Sectrans Digest

SIMPLE LOAN OR MUTUUM
G.R. No. L-20240
December 31, 1965
REPUBLIC OF THE PHILIPPINES, plaintiffappellee,

vs.
JOSE GRIJALDO, defendant-appellant.
FACTS:
In the year 1943 appellant Jose Grijaldo obtained
five loans from the branch office of the Bank of
Taiwan, Ltd. in Bacolod City, in the total sum of
P1,281.97 with interest at the rate of 6% per
annum, compounded quarterly. These loans are
evidenced by five promissory notes executed by
the appellant in favor of the Bank of Taiwan, Ltd.,
as follows: On June 1, 1943, P600.00; on June 3,
1943, P159.11; on June 18, 1943, P22.86; on
August 9, 1943,P300.00; on August 13, 1943,
P200.00, all notes without due dates, but because
the loans were due one year after they were
incurred. To secure the payment of the loans the
appellant executed a chattel mortgage on the
standing crops on his land, Lot No. 1494 known
as Hacienda Campugas in Hinigiran, Negros
Occidental.
By virtue of Vesting Order No. P-4, dated January
21, 1946, and under the authority provided for in
the Trading with the Enemy Act, as amended, the
assets in the Philippines of the Bank of Taiwan,
Ltd. were vested in the Government of the United
States. Pursuant to the Philippine Property Act of
1946 of the United States, these assets, including
the loans in question, were subsequently
transferred to the Republic of the Philippines by
the Government of the United States under
Transfer Agreement dated July 20, 1954. These
assets were among the properties that were
placed under the administration of the Board of
Liquidators created under Executive Order No.
372, dated November 24, 1950, and in
accordance with Republic Acts Nos. 8 and 477
and other pertinent laws.
On September 29, 1954 the appellee, Republic of
the Philippines, represented by the Chairman of
the Board of Liquidators, made a written
extrajudicial demand upon the appellant for the
payment of the account in question. The record
shows that the appellant had actually received
the written demand for payment, but he failed to
pay.
On January 17, 1961 the appellee filed a

complaint in the Justice of the Peace Court of
Hinigaran, Negros Occidental, to collect from the
appellant the unpaid account in question. The
Justice of the Peace Of Hinigaran, after hearing,
dismissed the case on the ground that the action
had prescribed. The appellee appealed to the
Court of First Instance of Negros Occidental and
on March 26, 1962 the court a quo rendered a
decision ordering the appellant to pay the
appellee the sum of P2,377.23 as of December
31, 1959, plus interest at the rate of 6% per
annum compounded quarterly from the date of
the filing of the complaint until full payment was
made. The appellant was also ordered to pay the
sum equivalent to 10% of the amount due as
attorney's fees and costs.
The appellant appealed directly to this Court.
During the pendency of this appeal the appellant
Jose Grijaldo died. Upon motion by the Solicitor
General this Court, in a resolution of May 13,
1963,
required
Manuel
Lagtapon,
Jacinto
Lagtapon, Ruben Lagtapon and Anita L. Aguilar,
who are the legal heirs of Jose Grijaldo to appear
and be substituted as appellants in accordance
with Section 17 of Rule 3 of the Rules of Court.
ISSUE:
Whether or not
extinguished.
the
obligation
to
pay
is
The appellant likewise maintains, in support of his

contention that the appellee has no cause of
action, that because the loans were secured by a
chattel mortgage on the standing crops on a land
owned by him and these crops were lost or
destroyed through enemy action his obligation to
pay the loans was thereby extinguished.
HELD:
This argument is untenable. The terms of the
promissory notes and the chattel mortgage that
the appellant executed in favor of the Bank of
Taiwan, Ltd. do not support the claim of appellant.
The obligation of the appellant under the five
promissory notes was not to deliver a
determinate thing namely, the crops to be
harvested from his land, or the value of the crops
that would be harvested from his land. Rather, his
obligation was to pay a generic thing the
amount of money representing the total sum of
the five loans, with interest. The transaction
between the appellant and the Bank of Taiwan,
Ltd. was a series of five contracts of simple loan
of sums of money. "By a contract of (simple) loan,
one of the parties delivers to another ... money or
other consumable thing upon the condition that
SECTRANS 2010/ ATTY. AGUINALDO
the same amount of the same kind and quality

shall be paid." (Article 1933, Civil Code) The
obligation of the appellant under the five
promissory notes evidencing the loans in
questions is to pay the value thereof; that is, to
deliver a sum of money a clear case of an
obligation to deliver, a generic thing. Article 1263
of the Civil Code provides:
In an obligation to deliver a generic thing,
the loss or destruction of anything of the
same kind does not extinguish the
obligation.
The chattel mortgage on the crops growing on
appellant's land simply stood as a security for the
fulfillment of appellant's obligation covered by
the five promissory notes, and the loss of the
crops did not extinguish his obligation to pay,
because the account could still be paid from
other sources aside from the mortgaged crops.
Frias vs San Diego-Sison

G.R. No. 155223 April 4, 2007
no interest shall be charged on the P3

million.
6. However, in the event that on the 6th
month the Respondent does not
purchase the land, the Petitioner has a
period of another 6 months (2nd) within
which to pay the sum of P3 million with
interest for the last six months only.
The downpayment shall be treated as
loan granted by the Respondent.
Petitioner received from Respondent P2

million in cash and P1 million in a post-dated
check which was subsequently considered as
stale. Therefore, only P2 million was received
as downpayment.
Before the check became stale, Petitioner

gave Respondent the TCT and the Deed of
Absolute Sale of the land.
Subsequently, Respondent decided not to

purchase the property and notified Petitioner
of this reminding the latter that the amount of
P2 million should be considered as a loan
payable within six months as stipulated in the
MOA with interest computed from such
notification.
Petitioner subsequently failed to return the P2

million pesos.
CA ruled that the P2 million downpayment

shall include interest computed at the time
the disputed amount was considered a loan.
Thus, this petition.
Facts
Petitioner is the owner of a house and lot in

Ayala Alabang.
Petitioner and Dra. Flora San Diego-Sison

(Respondent) entered into a Memorandum of
Agreement (MOA) over the cited property with
the following terms:
1. The land is to be sold for P 6.4 million.
2. Petitioner will receive P3 million from
respondent as downpayment.
3. In
light
of
the
downpayment,
respondent had 6 months (1st) to notify
the Petitioner of her intention to
purchase the land. However, the
balance is to be paid within another 6
months.
4. Prior to the first six months, the
Petitioner may still offer the cited land
to other persons provided that the P3
million downpayment shall be returned
to the Respondent including interest
based on prevailing compounded bank
interest.
5. Nevertheless, in case there are no
other buyers within the first 6 months,
Issue:
Whether or not the interest should be limited to
the 1st six months as contained in the MOA?
Ruling:
No. SC ruled in favour of Respondent.
The SC opined that if the terms of an

agreement are clear and leave no doubt as to
the intention of the contracting parties, the
literal meaning of its stipulations shall prevail.
It is further required that the various

stipulations of a contract shall be interpreted
together.
In this case, the phrase "for the last six

months only" should be taken in the context
of the entire agreement.
The MOA speaks of 2 periods of six months

each.
o
The 1st six-months was given to

Respondent to make up her mind
whether or not to purchase Petitioner's
property.
The 2nd six-months was given to

Petitioner to pay the P2 million loan
(downpayment) in the event that
Respondent decided not to buy the
property in which case interest will be
charged "for the last six months only",
referring to the 2nd six-month period.
This means that no interest will be

charged for the 1st six-months while
Respondent contemplating on whether
to buy the property, but only for the
2nd six-months after Respondent had
decided not to buy the property. This is
the meaning of the phrase "for the last
six months only".
Certainly, there is nothing in their
agreement that suggests that interest
will be charged for 6 months only even
if it takes defendant-appellant an
eternity to pay the loan
This does NOT mean that interest will no

longer be charged after the 2nd six-month
period since such stipulation was made on the
logical and reasonable expectation that such
amount would be paid within the date
stipulated. Therefore, the monetary interest
for the last 6 months continued to accrue until
actual payment of the loaned amount.
It has been held that for a debtor to continue

in possession of the principal of the loan and
to continue to use the same after maturity of
the loan without payment of the monetary
interest, would constitute unjust enrichment
on the part of the debtor at the expense of
the creditor.
Art. 1956. No interest shall be due when not

expressly stipulated in writing.
ARWOOD INDUSTRIES, INC. vs. D.M.
Consunji, Inc.
FACTS: Petitioner and respondent, as owner and

contractor,
respectively
entered
into
an
Agreement for the construction of petitioners
condominium. Despite the completion of the
project, petitioner was not able to pay respondent
the full amount and left a balance. Repeated
demands
were
left
unheeded
prompting
respondent to file a civil case against petitioner,
with a prayer among others that the full amount
be paid with interest of 2% per month, from Nov.
1990 up to the time of payment. RTC ruled in
favor of respondent. Petitioner appealed to the
CA, particularly opposing the imposition of the
2% interest. The CA ruled in favor of the 2%
interest.
Petitioners contention- The imposition of the
interest is without basis because (1) although it
was written in the Agreement, it was not
mentioned by the RTC in the dispositive portion
and (2) the interest does not apply to the
respondents claim but to the monthly progress
billing.
ISSUE: WON the RTC and Ca is correct in imposing
a 2% per month interest on the monetary award
or the balance of the contract price.
HELD: Yes. The Agreement between the parties is
the formal expression of the parties rights, duties
and obligations. It is the best evidence of the
intention of the parties. Consequently, upon the
fulfillment by respondent of its obligation to
complete the construction project, petitioner had
the correlative duty to pay for respondents
services. However, petitioner refused to pay the
balance of the contract price. From the moment
respondent completed the construction of the
condominium project and petitioner refused to
pay in full, there was delay on the part of
petitioner.
Delay in the performance of an obligation is
looked upon with disfavor because, when a party
to a contract incurs delay, the other party who
performs his part of the contract suffers damages
thereby. Obviously, respondent suffered damages
brought about by the failure of petitioner to
comply with its obligation on time. And, sans
elaboration of the matter at hand, damages take
the form of interest. Accordingly, the appropriate
measure of damages in this case is the payment
of interest at the rate agreed upon, which is 2%
interest for every month of delay.
It must be noted that the Agreement provided the
contractor, respondent in this case, two options in
case of delay in monthly payments, to wit: a)
suspend work on the project until payment is
remitted by the owner or b) continue the work
but the owner shall be required to pay interest at
a rate of two percent (2%) per month or a fraction

thereof. Evidently, respondent chose the latter
option, as the condominium project was in fact
already completed. The payment of the 2%
monthly interest, therefore, cannot be jettisoned
overboard.
Since the Agreement stands as the law between
the parties, this Court cannot ignore the
existence of such provision providing for a
penalty for every months delay. Facta legem
facunt inter partes. Neither can petitioner impugn
the Agreement to which it willingly gave its
consent. From the moment petitioner gave its
consent, it was bound not only to fulfill what was
expressly stipulated in the Agreement but also all
the consequences which, according to their
nature, may be in keeping with good faith, usage
and law. Petitioners attempt to mitigate its
liability to respondent should thus fail.
As a last-ditch effort to evade liability, petitioner
argues that the amount of P962,434.78 claimed
by respondent and later awarded by the lower
courts does not refer to monthly progress
billings, the delayed payment of which would
earn interest at 2% per month.
Petitioner appears confused by a semantics
problem. Monthly progress billings certainly
form part of the contract price. If the amount
claimed by respondent is not the monthly
progress billings provided in the contract, what
then does such amount represent? Petitioner has
not in point of fact convincingly supplied an
answer to this query. Neither has petitioner
shown any effort to clarify the meaning of
monthly progress billings to support its
position. This leaves us no choice but to agree
with respondent that the phrase monthly
progress billings refers to a portion of the
contract price payable by the owner (petitioner)
of the project to the contractor (respondent)
based on the percentage of completion of the
project or on work accomplished at a particular
stage. It refers to that portion of the contract
price still to be paid as work progresses, after the
downpayment is made.
This definition is, indeed, not without basis.
Articles 6.02 and 6.03 of the Agreement, which
respectively provides that the (b)alance shall be
paid in monthly progress payments based on
actual value of the work accomplished and that
the progress payments shall be reduced by a
portion of the downpayment made by the OWNER
corresponding to the value of the work
completed give sense to respondents
interpretation of monthly progress billings.
SONCUYA V. AZARRAGA
ROYAL SHIRT FACTORY, INC. v CO
FACTS:
-
The parties entered into a contract

wherein it is stipulated that 350 pairs of
ballet shoes will be sold by Co and that Co
had 9 days from delivery of the shoes to
make his choice of 2 alternatives: a)
consider the sale for the shoes closed at a
flat rate, or b) return the remaining unsold
ones to Royal.
Co failed to return the unsold pairs after 9
days and actually began making partial
payments on account of the purchase
price agreed upon.
Co then contended that there was merely
a consignment of the goods and he
wanted to return the unsold shoes. Royal
refused contending that it was an outright
sale.
ISSUE: WoN the sale was an outright sale / WoN

Co is bound by the interest stipulated in the
invoice.
SC: YES! / NO!
-
OUTRIGHT SALE
o Co accepted the invoice of the
ballet shoes and he even noted
down in his own handwriting the
partial payments that he made.
o If the sale has been on
consignment, a stipulation as to
the period of time for the return of
the unsold shoes should have been
made, however, this was not done
NOT BOUND BY THE INTEREST
o He did not sign the invoice slip the
stipulated interest was 20%, hence,
not binding
o However, he is bound by the legal
interest of 6%
Hence, Co was ordered to pay the balance
of the purchase price for the ballet shoes
+ legal interest
EMERITO M. RAMOS, et al., petitioners,

vs.
CENTRAL BANK OF THE PHILIPPINES,
respondents; COMMERCIAL BANK OF
MANILA, intervenor.
Facts: This involves question as to applicability of
Tapia ruling wherein the Court held that "the
obligation to pay interest on the deposit ceases

the moment the operation of the bank is
completely suspended by the duly constituted
authority, the Central Bank," to loans and
advances by the Central Bank
Held: Respondents have failed to adduce any
cogent argument to persuade the Court to
reconsider its Resolution at bar that the Tapia
ruling is fully applicable to the non-payment of
interest, during the period of the bank's forcible
closure, on loans and advances made by
respondent Central Bank.
Respondent Central Bank itself when it was then
managing the Overseas Bank of Manila (now
Commercial Bank of Manila) under a holding trust
agreement, held the same position in Idelfonso D.
Yap vs. OBM wherein it argued that "(I)n a suit
against the receiver of a national bank for money
loaned to the Bank while it was a going concern,
it was error to permit plaintiff to recover interest
on the loan after the bank's suspension"
A significant development of the case, the
Government Service Insurance System (GSIS) has
acquired ownership of 99.93% of the outstanding
capital stock of COMBANK. The Court's Resolution
manifestly redounds to the benefit of another
government institution, the GSIS, and to the
preservation of the banking system.
LIRAG TEXTILE MILLS, INC. VS. SSS
153 SCRA 338
Facts:
SSS (respondent) and Lirag Textile Mills

(Petitioner)
entered
into
a
Purchased
Agreement which Respondent agreed to
purchase preferred stocks of Petitioner worth
P1 million subject to conditions:
o For Petitioner to repurchase the
shares of stocks at a regular
interval of one year and to pay
dividends.
o Failure to redeem and pay the
dividend, the entire obligation shall
become due and demandable and
it shall be liable for an amount
equivalent to 12% of the amount
then outstanding as liquidated
damages.
Basilio Lirag (Basilio) as President of Lirag
Textile Mills signed the Agreement as a surety
to guarantee the redemption of the stocks,
the payment of dividends and other
obligations.
Pursuant to the Agreement, Respondent paid

Petitioner P500,000 on two occasions and the
latter issued 5,000 preferred stocks with a par
value of P100 as evidenced by Stock
Certificate Nos. 128 and 139.
After sending Respondent sent demand
letters, Petitioner and Basilio still made no
redemption nor made dividend payments.
Respondent filed an action for specific
performance and damages against Petitioner:
Petitioner contends that there is no obligation
on their part to redeem the stock certificates
since Respondent is still a preferred stock
holder of the company and such redemption
is dependent upon the financial ability of the
company.
On the part of Basilio, he contends that his
liability only arises only if the company is
liable and does not perform its obligations
under the Agreement.
Issue:
1) Whether or not the Purchase Agreement
entered into by the Parties is a debt
instrument?
2) If so, Is Basilio liable as surety?
3) Whether or not Lirag is liable for the
interest as liquidated damages?
Held:
1) YES, the Purchase Agreement is a debt
instrument. The terms and conditions of the
Agreement show that parties intended the
repurchase of preferred shares on the
respective scheduled dates to be an absolute
obligation, which does not depend on the
financial ability of the corporation.
o This absolute obligation on the part of the
Petitioner corporation is made manifest by
the fact that a surety was required to see
to it that the obligation is fulfilled in the
event the principal debtors inability to do
so.
o It cannot be said that SSS is a preferred
stockholder. The rights given by the
Purchase Agreement to SSS are not rights
enjoyed by ordinary stockholders. Since
there was a condition that failure to
repurchase the stocks on the scheduled
dates renders the entire obligation due
and demandable with interest.
These
features clearly show that intent of the
parties to be bound therein as debtor and
creditor and not as a corporation and
stockholder.
2) YES, Basilio is liable as surety. Thus it follows

that he cannot deny liability for Lirags
default. As surety, he is bound immediately to
pay SSS the amount then outstanding.
3) The award of liquidated damages represented
by 12% of the amount then outstanding is
correct, considering that the petitioners in the
stipulation of facts admitted having failed to
fulfill their obligations under the Agreement.
The grant of liquidated damages is expressly
provided for the Purchase Agreement in case
of contractual breach.
Since Lirag did not deny its failure to redeem
the preferred shares and the non-payment of
dividends which are overdue, they are bound
to earn legal interest from the time of
demand, in this case, judicial i.e. the time of
filing the action.
ANGEL WAREHOUSING vs CHELDA

Facts:
Angel Warehousing sued Chelda for
the recovery of unpaid loans amounting to
P20,880 because the post dated checks issued by
Chelda were dishonored. Chelda said that Angel
Warehousing charged usurious interests, thus
they have no cause of action against them &
cant recover the remaining balance.
Issue:
W/N illegal terms as to payment of
interest likewise renders a nullity the legal terms
as to the payment of the principal debt?
Ruling:
No. The contract of loan with
usurious interest consists of principal and
accessory stipulations and the two stipulations
are divisible in the sense that the principal debt
can stand without the usurious interest
(accessory). These are divisible contracts. In
divisible contracts, if the illegal terms can be
separated from legal ones, the latter may be
enforced. Illegality lies only as to the prestation to
pay interest, being separable, thus should be
rendered void. If the principal will be forfeited this
would unjustly enrich the borrower at the
expense of the lender.
CU-UNJIENG V. MABALACAT
Facts: Cu Unjieng e Hijos loaned Mabalacat 163 k,
for security, Mabalacat mortgaged its property.
Mabalacat failed to pay, but Cu Unjieng extended
the payment. Cu Unjieng filed a case against
Mabalacat for foreclosure of property and
payment of attorney's fees. It also claims interest
over interest. Mabalacat insisted that the

agreement for the extension of the time of
payment had the effect of abrogating the
stipulation of the original contract with respect to
the acceleration of the maturity of the debt by
non-compliance with the terms of the mortgage.
The issue related on this case is the interest over
interest.
Issue: WoN Cu-Unjieng is entitled to interest over
interest.
Ruling: It is well settled that, under article 1109 of
the Civil Code, as well as under section 5 of the
Usury Law (Act No. 2655), the parties may
stipulate that interest shall be compounded; and
rests for the computation of compound interest
can certainly be made monthly, as well as
quarterly, semiannually, or annually. But in the
absence
of
express
stipulation
for
the
accumulation of compound interest, no interest
can be collected upon interest until the debt is
judicially claimed, and then the rate at which
interest upon accrued interest must be computed
is fixed at 6 per cent per annum. In this case,
there was no compound interest in the
agreement.
DAVID vs. CA
G.R.No. 115821, October 13, 1999
Facts:
A writ of attachment over the real
properties owned by Valentin Afable, Jr.. RTC
ordered Afable, Jr. To pay David P66,500 plus
interest from July 24, 1974, until fully paid. RTC
amended its decison and ruled that legal rate of
interest should be computed from January 4,
1966, instead of from July 24, 1974.
Afable appealed to the Court of Appeals
and then to the Supreme Court. In both
instances, the decision of the lower court was
affirmed. Entries of judgment were made and the
record of the case was remanded to Branch 27 for
the final execution.
An Alias Writ of Execution was issued by
virtue of which respondent Sheriff Melchor P. Pea
conducted a public auction.
Sheriff Pea
informed the petitioner that the total amount of
the judgment is P270,940.52. The amount
included a computation of simple interest.
Afable, however, claimed that the judgment
award should be P3,027,238.50, because the
amount due ought to be based on compounded
interest.
Although the auctioned properties were
sold to the petitioner, Sheriff Pea did not issue
the Certificate of Sale because there was an
excess in the bid price in the amount of

P2,941,524.47, which the petitioner failed to pay
despite notice.
David filed a Motion praying
that respondent Judge Cruz issue an order
directing respondent Sheriff Pea to prepare and
execute a certificate of sale in his favor. His
reason is that compound interest, which is
allowed by Article 2212 of the Civil Code, should
apply in this case.
David claim that in computing the interest
due of the P66,500.00, interest should be
computed at 6% on the principal sum of
P66,500.00 pursuant to Article 2209 and then
interest on the legal interest should also be
computed in accordance with the language of
Article 2212 of the Civil Code.
Issue: Whether or not the amount due should be
subject to a simple interest or compounded
interest.
Ruling:
In cases where no interest stipulated,
compounded interest could be further earned
no
The Court ruled that Article 2212

contemplates the presence of stipulated or
conventional interest which has accrued when
demand was judicially made. In cases where no
interest had been stipulated by the parties, as in
the case of Philippine American Accident
Insurance, no accrued conventional interest could
further earn interest upon judicial demand.
In this case, no interest was stipulated by
the parties. In the promissory note denominated
Compromise Agreement signed by the Afable,
Jr. which was duly accepted by the David no
interest was mentioned. That being the case, the
interest should only be subject to a simple
interest.
Topic: Simple Loan or Mutuum; Article 1960

Velez v. Balzarra
FACTS:
Plaintiff Velez filed a complaint for the
return of parcels of land sold by Defendant
to Plaintiffs husband. She further alleged
that
defendants
had
remained
in
possession of said land under Contract of
Lease but for over 2 years defendants had
not paid the agreed rentals.
Defendant alleged that the real agreement
was a loan secured by a mortgage of
those lands.
Trial court found that the payments made

by defendants were not made by way of
interest but as payments for the principal.
Defendant overpaid therefore Plaintiff
should return excess.
ISSUE: Whether payments were intended to be

applied to the principal OR were considered as
rents, interests?
HELD:
Payments were NOT rents, interests
Neri took possession of land and collected
fruits. The creditor having enjoyed the
beneficial use of the lands delivered as
security for the loan, it appears to have
been the intention of the parties that the
creditor should be compensated thereby.
Though receipts, payments are called
rents, they were prepared by Neri (Ps
husband) and Plaintiff, and defendants in
their ignorance did not look into the
wording, being merely satisfied that they
were proofs of payment.
The liability of plaintiff to return the excess
payments is in keeping with Article 1895
(Old Civil Code) which provides that,
when something is received which there
is no right to collect, and which by mistake
has been unduly delivered, the obligation
to restore it arises.
The 2 requisites are present: 1) There is no
right to collect these excess sums; and 2)
the amounts have been paid through
mistake by defendants. Such mistake is
shown by the fact that their contracts
never intended that either rents or interest
should be paid, and by the further fact
that when these payments were made,
they were intended by defendants to be
applied to the principal, but they overpaid
the amounts loaned to them.
USURY LAW
G.R. No. 128990
September 21, 2000
INVESTORS FINANCE
CORPORATION, petitioner,
vs.
AUTOWORLD SALES CORPORATION, and PIO
BARRETTO REALTY DEVELOPMENT
CORPORATION,respondents.
FACTS:
Petitioner Investors Finance Corporation, then

known also as FNCB Finance (now doing business
under the name of Citytrust Finance Corporation),
is a financing company doing business with
private respondent Autoworld Sales Corporation
(AUTOWORLD) since 1975. Anthony Que,
president of AUTOWORLD, also held the same
position at its affiliate corporation, private
respondent Pio Barretto Realty Corporation
(BARRETTO).
Sometime in August 1980 Anthony Que, in behalf
of AUTOWORLD, applied for a direct loan with
FNCB. However, since the Usury Law imposed an
interest rate ceiling at that time, FNCB informed
Anthony Que that it was not engaged in direct
lending; consequently, AUTOWORLD's request for
loan was denied.
But sometime thereafter, FNCB's Assistant Vice
President, Mr. Leoncio Araullo, informed Anthony
Que that although it could not grant direct loans
it could extend funds to AUTOWORLD by
purchasing any of its outstanding receivables at a
discount. After a series of negotiations the parties
agreed to execute an Installment Paper Purchase
("IPP") transaction to enable AUTOWORLD to
acquire the additional capital it needed. The
mechanics of the proposed "IPP" transaction was
(1) First, Pio Barretto (BARRETTO) would

execute a Contract to Sell a parcel of land
in
favor
of
AUTOWORLD
for
P12,999,999.60 payable in sixty (60) equal
monthly installments of P216,666.66.
Consequently, BARRETTO would acquire
P12,999,999.60 worth of receivables from
AUTOWORLD;
(2) FNCB would then purchase the
receivables worth P12,999,999.60 from
BARRETTO at a discounted value of
P6,980,000.00 subject to the condition
that such amount would be "flowed back"
to AUTOWORLD;
(3) BARRETTO, would in turn, execute a
Deed of Assignment (in favor of FNCB)
obliging
AUTOWORLD
to
pay
the
installments
of
the
P12,999,999.60
purchase price directly to FNCB; and
(4) Lastly, to secure the payment of the
receivables
under
the
Deed
of
Assignment, BARRETTO would mortgage
the property subject of the sale to FNCB.
On
17
November
1980
FNCB
informed
AUTOWORLD that its Executive Committee
approved the proposed "IPP" transaction. The

lawyers of FNCB then drafted the contracts
needed and furnished Anthony Que with copies
thereof.
On 9 February 1981 the parties signed three (3)
contracts to implement the "IPP" transaction:
(1) Contract to Sell whereby BARRETTO
sold a parcel of land to AUTOWORLD,
situated in San Miguel, Manila, together
with the improvements thereon, covered
by TCT No. 129763 for the price of
P12,999,999.60 payable in sixty (60)
consecutive
and
equal
monthly
installments of P216,666.66.
(2)
Deed
of
Assignment
whereby
BARRETTO assigned and sold in favor of
FNCB all its rights, title and interest to all
the money and other receivables due from
AUTOWORLD under the Contract to Sell,
subject to the condition that the assignee
(FNCB) has the right of recourse against
the assignor (BARRETTO) in the event that
the payor (AUTOWORLD) defaulted in the
payment of its obligations.
(3) Real Estate Mortgage whereby
BARRETTO, as assignor, mortgaged the
property subject of the Contract to Sell to
FNCB as security for payment of its
obligation under the Deed of Assignment.
After the three (3) contracts were concluded
AUTOWORLD started paying the monthly
installments to FNCB.
On 18 June 1982 AUTOWORLD transacted with
FNCB for the second time obtaining a loan of
P3,000,000.00 with an effective interest rate of
28% per annum. AUTOWORLD and BARRETTO, as
co-makers, then signed a promissory note in
favor of FNCB worth P5,604,480.00 payable in
sixty (60) consecutive monthly installments of
P93,408.00. To secure the promissory note,
AUTOWORLD mortgaged a parcel of land located
in Sampaloc, Manila, to FNCB. Thereafter,
AUTOWORLD began paying the installments.
In December 1982, after paying nineteen (19)
monthly installments of P216,666.66 on the first
transaction ("IPP" worth P6,980,000.00) and three
(3) monthly installments of P93,408.00 on the
second transaction (loan worth P3,000,000.00),
AUTOWORLD advised FNCB that it intended to
preterminate the two (2) transactions by paying
their outstanding balances in full. It then
requested FNCB to provide a computation of the
remaining balances. FNCB sent AUTOWORLD its
computation requiring it to pay a total amount of

P10,026,736.78, where P6,784,551.24 was the
amount to settle the first transaction while
P3,242,165.54 was the amount to settle the
second transaction.
On 20 December 1982 AUTOWORLD wrote FNCB
that it disagreed with the latter's computation of
its outstanding balances. On 27 December 1982
FNCB replied that it would only be willing to
reconcile
its
accounting
records
with
AUTOWORLD upon payment of the amounts
demanded. Thus,
despite
its
objections,
AUTOWORLD
reluctantly
paid
FNCB
P10,026,736.78 through its UCPB account.
On 5 January 1983 AUTOWORLD asked FNCB for a
refund of its overpayments in the total amount of
P3,082,021.84. According to AUTOWORLD, it
overpaid P2,586,035.44 to settle the first
transaction and P418,262.00 to settle the second
transaction.
The parties attempted to reconcile their
accounting
figures
but
the
subsequent
negotiations broke down prompting AUTOWORLD
to file an action before the Regional Trial Court of
Makati to annul the Contract to Sell, the Deed of
Assignment and the Real Estate Mortgage all
dated 9 February 1981. It likewise prayed for the
nullification of thePromissory Note dated 18 June
1982 and the Real Estate Mortgage dated 24 June
1982.
In its complaint, AUTOWORLD alleged that the
aforementioned contracts were only perfected to
facilitate a usurious loan and therefore should be
annulled
FNCB argued that the contracts dated 9 February
1981 were not executed to hide a usurious loan.
Instead, the parties entered into a legitimate
Installment Paper Purchase ("IPP") transaction, or
purchase of receivables at a discount, which
FNCB could legally engage in as a financing
company. With regard to the second transaction,
the existence of a usurious interest rate had no
bearing on the P3,000,000.00 loan since at the
time it was perfected on 18 January 1982 Central
Bank Circular No. 871 dated 21 July 1981 had
effectively lifted the ceiling rates for loans having
a period of more than three hundred sixty-five
(365) days.
On 11 July 1988 the Regional Trial Court of Makati
ruled in favor of FNCB declaring that the parties
voluntarily and knowingly executed a legitimate
"IPP"
transaction
or
the
discounting
of
receivables. AUTOWORLD was not entitled to any
reimbursement since it was unable to prove the

existence of a usurious loan.
The Court of Appeals modified the decision of the
trial court and concluded that the "IPP"
transaction, comprising of the three (3) contracts
perfected on 9 February 1981, was merely a
scheme employed by the parties to disguise a
usurious loan. It ordered the annulment of the
contracts and required FNCB to reimburse
AUTOWORLD P2,586,035.44 as excess interest
payments over the 12% ceiling rate. However,
with regard to the second transaction, the
appellate court ruled that at the time it was
executed the ceiling rates imposed by the Usury
Law had already been lifted thus allowing the
parties to stipulate any rate of interest.
ISSUE:
We stress at the outset that this petition concerns
itself only with the first transaction involving the
alleged' "IPP" worth P6,980,000.00, which was
implemented through the three (3) contracts of 9
February 1981. As to the second transaction,
which involves the P3,000,000.00 loan, we agree
with the appellate court that it was executed
when the ceiling rates of interest had already
been removed, hence the parties were free to fix
any interest rate.
The pivotal issue therefore is whether the three
(3) contracts all dated 9 February 1981 were
executed to implement a legitimate Installment
Paper Purchase ("IPP") transaction or merely to
conceal a usurious loan.
HELD:
The three (3) contracts were executed to conceal
a usurious loan.
Generally, the courts only need to rely on the
face of written contracts to determine the
intention of the parties. "However, the law will
not permit a usurious loan to hide itself behind a
legal form. Parol evidence is admissible to show
that a written document though legal in form was
in fact a device to cover usury. If from a
construction of the whole transaction it becomes
apparent that there exists a corrupt intention to
violate the Usury Law, the courts should and will
permit no scheme, however ingenious, to becloud
the crime of usury." The following circumstances
show that such scheme was indeed employed:
First, petitioner claims that it was never a party
to the Contract to Sell between AUTOWORLD and
BARRETTO. As far as it was concerned, it merely
purchased receivables at a discount from
BARRETTO as evidenced by the Deed of

Assignment dated 9 February 1981. Whether
the Contract to Sell was fictitious or not would
have no effect on its right to claim the
receivables of BARRETTO from AUTOWORLD since
the two contracts were entirely separate and
distinct from each other.
Curiously however, petitioner admitted that its
lawyers were the ones who drafted all the three
(3) contracts involved which were executed on
the same day. Also, petitioner was the one who
procured the services of the Asian Appraisal
Company to determine the fair market value of
the land to be sold way back in September of
1980 or six (6) months prior to the sale. If it were
true that petitioner was never privy to
the Contract to Sell, then why was it interested in
appraising the lot six (6) months prior to the sale?
And why did petitioner's own lawyers prepare the
Contract to Sell? Obviously, petitioner actively
participated in the sale to ensure that the
appraised lot would serve as adequate collateral
for the usurious loan it gave to AUTOWORLD.
Second, petitioner insists that the 9 February
1981 transaction was a legitimate "IPP"
transaction where it only bought the receivables
of BARRETTO from AUTOWORLD amounting to
P12,999,999.60 at a discounted price of
P6,980,000.00. However, per instruction of
petitioner in its letter to BARRETTO dated 17
November 1980 the whole purchase price of the
receivables was to be "flowed back" to
AUTOWORLD. And in its subsequent letter of 24
February 1981 petitioner also gave instructions
on how BARRETTO should apply the proceeds
worth P6,980,000.00.
It can be seen that out of the nine (9) items of
appropriation stated (in the letter), Item Nos. 2-8
had to be returned to petitioner. Thus, in
compliance with the aforesaid letter, BARRETTO
had to yield P4,058,468.47 of the P6,980,000.00
to petitioner to settle some of AUTOWORLD's
previous debts to it. Any remaining amount after
the application of the proceeds would then be
surrendered to AUTOWORLD in compliance with
the letter of 17 November 1980; none went to
BARRETTO.
The foregoing circumstances confirm that the
P6,980,000.00 was really an indirect loan
extended to AUTOWORLD so that it could settle
its previous debts to petitioner. Had petitioner
entered into a legitimate purchase of receivables,
then BARRETTO, as seller, would have received
the whole purchase price, and free to dispose of
such proceeds in any manner it wanted. It would
not have been obliged to follow the "Application

of Proceeds" stated in petitioner's letter.
Third, in its 17 November 1980 letter to
BARRETTO, petitioner itself designated the
proceeds of the "IPP" transaction as a "loan." In
that letter, petitioner stated that the "loan
proceeds" amounting to P6,980,000.00 would be
released to BARRETTO only upon submission of
the documents it required. And as previously
mentioned, one of the required documents was a
letter agreement between BARRETTO and
AUTOWORLD stipulating that the P6,980,000.00
should be "flowed back" to AUTOWORLD. If it
were a genuine "IPP" transaction then petitioner
would not have designated the money to be
released as "loan proceeds" and BARRETTO would
have been the end recipient of such proceeds
with no obligation to turn them over to
AUTOWORLD.
Fourth, after the interest rate ceilings were lifted
on 21 July 1981 petitioner extended on 18 June
1982 a direct loan of P3,000,000.00 to
AUTOWORLD. This time however, with no more
ceiling rates to hinder it, petitioner imposed a
28% effective interest rate on the loan. And no
longer having a need to cloak the exorbitant
interest rate, the promissory note evidencing the
second transaction glaringly bore the 28%
interest rate on its face. We are therefore of the
impression that had there been no interest rate
ceilings in 1981, petitioner would not have
resorted to the fictitious "IPP" transaction;
instead, it would have directly loaned the money
to AUTOWORLD with an interest rate higher than
12%.
Thus, although the three (3) contracts seemingly
show at face value that petitioner only entered
into a legitimate discounting of receivables, the
circumstances cited prove that the P6,980,000.00
was really a usurious loan extended to
AUTOWORLD.
Petitioner anchors its defense on Sec. 7 of the
Usury Law which states
Provided, finally, That nothing herein
contained shall be construed to prevent
the purchase by an innocent purchaser of
a negotiable mercantile paper, usurious or
otherwise, for valuable consideration
before maturity, when there has been no
intention on the part of said purchaser to
evade the provisions of the Act and said
purchase was not a part of the original
usurious transaction. In any case however,
the maker of said note shall have the right
to recover from said original holder the
10
whole interest paid by him thereon and, in

any case of litigation, also the costs and
such attorney's fees as may be allowed by
the court.
year, if the borrower pays P200.00, the whole

P200.00 would be considered usurious interest,
not just the portion thereof in excess of the
interest allowed by law.
Indeed, the Usury Law recognizes the legitimate

purchase of negotiable mercantile paper by
innocent purchasers. But even the law has
anticipated the potential abuse of such
transactions to conceal usurious loans. Thus, the
law itself made a qualification. It would recognize
legitimate purchase of negotiable mercantile
paper, whether usurious or otherwise, only if the
purchaser had no intention of evading the
provisions of the Usury Law and that the
purchase was not a part of the original usurious
transaction. Otherwise, the law would not
hesitate to annul such contracts. Thus, Art. 1957
of the Civil Code provides
In the instant case, AUTOWORLD obtained a loan

of P6,980,000.00. Thereafter, it paid nineteen
(19) consecutive installments of P216,666.66
amounting to a total of P4,116,666.54, and
further paid a balance of P6,784,551.24 to settle
it. All in all, it paid the aggregate amount of
P10,901,217.78 for a debt of P6,980,000.00. For
the 23-month period of the existence of the loan
covering the period February 1981 to January
1982, AUTOWORLD paid a total of P3,921,217.78
in interests. Applying the 12% interest ceiling rate
mandated by the Usury Law, AUTOWORLD should
have only paid a total of P1,605,400.00 in
interests. Hence, AUTOWORLD is entitled to
recover the whole usurious interest amounting to
P3,921,217.78.
Contracts and stipulations, under any

cloak or device whatever, intended to
circumvent the laws on usury shall be
void. The borrower may recover in
accordance with the laws on usury.
In the case at bar, the attending factors
surrounding the execution of the three (3)
contracts on 9 February 1981 clearly establish
that the parties intended to transact a usurious
loan. These contracts should therefore be
declared void. Having declared the transaction
between the parties as void, we are now tasked
to
determine
how
much
reimbursement
AUTOWORLD is entitled to. The Court of Appeals,
adopting the computation of AUTOWORLD in its
plaintiff-appellant's brief, ruled
According to plaintiff-appellant, defendantappellee
was
able
to
collect
P3,921,217.78 in interests from appellant.
This is not denied by the appellee.
Computed at 12% the effective interest
should have been P1,545,400.00. Hence,
appellant
may
recover
P2,586,035.44, representing overpayment
arising from usurious interest rate charged
by appellee.
While we do not dispute the appellate court's
finding that the first transaction was a usurious
loan, we do not agree with the amount of
reimbursement awarded to AUTOWORLD. Indeed,
it erred in awarding only the interest paid in
excess of the 12% ceiling. In usurious loans, the
creditor can always recover the principal
debt. However, the stipulation on the interest is
considered void thus allowing the debtor to claim
the whole interest paid. In a loan of P1,000.00
with interest at 20% per annum or P200.00 per
Solangon vs Salazar
G.R. No. 125944
June 29, 2001
Facts:
Petitioner-spouses executed 3 real estate

mortgages on a parcel of land situated in
Bulacan, in favor of the same Respondent
Salazar to secure payment of loans of P60 K,
P136 K and P230 K payable within 4 months,
1 year, and 4 months in that order, with 6%
monthly interest on the first loan, and legal
interests on the others.
This action was initiated by the Petitionerspouses to prevent the foreclosure of the
mortgaged property.
They alleged that they obtained only one loan

from the Respondent which was the P60 K
secured by the first mortgage. Also, Petitionerspouses opined that the 6% monthly interest
was unconscionable.
The subsequent mortgages were merely

continuations of the first one, which is null
and void.
Moreover, the Respondent assured them that

he will not foreclose the mortgage as long as
they pay the stipulated interest upon maturity
or within a reasonable time thereafter.
Petitioner-spouses substantially paid the loans
with interest but were unable to pay it in full.
11
On the other hand, the Respondent claimed

that the mortgages were executed to secure 3
separate loans of and that the first two loans
were paid, but the last one was not.
He denied having represented that he will not

foreclose the mortgage as long as the
Petitioner-spouses pay interest.
Lower courts ruled in favour of Respondent.

Thus, this petition.
Issue:
Whether or not the 6% monthly interest is
unconscionable?
Ruling:
Yes. The SC ruled that this is unconscionable.
While the Usury Law ceiling on interest rates

was lifted by C.B. Circular No. 905, nothing in
the said circular grants lenders carte blanche
authority to raise interest rates to levels
which will either enslave their borrowers or
lead to a hemorrhaging of their assets.
In Medel v. Court of Appeals, the Court
decreed that the 5.5% interest or 66% per
annum was not usurious but held that the
same must be equitably reduced for being
iniquitous, unconscionable and exorbitant ,
and hence, contrary to morals (contra bonos
mores), if not against the law.
In the case at bench, Petitioner-spouses stand
on a worse situation. They are required to pay
the stipulated interest rate of 6% per month
or 72% per annum which is definitely
outrageous and inordinate.
aver that what was really executed between them

and the respondent is a real estate mortgage and
that there was no agreement limiting the period
within which to exercise the right to repurchase
and that they have even overpaid respondent.
Respondent offered in evidence a document
denominated as Sinumpaang Salaysay which had
a provision of an interest of 7% per month on the
principal loan of Php 150,000. RTC ruled that the
transaction was actually a loan and the payment
was secured by a mortgage of the property, and
that the petitioners had made payments which
resulted in overpayment as the interest was at
7% per annum. Respondent filed an MR alleging
that the interest stipulated in the Sinumpaang
Salaysay was 7% per month. The RTC ruled in
favor of the respondent acknowledging that the
correct interest rate stipulated was 7% per
month. However, the RTC declared that the 7%
per month interest is too burdensome and
onerous and so the court unilaterally reduced the
interest rate from 7% per month to 5% per
month. Petitioners filed an MR alleging that either
5%
or
7%
per
month
is
exorbitant,
unconscionable, unreasonable, usurious and
inequitable.
ISSUE: WON the interest of
exorbitant,
unconscionable,
usurious and inequitable.
5% month is
unreasonable,
HELD: NO. It is a basic principle in civil law that

parties are bound by the stipulations in the
contracts voluntarily entered into by them.
Parties are free to stipulate terms and conditions
which they deem convenient provided they are
not contrary to law, morals, good customs, public
order, or public policy.
SPOUSES PASCUAL VS. RAMOS
The interest rate of 7% per month was voluntarily

agreed upon by RAMOS and the PASCUALs. There
is nothing from the records and, in fact, there is
no allegation showing that petitioners were
victims of fraud when they entered into the
agreement with RAMOS. Neither is there a
showing that in their contractual relations with
RAMOS, the PASCUALs were at a disadvantage on
account of their moral dependence, ignorance,
mental weakness, tender age or other handicap,
which would entitle them to the vigilant
protection of the courts as mandated by Article
24 of the Civil Code.
FACTS: Petitioners executed a Deed of Absolute

Sale with Right to Repurchase with respondent, in
consideration of Php 150,000. The petitioners did
not exercise their right to repurchase the property
within the stipulated one-year period; hence,
respondent prayed that the title over the parcels
of land be consolidated in his favor. Petitioners
With the suspension of the Usury Law and the

removal of interest ceiling, the parties are free to
stipulate the interest to be imposed on loans.
Absent any evidence of fraud, undue influence, or
any vice of consent exercised by RAMOS on the
PASCUALs, the interest agreed upon is binding
upon them. This Court is not in a position to
Hence, the interest rate must be reduced

equitably. An interest of 12% per annum is
deemed fair and reasonable.
12
impose upon parties contractual stipulations

different from what they have agreed upon
Interest on amount of damages =

imposed by discretion of court at
6%
o No interest shall be ordered on
unliquidated claims/damages until
demand can be established with
reasonable certainty
o When demand is established with
reasonable certainty, interest shall
begin to run from the time the
claim is made
(judicially/extrajudicially)
o But if it cannot be reasonably
established at the time demand
was made = interest to run from
date of judgment of the court
If judgment becomes Final and Executory
o Rate of legal interest = 12%
o From finality to satisfaction
o Why? It is already considered as
forbearance
o
REFORMINA V. TOMOL
EASTERN SHIPPING v CA
FACTS:
-
2 Fiber drums of Riboflavin were shipped

from Japan for delivery vessel owned by
Eastern Shipping (P) and that the
shipment was insured by Mercantile
Insurance (R)
Upon arrival in Manila, it was discharged
unto the custody of Metro Port, which it
stated in its survey that 1 drum was in bad
order.
It was then received by Allied Brokerage
wherein it stated in its survey that one
drum was opened and without seal
Allied then delivered it to the consignees
W/H, which it excepted that 1 drum
contained spillages while the rest was
adulterated/fake
R then filed claims against P for the losses
sustained by the consignee (which R
subrogated).
LC ruled in favor of R and ordered P to pay
damages, however, it failed to state when
the interest rate should commence from
date of filing of complaint at 12% or from
date of judgment of TC at 6%
ISSUE: When should the interest rate commence

and at what rate
SC: 6% from the date of decision and 12% from
date of finality of judgment until payment
-
This case laid down the rules on the

interest rates:
A) when an obligation regardless of its
source, is breached, the contravenor can
be held liable for damages
B) 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,
shall be as follows:
If it consists of payment of money
(loan/forbearance)
o Interest due imposed = as
stipulated in writing and the
o Interest due = earn legal interest
from the time it is judicially
demanded
o No stipulation = 12% per annum
from date of default (judicial/extra
judicial)
If it is not loan/forbearance
EASTERN ASSURANCE AND SURETY

CORPORATION (EASCO), vs. Court of
Appeals
Facts:
1) On April 9, 1981, private respondent
Vicente Tan insured his building in
Dumaguete City against fire with
petitioner Eastern Assurance and Surety
Corporation (EASCO) for P250,000.00.
2) On June 26, 1981, the building was
destroyed by fire. As his claim for
indemnity was refused, private respondent
filed a complaint for breach of contract
with damages against petitioner. The RTC
Court, decided in favour of Vicente Tan. In
its ruling, the RTC court imposed the rate
of interest at 12% per annum, and
decided that EASCO to pay immediately to
Vicente Tan the unpaid balance of interest
of the principal amount of P250,000.00
equivalent to 6% per annum from June 26,
1981 to September 30,1994.
3) Petitioner EASCO appealed to the Court of
Appeals, which, on July 30, 1993, affirmed
the decision of the trial court. The CA, on
the authority of prior case, Eastern
Shipping Lines, Inc. v. Court of Appeals,
that the interest rate on the amount due
should be 6% per annum from June 26,
1981 to August 24, 1993, and 12% per
annum beginning August 25, 1993 until
the money judgment is paid.
13
4) Thereafter, petitioner EASCO tendered

payment of the money judgment in the
amount of P250,000.00 plus interest of 6%
per annum from June 26, 1981 to July 30,
1993.
5) However, private respondent refused to
accept payment on the ground that the
applicable legal rate of interest was 12%
per annum. Subsequently, private
respondent brought the matter to the
Insurance Commission.
6) Then in, 1995, the parties agreed before
the hearing officer of the commission that
the interest should be computed from June
26, 1981 to September 30, 1994.
Petitioner would file with the trial court a
motion to fix the legal rate of interest
attaching thereto a check in the amount of
P250,000.00 with 6% interest per annum.
7) In its appeal EASCO to the SC, it
contended that the CA wrongfully applied
the aforecited paragraph 3 of the
suggested rules of thumb for future
guidance [as formulated in Eastern
Shipping Lines, Inc. v. Court of Appeals,
and unlawfully ignored or disregarded the
agreed cut-off date for the payment of the
legal rate.
Issue: When the judgment of the court
awarding a sum of money becomes final
and executory what is the rate to be
imposed?
Held: Petitioner's contentions are without
merit.
The prior Eastern Shipping Lines, Inc. v. Court of
Appeals, was held:
I. When an obligation, regardless of its
source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts, is
breached, the contravener can be held
liable for damages. The provisions under
"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:
Par. 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.
Unquestionably, this case falls under the rule
stated in paragraph 3. The question is whether
this rule can be applied to this case.
The prior Eastern Shipping Lines, case. did not lay
down any new rules because it was just a a
comprehensive summary of existing rules on the
computation of legal interest.
As to the "cut-off date" for the payment of legal
interest:
The trial court's finding on this point is binding.
Hence, the payment of 12% legal interest per
annum should commence from August 25, 1993,
the date the decision of the trial court became
final, up to September 30, 1994, the agreed "cutoff-date" for the payment of legal interest. The
decision of the CA is affirmed.
PILIPINAS BANK, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, and
LILIA R. ECHAUS, respondents.
Facts: private respondent filed a complaint
against petitioner and its president, Constantino
Bautista, for collection of a sum of money. The
complaint alleged: (1) that petitioner and
Greatland executed a "Dacion en Pago," wherein
Greatland conveyed to petitioner several parcels
of land in consideration of the sum of
P7,776,335.69; (2) that Greatland assigned
P2,300,000.00 out of the total consideration in
favor of private respondent; and (3) that
notwithstanding her demand for payment,
petitioner refused and failed to pay the said
amount assigned to her.
Petitioner claimed: (1) that its former president
had no authority (2) that it never ratified the
same; and (3) that assuming arguendo that the
agreement was binding, the conditions stipulated
therein were never fulfilled.
The trial court ruled in favor of private
respondent.
14
Court of Appeals modified the Order dated April

3, 1985, by limiting the execution pending appeal
against petitioner to P5,517.707.00
Trial court granted the new motion for execution

pending appeal. Petitioner complied with the writ
of execution pending appeal by issuing two
manager's checks in the total amount of
P5,517,707.00
The Court of Appeals rendered a decision in CAG.R. No. CV-06017, which modified the judgment
of the trial court
ISSUE: WoN the rate to be used is 6%

SC: YES!
-
Petitioner filed a motion in the trial court praying

that private respondent to refund to her the
excess payment of P1,898,623.67 with interests
at 6%. It must be recalled that while private
respondent was able to collect P5,517,707.00
from petitioner pursuant to the writ of advance
execution, the final judgment in the main case
awarded to private respondent damages in the
total amount of P3,619,083.33
ISSUE: What interest rate applicable?
HELD: 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.
(1) the amount of P2,300,000.00 adjudged to be
paid by petitioner to private respondent shall
earn interest of 6% per annum - The said
obligation 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.
(2) the amount of P1,898,623.67 to be refunded
by private respondent to petitioner shall earn
interest of 12% per annum. - where money is
transferred from one person to another and the
obligation to return the same or a portion thereof
is subsequently adjudged.
Facts:
FACTS:
Province of Isabela issued several checks
drawn against its account with PNB (P) in
favor of Ibarrola (R), as payments for the
purchase of medicines.
This case does not involve a loan,

forbearance of money or judgment
involving a loan or forbearance of money
as it arose from a contract of sale whereby
R did not receive full payment for her
merchandise.
When an obligation arises from a contract
of purchase and sale and not from a
contract of loan or mutuum, the
applicable rate is 6% per annum as
provided in Art. 2209 of the NCC
6% from filing of complaint until full
payment before finality of judgment
12% from finality of judgment
PLANTILLA vs. BALIWAG
358 SCRA 396
PNB v CA
The checks were delivered to Rs agents

who turned them over to R, except 23
checks amounting to P98k.
Due to failure to receive full amount, R
filed case against P
LC, CA and SC ordered PNB to pay
however, all 3 courts failed to specify the
legal rate of interest 6% or 12%
In a civil case, lower court rendered a decision

ordering:
o Spouses Orga and Plantilla to reinstate
Suiza as share tenant
o That they pay Suiza unrealized shares
from the harvests of coconut fruits
from August until reinstated the
amount of P1,000 with legal interest
until fully paid.
The decision, however, did not state the
interest to be charged.
A writ of execution was issued addressed to
Sheriff Baliwag.
Baliwag demanded payment from the spouses
representing the share of Suiza the amount of
480k, representing the coconut harvest from
Aug 1979 to Jan 1998 at P1,000 with 8
harvests per year with an interest rate of 12%
per annum or a total of 222% plus attorneys
fees.
Col. Plantilla, administrator of the spouses,
filed an administrative complaint against
Baliwag charging him of serious irregularities
in implementation of the writ of execution
alleging that dispositive portion of the
15
decision did not contain 8 harvest per year

and Baliwag took it upon himself to specify
the number of harvests.
digest because I assume that my industrious &

responsible classmates took down notes... = p
RODZSSEN SUPPLY V. FAR EAST
Issue: Whether
irregularities?
or
not
Sheriff
is
guilty
of
Held:
Yes, Baliwag is guilty of malfeasance, not
irregularities. The determination of the amount
due under the writ properly pertained to the
Judge. Yet, respondent assumed the task. For
doing so instead of pointing out to the court the
deficiency of the writ, he should be sanctioned.
He should not have arrogated unto himself
judicial functions that were to be performed only
by the judge.
The computation of the amount due under the

writ is not the duty of the sheriff. Such amount
should have already been specifically stated in
the writ if execution issued by the court under
Section 3 Rule 39 of the 1997 Rules of Court. All
that the sheriff should do upon receipt of that writ
is the ministerial duty of enforcing it.
RCBC vs ALFA
Facts:
Alfa on separate instances was
granted by RCBC 4 letters of credit to facilitate
the purchase of raw materials for their garments
business. Alfa executed 4 trust receipts and made
comprehensive surety agreements wherein the
signatory officers of Alfa agreed in joint/several
capacity to pay RCBC in case the company
defaulted. RCBC filed a case versus Alfa for a sum
of money. The CA awarded only P3M (minimum
amount) to RCBC instead of P18M as stipulated in
their contract.
Issue:
W/N the CA can deviate from the
provisions of the contract between the parties?
Ruling:
No.
Contracting
parties
may
establish agreements terms, deemed advisable
provided they are not contrary to law/public
policy. A contract is a law between the parties. In
this case its valid because it was not excessive
under the Usury Law.
*Atty. Aguinaldo assigned this case because he
just wanted to show us how to compute for the
interest in long term deals. He even made a
diagram on the board. Di ko na ilalagay un sa
Facts: On January 15, 1979, defendant Rodzssen

Supply, Inc. opened with plaintiff Far East Bank
and Trust Co. a 30-day domestic letter of credit, in
the amount of P190,000.00 in favor of Ekman and
Company, Inc. (Ekman) for the purchase from the
latter of five units of hydraulic loaders, to expire
on February 15, 1979. The three loaders were
delivered to defendant for which plaintiff paid
Ekman and which defendant paid plaintiff before
expiry date of LC. The remaining two loaders
were delivered to defendant but the latter
refused to pay. Ekman pressed payment to
plaintiff. Plaintiff paid Ekman for the two loaders
and later demanded from defendant such amount
as it paid Ekman. Defendant refused payment
contending that there was a breach of contract by
plaintiff who in bad faith paid Ekman, knowing
that the two units of hydraulic loaders had been
delivered to defendant after the expiry date of
subject
LC.
Issue: WON petitioner is liable to respondent.
Ruling: The SC agrees with the CA that petitioner
should pay respondent bank the amount the
latter expended for the equipment belatedly
delivered by Ekman and voluntarily received and
kept by petitioner. Equitable considerations
behoove us to allow recovery by respondent.
True, it erred in paying Ekman, but petitioner
itself was not without fault in the transaction. It
must be noted that the latter had voluntarily
received and kept the loaders since October
1979. When both parties to a transaction are
mutually negligent in the performance of their
obligations, the fault of one cancels the
negligence of the other and, as in this case, their
rights and obligations may be determined
equitably under the law proscribing unjust
enrichment.
MENDOZA vs CA
G.R.No. 116710, June 25,2001
Facts:
PNB extended P500,000 credit line and P1
million letter of credit infavor of Mendoza. As
security for the credit accomodations, he
mortgaged real and personal properties to PNB.
The real estate mortgage provided for an
escalation clause.
16
He also executed 3 promissory notes

covering the P500,000 credit line in 1979. The
said notes also provided for an interest at the
rate of 12% per annum until paid , and that PNB
may raise the interest without further notice.
He also executed 11 Application and
Agreement for the commercial letter of credit
providing for 9% interest per annum from the
date of drafts until the arrival of payment in New
York and that the bank may increase the interest
without further notice. The bank sent a letter to
Mendoza, informing him that the interest rates
increased to 14% per annum.
Mendoza made some proposals for the
restructuring of his past due accounts into 5 year
term loan and for an additional P2 million letter of
credit. However, PNB did not approve his proposal
and reduced the letter of credit to P 1 million only.
Mendoza claimed that he was forced to
sign 2 blank promissory notes and claimed that
his proposal for 5 year restructuring of his past
due accounts was approved . He also alleged taht
PNB violated their agreement because PNB
inserted 21% instead of 18% in the first
promissory note and 18% instead of 12% in the
second promissory note. The 2 promissory notes
also provided escalation clauses.
The 2 newly executed promissory notes
novated the three 1979 promissory notes and 11
Application and Agreement for Commercial Letter
of Credit executed by Mendoza earlier.
After sometime, pursuant to the escalation
clause, the interests in the two promissory notes
were again increased. Due to Mendozas failure to
pay the 2 promissory notes, PNB foreclosed the
real and personal mortgages. Mendoza filed for
specific performance, nullification of foreclosure
and damages.
Issue: Whether or not the interest rates imposed

on the 2 newly executed promissory notes were
valid.
Ruling:
The Court upheld the validity of the 2
newly executed promissory notes on the ground
that private transactions are presumed to be fair
and regular.
However, it ruled that interest rates
imposed on the 2 newly executed promissory
notes are not valid on the ground that Mendoza
was not informed beforehand by PNB of the

change in the stipulated interest rates.
It held that unilateral determination and
imposition of increased interest rates by PNB is
violative of the principle of mutuality of contract.
Contract changes must be made with the consent
of the contractiong parties. The minds of all
parties must meet as to the proposed
modification, especially wwhen it affects an
important aspect of the agreement. No one
receiving a proposal to change a contract to
which the party is obliged to answer the proposal,
and his silence per se cannot be construed as
acceptance.
DEPOSIT
Topic: Deposit; Article 1962

Calibo v. CA
FACTS:
Respondent Abellas son Mike rented for
residential
purposes
the
house
of
Petitioner Calibo.
Respondent left a tractor in his sons
garage for safekeeping
Petitioner Mike had not paid rentals,
electric and water bills
Mike reassured Calibo that the tractor
would stand as guarantee for its payment
Respondent wanted to take possession of
his tractor but Petitioner said that the Mike
had left the tractor with him as security for
the payment of Mikes obligation to him.
Respondent issued postdated checks but
Petitioner will only accept check if
Respondent executes Promissory Note to
cover payment for unpaid electric and
water bills.
Petitioner instituted an action for replevin
claiming ownership of the tractor and
seeking to recover possession thereof
from petitioner. Likewise, he asserts that
the tractor was left with him, in the
concept of an innkeeper, on deposit and
that he may validly hold on thereto until
Mike Abella pays his obligations.
TC and CA Mike could not have validly
pledged the tractor because he was not
the owner. NO DEPOSIT
ISSUE: WON there was a valid deposit?
HELD: NO
In a contract of deposit, a person receives
an object belonging to another with the
obligation of safely keeping it and of
returning the same. Petitioner himself
17
stated that he received the tractor not to

safely keep it but as a form of security for
the payment of Mike Abellas obligations.
There is no deposit where the principal
purpose for receiving the object is not
safekeeping.
Consequently, petitioner had no right to
refuse delivery of the tractor to its lawful
owner. On the other hand, private
respondent, as owner, had every right to
seek to repossess the tractor including the
institution of the instant action for
replevin.
BISHOP OF JARO V. DELA PENA
CA Agro-Industrial vs CA
G.R. No. 90027 March 3, 1993
Mrs. Ramos demanded the execution of a

deed of sale which necessarily entailed the
production of the certificates of title. Thus,
Petitioner with the spouses went to
Respondent Bank to retrieve the titles.
However, when opened in the presence of the

Bank's representative, the SDB 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,
the Petitioner allegedly failed to realize the
expected profit of P285K.
Hence, Petitioner filed a complaint for

damages against Respondent Bank.
Lower courts ruled in favour of Respondent

Bank. Thus, this petition.
Issues:
1. Whether or not the disputed contract is an
ordinary contract of lease?
Facts
Petitioner (through its President) purchased 2

parcels of land from spouses Pugao for P350 K
with a downpayment of P75 K.
Per agreement, the land titles will be
transferred upon full payment and will be
placed in a safety deposit box (SBDB) of any
bank. Moreover, the same could be withdrawn
only upon the joint signatures of a
representative of the Petitioner and the
Pugaos upon full payment of the purchase
price.
Thereafter, Petitioner and spouses placed the
titles in SDB of Respondent Security Bank and
signed a lease contract which substantially
states that the Bank will not assume liability
for the contents of the SDB.
Subsequently, 2 renter's keys were given to
the renters one to the Petitioner and the
other to the Pugaos. A guard key remained in
the possession of the Respondent Bank. The
SDB can only be opened using these 2 keys
simultaneously.
Afterwards, a certain Mrs. Ramos offered to
buy from the Petitioner the 2 lots that would
yield a profit of P285K.
2. Whether or not the provisions of the cited

contract are valid?
3. Whether or not Respondent Bank is liable for
damages?
Ruling:
1. No. SC ruled that it is a special kind of deposit
because:
the full and absolute possession and

control of the SDB was not given to the
joint renters the Petitioner and the
Pugaos.
The guard key of the box remained with the

Respondent Bank; without this key, neither
of the renters could open the box and vice
versa.
In this case, the said key had a duplicate

which was made so that both renters could
have access to the box.
Moreover, the renting out of the SDBs is

not independent from, but related to or in
conjunction with, the principal function of a
contract of deposit the receiving in
18
custody of funds, documents and other

valuable objects for safekeeping.
2. NO. SC opined that it is void.
Generally, the Civil Code provides that the

depositary (Respondent Bank) would be
liable if, in performing its obligation, it is
found guilty of fraud, negligence, delay or
contravention of the tenor of the
agreement.
In the absence of any stipulation, the

diligence of a good father of a family is to
be observed.
Hence, any stipulation exempting the

depositary from any liability arising from
the loss of the thing deposited on account
of fraud, negligence or delay would be
void for being contrary to law and public
policy (which is present in the disputed
contract)
Said provisions are inconsistent with the

Respondent Bank's responsibility as a
depositary under Section 72(a) of the
General Banking Act.
acceded. The defendants were not able to pay

the
full
amount
of
their
indebtedness
notwithstanding the request made by plaintiffappellee. The lower court ruled in favor of
plaintiff-appellee for the recovery of the amount
due.
ISSUE: Whether the agreement entered into by
the parties is one of loan or of deposit?
HELD: The document executed was a contract of
loan. Where money, consisting of coins of legal
tender, is deposited with a person and the latter
is authorized by the depositor to use and dispose
of the same, the agreement is not a contract of
deposit, but a loan. A subsequent agreement
between the parties as to interest on the amount
said to have been deposited, because the same
could not be returned at the time fixed therefor,
does not constitute a renewal of an agreement of
deposit, but it is the best evidence that the
original contract entered into between therein
was for a loan under the guise of a deposit.
G.R. Nos. L-26948 and L-26949
October 8, 1927
SILVESTRA BARON, plaintiff-appellant,
vs.
3. NO. SC ruled that:

no competent proof was presented to
show that Respondent Bank was aware of
the private agreement between the
Petitioner and the Pugaos that the Land
titles were withdrawable from the SDB
only upon both parties' joint signatures,
and that no evidence was submitted to

reveal that the loss of the certificates of
title was due to the fraud or negligence of
the Respondent Bank.
PABLO DAVID, defendant-appellant.

And
GUILLERMO BARON, plaintiff-appellant,
vs.
PABLO DAVID, defendant-appellant.
FACTS:
-
The defendant owns a rice mill, which was

well patronized by the rice growers of the
vicinity.
On January 17, 1921, a fire occurred that

destroyed the mill and its contents, and it
was some time before the mill could be
rebuilt and put in operation again.
Silvestra Baron (P1) and Guillermo Baron

(P2) each filed an action for the recovery
of the value of palay from the defendant
(D), alleged that:
ART. 1977. OBLIGATION NOT TO MAKE USE

OF THING DEPOSITED UNLESS AUTHORIZED.
JAVELLANA VS. LIM
FACTS: Defendants executed a document in favor
of plaintiff-appellee wherein it states that they
have received, as a deposit, without interest,
money from plaintiff-appellee and agreed upon a
date when they will return the money. Upon the
stipulated due date, defendants asked for an
extension to pay and binding themselves to pay
15% interest per annum on the amount of their
indebtedness, to which the plaintiff-appellee
The palay have been sold by both

plaintiffs to the D in the year 1920
Palay was delivered to D at his

special request, with a promise of
19
compensation at the highest price

per cavan
-
D claims that the palay was deposited

subject to future withdrawal by the
depositors or to some future sale, which
was never effected. D also contended that
in order for the plaintiffs to recover, it is
necessary that they should be able to
establish that the plaintiffs' palay was
delivered in the character of a sale, and
that if, on the contrary, the defendant
should prove that the delivery was made
in the character of deposit, the defendant
should be absolved.
ISSUE: WoN there was deposit

SC: NO
-
Art. 1978. When the depositary has

permission to use the thing deposited, the
contract loses the concept of a deposit
and becomes a loan or commodatum,
except where safekeeping is still the
principal purpose of the contract. The
permission shall not be presumed, and its
existence must be proved.
The case does not depend precisely upon
this
explicit
alternative;
for
even
supposing that the palay may have been
delivered in the character of deposit,
subject to future sale or withdrawal at
plaintiffs' election, nevertheless if it was
understood that the defendant might mill
the palay and he has in fact appropriated
it to his own use, he is of course bound to
account for its value.
In this connection we wholly reject the
defendant's pretense that the palay
delivered by the plaintiffs or any part of it
was actually consumed in the fire of
January, 1921. Nor is the liability of the
defendant in any wise affected by the
circumstance that, by a custom prevailing
among rice millers in this country, persons
placing palay with them without special
agreement as to price are at liberty to
withdraw it later, proper allowance being
made for storage and shrinkage, a thing
that is sometimes done, though rarely.
UNITED STATES, vs. IGPUARA

Facts: The defendant Jose igpuara was entrusted
with the amount of P2,498 by Montilla and
Veraguth. Without the consent of Montilla and

Veraguth however, Igpuara used the said amount
for his own ends. Thus, igpuara was charged and
convicted with estafa, for having swindled Juana
Montilla and Eugenio Veraguth out of P2,498
which he had taken as deposit from the former to
be at the his disposal. Igpuara was sentenced to
pay Juana Montilla P2,498 . The instrument for
the deposit reads:
We hold at the disposal of Eugenio Veraguth the
sum of two thousand four hundred and ninetyeight pesos (P2,498), the balance from Juana
Montilla's sugar. Iloilo, June 26, 1911, Jose
Igpuara, for Ramirez and Co
Igpuara contended that the amount was not
deposit for there was no certificate of deposit,
there was no transfer or delivery of the P2,498
and what transpired was a loan. If assuming that
it was deposit, this is negotiable.
Issues: Whether or not it is necessary that there
be transfer or delivery in order to constitute a
deposit.
Held: No.
A deposit is constituted from the time a
person receives a thing belonging to
another with the obligation of keeping and
returning it. (Art. 1758, Civil Code.)
His contention is without merit because firstly,
the defendant drew up a document declaring that
they remained in his possession. With the
understanding that he would, for it has no other
purpose.
The certificate of deposit in question is not
negotiable because only instruments payable to
order are negotiable. Hence, this instrument not
being to order but to bearer, it is not negotiable.
As for the argument that the depositary may use
or dispose oft he things deposited, the depositor's
consent is required thus, the rights and
obligations of the depositary and of the depositor
shall cease and the rules and provisions
applicable to commercial loans, commission, or
contract which took the place of the deposit shall
be observed. Igpuara however has shown no
authorization whatsoever or the consent of the
depositary for using or disposing of the P2,498.
That there was not demand on the same or the
next day after the certificate was signed, does
not operate against the depositor, or signify
anything except the intention not to press it.
20
Failure to claim at once or delay for sometime in

demanding restitution of the things deposited,
which was immediately due, does not imply such
permission to use the thing deposited as would
convert the deposit into a loan.
Judgment appealed from is affirmed
ANICETA PALACIO, plaintiff-appellee,

vs.
DIONISIO SUDARIO, defendant-appellant.
FACTS: The plaintiff made an arrangement for the
pasturing of eighty-one head of cattle, in return
for which she has to give one-half of the calves
that might be born and was to pay the defendant
one-half peso for each calf branded. On demand
for the whole, forty-eight head of cattle were
afterwards returned to her and this action is
brought to recover the remaining thirty-three.
Bacos. Gullas and Lopez signed as indorsers

of this warrant. Thereupon it was cashed by
PNB.
The warrant was subsequently dishonored by
the Insular treasurer.
At that time, Gullas had a balance of P500 in
PNB. From this balance, he also issued some
checks which eventually could not be paid
when it was sequestered by the Bank.
When it learned of the dishonor, PNB sent
notice to Gullas stating that it applied the
outstanding balances from his current account
as payment of the dishonored warrant. Such
notice could not be delivered to him since he
was out of town.
Without any action from Gullas, PNB applied
the dishonored warrant against his account.
Because of this, Gullas was unable to pay for
the checks he issued before the application.
Gullas filed a complaint against PNB.
Issue:
Defendant in reply to the demand for the cattle,
in which he seeks to excuse himself for the loss of
the missing animals.
As a second defense it is claimed that the thirtythree cows either died of disease or were
drowned in a flood. The defendant's witnesses
swore that of the cows that perished, six died
from overfeeding, and they failed to make clear
the happening of any flood sufficient to destroy
the others.
HELD: If we consider the contract as one of
deposit, then under article 1183 of the Civil Code,
the burden of explanation of the loss rested upon
the depositary and under article 1769 the fault is
presumed to be his. The defendant has not
succeeded in showing that the loss occurred
either without fault on his part or by reason of
caso fortuito.
If, however, the contract be not one strictly of
deposit but one according to a local custom for
the pasturing of cattle, the obligations of the
parties remain the same.
GULLAS vs. NATIONAL BANK

62 PHIL 519
Facts:
Atty. Gullas has a current account with PNB.

The treasury of the US issued a warrant in the
amount of $361 payable to the order of
Whether or not PNB has a right to apply a deposit

to the debt of a depositor to the bank?
Held:
Yes, PNB has a right to apply the payment against
the account of the depositor.
The relation between a depositor and a bank is
that if creditor and debtor. The general rule is
that a bank has a right to set off of the deposit in
its hands for the payment of any indebtedness to
it on the part of the depositor.
However, prior to the mailing of the notice of
dishonor and without waiting for any action by
Gullas, the bank made use of the money standing
in his account to make good for the treasury
warrant. At this point recall that Gullas was
merely an indorser. Notice should have been
given to him in order that he might protect his
interest. He should be awarded with nominal
damages because of the premature action of the
Bank.
SERRANO vs CENTRAL BANK

Facts:
Serrano had P350K worth of time
deposits in Overseas Bank of Manila. He made a
series of encashment but was not successful. He
filed a case against Overseas Bank & he also
included the Central Bank so that the latter may
also be jointly and severally liable. Serrano
argued that the CB failed to supervise the acts of
21
Overseas Bank and protect the interests of its

depositors by virtue of constructive trust.
Issue:
W/N the Central Bank is liable?
Ruling:
No. There is no breach of trust from
a banks failure to return the subject matter of
the deposit. Bank deposits are in the nature of
irregular deposits. All kinds of bank deposits are
to be treated as loans and are to be covered by
the law on loans Art.1980. In reality the depositor
is the creditor while the bank is the debtor. Failure
of the respondent bank to honor the time deposit
is failure to pay its obligation as a debtor.
SESBRENO V. CA
Facts: Sesbreno entered into a money market,
giving 300k to Philfinance. As an exchange,
Philfinance gave checks and confirmation of sale
of Delta Motor Corp certificates. Checks bounced.
Sesbreno is running after Philipinas Bank (payee)
(Holder of security of primissory note) and Delta
(maker). Delta contends that it is not liable
because there was "reconstruction" of debt of
Delta to Philfinance, the promissory note is not
valid anymore. It also contends that the
document cannot be assigned because its non
negotiable. RTC ruled that Philfinance is liable
because Philfinance already knows that the
liability was already waived and it still issued the
certificate. However, since Philfinance was not
impleaded, judgment cannot be made against
Philfinance. The issue related in this case is
regarding
trasferrability
and
assignability.
Issue: WoN the non-negotiable instrument is non
transferrable/assignable
Ruling: Assignable is different from tranferrability.
Negotiable instruments can be indorsed. Non
negotiable
instrumets
can
be
assigned.
Therefore, non negotiable instrument can be
assigned.
DE LOS SANTOS vs TAN KHEY
O.G.No.26695-R, July 30, 1962
Facts:
Tan Khey was the owner of International
Hotel located in Iloilo city. Romeo de los Santos
lodged in Tna Kheys hotel. After arrival, he left
the hotel, depositing his revolver and his bag with
the person in charge in the hotel. When he

returned to the hotel, he took his revolver and his
bag from the person in charge in the hotel and
proceeded to his room. He locked the door before
sleeping.
When he woke up, he discovered that the
door in his room was opened and his bag and
pants, wherein he placed his revolver , was
missing. He reported the matter to the Assistant
Manager of the hotel, who in turn informed Tan
Khey.
A secret service agent was sent to
investigate and it was found that the wall of the
room occupied by De los Santos was only seven
feet high with an open space above through
which one could enter from outside. De los
Santos told the detective that he lost his revolver.
Tan Khey disclaimed liability because De
los Santos did not deposit his properties with the
manager despite a notice to that effect was
posted in the hotel.
Tan Khey contended that to be liable
under Article 1998 of the Civil Code, the following
conditions must concur:
1. Deposit of effects by travellers in hotel
or inn
2. Notice given to hotel keepers or
employees of the effects brought by
guests
3. Guest
or
travellers
take
the
precautions which said hotel keepers
or their substitutes advised relative to
the care and vigilance of their effects.
Issue: Whether the hotel owner should be held
liable for the loss of the effects of the guest?
Rulng:
The Court ruled that the hotel owner
should be liable for the loss of the revolver, pants
and bag of the guest.
Deposit
While the law speaks of deposit of
effects by travellers in hotels or inns, personal
receipt by the innkeeper for safe keeping of
effects is not necessaily meant thereby. The
reason therefor is the fact that it is the nature of
business of an innkeeper to provide not only
lodging for travellers but also to security to their
persons and effects. The secuity mentioned is not
confined to the effects actually delivered to the
innkeeper but also to all effects placed within the
22
premises of the hotel. This is because innkeepers

by the neture of their business, have supervision
and controlof their inns and the premises threof.
It is not necessary that the effect was
actually delivered but it is enough that they are
within the inn. If a guest and goods are within the
inn, that is sufficient to charge him.
The owner of a hotel may exonerate
himself from liability by showing that the guest
has taken exclusive control of his own goods, but
this must be exclusive custody and control of a
guest, and must not be held under the
supervision and care of the innkeeper,ey are kept
in a room assigned to a guest or the other proper
depository in the house.
In this case, the guest deposited his
effects in the hotel because they are in his room
and within the premises of the hotel, and
therefore, within the supervision and control of
the hotel owner.
Notice
The Court ruled that there was no doubt
that the person in charge had knowledge of his
revolver, the bag, and pants of the guest, De los
Santos.
The requirement of notice being evidently
for the purpose of closing the door to fraudulent
claims for non-existent articles, the lack thereof
was fatal to De los Santos claim for reparation
for the loss of his eyeglass, ring, and cash.
Precautions
While an innkeeper cannot free himself
from responsibility by posting notices, there can
be no doubt of the innkeepers right to make such
regulations in the management of his inn as will
more effectually secure the property of his guest
and operate as protection to himself, and that it
is incumbent upon the guest, if he means to hold
the inkeeper ho his responsibility, to comply with
any regulation that is just and reasonable, when
he is requested to do so.
However, in this case, the notice requiring
actual deposit of the effects with the manager
was an unreasonable regulation.
It was
unreasonable to require the guest to deposit his
bag ,pants and revolver to the manager. De los
Santos had exercised the necessary diligence
with respect to the care and vigilance of his
effects.
Topic: Deposit; Article 2003

YHT Realty v. CA
FACTS:
Respondent McLoughlin would 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 checkbook.
When he went abroad, 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
McLouglins key and was able to open the
safety deposit box with the assistance of
Lopez, Paiyam and Lainez. Lopez alsto 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 the hotels Undertaking is valid?
HELD: NO
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 carriers
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
23
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 guests
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, CC 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 WAREHOUSE RECEIPTS LAW
G.R. No. L-16315
month. Henceforth, if the sugar is not yet

withdrawn, a penalty of P0.25 per picul or fraction
thereof a month is imposed. (Exhibits "B-1", "C1", "D-1", "B-2", "C-2", p. 10, t.s.n.)
The storage of sugar is carried in the books of the
company under Account No. 5000, denominated
"Manufacturing Cost Ledger Control"; the storage
fees under Account No. 521620; the expense
accounts of the factory under Account No. 5200;
and the so-called "Sugar Bodega Operations"
under Account No. 5216, under which is a SubAccount No. 20, captioned, "Credits". (Pp. 16-17,
t.s.n., Exhibit "F".) The collections from storage
after the lapse of the first 90 days period are
entered in the company's books as debit to CASH,
and credit to Expense Account No. 2516-20 (p.
18, t.s.n.).
The credit for storage charges decreased the
deductible expense resulting in the corresponding
increase of the taxable income of the petitioner.
This is reflected by the entries enclosed in
parenthesis in Exhibit "G", under the heading
"Storage Charges". (P. 18, t.s.n.) The alleged
reason for this accounting operation is that,
inasmuch as the "Sugar Bodega Operations" is
considered as an expense account, entries under
it are "debits". Similarly, since "Storage Charges"
constitute "credit", the corresponding figures (see
Exhibit "C") are enclosed in parenthesis as they
decrease the expenses of maintaining the sugar
warehouses.
May 30, 1964
COMMISSIONER OF INTERNAL
REVENUE, petitioner,
vs.
HAWAIIAN-PHILIPPINE
COMPANY, respondent.
FACTS:
The petitioner, a corporation duly organized in
accordance with law, is operating a sugar central
in the City of Silay, Occidental Negros. It produces
centrifugal sugar from sugarcane supplied by
planters. The processed sugar is divided between
the planters and the petitioner in the proportion
stipulated in the milling contracts, and thereafter
is deposited in the warehouses of the latter. (Pp.
4-5, t.s.n.) For the sugar deposited by the
planters, the petitioner issues the corresponding
warehouse receipts of "quedans". It does not
collect storage charges on the sugar deposited in
its warehouse during the first 90 days period
counted from the time it is extracted from the
sugarcane. Upon the lapse of the first ninety days
and up to the beginning of the next milling
season, it collects a fee of P0.30 per picul a
Upon investigation conducted by the Bureau, it

was found that during the years 1949 to 1957,
the petitioner realized from collected storage fees
a total gross receipts of P212,853.00, on the basis
of which the respondent determined the
petitioner's liability for fixed and percentage
taxes, 25% surcharge, and administrative penalty
in the aggregate amount of P8,411.99 (Exhibit
"5", p. 11, BIR rec.)
After due hearing the Court of Tax Appeals
ordered the CIR to refund to respondent
Hawaiian-Philippine Company the amount of
P8,411.99 representing fixed and percentage
taxes assessed against it and which the latter had
deposited with the City Treasurer of Silay,
Occidental Negros
ISSUE:
Whether or notpetitioner is a warehouseman
liable for the payment of the fixed and
percentage taxes prescribed in Sections 182 and
191 of the National Internal Revenue Code
HELD:
24
YES.
Respondent
disclaims
liability
under
the
provisions quoted above, alleging that it is not
engaged the business of storing its planters'
sugar for profit; that the maintenance of its
warehouses is merely incidental to its business of
manufacturing sugar and in compliance with its
obligation to its planters. We find this to be
without merit.
Afterwards, respondent Tiong insured the

warehouse and the palay deposited therein
with the Alliance Surety and Insurance
Company.
But prior to the issuance of the license to

Respondent, he had on several occasions
received palay for deposit from Plaintiff
Gonzales, totaling 368 sacks, for which he
issued receipts.
After he was licensed as a bonded

warehouseman, Go Tiong again received
various deliveries of palay from Plaintiff,
totaling 492 sacks, for which he issued the
corresponding receipts, all the grand total of
860 sacks, valued at P8,600 at the rate of P10
per sack.
Noteworthy is that the receipts issued by Go

Tiong to the Plaintiff were ordinary receipts,
not the "warehouse receipts" defined by the
Warehouse Receipts Act (Act No. 2137).
On or about March 15, 1953, Plaintiff

demanded from Go Tiong the value of his
deposits in the amount of P8,600, but he was
told to return after two days, which he did, but
Go Tiong again told him to come back.
A few days later, the warehouse burned to the

ground.
Before the fire, Go Tiong had been accepting

deliveries of palay from other depositors and
at the time of the fire, there were 5,847 sacks
of palay in the warehouse, in excess of the
5,000 sacks authorized under his license.
After the burning of the warehouse, the

depositors of palay, including Plaintiff, filed
their claims with the Bureau of Commerce.
However, according to the decision of the trial

court, nothing came from Plaintiff's efforts to
have his claim paid.
Thereafter, Gonzales filed the present action

against Go Tiong and the Luzon Surety for the
sum of P8,600, the value of his palay, with
legal interest, damages in the sum of P5,000
and P1,500 as attorney's fees.
While the case was pending in court, Gonzales

and Go Tiong entered into a contract of
amicable settlement to the effect that upon
the settlement of all accounts due to him by
It is clear from the facts of the case that, after

manufacturing the sugar of its planters,
respondent stores it in its warehouses and issues
the corresponding "quedans" to the planters who
own the sugar; that while the sugar is stored free
during the first ninety days from the date the it
"quedans" are issued, the undisputed fact is that,
upon the expiration of said period, respondent
charger, and collects storage fees; that for the
period beginning 1949 to 1957, respondent's
total gross receipts from this particular enterprise
amounted to P212,853.00.
A warehouseman has been defined as one who
receives and stores goods of another for
compensation (44 Words and Phrases, p. 635).
For one to be considered engaged in the
warehousing business, therefore, it is sufficient
that he receives goods owned by another for
storage, and collects fees in connection with the
same. In fact, Section 2 of the General Bonded
Warehouse Act, as amended, defines a
warehouseman as "a person engaged in the
business of receiving commodity for storage."
That respondent stores its planters' sugar free of
charge for the first ninety days does not exempt
it from liability under the legal provisions under
consideration. Were such fact sufficient for that
purpose, the law imposing the tax would be
rendered ineffectual.
Gonzalez vs Go Tiong
Facts:
Go Tiong (respondent) owned a rice mill and

warehouse, located in Pangasinan. Thereafter,
he obtained a license to engage in the
business of a bonded warehouseman.
Subsequently, respondent Tiong executed a

Guaranty Bond with the Luzon Surety Co to
secure the performance of his obligations as
such bonded warehouseman, in the sum of
P18,334, in case he was unable to return the
same.
25
Go Tiong, he, Gonzales, would have all actions

pending against Go Tiong dismissed.
Inasmuch as Go Tiong failed to settle the

accounts, Gonzales prosecuted his court
action
ISSUE:
Whether or not Plaintiffs claim is governed by the
Bonded Warehouse Act due to Go Tiongs act of
issuing to the former ordinary receipts, not
warehouse receipts?
RULING:
YES. SC ruled in favor Plaintiff.
Act No. 3893 provides that any deposit made

with Respondent Tiong as a bonded
warehouseman must necessarily be governed
by the provisions of Act No. 3893.
The kind or nature of the receipts issued by

him for the deposits is not very material much
less decisive since said provisions are not
mandatory and indispensable
Under Section 1 of the Warehouse Receipts

Act, the issuance of a warehouse receipt in
the form provided by it is merely permissive
and directory and not obligatory. . "Receipt",
under this section, can be construed as any
receipt issued by a warehouseman for
commodity delivered to him
As the trial court well observed, as far as Go
Tiong was concerned, the fact that the
receipts issued by him were not "quedans" is
no valid ground for defense because he was
the principal obligor.
Furthermore, as found by the trial court, Go

Tiong had repeatedly promised Plaintiff to
issue to him "quedans" and had assured him
that he should not worry; and that Go Tiong
was in the habit of issuing ordinary receipts
(not "quedans") to his depositors.
Furthermore, Section 7 of said law provides

that as long as the depositor is injured by a
breach of any obligation of the
warehouseman, which obligation is secured
by a bond, said depositor may sue on said
bond.
In other words, the surety cannot avoid

liability from the mere failure of the
warehouseman to issue the prescribed

receipt.
WAREHOUSE RECEIPT: Failure to mark nonnegotiable.

ROMAN V. ASIA BANKING CORPORATION
FACTS: U. de Poli, for value received, issued a
quedan convering the 576 bultos of tobacco to
the Asia Banking Corporation (claimant &
appellant). It was executed as a security for a
loan. The aforesaid 576 butlos are part and parcel
of the 2, 766 bultos purchased by U. de Poli from
Felisa Roman (claimant & appellee).
The quedan was marked as Exhibit D which is a
warehouse receipt issued by the warehouse of U.
de Poli for 576 bultos of tobacco. In the left
margin of the face of the receipt, U. de Poli
certifies that he is the sole owner of the
merchandise therein described. The receipt is
endorsed in blank; it is not markednonnegotiable or not negotiable.
Since a sale was consummated between Roman
and U. de Poli, Romans claim is a vendors lien.
The lower court ruled in favor of Roman on the
theory that since the transfer to Asia Banking
Corp. (ASIA) was neither a pledge nor a
mortgage, but a security for a loan, the vendors
lien of Roman should be accorded preference
over it.
However, if the warehouse receipt issued was
non-negotiable, the vendors lien of Roman
cannot prevail against the rights of ASIA as
indorsee of the receipt.
ISSUE: WON the quedan issued by U. de Poli in
favor of ASIA. is negotiable, despite failure to
mark it as not negotiable?
HELD: YES. The warehouse receipt in question is
negotiable. It recited that certain merchandise
deposited in the ware house por orden of the
depositor instead of a la orden, there was no
other direct statement showing whether the
goods received are to be delivered to the bearer,
to a specified person, or to a specified order or
his order. However, the use of por orden was
merely a clerical or grammatical error and that
the receipt was negotiable.
As provided by the Warehouse Receipts Act, in
case the warehouse man fails to mark it as nonnegotiable, a holder of the receipt who purchase
if for value supposing it to be negotiable may, at
his option, treat such receipt as imposing upon
the warehouseman the same liabilities he would
26
have incurred had the receipt been negotiable.

This appears to have given any warehouse
receipt not marked non-negotiable practically
the same effect as a receipt which, by its terms,
is negotiable provided the holder of such
unmarked receipt acquired it for value supposing
it to be negotiable, circumstances which
admittedly exist in the present case. Hence, the
rights of the indorsee, ASIA, are superior to the
vendors lien.
Bank of P.I. v. Herridge

FACTS:
The insolvent Umberto de Poli was for several
years engaged on an extensive scale in the
exportation of Manila hemp, maguey and other
products of the country.
He was also a licensed public warehouseman,
though most of the goods stored in his
warehouses appear to have been merchandise
purchased by him for exportation and deposited
there by he himself.chanr
In order to finance his commercial operations De
Poli established credits with some of the leading
banking institutions doing business in Manila at
that time, among them the Hongkong & Shanghai
Banking Corporation, the Bank of the Philippine
Islands, the Asia Banking Corporation, the
Chartered Bank of India, Australia and China, and
the American Foreign Banking Corporation.
De Poli opened a current account credit with the
bank against which he drew his checks in
payment of the products bought by him for
exportation.
Upon the purchase, the products were stored in
one of his warehouses and warehouse receipts
issued therefor which were endorsed by him to
the bank as security for the payment of his credit
in the account current.
When the goods stored by the warehouse
receipts were sold and shipped, the warehouse
receipt was exchanged for shipping papers, a
draft was drawn in favor of the bank and against
the foreign purchaser, with bill of landing
attached, and the entire proceeds of the export
sale were received by the bank and credited to
the current account of De Poli.chanroble
De Poli was declared insolvent by the Court of

First Instance of Manila with liabilities to the
amount of several million pesos over and above
his assets. An assignee was elected by the
creditors and the election was confirmed by the
court
Among the property taken over the assignee was
the
merchandise
stored
in
the
various
warehouses of the insolvent. This merchandise
consisted principally of hemp, maguey and
tobacco.
The various banks holding warehouse receipts
issued by De Poli claim ownership of this
merchandise under their respective receipts,
whereas the other creditors of the insolvent
maintain that the warehouse receipts are not
negotiable, that their endorsement to the present
holders conveyed no title to the property, that
they cannot be regarded as pledges of the
merchandise inasmuch as they are not public
documents
and
the
possession
of
the
merchandise was not delivered to the claimants
and that the claims of the holders of the receipts
have no preference over those of the ordinary
unsecured creditors.law lib
ISSSUE:
Whether or not the warehouse receipts issued are
negotiable?
HELD:
Yes,
a
warehouseman
who
deposited
merchandise in his own warehouse, issued a
warehouse receipts therefore and thereafter
negotiated the receipts by endorsement. The
receipt recites that the goods were deposited
por orden of the depositor, the warehouseman,
but contained no statement that the goods were
to be delivered to the bearer of the receipts or to
a specified person. It is in the form of a
warehouse
receipts
and
was
not
mark
nonnegotiable.
Therefore the receipts was negotiable warehouse
receipts and the words por orden must be
construed to mean to the order.
PNB v PRODUCERS WAREHOUSE

ASSOCIATION
FACTS:
27
PNB (P) is a bank in PH, Producers

Warehouse Association (D) is a domestic
corporation doing general warehouse
business and Phil. Fiber and Produce
Company (Fiber) is another domestic
corporation.
D and Fiber entered into a written
contract, wherein Fiber would act as the
general manager of the business of D and
that Fiber would exercise a general and
complete supervision over the
management of the business of D.
Nov and Dec 1918 D issued negotiable
quedans to Fiber for 15k++ piculs of
Copra, which the terms states that
o D agreed to deliver that amount of
copra to Fiber or its order
o D will deliver the packages noted
therein upon the surrender of the
warrant to D
o No transfer of interest/ownership
will be recognized unless registered
in the books of D
o The words negotiable warrant
were printed in red ink in the
quedan
Fiber then arranged for overdraft with P for
P1M and to secure it, the subject quedans
were endorsed in blank and delivered by
Fiber to P, which became the owner and
holder thereof.
P later on requested D the delivery of
copra described in the quedans, however,
D refused to comply despite repeated
requests of P, stating that it could not be
delivered since the goods mentioned are
not in the warehouse.
D stated that the quedans were invalid
and wrongfully issued and that the copra
was not in its warehouse
LC ruled in favor of D
ISSUE: WoN the quedans were validly negotiated

to P
SC: YES!
-
The quedans have legal force and effect

o They were duly executed by Wicks,
as treasurer and Torres as
warehouseman, for and in behalf of
D.
o The said quedans were endorsed in
blank and physical possession was
delivered to P as collateral security
for the overdraft of Fiber Company
and
o That the quedans were in
negotiable form.
D cannot now deny the existence of the
quedans
CRUZ vs. VALERO

Facts:
Valero is president of the Luzon Sugar Co. while
appellant Cruz had a share amounting to
1,544.38 piculs export centrifugal sugar, which
was exchanged for an equal amount of domestic
centrifugal sugar. Cruz deposited in the Luzon
Sugar Company's warehouse within its
compound, with the obligation on its part to
deliver it to the appellant on demand, that the
appellant was entitled to 238.20 piculs of
domestic centrifugal sugar as his share in the
1940-1941 crop. On different dates, the appellant
had withdrawn several piculs of sugar, reducing
reducing the number of gallons of molasses.
Cruz claims that on December 1941, the Luzon
Sugar Company (LSC) did not have in its
warehouse the sugar he had stored in its
warehouse for safekeeping and the number of
gallons of molasses he had left in its possession
contained in cylindrical tanks, because the Valero
had disposed of the same without the knowledge
and consent of appellant and that when the
appellant wanted to withdraw his sugar from the
warehouse of LSC, the amount of sugar stored in
the warehouse was not manufactured by the
Luzon Sugar Company but by a different
company.
This was denied by LSC, contending that it had
sufficient amount of sugar manufactured by it
and was in a position to deliver sugar. Its
warehouse was however bombed by Japanese
and the warehouse damaged by shrapnel and
some piculs of centrifugal sugar were looted,
some taken by the Japanese after the occupation
and the remaining brought by the Japanese Army
to Northern Luzon. Thus it became impossible the
deliver the centrifugal sugar and molasses
belonging of Cruz.
Issue: Whether or not the LSC still has the
obligation to deliver the same amount and kind of
sugar stored in its warehouse.
HELD: Since there was enough sugar to cover
and deliver 1,081.79 piculs of domestic, reserve
and additional sugar belonging to the Cruz who,
according to the milling contract, was in duty
bound to take delivery thereof at the warehouse,
since it was established that the LSC compound
was bombed on December 1941 by the Japanese
who also occupied it from 1 January to 20
February 1942, the loss was due to the war or to
a fortuitous event and therefore, the obligation of
the depositary to deliver what has been
deposited in him has been extinguished by the
28
happening of a fortuitous event, which in this

case, is the pacific war. The judgment appealed
from is affirmed.
This is an appeal from a decision of the Court of
First Instance of Nueva Ecija which orders the
defendant to pay to the plaintiff the sum of
P3,000, with interest thereon at the rate of 6%
per annum from June 26, 1940, and the costs of
action.
ESTRADA V. CAR
DMG INC. vs CONSOLIDATED TERMINALS
INC.
63 OG 10
Facts:
DMG ordered replacement parts for diesel

conversion engine from Germany.
Upon arrival in Manila, the shipment was
placed in the warehouse of Consolidated
Terminals.
When DMG demanded for the delivery of the
goods, Consolidated stated that it was already
released and delivered to DMG through a
delivery permit which was presented by a
certain Sandoval authorized by Alteza.
DMG contends that it has no such employees.
It demanded for the payment of such goods.
Issue:
Whether or not Consolidated is liable to DMG?
Held:
Consolidated becomes liable under Section 10 of

the WRL for misdelivery. On the contention that
DMG was negligent for allowing such permits to
fall into the hands of unauthorized persons,
contributory negligence is not one of the
defenses specified in its answer. In order to for it
to be a defense, it must previously show to have
been committed. The burden of proof is in himself
who alleges it as a defense. It cannot be inferred
from the fact that persons other than the
consignee or owner were able to take possession
of the shipping documents or the permit papers
which were supposed to be in the latters custody.
CONSOLIDATED vs ARTEX
Facts:
Consolidated Terminals Inc (CTI)
operated a customs warehouse in Manila. It
received 193 bales of high density compressed
raw cotton worth P99k. It was understood that CTI
would keep the cotton on behalf of Luzon
Brokerage until the consignee Paramount Textile
had opened the corresponding letter of credit in
favor of Adolph Hanslik Cotton. By virtue of
forged permits, Artex was able to obtain the bales
of cotton and paid P15k.
Issue:
W/N CTI as warehouseman was
entitled to the possession of the bales of cotton?
Ruling: No. CTI had no cause of action. It was not
the owner of the cotton. It was not a real party of
interest in the case. CTI was not sued for
damages by the real party in interest.
LUA KIAN VS. MANILA RAILROAD
Yes, Consolidated is liable to DMG.

Consolidated did not faithfully comply with its
duties and obligations. Section 9 of the
Warehouse Receipts Law does not deem it
sufficient as prerequisite for delivery the mere
presentment of the receipt. It further requires
that the person to whom the goods should be
delivered is one who is either himself entitled to
the propertyor who has written authority from
the person so entitled. Presentment of the
receipt must be couple with ascertainment that
the person so presenting it is rightfully entitled to
take delivery of the goods covered by the receipt.
Consolidated did not ascertain the identity of
Sandoval and Alteza. They have not called up
DMG first and ascertained the genuineness of the
authority in writing before delivering the articles
considering that they did not know either
Sandoval or Alteza.
Facts: Manila Railroad received into its custody a

shipment of cases of milk, of which 3.171 wwere
marked for Cebu and 1,829 for Lua Kia but
according to the bills of lading in Manila Railroad's
possession, Lua Kia was entitled to 2000 cases
and Cebu was entitled to 3000 cases. Manila
Railroad delivered 1,913 cases to Lua Kia, which
is 87 cases short in the bill of lading.
Issue: WoN manila RailRoad is liable to Lua Kia for
the
underlivered
cases
of
milk
Ruling. Yes. The legal relationship between an
arrastre operator and the consignee is akin to
that of a depositor and warehouseman. As
custodian of the goods discharged from the
vessel, it was A's duty like that of nay other
depositary to take good care of the goods and
turn them over to the party entitled to their
29
possession. Under this particular set of

circumstances, A should have held delivery
because of the discrepancy between the bill of
lading and the markings and conducted its own
investigation not unlike that under Sectopm 18 of
the Warehouse Receipts law, or called upon the
parties to interplead such ias in case under
Section 17 of the same law, in order to determint
the rightful owner of the goods.
AMERICAN FOREIGN BANKING

CORPORATION vs HERRIDGE
G.R.No.21005, December 20, 1924
The intention of the parties to the

transaction must prevail against such a technical
objection to the sufficiency of the description of
the tobacco. It might be different if there had
been Cagayan tobacco in the warehouse at the
time of the issuance of the quedan, or if there
were any doubt as to the identity of the tobacco
intended to be covered by the quedan.
The quedan was a negotiable warehouse
receipt which was duly issued and delivered by
the debtor U. de Poli to American Foreign Banking
Corporation and it divested him of his title to said
tobacco and transferred the position and the title
thereof
the
American
Foreign
Banking
Corporation.
Facts:
U. de Poli was a debtor of American
Foreign Banking Corporation. He issued a
warehouse receipt, commonly known as quedan.
The warehouse receipt of the mercahndise
covered thereby was described as Cagayan
tabacco en rama. It was indorsed in blank by U.
De Poli to American Foreign Banking Corporation
As security for an overdraft. U. De Poli became
insolvent and the bank presented its claim for the
delivery of the tobacco covered in the warehouse
receipt.
However, it was found that the tobacco
had come from Isabela and not from Cagayan,
and the banks claim was disputed by other
creditors of the insolvent on the ground that,
among others, that the tobacco claimed, being
Isabela tobacco, was not correctly described in
the warehouse receipt and that, therefore, the
receipt was ineffective as against the general
creditors.
Issue: Whether the use of the word Cagayan
instead of Isabela in describing the tobacco in
the quedan renders the quedan null and void as
negotiable warehouse receipt for the tobacco
intended to be covered by it.
Ruling:
The identity of the tobacco was sufficiently
established by the evidence. In the warehouse,
there was no other tobacco stored nut only the
Isabela tobacco. The debtor also said that Isabela
tobacco was the tobacco which he transsfered to
American Foreign Banking Corporation. Aside
from that, when the subaccountant of the bank
went to the warehouse to check which tobacco
was covered by the warehouse receipt, the
assignee and one of his accountants pointed to
him the Isabela tobacco.
Topic: Warehouse Receipts Law; sec. 38

PNB v. Atendido
FACTS:
Laureano Atendido obtained from PNB a
loan of P3k and pledged 2000 cavans of
palay to guarantee payment which were
then deposited in the warehouse of Cheng
Siong Lam & Co and to that effect the
borrower endorsed in favour of the bank
the corresponding warehouse receipt.
Before the maturity of the loan, the 2000
cavans of palay disappeared for unknown
reasons in the warehouse. When the loan
matured, the borrower failed to pay
obligation
Defendant claimed that the warehouse
receipt covering the palay which was
given as security having been endorsed in
blank in favour of the bank and the palay
having been lost or disappeared, he
thereby became relieved of liability.
ISSUE: Whether the surrender of the warehouse
receipt covering 2000 cavans of palay given as
security, endorsed in blank, to PNB, has the effect
of transferring their title or ownership OR it
should be considered merely as a guarantee to
secure the payment of the obligation of
Defendant?
HELD:
Nature of contract is Pledge supported by
the stipulations embodied in the contract
signed by Defendant when he secured the
loan from PNB.
The 2000 cavans of palay covered by the
warehouse receipt were given to PNB only
as a guarantee to secure the fulfilment by
Defendant in his obligation. This clearly
appears in the contract wherein it is
30
expressly stated that said 2000 cavanes of

palay were given as collateral security.
It follows that by the very nature of the
transaction its ownership remains with the
pledgor subject only to foreclosure in case
of non-fulfillment of the obligation.
By this we mean that if the obligation is
not paid upon maturity the most that the
pledge can do is to sell the property and
apply the proceeds to the payment of the
obligation and to return the balance, if
any, to the pledgor. This is the essence of
the contract, for, according to law, a
pledge cannot become the owner of, nor
appropriate to himself the thing given in
pledge.
If by the contract of pledge, the pledgor
continues to be the owner of the thing
pledged during the pendency of the
obligation, it stands to reason that in case
of loss of the property, the loss should be
borne by the pledgor.
The fact that the warehouse receipt
covering
the
palay was delivered,
endorsed in blank, to the bank does not
alter the situation, the purpose of such
endorsement being merely to transfer the
juridical possession of the property to the
pledge and to forestall any possible
disposition thereof on the part of the
pledgor.
Where a warehouse receipt or quedan is
transferred or endorsed to a creditor only
to secure the payment of a loan or debt,
the transferee or endorsee does not
automatically become the owner of the
goods covered by the warehouse receipt
or quedan but he merely retains the right
to keep and with the consent of the owner
to sell them so as to satisfy the obligation
from the proceeds of the sale. This is for
the simple reason that the transaction
involved is not a sale but only a mortgage
or pledge, and that if the property covered
by the quedans or warehouse receipts is
lost without fault or negligence of the
mortgagee or pledge or the transferee or
endorsee of the warehouse receipt or
quedan, then said goods are to be
regarded as lost on account of the real
owner, mortgagor or pledgor.
Plaintiff is a corporation engaged in business

generally, and that the Defendant HSBC is a
foreign bank authorized to engage in the
banking business in the Philippines.
On June 25, 1926, Otto Ranft called the office

of the Plaintiff to purchase hemp (abaca), and
he was offered the bales of hemp as
described in the contested negotiable
quedans.
The parties agreed to the aforesaid price, and

on the same date the quedans, together with
the covering invoice, were sent to Ranft by
the Plaintiff, without having been paid for the
hemp, but the Plaintiff's understanding was
that the payment would be made
against the same quedans,
and it appear that in previous

transaction of the same kind between
the bank and the Plaintiff, quedans
were paid one or two days after their
delivery to them.
Immediately these Quedans were pledged by

Otto Ranft to the Defendant HSBC to secure
the payment of his preexisting debts to the
latter.
The baled hemp covered by these warehouse

receipts was worth P31,635; 6 receipts were
endorsed in blank by the Plaintiff and Otto
Ranft, and 2 were endorsed in blank, by Otto
Ranft alone
On the evening of the said delivery date, Otto

Ranft died suddenly at his house in the City of
Manila.
When the Plaintiff found out, it immediately

demanded the return of the quedans, or the
payment of the value, but was told that the
quedans had been sent to the herein
Defendant as soon as they were received by
Ranft.
Shortly thereafter the Plaintiff filed a claim for

the aforesaid sum of P31,645 in the intestate
proceedings of the estate of the deceased
Otto Ranft, which on an appeal from the
decision of the committee on claims, was
allowed by the CFI Manila.
In the meantime, demand had been made by

the Plaintiff on the Defendant bank for the
return of the quedans, or their value, which
MARTINEZ V. PNB
Siy Cong Bien vs HSBC
FACTS
31
demand was refused by the bank on the

ground that it was a holder of the quedans in
due course.
person to whom a negotiable receipt

has been duly negotiated acquires
thereby:
(a) Such title to the goods as the
person negotiating the receipt to
him had or had ability to convey to
a purchaser in good faith for value,
and also such title to the goods as
the depositor of person to whose
order the goods were to be
delivered by the terms of the
receipt had or had ability to convey
to a purchaser in good faith for
value, and. . . .
ISSUE
Whether or not the Quedans endorsed in blank

gave the HSBC rightful and valid title to the
goods?
HELD
Therefore, the bank is not responsible for the

loss; the negotiable quedans were duly
negotiated to the bank and as far as the
record shows, there has been no fraud on the
part of the Defendant.
Moreover, Plaintiff is estopped to deny that

the bank had a valid title to the quedans for
the reason that the Plaintiff had voluntarily
clothed Ranft with all the attributes of
ownership and upon which the Defendant
bank relied. Subsequently, Plaintiff in this
case has suffered the loss of the quedans, but
as far as the court sees it, there is now no
remedy available to the Plaintiff equitable
estoppel place the loss upon him whose
misplaced confidence has made the wrong
possible as ruled in National Safe Deposit vs.
Hibbs (a US case)
YES. SC ruled in favour of Defendant HSBC.
It may be noted,
o
first, that the quedans in question

were negotiable in form;
second, that they were pledged by

Otto Ranft to the Defendant bank to
secure the payment of his preexisting
debts to said bank;
third, that such of the quedans as were

issued in the name of the Plaintiff were
duly endorsed in blank by the Plaintiff
and by Otto Ranft;
WAREHOUSE RECEIPT: Who may negotiate a

receipt?
and fourth, that the two remaining

quedans which were duly endorsed in
blank by him.
FACTS: Defendant issued on several dates

warehouse receipts, which were substantial in
form and contained the terms prescribed by law,
to Rosa Sy and Teresita Ng. Subsequently, some
of the warehouse receipts were negotiated and
indorsed to Luis Ramos and Cresencia Zoleta.
Ramos and Zoleta then used the quedans as
security for loans obtained by them from PNB.
Upon maturity, both failed to pay, prompting PNB
to demand the delivery of the sugar covered by
the quedans indorsed to it by Ramos and Zoleta.
Noahs refused to comply with the demand, PNB
filed a case for Specific Performance.
The bank had a perfect right to act as it did,

and its action is in accordance with sections
47, 38, and 40 of the Warehouse Receipts Act
However, the pertinent provision regarding

the rights the Defendant bank acquired over
the aforesaid quedans after indorsement and
delivery to it by Ranft, is found in section 41
of the Warehouse Receipts Act (Act No. 2137):
SEC. 41. Rights of person to whom a

receipt has been negotiated. A
PNB v. NOAHS ARK SUGAR REFINERY
The main contention of Noahs was that it was

still the owner of the subject quedans and the
quantity of sugar represented thereon because
the corresponding payment of Sy and Ng through
checks were dishonoured and so they did not
32
acquire ownership. The it follows that the

subsequent indorsers and plaintiff itself did not
acquire a better right of ownership than the
original vendees or first indorsers.
In the answer of Sy and Ng, they alleged that the
transaction
between
them
and
Noahs,
concerning the quedans, was bogus and
simulated. It was part of a complex banking
scheme and financial maneuvers to avoid VAT
payment and other BIR assessments.
ISSUES:
1. WON the non-payment of the purchase price
for the sugar stock evidenced by the quedans,
rendered invalid the negotiation of said quedans
by Sy and Ng to indorsers Ramos and Zoleta and
the subsequent negotiation of Ramos and Zoleat
to PNB?
2. WON PNB as indorsee of quedans was entitled
to
delivery
of
sugar
stocks
from
the
warehouseman, Noahs Ark?
HELD: The validity of the negotiation by RNS
Merchandising and St. Therese Merchandising to
Ramos and Zoleta, and by the latter to PNB to
secure a loan cannot be impaired by the fact that
the negotiation between Noah's Ark and RNS
Merchandising and St. Therese Merchandising
was in breach of faith on the part of the
merchandising firms or by the fact that the owner
(Noah's Ark) was deprived of the possession of
the same by fraud, mistake or conversion of the
person to whom the warehouse receipt/quedan
was subsequently negotiated if (PNB) paid value
therefor in good faith without notice of such
breach of duty, fraud, mistake or conversion. (See
Article 1518, New Civil Code). And the creditor
(PNB) whose debtor was the owner of the
negotiable document of title (warehouse receipt)
shall be entitled to such aid from the court of
appropriate jurisdiction attaching such document
or in satisfying the claim by means as is allowed
by law or in equity in regard to property which
cannot be readily attached or levied upon by
ordinary process. (See Art. 1520, New Civil Code).
If the quedans were negotiable in form and duly
indorsed to PNB (the creditor), the delivery of the
quedans to PNB makes the PNB the owner of the
property covered by said quedans and on deposit
with Noah's Ark, the warehouseman. (See Sy
Cong Bieng & Co. vs. Hongkong & Shanghai Bank
Corp., 56 Phil. 598).
of
RNS
Merchandising
and
St.
Therese
Merchandising, in breach of trust, fraud or
conversion against Noah's Ark.
PNB v SAYO, JR.
FACTS
-
ISSUE: WoN PNB is entitled to the stocks of sugar

as the endorsee of the quedans, without paying
the lien
SC: YES
-
In the case at bar, PNB's right to enforce the

obligation of Noah's Ark as a warehouseman, to
deliver the sugar stock to PNB as holder of the
quedans, does not depend on the outcome of the
third-party complaint because the validity of the
negotiation transferring title to the goods to PNB
as holder of the quedans is not affected by an act
Noahs Ark Sugar Refinery (Noahs) issued

several warehouse receipts (quedans),
which were negotiated to Rosa, RNS and
St. Therese (vendees), which were again
negotiated to Luis and Cresencia, which
they (Luis and Cresencia) endorsed to PNB
as security for 2 loan agreements.
o Transfer of quedans Noahs
Rosa, RNS and St. Therese Luis
and Cresencia PNB
Luis and Cresencia failed to pay their loans
hence PNB demanded delivery of sugar
stocks, however, Noahs Ark refused,
alleging ownership thereof.
Noahs Ark contended that the agreement
made by them with the vendees was
stopped since the bank dishonored the
payments made by the vendees to Noahs
Ark. As such, the vendees and the
endorsers of the quedans never acquired
ownership thereof.
Noahs Ark claimed for warehousemans
lien for the storage of the goods.
LC granted lien
PNB appealed
While PNB is entitled to the stocks of

sugar as the endorsee of the quedans,
delivery to it shall be effected only upon
payment of the storage fees.
The warehouseman is entitled to the
warehousemans lien that attaches to the
goods invokable against anyone who
claims a right of possession thereon.
However, in this case, the lien was lost
when R refused to deliver the goods,
which were not anchored to a valid excuse
(i.e. non satisfaction of W/Hman Lien) but
on an adverse claim of ownership.
The loss of W/H Mans lien does not
necessarily mean the extinguishment of
the obligation to pay the W/H fees and
charges which continues to be a personal
liability of the owners, PNB in this case.
However, such fees and charges have
ceased to accrue from the date of the
33
rejection by Noahs Ark to heed the lawful

demand for the release of the goods.
For value received we hereby guarantee

compliance with the terms and conditions
as outlined in the above contract.
2) Thereafter Machetti constructed the building
and, as the work progressed, payments were
made to him from time to time, until the entire
contract price, except the sum of P4,978.08, was
paid.
3) Later on it was found that the work had not
been carried out in accordance with the
specifications which formed part of the contract
and that the workmanship was not of the
standard required, and thus the Hospicio
presented a counterclaim for damages for the
partial noncompliance with the terms of the
agreement abovementioned, in the total sum of
P71,350.
4) During the duration of the trial however,
Machetti, declared insolvent and an order was
entered suspending the proceeding in the present
case. Thus, the Hospicio filed a motion asking
that the Fidelity and Surety Company be made
cross-defendant to the exclusion of Machetti and
that the proceedings be continued as to said
company, which motion was granted and
subsequently, the Hospicio filed a complaint
against the Fidelity and Surety Company for a
judgement against the company upon its
guaranty. The CFI rendered judgment against
Fidelity.
ISSUE: Whether or not Fidelity is answerable to
the Hospicio as guaranty of Machetti.
HELD:
GUARANTY AND SURETYSHIP
MACHETTI v HOSPICIO DE SAN JOSE

FACTS:
1) In 1916, Romulo Machetti, agreed to construct
a building in Manila for the Hospicio de San Jose,
for P64,000. One of the conditions of the
agreement was that the contractor should obtain
the "guarantee" of the Fidelity and Surety
Company of the Philippine Islands to the amount
of P128,800. Said contract read:
A) Guarantor implies an undertaking of guaranty,

as distinguished from suretyship and in this case,
it appears that the contract is the guarantor's
separate undertaking in which the principal does
not join, that its rests on a separate consideration
moving from the principal and that although it is
written in continuation of the contract for the
construction of the building, it is a collateral
undertaking separate and distinct from the latter.
All of these circumstances are distinguishing
features of contracts of guaranty.
B) On the other hand, a surety undertakes to pay
if the principal does not pay, the guarantor only
binds himself to pay if the principal cannot pay.
The one is the insurer of the debt, the other an
insurer of the solvency of the debtor. This latter
liability is what the Fidelity Company assumed in
this case. Thus, Fidelity having bound itself to pay
only the event its principal, cannot pay it follows
that it cannot be compelled to pay until it is
34
shown that Machetti is unable to pay. The

judgment appealed from is therefore reversed.
FACTS: Respondent entered into contract with

SOB for construction of Therapy Bldg. SOB
demanded bonds to secure performance. Project
was delayed
We, MRC et. al, as principal and the Standard

Insurance Co. Inc xxx as surety does not suffice
to make contract binding on the MRC unless it is
shown that the same was authorized by it.
Neither the signature nor the acknowledgment
indicates that the act of that of the MRC or that
the latter had empowered MPS to execute the
bond in its behalf. The result would be that the
appeal bond is void and unenforceable for lack of
principal debtor or obligation.
DOCTRINE:
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 the person binds
himself solidarily with the principal debtor, the
contract is called suretyship.
While the surety bound itself to pay jointly and

severally, such an undertaking presupposes that
the obligation is to be enforceable against
someone else besides the surety and the latter
could always claim that it was never its intention
to be the sole person obliged thereby.
PHIL EXPORT v VP EUSEBIO
That the guarantee issued by the

petitioner is unconditional and irrevocable does
not make the petitioner a surety. As a guaranty, it
is still characterized by its subsidiary and
conditional quality because it does not take effect
until
the
fulfillment
of
the
condition.
Unconditional guarantee is still subject to the
condition that the principal debtor should default
in his obligation first before resort to the
guarantor could be had.
MANILA RAILROAD v ALVENDIA
Facts:
CFI sentenced Manila Railroad Co. (MRC) and

Manila Port Service (MPS) to pay Bataan
Refining Corp.
MPS filed a notice of appeal accompanied by
an appeal bond.
Noticing that the appeal bond was only
executed by MPS signed by the manager and
Standard Insurance (as surety) signed by the
vice-president, the trial court rejected the
record on appeal.
It is contended by MRC that the MPS, being a
mere subsidiary or department of MRC,
without legal personality of its own, the bond
filed by the former should be a bond for the
MRC and that the appeal of the latter should
have been given due course.
Issue: Whether or not the notice of appeal should

be accepted?
Held:
No, the notice of appeal should be rejected.
Where there is no principal debtor in the
appeal bond, it is void and unenforceable.
The mere recital in the body of the instrument,
IFC v IMPERIAL TEXTILE

Facts: IFC extended to PPIC a loan of
US$7,000,000.00, payable in sixteen (16)
semi-annual
installments
of
US$437,500.00 each, beginning June 1,
1977 to December 1, 1984. On December
17, 1974, a Guarantee Agreement was
executed with Imperial Textile Mills, Inc.
(ITM). ITM agreed to guarantee PPIC's
obligations under the loan agreement.
PPIC paid the installments due on June 1,
1977, December 1, 1977 and June 1,
1978. Despite the rescheduling of the
installment payments, however, PPIC
defaulted. IFC demanded ITM and
Grandtex, as guarantors of PPIC, to pay
the outstanding balance. However, the
outstanding balance remained unpaid.
Issue: The issue is whether ITM is a surety, and
thus solidarily liable with PPIC for the payment of
the loan.
Ruling: Yes. The Agreement uses guarantee and
guarantors, prompting ITM to base its argument
on those words. This Court is not convinced that
the use of the two words limits the Contract to a
mere guaranty. The specific stipulations in the
Contract show otherwise.
While referring to ITM as a guarantor, the
Agreement
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.
Indubitably therefore, ITM bound itself to be
solidarily.
35
SEVERINO v SEVERINO
F: upon the death of x, who left considerable
property, a litigation ensued between c, xs
widow, and other heirs of x. a compromise was
effected by which d, a son of x, took over the
property pertaining to the estate of x at the same
time agreeing to pay P100k to c, payable, first in
P40k cash upon the execution of the document of
compromise and the balance, in three equal
installments. G. affixed his name as guarantor
Upon ds failure to pay the balance, c instituted
an action against d and g, the latter contending
that he received nothing for affixing his signature
as guarantor to the contract and that in effect the
contract was lacking in consideration as to him.
Issue: is there a consideration for the guaranty?
Ruling: a guarantor or surety is bound by the
same consideration that makes the contract
effective between the principal parties thereto.
The compromise and dismissal of lawsuit is
recognized in law as a valuable consideration;
and the dismissal of the action which c instituted
against d was an adequate consideration to
support the promise on the part of d to pay the
sums stipulated in the contract subject of the
action
It is neither necessary that the guarantor or
surety should receive any part of the benefit, if
such there be accruing to his principal. The true
consideration of this contract was the detriment
suffered by c in the former action in dismissing
the proceeding and it is immaterial that no
benefit may have accrued either to the principal
or his guarantor
LEE v CA
FACTS: PBCOM was furnished by a board
resolution stating that they authorize President,
Mr. Charles Lee, and the Vice-President and
General Manager, Mr. Mariano A. Sio to apply for,
negotiate and secure the approval of commercial
loans
and
other
banking
facilities
and
accommodations, from the Philippine Bank of
Communications, in such sums as they shall
deem advantageous, the principal of all of which
shall not exceed the total amount of TEN MILLION
PESOS (P10,000,000.00), Philippine Currency,
plus any interests.
Mico availed of the loans and as security for the
loans, MICO through its Vice-President and
General Manager, Mariano Sio, executed on May
16, 1979 a Deed of Real Estate Mortgage over its

properties situated in Pasig, Metro Manila.
On March 26, 1979 Charles Lee, Chua Siok Suy,
Mariano Sio, Alfonso Yap and Richard Velasco, in
their personal capacities executed a Surety
Agreement in favor of PBCom whereby the
petitioners jointly and severally, guaranteed the
prompt payment on due dates of overdrafts,
promissory notes, discounts, drafts, letters of
credit, bills of exchange, trust receipts, and other
obligations of every kind and nature, for which
MICO may be held accountable by PBCom. It was
provided, however, that the liability of the
sureties shall not at any one time exceed the
principal amount of Three Million Pesos plus
interest, costs, losses, charges and expenses
including attorneys .
On July 14, 1980, petitioner Charles Lee, in his
capacity as president of MICO, wrote PBCom and
applied for an additional loan in the sum of Four
Million Pesos). The loan was intended for the
expansion and modernization of the companys
machineries. Upon approval of the said
application for loan, MICO availed of the
additional loan of Four Million Pesos (as
evidenced by Promissory Note TA No. 094.
As per agreement, the proceeds of all the loan
availments were credited to MICOs current
checking account with PBCom. To induce the
PBCom to increase the credit line of MICO,
Charles Lee, Chua Siok Suy, Mariano Sio, Alfonso
Yap, Richard Velasco and Alfonso Co (hereinafter
referred to as petitioners-sureties), executed
another surety agreement in favor of PBCom on
July 28, 1980, whereby they jointly and severally
guaranteed the prompt payment on due of
overdrafts, promissory notes, discounts, drafts,
letters of credit, bills of exchange, trust receipts
and all other obligations of any kind and nature
for which MICO may be held accountable by
PBCom. It was provided, however, that their
liability shall not at any one time exceed the sum
of Seven Million Five Hundred Thousand Pesos
including interest, costs, charges, expenses and
attorneys fees incurred by MICO in connection
therewith.
Upon maturity of all credit availments obtained
by MICO from PBCom, the latter made a demand
for payment. For failure of petitioner MICO to pay
the obligations incurred despite repeated
demands,
private
respondent
PBCom
extrajudicially foreclosed MICOs real estate
mortgage and sold the said mortgaged properties
in a public auction sale held on November 23,
1982 and PBCom won and applied the proceeds
of the purchase price at public auction of Three
36
Million Pesos to the expenses of the foreclosure,

interest and charges and part of the principal of
the loans, leaving an unpaid balance of Five
Million Four Hundred Forty-One Thousand Six
Hundred Sixty-Three Pesos and Ninety Centavos
exclusive of penalty and interest charges.
Aside from the unpaid balance, MICO likewise had
another standing obligation and PBCom then
demanded the settlement of the aforesaid
obligations from herein petitioners-sureties who,
however,
refused
to
acknowledge
their
obligations to PBCom under the surety
agreements.
Hence, PBCom filed a complaint with prayer for
writ of preliminary attachment, alleging that
MICO was no longer in operation and had no
properties to answer for its obligations. PBCom
further alleged that petitioner Charles Lee has
disposed or concealed his properties with intent
to defraud his creditors. Except for MICO and
Charles Lee, the sheriff of the RTC failed to serve
the summons on herein petitioners-sureties since
they were all reportedly abroad at the time. An
alias summons was later issued but the sheriff
was not able to serve the same to petitioners
Alfonso Co and Chua Siok Suy who was already
sickly at the time and reportedly in Taiwan where
he later died.
Petitioners contend that there was no proof that
the proceeds of the loans or the goods under the
trust receipts were ever delivered to and received
by MICO. But the record shows otherwise.
Petitioners-sureties
further
contend
that
assuming that there was delivery by PBCom of
the proceeds of the loans and the goods, the
contracts were executed by an unauthorized
person, more specifically Chua Siok Suy who
acted fraudulently and in collusion with PBCom to
defraud MICO.
ISSUE: Whether or not the individual petitioners,
as sureties, may be held liable under the two (2)
Surety Agreements executed on March 26, 1979
and July 28, 1980.
RULING: Yes.
The court ruled that it is proven that MICO
received the proceeds of the loan and that
PBCom has the right to to believe that Chua Siok
Suy
based on the Certificate issued by the
Sectretary of MICO.
The court ruled that as regards petitionerssureties contention that they obtained no
consideration
whatsoever
on
the
surety
agreements, the court pointed that the
consideration for the sureties is the very

consideration for the principal obligor, MICO, in
the contracts of loan.
In the case of Willex Plastic Industries
Corporation vs. Court of Appeals, we ruled that
the consideration necessary to support a
surety obligation need not pass directly to
the surety, a consideration moving to the
principal alone being sufficient. For a
guarantor or surety is bound by the same
consideration that makes the contract
effective between the parties thereto.
It is not necessary that a guarantor or
surety should receive any part or benefit, if
such there be, accruing to his principal.
DE GUZMAN v SANTOS
FACTS:
Jerry O. Toole, Antonio Abad and Anastacio
Santos formed a general mercantile
partnership
Philippine
American
Construction Company with a capital of
P14k.
P10k of which were taken by way of loan
from Paulino Candelaria. The partnership
and the co-partners undertook and bound
themselves to pay jointly and severally
the indebtedness.
Upon default, Paulino filed civil case
against Phil-Am Construction Company
and co-partners for the recovery of loan
TC ordered all Defendants to pay jointly
and severally; CA affirmed
Upon filing of complaint, Paulino obtained
a writ of attachment against Defendants.
The Sheriff attached properties of 3
partners. Partnership offered to post a
bond of P10k.
Phil-Am
Construction
Company
as
principal then represented by the partner
Antonio Abad, Santiago Lucero and
Meliton Carlos as guarantors executed a
bond of P10k in favour of Paulino for the
lifting of the attachment.
After issuance of writ of execution, Sheriff
found no property of the judgment
debtors. Paulino moved for the issuance of
writ of execution against the guarantors of
Defendants.
Guarantor-Plaintiff
and
co-guarantor
Meliton Carlos later paid the creditor and
were able to recover from Antonio Abad a
sum of P3800, which they divided equally.
It appeared that the payment made by the
plaintiff to Paulino was reduced to the sum
of P3665. Plaintiff now demands from
Anastacio Santos the return of the
aforesaid sum but Anastacio refused.
37
ISSUE: Whether or not Defendant is bound to pay

Plaintiff what he had advanced to Paulino?
HELD: YES
Article 1838 provides that any guarantor
who pays for the debtor shall be
indemnified by the latter even should the
guaranty have been undertaken without
the knowledge of the debtor.
IN THIS CASE: The guarantor was the
deceased
Santiago
Lucero,
now
represented by the plaintiff in her capacity
as judicial administratrix, and the debtor is
the defendant-appellant. Applying the
provision cited, it is obvious that the
Defendant is legally bound to pay what
the Plaintiff had advanced to the creditor
upon the judgment, notwithstanding the
fact that the bond had been given without
his knowledge.
Any person who makes a payment for
the account of another may recover
from the debtor the amount of the
payment, unless it was made against
the express will of the latter. In the
latter case, he can only recover from
the debtor in so far as the payment
has been beneficial to the latter.
It is evident that Defendant is bound to
pay to the plaintiff what the latter had
advanced to the creditor upon the
judgment, and this is more so because it
appears that although Lucero executed
the
bond
without
his
knowledge,
nevertheless he did not object thereto or
repudiate the same at any time.
MUNICIPALITY OF GASAN v MARASIGAN
FACTS:
The plaintiff-appellee municipality, on December
9, 1930, put up at auction the privilege of
gathering whitefish spawn in its jurisdictional
waters for the period of one year from January 1,
1931. Two bidders, Graciano Napa and Miguel
Marasigan, appeared at the auction. Graciano
Napa proposed to accept the privilege by paying
P5,000 therefor, Miguel Marasigan proposed to do
likewise, but by paying only P4,200.
series of 1925, of the council of said plaintiff,

Miguel Marasigan filed the bond, Exhibit B,
subscribed on December 15, 1930, by the
defendants-appellants Angel R. Sevilla and
Gonzalo L. Luna, who bound themselves in said
document to pay to the plaintiff the sum of
P8,400, if Miguel Marasigan failed to deposit onefourth of P4,200 quarterly in advance in the
municipal treasury of Gasan.
Graciano Napa forwarded a protest (Exhibit 4) to
the provincial board, which protest was later
indorsed by said provincial board to the Chief of
the Executive Bureau, alleging that the plaintiff
municipality violated the provisions of section
2323 of the Administrative Code in rejecting his
bid.
The provincial board, passing upon Graciano
Napa's protest and acting under the authority
which, in its opinion, was granted to it by section
2233 of the Administrative Code, held that
resolution No. 161, series of 1930, by virtue of
which the municipal council of Gasan rejected
Graciano Napa's bid and accepted that of Miguel
Marasigan, notwithstanding the fact that the
latter offered to pay less, was invalid, and
suggested that the privilege should be, awarded
to Graciano Napa who, in its opinion, appeared to
be the highest bidder in accordance with the
provisions of sections 2323 and 2319 of the
Administrative Code (Exhibit 9). The Executive
Bureau, concurring with the provincial board's
points of view, declared, in turn, that the
concession made to Marasigan was illegal in view
of the fact that Graciano Napa was the highest
bidder (Exhibit 13).
The plaintiff municipality decided to award the
privilege of gathering whitefish spawn within its
waters to Graciano Napa, giving him a period of
seven days, from January 8, 1931 (Exhibit 19-A),
to deposit the sum of P500.
Graciano Napa not only failed to make the
deposit required by the plaintiff but he formally
declared,
through
his
duly
authorized
representative, that he yielded the privilege
granted him to Miguel Marasigan or to any other
person selected by the municipal authorities.
The council of the plaintiff-appellee municipality,

in its resolution No. 161 (Exhibit 1) of December
11, 1930 rejected Graciano Napa's bid and
accepted that of the appellant Miguel Marasigan.
One day later plaintiff-appellee municipality sent

the letter Exhibit 21 to Miguel Marasigan
informing him that the contract between them
becomes effective on January 14, 1931.
To secure his compliance with the terms of the

contract which was immediately formalized by
him and the plaintiff, and pursuant to the
provisions of section 8 of resolution No. 128,
Prior to this, plaintiff informed Marasigan that the

contract granting Marasigan the privilege is
suspended & considered ineffective while the
protest is pending.
38
Plaintiff filed an action to recover from Marasigan,

Sevilla and Luana the sum of P 3,780 as part of
license fees which they failed to pay.
On July 1919, Smith, Bell & Co. informed both

Harden and PNB that the expellers had
arrived.
ISSUE: w/n respondents are liable
Shortly thereafter Harden, having examined

the machinery in the Plaintiff's bodega,
advised the Bank that the expellers were not
as ordered.
Consequently, the Bank naturally refused to

accept and pay for the machinery, and the
Plaintiff disposed of them to the best
advantage in the Manila market at a price
which was below the price at which Harden
had agreed to take them.
The ground upon which the defense is chiefly

rested is that the expellers tendered by the
Plaintiff were "side-drive" instead of "enddrive" expellers, and in support of this
contention Harden was produced by the
Defendant as a witness, and he denied that
the order for expellers had been changed
upon his instructions.
HELD:
No. The contract was not only considered not
consummated but cancelled.
It ceased to be valid when it was cancelled
Neither the appellant nor his sureties were bound
to comply with the terms of their respective
contracts of fishing privilege and suretyship.
This is so particularly with respect to the sureties,
because suretyship cannot exist without a valid
obligation.
Guaranty is not presumed.
The elimination of the obligation for which said
sureties desired to answer with their bond also
rendered the bond also eliminated.
SMITH BELL v PNB
Issue:
FACTS
Whether or not PNB is subsidiary liable?
Rulings:
On April 1918, Fred M. Harden applied to

Smith, to buy 8 Anderson expellers end drive,
latest model, for the price of P80,000, to be
paid on delivery. This would be used for the
extraction of coconut oil.
It was understood that these expellers would

be manufactured in the US and delivery would
be in the month of February or March of the
ensuing year.
In order to assure the prompt payment of the

price upon delivery, an arrangement was
made between Harden and the Philippine
National Bank (PNB) whereby the latter bound
itself to Smith, Bell & Co. for the payment of
the contract price, but provided that the
expellers would delivered to them and must
be new and in first class working order.
Shortly after the contract was made, Harden

appeared in the office of Smith, Bell & Co. and
requested them to change the order for the
expellers from "end-drive" to "side-drive;" and
in obedience to this instruction, the house
cabled to its agent in New York to change the
order accordingly, which was done.
NO. The SC ruled that PNBs liability is primary

in nature.
The contract by which the Bank obligated

itself is both in form and effect an
independent undertaking on the part of the
Bank directly to the Plaintiff; and inasmuch as
the Plaintiff had compiled, or offered to
comply, with the terms of said contract, the
Bank is bound by its promise to pay the
purchase price.
Its obligation to the Plaintiff is direct and

independent. The debt must be considered a
liquidated debt, in the sense intended in
article 1825 of the Civil Code; and the action
is now maintainable by the Plaintiff directly
against the Bank without regard to the
position of Harden.
The Bank is to be considered strictly in the

light of an independent promisor, a
consequence would be that Harden had no
authority to change the order from end-drive
to side-drive expellers; in other words, that
the Bank should be held to be obligated
according to the terms of the order as it stood
39
when the Bank entered into the undertaking

which is the subject of the suit.
WISE & CO. v KELLY

FACTS: Kelly bought goods and merchandise on
credit from Wise and Co., with the agreement that
Kelly will apply the proceeds of its sale to the
discharge of his indebtedness. Lim, as surety for
Kelly, guaranteed unto Wise & Co. the payment of
a sum of money which Kelly owes to Wise for
goods and merchandise received and purchased
by Kelly, to be sold in his establishment, upon the
condition that Kelly will pay over to Wise at the
end of each month all sums which he may receive
from the sale of said goods and merchandise, and
that in the contrary event, the surety undertakes
to pay Wise such sums as Kelly may fail to turn in.
As alleged by Wise, Kelly has not paid any money
and thus filed a collection case against Kelly and
Lim. Lim interposed the defense that the
obligation was conditional as to him, and that the
fact constituting the condition had not occurred.
Lower court dismissed the case against Lim on
the ground that wise has not proven that Kelly
had failed to turn over any money and
established the conclusion that Lim had incurred
no liability.
agreements to guaranty among others,

any existing indebtedness of Davao
Agricultural Industries Corporation
provided that the liability shall not exceed
at any one time the aggregate principal
sum of P100,000.00.
The sole issue resolved by respondent

court was the interpretation of the
comprehensive surety agreement,
particularly in reference to the
indebtedness evidenced by the promissory
note involved in the instant case, said
comprehensive surety agreement having
been signed by Enrique Go, Sr. and private
respondent, binding themselves as
solidary debtors of said corporation not
only to existing obligations but to future
ones.
Respondent court said that corollary to

that agreement must be another
instrument evidencing the obligation in a
form of a promissory note or any other
evidence of indebtedness without which
the said agreement serves no purpose;
that since the promissory notes, which is
primarily the basis of the cause of action
of petitioner, is not signed by private
respondent, the latter can not be liable
thereon.
ISSUE: WON Lim should be held liable.

HELD: NO. Lim is not liable for the difference
between the amount realized from the sale of the
merchandise and the purchase price of the same.
Lim as surety did not undertake to pay the
principal amount due. His agreement was limited
to respond for the performance by Kelly of one of
the accessory pacts, namely, the undertaking to
deliver to Wise the total proceeds of the sales of
the merchandise for the invoice value of which
the promissory note was given. Wise has not
proved that it has NOT in fact received all the
money derived from the sale of the merchandise
mentioned in the note, it follows that there is no
evidence of the existence of the condition to
which the obligation assumed by Lim was
subordinated. In obligations subject to a
suspensive condition the acquisitions of the right
on the part of the creditor depends upon the
occurrence of the event constituting the
conditions.
A promissory note in the amount of

P100,000.00 was issued in favor of
petitioner. Said note was signed by
Enrique Go, Sr. in his personal capacity
and in behalf of Daicor. The promissory
note was not fully paid despite repeated
demands; hence petitioner filed a
complaint for a sum of money against
Daicor, Enrique Go, Sr. and Residoro Chua
Petitioner alleged that by virtue of the
execution of the comprehensive surety
agreement, private respondent is liable
because said agreement covers not
merely the promissory note subject of the
complaint, but is continuing; and it
encompasses every other indebtedness
the Borrower may, from time to time incur
with petitioner bank.
ISSUE: whether private respondent is liable to pay

the obligation evidence by the promissory note?
FACTS:
RCBC v ARRO
Residoro Chua and Enrique Go, Sr.

executed a comprehensive surety
HELD:
YES, The comprehensive surety

agreement was jointly executed by
40
Residoro Chua and Enrique Go, Sr.,

President and General Manager,
respectively of Daicor, 1976 to cover
existing as 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 agreement was executed obviously to
induce petitioner to grant any application
for a loan Daicor may desire to obtain
from petitioner bank. The guaranty is a
continuing one which shall remain in full
force and effect until the bank is notified
of its termination.
The surety agreement which was earlier
signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it
being dependent upon a principal one
which, in this case is the loan obtained by
Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to
grant the loan was the surety agreement
whereby Go and Chua bound themselves
solidarily to guaranty the punctual
payment of the loan at maturity. By terms
that are unequivocal, it can be clearly
seen that the surety agreement was
executed to guarantee future debts which
Daicor may incur with petitioner, as is
legally allowable under the Civil Code
WILLEX PLASTICS v CA
FACTS:
- Inter Resin opened a Letter of Credit with
Manila Banking Corp. with security of
Continuing Surety Agreement signed by
Inter
Resin
and
Investment
and
Underwriting Corp (IUCP) wherein they
bound themselves solidarily for the.
- Later Inter Resin together with Willex (P)
executed a continuing guaranty in favor of
IUCP, stating that Inter Resin and P are
solidarily liable. Due to this, IUCP paid
Manila Bank P4M (Letter of Credit)
- IUCP then demanded payment of the
amount, however, Inter Resin and P failed
to do so. Hence, this case
- P contends that it should not be liable
since P is merely a guarantor
ISSUE: WoN P ma be held jointly and severally
liable with Inter Resin for the amount paid by
Interbank to Manila Bank
SC: YES
- The amount had been paid by InterBank to
Manila bank
The intention of the parties is to secure

the payment of the obligation.
o CA held-to secure the guarantee
undertaken by Interbank of the
credit accommodation granted to
Inter Resin by Manila Bank,
Interbank required P to sign a
Continuing Guaranty
DOCTRINE: Although a contract of suretyship is

ordinarily not be construed retrospective, in the
end the intention of the parties as revealed by
the evidence is controlling
TRADERS INSURANCE v DY
FACTS:
1) For several years Destilleria Lim Tuaco & Co.,
Inc. had one Dy Eng Giok as its provincial sales
agent who has the duty of turning over the
proceeds of his sales to the distillery company. In
1951, Dys outstanding running account was in
the sum of P12,898.61. Thereafter, a surety bond
was executed by Dy as principal and Traders
Insurance as solidary guarantor, whereby they
bound themselves, jointly and severally,
WHEREAS, the contract requires the
above bounden principal to give a good
and sufficient bond in the above stated
sum to secure the full and faithful
fulfillment on its part of said contract;
namely, to guarantee the full payment of
the Principal's obligation not to exceed the
above stated sum.
2) On the same date, by Eng Giok, as principal,
with Pedro Lopez Dee and Pedro Dy-Liacco, as
counterboundsmen, subscribed an indemnity
agreement in favor of appellant Surety Company,
where, in consideration of its surety bond, the
three agreed to be obligated to the surety
company. Thereafter, Dy contracted obligations in
favor of the Destilleria in the amount of
P41,449.93; and Dy made remittances of the
same amount
3) The distillary, however, applied said
remittances first to Dy Eng Giok's outstanding
balance prior to August 4, 1951, before the
suretyship agreement was executed, in the sum
of P12,898.61; and the balance of P28,965.88 to
Dy's obligations between August 4, 1951 and
August 3, 1952.
4) Then demanded payment of the remainder
from Dy, and later, from the appellant Surety
Company. The latter paid P10,000.00 (the
maximum of its bond) on July 17, 1953,
apparently, without questioning the demand; and
41
then sought reimbursement from Dy Eng Giok

and his counter guarantors, who however failed
to pay. Because of this the company brought an
action to enforce collection.
5) The CFI absolved the counter-guarantors on
the theory that in so far as they are concerned,
the payments made by Dy from August 4, 1951
to August 3, 1952, should have been applied to
his obligations during that period, which were the
ones covered by the surety bond and the counterguaranty; and since these obligations only
amounted to P41,449.93, the payments
exceeding the obligations, the CFI concluded that
the Surety Company incurred no liability and the
counterbondsmen in turn had nothing to answer
for.
HELD:
A) The CFI is correct. There are two reasons why
the remittances by Dy Eng Giok in the sum of
P41,864.49 should be applied to the obligation of
P41,449.93 contracted by him during the period
covered by the suretyship agreement:
a.. In the absence of express stipulation, a
guaranty or suretyship operates
prospectively and not retroactively; that is
to say, it secures only the debts
contracted after the guaranty takes effect
because a guaranty is not presumed, but
must be express, and can not extend to
more than what is stipulated.
b.. Since the obligations of Dy between
August 4, 1951 to August 4, 1952, were
guaranteed, while his indebtedness prior
to that period was not secured, then in the
absence of express application by the
debtor, any partial payments made by him
should be imputed or applied to the debts
that were guaranteed, since they are
regarded as the more onerous debts from
the standpoint of the debtor.
B) In essence therefore debts covered by a
guaranty are deemed more onerous to the debtor
than the simple obligations because, in their
case, the debtor may be subjected to action not
only by the creditor, but also by the guarantor,
and this even before the guaranteed debt is paid
by the guarantor; hence, the payment of the
guaranteed debt liberates the debtor from
liability to the creditor as well as to the guarantor,
while payment of the unsecured obligation only
discharges him from possible action by only one
party, the unsecured creditor.
C) Thus, payment voluntarily made by appellant

was improper since it was not liable under its
bond; consequently, it can not demand
reimbursement from the counterbondsmen but
only from Dy.
D) Ultimately, the application by a creditor
depends upon the debtor acquiescence thereto.
In the present case, as already noted, there is no
evidence that the receipts for payment expressed
any imputation, or that the debtor agreed to the
same. Judgment is affirmed.
SOCONY v CHO SIONG

FACTS: Cho Siong entered into contract of agency
for distribution of petroleum products, assumed
liability of former agent Tong Kuan. His agency
bond was secured by Ong Guan Can. Defaulted in
the amount of P64.00
DOCTRINE:
Under the terms of the bond signed
by the surety, he did not answer for the principal
obligor save for the Latters acts by virtue of the
contract of agency. He cannot be held liable for
the debt of a former agent, which the principal
obligor assumed by virtue of another contract, of
which said surety was not even aware. A contract
of suretyship is to be strictly interpreted and is
not to be extended beyond its terms.
GARON v PROJECT MOVERS

Facts:
Project Movers Realty and Devt Corp (PMRDC)

obtained a loan from Garon. The loan was
covered by a Promissory note to mature on
December 19. The stipulated interest rate was
36% per annum.
To secure the payment of the loan, PMRDC
undertook to assign to Garon its leasehold
rights over a space at the Monumento Plaza
Commercial Complex.
The parties stipulated that failure to pay the
note or any portion thereof, or any interest
thereon, shall constitute as default and the
entire obligation shall become due and
demandable without need of demand.
PMRDC obtained another loan from Garon at
17% per annum to mature on December 31. It
is covered by another promissory note and
secure a leasehold rights over another space
in Monumento Plaza.
To secure its obligations to assign the
leasehold rights to Garon, PMRDC procured a
surety bond from Stronghold Insurance, which
42
the liability of the surety will not exceed the

sum of P12M and will expire on Nov 7.
When PMRDC defaulted in the payment of its
obligations, Garon sent a demand letter dated
Nov 3 requiring PMRDC to execute and deliver
a unilateral Deed of Assignment of its
leasehold rights over the commercial spaces.
Garon also sent a demand letter to the surety
on Nov 6.
For failure to comply with the demand, Garon
filed a complaint for collection of the principal
obligation against PMRDC and the surety.
The surety contends that the complaint stated
no cause of action and was prematurely filed.
At the time Garon sent the demand letter, the
obligation guaranteed by the bond had not
yet matured.
On the part of PMRDC, it denied that it
executed the promissory noted and alleged
instead that they were mere roll-overs. It also
alleged that it already complied with its
undertaking under the promissory notes when
it put up a surety bond. And that when Garon
chose to demand from the surety, she
effectively waived the right to claim for it.
Issue: Whether or not the surety is liable to

Garon under its surety bond.
Held:
Yes, the surety is liable in general. The principal
obligation guaranteed by the surety bond is the
assignment of leasehold rights of PMRDC to
Garon over the subject spaces. Garon made a
formal demand but PMRDC defaulted. As such,
PMRDCs liability arose. Consequently, the
suretys liability likewise arose.
Suretyship arises upon the solidary binding of a
person with the principal debtor, for the purpose
of fulfilling an obligation. A surety is considered in
law as being the same party as the debtor in
relation to whatever is adjudged as touching the
obligation of the latter and their liabilities are
interwoven as to be inseparable. Although a
surety contract is secondary to the principal
obligation, the liability of the surety is
direct, primary and absolute or equivalent
to that of a regular party to the
undertaking.
Note:
Surety in this case was not held liable since its
undertaking under the surety bond was merely to
guarantee the assignment of PMRDCs leasehold
rights and not the payment of the entire
obligation and Garon is seeking to enforce her
right to collect the principal debt rather than

enforce the security.
REPUBLIC v PAL-FOX LUMBER
Facts: Pal-Fox Lumber Co., Inc. was indebted to
the Bureau of Internal Revenue for forest charges
and surcharges amounting to P11,851.56, and
that the Far Eastern Surety & Insurance Co., Inc.
was jointly and severally liable with the lumber
company for the payment of said forest charges
up
to
P5,000.00.
Republic
moved
for
reconsideration, pointing out that the surety
company's correct liability under the appealed
decision was P5,000.00 plus legal interest from
the filing of the complaint. In other words, the
Republic would want the surety company to pay
the legal interest adjudged by the trial court
before the case may finally be considered
dismissed. Far Eastern's denial of liability for such
interest is based on the stipulation in the bond
that it was bound to the plaintiff "in the sum of
P5,000.00."
Issue: W/N Far Eastern should also pay interest?
Ruling: Yes. Article 2055, paragraph 2, of the Civil

Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall
comprise not only the principal obligation but
also all its accessories, including judicial costs.
COMMONWEALTH v CA
This case is about SIGS and ELBA borrowing
money from RCBC worth P4m. Commonwealth
being the surety. SIGS and ELBA defaulted so
RCBC went after Commonwealth. Commonwealth
insists on not paying. Lower Court ruled in favor
of RCBC and ordered Commonwealth to pay the
principal debt plus interest. Commonwealth
refused. Commonwealth appealed to CA and
questions the ruling of the lower court awarding
interest. (focus on interest)
Issue: WoN Commonwealth whould pay principal
and interest
Ruling: Obviously, Commonwealth is obliged to
pay the principal being the surety. Regarding the
interest,
generally
no.
However
because
Commonwealth refused to pay the principal when
the lower court ordered it to do so, it is now
bound to pay the interest.
NAMARCO v MARQUEZ
43
FACTS:
Properties, rights, obligations, and
contracts of the Philippine Relief and Trade
Rehabilitation Administration (PRATRA) had been
transferred to the Price Stabilization Corporation
(PRISCO) and subsequently all rights and
contracts of the PRISCO involving real estate,
fixed assets and stock in trade had been assumed
by herein plaintiff, the NAMARCO.
Marquez secured from the PRATRA one tractor
and one rice thresher, with a total value of
P20,000.00 for which the said defendant paid
thereon the sum of P8,000.00 as down payment,
thereby leaving a balance of P12,000.00.
Marquez executed a promissory note in the
amount of P12,000.00 payable in installments
commencing from June 24, 1951 to June 25,
1952, with interest thereon at the rate of 7% per
annum from June 24, 1950 until finally paid.
To
guarantee
full
compliance
with
the
aforementioned obligation, defendant Marquez,
as principal, and defendant Plaridel Surety &
Insurance
Company,
as
surety,
executed
Guaranty Bond P. S. & I. No. 4220 in favor of the
PRATRA, wherein they bound themselves, jointly
and severally, to pay the said amount of
P12,000.00 (Exhibit C).
In this guaranty bond, the surety expressly
waives its right to demand payment and notice of
non-payment and agrees that the liabilities of this
guaranty shall be direct and immediate and not
contingent upon the exhaustion by the PRATRA of
whatever remedies it may have against the
principal, and that the same shall be valid and
continuous until the obligation so guaranteed is
paid in full.
After making partial payment, Marquez defaulted
in the payment of the other installments. Plaintiff
demanded from defendants Marquez and Plaridel
Surety & Insurance Company, payment of their
outstanding obligation. The claim, therefore, of
defendant Plaridel Surety & Insurance Company
that they never received a demand for payment
from plaintiff must necessarily fail, considering
that it is clearly shown in registry return receipts
that the same had been received by the
addressee.
ISSUES: Whether the surety's liability can exceed
the sum of P12,000.00.
RULING: Yes
While the guarantee was for the original amount
of the debt of Gabino Marquez, the amount of the
judgment by the trial court in no way violates the
rights of the surety. The judgment on the principal
was only for P10,000.00, while the remaining
P9,990.91 represent the moratory interest due on

account of the failure to pay the principal
obligation from and after the same had fallen
due, and default had taken place. Appellant
surety was fully aware that the obligation earned
interest, since the note was annexed to its
contract, Exhibit "C".
The contract of guaranty executed by the
appellant Company nowhere excludes this
interest, and Article 2055, paragraph 2, of
the Civil Code of the Philippines is clearly
applicable.
If it (the guaranty) be simple
or indefinite, it shall comprise not
only the principal obligation but also
all its accessories, including judicial
costs, provided with respect to the
latter, that the guarantor shall only
be liable for those costs incurred
after he has been judicially required
to pay.
Compensated sureties are not entitled to have
their contracts interrupted strictissimi juris in
their favor
VIZCONDE v IAC
FACTS:
Perlas called Vizconde and asked her to
sell an 8 carat diamond ring on a
commission for P85k
Vizconde
later
returned
the
ring.
Afterwards, Vizconde called on Perlas and
claimed that there was a sure buyer for
the ring, Pilar Pagulayan
Pagulayan gave a post-dated check; Perlas
and Vizconde signed a receipt (Exh. A)
The check was dishonoured. After 9 days,
Pagulayan paid Perlas P5k against the
value of the ring and gave 3 Certificates of
Title to guarantee delivery of the balance
of such value (Exh D)
Perlas filed a complaint against Pagulayan
and Vizconde for estafa.
TC and CA Vizconde and Pagulayan had
assumed a joint agency in favour of Perlas
for the sale of the latters ring, which
rendered them criminally liable, upon
failure to return the ring or deliver its
agreed value, under Art 315, par 1(b) of
the Revised Penal Code
SOL GEN disagreed; Vizconde cant be
convicted of estafa based on the Exhibits
presented
ISSUE: Whether Vizconde was considered as
agent of Perlas or mere guarantor of obligation of
Pagulayan?
44
HELD: Mere guarantor

Nothing in the language of the receipt,
Exh A, or in the proven circumstances
attending its execution can logically be
considered as evidencing the creation of
an agency between Perlas, as principal,
and Vizconde as agent, for the sale of the
formers ring.
If any agency was established, it was one
between Perlas and Pagulayan only, this
being the logical conclusion from the use
of the singular I in said clause, in
conjunction with the fact that the part of
the receipt in which the clause appears
bears only the signature of Pagulayan.
To warrant anything more than a mere
conjecture
that
the
receipt
also
constituted Vizconde the agent of Perlas
for the same purpose of selling the ring,
the cited clause should at least have used
the plural we, or the text of the receipt
containing that clause should also have
carried Vizcondes signature.
The joint and several undertaking
assumed by Vizconde in a separate writing
below the main body of the receipt,
Exhibit A, merely guaranteed the civil
obligation Pagulayan to pay Perlas the
value of the ring in the event of her
(Pagulayans) failure to return said article.
What is clear from Exh A is that the ring
was entrusted to Pagulayan to be sold on
commission; there is no mention therein
that it was simultaneously delivered to
and received by Vizconde for the same
purpose or, therefore, that Vizconde was
constituted, or agreed to act as, agent
jointly with Pagulayan for the sale of the
ring.
What Vizconde solely undertook was to
guarantee the obligation of Pagulayan to
return the ring or deliver its value; and
that guarantee created only a civil
obligation, without more, upon default of
the principal.
Upon the evidence, Vizconde was a mere
guarantor, a solidary one to be sure, of the
obligation assumed by Pagulayan to
complainant Perlas for the return of the
latters ring or the delivery of its value.
Whatever liability was incurred by
Pagulayan
for
defaulting
on
such
obligation and this is not inquired into
that of Vizconde consequent upon such
default was merely civil, not criminal.
ESTATE OF HEMADY v LUZON SURETY
FACTS:
The Luzon Surety Co. had filed a claim against the

Estate based on twenty different indemnity
agreements, or counter bonds, each subscribed
by a distinct principal and by the deceased K. H.
Hemady, a surety solidary guarantor) in all of
them, in consideration of the Luzon Surety Co.s
of having guaranteed, the various principals in
favor of different creditors.
The Luzon Surety Co., prayed for allowance, as a
contingent claim, of the value of the twenty
bonds it had executed in consideration of the
counterbonds, and further asked for judgment for
the unpaid premiums and documentary stamps
affixed to the bonds, with 12 per cent interest
thereon.
The lower court, by order of September 23, 1953,
dismissed the claims of Luzon Surety Co., on the
ground that whatever losses may occur after
Hemadys death, are not chargeable to his estate,
because upon his death he ceased to be
guarantor.
The reasoning of the court below ran as follows:
The administratrix further contends that upon
the death of Hemady, his liability as a guarantor
terminated, and therefore, in the absence of a
showing that a loss or damage was suffered, the
claim cannot be considered contingent. This
Court believes that there is merit in this
contention and finds support in Article 2046 of
the new Civil Code. It should be noted that a new
requirement has been added for a person to
qualify as a guarantor, that is: integrity. As
correctly pointed out by the Administratrix,
integrity is something purely personal and is not
transmissible. Upon the death of Hemady, his
integrity was not transmitted to his estate or
successors. Whatever loss therefore, may occur
after Hemadys death, are not chargeable to his
estate because upon his death he ceased to be a
guarantor.
Another clear and strong indication that the
surety company has exclusively relied on the
personality, character, honesty and integrity of
the now deceased K. H. Hemady, was the fact
that in the printed form of the indemnity
agreement there is a paragraph entitled Security
by way of first mortgage, which was expressly
waived and renounced by the security company.
The security company has not demanded from K.
H. Hemady to comply with this requirement of
giving security by way of first mortgage. In the
supporting papers of the claim presented by
Luzon Surety Company, no real property was
mentioned in the list of properties mortgaged
which appears at the back of the indemnity
agreement. (Rec. App., pp. 407-408).
ISSUE: W/N the liability of the guarantor was
terminated upon his death
45
HELD: NO.
Under the present Civil Code (Article 1311), as
well as under the Civil Code of 1889 (Article
1257), the rule is that
Contracts take effect only as between the
parties, their assigns and heirs, except in the
case where the rights and obligations arising from
the contract are not transmissible by their
nature, or by stipulation or by provision of
law.
Under our law, therefore, the general rule is that
a partys contractual rights and obligations are
transmissible to the successors.
Of the three exceptions fixed by Article 1311, the
nature of the obligation of the surety or guarantor
does not warrant the conclusion that his peculiar
individual qualities are contemplated as a
principal inducement for the contract. What did
the creditor Luzon Surety Co. expect of K. H.
Hemady when it accepted the latter as surety in
the
counterbonds?
Nothing
but
the
reimbursement of the moneys that the Luzon
Surety Co. might have to disburse on account of
the obligations of the principal debtors. This
reimbursement is a payment of a sum of money,
resulting from an obligation to give; and to the
Luzon Surety Co., it was indifferent that the
reimbursement should be made by Hemady
himself or by some one else in his behalf, so long
as the money was paid to it.
The second exception of Article 1311, p. 1, is
intransmissibility by stipulation of the parties.
Being exceptional and contrary to the general
rule, this intransmissibility should not be easily
implied, but must be expressly established, or at
the very least, clearly inferable from the
provisions of the contract itself, and the text of
the agreements sued upon nowhere indicate that
they are non-transferable.
Because under the law (Article 1311), a person
who enters into a contract is deemed to have
contracted for himself and his heirs and assigns,
it is unnecessary for him to expressly stipulate to
that effect; hence, his failure to do so is no sign
that he intended his bargain to terminate upon
his death. Similarly, that the Luzon Surety Co., did
not require bondsman Hemady to execute a
mortgage indicates nothing more than the
companys faith and confidence in the financial
stability of the surety, but not that his obligation
was strictly personal.
The third exception to the transmissibility of
obligations under Article 1311 exists when they
are not transmissible by operation of law. The
provision makes reference to those cases where
the law expresses that the rights or obligations
are extinguished by death, as is the case in legal
support (Article 300), parental authority (Article
327), usufruct (Article 603), contracts for a piece

of work (Article 1726), partnership (Article 1830
and agency (Article 1919). By contract, the
articles of the Civil Code that regulate guaranty
or suretyship (Articles 2047 to 2084) contain no
provision that the guaranty is extinguished upon
the death of the guarantor or the surety.
WISE & CO. v TANGLAO
FACTS
In the CFI of Manila, Wise & Co filed a civil

case against Cornelio C. David for the
recovery of a certain sum of money.
David was an agent of Wise & Co. and the

amount claimed from him was the result of a
liquidation of accounts showing that he was
indebted in said amount.
In said case Wise & Co. asked and obtained a

preliminary attachment of David's property.
To avoid the execution of said attachment,

David succeeded in having the defendant
Attorney Tanglao sign a power of attorney in
his favor, with a clause (considered a special
POA to David) To sign as guarantor for
himself in his indebtedness to Wise &
Company of Manila, and to mortgage the
Attorneys lot
Subsequently, David made a compromise with

the petitioner by paying P340 leaving an
unpaid balance of P296 and pledged the lot
owned by the Atty as a guaranty for the
balance.
Wise & Co. now institutes this case against

Tanglao for the recovery of said unpaid
amount.
There is no doubt that under POA, Tanglao

empowered David, in his name, to enter into a
contract of suretyship and a contract of
mortgage of the property described in the
document, with Wise & Co.
However, David used said power of attorney

only to mortgage the property and did not
enter into contract of suretyship.
ISSUE
Whether or not Atty. Tanglao is liable?
RULING
46
NO.
The SC ruled that there is nothing stated in

the Compromise Agreement to the effect that
Tanglao became David's surety for the
payment of the sum in question. Neither is
this inferable from any of the clauses thereof,
and even if this inference might be made, it
would be insufficient to create an obligation of
suretyship which, under the law, must be
express and cannot be presumed.
The only obligation which the Compromise

Agreement, in connection with POA, has
created on the part of Tanglao, is that
resulting from the mortgage of a property
belonging to him to secure the payment of
said P640. However, a foreclosure suit is not
instituted in this case against Tanglao, but a
purely personal action for the recovery of the
amount still owed by David.
At any rate, even granting that Defendant

Tanglao may be considered as a surety under
the cited Compromise the action does not yet
lie against him on the ground that all the legal
remedies against the debtor have not
previously been exhausted (art. 1830 of the
Civil Code, and decision of the Supreme Court
of Spain of March 2, 1891).
ISSUE: WHETHER THE MORTGAGE IN QUESTION

COULD BE FORECLOSED ALTHOUGH PLAINTIFF
HAD NOT EXHAUSTED, AND DID NOT INTEND TO
EXHAUST, THE PROPERTIES OF HIS PRINCIPAL
DEBTOR.
HELD: NO. The right of guarantors, under Art.
2058 of the Civil Code, to demand exhaustion of
the property of the principal debtor, exists only
when a pledge or a mortgage has not been given
as special security for the payment of the
principal obligation.
Although an ordinary personal guarantor not a
mortgagor or pledgor may demand exhaustion
of the properties of the principal debtor, the
creditor
may,
prior
thereto,
secure
judgment against said guarantor, who shall
be entitled, however, to a deferment of the
execution of said judgment against him
until after the properties of the principal
debtor shall have been exhausted to satisfy
the obligation involved in the case.
FACTS:
This is a proceeding instituted by the

petitioner to annul the order of May 8,
1939, entered by the Court of First
Instance of Leyte, which provided for the
sale at public auction of the real property
described in Transfer Certificate of Title
No. 395 issued in favor of the petitioner,
so that the proceeds thereof may be
applied to the payment of the credit of the
respondent W.S. Price in the sum of
P15,000
In civil case No. 3707 of the Court of First

Instance of Leyte, W.S. Price, plaintiff vs.
Ceferino Ibaez et al., defendants, said
court rendered judgment ordering the
defendants to pay the plaintiff within
ninety days the sum of P15,000, with the
legal interest thereon from January 16,
1934, and in case of default on their part,
that the real property subject matter of
the mortgage be sold at public auction so
that the proceeds thereof may be applied
to the payment of the sum in question and
the interest thereon.
After the period of ninety days has elapsed

and Rafael Martinez and Ceferino Ibaez
failed to pay the sum in question with the
interest thereon, the respondent Price filed
The Plaintiff has in its favor a judgment

against debtor David for the payment of debt.
It does not appear that the execution of this
judgment has been asked for and the
Compromise, on the other hand, shows that
David has two pieces of property the value of
which is in excess of the balance of the debt
the payment of which is sought of Tanglao in
his alleged capacity as surety.
SOUTHERN MOTORS v BARBOSA

FACTS: Defendant Barbosa executed a real estate
mortgage for the only purpose of guaranteeing
as surety and/or guarantor the payment of the
debt of one Alfredo Brillantes in favor of Southern
Motors, Inc. due to the failure of Brillantes to
settle his obligation; plaintiff filed an action
against defendant to foreclose the real estate
mortgage. Defendant filed an answer alleging
that the plaintiff has no right of action against
him because the plaintiff did not intent to exhaust
all recourses to collect from the true debtor
(Brillantes), notwithstanding the fact that the
latter is solvent and has many properties within
the Province of Iloilo.
SAAVEDRA v PRICE
47
a motion praying that the real property

mortgaged be sold at public auction for
the payment of his mortgage credit and its
interest.
This was denied.
The petitioner now claims that the
respondent Judge acted with abuse of his
discretion in not transferring the hearing
of the motion for the sale of the
mortgaged realty and that he exceeded
his jurisdiction in ordering the sale of said
property.
ISSUE: Whether or not the order of sale of such

property was proper?
HELD:
It is contended that since the petitioner is

not the debtor and as she, on the other
hand is the owner of the mortgaged realty,
she merely acted as surety to Rafael
Martinez, the principal debtor, and as such
she entitled to the benefit of the
exhaustion of the property of the principal
debtor, in accordance with the provision of
article 1830 of the Civil Code.
We are of the opinion that this last
contention is likewise unfounded and
untenable.
o In the first place, this alleged defense
should have been interposed before
the judgment was rendered in this
case and it is too late to raise it for the
first time as a ground for opposing the
motion to sell the real property in
question.
o In the second place, the contention
that the mortgaged real property
belonging to the petitioner cannot be
sold to pay the debt for the reason that
she is a mere surety of Rafael
Martinez, finds no support in the law.
It is true that the petitioner is a surety
with regard to Rafael Martinez and as such
surety she is entitled to resort to the
actions and remedies against him which
the law affords her, but we should not lose
sight of the fact that she was sued not as
a surety but as a mortgage debtor for
being the owner of the mortgaged
property
ARROYO v JUNGSAY
FACTS:
Arroyo (P) is an appointed guardian of an

imbecile, while Jungsay et al (D) are the
previous guardian and bondsmen who
absconded.
D, the former guardian of the ward,
absconded with the funds of his ward.
LC ordered D to pay P, which the
bondsmen appealed. D also pointed out
properties of the previous guardian which
are now being adversely claimed by 3rd
parties
ISSUE: WoN the bondsmen are liable

SC: YES
- For the surety to be not liable, he must be
able to point out property of the principal
debtor which are realizable and is situated
within the Philippines to insure the
fulfillment of the obligation and furnish the
creditor with the means of obtaining its
fulfillment without delay
- The property pointed out by the sureties is
not sufficient to pay the indebtedness; it is
not salable; it is encumbered to 3rd parties
FACTS:
BITANGA v PYRAMID
1) On March 26 1997, Pyramid entered into an

agreement with Macrogen Realty, of which
Bitanga is the President, to construct for the
latter a building, located in Sucat, Paraaque.
Pyramid then commenced civil, structural, and
architectural works on the construction project.
However, Macrogen Realty failed to settle
respondents progress billings. Bitanga, assured
Pyramid that the outstanding account of
Macrogen Realty would be paid.Thus, Pyramid
continued the construction project.
2) In August 1998, Pyramid suspended work on
the construction project since the conditions that
it imposed for the continuation thereof, including
payment of unsettled accounts, had not been
complied with by Macrogen Realty and
eventually, on 1 September 1999, respondent
instituted with the Construction Industry
Arbitration Commission (CIAC) a case for
arbitration against Macrogen Realty seeking
payment by the latter of its unpaid billings and
project costs. Macrogen, chose to amicably settle
the arbitration case and both parties entered into
a Compromise Agreement, with Bitanga acting as
signatory for and in behalf of Macrogen Realty.
3) Under the Agreement, Macrogen Realty agreed
to pay Pyramid the total amount in six equal
monthly installments, that if it would default in
the payment of two successive monthly
installments, immediate execution could issue
48
against it for the unpaid balance, without need of

judgment from any court or tribunal. Bitanga
guaranteed the obligations of Macrogen Realty
under the Compromise Agreement by executing a
Contract of Guaranty in favor of respondent, by
virtue of which he irrevocably and unconditionally
guaranteed the full and complete payment of the
principal amount of liability of Macrogen Realty.
4) However, despite this, Macrogen Realty failed
and refused to pay all the monthly installments
agreed upon in the Compromise Agreement.
Thus, on 7 September 2000, respondent moved
for the issuance of a writ of execution against
Macrogen Realty, which was granted.
5) The sheriff however filed a return stating that
he was unable to locate any property of
Macrogen Realty, except its bank deposit of
P20,242.33, with the Planters Bank, Buendia
Branch. Respondent then made, on January 3,
2001, a written demand on petitioner, as
guarantor of Macrogen Realty, to pay the
P6,000,000.00, or to have properties of the
Macrogen Realty sufficient to cover the obligation
guaranteed. Said demands met no reply.
6) As to Marilyns (bitangas wife) liability,
Pyramid contended that Macrogen Realty was
owned and controlled by bitanga and Marilyn
and/or by corporations owned and controlled by
them. On the theory that since the completion of
the construction project would have redounded to
the benefit of both petitioner and Marilyn and/or
their corporations; and considering, Marilyns
interest in a corporation which controls Macrogen
Realty, Marilyn cannot be unaware of the
obligations incurred by Macrogen Realty and/or
petitioner in the course of the business
operations of the said corporation.
7) Pyramid filed suit that a judgment be rendered
ordering petitioner and Marilyn to comply with
their obligation under the Contract of Guaranty
by paying respondent the amount of
P6,000,000.000.
8) Marilyn contended that, since she did not cosign the Contract of Guaranty with her husband;
nor was she a party to the Compromise
Agreement between respondent and Macrogen
Realty. She had no part at all in the execution of
the said contracts. This was denied
ISSUES:
(1) whether the defendants were liable under the
contract of guarantee dated April 17, 2000
entered into between Benjamin Bitanga and the
plaintiff;
(2) whether defendant wife Marilyn Bitanga is

liable in this action;
HELD:
A) Under a contract of guarantee, the guarantor
binds himself to the creditor to fulfill the
obligation of the principal debtor in case the
latter should fail to do so. The guarantor who
pays for a debtor, in turn, must be indemnified by
the latter. However, the guarantor cannot be
compelled to pay the creditor unless the latter
has exhausted all the property of the debtor and
resorted to all the legal remedies against the
debtor. This is what is otherwise known as the
benefit of excussion.
Article 2060 of the Civil Code reads:
In order that the guarantor may make use
of the benefit of excussion, he must set it
up against the creditor upon the latters
demand for payment from him, and point
out to the creditor available property of
the debtor within Philippine territory,
sufficient to cover the amount of the debt.
B) Said provision imposes a condition for the
invocation of the defense of excussion. Article
2060 of the Civil Code clearly requires that in
order for the guarantor to make use of the benefit
of excussion, he must set it up against the
creditor upon the latters demand for payment
and point out to the creditor available property of
the debtor within the Philippines sufficient to
cover the amount of the debt.
C) In this case, despite having been served a
demand letter at his office, petitioner still failed
to point out to the respondent properties of
Macrogen Realty sufficient to cover its debt. Such
failure on petitioners part forecloses his right to
set up the defense of excussion.
D) Article 2059(5) of the Civil Code thus finds
application and precludes petitioner from
interposing the defense of excussion. We quote:
(5) If it may be presumed that an
execution on the property of the principal
debtor would not result in the satisfaction
of the obligation.
E) Petition is DENIED.
ONG v PCIB
FACTS: Cho Siong entered into contract of agency
for distribution of petroleum products, assumed
49
liability of former agent Tong Kuan. His agency

bond was secured by Ong Guan Can. Defaulted in
the amount of P64.00
DOCTRINE:
Under the terms of the bond signed
by the surety, he did not answer for the principal
obligor save for the Latters acts by virtue of the
contract of agency. He cannot be held liable for
the debt of a former agent, which the principal
obligor assumed by virtue of another contract, of
which said surety was not even aware. A contract
of suretyship is to be strictly interpreted and is
not to be extended beyond its terms.
MIRA HERMANOS v MANILA TOBACCONISTS

Facts:
By virtue of a written contract, Mira Hermanos

(MH) agreed to deliver to Manila Tobacconists
(MT) merchandise for sale on consignment
under certain specified terms and MT agreed
to pay MH on or before the 20 th day of each
month the invoice value of all the
merchandise sold during the preceding
month.
MH required MT a bond of 3,000 which was
executed by Provident Insurance (PI).
The volume of the business of MT increased
so that the merchandise received by way of
consignment from MH exceeded 3,000 in
value.
MH required MT to post an additional bond of
2,000 which MT complied, executing a bond
with same conditions with the Manila
Compania de Seguros (MCS) for the excess of
3,000 up to 5,000.
After liquidation of the transaction, a balance
was due from MT to MH for the amount of
2,200 which MT is unable to pay.
PI, as surety, only paid 1,300, alleging that
the remaining 40% should be paid by the
other surety, MCS.
Issue: Whether or not MCS should be held liable

for the remaining 40% of the balance due?
Held:
No, the bond of 3,000 filed by PI responded for
the obligation of MT up to the some of 3,000,
inasmuch as the bond of 2,000 filed by MCS
responded for the obligation of MT only insofar as
it might exceed 3,000 and up to 5,000.
The provision in
sureties of only
does not apply
bonds on their
the NCC with regard to several

one debtor for the same debt
in this case. Although the two
face appear to guarantee the
same debt coextensively up to 2,000 that of PI

alone extending beyond that sum up to 3,000 it
was pleaded and conclusively proven that in
reality said bonds, or the two sureties, do not
guarantee the same debt because PI guarantees
only the first 3,000 while MCS only the excess up
to 5,000.
CACHO v VALLES
Facts: On October 29, 1920, the National Sporting
Club, of Manila, obligated itself by a promissory
note payable at four months to pay to Jose Ma.
Cacho. Below the signature of said National
Sporting Club, as signed by the proper officers of
the Club, the following personal guaranty was
written: "We guarantee this obligation." (Sgd.) J.
A. Valles, J. L. Mateu, G. J. Heffting, Ed. Chesley,
Baldomero Roxas. This note was not paid at
maturity. An action was instituted thereon against
the National Sporting Club and the guarantors.
Baldomero Roxas interposed a defence claiming
the right of division as among the co-sureties,
and asking that in case he should be found liable
that he should be held responsible only for his
aliquot part of the debt.
Issue: W/N in case of the insolvency of one or
more of several simple sureties, those who
remain solvent can be made to pay the entire
debt?
Ruling: None of the sureties, so far as this record
shows, has been declared bankrupt. The benefit
of division therefore has not been lost, and the
rule declaring each surety liable only for his
aliquot part of the guaranteed debt, must hold.
The obligation of the surety cannot be extended
beyond its specified limits. A co-surety is entitled
to the benefit of division from the very moment
that he contracts the obligation, except where
there is stipulation to the contrary.
TUASON v MACHUCA
F: Universal Trading Company was going to
withdraw goods from the Bureau of Customs to
be delivered to BPI. To withdraw, they gave a
bond executed by Manila Compania de Seguros.
That bond was secured solidarily by Tuason Co.
and Machuca of Universal Trading. It was to be
paid whether or not Manila Compania already
paid CIR. Manila Compania demanded payment
from Tuason. Manila Compania filed a case
against tuason. Tuason later payed but incurred
litigation expenses. Tuason now demands
payment from Machuca. Tuason filed a case for
collection of money from Machuca. The lower
court ruled that Machuca should pay the debt and
50
the expenses incurred by Tuason in the case for

collection of money.
Issue: Won Machuca should pay the expenses
incurred by Tuason in its case vs. Manila
Compania
Ruling: NO! it was not Machucas fault why tuason
incurred expenses in the litigation of Manila
Compania and Tuason. If tuason paid Manila
compania, no litigation expenses will be paid.
AUTOCORP v INTRA STRATA
FACTS: Autocorp Group, represented by its
President, petitioner Peter Y. Rodriguez, secured
two ordinary re-export bond from private
respondent Intra Strata Assurance Corporation
(ISAC) in favor of public respondent Bureau of
Customs (BOC) to guarantee the re-export of one
unit of Hyundai Excel 4-door 1.5 LS and Hyundai
Sonata 2.4 GLS, and/or to pay the taxes and
duties thereon.
Petitioners executed and signed two Indemnity
Agreements with identical stipulations in favor of
ISAC, agreeing to act as surety of the subject
bonds. Petitioner Rodriguez signed the Indemnity
Agreements both as President of the Autocorp
Group and in his personal capacity.
In sum, ISAC issued the subject bonds to
guarantee compliance by petitioners with their
undertaking with the BOC to re-export the
imported vehicles within the given period and pay
the taxes and/or duties due thereon. In turn,
petitioners agreed, as surety, to indemnify ISAC
for the liability the latter may incur on the said
bonds.
Petitioner Autocorp Group failed to re-export the
items guaranteed by the bonds and/or liquidate
the entries or cancel the bonds, and pay the
taxes and duties pertaining to the said items
despite repeated demands made by the BOC, as
well as by ISAC. By reason thereof, the BOC
considered the two bonds, with a total face value
of
P1,034,649.00,
forfeited.
Failing to secure from petitioners the payment of
the face value of the two bonds, despite several
demands sent to each of them as surety under
the Indemnity Agreements, ISAC filed with the
RTC on 24 October 1995 an action against
petitioners.
Petitioners contend that their obligation to ISAC is
not yet due and demandable. They cannot be
made liable by ISAC in the absence of an actual
forfeiture of the subject bonds by the BOC and/or
an explicit pronouncement by the same bureau

that ISAC is already liable on the said bonds.
ISSUES: Whether actual forfeiture of the subject
bonds is necessary for the petitioners to be liable
to ISAC under the Indemnity Agreements?
RULING: The liability of the guarantor
already triggers the liability of the debtor.
Autocrops liability
Actual forfeiture of the subject bonds is not
necessary for petitioners to be liable thereon to
ISAC as surety under the Indemnity Agreements.
Petitioners' obligation to indemnify ISAC became
due and demandable the moment the bonds
issued by ISAC became answerable for
petitioners' non-compliance with its undertaking
with the BOC. Stated differently, petitioners
became liable to indemnify ISAC at the same time
the bonds issued by ISAC were placed at the risk
of forfeiture by the BOC for non-compliance by
petitioners with its undertaking.
It is worthy to note that petitioners did not
impugn the validity of the stipulation in the
Indemnity Agreements allowing ISAC to proceed
against petitioners the moment the subject bonds
become due and demandable, even prior to
actual forfeiture or payment thereof. Even if they
did so, the Court would be constrained to uphold
the validity of such a stipulation for it is but a
slightly expanded contractual expression of
Article 2071 of the Civil Code which provides,
inter alia, that the guarantor may proceed
against the principal debtor the moment
the debt becomes due and demandable.
Art. 2071. The guarantor, even before having
paid, may proceed against the principal
debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve
him from the guaranty within a specified period,
and this period has expired;
(4) When the debt has become demandable,
by reason of the expiration of the period for
payment;
(5) After the lapse of ten years, when the
principal obligation has no fixed period for its
maturity, unless it be of such nature that it
cannot be extinguished except within a period
longer than ten years;
51
(6) If there are reasonable grounds to fear that

the principal debtor intends to abscond;
(7) If the principal debtor is in imminent danger of

becoming insolvent.
In all these cases, the action of the guarantor is

to obtain release from the guaranty, or to
demand a security that shall protect him from
any proceedings by the creditor and from the
danger of insolvency of the debtor.
Rodriguezs liability
Petitioner Rodriguez posits that he is merely a
guarantor, and that his liability arises only when
the person with whom he guarantees the credit,
Autocorp Group in this case, fails to pay the
obligation. Petitioner Rodriguez invokes Article
2079 of the Civil Code on Extinguishment of
Guaranty, which states:
Art. 2079. An extension granted to the debtor by
the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on
the part of the creditor to demand payment after
the debt has become due does not of itself
constitute any extension of time referred to
herein.
The use of the term guarantee in a contract does
not ipso facto mean that the contract is one of
guaranty. It thus ruled that both petitioners
assumed liability as a regular party and obligated
themselves as original promissors, i.e., sureties.
The provisions of the Civil Code on Guarantee,
other than the benefit of excussion, are
applicable and available to the surety.[22] The
Court finds no reason why the provisions of
Article 2079 would not apply to a surety.
This, however, would not cause a reversal of the
Decision of the Court of Appeals. The Court of
Appeals was correct that even granting arguendo
that there was a modification as to the effectivity
of the bonds, petitioners would still not be
absolved from liability since they had authorized
ISAC to consent to the granting of any extension,
modification, alteration and/or renewal of the
subject bonds
SAENZ v YAP CHUAN
FACTS:
Engracio Palanca a judicial administrator
gave bond to guarantee his administration
of the estate of Margarita Jose
The bond was executed by Engracio,
Plaintiff Saenz and two others in favour of
the government for the sum of P60k
On the same date, Engracio and 5 others

executed a bond in favour of Saenz; Yap
Chuan P20k and the other 4 P5k each
TC ordered Saenz, as surety in solidum of
the ex-administrator Engracio to pay the
estate the sum of P41k
Saenz paid to the administrator of the
estate P8k; He filed sut against 5 sureties
who executed the bond
TC acquitted Defendant from the P20k
claim and ordered the other 4 to pay P2k
each.
Both parties appealed. Defendants were
claiming that they are only liable for P1k
each only according to the terms of the
contract. Plaintiff was claiming that he is
entitled to maximum sum of P5k for which
each one had bound himself in the
contract.
ISSUE: Whether or not Vizmanos is entitled to

P20k, a reimbursement of P5k each from the
Defendants?
HELD: NO
The bond of a debtor to protect his surety
is not a sub bond nor a second bond with
respect to the original creditor. It is
nothing but a substitution of the obligation
of the debtor with respect to his surety,
and is necessarily governed by the legal
provisions which regulate the right of
action of the surety against the party for
whom he gave the bond, that is, an action
of subrogation which lies with the surety
to compel the debtor to comply with the
obligation to reimburse.
This action arising out of subrogation is
the remedy for securing reimbursement of
the amount that another has paid, and
cannot exceed, except there is an express
agreement to the contrary, the amount
actually paid by the surety in place of the
debtor.
IN THIS CASE: The following terms of an
obligation cannot be considered as an
express agreement to the contrary: x x
x bind themselves as such conjointly to
reimburse or pay whatever amounts the
latter (the surety) may have to pay or
shall have paid by reason of the judicial
bond, inasmuch as this manner of
expressing the intention of the obligated
parties does not constitute a true
disjunctive proposition, but is merely
explanatory of the obligation as if
contracted by the debtor himself, the only
natural and logical interpretation.
52
To ask an indemnity of P20k, when the loss

to be indemnified is only P8k is contrary to
law.
Vizmanos only entitled to an action
against 4 Defendants for recovery of
maximum P5k. He cannot collect more
than the sum which he himself was
actually compelled to pay.
MANILA SURETY v BATU CONSTRUCTION

FACTS:
On July 8, 1950, the defendant Batu Construction
& Company, as principal, and the plaintiff Manila
Surety & Fidelity Co. Inc., as surety, executed a
surety bond for the sum of P8,812.00 to insure
faithful performance of the former's obligation as
contractor for the construction of the Bacarra
Bridge, Project PR-72 (No. 3) Ilocos Norte
Province. On the same date, July 8,1950, the Batu
Construction & Company and the defendants
Carlos N. Baquiran and Gonzales P. Amboy
executed an indemnity agreement to protect the
Manila Surety & Fidelity Co. Inc.., against
damage, loss or expenses which it may sustain as
a consequence of the surety bond executed by it
jointly with Batu Construction & Company.
On or about May 30, 1951, the plaintiff received a
notice from the Director of Public Works (Exhibit
B) annulling its contract with the Government for
the construction of the Bacarra Bridge because of
its failure to make satisfactory progress in the
execution of the works, with the warning that
,any amount spent by the Government in the
continuation of the work, in excess of the contract
price, will be charged against the surety bond
furnished by the plaintiff. It also appears that a
complaint by the laborers in said project of the
Batu Construction & Company was filed against it
and the Manila Surety and Fidelity Co., Inc., for
unpaid wages amounting to P5,960.10.
Trial Court dismissed the case holding that
provisions of article 2071 of the new Civil Code
may be availed of by a guarantor only and not by
a surety the complaint, with costs against the
plaintiff.
ISSUE: The main question to determine is
whether the last paragraph of article 2071 of the
new Civil Code taken from article 1843 of the old
Civil Code may be availed of by a surety.
HELD:
A guarantor is the insurer of the solvency of the
debtor; a surety is an insurer of the debt. A
guarantor binds himself to pay if the principal is

unable to pay; a surety undertakes to pay if the
principal does not pay. 1 The reason which could
be invoked for the non-availability to a surety of
the provisions of the last paragraph of article
2071 of the new Civil Code would be the fact that
guaranty like commodatum2 is gratuitous. But
guaranty could also be for a price or
consideration as provided for in article 2048. So,
even if there should be a consideration or price
paid to a guarantor for him to insure the
performance of an obligation by the principal
debtor, the provisions of article 2071 would still
be available to the guarantor. In suretyship the
surety becomes liable to the creditor without the
benefit of the principal debtor's exclusion of his
properties, for he (the surety) maybe sued
independently. So, he is an insurer of the debt
and as such he has assumed or undertaken a
responsibility or obligation greater or more
onerous than that of guarantor. Such being the
case, the provisions of article 2071, under
guaranty, are applicable and available to a surety.
The reference in article 2047 to, the provisions of
Section 4, Chapter 3, Title 1, Book IV of the new
Civil Code, on solidary or several obligations,
does not mean that suretyship which is a solidary
obligation is withdrawn from the applicable
provisions governing guaranty.
The plaintiff's cause of action does not fall under
paragraph 2 of article 2071 of the new Civil Code,
because there is no proof of the defendants'
insolvency. The fact that the contract was
annulled because of lack of progress in the
construction of the bridge is no proof of such
insolvency. It does not fall under paragraph 3,
because the defendants have not bound
themselves to relieve the plaintiff from the
guaranty within a specified period which already
has expired, because the surety bond does not fix
any period of time and the indemnity agreement
stipulates one year extendible or renewable until
the bond be completely cancelled by the person
or entity in whose behalf the bond was executed
or by a Court of competent jurisdiction. It does
not come under paragraph 4, because the debt
has not become demandable by reason of the
expiration of the period for payment. It does not
come under paragraph 5 because of the lapse of
10 years, when the principal obligation has no
period for its maturity, etc., for 10 years have not
yet elapsed. It does not fall under paragraph 6,
because there is no proof that "there are
reasonable grounds to fear that the principal
debtor intends to abscond." It does not come
under paragraph 7, because the defendants, as
principal debtors, are not in imminent danger of
becoming insolvent, there being no proof to that
effect.
53
But the plaintiff's cause of action comes under

paragraph 1 of article 2071 of the new Civil Code,
because the action brought by Ricardo Fernandez
and 105 persons in the Justice of the Peace Court
of Laoag, province of Ilocos Norte, for the
collection of unpaid wages amounting to
P5,960.10, is in connection with the construction
of the Bacarra Bridge, Project PR-72 (3),
undertaken by the Batu Construction & Company,
and one of the defendants therein is the herein
plaintiff, the Manila Surety and Fidelity Co., Inc.,
and paragraph 1 of article 2071 of the new Civil
Code provides that the guarantor, even before
having paid, may proceed against the principal
debtor "to obtain release from the guaranty, or to
any proceedings by the creditor or from the
danger of insolvency of the debtor, when he (the
guarantor) is sued for payment. It does not
provide that the guarantor be sued by the
creditor for the payment of the debt. It simply
provides that the guarantor of surety be sued for
the payment of an amount for which the surety
bond was put up to secure the fulfillment of the
obligation undertaken by the principal debtor. So,
the suit filed by Ricardo Fernandez and 105
persons in the Justice of the Peace Court of
Laoag, province of Ilocos Norte, for the collection
of unpaid wages earned in connection with the
work done by them in the construction of the
Bacarra Bridge, Project PR-72(3), is a suit for the
payment of an amount for which the surety bond
was put up or posted to secure the faithful
performance of the obligation undertaken by the
principal debtors (the defendants) in favor of the
creditor, the Government of the Philippines.
The order appealed from dismissing
complaint is reversed and set aside.
FACTS:
Thereafter, Appellant averred that the loan in

question was secured by him only in
accommodation of one Hao Lam, and that
Plaintiff agreed not to take any steps against
Appellant and the mortgage executed by him
in Plaintiff's favor until the latter had failed to
obtain payment from said Hao Lam.
Eight months later, Plaintiff filed a motion for

summary judgment saying that Appellang
presented no real and meritorious defense
and that it was entitled to a summary
judgment in its favor, based on the affidavit of
its comptroller Pedro R. Mendiola essentially
saying that:
Notwithstanding said several demands by

Plaintiff, Defendant has failed and refused
and still fails and refuses to pay the same.
The lower courts ruled in favour of Plaintiff.

Thus this petition.
Whether or not Defendant Alvarez is liable?

Ruling:
NO. The SC ruled that there exists a

controversy in the complaint and answer as to
whether or not Appellee had actually paid
Appellant's obligation to the Philippine
National Bank, a matter which should be
decided in the affirmative before Appellant, as
surety, can claim reimbursement from
Appellant, the principal debtor.
However, Appellee is correct in saying that

said defense is immaterial to its right to
recovery, since the mortgage deed executed
by Appellant in its favor (the genuineness and
due execution of which Appellant admitted in
his answer) shows Appellant to be the actual
and only debtor, and Appellant is precluded
from varying this representation by parol
evidence.
In ruling for the Appellant, the SC opined that

the last paragraph of Art. 2071 of the New
Civil Code, provides that the only action the
guarantor can file against the debtor "to
obtain release from the guaranty, or to
GEN. INDEMNITY v ALVAREZ
The complaint further alleged that the

Appellant failed to pay said loan, together
with interest, to PNB as a result of which the
bank deducted the amount thereof Plaintiff's
deposit.
That he has personal knowledge of the

indebtedness of the Defendant.
Issue:
the
On February 1954, Appellee General

Indemnity Co., Inc., filed a complaint in the
CFI Manila against Appellant Estanislao
Alvarez for the recovery of the sum of P2,000
representing the amount of a loan allegedly
taken by the Appellant from the PNB, which
the Appellee guaranteed with an indemnity
bond, and for which Appellant, as counterguaranty, executed in Plaintiff's favor a
mortgage on his share of land in a parcel of
land .
54
any proceeding by the creditor and from the

danger of insolvency of the debtor."
An action by the guarantor against the

principal debtor for payment, before the
former has paid the creditor, is premature.
INTRA STRATA v REPUBLIC

FACTS: Grand Textile imported materials from
other countries which, upon arrival, were
transferred to Customs Bonded Warehouse.
Grand Textile was obliged to pay customs
charges. To secure payment of these obligations,
petitioners issued general warehousing bonds in
favor of the Bureau of Customs (BOC). Without
payment of any of the obligations due, Grand
Textile withdrew the imported goods from
storage. BOC demanded payment from Grand
Textile as importer and from the petitioners as
sureties. All three failed to pay. The government
filed a collection suit against the parties.
Lower Court ruled against petitioners, CA
affirmed. Petitioners allege that: (1) they were
released from their obligations under their bonds
when Grand Textile withdrew the imported goods
without payment of taxes, duties, and other
charges; and (2) that their non-involvement in the
active handling of the warehoused items from the
time they were stored up to their withdrawals
substantially increased the risks they assumed
under the bonds they issued, thereby releasing
them from liabilities under these bonds.
ISSUE: Whether the withdrawal of the stored
goods, wares, and merchandise without notice
to them as sureties released them from any
liability for the duties, taxes, and charges they
committed to pay under the bonds they issued?
HELD: NO. By its very nature under the terms of
the laws regulating suretyship, the liability of the
surety is joint and several but limited to the
amount of the bond, and its terms are
determined strictly by the terms of the contract
of suretyship in relation to the principal contract
between the obligor and the obligee. The
definition and characteristics of a suretyship bring
into focus the fact that a surety agreement is an
accessory contract that introduces a third party
element in the fulfillment of the principal
obligation that an obligor owes an obligee. In
short, there are effectively two (2) contracts
involved when a surety agreement comes into
play a principal contract and an accessory
contract of suretyship. Under the accessory
contract, the surety becomes directly, primarily,
and equally bound with the principal as the
original promissor although he possesses no
direct or personal interest over the latters
obligations and does not receive any benefit
therefrom.
Considered in relation with the underlying laws

that are deemed read into these bonds, it is at
once clear that the bonds shall subsist that is,
shall remain in full force and effect unless the
imported articles are regularly and lawfully
withdrawn. . .on payment of the legal customs
duties, internal revenue taxes, and other charges
to which they shall be subject. Fully fleshed
out, the obligation to pay the duties, taxes, and
other charges primarily rested on the principal
Grand Textile; it was allowed to warehouse the
imported articles without need for prior payment
of the amounts due, conditioned on the filing of a
bond that shall remain in full force and effect
until the payment of the duties, taxes, and
charges due. Under these terms, the fact that a
withdrawal has been made and its circumstances
are not material to the sureties liability, except
to signal both the principals default and the
elevation to a due and demandable status of the
sureties solidary obligation to pay. Under the
bonds plain terms, this solidary obligation
subsists for as long as the amounts due on the
importations have not been paid. Thus, it is
completely erroneous for the petitioners to say
that they were released from their obligations
under their bond when Grand Textile withdrew the
imported goods without payment of taxes, duties,
and
charges.
From
a
commonsensical
perspective, it may well be asked: why else would
the law require a surety when such surety would
be bound only if the withdrawal would be regular
due to the payment of the required duties, taxes,
and other charges?
We note in this regard the rule that a surety is
released from its obligation when there is a
material alteration of the contract in connection
with which the bond is given, such as a change
which imposes a new obligation on the promising
party, or which takes away some obligation
already imposed, or one which changes the legal
effect of the original contract and not merely its
form. A surety, however, is not released by a
change in the contract which does not have the
effect of making its obligation more onerous.
We find under the facts of this case no significant
or material alteration in the principal contract
between the government and the importer, nor in
the obligation that the petitioners assumed as
sureties. Specifically, the petitioners never
assumed, nor were any additional obligation
imposed, due to any modification of the terms of
importation and the obligations thereunder. The
obligation, and one that never varied, is on the
part of the importer, to pay the customs duties,
taxes, and charges due on the importation, and
on the part of the sureties, to be solidarily bound
to the payment of the amounts due on the
imported goods upon their withdrawal or upon
55
expiration of the given terms. The petitioners

lack of consent to the withdrawal of the goods, if
this is their complaint, is a matter between them
and the principal Grand Textile; it is a matter
outside the concern of government whose
interest as creditor-obligee in the importation
transaction is the payment by the importerobligor of the duties, taxes, and charges due
before the importation process is concluded.
With respect to the sureties who are there as
third parties to ensure that the amounts due are
paid, the creditor-obligee's active concern is to
enforce the sureties solidary obligation that has
become due and demandable.
With regard to the issue on the notice, the surety
does not, by reason of the surety agreement,
earn the right to intervene in the principal
creditor-debtor relationship; its role becomes
alive only upon the debtors default, at which
time it can be directly held liable by the creditor
for payment as a solidary obligor. A surety
contract is made principally for the benefit of the
creditor-obligee and this is ensured by the
solidary nature of the sureties undertaking.
Under these terms, the surety is not entitled as a
rule to a separate notice of default, nor to the
benefit of excussion, and may be sued separately
or
together
with
the
principal
debtor.
Significantly, nowhere in the petitioners bonds
does it state that prior notice is required to fix the
sureties liabilities.
Without
such
express
requirement, the creditors right to enforce
payment cannot be denied as the petitioners
became bound as soon as Grand Textile, the
principal debtor, defaulted. Thus, the filing of the
collection suit was sufficient notice to the sureties
of their principals default.
FACTS:
this mortgage shall immediately become

due and payable and this mortgage on the
property herein mentioned as well as the
Luzon Surety Bond may be foreclosed by
the vendor-mortgagee
Roa failed to pay the monthly installment

and the whole amount fell due.
The defendant asked for an extension

which was granted.
After the extension given, the surety now

argued that they already release from
their obligation.
ISSUE:
HELD:
RADIO CORP. OF THE PHILS. v ROA

The defendant Jesus R. Roa became
indebted to the Philippine Theatrical
Enterprises, Inc., in the sum of P28,400
payable in seventy-one equal monthly
installments at the rate of P400 a month
commencing thirty days after December
11, 1931, with five days grace monthly
until complete payment of said sum. On
that same date the Philippine Theatrical
Enterprises, Inc., assigned all its right and
interest in that contract to the Radio
Corporation of the Philippines.
In the said contract there was an
accelerating clause that in case the
vendee-mortgagor fails to make any of the
payments as hereinbefore provided, the
whole amount remaining unpaid under
Whether or not the extension granted in

the above copied letter by the plaintiff,
without the consent of the guarantors, the
herein appellants, extinguishes the latter's
liability not only as to the installments due
at that time, as held by the trial court, but
also as to the whole amount of their
obligation?
FACTS:
NO, The rule that an extension of time

granted to the debtor by the creditor,
without the consent of the sureties,
extinguishes the latter's liability is
common both to Spanish jurisprudence
and the common law; and it is well settled
in English and American jurisprudence
that where a surety is liable for different
payments, such as installments of rent, or
upon a series of promissory notes, an
extension of time as to one or more will
not affect the liability of the surety for the
others
VILLA v GARCIA BOSQUE
A sale of property was made by the attorney in

fact for a stated consideration, part of which was
paid in cash and the balance made payable in
deferred instalments. The attorney in fact then
executed a substituted power of attorney in favor
of a third person to enable the latter to collect the
deferred instalments.
SC:
-
Extension of time by Creditor to Principal

Debtor; Effect on liability of sureties
56
Where the purchase price of property is

payable in various installments, an
extension of time granted by the creditor
to the debtor with respect to one
instalment will discharge the sureties,
whether simple or solidary, from ALL
liability as to such instalment bit it DOES
NOT AFFECT their liability for other
instalments
unconnected
with
the
extension of time.
HOSPICIO DE SAN JOSE v FIDELITY

SECURITY BANK v CUENCA
DOCTRINE:
An extension granted to the debtor
by the creditor without the consent of the
guarantor extinguishes the guaranty. The 1989
Loan Agreement expressly stipulated that its
purpose was to liquidate, not to renew or
extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989
Loan Agreeement, which had alledgedly extended
the original P8 million credit facility. Hence, his
obligation as a surety should be deemed
extinguished, pursuant to Article 2079 of the Civil
Code, which specifically states that [a]n
extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes
the guaranty.
An essential alteration in the terms of a
Loan Agreement without the consent of the
surety extinguishes the latters obligation. The
submission that only the borrower, not the surety,
is entitled to be notified of any modification in the
original loan accommodation is untenable-such
theory is contrary to the to the principle that a
surety cannot assume an obligation more onerous
than that of the principal. That the Indemnity
Agreement is a continuing surety does not
authorize the lender to extend the scope of the
principal obligation inordinately; A continuing
guaranty is one which covers all transaction,
including those arising in the future, which are
within the description or contemplation of the
contract of guaranty, until the expiration or
termination thereof.
Facts:
PNB v MANILA SURETY
PNB had opened a letter of credit and

advanced thereon $120K to Edgingtom Oil
Refinery for 8,000 tons of hot asphalt. Of this
amount, 2,000 tons were released and
delivered to Adams & Taguba Corp (ATACO)
under a trust receipt guaranteed by Manila
Surety & Fidelity Co. (MSFC) up to the amount
of 75K.
To pay for the asphalt, ATACo constituted PNB

its assignee and atty-in-fact to receive and
collect from the Bureau of Public Works (BPW)
the amount aforesaid out of funds payable to
the assignor under a purchase order.
ATACO delivered to BPW and the latter
accepted the asphalt to the total value of
400K.
After this, PNB regularly collected for 8
months. Thereafter, it ceased to collect until
after 4 years, its investigators found that
more money were payable to ATACO from
BPW, because the latter allowed other
creditors to collect funds due to ATACO under
the same purchase order.
PNB demanded from ATACO and MSFC for
payment but both refused.
PNB filed a complaint against ATACO and
MSFC to recover the balance with interests
and costs.
PNB contends that the power of attorney
obtained from ATACO was merely an
additional security in its favor and that it was
the duty of the surety not that of the creditor
to see to it that the obligor fulfills his
obligations and that the creditor owed the
surety no duty of active diligence to collect
any sum from the principal debtor.
Issue: Whether or not MFSC should be held liable

for the unpaid balance?
Held: No, MFSC is not liable.
PNB is not negligent in failing to collect from the
principal debtor but is negligent for its failure 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 care of a good father of the
family and becomes liable for damages which the
principal may suffer through non-performance.
Even if the assignment with power of attorney
from the principal debtor were considered as
mere additional security, still by allowing the
assigned funds to be exhausted without notifying
the surety, PNB deprived the former of any
possibility of recoursing against that security.
Article 2080 of the Civil Code provides that
guarantors even though they are solidary,
are released from their obligation whenever
some act of the creditor they cannot be
subrogated to the rights, mortgages and
preferences of the latter.
57
PROVISIONS COMMON TO PLEDGE AND

MORTGAGE
ARENAS v RAYMUNDO
Facts: Estanislaua Arenas and Julian La O, brought
suit against Fausto O. Raymundo (pawnshop
owner). The plaintiffs alleged that the said
jewelry, during the last part of April or the
beginning of May, 1908, was delivered to Elena
de Vega to sell on commission, and that the
latter, in turn, delivered it to Conception Perello,
likewise to sell on commission, but that Perello,
instead of fulfilling her trust, pledged the jewelry
in the defendant's pawnshop. The said jewelry
was then under the control and in the possession
of the defendant, as a result of the pledge by
Perello, and that the former refused to deliver it
to the plaintiffs.
Issue: W/N the
pawnshop should return the
jewelry to the plaintiffs?
Ruling: Yes. In the present suit, it was not proven
that Estanislaua Arenas authorized Perello to
pawn the jewelry given to her by Arenas to sell on
commission. Conception Perello was not the
legitimate owner of the jewelry which she
pledged to the defendant Raymundo, for a
certain sum that she received from the latter as a
loan, the contract of pledge entered the jewelry
so pawned cannot serve as security for the
payment of the sum loaned, nor can the latter be
collected out of the value of the said jewelry. The
Civil Code prescribes as one of the essential
requisites of the contracts of pledge and of
mortgage, that the thing pledged or mortgaged
must belong to the person who pledges or
mortgages it. This essential requisite for the
contract of pledge between Perello and the
defendant being absent as the former was not
the owner of the jewelry given in pledge.
UNION MOTOR CORP. v CA
This case is about the spouses respondents who
bought a jeepney worth 30k. to finance the
purchase, the spouses entered into a chattel
mortgage with Union Motors wherein the security
will be the jeepney. Union motors then transferred
the mortgage to a financing company. Receipts
and other documents of ownership were issued
however, the jeep is still not in the possession of
the spouses. The spouses tried to have
possession of the jeep but failed. Frustrated, they
did not continue the payment. LC ruled in favor of
the spouses saying that they are not liable
because there is still no delivery. Finance Co.
claimed there was constructive delivery because
how can the spouses mortgage the property if
they do not own the it.
Issue: WoN there was delivery

Ruling: Non! Chattel mortgage do not prove
delivery.
DBP v PRUDENTIAL
CAVITE DEVELOPMENT v SPOUSES LIM
FACTS:
Rodolfo Guansing obtained a loan in the
amount of P90k from Cavite Devt Bank
(CDB) and mortgaged a parcel of land
covered by TCT in his name to secure the
loan.
When Guansing defaulted in the payment
of his loan, CDB foreclosed the mortgage
and consolidated the title to the property
in its name
R Lim offered to purchase the property
from CDB and paid P30k as option money.
She later on discovered that the subject
property was originally registered in the
name of Perfecto Guansing, father of
Rodolfo Guansing.
R filed an action for specific performance
and damages against CDB for serious
misrepresentation
CDB denied that a contract of sale was
ever perfected between them and R. Rs
letter offer clearly states that the sum of
P30k was given as option money NOT
earnest money; therefore only an option
contract
ISSUE: WON there was a valid foreclosure of the
mortgage and subsequently a contract of sale?
HELD: NO
NEMO DAT QUOD NON HABET
The sale by CDB to Lim of the property
mortgaged by Rodolfo Guansing is
deemed a nullity for CDB did not have a
valid title to the said property.
CDB never acquired a valid title to the

property because the foreclosure sale, by
virtue of which, the property had been
awarded to CDB as highest bidder, is
likewise void since the mortgagor was not
the owner of the property foreclosed.
DE LEON v CALALO
FACTS:
This case was brought below by respondent
Eduardo Calalo for the annulment of the
mortgage executed by his brother, Augorio
Calalo, in favor of petitioner Roberto de Leon
58
covering a piece of land and the improvements

thereon, consisting of a residential house and a
commercial building located at 45/4th Street,
East Tapinac, Olongapo City. Respondent Eduardo
alleged that he was the owner of the property
mortgaged, having bought it for P306,000.00
from the spouses Federico and Marietta Malit on
September 13, 1984. He claimed that, as he was
then a member of the merchant marines and
stayed abroad, the Deed of Absolute Sale
covering the land was made in favor of his
brother, Augorio Calalo; that on April 8, 1985,
Augorio executed a Deed of Donation in favor of
the minor Julsunthie Calalo, herein respondents
son, who, from the time the property was
purchased until the filing of the complaint, had
been receiving the fruits of the property; that on
September 14, 1988, Augorio mortgaged the said
property to petitioner Roberto de Leon without his
[respondents] knowledge and consent; that the
mortgage was amended on September 30, 1988;
that Augorio did not have any right to mortgage
the property because he was not the owner
thereof; and that he (respondent Eduardo)
learned only in June 1992 that the property was
the subject of an extrajudicial foreclosure. Named
defendants in the action were petitioner Roberto
de Leon, Augorio Calalo and Benjamin Gonzales,
the sheriff conducting the foreclosure proceeding.
In due time, petitioner De Leon filed an answer in
which he claimed to be a mortgagee in good
faith,
having
previously
ascertained
the
ownership of Augorio who occupied and
possessed the land in question and in whose
name the land was registered in the Register of
Deeds and in various other documents. He
pointed out that even the deed of sale attached
to respondents complaint showed that the land
was in Augorios name, clearly proving that the
latter owned the property. Petitioner De Leon
averred that the mortgage in his favor was
registered with the Register of Deeds and that it
had been amended four times.
ISSUE: W/N the mortgage executed by Augorio
Calalo in favor of petitioner De Leon is valid.
HELD:
There is no dispute that the land subject of the
mortgage is titled in the name of Augorio Calalo.
Nor is there any question that petitioner De Leon
did not know of the claim of ownership of
respondent Eduardo Calalo until after the present
action was instituted. As the trial court found,
petitioner De Leon examined the relevant
documents pertaining to the land, consisting of
the transfer certificate of title, the tax
declarations in the City Assessors Office and
information on the records in the barangay, and

found that the land was registered in the name of
Augorio Calalo. Upon due inspection of the
property, he also found it to be occupied by
Augorio Calalo. Petitioner had no reason to
believe that the land did not belong to Augorio.
Persons dealing with property covered by a
torrens certificate of title, as buyers or
mortgagees, are not required to go beyond what
appears on the face of the title. The public
interest in upholding the indefeasibility of torrens
titles, as evidence of the lawful ownership of the
land or of any encumbrance thereon, protects
buyers or mortgagees who, in good faith, rely
upon what appears on the face of the certificate
of title.4 Petitioner De Leon is a mortgagee in
good faith.
Whether the money used in acquiring the
property from the original owners came from
respondent Eduardo Calalo and the title to the
property was placed in the name of his brother
Augurio Calalo only because respondent thought
he was not qualified to acquire lands in the
Philippines because he had become an American
citizen, and that the land was subsequently
donated to respondent Eduardos son, Julsunthie,
are matters not known to petitioner. Hence,
whether Augorio Calalo committed a breach of
trust and whether the property was validly
donated to petitioners son Julsunthie are
questions which must be resolved in a separate
proceeding.
CEBU INTERNATIONAL v CA
ERENA v QUERRA-KAUFFMAN
FACTS: Respondent is the owner of a lot with
house, with the TCT kept in a safety deposit box.
She left the key of the box to her husband as she
was leaving for the US. Later on, the daughter of
respondent as well as her husband left for the US,
and the key was entrusted to the sister of her
husband, Mira Bernal. After a few months,
respondent asked her sister to get the TCT in the
safety deposit box to be able to sell the property.
When the safe was broken, the items inside were
missing, including the title to the lot and tax
declarations, as well as jewelry.
Respondent discovered from Bernal that she and

Jennifer Ramirez, Victors daughter took the title
and mortgaged it to petitioner. There was a
woman who pretended to be the owner of the lot,
showing the TCT in her name as Vida Dana
Querrer and identification card. Petitioner verified
with the Office of the Register of Deeds that the
property was in the name of Vida Dana Querrer
and that it was free of any lien or encumbrance.
59
Subsequently, petitioner was convinced to enter

into a Real Estate Mortgage Contract which was
later on notarized and filed with the Office of the
Register of Deeds and annotated on the TCT.
Respondent filed a complaint against petitioner,

Bernal and Ramirez for Nullification of Deed of
Real Estate Mortgage.
The RTC ruled in favor of petitioner and declared

the Deed of Real Estate Mortgage valid. The CA
rendered judgment in favor of defendant on the
ground that in a Real Estate Mortgage contract, it
is essential that the mortgagor be the absolute
owner of the property to be mortgaged;
otherwise the mortgage is void.
ISSUE: WON THE REAL

CONTRACT IS VALID?
ESTATE
MORTGAGE
HELD: NO. One of the essential requisites of a

mortgage contract is that the mortgagor must be
the absolute owner of the thing mortgaged. A
mortgage is, thus, invalid if the mortgagor is not
the property owner. In this case, the trial court
and the CA are one in finding that based on the
evidence on record the owner of the property is
respondent who was not the one who mortgaged
the same to the petitioner.
Petitioner cannot be considered an innocent

purchaser for value, relying on the Torrents title.
While a Torrens title serves as evidence of an
indefeasible title to the property in favor of the
person whose name appears therein, when the
instrument presented for registration is forged,
even if accompanied by the owners duplicate
certificate of title, the registered owner does not
thereby lose his title, and neither does the
assignee of the mortgagee, for that matter,
acquire any right or title to the property. In such a
case, the transferee or the mortgagee, based on
a forged instrument, is not even a purchaser or a
mortgagee for value protected by law.
Petitioner cannot also invoke the doctrine of a

mortgagee on good faith. Said doctrine speaks of
a situation where, despite the fact that the
mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage

contract or any foreclosure sale arising therefrom
are given effect by reason of public policy. The
doctrine of mortgagee in good faith presupposes
that the mortgagor, who is not the rightful owner
of the property, has already succeeded in
obtaining a Torrens title over the property in his
name and that, after obtaining the said title, he
succeeds in mortgaging the property to another
who relies on what appears on the said title- it
does not apply to a situation where the title is still
in the name of the rightful owner and the
mortgagor is a different person pretending to be
the owner.
PNB v AGUDELO
Vda. DE JAYME v CA
FACTS:
- Spouses Jayme (P) are the registered
owners of a parcel of land. They entered
into a contract of lease with Asian Cars (R)
covering half of the lot for 20 years
- The contract allows R to mortgage the
property as long as the proceeds will be
for the construction of a building on the
land.
- R mortgaged the property for P6M to
MetroBank, covering the whole lot, and in
which P signed the documents. R also
executed an undertaking wherein the
officers of R are liable personally to the
mortgage
- R defaulted and MetroBank foreclosed the
property.
- P filed for annulment of mortgage as it
was acquired through fraud
- RTC and CA declared the mortgage and
undertaking valid
ISSUE: WON Mortgage allowing R to mortgage the
property was valid
SC: YES
- It has long been settled that it is valid so
long as valid consent was given. In
consenting thereto even granting that
petitioner may not be assuming personal
liability for the debt, her property shall
nevertheless secure and respond for the
performance of the principal obligation
- The law recognizes instances when
persons not directly parties to a loan
agreement may give as security their own
properties for the principal transaction.
- In this case, the spouses should not be
allowed to disclaim the validity of a
transaction they voluntarily and knowingly
entered into for the simple reason that
such transaction turned out prejudicial to
them later on.
60
Records show that P voluntarily agreed to

use their property as collateral for Rs
loan, hence, no fraud
The undertaking made by R and its
officers are valid, hence they are liable to
reimburse P for the damages they suffered
by reason of the mortgage
SPOUSES BELO v PNB
FACTS:
1) Eduarda Belo owned an agricultural land with
an area of 661,288 square meters in Panitan,
Capiz, which she leased a portion to respondents
spouses Eslabon, for a period of 7 years at the
rate of P7,000.00 per year.
2) Respondents spouses Eslabon obtained a loan
from PNB secured by a real estate mortgage on
their own 4 residential houses located in Roxas
City, as well as on the agricultural land owned by
Eduarda Belo. The assent of Eduarda Belo to the
mortgage was acquired through a special power
of attorney which was executed in favor of
respondent Marcos Eslabon on June 15, 1982.
3) The spouses Eslabon failed to pay their loan
obligation, and so extrajudicial foreclosure
proceedings against the mortgaged properties
were instituted by PNB and was the highest
bidder
of
the
foreclosed
properties
at
P447,632.00.
4) Meanwhile, Eduarda Belo sold her right of
redemption to petitioners spouses Enrique and
Florencia Belo under a deed of absolute sale of
proprietary and redemption rights. Before the
expiration of the redemption period, petitioners
spouses Belo tendered payment for the
redemption of the agricultural land which
includes the bid price of respondent PNB, plus
interest and expenses.
5) However, PNB rejected the tender of payment
of petitioners spouses Belo contending that the
redemption price should be the total claim of the
bank on the date of the auction sale and custody
of property plus charges accrued and interests
amounting to P2,779,978.72 to which the
spouses disagreed and refused to pay the said
total claim of respondent PNB. Thereafter the\
spouses Belo filed in the RTC an action for
declaration of nullity of mortgage, with an
alternative cause of action, in the event that the
accommodation mortgage be held to be valid, to
compel respondent PNB to accept the redemption
price tendered by petitioners spouses Belo which
is based on the winning bid price of respondent
PNB in the extrajudicial foreclosure. The RTC ruled

in favour of the spouses belo.
6) On appeal, the CA ruled that the petitioners
spouses Belo should pay the entire amount due
to PNB under the mortgage deed at the time of
the foreclosure sale plus interest, costs and
expenses.
ISSUE: whether or not the SPA the real estate
mortgage contract, the foreclosure proceedings
and the subsequent auction sale involving
Eduarda Belo's property are valid. And assuming
they are valid, whether or not the petitioners are
required to pay, as redemption price, the entire
claim of respondent PNB in the amount of
P2,779,978.72 as of the date of the public auction
sale on June 10, 1991.
HELD:
A) The validity of the SPA and the mortgage
contract cannot anymore be assailed due to
petitioners Belo failure to appeal the same after
the trial court rendered its decision affirming their
validity.
B) Also, the SPA executed by Eduarda Belo in
favor of the respondents spouses Eslabon and the
Real
Estate
Mortgage
executed
by
the
respondents spouses in favor of respondent PNB
are valid. It is stipulated in paragraph three (3) of
the SPA that Eduarda Belo appointed the Eslabon
spouses "to make, sign, execute and deliver any
contract of mortgage or any other documents of
whatever nature or kind . . . which may be
necessary or proper in connection with the loan
herein mentioned, or with any loan which my
attorney-in-fact may contract personally in his
own name
C) ThisSPA was not meant to make her a coobligor to the principal contract of loan between
respondent PNB, as lender, and the spouses
Eslabon, as borrowers. Eduarda Belo consented to
be an accommodation mortgagor in the sense
that she signed the SPA to authorize respondents
spouses Eslabons to execute a mortgage on her
land.
D) An accommodation mortgage isnt 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."
61
E) An accommodation mortgagor, ordinarily, is

not himself a recipient of the loan.
F) There is no doubt that Eduarda Belo, assignor
of the petitioners, is an accommodation
mortgagor. Section 25 of P.D. No. 694 provides
that "the mortgagor shall have the right to
redeem the property by paying all claims of the
Bank against him". From said provision can be
deduced that the mortgagor referred to by that
law is one from whom the bank has a claim in the
form of outstanding or unpaid loan; he is also
called a borrower or debtor-mortgagor.
Alinea and Belarmino loaned P480 from

Alcantara.
According to the loan agreement, if the period
has expired without payment of the loan, the
house and lot of Alinea and Belarmino will be
considered sold to Alcantara.
Alinea and Belarmino failed to pay.
They refused to deliver the property to
Alcantara.
Alcantara filed an action against them.
The defendants contend that the amount
claimed by Alcantara included the interest
and that the principal borrowed was only 200
and that the interest was 280.
They also alleged as their special defense that
they offered to pay Alcantara the sum of 480
but the latter had refused to accept the same.
G) PNB has no claim against accommodation

mortgagor Eduarda Belo inasmuch as she only
mortgaged her property to accommodate the
Eslabon spouses who are the loan borrowers of
the PNB. The principal contract is the contract of
loan
between
the
Eslabon
spouses,
as
borrowers/debtors, and the PNB as lender. The
accommodation real estate mortgage which
secures the loan is only an accessory contract.
Thus, the term "mortgagor" in Section 25 of P.D.
No. 694 pertains only to a debtor-mortgagor and
not to an accommodation mortgagor.
H) Moreover, the mortgage contract provides that

". . . the mortgagee may immediately foreclose
this mortgage judicially in accordance with the
Rules of Court or extrajudicially in accordance
with Act No. 3135, as amended and Presidential
Decree No. 385 Thus, since the mortgage
contract in this case is in the nature of a contract
of adhesion as it was prepared solely by
respondent, it has to be interpreted in favor of
petitioners.
1) No. The property, the sale of which was

agreed to by the debtors does not appear
mortgaged in favor of the creditor because in
order to constitute a valid mortgage it is
indispensable
that
the
instrument
be
registered in the Register of Property and the
document contract does not constitute a
mortgage nor it could possibly be a mortgage,
for the reason that the said document is not
vested with the character and conditions of a
public instrument.
J) While the petitioners, as assignees of Eduarda

Belo, are not required to pay the entire claim of
respondent PNB against the principal debtors,
they can only exercise their right of redemption
with respect to the parcel of land belonging to
Eduarda Belo, the accommodation mortgagor.
Thus, they have to pay the bid price less the
corresponding loan value of the foreclosed 4
residential lots of the spouses Eslabon. Thus,
petitioners are allowed to redeem only the
property registered in the name of Eduarda Belo,
by paying only the bid price less the
corresponding loan value of the foreclosed (4)
residential lots of the respondents spouses
Eslabon.
BUSTAMANTE v ROSEL
ALCANTARA v ALINEA
Facts:
Issue:
1) WON there was a valid mortgage?
2) WON the defendants should deliver
property to Alcantara?
the
Held:
The contract is not a pledge since the said

property is not personal property and the
debtor continued in possession thereof and
was never been occupied by the creditor.
It is also not an antichresis by reason that as
the creditor has never been in possession of
the property nor has enjoyed the said
property nor for one moment received its
rents.
2) Yes. The will of the parties are controlling, In
this case, a contract of loan and a promise of
sale of a house and lot, the price of which
should be the amount loaned, if within a fixed
period of time such amount should not be
paid by the debtor-vendor of the property to
the creditor-vendee of same. The fact that the
parties have agreed at the same time, in such
a manner that the fulfillment of the promise of
sale would depend upon the nonpayment or
62
return of the amount loaned, has not

produced any change in the nature and legal
conditions of either contract, or any essential
defect which would tend to nullify the same.
MAHONEY v TUASON
Facts: P. Blanc, the owner of the jewels, entered
into a contract of pledge, delivering to the
creditor Mariano Tuason several jewels and other
merchandise for the purpose of securing the
fulfillment of the obligation which he (Blanc) had
contracted in favor of the latter who had
guaranteed the payment of a considerable
amount of money which Blanc owed to the
Chartered Bank. Creditor Tuason paid to the
Chartered Bank the sum of sixteen thousand
pesos (P16,000) which the debtor Blanc owed and
failed to pay, and that the latter did not
reimburse Tuason the amount paid to the bank
together with interests thereon.
upon the execution of the sale, subject only to

the vendors rights of redemption. The said
stipulation is a pactum commissorium which
enables the mortgagee to acquire ownership of
the mortgaged property without need of
forclosure. It is void. Its insertion in the contract is
an avowal of the intention to mortgage rather
than to sell the property.
DAYRIT v CA
FACTS:
Dayrit, Sumbillo and Angeles
entered into a contract with Mobil Oil Phil, entitled
LOAN & MORTGAGE AGREEMENT. Defendants
violated the LOAN & MORTGAGE AGREEMENT
because they only paid one installment. They also
failed to buy the quantities required in the Sales
Agreement.
Issue: W/N Tuason can appropriate the things

given by way of pledge?
The plaintiff made a demand, Dayrit answered

acknowledging his liability. Trial Court ruled in
favor of plaintiff and also ruled that each of the
three defendants shall pay 1/3 of the cost. No
appeal had been taken so the decision became
final and executor.
Ruling: No.
Tuason is entitled to retain and
appropriate to himself the merchandise received
in pledge is null and indefensible, because he can
only recover his credit, according to law, from the
proceeds of the sale of the same. Art. 2088.
Mobil filed for the execution of the judgment.

Dayrit opposed alleging that they had an
agreement with Mobil, that he would not appeal
anymore but Mobil would release the mortgage
upon payment of his 1/3 share.
LANUZA v DE LEON
Spouses lanuza executed a deed of sale with a
right to repurchase to Reyes. Upon expiration of
term to repurchase, the time was extended
without the wife of lanuza signing the document.
A stipulation to the effect that the ownership will
only be passed to the vendee if the vendor fails
to repurchase the property was included. The
spouses then mortgage the property to
respondent to secure a debt. The debt was
unpaid and respondent filed a case to foreclose
the mortgage which was granted. Reyes filed a
case for consolidation, claiming she has the right
to the property. Reyes claims the ownership in the
property automatically passes immediately to
him after the sale and not after the end of the
period to repurchase.
Issue: won reyes contention valid
Ruling: yes. a stipulation in a purported pacto de
retro sale that the ownership over the property
sold would automatically pass to the vendee in
case no redemption was effected within the
stipulated period is contrary to the nature of a
true pacto de retro sale, under which the vendee
acquires ownership of the thing sold immediately
Mobil claimed that the agreement was that it

would only release the mortgage if the whole
principal mortgaged debt plus the whole accrued
interest were fully paid.
ISSUE: Whether or not the CFI erred in ordering
the sale at public auction of the mortgaged
properties to answer for the entire principal
obligation of Dayrit, Sumbillo and Angeles.
RULING:
While it is true that the obligation is merely joint
and each of the defendant is obliged to pay his
1/3 share of the joint obligation, the undisputed
fact remains that the intent and purpose of the
LOAN & MORTGAGE AGREEMENT was to secure
the entire loan.
The court ruled that a mortgage directly
and immediately subjects the property upon
which it is imposed, the same being
indivisible even though the debt may be
divided, and such indivisibility likewise
unaffected by the fact that the debtors are
not solidarily liable.
FACTS:
YU v PCIB
63
P mortgaged their title, interest, and

participation over several parcels of land
located in Dagupan City and Quezon City
in favour of PCIB (R) as security for the
payment of a loan in the amount of P9mill
P failed to pay the loan; R filed a Petition
for Extrajudicial Foreclosure of Real Estate
Mortgage on the Dagupan City properties.
A Certificate of Sale was issued in favour
of R. Subsequently, R filed an Ex-Parte
Petition for Writ of Possession before RTC
Dagupan
P filed a Motion to Dismiss. They argued
that the Certificate of Sale is void because
the real estate mortgage is indivisible, the
mortgaged properties in Dagupan City and
Quezon City cannot be separately
foreclosed.
R the filing of two separate foreclosure
proceedings did not violate Article 2089 of
the Civil Code on the indivisibility of a real
estate mortgage since Section 2 of Act No.
3135 expressly provides that extra-judicial
foreclosure may only be made in the
province or municipality where the
property is situated. R further submits that
the filing of separate applications for
extra-judicial foreclosure of mortgage
involving several properties in different
locations is allowed by A.M. No. 99-10-050,
the
Procedure
on
Extra-Judicial
Foreclosure of Mortgage, as further
amended on August 7, 2001.
TC denied Motion
Where the application concerns the

extrajudicial foreclosure of mortgages
of real estates and/or chattels in
different
locations
covering
one
indebtedness, only one filing fee
corresponding to such indebtedness
shall be collected. The collecting Clerk
of Court shall, apart from the official
receipt of the fees, issue a certificate
of payment indicating the amount of
indebtedness, the filing fees collected,
the
mortgages
sought
to
be
foreclosed, the real estates and/or
chattels
mortgaged
and
their
respective
locations, which
certificate shall serve the purpose
of having the application docketed
with the Clerks of Court of the
places where the other properties
are located and of allowing the
extrajudicial
foreclosures
to
proceed
thereat.
(Emphasis
supplied)
ISSUE: WON a real estate mortgage over several

properties located in different localities can be
separately foreclosed in different places?
HELD: YES
What the law proscribes is the foreclosure
of only a portion of the property or a
number
of
the
several
properties
mortgaged corresponding to the unpaid
portion of the debt where, before
foreclosure proceedings, partial payment
was made by the debtor on his total
outstanding loan or obligation.
This also means that the debtor cannot
ask for the release of any portion of the
mortgaged property or of one or some of
the several lots mortgaged unless and
until the loan thus secured has been fully
paid, notwithstanding the fact that there
has been partial fulfillment of the
obligation. Hence, it is provided that the
debtor who has paid a part of the debt
cannot
ask
for
the
proportionate
extinguishment of the mortgage as long
as the debt is not completely satisfied. In
essence, indivisibility means that the

mortgage obligation cannot be divided
among the different lots, that is, each and
every parcel under mortgage answers for
the totality of the debt
A.M. No. 99-10-05-0,the Procedure on
Extra-Judicial Foreclosure of Mortgage,
lays down the guidelines for extra-judicial
foreclosure proceedings on mortgaged
properties located in different provinces. It
provides that the venue of the extrajudicial foreclosure proceedings is the
place where each of the mortgaged
property is located. Relevant portion
provides:
The indivisibility of the real estate

mortgage is not violated by conducting
two separate foreclosure proceedings on
mortgaged properties located in different
provinces as long as each parcel of land is
answerable for the entire debt
METROBANK v SLGT
FACTS:
On October 25, 1995, Dylanco and SLGT each
entered into a contract to sell with ASB for the
purchase of a unit (Unit 1106 for Dylanco and
Unit 1211 for SLGT) at BSA Towers then being
developed by the latter. As stipulated, ASB will
deliver the units thus sold upon completion of the
construction or before December 1999. Relying
on this and other undertakings, Dylanco and
64
SLGT each paid in full the contract price of their

respective units. The promised completion date
came and went, but ASB failed to deliver, as the
Project remained unfinished at that time. To make
matters worse, they learned that the lots on
which the BSA Towers were to be erected had
been mortgaged6 to Metrobank, as the lead bank,
and UCPB7 without the prior written approval of
the Housing and Land Use Regulatory Board
(HLURB).
Alarmed by this foregoing turn of events,
Dylanco, on August 10, 2004, filed with the
HLURB a complaint for delivery of property and
title and for the declaration of nullity of
mortgage. A similar complaint filed by SLGT
followed three (3) days later. At this time, it
appears that the ASB Group of Companies, which
included ASB, had already filed with the
Securities and Exchange Commission a petition
for rehabilitation and a rehabilitation receiver had
in fact been appointed.
What happened next are laid out in the OP
decision adverted to above, thus:
In response to the above complaints, ASB
alleged that it encountered liquidity
problems sometime in 2000 after its
creditors
[UCPB
and
Metrobank]
simultaneously demanded payments of
their loans; that on May 4, 2000, the
Commission (SEC) granted its petition for
rehabilitation; that it negotiated with UCPB
and Metrobank but nothing came out
positive from their negotiation .
On the other hand, Metrobank claims that
complainants [Dylanco and SLGT] have no
personality to ask for the nullification of
the mortgage because they are not parties
to the mortgage transaction ; that the
complaints must be dismissed because of
the ongoing rehabilitation of ASB; xxx that
its claim against ASB, including the
mortgage to the [Project] have already
been transferred to Asia Recovery
Corporation; xxx.
UCPB, for its part, denies its liability to
SLGT [for lack of privity of contract]
[and] questioned the personality of SLGT
to challenge the validity of the mortgage
reasoning that the latter is not party to the
mortgage contract [and] maintains that
the mortgage transaction was done in
good faith. Finally, it prays for the
suspension of the proceedings because of
the on-going rehabilitation of ASB.
In resolving the complaint in favor of

Dylanco and SLGT, the Housing Arbiter
ruled that the mortgage constituted over
the lots is invalid for lack of mortgage
clearance from the HLURB.
ISSUE: W/N The declaration of nullity of the entire
mortgage constituted on the project land site and
the improvements was valid. and
HELD:
Both petitioners do not dispute executing the
mortgage in question without the HLURBs prior
written approval and notice to both individual
respondents. Section 18 of Presidential Decree
No. (PD) 957 The Subdivision and Condominium
Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of
any unit or lot shall be made by the
owner or developer without prior
written approval of the [HLURB]. Such
approval shall not be granted unless it is
shown that the proceeds of the mortgage
loan shall be used for the development of
the condominium or subdivision project .
The loan value of each lot or unit covered
by the mortgage shall be determined
and the buyer thereof, if any, shall be
notified before the release of the
loan. The buyer may, at his option, pay
his installment for the lot or unit directly to
the mortgagee who shall apply the
payments to the corresponding mortgage
indebtedness secured by the particular lot
or unit being paid for . (Emphasis and
word in bracket added)
There can thus be no quibbling that the project
lot/s and the improvements introduced or be
introduced thereon were mortgaged in clear
violation of the aforequoted provision of PD 957.
And to be sure, Dylanco and SLGT, as Project unit
buyers, were not notified of the mortgage before
the release of the loan proceeds by petitioner
banks.
As it were, PD 957 aims to protect innocent
subdivision lot and condominium unit buyers
against fraudulent real estate practices. Its
preambulatory clauses say so and the Court need
not belabor the matter presently. Section
18, supra, of the decree directly addresses the
problem of fraud and other manipulative
practices perpetrated against buyers when the lot
or unit they have contracted to acquire, and
which they religiously paid for, is mortgaged
without their knowledge, let alone their consent.
The avowed purpose of PD 957 compels, as the
65
OP correctly stated, the reading of Section 18 as

prohibitory and acts committed contrary to it are
void. Any less stringent construal would only
accord unscrupulous developers and their
financiers unbridled discretion to follow or not to
follow PD 957 and thus defeat the very lofty
purpose of that decree. It thus stands to reason
that a mortgage contract executed in breach of
Section 18 of the decree is null and void.
It will not avail the petitioners any to feign

ignorance of PD 957 requiring prior written
approval of the HLURB, they being charged with
knowledge of such requirement since granting
loans secured by a real estate mortgage is an
ordinary part of their business.
CENTRAL BANK v CA
PLEDGE
The next question to be addressed turns on

whether or not the nullity extends to the entire
mortgage contract.
The poser should be resolved, as the CA and OP
did resolve it, in the affirmative. This disposition
stems from the basic postulate that a mortgage
contract is, by nature, indivisible. Consequent to
this feature, a debtor cannot ask for the release
of any portion of the mortgaged property or of
one or some of the several properties mortgaged
unless and until the loan thus secured has been
fully paid, notwithstanding the fact that there has
been partial fulfillment of the obligation. Hence, it
is provided that the debtor who has paid a part of
the debt cannot ask for the proportionate
extinguishments of the mortgage as long as the
debt is not completely satisfied.
The situation obtaining in the case at bench is
within the purview of the aforesaid rule on the
indivisibility of mortgage. It may be that Section
18 of PD 957 allows partial redemption of the
mortgage in the sense that the buyer is entitled
to pay his installment for the lot or unit directly to
the mortgagee so as to enable him - the said
buyer - to obtain title over the lot or unit after full
payment thereof. Such accommodation statutorily
given to a unit/lot buyer does not, however,
render the mortgage contract also divisible.
Generally, the divisibility of the principal
obligation is not affected by the indivisibility of
the mortgage. The real estate mortgage
voluntarily constituted by the debtor (ASB) on the
lots or units is one and indivisible. In this case,
the mortgage contract executed between ASB
and the petitioner banks is considered indivisible,
that is, it cannot be divided among the different
buildings or units of the Project. Necessarily,
partial extinguishment of the mortgage cannot be
allowed. In the same token, the annulment of the
mortgage is an all or nothing proposition. It
cannot be divided into valid or invalid parts. The
mortgage is either valid in its entirety or not valid
at all. In the present case, there is doubtless only
one mortgage to speak of. Ergo, a declaration of
nullity for violation of Section 18 of PD 957 should
result to the mortgage being nullified wholly.
YULIONGSIU v PNB
FACTS: Yulongsiu owned 2 vessels and equity in
FS-203, which were purchased by him from the
Philippine Shipping Commission, by installment.
Plaintiff obtained a loan from defendant and to
guarantee payment, plaintiff pledged the 2
vessels and the equity on FS-203, as evidenced
by a pledge contract. Plaintiff made a partial
payment and the remaining balance was renewed
by the execution of 2 promissory notes in the
banks favor. These two notes were never paid at
all by plaintiff on their respective due dates.
Defendant bank filed a criminal case against

plaintiff charging the latter with estafa through
falsification of commercial documents, and the
trial court convicted the plaintiff and was
sentenced to indemnify the defendant. The
corresponding writ of execution issued to
implement the order for indemnification was
returned unsatisfied as plaintiff was totally
insolvent.
Meanwhile, together with the institution of the

criminal
action,
defendant
took
physical
possession of the 2 vessels and transferred the
equity on FS-203 to the defendant. Later on, the
2 vessels were sold by defendant to third parties.
Plaintiff commenced an action for recovery on the

pledged items, and alleges, among others, that
the contract executed was a chattel mortgage so
the creditor defendant could not take possession
of the chattel object thereof until after there has
been default.
ISSUE: Whether the contract entered into

between plaintiff and defendant is a chattel
mortgage or a valid contract of pledge?
66
HELD: Its a contract of pledge. The contract itself

provides that it is a contract of pledge and the
judicial admission that it is a pledge contract
cannot be offset without showing of palpable
mistake.
The pledgee defendant was therefore entitled to

the actual possession of the vessels. The
plaintiffs continued operation of the vessels after
the pledge contract was entered into places his
possession subject to the order of the pledge. The
pledge can temporarily entrust the physical
possession of the chattels pledged to the pledgor
without invalidating the pledge. In this case, the
pledgor is regarded as holding the pledge merely
as a trustee for the pledge.
As to the validity of the pledge contract with

regard to delivery, plaintiff alleges that
constructive delivery is insufficient to make
pledge effective. The Court ruled that type of
delivery will depend on the nature and peculiar
circumstances of each case. Since the defendant
bank was, pursuant to the pledge contract, in full
control of the vessels through plaintiff, the former
could take actual possession at any time during
the life of the pledge to make more effective its
security.
FACTS:
FBDC entered and occupied the leased

premises. FBDC also appropriated the
equipment and properties left by Tirreno
pursuant to Section 22 of their Contract of
Lease as partial payment for Tirreno's
outstanding obligations.
Yllas Lending Corporation and Jose S.

Lauraya, in his official capacity as
President, (respondents) caused the sheriff
of Branch 59 of the trial court to serve an
alias writ of seizure against FBDC. On the
same day, FBDC served on the sheriff an
affidavit of title and third party claim
Despite FBDC's service upon him of an

affidavit of title and third party claim, the
sheriff proceeded with the seizure of
certain items from FBDC's premises
The sheriff delivered the seized properties

to respondents. FBDC questioned the
propriety of the seizure and delivery of the
properties to respondents without an
indemnity bond before the trial court.
FBDC argued that when respondents and
Tirreno entered into the chattel mortgage
agreement on 9 November 2000, Tirreno
no longer owned the mortgaged properties
as FBDC already enforced its lien on 29
September 2000.
FBDC v YLLAS LENDING
FBDC executed a lease contract in favor of

Tirreno, Inc. (Tirreno) over a unit at the
Entertainment Center - Phase 1 of the
Bonifacio Global City in Taguig, Metro
Manila
Two provisions in the lease contract are

pertinent to the present case: Section 20,
which is about the consequences in case
of default of the lessee, and Section 22,
which is about the lien on the properties of
the lease.
alleged failure to settle its outstanding

obligations
Tirreno began to default in its lease

payments in 1999. By July 2000, Tirreno
was already in arrears by P5,027,337.91.
FBDC and Tirreno entered into a
settlement agreement on 8 August 2000.
Despite the execution of the settlement
agreement, FBDC found need to send
Tirreno a written notice of termination
dated 19 September 2000 due to Tirreno's
ISSUE: Whether or not the dismissal of FBDC's

third party claim upon the trial court's erroneous
interpretation that FBDC has no right of
ownership over the subject properties because
Section 22 of the contract of lease is void for
being a pledge and a pactum commissorium?
HELD:
No, This stipulation is in the nature of a

resolutory condition, for upon the exercise
by the [lessor] of his right to take
possession of the leased property, the
contract is deemed terminated. This kind
of contractual stipulation is not illegal,
there being nothing in the law proscribing
such kind of agreement.
Judicial permission to cancel the

agreement was not, therefore necessary
because of the express stipulation in the
contract of [lease] that the [lessor], in
case of failure of the [lessee] to comply
with the terms and conditions thereof, can
67
take-over the possession of the leased

premises, thereby cancelling the contract
of sub-lease. Resort to judicial action is
necessary only in the absence of a special
provision granting the power of
cancellation.
We allow FBDC's forfeiture of Tirreno's

properties in the leased premises. By
agreement between FBDC and Tirreno, the
properties are answerable for any unpaid
rent or charges at any termination of the
lease. Such agreement is not contrary to
law, morals, good customs, or public
policy. Forfeiture of the properties is the
only security that FBDC may apply in case
of Tirreno's default in its obligations
PNB v ATENDIDO
(Re Incorporeal Rights)
FACTS:
Laureano Atendido (LA) obtained from PNB (P) a
loan payable in 120 days with interest. To
guarantee its payment LA pledge to the bank
2,000 cavans of palay which were deposited in a
warehouse and to that effect endorsed in favor of
the bank the corresponding WH receipt. Before
the maturity of the loan, the cavans of rice
dissappeared from the WH. LA failed to pay the
loan upon matrity and so the present action was
instituted. LA set up the defense that the quedan
covering the palay which was given as security
having been endorsed in blank in favor of the
bank and the palay having been lost or
disappeared, he thereby became relieved of
liability.
ISSUE: WoN LA is relieved from liability
SC: NO!
The surrender of the warehouse receipt fiven as
security, endorsed in blank was NOT that of a
final transfer or that WH receipt but merely as a
guaranty to the fulfillment of the obligation of
P3k. This being so, the ownership remains with
the pledgor subject only to foreclosure in case of
nonfulfillment
of
obligation.
The
pledgor,
continuing to be the owner of the goods pledged
during the pendency of the obligation in case of
the loss of the property, the loss is borne by him.
OCEJO PEREZ v INTERNATIONAL BANK
FACTS:
1) On March 7, 1914, Chua Teng Chong, executed
to the International Banking Corporation a
promissory note, payable one month after date,
for the sum of P20,000 which note was also
attached to another private document, signed by
Chua, which stated that he had deposited with
the bank, as security for the said note, 5,000

piculs of sugar, which were said stored in a
warehouse in Binondo, Manila.
2) The bank made no effort to exercise any active
ownership over said merchandise until the April
16, when it discovered that the amount of sugar
stored in the said warehouse was much less than
what was mentioned in the contract. The
agreement between the bank and Chua Teng
Chong with respect to the alleged pledge of the
sugar was never recorded in a public instrument.
3) On March 24, 1914, the plaintiff partnership
Ocejo, Perez and Co., entered into contract with
Chua for the sale to him of sugar where the
delivery should be made in April. The delivery
was completed April 16, 1914, and the sugar was
stored in the buyer's warehouse situated at
Muelle de la Industria. On this same date, the
bank sent an employee to inspect the sugar
described in the pledge agreement, which should
have been stored in the Calle Toneleros
warehouse. It was discovered that the amount of
sugar in that warehouse did not exceed 1,800
piculs, it was supposed to have 5,000 piculs of
sugar. Eventually, the employee was informed
that the rest of the sugar covered by the pledge
agreement was stored in the warehouse at No.
119, Muelle de la Industria. The bank's
representative immediately went to this
warehouse, found 3,200 piculs of sugar, of which
he took immediate possession, closing the
warehouse with the bank's padlocks.
4) On April 17, 1914, partnership Ocejo
presented, for collection, its account for the
purchase price of the sugar, but chua refused to
make payment, and up to the present time the
sellers have been unable to collect the purchase
price of the merchandise in question.
5) The partnership Ocejo made a demand on the
bank for the delivery of the sugar, to which
demand the bank refused to accede. A suit was
filed by Ocejo alleging that said defendant was
unlawfully holding the seized sugar, the property
of the plaintiff firm Ocejo, which the bank had
received from Chua Teng Chong, and prayed for
the judgment for the possession of said sugar.
6) Subsequently, by agreement of the parties, the
sugar was sold and the proceeds of the deposited
in the bank. Afterwards, a complaint in
intervention was filed by Chua Seco, the assignee
of the insolvency of Chua Teng Chong, asserting a
preferential right to the sugar, or to the proceeds
of its sale contending that the sugar is the
property of the insolvent estate represented by
68
him. The lower court rendered judgment in favor

of the Oceja
ISSUES:
(a) Did title to the sugar pass to the buyer upon
its delivery to him (chua seco)?
(b) Assuming to pay that the title passed to the
buyer, did his failure to pay the purchase price
authorize the seller to rescind the sale?
(c) Can the pledge of the sugar to the bank be
sustained upon the evidence as to the
circumstances under which it obtained physical
possession thereof?
HELD:
A) The SC agreed with Chuas contention that he
was entitled to demand payment of the sugar at
any time after the delivery. No term having been
stipulated within which the payment should be
made, payment was demandable at the time and
place of the delivery of the thing sold. The seller
did not avail himself of his right to demand
payment as soon as the right to such payment
arose, but as no term for payment was stipulated,
he was entitled, to require payment to be made
at any time after delivery, and it was the duty of
the buyer to pay the price immediately upon
demand. In essence, the delivery had the effect
of transmitting the title of the sugar to the buyer.
B) Failure on the part of the buyer to pay the
price on demand: Article 1506 of the Civil Code
provides that the contract of sale may be
rescinded for the same causes as all other
obligations, in addition to the special causes
enumerated in the preceding articles. It is also
observed that the article does not distinguish the
consummated sale from the merely perfected
sale. In the contract of the sale the obligation to
pay the price is correlative to the obligation to
deliver the thing sold. Nonperformance by one of
the parties authorizes the other to exercise the
right, conferred upon him by the law, to elect to
demand the performance of the obligation or its
rescission.
C) The sugar here in question could not be
possibly have been the subject matter of the
contract of pledge which the parties undertook to
create by the private document, inasmuch as it
was not at the time the property of the bank, and
this constitutes an indispensable requisite for the
creation of a pledge.
D) It is not shown that an effort was made to

pledge the sugar, the subject matter of this case.
Though it happened that the day the sugar was
delivered, the Chua gave the bank's
representative the keys of the warehouse on the
Muelle de la Industria in which the sugar was
stored, it was not because of an agreement
concerning the pledge of the sugar. From the
facts, no attempt was made to enter into any
agreement for the pledge of the sugar here in
question. The bank took possession of that sugar
under the erroneous belief, based upon the false
statement of Chua Teng Chong, that it was a part
of the lot mentioned in the private document.
Even assuming that an attempt was made to
pledge the sugar and that delivery was made in
accordance with the agreement, the pledge so
established would be void as against third
persons since it is provided Article 1865 of the
Civil Code that a pledge is without effect as
against third persons "if the certainty of the date
does not appear by public instrument."
E) As to assignee Chua Seco: He filed a complaint
in intervention in this suit, in which he contends
that by reason of its sale and delivery by plaintiff
to the insolvent, title to the sugar passed to the
latter and that the pledge set up by the bank is
void as to third persons. The title to the sugar
having been commenced against him before the
declaration of insolvency, the assignee, Chua
Seco, has a better right to its possession or to the
product of its sale during the pendency of this
action. The decision of the court below is
therefore reversed, and it is decided that the
assignee of the bankruptcy of Chua Teng Chong is
entitled to the product of the sale of the sugar
here in question, to wit, P10,826.76, together
with the interest accruing thereon, reserving
proceedings. So ordered.
CRUZ v LEE
Facts:
SARMIENTO v JAVELLANA
Spouses Villasenor obtained a loan from

Javellana to be paid within one year with an
interest of 25% p.a. evidenced by to
documents.
They pledged 4,000 worth of jewels.
Upon maturity, the Spouses requested for an
extension.
After 7 years, Villasenor offered to pay the
loan and redeem the jewels.
Javellana refused on the ground that
redemption period has already expired and he
has already bought the jewels from the wife of
Villasenor.
69
Villasenor brought an action against Javellana

to compel the return of the jewels pledged.
Issues:
1) WON Villasenor can still redeem the jewels?
2) WON the right to redeem has already expired?
Held:
1) Yes. As the jewels in question were in the
possession of the defendant to secure the
payment of a loan of 1,500 with interest
thereon
and
for
having
subsequently
extended the term of the loan indefinitely,
and so long as the value of the jewels pledged
was sufficient to secure the payment of the
capital and the accrued interest, the
defendant is bound to return the jewels or
their value to the plaintiffs, and the plaintiffs
have the right to demand the same upon the
payment by them of the sum of 1,500 plus
interest.
2) An action for recovery of the goods which
were pledged to secure the payment of a loan
evidenced by a document is an action on a
written contract which has a prescriptive
period of 10 years from the date on which the
debtor may have paid the debt and
demanded the return of the goods pledged.
In this case, the expiration of the contract was
in 1912 and the action to recover was filed in
1920, therefore, the action has not yet
prescribed.
PARAY v RODRIGUEZ
Facts: Respondents were the owners, in their
respective personal capacities, of shares of stock
in a corporation known as the Quirino-LeonorRodriguez Realty Inc.1 Sometime during the years
1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to
petitioners
Bonifacio
and
Faustina
Paray
("Parays")
the
payment of certain loan
obligations. When the Parays attempted to
foreclose the pledges on account of respondents
failure to pay their loans, respondents filed
complaints with the Regional Trial Court (RTC) of
Cebu City and , sought the declaration of nullity
of the pledge agreements. However the RTC, in
its decision3 dated 14 October 1988, dismissed
the complaint and gave "due course to the
foreclosure and sale at public auction of the
various pledges. Respondents then received
Notices of Sale which indicated that the pledged
shares were to be sold at public auction.
However, before the scheduled date of auction,

all of respondents caused the consignation with
the RTC Clerk of Court of various amounts. It was
claimed that respondents had attempted to
tender these payments to the Parays, but had
been
rebuffed.
Notwithstanding
the
consignations, the public auction took place as
scheduled,
with petitioner
Vidal
Espeleta
successfully bidding. Respondents instead filed
on 13 November 1991 a complaint seeking the
declaration of nullity of the concluded public
auction. Petitioners now argue that the essential
procedural requisites for the auction sale had
been satisfied.
Issue: W/N the the essential procedural requisites
for the auction sale had been satisfied?
Ruling: Yes. Under the Civil Code, the foreclosure
of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs
to do, if the credit has not been satisfied in due
time, is to proceed before a Notary Public to the
sale of the thing pledged.
MANILA SURETY v VELAYO
F: Manila Surety & Fidelity Co., upon request of
Rodolfo Velayo, executed a bond for P2,800.00 for
the dissolution of a writ of attachment obtained
by one Jovita Granados in a suit against Rodolfo
Velayo in the Court of First Instance of Manila.
Velayo undertook to pay the surety company an
annual premium of P112.00 and provided
collateral jewelry with the authority to sell in
case Manila Surety will be obliged to pay.
Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the
surety company was forced to pay P2,800.00 that
it later sought to recoup from Velayo; and upon
the latter's failure to do so, the surety caused the
pledged jewelry to be sold, realizing therefrom a
net product of P235.00 only The surety files a
claim against Velayo because the security Is
insufficient. Velayo claims the sale of the jewelry
even if insufficient extinguishes the principal
obligation.
Issue: Won Velayos contention is correct
Ruling: Yes! The sale of the thing pledged shall
extinguish the principal obligation, whther or not
the proceeds of the sale are equal to the amount
of the principal obligation, interest and expenses
in a proper case.
REAL MORTGAGE
VIOLA v EPCIB
70
FACTS: Via a contract denominated as CREDIT

LINE AND REAL ESTATE MORTGAGE AGREEMENT
FOR PROPERTY LINE (Credit Line Agreement)
executed on March 31, 1997, Leo-Mers
Commercial, Inc., as the Client, and its officers
spouses
Leopoldo
and
Mercedita
Viola
(petitioners) obtained a loan through a credit line
facility in the maximum amount of P4,700,000.00
from the Philippine Commercial International
Bank (PCI Bank), which was later merged with
Equitable Bank and became known as Equitable
PCI Bank, Inc.
To secure the payment of the loan, petitioners
executed also on March 31, 1997 a Real Estate
Mortgage in favor of PCIBank over their two
parcels of land.
Petitioners availed of the full amount of the loan.
Subsequently,
they made partial payments and
made no further payments and despite demand,
they failed to pay their outstanding obligation.
Respondent thus extrajudicially foreclosed the
mortgage before the Office of the Clerk of Court &
Ex-Officio Provincial Sheriff of the Regional Trial
Court (RTC) of Marikina City. The mortgaged
properties were sold on April 10, 2003 for
P4,284,000.00 at public auction to respondent,
after which a Certificate of Sale dated April 21,
2003 was issued.
More than five months later or on October 8,
2003, petitioners filed a complaint for annulment
of foreclosure sale. They claim that:
a) they had made substantial payments
b) the foreclosure proceedings and auction
sale were not only irregularly and
prematurely held but were null and void
because the mortgage debt is only
P2,224,073.31 on the principal obligation
and P1,455,137.36 on the interest, or a
total of only P3,679,210.67 as of April 15,
2003, but the mortgaged properties were
sold to satisfy an inflated and erroneous
principal obligation of P4,783,254.69, plus
3% penalty fee per month or 33% per
year and 15% interest per year, which
amounted to P14,024,623.22 as of
September 30, 2002;
c) that the parties never agreed and
stipulated in the real estate mortgage
contract that the 15% interest per annum
on the principal loan and the 3% penalty
fee per month on the outstanding amount
would be covered or secured by the
mortgage;
ISSUE:
whether the mortgage contract also
secured the penalty fee per month on the
outstanding amount as stipulated in the Credit

Line Agreement.
RULING: A mortgage must sufficiently
describe the debt sought to be secured,
which description must not be such as to
mislead or deceive, and an obligation is not
secured by a mortgage unless it comes
fairly within the terms of the mortgage.
In the case at bar, the parties executed two
separate documents on March 31, 1997 the
Credit Line Agreement granting the Client a loan
through a credit facility in the maximum amount
of P4,700,000.00, and the Real Estate Mortgage
contract
securing
the
payment
thereof.
Undisputedly, both contracts were prepared by
respondent and written in fine print, single space.
The provision of the mortgage contract does not
specifically mention that, aside from the principal
loan obligation, it also secures the payment of a
penalty fee of three percent (3%) per month of
the outstanding amount to be computed from the
day deficiency is incurred up to the date of full
payment thereon, which penalty was expressly
stipulates in the Credit Line Agreement.
Since an action to foreclose must be limited to
the amount mentioned in the mortgage and the
penalty fee of 3% per month of the outstanding
obligation is not mentioned in the mortgage, it
must be excluded from the computation of the
amount secured by the mortgage.
Penalty fee is entirely different from bank
charges. The phrase bank charges is normally
understood to refer to compensation for services.
A penalty fee is likened to a compensation for
damages in case of breach of the obligation.
Being penal in nature, such fee must be specific
and fixed by the contracting parties, unlike in the
present case which slaps a 3% penalty fee per
month of the outstanding amount of the
obligation.
DILAG v HEIRS OF RESSURECCION
FACTS:
BEFORE 1936: Laureano Marquez (LM) was
indebted to Fortunato Resurreccion (FR) in
the sum of P5k as the balance of purchase
price of a parcel of land which LM bought
and received from FR.
FR was in turn indebted to Luzon Surety
Company in the same amt, secured by a
mortgage on 3 parcels of land one of
which was bought by LM from him
AS EARLY AS 193: LM had agreed to pay
FRs indebtedness to Luzon Surety
71
Company by way of satisfaction of his own

indebtedness to FR in the same amt
LM failed to pay indebtedness of FR to the
Luzon Surety Company, and the latter
foreclosed
judicially
the
mortgage
executed in its favour by FR
Since LM did not fulfil his promise, FR
commenced an action against LM to
recover the value of lost properties
LM sale at public auction of 5 parcels of
land mentioned in FRs complaint is invalid
because
they
are
not
specifically
described in the mortgage deed. LM
acquired those parcels of land subsequent
to the execution of mortgage deed.
In the fifth clause of said document
Laureano
Marquez
stipulated
that
inasmuch as the five parcels of land
described in the fourth clause were not
sufficient to cover all his obligations in
favor of Fortunato Resurreccion, he also
constituted a mortgage in favor of the
latter and his assignees on any other
property he then might have and on those
he might acquire in the future.
ISSUE: WON such a stipulation constitute a valid

mortgage on the 5 other parcels of land which LM
subsequently acquired?
HELD: NO
LM could not legally mortgage any
property he did not yet own. In order that
a mortgage may be validly constituted the
instrument by which it is created must be
recorded in the Registry of Deeds and so
far as the additional parcels of land are
concerned, the registration of Deed of
Mortgage did not affect and could not
have affected them because they were not
specifically described therein.
PBCOM v MACADAEG
FACTS:
On September 30, 1950, respondents Pedro B.
Bautista, Dativa Corrales Bautista, Inocencio C.
Campos, and the Flash Taxi Company jointly and
severally applied for and obtained a credit
accommodation from the petitioner bank in the
sum of P100,000.00, and as a security therefor
executed in favor of the bank, in one single
document, a real estate mortgage over four
parcels of land, and a chattel mortgage on some
movie equipment and thirty taxicabs.
Respondents having failed to pay the total
amount of P128,902.42 due on the credit
accommodation referred to, the petitioner bank
procured the extrajudicial foreclosure of the real
estate mortgage in accordance with Act No. 3135,
as amended, and at the foreclosure sale on

January 9, 1956, the bank acquired the properties
mortgaged as the highest bidder for the sum of
P68,365.60.
Claiming a balance of P62, 749.72 still due, the
petitioner bank, instead of foreclosing
respondents' chattel mortgage, filed against
them on may 22, 1956, Civil Case No. 29752 for
the collection of said balance. The lower court, on
June 30, 1956, rendered judgment ordering
defendants to pay the plaintiff bank, jointly and
severally, the sum of P62, 749.72, with interest
thereon at the rate of 7% per annum from May
22, 1956 until the said amount is fully paid.
On September 18,1956, the court issued an order
to execute said judgment; it does not appear,
though, that plaintiff sought the enforcement of
the writ of execution.
On April 24, 1957, the court issued another order
for the execution of the judgement, pursuant to
which the sheriff of Manila published a "Notice of
Sale," setting for sale at public auction on May
13, 1957 the rights, interest or participation of
respondents on the certificate of public
convenience registered in the name of the Flash
Taxi Co. in cases Nos. 32578 of the Public Service
Commission.
On May 13, 1957, the sheriff sold the rights,
interests, or participation of respondents in the
certificate of public convenience in question to
the plaintiff bank as the highest bidder for the
amount of P60,371.25, and two days later, on
May 15, the sheriff issued to plaintiff the
corresponding certificate of sale.
Respondents Pedro B. Bautista, et al., filed in the
court below a "Petition To Set Aside Order dated
June 8, 1957, Confirming Sheriffs Sale of may 15,
1957 and to Declare its Nullity," claiming, as
grounds for the petitions, that they had other
properties which they had pointed out to the
plaintiff bank with which the judgement could be
satisfied that the law grants to the judgement
debtor the right to direct which of his properties
should be sold in execution of a judgement; that
the sale of the certificate of public convenience in
question would mean irreparable damage to
them and would prove of work about forth drivers
employed in their taxicab business; and that
defendants had no objection to bearing the
expenses of the sale sought to be revoked and of
any subsequent execution sales in satisfaction of
the judgement.
Plaintiff bank opposed the petition, contending
that there was no showing that the sheriff's sale
72
in question was irregular or not in accordance

with law; that the subject of the execution sale
being personal property, and a certificate of sale
having already been delivered to it by the sheriff,
the court could no longer set aside said sale
ISSUE: W/N the sheriffs sale was irregular and
therefore null and void.
Engr. Garcia obtained a loan from

petitioner and as security executed a
mortgage over the property subject to the
Contract to Sell with the private
respondents. Petitioner registered its
mortgage on these titles without any other
encumbrance or lien annotated therein.
When the loan was due, Engr. Garcia failed

to pay hence petitioner instituted an
extrajudicial foreclosure on the subject
lots.
Private respondents prayed for the

annulment of the mortgage in favor of
petitioner.
Petitioner filed its Answer contending that

private respondents have no cause of
action against it; that at the time of the
loan application and execution of the
promissory note and real estate mortgage
by Garcia, there were no known individual
buyers of the subject land nor annotation
of any contracts, liens or encumbrances of
third persons on the titles of the subject
lots; that the loan was granted and
released without notifying HLURB as it was
not necessary.
CA ruled in favor of private respondents

saying that despite the contracts to sell,
Garcia/TransAmerican did not apprise
petitioner of the existence of these
contracts nor did petitioner exhaust any
effort to inquire into their existence since
petitioner merely relied on the purported
clean reconstituted titles in the name of
Garcia; that the mortgage of the subject
lots without the consent of the buyers and
the authorization of the HLURB is a clear
violation of P.D. No. 957; that the
mortgage
contract
is
void
and
unenforceable
against
private
respondents.
HELD:
The alleged nullity is claimed to arise from the
fact that the real estate and chattel mortgage
executed by respondents to secure their credit
accommodation with the petitioner bank was
indivisible, and that consequently, the bank had
no legal right to extra judicially foreclose only the
real estate mortgage and leave out the chattel
mortgage, and then sue respondents for a
supposed deficiency judgement; and for this
reason, respondents assert that the judgement in
the bank's favor for such deficiency in Civil Case
No. 29752 is a nullity.
The argument is fallacious because the mere
embodiment of the real estate mortgage and the
chattel mortgage in one document does not fuse
both securities into an indivisible whole. Both
remain distinct agreements, differing not only in
the subject-matter of the contract but in the but
in the governing legal provisions. Petitioner bank,
therefore, had every right to foreclose the real
estate mortgage and waive the chattel mortgage,
and maintain instead a personal action for the
recovery of the unpaid balance of its credit (De la
Rama vs. Sajo, 45 Phil., 703;
Salomon vs. Dantees, 63 Phil., 522; Brancharch
Motor Co. vs. Rangal, et al., 68 Phil., 287, 290).
This petitioner did by filing civil Case No. 29752
for the collection of the unpaid balance of
respondents' indebtedness; and the validity and
correctness of the action was admitted by
respondents themselves when they confessed
judgement thereto. The court in fact decision
pursuant to such confession of judgement, and
the decision has long since been final and
executory.
PRUDENTIAL BANK v PANIS
Facts:
HOME BANKERS v CA
Private respondents entered into a
Contract
to
Sell
Agreement
with
TransAmerican through Engr. Garcia over
portions of land with one unit three-storey
townhouse to be built on each portion.
ISSUES:
1. WON HLURB has jurisdiction over the
case?
2. WON the mortgage is valid?
3. WON petitioner is a mortgagee in good
faith and since the titles on their face were
free
from
any
claims,
liens
and
encumbrances at the time of the
mortgage, it is not obliged under the law
to go beyond the certificates of title
registered under the Torrens system and
73
had every reason to rely on the

correctness and validity of those titles.?
HELD:
1. HLURB has jurisdiction. The Court ruled in
a prior case that the jurisdiction of the
HLURB to regulate the real estate trade is
broad enough to include jurisdiction over
complaints for specific performance of the
sale, or annulment of the mortgage, of
a condominium unit, with damages.
2. THE MORTGAGE IS VOID. Under Section 18
of P.D. No. 957, it is provided that no
mortgage on any unit or lot shall be made
by the owner or developer without prior
written approval of the HLURB Such
approval shall not be granted unless it is
shown that the proceeds of the mortgage
loan shall be used for the development of
the condominium or subdivision project
and effective measures have been
provided to ensure such utilization.
Without the prior written approval of the
HLURB, the latter has the jurisdiction to
annul the mortgage for being void.
3. Petitioner is NOT A MORTGAGEE IN GOOD
FAITH. Petitioner knew that the loan it was
extending to Garcia/TransAmerican was for
the purpose of the development of the
eight-unit
townhouses.
Petitioners
insistence that prior to the approval of the
loan, it undertook a thorough check on the
property and found the titles free from
liens and encumbrances would not
suffice. It was incumbent upon petitioner
to inquire into the status of the lots which
includes verification on whether Garcia
had secured the authority from the HLURB
to mortgage the subject lots. Petitioner
failed to do so. We likewise find petitioner
negligent in failing to even ascertain from
Garcia if there are buyers of the lots who
turned out to be private respondents.
Petitioners want of knowledge due to its
negligence takes the place of registration thus it is presumed to know the rights of
respondents over the lot - and the
conversion of its status as mortgagee to
buyer-owner
will
not
lessen
the
importance of such knowledge.
SAMANILLA v CAJUCOM
MOBIL PHILIPPINES v DIOCARES
FACTS:
The parties Mobil and Diocares entered an
agreement wherein on cash basis, Mobil will
deliver minimum of 50k liters of petroleum a
month. To secure this, diocares executed a Real

Mortgage. Diocares failed to pay the balance of
their indebtedness and Mobil filed an action for
the collection of the balance of the purchase
amount or that the Real Property mortgaged by
Diocares be sold to a public auction and the
proceeds be applied to the payment of the
obligation. LC did not grant foreclosure on the
ground that the mortgage was not validly
executed (not registered).
ISSUE: WON failure to register the Real Mortgage
would render it invalid
SC: NO!
- If the instrument is not recorded, the
mortgage is nevertheless binding between
the parties. Its conclusion, however, is that
what was thus created was merely a
personal obligation but did not establish
a real estate mortgage.
- The mere fact that there is as yet no
compliance with the requirement that it be
recorded cannot be a bar to foreclosure
FACTS:
MCCULLOUGH v VELOSO
1) On March 23, 1920, the plaintiff McCullough &

Co., sold to Mariano Veloso the "McCullough
Building," and the land thereon, for the price of
P700,000. Veloso paid P50,000 cash on account
at the execution of the contract, leaving a
balance of P650,000 to be paid.
2) Veloso assumed also the obligation to insure
the property for not less than P500,000, as well
as to pay all legal taxes that might be imposed
upon the property, and in the event of his failure
to do so, the plaintiff should pay said taxes at the
expense of Veloso, with the right to recover of
him the amounts thus paid, with interest at 7 per
cent per year. To secure the payment of these
amounts, Veloso mortgaged the property
purchased
3) It was, also, stipulated that in case of failure on
the part of Veloso to comply with any of the
stipulations contained in the mortgage deed, all
the installments with the interest thereon shall
become due, and the creditor shall then have the
right to bring the proper action for the collection
of the unpaid part of the debt.
4) On August 21, 1920, Mariano Veloso, in turn,
sold the property, with the improvements thereon
for P100,00 to Joaquin Serna, who agreed to
respect the mortgage of the property in favor of
the plaintiff and to assume Mariano Veloso's
obligation to pay the plaintiff the balance due of
74
the price of the estate on the respective dates

when payments should be made according to the
contract between Mariano Veloso and the
plaintiff.
5) Veloso paid P50,000 on account of the
P650,000, and Serna made several payments up
to the total sum of P250,000. Subsequently,
however, neither Veloso, nor Serna, made any
payment upon the last installments, by virtue of
which delay, the whole obligation became due,
and Veloso lost the right to the installments
stipulated in his contract with the plaintiff.
6) Upon a liquidation of the debt of Mariano
Veloso in favor of the plaintiff, including the
interest due, with the result that Veloso owed
exactly P510,047.34. Thus, the plaintiff brings
this action to recover of the defendant the sum
due of P510,047.34. The defendant contends
however that having sold the property to Serna,
and the latter having assumed the obligation to
pay the plaintiff the unpaid balance of the price
secured by the mortgage upon the property, he
no more obligation and it is upon Serna to pay
the plaintiff.
HELD:
A) The mortgage is merely an encumbrance upon
the property and does not extinguish the title of
the debtor, who does not, therefore, lose his
principal attribute as owner, that is, the right to
dispose. the fact that the plaintiff recognized the
efficaciousness of that sale cannot prejudice him,
which sale the defendant had the right to make
and the plaintiff cannot oppose and which, at all
events, could not affect the mortgage, since it
follows the property whoever the possessor may
be.
B) The Mortgage Law in force at the promulgation
of the Civil Code and referred to in the latter,
provided, among other things, that the debtor
should not pay the debt upon its maturity after a
judicial or notarial demand for payment has been
made by the creditor upon him. Accordingly, the
obligation of the new possessor to pay the debt
originated only from the right of the creditor to
demand payment of him, it being necessary that
a demand for payment should have previously
been made upon the debtor and the latter should
have failed to pay.
C) The Civil Code imposes the obligation of the
debtor to pay the debt stand although the
property mortgaged to secure the payment of
said debt may have been transferred to a third
person.
SANTIAGO v DIONISIO
DOCTRINE:
All persons having or claiming an
interest in the mortgaged premises subordinate
in right to that of the holder of the mortgage
should be made defendants in the action for the
foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case
merely to oppose the confirmation of the sale
upon learning that such a sale had been made, is
no the same as being a party to the suit to the
extent of being bound by the judgement in the
foreclosure suit.
The effect of the failure to implead a
subordinate lienholder or subsequent purchaser
or both is to render the foreclosure ineffective as
against them, with the result that there remains
in their favor the unforeclosed equity of
redemption.
Facts:
PADERES v CA
Manila International Construction Corporation

(MICC) mortgaged 21 properties in favor of
Banco Filipino (BF) for a loan of P1.8M. The
mortgaged was registered with the Registry of
Deeds.
2 of the lots were later sold to Spouses
Paderes and Spouses Bergardo.
MICC failed to pay the loan.
Without any redemption having been made
within the reglementary period, Banco Filipino
foreclosed the properties extra judicially.
BF won as the highest bidder in the auction
sale.
Paderes and Bergardo filed a petition stating
that their right is superior than BF since they
are buyers in good faith and are still entitled
to redeem.
Issue: WON Paderes and Bergardo has still rights

over the properties?
Held:
No. Sale or transfer cannot affect or release the
mortgage. A purchaser is necessarily bound to
acknowledge and respect the encumbrance to
which is subjected the purchased thing and which
is at the disposal of the creditor in order that he,
under the terms of the contract, may recover the
amount of his credit therefrom.
75
For a recorded real estate mortgage is a right in

rem, a lien on the property whoever its owner
may be because the personality of the owner is
disregarded.
The
mortgage
subsists
notwithstanding changes of ownership. The last
transferee is just as much of a debtor as the first
one. A mortgage lien is inseparable from the
property mortgaged. All subsequent purchasers
thereof must respect the mortgage, whether the
transfer to them be with or without the consent of
the mortgagee. For the mortgage until
discharged, follows the property.
With regard to the redemption period, it is settled
that the buyer in a foreclosure sale becomes the
absolute owner of the property purchased if it is
not redeemed during the period of one year after
the registration of the sale. As such, he is entitled
to the possession of the said property and can
demand it any time following the consolidation of
ownership in his name and the issuance to him of
a new TCT. If the buyer demands the possession
of the property before the expiration period, he
has to post a bond. No bond is required after the
redemption period if the property is not
redeemed.
VELASCO v CA
Facts: November 10, 1965, Alta Farms secured

from the GSIS a Three Million Two Hundred Fifty
Five Thousand Pesos (P3,255,000.00) loan and an
additional loan of Five Million Sixty-Two Thousand
Pesos (P5,062,000.00) on October 5, 1967, to
finance a piggery project. Alta Farms defaulted in
the payment because of this that Alta Farms
executed a Deed of Sale With Assumption of
Mortgage with Asian Engineering Corporation on
July 10, 1969 but without the previous consent or
approval of the GSIS and in direct violation of the
provisions of the mortgage contracts. Even without
the approval of the Deed of Sale With Assumption
of Mortgage by the GSIS, Asian Engineering
Corporation executed an Exclusive Sales Agency,
Management and Administration Contract in favor
of Laigo Realty Corporation, with the intention of
converting the piggery farm into a subdivision.
After developing the area, on December 4, 1969,
Laigo entered into a contract with Amable
Lumanlan, one of the petitioners, to construct for
the home buyers, 20 houses on the subdivision.
Petitioner Lumanlan allegedly constructed 20
houses for the home buyers and for which he claims
a balance of P309,187.76 from the home buyers and
Laigo. Out of his claim, petitioner Lumanlan admits
that Mrs. Rhody Laigo paid him in several checks

totalling P124,855.00 but which checks were all
dishonoured. On December 29, 1969, Laigo entered
into a contract with petitioner Pepito Velasco to
construct houses for the home buyers who agreed
with Velasco on the prices and the downpayment.
Petitioner Velasco constructed houses for various
home buyers, who individually agreed with Velasco,
as to the prices and the downpayment to be paid by
the individual home buyers.When neither Laigo nor
the individual home buyers paid for the home
constructed, Velasco wrote the GSIS to intercede for
the unpaid accounts of the home buyers.
Issue: W/N GSIS is liable to the petitioners for the
cost of the materials and labor furnished by them in
construction of the 63 houses now owned by the
GSIS?
Ruling: Yes. GSIS should pay the petitioners. GSIS
assumed ownership of the houses built by
petitioners and was benefited by the same. Art.
2127, the mortgage extends to the natural
accessions, to the improvements, growing fruits,
rents.
AFABLE v BELANDO
Afable brought a suit against Belando for an
unpaid promissory note. Judgment was rendered
in favor of him and because Belando has no
money, the rents in her property was given to
Afable. It turns out, before Afable filed a case for
the collection of money, another creditor of
Belando, La Urbana, already had a lien on the
property because Belando borrowed money from
La Urbana and as a security, Belando mortgaged
the property being rented to La Urbana. La
Urbana filed a petition to intervene in the case of
Afable v Belando and claims that since the
property was mortgaged to them, they also own
the rents and the rents cannot be given to Afable.
Issue: Won the contention of La Urbana is valid
Ruling: Yes. The mortgage extends to the rents
not yet received when the obligation becomes
due. In this case, because the property was
mortgaged to La Urbana, they also own the rents
of the mortgaged property.
Bank of America v American Realty
F: Petitioner Bank of America NT & SA (BANTSA)
is an international banking and financing
institution Bank of America International Limited
76
(BAIL), on the other hand, is a limited liability

company organized and existing under the laws
of England.
improvements existing thereon and all the

personal properties of the mortgagor located in
its place of business.
BANTSA and BAIL on several occasions granted

three major multi-million United States (US)
Dollar loans to the following corporate borrowers
and which are foreign affiliates of private
respondent. 3
On the same date, DALCO executed a second

mortgage on the same properties in favor of
ATLANTIC to secure payment of the unpaid
balance of the sale price of the lumber
concession.
Due to the default in the payment of the loan

amortizations, BANTSA and the corporate
borrowers signed and entered into restructuring
agreements. As additional security for the
restructured loans, private respondent ARC
(American Realty) as third party mortgagor
executed two real estate mortgages, over its
parcels of land including improvements thereon,
located at Bulacan.
Both deeds contained the following provision

extending the mortgage lien to properties to be
subsequently acquired referred to hereafter as
"after acquired properties" by the mortgagor:
Eventually, the corporate borrowers defaulted in

the payment of the restructured loans prompting
petitioner BANTSA to file civil actions before
foreign courts for the collection. This includes the
property of American Realty. Petitioners already
filed collection cases in foreign courts. It also filed
an extrajudicial foreclosure on the property in
Bulacan in which American Realty question
because the petitioners cannot file a case for
collection and a case for extrajudicial foreclosure
at the same time.
Issue: Won the contention of respondents are
valid
Ruling: yes! The mortgagee cannot have both
remedies. He has only one cause of action, i.e.,
non-payment of the mortgage debt; hence, he
cannot split up his cause of action by filing a
compliant for payment of the and another
complaint for foreclosure.
PEOPLES BANK v DAHICAN LUMBER
FACTS: On September 8, 1948, Atlantic Gulf &
Pacific Company of Manila, a West Virginia
corporation licensed to do business in the
Philippines hereinafter referred to as ATLANTIC
sold and assigned all its rights in the Dahican
Lumber concession to Dahican Lumber Company
hereinafter referred to as DALCO. Thereafter, to
develop the concession, DALCO obtained various
loans from the People's Bank & Trust Company.
As
security
for
the
payment
of
the
abovementioned loans, DALCO executed in favor
of the BANK the latter acting for itself and as
trustee for the Export-Import Bank of Washington
D.C. a deed of mortgage covering five parcels
of land together with all the buildings and other
All property of every nature and

description
taken
in
exchange
or
replacement, and all buildings, machinery,
fixtures, tools equipment and other
property which the Mortgagor may
hereafter
acquire,
construct,
install,
attach, or use in, to, upon, or in
connection with the premises, shall
immediately be and become subject to the
lien of this mortgage in the same manner
and to the same extent as if now included
therein, and the Mortgagor shall from time
to time during the existence of this
mortgage furnish the Mortgagee with an
accurate inventory of such substituted and
subsequently acquired property.
Both mortgages were registered in the Office of
the Register of Deeds. In addition thereto DALCO
and DAMCO pledged to the BANK 7,296 shares of
stock of DALCO and 9,286 shares of DAMCO to
secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the
fifth promissory note upon its maturity, the BANK
paid the same to the Export-Import Bank of
Washington D.C., and the latter assigned to the
former its credit and the first mortgage securing
it. Subsequently, the BANK gave DALCO and
DAMCO up to April 1, 1953 to pay the overdue
promissory note.
After July 13, 1950 the date of execution of the
mortgages mentioned above DALCO purchased
various machineries, equipment, spare parts and
supplies in addition to, or in replacement of some
of those already owned and used by it on the
date aforesaid. Pursuant to the provision of the
mortgage deeds quoted theretofore regarding
"after acquired properties," the BANK requested
DALCO to submit complete lists of said properties
but the latter failed to do so.
The alleged sales of equipment, spare parts and
supplies by CONNELL and DAMCO to It, was
subsequently rescinded by the parties.
77
The BANK, in its own behalf and that of ATLANTIC,

demanded that said agreements be cancelled but
CONNELL and DAMCO refused to do so. As a
result, ATLANTIC and the BANK commenced
foreclosure proceedings.
Main contentions of plaintiffs as appellants are
the following: that the "after acquired properties"
were subject to the deeds of mortgage mentioned
heretofore; that said properties were acquired
from suppliers other than DAMCO and CONNELL;
that even granting that DAMCO and CONNELL
were the real suppliers, the rescission of the sales
to DALCO could not prejudice the mortgage lien
in favor of plaintiffs.
The defendants-appellants contend that the
mortgages aforesaid were null and void as
regards the "after acquired properties" of DALCO
because they were not registered in accordance
with the Chattel Mortgage Law.
ISSUES:
1. are
the
so-called
"after
acquired
properties" covered by and subject to the
deeds of mortgage subject of foreclosure?
2. assuming that they are subject thereto,
are the mortgages valid and binding on
the properties aforesaid inspite of the fact
that they were not registered in
accordance with the provisions of the
Chattel Mortgage Law?
RULING:
1. it is crystal clear that all property of every
nature and description taken in exchange
or replacement, as well as all buildings,
machineries, fixtures, tools, equipments,
and other property that the mortgagor
may acquire, construct, install, attach; or
use in, to upon, or in connection with the
premises that is, its lumber concession
"shall immediately be and become
subject to the lien" of both mortgages in
the same manner and to the same extent
as if already included therein at the time
of their execution.
Such stipulation is neither unlawful nor
immoral, its obvious purpose being to
maintain, to the extent allowed by
circumstances, the original value of the
properties given as security. Indeed, if
such properties were of the nature already
referred to, it would be poor judgment on
the part of the creditor who does not see
to it that a similar provision is included in

the contract.
2. the chattels were placed in the real
properties mortgaged to plaintiffs, they
came within the operation of Art. 415,
paragraph 5 and Art. 2127 of the New Civil
Code. It is not disputed in the case at bar
that the "after acquired properties" were
purchased by DALCO in connection with,
and for use in the development of its
lumber concession and that they were
purchased
in
addition
to,
or
in
replacement of those already existing in
the premises on July 13, 1950. In Law,
therefore, they must be deemed to have
been immobilized, with the result that the
real estate mortgages involved herein
which were registered as such did not
have to be registered a second time as
chattel mortgages in order to bind the
"after acquired properties" .
PHIL SUGAR ESTATE v CAMPS

FACTS:
Defendant executed and delivered to
Plaintiff a mortgage on certain real estate,
which is particularly described therein,
including the building erected thereon,
in order to guarantee the payment of
certain sum of money; Another mortgage
upon the same property to secure the
payment of an additional sum of money
Plaintiff commenced an action to recover
said sums and to foreclose said mortgages
when neither of said sums of money
secured by said mortgages was fully paid
and satisfied
Def denied; alleged that the sum of P3k
included in said mortgages for the
payment of expenses was excessive
TC Judge Ostrand ordered foreclosure of
said mortgages
While Sheriff tried to sell the property
included
in
said
mortgages,
Def
interposed an objection that a certain
cinematograph
which
had
been
constructed upon the property mortgaged
was not included therein and that it should
not, therefore, be sold under said
execution.
Despite objection, Sheriff sold the property
mortgaged together with the buildings
erected thereon
Def objected to the confirmation of said
sale; said cinematograph in question was
created by simply reforming a building
78
located on the land at the time said

mortgage was executed and delivered;
that it was not a new structure on said
land; that it was the result of changing
and altering a building already upon the
land, for the purpose of making it into a
cinematograph
TC Judge Harvey confirmed said sale
ISSUE: WON the sale under execution by the

sheriff of certain real property including the
buildings thereon should be confirmed?
HELD: YES
Questions presented by Camps have been
discussed by this court and decided
against his contention in the case of
Bischoff v. Pomar and Compania General
de Tabacos.
In that case, this court discussed the very
articles of the Mortgage Law upon which
Camps now seeks relief. In that case the
Court said:
So that even though no mention
had been made of said machinery
and tramway in the mortgage
instrument, the mortgage of the
property whereon they are located
in understood by law to extend to
them and they must be considered
as included therein, as well as all
other improvements, unless there
was an express stipulation between
the parties that they should be
excluded.
IN THIS CASE: the buildings erected

thereon" were expressly included in the
mortgage. Nothing in the form of buildings
was exclude. The buildings, therefore,
were manifestly included in the mortgage.
July 7, 1900. But the hacienda was not able to

increase the sugar it yielded and defendant On
August 5, 1904, Grindrod who feared of not
getting paid obtained a preliminary attachment
over all the property of Evaristo including the lien
that was assigned to appellant. The same was
registered on August 12, 1904. A dispute arised
over the rightful owner of the lien, defendants
main contention is that since the assignment
made to Lopez was not registered it is not binding
and has no effect.
ISSUE: WON THE ASSIGNMENT OF A MORTGAGE
CREDIT NEED TO BE REGISTERED FOR IT TO BE
VALID AND EFFECTIVE?
HELD: NO. Although the Civil Code provides that
A mortgage credit may be alienated or assigned
to a third person, wholly or partially, with the
formalities required by law, the fact that
such assignment was not registered in the
property register is no obstacle to the transfer of
the dominion or ownership of said credit in the
sum therein stated in favor of Lopez. In as much
as the assignment or alienation of a credit, made
by the owner thereof in favor of another, is prior
to the act of its registration, and entirely
independent of such formality to such an extent
that, if any question should arise over the
contract between the assignor and the assignee,
it would have to be decided according to common
law without need of previous registration of the
title, which shows that a credit secured by a
mortgage may be assigned or alienated, and is a
perfectly valid contract even if it were not
registered.
Also, the registration
alienation of a credit
required, among others,
only necessary in order
as against third parties.
of the assignment or
secured by mortgage,
of the Mortgage Law, is
that it may be effectual
BPI v CONCEPCION
TADY-Y v PNB
LITONJUA v L&R CORPORATION
PRUDENTIAL BANK v ALVIAR
FACTS:
- Spouses Litonjua (P) obtained a loan from
L & R Corporation (R) Aug 6, 1974
(P200k) and Mar 27, 1978 (P200k) which
are secured by a mortgage on 2 parcels of
land owned by P
- However, P sold to Phil White House Auto
Supply (PWHAS) the subject parcels of
land, without prior written consent of R,
pursuant to the Mortgage agreement that
they have.
- Upon default of P, R initiated an
extrajudicial sale and won the bidding.
LOPEZ v ALVAREZ
FACTS: Appellee Evaristo holds a lien over the
estate of one Vicente Lopez as the latter
executed a mortgage deed in favor of Evaristo.
On April 5, 1904, Evaristo assigned his lien on the
estate to appellant Manuel Lopez through a public
instrument but the same was not registered in
the Registry of Deeds. Appellee Grindrod is a
creditor of Evaristo, to whom the latter promised
to pay his obligation through the sugar yielded by
the hacienda, said agreement was entered into
79
P later on filed for redemption of the

property but R refused to do accept the
payment contending that P violated the
contract
R informed the Sheriff and Register of
Deeds, stating: (1) that the sale of the
mortgaged properties to PWHAS was
without its consent, in contravention of
their Deed of Real Estate Mortgage; and
(2) that it was not the spouses Litonjua,
but PWHAS, who was seeking to redeem
the foreclosed properties,
Register of Deeds issued TCT in favor of R
A complaint for Quieting of Title,
Annulment of Title and Damages with
preliminary injunction was filed by the
spouses Litonjua and PWHAS against R
LC ruled in favor of R and affirmed by CA
ISSUE: WON paragraphs 8 and 9 of the Real

Estate Mortgage are valid and enforceable;
SC: NO!
- Art. 2130 stipulation forbidding
alienation of mortgaged property is VOID
- A real mortgage is merely an
encumbrance; it does not extinguish the
title of the debtor, whose right to dispose
a principal attribute of ownership is
not thereby lost. Thus, a mortgagor had
every right to sell his mortgaged property,
which right the mortgagee cannot oppose.
- Although the provision does not absolutely
prohibit the mortgagor from selling his
mortgaged property; but what it does not
outrightly prohibit, it nevertheless
achieves.
- For all intents and purposes, the
stipulation practically gives the mortgagee
the sole prerogative to prevent any sale of
the mortgaged property to a third party.
- The mortgagee can simply withhold its
consent and thereby, prevent the
mortgagor from selling the property. This
creates an unconscionable advantage for
the mortgagee and amounts to a virtual
prohibition on the owner to sell his
mortgaged property. In other words,
stipulations like those covered by
paragraph 8 (requiring P to acquire prior
consent of R before alienating the
property) of the subject Deed of Real
Estate Mortgage circumvent the law,
specifically, Article 2130 of the New Civil
Code.
- Being contrary to law, paragraph 8 of the
subject Deed of Real Estate Mortgage is
not binding upon the parties.
UNION BANK v CA
FACTS:
1) A real estate mortgage was executed on
December 1991 by spouses Dario (hereafter
mortgagors) in favor of UNIONBANK to secure a
P3 million loan which covered a Quezon City
property in Leopoldo Dario's name and was
annotated on the title. For non-payment of the
principal obligation, UNIONBANK extrajudicially
foreclosed the property mortgaged on August
1993 and sold the same at public auction, with
itself posting the highest bid.
2) One week before the one-year redemption
period expired, private respondents filed a
complaint with the RTC against the mortgagors,
UNIONBANK and the Register of Deeds annulment
of sale and real estate mortgage reconveyance
and prayer for restraining notice of lis pendens
was annotated on the title.
3) On October 1994, the RTC issued a TRO
enjoining the redemption of property within the
statutory period and its consolidation under
UNIONBANK's name.
4) Without notifying private respondents,
UNIONBANK consolidated its title over the
foreclosed property on October 1994,
UNIONBANK's name was issued in the new TCT.
5) Private respondents filed an amended
complaint, alleging that they, not the mortgagors,
are the true owners of the property mortgaged
and insisting on the invalidity of both the
mortgage and its subsequent extrajudicial
foreclosure. They claimed that the original title,
was entrusted to a certain Atty. Reynaldo Singson
preparatory to its administrative reconstitution
after a fire gutted the Quezon City Hall building.
Mortgagor Leopoldo, private respondent
Fermina's son, obtained the property from Atty.
Singson, had the title reconstituted under his
name without private respondents' knowledge,
executed an ante-dated deed of sale in his favor
and mortgaged the property to UNIONBANK.
6) On December 1994, the RTC admitted the
aforementioned amended complaint. UNIONBANK
filed its answer ad cautelam asserting its status
as an innocent mortgagee for value whose right
or lien upon the property mortgaged must be
respected even if, the mortgagor obtained his
title through fraud. It also averred that the action
had become "moot and academic by the
consolidation of the foreclosed property on 24
October 1994" in its name.
7) On appeal, the CA nullified the consolidation of
ownership, which was the prior judgment in the
80
RTC, ordered the Register of Deeds to cancel the

certificate of title in UNIONBANK's name and to
reinstate TCT of respondents.
ISSUE: Whether UNIONBANK is a mortgagee in
good faith and for value with a right to
consolidate ownership over the foreclosed
property with the redemption period having
expired and there having been no redemptioners.
HELD:
A) The SC disagrees with the CAs judgment that
consolidation deprived private respondents of
their property without due process. Because the
buyer in a foreclosure sale becomes the absolute
owner of the property purchased if it is not
redeemed during the period of one year after the
registration of the sale. In effect, consolidation
took place as a matter of right since there was no
redemption of the foreclosed property and the
TRO expired upon dismissal of the complaint.
C) UNIONBANK need not have informed private
respondent that it was consolidaint its title over
the property, upon the expiration of the
redemption period, without the judgment debtor
having made use of his right of redemption, the
ownership of the property sold becomes
consolidated in the purchaser. Upon failure to
redeem foreclosed realty, consolidation of title
becomes a matter of right on the part of the
auction buyer, and the issuance of a certificate of
title in favor of the purchaser becomes ministerial
upon the Register of Deeds.
C) At any rate, the consolidation of ownership
over the mortgaged property in favor of
UNIONBANK and the issuance of a new title in its
name during the pendency of an action for
annulment and reconveyance will not cause
injury to private respondents because as
purchaser at a public auction, UNIONBANK is only
substituted to and acquires the right, title,
interest and claim of the judgment debtors or
mortgagors to the property at the time of levy.
With the main action for reconveyance pending
before the RTC, the notice of lis pendens,
sufficiently protects private respondents interest
over the property. Thus the Decision of the Court
of Appeals is REVERSED and SET ASIDE. The
order of the trial court dated 7 August 1999,
declaring UNIONBANK's prayer for writ of
preliminary injunction moot and academic, is
hereby REINSTATED. Let this case be remanded
to the Regional Trial Court for trial on the merits.
DBP v LICUANAN
DOCTRINE:
All persons having or claiming an
interest in the mortgaged premises subordinate
in right to that of the holder of the mortgage
should be made defendants in the action for the
foreclosure of the mortgage. Intervening as a
subordinate lienholder in a foreclosure case
merely to oppose the confirmation of the sale
upon learning that such a sale had been made, is
no the same as being a party to the suit to the
extent of being bound by the judgement in the
foreclosure suit.
The effect of the failure to implead a
subordinate lienholder or subsequent purchaser
or both is to render the foreclosure ineffective as
against them, with the result that there remains
in their favor the unforeclosed equity of
redemption.
DBP v GO
Facts:
In 1982, Go obtained a loan from DBP

evidenced by two promissory notes, one for
194K payable quarterly for 5 years and the
other 300K payable quarterly for 7 years.
He mortgaged his real and personal property.
A contract provision states that DBP can
unilaterally increase the interest rate and
requires Go to insure the mortgaged
properties.
DBP increased its interest rate to 35% then
lowered it to 29%.
Go failed to pay the loan.
In 1986, DBP extrajudicially foreclosed the
property and was declared the winner as the
highest bidder in the auction sale.
Go filed an action to annul the auction sale.
Both RTC and CA declared that the
extrajudicial foreclosure was void because
loan has not yet mature at the time of the
foreclosure sale (the foreclosure was done
less than 5 years from the execution of the
contract).
Issue: WON the extrajudicial foreclosure should

be declared null and void?
Held:
Yes. The mortgage contract states that petitioner
may resort to either judicial or extrajudicial
foreclosure in case of default. Petitioner opted for
extrajudicial foreclosure. However, both the trial
court and the CA declared that the extrajudicial
foreclosure void for being premature. For all
intents and purposes, there has been no
foreclosure. Therefore, this Court or any court
81
cannot issue a writ of execution to judicially

foreclose the property.
FIESTAN v CA
Facts: Dionisio Fiestan and Juanita Arconada

owners of a parcel of land (Lot No. 2B) situated in
Ilocos Sur covered by TCT T-13218 which they
mortgaged to the Development Bank of the
Philippines (DBP) as security for their P22,400.00
loan. Lot No. 2-B was acquired by the DBP as the
highest bidder at a public auction sale on August 6,
1979 after it was extrajudicially foreclosed by the
DBP in accordance with Act No. 3135, as amended
by Act No. 4118, for failure of petitioners to pay
their mortgage indebtedness. On April 13,1982, the
DBP sold the lot to Francisco Peria in a Deed of
Absolute Sale. Francisco Peria mortgaged said lot to
the PNB Vigan Branch as security for his loan of
P115,000.00 as required by the bank to increase his
original loan from P49,000.00 to P66,000.00 until it
finally reached the approved amount of
P115,000.00. Since petitioners were still in
possession of Lot No. 2-B, the Provincial Sheriff
ordered them to vacate the premises.
Issue: W/N there was a valid extrajudicial
foreclosure sale?
Ruling: Yes. The formalities of a levy, as an
essential requisite of a valid execution sale under
Section 15 of Rule 39 and a valid attachment lien
under Rule 57 of the Rules of Court, are not basic
requirements before an extrajudicially foreclosed
property can be sold at public auction. The case at
bar, as the facts disclose, involves an extrajudicial
foreclosure sale. Act No. 3135, as amended by Act
No. 4118 otherwise known as "An Act to Regulate
the Sale of Property under Special Powers Inserted
in or Annexed to Real Estate Mortgages" applies in
cases of extrajudicial foreclosure sale.
BANK OF AMERICA v AMERICAN REALTY

CHIENG v SPOUSE SANTOS
FIRST MARBELLA v GATMAYTAN
FACTS:
R is the registered owner of Fontavilla No.
501 (condo unit), Marbella I Condominium,
Roxas Blvd under CCT No. 1972
P filed a Petition for Extradudicial

foreclosure of the condominium unit of R
and alleged that P is a duly organized
association
of
the
tenants
and
homeowners of Marbella I Condominium;
that R is a member thereof but has unpaid
association dues amounting to P3.2mill;
that R refused to to pay his dues despite
demand
P - that it is expressly provided under
Section 20 of Republic Act (R.A.) No. 4726
that it has the right to cause the
extrajudicial foreclosure of its annotated
lien on the condominium unit. Its petition
then is cognizable by the RTC under
Administrative Matter No. 99-10-05
R objected to P's right to file the petition
for extra-judicial foreclosure, pointing out
that the latter does not hold a real estate
mortgage on the condominium unit or a
special power of attorney to cause the
extra-judicial foreclosure sale of said unit.
- there is even a pending litigation regarding the
validity of petitioner's constitution as a
homeowners association and its authority to
assess association dues, annotate unpaid
assessments on condominium titles and enforce
the same through extrajudicial foreclosure sale
Clerk of Court, as Ex-Officio Sheriff,
recommended to RTC Exec. Judge :
Under the facts given, no mortgage exists
between the petitioner and respondent.
Evidently, it is not one of those
contemplated under Act 3135 as amended
by Act 4118. The allegation simply does
not
show
a
mortgagor-mortgagee
relationship since respondent liability
arises from his failure to pay dues,
assessments and charges due to the
petitioner.
As clearly stated, the authority of the
Executive Judge under Administrative
Matter No. 99-10-05-0, as amended dated
March 1, 2001, covers extra-judicial
foreclosure of real estate mortgages under
R.A. No. 3135 and chattel mortgages
under P.D. No. 1508. There is nothing in
the above mentioned Circular which
authorizes the Executive Judge and/or the
Ex-Officio Sheriff to extra judicially
foreclose
properties
covered
by
obligations other than the said mortgages.
Hence, the subject petition is not proper
for extra-judicial foreclosure under the
supervision of the Executive Judge.
Dismissal of the subject petition is
recommended
82
TC denied request for extrajudicial

foreclosure of the subject condo unit and
dismissed the petition; It not within the
authority of Exec. Judge to supervise and
approve the extrajudicial foreclosures of
mortgage
ISSUE: WON P has a right to file a petition for

extrajudicial foreclosure?
HELD: NO
In order to avail itself of a writ
of mandamus, petitioner must establish
that it has a clear right to the extrajudicial
foreclosure sale of the condominium unit
of respondent. Under Circular No. 72002, implementing
Supreme
Court
Administrative Matter No. 99-10-05-0, it is
mandatory that a petition for extrajudicial
foreclosure be supported by evidence that
petitioner holds a special power or
authority to foreclose
Without proof of petitioner's special
authority to foreclose, the Clerk of Court
as Ex-Oficio Sheriff is precluded from
acting on the application for extrajudicial
foreclosure
IN THIS CASE: the only basis of petitioner
for causing the extrajudicial foreclosure of
the condominium unit of respondent is a
notice of assessment annotated on CCT
No. 1972 in accordance with Section 20 of
R.A.
No.
4726.
However,
neither
annotation nor law vests it with sufficient
authority to foreclose on the property
The notice of assessment contains no
provision for the extrajudicial foreclosure
of the condominium unit. All that it states
is that the assessment of petitioner
against respondent for unpaid association
dues constitutes a "first lien against [the]
condominium unit
Section 20 of RA 4726 does not grant P
special authority to foreclose. It merely
prescribes the procedure by which
petitioner's claim may be treated as a
superior lien - i.e., through the annotation
thereof on the title of the condominium
unit.
While the law also grants petitioner the

option to enforce said lien through either
the judicial or extrajudicial foreclosure sale
of the condominium unit, Section 20 does
not by itself, ipso facto, authorize judicial
as extra-judicial foreclosure of the
condominium unit. Petitioner may avail
itself of either option only in the manner
provided for by the governing law and
rules. As already pointed out, A.M. No. No.
99-10-05-0,
as
implemented
under
Circular
No.
7-2002,
requires
that
petitioner furnish evidence of its special
authority to cause the extrajudicial
foreclosure of the condominium unit.
LANGKAAN REALTY v UCPB
BOHANAN v CA
METROBANK v WONG
FACTS: Mindanao Grains, Inc. applied for a credit
accommodation with petitioner. As security for
such credit accommodation, respondent Wong
executed a real estate mortgage in favor of
petitioner. Due to MGIs failure to pay the
obligation, petitioner filed an application for
extrajudicial foreclosure which was published in
Pagadian Times once, for three consecutive
weeks setting the date for the auction sale. No
notice was posted in the municipality or city
where the mortgaged property was situated. The
auction sale proceeded and petitioner was
adjudged as the sole and highest bidder. After the
expiration of the one year redemption period,
ownership
was
consolidated
and
TCT
correspondingly issued in the name of petitioner.
Respondent
unaware
of
the
foregoing
developments,
applied
for
a
credit
accommodation with another bank, only to find
out that his property was already foreclosed by
petitioner. Respondent filed a case assailing the
validity of the extrajudicial foreclosure on the
ground that petitioner did not comply with the
procedural requirements of law.
Petitioner on the other hand justifies his claim by

citing Olizon v. CA, (1) that its failure to comply
with the posting requirement did not necessarily
result in the nullification of the foreclosure sale
since
it
complied
with
the
publication
requirement; and (2) that personal notice of the
foreclosure proceedings to respondent is not a
condition sine qua non for its validity.
ISSUE:
1.
WON
PERSONAL
NOTICE
TO
RESPONDENT IS A CONDITION SINE QUA NON TO
THE
VALIDITY
OF
THE
FORECLOSURE
PROCEEDINGS?
2. WON PETITIONERS NON-COMPLIANCE
WITH THE POSTING REQUIREMENT IS FATAL TO
THE
VALIDITY
OF
THE
FORECLOSURE
PROCEEDINGS?
83
Publication of the same in a

newspaper of general circulation.
o FAILURE TO PUBLISH the notice of
sale constitutes a jurisdictional
defect, which INVALIDATES the
sale.
RE: WAIVER OF PUBLICATION
REQUIREMENTS
o PNB and R have absolutely NO
RIGHT to waive the posting and
publication requirements of the
law.
o The principal object of a notice of
sale in a foreclosure of mortgage is
not so much to notify the
mortgagor as to inform the public
generally of the nature and
condition of the property to be
sold, and of the time, place and
terms of the sale
Notice is given to secure bidders and
prevent a sacrifice of the property
Statutory requirement of Publication is
mandatory not for the mortgagors
benefit, but for the public or 3rd persons.
o
HELD:
1. Section 3 of Act no. 3135 only requires: (1)
the posting of notices of sale in three
public places, and (2) the publication of
the same in a newspaper of general
circulation.
Personal
notice
to
the
mortgagor is not necessary. Nevertheless,
the parties are not precluded from
exacting additional requirements. In the
case at bar, it was stipulated that notice
should be served to the mortgagor. When
petitioner failed to send the notice of
foreclosure sale to respondent, he
committed a contractual breach sufficient
to render the foreclosure sale null and
void.
2. The general rule is that non-compliance
with the posting requirement is fatal to the
validity of the foreclosure proceedings.
The Olizon case was an exception due to
the unusual nature of the attendant facts
and
peculiarity
of
the
confluent
circumstances which are not present in
the instant case. While the law recognizes
the right of the bank to foreclose a
mortgage upon the mortgagors failure to
pay his obligation, it is important that such
right be exercised according to its clear
mandate. Each and every requirement of
the law must be complied with
PNB v CA
PNB v NEPOMUCENO PRODUCTIONS, INC.
FACTS:
PNB granted respondents (R) a credit line to
finance the filming of the movie Pacific
Connection. The loan was secured by mortgages
on Rs real and personal properties (Malugay
property, Forbes Park Property and motion picture
equipments). However, R defaulted in their
obligation. PNB sought foreclosure of the
mortgaged properties where pNB was the highest
bidder. R filed for annulment of foreclosure sale
since it is null and void for lack of publication of
the notice of sale. LC annulled foreclosure.
ISSUE: WoN the foreclosure sale was valid despite
lack of publication
SC: NO!
- Act 3135, governing EJF of mortgages on
real property is specific with regard to the
posting and publication requirements of
the notice of sale, which requires:
o Posting of notices of sale in 3 public
places
FACTS:
PNB v SPOUSES CABATINGAN
1) Respondent spouses Cabatingan obtained two

loans, secured by a real estate mortgage, in the
total amount of P421,200 from petitioner PNB.
They were unable to fully pay their obligation
despite having been granted more than enough
time to do so.
2) Thus, PNB extrajudicially foreclosed on the
mortgage. Thereafter, a notice of extrajudicial
sale was issued. Pursuant to this, the properties
were sold at public auction on November 5, 1991.
PNB was the highest bidder.
3) On March 16, 1993, respondent
spouses filed in the RTC a complaint for
annulment of extrajudicial foreclosure of
real estate mortgage and the November
5, 1991 auction sale.
4) Petitioners claimed that the provisions of ACT
no. 3135 must be observed strictly. Thus,
because the public auction of the foreclosed
properties was held for only 20 minutes (instead
of seven hours as required by law), the
consequent sale was void. Thus, the RTC issued
an order annulling the sale at public auction.
ISSUE: Whether a sale at public auction, to be
valid, must be conducted the whole day from
9:00 a.m. until 4:00 p.m. of the scheduled auction
day.
84
HELD:
A) Section 4 of Act 3135 provides that the

sale must take place between the hours
of nine in the morning and four in the
afternoon.
B) A creditor may foreclose on a real estate

mortgage only if the debtor fails to pay the
principal obligation when it falls due. But the
foreclosure of a mortgage does not extinguish a
debtors obligation to his creditor. The proceeds
of a sale at public auction may not be sufficient to
extinguish the liability of the former to the latter.
For this reason, Section 4 of Act 3135 should be
construed in such a way that affords the creditor
greater opportunity to satisfy his claim without
unduly rewarding the debtor for not paying his
just debt.
C) The word between ordinarily means in the
time interval that separates. Thus, between the
hours of nine in the morning and four in the
afternoon merely provides a time frame within
which an auction sale may be conducted.
Therefore, a sale at public auction held within the
intervening period provided by law is valid,
without regard to the duration or length of time it
took the auctioneer to conduct the proceedings.
Since it was conducted within the time frame
provided by law, the sale was valid.
MONZON v RELOVA
DOCTRINE:
Any person having a lien on the
property subsequent to the mortgage or deed of
trust under which the property is sold, may
redeem the same at any time within the term of
one year from and after the date of sale.
Even if, for the sake of argument, Rule 68
is to be applied to extrajudicial foreclosure of
mortgages, such right can only be given to
second mortgagees who are made parties to the
(judicial) foreclosure. While a second mortgagee
is a proper and in a sense even a necessary party
to a proceeding to foreclose a first mortgage on
real property, he is not an indispensable party,
because a valid decree may be made, as between
the mortgagor and the first mortgagee, without
regard to the second mortgagee; but the
consequence of a failure to make the second
mortgagee a party to the proceeding is that the
lien of the second mortgagee on the equity of
redemption is not affected by the decree of
foreclosure.
SAGUAN v PBCOM
Facts:
Saguan obtained a loan of 3M from PBC and

mortgaged his 5 lands.
Saguan defaulted.
PBC extrajudicially foreclosed the property
and won as the highest bidder in the auction
sale.
Because Saguan failed to redeem, the
properties were consolidated in the name of
PBC which later on filed a writ of possession.
Saguan filed an opposition since PBC failed to
return the excess amount of the extrajudicial
foreclosure sale.
PBC points to Saguans remaining unsecured
obligations with the former to which the
excess or surplus proceeds were applied.
Issue:
1) WON the writ of possession should be issued?
2) WON PBC may unilaterally apply the excess
proceeds to petitioners remaining unsecured
obligations?
Held:
1) Yes. A writ of possession is an order enforcing
a judgment to allow a persons recovery of
possession of real or personal property. This
writ may be issued either 1) within the oneyear redemption period, upon filing of the
bond, 2) after the lapse of the redemption
period, without the need of a bond.
In this case, the issuance of RTC of a writ of
possession in favor of PBC is proper since the
redemption period has already expired. The
duty of the trial court to grant a writ of
possession in such instances is ministerial,
and the court may not exercise discretion or
judgment. Even if the excess proceeds were
not returned to the petitioner, the writ is still
valid.
A party may file a petition to set aside the

foreclosure sale to cancel the writ of
possession in the same proceeding where the
writ was requested. However, in this case,
petitioners do not challenge the validity of the
foreclosure only the contention that the
excess proceeds were not returned to them.
2) No. The foreclosure of petitioners properties

was meant to answer only the obligation
secured by the mortgage. Even if the
85
petitioners have remaining obligations with

the respondent, these obligations were not
collateralized by the foreclosed mortgage.
The petitioners remedy lies in a separate civil
action for collection of a sum of money and
not an action to set aside the foreclosure sale.
SUICO v CA
QUIRINO GONZALES v CA
Facts: Petitioners applied for credit
accommodations with respondent bank, which
the bank approved granting a credit line of
Php900,000.00. Petitioners obligations were
secured by a real estate mortgage on four parcels
of land. Also, petitioners had made certain
advances in separate transactions from the bank
in connection with QGLCs exportation of logs and
executed a promissory note in 1964.
Due to petitioners long default in the payment of
their obligations under the credit line, the bank
foreclosed the mortgage and sold the properties
covered to the highest bidder in the auction.
Respondent bank, alleging non-payment of the
balance of QGLCs obligation after the
proceedings of the foreclosure sale were applied
and non-payment of promissory notes despite
repeated demands, filed a complaint for sum of
money against petitioners.
Petitioners, on the other hand, asserted that the
complaint states no cause of action and assuming
that it does, the same is barred by prescription or
void for want of consideration.
Issue: Whether or not the cause of action is
barred by prescription.
Held: An action upon a written contract, an
obligation created by law, and a judgment must
be brought within 10 years from the time the
right of action accrues.
The finding of the trial court that more than ten
years had elapsed since the right to bring an
action on the Banks first to sixth causes had
arisen is not disputed. The Bank contends,
however, that the notices of foreclosure sale in
the foreclosure proceedings of 1965 are
tantamount to formal demands upon petitioners
for the payment of their past due loan obligations
with the Bank; hence, said notices of foreclosure
sale interrupted the running of the prescriptive
period.
The Banks contention has no merit. Prescription
of actions is interrupted when they are filed
before the court, when there is a written
extrajudicial demand by the creditors, and when
there is any written acknowledgment of the debt
by the debtor.
The law specifically requires a written

extrajudicial demand by the creditor which is
absent in the case at bar. The contention that the
notices of foreclosure are tantamount to a written
extrajudicial demand cannot be appreciated, the
contents of said notices not having been brought
to light.
But even assuming that the notices interrupted
the running of the prescriptive period, the
argument would still not lie for the following
reasons:
The Bank seeks the recovery of the deficient
amount of the obligation after the foreclosure of
the mortgage. Such suit is in the nature of a
mortgage action because its purpose is to enforce
the mortgage contract. A mortgage action
prescribes after ten years from the time the right
of action accrued.
The law gives the mortgagee the right to claim
for the deficiency resulting from the price
obtained in the sale of the property at public
auction and the outstanding obligation
proceedings. In the present case, the Bank, as
mortgagee, had the right to claim payment of the
deficiency after it had foreclosed the mortgage in
1965. as it filed the complaint only on January 27,
1977, more than ten years had already elapsed,
hence, the action had then prescribed.
PIANO v CAYANONG
FACTS: On March 17, 1952, the plaintiffs
commenced an action to foreclose a mortgage
executed by the defendant in favor of the
plaintiffs upon a parcel of land. The partieslitigant submitted a compromise agreement.
The defendant failed to pay the obligation within
the period set by the Court; so the property in
question was sold at public auction on Jan. 30,
1952(should be 1953) per order of the court, by
the deputy sheriff of Maasin, Leyte, to the
plaintiffs, they being the only bidders for P2,475.
The certificate of sheriff's sale contained the
provision that the said property is subject "to
redemption within one year from the date hereof
in the manner provided by the law applicable to
the case." On March 11, 1953, the plaintiffs filed
a motion for the confirmation of the sale
executed by the sheriff, which was unopposed by
the defendant. The sale was confirmed by the
Court on March 21, 1953.
Thereafter, the plaintiffs filed a petition for writ of
possession; by virtue of such petition the court
adjudicated possession to the plaintiffs on Aug.
15, 1953. On Aug. 20, 1953, the deputy clerk
issued the writ of possesion prayed for by the
plaintiffs.
On Jan. 26, 1954, the defendant deposited with
the court the sum of P2,783.93, P2,772 of which
was in the concept of redemption deposit to be
86
delivered to Generosa Cayanong and her

husband.
The oppositor Francisco Pilapil, on Feb. 11, 1954,
filed an opposition to the defendants' motion of
Jan. 26, 1954, claiming that the property, subject
of foreclosure, having been sold at a judicial
foreclosure sale, was not subject to redemption
after the judicial sale was confirmed, title thereto
having been fully vested and consolidated in
favor of Cayanong and Bellones, their assignees
and successors-in-interest.
ISSUE: Whether the property subject of
foreclosure, having been sold at a judicial
foreclosure sale is subject to redemption after the
judicial sale was confirmed.
RULING:
In a foreclosure of mortgage under Rule 70 of the
Rules of Court, there is no right of redemption
after the sale is confirmed, although there is an
equity of redemption in favor of the mortgagor or
junior encumbrancer, consisting in the right to
redeem the mortgaged property within the 90day period, or even thereafter, but before the
confirmation of the sale.
It is only in cases of foreclosures of mortgages in
favor of banking and credit institutions (Sec. 76,
General Banking Act [Rep. Act 337]), to the
Philippine National Bank (Acts Nos. 2747, and
2938), and in extrajudicial foreclosures (Act 3135
as amended by Act 4118), where, by express
provision, the law allows redemption. In all other
foreclosure cases, there is no legal redemption.
The sheriff, therefore, has no authority to grant or
insert a period of redemption in the certificate of
sale, when the same is conducted pursuant to
Rule 70 and, wanting in said authority, any
insertion therein has no validity and effect. Once
the judicial sale is confirmed by the court, the
rights are vested in the purchaser (Sec. 3, Rule
70).
LANDRITO v CA
FACTS:
P obtained a loan of P350k from R and
secured payment by executing a deed of
real estate mortgage of their parcel of
land at Muntinlupa;
obtained again
another loan P 1mill and was granted by R
with an amendment of real estate
mortgage
P defaulted and refused to comply with
their obligation despite repeated demands
R filed a petition for the extrajudicial
foreclosure of the mortgage. Mortgaged
property was sold in a public auction with

R as highest bidder. R registered sheriffs
certificate of sale.
P filed a complaint for annulment of the
extrajudicial foreclosure and auction sale
and alleged that said foreclosure and
auction sale were null and void for failure
to comply with requirements of notice and
publication; the mortgaged property was
illegally
foreclosed;
application
for
consolidation of title was premature
because the Rs Husband granted them an
extension of the period of redemption
TC granted Rs Motion to Dismiss; action
already barred by laches. CA affirmed
ISSUE: WON the extrajudicial foreclosure and

public auction sale of the subject parcel of land
are valid and lawful?
HELD: YES
Records indubitably show that at the time
of the foreclosure sale on 11 August 1993,
petitioners were already in default in their
loan obligation to respondent Carmencita
San Diego.
A final notice of demand for payment had
been sent to them, despite which they still
failed
to
pay.
Hence,
respondent
Carmencita
San
Diegos
resort
to
extrajudicial foreclosure, provided no less
in the parties Amendment of Real Estate
Mortgage.
The rule has been, and still is, that in real
estate mortgage, when the principal
obligation is not paid when due, the
mortgagee has the right to foreclose on
the mortgage and to have the mortgaged
property seized and sold with the view of
applying the proceeds thereof to the
payment of the obligation
IN THIS CASE: The validity of the
extrajudicial foreclosure on 11 August
1993 was virtually confirmed by the trial
court when it dismissed petitioners
complaint, and rightly so, what with the
fact that petitioners failed to exercise their
right of redemption within the 1-year
period
therefor
counted
from
the
registration of the sheriffs certificate of
sale.
It appears from the evidence on record
that despite due notice and publication of
the same in a newspaper of general, P did
not bother to attend the foreclosure sale
nor raise any question regarding the
propriety of the sale.
It was only on November 9, 1994, or more
than one year from the registration of the
Sheriffs Certificate of Sale, that P filed the
87
instant complaint. Clearly, P had slept on

their rights and are therefore guilty of
laches, which is defined as the failure or
neglect for an unreasonable or explained
length of time to do that which, by
exercising due diligence, could or
should have been done earlier, failure of
which gives rise to the presumption that
the person possessed of the right or
privilege has abandoned or has declined
to assert the same.
In Lazo v. Republic Surety & Insurance
Co., Inc., this Court has made it clear that
it is only where, by voluntary agreement
of the parties, consisting of extensions of
the redemption period, followed by
commitment by the debtor to pay the
redemption price at a fixed date, will
the concept of legal redemption be
converted into one of conventional
redemption.
IN THIS CASE: There is no showing
whatsoever that petitioners agreed to pay
the redemption price on or before 11
November 1994, as allegedly set by Mrs.
San Diegos husband. On the contrary,
their act of filing their complaint on 09
November 1994 to declare the nullity of
the foreclosure sale is indicative of their
refusal to pay the redemption price on the
alleged deadline set by the husband. At
the very least, if they so believed that
their
loan
obligation
was
only
for P1,000,000.00, petitioners should have
made an offer to redeem within one (1)
year from the registration of the sheriffs
certificate of sale, together with a tender
of the same amount. This, they never did.
METROBANK v TAN
IBAAN RURAL BANK v CA
RAMIREZ v CA
FACTS: One Ronnie Garcia executed a first
mortgage over a parcel of land in favor of PNB as
a security for a loan granted by PNB. The deed
was registered with the Register of Deeds and
annotated in the title of the mortgaged property.
During the subsistence of the first mortgage,
Ronnie executed a second mortgage over the
same property in favor of private respondent
Marmeto which was also recorded on the title. For
failure to pay his loan, PNB extra-judicially
foreclosed the mortgage and a Certificate of Sale
was issued in its favor on Nov. 8, 1977. The
second mortgage was also extra-judicially
foreclosed and a Certificate of Sale was issued in
favor of Marmeto on June 27, 1978.
On February 1980, Ronnie executed a Waiver

and Renunciation of Rights with respect to his
right of redemption with respect to the first
mortgage in favor of his father. The latter
assigned his right to petitioner Nimfa Ramirez,
who in turn paid the total redemption price to
PNB which accepted it. Meanwhile, Ronnie having
not exercised his right of redemption over the
second mortgage, Marmeto filed in court for the
Consolidation of Ownership over the mortgaged
property to which petitioner Ramirez filed an
adverse claim.
ISSUE:
1. Whether Ramirez had acquired any right
by virtue of her having redeemed the
property in question beyond the one-year
redemption period?
2. What will be the effect of the redemption
by Ramirez on private respondent
Marmeto?
HELD:
1. Yes, by accepting the redemption price
after the statutory period for redemption
had expired, PNB is considered to have
waived the one (1) year period within
which Ramirez could redeem the property.
There is nothing in the law which prevents
such a waiver. Allowing a redemption after
the lapse of the statutory period, when the
buyer at the foreclosure does not object
but even consents to the redemption, will
uphold the policy of the law. Thus, there is
no doubt that the redemption made by
petitioner Ramirez is valid.
2. The rule is well settled that a second
mortgagee merely takes what is called an
equity of redemption and thus a second
mortgagee has to wait until after the
debtor's obligation to the first mortgagee
has been fully settled. The rights of a
second mortgagee are strictly subordinate
to the superior lien of the first mortgagee.
In the case at bar, the proper foreclosure
of the first mortgage gave, not only the
first mortgagor, but also subsequent lien
holders like Marmeto, the right to redeem
the property within the statutory period.
Marmeto failed to make the redemption
but instead it was the petitioner who made
such redemption.
TOLENTINO v CA
SPOUSES OLIVEROS v PRESIDING JUDGE
88
FACTS:
The mortgagors (P) obtained 2 loans for the
construction of the Cabuyao Commercial Complex
for P58M as evidenced by promissory notes from
Metrobank (R). To secure the loans, Spouses
Oliveros and Nevalga executed a Deed of Real
Estate Mortgage in favor of Metrobank over the 3
parcels of land together with all the buildings and
improvements existing thereon. Due to the failure
of mortgagors to pay their loan, Metrobank
instituted an EJF over the Real Estate Mortgage.
Metrobank won the bid. Mortgagors failed to
redeem
the
property
hence,
Metrobank
consolidated its title to the subject property.
Metrobank demanded P to turn over the actual
possession of the property but the mortgagors
failed and refused to do so. Metrobank filed a writ
of possession which the Petitioner Spouses
opposed claiming thata pending case was in
another court for nullification of foreclosure
proceedings.
Certificate of Sale was then registered in the

Registry of Deeds of Quezon City.
ISSUE: WoN a writ of possession is proper when

there is a pending case to nullify the foreclosure
sale
HELD:
SC: YES!
- Metrobank purchased the properties at a
public auction following the EJF of the
subject properties. Certificate of sale over
the properties were issued in favor of
Metrobank and registered with RD. P as
mortgagors failed to redeem the
properties within the 1 year period of
redemption hence Metrobank consolidated
its ownership over the subject properties.
- Metrobank having consolidated its title to
the mortgaged properties is even more
entitled now to possession thereof and
makes more unmistakable its right to file
an ex parte motion for the issuance of a
writ of possession.
- The issuance of the writ of possession
becomes a mere ministerial duty on the
part of the judge, regardless of WoN there
is a pending action for nullification of the
sale at public auction or foreclosure itself
FACTS:
CHINA BANK v ORDINARIO
1) Petitioner ChinaBank granted 3 loans to

TransAmerican owned by spouses Garcia, secured
by real estate mortgages constituted by Jesus
Garcia 45 parcels of land The contracts of
mortgage were all registered in the same
Registry. Subsequently for failure of
TransAmerican to pay its loans, Chinabank
foreclosed extrajudicially the three real estate
mortgages which were then sold at public auction
for P38,004,205.01 to the same bank. The
2) Thereafter Chinabank filed with the RTC a

petition for issuance of a writ of possession,
which was granted, thus placing Chinabank in
possession of the 45 parcels of land. Then,
spouses Ordinario, filed a motion for
reconsideration praying that the parcel of land be
excluded from the above order alleging, that they
purchased the land covered on which was
constructed their townhouse and that the
mortgage foreclosure cannot prevail over their
superior right as legitimate buyers of the area.
3) To this, Chinabank filed its opposition to
respondents motion for reconsideration. The trial
court denied Sps Ordinarios motion for
reconsideration. On appeal, this was overturned
by the CA.
A) Under Section 7 of Act No. 3135, the purchaser

in a foreclosure sale is entitled to possession of
the property. Thus the writ prayed for by
petitioner granting it possession has to be issued
as a matter of course, being a ministerial
duty of the trial court to grant such writ of
possession. No discretion is left for the trial
court.
B) Under the Rules of Court a third-party claimant
or a stranger to the foreclosure suit, like
respondents herein, can opt to file a remedy
known as terceria against the sheriff or officer
effecting the writ by serving on him an affidavit of
his title and a copy thereof upon the judgment
creditor. By the terceria, the officer shall not be
bound to keep the property and could be
answerable for damages. A third-party claimant
may also resort to an independent "separate
action," the object of which is the recovery of
ownership or possession of the property seized by
the sheriff, as well as damages arising from
wrongful seizure and detention of the property
despite the third-party claim. If a "separate
action" is the recourse, the third-party claimant
must institute in a forum of competent
jurisdiction an action, distinct and separate from
the action in which the judgment is being
enforced, even before or without need of filing a
claim in the court that issued the writ. Both
remedies are cumulative and may be availed of
independently of or separately from the other.
Availment of the terceria is not a condition sine
qua non to the institution of a "separate action."
C) In essence, the Court of Appeals committed
palpable error when it granted Spouses
89
Ordinarios motion for reconsideration and set

aside the orders dated April 10, 1991 and
September 21, 1992 of the RTC. Thus, the
appealed Decision and Resolution of the Court of
Appeals are REVERSED and SET ASIDE. The
orders of the RTC, Branch 90, Quezon City,
directing the issuance of a writ of possession in
favor of petitioner bank are AFFIRMED.
ANTICHRESIS
DELA VEGA v BALLILOS

BARRETTO v BARRETTO
claimant the price of the eight part sold to

him. The third part of the ownership of the
hacienda was transferred to the plaintiff by
the donor Guadalupe Barretto.
Antonio and Ricardo, as grantors, sold and
conveyed all their rights and actions included
and derived from the said hypothecary credit
for the price of P14,000 which would be paid
by the grantee and vendee by installments
and in the manner prescribed in the said
deed, assigning to him, besides, all the rights
which the said brothers had over the two-third
parts of the said hacienda.
Facts:
Issue: WON there was a transfer of ownership to

Alberto?
Held:
After the death of Juan Antonio Barretto, Sr.,

his son Juan Antonio Grandpre, in his own
behalf and as the executor of his father,
mortgaged, the cultivated half of said
hacienda in favor of Antonio Vicente Barretto
as security for the amount of P11,000 which
the latter loaned to him.
By verbal agreement, Antonio will collect his
credit from the products of the property.
His three children and heirs Antonio Ma
Barretto, Ricardo Esteban Barretto, and
Guadalupe Barretto came to succeed after the
death of Antonio.
Guadalupe made a donation inter vivos in
favor of the plaintiff Alberto Barretto of the
undivided one-third part of the hypothecary
credit and of the rights belonging to her
deceased father Antonio Vicente Barretto,
assigning to the donee all the rights and
actions which she might have in the
foreclosure proceedings exhibited at the trial
of the present action, on the condition that as
soon as the donee Alberto Barretto could
collect the said one-third part of the credit or
should obtain the assignment of the property
of the debtor, he would divide what was
donated, into nine equal parts among the
donee himself and six living brothers and the
heirs of their two brothers now dead, each
receiving one-ninth part.
Alberto Barretto, complying with the condition
imposed in said document of the donation
paid to each of his brothers and nephews, and
in exchange for the sums received as such
price his co-donees assigned and conveyed to
him one-eight part of the third of the said
hacienda and whatever rights and interests
the grantors might have by virtue of the said
donation in favor of the plaintiff Barretto.
It is to be noted that the plaintiff bought oneeight undivided part of the third of the whole
hacienda of Balintagac and paid to every
No. the plaintiff did not obtain by assignment,

sale, or transfer, as expressed in said deeds, the
ownership of the said hacienda of Balintagac, but
only the hypothecary credit which the heirs of the
deceased creditor Antonio Vicente Barretto had
inherited from the latter, after the plaintiff had
obtained from his other brothers the conveyance
of their respective rights to the donation.
The rights acquired by the creditor were

transmitted by hereditary title through operation
of law to the heirs of the same Antonio M.a,
Ricardo Esteban, and Guadalupe, Barretto y
Rocha and these in turn assigned, sold and
transferred the credit with all their rights as
hypothecary creditors, as well as the right to the
usufruct of all the hacienda of Balintagac to the
plaintiff Alberto Barretto.
When in the record of an action it is fully

established that the parties indebted in a certain
amount, which is secured with a mortgage over
of their hacienda, having delivered to the
creditor not only the mortgaged half but the
whole hacienda, not in the nature of an
assignment of property in payment of a debt, still
unpaid, but with the object that the creditor may
collect by means of usufruct his credit and the
interest agreed upon, the verbal contract which is
inferred from such facts and presumed to have
been entered into between the parties, although
not set in any document, deserves in law the
name of antichresis as defined in Article 1881 of
the Civil Code.
90
By the antichresis a creditor acquires a

right to receive the fruits of real property
of his debtor, with the obligation to apply
them to the payment of the interest, if
due, and afterwards to the principal of
his credit.
The creditor in antichresis cannot by mere

possession of the real property which he received
by virtue of an antichresis acquire ownership over
the same for failure of the debtor to pay the debt
within the stipulated time, any agreement to the
contrary being void; and the debtor on his part
cannot recover the enjoyment and use of the real
property given in antichresis to the creditor,
without having previously paid the latter all his
debt and interests thereon, the creditor being
entitled to ask the courts that the said real
property be sold to satisfy his credit.
With regard to prescription, the creditor in

antichresis can never by prescription acquire the
ownership of the real property received in
antichresis, as he entered into the possession of
the same not as an owner but as a creditor with
right only to collect his credit from the fruits of
said real property.
The extinguishment of the right as creditor and

the termination of his use and possession of the
real property given in antichresis depend upon
the full payment of the debt and its interests,
after the liquidation of the amounts entered on
the account of the debtors and received by the
creditor.
LEGAZPI & SALCEDO v CELESTIAL
ANGELES v SEC. OF JUSTICE
PANDO v GIMENEZ
FACTS: This action was instituted for the purpose
of foreclosing a mortgage executed by defendant
Antonio Gimenez. Massy Teague was also
impleaded for having purchased at public auction
one of the mortgaged properties.
In order to secure the payment of P8,000 which
the defendant Gimenez owed the plaintiff, he
mortgaged the house at No. 655 Santa Mesa,
Manila, and the leasehold right on the lot upon
which it stands (Exhibit A). This was payable on
October 27, 1925, but, in spite of nonpayment,
the creditor, who is the plaintiff herein, did not

foreclose the mortgage.
The defendant was leaving the City of Manila in
order to attend to his business in the Province of
Cagayan, and at the special instance and request
of the herein plaintiff, said defendant gave to the
plaintiff the full control, and complete and
absolute administration of the building and the
parcel of land on which said building was erected,
situated in Santa Mesa, District of Santa Mesa,
mortgaged to the plaintiffIt and it was agreed
between them that the plaintiff would collect the
rents of said house, in order to apply them to the
payment of interest on the amount of the
indebtedness.
For default in the payment of taxes for the years
1925 and 1926, the house was on November 23,
1926 sold at public auction, and, for failure to
exercise the right of legal redemption, the City of
Manila, the attachment creditor and vendor of the
property, executed a final deed of sale in favor of
the purchaser, the other defendant Massy
Teague.
Furthermore, for default in the payment of the
rents due on the lot of said house for the years
1925 to 1928, the Santa Mesa estate, the lessor
of said land, cancelled the lease on July 13, 1928,
pursuant to the terms of the contract.
The appellant Gimenez contends that the plaintiff
was responsible for the delinquency in the
payment of both the tax on the house and the
rent of the lot, which caused him the loss of the
said house and the leasehold right on the lot,
because the plaintiff was at that time in charge of
the administration of the premises with the
obligation to attend to the payment of the tax
and the rents.
The plaintiff denied that he had such obligation,
alleging that his duties were confined to the
collection of the rents of the house in order to
apply them to the payment of the interest on the
mortgage.
Such was in fact the original agreement; but the
appellant asserts that it was modified by the
letter.
ISSUE: Whether or not the the administration of

the property in question assumed by the plaintiff
toward the end of October, 1925 is antichretic in
character.
RULING:
91
Taking into account the language of the letter

Exhibit 1 and the appellant's unimpeached
testimony, we are constrained to hold that it has
been proved by a preponderance of evidence,
that even though at first the plaintiff had only
undertaken to collect the rents of the house, later
on, towards the end of October, 1925, he
assumed the obligation to pay both the tax on
the house, and the rent of the lot.
As to the consideration contained in the judgment
appealed from to the effect that, in view of the
reduction of the rent of the house in May, 1926,
the plaintiff would not have accepted the
administration under the conditions alleged by
the defendant-appellant, it must be remembered
that the plaintiff took over such complete
administration months before such reduction of
rents, and it does not appear that the reduction
was foreseen.
From all these circumstances it follows that the
administration of the property in question
assumed by the plaintiff toward the end of
October, 1925 is antichretic in character, and
therefore justice and equity demand that
application be here made of the Civil Code
provisions touching the obligations of the
antichretic creditor, to wit:
The creditor is obliged to pay the taxes
and charges which burden the estate, in
the absence of an agreement to the
contrary.
He shall also be obliged to pay any
expenses necessary for its preservation
and repair.
Any sums he may expend for such
purposes shall be chargeable against the
fruits. (Art. 1882, Civil Code.)
These obligations arise from the very nature of
the covenant, and are correlated with the
plaintiff's acquired right to take charge of the
property and collect the fruits for himself.
PERALTA v QUIMPO
51 OG No. 3 p. 1383, Sept 1954
NO COPY AVAILABLE
VILLANUEVA v IPONDO
CHATTEL MORTGAGE
ALEMAN v CATERA
ALLIED BANK v SALAS
FACTS: Petitioner-bank (through petitioners
predecessor) granted Gencor Marketing, Inc. a
time loan and was secured by a Deed of Chattel
Mortgage over certain printing machineries and
equipments; said deed was recorded in the
Chattel Mortgage Registry in Feb. 7, 1974. Gencor
failed to pay prompting petitioner to extra
judicially foreclose the mortgage and requested
the Sheriff of Quezon City to effect the said
foreclosure. Upon issuance of the Notice of
Sheriffs sale, private respondent filed a motion in
court to enjoin the public auction alleging that the
properties have been previously levied and
attached by the Sheriff of Rizal.
Metrobank is a creditor of Gencors president and
claims the properties as the exclusive property of
the president doing business under the firm name
of Gencor Printing and as such may not be
foreclosed and sold at auction. During the trial it
was admitted by petitioner that the properties
belonged to the president and not to Gencor.
ISSUE: WHO between the two claimants has a
better right over the property.
HELD: Petitioner has the better right. Even
though petitioner admitted that it was the
president and not gencor who owned the
properties, the Court nevertheless finds that the
chattel mortgage over the printing machineries
and equipment was ratified and approved by
Clarencio Yujuico. As earlier stated and as pointed
out by petitioner, it was Clarencio Yujuico as
president of Gencor Marketing, Inc., who signed
the promissory note evidencing the time loan
granted by petitioner's predecessor General Bank
and Trust Company in favor of Gencor Marketing,
Inc.
Finding the chattel mortgage to be valid, the
Court takes special note of the fact that said
chattel mortgage was registered and duly
recorded in the Chattel Mortgage Registry of
Quezon City on February 7, 1974, prior to April
22, 1977, the date the writ of attachment of the
properties in question was issued. This is a
significant factor in determining who of two
contending claimants should be given preference
over the same properties in question.
The registration of the chattel mortgage more
than three years prior to the writ of attachment
issued by respondent judge is an effective and
binding notice to other creditors of its existence
and creates a real right or a lien, which being
recorded, follows the chattel wherever it goes. 7
92
The chattel mortgage lien attaches to the

property wherever it may be. Thus, private
respondent as attaching creditor acquired the
properties in question subject to petitioner's
mortgage lien as it existed thereon at the time of
the attachment.
In this regard, it must be stressed that the right of

those who so acquire said properties should not
and cannot be superior to that of the creditor who
has in his favor an instrument of mortgage
executed with the formalities of law, in good faith,
and without the least indication of fraud. 8
Applying the foregoing principle to the case at
bar, the Court finds the lien of petitioner's chattel
mortgage over the mortgaged properties in
question superior to the levy on attachment
made on the same by private respondent as
creditor of chattel mortgagor Clarencio Yujuico.
What may be attached by private respondent as
creditor of said chattel mortgagor is only the
equity or right of redemption of the mortgagor.
MAKATI LEASING v WEAREVER TEXTILES
TSAI v CA
FACTS:
- Ever Textile (R) obtained a P3M loan from
PBCOM (P), with Real Property and Chattel
Mortgage over the lot, where its factory
stands and the chattels located therein as
enumerated in its attached schedule
- A 2nd loan was obtained secured by a
Chattel Mortgage over personal properties
listed in its attached list, which is similar
to the attached list to the 1st mortgage.
- On the same date of the 2nd loan, R
purchased
various
machines
and
equipments
- Later, R filed insolvency proceedings
- P commenced an extrajudicial foreclosure
(EJF), wherein P won the bid and the
properties were leased and later sold to
Tsai. P sold the factory, properties and the
contested machineries of R.
- R filed for annulment of sale contending
that the machineries bought by R which
are not included in the list should be
excluded from the sale to TSAI
- P contended that the machineries, which
are connected to the land, are part of the
real estate stated in the Mortgage.
- RTC and CA ruled in favor of R.
ISSUE: WoN the contested machineries (property
bought by R on the same day that the 2 nd loan
was executed) should be inlcluded in the auction
sale and sale to TSAI
SC: NO!
Based on the pieces of evidence, the true

intention of P and R is to treat machinery
and equipment as chattels.
The controverted machineries are not
covered by or included in either of the 2
mortgages
The machineries were not included in the
Notice of Sale
An immovable may be considered a
personal property if there is a stipulation
as when it is used as security in the
payment of an obligation where a chattel
mortgage is executed over it, as in the
case at bar.
DOCTRINE: a chattel mortgage shall be deemed

to cover only the property described therein and
not like or substituted property thereafter
acquired by the mortgagor and placed in the
same depository as the property originally
mortgaged.
ACME SHOE v CA
FACTS:
1) Petitioner Chua Pac, the president and general
manager of co-petitioner Acme Shoe, executed
on June 1978, for and in behalf of the company, a
chattel mortgage in favor of private respondent
Producers Bank of the Philippines as security for
petitioner's corporate loan of P3,000,000.00. It
was stated that:
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
2) On 10 and 11 January 1984, the bank yet again
extended to petitioner corporation a loan of
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.
The bank then applied for an extra judicial
foreclosure of the chattel mortgage, with the
93
Sheriff of prompting Acme to file an injunction,

which was dismissed. The court also ordered the
foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations.
ISSUE: Whether it is 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:
A) Contracts of security are either personal or
real. In contracts of personal security, such as a
guaranty or a suretyship, the faithful performance
of the obligation by the principal debt or is
secured by the personal commitment of another.
B) In contracts of real security, such as a pledge,
a mortgage or an antichresis, that fulfillment is
secured by an encumbrance of property in
pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage,
by the execution of the corresponding deed
substantially in the form prescribed by law; in
real estate mortgage, by the execution of a public
instrument encumbering the real property
covered thereby; and in antichresis, by a written
instrument granting to the creditor the right to
receive the fruits of an immovable property with
the obligation to apply such fruits to the payment
of interest, if owing, and thereafter to the
principal of his credit upon the essential
condition that 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 8 of the agreement.
C) While a pledge, real estate mortgage, or
antichresis may secure after-incurred obligations
so long as these future debts are accurately
described, a chattel mortgage, can only cover
obligations existing at the time the mortgage is
constituted.
D) 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. Refusal on the part
of the borrower to execute the agreement so as
to cover the after-incurred obligation can

constitute an act of default on the part of the
borrower of the financing agreement whereon the
promise is written but the remedy of foreclosure
can only cover the debts extant at the time of
constitution and during the life of the chattel
mortgage sought to be foreclosed.
E) A chattel mortgage, as hereinbefore so
intimated, must comply substantially with the
form prescribed by the Chattel Mortgage Law
itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. The fact,
.that the statute has provided that the parties to
the contract must execute an oath that the
mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and
for no other purpose, and that the same is a just
and valid obligation, and one not entered into for
the purpose of fraud means that the debt
referred to in the law is a current, not an
obligation that is yet merely contemplated.
F) 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 other
words, 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.
CERNA v CA
MAGNA FINANCIAL v COLARINA
Facts:
Elias Colarina bought on installment from

Magna Financial Services (MFS) one Suzuki
Multicab.
After making a down payment, Colarina
executed a promissory note for the balance of
P229,284.00 payable in 36 equal monthly
installments. To secure payment, Colarina
executed an integrated promissory note and
deed of chattel mortgage over the motor
vehicle.
Colarina
failed
to
pay
the
monthly
amortization accumulating an unpaid balance
of P131,607.00.
Despite repeated demands, he failed to make
the necessary payment.
MFS filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin.
94
Upon the filing of a Replevin Bond, a Writ of

Replevin was issued. Summons, together with
a copy of the Writ of Replevin, was served on
Colarina who voluntarily surrendered physical
possession of the vehicle to the Sheriff.
The motor vehicle was turned over by the
sheriff to Magna Financial Services Group, Inc.
The trial court rendered judgment in favor of
MFS and asked Coralina to pay the unpaid
balance and foreclose the chattel mortgage.
Colarina appealed to the Regional Trial Court
which affirmed in toto the decision of the
MTCC.
CA reversed the decision of MTCC and RTC
stating that MTC and the RTC erred in ordering
the defendant to pay the unpaid balance of
the purchase price of the subject vehicle
irrespective of the fact that the instant
complaint was for the foreclosure of its chattel
mortgage.
Issue:
1) WON MFS can avail of the two remedies,
payment of unpaid balance and foreclosure of
chattel mortgage?
2) WON there was actual foreclosure?
Held:
1) No. Article 1484, paragraph 3, provides that if
the vendor has availed himself of the right to
foreclose the chattel mortgage, he shall have
no further action against the purchaser to
recover any unpaid balance of the purchase
price. Any agreement to the contrary shall be
void. In other words, in all proceedings for the
foreclosure of chattel mortgages executed on
chattels which have been sold on the
installment plan, the mortgagee is limited to
the property included in the mortgage.
Petitioner resolutely declared that it has opted
for the remedy provided under Article 1484(3)
of the Civil Code, that is, to foreclose the
chattel mortgage. The petitioners prayer
contains two remedies, payment of unpaid
balance and foreclosure of chattel mortgage.
Such a scheme is not only irregular but is a
flagrant circumvention of the prohibition of
the law. By praying for the foreclosure of the
chattel, Magna Financial Services Group, Inc.
renounced whatever claim it may have under
the promissory note.
2) No. In the case at bar, there is no dispute that
the subject vehicle is already in the
possession of the petitioner, Magna Financial
Services
Group,
Inc.
However,
actual
foreclosure
has
not
been
pursued,
commenced or concluded by it. Where the
mortgagee elects a remedy of foreclosure, the
law requires the actual foreclosure of the
mortgaged chattel. It is the actual sale of the
mortgaged chattel that would bar the creditor
(who chooses to foreclose) from recovering
any unpaid balance. And it is deemed that
there has been foreclosure of the mortgage
when all the proceedings of the foreclosure,
including the sale of the property at public
auction, have been accomplished.
Be that as it may, although no actual
foreclosure as contemplated under the law
has taken place in this case, since the vehicle
is already in the possession of Magna
Financial Services Group, Inc. and it has
persistently and consistently avowed that it
elects the remedy of foreclosure, the Court of
Appeals, thus, ruled correctly in directing the
foreclosure of the said vehicle without more.
BA FINANCE v CA
BICOL SAVINGS v GUINHAWA
F: Victorio Depositario together with private
respondent Jaime Guinhawa, acting as solidary
co-maker, took a loan from petitioner Bicol
Savings and Loan Association (BISLA) payable
every 19th day of each month. To secure the
payment of the foregoing loan obligation, the
principal borrower Victorio Depositario put up as
security a chattel mortgage which was a Yamaha
Motorcycle. Said motorcycle was eventually
foreclosed by reason of the failure of Depositario
and private respondent Guinhawa to pay the
loan. There was a deficiency in the amount of
P5,158.06 where BISLA made a demand to pay
the same. Petitioner BISLA (plaintiff therein) filed
a complaint for the recovery of a sum of money
constituting the deficiency after foreclosure of the
chattel mortgage put up by the principal borrower
Depositario against the latter and his solidary comaker Guinhawa (herein private respondent) as
defendants. Eventually, a stipulation of facts was
entered into between BISLA and Guinhawa. They
agreed to drop Depositario, as "his whereabouts
being unknown now and he could not be served
with summons". The creditor claims that he can
maintain an action for deficiency and claim P5k
balance.
Issue: WoN creditor can claim remaining balance
Ruling: Yes! The creditor may maintain an action
for deficiency although the chattel mortgage law
Is silent on this point. The reason is tat a chattel
mortgage is only given as a security and not as
95
payment for the debt in case of failure of

payment
deficiency in case of a reduction in the price at

public auction.
PAMECA WOOD v CA
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 Bank. 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 correctly pointed out by the trial court, the

said article applies clearly and solely to the sale
of personal property the price of which is payable
in installments. Although Article 1484, paragraph
(3) expressly bars any further action against the
purchaser to recover an unpaid balance of the
price, where the vendor opts to foreclose the
chattel mortgage on the thing sold, should the
vendee's failure to pay cover two or more
installments,
this
provision
is
specifically
applicable to a sale on installments.
As security for the said loan, a chattel mortgage

was also executed over PAMECA's properties in
Dumaguete City, consisting of inventories,
furniture and equipment, to cover the whole
value of the loan.
On January 18, 1984, and upon petitioner
PAMECA's failure to pay, respondent bank
extrajudicially foreclosed the chattel mortgage,
and, as sole bidder in the public auction,
purchased the foreclosed properties for a sum of
P322, 350.00.
On June 29, 1984, respondent bank filed a
complaint for the collection of the balance.
Petitioners submit that Articles 1484 and 2115 of
the Civil Code be applied in analogy to the instant
case to preclude the recovery of a deficiency
claim.
ISSUES: Whether the foreclosure of the chattel
mortgage valid
RULING:
The court did not find anything irregular or
fraudulent in the circumstance that respondent
bank was the sole bidder in the sale, as all the
legal procedures for the conduct of a foreclosure
sale have been complied with, thus giving rise to
the presumption of regularity in the performance
of public duties.
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 creditormortgagee from retaining the excess of the sale
proceeds there is a corollary obligation on the
part of the debtor-mortgagee to pay the
SUPERLINES v ICC
FACTS:
Superlines decided to acquire five (5) new
buses
from
the
Diamond
Motors
Corporation for the price of P10k.
However, Superlines lacked financial
resources for the purpose so by virtue of a
board
resolution,
it
authorized
its
President and Gen Mgr Lavides to look for
a loan for the purchase of said buses.
Lavides negotiated with ICC Leasing. ICC
agreed to finance the purchase of the new
buses via a loan and proposed a 3-yr term
for the payment. The new buses to be
purchased were to be used by Superlines
as security for the loan.
Diamond Motors sold to Superlines 5 new
buses and was registered under the name
of Superlines.
Superlines executed 2 docus Deed of
Chattel Mortgage over said buses a
security for the purchase price of buses in
P13mill loaned by ICC to Superlines; a
Continuing Guaranty to pay jointly and
severally in favour of ICC the amount of
P13mill
After paying only 7 monthly amortizations,
Superlines defaulted in the payment of its
obligation to ICC.
ICC filed a complaint for collection of sum
of money with a prayer for a writ of
replevin
TC dismissed; ICC and Superlines forged a
consumer loan agreement and not an
amortized commercial loan.
CA reversed;
- ICC and Superlines entered into an
amortized commercial loan agreement
with ICC as creditor-mortgagee and
Superlines as debtor-mortgagor, and
ordered Superlines and Lavides to pay
jointly and severally the sum of P5mill
as deficiency
- It was Diamond Motors Corporation
and not ICC which sold the subject
96
buses to Superlines. It held that no

evidence had been presented by
Superlines to show that ICC bought the
said buses from Diamond Motors
Corporation
under
a
special
arrangement and that ICC sold the
buses to Superlines. The appellate
court also ruled that Article 1484(3) is
applicable only where there is vendorvendee relationship between the
parties and since ICC did not sell the
buses to Superlines, the latter cannot
invoke said law.
ISSUE: WON there was an amortized commercial

loan agreement?
HELD: YES
DIAMOND is the seller of the five units of
buses and not the plaintiff
No convincing evidence, except the selfserving testimony of defendant Manolet
Lavides, was presented to prove that there
was an internal arrangement between the
plaintiff, as financing agent, and Diamond,
as seller of the buses. In fact, defendant
Lavides
admitted
under
oath
that
DIAMOND and plaintiff did not enter into
transaction over the sale of the buses
The evidence shows that the transaction
between the parties was an "amortized
commercial
loan"
to
be
paid
in
installments
P failed to adduce a preponderance of
evidence to prove that R and Diamond
Motors Corporation entered into a special
arrangement relative to the issuance of
certificates of registration over the buses
under the name of petitioner Superlines.
P
were also unable to prove that
respondent purchased from Diamond
Motors Corporation the new buses. In
contrast, the vehicle invoices of Diamond
Motors Corporation irrefragably show that
it sold the said buses to petitioner
Superlines. The net proceeds of the loan
were remitted by respondent to petitioner
Superlines and the latter remitted the
same to Diamond Motors Corporation in
payment of the purchase price of the
buses. In fine, respondent and Diamond
Motors Corporation had no direct business
transactions relative to the purchase of
the buses and the payment of the
purchase price thereof.
The evidence on record shows that under
the Promissory Note, Chattel Mortgage
and Continuing Guaranty, respondent was
the creditor-mortgagee of petitioner
Superlines and not the vendor of the new
buses. Hence, petitioners cannot find

refuge in Article 1484(3) of the New Civil
Code.
What should apply was the Chattel
Mortgage
executed
by
petitioner
Superlines and R in relation to the Chattel
Mortgage Law.
This Court had consistently ruled that if in
an extra-judicial foreclosure of a chattel
mortgage
a
deficiency
exists,
an
independent civil action may be instituted
for the recovery of said deficiency. To deny
the mortgagee the right to maintain an
action to recover the deficiency after
foreclosure of the chattel mortgage would
be to overlook the fact that the chattel
mortgage is only given as security and not
as payment for the debt in case of failure
of payment. Both the Chattel Mortgage
Law and Act 3135 governing extra-judicial
foreclosure of real estate mortgage, do not
contain any provision, expressly or
impliedly, precluding the mortgagee from
recovering deficiency of the principal
obligation.
ESGUERRA v CA
BPI CREDIT v CA
SERVICEWIDE v CA
FACTS:
Respondents executed a promissory note
and a chattel mortgage over a vehicle
they bought from the mortgagee itself, C.
R. Tecson Enterprises, for the payment in
installments of the vehicle. C. R. Tecson
Enterprises, on the same date, assigned in
favor of Filinvest Credit Corporation. The
respondents were aware that the new
mortagee is Filinvest.
Respondent spouses by way of Deed of

Sale with Assumption of Mortgage
transferred and delivered the vehicle to
Conrado Tecson.
Subsequently, Filinvest assigned all its

rights as mortgagee to petitioner.
Respondents failed to pay the installments

and despite demands from petitionermortgagee to pay or to return the vehicle.
Petitioner filed a complaint for Replevin

but the respondents alleged in their
Answer that they can no longer be held
liable as they had already conveyed the
car to Conrado Tecson.
97
ISSUE:
1. WON the assignment of credit by the
creditor-mortgagee quires the notice and
consent of the debtor- mortgagor?
2. WON the assignment of credit by the
debtor- mortgagor requires the notice and
consent of the creditor-mortgagee?
HELD:
1. Only notice to the debtor-mortgagor of
the assignment of credit is required. His
consent is not required.
2. In contrast, consent of the creditormortgagee to the alienation of the
mortgaged property is necessary in order
to bind said creditor. Since the assignee of
the credit steps into the shoes of the
creditor-mortgagee to whom the chattel
was mortgaged, it follows that the
assignee's consent is necessary in order to
bind him of the alienation of the
mortgaged thing by the debtor-mortgagor.
This is tantamount to a novation. As the
new assignee, petitioner's consent is
necessary before respondent spouses'
alienation of the vehicle can be considered
as binding against third persons. Petitioner
is considered a third person with respect
to the sale with mortgage between
respondent spouses and third party
defendant Conrado Tecson.
CONCURRENCE AND PREFERENCE OF

CREDITS
in the case alleging that it cannot be

levied upon since it is already the owner of
the subject jalousies.
ISSUE: WoN R may levy the jalousies
SC: NO!
- When the glass and wooden jalousies were
delivered and installed in the leased
premises, P became the owner thereof,
due to the contract between P and Capitol
in which it stated that all permanent
improvements made by lessee shall
belong to the lessor and that said
improvements hav been considered as
part of the monthly rentals.
- The fact that Capitol failed to pay R the
purchase price of the items levied upon
did not prevent the transfer of ownership
to Capitol and then to P.
UY v ZAMORA
FACTS:
1) At the instance of plaintiff Uy, the MTC ordered
the attachment of a vehicle belonging to Zamora.
The writ was levied on the vehicle on August 11,
1960. Subsequently, the Municipal Court
rendered judgment for the plaintiff Uy and
ordered defendant Zamora to pay the sum of
P1,740. Zamora appealed to the CFI.
2) While the case was pending appeal, the Allied
Finance, Inc. intervene. According to it, the
vehicle, which was attached by the Sheriff, had
previously been mortgaged to it by Zamora to
secure the payment of a loan and that at the time
of the filing of the complaint in intervention, a
balance of P2,451.93 remained in its favor. Allied,
prayed that Zamora be ordered to pay P2,451.93
as principal.
DE BARRETTO v VILLANUEVA
SAMPAGUITA PICTURES v JALWINDOR
FACTS:
- Sampaguita (P) is the owner of a building
which its roofdeck was leased to Capitol
300 (Capitol), wherein it was agreed that
whatever
improvements
introduced
therein by Capitol will later be owned by P.
- Capitol purchased on credit from Jalwindor
(R) glass and wooden jalousies which were
DELIVERED and INSTALLED in the leased
premises by R, replacing the existing
windows of P.
- Capitol failed to pay and R filed an action
for collection of sum of money against
Capitol.
- R made a levy on the glass and wooden
jalousies in question, which P intervened
3) On January 12, 1961, Uy and Zamora,

submitted to the court a compromise agreement
wherein Zamora admitted being indebted to Uy.
Since the motor vehicle had already been sold on
order of the Court for P2,500 to prevent
depreciation, defendant Zamora agreed to have
plaintiff Uy's credit paid out of the proceeds of
the sale.
4) The court found defendant Zamora to be liable
to plaintiff Uy in the amount of P2,500, and to the
intervenor in the amount of P2,451.93, plus
interest. Uy claims preference on the basis of a
lien arising from the attachment of the vehicle on
August 11, 1960. On the other hand, allied bases
its claim to preference on a Deed of Chattel
Mortgage covering the same motor vehicle.
98
ISSUE: Which of the two credits is preferred?

HELD:
A) Considering the fact that Allied Finance, Inc.
registered its mortgage only on August 24, 1960,
or subsequent to the date of the writ of
attachment obtained by plaintiff Uy on August 11,
1960, the credit of the intervenor cannot prevail
over that of the plaintiff.
B) The SC disagreed with the lower courts
decision upheld Allieds credit on the ground that,
being embodied in a public instrument of an
earlier date (June 20, 1960), it should take
precedence over plaintiff's lien by attachment
(August 11, 1960), pursuant to Article 2244 of the
Civil Code, for the reason that, as already stated,
the credit of the Allied cannot be considered as
preferred until the same has been recorded in the
Motor Vehicles Office.
C) A mortgage of motor vehicles, in order to
affect third persons, should not only be registered
in the Chattel Mortgage Registry, but the same
should also be recorded in the Motor Vehicles
Office The decision of the lower court is reversed,
without pronouncement as to costs.
CORDOVA v REYES
CENTRAL BANK v MORFE
Facts:
The Monetary Board found the Fidelity

Savings Bank to be insolvent. The Board
directed the Superintendent of Banks to take
charge of its assets, forbade it to do business
and instructed the Central Bank Legal Counsel
to take legal actions.
Prior to the institution of the liquidation
proceeding but after the declaration of
insolvency, the spouses Elizes filed a
complaint in the CFI against the Fidelity
Savings Bank for the recovery of the balance
of their time deposits.
In the judgment rendered in that case, the
Fidelity Savings Bank was ordered to pay the
Elizes spouses the sum plus accumulated
interest.
In another case, the spouses Padilla secured a
judgment against the Fidelity Savings Bank for
the sums as the balance of their time
deposits, plus interests, moral and exemplary
damages and attorney's fees.
The lower court (having cognizance of the
liquidation proceeding), upon motions of the
Elizes and Padilla spouses and over the

opposition of the Central Bank, directed the
latter as liquidator, to pay their time deposits
as preferred judgments, evidenced by final
judgments, within the meaning of article
2244(14)(b) of the Civil Code.
Central Bank contends that the final
judgments secured by the Elizes and Padilla
spouses do not enjoy any preference because
(a) they were rendered after the Fidelity
Savings Bank was declared insolvent and (b)
under the charter of the Central Bank and the
General Banking Law, no final judgment can
be validly obtained against an insolvent bank.
Issue: Whether a final judgment for the payment

of a time deposit in a savings bank which
judgment was obtained after the bank was
declared insolvent, is a preferred claim against
the bank?
Held:
No. It should be noted that fixed, savings, and
current deposits of money in banks and similar
institutions are not true deposits. They are
considered simple loans and, as such, are not
preferred credits.
The aforequoted section 29 of the Central Bank's
charter explicitly provides that when a bank is
found to be insolvent, the Monetary Board shall
forbid it to do business and shall take charge of
its assets. Evidently, one purpose in prohibiting
the insolvent bank from doing business is to
prevent some depositors from having an undue or
fraudulent preference over other creditors and
depositors.
We are of the opinion that such judgments cannot
be considered preferred and that article 2244(14)
(b) does not apply to judgments for the payment
of the deposits in an insolvent savings bank
which were obtained after the declaration of
insolvency.
In the Rohr case, the general principle of equity
that the assets of an insolvent are to be
distributed ratably among general creditors
applies with full force to the distribution of the
assets of a bank. A general depositor of a bank is
merely a general creditor, and, as such, is not
entitled to any preference or priority over other
general creditors.
The assets of a bank in process of liquidation are
held in trust for the equal benefit of all creditors,
and one cannot be permitted to obtain an
advantage or preference over another by an
attachment, execution or otherwise.
99
Considering that the deposits in question, in their

inception, were not preferred credits, it does not
seem logical and just that they should be raised
to the category of preferred credits simply
because the depositors, taking advantage of the
long interval between the declaration of
insolvency and the filing of the petition for judicial
assistance and supervision, were able to secure
judgments for the payment of their time deposits.
MANABAT v LAGUNA FED
PHIL SAVINGS BANK v LANTIN
F: c built a duplex apartment house on a
registered lot of spouses x and y, using his own
money, P25k to finish the construction.
Meanwhile, x and y obtained from psb a loan
secured by a mortgage to complete construction.
At the time of the registration of the mortgage,
the transfer certificate of title over the property
was free from all liens and encumbrances. PSB
foreclosed the mortgage, and being the highest
bidder a new certificate of title was subsequently
issued in its favor
C filed an action against the spouses to collect
the unpaid cost of construction. As x and y did
not have any properties to satisfy the judgment
rendered in his favor, c demanded from psb a pro

rata share in the value of the duplex apartment in
accordance with article 2242.
Issue: is c entitled to claim pro rata share in the
value of the property in question.
Ruling: no. the action filed by c to collect the
unpaid cost of the construction of the duplex
apartment is far from being a general liquidation
of the estate of x and y.
Although the lower court found that there were
no known creditors other than c and psb, this
cannot be conclusive. It will not bar other
creditors in the event they show up and present
their claims against psb, claiming they have also
preferred
claims
against
the
property.
Consequently, the transfer certificate of title
issued to psb which is supposed to be
indefeasible would remain constantly unstable
and questionable. Such could not have been the
intention of article 2243 of the civil code although
it considers claims and credits under article 2242
as statutory liens. Neither does the de barreto
caes sanction such instability.
100

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SIMPLE LOAN OR MUTUUM

G.R. No. L-20240

December 31, 1965

REPUBLIC OF THE PHILIPPINES, plaintiffappellee,

On January 17, 1961 the appellee filed a

The appellant likewise maintains, in support of his

SECTRANS 2010/ ATTY. AGUINALDO

the same amount of the same kind and quality

Frias vs San Diego-Sison

no interest shall be charged on the P3

Petitioner received from Respondent P2

Before the check became stale, Petitioner

Subsequently, Respondent decided not to

Petitioner subsequently failed to return the P2

CA ruled that the P2 million downpayment

Petitioner is the owner of a house and lot in

Petitioner and Dra. Flora San Diego-Sison

The SC opined that if the terms of an

It is further required that the various

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In this case, the phrase "for the last six

The MOA speaks of 2 periods of six months

The 1st six-months was given to

The 2nd six-months was given to

This means that no interest will be

This does NOT mean that interest will no

It has been held that for a debtor to continue

Art. 1956. No interest shall be due when not

FACTS: Petitioner and respondent, as owner and

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a rate of two percent (2%) per month or a fraction

The parties entered into a contract

ISSUE: WoN the sale was an outright sale / WoN

EMERITO M. RAMOS, et al., petitioners,

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obligation to pay interest on the deposit ceases

SSS (respondent) and Lirag Textile Mills

Pursuant to the Agreement, Respondent paid

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2) YES, Basilio is liable as surety. Thus it follows

ANGEL WAREHOUSING vs CHELDA

over interest. Mabalacat insisted that the

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excess in the bid price in the amount of

The Court ruled that Article 2212

Topic: Simple Loan or Mutuum; Article 1960

Trial court found that the payments made

ISSUE: Whether payments were intended to be

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Petitioner Investors Finance Corporation, then

(1) First, Pio Barretto (BARRETTO) would

approved the proposed "IPP" transaction. The

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computation requiring it to pay a total amount of

reimbursement since it was unable to prove the

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BARRETTO as evidenced by the Deed of

not have been obliged to follow the "Application

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whole interest paid by him thereon and, in

year, if the borrower pays P200.00, the whole

Indeed, the Usury Law recognizes the legitimate

In the instant case, AUTOWORLD obtained a loan

Contracts and stipulations, under any