contract of
pledge between him and Mike; and that Mike was
Pablo’s agent because Pablo was aware of the fact that
Mike pledged the tractor to him. In the alternative,
Calibo invoked that if there’s no contract of pledge,
there is at least a contract of deposit since Mike
himself left the tractor with him in the concept of an
innkeeper.
ISSUE: Whether or not the arguments of Calibo are
valid.
HELD: No. There is no contract of pledge.
The elements of a contract of pledge are as follows:
1. the pledge is constituted to secure the fulfillment
of a principal obligation;
2. the pledgor be the absolute owner of the thing
pledged; and
3. the person constituting the pledge has the free
disposal of his property, and in the absence thereof,
that he be legally authorized for the purpose.
In this case, element number 2 is missing. Mike is not
the absolute owner of the tractor.
There is no contract of agency between Pablo and
Mike.
It was proven in court that Pablo only left the tractor
in his son’s possession only for the purpose of
safekeeping. Pablo was not aware that his son
pledged it to Calibo and he never authorized his son to
do so.
There is no contract of deposit between Mike and
Calibo.
There is no deposit where the principal purpose for
receiving the object is not safekeeping. In this case,
Calibo himself admitted in court that Mike delivered the
tractor to him as security for Mike’s debts.
The judgment ordering Calibo to return the tractor to
Pablo was affirmed by the Supreme Court.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 36
CHAN VS. MACEDA, JR.
FACTS: On July 28, 1976, Bonifacio S. Maceda, Jr.,
herein respondent, obtained a P7.3 million loan from
the Development Bank of the Philippines for the
construction of his New Gran Hotel Project in
Tacloban City. Thereafter, on September 29, 1976,
respondent entered into a building construction
contract with Moreman Builders Co., Inc.,
(Moreman). They agreed that the construction would
be finished not later than December 22, 1977.
Respondent purchased various construction materials
and equipment in Manila. Moreman, in turn,
deposited them in the warehouse of Wilson and Lily
Chan, herein petitioners. The deposit was free of
charge. Unfortunately, Moreman failed to finish the
construction of the hotel at the stipulated time.
Hence, on February 1, 1978, respondent filed with the
then Court of First Instance (CFI, now Regional Trial
Court), Branch 39, Manila, an action for rescission
and damages against Moreman, docketed as Civil Case
No. 113498.
Meanwhile, during the pendency of the case,
respondent ordered petitioners to return to him the
construction materials and equipment which Moreman
deposited in their warehouse. Petitioners, however,
told them that Moreman withdrew those construction
materials in 1977.
Hence, on December 11, 1985, respondent filed with
the Regional Trial Court, Branch 160, Pasig City, an
action for damages with an application for a writ of
preliminary attachment against petitioners,7 docketed
as Civil Case No. 53044.
ISSUES:
1. Has respondent presented proof that the
construction materials and equipment were actually
in petitioners' warehouse when he asked that the
same be turned over to him? NO
2. If so, does respondent have the right to demand
the release of the said materials and equipment or
claim for damages? NO
HELD: Under Article 1311 of the Civil Code, contracts
are binding upon the parties (and their assigns and
heirs) who execute them. When there is no privity of
contract, there is

likewise no obligation or liability to speak about and
thus no cause of action arises. Specifically, in an
action against the depositary, the burden is on the
plaintiff to prove the bailment or deposit and the
performance of conditions precedent to the right of
action. A depositary is obliged to return the thing to
the depositor, or to his heirs or successors, or to
the person who may have been designated in the
contract.
In the present case, the record is bereft of any contract
of deposit, oral or written, between petitioners and
respondent. If at all, it was only between petitioners
and Moreman. And granting arguendo that there was
indeed a contract of deposit between petitioners and
Moreman, it is still incumbent upon respondent to
prove its existence and that it was executed in his
favor. However, respondent miserably failed to do so.
The only pieces of evidence respondent presented to
prove the contract of deposit were the delivery
receipts. Significantly, they are unsigned and not
duly received or authenticated by either Moreman,
petitioners or respondent or any of their authorized
representatives. Hence, those delivery receipts have no
probative value at all. While our laws grant a person
the remedial right to prosecute or institute a civil
action against another for the enforcement or
protection of a right, or the prevention or redress of
a wrong, every cause of action ex- contractu must be
founded upon a contract, oral or written, express or
implied.
Moreover, respondent also failed to prove that there
were construction materials and equipment in
petitioners' warehouse at the time he made a demand
for their return.
Considering that respondent failed to prove (1) the
existence of any contract of deposit between him and
petitioners, nor between the latter and Moreman in
his favor, and (2) that there were construction
materials in petitioners' warehouse at the time of
respondent's demand to return the same, we hold that
petitioners have no corresponding obligation or
liability to respondent with respect to those
construction materials.
Anent the issue of damages, petitioners are still not
liable because, as expressly provided for in Article
2199 of the Civil Code, actual or
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 37
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 actual amount thereof.
It must point out specific facts which could afford a
basis for measuring whatever compensatory or actual
damages are borne.
Considering our findings that there was no contract of
deposit between petitioners and respondent or
Moreman and that actually there were no more
construction materials or equipment in petitioners'
warehouse when respondent made a demand for their
return, we hold that he has no right whatsoever to
claim for damages.
SIA v. CA
FACTS: Herein petitioner and respondent entered into
a contract denominated as a Lease Agreement
whereby the former rented a safety deposit box
owned by the latter . Petitioner placed in the deposit
box her stamp collection which was subsequently lost
and damaged due to a flood that took place in 1985 and
1986. The defendant bank rejected the petitioner’ s
claim for compensation for his damaged stamps
collection, so, the plaintiff instituted an action for
damages against the defendant bank.
The bank alleged that the contract was that of lease
and its liability was limited to the exercise of the
diligence to prevent the opening of the safe by any
person other than the Renter, his authorized agent or
legal representative; The Bank is not a depository of
the contents of the safe and it has neither the
possession nor the control of the same. The Bank has
no interest whatsoever in said contents, except as
herein provided, and it assumes absolutely no liability
in connection therewith.
RTC ruled in favor of petitioner. CA reversed the
decision.
ISSUE: Is SBTC liable for damages and loss? YES

HELD: SBTC is a Depository Notwithstanding the
Contract of Lease.
In the recent case CA Agro-Industrial Development
Corp. vs. Court of Appeals, the Court held that the use
of a safety deposit box is not a contract of lease and
that it is actually a special kind of deposit.
The prevailing rule in American jurisprudence
— that the relation between a bank renting out safe
deposit boxes and its customer with respect to the
contents of the box is that of a bailor and bailee, the
bailment for hire and mutual benefit — has been
adopted in this jurisdiction, thus:
In the context of our laws which authorize banking
institutions to rent out safety deposit boxes, it is
clear that in this jurisdiction, the prevailing rule in
the United States has been adopted. Section 72 of
the General Banking Act [R.A. 337, as amended]
pertinently provides:
"Sec. 72. In addition to the operations specifically
authorized elsewhere in this Act, banking institutions
other than building and loan associations may perform
the following services:
(a) Receive in custody funds, documents, and valuable
objects, and rent safety deposit boxes for the
safequarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section
asdepositories or as agents. . .
."(emphasis supplied)
Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving
in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety
deposit boxes is not independent from, but related to
or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in
writing (Art. 1969, Civil Code] and, pursuant to Article
1306 of the Civil Code, the parties thereto may
establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs,
public order or public policy. The depositary's
responsibility for the safekeeping of the objects
deposited in the case at bar is governed by Title I,
Book IV of the Civil Code. Accordingly,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 38
the depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay
or contravention of the tenor of the agreement [Art.
1170, id.]. In the absence of any stipulation
prescribing the degree of diligence required, that of
a good father of a family is to be observed [Art. 1173,
id.]. Hence, any stipulation exempting the depositary
from any liability arising from the loss of the thing
deposited on account of fraud, negligence or delay
would be void for being contrary to law and public
policy.
Condition 13 and 14 of the Contract of Lease are Void.
Conditions 13 and l4 of the questioned contract of lease
of the safety deposit box, which read: "13. The bank is a
depositary of the contents of the safe and it has
neither the possession nor control of the same.
"14. The bank has no interest whatsoever in said
contents, except as herein expressly provided, and it
assumes absolutely no liability in connection
therewith."
are void as they are contrary to law and public policy.
Said provisions are inconsistent with the respondent
Bank's responsibility as a depositary under Section 72
(a) of the General Banking Act.
Furthermore, condition 13 stands on a wrong premise
and is contrary to the actual practice of the Bank. It is
not correct to assert that the Bank has neither the
possession nor control of the contents of the box since
in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover,
the respondent Bank keeps the guard key to the
said box.
As stated earlier, renters cannot open their respective
boxes unless the Bank cooperates by presenting and
using this guard key. Clearly then, to the extent above
stated, the foregoing conditions in the contract in
question are void and ineffective. It has been said:
"With respect to property deposited in a safe- deposit
box by a customer of a safe-deposit company, the
parties, since the relation is a contractual one, may
by special contract define their respective duties or
provide for increasing or limiting the liability of the
deposit company, provided such contract is not in
violation of law or public policy. It must clearly appear
that there actually was such a special contract,

however, in order to vary the ordinary obligations
implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The
company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by
its own fraud or negligence or that, of its agents or
servants, and if a provision of the contract may be
construed as an attempt to do so, it will be held
ineffective for the purpose. Although it has been held
that the lessor of a safe-deposit box cannot limit its
liability for loss of the contents thereof through its
own negligence, the view has been taken that such a
lessor may limit its liability to some extent by
agreement or stipulation.
SBTC is Negligent.
Respondent cannot invoke fortuitous event under
Article 1174by reason of its negligence . SBTC's
negligence aggravated the injury or damage to the
stamp collection. SBTC was aware of the floods of
1985 and 1986; it also knew that the floodwaters
inundated the room where Safe Deposit Box No. 54 was
located. In view thereof, it should have lost no time in
notifying the petitioner in order that the box could
have been opened to retrieve the stamps, thus saving
the same from further deterioration and loss. In this
respect, it failed to exercise the reasonable care and
prudence expected of a good father of a family,
thereby becoming a party to the aggravation of the
injury or loss.
Accordingly, the aforementioned fourth characteristic
of a fortuitous event is absent Article 1170 of the Civil
Code is therefore applicable ;
Those who in the performance of their obligation are
guilty of fraud, negligence, or delay, and those who in
any manner contravene the tenor thereof, are liable
for damages.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP. vs CA
and SECURITY BANK AND TRUST COMPANY
FACTS: On July 3, 1979, petitioner through its president
Sergio Aguirre, and spouses Ramon
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 39
and Paula Pugao entered into an agreement where
the former purchased from the latter two parcels of
land for P350,625. P75,725 was paid as downpayment
while the balance was covered by three postdated
checks. Among the terms and conditions of said
agreement were that the titles to the lots shall be
transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the
certificates of title shall be deposited in a safety
deposit box. The same could be withdrawn only upon
the joint signatures of petitioner and spouses Pugaos
upon full payment of the purchase price.
Petitioner and spouses Pugaos then rented safety
deposit box no. 1448 of respondent Security Bank and
Trust Company and for this purpose both signed a
contract of lease which contained the following
conditions:
13. The bank is not a depositary of the
contents of the safe and it has neither the possession
nor control of the same.
14. The bank has no interest whatsoever
in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection
therewith.
Thereafter, a certain Mrs. Margarita Ramos offered to
buy from the petitioner the two lots and demanded
the execution the deed of sale which necessarily
entailed the production of the certificates of title.
However, when the safety deposit box was open, the
box yielded no such certificates. The delay in the
reconstitution of the title compelled Mrs. Ramos to
withdraw her offer and as a consequence, petitioner
allegedly suffered a loss which forced the latter to file
a complaint for damages against Security Bank and
Trust Company.
The Court of First Instance (Regional Trial Court)
decided in favor of respondent bank citing paragraph
13 and 14 of the contract of lease which exonerates
the bank from any liability. The Court of Appeals in
turn affirmed the decision of the trial court on the
theory that the contract executed between petitioner
and respondent bank is a contract of lease (Article
1643) by virtue of which respondent bank was
divested of any possession nor control over the safety
deposit box.

ISSUE: Is the contractual relation between petitioner
and respondent bank one of bailor and bailee or one
of lessor and lessee? bailor and bailee
HELD: The contract in the case at bar is a
special kind of deposit.
The Court agrees with the petitioner that the
contract for the rent of the safety deposit box is not an
ordinary contract of lease. However, the Court cannot
fully subscribe to the view that the same contract is
to be strictly governed by the provisions of the Civil
Code on deposit. It cannot be characterized as a
contract of lease because the full and absolute
possession and control of the safety deposit box was
not given to the joint renters. The guard key
remained with the bank and without this, the renters
cannot open the safety deposit box. On the other
hand, the respondent bank could not likewise open the
box without the renter's key. Thus, Article 1643 and
Article 1975 which was invoked by the Court of
Appeals does not apply in the present case.
We observe, however, that the deposit theory itself
does not altogether find unanimous support even in
American jurisprudence. We agree with the petitioner
that under the latter, the prevailing rule is that the
relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents
of the box is that of a bail or and bailee, the bailment
being for hire and mutual benefit. This is just the
prevailing view because:
There is, however, some support for the view that the
relationship in question might be more properly
characterized as that of landlord and tenant, or lessor
and lessee. It has also been suggested that it should
be characterized as that of licensor and licensee. The
relation between a bank, safe-deposit company, or
storage company, and the renter of a safe- deposit
box therein, is often described as contractual, express
or implied, oral or written, in whole or in part. But
there is apparently no jurisdiction in which any rule
other than that applicable to bailments governs
questions of the liability and rights of the parties in
respect of loss of the contents of safe-deposit boxes.
In the context of Philippine laws which
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 40
authorize banking institutions to rent out safety deposit
boxes, it is clear that in this jurisdiction, the prevailing
rules in the United States has been adopted. Section
72 of the General Banking Act provides:
Sec. 72. In addition to the operations
specifically authorized elsewhere in this Act, banking
institutions other than building and loan associations
may perform the following services:
(a) Receive in custody funds, documents, and
valuable objects, and rent safety deposit boxes for
the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services
permitted under subsections (a), (b) and (c) of this
section as depositories or as agents. . .
.(emphasis supplied)
It is to be noted that the primary function is still found
within the parameters of a contract of deposit, i.e.,
the receiving in custody of funds, documents and
other valuable objects for safekeeping. The renting
out of the safety deposit boxes is not independent
from, but related to or in conjunction with, this
principal function. . A contract of deposit may be
entered into orally or in writing and, pursuant to Article
1306 of the Civil Code, the parties thereto may
establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs,
public order or public policy. Accordingly, the
depositary would be liable if, in performing its
obligation, it is found guilty of fraud, negligence, delay
or contravention of the tenor of the agreement.
N.B.
1. In the absence of any stipulation prescribing
the degree of diligence required, that of a good father
of a family is to be observed. Hence, any stipulation
exempting the depositary from any liability arising from
the loss of the thing deposited on account of fraud,
negligence or delay would be void for being
contrary to law and public policy. Thus, conditions 13
and 14 of the questioned contract of lease of the
safety deposit box are void as they are contrary to
law and public

policy.
2. Although the contract between petitioner
and respondent bank was considered as a contract of
deposit, the Court still affirmed the CA's decision to
dismiss the case because no competent proof was
presented to show that respondent bank was aware
of the agreement between the petitioner and spouses
Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon
both parties' joint signatures. Also, no evidence was
submitted to reveal that the loss of the certificates
of title was due to fraud or negligence of the
respondent bank.
SILVESTRA BARON vs PABLO DAVID
G.R. Nos. L-26948 and L-26949 (October 8, 1927)
FACTS: Silvestra Baron and Guillermo Baron, plaintiffs
in the present case are the aunt and uncle
respectively of Pablo David, the defendant, who is
engaged in running a rice mill in the municipality of
Magalang, in the Province of Pampanga.
In the months of March, April and May 1920,
Silvestra placed a quantity of palay in Pablo's mill
which amounted to 1,012 cavans and 24 kilos. During
the same period, Guillermo placed 1,865 cavans and
43 kilos of palay in the same milll. On January 17,
1921, a fire occurred that destroyed the rice mill
and its contents owned and in the possession of Pablo
David. Silvestra and Guillermo now seek to recover the
value of such palays as they both claim that the palay
they delivered was sold to Pablo. Pablo, on the other
hand, claims that the palay was deposited subject to
future withdrawal by the depositors or subject to
some future sale which was never effected. Pablo
therefore seeks to relieved himself from all
responsibility by virtue of the fire.
ISSUES:
1) What is the nature of the contract between the
parties?
2)Whether or not Pablo David is liable for the value
of the palays
HELD:
1) The contract between the parties is a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 41
contract of commodatum.
Under Article 1768 of the Civil Code, when the
depository has the permission to make use of the
thing deposited, the contract loses the character of
mere deposit and becomes a loan or a commodatum;
and of course by appropriating the thing, the bailee
becomes responsible for its value. In the present
case, the parties agreed that Pablo was at liberty to
convert it into rice and dispose of it at his pleasure. It
was insignificant whether the contract between the
parties is that of a sale or a deposit for even
supposing that the palay may have been delivered in
the character of deposit subject to future sale or
withdrawal at plaintiff's election because it was
understood that Pablo might mill the palay and he
has in fact appropriated it to his own use, therefore he
is bound to account for its value.
2) Pablo David is liable for the value of the palay.
It should be stated that the palay in question was
place by the plaintiffs in the defendant's mill with
the understanding that the defendant was at liberty to
convert it into rice and dispose of it at his pleasure. The
mill was actively running during the entire season, and
as palay was daily coming in from many customers and
as rice was being constantly shipped by the
defendant to Manila, or other rice markets, it was
impossible to keep the plaintiffs' palay segregated. In
fact the defendant admits that the plaintiffs' palay
was mixed with that of others. In view of the nature of
the defendant's activities and the way in which the
palay was handled in the defendant's mill, it is quite
certain that all of the plaintiffs' palay, which was put
in before June 1, 1920, been milled and disposed of
long prior to the fire of January 17, 1921.
Considering the fact that the defendant had thus
milled and doubtless sold the plaintiffs' palay prior to
the date of the fire, it result that he is bound to
account for its value, and his liability was not
extinguished by the occurrence of the fire.
ANGEL JAVELLANA vs JOSE LIM, ET AL.,
G.R. No. 4015 (August 24, 1908)
FACTS: On October 30, 1906, Angel Javellana filed a
complaint with the Court of First

Instance against Jose Lim and Ceferino Domingo Lim
and be sentenced jointly and severally to pay the sum
of P2.686.58 with interest at the rate of 15 per cent per
annum.
It was alleged that on May 26, 1897, the defendants
executed and subscribed a document in favor of the
plaintiff reading as follows:
We have received from Angel Javellana, as a deposit
without interest, the sum of two thousand six hundred
and eighty-six cents of pesos fuertes, which we will
return to the said gentleman, jointly and severally, on
the 20th of January, 1898. — Jaro, 26th of May, 1897.
— Signed Jose Lim. — Signed: Ceferino Domingo Lim.
When the obligation became due, the defendants
begged the plaintiff for an extension of time for the
payment thereof, agreeing to pay interest at the rate
of 15 per cent, to which the latter accepted. On May
15, 1902, the defendants paid on account of interest
due the sum of P1,000, with the exception of either
capital or interest, had thereby been subjected to loss
and damages. The defendants admitted the statements
of the plaintiff relative to the payment of P1,102.16
made on November 15, 1902, not as payment of
interest but on account of the principal, and denied
that there had been any agreement as to the
extension of the time of payment and the payment of
interest at the rate of 15 per cent per annum.
ISSUE: Whether or not the contract between the
parties is a contract of deposit
HELD: The contract between the parties is a contract
of loan. The document of indebtedness inserted in
the complaint stated that the plaintiff left on deposit
with the defendants a given sum of money which they
were jointly and severally obliged to return on a certain
date fixed in the document; but nevertheless it was
acknowledged at the date thereof, November 15,
1902, the amount deposited had not yet been returned
to the plaintiff, whereby he was subject to losses and
damages. When the return was again stipulated with
the further agreement that the amount deposited
should bear interest at the rate of 15 per cent per
annum, from the aforesaid date of January 20, and
that the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 42
1,000 pesos paid to the plaintiff on the 15th of May,
1900, according to the receipt issued by him to the
defendants, would be included, and that the said rate
of interest would obtain until the defendants on the
20th of May, 1897, it is called a deposit consisted, and
they could have accomplished the return agreed upon
by the delivery of a sum equal to the one received by
them.
For this reason, it is understood that the defendants
were lawfully authorized to make use of the amount
deposited, which they have done, as shown when
they asked for an extension of the time to return the
amount, inasmuch as they have subjected the
plaintiff to losses and damages for not complying with
what was stipulated and being aware that they had
used the money that they received apparently as a
deposit, they promised to pay the interest from the
date named until the time when the refund should be
made. Such conduct on the part of the defendants
is unquestionable evidence that the transaction was
not a deposit, but a real contract of loan.
Article 1767 of the Civil Code provides that
—
The depository cannot make use of the thing
deposited without the express permission of the
depositor.
Otherwise he shall be liable for losses and damages.
Article 1768 also provides that —
When the depository has permission to make use of
the thing deposited, the contract loses the character
of a deposit and becomes a loan or bailment.
The permission shall not be presumed, and its
existence must be proven.
When on one of the latter days of January, 1898,
Jose Lim went to the office of the plaintiff asking for an
extension of one year, and agreed to pay interest at
the rate of 15 per cent per annum, it was because, as a
matter of fact, he did not have in his possession the
amount deposited, he having made use of the same in
his business and for his own profit; and the
plaintiff, by granting them the extension, evidently
confirmed the express permission previously given to
use and dispose of the

amount deposited, which, in accordance with the loan,
to all intents and purposes gratuitously, until the 20th
of January, 1898, and from that dated with interest at
15 per cent per annum until its full payment, deducting
from the total amount of interest the sum of 1,000
pesos, in accordance with the provisions of article 1173
of the Civil Code.
Notwithstanding that it does not appear that Jose
Lim signed the document executed in the presence of
three witnesses on the 15th of November, 1902, by
Ceferino Domingo Lim on behalf of himself and the
former, nevertheless, the said document has not been
contested as false, either by a criminal or by a civil
proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who
attested the execution of the same; and from the
evidence in the case one is sufficiently convinced that
the said Jose Lim was perfectly aware of and
authorized his joint co-debtor to liquidate the
interest, to pay the sum of 1,000 pesos, on account
thereof, and to execute the aforesaid document No. 2.
A true ratification of the original document of deposit
was thus made, and not the least proof is shown in
the record that Jose Lim had ever paid the whole or
any part of the capital stated in the original document.
There was no renewal of the contract deposited
converted into a loan, because, as has already been
stated, the defendants received said amount by virtue
of real loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to
dispose of the amount deposited. This they have done,
as has been clearly shown.
COMPAÑIA AGRICOLA VS. NEPOMUCENO
FACTS: On March 17, 1927, the registered partnerships,
Mariano Velasco & Co., Mariano Velasco, Sons, & Co.,
and Mariano Velasco & Co., Inc., were declared
insolvent by the Court of First Instance of Manila.
On the 16th day of April, 1927, the Compania Agricola
de Ultramar filed a claim against one of the
insolvents Mariano Velasco & Co., claiming the sum
of P10,000, with the agreed interest thereon at the
rate of 6 per cent per annum from April 5, 1918, until
its full payment was a deposit with said Mariano
Velasco & Co.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 43
and asked the court to declare it a preferred claim.
The assignee of the insolvency answered the claim by
interposing a general denial.
On September 23, 1929, the court rendered a decision
declaring that the alleged deposit was a preferred
claim for the sum mentioned, with interest at 6 per
cent per annum from April 5, 1918, until paid. From
this decision the assignee appealed.
The evidence presented by the claimant Compania
Agricola de Ultramar consisted of a receipt in writing,
and the testimony of Jose Velasco who was manager
of Mariano Velasco
& Co. at the time the note was executed. The receipt
reads as follows:
MANILA, P. I., April 5, 1918.
Received from the "Compania Agricola de Ultramar"
the sum of ten thousand Philippine pesos as a
deposit at the interest of six per cent annually, for
the term of three months from date.
In witness thereof, I sign the present. MARIANO
VELASCO & CO.
By (Sgd.) JOSE VELASCO
Manager.
P10,000.00.
In his testimony, Jose Velasco stated that his
signature on the receipt was authentic and that he
received the said sum of P10,000 from the appellee
and deposited it with the bank in the current account
of Mariano Velasco & Co.
ISSUE: WON the claim filed is that of a deposit or a
loan? LOAN
HELD: The Supreme Court reiterated the ruling in the
case of Gavieres vs. De Tavera (1 Phil., 17) which had a
very similar facts to the present case. The court held
that the transaction therein involved was a loan and
not a deposit. The court said:
Although in the document in question a deposit is
spoken of, nevertheless from an examination of the
entire document it clearly appears that the contract
was a loan and that such was the intention of the
parties. It is unnecessary to recur to the

cannons of interpretation to arrive at this
conclusion. The obligation of the depository to pay
interest at the rate of 6 per cent to the depositor
suffices to cause the obligation to be considered as
a loan and makes it likewise evident that it was the
intention of the parties that the depository should
have the right to make use of the amount
deposited, since it was stipulated that the amount
could be collected after notice of two months in
advance. Such being the case, the contract lost the
character of a deposit and acquired that of a loan.
(Art.1768, Civil Code.)
Article 1767 of the Civil Code provides that — "The
depository cannot make use of the thing deposited
without the express permission of the depositor."
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that — "When the
depository has permission to make use of the thing
deposited, the contract loses the character of a
deposit and becomes a loan or bailment." "The
permission not be presumed, and its existence must be
proven."
Moreover it may be inferred that there was no
renewal of the contract of deposit converted into a
loan, because, as has already been stated, the
defendants received said amount by virtue of a real
loan contract under the name of a deposit, since
the so-called bailees were forthwith authorized to
dispose of the amount deposited. This they have
done, as has been clearly shown.
The ten thousand pesos delivered by the appellee to
Mariano Velasco & Co. cannot be regarded as a
technical deposit. But the appellee argues that it is
at least an "irregular deposit." This argument is, we
think, sufficiently answered in the case of Rogers vs.
Smith, Bell & Co. (10 Phil., 319). There this court
said:
…Manresa, in his Commentaries on the Civil Code
(vol. 11, p. 664), states that there are three points
of difference between a loan and an irregular deposit.
The first difference which he points out consists in
the fact that in an irregular deposit the only benefit
is that which accrues to the depositor, while in a
loan the essential cause for the transaction is the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 44
necessity of the borrower.
Nor does the contract in question fulfill the third
requisite indicated by Manresa, which is, that in an
irregular deposit, the depositor can demand the
return of the article at any time, while a lender is
bound by the provisions of the contract and cannot
seek restitution until the time for payment, as
provided in the contract, has arisen. It is apparent from
the terms of this documents that the plaintiff could
not demand his money at any time. He was bound to
give notice of his desire for its return and then to
wait for six months before he could insist upon
payment.
In the present case the transaction in question was
clearly not for the sole benefit of the Compania
Agricola de Ultramar; it was evidently for the benefit
of both parties. Neither could the alleged depositor
demand payment until the expiration of the term of
three months.
For the reasons stated, the appealed judgment is
reversed, and we hold that the transaction in question
must be regarded as a loan, without preference.
ROGERS VS. SMITH
FACTS: Plaintiff Jose Rogers (Rogers) brought this
action in the CFI city of Manila upon the following
document:(the subject document of the case) No. 1418.
$12,000.
The sum of pesos twelve thousand has been
deposited with us, received from Jose Rogers, which
sum we will pay on the last day of the six months after
the presentation of this document, to the order of Mr.
Jose Rogers. Manila, February 17, 1876. SMITH, BELL &
CO.
The said sum of twelve thousand pesos shall bear
interest at the rate of eight per centum (8%) per
annum from this date, February 17, 1876.
SMITH, BELL & CO.
When this document was delivered by the defendants
Smith, Bell & CO. (Smith) to Rogers, 12,000 pesos in
silver were worth more than 12,000 pesos in gold.

The only question in the case is, whether upon these
documents Rogers is entitled to recover 12,000 pesos
or 24,000 pesos. CFI held that he was entitled to
recover only 12,000 pesos. Rogers has appealed.
Rogers delivered to Smith, in consideration of the
execution of the document, 12,000 in gold.
Soon thereafter Rogers moved to Barcelona and has
since resided there. Smith remitted the interest to
him every three months at the rate of 8 per cent per
annum until the 30th day of January, 1888, when they
notified him that thereafter the interest would be 6 per
cent. Rogers accepted this reduction and interest and
that rate was remitted to him by Smith until the 10th of
February, 1904. This interest was remitted in silver;
that is to say, every three months the Smith took
180 pesos in silver and with it bought exchange on
Barcelona or other European point converted into
pesetas. Rogers received these payments in silver
without any protest whatever until the 10th day of
February, 1904.
In his letter of that date, he called the attention of the
Smith to the fact that by the new American law in
force in the Philippines the gold standard had been
introduced and that by reason thereof he was entitled
to receive his interest in gold, in view of the fact that
when he delivered the money to the Smith in 1876
he delivered it in gold coin.
In another letter of the 15th of December, 1904, he
expressly refers to the act of Congress of March 2,
1903, and to the subsequent proclamations of the
Governor- General relating to coinage.
Rogers claims that, having paid to Smith 12,000
pesos in gold coin, he is now entitled to receive from
them the value of 12,000 pesos in gold coin; that is to
say, 24,000 pesos in silver. It is necessary to determine
in the first place the nature of the contract evidenced
by the document of the 17th of February, 1876.
ISSUE: WON the document is an evidence of an
ordinary loan which created between the Rogers
and the Smith the simple relation of debtor and
creditor. YES
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 45
HELD: The document is an evidence of ordinary loan.
Rogers repeatedly calls it a deposit, that is, that the
ownership of the particular coin which was delivered
by him to Smith did not pass to Smith but remained in
him and that Smith was bound to return to him the
identical coin which they had received. It is apparent
that no such claim could be maintained in view of
that part of the instrument which provides for the
payment of interest. But while not a deposit in the
strict sense of the word, the document evidences what
is known as an "irregular deposit."
The Supreme Court cited Manresa's discussion on the
differences of a loan and an irregular deposit
namely:
1. in irregular deposit the benefit accrues to the
depositor alone whereas in loan the benefit is
for both parties, the essential cause is the
necessity of the borrower;
2. in irregular deposit the depositor has a
preference over other creditors whereas in
loan there is no such preference;
3. in irregular deposit the depositor can
demand the return of the article at any time
whereas in loan the parties are bound by the
contract.
In the first difference, the contract in question does
not fulfill this requirement of an irregular deposit. It is
very apparent that is was not for the sole benefit of
Rogers. It like any other loan of money was for the
benefit of both parties. The benefit which Smith, Bell
& Co. received was the use of the money; the
benefit which Rogers received was the interest of his
money. In the letter which Smith, Bell & Co. on the
30th of June, 1888, notified the plaintiff of the
reduction of the interest, they said: "We call your
attention to this matter in order that you may if you
think best employ your money in some other place."
The second difference which exists, according to
Manresa, between an irregular deposit and a loan lies
in the fact that in an irregular deposit the depositor
has a preference over

other creditors in the distribution of the debtor's
property. It is apparent, therefore, that this document
does not state those requisites which are essential to
an irregular deposit.
Nor does the contract in question fulfill the third
requisite, which is, in an irregular deposit, the
depositor can demand the return of the article at any
time, while a lender is bound by the provisions of
the contract and cannot seek restitution until the time
for payment, as provided in the contract, has arisen.
It is apparent from the terms of this document that
the plaintiff could not demand his money at any time.
He was bound to give notice of his desire for its return
and then to wait for six months before he could insist
upon payment.
From the above discussions, it is very apparent that is
was not for the sole benefit of Rogers. Like any other
loan it was for the benefit of both parties. The
benefit of Smith Bell Company was the use of the
money while Jose Rogers' benefit was the interest on
his money. Also, he was not able to demand for the
money at any time for he is supposed to give notice
and wait for six months first before payment. Thus,
the transaction is that of an ordinary loan and not an
irregular deposit.
BPI v. CA
FACTS: Private respondents Eastern Plywood
Corporation (Eastern) and Benigno D. Lim (Lim), held
one joint bank account with the Commercial Bank and
Trust Co. (CBTC), the predecessor-in-interest of
petitioner Bank of the Philippine Islands (BPI).
Sometime in March 1975, a joint checking account
with Lim in the amount of P120,000.00 was opened by
Mariano Velasco with funds withdrawn from the
account of Eastern and/or Lim.
Velasco died. At the time of his death, the outstanding
balance of the account stood at P662,522.87.
On 5 May 1977, by virtue of an Indemnity Undertaking
executed by Lim one-half of this amounts was
provisionally released and transferred to one of the
bank accounts of Eastern with CBTC. Thereafter,
Eastern
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 46
obtained a loan of P73,000.00 from CBTC as
"Additional Working Capital,". Eastern issued a
negotiable promissory note for P73,000.00 payable
on demand to the order of CBTC with interest at 14%
per annum. The note was signed by Lim. The loan is
wholly/partly secured by the Hold-Out on a 1:1 on C/A
No. 2310-001-42, which refers to the joint account of
Velasco and Lim with a balance of P331,261.44. In
addition, Eastern and Lim, and CBTC signed another
document entitled "Holdout Agreement,"
On the other hand, a case for the settlement of
Velasco's estate was filed. In the said case, the whole
balance of P331,261.44 in the aforesaid joint account
of Velasco and Lim was being claimed as part of
Velasco's estate. The intestate court granted motion
of the heirs of Velasco to withdraw the balance and
authorized the heirs to divide among themselves the
amount withdrawn.
CBTC was merged with BPI. BPI filed a complaint
against Lim and Eastern demanding payment of the
promissory note for P73,000.00. Defendants Lim and
Eastern, in turn, filed a counterclaim against BPI for
the return of the balance in the disputed account
subject of the Holdout Agreement and the interests
thereon after deducting the amount due on the
promissory note.
RTC dismissed the complaint and CA affirmed the
decision.
BPI’s CONTENTION: BPI alleged that the Holdout
Agreement in question was subject to a suspensive
condition stated therein, viz., that the "P331,261.44
shall become a security for respondent Lim's
promissory note only if respondents' Lim and Eastern
Plywood Corporation's interests to that amount are
established as a result of a final and definitive judicial
action or a settlement between and among the
contesting parties thereto." Hence, BPI asserts, the
Court of Appeals erred in affirming the trial court's
decision dismissing the complaint on the ground that
it was the duty of CBTC to debit the account of the
defendants to set off the amount of P73,000.00 covered
by the promissory note.
EASTERN and LIM’s CONTENTION: Eastern and Lim
dispute the "suspensive condition"

argument of the petitioner that they are rightful
owners of the money in question, the suspensive
condition does not find any application in this case
and the bank had the duty to set off this deposit with
the loan.
ISSUES:
1. WON BPI can demand payment of the loan of
P73,000.00 despite the existence of the Holdout
Agreement? YES
2. WON BPI is still liable to the private
respondents on the account subject of the Holdout
Agreement after its withdrawal by the heirs of
Velasco? YES
HELD:
ISSUE 1: It is clear in paragraph 02 of the “Holdout
Agreement” that CBTC, or BPI as its successor-in-
interest, had every right to demand that Eastern and
Lim settle their liability under the promissory note. It
cannot be compelled to retain and apply the deposit
in Lim and Velasco's joint account to the payment of
the note. What the agreement conferred on CBTC was
a power, not a duty. Generally, a bank is under no
duty or obligation to make the application. To apply the
deposit to the payment of a loan is a privilege, a right
of set- off which the bank has the option to exercise.
Also, paragraph 05 of the Holdout Agreement itself
states that notwithstanding the agreement, CBTC was
not in any way precluded from demanding payment
from Eastern and from instituting an action to
recover payment of the loan. What it provides is an
alternative, not an exclusive, method of enforcing its
claim on the note. Its suit for the enforcement of the
note was then in order and it was error for the trial
court to dismiss it on the theory that it was set off
by an equivalent portion in C/A No. 2310-001-42
which BPI should have debited. The "suspensive
condition" theory of the petitioner is, therefore,
untenable.
ISSUE 2: The Court of Appeals correctly decided on
the counterclaim. The counterclaim of Eastern and Lim
for the return of the P331,261.44 was equivalent to a
demand that they be allowed to withdraw their
deposit with the bank. Article 1980 of the Civil Code
expressly provides that "[f]ixed, savings, and current
deposits of money in banks and similar institutions shall
be governed by the provisions
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 47
concerning simple loan."
In Serrano vs. Central Bank of the Philippines, we
held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn
interest. The relationship then between a depositor
and a bank is one of creditor and debtor. The deposit
under the questioned account was an ordinary bank
deposit; hence, it was payable on demand of the
depositor.
The account was proved and established to belong
to Eastern even if it was deposited in the names of
Lim and Velasco. As the real creditor of the bank,
Eastern has the right to withdraw it or to demand
payment thereof. BPI cannot be relieved of its duty
to pay Eastern simply because it already allowed the
heirs of Velasco to withdraw the whole balance of the
account. The petitioner should not have allowed such
withdrawal because it had admitted in the Holdout
Agreement the questioned ownership of the money
deposited in the account.
Moreover, the order of the court merely authorized the
heirs of Velasco to withdraw the account. BPI was not
specifically ordered to release the account to the said
heirs; hence, it was under no judicial compulsion to do
so. Because the ownership of the deposit remained
undetermined, BPI, as the debtor, had no right to pay to
persons other than those in whose favor the
obligation was constituted or whose right or authority
to receive payment is indisputable. Payment made by
the debtor to the wrong party does not extinguish the
obligation as to the creditor who is without fault or
negligence, even if the debtor acted in utmost good
faith and by mistake as to the person of the
creditor, or through error induced by fraud of a third
person. The payment then by BPI to the heirs of
Velasco, even if done in good faith, did not extinguish
its obligation to the true depositor, Eastern.
METROBANK VS BA FINANCE
FACTS: Lamberto Bitanga obtained from respondent
BA Finance a loan, to secure which, he mortgaged his
car to respondent BA Finance. Bitanga had the
mortgaged car insured by respondent Malayan
Insurance.

The car was stolen. On Bitanga's claim, Malayan
Insurance issued a check payable to the order of "BA
Finance Corporation and Lamberto Bitanga", drawn
against China Bank. The check was crossed with the
notation "For Deposit Payees' Account Only." Without
the indorsement or authority of his co-payee BA
Finance, Bitanga deposited the check to his account
with the Asian Bank, now merged with herein
petitioner Metrobank. Bitanga subsequently withdrew
the entire proceeds of the check. In the meantime,
Bitanga's loan became past due, but despite demands,
he failed to settle it.
BA Finance eventually learned of the loss of the car
and of Malayan Insurance's issuance of a crossed check
payable to it and Bitanga, and of Bitanga's depositing it
in his account at Asian Bank and withdrawing the
entire proceeds thereof. BA Finance thereupon
demanded the payment of the value of the check from
Asian Bank but to no avail, prompting it to file a
complaint before the RTC for sum of money and
damages against Asian Bank and Bitanga, alleging that,
inter alia, it is entitled to the entire proceeds of the
check. The RTC, holding that Asian Bank was negligent
in allowing Bitanga to deposit the check to his account
and to withdraw the proceeds thereof, without his
co-payee BA Finance having indorsed it or authorized
him to indorse it in its behalf, found Asian Bank and
Bitanga jointly and severally liable to BA Finance
following Section 41 of the NIL. The appellate court
affirmed the RTC's decision and held that BA Finance
has a cause of action against it even if the subject
check had not been delivered to BA Finance by the
issuer itself. Hence, this petition.
ISSUE: WON the petitioner is liable for the full value of
the check. YES
HELD: The SC held that Sec 41 of the NIL provides:
"Where an instrument is payable to the order of two
or more payees or indorsees who are not partners, all
must indorse unless the one indorsing it has no
authority to indorse for the others. Bitanga alone
endorsed the crossed check, and the petitioner
allowed the deposit and release of the proceeds
thereof, despite the absence of authority of Bitanga's
co-payee BA Finance to endorse it on its
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 48
behalf. The payment of an instrument over a missing
indorsement is the equivalent of payment on a forged
indorsement or an unauthorized indorsement in itself
in the case of joint payees. Clearly, petitioner,
through its employee, was negligent when it allowed
the deposit of the crossed check, despite the lone
endorsement of Bitanga, ostensibly ignoring the fact
that the check did not, it bears repeating, carry the
indorsement of BA Finance.
REYES vs CA
FACTS: In view of the 20th Asian Racing Conference to
be held in Sydney, Australia, the Philippine Racing Club,
Inc. (PRCI) sent 4 delegates to the said conference.
Petitioner Gregorio Reyes, as VP for finance racing
manager, treasurer, and directory of PRCI, sent
Godofredo Reyes, the club's chief cashier, to Far East
Bank and Trust Company (respondent) to apply for a
foreign exchange demand draft in Australian dollars
(AU$ 1,610.00).
Mr. Yasis, bank's assistant cashier, first denied the
application for the reason that respondent bank did
not have an Australian dollar account in any bank in
Sydney. Since Godofredo asked if there could be a way
for respondent bank to accommodate PRCI's urgent
need to remit AUS$ to SYdney, Yasis informed him
of another way of effecting the requested
remittance.
The respondent bank would draw a demand draft
against Westpac-Sydney and have the latter reimburse
itself from the US$ account of the respondent in
Westpac-New York. This arrangement has been
customarily resorted to since the 1960s and the
procedure has proven to be problem-free.
July 28, 1988, the respondent bank approved the said
application of PRCI and issued Foreign Exchange
Demand Draft(FXDD) No. 209968 in the sum applied
for payable to the order of the 20th Asian Racing
Conference Secretariat of Sydney, Australia, and
addressed to Westpac-Sydney as the drawee bank.
August 10, 1988, upon due presentment of the

FXDD the same was dishonored, with the notice of
dishonor stating; "xxx No account held with Westpac."
Meanwhile, on August 16, 1988, Wespac-New York
sent a cable to respondent bank informing the latter
that its dollar account in the sum of AU$ 1,610.00 was
debited. The respondent bank informed Wespac-New
York requesting the latter to honor the
reimbursement claim of Westpac- Sydney. Upon its
second presentment for payment, FXDD No. 209968
was again dishonored by Westpac-Sydney for the
same reason.
When the petitioner Gregorio Reyes arrived in Sydney
in the morning of September 18, 1988, he went
directly to the lobby of Hotel Regent Sydney to
register as a conference delegate. At the registration
desk, the conference secretariat said that he could
not register because the FXDD for his registration fee
had been dishonored for the second time. The same
situation was experienced by his wife Consuelo who is
a member of the House of Rep representing the
District of Makati, Metro Manila.
The petitioners filed a complaint for damages against
FEBTC. Claiming that as a result of the dishonor of the
said demand draft, they were exposed to unnecessary
shock, social humiliation, and deep mental anguish in
a foreign country, and in the presence of an
international audience. RTC and CA ruled in favor of
the respondent.
ISSUE: WON the respondent bank was negligent. NO
HELD: The facts as found by the courts a quo show
that respondent bank did not cause an erroneous
transmittal of its SWIFT cable message to Westpac-
Sydney. It was the erroneous decoding of the cable
message on the part of Westpac-Sydney mistakenly
read the printed figures in the SWIFT cable message
of respondent bank as "MT799" instead of as
"MT199". As a result, Westpac- Sydney construed the
said cable message as a format for letter of credit,
and not for a demand draft. The figure before '99' can
still be distinctly seen as number '1' and not number
'7' is in a slanting position while the line of a '1' id in a
1 horizontal position. Thus, the number '1' in 'MT199'
cannot be construed as '7'.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 49
The degree of diligence required of banks, is more
than that of a good father of a family where the
fiduciary nature of their relationship with their
depositors is concerned. In other words, banks are
duty bound to treat the deposit accounts of their
depositors with the highest degree of care. But the
said ruling applies only to cases where bank act
under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. But the same higher
degree of diligence is not expected to be exerted by
banks in commercial transactions that do not involve
their fiduciary relationship with their depositors.
Respondent bank was not required to exert more than
the diligence of a good father of a family in regard to
the sale and issuance of the subject FXDD. The case at
bar does not involve the handling of the petitioner's
deposit. Instead, the relationship involved was that of a
buyer and seller, that is, between the respondent
bank as the seller of the subject foreign exchange
demand draft, and PRCI as the buyer of the same,
with the 20th Asian Racing conference Secretariat in
Sydney, Australia as the payee thereof. The FXDD was
intended for the payment of the registration fees of
the petitioners as delegates of the PRCI.
The evidence shows that the respondent bank did
everything within its power to prevent the dishonor
of the subject FXDD. The erroneous reading of its
cable message to Westpac- Sydney by an employee of
the latter could not have been foreseen by the
respondent bank. Being unaware that its employee
erroneously read the said cable message, Westpac-
Sydney merely stated that the respondent bank has no
deposit account with it to cover for the amount AU$
1,610.00 indicated in the FXDD. Thus, the respondent
bank had the impression that Westpac-New York had
not yet made available the amount for reimbursement
to Westpac- Sydney despite the fact that respondent
bank has a sufficient deposit dollar acct with Westpac-
New York. That was the reason why the respondent
bank had to re-confirm and repeatedly notify
Westpac-New York to debit its (respondent bank's)
deposit dollar with it and to transfer or credit the
corresponding amount to Westpac-Sydney to cover the
amount of the said demand draft.

NOTE: The degree of diligence required of banks, is
more than that of a good father of a family where
the fiduciary nature of their relationship with their
depositors is concerned.
GUINGONA VS CITY FISCAL
FACTS: From March 20, 1979 to March 1981, David
invested with the Nation Savings and Loan Association
(NSLA) the sum of P 1,145,546.20 on nine deposits, P
13,531.94 on savings account deposits (jointly with his
sister, Denise Kuhne), US$10,000 on time deposit,
US$15,000 under a receipt and guarantee of
payment and US$50,000 under a receipt dated June 8,
1980 (jointly with Denise Kuhne), that David was
induced into making the aforestated investments by
Robert Marshal an Australian national who was
allegedly a close associate of petitioner Guingona Jr.,
then NSLA President.
NSLA was placed under receivership by the Central
Bank, so that David filed claims therewith for his
investments and those of his sister; On June 1981,
Guingona and Martin, upon David's request, assumed
the bank's obligation to David by executing a joint
promissory note in favor of private respondent
acknowledging an indebtedness of P1,336,614.02
and US$75,000. This
promissory note was based on the statement of
account as of June 30, 1981 prepared by the private
respondent. The amount of indebtedness assumed
appears to be bigger than the original claim because
of the added interest and the inclusion of other
deposits of private respondent's sister in the amount of
P116,613.20.
On July 17, 1981, petitioners Guingona and Martin
agreed to divide the said indebtedness, and the
petitioner Guingona executed another promissory
note antedated to June 17, 1981 whereby he
personally acknowledged an indebtedness of
P668,307.01 and US$37,500 in favor of private
respondent. On July 22, 1981, David received a report
from the Central Bank that only P305,821.92 of those
investments were entered in the records of NSLA.
On Dec 1981, David filed I.S. No. 81-31938 in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 50
the Office of the City Fiscal. David charged petitioners
with estafa and violation of Central Bank Circular No.
364 and related regulations on foreign exchange
transactions.
Petitioners moved to dismiss the charges against
them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation, but the
motion was denied. After the presentation of David's
principal witness, petitioners filed this petition for
prohibition and injunction because:
a. The production of various documents
showed that the transactions between David and
NSLA were simple loans i.e., civil obligation which
were novated when Guingona and Martin assumed
them
ISSUE: WON the contracted perfected was a contract
of simple loan. YES
HELD: It must be pointed out that when private
respondent David invested his money on nine. and
savings deposits with the aforesaid bank, the contract
that was perfected was a contract of simple loan or
mutuum and not a contract of deposit. Thus, Article
1980 of the New Civil Code provides that:
Article 1980. Fixed, savings, and current
deposits of-money in banks and similar
institutions shall be governed by the provisions
concerning simple loan.
In the case of Central Bank of the Philippines vs.
Morfe, the SC said:
It should be noted that fixed, savings, and
current deposits of money in banks and similar
institutions are hat true deposits. are
considered simple loans and, as such, are not
preferred credits.
This Court also declared in the recent case of
Serrano vs. Central Bank of the Philippines (96 SCRA
102 [1980]) that:
Bank deposits are in the nature of irregular
deposits. They are really 'loans because they
earn interest. All kinds of bank deposits,
whether fixed, savings, or current are to be
treated as loans and are to be covered by the
law on loans. Current and saving deposits, are
loans to a bank because it can use the same.
Hence, the relationship between the private

respondent and the Nation Savings and Loan
Association is that of creditor and debtor;
consequently, the ownership of the amount deposited
was transmitted to the Bank upon the perfection of
the contract and it can make use of the amount
deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While
the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or
deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited
will not constitute estafa through misappropriation
punishable under Article 315, par. l(b) of the Revised
Penal Code, but it will only give rise to civil liability.
The nature of simple loan is defined in Articles 1933
and 1953 of the Civil Code.
"Art. 1933. — By the contract of loan, one
of the parties delivers to another, either
something not consumable so that the latter
may use the same for a certain time- and
return it, in which case the contract is called
a commodatum; or money or other
consumable thing, upon the
condition that the same
amount of the same kind and quality shall
he paid in which case the contract is simply
called a loan or mutuum. "Commodatum is
essentially gratuitous. "Simple loan may be
gratuitous or with a stipulation to pay interest.
"In commodatum the bailor retains the
ownership of the thing loaned while in
simple loan, ownership passes to the
borrower.
"Art. 1953. — A person who receives a loan of
money or any other fungible thing acquires the
ownership thereof, and is bound to pay to
the creditor an equal amount of the same
kind and quality."
It can be readily noted from the above-quoted
provisions that in simple loan (mutuum), as contrasted
to commodatum the borrower acquires ownership of
the money, goods or personal property borrowed Being
the owner, the borrower can dispose of the thing
borrowed (Article 248, Civil Code) and his act will not
be considered misappropriation thereof' (Yam vs.
Malik).
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 51
But even granting that the failure of the bank to pay
the time and savings deposits of private respondent
David would constitute a violation of paragraph 1(b)
of Article 315 of the Revised Penal Code, nevertheless
any incipient criminal liability was deemed avoided,
because when the aforesaid bank was placed under
receivership by the Central Bank, petitioners
Guingona and Martin assumed the obligation of the
bank to private respondent David, thereby resulting
in the novation of the original contractual obligation
arising from deposit into a contract of loan and
converting the original trust relation between the bank
and private respondent David into an ordinary
debtor- creditor relation between the petitioners and
private respondent. Consequently, the failure of the
bank or petitioners Guingona and Martin to pay the
deposits of private respondent would not constitute a
breach of trust but would merely be a failure to pay
the obligation as a debtor.
NOTE: While the bank has the obligation to return
the amount deposited, it has, however, no obligation
to return or deliver the same money that was
deposited.
PROVINCE OF BATAAN VS. VILLAFUERTE (G.R. No.
129995, October 19, 2001)
FACTS: In its order, the lower court directed that
petitioner Province of Bataan to remit to said court
whatever lease rentals petitioner may receive from
lessees 7-R Port and Marina Port Services, and that
such lease rentals be placed under a special time
deposit with the Land Bank for the account of the RTC-
Balanga Branch 4, in escrow, for the person or persons,
natural or juridical, who may be adjudged lawfully
entitled thereto. The order denied herein petitioner’s
motion for reconsideration of the 28 July, 1993 order.
Pursuant to Presidential Decree No. 464, otherwise
known as the Real Property Tax Code of 1974, the
Provincial Treasurer of Bataan advertised for auction
sale the BASECO property due to real estate tax
delinquency amounting to P7,914,281.72, inclusive of
penalties. At the auction sale, no bidder vied for said
property as a result of which, the Provincial Treasurer
of Bataan adjudged the property to, and acquired
the

same for, and in the name of herein petitioner
Province of Bataan. Upon the expiration of the one-
year redemption period, and without the owner
exercising its right to redeem the subject property, the
Provincial Government of Bataan consolidated its title
thereon; the corresponding certificates of title were
then issued in the name of herein petitioner Province
of Bataan.
Eventually, petitioner, thru then Provincial Governor
Enrique T. Garcia, entered into a ten-year contract of
lease with 7-R Port Services, Inc., whereby portions of
the BASECO property including facilities and
improvements thereon, were leased to the latter for a
minimum escalating annual rental of P18 million.
Petitioner forged another contract of lease with
Marina Port Services, over a ten- hectare portion of
the BASECO property. Private respondent filed for
annulment of sale, principally assailing the validity of
the tax delinquency sale of the BASECO property in
favor of petitioner Province of Bataan. PCGG filed for
writ of preliminary injunction to enjoin herein
petitioner “from entering into a lease contract with
Marina Port Services, Inc. (Marina), or any other
entity, and/or from implementing/enforcing such
lease contract, if one has already been executed, and
to maintain the status quo until further orders from
the Court.”
The lower court denied the motion ratiocinating that
the lease contract with Marina was already a fait
accompli when the motion was filed, and that Marina
was not a party to the suit for not having been
impleaded as party-defendant.
The PCGG filed with the lower court an “Urgent
Motion to Deposit Lease Rentals,” alleging inter alia
that the rentals amounting to “Hundreds of Millions of
Pesos” are “in danger of being unlawfully spent,
squandered and dissipated to the great and irreparable
damage of plaintiffs who are the rightful owners of
the property leased.”
The lower court granted the PCGG’s urgent motion
and ordered the defendant Province of Bataan to remit
to the court the lease rentals it may receive from the
defendant 7-R Port Services and the Marina Port
Services from the receipt of this order. It also
ordered the clerk of court to deposit the amount
under
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 52
special time deposit with the Land Bank in the name or
account of the Court to be held in trust for the person,
natural or juridical, who may lawfully be entitled
thereto.
ISSUE: Whether or not the deposit of rentals in escrow
was proper. YES
HELD: In the main, petitioner insists that the
issuance of the escrow order by the trial court “was
patently irregular, if not downright anomalous”,
reasoning that “nowhere in the Revised Rules of Court
is the trial court, or any court for that matter,
authorized to issue such escrow order, whether as a
provisional or permanent remedy.” According to
petitioner, “the escrow orders in question are null and
void ab initio for having been issued absent any
legal basis” and are “merely calculated to prejudice
the petitioner province without any practical or
worthwhile, much less legal objective.”
The court does not agree. An escrow fills a definite
niche in the body of the law; it has a distinct legal
character. The usual definition is that an escrow is a
written instrument which by its terms imports a legal
obligation and which is deposited by the grantor,
promisor, or obligor, or his agent with a stranger or
third party, to be kept by the depositary until the
performance of a condition or the happening of a
certain event, and then to be delivered over to the
grantee, promisee, or obligee.
While originally, the doctrine of escrow applied only to
deeds by way of grant, or as otherwise stated,
instruments for the conveyance of land, under modern
theories of law, the term escrow is not limited in its
application to deeds, but is applied to the deposit of
any written instrument with a third person. Particular
instruments which have been held to be the subject
of an escrow include bonds or covenants, deeds,
mortgages, oil and gas leases, contracts for the sale
of land or for the purchase of personal property,
corporate stocks and stock subscriptions, promissory
notes or other commercial paper, insurance
applications and policies, contracts for the settlement
of will- contest cases, indentures of apprenticeship,
receipts assigning concessions and discontinuances and
releases of causes of action. Moreover, it is no longer
open to question that money may be delivered in

escrow.
“ X X X the impugned orders appear to us as a fair
response to the exigencies and equities of the
situation.
Parenthetically, it is not disputed that even before the
institution of the case, the Province of Bataan has
been utilizing the rental payments on the Baseco
Property to meet its financial requirements. To us, this
circumstance adds a more compelling dimension for
the issuance of the assailed orders. X X X”
Applying the foregoing principles and considering the
peculiarities of the instant case, the lower court, in
the course of adjudicating and resolving the issues
presented in the main suit, is clearly empowered to
control the proceedings therein through the adoption,
formulation and issuance of orders and other ancillary
writs, including the authority to place the properties in
custodia legis, for the purpose of effectuating its
judgment or decree and protecting further the
interests of the rightful claimants of the subject
property.
To trace its source, the court’s authority proceeds from
its jurisdiction and power to decide, adjudicate and
resolve the issues raised in the principal suit. Stated
differently, the deposit of the rentals in escrow with
the bank, in the name of the lower court, “is only an
incident in the main proceeding.” To be sure, placing
property in litigation under judicial possession, whether
in the hands of a receiver, and administrator, or as in
this case, in a government bank is an ancient and
accepted procedure. Consequently, we find no
cogency to disturb the questioned orders of the
lower court and in effect uphold the propriety of the
subject escrow orders.
III.Necessary Deposit
YHT REALTY VS. CA
(451 SCRA 638, G.R. No. 126780, February
17, 2005)
FACTS: McLoughlin (private respondent), an
Australian businessman, regularly stayed at Sheraton
Hotel during
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 53
trips to Philippines. McLoughlin became friends with
Tan, who convinced the former to transfer from
Sheraton Hotel to Tropicana Hotel were (petitioners)
Lainez, Payam and Lopez. Lopez served as manager
while Lainez and Payam had custody of the keys for
the safety deposit boxes of Tropicana Hotel.
The procedure for the safety deposit box at
Tropicana Hotel was that it can be opened by 2 keys
only. 1 key is given to the registered hotel guest while
the other key is held by the hotel management.
McLoughlin deposited $15,000 (US) and
$10,000 (AUS) as well as letters, bankbooks, credit
cards and a checkbook in the safety deposit box during
his stay at Tropicana Hotel.
After his trips abroad, McLoughlin discovered that
some cash and valuables he deposited in the safety
deposit box were missing. McLoughlin immediately
confronted Lainez and Payam. Both admitted that Tan
opened the safety deposit box with the key assigned
to him.
When McLoughlin confronted Tan, she admitted to
have stolen the key with the assistance of Lopez,
Payam and
Lainez. A promissory note was written by Lopez,
promising to pay the amount of $4,000 (AUS) and
$2,000 (US).
McLoughlin insisted that Tropicana Hotel be
responsible for the loss. However, Lopez refused and
relied on the conditions for renting the safety deposit
box which provides that the hotel is free from any
liability arising from loss should the key be lost and
to return the key and execute the release in favor
of the hotel upon giving up the use of the box.
McLoughlin filed a case against petitioners. RTC ruled
in favor of McLoughlin, making petitioners jointly and
severally liable for the losses plus damages. The
hotel conditions were ruled not valid for being
contrary to Art 2003 of the NCC and public policy.
The CA also ruled in favor of McLoughlin.
ISSUE: Whether or not YHT Corporation is jointly and
severally liable for the losses suffered by McLoughlin? –
YES.

HELD: SC appreciated the facts found and proven by
the lower court that McLoughlin indeed deposited
such cash and valuables as he claimed.
The evidence also revealed that the hotel guest alone
cannot open the safety deposit box without the
assistance of the hotel management or its employees.
In case of loss of any item deposited, it is inevitable
to conclude that the management had at least a hand
in the consummation of the taking, unless the reason
for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who
were employees of Tropicana, had custody of the
master key of the management when the loss took
place. They even admitted that they assisted Tan on 3
separate occasions in opening McLoughlin’s safety
deposit box.
It is proved that Tropicana had prior knowledge that a
person aside from the registered guest had access to
the safety deposit box. Yet the management failed to
notify McLoughlin of the incident and waited for him to
discover the taking before it disclosed the matter to
him. Therefore, Tropicana should be held responsible
for the damage suffered by McLoughlin by reason of
the negligence of its employees.
Tan’s acts should have prompted the management to
investigate her relationship with McLoughlin. Then,
petitioners would have exercised due diligence
required of them. Failure to do so warrants the
conclusion that the management had been remiss in
complying with the obligations imposed upon hotel-
keepers under the law.
Under Art 1170 of NCC, those who, in the performance
of their obligations, are guilty of negligence, are
liable for damages. As to who shall bear the burden
of paying damages, Art 2180 Par (4) of NCC provides
that the owners and managers of an establishment are
likewise responsible for damages caused by their
employees in the service of the branches in which
the latter are employed or on the occasion of their
functions.
Also, this Court has ruled that if an employee is found
negligent, it is presumed that the employer was
negligent in selecting and/or
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 54
supervising him for it is hard for the victim to prove
the negligence of such employer.
Thus, given the fact that the loss of McLoughlin’s
money was consummated through the negligence of
Tropicana’s employees in allowing Tan to open the
safety deposit box without the guest’s consent, both
the assisting employees and YHT Realty Corporation
itself, as owner and operator of Tropicana, should be
held solidarily liable pursuant to Article 2193.
Also, Art 2003 is controlling which provides that the
hotel-keeper cannot free himself from responsibility
by posting notices to the effect that he is not liable
for the articles brought by the guest. Any stipulation
between the hotel- keeper and the guest whereby the
responsibility of the former as set forth in Articles
1998 to 2001 is suppressed or diminished shall be void.
Petitioners contend that McLoughlin’s case was
mounted on the theory of contract, but the trial court
and the appellate court upheld the grant of the
claims of the latter on the basis of tort. There is
nothing anomalous in how the lower courts decided
the controversy for this Court has pronounced a
jurisprudential rule that tort liability can exist even if
there are already contractual relations. The act that
breaks the contract may also be tort.
DURBAN APARTMENTS VS. PIONEER (639 SCRA
441, G.R. No. 179419, January
12, 2011)
FACTS: On July 22, 2003, Pioneer Insurance and Surety
Corporation, by right of subrogation, filed [with the
RTC of Makati City] a Complaint for Recovery of
Damages against Durban Apartments Corporation,
doing business under the name and style of City
Garden Hotel, and [defendant before the RTC] Vicente
Justimbaste.
Respondent’s contention:
Respondent averred that it is the insurer for loss
and damage of Jeffrey See’s Suzuki Grand Vitara in
the amount of P1,175,000.
On April 30, 2002, See arrived and checked in at the
City Garden Hotel in Makati corner

Kalayaan Avenues, Makati City before
midnight, and its parking attendant, defendant
Justimbaste got the key to said Vitara from See to park
it.
On May 1, 2002 (1am) – the Hotel Chief Security
Officer informed him that his car was carnapped while
it was parked unattended at the parking area of
Equitable PCI Bank along Makati Ave.
See then reported the incident to the Operations
Division of Makati City Police Anti- Carnapping unit
and then conducted investigation. The car has not yet
been recovered since July 23, 2002.
Respondent paid P1,163,250 money claim of See and
mortagee ABN AMRO Savings Bank as indemnity for
the loss of the car. The car was lost due to the
negligence of Durban Apartments and Justimbaste
because it was discovered that this was the second
time that a similar incident of carnapping happened in
the valet parking service of Durban Apartments and
no necessary precautions were taken to prevent its
repetition.
Defendant Justimbaste and Durban Apartments failed
and refused to pay Pioneer’s valid, just, and lawful
claim despite written demands.
Petitioner’s contention:
See did not check in at its hotel, on the contrary, he
was a guest of a certain Ching Montero x x x;
defendant x x x Justimbaste did not get the ignition key
of See’s Vitara, on the contrary, it was See who
requested a parking attendant to park the Vitara at
any available parking space, and it was parked at
the Equitable Bank parking area, which was within
See’s view, while he and Montero were waiting in front
of the hotel.
They made a written denial of the demand of
[respondent] Pioneer Insurance for want of legal basis;
valet parking services are provided by the hotel for the
convenience of its customers looking for a parking
space near the hotel premises; it is a special privilege
that it gave to Montero and See; it does not include
responsibility for any losses or damages to motor
vehicles and its accessories in the parking area; and the
same holds true even if it
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 55
was See himself who parked his Vitara within the
premises of the hotel as evidenced by the valet
parking customer’s claim stub issued to him.
Defendant Justimbaste saw the Vitara speeding away
from the place where it was parked; he tried to run
after it, and blocked its possible path but to no avail.
RTC ruled in favor of respondent and ordered Durban
Apartment to pay respondent the sum of P1, 163,
250.00. CA affirmed the decision of RTC. Hence, present
petition.
ISSUE: Whether or not petitioner is liable to
respondent for the loss of See’s vehicle.YES.
HELD: In this case, respondent substantiated the
allegations in its complaint, i.e., a contract of
necessary deposit existed between the insured See
and petitioner.
On this score, we find no error in the following
disquisition of the appellate court. The records also
reveal that upon arrival at the City Garden Hotel, See
gave notice to the doorman and parking attendant
of the said hotel, x x x Justimbaste, about his Vitara
when he entrusted its ignition key to the latter. x x
x Justimbaste issued a valet parking customer claim
stub to See, parked the Vitara at the Equitable PCI
Bank parking area, and placed the ignition key inside
a safety key box while See proceeded to the hotel
lobby to check in. The Equitable PCI Bank parking area
became an annex of City Garden Hotel when the
management of the said bank allowed the parking of
the vehicles of hotel guests thereat in the evening
after banking hours.
Article 1962, in relation to Article 1998, of the Civil
Code defines a contract of deposit and a necessary
deposit made by persons in hotels or inns:
Art. 1962. A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same.
If the safekeeping of the thing delivered is not the
principal purpose of the contract, there is no deposit
but some other contract.
Art. 1998. The deposit of effects made by travelers in
hotels or inns shall also be

regarded as necessary. The keepers of hotels or inns
shall be responsible for them as depositaries,
provided that notice was given to them, or to their
employees, of the effects brought by the guests and
that, on the part of the latter, they take the
precautions which said hotel-keepers or their
substitutes advised relative to the care and vigilance
of their effects.
Plainly, from the facts found by the lower courts, the
insured See deposited his vehicle for safekeeping
with petitioner, through the latter’s employee,
Justimbaste. In turn, Justimbaste issued a claim stub
to See. Thus, the contract of deposit was perfected
from See’s delivery, when he handed over to
Justimbaste the keys to his vehicle, which Justimbaste
received with the obligation of safely keeping and
returning it. Ultimately, petitioner is liable for the
loss of See’s vehicle.
POLICY: A deposit is constituted from the moment a
person receives a thing belonging to another, with the
obligation of safely keeping it and returning the same.
IV.Sequestration or Judicial Deposit
LOS BAÑOS RURAL BANK VS AFRICA
FACTS: Pacita Africa is the widow of Alberto Africa
and the rest of her co-petitioners are their children.
In June 1989, the Register of Deeds was razed by fire,
destroying some of its records/documents among
which was the original TCT covering a parcel of land
registered in the name of petitioner Pacita. The
aforesaid property was part of the conjugal property
of petitioner Pacita and her late husband Alberto
Africa.
On request of Pacita, private respondent Macy Africa,
the common-law wife of petitioner Antonio Africa,
worked for the reconstitution of the TCT. While the
reconstituted title was in her possession, Macy
allegedly forged, or caused the forgery of, Pacita’s
signature on a Deed of Absolute Sale purporting to
transfer
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 56
ownership of the subject property to Macy. On the
strength of the forged Deed of Absolute Sale, Macy
was able to cause the issuance of a TCT in her name,
without the knowledge of any of herein petitioners.
In March 1994, petitioners discovered that the subject
property was mortgaged by Macy to the respondent
bank. To protect their interests over the subject
property, petitioners lodged an action in court against
Macy and the respondent bank for Annulment of
Title, Deed of Absolute Sale and Deed of Mortgage.
The respondent bank in utter bad faith, foreclosed the
subject property on June 11, 1996 without due notice
to the petitioners, prompting the petitioners to
amend [their] complaint, this time incorporating
therein a prayer for the issuance of a temporary
restraining order and/or writ of preliminary
injunction, to stop the respondent bank from, among
others, consolidating title to the subject property.
Petitioner argues that respondents do not have a right
to the relief demanded, because they merely have
possession of the property, as the legal title is in the
9
name of Macy Africa. Furthermore, it claims that the
consolidation of title in its name does not constitute an
"invasion of a right that is material and substantial.
On the other hand, respondents maintain that they
would suffer great irreparable damage if the writ of
11
preliminary injunction is not granted. They likewise
contend that if petitioner is allowed to consolidate
its title to the subject property, they would lose their
ancestral home, a loss that would result in unnecessary
and protracted proceedings involving third parties.
ISSUE: Whether the appellate court erred in issuing
a writ of preliminary injunction to stop petitioner’s
consolidation of its title to the subject property.
HELD:
Main Issue:
Propriety of Preliminary Injunction
We agree with respondents.
The grounds for the issuance of a writ of

preliminary injunction are enumerated in Rule 58,
Section 3 of the Revised Rules of Court, which reads
as follows:
"Sec. 3. Grounds for issuance of preliminary
injunction. – A preliminary injunction may be
granted when it is established;
(a)That the applicant is entitled to the relief
demanded, and the whole or part of such relief consists
in restraining the commission or continuance of
the act or acts complained of, or in requiring the
performance of an act or acts, either for a limited
period or perpetually; (b)That the commission,
continuance or non- performance of the act or acts
complained of during the litigation would
probably work injustice to the
applicant; or
(c)That a party, court, agency or a person is doing,
threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in
violation of the rights of the applicant respecting the
subject of the action or proceeding, and tending to
render the judgment ineffectual."
Injunction is a preservative remedy aimed at no
other purpose than to protect the complainant’s
13
substantive rights and interests during the pendency
14
of the principal action. A preliminary injunction, as
15
the term itself suggests, is merely temporary. It is to
be resorted to only when there is a pressing necessity
to avoid injurious consequences that cannot be
remedied under any standard of compensation.
Moreover, injunction, like other equitable remedies,
should be issued only at the instance of a suitor who
has sufficient interest in or title to the right or the
17
property sought to be protected. It is proper only
when the plaintiff appears to be entitled to the relief
18
demanded in the complaint. In particular, the
existence of the right and the violation thereof must
19
appear in the allegations of the complaint and
must constitute at least a prima facie showing of a
20
right to the final relief. Thus, there are two requisite
conditions for the issuance of a preliminary injunction,
namely, (1) the right to be protected exists prima facie,
and (2) the acts sought to be enjoined are violative of
21
that right. It must be proven that the violation
sought to be prevented would cause an irreparable
injustice.
Further, while a clear showing of the right is
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 57
necessary, its existence need not be conclusively
22
established. In fact, the evidence required to justify
the issuance of a writ of preliminary injunction in the
hearing thereon need not be conclusive or complete.
The evidence need only be a "sampling" intended
merely to give the court an idea of the justification
for the preliminary injunction, pending the decision
23
of the case on the merits. Thus, to be entitled to
the writ, respondents are only required to show that
they have the ostensible right to the final relief prayed
for in their Complaint.
First Requisite: Existence of the Right
In the case at bar, we find ample justification for the
25
issuance of a writ of preliminary injunction.
Evidently, the question on whether or not respondents
possess the requisite right hinges on the prima facie
existence of their legal title to the subject
26
property. They have shown that they have that
right, and that it is directly threatened by the act
sought to be enjoined.
First, Respondent Pacita Africa is the registered owner
of the subject property. Her ownership is evidenced
by the reconstituted Transfer Certificate of Title.
30
Second, the validity of the Deed of Sale dated
December 29, 1992, is still in dispute because
Respondent Pacita Africa claims that her signature was
3
forged by the vendee, Macy Africa.
Third, there is doubt as to the validity of the
mortgage in favor of petitioner, because there exists
on record two TCTs covering the mortgaged property:
32
(1) TCT No. 81519 registered in the name of Pacita
33
Africa and (2) TCT No. 81519 registered in the name
of Macy Africa.
If indeed the Deed of Sale is a forgery, no parcel of
34
land was ever transferred to the purported buyer
who, not being the owner, could not have validly
35
mortgaged the property. Consequently, neither has
petitioner
-- the buyer and mortgagee of the same lot -- ever
36
acquired any title thereto. Significantly, no evidence
was presented by petitioner to controvert these
allegations put forward by respondents. Clearly then,
on the basis of the evidence presented, respondents
possess the

right to prevent petitioner from consolidating the title
in its name. The first requisite -- the existence of a
37
right to be protected -- is thus present.
Second Requisite: Violation of Applicant’s Right
As to the second requisite, what is sought to be
enjoined by respondents is the consolidation of the
title to the subject property in petitioner’s name.
After having discovered that the property had been
mortgaged to petitioner, respondents filed on June
12, 1994 an action for Annulment of Title, Deed of
Sale, and Mortgage to protect their rights over the
38
property. This notwithstanding, petitioner
39
foreclosed it on June 11, 1996. To enjoin petitioner
from consolidating the title in its name, respondents
40
then filed an Amended Complaint, praying for a
writ of preliminary injunction.
Unless legally stopped, petitioner may consolidate
title to the property in its name and enjoy the
unbridled freedom to dispose of it to third persons, to
41
the damage and prejudice of respondents. What
respondents stand to lose is material and
42
substantial. They would lose their ancestral home
43
even without the benefit of a trial. Clearly, the act
sought to be enjoined is violative of their
44
proprietary right over the property.
A writ of preliminary injunction is issued precisely to
preserve threatened or continuous irremediable injury
to some of the parties before their claims can be
45
thoroughly studied and adjudicated. Denial of the
application for the writ may make the Complaint of
respondents moot and academic. Furthermore, it would
render ineffectual a final judgment in their favor or, at
the very least, compel them to litigate needlessly with
third persons who may have acquired an interest in
46
the property. Such a situation cannot be
47
countenanced.
Lis Pendens
Petitioner further contends that respondents are not
entitled to the relief prayed for, because they caused a
notice of lis pendens to be annotated at the back of
TCT No. 81519, registered in the name of Macy P.
Africa; thus, that notice provided ample protection of
48
their rights and interests.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 58
We are not persuaded. A notice of lis pendens serves as
an announcement to the whole world that a particular
real property is in litigation and as a warning that
those who acquire an interest in the property do so at
their own risk -- they gamble on the result of the
49
litigation over it.
However, the cancellation of such notice may be
ordered by the court that has jurisdiction over it at
50
any given time. Its continuance or removal -- like
the continuance or the removal of a preliminary
attachment or injunction -- is not contingent on the
existence of a final judgment on the action and
51
ordinarily has no effect on the merits thereof. Thus,
the notice of lis pendens does not suffice to protect
52
herein respondents’ rights over the property. It
does not provide complete and ample protection.
Status Quo Ante
Petitioner further claims that the RTC erred in
enjoining the foreclosure sale of the subject
53
property. It argues that the foreclosure may no
longer be enjoined, because it has long been effected
54
since 1996. We agree with petitioner.
It is a well-entrenched rule that consummated acts
55
can no longer be restrained by injunction whose sole
objective is to preserve the status quo until the
56
merits of the case are fully heard. Status quo is
defined as the last actual peaceful uncontested
situation that precedes a controversy, and its
57
preservation is the office of an injunctive writ.
In the instant case, the status quo was the situation of
the parties at the time of the filing of the Amended
58
Complaint with a prayer for a writ of preliminary
injunction. It was that point at which petitioner had
already foreclosed the subject property and, hence,
could no longer be enjoined from going on with the
foreclosure. However, the last actual uncontested
status that preceded the controversy was when the
property in dispute was still registered in the name
of Macy Africa, petitioner not having consolidated in
59
its name the title thereto. Thus, the issuance of the
60
writ would no doubt preserve the status quo.
We cannot rule on the allegation of petitioner that
this case is a "scam perpetrated by private

61
respondents" to defraud it. The truth or the falsity
of that assertion cannot be ascertained by this Court
at this time. Verily, we refrain from expressing any
opinion on the merits of the case, pending a full
consideration of the evidence that would be
presented by the parties.
PART V: WAREHOUSE RECEIPTS LAW PART VI: TRUST
RECEIPTS LAW
PART VII: GUARANTY & SURETYSHIP
(Articles 2047-2084) I.
Nature and Extent
ESCAÑO & SILOS V. ORTIGAS, JR.
FACTS: On April 28, 1980, Private Development
Corporation of the Philippines (PDCP) entered into a
loan agreement with Falcon Minerals, Inc. (Falcon)
amounting to
$320,000.00 subject to terms and conditions.
On the same day, three (3) stockholder-officers of
Falcon: Ortigas Jr., George A. Scholey, and George T.
Scholey executed an Assumption of Solidary Liability
“to assume in their individual capacity, solidary
liability with Falcon for due and punctual payment”
of the loan contracted by Falcon with PDCP. Two (2)
separate guaranties were executed to guarantee
payment of the same loan by other stockholders and
officers of Falcon, acting in their personal and
individual capacities.
One guaranty was executed by Escaño, Silos, Silverio,
Inductivo and Rodriguez. Two years later, an
agreement was developed to cede control of Falcon
to Escaño, Silos and Matti. Contracts were executed
whereby Ortigas, George A. Scholey, Inductivo and the
heirs of then already deceased George T. Scholey
assigned their shares of stock in Falcon to Escaño, Silos
and Matti.
An Undertaking dated June 11, 1982 was executed by
the concerned parties, namely: with Escaño, Silos and
Matti as “sureties” and Ortigas, Inductivo and Scholeys
as “obligors”. Falcon eventually availed of the
sum of
$178,655.59 from the credit line extended by PDCP.
It would also execute a Deed of Chattel Mortgage over
its personal properties to further
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 59
secure the loan. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on
the chattel mortgage, there remained a subsisting
deficiency of Php 5,031,004.07 which falcon did not
satisfy despite demands.
ISSUE: Whether the obligation to repay is solidary, as
contended by respondent and the lower courts, or
merely joint as argued by petitioners.
HELD: The obligation to repay is only jointly as declared
by the Court. In case there is a concurrence of two or
more creditors or of two or more debtors in one and
the same obligation, Article 1207 of the Civil Code
states that among them, “there is a solidary liability
only when the obligation expressly so states, or when
the law or the nature of the obligation requires
solidarity.” Article 1210 supplies further caution
against the broad interpretation
o f s o lid a r ity b y p ro v id in g : “T h e in d iv is ib ility o f an
obligation does not necessarily give rise to solidarity.
Nor does solidarity of itself imply indiv is ib il ity .” T h e se
Civ il Co d e p rovis io n s establish that in case of
concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the
absence of express and indubitable terms
characterizing the obligation as solidary, the
presumption is that the obligation is only joint. It thus
becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such
fact with a preponderance of evidence. Note that
Article 2047 itself specifically calls for the application
of the provisions on joint and solidary obligations to
surety ship contracts. Article 1217 of the Civil Code
thus comes into play, recognizing the right of
reimbursement from a co-debtor (the principal
debtor, in case of suretyship) in favor of the one who
paid (i.e. the surety).
However, a significant distinction still lies between a
joint and several debtor, on one hand, and a surety on
the other. Solidarity signifies that the creditor can
compel any one of the joint and several debtors or
the surety alone to answer for the entirety of the
principal debt. The difference lies in the respective
faculties of the joint and several debtor and the surety
to seek reimbursement for the sums they paid out to
the creditor. In the case of joint and several debtors,
Article1217 makes plain
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 60

that the solidary debtor who effected the payment Lucky Star Drilling & Construction Corporation (Lucky
to the creditor “may claim from his co- debtors only Star) - obligor
the share which corresponds to each, with the Stronghold Insurance Company (Stronghold) – surety,
interest for the payment already made.” Such solidary respondent
debtor will not be able to recover from the co-debtors
the full amount already paid to the creditor, because FACTS: ABC entered into an agreement with Lucky
the right to recovery extends only to the proportional Star as part of the completion of its project to
share of the other co-debtors, and not as to the construct the ACG Commercial Complex. Lucky Star
particular proportional share of the solidary debtor was to supply labor, materials, tools, and equipment
who already paid. In contrast, even as the surety is including technical supervision to drill one (1)
solidarily bound with the principal debtor to the exploratory production well on the project site.
creditor, the surety who does pay the creditor has the
right to recover the full amount paid, and not just To guarantee faithful compliance with their
any proportional share, from the principal debtor or agreement, Lucky Star engaged respondent Stronghold
debtors. Such right to full reimbursement falls within which issued two (2) bonds in favor of petitioner ABC.
the other rights, actions and benefits which pertain to
the surety by reason of the subsidiary obligation ABC paid Lucky Star P575,000.00 as advance payment,
assumed by the surety. representing 50% of the contract price. Lucky Star,
thereafter, commenced the drilling work.
Decision: Petitioners and Matti are jointly liable to
Ortigas, Jr. in the amount of P1.3M; Legal interest of On agreed completion date, Lucky Star managed to
12% per annum on P 1.3M computed from March accomplish only 10% of the drilling work. ABC sent a
14, 1994. Assailed rulings are affirmed. Costs against demand letter to Lucky Star for the immediate
petitioners. completion of the drilling work. However, Lucky Star
failed to fulfill its obligation.
Note: A guarantor who binds himself in solidum with
the principal debtor under the provisions of the ABC sent Notice of Rescission of Contract with Demand
second paragraph does not become a solidary co- for Damages to Lucky Star and a Notice of Claim for
debtor to all intents and purposes. payment to Stronghold to make good its obligation
under its bonds.
Despite notice, ABC did not receive any reply either
SURETY SOLIDARY CO- from Lucky Star or Stronghold, prompting it to file its
DEBTOR Complaint for Rescission with Damages against both
before the RTC.
Outside of the liability he Solidarity signifies that
assumes to pay the debt the creditor can compel
RTC rendered the assailed decision ordering Lucky
before the property of any one of the joint and Star to pay ABC but absolving Stronghold from
the principal debtor has several debtors or the liability. Relevant parts of the decision reads: “The
been exhausted surety alone to answer surety bond and performance bond executed by
for the entirety of the defendants Lucky Star and Stronghold Insurance are in
principal debt. the nature of accessory contracts which depend for its
Has the right to recover “May claim from his co- existence upon another contract. Thus, when the
the full amount paid, and debtors only the share agreement between the plaintiff Asset Builders and
not just any proportional which corresponds to defendant Lucky Star was rescinded, the surety and
share, from the principal each, with the interest performance bond were automatically cancelled.”
debtor or debtors. for the payment already
made.” Thus, Asset Builders filed this present petition for
Subsidiary Solidary review on certiorari assailing decision of RTC which
ASSET BUILDERS VS STRONGHOLD orders defendant Lucky Star to pay

Asset Builders Corp (ABC) – obligee, petitioner


petitioner Asset Builders the sum of P575,000.00 with
damages, but absolving respondent Stronghold
Insurance of any liability on its Surety Bond and
Performance Bond.
ISSUE: Whether or not respondent insurance
company, as surety, can be held liable under its
bonds.
HELD: Yes. As provided in Article 2047, the surety
undertakes to be bound solidarily with the principal
obligor. That undertaking makes a surety agreement
an ancillary contract as it presupposes the existence of
a principal contract. Although the contract of a surety is
in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt
or duty of another although it possesses no direct or
personal interest over the obligations nor does it
receive any benefit therefrom. Let it be stressed that
notwithstanding the fact that the surety contract is
secondary to the principal obligation, the surety
assumes liability as a regular party to the undertaking.
Suretyship, in essence, contains two types of
relationship – the principal relationship between the
obligee (petitioner) and the obligor (Lucky Star), and
the accessory surety relationship between the
principal (Lucky Star) and the surety (respondent). In
this arrangement, the obligee accepts the surety’s
solidary undertaking to pay if the obligor does not
pay. Such acceptance, however, does not change in
any material way the obligee’s relationship with the
principal obligor. Neither does it make the surety an
active party to the principal obligee-obligor
relationship. Thus, the acceptance does not give the
surety the right to intervene in the principal contract.
The surety’s role arises only upon the obligor’s
default, at which time, it can be directly held liable
by the obligee for payment as a solidary obligor.
In the case at bench, when Lucky Star failed to finish
the drilling work within the agreed time frame
despite petitioner’s demand for completion, it was
already in delay. Due to this default, Lucky Star’s liability
attached and, as a necessary consequence,
respondent’s liability under the surety agreement
arose.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 61
Undeniably, when Lucky Star reneged on its
undertaking with the petitioner and further failed to
return the P575,000.00 downpayment that was
already advanced to it, respondent, as surety,
became solidarily bound with Lucky Star for the
repayment of the said amount to petitioner.
Contrary to the trial court’s ruling, respondent
insurance company was not automatically released
from any liability when petitioner resorted to the
rescission of the principal contract for failure of the
other party to perform its undertaking. Precisely, the
liability of the surety arising from the surety contracts
comes to life upon the solidary obligor’s default. It
should be emphasized that petitioner had to choose
rescission in order to prevent further loss that may
arise from the delay of the progress of the project.
Without a doubt, Lucky Star’s unsatisfactory progress
in the drilling work and its failure to complete it in due
time amount to non-performance of its obligation.
In fine, respondent should be answerable to
petitioner on account of Lucky Star’s non-
performance of its obligation as guaranteed by the
performance bond.
Finally, Article 1217 of the New Civil Code
acknowledges the right of reimbursement from a co-
debtor (the principal co-debtor, in case of suretyship)
in favor of the one who paid (the surety). Thus,
respondent is entitled to reimbursement from Lucky
Star for the amount it may be required to pay petitioner
arising from its bonds.
CASTELLVI DE HIGGINS VS SELLNER
(L-158025, November 5, 1920)
FACTS: Higgins filed an action to recover against
Sellner the sum of P10,000. The basis of the action is
a letter written by defendant George C. Sellner to
John T. Macleod, agent for Mrs. Horace L. Higgins, on
May 31, 1915, of the following tenor:
DEAR SIR: I hereby obligate and bind myself,
my heirs, successors and assigns that if the
promissory note executed the 29th day of
May, 1915 by the Keystone Mining Co., W.H.
Clarke,

and John Maye, jointly and severally, in your
favor and due six months after date for Pesos
10,000 is not fully paid at maturity with
interest, I will, within fifteen days after notice
of such default, pay you in cash the sum of
P10,000 and interest upon your surrendering
to me the three thousand shares of stock of
the Keystone Mining Co. held by you as
security for the payment of said note.
Respectfully,
(Sgd.) GEO. C. SELLNER.
Higgins contends that he is a surety while Sellner
contends that he is a guarantor.
ISSUE: What is the status of the transaction?
GUARANTY.
HELD: In the original Spanish of the Civil Code now in
force in the Philippine Islands, Title XIV of Book IV is
entitled "De la Fianza." The Spanish word "fianza" is
translated in the Washington and Walton editions of
the Civil Code as "security." "Fianza" appears in the
Fisher translation as"suretyship." The Spanish word
"fiador" is found in all of the English translations of the
Civil Code as "surety." The law of guaranty is not
related of by that name in the Civil Code, although
indirect reference to the same is made in the Code of
Commerce. In terminology at least, no distinction is
made in the Civil Code between the obligation of a
surety and that of a guarantor.
A surety and a guarantor are alike in that each
promises to answer for the debt or default of
another. A surety and a guarantor are unlike in that
the surety assumes liability as a regular party to the
undertaking, while the liability as a regular party to
upon an independent agreement to pay the
obligation if the primary pay or fails to do so. A
surety is charged as an original promissory; the
engagement of the guarantor is a collateral
undertaking. The obligation of the surety is primary;
the obligation of the guarantor is secondary.
Turning back again to our Civil Code, we first note
that according to article 1822 "By fianza (security or
suretyship) one person binds himself to pay or perform
for a third person in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 62
case the latter should fail to do so." But "If the surety
binds himself in solidum with the principal debtor, the
provisions of Section fourth, Chapter third, Title first,
shall be applicable." What the first portion of the
cited article provides is, consequently, seen to be
somewhat akin to the contract of guaranty, while what
is last provided is practically equivalent to the contract
of suretyship. When in subsequent articles found in
section 1 of Chapter II of the title concerning fianza,
the Code speaks of the effects of suretyship
between surety and creditor, it has, in comparison
with the common law, the effect of guaranty between
guarantor and creditor. The civil law suretyship is,
accordingly, nearly synonymous with the common
law guaranty; and the civil law relationship existing
between codebtors liable in solidum is similar to the
common law suretyship.
It is perfectly clear that the obligation assumed by
SELLNER was simply that of a guarantor, or, to be
more precise, of the fiador whose responsibility is fixed
in the Civil Code. The letter of Mr. Sellner recites that
if the promissory note is not paid at maturity, then,
within fifteen days after notice of such default and
upon surrender to him of the three thousand shares
of Keystone Mining Company stock, he will assume
responsibility. Sellner is not bound with the principals
by the same instrument executed at the same time
and on the same consideration, but his responsibility is
a secondary one found in an independent collateral
agreement. Neither is Sellner jointly and severally
liable with the principal debtors.
With particular reference, therefore, to assignments
of error, Sellner is a guarantor within the meaning of the
provisions of the Civil Code.
There is also an equitable aspect to the case which
reenforces this conclusion. The note executed by the
Keystone Mining Company matured on November 29,
1915. Interest on the note was not accepted by the
makers until September 30, 1916. When the note
became due, it is admitted that the shares of stock used
as collateral security were selling at par; that is, they
were worth pesos 30,000. Notice that the note had
not been paid was not given to and when the
Keystone Mining Company stock was worthless. Sellner,
consequently, through

the laches of plaintiff, has lost possible chance to
recoup, through the sale of the stock, any amount
which he might be compelled to pay as a surety or
guarantor. The "indulgence," as this word is used in
the law of guaranty, of the creditors of the principal,
as evidenced by the acceptance of interest, and by
failure promptly to notify the guarantor, may thus
have served to discharge the guarantor.
PALMARES VS CA
(288 SCRA, 422, G.R. No. 126490, March 31,
1998)
FACTS: Pursuant to a promissory note dated March
13, 1990, private respondent M.B. Lending
Corporation extended a loan to the spouses Osmeña
and Merlyn Azarraga, together with petitioner
Estrella Palmares, in the amount of P30,000.00
payable on or before May 12, 1990, with
compounded interest at the rate of 6% per annum
to be computed every 30 days from the date thereof.
On four occasions after the execution of the
promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a
total of P16,300.00, thereby leaving a balance of
P13,700.00. No payments were made after the last
payment on September 26, 1991.
Consequently, on the basis of petitioner's solidary
liability under the promissory note, Respondent
Corporation filed a complaint against petitioner
Palmares as the lone party defendant, to the
exclusion of the principal debtors, allegedly by reason
of the insolvency of the latter.
In her Amended Answer with Counterclaim, petitioner
alleged that sometime in August 1990, immediately
after the loan matured, she offered to settle the
obligation with respondent corporation but the latter
informed her that they would try to collect from the
spouses Azarraga and that she need not worry about it;
that there has already been a partial payment in the
amount of P17,010.00; that the interest of 6% per
month compounded at the same rate per month, as
well as the penalty charges of 3% per month, are
usurious and unconscionable; and that while she
agrees to be liable on the note but only upon default
of the principal debtor, respondent corporation acted
in bad
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 63
faith in suing her alone without including the
Azarragas when they were the only ones who
benefited from the proceeds of the loan.
ISSUE: Where a party signs a promissory note as a co-
maker and binds herself to be jointly and severally
liable with the principal debtor in case the latter
defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a
surety as an insurer of the debt, or of a guarantor who
warrants the solvency of the debtor? SURETY
HELD: The Civil Code pertinently provides: Art. 2047.
By guaranty, a person called the guarantor binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title
I of this Book shall be observed. In such case the
contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts
that if the terms of a contract are clear and leave
no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall
control. In the case at bar, petitioner expressly bound
herself to be jointly and severally or solidarily liable
with the principal maker of the note. The terms of
the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety.
A surety is an insurer of the debt, whereas a
guarantor is an insurer of the solvency of the debtor.
A suretyship is an undertaking that the debt shall be
paid; a guaranty, an undertaking that the debtor shall
pay. Stated differently, a surety promises to pay the
principal's debt if the principal will not pay, while a
guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety
binds himself to perform if the principal does not,
without regard to his ability to do so. A guarantor, on
the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other
words, a surety undertakes directly for the payment
and is so responsible at once if the principal debtor
makes default, while a guarantor contracts to

pay if, by the use of due diligence, the debt cannot
be made out of the principal debtor.
In a desperate effort to exonerate herself from liability,
petitioner erroneously invokes the rule on strictissimi
juris, which holds that when the meaning of a contract
of indemnity or guaranty has once been judicially
determined under the rule of reasonable construction
applicable to all written contracts, then the liability of
the surety, under his contract, as thus interpreted and
construed, is not to be extended beyond its strict
meaning. The rule, however, will apply only after it
has been definitely ascertained that the contract is one
of suretyship and not a contract of guaranty. It cannot
be used as an aid in determining whether a party's
undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there
can be no doubt that the stipulation contained in the
third paragraph of the controverted suretyship
contract merely elucidated on and made more specific
the obligation of petitioner as generally defined in the
second paragraph thereof. Resultantly, the theory
advanced by petitioner, that she is merely a
guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for
being incongruent with the judicial pronouncements
adverted to above.
In this regard, we need only to reiterate the rule
that a surety is bound equally and absolutely with the
principal, and as such is deemed an original
promisor and debtor from the beginning. It will
further be observed that petitioner's undertaking as
co-maker immediately follows the terms and
conditions stipulated between respondent corporation,
as creditor, and the principal obligors. A surety is
usually bound with his principal by the same
instrument, executed at the same time and upon the
same consideration; he is an original debtor, and his
liability is immediate and direct. A surety usually
enters into the same obligation as that of his
principal, and the signatures of both usually appear
upon the same instrument, and the same
consideration usually supports the obligation for both
the principal and the surety.
There is no merit in petitioner's contention that the
complaint was prematurely filed because
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 64
the principal debtors cannot as yet be considered in
default, there having been no judicial or extrajudicial
demand made by respondent corporation. Significantly,
paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of
payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no longer
necessary in order that delay may exist since the
contract itself already expressly so declares. As a surety,
petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is
not necessary before bringing suit against them, since
the commencement of the suit is a sufficient demand.
On this point, it may be worth mentioning that a
surety is not even entitled, as a matter of right, to be
given notice of the principal's default. Inasmuch as
the creditor owes no duty of active diligence to take
care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default
of the principal cannot have the effect of discharging
the surety. The surety is bound to take notice of the
principal's default and to perform the obligation. He
cannot complain that the creditor has not notified
him in the absence of a special agreement to that
effect in the contract of suretyship.
A creditor's right to proceed against the surety exists
independently of his right to proceed against the
principal.
Under Article 1216 of the Civil Code, the creditor
may proceed against any one of the solidary debtors
or some or all of them simultaneously. The rule,
therefore, is that if the obligation is joint and several,
the creditor has the right to proceed even against the
surety alone. Since, generally, it is not necessary for
the creditor to proceed against a principal in order to
hold the surety liable, where, by the terms of the
contract, the obligation of the surety is the same that
of the principal, then soon as the principal is in
default, the surety is likewise in default, and may
be sued immediately and before any proceedings are
had against the principal. Perforce, in accordance
with the rule that, in the absence of statute or
agreement otherwise, a surety is primarily liable, and
with the rule that his proper remedy is to pay the
debt and

pursue the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in the
absence of any agreement limiting the application of
the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust
his remedies against the principal, particularly where
both principal and surety are equally bound.
We agree with respondent corporation that its mere
failure to immediately sue petitioner on her
obligation does not release her from liability. Where
a creditor refrains from proceeding against the
principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does
not affect the creditor's rights vis-a-vis the surety,
unless the surety requires him by appropriate notice
to sue on the obligation. Such gratuitous indulgence
of the principal does not discharge the surety whether
given at the principal's request or without it, and
whether it is yielded by the creditor through
sympathy or from an inclination to favor the
principal, or is only the result of passiveness. The
neglect of the creditor to sue the principal at the time
the debt falls due does not discharge the surety, even if
such delay continues until the principal becomes
insolvent. And, in the absence of proof of resultant
injury, a surety is not discharged by the creditor's mere
statement that the creditor will not look to the
surety, or that he need not trouble himself. The
consequences of the delay, such as the subsequent
insolvency of the principal, or the fact that the
remedies against the principal may be lost by lapse of
time, are immaterial.
The raison d'être for the rule is that there is
nothing to prevent the creditor from proceeding against
the principal at any time. At any rate, if the surety is
dissatisfied with the degree of activity displayed by the
creditor in the pursuit of his principal, he may pay
the debt himself and become subrogated to all the
rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a
debtor in default, by delay permitted by the creditor
without change in the time when the debt might be
demanded, does not constitute an extension of the
time of payment, which would release the surety. In
order to constitute an extension discharging the
surety, it should
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 65
appear that the extension was for a definite period,
pursuant to an enforceable agreement between the
principal and the creditor, and that it was made
without the consent of the surety or with a
reservation of rights with respect to him. The
contract must be one which precludes the creditor
from, or at least hinders him in, enforcing the
principal contract within the period during which he
could otherwise have enforced it, and which precludes
the surety from paying the debt.
None of these elements are present in the instant case.
Verily, the mere fact that respondent corporation gave
the principal debtors an extended period of time
within which to comply with their obligation did not
effectively absolve here in petitioner from the
consequences of her undertaking. Besides, the burden
is on the surety, herein petitioner, to show that she
has been discharged by some act of the creditor,
herein respondent corporation, failing in which we
cannot grant the relief prayed for.
As a final issue, petitioner claims that assuming that
her liability is solidary, the interests and penalty
charges on the outstanding balance of the loan cannot
be imposed for being illegal and unconscionable.
Petitioner additionally theorizes that respondent
corporation intentionally delayed the collection of the
loan in order that the interests and penalty charges
would accumulate. The statement, likewise traversed
by said respondent, is misleading.
MACHETTI VS HOSPICIO DE SAN JOSE
(G.R. No. L-16666, April 10, 1922)
FACTS: Machetti undertook to construct a building for
Hospicio de San Jose. In such written agreement,
Macheti obtained the ‘guarantee’ of Fidelity and
Surety Company of the Philippine Islands.
Machetti undertook the construction with the
supervision of the Hospicio architect. Machetti was
paid for the work with the exception of P4, 978 to
which the former filed a complaint. A counterclaim
with damages was field by Hospicio alleging that the
work has not been carried out in accordance with the
specifications provided in the agreement.

Machetti was thereafter declared as insolvent and the
proceeding was suspended.
Hospicio filed a motion asking that Fidelity be made a
cross defendant and that the proceeding continue as
against such company. The Court granted the motion
and Hospicio sought to recover from Fidelity the
amount of P12, 800 as guaranty. The Court ruled in
favor of Hospicio hence this present appeal.
ISSUE: WON recourse can be had against Fidelity as
guaranty? NO (not yet)
HELD: (Discussion centered on the difference of surety
and guaranty)
It appear that the contract is the guarantor's
separate undertaking in which the principal does not
join, that its rests on a separate consideration moving
from the principal and that although it is written in
continuation of the contract for the construction of the
building, it is a collateral undertaking separate and
distinct from the latter. All of these circumstances are
distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the
principal does not pay, the guarantor only binds
himself to pay if the principal cannot pay. The one is the
insurer of the debt, the other an insurer of the solvency
of the debtor. This latter liability is what the Fidelity
and Surety Company assumed in the present case.
The undertaking is perhaps not exactly that of a
fianza under the Civil Code, but is a perfectly valid
contract and must be given the legal effect if ordinarily
carries. The Fidelity and Surety Company having
bound itself to pay only the event its principal,
Machetti, cannot pay it follows that it cannot be
compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the
return of a writ of execution unsatisfied or by other
means, but is not sufficiently established by the mere
fact that he has been declared insolvent in insolvency
proceedings under our statutes, in which the extent
of the insolvent's inability to pay is not determined
until the final liquidation of his estate.
Therefore, Hospicio much first exhaust all its
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 66
remedy against Machetti.
GILAT SATELLITE NETWORKS LTD. v. UNITED
COCONUT PLANTERS BANK GENERAL INSURANCE CO.,
INC.
FACTS: On September 15, 1999, One Virtual placed
with GILAT a purchase order for various
telecommunications equipment, accessories, spares,
services and software, at a total purchase price of US$
2,128,250.00. Of the said purchase price for the
goods delivered, One Virtual promised to pay a
portion thereof totalling US$1.2 Million in accordance
with the payment schedule dated
22 November 1999. To ensure the prompt payment of
this amount, it obtained defendant UCPB’s surety
bond dated 3 December 1999, in favor of GILAT.
During the period between September 1999 and June
2000, GILAT shipped and delivered to One Virtual the
purchased products and equipment, as evidenced by
airway bills/Bill of Lading. All of the equipment,
including the software components for which
payment was secured by the surety bond, was
shipped by GILAT and duly received by One Virtual.
Under an endorsement dated December 23, 1999, the
surety issued, with One Virtuals conformity, an
amendment to the surety bond, Annex A thereof,
correcting its expiry date from May 30, 2001 to July 30,
2001.
One Virtual failed to pay GILAT the amount of US$
400,000.00 on the due date of May 30, 2000 in
accordance with the payment schedule to the surety
bond, prompting GILAT to write the surety defendant
UCPB on June 5, 2000, a demand letter for payment of
the said amount of US$400,000.00. No part of the
amount set forth in this demand has been paid to
date by either One Virtual or defendant UCPB. One
Virtual likewise failed to pay on the succeeding
payment installment date of 30 November 2000 of
the surety bond, prompting GILAT to send a second
demand letter dated January 24, 2001, for the
payment of the full amount of US$1,200,000.00
guaranteed under the surety bond, plus interests and
expenses and which letter was received by the
defendant surety on January 25, 2001. However,
defendant UCPB failed to settle the amount of
US$1,200,000.00 or a part thereof, hence, the instant
complaint.

Gilat filed a Complaint against respondent UCPB to
recover the amounts supposedly covered by the
surety bond, plus interests and expenses.
ISSUES:
1. WON the CA erred in dismissing the case and
ordering petitioner and One Virtual to arbitrate.
2. WON petitioner is entitled to legal interest due
to the delay in the fulfillment by respondent of
its obligation under the Suretyship Agreement.
HELD:
Suretyship Agreement
The existence of a suretyship agreement does not give
the surety the right to intervene in the principal
contract, nor can an arbitration clause between the
buyer and the seller be invoked by a non-party such
as the surety.
Petitioner alleges that arbitration laws mandate that no
court can compel arbitration, unless a party entitled
to it applies for this relief. This referral, however,
can only be demanded by one who is a party to
the arbitration agreement. Considering that neither
petitioner nor One Virtual has asked for a referral,
there is no basis for the CAs order to arbitrate.
Moreover, Articles 1216 and 2047 of the Civil Code
clearly provide that the creditor may proceed against
the surety without having first sued the principal
debtor. Even the Surety Agreement itself states that
respondent becomes liable upon mere failure of the
Principal to make such prompt payment. Thus,
petitioner should not be ordered to make a separate
claim against One Virtual (via arbitration) before
proceeding against respondent.
On the other hand, respondent maintains that a
surety contract is merely an accessory contract,
which cannot exist without a valid obligation. Thus, the
surety may avail itself of all the defenses available to
the principal debtor and inherent in the debt that is,
the right to invoke the arbitration clause in the
Purchase Agreement.
We agree with petitioner.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 67
In suretyship, the oft-repeated rule is that a surety’s
liability is joint and solidary with that of the principal
debtor. This undertaking makes a surety agreement
an ancillary contract, as it presupposes the existence
of a principal contract. Nevertheless, although the
contract of a surety is in essence secondary only to a
valid principal obligation, its liability to the creditor or
promise of the principal is said to be direct, primary and
absolute; in other words, a surety is directly and
equally bound with the principal. He becomes liable
for the debt and duty of the principal obligor, even
without possessing a direct or personal interest in the
obligations constituted by the latter. Thus, a surety
is not entitled to a separate notice of default or to
the benefit of excussion. It may in fact be sued
separately or together with the principal debtor.
After a thorough examination of the pieces of
evidence presented by both parties, the RTC found
that petitioner had delivered all the goods to One
Virtual and installed them. Despite these compliances,
One Virtual still failed to pay its obligation, triggering
respondent’s liability to petitioner as the formers
surety. In other words, the failure of One Virtual, as
the principal debtor, to fulfill its monetary obligation to
petitioner gave the latter an immediate right to
pursue respondent as the surety.
Consequently, we cannot sustain respondents claim
that the Purchase Agreement, being the principal
contract to which the Suretyship Agreement is
accessory, must take precedence over arbitration as
the preferred mode of settling disputes.
First, the acceptance of a surety agreement does
not change in any material way the creditor’s
relationship with the principal debtor nor does it
make the surety an active party to the principal
creditor-debtor relationship. In other words, the
acceptance does not give the surety the right to
intervene in the principal contract. The surety’s role
arises only upon the debtors default, at which time, it
can be directly held liable by the creditor for
payment as a solidary obligor. Hence, the surety
remains a stranger to the Purchase Agreement. We
agree with petitioner that respondent cannot invoke
in its favor the arbitration clause in the Purchase
Agreement, because it is not a party

to that contract. An arbitration agreement being
contractual in nature, it is binding only on the parties
thereto, as well as their assigns and heirs.
Second, Section 24 of Republic Act No. 928542 is clear
in stating that a referral to arbitration may only take
place if at least one party so requests not later than
the pre-trial conference, or upon the request of both
parties thereafter. Respondent has not presented even
an iota of evidence to show that either petitioner or
One Virtual submitted its contesting claim for
arbitration.
Third, sureties do not insure the solvency of the
debtor, but rather the debt itself. They are contracted
precisely to mitigate risks of nonperformance on the
part of the obligor. This responsibility necessarily places
a surety on the same level as that of the principal
debtor. The effect is that the creditor is given the right
to directly proceed against either principal debtor or
surety. This is the reason why excussion cannot be
invoked. To require the creditor to proceed to
arbitration would render the very essence of
suretyship nugatory and diminish its value in
commerce. If the surety is dissatisfied with the degree
of activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and become
subrogated to all the rights and remedies of the
creditor.
Interest; Delay
Interest, as a form of indemnity, may be awarded to
a creditor for the delay incurred by a debtor in the
payment of the latter’s obligation, provided that the
delay is inexcusable.
Anent the issue of interests, petitioner alleges that it
deserves to be paid legal interest of 12% per annum
from the time of its first demand on respondent on 5
June 2000 or at most, from the second demand on
24 January 2001 because of the latter’s delay in
discharging its monetary obligation. Citing Article 1169
of the Civil Code, petitioner insists that the delay
started to run from the time it demanded the
fulfilment of respondent’s obligation under the
suretyship contract. Significantly, respondent does not
contest this point, but instead argues that it is only
liable for legal interest of 6% per annum from the
date of petitioner’s last
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 68
demand on 24 January 2001.
We sustain petitioner. Article 2209 of the Civil Code is
clear: if an obligation consists in the payment of a
sum of money, and the debtor incurs a delay, the
indemnity for damages, there being no stipulation to
the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the
legal interest.
Delay arises from the time the obligee judicially or
extrajudicially demands from the obligor the
performance of the obligation, and the latter fails to
comply. Delay, as used in Article 1169, is synonymous
with default or mora, which means delay in the
fulfilment of obligations. It is the nonfulfillment of
an obligation with respect to time.52 In order for
the debtor (in this case, the surety) to be in default, it
is necessary that the following requisites be present:
(1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance
judicially or extrajudicially.
Having held that a surety upon demand fails to pay, it
can be held liable for interest, even if in thus paying, its
liability becomes more than the principal obligation.
The increased liability is not because of the contract,
but because of the default and the necessity of judicial
collection.
However, for delay to merit interest, it must be
inexcusable in nature.
As to the issue of when interest must accrue, our Civil
Code is explicit in stating that it accrues from the
time judicial or extrajudicial demand is made on the
surety. This ruling is in accordance with the provisions
of Article 1169 of the Civil Code and of the settled
rule that where there has been an extra-judicial
demand before an action for performance was filed,
interest on the amount due begins to run, not from
the date of the filing of the complaint, but from the
date of that extra-judicial demand. Considering that
respondent failed to pay its obligation on 30 May
2000 in accordance with the Purchase Agreement,
and that the extrajudicial demand of petitioner was
sent on
5 June 2000, we agree with the latter that interest must
start to run from the time petitioner sent its first
demand letter (5 June 2000), because the obligation
was already due and demandable at that time.

WILLEX PLASTIC, INC. V. CA, INTERNATIONAL
CORPORATE BANK (1996)
Doctrine: It is never necessary that a guarantor or
surety should receive any part or benefit, if such there
be, accruing to his principal
FACTS: 1978: Inter-Resin took out a loan from Manila
Bank. As additional security, Inter- Resin and
Investment Underwriting
(IUCP) executed a Continuing Surety Agreement stating
that they are liable to Manila Bank solidarily for the
loan taken out by Inter- Resin.
1979: Inter-Resin and Willex Plastic executed a
Continuing Guarantee for the loan which Inter-Resin
obtained from Investment Underwriting to the extent of
P5M.
1981: Investment Underwriting (IUCP) paid Manila Bank
P4M to satisfy Inter-Resin’s 1978 Obligation.
Investment Underwriting (IUCP) then demanded
payment of the P4M from both Inter-Resin and Willex.
Inter-Resin paid IUCP P600K from the proceeds
of its fire insurance
Willex denied obligation, it alleged that it is only a
guarantor of the principal, hence its liability was only
secondary to the principal and that it did not receive
consideration nor benefit from the contract between
the bank and Inter-Resin.
Willex insisted that IUCP should pursue Inter- Resin
and apply to the loan the assets of the latter first
before going after it.
Willex further alleged that it is guarantor of a loan to
Manila Bank and not to Interbank, hence the
Continuing Guaranty cannot be retroactive applied as
contracts of suretyship contemplates future dealing.
ISSUE: WON Willex is liable as guarantor for the loans
obtained by Inter-Resin to IUCP? – Yes
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 69
HELD: Intent is controlling: clear from the evidence
that the Continuing Guarantee executed by Willex
with Inter-Resin would cover sums obtained (in the
past– retroactive) and/or to be obtained by Inter-Resin
Industrial from Interbank.
Although a contract of suretyship is ordinarily not to
be construed as retrospective, in the end the intention
of the parties as revealed by the evidence is
controlling– apply it to the 1978 loan.
Guarantor or surety is bound by the same
consideration that makes the contract effective
between the principal parties thereto.
. . . It is never necessary that a guarantor or surety
should receive any part or benefit, if such there be,
accruing to his principal.
RCBC VS. HON. JOSE P. ARRO
31 July 1982
FACTS: Private respondent Residoro Chua, with
Enrique Go, Sr., executed a comprehensive surety
agreement to guaranty, above all, any existing or
future indebtedness of Davao Agricultural Industries
Corporation (Daicor), and/or induce the bank at
anytime or from time to time to make loans or
advances or to extend credit to said Daicor, provided
that the liability shall not exceed at any time
Php100,000.00.
A promissory note for Php100,000.00 (for additional
capital to the charcoal buy and sell and the activated
carbon importation business) was issued in favor of
petitioner RCBC payable a month after execution. This
was signed by Go in his personal capacity and in
behalf of Daicor. Respondent Chua did not sign in
said promissory note. As the note was not paid despite
demands, RCBC filed a complaint for a sum of money
against Daicor, Go and Chua.
The complaint against Chua was dismissed upon his
motion, alleging that the complaint states no cause of
action against him as he was not a signatory to the
note and hence he cannot be held liable. This was so
despite RCBC’s opposition, invoking the
comprehensive surety agreement which it holds to
cover not just the note in question but also every other
indebtedness that Daicor may

incur from petitioner bank. RCBC moved for
reconsideration of the dismissal but to no avail.
ISSUE: WON respondent Chua may be held liable
with Go and Daicor under the promissory note, even if
he was not a signatory to it, in light of the provisions
of the comprehensive surety agreement wherein he
bound himself with Go and Daicor, as solidary debtors,
to pay existing and future debts of said corporation.
HELD: Yes, he may be held liable. The
comprehensive surety agreement executed by Chua
and Go, as president and general manager,
respectively, of Daicor, was to cover existing as well as
future obligations which Daicor may incur with RCBC.
This was only subject to the proviso that their liability
shall not exceed at any one time the aggregate principal
amount of Php100,000.00. (Par.1 of said agreement).
The agreement was executed to induce petitioner
Bank to grant any application for a loan Daicor would
request for. According to said agreement, the guaranty
is continuing and shall remain in full force or effect until
the bank is notified of its termination.
During the time the loan under the promissory note
was incurred, the agreement was still in full force and
effect and is thus covered by the latter agreement.
Thus, even if Chua did not sign the promissory note,
he is still liable by virtue of the surety agreement.
The only condition necessary for him to be liable
under the agreement was that Daicor “is or may
become liable as maker, endorser, accept or or
otherwise.”
The comprehensive surety agreement signed by Go
and Chua was as an accessory obligation dependent
upon the principal obligation, i.e., the loan obtained by
Daicor as evidenced by the promissory note. The
surety agreement unequivocally shows that it was
executed to guarantee future debts that may be
incurred by Daicor with petitioner, as allowed under
NCC Art.2053.
“A guaranty may also be given as security for future
debts, the amount of which is not yet known; there
can be no claim against the guarantor until the debt is
liquidated. A conditional obligation may also be
secured.”
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 70
ATOK CORPORATION vs. COURT OF APPEALS, SANYU
CORPORATION, DANILO E. ARRIETA, NENITA B.
ARRIETA, PABLITO BERMUNDO and LEOPOLDO
HALILI
FACTS: SANYU as principal and Sanyu Trading along
with individual private stockholders of SC(Halili and
Bermundo) as sureties, executed in the continuing
Suretyship Agreement in favor of ATOK as creditor.
Under this Agreement, Sanyu Trading and Halili and
Bermudo jointly and severally unconditionally
guarantee to ATOK CORPORATION the full, faithful and
prompt payment and discharge of any and all
indebtedness of SANYU.
The word "indebtedness" is used herein in its most
comprehensive sense and includes any and all
advances, debts, obligations and liabilities of Principal
or any one or more of them,here[to]fore, now or
hereafter made, incurred or created, whether voluntary
or involuntary and however arising, whether direct or
acquired by the Creditor by assignment or succession,
whether due or not due, absolute or contingent,
liquidated or unliquidated, determined or
undetermined and whether the Principal may be may
be liable individually of jointly with others, or
whether recovery upon such indebtedness may be or
hereafter become barred by any statute of limitations,
or whether such indebtedness may be or otherwise
become unenforceable.
SANYU assigned its trade receivables (P125K) in
consideration of receipt from ATOK of the amount of
P105,000.00.
Later, additional trade receivables were assigned by
SANYU to ATOK with a total face value of P100,378.45.
Subsequently Atok commenced action against SANYU,
the Arrieta spouses, Pablito Bermundo and Leopoldo
Halili to collect the sum of P120,240.00 plus penalty
charges amounting to P0.03 for every peso due and
payable for each month starting from 1 September
1983.

ATOK alleged that SANYU had failed to collect and remit
the amount due under the trade receivables.
SANYU et al sought dismissal of Atok's claim upon
the ground that such claim had prescribed under
Article 1629 of the Civil Code and for lack of cause of
action. The private respondents contended that the
Continuing Suretyship Agreement, being an accessory
contract, was null and void since, at the time of its
execution, SANYU had no pre-existing obligation due
to ATOK.
ISSUE: Whether the individual private respondents
may be held solidarily liable with SANYU under the
provisions of the Continuing Suretyship Agreement. YES
OR Whether that Agreement must be held null and
void as having been executed without consideration
and without a pre-existing principal obligation to
sustain it. NO
HELD: It is true that a serious guaranty or a
suretyship agreement is an accessory contract in the
sense that it is entered into for the purpose of
securing the performance of another obligation which
is denominated as the principal obligation. It is also
true that Article 2052 of the Civil Code states that "a
guarantee cannot exist without a valid obligation."
This legal proposition is not, however, like most legal
principles, to be read in an absolute and literal
manner and carried to the limit of its logic.
Art. 2052. A guaranty cannot exist without a valid
obligation.
Nevertheless, a guaranty may be constituted to
guarantee the performance of a voidable or an
unenforceable contract. It may also guaranty a natural
obligation."
Art. 2053. A guaranty may also be given as security
for future debts, the amount of which is not yet
known; there can be no claim against the guarantor
until the debt is liquidated. A conditional obligation
may also be secured.
In National Rice and Corn Corporation v. Jose
A. Fojas and Alto Surety Co., Inc., appellant
Fojas questions the validity of the additional bonds on
the theory that when
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 71
they were executed, the principal obligation referred to
in said bonds had not yet been entered into, as no copy
thereof was attached to the deeds of suretyship. This
defense is untenable, because in its complaint the
NARIC averred, and the appellant did not deny that
these bonds were posted to secure the additional
credit that Fojas has applied for, and the credit
increase over his original contract was sufficient
consideration for the bonds. That the latter were signed
and filed before the additional credit was extended by
the NARIC is no ground for complaint. Article 1825 of the
Civil Code of 1889, in force in 1948, expressly
recognized that "a guaranty may also be given as
security for future debts the amount of which is not
yet known."
In Rizal Commercial Banking Corporation
v. Arro, the Court was confronted again with the
same issue, that is, whether private respondent was
liable to pay a promissory note dated 29 April 1977
executed by the principal debtor in the light of the
provisions of a comprehensive surety agreement
which petitioner bank and the private respondent had
earlier entered into on 19 October 1976. Under the
comprehensive surety agreement, the private
respondents had bound themselves as solidary debtors
of the Diacor Corporation not only in respect of
existing obligations but also in respect of future ones.
In holding private respondent surety (Residoro Chua)
liable under the comprehensive surety agreement, the
Court said that the surety agreement which was earlier
signed by Enrique Go, Sr. and private respondent, is an
accessory obligation, it being dependent upon a
principal one, which, in this case is the loan obtained
by Daicor as evidenced by a promissory note. What
obviously induced petitioner bank to grant the loan
was the surety agreement whereby Go and Chua
bound themselves solidarily to guaranty the punctual
payment of the loan at maturity. By terms that are
unequivocal, it can be clearly seen that the surety
agreement was executed to guarantee future debts
which Daicor may incur with petitioner, as is legally
allowable under the Civil Code.
In both Case Laws, the Court rejected the distinction
which the Court of Appeals in the case at bar
sought to make with respect to Article 2053, that is,
that the "future debts" referred to in that Article
relate to "debts

already existing at the time of the constitution of the
agreement but the amount of which is unknown,"
and not to debts not yet incurred and existing at
that time. Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even
before the principal obligation intended to be
secured thereby is born, any more that there would
be in saying that obligations which are subject to a
condition precedent are valid and binding before the
occurrence of the condition precedent.
Comprehensive or continuing surety agreements are
in fact quite common place in present day financial
and commercial practice. A bank or a financing
company which anticipates entering into a series of
credit transactions with a particular company,
commonly requires the projected principal debtor to
execute a continuing surety agreement along with its
sureties. By executing such an agreement, the
principal places itself in a position to enter into the
projected series of transactions with its creditor; with
such surety agreement, there would be no need to
execute a separate surety contract or bond for each
financing or credit accommodation extended to the
principal debtor. As we understand it, this is precisely
what happened in the case at bar.
JACINTO UY DIÑO and NORBERTO UY vs.
HON. COURT OF APPEALS and
METROPOLITAN BANK AND TRUST
COMPANY
FACTS: In 1977, Uy Tiam Enterprises and Freight
Services, thru its representative Uy Tiam, applied for
and obtained credit accommodations (LOC and TRA)
METROBANK in the sum of P700,000.00. To secure
the aforementioned credit accommodations Uy and
Diño executed separate Continuing Suretyships,
where Norberto UY agreed to pay METROBANK any
indebtedness of UTEFS up to the aggregate sum of
P300,000.00 while Jacinto Uy Diño agreed to be bound
up to the aggregate sum of P800,000.00. This
obligation was settled and paid by UTEFS.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 72
Again in 1979, UTEFS secured another credit
accommodation which was fully settled. They then
applied and obtained an irrevocable letter of credit in
the sum of P815, 600.00, covered UTEFS' purchase of
"8,000 Bags Planters Urea and 4,000 Bags Planters 21-
0-0." It was applied for and obtain by UTEFS
without the participation of Norberto Uy and Jacinto
Uy Diño as they did not sign the document
denominated as "Commercial Letter of Credit and
Application." Also, they were not asked to execute any
suretyship to guarantee its payment. Neither did
METROBANK nor UTEFS inform them that the 1979
Letter of Credit has been opened and the Continuing
Suretyships separately executed in February, 1977
shall guarantee its payment.
UTEFS executed and delivered to METROBANK the
Trust Receipt whereby the former acknowledged
receipt in trust from the latter of the aforementioned
goods from Planters Products which amounted to
P815,
600.00. Being the entrusted, the former agreed to
deliver to METROBANK the entrusted goods in the
event of non-sale or, if sold, the proceeds of the
sale thereof, on or before September 2, 1979.
However, UTEFS did not acquiesce to the obligatory
stipulations in the trust receipt.
METROBANK sent letters to the said principal obligor
and its sureties, Uy and Uy Diño, demanding payment
of the amount due.
Diño denied his liability saying that he cannot be held
liable for the 1979 credit accommodation because it is
a new obligation contracted without his participation.
Besides, the 1977 credit accommodation which he
guaranteed has been fully paid. Accordingly, the
Continuing Suretyships executed in 1977 cannot be
availed of to secure Uy Tiam's Letter of Credit obtained
in 1979 because a guaranty cannot exist without a
valid obligation. It was further argued that they
cannot be held liable for the obligation contracted in
1979 because they are not privies thereto as it was
contracted without their participation.
METROBANK contends that the terms and conditions
embodied in the comprehensive

suretyships separately executed by sureties-
defendants, the bank argued that sureties- movants
bound themselves as solidary obligors of defendant Uy
Tiam to both existing obligations and future ones
based on Article 2053
ISSUE: Whether petitioners are liable as sureties for the
1979 obligations of Uy Tiam to METROBANK by virtue
of the Continuing Suretyship Agreements they
separately signed in 1977. YES but only for the amount
or limit stated in the surety contract
HELD: A continuing guaranty is one which covers all
transactions, including those arising in the future,
which are within the description or contemplation of
the contract, of guaranty, until the expiration or
termination thereof. A guaranty shall be construed as
continuing when by the terms thereof it is evident that
the object is to give a standing credit to the principal
debtor to be used from time to time either
indefinitely or until a certain period, especially if the
right to recall the guaranty is expressly reserved.
Hence, where the contract of guaranty states that the
same is to secure advances to be made "from time
to time" the guaranty will be construed to be a
continuing one.
The use of particular words and expressions such as
payment of "any debt," "any indebtedness," "any
deficiency," or "any sum," or the guaranty of "any
transaction" or money to be furnished the principal
debtor "at any time," or "on such time" that the
principal debtor may require, have been construed
to indicate a continuing guaranty.
The Court looked into the provisions of the Surety
entered by Diño.
It shows that the suretyship agreement are continuing
in nature. Petitioners do not deny this; in fact, they
candidly admitted it. Neither have they denied the
fact that they had not revoked the suretyship
agreements. The purpose of the execution of the
Continuing Suretyships was to induce appellant to
grant any application for credit accommodation (letter
of credit/trust receipt) UTEFS may desire to obtain
from appellant bank. By its terms, each suretyship is
a continuing one
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 73
which shall remain in full force and effect until the
bank is notified of its revocation.
The Continuing Suretyship Agreements CAN be made
applicable to the 1979 obligation even if the latter was
not yet in existence when the agreements were
executed in 1977, as stated in Art 2053 par 2.
The limit of the petitioners respective liabilities must
be determined from the suretyship agreement each
had signed. The Continuing Suretyship Agreements
signed by petitioner Diño and petitioner Uy fix the
aggregate amount of their liability, at any given time,
at P800,000.00 and P300,000.00, respectively. It is also
stated in the contract that they are bound to pay for
the interest and for a reasonable amount of cost of
suit in case of judicial proceedings. The law is clear
that a guarantor may bond himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Thus, by express mandate of the Continuing
Suretyship Agreements which they had signed,
petitioners separately bound themselves to pay interest,
expenses, attorney's fees and costs.
Even without such stipulations, the petitioners would,
nevertheless, be liable for the interest and judicial
costs.
Article 2055 of the Civil Code provides that … A
guaranty is not presumed; it must be express and
cannot extend to more than what is stipulated
therein. If it be simple or indefinite, it shall comprise
not only the principal obligation, but also all its
accessories, including the judicial costs, provided with
respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been
judicially required to pay. Interest and damages are
included in the term accessories. However, such
interest should run only from the date when the
complaint was filed in court. Even attorney's fees may
be imposed whenever appropriate, pursuant to Article
2208 of the Civil Code.
FORTUNE MOTORS (PHILS.) CORPORATION
and EDGAR L. RODRIGUEZA vs. THE
HONORABLE

COURT OF APPEALS and FILINVEST CREDIT
CORPORATION
FACTS: In 1981, Joseph Chua and Edgar Rodrigueza
executed separate surety agreements in favor of
Fortune Motors (Phils.) Corporation to cover obligations
incurred by Fortune Motors whether they be
enforced or thereafter made (from the time of said
surety contracts).
In 1982, Fortune Motors secured cars from Canlubang
Automotive Resources Corporation (CARCO) via trust
receipts and drafts made by CARCO. These were
assigned to Filinvest Credit Corporation. Later
Filinvest, when the obligation matured, demanded
payment from Fortune Motor as well as from Chua
and Rodrigueza. No payment was made. A case was
filed. Rodrigueza averred that the surety agreement
was void because when it was signed in 1981, the
principal obligation (1982) did not yet exist.
ISSUE: Whether surety can exist even if there was no
existing indebtedness at the time of its execution. YES
HELD: Surety May Secure Future Obligations
The case at bench falls on all fours with Atok Finance
Corporation vs. Court of Appeals which reiterated our
rulings in National Rice and Corn Corporation (NARIC)
vs. Court of Appeals and Rizal Commercial Banking
Corporation vs. Arro.
Future obligations can be covered by a surety.
Comprehensive or continuing surety agreements are
in fact quite commonplace in present day financial
and commercial practice. A bank or financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties.
By executing such an agreement, the principal places
itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each financing
or credit accommodation extended to the principal
debtor.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 74
SOUTH CITY HOMES vs. BA
FACTS: Fortune Motors Corporation (Phils.) has been
availing of the credit facilities of plaintiff-appellant BA
Finance Corporation. On January 17, 1983, Joseph L.
G. Chua, President of Fortune Motors Corporation,
executed in favor of plaintiff-appellant a Continuing
Suretyship Agreement, in which he "jointly and
severally unconditionally" guaranteed the "full, faithful
and prompt payment and discharge of any and all
indebtedness" of Fortune Motors Corporation to BA
Finance Corporation.
On February 3, 1983, Palawan Lumber Manufacturing
Corporation plaintiff-appellant a Continuing Suretyship
Agreement in which, said corporation "jointly and
severally unconditionally" guaranteed the "full, faithful
and prompt payment and discharge of any and all
indebtedness of Fortune Motors Corporation to BA
Finance Corporation. On the same date, South City
Homes, Inc. represented by Edgar
C. Rodrigueza and Aurelio F. Tablante, likewise
executed a Continuing Suretyship Agreement in which
said corporation "jointly and severally unconditionally"
guaranteed the "full, faithful and prompt payment and
discharge of any and all indebtedness" of Fortune
Motors Corporation to BA Finance Corporation.
Upon failure of the defendant-appellant Fortune
Motors Corporation to pay the amounts due under
the drafts and to remit the proceeds of motor
vehicles sold or to return those remaining unsold in
accordance with the terms of the trust receipt
agreements, BA Finance Corporation sent demand
letter to Edgar C. Rodrigueza, South City Homes, Inc.,
Aurelio Tablante, Palawan Lumber Manufacturing
Corporation, Joseph L. G. Chua, George D. Tan and
Joselito C. Baltazar. Since the defendants-appellants
failed to settle their outstanding account with plaintiff-
appellant, the latter filed on December 22, 1983 a
complaint for a sum of money with prayer for
preliminary attachment.
On January 19, 1984, the defendants filed a Motion
to Dismiss. Therein, they alleged that conventional
subrogation effected a novation without the
consent of the debtor (Fortune

Motors Corporation) and thereby extinguished the
latter's liability; that pursuant to the trust receipt
transaction, it was premature under P.
D. No. 115 to immediately file a complaint for a sum of
money as the remedy of the entruster is an action for
specific performance; that the suretyship agreements
are null and void for having been entered into
without an existing principal obligation; and that
being such sureties does not make them solidary
debtors.
ISSUE: Whether the suretyship agreement is valid
HELD: On the first issue, petitioners assert that the
suretyship agreement they signed is void because
there was no principal obligation at the time of signing
as the principal obligation was signed six (6) months
later. The Civil Code, however, allows a suretyship
agreement to secure future loans even if the amount is
not yet known.
Article 2053 of the Civil Code provides that: "Art. 2053.
A guaranty may also be given as security for future
debts, the amount of which is not yet known. x x x"
In Fortune Motors (Phils.) Corporation v. Court of
Appeals we held:
"To fund their acquisition of new vehicles (which are
later retailed or resold to the general public), car
dealers normally enter into wholesale automotive
financing schemes whereby vehicles are delivered by
the manufacturer or assembler on the strength of
trust receipts or drafts executed by the car dealers,
which are backed up by sureties. These trust receipts
or drafts are then assigned and/or discounted by the
manufacturer to/with financing companies, which
assume payment of the vehicles but with the
corresponding right to collect such payment from
the car dealers and/or the sureties. In this manner,
car dealers are able to secure delivery of their stock-
in-trade without having to pay cash therefor;
manufacturers get paid without any receivables/
collection problems; and financing companies earn
their margins with the assurance of payment not only
from the dealers but also from the sureties. When
the vehicles are eventually resold, the car dealers are
supposed to pay the financing companies — and the
business goes merrily on. However, in the event
the car
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 75
dealer defaults in paying the financing company, may
the surety escape liability on the legal ground that
the obligations were incurred subsequent to the
execution of the surety contract?
"x x x Of course, a surety is not bound under any
particular principal obligation until that principal
obligation is born. But there is no theoretical or
doctrinal difficulty inherent in saying that the
suretyship agreement itself is valid and binding even
before the principal obligation intended to be secured
thereby is born, any more than there would be in
saying that obligations which are subject to a
condition precedent are valid and binding before
the occurrence of the condition precedent.
"Comprehensive or continuing surety agreements are
in fact quite commonplace in present day financial
and commercial practice. A bank or financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties.
By executing such an agreement, the principal places
itself in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each financing
or credit accommodation extended to the principal
debtor."
PACIFIC BANKING CORPORATION vs. IAC
FACTS: On October 24, 1975, Celia Syjuco Regala,
applied for and obtained from the plaintiff the
issuance and use of Pacificard credit card, under the
Terms and Conditions Governing the Issuance and Use
of Pacificard. On the same date, the defendant-
appelant Robert Regala, Jr., spouse of defendant Celia
Regala, executed a "Guarantor's Undertaking in favor
of the appellee Bank, whereby the latter agreed "jointly
and severally of Celia Aurora Syjuco Regala, to pay
the Pacific Banking Corporation upon demand, any and
all indebtedness, obligations, charges or liabilities due
and incurred by said Celia Aurora Syjuco Regala with
the use of the Pacificard, or renewals thereof, issued
in her favor by the

Pacific Banking Corporation". It was also agreed that
"any changes of or novation in the terms and
conditions in connection with the issuance or use of
the Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any
manner release me/us from responsibility hereunder, it
being understood that I fully agree to such charges,
novation or extension, and that this understanding is
a continuing one and shall subsist and bind me until
the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid.
The defendant Celia Regala, as such Pacificard holder,
had purchased goods and/or services on credit under
her Pacificard, for which the plaintiff advanced the
cost amounting to P92,803.98 at the time of the filing
of the complaint.
In view of defendant Celia Regala's failure to settle
her account for the purchases made thru the use of the
Pacificard, a written demand was sent to the latter and
also to the defendant Roberto Regala, Jr. under his
"Guarantor's Undertaking."
Private respondent Roberto Regala, Jr. was made liable
only to the extent of the monthly credit limit granted
to Celia Regala, i.e., at P2,000.00 a month and only for
the advances made during the one year period of the
card's effectivity counted from October 29, 1975 up to
October 29, 1976
ISSUE: What is the extent of Roberto’s liability?
HELD: It is true that under Article 2054 of the Civil
Code, "(A) guarantor may bind himself for less, but not
for more than the principal debtor, both as regards the
amount and the onerous nature of the conditions. 2
It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in using the
card beyond the original period of its effectivity,
October 29, 1979. We do not agree however, that
Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his
wife, expressly bound himself up to the extent of the
debtor's (Celia) indebtedness likewise expressly waiving
any "discharge in case of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 76
any change or novation of the terms and conditions
in connection with the issuance of the Pacificard
credit card." Roberto, in fact, made his commitment as
a surety a continuing one, binding upon himself until all
the liabilities of Celia Regala have been fully paid. All
these were clear under the "Guarantor's Undertaking"
Roberto signed, thus:
. . . Any changes of or novation in the terms and
conditions in connection with the issuance or use of
said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any
manner release me/us from the responsibility
hereunder, it being understood that the undertaking is
a continuing one and shall subsist and bind me/us
until all the liabilities of the said Celia Syjuco Regala
have been fully satisfied or paid. (p. 12, supra;
emphasis supplied)
Private respondent Roberto Regala, Jr. had been made
aware by the terms of the undertaking of future
changes in the terms and conditions governing the
issuance of the credit card to his wife and that,
notwithstanding, he voluntarily agreed to be bound as
a surety. As in guaranty, a surety may secure additional
and future debts of the principal debtor the amount of
which is not yet known.
The application by respondent court of the ruling in
Government v. Tizon, supra is misplaced. It was held in
that case that:
. . . although the defendants bound themselves in
solidum, the liability of the Surety under its bond
would arise only if its co-defendants, the principal
obligor, should fail to comply with the contract. To
paraphrase the ruling in the case of Municipality of
Orion vs. Concha, the liability of the Surety is
"consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the
Surety "is considered in law as being the same party as
the debtor in relation to whatever is adjudged,
touching the obligation of the latter"; or the liabilities
of the two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the
expression, if the defendants are held liable, their
liability to pay the plaintiff would be solidary, but the
nature of the Surety's undertaking is such that it does
not incur liability unless and until the principal debtor
is held liable.

A guarantor or surety does not incur liability unless
the principal debtor is held liable. It is in this sense that
a surety, although solidarily liable with the principal
debtor, is different from the debtor. It does not mean,
however, that the surety cannot be held liable to the
same extent as the principal debtor. The nature and
extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of
suretyship.
MOLINO vs. SECURITY DINERS
FACTS: The Security Diners International Corporation
("SDIC') operates a credit card system under the name
of Diners Club through which it extends credit
accommodation to its cardholders for the purchase of
goods and payment of services from its member
establishments to be reimbursed later on by the
cardholder upon proper billing. There are two types
of credit cards issued: one, the Regular (Local) Card
which entitles the cardholder to purchase goods and
pay services from member establishments in an
amount not exceeding P10,000.00; and two, the
Diamond (Edition) Card which entitles the cardholder
to purchase goods and pay services from member
establishments in unlimited amounts. One of the
requirements for the issuance of either of these cards
is that an applicant should have a surety.
On July 24, 1987, Danilo A. Alto applied for a Regular
(Local) Card with SDIC. He got as his surety his own
sister-in-law Jeanette Molino Alto. Thus, Danilo signed
the printed application form and Jeanette signed the
Surety Undertaking.
On the basis of the completed and signed Application
Form and Surety Undertaking, the SDIC issued to
Danilo Diners Card No. 36510293216-0006. The latter
used this card and initially paid his obligations to
SDIC. On February 8, 1988, Danilo wrote SDIC a
letter requesting it to upgrade his Regular (Local)
Diners Club Card to a Diamond (Edition) one. As a
requirement of SDIC, Danilo secured from Jeanette her
approval. The latter obliged and so on March 2, 1988,
she signed a Note which states:
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 77
"This certifies that I, Jeanette D. Molino,
approve of the request of Danilo and Gloria
Alto with Card No. 3651-203216 0006 and
3651-203412-5007 to upgrade their card from
regular to diamond edition."
Danilo's request was granted and he was issued a
Diamond (Edition) Diners Club Card. He used this card
and made purchases from member establishments.
On October 1, 1988 Danilo had incurred credit
charged plus appropriate interest and service charges
in the aggregate amount of P166,408.31. He defaulted
in the payment of this obligation.
SDIC demanded of Danilo and Jeanette to pay said
obligation but they did not pay. So, on November 9,
1988, SDIC filed an action to collect said indebtedness
against Danilo and Jeanette.
Defendant Danilo Alto failed to file an Answer.
Petitioner was left as the lone defendant, sued in her
capacity as surety of Danilo.
In the Answer petitioner claimed that her liability
under the Surety Undertaking was limited to
P10,000.00 and that she did not expressly and
categorically agree to act as surety for Danilo in an
amount higher than P10,000.00.
Petitioner posits that she did not expressly give her
consent to be bound as surety under the upgraded
card. She points out that the note she signed,
marked as Exhibit "C", registering her approval of the
request of Danilo Alto to upgrade his card, renders
the Surety Undertaking she signed under the terms of
the previous card "without probative value, immaterial
and irrelevant as it covers only the liability of the
surety in the use of the regular credit card by the
principal debtor x x x. " She argues further that
because the principal debtor, Danilo Alto, was not held
liable, having been dropped as a defendant, she
could not be said to have incurred liability as surety.
ISSUE: Whether petitioner is liable as surety under
the Diamond card revolves around the effect of the
upgrading by Danilo Alto of his card.

HELD: There is no doubt that the upgrading was a
novation of the original agreement covering the first
credit card issued to Danilo Alto, basically since it was
committed with the intent of canceling and replacing
the said card. However, the novation did not serve to
release petitioner from her surety obligations because
in the Surety Undertaking she expressly waived
discharge in case of change or novation in the
agreement governing the use of the first credit card.
The nature and extent of petitioner's obligations are
set out in clear and unmistakable terms in the Surety
Undertaking. Thus:
2. She declared that "any change or novation in the
Agreement or any extension of time granted by
SECURITY DINERS to pay such obligation, charges, and
fees, shall not release (her) from this Surety
Undertaking";
We cannot give any additional meaning to the plain
language of the subject undertaking. The extent of a
surety's liability is determined by the language of the
suretyship contract or bond itself.
This case is no different from Pacific Banking
Corporation vs. IAC, supra, correctly applied by the
Court of Appeals, which involved a Guarantor's
Undertaking (although thus denominated, it was in
substance a contract of surety signed by the husband
for the credit card application of his wife. Like herein
petitioner, the husband also argued that his liability
should be limited to the credit limit allowed under his
wife's card but the Court declared him liable to the full
extent of his wife's indebtedness. Thus:
We need not look elsewhere to determine the
nature and extent of private respondent Roberto
Regala, Jr.'s undertaking. As a surety he bound
himself jointly and severally with the debtor Celia
Regala "to pay the Pacific Banking Corporation
upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred
by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor
by Pacific Banking Corporation. x x x.
xxx xxx xxx
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 78
It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00
per month and that Celia Regala succeeded in using
the card beyond the original period of its
effectivity, October 29, 1979. We do not agree,
however, that Roberto Jr.'s liability should be
limited to that extent. Private respondent
Roberto Regala, Jr., as surety of his wife, expressly
bound himself up to the extent of the debtor's
(Celia's) indebtedness likewise expressly waiving
any "discharge in case of any change or novation
of the terms and conditions in connection with
the issuance of the Pacificard credit card." Roberto,
in fact, made his commitment as a surety a
continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All
these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
"x x x Any changes of or novation in the terms
and conditions in connection with the issuance
or use of said Pacificard, or any extension of
time to pay such obligations, charges or
liabilities shall not in any manner release
me/us from the responsibility hereunder, it
being understood that the undertaking is a
continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia
Syjuco Regala have been fully satisfied or paid."
As a last-ditch measure, petitioner asseverates that,
being merely a surety, a pronouncement should first
be made declaring the principal debtor liable before
she herself can be proceeded against. The argument,
which is hinged upon the dropping of Danilo as
defendant in the complaint, is bereft of merit.
The Surety Undertaking expressly provides that
petitioner's liability is solidary. A surety is considered
in law as being the same party as the debtor in
relation to whatever is adjudged touching the
obligation of the latter, and their liabilities are
interwoven as to be inseparable. Although the contract
of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor is direct,
primary and absolute; he becomes liable for the debt
and duty of another although he possesses no direct
or personal interest over the obligations

nor does he receive any benefit therefrom. There
being no question that Danilo Alto incurred debts of
P166,408.31 in credit card advances, an obligation
shared solidarily by petitioner, respondent was
certainly within its rights to proceed singly against
petitioner, as surety and solidary debtor, without
prejudice to any action it may later file against Danilo
Alto, until the obligation is fully satisfied. This is so
provided under Article 1216 of the Civil Code:
The creditor may proceed against any one of the
solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
be subsequently directed against the others, so
long as the debt has not been fully collected.
Petitioner is a graduate of business administration,
and possesses considerable work experience in
several banks. She knew the full import and
consequence of the Surety Undertaking that she
executed. She had the option to withdraw her
suretyship when Danilo upgraded his card to one that
permitted unlimited purchases, but instead she
approved the upgrading. While we commiserate in
the financial predicament she now faces, it is also
evident that the liability she incurred is only the
legitimate consequence of an undertaking that she
freely and intelligently obliged to.
GATEWAY ELECTRONICS CORPORATION and
GERONIMO B. DELOS REYES, JR., VS. ASIANBANK
CORPORATION
(574 SCRA 698, G.R. No. 172041, December
18, 2008)
FACTS: Petitioner Gateway Electronics Corporation
(Gateway) is a domestic corporation that used to be
engaged in the semi-conductor business. During the
period material, petitioner Geronimo delos Reyes, Jr.
was its president and one Andrew delos Reyes its
executive vice-president. In July 1996, Geronimo and
Andrew executed separate but almost identical deeds
of suretyship for Gateway in favor of respondent
Asianbank Corporation (Asianbank). Asianbank later
extended to Gateway several export packing loans in
the total aggregate amount of USD ~ 1.7Million. This
loan package was later consolidated with a Dollar
Promissory Note
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 79
(PN) for the amount of USD ~1.7Million (same amount
as above) and secured by a chattel mortgage over
Gateway’s equipment for USD 2 million.
Gateway initially made payments on its loan
obligations, but eventually defaulted. Upon
Gateway’s request, Asianbank extended the maturity
dates of the loan several times. On July 15 and 30,
1999, Gateway issued two checks as payment for its
arrearages and interests for the periods June 30 and
July 30, 1999; However, both checks were dishonored
for insufficiency of funds. Asianbank’s demands for
payment made upon Gateway and its sureties went
unheeded such that as of November 23, 1999,
Gateway’s obligation to Asianbank, inclusive of
principal, interest, and penalties, totaled USD
~2.2Million.
Thus, Asianbank later filed with the RTC Makati a
complaint for a sum of money against Gateway,
Geronimo, and Andrew.
RTC held Gateway, Geronimo and Andrew jointly and
severally liable to pay Asianbank. Gateway, Geronimo
and Andrew appealed to the CA.
During the appeal, Gateway filed a petition for
voluntary insolvency with the RTC Cavite in which
Asianbank was listed as one of the creditors.
CA affirmed the decision of the RTC Makati.
Gateway, Geronimo and Andrew filed MR stating
that RTC Cavite had issued an Order declaring
Gateway insolvent.
ISSUES:
1. WON Geronimo is liable as surety to pay
Asianbank – YES
2. WON Geronimo should be liable to pay
notwithstanding
the order of insolvency of the SEC – YES
HELD:
1. Gateway may be discharged from Liability but not
Geronimo
Under this issue, SC discussed the effect of the
issuance of an order declaring Gateway insolvent
under the Insolvency Law. Here, SC ruled that in
accordance with said law, the issuance of the
insolvency order had the effect of automatically
staying the civil action for a

sum of money filed by Asianbank against Gateway. In
net effect, the proceedings before the CA, but only
insofar as the claim against Gateway was concerned,
was, or ought to have been, suspended after the
date of the order. But according to SC, Geronimo’s
liability is a different story. Suretyship is covered by
Article 2047 of the CC, which states:
By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do
so. If a person binds himself solidarily with the
principal debtor, the provisions of Section 4, Chapter
3, Title I of this Book shall be observed. In such case
the contract is called a suretyship.
xxx
A creditor’s right to proceed against the surety exists
independently of his right to proceed against the
principal. Under Article 1216 of the CC, the creditor
may proceed against any one of the solidary debtors
or some or all of them simultaneously.
The rule, therefore, is that if the obligation is joint
and several, the creditor has the right to proceed
even against the surety alone. Since, generally, it is
not necessary for the creditor to proceed against a
principal in order to hold the surety liable, where, by
the terms of the contract, the obligation of the
surety is the same as that of the principal, then soon
as the principal is in default, the surety is likewise in
default, and may be sued immediately and before
any proceedings are had against the principal.
Perforce, x x x a surety is primarily liable, and with
the rule that his proper remedy is to pay the debt
and pursue the principal for reimbursement, the
surety cannot at law, unless permitted by statute and
in the absence of any agreement limiting the
application of the security, require the creditor or
obligee, before proceeding against the surety, to
resort to and exhaust his remedies against the
principal, particularly where both principal and surety
are equally bound.
Clearly, Asianbank’s right to collect payment for the
full amount from Geronimo, as surety, exists
independently of its right against Gateway as
principal debtor; it could thus proceed against one of
them or file separate actions against them to
recover the principal
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 80
debt covered by the deed on suretyship, subject to
the rule prohibiting double recovery from the same
cause. This legal postulate becomes all the more
logical in case of an insolvency situation where, as
here, the insolvency court is bereft of jurisdiction
over the sureties of the principal debtor.
As Asianbank aptly points out, A SUIT AGAINST THE
SURETY, INSOFAR AS THE SURETY’S SOLIDARY
LIABILITY IS CONCERNED, IS NOT AFFECTED BY AN
INSOLVENCY PROCEEDING INSTITUTED BY OR AGAINST
THE PRINCIPAL DEBTOR.
The same principle holds true with respect to the
surety of a corporation in distress which is subject of a
rehabilitation proceeding before the Securities and
Exchange Commission (SEC). A surety of the
distressed corporation can be sued separately to
enforce his liability as such, notwithstanding an SEC
order declaring the former under a state of
suspension of payment.
2. Geronimo’s Argument: As things stand, his liability, as
compared to that of Gateway, is contextually more
onerous and burdensome, precluded as he is from
seeking recourse against the insolvent corporation.
From this premise, Geronimo claims that since
Gateway cannot, owing to the order of insolvency,
be made to pay its obligation, he, too, being just a
surety, cannot also be made to pay, obviously
having in mind Art. 2054 of the CC, as follows:
A guarantor may bind himself for less, but not for more
than the principal debtor, both as regards the
amount and the onerous nature of the conditions.
Should he have bound himself for more, his
obligations shall be reduced to the limits of that of the
debtor.
SC’s Ruling:
Provision does not free surety from liability. Liability
may be less, but not free.
Art. 2054 pronounces the rule that the obligation of a
guarantor may be less, but cannot be more than the
obligation of the principal debtor. The rule, however,
cannot possibly be stretched to mean that a guarantor
or surety is freed from liability as

such guarantor or surety in the event the principal
debtor becomes insolvent or is unable to pay the
obligation. This interpretation would defeat the very
essence of a suretyship contract which, by definition,
refers to an agreement whereunder one person, the
surety, engages to be answerable for the debt, default,
or miscarriage of another known as the principal.
Geronimo’s position that a surety cannot be made to
pay when the principal is unable to pay is clearly
erroneous and must be rejected.
* When a creditor goes after a debtor and its surety,
and then the debtor is subsequently declared insolvent
by the court/SEC, such declaration of insolvency
neither invalidates the suretyship nor does it mean
that the surety is no longer liable to pay for the
amount owed by the debtor to the creditor.
SECURITY BANK AND TRUST COMPANY, Inc. vs.
RODOLFO M. CUENCA,
(341 SCRA 781, G.R. No. 138544, October 3,
2000)
FACTS: Sta. Ines Melale (‘Sta. Ines’) is a corporation
engaged in logging operations. It was a holder of a
Timber License Agreement issued by DENR. November
10, 1980, Security Bank and Trust Co. granted Sta.
Ines Melale Corporation [SIMC] a credit line in the
amount of P8,000,000.00 to assist the latter in meeting
the additional capitalization requirements of its logging
operations.
The Credit Approval Memorandum expressly stated
that the P8M Credit Loan Facility shall be effective
until 30 November 1981. To secure the payment of
the amounts drawn by SIMC from the above-
mentioned credit line, SIMC executed a Chattel
Mortgage over some of its machinery and equipment in
favor of SBTC. As additional security for the payment
of the loan, Rodolfo M. Cuenca executed an
Indemnity Agreement dated 17 December 1980 in
favor of SBTC whereby he solidarily bound himself
with SIMC stating by virtue of aforesaid credit
accommodation(s) including the substitutions,
renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit
accommodation(s).
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 81
On 26 November 1981, four (4) days prior to the
expiration of the period of effectivity of the P8M-
Credit Loan Facility, SIMC made a first drawdown
from its credit line with SBTC in the amount of
P6,100,000.00 To cover said drawdown, SIMC duly
executed promissory note. Sometime in 1985, Cuenca
resigned as President and Chairman of the Board of
Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of Cuenca in Sta. Ines
were sold at a public auction.
Subsequently, appellant SIMC repeatedly availed of its
credit line and obtained six (6) other loans from
SBTC in the aggregate amount P6,369,019.50 which
were covered by promissory notes. SIMC, however,
encountered difficulty in making the amortization
payments on its loans and requested SBTC for a
complete restructuring of its indebtedness. SBTC
accommodated SIMC’s request and signified its
approval in a letter dated 18 February 1988 wherein
SBTC and defendant appellant Sta. Ines, without
notice to or the prior consent of Cuenca, agreed to
restructure the past due obligations of Sta. Ines.
Security Bank agreed to extend to Sta. Ines loans
amounting to 8.8M and 3.4M. It should be pointed out
that in restructuring Sta. Ines’ obligations to Security
Bank, Promissory Note in the amount P6,100,000.00,
which was the only loan incurred prior to the
expiration of the P8M-Credit Loan Facility on 30
November 1981 and the only one covered by the
Indemnity Agreement dated 19 December 1980.
Pursuant to the agreement to restructure its past due
obligations to Security Bank, Sta. Ines thus executed
the 2 more promissory notes (total: 12.2M), both dated
09 March 1988 in favor of Security Bank.
To formalize their agreement to restructure the loan
obligations of Sta. Ines, Security Bank and Sta. Ines
executed a Loan Agreement dated 31 October 1989 the
purpose of which is “The First Loan shall be applied to
liquidate the principal portion of the Borrower’s present
total outstanding indebtedness to the Lender (the
‘indebtedness’) while the Second Loan shall be applied
to liquidate the past due interest and penalty portion
of the Indebtedness.” SIMC defaulted in the payment
of its restructured loan obligations to SBTC despite
demands made upon appellant SIMC and CUENCA.

Appellants individually and collectively refused to pay
the SBTC. Thus, SBTC filed a complaint for collection of
sum of money on 14 June 1993, resulting after trial on
the merits in a decision by the court a quo, x x x
from which Cuenca appealed.
The CA ruled that the 1989 Loan Agreement had
novated the 1980 credit accommodation earlier
granted by the bank to Sta. Ines. It noted that the 1989
Loan Agreement had been executed without notice to,
much less consent from, Cuenca who at the time was
no longer a stockholder of the corporation. It further
held that the restructuring of Sta. Ines’ obligation
under the 1989 Loan Agreement was tantamount to a
grant of an extension of time to the debtor without
the consent of the surety. Under Article 2079 of the
Civil Code, such extension extinguished the surety.
ISSUE: WON the liability of Mr. Cuenca was
extinguished by the extension granted to the debtor.
HELD: YES.
RELEASE WITHOUT CONSENT OF GUARANTOR
The 1989 Loan Agreement expressly stipulated that its
purpose was to “liquidate,” not to renew or extend,
the outstanding indebtedness. Moreover, respondent
did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should
be deemed extinguished, pursuant to Article 2079 of
the Civil Code, which specifically states that “[a]n
extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty. x x x.” In an earlier case, the Court
explained the rationale of this provision in this wise:
“The theory behind Article 2079 is that an extension
of time given to the principal debtor by the creditor
without the surety’s consent would deprive the surety
of his right to pay the creditor and to be immediately
subrogated to the creditor’s remedies against the
principal debtor upon the maturity date. The surety is
said to be entitled to protect himself against the
contingency of the principal debtor or the
indemnitors becoming insolvent during the extended
period.”
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 82
It is emphasized that an essential alteration in the
terms of the Loan Agreement without the consent of
the surety extinguishes the latter’s obligation. As the
Court held in National Bank
v. Veraguth, “[i]t is fundamental in the law of
suretyship that any agreement between the creditor
and the principal debtor which essentially varies the
terms of the principal contract, without the consent of
the surety, will release the surety from liability.”
While respondent held himself liable for the credit
accommodation or any modification thereof, such
clause should be understood in the context of the P8
million limit and the November 30, 1981 term. It did
not give the bank or Sta. Ines any license to modify
the nature and scope of the original credit
accommodation, without informing or getting the
consent of respondent who was solidarily liable.
Taking the bank’s submission to the extreme,
respondent (or his successors) would be liable for loans
even amounting to, say, P100 billion obtained 100
years after the expiration of the credit
accommodation, on the ground that he consented to
all alterations and extensions thereof. Indeed, it has
been held that a contract of surety “cannot extend to
more than what is stipulated. It is strictly construed
against the creditor, every doubt being resolved
against enlarging the liability of the surety.” In the
absence of an unequivocal provision that respondent
waived his right to be notified of or to give consent to
any alteration of the credit accommodation, we cannot
sustain petitioner’s view that there was such a waiver.
It should also be observed that the Credit Approval
Memorandum clearly shows that the bank did not
have absolute authority to unilaterally change the
terms of the loan accommodation. Indeed, it may do
so only upon notice to the borrower.
The present controversy must be distinguished from
Philamgen v. Mutuc, in which the Court sustained a
stipulation whereby the surety consented to be
bound not only for the specified period, “but to
any extension thereafter made, an extension x x x that
could be had without his having to be notified.”

In that case, the surety agreement contained this
unequivocal stipulation: “It is hereby further agreed
that in case of any extension of renewal of the
bond, we equally bind ourselves to the Company
under the same terms and conditions as herein
provided without the necessity of executing another
indemnity agreement for the purpose and that we
hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted
under this indemnity agreement.”
In the present case, there is no such express
stipulation. At most, the alleged basis of
respondent’s waiver is vague and uncertain. It confers
no clear authorization on the bank or Sta. Ines to
modify or extend the original obligation without the
consent of the surety or notice thereto.
NOVATION
Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the
obligation obtained under the 1980 credit
accomodation. This is evident from its explicit provision
to “liquidate” the principal and the interest of the
earlier indebtedness, as the following shows:
“1.02. Purpose. The First Loan shall be applied to
liquidate the principal portion of the Borrower’s
present total outstanding Indebtedness to the Lender
(the “Indebtedness”) while the Second Loan shall be
applied to liquidate the past due interest and penalty
portion of the Indebtedness. Furthermore, several
incompatibilities between the 1989 Agreement and
the 1980 original obligation demonstrate that the two
cannot coexist. While the 1980 credit accommodation
had stipulated that the amount of loan was not to
exceed P8 million, the 1989 Agreement provided that
the loan was P12.2 million. The periods for payment
were also different.
Since the 1989 Loan Agreement had extinguished the
original credit accommodation, the Indemnity
Agreement, an accessory obligation, was necessarily
extinguished also, pursuant to Article 1296 of the
Civil Code, which provides that when the principal
obligation is extinguished in consequence of a
novation, accessory obligations may subsist only
insofar as they
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 83
may benefit third persons who did not give their
consent.”
CONTINUING SURETY
In the present case, the Indemnity Agreement was
subject to the two limitations of the credit
accommodation: (1) that the obligation should not
exceed P8 million, and (2) that the accommodation
should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to
loans obtained on or before the aforementioned
expiry date and not exceeding the total of P8 million.
Accordingly, the surety of Cuenca secured only the
first loan of P6.1 million obtained on November 26,
1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation,
that were obtained in 1986. Certainly, he could not
have guaranteed the 1989 Loan Agreement, which
was executed after November 30, 1981 and which
exceeded the stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the
Court found the surety liable for the loan obtained
after the payment of the original one, which was
covered by a continuing surety agreement. At the risk
of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that “each suretyship
is a continuing one which shall remain in full force
and effect until this bank is notified of its revocation.”
Since the bank had not been notified of such
revocation, the surety was held liable even for the
subsequent obligations of the principal borrower. No
similar provision is found in the present case. On the
contrary, respondent’s liability was confined to the
1980 credit accommodation, the amount and the
expiry date of which were set down in the Credit
Approval Memorandum.
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, , vs. ESTEBAN PICZON and SOSING-
LOBOS & CO., INC., (G.R. No. L-29139, November 15,
1974)
FACTS: This an appeal from the decision of the Court
of First Instance of Samar in its Civil Case No. 5156,
entitled Consuelo P. Piczon, et al. vs. Esteban Piczon,
et al., sentencing defendants-appellees, Sosing Lobos
and Co., Inc., as principal, and Esteban Piczon, as

guarantor, to pay CONSUELO P. PICZON, RUBEN O.
PICZON and AIDA P.
ALCANTARA "the sum of P12,500.00 with 12%
interest from August 6, 1964 until said principal
amount of P12,500.00 shall have been duly paid, and
the costs." Annex "A", the actionable document of
appellants reads thus:
AGREEMENT OF LOAN KNOW YE ALL MEN BY THESE
PRESENTS: That I, ESTEBAN
PICZON, of legal age, married, Filipino, and resident
of and with postal address in the municipality of
Catbalogan, Province of Samar, Philippines, in my
capacity as the President of the corporation known as
the "SOSINGLOBOS and CO., INC.," as controlling
stockholder, and at the same time as guarantor for the
same, do by these presents contract a loan of
Twelve Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is hereby
acknowledged, from the "Piczon and Co., Inc." another
corporation, the main offices of the two corporations
being in Catbalogan, Samar, for which I undertake,
bind and agree to use the loan as surety cash deposit
for registration with the Securities and Exchange
Commission of the incorporation papers relative to
the "Sosing-Lobos and Co., Inc.," and to return or
pay the same amount with Twelve Per Cent (12%)
interest per annum, commencing from the date of
execution hereof, to the "Piczon and Co., Inc., as
soon as the said incorporation papers are duly
registered and the Certificate of Incorporation issued
by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name
in Catbalogan, Samar, Philippines, this 28th day of
September, 1956. (signed)Esteban Piczon.
ISSUES:
(a) SHOULD THE PAYMENT OF 12% INTEREST ON
THE PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964,
ONLY, OR FROM SEPTEMBER 28, 1956, WHEN ANNEX
"A" WAS DULY EXECUTED? SEPTEMBER 28, 1956
(b) Is Esteban Piczon liable a guarantor or a surety?
GUARANTOR
HELD: a. Instead of requiring appellees to pay interest
at 12% only from August 6, 1964, the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 84
trial court should have adhered to the terms of the
agreement which plainly provides that Esteban Piczon
had obligated Sosing-Lobos and Co., Inc. and himself
to "return or pay (to Piczon and Co., Inc.) the same
amount (P12,500.00) with Twelve Per Cent (12%)
interest per annum commencing from the date of the
execution hereof", Annex A, which was on September
28, 1956. Under Article 2209 of the Civil Code
"(i)f the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the
contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum."
In the case at bar, the "interest agreed upon" by the
parties in Annex A was to commence from the
execution of said document.
b. Under the terms of the contract, Annex A,
Esteban Piczon expressly bound himself only as
guarantor, and there are no circumstances in the
record from which it can be deduced that his liability
could be that of a surety. A guaranty must be express,
(Article 2055, Civil Code) and it would be violative of
the law to consider a party to be bound as a surety
when the very word used in the agreement is
"guarantor."
Moreover, as well pointed out in appellees' brief, under
the terms of the pre-trial order, appellants accepted
the express assumption of liability by Sosing-Lobos &
Co., Inc. for the payment of the obligation in question,
thereby modifying their original posture that
inasmuch as that corporation did not exist yet at the
time of the agreement, Piczon necessarily must have
bound himself as insurer.
As already explained earlier, appellants' prayer for
payment of legal interest upon interest due from the
filing of the complaint can no longer be entertained,
the same not having been made an issue in the
pleadings in the court below. We do not believe that
such a substantial matter can be deemed included in
a general prayer for "any other relief just and
equitable in the premises", especially when, as in this
case, the pre-trial order does not mention it in the
enumeration of the issues to be resolved by the court.

BA FINANCE vs. CA
FACTS: Renato Gaytano, doing business under the
name Gebbs International, applied for and was
granted a loan with respondent Traders Royal Bank
in the amount of P60,000.00. As security for the
payment of said loan, the Gaytano spouses executed a
deed of suretyship whereby they agreed to pay jointly
and severally to Traders Royal Bank bank the amount
of the loan including interests, penalty and other bank
charges.
In a letter addressed toTraders Royal Bank, Philip
Wong as credit administrator of BA Finance
Corporation for and in behalf of the latter,
undertook to guarantee the loan of the Gaytano
spouses. Partial payments were made on the loan
leaving an unpaid balance in the amount of P85,807.25.
Since the Gaytano spouses refused to pay their
obligation, Traders Royal Bank filed with the trial
court complaint for sum of money against the Gaytano
spouses and petitioner BA Finance Corporation as
alternative defendant. The Gaytano spouses did not
present evidence for their defense. BA Finance
Corporation corporation, on the other hand, raised
the defense of lack of authority of its credit
administrator to bind the corporation.
The trial court rendered a decision in favor of plaintiff
and against defendants Gaytano spouses, ordering
the latter to jointly and severally pay the plaintiff. Not
satisfied with the decision, Traders Royal Bank
appealed with the Court of Appeals. Respondent
appellate court rendered judgment modifying the
decision of the trial court. Hence, this petition.
ISSUE: WON the letter of guaranty is ultra vires and
thus invalid and/or unenforceable. YES
HELD: It is a settled rule that persons dealing with an
assumed agent, whether the assumed agency be a
general or special one are bound at their peril, if they
would hold the principal liable, to ascertain not only
the fact of agency but also the nature and extent of
authority, and in case either is controverted, the
burden of proof is upon them to establish it (Harry
Keeler
v. Rodriguez, 4 Phil. 19).
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 85
Hence, the burden is on Traders Royal Bank to
satisfactorily prove that the credit administrator with
whom they transacted acted within the authority given
to him by his principal, BA Finance Corporation.
The only evidence presented by Traders Royal Bank was
the testimony of Philip Wong, credit administrator, w
ho testifiedthat he had authority to issue guarantees
as can be deducedfrom the wording of the
memorandum given to him by BA Finance Corporation
on his lending authority. The said memorandum
allegedly authorized Wong not only to approve and
grant loans but also to enter into contracts of guaranty
in behalf of the corporation.
Although Wong was clearly authorized to approve loans
even up to P350,000.00 without any security
requirement, which is far above the amount subject
of the guaranty in the amount of P60,000.00, nothing
in the said memorandum expressly vests on the credit
administrator power to issue guarantees. We cannot
agree with respondent's contention that the phrase
"contingent commitment" set forth in the
memorandum means guarantees.
It has been held that a power of attorney or
authority of an agent should not be inferred from
the use of vague or general words. Guaranty is not
presumed, it must be expressed and cannot be
extended beyond its specified limits (Director v. Sing
Juco, 53 Phil. 205). In one case, where it appears that a
wife gave her husband power of attorney to loan
money, this Court ruled that such fact did not
authorize him to make her liable as a surety for the
payment of the debt of a third person (Bank of
Philippine Islands v. Coster, 47Phil. 594).
The sole allegation of the credit administrator in the
absence of any other proof that he is authorized to
bind BA Finance Corporation in a contract of
guaranty with third persons should not be given
weight. The representation of one who acts as agent
cannot by itself serve as proof of his authority to act as
agent or of the extent of his authority as agent
(Velasco v. La Urbana, 58Phil. 681). Wong's testimony
that he had entered into similar transactions of
guaranty in the past for and in behalf of the BA
Finance Corporation, lacks credence due to his failure

to show documents or records of the alleged past
transactions.
The actuation of Wong in claiming and testifying that
he has the authority is understandable. He would
naturally take steps to save himself from personal
liability for damages to respondent bank considering
that he had exceeded his authority. The rule is clear that
an agent who exceeds his authority is personally liable
for damages.
Anent the conclusion of respondent appellate court
that BA Finance Corporation is estopped from alleging
lack of authority due to its failure to cancel or
disallow the guaranty, the Court rules that said
conclusion has no basis in fact. Respondent bank had
not shown any evidence aside from the testimony of
the credit administrator that the disputed transaction
of guaranty was in fact entered into the official
records or files of petitioner corporation, which will
show notice or knowledge on the latter's part and
its consequent ratification of the said transaction. In
the absence of clear proof, it would be unfair to hold
BA Finance Corporation guilty of estoppel in allowing
its credit administrator to act as though the latter had
power to guarantee.
TEXAS COMPANY vs ALONZO
FACTS: On November 5, 1935 Leonor S. Bantug and
Tomas Alonso were sued by the Texas Company (P.I.),
Inc. for the recovery of the sum of P629, unpaid
balance of the account of Leonora S. Bantug in
connection with the agency contract with the Texas
Company for the faithful performance of which Tomas
Alonso signed the following:
For value received, we jointly and severally do hereby
bind ourselves and each of us, in solidum, with
Leonor S. Bantug the agent named in the within and
foregoing agreement, for full and complete
performance of same hereby waiving notice of non-
performance by or demand upon said agent, and the
consent to any and all extensions of time for
performance. Liability under this undertaking,
however, shall not exceed the sum of P2,000,
Philippine currency.
Witness the hand and seal of the undersigned affixed
in the presence of two witness, this
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 86
12th day of August, 1929.
Leonor S. Bantug was declared in default as a result of
her failure to appear or answer, but Tomas Alonso
filed an answer setting up a general denial and the
special defenses that Leonor S. Bantug made him
believe that he was merely a co-security of one
Vicente Palanca and he was never notified of the
acceptance of his bond by the Texas Company.
The CFI of Cebu sentenced Leonor S. Bantug and
Tomas Alonso to pay jointly and severally to the Texas
Company the sum of P629, with interest at the rate of
six per cent (6%) from the date of filing of the
complaint, and with proportional costs. The CA
modified the judgment; Leonor S. Bantug was held
solely liable for the payment of the aforesaid sum of
P629 to the Texas Company, with the consequent
absolution of Tomas Alonso.
According to the petitioner, the CA erred in holding
that there was merely an offer of guaranty on the
part of the respondent, Tomas Alonso, and that the
latter cannot be held liable thereunder because he was
never notified by the Texas Company of its acceptance.
ISSUE: WON there was merely an offer of
guaranty on the part of Alonso? YES
HELD: The CA has placed reliance upon our decision
in National Bank vs. Garcia (47 Phil., 662), while the
petitioner invokes the case of National Bank vs.
Escueta, (50 Phil., 991). In the first case, it was held
that there was merely an offer to give bond and, as
there was no acceptance of the offer, this court
refused to give effect to the bond. In the second case,
the sureties were held liable under their surety
agreement which was found to have been accepted
by the creditor, and it was therein ruled that an
acceptance need not always be express or in writing.
The Court of Appeals found as a fact, and that the
bond in question was executed at the request of the
petitioner by virtue of the following clause of the
agency contract:
Additional Security. — The Agent shall whenever
requested by the Company in addition to the
guaranty herewith provided,

furnish further guaranty or bond, conditioned upon
the Agent's faithful performance of this contract, in
such individuals of firms as joint and several sureties
as shall be satisfactory to the Company.
In view of the foregoing clause which should be the
law between the parties, it is obvious that, before a
bond is accepted by the petitioner, it has to be in such
form and amount and with such sureties as shall be
satisfactory hereto; in other words, the bond is
subject to petitioner's approval. The logical implication
arising from this requirement is that, if the petitioner
is satisfied with any such bond, notice of its
acceptance or approval should necessarily be given to
the proper party in interest, namely, the surety or
guarantor. There is no evidence in this case tending to
show that the respondent, Tomas Alonso, ever had
knowledge of any act on the part of petitioner
amounting to an implied acceptance, so as to justify
the application of our decision in National Bank vs.
Escueta.
The decision appealed of CA is affirmed.
POLICY: Where there is merely an offer of, or
proposition for, a guaranty, or merely a conditional
guaranty in the sense that it requires action by the
creditor before the obligation becomes fixed, it does
not become a binding obligation until it is accepted
and, unless there is a waiver of notice of such
acceptance is given to, or acquired by, the guarantor, or
until he has notice or knowledge that the creditor has
performed the conditions and intends to act upon the
guaranty. The acceptance need not necessarily be
express or in writing, but may be indicated by acts
amounting to acceptance.
Where, upon the other hand, the transaction is not
merely an offer of guaranty but amounts to direct or
unconditional promise of guaranty, unless notice of
acceptance is made a condition of the guaranty, all
that is necessary to make the promise binding is
that the promise should act upon it, and notice of
acceptance is not necessary, the reason being that the
contract of guaranty is unilateral.
VISAYAN SURETY vs CA
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 87
FACTS: On February 1993, the spouses Danilo Ibajan
and Mila Ambe Ibajan (plantiffs) filed with the RTC a
complaint against spouses Jun and Susan Bartolome
(defendants), for replevin to recover from them the
possession of an Isuzu jeepney, with damages.
Spouses Ibajan alleged that they were the owners of an
Isuzu jeepney which was forcibly and unlawfully taken
by Spouses Bartolome on December 1992, while
parked at their residence.
Spouses Ibajan filed a replevin bond through
petitioner Visayan Surety & Insurance Corporation.
The contract of surety provided thus: "WHEREFORE,
we, sps. Danilo Ibajan and Mila Ibajan and the
VISAYAN SURETY & INSURANCE CORP., jointly and
severally bind ourselves in the sum of P300,000 for the
return of the property to the defendant, if the return
thereof be adjudged, and for the payment to the
defendant of such sum as he/she may recover from the
plaintiff in the action."
RTC granted issuance of a writ of replevin and as such,
the sheriff seized the subject vehicle and turned over
the same to spouses Ibajan. However on May 1993,
Dominador Ibajan, father of Danilo Ibajan, filed a
motion for leave of court to intervene, stating that
he has a right superior to the spouses Ibajan over
the ownership and possession of the subject vehicle.
RTC granted the motion to intervene. Then later, RTC
issued an order granting the motion to quash the writ
of replevin and ordered Mila Ibajan to return the
subject jeepney to the intervenor Dominador Ibajan.
RTC thereafter ordered the issuance of a writ of
replevin in favor of the intervenor Dominador who was
the registered owner. This writ of replevin in favor of
intervenor Dominador was however returned
unsatisfied. Thus, in March 1994, intervenor
Dominador filed with RTC a motion/application for
judgment against spouses Ibajan’s bond.
RTC ruled in favor of Dominador and ordered spouses
Ibajan and Visayan Surety and Insurance Corporation
to pay the former jointly and severally the value of
the jeepney in the amount of P150,000 and other
damages. CA affirmed RTC decision.

ISSUE: WON the surety is liable to an intervenor on a
replevin bond posted by Visayan Surety in favor of
defendants. NO
HELD: Who is an intervenor?
An intervenor is a person, not originally impleaded in a
proceeding, who has legal interest in the matter in
litigation, or in the success of either of the parties, or
an interest against both, or is so situated as to be
adversely affected by a distribution or other disposition
of property in the custody of the court or of an
officer thereof.
An intervenor is not a party to a contract of surety
which he did not sign and which was executed by
plaintiffs and defendants. It is a basic principle in
law that contracts can bind only the parties who had
entered into it; it cannot favor or prejudice a
third person. Contracts take effect between the parties,
their assigns, and heirs, except in cases where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law.
A contract of surety is an agreement where a party
called the surety guarantees the performance by
another party called the principal or obligor of an
obligation or undertaking in favor of a third person
called the obligee. Specifically, suretyship is a
contractual relation resulting from an agreement
whereby one person, the surety, engages to be
answerable for the debt, default or miscarriage of
another, known as the principal.
The obligation of a surety cannot be extended by
implication beyond its specified limits. "When a surety
executes a bond, it does not guarantee that the
plaintiff’s cause of action is meritorious, and that it
will be responsible for all the costs that may be
adjudicated against its principal in case the action fails.
The extent of a surety’s liability is determined only by
the clause of the contract of suretyship." A contract of
surety is not presumed; it cannot extend to more than
what is stipulated.
Since the obligation of the surety cannot be
extended by implication, IT FOLLOWS THAT THE
SURETY CANNOT BE HELD LIABLE TO THE
INTERVENOR WHEN THE
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 88
RELATIONSHIP AND OBLIGATION OF THE SURETY IS
LIMITED TO THE DEFENDANTS SPECIFIED IN THE
CONTRACT OF
SURETY. Here, the defendants are the spouses
Bartolome.
SC ruled that Visayan Surety is not liable under the
replevin bond to the intervenor Dominador.
POLICY: Recall in your OBLICON: Stipulations in the
contract govern. Thus, you cannot extend the
obligations of a party beyond what is stipulated in the
contract.
ESTATE OF HEMADY VS. LUZON SURETY
FACTS: The Luzon Surety Co. had filed a claim
against the Estate based on twenty different
indemnity agreements, or counter bonds, each
subscribed by a distinct principal and by the deceased
K. H. Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.’s of
having guaranteed, the various principals in favor of
different creditors.
The Luzon Surety Co., prayed for allowance, as a
contingent claim, of the value of the twenty bonds it
had executed in consideration of the counterbonds,
and further asked for judgment for the unpaid
premiums and documentary stamps affixed to the
bonds, with 12 per cent interest thereon.
Before answer was filed, and upon motion of the
administratrix of Hemady’s estate, the lower court,
by order of September 23, 1953, dismissed the claims
of Luzon Surety Co., on two grounds: (1) that the
premiums due and cost of documentary stamps were
not contemplated under the indemnity agreements to
be a part of the undertaking of the guarantor (Hemady),
since they were not liabilities incurred after the
execution of the counterbonds; and (2) that
“whatever losses may occur after Hemady’s death,
are not chargeable to his estate, because upon his
death he ceased to be guarantor.”
Lower Court’s ruling: The administratrix further
contends that upon the death of Hemady, his liability
as a guarantor terminated, and therefore, in the
absence of a showing that a

loss or damage was suffered, the claim cannot be
considered contingent. This Court believes that there
is merit in this contention and finds support in Article
2046 of the new Civil Code. It should be noted that a
new requirement has been added for a person to
qualify as a guarantor, that is: integrity. As correctly
pointed out by the Administratrix, integrity is
something purely personal and is not transmissible.
Upon the death of Hemady, his integrity was not
transmitted to his estate or successors. Whatever loss
therefore, may occur after Hemady’s death, are not
chargeable to his estate because upon his death he
ceased to be a guarantor. Another clear and strong
indication that the surety company has exclusively
relied on the personality, character, honesty and
integrity of the now deceased K.
H. Hemady, was the fact that in the printed form of
the indemnity agreement there is a paragraph entitled
‘Security by way of first mortgage, which was expressly
waived and renounced by the security company. The
security company has not demanded from K.
H. Hemady to comply with this requirement of giving
security by way of first mortgage. In the supporting
papers of the claim presented by Luzon Surety
Company, no real property was mentioned in the list
of properties mortgaged which appears at the back of
the indemnity agreement.”
ISSUE: WON the liability of Hemady as guarantor
terminated upon his death. NO
HELD: We find this reasoning untenable. Under the
present Civil Code (Article 1311), as well as under the
Civil Code of 1889 (Article 1257), the rule is that —
“Contracts take effect only as between the parties,
their assigns and heirs, except in the case where the
rights and obligations arising from the contract are not
transmissible by their nature, or by stipulation or by
provision of law.”
While in our successional system the responsibility of
the heirs for the debts of their decedent cannot
exceed the value of the inheritance they receive from
him, the principle remains intact that these heirs
succeed not only to the rights of the deceased but
also to his obligations. Articles 774 and 776 of the New
Civil Code (and Articles 659 and 661 of the preceding
one) expressly so provide, thereby confirming Article
1311 already
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 89
quoted. (See Art. 774 and 776)
In Mojica vs. Fernandez, 9 Phil. 403, this Supreme
Court ruled: “Under the Civil Code the heirs, by
virtue of the rights of succession are subrogated to all
the rights and obligations of the deceased (Article
661) and cannot be regarded as third parties with
respect to a contract to which the deceased was a
party, touching the estate of the deceased (Barrios
vs. Dolor, 2 Phil. 44).
The binding effect of contracts upon the heirs of the
deceased party is not altered by the provision in our
Rules of Court that money debts of a deceased must
be liquidated and paid from his estate before the
residue is distributed among said heirs (Rule 89). The
reason is that whatever payment is thus made from
the estate is ultimately a payment by the heirs and
distributees, since the amount of the paid claim in fact
diminishes or reduces the shares that the heirs would
have been entitled to receive.
Under our law, therefore, the general rule is that a
party’s contractual rights and obligations are
transmissible to the successors. The rule is a
consequence of the progressive “depersonalization” of
patrimonial rights and duties that, as observed by
Victorio Polacco, has characterized the history of these
institutions.
Of the three exceptions fixed by Article 1311, the
nature of the obligation of the surety or guarantor
does not warrant the conclusion that his peculiar
individual qualities are contemplated as a principal
inducement for the contract. What did the creditor
Luzon Surety Co. expect of K. H. Hemady when it
accepted the latter as surety in the counterbonds?
Nothing but the reimbursement of the moneys that
the Luzon Surety Co. might have to disburse on
account of the obligations of the principal debtors.
This reimbursement is a payment of a sum of money,
resulting from an obligation to give; and to the
Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady himself or
by someone else in his behalf, so long as the money
was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties.

Being exceptional and contrary to the general rule,
this intransmissibility should not be easily implied, but
must be expressly established, or at the very least,
clearly inferable from the provisions of the contract
itself, and the text of the agreements sued upon
nowhere indicate that they are nontransferable.
Because under the law (Article 1311), a person who
enters into a contract is deemed to have contracted
for himself and his heirs and assigns, it is unnecessary
for him to expressly stipulate to that effect; hence, his
failure to do so is no sign that he intended his
bargain to terminate upon his death.
Similarly, that the Luzon Surety Co., did not require
bondsman Hemady to execute a mortgage indicates
nothing more than the company’s faith and
confidence in the financial stability of the surety, but
not that his obligation was strictly personal.
The third exception to the transmissibility of obligations
under Article 1311 exists when they are “not
transmissible by operation of law”. The provision makes
reference to those cases where the law expresses that
the rights or obligations are extinguished by death, as is
the case in legal support (Article 300), parental
authority (Article 327), usufruct (Article 603),
contracts for a piece of work (Article 1726),
partnership (Article 1830 and agency (Article 1919).
By contract, the articles of the Civil Code that regulate
guaranty or suretyship (Articles 2047 to 2084) contain
no provision that the guaranty is extinguished upon
the death of the guarantor or the surety. The lower
court sought to infer such a limitation from Art. 2056,
to the effect that “one who is obliged to furnish a
guarantor must present a person who possesses
integrity, capacity to bind himself, and sufficient
property to answer for the obligation which he
guarantees”. It will be noted, however, that the law
requires these qualities to be present only at the time
of the perfection of the contract of guaranty. It is self-
evident that once the contract has become perfected
and binding, the supervening incapacity of the
guarantor would not operate to exonerate him of the
eventual liability he has contracted; and if that be true
of his capacity to bind himself, it should also be
true of his integrity, which is a quality mentioned in
the article alongside the capacity.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 90
The foregoing concept is confirmed by the next Article
2057, that runs as follows: “ART. 2057.
— If the guarantor should be convicted in first
instance of a crime involving dishonesty or should
become insolvent, the creditor may demand another
who has all the qualifications required in the
preceding article. The case is excepted where the
creditor has required and stipulated that a specified
person should be guarantor.” From this article it
should be immediately apparent that the
supervening dishonesty of the guarantor (that is to say,
the disappearance of his integrity after he has
become bound) does not terminate the contract but
merely entitles the creditor to demand a
replacement of the guarantor. But the step remains
optional in the creditor: it is his right, not his duty;
he may waive it if he chooses, and hold the guarantor
to his bargain. Hence Article 2057 of the present Civil
Code is incompatible with the trial court’s stand that
the requirement of integrity in the guarantor or surety
makes the latter’s undertaking strictly personal, so
linked to his individuality that the guaranty
automatically terminates upon his death.
The contracts of suretyship entered into by K.
H. Hemady in favor of Luzon Surety Co. not being
rendered intransmissible due to the nature of the
undertaking, nor by the stipulations of the contracts
themselves, nor by provision of law, his eventual
liability thereunder necessarily passed upon his death
to his heirs. The contracts, therefore, give rise to
contingent claims provable against his estate under
section 5, Rule 87.
“The most common example of the contigent claim
is that which arises when a person is bound as
surety or guarantor for a principal who is insolvent
or dead. Under the ordinary contract of suretyship
the surety has no claim whatever against his principal
until he himself pays something by way of
satisfaction upon the obligation which is secured.
When he does this, there instantly arises in favor of the
surety the right to compel the principal to exonerate
the surety. But until the surety has contributed
something to the payment of the debt, or has
performed the secured obligation in whole or in part, he
has no right of action against anybody
— no claim that could be reduced to judgment.

For Defendant administratrix it is averred that the
above doctrine refers to a case where the surety files
claims against the estate of the principal debtorand it is
urged that the rule does not apply to the case
before us, where the late Hemady was a surety, not a
principal debtor. The argument evinces a superficial
view of the relations between parties. If under the
Gaskell ruling, the Luzon Surety Co., as guarantor,
could file a contingent claim against the estate of the
principal debtors if the latter should die, there is
absolutely no reason why it could not file such a claim
against the estate of Hemady, since Hemady is a
solidary co-debtor of his principals. What the Luzon
Surety Co. may claim from the estate of a principal
debtor it may equally claim from the estate of
Hemady, since, in view of the existing solidarity, the
latter does not even enjoy the benefit of exhaustion
of the assets of the principal debtor.
Our conclusion is that the solidary guarantor’s liability
is not extinguished by his death, and that in such
event, the Luzon Surety Co., had the right to file
against the estate a contingent claim for
reimbursement.
NOTE: The liability of the solidary guarantor is not
terminated by his death.
III. Effects of Guaranty
WISE CO. VS. TANGLAO
FACTS: In the CFI of Manila, Wise & Co filed a civil case
against Cornelio C. David for the
was an agent of Wise & Co. and the amount claimed
from him was the result of a liquidation of accounts
showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a
To avoid the execution of said attachment, David
succeeded in having the defendant Atty. Tanglao sign a
power of attorney in his favor, with a clause
(considered a special POA to David) “ To sign as
guarantor for himself in his indebtedness to Wise &
Company of Manila, and to mortgage the Attorney’s
lot”
Subsequently, David made a compromise
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 91
agreement with the petitioner Wise&Co. to pay for the
sum of P640, payable at the rate of P80 per month and
he pledged the lot owned by the Atty. Dionisio Tanglao
as a guaranty for the balance.
David paid the sum of P343.47 to Wise & Co., on
account of the P640 which he bound himself to pay
leaving an unpaid balance of P296.53.
Wise & Co. now institutes this case against Tanglao
for the recovery of said balance of P296.53.
ISSUE: WON Atty. Dionisio Tanglao is liable for the
unpaid balance. NO.
HELD: NOTE: Exhibit A – power of attorney; Exhibit B-
Compromise agreement.
There is no doubt that under Exhibit A, Tanglao
empowered David, in his name, to enter into a
contract of suretyship and a contract of mortgage of
the property described in the document, with Wise
& Co. However, David used said power of attorney
only to mortgage the property and did not enter
into contract of suretyship. Nothing is stated in Exhibit
B to the effect that Tanglao became David's surety
for the payment of the sum in question. Neither is
this inferable from any of the clauses thereof, and
even if this inference might be made, it would be
insufficient to create an obligation of suretyship which,
under the law, must be express and cannot be
presumed.
It appears from the foregoing that defendant,
Tanglao could not have contracted any personal
responsibility for the payment of the sum of P640.
The only obligation which Exhibit B, in connection with
Exhibit A, has created on the part of Tanglao, is that
resulting from the mortgage of a property belonging to
him to secure the payment of said P640. However, a
foreclosure suit is not instituted in this case against
Tanglao, but a purely personal action for the
recovery of the amount still owed by
defendant Tanglao may be considered as a surety
under Exhibit B, the action does not yet lie against him
on the ground that all the legal remedies against the
debtor have not previously been exhausted (art. 1830
of the

Civil Code, and decision of the Supreme Court of Spain
of March 2, 1891).
The plaintiff has in its favor a judgment against debtor
David for the payment of debt. It does not appear
that the execution of this judgment has been asked for
and Exhibit B, on the other hand, shows that David has
two pieces of property the value of which is in excess
of the balance of the debt the payment of which is
sought of Tanglao in his alleged capacity as surety.
PHILIPPINE BANK OF COMMUNICATIONS VS. COURT
OF APPEALS, JOSEPH L.G. CHUA AND JALECO DEV’T,
INC.
FACTS: On April 14, 1976, Fortune Motors (Phils.), Inc.
executed a Surety Agreement in favor of Philippine
Bank of Communications (PBCOM for short) with
Joseph L.G. Chua, as one of the sureties.
On March 6, 1981, Forte Merchant Finance, Inc.,
executed a Surety Agreement in favor of PBCOM with
Joseph L.G. Chua as one of the sureties
On October 24, 1983 Chua executed a Deed of
Exchange transferring a parcel of land with
improvements thereon covered by TCT No. S- 52808
(343721) to JALECO Development, Inc. As a result, TCT
No. 126573 of the Register of Deeds of Rizal covering
the aforementioned parcel of land was issued in the
name of JALECO Development, Inc., on November 24,
1983.
On November 2, 1983, Chua sold 6,000 shares of
JALECO Development, Inc., to Mr. Chua Tiong King for
P600,000.00 and another 6,000 shares of JALECO
Development, Inc. to Guillermo Jose, Jr. also for
P600,000.00 and Caw Le Ja Chua, wife of Chua sold
the 6,000 share of JALECO Development, Inc., to Chua
Tiong King for P200,000.00
In the meanwhile, for failure of both Fortune
Motors (Phils.), Inc. and Forte Merchant Finance, Inc.
to meet their respective financial obligations with
PBCOM, the latter filed Civil Case No. 84-25159
against Fortune Motors (Phils.), Inc., Joseph L. G.
Chua et. al. and Civil Case No. 84-25160 against
Forte
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 92
Merchant Finance, Inc., Joseph L. G. Chua et. al. with
the Regional Trial Court of Manila, both for Sum of
Money with Writ of Preliminary Attachment where
PBCOM was able to obtain a notice of levy on the
properties of Fortune Motors (Phils.)
When plaintiff was able to locate Chua's former
property situated in Dasmariñas, Makati, Metro Manila,
covered by TCT No. S-52808 containing an area of
1,541 square meters which was already transferred to
JALECO Development, Inc., under TCT No. 126573 by
virtue of the Deed of Exchange dated October 24,
1983, PBCOM filed Civil Case No. 7889 for annulment of
Deed of Exchange with the Regional Trial Court of
Makati, Metro Manila.
Chua admitted the Deed of Exchange in favor of
JALECO and contended that it was done in good faith
and in accordance with law.
ISSUE: WON the Deed of Exchange should be cancelled.
YES
HELD: For failure of both Fortune Motors (Phils), Inc.
and Forte Merchant Finance, Inc. to pay their
obligations with the petitioner, the latter filed the two
civil cases against Fortune Motors (Phils.), Inc. and
Forte Merchant Finance, Inc. and respondent Chua,
among others with the Regional Trial Court of Manila.
The petitioner was granted a writ of attachment as a
result of which properties belonging to Fortune
Motors (Phils.) were attached. It turned out, however,
that the attached properties of Fortune Motors
(Phils.), Inc. were already previously
attached/mortgaged to prior lien holders in the
amount of about P70,000,000.00. As regards Forte
Merchant Finance, Inc., it appears that it has no
property to satisfy the debts it incurred with
PBCOM. The record further shows that as regards
Chua, the property subject of the Deed of Exchange
between him and JALECO was his only property.
Under these circumstances, the petitioner's petition
for annulment of the deed of exchange on the
ground that the deed was executed in fraud of
creditors, despite the pendency of the two (2) other
civil cases is well-taken.
As surety for the financial obligations of Fortune
Motors (Phils.), Inc. and the Forte Merchant Finance,
Inc., with the petitioner,

respondent Chua bound himself solidarily liable with
the two (2) principal debtors. (Article 2047, Civil Code)
The petitioner may therefore demand payment of the
whole financial obligations of Fortune Motors (Phils.),
Inc. and Forte Finance, Inc., from Chua, if the petitioner
chooses to go directly after him. Hence, since the only
property of Chua was sold to JALECO after the debts
became due, the petitioner has the right to file an
annulment of the deed of exchange between Chua
and JALECO wherein Chua sold his only property to
JALECO to protect his interests and so as not to make
the judgments in the two (2) cases illusory.
Parenthetically, the appellate court's observation that
the petitioner's interests are sufficiently protected by
a writ of attachment on the properties of Fortune
Finance (Phils.), Inc. has neither legal nor factual basis.
PRUDENTIAL BANK vs. INTERMEDIATE APPELLATE
COURT, PHILIPPINE RAYON MILLS, INC. and
ANACLETO R. CHI
FACTS: This case involves an action for the recovery
of sum of money representing the amount paid by
Prudential Bank to Nissho Company Ltd. of Japan for
textile machinery imported by Philippine Rayon Mills
Inc.
On August 8, 1962, Philippine Rayon Mills Inc. entered
into a contract with Nissho Co., Ltd. of Japan for the
importation of textile machineries under a five-year
deferred payment plan. Philippine Rayon applied for a
commercial letter of credit with the Prudential Bank
and Trust Company in favor of Nissho in the amount
of $128,548,78. Nissho withdrew twelve drafts against
the letter of credit which Prudential Bank paid to the
Bank of Tokyo but only two of these drafts were
accepted by Anacleto Chi, the president of Philippine
Rayon.
Upon the arrival of the machineries, the Prudential
Bank indorsed the shipping documents to the
defendant-appellant which accepted delivery of the
same. They executed, by prior arrangenment, a trust
receipt which was signed by Anacleto Chi to enable
Philippine Rayon Mills to take delivery of the
machines.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 93
At the back of the trust receipt is a printed form to be
accomplished by two sureties who, by the very
terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the
defendant-appellant fail to pay the total amount or
any portion of the drafts issued by Nissho and paid
for by Prudential Bank. The defendant-appellant was
able to take delivery of the textile machineries and
installed the same at its factory site at 69 Obudan
Street, Quezon City.
Sometime in 1967, the defendant-appellant ceased
business operation. On December 29, 1969, defendant-
appellant's factory was leased by Yupangco Cotton Mills
for an annual rental of P200,000.00. The lease was
renewed on January 3, 1973. On January 5, 1974, all
the textile machineries in the defendant-appellant's
factory were sold to AIC Development Corporation for
P300,000.00.
The obligation of the defendant-appellant arising from
the letter of credit and the trust receipt remained
unpaid and unliquidated. Repeated formal demands for
the payment of the said trust receipt yielded no
result Hence, the present action for the collection of
the principal amount of P956,384.95 was filed on
October 3, 1974 against the defendant- appellant and
Anacleto R. Chi. In their respective answers, the
defendants interposed identical special defenses, viz.,
the complaint states no cause of action; if there is, the
same has prescribed; and the plaintiff is guilty of
laches.
The trial court rendered judgment holding Philippine
Rayon Mills Inc. liable for the sum of P153,645.22 which
represented the two drafts accepted by Anacleto. The
case against Anacleto Chi was dismissed.
Petitioner appealed the decision to the then
Intermediate Appellate Court. In urging the said court
to reverse or modify the decision, petitioner alleged
in its Brief that the trial court erred in (a) disregarding
its right to reimbursement from the private
respondents for the entire unpaid balance of the
imported machines, the total amount of which was
paid to the Nissho Company Ltd., thereby violating
the principle of the third party payor's right to
reimbursement provided for in the second

paragraph of Article 1236 of the Civil Code and under
the rule against unjust enrichment; (b) refusing to
hold Anacleto R. Chi, as the responsible officer of
defendant corporation, liable under Section 13 of P.D
No 115 for the entire unpaid balance of the imported
machines covered by the bank's trust receipt
(c) finding that the solidary guaranty clause signed by
Anacleto R. Chi is not a guaranty at all; (d)
controverting the judicial admissions of Anacleto R.
Chi that he is at least a simple guarantor of the
said trust receipt obligation;
(e) contravening, based on the assumption that Chi is a
simple guarantor, Articles 2059, 2060 and 2062 of
the Civil Code and the related evidence and
jurisprudence which provide that such liability had
already attached; (f) contravening the judicial
admissions of Philippine Rayon with respect to its
liability to pay the petitioner the amounts involved in
the draft; and (g) interpreting "sight" drafts as
requiring acceptance by Philippine Rayon before the
latter could be held liable thereon.
ISSUES:(only the 3rd issue is related to the topic)
1. Whether presentment for acceptance of the drafts
was indispensable to make Philippine Rayon liable
thereon; - NO
2. Whether Philippine Rayon is liable on the basis of
the trust receipt; - YES
3. Whether private respondent Chi is jointly and
severally liable with Philippine Rayon for the
obligation sought to be enforced - NO and if not,
whether he may be considered a guarantor -YES; in the
latter situation, whether the case should have been
dismissed on the ground of lack of cause of action
as there was no prior exhaustion of Philippine Rayon's
properties. -NO
HELD:
ISSUE #1: A letter of credit is defined as an
engagement by a bank or other person made at the
request of a customer that the issuer will honor drafts
or other demands for payment upon compliance with
the conditions specified in the credit. Through a letter
of credit, the bank merely substitutes its own promise
to pay for one of its customers who in return promises
to pay the bank the amount of funds mentioned in the
letter of credit plus credit or commitment fees
mutually agreed upon. In the instant case then, the
drawee was necessarily the herein petitioner. It was
to the latter that the drafts
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 94
were presented for payment. In fact, there was no
need for acceptance as the issued drafts are sight
drafts. Presentment for acceptance is necessary only in
the cases expressly provided for in Section 143 of the
Negotiable Instruments Law (NIL). The said section
reads:
Sec. 143. When presentment for acceptance must be
made. — Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any
other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument;
or
(b) Where the bill expressly stipulates that it shall
be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than
at the residence or place of business of the drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the bill
liable.
Obviously then, sight drafts do not require presentment
for acceptance.
The acceptance of a bill is the signification by the
drawee of his assent to the order of the drawer;
this may be done in writing by the drawee in the bill
itself, or in a separate instrument.
ISSUE #2: The trial court and the public respondent
likewise erred in disregarding the trust receipt and in
not holding that Philippine Rayon was liable thereon.
In People vs. Yu Chai Ho, this Court explains the
nature of a trust receipt by quoting In re Dunlap
Carpet Co., thus:
By this arrangement a banker advances money to an
intending importer, and thereby lends the aid of
capital, of credit, or of business facilities and agencies
abroad, to the enterprise of foreign commerce. Much
of this trade could hardly be carried on by any other
means, and therefore it is of the first importance
that the fundamental factor in the transaction, the
banker's advance of money and credit, should receive
the amplest protection. Accordingly, in order to secure
that the banker shall be repaid at the critical point

— that is, when the imported goods finally reach the
hands of the intended vendee — the banker takes the
full title to the goods at the very beginning; he takes
it as soon as the goods are bought and settled for by
his payments or acceptances in the foreign country,
and he continues to hold that title as his
indispensable security until the goods are sold in the
United States and the vendee is called upon to pay
for them. This security is not an ordinary pledge by the
importer to the banker, for the importer has never
owned the goods, and moreover he is not able to
deliver the possession; but the security is the
complete title vested originally in the bankers, and
this characteristic of the transaction has again and
again been recognized and protected by the courts.
Of course, the title is at bottom a security title, as it
has sometimes been called, and the banker is always
under the obligation to reconvey; but only after his
advances have been fully repaid and after the
importer has fulfilled the other terms of the contract.
As further stated in National Bank vs. Viuda e Hijos de
Angel Jose, trust receipts:
. . . [I]n a certain manner, . . . partake of the nature
of a conditional sale as provided by the Chattel
Mortgage Law, that is, the importer becomes absolute
owner of the imported merchandise as soon an he has
paid its price. The ownership of the merchandise
continues to be vested in the owner thereof or in
the person who has advanced payment, until he has
been paid in full, or if the merchandise has already
been sold, the proceeds of the sale should be
turned over to him by the importer or by his
representative or successor in interest.
Under P.D. No. 115, otherwise known an the Trust
Receipts Law, which took effect on 29 January 1973,
a trust receipt transaction is defined as "any
transaction by and between a person referred to in
this Decree as the entruster, and another person
referred to in this Decree as the entrustee, whereby
the entruster, who owns or holds absolute title or
security interests' over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latter's
execution and delivery to the entruster of a signed
document called the "trust receipt" wherein the
entrustee binds himself to hold the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 95
designated goods, documents or instruments in trust
for the entruster and to sell or otherwise dispose of the
goods, documents or instruments with the obligation
to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, instruments
themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and
conditions specified in the trusts receipt, or for other
purposes substantially equivalent to any one of the
following: . . ."
ISSUE #3: We also conclude, for the reason
hereinafter discussed, and not for that adduced by the
public respondent, that private respondent Chi's
signature in the dorsal portion of the trust receipt did
not bind him solidarily with Philippine Rayon. The
statement at the dorsal portion of the said trust
receipt, which petitioner describes as a "solidary
guaranty clause", reads:
In consideration of the PRUDENTIAL BANK AND TRUST
COMPANY complying with the foregoing, we jointly
and severally agree and undertake to pay on demand
to the PRUDENTIAL BANK AND TRUST COMPANY
all sums of money which the said PRUDENTIAL BANK
AND TRUST COMPANY
may call upon us to pay arising out of or pertaining to,
and/or in any event connected with the default of
and/or non-fulfillment in any respect of the undertaking
of the aforesaid:
PHILIPPINE RAYON MILLS, INC.
We further agree that the PRUDENTIAL BANK AND
TRUST COMPANY does not have to take any steps or
exhaust its remedy against aforesaid:
before making demand on me/us.
(Sgd.) Anacleto R. Chi
ANACLETO R. CHI
Our own reading of the questioned solidary guaranty
clause yields no other conclusion than that the
obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks
of waiver of exhaustion, which, nevertheless, is
ineffective in this case because the space therein for
the party whose property may not be exhausted

was not filled up. Under Article 2058 of the Civil
Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for
the obligation. Petitioner likewise admits that the
questioned provision is a solidary guaranty clause,
thereby clearly distinguishing it from a contract of
surety.
It, however, described the guaranty as solidary between
the guarantors; this would have been correct if two (2)
guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it
or to the liability existing between themselves. It does
not refer to the undertaking between either one or
both of them on the one hand and the petitioner on
the other with respect to the liability described under
the trust receipt. Elsewise stated, their liability is not
divisible as between them, i.e., it can be enforced to
its full extent against any one of them.
Furthermore, any doubt as to the import, or true
intent of the solidary guaranty clause should be
resolved against the petitioner. The trust receipt,
together with the questioned solidary guaranty
clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the
affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly
construed against the party responsible for its
preparation.
Neither can We agree with the reasoning of the public
respondent that this solidary guaranty clause was
effectively disregarded simply because it was not
signed and witnessed by two (2) persons and
acknowledged before a notary public. While indeed,
the clause ought to have been signed by two (2)
guarantors, the fact that it was only Chi who signed
the same did not make his act an idle ceremony or
render the clause totally meaningless. By his signing,
Chi became the sole guarantor.
The attestation by witnesses and the
acknowledgement before a notary public are not
required by law to make a party liable on the
instrument. The rule is that contracts shall be
obligatory in whatever form they may have been
entered into, provided all the essential requisites
for their validity are present;
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 96
however, when the law requires that a contract be in
some form in order that it may be valid or enforceable,
or that it be proved in a certain way, that
requirement is absolute and indispensable. With respect
to a guaranty, which is a promise to answer for the
debt or default of another, the law merely requires
that it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless
ratified. While the acknowledgement of a surety
before a notary public is required to make the same
a public document, under Article 1358 of the Civil
Code, a contract of guaranty does not have to
appear in a public document.
The remaining issue to be resolved concerns the
propriety of the dismissal of the case against private
respondent Chi. The trial court based the dismissal,
and the respondent Court its affirmance thereof, on the
theory that Chi is not liable on the trust receipt in any
capacity — either as surety or as guarantor — because
his signature at the dorsal portion thereof was useless;
and even if he could be bound by such signature as a
simple guarantor, he cannot, pursuant to Article
2058 of the Civil Code, be compelled to pay
until after petitioner has exhausted and resorted to all
legal remedies against the principal debtor, Philippine
Rayon. The records fail to show that petitioner had
done so. Reliance is thus placed on Article 2058 of the
Civil Code which provides:
Art. 2058. The guarantor cannot be compelled to pay
the credit unless the latter has exhausted all the
property of the debtor, and has resorted to all the
legal remedies against the debtor.
Simply stated, there is as yet no cause of action against
Chi.
Excussion is not a condition sine qua non for the
institution of an action against a guarantor. In Southern
Motors, Inc. vs. Barbosa, this Court stated:
Although an ordinary personal guarantor — not a
mortgagor or pledgor — may demand the
aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor,
who shall be entitled, however, to a deferment of the
execution of said judgment

against him until after the properties of the principal
debtor shall have been exhausted to satisfy the
obligation involved in the case.
However, Chi's liability is limited to the principal
obligation in the trust receipt plus all the accessories
thereof including judicial costs; with respect to the
latter, he shall only be liable for those costs incurred
after being judicially required to pay. Interest and
damages, being accessories of the principal obligation,
should also be paid; these, however, shall run only
from the date of the filing of the complaint. Attorney's
fees may even be allowed in appropriate cases.
FIDELIZA J. AGLIBOT vs. INGERSOL L. SANTIA
G.R. No. 185945 (December 05, 2012)
FACTS: Engr. Ingersol L.Santia loaned P2,500,000 to
Pacific Lending and Capital Corporation, through its
manager Fideliza J. Aglibot. The loan was evidence by
a promisorry note date July 1, 2003 and payable in one
year subject to interest at 24% per annum. Aglibot
then issued and delivered to Santia eleven post-
dated personal checks drawn from her own demand
account as a guaranty or security for the payment of
the note.
Upon presentation of the checks, they were
dishonored by the bank for having been drawn against
insufficient funds or closed account. Santia then
demanded payment from PLCC and Aglibot of the face
value of the checks, but neither of them heeded his
demand. As a result, eleven Informations for violation
of BP 22 were filed against Aglibot.
Aglibot, in her defense, admitted that she did obtain
the loan from Santia, but claimed that she did so in
behalf of PLCC; that before granting the loan, Santia
demanded and obtained from her a security for the
repayment thereof, but with the understanding that
upon remittance in case of the face amount of the
checks, Santia would correspondingly return to her
each check so paid. Aglibot also mainted that she
was a mere guarantor of the PLCC's debt and Santia
failed to exhaust all means to collect the debt from
PLCC and therefore she is not subsidiary liable.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 97
ISSUE: Whether or not Aglibot is a guarantor and
thus, can invoke the benefit of excussion - NO, Aglibot
is an accommodation party
HELD: The RTC in its decision held that Aglibot signed
the promissory note on behalf of PLCC as manager and
nowhere does it appear that she signed as a
accommodation party. The RTC further ruled that what
Aglibot agreed to do by issuing her personal checks
was merely to guarantee the indebtedness of PLCC,
and thus she must be accorded the benefit of
excussion- prior exhaustion of the property of the
debtor- as provided under Article 2058 of the Civil
Code-
Art. 2058. The guarantor cannot be compelled to pay
the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the
legal remedies against the debtor.
However, in the present case, Aglibot's claim as a
mere guarantor is bereft of merit for want of proof as
provided under Article 1403(2) of the Civil Code,
embodying the Statute of Frauds which provides-
Art. 1403. The following contracts are unenforceable,
unless they are ratified:
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the following
cases an agreement hereafter made shall be
unenforceable by action, unless the same, or some
note or memorandum thereof, be in writing, and
subscribed by the party charged, or by his agent;
evidence, therefore, of the agreement cannot be
received without the writing, or a secondary evidence
of its contents:
a) An agreement that by its terms is not to be
performed within a year from the making thereof;
b) A special promise to answer for the debt, default,
or miscarriage of another;
c) An agreement made in consideration of marriage,
other than a mutual promise to marry;
d) An agreement for the sale of goods, chattels or
things in action, at a price not less than five hundred
pesos, unless the buyer accept and receive part of
such goods and chattels, or the

evidences, or some of them, or such things in action,
or pay at the time some part of the purchase
money; but when a sale is made by auction and entry
is made by the auctioneer in his sales book, at the
time of the sale, of the amount and kind of property
sold, terms of sale, price, names of purchasers and
person on whose account the sale is made, it is a
sufficient memorandum;
e) An agreement for the leasing of a longer period
than one year, or for the sale of real property or of
an interest therein;
f) A representation to the credit of a third person.
Under the above provision, concerning a guaranty
agreement, which is a promise to answer for the debt
or default of another, the law clearly requires that
it, or some note or memorandum thereof, be in
writing. Otherwise, it would be unenforceable unless
ratified, although under Article 1358 of the Civil Code,
a contract of guaranty does not have to appear in a
public document.
Under Article 2055 of the Civil Code, it is provided that
a guaranty is not presumed, but must be express and
cannot extend to more than what is stipulated
therein. This is the obvious rationale why a contract of
guaranty is unenforceable unless made in writing or
evidenced by some writing. For as pointed out by
Santia, Aglibot has not shown any proof, such as a
contract, a secretary’s certificate or a board resolution,
nor even a note or memorandum thereof, whereby it
was agreed that she would issue her personal
checks in behalf of the company to guarantee the
payment of its debt to Santia. Certainly, there is
nothing shown in the Promissory Note signed by
Aglibot herself remotely containing an agreement
between her and PLCC resembling her guaranteeing
its debt to Santia. And neither is there a showing that
PLCC thereafter ratified her act of "guaranteeing" its
indebtedness by issuing her own checks to Santia.
N.B.: Why Aglibot is an accommodation party
The appellate court ruled that by issuing her own
post-dated checks, Aglibot thereby bound herself
personally and solidarily to pay Santia, and dismissed
her claim that she issued her said checks in her
official capacity as PLCC’s
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 98
manager merely to guarantee the investment of
Santia. It noted that she could have issued
PLCC’s checks, but instead she chose to issue her own
checks, drawn against her personal account with
Metrobank. It concluded that Aglibot intended to
personally assume the repayment of the loan,
pointing out that in her Counter-Affidavit, she even
admitted that she was personally indebted to Santia,
and only raised payment as her defense, a clear
admission of her liability for the said loan.
The facts below present a clear situation where Aglibot,
as the manager of PLCC, agreed to accommodate its
loan to Santia by issuing her own post-dated checks in
payment thereof. She is what the Negotiable
Instruments Law calls an accommodation party.
BENJAMIN BITANGA vs PYRAMID CONSTRUCTION
ENGINEERING CORPORATION
G.R. No. 173526 (August 28, 2008)
FACTS: On March 26, 1997, Pyramid Construction
Engineering Corporation entered into an agreement
with Macrogen Realty, of which Benjamin Bitanga is
the president, to construct in favor of the latter, the
Shoppers Gold Building. Pyramid commenced the
construction project on May 1997. However, Macrogen
Realty failed to settle Pyramid's progress billings,
which resulted to the suspension of the work.
In August 1998, Pyramid once again suspended the
construction work because the conditions that is
imposed for its continuation, including payment of the
unsettled accounts had not been complied with by
Macrogen Realty. Pyramid then instituted a case with
the Construction Industry Association Commission
against Macrogen Realty seeking payment from the
latter for the unpaid billings and project costs.
On April 17, 2000, before the arbitration case could
be set for trial, both parties entered into a compromise
agreement whereby Macrogen Realty agreed to pay
the total amount of P6,000,000 in six equal monthly
installments. Bitanga guaranteed the obligations of
Macrogen Realty under the compromise agreement
by executing a Contract of

Guaranty in favor of Pyramid, by virtue of which he
irrevocably and unconditionally guaranteed the full
and complete payment of the principal liability of
Macrogen Realty.
However, contrary to petitioner’s assurances,
Macrogen Realty failed and refused to pay all the
monthly installments agreed upon in the
Compromise Agreement. Hence, on 7 September
2000, respondent moved for the issuance of a writ of
8
execution against Macrogen Realty, which CIAC
granted.
9 2060 of the Civil Code clearly requires that in order
On 29 November 2000, the sheriff filed a return
stating that he was unable to locate any property of
Macrogen Realty, except its bank deposit of
P20,242.33, with the Planters Bank, Buendia Branch.
Respondent then made, on 3 January 2001, a written
demand on petitioner, as guarantor of Macrogen
Realty, to pay the P6,000,000.00, or to point out
available properties of the Macrogen Realty within the
Philippines sufficient to cover the obligation
guaranteed. It also made verbal demands on
petitioner. Yet, respondent’s demands were left
unheeded.
As a special and affirmative defense, petitioner argued
that the benefit of excussion was still available to
him as a guarantor since he had set it up prior to
any judgment against him. According to petitioner,
respondent failed to exhaust all legal remedies to
collect from Macrogen Realty the amount due under
the Compromise Agreement, considering that
Macrogen Realty still had uncollected credits which
were more than enough to pay for the same. Given
these premise, petitioner could not be held liable as
guarantor.
ISSUE: Whether or not Benjamin Bitanga can avail
himself of the benefit of excussion - NO
HELD: Under a contract of guarantee, the guarantor
binds himself to the creditor to fulfill the obligation
of the principal debtor in case the latter should fail
to do so. The guarantor who pays for a debtor, in
turn, must be indemnified by the latter. However,
the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the
property of the debtor and resorted to all the legal
remedies against the debtor. This is what
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 99
is otherwise known as the benefit of excussion.
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of
the benefit of excussion, he must set it up against the
creditor upon the latter’s demand for payment from
him, and point out to the creditor available property of
the debtor within Philippine territory, sufficient to cover
the amount of the debt.
The afore-quoted provision imposes a condition for
the invocation of the defense of excussion. Article
for the guarantor to make use of the benefit of
excussion, he must set it up against the creditor
upon the latter’s demand for payment and point out
to the creditor available property of the debtor within
the Philippines sufficient to cover the amount of the
debt.
It must be stressed that despite having been served
a demand letter at his office, petitioner still failed to
point out to the respondent properties of Macrogen
Realty sufficient to cover its debt as required under
Article 2060 of the Civil Code. Such failure on
petitioner’s part forecloses his right to set up the
defense of excussion.
Worthy of note as well is the Sheriff’s return stating
that the only property of Macrogen Realty which he
found was its deposit of P20,242.23 with the
Planters Bank.
Article 2059(5) of the Civil Code thus finds
application and precludes petitioner from interposing
the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxxx
(5) If it may be presumed that an execution
on the property of the principal debtor
would not result in the satisfaction of the
obligation.
Benjamin Bitanga had not genuinely controverted the
return made by Sheriff Joseph
F. Bisnar, who affirmed that, after exerting diligent
efforts, he was not able to locate any

property belonging to the Macrogen Realty, except for
a bank deposit with the Planter’s Bank at Buendia, in
the amount of P20,242.23. It is axiomatic that the
liability of the guarantor arises when the insolvency
or inability of the debtor to pay the amount of debt
is proven by the return of the writ of execution that
had not been unsatisfied.
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO
and LEONOR STA. ANA vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION
FACTS: Traders Royal Bank (TRB) extended to JN
Development Corporation (JN) an Export Packing Credit
Line for P2,000,000. The loan was covered by a real
estate mortgage and a letter of guarantee from
respondent Philippine Export and Foreign Loan
Guarantee Corporation (PhilGuarantee).
Upon JN’s failure to pay the loan when it matured,
PhilGuarantee, upon TRB’s request to make good its
guarantee, paid the latter.
Subsequently, PhilGuarantee made several demands
on JN, but the latter proposed to settle the obligation
by way of development and sale of the mortgaged
property instead, which PhilGuarantee rejected.
PhilGuarantee thus filed a complaint for collection of
money and damages against herein petitioners. The
RTC ruled that since TRB was able to foreclose the
real estate mortgage executed by JN the obligation
was extinguished and thus the latter is not liable to
reimburse PhilGuarantee.
In addition, the RTC held that since the guarantee
was good for only one year, which was not renewed
after the expiry of said period, PhilGuarantee had no
more legal duty to pay TRB.
On appeal, the CA reversed the RTC’s decision.
ISSUES:
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 100
1. Whether or not PhilGuarantee’s payment to TRB
amounts to a waiver of its right under Article 2058
of the Civil Code
2. Whether or not PhilGuarantee had no obligation
to pay TRB because of the alleged expiration of
contract of guarantee
RULING:
1. Under a contract of guarantee, the guarantor
binds himself to the creditor to fulfil the
obligation of the principal debtor in case the latter
should fail to do so. The guarantor who pays
for a debtor, in turn, must be indemnified by
the latter. Under Article 2058, the guarantor
cannot be compelled to pay the creditor unless
the latter has exhausted all the property of the
debtor and resorted to all the legal remedies
against the debtor (benefit of excussion). The
creditor must first obtain a judgment against the
principal debtor before assuming to run after
the alleged guarantor since the exhaustion of the
principal’s property’ cannot begin to take place
before judgment has been obtained. In order that
the guarantor may make use of the benefit of
excussion, he must set it up against the creditor
upon the latter’s demand for payment and point
out to the creditor available property of the
debtor within the Philippines sufficient to cover the
amount of the debt. Excussion is a right
granted to the guarantor by law and as such he
may opt to make use of it or waive it.
PhilGuarantee’s waiver of the right of excussion
cannot prevent it from demanding reimbursement
from petitioners. While a guarantor enjoys the
benefit of excussion, nothing prevents him from
paying the obligation once demand is made on
him. The law clearly requires the debtor to
indemnify the guarantor what the latter has paid.
2. The guarantee was only up to December 17,
1980. JN’s obligation with TRB fell due on June 30,
1980, and demand on PhilGuarantee was made by
TRB on October 8, 1980. That payment was
actually made only on March 10, 1981 does not
take it out of the terms of the guarantee. What
is controlling is that default and demand on
PhilGuarantee had taken place while the guarantee
was still in

force. The benefit of excussion, as well as the
requirement of consent to extensions of payment,
is a protective device pertaining to and conferred
on the guarantor. These may be invoked by the
guarantor against the creditor as defenses to bar
the unwarranted enforcement of the guarantee.
However, PhilGuarantee did not avail of these
defenses when it paid its obligation once demand
was made on it.
MIRA HERMANOS, INC. vs. MANILA
TOBACCONISTS, INC., ET AL.,; PROVIDENT
INSURANCE CO.
FACTS: By virtue of a written contract entered into
between Mira Hermanos, Inc., and Manila
Tobacconists, Inc., the former agreed to deliver to the
latter merchandise for sale on consignment under
certain specified terms and the latter agreed to pay
to the former on or before the 20th day of each
month the invoice value of all the merchandise sold
during the preceding month.
Mira Hermanos, Inc., required of the Manila
Tobacconists, Inc., a bond of P3,000, which was
executed by the Provident Insurance Co., on
September 2, 1939, to secure the fulfillment of the
obligation of the Tobacconists under the contract up to
the sum of P3,000.
In October, 1940, the volume of the business of the
Tobacconists having increased so that the
merchandise received by it on consignment from Mira
Hermanos exceeded P3,000 in value, Mira Hermanos
required of the Tobacconist an additional bond of
P2,000, and in compliance with that requirement the
defendant Manila Compañia de Seguros, on October
16, 1940, executed a bond of P2,000 with the same
terms and conditions (except as to the amount) as
the bond of the Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was
made of the transactions between Mira Hermanos
and the Tobacconists, as a result of which there was
found a balance due from the latter to the former of
P2,272.79, which indebtedness the Tobacconists
recognized but was unable to pay. Thereupon Mira
Hermanos made a demand upon the two surety
companies for
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 101
the payment of said sum.
The Provident Insurance Co., paid only the sum of
P1,363.67, which is 60% of the amount owned by the
Tobacconists to Mira Hermanos, alleging that the
remaining 40% should be paid by the other surety,
Manila Compañia de Seguros, in accordance with
Article 8137 of the Civil Code.
The Manila Compañia de Seguros refused to pay the
balance, contending that so long as the liability of
the Tobacconists did not exceed P3,000, it was not
bound to pay anything because its bond referred only
to the obligation of the Tobacconists in excess of
P3,000 and up to P5,000.
Hence Mira Hermanos, Inc., brought this to recover
from
them jointly and severally the sum of P909.12 with
legal interest thereon from the date of the complaint.
ISSUE: WON Provident Insurance Co. is entitled to the
"benefit of division" provided in article 1837 of the
Civil Code
HELD: Article 1837 of the [Old] Civil Code reads as
follows:
Art. 1837. Should there be several sureties of only one
debtor for the same debt, the liability therefor shall be
divided among them all. The creditor can claim from
each surety only his proportional part unless liability
in solidum has been expressly stipulated.
The right to the benefit of division against the co-
sureties for their respective shares ceases in the same
cases and for the same reason as that to an
exhaustion of property against the principal debtor.
While on its face the bond given by the Manila
Compañia de Seguros contains the same terms and
conditions (except as to the amount) as those of the
bond given by the Provident Insurance Co.,
nevertheless it was pleaded by the Manila Compañia
de Seguros and found proven by the trial court.
As the trial court observed, there would have been
no need for the additional bond of P2,000

if its purpose were to cover the first P2,000 already
covered by the P3,000 bond of the Provident Insurance
Co.
Indeed, if the purpose of the additional bond of P2,000
were to cover not the excess over and above P3,000
but the first P2,000 of the obligation of the principal
debtor like the bond of P3,000 which covered only
the first P3,000 of said obligation, then it would result
that had the obligation of the Tobacconists exceeded
P3,000, neither of the two bonds would have
responded for the excess, and that was precisely the
event against which Mira Hermanos wanted to
protect itself by demanding the additional bond of
P2,000.
For instance, suppose that the obligation of the
principal debtor, the Tobacconists, amounted to
P5,000; if both bonds were co-extensive up to P2,000
— as would logically follow if appellant's contention
were correct — the result would be that the first
P2,000 of the obligation would have to be divided
between and paid equally by the two surety
companies, which should pay P1,000 each, and of the
balance of P3,000 the Provident Insurance Co. would
have to pay only P1,000 more because its liability is
limited to the first P3,000, thus leaving the plaintiff
in the lurch as to the excess of P2,000.
That was manifestly not the intention of the parties.
As a matter of fact, when the Provident gave its bond
and fixed the premiums thereon it assumed an
obligation of P3,000 in solidum with the Tobacconists
without any expectation of any benefit of division with
any other surety.
The additional bond of P2,000 was, more than a year
later, required by the creditor of the principal debtor
for the protection of said creditor and certainly not
for the benefit of the original surety, which was not
entitled to expect any such benefit.
The foregoing considerations, which fortify the trial
court's conclusion as to the real intent and agreement
of the parties with regard to the bond of P2,000 given
by the Manila Compañia de Seguros, destroys at the
same time the theory of the appellant regarding the
applicability of article 1837 of the Civil Code.
That article refers to several sureties of only
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 102
one debtor for the same debt. In the instant case,
altho the two bonds on their face appear to guarantee
the same debt coextensively up to P2,000 — that of
the Provident Insurance Co. alone extending beyond
that sum up to P3,000 — it was pleaded and
conclusively proven that in reality said bonds, or the
two sureties, do not guarantee the same debt
because the Provident Insurance Co. guarantees only
the first P3,000 and the Manila Compañia de
Seguros, only the excess over and above said amount
up to P5,000. Article 1837 does not apply to this
factual situation.
TUASON, TUASON, INC. vs. ANTONIO MACHUCA
FACTS: "Manila Compañia de Seguros" obtained from
the Universal Trading Company and Tuason, Tuason &
Co., a solidary note for the sum of P9,663 executed by
said companies in its favor. Before signing said note,
Tuason, Tuason & Co., in turn, caused the Universal
Trading Company and its president Antonio Machuca,
personally, to sign a document (Exhibit B), wherein
they bound themselves solidarily to pay, reimburse,
and refund to the company all such sums or
amounts of money as it, or its representative, may
pay or become bound to pay, upon its obligation
with "Manila Compañia de Seguros," whether or not it
shall have actually paid such sum or sums or any part
thereof.
The Universal Trading Company having been declared
insolvent, "Manila Compañia de Seguros" brought an
action in the lower court against Tuason, Tuason &
Co. to recover the value of the note for P9,663 and
obtained final judgment therein, which was affirmed
by this court on appeal, for the total sum of
P12,197.27, which includes the value of the note
with interest thereon.
Subsequently, all the rights of Tuason, Tuason
& Co. were transferred to the plaintiff Tuason, Tuason,
Inc.
Later on Tuason, Tuason, Inc., brought this action to
recover of Antonio Machuca the sum of P12,197.27
which it was sentenced to pay in
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 103

the case filed against it by "Manila Compañia de

Seguros," plus P3,000 attorney's fees, and P155.92 The defendant also contends that the document
court's costs and sheriff's fees, that is, a total of executed by Albina Tuason in favor of "Manila
P15,353.19. Compañia de Seguros" assuming and making hers the
obligation of Tuason, Tuason & Co., was a novation of
ISSUES: the contract by substitution of the debtor, and
a) WON Tuason, Tuason Inc. Is entitled to the relief relieved Tuason, Tuason & Co. from all obligation in
sought in view of the above facts? favor of "Manila Compañia de Seguros."
b) WON Tuason, Tuason Inc. has the right to recover
As to this, it is enough to say that if this was what
from Machuca more than the value of the note
Albina Tuason contemplated in signing the document,
executed by Tuason, Tuason, Inc. in favor of Manila
evidently it was not what "Manila Compañia de
Compania de Seguros?
Seguros" accepted. As above stated, "Manila
Compañia de Seguros" accepted this document only
HELD: The plaintiff company argues that, at all events, it
as additional security for its credit and not as a
is entitled to bring this action under article 1843 of
novation of the contract.
the Civil Code, which provides that the surety may,
even before making payment, bring action against
Our conclusion is that the plaintiff has the right to
the principal debtor.
recover of the defendant the sum of P9,663, the value
of the note executed by the plaintiff in favor of "Manila
This contention of the plaintiff is untenable. The
Compañia de Seguros" which the plaintiff is under
present action, according to the terms of the
obligation to pay by virtue of final judgment. We do
complaint, is clearly based on the fact of payment. It
not believe, however, that the defendant must pay
is true that, under article 1843, an action lies against
the plaintiff the expenses incurred by it in the
the principal debtor even before the surety pays the
litigation between it and "Manila Compañia de Seguros."
debt, but it clearly appears in the complaint that
That litigation was originated by the plaintiff having
this is not the action brought by the plaintiff.
failed to fulfill its obligation with "Manila Compañia de
Moreover this article 1843 provided several
Seguros," and it cannot charge the defendant with
cumulative remedies in favor of the surety, at his
expenses which it was compelled to make by reason of
election, and the surety who brings an action under
its own fault. It is entitled, however, to the expenses
this article must choose the remedy and apply for it
incurred by it in this action brought against the
specifically. At any rate this article does not provide
defendant, which are fixed at P1,653.65 as attorney's
for the reimbursement of any amount, as is sought by
fees.
the plaintiff.

But although the plaintiff has not as yet paid

KUENZLE & STREIFF VS. TAN SUNCO
"Manila Compañia de Seguros" the amount of the
judgment against it, and even considering that this
FACTS: Kuenzle & Streiff instituted an action against
action cannot be held to come under article 1843 of
Chung Chu Sing for the recovery of indebtedness.
the Civil Code, yet the plaintiff is entitled to the relief
Before Kuenzle & Streiff could secure judgment, Tan
sought in view of the facts established by the evidence.
Sunco brought an action against Chung Chu Sing for
The plaintiff became bound, by virtue of a final
the payment of another obligation for which Tan
judgment, to pay the value of the note executed by
Sunco acted as guarantor. Chung Chu Sing confessed
it in favor of "Manila Compañia de Seguros."
judgment in favor of Tan Sunco. Immediately after
According to the document executed solidarily by the
obtaining judgment, Tan Sunco caused to be levied
defendant and the Universal Trading Company, the
upon under execution all the properties of Chung Chu
defendant bound himself to pay the plaintiff as soon
Sing. Kuenzle & Streiff commenced an action to set
as the latter may have become bound and liable,
aside the judgment, claiming it was obtained by the
whether or not it shall have actually paid. It is
fraud and collusion, and that Tan Sunco had not paid
indisputable that the plaintiff became bound and liable
by a final judgment to pay the value of the note to
"Manila Compañia de Seguros."

the debt for which as guarantor he obtained the
judgment.
ISSUE: WON a guarantor who sues his principal
debtor before paying the debt himself entitled to
recover judgment for the debt?
HELD: No, while the surety has the right to obtain
judgment against his principal debtor, he will not be
permitted to realize on said judgment to the point of
actual collection until he has satisfied, or caused to be
satisfied, the obligation the payment of the obligation
of which he assures. A guarantor who obtains judgment
against his principal cannot execute said judgment
against the latter’s property until he has paid the debt
for which he stands as guarantor.
MANILA SURETY v BATU CONSTRUCTION
FACTS:` On July 8, 1950, the defendant Batu
Construction & Company, as principal, and the plaintiff
Manila Surety & Fidelity Co. Inc., as surety, executed
a surety bond for the sum of P8,812.00 to insure
faithful performance of the former's obligation as
contractor for the construction of the Bacarra Bridge,
Project PR- 72 (No. 3) Ilocos Norte Province. On the
same date, July 8,1950, the Batu Construction &
Company and the defendants Carlos N. Baquiran and
Gonzales P. Amboy executed an indemnity agreement
to protect the Manila Surety & Fidelity Co. Inc..,
against damage, loss or expenses which it may
sustain as a consequence of the surety bond executed
by it jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a
notice from the Director of Public Works (Exhibit B)
annulling its contract with the Government for the
construction of the Bacarra Bridge because of its
failure to make satisfactory progress in the
execution of the works, with the warning that ,any
amount spent by the Government in the continuation
of the work, in excess of the contract price, will be
charged against the surety bond furnished by the
plaintiff. It also appears that a complaint by the
laborers in said project of the Batu Construction &
Company was filed against it and the Manila Surety
and Fidelity Co., Inc., for unpaid wages amounting to
P5,960.10.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 104
Trial Court dismissed the case holding that provisions
of article 2071 of the new Civil Code may be availed of
by a guarantor only and not by a surety the
complaint, with costs against the plaintiff.
ISSUE: The main question to determine is whether the
last paragraph of article 2071 of the new Civil Code
taken from article 1843 of the old Civil Code may be a
vailed of by a surety.
HELD: YES
Provision of law under guaranty available to surety
In suretyship the surety becomes liable to the creditor
without the benefit of the principal debtor's exclusion
of his properties, for he (the surety) maybe sued
independently. So, he is an insurer of the debt and
as such he has assumed or undertaken a responsibility
or obligation greater or more onerous than that of
guarantor. Such being the case, the provisions of article
2071, under guaranty, are applicable and available to a
surety. Hence, a surety, even before having paid, may
proceed against the principal debtor to obtain release
from the surety, or to demand a security that shall
protect him from any proceedings by the creditor or
from the danger of insolvency of the debtor, when the
surety is sued for payment.
PNB VS MANILA SURETY
FACTS: PNB had opened a letter of credit and advanced
thereon $120,000 to Edgington Oil Refinery for 8,000
tons of hot asphalt. Of this amount, 2,000 tons worth
P279,000 were released and delivered to ATACO under
a trust receipt guaranteed by Manila Surety and
Fidelity.
To pay for the asphalt, ATACO constituted PNB its
assignee and attorney-in-fact to receive and collect for
Bureau of Public Works the amount out of the funds
payable to the assignor.
ATACO delivered to the Bureau of Public Works and
the latter accepted. Of this amount the Bank regularly
collected. Thereafter for unexplained reasons, the
Bank ceased to collect from the bureau. It was later
on discovered that more money were payable to
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 105

ATACO from the Public Works office but the bank
allowed another creditor to collect the funds due to
ATACO.
Its demands on the principal debtor and the Surety
having been refused, the Bank sued both in the Court
of First Instance of Manila to recover the balance of
P158,563.18 as of February 15, 1950, plus interests and
costs.
The bank contends that the power of attorney
obtained from ATACO was merely in additional security
in its favor, and that it was the duty of the surety, and
not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor
owed the surety no duty of active diligence to collect
any, sum from the principal debtor.
Appeals is thus not only conclusive on us but fully
supported by the evidence.
Even if the Court of Appeals erred on the second
reason it advanced in support of the decision now
under appeal, because the rules on application of
payments, giving preference to secured obligations
are only operative in cases where there are several
distinct debts, and not where there is only one that
is partially secured, the error is of no importance, since
the principal reason based on the Bank's negligence
furnishes adequate support to the decision of the
Court of Appeals that the surety was thereby
released.

ISSUE: W/N Manila Surety is released from the

obligation as surety.
HELD: Yes. Surety is released when assigned funds
permitted by the creditor to be exhausted is made
without notifying the former.

By allowing the assigned funds to be exhausted

without notifying the surety, the Bank deprived the
former of any possibility of recoursing against that
security, therefore the surety is released.

The appellant points out to its letter of demand,

Exhibit "K", addressed to the Bureau of Public Works,
on May 5, 1949, and its letter to ATACO, Exhibit "G",
informing the debtor that as of its date, October 31,
1949, its outstanding balance was P156,374.83. Said
Exhibit "G" has no bearing on the issue whether the
Bank has exercised due diligence in collecting from the
Bureau of Public Works, since the letter was addressed
to ATACO, and the funds were to come from
elsewhere. As to the letter of demand on the Public
Works office, it does not appear that any reply thereto
was made; nor that the demand was pressed, nor
that the debtor or the surety were ever apprised that
payment was not being made. The fact remains that
because of the Bank's inactivity the other creditors
were enabled to collect P173,870.31, when the
balance due to appellant Bank was only P158,563.18.
The finding of negligence made by the Court of
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STRONGHOLD VS. REPUBLIC (492 SCRA 179,
G.R. No. 147561, June
22, 2006)
FACTS: On May 24, 1989, [respondent] Republic-Asahi
Glass Corporation (Republic-Asahi) entered into a
contract with Jose D. Santos, Jr., the proprietor of
JDS Construction (JDS), for the construction of
roadways and a drainage system in Republic-Asahi’s
compound. In order ‘to guarantee the faithful and
satisfactory performance of its undertakings’ JDS, shall
post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). Hence, JDS executed,
jointly and severally with [petitioner] Stronghold
Insurance Co., Inc (SICI).
Republic-Asahi’s engineers called the attention of JDS
to the alleged alarmingly slow pace of the
construction. However, said reminders went unheeded
by JDS. Dissatisfied with the progress of the work
undertaken by, Republic-Asahi
extrajudicially rescinded the contract pursuant to
Article XIII of said contract, and wrote a letter to JDS
informing the latter of such rescission. Such rescission,
according to Article XV of the contract shall not be
construed as a waiver of Asahi’s right to recover
damages from JDS and the latter’s sureties.
Republic-Asahi alleged that, as a result of JDS’s failure
to comply with the provisions of the contract, which
resulted in the said contract’s rescission, it had to hire
another contractor to finish the project, for which it
incurred an additional expense. Subsequently,
Republic-Asahi sent a letter to Stronghold SICI filing its
claim under the bond for not less than P795,000.00. On
January 6, 1990, Republic-Asahi again sent another
letter reiterating its demand for payment under the
aforementioned bond. Both letters allegedly went
unheeded.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 111
Republic-Asahi then filed [a] complaint against JDS
and SICI. It sought from JDS payment of
P3,256,874.00 representing the additional expenses
for the completion of the project using another
contractor, and from JDS and SICI, jointly and
severally, payment of P750,000.00 as damages in
accordance with the performance bond.
Summons were duly served on defendant- appellee
SICI. However, not in the case Jose D. Santos, Jr.
who already died and JDS Construction was no longer
at its address and its whereabouts were unknown.
SICI filed its answer, alleging that the Republic- Asahi’s
money claims against SICI and JDS have been
extinguished by the death of Jose D. Santos, Jr.
It further alleged that:
 Republic-Asahi can no longer prove its claim
for damages in view of the death of Santos.
 SICI was not informed by Republic- Asahi of
the death of Santos.
 SICI was not informed by Republic- Asahi of
the unilateral rescission of its contract with
JDS, thus SICI was deprived of its right to
protect its interests as surety under the
performance bond, and therefore it was
released from all liability.
Lower court dismissed the complaint of Republic-
Asahi against JDS and SICI, on the ground that the
claim against JDS did not survive the death of its sole
proprietor, Jose D. Santos, Jr. Upon Motion for
Reconsideration the dismissal of the case against
Stronghold Insurance Company, Inc., is reconsidered.
However, the case against defendant Jose D. Santos,
Jr. (deceased) remains undisturbed.
The CA ruled that SICI’s obligation under the surety
agreement was not extinguished by the death of Jose
D. Santos, Jr. Consequently, Republic-Asahi could still go
after SICI for the bond.

ISSUE: WON petitioner’s liability under the
performance bond was automatically extinguished by
the death of Santos, the principal. NO
HELD: As a general rule, the death of either the
creditor or the debtor does not extinguish the
obligation. Obligations are transmissible to the heirs,
except when the transmission is prevented by the
law, the stipulations of the parties, or the nature of
the obligation. Only obligations that are personal or
are identified with the persons themselves are
extinguished by death.
Section 5 of Rule 86 of the Rules of Court expressly
allows the prosecution of money claims arising from a
contract against the estate of a deceased debtor.
Evidently, those claims are not actually extinguished.
What is extinguished is only the obligee’s action or
suit filed before the court, which is not then acting as a
probate court.
In the present case, whatever monetary liabilities or
obligations Santos had under his contracts with
respondent were not intransmissible by their nature,
by stipulation, or by provision of law. Hence, his
death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to
his estate. Death is not a defense that he or his
estate can set up to wipe out the obligations under
the performance bond. Consequently, petitioner as
surety cannot use his death to escape its monetary
obligation under its performance bond.
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as
follows:
"Art. 2047. By guaranty a person, called the
guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter
should fail to do so.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 112
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I
of this Book shall be observed. In such case the
contract is called a suretyship."
xxxxxxxxx
"Art. 1216. The creditor may proceed against any
one of the solidary debtors or some or all of them
simultaneously. The demand made against one of
them shall not be an obstacle to those which may
subsequently be directed against the others, so long
as the debt has not been fully collected."
Thus, the surety’s obligation is not an original and
direct one for the performance of his own act, but
merely accessory or collateral to the obligation
contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to
a valid principal obligation, his liability to the creditor
or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally
bound with the principal.
Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the
petitioner herein, in view of the solidary nature of
their liability. The death of the principal debtor will
not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently,
despite the death of the principal debtor,
respondent may still sue petitioner alone, in
accordance with the solidary nature of the latter’s
liability under the performance bond.
POLICY: A surety company’s liability under the
performance bond it issues is solidary. The death of
the principal obligor does not, as a rule, extinguish the
obligation and the solidary nature of that liability.

SPOUSES TOH VS. SOLID BANK (G.R. No.
154183, August 7, 2003)
FACTS: RESPONDENT SOLID BANK
extended an "omnibus line" credit facility worth
P10 million in favor of respondent First Business
Paper Corporation (FBPC). A letter-advise dated May
16, 1993 was sent to FBPC which stated the terms
and conditions of the agreement as well as the
checklist of documents among which is the Continuing
Guaranty for any and all amounts signed by petitioner-
spouses Luis Toh and Vicky Tan Toh, and respondent-
spouses Kenneth and Ma. Victoria Ng Li. The spouses
Toh were then Chairman of the Board and Vice-
President while respondent-spouses Li were President
and General Manager, respectively, of the same
corporation.
On 10 May 1993, spouses Toh and spouses Li signed
the required Continuing Guaranty, which defined the
contract arising therefrom as a surety agreement and
provided for the solidary liability of the signatories.
The Continuing Guaranty set forth no maximum limit
on the indebtedness that respondent FBPC may incur
and for which the sureties may be liable.
The surety also contained a de facto acceleration
clause if "default be made in the payment of any of
the instruments, indebtedness, or other obligation"
guaranteed by petitioners and respondents. So as to
strengthen this security, the Continuing Guaranty
waived rights of the sureties against delay or
absence of notice or demand on the part of respondent
Bank, and gave future consent to the Bank's action to
"extend or change the time payment, and/or the
manner, place or terms of payment," including
renewal, of the credit facility in such manner and upon
such terms as the Bank without notice to or further
assent from the sureties.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 113
By November 17 1993, FBPC opened 13 letters of
credit and obtained loans totaling P15,227,510.00. As
the letters of credit were secured, FBPC through its
officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor
Padilla as signatories executed a series of trust receipts
over the goods allegedly purchased from the
proceeds of the loans. But the Spouses Li had
fraudulently departed from their conjugal home.
The Bank served a demand letter upon FBPC and
petitioner Luis Toh invoking the acceleralation clause in
the trust receipts of FBPC and claimed payment for
P10,539,758.68 as unpaid overdue accounts on the
letters of credit plus interests and penalties. On 17
January 1994 respondent Bank filed a complaint for
sum of money with ex parte application for a writ of
preliminary attachment against FBPC, spouses Li, and
spouses Toh. Hence, properties of FBPC were
impounded but was later released to third party
claimants.
Spouses Toh alleged that they were made to sign
papers in blank and the Continuing Guaranty could
have been one of them , it was impossible and absurd
for them to have freely and consciously executed the
surety on 10 May 1993, the date appearing on its face
since beginning March of that year they had already
divested their shares in FBPC and assigned them in
favor of respondent Kenneth Ng Li although the deeds
of assignment were notarized only on 14 June 1993.
They also contended that through FBPC Board
Resolution dated 12 May 1993 petitioner Luis Toh
was removed as an authorized signatory for FBPC and
replaced by spouses Li and Redentor Padilla for all
the transactions of FBPC with respondent Bank. They
even resigned from their respective positions in FBPC as
reflected in the 12 June 1993 Secretary's Certificate
submitted to the Securities and

Exchange Commission as petitioner Luis Toh was
succeeded as Chairman by respondent Ma. Victoria
Ng Li, while one Mylene C. Padilla took the place of
petitioner Vicky Tan Toh as Vice-President.
Finally, Toh averred that sometime in June 1993 they
obtained from respondent Kenneth Ng Li their
exclusion from the several surety agreements they
had entered into with different banks, i.e., Hongkong
and Shanghai Bank, China Banking Corporation, Far
East Bank and Trust Company, and herein
respondent Bank. As a matter of record, these other
banks executed written surety agreements that
showed respondent Kenneth Ng Li as the only surety of
FBPC's indebtedness.
TC-FBPC liable to pay Solid Bank Corporation the
principal of P10,539,758.68 plus twelve percent (12%)
interest per annum from finality of the Decision until
fully paid, but absolving petitioner-spouses Toh of any
liability.
CA-modified the Decision and held that by signing the
Continuing Guaranty, petitioner-spouses became
solidarily liable with FBPC citing that they failed to
execute any written revocation of the Continuing
Guaranty with notice to respondent Bank, the
instrument remained in full force and effect when
the letters of credit were availed of by respondent
FBPC.
Petitioner-spouses Luis Toh and Vicky Tan Toh maintain
that the Continuing Guaranty is not legally valid and
binding against them for having been executed long
after they had withdrawn from FBPC. Lastly, they
claim that the surety agreement has been
extinguished by the material alterations thereof and of
the "letter-advise" which were allegedly brought about
by:
(ii) the provision of an acceleration
clause in the trust receipts;
(iii) the flight of their co-sureties, Li;
(iv) the grant of credit facility despite the non-
payment of marginal deposits
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 114
in an amount beyond the credit limit of P10
million pesos;
(v) the inordinate delay of the Bank in
demanding the payment of the indebtedness;
(vi) the presence of ghost deliveries and fictitious
purchases using the Bank's letters of credit and
trust receipts;
(vii) the extension of the due dates of the
letters of credit without the required 25%
partial payment per extension;
(viii) the approval of another letter of
credit, L/C 93-0042, even after respondent-
spouses Li had defaulted on their previous
obligations; and,
(ix) the unmistakable pattern of fraud.
ISSUE: WON the spouses Toh are liable as sureties to
Solidbank. NO
HELD: The Continuing Guaranty is a valid and binding
contract of petitioner-spouses as it is a public
document that enjoys the presumption of authenticity
and due execution. We are bound by the consistent
finding of the courts a quo that petitioner- spouses
Toh "voluntarily affixed their signature[s]" on the
surety agreement and were thus "at some given point
in time willing to be liable under those forms." In
the absence of clear, convincing and more than
preponderant evidence to the contrary, our ruling
cannot be otherwise.
Similarly, there is no basis for petitioners to limit their
responsibility so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing
Guaranty restricts their contractual undertaking to
such condition or eventuality. In fact the obligations
assumed by them therein subsist "upon the
undersigned, the heirs, executors, administrators,
successors and assigns of the undersigned, and shall
inure to the benefit of, and be enforceable by you,
your successors, transferees and assigns," and that
their commitment "shall remain in full force and
effect until written

notice shall have been received by [the Bank] that it
has been revoked by the undersigned."
Verily, if petitioners intended not to be charged as
sureties after their withdrawal from FBPC, they could
have simply terminated the agreement by serving
the required notice of revocation upon the Bank as
expressly allowed therein.
In Garcia v. CA we ruled –
Regarding the petitioner's claim that he is liable only
as a corporate officer of WMC, the surety agreement
shows that he signed the same not in representation of
WMC or as its president but in his personal capacity.
He is therefore personally bound. There is no law that
prohibits a corporate officer from binding himself
personally to answer for a corporate debt. While the
limited liability doctrine is intended to protect the
stockholder by immunizing him from personal liability
for the corporate debts, he may nevertheless divest
himself of this protection by voluntarily binding
himself to the payment of the corporate debts. The
petitioner cannot therefore take refuge in this
doctrine that he has by his own acts effectively
waived. Insofar as petitioners stipulate in the
Continuing Guaranty that respondent Bank "may at any
time, or from time to time, in [its] discretion x x x
extend or change the time payment," this provision
even if understood as a waiver is confined per se to
the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-
advise."
In other words, the authority of the Bank to defer
collection contemplates only authorized extensions,
that is, those that meet the terms of the "letter-
advise." Certainly, while the Bank may extend the
due date at its discretion pursuant to the Continuing
Guaranty, it should nonetheless comply with the
requirements that domestic letters of credit be
supported by fifteen percent (15%) marginal
deposit
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 115
extendible three (3) times for a period of thirty (30)
days for each extension, subject to twenty-five percent
(25%) partial payment per extension. Any doubt on
the terms and conditions of the surety agreement
should be resolved in favor of the surety.
Stated otherwise, an extension of the period for
enforcing the indebtedness does not by itself bring
about the discharge of the sureties unless the extra
time is not permitted within the terms of the
waiver, i.e., where there is no payment or there is
deficient settlement of the marginal deposit and the
twenty-five percent (25%) consideration, in which case
the illicit extension releases the sureties.
Under Art. 2055 of the Civil Code, the liability of a
surety is measured by the terms of his contract, and
while he is liable to the full extent thereof, his
accountability is strictly limited to that assumed by its
terms.
Respondent Bank extended several letters of credit
were for 90 days with alarmingly flawed and
inadequate consideration - the indispensable marginal
deposit of fifteen percent (15%) and the twenty-five
percent (25%) prerequisite for each extension of thirty
(30) days. It bears stressing that the requisite marginal
deposit and security for every thirty (30) - day
extension specified in the "letter-advise" were not set
aside or abrogated nor was there any prior notice of
such fact, if any was done.
The foregoing extensions of the letters of credit
made by respondent Bank without observing the
rigid restrictions for exercising the privilege are not
covered by the waiver stipulated in the Continuing
Guaranty. Evidently, they constitute illicit extensions
prohibited under Art. 2079 of the Civil Code, "[a]n
extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes
the guaranty."

This act of the Bank is not mere failure or delay on its
part to demand payment after the debt has become
due, as was the case in unpaid five (5) letters of credit
which the Bank did not extend, defer or put off, but
comprises conscious, separate and binding agreements
to extend the due date. As a result of these illicit
extensions, petitioner- spouses Luis Toh and Vicky Tan
Toh are relieved of their obligations as sureties of
respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that
militate against the enforcement of the Continuing
Guaranty against the accommodation sureties. Firstly,
the guaranty was executed more than thirty (30) days
from the original acceptance period as required in the
"letter-advise." Thereafter, barely two (2) days after the
Continuing Guaranty was signed, corporate agents of
FBPC were replaced on 12 May 1993 and other
adjustments in the corporate structure of FBPC
ensued in the month of June 1993, which the Bank
did not investigate although such were made known
to it. By the same token, there is no explanation on
record for the utter worthlessness of the trust
receipts in favor of the Bank when these documents
ought to have added more security to the
indebtedness of FBPC. The Bank has in fact no
information whether the trust receipts were indeed
used for the purpose for which they were obtained.
The consequence of these omissions is to discharge
the surety, the spouses Toh,, under Art. 2080 of the
Civil Code, or at the very least, mitigate the liability of
the surety up to the value of the property or lien
released – If the creditor x x x has acquired a lien upon
the property of a principal, the creditor at once
becomes charged with the duty of retaining such
security, or maintaining such lien in the interest of the
surety, and any release or impairment of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 116
this security as a primary resource for the payment of
a debt, will discharge the surety to the extent of the
value of the property or lien released x x x x [for]
there immediately arises a trust relation between the
parties, and the creditor as trustee is bound to
account to the surety for the value of the security in his
hands.
For the same reason, the grace period granted by
respondent Bank represents unceremonious
abandonment and forfeiture of the fifteen percent
(15%) marginal deposit and the twenty-five percent
(25%) partial payment as fixed in the "letter-advise."
These payments are unmistakably additional securities
intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC
becomes insolvent during the extension period.
Compliance with these requisites was not waived by
petitioners in the Continuing Guaranty. For this
unwarranted exercise of discretion, respondent Bank
bears the loss; due to its unauthorized extensions to
pay granted to FBPC, petitioner-spouses Luis Toh and
Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty.
Finally, the foregoing omission or negligence of
respondent Bank in failing to safe-keep the security
provided by the marginal deposit and the twenty-
five percent (25%) requirement results in the
material alteration of the principal contract, i.e., the
"letter-advise," and consequently releases the surety.
This inference was admitted by the Bank through the
testimony of its lone witness that "[w]henever this
obligation becomes due and demandable, except
when you roll it over, (so) there is novation there
on the original obligations."
As has been said, "if the suretyship contract was made
upon the condition that the principal shall furnish the
creditor additional security, and the security being
furnished under these conditions is

afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of the
securities released, for such a transaction amounts to
an alteration of the main contract."
Petition granted. Decision of CA is reversed and set
aside. Spouses Toh are absolved.
CALIBO VS. CA
(G.R. No. 120528, January 29, 2001)
FACTS: January 25, 1979, Dr. Pablo U. Abella
purchased an MF 210 agricultural tractor which he
used in his farm in Dagohoy, Bohol. Sometime in
October or November 1985, Pablo Abella’s son, Mike
Abella rented for residential purposes the house of
defendant-appellant Dionisio R. Calibo, Jr., in Tagbilaran
City.
In October 1986, Pablo Abella pulled out his
aforementioned tractor from his farm in Dagohoy,
Bohol, and left it in the safekeeping of his son, Mike
Abella, in Tagbilaran City. Mike kept the tractor in the
garage of the house he was leasing from Calibo.
Since he started renting Calibo’s house, Mike had been
religiously paying the monthly rentals therefor, but
beginning November of 1986, he stopped doing so.
The following month, Calibo learned that Mike had
never paid the charges for electric and water
consumption in the leased premises which the latter
was duty- bound to shoulder.
Thus, Calibo confronted Mike about his rental arrears
and the unpaid electric and water bills. During this
confrontation, Mike informed Calibo that he (Mike)
would be staying in the leased property only until the
end of December 1986. Mike also assured Calibo that
he would be settling his account with the latter,
offering the tractor as security. Mike even asked
Calibo to help him find a buyer for the tractor so he
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 117
could sooner pay his outstanding obligation.
In January 1987 when a new tenant moved into the
house formerly leased to Mike, Calibo had the tractor
moved to the garage of his father’s house, also in
Tagbilaran City. After a long while, or on November
22, 1988, Mike’s father, Pablo Abella, came to
Tagbilaran City to claim and take possession of the
tractor. Calibo, however, informed Pablo that Mike left
the tractor with him as security for the payment of
Mike’s obligation to him. Pablo offered to write Mike
a check for P2,000.00 in payment of Mike’s unpaid
lease rentals, in addition to issuing postdated checks
to cover the unpaid electric and water bills the
correctness of which Pablo said he still had to verify with
Mike.
Calibo told Pablo that he would accept the P2,000.00-
check only if the latter would execute a promissory
note in his favor to cover the amount of the unpaid
electric and water bills. Pablo was not amenable to this
proposal. The two of them having failed to come to an
agreement, Pablo left and went back to Cebu City,
unsuccessful in his attempt to take possession of the
tractor.”
On November 25, 1988, Dr. Abella instituted an
action for replevin, claiming ownership of the tractor
and seeking to recover possession thereof from
petitioner.
RTC: ruled in favor of Dr. Abella.
CA: sustained the ruling of the trial court that Mike
Abella could not have validly pledged the subject
tractor to petitioner since he was not the owner
thereof, nor was he authorized by its owner to
pledge the tractor.
ISSUE: WON the tractor in question was validly
pledged to Atty. Calibo. NO.
HELD: Atty. Calibo claims that the tractor in question
was validly pledged to him by

Dr. Abella’s son Mike Abella to answer for the latter’s
monetary obligations to petitioner. In the alternative,
petitioner asserts that the tractor was left with him, in
the concept of an innkeeper, on deposit and that he
may validly hold on thereto until Mike Abella pays his
obligations.
He maintains that even if Mike Abella were not the
owner of the tractor, a principal- agent relationship
may be implied between Mike Abella and Dr. Abella.
He contends that the latter failed to repudiate the
alleged agency, knowing that his son is acting on his
behalf without authority when he pledged the tractor
to petitioner. Calibo argues that, under Article 1911 of
the Civil Code, Dr. Abella is bound by the pledge,
even if it were beyond the authority of his son to
pledge the tractor, since he allowed his son to act as
though he had full powers.
In a contract of pledge, the creditor is given the right to
retain his debtor’s movable property in his possession,
or in that of a third person to whom it has been
delivered, until the debt is paid. For the contract to be
valid, it is necessary that:
the pledge is constituted to secure the
fulfillment of a principal obligation;
the pledgor be the absolute owner of the
thing pledged; and
the person constituting the pledge has the free
disposal of his property, and in the absence
thereof, that he be legally authorized for the
purpose.
As found by the trial court and affirmed by respondent
court, the pledgor in this case, Mike Abella, was not
the absolute owner of the tractor that was allegedly
pledged to petitioner. The tractor was owned by
his father, Dr. Abella, who left the equipment with
him for safekeeping. Clearly, the second requisite for a
valid pledge, that the pledgor be the absolute owner
of the property, is absent in this case. Hence,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 118
there is no valid pledge.
“He who is not the owner or proprietor of the
property pledged or mortgaged to guarantee the
fulfillment of a principal obligation, cannot legally
constitute such a guaranty as may validly bind the
property in favor of his creditor, and the pledgee or
mortgagee in such a case acquires no right whatsoever
in the property pledged or mortgaged.”
(Discussion regarding Agency)
There also does not appear to be any agency in this
case. We agree with the Court of Appeals that:
“As indicated in Article 1869, for an agency relationship
to be deemed as implied, the principal must know
that another person is acting on his behalf without
authority. Here, appellee categorically stated that the
onlypurpose for his leaving the subject tractor in the
care and custody of Mike Abella was for safekeeping,
and definitely not for him to pledge or alienate the
same. If it were true that Mike pledged appellee’s
tractor to appellant, then Mike was acting not only
without appellee’s authority but without the latter’s
knowledge as well.
(Discussion regarding Deposit)
There is likewise no valid deposit in this case. In a
contract of deposit, a person receives an object
belonging to another with the obligation of safely
keeping it and of returning the same. Petitioner himself
states that he received the tractor not to safely
keep it but as a form of security for the payment of
Mike Abella’s obligations. There is no deposit where
the principal purpose for receiving the object is not
safekeeping.

DEVELOPMENT BANK OF THE PHILIPPINES V
PRUDENTIAL BANK
Litex could not have subjected the goods under the
trust receipt to a chattel mortgage. Thus, the
inclusion in the mortgage was void and had no legal
effect. There being no valid mortgage, there could also
be no valid foreclosure or valid auction sale. Thus, DBP
could not be considered either as a mortgagee or as a
purchaser in good faith.
FACTS: Lirag Textile Mills, Inc. (Litex) opened an
irrevocable commercial letter of credit with
respondent Prudential Bank for US$498,000. This was
in connection with its importation of 5,000 spindles
for spinning machinery with drawing frame, simplex
fly frame, ring spinning frame and various accessories,
spare parts and tool gauge. These were released to
Litex under covering “trust receipts” it executed in favor
of Prudential Bank. Litex installed and used the items in
its textile mill located in Montalban, Rizal. 9 years
later, DBP granted a foreign currency loan in the
amount of US$4,807,551 to Litex.
To secure the loan, Litex executed real estate and
chattel mortgages on its plant site in Montalban,
Rizal, including the buildings and other
improvements, machineries and equipments there.
Among the machineries and equipments mortgaged
in favor of DBP were the articles covered by the
“trust receipts.” Sometime in June 1982, Prudential
Bank learned about DBP’s plan for the overall
rehabilitation of Litex. In a July 14, 1982 letter,
Prudential Bank notified DBP of its claim over the
various items covered by the “trust receipts” which
had been installed and used by Litex in the textile mill.
Prudential Bank informed DBP that it was the absolute
and juridical owner of the said items and they were
thus not part of the mortgaged assets that could be
legally ceded to DBP.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 119
For the failure of Litex to pay its obligation, DBP extra-
judicially foreclosed on the real estate and chattel
mortgages, including the articles claimed by Prudential
Bank. During the foreclosure sale held on April 19, 1983,
DBP acquired the foreclosed properties as the highest
bidder. Learning of the intended public auction,
Prudential Bank wrote a letter dated September 6,
1984 to DBP reasserting its claim over the items
covered by “trust receipts” in its name and advising
DBP not to include them in the auction. It also
demanded the turn-over of the articles or
alternatively, the payment of their value.
ISSUE: Whether or not the chattel mortgage covers
the goods under the trust receipt
HELD: No. Article 2085 (2) of the Civil Code requires
that, in a contract of pledge or mortgage, it is essential
that the pledgor or mortgagor should be the absolute
owner of the things pledged or mortgaged. Article
2085 (3) further mandates that the person
constituting the pledge or mortgage must have the
free disposal of his property, and in the absence
thereof, that he be legally authorized for the purpose.
Litex had neither absolute ownership, free disposal
nor the authority to freely dispose of the articles.
Litex could not have subjected them to a chattel
mortgage. Their inclusion in the mortgage was void and
had no legal effect. There being no valid mortgage,
there could also be no valid foreclosure or valid
auction sale. Thus, DBP could not be considered either
as a mortgagee or as a purchaser in good faith.
No one can transfer a right to another greater than
what he himself has. Nemo dat quod non habet.
Hence, Litex could not transfer a right that it did not
have over the disputed items. Corollarily, DBP could
not acquire a right greater than what its predecessor-
in-interest had. The spring cannot rise higher than its
source. DBP merely stepped into the shoes of Litex as

trustee of the imported articles with an obligation to
pay their value or to return them on Prudential
Bank’s demand. By its failure to pay or return them
despite Prudential Bank’s repeated demands and by
selling them to Lyon without Prudential Bank’s
knowledge and conformity, DBP became a trustee ex
maleficio.
As a consequence of the release of the goods and
the execution of the trust receipt, a two-fold
obligation is imposed on the entrustee, namely:
(1) to hold the designated goods, documents or
instruments in trust for the purpose of selling or
otherwise disposing of them and
(2) to turn over to the entruster either the proceeds
thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt, or the
goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in
the trust receipt.
In the case of goods, they may also be released for
other purposes substantially equivalent to (a) their
sale or the procurement of their sale; or (b) their
manufacture or processing with the purpose of
ultimate sale, in which case the entruster retains his
title over the said goods whether in their original or
processed form until the entrustee has complied fully
with his obligation under the trust receipt; or (c) the
loading, unloading, shipment or transshipment or
otherwise dealing with them in a manner preliminary
or necessary to their sale.
Thus, in a trust receipt transaction, the release of the
goods to the entrustee, on his execution of a trust
receipt, is essentially for the purpose of their sale or
is necessarily connected with their ultimate or
subsequent sale.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 120
CAVITE DEVELOPMENT vs. SPOUSES LIM
FACTS: One Rodolfo Guansing obtained a loan in the
amount of P90,000.00 from Cavite Development Bank
(CDB). As a security, he mortgaged a parcel of land
situated La Loma, Quezon City and covered by TCT
No. 300809 registered in his name. Guansing defaulted
on the payment of the loan, which led CDB to foreclose
the mortgage and later on emerged as the highest
bidder and subsequently, the owner of the lot after
Guansing failed to redeem the same.
The Spouses Lim, through a broker, offered to
purchase the property from CDB. The formal written
offer stated a payment of P30,000 (10% of P300,000)
as option money, provided that the land be cleared
of illegal occupants. For payment of the option
money, CDB issued an official receipt. However, after
following up on the sale, Lim discovered that the
original owner of the land is PERFECTO GUANSING,
the father of Rodolfo. In a civil case instituted by
Perfecto for the cancellation of Rodolfo’s title, the
Supreme Court adjudged Perfecto as the real owner
after proving that Rodolfo fraudulently obtained it.
Thus, Rodolfo’s title was cancelled and a new one
was issued to Perfecto.
Aggrieved, the Spouses Lim instituted an action for
specific performance and damages questioning the
ability of CDB, and its mother company Far East Bank
and Trust Company (FEBTC), to sell the subject
property.
The Regional Trial Court rendered a decision in favor of
the Spouses Lim, which was affirmed by the Court of
Appeals.

ISSUES:
(1) What is the legal relation between the parties?
(2) Whether or not Rodolfo Guansing/CDB was the
absolute owner of the subject property as
required under Art. 2085 to effect a valid
mortgage/sale?
(3) Whether or not CDB is a “mortgagee in good
faith”?
HELD:
(1) The parties entered into a CONTRACT OF SALE.
 The formal written offer of the Spouses
Lim was accepted by CDB.
 The Spouses Lim paid the option money,
which left only the balance of the
purchase price to be paid.
 In the Law on Sales, one does not need
to be the owner at the perfection of the
contract.
 HOWEVER, NEMO DAT QUOD NON
HABET [One cannot give what he does
not have]. At the consummation stage,
it was impossible for CDB to comply with
its legal obligation.
(2) NO. The sale by CDB to Lim of the property
mortgaged in 1983 by Rodolfo Guansing must,
therefore, be deemed a nullity for CDB did not
have a valid title to the said property.
 CDB never acquired a valid title to the
property because the foreclosure sale, by
virtue of which the property had been
awarded to CDB as highest bidder, is
likewise void since the mortgagor was
not the owner of the property foreclosed
 A “forced sale” is still a sale within the
contemplation of the law. Thus, the
principle that the seller must be the
owner of the thing sold also applies.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 121
(3) NO. CDB cannot be considered as a mortgagee in
good faith.
 CDB was remiss in its duty as bank
and failed to exercise the due diligence
required of it. In short, CDB was negligent.
 Citing jurisprudence, it is standard
practice for banks, before approving a
loan, to send representatives to the
premises of the land offered as
collateral and to investigate who are the
real owners thereof, noting that banks
are expected to exercise more care and
prudence than private individuals in their
dealings, even those involving registered
lands, for their business is affected with
public interest
 No evidence to the contrary.
o Extrajudicial Settlement of the
Estate With Waiver, a self-
executed deed by Rodolfo,
should have placed CDB on guard.
o Report of the purported ocular
inspection by its representatives
was never admitted into evidence.
MAMERTA VDA. DE JAYME VS CA
FACTS: The spouses Graciano and Mamerta Jayme
are the registered owners of Lot 2700, situated in the
Municipality of Mandaue On January 8, 1973,
they
5
entered into a Contract of Lease with George Neri,
president of Airland Motors Corporation (now Cebu
Asiancars Inc.), covering one-half of Lot 2700. The
lease was for twenty (20) years.
The terms and conditions of the lease contract
stipulated that Cebu Asiancars Inc. (hereafter,
Asiancars) may use the leased premises as a
collateral to secure payment of a loan which
Asiancars may obtain from any bank, provided that
the

proceeds of the loan shall be used solely for the
construction of a building which, upon the termination
of the lease or the voluntary surrender of the leased
premises before the expiration of the contract, shall
automatically become the property of the Jayme
spouses (the lessors).
7 Petitioners claim that Neri and Asiancars did not tell
A Special Power of Attorney\ dated January 26,
1974, was executed in favor of respondent George Neri,
who used the lot to secure a loan of P300,000 from
the General Bank and Trust Company. The loan was
fully paid on August 14, 1977.
In October 1977, Asiancars obtained a loan of
P6,000,000 from the Metropolitan Bank and Trust
Company (MBTC). The entire Lot 2700 was offered as
one of several properties given as collateral for the
loan. As mortgagors, the spouses signed a Deed of
Real Estate Mortgage dated November 21, 1977 in
favor of MBTC. It stated that the deed was to secure
the payment of a loan obtained by Asiancars from the
bank.
To assure the Jayme spouses, Neri and the other
officers of Asiancars, executed an undertaking .In it
they promised, in their personal capacities and/or in
representation of Cebu Asiancars, Inc., "to compensate
Mr. & Mrs. Graciano Jayme for any and all or
whatever damage they may sustain or suffer by virtue
and arising out of the mortgage to MBTC. In addition,
Neri wrote a letter dated September 1, 1981 addressed
to Mamerta Jayme acknowledging her "confidence
and help" extended to him, his family and Asiancars.
He promised to pay their indebtedness to MBTC
before the loan was due.
Meeting financial difficulties and incurring an
outstanding balance on the loan, Asiancars conveyed
ownership of the building on the leased premises to
MBTC, by way of "dacion en pago." Asiancars failed to
pay.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 122
Eventually, MBTC extrajudicially foreclosed the
mortgage. A public auction was held on February 4,
1981. MBTC was the highest bidder for
P1,067,344.35. A certificate of sale was issued and
was registered with the Register of Deeds.
them that the indebtedness secured by the mortgage
was for P6,000,000 and that the security was the
whole of Lot 2700. Petitioners allege that the deed
presented to the Jayme spouses was in blank,
without explanation on the stipulations contained
therein, except that its conditions were identical to
those of the stipulations when they mortgaged half
the lot’s area previously with General Bank. Petitioners
also alleged that the Jayme spouses were illiterate and
only knew how to sign their names. That because they
did not know how to read nor write, and had given
their full trust and confidence to George Neri, the
spouses were deceived into signing the Deed of
Real Estate Mortgage. Their intention as well as
consent was only to be bound as guarantors.
ISSUE: WON the dacion en pago by Asiancars in
favor of MBTC is valid and binding despite the
stipulation in the lease contract that ownership of the
building will vest on the Jaymes at the termination
of the lease.
HELD: In the case at bar, when Asiancars failed to pay
its obligations with MBTC, the properties given as
security (one of them being the land owned by the
Jaymes) became subject to foreclosure. When several
things are given to secure the same debt in its
entirety, all of them are liable for the debt, and
the creditor does not have to divide his action by
distributing the debt among the various things pledged
or mortgaged. Even when only a part of the debt
remains unpaid, all the things are liable for such
balance.

The debtor cannot ask for the release of one or
some of the several properties pledged or mortgaged
(or any portion thereof) or proportionate
extinguishment of the pledge or mortgage unless and
until the debt secured has been fully paid.
The alienation of the building by Asiancars in favor of
MBTC for the partial satisfaction of its indebtedness is,
in our view, also valid. The ownership of the building
had been effectively in the name of the lessee-
mortgagor (Asiancars), though with the provision that
said ownership be transferred to the Jaymes upon
termination of the lease or the voluntary surrender
of the premises. The lease was constituted on
January 8, 1973 and was to expire 20 years
thereafter, or on January 8, 1993. The alienation via
dacion en pago was made by Asiancars to MBTC on
December 18, 1980, during the subsistence of the
lease. At this point, the mortgagor, Asiancars, could
validly exercise rights of ownership, including the right
to alienate it, as it did to MBTC.
HECHANOVA vs ADIL
FACTS: Pio Servando sought to annul the sale made by
Jose Servando of three parcels of land which
according to him were mortgaged in his favor.
Alternatively, if the sale is not annulled, to order the
defendant Jose Servando to pay the amount of
P20,000.00, plus interests, and to order defendants to
pay damages. Attached to the complaint was a copy
of the private document evidencing the alleged
mortgage (Annex A), which is quoted hereunder:
August 20, 1970
This is to certify that I, Jose Yusay Servando, the sole
owner of three parcel of land under Tax Declaration
No. 28905, 44123 and 31591 at Lot No. 1, 1863-
Portion of 1863 & 1860 situated at Sto. Nino St.,
Arevalo, Compania St. &
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 123
Compania St., Interior Molo, respectively, have this
date mortgaged the said property to my cousin Pio
Servando, in the amount of TWENTY THOUSAND
PESOS
(P20,000.00), redeemable for a period not exceeding
ten (10) years, the mortgage amount bearing an
interest of 10% per annum.
I further certify that in case I fail to redeem the said
properties within the period stated above, my cousin
Pio Servando, shall become the sole owner thereof.
ISSUE: WON the sale can be annulled by reason that
a mortgages has been constituted on the subject
properties. NO
HELD: Plaintiff has no standing to question the validity
of the deed of sale executed by the deceased
defendant Jose Servando in favor of his co-defendants
Hechanova and Masa. No valid mortgage has been
constituted plaintiff's favor, the alleged deed of
mortgage being a mere private document and not
registered; moreover, it contains a stipulation (pacto
comisorio) which is null and void under Article 2088 of
the Civil Code. Even assuming that the property was
validly mortgaged to the plaintiff, his recourse was
to foreclose the mortgage, not to seek annulment of
the sale.
MANILA BANKING vs TEODORO
FACTS: On April 25, 1966, Anastacio Jr. & Grace Anna,
together with Anastacio Teodoro, Sr., jointly and
severally, executed in favor of Manila Banking Copr.
(MB) a Promissory Note (No. 11487) for the sum of
P10,420.00 payable in 120 days, or on August 25,
1966, at 12% interest per annum. Teodoros failed to
pay the said amount inspire of repeated demands and
the obligation as of September 30, 1969 stood at P
15,137.11 including accrued interest and service
charge.

On May 3, 1966 and June 20, 1966, Anastacio Sr.
(Father) and Anastacio, Jr. (Son) executed in favor of
MB two Promissory Notes (Nos. 11515 and 11699) for
P8,000.00 an P1,000.00 respectively, payable in 120
days at 12% interest per annum. They made a
partial payment on the May 3, 1966 promissory Note
but none on the June 20, 1966 Promissory Note,
leaving still an unpaid balance of P8,934.74 as of
September 30, 1969 including accrued interest and
service charge.
The three Promissory Notes stipulated that any interest
due if not paid at the end of every month shall be
added to the total amount then due, the whole amount
to bear interest at the rate of 12% per annum until
fully paid. It appears that on January 24, 1964, the
Son executed in favor of plaintiff a Deed of
Assignment of Receivables from the Emergency
Employment Administration in the sum of
P44,635.00. The Deed of Assignment provided that it
was for and in consideration of certain credits, loans,
overdrafts and other credit accommodations extended
to Teodoros as security for the payment of said sum
and the interest thereon, and that they do hereby
remise, release and quitclaim all its rights, title, and
interest in and to the accounts receivables.
In their stipulations of Fact, it is admitted by the parties
that MB extended loans to Teodoros on the basis
and by reason of certain contracts entered into by
the defunct Emergency Employment Administration
(EEA) with Teodoros for the fabrication of fishing
boats, and that the Philippine Fisheries Commission
succeeded the EEA after its abolition; that non-
payment of the notes was due to the failure of the
Commission to pay Teodoros after the latter had
complied with their contractual obligations.
For failure of Teodoros to pay the sums
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 124
due on the Promissory Note, this action was
instituted on November 13, 1969, originally against
the Father, Son, and the latter's wife. The Father
died. The action, then is against Son and his wife
for the collection of the sum of P 15,037.11 on
Promissory Note No. 14487; and against Son for the
recovery of P 8,394.7.4 on Promissory Notes Nos.
11515 and 11699, plus interest on both amounts at
12% per annum from September 30, 1969 until fully
paid, and 10% of the amounts due as attorney's fees.
ISSUE 1: WON the assignment of receivables has the
effect of payment of all the loans contracted by
appellants from appellee bank. NO
HELD 1: Assignment of credit is an agreement by virtue
of which the owner of a credit, known as the assignor,
by a legal cause, such as sale, dation in payment,
exchange or donation, and without the need of the
consent of the debtor, transfers his credit and its
accessory rights to another, known as the assignee,
who acquires the power to enforce it to the same
extent as the assignor could have enforced it against
the debtor. ...
It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor,
in order to obtain a release from his debt, assigns to
his creditor a credit he has against a third person, or it
may constitute a donation as when it is by gratuitous
title; or it may even be merely by way of guaranty, as
when the creditor gives as a collateral, to secure his
own debt in favor of the assignee, without
transmitting ownership. The character that it may
assume determines its requisites and effects. Its
regulation, and the capacity of the parties to execute
it; and in every case, the obligations between assignor
and assignee will depend upon the judicial relation
which is the basis of the assignment.

It is evident that the assignment of receivables
executed by appellants on January 24, 1964 did not
transfer the ownership of the receivables to
appellee bank and release appellants from their loans
with the bank incurred under promissory notes Nos.
11487,11515 and 11699.
The Deed of Assignment provided that it was for
and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the
sum of P10,000.00 extended to appellants by appellee
bank, and as security for the payment of said sum
and the interest thereon; that appellants as assignors,
remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts
receivable assigned (lst paragraph). It was further
stipulated that the assignment will also stand as a
continuing guaranty for future loans of appellants to
appellee bank and correspondingly the assignment
shall also extend to all the accounts receivable;
appellants shall also obtain in the future, until the
consideration on the loans secured by appellants
from appellee bank shall have been fully paid by them
(No. 9).
The position of Teodoros, however, is that the deed
of assignment is a quitclaim in consideration of their
indebtedness to appellee bank, not mere guaranty, in
view of the provisions of the deed of assignment.
The character of the transactions between the parties
is not, however, determined by the language used in
the document but by their intention.
The characters of the transaction between the parties
is to be determined by their intention, regardless of
what language was used or what the form of the
transfer was. If it was intended to secure the payment
of money, it must be construed as a pledge. However,
even though a transfer, if
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 125
regarded by itself, appellate to have been absolute, its
object and character might still be qualified and
explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral
security. It has been Id that a transfer of property by
the debtor to a creditor, even if sufficient on its farm to
make an absolute conveyance, should be treated as a
pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the
use of the terms ordinarily exporting conveyance, of
absolute ownership will not be given that effect in such
a transaction if they are also commonly used in
pledges and mortgages and therefore do not
unqualifiedly indicate a transfer of absolute ownership,
in the absence of clear and ambiguous language or
other circumstances excluding an intent to pledge.
(Lopez v. Court of Appeals, 114 SCRA 671 [1982]).
Definitely, the assignment of the receivables did not
result from a sale transaction. It cannot be said to
have been constituted by virtue of a dation in payment
for appellants' loans with the bank evidenced by
promissory note Nos. 11487, 11515 and 11699 which
are the subject of the suit for collection in Civil Case
No. 78178. At the time the deed of assignment was
executed, said loans were non- existent yet. The deed
of assignment was executed on January 24, 1964
(Exh. "G"), while promissory note No. 11487 is dated
April 25, 1966 (Exh. 'A), promissory note 11515,
dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966 (Exh. "C").
At most, it was a dation in payment for P10,000.00,
the amount of credit from appellee bank indicated in
the deed of assignment. At the time the assignment
was executed, there was no obligation to be
extinguished except the amount of P10,000.00.
Moreover, in order that an obligation may be
extinguished by another which substitutes the same,
it is imperative that it be so declared in unequivocal
terms, or that the old and the

new obligations be on every point incompatible with
each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as
collateral security for the bank loans of appellants, as
a continuing guaranty for whatever sums would be
owing by defendants to plaintiff, as stated in
stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a
pledge or a dation in payment, the presumption is in
favor of pledge, the latter being the lesser transmission
of rights and interests (Lopez
v. Court of Appeals, supra).
ISSUE 2: WON Manila Banking must first exhaust all
legal remedies against the Philippine Fisheries
Commission before it can proceed against appellants
for collections of loan under the promissory notes
which are plaintiffs bases in the action for collection
in Civil Case No. 78178. NO.
HELD 2: The obligation of Teodoros under the
promissory notes not having been released by the
assignment of receivables, appellants remain as the
principal debtors of MB rather than mere
guarantors. The deed of assignment merely
guarantees said obligations. That the guarantor cannot
be compelled to pay the creditor unless the latter has
exhausted all the property of the debtor, and has
resorted to all the legal remedies against the debtor,
under Article 2058 of the New Civil Code does not
therefore apply to them. It is of course of the
essence of a contract of pledge or mortgage that when
the principal obligation becomes due, the things in
which the pledge or mortgage consists may be
alienated for the payment to the creditor (Article
2087, New Civil Code). In the instant case, Teodooros
are both the principal debtors and the pledgors or
mortgagors. Resort to one is, therefore, resort to the
other.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 126
MB did try to collect on the pledged receivables. As
the Emergency Employment Agency (EEA) which
issued the receivables had been abolished, the
collection had to be coursed through the Office of
the President which disapproved the same. The
receivable became virtually worthless leaving Teodoros'
loans from MB unsecured. It is but proper that after
their repeated demands made on appellants for the
settlement of their obligations, appellee bank should
proceed against appellants. It would be an exercise in
futility to proceed against a defunct office for the
collection of the receivables pledged.
ALCANTARA vs ALINEA et al
FACTS: Alcantara filed a complaint in the Court of
First Instance of La Laguna, praying that judgment
be rendered in his behalf ordering the defendants to
deliver to him the house and lot claimed, and to pay
him in addition thereto as rent the sum of 8 pesos per
month from February of that year, and to pay the costs
of the action.
Alcantara alleged in effect that on the 29th day of
February, 1904, the defendants, Ambrosio Alinea and
Eudosia Belarmino, borrowed from him the sum of
480 pesos, payable in January of said year 1905 under
the agreement that if, at the expiration of the said
period, said amount should not be paid it would be
understood that the house and lot, the house being
constructed of strong materials, owned by the said
defendants and located in the town of San Pablo on
the street of the same name, Province of La Laguna,
be considered as absolutely sold to the plaintiff for
the said sum; that the superficial extent and
boundaries of said property are described in the
complaint; and that, notwithstanding that the time for
the payment of said sum has expired and no payment
has been made, the defendants refuse to deliver to
plaintiff the said property, openly violating

that which they contracted to do and depriving him
to his loss of the rents which plaintiff should receive,
the same counting from February, 1905.
After having taken the evidence of both parties and
attaching the documents presented in evidence to
the record, the judge on November 27, 1905,
rendered a judgment ordering the defendants to
deliver to the plaintiff the house and lot, the object of
this litigation, and to pay the costs of the action, not
making any finding upon the question of loss or
damages by reason of the absence of proof on these
points. The defendants duly took exception to this
decision, and asked for a new trial of the case on the
ground that the findings of the court below in its
decision were plainly contrary to law, which motion
was overruled and from which ruling defendants also
excepted.
ISSUE: WON the two contracts entered into between
the parties are void? NO
HELD: The fact that the parties have agreed at the
same time, in such a manner that the fulfilment of
the promise of sale would depend upon the non-
payment or return of the amount loaned, has not
produced any charge in the nature and legal conditions
of either contract, or any essential defect which
would tend to nullify the same.
If the promise of sale is not vitiated because,
according to the agreement between the parties
thereto, the price of the same is to be the amount
loaned and not repaid, neither would the loan be null or
illegal, for the reason that the added agreement
provides that in the event of failure of payment the
sale of property as agreed will take effect, the
consideration being the amount loaned and not paid.
The property, the sale of which was agreed to by the
debtors, does not appear mortgaged in favor of the
creditor, because
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 127
in order to constitute a valid mortgage it is
indispensable that the instrument be registered in
the Register of Property, in accordance with article
1875 of the Civil Code. In the case at bar, the
transaction does not constitute a mortgage, nor could it
possibly be a mortgage, for the reason of said
document is not vested with the character and
conditions of a public instrument. Also, the said
property could not be pledged, not being personal
property, and notwithstanding the said double contract
the debtor continued in possession thereof and the
said property has never been occupied by the creditor.
Neither was there ever any contract of antichresis by
reason of the said contract of loan, inasmuch as the
creditor plaintiff has never been in possession thereof,
nor has he enjoyed the said property, nor for one
moment ever received its rents; therefore, there are
no proper terms in law, taking into consideration the
terms of the conditions contained in the aforesaid
contract, whereby this court can find that the
contract was null, and under no consideration
whatever would it be just to apply to the plaintiff
articles 1859 and 1884 of the same code.
The contract (pactum commissorium), indicates the
existence of the contracts of mortgage or of pledge or
that of antichresis, none of which have coincided in
the loan indicated herein.
It is a principle in law, that the will of the
contracting parties is the law of contracts. It was agreed
between plaintiff and defendants herein that if
defendants should not pay the loan of 480 pesos in
January1905, the property belonging to the defendants
and described in the contract should remain sold for
the aforesaid sum. The document of contract has
been recognized by the defendant Alinea and by the
witnesses who signed same with him, being therefore
an authentic and efficacious document, in accordance
with

article 1225 of the Civil Code; and as the amount
loaned has not been paid and continues in possession
of the debtor, it is only just that the promise of sale be
carried into effect, and the necessary instrument be
executed by the vendees.
Therefore, by virtue of the reasons given above and
accepting the findings given in the judgment appealed
from, we affirm the said judgment herein, with the
costs against the appellants.
After expiration of twenty days from the date of the
notification of this decision let judgment be entered in
accordance herewith and ten days thereafter let the
case be remanded to the court from whence it came for
proper action.
UY TONG VS. CA
G.R. No. 77465, May 21, 1988
FACTS: Uy Tong (also known as Henry Uy) and Kho
Po Giok (Spouses Uy) used to be the owners of
Apartment No. 307 of the Ligaya Building, together
with the leasehold right for 99 years over the land on
which the building stands. The land is registered in
the name of Ligaya Investments, Inc. It appears that
Ligaya Investments, Inc. owned the building which
houses the apartment units but sold Apartment No.
307 and leased a portion of the land in which the
building stands to the Spouses.
1969, the Spouses purchased from Bayanihan
Automotive, Inc. (Bayanihan) 7 units of motor vehicles
for a total amount of P47,700.00 payable in 3
installments. After making a down payment of
P7,700.00, the Spouses failed to pay the balance of
P40,000.00. Due to these unpaid balances, Bayanihan
filed an action for specific performance against the
Spouses.
The trial court rendered a judgment in favor of
Bayanihan, ordering the Spouses, jointly
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 128
and severally, to pay them the sum of P40,000.00,
with interest at the legal rate from July 1, 1970 until
full payment. In the event of their failure to do so within
30 days from notice of this judgment, they are ordered
to execute the corresponding deed of absolute sale in
favor of the plaintiff and/or the assignment of
leasehold rights over the defendant's apartment
located at 307 Ligaya Building,
Pursuant to said judgment, an order for execution
pending appeal was issued by the trial court and a
deed of assignment dated May 27, 1972, was
executed by the Spouses over Apartment of the
Ligaya Building together with the leasehold right
over the land on which the building stands.
Notwithstanding the execution of the deed of
assignment, the Spouses remained in possession of
the premises. This prompted BAYANHAN to file an
ejectment case against the spouses.
Spouses contend that the deed of assignment is null
and void because it is in the nature of a pactum
commissorium and/or was borne out of the same.
ISSUE: WON the deed of assignment is void because
it is in the nature of pactum commissorium? NO
HELD: The prohibition on pactum commissorium
stipulations is provided for by Article 2088 of the Civil
Code:
Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of
the same. Any stipulation to the contrary is null and
void.
The aforequoted provision furnishes the two elements
for pactum commissorium to exist:
(1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged
by way of security for the payment of the
principal obligation; and

(2) that there should be a stipulation for an
automatic appropriation by the creditor of
the thing pledged or mortgaged in the
event of non- payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement
evinces no basis for the application of the pactum
commissorium provision. First, there is no indication of
any contract of mortgage entered into by the
parties. It is a fact that the parties agreed on the sale
and purchase of trucks.
Second, there is no case of automatic appropriation of
the property by Bayanihan. When the Spouses
defaulted in their payments of the second and third
installments of the trucks they purchased, Bayanihan
filed an action in court for specific performance. The
trial court rendered favorable judgment for
Bayanihan and ordered the Spouses to pay the
balance of their obligation and in case of failure to do
so, to execute a deed of assignment over the property
involved in this case. The Spouses elected to execute
the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on
Bayanihan because it took the intervention of the
trial court to exact fulfillment of the obligation,
which, by its very nature is "anathema to the concept
of pacto commissorio." And even granting that the
original agreement between the parties had the badges
of pactum commissorium, the deed of assignment
does not suffer the same fate as this was executed
pursuant to a valid judgment in Civil Case No. 80420
as can be gleaned from its very terms and conditions.
This being the case, there is no reason to impugn the
validity of the said deed of assignment.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 129
SPOUSES ONG VS. ROBAN LENDING
557 SCRA 516 ; G.R. No. 172592, July 9,
2008
FACTS: Throughout 1999 and 2000, spouses Ong
borrowed through mutiple loans a total of 4m from
Roban Lending. These loans were covered by a real
estate mortgage (REM) over the spouses’ parcels of
land in Tarlac.
In 2001, both parties consolidated their loans, which
now totaled 5.9m. They then executed two
documents: a Dacion in Payment agreement, where
the sps assigned the properties covered by the REM to
Roban Lending; and a Memorandun of Agreement,
which stated that if the sps fail to pay the
restructured loan, then Roban can validly enforce
the Dacion en Pago.
In 2002, the sps moved to declare the dacion en pago
agreement and memorandum of agreement executed
in 2001 were void for being pactum commissorium.
Roban Lending claimed that dacion en pago is
recognized under Art 1245, as a special form of
payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of
their monetary obligation.
ISSUE: WON the memorandum of agreement and
dacion en pago agreement amounted to pactum
commissorium and thus void? YES
HELD: Both documents in effect automatically allow
Roban
Lending to acquire ownership of the properties should
the sps fail to pay.
The SC found that both documents worked as a way to
circumvent the prohibition found in Article 2088:
“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."
The elements of pactum commissorium, which enables
the mortgagee to acquire ownership of the mortgaged
property without the need of any foreclosure
proceedings, are:
(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 nonpayment of the
principal obligation within the stipulated
period.
In the case at bar, the Memorandum of Agreement
and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the
petitioners to pay their debt within the one-year
period gives respondent the right to enforce the
Dacion in Payment transferring to it ownership of the
properties covered by the REM.
Why there is no dacion in this case: the ‘dacion’
did not extinguish the sps’ obligation
In a true dacion en pago, the assignment of the
property extinguishes the monetary debt. In the case
at bar, the alienation of the properties was by way of
security, and not by way of satisfying the debt. The
Dacion in Payment did not extinguish petitioners’
obligation to respondent. On the contrary, under the
Memorandum of Agreement executed on the same
day as the Dacion in Payment, petitioners had to
execute a promissory note for P5,916,117.50 which
they were to pay within one year.
That the questioned contracts were freely and
voluntarily executed by petitioners and
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 130
respondent is of no moment, pactum commissorium
being void for being prohibited by law.
Side issue on interest rate:
The monthly interest rate of 3.5% per month (42%
annum) – found unconscionable and reduced to 12%
Penalty interest of 5% per month (60% annum) –
found iniquitous and reduced to 12% per annum from
date of demand.
MCMICKING VS. MARTINEZ
15 Phil. 204, G.R. No. L-5219, February 15, 1910
FACTS: Sometime during the year 1908, Pedro
Martinez, defendant, obtained judgment in the CFI of
the city of Manila against one Maria Aniversario.
Thereafter execution was issued upon said judgment
and the sheriff levied upon a pailebot (“pilots boat”)
alleged to be the property of said Maria Aniversario.
Defendant Go Juna intervened and claimed a lien
upon said boat by virtue of a pledge of the same to
th
him by the said Maria Aniversario made on the 27
day of February, 1907, which said pledge was
evidenced by a public instrument bearing that date.
This action was brought by the sheriff against Go Juna
and Pedro Martinez to determine the rights of the
parties to the funds in his hands. Maria Aniversario
was not made a party. Pedro Martinez alleged as a
defense that the pledge which said document was
intended to constitute had not been made effective
by delivery of the property pledged, as required by
article 1863 of the Civil Code, and that, therefore,
there existed no preference in favor of said Go Juna.
The court declared a preference in favor of Pedro
Martinez, and ordered the sheriff to pay over the said
funds in consonance therewith. An appeal was taken
from said

judgment.
ISSUE: WON there was a pledge. NO.
HELD: The court concluded that the property was not
delivered in accordance with the provisions of article
1863 of the Civil Code. The pledge was ineffective
against Martinez. It appears, however, that the
document of pledge is a public document which
contains an admission of indebtedness. In other
words, while it is intended to be a pledge, it is also a
credit which appears in a public document.
Article 1924, paragraph 3, letter a, is therefore
applicable; and, said public document antedating the
judgment of defendant Martinez, takes preference
thereover.
The validity of that document in so far as it shows an
indebtedness against Maria Aniversario and its
effectiveness against her have not, however, been
determined. She is not a party to this action. No
judgment can be rendered affecting her rights or
liabilities under said instrument. If said instrument is
invalid or for any other cause unenforceable against
her, it would be wholly unjust, by declaring its
preference over a debt acknowledged by and
conclusive against her, to require that said funds be
paid over to the holder of said document. That
would be to require her to pay a debt which has not
only been shown to be enforceable against her but
which, as a witness for the defendant Martinez on
the trial of this cause, she expressly and vehemently
repudiated as a valid claim against her.
Where a pledge in the form of a public instrument,
duly executed as such, contains an admission of the
indebtedness in a specified amount to secure which
debt said pledge was made, and said pledge is void for
failure to deliver to the creditor, or to a third person
agreed upon, the property pledged, said
indebtedness is,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 131
nevertheless, one appearing in a public instrument
under article 1924 of the Civil Code, and such debt
takes preference over a judgment secured against the
pledgor subsequent to the date of said public
instrument.
The judgment is, therefore, reversed; and it is ordered
that the cause be returned to the court below; that the
plaintiff bring in Maria Aniversario as a party to this
action, and that she be given an opportunity to
make her defense, if she has any, to the document in
question under proper procedure.
POLICY: A pledge (not a chattel mortgage) of personal
property to secure an indebtedness is without force
or effect unless the property pledged is delivered to
the pledgee or to some third person agreed upon.
CALTEX vs PNB (1992)
FACTS: PNB issued 280 certificates of time deposit
(CTDs) in favor of Angel dela Cruz who deposited with
PNB the aggregate amount of P1,120,000.00. Angel
delivered the CTD to Caltex in connection with his
purchased of fuel products. Thereafter, Angel
informed PNB that she lost all the CTD. Ultimately
280 replacement CTDs were issued in favor of Angel.
Angel negotiated and obtained a loan from PNB
amounting toP875,000.00. Angel executed a notarized
Deed of Assignment of TD, surrendering to PNB "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.
Credit Manager Caltex went to PNB and presented
for verification the CTDs

declared lost by Angel alleging that the same were
delivered to Caltex "as security for purchases made
with Caltex Philippines, Inc." by said Angel.
When the loan of Angel with PNB matured and fell
due PNB set-off and applied the time deposits in
question to the payment of the matured loan
ISSUE: Whether CALTEX can rightfully recover on the
CTDs. NO
HELD: 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.
However, the CTDs were delivered to Caltex not as
payment but as a security for payment.
If it were true that the CTDs were delivered as payment
and not as security, petitioner's credit manager could
have easily said so, instead of using the words "to
guarantee" in the letter aforequoted. Had Caltex
produced the receipt prayed for by PNB, it could have
proved, if such truly was the fact, that the CTDs were
delivered as payment and not as security.
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
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 132
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.
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.
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.
ESTATE OF LITTON V MENDOZA AND CA | 1998
FACTS: In 1963, CMB Products, with Mendoza as
president, offered to sell textile cotton materials to
the Bernal spouses, who were engaged in
manufacture of embroidery, garments and cotton
materials. For this purpose, Mendoza introduced the
spouses to Alfonso Tan.
The spouses purchased on credit from Tan cotton
materials amounting to 80,000.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 133
Mendoza guaranteed the payment of the debt.
Tan then delivered the cotton materials to the
spouses. In view of the arrangement, CBM Products
(thru Mendoza) asked for and received a post-dated
check for the payment of the spouses’ debt.
It was understood that Mendoza will retain the check
until the cotton materials are finally manufactured into
garments, after which Mendoza will sell the finished
products for the spouses. Meanwhile, the check
matured without having been cashed so Mendoza
demanded for another check without a date.
Feb. 28, 1964, Mendoza issued two checks in favour
of Tan. He told the spouses of the same and told
them they are indebted to him and asked the spouses
to sign an instrument whereby Mendoza assigned the
said amount to Insular Products, Inc..
Tan had the two checks discounted but were later
returned with words ‘stop payment’. It appears it was
ordered by Mendoza for failure of the spouses to
deposit sufficient funds for the check issued by the
spouses in his favour.
Tan sued Mendoza while the spouses brought an
action for interpleader for not knowing whom to
pay. Pendente lite, Tan assigned in favour of Littion,
Sr his litigatious credit (in action of spouses) against
Mendoza, duly submitted to the court, with notice to
the parties.
TC ordered Mendoza to pay Tan 76k, which was
affirmed by the CA.
Mendoza entered into Compromise Agreement with
Tan wherein the latter recognized that his claims
against Mendoza had been settled and because of that,
both waives any claim against the other; with a
provision that it no way affects

Tan’s right to go against the spouses.
Mendoza filed MFR saying that there was the
compromise agreement which absolved him from
liability.
Tan opposed this saying the Compromise agreement
was null and void because of the deed of assignment
executed in favour of Litton, Sr.; he says that with
such, he has no more right to alienate said credit;
The compromise agreement was
approved:
a. It said that the assignment was by way of
securing only his obligation to Litton, Sr.;
b. Thus, Tan retained possession and dominion
over the credit (2085);
c. Although considered as a litigatious credit,
such may be validly alienated by Tan; such
alienation is subject to the remedies of Litton
under 6 of CC whereby, the assignment if
proven prejudicial to Litton, may entitle Littion
to pursue his remedies against Tan;
d. The alienation of a litigatious credit is further
subject to the debtor’s right of redemption
under 1634;
ISSUE: Can a plaintiff in a case, who had previously
assigned in favor of his creditor his litigated credit in
said case, by a deed of assignment which was duly
submitted to the court, validly enter into a
compromise agreement thereafter releasing the
defendant therein from his claim without notice to his
assignee? NO
HELD: The purpose of compromise is to replace and
terminate controverted claims. Once approved, it has
the force of res judicata (except for vices of consent or
forgery). Petitioner seeks to set aside the
compromise agreement since prior thereto, Tan
executed a deed of assignment in favour of Littion, Sr.
involving the same litigated credit.
Fact that assignment was done by way of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 134
securing Tan’s obligation in favour of Littion, Sr. does
not affect the resolution of the matter. Also, the
validity of pledge/guaranty in favour of Liiton has not
been questioned.
Deed of assignment fulfils the requirements of a valid
pledge or mortgage.
Although it is true that Tan may validly alienate the
litigatious credit as ruled by the appellate court, citing
Article 1634 of the Civil Code, said provision should
not be taken to mean as a grant of an absolute
right on the part of the assignor Tan to indiscriminately
dispose of the thing or the right given as security. The
Court rules that the said provision should be read in
consonance with Article 2097 of the same code.
Although the pledgee or the assignee, Litton, Sr.
did not ipso facto become the creditor of private
respondent Mendoza, the pledge being valid, the
incorporeal right assigned by Tan in favor of the former
can only be alienated by the latter with due notice to
and consent of Litton, Sr. or his duly authorized
representative. To allow the assignor to dispose of or
alienate the security without notice and consent of the
assignee will render nugatory the very purpose of a
pledge or an assignment of credit.
Moreover, under Article 1634, the debtor has a
corresponding obligation to reimburse the assignee,
Litton, Sr. for the price he paid or for the value given
as consideration for the deed of assignment. Failing
in this, the alienation of the litigated credit made by
Tan in favor of private respondent by way of a
compromise agreement does not bind the assignee,
petitioner herein.

DIOSDADO YULIONGSIU vs.
PHILIPPINE NATIONAL BANK
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, 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
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 135
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 instalments 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.
ISSUE: W/N the contract was a chattel mortgage so
that PNB cannot take possession of the chattels until
after there has been default. NO, PLEDGE
HELD: The parties stipulated as a fact that Exhibit "A" &
"1-Bank" is a pledge contract. Necessarily, this judicial
admission binds Yuliongsiu. Without any showing that
this was made thru palpable mistake, no amount of
rationalization can offset it.
PNB as pledgee was therefore entitled to the actual
possession of the vessels. While it is true that Yuliongsiu
continued operating the vessels after the pledge
contract was entered into, his possession was
expressly made “subject to the order of the pledgee."
The provision of Art. 2110 of the present Civil Code
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.
Yuliongsiu also urge Us to rule that constructive
delivery is insufficient to make pledge effective. 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., a vessel used in maritime
business, such delivery is sufficient. Since PNB
was, pursuant to the terms of pledge contract, in full
control of the vessels thru Yuliongsiu, 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. Nor
was it unjustified considering that Yuliongsiu had just
defrauded the PNB in the huge sum of P184,000
LIM TAY vs. COURT OF APPEALS
FACTS: On January 8, 1980, Respondent-
Appellee Sy Guiok and Alfonso Sy Lim secured a
loan from the [p]etitioner in the amount of P40,000
each payable within six (6) months. To secure the
payment of the aforesaid loan and interest thereon,
Respondent Guiok executed a Contract of Pledge in
favor of the [p]etitioner whereby he pledged his three
hundred (300) shares of stock in the Go Fay &
Company Inc., Respondent Corporation, for brevity's
sake.
Under said "Contracts of Pledge," Respondent[s]
Guiok and Sy Lim covenanted, that:
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 136
3. In the event of the failure of the
PLEDGOR to pay the amount within a period
of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose the
pledge upon the said shares of stock hereby
created by selling the same at public or private
sale …
Respondent Guiok and Sy Lim endorsed their
respective shares of stock in blank and delivered the
same to the [p]etitioner.
However, Respondent Guiok and Sy Lim failed to pay
their respective loans and the accrued interests
thereon to the [p]etitioner. In October, 1990, the
[p]etitioner filed a "Petition for Mandamus" against
Respondent Corporation, with the SEC e praying that
an order be issued directing the corporate secretary of
[R]espondent Go Fay & Co., Inc. to register the stock
transfers and issue new certificates in favor of Lim Tay.
The corporate secretary of Respondent Corporation
refused to record the transfer of the shares of stock of
Respondent Guiok and Sy Lim in favor of and under the
name of the [p]etitioner and to issue new certificates
of stock to the [p]etitioner stating that the pledge
entered by the parties did not automatically vest [i]n
complainant ownership of the pledged shares.
ISSUE: Whether or not the pledgor in this case
became the owner of the pledged share by virtue of
the contract of pledge entered by the parties. NO.
HELD: The contractual stipulation, which was part of
the Complaint, shows that plaintiff was merely
authorized to foreclose the pledge upon maturity of
the loans, not to own them. Such foreclosure is not
automatic, for it must be done in a public or private
sale. Nowhere did the Complaint mention that
petitioner had in fact foreclosed the pledge and
purchased the

shares after such foreclosure. His status as a mere
pledgee does not, under civil law, entitle him to
ownership of the subject shares. It is also noteworthy
that petitioner's Complaint did not aver that said shares
were acquired through extraordinary prescription,
novation or laches. Moreover, petitioner's claim,
subsequent to the filing of the Complaint, that he
acquired ownership of the said shares through these
three modes is not indubitable and still has to be
resolved. In fact, as will be shown, such allegation-has
no merit. Manifestly, the Complaint by itself did not
contain any prima facie showing that petitioner was
the owner of the shares of stocks. Quite the contrary, it
demonstrated that he was merely a pledgee, not an
owner.
Without Foreclosure and Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares.
Petitioner initially argued that ownership of the shares
pledged had passed to him, upon Respondents Sy
Guiok and Sy Lim's failure to pay their respective loans.
But on appeal, petitioner claimed that ownership
over the shares had passed to him, not via the
contracts of pledge, but by virtue of prescription and
by respondents' subsequent acts which amounted to
a novation of the contracts of pledge. We do not
agree.
At the outset, it must be underscored that petitioner
did not acquire ownership of the shares by virtue of
the contracts of pledge. Article 2112 of the Civil Code
states:
The creditor to whom the credit has not been
satisfied in due time, may proceed before a
Notary Public to the sale of the thing
pledged. This sale shall be made at a public
auction, and with notification to the debtor
and the owner of the thing pledged in a
proper case, stating the amount for which the
public sale is to be held. If at the first auction
the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 137
thing is not sold, a second one with the same
formalities shall be held; and if at the second
auction there is no sale either, the creditor
may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance
for his entire claim.
Furthermore, the contracts of pledge contained a
common proviso, which we quote again for the sake of
clarity:
3. In the event of the failure of the
PLEDGOR to pay the amount within a period
of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock
hereby created by selling the same at public
or private sale with or without notice to the
PLEDGOR, at which sale the PLEDGEE may be
the purchaser at his option; and "the PLEDGEE
is hereby authorized and empowered at his
option to transfer the said shares of stock on
the books of the corporation to his own
name, and to hold the certificate issued in
lieu thereof under the terms of this pledge,
and to sell the said shares to issue to him
and to apply the proceeds of the sale to the
payment of the said sum and interest, in the
manner hereinabove provided;
There is no showing that petitioner made any
attempt to foreclose or sell the shares through public
or private auction, as stipulated in the contracts of
pledge and as required by Article 2112 of the Civil
Code. Therefore, ownership of the shares could not
have passed to him. The pledgor remains the owner
during the pendency of the pledge and prior to
foreclosure and sale, as explicitly provided by Article
2103 of the same Code:

Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the
actions which pertain to the owner of the
thing pledged in order to recover it from, or
defend it against a third person.
No Novation in Favor of Petitioner.
Neither did petitioner acquire the shares by virtue of a
novation of the contract of pledge. Novation is
defined as "the extinguishment of an obligation by a
subsequent one which terminates it, either by
changing its object or principal conditions, by
substituting a new debtor in
place of the old one, or by subrogating a third
26
person to the rights of the creditor." Novation of a
contract must not be presumed. "In the absence of
an express
agreement, novation takes place only when the old
and the new obligations are incompatible on every
point."
In the present case, novation cannot be presumed by
(a) respondents' indorsement and delivery of the
certificates of stock covering the 600 shares, (b)
petitioner's receipt of dividends from 1980 to 1983,
and (c) the fact that respondents have not instituted
any action to recover the shares since 1980.
Respondents' indorsement and delivery of the
certificates of stock were pursuant to paragraph 2
of the contract of pledge which reads:
2. The said certificates had been delivered by
the PLEDGOR endorsed in blank to be held by
the PLEDGEE under the pledge as security for
the payment of the aforementioned sum and
interest thereon accruing.
This stipulation did not effect the transfer of ownership
to petitioner. It was merely in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 138
compliance with Article 2093 of the Civil Code,
which requires that the thing pledged be placed in the
possession of the creditor or a third person of
common agreement; and Article 2095, which states
that if the thing pledged are shares of stock, then the
"instrument proving the right pledged" must be
delivered to the creditor.
Moreover, the fact that respondents allowed the
petitioner to receive dividends pertaining to the
shares was not meant to relinquish ownership
thereof. As stated by respondent corporation, the
same was done pursuant to an agreement between
the petitioner and Respondents Sy Guiok and Sy Lim,
following Article 2102 of the civil Code which
provides:
It the pledge earns or produces fruits,
income, dividends, or interests, the creditor
shall compensate what he receives with
those which are owing him; but if none are
owing him, or insofar as the amount may
exceed that which is due, he shall apply it
to the principal. Unless there is a stipulation
to the contrary, the pledge shall extend to
the interest and the earnings of the right
pledged.
Novation cannot be inferred from the mere fact that
petitioner has not, since 1980, instituted any action to
recover the shares. Such action is in fact premature,
as the loan is still outstanding. Besides, as already
pointed out, novation is never presumed or inferred.

INSULAR LIFE vs. ROBERT YOUNG
FACTS: In December, 1987, respondent Robert Young,
together with his associates and co-respondents,
acquired by purchase Home Bankers Savings and Trust
Co., now petitioner Insular Savings Bank ("the Bank,"
for brevity), from the Licaros family for
P65,000,000.00.
On December, 1990, Benito Araneta, a stockholder of
the Bank, signified his intention to purchase 99.82%
of its outstanding capital stock for P340,000,000.00,
subject to the condition that the ownership of all the
shares will be consolidated in Young's name. On
February 5, 1991, Araneta paid Young P14,000,000.00
as part of the downpayment.
In order to carry out the intended sale to Araneta,
Young bought from Jorge Go and his group their 45%
equity in the Bank for P153,000,000.00. In order to
pay this amount, Young obtained a short-term loan of
P170,000,000.00 from International Corporate Bank
("Interbank") to finance the purchase.
However, Araneta backed out from the intended sale
and demanded the return of his downpayment.
Meanwhile, Young's loan from Interbank became due,
causing his serious financial problem.
On August 27, 1991, Young and Insular Life entered
into a Credit Agreement. Under its provisions, Insular
Life extended a loan to Young in the amount of
P200,000,000.00. To secure the loan, Young, acting in
his behalf and as attorney-in-fact of the other
stockholders, executed on the same day a Deed of
Pledge over 1,324,864 shares which represented
99.82% of the outstanding capital stock of the Bank.
The next day, he also executed a promissory note in
favor of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 139
Insular Life in the same amount with an interest
rate of 26% per annum to mature
120 days from execution. The Credit Agreement
further provides that Insular Life shall have the prior
right to purchase the Schedule I Shares (owned by
Young) and the Schedule II Shares (owned by the other
stockholders of the Bank), as well as the 250,000
shares which will be issued after the additional
capital of P25,000,000.00 (payable from the proceeds
of the loan) shall have been infused.
On October 1, 1991, Insular Life and Insular Life
Pension Fund formally informed Young of their
intention to acquire 30% and 12%, respectively, of the
Bank's outstanding shares, subject to due diligence
audit and proper documentation.
On October 11, 1991, Insular Life, through a team of
auditors led by Mr. Wilfrido Patawaran, conducted a
due diligence audit on the Bank pursuant to the
MOA. The audit revealed several check-kiting
operations which amounted to P340,000,000.00, an
anomaly in which Young took responsibility.
On October 21, 1991, Young signed a letter prepared
by Atty. Jacinto Jimenez, counsel of Insular Life,
addressed to Mr. Vicente R. Ayllon, Chairman of the
Bank's Board of Directors, stating that due to
business reverses, he shall not be able to pay his
obligations under the Credit Agreement between him
and Insular Life. Consequently, Young "unconditionally
and irrevocably waive(s) the benefit of the period"
of the loan (up to December 26, 1991) and Insular
"may consider (his) obligations thereunder as
defaulted." He likewise interposes no objection to
Insular Life's exercise of its rights under the said
agreement.
Forthwith, Insular Life instructed its counsel to foreclose
the pledge constituted upon the shares. The latter
then sent Young a

notice informing him of the sale of the shares in a
public auction scheduled on October 28, 1991, and in
the event that the shares are not sold, a second
auction sale shall be held the next day, October 29.
On October 28, 1991, only Insular Life submitted a
bid, hence, the shares were not sold on that day.
The next day, a second auction was held. Again, Insular
Life was the sole bidder. Since the shares were not
sold at the two public auctions, Insular Life
appropriated to itself, not only the original 1,324,864
shares, but also the 250,000 shares subsequently
issued by the Bank and delivered to Insular Life by
way of pledge. Thus, Insular Life gave Young an
acquittance of his entire claim.
Thereafter, title to the said shares was consolidated in
the name of Insular Life. On November 12, 1991, the
Bangko Sentral ng Pilipinas' Supervision and
Examination Sector approved Insular Life's request to
maintain its present ownership of 99.82% of the Bank.
On January 7, 1992, Young and his associates filed a
complaint against the Bank, Insular Life and its counsel,
Atty. Jacinto Jimenez, petitioners, for annulment of
notarial sale. The complaint alleges, that the notarial
sale conducted by petitioner Atty. Jacinto Jimenez is
void as it does not comply with the requirement of
notice of the second auction sale.
ISSUE: W/N the foreclosure of the pledge is void. NO
HELD: It is as error to declare that the auction sale is
void since petitioners failed to send a separate notice
for the second auction.
Article 2112 of the Civil Code provides: "The creditor to
whom the credit has not been satisfied in due
time, may proceed before a Notary Public for the
sale of the thing pledged. The sale shall be made at a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 140
public auction, and with notification to the debtor
and the owner of the thing pledged in a proper case,
stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a
second one with the same formalities shall be held; and
if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this
case he shall be obliged to give an acquittance for his
entire claim."
Clearly, there is no prohibition contained in the law
against the sending of one notice for the first and
second public auction as was done here by
petitioner Insular Life. The purpose of the law in
requiring notice is to sufficiently apprise the debtor
and the pledgor that the thing pledged to secure
payment of the loan will be sold in a public auction and
the proceeds thereof shall be applied to satisfy the
debt. When petitioner Insular Life sent a notice to
Young informing him of the public auction scheduled
on October 28, 1991, and a second auction on the
next day, October 29, in the event that the shares
are not sold on the first auction, the purpose of the
law was achieved. We thus reject respondents'
argument that the term "second one" refers to a
separate notice which requires the same formalities as
the first notice.
MANILA SURETY vs. VELAYO
FACTS: 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.
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 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.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 141
ISSUE: Whether or not the sale of the pledged jewelry
extinguished Velayo’s liability
HELD: The core of the appealed decision is the
following portion thereof:
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.
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 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. No deficiency is
recoverable.
DEVELOPMENT BANK OF THE PHILIPPINES VS. COURT
OF APPEALS, CELEBRADA MANGUBAT AND ABNER
MANGUBAT
(G.R. No. 110053, October 16, 1995)
FACTS: On April 27, 1965, Pacifico Chica mortgaged
the land to DBP to secure a loan of P6,000.00.
However, he defaulted in the payment of the loan,
hence DBP caused the extrajudicial foreclosure of the
mortgage. In the auction sale held on September 9,
1970, DBP acquired the property as the highest
bidder and was
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 142
issued a certificate of sale on September 17, 1970
by the sheriff. The certificate of sale was entered in
the Book of Unregistered Property on September 23,
1970. Pacifico Chica failed to redeem the property,
and DBP consolidated its ownership over the same.
On October 14, 1980, respondent spouses offered to
buy the property for P18,599.99. DBP made a
counter-offer of P25,500.00 which was accepted by
respondent spouses. The parties further agreed that
payment was to be made within six months thereafter
for it to be considered as cash payment. On July
20, 1981, the deed of absolute sale, which is now
being assailed herein, was executed by DBP in favor
of respondent spouses. Said document contained a
waiver of the seller's warranty against eviction.
Thereafter, respondent spouses applied for an
industrial tree planting loan with DBP. The latter
required the former to submit a certification from
the Bureau of Forest Development that the land is
alienable and disposable. However, on October 29,
1981, said office issued a certificate attesting to the
fact that the said property was classified as
timberland, hence not subject to disposition. The loan
application of respondent spouses was nevertheless
eventually approved by DBP in the sum of
P140,000.00, despite the aforesaid certification of the
bureau, on the understanding of the parties that DBP
woul work for the release of the land by the former
Ministry of Natural Resources.
To secure payment of the loan, respondent spouses
executed a real estate mortgage over the land on
March 17, 1982, which document was registered in
the Registry of Deeds pursuant to Act No. 3344.
However, DBP did not release the entire amount of
the loan ostensibly because the release of the land
from the then Ministry of Natural Resources had not
been obtained. On July

7, 1983, respondent spouses, as plaintiffs, filed a
complaint against DBP in the trial court seeking the
annulment of the subject deed of absolute sale on the
ground that it belongs to the lands of the public domain.
DBP averred that the annulment of the sale and the
return of the purchase price to respondent spouses
would redound to their benefit but would result in
petitioner's prejudice, since it had already released
P118,540.00 to the former while it would be left
without any security for theP140,000.00 loan and that
in the remote possibility that the land is reverted to
the public domain, respondent spouses should be
made to immediately pay, jointly and severally, the
total amount of P118,540.00 with interest. RTC
rendered judgment in favor of respondent spouses,
annulling the deed of absolute sale. CA affirmed.
ISSUE: [Main issues in this case]
(1) WON private respondent spouses Celebrada and
Abner Mangubat should be ordered to pay petitioner
DBP their loan obligation due under the mortgage
contract executed between them and DBP. YES.
(2) WON petitioner should reimburse respondent
spouses the purchase price of the property and the
amount of P11,980.00 for taxes and expenses for the
relocation Survey. (must be qualified) DBP should
reimburse the spouses for the purchase price but not
for taxes and expenses for recolaction.
HELD 1:
Considering that neither party questioned the legality
and correctness of the judgment of the court a quo, as
affirmed by respondent court, ordering the
annulment of the deed of absolute sale, such decreed
nullification of the document has already achieved
finality.
Turning now to the issue of whether or not private
respondents should be made to pay
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 143
petitioner their loan obligation amounting to
P118,540.00, we answer in the affirmative.
In its legal context, the contract of loan executed
between the parties is entirely different and discrete
from the deed of sale they entered into. The
annulment of the sale will not have an effect on the
existence and demandability of the loan. One who
has received money as a loan is bound to pay to the
creditor an equal amount of the same kind and quality.
The fact that the annulment of the sale will also
result in the invalidity of the mortgage does not
have an effect on the validity and efficacy of the
principal obligation, for even an obligation that is
unsupported by any security of the debtor may also
be enforced by means of an ordinary action. Where a
mortgage is not valid, as where it is executed by
one who is not the owner of the property, or the
consideration of the contract is simulated or false,
the principal obligation which it guarantees is not
thereby rendered null and void. That obligation
matures and becomes demandable in accordance with
the stipulations pertaining to it.
Under the foregoing circumstances, what is lost is
only the right to foreclose the mortgage as a special
remedy for satisfying or settling the indebtedness
which is the principal obligation. In case of nullity, the
mortgage deed remains as evidence or proof of a
personal obligation of the debtor, and the amount due
to the creditor may be enforced in an ordinary
personal action.
HELD 2:
A contract which the law denounces as void is
necessarily no contract whatever, and the acts of
the parties in an effort to create one can in no
wise bring about a change of their legal status. The
parties and the subject matter of the contract remain
in all particulars just as they did

before any act was performed in relation thereto.
An action for money had and received lies to recover
back money paid on a contract, the consideration of
which has failed. As a general rule, if one buys the
land of another, to which the latter is supposed to
have a good title, and, in consequence of facts
unknown alike to both parties, he has no title at all,
equity will cancel the transaction and cause the
purchase money to be restored to the buyer,
putting both parties in status quo.
Thus, on both local and foreign legal principles, the
return by DBP to respondent spouses of the purchase
price, plus corresponding interest thereon, is
ineluctably called for. However, despite that
admission of respondent spouses’ list of damages as
evidence, the Court agrees with petitioner that the
same cannot constitute sufficient legal basis for an
award of P4,000.00 and P7,980.00 as reimbursement
for land taxes and expenses for the relocation survey,
respectively. The list of damages was prepared
extrajudicially by respondent spouses by themselves
without any supporting receipts as bases thereof or to
substantiate the same. That list, per se, is necessarily
self-serving and, on that account, should have been
declared inadmissible in evidence as the factum
probans.
In order that damages may be recovered, the best
evidence obtainable by the injured party must be
presented. Actual or compensatory damages cannot
be presumed, but must be duly proved, and so
proved with a reasonable degree of certainty.
[Other Possible questions:]
(1) Was the deed of sale void? YES. Considering
that neither party questioned the legality and
correctness of the judgment of the court a quo, as
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 144
affirmed by respondent court, ordering the
annulment of the deed of absolute sale, such
decreed nullification of the document has already
achieved finality.
(2) Was there a contract of mortgage? NO, the fact of
annulment of the sale resulted in the invalidity of
themortgage, the subject property being classified as
timberland. Hence, DBP had no title to the property.
(3) Will the invalidity of the contract of mortgage
affect the principal loan obligation? NO, since it is an
accessory contract.
MARCELO R. SORIANO vs. SPOUSES RICARDO and
ROSALINA GALIT (G.R. No. 156295, September 23,
2003)
FACTS: Respondent Ricardo Galit contracted a loan
from petitioner Marcelo Soriano amounting to
P480,000.00. This loan was secured by a REM over a
parcel of land covered by OCT. No. 569. When
respondent defaulted in his obligation, Soriano filed a
complaint for sum of money against him with the RTC of
Balanga City.
Upon failure of the respondent spouses Galit to file
their answer, the trial court declared the spouses in
default and it thereafter rendered judgment in favor of
petitioner Soriano ordering the respondents to pay.
The judgment became final and executory.
Accordingly, the trial court issued a writ of execution
in due course, by virtue of which, Deputy Sheriff
Renato E. Robles levied on the following real
properties of the Galit spouses: (1) A parcel of land
covered by OCT No. T-569 (Homestead Patent No.
14692) situated in the Bo. of Tapulac, Orani, Bataan;
(2)STORE/HOUSE – CONSTRUCTED on
Lot No. 1103 made of strong materials G.I. roofing
situated at Centro I, Orani, Bataan; and (3)BODEGA –
constructed on Lot 1103, made of strong materials,
G.I. roofing, situated in Centro I, Orani, Bataan. On
December 23, 1998, petitioner

emerged as the highest and only bidder with a bid
price of P483,000.00.
Thus, on February 4, 1999, Deputy Sheriff Robles
issued a Certificate of Sale of Execution of Real
Property. On April 23, 1999, petitioner caused the
registration of the “Certificate of Sale on Execution of
Real Property” with the Registry of Deeds.
Ten months from the time the Certificate of Sale on
Execution was registered with the Registry of Deeds,
petitioner moved for the issuance of a writ of
possession which was granted by the RTC. This was,
however, subsequently nullified by the Court of
Appeals because it included a parcel of land (OCT No. T-
40785) which was not among those explicitly
enumerated in the Certificate of Sale issued by the
Deputy Sheriff, but on which stand the immovables (the
BODEGA and STORE/HOUSE)
covered by the said Certificate. Petitioner contends
that the sale of these immovables necessarily
encompasses the land on which they stand.
ISSUES:
(1) WON the land on which the buildings levied
upon in
execution is necessarily included. NO.
(2) WON the cert. of sale on execution of real
property and the writ of possession are null and void
despite the fact that they enjoy the presumption of
regularity being public documents. YES.
HELD:
(1) Art. 4151 of the Civil Code enumerates land and
buildings separately. This can only mean that a
building is, by itself, considered immovable. Thus, it
has been held that while it is true that a mortgage of
land necessarily includes, in the absence of
stipulation of the improvements thereon, buildings,
still a building by itself may be mortgaged apart from
the land on which it has been built. Such mortgage
would be still a real estate mortgage for the building
would still be considered immovable
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 145
property even if dealt with separately and apart
from the land.
In this case, considering that what was sold by virtue
of the writ of execution issued by the trial court
was merely the storehouse and bodega constructed on
the parcel of land covered by Transfer Certificate of
Title No. T-40785, which by themselves are real
properties of respondents spouses, the same should be
regarded as separate and distinct from the conveyance
of the lot on which they stand.
(2) True, public documents by themselves may be
adequate to establish the presumption of their validity.
However, their probative weight must be evaluated
not in isolation but in conjunction with other evidence
adduced by the parties in the controversy, much more
so in this case where the contents of a copy thereof
subsequently registered.
ART. 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all
kinds adhered to the soil.
xxxxxx
(3) Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking them material or
deterioration of the object;
(4) Statues, reliefs, paintings or other objects for use
or ornamentation, placed in buildings or on lands by
the owner of the immovable in such a manner that it
reveals the intention to attach them permanently to
the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the tenement
for an industry or works which may be carried on
in a building or on a piece of land, and which
tend directly to meet the needs of the said industry
or works;
(6) Animal houses, pigeon houses, beehives, fish
ponds or breeding places of

similar nature, in case their owner has placed them
or preserves them with the intention to have them
permanently attached to the land, and forming a
permanent part of it; the animals in these places are
also included;
xxxxxx
(9) Docks and structures which, though floating, are
intended by their nature and object to remain at a
fixed place on a river, lake or for documentation
purposes is being contested. No reason has been
offered how and why the questioned entry was
subsequently intercalated in the copy of the
certificate of sale subsequently registered with the
Registry of Deeds. Absent any satisfactory
explanation as to why said entry was belatedly
inserted, the surreptitiousness of its inclusion coupled
with the furtive manner of its intercalation casts
serious doubt on the authenticity of petitioner’s copy
of the Certificate of Sale. Thus, it has been held that
while a public document like a notarized deed of sale
is vested with the presumption of regularity, this is
not a guarantee of the validity of its contents.
It must be pointed out in this regard that the issuance
of a Certificate of Sale is an end result of judicial
foreclosure where statutory requirements are strictly
adhered to; where even the slightest deviations
therefrom will invalidate the proceeding and the
sale. Among these requirements is an explicit
enumeration and correct description of what
properties are to be sold stated in the notice. The
stringence in the observance of these requirements is
such that an incorrect title number together with a
correct technical description of the property to be
sold and vice versa is deemed a substantial and fatal
error which results in the invalidation of the sale.
The certificate of sale is an accurate record of what
properties were actually sold to satisfy the debt. The
strictness in the observance of accuracy and
correctness in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 146
the description of the properties renders the
enumeration in the certificate exclusive. Thus,
subsequently including properties which have not
been explicitly mentioned therein for registration
purposes under suspicious circumstances smacks of
fraud. The explanation that the land on which the
properties sold is necessarily included and, hence, was
belatedly typed on the dorsal portion of the copy of
the certificate subsequently registered is at best a
lame excuse unworthy of belief.
The appellate court correctly observed that there was
a marked difference in the appearance of the
typewritten words appearing on the first page of the
copy of the Certificate of Sale registered with the
Registry of Deeds[38] and those appearing at the dorsal
portion thereof.
Underscoring the irregularity of the intercalation is
the clearly devious attempt to let such an insertion
pass unnoticed by typing the same at the back of the
first page instead of on the second page which was
merely half-filled and could accommodate the entry
with room to spare.
DANILO D. MENDOZA, also doing business under
the name and style of ATLANTIC EXCHANGE
PHILIPPINES, vs. COURT OF APPEALS, PHILIPPINE
NATIONAL BANK, FERNANDO MARAMAG, JR.,
RICARDO G. DECEPIDA and BAYANI A. BAUTISTA
(G.R. No. 116710, June 25, 2001)
.
FACTS: Petitioner Danilo D. Mendoza is engaged in
the domestic and international trading of raw materials
and chemicals. He operates under the business name
Atlantic Exchange Philippines (Atlantic). Sometime in
1978 he was granted by respondent Philippine National
Bank (PNB) a 500,000.00 credit line and a
1,000,000.00 Letter of Credit/Trust Receipt (LC/TR) line.
As security for the credit accommodations and for
those which may thereinafter be

granted, petitioner mortgaged to respondent PNB the
following: 1) three (3) parcels of land with
improvements 2) his house and lot and 3) several
pieces of machinery and equipment in his Pasig
cocochemical plant.
Petitioner executed in favor of respondent PNB three
(3) promissory notes covering the Five Hundred
Thousand Pesos (P500,000.00) credit line. Petitioner
made use of his LC/TR line to purchase raw materials
from foreign importers.
On March 9, 1981, he wrote a letter to respondent PNB
requesting for the restructuring of his past due
accounts into a five-year term loan and for an
additional LC/TR line of Two Million Pesos
(P2,000,000.00). According to the letter, because of
the shut-down of his end-user companies and the
huge amount spent for the expansion of his business,
petitioner failed to pay to respondent bank his LC/TR
accounts as they became due and demandable. PNB
Mandaluyong replied on behalf of the respondent bank
and required petitioner to submit documents its:
1) Audited Financial Statements for 1979 and 1980;
2) Projected cash flow (cash in - cash out) for five (5)
years detailed yearly; and
3) List of additional machinery and equipment and
proof of ownership thereof.
On September 25, 1981, petitioner sent another letter
addressed to PNB Vice- President Jose Salvador,
regarding his request for restructuring of his loans.
He offered respondent PNB the following proposals:
1) the disposal his house and lot and a vacant lot
in order to pay the overdue trust receipts; 2)
capitalization and conversion of the balance into a 5-
year term loan payable semi-annually or on annual
installments; 3) a new Two Million Pesos
(P2,000,000.00) LC/TR line in order to enable Atlantic
Exchange Philippines to operate at full capacity.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 147
The petitioner testified that respondent PNB
Mandaluyong Branch found his proposal favorable
and recommended the implementation of the
agreement. However, Fernando Maramag, PNB
Executive Vice-President, disapproved the proposed
release of the mortgaged properties and reduced the
proposed new LC/TR line to One Million Pesos
(P1,000,000.00). Petitioner claimed he was forced to
agree to these changes and that he was required to
submit a new formal proposal and to sign two (2)
blank promissory notes.
According to petitioner, respondent PNB approved his
proposal. He further claimed that he and his wife were
asked to sign two
(2) blank promissory note forms. According to
petitioner, they were made to believe that the blank
promissory notes were to be filled out by respondent
PNB to conform with the 5-year restructuring plan
allegedly agreed upon.
Petitioner testified that respondent PNB allegedly
contravened their verbal agreement by 1) affixing
dates on the two
(2) subject promissory notes to make them mature in
two (2) years instead of five (5) years as supposedly
agreed upon.
Upon their failure to make good of the said loans
Respondent PNB extra-judicially foreclosed the real
and chattel mortgages, and the mortgaged properties
were sold at public auction to respondent PNB, as
highest bidder, for a total of Three Million Seven
Hundred Ninety Eight Thousand Seven Hundred
Nineteen Pesos and Fifty Centavos (P3,798,719.50).
ISSUE: WON the foreclosure sale was proper.
HELD: (The court found out that PNB did not
categorically agree to petitioner’s proposal to extend
the credit line to five years.)To the substantive
issue of mortgate. Petitioner prays for the release

of some of his movables being withheld by respondent
PNB, alleging that they were not included among
the chattels he mortgaged to respondent bank.
However, petitioner did not present any proof as to
when he acquired the subject movables and hence it is
not to be believe that the same were "after
acquired" chattels not covered by the chattel and real
estate mortgages.
In asserting its rights over the subject movables,
respondent PNB relies on a common provision in the
two (2) subject Promissory Notes Nos. 127/82 and
128/82 which
states:
In the event that this note is not paid at
maturity or when the same becomes due
under any of the provisions hereof, we
hereby authorized the BANK at its option and
without notice, to apply to the payment of
this note, any and all moneys, securities and
things of value which may be in its hands on
deposit or otherwise belonging to me/us and
for this purpose. We hereby, jointly and
severally, irrevocably constitute and appoint
the BANK to be our true Attorney-in- Fact with
full power and authority for us in our name
and behalf and without prior notice to
negotiate, sell and transfer any moneys
securities and things of value which it may
hold, by public or private sale and apply the
proceeds thereof to the payment of this note.
It is clear, however, from the above-quoted provision
of the said promissory notes that respondent bank is
authorized, in case of default, to sell "things of
value" belonging to the mortgagor "which may be on
its hands for deposit or otherwise belonging to me/us
and for this purpose." Besides, the petitioner
executed not only a chattel mortgage but also a real
estate mortgage to secure his loan obligations
to
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 148
respondent bank.
A stipulation in the mortgage, extending its scope and
effect to after-acquired property is valid and binding
where the after- acquired property is in renewal of, or
in substitution for, goods on hand when the
mortgage was executed, or is purchased with the
proceeds of the sale of such goods. More importantly,
respondent bank makes a valid argument for the
retention of the subject movables. Respondent PNB
asserts that those movables were in fact
"immovables by destination" under Art. 415
(5) of the Civil Code. It is an established rule that a
mortgage constituted on an immovable includes not
only the land but also the buildings, machinery and
accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and
accessories belonging to the mortgagor, installed after
the constitution thereof.
SPOUSES VIOLA vs EQUITABLE (2008)
FACTS: March 31, 1997 Spouses Leopoldo and
Mercedita Viola of Leo-Mers Commercial, Inc. obtained
a loan through a credit line facility in the maximum
amount of P 4,700,000.00 from the Philippine
Commercial International Bank (PCI Bank), which was
later merged with Equitable Bank and became known
as Equitable PCI Bank, Inc.
The Credit Line Agreement stipulated that the loan
would bear interest at the "prevailing PCI Bank
lending rate" per annum on the principal obligation
and a "penalty fee of three percent (3%) per month
on the outstanding amount."
To secure the payment of the loan, a
―Real Estate Mortgage over their 2 parcels of land in
favor of PCI Bank was executed. Spouses Viola made
partial payments which totaled P 3,669,210.67; PCI
Bank contends however, that Spouses

Viola made no further payments since Nov. 24, 2000
despite demand they failed to pay their outstanding
obligation which as of September 30, 2002, totaled
P14,024,623.22, broken down as follows:
Principal obligation P4,783,254.6
9 amounted to P14,024,623.22 as of September 30,
Past due interest from
11/24/00 to 09/30/02 at
15% interest P1,345,290.3
8 interest per annum on the principal loan and the 3%
Penalty at 3% per month
from
03/31/98 to P7,896,078.1
02/23/02 5 unreasonable, iniquitous and unconscionable,
P14,024,623.
22
Thus, PCI Bank extrajudicially foreclosed the
mortgage before the Regional Trial Court (RTC) and
that the mortgaged properties were sold at a public
auction.
More than five months later or on October 8, 2003,
petitioners filed a complaint for annulment of
foreclosure sale. Petitioners alleged, inter alia, that
1. they had made substantial payments of
P3,669,210.67 receipts of which were issued
without respondent specifying "whether the
payment was for interest, penalty or the principal
obligation;" that based on respondent’s statement
of account, not a single centavo of their payments
was applied to the principal obligation;
2. that every time respondent sent them a statement
of account and demand letters, they requested
for a proper accounting for the purpose of
determining their actual obligation, but all their
requests were unjustifiably ignored on account of
which they were forced to discontinue payment;
3. that "the foreclosure proceedings and auction sale
were not only irregularly and prematurely held but
were null and void because the mortgage debt is
only P2,224,073.31 on the principal
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 149
obligation and P1,455,137.36 on the interest, or a
total of only P3,679,210.67 as of April 15, 2003, but
the mortgaged properties were sold to satisfy an
inflated and erroneous principal obligation of
P4,783,254.69, plus 3% penalty fee per month or
33% per year and 15% interest per year, which
2002;"
4. that "the parties never agreed and stipulated in
the real estate mortgage contract" that the 15%
penalty fee per month on the outstanding amount
would be covered or secured by the mortgage;
5. that assuming respondent could impose such
interest and penalty fee, the same are "exorbitant,
hence, must be reduced;" and that respondent is
only allowed to impose the legal rate of interest
of 12% per annum on the principal loan absent
any stipulation thereon.
Respondent denied petitioners’ assertions, contending,
inter alia, that the absence of stipulation in the
mortgage contract securing the payment of 15%
interest per annum on the principal loan, as well as the
3% penalty fee per month on the outstanding
amount, is immaterial since the mortgage contract is
"a mere accessory contract which must take its
bearings from the principal Credit Line Agreement."
The RTC upheld the position of the PCI Bank but
reduced the interest on the principal loan from 15%
to 12% per annum and the penalty fee per month on
the outstanding amount from 3% to 1.5% per month.
Accordingly, the court nullified the foreclosure
proceedings and the Certificate of Sale subsequently
issued, "without prejudice" to the holding anew of
foreclosure proceedings based on the "re- computed
amount" of the indebtedness, "if the circumstances so
warrant."

Spouses Viola filed a Motion for Reconsideration but
it was denied. On appeal, the Court of Appeals (CA)
dismissed the petition for lack of merit.
ISSUE: WON the mortgage contract also secured the
penalty fee per month on the outstanding amount as
stipulated in the Credit Line Agreement? NO
HELD: A mortgage must "sufficiently describe the
debt sought to be secured, which description must
not be such as to mislead or deceive, and an obligation
is not secured by a mortgage unless it comes fairly
within the terms of the mortgage.
In the case at bar, the parties executed two separate
documents on March 31, 1997 – the Credit Line
Agreement granting the Client a loan through a credit
facility in the maximum amount of P4,700,000.00, and
the Real Estate Mortgage contract securing the
payment thereof. Undisputedly, both contracts were
prepared by respondent and written in fine print,
single space.
The Real Estate Mortgage contract states its coverage,
thus:
That for and in consideration of certain loans,
credit and other banking facilities obtained x x x
from the Mortgagee, the principal amount of
which is PESOS FOUR MILLION SEVEN
HUNDERED THOUSAND
ONLY (P4,700,000.00) Philippine Currency, and for
the purpose of securing the payment thereof,
including the interest and bank charges accruing
thereon, xxx
The immediately-quoted provision of the mortgage
contract does not specifically mention that, aside
from the principal loan obligation, it also secures the
payment of "a penalty fee of three percent (3%)
per month of the outstanding amount to be computed
from the day deficiency is
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 150
incurred up to the date of full payment thereon,"
which penalty as the above- quoted portion of the
Credit Line Agreement expressly stipulates.
Since an action to foreclose "must be limited to the
amount mentioned in the mortgage" and the penalty
fee of 3% per month of the outstanding obligation is
not mentioned in the mortgage, it must be excluded
from the computation of the amount secured by the
mortgage.
Regarding CA decision that the phrase "including the
interest and bank charges" in the mortgage contract
"refers to the penalty charges stipulated in the Credit
Line Agreement" is unavailing.
"Penalty fee" is entirely different from "bank charges."
The phrase "bank charges" is normally understood to
refer to compensation for services. A "penalty fee" is
likened to a compensation for damages in case of
breach of the obligation. Being penal in nature, such
fee must be specific and fixed by the contracting
parties, unlike in the present case which slaps a 3%
penalty fee per month of the outstanding amount of
the obligation.
Moreover, the "penalty fee" does not belong to the
species of obligation enumerated in the mortgage
contract, namely: "loans, credit and other banking
facilities obtained x x x from the Mortgagee, . . .
including the interest and bank charges, . . . the
costs of collecting the same and of taking possession
of and keeping the mortgaged properties, and all
other expenses to which the Mortgagee may be put
in connection with or as an incident to this mortgage
. . ."
In Philippine Bank of Communications v. Court of
Appeals which raised a similar issue, this Court held:
The sole issue in this case is whether, in the
foreclosure of a real estate

mortgage, the penalties stipulated in two
promissory notes secured by the mortgage may
be charged against the mortgagors as part of
the sums secured, although the mortgage contract
does not mention the said penalties.
The court held, Indeed, a mortgage must
sufficiently describe the debt sought to be
secured, which description must not be such as
to mislead or deceive, and an obligation is not
secured by a mortgage unless it comes fairly
within the terms of the mortgage. Under the rule
of ejusdem generis, where a description of things
of a particular class or kind is "accompanied by
words of a generic character, the generic words will
usually be limited to things of a kindred nature
with those particularly enumerated . . . " A penalty
charge does not belong to the species of
obligations enumerated in the mortgage, hence,
the said contract cannot be understood to secure
the penalty.
Regard i n g Respo n d en t’ s con ten ti o n that absence of
stipulation for the penalty fee in the mortgage
contract is of no consequence as the deed of
mortgage is merely an “accessory
co n tract” th at "mu st tak e i ts b eari n g s from the
principal Credit Line Agreement,".
Such absence is significant as it creates an ambiguity
between the two contracts, which ambiguity must be
resolved in favor of petitioners and against
respondent who drafted the contracts. Again, as
stressed by the Court in Philippine Bank of
Communications:
A mortgage and a note secured by it are
deemed parts of one transaction and are construed
together, thus, an ambiguity is created when the
notes provide for the payment of a penalty but
the mortgage contract does not.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 151
Construing the ambiguity against the petitioner, it
follows that no penalty was intended to be
covered by the mortgage. Plainly, the petitioner
can be as specific as it wants to be, yet it simply
did not specify nor even allude to, that the
penalty in the promissory notes would be
secured by the mortgage. This can then only be
interpreted to mean that the petitioner had no
design of including the penalty in the amount
secured.
RTC decision AFFIRMED with MODIFICATION in that
the "penalty fee" per month of the outstanding
obligation is excluded in the computation of the
amount secured by the Real Estate Mortgage
executed by petitioners in respondent’s favor.
POLICY: A mortgage must sufficiently describe the debt
sought to be secured, which description must not be
such as to mislead or deceive. An obligation is not
secured by a mortgage unless it comes fairly within the
terms of the mortgage.
TAN vs VALDEHUEZA (1975)
FACTS: The parcel of land described in the first
cause of action was the subject matter of the
public auction sale held on May 6, 1955 at the
Capitol Building in Oroquieta, Misamis Occidental,
wherein the plaintiff was the highest bidder and as
such a Certificate of Sale was executed by MR. VICENTE
D. ROA who was then the Ex-Officio Provincial Sheriff
in favor of LUCIA TAN the herein plaintiff. Due to the
failure of defendant Arador Valdehueza to redeem
the said land within the period of one year as being
provided by law, MR. VICENTE D. ROA who was
then the Ex- Officio Provincial Sheriff executed an
ABSOLUTE DEED OF SALE in favor of the plaintiff
LUCIA TAN.
Defendants ARADOR VALDEHUEZA and

REDICULO VALDEHUEZA have executed two
documents of DEED OF PACTO DE RETRO SALE in
favor of the plaintiff herein, LUCIA TAN of two
portions of a parcel of land which is described in the
second cause of action with the total amount of
ONE THOUSAND FIVE HUNDRED PESOS (P1,500.00).
That from the execution of the Deed of Sale with right
to repurchase mentioned in the second cause of
action, defendants Arador Valdehueza and Rediculo
Valdehueza remained in the possession of the land;
that land taxes to the said land were paid by the
same said defendants.
Tan filed a complaint forinjunction on July 24, 1957
against the Valdehuezas, to enjoin them "from
entering the above- described parcel of land and
gathering the nuts therein ...." This complaint and the
counterclaim were subsequently dismissed for failure
of the parties "to seek for the immediate trial
thereof, thus evincing lack of interest on their part to
proceed with the case.
The Deed of Pacto de Retro referred to in stipulation
of fact no. 5 as "Annex D" (dated August 5, 1955) was
not registered in the Registry of Deeds, while the Deed
of Pacto de Retro referred to as "Annex E" (dated
March 15, 1955) was registered.
On the basis of the stipulation of facts and the
annexes, the trial court rendered judgment, as follows:
Declaring Lucia Tan the absolute owner of the property
described in the first cause of action of the amended
complaint;
And as regards the land covered by deed of pacto de
retro annex 'D', the herein defendants Arador
Valdehueza and Rediculo Valdehueza are hereby
ordered to pay the plaintiff the amount of P300 with
legal interest of 6% from August 15, 1966, the said
land serving as guaranty of the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 152
said amount of payment;
ISSUE: Was there a valid mortgage? (YES)
HELD: The trial court treated the registered deed of
pacto de retro as an equitable mortgage but
considered the unregistered deed of pacto de retro
"as a mere case of simple loan, secured by the
property thus sold under pacto de retro," on the
ground that no suit lies to foreclose an unregistered
mortgage. It would appear that the trial judge had not
updated himself on law and jurisprudence; he cited, in
support of his ruling, article 1875 of the old Civil Code
and decisions of this Court circa 1910 and 1912.
Under article 1875 of the Civil Code of 1889,
registration was a necessary requisite for the validity of
a mortgage even as between the parties, but under
article 2125 of the new Civil Code (in effect since
August 30,1950), this is no longer so.
If the instrument is not recorded, the mortgage is
nonetheless binding between the parties. (Article 2125,
2nd sentence).
The Valdehuezas having remained in possession of the
land and the realty taxes having been paid by them,
the contracts which purported to be pacto de retro
transactions are presumed to be equitable mortgages,
5 whether registered or not, there being no third
parties involved.
ISSUE ON THE PROCEEDS OF THE HARVEST
The Valdehuezas claim that their answer to the
complaint of the plaintiff affirmed that they
remained in possession of the land and gave the
proceeds of the harvest to the plaintiff; it is thus
argued that they would suffer double prejudice if they
are to pay legal interest on the amounts stated in the
pacto de retro contracts, as the lower court has
directed, and that therefore the court should have
ordered evidence to be

adduced on the harvest.
The record does not support this claim. Nowhere in
the original and the amended complaints is an
allegation of delivery to the plaintiff of the harvest
from the land involved in the second cause of action.
Hence, the defendants' answer had none to affirm.
In submitting their stipulation of facts, the parties
prayed "for its approval and maybe made the basis of
the decision of this Honorable Court. " (emphasis
supplied) This, the court did. It cannot therefore be
faulted for not receiving evidence on who profited
from the harvest.
ISSUE ON LEGAL INTEREST
The imposition of legal interest on the amounts
subject of the equitable mortgages, P1,200 and P300,
respectively, is without legal basis, for, "No interest
shall be due unless it has been expressly stipulated
in writing." (Article 1956, new Civil Code) Furthermore,
the plaintiff did not pray for such interest; her thesis
was a consolidation of ownership, which was properly
rejected, the contracts being equitable mortgages.
With the definitive resolution of the rights of the parties
as discussed above, we find it needless to pass upon
the plaintiffs petition for receivership. Should the
circumstances so warrant, she may address the said
petition to the court a quo.
ACCORDINGLY, the judgment a quo is hereby modified,
as follows: (a) the amounts of P1,200 and P300
mentioned in Annexes E and D shall bear interest at six
percent per annum from the finality of this decision;
and (b) the parcel of land covered by Annex D shall be
treated in the same manner as that covered by
Annex E, should the defendants fail to pay to the
plaintiff the sum of P300 within 90 days from the
finality of this decision. In all other respects the
judgment is affirmed. No
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 153
costs.
STATE INVESTMENT vs CA (1996)
FACTS: On October 15, 1969, a contract to sell was
executed by Spouses Canuto and Ma. Aranzazu Oreta,
and the Solid Homes, Inc. (SOLID), involving a parcel of
land in Capitol Park Homes Subd., in Quezon City
for a consideration of P 39,347.00.
Upon signing of the contract, the spouses made
payment amounting to P 7,869.40, with the
agreement that the balance shall be payable in
monthly installments of P 451.70, at 12% interest p.a.
On November 4, 1976. SOLID executed several real
estate mortgage contracts in favor of State
Investment Homes, Inc. (STATE) over its subdivided
parcels of land, one of which is the subject lot. For
failure of SOLID to comply with its mortgage
obligations contract, STATE extrajudicially foreclosed
the mortgaged properties including the subject lot on
April 6, 1983, with the corresponding certificate of
sale issued therefore to STATE.
On June 23, 1984; SOLID thru a MOA negotiated for
the deferment of consolidation of ownership over the
foreclosed properties by committing to redeem the
properties from STATE.Thereafter, the spouses filed
a complaint before the HLURB, against SOLID and
STATE for failure on the part of SOLID to execute the
necessary absolute deed of sale as well as to deliver the
title to said property despite full payment of purchase
price.
In defense, SOLID alleged that the obligation under
the contract to sell has become so difficult that they
be released from the said obligation by substituting
subject lot with another suitable residential lot from
another subdivision, which they

operate. STATE averred that unless SOLID pays the
redemption price of P 125,195.00, it has a “right to
hold on and not release the foreclosed properties.”
The OAALA rendered a decision ordering STATE to
execute a deed of conveyance in favor of the spouses,
and SOLID to pay STATE the portion of its loan,
which corresponds to the value of the lot as
collateral.
ISSUE: Who between the Spouses Oreta and STATE
have better right over the subject lot? (SPOUSES
ORETA)
HELD: STATE's registered mortgage right over the
property is inferior to that of respondents-spouses'
unregistered right. The unrecorded sale between
respondents-spouses and SOLID is preferred for the
reason that if the original owner (SOLID, in this case)
had parted with his ownership of the thing sold then he
no longer had ownership and free disposal of that thing
so as to be able to mortgage it again. Registration of the
mortgage is of no moment since it is understood to be
without prejudice to the better right of third parties.
Petitioner asserts that a purchaser or mortgagee of
land/s covered under the Torrens System "is not
required to do more than rely upon the certificate of
title for it is enough that the purchaser or
mortgagee examines the pertinent certificate of title
without need of looking beyond such title."
As a general rule, where there is nothing in the
certificate of title to indicate any cloud or vice in the
ownership of the property, or any encumbrance
thereon, the purchaser is not required to explore
further than what the Torrens Title upon its face
indicates in quest for any hidden defect or inchoate
right that may subsequently defeat his right thereto.
This rule, however, admits of an exception as where
the purchaser or mortgagee, has knowledge of a
defect or lack of title in his vendor, or that he was
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 154
aware of sufficient facts to induce a reasonably prudent
man to inquire into the status of the title of the
property in litigation.
In this case, petitioner was well aware that it was
dealing with SOLID, a business entity engaged in the
business of selling subdivision lots. In fact, the OAALA
found that at the time the lot was mortgaged,
respondent State Investment House Inc., [now
petitioner] had been aware of the lot's location and that
the said lot formed part of Capital Park/Homes
Subdivision.” In Sunshine Finance and Investment Corp.
v. Intermediate Appellate Court, the Court noting
petitioner therein to be a financing corporation,
deviated from the general rule that a purchaser or
mortgagee of a land is not required to look further that
what appears on the face of the Torrens Title. Thus:
Nevertheless, we have to deviate from the general
rule because of the failure of the petitioner in this
case to take the necessary precautions to ascertain if
there was any flaw in the title of the mortgage. The
petitioner is an investment and financing
corporation. We presume it is experienced in its
business. Ascertainment of the status and condition of
properties offerred to it as security for the loans it
extends must be a standard and indispensable part
of its operations. Surely, it cannot simply rely on an
examination of a Torrens certificate to determine
what the subject property looks like as its condition is
not apparent in the document. The land might be in
a depressed area. There might be squatters on it. It
might be easily inundated. It might be an interior lot,
without convenient access. These and other similar
factors determine the value of the property and so
should be of practical concern to the petitioner.
xxx xxx xxx
Our conclusion might have been different if the
mortgagee were an ordinary individual

or company without the expertise of the petitioner in
the mortgage and sale of registered land or if the
land mortgaged were some distance from the
mortgagee and could not be conveniently inspected.
But there were no such impediments in this case. The
facilities of the petitioner were not so limited as to
prevent it from making a more careful examination of
the land to assure itself that there were no
unauthorized persons in possession.
The above-enunciated rule should apply in this case as
petitioner admits of being a financing institution.
11
We take judicial notice of the uniform
practice of
financing institutions to investigate, examine and
assess the real property offered as security for any
loan application especially where, as in this case,
the subject property is a subdivision lot located at
Quezon City,
M.M. It is a settled rule that a purchaser or
mortgagee cannot close its eyes to facts which
should put a reasonable man upon his guard, and
then claim that he acted in good faith under the
belief that there was no defect in the title of
the vendor or mortgagor. Petitioner's
constructive knowledge of the defect in the title of
the subject property, or lack of such knowledge due
to its negligence, takes the place of registration of
the rights of respondents-spouses. Respondent Court
thus correctly ruled that petitioner was not a
purchaser or mortgagee in good faith; hence
petitioner can not solely rely on what merely
appears on the face of the Torrens Title.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 155
PHILIPPINE NATIONAL BANK, AS THE ATTORNEY-IN-
FACT OF OPAL PORTFOLIO INVESTMENTS (SPV-AMC),
INC. vs. MERCEDES CORPUZ, REPRESENTED BY HER
ATTORNEY-IN- FACT VALENTINA CORPUZ
FACTS: On October 4, 1974 respondent Mercedes
Corpuz delivered her owner’s duplicate copy of
Transfer Certificate of Title (TCT) 32815 to Dagupan
City Rural Bank as security against any liability she
might incur as its cashier. She later left her job and
went to the United States.
On October 24, 1994 the rural bank where she worked
cancelled its lien on Corpuz’s title, she having
incurred no liability to her employer. Without Corpuz’s
knowledge and consent, however, Natividad Alano,
the rural bank’s manager, turned over Corpuz’s title
to Julita Camacho and Amparo Callejo.
Conniving with someone from the assessor’s office,
Alano, Camacho, and Callejo prepared a falsified
deed of sale, making it appear that on February 23,
1995 Corpuz sold her land to one "Mary Bondoc" for
P50,000.00. They caused the registration of the deed
of sale, resulting in the cancellation of TCT 32815 and
the issuance of TCT 63262 in Bondoc’s name. About a
month later or on March 27, 1995 the trio executed
another fictitious deed of sale with "Mary Bondoc"
selling the property to the spouses Rufo and Teresa
Palaganas for only P15,000.00. This sale resulted in
the issuance of TCT 63466 in favor of the Palaganases.
Nine days later or on April 5, 1995 the Palaganases
executed a deed of sale in favor of spouses Virgilio
and Elena Songcuan for P50,000.00, resulting in the
issuance of TCT 63528. Finally, four months later or
on August 10, 1995 the Songcuans took out a loan
of P1.1 million from petitioner Philippine National
Bank (PNB) and, to secure payment, they

executed a real estate mortgage on their title.
Before granting the loan, the PNB had the title verified
and the property inspected.
On November 20, 1995 respondent Corpuz filed,
through an attorney-in-fact, a complaint before the
Dagupan Regional Trial Court (RTC) against Mary
Bondoc, the Palaganases, the Songcuans, and petitioner
PNB, asking for the annulment of the layers of deeds
of sale covering the land, the cancellation of TCTs
63262, 63466, and 63528, and the reinstatement of
TCT 32815 in her name.
On June 29, 1998 the RTC rendered a decision granting
respondent Corpuz’s prayers. This prompted
petitioner PNB to appeal to the Court of Appeals
(CA). On July 31, 2007 the CA affirmed the decision of
the RTC and denied the motion for its
reconsideration, prompting PNB to take recourse to
this Court.
ISSUE: The sole issue presented in this case is
whether or not petitioner PNB is a mortgagee in good
faith, entitling it to its lien on the title to the property
in dispute.
RULING: Petitioner PNB points out that, since it did a
credit investigation, inspected the property, and
verified the clean status of the title before giving out
the loan to the Songcuans, it should be regarded as a
mortgagee in good faith. PNB claims that the
precautions it took constitute sufficient compliance
with the due diligence required of banks when dealing
with registered lands.
As a rule, the Court would not expect a mortgagee
to conduct an exhaustive investigation of the history
1
of the mortgagor’s title before he extends a loan.
But petitioner PNB is not an ordinary mortgagee; it is
2
a bank. Banks are expected to be more cautious
than ordinary individuals in dealing with lands, even
registered ones, since the business of banks is
imbued with public interest. It is
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 156
of judicial notice that the standard practice for banks
before approving a loan is to send a staff to the
property offered as collateral and verify the
genuineness of the title to determine the real owner or
owners.
One of the CA’s findings in this case is that in the
course of its verification, petitioner PNB was
informed of the previous TCTs covering the subject
property. And the PNB has not categorically contested
this finding. It is evident from the faces of those
titles that the ownership of the land changed from
Corpuz to Bondoc, from Bondoc to the Palaganases,
and from the Palaganases to the Songcuans in less than
three months and mortgaged to PNB within four months
of the last transfer.
The above information in turn should have driven the
PNB to look at the deeds of sale involved. It would have
then discovered that the property was sold for
ridiculously low prices: Corpuz supposedly sold it to
Bondoc for justP50,000.00; Bondoc to the Palaganases
for just P15,000.00; and the Palaganases to the
Songcuans also for justP50,000.00. Yet the PNB gave
the property an appraised value of
P781,760.00. Anyone who deliberately ignores a
significant fact that would create suspicion in an
otherwise reasonable person cannot be considered as
an innocent mortgagee for value. The Court finds no
reason to reverse the CA decision.

CANLAS VS. CA
FACTS: The private respondent own several parcels of
land located in Quezon City for which he is the
registered owner. He secured loans from L and R
corporations and executed deeds of mortgage over
the parcels of land for the security of the same. Upon
the maturity of said loans, the firm initiated an
extrajudicial foreclosure of the properties in question
after private respondent failed to pay until maturity.
The private respondent filed a complaint for injunction
over the said foreclosure and for redemption of the
parcels of land. Two years after the filing of the petition,
private respondent and L and R corporation entered
into a compromise agreement that renders the
former to be insured another year for the said
properties. Included in the stipulations were the
attorney’s fees amounting to Php 100,000.00. The
private respondent however, remained to be in turmoil
when it came to finances and was apparently unable
to pay and secure the attorney’s fees, more so the
redemption liability. Relief was discussed by
petitioner and private respondent executed a
document to redeem the parcels of land and to
register the same to his name.
Allegations were made by the private respondent
claiming the parcels of land to his name but without
prior notice, the properties were already registered
under the petitioner’s name. The private respondent
calls for a review and for the court to act on the
said adverse claim by petitioner on said certificates
for the properties consolidated by the redemption
price he paid for said properties. The private
respondent filed a suit for the annulment of
judgment in the Court of appeals which ruled over the
same.
ISSUE: whether the petitioner is on solid ground on
the reacquisition over the said properties.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 157
RULING: By Atty. Canlas' own account, "due to lack of
paying capacity of respondent Herrera, no financing
entity was willing to extend him any loan with which
to pay the redemption price of his mortgaged
properties and petitioner's P100,000.00 attorney's fees
awarded in the Compromise Judgment," a
development that should have tempered his demand
for his fees. For obvious reasons, he placed his
interests over and above those of his client, in
opposition to his oath to "conduct himself as a lawyer
... with all good fidelity ... to [his] clients." The Court
finds the occasion fit to stress that lawyering is not
a moneymaking venture and lawyers are not
merchants, a fundamental standard that has, as a
matter of judicial notice, eluded not a few law
advocates. The petitioner's efforts partaking of a
shakedown" of his own client are not becoming of a
lawyer and certainly, do not speak well of his fealty to
his oath to "delay no man for money."
We are not, however, condoning the private
respondent's own shortcomings. In condemning Atty.
Canlas monetarily, we cannot overlook the fact that
the private respondent has not settled his liability for
payment of the properties. To hold Atty. Canlas alone
liable for damages is to enrich said respondent at
the expense of his lawyer. The parties must then
set off their obligations against the other.
AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION
OF HINIGARAN vs. ESTANISLAO YULO YUSAY, ET AL.
FACTS: July 20, 1952, Rafaela Yulo executed in favor of
the movant a mortgage for P33,626.29, due from her,
her mother, sisters, brothers, and others, which
amount she assumed to pay to the movant. A motion
was presented to the court by the movant demanding
the surrender of the owner's duplicate

certificate of title that he may annotate said mortgage
at the back of the certificate. Estanislao Yusay, a part
owner of the lot, opposed the petition on the ground
that he is owner of a part of the property in
question; that the granting of the motion would
operate to his prejudice, as he has not participated in
the mortgage cited in the motion; that Rafaela Yulo is
dead; that the motion is not verified and movant's
rights have lapsed by prescription. Finally it is argued
that his opposition raises a controversial matter
which the court has no jurisdiction to pass upon.
Margarita, Maria, Elena and Pilar, all surnamed Yulo,
joined the oppositor Estanislao Yusay, raising the same
objections interposed by Yusay.
The existence of the mortgage is not disputed, and
neither is the fact that the mortgagor Rafaela Yulo
is part owner of Lot No. 855 of the Cadastral Survey
of Pontevedra. The oppositors do not dispute that she
is such a part owner, and their main objection to
the petition is that as part owners of the property,
the annotation of the mortgage on the common title
will affect their rights.
ISSUE: WON as part owners of the property, the
annotation of the mortgage on the common title will
affect their (Yusay) rights.
RULING: The court held that even if the ownership
of the deceased Rafaela Yulo over the portion of the
lot in question and the validity of the mortgage are
disputed, such invalidity of the mortgage is no proof
of the non-existence of the mortgage nor a ground for
objecting to its registration, citing the case of Register
of Deeds of Manila vs. Maxima Tinoco Vda. de Cruz,
et, al., 95 Phil., 818; 53 Off. Gaz., 2804.
In his Brief before this Court, counsel for appellants
argue that the mortgage sought to be registered was
not recorded before the closing of the intestate
proceedings of the deceased mortgagor, but was
so
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 158
recorded only four months after the termination of
said proceedings, so that the claim of movant has
been reduced to the character of a mere money
claim, not a mortgage, hence the mortgage may not be
registered. In the first place, as the judge below
correctly ruled, the proceeding to register the
mortgage does not purport to determine the
supposed invalidity of the mortgage or its effect.
Registration is a mere ministerial act by which a
deed, contract or instrument is sought to be
inscribed in the records of the Office of the Register of
Deeds and annotated at the back of the certificate of
title covering the land subject of the deed, contract
or instrument.
The registration of a lease or mortgage, or the entry of
a memorial of a lease or mortgage on the register, is
not a declaration by the state that such an
instrument is a valid and subsisting interest in land; it
is merely a declaration that the record of the title
appears to be burdened with the lease or mortgage
described, according to the priority set forth in the
certificate.
The mere fact that a lease or mortgage was
registered does not stop any party to it from setting up
that it now has no force or effect. (Niblack, pp. 134-
135, quoted in Francisco Land Registration Act, l950
ed., p. 348.)
The court below, in ordering the registration and
annotation of the mortgage, did not pass on its
invalidity or effect. As the mortgage is admittedly an act
of the registered owner, all that the judge below did
and could do, as a registration court, is to order its
registration and annotation on the certificate of title
covering the land mortgaged. By said order the court
did not pass upon the effect or validity of the
mortgage — these can only be determined in an
ordinary case before the courts, not before a court
acting merely as a registration court, which did not
have

the jurisdiction to pass upon the alleged effect or
validity.
Wherefore, the order appealed from is hereby
affirmed, with costs against oppositors-appellants. So
ordered.
JOE A. ROS and ESTRELLA AGUETE vs. PHILIPPINE
NATIONAL BANK - LAOAG BRANCH
G.R. No. 170166 (April 6, 2011)
FACTS: On January 13, 1983, spouses Jose A. Ros and
Estrella Aguete filed a complaint for the annulment of
the Real Estate Mortgage and all legal proceedings
taken thereunder against PNB, Laoag Branch before
the Court of First Instance, Ilocos Norte.
The averments in the complaint disclosed that
plaintiff-appellee Joe A. Ros obtained a loan of
P115,000.00 from PNB Laoag Branch on October 14,
1974 and as security for the loan, plaintiff-appellee
Ros executed a real estate mortgage involving a
parcel of land – Lot No. 9161 of the Cadastral Survey of
Laoag, with all the improvements thereon described
under Transfer Certificate of Title No. T-9646.
Upon maturity, the loan remained outstanding. As a
result, PNB instituted extrajudicial foreclosure
proceedings on the mortgaged property. After the
lapse of one (1) year without the property being
redeemed, the property was consolidated and
registered in the name of PNB, Laoag Branch on August
10, 1978.
Claiming that she has no knowledge of the loan
obtained by her husband nor she consented to the
mortgage instituted on the conjugal property – a
complaint was filed by Estrella Aguete to annul the
proceedings pertaining to the mortgage, sale and
consolidation of the property – interposing the defense
that her signatures affixed on the documents were
forged and
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 159
that the loan did not redound to the benefit of the
family.
In its answer, PNB prays for the dismissal of the
complaint for lack of cause of action, and insists that it
was plaintiffs-appellees’ own acts of
omission/connivance that bar them from recovering
the subject property on the ground of estoppel,
laches, abandonment and prescription.
On 29 June 2001, the trial court rendered its Decision
in favor of petitioners. The trial court declared that
Aguete did not sign the loan documents, did not
appear before the Notary Public to acknowledge the
execution of the loan documents, did not receive
the loan proceeds from PNB, and was not aware of
the loan until PNB notified her in 14 August 1978
that she and her family should vacate the mortgaged
property because of the expiration of the
redemption period. Under the Civil Code, the
effective law at the time of the transaction, Ros could
not encumber any real property of the conjugal
partnership without Aguete’s consent. Aguete may,
during their marriage and within ten years from the
transaction questioned, ask the courts for the
annulment of the contract her husband entered into
without her consent, especially in the present case
where her consent is required.
On 17 October 2005, the appellate court rendered
its Decision and granted PNB’s appeal. The appellate
court reversed the trial court’s decision, and dismissed
petitioners’ complaint.
The appellate court stated that the trial court
concluded forgery without adequate proof. The
appellate court declared that Aguete affixed her
signatures on the documents knowingly and with her
full consent.

Assuming arguendo that Aguete did not give her
consent to Ros’ loan, the appellate court ruled
that the conjugal partnership is still liable because
the loan proceeds redounded to the benefit of the
family. The records of the case reveal that the loan
was used for the expansion of the family’s business.
Therefore, the debt obtained is chargeable against the
conjugal partnership.
ISSUE: Whether or not the real estate mortgage was
valid? YES
HELD: The Civil Code was the applicable law at the
time of the mortgage. The subject property is thus
considered part of the conjugal partnership of gains,
as provided under Articles 153, 160, 161, 166 and 173
of the Civil Code.
There is no doubt that the subject property was
acquired during Ros and Aguete’s marriage. There is
also no doubt that Ros encumbered the subject
property when he mortgaged it for P115,000.00. PNB
Laoag does not doubt that Aguete, as evidenced by
her signature, consented to Ros’ mortgage to PNB of
the subject property. On the other hand, Aguete
denies ever having consented to the loan and also
denies affixing her signature to the mortgage and
loan documents.
The husband cannot alienate or encumber any
conjugal real property without the consent, express or
implied, of the wife. Should the husband do so, then
the contract is voidable. Article 173 of the Civil Code
allows Aguete to question Ros’ encumbrance of the
subject property. Annulment will be declared only
upon a finding that the wife did not give her consent.
In the present case, we follow the conclusion of the
appellate court and rule that Aguete gave her consent
to Ros’ encumbrance of the subject property.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 160
The documents disavowed by Aguete are
acknowledged before a notary public, hence they are
public documents. Every instrument duly
acknowledged and certified as provided by law may
be presented in evidence without further proof,
the certificate of
acknowledgment being prima facie
evidence of the execution of the instrument or
document involved. The execution of a document that
has been ratified before a notary public cannot be
disproved by the mere denial of the alleged signer.
PNB was correct when it stated that petitioners’
omission to present other positive evidence to
substantiate their claim of forgery was fatal to
petitioners’ cause. Petitioners did not present any
corroborating witness, such as a handwriting expert,
who could authoritatively declare that Aguete’s
signatures were really forged.
A notarized document carries the evidentiary weight
conferred upon it with respect to its due execution,
and it has in its favor the presumption of regularity
which may only be rebutted by evidence so clear,
strong and convincing as to exclude all controversy
as to the falsity of the certificate. Absent such, the
presumption must be upheld.
Ros himself cannot bring action against PNB, for no
one can come before the courts with unclean hands.
In their memorandum before the trial court, petitioners
themselves admitted that Ros forged Aguete’s
signatures.
The application for loan shows that the loan would be
used exclusively "for additional working [capital] of
buy & sell of garlic & virginia tobacco." In her
testimony, Aguete confirmed that Ros engaged in
such business, but claimed to be unaware whether it
prospered. Aguete was also aware of loans contracted
by Ros, but did not know where he "wasted the
money."

Debts contracted by the husband for and in the
exercise of the industry or profession by which he
contributes to the support of the family cannot be
deemed to be his exclusive and private debts.
If the husband himself is the principal obligor in the
contract, i.e., he directly received the money and
services to be used in or for his own business or his
own profession, that contract falls within the term "x
x x x obligations for the benefit of the conjugal
partnership." Here, no actual benefit may be proved.
It is enough that the benefit to the family is
apparent at the signing of the contract. From the
very nature of the contract of loan or services, the
family stands to benefit from the loan facility or
services to be rendered to the business or
profession of the husband. It is immaterial, if in the
end, his business or profession fails or does not
succeed. Simply stated, where the husband contracts
obligations on behalf of the family business, the
law presumes, and rightly so, that such obligation
will redound to the benefit of the conjugal
partnership.
Thus, Ros' loan redounded to the benefit of the family
and thus, the debt is chargeable to the conjugal
partnership.
PRODUCERS BANK OF THE PHILIPPINES vs. EXCELSA
INDUSTRIES, INC.
G.R. No. 152071 (May 8, 2009)
FACTS: Respondent Excelsa Industries, Inc. is a
manufacturer and exporter of fuel products,
particularly charcoal briquettes, as an alternative fuel
source. Sometime in January 1987, respondent applied
for a packing credit line or a credit export advance with
petitioner Producers Bank of the Philippines, a
banking institution duly organized and existing under
Philippines laws. The application was supported by
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 161
Letter of Credit No. M3411610NS2970 dated 14
October 1986. Kwang Ju Bank, Ltd. of Seoul, Korea
issued the letter of credit through its correspondent
bank, the Bank of the Philippine Islands, in the
amount of US$23,000.00. T.L. World Development
Corporation, who was the original beneficiary of the
letter of credit, transferred to respondent all its
rights and obligations under the said letter of credit.
Petitioner approved respondent’s application for a
packing credit line in the amount of P300,000.00, of
which about P96,000.00 in principal remained
outstanding. Respondent executed the corresponding
promissory notes evidencing the indebtedness.
Prior to the application for the packing credit line,
respondent had obtained a loan from petitioner in the
form of a bill discounted and secured credit
accommodation in the amount of
P200,000.00, of which P110,000.00 was outstanding at
the time of the approval of the packing credit line.
The loan was secured by a real estate mortgage
dated
05 December 1986 over respondent’s properties.
The real estate mortgage contained the following
clause:
For and in consideration of those certain loans,
overdraft and/or other credit accommodations on
this date obtained from the MORTGAGEE, and to
secure the payment of the same, the principal of all of
which is hereby fixed at P500,000, Philippine
Currency, as well as those that the MORTGAGEE may
hereafter extend to the MORTGAGOR, including
interest and expenses or any other obligation owing
to the MORTGAGEE, the MORTGAGOR
does hereby transfer and convey by way of mortgage
unto the MORTGAGEE, its successors or assigns, the
parcels of land which are described in the list inserted
on the back of this document, and/or appended
hereto, together with all the

buildings and improvements now existing or which
may hereafter be erected or constructed thereon, of
which the MORTGAGOR declares that he/it is the
absolute owner, free from all liens and encumbrances.
On 17 March 1987, respondent presented for
negotiation to petitioner drafts drawn under the letter
of credit and the corresponding export documents in
consideration for its drawings in the amounts of
US$5,739.76 and US$4,585.79. Petitioner purchased
the drafts and export documents by paying
respondent the peso equivalent of the drawings. The
purchase was subject to the conditions laid down in
two separate undertakings by respondent dated 17
March 1987 and 10 April 1987.
On 24 April 1987, Kwang Ju Bank, Ltd. notified
petitioner through cable that the Korean buyer refused
to pay respondent’s export documents on account of
typographical discrepancies. Kwang Ju Bank, Ltd.
returned to petitioner the export documents.
Upon learning about the Korean importer’s non-
payment, respondent sent petitioner a letter dated 27
July 1987, informing the latter that respondent had
brought the matter before the Korea Trade Court
and that it was ready to liquidate its past due
account with petitioner. Respondent sent another
letter dated 08 September 1987, reiterating the
same assurance. In a letter
05 October 1987, Kwang Ju Bank, Ltd. informed
petitioner that it would be returning the export
documents on account of the non-acceptance by the
importer.
Petitioner demanded from respondent the payment
of the peso equivalent of the export documents, plus
interest and other charges, and also of the other due
and unpaid loans. Due to respondent’s failure to
heed the demand, petitioner moved for the
extrajudicial foreclosure on the real
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 162
estate mortgage over respondent’s properties.
At the public auction held on 05 January 1988, the
Sheriff of Antipolo, Rizal issued a Certificate of Sale in
favor of petitioner as the highest bidder. The
certificate of sale was registered on 24 March
1988. Subsequently, petitioner executed an affidavit of
consolidation over the foreclosed properties after
respondent failed to redeem the same. As a result, the
Register of Deeds of Marikina issued new certificates
of title in the name of petitioner.
On 17 November 1989, respondent instituted an action
for the annulment of the extrajudicial foreclosure with
prayer for preliminary injunction and damages against
petitioner and the Register of Deeds of Marikina.
Docketed as Civil Case No. 1587-A, the complaint was
raffled to Branch 73 of the RTC of Antipolo, Rizal.
The complaint prayed, among others, that the
defendants be enjoined from causing the transfer of
ownership over the foreclosed properties from
respondent to petitioner.
On 18 December 1997, the RTC rendered a decision
upholding the validity of the extrajudicial foreclosure
and ordering the issuance of a writ of possession in
favor of petitioner. The Court of Appeals then rendered
the assailed decision reversing the decision of the RTC.
ISSUE:
1) Whether or not Excelsa is liable for the dishonor
of the draft and export - YES
2) Whether or not the real estate mortgage also
served as security for respondent's drafts that were
not accepted and paid by Kwang Ju Bank, Ltd. - YES
3) Whether or not extrajudicial foreclosure of the
mortgage may be invalidated for lack of notice to
respondent - NO
4) Whether or not respondent may still question the
foreclosure sale - NO

HELD:
1) Excelsa is liable.
Much of the discussion has revolved around who
should be liable for the dishonor of the draft and
export documents. In the two undertakings executed by
respondent as a condition for the negotiation of the
drafts, respondent held itself liable if the drafts
were not accepted. The two undertakings signed by
respondent are similarly-worded and contained
respondent’s express warranties, to wit:
In consideration of your negotiating the above
described draft(s), we hereby warrant that the said
draft(s) and accompanying documents thereon are
valid, genuine and accurately represent the facts
stated therein, and that such draft(s) will be
accepted and paid in accordance with its/their tenor.
We further undertake and agree, jointly and severally,
to defend and hold you free and harmless from any
and all actions, claims and demands whatsoever, and
to pay on demand all damages actual or
compensatory including attorney’s fees, costs and
other awards or be adjudged to pay, in case of suit,
which you may suffer arising from, by reason, or on
account of your negotiating the above draft(s)
because of the following discrepancies or reasons or
any other discrepancy or reason whatever.
We hereby undertake to pay on demand the full
amount of the above draft(s) or any unpaid balance
thereof, the Philippine perso equivalent converted at
the prevailing selling rate (or selling rate prevailing at
the date you negotiate our draft, whichever is higher)
allowed by the Central Bank with interest at the
rate prevailing today from the date of negotiation,
plus all charges and expenses whatsoever incurred in
connection therewith. You shall neither be obliged to
contest or dispute any refusal to accept or to pay the
whole or any part of the above
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 163
draft(s), nor proceed in any way against the drawee,
the issuing bank or any endorser thereof, before making
a demand on us for the payment of the whole or any
unpaid balance of the draft(s).
In Velasquez v. Solidbank Corporation, where the
drawer therein also executed a separate letter of
undertaking in consideration for the bank’s
negotiation of its sight drafts, the Court held that the
drawer can still be made liable under the letter of
undertaking even if he is discharged due to the
bank’s failure to protest the non-acceptance of the
drafts. The Court explained, thus:
Petitioner, however, can still be made liable under
the letter of undertaking. It bears stressing that it is a
separate contract from the sight draft. The liability
of petitioner under the letter of undertaking is
direct and primary. It is independent from his
liability under the sight draft. Liability subsists on it
even if the sight draft was dishonored for non-
acceptance or non-payment.
2) The real estate mortgage served as security for
respondent's drafts. Respondent executed a real
estate mortgage containing a "blanket mortgage
clause," also known as a "dragnet
clause." It has been settled in a long line of
decisions that mortgages given to secure future
advancements are valid and legal contracts, and the
amounts named as consideration in said contracts do
not limit the amount for which the mortgage may
stand as security if from the four corners of the
instrument the intent to secure future and other
indebtedness can be gathered.
In Union Bank of the Philippines v. Court of Appeals,
the nature of a dragnet clause was explained, thus:
Is one which is specifically phrased to
subsume all debts of past and future origins. Such
clauses are "carefully scrutinized and strictly

construed." Mortgages of this character enable the
parties to provide continuous dealings, the nature or
extent of which may not be known or anticipated at
the time, and they avoid the expense and
inconvenience of executing a new security on each
new transaction. A "dragnet clause" operates as a
convenience and accommodation to the borrowers
as it makes available additional funds without their
having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs
of extra legal services, recording fees, et cetera.
Petitioner, therefore, was not precluded from seeking
the foreclosure of the real estate mortgage based on
the unpaid drafts drawn by respondent.
3) Extrajudicial foreclosure was valid. Under
paragraph 12 of the real estate mortgage,
personal notice of the
foreclosure sale is not a requirement to the validity of
the foreclosure sale.
A perusal of the records of the case shows that a
notice of sheriff’s sale was sent by registered mail to
respondent and received in due course. Yet,
respondent claims that it did not receive the notice
but only learned about it from petitioner. In any
event, paragraph 12 of the real estate mortgage
requires petitioner merely to furnish respondent
with the notice and does not oblige petitioner to
ensure that respondent actually receives the notice.
On this score, the Court holds that petitioner has
performed its obligation under paragraph 12 of the
real estate mortgage.
4) Respondent cannot question the foreclosure sale.
Plaintiff is estopped from questioning the
foreclosure. The plaintiff is guilty of laches and
cannot at this point in time question the foreclosure
of the subject properties. Defendant bank
made
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 164
demands against the plaintiff for the payment of
plaintiff’s outstanding loans and advances with the
defendant as early as July 1997.
Plaintiff acknowledged such outstanding loans and
advances to the defendant bank and committed to
liquidate the same. For failure of the plaintiff to pay
its obligations on maturity, defendant bank foreclosed
the mortgage on subject properties on January 5, 1988
the certificate of sale was annotated on March 24,
1988 and there being no redemption made by the
plaintiff, title to said properties were consolidated in
the name of defendant in July 1989. Undeniably,
subject foreclosure was done in accordance with the
prescribed rule.
PRUDENTIAL BANK vs. DON A. ALVIAR
& GEORGIA B. ALVIAR G.R. No.
150197 (July 28, 2005)
FACTS: Don A. Alviar and Georgia B. Alviar, are the
registered owners of a parcel of land in San Juan,
Metro Manila. On 10 July 1975, they executed a deed
of real estate mortgage in favor of petitioner
Prudential Bank to secure the payment of a loan worth
P250,000.00. On 4 August 1975, respondents executed
the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan
matured on 4 August 1976 at an interest rate of 12%
per annum with a 2% service charge, and that the
note is secured by a real estate mortgage as
aforementioned.
The real estate mortgage contained the following
clause:
That for and in consideration of certain loans,
overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or
hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same
and those that may hereafter be obtained, the
principal or all of which is hereby fixed at Two Hundred
Fifty

Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted
on the back of this document, and/or appended
hereto, together with all the buildings and
improvements now existing or which may hereafter
be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner
free from all liens and encumbrances. (this is a
blanket mortgage clause or dragnet clause)
On 22 October 1976, Don Alviar executed another
promissory note, PN BD#76/C-345 for P2,640,000.00,
secured by D/A SFDX
#129, signifying that the loan was secured by a "hold-
out" on the mortgagor’s foreign currency savings
account with the bank under Account No. 129, and
that the mortgagor’s passbook is to be surrendered to
the bank until the amount secured by the "hold-out" is
settled.
On 27 December 1976, respondent spouses executed
for Donalco Trading, Inc., of which the husband and
wife were President and Chairman of the Board and
Vice President, respectively, PN BD#76/C- 430 covering
P545,000.000. As provided in the note, the loan is
secured by "Clean- Phase out TOD CA 3923," which
means that the temporary overdraft incurred by
Donalco Trading, Inc. with petitioner is to be
converted into an ordinary loan.
On 16 March 1977, petitioner wrote Donalco Trading,
Inc., informing the latter of its approval of a straight
loan of P545,000.00, the proceeds of which shall
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 165
be used to liquidate the outstanding loan of
P545,000.00 TOD. The letter likewise mentioned that
the securities for the loan were the deed of
assignment on two promissory notes executed by
Bancom Realty Corporation with Deed of Guarantee in
favor of A.U. Valencia and Co. and the chattel
mortgage on various heavy and transportation
equipment.
On 06 March 1979, respondents paid petitioner
P2,000,000.00, to be applied to the obligations of
G.B. Alviar Realty and Development, Inc. and for
the release of the real estate mortgage for
the P450,000.00 loan covering the two lots located at
Vam Buren and Madison Streets, North Greenhills, San
Juan, Metro Manila. The payment was acknowledged
by petitioner who accordingly released the mortgage
over the two properties.
On 15 January 1980, petitioner moved for the
extrajudicial foreclosure of the mortgage on the
property covered by TCT No. 438157. Per petitioner’s
computation, respondents had the total
obligation of P1,608,256.68, covering the three
promissory notes plus assessed past due interests
and penalty charges. The public auction sale of the
mortgaged property was set on 15 January 1980.
Respondents filed a complaint for damages with a
prayer for the issuance of a writ of preliminary
injunction with the RTC of Pasig, claiming that they
have paid their principal loan secured by the mortgaged
property, and thus the mortgage should not be
foreclosed. For its part, petitioner averred that the
payment of P2,000,000.00 made on 6 March 1979
was not a payment made by respondents, but by G.B.
Alviar Realty and Development Inc., which has a
separate loan with the bank secured by a separate
mortgage.
ISSUES:
1) Whether or not the blanket mortgage clause or
dragnet clause is valid - VALID
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 166

2) Whether or not the blanket mortgage clause Under American jurisprudence, two schools of
applies even to subsequent advancements for which thought have emerged on this question. One school
other securities were intended - NO advocates that a "dragnet clause" so worded as to be
3) Whether or not the foreclosure of the property broad enough to cover all other debts in addition to
the one specifically secured will be construed to cover
was proper - NO
a different debt, although such other debt is secured
by another mortgage. The contrary thinking
HELD: A "blanket mortgage clause," also known as a
maintains that a mortgage with such a clause will not
"dragnet clause" in American jurisprudence, is one
secure a note that expresses on its face that it is
which is specifically phrased to subsume all debts of
otherwise secured as to its entirety, at least to
past or future origins. Such clauses are "carefully
anything other than a deficiency after exhausting the
scrutinized and strictly construed." Mortgages of this
security specified therein, such deficiency being an
character enable the parties to provide continuous
indebtedness within the meaning of the mortgage, in
dealings, the nature or extent of which may not be
the absence of a special contract excluding it from the
known or anticipated at the time, and they avoid
arrangement.
the expense and inconvenience of executing a new
security on each new transaction.
The latter school represents the better position. The
A "dragnet clause" operates as a convenience and
parties having conformed to the "blanket mortgage
accommodation to the borrowers as it makes available
clause" or "dragnet clause," it is reasonable to
additional funds without their having to execute
conclude that they also agreed to an implied
additional security documents, thereby saving time,
understanding that subsequent loans need not be
travel, loan closing costs, costs of extra legal
secured by other securities, as the subsequent loans
services, recording fees, et cetera. Indeed, it has been
will be secured by the first mortgage. In other words,
settled in a long line of decisions that mortgages
the sufficiency of the first security is a corollary
given to secure future advancements are valid and
component of the "dragnet clause." But of course,
legal contracts, and the amounts named as
there is no prohibition, as in the mortgage contract in
consideration in said contracts do not limit the
issue, against contractually requiring other securities
amount for which the mortgage may stand as
for the subsequent loans. Thus, when the mortgagor
security if from the four corners of the instrument
takes another loan for which another security was
the intent to secure future and other indebtedness
given it could not be inferred that such loan was made
can be gathered.
in reliance solely on the original security with the
"dragnet clause," but rather, on the new security
On the basis of the blanket mortgage clause
given. This is the "reliance on the security test."
contained in the real estate mortgage, petitioner and
respondents intended the real estate mortgage to
It was therefore improper for petitioner in this case
secure not only the P250,000.00 loan from the
to seek foreclosure of the mortgaged property
petitioner, but also future credit facilities and
because of non- payment of all the three
advancements that may be obtained by the
promissory notes. While the existence and validity of
respondents.
the "dragnet clause" cannot be denied,

there is a need to respect the existence of the other
security given for PN BD#76/C-
345. The foreclosure of the mortgaged property
should only be for the P250,000.00 loan
covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory
note. While the "dragnet clause" subsists, the
security specifically executed for subsequent loans
must first be exhausted before the mortgaged
property can be resorted to.
It is important to note that the mortgage contract,
as well as the promissory notes subject of this case,
is a contract of adhesion, to which respondents’ only
participation was the affixing of their signatures or
"adhesion" thereto. A contract of adhesion is one in
which a party imposes a ready-made form of
contract which the other party may accept or
reject, but which the latter cannot modify.
The real estate mortgage in issue appears in a
standard form, drafted and prepared solely by
petitioner, and which, according to jurisprudence
must be strictly construed against the party
responsible for its preparation. If the parties
intended that the "blanket mortgage clause" shall
cover subsequent advancement secured by separate
securities, then the same should have been indicated
in the mortgage contract. Consequently, any
ambiguity is to be taken contra proferentum, that is,
construed against the party who caused the
ambiguity which could have avoided it by the exercise
of a little more care. To be more emphatic, any
ambiguity in a contract whose terms are susceptible
of different interpretations must be read against the
party who drafted it, which is the petitioner in this
case.
Even the promissory notes in issue were made on
standard forms prepared by petitioner, and as
such are likewise
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 167
contracts of adhesion. Being of such nature, the same
should be interpreted strictly against petitioner and
with even more reason since having been
accomplished by respondents in the presence of
petitioner’s personnel and approved by its manager,
they could not have been unaware of the import
and extent of such contracts.
Petitioner, however, is not without recourse. Both
the Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and
gave no credence to their claim that they paid the
said amount when they paid petitioner
P2,000,000.00. Thus, the mortgaged property could
still be properly subjected to foreclosure proceedings
for the unpaid P250,000.00 loan, and as mentioned
earlier, for any deficiency after D/A SFDX#129,
security for PN BD#76/C- 345, has been exhausted,
subject of course to defenses which are available to
respondents.
N.B. In the absence of clear, supportive evidence of
a contrary intention, a mortgage containing a
"dragnet clause" will not be extended to cover future
advances unless the document evidencing the
subsequent advance refers to the mortgage as
providing security therefor.
PHILIPPINE CHARITY SWEEPSTAKES OFFICE (PCSO) vs.
NEW DAGUPAN METRO GAS CORPORATION, PURITA
E. PERALTA and PATRICIA P. GALANG
FACTS: Purita E. Peralta is the registered owner of a
parcel of land located at Bonuan Blue Beach
Subdivision, Dagupan City. In 1989, a real estate
mortgage was constituted over such property in
favor of PCSO to secure the payment of the
sweepstakes tickets purchased Patricia P. Galang
(provincial distributor).

However on July 31, 1990, Peralta sold, under a
conditional sale, the subject property to New Dagupan.
The conveyance to be absolute (full payment of the
price of P800,000.00), New Dagupan paid Peralta
P200,000.00 upon the execution of the
corresponding deed and the balance of P600,000.00
by monthly instalments of P70,000.00.
Peralta showed to New Dagupan a photocopy of TCT,
which bore no liens and encumbrances, and undertook
to deliver the owner’s duplicate within three (3)
months from the execution of the contract.
In view of Peralta’s failure to deliver the owner’s
duplicate of TCT and to execute a deed of absolute sale
in its favor, New Dagupan withheld payment of the
last instalment and through its President, Julian Ong
Cuña, executed an affidavit of adverse claim, which
was annotated on October 1, 1991.
Due to Peralta’s continued failure to deliver a deed of
absolute sale and the owner’s duplicate of the title,
New Dagupan filed a complaint for specific
performance her.
On the other hand, on May 20, 1992, during the
pendency of New Dagupan’s complaint against
Peralta, PCSO caused the registration of the
mortgage. PCSO filed an application for the
extrajudicial foreclosure sale of the subject property
in view of Galang’s failure to fully pay the sweepstakes
she purchased in 1992. A public auction took place on
June 15, 1993 where PCSO was the highest bidder. A
certificate of sale was correspondingly issued to PCSO.
New Dagupan obtained from the ROD of Dagupan
City for its use in Civil Case a certified true copy of
TCT that reflected PCSO’s mortgage lien, claiming that
it is only then that it was informed of the subject
mortgage, sent a letter to PCSO on
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 168
October 28, 1993, notifying the latter of its complaint
against Peralta and its claim over the subject
property and suggesting that PCSO intervene and
participate in the case.
The RTC rendered a Decision (for the specific
performance case), approving the compromise
agreement between Peralta and New Dagupan. When
the decision became final and executory, New Dagupan
once again demanded Peralta’s delivery of the owner’s
duplicate of TCT.
In a letter dated March 29, 1994, New Dagupan made
a similar demand from PCSO, who in response, stated
that it had already foreclosed the mortgage on the
subject property and it has in its name a certificate
of sale for being the highest bidder in the public
auction that took place on June 15, 1993.
Thus, New Dagupan filed with the RTC a petition
against PCSO for the annulment of TCT or surrender of
the owner’s duplicate thereof.
The RTC Branch 42 rendered a Decision in New
Dagupan’s favor and ordered PCSO to deliver the
owner’s duplicate copy of TCT in its possession to
the Registry of Deeds of Dagupan City for the
purpose of having the decision to be annotated at the
back thereof.
PCSO’s appeal from the foregoing adverse decision was
dismissed. By way of its assailed decision, the CA did
not agree with PCSO’s claim that the subject
mortgage is in the nature of a continuing guaranty,
holding that Peralta’s undertaking to secure Galang’s
liability to PCSO is only for a period of one year and
was extinguished when Peralta completed payment
on the sweepstakes tickets she purchased in 1989.
ISSUE: Who between New Dagupan and PCSO has a
better right to the property in

question – NEW DAGUPAN
RULING: As a general rule, a mortgage liability is
usually limited to the amount mentioned in the
contract. However, the amounts named as
consideration in a contract of mortgage do not
limit the amount for which the mortgage may stand
as security if from the four corners of the instrument
the intent to secure future and other indebtedness
can be gathered.
Alternatively, while a real estate mortgage may
exceptionally secure future loans or advancements,
these future debts must be specifically described in the
mortgage contract. An obligation is not secured by a
mortgage unless it comes fairly within the terms of the
mortgage contract.
The stipulation extending the coverage of a mortgage to
advances or loans other than those already obtained
or specified in the contract is valid and has been
commonly referred to as a "blanket mortgage" or
"dragnet" clause.
In Prudential Bank v. Alviar,28 this Court elucidated
on the nature and purpose of such a clause as
follows:
A "blanket mortgage clause," also known as a
"dragnet clause" in American jurisprudence, is one
which is specifically phrased to subsume all debts of
past or future origins. Such clauses are "carefully
scrutinized and strictly construed." Mortgages of this
character enable the parties to provide continuous
dealings, the nature or extent of which may not be
known or anticipated at the time, and they avoid the
expense and inconvenience of executing a new
security on each new transaction. A "dragnet clause"
operates as a convenience and accommodation to the
borrowers as it makes available additional funds
without their having to execute additional security
documents, thereby saving time, travel, loan closing
costs, costs of extra legal services, recording
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 169
fees, et cetera. x x x.29 (Citations omitted)
A mortgage that provides for a dragnet clause is in the
nature of a continuing guaranty and constitutes an
exception to the rule than an action to foreclose a
mortgage must be limited to the amount mentioned
in the mortgage contract. Its validity is anchored on
Article 2053 of the Civil Code and is not limited to
a single transaction, but contemplates a future course
of dealing, covering a series of transactions, generally
for an indefinite time or until revoked. It is prospective
in its operation and is generally intended to provide
security with respect to future transactions within
certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor
becomes liable. In other words, a continuing guaranty
is one that covers all transactions, including those
arising in the future, which are within the description
or contemplation of the contract of guaranty, until
the expiration or termination thereof.30
In this case, PCSO claims the subject mortgage is a
continuing guaranty. According to PCSO, the intent
was to secure Galang’s ticket purchases other than
those outstanding at the time of the execution of
the Deed of Undertaking with First Real Estate
Mortgage on March 8, 1989 such that it can foreclose
the subject mortgage for Galang’s non-payment of her
ticket purchases in 1992. PCSO does not deny and
even admits that Galang had already settled the
amount of P450,000.00.
However, PCSO refuses to concede that the subject
mortgage had already been discharged, claiming that
Galang had unpaid ticket purchases in 1992 and these
are likewise secured as evidenced by the following
clause in the Deed of Undertaking with First Real
Estate Mortgage.
As the CA correctly observed, the use of

the terms "outstanding" and "unpaid" militates
against PCSO’s claim that future ticket purchases are
likewise secured. That there is a seeming ambiguity
between the provision relied upon by PCSO containing
the phrase "after each draw" and the other provisions,
which mention with particularity the amount of
P450,000.00 as Galang’s unpaid and outstanding
account and secured by the subject mortgage,
should be construed against PCSO. The subject
mortgage is a contract of adhesion as it was
prepared solely by PCSO and the only participation of
Galang and Peralta was the act of affixing their
signatures thereto.
Considering that the debt secured had already been
fully paid, the subject mortgage had already been
discharged and there is no necessity for any act or
document to be executed for the purpose. As
provided in the Deed of Undertaking with First Real
Estate Mortgage:
15. Upon payment of the principal amount together
with interest and other expenses legally incurred by
the MORTGAGEE, the above-undertaking is considered
terminated.
Section 6234 of Presidential Decree (P.D.) No. 1529
appears to require the execution of an instrument in
order for a mortgage to be cancelled or discharged.
However, this rule presupposes that there has been a
prior registration of the mortgage lien prior to its
discharge.
In this case, the subject mortgage had already been
cancelled or terminated upon Galang’s full payment
before PCSO availed of registration in 1992.
As the subject mortgage was not annotated on TCT
No. 52135 at the time it was terminated, there was no
need for Peralta to secure a deed of cancellation in
order for such discharge to be fully effective and duly
reflected on the face of her title.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 170
Therefore, since the subject mortgage is not in the
nature of a continuing guaranty and given the
automatic termination thereof, PCSO cannot claim that
Galang’s ticket purchases in 1992 are also secured.
From the time the amount of P450,000.00 was fully
settled, the subject mortgage had already been
cancelled such that Galang’s subsequent ticket
purchases are unsecured. Simply put, PCSO had
nothing to register, much less, foreclose.
Consequently, PCSO’s registration of its non-existent
mortgage lien and subsequent foreclosure of a
mortgage that was no longer extant cannot defeat
New Dagupan’s title over the subject property.
ASIA TRUST DEVELOPMENT BANK vs.
CARMELO H. TUBLE
FACTS: Carmelo H. Tuble, who served as the vice-
president of petitioner Asia trust Development Bank
availed himself of the car incentive plan and loan
privileges offered by the bank. He was also entitled to
the Senior Managers Deferred Incentive Plan (DIP)
Tuble acquired a Nissan Vanette through the
company’s car incentive plan. The arrangement was
made to appear as a lease agreement requiring only
the payment of monthly rentals. Accordingly, the lease
would be terminated in case of the employee’s
resignation or retirement prior to full payment of the
price.
As regards the loan privileges, Tuble obtained three
separate loans.
a.) First, a real estate loan evidenced by the January
18 1993 Promissory note with maturity date of
January 1, 1999 was secured by a mortgage over his
property covered by transfer certificate.
b.) Second was a consumption loan, evidenced by the
January 10, 1994
c.) Third, a salary loan.

He resigned on March 30, 1995 and was
subsequently given the option to either return the
vehicle without any further obligation or retain the
unit or pay its remaining book value.
Tuble had the following obligations to the bank after
his retirement
a.) The purchase or return of the Nissan
b.) 100,000 as consumption loan c.)
421,800 as real estate loan d.) 16,250 as
salary loan
Moreover, the bank also owed Tuble his pro-rata
share in the DIP which was to be issued after the bank
had given the resigned employees clearance and
25,797 representing his final salary and corresponding
13th month pay.
He claimed that since he and the bank were debtors
and creditors of each other, the offsetting of loans
could legally take place. He then asked the bank to
simply compute his DIP and apply his receivables to his
loans. The bank refused and sent him a demand
letter and required him to return the Nissan Vanette.
On August 14, 1995, Tuble wrote the bank again to
follow up his request to offset the loans. This was not
immediately acted upon, and it was only on October
13, 1995 that the bank finally allowed the offsetting
of his various claims and liabilities. As a result, his
liabilities were reduced to 970 thousand plus the
unreturned value of the vehicle.
The bank then filed a complaint for replevin against
tuble. The judgement was favorable for the bank.
To collect the liabilities of Tuble, it also filed a petition
for extra-judicial foreclosure of real estate mortgage
over his property. It was based on his real estate loan.
He redeemed the property. With this
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 171
payment, he was released from his accountabilities
and had his clearance. The bank then issued the
clearance necessary for the release of his DIP share.
Tuble received a manager’s check in the amount of
166,049 representing his share in the DIP funds.
Tuble paid the redemption price but disputed its
costing. He filed a complaint for recovery of a sum
of money and damages before the RTC. The RTC
ruled in favor of Tuble. They held that the value of
the car should not have been included given that it
was already returned. The CA affirmed the RTC.
ISSUES:
ISSUE 1: Whether or not the bank is entitled to
include these items in the redemption price: the 18%
annual interest on the bid price of P421,800.
RULING: The 18% Annual Interest on the Bid Price of
P421,800
The Applicable Law
The bank argues that instead of referring to the Rules of
Court to compute the redemption price, the courts a
quo should have applied the General Banking Law,
considering that petitioner is a banking institution.
The statute referred to requires that in the event of
judicial or extrajudicial foreclosure of any mortgage on
real estate that is used as security for an obligation to
any bank, banking institution, or credit institution, the
mortgagor can redeem the property by paying the
amount fixed by the court in the order of execution,
with interest thereon at the rate specified in the
mortgage.18
Petitioner is correct.
From the plethora of cases, the SC held that the
General Banking Act – being a special and subsequent
legislation – has the effect of amending Section 6 of
Act No.

3135, insofar as the redemption price is concerned,
when the mortgagee is a bank. Thus, the amount to be
paid in redeeming the property is determined by the
General Banking Act, and not by the Rules of Court in
Relation to Act 3135.
The Remedy of Foreclosure
Firstly, at the time respondent resigned, which was
chronologically before the foreclosure proceedings, he
had several liabilities to the bank. Secondly, when the
bank later on instituted the foreclosure proceedings,
it foreclosed only the mortgage secured by the real
estate loan of P421,800.22 It did not seek to include, in
the foreclosure, the consumption loan under
Promissory Note No. 0143 or the other alleged
obligations of respondent. Thirdly, on 28 February
1996, the bank availed itself of the remedy of
foreclosure and, in doing so, effectively gained the
property.
As a result of these established facts, one evident
conclusion surfaces: the Real Estate Mortgage
Contract on the secured property is already
extinguished.
In foreclosures, the mortgaged property is subjected
to the proceedings for the satisfaction of the
obligation. As a result, payment is effected by
abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or
to pay indemnity.
Once the proceeds from the sale of the property
are applied to the payment of the obligation, the
obligation is already extinguished.
Thus, in Spouses Romero v. Court of Appeals, the SC
held that the mortgage indebtedness was extinguished
with the foreclosure and sale of the mortgaged
property, and that what remained was the right of
redemption granted by law.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 172
Consequently, since the Real Estate Mortgage
Contract is already extinguished, petitioner can no
longer rely on it or invoke its provisions, including the
dragnet clause stipulated therein. It follows that the
bank cannot refer to the 18% annual interest charged
in Promissory Note No. 0143, an obligation allegedly
covered by the terms of the Contract.
Neither can the bank use the consummated contract
to collect on the rest of the obligations, which were
not included when it earlier instituted the foreclosure
proceedings. It cannot be allowed to use the same
security to collect on the other loans. To do so would
be akin to foreclosing an already foreclosed property.
Rather than relying on an expired contract, the bank
should have collected on the excluded loans by
instituting the proper actions for recovery of sums of
money. Simply put, petitioner should have run after
Tuble separately, instead of hostaging the same
property to cover all of his liabilities.
The Dragnet Clause
In any event, assuming that the Real Estate
Mortgage Contract subsists, the SC ruled that the
dragnet clause therein does not justify the imposition
of an 18% annual interest on the redemption price.
The Court has recognized that, through a dragnet
clause, a real estate mortgage contract may
exceptionally secure future loans or advancements.
But an obligation is not secured by a mortgage,
unless, that mortgage comes fairly within the terms
of the mortgage contract.
Moreover, the mortgage agreement, being a contract
of adhesion, is to be carefully scrutinized and strictly
construed against the bank, the party that
prepared the

agreement.
The Court finds that there is no specific mention of
interest to be added in case of either default or
redemption. The Real Estate Mortgage Contract itself
is silent on the computation of the redemption
price. Although it refers to the Promissory Notes as
constitutive of Tuble’s secured obligations, the said
contract does not state that the interest to be charged
in case of redemption should be what is specified in
the Promissory Notes.
Thus, an ambiguity results as to which interest shall
be applied, for to apply an 18% interest per annum
based on Promissory Note No. 0143 will negate the
existence of the 0% interest charged by Promissory
Note No. 0142. Notably, it is this latter Promissory
Note that refers to the principal agreement to which
the security attaches.
In resolving this ambiguity, the SC refer to a basic
principle in the law of contracts: "Any ambiguity is
to be taken contra proferentem, that is, construed
against the party who caused the ambiguity which
could have avoided it by the exercise of a little more
care."
Therefore, the ambiguity in the mortgage deed
whose terms are susceptible of different interpretations
must be read against the bank that drafted it.
Furthermore, the Court refuses to be blindsided by the
dragnet clause in the Real Estate Mortgage Contract
to automatically include the consumption loan, and
its corresponding interest, in computing the
redemption price.
In the absence of clear and supportive evidence of a
contrary intention, a mortgage containing a dragnet
clause will not be extended to cover future
advances, unless the document evidencing the
subsequent advance
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 173
refers to the mortgage as providing security
therefor.
In this regard, the Court adopted the "reliance on
the security test", the test as follows:
A mortgage with a "dragnet clause" is an "offer" by
the mortgagor to the bank to provide the security of
the mortgage for advances of and when they were
made. Thus, it was concluded that the "offer" was
not accepted by the bank when a subsequent
advance was made because (1) the second note was
secured by a chattel mortgage on certain vehicles,
and the clause therein stated that the note was
secured by such chattel mortgage; (2) there was no
reference in the second note or chattel mortgage
indicating a connection between the real estate
mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name
alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing
business under an assumed name; and (4) there was
no allegation by the bank, and apparently no proof,
that it relied on the security of the real estate
mortgage in making the advance. (Emphasis
supplied)
The second loan agreement, or Promissory Note No.
0143, referring to the consumption loan makes no
reference to the earlier loan with a real estate
mortgage. Neither does the bank make any allegation
that it relied on the security of the real estate
mortgage in issuing the consumption loan to Tuble.
Tuble was Asia Trust’s previous vice- president, as
one of the senior officers, the consumption loan was
given to him not as an ordinary loan, but as a form of
accommodation or privilege. The bank’s grant of the
salary loan to Tuble was apparently not motivated by
the creation of a security in favor of the bank, but by
the

fact the he was a top executive of petitioner.
Thus, the bank cannot claim that it relied on the
previous security in granting the consumption loan to
Tuble. For this reason, the dragnet clause will not be
extended to cover the consumption loan. It follows,
therefore, that its corresponding interest – 18% per
annum – is inapplicable.
ISSUE 2: Whether or not the bank is entitled to
interest charges on Promissory Note 0142
RULING: In addition to the 18% annual interest, the
bank also claims a 12% per annum on the
consumption loan. Notwithstanding that promissory
note contains no stipulation on interest payments,
the bank still claims that Tuble is liable to pay the
legal interest pursuant to article 2209 of the family
code:
Article 2209 – If the obligation consists in the
payment of a sum of money and the debtor incurs in
delay, the indemnity for damages, there being no
stipulation shall be the payment of the interest agreed
upon and in the absence of stipulation, the legal
interest, which is six per cent per annum.
While Article 2209 allows the recovery of interest
sans stipulation, this charge is provided not as a form
of monetary interest but as one of compensatory
interest.
a.) Monetary interest refers to the
compensation set by the parties for the
use or forbearance of money.
b.) Compensatory interest refers to the
penalty or indemnity for damages
imposed by law or courts. This is due only
if the obligor is proven to have defaulted
in paying the loan.
A default must exist before the bank can collect the
compensatory legal interest of 12% per annum.
Tuble denies being in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 174
default since by way of legal compensation, he
effectively paid his liabilities on time.
The court held that there was no legal compensation.
In order for legal compensation to take effect,
article 1279 requires that the debts be liquidated
and demandable.
a. Requisites for legal compensation:
i.) That each one of the obligors be bound
physically, and that he be at the
same time a principal creditor of the other.
ii.) That both debts consist in a sum of money,
or if the things due are
consumable, they be of the same kind,
and also of the same quality if the
latter has been stated.
iii.) That the two debts be due
iv.) That they be liquidated and demandable
v.) That over neither of them there be any
retention, or controversy,
commenced by third persons and
communicated n due time to the debtor.
Liquidated debts are those who exact amount has
already been determined. In this case, the receivable
of Tuble, including his DIP share was not yet
determined. It was the bank’s policy to compute and
issue the computation only after the retired employee
had been cleared by the bank. Thus, Tuble
incorrectly invoked legal compensation.
SPOUSES ANTONIO & LETICIA VEGA VS SSS & PILAR
DEVELOPMENT CORPORATION
FACTS: Magdalena Reyes owned a piece of titled land
in Pilar Village, Las Piñas CIty. On August 17, 1979,
she got a housing Loan from SSS for which she
mortgaged her land.
Late 1979, Reyes asked the Sps Vega to

assume the loan and buy her house and lot since she
was to emigrate.
An employee at SSS said, however, that SSS did not
approve of members transferring their mortgaged
homes.
But the Spouses Vega (Vegas) could make a private
arrangement with Reyes provided that they pay the
monthly amortizations on time. Vegas agreed for Reyes
to execute in their favor a deed of assignment of
real property with assumption of mortgage and paid
Reyes P20,000 after she undertook to update the
amortizations before leaving the country. The Vegas
took possession of the house in January 1981. Reyes
did not execute the deed of assignment. She left the
country and left her sister (Julieta Ofilada) a special
power of attorney to convey ownership of property.
Sometime between 1983 and 1984, Ofilada executed
the deed of assignment in favor of the Vegas, kept
the original and gave the Vegas two copies, one to be
given to the Home Development Mortgage Fund and
kept the other. A storm in 1984 resulted in flood and
destroyed their personal copy.
In 1992, the Vegas learned that Reyes did not update
the amortizations because they received a notice to
Reyes from the SSS. They told the SSS that they
already gave the payment to Reyes but, since it
appeared indifferent, on January 6, 1992, the Vegas
updated the amortization and paid P115,738.48 to the
SSS. They negotiated seven additional remittances
and the SSS accepted P8,681 more from the Vegas.
On April 16, 1993, PDC filed an action for sum of
money against Reyes before the RTC of Manila,
claiming that Reyes borrowed from Apex Mortgage
and Loans Corporation (Apex) P46,500 to buy the lot
and construct a house on it.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 175
Apex assigned Reyes' credit to PDC on December 29,
1992.
RTC: Reyes must pay the PDC the loan of P46,398 plus
interest and penalties beginning April 11, 1979 as well
as attorney's fees and costs. Unable to pay, RTC
issued a writ of execution against Reyes and its Sheriff
levied on the property in Pilar Village.
On Feb 16, 1994, the Vegas requested the SSS to
acknowledge their status as subrogees and to give
them an update of the account so they could settle
it in full. SSS did not reply. RTC sheriff published a
notice for the auction sale of the property on Feb 24,
March 3 and 10, 1994. He also gave notice to the Vegas
on March 20. The Vegas filed an affidavit of third
party claimant and a motion to quash the levy on the
property. However, RTC directed the sheriff to
proceed with the execution.
The Vegas got a telegram informing them that the
SSS intended to foreclose on the property to satisfy
the unpaid debt of P38,789.58. The Vegas requested
from the SSS in writing for the exact amount of the
indebtedness and for assurance that they would be
entitled to the discharge of the mortgage and
delivery of the proper subrogation documents upon
payment. They also sent a P37,521.95 manager's check
that SSS refused to accept.
The Vegas filed an action for consignation, damages,
and injunction with application for preliminary
injunction and TRO against SSS, PDC, the RTC sheriff
and the Register of Deeds before the RTC in Las
Piñas. While the case was pending, SSS released the
mortgage to PDC. A writ of possession evicted the
Vegas from the property. RTC decided in favor of
the Vegas. CA reversed.
ISSUE :WON Reyes validly sold her SSS- mortgaged
property to the Vegas

HELD: Reyes acquired the property in this case through
a loan from the SSS in whose favor she executed a
mortgage as collateral for the loan. Although the
loan was still unpaid, she assigned the property to the
Vegas without notice to or the consent of the SSS.
The Vegas continued to pay the amortizations
apparently in Reyes’ name. Meantime, Reyes
apparently got a cash loan from Apex, which assigned
the credit to PDC. This loan was not secured by a
mortgage on the property but PDC succeeded in
getting a money judgment against Reyes and had it
executed on the property. Such property was still in
Reyes’ name but, as pointed out above, the latter had
disposed of it in favor of the Vegas more than 10
years before PDC executed on it.
The question is: was Reyes’ disposal of the property in
favor of the Vegas valid given a provision in the
mortgage agreement that she could not do so without
the written consent of the SSS?
The CA ruled that, under Article 1237 of the Civil
Code, the Vegas who paid the SSS amortizations except
the last on behalf of Reyes, without the latter’s
knowledge or against her consent, cannot compel the
SSS to subrogate them in her rights arising from the
mortgage. Further, said the CA, the Vegas’ claim of
subrogation was invalid because it was done without
the knowledge and consent of the SSS as required
under the mortgage agreement.
But Article 1237 cannot apply in this case since Reyes
consented to the transfer of ownership of the
mortgaged property to the Vegas. Reyes also agreed for
the Vegas to assume the mortgage and pay the balance
of her obligation to SSS. Of course, paragraph 4 of the
mortgage contract covering the property required
Reyes to secure SSS’ consent before selling the
property. But, although such a stipulation is valid and
binding, in the sense that the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 176
SSS cannot be compelled while the loan was unpaid
to recognize the sale, it cannot be interpreted as
absolutely forbidding her, as owner of the mortgaged
property, from selling the same while her loan
remained unpaid. Such stipulation contravenes public
policy, being an undue impediment or interference
on the transmission of property.
Besides, when a mortgagor sells the mortgaged
property to a third person, the creditor may demand
from such third person the payment of the principal
obligation. The reason for this is that the mortgage
credit is a real right, which follows the property
wherever it goes, even if its ownership changes.
Article 2129 of the Civil Code gives the mortgagee,
here the SSS, the option of collecting from the third
person in possession of the mortgaged property in the
concept of owner. More, the mortgagor-owner’s sale
of the property does not affect the right of the
registered mortgagee to foreclose on the same even
if its ownership had been transferred to another
person. The latter is bound by the registered
mortgage on the title he acquired.
After the mortgage debt to SSS had been paid,
however, the latter had no further justification for
withholding the release of the collateral and the
registered title to the party to whom Reyes had
transferred her right as owner.
Under the circumstance, the Vegas had the right to sue
for the conveyance to them of that title, having been
validly subrogated to Reyes’ rights.

PINEDA VS. CA
FACTS: Spouses Benitez mortgaged a house and lot in
favor of Juanita P. Pineda (“Pineda”) and Leila P. Sayoc
(“Sayoc”) which was not registered . With the
consent of Pineda, spouses Benitez sold the house,
which was part of the Property, to Olivia G. Mojica
(“Mojica”). On the same date, Mojica filed a petition for
the issuance of a second owner’s duplicate alleging
that she “purchased a parcel of land” and the
“owner’s duplicate copy was lost.” The same was
granted.
The lot was also subsequently sold to Mojica. Mojica
executed a deed of mortgage over the same property
in favor of Gonzales which deed was registered. Pineda
and Sayoc filed a complaint against the Spouses Benitez
and Mojica. The complaint prayed for the cancellation
of the second owner’s duplicate. During the pendency
of the case, Pineda caused the annotation of a notice
of lis pendens. The Court ruled that the second
owner’s duplicate was void.
Meanwhile, Mojica defaulted in paying the obligation
to Gonzales so the latter foreclosed the mortgaged
and purchased it at the auction sale. A new TCT was
issued in the name of Gonzales.
Pineda and Sayoc filed a motion with the trial court
for the issuance of an order requiring Gonzales to
surrender the owner’s duplicate of TCT to the ROD.
The Trial Court declared the title of Gonzales as void
and ordered the reinstatement of the TC in the name
of Spouses Benitez. The CA ruled in favor of Gonzales
ISSUES:
1.WON the mortgage to Gonzales is valid.
YES
2.WON Gonzales is an innocent purchaser/ mortgagee
for value. YES
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 177
HELD:
Mojica’s Title is Void Since the TCT of the property
was not actually lost but was in the possession of
Pineda, the reconstitution proceeding and the second
TCT issue in favor of Mojica by virtue of the sale
were void.
However, the prior mortgage of the Property by the
Spouses Benitez to Pineda and Sayoc did not prevent
the Spouses Benitez, as owners of the Property,
from selling the Property to Mojica. A mortgage is
merely an encumbrance on the property and does not
extinguish the title of the debtor who does not lose
his principal attribute as owner to dispose of the
property. The law even considers void a stipulation
forbidding the owner of the property from
alienating the mortgaged immovable.
Since the Spouses Benitez were the undisputed owners
of the Property, they could validly sell and deliver the
Property to Mojica. The execution of the notarized
deed of sale between the Spouses Benitez and Mojica
had the legal effect of actual or physical delivery.
Ownership of the Property passed from the Spouses
Benitez to Mojica. The nullity of the second owner’s
duplicate of TCT did not affect the validity of the sale
as between the Spouses Benitez and Mojica.
Gonzales is an Innocent Purchaser for Value The
nullity of MOjica’s title does not automatically carry
with it the nullity of the annotation of Gonzales’
mortgage. The rule is that a mortgage annotated on a
void title is valid if the mortgagee registered the
mortgage in good faith.
Gonzales registered her mortgage in good faith.
Gonzales had no actual notice of the prior
unregistered mortgage in favor of Pineda and Sayoc.
To bind third parties to an unregistered encumbrance,
the law requires actual notice. The fact that Mojica,

who sold the Property to Gonzales, had actual notice
of the unregistered mortgage did not constitute actual
notice to Gonzales, absent proof that Gonzales herself
had actual notice of the prior mortgage. Thus,
Gonzales acquired her rights as a mortgagee in good
faith.
When Mojica defaulted in paying her debt, Gonzales
caused the extrajudicial foreclosure of the mortgaged
Property. Gonzales purchased the mortgaged Property
as the sole bidder at the public auction sale. For
Mojica’s failure to redeem the foreclosed Property
within the prescribed period, Gonzales consolidated
her title to the Property. Absent anyevidence to the
contrary, the sale at public auction of the Property to
Gonzales was valid. Thus, the title or ownership of
the Property passed from Mojica to Gonzales. At
this point, therefore, Gonzales became the owner of
the Property. When Gonzales purchased the Property
at the auction sale, Pineda and Sayoc had already
annotated the lis pendens on the original of TCT
8361, which remained valid. However, the mortgage
of Gonzales was validly registered prior to the
notation of the lis pendens. The subsequent
annotation of the lis pendens could not defeat the
rights of the mortgagee or the purchaser at the
auction sale who derived their rights under a prior
mortgage validly registered. The settled rule is that
the auction sale retroacts to the date of the
registration of the mortgage, putting the auction sale
beyond the reach of any intervening lis pendens, sale
or attachment.
SPOUSES ROSALES VS. SPOUSES SUBA
FACTS: On June 13, 1997, RTC rendered a decision in
two Civil Cases, the dispositive portion of which reads:
(1) Declaring the Deed of Sale of Exhibit D, G and
I, affecting the property in
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 178
question, as an equitable mortgage;
(2) Declaring the parties Erlinda Sibug and
Ricardo Rosales, within 90 days from finality of this
Decision, to deposit with the Clerk of Court, for
payment to the parties Felicisimo Macaspac and
Elena Jiao, the sum of P65,000.00, with interest at nine
(9) percent per annum from September 30, 1982 until
payment is made, plus the sum of P219.76 as
reimbursement for real estate taxes;
(3) Directing the parties Felicisimo Macaspac
and Elena Jiao, upon the deposit on their behalf of
the amounts specified in the foregoing paragraph, to
execute a deed of reconveyance of the property in
question to Erlinda Sibug, married to Ricardo Rosales,
and the Register of Deeds of Manila shall cancel
Transfer Certificate of Title No. 150540 in the name
of the Macaspacs (Exh. E) and issue new title in the
name of Sibug;
(4) For non-compliance by Sibug and Rosales of
the directive in paragraph (2) of this dispositive
portion, let the property be sold in accordance with
the Rules of Court for the release of the mortgage
debt and the issuance of title to the purchaser.
The decision became final and executor. Spouses
Rosales, judgment debtors and petitioners failed to
comply with par 2 (deposit with Clerk of Court 65k).
This prompted Macaspac, as judgment creditor, to file
a motion for execution. On May 15, 1998, an auction
sale of the property was held, wherein petitioners
participated. The property was sold for 285k to
spouses Suba (respondents), being the highest bidders.
Respondents thereafter filed with the court a motion
for writ of possession, contending that the confirmation
of the sale “effectively cut of petitioners’ equity of
redemption.” RTC ruled that petitioners have no right
to redeem since the case is for judicial foreclosure of
mortgage. Hence, respondents as purchasers are
entitled to possession. CA affirmed: no right of

redemption in judicial foreclosure of mortgage.
ISSUE: WON petitioners have the right to redeem the
subject property. NO
HELD: The decision of the trial court, which is final
and executory, declared the transaction between
petitioners and Macaspac an equitable mortgage.
The Court defined an equitable mortgage as “one
which although lacking in some formality, or form or
words, or other requisites demanded by a statute,
nevertheless reveals the intention of the parties to
charge real property as security for a debt, and
contains nothing impossible or contrary to law.” An
equitable mortgage is not different from a real estate
mortgage, and the lien created thereby ought not to
be defeated by requiring compliance with the
formalities necessary to the validity of a voluntary real
estate mortgage.[6] Since the parties’ transaction is
an equitable mortgage and that the trial court ordered
its foreclosure, execution of judgment is governed by
Sections 2 and 3, Rule 68 of the 1997 Rules of Civil
Procedure, as amended.
In Huerta Alba Resort, Inc. vs. Court of Appeals,[7] we
held that the right of redemption is not recognized in
a judicial foreclosure, thus:
“The right of redemption in relation to a mortgage–
understood in the sense of a prerogative to re-
acquire mortgaged property after registration of the
foreclosure sale– exists only in the case of the
extrajudicial foreclosure of the mortgage. No such
right is recognized in a judicial foreclosure except
only where the mortgagee is the Philippine National
bank or a bank or a banking institution.
“Where a mortgage is foreclosed extrajudicially, Act
3135 grants to the mortgagor the right of redemption
within one (1) year from the registration of the
sheriff’s certificate of foreclosure sale.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 179
“Where the foreclosure is judicially effected, however,
no equivalent right of redemption exists. The law
declares that a judicial foreclosure sale, ‘when
confirmed by an order of the court, x x x shall operate
to divest the rights of all the parties to the action and
to vest their rights in the purchaser, subject to such
rights of redemption as may be allowed by law.’ Such
rights exceptionally ‘allowed by law’ (i.e., even after
the confirmation by an order of the court) are those
granted by the charter of the Philippine National Bank
(Act Nos. 2747 and 2938), and the General Banking Act
(R.A.337). These laws confer on the mortgagor, his
successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on
foreclosure–after confirmation by the court of the
foreclosure sale–which right may be exercised within
a period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of
Property.
“But, to repeat, no such right of redemption exists in
case of judicial foreclosure of a mortgage if the
mortgagee is not the PNB or a bank or banking
institution. In such a case, the foreclosure sale, ‘when
confirmed by an order of the court, x x x shall
operate to divest the rights of all the parties to the
action and to vest their rights in the purchaser.’ There
then exists only what is known as the equity of
redemption. This is simply the right of the
defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the
secured debt within the 90-day period after the
judgment becomes final, in accordance with Rule 68,
or even after the foreclosure sale but prior to its
confirmation.
“This is the mortgagor’s equity (not right) of redemption
which, as above stated, may be exercised by him
even beyond the 90- day period ‘from the date of
service of the order,’ and even after the foreclosure
sale

itself, provided it be before the order of confirmation of
the sale. After such order of confirmation, no
redemption can be effected any longer.”
Clearly, as a general rule, there is no right of
redemption in a judicial foreclosure of mortgage.
The only exemption is when the mortgagee is the
Philippine National Bank or a bank or a banking
institution. Since the mortgagee in this case is not
one of those mentioned, no right of redemption exists
in favor of petitioners. They merely have an equity of
redemption, which, to reiterate, is simply their right,
as mortgagor, to extinguish the mortgage and retain
ownership of the property by paying the secured debt
prior to the confirmation of the foreclosure sale.
However, instead of exercising this equity of
redemption, petitioners chose to delay the proceedings
by filing several manifestations with the trial court.
Thus, they only have themselves to blame for the
consequent loss of their property.
SPOUSES LANDRITO VS. CA
FACTS : In July 1990, spouses Landrito obtained a loan
of P350,000.00 from respondent Carmencita San
Diego. To secure payment thereof, petitioners
executed on 02 August 1990 a deed of real estate
mortgage over their parcel of land located at
Bayanan, Muntinlupa, Rizal.
After making substantial payments, petitioners again
obtained and were granted by Carmencita San Diego
an additional loan of One Million Pesos. To secure
this additional loan, the parties executed on 13
September 1991 an "Amendment of Real Estate
Mortgage", whereunder they stipulated that the loan
shall be paid within six (6) months from 16 September
1991, and if not paid within said period, the mortgagee
shall have the right to declare the mortgage due
and may
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 180
immediately foreclose the same judicially or
extrajudicially, in accordance with law.
On 30 June 1993, after her efforts to collect proved
futile, respondent Carmencita San Diego filed a
petition for the extrajudicial foreclosure of the
mortgage. Property was sold in a public auction with
Carmencita San Diego as the highest bidder for
P2,000,000.00.
With the petitioners having failed to redeem their
property within the 1-year redemption period from
the date of inscription of the sheriff’s certificate of
sale, as provided for in Act No. 3135, as amended,
the San Diegos caused the consolidation of title over
the foreclosed property in their names.
Then, on 09 November 1994, petitioners filed their
complaint for annulment of the extrajudicial
foreclosure and auction sale, with damages.
Petitioners alleged that (1) said foreclosure and
auction sale were null and void for failure to comply
with the requirements of notice and publication, as
mandated by Act 3135, as amended; (2) the
mortgaged property was illegally foreclosed in the
light of the settled rule that an action to foreclose a
mortgage must be limited to the amount mentioned in
the mortgage document, in this case, P1,000,000.00,
which amount was allegedly bloated by respondent
Carmencita San Diego to P1,950,000.00; and (3) the
San Diegos’ application for consolidation of title was
premature because the husband, Benjamin San Diego,
allegedly granted them an extension of the period of
redemption up to 11 November 1994.
TC- the latter’s cause of action is already barred by
laches on account of their failure or neglect for an
unreasonable length of time to do that which, by
exercising due diligence, could or should have been
done earlier. Also that petitioners’ inaction
constituted a waiver on their part.

ISSUE: WON the extra-judicial foreclosure and public
auction sale of the subject parcel of land are valid and
lawful when the amount stated in letter-request or the
petition for extrajudicial foreclosure and in the notice
of sheriff sale doubled the amount stipulated in the
Amendment of Real Estate Mortgage. NO
HELD: At the time of the foreclosure sale on 11 August
1993, petitioners were already in default in their loan
obligation.
Much earlier, or on 27 April 1993, a final notice of
demand for payment had been sent to them, despite
which they still failed to pay. Hence, respondent
Carmencita San Diego’s resort to extrajudicial
foreclosure, provided no less in the parties’
"Amendment of Real Estate Mortgage".
The rule has been, and still is, that in real estate
mortgage, when the principal obligation is not paid
when due, the mortgagee has the right to foreclose on
the mortgage and to have the mortgaged property
seized and sold with the view of applying the
proceeds thereof to the payment of the obligation.
Here, the validity of the extrajudicial foreclosure on
11 August 1993 was virtually confirmed by the trial
court when it dismissed petitioners’ complaint, and
rightly so, what with the fact that petitioners failed to
exercise their right of redemption within the 1-year
period therefore counted from the registration of the
sheriff’s certificate of sale.
We do not take issue with petitioners’ submission
that a mortgage may be foreclosed only for the
amount appearing in the mortgage document, more so
where, as here, the mortgage contract entered into by
the parties is evidently silent on the payment of
interest.
It appears from the evidence on record that
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 181
despite due notice and publication of the same in a
newspaper of general circulation, petitioners did not
bother to attend the foreclosure sale nor raise any
question regarding the propriety of the sale. It was
only on November 9, 1994, or more than one year
from the registration of the Sheriff’s Certificate of Sale,
that [petitioners] filed the instant complaint. Clearly,
[petitioners] had slept on their rights and are
therefore guilty of laches, which is defined as the
failure or neglect for an unreasonable or explained
length of time to do that which, by exercising due
diligence, could or should have been done earlier,
failure of which gives rise to the presumption that
the person possessed of the right or privilege has
abandoned or has declined to assert the same.
The law on redemption of mortgaged property is
clear. Republic Act No. 3135 (An Act to Regulate
the Sale of Property Under Special Powers Inserted In
Or Annexed to Real Estate Mortgages), as amended by
Republic Act No. 4118, provides in Section 6 thereof,
thus:
"Sec. 6. In all cases in which an extrajudicial sale is
made under the special power hereinbefore referred
to, the debtor, his successors in interest or any
judicial creditor or judgment creditor of said debtor, or
any person having a lien on the property subsequent to
the mortgage or deed of trust under which the
property is sold, may redeem the same at any time
within the term of one year from and after the date of
the sale; xxx"
In a long line of cases, this Court has consistently ruled
that the one-year redemption period should be
counted not from the date of foreclosure sale, but
from the time the certificate of sale is registered with
the Register of Deeds. Here, it is not disputed that the
sheriff’s certificate of sale was registered on 29 October
1993.
From the foregoing, it is clear as day that

even the complaint filed by the petitioners with the
trial court on 09 November 1994 was instituted
beyond the 1-year redemption period. In fact,
petitioners no less acknowledged that their complaint
for annulment of extrajudicial foreclosure and auction
sale was filed about eleven (11) days after the
redemption period had already expired on 29 October
19947. They merely harp on the alleged increase in
the redemption price of the mortgaged property as
the reason for their failure to redeem the same.
However, and as already pointed out herein, they
chose not, despite notice, to appear during the
foreclosure proceedings. Of course, petitioners
presently insist that they requested for and were
granted an extension of time within which to
redeem their property, relying on a handwritten note
allegedly written by Mrs. San Diego’s husband on
petitioners’ statement of account, indicating therein
the date 11 November 1994 as the last day to pay their
outstanding account in full. Even assuming, in gratia
argumenti, that they were indeed granted such an
extension, the hard reality, however, is that at no time
at all did petitioners make a valid offer to redeem
coupled with a tender of the redemption price.
For, in Lazo v. Republic Surety & Insurance Co., Inc.,
this Court has made it clear that it is only where, by
voluntary agreement of the parties, consisting of
extensions of the redemption period, followed by
commitment by the debtor to pay the redemption
price at a fixed date, will the concept of legal
redemption be converted into one of conventional
redemption.
POLICY: Period of redemption is not a prescriptive
period but a condition precedent provided by law
to restrict the right of the person exercising
redemption. Correspondingly, if a person exercising the
right of redemption has offered to redeem the
property within the period fixed, he is considered to
have complied with the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 182
condition precedent prescribed by law and may
thereafter bring an action to enforce redemption. If
the period is allowed to lapse before the right of
redemption is exercised, then the action to enforce
redemption will not prosper, even if the action is
brought within the ordinary prescriptive period.
Moreover, the period within which to redeem the
property sold at a sheriff’s sale is not suspended by the
institution of an action to annul the foreclosure sale.
GOLDENWAY MERCHANDISING CORPORATION
vs. EQUITABLE PCI BANK
FACTS: Goldenway Merchandising Corporation
(petitioner) executed a Real Estate Mortgage in favor
of Equitable PCI Bank (respondent) over its real
properties situated in Valenzuela, Bulacan (now
Valenzuela City). The mortgage secured the
P2,000,000.00 loan granted by respondent to
petitioner and was duly registered.
As Goldenway failed to settle its loan obligation,
Equitable extrajudicially foreclosed the mortgage.
During the public auction, the mortgaged properties
were sold for P3,500,000.00 to Equitable and a
Certificate of Sale was issued.
Goldenway’s counsel offered to redeem the foreclosed
properties by tendering a check in the amount of
P3,500,000.00. It’s counsel met with Equitable’s
counsel reiterating their intention to exercise the right
of redemption. However, Goldenway was told that
such redemption is no longer possible because the
certificate of sale had already been registered.
Goldenway filed a complaint for specific performance
and damages against Equitable, asserting that it is the
one-year period of redemption under Act No. 3135

which should apply and not the shorter redemption
period provided in R.A. No. 8791. Goldenway argued
that applying Section 47 of R.A. 8791 to the real
estate mortgage executed in 1985 would result in the
impairment of obligation of contracts and violation of
the equal protection clause under the Constitution.
Additionally, Goldenway faulted Equitable for
allegedly failing to furnish it and the Office of the Clerk
of Court with a Statement of Account as directed in the
Certificate of Sale, due to which Goldenway was not
apprised of the assessment and fees incurred by
Equitable, thus depriving Goldenway of the opportunity
to exercise its right of redemption.
Equitable pointed out that Goldenway cannot claim
that it was unaware of the redemption price which is
clearly provided in Section 47 of R.A. No. 8791, and
that Goldenway had all the opportune time to
redeem the foreclosed properties. As to the check
payment tendered by Goldenway, Equitable said that
even assuming arguendo such redemption was timely
made, it was not for the amount as required by law.
RTC rendered its decision dismissing the complaint.
CA which affirmed RTC’s decision.
In the present petition, Goldenway contended that
Section 47 of R.A. No. 8791 is inapplicable considering
that the contracting parties expressly and categorically
agreed that the foreclosure of the real estate mortgage
shall be in accordance with Act No. 3135. It contended
that the right of redemption is part and parcel of the
Deed of Real Estate Mortgage itself and attaches
thereto upon its execution.
It also argues that applying Section 47 of
R.A. No. 8791 to the present case would
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 183
be a substantial impairment of its vested right of
redemption under the real estate mortgage contract.
Such impairment would be violative of the
constitutional proscription against impairment of
obligations of contract.
ISSUES: Whether or not the redemption period should
be the 1-year period provided under Act 3135, and
not the shorter period under RA 8791 as the parties
expressly agreed that foreclosure would be in
accordance with Act 3135. (The shorter period under
RA 8791 should apply.)
May the foregoing amendment be validly applied in
this case when the real estate mortgage contract
was executed in 1985 and the mortgage foreclosed
when R.A. No. 8791 was already in effect? Yes
HELD: The law governing cases of extrajudicial
foreclosure of mortgage is Act No. 3135,14 as amended
by Act No. 4118. Section 6 thereof provides:
SEC. 6. In all cases in which an extrajudicial sale is
made under the special power hereinbefore referred to,
the debtor, his successors-in-interest or any judicial
creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to the
mortgage or deed of trust under which the property is
sold, may redeem the same at any time within the
term of one year from and after the date of the sale;
and such redemption shall be governed by the
provisions of sections four hundred and sixty-four to
four hundred and sixty-six, inclusive, of the Code of
Civil Procedure, in so far as these are not inconsistent
with the provisions of this Act.
The one-year period of redemption is counted from the
date of the registration of the certificate of sale. In this
case, the parties provided in their real estate

mortgage contract that upon petitioner’s default and
the latter’s entire loan obligation becoming due,
respondent may immediately foreclose the mortgage
judicially in accordance with the Rules of Court, or
extrajudicially in accordance with Act No. 3135, as
amended.
However, Section 47 of R.A. No. 8791 otherwise
known as "The General Banking Law of 2000" which
took effect on June 13, 2000, amended Act No. 3135.
Said provision reads:
SECTION 47. Foreclosure of Real Estate Mortgage. —
In the event of foreclosure, whether judicially or
extrajudicially, of any mortgage on real estate which
is security for any loan or other credit accommodation
granted, the mortgagor or debtor whose real property
has been sold for the full or partial payment of his
obligation shall have the right within one year after
the sale of the real estate, to redeem the property by
paying the amount due under the mortgage deed, with
interest thereon at the rate specified in the mortgage,
and all the costs and expenses incurred by the bank or
institution from the sale and custody of said property
less the income derived therefrom. However, the
purchaser at the auction sale concerned whether in a
judicial or extrajudicial foreclosure shall have the
right to enter upon and take possession of such
property immediately after the date of the
confirmation of the auction sale and administer the
same in accordance with law. Any petition in court to
enjoin or restrain the conduct of foreclosure
proceedings instituted pursuant to this provision shall
be given due course only upon the filing by the
petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which
the bank may suffer by the enjoining or the restraint of
the foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose
property is being sold
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 184
pursuant to an extrajudicial foreclosure, shall have the
right to redeem the property in accordance with this
provision until, but not after, the registration of the
certificate of foreclosure sale with the applicable
Register of Deeds which in no case shall be more than
three (3) months after foreclosure, whichever is
earlier. Owners of property that has been sold in a
foreclosure sale prior to the effectivity of this Act
shall retain their redemption rights until their
expiration.
Under the new law, an exception is thus made in
the case of juridical persons which are allowed to
exercise the right of redemption only "until, but not
after, the registration of the certificate of foreclosure
sale" and in no case more than 3 months after
foreclosure, whichever comes first.
Petitioner’s contention that Section 47 of
R.A. 8791 violates the constitutional proscription
against impairment of the obligation of contract has no
basis. The purpose of the non-impairment clause of
the Constitution is to safeguard the integrity of
contracts against unwarranted interference by the
State. There is an impairment if a subsequent law
changes the terms of a contract between the parties,
imposes new conditions, dispenses with those agreed
upon or withdraws remedies for the enforcement of
the rights of the parties.
Section 47 did not divest juridical persons of the right
to redeem their foreclosed properties but only
modified the time for the exercise of such right by
reducing the one-year period originally provided in
Act No. 3135. The new redemption period
commences from the date of foreclosure sale, and
expires upon registration of the certificate of sale or
three months after foreclosure, whichever is earlier.
There is likewise no retroactive application of the new
redemption period because Section
47 exempts from its operation those properties
foreclosed prior to its effectivity

and whose owners shall retain their redemption rights
under Act No. 3135.
We agree with the CA that the legislature clearly
intended to shorten the period of redemption for
juridical persons whose properties were foreclosed
and sold in accordance with the provisions of Act No.
3135.
The difference in the treatment of juridical persons
and natural persons was based on the nature of the
properties foreclosed – whether these are used as
residence, for which the more liberal one-year
redemption period is retained, or used for industrial
or commercial purposes, in which case a shorter term
is deemed necessary to reduce the period of
uncertainty in the ownership of property and enable
mortgagee-banks to dispose sooner of these acquired
assets.
It must be underscored that the General Banking
Law of 2000 sought to reform the General Banking Act
of 1949 to maintain a safe and sound banking system.
The amendment introduced by Section 47 embodied
one of such safe and sound practices aimed at
ensuring the solvency and liquidity of our banks.
The right of redemption must be exercised in the
manner prescribed by the statute, and within the
prescribed time limit, to make it effective.
Furthermore, as with other individual rights to contract
and to property, it has to give way to police power
exercised for public welfare.
Having ruled that the assailed Section 47 of R.A. No.
8791 is constitutional, we find no reversible error
committed by the CA in holding that petitioner can no
longer exercise the right of redemption over its
foreclosed properties after the certificate of sale in
favor of respondent had been registered.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 185
UNIONBANK OF THE PHILIPPINES VS. THE COURT OF
APPEALS and FERMINA S. DARIO and REYNALDO S.
DARIO
FACTS: This case stemmed from a real estate
mortgage executed by spouses Leopoldo and Jessica
Dario (hereafter mortgagors) in favor of UNIONBANK to
secure a P3 million loan, including interest and other
charges. The mortgage covered a Quezon City property
in Leopoldo Dario’s name and was annotated on the
title on 18 December 1991. For non-payment of the
principal obligation, UNIONBANK extrajudicially
foreclosed the property mortgaged on 12 August 1993
and sold the same at public auction, with itself
posting the highest bid.
On 4 October 1994, one week before the one-year
redemption period expired, the DARIOs filed a
complaint with the RTC of Quezon City against the
mortgagors, UNIONBANK, the Register of Deeds and
the City Sheriff of Quezon City. The complaint was for
annulment of sale and real estate mortgage with
reconveyance and prayer for restraining order and
prohibitory injunction. A notice of lis pendens was
annotated on the title.
On 10 October 1994, RTC issued a temporary
restraining order (TRO) enjoining the redemption of
property within the statutory period and its
consolidation under UNIONBANK’s name.
In the meantime, without notifying the DARIOs,
UNIONBANK consolidated its title over the foreclosed
property on 24 October 1994. TCT No. 41828 was
cancelled and TCT No. 120929 in UNIONBANK’s
name
was issued in its stead.
The DARIOs filed an amended complaint on 9
December 1994, alleging that they, not the
mortgagors, are the true owners of the property
mortgaged and insisting on the invalidity of both the
mortgage and its

subsequent extrajudicial foreclosure. They claimed
that the original title, TCT No. 61571, was entrusted
to a certain Atty. Reynaldo Singson preparatory to its
administrative reconstitution after a fire gutted the
Quezon City Hall building. Mortgagor Leopoldo, private
respondent Fermina’s son, obtained the property from
Atty. Singson, had the title reconstituted under his
name without the DARIOs’ knowledge, executed an
ante-dated deed of sale in his favor and mortgaged
the property to UNIONBANK.
The CA upheld Judge Capulong’s order admitting the
amended complaint on 24 April 1995, UNIONBANK
thereafter elevated its cause to this Court.
Meanwhile, on 9 February 1995 UNIONBANK filed its
answer ad cautelam asserting its status as an
innocent mortgagee for value whose right or lien upon
the property mortgaged must be respected even if
the mortgagor obtained his title through fraud. It also
averred that the action had become “moot and
academic by the consolidation of the foreclosed
property on 24 October 1994” in its name, resulting to
the issuance of TCT No. 120929 by the Register of
Deeds of Quezon City.
In its 19 August 1995 Order, the RTC held the
mortgagors and the City Sheriff of Quezon City in
default and sustained UNIONBANK’s contention that the
act sought to be enjoined had been enforced,
negating the need of hearing the application for
preliminary injunction.
After considering the arguments presented by the
parties, the CA ruled that despite its knowledge that
the ownership of the property was being questioned,
UNIONBANK took advantage of the DARIOs’ procedural
error by consolidating title to the property, which
“smacked of bad faith” and “evinced a reprobate
disposition of the part of its counsel to advance his
client’s cause by fair means or foul.” As a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 186
result thereof the transfer of title was vitiated by
non-adherence to procedural due process.
On 26 June 1997, CA nullified the consolidation of
ownership, ordered the Register of Deeds to cancel
the certificate of title in UNIONBANK’s name and to
reinstate TCT No. 41828 with the notice of lis penden
sannotated at the back. The CA also set aside the
portion of the assailed RTC Orders that declared the
DARIOs’ prayer for writ of preliminary injunction as
moot and academic. UNIONBANK’s motion for
reconsideration of the above- mentioned decision was
likewise rejected for lack of merit on 7 April 1998.
UNIONBANK’s contention: came to this Court claiming
to be a mortgagee in good faith and for value with a
right to consolidate ownership over the foreclosed
property with the redemption period having expired
and there having been no redemptioners. UNIONBANK
contends that the TRO which provisionally enjoined
the tolling of the redemption period was
automatically dissolved upon dismissal of the
complaint on 17 October 1994. Conformably,
consolidation of title in its name and the issuance of
TCT No. 120929 rendered further proceedings on the
application for injunction academic. Moreover, the
alleged fraudulent mortgage was facilitated through the
DARIOs’ negligence so they must bear the loss. It
also contends that since the DARIOs had filed several
pleadings, due process, being an opportunity to be
heard either through pleadings or oral arguments, was
observed.
Dario’s contention: that UNIONBANK’s consolidation of
the title in its name was in bad faith, vitiated a
standing court order, is against the law, thus void ab
initio. The application for preliminary injunction was not
rendered moot and academic by consolidation, which
took place during the lifetime of the TRO, and did not
follow the

proper legal procedure due to the surreptitious manner
it was accomplished. By treating the application for
preliminary injunction as moot and academic and
denying the motion for indirect contempt without
hearing, the RTC order ran afoul with the
requirements of due process.
ISSUE: Whether or not the consolidation of title in
UNIONBANK’s name proper. YES
HELD: UNIONBANK’s consolidation of title over the
property on 24 October 1994 was proper, though
precipitate. Contrary to the DARIOs’ allegation
UNIONBANK violated no standing court order. The
only bar to consolidation was the temporary
restraining order issued by Justice Lipana- Reyes on 10
October 1994 which effectively halted the tolling of the
redemption period 7 days short of its expiration.
When the DARIOs’ original complaint was dismissed on
17 October 1994 for failure to append a certification of
non-forum shopping, the TRO, as an ancillary order
that cannot stand independent of the main
proceeding, became functus officio. Thus the tolling of
the 12-month redemption period, interrupted by the
filing of the complaint and the TRO, recommenced and
eventually expired 7 days thereafter or on 24 October
1994, the date of the disputed consolidation.
The motion for reconsideration and to amend
complaint filed by private respondent on 20 October
1994 was of no moment, this Court recognizing that
“a dismissal, discontinuance or non-suit of an action in
which a restraining order or temporary injunction
has been granted operates as a dissolution of the
restraining order or temporary injunction,” regardless
of whether the period for filing a motion for
reconsideration of the order dismissing the case or
appeal therefrom has expired. The rationale therefor is
that even in cases where an appeal is taken from a
judgment
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 187
dismissing an action on the merits, the appeal does
not suspend the judgment, hence the general rule
applies that a temporary injunction terminates
automatically on the dismissal of the action.
We disagree with the appellate court’s observation
that consolidation deprived the DARIOs of their
property without due process. It is settled that the
buyer in a foreclosure sale becomes the absolute
owner of the property purchased if it is not redeemed
during the period of one year after the registration
of the sale. Consolidation took place as a matter of
right since there was no redemption of the foreclosed
property and the TRO expired upon dismissal of the
complaint. UNIONBANK need not have informed
private respondent that it was consolidating its title
over the property, upon the expiration of the
redemption period, without the judgment debtor
having made use of his right of redemption, the
ownership of the property sold becomes consolidated
in the purchaser. Notice to the mortgagors and with
more reason, to the DARIOs who are not even parties
to the mortgage contract nor to the extrajudicial sale
is not necessary.
In real estate mortgage, when the principal obligation is
not paid when due, the mortgage has the right to
foreclose the mortgage and to have the property
seized and sold with a view to applying the
proceeds to the payment of the principal obligation.
Foreclosure may be effected either judicially or
extrajudicially.
In a public bidding during extra-judicial foreclosure,
the creditor-mortgagee, trustee, or other person
authorized to act for the creditor may participate
and purchase the mortgaged property as any other
bidder. Thereafter the mortgagor has one year within
which to redeem the property from and after
registration of sale with the Register of Deeds. In case
of non-

redemption, the purchaser at foreclosure sale shall file
with the Register of Deeds, either a final deed of sale
executed by the person authorized by virtue of the
power of attorney embodied in the deed or mortgage,
or his sworn statement attesting to the fact of non-
redemption; whereupon, the Register of Deeds shall
issue a new certificate of title in favor of the
purchaser after the owner’s duplicate of the certificate
has been previously delivered and cancelled. Thus,
upon failure to redeem foreclosed realty, consolidation
of title becomes a matter of right on the part of the
auction buyer, and the issuance of a certificate of
title in favor of the purchaser becomes ministerial
upon the Register of Deeds.
DOCTRINE: In real estate mortgage, when the principal
obligation is not paid when due, the mortgages has the
right to foreclose the mortgage and to have the
property seized and sold with a view to applying the
proceeds to the payment of the principal obligation.
Foreclosure may be effected either judicially or
extrajudicially. In a public bidding during extra-judicial
foreclosure, the creditor- mortgagee, trustee, or other
person authorized to act for the creditor may
participate and purchase the mortgaged property as
any other bidder. Thereafter the mortgagor has one
year within which to redeem the property from and
after registration of sale with the Register of Deeds. In
case of non-redemption, the purchaser at foreclosure
sale shall file with the Register of Deeds, either a final
deed of sale executed by the person authorized by
virtue of the power of attorney embodied in the
deed or mortgage, or his sworn statement attesting to
the fact of non-redemption; whereupon, the Register
of Deeds shall issue a new certificate of title in
favor of the purchaser after the owner’s duplicate of
the certificate has been previously delivered and
cancelled. Thus, upon failure to redeem foreclosed
realty, consolidation of title becomes a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 188
matter of right on the part of the auction buyer,
and the issuance of a certificate of title in favor of
the purchaser becomes ministerial upon the Register of
Deeds.
PHILBANCOR FINANCE, INC. AND VICENTE HIZON,
JR. VS. COURT OF APPEALS
FACTS: On July 14, 1992, private respondents Alfredo
Pare, Pablo Galang and Amado Vie, filed with the
Provincial Agrarian Reform Adjudication Board
(PARAB) a complaint for maintenance of possession
with redemption and tenancy right of pre-emption
against petitioners Philbancor Finance, Inc. and
Vicente Hizon, Jr.
Hizon is the owner of the disputed agricultural lands
located in San Fernando, Pampanga and that private
respondents are the legitimate and bona fide tenants
on the lots for more than fifty (50) years.
In October 1983, Hizon, without their knowledge,
mortgaged the disputed lots to Philbancor Finance, Inc.
Hizon failed to pay his obligations to Philbancor, which
eventually led to the sale of the mortgaged lots to the
latter. The certificate of sale of the subject property,
which was sold at public auction, was registered with
the ROD of Pampanga on July 31, 1985.
Private respondents came to know of the transaction
only when they were notified by Philbancor to vacate
the lots, and Philbancor threatened to take from
them the actual or physical possession of the
agricultural lots.
Philbancor alleged, among others, that it has no
tenancy or agricultural relationship with private
respondents considering that it acquired ownership
over the disputed lots by virtue of an extra-judicial
foreclosure sale pursuant to Act 3135, as amended;
that it is not an agricultural lessor as

contemplated in Section 10 of R.A. No. 3844, as
amended; that assuming private respondents have
the right to redeem the lots in question, such right
has already expired in accordance with Section 12 of
R.A. 3844, which states that the right of
redemption may be exercised within two
(2) years from the registration of the sale.
Decision was rendered in favor of private
respondents.
ISSUE: Whether or not the private respondents could
still exercise their right of redemption of the parcels
of land sold at public auction due to foreclosure of
the mortgages thereon considering that they invoked
their right to redeem only on July 14, 1992, seven
years after the date of registration of the certificate of
sale with the Register of Deeds. – NO
HELD: Redemption period already elapsed
R.A. No. 3844, Section 12, provides as follows:
In case the landholding is sold to a third person
without the knowledge of the agricultural lessee, the
latter shall have the right to redeem the same at a
reasonable price and consideration. Provided, that the
entire landholding sold must be redeemed. Provided
further, that where there are two or more agricultural
lessees, each shall be entitled to said right of
redemption only to the extent of the area actually
cultivated by him. The right of redemption under this
section may be exercised within two (2) years from the
registration of the sale and shall have priority over
any other right of legal redemption.
In this case, the certificate of sale of the subject
property, which was sold at public auction, was
registered with the ROD of Pampanga on July 31,
1985. The 2-year redemption period thus expired on
July 31, 1987. The complaint for redemption was
filed by respondents only on July 14, 1992,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 189
five (5) years after expiration of the redemption period
prescribed by law. Private respondents may still
continue possession of the lots Nonetheless, private
respondents may continue in possession and
enjoyment of the land in question as legitimate
tenants because the right of tenancy attaches to the
landholding by operation of law. The leasehold
relation is not extinguished by the alienation or
transfer of the legal possession of the landholding. SC
GRANTED petition.
CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF
QUEZON CITY, and ALVIN EMERSON S. YU vs RIZAL
COMMERCIAL BANKING CORPORATION
FACTS: The spouses Roberto and Monette Naval
obtained a loan from respondent Rizal Commercial
Banking Corporation, secured by a real estate
mortgage of properties. In 1998, the real estate
mortgage was later foreclosed and the properties
were sold at public auction with respondent as the
highest bidder. The corresponding Certificates of Sale
were issued in favor of respondent on August 4, 1998.
However, the certificates of sale were allegedly
registered only on February 10, 2004.
On May 30, 2003, an auction sale of tax delinquent
properties was conducted by the City Treasurer of
Quezon City. Included in the properties that were
auctioned were two (2) townhouse units and the
parcel of land. For these delinquent properties, Alvin
Emerson S. Yu was adjudged as the highest bidder.
Upon payment of the tax delinquencies, he was
issued the corresponding Certificate of Sale of
Delinquent Property.
On February 10, 2004, the Certificate of Sale of
Delinquent Property was registered with the Office of
the Register of Deeds of Quezon City.

On June 10, 2004, respondent tendered payment for all
of the assessed tax delinquencies, interest, and other
costs of the subject properties with the Office of the
City Treasurer, Quezon City. However, the Office of the
City Treasurer refused to accept said tender of
payment.
Undeterred, on June 15, 2004, respondent filed before
the Office of the City Treasurer a Petition for the
acceptance of its tender of payment and for the
subsequent issuance of the certificate of redemption
in its favor. Nevertheless, respondents subsequent
tender of payment was also denied.
Petitioners argue:
that the RTC erred when it ruled that P.D. No. 464
was not repealed by R.A. No. 7160 and when it
concluded that the phrase from the date of sale as
appearing in Section 261 of R.A. No. 7160 means
that the counting of the one (1) year redemption
period of tax delinquent properties sold at public
action shall commence from the date of registration
of the certificate of sale.
Respondent argues:
the RTC did not rule that P.D. No. 464 was not repealed
by R.A. No. 7160, it merely made reference to
Section 78 of P.D. No. 464.
ISSUES:
 W/N section 78 of p.d. 464 was repealed by
republic act no. 7160 known as the local
government code of 1991.
 Whether the period of redemption in a realty tax
sale in Quezon City [h]as to be reckoned from
the date of annotation of the certificate of sale
pursuant to paragraph 7, section 14 of Quezon
City tax ordinance no. Sp-91- 93 or from the date
of sale pursuant to section 261 of r.a. 7160.
 Whether or not the respondent is
entitled to the protection of all the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 190
provisions of Quezon City tax ordinance number sp-
91-93, otherwise known as Quezon City revenue
code of 1993, including section 14 thereof,
promulgated pursuant to r.a. 7160;
HELD:
1. The issue of whether or not R.A No. 7160 or
the Local Government Code, repealed P.D. No. 464 or
the Real Property Tax Code has long been laid to rest by
this Court. Jurisdiction thrives to the effect that
R.A. No. 7160 repealed P.D. No. 464. From January 1,
1992 onwards, the proper basis for the computation
of the real property tax payable, including penalties or
interests, if applicable, must be R. A. No. 7160.
As such, it is apparent that in case of sale of tax
delinquent properties, R.A. No. 7160 is the general
law applicable. Consequently, as regards redemption
of tax delinquent properties sold at public auction,
the pertinent provision is Section 261 of R.A. No.
7160, which provides:
Section 261. Redemption of Property Sold. Within
one (1) year from the date of sale, the owner of
the delinquent real property or person having legal
interest therein, or his representative, shall have
the right to redeem the property upon payment
to the local treasurer of the amount of delinquent
tax, including the interest due thereon, and the
expenses of sale from the date of delinquency to
the date of sale, plus interest of not more than
two percent (2%) per month on the purchase
price from the date of sale to the date of
redemption. Such payment shall invalidate the
certificate of sale issued to the purchaser and the
owner of the delinquent real property or person
having legal interest therein shall be entitled to a
certificate of redemption which shall be issued by
the local treasurer or his deputy.
From the date of sale until the expiration

of the period of redemption, the delinquent real
property shall remain in the possession of the
owner or person having legal interest therein
who shall remain in the possession of the owner or
person having legal interest therein who shall be
entitled to the income and other fruits thereof.
The local treasurer or his deputy, upon receipt
from the purchaser of the certificate of sale, shall
forthwith return to the latter the entire amount
paid by him plus interest of not more than two
percent (2%) per month. Thereafter, the property
shall be free from all lien of such delinquent tax,
interest due thereon and expenses of sale.
2. From the foregoing, the owner of the delinquent
real property or person having legal interest therein,
or his representative, has the right to redeem the
property within one (1) year from the date of sale
upon payment of the delinquent tax and other fees.
Verily, the period of redemption of tax delinquent
properties should be counted not from the date of
registration of the certificate of sale, as previously
provided by Section 78 of P.D. No. 464, but rather on
the date of sale of the tax delinquent property, as
explicitly provided by Section 261 of R.A. No. 7160.
Nonetheless
the government of Quezon City, pursuant to the taxing
power vested on local government units by Section 5,
Article X of the 1987 Constitutions and R.A. No. 7160,
enacted City Ordinance No. SP-91, S-93, otherwise
known as the Quezon City Revenue Code of 1993,
providing, among other things, the procedure in the
collection of delinquent taxes on real properties
within the territorial jurisdiction of Quezon City.
Section 14 (a), Paragraph 7, the Code provides:
Within one (1) year from the date of the
annotation of the sale of the property
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 191
at the proper registry, the owner of the delinquent real
property or person having legal interest therein, or his
representative, shall have the right to redeem the
property by paying to the City Treasurer the amount of
the delinquent tax, including interest due thereon, and
the expenses of sale plus interest of two percent (2) per
month on the purchase price from the date of sale to
the date of redemption. Such payment shall invalidate
the certificate of sale issued to the purchaser and the
owner of the delinquent real property or person
having legal interest therein shall be entitled to a
certificate of redemption which shall be issued by the
City Treasurer.
xxxx
Verily, the ordinance is explicit that the one-year
redemption period should be counted from the date of
the annotation of the sale of the property at the
proper registry. At first glance, this provision runs
counter to that of Section 261 of R.A. No. 7160 which
provides that the one year redemption period shall
be counted from the date of sale of the tax
delinquent property. There is, therefore, a need to
reconcile these seemingly conflicting provisions of a
general law and a special law.
To harmonize the provisions of the two laws and to
maintain the policy of the law to aid rather than to
defeat the owners right to redeem his property, Section
14 (a), Paragraph 7 of City Ordinance No. SP-91, S-93
should be construed as to define the phrase one (1)
year from the date of sale as appearing in Section
261 of R.A. No. 7160, to mean one (1) year from the
date of the annotation of the sale of the property at the
proper registry.
3. Consequently, the counting of the one
(1) year redemption period of property sold at public
auction for its tax delinquency should be counted from
the date of annotation of the certificate of sale in
the proper Register of Deeds. Applying the foregoing
to the case at bar, from the date

of registration of the Certificate of Sale of Delinquent
Property on February 10, 2004, respondent had until
February 10, 2005 to redeem the subject properties.
Hence, its tender of payment of the subject properties
tax delinquencies and other fees on June 10, 2004,
was well within the redemption period, and it was
manifest error on the part of petitioners to have
refused such tender of payment.
CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO
vs. HON. HILARIO L. LAQUI
“The right to possession of a purchaser at an
extrajudicial foreclosure sale is not affected by a
pending case questioning the validity of the foreclosure
proceeding. The latter is not a bar to the former.”
FACTS: November 1994: Philippine Bank of
Communication (respondent) loaned P3,200,000 to
the petitioners. To secure the loan, petitioners
executed in favor of private respondent a Deed of
Real Estate Mortgage.
August 1997: the mortgage was amended, and the loan
was increased by P1,800,000, making the amount
P5,000,000. For failure of petitioners to pay the full
amount of the outstanding loan upon demand,
private respondent applied for the extrajudicial
foreclosure of the real estate mortgage.
TRIAL COURT: Granted respondent’s motion for a
declaration of general default and allowed them to
present evidence ex parte.
COURT OF APPEALS: Petitioners appealed. However,
it was dismissed since the counsel for petitioners
failed to indicate the updated PTR Number in the
said petition, which is a ground for outright dismissal
under B.M 1132. The court held that a proceeding for
the issuance of a writ of possession is ex parte in
nature.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 192
ISSUE: Whether the writ of possession was properly
issued despite the pendency of a case questioning the
validity of the extrajudicial foreclosure sale even when
petitioners were declared in default.
HELD: The Supreme Court held that since the private
respondent had purchased the property at the
foreclosure sale, their right over the said property
became absolute, vesting in it the corollary right of
possession.
Petitioners cannot oppose or appeal the court’s order
granting the writ of possession in an ex parte
proceeding. The remedy of petitioners is to have the
sale set aside and the writ of possession cancelled in
accordance with Section 8 of Act No. 3135, as
amended:
SEC. 8. The debtor may, in the proceedings in which
possession was requested, but not later than thirty days
after the purchaser was given possession, petition that
the sale be set aside and the writ of possession
cancelled, specifying the damages suffered by him,
because the mortgage was not violated or the sale was
not made in accordance with the provisions hereof.
MALLARI vs. GOVERNMENT SERVICE INSURANCE
SYSTEM
FACTS: In 1968, the petitioner obtained two loans
totaling P34,000.00 from respondent GSIS. To secure
the performance, he mortgaged two parcels of land
registered under his and his wife Marcelina Mallari’s
names. However, he paid GSIS about ten years after
contracting the obligations only P10,000.00 and
P20,000.00.
Nearly three years later (1984), GSIS applied for the
extrajudicial foreclosure of the mortgage by reason of
his failure

to settle his account. He requested an updated
computation of his outstanding account. He
persuaded the sheriff to hold the publication of the
foreclosure to await action on his pending request
for final accounting (that is, taking his payments of
P30,000.00 made in 1978 into account). GSIS
responded to his request. It finally commenced
extrajudicial foreclosure proceedings against him
because he had meanwhile made no further payments.
The petitioner sued GSIS (prelim injunction). The RTC
decided in his favor, nullifying the extrajudicial
foreclosure and auction sale. GSIS appealed to the CA,
which reversed the RTC. Petitioner elevated the CA
decision to this Court via petition for review on
certiorari.
This Court denied his petition for review and
motion for reconsideration. As a result, the CA decision
became final and executory, rendering unassailable
both the extrajudicial foreclosure and auction sale.
Because of the petitioner’s request for an extension
of time to vacate the properties, GSIS acceded to the
request. Yet, the petitioner did not voluntarily vacate
the properties, but instead filed a MR and/or to quash
the writ of execution and motion to hold GSIS in
contempt of court for painting the fence of the
properties during the pendency of his said motion.
ISSUE: W/N the petitioner, as defaulting mortgagor,
was not entitled under Act 3135, as amended, and
its pertinent jurisprudence to any prior notice of the
application for the issuance of the writ of
possession.
HELD: No. The petitioner, as defaulting mortgagor, was
not entitled under Act 3135, as amended, and its
pertinent jurisprudence to any prior notice of the
application for the issuance of the writ of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 193
possession.
A writ of possession, which commands the sheriff to
place a person in possession of real property, may be
issued in:
(1) Land registration proceedings under Section 17 of
Act No. 496;
(2) Judicial foreclosure, provided the debtor is in
possession of the mortgaged property, and no third
person, not a party to the foreclosure suit, had
intervened;
(3) Extrajudicial foreclosure of a real estate mortgage,
pending redemption under Section 7 of Act No. 3135,
as amended by Act No. 4118; and
(4) Execution sales, pursuant to the last paragraph
31
of Section 33, Rule 39 of the Rules of Court.
Anent the redemption of property sold in an
extrajudicial foreclosure sale made pursuant to the
32
special power referred to in Section 1 of Act No.
33
3135, as amended,
the debtor, his successor-in-interest, or any judicial
creditor or judgment creditor of said debtor, or any
person having a lien on the property subsequent to
the mortgage or deed of trust under which the
property is sold has the right to redeem the property at
anytime within the term of one year from and after
the date of the sale, such redemption to be governed
by the provisions of Section 464 to Section 466 of the
Code of Civil Procedure, to the extent that said
provisions were not inconsistent
34
with the provisions of Act 3135.
In this regard, we clarify that the redemption period
envisioned under Act 3135 is reckoned from the date
of the registration of the sale, not from and after the
date of the sale, as the text of Act 3135 shows. Although
the original Rules of Court (effective on July 1, 1940)
incorporated Section 464 to Section 466 of the Code of
Civil Procedure as its Section 25 (Section 464);
Section 26 (Section 465); and
Section 27 (Section 466) of Rule 39, with Section 27
still expressly reckoning the

redemption period to be "at any time within twelve
months after the sale;" and although the Revised Rules
of Court (effective on January 1, 1964) continued to
provide in Section 30 of Rule 39 that the redemption
be made from the purchaser "at any time
35
within twelve (12) months after the sale,"
the 12-month period of redemption came to be held as
beginning "to run not from the date of the sale but
from the time of registration of the sale in the Office
36
of the Register of Deeds." This construction was
due to the fact that the sheriff’s sale of registered (and
unregistered) lands did not take effect as a
conveyance, or did not
bind the land, until the sale was registered in the
37
Register of Deeds.
Desiring to avoid any confusion arising from the
conflict between the texts of the Rules of Court
(1940 and 1964) and Act No. 3135, on one hand, and
the jurisprudence clarifying the reckoning of the
redemption period in judicial sales of real property,
on the other hand, the Court has incorporated in
Section 28 of Rule 39 of the current Rules of Court
(effective on July 1, 1997) the foregoing judicial
construction of reckoning the redemption period from
the date of the registration of the certificate of sale, to
wit:
Sec. 28. Time and manner of, and amounts
payable on, successive redemptions; notice to be
given and filed. — The judgment obligor, or
redemptioner, may redeem the property from the
purchaser, at any time within one (1) year from
the date of the registration of the certificate of
sale, by paying the purchaser the amount of his
purchase, with one per centum per month
interest thereon in addition, up to the time of
redemption, together with the amount of any
assessments or taxes which the purchaser may
have paid thereon after purchase, and interest on
such last named amount at the same rate; and if
the purchaser be also a creditor having a prior lien
to that of the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 194
redemptioner, other than the judgment under
which such purchase was made, the amount of
such other lien, with interest.
Property so redeemed may again be redeemed
within sixty (60) days after the last redemption upon
payment of the sum paid on the last redemption,
with two per centum thereon in addition, and the
amount of any assessments or taxes which the last
redemptioner may have paid thereon after
redemption by him, with interest on such last-
named amount, and in addition, the amount of
any liens held by said last redemptioner prior to
his own, with interest. The property may be
again, and as often as a redemptioner is so
disposed, redeemed from any previous
redemptioner within sixty (60) days after the last
redemption, on paying the sum paid on the last
previous redemption, with two per centum thereon
in addition, and the amounts of any assessments or
taxes which the last previous redemptioner paid
after the redemption thereon, with interest
thereon, and the amount of any liens held by the
last redemptioner prior to his own, with interest.
Written notice of any redemption must be given
to the officer who made the sale and a
duplicate filed with the registry of deeds of the
place, and if any assessments or taxes are paid
by the redemptioner or if he has or acquires any
lien other than that upon which the redemption
was made, notice thereof must in like manner be
given to the officer and filed with the registry of
deeds; if such notice be not filed, the property
may be redeemed without paying such
assessments, taxes, or liens. (30a) (Emphasis
supplied).
Accordingly, the mortgagor or his successor-in-interest
must redeem the foreclosed property within one
year from

the registration of the sale with the Register of Deeds
in order to avoid the title from consolidating in the
purchaser. By failing to redeem thuswise, the
mortgagor loses all interest over the foreclosed
38
property. The purchaser, who has a right to
possession that extends beyond the
expiration of the redemption period, becomes the
absolute owner of the property when no redemption
39
is made, that it is no longer necessary for the
purchaser to file the bond required under Section 7
of Act No. 3135, as amended, considering that the
possession of the land becomes his absolute right as
40
the land’s confirmed owner. The consolidation of
ownership in the purchaser’s name and the
issuance to him of a new TCT then entitles him to
demand possession of the property at any time, and
the issuance of a writ of possession to him becomes a
matter of right upon the consolidation of title in his
name.
The court can neither halt nor hesitate to issue the
writ of possession. It cannot exercise any discretion
to determine whether or not to issue the writ, for
the issuance of the writ to the purchaser in an
extrajudicial foreclosure sale becomes a
41
ministerial function. Verily, a marked
distinction exists between a discretionary act and a
ministerial one. A purely ministerial act or duty is one
that an officer or tribunal performs in a given state of
facts, in a prescribed manner, in obedience to the
mandate of a legal authority, without regard to or the
exercise of his own judgment upon the propriety or
impropriety of the act done. If the law imposes a duty
upon a public officer and gives him the right to decide
how or when the duty shall be performed, such duty
is discretionary, not ministerial. The duty is ministerial
only when its discharge requires neither the exercise
of official discretion nor the
42
exercise of judgment.
The proceeding upon an application for a writ of
possession is ex parte and summary
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 195
in nature, brought for the benefit of one party only
and without notice being sent by the court to any
person adverse in interest. The relief is granted even
without giving an opportunity to be heard to the
person
43
against whom the relief is sought. Its nature as an
ex parte petition under Act
No. 3135, as amended, renders the application for the
issuance of a writ of possession a non-litigious
44
proceeding.
It is clear from the foregoing that a non- redeeming
mortgagor like the petitioner had no more right to
challenge the issuance of the writ of execution cum
writ of possession upon the ex parte application of
GSIS. He could not also impugn anymore the
extrajudicial foreclosure, and could not undo the
consolidation in GSIS of the ownership of the
properties covered by TCT No. 284272-R and TCT
No. 284273-R, which
consolidation was already irreversible. Hence, his
moves against the writ of execution cum writ of
possession were tainted by bad faith, for he was
only too aware, being his own lawyer, of the dire
consequences of his non-redemption within the
period provided by law for that purpose.
DEVELOPMENT BANK OF THE PHILIPPINES VS
CA and EMERAL RESORT HOTEL CORP. (G.R.
No.
125838, June 10, 2003)
FACTS: Emerald Resort Hotel Corporation ("ERHC")
obtained a loan from petitioner Development Bank
of the Philippines ("DBP"). To secure the loan, ERHC
mortgaged its personal and real properties to DBP. On
18 March 1981, DBP approved a restructuring of
ERHC’s loan subject to certain conditions.
On 5 June 1986, alleging that ERHC failed to pay its
loan, DBP filed with the Office of the Sheriff, Regional
Trial Court of Iriga City, an Application for Extra-
judicial

Foreclosure of Real Estate and Chattel Mortgages.
Deputy Provincial Sheriffs Abel Ramos and Ruperto
Galeon issued the required notices of public auction
sale of the personal and real properties. However,
Sheriffs Ramos and Galeon failed to execute the
corresponding certificates of posting of the notices.
On 10 July 1986, the auction sale of the personal
properties proceeded.
The Office of the Sheriff scheduled on 12 August
1986 the public auction sale of the real properties.
The Bicol Tribune published on 18 July 1986, 25 July
1986 and 1 August 1986 the notice of auction sale
of the real properties. However, the Office of the
Sheriff postponed the auction sale on 12 August 1986
to 11 September 1986 at the request of ERHC. DBP did
not republish the notice of the rescheduled auction
sale because DBP and ERHC signed an agreement to
postpone the 12 August 1986 auction sale. ERHC,
however, disputes the authority of Jaime Nuevas who
signed the agreement for ERHC.
On 22 December 1986, ERHC filed with the Regional
Trial Court of Iriga City a complaint for annulment of
the foreclosure sale of the personal and real properties.
ERHC alleged that the foreclosure was void mainly
because (1) DBP failed to comply with the procedural
requirements prescribed by law; and (2) the
foreclosure was premature.
DBP’s CONTENTION: DBP maintains that it complied
with the mandatory posting requirement under
applicable laws. DBP insists that the non-execution of
the certificate of posting of the auction sale notices did
not invalidate the foreclosure. DBP also maintains
that when upon their (DBP and ERHC) agreement to
postpone the auction sale, there was no more need
to publish the notice for the September 11,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 196
1986 auction sale.
ISSUE: W/N DBP complied with the posting and
publication requirements under applicable laws for a
valid foreclosure.
HELD: POSTING REQUIREMENT: COMPLIED WITH
This Court ruled in Cristobal v. Court of Appeals that
a certificate of posting is not required, much less
considered indispensable for the validity of an
extrajudicial foreclosure sale of real property under Act
No. 3135. In the present case, the foreclosing sheriffs
failed to execute the certificate of posting of the
auction sale notices. However, this fact alone does not
prove that the sheriffs failed to post the required
notices. As held before, "the fact alone that there is
no certificate of posting attached to the sheriff's
records is not sufficient to prove the lack of posting."
Based on the records, DBP presented sufficient
evidence to prove that the sheriffs posted the notices
of the extrajudicial sale. A careful examination of
these two documents clearly shows that the foreclosing
sheriffs posted the required notices of sale.
Deputy Sheriff Galeon also testified that he, together
with Sheriff Ramos, actually posted the notices of
sale. Indisputably, there is clear and convincing
evidence of the posting of the notices of sale. What the
law requires is the posting of the notice of sale, which
is present in this case, and not the execution of the
certificate of posting.
Moreover, ERHC bore the burden of presenting
evidence that the sheriffs failed to post the notices of
sale. In the absence of contrary evidence, as in this
case, the presumption prevails that the sheriffs
performed their official duty of posting the notices of
sale. Consequently, we hold that the non-execution of
the certificate of posting cannot nullify the foreclosure
of the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 197

chattel and real estate mortgages in the instant of sale.

case.
The form of the notice of extrajudicial sale is now
PUBLICATION REQUIREMENT: NOT COMPLIED 26
prescribed in Circular No. 7-2002 issued by the
The Court held recently in Ouano v. Court of Appeals Office of the Court Administrator on 22 January 2002.
that republication in the manner prescribed by Act Section 4(a) of Circular No. 7-2002 provides that:
No. 3135 is necessary for the validity of a postponed
XXX
extrajudicial foreclosure sale. Another publication is
"In the event the public auction should not take
required in case the auction sale is rescheduled, and
place on the said date, it shall be held on ,_
the absence of such republication invalidates the
without further notice."
foreclosure sale. The Court also ruled in Ouano
that the parties have no right to waive the publication
The last paragraph of the prescribed notice of sale
requirement in Act No. 3135.
allows the holding of a rescheduled auction sale
without reposting or republication of the notice.
Publication, therefore, is required to give the
However, the rescheduled auction sale will only be
foreclosure sale a reasonably wide publicity
valid if the rescheduled date of auction is clearly
such that those interested might attend the
specified in the prior notice of sale. The absence of
public sale. To allow the parties to waive
this information in the prior notice of sale will render
this jurisdictional requirement would result in
the rescheduled auction sale void for lack of
converting into a private sale what ought to
reposting or republication. If the notice of auction
be a public auction.
sale contains this particular information, whether or
not the parties agreed to such rescheduled date,
The Court also ruled on DBP’s argument that Sec. 24,
there is no more need for the reposting or
Rule 39 of the Rules of Court does not apply in the
republication of the notice of the rescheduled auction
present case. Act No. 3135, as amended by Act No.
sale.
4118 otherwise known as "An Act to Regulate the
Sale of Property under Special Powers Inserted in or
In the instant case, there is no information in the
Annexed to Real Estate Mortgages" applies in cases of
notice of auction sale of any date of a rescheduled
extrajudicial foreclosure sale. A different set of law
auction sale. Even if such information were stated in
applies to each class of sale mentioned. The cited
the notice of sale, the reposting and republication of
provision in the Rules of Court hence does not apply
the notice of sale would still be necessary because
to an extrajudicial foreclosure sale.
Circular No. 7-2002 took effect only on 22 April 2002.
There were no such guidelines in effect during the
As to DBP’s contention that ERHC’s act of requesting questioned foreclosure.
postponement of the 12 August 1986 auction sale
estops ERHC from challenging the absence of
Clearly, DBP failed to comply with the publication
publication of the notice of the rescheduled auction
requirement under Act No. 3135. There was no
sale, the records are bereft of any evidence that ERHC
publication of the notice of the rescheduled auction
requested the postponement without need of
sale of the real properties. Therefore, the
republication of the notice
extrajudicial foreclosure of the real estate mortgage
is void.

JOSE RAMIREZ vs THE MANILA BANKING CORP.
(G.R. No. 198800,
December 11, 2013)
FACTS: Jose T. Ramirez mortgaged two parcels of
land located at Bayanbayanan, Marikina City in favor
of The Manila Banking Corporation to secure his
P265,000 loan. The real estate mortgage provides
that all correspondence relative to the mortgage
including notifications of extrajudicial actions shall be
sent to petitioner Ramirez at his given address, to wit:
N) All correspondence relative to this
MORTGAGE, including demand letters, summons,
subpoenas or notifications of any judicial or
extrajudicial actions shall be sent to the
MORTGAGOR at the address given above or at
the address that may hereafter be given in
writing by the MORTGAGOR to the MORTGAGEE,
and the mere act of sending any
correspondence by mail or by personal delivery to
the said address shall be valid and effective
notice to the MORTGAGOR for all legal purposes
and the fact that any communication is not
actually received by the MORTGAGOR, or that it
has been returned unclaimed to the
MORTGAGEE, or that no person was found at
the address given, or that the address is fictitious
or cannot be located, shall not excuse or relieve
the MORTGAGOR from the effects of such notice.
Manila Bank filed a request for extrajudicial foreclosure
of real estate mortgage on the ground that Ramirez
failed to pay his loan despite demands. During the
auction sale on September 8, 1994, respondent was the
only bidder for the mortgaged properties.
Ramirez sued respondent for annulment of sale and
prayed that the certificate of sale be annulled on the
ground, among others, that paragraph N of the
real estate
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 198
mortgage was violated for he was not notified of the
foreclosure and auction sale.
In its answer, respondent claimed that the foreclosure
proceedings were valid.
ISSUE: W/N Paragraph N of the Real Estate Mortgage
was violated by Manila Bank and What is its effect?
HELD: YES. Paragraph N was violated by Manila
Bank.
The Court ruled that when respondent failed to send
the notice of extrajudicial foreclosure sale to Ramirez, it
committed a contractual breach of said paragraph N
sufficient to render the extrajudicial foreclosure sale on
September 8, 1994 null and void.
In Carlos Lim, et al. v. Development Bank of the
Philippines, we held that unless the parties stipulate,
personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not necessary because
Section 3 of Act No. 3135 only requires the posting of
the notice of sale in three public places and the
publication of that notice in a newspaper of general
circulation. In this case, the parties stipulated in
paragraph N of the real estate mortgage that all
correspondence relative to the mortgage including
notifications of extrajudicial actions shall be sent to
mortgagor Ramirez at his given address. Respondent
had no choice but to comply with this contractual
provision it has entered into with Ramirez. The
contract is the law between them. Hence, we cannot
agree with the bank that paragraph N of the real
estate mortgage does not impose an additional
obligation upon it to provide personal notice of the
extrajudicial foreclosure sale to the mortgagor
Ramirez.
As we explained in Metropolitan Bank v. Wong, the
bank’s violation of paragraph N of the real estate
mortgage is sufficient to invalidate the extrajudicial
foreclosure sale.

ALFREDO OUANO vs CA and HEIRS OF JULIETA OUANO
(G.R. No. 129729,
March 4, 2003)
FACTS: On June 8, 1977, Julieta M. Ouano (Julieta),
now deceased, obtained a loan from the PNB in the
amount of P104,280.00. As security for said loan, she
executed a real estate mortgage over two parcels of
land located at Opao, Mandaue City. She defaulted
on her obligation. On September 29, 1980, PNB filed
a petition for extrajudicial foreclosure with the City
Sheriff of Mandaue City.
On November 4, 1980, the sheriff prepared a notice of
sale setting the date of public auction of the two
parcels of land on December 5, 1980 at 9:00 a.m.
to 4:00
p.m. He caused the notice to be published in the
Cebu Daily Times, a newspaper of general circulation
in Mandaue City, in its issues of November 13, 20
and 27, 1980. He likewise posted copies thereof in
public places in Mandaue City and in the place
where the properties are located.
However, the sale as scheduled and published did not
take place as the parties, on four separate dates,
executed Agreements to Postpone Sale (Agreements).
These Agreements were addressed to the sheriff,
requesting the latter to defer the auction sale to
another date at the same time and place, "without
any further republication of the Notice."
There was however no sale that took place and was
repeatedly postponed and in all these
postponements, no new notice of sale was issued, nor
was there any republication or reposting of notice for
the rescheduled dates.
Finally, on May 29, 1981, the sheriff conducted the
auction sale, awarding the two parcels of land to PNB,
the only bidder. He executed a Certificate of Sale
certifying the sale for and in consideration of P195,
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 199
510.50.
Julieta failed to redeem the properties within the
one year period from registration of sale. PNB later
conveyed the properties to Alfredo Ouano, the brother
of Julieta.
On March 28, 1983, Julieta sent demand letters to
PNB and petitioner, pointing out irregularities in the
foreclosure sale.On April 18, 1983, Julieta filed a
complaint with the Regional Trial Court (RTC) of Cebu
for the nullification of the May 29, 1981 foreclosure
sale.
ISSUE: W/N the requirements of Act No. 3135 were
complied with in the May 29, 1981 foreclosure sale.
HELD: The governing law for extrajudicial foreclosures
is Act No. 3135 as amended by Act No. 4118. The
provision relevant to this case is Section 3, which
provides:
SEC. 3. Notice shall be given by posting notices
of the sale for not less than twenty (20) days
in at least three public places of the
municipality or city where the property is
situated, and if such property is worth more
than four hundred pesos, such notice shall
also be published once a week for at least
three consecutive weeks in a newspaper of
general circulation in the municipality of city.
In a number of cases, we have consistently held that
failure to advertise a mortgage foreclosure sale in
compliance with statutory requirements constitutes a
jurisdictional defect invalidating the sale. Consequently,
such defect renders the sale absolutely void and no
title passes.
Petitioner, however, insists that there was substantial
compliance with the publication requirement,
considering that prior publication and posting of the
notice of the first date were made.

In Tambunting v. Court of Appeals, we held that
republication in the manner prescribed by Act No.
3135 is necessary for the validity of a postponed
extrajudicial foreclosure sale.
Publication, therefore, is required to give the
foreclosure sale a reasonably wide publicity such that
those interested might attend the public sale. To allow
the parties to waive this jurisdictional requirement
would result in converting into a private sale what
ought to be a public auction.
Moreover, assuming arguendo that the written
waivers are valid, we find noticeable flaws that would
nevertheless invalidate the foreclosure proceedings. The
Agreements are clearly defective for having been
belatedly executed and filed with the sheriff. The
party who may be said to be at fault for this failure,
and who should bear the consequences, is no other
than PNB, the mortgagee in the case at bar. It is
the mortgagee who causes the mortgaged property
to be sold, and the date of sale is fixed upon his
instruction. We have held that the mortgagee's right to
foreclose a mortgage must be exercised according to
the clear mandate of the law. Every requirement of
the law must be complied with, lest the valid exercise
of the right would end. PNB's inaction on the
scheduled date of sale and belated filing of requests to
postpone may be deemed as an abandonment of the
petition to foreclose it filed with the sheriff.
Consequently, its right to foreclose the mortgage
based on said petition lapsed.
In a vain attempt to uphold the validity of the
aforesaid waiver, petitioner asserts that the Court of
Appeals should have applied Rule 39, Section 24 of
the Rules of Court, which allows adjournment of
execution sales by agreement of the parties. The cited
provision in the Rules of Court hence does not apply to
an extrajudicial foreclosure sale. Act No. 3135, as
amended by Act No. 4118 otherwise
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 200
known as "An Act to Regulate the Sale of Property
under Special Powers Inserted in or Annexed to Real
Estate Mortgages" applies in cases of extrajudicial
foreclosure sale. A different set of law applies to each
class of sale mentioned.
Next, petitioner maintains that Julieta's act of
requesting the postponement and repeatedly signing
the Agreements had placed her under estoppel,
barring her from challenging the lack of publication of
the auction sale.
We rule otherwise. Julieta did request for the
postponement of the foreclosure sale to extend the
period to settle her obligation. However, the records do
not show that she requested the postponement
without need of republication and reporting of notice
of sale.
In addition, we observe herein that the Agreements
prepared by the counsel of PNB were in standard
forms of the bank, labeled as "Legal Form No. We
therefore held that said agreement partakes of the
nature of a contract of adhesion, i.e., one in which
one of the contracting parties imposes a ready-made
form of contract which the other party may accept or
reject, but cannot modify. One party prepares the
stipulation in the contract, while the other party
merely affixes his signature or his "adhesion" thereto,
giving no room for negotiation, and depriving the
latter of the opportunity to bargain on equal footing.
As such, their terms are construed strictly against the
party who drafted it.
More importantly, the waiver being void for being
contrary to the express mandate of Act No. 3135,
such cannot be ratified by estoppel. Estoppel cannot
give validity to an act that is prohibited by law or one
that is against public policy. Neither can the defense of
illegality be waived.

DARCEN V. V.R. GONZALES CREDIT ENTERPRISES,
INC.
G.R. No. 199747; April 03, 2013
FACTS: Spouses MamertoDarcen and Flora De Guzman
begot 7 children, namely: Teodoro, Mamerto, Jr.,
Nestor, Benilda, and Elenita (petitioners), and their
brothers Arturo and Manuel.
Mamerto died in 1986, leaving behind 3 titled parcels
of land located in Bulacan, all under the name
“Mamerto Darcen married to Flora de Guzman.”
According to the petitioners, sometime in 1990,
their brother Manuel borrowed money from Veronica
Gonzales (Gonzales), president of V.R. Gonzales Credit
Enterprises. Manuel sought their consent in
constituting a mortgage over the above properties of
their father, but the petitioners refused. Manuel then
caused the execution of an Extra-Judicial Settlement of
Estate with Waiver (ESEW) by forging the signatures
of the petitioners and their mother Flora.
In the said instrument, the petitioners were said to
have waived their shares in their father’s estate in
favor of their mother, thus making Flora the sole owner
of the 3 lots.
Meanwhile, fire had razed part of the ROD of Bulacan
and destroyed the titles to the lots. After
reconstitution of the titles, new titles were issued in
the name of “Flora de Guzman, Filipino, of legal age,
widow.”
Petitioners further claim that on the day that the new
titles were issued, they caused the annotation
thereon of their hereditary claim in their father’s
estate. In 2000, Flora died.
In 2007, Gonzales demanded payment from the
petitioners of several loans allegedly taken out by
Flora, claiming that the latter had mortgaged the
properties to
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 201
VR Enterprise.
Petitioners say that they “immediately noted that the
purported signatures of their mother on the 3
mortgage contracts were actually forgeries, and that
the mortgage contracts did not state when the
supposed loan obligations would become due and
demandable.”
They maintain that their mother did not contract the
loans, and they point to their brothers Manuel and
Arturo, whose signatures appear as witnesses on the
mortgage documents, as guilty of forging her
signatures and of receiving the proceeds of the loans.
The petitioners also disclaim any knowledge of the
loans, or of their consent thereto, either before or after.
VR Enterprise extrajudicially foreclosed the mortgage
over the lots, but meanwhile, petitioners filed for
“Annulment of Mortgage, Extra-Judicial Foreclosure,
Auction Sale, Certificate of Sale, and Damages,” seeking
to void the real estate mortgages, the extrajudicial
foreclosure and the auction sale of the lots.
The three properties were sold, with the VR
Enterprise as the highest bidder. The one-year period
to redeem lapsed. VR Enterprise executed an
affidavit of consolidation of ownership, and a writ
of possession was issued against petitioners.
Contention of Petitioners:
They are adverse claimants who are third parties and
strangers to the real estate mortgages executed by
their mother. The issuance of a writ of possession in
favor of the purchaser in an extrajudicial foreclosure
sale ceases to be ministerial where the property is in
the possession of a third party who holds the property
under a claim adverse to that of the
debtor/mortgagor.
The petitioners maintain that they knew nothing
about the mortgage contracts,

whose validity is now the subject of their appeal.
They further claim that their signatures in the ESEW
were forged. As co-heirs and co-owners with their
mother of the subject lots, they have a claim directly
adverse to hers, and therefore, also directly adverse
to her successor-in- interest, VR Enterprise. Thus
they should be entitled to retain possession of the
properties until the claim for ownership is resolved.
ISSUE: WON the petitioners are adverse claimants
entitled to retain possession of the properties. NO
HELD: The long-settled rule in extrajudicial foreclosure
of real estate mortgage is that after consolidation of
ownership of the foreclosed property, it is the
ministerial duty of the court to issue, as a matter of
right, an ex parte writ of possession to the buyer.
The established rule is that the purchaser in an
extrajudicial foreclosure sale becomes the absolute
owner of the property if no redemption is made
within 1 year from the registration of the certificate
of sale.
Possession, being a recognized essential attribute of
ownership after consolidation of title, the purchaser
may demand possession as a matter of right.
The possession may be granted to the buyer either
(a) within the one-year redemption period,
upon the filing by the purchaser of a bond, or
(b) after the lapse of the redemption period,
without need of a bond.
It is a time-honored legal precept that after the
consolidation of titles in the buyer’s name, for failure
of the mortgagor to redeem, entitlement to a writ of
possession becomes a matter of right. As the
confirmed owner, the purchaser’s right to
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 202
possession becomes absolute. The basis of this right
to possession is the purchaser’s ownership of the
property.There is even no need for him to post a
bond, and it is the ministerial duty of the courts to
issue the same upon proper application and proof of
title.
The nature of an ex parte petition for issuance of
the possessory writ is a non- litigious proceeding and
summary in nature. As an ex parte proceeding, it is
brought for the benefit of one party only, and
without notice to or consent by any person
adversely interested.
Furthermore, it is settled that a pending action for
annulment of mortgage or foreclosure sale does not
stay the issuance of the writ of possession.
Nonetheless, the ministerial duty of the court to
issue an ex parte writ of possession ceases once it
appears that there is a third party in possession of
the property, who is a stranger to the mortgage
and who claims a right adverse to that of the
debtor/ mortgagor.
Section 33, Rule 39 of the Rules of Court provides
that in an execution sale, the possession of the
property shall be given to the purchaser or last
redemptioner, unless a third party is actually holding
the property adversely to the judgment obligor. The
application of the above Section has been extended to
extrajudicial foreclosure sales pursuant to Section 6 of
Act No. 3135.
The petitioners have persisted in making the point
that they are strangers to the mortgage contracts
executed by their mother over their father’s lots,
which they claim to co-own with her, an interest
adverse to that of the VR Enterprise.
Thus, as an exception, the possession of the
mortgaged property may be awarded to

a purchaser in the extrajudicial foreclosure unless a
third party is actually holding the property adversely to
the judgment debtor.
The purchaser’s right of possession is recognized
only as against the judgment debtor and his
successor-in-interest but not against persons whose
right of possession is adverse to the latter.
However, the SC finds no proof that the petitioners
are adverse third-party claimants entitled to be
retained in possession.
The chief consideration for granting to VR Enterprise
a writ of possession was that the assailed mortgages
executed by Flora in 1995 were constituted on
properties covered by titles issued solely in her
name.
It will be noted that it was only in June 2007, after
VR Enterprise had threatened them with extrajudicial
foreclosure and eviction, or after 12 years had passed,
that the petitioners brought an action to annul the
real estate mortgages, and meanwhile, Flora had
obtained several loans totaling P7.5 million fromVR
Enterprise. It took petitioners even longer, 15 years, to
assail the validity of the ESEW, which gave Flora sole
title to the subject lots under the new reconstituted
titles issued to her.
Realizing that their claim of forgery of their mother’s
signature in the mortgage contracts was tenuous, the
petitioners now claim that an earlier instrument, the
ESEW, was falsified by their brothers Manuel and
Arturo who forged their signatures. Yet the petitioners
did not explain why the said instrument named neither
Manuel nor Arturo but their mother Flora as the
sole beneficiary of the heirs’ waiver.
Considering that the petitioners are now asserting that
their signatures in the ESEW had been forged, it is
inexplicable why they failed to attach a copy thereof
to
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 203
their Opposition to the ex parte petition for writ of
possession. All that they could say about this
“oversight” is that they “were never able to insist on
the presentation of the said document because they
were never parties in the case for writ of possession.
Besides, the case for writ of possession is summary
and non- adversarial.”
But this is a lie and an obvious subterfuge, for the fact
is that they appeared with their lawyer, and had an
opportunity to lay out the complete facts and
present whatever pertinent documents were in their
possession. They did no such thing.
Not only did petitioners not sue to annul the
extrajudicial settlement, but on the very day that the
new titles were issued to Flora, an inscription appears
in the said titles announcing that one-half (½) of the
lots would be bound for the next two years to possible
claims by other heirs or unknown creditors against the
estate of Mamerto. All three titles bear this same
inscription, which the petitioners admit that they
themselves had caused to be annotated on their
mother’s titles.
All the above leave little doubt that the petitioners had
always known about, and had consented to, the
extrajudicial settlement of the estate of their father
Mamerto, as well as waiver by them of their shares
therein in favor of their mother Flora. For this very
reason, they cannot now be permitted to interpose an
adverse claim in the subject mortgaged lots and defeat
the writ of possession issued to VR Enterprise.
Note: Any question regarding the validity of the
mortgage or its foreclosure cannot be a legal ground
for the refusal to issue a writ of possession.
Regardless of whether or not there is a pending suit
for the annulment of the mortgage or the foreclosure
itself, the purchaser is entitled to a writ of possession
without prejudice, of

course, to the eventual outcome of the pending
annulment case.
BARRETTO VS. BARRETTO
G.R. No. L-11933; December 1, 1917
FACTS: Juan Antonio Barretto, Sr. succeeded by his
children Juan Antonio, Jr. (debtor), Leonardo (Atty. of
debtor) and other heirs Juan Antonio Jr. borrowed
money from Antonio Vicente Barretto (creditor)
mortgaged the hacienda failed to pay Antonio took
possession of the hacienda Antonio succeeded by
Alberto (son, plaintiff) Alberto in present possession
Leonardo usurped the hacienda
Alberto’s case
 Alberto Barretto alleges that he is the owner of
the whole hacienda called Balintagac.
 He was in possession of the said hacienda
quietly, peacefully, and continuously, as were his
predecessors since the year 1884 until 1912.
 Leonardo Barretto, alleging himself to be the
owner of a certain part of said hacienda, illegally
and unduly usurped a portion thereof.
 Leonardo refused to return that portion of land
usurped together with the fruits received, or their
value, in spite of the fact that he has been
required to do so in writing by the Alberto.
Leonardo’s case
 The hacienda of Balintagac was owned and
possessed by Juan Antonio Barretto, Sr., who died
in 1881 and left
7 children: Juan Antonio, Angelica Maria,
Leonardo, Francisca, Bartolome, Jose and Leopoldo.
 The 7 children of Juan Antonio, Sr. succeeded him
in all his rights and actions and became owners
with the right of possession of hacienda
Balintagac.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 204
 Juan Antonio Jr., then executor of his deceased
father Juan Antonio Sr., declaring himself to be
the absolute owner of all the hacienda of
Balintagac, borrowed money in the sum of P11,000
from Antonio Vicente Barretto for the expenses of
the hacienda with the obligation to pay P1,000
for delinquency, and interests at 8% per annum,
payable quarterly in advance
 As guaranty for said loan, he mortgaged the
cultivated half of the hacienda and other
properties.
 For the failure of the debtor to pay his debt, the
creditor Antonio Vicente brought an action to
foreclose the mortgage in order to recover the
money loaned, against Juan Antonio Jr. in his
own behalf and as executor of his father.
 Half of the mortgaged hacienda was levied upon
and a judgment to sell the property was
rendered, but it could not be sold in spite of the
fact that it was placed at auction three times.
 Antonio Vicente prayed for the adjudication of all
the property attached to the payment of his credit
of P7,648, to which Leonardo voluntarily agreed
and consented as attorney in fact of Juan Antonio
Jr.
 Juan Antonio Jr. and his brothers, not being able
to pay the debt, interests, and costs, delivered
and conveyed all the hacienda of Balintagac to
the creditor.
 From then, the brothers of Juan Antonio Jr.
administered, by the appointment and exclusive
account of Antonio Vicente, the entire hacienda,
acknowledging him as the owner of all of it and
delivering to him all its products till April 1896.
ISSUES:
1. WON there was a contract of antichresis. YES
2. WON the creditor acquires through possession the
ownership of the real property in antichresis when
debtor fails
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 205

to pay debt within the stipulated time.

Since it is not shown that the debtors have delivered
NO.
the whole hacienda to the creditor by assignment of
the property, it is to be presumed that the debtors
HELD: Antonio Vicente Barretto as creditor
delivered not only one half, but the whole hacienda
— not being able to collect his credit of P11,000
with a view that the creditor might collect by
and interest at 8%, nor obtain the adjudication in his
usufruct his credit with the accrued interests.
favor of half of hacienda of Balintagac which was
mortgaged for the security of the debt, and there
In spite of the fact that the agreement between the
having been no bidders on the three occasions in which
creditor and the debtors was not set down in any
it was offered for public auction — took possession
document, due to the relationship which exists
of all the hacienda, and from that time on received
between them, it may safely be asserted that the
through his administrators the products of the same for
debtors have limited themselves to give to the
the purpose of collecting his credit interests.
creditor the right to collect his credit from the fruits
of the hacienda of Balintagac, conferring upon him the
It may be established that he took possession of said
possession of the property, but not transferring to
hacienda by virtue of voluntary assignment with the
him the dominion of the same, since such transfer
express consent of heirs of Juan Antonio Sr., owner of
was not proved in the present action.
one-half of the hacienda and of Juan Antonio Jr.,
owner of the other half.
The agreement or verbal stipulation is an antichresis
as defined by Article 1881 of the Civil Code, which
It does not fully appear which contract has been
says:
entered into between the creditor and the heirs of Juan
By the antichresis a creditor acquires a right
Antonio, Sr., and his son Juan Antonio Jr; but from
to receive the fruits of real property of his
the facts that have been fully established it is inferred
debtor, with the obligation to apply them to
that once the foreclosure proceedings were suspended,
the payment of the interest, if due, and
because the creditor had not been able to obtain the
afterwards to the principal of his credit.
adjudication of the hacienda in his favor, the creditor
took possession of the hacienda of Balintagac, and
The perusal of articles 1882-1886 shows that the
held it in usufruct with the knowledge and express
possession of the hacienda enjoyed by the creditor
consent of its legitimate owners; there has not been
Antonio Vicente and his successors up to the present
any opposition or protest against the possession, which
time was conferred to them by virtue of the stated
by usufruct the creditor and his successors enjoyed.
contract or agreement in antichresis.
Considering that from the facts proved, which refer to
One of the administrators of the hacienda presented
the possession and usufruct enjoyed by Antonio
the sworn declaration of ownership for the purposes
Vicente and then his successors, one of whom is
of tax assessment and paid the land tax in the name
Alberto Barretto, it is logically deduced that such
of the creditor who possessed and held the hacienda in
facts were accomplished by virtue of a verbal
usufruct.
contract, and not by written one, entered into
between the owners of the hacienda and the creditor
Although article 1884 states that the
Antonio Vicente.

creditor does not acquire through possession the
ownership of the real property delivered by virtue of
an antichresis for failure to pay the debt within the
stipulated time, nevertheless, the debtor cannot
recover the use of the real property given in
antichresis to the creditor, without previously fully
paying the creditor. In case of insolvency, the creditor
may ask for the sale of the real property which he
possesses in antichresis, unless the pending debt is
paid.
It appears that defendant Leonardo, without the
consent of Alberto, took over and usurped a portion
of land of the hacienda, withholding and refusing to
deliver them to the creditor in antichresis on the
pretext that he is the owner of the whole hacienda.
Although it appears that the debt has been paid,
Leonardo still acted without just reason and in
contravention of article 1883 when he effected the
usurpation.
It is known that the action to recover a thing, where a
legitimate possessor has been deprived of his
possession, takes place in accordance with the law
even against the owner himself, who can never be
protected by the law even on his right of ownership,
without first restoring what he acquired through an
illegal act of dispossession.
Though Alberto Barretto has no title of ownership over
the hacienda of Balintagac, and therefore, he cannot be
declared owner of the same, nevertheless, his claim
that a judgment be rendered ordering the return to
him of the portion usurped by Leonardo is in conformity
with the law.
Alberto being in the legitimate possession and use of
all the hacienda of Balintagac which was voluntarily
delivered to him by Juan Antonio, Jr. and his co-heirs,
with the object that the creditor Antonio Vicente
might collect the capital and interests which they
owed and still owe him — a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 206
lawful contractual act called by law a covenant in
antichresis — the debtors cannot, while the debt
exists and is not fully paid, recover or reacquire the
possession and use of the real property delivered to
the creditor, without the latter giving his consent;
Consequently, Leonardo, without the knowledge or
consent Alberto Barretto, who succeeded in the
possession and use of the hacienda, could not have
recovered, by usurpation, the possession and use of
a portion of the hacienda.
MACAPINLAC VS. REPIDE
G.R. No. 18574; September 20, 1922
FACTS: On and prior to August 22, 1916, Jose
Macapinlac was the owner of the Hacienda Dolores, a
property located in Pampanga. This property had been
registered and a Torrens certificate of title had been
issued.
On the date above stated, Macapinlac was indebted to
Bachrach Motor Company for the price of an
automobile and its accessories, purchased upon credit;
and as evidence of this indebtedness he executed 14
promissory notes (PNs) payable to Bachrach
amounting to the sum of P12,960.
Contemporaneously with the delivery of the PNs,
Macapinlac executed what purports to be a deed of
sale, with privilege of repurchase, to be exercised on
or before October 2, 1917 (due date of the debt).
This transfer covered the Hacienda Dolores. In this
conveyance E. M. Bachrach is named as transferee.
On November 8, 1917, Francisco Repide acquired, for
the sum of P5,000, all the rights of E. M. Bachrach
in the property which had been conveyed to the
latter. Repide was well aware that the transfer of the
property to Bachrach had been made

by the Macapinlac for the purpose of securing a
debt owing to Bachrach Company, and he was
furthermore aware that part of the debt has been
paid and there was only balance of less than one-
half of the sum of P12,960. After Repide had
acquired the interest in the hacienda in question, he
processed the certificate of title to be transferred to his
own name.
To accomplish this, it was necessary to make it appear
that the contract of sale with pacto de retro noted in
the original Torrens certificate was really and truly
what it appeared to be, that is, a contract of sale, not a
mere mortgage, and that the ownership had
consolidated in the purchaser by reason of the
failure of the seller to repurchase the property before
the expiration of the time allowed for redemption.
Inasmuch as it appeared that the ownership had then
consolidated in the purchaser, he directed the ROD
of Pampanga to register the property in the name of
Francisco Gutierrez Repide and to issue to him a new
certificate of transfer, which was accordingly done.
At the time of the filing of this complaint, Repide
was in actual possession of the property in question,
and that he had in effect been enjoying possession
since August 1917.
ISSUES:
1. WON the contract executed between Macapinlac
and Bachrach Motor, the sale with pacto de retro,
was a deed of sale or an equitable mortgage.
Equitable Mortgage(EM)
2. What contract govern between Macapinlac and
Repide (as successor in interest of Bachrach) if
the original contract executed by plaintiff with
Bachrach was an EM. Contract of Antichresis.
HELD:
1. In taking up these problems we begin with
the situation created by the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 207
execution of the contract of sale with pacto de retro
between Macapinlac and Bachrach Company. In this
connection the first and most obvious proposition to
be laid down is that since the conveyance is alleged
to have been executed as security for a debt owing
by Macapinlac to Bachrach, it follows that in equity,
said conveyance must be treated as a mere security or
substantially as a mortgage, as creating a mere
equitable charge in favor of the creditor or person
named as the purchaser therein.
In this connection the cardinal rule is that a party who
acquires any interest in property with notice of an
existing equity takes subject to that equity. In other
words, having acquired the interest of Bachrach in the
Hacienda Dolores, with knowledge that the contract has
been executed as security for a debt, Francisco Repide
must be understood to stand in exactly the same
position occupied by Bachrach, if the transfer to
Repide had never been effected.
Repide’s contention:
Repide insisted that his title has become indefeasible
and the action of Macapinlac already prescribed,
owing to the fact that the conveyance of the land to
him has been followed by the issuance of a TCT in his
name, and the original certificate in the name of
Macapinlac has been cancelled — all of which had
been accomplished more than one year before the
present action was begun.
In the first place, it must be borne in mind that the
equitable doctrine, to the effect that any conveyance
intended as security for a debt will be held in effect
to be amortgage, whether so actually expressed in the
instrument or not, operates regardless of the form of
the agreement chosen by the contracting parties as the
repository of their will.
Equity looks through the form and considers the
substance; and no kind of

engagement can be adopted which will enable the
parties to escape from the equitable doctrine to
which reference is made. In other words, a conveyance
of land, accompanied by registration in the name of the
transferee and the issuance of a new certificate, is no
more secured from the operation of this equitable
doctrine than the most informal conveyance that
could be devised.
In the second place, the circumstance that the land has
been registered under the Torrens system does not
change or affect civil rights and liabilities with respect
thereto. An ordinary transfer of land, effected in any of
the ways allowed by law, even when followed by
registration and that issuance of a new certificate of
the Land Registration Act, has a different character.
Applying said provision to the facts of the present
case, it must follow that the cause of action of the
plaintiff to annul the registration of this property in
the name of Francisco Repide did not prescribe at one
year, and the plaintiff's cause of action upon this
branch of the case had not in fact been barred at all
when the present action was begun.
2. Discussion on antichresis:
The preceding discussion conducts us to the
conclusion that the estate of Francisco Repide
occupies substantially the position of a mortgagee in
possession. The question then arises as to what are
the legal rights of the plaintiff as against the Repide
estate.
The solution of this problem is to be found in the
application of the doctrine formulated in Barretto vs.
Barretto. In that case the heirs of a mortgagee of an
estate were found in possession of mortgaged property
more than thirty years after the mortgage had been
executed; and it was shown that the mortgage had
never been foreclosed. Upon this state of facts it was
in effect held that the rights of the parties, heirs of
the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 208
mortgagor and mortgagee, were essentially the same
as under the contract of antichresis.
By reference to the appropriate provisions of theCivil
Code (arts. 1881-1884), in the chapter dealing with
antichresis, it will be at once seen that while non-
payment of the debt does not vest the ownership of
the property in the creditor, nevertheless the debtor
cannot recover the enjoyment of the property
without first paying in full what he owes to his
creditor. At the same time, however, the creditor is
under obligation to apply the fruits derived from the
estate in satisfaction, first, of the interest on the
debt, and secondly, to the payment of the principal.
From this is necessarily deduced the obligation of the
creditor to account to the debtor for said fruits and the
corresponding right of the debtor to have the same
applied in satisfaction of the mortgage debt.
The respective rights and obligations of the parties to a
contract of antichresis may be taken to be established,
namely:
 that if the mortgagee acquires possession in any
lawful manner, he is entitled to retain such
possession until the indebtedness is satisfied and
the property redeemed;
 that the non-payment of the debt within the term
agreed does not vest the ownership of the
property in the creditor;
 that the general duty of the mortgagee in
possession towards the premises is that of the
ordinary prudent owner;
 that the mortgagee must account for the rents
and profits of the land, or its value for purposes
of use and occupation, any amount thus realized
going towards the discharge of the mortgage
debt;
 that if the mortgagee remains in possession after
the mortgage debt has been satisfied, he
becomes a trustee for the mortgagor as to
the
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 209

excess of the rents and profits over such debt;

and HELD: The terms of the contract it is clearly a sale
with the right to repurchase. It speaks in unequivocal
 that the mortgagor can only enforce his rights to
terms of a sale and the conveyance of land with the
the land by an equitable action for an account and
right to repurchase, and the character of the contract
to redeem.
is that of a sale with the right to repurchase. The
contract is very defective in its wording, especially so
where it refers to the period within which to exercise
ALOJADO VS SIONCO
the right to repurchase. But examining it as a whole,
it clearly appears that it was the parties' intention that
FACTS: Juana Mabaquiao sold the land- in-dispute
the vendor could repurchase the land without delay
described in the complaint to Nicolas Alegata . Alegata
when he had the means to pay the purchase price.
died. Settlement proceedings of his estate was
instituted, his property, which included the land-in-
What characterizes a contract or antichresis is that
dispute was adjudicated to Lim Kang Sang and Lim
the creditor acquires the right to receive the fruits of
Eng Teeng, his only heirs. Lim Kang and Lim Eng
the property of his debtor with the obligation to
sold the land to Lim Ponso & Co., with the right to
apply them to the payment of interests, if any is
repurchase for the period of one year Period expired
due, and then to the principal of his credit. Nowhere
without this right having exercised.
in the contract in question does this character of a
contract of antichresis appear. The only substantial
Lim Ponso & Co. transferred this land unconditionally
thing agreed upon between the parties was that
to Lim Siongco and Lim Kingko.
Juana Mabaquiao could repurchase the land when she
had the means.
Juana Mabaquiao dies. Intestate proceedings took
place and Ambrosio T. Alojado was appointed
ISSUE: Whether or not the title to the land conveyed
administrator. Ambrosio, as administration, brought
by Juana Mabaquiao has been consolidated.? YES
this action against Lim Sionco, Lim Kingko and Lim
Ponso & Co. prays that he be declared the absolute
HELD: This action was brought in January, 1922, fifteen
owner of this land with the improvements thereon,
years after the contract was entered into. The
and that the defendants be ordered to restore and
contract, as been noted, fixes the period for the
respect his right of ownership, possession and usufruct
exercise of the right of redemption until Juana
of the property;
Mabaquiao, or her heirs has the means.
RTC: in favor of Lim Sionco, Lim Kingko, Lim Ponso
Whether or not this is considered a period, it is clear
&Co.
that the title transmitted to Nicolas Alegata has been
consolidated.
Ambrosio contends that the contract executed by
Juana Mabaquiao with Nicolas Alegata was not a
According to article 1508 of the Civil Code, when no
contract of sale with the right to repurchase, but a
period of redemption is fixed it shall last four years,
contract or antichrises
and it is fixed, it shall not exceed ten years. The right
of redemption not having been exercised the
ISSUE: WON the contract was a contract of
antichresis or contract of sale with right to
redemption? Contract of sale with right to
remdemption

period of ten years, the title of Nicolas Alegata, or his
heirs, has by this fact alone been consolidated any
events.
RAMIREZ v. CA
G.R. No. L-38185. September 24, 1986
FACTS: On September 15, 1959, petitioners-spouses
Hilario Ramirez and Valentina Bonifacio filed an
application for registration of a parcel of riceland in
Pamplona, Las Pinas, Rizal. After notice and
publication, nobody appeared to oppose the
application. An order of general default was issued
and the court allowed the petitioners to present
evidence in support of their claim. Thereafter, the
petitioners presented parole evidence that they
acquired the land in question by purchase from
Gregoria Pascual during the early part of the American
regime but the corresponding contract of sale was
lost and no copy or record of the same was
available. On January 30, 1960, the court ordered the
issuance of the decree of registration and
consequently, Original Certificate of Title No. 2273 of
the Registry of Deeds of Rizal was issued in the
petitioners’ names. On March 30, 1960, private
respondents filed a petition to review the decree of
registration on the ground of fraud. The respondents
alleged among others that they obtained a loan of
P400.00 from the petitioners in which they secured
with a mortgage on the land in question by way of
antichresis and that there were several attempts to
redeem the land but were refused by the petitioners.
The trial court ordered the cancellation of the
original certificate of title. The Court of Appeals
affirmed the decision.
ISSUE: Can an antichretic creditor acquire land of
debtor by prescription? NO.
HELD: An antichretic creditor cannot acquire the land
of a debtor by prescription. An antichretic creditor is
not a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 210
possessor in the concept of owner but a mere
holder placed in possession of the land by its
owners. Thus, possession of an antichretic creditor
cannot serve as a title for acquiring dominion. The
court, from other cases like Trillana v. Manansala,
Valencia v. Acala and Barretto v. Barretto, held that
the antichretic creditor cannot ordinarily acquire by
prescription the land surrendered to him by the
debtor. Holding: The decision appealed from is
affirmed with a modification that the respondents are
ordered to pay the petitioners the amount of
P400.00 as principal for the contract of antichresis,
the fruits obtained from the possession of the land
having been applied to the interests on the loan.
ANCIETO BANGIS V HEIRS OF SERAFIN AND
SALUD ADOLFO GR 190875 June 13 2012
FACTS: Spouses Serafin, Sr. and Saludada Adolfo
were the original registered owners of a lot which
was mortgaged to the DBP. Upon default in the
payment of the loan obligation, it was foreclosed
and ownership was consolidated in DBP’s name under
a TCT. Serafin Adolfo, Sr. repurchased the same and
was issued a TCT a year after his wife died. He
allegedly mortgaged the subject property to Ancieto
Bangis who took possession of the land but their
transaction was not reduced into writing. When Adolfo
died, his heirs executed a deed of extrajudicial
partition covering the subject property and TCT issued
to them. The said property was subdivided and
separate titles were issued in names of the heirs of
Adolfo. The heirs of Adolfo filed a complaint for
annulment of the deed of sale and declaration of the
purported contract of sale as antichresis, accounting
and redemption of property and damages against
Bangis. The RTC rendered a decision in favor of the
heirs of Adolfo declaring that the contract as an
antichresis, ordering the defendant to

deliver the possession of the property in question to
the plaintiffs and the TCT under Bangis as null and void.
Thus, the heirs of Bangis appealed before the CA.
CA affirmed the RTC finding that the contract
between the parties was a mortgage, not a sale. It
noted that while Bangis was given possession of the
subject property, the certificate of title remained in
the custody of Adolfo and was never cancelled.
ISSUE: WON the transaction between the parties was
one of sale and not a mortgage or antichresis. NEITHER
HELD: There was neither an antichresis nor sale. For
the contract of antichresis to be valid, Article 2134 of
the Civil Code requires that “the amount of the
principal and of the interest shall be specified in writing;
otherwise the contract of antichresis shall be void.” In
this case, the Heirs of Adolfo were indisputably unable
to produce any document in support of their claim
that the contract between Adolfo and Bangis was an
antichresis, hence, the CA properly held that no such
relationship existed between the parties.
The bare testimony of one of the Heirs of Bangis,
Rodolfo Bangis, that the subject document was only
handed to him by his father, Aniceto, with the
information that the original thereof “could not be
found” was insufficient to justify its admissibility.
The identification made by Notary Public Atty. Valentin
Murillo that he notarized such document cannot be
given credence as his conclusion was not verified
against his own notarial records.
In sum, the Heirs of Bangis failed to establish the
existence and due execution of the subject deed on
which their claim of ownership was founded.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 211
OLAF N. BORLOUGH vs. FORTUNE ENTERPRISES, INC.
FACTS: Fortune Enterprises, Inc. sold to Salvador
Aguinaldo a Chevrolet sedan, which it from United Car
Exchange, and for not having paid it in full, the latter
executed on the same date a promissory note in the
amount of P2,400 payable in 20 installments.
To secure the payment of this note, Aguinaldo
executed a deed of chattel mortgage over said car.
The deed was duly registered in the office of the
Register of Deeds of Manila.
As the buyer-mortgagor defaulted in the payment of
the installments due, counsel for Fortune Enterprises
Inc. addressed a letter on May 16, 1952, requesting
him to make the necessary payment and to keep his
account up to date, so that no court action would
be resorted to.
The above-described car found its way again into the
United Car Exchange which sold the same in cash for
P4,000 to one O.
N. Borlough. Accordingly, he registered it on the
following day with the Motor Vehicles Office.
1. N. Borlough took possession of the vehicle from
the time he purchased it, On July 10, 1952, Fortune
Enterprises, Inc. brought action against Salvador
Aguinaldo to recover the balance of the purchase
price.
Borlough filed a third-party complaint, claiming the
vehicle. Thereupon, Fortune Enterprises, Inc.
amended its complaint, including Borlough as a
defendant and alleging that he was in connivance with
Salvador Aguinaldo and was unlawfully hiding and
concealing the vehicle in order to evade seizure by
judicial process. Borlough answered alleging that he
was in legal possession thereof, having purchased it
in good faith and for the full

price of P4,000, and that he had a certificate of
registration of the vehicle issued by the Motor
Vehicles Office, and he prayed for the dismissal of
the complaint, the return of the vehicle and for
damages against the plaintiff.
ISSUE: Whether or not the mortgage binds Borlough
who is a purchaser in good faith. NO.
HELD: Two recording laws are here being invoked, one
by each contending party — the Chattel Mortgage
Law (Act No. 1508), by the mortgagor and the
Revised Motor Vehicles Law (Act No. 3992), by a
purchaser in possession.
The Revised Motor Vehicles Law is a special
legislation enacted to "amend and compile the laws
relative to motor vehicles," whereas the Chattel
Mortgage Law is a general law covering mortgages of
all kinds of personal property. The former is the
latest attempt to assemble and compile the motor
vehicle laws of the Philippines, all the earlier laws on
the subject having been found to be very deficient in
form as well as in substance; it had been designed
primarily to control the registration and operation of
motor vehicles.
Counsel for petitioner contends that the passage of
the Revised Motor Vehicles Law had the effect of
repealing the Chattel Mortgage Law, as regards
registration of motor vehicles and of the recording of
transaction affecting the same. We do not believe
that it could have been the intention of the
legislature to bring about such a repeal. In the first
place, the provisions of the Revised Motor Vehicles
Law on registration are not inconsistent with does of
the Chattel Mortgage Law. In the second place,
implied repeals are not favored; implied repeals are
permitted only in cases of clear and positive
inconsistency. The first paragraph of section 5
indicates that the provisions of the Revised Motor
Vehicles Law regarding
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 212
registration and recording of mortgage are not
incompatible with a mortgage under the Chattel
Mortgage Law. The section merely requires report to
the Motor Vehicles Office of a mortgage; it does not
state that the registration of the mortgage under
the Chattel Mortgage Law is to be dispensed with.
We have, therefore, an additional requirements in the
Revised Motor Vehicles Law, aside from the registration
of a chattel mortgage, which is to report a mortgage to
the Motor Vehicles Office, if the subject of the
mortgage is a motor vehicle; the report merely
supplements or complements the registration.
The recording provisions of the Revised Motor Vehicles
Law, therefore, are merely complementary to those
of the Chattel Mortgage Law. A mortgage in order to
affect third persons should not only be registered in
the Chattel Mortgage Registry, but the same should
also be recorded in the motor Vehicles Office as
required by section 5 (e) of the Revised Motor
Vehicles Law [Whenever any owner hypothecates or
mortgage any motor vehicle as surety for a debt or
other obligation, the creditor or person in whose favor
the mortgage is made shall, within seven days,
notify the Chief of the Motor Vehicles Office in
writing]. And the failure of the respondent mortgage
to report the mortgage executed in its favor had the
effect of making said mortgage ineffective against
Borlough, who had his purchase registered in the said
Motor Vehicles Office.
One holding a lien on a motor vehicle, in so far as he
can reasonably do so, must protect himself and
others thereafter dealing in good faith by complying
and requiring compliance with the provisions of the
laws concerning certificates of title to motor vehicles,
such as statutes providing for the notation of liens or
claims against the motor vehicle certificate of title or
manufacturer's certificate, or for the issuance to the
mortgagee of a new

certificate of ownership.
The holder of a lien who is derelict in his duty to
comply and require compliance with the statutory
provisions acts at his own peril, and must suffer the
consequence of his own negligence; and accordingly,
he is not entitled to the lien as against a subsequent
innocent purchaser filed as provided by other chattel
mortgage statutes.
The above authorities leave no room for doubt that
purchaser O. N. Borlough's right to the vehicle should
be upheld as against the previous and prior
mortgage Fortune Enterprises, Inc., which failed to
record its lien in accordance with the Revised Motor
Vehicles Law.
STANDARD OIL COMPANY vs.
JARAMILLO
FACTS: Gervasia de la Rosa, Vda. de Vera, was the
lessee of a parcel of land situated in the City of
Manila and owner of the house of strong materials
built thereon, upon which date she executed a
document in the form of a chattel mortgage,
purporting to convey to the petitioner by way of
mortgage both the leasehold interest in said lot and
the building which stands thereon.
The clauses in said document describing the property
intended to be thus mortgage are expressed in the
following words:
Now, therefore, the mortgagor hereby
conveys and transfer to the mortgage, by
way of mortgage, the following described
personal property, situated in the City of
Manila, and now in possession of the
mortgagor, to wit:
(1) All of the right, title, and interest of the
mortgagor in and to the contract of lease
hereinabove referred to, and in and to
the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 213
premises the subject of the said lease;
(2) The building, property of the
mortgagor, situated on the aforesaid leased
premises.
After said document had been duly acknowledge and
delivered, the petitioner caused the same to be
presented to the respondent, Joaquin Jaramillo, as
register of deeds of the City of Manila, for the purpose
of having the same recorded in the book of record
of chattel mortgages. Upon examination of the
instrument, the respondent was of the opinion that it
was not a chattel mortgage, for the reason that the
interest therein mortgaged did not appear to be
personal property, within the meaning of the Chattel
Mortgage Law, and registration was refused on this
ground only.
ISSUE: Whether or not the RoD may refuse registration
of the mortgage. NO
HELD: The duties of a register of deeds in
respect to the registration of chattel mortgage are of
a purely ministerial character; and no provision of law
can be cited which confers upon him any judicial or
quasi-judicial power to determine the nature of any
document of which registration is sought as a chattel
mortgage.
His duties in respect to such instruments are
ministerial only. The efficacy of the act of recording a
chattel mortgage consists in the fact that it operates as
constructive notice of the existence of the contract,
and the legal effects of the contract must be
discovered in the instrument itself in relation with the
fact of notice. Registration adds nothing to the
instrument, considered as a source of title, and
affects nobody's rights except as a specifies of notice.
Articles 334 and 335 of the Civil Code supply no
absolute criterion for discriminating between real
property and

personal property for purpose of the application of
the Chattel Mortgage Law. Those articles state rules
which, considered as a general doctrine, are law in
this jurisdiction; but it must not be forgotten that
under given conditions property may have character
different from that imputed to it in said articles. It is
undeniable that the parties to a contract may by
agreement treat as personal property that which by
nature would be real property; and it is a familiar
phenomenon to see things classed as real property
for purposes of taxation which on general principle
might be considered personal property. Other
situations are constantly arising, and from time to
time are presented to this court, in which the proper
classification of one thing or another as real or personal
property may be said to be doubtful.
SALDANA vs. PHILIPPINE GUARANTY
FACTS: in order to secure an indebtedness of
P15,000.00, Josefina Vda. de Aleazar executed in favor
of the plaintiff-appellant Buenaventura Saldana a
chattel mortgage covering properties described as
follows:
A building of strong materials, used for restaurant
business, located in front of the San Juan de Dios
Hospital at Dewey Boulevard, Pasay City, and the
following personal properties therein contained:
1 Radio, Zenith, cabinet type. 1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside. 1 Sala set
upholstered, 6 pieces.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment
found in the said premises.
Subsequent to the execution of the mortgage, a writ
of execution was duly
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 214
issued as a result of a civil case instituted by Hospital
de San Juan de Dios against Josefina Eleazar;
whereupon the following properties of Josefina
Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8 tubes). 2
Showcases (big, with mirrors).
1 Rattan sala set with 4 chairs, 1 table and 3
sidetables .
1 Wooden drawer.
1 Tocador (brown with mirror). 1
Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with 4
burners).
1 Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldana
filed a third-party claim asserting that the above-
described properties levied are subject to his chattel
mortgage of May 8, 1953. In virtue thereof, the sheriff
released only some of the property originally
included in the levy of January 28, 1957, to wit:
1 Radio, Zenith, cabinet type. 8 Tables,
stateside.
32 Chromiun chairs, stateside. 1 G.E.
Deep freezer.
Appellants claims that the phrase in the chattel
mortgage contract — "and all other furnitures, fixtures
and equipment found in the said premises", validly
and sufficiently covered within its terms the personal
properties disposed of in the auction sale,
ISSUE: Whether or not the properties levied are
covered by the mortgage. YES.
HELD: Section 7 of Act No. 1508, commonly and
better known as the Chattel Mortgage Law, does not
demand a minute and specific description of every
chattel mortgaged in the deal of mortgage but only

requires that the description of the properties be
such "as to enable the parties in the mortgage, or
any other person, after reasonable inquiry and
investigation to identify the same". Gauged by this
standard, general description have been held by this
Court.
the description in the mortgage must point out its
subject matter so that such person may identify the
chattels observed, but it is not essential that the
description be so specific that the property may be
identified by it alone, if such description or means of
identification which, if pursued will disclose the
property conveyed.
The specifications in the chattel mortgage contract in
the instant case, we believe, in substantial compliance
with the "reasonable description rule" fixed by the
chattel Mortgage Act. We may notice in the agreement,
moreover, that the phrase in question is found after
an enumeration of other specific articles. It can thus
be reasonably inferred therefrom that the "furnitures,
fixture and equipment" referred to are properties of
like nature, similarly situated or similarly used in the
restaurant of the mortgagor located in front of the San
Juan de Dos Hospital at Dewey Boulevard, Pasay City,
which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises.
A contrary view would unduly impose a more rigid
condition than what the law prescribes, which is that
the description be only such as to enable
identification after a reasonable inquiry and
investigation.
ALEKO E. LILIUS vs. MANILA RAILROAD COMPANY
(G.R. No. 42551, September 4, 1935)
FACTS: In G.R. No. L-39587, Aleko E.
Lilius, and his wife Sonja Maria Lilius, and Brita
Marianne Lilius, met an accident, wherein their
Studebaker car, collided with locomotive No. 713,
Manila Railroad
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 215
Company’s train. They sustained lifethreatening
wounds, fractures and other injuries, which left them
permanently disfigured. The Supreme Court ruled in
favor of Aleko Lilius, et al, awarding them in the
amount of P33,525.03 as damages, including interest
and costs.
In G.R. No. 42551, herein case, Laura Lindley Shuman,
the Manila Wine Merchants, Ltd., the Bank of the
Philippine Islands and the Manila Motor Co.,
Inc(creditors of the spouses Lilius)., have appealed
from an order of the Court of First Instance of Manila
fixing the degree of preference of the claimants and
distributing the proceeds of the judgment of this
court in the case of Lilius vs. Manila Railroad Co.
APPEAL OF LAURA LINDLEY SHUMAN
:The lower court erred in holding that Dr.
W.H. Waterous and Dr. M. Marfori had a claim
against the plaintiff, Aleko E. Lilius superior to the
claim of the appellant, Laura Lindley Shuman, against
him."
One of the contentions of this appellant under this
assignment of error is that her claim, having been
made the basis of the plaintiffs' action and of the
award for damages, as shown in the original decision
herein, should constitute, and does constitute a
superior lien against the funds awarded said plaintiffs,
to those of any other claimants, except the two
doctors, the hospital and the other nurse, and that as
to the claims of the two doctors, the hospital and
the other nurse the claim of this appellant has equal
preference with their claims.
APPEAL OF THE MANILA WINE MERCHANTS, LTD.,
AND THE BANK OF THE PHILIPPINE ISLANDS.
:The
appellants, the Manila Wine Merchants. Ltd., and the
Bank of the Philippine islands also contend that the sum
separately awarded Sonja Maria Lilius is conjugal
property and therefore liable for the payment of
the private debts of her

husband, Aleko E. Lilius, contracted during her
marriage.
APPEAL OF THE THE MANILA MOTOR
CO., INC.: For its part, Manila Motor Co., Inc. claims
that the lower court erred in not holding their claims,
evidenced by public instruments and final judgment,
as preferred over all other claims against Aleko E.
Lilius. In support of its claim of preference against
the fund of Aleko E. Lilius was a certified copy of its
judgment against him in civil case No. 41159 of the
Court of First Instance of Manila, together with a
certified copy of the writ of execution and the
garnishment issued by virtue of said judgment. The
alleged public document evidencing its claim was not
offered in evidence but, in their brief in this court,
counsel for the Motor Co., Inc., merely assume that
its credit is evidenced by a public document dated may
10, 1931, because the court, in its judgment in said
civil case No. 41159, refers to a mortgage appearing in
the evidence as Exhibit A, as the basis of its judgment,
without mentioning the date of the execution of the
exhibit.
ISSUE: WON the reference to a mortgage appearing in
a public document in a judgment, entitled to preference
under article 1924 of the Civil Code. NO
HELD: This reference in said judgment to a mortgage
is not competent or satisfactory evidence as against
third persons upon which to base a finding that the
Manila Motor Company's credit evidenced by a public
document within the meaning of article 1924 of the
Civil Code. If the Manila motor Co., Inc., desired to rely
upon a public document in the form of a mortgage as
establishing its preference in this case, it should have
offered that document in evidence, so that the court
might satisfy itself as to its nature and unquestionably
fix the date of its execution.
Under section 5 of Act No. 1507 as amended by Act
No. 2496, a chattel does
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 216
not have to be acknowledged before a notary
public. As against creditors and subsequent
encumbrances, the law does require an affidavit of
good faith appended to the mortgage and recorded
with it. A chattel mortgage may, however, be valid as
between the parties without such an affidavit of good
faith. In 11 Corpus Juris, 482, the rule is expressly
stated that as between the parties and as to third
persons who have no rights against the mortgagor, no
affidavit of good faith is necessary. It will thus be
seen that under the law, a valid mortgage may exist
between the parties without its being evidenced by a
public document.
This court would not be justified, merely from the
reference by the lower court in that case to a
mortgage, in assuming that its date appears in a
public document. if the Manila motor Co., Inc.,
desired to rely upon a public document in the form
of a mortgagor as establishing its preference in this
case, it should have offered that document in
evidence, so that the court might satisfy itself as to its
nature and unquestionably fix the date of its execution.
There is nothing either in the judgment relied upon or
in the evidence to show the date of said mortgage. The
burden was upon the claimant to prove that it
actually had a public Code.
It is essential that the nature and the date of the
document be established by competent evidence
before the court can allow a preference as against the
other parties to this proceeding. Inasmuch as the
claimant failed to establish its preference, based on a
public document, the lower court properly held that
its claim against the said Aleko E. Lilius was based on
the final judgment in civil case No. 41159 of the
Court of First Instance of Manila of May 3, 1932. The
court, therefore, committed no error in holding that
the claim of the Manila Motor Co., Inc., was inferior
in preference to those of the appellees in this case.

CEBU INTERNATIONAL FINANCE
CORPORATION, petitioner,vs. COURT OF APPEALS,
ROBERTO ONG AND
ANGTAY, respondents
(268 SCRA 178, G.R. No. 107554,
February 13, 1997)
FACTS: On 4 March 1987, Jacinto Dy executed a
Special Power of Attorney in favor of private
respondent Ang Tay, authorizing the latter to sell the
cargo vessel Owned by Dy and christened LCT
“Asiatic.”
On 28 April 1987, through a Deed of Absolute Sale,
Ang Tay sold the subject vessel to private
respondent Robert Ong (Ong) for P900,000.00. Ong
paid the purchase price by issuing three (3) checks in
the following amounts: P150,000.000, P600,000.00
and P150,000.00. However,
since the payment was not made in cash, it was
specifically stipulated in the deed of sale that the
“LCT Asiatic shall not be registered or transferred to
Robert Ong until complete payment.”
Thereafter, Ong obtained possession of the subject
vessel so he could begin deriving economic benefits
therefrom. He, likewise, obtained copies of the
unnotarized deed of sale allegedly to be shown to
the banks to enable him to acquire a loan to
replenish his (Ong’s) capital. The aforequoted
condition, however, which was handwritten on the
original deed of sale, does not appear on Ong’s
copies.
Contrary to the aforementioned agreements and
without the knowledge of Ang Tay, Ong had his
copies of the deed of sale (on which the
aforementioned prohibition does not appear)
notarized on 18 May 1987. Ong presented the
notarized deed to the Philippine Coast Guard which
subsequently issued him a Certificate of Ownership and
a Certificate of Philippine
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 217
Register over the subject vessel on 27 May 1987. Ong
also succeeded in having the name of the vessel
changed to LCT “Orient Hope.”
On 29 October 1987, Ong acquired a loan from
petitioner in the amount of P496,008.00 to be paid
in instalments as evidenced by a promissory note of
even date.
As security for the loan, Ong executed a chattel
mortgage over the subject vessel, which mortgage
was registered with the Philippine Coast Guard and
annotated on the Certificate of Ownership.
In paragraph 3 of the Deed of Chattel Mortgage, it was
stated that:
3. The said sum of 496,008.00 represents the balance
due on of MORTGAGOR(S) from the MORTGAGEE
and is payable in the office of the MORTGAGEE at
Cebu City or in the office of the latter’s assignee, in
case the rights and interests of the MORTGAGEE in
the foregoing mortgage are assigned to a third
person, under the terms of said promissory note, as
follows: (a)(P20,667.00 on or before…...and (b) the
balance in Twenty Four (24) equal successive
monthly instalments on the . . .
. . . day of each and every succeeding month thereafter
until the amount is fully paid. The interest on the
foregoing instalments shall be paid on the same date
that the instalments become payable and additional
interest at the rate of fourteen (14%) per cent per
annum will be charged on all amounts, principal and
interest, not paid on due date.
Ong defaulted in the payment of the monthly
instalments. Consequently, on 11 May 1988,
petitioner sent him a letter demanding delivery of
the mortgaged vessel for foreclosure or in the
alternative to pay the balance of P437,802.00
pursuant to paragraph 11 of the deed of chattel
mortgage.

Meanwhile, the two checks (worth P600,000.00 and
P150,000.00) paid by
Ong to Ang Tay for the purchase of the subject
vessel bounced. Ang Tay’s search for the elusive Ong
and all attempts to confer with him proved to be futile.
A subsequent investigation and inquiry with the Office
of the Coast Guard revealed that the subject vessel was
already in the name of Ong, in violation of the
express undertaking contained in the original deed of
sale.
As a result thereof, on 13 January 1988, Ang Tay
and Jacinto Dy filed a civil case for rescission and
replevin with damages against Ong and his wife.
ISSUES:
1. WON the chattel mortgage contract between
petitioner and Ong is valid.
2. WON petitioner is a mortgagee in good faith
whose lien over the mortgaged vessel should be
respected.
HELD:
1. As to validity of the mortgage contract between
Cebu International and Ong:
The key lies in the certificate of ownership issued in
Ong's name (which, along with the deed of sale, he
submitted to petitioner as proof that he is the owner of
the ship he gave as security for his loan). It was plainly
stated therein that the ship LCT "Orient Hope" ex
"Asiatic," by means of a Deed of Absolute Sale dated
28 April 1987, was "sold and transferred by Jacinto Dy
to Robert Ong."
There can be no dispute then that it was Dy who
was the seller and Ong the buyer of the subject vessel.
Coupled with the fact that there is no evidence
euphony transaction between Jacinto Dy or Ang Tay
and petitioner, it follows, therefore, that petitioner's
role in the picture is properly and logically that of
a creditor-mortgagee
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 218
and not owner-seller.
It is paragraph 2 of the mortgage contract which
accurately expresses the true nature of the
transaction between petitioner and Ong--that it is a
simple loan with chattel mortgage. The amount
petitioner loaned to Ong does not represent the
balance of any purchase price since the
aforementioned documents state that Ong is already
the absolute owner of the subject vessel.
Obviously, therefore, paragraph 3 of the said contract
was filled up by mistake. Considering that petitioner
used a form contract, it is not improbable that such
an oversight may have been committed-- negligently
but unintentionally and without malice.
Accordingly, the chattel mortgage contract between
petitioner and Ong is valid and subsisting.
2. As to the good faith of Cebu International as
mortgagee whose lien over the mortgaged vessel
should be respected:
The prevailing jurisprudence is that “a mortgagee
has a right to rely in good faith on the certificate of
title of the mortgagor to the property given as
security and in the absence of any sign that might
arouse suspicion, has no obligation to undertake
further investigation. Hence, even if the mortgagor is
not the rightful owner of or does not have a valid
title to the mortgaged property, the mortgagee or
transferee in good faith is nonetheless entitled to
protection.” Although this rule generally pertains to
real property, particularly registered land, it may
also be applied by analogy to personal property, in
this case specifically, since ship owners are, likewise,
required by law to register their vessels with the
Philippine Coast Guard.
ANG TAY’S CONTENTIONS:

That the above rule is not applicable in the case at bar
in the face of the numerous "badges of bad faith"
on the part of petitioner.
Ang Tay's contentions are unmeritorious. As
previously discussed, paragraph 3 of the chattel
mortgage contract was erroneously but
unintentionally filled up. The failure of petitioner to
exercise due care in filling up the necessary provisions
in the chattel mortgage contract does not, however,
amount to bad faith. It was a mere oversight and not
a deliberate and malicious act.
ISSUE ON AFFIDAVIT OF GOOD FAITH
That petitioner's bad faith is further demonstrated
by its failure to comply with the special affidavit of
good faith as required in Sec. 4 of P.D. No. 1521.
The special affidavit of good faith, on the other
hand, is required only for the purpose of
transforming an already valid mortgage into a
"preferred mortgage." Thus, the abovementioned
affidavit is not necessary for the validity of the chattel
mortgage itself but only to give it a preferred status.
***
Petitioner had every right to rely on the Certificate of
Ownership and Certificate of Philippine Register duly
issued by the Philippine Coast Guard in Ong's name.
Petitioner had no reason to doubt Ong's ownership
over the subject vessel. The documents presented by
Ong, upon petitioner's insistence before accepting the
said vessel as loan security, were all in order and
properly issued by the duly constituted authorities.
There was no circumstance that might have aroused
petitioner's suspicion or alerted it to any infirmity
committed by Ong. It had no participation in and
was not privy to the sale transaction between
Jacinto Dy (through Ang Tay) and Ong. Petitioner,
thus, had no obligation to undertake further
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 219
investigation since it had the necessary documents to
prove Ong's ownership. In addition petitioner even
took pains to inspect the subject vessel which was in
Ong's possession.
Although Ang Tay may also be an innocent person, a
similar victim of Ong's fraudulent machinations, it was
his act of confidence which led to the present fiasco.
Ang Tay readily agreed to execute a deed of absolute
sale in Ong's favor even though Ong had yet to make
a complete payment of the purchase price. It is true
that in the copy of the said deed submitted by Ang
Tay there was an undertaking that ownership will
not vest in Ong until full payment.
However, Ong was able to obtain several copies of
the deed with Ang Tay's signature and had these
notarized without the aforementioned undertaking as
evidenced by the copy of the deed of sale presented
by petitioner. The Deed of Absolute Sale consisted of
two (2) pages. The signatures of Ang Tay and Ong
appeared only on the first page of the deed. The
Second page contained the continuation of the
acknowledgment and the undertaking. Ong could have
easily reproduced the second page without the
undertaking since this page was not signed by the
contracting parties. To complete the deception, Ang
Tay unwittingly allowed Ong to have possession of
the ship. Hence, in consonance with our ruling that:
... as between two innocent persons, the mortgagee
and the owner of the mortgaged property, one of
whom must suffer the consequence of a breach of
trust, the one who made it possible by his act of
confidence must bear the loss, it is Ang Tay and his
principal Jacinto Dy who must, unfortunately, suffer
the consequences thereof. They are considered
bound by the chattel mortgage on the subject vessel.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO
G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R.
PULIDO vs HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE PHILIPPINES
(310 SCRA 281, G.R. No. 106435, July
14, 1999)
FACTS: On April 17, 1980, petitioner PAMECA obtained
2Mworth loan from respondent Bank. By virtue of this
loan, petitioner PAMECA, through its President,
petitioner Teves, executed a promissory note for the
said amount, promising to pay the loan by installment.
As security for the said loan, a chattel mortgage was
also executed over PAMECA's properties in
Dumaguete City, consisting of inventories, furniture
and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECA's
failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in
the public auction, purchased the foreclosed properties.
On June 29, 1984, respondent bank filed a complaint
for the collection of the balance against petitioner
PAMECA and private petitioners herein, as solidary
debtors with PAMECA under the promissory note.
RTC ruled in favor of respondent Bank. CA affirmed
RTC’s decision.
Petitioners now claim that respondent appellate court
gravely erred in not holding that the public auction sale
of petitioner PAMECA's chattels were tainted with
fraud, as the chattels of the said petitioner were
bought by private respondent as sole bidder in only 1/6
of the market value of the property, hence
unconscionable and inequitable (P322,350.00 from
2M), and therefore null and void.
Petitioners contend that the amount of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 220
P322,350.00 at which respondent bank bid for and
purchased the mortgaged properties was
unconscionable and inequitable considering that, at
the time of the public sale, the mortgaged properties
had a total value of more than P2,000,000.00.
According to petitioners, this is evident from an
inventory which valued the properties at
P2,518,621.00, in accordance with the terms of the
chattel mortgage contract between the parties that
required that the inventories "be maintained at a level
no less than P2 million".
Petitioners argue that respondent bank's act of bidding
and purchasing the mortgaged properties for
P322,350.00 or only about 1/6 of their actual value
in a public sale in which it was the sole bidder was
fraudulent, unconscionable and inequitable, and
constitutes sufficient ground for the annulment of the
auction sale.
ISSUE: WON the auction sale is null and void on
grounds of fraud and inadequacy of price. – NO
HELD: There is no merit in petitioners' submission that
the public auction sale is void on grounds of fraud
and inadequacy of price.
Petitioners never assailed the validity of the sale in the
RTC, and only in the Court of Appeals did they
attempt to prove inadequacy of price.
Having nonetheless examined the inventory and
chattel mortgage document as part of the records, We
are not convinced that they effectively prove that
the mortgaged properties had a market value of at
least P2,000,000.00 on January 18, 1984, the date of the
foreclosure sale.
At best, the chattel mortgage contract only indicates
the obligation of the mortgagor to

maintain the inventory at a value of at least
P2,000,000.00, but does not evidence compliance
therewith.
Furthermore, the mere fact that respondent bank was
the sole bidder for the mortgaged properties in the
public sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence,
and may not be inferred from the lone circumstance
that it was only respondent bank that bid in the sale
of the foreclosed properties.
NOTE: The mere fact that the mortgagee was the
sole bidder for the mortgaged property in the public
sale does not warrant the conclusion that the
transaction was attended with fraud.
CABRAL vs EVANGELISTA
FACTS: On 12 Dec 1959, George had executed in favor
of Cabral Spouses a chattel mortgage covering a
Morrison English piano and a Frigidaire GM Electric
Stove as security for payment to the latter of a
promissory note in the sum of P1k executed on the
same date in the Chattel Mortgage Register of Rizal
on 14 Dec 1959. Meanwhile, the Evangelista spouses
obtained a final money judgment against Tanuya in
a Civil Case. They caused the levy in execution on
Tanuya’s personal properties, including the piano and
the stove mortgaged to Cabral spouses.
The said mortgage chattels, together with other
personal properties of the judgment debtor, were
sold at public auction to Evangelista spouses as the
highest bidders. The judgment credit of Evangelista
spouses, as creditors in the said Civil Case, was
considered paid up and the Sheriff issued the
corresponding certificate of sale in their favor.
Subsequently, 8 months after the maturity
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 221
of Tanuya’s promissory note and his having defaulted
in the payment thereof, Cabral spouses filed their
complaint against Tanuya and the Evangelista
spouses, alleging that the Evangelista spouses had
refused their demands to pay the amount due to
Tanuya’s promissory note or to exercises their right
of redemption and praying for judgment, ordering
Tanuya and Evangelista spouses, jointly and solidarily,
to pay them the amounts stipulated on the note, and
in case of the failure to make such payment, to order
them to deliver to the Sheriff the mortgaged chattels
for sale at public auction to satisfy their mortgage
credit.
The trial court rendered a decision in favor of the
Cabral spouses. Upon appeal, the CA ordered Tanuya
and the Evengelista spouses to pay the Cabral spouses
jointly and severally the amount plus interest as
provided in the promissory note.
Evangelista spouses now claim that their right over
the mortgaged chattels as purchasers at the public
sale in execution of their judgment against their
debtor, defendant Tunaya, should not be held
subordinate to the mortgage lien of plaintiffs-
appellees as mortgagees, by virtue of prescription and
laches on the part of said mortgagees as well as of
their having purchased the chattels at a public
sheriffs sale.
ISSUES:
(1) Has the right of the Cabral spouses to recover the
properties prescribed? NO.
(2) Did the certificate of sale give the Evangelista
spouses superior right against the Cabral
spouses? NO.
(3) Are the Evangelista spouses jointly and severally
liable with Tunaya to the Cabral spouses? YES
HELD:
(1) This thirty-day period is the minimum
period after violation of the

mortgage condition for the mortgage creditor to
cause the sale at public auction of the mortgaged
chattels, with at least ten days notice to the
mortgagor and posting of public notice of the time,
place and purpose of such sale, and is a period of
grace for the mortgagor, who has no right of
redemption after the sale is held, to
5 said automobile was subject to a mortgage lien. In
discharge the mortgage obligation.
The prescription period for recovery of movables for
foreclosure purposes such as in the present case is
eight years as provided in Article 1140 of the Civil
6
Code, and here plaintiffs had timely filed
their action within 8 months from the mortgage
debtor's default.
By the same token, neither could laches properly be
imputed against plaintiffs, who filed their action
promptly after they had been advised by their debtor,
defendant Tunaya, of the public auction sale on June
24, 1960 of the chattels at the instance of defendants-
appellants as his judgment creditors.
(2) Defendants-appellants' purchase of the
mortgaged chattels at the public sheriff's sale and the
delivery of the chattels to them with a certificate of
sale did not give them a superior right to the
chattels as against plaintiffs-mortgagees.
Rule 39, section 22 of the old Rules of Court (now Rule
39, section 25 of the Revised Rules), cited by appellants
precisely provides that "the sale conveys to the
purchaser all the right which the debtor had in such
property on the day the execution or attachment was
levied."
It has long been settled by this Court that "The right
of those who so acquire said properties should not and
cannot be superior to that of the creditor who has in
his favor an instrument of mortgage executed with
the formalities of the law, in good faith, and without
the least indication of fraud.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 222
This is all the more true in the present case, because,
when the plaintiff purchased the automobile in
question on August 22, 1933, he knew, or at least, it is
presumed that he knew, by the mere fact that the
instrument of mortgage, Exhibit 2, was registered in
the office of the register of deeds of Manila, that
purchasing it, with full knowledge that such
circumstances existed, it should be presumed that he
did so, very much willing to respect the lien existing
thereon, since he should not have expected that with
the purchase, he would acquire a better right than
that which the vendor then had."
In another case between two mortgagees, we held
that "As between the first and second mortgagees,
therefore, the second mortgagee has at most only he
right to redeem, and even when the second
mortgagee goes through the formality of an extrajudicial
foreclosure, the purchaser
acquires no more than the right of redemption from
9
the first mortgagee."
The superiority of the mortgagee's lien over that of a
subsequent judgment creditor is now expressly
provided in Rule 39, section 16 of the Revised Rules of
Court, which states with regard to the effect of levy
on execution as to third persons that "The levy on
execution shall create a lien in favor of the judgment
creditor over the right, title and interest of the
judgment debtor in such property at the time of the
levy, subject to liens or incumbrances then existing."
(3) Article 559 of the Civil Code providing that
"If the possessor of a movable lost or of which the
owner has been unlawfully deprived, has acquired it in
good faith at a public sale, the owner cannot obtain
its return without reimbursing the price paid therefor..."
cited by appellants has no application in the present
case, for as pointed above, they

acquired the chattels subject to the existing mortgage
lien of plaintiffs thereon. Appellants state in their brief
that they paid for the chattels the amount of
10
P2,373.00.
As pointed out by appellees, the record shows that
defendants-appellants had disposed of the mortgaged
11
chattels "to other persons at a discounted rate"
and
had, therefore, appropriated the same as if the chattels
were of their absolute ownership, in complete
derogation of plaintiffs' superior mortgage lien and in
disregard of plaintiffs' demands to them prior to the
filing of their complaint on October 11, 1960, to pay
or exercise their right of redemption.
Appellants by their act of disposition of the mortgaged
chattels, whose value were admittedly more than
adequate to secure Tunaya's mortgage obligation, have
thus practically nullified plaintiffs' superior right to
foreclose the mortgage and collect the amount due
them. Considering the long period that has elapsed
since October 11, 1960 when plaintiffs tried to
enforce their claim and defendants-appellants'
adamant resistance thereof and unjust refusal to
recognize plaintiffs' clearly superior right to the
chattels, which appellants admittedly disposed of
without lawful right to other unknown persons
obviously to defeat plaintiffs' right over the same,
we are satisfied that justice and equity justify the
lower court's judgment holding the defendants-
appellants solidarily liable for the amount due plaintiffs-
appellees
NORTHERN MOTORS vs COQUIA
FACTS: ***Manila Yellow Taxicab, executed a chattel
mortgage over several taxicabs in favor of Northern
Motors. TROPICAL is a judgment creditor of Yellow
Taxicab which assigned the credit to ONG.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 223
MYT failed to pay its loan so On December
12 1974, Sheriff then levied upon 20 taxicabs in
favor of Tropical, 8 of which are security for the chattel
mortgage. Northern Motors filed an intervention on
December 18, 1974; however, the levied taxicabs
were sold the same day at 2pm although agreement
shows that it should have happened at 4pm. Indemnity
bond was posted by TROPICAL, but the bond was
cancelled after the sale without notice to Northern
Motors.
A second levy was made upon 35 taxicabs, 7 of
which are mortgaged to Northern Motors. The taxies
were levied and sold at an auction sale. The auction
sale proceeded and the purchasers were of unknown
addresses, hence the 8 taxicabs cannot be recovered.
The proceeds of the auction were contested by
Northern Motors. Moreover the sheriff deducted the
expenses of the execution sale from the proceeds.***
Honesto Ong and City Sheriff of Manila filed a motion
for the reconsideration of this Court's resolution which
held that the lien of Northern Motors, Inc., as
chattel mortgagee, over certain taxicabs is superior to
the levy made on the said cabs by Honesto Ong, the
assignee of the unsecured judgment creditor of the
chattel mortgagor, MYT.
On the other hand, Northern Motors, Inc. in its motion
for the partial reconsideration prayed for the reversal
of the lower court's orders cancelling the bond filed
by Filwriters Guaranty Assurance Corporation. It further
prayed that the sheriff should be required to deliver
to it the proceeds of the execution sale of the
mortgaged taxicabs without deducting the expenses
of execution.
ISSUES:
1. WON the expenses for the execution sale should
be deducted from the proceeds thereof. NO

2. WON the purchaser has a better right than the
creditor/mortgagee. NO
HELD:
The motion for reconsideration of Ong and the sheriff
should be denied. Those cabs cannot be sold at an
execution sale because the levy thereon was wrongful.
Ong had no right to levy upon the mortgaged taxicabs
and that he could have levied only upon the
mortgagor's equity of redemption. The essence of the
chattel mortgage is that the mortgaged chattels should
answer for the mortgage credit and not for the
judgment credit of the mortgagor's unsecured
creditor. The mortgagee is not obligated to file an
"independent action" for the enforcement of his
credit. To require him to do so would be a nullification
of his lien and would defeat the purpose of the chattel
mortgage which is to give him preference over the
mortgaged chattels for the satisfaction of his credit.
(See art. 2087, Civil Code).
Intervenor Filinvest Credit Corporation, the assignee of
a portion of the chattel mortgage credit, realized that
to vindicate its claim by independent action would
be illusory. Thus, it was constrained to enter into a
compromise with Honesto Ong by agreeing to pay
him P145,000. That amount was characterized by
Northern Motors, Inc. as the "ransom" for the taxicabs
levied upon by the sheriff at the behest of Honesto
Ong.
Ong's theory that Manila Yellow Taxicab's breach of
the chattel mortgage should not affect him because
he is not privy of such contract is untenable. The
registration of the chattel mortgage is an effective and
binding notice to him of its existence or a lien which,
being recorded, follows the chattel wherever it goes.
His contention that Northern Motors, Inc., was
negligent because it did not sue the sheriff within
the 120-day period provided
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 224
for in section 17, Rule 39 of the Rules of Court is not
correct. Such action was filed on April 14, 1975 in the
Court of First Instance of Rizal, Pasig Branch XIII, in Civil
Case No. 21065 entitled "Northern Motors, Inc. vs.
Filwriters Guaranty Assurance Corporation, et al.".
However, instead of Honesto Ong, his assignor,
Tropical Commercial Corporation, was impleaded as a
defendant therein. That might explain his unawareness
of the pendency of such action.
Ong admits "that the mortgagee's right to the
mortgaged property is superior to that of the
judgment creditor". But he contends that the rights of
the purchasers of the cars at the execution sale should
be respected. He reasons out they were not parties to
the mortgage and that they acquired the cars prior to
the mortgagee's assertion of its rights thereto.
The third-party claim filed by Northern Motors, Inc.
should have alerted the purchasers to the risk which
they were taking when they took part in the auction
sale. Moreover, at an execution sale the buyers
acquire only the right of the judgment debtor which
in this case was a mere right or equity of redemption.
The sale did not extinguish the pre-existing mortgage
lien.
As to Petitioners motion for partial reconsideration. —
The lower court in its order of January 3, 1975
cancelled the indemnity bonds for P480,000 filed by
Filwriters Guaranty Assurance Corporation for Tropical
Commercial Co., Inc. The bonds were cancelled
without notice to Northern Motors, Inc. as third-party
claimant. Bond should be reinstated. Purpose of
surety-that the surety be ordered to pay damages in
the event that the eight taxicabs could not be
surrendered to the mortgagee.
We already held that the execution was not justified
and that Northern Motors,

Inc., as mortgagee, was entitled to the possession
of the eight taxicabs. Those cabs should not have
been levied upon and sold at public auction to satisfy
the judgment credit which was inferior to the chattel
mortgage. Since the cabs could no longer be
recovered because they had been transferred to
persons whose addresses are unknown, the proceeds
of the execution sale may be regarded as a partial
substitute for the unrecoverable cabs . Northern
Motors, Inc. is entitled to the entire proceeds without
deduction of the expenses of execution.
POLICY: The mortgagee has a better right over the
thing mortgaged than the judgment creditors of the
mortgagor. It is improper to deduct the expenses of
an illegal auction from the proceeds of thereof.
Proceeds of the must be delivered to the mortgagee
in full.
CORDOVA vs REYES
FACTS: Sometime in 1977 and 1978, petitioner Jose
Cordova bought from Philfinance certificates of stock
of Celebrity Sports Plaza Inc (CSPI) and shares of stock
of other corporations. He was issued a confirmation of
sale. CSPI shares were delivered to former Filmanbank
and Philtrust Banks (as custodian banks to hold the
shares in behalf of Cordova).
In 1981, Philfinance was placed under receivership by
SEC. Thereafter, private respondents Reyes and Atty
Wendell Coronel were appointed as liquidators. In
1991, without the knowledge and consent of Cordova
and without authority from SEC, private respondents
withdrew the CSPI shares from the custodian banks.
They subsequently sold the shares to Northeast
Corporation and included the proceeds thereof in the
funds of Philfinance. Cordova learned about the sale
only in 1996. He filed a complaint
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 225
against private respondents in the receivership
proceedings with the SEC for the return of the shares.
In 1998, SEC dismissed the petition, but granted it
upon reconsideration. It held that Cordova was the
owner of the CSPI shares by virtue of a confirmation
sale (which was considered as a deed of assignment)
issued to him by Philfinance. But since the shares had
already been sold and proceeds commingled with
other assets of Philfinance, Cordova’s status was
converted into that of an ordinary creditor for the
value of such shares.
Therefore, it ordered private respondents to pay
Cordova the amount of P5,062,500, representing the
15% of monetary value of his CSPI shares plus interest
at the legal rate from the time of their unauthorized
sale.
ISSUES:
1. WON petitioner should be considered as
preferred (and secured) creditor of Philfinance
NO
2. WON petitioner can recover the full value of his
CSPI shares or merely 15% thereof like all other
ordinary creditors of Philfinance only 15%
3. WON petitioner is entitled to legal interest NO
HELD:
To resolve the issues, we have to determine if
petitioner was indeed a creditor of Philfinance. – SC
held that petitioner had become an ORDINARY creditor
of Philfinance. Certainly, petitioner had the right to
demand the return of the shares. He filed a
complaint in the liquidation proceedings. He sought
instead to recover their monetary value.
The CSPI shares were specific or determinate movable
properties. But after they were sold, the money raised
from the sale became generic and were commingled
with other assets of

Philfinance. Unlike shares of stock, money is generic.
This means that once a certain amount is added to
the cash balance, one can no longer pinpoint the
specific amount included which then becomes part of
a whole mass of money.
It thus became impossible to identify the exact
proceeds of the sale of the CSPI shares. Petitioner’s
only remedy was to file a claim on the whole mass of
these assets, to which unfortunately all other creditors
of Philfinance also had a claim.
Petitioner’s right of action against Philfinance was a
“claim” properly to be litigated in the liquidation
proceedings. He had a right to the payment of the
value of his shares. His demand was of a pecuniary
nature since he was claiming the monetary value of
his shares. It was in this sense that he was a creditor
of Philfinance.
Petitioner argues that he was a preferred creditor
because private respondents illegally withdrew his CSPI
shares from the custodian banks and sold them
without his knowledge and consent and without
authority from the SEC. He quotes Article 2241 (2) of
the Civil Code:
With reference to specific movable property
of the debtor, the following claims or liens shall
be preferred:
(2) Claims arising from
misappropriation, breach of trust, or
malfeasance by public officials committed in
the performance of their duties, on the
movables, money or securities obtained by
them;
He asserts that, as a preferred creditor, he was entitled
to the entire monetary value of his shares. Petitioner’s
argument is incorrect. Article 2241 refers only to
specific movable property. His claim was for the
payment of money, which, as already discussed, is
generic property and
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 226
not specific or determinate. Considering that
petitioner did not fall under any of the provisions
applicable to preferred creditors, he was deemed an
ordinary creditor under Article 2245:
Credits of any other kind or class, or by any
other right or title not comprised in the four
preceding articles, shall enjoy no preference.
This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be
paid pro rata regardless of dates.
Like all the other ordinary creditors or claimants
against Philfinance, he was entitled to a rate of
recovery of only 15% of his money claim.
Was petitioner entitled to interest?
Petitioner is not entitled to legal interest of 12% per
annum because the amount owing to him was not a
loan or forbearance of money. Neither was he entitled
to legal interest of 6% per annum under Art 2209 of the
Civil Code since it applies only when there is a delay
in the payment of a sum of money.
DE BARRETO vs VILLANUEVA
FACTS: Rosario Cruzado sold all her right, title, and
interest and that of her children in the house and lot
herein involved to Villanueva for P19K. The purchaser
paid P1,500 in advance, and executed a promissory
note for the balance. However, the buyer could only
pay P5,500 On account of the note, for which reason
the vendor obtained judgment for the unpaid
balance. In the meantime, the buyer Villanueva was
able to secure a clean certificate of title and
mortgaged the property to appellant Barretto to
secure a loan of P30K, said mortgage having been
duly recorded.

Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming
final asked for execution. Cruzado filed a motion for
recognition for her "vendor's lien" invoking Articles
2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated
on the back of the title, with the proviso that in case
of sale under the foreclosure decree the vendor's lien
and the mortgage credit of appellant Barretto
should be paid pro rata from the proceeds.
Appellants insist that:
1. The vendor's lien, under Articles 2242 and
2243 of the new, Civil Code of the Philippines, can
only become effective in the event of insolvency of
the vendee, which has not been proved to exist in
the instant case; and .
2. That the Cruzado is not a true vendor of the
foreclosed property.
Article 2242 of the new Civil Code enumerates the
claims, mortgage and liens that constitute an
encumbrance on specific immovable property, and
among them are:
. applicable only to the insolvent debtor, suffice it to
(2) For the unpaid price of real property sold, upon
the immovable sold; and
(5) Mortgage credits recorded in the Registry of
Property."
Article 2249 of the same Code provides that "if
there are two or more credits with respect to the
same specific real property or real rights, they shall
be satisfied pro- rata after the payment of the taxes
and assessment upon the immovable property or real
rights.
HELD: Application of the above-quoted provisions to
the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property
in question has the right to share pro-rata with the
appellants the proceeds of the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 227
foreclosure sale.
ISSUE: Appell ant ’s ar gu me nt : inasmuch as the unpaid
vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered
rights over the property.
HELD: There is nothing to this argument. Note must
be taken of the fact that article 2242 of the new
Civil Code enumerating the preferred claims,
mortgages and liens on immovables, specifically
requires that. Unlike the unpaid price of real property
sold. mortgage credits, in order to be given preference,
should be recorded in the Registry of Property. If the
legislative intent was to impose the same requirement
in the case of the vendor's lien, or the unpaid price of
real property sold, the lawmakers could have easily
inserted the same qualification which now modifies
the mortgage credits. The law, however, does not
make any distinction between registered and
unregistered vendor's lien, which only goes to show
that any lien of that kind enjoys the preferred credit
status.
As to the point made that the articles of the Civil Code
on concurrence and preference of credits are
say that nothing in the law shows any such limitation.
If we are to interpret this portion of the Code as
intended only for insolvency cases, then other
creditor-debtor relationships where there are
concurrence of credits would be left without any rules
to govern them, and it would render purposeless the
special laws on insolvency.
Resolution on Motion to Consider (1962)
Appellants, spouses Barretto, have filed a motion
vigorously urging that our decision be reconsidered
and set aside, and a new one entered declaring that
their right as mortgagees remain superior to the
unrecorded claim of herein appellee for the

balance of the purchase price of her rights, title, and
interests in the mortgaged property.
We have reached the conclusion that our original
decision must be reconsidered and set aside:
Under the system of the Civil Code of the Philippines,
only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under
Article 2242 enjoy no priority among themselves, but
must be paid pro-rata i.e., in proportion to the
amount of the respective credits. Thus, Article
2249 provides:
If there are two or more credits with respect to the
same specific real property or real rights, they, shall
be satisfied pro- rata after the payment of the taxes
and assessments upon the immovable property or real
rights."
The full application of Articles 2249 and 2242 demands
that there must be first some proceedings where the
claims of all the preferred creditors may be bindingly
adjudicated, such as:
1. insolvency,
2. the settlement of decedents estate under
Rule 87 of the Rules of Court, or
3. other liquidation proceedings of similar
import.
This explains the rule of Article 2243 of the new Civil
Code that —
The claims or credits enumerated in the two
preceding articles" shall be considered as mortgages or
pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency.
And the rule is further clarified in the Report of the
Code Commission, as follows:
The question as to whether the Civil Code and the
insolvency Law can be harmonized
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 228
is settled by Article 2243. The preferences named in
Articles 2261 and 2262 (now 2241 and 2242) are to
be enforced in accordance with the Insolvency Law."
RULE:
Thus, it becomes evident that one preferred creditor's
third-party claim to the proceeds of a foreclosure
sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to
ascertain the pro-rata dividend
corresponding to each, because the rights of the other
creditors likewise" enjoying preference under Article
2242 can not be ascertained.
HELD: There being no insolvency or liquidation, the
claim of the appellee, as unpaid vendor, did not require
the character and rank of a statutory lien co- equal
to the mortgagee's recorded encumbrance, and must
remain subordinate to the latter.
PHILIPPINE SAVINGS vs LANTIN
FACTS: Involved in this case is a duplex- apartment
house on a lot covered by TCT No. 86195 situated at
San Diego Street, Sampaloc, Manila, and owned by the
spouses Filomeno and Socorro Tabligan.
The duplex-apartment house was built for the
spouses by private respondent Candido Ramos, a duly
licensed architect and building contractor, at a total
cost of P32,927.00. The spouses paid private
respondent the sum of P7,139.00 only. Hence, the
latter used his own money, P25,788.50 in all, to finish
the construction of the duplex-apartment.
Meanwhile, on December 16, 1966,

February 1, 1967, and February 28, 1967, the spouses
Tabligan obtained from petitioner Philippine Savings
Bank three (3) loans in the total amount of
P35,000.00, the purpose of which was to complete
the construction of the duplex-apartment. To secure
payment of the l2oans, the spouses executed in favor of
the petitioner three (3) promissory notes and three
(3) deeds of real estate mortgages over the property
subject matter of this litigation.
On December 19, 1966, the petitioner registered the
December 16, 1966 deed of real estate mortgage with
the Register of Deeds of Manila. The subsequent
mortgages of February 1, 1967, and
February 28, 1967, were registered with the Register of
Deeds of Manila on February 2, 1967 and March 1,
1967, respectively. At the time of the registration of
these mortgages, Transfer Certificate of Title No.
86195 was free from all liens and encumbrances.
The spouses failed to pay their monthly amortizations.
As a result thereof, the petitioner bank foreclosed
the mortgages, and at the public auction held on July
23, 1969, was the highest bidder.
On August 5, 1969, the petitioner bank registered the
certificate of sale issued in its favor. On August 9,
1970, the bank consolidated its ownership over the
property in question, and Transfer Certificate of Title
No. 101864 was issued by the Register of Deeds of
Manila in the name of the petitioner bank.
Upon the other hand, the private respondent filed an
action against the spouses to collect the unpaid cost
of the construction of the duplex-apartment before
the Court of First Instance of Manila, Branch I, which
case was docketed therein as Civil Case No. 69228.
During its pendency, the private respondent succeeded
in obtaining the issuance of a writ of preliminary
attachment, and
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 229
pursuant thereto, had the property in question
attached. Consequently, a notice of adverse claim was
annotated at the back of Transfer Certificate of Title
No. 86195.
On August 26, 1968, a decision was rendered in
Civil Case No. 69228 in favor of the private
respondent and against the spouses. A writ of
execution was accordingly issued but was returned
unsatisfied.
As the spouses did not have any properties to satisfy
the judgment in Civil Case No. 69228, the private
respondent addressed a letter to the petitioner for
the delivery to him (private respondent) of his pro-
rata share in the value of the duplex-apartment in
accordance with Article 2242 of the Civil Code. The
petitioner refused to pay the pro-rata value prompting
the private respondent to file the instant action. A
decision was rendered in favor of the private
Respondent.
ISSUE: whether or not the private respondent is
entitled to claim a pro-rata share in the value of
the property in question.
RULING: NO. The conclusions of the lower court are not
supported by the law and the facts.
Concurrence of credits occurs when the same specific
property of the debtor or all of his property is
subjected to the claims of several creditors. The
concurrence of credits raises no questions of
consequence were the value of the property or the
value of all assets of the debtor is sufficient to pay
in fall all the creditors. However, it becomes material
when said assets are insufficient for then some
creditors of necessity will not be paid or some creditors
will not obtain the full satisfaction of their claims. In
this situation, the question of preference will then
arise, that is to say who of the creditors will be paid
the all of

the others.
The proceedings in the court below do not partake of
the nature of the insolvency proceedings or
settlement of a decedent’s estate. The action filed by
Ramos was only to collect the unpaid cost of the
construction of the duplex apartment. It is far from
being a general liquidation of the estate of the
Tabligan spouses.
Insolvency proceedings and settlement of a
decedent’s estate are both proceedings in rem which
are binding against the whole world. All persons having
interest in the subject matter involved, whether they
were notified or not, are equally bound. Consequently,
a liquidation of similar import or "other equivalent
general liquidation’ must also necessarily be a
proceeding in rem so that all interested persons
whether known to the parties or not may be bound
by such proceeding.
In the case at bar, although the lower court found that
"there were no known creditors other than the
plaintiff and the defendant herein", this can not be
conclusive. It will not bar other creditors in the
event they show up and present their claims against
the petitioner bank, claiming that they also have
preferred liens against the property involved.
Consequently, Transfer Certificate of Title No. 101864
issued in favor of the bank which is supposed to be
indefeasible would remain constantly unstable and
questionable. Such could not have been the intention
of Article 2243 of the Civil Code although it considers
claims and credits under Article 2242 as statutory
liens. Neither does the De Barretto case sanction
such instability.
J.L. BERNARDO VS CA
FACTS: Sometime in 1990, the municipal government
of San Antonio, Nueva Ecija approved the
construction of the San Antonio Public Market. The
construction of
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 230
the market was to be funded by the Economic
Support Fund Secretariat (ESFS), a government agency
working with the USAID. Under ESFS "grant-loan-
equity" financing program, the funding for the
market would be composed of a (a) grant from
ESFS, (b) loan extended by ESFS to the Municipality of
San Antonio, and (c) equity or counterpart funds
from the Municipality.
It is claimed by petitioners Santiago R. Sugay, Edwin A.
Sugay, Fernando S.A. Erana and J.L. Bernardo
Construction, a single proprietorship owned by
Juanito L. Bernardo, that they entered into a business
venture for the purpose of participating in the
bidding for the public market. It was agreed by
petitioners that Santiago Sugay would take the lead
role and be responsible for the preparation and
submission of the bid documents, financing the entire
project, providing and utilizing his own equipment,
providing the necessary labor, supplies and materials
and making the necessary representations and doing
the liaison work with the concerned government
agencies.
On April 20, 1990, J.L. Bernardo Construction, thru
petitioner Santiago Sugay, submitted its bid together
with other qualified bidders. After evaluating the bids,
the municipal pre-qualification bids and awards
committee, headed by respondent Jose L. Salonga
(then incumbent municipal mayor of San Antonio) as
Chairman, awarded the contract to petitioners. On
June 8, 1990, a Construction Agreement was entered
into by the Municipality of San Antonio thru
respondent Salonga and petitioner J.L. Bernardo
Construction.
It is claimed by petitioners that under this
Construction Agreement, the Municipality agreed to
assume the expenses for the demolition, clearing and
site filling of the construction site in the amount of
P1,150,000 and, in addition, to provide cash equity of
P767,305.99 to be remitted

directly to petitioners.
Petitioners allege that, although the whole amount of
the cash equity became due, the Municipality refused
to pay the same, despite repeated demands and
notwithstanding that the public market was more than
ninety-eight percent (98%) complete as of July 20, 1991.
Furthermore, petitioners maintain that Salonga induced
them to advance the expenses for the demolition,
clearing and site filling work by making
representations that the Municipality had the financial
capability to reimburse them later on. However,
petitioners claim that they have not been reimbursed
for their expenses.
On July 31, 1991, J.L. Bernardo Construction, Santiago
Sugay, Edwin Sugay and Fernando Erana, with the
latter three bringing the case in their own personal
capacities and also in representation of J.L. Bernardo
Construction, filed a complaint for breach of
contract, specific performance, and collection of a sum
of money, with prayer for preliminary attachment
and enforcement of contractors lien against the
Municipality of San Antonio, Nueva Ecija and
Salonga, in his personal and official capacity as
municipal mayor. After defendants filed their answer,
the Regional Trial Court held hearings on the
ancillary remedies prayed for by plaintiffs.
On September 5, 1991, the Regional Trial Court issued
the writ of preliminary attachment prayed for by
plaintiffs. It also granted J.L. Bernardo Construction
the right to maintain possession of the public market
and to operate the same.
ISSUE: Whether or not the grant of writ of attachment
and the contractor’s lien proper?
HELD: There is no contractor’s lien in favor of
petitioners.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 231
Articles 2241 and 2242 of the Civil Code enumerates
certain credits which enjoy preference with respect
to specific personal or real property of the debtor.
Specifically, the contractor’s lien claimed by petitioners
is granted under the third paragraph of Article 2242
which provides that the claims of contractors
engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with
respect to the specific building or other immovable
property constructed.
However, Article 2242 only finds application when
there is a concurrence of credits, i.e. when the same
specific property of the debtor is subjected to the
claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all
the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of
the others. Fundamental tenets of due process will
dictate that this statutory lien should then only be
enforced in the context of some kind of a proceeding
where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency
proceedings.
This is made explicit by Article 2243 which states that
the claims and liens enumerated in articles 2241 and
2242 shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of
legal provisions governing insolvency.
The action filed by petitioners in the trial court does
not partake of the nature of an insolvency proceeding.
It is basically for specific performance and damages.
Thus, even if it is finally adjudicated that petitioners
herein actually stand in the position of unpaid
contractors and are entitled to invoke the
contractor’s lien granted under Article 2242, such lien
cannot be enforced in the present action

for there is no way of determining whether or not
there exist other preferred creditors with claims over
the San Antonio Public Market. The records do not
contain any allegation that petitioners are the only
creditors with respect to such property. The fact that
no third party claims have been filed in the trial court
will not bar other creditors from subsequently
bringing actions and claiming that they also have
preferred liens against the property involved.
ATLANTIC ERECTORS, INC. vs.
HERBAL COVE REALTY CORPORATION
G.R. No. 148568 (March 20, 2003)
FACTS: On June 20, 1996, Herbal Cove Realty
Corporation and Atlantic Erectors, Inc. entered into
a Construction Contract whereby the former agreed
to construct four (4) units of townhouses designated
and one (1) single detached unit for an original contract
price of P15,726,745.19 which was later adjusted to
P16,726,745.19 as a result of additional works.
Respondent was not able to finish the construction
in time and as a consequence petitioner filed a
complaint for sum of money with damages. Petitioner
won the suit and the RTC ordered respondent to pay
around 24 million in damages and fees. (The cause of
action in this case is a money claim by one creditor)
On November 21, 1997, petitioner filed a notice of
lis pendens for annotation of the pendency of Civil
Case No. 97-707 on titles TCTs nos. T-30228, 30229,
30230, 30231
and 30232. When the lots covered by said titles were
subsequently subdivided into 50 lots, the notices of lis
pendens were carried over to the titles of the
subdivided lots, i.e., Transfer Certificate of Title Nos.
T-36179 to T-36226 and T-36245 to T-36246 of the
Register of Deeds of Tagaytay City. (The case does
not explain the existence of these TCT's. It was not
mentioned if these
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 232
were securities or properties under execution.)
On January 30, 1998, respondent and a certain
Ernest L. Escaler, filed a Motion to Dismiss petitioner's
Complaint for lack of jurisdiction and for failure to
state a cause of action. They claimed that the Makati
RTC has no jurisdiction over the subject matter of
the case because the parties' Construction Contract
contained a clause requiring them to submit their
dispute to arbitration. The case against respondent
was dismissed because of failure to comply with the
arbitration clause. Under the law, a prior resort to
arbitration is a condition precedent for filing a court
action. Thus, in effect, the court admitted it had no
jurisdiction to hear and decide the case.
On April 24, 1998, respondent filed a Motion to
Cancel Notice of Lis Pendens. It argued that the
notices of lis pendens are without basis because
petitioner's action is a purely personal action to collect
a sum of money and recover damages and does not
directly affect title to, use or possession of real
property. This motion was granted.
However, the notices of lis pendens were
subsequently reinstated after judge Ranada claimed
that a notice of lis pendens serves only as a
precautionary measure or warning to prospective
buyers of a property that there is a pending
litigation involving the case. Respondent then made an
appeal to the CA which rendered a decision in favor of
the former.
Claims of each party:
petitioner- the money claim constitutes a lien that
can be enforced to secure payment for the said
obligations. The lien on respondent's property was
necessary to preserve the alleged improvement it
had made on the subject land.
respondent- the annotation is bereft of any factual or
legal basis because the action does not directly
affect the title to the

property, or the use or possession thereof. The
annotation is baseless and cannot be made through
the enforcement of a contractor's lien under Art.
2242 as said provision applies only to cases in which
there are several creditors carrying on a legal action
against an insolvent debtor.
ISSUE:
1. Whether or not money claims representing cost
of materials and labor on the houses constructed on a
property are a proper lien for annotation of lis pendens
on the property title
2. Whether or not the trial court, after having
declared itself without jurisdiction to try the case, may
still decide on thesubstantial issue of the case\
HELD:
1.NO, the lis pendens annotations were improper.
As a general rule, the only instances in which a
notice of lis pendens may be availed of are as follows:
(a) an action to recover possession of real estate;
(b) an action for partition; and (c) any other court
proceedings that directly affect the title to the land
or the building thereon or the use or the occupation
thereof. Additionally, this Court has held that resorting
to lis pendens is not necessarily confined to cases that
involve title to or possession of real property. This
annotation also applies to suits seeking to establish a
right to, or an equitable estate or interest in, a specific
real property; or to enforce a lien, a charge or an
encumbrance against it.
Petitioner's money claim is not a contractor's lien
Apparently, petitioner proceeds on the premise that its
money claim involves the enforcement of a lien. Since
the money claim is for the nonpayment of materials
and labor used in the construction of townhouses,
the lien referred to would have to be that provided
under Article
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 233
2242 of the Civil Code. This provision describes a
contractor's lien over an immovable property as
follows:
Art. 2242. With reference to specific immovable
property and real rights of the debtor, the
following claims, mortgages and liens shall be
preferred, and shall constitute an encumbrance
on the immovable or real right:
xxx xxx xxx
(3) Claims of laborers, masons, mechanics
and other workmen, as well as of architects,
engineers and contractors, engaged in the
construction, reconstruction or repair of
buildings, canals or other works, upon said
buildings, canals or other works;
(4) Claims of furnishers of materials used in
the construction, reconstruction, or repair of
buildings, canals or other works, upon said
buildings, canals or other works.
However, a careful examination of petitioner's
Complaint, as well as the reliefs it seeks, reveals that
no such lien or interest over the property was ever
alleged. The Complaint merely asked for the payment
of construction services and materials plus damages,
without mentioning -- much less asserting -- a lien or
an encumbrance over the property. Verily, it was a
purely personal action and a simple collection case. It
did not contain any material averment of any
enforceable right, interest or lien in connection with
the subject property. Even if a party initially avails itself
of a notice of lis pendens upon the filing of a case in
court, such notice is rendered nugatory if the case
turns out to be a purely personal action.
As it is, petitioner's money claim cannot be
characterized as an action that involves the enforcement
of a lien or an encumbrance, one that would thus
warrant the annotation of the Notice of Lis Pendens.
Indeed, the nature of an action is determined by
the allegations of the complaint.

Even assuming that petitioner had sufficiently alleged
such lien or encumbrance in its Complaint, the
annotation of the Notice of Lis Pendens would still
be unjustified, because a complaint for collection and
damages is not the proper mode for the
enforcement of a contractor's lien.
Contractor's lien and the proper methods of
enforcing it
In J.L. Bernardo Construction v. Court of Appeals,
the Court explained the concept of a contractor's lien
under Article 2242 of the Civil Code and the proper
mode for its enforcement as follows:
Articles 2241 and 2242 of the Civil Code
enumerates certain credits which enjoy
preference with respect to specific personal or
real property of the debtor. Specifically, the
contractor's lien claimed by the petitioners is
granted under the third paragraph of Article
2242 which provides that the claims of
contractors engaged in the construction,
reconstruction or repair of buildings or other
works shall be preferred with respect to the
specific building or other immovable property
constructed.
However, Article 2242 finds application when
there is a concurrence of credits, i.e., when the
same specific property of the debtor is subjected
to the claims of several creditors and the value
of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation,
the question of preference will arise, that is, there
will be a need to determine which of the creditors
will be paid ahead of the others. Fundamental
tenets of due process will dictate that this
statutory lien should then only be enforced in
the context of some kind of a proceeding where
the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency
proceedings.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 234
Clearly then, neither Article 2242 of the Civil Code
nor the enforcement of the lien thereunder is
applicable here, because petitioner's Complaint failed
to satisfy the foregoing requirements. Nowhere does it
show that respondent's property was subject to the
claims of other creditors or was insufficient to pay for
all concurring debts. Moreover, the Complaint did not
pertain to insolvency proceedings or to any other action
in which the adjudication of claims of preferred
creditors could be ascertained.
2.The trial court still had jurisdiction to decide on
the substantial issue of the case
The trial court lost jurisdiction over the case only on
August 31, 1998, when petitioner filed its Notice of
Appeal. Thus, any order issued by the RTC prior to
that date should be considered valid, because the
court still had jurisdiction over the case. Accordingly, it
still had the authority or jurisdiction to issue the July
30, 1998 Order canceling the Notice of Lis Pendens.
On the other hand, the November 4, 1998Order that
set aside the July 30, 1998 Order and reinstated that
Notice should be considered without force and effect,
because it was issued by the trial court after it had
already lost jurisdiction.
Finally, petitioner vehemently insists that the trial court
had no jurisdiction to cancel the Notice. Yet, the
former filed before the CA an appeal, docketed as CA-
GR CV No. 65647, questioning the RTC's dismissal of
the Complaint for lack of jurisdiction. Moreover, it
must be remembered that it was petitioner which
had initially invoked the jurisdiction of the trial court
when the former sought a judgment for the recovery
of money and damages against respondent. Yet again,
it was also petitioner which assailed that same
jurisdiction for issuing an order unfavorable to the
former's cause. Indeed, parties cannot invoke the
jurisdiction of a court to

secure affirmative relief, then repudiate or question
that same jurisdiction after obtaining or failing to obtain
such relief.
DEVELOPMENT BANK OF THE PHILIPPINES vs.
HONORABLE COURT OF APPEALS & REMINGTON
INDUSTRIAL SALES CORPORATION G.R. No. 126200
(August 16, 2001)
FACTS: Marinduque Mining-Industrial Corporation
(MMIC) obtained from the Philippine National Bank
(PNB) various loan accommodations. To secure the
loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel
Mortgage in favor of PNB. The mortgage covered all
of Marinduque Mining's real properties, located at
Surigao del Norte, Sipalay, Negros Occidental, and at
Antipolo, Rizal, including the improvements thereon.
As of November 20, 1980, the loans extended by PNB
amounted to P4 Billion, exclusive of interest and
charges.
On July 13, 1981, Marinduque Mining executed in
favor of PNB and the Development Bank of the
Philippines (DBP) a second Mortgage Trust
Agreement. In said agreement, Marinduque Mining
mortgaged to PNB and DBP all its real properties
located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the
improvements thereon. The mortgage also covered all
of Marinduque Mining's chattels, as well as assets of
whatever kind, nature and description which
Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and
Chattel Mortgage dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans totaling
P2 Billion from DBP, exclusive of interest and charges.
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 235
On April 27, 1984, Marinduque Mining executed in
favor of PNB and DBP an Amendment to Mortgage
Trust Agreement by virtue of which Marinduque
Mining mortgaged in favor of PNB and DBP all
other real and personal properties and other real
rights subsequently acquired by Marinduque Mining.
For failure of Marinduque Mining to settle its loan
obligations, PNB and DBP instituted sometime on July
and August 1984 extrajudicial foreclosure proceedings
over the mortgaged properties.
In the ensuing public auction sale conducted on August
31, 1984, PNB and DBP emerged and were
declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights
together with the improvements thereon as well as
machineries and equipments of MMIC.
PNB and DBP thereafter thru a Deed of Transfer
dated August 31, 1984 and June 6 1994, purposely, in
order to ensure the continued operation of the
Nickel refinery plant and to prevent the deterioration of
the assets foreclosed, assigned and transferred to
Nonoc Mining and Industrial Corporation amd
Maricalum Mining Corp. respectively, all their rights,
interest and participation over the foreclosed
properties of MMIC.
On February 27, 1987, PNB and DBP, pursuant to
Proclamation No. 50 as amended, again assigned,
transferred and conveyed to the National Government
thru the Asset Privatization Trust (APT) all its existing
rights and interest over the assets of MMIC, earlier
assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement
Corporation.
In the meantime, between July 16, 1982 to October 4,
1983, Marinduque Mining purchased and caused to
be delivered

construction materials and other merchandise from
Remington Industrial Sales Corporation (Remington)
worth P921,755.95. The purchases remained unpaid as
of August 1, 1984 when Remington filed a complaint
for a sum of money and damages against
Marinduque Mining for the value of the unpaid
construction materials and other merchandise
purchased by Marinduque Mining, as well as interest,
attorney's fees and the costs of suit.
Remington's original complaint was later amended to
implead additional defendants and in the end, the co-
defendants were MMIC, PNB, DBP, Nonoc Mining,
Maricalum Mining, Island Cement and Asset
Privatization Trust.
The RTC ruled in favor of Remington, whose decision
was later affirmed by the CA. The CA held that
there exists in Remington's favor a lien on the unpaid
purchases of MMIC and as transferee, DBP must be
held liable for the value thereof.
ISSUE: Whether or not Remington can enforce its
claim for unpaid purchases made by MMIC against
DBP
HELD: No, in the absence of liquidation proceedings,
Remington's claim cannot be enforced against DBP.
ARTICLE 2241. With reference to specific movable
property of the debtor, the following claims or liens
shall be preferred:
xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on
said movables, so long as they are in the possession of
the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the
price; this right is not lost by the immobilization of
the thing by destination, provided it has not lost its
form, substance and identity, neither is the right lost
by the
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 236
sale of the thing together with other property for a
lump sum, when the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value thereof;
In Barretto vs. Villanueva, the Court had occasion to
construe Article 2242, governing claims or liens over
specific immovable property.
In its decision upholding the order of the lower
court, the Court ratiocinated thus: Article 2242
of the new Civil Code
enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable
property, and among them are:
"(2) For the unpaid price of real property sold, upon
the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of
Property."
Article 2249 of the same Code provides that "if
there are two or more credits with respect to the
same specific real property or real rights, they shall
be satisfied pro- rata, after the payment of the
taxes and assessments upon the immovable property
or real rights."
Application of the above-quoted provisions to the
case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property
in question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
xxx xxx xxx
As to the point made that the articles of the Civil Code
on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to
say that nothing in the law shows any such limitation.
If we are to interpret this portion of the Code as
intended only for insolvency

cases, then other creditor-debtor relationships where
there are concurrence of credits would be left without
any rules to govern them, and it would render
purposeless the special laws on insolvency.
Upon motion by appellants, however, the Court
reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court, explained the
reasons for the reversal:
The previous decision failed to take fully into
account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities
among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among
creditors entitled to preference as to specific real
property under Article 1923 were to be resolved
according to an order of priorities established by
Article 1927, whereby one class of creditors could
exclude the creditors of lower order until the claims
of the former were fully satisfied out of the proceeds
of the sale of the real property subject of the
preference, and could even exhaust proceeds if
necessary.
Under the system of the Civil Code of the Philippines,
however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro rata,
i.e., in proportion to the amount of the respective
credits. Thus, Article 2249 provides:
"If there are two or more credits with respect
to the same specific real property or real rights,
they shall be satisfied pro rata, after the payment
of the taxes and assessments upon the immovable
property or real rights."
But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of
Article 2242
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 237
(or such of them as have credits outstanding) must
necessarily be convened, and the import of their
claims ascertained. It is thus apparent that the full
application of Articles 2249 and 2242 demands that
there must be first some proceeding where the claims
of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of
decedent's estate under Rule 87 of the Rules of Court,
or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new
Civil Code that —
"The claims or credits enumerated in the
two preceding articles shall be considered as
mortgages or pledges of real or personal property, or
liens within the purview of legal provisions governing
insolvency.
And the rule is further clarified in the Report of
the Code Commission, as follows "The question as to
whether the
Civil Code and the Insolvency Law can be harmonized
is settled by this Article (2243). The preferences named
in Articles 2261 and 2262 (now 2241 and 2242) are to
be enforced in accordance with the Insolvency Law."
Thus, it becomes evident that one preferred
creditor's third-party claim to the proceeds of a
foreclosure sale (as in the case now before us) is not
the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless
the claimant were enforcing a credit for taxes that
enjoy absolute priority. If none of the claims is for
taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the
other creditors likewise enjoying preference under
Article 2242 cannot be ascertained.
Although Barretto involved specific
immovable property, the ruling therein should apply
equally in this case where

specific movable property is involved. As the
extrajudicial foreclosure instituted by PNB and DBP is
not the liquidation proceeding contemplated by the
Civil Code, Remington cannot claim its pro rata share
from DBP.
Thus, Remington cannot enforce its lien against DBP
because there was no liquidation proceeding. The
liquidation proceeding contemplated by the Civil Code
is not the extrajudicial foreclosure done by DBP. The
proceeding contemplated is where the claims of all
the preferred creditors may be bindingly adjudicated
such as insolvency, settlement of decedent's estate or
other similar proceedings.
REPUBLIC VS. PERALTA
[150 SCRA 37(1987)]
FACTS: The Republic of the Philippines seeks the
review on certiorari of the Order of the CFI of Manila
in its Civil Case No. 108395 entitled "In the Matter of
Voluntary Insolvency of Quality Tobacco Corporation,
Quality Tobacco.”
In its questioned Order, the trial court held that the
above enumerated claims of USTC and FOITAF
(hereafter collectively referred to as the "Unions") for
separation pay of their respective members embodied
in final awards of the NLRC were to be preferred over
the claims of the Bureau of Customs and the BIR.
The trial court, in so ruling, relied primarily upon
Article 110 of the Labor Code.
The Solicitor General, in seeking the reversal of the
questioned Orders, argues that Article 110 of the
Labor Code is not applicable as it speaks of "wages,"
a term which he asserts does not include the
separation pay claimed by the Unions.
"Separation pay," the Solicitor General contends: is
given to a laborer for a
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 238
separation from employment computed on the basis
of the number of years the laborer was employed by
the SEC.
1. Requirements for Issuance of License. Every
applicant for license to operate a private
employment agency or manning agency shall
submit a written application together with the
following requirements: xxx xxx
f. A verified undertaking stating that the applicant:
xxx xxx xxx(3) Shall assume joint and solidary liability
with the employer for all claims and liabilities which
may arise in connection with the implementation of
the contract; including but not limited to payment of
wages, health and disability compensation and
reparation.
employer; it is a form of penalty or damage against the
employer in favor of the employee for the latter's
dismissal or separation from service
ISSUE: WON separation pay of their respective
members embodied in final awards of the NLRC were
to be preferred over the claims of the Bureau of
Customs and the BIR (WON separation pay is
included in the term “wages”)
HELD: YES. For the specific purposes of Article 1109
and in the context of insolvency termination or
separation pay is reasonably regarded as forming part
of the remuneration or other money benefits accruing
to employees or workers by reason of their having
previously rendered services to their employer; as
such, they fall within the scope of "remuneration or
earnings — for services rendered or to be rendered —
."
Liability for separation pay might indeed have the
effect of a penalty, so far as the employer is
concerned. So far as concerns the employees, however,
separation pay is

additional remuneration to which they become
entitled because, having previously rendered services,
they are separated from the employer's service.
Reasoning
We note, in this connection, that in Philippine
Commercial and Industrial Bank (PCIB) us. National
Mines and Allied Workers Union, the Solicitor General
took a different view and there urged that the term
"wages" under Article 110 of the Labor Code may be
regarded as embracing within its scope severance pay
or termination or separation pay. In PCIB, this Court
agreed with the position advanced by the Solicitor
General. We see no reason for overturning this
particular position.
The resolution of the issue of priority among the
several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a
reading of Article 110 of the labor Code alone.
Article 110 of the Labor Code, in determining the
reach of its terms, cannot be viewed in isolation.
Rather, Article 110 must be read in relation to the
provisions of the Civil Code concerning the
classification, concurrence and preference of credits,
which provisions find particular application in
insolvency proceedings where the claims of all
creditors, preferred or non-preferred, may be
adjudicated in a binding manner.
Disposition
MODIFIED and REMANDED to the trial court for further
proceedings in insolvency.
Article 97 (f) of the Labor Code defines "wages" in the
following terms:
Wage' paid to any employee shall mean the
remuneration or earnings, however designated,
capable of being expressed in terms of money,
whether fixed or ascertained on a time, task,
piece, or
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 239
commission basis, or other method of calculating
the same, which is payable by an employer to an
employee under a written or unwritten contract of
employment for work done or to be done, or for services
rendered or to be rendered, and includes the fair and
reasonable value, as determined by the Secretary of
Labor, of board, lodging, or other facilities customarily
furnished by the employer to the employee. 'Fair
and reasonable value' shall not include any profit to
the employer or to any person affiliated with the
employer.(emphasis supplied)
Article 110. Worker preference in case of
bankruptcy — In the event of bankruptcy or
liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due
them for services rendered during the period prior to
the bankruptcy or liquidation, any provision of law to
the contrary notwithstanding. Union paid wages
shall be paid in full before other creditors may
establish any claim to a share in the assets of the
employer. (emphasis supplied).
DEVELOPMENT BANK OF THE PHILIPPINES VS. NLRC
[242 SCRA 59 (1995)]
FACTS: PSC obtained a loan in 1983 from the DBP to
finance its iron smelting and steel manufacturing
business. To secure said loan, PSC mortgaged to DBP
real properties with all the buildings and
improvements thereon and chattels. By virtue of the
said loan agreement, DBP became the majority
stockholder of PSC, with stockholdings. Subsequently,
it took over the management of PSC. When PSC failed
to pay its obligation with DBP, DBP foreclosed and
acquired the mortgaged real estate and chattels of
PSC in the auction sales in 1987. Petitioners filed a
Petition for Involuntary Insolvency in the RTC against
PSC and DBP, impleading as

co-respondents therein Olecram Mining Corporation
and Jose Panganiban Ice Plant and Cold Storage, with
said petitioners representing themselves as unpaid
employees of said private respondents. Herein private
respondents filed a complaint with the Department
of Labor against PSC, including later on DBP, for non-
payment of salaries, 13th month pay, incentive leave
pay and separation pay. DBP submits that when it
foreclosed the assets of PSC, it did so as a foreclosing
creditor.
ISSUE: Whether DBP, as foreclosing creditor, could be
held liable for the unpaid wages, 13th month pay,
incentive leave pay and separation pay of the
employees of PSC
The terms 'declaration' of bankruptcy or 'judicial'
liquidation in Article 110 of the Labor Code have been
eliminated by RA 6715, which took effect on March 21,
1989. Does this mean then that liquidation
proceedings have been done away with?
RULING: We opine in the negative. Because of its
impact on the entire system of credit, Article 110 of the
Labor Code cannot be viewed in isolation but must be
read in relation to the Civil Code scheme on
classification and preference of credits.
In the event of insolvency, a principal objective
should be to effect an equitable distribution of the
insolvent's property among his creditors. To accomplish
this there must first be some proceeding where notice
to all of the insolvent's creditors may be given and
where the claims of preferred creditors may be
bindingly adjudicated.
The right of first preference as regards unpaid wages
recognized by Article 110 does not constitute a lien on
the property of the insolvent debtor in favor or
workers. It is but a preference of credit in their favor, a
preference in application. It is a method adopted to
determine and specify the order
CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 240
in which credits should be paid in the final distribution
of the proceeds of the insolvent's assets. The DBP
anchors its claim on a mortgage credit, which 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 (Art. 2176, CC). It creates a real right which
is enforceable against the whole world. It is a lien
on an identified immovable property, which a
preference is not.
Even if Article 110 and its Implementing Rule, as
amended, should be interpreted to mean `absolute
preference,' the same should be given only
prospective effect in line with the cardinal rule that
laws shall have no retroactive effect, unless the
contrary is provided (Art. 4, CC). Thereby, any
infringement on the constitutional guarantee on non-
impairment of obligation of contracts (Sec. 10, Art. III,
1987 Consti.) is also avoided. In point of fact, DBP's
mortgage credit antedated by several years the
amendatory law, RA 6715. To give Article 110
retroactive effect would be to wipe out the mortgage
in DBP's favor and expose it to a risk which it
sought to protect itself against by requiring a
collateral in the form of real property.
In fine, the right to preference given to workers
under Article 110 of the Labor Code cannot exist in
any effective way prior to the time of its
presentation in distribution proceedings. It will find
application when, in proceedings such as insolvency,
such unpaid wages shall be paid in full before the
`claims of the Government and other creditors' may
be paid. But, for an orderly settlement of a debtor's
assets, all creditors must be convened, their claims
ascertained and inventoried, and thereafter the
preference determined in the course of judicial
proceedings which have for their object the subjection
of the property of the debtor to the payment of his
debts or other lawful
 CRED TRANS Digest Pool | Atty. Sarona SY 2015-2016 241

obligations. Thereby, an orderly determination of

preference of creditors' claims is assured; the
adjudication made will be binding on all parties-in-
interest, since those proceedings are proceedings in
rem; and the legal scheme of classification,
concurrence and preference of credits in the Civil
Code, the Insolvency Law, and the Labor Code is
preserved in harmony.

Isaiah 41:10

“So do not fear, for I am with you; do not be

dismayed, for I am your God. I will strengthen you and
help you; I will uphold you with my righteous right
hand.”