rd

3 Floor, Philippine Nurses Association,

# 1663 F. T. Benitez St, Malate, Manila
CIVIL LAW
Handout No. 30

CREDIT TRANSACTIONS

Loan transactions in banking institutions usually entail the execution of loan documents,
typically a promissory note, covered by a real estate mortgage and/or a surety agreement.

In the instant case, petitioner Rosalina admitted that she was a party to these loan documents
although she vehemently insisted that she had received nothing from the proceeds of the loan.
Meanwhile, respondent bank offered in evidence the Promissory Note, the Real Estate Mortgage
and the Surety Agreement signed by the parties. (Carodan vs. China Bank Corporation, 785 SCRA
179, G.R. No. 210542 February 24, 2016)

The validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code
which provides that (t)hird persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.

We find that Rosalina is liable as an accommodation mortgagor. In Belo v. PNB, 353 SCRA 359
(2001), we had the occasion to declare: An accommodation mortgage is not necessarily void
simply because the accommodation mortgagor did not benefit from the same. The validity of an
accommodation mortgage is allowed under Article 2085 of the New Civil Code which provides
that (t)hird persons who are not parties to the principal obligation may secure the latter by
pledging or mortgaging their own property. An accommodation mortgagor, ordinarily, is not
himself a recipient of the loan, otherwise that would be contrary to his designation as such.
(Carodan vs. China Bank Corporation, 785 SCRA 179, G.R. No. 210542 February 24, 2016)

“Suretyship” and “Guaranty,” Distinguished.

A contract of suretyship (second paragraph of Article 2047) has been juxtaposed against a
contract of guaranty (first paragraph of Article 2047) as follows: 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. (Carodan vs. China Bank Corporation, 785 SCRA 179, G.R. No. 210542 February
24, 2016)

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CIVIL LAW
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CREDIT TRANSACTIONS
If the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of
mortgage, the mortgagee is entitled to claim the deficiency from the debtor.

A mortgage is simply a security for, and not a satisfaction of indebtedness. If the proceeds of the
sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee
is entitled to claim the deficiency from the debtor. We have already recognized this rule: While
Act No. 3135, as amended, does not discuss the mortgagee’s right to recover the deficiency,
neither does it contain any provision expressly or impliedly prohibiting recovery. If the legislature
had intended to deny the creditor the right to sue for any deficiency resulting from the
foreclosure of a security given to guarantee an obligation, the law would expressly so provide.
Absent such a provision in Act No. 3135, as amended, the creditor is not precluded from taking
action to recover any unpaid balance on the principal obligation simply because he chose to
extrajudicially foreclose the real estate mortgage. (Carodan vs. China Bank Corporation, 785 SCRA
179, G.R. No. 210542 February 24, 2016)

Considering that the loan obligation of petitioner is valid and existing, it necessarily follows
that Banco de Oro (BDO), the creditor, or its successor-in-interest, cannot be allowed to
unilaterally sell the chattel securing the loan and apply the proceeds thereof as payment, full
or partial, to the said loan. This would constitute a clear case of pactum commissorium, which
is expressly prohibited by Article 2088 of the Civil Code.

This Court reiterates that the WPI shares assume the character of a security for a valid and
existing loan obligation, which is included in the IMA Account. Stated in simpler terms, one (1) of
the assets in the IMA Account is a receivable secured by a chattel mortgage, more particularly
the valid and existing loan obligation between BDO and petitioner, secured by the WPI shares.
Consequently, considering that the loan obligation of petitioner is valid and existing, it necessarily
follows that BDO, the creditor, or its successor-in-interest, cannot be allowed to unilaterally sell
the chattel securing the loan and apply the proceeds thereof as payment, full or partial, to the
said loan. This would constitute a clear case of pactum commissorium, which is expressly
prohibited by Article 2088 of the Civil Code. (The Wellex Group, Inc. vs. Urieta, 791 SCRA 144, G.R.
No. 211098 April 20, 2016)

Given that the subrogee merely steps into the shoes of the creditor, he acquires no right greater
than those of the latter.

In line with our holding in The Wellex Group, Inc. v. Sandiganbayan, 674 SCRA 390 (2012), that
“the forfeiture had the effect x x x as creditor,” the state has stepped into the shoes of the BDO.
As this Court has consistently ruled, “[s]ubrogation is the substitution of one person by another
with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of
the other in relation to a debt or claim, including its remedies or securities. x x x It contemplates
full substitution such that it places the party subrogated in the shoes of the creditor, and he may
use all means that the creditor could employ to enforce payment.” Given that the subrogee

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CIVIL LAW
Handout No. 30

CREDIT TRANSACTIONS
merely steps into the shoes of the creditor, he acquires no right greater than those of the latter.
(The Wellex Group, Inc. vs. Urieta, 791 SCRA 144, G.R. No. 211098 April 20, 2016)

When the principal property is mortgaged, the mortgage shall include all natural or civil fruits
and improvements found thereon when the secured obligation becomes due as provided in
Article 2127 of the Civil Code. Consequently, in case of nonpayment of the secured debt,
foreclosure proceedings shall cover not only the hypothecated property but all its accessions
and accessories as well.

As to petitioner’s argument that they were not a party to the real estate mortgage nor its claim
that the mortgage does not include the building allegedly owned by St. Raphael Montessori, the
same has no leg to stand on. When the principal property is mortgaged, the mortgage shall
include all natural or civil fruits and improvements found thereon when the secured obligation
becomes due as provided in Article 2127 of the Civil Code. Consequently, in case of nonpayment
of the secured debt, foreclosure proceedings shall cover not only the hypothecated property but
all its accessions and accessories as well. Thus, improvements constructed by the mortgagor on
the subject lot covered by the real estate mortgage contract with the mortgagee bank are
included in the foreclosure proceedings instituted by the latter. While this rule is not without
qualifications, the instant case does not fall under its exceptions. For the exception to apply, the
property need not only be possessed by a third party, but also held by the third party adversely
to the judgment obligor. St. Raphael could not be considered as an adverse claimant in the
absence of proof showing any adverse title or claim of ownership on the subject lot. (St. Raphael
Montessori School, Inc. vs. Bank of the Philippine Islands, 773 SCRA 419, G.R. No. 184076 October
21, 2015)

Upon the lapse of the redemption period, a writ of possession may be issued in favor of the
purchaser in a foreclosure sale, also upon a proper ex parte motion.

No bond is necessary for its issuance; the mortgagor is now considered to have lost any interest
over the foreclosed property. The purchaser then becomes the owner of the foreclosed property,
and he can demand possession at any time following the consolidation of ownership of the
property and the issuance of the corresponding TCT in his/her name. It is at this point that the
right of possession of the purchaser can be considered to have ripened into the absolute right of
a confirmed owner. The issuance of the writ, upon proper application, is a ministerial function
that effectively forbids the exercise by the court of any discretion. This scenario is governed by
Section 6 of Act No. 3135, in relation to Section 35, Rule 39 of the Revised Rules of Court. (St.
Raphael Montessori School, Inc. vs.Bank of the Philippine Islands, 773 SCRA 419, G.R. No. 184076
October 21, 2015)

An action to enforce a right arising from a mortgage should be enforced within ten (10) years
from the time the right of action accrues, i.e., when the mortgagor defaults in the payment of

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3 Floor, Philippine Nurses Association,
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CIVIL LAW
Handout No. 30

CREDIT TRANSACTIONS
his obligation to the mortgagee; otherwise, it will be barred by prescription and the mortgagee
will lose his rights under the mortgage.

However, mere delinquency in payment does not necessarily mean delay in the legal concept. To
be in default is different from mere delay in the grammatical sense, because it involves the
beginning of a special condition or status which has its own peculiar effects or results. (Maybank
Philippines, Inc. [formerly PNB-Republic Bank] vs. Tarrosa, 772 SCRA 670, G.R. No. 213014 October
14, 2015)

Prior to Nacar v. Gallery Frames, 703 SCRA 439 (2013), and Bangko Sentral ng Pilipinas-
Monetary Board (BSP-MB) Resolution No. 796 dated May 16, 2013, the rate of legal interest
was pegged at twelve percent (12%) per annum from finality of judgment until its satisfaction,
“this interim period being deemed to be by then an equivalent to a forbearance of credit.”

On July 25, 2011, the Court of Appeals’ May 4, 2010 Decision became final and executory and
was recorded in the Book of Entries of Judgments. Prior to Nacar v. Gallery Frames, 703 SCRA
439 (2013), and Bangko Sentral ng Pilipinas-Monetary Board Resolution No. 796 dated May 16,
2013, the rate of legal interest was pegged at 12% per annum from finality of judgment until its
satisfaction, “this interim period being deemed to be by then an equivalent to a forbearance of
credit.” Similar to this case,Nacar was already in the execution stage and the resolution awarding
backwages and separation pay had attained finality prior to the issuance of Bangko Sentral ng
Pilipinas Resolution. Applying the guidelines discussed above, this court in Nacar imposed the
legal interest of 12% per annum of the total monetary awards, computed from finality of this
court’s 2002 resolution to June 30, 2013 and 6% per annum from July 1, 2013 until their full
satisfaction. Based on Nacar and the above discussion, we grant Limlingan and Leyco’s Petition
as to the modification of the legal rate of interest. Limlingan and Leyco are entitled to legal
interest at the following rates: 12% per annumcomputed from July 25, 2011, the date of the
finality of the Court of Appeals’ May 4, 2010 Decision, up to June 30, 2013, and 6% per
annum from July 1, 2013 until full satisfaction of the award. (Victor S. Limlingan, et al. vs. Asian
Institute of Management, Inc. and Asian Institute of Management, Inc. vs. Victor S. Limlingan, et
al., G.R. No. 220481 & G.R. No. 22503, February 17, 2016)

Article 1956 of the Civil Code spells out the basic rule that “[n]o interest shall be due unless it
has been expressly stipulated in writing.”

On the matter of interest, the text of the acknowledgment receipt is simple, plain, and
unequivocal. It attests to the contracting parties’ intent to subject to interest the loan extended
by petitioners to respondents. The controversy, however, stems from the acknowledgment
receipt’s failure to state the exact rate of interest. (Abella vs. Abella, 762 SCRA 221, G.R. No.
195166 July 8, 2015)

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CIVIL LAW
Handout No. 30

CREDIT TRANSACTIONS

The Supreme Court’s (SC’s) intervening Decision in Nacar v. Gallery Frames, 703 SCRA 439
(2013), recognized that the legal rate of interest has been reduced to six percent (6%) per
annum.

Recently, however, the Bangko Sentral ng Pilipinas-Monetary Board (BSP-MB), in its Resolution
No. 796 dated May 16, 2013, approved the amendment of Section 2 of Circular No. 905, Series
of 1982 and, accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the
pertinent portion of which reads: The Monetary Board, in its Resolution No. 796 dated 16 May
2013, approved the following revisions governing the rate of interest in the absence of stipulation
in loan contracts, thereby amending Section 2 of Circular No. 905, Series of 1982: Section 1. The
rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed
in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum. Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations
for Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended accordingly. (Abella vs. Abella, 762 SCRA 221, G.R. No.
195166 July 8, 2015)

The imposition of an unconscionable interest rate is void ab initio for being “contrary to morals,
and the law.”

In determining whether the rate of interest is unconscionable, the mechanical application of

preestablished floors would be wanting. The lowest rates that have previously been considered
unconscionable need not be an impenetrable minimum. What is more crucial is a consideration
of the parties’ contexts. Moreover, interest rates must be appreciated in light of the fundamental
nature of interest as compensation to the creditor for money lent to another, which he or she
could otherwise have used for his or her own purposes at the time it was lent. It is not the default
vehicle for predatory gain. As such, interest need only be reasonable. It ought not be a supine
mechanism for the creditor’s unjust enrichment at the expense of another. (Abella vs. Abella,
762 SCRA 221, G.R. No. 195166 July 8, 2015)

Apart from respondents’ liability for conventional interest at the rate of twelve percent (12%)
per annum, outstanding conventional interest — if any is due from respondents — shall itself
earn legal interest from the time judicial demand was made by petitioners.

This is consistent with Article2212 of the Civil Code, which provides:

Art.2212.Interest dueshall earn legal interest from the time it is judicially demanded,although t
he obligation may be silent upon this point.

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3 Floor, Philippine Nurses Association,
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CIVIL LAW
Handout No. 30

CREDIT TRANSACTIONS
So, too,Nacar states that “the interest due shall itself earn legal interestfrom the time it is judic
ially demanded.”

Consistent with Nacar, as well as with our ruling in Rivera v. Spouses Chua, 746 SCRA 1 (2015),
the interest due on conventional interest shall be at the rate of 12% per annum from July 31,
2002 to June 30, 2013. Thereafter, or starting July 1, 2013, this shall be at the rate of 6% per
annum.
xxx
Nacar provides that “[w]hen 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 six percent (6%) per annum.”—As respondents had already fully paid the
principal and all conventional interest that had accrued, they were no longer obliged to make
further payments. Any further payment they made was only because of a mistaken impression
that they were still due. Accordingly, petitioners are now bound by a quasi-contractual obligation
to return any and all excess payments delivered by respondents. Nacar provides that “[w]hen 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.” This applies to obligations arising from quasi-contracts such as solutio indebiti. (Abella
vs. Abella, 762 SCRA 221, G.R. No. 195166 July 8, 2015)

Administrative Order (AO) No. 3 is a directive for executive judges and clerks of courts which,
under its preliminary paragraph is [i]n line with the responsibility of an Executive Judge, under
AO No. 6, dated June 30, 1975, for the management of courts within his administrative area,
included in which is the task of supervising directly the work of the Clerk of Court, who is also
the Ex Officio Sheriff, and his staff, x x x, Surely, a petition for foreclosure with the notary public
is not within the contemplation of the aforesaid directive as the same is not filed with the court.

At the outset, the Court agrees with the ruling of both the RTC and the CA that as early as the
case of China Banking Corporation v. Court of Appeals, 265 SCRA 327 (1996), this Court has
already ruled that extrajudicial foreclosures conducted by a notary public do not come within the
coverage of the provisions of Administrative Order No. 3 because they are not filed with the
court. This Court held, thus: Moreover, Administrative Order No. 3 is a directive for executive
judges and clerks of courts which, under its preliminary paragraph is [i]n line with the
responsibility of an Executive Judge, under Administrative Order No. 6, dated June 30, 1975, for
the management of courts within his administrative area, included in which is the task of
supervising directly the work of the Clerk of Court, who is also the Ex Officio Sheriff, and his staff,
x x x, Surely, a petition for foreclosure with the notary public is not within the contemplation of
the aforesaid directive as the same is not filed with the court. At any rate, Administrative Order
No. 3 cannot prevail over Act No. 3135, as amended. It is an elementary principle in statutory
construction that a statute is superior to an administrative directive and the former cannot be
repealed or amended by the latter. (Ravago vs. Metropolitan Bank & Trust Company, 765 SCRA
256, G.R. No. 188739 August 5, 2015)

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Handout No. 30

CREDIT TRANSACTIONS

It can be gleaned from the amendatory provisions of A.M. No. 99-10-05-0 that, upon effectivity
of the said amendments on January 15, 2000, applications for extrajudicial foreclosures under
the direction of a notary public are already among those which are required to be filed with the
Executive Judge.

It can be gleaned from the amendatory provisions of A.M. No. 99-10-05-0 that, upon effectivity
of the said amendments on January 15, 2000, applications for extrajudicial foreclosures under
the direction of a notary public are already among those which are required to be filed with the
Executive Judge. Hence, it is clear that prior to the effectivity of A.M. No. 99-10-05-0, applications
for notarial foreclosures which are conducted by a notary public were not required to be filed
with the court. This is precisely the reason why the Court in the China Banking case held that
extrajudicial foreclosures conducted by a notary public do not come within the coverage of the
provisions of Administrative Order No. 3, which, among others, require the sheriff to receive and
docket the application for extrajudicial foreclosure and collect the prescribed filing fees. (Ravago
vs. Metropolitan Bank & Trust Company, 765 SCRA 256, G.R. No. 188739 August 5, 2015)

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