Republic of the Philippines

TARLAC STATE UNIVERSITY

G. Romulo Boulevard, Tarlac City 2300
SCHOOL OF LAW

COMPILATION OF CASE DIGESTS IN CREDIT TRANSACTIONS

In Partial Fulfillment of the

Requirements for the Course
Credit Transactions

Presented by:
JD II
Aileen S. Balilo
Noel D. Bautista
Nikko Canillo
Manuel Dancel
Ray John Dorig
Bethina Jane Garcia
Kimberly Ann Lanuza
Melissa Prellejera

Presented to:

Atty. Cristina Elaine D. Mangrobang

 TABLE OF CONTENTS

I. LOAN……………………………………………………………………………………………………………..1

CEBU INTERNATIONAL FINANCE CORP. v. COURT OF APPEALS…………………………………1

ALMEDA VS. COURT OF APPEALS………………………………………………………………………………2
PHILIPPINE NATIONAL BANK v. COURT OF APPEALS………………………………………………...3
BPI INVESTMENT CORPORATION v. HON. COURT OF APPEALS and
ALS MANAGEMENT & DEVELOPMENT CORPORATION……………………………………………….5
CAROLYN M. GARCIA v. RICA MARIE S. THIO……………………………………………………………...6
CELESTINA T. NAGUIAT v. COURT OF APPEALS and AURORA QUEAÑO……………………….7
OLIVIA M. NAVOA and ERNESTO NAVOA v. COURT OF APPEALS,
TERESITA DOMDOMA and EDUARDO DOMDOMA……………………………………………………....8
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE v.
THE HONORABLE COURT OF APPEALS and THE PHILIPPINE
BANK OF COMMERCE……………………………………………………………………………………………….9
SAURA IMPORT and EXPORT CO., INC. v. DEVELOPMENT BANK
OF THE PHILIPPINES………………………………………………………………………………………………10
EUFEMIA ALMEDA and ROMEL ALMEDA v.
BATHALA MARKETING INDUSTRIES, INC…………………………………………………………………11
EQUITABLE PCI BANK v. NG SHEUNG NGOR………………………………………………………...…...12
LUCIA R. SINGSON v. CALTEX (PHILIPPINES), INC………………………………………………..…...15
FELIX DE LOS SANTOS vs. AGUSTINA JARRA, administratrix of the
estate of Magdaleno Jimenea, deceased…………………………………………………………………….17
POLO S. PANTALEON VS. AMERICAN EXPRESS INTERNATIONAL, INC……………………...18
SEVERINO TOLENTINO and POTENCIANA MANIO v.
BENITO GONZALEZ SY CHIAM……………………………………………………………………………….....19

A. COMMODATUM………………………………………………………………………………………….…22

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE v.

COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO
AND JUAN VALDEZ…………………………………………………………………………………………22
PAJUYO v. COURT OF APPEALS………………………………………………………………………..24
EMILIA MANZANO v. MIGUEL PEREZ SR., LEONCIO PEREZ,
MACARIO PEREZ, FLORENCIO PEREZ, NESTOR PEREZ,
MIGUEL PEREZ JR. and GLORIA PEREZ……………………………………………………….…...25
PRODUCERS BANK OF THE PHILIPPINES v.
HON. COURT OF APPEALS AND FRANKLIN VIVES………………………………………..…..27
REPUBLIC OF THE PHILIPPINES v. JOSE V. BAGTAS,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate
left by the late Jose V. Bagtas…………………………………………………………………………..28
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS) v.
THE HONORABLE COURT OF APPEALS, HEIRS OF
DOMINGO P. BALOY, represented by RICARDO BALOY et al………………………..….30
MARGARITA QUINTOS and ANGEL A. ANSALDO vs. BECK……………………………….30

II. THE USURY LAW AND CENTRAL BANK CIRCULAR NO. 416 (1974) AND BANKO
SENTRAL NG PILIPANS CIRCULAR NO. 799 (2013)………………………………………......32

TIO KHE CHIO v. THE HONORABLE COURT OF APPEALS and EASTERN

ASSURANCE AND SURETY CORPORATION…………………………………………………………………32
PILIPINAS BANK v. THE HON. COURT OF APPEALS, and LILIA R. ECHAUS…………………..33
SPOUSES DAVID B. CARPO AND RECHILDA S. CARPO v.
ELEANOR CHUA AND ELMA DY NG…………………………………………………………………………….35
CASA FILIPINA DEVELOPMENT CORPORATION v. THE DEPUTY EXECUTIVE………………37
ANTONIO L. CASTELO, ET AL. v. COURT OF APPEALS and MILAGROS DELA ROSA……….39
EASTERN SHIPPING LINES, INC. v. HON. COURT OF APPEALS
AND MERCANTILE INSURANCE COMPANY, INC………………………………………………………….42
LUCIA TAN v. ARADOR VALDEHUEZA and REDICULO VALDEHUEZA…………………………..45

III. TRUTH IN LENDING ACT………………………………………………………………………………47

UNITED COCONUT PLANTERS BANK v. SPOUSES SAMUEL and

ODETTE BELUSO………………………………………………………………………………………………………47

IV. DEPOSIT………………………………………………………………………………………………………50

BANK OF THE PHILIPPINE ISLANDS v. THE INTERMEDIATE APPELLATE

COURT and RIZALDY T. ZSHORNACK…………………………………………………………………………..50
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., v. THE HONORABLE
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY……………………………….51
LUZAN SIA v. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY…………..53
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM v.
THE COURT OF APPEALS and MAURICE McLOUGHLIN………………………………………………...55
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA v.
INSULAR BANK OF ASIA AND AMERICA………………………………………………………………………56
MANUEL M. SERRANO v. CENTRAL BANK OF THE PHILIPPINES;
OVERSEAS BANK OF MANILA et al……………………………………………………………………………….57
TRIPLE-V FOOD SERVICES, INC. vs. FILIPINO MERCHANTS INSURANCE
COMPANY INC……………………………………………………………………………………………………………..58
DURBAN APARTMENTS CORPORATION, doing business under the name
and style of CITY GARDEN HOTEL vs. PIONEER INSURANCE AND SURETY
CORPORATION……………………………………………………………………………………………………………59
PEOPLE OF THE PHILIPPINES vs. TERESITA PUIG and ROMERO PORRAS………………………60

V. PLEDGE……………………………………………………………………………………………………………62

MANILA SURETY and FIDELITY COMPANY, INC v. RODOLFO R. VELAYO………………………..62

INTEGRATED REALTY CORPORATION v. PHILIPPINE NATIONAL BANK………………………...63

VI. MORTGAGE……………………………………………………………………………………………………..66

ROSE PACKING COMPANY, INC. v. THE COURT OF APPEALS, HON. PEDRO

C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III),
PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF
OF RIZAL………………………………………………………………………………………………………………………66
PERFECTO DY, JR v. COURT OF APPEALS, GELAC TRADING INC.,
and ANTONIO V. GONZALES………………………………………………………………………………………….68
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES,
VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO v. HON. COURT OF
APPEALS and DEVELOPMENT BANK OF THE PHILIPPINES……………………………………………70
OLEA v. COURT OF APPEALS…………………………………………………………………………………………71
MANUEL D. MEDIDA, DEPUTY SHERIFF OF THE PROVINCE OF CEBU,
CITY SAVINGS BANK (FORMERLY CEBU CITY SAVINGS AND LOAN
ASSOCIATION, INC.) and TEOTIMO ABELLANA v. COURT OF
APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO…………………………………………73
DEVELOPMENT BANK OF THE PHILIPPINES v. COURT OF APPEALS
and LYDIA CUBA…………………………………………………………………………………………………………..74
CIRCE S. DURAN and ANTERO S. GASPAR v. INTERMEDIATE
APPELLATE COURT, ERLINDA B. MARCELO-TIANGCO
and RESTITUTO TIANGCO……………………………………………………………………………………………75
VICENTE C. REYES v. FRANCISCO SIERRA, EMILIO SIERRA,
ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO SIERRA,
CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS………………………………………76
VINCENT P. DAYRIT V. THE COURT OF APPEALS, HON. ARCA,
Judge of the Court of First Instance of Manila, Branch I,
MOBIL OIL PHILIPPINES, INC., and ELADIO YLAGAN, Special Sheriff…………………………......77
CORNELIO M. ISAGUIRRE v. FELICITAS DE LARA……………………………………………………….....78
OSMUNDO S. CANLAS and ANGELINA CANLAS v. COURT OF APPEALS,
ASIAN SAVINGS BANK, MAXIMO C. CONTRERAS and VICENTE MAOSCA……………………….80
SEVERINO TOLENTINO and POTENCIANA MANIO vs. BENITO GONZALES SY CHIAM.......82
MAGDALENA C. DE BARRETO, ET AL. vs. JOSE G. VILLANUEVA, ET AL………………………….84

VII. ANTICHRESIS………………………………………………………………………………………………..86

CECILIO DIEGO v. SEGUNDO FERNANDO……………………………………………………………………...86

ORTIZ v. KAYANAN……………………………………………………………………………………………………...87

VIII. GUARANTY AND SURETY……………………………………………………………………………..90

RIZAL COMMERCIAL BANKING CORPORATION v. HON. JOSE P. ARRO,

JUDGE OF THE COURT OF FIRST INSTANCE, and RESIDORO CHUA……………………………….90
SPOUSES ALFREDO and SUSANA ONG v. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK………………………………………..…………………………………………………….91
LUZON STEEL CORPORATION, REPRESENTED BY TOMAS AQUINO CU
v. JOSE O. SIA, TIMES SURETY & INSURANCE CO. INC…………………………………………………..92
INTERNATIONAL FINANCE CORPORATION v. IMPERIAL TEXTILE MILLS, INC………….....92
E. ZOBEL, INC. v. THE COURT OF APPEALS, CONSOLIDATED
BANK AND TRUST CORPORATION and SPOUSES RAUL and ELEA R. CLAVERIA…………....93
GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES v.
MARCELINO TIZON, ET AL……………………………………………………………………………………….…95
PHILIPPINE NATIONAL BANK PHILIPPINE NATIONAL BANK v.
MANILA SURETY & . MANILA SURETY & FIDELITY CO., INC., and
THE COURT OF APPEALS…………………………………………………………………………………………...96
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ JOSE C. TUPAZ IV and
PETRONILA C. TUPAZ v. THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS
ANTONIO GARCIA, JR., v. COURT OF APPEALS, LASAL………………………………………….…….98
DEVELOPMENT CORPORATION………………………………………………………………………………..101
ESTRELLA PALMARES ESTRELLA PALMARES v. COURT OF APPEALS
and M.B. . COURT OF APPEALS and M.B. LENDING CORPORATION
LENDING CORPORATION…………………………………………………………………………………………105
SALVADOR P. ESCAÑO and MARIO M. SILOS SALVADOR P. ESCAÑO
and MARIO M. SILOS v. RAFAEL . RAFAEL ORTIGAS, JR. ORTIGAS, JR…………………………111
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC v.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and
REGIONAL SHERIFF OF CALOOCAN CITY………………………………………………………………….114

IX. CONCURENCE AND PREFERENCE OF CREDITS………………………………..…………….116

DEVELOPMENT BANK OF THE PHILIPPINES v. THE NATIONAL

LABOR RELATIONS COMMISSION and MALAYANG SAMAHAN
NG MGA MANGAGAWA SA ATLAS TEXTILE DEVELOPMENT CORPORATION………………116
DEVELOPMENT BANK OF THE PHILIPPINES v. HONORABLE COURT
OF APPEALS and REMMINGTON INDUSTRIAL SALES CORPORATION…………………………117

X. R.A. 10142 (FINANCIAL REHABILITATION AND INSOLVENCY ACT OF THE

PHILIPPINES)……………………………………………………………………………………………………119

RUBY INDUSTRIAL CORPORATION v. COURT OF APPEALS…………………………….…………….119

RIZAL COMMERCIAL BANKING CORP. v. INTERMEDIATE APPELLATE COURT…………......120
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM v. DAWAY………………………...122
I. LOANS

CEBU INTERNATIONAL FINANCE CORP. VS. COURT OF APPEALS

G.R. NO. 123031. OCTOBER 12, 1999.
QUISUMBING, J.:

SYLLABUS:

CIVIL LAW; COMMERCIAL LAW; LOAN; IN A MONEY MARKET TRANSACTION, THE

INVESTOR IS A LENDER WHO LOANS HIS MONEY TO A BORROWER THROUGH A
MIDDLEMAN OR DEALER.— a “money market is a market dealing in standardized short-
term credit instruments (involving large amounts) where lenders and borrowers do not
deal directly with each other but through a middle man or dealer in open market. In a
money market transaction, the investor is a lender who loans his money to a borrower
through a middleman or dealer.

CHECK; A CHECK IS NOT A LEGAL TENDER, AND THEREFORE CANNOT CONSTITUTE

VALID TENDER OF PAYMENT.—In a loan transaction, the obligation to pay a sum certain
in money may be paid in money, which is the legal tender or, by the use of a check. A check
is not a legal tender, and therefore cannot constitute valid tender of payment. “Since a
negotiable instrument is only a substitute for money and not money, the delivery of such an
instrument does not, by itself, operate as payment (citation omitted). A check, whether a
manager’s check or ordinary check, is not legal tender, and an offer of a check in payment
of a debt is not a valid tender of payment and may be refused receipt by the obligee or
creditor. Mere delivery of checks does not discharge the obligation under a judgment. The
obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3.)”

FACTS:

Vicente Alegre invested with Cebu International Finance Corporation (CIFC)

P500,000.00 in cash. CIFC issued promissory note which covered private respondent’s
placement. CIFC issued BPI Check No. 513397 (the Check) in favor of private respondent as
proceeds of his matured investment. Mrs. Alegre deposited the Check with RCBC but BPI
dishonored it, annotating therein that the “Check is subject of an investigation”. BPI took
possession of the Check pending investigation of several counterfeit checks drawn against
CIFC’s checking account. Private respondent demanded from CIFC that he be paid in cash
but the latter refused. Private respondent Alegre filed a case for recovery of a sum of
money against CIFC.

CIFC asserts that since BPI accepted the instrument, the bank became primarily
liable for the payment of the Check. When BPI offset the value of the Check against the
losses from the forged checks allegedly committed by private respondent, the Check was
deemed paid.

11
ISSUE:

Whether or not petitioner CIFC is discharged from the liability of paying the value of
the Check.

RULING:

The Court held in the negative. In a money market transaction, the investor is a
lender who loans his money to a borrower through a middleman or dealer. A check is not
legal tender, and therefore cannot constitute valid tender of payment. Since a negotiable
instrument is only substitute for money and not money, the delivery of such an instrument
does not by itself, operate as payment. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and remains suspended
until the payment by commercial document is actually realized. (Article 1249)

Petition denied.

ALMEDA VS. COURT OF APPEALS

G.R. NO. 113412. APRIL 17, 1996.
KAPUNAN, J.:

SYLLABUS:

SPECIAL CONTRACTS; LOAN; INTEREST IS REQUIRED TO BE EXPRESSLY STIPULATED

IN WRITING. — The manner of agreement is itself explicitly stipulated by the Civil Code
when it provides, in Article 1956 that "No interest shall be due unless it has been expressly
stipulated in writing." What has been "stipulated in writing" from a perusal of interest rate
provision of the credit agreement signed between the parties is that petitioners were
bound merely to pay 21% interest, subject to a possible escalation or de-escalation, when
1) the circumstances warrant such escalation or de-escalation; 2) within the limits allowed
by law; and (3) upon agreement.

LIFTING OF USURY CEILING; DOES NOT GRANT BANKS CARTE BLANCHE AUTHORITY
TO RAISE INTEREST; RULE UNDER CB CIRCULAR 905. — While the Usury Law ceiling on
interest rates was lifted by C.B. Circular 905, nothing in the said circular could possibly be
read as granting respondent bank carte blanche authority to raise interest rates to levels
which would either enslave its borrowers or lead to a hemorrhaging of their assets.
Borrowing represents a transfusion of capital from lending institutions to industries and
businesses in order to stimulate growth. This would not, obviously, be the effect of PNB's
unilateral and lopsided policy regarding the interest rates of petitioners' borrowings in the
instant case.

ESCALATION CLAUSES; VALID AS LONG AS NOT SOLELY POTESTATIVE BUT BASED ON

REASONABLE AND VALID GROUNDS. — Escalation clauses are not basically wrong or
legally objectionable so long as they are not solely potestative but based on reasonable and
valid grounds. Here, as clearly demonstrated above, not only the increases of the interest
rates on the basis of the escalation clause patently unreasonable and unconscionable, but
also there are no valid and reasonable standards upon which the increases are anchored.

2
FACTS:

On various dates in 1981, the Philippine National Bank granted to herein

petitioners, the spouses Ponciano L. Almeda and Eufemia P. Almeda, several loan/credit
accommodations totaling P18 Million pesos payable in a period of six years at an interest
rate of 21% per annum. To secure the loan, the spouses Almeda executed a Real Estate
Mortgage Contract covering a 3,500 square meter parcel of land, together with the building
erected thereon (the Marvin Plaza) located at Pasong Tamo, Makati, Metro Manila. Between
1981 and 1984, petitioners made several partial payments on the loan totaling.
P7,735,004.66, a substantial portion of which was applied to accrued interest. On March 31,
1984, respondent bank, over petitioners’ protestations, raised the interest rate to 28%,
allegedly pursuant to Section III-c (1) of its credit agreement. Said interest rate thereupon
increased from an initial 21% to a high of 68% between March of 1984 to September of
1986.

Petitioner protested the increase in interest rates, to no avail. Before the loan was to
mature in March, 1988, the spouses filed on, February 6, 1988 a petition for declaratory
relief with prayer for a writ of preliminary injunction and temporary restraining order.
Invoking the Law on Mandatory Foreclosure (Act 3135, as amended and P.D. 385), the PNB
countered by ordering the extrajudicial foreclosure of petitioner’s mortgaged properties
and scheduled an auction sale for March 14, 1989. Upon motion by petitioners, however,
the lower court, on April 5, 1989, granted a supplemental writ of preliminary injunction,
staying the public auction of the mortgaged property.

ISSUE:

Whether or not PNB was authorized to raise its interest rates from 21% to as high
as 68% under the credit agreement.

RULING:

No. Any contact which appears to be heavily weighted in favor of one of the parties
so as to lead to an unconscionable result is void. Likewise, any stipulation regarding the
validity or compliance of the contract which is left solely to the will of one of the parties is
invalid. The binding effect of any agreement between parties to a contract is premised on
two settled principle: that any obligation arising from the contact has the force of law
between the parties; and that there must be mutuality between the parties based on their
essential equality.

PHILIPPINE NATIONAL BANK VS. COURT OF APPEALS

G.R. NO. 107569. NOVEMBER 8, 1994.
PUNO, J.:

SYLLABUS:

CIVIL LAW; CONTRACTS; P.D. NO. 1684 AND C.B. CIRCULAR NO. 905 DID NOT
AUTHORIZE EITHER PARTY TO UNILATERALLY RAISE THE INTEREST RATE
WITHOUT THE OTHER’S CONSENT.—P.D. No. 1684 and C.B. Circular No. 905 no more

3
than allow contracting parties to stipulate freely regarding any subsequent adjustment in
the interest rate that shall accrue on a loan or forbearance of money, goods or credits. In
fine, they can agree to adjust, upward or downward, the interest previously stipulated.
However, contrary to the stubborn insistence of petitioner bank, the said law and circular
did not authorize either party to unilaterally raise the interest rate without the other’s
consent.

IT IS BASIC THAT THERE CAN BE NO CONTRACT IN THE TRUE SENSE IN THE ABSENCE
OF THE ELEMENT OF AGREEMENT, OR OF MUTUAL ASSENT OF THE PARTIES.—It is
basic that there can be no contract in the true sense in the absence of the element of
agreement, or of mutual assent of the parties. If this assent is wanting on the part of one
who contracts, his act has no more efficacy than if it had been done under duress or by a
person of unsound mind.

CONTRACT CHANGES MUST BE MADE WITH THE CONSENT OF THE CONTRACTING

PARTIES.—Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification, especially
when it affects an important aspect of the agreement. In the case of loan contracts, it cannot
be gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be

FACTS:

Private respondents, who are owners of NACIDA – registered enterprise, obtained

from petitioner PNB a loan initially pegged at 12% interest per annum. The contract
agreement includes, among others, a clause which allows PNB to raise the rate of interest
depending on the banks future policy. During the term of the agreement, PNB, on several
occasions imposed subsequent raises to the applicable rate ranging from the original 12%
up to 42% imposing also a 6% penalty per annum.

ISSUE:

Whether or not PNB may raise the rate of interest based solely on a certain clause in
the contract and without consent from the debtor as to the amount and rate increased.

RULING:

No. it is basic that there can be no contract in the true sense in the absence of the
element of agreement, or of mutual assent of the parties. If this assent is wanting on the
part of the one who contracts, his act has no more efficacy than if it had been done under
duress or by a person of unsound mind.

Similarly, contract changes must be made with the consent of the contracting
parties. The minds of all the parties met as to the proposed modification, especially when it
affect an important aspect of the agreement. In the case of loan contracts, it cannot be
gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, every change must be mutually agreed upon, otherwise, it is bereft of
any binding effect. The court cannot countenance petitioner bank’s posturing that the
escalation clause at bench gives it unbridled right top unilaterally upwardly adjust the

4
interest on private respondent’s loan. That would completely take away from private
respondents the right to assent to an important modification to an agreement, and would
negate the element of mutuality on contracts.

BPI INVESTMENT CORPORATION v.

HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT CORPORATION
G.R. No. 133632, February 15, 2002
QUISUMBING, J.

SYLLABUS:

A contract of loan is not a consensual contract but a real contract. It is perfected only upon
the delivery of the object of the contract.

FACTS:

Frank Roa obtained a loan from Ayala Investment and Development Corporation
(AIDC), for the construction of his house. Said house and lot were mortgaged to AIDC to
secure the loan. Roa sold the properties to ALS and Litonjua, the latter paid in cash and
assumed the balance of Roa’s indebtedness with AIDC. AIDC was not willing to extend the
old interest to private respondents and proposed a grant of new loan of P500,000 with
higher interest to be applied to Roa’s debt, secured by the same property. Private
respondents executed a mortgage deed containing the stipulation. The loan contract was
signed on 31 March 1981 and was perfected on 13 September 1982, when the full loan was
released to private respondents.

BPIIC, AIDC’s predecessor, released to private respondents P7,146.87, purporting to

be what was left of their loan after full payment of Roa’s loan. BPIIC filed for foreclosure
proceedings on the ground that private respondents failed to pay the mortgage
indebtedness. Private respondents maintained that they should not be made to pay
amortization before the actual release of the P500,000 loan. The suit was dismissed and
affirmed by the CA.

ISSUE:

Whether or not a contract of loan is a consensual contract.

HELD:

The Court held in the negative. A loan contract is not a consensual contract but a
real contract. It is perfected only upon delivery of the object of the contract. A contract o
loan involves a reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other; it is a basic principle in reciprocal obligations that
neither party incurs in delay, if the other does not comply or is not ready to comply is a
proper manner with what is incumbent upon him. Obligation to pay commenced only on
October 13, 1982, a month after the perfection of the contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of
the other. It is a basic principle in reciprocal obligations that neither party incurs in delay,
if the other does not comply or is not ready to comply in a proper manner with what is

5
incumbent upon him. 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.

CAROLYN M. GARCIA v.
RICA MARIE S. THIO, Respondent.
G.R. NO. 154878, March 16, 2007
CORONA, J.

SYLLABUS:

A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract. Delivery is the act by which the res or substance is
thereof placed within the actual or constructive possession or control of another. Upon
delivery of the object of the contract of loan the debtor acquires ownership of such money or
loan proceeds and is bound to pay the creditor an equal amount.

FACTS:

Respondent Thio received from petitioner Garcia two crossed checks which amount
to US$100,000 and US$500,000, respectively, payable to the order of Marilou Santiago.
According to petitioner, respondent failed to pay the principal amounts of the loans when
they become due and so she filed a complaint for sum of money and damages with the RTC.
Respondent denied that she contracted the two loans and countered that it was Marilou
Satiago to whom petitioner lent the money. She claimed she was merely asked y petitioner
to give the checks to Santiago. She issued the checks for P76,000 and P20,000 not as
payment of interest but to accommodate petitioner’s request that respondent use her own
checks instead of Santiago’s.

RTC ruled in favor of petitioner. CA reversed RTC and ruled that there was no
contract of loan between the parties.

ISSUES:

(1) Whether or not there was a contract of loan between petitioner and
respondent.
(2) Who borrowed money from petitioner, the respondent or Marilou Santiago?

HELD:

(1) The Court held in the affirmative. A loan is a real contract, not consensual, and as
such is perfected only upon the delivery of the object of the contract. Upon delivery of the
object of the contract of loan (in this case the money received by the debtor when the
checks were encashed) the debtor acquires ownership of such money or loan proceeds and
is bound to pay the creditor an equal amount. It is undisputed that the checks were
delivered to respondent.

6
 (2)However, the checks were crossed and payable not to the order of the
respondent but to the order of a certain Marilou Santiago. Delivery is the act by which the
res or substance is thereof placed within the actual or constructive possession or control of
another. Although respondent did not physically receive the proceeds of the checks, these
instruments were placed in her control and possession under an arrangement whereby she
actually re-lent the amount to Santiago.

CELESTINA T. NAGUIAT, Petitioner

v. COURT OF APPEALS and AURORA QUEAÑO
G. R. No. 118375, October 3, 2003
TINGA, J.

SYLLABUS:

An accepted promise to deliver something by way of commodatum or simple loan is

binding upon the parties, but the commodatum or simple loan itself shall not be perfected
until the delivery of the object of the contract. A loan contract is a real contract, not
consensual, and as such, is perfected only upon the delivery of the objects of the contract.

FACTS:

Queaño applied with Naguiat a loan for P200,000, which the latter granted. Naguiat
indorsed to Queaño Associated bank Check No. 090990 for the amount of P95,000 and
issued also her own Filmanbank Check to the order of Queaño for the amount of P95,000.
The proceeds of these checks were to constitute the loan granted by Naguiat to Queaño. To
secure the loan, Queaño executed a Deed of Real Estate Mortgage in favor of Naguiat, and
surrendered the owner’s duplicates of titles of the mortgaged properties. The deed was
notarized and Queaño issued to Naguiat a promissory note for the amount of P200,000.
Queaño also issued a post-dated check amounting to P200,000 payable to the order of
Naguait. The check was dishonoured for insufficiency of funds. Demand was sent to
Queaño. Shortly, Queaño, and one Ruby Reubenfeldt met with Naguiat. Queaño told Naguiat
that she did not receive the loan proceeds, adding that the checks were retained by
Reubenfeldt, who purportedly was Naguiat’s agent.

Naguiat applied for extrajudicial foreclosure of the mortgage. RTC declared the Deed
as null and void and ordered Naguiat to return to Queaño the owner’s duplicates of titles of
the mortgaged lots.

ISSUE:

Whether or not the issuance of check resulted in the perfection of the loan contract.

HELD:

The Court held in the negative. No evidence was submitted by Naguiat that the
checks she issued or endorsed were actually encashed or deposited. The mere issuance of
the checks did not result in the perfection of the contract of loan. The Civil Code provides
that the delivery of bills of exchange and mercantile documents such as checks shall
produce the effect of payment only when they have been cashed. It is only after the checks

7
have been produced the effect of payment that the contract of loan may have been
perfected.

Article 1934 of the Civil Code provides: An accepted promise to deliver something
by way of commodatum or simple loan is binding upon the parties, but the commodatum or
simple loan itself shall not be perfected until the delivery of the object of the contract. A
loan contract is a real contract, not consensual, and as such, is perfected only upon the
delivery of the objects of the contract.

OLIVIA M. NAVOA and ERNESTO NAVOA v. COURT OF APPEALS, TERESITA DOMDOMA

and EDUARDO DOMDOMA
G.R. NO. 59255 DECEMBER 29, 1995
BELLOSILLO, J.:

SYLLABUS:

CHECKS ARE EVIDENCE OF LOANS: Loans granted to petitioners are secured by

corresponding checks dated a month after each loan was obtained. From the allegations in
the complaint there is no other fair interference than that the loans were payable one
month after they were contracted and the checks issued by petitioners were drawn to
answer for their debts to private respondent.

FACTS:

Olivia obtain loans from Teresita for the purpose of investing the same in the
purchase of jewelry, which loan were secured by personal check of the former. In addition
to that, Olivia obtained a diamond ring from Teresita, and as a security for the said ring,
Olivia issued a PCIB check with the condition that if the ring is not returned within 15 days,
it shall be considered as sold. However, petitioners failed to return the ring and pay the
loans, and all the checks they issued were dishonored.

ISSUE:

Whether or Not private respondent has a cause of action against the petitioners

HELD:

Yes. All the loans granted to petitioners are secured by corresponding checks dated
a month after each loan was obtained. In this regard, the term security is defined as means
of ensuring the enforcement of an obligation or of protecting some interest in property. It
may be personal, as when an individual becomes a surety or a guarantor; or a property
security, as when a mortgage, pledge, charge, lien, or other device is used to have property
held, out of which the person to be made secured can be compensated for loss. Security is
something to answer for as a promissory note. That is why a secured creditor is one who
holds a security from his debtor for payment of a debt. From the allegations in the
complaint there is no other fair interference than that the loans were payable one month
after they were contracted and the checks issued by petitioners were drawn to answer for
their debts to private respondent.

8
 Petitioners failed to make good the checks on their dates for payment of their
obligations.

RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE vs.

THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE
G.R. NO. L-49101. OCTOBER 24, 1983
GUERRERO, J:

SYLLABUS:

A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT: a contract of loan is perfected at

the same time a contract of mortgage is executed. A promissory note is merely an evidence
of indebtedness and does not indicate lack of consideration of the mortgage at the time of
its execution.

FACTS:

The Lozanos were the owners of the property which they mortgaged to secure the
payment of the loan in the amount of P 75,000 they were about to obtain from the
defendant bank. Two days later, before receiving the P 75,000.000 from the bank, the
Lozanos executed in favor of herein plaintiff a deed of sale with mortgage for a
consideration of P 100,000. The P 75,000 was received 6 days after the execution of the
deed of mortgage when the Lozanos and the co-maker signed the promissory note.

Upon failure to secure the payment, the defendant bank applied for foreclosure of
the mortgage and an auction was conducted and offers from plaintiff to repurchase the
property failed. Now, plaintiff contends that since the P 75,000 was not received by the
Lozanos at the time the mortgage was executed makes the deed of mortgage invalid
because of its lack of consideration. Plaintiff further alleged that in the absence of a
principal obligation, there is want of consideration in the accessory contract, which
consequently impairs its validity and fatally affects its very existence.

ISSUE:

Whether the real estate mortgage executed by the spouses Lozano was valid

HELD:

Yes. The fact that the Lozanos did not collect from the bank the consideration of the
mortgage on the date it was executed is immaterial. A contract of loan, being a consensual
contract, was perfected at the same time the contract of mortgage was executed. Further, it
was stipulated in the contract of mortgage that should the mortgaged property is sold, the
vendee shall assume the mortgage in the terms and conditions under which it is
constituted. It can also be said that petitioners voluntarily assumed the mortgage when
they entered into the deed of sale with mortgage. They are now estopped from impugning
its validity.

9
SAURA IMPORT and EXPORT CO., INC. vs.
DEVELOPMENT BANK OF THE PHILIPPINES
G.R. NO. L-24968. APRIL 27.1972
MAKALINTAL, J.:

SYLLABUS:

AN ACCEPTED PROMISE TO DELIVER BY WAY OF COMMODATUM OR SIMPLE LOAN IS

BINDING UPON PARTIES: ART. 1934 of the civil code. An accepted promise to deliver
something, by way of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perferted until the delivery of the object of
the contract.

FACTS:

Herein plaintiff applied for an industrial loan to the Rehabilitation Finance

Corparotaion, now Development Bank of the Philippines, and the factory to be constructed
as the security for said loan. Defendant bank entertained the loan which amounts to P
500,000 with the condition that the DENR shall certify the raw materials needed by the
plaintiff to carry out its operation are available in the immediate vicinity and that there is
prospect of increased production thereof to provide adequately for the requirements of the
factory. However, plaintiff realized that it could not meet said conditions and sent a letter
to defendant bank informing the latter that raw materials is not sufficient in quantity “this
year or probably next year” and further requested the partial release of the loan. Defendant
Bank turned down the request and the negotiations came to a standstill. Plaintiff did not
pursue the matter further and, instead, requested for the cancellation of the mortgage.

Nine years after the mortgage was cancelled, plaintiff commenced a suit for
damages on the alleged failure of defendant bank to comply with its obligation. The trial
court ruled in favor of the plaintiff and ruled that there was a perfected contract between
the parties, thus the defendant bank is guilty of breach thereof. Defendant, on the other
hand, claims that there was no perfected contract.

ISSUE:

Whether or not there was a perfected contract which would make the defendant
guilty of breach of contract

HELD:

Yes, there was indeed a perfected consensual contract as recognized in Article 1934
of the Civil Code which provides that an accepted promise to deliver something, by
commodatum or simple loan is binding upon parties but the loan commodatum or loan
itself shall not be perfected until the delivery of the object of the contract. However, the act
of the defendant bank of turning down the plaintiff’s request and the cancellation of the
mortgage on the part of the plaintiff constitute mutual desistance which extinguished the
obligations of both. The defendant bank was relieved of its obligations to comply upon the
initiative of the plaintiff itself hence, not liable for any breach.

10
EUFEMIA ALMEDA and ROMEL ALMEDA v. BATHALA MARKETING INDUSTRIES, INC.
G.R. No. 150806, JANUARY 28, 2008
NACHURA, J.:

SYLLABUS:

ARTICLE 1250, NEW CIVIL CODE: In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an agreement
to the contrary.

EXTRAORDINARY INFLATION; DEFINITION: Extraordinary inflation exists when there is

a decrease or increase in the purchasing power of the Philippine currency which is unusual
or beyond the common fluctuation in the value of said currency, and such increase or
decrease could not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation

EXTRAORDINARY INFLATION; REQUISITE: Absent an official pronouncement or

declaration by competent authorities of the existence of extraordinary inflation during a
given period, the effects of extraordinary inflation are not to be applied.

FACTS:

Respondent, as lessee, renewed its Contract of Lease with Ponciano Almeda, as

lessor.

During the effectivity of the contract, Ponciano died so the respondent dealt with
petitioners thereafter. Respondent received letter from petitioners, informing the former
that its monthly rental should be increased by 73% pursuant to Condition No. 7 of the
contract and Article 1250 of the Civil Code. Respondent opposed petitioners' demand and
insisted that there was no extraordinary inflation.

Respondent instituted an action for declaratory relief for purposes of determining

the correct interpretation of Condition Nos. 6 and 7 of the lease contract to prevent damage
and prejudice. Petitioners contend that Article 1250 of the Civil Code does not apply to this
case because the contract stipulation speaks of extraordinary inflation or devaluation while
the Code speaks of extraordinary inflation or deflation.

Petitioners in turn filed an action for ejectment, rescission and damages against
respondent for failure of the latter to vacate the premises after the demand made by the
former.

ISSUE:

Whether the amount of rentals due the petitioners should be adjusted by reason of
extraordinary inflation or devaluation

11
HELD:

No. Although Condition No. 7 of the contract speaks of "extraordinary inflation or

devaluation" as compared to Article 1250's "extraordinary inflation or deflation," it is
found when the parties used the term "devaluation," they really did not intend to depart
from Article 1250 of the Civil Code. Thus, Condition No. 7 of the contract should be read in
harmony with the Civil Code provision.

That this is the intention of the parties is evident from petitioners' letter dated
January 26, 1998, where, in demanding rental adjustment ostensibly based on Condition
No. 7, petitioners made explicit reference to Article 1250 of the Civil Code, even quoting the
law verbatim:

In case an extraordinary inflation or deflation of the currency stipulated should

supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.

Inflation has been defined as the sharp increase of money or credit, or both, without
a corresponding increase in business transaction. There is inflation when there is an
increase in the volume of money and credit relative to available goods, resulting in a
substantial and continuing rise in the general price level.

Extraordinary inflation exists when there is a decrease or increase in the purchasing

power of the Philippine currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation

The erosion of the value of the Philippine peso in the past three or four decades,
starting in the mid-sixties, is characteristic of most currencies. While the Court may take
judicial notice of the decline in the purchasing power of the Philippine currency in that
span of time, such downward trend of the peso cannot be considered as the extraordinary
phenomenon contemplated by Article 1250 of the Civil Code. Furthermore, absent an
official pronouncement or declaration by competent authorities of the existence of
extraordinary inflation during a given period, the effects of extraordinary inflation are not
to be applied.

EQUITABLE PCI BANK v. NG SHEUNG NGOR

G.R. No. 171545, DECEMBER 19, 2007
CORONA, J.:

SYLLABUS:

CONTRACTS OF ADHESION NOT INVALID PER SE: It is erroneous to conclude that

contracts of adhesion are invalid per se. They are as binding as ordinary contracts. A party
is in reality free to accept or reject it.

12
VALID ESCALATION CLAUSE; ELEMENTS: A valid escalation clause provides that: (a) The
rate of interest will only be increased if the applicable maximum rate of interest is
increased by law or by the Monetary Board; and (b) The stipulated rate of interest will be
reduced if the applicable maximum rate of interest is reduced by law or by the Monetary
Board (de-escalation clause).

EXTRAORDINARY INFLATION (OR DEFLATION); REQUISITES: For extraordinary

inflation (or deflation) to affect an obligation, the following requisites must be proven that:
(a) There was an official declaration of extraordinary inflation or deflation from the Bangko
Sentral ng Pilipinas (BSP); (b) The obligation was contractual in nature; and (c) The parties
expressly agreed to consider the effects of the extraordinary inflation or deflation.

BANK AND DEPOSITOR; SET-OFF OR COMPENSATION: The relationship between a bank

and its depositor is that of creditor and debtor. For this reason, a bank has the right to set-
off the deposits in its hands for the payment of a depositor's indebtedness.

FACTS:

Respondents filed an action for annulment and/or reformation of documents and

contracts against Equitable, claiming that Equitable induced them to avail of its peso and
dollar credit facilities by offering low interest rates so they accepted Equitable's proposal
and signed the bank's pre-printed promissory notes on various dates beginning 1996.
They, however, were unaware that the documents contained identical escalation clauses
granting Equitable authority to increase interest rates without their consent.

Equitable asserted that respondents knowingly accepted all the terms and
conditions contained in the promissory notes. In fact, they continuously availed of and
benefited from Equitable's credit facilities for five years.

RTC upheld the validity of the promissory notes. It found that, in 2001 alone,
Equitable restructured respondents' loans. RTC, however, invalidated the escalation clause
contained therein because it violated the principle of mutuality of contracts. Nevertheless,
it took judicial notice of the steep depreciation of the peso during the intervening period
and declared the existence of extraordinary deflation.

ISSUES:

1. Whether the promissory note is valid

2. Whether the escalation clause violated the principle of mutuality of contracts

3. Whether there is extraordinary deflation

4. Whether Equitable had the right to set-off the deposits in its hands for the payment
of a depositor's indebtedness

13
HELD:

1. Yes. If the terms and conditions offered by Equitable had been truly prejudicial to
respondents, they would have walked out and negotiated with another bank at the first
available instance, but they did not. Instead, they continuously availed of Equitable's
credit facilities for five long years.

It is erroneous to conclude that contracts of adhesion are invalid per se. They are as
binding as ordinary contracts. A party is in reality free to accept or reject it. A contract
of adhesion becomes void only when the dominant party takes advantage of the
weakness of the other party, completely depriving the latter of the opportunity to
bargain on equal footing.

2. Yes. Escalation clauses are not void per se. However, one “which grants the creditor
an unbridled right to adjust the interest independently and upwardly, completely
depriving the debtor of the right to assent to an important modification in the
agreement” is void. Clauses of that nature violate the principle of mutuality of contracts.

A valid escalation clause provides that:

a. The rate of interest will only be increased if the applicable maximum rate of
interest is increased by law or by the Monetary Board; and
b. The stipulated rate of interest will be reduced if the applicable maximum rate of
interest is reduced by law or by the Monetary Board (de-escalation clause).

In this case, Equitable dictated the interest rates if the term (or period for repayment)
of the loan was extended. Respondents had no choice but to accept them. This was a
violation of Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did
not contain the necessary provisions for validity. Thus, the escalation clause was void.

3. No. For extraordinary inflation (or deflation) to affect an obligation, the following
requisites must be proven that:

a. There was an official declaration of extraordinary inflation or deflation from

the Bangko Sentral ng Pilipinas (BSP);
b. The obligation was contractual in nature; and
c. The parties expressly agreed to consider the effects of the extraordinary
inflation or deflation.

Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out
of a contract, the parties did not agree to recognize the effects of extraordinary
inflation (or deflation).

4. Yes. The relationship between a bank and its depositor is that of creditor and debtor.
For this reason, a bank has the right to set-off the deposits in its hands for the payment
of a depositor's indebtedness.

14
 Respondents indeed defaulted on their obligation. Thus, Equitable had the option to
exercise its legal right to set-off or compensation.

LUCIA R. SINGSON v. CALTEX (PHILIPPINES), INC.

G.R. No. 137798, OCTOBER 4, 2000
GONZAGA-REYES, J.:

SYLLABUS:

ARTICLE 1250, NEW CIVIL CODE: In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is an agreement
to the contrary.

EXTRAORDINARY INFLATION; DEFINITION: There is a decrease or increase in the

purchasing power of the Philippine currency which is unusual or beyond the common
fluctuation in the value of said currency, and such increase or decrease could not have been
reasonably foreseen or was manifestly beyond the contemplation of the parties at the time
of the establishment of the obligation.

EXTRAORDINARY INFLATION; REQUISITE: The effects of extraordinary inflation are not

to be applied without an official declaration thereof by competent authorities.

FACTS:

Singson and CALTEX entered into a contract of lease over a parcel of land.

Five years before the expiration of the lease contract, Singson asked respondent to
adjust or increase the amount of rentals citing that the country was experiencing
extraordinary inflation.

CALTEX refused petitioner's request and declared that the terms of the lease
contract are clear as to the rental amounts therein provided being “the maximum rental
which the lessor may collect during the term of the lease.”

To substantiate its allegation of extraordinary inflation, Singson presented the

Assistant Director of the Supervising and Examining Sector of the Central Bank, who
attested that the inflation rate increased abruptly during the period 1982 to 1985, caused
mainly by the devaluation of the peso. Singson also submitted into evidence a certification
of the official inflation rates from 1966 to 1986 prepared by the National Economic
Development Authority (NEDA) based on consumer price index, which reflected that at the
time the parties entered into the subject contract, the inflation rate was only 2.06%; then, it
soared to 34.51% in 1974, and in 1984, reached a high of 50.34%.

He invoked by analogy the principle of rebus sic stantibus in public international

law, under which a vital change of circumstances justifies a state's unilateral withdrawal
from a treaty. Singson posited that in pegging the monthly rental rates of P2.50 and P3.00
per square meter, respectively, the parties were guided by the economic conditions
prevalent in 1968, when the Philippines faced robust economic prospects.

15
ISSUE:

Whether there existed an extraordinary inflation during the period 1968 to 1983
that would justify an adjustment or increase of the rentals between the parties

HELD:

NO. Article 1250 of the Civil Code states:

In case an extraordinary inflation or deflation of the currency stipulated should

supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the
contrary.

Extraordinary inflation exists when there is a decrease or increase in the purchasing

power of the Philippine currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could not have been reasonably
foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation.

The supervening of extraordinary inflation is never assumed. The party alleging it

must lay down the factual basis for the application of Article 1250.

a. From the period 1966 to 1986, the official inflation rate never exceeded 100% in
any single year;
b. The highest official inflation rate recorded was in 1984 which reached only 50.34%;
c. Over a 21 year period, the Philippines experienced a single-digit inflation in 10
years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and 1986);
d. In other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and
1989) when the Philippines experienced double-digit inflation rates, the average of
those rates was only 20.88%;
e. While there was a decline in the purchasing power of the Philippine currency from
the period 1966 to 1986, such cannot be considered as extraordinary; rather, it is a
normal erosion of the value of the Philippine peso which is a characteristic of most
currencies.

Erosion is indeed an accurate description of the trend of decline in the value of the
peso in the past three to four decades.

Moreover, the effects of extraordinary inflation are not to be applied without an

official declaration thereof by competent authorities.

16
FELIX DE LOS SANTOS vs. AGUSTINA JARRA, administratrix of the estate of
Magdaleno Jimenea, deceased
G.R. No. L-4150. February 10, 1910
TORRES, J.:

SYLLABUS:

CONTRACT OF 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.

FACTS:

Jimenea borrowed and obtained from the plaintiff ten first class carabaos, to be used
at the animal-power mill of his hacienda without recompense or remuneration under the
sole condition that they should be returned to the owner as soon as the work at the mill
was terminated. However, Jimenea did not return the carabaos despite the fact that the
plaintiff claimed their return after work at the mill was finished. When Jimenea died, the
defendant was appointed as the administratrix of his estate and took over the
administration of Jimeneas estate.

Plaintiff presented his claim to the commissioners of the estate of Jimenea for the
return of the ten carabaos but was rejected. Defendant alleges that while the late Jimenea
asked the plaintiff to loan him ten carabaos, only three second hand carabaos were
obtained which were afterwards transferred by sale by the plaintiff to the late Jimenea.

ISSUE:

Whether the ten carabaos was loaned to the late Jimenea

HELD:

Yes. The record disclosed that it has been fully proven from the testimony of a
sufficient number of witnesses that the plaintiff, sent in charge of various persons the ten
carabaos requested by Jimenea, in the two letters produced at the trial by the plaintiff, and
that Jimenea received them in the presence of the brother of Jimenea, who saw the animals
arrive at the hacienda where it was proposed to employ them.

The alleged purchase of three carabaos by Jimenea from his son-in-law Santos is not
evidenced by any trustworthy documents such as those of transfer, nor were the
declarations of the witnesses presented by the defendant affirming it satisfactory; for said
reason it cannot be considered that Jimenea only received three carabaos on loan from
plaintiff, and that he afterwards kept them definitely by virtue of the purchase.

Hence, the carabaos loaned or given on commodatum to the now deceased Jimenea
were ten in number; that they, or at any rate the six surviving ones, have not been returned
to the plaintiff, and that it is not true that the latter sold to the former three carabaos that
the purchaser was already using; therefore, as the said six carabaos were not the property

17
of the deceased nor of any of his descendants, it is the duty of the administratrix of the
estate to return them or indemnify the owner for their value.

POLO S. PANTALEON VS. AMERICAN EXPRESS INTERNATIONAL, INC.

G.R. No. 174269. MAY 8, 2009
TINGA, J.:

SYLLABUS:

NATURE OF CREDIT CARD TRANSACTIONS: The bank credit card system involves a
tripartite relationship between the issuer bank, the cardholder, and merchants
participating in the system. The issuer bank establishes an account on behalf of the person
to whom the card is issued, and the two parties enter into an agreement which governs
their relationship. This agreement provides that the bank will pay for cardholder’s account
the amount of merchandise or services purchased through the use of the credit card and
will also make cash loans available to the cardholder. It also states that the cardholder shall
be liable to the bank for advances and payments made by the bank and that the
cardholder’s obligation to pay the bank shall not be affected or impaired by any dispute,
claim, or demand by the cardholder with respect to any merchandise or service purchased.
The merchants participating in the system agree to honor the bank’s credit cards. The bank
irrevocably agrees to honor and pay the sales slips presented by the merchant if the
merchant performs his undertakings such as checking the list of revoked cards before
accepting the card. These slips are forwarded to the member bank which originally issued
the card. The cardholder receives a statement from the bank periodically and may then
decide whether to make payment to the bank in full within a specified period, free of
interest, or to defer payment and ultimately incur an interest charge.

USE OF CREDIT CARD A MERE OFFER TO ENTER INTO LOAN AGREEMENTS: The
contractual relationship begins to exist only upon the meeting of the offer and acceptance
of the parties involved. In more concrete terms, when cardholders use their credit cards to
pay for their purchases, they merely offer into loan agreements with the credit card
company. Only after the latter approves the purchase requests that the parties enter into
binding loan contracts.

FACTS:

In October 1991, Pantaleon together with his family went on a guided European
tour. The group began their with a trip to the Coster Diamond House. To have enough time
to take a guided city tour of Amsterdam before their departure scheduled on that day.
While at Coster, Mrs. Pantaleon decided to purchase some diamond pieces worth a total of
$13,826.00. Pantaleon presented his American Express credit card to the sales clerk to pay
for this purchase.. The sales clerk swiped the credit card and asked Pantaleon to sign the
charge slip, which was then electronically referred to AMEX’s Amsterdam office. Coster had
not received approval from AMEX for the purchase so Pantaleon asked the store clerk to
cancel the sale. The store manager, however, convinced Pantaleon to wait a few more
minutes. Subsequently, the store manager informed Pantaleon that AMEX was asking for
bank references; Pantaleon responded by giving the names of his Philippine depository
banks. 45 minutes after Pantaleon presented his credit card, AMEX still had not approved
the purchase. Since the city tour could not begin until the Pantaleons were onboard the

18
tour bus, Coster decided to release the purchased items to Pantaleon even without AMEX’s
approval.

After the trip to Europe, the Pantaleon family proceeded to the United States. Again,
Pantaleon experienced delay in securing approval for purchases using his American
Express credit card on two separate occasions. He experienced the first delay when he
wanted to purchase golf equipment in the amount of $1,475.00. Another delay occurred
when he wanted to purchase children’s shoes worth $87.00. Upon return to Manila,
Pantaleon sent AMEX a letter demanding an apology for the humiliation and inconvenience
he and his family experienced due to the delays in obtaining approval for his credit card
purchases. AMEX responded by explaining that the delay in Amsterdam was due to the
amount involved – the charged purchase of $13,826.00 deviated from Pantaleon’s
established charge purchase pattern. Dissatisfied with this explanation, Pantaleon filed an
action for damages against the credit card company with the Makati City Regional Trial
Court (RTC).

ISSUE:

Whether AmEx committed a breach of its obligations to Pantaleon

HELD:

Yes. The Court is convinced that defendants delay constitutes breach of its
contractual obligation to act on his use of the card abroad "with special handling.” The
delay committed by AMEX was clearly attended by unjustified neglect and bad faith, since it
alleges to have consumed more than one hour to simply go over Pantaleon’s past credit
history with AMEX, his payment record and his credit and bank references, when all such
data are already stored and readily available from its computer. There is nothing in
Pantaleon’s billing history that would warrant the imprudent suspension of action by
AMEX in processing the purchase.

SEVERINO TOLENTINO and POTENCIANA MANIO v. BENITO GONZALEZ SY CHIAM

G.R. No. 26085, August 12, 1927
JOHNSON, J.:

SYLLABUS:

ARTICLE 1370 [1281]; NEW CIVIL CODE: If the terms of a contract are clear and leave no
doubt as to the intention of the contracting parties, the literal sense of its stipulations shall
be followed.

ARTICLE 1371 [1282]; NEW CIVIL CODE: In order to judge as to the intention of the
contracting parties, attention must be paid principally to their conduct at the time of
making the contract and subsequently thereto.

DIFFERENCE BETWEEN CONTRACT OF LOAN AND CONTRACT OF RENT: a. In a

contract of rent, the owner of the property does not lose his ownership. He simply loses his
control over the property rented during the period of the contract. In a contract of loan, the
thing loaned becomes the property of the obligor. In a contract of rent, the relation

19
between the contractors is that of landlord and tenant. In a contract of loan of money,
goods, chattels or credits, the relation between the parties is that of obligor and obligee.
Rent may be defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. A loan signifies the giving of a
sum of money, goods or credits to another, with a promise to repay, but not a promise to
return the same thing. A contract of rent is a contract by which one of the parties delivers
to the other some nonconsumable thing, in order that the latter may use it during a certain
period and return it to the former; whereas a contract of loan signifies the delivery of
money or other consumable things upon condition of returning an equivalent amount of
the same kind or quality

FACTS:

Sometime prior to 28 November 1922, the appellants purchased of the Luzon Rice
Mills, Inc., a piece or parcel of land with the camarin located thereon, for the price of
P25,000, promising to pay therefor in three installments. The first installment of P2,000
was due on or before 2 May 1921; the second installment of P8,000 was due on or before
31 May 1921; the balance of P15,000 at 12 per cent interest was due and payable on or
about the 30 November 1922.

One of the conditions of the contract of purchase was that on failure of the
purchaser to pay the balance of said purchase price or any of the installments on the date
agreed upon, the property bought would revert to the original owner.

On 7 November 1922, the representative of the vendor of the property in question

wrote a letter to the appellant, notifying the latter that if the balance of the indebtedness
was not paid, an action would be brought for the purpose of recovering the property,
together with damages for noncompliance with the condition of the contract of purchase.

Realizing that they would be unable to pay the balance due, purchasers began to
make an effort to borrow money with which to pay the balance due. An application was
made to the defendant for a loan for the purpose of satisfying their indebtedness to the
vendor of said property. After some negotiations the defendants agreed to loan the
plaintiffs the sum of P17, 500 upon condition that the plaintiffs execute and deliver to him a
pacto de retro of said property.

The balance of P15,000 with interest was paid on or about 1 December 1922. The
vendor of the property issued to the purchasers the transfer certificate of title.

Some parts of the contract are:

Second. That it is a condition of this sale that if within five (5) years counted
from December 1, 1922, we return the aforementioned price of seventeen
thousand five hundred pesos to the said Don Benito Gonzalez Sy Chiam (P17,
500) said Mr. Benito Gonzalez and Chiam are obliged to re-sell us the farm
described above; But if this five-year period elapses without exercising the right
of withdrawal that we have reserved, then this absolute and irrevocable sale
will remain.

20
 Third. That during the aforementioned term of the retraction we will have the
above described property for rent, subject to the following conditions:
a. The rent that we were obliged to pay for monthly payments due to Don Benito
Gonzalez Sy Chiam and at his domicile, was three hundred and seventy-five
pesos (P375) Philippine currency, each month.
b. The amillaramiento of the leased farm will be for the account of said Don
Benito Gonzalez Sy Chiam, as well as the fire insurance premium, if he agreed
to the said Mr. Benito Gonzalez Sy Chiam to insure said farm.
c. Failure to pay the rent stipulated here for two consecutive months will lead to
the termination of this lease and the loss of the right of withdrawal that we
have reserved, as if the term for it had naturally expired, being able by virtue of
said Mr. Gonzalez Sy Chiam take possession of the farm and evict us from it.

ISSUES:

1. Whether the contract in question is a pacto de retro

2. Under a pacto de retro, when the vendor becomes a tenant of the purchaser and
agrees to pay a certain amount per month as rent, whether the rent renders such a
contract usurious when the amount paid as rent, computed upon the purchase price,
amounts to a higher rate of interest upon said amount than that allowed by law

HELD:

1. Yes. An examination of the contract of sale shows clearly that it is a pacto de retro
and not a mortgage.

From the foregoing, the conclusions are: First, the contract of pacto de retro is an
absolute sale of the property with the right to repurchase and not a mortgage; and,
second, by virtue of the said contract, the vendor became the tenant of the
purchaser.

In every case in which the court has construed a contract to be a mortgage or a loan
instead of a sale with pacto de retro, it has done so, either because the terms of such
contract were incompatible or inconsistent with the theory that said contract was
one of purchase and sale.

Article 1370 [1281] of the Civil Code provides: “If the terms of a contract are clear
and leave no doubt as to the intention of the contracting parties, the literal sense of its
stipulations shall be followed.”

Article 1371 [1282] provides: “In order to judge as to the intention of the contracting
parties, attention must be paid principally to their conduct at the time of making the
contract and subsequently thereto.”

2. No. When the vendor of property under a pacto de retro rents the property and
agrees to pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a “tenant” under any other contract of lease.

21
 Usury, generally speaking, may be defined as contracting for or receiving something
in excess of the amount allowed by law for the loan or forbearance of money—the
taking of more interest for the use of money than the law allows.

A contract of loan differs materially from a contract of rent.

a. In a contract of rent, the owner of the property does not lose his ownership.
He simply loses his control over the property rented during the period of the
contract. In a contract of loan, the thing loaned becomes the property of the
obligor.
b. In a contract of rent, the relation between the contractors is that of landlord
and tenant. In a contract of loan of money, goods, chattels or credits, the
relation between the parties is that of obligor and obligee.
c. Rent may be defined as the compensation either in money, provisions,
chattels, or labor, received by the owner of the soil from the occupant
thereof. A loan signifies the giving of a sum of money, goods or credits to
another, with a promise to repay, but not a promise to return the same thing.
d. A contract of rent is a contract by which one of the parties delivers to the
other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of loan
signifies the delivery of money or other consumable things upon condition of
returning an equivalent amount of the same kind or quality.

To hold that usury can be based upon the comparative actual rental value and value
of the property, is to subject every landlord to an annoyance not contemplated by
the law, and would create a very great disturbance in every business or rural
community.

A. COMMODATUM

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner, vs. COURT

OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Nos. L-80294-95. September 21, 1988
GANCAYCO, J.:

SYLLABUS:

COMMODATUM: When petitioner borrowed the house of private respondents’

predecessors, and petitioner was allowed its free use, private respondents became bailors
in commodatum, and petitioner, the bailee.—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

22
could not ripen into title by way of ordinary acquisitive prescription because of the absence
of just title.

FACTS:

The Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with
the Court of First Instance of Baguio-Benguet on September 5, 1962 an application for
registration of title over Lots 1, 2, 3, and 4 in Psu-194357, situated at Poblacion Central, La
Trinidad, Benguet, docketed as LRC N-91, said Lots being the sites of the Catholic Church
building, convents, high school building, school gymnasium, school dormitories, social hall,
stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of Egmidio
Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting
ownership and title thereto. The Heirs of Juan Valdez and the Heirs of Egmidio Octaviano
filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership and
title thereto since their predecessors’ house was borrowed by petitioner Vicar after the
church and the convent were destroyed.

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.

ISSUES:

5. Whether or not Vicar, which had been in possession of Lots 2 and 3 are bailees
pursuant to a contract of commodatum.

6. Whether or not the failure to return the subject matter of commodatum constitutes
an adverse possession on the part of the owner.

HELD:

3. 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.

4. No. The bailees’ failure to return the subject matter of commodatum to the bailor
did not mean adverse possession on the part of the borrower. The bailee held in
trust the property subject matter of commodatum. 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. Vicar repudiated the
trust when it declared the subject properties in its name for taxation purposes.

23
PAJUYO VS. COURT OF APPEALS
G.R. NO. 146364. JUNE 3, 2004.
CARPIO, J.:

SYLLABUS:

CONTRACTS; COMMODATUM; PRECARIUM; WORDS AND PHRASES; AN

ESSENTIAL FEATURE OF COMMODATUM IS THAT IT IS GRATUITOUS, WHILE
ANOTHER FEATURE IS THAT THE USE OF THE THING BELONGING TO ANOTHER IS
FOR A CERTAIN PERIOD; 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; PRECARIUM IS A KIND OF
COMMODATUM.—In a contract of commodatum, one of the parties delivers to another
something not consumable so that the latter may use the same for a certain time and return
it. An essential feature of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for a certain period.
Thus, the bailor cannot demand the return of the thing loaned until after expiration of the
period stipulated, or after accomplishment of the use for which the commodatum is
constituted. If the bailor should have urgent need of the thing, he may demand its return for
temporary use. If the use of the thing is merely tolerated by the bailor, he can demand the
return of the thing at will, in which case the contractual relation is called
a precarium. Under the Civil Code, precarium is a kind of commodatum.

FACTS:

Pajuyo entrusted a house to Guevara for the latter's use provided he should return
the same upon demand and with the condition that Guevara should be responsible of the
maintenance of the property. Upon demand Guevara refused to return the property to
Pajuyo. The petitioner then filed an ejectment case against Guevara with the MTC who
ruled in favor of the petitioner. On appeal with the CA, the appellate court reversed the
judgment of the lower court on the ground that both parties are illegal settlers on the
property thus have no legal right so that the Court should leave the present situation with
respect to possession of the property as it is, and ruling further that the contractual
relationship of Pajuyo and Guevara was that of a commodatum.

ISSUE:

Whether or not the contractual relationship of Pajuyo and Guevara that of a

commodatum.

RULING:

No. The Court of Appeals’ theory that the Kasunduan is one of commodatum is
devoid of merit. In a contract of commodatum, one of the parties delivers to another
something not consumable so that the latter may use the same for a certain time and return
it. An essential feature of commodatum is that it is gratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certain period. Thus,
the bailor cannot demand the return of the thing loaned until after expiration of the period
stipulated, or after accomplishment of the use for which the commodatum is constituted. If

24
the bailor should have urgent need of the thing, he may demand its return for temporary
use. If the use of the thing is merely tolerated by the bailor, he can demand the return of the
thing at will, in which case the contractual relation is called a precarium. Under the Civil
Code, precarium is a kind of commodatum. 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 tenant’s withholding of the property would then
be unlawful.

EMILIA MANZANO v.
MIGUEL PEREZ SR., LEONCIO PEREZ, MACARIO PEREZ, FLORENCIO PEREZ, NESTOR
PEREZ, MIGUEL PEREZ JR. and GLORIA PEREZ
G.R. No. 112485, August 9, 2001
PANGANIBAN, J.

SYLLABUS:

Oral testimony cannot, as a rule, prevail over a written agreement of the parties. In
order to contradict the facts contained in a notarial document, such as the two "Kasulatan ng
Bilihang Tuluyan", as well as the presumption of regularity in the execution thereof, there
must be clear and convincing evidence that is more than merely preponderant.

"There is always the presumption that a written contract is for a valuable

consideration. The execution of a deed purporting to convey ownership of a realty is in itself
prima facie evidence of the existence of a valuable consideration and the party alleging lack of
consideration has the burden of proving such allegation. Assuming that such consideration is
suspiciously insufficient, this circumstance alone, is not sufficient to invalidate the sale. The
inadequacy of the monetary consideration does not render a conveyance null and void, for the
vendor's liberality may be a sufficient cause for a valid contract.

FACTS:

Petitioner Emilia Manzano alleged that she is the owner of a residential house and
lot situated at General Luna St. Laguna. In 1979, Nieves Manzano, sister of the petitioner
borrowed the aforementioned property as collateral for a projected loan. Pursuant to their
understanding, the petitioner executed two deeds of conveyance for the sale of the
residential lot and the house erected, both for a consideration of P1.00 plus other valuables
allegedly received by her from Nieves Manzano. Nieves Manzano, together with her
husband, respondent Miguel Perez, Sr. obtained a loan from the Rural Bank of Infanta, Inc.
in the sum of P30,000.00. To secure payment of their indebtedness, they executed a Real
Estate Mortgage over the subject property in favor of the bank. Nieves Manzano died on 18
December 1979 leaving her husband and children as heirs. These heirs refused to return
the subject property to the petitioner even after the payment of their loan with the Rural
Bank. The petitioner sought the annulment of the deeds of sale and execution of a deed of
transfer or reconveyance of the subject property in her favor, and award of damages. The

25
Court of Appeals ruled that it was not convinced by petitioner's claim that there was a
supposed oral agreement of commodatum over the disputed house and lot. Hence, this
petition.

The petitioner alleged that properties in question after they have been transferred
to Nieves Manzano, were mortgaged in favor of the Rural Bank of Infanta, Inc to secure
payment of the loan. The documents covering said properties which were given to the bank
as collateral of said loan, upon payment and release to the private respondents, were
returned to petitioner by Florencio Perez. These are a clear recognition by respondents
that petitioner is the owner of the properties in question.

The respondents countered that they are the owners of the property in question
being the legal heirs of Nieves Manzano who purchased the same from the petitioner for
value and in good faith, as shown by the deeds of sale which contain the true agreements
between the parties therein that except for the petitioner's bare allegations, she failed to
show any proof that the transaction she entered into with her sister was a loan and not a
sale.

ISSUE:

Whether the agreement between the parties was a commodatum or an absolute

sale.

HELD:

The contract is a contract of Sale and not a Commodatum. The court ruled that
petitioner has presented no convincing proof of her continued ownership of the subject
property. In addition to her own oral testimony, she submitted proof of payment of real
property taxes, but such payment was made only after her Complaint had already been
lodged before the trial court. Neither can the court give weight to her allegation that
respondent's possession of the subject property was merely by virtue of her tolerance. Oral
testimony cannot, as a rule, prevail over a written agreement of the parties. In order to
contradict the facts contained in a notarial document, such as the two “Kasulatan ng
Bilihang Tuluyan” in this case, as well as the presumption of regularity in the execution
thereof, there must be clear and convincing evidence that is more than merely
preponderant. Here petitioner has failed to come up with even a preponderance of
evidence to prove her claim.

Courts are not blessed with the ability to read what goes on in the minds of people.
That is why parties to a case are given all the opportunity to present evidence to help the
courts decide on who are telling the truth and who are lying, who are entitled to their claim
and who are not. The Supreme Court cannot depart from these guidelines and decide on
the basis of compassion alone because, aside from being contrary to the rule of law and our
judicial system, this course of action would ultimately lead to anarchy.

26
PRODUCERS BANK OF THE PHILIPPINES v.
HON. COURT OF APPEALS AND FRANKLIN VIVES
G.R. No. 115324, February 19, 2003
CALLEJO, SR., J.

SYLLABUS:

Art. 1936 provides that 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.

FACTS:

Sanchez asked his friend Mr. Vives to help her another friend Doronilla. Mr. Vives
agreed and deposited Php 200,000 to a Producer’s Bank savings account named under
Sterella (business owned by Doronilla). Such deposit will be used as a show money for
Sterella’s incorporation. The authorized signatories of the account were Mrs. Vives and
Sanchez. The passboook was held by Mrs. Vives. Despite this, Doronilla was able to transfer
Php 110,000 to his own account.

Doronilla issued checks as payments to Vives, however, they were all dishonored
upon presentment. Hence, Vives filed a case against Doronilla, Sanchez and Producer’s
Bank for the recovery of his money. RTC – ruled in favor of Vives. The contract between
Vives and Doronilla is commodatum. Also, the bank is liable as the employer of its branch
manager which is found to be in collusion with Doronilla. Coourt of Appeals affirmed the
decision.

ISSUES:

(1) Whether the contract between Vives and Doronilla is a mutuum or a

commodatum.
(2) Whether or not Producer’s Bank is liable to Vives.

HELD:

(1) The contract is a Commodatum. The Petitioner bank contends that the
transaction between Vives and Doronilla is a simple loan (mutuum) since all the elements
of a mutuum are present: (a) What was delivered by Vives to Doronilla was money, a
consumable thing; and (b) the transaction was onerous as Doronilla was obliged to pay
interest. Since the contract is a loan, the bank is not liable as it was not a party thereto.

The SC held otherwise. Art. 1933 provides 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. Art.
1936 provides that 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

27
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.

As correctly pointed out by both the Court of Appeals and the trial court, the
evidence shows that private respondent agreed to deposit his money in the savings account
of Sterela specifically 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
thirty (30) days.”

Vives merely “accommodated” Doronilla by lending his money without

consideration, as a favor to his good friend Sanchez. It was however clear to the parties to
the transaction that the money would not be removed from Sterela’s savings account and
would be returned to private respondent after thirty (30) days.

(2) Yes. Neither does the Court agree with petitioner’s contention that it is not
solidarily liable for the return of private respondent’s money because it was not privy to
the transaction between Doronilla and Vives.

The nature of said transaction, that is, whether it is a mutuum or a commodatum,

has no bearing on the question of petitioner’s liability for the return of private respondent’s
money because the factual circumstances of the case clearly show that petitioner, through
its employee Mr. Atienza, was partly responsible for the loss of private respondent’s money
and is liable for its restitution.

REPUBLIC OF THE PHILIPPINES vs.

JOSE V. BAGTAS, FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by
the late Jose V. Bagtas
G.R. No. L-17474. October 25, 1962
PADILLA, J.:

SYLLABUS:

COMMODATUM: Article 1933 of the Civil Code provides that a commodatum is essentially
gratuitous. If any compensation is to be paid by him who acquires the use, the contract
ceases to be a commodatum.

OBLIGATION OF THE BAILEE FOR THE LOSS OF THE THING, EVEN THROUGH A
FORTUITOUS EVENT: Article 1942 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;

28
FACTS:

Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of
Animal Industry three bulls for a period of one year from May 1948 to May 1949 for
breeding purposes. The bulls where valued as P 1.176.46, P 1,320.56 and P 744.46. Upon
the expiration of the contract, Bagtas asked for the renewal for another year (until 1950)
but the renewal was approved for only a single bull and the Bureau requested for the
return of the other two. Bagtas offered to pay for the value of the three bulls but the
Bureau reiterated that either the bulls be returned or their book value should be paid.
Bagtas failed to return all three bulls or pay hence the Republic commenced an action
against him for the proper payment and return of the bulls. Felicidad Bagtas, surviving
spouse of deceased, alleged that one of the bulls died from gunshot wounds inflicted during
a Huk raid and the other two were already returned to the Bureau. Felicidad now contends
that since the bull was accidentally killed during a raid or due to force majeure, she is
relieved from the duty of returning the bull or paying its value. Felicidad further contends
that the contract was commodatum and for that reason, the Bureau retained ownership
over the bull and it should suffer the loss.

ISSUES:

1. Whether or not the Contract is a commodatum

2. Whether or not Bagtas should be held liable even with the occurrence of a
fortuitous event

HELD:

1. No. The contract could not be considered as commodatum because a contract of

commodatum is essentially gratuitous (Article 1933 of the civil code). In this
case, the breeding fee is considered a compensation thus the contract is in fact a
lease of the bull.

2. Yes. Even assuming that the contract is a commodatum, Bagtas would still be
liable pursuant to article 1942 of the Civil code which provides that a bailee in a
contract of commodatum is liable for the loss of the thing, even if it should be
through a fortuitous event if (1) he keeps it longer than the period stipulated and
(2) I the thing loaned has been delivered with appraisal of its value. In this case
Bagtas kept the bull after the contract expired and the bulls had each an
appraised book value and no there is no stipulation that in case of loss of the bull
due to fortuitous event Bagtas would be exempt from liability.

29
REPUBLIC OF THE PHILIPPINES (BUREAU OF LANDS) vs.
THE HONORABLE COURT OF APPEALS, HEIRS OF DOMINGO P. BALOY, represented by
RICARDO BALOY et al.
G.R. No. L-46145. November 26, 1986
PARAS, J.:

SYLLABUS:

COMMODATUM: Where the possession is only intended to be transient, the owner is not
divested of his title, although it cannot be exercised in the meantime.

FACTS:

Applicants’ claim, herein respondents, is anchored on their possessory information

title coupled with their continuous, adverse and public possession over the land in
question. The possessory title shows the lands description and the area of the land.

Director of Lands opposed the registration alleging that the land had become public
land. It further claimed that the area was declared within the US Naval Reservation and
that Domingo Baloy failed to file his claim within the prescribed period.

ISSUE:

Whether or not Domingo Baloy has retained his claim over the land

HELD:

Yes. The occupancy of the U.S. Navy was not in the concept of owner. It partakes of
the nature of a commodatum. It cannot therefore militate the title of Domingo Baloy and his
successors-in-interest. One's ownership of a thing may be lost by prescription by reason of
another's possession if such possession be under claim of ownership, not where the
possession is only intended to be transient, as in the case of the U.S. Navy's occupation of
the land concerned, in which case the owner is not divested of his title, although it cannot
be exercised in the meantime.

Thus, when the US Navy possessed the area, the possessory rights of Baloy or heirs
were merely suspended and not lost by prescription.

MARGARITA QUINTOS and ANGEL A. ANSALDO vs. BECK

G.R. No. L-46240, November 3, 1939
IMPERIAL, J.:

SYLLABUS:

COMMODATUM: Article 1933 of the Civil Code provides that a commodatum is essentially
gratuitous. If any compensation is to be paid by him who acquires the use, the contract
ceases to be a commodatum.

30
OBLIGATION OF THE BAILEE TO RETURN THING: It is stipulated in their contract of
commodatum that the defendant is bound to return the thing loaned upon the Plaintiff’s
demand. As the defendant had voluntarily undertaken to return all the furniture to the
plaintiff, 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 defendant's behest. The latter, as
bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a duty
to accept the offer to return the furniture, because the defendant wanted to retain the three
gas heaters and the four electric lamps.

FACTS:

Beck was a tenant of the plaintiff. On January 14, 1936, upon the novation of the
contract of lease between the plaintiffs and Beck, the plaintiffs gratuitously granted to Beck
the use of furniture subject to the condition that Beck would return it to the Plaintiff upon
demand., Plaintiff sold the property to the Lopez’ and subsequently notified Beck of the
same giving him sixty days to vacate the premises under one of the clauses of the contract
of the lease.

Consequently, plaintiff required Beck to return all the furniture transferred to him
for them in the house where they were found. Beck wrote to the plaintiffs reiterating that
she may call for the furniture in the ground floor of the house and then wrote another letter
to the plaintiff informing them that he could not give up the three gas heaters and four
electric lamps because he would use them until the 15th of November when the lease
expires. Plaintiff to get the furniture in view of the fact that the defendant refused to make
delivery of all of them. On November 15, 1936, before vacating the house, Beck deposited
with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the custody of the sheriff.

ISSUE:

Whether defendant complied with his obligation to return the furniture upon
plaintiff’s demand.

HELD:

No. The contract entered into between the parties is one of commodatum. Plaintiff
gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof; by this contract Beck bound himself to return the furniture to the
Plaintiff upon the latter’s demand. The obligation voluntarily assumed by Beck means that
he should return all of them to the plaintiff at the latter’s residence or house. Beck did not
comply with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and four electric lamps.

31
II. THE USURY LAW AND CENTRAL BANK CIRCULAR NOS. 416 (1974)
AND BANKO SENTRAL NG PILIPANS CIRCULAR NO. 799 (2013)

TIO KHE CHIO, petitioner, vs. THE HONORABLE COURT OF APPEALS and EASTERN
ASSURANCE AND SURETY CORPORATION, respondents.
202 SCRA 119, G.R. Nos. 76101-02 September 30, 1991
FERNAN, C.J.:

SYLLABUS:

INTEREST: The adjusted rate mentioned in Circular No. 416 [took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest
from six (6%) to twelve (12%) per cent] of the Central Bank refers only to loans or for
bearances of money, goods or credits and court judgments thereon but not to court
judgments for damages arising from injury to persons and loss of property which does not
involve a loan. Rates under the Usury Law applicable only to interest by way of
compensation for the use or forbearance of money interest by way of damages is governed
by Article 2209 of the Civil Code.

FACTS:

On December 18, 1978, Petitioner Tio Khe Chio imported one thousand (1,000) bags
of fishmeal valued at $36,000.30 from the U.S.A. The goods were insured with Eastern
Assurance and Surety Corporation (EASCO) and shipped on board the M/V Peskov, a vessel
owned by Far Eastern Shipping Company. However, when the goods reached Manila, they
were found to have been damaged by sea water which rendered the fishmeal useless. Tio
Khe Chio filed a claim with EASCO and Far Eastern Shipping but both refused to pay.
Whereupon, Tio Khe Chio sued them before the then CFI of Cebu for damages. The trial
court rendered judgment ordering EASCO and Far Eastern Shipping to pay Tio Khe Chio
solidarily the sum of P105,986.68 less the amount of P18,387.86 for unpaid premiums with
interest at the legal rate from the filing of the complaint. The judgment became final as to
EASCO. The trial court, upon motion by Tio Khe Chio, issued a writ of execution against
EASCO.

The sheriff enforcing the writ reportedly fixed the legal rate of interest at 12%.
EASCO moved to quash the writ alleging that the legal interest to be computed should be
6% per annum in accordance with Article 2209 of the Civil Code and not 12% as insisted
upon by Tio Khe Chio’s counsel. The trial court denied EASCO’s motion, while on appeal,
the Court of Appeals set aside the trial court’s decision and reduced the interest rate to 6%
per annum.

ISSUE:

Whether or not 6% per annum is the correct legal interest.

HELD:

Yes. The adjusted rate mentioned in Circular No. 416 [took effect on July 29, 1974
pursuant to Presidential Decree No. 116 (Usury Law) which raised the legal rate of interest
from six (6%) to twelve (12%) per cent] of the Central Bank refers only to loans or

32
forbearances of money, goods or credits and court judgments thereon but not to court
judgments for damages arising from injury to persons and loss of property which does not
involve a loan. Rates under the Usury Law applicable only to interest by way of
compensation for the use or forbearance of money interest by way of damages is governed
by Article 2209 of the Civil Code, which clearly states that in the absence of stipulation,
when the obligations consists in the payment of a sum of money and the debtor incurs in
delay, the indemnity for damages shall be at 6% per annum legal interest.

In the light of the fact that the contending parties did not allege the rate of interest
stipulated in the insurance contract, the legal interest was properly pegged by the
Appellate Court at six (6%) per cent.

PILIPINAS BANK, petitioner, vs. THE HON. COURT OF APPEALS, and LILIA R. ECHAUS,
respondents.
225 SCRA 268, G.R. No. 97873 August 12, 1993
QUIASON, J.:

SYLLABUS:

INTEREST; CB CIRCULAR NO. 416: 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. The judgments spoken of and referred to in Circular No. 416 are ‘judgments
in litigation involving loans or forbearance of any money, goods or credits. Any other kind
of monetary judgment which has nothing to do with nor involving loans or forbearance of
any money, goods or credits does not fall within the coverage of the said law for it is not,
within the ambit of the authority granted to the Central Bank”, (Reformina v. Tomol, Jr., 139
SCRA 260).

CIVIL CODE, ART. 2209; OBLIGATION ARISING FROM CONTRACT OF PURCHASE AND
SALE: The amount of P2,300,000.00 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.

FACTS:

Petitioner Pilipinas Bank and Greatland Realty Corporation (GRC)executed a dacion

en pago wherein the latter conveyed to the former several lands in consideration of the
sum of P7,776,335.69. Shortly thereafter, GRC assigned P2,300,00.00 out of the total
consideration of the dacion en pago in favor of Lilia R. Echaus. Notwithstanding Echaus’
demand for payment, Pilipinas Bank refused and failed to pay prompting Echaus to file a
case against the said bank. The trial court ruled in her favor and ordered the total amount
to be paid to be P5,517,707.00.

Pilipinas Bank appealed before the Court of Appeals on the same day. Lilia filed
motion for execution pending appeal. The trial court granted the appeal.

33
 Pilipinas Bank complied with the writ of execution pending appeal by issuing two
manager’s checks in the total amount of P 5,517,707.00. The check payable to Lilia was
enchased. After which, The Court of Appeals rendered a decision which modified the
judgment of trial court, reducing the amount to be paid by Pilipinas Bank. The decision of
the Court of Appeals rendered final and executory. Pilipinas Bank filed motion in the trial
court praying for Lilia to refund to her excess payment of P1, 898,623.67 with interest at
6%.

The trial court, while ordering the refund to Pilipinas Bank of the excess payment,
fixed the interest rate due on the amount of P2,300,000.00 at 12% per annum as proposed
by Lilia, instead of 6% per annum as proposed by Pilipinas Bank.

ISSUE:

Whether or not the interest rate due on the amount of P2,300,000.00 should be
12%.

HELD:

No. 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. Article 2209 of the Civil Code states that If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the indemnity for damages, there being
no stipulation to the contrary, shall be the payment of the interest agreed upon, and in the
absence of stipulation, the legal interest, which is six per cent per annum.

The Central Bank Circular No. 416 provides that 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.

The judgments spoken of and referred to in Circular No. 416 are "judgments in
litigation involving loans or forbearance of any money, goods or credits. Any other kind of
monetary judgment which has nothing to do with nor involving loans or forbearance of any
money, goods or credits does not fall within the coverage of the said law for it is not, within
the ambit of the authority granted to the Central Bank."

The said amount was a portion of the P7,776,335.69 which petitioner was obligated
to pay GRC as consideration for the sale of several parcels of land by GRC to petitioner. The
amount of P2,300,000.00 was assigned by GRC 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.

34
SPOUSES DAVID B. CARPO AND RECHILDA S. CARPO v.
ELEANOR CHUA AND ELMA DY NG
G.R. Nos. 150773 & 153599, September 30, 2005, SECOND DIVISION
TINGA, J.

SYLLABUS:

Usurious loan transaction is not a complete nullity but defective only with respect to
the agreed interest. In simple loan with stipulation of usurious interest, the prestation of the
debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is
not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is illegal.

FACTS:

Petitioners borrowed from respondents the amount of P175,000.00, payable within

six (6) months with an interest rate of six percent (6%) per month. To secure the payment
of the loan, petitioners mortgaged their residential house and lot.

Petitioners failed to pay the loan upon demand. Consequently, the real estate
mortgage was extrajudicially foreclosed where the respondents emerged winners in the
public auction.

Petitioners failed to exercise their right of redemption, thus a certificate of sale was
issued and new TCT was issued in the name of respondents. Despite the issuance of the
TCT, petitioners continued to occupy the said house and lot, prompting respondents to file
a petition for writ of possession. Writ of possession was then issued.

Petitioners filed a complaint for annulment of real estate mortgage and the
consequent foreclosure proceedings.

Petitioners claim that following the Courts ruling in Medel v. Court of Appeals the
rate of interest stipulated in the principal loan agreement is clearly null and void.
Consequently, they also argue that the nullity of the agreed interest rate affects the validity
of the real estate mortgage.

ISSUE:

Whether the interest rate is valid.

HELD:

No. The interest rate is not valid. Petitioners contend that the agreed rate of interest
of 6% per month or 72% per annum is so excessive, iniquitous, unconscionable and
exorbitant that it should have been declared null and void. Instead of dismissing their
complaint, they aver that the lower court should have declared them liable to respondents
for the original amount of the loan plus 12% interest per annum and 1% monthly penalty
charge as liquidated damages, in view of the ruling in Medel v. Court of Appeals where the
Court found that the interest stipulated at 5.5% per month or 66% per annum was so

35
iniquitous or unconscionable as to render the stipulation void. In a long line of cases, this
Court has invalidated similar stipulations on interest rates for being excessive, iniquitous,
unconscionable and exorbitant.

In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum.
By the standards set in the above-cited cases, this stipulation is similarly invalid.From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract principle
embodied in Article 1306 of the Civil Code, contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order, or public policy. In the ordinary
course, the codal provision may be invoked to annul the excessive stipulated interest.

The question as to whether the invalidity of the stipulation on interest carries with
it the invalidity of the principal obligation is crucial. The consideration of the mortgage
contract is the same as that of the principal contract from which it receives life, and without
which it cannot exist as an independent contract. Being a mere accessory contract, the
validity of the mortgage contract would depend on the validity of the loan secured by it.

Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the more
reasonable rate of 12% per annum. This is congruent with the rule that a usurious loan
transaction is not a complete nullity but defective only with respect to the agreed interest.

Further, Article 1273, Civil Code, provides: "The renunciation of the principal debt
shall extinguish the accessory obligations; but the waiver of the latter shall leave the
former in force."

Article 1420 of the New Civil Code provides in this regard: "In case of a divisible
contract, if the illegal terms can be separated from the legal ones, the latter may be
enforced."

In simple loan with stipulation of usurious interest, the prestation of the debtor to
pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not
illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence,
being separable, the latter only should be deemed void, since it is the only one that is illegal.

The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in delay,
the debt earns interest from the date of the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for there was none, the same being void.
Rather, it is due to the general provision of law that in obligations to pay money, where the
debtor incurs in delay, he has to pay interest by way of damages

Hence, it is clear and settled that the principal loan obligation still stands and
remains valid. By the same token, since the mortgage contract derives its vitality from the
validity of the principal obligation, the invalid stipulation on interest rate is similarly
insufficient to render void the ancillary mortgage contract.

36
CASA FILIPINA DEVELOPMENT CORPORATION v. THE DEPUTY EXECUTIVE
SECRETARY
G.R. No. 96494, MAY 28, 1992
MEDIALDEA, J.:

SYLLABUS:

NO SPECIFIC RATE SET BY THE PARTIES: The ruling in Reformina v. Tomol deals
exclusively with cases where damages in the form of interest is due but no specific rate has
been previously set by the parties. In such cases, the legal interest of 12% per annum must
be applied.

SPECIFIC RATE SET BY THE PARTIES: If a particular rate of interest has been expressly
stipulated by the parties, that interest, not the legal rate of interest, shall be applied.

FACTS:

Jose Valenzuela, Jr. filed a complaint against Casa Filipina Development Corporation
before the Office of Appeals, Adjudication and Legal Affairs (OAALA) of the then Human
Settlements Regulatory Commission (now Housing and Land Use Regulatory Board) for its
failure to execute and deliver the deed of sale and transfer certificate of title.

He alleged that he entered into a contract to sell with petitioner for the purchase of
lot for a total purchase price of P68, 400.00 with P16, 416.00 as downpayment, and the
balance of P51, 984.00 to be paid in 12 equal monthly installments of P4, 915.16 with 24%
interest per annum starting September 3, 1984. On October 7, 1985, he made his full and
final payment under O.R. No. 6266.

Despite full payment, petitioner refused to execute the necessary deed of absolute
sale and deliver the corresponding transfer certificate of title to him. Since October 1985,
he had offered to pay for or reimburse petitioner the expenses for the transfer of the title,
but the latter refuses to accept the same.

On January 21, 1987, the OAALA rendered judgment in favor of private respondent:

“…In the event private respondent is unable to deliver the title to the said lot,
private respondent is hereby ordered to refund (to) complainant his total
payments amounting to P76, 180.82 plus 24% interest per annum from June 30,
1986, the date of the filing of the complaint, until fully paid.”

Petitioner asserted that in granting both remedies of specific performance and

rescission, public private respondent ignored a well-pronounced rule that these remedies
cannot be availed of at the same time. There is no evidence showing that private
respondent had offered to pay the expenses for the transfer of the title. Furthermore the
amount of 24% interest imposed by the OAALA in case of refund is high and without basis:

1. HLURB Resolution No. R-421, series of 1988, strictly enjoins the maximum interest
to be awarded in case of refund to 12%;

37
 2. Although condition no. 1 of their contract to sell provides for said rate of interest, it
merely applies to interest on installment payments but not with respect to refunds;

3. Since the contract between them is not a forbearance of money or loan, the doctrine
laid down in the case of Reformina v. Tomol, Jr applies, that is, except where the
action involves forbearance of money or loan, interest which courts may award is
only up to 12% (should be 6%).

ISSUE:

Whether the stipulated interest of 24% should be applied in case the petitioner was
unable to deliver the title to the said lot

HELD:

Yes. Adopting the disposition of the Office of the Solicitor General on the correct rate
of interest:

The ruling in Reformina v. Tomol deals exclusively with cases where

damages in the form of interest is due but no specific rate has been
previously set by the parties. In such cases, the legal interest of 12% per
annum must be applied. In the present case, however, the interest rate of
24% per annum was mutually agreed upon by petitioner and private
respondent in their contract to sell — this was the interest rate imposed on
private respondent for the payment of the installments on the contract price,
and there is no reason why this same interest rate should not be equally
applied to petitioner which is guilty of violating the reciprocal obligation.

It is, thus, evident that if a particular rate of interest has been

expressly stipulated by the parties, that interest, not the legal rate of interest,
shall be applied.

For the other assertions of petitioner, it is plain enough in the OAALA decision that
rescission is being ordered only in the event specific performance is not feasible. Moreover,
petitioner is already estopped from raising this issue because in its appeal memorandum
submitted before the HLURB, it leaded that:

5. Appellant prays that it be given a period/time to redeem the title or the

demand for issuance of title be suspended from the Comsavings Bank before
any deed of absolute sale be executed so that the Transfer Certificate of Title be
issued and/or refund be ordered.

OAALA found as a fact that "the complaint-appellee was ready, willing and able to
pay for the expenses for the transfer of title as stipulated in the Contract to Sell.”

38
ANTONIO L. CASTELO, ET AL. v. COURT OF APPEALS and MILAGROS DELA ROSA
G.R. No. 96372, MAY 22, 1995
FELICIANO, J.:

SYLLABUS:

ARTICLE 2209, NEW CIVIL CODE: 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.

ARTICLE 2209; TRANSACTIONS: The “obligation consisting in the payment of a sum of

money” referred to in Article 2209 is not confined to a loan or forbearance of money. The
Court consistently applied Article 2209 in the determination of the interest properly
payable where there was default in the payment of the price or consideration under a
contract of sale. Article 2209 has also been applied in cases involving an action for damages
for injury to persons and loss of property; to actions for damages arising from unpaid
insurance claims; and an action involving the appropriate rate of interest on just
compensation that is payable for expropriated lands.

AMBIGUOUS CONTRACT LANGUAGE: In case of ambiguity in contract language, the

interpretation which establishes a less onerous transmission of rights or imposition of
lesser burdens which permits greater reciprocity between the parties, is to be adopted.

FACTS:

On 15 October 1982, petitioners entered into a contract denominated as a “Deed of

Conditional Sale” with private respondent involving a parcel of land. The agreed price of
the land was P269, 408.00. Upon signing the contract, private respondent paid petitioners
P106, 000.00 leaving a balance of P163, 408.00.

The Deed of Conditional Sale also stipulated that:

b.) The balance of P163, 408.00 to be paid on or before December 31, 1982
without interest and penalty charges;
c.) Should the said balance [remain unpaid] by the VENDEE, the VENDORS
hereby agree to give the VENDEE a grace period of SIX (6) months or up to
June 30, 1983 to pay said balance provided that interest at the rate of 12%
per annum shall be charged and 1% penalty charge a month shall be imposed
on the remaining diminishing balance.

Private respondent was unable to pay the remaining balance on or before 30 June
1983.
On 29 July 1983, petitioners filed an action for specific performance with damages
against private respondent.

RTC ordered the rescission of the Deed of Conditional Sale.

39
 Petitioners went on Certiorari to the Court of Appeals questioning the RTC decision.
They claimed that rescission of the contract was only an alternative relief available under
the Civil Code, while their complaint before the RTC had asked for specific performance
with damages.

CA rendered the following:

WHEREFORE, the writ of certiorari is hereby granted annulling the decision of

Judge Malaya dated 17 August 1984 and a new one entered:
1) allowing the amendment of the complaint to conform to the evidence
already presented and defaulted defendant to answer the amendment within
the reglementary period; and
2) ordering the defendant to comply with her obligation under the conditional
sale to pay the balance of the conditional sale in the amount of P163,408.00, to
pay interest and in default thereof the rescission thereof is the alternative.

A writ of execution of the 21 November 1986 judgment of the CA was issued by the
RTC on 2 September 1988. Accordingly, a Sheriff's Notice to Pay Judgment was served on
private respondent requiring her to pay petitioners a total of P197, 723.68, computed as
follows:

Principal P163,408.00
Plus interest of 12% (per contract) from 21 Nov. 1986 to 2 Sept. 34,315.68
1988
Total amount of judgment (excluding sheriff's fees and expenses) P197,723.683

Petitioners filed a motion for reconsideration and a separate motion for alias writ of
execution contending that the sum of P197, 723.68, based on the Sheriff's own
computation, was erroneous. They argued that the obligation of private respondent was to
pay (a) interest at the rate of twelve percent (12%) per annum plus (b) one percent (1%)
penalty charge per month, from default, i.e. from 1 January 1983. Thus, the amount to be
paid by the Defendant should be P398, 814.88 instead and not P197, 723.68 or a difference
of P201, 091.20.

They also claimed that the amount arrived at by the Sheriff was inconsistent not
only with the CA decision of 21 November 1986, but also the stipulations in the “Deed of
Conditional Sale.”

However, RTC said, denying the motion for alias writ of execution:

…"to pay interest" found in the dispositive portion of the CA 21 November 1986
decision did not refer to the stipulation in the "Deed of Conditional Sale" but
rather to the legal rate of interest imposed by the CA which started to run from
12 February 1987, the date of entry of judgment. Had it intended otherwise, the
CA would have declared so.

40
ISSUES:

1. Whether the phrase to pay interest refers to the interest stipulated by the parties in
the Deed of Conditional Sale

2. Whether, during the period of 1 January 1983 up to 30 June 1983, 12% interest per
annum plus 1% penalty charge a month was payable "on the remaining diminishing
balance;" or whether during the period from 1 January 1983 to 30 June 1983, only
12% per annum interest was payable while the 1% per month penalty charge would
in addition begin to accrue on any balance remaining unpaid as of 1 July 1983

HELD:

5. Yes. The phrase “to pay interest,” found in the dispositive portion of CA decision
must, under applicable law, refer to the interest stipulated by the parties in the Deed
of Conditional Sale.

First, the phrase “to pay interest” comes close upon the heels of the preceding
phrase “to comply with her obligation under the conditional sale to pay the balance
— of P163, 408.00.” A strong inference arises that the “interest” required to be paid
is the interest stipulated as part of the “obligation under the conditional sale to pay
the balance of the purchase price of the land.”

Second, there is no question that private respondent had failed to pay the balance of
P163, 408.00 on or before 31 December 1982. The applicable law is to be found in
Article 2209 of the Civil Code which provides as follows:

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 percent (6%) per
annum.

Under Article 2209, 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 or 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.

Applying Article 2209, the “Deed of Conditional Sale” specifically provided for
“interest at the rate of 12% per annum” and a “1% penalty charge a month to be
imposed on their remaining diminishing balance.”

Article 2209 governs transactions involving the payment of indemnity in the

concept of damages arising from delay in the discharge of obligations consisting of
the payment of a sum of money. The “obligation consisting in the payment of a sum

41
 of money” referred to in Article 2209 is not confined to a loan or forbearance of
money. The Court consistently applied Article 2209 in the determination of the
interest properly payable where there was default in the payment of the price or
consideration under a contract of sale as in the case at bar. Article 2209 has also
been applied by the Court in cases involving an action for damages for injury to
persons and loss of property; to actions for damages arising from unpaid insurance
claims; and an action involving the appropriate rate of interest on just
compensation that is payable for expropriated lands.

6. The Court has believed that the contracting parties intended the latter view of their
stipulation on interest; for if the parties had intended that during the grace period
from 1 January 1983 to 30 June 1983, interest consisting of 12% per annum plus
another 12% per annum (equivalent to 1% per month), or a total of 24% per
annum, was payable, then they could have simply said so. Instead, the parties
distinguished between interest at the rate of 12% per annum and the 1% a month
penalty charge.

The interpretation adopted is also supported by the principle that in case of

ambiguity in contract language, that interpretation which establishes a less onerous
transmission of rights or imposition of lesser burdens which permits greater
reciprocity between the parties, is to be adopted.

Summarizing the import of the contractual stipulation of the parties:

(1) During the period from 1 January 1983 up to 30 June 1983, private respondent
was bound to pay interest at the rate of 12% per annum on the unpaid balance of
P163, 408.00.
(2) Commencing on 1 July 1983, and until full payment, he was bound to pay
interest at the rate of 12% per annum plus another 12% per annum (or 1% penalty
charge a month), or a total of 24% per annum to be computed on the “remaining
diminishing unpaid balance.”

EASTERN SHIPPING LINES, INC. v. HON. COURT OF APPEALS AND MERCANTILE

INSURANCE COMPANY, INC.
G.R. No. 97412, JULY 12, 1994
VITUG, J.:

SYLLABUS:

OBLIGATION NOT CONSTITUTING LOAN OR FORBEARANCE OF MONEY: 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.

PAYMENT OF LEGAL INTEREST; NOT CONSTITUTING LOAN OR FORBEARANCE OF

MONEY: Where the demand is established with reasonable certainty, the interest shall
begin to run from the time the claim is made judicially or extrajudicially, 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.

42
AWARDING A SUM OF MONEY; FINAL AND EXECUTORY: When the judgment of the court
awarding a sum of money becomes final and executory, the rate of legal interest 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.

FACTS:

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama,
Japan for delivery vessel owned by defendant Eastern Shipping Lines.

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. As a consequence of the losses sustained,
plaintiff was compelled to pay the consignee P19,032.95, so it became subrogated to all the
rights of action of consignee against defendants.

As for defendant Eastern Shipping, it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any
damage/losses incurred after the shipment was turned over to the latter, was no longer its
liability.

Metroport averred that although subject shipment was discharged unto its custody,
portion of the same was already in bad order.

Allied Brokerage alleged that plaintiff has no cause of action against it, not having
negligent or at fault for the shipment was already in damage and bad order condition when
received by it.

After considering the evidence, the court 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.

Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when it held that the grant of interest on the
claim of private respondent should commence from the date of the filing of the complaint at
the rate of twelve percent per annum instead of from the date of the decision of the trial
court and only at the rate of six percent per annum, private respondent's claim being
indisputably unliquidated.

43
ISSUES:

Whether the applicable rate of interest is 12% or six percent 6% and 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

HELD:

The legal interest to be paid is 6% on the amount due computed from the decision,
dated 03 February 1988, of the CA, and a 12% interest, in lieu of 6%, shall be imposed on
such amount upon finality of the Supreme Court decision until the payment thereof.

There has been a consistent holding that 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.

By way of clarification and reconciliation, the Court has suggested the following
rules for future guidance:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravener 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

44
 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.

LUCIA TAN v. ARADOR VALDEHUEZA and REDICULO VALDEHUEZA

G.R. No. L-38745, AUGUST 6, 1975
CASTRO, J.:

SYLLABUS:

ARTICLE 2125, NEW CIVIL CODE: If the instrument is not recorded, the mortgage is
nonetheless binding between the parties.

ARTICLE 1956, NEW CIVIL CODE: No interest shall be due unless it has been expressly
stipulated in writing.

FACTS:

An action was instituted by Lucia Tan against defendants for (a) declaration of
ownership and recovery of possession of the parcel of land described in the first cause of
action of the complaint, and (b) consolidation of ownership of two portions of another
parcel of (unregistered) land described in the second cause of action of the complaint,
purportedly sold to Tan in two separate deeds of pacto de retro.

The parcel of land described in the first cause of action was the subject matter of the
public auction sale, wherein Tan was the highest bidder. Due to the failure of Valdehueza to
redeem the said land within the period of one year as being provided by law, the Ex-Officio
Provincial Sheriff executed an ABSOLUTE DEED OF SALE in favor of Tan.

The defendants executed two documents of DEED OF PACTO DE RETRO SALE in

favor of Tan of two portions of a parcel of land which is described in the second cause of
action with the total amount of P1, 500.00

From the execution of the Deed of Sale with right to repurchase mentioned in the
second cause of action, defendants remained in the possession of the land and remained
paying the land taxes.

A complaint for injunction was filed by Tan against defendants to enjoin them "from
entering the parcel of land and gathering the nuts therein ...."

The Deed of Pacto de Retro dated August 5, 1955 was not registered in the Registry
of Deeds, while the Deed of Pacto de Retro dated March 15, 1955 was registered.

45
 RTC 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.

RTC rendered judgment, as follows:

1. Declaring Tan the absolute owner of the property described in the first cause of
action; and ordering the herein defendants not to encroach … her proprietary rights;
and, from which property they must be dispossessed;
2. Ordering the defendants to jointly and severally pay Tan the amount of P1,200, with
legal interest of 6% as of August 15, 1966…
3. And as regards the land covered by deed of pacto de retro (unregistered land), the
defendants are ordered to pay Tan the amount of P300 with legal interest of 6% from
August 15, 1966, the said land serving as guaranty of the said amount of payment;

ISSUES:

1. Whether the unregistered deed of pacto de retro was simple loan

2. Whether there should be an imposition of legal interest

HELD:

1. No. Article 2125 of NCC states that if the instrument is not recorded, the mortgage is
nonetheless binding between the parties.

The defendants 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, whether registered or not,
there being no third parties involved.

2. No. The imposition of legal interest on the amounts subject of the equitable
mortgages, P1, 200 and P300, respectively, is without legal basis,

Article 1956, New Civil Code provides: “No interest shall be due unless it has been
expressly stipulated in writing."

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.

46
III. TRUTH IN LENDING ACT

UNITED COCONUT PLANTERS BANK v.

SPOUSES SAMUEL and ODETTE BELUSO
G.R. NO. 159912, August 17, 2007
CHICO-NAZARIO, J.

SYLLABUS:

In order that obligations arising from contracts may have the force of law between the
parties, there must be mutuality between the parties based on their essential equality. A
contract containing a condition which makes its fulfillment dependent exclusively upon the
uncontrolled will of one of the contracting parties, is void. Hence, even assuming that the
agreement between the parties, gave a license to the creditor to increase the interest rate at
will during the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan agreement
with the character of a contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being reduced to the alternative "to
take it or leave it". Such a contract is a veritable trap for the weaker party whom the courts of
justice must protect against abuse and imposition.

FACTS:

Petition for Review on Certiorari declaring void the interest rate provided in the
promissory notes executed by the respondents Spouses Samuel and Odette Beluso
(spouses Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).

UCPB granted the spouses Beluso a Promissory Notes Line under a Credit
Agreement whereby the latter could avail from the former credit of up to a maximum
amount of P1.2 Million pesos for a term ending on 30 April 1997. The spouses Beluso
constituted, other than their promissory notes, a real estate mortgage over parcels of land
in Roxas City, covered by Transfer Certificates of Title No. T-31539 and T-27828, as
additional security for the obligation. The Credit Agreement was subsequently amended to
increase the amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and
to extend the term thereof to 28 February 1998.

On 30 April 1997, the payment of the principal and interest of the latter two
promissory notes were debited from the spouses Beluso’s account with UCPB; yet, a
consolidated loan for P1.3 Million was again released to the spouses Beluso under one
promissory note with a due date of 28 February 1998. To completely avail themselves of
the P2.35 Million credit line extended to them by UCPB, the spouses Beluso executed two
more promissory notes for a total of P350,000.00. However, the spouses Beluso alleged
that the amounts covered by these last two promissory notes were never released or
credited to their account and, thus, claimed that the principal indebtedness was only P2
Million.

The spouses Beluso, however, failed to make any payment of the foregoing amounts.

47
 On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorney’s fees, but the spouses Beluso failed to
comply therewith. On 28 December 1998, UCPB foreclosed the properties mortgaged by
the spouses Beluso to secure their credit line, which, by that time, already ballooned to
P3,784,603.00.

On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting
and Damages against UCPB with the RTC of Makati City.

Trial court declared in its judgment that:

a. the interest rate used by [UCPB] void
b. the foreclosure and Sheriff’s Certificate of Sale void
c. UCPB is ordered to return to [the spouses Beluso] the properties
subject of the foreclosure
d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 by way of
attorney’s fees
e. UCPB to pay the costs of suit.
f. Spouses Beluso] are hereby ordered to pay [UCPB] the sum of
P1,560,308.00.

8Court of Appeals affirmed Trial court's decision subject to the modification that
defendant-appellant UCPB is not liable for attorney’s fees or the costs of suit.

ISSUES:

1. Whether or not interest rate stipulated was void.

2. Whether or not Spouses Beluso are subject to 12% interest and compounding
interest stipulations even if declared amount by UCPB was excessive.

3. Whether or not foreclosure was void.

HELD:

1. Yes, stipulated interest rate is void because it contravenes on the principle of

mutuality of contracts and it violates the Truth in lending Act. The provision stating that
the interest shall be at the “rate indicative of DBD retail rate or as determined by the
Branch Head” is indeed dependent solely on the will of petitioner UCPB. Under such
provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB
is given this choice, the rate should be categorically determinable in both choices. If either
of these two choices presents an opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire interest rate provision violative of the
principle of mutuality of contracts.

In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not sufficiently indicate with

48
particularity the interest rate to be applied to the loan covered by said promissory notes
which is required in TRuth in Lending Act

2. Yes. Default commences upon judicial or extrajudicial demand. The excess

amount in such a demand does not nullify the demand itself, which is valid with respect to
the proper amount. There being a valid demand on the part of UCPB, albeit excessive, the
spouses Beluso are considered in default with respect to the proper amount and, therefore,
the interests and the penalties began to run at that point. As regards the award of 12%
legal interest in favor of petitioner, the RTC actually recognized that said legal interest
should be imposed, thus: “There being no valid stipulation as to interest, the legal rate of
interest shall be charged.” It seems that the RTC inadvertently overlooked its non-inclusion
in its computation. It must likewise uphold the contract stipulation providing the
compounding of interest. The provisions in the Credit Agreement and in the promissory
notes providing for the compounding of interest were neither nullified by the RTC or the
Court of Appeals, nor assailed by the spouses Beluso in their petition with the RTC. The
compounding of interests has furthermore been declared by this Court to be legal.

3. No. The foreclosure proceedings are valid since there was a valid demand made
by UCPB upon the spouses Beluso. Despite being excessive, the spouses Beluso are
considered in default with respect to the proper amount of their obligation to UCPB and,
thus, the property they mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to the extent of the
amounts to which UCPB is rightfully entitled.

49
IV. DEPOSIT

BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE APPELLATE

COURT and RIZALDY T. ZSHORNACK, respondents.
G.R. No. No. L-66826 August 19, 1988
CORTES, J.:

SYLLABUS:

CONTRACT OF DEPOSIT: The contract between Zshornack and the bank, as to the
$3,000.00, was a contract of deposit defined under Art. 1962 of the New Civil Code.—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 for 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.

FACTS:

Rizaldy T. Zshornack and his wife, Shirley Gorospe, are account holders with
COMTRUST. Being such, they maintained a dollar savings account and a peso current
account with the said bank. On December 8, 1975, Rizaldy Zshornack entrusted to
COMTRUST, thru Garcia, US$3,000.00 cash (popularly known as greenbacks) for
safekeeping, and that the agreement was embodied in a document.

Meanwhile, an application for a dollar draft was accomplished by Virgilio Garcia,

branch manager of Comtrust, payable to a certain Leovigilda Dizon. In the application,
Garcia indicated that the amount was to be charged to the dollar savings account of the
Zshornacks but the name of the purchaser of the dollar draft was not indicated.
Subsequently, Comtrust issued a check payable to the order of Dizon. Shortly thereafter,
Rizaldy Zshornack noticed the withdrawal from his account and demanded explanation to
which the bank replied that the withdrawal was given to Atty. Ernesto Zshornack, Jr.,
Rizaldy’s brother when the latter encashed a Manilabank Cashier’s Check.

ISSUE:

Whether or not the contract between petitioner and respondent bank is a deposit.

HELD:

Yes. 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.

50
 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.

It must be noted however, because the subject of the contract here is a foreign
exchange, it is covered by Central Bank Circular No. 20 which requires that, “All receipts of
foreign exchange by any resident person, firm, company or corporation shall be sold to
authorized agents of the Central Bank by the recipients within one business day following
the receipt of such foreign exchange.”

Since 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 intend to sell the US
dollars to the Central Bank within one business day from receipt. Otherwise, the contract
of depositum would never have been entered into at all.

Simply put, the transaction between Zshornack and the bank was void having been
executed against the provisions of a mandatory law (CB Circ No. 20). Thus, Being in pari
delicto, the law cannot afford either of them remedy.

CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner, vs. THE HONORABLE

COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
G.R. No. 90027 March 3, 1993
DAVIDE, JR., J.:

SYLLABUS:

DEPOSIT: A contract for the rent of a safety deposit box is not an ordinary contract
of lease but a special kind of deposit. The contract for the rent of the safety deposit box is
not an ordinary contract of lease as defined in Article 1643 of the Civil Code. However, such
contract of deposit is not to be strictly governed by the provisions in the Civil Code on
deposit; the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the joint renters.
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.

FACTS:

On July 3, 1979, CA Agro (through its President, Sergio Aguirre) and spouses Pugao
entered into an agreement whereby the former purchased two parcels of land for P350,
525 with a P75, 725 down payment while the balance was covered by three (3) postdated

51
checks. Among the terms embodied in a Memorandum of True and Actual Agreement of
Sale of Land were that 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 titles
thereto shall be deposited in a safety deposit box of any bank. The same could be
withdrawn only upon the joint signatures of a representative of the petitioner upon full
payment of the purchase price. They then rented Safety Deposit box of private respondent
Security Bank and Trust Company (SBTC). For this purpose, both signed a contract of lease
which contains 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.

After the execution of the contract, two (2) renter’s key were given to Aguirre, and
Pugaos. A key guard remained with the bank. The safety deposit box has two key holes and
can be opened with the use of both keys. Petitioner claims that the CTC were placed inside
the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the
two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00 for
the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October 1979 to
open the safety deposit box and get the certificates of title. However, when opened in the
presence of the Bank's representative, the box yielded no such certificates. Because of the
delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase
the lots; as a consequence thereof, the petitioner allegedly failed to realize the expected
profit of P280,500.00. Hence, a complaint for damages was filed on 1 September 1980
against the respondent Bank with the Court of First Instance (now Regional Trial Court) of
Pasig, Metro Manila.

ISSUE:

Whether or not the contractual relation between the petitioner and the respondent
bank in the contract of rent of a safety deposit box is one of bailor and bailee.

HELD:

Yes. However, such contract of deposit is not to be strictly governed by the

provisions in the Civil Code on deposit; the contract in the case at bar is a special kind of
deposit. It cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box was not
given to the joint renters. The 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 bailee, the bailment being for hire and mutual benefit.

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

52
States has been adopted. Section 72 of the General Banking Act pertinently provides: xxx
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. Thus, depositary’s liability is
governed by our civil code rules on obligation and contracts, and thus the SBTC would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement.

LUZAN SIA, petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
222 SCRA 24, G.R. No. 102970 May 13, 1993
DAVIDE, JR., J.:

SYLLABUS:

DEPOSIT: Contract for the use of safety deposit box is a special kind of deposit and the
relationship between the parties thereto, with respect to the contents of the box, is that of a
bailor and bailee, the bailment being for hire and mutual benefit. In the case of CA Agro-
Industrial Development Corp. vs. Court of Appeals, this Court explicitly rejected the
contention that a contract for the use of a safety deposit box is a contract of lease governed
by Title VII, Book IV of the Civil Code. The Court in that case did not fully subscribe to the
view that it is a contract of deposit to be strictly governed by the Civil Code provision on
deposit; it is 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 being for hire and mutual
benefit has been adopted in this jurisdiction.

Likewise, conditions in a “Lease Agreement” covering a safety deposit box which

exempt the bank from any liability for damage, loss or destruction of the contents thereof
arising from its own or its agent’s fraud, negligence or delay are considered null and void,
for being contrary to law and public policy.

FACTS:

On March 22, 1985, Petitioner Luzon Sia rented a safety deposit box No. 54 of
Security Bank and Trust Co. (SBTC for brevity) at its Binondo Branch. Said contract was
denominated as a Lease Agreement. In the safety deposit box, which was at the bottom or
at the lowest level of the safety deposit boxes of the respondent bank, petitioner placed his
collection of stamps. During the floods that took place in 1985 and 1986, floodwater seeped
into the safety deposit box leased by the petitioner and caused, according to him, damage to
his stamp collection.

Petitioner Sia instituted an action for damages against the respondent bank. SBTC
however, denied liability for the damaged stamps collection of the plaintiff on the basis of
the ‘Rules and Regulations Governing the Lease of Safe Deposit Boxes’ (Exhs. “A-1”, “1-A”),
particularly paragraphs 9 and 13, which reads (sic):

53
 ‘9. The liability of the Bank, by reason of the lease, is 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;

xxx

13. 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.’

SBTC also contended that its contract with the plaintiff over safety deposit box No.
54 was one of lease and not of deposit and, therefore, governed by the lease agreement
which should be the applicable law; that the destruction of the plaintiff’s stamps collection
was due to a calamity beyond its control; and that there was no obligation on its part to
notify the plaintiff about the floodwaters that inundated its premises at Binondo branch
which allegedly seeped into the safety deposit box leased to the plaintiff. The trial court
ruled for Sia and ordered SBTC to pay him damages.

ISSUE:

Whether or not the contract over Safety Deposit Box No. 54 is one of lease and not of
deposit.

HELD:
Yes. However, such contract of deposit is not to be strictly governed by the
provisions in the Civil Code on deposit. A Contract for the use of safety deposit box is 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 being for hire and mutual
benefit has been adopted in this jurisdiction.

Likewise, conditions in a “Lease Agreement” covering a safety deposit box which

exempt the bank from any liability for damage, loss or destruction of the contents thereof
arising from its own or its agent’s fraud, negligence or delay are considered null and void,
for being contrary to law and public policy.

Section 72 of the General Banking Act pertinently provides: xxx 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.

With regard to SBTC’s argument that the destruction of the plaintiff’s stamps collection
was due to a calamity and therefore beyond its control, and that there was no obligation on
its part to notify the plaintiff about the floodwaters that inundated its premises at Binondo
branch, the Court finds SBTC negligent. SBTC’s negligence aggravated the injury or damage
to the petitioner which resulted from the loss or destruction of 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

54
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.

YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM v.

THE COURT OF APPEALS and MAURICE McLOUGHLIN
G.R. NO. 126780, February 17, 2005
TINGA, J.

SYLLABUS:

Art. 2003 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. Also, the New Civil Code is explicit that
the responsibility of the hotel-keeper shall extend to loss of, or injury to, the personal property
of the guests even if caused by servants or employees of the keepers of hotels or inns as well as
by strangers, except as it may proceed from any force majeure.

FACTS:

Respondent McLoughlin would always stay at Tropicana Hotel every time he is here
in the Philippines and would rent a safety deposit box. The safety deposit box could only be
opened through the use of 2 keys, one of which is given to the registered guest, and the
other remaining in the possession of the management of the hotel. McLoughlin allegedly
placed the following in his safety deposit box – 2 envelopes containing US Dollars, one
envelope containing Australian Dollars, Letters, credit cards, bankbooks and a check book.
On 12 December 1987, before leaving for a brief trip, McLoughlin took some items from the
safety box which includes the following: envelope containing Five Thousand US Dollars
(US$5,000.00), the other envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards. The other items were left in the
deposit box. Upon arrival, he found out that a few dollars were missing and the jewelry he
bought was likewise missing. Eventually, he confronted Lainez and Paiyam who admitted
that Tan opened the safety deposit box with the key assigned to him. McLoughlin went up
to his room where Tan was staying and confronted her. Tan admitted that she had stolen
McLouglin’s key and was able to open the safety deposit box with the assistance of Lopez,
Paiyam and Lainez. Lopez also told McLoughlin that Tan stole the key assigned to
McLouglin while the latter was asleep. McLoughlin insisted that it must be the hotel who
must assume responsibility for the loss he suffered. Lopez refused to accept responsibility
relying on the conditions for renting the safety deposit box entitled “Undertaking For the
Use of Safety Deposit Box”

ISSUE:

Whether or not the “Undertaking for the Use of Safety Deposit Box” admittedly
executed by private respondent is null and void.

55
HELD:

YES. Article 2003 was incorporated in the New Civil Code as an expression of public
policy precisely to apply to situations such as that presented in this case. The hotel
business like the common carrier’s business is imbued with public interest. Catering to the
public, hotelkeepers are bound to provide not only lodging for hotel guests and security to
their persons and belongings. The twin duty constitutes the essence of the business. The
law in turn does not allow such duty to the public to be negated or diluted by any contrary
stipulation in so-called “undertakings” that ordinarily appear in prepared forms imposed
by hotel keepers on guests for their signature. In an early case (De Los Santos v. Tan Khey),
CA ruled that to hold hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees. It is enough
that such effects are within the hotel or inn. With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guest’s knowledge
and consent from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the “undertaking” manifestly contravene Article 2003, Civil Code
for they allow Tropicana to be released from liability arising from any loss in the contents
and/or use of the safety deposit box for any cause whatsoever. Evidently, the undertaking
was intended to bar any claim against Tropicana for any loss of the contents of the safety
deposit box whether or not negligence was incurred by Tropicana or its employees. The
New Civil Code is explicit that the responsibility of the hotel-keeper shall extend to loss of,
or injury to, the personal property of the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers, except as it may proceed from any
force majeure.

SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA v. INSULAR BANK OF ASIA AND
AMERICA
G.R. NO. 73271 MAY 29, 1987
MELENCIO-HERRERA, J.:

SYLLABUS:

DEPOSIT OF ITEMS COVERED BY TRUST RECEIPT DOES NOT EXTINGUISH PRINCIPAL

OBLIGATION: The goods the Vintolas had purchased through IBAA financing remain their
own property and they hold it at their own risk. The trust receipt arrangement did not
convert the IBAA into an investor; the latter remained a lender and creditor. The Vintolas
cannot justifiably claim that because they have surrendered the goods to IBAA and
subsequently deposited them in the custody of the court, they are absolutely relieved of
their obligation to pay their loan because of their inability to dispose of the goods.

FACTS:

Petitioners, doing business under the name Dax Kin International, were granted
domestic letter of credit by IBAA. After petitioners received puka and olive shells, they
executed a Trust Receipt Agreement with IBAA where they will hold the goods in trust for
IBAA and will return the proceeds once sold. However, petitioners defaulted in their
payment and failed to sell the shells so they deposited the goods in the court.

56
ISSUE:

Whether or Not the deposit extinguished the loan/obligation

HELD:

No. IBAA did not become the real owner of the goods. It was merely a holder of a
security title for the advances it has made to the Vintolas. The goods the Vintolas had
purchased through IBAA financing remain their own property and they hold it at their own
risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter
remained a lender and creditor.

Since the IBAA is not the factual owner of the goods, the Vintolas cannot justifiably
claim that because they have surrendered the goods to IBAA and subsequently deposited
them in the custody of the court, they are absolutely relieved of their obligation to pay their
loan because of their inability to dispose of the goods. The fact that they were unable to sell
the seashells in question does not affect IBAA’s right to recover the advances it had made
under the Letter of Credit.

MANUEL M. SERRANO vs.

CENTRAL BANK OF THE PHILIPPINES; OVERSEAS BANK OF MANILA et al
G.R. No. L-30511. February 14, 1980
CONCEPCION, JR., J.:

SYLLABUS:

BANK DEPOSITS ARE IN THE NATURE OF IRREGULAR DEPOSITS: 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.

FACTS:

Petitioner and Concepcion Maneja made a time deposit of P 150,00 and P 200,00
respectively with the respondent Overseas Bank of Manila (OBM). Maneja subsequently
assigned and conveyed to petitioner. Notwithstanding series of demands for encashment,
not a single one of the time deposit certificates was honored by respondent OBM.

Through a petition for mandamus and prohibition, petitioner seeks the

establishment of a solidary liability to the amount of P 350,000, with interest, against
respondent Central Bank of the Philippines (on the ground that it failed to exercise strict
supervision over respondent OBM) and OBM (for failure to return the time deposits made
by petitioner and that assigned to him). The action is in the nature of a recovery of time
deposits plus interest and recovery of damages from both respondent banks. Petitioner
claims that a constructive trust must be created in his favor when OBM increased its
collaterals in favor of respondent Central Bank for the former’s overdrafts and emergency
loans, since these collaterals were acquired by the use of depositors’ money.

57
ISSUE:

Whether or not petitioner’s contention is correct

HELD:

No. Both parties overlooked one fundamental principle in the nature of bank
deposits. Bank deposits are in the nature of irregular deposits. They are really loans
because they earn interest hence governed by the law on loans. Thus, in this case the
petitioner is in reality a creditor of OBM and in turn the latter is the petitioner’s debtor.
Failure of OBM to honor the time deposit is failure to pay its obligation as a debtor.

Thus, these claims should be ventilated in the courts with proper jurisdiction and
the use of the actions mandamus and prohibition is not proper.

TRIPLE-V FOOD SERVICES, INC. vs. FILIPINO MERCHANTS INSURANCE COMPANY INC.
G.R. NO. 160544. FEBRUARY 21, 2005

SYLLABUS:

WHEN IS A CONTRACT OF DEPOSIT MADE: In a contract of deposit, a person receives an

object belonging to another with the obligation of safely keeping it and returning the same.
A deposit may be constituted even without any consideration. It is not necessary that the
depositary receives a fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.

EXCLUSIONARY STIPULATION VOID: The parking claim stub embodying the terms and
conditions of the parking, including that of relieving petitioner from any loss or damage to
the car, is essentially a contract of adhesion, drafted and prepared as it is by the petitioner
alone with no participation whatsoever on the part of the customers, like De Asis, who
merely adheres to the printed stipulations therein appearing. While contracts of adhesion
are not void in themselves, yet this Court will not hesitate to rule out blind adherence
thereto if they prove to be one-sided under the attendant facts and circumstances. Hence,
and as aptly pointed out by the Court of Appeals, petitioner must not be allowed to use its
parking claim stub's exclusionary stipulation as a shield from any responsibility for any
loss or damage to vehicles or to the valuables contained therein.

FACTS:

On March 2, 1997 De Asis dined at petitioner’s Kamayan Restaurant. De Asis was

using a Mitsubishi Galant Super Saloon Model 1995 with the plate number UBU 955,
assigned to her by her employer Crispa. On said date, De Asis availed the valet parking
service of petitioner and entrusted her car key to petitioner's valet counter. A
corresponding parking ticket was issued as receipt for the car. The car was then parked by
Madirano, petitioner's valet attendant at the designated parking area. Few minutes later,
Madridano noticed that the car was not in its parking slot and its key no longer in the box
where valet attendants usually keep the keys of cars entrusted to them. The car was never
recovered. Thereafter, Crispa filed a claim against its insurer, herein respondent Filipino
Merchants Insurance Company, Inc. (FMICI). Having indemnified Crispa in the amount of
P669.500 for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with
the RTC at Makati City an action for damages against petitioner Triple-V Food Services.

However, petitioner argued that in accepting the complimentary valet parking

service, De Asis received a parking ticket whereunder it is so provided that "[Management

58
and staff will not be responsible for any loss of or damage incurred on the vehicle nor of
valuables contained therein]" a provision which, to petitioner's mind, is an explicit waiver
of any right to claim indemnity for the loss of the car; and that De Asis knowingly assumed
the risk of loss when she allowed petitioner to park her vehicle, adding that its valet
parking service did not include extending a contract of insurance or warranty for the loss of
the vehicle.

ISSUE:

1. Whether the petitioner is a depositary of the vehicle

2. Whether the petitioner was negligent in its duties as a depositary thereof and as
an employer of the valet attendant

HELD:

Yes. When De Asis entrusted the car in question to petitioners valet attendant while
eating at petitioner's Kamayan Restaurant, the former expected the car's safe return at the
end of her meal. Thus, petitioner was constituted as a depositary of the same car. Petitioner
cannot evade liability by arguing that neither a contract of deposit nor that of insurance,
guaranty or surety for the loss of the car was constituted when De Asis availed of its free
valet parking service.

Yes. De Asis deposited the car in question with the petitioner as part of the latter's
enticement for customers by providing them a safe parking space within the vicinity of its
restaurant. In a very real sense, a safe parking space is an added attraction to petitioner's
restaurant business because customers are thereby somehow assured that their vehicle are safely
kept, rather than parking them elsewhere at their own risk. Having entrusted the subject car to
petitioner's valet attendant, customer De Asis, like all of petitioner's customers, fully expects the
security of her car while at petitioner's premises/designated parking areas and its safe return at the
end of her visit at petitioner's restaurant.

DURBAN APARTMENTS CORPORATION, doing business under the name and style of
CITY GARDEN HOTEL vs. PIONEER INSURANCE AND SURETY CORPORATION
G.R. NO. 179419. JANUARY 12, 2011
NACHURA, J.:

SYLLABUS:

DEPOSIT MADE BY TRAVELERS IN HOTELS ARE NECESSARY: Article 1998 of the Civil
Code – The deposit of effects made by the 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 the effects.

FACTS:

See arrived and checked in at the City Garden Hotel before midnight, and its parking
attendant, Justimbaste , got the key to Suzuki Grand Vitara from See to park it. On May 1,
2002, at about 1 o’clock in the morning, See was awakened in his room by a phone call from

59
the Hotel Chief Security Officer who informed him that his Vitara was carnapped while it
was parked unattended at the parking area of Equitable PCI Bank.

See made the necessary reports and filed a claim for insurance with Pioneer.
P1,163,250.00 was paid to See as money claim and indemnity for the loss of the Vitara.
Pioneer alleged that the loss was an offshoot of the hotel’s negligence and accordingly filed
claim by means of subrogation, against the hotel and its parking valet. It was found out that
the loss was due to the negligence of petitioner and defendant because it was discovered
during the investigation that this was the second time that a similar incident of carnapping
happened in the valet parking service of petitioner and no necessary precautions were
taken to prevent its repetition. Pioneer argued that the hotel was wanting in due diligence
in the selection and supervision of its employees particularly defendant Justimbaste, its
parking valet.

The hotel argued that the insured was not a guest of the hotel but a visitor and that
its valet did not get his keys but it was See who requested him to find a space wherever one
was available, that valet parking was provided for convenience of its customers and that it
was a special privilege that was given to the insured. The vehicle was taken without using
the key which was even turned over to the owner.

ISSUE:

Whether the petitioner is liable to respondent for the loss of See’s vehicle.

HELD:

Yes. A contract of necessary deposit existed between the insured See and the
petitioner. The records reveal that upon arrival at the City Garden Hotel, See gave notice to
the doorman and Justimbaste about his Vitara when he entrusted its ignition key to the
latter. 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.

See deposited his vehicle for safekeeping with petitioner through Justimbaste. In
turn, Justimnbaste 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
Justimnbaste received with the obligation of safely keeping and returning it.

PEOPLE OF THE PHILIPPINES vs. TERESITA PUIG and ROMERO PORRAS

G.R. Nos. 173654-765. AUGUST 28, 2008
CHICO-NAZARIO, J.:

SYLLABUS:

OWNERSHIP OF BANK DEPOSITS: The Bank acquires ownership of the money deposited
by its clients; and the employees of the Bank, who are entrusted with the possession of
money of the Bank due to the confidence reposed in them, occupy positions of confidence.

60
FACTS:

Respondents were the cashier and Bookkeeper of the Rural Bank of Potolan, Inc and
that they conspired and helped one another to steal P15,000.00 from the Bank. The RTC
refused to issue a warrant of arrest against respondents for insufficiency alleged in the
information for Qualified Theft because “taking without the consent of owners” was
missing on the ground that it is the depositor-clients, not the bank, who filed the complaint
and that the information was bereft of the phrase “dependence, guardianship or vigilance
between the respondents and the offended party that would have created a high degree of
confidence between them which the respondents could have abused.”

Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings,
and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article 1953 of the same Code
provides that "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." Thus, it posits that the depositors who place their money with the bank
are considered creditors of the bank. The bank acquires ownership of the money deposited
by its clients, making the money taken by respondents as belonging to the bank.

ISSUE:

Whether the information sufficiently allege all essential elements constituting the
crime of Qualified Theft.

HELD:

Yes. It is evident that the Information need not use the exact language of the statute
in alleging the acts or omissions complained of as constituting the offense. It is beyond
doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank who come into
possession of the monies deposited therein enjoy the confidence reposed in them by their
employer. Banks, on the other hand, where monies are deposited, are considered the
owners thereof. This is very clear not only from the express provisions of the law, but from
established jurisprudence.

The Court has consistently considered the allegations in the Information that such
employees acted with grave abuse of confidence, to the damage and prejudice of the Bank,
without particularly referring to it as owner of the money deposits, as sufficient to make
out a case of Qualified Theft. The money in this case was in the possession of the defendant
as receiving teller of the bank, and the possession of the defendant was the possession of
the Bank. The Court held therein that when the defendant, with grave abuse of confidence,
removed the money and appropriated it to his own use without the consent of the Bank,
there was taking as contemplated in the crime of Qualified Theft.

61
V. PLEDGE

MANILA SURETY and FIDELITY COMPANY, INC v. RODOLFO R. VELAYO

G.R.NO. L-21069
REYES, J.B.L., J.:

SYLLABUS:

DEFICIENCY IN THE AMOUNT OF THE PRINCIPAL OBLIGATION AND THE PRICE OF

THE THING PLEDGED WHEN SOLD NOT RECOVERABLE: Art. 2115 provides that “The
sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds
of the sale are equal to the amount of the principal obligation, interest and expenses in a
proper case. If the price of the sale is more than said amount, the debtor shall not be entitled
to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the
contrary.” The provision is clear and unmistakeable, 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.

FACTS:

Manila Surety, upon request of Velayo, executed a bond for P2,800.00 for the
dissolution of a writ of attachment obtained by Jovita Granados in a suit against Velayo. As
a collateral security and by way of pledge, Velayo delivered four (4) pieces of jewelry to
Manila Surety in addition to the undertaking of paying an annual premium of P112.00.
Velayo also gave Manila Surety the power to sell the jewelry in case the surety paid or
become obligated to pay any amount of money in connection with the 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 was later on rendered against Velayo and Manila Surety was forced to pay
P2,800.00 that it later sought to recoup from Velayo. Manila Surety caused the pledged
jewelry to be sold, realizing therefrom a net product of P235.00 only.s After Velayo’s failure
to pay the balance, Manila Surety brought a suit against him, but he countered with a claim
that the sale of the pledged jewelry extinguished any further liability under Article 2115.

ISSUE:

Whether or Not the sale of the thing pledged extinguishes the of the principal
obligation

HELD:

Yes. Article 2115 provides that:

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

62
 the sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation
to the contrary.

The provision is clear and unmistakeable, 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.

INTEGRATED REALTY CORPORATION v. PHILIPPINE NATIONAL BANK

G.R. No. L-60705, JUNE 28, 1989
REGALADO, J.:

SYLLABUS:

PLEDGE; REQUIREMENTS: The deed of assignment has satisfied the requirements of a

contract of pledge: (a) It be constituted to secure the fulfillment of a principal obligation;
(b) The pledgor be the absolute owner of the thing pledged; (c) The persons constituting
the pledge have the free disposal of their property, and in the absence thereof, that they be
legally authorized for the purpose, and (d) The thing pledged be placed in the possession of
the creditor, or of a third person by common agreement was complied with by the
execution of the deed of assignment in favor of PNB.

INTEREST AS DAMAGES: While it is true that under Article 1956 of the Civil Code no
interest shall be due unless it has been expressly stipulated in writing, this applies only to
interest for the use of money.

SIMPLE LOAN OR MUTUUM: When Santos invested his money in time deposits with OBM,
they entered into a contract of simple loan or mutuum, not a contract of deposit.

FACTS:

Defendant Raul L. Santos made two time deposits with defendant Overseas Bank of
Manila (OBM).

Integrated Realty Corporation (IRC), thru its President-defendant Santos, applied

for a loan and/or credit line with Philippine National Bank (PNB). To secure the said loan,
defendant Santos executed a Deed of Assignment of the two time deposits.

OBM, after the due dates of the time deposit certificates, did not pay PNB. PNB
demanded payment from defendants IRC and Santos, and from OBM.

IRC and Santos replied that the obligation (loan) of IRC was deemed paid with the
irrevocable assignment of the time deposit certificates, and that they are not answerable
for the insolvency of OBM.

The judgment is rendered, ordering:

63
 1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the
plaintiff, jointly and solidarily, the total amount of P 700,000.00 plus interest at
the rate of 9% per annum from maturity dates of the two promissory notes on
January 11 and February 6, 1968, respectively, plus 1-1/ 2% additional interest
effective February 28, 1968 and additional penalty interest of 1% per annum of
the amount of P 700,000.00 from the time of maturity of loan up to the time the
said amount of P 700,000.00 is actually paid to the plaintiff;
XXX
3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated
Realty Corporation and Raul L. Santos whatever amounts the latter will pay to
the plaintiff with interest from date of payment;

ISSUES:

1. Whether the liability of IRC and Santos with PNB should be deemed to have been
paid by virtue of the deed of assignment made by the former in favor of PNB

2. Whether OBM should be held liable for damages

3. Whether OBM should reimburse IRC and Santos the entire amount they may be
adjudged to pay PNB

HELD:

1. No. The deed of assignment in this case is actually a pledge.

The deed of assignment has satisfied the requirements of a contract of pledge:

a. It be constituted to secure the fulfillment of a principal obligation;

b. The pledgor be the absolute owner of the thing pledged;
c. The persons constituting the pledge have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
d. The thing pledged be placed in the possession of the creditor, or of a third
person by common agreement was complied with by the execution of the
deed of assignment in favor of PNB.

Santos, as assignor, made an express undertaking that he would remain liable for
any outstanding balance of his obligation should PNB be unable to actually receive
or collect the assigned sums resulting from any agreements, orders or decisions of
the court or for any other cause whatsoever. The term “for any cause whatsoever” is
broad enough to include the situation involved in the present case.

2. Yes. It was only on July 31, 1968 when OBM was excluded from clearing with the
Central Bank (CB) under Monetary Board Resolution No. 1263. Subsequently, on
August 2, 1968, pursuant to Resolution No. 1290 of the CB, OBM's operations were
suspended.

Thus, when PNB demanded from OBM payment of the amounts due on the two time
deposits which matured on January 11, 1968 and February 6, 1968, respectively,

64
there was as yet no obstacle to the faithful compliance by OBM of its liabilities
thereunder.

While it is true that under Article 1956 of the Civil Code no interest shall be due unless
it has been expressly stipulated in writing, this applies only to interest for the use of
money. OBM is being required to pay such interest, not as interest income stipulated
in the certificates of time deposit, but as damages for failure and delay in the
payment of its obligations, which thereby compelled IRC and Santos to resort to the
courts.

When Santos invested his money in time deposits with OBM, they entered into a
contract of simple loan or mutuum, not a contract of deposit.

3. No. Their liability to pay the various interests of 9% on the principal obligation, 1-
1/2% additional interest and 1% penalty interest is an offshoot of their failure to
pay under the terms of the two promissory notes executed in favor of PNB.

OBM was never a party to promissory notes. There is, therefore, no privity of
contract between OBM and PNB which will justify the imposition of the interests
upon OBM, whose liability should be strictly confined to and within the provisions of
the certificates of time deposit involved in this case.

65
VI. MORTGAGE

ROSE PACKING COMPANY, INC., petitioner, vs. THE COURT OF APPEALS, HON. PEDRO
C. NAVARRO, Judge of the Court of First Instance of Rizal (Br. III), PHILIPPINE
COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents.
167 SCRA 309, No. L-33084 November 14, 1988
PARAS, J.:

SYLLABUS:

INDIVISIBILITY OF MORTGAGE; The rule of indivisibility of mortgage will not apply

where there was failure of consideration on the part of the respondent bank, and where
said bank was in default in complying with its obligation to release the amount of
P710,000.00. In fact the real estate mortgage itself becomes unenforceable. Finally, it is
noted that as already stated hereinabove, the exact amount of petitioner's total debt was
still unknown.

FACTS:

On December 12, 1962 respondent bank Philippine Commercial and Industrial Bank
(PCIB) approved a letter request by petitioner for the reactivation of its overdraft line of
P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of
P550,000.00 as well as an application for loan of P300,000.00 on fully secured real estate
and chattel mortgage and on the further condition that respondent PCIB appoint its
executive vice-president Roberto S. Benedicto as its representative in petitioner’s board of
directors.

On November 3, 1965 the National Investment and Development (NIDC), the

wholly-owned investment subsidiary of PNB, approved a P2.6 million loan application of
petitioner with certain conditions. However, only the amount of P100,000.00 was released
by the NIDC to petitioner. Thereafter, the NIDC refused to make further releases on the
approved loan. Petitioner purchased five (5) parcels of land in Pasig, Rizal making down
payment thereon.

August 3, 1966 and October 5,, 1966, respondent PCIB approved additional
accommodations to petitioner consisting of P 710,000.00 loan for the payment of the
balance of the purchase price of those lots in Pasig. However, PCIB released only P
300,000.00 of the P 710,000.00 on approved loan for the payment of the Pasig lands and
some P 300, 000.00 for operating capital.

On June 29 1967, the Development Bank of the Philippines approved on application

by petitioner for a loan of P 1,840,000.00 and a guarantee for $ 652,682.00 for the purchase
of can making equipment. Petitioner advised respondent PCIB of the availability of P
800,000.00 to partially pay off its account and requested the release of the titles to the
Pasig lots for delivery to the DBP.

On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene
Knecht, its president for the collection of petitioner’s indebtedness to respondent bank. The
PCIB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at
an auction sale.

66
 Petitioner filed a complaint in the Court of First Instance of Rizal to enjoin
respondents PCIB and the sheriff from the proceeding with the foreclosure sale, and to ask
the lower court to fix a new period for the payment of the obligations of petitioner to PCIB.
The lower court issued an order denying the petition. The petitioner filed with respondent
Court of Appeals a petition for certiorari with application for restraining order and
preliminary injunction. Hence, the petition is also denied.

ISSUE:

Whether or not Rose Packing Company, Inc. was in default to justify the foreclosure
of the mortgaged property which secured several loans.

HELD:

No. Respondent bank was in default in fulfilling its reciprocal obligation under their
loan agreement. By its own admission it failed to release the P710,000.00 loan it approved
on October 13, 1966 in which case, petitioner corporation, under Article 1191 of the Civil
Code, may choose between specific performance or rescission with damages in either case.

As a consequence, the real estate mortgage of Petitioner Corporation cannot be

entirely foreclosed to satisfy its total debt to respondent bank.

The loans of petitioner corporation from respondent bank were supposed to

become due only at the time that if receives from the NIDC and PDCP the proceeds of the
approved scheme. As it is, the conditions did not happen.

For an obligation to become due there must generally a demand. Default generally
begins from the moment the creditor demands the performance of the obligation. Without
such demand, judicial or extra-judicial, the effects of default will not arise.

The issue of whether the foreclosure sale of the mortgaged properties en masse was
valid or not must be answered in the negative. The rule of indivisibility of a real estate
mortgage refers to the provisions of Article 2089 of the Civil Code, which provides:

"Art. 2089, A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or of the creditor.”

Therefore the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as the debt is not
completely satisfied.

Neither can the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have not been
paid.

From these provisions is excepted the case in which, there being several
things given in mortgage or pledge, each one of them guarantees only a determinate
portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge
or mortgage as the portion of the debt for which each thing is specially answerable is
satisfied."

67
 Respondent bank cites the above-quoted article in its argument that the mortgage
contract is indivisible and that the loan it secures cannot be divided among the different
lots. Respondent Court upheld the validity of the sale en masse.

The rule, however, is not applicable to the instant case as it presupposes several heirs
of the debtor or creditor which does not obtain in this case. Furthermore, granting that
there was consolidation of the entire loan of petitioner corporations approved by
respondent bank, the rule of indivisibility of mortgage cannot apply where there was
failure of consideration on the part of respondent bank for the mismanagement of the
affairs of petitioner corporation and where said bank is in default in complying with its
obligation to release to petitioner corporation the amount of P710,000.00. In fact the real
estate mortgage itself becomes unenforceable. Finally, it is noted that as already stated
hereinabove, the exact amount of petitioner's total debt was still unknown.

PERFECTO DY, JR. petitioner, vs. COURT OF APPEALS, GELAC TRADING INC., and
ANTONIO V. GONZALES, respondents.
198 SCRA 826, G.R. No. 92989 July 8, 1991
GUTIERREZ, JR., J.:

SYLLABUS:

CHATTEL MORTGAGE: The mortgagor who gave the property as security under a
chattel mortgage did not part with the ownership over the same. He had the right to sell it
although he was under the obligation to secure the written consent of the mortgagee or he
lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the
Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity
of the sale would still not be affected.

FACTS:

Wilfredo Dy purchased a truck and a farm tractor through Libra Finance and
Investment Corp. (Libra) which was also mortgaged with the latter, as a security to the
loan.

Petitioner, expressed his desire to purchase his brother’s tractor in a letter to Libra
which also includes his intention to shoulder its mortgaged. Libra approved the request. At
the time that Wilfredo Dy executed a deed of absolute sale in favor of petitioner, the tractor
and truck were in the possession of Libra for his failure to pay the amortization. Despite the
offer of full payment by the petitioner to Libra for the tractor, the immediate release could
not be effected because Wilfredo had obtained financing not only for said tractor but also
for a truck and Libra insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck
so that full payment could be made for both. The debt was eventually settled in full with
the financing firm. Payment having been effected through an out-of-town check, Libra
insisted that it be cleared first before Libra could release the chattels in question.

Meanwhile, in another civil case, an alias writ of execution was issued and the
provincial sheriff was able to seize and levy on the tractor which was in the premises of
Libra in Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac

68
Trading was the lone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio
Gonzales.

It was only when the check was cleared on January 17, 1980 that the petitioner
learned about GELAC having already taken custody of the subject tractor. Consequently, the
petitioner filed an action to recover the subject tractor against GELAC Trading with the
Regional Trial Court of Cebu City.

ISSUE:

Whether or not Wilfredo validly sold the truck and the tractor while these were
mortgaged.

HELD:
Yes. The mortgagor who gave the property as security under a chattel mortgage did
not part with the ownership over the same. He had the right to sell it although he was
under the obligation to secure the written consent of the mortgagee or he lays himself open
to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code.
And even if no consent was obtained from the mortgagee, the validity of the sale would still
not be affected.

In the case at bar, there is no reason why Wilfredo Dy, as the chattel mortgagor
cannot sell the subject tractor. There is no dispute that the consent of Libra Finance was
obtained in the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner
to purchase the tractor and assume the mortgage debt of his brother. The sale between the
brothers was therefore valid and binding as between them and to the mortgagee, as well.

In the instant case, actual delivery of the subject tractor could not be made.
However, there was constructive delivery already upon the execution of the public
instrument pursuant to Article 1498 and upon the consent or agreement of the parties
when the thing sold cannot be immediately transferred to the possession of the vendee.
(Art. 1499).

While it is true that Wilfredo Dy was not in actual possession and control of the
subject tractor, his right of ownership was not divested from him upon his default. Neither
could it be said that Libra was the owner of the subject tractor because the mortgagee
cannot become the owner of or convert and appropriate to himself the property
mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor.
The only remedy given to the mortgagee is to have said property sold at public auction and
the proceeds of the sale applied to the payment of the obligation secured by the mortgagee.

Where a third person purchases the mortgaged property, he automatically steps

into the shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA
521 [1989]). His right of ownership shall be subject to the mortgage of the thing sold to
him. In the case at bar, the petitioner was fully aware of the existing mortgage of the
subject tractor to Libra. In fact, when he was obtaining Libra’s consent to the sale, he
volunteered to assume the remaining balance of the mortgage debt of Wilfredo Dy which
Libra undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage
obligation so that the tractor could be released to the petitioner. It was never intended nor

69
could it be considered as payment of the purchase price because the relationship between
Libra and the petitioner is not one of sale but still a mortgage.

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES

and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.
310 SCRA 281, G.R. No. 106435 July 14, 1999
GONZAGA-REYES, J.:

SYLLABUS:

CHATTEL MORTGAGE; PLEDGE: Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no longer recover
proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the
Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary
obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction
in the price at public auction.

FACTS:

On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA)
obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent
Development Bank of the Philippines. By virtue of this loan, petitioner PAMECA, through its
President, petitioner Herminio C. 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, Upon PAMECAs failure to pay, respondent bank extrajudicially
foreclosed the chattel mortgage, and, as sole bidder in the public auction, purchased the
foreclosed properties for P322,350.00. On June 29, 1984, respondent bank filed a
complaint for the collection of the balance of P4,366,332.46 with Branch 132 of the
Regional Trial Court of Makati City against petitioner PAMECA and private petitioners
herein, as solidary debtors with PAMECA under the promissory note. The RTC ordered
PAMCECA and the private petitioners to pay the balance. PAMECA argued that DBP cannot
collect the balance because Article 2115 of the Civil Code on pledge that if the price of the
sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding
any stipulation to the contrary. PAMECA anchors its argument on Article 2141 that the
provisions on pledge, insofar as they are not in conflict with the Chattel Mortgage Law,
shall be applicable to chattel mortgages.

ISSUE:

Whether DBP may not recover the balance of the value of the mortgaged properties
pursuant to Article 2115 in relation to Article 2141 of the Civil Code.

HELD:

No. DBP may recover the balance of the value of the mortgaged properties.

70
 The provisions of the Chattel Mortgage Law regarding the effects of foreclosure of
chattel mortgage, being contrary to the provisions of Article 2115, Article 2115 in relation
to Article 2141, may not be applied to the case.

Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

“x x x

The officer making the sale shall, within thirty days thereafter, make in writing a return of
his doings and file the same in the office of the Registry of Deeds where the mortgage is
recorded, and the Register of Deeds shall record the same. The fees of the officer for selling
the property shall be the same as the case of sale on execution as provided in Act
Numbered One Hundred and Ninety, and the amendments thereto, and the fees of the
Register of Deeds for registering the officer’s return shall be taxed as a part of the costs of
sale, which the officer shall pay to the Register of Deeds. The return shall particularly
describe the articles sold, and state the amount received for each article, and shall operate
as a discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be
applied to the payment, first, of the costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such mortgage, and the residue shall be paid
to persons holding subsequent mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding under him on demand.”
(Emphasis supplied)

It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that
the pledgor may no longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and
costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtor-
mortgagee to pay the deficiency in case of a reduction in the price at public auction.

OLEA VS. COURT OF APPEALS

G.R. NO. 109696. AUGUST 14, 1995.
BELLOSILLO, J.:

SYLLABUS:

SALES; LOANS; MORTGAGES; EQUITABLE MORTGAGES; ART. 1602 OF THE NEW CIVIL
CODE PROVIDES THAT THE CONTRACT OF SALE WITH RIGHT TO REPURCHASE
SHALL BE PRESUMED TO BE AN EQUITABLE MORTGAGE IN ANY OF THE
CIRCUMSTANCES ENUMERATED THEREIN.—We cannot sustain petitioner. Art. 1602 of
the New Civil Code provides that the contract of sale with right to repurchase shall be
presumed to be an equitable mortgage in any of the following cases: (a) when the price of
the sale is unusually inadequate; (b) when the vendor remains in possession as lessee or
otherwise; (c) when upon or after the expiration of the right to repurchase another
instrument extending the period of redemption or granting a new period is executed; (d)
when the purchaser retains for himself a part of the purchase price; (e) when the vendor
binds himself to pay the taxes on the thing sold; and, (f) in any other case where it may be

71
fairly inferred that the real intention of the parties is that the transaction shall secure the
payment of a debt or the performance of any other obligation.

PACTUM COMMISSORIUM.— A stipulation that the ownership of the property would

automatically pass to the vendee in case no redemption is effected within a stipulated
period is void for being a pactum commissorium which enables the mortgagee to acquire
ownership of the mortgaged property without need of foreclosure.

FACTS:

Spouses Pacardo executed a deed of sale con pacto de retro in favor of Palabrica,
predecessor-in-interest of petitioner, the condition of the sale is that the spouses or their
heirs will repurchase the land after 3 years. The Pacardo spouses remained in possession of
the land. Despite the lapse of 3 years, the Pacardo spouses failed to repurchase the
property. Petitioner, Thelma Olea, then filed a case against the respondents for recovery of
possessions with damages. The spouses filed their answer alleging that their parents
intended the disputed transaction to be an equitable mortgage and not a sale with right to
repurchase.

ISSUE:

Whether or not the sale was a sale con pacto de retro.

Ruling:

No. it was an equitable mortgage. Article 1602 of the New Civil Code provides for
cases where the contract of sale with right of repurchase shall be presumed to be an
equitable mortgage. It has been held that a contract should be construed as a mortgage or a
loan instead of a pacto de retro sale when its terms are ambiguous or the circumstances
surrounding the execution or its performance are incompatible or inconsistent with the
theory that it is a sale.

Even when a document appears on its face to be a sale with pacto de retro, the
owner of the property may prove that the contract is really a loan with mortgage by raising
as an issue the fact that the document does not express the true intent and agreement of
the parties. In this case, parol evidence then becomes competent and admissible to prove
that the instrument was in truth and in fact given merely as a security for the repayment of
the loan.

In case of doubt, a contract purporting to be a sale with right to repurchase shall be

construed as an equitable mortgage because a stipulation that the ownership of the
property would transfer to the vendee in case no redemption was effected within the
stipulated period is void for being a pactum commisorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of forclosure.

72
MANUEL D. MEDIDA, DEPUTY SHERIFF OF THE PROVINCE OF CEBU, CITY SAVINGS
BANK (FORMERLY CEBU CITY SAVINGS AND LOAN ASSOCIATION, INC.) and TEOTIMO
ABELLANA v. COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO
G.R. NO. 98334 MAY 8, 1992
REGALADO, J.:

SYLLABUS:

OWNERSHIP OF THE LAND REMAINS WITH THE MORTGAGOR EVEN AFTER

FORECLOSURE SALE UNTIL THE PERIOD OF REDEMPTION HAS EXPIRED: During said
period, it cannot be said that the mortgagor is no longer the owner of the foreclosed
property since the rule up to now is that the right of a purchaser is merely inchoate until
after the period of redemption has expired without the right being exercised. The title to
land sold under mortgage foreclosure remains in the mortgagor or his grantee until the
expiration of the redemption period and conveyance by the master’s deed.

FACTS:

Spouses Dolino, alarmed of losing their right of redemption over lot no. 4371 from
Mr. Juan Gandioncho, purchaser of the lot, went to Teotimo, president of the association, to
obtain a loan of P30,000.00. Teofredo Dolino, son of spouses Dolino, filed a loan application
with lot no. 4731 offered as security for the P30,000.00 loan from the association.
Subsequently, they executed a promissory note in favor of the association. Both documents
indicated the principal obligation of P30,000.00 payable in one year at 12% interest per
annum.

ISSUE:

Whether or Not a mortgagor, whose property has been extrajudicially foreclosed

and sold at a corresponding foreclosure sale, may validly execute a mortgage contract over
the same property during the period of redemption

HELD:

Yes. It is undisputed that the real estate mortgage in favor of petitioner bank was
executed by respondent spouses during the period of redemption. We reiterate that during
said period, it cannot be said that the mortgagor is no longer the owner of the foreclosed
property since the rule up to now is that the right of a purchaser is merely inchoate until
after the period of redemption has expired without the right being exercised. The title to
land sold under mortgage foreclosure remains in the mortgagor or his grantee until the
expiration of the redemption period and conveyance by the master’s deed. To repeat, the
rule has always been that it is only upon the expiration of the redemption period, without
the judgment debtor having made use of his right of redemption, that the ownership of the
land is passed in the purchaser.

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DEVELOPMENT BANK OF THE PHILIPPINES v. COURT OF APPEALS and LYDIA CUBA
G.R. NO. 118342, JANUARY 5, 1998
DAVIDE, JR., J.:

SYLLABUS:

PROHIBITION ON DISPOSING OF APPROPRIATING THE THING GIVEN AS SECURITY

FOR THE PAYMENT OF DEBT: Article 2088 of the Civil Code provides that “The creditor
cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.” At any rate, DBP’s act of appropriating Lydia’s
leasehold rights was violative of Article 2088 of the Civil code, which forbids a credit from
appropriating, or disposing of, the thing given as security for the payment of debt.

PACTUM COMMISSORIUM; ELEMENTS: The elements of pactum commissorium are as

follows: 1) there should be a property mortgaged by way of security for the payment of the
principal obligation; and 2) there should be a stipulation for automatic appropriation by
the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.

FACTS:

Lydia Cuba obtained loans from DBP in the amounts of P109,000; P109,000; and
P98,700 under the terms stated in a Promissory Notes. As security for the said loans, she
executed two Deeds of Assignment of her Leasehold Rights of her Fishpond Lease
Agreement No. 2083. However, she failed to pay her loans on the scheduled dates
stipulated in her Notes. Due to failure to pay, DBP then appropriated the Leasehold Rights
of Lydia without foreclosure proceedings, wither judicial or extra judicial.

The lower court ruled that DBP’s taking possession and ownership of the property
without foreclosure was plainly violative of Article 2088 of the Civil Code which provides
as follows:
Art. 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 trial court also invalidated condition no. 12 of the Assignment of Leasehold
Rights for being a clear case of pactum commissorium expressly prohibited and declared
null and void by Article 2088.

ISSUES:

Whether or not the assignment of leasehold rights was a mortgage contract

Whether or not condition no. 12 of the deed of assignment constituted pactum

commissorium

Whether or not DBP’s act of appropriating Lydia’s leasehold rights was violative of
Article 2088 of the Civil Code

74
HELD:

Yes, the assignment of leasehold rights was a mortgage contract. In all of the notes
covering all the loans of Lydia from DBP, there was a provision that “In the event of
foreclosure of the mortgage securing the notes, I/We further bind myself/ourselves,
jointly and severally to pay the deficiency, if any.” Simultaneously with the execution
of the notes was the execution of “Assignments of Leasehold Rights” where Lydia
assigned her leasehold rights and interest over the fishpond, together with the
improvements thereon. The instrument itself is a mortgage contract.

No. Condition no. 12 is does not constitute pactum commissorium. The elements of
pactum commissorium are as follows: 1) there should be a property mortgaged by
way of security for the payment of the principal obligation; and 2) there should be a
stipulation for automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period.
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon Lydia’s failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among
other things, to sell or otherwise dispose of the said real rights.

Yes. At any rate, DBP’s act of appropriating Lydia’s leasehold rights was violative of
Article 2088 of the Civil code, which forbids a credit from appropriating, or
disposing of, the thing given as security for the payment of debt.

CIRCE S. DURAN and ANTERO S. GASPAR vs.

INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO-TIANGCO
and RESTITUTO TIANGCO
G.R. No. L-64159. September 10, 1985
RELOVA, J p:


SYLLABUS:

IF THE MORTGAGEE IS IN GOOD FAITH: The mortgagee has the right to rely upon what
appears in the certificate of title.

VALID TITLE FROM A FROGED OR FRAUDULENT DOCUMENT: a fraudulent or forged

document of sale may become the ROOT of a valid title if the certificate of title has already
been transferred from the name of the true owner to the name of the forger or the name
indicated by the forger.

FACTS:

Circe Duran, herein petitioner, owned two parcels of land which are the subject
matter of this case. In 1954, petitioner went to United States of America. In 1963, a deed of
sale of the two lots mentioned was made in favor of the petitioner’s mother, who
mortgaged the same property to herein private respondent, Erlinda Tiangco. When
petitioner learned of said sale and mortgage, she wrote the Register of Deeds of Caloocan
City informing the latter that she had not given her mother any authority to sell and
mortgage any of her properties. Meanwhile, petitioner’s mother failed to redeem the
mortgaged properties and foreclosure proceedings were initiated by the private

75
respondent and, ultimately, the sale by the sheriff and the issuance of Certificate of Sale in
favor of the private respondent.

Petitioner then claimed that the deed of sale in favor of her mother is a forgery and
void.

ISSUE:

Whether or not the mortgage is valid

HELD:

Yes. While it is true that under Article 2086 of the civil code, it is essential that the
mortgagor be the absolute owner of the property mortgaged, in this case however insofar
as innocent third persons are concerned the owner is the petitioner’s mother. The
mortgagee had the right to rely upon the certificate of title. Here, the private respondent is
a buyer in good faith and for value. Where innocent third persons relying on the
correctness of the certificate of title issued, acquire rights over the property, the court
cannot disregard such rights and order the total cancellation of the certificate for that
would impair the public confidence in the certificate of title.

VICENTE C. REYES vs.

FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO
SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS
G.R. No. L-28658. October 18, 1979
DE CASTRO, J :

SYLLABUS:

FAILURE OF THE MORTGAGOR TO REDEEM DOES NOT VEST OWNERSHIP OF THE

PROERTY TO THE MORTGAGEE: Failure of mortgagor to redeem the property does not
automatically vest ownership of the property to the mortgagee, which would grant the
latter the right to appropriate the thing mortgaged or dispose of it.

“ONCE A MORTGAGE ALWAYS A MORTGAGE”: The parties cannot by any stipulation,

however express and positive, render it anything but a mortgage. No right passes to
applicant except that of a mortgage since one cannot acquire a right from another who was
not in possession thereof. A derivative right cannot rise higher than its source.

FACTS:

Basilia Beltran borrowed from the petitioner’s father an amount of P 100.000 and
secured by the piece of land in question as evidenced by a written contract. Basilia Beltran
died before petitioner’s father could recover from the loan. Vicente Reyes, petitioner, filed
an application for registration of his title to the parcel of land relying on his belief that the
property belongs to his father who bought the same from Basilia. Petitioner contends that
the contract is in fact a sale and not a mortgage. Petitioner further alleged that his family
has been paying the realty taxes up to the time his father acquired the parcel of land. The
oppositors, Director of Lands, claims that said contract should be treated not as a contract
of sale but as a mortgage, antichresis, or pactum commissorium.

76
ISSUE:

Whether the contract is a mortgage contract

HELD:

Yes. The intention of the parties at the time of the execution of the contract must
prevail, that is, the borrowing and lending of money with security. From the nature of the
transaction, applicant's predecessor-in- interest is a mere mortgagee, and ownership of the
thing mortgaged is retained by Basilia Beltran, the mortgagor. Failure of mortgagor to
redeem the property does not automatically vest ownership of the property to the
mortgagee, which would grant the latter the right to appropriate the thing mortgaged or
dispose of it. This violates the provision of Article 2088 of the New Civil Code, which reads:

"The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void."

The act of applicant in registering the property in his own name upon mortgagor's
failure to redeem the property would amount to a pactum commissorium which is against
good morals and public policy.

VINCENT P. DAYRIT VS.

THE COURT OF APPEALS, HON. ARCA, Judge of the Court of First Instance of Manila,
Branch I, MOBIL OIL PHILIPPINES, INC., and ELADIO YLAGAN, Special Sheriff
G.R. No. L-29388. December 28, 1970
CASTRO, J.:

SYLLABUS:

LIABILITY OF THE MORTGAGED PROPERTIES: 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.

FACTS:

Vincent Dayrit, petitioner, and two others entered into a loan and mortgage
agreement with Mobil Oil Philippines, inc. The agreement provides, among others, that the
loan shall be in the amount of P 150,000 and that in case of default of the borrowers of any
installments Mobil shall have the right to foreclose the mortgage. The properties concerned
are two parcels of land and improvements therein which belong solely to Vicente Dayrit.

The petitioner and other borrowers violated the agreement having paid only one
installment. Mobil oil commenced the proper action with the trial court and hence the court
ordered the three borrowers to “pay the entire obligation and in default of such payment,
the properties put up in collateral shall be sold in foreclosure sale”. Upon motion for
execution of Mobil oil, petitioner filed an opposition alleging that before finality of the

77
judgement he and Mobil oil had an agreement in which he (petitioner) offers to pay his
one-third share with the corresponding release of the mortgage on all of his properties.
Thus, a 30-day grace period was granted which was subsequently extended for another 20
days. On the other hand, Mobil, in its urgent reply, alleged that the respondent agreed to
release the collateral only if the whole principal debt plus interest were fully paid.
Petitioner however prays that he be allowed to deposit the amount corresponding to his
one-third share of the obligation and the collateral over the properties be released. The
trial court ruled in favor of Mobil Oil and ruled that the mortgaged properties must answer
for the entire obligation.

ISSUE:

Whether or not the mortgaged properties should answer for the entire obligation

HELD:

Yes. While it is true that the obligation by the three borrowers from the above
judgment is merely joint and each of them is obliged to pay only his one-third share, the
undisputed fact remains that the intent and purpose of the loan and mortgage agreement
was to secure the entire P 150,000. Payment of only one installment violates said
agreement. Jurisprudence provides that a mortgage directly subjects the property upon
which it is imposed, the same being indivisible even though the debt may be divided, and
such indivisibility likewise being unaffected by the fact that the debtors are not solidarily
liable.

CORNELIO M. ISAGUIRRE, Petitioner, v. FELICITAS DE LARA, Respondent.

G.R. No. 138053. May 31, 2000.
GONZAGA-REYES, J.:

SYLLABUS:

THE MORTGAGEE MERELY HAS TO ANNOTATE HIS CLAIM AT THE BACK OF THE CERTIFICATE OF
TITLE IN ORDER TO PROTECT HIS RIGHTS AGAINST THIRD PERSONS AND THEREBY SECURE THE
DEBT. There is therefore no necessity for him to actually possess the property. Neither
should a mortgagee in an equitable mortgage fear that the contract relied upon is not
registered and hence, may not operate as a mortgage to justify its foreclosure.

FACTS:

Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales

Application over a parcel of land identified as portion of Lot 502, Then, on November 3,
1961, by virtue of a decision rendered by the Secretary of Agriculture and Natural
Resources dated November 19, 1954, a subdivision survey was made and the area was
further reduced to 1,000 square meters. On this lot stands a two-story residential-
commercial apartment declared for taxation purposes under TD 43927 in the name of
respondent’s sons — Apolonio and Rudolfo, both surnamed de Lara.

Sometime in 1953, respondent obtained several loans from the Philippine National
Bank. When she encountered financial difficulties, respondent approached petitioner
Cornelio M. Isaguirre. On February 10, 1960, a document denominated as a "Deed of Sale
and Special Cession of Rights and Interests" was executed by respondent and petitioner,
whereby the former sold a 250 square meter portion of Lot No. 502, together with the two-

78
story commercial and residential structure standing thereon, in favor of petitioner, for and
in consideration of the sum of P5,000.

On August 21, 1969, petitioner filed a sales application over the subject property on
the basis of the deed of sale. His application was approved on January 17, 1984, resulting in
the issuance of Original Certificate of Title No. P-11566 on February 13, 1984, in the name
of petitioner. Meanwhile, the sales application of respondent over the entire 1,000 square
meters of subject property (including the 250 square meter portion claimed by petitioner)
was also given due course, resulting in the issuance of Original Certificate of Title No. P-
13038 on June 19, 1989, in the name of Respondent.

Due to the overlapping of titles, petitioner filed an action for quieting of title and
damages with the Regional Trial Court of Davao City against respondent on May 17, 1990.

After trial on the merits, the trial court rendered judgment on October 19, 1992, in
favor of petitioner declaring him to be the lawful owner of the disputed property. However,
the Court of Appeals reversed the trial court’s decision, holding that the transaction
entered into by the parties, as evidenced by their contract, was an equitable mortgage, not
a sale. 5 The appellate court’s decision was based on the inadequacy of the consideration
agreed upon by the parties, on its finding that the payment of a large portion of the
"purchase price" was made after the execution of the deed of sale in several installments of
minimal amounts; and finally, on the fact that petitioner did not take steps to confirm his
rights or to obtain title over the property for several years after the execution of the deed of
sale. As a consequence of its decision, the appellate court also declared Original Certificate
of Title No. P-11566 issued in favor of petitioner to be null and void. On July 8, 1996, in a
case docketed as G. R. No. 120832, this Court affirmed the decision of the Court of Appeals
and on September 11, 1996, we denied petitioner’s motion for reconsideration.

On May 5, 1997. respondent filed a motion for execution with the trial court, praying
for the immediate delivery of possession of the subject property, which motion was
granted. On February 3, 1998, respondent moved for a writ of possession, invoking our
ruling in G. R. No. 120832 Petitioner opposed the motion, asserting that he had the right of
retention over the property until payment of the loan and the value of the improvements
he had introduced on the property. On March 12, 1998, the trial court granted respondent’s
motion for writ of possession.

ISSUES:

(1) Whether or not the mortgagee in an equitable mortgage has the right to retain
possession of the property pending actual payment to him of the amount of indebtedness
by the mortgagor; and

(b) Whether or not petitioner can be considered a builder in good faith with respect to the
improvements he made on the property before the transaction was declared to be an
equitable mortgage law library

HELD:

No, the mortgagee in an equitable mortgage has no right to retain possession of the
property pending actual payment to him

The mortgagee merely has to annotate his claim at the back of the certificate of title
in order to protect his rights against third persons and thereby secure the debt. There is
therefore no necessity for him to actually possess the property. Neither should a mortgagee
in an equitable mortgage fear that the contract relied upon is not registered and hence, may
not operate as a mortgage to justify its foreclosure.

79
 In the same vein, there is nothing to stop the mortgagor de Lara from acquiring
possession of the property pending actual payment of the indebtedness to petitioner. This
does not in anyway endanger the petitioner’s right to security since, as pointed out by
private respondents, the petitioner can always have the equitable mortgage annotated in
the Certificate of Title of private respondent and pursue the legal remedies for the
collection of the alleged debt secured by the mortgage. In this case, the remedy would be to
foreclose the mortgage upon failure to pay the debt within the required period.

Petitioner’s claims that he was a builder in good faith and entitled to reimbursement
for the improvements he introduced upon the property were rejected by the Court of
Appeals. It held that petitioner knew, or at least had an inkling, that there was a defect or
flaw in his mode of acquisition. Nevertheless, the appellate court declared petitioner to
have the following rights.

He is entitled to reimbursement for the necessary expenses which he may have

incurred over the property, in accordance with Art. 526 and Art. 452 of the Civil Code.
Moreover, considering that the transaction was merely an equitable mortgage, then he is
entitled to payment of the amount of indebtedness plus interest, and in the event of non-
payment to foreclose the mortgage. Meanwhile, pending receipt of the total amount of debt,
private respondent is entitled to possession over the disputed property.

WHEREFORE, the Petition is hereby DISMISSED, and this case is ordered remanded to the
Regional Trial Court of Davao City for further proceedings.

OSMUNDO S. CANLAS and ANGELINA CANLAS, Petitioner, v. COURT OF APPEALS, ASIAN

SAVINGS BANK, MAXIMO C. CONTRERAS and VICENTE MAOSCA, Respondents.
G.R. No. 112160. February 28, 2000
PURISIMA, J.:

SYLLABUS

DOCTRINE OF LAST CLEAR CAHNCE: which is applicable here, the respondent bank
must suffer the resulting loss. In essence, the doctrine of last clear chance is to the effect
that where both parties are negligent but the negligent act of one is appreciably later in
point of time than that of the other, or where it is impossible to determine whose fault or
negligence brought about the occurrence of the incident, the one who had the last clear
opportunity to avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery of damages caused by the
supervening negligence of the latter, who had the last fair chance to prevent the
impending harm by the exercise of due diligence.

CONTRACT OF MORTGAGE MUST BE CONSTITUTED ONLY BY THE ABSOLUTE OWNER ON THE

PROPERTY MORTGAGED; a mortgage, constituted by an impostor is void. Considering that
it was established indubitably that the contract of mortgage sued upon was entered into
and signed by impostors who misrepresented themselves as the spouses Osmundo
Canlas and Angelina Canlas, the Court is of the ineluctible conclusion and finding that
subject contract of mortgage is a complete nullity.

FACTS:

Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private

respondent, Vicente Maosca, decided to venture in business and to raise the capital needed
therefor. The former then executed a Special Power of Attorney authorizing the latter to
mortgage two parcels of land.

80
 Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente
Manosca, for and in consideration of P850,000.00, P500,000.00 of which payable within
one week, and the balance of P350,000.00 to serve as his (Osmundo's) investment in the
business.

On September 3, 1982, Vicente Maosca was able to mortgage the same parcels of
land for P100,000.00 to a certain Attorney Manuel Magno, with the help of impostors who
misrepresented themselves as the spouses, Osmundo Canlas and Angelina Canlas.

On September 29, 1982, private respondent Vicente Maosca was granted a loan by
the respondent Asian Savings Bank (ASB) in the amount of P500,000.00, with the use of
subject parcels of land as security, and with the involvement of the same impostors who
again introduced themselves as the Canlas spouses.6 When the loan it extended was not
paid, respondent bank extrajudicially foreclosed the mortgaged.

On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent bank
that the execution of subject mortgage over the two parcels of land in question was without
their (Canlas spouses) authority, and request that steps be taken to annul and/or revoke
the questioned mortgage. On January 18, 1983, petitioner Osmundo Canlas also wrote the
office of Sheriff Maximo C. Contreras, asking that the auction sale scheduled on February 3,
1983 be cancelled or held in abeyance. Butrespondents Maximo C. Contreras and Asian
Savings Bank refused to heed petitioner Canlas' stance and proceeded with the scheduled
auction

Consequently, on February 3, 1983 the herein petitioners instituted the present case
for annulment of deed of real estate mortgage with prayer for the issuance of a writ of
preliminary injunction; and on May 23, 1983, the trial court issued an Order restraining the
respondent sheriff from issuing the corresponding Certificate of Sheriffs
Sale.8cräläwvirtualibräry

On June 1, 1989, the lower court a quo came out with a decision annulling subject
deed of mortgage.

From such Decision below, Asian Savings Bank appealed to the Court of Appeals,
which handed down the assailed judgment of reversal.

ISSUE:

Whether or not the Court of Appeals erred in reversing the judgment of the lower court.

HELD:

Yes. Evidently, the efforts exerted by the bank to verify the identity of the couple
posing as Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank
to observe more than the diligence of a good father of a family. The negligence of
respondent bank was magnified by the fact that the previous deed of mortgage (which was
used as the basis for checking the genuineness of the signatures of the suppose Canlas
spouses) did not bear the tax account number of the spouses, 15 as well as the Community
Tax Certificate of Angelina Canlas.16 But such fact notwithstanding, the bank did not
require the impostors to submit additional proof of their true identity.

Under the doctrine of last clear chance, which is applicable here, the respondent
bank must suffer the resulting loss. In essence, the doctrine of last clear chance is to the
effect that where both parties are negligent but the negligent act of one is appreciably later
in point of time than that of the other, or where it is impossible to determine whose fault or
negligence brought about the occurrence of the incident, the one who had the last clear

81
opportunity to avoid the impending harm but failed to do so, is chargeable with the
consequences arising therefrom. Stated differently, the rule is that the antecedent
negligence of a person does not preclude recovery of damages caused by the supervening
negligence of the latter, who had the last fair chance to prevent the impending harm by the
exercise of due diligence.

In ruling for respondent bank, the Court of Appeals concluded that the petitioner
Osmundo Canlas was a party to the fraudulent scheme of Maosca and therefore, estopped
from impugning the validity of subject deed of mortgage

Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca, explaining
thus why he (Osmundo) did not bother to correct what Maosca misrepresented and to
assert ownership over the two parcels of land in question.s-daad

Not only that; while it is true that Osmundo Canlas was with Vicente Maosca when
the latter submitted the documents needed for his loan application, and when the check
of P200,000.000 was released, the former did not know that the collateral used by Maosca
for the said loan were their (Canlas spouses) properties. Osmundo happened to be with
Maosca at the time because he wanted to make sure that Maosca would make good his
promise to pay the balance of the purchase price of the said lots out of the proceeds of the
loan.

The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not estop
him from assailing the validity of the mortgage because the said amount was in payment of
the parcels of land he sold to Maosca.24cräläwvirtualibräry

What is decisively clear on record is that Maosca managed to keep Osmundo Canlas
uninformed of his (Maosca's) intention to use the parcels of land of the Canlas spouses as
security for the loan obtained from Asian Savings Bank. Since Vicente Maosca showed
Osmundo Canlas several certificates of title of lots which, according to Maosca were the
collaterals, Osmundo Canlas was confident that their (Canlases) parcels of land were not
involved in the loan transaction with the Asian Savings Bank.25 Under the attendant facts
and circumstances, Osmundo Canlas was undoubtedly negligent, which negligence made
them (petitioners) undeserving of an award of Attorneys fees.

Settled is the rule that a contract of mortgage must be constituted only by the
absolute owner on the property mortgaged;26 a mortgage, constituted by an impostor is
void.27 Considering that it was established indubitably that the contract of mortgage sued
upon was entered into and signed by impostors who misrepresented themselves as the
spouses Osmundo Canlas and Angelina Canlas, the Court is of the ineluctible conclusion and
finding that subject contract of mortgage is a complete nullity.

WHEREFORE , the Petition is GRANTED and the Decision of the Court of Appeals, dated
September 30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The Decision of Branch 59 of the
Regional Trial Court of Makati City in Civil Case No. M-028 is hereby REINSTATED. No
pronouncement as to costs.

SEVERINO TOLENTINO and POTENCIANA MANIO vs. BENITO GONZALES SY CHIAM

G.R. No. L-26085, August 12, 1927
JOHNSON, J.:


SYLLABUS:

“PACTO DE RETRO” – The contract which is copied in full in the decision is a pacto de
retro and not a mortgage; that at the time of its execution and delivery the parties thereto
intended to execute a pacto de retro (a conditional sale) and not a mortgage (a loan); that

82
the vendor became a tenant of the purchaser and not a mortgagor. It has been the uniform
rule of this court, due to the severity of a contract of pacto de retro, to declare the same to
be a mortgage and not a sale whenever the interpretation of Tolentino and Manio v.
Gonzalez Sy Chiam such a contract justifies that conclusion. There must be something,
however, in the language of the contract or in the conduct of the parties which shows
clearly and beyond doubt that they intended the contract to be a mortgage and not a pacto
de retro.

FACTS:

Prior to 28 November 1922, the appellants purchased the Luzon Rice Mills Inc., a piece
or parcel of land located in Tarlac City for the price of P25,000, promising to pay in
installments.

a) First installment of P2,000 was duly paid on or before May 2, 1921

b) Second installment of P8,000 was duly paid on or before May 31, 1921
c) Third installment of P15,000 at 12% interest due before November 30, 1922

One of the conditions of the contract of purchase was that on failure of the purchasers
to pay the balance of said purchase price or any of the installments on the date agreed
upon, the property bought would revert to the original owner. On November 7, 1922, a
representative of the vendor of the subject property wrote a letter notifying the appellant
that if the balance of indebtedness was not paid, an action would be brought for the
purpose of recovering the property, together with damages for non-compliance with the
condition of the contract of purchase.

The payments due were paid due to the appellant acquiring a loan amounting to
P17,500, upon condition that the plaintiffs execute and deliver to him a pacto de retro of
the subject property.

ISSUE:

Whether the contract is that of a mortgage

HELD:

No, it has been the uniform theory of this court, due to the severity of a contract of pacto de
retro, to declare the same to be a mortgage and not a sale whenever the interpretation of such a
contract justifies that conclusion. There must be something, however, in the language of the
contract or in the conduct of the parties which shows clearly and beyond doubt that they intended
the contract to be a "mortgage" and not a pacto de retro. The evidence introduced by the appellant
in the present case does not meet with that stringent requirement. There is not a word, a phrase, a
sentence or a paragraph in the entire record, which justifies this court in holding that the said
contract of pacto de retro is a mortgage and not a sale with the right to repurchase. Article 1281 of
the Civil Code provides: "If the terms of a contract are clear and leave no doubt as to the intention of
the contracting parties, the literal sense of its stipulations shall be followed." Article 1282 provides:
"in order to judge as to the intention of the contracting parties, attention must be paid principally to
their conduct at the time of making the contract and subsequently thereto."

83
MAGDALENA C. DE BARRETO, ET AL. vs.
JOSE G. VILLANUEVA, ET AL.
G.R. No. L-14938. JANUARY 28, 1961
GUTIERREZ DAVID, J.:

SYLLABUS:

LOAN ON REAL ESTATE: Loans on real estate security would become aleatory and risky
transactions, for no, prospective lender could accurately estimate the hidden liens on the
property offered as security, unless he indulged in complicated, tedious investigations, .
The logical result might well be a contraction of credit unforeseeable proportions that
could lead to economic disaster.

FACTS:

Cruzado obtained from RFC a loan in the amount of P11,000.00. To secure payment,
she mortgaged the subject. After failing to pay certain installments the mortgage was
foreclosed and the RFC acquired the property subject to her rights as mortgagor to re-
purchase the same. On July 1951, the land was sold back to her conditionally. Cruzado then
sold to Villanueva the subject land together with the improvements by installments.
Subsequently, Villanueva was able to secure in her name the title covering the subject
property, and eventually mortgaged the same to Barretto as security for a loan.

However, Villanueva failed to pay the remaining installments of the subject property
which caused a complaint for the recovery of the same filed by Cruzado. Pending trial of the
case, a lien was constituted upon the in favor of Cruzado. Villanueva having failed to pay
her debt to Barretto, the latter instituted against Villanueva an action for foreclosure of
mortgage, impleading Cruzado as parties defendants and who was absolved from the
complaint and sentenced Villanueva to pay Barretto. Upon the finality of this decision,
Barretto filed a motion for the issuance of a writ of execution which was granted.

Cruzado filed a "Vendor's Lien" over the real property subject of the foreclosure suit,
the said amount representing the unpaid balance of the purchase price of the said property.
The court decreed that should the realty in question be sold at public auction in the
foreclosure proceedings, Cruzado shall be credited with their pro-rata share in the
proceeds thereof, "pursuant to the provision of articles 2248 and 2249 of the new Civil
Code in relation to Article 2242, paragraph 2 of the same Code." Barretto filed a motion for
reconsideration but the sheriff of Manila, acting in pursuance of the order of the court
granting the writ of execution, sold at public auction the property in question. As highest
bidder, Barretto acquired the properties.

ISSUE:

Whether 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.

HELD:

Yes. In the absence of insolvency proceedings the conflict between the parties the
same is decided pursuant to the well-established principle concerning registered lands;
that a purchaser in good faith and for value registered property free from liens and
encumbrances other than statutory liens and those recorded in the certificate of title. There
being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not

84
require the character and rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter. A close study of the facts fails to
show that Cruzado should be regarded as unpaid vendors of the property involved as to be
entitled to preference under Article 2242. It is clear that ownership of the property had
passed to the RFC since 1950, when it consolidated its purchase at the foreclosure sale and
obtained a certificate of title in its corporate name. The subsequent contract of resale in
favor of the Cruzados did not revest ownership in them, since they failed to comply with its
terms and conditions, and the contract itself provided that the title should remain in the
name of the RFC until the price was fully paid.

Therefore, when after defaulting in their payments due under the resale contract
with the RFC the appellants Cruzados sold to Villanueva "their rights, title, interest and
dominion" to the property, they merely assigned whatever rights or claims they might still
have thereto; the ownership of the property rested with the RFC. The sale from Cruzado to
Villanueva, therefore, was not so much a sale of the land and its improvements as it was a
quit-claim deed in favor of Villanueva. In law, the operative sale was that from the RFC to
the latter, and it was the RFC that should be regarded as the true vendor of the property. At
the most, the Cruzados transferred to Villanueva an option to acquire the property, but not
the property itself, and their credit, therefore, cannot legally constitute a vendor's lien on
the corpus of that property that should stand on an equal footing with the mortgaged credit
held by appellant Barretto.

85
VII. ANTICHRESIS

CECILIO DIEGO, plaintiff and appellee, vs. SEGUNDO FERNANDO defendant and
appellant.
109 Phil. 143, No. L-15128 August 25, 1960
GONZAGA-REYES, J.:

SYLLABUS:

MORTGAGE NOT ANTICHRESIS: If a contract of loan with security does not stipulate the
payment of interest like in the case at bar, and possession of the mortgaged property is
delivered to the mortgagee in order that the latter may gather its fruits, but without stating
that said fruits are to be applied to the payment of interest, if any, and afterwards that of
the principal, the contract is a mortgage and not antichresis.

FACTS:

On May 26, 1950, the defendant Segundo Fernando executed a deed of mortgage in
favor of plaintiff Cecilio Diego over two parcels of land registered in his name, to secure a
loan of P2,000, without interest, payable within four years from the date of the mortgage
(Exhibit "A"). After the execution of the deed, possession of the mortgaged properties were
turned over to the mortgagee.

The debtor having failed to pay the loan after four years, the mortgagee Diego made
several demands upon him for payment; and as the demands were unheeded, Diego filed
this action for foreclosure of mortgage.

Defendant Fernando's defense was that the true transaction between him and
plaintiff was one of antichresis and not of mortgage; and that as plaintiff had allegedly
received a total of 120 cavans of palay from the properties given as security, which, at the
rate of P10 a cavan, represented a value of P5,200, his debt had already been paid, with
plaintiff still owing him a refund of some P2,720.00. The Court below, however, found that
there was nothing in the deed of mortgage to show that it was not a true contract of
mortgage, and that the fact that possession of the mortgaged properties were turned over
to the mortgagee did not alter the transaction; that the parties must have intended that the
mortgagee would collect the fruits of the mortgaged properties as interest on his loan.

ISSUE:

Whether the contract between the parties is one of antichresis.

HELD:
No. The contract is one of mortgage.

To be antichresis, it must be expressly agreed between creditor and debtor that the
former, having been given possession of the properties given as security, is to apply their
fruits to the payment of the interest, if owing, and thereafter to the principal of his credit
such that when a contract of loan with security does not stipulate the payment of interest
but provides for the delivery to the creditor by the debtor of the property given as security,
in order that the latter may gather its fruits, without stating that said fruits are to be
applied to the payment of interest, if owing, and afterwards that of the principal, the
contract is a mortgage and not antichresis.

86
 However, appellee should be made to account for the fruits he received from the
properties mortgaged from the time of the filing of this action until full payment by
appellant, which fruits should be deducted from the total amount due him from appellant
under this judgment.

ORTIZ v. KAYANAN
G.R. No. L-32974, JULY 30, 1979
ANTONIO, J.:

SYLLABUS:

RIGHT OF RETENTION: Possession in good faith ceases or is legally interrupted from the
moment defects in the title are made known to the possessor. However, even after his good
faith ceases, the possessor in fact can still retain the property, pursuant to Article 546 of the
New Civil Code, until he has been fully reimbursed for all the necessary and useful expenses
made by him on the property. The principal characteristic of the right of retention is its
accessory character. It is accessory to a principal obligation.

CONTRACT OF ANTICHRESIS: The creditor acquires the right to receive the fruits of an
immovable of his debtor with the obligation to apply them to payment of the interest, if
owing, and thereafter to the principal of his credit. The debtor cannot reacquire enjoyment
of the immovable until he has actually paid what he owes the creditor.

COMPENSATION OR SET OFF; TOTALLY OR PARTIALLY: Respondents deposited in

court the amount of the judgment in the sum of P13, 632.00 in cash, subject only to the
accounting of the tolls collected by the petitioner so that whatever is due from him may be
set off with the amount of reimbursement. Compensation or set off may take place, either
totally or partially.

FACTS:

The lot in controversy was the subject of Homestead Application of Martin Dolorico
II, plaintiff's ward. Since then it was plaintiff who continued the cultivation and possession
of the property, without filing any application to acquire title thereon.

Dolorico II named his uncle, Martin Dolorico I as his heir and successor in interest.
Later on, Dolorico I executed an affidavit relinquishing his rights over the property in favor
of defendants Comintan and Zamora. The Homestead Application was cancelled and
thereafter, Comintan and Zamora filed their respective sales applications.

Respondent Court rendered judgment awarding the one-half portion of the property
in litigation in favor of Comintan, being the successful bidder in the public auction giving
due course to the Sales Application of Zamora over the other half, without prejudice to the
right of Ortiz to participate in the public bidding. However, should plaintiff Ortiz be not
declared the successful bidder thereof, Comintan and Zamora are ordered to reimburse
jointly Ortiz the improvements he has introduced on the whole property in the amount of
P13,632.00, the latter having the right to retain the property until after he has been fully
paid therefor.

87
 From March 1967 to December 31, 1968, Ortiz collected tolls on a portion of the
property in question wherein he has not introduced any improvement, thru which
vehicular traffic was detoured or diverted, and again from September 1969 to March 31,
1970, Ortiz resumed the collection of tools on the same portion without rendering any
accounting on said tolls to the Receiver.

The Supreme Court affirmed that the tolls belong to the defendant, considering that
the same were collected on a portion of the land question where the plaintiff did not
introduce any improvement.

Ortiz contends that so long as the aforesaid amount of P13, 632.00 decreed in the
judgment representing the expenses for clearing the land and the value of the coconuts and
fruit trees planted by him remains unpaid, he can appropriate for his exclusive benefit all
the fruits which he may derive from the property, without any obligation to apply any
portion thereof to the payment of the interest and the principal of the debt.

ISSUES:

Whether the tolls collected from the diversionary road on the property, which is
public land, belong to Ortiz

HELD:

No. To Comintan belongs the tolls collected from a portion of the land awarded to
him by the doctrine of accretion and his right over the same is ipso jure. It is so because, an
applicant who has complied with all the terms and conditions which entitle him to a patent
for a particular tract of public land, acquires a vested right therein and is to be regarded as
equitable owner thereof, so that even without a patent, a perfected homestead or sales
application is a property right in the fullest sense, unaffected by the fact that the paramount
title is still in the Government and no subsequent law can deprive him of that vested right.

Possession in good faith ceases or is legally interrupted from the moment defects in
the title are made known to the possessor. However, even after his good faith ceases, the
possessor in fact can still retain the property, pursuant to Article 546 of the New Civil Code,
until he has been fully reimbursed for all the necessary and useful expenses made by him
on the property.

The principal characteristic of the right of retention is its accessory character. It is

accessory to a principal obligation. It is analogous to that of a pledge if the property
retained is a movable, and to that of antichresis, if the property held is immovable.

In a pledge, if the thing pledged earns or produces fruits, income, dividends or

interests, the creditor shall compensate what he receives with those which are owing him.

In a contract of antichresis, the creditor acquires the right to receive the fruits of an
immovable of his debtor with the obligation to apply them to payment of the interest, if
owing, and thereafter to the principal of his credit. The debtor cannot reacquire enjoyment
of the immovable until he has actually paid what he owes the creditor.

88
 Thus, Ortiz cannot appropriate for his own exclusive benefit the tolls which he
collected from the property retained by him. Thus, the disputed tolls, after deducting Ortiz’
expenses for administration, belong to Comintan.

Respondents deposited in court the amount of the judgment in the sum of

P13,632.00 in cash, subject only to the accounting of the tolls collected by the petitioner so
that whatever is due from him may be set off with the amount of reimbursement.
Compensation or set off may take place, either totally or partially.

89
VIII. GUARANTY AND SURETY

RIZAL COMMERCIAL BANKING CORPORATION v. HON. JOSE P. ARRO, JUDGE OF THE

COURT OF FIRST INSTANCE, and RESIDORO CHUA
G.R. NO. L-49401 JULY 30 1982
DE CASTRO, J.:

SYLLABUS:

SURETY AGREEMENT; ACCESSORY CONTRACT: The surety agreement which was earlier
signed by Go, Sr. 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. The loan was,
therefore, covered by the said agreement, and private respondent, even if he did not sign
the promissory note, is liable by virtue of the surety agreement.

FUTURE DEBTS CAN BE GUARANTEED BY SURETY AGREEMENTS: Article 2053 of the

Civil Code, provides that, “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.”

FACTS:

Chua and Go. Sr. executed a comprehensive surety agreement to guaranty among
others any existing loan of Daicor, provided that it will not exceed P100,000.00. Later on, a
promissory note amounting to P100,000.00 was issued in favor of petitioner and was
signed by Go, Sr. in his personal capacity. The note was not fully paid despite demands;
hence, a complaint for a sum of money was filed against Daicor, Chua and Go, Sr. Chua
argued that he cannot be made liable because only Go, Sr. signed the note.

ISSUE:

1. Whether or Not Chua is liable to pay the obligation

2. Whether or not a surety agreement can guarantee future debts

HELD:

1. Yes. The comprehensive surety agreement was jointly executed by Chua and Go, Sr.,
president and general manager, respectively of Daicor to cover existingas well as
future obligations which Daicor may incur with the petitioner bank, subject only to
the proviso that their liability shall not exceed at any one time the aggregate
principal sum of P100,000.00. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the promissory note, is
liable by virtue of the surety agreement.

The surety agreement which was earlier signed by Go, Sr. 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.

90
 2. Yes. According to Article 2053 of the Civil Code, “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.”

SPOUSES ALFREDO and SUSANA ONG v. PHILIPPINE COMMERCIAL INTERNATIONAL BANK

G.R. NO. 160466 JANUARY 17, 2005
PUNO, J.:

SYLLABUS:

ARTICLES 2063 AND 2081; NOT APPLICABLE TO SURETIES: A guarantor insures the solvency of
the debtor while a surety insures the solvency of the debt. The benefit of excussion is not available
to the surety as he is principally liable for the payment of the debt.

FACTS:

BMC needed additional capital for its business and applied for its business and applied for
various loans amounting to a total of P5,000,000.00 with PCIB where the spouses acted as sureties
and issued 3 promissory notes for the purpose. Later on, BMC filed for rehabilitation and
suspension of payments with SEC and a MOA was executed by BMC, the spouses who are the
president and treasurer of BMC, and the creditors of BMC for the temporary suspension of payment
and any pending civil action against BMC.

However, PCIB filed a case against petitioner-spouses for a collection of sum of money,
holding them liable as sureties on the 3 promissory notes for the P5,000,000.00 loan.

ISSUES:

1. Whether or not Articles 2063 and 2081 of the Civil Code are applicable to sureties
2. Whether or not PCIB can collect from the spouses who acted as sureties even if there is a
compromise between the debtor and the creditors

HELD:

1. No. Article 2063 which provides that a compromise between the creditor and principal
debtor benefits the guarantor and should not prejudice the latter; and Article 2081 which
provides that the guarantor may set up against the creditor all the defenses which pertain to
the principal debtor and are inherent to the debt; but not those which are purely personal
to the debtor; are not applicable for sureties.

A guarantor insures the solvency of the debtor while a surety insures the solvency of the
debt. The benefit of excussion is not available to the surety as he is principally liable for the
payment of the debt.

2. Yes. Under Article 1216 of the Civil Code, respondent bank as creditor may proceed against
petitioner-spouses as sureties despite the execution of the MOA which provided for the
suspension of payment and filing of collection suits against BMC.

91
LUZON STEEL CORPORATION, REPRESENTED BY TOMAS AQUINO CU v. JOSE O. SIA,
TIMES SURETY & INSURANCE CO. INC.
G.R. NO. L-26449 MAY 15, 1969
REYES, J.B.L., J.:

SYLLABUS:

PREVIOUS EXHAUSTION OF DEBTOR’S PROPERTY NOT NEEDED TO PROCEED

AGAINST SURETY: It is prescribed in Article 2059, paragraph 2, of the Civil Code that the
excusion (previous exhaustion of the property of the debtor) shall not take place “if he
(guarantor) has bound himself solidarily with the debtor.

FACTS:

Luzon Steel sued Metal Manufacturing and Sia, as manager, for breach of contract.
Plaintiff and defendant, without intervention of Times Surety, entered into a compromise;
however, defendant failed to comply. Hence, plaintiff obtained a writ of execution against
defendant and Surety.

ISSUES:

Whether or not the writ of execution could be issued against the surety without
previous exhaustion of the debtor’s properties

HELD:

Yes. The surety bound itself “jointly and solidary” with the defendant; and it is
prescribed in Article 2059, paragraph 2, of the Civil Code that the excusion (previous
exhaustion of the property of the debtor) shall not take place “if he (guarantor) has bound
himself solidarily with the debtor.

In addition to that, the surety cannot demand exhaustion of the property of the
debtor unless he can point out sufficient leviable property of the debtor within the
Philippine territory. There is no record that the appellee surety has done so in accordance
with Article 2060.

INTERNATIONAL FINANCE CORPORATION v. IMPERIAL TEXTILE MILLS, INC.

G.R. NO.160324 NOVEMBER 15, 2005
PANGANIBAN, J.:

SYLLABUS:

TENOR OF THE CONTRACT, NOT THE TITLE, GOVERNS THE LIABILITY OF THE
PARTIES: The use of word “guarantee” does not ipso facto make the contract one of
guaranty. Despite the use of “guarantee” and “guarantors” in the agreement, the agreement
also specifically stated that the corporation was “jointly and severally” liable. The very
terms of a contract govern the obligations of the parties or the extent of the obligor’s
liability.

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FACTS:

A guarantee agreement was executed by IFC, ITM and Grandtex. ITM and Grandtex
agree to guarantee PPIC’s obligations under the loan granted to it by IFC. Some of the
payments were rescheduled as requested by PPIC; however, it still defaulted.

By virtue of PPIC’s failure, IFC together with DBM applied for extrajudicial
foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all
improvements owned by PPIC; however, the foreclosure did not satisfy all the obligations
of PPIC. IFC demanded ITM and Grandtex, as guarantors to PPIC, to pay the outstanding
balance.

ISSUE:

Whether or not ITM and Grandtex are guarantors based from the tenor of the
agreement

HELD:

No. Despite the use of “guarantee” and “guarantors” in the agreement, the
agreement also specifically stated that the corporation was “jointly and severally” liable. To
put emphasis on the nature of that liability, the contract further stated that ITM was a
primary obligor, not a mere surety. Those stipulations meant only one thing; that at
bottom, and to all legal intents and purposes, it was a surety.

The use of word “guarantee” does not ipso facto make the contract one of guaranty.
This Court has recognized that the word is frequently employed in business transactions to
describe the intention to be bound by a primary or an independent obligation. The very
terms of a contract govern the obligations of the parties or the extent of the obligor’s
liability.

E. ZOBEL, INC. v. THE COURT OF APPEALS, CONSOLIDATED BANK AND TRUST

CORPORATION and SPOUSES RAUL and ELEA R. CLAVERIA
G.R. NO. 113931 MAY 6, 1998
MARTINEZ, J.:

SYLLABUS:

THE USE OF THE TERM “GUARANTEE” DOES NOT IPSO FACTO MEAN THAT THE
CONTRACT IS ONE OF GUARANTY: Authorities recognize that the word “guarantee” is
frequently employed in business transactions to describe not the security of the debt but an
intention to be bound by a primary of independent obligation. The terms of the contract
categorically obligates petitioner as “surety” to induce SOLIDBANK to extend its credit to
respondent spouses. The contract clearly discloses that petitioner assumed liability to
SOLIDBANK as a regular party to the undertaking and obligated itself as an original
promisor.

ARTICLE 2080; NOT APPLICABLE TO: Article 2080 does not apply where the liability is as
a surety, not as a guarantor.

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FACTS:

Spouses Claveria obtained a loan to finance the purchase of three (3) vessels. Said
vessels were covered by a chattel mortgage and a continuing guarantee was executed by E.
Zobel. Spouses defaulted in the payment of the entire obligation; hence, SOLIDBANK filed a
complaint for sum of money with prayer for a writ of preliminary attachment against the
spouses and E. Zobel. Petitioner contends that its liability as a guarantor was extinguished
pursuant to Article 2080 of the Civil Code. It argued that it has lost its right to be
subrogated to the first chattel mortgage in view of SOLIDBANK’s failure to register the
chattel mortgage with the appropriate government agency.

ISSUES:

1. Whether or Not the petitioner under the “continuing guaranty” obligated itself to
SOLIDBANK as a guarantor
2. Whether or Not Article 2080 is applicable to a surety

HELD:

1. No. The contract executed by petitioner in favor of SOLIDBANK, albeit denominated

as a “continuing guaranty” is a contract of surety. The terms of the contract
categorically obligates petitioner as “surety” to induce SOLIDBANK to extend its
credit to respondent spouses. The contract clearly discloses that petitioner assumed
liability to SOLIDBANK as a regular party to the undertaking and obligated itself as
an original promisor.

The use of the term “guarantee” does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word “guarantee” is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary of independent obligation.

Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. However, under our civil law, they may be distinguished thus:
A surety is usually bound with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original promisor and debtor
from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by mere indulgence of the creditor to the
principal, no matter how much may be injured thereby. On the other hand, the
contract of guaranty is the guarantor’s own separate undertaking, in which the
principal does not join. It is usually entered into before or after that of the principal,
and is often supported on a separate consideration form that supporting the
contract of the principal. The original contract of his principal is not his contract,
and he is not bound to take notice of its non-performance. He is often discharged by
the mere indulgence of the creditor to the principal, and is usually not liable unless
notified of the default of the principal

2. No. Article 2080 does not apply where the liability is as a surety, not as a guarantor.

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GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES, represented by the BUREAU
OF SUPPLY COORDINATION, Plaintiff-Appellee, v. MARCELINO TIZON, ET
AL., Defendants. CAPITAL INSURANCE & SURETY CO., INC., Defendant-Appellant.
G.R. No. L-22108. August 30, 1967.
ANGELES, J.:

SYLLABUS:

APPEALS; APPEAL BY ONE OF SEVERAL JUDGMENT DEBTORS; EFFECT ON LIABILITY

OF THOSE WHO DID NOT APPEAL; WHEN RESULT OF THE APPEAL, IF FAVORABLE,
WILL INURE TO THE BENEFIT OF THE OTHERS. — Whether an appeal by one of several
judgment debtors will affect the liability of those who did not appeal must depend upon the
facts in each particular case. If the judgment can only be sustained upon the liability of the
one who appeals and the liability of the other co-judgment debtors depends solely upon the
question whether or not the appellant is liable, and the judgment is revoked as to that
appellant, then the result of his appeal will inure to the benefit of all (Municipality of Orion
v. Concha)

APPEAL INURES TO THE BENEFIT OF OTHERS, IF THE PARTIES’ OBLIGATION IS

SOLIDARY; CASE AT BAR. — In the case at bar, the Surety bond itself, jointly and
severally, with the principal obligor to pay the Republic of the Philippines any loss or
damage the latter may suffer, not exceeding 10,000.00, "in case of delay and/or default in
the execution of the contract." The liability of the Surety is thus 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" (Municipality of
Orion v. Concha, supra). In other words, 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. While it is true
that the Surety did not appeal the decision of the inferior court to the Court of First
Instance, and on account of its failure to appeal, it lost its personality to appear in the latter
court or to file an answer therein, it is not yet certain that the Surety’s liability unto plaintiff
has attached. If the principal debtor’s assertion on appeal that it has no liability to the
plaintiff is proven and sustained, the reversal of the judgment of the inferior court would
operate as a reversal on the Surety, even though it did not appeal, in view of the
dependency of its obligation upon the liability of principal debtor. The principal debtor
might succeed in his appeal, in which event the judgment of the inferior court could not
continue in force against the Surety. Consequently, it is premature to execute said judgment
against the Surety.

FACTS:

It appears that in a bidding conducted by the Bureau of Supply Coordination of the

Department of General Services, for the supply of "one (1) Baylift portable heavy-duty
truck and auto lift, fully air operated, 500 lbs. capacity, and two (2) Baylift Ramps, U.S.
manufacture," Tizon Engineering, of which Marcelino Tizon was the sole owner and
proprietor, won the bid, having offered the lowest bid of P4,000,00. To guarantee faithful
performance of the conditions of the bid, the Bureau of Supply Coordination required Tizon
Engineering to give a bond in the sum of P10,000.00. On September 12, 1958, the Surety
issued its bond for the said amount in favor of the Republic of the Philippines. Tizon
Engineering failed to comply with the conditions of the bid, failing as he did to deliver the
equipment called for in the Buyer’s order No. 42546 of the Bureau of Supply, constraining
the latter to purchase the equipment from Fema Trading, the second lowest bidder,
resulting in a loss of P2,975.00 to the Government. Notwithstanding demands made by the
Bureau of Supply on defendants Marcelino Tizon and the Surety to pay said amount, they

95
failed and refused. Hence, complaint was filed in the City Court of Manila by the Republic of
the Philippines to recover the said sum with legal interests, plus attorney’s fees and costs.
After trial, judgment was rendered in favor of the plaintiff and against the defendants,
ordering the latter to pay, jointly and severally, the sum of P2,972.00 with legal interests
from November 12, 1960, and the costs of suit. Only defendant Tizon appealed from the
decision to the Court of First Instance of Manila.

On August 29, 1963, the plaintiff filed a motion praying" (a) To strike out the answer
filed by the Surety reproducing its answer filed in the City Court; (b) To remand the case to
the City Court, as concerns the Surety, for execution of the judgment rendered in said
court."cral

ISSUE:

Whether an appeal by Tizon on the sentenced to pay solidarily a sum of money,

inures to the benefit of the surety.

HELD:

Yes. In the case at bar, the Surety bond itself, jointly and severally, with the principal
obligor to pay the Republic of the Philippines any loss or damage the latter may suffer, not
exceeding 10,000.00, "in case of delay and/or default in the execution of the contract." The
liability of the Surety is thus 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" (Municipality of Orion v. Concha, supra). In other
words, 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. While it is true that the Surety did not appeal the
decision of the inferior court to the Court of First Instance, and on account of its failure to
appeal, it lost its personality to appear in the latter court or to file an answer therein, it is
not yet certain that the Surety’s liability unto plaintiff has attached. If the principal debtor’s
assertion on appeal that it has no liability to the plaintiff is proven and sustained, the
reversal of the judgment of the inferior court would operate as a reversal on the Surety,
even though it did not appeal, in view of the dependency of its obligation upon the liability
of principal debtor. The principal debtor might succeed in his appeal, in which event the
judgment of the inferior court could not continue in force against the Surety. Consequently,
it is premature to execute said judgment against the Surety.

PHILIPPINE NATIONAL BANK PHILIPPINE NATIONAL BANK, p e titio n e r , v s v s .

MANILA SURETY & . MANILA SURETY & FIDELITY CO., INC., and THE COURT OF
APPEALS (Second Division) FIDELITY CO., INC., and THE COURT OF APPEALS (Second
Division), r e s p o n d e n t s
G.R. No. L-20567. July 30, 1965
REYES, J.B.L. REYES, J.B.L., J p p:

SYLLABUS

AGENCY; DUTY OF AGENT TO ACT WITH THE CASE OF A GOOD FATHER OF A FAMILY.
— An agent is required to act with the care of a good father of a family and becomes liable
for the damages which the principal may suffer through his nonperformance.

BANK LIABLE FOR NEGLECT IN COLLECTING SUMS DUE ITS DEBTOR. — A bank is
answerable for negligence in failing to collect the sums due its debtor from the latter's own

96
debtor, contrary to said bank's duty as holder of an exclusive and irrevocable power of
attorney to make such collections.

3. SURETYSHIP; SURETY RELEASED WHEN ASSIGNED FUNDS PERMITTED BY

CREDITOR TO BE EXHAUSTED WITHOUT NOTIFYING FORMER. — By allowing the
assigned funds to be exhausted without notifying the surety, the creditor deprives the
surety of any possibility of recoursing against that security, and therefore the surety is
released.

FACTS:

The material facts of the case, as found by the appellate Court, are as follows: The
Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00
to Edgington Oil Renery for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth
P279,000.00 were released and delivered to Adams & Taguba Corporation (known as
ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to the amount
of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee and
attorney-in-fact to receive and collect from the Bureau of Public Works the amount
aforesaid out of funds payable to the assignor under Purchase Order No. 71947.

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to
the total value of P431,466.52. Of this amount the Bank regularly collected, from April 21,
1948 to November 18, 1948, P106,382.01.

Thereafter, for unexplained reasons, the Bank ceased to collect 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 lower court render its decision in favor of the bank, however after appeal the
Court of Appeals render an adverse decision.

ISSUE:

Whether or not the surety is released when assigned funds permitted by creditor to
be exhausted without notifying the former.

HELD:

The Court of Appeals did not hold the Bank answerable for negligence in failing to
collect from the principal debtor but for its neglect in collecting the sums due to the debtor
from the Bureau of Public Works, contrary to its duty as holder of an exclusive and
irrevocable power of attorney to make such collections, since an agent is required to act
with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-performance (Civ. Code, Art.
1884). Certainly, the Bank could not expect either ATACO or the surety to collect from the
Bureau of Public Works the moneys it had failed to demand. Not only because these parties
had the right to expect that the Bank would diligently perform its duty under its power of
attorney, but because they could not have collected from the Bureau even if they had
attempted to do so. It must not be forgotten that the Bank's power to collect was expressly
made irrevocable, so that the Bureau of Public Works could very well refuse to make
payments to the principal debtor itself. Even if the assignment with power of attorney from
the principal debtor were considered as more additional security, still, by allowing the

97
assigned funds to be exhausted without notifying the surety, the Bank deprived the former
of any possibility of recoursing against that security. The Bank thereby exonerated the
surety, pursuant to Article 2080 of the Civil Code: "Art. 2080. — The guarantors, even
though they be solidary, are released from their obligation whenever by some act of the
creditor they cannot be subrogated to the rights, mortgages and preferences of the latter."

JOSE C. TUPAZ IV and PETRONILA C. TUPAZ JOSE C. TUPAZ IV and PETRONILA C.

TUPAZ, petitioners , vs . THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS COURT OF APPEALS and BANK OF THE PHILIPPINE ISLANDS, respondents
G.R. No. 145578. November 18, 2005

SYLLABUS:

MERCANTILE LAW; PRIVATE CORPORATIONS; INDIVIDUALS ACTING AS CORPORATE

AGENTS ARE NOT PERSONALLY LIABLE FOR ANY DEBTS THEY INCURRED ACTING IN
SUCH CAPACITY; EXCEPTION. — A corporation, being a juridical entity, may act only
through its directors, ocers, and employees. Debts incurred by these individuals, acting as
such corporate agents, are not theirs but the direct liability of the corporation they
represent. As an exception, directors or ocers are personally liable for the corporation's
debts only if they so contractually agree or stipulate.

CORPORATE OFFICERS SIGNING JOINTLY AND SEVERALLY WITH THE CORPORATION

IN A TRUST RECEIPT CONTRACT IS LIABLE ONLY AS GUARANTOR; RATIONALE. — In
Prudential Bank v. Intermediate Appellate Court, the Court interpreted a substantially
identical clause in a trust receipt signed by a corporate officer who bound himself
personally liable for the corporation's obligation. The petitioner in that case contended that
the stipulation "we jointly and severally agree and undertake" rendered the corporate
officer solidarily liable with the corporation. We dismissed this claim and held the
corporate ocer liable as guarantor only. The Court further ruled that had there been more
than one signatories to the trust receipt, the solidary liability would exist between the
guarantors. We held: Petitioner [Prudential Bank] insists that by virtue of the clear wording
of the . . . clause ". . . we jointly and severally agree and undertake . . .," and the concluding
sentence on exhaustion, [respondent] Chi's liability therein is solidary. . . . Our . . . 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 lled 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. . . . 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

98
clause, is on a form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the axing 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.

CIVIL LAW; CONTRACTS; TRUST RECEIPT; GUARANTOR IS LIABLE FOR THE

CORPORATION'S PRINCIPAL DEBT AND OTHER ACCESSORY LIABILITIES;
RATIONALE. — However, respondent bank's suit against petitioner Jose Tupaz stands
despite the Court's standing that he is liable as guarantor only. First, excussion is not a pre-
requisite to secure judgment against a guarantor. The guarantor can still demand
deferment of the execution of the judgment against him until after the assets of the
principal debtor shall have been exhausted. Second, the benefit of excussion may be
waived. Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz waived
excursion when he agreed that his "liability in [the] guaranty shall be DIRECT AND
IMMEDIATE, without any need whatsoever on . . . [the] part [of respondent bank] to take
any steps or exhaust any legal remedies. . . . ." The clear import of this stipulation is that
petitioner Jose Tupaz waived the benefit of excussion under his guarantee. As guarantor,
petitioner Jose Tupaz is liable for El Oro Corporation's principal debt and other accessory
liabilities (as stipulated in the trust receipt and as provided by law) under the trust receipt
dated 30 September 1981. That trust receipt (and the trust receipt dated 9 October 1981)
provided for payment of attorney's fees equivalent to 10% of the total amount due and an
"interest at the rate of 7% per annum, or at such other rate as the bank may x, from the
date due until paid. . . ." In the applications for the letters of credit, the parties stipulated
that drafts drawn under the letters of credit are subject to interest at the rate of 18% per
annum.

INTEREST; PROPER COMPUTATION. — The lower courts correctly applied the 18%
interest rate per annum considering that the face value of each of the trust receipts is based
on the drafts drawn under the letters of credit. Based on the guidelines laid down in
Eastern Shipping Lines, Inc. v. Court of Appeals, the accrued stipulated interest earns 12%
interest per annum from the time of the ling of the Informations in the Makati Regional
Trial Court on 17 January 1984. Further, the total amount due as of the date of the finality
of this Decision will earn interest at 18% per annum until fully paid since this was the
stipulated rate in the applications for the letters of credit. The accounting of El Oro
Corporation's debts as of 23 January 1992, which the trial court used, is no longer useful as
it does not specify the amounts owing under each of the trust receipts. Hence, in the
execution of this Decision, the trial court shall compute El Oro Corporation's total liability
under each of the trust receipts dated 30 September 1981 and 9 October 1981 based on the
following formula: TOTAL AMOUNT DUE = [principal + interest + interest on interest] -
partial payments made Interest = principal x 18% per annum x no. of years from due date
until finality of judgment Interest on interest = interest computed as of the ling of the
complaint (17 January 1984) x 12% x no. of years until finality of judgment Attorney's fees
is 10% of the total amount computed as of finality of judgment Total amount due as of the
date of finality of judgment will earn an interest of 18% per annum until fully paid. In so
delegating this task, we reiterate what we said in Rizal Commercial Banking Corporation v.
Alfa RTW Manufacturing Corporation where we also ordered the trial court to compute the
amount of obligation due based on a formula substantially similar to that indicated above:
The total amount due under the contract may be easily determined by the trial court
through a simple mathematical computation based on the formula specified above.

99
Mathematics is an exact science, the application of which needs no further proof from the
parties.

CIVIL LIABILITY; NOT EXTINGUISHED BY THE ACQUITTAL IN CRIMINAL ACTION. —

The rule is that where the civil action is impliedly instituted with the criminal action, the
civil liability is not extinguished by acquittal — [w]here the acquittal is based on
reasonable doubt . . . as only preponderance of evidence is required in civil cases; where the
court expressly declares that the liability of the accused is not criminal but only civil in
nature . . . as, for instance, in the felonies of estafa, theft, and malicious mischief committed
by certain relatives who thereby incur only civil liability (See Art. 332, Revised Penal Code);
and, where the civil liability does not arise from or is not based upon the criminal act of
which the accused was acquitted .

FACTS:

Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were

VicePresident for Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation ("El Oro Corporation"). El Oro Corporation had a contract with the
Philippine Army to supply the latter with "survival bolos."

To finance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands
("respondent bank") for two commercial letters of credit. The letters of credit were in favor
of El Oro Corporation's suppliers.

Simultaneous with the issuance of the letters of credit, petitioners signed trust
receipts in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV
("petitioner Jose Tupaz") signed, in his personal capacity, a trust receipt corresponding to
Letter of Credit No. 2-00896-3 (for P564,871.05).

On 9 October 1981, petitioners signed, in their capacities as officers of El Oro

Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for
P294,000).

Respondent bank charged petitioners with estafa under Section 13, Presidential
Decree No. 115 ("Section 13") 7 7 or Trust Receipts Law ("PD 115").

On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa
on reasonable doubt. However, the trial court found petitioners solidarily liable with El Oro
Corporation for the balance of El Oro Corporation's principal debt under the trust receipts.
In its Decision of 7 September 2000, the Court of Appeals armed the trial court's ruling.

ISSUE:

(1) Whether petitioners bound themselves personally liable for El Oro Corporation's debts
under the trust receipts;

(2) If so — (a) whether petitioners' liability is solidary with El Oro Corporation; and (b)
whether petitioners' acquittal of estafa under Section 13, PD 115 extinguished their civil
liability.

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HELD:

No. A corporation, being a juridical entity, may act only through its directors, officers,
and employees. Debts incurred by these individuals, acting as such corporate agents, are
not theirs but the direct liability of the corporation they represent. As an exception,
directors or officers are personally liable for the corporation's debts only if they so
contractually agree or stipulate. In the trust receipt dated 9 October 1981, petitioners
signed below this clause as officers of El Oro Corporation. Thus, under petitioner Petronila
Tupaz's signature are the words "Vice-Pres–Treasurer" and under petitioner Jose Tupaz's
signature are the words "Vice-Pres–Operations." By so signing that trust receipt,
petitioners did not bind themselves personally liable for El Oro Corporation's obligation.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners' claim that they
are not personally liable for El Oro Corporation's obligation.The trust receipt dated 30
September 1981, the dorsal portion of which petitioner Jose Tupaz signed alone, we found
that he did so in his personal capacity. Petitioner Jose Tupaz did not indicate that he was
signing as El Oro Corporation's VicePresident for Operations. Hence, petitioner Jose Tupaz
bound himself personally liable for El Oro Corporation's debts. Not being a party to the
trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable under such
trust receipt.

Here, respondent bank chose not to file a separate civil action 30 30 to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in Criminal
Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose Tupaz, his
acquittal did not extinguish his civil liability. As the Court of Appeals correctly held, his
liability arose not from the criminal act of which he was acquitted ( e x d elit o ) but from
the trust receipt contract ( e x c o n t r a c t u ) of 30 September 1981. Petitioner Jose Tupaz
signed the trust receipt of 30 September 1981 in his personal capacity.

ANTONIO GARCIA, JR., petitioner, vs. COURT OF APPEALS, LASAL

DEVELOPMENT CORPORATION, respondents.
G.R. No. 80201. November 20, 1990.
Cruz, J:

SYLLABUS:

CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; NATURE AND PURPOSE THEREOF . —

The petitioner's rst ground is that, as found by the trial court, the surety agreement was
invalid because no consideration had been paid to him by PISO for executing the contract
and that the amount of the entire loan had been received and enjoyed by WMC. He cites the
following articles of the Civil Code in support of his contention that lack of consideration
was a personal defense available to him as surety. The point is not well taken in view of the
nature and purpose of a surety agreement. 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 peculiar nature of a surety
agreement is that it is regarded as valid despite the absence of any direct consideration
received by the surety either from the principal obligor or from the creditor. A contract of
surety, like any other contract, must generally be supported by a sufficient consideration.
However, the consideration necessary to support a surety obligation need not pass directly
to the surety; a consideration moving to the principal alone will suffice. It has been held
that if the delivery of the original contract is contemporaneous with the delivery of the

101
surety's obligation, each contract becomes completed at the same time, and the
consideration which supports the principal contract likewise supports the subsidiary one.
(Faust v. Rodelheim; Ballard v. Burton, 64). And this is the kind of surety contract to which
the rule of strict construction applies as opposed to a compensated surety contract
undertaken by surety corporations which are organized for the purpose of conducting an
indemnity business at established rates and compensation unlike an ordinary surety
agreement where the surety binds his name through motives of friendship and
accommodation. (Pastoral v. Mutual Security Insurance Corp., 14 SCRA 1011).

OBLIGATION AND LIABILITY OF A SURETY. — 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; (Sykes v. Everett, 167
NC 600), in other words, he is directly and equally bound with the principal. The surety
therefore becomes liable for the debt or duty of another although he possesses no direct or
personal interest over the obligations nor does he receive any benet therefrom. (Miner's
Merchants Bank v. Gidley).

SURETY NOT AFFECTED BY THE CHANGE IN THE RATE OF CD INTEREST , SUCH BEING
MERELY A COLLATERAL AGREEMENT BETWEEN THE CREDITOR AND THE PRINCIPAL
DEBTOR. — As for the compounded interest, we apply by analogy the case of Bank of the
Philippine Islands v. Gooch and Redfern, (45 Phil. 514) which was armed in the later case of
the Bank of the Philippine Islands v. Albaladejo & Cia (53 Phil. 141). In the said cases, the
respective sureties claimed that since the creditor changed the rate of interest in the
principal obligation without their knowledge or consent, they were relieved from liability
under their contract. It was held, however, that the change in the rate of interest was
merely a collateral agreement between the creditor bank and the principal debtor that did
not affect the surety. When the debtor promised to pay the extra rate of interest on demand
of the plaintiff, the liability he assumed was his alone and was separate and apart from the
original contract. His agreement to pay the additional rate of interest was an additional
burden upon him and him only. That obligation in no way affected the original contract of
the surety, whose liability remained unchanged. (Keene's Admr. v. Miller, 103 Ky, 628;
Parson on Bills and Notes, 571, Chitty on Bills, 212; Malteson v. Ellsworth, 33 Wis 488).

OBLIGATIONS AND CONTRACTS; NOVATION; REQUISITES THEREOF; NOT

ESTABLISHED IN THE CASE AT BAR. — The petitioner cites other supposed agreements
in support of his theory of novation such as the prepayment of the restructured loans of
WMC before the distribution of dividends to the common stockholders, the proposed sale
on installments of its assets to Negros Occidental Copperfield Mines, and the preference
given to other creditors of WMC over PISO. But we do not think these are material as, to be
so, the alteration must change the legal effects of the original contract. The alleged
alterations do not have that effect. The most important argument against the alleged
novation is the failure of the petitioner to establish the validity of the new contract, an
essential requisite for the novation of a previous valid obligation. Petitioner insists that the
various communications made by WMC with DBP , together with the memorandum of
agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC
with all its creditors, including DBP . We do not think so. It is true as a general rule no form
of words or writing is necessary to give effect to a novation. (Re Dissolution of F . Yeager
Bridge Culvert Co., 150 Mich. App. 386, NW 2d 99). Nevertheless, since the parties involved

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here are corporations, it must first be proved that the contracts, assuming they were made,
were executed by the persons possessing the proper authority to bind their respective
principals. Annexes 1-4 are a mere exchange of correspondence between the officers of
WMC and DBP . Although they contain the provisions and proposals that, according to
petitioner, should suffice to establish that the original contract between WMC and PISO has
been materially altered, they cannot be considered perse sufficient to give rise to a valid
new obligation. WMC was in fact directed by Joseph W. Edralin, the Assistant Executive
Officer of the DBP , to communicate with Atty. Hilario Oraolino of the Office of the Chief
Legal Counsel for the preparation and execution of the necessary legal documents to cover
the approval and confirmation of the several proposals made. No such documents, as duly
signed by the parties, were ever presented in court. Annexes 5 to 7 are also incomplete
documents and not binding without the signatures of the supposed contracting parties. We
approve the following observations made by the Court of Appeals: Novation of contract
cannot be presumed. 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 (Art. 1292,
Civil Code). In every novation there are four essential requisites. (1) a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment
of the old contract; and (4) validity of the new one. Novation requires the creation of new
contractual relations as well as the extinguishment of the old. There must be a consent of
all the parties to the substitution, resulting in the extinction of the old obligation and the
creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707). The acceptance of the
promissory note by the plaintiff is not novation of the contract. The legal doctrine is that an
obligation to pay a sum of money is not novated in a new instrument by changing the term
of payment and adding other obligations not incompatible with the old one (Inchausti & Co.
v. Yulo, 34 Phil. 978). It is not proper to consider an obligation novated as in the case at bar
by the mere granting of extension of payment which did not even alter its essence. To
sustain novation necessitates that the same be so declared in unequivocal terms or that
there is complete and substantial incompatibility between the two obligations (Sandico v.
Paquing, 42 SCRA 322). An obligation to pay a sum of money is not novated in a new
instrument wherein the old is ratified by changing only the terms of payment and adding
other obligations not incompatible with the old one or wherein the old contract is merely
supplementing the new one (Dungo v. Lopeña, L-19377, Dec. 29, 1962, 6 SCRA 1007;
Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v.
Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV
04710, Nov. 27, 1985).

COMMERCIAL LAW; CORPORATIONS; LIMITED LIABILITY DOCTRINE; MAY BE

WAIVED WHEN THE CORPORATE OFFICER VOLUNTARILY BINDS HIMSELF TO
ANSWER FOR CORPORATE DEBTS. — 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 ocer 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.

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CREDITORS MUST BE PAID FIRST BEFORE DISTRIBUTION OF DIVIDENDS AMONG
STOCKHOLDERS; UNSECURED CREDITORS, GIVEN PREFERENCE IN BANKRUPTCY OR
INSOLVENCY PROCEEDINGS. — It is axiomatic, and only fair, that the creditors of a
corporation must be paid first before dividends may be distributed among the
stockholders. Unsecured creditors are given preference in bankruptcy or insolvency
proceedings because secured creditors can after all go against the security given by the
debtor. As for the installment sale of WMC's assets to Negros Occidental Coppereld Mines,
which might make it difficult for the petitioner to recover any amount it may have to pay on
the loan of WMC, this was a risk he took when he signed the surety agreement. As it did not
prohibit the alienation of the properties of the principal debtor, the sale to Negros cannot
be considered a novation of the original agreement. In fact, the proposed sale was intended
precisely to enable WMC to meet its pending obligations.

REMEDIAL LAW; ISSUE NOT RAISED IN THE COURT A Q U O CANNOT BE RAISED FOR
THE FIRST TIME ON APPEAL. — The argument of subrogation cannot be considered at
this stage as it is being invoked only now. It is settled that an issue not raised in the court a
q u o cannot be raised for the first time on appeal because this would be offensive to the
basic rules of fair play. (Filipino Merchants v. Court of Appeals, G.R. No. 85141, November
28, 1989; Ramos v. IAC, 175 SCRA 70).

FACTS:

On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the
Philippine Investments Systems Organization (PISO) two loans for P2,500,000.00 and
P1,000,000.00 for which it issued the corresponding promissory notes payable on May 30,
1977. On the same date, Antonio Garcia and Ernest Kahn executed a surety agreement
binding themselves jointly and severally for the payment of the loan of P2,500,000.00 on
due date.

Upon failure of WMC to pay after repeated demands, demand was made on Garcia
pursuant to the surety agreement. Garcia also failed to pay. Hence, on April 5, 1983, Lasal
Development Corporation (to which the credit had been assigned earlier by PISO) sued
Garcia for recovery of the debt in the Regional Trial Court of Makati.

On May 18, 1983, Garcia moved to dismiss on the grounds that: (a) the complaint
stated no cause of action; (b) the suit would result in unjust enrichment of the plaintiff
because he had not received any consideration from PISO; (c) the surety agreement
violated the doctrine of the limited liability of corporations; and (d) the principal obligation
had been novated.

The trial court granted the motion and dismissed the complaint on the ground that
the surety agreement was invalid for absence of consideration. The plaintiff moved for
reconsideration and when this was denied elevated the matter to the Court of Appeals
which reversed the judgment.

ISSUE:

Whether or not Garcia as a surety is liable as a surety given that he did not received
any consideration from PISO.

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HELD:

Yes, Garcia is still liable as a surety.

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 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.

The surety therefore becomes liable for the debt or duty of another although he
possesses no direct or personal interest over the obligations nor does he receive any
benefit therefrom. The peculiar nature of a surety agreement is that it is regarded as valid
despite the absence of any direct consideration received by the surety either from the
principal obligor or from the creditor. A contract of surety, like any other contract, must
generally be supported by a sucient consideration. However, the consideration necessary
to support a surety obligation need not pass directly to the surety; a consideration moving
to the principal alone will suffice.

ESTRELLA PALMARES ESTRELLA PALMARES, petitioner , v s . COURT OF APPEALS and

M.B. . COURT OF APPEALS and M.B. LENDING CORPORATION LENDING
CORPORATION, respondents .
G.R. No. 126490. March 31, 1998
REGALADO REGALADO, J:

SYLLABUS:

CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF ADHESION; NOT P E R S

E INVALID. — Contracts of adhesion are not invalid perse and that on numerous occasions
the binding effects thereof have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the provisions are intended to
apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating
such contracts, the Court has construed obscurities and ambiguities in the restrictive
provisions of contracts of adhesion strictly albeit not unreasonably against the drafter
thereof when justified in light of the operative facts and surrounding circumstances. The
factual scenario obtaining in the case before us warrants a liberal application of the rule in
favor of respondent corporation.

INTERPRETATION OF CONTRACTS; LITERAL MEANING OF ITS PROVISION SHALL

CONTROL IF THE TERMS THEREOF ARE CLEAR AND LEAVE NO DOUBT UPON THE
INTENTION OF THE PARTIES. — 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.

CASE AT BAR. — 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. Her

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pretension that the terms "jointly and severally or solidarily liable" contained in the second
paragraph of her contract are technical and legal terms which could not be easily
understood by an ordinary layman like her is diametrically opposed to her manifestation in
the contract that she "fully understood the contents" of the promissory note and that she is
"fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntary axed her signature thereto; ergo, she cannot now be heard to claim otherwise.
Any reference to the existence of fraud is unavailing. Fraud must be established by clear
and convincing evidence, mere preponderance of evidence not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her
own uncorroborated and, expectedly, self-serving allegations.

PARTY IS ESTOPPED TO ASSERT MISAPPREHENSION OF LEGAL EFFECT OF

UNDERTAKING WHERE SHE ENTERED INTO IT WITH FULL KNOWLEDGE OF ITS
TERMS AND CONDITIONS. — Having entered into the contracts with full knowledge of its
terms and conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal effect of the
undertaking. The rule that ignorance of the contents of an instrument does not ordinarily
affect the liability of one who signs it also applies to contracts of suretyship. And the
mistake of a surety as to the legal effect of her obligation is ordinarily no reason for
relieving her of liability.

SURETY DIFFERENTIATED FROM GUARANTY. — 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.

INTENTION OF CONTRACTING PARTIES; JUDGED BY THEIR CONTEMPORANEOUS

AND SUBSEQUENT ACTS. — It is a well-entrenched rule that in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts shall also
be principally considered.

SURETYSHIP; SURETY IS BOUND EQUALLY AND ABSOLUTELY WITH THE PRINCIPAL.

— A surety is bound equally and absolutely with the principal, and as such is deemed an
original promisor and debtor from the beginning. This is because in suretyship there is but
one contract, and the surety is bound by the same agreement which binds the principal. In
essence, the contract of a surety starts with the agreement, which is precisely the situation
obtaining in this case before the Court.

SURETY IS AN ORIGINAL DEBTOR AND HIS LIABILITY IS IMMEDIATE AND DIRECT. —

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. Thus, it has been held that where a written agreement on the same
sheet of paper with and immediately following the principal contract between the buyer

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and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties" jointly
liable with the buyer. 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.

SURETY BOUND BY WAIVER EXECUTED BY PRINCIPAL. — There is no merit in

petitioner's contention that the complaint was prematurely led because the principal
debtors cannot as yet be considered in default, there having been no judicial or
extrajudicial demand made by respondent corporation. Petitioner has agreed that
respondent corporation may demand payment of the loan from her in case the principal
maker defaults, subject to the same conditions expressed in the promissory note.
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.

DEMAND ON SURETIES, NOT NECESSARY BEFORE BRINGING SUIT AGAINST THEM;

NOR ENTITLED TO BE GIVEN NOTICE OF PRINCIPAL 'S DEFAULT. — 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 surety. In the absence of a statutory or contractual
requirement, it is not necessary that payment or performance of his obligation be rest
demanded of the principal, especially where demand would have been useless; nor is it a
requisite, before proceeding against the sureties, that the principal be called on to account.

RATIONALE BEHIND. — The underlying principle therefore is that suretyship is a direct

contract to pay the debt of another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default. As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal.

CREDITOR, NOT REQUIRED TO EXHAUST REMEDIES AGAINST THE PRINCIPAL

BEFORE HE CAN PROCEED AGAINST THE SURETY. — 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 a creditor to proceed against the 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 as soon as the 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 as soon as the principal is in default, the surety is likewise in default, and

107
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.

REASON. — 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. 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 right and remedies of the creditor.

EXTENSION DISCHARGING SURETY , CONSTRUED. — 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 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.

CASE AT BAR. — 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 herein 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.

DELAY IN DISCHARGING SURETY; THERE MUST BE ACTUAL OFFER OF PAYMENT. —

Respondent corporation cannot be faulted for not immediately demanding payment from
petitioner. It was petitioner who initially requested that the creditor try to collect from her
principal first, and she offered to pay only in case the creditor fails to collect. The delay, if
any, was occasioned by the fact that respondent corporation merely acquiesced to the

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request of petitioner. At any rate, there was here no actual offer of payment to speak of but
only a commitment to pay if the principal does not pay.

DEBTOR OF A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A DIFFERENT

ONE; CASE AT BAR. — Petitioner made a second attempt to settle the obligation by
offering a parcel of land which she owned. Respondent corporation was acting well within
its rights when it refused to accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may be of the same value, or more
valuable than that which is due. The obligee is entitled to demand fulfillment of the
obligation or performance as stipulated. A change of the object of the obligation would
constitute novation requiring the express consent of the parties.

A PERSON ENTERING INTO A CONTRACT HAS A RIGHT TO INSIST ON ITS

PERFORMANCE IN ALL PARTICULARS. — After the complaint was led against her,
petitioner reiterated her offer to pay the outstanding balance of the obligation in the
amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation
cannot be blamed for refusing the amount being offered because it fell way below the
amount it had computed, based on the stipulated interests and penalty charges, as owing
and due from herein petitioner. A debt shall be understood to have been paid unless the
thing or service in which the obligation consists has been completely delivered or
rendered, as the case may be. In other words, the prestation must be fulfilled completely. A
person entering into a contract has a right to insist on its performance in all particulars.
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay
because the moment the latter accept the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, then the obligation shall be
deemed fully complied with. Precisely, this is what respondent corporation wanted to
avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract.

LOAN; PAYMENT OF INTEREST AS PENALTY; AMOUNT MAY BE EQUITABLY REDUCED.

— It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the ling of the present case. Article 1229 of
the Civil Code provides that the court shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. And, even if there has
been no performance, the penalty may also be reduced if it is iniquitous or leonine. In a
case previously decided by this Court which likewise involved private respondent M.B.
Lending Corporation, and which is substantially on all fours with the one at bar, we decided
to eliminate altogether the penalty interest for being excessive and unwarranted.
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.

PAYMENT OF ATTORNEY'S FEES; MAY BE REDUCED IF THE AMOUNT APPEARS

UNCONSCIONABLE OR UNREASONABLE; 25% OF THE TOTAL AMOUNT DUE,
UNCONSCIONABLE. — Finally, with respect to the award of attorney's fees, this Court has
previously ruled that even with an agreement thereon between the parties, the court may
nevertheless reduce such attorney's fees fixed in the contract when the amount thereof
appears to be unconscionable or unreasonable. To that end, it is not necessary to show, as
in other contracts, that it is contrary to morals or public policy. The grant of attorney's fees
equivalent to 25% of the total amount due is, in our opinion, unreasonable and
immoderate, considering the minimal unpaid amount involved and the extent of the work

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involved in this simple action for collection of a sum of money. We, therefore, hold that the
amount of P10,000.00 as and for attorney's fee would be sufficient in this case.

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. 1 1 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. 2 2 Consequently, on
the basis of petitioner's solidary liability under the promissory note, respondent
corporation led 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.

Petitioner, when informed that the debtors defaulted, requested that creditor try to
collect from her principal first and offered to settle the obligation in case the creditor fails
to collect. She also offered a parcel of land to settle the obligation which the creditor
refused. Thereafter, a complaint was led against petitioner to the exclusion of the principal
debtors. Again petitioner offered to pay but the amount offered was way below the amount
computed. The trial court dismissed the complaint and ruled that the complaint against the
petitioner amounted to a discharge of a prior party, that the offer to pay made by petitioner
who is secondarily liable to the instrument discharged petitioner. The Court of Appeals,
reversing the trial court, ruled that petitioner is solidarily liable with the principal debtors
and may be sued for the entire obligation. Hence, this recourse.

ISSUE:

Whether or not the petitioner is liable as a surety.

HELD:

Yes. The Supreme Court held that it is a cardinal rule in interpretations of contracts
that if the terms of a contract are clear and leave no doubt upon the intention of the parties,
the literal meaning of its stipulation shall control. Hence, where petitioner expressly binds
herself to be jointly and severally or solidarily liable with the principal maker of the note,
her liability is that of a surety and is bound equally and absolutely with the principal.
Having entered into a contract with full knowledge of its terms and conditions, petitioner is
estopped to assert that she did so in ignorance of their legal effect. The obligee is entitled to
demand fulfillment of the obligation or performance stipulated, hence, an offer to pay
obligation in an amount less or different from that due does not discharge liability.

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SALVADOR P. ESCAÑO and MARIO M. SILOS SALVADOR P. ESCAÑO and MARIO M.
SILOS , petitioners, vs . RAFAEL . RAFAEL ORTIGAS, JR. ORTIGAS, JR., respondent .
G.R. No. 151953. June 29, 2007.
TINGA TINGA, J:

SYLLABUS:

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.

THE SURETY UNDERTAKES TO BE BOUND SOLIDARILY WITH THE PRINCIPAL DEBTOR .As provided
in Article 2047 in a surety agreement the surety undertakes to be bound solidarily with the
principal debtor. Thus, a surety agreement is an ancillary contract as it presupposes the
existence of a principal contract. It appears that Ortigas’s argument rests solely on the
solidary nature of the obligation of the surety under Article 2047. In tandem with the
nomenclature "SURETIES" accorded to petitioners and Matti in the Undertaking, however,
this argument can only be viable if the obligations established in the Undertaking do
partake of the nature of a suretyship as defined under Article 2047 in the first place. That
clearly is not the case here, notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking.

IN SURETYSHIP REQUIRES A PRINCIPAL DEBTOR Again, as indicated by Article 2047, a

suretyship requires a principal debtor to whom the surety is solidarily bound by way of an
ancillary obligation of segregate identity from the obligation between the principal debtor
and the creditor. The suretyship does bind the surety to the creditor, inasmuch as the latter
is vested with the right to proceed against the former to collect the credit in lieu of
proceeding against the principal debtor for the same obligation. At the same time, there is
also a legal tie created between the surety and the principal debtor to which the creditor is
not privy or party to. The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. At the same time, the
surety may seek reimbursement from the principal debtor for the amount paid, for the
surety does in fact "become subrogated to all the rights and remedies of the creditor."

A GUARANTOR WHO BINDS HIMSELF IN SOLIDUM WITH THE PRINCIPAL DEBTOR UNDER THE
PROVISIONS OF THE SECOND PARAGRAPH DOES NOT BECOME A SOLIDARY CO-DEBTOR TO ALL
INTENTS AND PURPOSES . There is a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he assumes to pay the debt before the
property of the principal debtor has been exhausted, retains all the other rights, actions
and benefits which pertain to him by reason of the fiansa; while a solidary co-debtor has no
other rights than those bestowed upon him in Section 4, Chapter 3, Title I, Book IV of the
Civil Code.

FACTS:

On 28 April 1980, Private Development Corporation of the Philippines (PDCP)

entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to
make available and lend to Falcon the amount of US$320,000.00, for specific purposes and
subject to certain terms and conditions. On the same day, three stockholders-officers of
Falcon, namely: respondent Rafael Ortigas, Jr. (Ortigas), George A. Scholey and George T.
Scholey executed an Assumption of Solidary Liability whereby they agreed "to assume in

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[their] individual capacity, solidary liability with [Falcon] for the due and punctual
payment" of the loan contracted by Falcon with PDCP . In the meantime, two separate
guaranties were executed to guarantee the payment of the same loan by other stockholders
and officers of Falcon, acting in their personal and individual capacities. In the meantime,
two separate guaranties were executed to guarantee the payment of the same loan by other
stockholders and officers of Falcon, acting in their personal and individual capacities. One
Guaranty was executed by petitioner Salvador Escaño (Escaño), while the other by
petitioner Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo
(Inductivo) and Joaquin J. Rodriguez (Rodriguez).

Two years later, an agreement developed to cede control of Falcon to Escaño, Silos
and Joseph M. Matti (Matti). Thus, 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. Part of the consideration that induced
the sale of stock was a desire by Ortigas, et al., to relieve themselves of all liability arising
from their previous joint and several undertakings with Falcon, including those related to
the loan with PDCP. Thus, an Undertaking dated 11 June 1982 was executed by the
concerned parties, namely: with Escaño, Silos and Matti identified in the document as
"SURETIES," on one hand, and Ortigas, Inductivo and the Scholeys as "OBLIGORS," on the
other.

Falcon eventually availed of the sum of US$178,655.59 from the credit line extended
by PDCP. It would also execute a Deed of Chattel Mortgage over its personal properties to
further secure the loan. However, Falcon subsequently defaulted in its payments. After
PDCP foreclosed on the chattel mortgage, there remained a subsisting deficiency of
₱5,031,004.07, which Falcon did not satisfy despite demand.

On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escaño, Silos, Silverio and Inductivo.. For his part, Ortigas filed together with his answer a
cross-claim against his co-defendants Falcon, Escaño and Silos, and also manifested his
intent to file a third-party complaint against the Scholeys and Matti. The cross-claim lodged
against Escaño and Silos was predicated on the 1982 Undertaking, wherein they agreed to
assume the liabilities of Ortigas with respect to the PDCP loan.

Then on 24 February 1994, Ortigas entered into his own compromise

agreementwith PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Thereby,
Ortigas agreed to pay PDCP ₱1,300,000.00 as "full satisfaction of the PDCP’s claim against
Ortigas," in exchange for PDCP’s release of Ortigas from any liability or claim arising from
the Falcon loan agreement, and a renunciation of its claims against Ortigas.

In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escaño, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a third-party
complaint against Matti and Silos, while he maintained his cross-claim against Escaño. In
1995, Ortigas filed a motion for Summary Judgment in his favor against Escaño, Silos and
Matti. On 5 October 1995, the RTC issued the Summary Judgment, ordering Escaño, Silos
and Matti to pay Ortigas, jointly and severally, the amount of ₱1,300,000.00, as well as
₱20,000.00 in attorney’s fees. From the Summary Judgment, recourse was had by way of
appeal to the Court of Appeals. Escaño and Silos appealed jointly while Matti appealed by

112
his lonesome. In a Decision dated 23 January 2002, the Court of Appeals dismissed the
appeals and affirmed the Summary Judgment.

From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escaño and Silos appealed jointly while Matti appealed by his lonesome. In a
Decision dated 23 January 2002, the Court of Appeals dismissed the appeals and affirmed
the Summary Judgment.

ISSUE:

Whether or not petitioner only jointly and severally liable to Ortigas.

HELD:

No, petitioners are only jointly liable.

These Civil Code provisions establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in the absence of
express and indubitable terms characterizing the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes incumbent upon the party alleging that the
obligation is indeed solidary in character to prove such fact with a preponderance of
evidence.

The Undertaking does not contain any express stipulation that the petitioners
agreed "to bind themselves jointly and severally" in their obligations to the Ortigas group,
or any such terms to that effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations. We
rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen (13)
times in the document. Ortigas claims that such manner of identification sufficiently
establishes that the obligation of petitioners to him was joint and solidary in nature.

The term "surety" has a specific meaning under our Civil Code. Article 2047
provides the statutory definition of a surety agreement, thus:

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. [Emphasis supplied]

As provided in Article 2047 in a surety agreement the surety undertakes to be

bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears that Ortigas’s
argument rests solely on the solidary nature of the obligation of the surety under Article
2047. In tandem with the nomenclature "SURETIES" accorded to petitioners and Matti in
the Undertaking, however, this argument can only be viable if the obligations established in
the

Undertaking do partake of the nature of a suretyship as defined under Article 2047

in the first place. That clearly is not the case here, notwithstanding the use of the
nomenclature "SURETIES" in the Undertaking. The mere utilization of the term "SURETIES"

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could not work to such effect, especially as it does not appear who exactly is the principal
debtor whose obligation is "assured" or "guaranteed" by the surety.

WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial
Court dated 5 October 1995 is modified by declaring that petitioners and Joseph M. Matti
are only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr. in the
amount of ₱1,300,000.00. The Order of the Regional Trial Court dated 7 March 1996 is
MODIFIED in that the legal interest of 12% per annum on the amount of ₱1,300,000.00 is to
be computed from 14 March 1994, the date of judicial demand, and not from 28 February
1994 as directed in the Order of the lower court. The assailed rulings are affirmed in all
other respects. Costs against petitioners.

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
G.R. No. 103576 August 22, 1996
VITUG, J.

SYLLABUS

ONCE THE OBLIGATION IS COMPLIED WITH , THEN THE CONTRACT OF SECURITY BECOMES , IPSO
FACTO , NULL AND VOID . If the obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of the obligation, but that should
the obligation be duly paid, then the contract is automatically extinguished proceeding
from the accessory character of the agreement. As the law so puts it, once the obligation is
complied with, then the contract of security becomes, ipso facto, null and void.

FACTS:

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company,
a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The
mortgage stood by way of security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this effect —

(c) If the MORTGAGOR, his heirs, executors or administrators shall well and
truly perform the full obligation or obligations above-stated according to the
terms thereof, then this mortgage shall be null and void. . . .

In case the MORTGAGOR executes subsequent promissory note or notes

either as a renewal of the former note, as an extension thereof, or as a new
loan, or is given any other kind of accommodations such as overdrafts, letters
of credit, acceptances and bills of exchange, releases of import shipments on
Trust Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or accommodations
without the necessity of executing a new contract and this mortgage shall
have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also
stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of
this mortgage.

In due time, the loan of P3,000,000.00 was paid by petitioner corporation.

Subsequently, in 1981, it obtained from respondent bank additional financial

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accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully
paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a
loan of one million pesos (P1,000,000.00) covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was not settled at
maturity. Respondent bank thereupon applied for an extra judicial foreclosure of the
chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a prayer
for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil
Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by the
stipulations, afore quoted, of the chattel mortgage.

ISSUE:

Whether or not it would be valid and effective to have a clause in a chattel mortgage
that purports to likewise extend its coverage to obligations yet to be contracted or
incurred.

HELD:

No.While a pledge, real estate mortgage, or antichresis may exceptionally secure

after-incurred obligations so long as these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be compelled upon, the security
itself, however, does not come into existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form prescribed by
the Chattel Mortgage Law.

In the chattel mortgage here involved, the only obligation specified in the chattel
mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully
paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian Catholic
Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court
said —

. . . A mortgage that contains a stipulation in regard to future advances in the credit

will take effect only from the date the same are made and not from the date of the
mortgage.

The significance of the ruling to the instant problem would be that since the 1978
chattel mortgage had ceased to exist coincidentally with the full payment of the
P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the new
loans that were concluded thereafter.

WHEREFORE, the questioned decisions of the appellate court and the lower court are set
aside without prejudice to the appropriate legal recourse by private respondent as may still
be warranted as an unsecured creditor. No costs.

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IX CONCURENCE AND PREFERENCE OF CREDITS

DEVELOPMENT BANK OF THE PHILIPPINES v.

THE NATIONAL LABOR RELATIONS COMMISSION and MALAYANG SAMAHAN NG MGA
MANGAGAWA SA ATLAS TEXTILE DEVELOPMENT CORPORATION
G.R. No. 86227, January 19, 1994
VITUG, J.

SYLLABUS:

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 their unpaid
wages and other monetary claims, any provision of law to the contrary notwithstanding. Such
unpaid wages, and monetary claims shall be paid in full before the claims of the Government
and other creditors may be paid.

FACTS:

The private respondents were employees of ATLAS, a textile firm, which

hypothecated its certain assets to DBP. After ATLAS defaulted in its obligations, DBP
foreclosed on the mortgage in March 1985. The latter acquired the mortgaged assets by
virtue of the foreclosure sale.

The private respondents filed their aforementioned claim, on 30 October 1985,

against both ATLAS and DBP. The Labor Arbiter ruled for the private respondents. On
appeal by DBP, the decision was sustained by the NLRC.

ISSUE:

Whether or not there is an error on the part of NLRC to consider the workers'
preference under Article 110 of the Labor Code over that of DBP's mortgage lien.

HELD:

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.

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 have no retroactive effect, unless the contrary is provided
(Article 4, Civil Code). Thereby, any infringement on the constitutional guarantee on non-
impairment of the obligation of contracts (Section 10, Article III, 1987 Constitution) is also
avoided. In point of fact, DBP's mortgage credit antedated by several years the amendatory
law, RA No. 6715. To give Article 110 retroactive effect would be to wipe out the mortgage

116
in DBP's favor and expose it to a risk which is sought to protect itself against by requiring a
collateral in the form of real property.

In fine, the right of 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 preferences determined in the
course of judicial proceedings which have for their object the subjection of the property of
the debtor of the payment of his debts and other lawful 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 proceeding 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.

DEVELOPMENT BANK OF THE PHILIPPINES vs.

HONORABLE COURT OF APPEALS and REMMINGTON INDUSTRIAL SALES
CORPORATION
G.R. No. 126200. AUGUST 16, 2001
KAPUNAN, J.:

SYLLABUS:

CONCURRENCE AND PREFERENCE OF CREDITS: In the absence of liquidation

proceedings, the vendor’s lien on the unpaid purchases cannot be enforced against the
transferee of such purchases.

FACTS:

In 1978, Marinduque Mining obtained from PNB various loan accommodations. To

secure said loans, it executed a deed of real estate mortgage in favor of PNB which covers
all itss real properties including improvements thereon. In 1981, Marinduque Mining
executed a second Mortgage Trust Agreement in favor of PNB and DBP and in 1984, it
amended said agreement to cover real and personal properties subsequently acquired by
it.

Marinduque Mining Failed to settle its obligations hence, PNB and DBP instituted
sometime in 1984 extrajudicial foreclosure proceedings over the mortgaged properties.
PNB and DBP acquire the properties as highest bidders in the public auction. In the same
year, PNB and DBP transferred and assigned said properties to Nonoc Mining, Maricalum
Minig and to the National Government thru Asset Privatization Trust.

In the meantime, sometime between 1982 to 1983, Marinduque Mining purchased

construction materials from Remington Industrial Sales Corporation, herein private
respondent. The purchase remained unpaid thus, private respondent filed a complaint for
sum of money and damages against Marinduque Mining. Subsequently, respondent’s
original complaint was amended to include PNB, DBP, Nonoc Mining, Maricalum Minig and
the Asset Privatization Trust as co-defendants. The RTC ruled in favor of the private

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respondent and ordered the defendants Marinduque Mining, PNB, DBP etc. to be held
liable solidarily. Private respondent claims that it is entitled to pro rata claim in the
foreclosure proceedings held pursuant to article 2249 of the civil code.

ISSUE:

Whether or not private respondent may claim its pro rata from DBP.

HELD:

No. The court ruled in Barretto vs. Villanueva that in order to make prorating in
article 2249 of the civil code effective, the preferred creditors enumerated in Article 2242
must necessarily be convened, and the import of their claims ascertained. Application of
2249 and 2242 demands that there must be first some proceeding where the claims of all
preferred creditors be bindingly adjudicated, such as insolvency, settlement of decedent’s
estate under the Rules of Court, or other liquidation proceedings of similar import. Thus,
claim to the proceeds of a foreclosure sale, as in the case now, is not the proceeding
contemplated by law for the enforcement of the preferences under the civil code unless the
claimant were enforcing a credit for taxes that enjoy absolute priority.

As the extrajudicial foreclosure instituted by PNB and DBP is not the liquidation
proceeding contemplated by the civil code, private respondent cannot claim its pro rata
share from DBP.

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X. R.A. 10142 (FINANCIAL REHABILITATION AND INSOLVENCY ACT OF
THE PHILIPPINES)

RUBY INDUSTRIAL CORPORATION VS. COURT OF APPEALS

G.R. NOS. 124185-87. JANUARY 20, 1998.
PUNO, J.:

SYLLABUS:

REHABILITATION CONTEMPLATES A CONTINUANCE OF CORPORATE LIFE AND

ACTIVITIES IN AN EFFORT TO RESTORE AND REINSTATE THE CORPORATION TO ITS
FORMER POSITION OF SUCCESSFUL OPERATION AND SOLVENCY.—Rehabilitation
contemplates a continuance of corporate life and activities in an effort to restore and
reinstate the corporation to its former position of successful operation and solvency. When
a distressed company is placed under rehabilitation, the appointment of a management
committee follows to avoid collusion between the previous management and creditors it
might favor, to the prejudice of the other creditors. All assets of a corporation under
rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude
one from obtaining an advantage or preference over another by the expediency of
attachment, execution or otherwise. As between the creditors, the key phrase is equality in
equity. Once the corporation threatened by bankruptcy is taken over by a receiver, all the
creditors ought to stand on equal footing. Not any one of them should be paid ahead of the
others. This is precisely the reason for suspending all pending claims against the
corporation under receivership.

FACTS:

Ruby Industrial Corporation (RUBY) suffered severe liquidity problems. For its
rehabilitation, Benhar International, Inc. represented by RUBY's majority stockholders,
submitted to the Securities and Exchange Commission (SEC) the BENHAR/RUBY
Rehabilitation Plan which was subsequently approved by the SEC hearing panel. The
minority stockholders appealed the approval to the SEC en banc and submitted their own
rehabilitation plan. The SEC en banc granted the temporary restraining order as well as
issued the writ of preliminary injunction against the enforcement of BENHAR/RUBY
Rehabilitation Plan, which was likewise upheld by the Court of Appeals and this Court.

Meanwhile, before the SEC Hearing Panel approved the BENHAR/RUBY Plan,
BENHAR had already implemented part of the plan by paying one of RUBY's secured
creditors, the Far East Bank and Trust Company. Moreover, despite the SEC en banc's TRO
and injunction, BENHAR still paid RUBY's other secured creditors who, in turn, assigned
their credits in favor of BENHAR. Upon petition of the Allied Leasing and Finance
Corporation, Ruby's biggest unsecured creditor, and private respondent Lim, the SEC
Hearing Panel nullified the deeds of assignment executed by RUBY's creditors in favor of
BENHAR.

However, while the SEC en banc enjoined the implementation of BENHAR/RUBY

Plan. RUBY filed with the SEC en banc an ex parte petition to create a new management
committee and to approve a revised rehabilitation plan. This was objected to by over 90%
of RUBY's creditors and the three members of the original management committee on the

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ground that its approval is tantamount to giving due advantage to BENHAR to the prejudice
of other RUBY's creditors and minority stockholders. Despite the objections, the SEC
Hearing Panel approved it and was affirmed by the SEC en banc. On appeal, the Court of
Appeals set aside SEC's approval of the Revised BENHAR/RUBY plan and remanded the
case to the SEC for further proceedings.

ISSUE:

Whether or not the BENHAR/RUBY Rehabilitation Plan valid.

RULING:

No. The Court ruled that rehabilitation contemplates a continuance of corporate life
and activities in effort to restore and reinstate the corporation to its former position of
successful operation and solvency. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one from
obtaining an advantage or preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key phrase is equality in equity. Once
the corporation threatened by bankruptcy is taken over by a receiver, all the creditors
ought to stand on equal footing. Not any one of them should be paid ahead of the others.
This is precisely the reason for suspending all pending claims against the corporation
under receivership.

RIZAL COMMERCIAL BANKING CORP. VS. INTERMEDIATE APPELLATE COURT

G.R. NO. 74851. DECEMBER 9, 1999.
MELO, J.:

SYLLABUS:

CREDITORS; ISSUE OF WHETHER OR NOT PREFERRED CREDITORS OF DISTRESSED

CORPORATIONS STAND ON EQUAL FOOTING WITH ALL OTHER CREDITORS GAINS
RELEVANCE AND MATERIALITY ONLY UPON THE APPOINTMENT OF A MANAGEMENT
COMMITTEE, REHABILITATION RECEIVER, BOARD, OR BODY.—The issue of whether
or not preferred creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a management
committee, rehabilitation receiver, board, or body. Insofar as petitioner RCBC is concerned,
the provisions of Presidential Decree No. 902-A are not yet applicable and it may still be
allowed to assert its preferred status because it foreclosed on the mortgage prior to the
appointment of the management committee on March 18, 1985. The Court, therefore,
grants the motion for reconsideration on this score.

SUSPENSION OF CLAIMS AGAINST A CORPORATION UNDER REHABILITATION IS

COUNTED OR FIGURED UP ONLY UPON THE APPOINTMENT OF A MANAGEMENT
COMMITTEE OR A REHABILITATION RECEIVER.—It is thus adequately clear that
suspension of claims against a corporation under rehabilitation is counted or figured up
only upon the appointment of a management committee or a rehabilitation receiver. The
holding that suspension of actions for claims against a corporation under rehabilitation
takes effect as soon as the application or a petition for rehabilitation is filed with the SEC—
may, to some, be more logical and wise but unfortunately, such is incongruent with the

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clear language of the law. To insist on such ruling, no matter how practical and noble,
would be to encroach upon legislative prerogative to define the wisdom of the law—plainly
judicial legislation.

FACTS:

On September 28, 1984, private respondent, BF Homes, filed a "Petition for

Rehabilitation and for Declaration of Suspension of Payments" (SEC Case No. 002693) with
the Securities and Exchange Commission (SEC). One of the creditors listed in its inventory
of creditors and liabilities was the petitioner. Subsequently, upon request of petitioner, the
sheriff extra-judicially foreclosed its real estate mortgage on some properties of private
respondent. Thereafter, a public auction sale was held on January 29, 1985, in which
petitioner was the highest bidder for the properties auctioned. The sheriff, however,
withheld the delivery to petitioner of a certificate of sale covering the auctioned properties
because of the proceedings in the SEC. On February 13, 1985, the SEC belatedly issued a
writ of preliminary injunction stopping the auction sale. Petitioner then filed with the
Regional Trial Court, of Rizal an action for mandamus against the provincial sheriff and his
deputy. On March 18, 1985, the SEC appointed a Management Committee for private
respondent. On May 8, 1985, the trial court granted petitioner's motion in
the mandamus case. Private respondent filed an original complaint with the IAC praying for
the annulment of the judgment. The IAC rendered a decision dismissing the mandamus case
and suspending issuance to petitioner of new land titles until the resolution of Case No.
002693 by the SEC. On appeal, the Supreme Court, in its decision, upheld the decision of the
IAC. Hence, this motion for reconsideration. Hence, this motion for reconsideration.

ISSUE:

Whether or not the all actions against BF Homes be suspended.

RULING:

Yes. Once a management committee, rehabilitation receiver, board or body is

appointed pursuant to P.D. 902-A, all actions for claims of both a secured or unsecured
creditor, without distinction on this score, against a distressed corporation pending before
any court, tribunal, board or body shall be suspended. Secured creditors, in the meantime,
shall not be allowed to assert such preference before the Securities and Exchange
Commission. This should give the receiver a chance to rehabilitate the corporation if there
should still be a possibility for doing so. However, in the event that rehabilitation is no
longer feasible and claims against the distressed corporation would eventually have to be
settled, the secured creditors shall enjoy preference over the unsecured creditors subject
only to the provisions of the Civil Code on Concurrence and Preferences of Credit.

The Supreme Court granted the motion for reconsideration, for the cogent reason
that suspension of actions for claims commences only from the time a management
committee or receiver is appointed by the SEC. Insofar as petitioner RCBC is concerned, the
provisions of Presidential Decree No. 902-A are not yet applicable and it may still be
allowed to assert its preferred status because it foreclosed on the mortgage prior to the
appointment of the management committee on March 18, 1985.

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METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM VS. DAWAY
G.R. NO. 160732. JUNE 21, 2004.
AZCUNA, J.:

SYLLABUS:

The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to the
the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations are
not solidary with the debtor.

The concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are
inconsistent with each other. The guarantee theory destroys the independence of the
bank’s responsibility from the contract upon which it was opened and the nature of both
contracts is mutually in conflict with each other. A Standby Letter of Credit is not a
guaranty because under a Standby Letter of Credit, the bank undertakes a primary
obligation. On the other hand, a guarantor undertakes a collateral obligation which arises
only upon the debtor’s default. A Standby Letter of Credit is a primary obligation and not
an accessory contract.

FACTS:

Maynilad obtained a 20-year concession to manage, repair, refurbish, and upgrade

existing Metropolitan Waterworks and Sewerage System (MWSS) water delivery and
sewerage services in Metro Manila’s west zone. Maynilad, under the concession agreement
undertook to pay concession fees and its foreign loans. To secure its obligations, Maynilad
was required under Section 9 of the concession contract to put up a bond, bank guarantee
or other security acceptable to MWSS. Pursuant to this requirement, Maynilad arranged on
for a three-year facility with a number of foreign banks led by Citicorp Intl for the issuance
of an irrevocable standby letter of credit (SLC) in the amount of $120 million in favor of
MWSS for the full and prompt payment of Maynilad’s obligations to MWSS. Due to
devaluation of the peso and other business reversals of Maynilad, MWSS filed a notice of
early termination of the concession contract. Upon certification of the non-performance of
Maynilad obligation, the MWSS moved to collect from Citicorp on the standby letters of
credit issued. Maynilad filed for corporate rehabilitation. Judge Daway stayed the payment
of the letter of credit by Citicorp pursuant to Sec 6 (b) of Rule 4 of the Interim Rules on
Corporate Rehabilitation.

ISSUE:

Whether or not the payment of the standby of letter of credit can be stayed by filing
of a petition for rehabilitation.

RULING:

No. The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to
the standby letter of credit issued by the bank as the former prohibition is on the
enforcement of claims against guarantors or sureties of the debtors whose obligations are
not solidary with the debtor.

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 The participating bank’s obligation under the letter of credit are solidary with
respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to
pay and is not conditioned on the prior exhaustion of the debtors assets. These are the
same characteristics of a surety or solidary obligor. And being solidary, the claims against
them can be pursued separately from and independently of the rehabilitation case.

Issuing banks under the letters of credit are not equivalent to guarantors. The
concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent
with each other. The guarantee theory destroys the independence of the bank’s
responsibility from the contract upon which it was opened and the nature of both contracts
is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation
is merely collateral and it arises only upon the default of the person primarily liable. On the
other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We
have also defined a letter of credit as an engagement by a bank or other person made at the
request of a customer that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit.

A Standby Letter of Credit is not a guaranty because under a Standby Letter of

Credit, the bank undertakes a primary obligation. On the other hand, a guarantor
undertakes a collateral obligation which arises only upon the debtor’s default. A Standby
Letter of Credit is a primary obligation and not an accessory contract.

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