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THIRD DIVISION 90-1540 8-7-90 P720,984.

00 11-5-90
[G.R. No. 137232. June 29, 2005] 90-1569 8-9-90 P209,433.75 11-8-90
ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO 90-0922 5-28-90 P747,780.00 8-26-90
YUJUICO, petitioners, vs. HOME BANKERS SAVINGS AND TRUST The counterclaims of defendants are hereby DISMISSED.
COMPANY, respondent. SO ORDERED. (OR, p. 323; Rollo, p. 73).[2]
DECISION Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of Appeals,
SANDOVAL-GUTIERREZ, J.: contending that under the trust receipt contracts between the parties, they merely held the
For our resolution is the petition for review on certiorari assailing the Decision[1] of the goods described therein in trust for respondent Home Bankers Savings and Trust
Court of Appeals dated March 31, 1998 in CA-G.R. CV No. 48708 and its Resolution dated Company (the bank) which owns the same. Since the ownership of the goods remains with
January 12, 1999. the bank, then it should bear the loss. With the destruction of the goods by fire, petitioners
The facts of the case as found by the Court of Appeals are: should have been relieved of any obligation to pay.
Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers The Court of Appeals, however, affirmed the trial courts judgment, holding that the bank
Savings & Trust Co. for an Omnibus Credit Line for P10 million. The bank approved RTMCs is merely the holder of the security for its advance payments to petitioners; and that the goods
credit line but for only P8 million. The bank notified RTMC of the grant of the said loan thru a they purchased, through the credit line extended by the bank, belong to them and hold said
letter dated March 2, 1989 which contains terms and conditions conformed by RTMC thru goods at their own risk.
Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement in favor of the Petitioners then filed a motion for reconsideration but this was denied by the Appellate
bank, in which he bound himself jointly and severally with RTMC for the payment of all Court in its Resolution dated January 12, 1999.
RTMCs indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by Hence, this petition for review on certiorari ascribing to the Court of Appeals the
making numerous drawdowns, each drawdown being covered by a separate promissory note following errors:
and trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of I
eleven (11) promissory notes. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
Despite the lapse of the respective due dates under the promissory notes and notwithstanding ACTS OF THE PETITIONERS-DEFENDANTS WERE TANTAMOUNT TO A VALID AND
the banks demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank EFFECTIVE TENDER OF THE GOODS TO THE RESPONDENT-PLAINTIFF.
filed a complaint for sum of money against RTMC and Yujuico before the Regional Trial II
Court, Br. 16, Manila. THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE
In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they should be absolved OF RES PERIT DOMINO IN THE CASE AT BAR CONSIDERING THE VALID AND
from liability. They claimed that although the grant of the credit line and the execution of the EFFECTIVE TENDER OF THE DEFECTIVE RAW MATERIALS BY THE PETITIONERS-
suretyship agreement are admitted, the bank gave assurance that the suretyship agreement was DEFENDANTS TO THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION
merely a formality under which Yujuico will not be personally liable. They argue that the IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH THE
importation of raw materials under the credit line was with a grant of option to them to turn- RESPONDENT-PLAINTIFF.
over to the bank the imported raw materials should these fail to meet their manufacturing III
requirements. RTMC offered to make such turn-over since the imported materials did not THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF THE CIVIL
conform to the required specifications. However, the bank refused to accept the same, until the CODE AND THE LONG-STANDING JURISPRUDENCE THAT INTENTION OF THE
materials were destroyed by a fire which gutted down RTMCs premises. PARTIES IS PRIMORDIAL IN ITS FAILURE TO UPHOLD THE INTENTION OF THE
For failure of the parties to amicably settle the case, trial on the merits proceeded. After the PARTIES THAT THE SURETY AGREEMENT WAS A MERE FORMALITY AND DID
trial, the Court a quo rendered a decision in favor of the bank, the decretal part of which reads: NOT INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff AGREEMENT.
and against defendants who are ordered to pay jointly and severally in favor of plaintiff, IV
inclusive of stipulated 30% per annum interest and penalty of 3% per month until fully paid, ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS VALID AND
under the following promissory notes: EFFECTIVE, THE HONORABLE COURT OF APPEALS VIOLATED THE BASIC LEGAL
90-1116 6-20-90 P737,088.25 9-18-90 PRECEPT THAT A SURETY IS NOT LIABLE UNLESS THE DEBTOR IS HIMSELF
(maturity) LIABLE.
90-1320 7-13-90 P650,000.00 10-11-90 V
90-1334 7-17-90 P422,500.00 10-15-90 THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF TRUST
90-1335 7-17-90 P422,500.00 10-15-90 RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE RESPONDENT.
90-1347 7-18-90 P795,000.00 10-16-90 The above assigned errors boil down to the following issues: (1) whether the Court of
90-1373 7-20-90 P715,900.00 10-18-90 Appeals erred in holding that petitioners are not relieved of their obligation to pay their loan
90-1397 7-27-90 P773,500.00 10-20-90 after they tried to tender the goods to the bank which refused to accept the same, and which
90-1429 7-26-90 P425,750.00 10-24-90 goods were subsequently lost in a fire; (2) whether the Court of Appeals erred when it ruled

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that petitioners are solidarily liable for the payment of their obligations to the bank; and (3) Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the
whether the Court of Appeals violated the Trust Receipts Law. bank.
On the first issue, petitioners theorize that when petitioner RTMC imported the raw Anent the second issue, petitioner Yujuico contends that the suretyship agreement he
materials needed for its manufacture, using the credit line, it was merely acting on behalf of signed does not bind him, the same being a mere formality.
the bank, the true owner of the goods by virtue of the trust receipts. Hence, under the doctrine We reject petitioner Yujuicos contentions for two reasons.
of res perit domino, the bank took the risk of the loss of said raw materials. RTMCs role in the First, there is no record to support his allegation that the surety agreement is a mere
transaction was that of end user of the raw materials and when it did not accept those materials formality; and
as they did not meet the manufacturing requirements, RTMC made a valid and effective tender Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by
of the goods to the bank. Since the bank refused to accept the raw materials, RTMC stored petitioner Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly
them in its warehouse. When the warehouse and its contents were gutted by fire, petitioners and severally with RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised
obligation to the bank was accordingly extinguished. Rules of Court is in point, thus:
Petitioners stance, however, conveniently ignores the true nature of its transaction with SEC. 9. Evidence of written agreements. When the terms of an agreement have been reduced
the bank. We recall that RTMC filed with the bank an application for a credit line in the in writing, it is considered as containing all the terms agreed upon and there can be, between
amount of P10 million, but only P8 million was approved. RTMC then made withdrawals the parties and their successors in interest, no evidence of such terms other than the contents of
from this credit line and issued several promissory notes in favor of the bank. In banking and the written agreement.
commerce, a credit line is that amount of money or merchandise which a banker, merchant, or However, a party may present evidence to modify, explain, or add to the terms of the written
supplier agrees to supply to a person on credit and generally agreed to in advance. [3] It is the agreement if he puts in issue in his pleading:
fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full (a) An intrinsic ambiguity, mistake, or imperfection in the written agreement;
extent of which the latter may avail himself of his dealings with the former but which he must (b) The failure of the written agreement to express the true intent and agreement
not exceed and is usually intended to cover a series of transactions in which case, when the of the parties thereto;
customers line of credit is nearly exhausted, he is expected to reduce his indebtedness by (c) The validity of the written agreement; or
payments before making any further drawings.[4] (d) The existence of other terms agreed to by the parties or their successors in
It is thus clear that the principal transaction between petitioner RTMC and the bank is a interest after the execution of the written agreement.
contract of loan. RTMC used the proceeds of this loan to purchase raw materials from a x x x.
supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw materials Under this Rule, the terms of a contract are rendered conclusive upon the parties and
to the bank as collateral. Trust receipts were executed by the parties to evidence this security evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement
arrangement. Simply stated, the trust receipts were mere securities. embodied in a document.[13] We have carefully examined the Suretyship Agreement signed by
In Samo vs. People,[5] we described a trust receipt as a security transaction intended to Yujuico and found no ambiguity therein. Documents must be taken as explaining all the terms
aid in financing importers and retail dealers who do not have sufficient funds or resources to of the agreement between the parties when there appears to be no ambiguity in the language of
finance the importation or purchase of merchandise, and who may not be able to acquire credit said documents nor any failure to express the true intent and agreement of the parties. [14]
except through utilization, as collateral, of the merchandise imported or purchased. [6] As to the third and final issue At the risk of being repetitious, we stress that the contract
In Vintola vs. Insular Bank of Asia and America,[7] we elucidated further that a trust between the parties is a loan. What respondent bank sought to collect as creditor was the loan
receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest it granted to petitioners. Petitioners recourse is to sue their supplier, if indeed the materials
in the goods. It secures an indebtedness and there can be no such thing as security interest were defective.
that secures no obligation.[8] Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the
security interest as follows: Court of Appeals in CA-G.R. CV No. 48708 are AFFIRMED IN TOTO. Costs against
(h) Security Interest means a property interest in goods, documents, or instruments to secure petitioners.
performance of some obligation of the entrustee or of some third persons to the entruster and SO ORDERED.
includes title, whether or not expressed to be absolute, whenever such title is in substance
taken or retained for security only.
Petitioners insistence that the ownership of the raw materials remained with the bank is
untenable. In Sia vs. People,[9] Abad vs. Court of Appeals,[10] and PNB vs. Pineda,[11]we held
that:
If under the trust receipt, the bank is made to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods
in any manner it wants, which it cannot do, just to give consistency with purpose of the trust
receipt of giving a stronger security for the loan obtained by the importer. To consider the
bank as the true owner from the inception of the transaction would be to disregard the
loan feature thereof...[12]

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THIRD DIVISION credit and to remit the proceeds to petitioner, if sold, or to return the goods, if not sold, on or
before their agreed maturity dates.

METROPOLITAN BANK & TRUST COMPANY, G.R. No. 180165 When the trust receipts matured, private respondents failed to return the goods to
Petitioner, petitioner, or to return their value amounting to P68,749,487.96 despite demand. Thus,
Present: petitioner filed a criminal complaint [5] for estafa[6] against Visaland and private respondents
with the Office of the City Prosecutor of Manila (City Prosecutor). [7]
YNARES-SANTIAGO, J
- versus - Chairperson, In their Counter-Affidavit, [8] private respondents denied having entered into trust
CORONA,* receipt transactions with petitioner. Instead, private respondents claimed that the contract
CARPIO MORALES,** entered into by the parties was a Contract of Loan secured by a Real Estate Mortgage over two
CHICO-NAZARIO, and parcels of land situated at Tagaytay City and registered under the name of the spouses Wilbert
HON. SECRETARY OF JUSTICE RAUL M. NACHURA, JJ. and Isabelita King (the spouses King). [9]According to private respondents, petitioner made
GONZALES, OLIVER T. YAO and DIANA T. them sign documents bearing fine prints without apprising them of the real nature of the
YAO, transaction involved. Private respondents came to know of the trust receipt transaction only
Respondents. Promulgated: after they were served a copy of the Affidavit-Complaint of the petitioner.

April 7, 2009 After the requisite preliminary investigation, the City Prosecutor found that no
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x probable cause existed and dismissed Information Sheet (I.S.) No. 02G-30918 in a
Resolution[10] dated 23 January 2003. While the City Prosecutor was not persuaded by the
defense proffered by private respondents that no trust receipt transaction existed, it
DECISION nonetheless, dismissed the case for lack of evidence that prior demand was made by
petitioner. The City Prosecutor underscored that for a charge of estafa with grave abuse of
confidence to prosper, previous demand is an indispensable requisite.
CHICO-NAZARIO, J.: To prove that a demand was made prior to the institution of the criminal complaint,
petitioner attached to its Motion for Reconsideration a copy of a letter-demand [11] dated 27
Before this Court is a Petition for Review on Certiorari under Rule 45 of the February 2001, addressed to private respondents.
Revised Rules of Court filed by petitioner Metropolitan Bank and Trust Company, seeking to
reverse and set aside the Decision [1] dated 30 March 2007and the Resolution [2] dated 16 After the element of prior demand was satisfied, the City Prosecutor issued a
October 2007 of the Court of Appeals in CA-G.R. SP No. 91892. In its assailed Decision and Resolution[12] dated 11 October 2004 finding probable cause for estafa under Article 315,
Resolution, the appellate court affirmed the Resolution [3] of the Secretary of Justice directing paragraph 1(b)[13] of the Revised Penal Code, in relation to Presidential Decree No. 115.
[14]
the City Prosecutor of Manila to move for the withdrawal of the Informations for Estafa filed Accordingly, 23 separate Informations[15] for estafa were filed before the Regional Trial
against private respondents Oliver T. Yao and Diana T. Yao. Court (RTC) of Manila against private respondents. The cases were docketed as Criminal
Cases No. 04231721-44 and raffled to Branch 17 of the said court.
The factual and procedural antecedents of this present petition are as follows:
In the interim, private respondents appealed the investigating prosecutors Resolution
Petitioner is a banking institution duly authorized to engage in the banking business to the Secretary of Justice. In a Resolution[16] dated 31 March 2005, the Secretary of Justice
under Philippine laws. ruled that there was no probable cause to prosecute private respondents for estafa in relation to
Presidential Decree No. 115. The Secretary of Justice declared that the legitimate transactional
Private respondents were the duly authorized representatives of Visaland Inc. relationship between the parties being merely a contract of loan, violations of the terms
(Visaland), likewise a domestic corporation engaged in the real estate development business. thereunder were not covered by Presidential Decree No. 115. Thus, the Secretary of Justice
directed the City Prosecutor of Manila to move for the withdrawal of the Informations. In a
In order to finance the importation of materials necessary for the operations of its subsequent Resolution[17] dated 30 August 2005, the Secretary of Justice denied petitioners
sister company, Titan Ikeda Construction and Development Corporation (TICDC), private Motion for Reconsideration, for the matters raised therein had already been passed upon in his
respondents, on behalf of Visaland, applied with petitioner for 24 letters of credit, the prior resolution.
aggregate amount of which reached the sum of P68,749,487.96.Simultaneous with the
issuance of the letters of credit, private respondents signed trust receipts [4] in favor of Acting on the directive of the Secretary of Justice, the City Prosecutor moved for the
petitioner. Private respondents bound themselves to sell the goods covered by the letters of withdrawal of the Informations which was granted by the RTC in an Order [18] dated 29 July
2005. Consequently, Criminal Cases No. 04-231721 to No. 04231744 were withdrawn. The

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RTC refused to reconsider its earlier resolution in an Order [19] dated 3 February 2006, thereby certainty. It is merely based on opinion and reasonable belief. Thus, a finding of probable
denying petitioners Motion for Reconsideration. cause does not require an inquiry into whether there is sufficient evidence to procure a
conviction. It is enough that it is believed that the act or omission complained of constitutes
From the adverse Resolutions of the Secretary of Justice, petitioner elevated its case the offense charged. Precisely, there is a trial for the reception of evidence of the prosecution
before the Court of Appeals by filing a Petition for Certiorari,[20] which was docketed as CA- in support of the charge.[26]
G.R. SP No. 91892. Petitioner averred in its Petition that the Secretary of Justice abused his
discretion in ignoring the established facts and legal principles when he ruled that probable To determine the existence of probable cause, there is need to conduct preliminary
cause for the crime of estafa was absent. investigation. A preliminary investigation constitutes a realistic judicial appraisal of the merits
The Court of Appeals, however, in its Decision [21] dated 30 March 2007, dismissed of a case.[27] Its purpose is to determine whether (a) a crime has been committed; and (b)
petitioners Petition for Certiorari after finding that the Secretary of Justice committed no whether there is a probable cause to believe that the accused is guilty thereof. [28] It is a means
grave abuse of discretion in ruling against the existence of probable cause to prosecute private of discovering which person or persons may be reasonably charged with a crime.
respondents. In arriving at its assailed decision, the appellate court recognized the authority of
the Secretary of Justice to control and supervise the prosecutors, which includes the power to The conduct of preliminary investigation is executive in nature. The Court may not
reverse or modify their decisions without committing grave abuse of discretion. be compelled to pass upon the correctness of the exercise of the public prosecutors
Similarly ill-fated was Petitioners Motion for Reconsideration in a function unless there is a showing of grave abuse of discretion or manifest error in his
Resolution[22] dated 16 October 2007. findings.[29] Grave abuse of discretion implies a capricious and whimsical exercise of
judgment tantamount to lack or excess of jurisdiction. [30] The exercise of power must have
Unfazed by the turn of events, petitioner now comes before this Court urging us to been done in an arbitrary or a despotic manner by reason of passion or personal hostility. It
reverse the Court of Appeals Decision and Resolution and to direct the filing of Informations must have been so patent and gross as to amount to an evasion of positive duty or a virtual
against private respondents. For the disposition of this Court is the sole issue of: refusal to perform the duty enjoined or to act at all in contemplation of law. [31]

WHETHER OR NOT PROBABLE CAUSE EXISTS FOR THE In the present case, the abuse of discretion is patent in the act of the Secretary of
PROSECUTION OF PRIVATE RESPONDENTS FOR THE CRIME OF Justice holding that the contractual relationship forged by the parties was a simple loan, for in
ESTAFA IN RELATION TO P.D. NO. 115. so doing, the Secretary of Justice assumed the function of the trial judge of calibrating the
evidence on record, done only after a full-blown trial on the merits. The fact of existence or
non-existence of a trust receipt transaction is evidentiary in nature, the veracity of which can
Petitioner impugns the findings of the appellate court sustaining the non-existence of best be passed upon after trial on the merits, for it is virtually impossible to ascertain the real
probable cause as found by the Secretary of Justice. Petitioner insists that the allegations in its nature of the transaction involved based solely on the self-serving allegations contained in the
complaint, together with the pieces of evidence appended thereon, are sufficient to sustain a opposing parties pleadings. Clearly, the Secretary of Justice is not in a competent position to
finding of probable cause in preliminary investigation. pass judgment on substantive matters. The bases of a partys accusation and defenses are better
ventilated at the trial proper than at the preliminary investigation.
Asserting their innocence, private respondents continue to argue that the agreement
contracted by parties is one of loan, and not of trust receipt. To buttress their contention, We need not overemphasize that in a preliminary investigation, the public prosecutor
private respondents aver that a contract of mortgage was executed by the spouses King to merely determines whether there is probable cause or sufficient ground to engender a well-
secure private respondents loan obligation with petitioner, the proceeds of which were the ones founded belief that a crime has been committed, and that the respondent is probably guilty
utilized to finance the importation of materials. [23] Private respondents likewise defend the thereof and should be held for trial. It does not call for the application of rules and standards of
assailed Court of Appeals Decision and assert that the Secretary of Justice was justified in proof that a judgment of conviction requires after trial on the merits. The complainant need
overruling the investigating prosecutors findings, as sanctioned by Section 12 of DOJ not present at this stage proof beyond reasonable doubt. A preliminary investigation does not
Department Order No. 70.[24] require a full and exhaustive presentation of the parties evidence. [32] Precisely, there is a trial to
allow the reception of evidence for both parties to substantiate their respective claims.
The present petition bears impressive merits.
Having said the foregoing, this Court now proceeds to determine whether probable
Probable cause has been defined as the existence of such facts and circumstances as cause exists for holding private respondents liable for estafa in relation to Presidential Decree
would excite the belief in a reasonable mind, acting on the facts within the knowledge of the No. 115.
prosecutor, that the person charged was guilty of the crime for which he was
prosecuted. Probable cause is a reasonable ground of presumption that a matter is, or may be, Trust receipt transactions are governed by the provisions of Presidential Decree No.
well founded on such a state of facts in the mind of the prosecutor as would lead a person of 115 which defines such a transaction as follows:
ordinary caution and prudence to believe, or entertain an honest or strong suspicion, that a
thing is so.[25] The term does not mean actual or positive cause nor does it import absolute

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Section 4. What constitutes a trust receipt transaction. A trust therefrom whether in money or whatever form, separate and capable of identification as
receipt transaction, within the meaning of this Decree, is any transaction property of the entruster; (5) return the goods, documents or instruments in the event of non-
by and between a person referred to in this Decree as the entruster, and sale or upon demand of the entruster; and (6) observe all other terms and conditions of the
another person referred to in this Decree as the entrustee, whereby the trust receipt not contrary to the provisions of the decree. [33]
entruster, who owns or holds absolute title or security interests over
certain specified goods, documents or instruments, releases the same to the The entruster shall be entitled to the proceeds from the sale of the goods, documents
possession of the entrustee upon the latters execution and delivery to the or instruments released under a trust receipt to the entrustee to the extent of the amount owed
entruster of a signed document called a trust receipt wherein the entrustee to the entruster or as appears in the trust receipt; or to the return of the goods, documents or
binds himself to hold the designated goods, documents or instruments in instruments in case of non-sale; and to the enforcement of all other rights conferred on him in
trust for the entruster and to sell or otherwise dispose of the goods, the trust receipt, provided these are not contrary to the provisions of the document. [34] A
documents or instruments with the obligation to turn over to the entruster violation of any of these undertakings constitutes estafa defined under Article 315(1)(b) of the
the proceeds thereof to the extent of the amount owing to the entruster or Revised Renal Code, as provided by Section 13 of Presidential Decree No. 115 viz:
as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance Section 13. Penalty Clause. The failure of an entrustee to turn
with the terms and conditions specified in the trust receipt, or for other over the proceeds of the sale of the goods, documents or instruments
purposes substantially equivalent to any one of the following: covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
1. In the case of goods or documents, (a) to sell the goods or documents or instruments if they were not sold or disposed of in
procure their sale; or (b) to manufacture or process the goods with the accordance with the terms of the trust receipt shall constitute the crime of
purpose of ultimate sale: Provided, That, in the case of goods delivered estafa, punishable under the provisions of Article Three hundred and
under trust receipt for the purpose of manufacturing or processing before fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred
its ultimate sale, the entruster shall retain its title over the goods whether and fifteen, as amended, otherwise known as the Revised Penal Code. If
in its original or processed form until the entrustee has complied fully with the violation or offense is committed by a corporation, partnership,
his obligation under the trust receipt; or (c) to load, unload, ship or association or other juridical entities, the penalty provided for in this
transship or otherwise deal with them in a manner preliminary or Decree shall be imposed upon the directors, officers, employees or other
necessary to their sale; or officials or persons therein responsible for the offense, without prejudice
to the civil liabilities arising from the criminal offense.
2. In the case of instruments, a) to sell or procure their sale or
exchange; or b) to deliver them to a principal; or c) to effect the
consummation of some transactions involving delivery to a depository or Apropos thereto, Article 315(1)(b) of the Revised Renal Code punishes estafa
register; or d) to effect their presentation, collection or renewal. committed as follows:

The sale of goods, documents or instruments by a person in the ARTICLE 315. Swindling (estafa). Any person who shall
business of selling goods, documents or instruments for profit who, at the defraud another by any of the means mentioned hereinbelow shall be
outset of the transaction, has, as against the buyer, general property rights punished by:
in such goods, documents or instruments, or who sells the same to the
buyer on credit, retaining title or other interest as security for the payment 1st. The penalty of prision correccional in its maximum period
of the purchase price, does not constitute a trust receipt transaction and is to prision mayor in its minimum period, if the amount of the fraud is over
outside the purview and coverage of this Decree. 12,000 pesos but does not exceed 22,000 pesos, and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be
imposed in its maximum period, adding one year for each additional
An entrustee is one having or taking possession of goods, documents or instruments 10,000 pesos; but the total penalty which may be imposed shall not exceed
under a trust receipt transaction, and any successor in interest of such person for the purpose twenty years. In such case, and in connection with the accessory penalties
of payment specified in the trust receipt agreement. The entrustee is obliged to (1) hold the which may be imposed and for the purpose of the other provisions of this
goods, documents or instruments in trust for the entruster and shall dispose of them strictly in Code, the penalty shall be termed prision mayor to reclusion temporal, as
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust the case may be.
for the entruster and turn over the same to the entruster to the extent of the amount owed to the
entruster or as appears on the trust receipt; (3) insure the goods for their total value against
loss from fire, theft, pilferage or other casualties; (4) keep said goods or the proceeds

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2nd. The penalty of prision correccional in its minimum and Appeals in CA-G.R. SP No. 91892 are REVERSED and SET ASIDE. The Secretary of
medium periods, if the amount of the fraud is over 6,000 pesos but does Justice is hereby ORDERED to direct the Office of the City Prosecutor of Manila to
not exceed 12,000 pesos; forthwith FILE Informations for estafa against private respondents Oliver T. Yao and Diana T.
Yao before the appropriate court.
3rd. The penalty of arresto mayor in its maximum period
to prision correccional in its minimum period, if such amount is over 200 SO ORDERED.
pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if


such amount does not exceed 200 pesos, provided that in the four cases
mentioned, the fraud be committed by any of the following means; x x x.

As found in the Complaint-Affidavit of petitioner, private respondents were charged


with failing to account for or turn over to petitioner the merchandise or goods covered by the
trust receipts or the proceeds of the sale thereof in payment of their obligations
thereunder. The following pieces of evidence adduced from the affidavits and documents
submitted before the City Prosecutor are sufficient to establish the existence of probable cause,
to wit:

First, the trust receipts[35] bearing the genuine signatures of private respondents;
second, the demand letter[36] of petitioner addressed to respondents; and third, the initial
admission by private respondents of the receipt of the imported goods from petitioner. [37]

Prescinding from the foregoing, we conclude that there is ample evidence on record
to warrant a finding that there is a probable cause to warrant the prosecution of private
respondents for estafa. It must be once again stressed that probable cause does not require an
inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is
believed that the act or omission complained of constitutes the offense charged.

That private respondents did not sell the goods under the trust receipt but allowed it
to be used by their sister company is of no moment. The offense punished under Presidential
Decree No. 115 is in the nature of malum prohibitum. A mere failure to deliver the proceeds of
the sale or the goods, if not sold, constitutes a criminal offense that causes prejudice not only
to another, but more to the public interest. [38] Even more incredible is the contention of private
respondents that they did not give much significance to the documents they signed,
considering the enormous value of the transaction involved. Thus, it is highly improbable to
mistake trust receipt documents for a contract of loan when the heading thereon printed in
bold and legible letters reads: Trust Receipts. We are not prejudging this case on the
merits. However, by merely glancing at the documents submitted by petitioner entitled Trust
Receipts and the arguments advanced by private respondents, we are convinced that there is
probable cause to file the case and to hold them for trial.

All told, the evidentiary measure for the propriety of filing criminal charges has
been reduced and liberalized to a mere probable cause. As implied by the words themselves,
probable cause is concerned with probability, not absolute or moral certainty. [39]

WHEREFORE, premises considered, the instant Petition is GRANTED.The


Decision dated 30 March 2007 and the Resolution dated 16 October 2007 of the Court of

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THIRD DIVISION aforementioned Trust Receipt Agreements did not bear any maturity dates as they were left
unfilled or in blank by Asiatrust.[5]

ANTHONY L. NG, G.R. No. 173905 After petitioner received the goods, consisting of chemicals and metal plates from his
Petitioner, suppliers, he utilized them to fabricate the communication towers ordered from him by his
Present: clients which were installed in three project sites, namely: Isabel, Leyte; Panabo, Davao; and
Tongonan.
CORONA, J., Chairperson,VELASCO, JR.,
- versus- As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan
ABAD,* to Asiatrust. Asiatrust then conducted a surprise ocular inspection of petitioners business
PEREZ,** and through Villarva S. Linga, Asiatrusts representative appraiser.Linga thereafter reported to
MENDOZA, JJ. Asiatrust that he found that approximately 97% of the subject goods of the Trust Receipts
PEOPLE OF THE PHILIPPINES, were sold-out and that only 3 % of the goods pertaining to PN No. 1963 remained. Asiatrust
Respondent. Promulgated: then endorsed petitioners account to its Account Management Division for the possible
restructuring of his loan. The parties thereafter held a series of conferences to work out the
April 23, 2010 problem and to determine a way for petitioner to pay his debts. However, efforts towards a
x-----------------------------------------------------------------------------------------x settlement failed to be reached.

DECISION On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-
Affidavit before the Office of the City Prosecutor of Quezon City.Consequently, on September
12, 1999, an Information for Estafa, as defined and penalized under Art. 315, par. 1(b) of the
RPC in relation to Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC. The said
VELASCO, JR. Information reads:

The Case That on or about the 30th day of May 1997, in Quezon City,
Philippines, the above-named petitioner, did then and there willfully,
unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering
This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set aside the into a Trust Receipt Agreement with said complainant whereby said
August 29, 2003 Decision[1] and July 25, 2006 Resolution of the Court of Appeals (CA) in petitioner as entrustee received in trust from the said complainant various
CA-G.R. CR No. 25525, which affirmed the Decision [2] of the Regional Trial Court (RTC), chemicals in the total sum of P4.5 million with the obligation to hold the
Branch 95 in Quezon City, in Criminal Case No. Q-99-85133 for Estafa under Article 315, said chemicals in trust as property of the entruster with the right to sell the
paragraph 1(b) of the Revised Penal Code (RPC) in relation to Section 3 of Presidential same for cash and to remit the proceeds thereof to the entruster, or to
Decree No. (PD) 115 or the Trust Receipts Law. return the said chemicals if unsold; but said petitioner once in possession
The Facts of the same, contrary to his aforesaid obligation under the trust receipt
agreement with intent to defraud did then and there misappropriated,
misapplied and converted the said amount to his own personal use and
Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of benefit and despite repeated demands made upon him, said petitioner
building and fabricating telecommunication towers under the trade name Capitol Blacksmith refused and failed and still refuses and fails to make good of his
and Builders, applied for a credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc. obligation, to the damage and prejudice of the said Ma. Girlie C.
(Asiatrust). In support of Asiatrusts credit investigation, petitioner voluntarily submitted the Bernardez in the amount of P2,971,650.00, Philippine Currency.
following documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2) the list
of projects wherein he was commissioned by the said telecommunication companies to build CONTRARY TO LAW.
several steel towers; and (3) the collectible amounts he has with the said companies. [3]

On May 30, 1997, Asiatrust approved petitioners loan application. Petitioner was
then required to sign several documents, among which are the Credit Line Agreement, Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown trial
Application and Agreement for Irrevocable L/C, Trust Receipt Agreements, [4] and Promissory ensued.
Notes. Though the Promissory Notes matured on September 18, 1997, the two (2)

7
During the pendency of the abovementioned case, conferences between petitioner and
Asiatrusts Remedial Account Officer, Daniel Yap, were held. Afterward, a Compromise IT IS SO ORDERED.
Agreement was drafted by Asiatrust. One of the requirements of the Compromise Agreement
was for petitioner to issue six (6) postdated checks.Petitioner, in good faith, tried to comply by
issuing two or three checks, which were deposited and made good. The remaining checks, In rendering its Decision, the trial court held that petitioner could not simply argue
however, were not deposited as the Compromise Agreement did not push through. that the contracts he had entered into with Asiatrust were void as they were contracts of
adhesion. It reasoned that petitioner is presumed to have read and understood and is, therefore,
For his defense, petitioner argued that: (1) the loan was granted as his working bound by the provisions of the Letters of Credit and Trust Receipts. It said that it was clear
capital and that the Trust Receipt Agreements he signed with Asiatrust were merely that Asiatrust had furnished petitioner with a Statement of Account enumerating therein the
preconditions for the grant and approval of his loan; (2) the Trust Receipt Agreement precise figures of the outstanding balance, which he failed to pay along with the computation
corresponding to Letter of Credit No. 1963 and the Trust Receipt Agreement corresponding to of other fees and charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in
Letter of Credit No. 1964 were both contracts of adhesion, since the stipulations found in the Lending Act). Finally, the trial court declared that petitioner, being the entrustee stated in the
documents were prepared by Asiatrust in fine print; (3) unfortunately for petitioner, his Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster
contract worth PhP 18,000,000 with Islacom was not yet paid since there was a squabble as to and shall dispose of them strictly in accordance with the terms and conditions of the trust
the real ownership of the latters company, but Asiatrust was aware of petitioners receivables receipts; otherwise, he is obliged to return the goods in the event of non-sale or upon demand
which were more than sufficient to cover the obligation as shown in the various Project of the entruster, failing thus, he evidently violated the Trust Receipts Law.
Listings with Islacom, Smart Communications, and Infocom; (4) prior to the Islacom problem,
he had been faithfully paying his obligation to Asiatrust as shown in Official Receipt Nos. Ruling of the Appellate Court
549001, 549002, 565558, 577198, 577199, and 594986,[6]thus debunking Asiatrusts claim of
fraud and bad faith against him; (5) during the pendency of this case, petitioner even attempted Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6, 2001. In
to settle his obligations as evidenced by the two United Coconut Planters Bank Checks [7] he his Appellants Brief dated March 25, 2002, petitioner argued that the court a quo erred: (1) in
issued in favor of Asiatrust; and (6) he had already paid PhP 1.8 million out of the PhP 2.971 changing the name of the offended party without the benefit of an amendment of the
million he owed as per Statement of Account dated January 26, 2000. Information which violates his right to be informed of the nature and cause of accusation
against him; (2) in making a finding of facts not in accord with that actually proved in the trial
and/or by the evidence provided; (3) in not considering the material facts which if taken into
account would have resulted in his acquittal; (4) in being biased, hostile, and prejudiced
against him; and (5) in considering the prosecutions evidence which did not prove the guilt of
Ruling of the Trial Court petitioner beyond reasonable doubt.

On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the falloof which
After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding petitioner reads:
guilty of the crime of Estafa. The fallo of the Decision reads as follows:

WHEREFORE, the foregoing considered, the instant appeal is


WHEREFORE, judgment is hereby rendered finding the petitioner, DENIED.The decision of the Regional Trial Court of Quezon City, Branch
Anthony L. Ng GUILTY beyond reasonable doubt for the crime of Estafa 95 dated May 29, 2001 is AFFIRMED.
defined in and penalized by Article 315, paragraph 1(b) of the Revised
Penal Code in relation to Section 3 of Presidential Decree 115, otherwise SO ORDERED.
known as the Trust Receipts Law, and is hereby sentenced to suffer the
indeterminate penalty of from six (6) years, eight (8) months, and twenty
one (21) days of prision mayor, minimum, as the minimum penalty, to The CA held that during the course of the trial, petitioner knew that the complainant
twenty (20) years of reclusion temporal maximum, as the maximum Bernardez and the other co-witnesses are all employees of Asiatrust and that she is suing in
penalty. behalf of the bank. Since petitioner transacted with the same employees for the issuance of the
subject Trust Receipts, he cannot feign ignorance that Asiatrust is not the offended party in the
The petitioner is further ordered to return to the Asiatrust instant case. The CA further stated that the change in the name of the complainant will not
Development Bank Inc. the amount of Two Million, Nine Hundred prejudice and alter the fact that petitioner was being charged with the crime of Estafa in
Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate relation to the Trust Receipts Law, since the information clearly set forth the essential elements
of interest computed from the filing of the information on September of the crime charged, and the constitutional right of petitioner to be informed of the nature and
21,1999 until the amount is fully paid. cause of his accusations is not violated.[8]

8
misapprehension of facts or premised on the absence of evidence on record. [10] Especially in
As to the alleged error in the appreciation of facts by the trial court, the CA stated that it was criminal cases where the accused stands to lose his liberty by virtue of his conviction, the
undisputed that petitioner entered into a trust receipt agreement with Asiatrust and he failed to Court must be satisfied that the factual findings and conclusions of the lower courts leading to
pay the bank his obligation when it became due.According to the CA, the fact that petitioner his conviction must satisfy the standard of proof beyond reasonable doubt.
acted without malice or fraud in entering into the transactions has no bearing, since the offense
is punished as malum prohibitum regardless of the existence of intent or malice; the mere In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the
failure to deliver the proceeds of the sale or the goods if not sold constitutes the criminal RPC in relation to PD 115. The RPC defines Estafa as:
offense.
ART. 315. Swindling (estafa).Any person who shall defraud
With regard to the failure of the RTC to consider the fact that petitioners outstanding another by any of the means mentioned hereinbelow x x x
receivables are sufficient to cover his indebtedness and that no written demand was made upon
him hence his obligation has not yet become due and demandable, the CA stated that the mere 1. With unfaithfulness or abuse of confidence,
query as to the whereabouts of the goods and/or money is tantamount to a demand. [9] namely:
Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA said
that petitioner failed to present any substantial proof to support the aforementioned allegations a. xxx
against the RTC. b. By misappropriating or converting, to the prejudice
of another, money, goods, or any other personal property received by the
After the receipt of the CA Decision, petitioner moved for its reconsideration, which was offender in trust or on commission, or for administration, or under any
denied by the CA in its Resolution dated July 25, 2006. Thereafter, petitioner filed this Petition other obligation involving the duty to make delivery of or to return the
for Review on Certiorari. In his Memorandum, he raised the following issues: same, even though such obligation be totally or partially guaranteed by a
bond; or by denying having received such money, goods, or other property
x x x.[11]
Issues:

1. The prosecution failed to adduce evidence beyond a


reasonable doubt to satisfy the 2 nd essential element that there Based on the definition above, the essential elements of Estafa are: (1) that money,
was misappropriation or conversion of subject money or goods or other personal property is received by the offender in trust or on commission, or for
property by petitioner. administration, or under any obligation involving the duty to make delivery of or to return it;
(2) that there be misappropriation or conversion of such money or property by the offender, or
2. The state was unable to prove the 3 rd essential element of the denial on his part of such receipt; (3) that such misappropriation or conversion or denial is to
crime that the alleged misappropriation or conversion is to the the prejudice of another; and (4) there is demand by the offended party to the offender. [12]
prejudice of the real offended property.
Likewise, Estafa can also be committed in what is called a trust receipt transaction
3. The absence of a demand (4th essential element) on petitioner under PD 115, which is defined as:
necessarily results to the dismissal of the criminal case.

Section 4. What constitutes a trust receipts transaction.A trust


The Courts Ruling receipt transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the entruster, and
We find the petition to be meritorious. another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over
Essentially, the issues raised by petitioner can be summed up into onewhether or not petitioner certain specified goods, documents or instruments, releases the same to the
is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. possession of the entrustee upon the latters execution and delivery to the
entruster of a signed document called a trust receipt wherein the entrustee
It is a well-recognized principle that factual findings of the trial court are entitled to great binds himself to hold the designated goods, documents or instruments in
weight and respect by this Court, more so when they are affirmed by the appellate court. trust for the entruster and to sell or otherwise dispose of the goods,
However, the rule is not without exceptions, such as: (1) when the conclusion is a finding documents or instruments with the obligation to turn over to the entruster
grounded entirely on speculations, surmises, and conjectures; (2) the inferences made are the proceeds thereof to the extent of the amount owing to the entruster or
manifestly mistaken; (3) there is grave abuse of discretion; and (4) the judgment is based on as appears in the trust receipt or the goods, documents or instruments

9
themselves if they are unsold or not otherwise disposed of, in accordance A thorough examination of the facts obtaining in the instant case, however, reveals
with the terms and conditions specified in the trust receipt, or for other that the transaction between petitioner and Asiatrust is not a trust receipt transaction but one of
purposes substantially equivalent to any of the following: simple loan.

1. In the case of goods or documents: (a) to sell the PD 115 Does Not Apply
goods or procure their sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale: Provided, That, in the case of goods It must be remembered that petitioner was transparent to Asiatrust from the very
delivered under trust receipt for the purpose of manufacturing or beginning that the subject goods were not being held for sale but were to be used for the
processing before its ultimate sale, the entruster shall retain its title over fabrication of steel communication towers in accordance with his contracts with Islacom,
the goods whether in its original or processed form until the entrustee has Smart, and Infocom. In these contracts, he was commissioned to build, out of the materials
complied full with his obligation under the trust receipt; or (c) to load, received, steel communication towers, not to sell them.
unload, ship or transship or otherwise deal with them in a manner
preliminary or necessary to their sale; or The true nature of a trust receipt transaction can be found in the whereas clause of PD 115
which states that a trust receipt is to be utilized as a convenient business device to assist
2. In the case of instruments: (a) to sell or procure importers and merchants solve their financing problems. Obviously, the State, in enacting the
their sale or exchange; or (b) to deliver them to a principal; or (c) to effect law, sought to find a way to assist importers and merchants in their financing in order to
the consummation of some transactions involving delivery to a depository encourage commerce in the Philippines.
or register; or (d) to effect their presentation, collection or renewal.
As stressed in Samo v. People,[14] a trust receipt is considered a security transaction
The sale of good, documents or instruments by a person in the intended to aid in financing importers and retail dealers who do not have sufficient funds or
business of selling goods, documents or instruments for profit who, at the resources to finance the importation or purchase of merchandise, and who may not be able to
outset of transaction, has, as against the buyer, general property rights in acquire credit except through utilization, as collateral, of the merchandise imported or
such goods, documents or instruments, or who sells the same to the buyer purchased. Similarly, American Jurisprudence demonstrates that trust receipt transactions
on credit, retaining title or other interest as security for the payment of the always refer to a method of financing importations or financing sales. [15] The principle is of
purchase price, does not constitute a trust receipt transaction and is outside course not limited in its application to financing importations, since the principle is equally
the purview and coverage of this Decree. applicable to domestic transactions.[16] Regardless of whether the transaction is foreign or
domestic, it is important to note that the transactions discussed in relation to trust receipts
mainly involved sales.
In other words, a trust receipt transaction is one where the entrustee has the obligation to
deliver to the entruster the price of the sale, or if the merchandise is not sold, to return the
merchandise to the entruster. There are, therefore, two obligations in a trust receipt transaction: Following the precept of the law, such transactions affect situations wherein the
the first refers to money received under the obligation involving the duty to turn it over entruster, who owns or holds absolute title or security interests over specified goods,
(entregarla) to the owner of the merchandise sold, while the second refers to the merchandise documents or instruments, releases the subject goods to the possession of the entrustee. The
received under the obligation to return it (devolvera) to the owner.[13] A violation of any of release of such goods to the entrustee is conditioned upon his execution and delivery to the
these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided entruster of a trust receipt wherein the former binds himself to hold the specific goods,
in Sec. 13 of PD 115, viz: documents or instruments in trust for the entruster and to sell or otherwise dispose of the
Section 13. Penalty Clause.The failure of an entrustee to turn over the goods, documents or instruments with the obligation to turn over to the entruster
proceeds of the sale of the goods, documents or instruments covered by a the proceeds to the extent of the amount owing to the entruster or the goods, documents or
trust receipt to the extent of the amount owing to the entruster or as instruments themselves if they are unsold. Similarly, we held in State Investment House v.
appears in the trust receipt or to return said goods, documents or CA, et al. that the entruster is entitled only to the proceeds derived from the sale of goods
instruments if they were not sold or disposed of in accordance with the released under a trust receipt to the entrustee. [17]
terms of the trust receipt shall constitute the crime of estafa, punishable
under the provisions of Article Three hundred fifteen, paragraph one (b) of Considering that the goods in this case were never intended for sale but for use in
Act Numbered Three thousand eight hundred and fifteen, as amended, the fabrication of steel communication towers, the trial court erred in ruling that the agreement
otherwise known as the Revised Penal Code. x x x (Emphasis supplied.) is a trust receipt transaction.

In applying the provisions of PD 115, the trial court relied on the Memorandum of
Asiatrusts appraiser, Linga, who stated that the goods have been sold by petitioner and that
only 3% of the goods remained in the warehouse where it was previously stored. But for

10
reasons known only to the trial court, the latter did not give weight to the testimony of Linga
when he testified that he merely presumed that the goods were sold, viz: This is the very essence of Estafa under Art. 315, par. 1(b). The words convert and
misappropriated connote an act of using or disposing of anothers property as if it were ones
own, or of devoting it to a purpose or use different from that agreed upon. To misappropriate
COURT (to the witness) for ones own use includes not only conversion to ones personal advantage, but also every
attempt to dispose of the property of another without a right. [18]
Q So, in other words, when the goods were not there
anymore. You presumed that, that is already sold? Petitioner argues that there was no misappropriation or conversion on his part,
because his liability for the amount of the goods subject of the trust receipts arises and
A Yes, your Honor. becomes due only upon receipt of the proceeds of the sale and not prior to the receipt of the
full price of the goods.

Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply,
Undoubtedly, in his testimony, Linga showed that he had no real personal knowledge or proof petitioner is not liable for Estafa because Sec. 13 of PD 115 provides that an entrustee is only
of the fact that the goods were indeed sold. He did not notify petitioner about the inspection liable for Estafa when he fails to turn over the proceeds of the sale of the goods x x x covered
nor did he talk to or inquire with petitioner regarding the whereabouts of the subject by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
goods. Neither did he confirm with petitioner if the subject goods were in fact sold. Therefore, receipt x x x in accordance with the terms of the trust receipt.
the Memorandum of Linga, which was based only on his presumption and not any actual
personal knowledge, should not have been used by the trial court to prove that the goods have
in fact been sold. At the very least, it could only show that the goods were not in the
warehouse.
The trust receipt entered into between Asiatrust and petitioner states:
Having established the inapplicability of PD 115, this Court finds that petitioners
liability is only limited to the satisfaction of his obligation from the loan. The real intent of the
parties was simply to enter into a simple loan agreement. In case of sale I/we agree to hand the proceeds as soon as
received to the BANK to apply against the relative acceptance (as
To emphasize, the Trust Receipts Law was created to to aid in financing importers described above) and for the payment of any other indebtedness of
and retail dealers who do not have sufficient funds or resources to finance the mine/ours to ASIATRUST DEVELOPMENT BANK.[19] (Emphasis
importation or purchase of merchandise, and who may not be able to acquire credit supplied.)
except through utilization, as collateral, of the merchandise imported or purchased. Since
Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have known
that the said agreement could not possibly apply to petitioner. Clearly, petitioner was only obligated to turn over the proceeds as soon as he received
payment. However, the evidence reveals that petitioner experienced difficulties in collecting
Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC payments from his clients for the communication towers. Despite this fact, petitioner
and PD 115. endeavored to pay his indebtedness to Asiatrust, which payments during the period from
September 1997 to July 1998 total approximately PhP 1,500,000. Thus, absent proof that the
Goods Were Not Received in Trust proceeds have been actually and fully received by petitioner, his obligation to turn over the
same to Asiatrust never arose.
The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the money, goods
or other personal property must be received by the offender in trust or on commission, or for What is more, under the Trust Receipt Agreement itself, no date of maturity was
administration, or under any other obligation involving the duty to make delivery of, or to stipulated. The provision left blank by Asiatrust is as follows:
return it. But as we already discussed, the goods received by petitioner were not held in trust.
They were also not intended for sale and neither did petitioner have the duty to return them.
They were only intended for use in the fabrication of steel communication towers. x x x and in consideration thereof, I/we hereby agree to hold
said goods in Trust for the said Bank and as its property with liberty to sell
No Misappropriation of Goods or Proceeds the same for its account within ________ days from the date of execution
of the Trust Receipt x x x[20]
The second element of Estafa requires that there be misappropriation or conversion of such
money or property by the offender, or denial on his part of such receipt.

11
In fact, Asiatrust purposely left the space designated for the date blank, an action which in While petitioner admits to his civil liability to Asiatrust, he nevertheless does not
ordinary banking transactions would be noted as highly irregular. Hence, the only way for the have criminal liability. It is a well-established principle that person is presumed innocent until
obligation to mature was for Asiatrust to demand from petitioner to pay the obligation, which proved guilty. To overcome the presumption, his guilt must be shown by proof beyond
it never did. reasonable doubt. Thus, we held in People v. Mariano[22] that while the principle does not
connote absolute certainty, it means the degree of proof which produces moral certainty in an
Again, it also makes the Court wonder as to why Asiatrust decided to leave the unprejudiced mind of the culpability of the accused. Such proof should convince and satisfy
provisions for the maturity dates in the Trust Receipt agreements in blank, since those dates the reason and conscience of those who are to act upon it that the accused is in fact guilty. The
are elemental part of the loan. But then, as can be gleaned from the records of this case, prosecution, in this instant case, failed to rebut the constitutional innocence of petitioner and
Asiatrust also knew that the capacity of petitioner to pay for his loan also hinges upon the thus the latter should be acquitted.
latters receivables from Islacom, Smart, and Infocom where he had ongoing and future At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt,
projects for fabrication and installation of steel communication towers and not from the sale of thus:
said goods. Being a bank, Asiatrust acted inappropriately when it left such a sensitive bank
instrument with a void circumstance on an elementary but vital feature of each and every loan
transaction, that is, the maturity dates. Without stating the maturity dates, it was impossible for The practice of banks of making borrowers sign trust receipts to
petitioner to determine when the loan will be due. facilitate collection of loans and place them under the threats of criminal
prosecution should they be unable to pay it may be unjust and inequitable,
Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject goods and if not reprehensible. Such agreements are contracts of adhesion which
that petitioner will use them for the fabrication and installation of communication borrowers have no option but to sign lest their loan be disapproved. The
towers. Before granting petitioner the credit line, as aforementioned, Asiatrust conducted an resort to this scheme leaves poor and hapless borrowers at the mercy of
investigation, which showed that petitioner fabricated and installed communication towers for banks, and is prone to misinterpretation x x x.[23]
well-known communication companies to be installed at designated project sites. In fine, there
was no abuse of confidence to speak of nor was there any intention to convert the subject Such is the situation in this case.
goods for another purpose, since petitioner did not withhold the fact that they were to be used
to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of confidence Asiatrusts intention became more evident when, on March 30, 2009, it, along with petitioner,
and misappropriation occurred in this instance due to Asiatrusts knowledge of the facts. filed their Joint Motion for Leave to File and Admit Attached Affidavit of Desistance to
qualify the Affidavit of Desistance executed by Felino H. Esquivas, Jr., attorney-in-fact of the
Furthermore, Asiatrust was informed at the time of petitioners application for the Board of Asiatrust, which acknowledged the full payment of the obligation of the petitioner
loan that the payment for the loan would be derived from the collectibles of his clients. and the successful mediation between the parties.
Petitioner informed Asiatrust that he was having extreme difficulties in collecting from
Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the From the foregoing considerations, we deem it unnecessary to discuss and rule upon
proceeds of the goods has not yet arisen since he has yet to receive proceeds of the goods. the other issues raised in the appeal.
Again, petitioner could not be said to have misappropriated or converted the proceeds of the
transaction since he has not yet received the proceeds from his client, Islacom. WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision dated
May 29, 2001 is SET ASIDE. Petitioner ANTHONY L. NG is hereby ACQUITTED of the
charge of violation of Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of
This Court also takes judicial notice of the fact that petitioner has fully paid his PD 115.
obligation to Asiatrust, making the claim for damage and prejudice of Asiatrust baseless and
unfounded. Given that the acceptance of payment by Asiatrust necessarily extinguished SO ORDERED.
petitioners obligation, then there is no longer any obligation on petitioners part to speak of,
thus precluding Asiatrust from claiming any damage. This is evidenced by Asiatrusts Affidavit
of Desistance[21]acknowledging full payment of the loan.

Reasonable Doubt Exists

In the final analysis, the prosecution failed to prove beyond reasonable doubt that
petitioner was guilty of Estafa under Art. 315, par. 1(b) of the RPC in relation to the pertinent
provision of PD 115 or the Trust Receipts Law; thus, his liability should only be civil in
nature.

12
THIRD DIVISION materials or the proceeds of the sales in trust for Metrobank to the extent of the amount stated
G.R. No. 195117 August 14, 2013 in the trust receipts.
HUR TIN YANG, PETITIONER When the 24 trust receipts fell due and despite the receipt of a demand letter dated August 15,
vs. 2000, Supermax failed to pay or deliver the goods or proceeds to Metrobank. Instead,
PEOPLE OF THE PHILIPPINES, RESPONDENT. Supermax, through petitioner, requested the restructuring of the loan. When the intended
RESOLUTION restructuring of the loan did not materialize, Metrobank sent another demand letter dated
VELASCO JR., J.: October 11, 2001. As the demands fell on deaf ears, Metrobank, through its representative,
This is a motion for reconsideration of our February 1, 2012 Minute Resolution 1 sustaining the Winnie M. Villanueva, filed the instant criminal complaints against petitioner.
July 28, 2010 Decision2 and December 20, 2010 Resolution3 of the Court of Appeals (CA) in For his defense, while admitting signing the trust receipts, petitioner argued that said trust
CA-G.R. CR No. 30426, finding petitioner Hur Tin Yang guilty beyond reasonable doubt of receipts were demanded by Metrobank as additional security for the loans extended to
the crime of Estafa under A11icle 315, paragraph 1 (b) of the Revised Penal Code (RPC) in Supermax for the purchase of construction equipment and materials. In support of this
relation to Presidential Decree No. 115 (PD 115) or the Trust Receipts Law. argument, petitioner presented as witness, Priscila Alfonso, who testified that the construction
In twenty-four (24) consolidated Informations, all dated March 15, 2002, petitioner Hur Tin materials covered by the trust receipts were delivered way before petitioner signed the
Yang was charged at the instance of the same complainant with the crime of Estafa under corresponding trust receipts.7 Further, petitioner argued that Metrobank knew all along that the
Article 315, par. 1(b) of the RPC,4 in relation to PD 115,5 docketed as Criminal Case Nos. 04- construction materials subject of the trust receipts were not intended for resale but for personal
223911 to 34 and raffled to the Regional Trial Court of Manila, Branch 20. The 24 use of Supermax relating to its construction business.8
Informations––differing only as regards the alleged date of commission of the crime, date of The trial court a quo, by Judgment dated October 6, 2006, found petitioner guilty as charged
the trust receipts, the number of the letter of credit, the subject goods and the amount–– and sentenced him as follows:
uniformly recite: His guilt having been proven and established beyond reasonable doubt, the Court hereby
That on or about May 28, 1998, in the City of Manila, Philippines, the said accused being then renders judgment CONVICTING accused HUR TIN YANG of the crime of estafa under
the authorized officer of SUPERMAX PHILIPPINES, INC., with office address at No. 11/F, Article 315 paragraph 1 (a) of the Revised Penal Code and hereby imposes upon him the
Global Tower, Gen Mascardo corner M. Reyes St., Bangkal, Makati City, did then and there indeterminate penalty of 4 years, 2 months and 1 day of prision correccional to 20 years of
willfully, unlawfully and feloniously defraud the METROPOLITAN BANK AND TRUST reclusion temporal and to pay Metropolitan Bank and Trust Company, Inc. the amount of
COMPANY (METROBANK), a corporation duly organized and existing under and by virtue Php13,156,256.51 as civil liability and to pay cost.
of the laws of the Republic of the Philippines, represented by its Officer in Charge, WINNIE SO ORDERED.9
M. VILLANUEVA, in the following manner, to wit: the said accused received in trust from Petitioner appealed to the CA. On July 28, 2010, the appellate court rendered a Decision,
the said Metropolitan Bank and Trust Company reinforcing bars valued at ₱1,062,918.84 upholding the findings of the RTC that the prosecution has satisfactorily established the guilt
specified in the undated Trust Receipt Agreement covered by Letter of Credit No. MG-LOC of petitioner beyond reasonable doubt, including the following critical facts, to wit: (1)
216/98 for the purpose of holding said merchandise/goods in trust, with obligation on the part petitioner signing the trust receipts agreement; (2) Supermax failing to pay the loan; and (3)
of the accused to turn over the proceeds of the sale thereof or if unsold, to return the goods to Supermax failing to turn over the proceeds of the sale or the goods to Metrobank upon
the said bank within the specified period agreed upon, but herein accused once in possession demand. Curiously, but significantly, the CA also found that even before the execution of the
of the said merchandise/goods, far from complying with his aforesaid obligation, failed and trust receipts, Metrobank knew or should have known that the subject construction materials
refused and still fails and refuses to do so despite repeated demands made upon him to that were never intended for resale or for the manufacture of items to be sold. 10
effect and with intent to defraud and with grave abuse of confidence and trust, The CA ruled that since the offense punished under PD 115 is in the nature of malum
misappropriated, misapplied and converted the said merchandise/goods or the value thereof to prohibitum, a mere failure to deliver the proceeds of the sale or goods, if not sold, is sufficient
his own personal use and benefit, to the damage and prejudice of said METROPOLITAN to justify a conviction under PD 115. The fallo of the CA Decision reads:
BANK AND TRUST COMPANY in the aforesaid amount of ₱1,062,918.84, Philippine WHEREFORE, in view of the foregoing premises, the appeal filed in this case is hereby
Currency. DENIED and, consequently, DISMISSED. The assailed Decision dated October 6, 2006 of the
Contrary to law.6 Rregional Trial Court, Branch 20, in the City of Manila in Criminal Cases Nos. 04223911 to
Upon arraignment, petitioner pleaded "not guilty." Thereafter, trial on the merits then ensued. 223934 is hereby AFFIRMED.
The facts of these consolidated cases are undisputed: SO ORDERED.
Supermax Philippines, Inc. (Supermax) is a domestic corporation engaged in the construction Petitioner filed a Motion for Reconsideration, but it was denied in a Resolution dated
business. On various occasions in the month of April, May, July, August, September, October December 20, 2010. Not satisfied, petitioner filed a petition for review under Rule 45 of the
and November 1998, Metropolitan Bank and Trust Company (Metrobank), Magdalena Rules of Court. The Office of the Solicitor General (OSG) filed its Comment dated November
Branch, Manila, extended several commercial letters of credit (LCs) to Supermax. These 28, 2011, stressing that the pieces of evidence adduced from the testimony and documents
commercial LCs were used by Supermax to pay for the delivery of several construction submitted before the trial court are sufficient to establish the guilt of petitioner. 11
materials which will be used in their construction business. Thereafter, Metrobank required On February 1, 2012, this Court dismissed the Petition via a Minute Resolution on the ground
petitioner, as representative and Vice-President for Internal Affairs of Supermax, to sign that the CA committed no reversible error in the assailed July 28, 2010 Decision. Hence,
twenty-four (24) trust receipts as security for the construction materials and to hold those

13
petitioner filed the present Motion for Reconsideration contending that the transactions over the goods whether in its original or processed form until the entrustee has
between the parties do not constitute trust receipt agreements but rather of simple loans. complied full with his obligation under the trust receipt; or (c) to load, unload, ship
On October 3, 2012, the OSG filed its Comment on the Motion for Reconsideration, praying or transship or otherwise deal with them in a manner preliminary or necessary to
for the denial of said motion and arguing that petitioner merely reiterated his arguments in the their sale; or
petition and his Motion for Reconsideration is nothing more than a mere rehash of the matters 2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to
already thoroughly passed upon by the RTC, the CA and this Court. 12 deliver them to a principal; or (c) to effect the consummation of some transactions
The sole issue for the consideration of the Court is whether or not petitioner is liable for Estafa involving delivery to a depository or register; or (d) to effect their presentation,
under Art. 315, par. 1(b) of the RPC in relation to PD 115, even if it was sufficiently proved collection or renewal.
that the entruster (Metrobank) knew beforehand that the goods (construction materials) subject Simply stated, a trust receipt transaction is one where the entrustee has the obligation to
of the trust receipts were never intended to be sold but only for use in the entrustee’s deliver to the entruster the price of the sale, or if the merchandise is not sold, to return the
construction business. merchandise to the entruster. There are, therefore, two obligations in a trust receipt transaction:
The motion for reconsideration has merit. the first refers to money received under the obligation involving the duty to turn it over
In determining the nature of a contract, courts are not bound by the title or name given by the (entregarla) to the owner of the merchandise sold, while the second refers to the merchandise
parties. The decisive factor in evaluating such agreement is the intention of the parties, as received under the obligation to "return" it (devolvera) to the owner. 16 A violation of any of
shown not necessarily by the terminology used in the contract but by their conduct, words, these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided
actions and deeds prior to, during and immediately after executing the agreement. As such, in Sec. 13 of PD 115, viz:
therefore, documentary and parol evidence may be submitted and admitted to prove such Section 13. Penalty Clause.—The failure of an entrustee to turn over the proceeds of the sale
intention.13 of the goods, documents or instruments covered by a trust receipt to the extent of the amount
In the instant case, the factual findings of the trial and appellate courts reveal that the dealing owing to the entruster or as appears in the trust receipt or to return said goods, documents or
between petitioner and Metrobank was not a trust receipt transaction but one of simple loan. instruments if they were not sold or disposed of in accordance with the terms of the trust
Petitioner’s admission––that he signed the trust receipts on behalf of Supermax, which failed receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
to pay the loan or turn over the proceeds of the sale or the goods to Metrobank upon hundred fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen,
demand––does not conclusively prove that the transaction was, indeed, a trust receipts as amended, otherwise known as the Revised Penal Code. x x x (Emphasis supplied.)
transaction. In contrast to the nomenclature of the transaction, the parties really intended a Nonetheless, when both parties enter into an agreement knowing fully well that the return of
contract of loan. This Court––in Ng v. People14 and Land Bank of the Philippines v. the goods subject of the trust receipt is not possible even without any fault on the part of the
Perez,15 cases which are in all four corners the same as the instant case––ruled that the fact that trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation to Art.
the entruster bank knew even before the execution of the trust receipt agreements that the 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties would be
construction materials covered were never intended by the entrustee for resale or for the the return of the proceeds of the sale transaction. This transaction becomes a mere loan, where
manufacture of items to be sold is sufficient to prove that the transaction was a simple loan the borrower is obligated to pay the bank the amount spent for the purchase of the goods. 17
and not a trust receipts transaction. In Ng v. People, Anthony Ng, then engaged in the business of building and fabricating
The petitioner was charged with Estafa committed in what is called, under PD 115, a "trust telecommunication towers, applied for a credit line of PhP 3,000,000 with Asiatrust
receipt transaction," which is defined as: Development Bank, Inc. Prior to the approval of the loan, Anthony Ng informed Asiatrust that
Section 4. What constitutes a trust receipts transaction.—A trust receipt transaction, within the the proceeds would be used for purchasing construction materials necessary for the completion
meaning of this Decree, is any transaction by and between a person referred to in this Decree of several steel towers he was commissioned to build by several telecommunication
as the entruster, and another person referred to in this Decree as entrustee, whereby the companies. Asiatrust approved the loan but required Anthony Ng to sign a trust receipt
entruster, who owns or holds absolute title or security interests over certain specified goods, agreement. When Anthony Ng failed to pay the loan, Asiatrust filed a criminal case for Estafa
documents or instruments, releases the same to the possession of the entrustee upon the latter’s in relation to PD 115 or the Trust Receipts Law. This Court acquitted Anthony Ng and ruled
execution and delivery to the entruster of a signed document called a "trust receipt" wherein that the Trust Receipts Law was created to "to aid in financing importers and retail dealers
the entrustee binds himself to hold the designated goods, documents or instruments in trust for who do not have sufficient funds or resources to finance the importation or purchase of
the entruster and to sell or otherwise dispose of the goods, documents or instruments with the merchandise, and who may not be able to acquire credit except through utilization, as
obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing collateral, of the merchandise imported or purchased." Since Asiatrust knew that Anthony Ng
to the entruster or as appears in the trust receipt or the goods, documents or instruments was neither an importer nor retail dealer, it should have known that the said agreement could
themselves if they are unsold or not otherwise disposed of, in accordance with the terms and not possibly apply to petitioner, viz:
conditions specified in the trust receipt, or for other purposes substantially equivalent to any of The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115
the following: which states that a trust receipt is to be utilized "as a convenient business device to assist
1. In the case of goods or documents: (a) to sell the goods or procure their sale; or importers and merchants solve their financing problems." Obviously, the State, in enacting the
(b) to manufacture or process the goods with the purpose of ultimate sale: Provided, law, sought to find a way to assist importers and merchants in their financing in order to
That, in the case of goods delivered under trust receipt for the purpose of encourage commerce in the Philippines.
manufacturing or processing before its ultimate sale, the entruster shall retain its title

14
[A] trust receipt is considered a security transaction intended to aid in financing importers and Indeed, goods sold in retail are often within the custody or control of the trustee until they are
retail dealers who do not have sufficient funds or resources to finance the importation or purchased. In the case of materials used in the manufacture of finished products, these finished
purchase of merchandise, and who may not be able to acquire credit except through utilization, products – if not the raw materials or their components – similarly remain in the possession of
as collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence the trustee until they are sold. But the goods and the materials that are used for a construction
demonstrates that trust receipt transactions always refer to a method of "financing project are often placed under the control and custody of the clients employing the contractor,
importations or financing sales." The principle is of course not limited in its application to who can only be compelled to return the materials if they fail to pay the contractor and often
financing importations, since the principle is equally applicable to domestic transactions. only after the requisite legal proceedings. The contractor’s difficulty and uncertainty in
Regardless of whether the transaction is foreign or domestic, it is important to note that the claiming these materials (or the buildings and structures which they become part of), as soon
transactions discussed in relation to trust receipts mainly involved sales. as the bank demands them, disqualify them from being covered by trust receipt agreements. 19
Following the precept of the law, such transactions affect situations wherein the entruster, who Since the factual milieu of Ng and Land Bank of the Philippines are in all four corners similar
owns or holds absolute title or security interests over specified goods, documents or to the instant case, it behooves this Court, following the principle of stare decisis, 20 to rule that
instruments, releases the subject goods to the possession of the entrustee. The release of such the transactions in the instant case are not trust receipts transactions but contracts of simple
goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust loan. The fact that the entruster bank, Metrobank in this case, knew even before the execution
receipt wherein the former binds himself to hold the specific goods, documents or instruments of the alleged trust receipt agreements that the covered construction materials were never
in trust for the entruster and to sell or otherwise dispose of the goods, documents or intended by the entrustee (petitioner) for resale or for the manufacture of items to be sold
instruments with the obligation to turn over to the entruster the proceeds to the extent of the would take the transaction between petitioner and Metrobank outside the ambit of the Trust
amount owing to the entruster or the goods, documents or instruments themselves if they are Receipts Law.
unsold. x x x [T]he entruster is entitled "only to the proceeds derived from the sale of goods For reasons discussed above, the subject transactions in the instant case are not trust receipts
released under a trust receipt to the entrustee." transactions.1âwphi1 Thus, the consolidated complaints for Estafa in relation to PD 115 have
Considering that the goods in this case were never intended for sale but for use in the really no leg to stand on.
fabrication of steel communication towers, the trial court erred in ruling that the agreement is a The Court’s ruling in Colinares v. Court of Appeals21 is very apt, thus:
trust receipt transaction. The practice of banks of making borrowers sign trust receipts to facilitate collection of loans
xxxx and place them under the threats of criminal prosecution should they be unable to pay it may
To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail be unjust and inequitable. if not reprehensible. Such agreements are contracts of adhesion
dealers who do not have sufficient funds or resources to finance the importation or purchase of which borrowers have no option but to sign lest their loan be disapproved. The resort to this
merchandise, and who may not be able to acquire credit except through utilization, as scheme leaves poor and hapless borrowers at the mercy of banks and is prone to
collateral, of the merchandise imported or purchased." Since Asiatrust knew that petitioner misinterpretation x x x.
was neither an importer nor retail dealer, it should have known that the said agreement could Unfortunately, what happened in Colinares is exactly the situation in the instant case. This
not possibly apply to petitioner.18 reprehensible bank practice described in Colinares should be stopped and discouraged. For
Further, in Land Bank of the Philippines v. Perez, the respondents were officers of Asian this Court to give life to the constitutional provision of non-imprisonment for nonpayment of
Construction and Development Corporation (ACDC), a corporation engaged in the debts,22 it is imperative that petitioner be acquitted of the crime of Estafa under Art. 315, par. 1
construction business. On several occasions, respondents executed in favor of Land Bank of (b) ofthe RPC, in relation to PD 115.
the Philippines (LBP) trust receipts to secure the purchase of construction materials that they WHEREFORE, the Resolution dated February 1, 2012, upholding theCA's Decision dated
will need in their construction projects. When the trust receipts matured, ACDC failed to July 28, 2010 and Resolution dated December 20, 2010 in CA-G.R. CR No. 30426, is hereby
return to LBP the proceeds of the construction projects or the construction materials subject of RECONSIDERED. Petitioner Hur Tin Yang is ACQUITTED of the charge of violating Art.
the trust receipts. After several demands went unheeded, LBP filed a complaint for Estafa or 315, par. 1 (b) of the RPC, in relation to the pertinent provision of PD 115 in Criminal Case
violation of Art. 315, par. 1(b) of the RPC, in relation to PD 115, against the respondent Nos. 04-223911 to 34.
officers of ACDC. This Court, like in Ng, acquitted all the respondents on the postulate that SO ORDERED.
the parties really intended a simple contract of loan and not a trust receipts transaction, viz:
When both parties enter into an agreement knowing that the return of the goods subject of the
trust receipt is not possible even without any fault on the part of the trustee, it is not a trust
receipt transaction penalized under Section 13 of P.D. 115; the only obligation actually agreed
upon by the parties would be the return of the proceeds of the sale transaction. This transaction
becomes a mere loan, where the borrower is obligated to pay the bank the amount spent for the
purchase of the goods.
xxxx
Thus, in concluding that the transaction was a loan and not a trust receipt, we noted in
Colinares that the industry or line of work that the borrowers were engaged in was
construction. We pointed out that the borrowers were not importers acquiring goods for resale.

15
[G.R. No. 90828. September 5, 2000] entruster, conspiring, confederating together and mutually helping one another, did then and
MELVIN COLINARES and LORDINO VELOSO, petitioners, vs.HONORABLE there wilfully, unlawfully and feloniously fail and refuse to remit the proceeds of the sale of
COURT OF APPEALS, and THE PEOPLE OF THE the goods to the entruster despite repeated demands but instead converted, misappropriated
PHILIPPINES, respondents. and misapplied the proceeds to their own personal use, benefit and gain, to the damage and
DECISION prejudice of the Philippine Banking Corporation, in the aforesaid sum of P22,389.80,
DAVIDE, JR., C.J.: Philippine Currency.
In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for Contrary to PD 115 in relation to Article 315 of the Revised Penal Code. [16]
a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the The case was docketed as Criminal Case No. 1390.
latters convent at Camaman-an, Cagayan de Oro City. During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal
On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2x4x, 300 guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed the
SF tanguile wood tiles 12x12, 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement documents without reading the fine print, only learning of the trust receipt implication much
adhesive from CM Builders Centre for the construction project. [1] The following day, 31 later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt
October 1979, Petitioners applied for a commercial letter of credit [2] with the Philippine was a mere formality.[17]
Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders On 7 July 1986, the trial court promulgated its decision [18] convicting Petitioners of
Centre. PBC approved the letter of credit[3] for P22,389.80 to cover the full invoice value of estafa for violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and
the goods. Petitioners signed a pro-forma trust receipt [4] as security. The loan was due on 29 sentencing each of them to suffer imprisonment of two years and one day of prision
January 1980. correccional as minimum to six years and one day of prision mayor as maximum, and to
On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial solidarily indemnify PBC the amount of P20,824.44, with legal interest from 29 January 1980,
payment of the loan.[5] 12 % penalty charge per annum, 25% of the sums due as attorneys fees, and costs.
On 7 May 1980, PBC wrote[6] to Petitioners demanding that the amount be paid within The trial court considered the transaction between PBC and Petitioners as a trust receipt
seven days from notice. Instead of complying with PBCs demand, Veloso confessed that they transaction under Section 4, P.D. No. 115. It considered Petitioners use of the goods in their
lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until Carmelite monastery project an act of disposing as contemplated under Section 13, P.D. No.
15 June 1980 to settle the account.[7] 115, and treated the charge invoice[19] for goods issued by CM Builders Centre as a document
PBC sent a new demand letter [8]to Petitioners on 16 October 1980 and informed them within the meaning of Section 3 thereof. It concluded that the failure of Petitioners to turn over
that their outstanding balance as of 17 November 1979 was P20,824.40 exclusive of attorneys the amount they owed to PBC constituted estafa.
fees of 25%.[9] Petitioners appealed from the judgment to the Court of Appeals which was docketed as
On 2 December 1980, Petitioners proposed[10] that the terms of payment of the loan be CA-G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling that
modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting 31 they violated the Trust Receipt Law, and in holding them criminally liable therefor. In the
January 1980 until the account is fully paid. Pending approval of the proposal, Petitioners alternative, they contend that at most they can only be made civilly liable for payment of the
paid P1,000 to PBC on 4 December 1980, [11] and thereafter P500 on 11 February 1981, [12] 16 loan.
March 1981,[13] and 20 April 1981.[14] Concurrently with the separate demand for attorneys fees In its decision[20] 6 March 1989, the Court of Appeals modified the judgment of the trial
by PBCs legal counsel, PBC continued to demand payment of the balance. [15] court by increasing the penalty to six years and one day of prision mayor as minimum to
On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust fourteen years eight months and one day of reclusion temporal as maximum.It held that the
Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information which documentary evidence of the prosecution prevails over Velosos testimony, discredited
was filed with Branch 18, Regional Trial Court of Cagayan de Oro City.The accusatory Petitioners claim that the documents they signed were in blank, and disbelieved that they were
portion of the Information reads: coerced into signing them.
That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration [21]alleging
jurisdiction of this Honorable Court, the above-named accused entered into a trust receipt that the Disclosure Statement on Loan/Credit Transaction [22] (hereafter Disclosure Statement)
agreement with the Philippine Banking Corporation at Cagayan de Oro City wherein the signed by them and Tuiza was suppressed by PBC during the trial.That document would have
accused, as entrustee, received from the entruster the following goods to wit: proved that the transaction was indeed a loan as it bears a 14% interest as opposed to the trust
Solatone Acoustical board receipt which does not at all bear any interest.Petitioners further maintained that when PBC
Tanguile Wood Tiles allowed them to pay in installment, the agreement was novated and a creditor-debtor
Marcelo Cement Tiles relationship was created.
Umylin Cement Adhesive In its resolution[23]of 16 October 1989 the Court of Appeals denied the Motion for New
with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to Trial/Reconsideration because the alleged newly discovered evidence was actually forgotten
hold the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise evidence already in existence during the trial, and would not alter the result of the case.
dispose of the said items and to turn over to the entruster the proceeds of the sale of said goods Hence, Petitioners filed with us the petition in this case on 16 November 1989. They
or if there be no sale to return said items to the entruster on or before January 29, 1980 but that raised the following issues:
the said accused after receipt of the goods, with intent to defraud and cause damage to the

16
I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE unavailable, they could have compelled its production in court, [30] which they never
GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, DISCLOSURE ON did. Petitioners have miserably failed to establish the second requisite of the rule on newly
LOAN/CREDIT TRANSACTION, WHICH IF INTRODUCED AND ADMITTED, WOULD discovered evidence.
CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS. Petitioners themselves admitted that they searched again their voluminous records,
2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE meticulously and patiently, until they discovered this new and material evidence only upon
ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR VIOLATION learning of the Court of Appeals decision and after they were shocked by the penalty imposed.
[31]
OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315 PARAGRAPH (I) (B) Clearly, the alleged newly discovered evidence is mere forgotten evidence that
NOTWITHSTANDING THE NOVATION OF THE SO-CALLED TRUST RECEIPT jurisprudence excludes as a ground for new trial.[32]
CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO CREDITOR-DEBTOR However, the second issue should be resolved in favor of Petitioners.
SITUATION. Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any
In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny transaction by and between a person referred to as the entruster, and another person referred to
the petition for lack of merit. as the entrustee, whereby the entruster who owns or holds absolute title or security interest
On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that over certain specified goods, documents or instruments, releases the same to the possession of
they had already fully paid PBC on 2 February 1990 the amount of P70,000 for the balance of the entrustee upon the latters execution and delivery to the entruster of a signed document
the loan, including interest and other charges, as evidenced by the different receipts issued by called a trust receipt wherein the entrustee binds himself to hold the designated goods,
PBC,[24] and that the PBC executed an Affidavit of desistance. [25] documents or instruments with the obligation to turn over to the entruster the proceeds thereof
We required the Solicitor General to comment on the Motion to Dismiss. to the extent of the amount owing to the entruster or as appears in the trust receipt or the
In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in
was akin to a voluntary surrender or plea of guilty which merely serves to mitigate Petitioners accordance with the terms and conditions specified in the trust receipt.
culpability, but does not in any way extinguish their criminal liability. There are two possible situations in a trust receipt transaction. The first is covered by the
In the Resolution of 13 August 1990, we gave due course to the Petition and required the provision which refers to money received under the obligation involving the duty to deliver it
parties to file their respective memoranda. (entregarla) to the owner of the merchandise sold. The second is covered by the provision
The parties subsequently filed their respective memoranda. which refers to merchandise received under the obligation to return it (devolvera) to the
It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we owner.[33]
required the parties to move in the premises and for Petitioners to manifest if they are still Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by the
interested in the further prosecution of this case and inform us of their present whereabouts trust receipt to the entruster or to return said goods if they were not disposed of in accordance
and whether their bail bonds are still valid. with the terms of the trust receipt shall be punishable as estafa under Article 315 (1) of the
Petitioners submitted their Compliance. Revised Penal Code,[34] without need of proving intent to defraud.
The core issues raised in the petition are the denial by the Court of Appeals of A thorough examination of the facts obtaining in the case at bar reveals that the
Petitioners Motion for New Trial and the true nature of the contract between Petitioners and transaction intended by the parties was a simple loan, not a trust receipt agreement.
the PBC. As to the latter, Petitioners assert that it was an ordinary loan, not a trust receipt Petitioners received the merchandise from CM Builders Centre on 30 October 1979.On
agreement under the Trust Receipts Law. that day, ownership over the merchandise was already transferred to Petitioners who were to
The grant or denial of a motion for new trial rests upon the discretion of the judge.New use the materials for their construction project. It was only a day later, 31 October 1979, that
trial may be granted if: (1) errors of law or irregularities have been committed during the trial they went to the bank to apply for a loan to pay for the merchandise.
prejudicial to the substantial rights of the accused; or (2) new and material evidence has been This situation belies what normally obtains in a pure trust receipt transaction where
discovered which the accused could not with reasonable diligence have discovered and goods are owned by the bank and only released to the importer in trust subsequent to the grant
produced at the trial, and which, if introduced and admitted, would probably change the of the loan. The bank acquires a security interest in the goods as holder of a security title for
judgment.[26] the advances it had made to the entrustee. [35] The ownership of the merchandise continues to be
For newly discovered evidence to be a ground for new trial, such evidence must be (1) vested in the person who had advanced payment until he has been paid in full, or if the
discovered after trial; (2) could not have been discovered and produced at the trial even with merchandise has already been sold, the proceeds of the sale should be turned over to him by
the exercise of reasonable diligence; and (3) material, not merely cumulative, corroborative, or the importer or by his representative or successor in interest. [36] To secure that the bank shall be
impeaching, and of such weight that, if admitted, would probably change the judgment. [27] It is paid, it takes full title to the goods at the very beginning and continues to hold that title as his
essential that the offering party exercised reasonable diligence in seeking to locate the indispensable security until the goods are sold and the vendee is called upon to pay for them;
evidence before or during trial but nonetheless failed to secure it. [28] hence, the importer has never owned the goods and is not able to deliver possession. [37] In a
We find no indication in the pleadings that the Disclosure Statement is a newly certain manner, trust receipts partake of the nature of a conditional sale where the importer
discovered evidence. becomes absolute owner of the imported merchandise as soon as he has paid its price. [38]
Petitioners could not have been unaware that the two-page document exists. The Trust receipt transactions are intended to aid in financing importers and retail dealers
Disclosure Statement itself states, NOTICE TO BORROWER: YOU ARE ENTITLED TO A who do not have sufficient funds or resources to finance the importation or purchase of
COPY OF THIS PAPER WHICH YOU SHALL SIGN. [29] Assuming Petitioners copy was then

17
merchandise, and who may not be able to acquire credit except through utilization, as Mutia. Nowhere from Mutias testimony can it be gleaned that PBC represented to Petitioners
collateral, of the merchandise imported or purchased. [39] that the transaction they were entering into was not a pure loan but had trust receipt
The antecedent acts in a trust receipt transaction consist of the application and approval implications.
of the letter of credit, the making of the marginal deposit and the effective importation of The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes
goods through the efforts of the importer.[40] the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of
PBC attempted to cover up the true delivery date of the merchandise, yet the trial court another regardless of whether the latter is the owner. [45] Here, it is crystal clear that on the part
took notice even though it failed to attach any significance to such fact in the of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money
judgment. Despite the Court of Appeals contrary view that the goods were delivered to to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as
Petitioners previous to the execution of the letter of credit and trust receipt, we find that the shown by several receipts issued by PBC acknowledging payment of the loan.
records of the case speak volubly and this fact remains uncontroverted. It is not uncommon for The Information charges Petitioners with intent to defraud and misappropriating the
us to peruse through the transcript of the stenographic notes of the proceedings to be satisfied money for their personal use. The mala prohibita nature of the alleged offense
that the records of the case do support the conclusions of the trial court. [41] After such perusal notwithstanding, intent as a state of mind was not proved to be present in Petitioners
Grego Mutia, PBCs credit investigator, admitted thus: situation. Petitioners employed no artifice in dealing with PBC and never did they evade
ATTY. CABANLET: (continuing) payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms
Q Do you know if the goods subject matter of this letter of credit and trust receipt precisely to meet their obligation.
agreement were received by the accused? Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-
A Yes, sir sale, contrary to the express provision embodied in the trust receipt. They are contractors who
Q Do you have evidence to show that these goods subject matter of this letter of credit and obtained the fungible goods for their construction project. At no time did title over the
trust receipt were delivered to the accused? construction materials pass to the bank, but directly to the Petitioners from CM Builders
A Yes, sir. Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which
Q I am showing to you this charge invoice, are you referring to this document? should not be the basis for criminal prosecution in the event of violation of its provisions. [46]
A Yes, sir. The practice of banks of making borrowers sign trust receipts to facilitate collection of
xxx loans and place them under the threats of criminal prosecution should they be unable to pay it
Q What is the date of the charge invoice? may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion
A October 31, 1979. which borrowers have no option but to sign lest their loan be disapproved.The resort to this
COURT: scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to
Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and
numeral 1.[42] admitted that it was only after collection of the money, as manifested by its Affidavit of
During the cross and re-direct examinations he also impliedly admitted that the Desistance.
transaction was indeed a loan. Thus: WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16
Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused October 1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and
you admit that? SET ASIDE. Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of
A Because in the bank the loan is considered part of the loan. P.D. No. 115 in relation to Article 315 of the Revised Penal Code.
xxx No costs.
RE-DIRECT BY ATTY. CABANLET: SO ORDERED.
ATTY. CABANLET (to the witness)
Q What do you understand by loan when you were asked?
A Loan is a promise of a borrower from the value received. The borrower will pay the
bank on a certain specified date with interest[43]
Such statement is akin to an admission against interest binding upon PBC.
Petitioner Velosos claim that they were made to believe that the transaction was a loan
was also not denied by PBC. He declared:
Q Testimony was given here that that was covered by trust receipt. In short it was a special
kind of loan. What can you say as to that?
A I dont think that would be a trust receipt because we were made to understand by the
manager who encouraged us to avail of their facilities that they will be granting us a
loan[44]
PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with
Petitioners, to refute Velosos testimony, yet it only presented credit investigator Grego

18
FIRST DIVISION On 12 January 1993 the Labor Arbiter inhibited himself from the case because of
INTERASIAS's accusation of partiality. The records were then forwarded to the NLRC. On
G.R. No. 112592 December 19, 1995 the other hand, petitioner filed a Third-Party Claimant's Appeal/Memorandum. On 18 August
PRUDENTIAL BANK, petitioner, 1993 the NLRC dismissed petitioner's appeal as well as INTERASIA's Motion for
vs. Reconsideration of the resolution dated 23 December 1992. INTERASIA and petitioner
NATIONAL LABOR RELATIONS COMMISSION, CECILIA ORQUELLO, et al., separately moved to reconsider the ruling but on 12 November 1993 their motions were
ZENAIDA UCHI, et al., ALU-INTERASIA CONTAINER INDUSTRIES, INC., and denied.1 Hence petitioner brought this present recourse raising questions on the validity not
RAUL REMODO, respondents. only of the NLRC resolutions of 18 August and 12 November 1993 but also of the public
auction sale.2
BELLOSILLO, J.: Petitioner rails against the public auction of 5 November 1992 which was allegedly conducted
This petition for certiorari impugns the Resolutions of the National Labor Relations without notice and in a place other than the premises of INTERASIA as required by the
Commission (NLRC) dated 18 August and 12 November 1993 in NLRC Cases Nos. RAB-III- Manual of Instructions for Sheriffs. It also raises issue on the extent of its security title over
580-82 (Orquillo v. Interasia Container Industries, Inc.), RAB-III-3-585-82, (Uchi v. Interasia the properties subject of the levy on execution, submitting that while it may not have absolute
Container Industries, Inc.) and RAB-III-08-0049-87, (ALU-Interasia Container Industries, Inc. ownership over the properties, still it has right, interest and ownership consisting of a security
v. Interasia Container Industries, Inc.) dismissing the appeal of petitioner from the order of the title which attaches to the properties. Petitioner differentiates a trust receipt, which is a
Labor Arbiter denying its third-party claim to the personal properties subject of levy on security for the payment of the obligations of the importer, from a real estate mortgage
execution based on its trust receipts. executed as security for the payment of an obligation of a borrower. Petitioner argues that in
The records show that Interasia Container Industries, Inc. (INTERASIA), was embroiled in the latter the ownership of the mortgagor may not necessarily have any bearing on its
three (3) labor cases which were eventually resolved against it. Thus in NLRC Cases Nos. acquisition, whereas in the case of a trust receipt the acquisition of the goods by the borrower
RAB-III-03-580-82 and RAB-III-03-585-82 monetary awards consisting of 13th-month pay results from the advances made by the bank. It concludes that the security title of the bank in a
differentials and other benefits were granted to complainants. Subsequently the monetary trust receipt must necessarily be of the same or greater extent than the nature of the security
award was recomputed to include separation pay in the total sum of P126,788.30 occasioned arising from a real estate mortgage. Petitioner maintains that it is a preferred claimant to the
by the closure of operations of INTERASIA. In RAB-03-08-0049-87 the Labor Arbiter proceeds from the foreclosure to the extent of its security title in the goods which are valued at
declared the closure or shutdown of operations effected by INTERASIA as illegal and P46,100,253.92 otherwise its security title will become useless. 3
awarded to complainants the sum of P1,188,466.32 as wage differentials, separation pay and In their comment, private respondents support the findings of the NLRC. They submit that
other benefits. petitioner's negligence to immediately assert its right to cancel the Trust Receipt Agreements,
With the finality of the three (3) decisions, writs of execution were issued. The Sheriff levied upon INTERASIA's failure to comply with its obligation, is fatal to its claim.
on execution personal properties located in the factory of INTERASIA thus — "For Case 580 For its part, the NLRC claims to rely on our pronouncement on trust receipts in Vintola
and 585: One (1) lot-plastic sacks (scrap, one (1) lot — sling sacks, one (1) lot — plastic in v. Insular Bank of Asia and America. 4 It justifies the dismissal of petitioner's third-party claim
spools; and, For Case 0049: Five hundred (500) bags — plastic resins, one (1) lot plastic on the ground that trust receipts are mere security transactions which do not vest upon
resins sweaping (scrap) and one (1) lot — all plastic linings." petitioner any title of ownership, and that although the Trust Receipt Agreements described
Petitioner filed an Affidavit of Third-Party Claim asserting ownership over the seized petitioner as owner of the goods, there was no showing that it canceled the trust receipts and
properties on the strength of trust receipts executed by INTERASIA in its favor. As a result, took possession of the goods.5
the Sheriff suspended the public auction sale. But on 18 September 1992 the Labor Arbiter The petition is impressed with merit. We cannot subscribe to NLRC's simplistic interpretation
denied the claim of petitioner and directed the Sheriff to proceed with the levy of the of trust receipt arrangements. In effect, it has reduced the Trust Receipt Agreements to a pure
properties. Petitioner then filed separate appeals to the NLRC. and simple loan transaction. This perception was clearly dispelled in People
On 14 October 1992 the Sheriff posted Notices of levy and Sale of the seized properties on 21 v. Nitafan,6 citing the Vintola and Samo cases, where we explained the nature of a trust receipt
October 1992. However, no bidder appeared on the scheduled date hence the public auction thus —
sale was postponed to 5 November 1992. At the rescheduled date the Sheriff declared Angel (A) trust receipt arrangement does not involve a simple loan transaction
Peliglorio the highest bidder with an offer of P128,000.00 on the properties levied in Cases between a creditor and debtor-importer. Apart from a loan feature, the trust
Nos. 580 (RAB-III-580-82) and 585 (RAB-III-3-585-82), and P1,191,110.00 in Case No. 0049 receipt arrangement has a security feature that is covered by the trust
(RAB-111-08-0049-87). receipt itself. (Vintola v. Insular Bank of Asia and America, 150 SCRA
On 12 December 1992 the Labor Arbiter ordered the release of the properties to Peliglorio 578 [1987] That second feature is what provides the much needed
prompting INTERASIA to file a Motion to Set Aside and/or Declare Public Auction Sale Null financial assistance to our traders in the importation or purchase of goods
and Void Ab Initio for non-compliance with legal requisites. On 23 December 1992 the Labor or merchandise through the use of those goods or merchandise as
Arbiter denied the motion and directed the Sheriff to break open the plant of INTERASIA in collateral for the advancements made by a bank (Samo v. People, 115 Phil
order that Peliglorio could enter and take possession of the auctioned properties. INTERASIA 346 [1962]). The title of the bank to the security is the one sought to be
moved to reconsider the order. protected and not the loan which is a separate and distinct agreement.

19
Reliance cannot be placed upon the Vintola case as an excuse for the dismissal of petitioner's Sec. 12. Validity of entruster's security interest as against creditors. — The
claim. For in that case we sustained, rather than frustrated, the claim of the bank for payment entruster's security interest in goods, documents, or instruments pursuant
of the advances it had made to the purchaser of the goods, notwithstanding that it was not the to the written terms of a trust receipt shall be valid as against all creditors
factual owner thereof and that petitioners had already surrendered the goods to it due to their of the entrustee for the duration of the trust receipt agreement.
inability to sell them. We stated that the fact that the Vintolas were unable to sell the seashells From the legal and jurisprudential standpoint it is clear that the security interest of the
in question did not affect IBAA's right to recover the advances it had made under the loan entruster is not merely an empty or idle title. To a certain extent, such interest, such interest
covered by the Letter of Credit, with the trust receipt as a security for the loan. Thus, except becomes a "lien" on the goods because the entruster's advances will have to be settled first
for our disquisition on the nature of a trust receipt as restated in Nitafan, Vintola hardly has before the entrustee can consolidate his ownership over the goods. A contrary view would be
any bearing on the case at bench since the issue here involves the effect and enforcement of disastrous. For to refuse to recognize the title of the banker under the trust receipt as security
the security aspect whereas the former case deals with the loan aspect of a trust receipt for the advance of the purchase price would be to strike down a bona fide and honest
transaction. Apparently, the NLRC was confused about the nature of a trust receipt, transaction of great commercial benefit and advantage founded upon a well-recognized
specifically the security aspect thereof. custom by which banking credit is officially mobilized for manufacturers and importers of
The mechanics and effects flowing from a trust receipt transaction, particularly the importance small means. 10
given to the security held by the entruster, i.e., the person holding title over the goods, were The NLRC argues that inasmuch as petitioner did not cancel the Trust Receipt Agreements and
fully discussed in earlier decisions, as follows — took possession of the properties it could not claim ownership of the properties.
By this arrangement a banker advances money to an intending importer, We do not agree. Significantly, the law uses the word "may" in granting to the entruster the
and thereby lends the aid of capital, of credit, or of business facilities and right to cancel the trust and take possession of the goods. 11 Consequently, petitioner has the
agencies abroad, to the enterprise of foreign commerce. Much of this trade discretion to avail of such right or seek any alternative action, such as a third-party claim or a
could hardly be carried on by any other means, and therefore it is of the separate civil action which it deems best to protect its right, at anytime upon default or failure
first importance that the fundamental factor in the transaction, the banker's of the entrustee to comply with any of the terms and conditions of the trust agreement.
advance of money and credit, should receive the amplest protection. Besides, as earlier stated, the law warrants the validity of petitioner's security interest in the
Accordingly, in order to secure that the banker shall be repaid at the goods pursuant to the written terms of the trust receipt as against all creditors of the trust
critical point — that is, when the imported goods finally reach the hands receipt agreement. 12 The only exception to the rule is when the properties are in the hands of
of the intended vendee — the banker takes the full title to the goods at the an innocent purchaser for value and in good faith. The records however do not show that the
very beginning; he takes it as soon as the goods are bought and settled for winning bidder is such purchaser. Neither can private respondents plead preferential claims to
by his payments or acceptances in the foreign country, and he continues to the properties as petitioner has the primary right to them until its advances are fully paid.
hold that title as his indispensable security until the goods are sold in the In fine, we hold that under the law and jurisprudence the NLRC committed grave abuse of
United States and the vendee is called upon to pay for them. This security discretion in disregarding the third-party claim of petitioner. Necessarily the auction sale held
is not an ordinary pledge by the importer to the banker, for the importer on 5 November 1992 should be set aside. For there would be neither justice nor equity in
has never owned the goods, and moreover, he is not able to deliver the taking the funds from the party whose means had purchased the property under the contract. 13
possession; but the security is the complete title vested originally in the WHEREFORE, the petition for certiorari is GRANTED. The Resolutions of the National
bankers, and this characteristic of the transaction has again and again Labor Relations Commission dated 18 August and 12 November 1993 are SET ASIDE and a
been recognized and protected by the courts. Of course, the title is at new judgment is entered GRANTING the Third-Party Claim and ORDERING the Sheriff or
bottom a security title, as it has sometimes been called, and the banker is his representative to immediately deliver to petitioner PRUDENTIAL BANK the properties
always under the obligation to reconvey; but only after his advances have subject of the Trust Receipt Agreements.
been fully repaid and after the importer has fulfilled the other terms of the SO ORDERED.
contract (emphasis supplied). 7
. . . . [I]n a certain manner, (trust receipt contracts) partake of the nature of
a conditional sale as provided by the Chattel Mortgage Law, that is, the
importer becomes absolute owner of the imported merchandise as soon as
he has paid its price. The ownership of the merchandise continues to be
vested in the owner thereof or in the person who has advanced payment,
until he has been paid in full, or if the merchandise has already been sold,
the proceeds of the sale should be turned over to him by the importer or by
his representative or successor in interest (emphasis supplied). 8
More importantly, owing to the vital role trust receipts play in international and domestic
commerce, Sec. 12 of P.D. No. 1159 assures the entruster of the validity of his claim against all
creditors —

20
FIRST DIVISION
calorized lance pipes
G. R. No. 164317 February 6, 2006
[)]
ALFREDO CHING, Petitioner,
vs. 1895 12-17-80 03-17-81 P67,652.04 Spare parts for
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS- Spectrophotometer
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court, Manila,
Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE PEOPLE OF THE 1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
PHILIPPINES, Respondents.
DECISION 2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision 1 of the Court of Appeals 2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
(CA) in CA-G.R. SP No. 57169 dismissing the petition for certiorari, prohibition and rolling mills
mandamus filed by petitioner Alfredo Ching, and its Resolution2 dated June 28, 2004 denying
the motion for reconsideration thereof. 2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Lacolaboratory
Sometime in September to October 1980, PBMI, through petitioner, applied with the Rizal Equipment5
Commercial Banking Corporation (respondent bank) for the issuance of commercial letters of Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority
credit to finance its importation of assorted goods. 3 to sell but not by way of conditional sale, pledge or otherwise; and in case such goods were
Respondent bank approved the application, and irrevocable letters of credit were issued in sold, to turn over the proceeds thereof as soon as received, to apply against the relative
favor of petitioner. The goods were purchased and delivered in trust to PBMI. Petitioner acceptances and payment of other indebtedness to respondent bank. In case the goods
signed 13 trust receipts4 as surety, acknowledging delivery of the following goods: remained unsold within the specified period, the goods were to be returned to respondent bank
T/R Date Maturity Principal Description of Goods without any need of demand. Thus, said "goods, manufactured products or proceeds thereof,
Nos. Granted Date whether in the form of money or bills, receivables, or accounts separate and capable of
identification" were respondent bank’s property.
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK" When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to
Brand Synthetic return their value amounting to ₱6,940,280.66 despite demands. Thus, the bank filed a
Graphite Electrode criminal complaint for estafa6 against petitioner in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15 bundles) under Article 315, paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree
Calorized Lance Pipes (P.D.) No. 115, otherwise known as the Trust Receipts Law. Thirteen (13) Informations were
filed against the petitioner before the Regional Trial Court (RTC) of Manila. The cases were
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.
Refractory Tundish Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The
Bricks appeal was dismissed in a Resolution7 dated March 17, 1987, and petitioner moved for its
reconsideration. On December 23, 1987, the Minister of Justice granted the motion, thus
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts for reversing the previous resolution finding probable cause against petitioner. 8 The City
CCM Prosecutor was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot moulds
February 24, 1988.9The RTC, for its part, granted the Motion to Quash the Informations filed
2042 01-30-81 04-30-81 P469,669.29 High Fired Refractory by petitioner on the ground that the material allegations therein did not amount to estafa. 10
Nozzle Bricks In the meantime, the Court rendered judgment in Allied Banking Corporation v.
Ordoñez,11 holding that the penal provision of P.D. No. 115 encompasses any act violative of
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite an obligation covered by the trust receipt; it is not limited to transactions involving goods
Electrode [with] which are to be sold (retailed), reshipped, stored or processed as a component of a product
tapered pitch filed ultimately sold. The Court also ruled that "the non-payment of the amount covered by a trust
nipples receipt is an act violative of the obligation of the entrustee to pay." 12
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15 bundles petitioner before the Office of the City Prosecutor of Manila. The case was docketed as I.S.
No. 95B-07614.
21
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there 3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY
was no probable cause to charge petitioner with violating P.D. No. 115, as petitioner’s liability PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION AMOUNTING TO
was only civil, not criminal, having signed the trust receipts as surety. 13 Respondent bank AN EXCESS OF JURISDICTION WHEN THEY CONTINUED THE
appealed the resolution to the Department of Justice (DOJ) via petition for review, alleging PROSECUTION OF THE PETITIONER DESPITE LACK OF SUFFICIENT
that the City Prosecutor erred in ruling: BASIS.19
1. That there is no evidence to show that respondent participated in the In his petition, petitioner incorporated a certification stating that "as far as this Petition is
misappropriation of the goods subject of the trust receipts; concerned, no action or proceeding in the Supreme Court, the Court of Appeals or different
2. That the respondent is a mere surety of the trust receipts; and divisions thereof, or any tribunal or agency. It is finally certified that if the affiant should learn
3. That the liability of the respondent is only civil in nature. 14 that a similar action or proceeding has been filed or is pending before the Supreme Court, the
On July 13, 1999, the Secretary of Justice issued Resolution No. 25015 granting the petition Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
and reversing the assailed resolution of the City Prosecutor. According to the Justice Secretary, undertakes to notify this Honorable Court within five (5) days from such notice." 20
the petitioner, as Senior Vice-President of PBMI, executed the 13 trust receipts and as such, In its Comment on the petition, the Office of the Solicitor General alleged that -
was the one responsible for the offense. Thus, the execution of said receipts is enough to indict A.
the petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT
also declared that petitioner could not contend that P.D. No. 115 covers only goods ultimately PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE
destined for sale, as this issue had already been settled in Allied Banking Corporation v. OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER FALL WITHIN
Ordoñez,16 where the Court ruled that P.D. No. 115 is "not limited to transactions in goods THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE
which are to be sold (retailed), reshipped, stored or processed as a component of a product 315, PAR. 1(B) OF THE REVISED PENAL CODE.
ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to B.
return said goods if unsold or not otherwise disposed of in accordance with the terms of the THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE
trust receipts." DELAY HAS MARRED THE CONDUCT OF THE PRELIMINARY
The Justice Secretary further stated that the respondent bound himself under the terms of the INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL.
trust receipts not only as a corporate official of PBMI but also as its surety; hence, he could be C.
proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION
decision in Rizal Commercial Banking Corporation v. Court of Appeals; 17 and second, as the AND MANDAMUS IS NOT THE PROPER MODE OF REVIEW FROM THE
corporate official responsible for the offense under P.D. No. 115, via criminal prosecution. RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE PRESENT
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without PETITION MUST THEREFORE BE DISMISSED.21
prejudice to the civil liabilities arising from the criminal offense." Thus, according to the On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on
Justice Secretary, following Rizal Commercial Banking Corporation, the civil liability procedural grounds. On the procedural issue, it ruled that (a) the certification of non-forum
imposed is clearly separate and distinct from the criminal liability of the accused under P.D. shopping executed by petitioner and incorporated in the petition was defective for failure to
No. 115. comply with the first two of the three-fold undertakings prescribed in Rule 7, Section 5 of the
Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and
Informations against petitioner for violation of P.D. No. 115 before the RTC of Manila. The mandamus was not the proper remedy of the petitioner.
cases were docketed as Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of
before Branch 52 of said court. Petitioner filed a motion for reconsideration, which the Justice were correctly issued for the following reasons: (a) petitioner, being the Senior Vice-
Secretary of Justice denied in a Resolution18 dated January 17, 2000. President of PBMI and the signatory to the trust receipts, is criminally liable for violation of
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115 by his
the resolutions of the Secretary of Justice on the following grounds: actuations, had already been resolved and laid to rest in Allied Bank Corporation v.
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN Ordoñez;22 and (c) petitioner was estopped from raising the
FACT, ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING WHEN City Prosecutor’s delay in the final disposition of the preliminary investigation because he
THEY ALLOWED HIS PROSECUTION DESPITE THE FACT THAT NO failed to do so in the DOJ.
EVIDENCE HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN Thus, petitioner filed the instant petition, alleging that:
THE ALLEGED TRANSACTIONS. I
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON
GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS JURISDICTION THE GROUND THAT THE CERTIFICATION OF NON-FORUM SHOPPING
WHEN THEY CONTINUED PROSECUTION OF THE PETITIONER DESPITE INCORPORATED THEREIN WAS DEFECTIVE.
THE LENGTH OF TIME INCURRED IN THE TERMINATION OF THE II
PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE
OF THE INSTANT CASE. ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF

22
JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE IN absolute literalness. In his works on the Revised Rules of Civil Procedure, former Supreme
COMING OUT WITH THE ASSAILED RESOLUTIONS.23 Court Justice Florenz Regalado states that, with respect to the contents of the certification
The Court will delve into and resolve the issues seriatim. which the pleader may prepare, the rule of substantial compliance may be availed
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He of.27However, there must be a special circumstance or compelling reason which makes the
claims that the rules of procedure should be used to promote, not frustrate, substantial justice. strict application of the requirement clearly unjustified. The instant petition has not alleged
He insists that the Rules of Court should be construed liberally especially when, as in this any such extraneous circumstance. Moreover, as worded, the certification cannot even be
case, his substantial rights are adversely affected; hence, the deficiency in his certification of regarded as substantial compliance with the procedural requirement. Thus, the CA was not
non-forum shopping should not result in the dismissal of his petition. informed whether, aside from the petition before it, petitioner had commenced any other
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that action involving the same issues in other tribunals.
indubitably, the certificate of non-forum shopping incorporated in the petition before the CA is On the merits of the petition, the CA ruled that the petitioner failed to establish that the
defective because it failed to disclose essential facts about pending actions concerning similar Secretary of Justice committed grave abuse of discretion in finding probable cause against the
issues and parties. It asserts that petitioner’s failure to comply with the Rules of Court is fatal petitioner for violation of estafa under Article 315, paragraph 1(b) of the Revised Penal Code,
to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Court of Appeals.24 Be that as it may, even on the merits, the arguments advanced in support of the petition are not
We agree with the ruling of the CA that the certification of non-forum shopping petitioner persuasive enough to justify the desired conclusion that respondent Secretary of Justice
incorporated in his petition before the appellate court is defective. The certification reads: gravely abused its discretion in coming out with his assailed Resolutions. Petitioner posits
It is further certified that as far as this Petition is concerned, no action or proceeding in the that, except for his being the Senior Vice-President of the PBMI, there is no iota of evidence
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. that he was a participes crimines in violating the trust receipts sued upon; and that his liability,
It is finally certified that if the affiant should learn that a similar action or proceeding has been if at all, is purely civil because he signed the said trust receipts merely as a xxx surety and not
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions as the entrustee. These assertions are, however, too dull that they cannot even just dent the
thereof, of any other tribunal or agency, it hereby undertakes to notify this Honorable Court findings of the respondent Secretary, viz:
within five (5) days from such notice.25 "x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition ‘xxx If the violation or offense is committed by a corporation, partnership, association or other
should be accompanied by a sworn certification of non-forum shopping, as provided in the judicial entities, the penalty provided for in this Decree shall be imposed upon the directors,
third paragraph of Section 3, Rule 46 of said Rules. The latter provision reads in part: officers, employees or other officials or persons therein responsible for the offense, without
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. — The prejudice to the civil liabilities arising from the criminal offense.’
petition shall contain the full names and actual addresses of all the petitioners and respondents, "There is no dispute that it was the respondent, who as senior vice-president of PBM, executed
a concise statement of the matters involved, the factual background of the case and the the thirteen (13) trust receipts. As such, the law points to him as the official responsible for the
grounds relied upon for the relief prayed for. offense. Since a corporation cannot be proceeded against criminally because it cannot commit
xxx crime in which personal violence or malicious intent is required, criminal action is limited to
The petitioner shall also submit together with the petition a sworn certification that he has not the corporate agents guilty of an act amounting to a crime and never against the corporation
theretofore commenced any other action involving the same issues in the Supreme Court, the itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303).
Court of Appeals or different divisions thereof, or any other tribunal or agency; if there is such Thus, the execution by respondent of said receipts is enough to indict him as the official
other action or proceeding, he must state the status of the same; and if he should thereafter responsible for violation of PD 115.
learn that a similar action or proceeding has been filed or is pending before the Supreme "Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which
Court, the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he are ultimately destined for sale and not goods, like those imported by PBM, for use in
undertakes to promptly inform the aforesaid courts and other tribunal or agency thereof within manufacture. This issue has already been settled in the Allied Banking Corporation case,
five (5) days therefrom. xxx supra, where he was also a party, when the Supreme Court ruled that PD 115 is ‘not limited to
Compliance with the certification against forum shopping is separate from and independent of transactions in goods which are to be sold (retailed), reshipped, stored or processed as a
the avoidance of forum shopping itself. The requirement is mandatory. The failure of the component or a product ultimately sold’ but ‘covers failure to turn over the proceeds of the
petitioner to comply with the foregoing requirement shall be sufficient ground for the sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with the
dismissal of the petition without prejudice, unless otherwise provided. 26 terms of the trust receipts.’
Indubitably, the first paragraph of petitioner’s certification is incomplete and unintelligible. "In regard to the other assigned errors, we note that the respondent bound himself under the
Petitioner failed to certify that he "had not heretofore commenced any other action involving terms of the trust receipts not only as a corporate official of PBM but also as its surety. It is
the same issues in the Supreme Court, the Court of Appeals or the different divisions thereof evident that these are two (2) capacities which do not exclude the other. Logically, he can be
or any other tribunal or agency" as required by paragraph 4, Section 3, Rule 46 of the Revised proceeded against in two (2) ways: first, as surety as determined by the Supreme Court in its
Rules of Court. decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate
We agree with petitioner’s contention that the certification is designed to promote and official responsible for the offense under PD 115, the present case is an appropriate remedy
facilitate the orderly administration of justice, and therefore, should not be interpreted with under our penal law.

23
"Moreover, PD 115 explicitly allows the prosecution of corporate officers ‘without prejudice in excess of his authority under the Rule if the Information is filed against the respondent
to the civil liabilities arising from the criminal offense’ thus, the civil liability imposed on despite absence of evidence showing probable cause therefor. 34 If the Secretary of Justice
respondent in RCBC vs. Court of Appeals case is clearly separate and distinct from his reverses the Resolution of the Investigating Prosecutor who found no probable cause to hold
criminal liability under PD 115.’"28 the respondent for trial, and orders such prosecutor to file the Information despite the absence
Petitioner asserts that the appellate court’s ruling is erroneous because (a) the transaction of probable cause, the Secretary of Justice acts contrary to law, without authority and/or in
between PBMI and respondent bank is not a trust receipt transaction; (b) he entered into the excess of authority. Such resolution may likewise be nullified in a petition for certiorari under
transaction and was sued in his capacity as PBMI Senior Vice-President; (c) he never received Rule 65 of the Revised Rules of Civil Procedure.35
the goods as an entrustee for PBMI, hence, could not have committed any dishonesty or A preliminary investigation, designed to secure the respondent against hasty, malicious and
abused the confidence of respondent bank; and (d) PBMI acquired the goods and used the oppressive prosecution, is an inquiry to determine whether (a) a crime has been committed;
same in operating its machineries and equipment and not for resale. and (b) whether there is probable cause to believe that the accused is guilty thereof. It is a
The OSG, for its part, submits a contrary view, to wit: means of discovering the person or persons who may be reasonably charged with a crime.
34. Petitioner further claims that he is not a person responsible for the offense allegedly Probable cause need not be based on clear and convincing evidence of guilt, as the
because "[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), investigating officer acts upon probable cause of reasonable belief. Probable cause implies
petitioner cannot be held criminally liable as the transactions sued upon were clearly entered probability of guilt and requires more than bare suspicion but less than evidence which would
into in his capacity as an officer of the corporation" and that [h]e never received the goods as justify a conviction. A finding of probable cause needs only to rest on evidence showing that
an entrustee for PBM as he never had or took possession of the goods nor did he commit more likely than not, a crime has been committed by the suspect. 36
dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of However, while probable cause should be determined in a summary manner, there is a need to
merit. examine the evidence with care to prevent material damage to a potential accused’s
35. Petitioner’s being a Senior Vice-President of the Philippine Blooming Mills does not constitutional right to liberty and the guarantees of freedom and fair play 37 and to protect the
exculpate him from any liability. Petitioner’s responsibility as the corporate official of PBM State from the burden of unnecessary expenses in prosecuting alleged offenses and holding
who received the goods in trust is premised on Section 13 of P.D. No. 115, which provides: trials arising from false, fraudulent or groundless charges. 38
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse
the goods, documents or instruments covered by a trust receipt to the extent of the amount of discretion in issuing the assailed resolutions. Indeed, he acted in accord with law and the
owing to the entruster or as appears in the trust receipt or to return said goods, documents or evidence.
instruments if they were not sold or disposed of in accordance with the terms of the trust Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
receipt shall constitute the crime of estafa, punishable under the provisions of Article Three Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and meaning of this Decree, is any transaction by and between a person referred to in this Decree
fifteen, as amended, otherwise known as the Revised Penal Code. If the violation or offense is as the entruster, and another person referred to in this Decree as entrustee, whereby the
committed by a corporation, partnership, association or other juridical entities, the penalty entruster, who owns or holds absolute title or security interests over certain specified goods,
provided for in this Decree shall be imposed upon the directors, officers, employees or other documents or instruments, releases the same to the possession of the entrustee upon the latter’s
officials or persons therein responsible for the offense, without prejudice to the civil liabilities execution and delivery to the entruster of a signed document called a "trust receipt" wherein
arising from the criminal offense. (Emphasis supplied) the entrustee binds himself to hold the designated goods, documents or instruments in trust for
36. Petitioner having participated in the negotiations for the trust receipts and having received the entruster and to sell or otherwise dispose of the goods, documents or instruments with the
the goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing
proceeded against by virtue of the PBM’s violation of P.D. No. 115. 29 to the entruster or as appears in the trust receipt or the goods, documents or instruments
The ruling of the CA is correct. themselves if they are unsold or not otherwise disposed of, in accordance with the terms and
In Mendoza-Arce v. Office of the Ombudsman (Visayas), 30 this Court held that the acts of a conditions specified in the trust receipt, or for other purposes substantially equivalent to any of
quasi-judicial officer may be assailed by the aggrieved party via a petition for certiorari and the following:
enjoined (a) when necessary to afford adequate protection to the constitutional rights of the 1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
accused; (b) when necessary for the orderly administration of justice; (c) when the acts of the manufacture or process the goods with the purpose of ultimate sale; Provided, That,
officer are without or in excess of authority; (d) where the charges are manifestly false and in the case of goods delivered under trust receipt for the purpose of manufacturing or
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against processing before its ultimate sale, the entruster shall retain its title over the goods
the accused.31 The Court also declared that, if the officer conducting a preliminary whether in its original or processed form until the entrustee has complied fully with
investigation (in that case, the Office of the Ombudsman) acts without or in excess of his his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal
authority and resolves to file an Information despite the absence of probable cause, such act with them in a manner preliminary or necessary to their sale; or
may be nullified by a writ of certiorari.32 2. In the case of instruments a) to sell or procure their sale or exchange; or b) to
Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, 33 the Information deliver them to a principal; or c) to effect the consummation of some transactions
shall be prepared by the Investigating Prosecutor against the respondent only if he or she finds involving delivery to a depository or register; or d) to effect their presentation,
probable cause to hold such respondent for trial. The Investigating Prosecutor acts without or collection or renewal.

24
The sale of goods, documents or instruments by a person in the business of selling goods, The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions
documents or instruments for profit who, at the outset of the transaction, has, as against the involving goods procured as a component of a product ultimately sold has been resolved in the
buyer, general property rights in such goods, documents or instruments, or who sells the same affirmative in Allied Banking Corporation v. Ordoñez. 44 The law applies to goods used by the
to the buyer on credit, retaining title or other interest as security for the payment of the entrustee in the operation of its machineries and equipment. The non-payment of the amount
purchase price, does not constitute a trust receipt transaction and is outside the purview and covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold
coverage of this Decree. or otherwise not disposed of, violate the entrustee’s obligation to pay the amount or to return
An entrustee is one having or taking possession of goods, documents or instruments under a the goods to the entruster.
trust receipt transaction, and any successor in interest of such person for the purpose of In Colinares v. Court of Appeals,45 the Court declared that there are two possible situations in a
payment specified in the trust receipt agreement. 39 The entrustee is obliged to: (1) hold the trust receipt transaction. The first is covered by the provision which refers to money received
goods, documents or instruments in trust for the entruster and shall dispose of them strictly in under the obligation involving the duty to deliver it (entregarla) to the owner of the
accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust merchandise sold. The second is covered by the provision which refers to merchandise
for the entruster and turn over the same to the entruster to the extent of the amount owing to received under the obligation to return it (devolvera) to the owner. 46 Thus, failure of the
the entruster or as appears on the trust receipt; (3) insure the goods for their total value against entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the
loss from fire, theft, pilferage or other casualties; (4) keep said goods or proceeds thereof entruster or to return said goods if they were not disposed of in accordance with the terms of
whether in money or whatever form, separate and capable of identification as property of the the trust receipt is a crime under P.D. No. 115, without need of proving intent to defraud. The
entruster; (5) return the goods, documents or instruments in the event of non-sale or upon law punishes dishonesty and abuse of confidence in the handling of money or goods to the
demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to
contrary to the provisions of the decree.40 deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that
The entruster shall be entitled to the proceeds from the sale of the goods, documents or causes prejudice, not only to another, but more to the public interest. 47
instruments released under a trust receipt to the entrustee to the extent of the amount owing to The Court rules that although petitioner signed the trust receipts merely as Senior Vice-
the entruster or as appears in the trust receipt, or to the return of the goods, documents or President of PBMI and had no physical possession of the goods, he cannot avoid prosecution
instruments in case of non-sale, and to the enforcement of all other rights conferred on him in for violation of P.D. No. 115.
the trust receipt; provided, such are not contrary to the provisions of the document. 41 The penalty clause of the law, Section 13 of P.D. No. 115 reads:
In the case at bar, the transaction between petitioner and respondent bank falls under the trust Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of
receipt transactions envisaged in P.D. No. 115. Respondent bank imported the goods and the goods, documents or instruments covered by a trust receipt to the extent of the amount
entrusted the same to PBMI under the trust receipts signed by petitioner, as entrustee, with the owing to the entruster or as appears in the trust receipt or to return said goods, documents or
bank as entruster. The agreement was as follows: instruments if they were not sold or disposed of in accordance with the terms of the trust
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK receipt shall constitute the crime of estafa, punishable under the provisions of Article Three
as its property with liberty to sell the same within ____days from the date of the execution of hundred and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and
this Trust Receipt and for the Bank’s account, but without authority to make any other fifteen, as amended, otherwise known as the Revised Penal Code.1âwphi1 If the violation or
disposition whatsoever of the said goods or any part thereof (or the proceeds) either by way of offense is committed by a corporation, partnership, association or other juridical entities, the
conditional sale, pledge or otherwise. penalty provided for in this Decree shall be imposed upon the directors, officers, employees or
I/we agree to keep the said goods insured to their full value against loss from fire, theft, other officials or persons therein responsible for the offense, without prejudice to the civil
pilferage or other casualties as directed by the BANK, the sum insured to be payable in case of liabilities arising from the criminal offense.
loss to the BANK, with the understanding that the BANK is, not to be chargeable with the The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under
storage premium or insurance or any other expenses incurred on said goods. paragraph 1(b), Article 315 of the Revised Penal Code, or estafa with abuse of confidence. It
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the may be committed by a corporation or other juridical entity or by natural persons. However,
BANK, to apply against the relative acceptances (as described above) and for the payment of the penalty for the crime is imprisonment for the periods provided in said Article 315, which
any other indebtedness of mine/ours to the BANK. In case of non-sale within the period reads:
specified herein, I/we agree to return the goods under this Trust Receipt to the BANK without ARTICLE 315. Swindling (estafa). – Any person who shall defraud another by any of the
any need of demand. means mentioned hereinbelow shall be punished by:
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the 1st. The penalty of prision correccional in its maximum period to prision mayor in
form of money or bills, receivables, or accounts separate and capable of identification as its minimum period, if the amount of the fraud is over 12,000 pesos but does not
property of the BANK.42 exceed 22,000 pesos; and if such amount exceeds the latter sum, the penalty
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of provided in this paragraph shall be imposed in its maximum period, adding one year
public policy, the failure of person to turn over the proceeds of the sale of the goods covered for each additional 10,000 pesos; but the total penalty which may be imposed shall
by a trust receipt or to return said goods, if not sold, is a public nuisance to be abated by the not exceed twenty years. In such cases, and in connection with the accessory
imposition of penal sanctions.43 penalties which may be imposed and for the purpose of the other provisions of this

25
Code, the penalty shall be termed prision mayor or reclusion temporal, as the case IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs
may be; against the petitioner.
2nd. The penalty of prision correccional in its minimum and medium periods, if the SO ORDERED.
amount of the fraud is over 6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in
its minimum period, if such amount is over 200 pesos but does not exceed 6,000
pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed
200 pesos, provided that in the four cases mentioned, the fraud be committed by any of the
following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers or employees are
vested with the authority and responsibility to devise means necessary to ensure compliance
with the law and, if they fail to do so, are held criminally accountable; thus, they have a
responsible share in the violations of the law.48
If the crime is committed by a corporation or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the offense shall be charged and penalized
for the crime, precisely because of the nature of the crime and the penalty therefor. A
corporation cannot be arrested and imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment.49 However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty, may be fined. 50
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it
commands. A necessary part of the definition of every crime is the designation of the author of
the crime upon whom the penalty is to be inflicted. When a criminal statute designates an act
of a corporation or a crime and prescribes punishment therefor, it creates a criminal offense
which, otherwise, would not exist and such can be committed only by the corporation. But
when a penal statute does not expressly apply to corporations, it does not create an offense for
which a corporation may be punished. On the other hand, if the State, by statute, defines a
crime that may be committed by a corporation but prescribes the penalty therefor to be
suffered by the officers, directors, or employees of such corporation or other persons
responsible for the offense, only such individuals will suffer such penalty. 51Corporate officers
or employees, through whose act, default or omission the corporation commits a crime, are
themselves individually guilty of the crime.52
The principle applies whether or not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the crime and to those, who, by
virtue of their managerial positions or other similar relation to the corporation, could be
deemed responsible for its commission, if by virtue of their relationship to the corporation,
they had the power to prevent the act.53 Moreover, all parties active in promoting a crime,
whether agents or not, are principals.54 Whether such officers or employees are benefited by
their delictual acts is not a touchstone of their criminal liability. Benefit is not an operative
fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the
cloak of the separate corporate personality of PBMI. In the words of Chief Justice Earl
Warren, a corporate officer cannot protect himself behind a corporation where he is the actual,
present and efficient actor.55

26
EN BANC Philippine Islands of the said defendant corporation West Coast Life Insurance
G.R. No. L-8527 March 30, 1914 Company, and the said defendant Manuel C. Grey was and has been an agent and
WEST COAST LIFE INSURANCE CO., plaintiff, employee of the said defendant corporation West Coast Life Insurance Company,
vs. acting in the capacity of treasurer of the branch of the said defendant corporation in
GEO N. HURD, Judge of Court of First Instance, defendant. the Philippine Islands; that on or about the said 14th day of September, 1912, and for
Southworth, Hargis & Springer for plaintiff. some time thereafter, to wit, during the months of September and October, 1912, in
Haussermann, Cohn & Fisher for defendant. the city of Manila, P.I., the said defendants West Coast Life Insurance Company,
MORELAND, J.: John Northcott, and Manuel C. Grey, conspiring and confederating together, did then
This is an action for the issuance of a writ of prohibition against the defendant "commanding and there willfully, unlawfully, and maliciously, and to the damage of the Insular
the defendant to desist or refrain from further proceedings in a criminal action pending in that Life Insurance Company, a domestic corporation duly organized, registered, and
court." doing business in the Philippine Islands, and with intent o cause such damage and to
The petitioner is a foreign life-insurance corporation, duly organized under and by virtue of expose the said Insular Life Insurance Company to public hatred, contempt, and
the laws of the State of California, doing business regularly and legally in the Philippine ridicule, compose and print, and cause to be printed a large number of circulars, and,
Islands pursuant to its laws. in numerous printings in the form of said circulars, did publish and distribute, and
On the 16th of December, 1912, the assistant prosecuting attorney of the city of Manila filed cause to be published and distributed, among other persons, to policy holders and
an information in a criminal action in the Court of First Instance of that city against the prospective policy holders of the said Insular Life Insurance Company, among other
plaintiff, said corporation, and also against John Northcott and Manuel C. Grey, charging said things, a malicious defamation and libel in the Spanish language, of the words and
corporation and said individuals with the crime of libel. On the 17th day of December the tenor following:
defendant in his official capacity as judge of the court of First Instance signed and issued a "First. For some time past various rumors are current to the effect that the
process directed to the plaintiff and the other accused in said criminal action, which said Insular Life Insurance Company is not in as good a condition as i should
process reads as follows: be at the present time, and that really it is in bad shape. Nevertheless, the
UNITED STATES OF AMERICA, investigations made by the representative of the "Bulletin" have failed
PHILIPPINE ISLANDS. fully to confirm these rumors. It is known that the Insular Auditor has
In the Court of First Instance of the Judicial District of Manila. examined the books of the company and has found that its capital has
THE UNITED STATES No. 9661 diminished, and that by direction of said official the company has decided
versus Libel. to double the amount of its capital, and also to pay its reserve fund. All
WEST COAST LIFE INSURANCE CO., JOHN NORTHCOTT, AND MANUEL C. this is true."
GREY. That the said circulars, and the matters therein contained hereinbefore set forth in
To West Coast Life Insurance Co., John Northcott, and Manuel C. Grey, Manila. this information, tend to impeach and have impeached the honesty, virtue, and
SUMMONS. reputation of the said Insular Life Insurance Company by exposing it to public
You are hereby summoned to appear before the Court of First Instance of the city of hatred, contempt, and ridicule; that by the matters printed in said circulars, and
Manila P.I., on the 18th day of December, 1912, at the hour of 8 a.m., to answer the hereinbefore set forth in this information, the said defendants West Coast Life
charge made against you upon the information of F. H. Nesmith, assistant Insurance Company, John Northcott, and Manuel C. Grey meant and intended to
prosecuting attorney of the city of Manila, for libel, as set forth in the said state and represent to those to whom the said defendants delivered said circulars as
information filed in this copurt on December 16, 1912, a copy of which is hereto aforesaid, that the said Insular Life Insurance Company was then and there in a
attached and herewith served upon you. dangerous financial condition and on the point of going into insolvency, to the
Dated at the city of Manila, P. I., this 17th day of December, 1912. detriment of the policy holders of the said Insular Life Insurance Company, and of
those with whom the said Insular Life Insurance Company have and have had
(Sgd.) GEO N. HURD,
business transactions, and each and all of said persons to whom the said defendants
Judge, Court of First Instance.
delivered said circulars, and all persons as well who read said circulars understood
The information upon which said process was issued is as follows: the said matters in said circulars to have said libelous sense and meaning. Contrary
The undersigned accuses the West Coast Life Insurance Company, John Northcott, to law.
and Manuel C. Grey of the crime of libel, committed as follows: On the 20th day of December, 1912, the plaintiff, together with the other persons named as
That on or about the 14th day of September, 1912, and continuously thereafter up to accused in said process through their attorneys, served upon the prosecuting attorney and filed
and including the date of this complaint, in the city of Manila, P. I., the said with the clerk of the court a motion to quash said summons and the service thereof, on the
defendant West Coast Life Insurance Company was and has been a foreign ground that the court had no jurisdiction over the said company, there being no authority in the
corporation duly organized in the State of California, United States of America, and court for the issuance of the process, Exhibit B, the order under which it was issued being
registered and doing business in the Philippine Islands; that the said defendant John void. The court denied the motion and directed plaintiff to appear before it on the 28th day of
Nortcott then and there was and has been the general agent and manager for the

27
December, 1912, and to plead to the information, to which order the plaintiff then and there not believe that the courts are authorized to go to the extent of creating special procedure and
duly excepted. special processes for the purpose of carrying out those penal statutes, when the legislature
It is alleged in the complaint that "unless restrained by this Court the respondent will proceed itself has neglected to do so. To bring a corporation into court criminally requires many
to carry out said void order and compel your petitioner to appear before his court and plead additions to the present criminal procedure. While it may be said to be the duty of courts to see
and submit to criminal prosecution without having acquired any jurisdiction whatever over to it that criminals are punished, it is no less their duty to follow prescribed forms of procedure
your petitioner." and to go out upon unauthorized ways or act in an unauthorized manner.
The prayer of the complaint is, "your petitioner prays judgment for the issuance of a writ of There are many cases cited by counsel for the defendant which show that corporations have
prohibition against the respondent, commanding the respondent absolutely to desist or refrain been proceeded against criminally by indictment and otherwise and have been punished as
from further proceedings against your petitioner in the said criminal action." malefactors by the courts. Of this, of course, there can be no doubt; but it is clear that, in those
The basis of the action is that the Court of First Instance has no power or authority, under the cases, the statute, by express words or by necessary intendment, included corporations within
laws of the Philippine Islands, to proceed against a corporation, as such, criminally, to bring it the persons who could offend against the criminal laws; and the legislature, at the same time
into court for the purpose of making it amenable to the criminal laws. It is contended that the established a procedure applicable to corporations. No case has been cited to us where a
court had no jurisdiction to issue the process in evidence against the plaintiff corporation; that corporation has been proceeded against under a criminal statute where the court did not
the issuance and service thereof upon the plaintiff corporation were outside of the authority exercise its common law powers or where there was not in force a special procedure
and jurisdiction of the court, were authorized by no law, conferred no jurisdiction over said applicable to corporations.
corporation, and that they were absolutely void and without force or effect. The courts of the Philippine Islands are creatures of statute and, as we have said, have only
The plaintiff, further attacking said process, alleges that the process is a mixture of civil and those powers conferred upon them by statute and those which are required to exercise that
criminal process, that it is not properly signed, that it does not direct or require an arrest; that it authority fully and adequately. The courts here have no common law jurisdiction or powers. If
s an order to appear and answer on a date certain without restraint of the person, and that it is they have any powers not conferred by statute, expressly or impliedly, they would naturally
not in the form required by law. come from Spanish and not from common law sources. It is undoubted that, under the Spanish
Section 5 of General Orders, No. 58, defines an information as "accusation in writing charging criminal law and procedure, a corporation could not have been proceeded against criminally,
a period with a public offense." Section 6 provide that a complaint or information is sufficient as such, if such an entity as a corporation in fact existed under the Spanish law, and as such it
it if shows "the name of the defendant, or if his name cannot be discovered, that he is could not have committed a crime in which a willful purpose or a malicious intent was
described under a fictitious name with a statement that his true name is unknown to the required. Criminal actions would have been restricted or limited, under that system, to the
informant or official signing the same. His true name may be inserted at any stage of the officials of such corporations and never would have been directed against the corporation
proceedings instituted against him, whenever ascertained." These provisions, as well as those itself. This was the rule with relation to associations or combinations of persons approaching,
which relate to arraignment and counsel, and to demurrers and pleas, indicate clearly that the more or less, the corporation as it is now understood, and it would undoubtedly have been the
maker of the Code of Criminal Procedure had no intention or expectation that corporations rue with corporations. From this source, then, the courts derive no authority to bring
would be included among those who would fall within the provisions thereof. The only corporations before them in criminal actions, nor to issue processes for that purpose.
process known to the Code of Criminal Procedure, or which any court is by that order The case was submitted to this Court on an agreed statement of facts with a stipulation for a
authorized to issue, is an order of arrest. The Code of Criminal Procedure provides that "if the decision upon the merits. We are of the opinion that the plaintiff is entitled, under that
magistrate be satisfied from the investigation that the crime complained of has been stipulation, to the remedy prayed for.
committed, and there is reasonable ground to believe that the party charged has committed it, It is adjudged that the Court of First Instance of the city of Manila be and it is hereby enjoined
he must issue an order for his arrest. If the offense be bailable, and the defendant offer a and prohibited from proceeding further in the criminal cause which is before us in this
sufficient security, he shall be admitted to bail; otherwise he shall be committed to prison." proceeding, entitled United States vs. West Coast Life Insurance Company, a corporation, John
There is no authority for the issuance of any other process than an order of arrest. As a Northcott and Manuel C. Grey, so far as said proceedings relate to the said West Coast Life
necessary consequence, the process issued in the case before us is Insurance Company, a corporation, the plaintiff in the case.
without express authorization of statute.
The question remains as to whether or not he court may, of itself and on its own motion, create
not only a process but a procedure by which the process may be made effective.
We do not believe that the authority of the courts of the Philippine Islands extends so far.
While having the inherent powers which usually go with courts of general jurisdiction, we are
of the opinion that, under the circumstances of their creation, they have only such authority in
criminal matters as is expressly conferred upon them by statute or which it is necessary to
imply from such authority in order to carry out fully and adequately the express authority
conferred. We do not feel that Courts of First Instance have authority to create new procedure
and new processes in criminal law. The exercise of such power verges too closely on
legislation. Even though it be admitted, a question we do not now decide, that there are
various penal laws in the Philippine Islands which corporation as such may violate, still we do

28
THIRD DIVISION
At the time of the incident subject of the case at bar, petitioner Gonzalez was the
Chairman and Chief Executive Officer of Mondragon Leisure and Resorts Corporation
JOSE ANTONIO U. GONZALEZ, G. R. No. 164904 (MLRC). MLRC is the owner, developer and operator of Mimosa Leisure Estate [8] located at
Petitioner, the Clark Special Economic Zone (CSEZ), Clark Field, Pampanga. On 1 August 1997,
Present: petitioner Gonzalez, for and in behalf of MLRC, acknowledged receipt of various golfing
equipments and assorted Walt Disney items, and signed the corresponding two Trust Receipt
YNARES-SANTIAGO, J. agreements, i.e., Trust Receipt No. 001-016310-205, [9] covering the various golfing
Chairperson, equipments, and Trust Receipt No. 001-016310-206, [10] covering the assorted Walt Disney
- versus - AUSTRIA-MARTINEZ, items, both in favor of respondent HSBC.
CHICO-NAZARIO,
NACHURA, and The due date for Trust Receipt No. 001-016310-205, for the value of HK$85,540.00,
REYES, JJ. was on 1 September 1997, while that of Trust Receipt No. 001-016310-206, for the value of
HK$143,993.90, was on 28 January 1998.
HONGKONG & SHANGHAI BANKING
CORPORATION, Promulgated: When the due dates of subject Trust Receipts came and went without word from
Respondent. MLRC, respondent HSBC, through Paula L. Felipe (Felipe), Vice-President of respondent
October 19, 2007 HSBCs Credit Control Department, in a letter [11] dated 28 March 2000, demanded from MLRC
x--------------------------------------------------x the turnover of the proceeds of the sale of the assorted goods covered by the Trust Receipts or
the return of said goods. Despite demand, however, MLRC failed to return the assorted goods
DECISION or their value. Consequently, Felipe, for respondent HSBC, filed a criminal complaint for
estafa, i.e., for violation of Presidential Decree No. 115, the Trust Receipts Law, in relation to
Art. No. 315(1)(b) of the Revised Penal Code against petitioner Gonzalez before the Office of
CHICO-NAZARIO, J.: the City Prosecutor of Makati, docketed as I.S. No. 00-G-24734-35. The complaint-affidavit
contained the following allegations:

In this petition for review on certiorari[1] under Rule 45 of the Rules of Court, as 4. On August 1, 1997, Mr. Antonio U. Gonzalez, Chairman and
amended, petitioner Jose Antonio U. Gonzalez (Gonzalez) seeks; 1) the reversal of the 13 Chief Executive of Mondragon, executed in favor of the Bank Trust
January 2004 Decision,[2] and 6 August 2004 Resolution,[3] both of the Court of Appeals in CA- Receipt No. 001-016310-205, by virtue of which he acknowledged receipt
G.R. SP No. 75469; and 2) the dismissal of the complaint[4] for violation of Presidential from the Bank of (Sporting Goods) Golf Equipments (sic) with the value
Decree No. 115, otherwise known as the Trust Receipts Law, in relation to Article 315(1)(b) of of HK$85,540.00. Under this trust receipt, Mr. Gonzalez bound himself to
the Revised Penal Code, filed by respondent Hongkong & Shanghai Banking Corporation turn over to the Bank the proceeds of the sale of the goods or to return
(HSBC) against him before the City Prosecutor of Makati and docketed as I.S. No. 00-G- them in case of non-sale on January 28, 1998.
24734-35.
xxxx
The Court of Appeals, in its assailed decision and resolution, found no grave abuse
of discretion on the part of the Secretary and the succeeding Acting Secretary, both of the 5. On August 1, 1997, Mr. Gonzalez executed in favor of the
Department of Justice (DOJ), in their denial of petitioner Gonzalezs petition for review and Bank Trust Receipt No. 001-016310-206, by virtue of which he
motion for reconsideration, respectively. Consequently, the appellate court affirmed the 17 acknowledged receipt from the Bank of Assorted Disney Items with the
October 2002,[5] and 14 January 2003[6] twin resolutions of the DOJ, which in turn affirmed the value of HK$143,993.90. Under this trust receipt, Mr. Gonzalez bound
13 September 2000 Resolution,[7] of the City Prosecutor of Makati, recommending the filing of himself to turn over to the Bank the proceeds of the sale of the goods or to
an Information for violation of Presidential Decree No. 115, in relation to Article 315(1)(b) of return them in case of non-sale on September 1, 1997.
the Revised Penal Code against petitioner Gonzalez.
xxxx
The case stemmed from a complaint filed by respondent HSBC against petitioner
Gonzalez for estafa, more particularly, the violation of Presidential Decree No. 115, in relation 6. All the abovementioned trust receipts x x x executed by the
to Art. 315(1)(b) of the Revised Penal Code. respondents (sic) contain the following provisions:

The antecedents of the present petition are beyond dispute. They are:

29
1. The Document and the goods and/or proceeds to 6. x x x respondent, who merely performed a valid corporate act
which they relate (The Goods) will be held for your may not be held personally and criminally liable therefore (sic), absent a
[HSBC] benefit and the entrustee will receive the clear showing of fault or negligence on his part x x x.
Documents and take delivery of the Good exclusively
for the purpose of selling the Goods unless you 7. x x x it is required that the person charged with estafa
[HSBC] shall direct otherwise. pursuant to a trust receipt transaction must be proved to have
misappropriated, misused or converted to his own personal use to the
2. The Documents, the Goods and the proceeds of damage of the entruster, the proceeds of the goods covered by the trust
their sale are and will be held by the entrustee in trust receipts. Thus, mere failure to pay the amounts covered by the trust
for you [HSBC] as entruster and solely to your receipts does not conclusively constitute estafa as defined under P.D. 115
[HSBC] order and the entrustee shall pay the proceeds and the Revised Penal Code.
to you [HSBC], immediately on receipt thereof or of
each portion thereof, as the case may be, without set- 8. x x x. [W]hile respondent may have failed on behalf of
off or any deduction. The records of the entrustee shall MLRC (which is actually the debtor) to make payments on the due dates,
properly record your [HSBC] interest in the Goods. such failure is neither attributable to respondent or due to his wrongdoing
or fault but on account of circumstances concerning the corporation x x x.
xxxx
xxxx
10. This Trust Receipt shall be governed and
construed in all respects in accordance with P.D. 115 13. x x x there was a tacit agreement among the parties that
otherwise known as Trust Receipts Law. defendant, being a stable company with good credit standing, would be
accorded leniency and given enough leeway in the settlement of its
7. Despite repeated oral and written demands upon respondent, obligations.
respondent has not turned over to the Bank a single centavo of the
proceeds of the sale of the abovementioned goods covered by the Trust xxxx
Receipts, or returned any of the goods.[12]
17. x x x the unlawful closure of the Casino by CDC and
PAGCOR, coupled with the Asian economic crisis, severely affected its
In his defense, petitioner Gonzalez countered that: ability to pay its creditors, including complainant bank herein, which have
an aggregate exposure of about P5.3 Billion in Mondragon. These events
2. At the outset, it must be stressed that the transactions subject rendered it impossible for MLRC to duly comply with its financial
of the instant Complaint are between the complainant bank and obligations. These events barred plaintiff bank from
Mondragon Leisure and Resorts Corporation (MLRC) and that the officers declaring MLRCs obligation due and demandable, and consequently from
of the latter, including respondent herein, in all of their official acts and declaring MLRC in default. Thus, since MLRC is not in default,
transactions, are not acting in their own personal capacity but, rather, are respondents herein cannot be charged for estafa as the obligations on the
merely acting on behalf of the corporation and performing a valid basis of which they are being charged are not yet due and demandable. [13]
corporate act pursuant to a validly enacted resolution of the Board of
Directors.
Following the requisite preliminary investigation, in a Resolution dated 13
3. Moreover, it is clear that I cannot be held criminally September 2000, the City Prosecutor found probable cause to hold petitioner Gonzalez liable
responsible for alleged violation of the Trust Receipts subject hereof. The for two counts of estafa, more specifically, the violation of Presidential Decree No. 115, in
aforesaid transactions, while reportedly denominated as Trust Receipts relation to Art. 315(1)(b) of the Revised Penal Code. The City Prosecutor recommended that:
were not really intended by the parties to be trust receipt transaction within
the purview of P.D. 115. At best, they are loan transactions, for which the WHEREFORE, premises considered, it is respectfully
respondent cannot be held criminally liable. recommended that respondent Jose Antonio U. Gonzalez be indicted with
two (2) counts of Violation of P.D. 115 and that the attached Information
xxxx for that purpose be approved for filing in court.[14]

30
In finding probable cause to prosecute petitioner Gonzalez for the crime supposedly WHEREFORE, the assailed resolution is hereby AFFIRMED
committed, the City Prosecutor held that: and consequently, the petition is DENIED.[18]

After study, assessment and thorough evaluation of the evidence


obtaining in this case at bar, the undersigned finds probable cause to Subsequently, on 14 January 2003, Hon. Merceditas N. Gutierrez, then Acting
warrant respondents indictment with the offense charge (sic) all the Secretary of the DOJ, denied the motion for reconsideration of petitioner Gonzalez.
elements of which are obtaining under the aforementioned circumstances.
This is so because respondent admitted having executed the trust receipts Undaunted, petitioner Gonzalez went to the Court of Appeals via a Petition for
subject matter of the case in point. The defense raised by the respondent Review under Rule 43[19] of the Rules of Court, as amended.
though it appears to be meritorious are (sic) matters of defense best left for
the court to consider and appreciate during trial of the case. As shown On 13 January 2004, the Court of Appeals promulgated its Decision denying
above, the failure of the entrustee/respondent to account for the goods petitioner Gonzalezs recourse for lack of merit.
covered by the two (2) Trust Receipts which he received after notice and
demand caused him to be liable for two (2) counts of violation of P.D. 115. The appellate court, notwithstanding the procedural infirmity, as the petition filed
[15]
under Rule 43 of the Rules of Court, as amended, was the wrong mode of appeal, took
cognizance of and proceeded to resolve the petition based on substantive grounds. In holding
that no grave abuse of discretion amounting to lack or excess of jurisdiction tainted the actions
On 24 October 2000, petitioner Gonzalez appealed the foregoing resolution of the of the Secretary as well as the Acting Secretary of the DOJ in denying petitioner Gonzalezs
City Prosecutor to the DOJ by means of a petition for review. petition, the decision explained that:

In a Resolution dated 17 October 2002, Honorable Hernando B. Perez, then In the case at bar, it is decisively clear that petitioner executed
Secretary of the DOJ, denied said petition. In affirming the resolution of the City Prosecutor of the trust receipts in behalf of MLRC and that there was a failure to turn
Makati, the Secretary held that: over the proceeds from the goods sold and the goods themselves subject of
the trust receipts despite demand from the respondent bank. Such failure to
The gravamen of violation of PD 115 is the failure to account, account or turn over the proceeds or to return the goods subject of the trust
upon demand, for fund or property held in trust by virtue of a trust receipt receipts gives rise to the crime punished under the Trust Receipts Law.
x x x. This failure, being clearly present in the instant case, prima facie [Citation omitted.] Petitioner is ventilating before us the merits of his
evidence of misappropriation lies. A fortiori, the charges of dishonesty and causes or defenses, but this is not the occasion for the full and exhaustive
abuse of confidence will hold.[16] display of evidence. The presence or absence of the elements of the crime
is evidentiary in nature and shall be passed upon after a full-blown trial on
the merits. Petitioners defenses are matters best left to the discretion of the
Further, the Secretary ruled that: court during trial.[20]

The allegation of respondent that he cannot be made liable for


the offense as he was just performing a valid corporate act is untenable The fallo of the preceding decision reads:
x x x. The respondent being the Chairman and Chief Executive Officer
and the person who signed the trust receipts, there can be no doubt that WHEREFORE, the petition is DENIED for lack of merit. [21]
there is no other person who can be considered as more responsible than
him. He appears to be the most responsible person contemplated under the
aforesaid provision of P.D. 115. Petitioners motion for reconsideration was likewise denied in a Resolution dated 6
August 2004.
Finally, we agree with the Prosecutors findings that the other
defenses raised by the respondent are evidentiary in nature and best left to Hence, the present petition filed under Rule 45 of the Rules of Court, as amended.
the sound appreciation of the court in the course of the trial. [17]
In the present petition, petitioner Gonzalez fundamentally seeks to reverse the ruling
of the Court of Appeals on the following grounds:
The dispositive of the resolution provides:
I.

31
THE HONORABLE COURT OF APPEALS COMMITTED MANIFEST petitioner for his failure to comply with his obligations under the trust receipts, [27] because
ERROR IN NOT FINDING THAT FOR A VALID INDICTMENT unlike motor vehicles or parcels of land, which are frequently purchased on credit or on
UNDER PRESIDENTIAL DECREE NO. 115 TO LIE, THE SAID LAW installment basis,[28] the goods covered by the two trust receipts, i.e., assorted Disney items and
MUST BE READ IN CONJUNCTION WITH ARTICLE 315, various golfing equipments, are usually paid for in cash upon receipt by buyers; and if not
PARAGRAPH 1 (B) OF THE REVISED PENAL CODE WHICH sold, the merchandise should still be with MLRC. Hence, there was no reason for petitioner
REQUIRES THAT THE PERSON CHARGED WITH ESTAFA Gonzalezs failure to comply with his obligation under the two Trust Receipts to turn over the
PURSUANT TO A TRUST RECEIPT TRANSACTION MUST BE proceeds of the sale of the goods or to return the goods if they remained unsold.
PROVED TO HAVE MISAPPROPRIATED, MISUSED OR
CONVERTED TO HIS PERSONAL USE THE PROCEEDS OF THE We find no merit in the petition.
GOODS COVERED BY THE TRUST RECEIPTS TO THE DAMAGE
OF THE ENTRUSTER; and We agree with the Court of Appeals that no grave abuse of discretion amounting to
lack or excess of jurisdiction marred the assailed resolutions of the DOJ.
II.
Herein, petitioner Gonzalez questions the finding of probable cause by the City
NO PROBABLE CAUSE EXISTS TO WARRANT THE INDICTMENT Prosecutor to hold him liable to stand trial for the crime complained of. Probable cause has
OF PETITIONER FOR VIOLATION OF SECTION 13 OF been defined as the existence of such facts and circumstances as would excite the belief in a
PRESIDENTIAL DECREE 115.[22] reasonable mind, acting on the facts within the knowledge of the prosecutor, that the person
charged was guilty of the crime for which he was prosecuted. [29] A finding of probable cause
merely binds over the suspect to stand trial. It is not a pronouncement of guilt.[30]
On the whole, the basic issue presented before this Court in this petition is, given the
facts of the case, whether or not there is probable cause to hold petitioner Gonzalez liable to To determine the existence of probable cause, there is a need to conduct preliminary
stand trial for violation of Presidential Decree No. 115, in relation to Art. 315(1)(b) of the investigation. A preliminary investigation is an inquiry to determine whether (a) a crime has
Revised Penal Code. been committed; and (b) whether there is probable cause to believe that the accused is guilty
thereof. Such investigation is designed to secure the (accused) against hasty, malicious and
Petitioner Gonzalez contends that the Court of Appeals committed manifest error in oppressive prosecution, the conduct of which is executive in nature. [31]
ruling, that, probable cause existed to hold him liable to stand trial merely on the basis of his
admission that he executed the trust receipts subject matter of the case below and his failure to The executive department of the government is accountable for the prosecution of
account for the goods covered by the same. [23] He argues that the City Prosecutor of Makati crimes, its principal obligation being the faithful execution of the laws of the land. A necessary
and the DOJ failed to appreciate two important facts: 1) that the real transaction that led to the component of the power to execute the laws is the right to prosecute their violators.
[32]
present controversy was in fact a loan agreement; and 2) that MLRC simply extended to Best Corollary to this, the right to prosecute vests the prosecutor with a wide range of discretion,
Price PX, Inc., the owner and operator of Mimosa Mart at the CESZ, its credit line with the discretion of whether, what and whom to charge, the exercise of which depends on a
respondent HSBC, such that Best Price was the actual debtor of respondent bank. smorgasbord of factors which are best appreciated by prosecutors. [33]
Paradoxically, he maintains that the fact that (he) held a high position in MLRC was not
sufficient reason to charge him for alleged violation of trust receipts. [24] He insists further that Having said the foregoing, this Court consistently adheres to the policy of non-
he is not the person responsible for the offense allegedly committed because of the absence of interference in the conduct of preliminary investigations, and to leave to the investigating
a clear showing of fault or negligence on his part. According to petitioner Gonzalez, President prosecutor sufficient latitude of discretion in the determination of what constitutes sufficient
(sic) Decree No. 115 must be read in conjunction with Article 315, paragraph 1(b) of the evidence as will establish probable cause for the filing of an information against the supposed
Revised Penal Code x x x under both x x x it is required that the person charged offender,[34] courts can only review whether or not the executive determination of probable
with estafa pursuant to a trust receipt transaction must be proved to have misappropriated, cause was done without or in excess of jurisdiction resulting from grave abuse of
misused or converted to his own personal use the proceeds of the goods covered by the trust discretion. Thus, although it is entirely possible that the investigating prosecutor may
receipts to the damage of the entruster. Thus, petitioner concludes that mere failure to pay the erroneously exercise the discretion lodged in him by law, this does not render his act amenable
amounts covered by the trust receipts does not conclusively constitute estafa as defined under to correction and annulment by the extraordinary remedy of certiorari, absent any showing of
Presidential Decree No. 115 and Article 315, paragraph 1(b). grave abuse of discretion amounting to excess of jurisdiction. [35]

Respondent HSBC, on the other hand, contends that petitioner is criminally liable And for courts of law to grant the extraordinary writ of certiorari, so as to justify the
since he signed the trust receipts x x x;[25] and, that, [f]raud is not necessary for conviction for reversal of the finding on the existence of probable cause to file an information, the one
violation of the Trust Receipts Law,[26] the latter being in the nature of seeking the writ must be able to establish that the investigating prosecutor exercised his power
a malum prohibitum decree. On the issue of company reverses, Asian currency crisis and the in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must be
closure of the Mimosa Regency Casino, respondent HSBC counters that [t]hey do not excuse patent and gross as would amount to an evasion or to a unilateral refusal to perform the duty

32
enjoined or to act in contemplation of law. Grave abuse of discretion is not enough. [36] Excess The sale of good, documents or instruments by a person in the
of jurisdiction signifies that he had jurisdiction over the case but has transcended the same or business of selling goods, documents or instruments for profit who, at the
acted without authority.[37] outset of transaction, has, as against the buyer, general property rights in
such goods, documents or instruments, or who sells the same to the buyer
Try as we might, this Court cannot find substantiation that the executive on credit, retaining title or other interest as security for the payment of the
determination of probable cause was done without or in excess of jurisdiction resulting from purchase price, does not constitute a trust receipt transaction and is outside
grave abuse of discretion, when the City Prosecutor resolved to recommend the filing of the the purview and coverage of this Decree.
Information for two counts of violation of Presidential Decree No. 115 against petitioner
Gonzalez. Similarly, there is absolutely no showing that the DOJ, in the exercise of its power
to review on appeal the findings of the City Prosecutor of Makati, acted in an arbitrary or In general, a trust receipt transaction imposes upon the entrustee the obligation to deliver to
despotic manner that amounted to an excess or lack of jurisdiction. the entruster the price of the sale, or if the merchandise is not sold, to return the same to
the entruster. There are thus two obligations in a trust receipt transaction: the first, refers to
In the case at bar, petitioner Gonzalez is charged by respondent HSBC with violating money received under the obligation involving the duty to turn it over (entregarla) to the
Presidential Decree No. 115. Section 4 of the Trust Receipts Law defines a trust receipt owner of the merchandise sold,[38] while the second refers to merchandise received under the
transaction as obligation to return it (devolvera) to the owner.[39] A violation of any of these undertakings
constitutes estafa defined under Art. 315(1)(b) of the Revised Penal Code, as provided by Sec.
Section 4. What constitutes a trust receipts transaction. A trust 13 of Presidential Decree 115, viz:
receipt transaction, within the meaning of this Decree, is any transaction
by and between a person referred to in this Decree as the entruster, and Section 13. Penalty clause. The failure of an entrustee to turn
another person referred to in this Decree as entrustee, whereby over the proceeds of the sale of the goods, documents or instruments
the entruster, who owns or holds absolute title or security interests over covered by a trust receipt to the extent of the amount owing to
certain specified goods, documents or instruments, releases the same to the the entruster or as appears in the trust receipt or to return said goods,
possession of the entrustee upon the latters execution and delivery to documents or instruments if they were not sold or disposed of in
the entruster of a signed document called a trust receipt wherein accordance with the terms of the trust receipt shall constitute the crime
the entrusteebinds himself to hold the designated goods, documents or of estafa, punishable under the provisions of Article Three Hundred and
instruments in trust for the entruster and to sell or otherwise dispose of the Fifteen, paragraph one (b) of Act Numbered Three Thousand Eight
goods, documents or instruments with the obligation to turn over to Hundred and fifteen, as amended, otherwise known as the Revised Penal
the entruster the proceeds thereof to the extent of the amount owing to Code. If the violation or offense is committed by a corporation,
the entruster or as appears in the trust receipt or the goods, documents or partnership, association or other juridical entities, the penalty provided for
instruments themselves if they are unsold or not otherwise disposed of, in in this Decree shall be imposed upon the directors, officers, employees or
accordance with the terms and conditions specified in the trust receipt, or other officials or persons therein responsible for the offense, without
for other purposes substantially equivalent to any of the following: prejudice to the civil liabilities arising from the criminal offense.

1. In the case of goods or documents: (a) to sell the


goods or procure their sale; or (b) to manufacture or process the goods Article 315(1)(b) of the Revised Penal Code punishes estafa committed as follows:
with the purpose of ultimate sale: Provided, That, in the case of goods
delivered under trust receipt for the purpose of manufacturing or 1. With unfaithfulness or abuse of confidence, namely:
processing before its ultimate sale, the entruster shall retain its title over
the goods whether in its original or processed form until the entrustee has xxxx
complied fully with his obligation under the trust receipt; or (c) to load,
unload, ship or transship or otherwise deal with them in a manner (b) By misappropriating or converting, to the prejudice of
preliminary or necessary to their sale; or another, money, goods, or any other personal property
received by the offender in trust or on commission, or
2. In the case of instruments: (a) to sell or procure for administration, or under any other obligation
their sale or exchange; or (b) to deliver them to a principal; or (c) to effect involving the duty to make delivery of or to return the
the consummation of some transactions involving delivery to a depository same, even though such obligation be totally or
or register; or (d) to effect their presentation, collection or renewal. partially guaranteed by a bond; or by denying having
received such money, goods, or other property.

33
Petitioner Gonzalezs allegation that Best Price PX, Inc. is the real party in the trust
As found in the complaint-affidavit of respondent HSBCs representative, petitioner receipt transaction and his assertion that the real transaction between respondent HSBC and
Gonzalez is charged with failing to turn over to the Bank a single centavo of the proceeds of MLRC is a loan agreement, are matters of defense best left to the trial courts deliberation and
the sale of the (assorted) goods covered by the Trust Receipts, or x x x[40] or to return any of contemplation after conducting the trial of the criminal case. To reiterate, a preliminary
the assorted goods. From the evidence adduced before the City Prosecutor of Makati i.e., 1) investigation for the purpose of determining the existence of probable cause is not part of the
the two Trust Receipts bearing the acknowledgment signature of petitioner Gonzalez; 2) the trial. A full and exhaustive presentation of the parties evidence is not required, but only such
official documents concerning the transaction between MLRC and respondent HSBC; 3) the as may engender a well-grounded belief that an offense has been committed and that the
demand letter of respondent HSBC; and, significantly, 4) the counter-affidavit of petitioner accused is probably guilty thereof.[47]
Gonzalez containing his initial admission that on behalf of MLRC, he entered into a trust
receipt transaction with respondent HSBC the investigating officer determined that there In fine, the Court of Appeals committed no reversible error when it ruled that there
existed probable cause to hold petitioner Gonzalez for trial for the crime charged. Time and was no grave abuse of discretion on the part of the Secretary and Acting Secretary of the DOJ
again, this Court has stated that probable cause need not be based on clear and convincing in directing the filing of the Information against petitioner Gonzalez for violation of
evidence of guilt, neither on evidence establishing guilt beyond reasonable doubt and, Presidential Decree No. 115 in relation to Article 315(1)(b) of the Revised Penal Code.
definitely, not on evidence establishing absolute certainty of guilt; but it certainly demands
more than bare suspicion and can never be left to presupposition, conjecture, or even WHEREFORE, premises considered, the instant petition is DENIED for lack of
convincing logic.[41] In the present case, there being sufficient evidence to support the finding merit. The assailed 13 January 2004 Decision and 6 August 2004 Resolution, both of the Court
of probable cause by the City Prosecutor of Makati, the same cannot be said to have resulted of Appeals in CA-G.R. SP No. 75469 are hereby AFFIRMED. Costs against petitioner.
from bare suspicion, presupposition, conjecture or logical deduction. SO ORDERED.

That petitioner Gonzalez neither had the intent to defraud respondent HSBC nor
personally misused/misappropriated the goods subject of the trust receipts is of no
moment. The offense punished under Presidential Decree No. 115 is in the nature
of malum prohibitum. A mere failure to deliver the proceeds of the sale or the goods if
not sold, constitutes a criminal offense that causes prejudice not only to another, but more to
the public interest.[42] This is a matter of public policy as declared by the legislative
authority. Moreover, this Court already held previously that failure of the entrustee to turn over
the proceeds of the sale of the goods, covered by the trust receipt, to the entruster or to return
said goods if they were not disposed of in accordance with the terms of the trust receipt shall
be punishable as estafa under Art. 315(1)(b) of the Revised Penal Code without need of
proving intent to defraud.[43]

As a last ditch effort to exculpate himself from the offense charged, petitioner
Gonzalez posits that, the fact that (he) held a high position in MLRC was not sufficient reason
to charge him for alleged violation of trust receipts. [44]Unfortunately, it is but a futile
attempt. Though petitioner Gonzalez signed the Trust Receipts merely as a corporate officer of
MLRC and had no physical possession of the goods subject of such receipts, he cannot avoid
responsibility for violation of Presidential Decree No. 115 for two unpretentious reasons: first,
that the last sentence of Section 13 of the Trust Receipts Law, explicitly imposes the penalty
provided therein upon directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the criminal
offense, of a corporation, partnership, association or other juridical entities found to have
violated the obligation imposed under the law. The rationale for making such officers and
employees responsible for the offense is that they are vested with the authority and
responsibility to devise means necessary to ensure compliance with the law and, if they fail to
do so, are held criminally accountable; thus, they have a responsible share in the violations of
the law.[45] And second, a corporation or other juridical entity cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by imprisonment. [46]

34
[G.R. No. 122502. December 27, 2002] That the due date of the Trust Receipt is December 5, 1978, (Exh. C-4).
LORENZO M. SARMIENTO, JR. and GREGORIO LIMPIN, JR., petitioners, The defendants failed to comply with their undertaking under the Trust Receipt. Hence as
vs. COURT OF APPEALS and ASSOCIATED BANKING CORP., respondents. early as March, 1980, demands were made for them to comply with their undertaking (Exhs.
DECISION Q, R to R-2, S, T, D to D-1; F to F-2). However, defendants failed to pay their account. Legal
AUSTRIA-MARTINEZ, J.: action against the defendants was deferred due to the proposed settlement of the account (Exh
Filed with this court is the petition for review under Rule 45 of the Rules of Court U). However, no settlement was reached. Hence the bank, thru counsel, sent a final letter of
assailing the July 31, 1995 Decision [1] of the Court of Appeals in CA-G.R. CV No. 31568 demand on May 26, 1986 (Exh. E). On June 11, 1986, a complaint for Violation of the Trust
which affirmed the Decision of the Regional Trial Court of Davao City dated August 1, 1990 Receipt Law was filed against the defendants before the City Fiscals Office (Exh. L-3).
in Civil Case No. 19,272-88; and the October 25, 1995 Resolution [2] denying petitioners Thereafter, the corresponding Information was filed against the defendants. Defendant
Motion for Reconsideration. Lorenzo Sarmiento, Jr. was, however, dropped from the Information while defendant Gregorio
The dispositive portion of the trial courts decision reads as follows: Limpin, Jr. was convicted (Exh. P to P-9).
WHEREFORE, in view of all the foregoing, judgment is hereby rendered ordering defendants The defendants claim that they cannot be held liable as the 825 tons of assorted scrap iron,
Lorenzo Sarmiento, Jr. and Gregorio Limpin, Jr. to pay jointly and severally, the plaintiff bank subject of the trust receipt agreement, were lost when the vessel transporting them sunk, and
the principal sum of P495,000.00 plus interest thereon at the legal rate from December 6, 1978 that said scrap iron were delivered to Davao Libra Industrial Sales, a business concern over
until the full amount is paid; the sum of P49,500.00 as the agreed attorneys fees and the costs which they had no interest whatsoever.
of suit. They tried to show that the scrap irons were loaded on board Barge L-1853, owned and
Defendant Sarmientos counterclaim is DISMISSED. operated by Luzon Stevedoring, for shipment to Toledo Atlas Pier in Cebu (Exh. 1; that the
SO ORDERED.[3] said Barge capsized on October 4, 1978 while on its way to Toledo City, and a notice of
The facts of the case as found by the trial court and affirmed by the Court of Appeals are Marine Protest was made by Capt. Jose C. Barrientos (Exh. 2); that Benigno Azarcon executed
as follows: an affidavit attesting to the fact that Barge L-1853, capsized on October 4, 1978 and all its
On September 6, 1978, defendant Gregorio Limpin, Jr. and Antonio Apostol, doing business cargoes were washed away (Exh. 3); that Charlie Torregoza, a security guard of L.S.
under the name and style of Davao Libra Industrial Sales, filed an application for an Sarmiento and Company, Inc., who was one of those assigned to escort Barge L-1853,
Irrevocable Domestic Letter of Credit with the plaintiff Bank for the amount of P495,000.00 in prepared an Incident Report, showing that said Barge capsized on October 4, 1978 and that
favor of LS Parts Hardware and Machine Shop (herein after referred to as LS Parts) for the cargoes were washed away (Exhs. 4 and 4-A).[4]
purchase of assorted scrap irons. Said application was signed by defendant Limpin and After trial, the lower court rendered judgment in favor of herein private respondent
Apostol (Exh. A). The aforesaid application was approved, and plaintiff Bank issued Domestic Associated Banking Corporation.
Letter of Credit No. DLC No. DVO-78-006 in favor of LS Parts for P495,000.00 (Exh. B). On appeal by herein petitioners Sarmiento, Jr. and Limpin, Jr., the Court of Appeals
Thereafter, a Trust Receipt dated September 6, 1978, was executed by defendant Limpin and affirmed the judgment of the trial court, and, denied the Motion for Reconsideration of herein
Antonio Apostol (Exh. C). In said Trust Receipt, the following stipulation, signed by petitioner.
defendant Lorenzo Sarmiento, Jr. appears: - Hence, herein petition assigning the following errors:
In consideration of the Associated Banking Corporation releasing to Gregorio Limpin and 1. THE RESPONDENT COURT OF APPEALS IN ITS AFOREQUOTED RULING HAD
Antonio Apostol goods mentioned in the trust receipt, we hereby jointly and severally DEPARTED FROM THE APPLICABLE BASIC PRINCIPLE AND PROCEDURE TO THE
undertake and agree to pay, on demand, to the Associated Bank Corporation all sums and INSTANT CIVIL CASE EMBODYING THE OFFENDED PARTYS (ASSOCIATED BANK)
amount of money which said Associated Banking Corporation may call upon us to pay arising CLAIM FOR THE CIVIL LIABILITY OF P495,000.00, NOT HAVING BEEN EXPRESSLY
out of, pertaining to, and/or any manner connected with the trust receipt, WE FURTHER RESERVED BY IT, HAS BEEN NOT ONLY IMPLIEDLY, BUT IN FACT EXPRESSLY
AGREE that our liability in this undertaking shall be direct and immediate and not contingent INSTITUTED ALREADY IN CRIMINAL CASE NO. 14,126, THE INFORMATION FOR
upon the pursuit by the Associated Banking Corporation of whatever remedies it may have WHICH HAD BEEN FILED AHEAD AND THE PROCEEDINGS CONDUCTED PRIOR
against the aforesaid Gregorio Limpin and Antonio Apostol. TO THE PRESENT CIVIL CASE BEFORE THE SAME REGIONAL TRIAL COURT OF
SGD. T/LORENZO SARMIENTO, JR. DAVAO CITY IS PROCEDURALLY BARRED.
Surety/Guarantor (Exh. C-1) 2. THE RESPONDENT COURT OF APPEALS HAD DISREGARDED BY JUDICIAL FIAT
Among others, the Trust Receipt (Exh. C) provided that: THAT THE RTC OF DAVAO CITY IN CRIMINAL CASE No. 14,126 HAD IN FACT
The defendants acknowledged to have received in trust from the plaintiff Bank the ALREADY ADJUDGED CIVIL LIABILITY OF THE SAME CLAIM AS HEREIN IN
merchandise covered by the documents and agreed to hold said merchandise in storage as the FAVOR OF COMPLAINANT ASSOCIATED BANK AS AGAINST PETITIONER
property of the Bank, with liberty to sell the same for cash for its accounts provided the GREGORIO LIMPIN, JR.
proceeds thereof are turned over in their entirety to the bank to be applied against acceptance 3. THE RESPONDENT COURT OF APPEALS HAD IGNORED THE CLEAR ADMITTED
and any other indebtedness of the defendants to the bank. (Exh. C-2) FACT OF RECORD THAT FORMAL APPEARANCE OF COMPLAINANT BANKS
That the defendants shall immediately give notice to said Bank of any average damage, non- COUNSEL HAD BEEN ENTERED IN CRIMINAL CASE NO. 14,126.[5]
shipment, shortage, non-delivery or other happening not in the usual and ordinary course of With respect to the second assigned error, we find no cogent reason to disturb the
business (Exh. C-3). finding of the RTC of Davao City (Branch 12) in its Order dated December 16, 1988 [6] that the

35
decision promulgated by the RTC of Davao City (Branch 15) in Criminal Case No. 14,126 did initially dismissed the complaint holding that Vintolas acquittal in the criminal case barred the
not contain an award of civil liability as it appears in the dispositive portion of the latter courts complaint, but on motion for reconsideration filed by IBAA the lower court ruled in favor of
Decision dated July 14, 1988.[7] the latter. On appeal, the Vintolas contended that the civil action is already barred by the
Being interrelated, we shall discuss jointly the first and third assigned errors. judgment in the criminal case because IBAA did not reserve in the criminal case its right to
At the outset, it should be stated that in the Amended Information, dated April 1, 1987, enforce separately the Vintolas civil liability. They claim that by actively intervening in the
filed in Criminal Case No. 14,126, Lorenzo Sarmiento, Jr. was dropped as an accused. prosecution of the criminal case through a private prosecutor, IBAA had chosen to file the civil
[8]
Hence, with respect to Sarmiento Jr., Criminal Case No. 14,126 cannot, in any way, bar the action impliedly with the criminal action, pursuant to Section 1, Rule 111 of the 1985 Rules on
filing by private respondent of the present civil action against him. Criminal Procedure. In ruling that the Estafa case is not a bar to the institution of a civil action
With respect to Limpin, Jr., petitioners claim that private respondents right to institute for collection, this Court held that:
separately the civil action for the recovery of civil liability is already barred on the ground that [i]t is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared
the same was not expressly reserved in the criminal action earlier filed against said that the facts from which the civil action might arise, did not exist, for it will be recalled that
respondent. the decision of acquittal expressly declared that the remedy of the Bank is civil and not
Pertinent to this issue is the then prevailing Rule 111 of the 1985 Rules on Criminal criminal in nature. This amounts to a reservation of the civil action in IBAAs favor for the
Procedure. Section 1 thereof provides: Court would not have dwelt on a civil liability that it had intended to extinguish by the same
Section 1. Institution of criminal and civil actions. When a criminal action is instituted, the decision.
civil action for the recovery of civil liability is impliedly instituted with the criminal action, In the Bernaldes case, plaintiffs spouses Nicasio Bernaldes, Sr. and Perpetua Besas
unless the offended party waives the civil action, reserves his right to institute it separately, or together with their minor son, Jovito, filed a complaint for damages against defendant Bohol
institutes the civil action prior to the criminal action. Land Transportation Co. for the death of Jovitos brother Nicasio, Jr. and for serious physical
Such civil action includes recovery of indemnity under the Revised Penal Code, and damages injuries obtained by Jovito when the bus in which they were riding, fell off a deep
under Articles 32, 33, 34 and 2176 of the Civil Code of the Philippines arising from the same precipice. Defendant bus company moved to dismiss the complaint on the ground that in the
act or omission of the accused. criminal case earlier filed against its bus driver, plaintiffs intervened through their counsel but
A waiver of any of the civil actions extinguishes the others. The institution of, or the did not reserve therein their right to file a separate action for damages. The lower court
reservation of the right to file, any of said civil actions separately waives the others. sustained defendants motion to dismiss. On appeal, this Court held that the dismissal was
The reservation of the right to institute the separate civil actions shall be made before the improper and ruled thus:
prosecution starts to present its evidence and under circumstances affording the offended party True, appellants, through private prosecutors, were allowed to intervene whether properly or
a reasonable opportunity to make such reservation. improperly we do not decide here in the criminal action against appellees driver, but if that
x x x. amounted inferentially to submitting in said case their claim for civil indemnity, the claim
Under the Revised Rules of Criminal Procedure, effective December 1, 2000, [9] the same could have been only against the driver but not against appellee who was not a party therein.
Section of the same Rule provides: As a matter of fact, however, inspite of appellees statements to the contrary in its brief, there is
Section 1. Institution of criminal and civil actions. -- (a) When a criminal action is instituted, no showing in the record before Us that appellants made of record their claim for damages
the civil action for the recovery of civil liability arising from the offense charged shall be against the driver or his employer; much less does it appear that they had attempted to prove
deemed instituted with the criminal action unless the offended party waives the civil action, such damages. The failure of the court to make any pronouncement in its decision
reserves the right to institute it separately or institutes the civil action prior to the criminal concerning the civil liability of the driver and/or of his employer must therefore be due to
action. the fact that the criminal action did not involve at all any claim for civil indemnity.
[14]
The reservation of the right to institute separately the civil action shall be made before the (Emphasis supplied)
prosecution starts presenting its evidence and under circumstances affording the offended Later, in Jarantilla, this Court ruled that the failure of the trial court to make any
party a reasonable opportunity to make such reservation. pronouncement, favorable or unfavorable, as to the civil liability of the accused amounts to a
x x x. reservation of the right to have the civil liability litigated and determined in a separate action,
While a reading of the aforequoted provisions shows that the offended party is required for nowhere in the Rules of Court is it provided that if the court fails to determine the civil
to make a reservation of his right to institute a separate civil action, jurisprudence instructs that liability, it becomes no longer enforceable. [15]
such reservation may not necessarily be express but may be implied [10] which may be inferred Nothing in the records at hand shows that private respondent ever attempted to enforce
not only from the acts of the offended party but also from acts other than those of the latter. its right to recover civil liability during the prosecution of the criminal action against
Demonstrative of the principle of implied reservation of a separate civil action are the petitioners.
cases of Vintola vs. Insular Bank of Asia and America, [11] Bernaldes, Sr. vs. Bohol Land Petitioners correctly raised in their third assigned error that private respondents counsel
Transp., Inc.[12] and Jarantilla vs. Court of Appeals.[13] made a formal entry of appearance in Criminal Case No. 14,126. [16] However, it is undisputed
In the Vintola case, Insular Bank of Asia and America (IBAA, for brevity) charged that in the early proceedings of the criminal action, private respondents counsel moved to
spouses Tirso and Loreta Vintola with Estafa. The spouses were acquitted on the ground that withdraw his appearance. The trial court, in its Order dated September 4, 1987, granted such
the element of misappropriation or conversion was inexistent. Subsequently, IBAA filed a civil motion. [17] This Court has previously held that the appearance of the offended party in the
case to recover the value of the goods allegedly misappropriated or converted. The lower court criminal case through a private prosecutor may not per se be considered either as an implied

36
election to have his claim for damages determined in said proceedings or a waiver of his right
to have it determined separately. [18] He must actually or actively intervene in the criminal
proceedings as to leave no doubt with respect to his intention to press a claim for damages in
the same action.[19] In the present case, it can be said with reasonable certainty that by
withdrawal of appearance of its counsel in the early stage of the criminal proceedings, the
private respondent, indeed, had no intention of submitting its claim for civil liability against
petitioners in the criminal action filed against the latter.
Furthermore, private respondents right to file a separate complaint for a sum of money is
governed by the provisions of Article 31 of the Civil Code, to wit:
Article 31. When the civil action is based on an obligation not arising from the act or omission
complained of as a felony, such civil action may proceed independently of the criminal
proceedings and regardless of the result of the latter.
In the present case, private respondents complaint against petitioners was based on the
failure of the latter to comply with their obligation as spelled out in the Trust Receipt executed
by them.[20] This breach of obligation is separate and distinct from any criminal liability for
misuse and/or misappropriation of goods or proceeds realized from the sale of goods,
documents or instruments released under trust receipts, punishable under Section 13 of the
Trust Receipts Law (P.D. 115) in relation to Article 315(1), (b) of the Revised Penal Code.
Being based on an obligation ex contractu and not ex delicto, the civil action may proceed
independently of the criminal proceedings instituted against petitioners regardless of the result
of the latter.[21]
WHEREFORE, the petition is denied and the assailed Decision and Resolution of the
Court of Appeals are hereby AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

37
FIRST DIVISION the goods subject of the trust receipt. On September 24, 1984, petitioners turned over the
G.R. No. 159622 July 30, 2004 subject goods to the respondent bank.
LANDL & COMPANY (PHIL.) INC., PERCIVAL G. LLABAN and MANUEL P. On July 31, 1985, in the presence of representatives of the petitioners and respondent bank, the
LUCENTE, petitioners, goods were sold at public auction. The goods were sold for P30,000.00 to respondent bank as
vs. the highest bidder.
METROPOLITAN BANK & TRUST COMPANY, respondent. The proceeds of the auction sale were insufficient to completely satisfy petitioners'
outstanding obligation to respondent bank, notwithstanding the application of the time deposit
account of petitioner Lucente. Accordingly, respondent bank demanded that petitioners pay the
DECISION remaining balance of their obligation. After petitioners failed to do so, respondent bank
instituted the instant case to collect the said deficiency.
On March 31, 1997, after trial on the merits, the trial court rendered a decision, the dispositive
portion of which reads:
YNARES-SANTIAGO, J.: WHEREFORE, foregoing premises considered, Judgment is hereby rendered in
At issue in this petition for review on certiorari is whether or not, in a trust receipt transaction, favor of the plaintiff and against the defendant by (1) ordering the defendant to pay
an entruster which had taken actual and juridical possession of the goods covered by the trust jointly and severally to the plaintiff the sum of P292,172.23 representing the
receipt may subsequently avail of the right to demand from the entrustee the deficiency of the defendant's obligation, as of April 17, 1986; (2) to pay the interest at the rate of 19%
amount covered by the trust receipt. per annum to be reckoned from April 18, 1986 until [the] obligation is fully paid; (3)
As correctly appreciated by the Court of Appeals, the undisputed facts of this case are as to pay service charge at the rate of 2% per annum starting April 18, 1986; (4) to pay
follows: the sum equivalent to 10% per annum of the total amount due collectible by way of
Respondent Metropolitan Bank and Trust Company (Metrobank) filed a complaint for sum of Attorney's Fees; (5) to pay Litigation Expenses of P3,000.00 and to pay the cost of
money against Landl and Company (Phil.) Inc. (Landl) and its directors, Percival G. Llaban the suit; and (6) to pay penalty charge of 12% per annum.
and Manuel P. Lucente before the Regional Trial Court of Cebu City, Branch 19, docketed as SO ORDERED.1
Civil Case No. CEB-4895. Petitioners appealed to the Court of Appeals, raising the issues of: (1) whether or not
Respondent alleged that petitioner corporation is engaged in the business of selling imported respondent bank has the right to recover any deficiency after it has retained possession of and
welding rods and alloys. On June 17, 1983, it opened Commercial Letter of Credit No. 4998 subsequently effected a public auction sale of the goods covered by the trust receipt; (2)
with respondent bank, in the amount of US$19,606.77, which was equivalent to P218,733.92 whether or not respondent bank is entitled to the amount of P3,000.00 as and for litigation
in Philippine currency at the time the transaction was consummated. The letter of credit was expenses and costs of the suit; and (3) whether or not respondent bank is entitled to the award
opened to purchase various welding rods and electrodes from Perma Alloys, Inc., New York, of attorney's fees.
U.S.A., as evidenced by a Pro-Forma Invoice dated March 10, 1983. Petitioner corporation put On February 13, 2003, the Court of Appeals rendered a decision affirming in toto the decision
up a marginal deposit of P50,414.00 from the proceeds of a separate clean loan. of the trial court.2
As an additional security, and as a condition for the approval of petitioner corporation's Hence, this petition for review on the following assignment of errors:
application for the opening of the commercial letter of credit, respondent bank required I.
petitioners Percival G. Llaban and Manuel P. Lucente to execute a Continuing Suretyship THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING
Agreement to the extent of P400,000.00, excluding interest, in favor of respondent bank. THE TRIAL COURT'S RULING THAT RESPONDENT HAD THE RIGHT TO
Petitioner Lucente also executed a Deed of Assignment in the amount of P35,000.00 in favor CLAIM THE DEFICIENCY FROM PETITIONERS NOTWITHSTANDING THE
of respondent bank to cover the amount of petitioner corporation's obligation to the bank. FACT THAT THE GOODS COVERED BY THE TRUST RECEIPT WERE FULLY
Upon compliance with these requisites, respondent bank opened an irrevocable letter of credit TURNED OVER TO RESPONDENT.
for the petitioner corporation. II.
To secure the indebtedness of petitioner corporation, respondent bank required the execution THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN AFFIRMING
of a Trust Receipt in an amount equivalent to the letter of credit, on the condition that THE TRIAL COURT'S PATENTLY ERRONEOUS AWARD OF PRINCIPAL
petitioner corporation would hold the goods in trust for respondent bank, with the right to sell OBLIGATION, INTEREST, ATTORNEY'S FEES, AND PENALTY AGAINST
the goods and the obligation to turn over to respondent bank the proceeds of the sale, if any. If THE PETITIONERS.3
the goods remained unsold, petitioner corporation had the further obligation to return them to The instant petition is partly meritorious.
respondent bank on or before November 23, 1983. The resolution of the first assigned error hinges on the proper interpretation of Section 7 of
Upon arrival of the goods in the Philippines, petitioner corporation took possession and Presidential Decree No. 115, or the Trust Receipts Law, which reads:
custody thereof. Sec. 7. Rights of the entruster. - The entruster shall be entitled to the proceeds from
On November 23, 1983, the maturity date of the trust receipt, petitioner corporation defaulted the sale of the goods, documents or instruments released under a trust receipt to the
in the payment of its obligation to respondent bank and failed to turn over the goods to the entrustee to the extent of the amount owing to the entruster or as appears in the trust
latter. On July 24, 1984, respondent bank demanded that petitioners, as entrustees, turn over receipt, or to the return of the goods, documents or instruments in case of non-sale,

38
and to the enforcement of all other rights conferred on him in the trust receipt The second paragraph of Section 7 provides a statutory remedy available to an entruster in the
provided such are not contrary to the provisions of this Decree. event of default or failure of the entrustee to comply with any of the terms and conditions of
The entruster may cancel the trust and take possession of the goods, documents or the trust receipt or any other agreement between the entruster and the entrustee. More
instruments subject of the trust or of the proceeds realized therefrom at any time specifically, the entruster "may cancel the trust and take possession of the goods, documents or
upon default or failure of the entrustee to comply with any of the terms and instruments subject of the trust or of the proceeds realized therefrom at any time". The law
conditions of the trust receipt or any other agreement between the entruster and the further provides that "the entruster in possession of the goods, documents or instruments may,
entrustee, and the entruster in possession of the goods, documents or instruments on or after default, give notice to the entrustee of the intention to sell, and may, not less than
may, on or after default, give notice to the entrustee of the intention to sell, and may, five days after serving or sending of such notice, sell the goods, documents or instruments at
not less than five days after serving or sending of such notice, sell the goods, public or private sale, and the entruster may, at a public sale, become a purchaser. The
documents or instruments at public or private sale, and the entruster may, at a public proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the
sale, become a purchaser. The proceeds of any such sale, whether public or private, expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the
shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the
expenses of re-taking, keeping and storing the goods, documents or instruments; (c) entruster. The entrustee shall receive any surplus but shall be liable to the entruster for any
to the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall deficiency."
receive any surplus but shall be liable to the entruster for any deficiency. Notice of The trust receipt between respondent bank and petitioner corporation contains the following
sale shall be deemed sufficiently given if in writing, and either personally served on relevant clauses:
the entrustee or sent by post-paid ordinary mail to the entrustee's last known The BANK/ENTRUSTER may, at any time, and only at its option, cancel this trust
business address. and take possession of the goods/documents/instruments subject hereof or of the
There is no question that petitioners failed to pay their outstanding obligation to respondent proceeds realized therefrom wherever they may then be found, upon default or
bank. They contend, however, that when the entrustee fails to settle his principal loan, the failure of the ENTRUSTEE to comply with any of the terms and conditions of this
entruster may choose between two separate and alternative remedies: (1) the return of the Trust Receipt or of any other agreement between the BANK/ENTRUSTER and the
goods covered by the trust receipt, in which case, the entruster now acquires the ownership of ENTRUSTEE; and the BANK/ENTRUSTER having taken repossession of the
the goods which the entrustee failed to sell; or (2) cancel the trust and take possession of the goods/documents/instruments object hereof may, on or after default, give at least
goods, for the purpose of selling the same at a private sale or at public auction. Petitioners five (5) days' previous notice to the ENTRUSTEE of its intention to sell the
assert that, under this second remedy, the entruster does not acquire ownership of the goods, in goods/documents/instruments at public or private sale, at which public sale, it may
which case he is entitled to the deficiency. Petitioners argue that these two remedies are so become a purchaser; Provided, that the proceeds of any such sale, whether public or
distinct that the availment of one necessarily bars the availment of the other. Thus, when private, shall be applied: (a) to the payment of the expenses thereof; (b) to the
respondent bank availed of the remedy of demanding the return of the goods, the actual return payment of the expenses of retaking, keeping and storing the
of all the unsold goods completely extinguished petitioners' liability. 4 goods/documents/instruments; (c) to the satisfaction of all of the ENTRUSTEE's
Petitioners' argument is bereft of merit. indebtedness to the BANK/ENTRUSTER; and Provided, further, that the
A trust receipt is inextricably linked with the primary agreement between the parties. Time and ENTRUSTEE shall receive any surplus thereof but shall, in any case, be liable to the
again, we have emphasized that a trust receipt agreement is merely a collateral agreement, the BANK/ENTRUSTER for any deficiency. x x x
purpose of which is to serve as security for a loan. Thus, in Abad v. Court of Appeals,5 we No act or omission on the part of the BANK/ENTRUSTER shall be deemed and
ruled: considered a waiver of any of its rights hereunder or under any related letters of
A letter of credit-trust receipt arrangement is endowed with its own distinctive credit, drafts or other documents unless such waiver is expressly made in writing
features and characteristics. Under that set-up, a bank extends a loan covered by the over the signature of the BANK/ENTRUSTER.8
letter of credit, with the trust receipt as security for the loan. In other words, the The afore-cited stipulations in the trust receipt are a near-exact reproduction of the second
transaction involves a loan feature represented by the letter of credit, and a security paragraph of Section 7 of the Trust Receipts Law. The right of repossession and subsequent
feature which is in the covering trust receipt. x x x. sale at public auction which were availed of by respondent bank were rights available upon
A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires default, and which were conferred by statute and reinforced by the contract between the
a "security interest" in the goods. It secures an indebtedness and there can be no parties.
such thing as security interest that secures no obligation. 6 The initial repossession by the bank of the goods subject of the trust receipt did not result in
The Trust Receipts Law was enacted to safeguard commercial transactions and to offer an the full satisfaction of the petitioners' loan obligation. Petitioners are apparently laboring under
additional layer of security to the lending bank. Trust receipts are indispensable contracts in the mistaken impression that the full turn-over of the goods suffices to divest them of their
international and domestic business transactions. The prevalent use of trust receipts, the obligation to repay the principal amount of their loan obligation. This is definitely not the case.
danger of their misuse and/or misappropriation of the goods or proceeds realized from the sale In Philippine National Bank v. Hon. Gregorio G. Pineda and Tayabas Cement Company,
of goods, documents or instruments held in trust for entruster banks, and the need for Inc.,9 we had occasion to rule:
regulation of trust receipt transactions to safeguard the rights and enforce the obligations of the PNB's possession of the subject machinery and equipment being precisely as a form
parties involved are the main thrusts of the Trust Receipts Law. 7 of security for the advances given to TCC under the Letter of Credit, said possession

39
by itself cannot be considered payment of the loan secured thereby. Payment would Respondent bank's repossession of the properties and subsequent sale of the goods were
legally result only after PNB had foreclosed on said securities, sold the same and completely in accordance with its statutory and contractual rights upon default of petitioner
applied the proceeds thereof to TCC's loan obligation. Mere possession does not corporation.
amount to foreclosure for foreclosure denotes the procedure adopted by the The second paragraph of Section 7 expressly provides that the entrustee shall be liable to the
mortgagee to terminate the rights of the mortgagor on the property and includes the entruster for any deficiency after the proceeds of the sale have been applied to the payment of
sale itself. the expenses of the sale, the payment of the expenses of re-taking, keeping and storing the
Neither can said repossession amount to dacion en pago. Dation in payment takes goods, documents or instruments, and the satisfaction of the entrustee's indebtedness to the
place when property is alienated to the creditor in satisfaction of a debt in money entruster.
and the same is governed by sales. Dation in payment is the delivery and In the case at bar, the proceeds of the auction sale were insufficient to satisfy entirely
transmission of ownership of a thing by the debtor to the creditor as an accepted petitioner corporation's indebtedness to the respondent bank. Respondent bank was thus well
equivalent of the performance of the obligation. As aforesaid, the repossession of the within its rights to institute the instant case to collect the deficiency.
machinery and equipment in question was merely to secure the payment of TCC's We find, however, that there has been an error in the computation of the total amount of
loan obligation and not for the purpose of transferring ownership thereof to PNB in petitioners' indebtedness to respondent bank.
satisfaction of said loan. Thus, no dacion en pago was ever accomplished. (Citations Although respondent bank contends that the error of computation is a question of fact which is
omitted, underscoring supplied)10 beyond the power of this Court to review,13 the total amount of petitioners' indebtedness in this
Indeed, in the 1987 case of Vintola v. Insular Bank of Asia and America,11 we struck down the case is not a question of fact. Rather, it is a question of law, i.e., the application of legal
position of the petitioner-spouses that their obligation to the entruster bank had been principles for the computation of the amount owed to respondent bank, and is thus a matter
extinguished when they relinquished possession of the goods in question. Thus: properly brought for our determination.
A trust receipt… is a security agreement, pursuant to which a bank acquires a The first issue involves the amount of indebtedness prior to the imposition of interest and
"security interest" in the goods. It secures an indebtedness and there can be no such penalty charges. The initial amount of the trust receipt of P218,733.92, was reduced to
thing as security interest that secures no obligation. As defined in our laws: P192,265.92 as of June 14, 1984, as per respondent's Statement of Past Due Trust Receipt
(h) Security Interest means a property interest in goods, documents or dated December 1, 1993.14 This amount presumably includes the application of P35,000.00,
instruments to secure performance of some obligations of the entrustee or the amount of petitioner Lucente's Deed of Assignment, which amount was applied by
of some third persons to the entruster and includes title, whether or not respondent bank to petitioners' obligation. No showing was made, however, that the
expressed to be absolute, whenever such title is in substance taken or P30,000.00 proceeds of the auction sale on July 31, 1985 was ever applied to the loan. Neither
retained for security only. was the amount of P50,414.00, representing the marginal deposit made by petitioner
xxx xxx xxx corporation, deducted from the loan. Although respondent bank contends that the marginal
Contrary to the allegations of the VINTOLAS, IBAA did not become the real owner deposit should not be deducted from the principal obligation, this is completely contrary to
of the goods. It was merely the holder of a security title for the advances it had made prevailing jurisprudence allowing the deduction of the marginal deposit, thus:
to the VINTOLAS. The goods the VINTOLAS had purchased through IBAA The marginal deposit requirement is a Central Bank measure to cut off excess
financing remain their own property and they hold it at their own risk. The trust currency liquidity which would create inflationary pressure. It is a collateral security
receipt arrangement did not convert the IBAA into an investor; the latter remained a given by the debtor, and is supposed to be returned to him upon his compliance with
lender and creditor. his secured obligation. Consequently, the bank pays no interest on the marginal
"x x x for the bank has previously extended a loan which the L/C deposit, unlike an ordinary bank deposit which earns interest in the bank. As a
represents to the importer, and by that loan, the importer should be the real matter of fact, the marginal deposit requirement for letters of credit has been
owner of the goods. If under the trust receipt, the bank is made to appear discontinued, except in those cases where the applicant for a letter of credit is not
as the owner, it was but an artificial expedient, more of a legal fiction than known to the bank or does not maintain a good credit standing therein.
fact, for if it were so, it could dispose of the goods in any manner it wants, It is only fair then that the importer's marginal deposit (if one was made, as in this
which it cannot do, just to give consistency with the purpose of the trust case), should be set off against his debt, for while the importer earns no interest on
receipt of giving a stronger security for the loan obtained by the importer. his marginal deposit, the bank, apart from being able to use said deposit for its own
To consider the bank as the true owner from the inception of the purposes, also earns interest on the money it loaned to the importer. It would be
transaction would be to disregard the loan feature thereof. x x x" onerous to compute interest and other charges on the face value of the letter of credit
Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot which the bank issued, without first crediting or setting off the marginal deposit
justifiably claim that because they have surrendered the goods to IBAA and which the importer paid to the bank. Compensation is proper and should take place
subsequently deposited them in the custody of the court, they are absolutely relieved by operation of law because the requisites in Article 1279 of the Civil Code are
of their obligation to pay their loan because of their inability to dispose of the goods. present and should extinguish both debts to the concurrent amount (Art. 1290, Civil
The fact that they were unable to sell the seashells in question does not affect Code). Although Abad is only a surety, he may set up compensation as regards what
IBAA's right to recover the advances it had made under the Letter of Credit. the creditor owes the principal debtor, TOMCO (Art. 1280, Civil Code). 15
(Citations omitted.)12

40
The net amount of the obligation, represented by respondent bank to be P292,172.23 as of
April 17, 1986, would thus be P211,758.23.
To this principal amount must be imposed the following charges: (1) 19% interest per annum,
in keeping with the terms of the trust receipt;16 and (2) 12% penalty per annum, collected based
on the outstanding principal obligation plus unpaid interest, again in keeping with the wording
of the trust receipt.17 It appearing that petitioners have paid the interest and penalty charges
until April 17, 1986, the reckoning date for the computation of the foregoing charges must be
April 18, 1986.
A perusal of the records reveals that the trial court and the Court of Appeals erred in imposing
service charges upon the petitioners. No such stipulation is found in the trust receipt.
Moreover, the trial court and the Court of Appeals erred in computing attorney's fees
equivalent to 10% per annum, rather than 10% of the total amount due. There is no basis for
compounding the interest annually, as the trial court and Court of Appeals have done. This
amount would be unconscionable.
Finally, Lucente and Llaban's contention that they are not solidarily liable with petitioner
corporation is untenable. As co-signatories of the Continuing Suretyship Agreement, they
bound themselves, inter alia, to pay the principal sum in the amount of not more than
P400,000.00; interest due on the principal obligation; attorney's fees; and expenses that may
be incurred in collecting the credit. The amount owed to respondent bank is the amount of the
principal, interest, attorney's fees, and expenses in collecting the principal amount. The
Continuing Suretyship Agreement expressly states the nature of the liability of Lucente and
Llaban:
The liability of the SURETY shall be solidary, direct and immediate and not
contingent upon the bank's pursuit of whatever remedies the BANK have [sic]
against the Borrower or the securities or liens the BANK may possess and the
SURETY will at any time, whether due or not due, pay to the BANK with or
withour demand upon the Borrower, any of the instruments of indebtedness or other
obligation hereby guaranteed by the SURETY.18
Solidary liability is one of the primary characteristics of a surety contract, 19 and the Continuing
Suretyship Agreement expressly stipulates the solidary nature of Lucente and Llaban's
liability. All three petitioners thus share the solidary obligation in favor of respondent bank,
which is given the right, under the Civil Code, to proceed against any one of the solidary
debtors or some or all of them simultaneously.20
WHEREFORE, premises considered, the instant petition is PARTIALLY GRANTED. The
decision of the Court of Appeals in CA-G.R. CV No. 58193 dated February 13, 2003 is
AFFIRMED with MODIFICATIONS. Accordingly, petitioners are ordered to pay respondent
bank the following: (1) P211,758.23 representing petitioners' net obligation as of April 17,
1986; (2) interest at the rate of 19% per annum and penalty at the rate of 12% per
annum reckoned from April 18, 1986; (3) attorney's fees equivalent to 10% of the total amount
due and collectible; and (4) litigation expenses in the amount of P3,000.00. The service charge
at the rate of 2% per annum beginning April 18, 1986 is deleted. Costs against petitioners.
SO ORDERED.

41
SECOND DIVISION Transpacific, represented by its officers, Michael G. Say, Josephine G. Say and
Myrna Magpantay, entered into a Credit Line Agreement [4] with the Bank. Consequently, the
TRANSPACIFIC BATTERY, G.R. No. 173565 officers in behalf of Transpacific applied for nine (9) letters of credit (LC) with the Bank to
CORPORATION and MICHAEL G. SAY, facilitate the importation and/or purchases of certain merchandise, goods and supplies for its
Petitioners, business. The Bank issued the corresponding LCs to Transpacific. Transpacific then executed
and delivered to the Bank, as entrustor, nine (9) trust receipt agreements
Present:

CARPIO MORALES, J.*


Chairperson, with for the release of the imported merchandise and supplies in its favor, with the
- versus - TINGA, aforementioned officers, individual petitioners herein, binding themselves to be solidarily
VELASCO, JR., liable with Transpacific to the Bank for the value of the merchandise and supplies covered by
LEONARDO DE CASTRO,** and the trust receipts. The letters of credit and their corresponding trust receipts are listed below:
BRION, JJ.
SECURITY BANK & TRUST CO., Promulgated: Letter of Trust Date Issued Expiry Date Amount of Entrustees
Respondent. Credit Receipt of Trust Trust Receipt
No. Agreement Receipt
May 8, 2009 Ref. No.
73 DC- 731B- 21 July 19 October P359,040.00 Michael
x---------------------------------------------------------------------------------x
82/492 83/8927 1983 1983 G.Say,
Josephine G.
MICHAEL G. SAY and JOSEPHINE G.R. No. 173607
Say, Myrna E.
G. SAY,
Magpantay[5]
Petitioners,
73 DC- 731B- 8 August 7 November P369,600.00 Michael G.
- versus - 83/504 83/9126 1983 1983 Say, Melchor
G. Say,
SECURITY BANK & TRUST Myrna E.
COMPANY, Magpantay[6]
Respondent. 73 DC- 731B- 17 August 15 P355,200.00 Michael G.
83/517 83/9259 1983 November Say, Melchor
x---------------------------------------------------------------------------------x 1983 G. Say,
Myrna E.
Magpantay[7]
73 DC- 731B- 24 August 22 P119,359.69 Michael G.
DECISION 83/6278 83/9187 1983 November Say, Melchor
1983 G. Say,
TINGA, J.: Myrna E.
Magpantay[8]
Before this Court are two petitions for review on certiorari [1] under Rule 45 of the
Rules of Court seeking the reversal of the decision[2] of the Court of Appeals in CA-G.R. CV
No. 74644 which affirmed with modification the decision [3] of Branch 64 of the Regional Trial 73 DC- 731B- 9 September 8 December P68,772.19 Michael G.
Court of Makati City, ordering petitioners Transpacific Battery Company (Transpacific), 6994 83/9461 1983 1983 Say, Melchor
Michael Go Say (Michael), Melchor G. Say (Melchor) and Josephine G. Say (Josephine) G. Say,
jointly and severally liable to Security Bank and Trust Company (The Bank). Myrna E.
Magpantay[9]
The facts, as culled from the records, follow. 73 DC- 731B- 27 26 P84,032.62 Michael G.
6990 83/9617 September December Say, Melchor
1983 1983 G. Say,

42
Myrna E. Failure to meet one monthly installment when due shall cause the unmatured
Magpantay[10] balance to become due and demandable. The account shall be referred automatically to our
73 DC- 731B-83/587 6 October 4 January P661,122.00 Michael G. Special Accounts Department for collection.[16]
83/5580 1983 1984 Say, Melchor
G. Say, Alleging that out of the total obligation of P3,082,029.00, the amount
Myrna E. of P2,290,865.41 remained unpaid, the Bank demanded in writing the payment of the unpaid
Magpantay[11] balance.[17]
73 DC- 731B-83/588 6 October 4 January P826,402.50 Michael G.
83/5581 1983 1984 Say, Melchor Despite repeated demands, petitioners failed to comply with the restructuring
G. Say, agreement, prompting the Bank to file a criminal complaint for violation of Presidential
Myrna E. Decree No. 115 or the Trust Receipts Law. However, said complaint was dismissed.
Magpantay[12]
73 DC- 731B- 8 November 9 January P338,500.00 Michael G. On 24 January 1992, the Bank filed a complaint for recovery of a sum of money
83/432 83/8110 1983 1984 Say, Melchor with the RTC of Makati.[18]
G. Say,
Myrna E.
Magpantay[13]
In his answer,[19] Michael countered that the obligation had already been paid or if
Under the terms of the trust receipts, the entrustees agreed to hold the goods,
not totally paid, the same is very minimal. He further contended that said obligation had
merchandise and supplies, as well as the proceeds of the sale and collection thereof, in trust for
already been extinguished by novation when the Bank restructured the obligation of
the Bank for the payment of petitioners acceptance, bank commissions and charges, and/or any
Transpacific. He also claimed that the Bank is guilty of laches for its inaction for an
unreasonable length of time.[20]

Melchor and Josephine, for their part, argued that the trust receipts have not been
executed in strict compliance with the requirements of the Trust Receipts Law; that their
other indebtedness of petitioners to the Bank, and deliver the same to the Bank upon maturity participation in the questioned transactions was in their capacity as officers of Transpacific and
date of said trust receipts.[14] consequently, cannot be held liable in their individual capacities; that their signatures in some
of the documents were forged; and that the obligation had been extinguished by novation. [21]
On the maturity dates of the trust receipts, petitioners failed to account for and to
deliver to the Bank the proceeds of the sale and collection of the goods, merchandise and Ma. Fe Rosadio (Rosadio), who was employed at the Foreign Department of the
supplies subject of the trust receipts. Despite repeated demands, petitioners reneged on their Bank and tasked with documentation, processing and releasing of import bills and trust
obligation. receipts, testified for the Bank. She identified the trust receipts and attested to the genuineness
of the signatures of petitioners.
On 8 February 1984, petitioners and the Bank executed a letter-agreement
restructuring the formers obligation in the sum of P3,082,029.00, subject to the following
terms and conditions:

1. Payment of all interest and other charges prior to restructuring;


2. TR term is for one year with equal monthly principal payments; Instead of presenting their witnesses, petitioners filed a demurrer to
3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, amortized evidence[22] which the trial court denied on 8 December 1995.
monthly;
4. Interest rate subject to review every amortization due; and In a decision dated 5 March 2002, the trial court ruled in favor of the Bank.The
dispositive portion reads:

WHEREFORE, IN VIEW OF THE FOREGOING, judgment is


5. Against the joint and solidary liability of Sps. Miguel and Mary Say and rendered in favor of plaintiff Security Bank and Trust Company and
Michael Go Say.[15] against defendants Transpacific Battery Company, Michael Go Say,

43
Melchor G. Say and Josephine G. Say ordering the defendants to pay
jointly and severally to the plaintiff the following amounts: Novation is a mode of extinguishing an obligation by changing its objects or
principal obligations, by substituting a new debtor in place of the old one, or by subrogating a
1. The sum of P2,290,865.41 representing the balance of defendants third person to the rights of the creditor.[26] Article 1292 of the Civil Code expressly provides:
outstanding and unpaid obligation as of the filing of the complaint on
February 4, 1992 plus interest at the rate of 12% per annum from Art. 1292. In order that an obligation may be extinguished by
February 4, 1992 until full payment of the defendants obligation under another which substitute the same, it is imperative that it be so declared in
the aforecited Trust Receipts and/or Letter Agreement is made; unequivocal terms, or that the old and new obligations be in every point
2. Attorneys fees in the amount equivalent to 25% on the amount due; incompatible with each other.
3. Cost of suit.
SO ORDERED.[23]

The trial court lent credence to the testimony of Rosadio and upheld the authenticity
and genuineness of the signatures of the individual petitioners on the trust receipts. It also ruled In order for novation to take place, the concurrence of the following requisites are
that the restructuring of the obligation did not relieve individual petitioners of their liability as indispensable:
solidary debtors to the Bank as there was an express agreement on their part to be bound jointly
and severally with Transpacific under the trust receipts. [24] 1. There must be a previous valid obligation;
2. There must be an agreement of the parties concerned to a new contract;
On appeal, the Court of Appeals affirmed the ruling of the trial court with 3. There must be the extinguishment of the old contract; and
modification in that it deleted the award of attorneys fees. 4. There must be the validity of the new contract. [27]

The Court of Appeals decision centered on the finding that there was no novation in Novation is never presumed, and the animus novandi, whether totally or partially,
the restructuring of the obligation, therefore, the individual petitioners as solidary debtors must appear by express agreement of the parties, or by their acts that are too clear and
cannot be exonerated from the obligation of Transpacific. The appellate court also dismissed unmistakable. The extinguishment of the old obligation by the new one is a necessary element
the allegation of forgery for failure of petitioners to present evidence to support their allegation of novation, which may be effected either expressly or impliedly. The contracting parties must
that the purported signatures in the trust receipts were forged. With respect to the amount of the incontrovertibly disclose that their object in executing the new contract is to extinguish the old
unpaid obligation, the appellate court concluded that since the issue is factual in nature, the one. Upon the other hand, no specific form is required for an implied novation, and all that is
finding of the trial court should not be disturbed on appeal. prescribed by law would be an incompatibility between the two contracts. [28]

In the petition filed by Michael, he insists that novation had taken place and The test of incompatibility is whether the two obligations can stand together, each
effectively extinguished his obligation to the Bank. Moreover, he argues that he did not sign the one having its independent existence. If they cannot, they are incompatible and the latter
restructuring agreement; hence, he should not be made liable to pay any obligation due to the obligation novates the first. Corollarily, changes that breed incompatibility must be essential in
Bank under said agreement.[25] nature and not merely accidental. The incompatibility must take place in any of the essential
elements of the obligation, such as its object, cause or principal conditions thereof; otherwise,
Melchor and Josephine question the credibility of witness Rosadio to testify on the the change would be merely modificatory in nature and insufficient to extinguish the original
authenticity of their signatures on the trust receipts. They likewise point out the deficiencies in obligation.[29]
the trust receipts. Finally, they assert that whatever obligation they may have assumed under
the agreements in the trust receipts they signed was fully novated by the restructuring Petitioners proffer that the terms of the restructuring agreement are absolutely
agreement entered into between the Bank and Transpacific without their knowledge and incompatible with the terms of the trust receipts. First, the maturity date under the trust receipts
consent. is reckoned at ninety (90) days from their respective issuance dates whereas it is one (1) year
under the restructuring agreement. Second, payment is in full under the trust receipts while
The Bank posits that the arguments presented by petitioners involve factual questions under the restructured obligation, it is to be made in equal monthly installments. Third, the rate
and the findings thereof by the courts below are conclusive upon this Court. It also contends of interest under the trust receipts is 16% or 18% per annum whereas it is 5% per annum over
that there is no novation and the restructuring agreement was executed only to make it less prime rate or 30% per annum, whichever is higher, under the restructured obligation. Fourth,
onerous for the debtors to perform their obligation. It avers that although petitioners were no the restructuring agreement has a provision on the time of interest payments, as well as a
longer signatories in the restructuring agreement, they are still bound as they were not review of the interest rate, whereas there are no such provisions under the trust receipts. Fifth,
expressly released from their obligation. On the contrary, it points out that the restructuring the obligation under the trust receipts is secured by the joint and solidary liability of the alleged
agreement was even made subject to their joint and solidary liability. signatories, whereas the restructured obligation is secured by the joint and solidary liability of

44
Spouses Miguel and Mary Say and Michael G. Say. Sixth, there is no acceleration clause under it cannot be presumed that they have been relieved from the obligation. The old obligation
the trust receipts whereas the restructured obligation is subject to an acceleration clause. continues to subsist subject to the modifications agreed upon by the parties.

The circumstance that motivated the parties to enter into a restructuring agreement
was the failure of petitioners to account for the goods received in trust and/or deliver the
On the other hand, the Bank dismisses any incompatibility between the restructuring proceeds thereof. To remedy the situation, the parties executed an agreement to restructure
agreement and the trust receipt transactions. It alleges that the restructuring agreement even Transpacifics obligations.
made an express recognition of the trust receipts when it obliged the debtors pay all interests
and other charges prior to restructuring.Moreover, only the interest rates and the term of the The Bank only extended the repayment term of the trust receipts from 90 days to one
trust receipts were modified, according to the Bank. In fact, it claims that the restructuring year with monthly installment at 5% per annum over prime rate or 30% per annum whichever
agreement was executed to make it less onerous for the debtors to perform their obligation. is higher. Furthermore, the interest rates were flexible in that they are subject to review every
amortization due. Whether the terms appeared to be more onerous or not is immaterial. Courts
The primary issue for resolution is whether the obligation under the trust receipts are not authorized to extricate parties from the necessary consequences of their acts. The
was novated by the restructuring agreement. We rule in the negative. parties will not be relieved from their obligations as there was absolutely no intention by the
parties to supersede or abrogate the trust receipt transactions. The intention of the new
The material portions of the restructuring agreement is hereby reproduced for agreement was precisely to revive the old obligation after the original period expired and the
brevity: loan remained unpaid. Well-settled is the rule that, with respect to obligations to pay a sum of
money, the obligation is not novated by an instrument that expressly recognizes the old,
Gentlemen: changes only the terms of payment, adds other obligations not incompatible with the old ones,
or the new contract merely supplements the old one. [31]
We are pleased to inform you that our Executive Committee has
approved the restructuring of your outstanding past due trust receipts Equally unmeritorious is petitioners claim that they cannot be held liable to pay any
amounting to P3,082,029.00, subject to: obligation due to the Bank under the restructuring agreement because they did not participate
or sign the same. To reiterate, there is no novation. The trust receipts transactions and the
1. Payment of all interest and other charges prior to restructuring; restructuring agreement can both stand together.Petitioners have not shown that they were
2. TR term is for one year with equal monthly principal payments expressly released from the obligation.From the beginning, they were joint and solidary
3. Interest at 5% p.a. over prime rate or 30% p.a., whichever is higher, debtors under the trust receipts, the obligation of which subsist vis--vis the restructuring
amortized monthly; agreement. Being joint and solidary debtors, they are liable for the entirety of the obligation.
4. Interest rate subject to review every amortiaton due;
5. Against the joint and solidary liability of Sps. Miguel and Mary Say While petitioners Melchor and Josephine insist that they never claimed forgery, the
and Michael Go Say; crux of the matter still pertains to the credibility of the witness, which the courts below chose
to uphold. Suffice it to say that in the absence of any of the recognized exceptions, [32] the
factual findings of the trial court, especially when affirmed by the Court of Appeals are
Failure to meet one monthly installment when due shall cause the conclusive on this Court.
unmatured balance to become due and demandable. The account shall be
referred automatically to our Special Accounts Department for collection. WHEREFORE, the twin petitions are DENIED. The Decision of the Court of
[30]
Appeals in CA-G.R. CV No. 74644 is AFFIRMED. Costs against petitioners.

SO ORDERED.
Undoubtedly, there is no express novation since the restructuring agreement does not
state in clear terms that the obligation under the trust receipts is extinguished and in lieu
thereof the restructuring agreement will be substituted.Neither is there an implied novation
since the restructuring agreement is not incompatible with the trust receipt transactions.

Indeed, the restructuring agreement recognizes the obligation due under the trust
receipts when it required payment of all interest and other charges prior to restructuring. With
respect to Michael, there was even a proviso under the agreement that the amount due is
subject to the joint and solidary liability of Spouses Miguel and Mary Say and Michael Go
Say. While the names of Melchor and Josephine do not appear on the restructuring agreement,

45
SECOND DIVISION For the purpose of effectively carrying out all the terms and conditions of the Trust herein
G.R. No. 164051 October 3, 2012 created and to insure that the Trustee will comply strictly and faithfully with all undertakings
PHILIPPINE NATIONAL BANK, Petitioner, hereunder, the Trustee hereby agrees and consents to allow and permit PNB or its
vs. representatives to inspect all of the Trustee’s books, especially those pertaining to its
LILIAN S. SORIANO, Respondent. disposition of the Motor Vehicles and/or the proceeds of the sale hereof, at any time and
DECISION whenever PNB, at its discretion, may find it necessary to do so.
PEREZ, J.: The Trustee’s failure to account to PNB for the Motor Vehicles received in Trust and/or for the
We arc urged in this petition for review on certiorari to reverse and set aside the Decision of proceeds of the sale thereof within thirty (30) days from demand made by PNB shall
the Court of Appeals in C A-G.R. SP No. 762431 finding no grave abuse of discretion in the constitute prima facie evidence that the Trustee has converted or misappropriated said vehicles
ruling of the Secretary of the Department of Justice ( DOJ) which, in turn, dismissed the and/or proceeds thereof for its benefit to the detriment and prejudice of PNB. 4
criminal complaint for Estafa, i.e., violation of Section 13 of Presidential Decree No. 1 15 and Soriano’s failure to account for the proceeds of the sale of the motor vehicles, PNB, as
(Trust Receipts Law), in relation to Article 315, paragraph (b) of the Revised Penal Code, filed previously adverted to, filed a complaint-affidavit before the Office of the City Prosecutor of
by petitioner Philippine National Bank (PNB) against respondent Lilian S. Soriano (Soriano). 2 Naga City charging Soriano with fifty two (52) counts of violation of the Trust Receipts Law,
First, the ostensibly simple facts as found by the Court of Appeals and adopted by PNB in its in relation to Article 315, paragraph 1(b) of the Revised Penal Code.
petition and memorandum: In refutation, Soriano filed a counter-affidavit asserting that:
On March 20, 1997, [PNB] extended a credit facility in the form of [a] Floor Stock Line (FSL) 1. The obligation of [LISAM] which I represent, and consequently[,] my obligation, if any, is
in the increased amount of Thirty Million Pesos (₱30 Million) to Lisam Enterprises, Inc. purely civil in nature. All of the alleged trust receipt agreements were availments made by the
[LISAM], a family-owned and controlled corporation that maintains Current Account No. corporation [LISAM] on the PNB credit facility known as "Floor Stock Line" (FSL), which is
445830099-8 with petitioner PNB. just one of the several credit facilities granted to [LISAM] by PNB. When my husband
x x x. Soriano is the chairman and president of LISAM, she is also the authorized signatory in Leandro A. Soriano, Jr. was still alive, [LISAM] submitted proposals to PNB for the
all LISAM’s Transactions with [PNB]. restructuring of all of [LISAM’s] credit facilities. After exchanges of several letters and
On various dates, LISAM made several availments of the FSL in the total amount of Twenty telephone calls, Mr. Josefino Gamboa, Senior Vice President of PNB on 12 May 1998 wrote
Nine Million Six Hundred Forty Five Thousand Nine Hundred Forty Four Pesos and Fifty [LISAM] informing PNB’s lack of objection to [LISAM’s] proposal of restructuring all its
Five Centavos (₱ 29,645,944.55), the proceeds of which were credited to its current account obligations. x x x.
with [PNB]. For each availment, LISAM through [Soriano], executed 52 Trust Receipts (TRs). 2. On September 22, 1998 Mr. Avengoza sent a letter to [LISAM], complete with attached
In addition to the promissory notes, showing its receipt of the items in trust with the duty to copy of PNB Board’s minutes of meeting, with the happy information that the Board of
turn-over the proceeds of the sale thereof to [PNB]. Directors of PNB has approved the conversion of [LISAM’s] existing credit facilities at PNB,
Sometime on January 21-22, 1998, [PNB’s] authorized personnel conducted an actual physical which includes the FSL on which the Trust receipts are availments, to [an] Omnibus Line (OL)
inventory of LISAM’s motor vehicles and motorcycles and found that only four (4) units available by way of Revolving Credit Line (RCL), Discounting Line Against Post-Dated
covered by the TRs amounting to One Hundred Forty Thousand Eight Hundred Pesos Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with a "Full waiver of
(₱158,100.00) (sic) remained unsold. penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are
Out of the Twenty Nine Million Six Hundred Forty Four Thousand Nine Hundred Forty Four availments) and Time Loan. x x x.
Pesos and Fifty Five Centavos (₱29,644,944.55) as the outstanding principal balance [of] the 3. The [FSL] and the availments thereon allegedly secured by Trust Receipts, therefore, was
total availments on the line covered by TRs, [LISAM] should have remitted to [PNB], Twenty (sic) already converted into[,] and included in[,] an Omnibus Line (OL) of ₱106 million on
Nine Million Four Hundred Eighty Seven Thousand Eight Hundred Forty Four Pesos and September 22, 1998, which was actually a Revolving Credit Line (RCL)[.] 5
Fifty Five Centavos (₱29,487,844.55). Despite several formal demands, respondent Soriano PNB filed a reply-affidavit maintaining Soriano’s criminal liability under the TRs:
failed and refused to turn over the said [amount to] the prejudice of [PNB]. 3 2. x x x. While it is true that said restructuring was approved, the same was never implemented
Given the terms of the TRs which read, in pertinent part: because [LISAM] failed to comply with the conditions of approval stated in B/R No. 6, such
RECEIVED in Trust from the [PNB], Naga Branch, Naga City, Philippines, the motor vehicles as the payment of the interest and other charges and the submission of the title of the 283 sq.
("Motor Vehicles") specified and described in the Invoice/s issued by HONDA PHILIPPINES, m. of vacant residential lot, x x x Tandang Sora, Quezon City, as among the common
INC. (HPI) to Lisam Enterprises, Inc., (the "Trustee") hereto attached as Annex "A" hereof, conditions stated in paragraph V, of B/R 6. The nonimplementation of the approved
and in consideration thereof, the trustee hereby agrees to hold the Motor Vehicles in storage as restructuring of the account of [LISAM] has the effect of reverting the account to its original
the property of PNB, with the liberty to sell the same for cash for the Trustee’s account and to status prior to the said approval. Consequently, her claim that her liability for violation of the
deliver the proceeds thereof to PNB to be applied against its acceptance on the Trustee’s Trust Receipt Agreement is purely civil does not hold water. 6
account. Under the terms of the Invoices and (sic) the Trustee further agrees to hold the said In a Resolution,7 the City Prosecutor of Naga City found, thus:
vehicles and proceeds of the sale thereof in Trust for the payment of said acceptance and of WHEREFORE, the undersigned finds prima facie evidence that respondent LILIAN
any [of] its other indebtedness to PNB. SORIANO is probably guilty of violation of [the] Trust Receipt Law, in relation to Article 315
xxxx par. 1 (b) of the Revised Penal Code, let therefore 52 counts of ESTAFA be filed against the
respondent.8

46
Consequently, on 1 August 2001, the same office filed Informations against Soriano for fifty As stated at the outset, the appellate court did not find grave abuse of discretion in the
two (52) counts of Estafa (violation of the Trust Receipts Law), docketed as Criminal Case questioned resolution of the DOJ, and dismissed PNB’s petition for certiorari.
Nos. 2001-0641 to 2001-0693, which were raffled to the Regional Trial Court (RTC), Branch Hence, this appeal by certiorari.
21, Naga City. Before anything else, we note that respondent Soriano, despite several opportunities to do so,
Meanwhile, PNB filed a petition for review of the Naga City Prosecutor’s Resolution before failed to file a Memorandum as required in our Resolution dated 16 January 2008. Thus, on 8
the Secretary of the DOJ. July 2009, we resolved to dispense with the filing of Soriano’s Memorandum.
In January 2002, the RTC ordered the dismissal of one of the criminal cases against Soriano, In its Memorandum, PNB posits the following issues:
docketed as Criminal Case No. 2001-0671. In March of the same year, Soriano was arraigned I. Whether or not the Court of Appeals gravely erred in concurring with the finding of the DOJ
in, and pled not guilty to, the rest of the criminal cases. Thereafter, on 16 October 2002, the that the approval by PNB of [LISAM’s] restructuring proposal of its account with PNB had
RTC issued an Order resetting the continuation of the pre-trial on 27 November 2002. changed the status of [LISAM’s] obligations secured by Trust Receipts to one of an ordinary
On the other litigation front, the DOJ, in a Resolution9 dated 25 June 2002, reversed and set loan, non-payment of which does not give rise to a criminal liability.
aside the earlier resolution of the Naga City Prosecutor: II. Whether or not the Court of Appeals gravely erred in concluding and concurring with the
WHEREFORE, the questioned resolution is REVERSED and SET ASIDE and the City June 25, 2002 Resolution of the DOJ directing the withdrawal of the Information for Estafa
Prosecutor of Naga City is hereby directed to move, with leave of court, for the withdrawal of against the accused in Criminal Case Nos. 2001-0641 up to 0693 considering the well-
the informations for estafa against Lilian S. Soriano in Criminal Case Nos. 2001-0641 to 0693 established rule that once jurisdiction is vested in court, it is retained up to the end of the
and to report the action taken thereon within ten (10) days from receipt thereof. 10 litigation.
On various dates the RTC, through Pairing Judge Novelita Villegas Llaguno, issued the III. Whether or not the reinstatement of the 51 counts (Criminal Case No. 2001-0671 was
following Orders: already dismissed) of criminal cases for estafa against Soriano would violate her constitutional
1. 27 November 200211 right against double jeopardy.15
When this case was called for continuation of pre-trial, [Soriano’s] counsel appeared. Winnowed from the foregoing, we find that the basic question is whether the Court of Appeals
However, Prosecutor Edgar Imperial failed to appear. gravely erred in affirming the DOJ’s ruling that the restructuring of LISAM’s loan secured by
Records show that a copy of the Resolution from the Department of Justice promulgated on trust receipts extinguished Soriano’s criminal liability therefor.
October 28, 2002 was received by this Court, (sic) denying the Motion for Reconsideration of It has not escaped us that PNB’s second and third issues delve into the three (3) Orders of the
the Resolution No. 320, series of 2002 reversing that of the City Prosecutor of Naga City and RTC which are not the subject of the petition before us. To clarify, the instant petition assails
at the same time directing the latter to move with leave of court for the withdrawal of the the Decision of the appellate court in CA-G.R. SP No. 76243 which, essentially, affirmed the
informations for Estafa against Lilian Soriano. ruling of the DOJ in I.S. Nos. 2000-1123, 2000-1133 and 2000-1184. As previously narrated,
Accordingly, the prosecution is hereby given fifteen (15) days from receipt hereof within the DOJ Resolution became the basis of the RTC’s Orders granting the withdrawal of the
which to comply with the directive of the Department of Justice. Informations against Soriano. From these RTC Orders, the remedy of PNB was to file a
2. 21 February 200312 petition for certiorari before the Court of Appeals alleging grave abuse of discretion in the
Finding the Motion to Withdraw Informations filed by Pros. Edgar Imperial duly approved by issuance thereof.
the City Prosecutor of Naga City to be meritorious the same is hereby granted. As prayed for, However, for clarity and to obviate confusion, we shall first dispose of the peripheral issues
the Informations in Crim. Cases Nos. RTC 2001-0641 to 2001-0693 entitled, People of the raised by PNB:
Philippines vs. Lilian S. Soriano, consisting of fifty-two (52) cases except for Crim. Case No. 1. Whether the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 against Soriano as
RTC 2001-0671 which had been previously dismissed, are hereby ordered WITHDRAWN. directed by the DOJ violates the well-established rule that once the trial court acquires
3. 15 July 200313 jurisdiction over a case, it is retained until termination of litigation.
The prosecution of the criminal cases herein filed being under the control of the City 2. Whether the reinstatement of Criminal Cases Nos. 2001-0641 to 2001-0693 violate the
Prosecutor, the withdrawal of the said cases by the Prosecution leaves this Court without constitutional provision against double jeopardy.
authority to re-instate, revive or refile the same. We rule in the negative.
Wherefore, the Motion for Reconsideration filed by the private complainant is hereby Precisely, the withdrawal of Criminal Cases Nos. 2001-0641 to 2001-0693 was ordered by the
DENIED. RTC. In particular, the Secretary of the DOJ directed City Prosecutor of Naga City to
With the denial of its Motion for Reconsideration of the 25 June 2002 Resolution of the move, with leave of court, for the withdrawal of the Informations for estafa against Soriano.
Secretary of the DOJ, PNB filed a petition for certiorari before the Court of Appeals alleging Significantly, the trial court gave the prosecution fifteen (15) days within which to comply
that: with the DOJ’s directive, and thereupon, readily granted the motion. Indeed, the withdrawal of
A. THE SECRETARY OF THE DOJ COMMITTED GRAVE ABUSE OF DISCRETION the criminal cases did not occur, nay, could not have occurred, without the trial
AMOUNTING TO WANT OR EXCESS OF JURISDICTION IN REVERSING AND court’s imprimatur. As such, the DOJ’s directive for the withdrawal of the criminal cases
SETTING ASIDE THE RESOLUTON OF THE CITY PROSECUTOR OF NAGA CITY against Soriano did not divest nor oust the trial court of its jurisdiction.
FINDING A PRIMA FACIE CASE AGAINST PRIVATE RESPONDENT [SORIANO], FOR Regrettably, a perusal of the RTC’s Orders reveals that the trial court relied solely on the
THE SAME HAS NO LEGAL BASES AND IS NOT IN ACCORD WITH THE Resolution of the DOJ Secretary and his determination that the Informations for estafa against
JURISPRUDENTIAL RULINGS ON THE MATTER.14 Soriano ought to be withdrawn. The trial court abdicated its judicial power and refused to

47
perform a positive duty enjoined by law. On one occasion, we have declared that while the xxxx
recommendation of the prosecutor or the ruling of the Secretary of Justice is persuasive, it is It is beyond cavil that double jeopardy did not set in. Double jeopardy exists when the
not binding on courts.16 We shall return to this point shortly. following requisites are present: (1) a first jeopardy attached prior to the second; (2) the first
In the same vein, the reinstatement of the criminal cases against Soriano will not violate her jeopardy has been validly terminated; and (3) a second jeopardy is for the same offense as in
constitutional right against double jeopardy. the first. A first jeopardy attaches only (a) after a valid indictment; (b) before a competent
Section 7,17 Rule 117 of the Rules of Court provides for the requisites for double jeopardy to court; (c) after arraignment; (d) when a valid plea has been entered; and (e) when the accused
set in: (1) a first jeopardy attached prior to the second; (2) the first jeopardy has been validly has been acquitted or convicted, or the case dismissed or otherwise terminated without
terminated; and (3) a second jeopardy is for the same offense as in the first. A first jeopardy his express consent.
attaches only (a) after a valid indictment; (b) before a competent court; (c) after arraignment; Since we have held that the March 17, 2004 Order granting the motion to dismiss was
(d) when a valid plea has been entered; and (e) when the accused has been acquitted or committed with grave abuse of discretion, then respondents were not acquitted nor was there a
convicted, or the case dismissed or otherwise terminated without his express consent.18 valid and legal dismissal or termination of the case. Ergo, the fifth requisite which requires the
In the present case, the withdrawal of the criminal cases did not include a categorical dismissal conviction and acquittal of the accused, or the dismissal of the case without the approval of the
thereof by the RTC. Double jeopardy had not set in because Soriano was not acquitted nor was accused, was not met. Thus, double jeopardy has not set in. 20 (Emphasis supplied)
there a valid and legal dismissal or termination of the fifty one (51) cases against her. It stands We now come to the crux of the matter: whether the restructuring of LISAM’s loan account
to reason therefore that the fifth requisite which requires conviction or acquittal of the extinguished Soriano’s criminal liability.
accused, or the dismissal of the case without the approval of the accused, was not met. PNB admits that although it had approved LISAM’s restructuring proposal, the actual
On both issues, the recent case of Cerezo v. People,19 is enlightening. In Cerezo, the trial court restructuring of LISAM’s account consisting of several credit lines was never reduced into
simply followed the prosecution’s lead on how to proceed with the libel case against the three writing. PNB argues that the stipulations therein such as the provisions on the schedule of
accused. The prosecution twice changed their mind on whether there was probable cause to payment of the principal obligation, interests, and penalties, must be in writing to be valid and
indict the accused for libel. On both occasions, the trial court granted the prosecutor’s motions. binding between the parties. PNB further postulates that assuming the restructuring was
Ultimately, the DOJ Secretary directed the prosecutor to re-file the Information against the reduced into writing, LISAM failed to comply with the conditions precedent for its effectivity,
accused which the trial court forthwith reinstated. Ruling on the same issues raised by PNB in specifically, the payment of interest and other charges, and the submission of the titles to the
this case, we emphasized, thus: real properties in Tandang Sora, Quezon City. On the whole, PNB is adamant that the events
x x x. In thus resolving a motion to dismiss a case or to withdraw an Information, the trial concerning the restructuring of LISAM’s loan did not affect the TR security, thus, Soriano’s
court should not rely solely and merely on the findings of the public prosecutor or the criminal liability thereunder subsists.
Secretary of Justice. It is the court’s bounden duty to assess independently the merits of the On the other hand, the appellate court agreed with the ruling of the DOJ Secretary that the
motion, and this assessment must be embodied in a written order disposing of the motion. x x approval of LISAM’s restructuring proposal, even if not reduced into writing, changed the
x. status of LISAM’s loan from being secured with Trust Receipts (TR’s) to one of an ordinary
In this case, it is obvious from the March 17, 2004 Order of the RTC, dismissing the criminal loan, non-payment of which does not give rise to criminal liability. The Court of Appeals
case, that the RTC judge failed to make his own determination of whether or not there was declared that there was no breach of trust constitutive of estafa through misappropriation or
a prima facie case to hold respondents for trial. He failed to make an independent evaluation conversion where the relationship between the parties is simply that of creditor and debtor, not
or assessment of the merits of the case. The RTC judge blindly relied on the manifestation and as entruster and entrustee.
recommendation of the prosecutor when he should have been more circumspect and judicious We cannot subscribe to the appellate court’s reasoning. The DOJ Secretary’s and the Court of
in resolving the Motion to Dismiss and Withdraw Information especially so when the Appeals holding that, the supposed restructuring novated the loan agreement between the
prosecution appeared to be uncertain, undecided, and irresolute on whether to indict parties is myopic.
respondents. To begin with, the purported restructuring of the loan agreement did not constitute novation.
The same holds true with respect to the October 24, 2006 Order, which reinstated the case. Novation is one of the modes of extinguishment of obligations;21 it is a single juridical act with
The RTC judge failed to make a separate evaluation and merely awaited the resolution of the a diptych function. The substitution or change of the obligation by a subsequent one
DOJ Secretary. This is evident from the general tenor of the Order and highlighted in the extinguishes the first, resulting in the creation of a new obligation in lieu of the old. 22 It is not a
following portion thereof: complete obliteration of the obligor-obligee relationship, but operates as a relative extinction
As discussed during the hearing of the Motion for Reconsideration, the Court will resolve it of the original obligation.
depending on the outcome of the Petition for Review. Considering the findings of the Article 1292 of the Civil Code which provides:
Department of Justice reversing the resolution of the City Prosecutor, the Court gives Art. 1292. In order that an obligation may be extinguished by another which substitutes the
favorable action to the Motion for Reconsideration. same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
By relying solely on the manifestation of the public prosecutor and the resolution of the DOJ obligations be on every point incompatible with each other.
Secretary, the trial court abdicated its judicial power and refused to perform a positive duty contemplates two kinds of novation: express or implied. The extinguishment of the old
enjoined by law. The said Orders were thus stained with grave abuse of discretion and violated obligation by the new one is a necessary element of novation, which may be effected either
the complainant’s right to due process. They were void, had no legal standing, and produced expressly or impliedly.
no effect whatsoever.

48
In order for novation to take place, the concurrence of the following requisites is other charges, and the submission of the titles to the real properties in Tandang Sora, Quezon
indispensable: City. These conditions precedent imposed on the restructured Omnibus Line were never
(1) There must be a previous valid obligation; refuted by Soriano who, oddly enough, failed to file a Memorandum. To our mind, Soriano’s
(2) There must be an agreement of the parties concerned to a new contract; bare assertion that the restructuring was approved by PNB cannot equate to a finding of an
(3) There must be the extinguishment of the old contract; and implied novation which extinguished Soriano’s obligation as entrustee under the TR’s.
(4) There must be the validity of the new contract. 23 Moreover, as asserted by Soriano in her counter-affidavit, the waiver pertains to penalty
Novation is never presumed, and the animus novandi, whether totally or partially, must appear charges on the Floor Stock Line. There is no showing that the waiver extinguished Soriano’s
by express agreement of the parties, or by their acts that are too clear and unmistakable. The obligation to "sell the [merchandise] for cash for [LISAM’s] account and to deliver the
contracting parties must incontrovertibly disclose that their object in executing the new proceeds thereof to PNB to be applied against its acceptance on [LISAM’s] account." Soriano
contract is to extinguish the old one. Upon the other hand, no specific form is required for an further agreed to hold the "vehicles and proceeds of the sale thereof in Trust for the payment
implied novation, and all that is prescribed by law would be an incompatibility between the of said acceptance and of any of its other indebtedness to PNB." Well-settled is the rule that,
two contracts.24 Nonetheless, both kinds of novation must still be clearly proven. 25 with respect to obligations to pay a sum of money, the obligation is not novated by an
In this case, without a written contract stating in unequivocal terms that the parties were instrument that expressly recognizes the old, changes only the terms of payment, adds other
novating the original loan agreement, thus undoubtedly eliminating an express novation, we obligations not incompatible with the old ones, or the new contract merely supplements the
look to whether there is an incompatibility between the Floor Stock Line secured by TR’s and old one.28 Besides, novation does not extinguish criminal liability. 29 It stands to reason
the subsequent restructured Omnibus Line which was supposedly approved by PNB. therefore, that Soriano’s criminal liability under the TR’s subsists considering that the civil
Soriano is confident with her assertion that PNB’s approval of her proposal to restructure obligations under the Floor Stock Line secured by TR’s were not extinguished by the
LISAM’s loan novated the loan agreement secured by TR’s. Soriano relies on the following: purported restructured Omnibus Line.
1. x x x. All the alleged trust receipt agreements were availments made by [LISAM] on the In Transpacific Battery Corporation v. Security Bank and Trust Company,30 we held that the
PNB credit facility known as "Floor Stock Line," (FSL) which is just one of the several credit restructuring of a loan agreement secured by a TR does not per se novate or extinguish the
facilities granted to [LISAM] by PNB. When my husband Leandro A. Soriano, Jr. was still criminal liability incurred thereunder:
alive, [LISAM] submitted proposals to PNB for the restructuring of all of [LISAM’s] credit x x x Neither is there an implied novation since the restructuring agreement is not
facilities. After exchanges of several letters and telephone calls, Mr. Josefino Gamboa, Senior incompatible with the trust receipt transactions.
Vice President of PNB on 12 May 1998 wrote [LISAM] informing PNB’s lack of objection to Indeed, the restructuring agreement recognizes the obligation due under the trust receipts
[LISAM’s] proposal of restructuring all its obligations. x x x. when it required "payment of all interest and other charges prior to restructuring." With respect
2. On September 22, 1998, Mr. Avengoza sent a letter to [LISAM], complete with attached to Michael, there was even a proviso under the agreement that the amount due is subject to
copy of PNB’s Board’s minutes of meeting, with the happy information that the Board of "the joint and solidary liability of Spouses Miguel and Mary Say and Michael Go Say." While
Directors of PNB has approved the conversion of [LISAM’s] existing credit facilities at PNB, the names of Melchor and Josephine do not appear on the restructuring agreement, it cannot be
which includes the FSL on which the trust receipts are availments, to [an] Omnibus Line (OL) presumed that they have been relieved from the obligation. The old obligation continues to
available by way of Revolving Credit Line (RCL), Discounting Line Against Post-Dated subsist subject to the modifications agreed upon by the parties.
Checks (DLAPC), and Domestic Bills Purchased Line (DBPL) and with a "Full waiver of The circumstance that motivated the parties to enter into a restructuring agreement was the
penalty charges on RCL, FSL (which is the Floor Stock Line on which the trust receipts are failure of petitioners to account for the goods received in trust and/or deliver the proceeds
availments) and Time Loan. x x x.26 thereof. To remedy the situation, the parties executed an agreement to restructure
Soriano’s reliance thereon is misplaced. The approval of LISAM’s restructuring proposal is Transpacific's obligations.
not the bone of contention in this case. The pith of the issue lies in whether, assuming a The Bank only extended the repayment term of the trust receipts from 90 days to one year
restructuring was effected, it extinguished the criminal liability on the loan obligation secured with monthly installment at 5% per annum over prime rate or 30% per annum whichever is
by trust receipts, by extinguishing the entruster-entrustee relationship and substituting it with higher. Furthermore, the interest rates were flexible in that they are subject to review every
that of an ordinary creditor-debtor relationship. Stated differently, we examine whether the amortization due. Whether the terms appeared to be more onerous or not is
Floor Stock Line is incompatible with the purported restructured Omnibus Line. immaterial.1âwphi1 Courts are not authorized to extricate parties from the necessary
The test of incompatibility is whether the two obligations can stand together, each one having consequences of their acts. The parties will not be relieved from their obligations as there was
its independent existence. If they cannot, they are incompatible and the latter obligation absolutely no intention by the parties to supersede or abrogate the trust receipt transactions.
novates the first. Corollarily, changes that breed incompatibility must be essential in nature The intention of the new agreement was precisely to revive the old obligation after the original
and not merely accidental. The incompatibility must take place in any of the essential elements period expired and the loan remained unpaid. Well-settled is the rule that, with respect to
of the obligation, such as its object, cause or principal conditions thereof; otherwise, the obligations to pay a sum of money, the obligation is not novated by an instrument that
change would be merely modificatory in nature and insufficient to extinguish the original expressly recognizes the old, changes only the terms of payment, adds other obligations not
obligation.27 incompatible with the old ones, or the new contract merely supplements the old one. 31
We have scoured the records and found no incompatibility between the Floor Stock Line and Based on all the foregoing, we find grave error in the Court of Appeals dismissal of PNB’s
the purported restructured Omnibus Line. While the restructuring was approved in principle, petition for certiorari. Certainly, while the determination of probable cause to indict a
the effectivity thereof was subject to conditions precedent such as the payment of interest and

49
respondent for a crime lies with the prosecutor, the discretion must not be exercised in a
whimsical or despotic manner tantamount to grave abuse of discretion.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-
G.R. SP No. 76243 finding no grave abuse of discretion on the part of the Secretary of Justice
is REVERSED and SET ASIDE.
The Resolution of the Secretary of Justice dated 25 June 2002, directing the City Prosecutor of
Naga City to move for the withdrawal of the Informations for estafa in relation to the Trust
Receipts Law against respondent Lilian S. Soriano, and his 29 October 2002 Resolution,
denying petitioner's Motion for Reconsideration, are ANNULLED and SET ASIDE for
having been issued with grave abuse of discretion; and the Resolution or the Naga City
Prosecutor's Office dated 19 March 2001, finding probable cause against herein respondent,
is REINSTATED. Consequently, the Orders of the Regional Trial Court, Branch 21 of Naga
City in Criminal Cases Nos. 2001-0641 to 2001-0693, except Criminal Case No. 2001-0671,
dated 27 November 2002, 21 February 2003 and 15 July 2003 are SET ASIDE and its Order
of 16 October 2002 resetting the continuation or the pre-trial is REINSTATED. The RTC is
further ordered to conduct the pretrial with dispatch.
SO ORDERED.

50
[G.R. No. 133176. August 8, 2002] On August 29, 1997, the Court of Appeals rendered judgment, the dispositive portion of
PILIPINAS BANK, petitioner, vs. ALFREDO T. ONG and LEONCIA LIM, respondents. which reads:
DECISION "WHEREFORE, in view of all the foregoing, the assailed resolutions of the public
SANDOVAL-GUTIERREZ, J.: respondents are hereby SET ASIDE and in lieu thereof a new one rendered directing the public
Petition for review on certiorari[1] of the Resolutions[2] dated January 9, 1998 and March respondents to file the appropriate criminal charges for violation of P.D. No. 115, otherwise
25, 1998 of the Court of Appeals in CA-G.R. SP No. 42005, "Pilipinas Bank vs. The known as The Trust Receipts Law, against private respondents. [15]
Honorable Secretary of Justice, the City Prosecutor of Makati City, Alfredo T. Ong and However, upon respondents motion for reconsideration, the Court of Appeals reversed
Leoncia Lim," reversing its Decision dated August 29, 1997. itself, holding that the execution of the MOA constitutes novation which "places petitioner
On April 1991, Baliwag Mahogany Corporation (BMC), through its president, Bank in estoppel to insist on the original trust relation and constitutes a bar to the filing of any
respondent Alfredo T. Ong, applied for a domestic commercial letter of credit with petitioner criminal information for violation of the trust receipts law." [16]
Pilipinas Bank (hereinafter referred to as the bank) to finance the purchase of about 100,000 The bank filed a motion for reconsideration but was denied. [17] Hence this petition.
board feet of "Air Dried, Dark Red Lauan" sawn lumber. Petitioner bank contends that the MOA did not novate, much less extinguish, the
The bank approved the application and issued Letter of Credit No. 91/725-HO in the existing obligations of BMC under the trust receipt agreement. The bank, through the
amount of P3,500,000.00. To secure payment of the amount, BMC, through respondent Ong, execution of the MOA, merely assisted BMC to settle its obligations by rescheduling the
executed two (2) trust receipts[3] providing inter alia that it shall turn over the proceeds of the same. Hence, when BMC defaulted in its payment, all its rights, including the right to charge
goods to the bank, if sold, or return the goods, if unsold, upon maturity on July 28, 1991 and respondents for violation of the Trust Receipts Law, were revived.
August 4, 1991. Respondents Ong and Lim maintain that the MOA, which has the effect of a
On due dates, BMC failed to comply with the trust receipt agreement. On November 22, compromise agreement, novated BMCs existing obligations under the trust receipt
1991, it filed with the Securities and Exchange Commission (SEC) a Petition for agreement. The novation converted the parties relationship into one of an ordinary creditor and
Rehabilitation and for a Declaration in a State of Suspension of Payments under Section 6 (c) debtor. Moreover, the execution of the MOA precludes any criminal liability on their part
of P.D. No. 902-A,[4] as amended, docketed as SEC Case No. 4109. After BMC informed its which may arise in case they violate any provision thereof.
creditors (including the bank) of the filing of the petition, a Creditors' Meeting was held to: The only issue for our determination is whether respondents can be held liable for
(a) inform all creditor banks of the present status of BMC to avert any action which violation of the Trust Receipts Law.
would affect the company's operations, and (b) reach an accord on a common course of action Section 4 of PD No. 115 (The Trust Receipts Law) defines a trust receipt as any
to restore the company to sound financial footing. transaction by and between a person referred to as the entruster, and another person referred to
On January 8, 1992, the SEC issued an order [5] creating a Management Committee as the entrustee, whereby the entruster who owns or holds absolute title or security interest
wherein the bank is represented. The Committee shall, among others, undertake the over certain specified goods, documents or instruments, releases the same to the possession of
management of BMC, take custody and control of all its existing assets and liabilities, study, the entrustee upon the latter's execution and delivery to the entruster of a signed document
review and evaluate its operation and/or the feasibility of its being restructured. called a "trust receipt" wherein the entrustee binds himself to hold the designated goods,
On October 13, 1992, BMC and a consortium of 14 of its creditor banks entered into a documents or instruments with the obligation to turn over to the entruster the proceeds thereof
Memorandum of Agreement[6] (MOA) rescheduling the payment of BMCs existing debts. to the extent of the amount owing to the entruster or as appears in the trust receipt, or the
On November 27, 1992, the SEC rendered a Decision [7] approving the Rehabilitation goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in
Plan of BMC as contained in the MOA and declaring it in a state of suspension of payments. accordance with the terms and conditions specified in the trust receipt. [18]
However, BMC and respondent Ong defaulted in the payment of their obligations under Failure of the entrustee to turn over the proceeds of the sale of the goods covered by a
the rescheduled payment scheme provided in the MOA. Thus, on April 1994, the bank filed trust receipt to the entruster or to return the goods, if they were not disposed of, shall
with the Makati City Prosecutors Office a complaint [8] charging respondents Ong and Leoncia constitute the crime of estafa under Article 315, par. 1(b) of the Revised Penal Code. [19] If the
Lim (as president and treasurer of BMC, respectively) with violation of the Trust Receipts violation or offense is committed by a corporation, the penalty shall be imposed upon the
Law (PD No. 115), docketed as I.S. No. 94-3324. The bank alleged that both respondents directors, officers, employees or other officials or persons therein responsible for the offense,
failed to pay their obligations under the trust receipts despite demand. [9] without prejudice to the civil liabilities arising from the criminal offense. [20] It is on this
On July 7, 1994, 3rd Assistant Prosecutor Edgardo E. Bautista issued a premise that petitioner bank charged respondents with violation of the Trust Receipts Law.
Resolution[10]recommending the dismissal of the complaint. On July 11, 1994, the Resolution Mere failure to deliver the proceeds of the sale or the goods, if not sold, constitutes
was approved by Provincial Prosecutor of Rizal Herminio T. Ubana, Sr. [11] The bank filed a violation of PD No. 115.[21] However, what is being punished by the law is the dishonesty and
motion for reconsideration but was denied. abuse of confidence in the handling of money or goods to the prejudice of another regardless
Upon appeal by the bank, the Department of Justice (DOJ) rendered judgment [12]denying of whether the latter is the owner. [22]
the same for lack of merit. Its motion for reconsideration was likewise denied. [13] In this case, no dishonesty nor abuse of confidence can be attributed to
On July 5, 1996, the bank filed with this Court a petition for certiorari and mandamus respondents.Record shows that BMC failed to comply with its obligations upon maturity of
seeking to annul the resolution of the DOJ. In a Resolution dated August 21, 1996, this Court the trust receipts due to serious liquidity problems, prompting it to file a Petition for
referred the petition to the Court of Appeals for proper determination and disposition. [14] Rehabilitation and Declaration in a State of Suspension of Payments. It bears emphasis that
when petitioner bank made a demand upon BMC on February 11, 1994 to comply with its

51
obligations under the trust receipts, the latter was already under the control of the Management bank) to reschedule the existing credits. Moreover, it is erroneous to assume that the revesting
Committee created by the SEC in its Order dated January 8, 1992. [23] The Management of "all the rights of lenders against the borrower" means that petitioner can charge respondents
Committee took custody of all BMCs assets and liabilities, including the red lauan lumber for violation of the Trust Receipts Law under the original trust receipt agreement. As
subject of the trust receipts, and authorized their use in the ordinary course of business explained earlier, the execution of the MOA extinguished respondents obligation under the
operations. Clearly, it was the Management Committee which could settle BMCs trust receipts. Respondents liability, if any, would only be civil in nature since the trust receipts
obligations. Moreover, it has not escaped this Courts observation that respondent Ong paid were transformed into mere loan documents after the execution of the MOA. This is
P21,000,000.00 in compliance with the equity infusion required by the MOA.The mala reinforced by the fact that the mortgage contracts executed by the BMC survive despite its
prohibita nature of the offense notwithstanding, respondents intent to misuse or non-compliance with the conditions set forth in the MOA.
misappropriate the goods or their proceeds has not been established by the records. [24] All told, we find no reversible error committed by the Court of Appeals in rendering the
Did the MOA novate the trust agreement between the parties? assailed Resolutions.
In Quinto vs. People,[25] this Court held that there are two ways which could indicate the WHEREFORE, the petition is DENIED. The assailed Resolutions of the Court of
presence of novation, thereby producing the effect of extinguishing an obligation by another Appeals dated January 9, 1998 and March 25, 1998 in CA-G.R. SP No. 42005 are hereby
which substitutes the same. The first is when novation has been stated and declared in AFFIRMED.
unequivocal terms. The second is when the old and the new obligations are incompatible on SO ORDERED.
every point. The test of incompatibility is whether or not the two obligations can stand
together. If they cannot, they are incompatible and the latter obligation novates the
first. Corollarily, changes that breed incompatibility must be essential in nature and not merely
accidental. The incompatibility must take place in any of the essential elements of the
obligation, such as its object, cause or principal conditions, otherwise, the change is merely
modificatory in nature and insufficient to extinguish the original obligation.
Contrary to petitioner's contention, the MOA did not only reschedule BMCs debts, but
more importantly, it provided principal conditions which are incompatible with the trust
agreement. The undisputed points of incompatibility between the two agreements are:
Points of incompatibility Trust Receipt MOA
1) Nature of contract Trust Receipt Loan[26]
2) Juridical relationship Trustor-Trustee Lender-Borrower
3) Status of obligation Matured Payable within 7 years[27]
4) Governing law Criminal Civil & Commercial[28]
5) Security offered Trust Receipts Real estate/chattel mortgages[29]
6) Interest rate per annum (Unspecified) 14%[30]
7) Default charges 24% 14%[31]
8) No. of parties 3 16
Hence, applying the pronouncement in Quinto, we can safely conclude that the MOA
novated and effectively extinguished BMC's obligations under the trust receipt agreement.
Petitioner bank's argument that BMC's non-compliance with the MOA revived
respondents original liabilities under the trust receipt agreement is completely
misplaced.Section 8.4 of the MOA on termination reads:
"8.4 Termination. Any provision of this Agreement to the contrary notwithstanding, if the
conditions for rescheduling specified in Section 7 shall not be complied with on such later date
as the Qualified Majority Lenders in their sole and absolute discretion may agree in writing,
then
(i) the obligation of the Lenders to reschedule the Existing Credits as contemplated hereby
shall automatically terminate on such date:
(ii) the Existing Agreements shall continue in full force and effect on the remaining loan
balances as if this Agreement had not been entered into;
(iii) all the rights of the lenders against the borrower and Spouses Ong prior to the agreement
shall revest to the lenders."
Indeed, what is automatically terminated in case BMC failed to comply with the
conditions under the MOA is not the MOA itself but merely the obligation of the lender (the

52
THIRD DIVISION p. 26). On January 5, 1974, all the textile machineries in the defendant-
G.R. No. 74886 December 8, 1992 appellant's factory were sold to AIC Development Corporation for
PRUDENTIAL BANK, petitioner, P300,000.00 (Exhibit K, Ibid., p. 29).
vs. The obligation of the defendant-appellant arising from the letter of credit
INTERMEDIATE APPELLATE COURT, PHILIPPINE RAYON MILLS, INC. and and the trust receipt remained unpaid and unliquidated. Repeated formal
ANACLETO R. CHI, respondents. demands (Exhibits U, V, and W, Ibid., pp. 62, 63, 64) for the payment of
the said trust receipt yielded no result Hence, the present action for the
DAVIDE, JR., J.: collection of the principal amount of P956,384.95 was filed on October 3,
Petitioner seeks to review and set aside the decision 1 of public respondent; Intermediate 1974 against the defendant-appellant and Anacleto R. Chi. In their
Appellate Court (now Court of Appeals), dated 10 March 1986, in AC-G.R. No. 66733 which respective answers, the defendants interposed identical special
affirmed in toto the 15 June 1978 decision of Branch 9 (Quezon City) of the then Court of defenses, viz., the complaint states no cause of action; if there is, the same
First Instance (now Regional Trial Court) of Rizal in Civil Case No. Q-19312. The latter has prescribed; and the plaintiff is guilty of laches. 2
involved an action instituted by the petitioner for the recovery of a sum of money representing On 15 June 1978, the trial court rendered its decision the dispositive portion of which reads:
the amount paid by it to the Nissho Company Ltd. of Japan for textile machinery imported by WHEREFORE, judgment is hereby rendered sentencing the defendant
the defendant, now private respondent, Philippine Rayon Mills, Inc. (hereinafter Philippine Philippine Rayon Mills, Inc. to pay plaintiff the sum of P153,645.22, the
Rayon), represented by co-defendant Anacleto R. Chi. amounts due under Exhibits "X" & "X-1", with interest at 6% per annum
The facts which gave rise to the instant controversy are summarized by the public respondent beginning September 15, 1974 until fully paid.
as follows: Insofar as the amounts involved in drafts Exhs. "X" (sic) to "X-11",
On August 8, 1962, defendant-appellant Philippine Rayon Mills, Inc. inclusive, the same not having been accepted by defendant Philippine
entered into a contract with Nissho Co., Ltd. of Japan for the importation Rayon Mills, Inc., plaintiff's cause of action thereon has not accrued,
of textile machineries under a five-year deferred payment plan (Exhibit B, hence, the instant case is premature.
Plaintiff's Folder of Exhibits, p 2). To effect payment for said machineries, Insofar as defendant Anacleto R. Chi is concerned, the case is dismissed.
the defendant-appellant applied for a commercial letter of credit with the Plaintiff is ordered to pay defendant Anacleto R. Chi the sum of
Prudential Bank and Trust Company in favor of Nissho. By virtue of said P20,000.00 as attorney's fees.
application, the Prudential Bank opened Letter of Credit No. DPP-63762 With costs against defendant Philippine Rayon Mills, Inc.
for $128,548.78 (Exhibit A, Ibid., p. 1). Against this letter of credit, drafts SO ORDERED. 3
were drawn and issued by Nissho (Exhibits X, X-1 to X-11, Ibid., pp. 65, Petitioner appealed the decision to the then Intermediate Appellate Court. In urging the said
66 to 76), which were all paid by the Prudential Bank through its court to reverse or modify the decision, petitioner alleged in its Brief that the trial court erred
correspondent in Japan, the Bank of Tokyo, Ltd. As indicated on their in (a) disregarding its right to reimbursement from the private respondents for the entire
faces, two of these drafts (Exhibit X and X-1, Ibid., pp. 65-66) were unpaid balance of the imported machines, the total amount of which was paid to the Nissho
accepted by the defendant-appellant through its president, Anacleto R. Company Ltd., thereby violating the principle of the third party payor's right to reimbursement
Chi, while the others were not (Exhibits X-2 to X-11, Ibid., pp. 66 to 76). provided for in the second paragraph of Article 1236 of the Civil Code and under the rule
Upon the arrival of the machineries, the Prudential Bank indorsed the against unjust enrichment; (b) refusing to hold Anacleto R. Chi, as the responsible officer of
shipping documents to the defendant-appellant which accepted delivery of defendant corporation, liable under Section 13 of P.D No 115 for the entire unpaid balance of
the same. To enable the defendant-appellant to take delivery of the the imported machines covered by the bank's trust receipt (Exhibit "C"); (c) finding that the
machineries, it executed, by prior arrangement with the Prudential Bank, a solidary guaranty clause signed by Anacleto R. Chi is not a guaranty at all; (d) controverting
trust receipt which was signed by Anacleto R. Chi in his capacity as the judicial admissions of Anacleto R. Chi that he is at least a simple guarantor of the said trust
President (sic) of defendant-appellant company (Exhibit C, Ibid., p. 13). receipt obligation; (e) contravening, based on the assumption that Chi is a simple guarantor,
At the back of the trust receipt is a printed form to be accomplished by Articles 2059, 2060 and 2062 of the Civil Code and the related evidence and jurisprudence
two sureties who, by the very terms and conditions thereof, were to be which provide that such liability had already attached; (f) contravening the judicial admissions
jointly and severally liable to the Prudential Bank should the defendant- of Philippine Rayon with respect to its liability to pay the petitioner the amounts involved in
appellant fail to pay the total amount or any portion of the drafts issued by the drafts (Exhibits "X", "X-l" to "X-11''); and (g) interpreting "sight" drafts as requiring
Nissho and paid for by Prudential Bank. The defendant-appellant was able acceptance by Philippine Rayon before the latter could be held liable thereon. 4
to take delivery of the textile machineries and installed the same at its In its decision, public respondent sustained the trial court in all respects. As to the first and last
factory site at 69 Obudan Street, Quezon City. assigned errors, it ruled that the provision on unjust enrichment, Article 2142 of the Civil
Sometime in 1967, the defendant-appellant ceased business operation Code, applies only if there is no express contract between the parties and there is a clear
(sic). On December 29, 1969, defendant-appellant's factory was leased by showing that the payment is justified. In the instant case, the relationship existing between the
Yupangco Cotton Mills for an annual rental of P200,000.00 (Exhibit petitioner and Philippine Rayon is governed by specific contracts, namely the application for
I, Ibid., p. 22). The lease was renewed on January 3, 1973 (Exhibit J, Ibid., letters of credit, the promissory note, the drafts and the trust receipt. With respect to the last

53
ten (10) drafts (Exhibits "X-2" to "X-11") which had not been presented to and were not VIII. WHETHER OR NOT SIGHT DRAFTS REQUIRE PRIOR
accepted by Philippine Rayon, petitioner was not justified in unilaterally paying the amounts ACCEPTANCE FROM RESPONDENT PHIL. RAYON BEFORE THE
stated therein. The public respondent did not agree with the petitioner's claim that the drafts LATTER BECOMES LIABLE TO PETITIONER. 7
were sight drafts which did not require presentment for acceptance to Philippine Rayon In the Resolution of 12 March 1990, 8 this Court gave due course to the petition after the
because paragraph 8 of the trust receipt presupposes prior acceptance of the drafts. Since the filing of the Comment thereto by private respondent Anacleto Chi and of the Reply to the
ten (10) drafts were not presented and accepted, no valid demand for payment can be made. latter by the petitioner; both parties were also required to submit their respective memoranda
Public respondent also disagreed with the petitioner's contention that private respondent Chi is which they subsequently complied with.
solidarily liable with Philippine Rayon pursuant to Section 13 of P.D. No. 115 and based on As We see it, the issues may be reduced as follows:
his signature on the solidary guaranty clause at the dorsal side of the trust receipt. As to the 1. Whether presentment for acceptance of the drafts
first contention, the public respondent ruled that the civil liability provided for in said Section was indispensable to make Philippine Rayon liable
13 attaches only after conviction. As to the second, it expressed misgivings as to whether Chi's thereon;
signature on the trust receipt made the latter automatically liable thereon because the so-called 2. Whether Philippine Rayon is liable on the basis of
solidary guaranty clause at the dorsal portion of the trust receipt is to be signed not by one (1) the trust receipt;
person alone, but by two (2) persons; the last sentence of the same is incomplete and unsigned 3. Whether private respondent Chi is jointly and
by witnesses; and it is not acknowledged before a notary public. Besides, even granting that it severally liable with Philippine Rayon for the
was executed and acknowledged before a notary public, Chi cannot be held liable therefor obligation sought to be enforced and if not, whether he
because the records fail to show that petitioner had either exhausted the properties of may be considered a guarantor; in the latter situation,
Philippine Rayon or had resorted to all legal remedies as required in Article 2058 of the Civil whether the case should have been dismissed on the
Code. As provided for under Articles 2052 and 2054 of the Civil Code, the obligation of a ground of lack of cause of action as there was no prior
guarantor is merely accessory and subsidiary, respectively. Chi's liability would therefore arise exhaustion of Philippine Rayon's properties.
only when the principal debtor fails to comply with his obligation. 5 Both the trial court and the public respondent ruled that Philippine Rayon could be held liable
Its motion to reconsider the decision having been denied by the public respondent in its for the two (2) drafts, Exhibits "X" and "X-1", because only these appear to have been
Resolution of 11 June 1986, 6 petitioner filed the instant petition on 31 July 1986 submitting accepted by the latter after due presentment. The liability for the remaining ten (10) drafts
the following legal issues: (Exhibits "X-2" to "X-11" inclusive) did not arise because the same were not presented for
I. WHETHER OR NOT THE RESPONDENT APPELLATE COURT acceptance. In short, both courts concluded that acceptance of the drafts by Philippine Rayon
GRIEVOUSLY ERRED IN DENYING PETITIONER'S CLAIM FOR was indispensable to make the latter liable thereon. We are unable to agree with this
FULL REIMBURSEMENT AGAINST THE PRIVATE RESPONDENTS proposition. The transaction in the case at bar stemmed from Philippine Rayon's application
FOR THE PAYMENT PETITIONER MADE TO NISSHO CO. LTD. for a commercial letter of credit with the petitioner in the amount of $128,548.78 to cover the
FOR THE BENEFIT OF PRIVATE RESPONDENT UNDER ART. 1283 former's contract to purchase and import loom and textile machinery from Nissho Company,
OF THE NEW CIVIL CODE OF THE PHILIPPINES AND UNDER THE Ltd. of Japan under a five-year deferred payment plan. Petitioner approved the application. As
GENERAL PRINCIPLE AGAINST UNJUST ENRICHMENT; correctly ruled by the trial court in its Order of 6 March 1975: 9
II. WHETHER OR NOT RESPONDENT CHI IS SOLIDARILY LIABLE . . . By virtue of said Application and Agreement for Commercial Letter of
UNDER THE TRUST RECEIPT (EXH. C); Credit, plaintiff bank 10 was under obligation to pay through its
III. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL correspondent bank in Japan the drafts that Nisso (sic) Company, Ltd.,
ADMISSIONS OF RESPONDENT CHI HE IS LIABLE THEREON periodically drew against said letter of credit from 1963 to 1968, pursuant
AND TO WHAT EXTENT; to plaintiff's contract with the defendant Philippine Rayon Mills, Inc. In
IV. WHETHER OR NOT RESPONDENT CHI IS MERELY A SIMPLE turn, defendant Philippine Rayon Mills, Inc., was obligated to pay plaintiff
GUARANTOR; AND IF SO; HAS HIS LIABILITY AS SUCH bank the amounts of the drafts drawn by Nisso (sic) Company, Ltd. against
ALREADY ATTACHED; said plaintiff bank together with any accruing commercial charges,
V. WHETHER OR NOT AS THE SIGNATORY AND RESPONSIBLE interest, etc. pursuant to the terms and conditions stipulated in the
OFFICER OF RESPONDENT PHIL. RAYON RESPONDENT CHI IS Application and Agreement of Commercial Letter of Credit Annex "A".
PERSONALLY LIABLE PURSUANT TO THE PROVISION OF A letter of credit is defined as an engagement by a bank or other person made at the request of
SECTION 13, P.D. 115; a customer that the issuer will honor drafts or other demands for payment upon compliance
VI. WHETHER OR NOT RESPONDENT PHIL. RAYON IS LIABLE with the conditions specified in the credit. 11Through a letter of credit, the bank merely
TO THE PETITIONER UNDER THE TRUST RECEIPT (EXH. C); substitutes its own promise to pay for one of its customers who in return promises to pay the
VII. WHETHER OR NOT ON THE BASIS OF THE JUDICIAL bank the amount of funds mentioned in the letter of credit plus credit or commitment fees
ADMISSIONS RESPONDENT PHIL. RAYON IS LIABLE TO THE mutually agreed upon. 12 In the instant case then, the drawee was necessarily the herein
PETITIONER UNDER THE DRAFTS (EXHS. X, X-1 TO X-11) AND petitioner. It was to the latter that the drafts were presented for payment. In fact, there was no
TO WHAT EXTENT; need for acceptance as the issued drafts are sight drafts. Presentment for acceptance is

54
necessary only in the cases expressly provided for in Section 143 of the Negotiable drafts, thereby necessitating acceptance, it would be the petitioner — and not
Instruments Law (NIL). 13 The said section reads: Philippine Rayon — which had to accept the same for the latter was not the drawee.
Sec. 143. When presentment for acceptance must be made. — Presentment Presentment for acceptance is defined an the production of a bill of exchange to a
for acceptance must be made: drawee for acceptance. 18The trial court and the public respondent, therefore, erred in
(a) Where the bill is payable after ruling that presentment for acceptance was an indispensable requisite for Philippine
sight, or in any other case, where Rayon's liability on the drafts to attach. Contrary to both courts' pronouncements,
presentment for acceptance is Philippine Rayon immediately became liable thereon upon petitioner's payment
necessary in order to fix the thereof. Such is the essence of the letter of credit issued by the petitioner. A different
maturity of the instrument; or conclusion would violate the principle upon which commercial letters of credit are
(b) Where the bill expressly founded because in such a case, both the beneficiary and the issuer, Nissho
stipulates that it shall be presented Company Ltd. and the petitioner, respectively, would be placed at the mercy of
for acceptance; or Philippine Rayon even if the latter had already received the imported machinery and
(c) Where the bill is drawn the petitioner had fully paid for it. The typical setting and purpose of a letter of
payable elsewhere than at the credit are described in Hibernia Bank and Trust Co.vs. J. Aron & Co., Inc., 19 thus:
residence or place of business of Commercial letters of credit have come into general use in international
the drawee. sales transactions where much time necessarily elapses between the sale
In no other case is presentment for acceptance necessary in order to render and the receipt by a purchaser of the merchandise, during which interval
any party to the bill liable. great price changes may occur. Buyers and sellers struggle for the
Obviously then, sight drafts do not require presentment for acceptance. advantage of position. The seller is desirous of being paid as surely and as
The acceptance of a bill is the signification by the drawee of his assent to the order of the soon as possible, realizing that the vendee at a distant point has it in his
drawer; 14 this may be done in writing by the drawee in the bill itself, or in a separate power to reject on trivial grounds merchandise on arrival, and cause
instrument. 15 considerable hardship to the shipper. Letters of credit meet this condition
The parties herein agree, and the trial court explicitly ruled, that the subject, drafts are sight by affording celerity and certainty of payment. Their purpose is to insure
drafts. Said the latter: to a seller payment of a definite amount upon presentation of documents.
. . . In the instant case the drafts being at sight, they are supposed to be The bank deals only with documents. It has nothing to do with the quality
payable upon acceptance unless plaintiff bank has given the Philippine of the merchandise. Disputes as to the merchandise shipped may arise and
Rayon Mills Inc. time within which to pay the same. The first two drafts be litigated later between vendor and vendee, but they may not impede
(Annexes C & D, Exh. X & X-1) were duly accepted as indicated on their acceptance of drafts and payment by the issuing bank when the proper
face (sic), and upon such acceptance should have been paid forthwith. documents are presented.
These two drafts were not paid and although Philippine Rayon Mills The trial court and the public respondent likewise erred in disregarding the trust receipt and in
ought to have paid the same, the fact remains that until now they are still not holding that Philippine Rayon was liable thereon. In People vs. Yu Chai Ho, 20 this Court
unpaid. 16 explains the nature of a trust receipt by quoting In re Dunlap Carpet Co., 21 thus:
Corollarily, they are, pursuant to Section 7 of the NIL, payable on demand. Section 7 provides: By this arrangement a banker advances money to an intending importer,
Sec. 7. When payable on demand. — An instrument is payable on demand and thereby lends the aid of capital, of credit, or of business facilities and
— agencies abroad, to the enterprise of foreign commerce. Much of this trade
(a) When so it is expressed to be could hardly be carried on by any other means, and therefore it is of the
payable on demand, or at sight, or first importance that the fundamental factor in the transaction, the banker's
on presentation; or advance of money and credit, should receive the amplest protection.
(b) In which no time for payment Accordingly, in order to secure that the banker shall be repaid at the
in expressed. critical point — that is, when the imported goods finally reach the hands
Where an instrument is issued, accepted, or indorsed when overdue, it is, of the intended vendee — the banker takes the full title to the goods at the
as regards the person so issuing, accepting, or indorsing it, payable on very beginning; he takes it as soon as the goods are bought and settled for
demand. (emphasis supplied) by his payments or acceptances in the foreign country, and he continues to
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at hold that title as his indispensable security until the goods are sold in the
maturity of any accepted draft, bill of exchange or indebtedness shall not be United States and the vendee is called upon to pay for them. This security
extinguished or modified" 17 does not, contrary to the holding of the public is not an ordinary pledge by the importer to the banker, for the importer
respondent, contemplate prior acceptance by Philippine Rayon, but by the petitioner. has never owned the goods, and moreover he is not able to deliver the
Acceptance, however, was not even necessary in the first place because the drafts possession; but the security is the complete title vested originally in the
which were eventually issued were sight drafts And even if these were not sight bankers, and this characteristic of the transaction has again and again been

55
recognized and protected by the courts. Of course, the title is at bottom a action for damages, entirely separate and distinct from the criminal action, may be brought by
security title, as it has sometimes been called, and the banker is always the injured party in cases of defamation, fraud and physical injuries. Estafa falls under fraud.
under the obligation to reconvey; but only after his advances have been We also conclude, for the reason hereinafter discussed, and not for that adduced by the public
fully repaid and after the importer has fulfilled the other terms of the respondent, that private respondent Chi's signature in the dorsal portion of the trust receipt did
contract. not bind him solidarily with Philippine Rayon. The statement at the dorsal portion of the said
As further stated in National Bank vs. Viuda e Hijos de Angel Jose, 22 trust receipts: trust receipt, which petitioner describes as a "solidary guaranty clause", reads:
. . . [I]n a certain manner, . . . partake of the nature of a conditional sale as In consideration of the PRUDENTIAL BANK AND TRUST COMPANY
provided by the Chattel Mortgage Law, that is, the importer becomes complying with the foregoing, we jointly and severally agree and
absolute owner of the imported merchandise as soon an he has paid its undertake to pay on demand to the PRUDENTIAL BANK AND TRUST
price. The ownership of the merchandise continues to be vested in the COMPANY all sums of money which the said PRUDENTIAL BANK
owner thereof or in the person who has advanced payment, until he has AND TRUST COMPANY may call upon us to pay arising out of or
been paid in full, or if the merchandise has already been sold, the proceeds pertaining to, and/or in any event connected with the default of and/or
of the sale should be turned over to him by the importer or by his non-fulfillment in any respect of the undertaking of the aforesaid:
representative or successor in interest. PHILIPPINE RAYON MILLS, INC.
Under P.D. No. 115, otherwise known an the Trust Receipts Law, which took effect on 29 We further agree that the PRUDENTIAL BANK AND TRUST
January 1973, a trust receipt transaction is defined as "any transaction by and between a COMPANY does not have to take any steps or exhaust its remedy against
person referred to in this Decree as the entruster, and another person referred to in this Decree aforesaid:
as the entrustee, whereby the entruster, who owns or holds absolute title or security interests' before making demand on me/us.
over certain specified goods, documents or instruments, releases the same to the possession of (Sgd.) Ana
the entrustee upon the latter's execution and delivery to the entruster of a signed document ANACLET
called the "trust receipt" wherein the entrustee binds himself to hold the designated goods, Petitioner insists that by virtue of the clear wording of the statement, specifically the clause ". .
documents or instruments in trust for the entruster and to sell or otherwise dispose of the . we jointly and severally agree and undertake . . .," and the concluding sentence on
goods, documents or instruments with the obligation to turn over to the entruster the proceeds exhaustion, Chi's liability therein is solidary.
thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or In holding otherwise, the public respondent ratiocinates as follows:
the goods, instruments themselves if they are unsold or not otherwise disposed of, in With respect to the second argument, we have our misgivings as to
accordance with the terms and conditions specified in the trusts receipt, or for other purposes whether the mere signature of defendant-appellee Chi of (sic) the guaranty
substantially equivalent to any one of the following: . . ." agreement, Exhibit "C-1", will make it an actionable document. It should
It is alleged in the complaint that private respondents "not only have presumably put said be noted that Exhibit "C-1" was prepared and printed by the plaintiff-
machinery to good use and have profited by its operation and/or disposition but very recent appellant. A perusal of Exhibit "C-1" shows that it was to be signed and
information that (sic) reached plaintiff bank that defendants already sold the machinery executed by two persons. It was signed only by defendant-appellee Chi.
covered by the trust receipt to Yupangco Cotton Mills," and that "as trustees of the property Exhibit "C-1" was to be witnessed by two persons, but no one signed in
covered by the trust receipt, . . . and therefore acting in fiduciary (sic) capacity, defendants that capacity. The last sentence of the guaranty clause is incomplete.
have willfully violated their duty to account for the whereabouts of the machinery covered by Furthermore, the plaintiff-appellant also failed to have the purported
the trust receipt or for the proceeds of any lease, sale or other disposition of the same that they guarantee clause acknowledged before a notary public. All these show that
may have made, notwithstanding demands therefor; defendants have fraudulently misapplied the alleged guaranty provision was disregarded and, therefore, not
or converted to their own use any money realized from the lease, sale, and other disposition of consummated.
said machinery." 23 While there is no specific prayer for the delivery to the petitioner by But granting arguendo that the guaranty provision in Exhibit "C-1" was
Philippine Rayon of the proceeds of the sale of the machinery covered by the trust receipt, fully executed and acknowledged still defendant-appellee Chi cannot be
such relief is covered by the general prayer for "such further and other relief as may be just held liable thereunder because the records show that the plaintiff-appellant
and equitable on the premises." 24 And although it is true that the petitioner commenced a had neither exhausted the property of the defendant-appellant nor had it
criminal action for the violation of the Trust Receipts Law, no legal obstacle prevented it from resorted to all legal remedies against the said defendant-appellant as
enforcing the civil liability arising out of the trust, receipt in a separate civil action. Under provided in Article 2058 of the Civil Code. The obligation of a guarantor
Section 13 of the Trust Receipts Law, the failure of an entrustee to turn over the proceeds of is merely accessory under Article 2052 of the Civil Code and subsidiary
the sale of goods, documents or instruments covered by a trust receipt to the extent of the under Article 2054 of the Civil Code. Therefore, the liability of the
amount owing to the entruster or as appear in the trust receipt or to return said goods, defendant-appellee arises only when the principal debtor fails to comply
documents or instruments if they were not sold or disposed of in accordance with the terms of with his obligation. 27
the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Our own reading of the questioned solidary guaranty clause yields no other conclusion than
315, paragraph 1(b) of the Revised Penal Code. 25 Under Article 33 of the Civil Code, a civil that the obligation of Chi is only that of a guarantor. This is further bolstered by the last
sentence which speaks of waiver of exhaustion, which, nevertheless, is ineffective in this case

56
because the space therein for the party whose property may not be exhausted was not filled up. offense is committed by a corporation, partnership, association or other
Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be raised by juridical entities, the penalty provided for in this Decree shall be imposed
a guarantor before he may be held liable for the obligation. Petitioner likewise admits that the upon the directors, officers, employees or other officials or persons therein
questioned provision is a solidary guaranty clause, thereby clearly distinguishing it from a responsible for the offense, without prejudice to the civil liabilities arising
contract of surety. It, however, described the guaranty as solidary between the guarantors; this from the criminal offense.
would have been correct if two (2) guarantors had signed it. The clause "we jointly and A close examination of the quoted provision reveals that it is the last sentence which provides
severally agree and undertake" refers to the undertaking of the two (2) parties who are to sign for the correct solution. It is clear that if the violation or offense is committed by a corporation,
it or to the liability existing between themselves. It does not refer to the undertaking between partnership, association or other juridical entities, the penalty shall be imposed upon the
either one or both of them on the one hand and the petitioner on the other with respect to the directors, officers, employees or other officials or persons therein responsible for the offense.
liability described under the trust receipt. Elsewise stated, their liability is not divisible as The penalty referred to is imprisonment, the duration of which would depend on the amount of
between them, i.e., it can be enforced to its full extent against any one of them. the fraud as provided for in Article 315 of the Revised Penal Code. The reason for this is
Furthermore, any doubt as to the import, or true intent of the solidary guaranty clause should obvious: corporations, partnerships, associations and other juridical entities cannot be put in
be resolved against the petitioner. The trust receipt, together with the questioned solidary jail. However, it is these entities which are made liable for the civil liability arising from the
guaranty clause, is on a form drafted and prepared solely by the petitioner; Chi's participation criminal offense. This is the import of the clause "without prejudice to the civil liabilities
therein is limited to the affixing of his signature thereon. It is, therefore, a contract of arising from the criminal offense." And, as We stated earlier, since that violation of a trust
adhesion; 28 as such, it must be strictly construed against the party responsible for its receipt constitutes fraud under Article 33 of the Civil Code, petitioner was acting well within
preparation. 29 its rights in filing an independent civil action to enforce the civil liability arising therefrom
Neither can We agree with the reasoning of the public respondent that this solidary guaranty against Philippine Rayon.
clause was effectively disregarded simply because it was not signed and witnessed by two (2) The remaining issue to be resolved concerns the propriety of the dismissal of the case against
persons and acknowledged before a notary public. While indeed, the clause ought to have been private respondent Chi. The trial court based the dismissal, and the respondent Court its
signed by two (2) guarantors, the fact that it was only Chi who signed the same did not make affirmance thereof, on the theory that Chi is not liable on the trust receipt in any capacity —
his act an idle ceremony or render the clause totally meaningless. By his signing, Chi became either as surety or as guarantor — because his signature at the dorsal portion thereof was
the sole guarantor. The attestation by witnesses and the acknowledgement before a notary useless; and even if he could be bound by such signature as a simple guarantor, he cannot,
public are not required by law to make a party liable on the instrument. The rule is that pursuant to Article 2058 of the Civil Code, be compelled to pay until
contracts shall be obligatory in whatever form they may have been entered into, provided all after petitioner has exhausted and resorted to all legal remedies against the principal debtor,
the essential requisites for their validity are present; however, when the law requires that a Philippine Rayon. The records fail to show that petitioner had done so 33 Reliance is thus
contract be in some form in order that it may be valid or enforceable, or that it be proved in a placed on Article 2058 of the Civil Code which provides:
certain way, that requirement is absolute and indispensable. 30 With respect to a Art. 2056. The guarantor cannot be compelled to pay the creditor unless
guaranty, 31 which is a promise to answer for the debt or default of another, the law merely the latter has exhausted all the property of the debtor, and has resorted to
requires that it, or some note or memorandum thereof, be in writing. Otherwise, it would be all the legal remedies against the debtor.
unenforceable unless ratified. 32 While the acknowledgement of a surety before a notary public Simply stated, there is as yet no cause of action against Chi.
is required to make the same a public document, under Article 1358 of the Civil Code, a We are not persuaded. Excussion is not a condition sine qua non for the institution of an action
contract of guaranty does not have to appear in a public document. against a guarantor. In Southern Motors, Inc. vs. Barbosa, 34 this Court stated:
And now to the other ground relied upon by the petitioner as basis for the solidary liability of 4. Although an ordinary personal guarantor — not a mortgagor or pledgor
Chi, namely the criminal proceedings against the latter for the violation of P.D. No. 115. — may demand the aforementioned exhaustion, the creditor may, prior
Petitioner claims that because of the said criminal proceedings, Chi would be answerable for thereto, secure a judgment against said guarantor, who shall be entitled,
the civil liability arising therefrom pursuant to Section 13 of P.D. No. 115. Public respondent however, to a deferment of the execution of said judgment against him
rejected this claim because such civil liability presupposes prior conviction as can be gleaned until after the properties of the principal debtor shall have been exhausted
from the phrase "without prejudice to the civil liability arising from the criminal offense." to satisfy the obligation involved in the case.
Both are wrong. The said section reads: There was then nothing procedurally objectionable in impleading private respondent Chi as a
Sec. 13. Penalty Clause. — The failure of an entrustee to turn over the co-defendant in Civil Case No. Q-19312 before the trial court. As a matter of fact, Section 6,
proceeds of the sale of the goods, documents or instruments covered by a Rule 3 of the Rules of Court on permissive joinder of parties explicitly allows it. It reads:
trust receipt to the extent of the amount owing to the entruster or as Sec. 6. Permissive joinder of parties. — All persons in whom or against
appears in the trust receipt or to return said goods, documents or whom any right to relief in respect to or arising out of the same transaction
instruments if they were not sold or disposed of in accordance with the or series of transactions is alleged to exist, whether jointly, severally, or in
terms of the trust receipt shall constitute the crime of estafa, punishable the alternative, may, except as otherwise provided in these rules, join as
under the provisions of Article Three hundred and fifteen, paragraph one plaintiffs or be joined as defendants in one complaint, where any question
(b) of Act Numbered Three thousand eight hundred and fifteen, as of law or fact common to all such plaintiffs or to all such defendants may
amended, otherwise known as the Revised Penal Code. If the violation or arise in the action; but the court may make such orders as may be just to

57
prevent any plaintiff or defendant from being embarrassed or put to
expense in connection with any proceedings in which he may have no
interest.
This is the equity rule relating to multifariousness. It is based on trial convenience and is
designed to permit the joinder of plaintiffs or defendants whenever there is a common question
of law or fact. It will save the parties unnecessary work, trouble and expense. 35
However, Chi's liability is limited to the principal obligation in the trust receipt plus all the
accessories thereof including judicial costs; with respect to the latter, he shall only be liable for
those costs incurred after being judicially required to pay. 36 Interest and damages, being
accessories of the principal obligation, should also be paid; these, however, shall run only
from the date of the filing of the complaint. Attorney's fees may even be allowed in
appropriate cases.37
In the instant case, the attorney's fees to be paid by Chi cannot be the same as that to be paid
by Philippine Rayon since it is only the trust receipt that is covered by the guaranty and not the
full extent of the latter's liability. All things considered, he can be held liable for the sum of
P10,000.00 as attorney's fees in favor of the petitioner.
Thus, the trial court committed grave abuse of discretion in dismissing the complaint as
against private respondent Chi and condemning petitioner to pay him P20,000.00 as attorney's
fees.
In the light of the foregoing, it would no longer necessary to discuss the other issues raised by
the petitioner
WHEREFORE, the instant Petition is hereby GRANTED.
The appealed Decision of 10 March 1986 of the public respondent in AC-G.R. CV
No. 66733 and, necessarily, that of Branch 9 (Quezon City) of the then Court of First
Instance of Rizal in Civil Case No. Q-19312 are hereby REVERSED and SET
ASIDE and another is hereby entered:
1. Declaring private respondent Philippine Rayon
Mills, Inc. liable on the twelve drafts in question
(Exhibits "X", "X-1" to "X-11", inclusive) and on the
trust receipt (Exhibit "C"), and ordering it to pay
petitioner: (a) the amounts due thereon in the total sum
of P956,384.95 as of 15 September 1974, with interest
thereon at six percent (6%) per annum from 16
September 1974 until it is fully paid, less whatever
may have been applied thereto by virtue of foreclosure
of mortgages, if any; (b) a sum equal to ten percent
(10%) of the aforesaid amount as attorney's fees; and
(c) the costs.
2. Declaring private respondent Anacleto R. Chi
secondarily liable on the trust receipt and ordering him
to pay the face value thereof, with interest at the legal
rate, commencing from the date of the filing of the
complaint in Civil Case No. Q-19312 until the same is
fully paid as well as the costs and attorney's fees in the
sum of P10,000.00 if the writ of execution for the
enforcement of the above awards against Philippine
Rayon Mills, Inc. is returned unsatisfied.
Costs against private respondents.
SO ORDERED.

58
THIRD DIVISION thereafter, were criminally charged for estafa through falsification of commercial documents.
The case, however, was eventually dismissed by the Rizal Provincial Fiscal who found
G.R. No. 105395 December 10, 1993 no prima facieevidence to warrant prosecution.
BANK OF AMERICA, NT & SA, petitioners, Bank of America sued Inter-Resin for the recovery of P10,219,093.20, the peso equivalent of
vs. the draft for US$1,320,600.00 on the partial availment of the now disowned letter of credit.
COURT OF APPEALS, INTER-RESIN INDUSTRIAL CORPORATION, FRANCISCO On the other hand, Inter-Resin claimed that not only was it entitled to retain P10,219,093.20
TRAJANO, JOHN DOE AND JANE DOE, respondents. on its first shipment but also to the balance US$1,461,400.00 covering the second shipment.
Agcaoili & Associates for petitioner. On 28 June 1989, the trial court ruled for Inter-Resin, 4 holding that:
Valenzuela Law Center, Victor Fernandez and Ramon Guevarra for private respondents. (a) Bank of America made assurances that enticed Inter-Resin to send the merchandise to
Thailand; (b) the telex declaring the letter of credit fraudulent was unverified and self-serving,
VITUG, J.: hence, hearsay, but even assuming that the letter of credit was fake, "the fault should be borne
A "fiasco," involving an irrevocable letter of credit, has found the distressed parties coming to by the BA which was careless and negligent" 5 for failing to utilize its modern means of
court as adversaries in seeking a definition of their respective rights or liabilities thereunder. communication to verify with Bank of Ayudhya in Thailand the authenticity of the letter of
On 05 March 1981, petitioner Bank of America, NT & SA, Manila, received by registered credit before sending the same to Inter-Resin; (c) the loading of plastic products into the vans
mail an Irrevocable Letter of Credit No. 20272/81 purportedly issued by Bank of Ayudhya, were under strict supervision, inspection and verification of government officers who have in
Samyaek Branch, for the account of General Chemicals, Ltd., of Thailand in the amount of their favor the presumption of regularity in the performance of official functions; and (d) Bank
US$2,782,000.00 to cover the sale of plastic ropes and "agricultural files," with the petitioner of America failed to prove the participation of Inter-Resin or its employees in the alleged fraud
as advising bank and private respondent Inter-Resin Industrial Corporation as beneficiary. as, in fact, the complaint for estafa through falsification of documents was dismissed by the
On 11 March 1981, Bank of America wrote Inter-Resin informing the latter of the foregoing Provincial Fiscal of Rizal.6
and transmitting, along with the bank's communication, On appeal, the Court of Appeals 7 sustained the trial court; hence, this present recourse by
the latter of credit. Upon receipt of the letter-advice with the letter of credit, Inter-Resin sent petitioner Bank of America.
Atty. Emiliano Tanay to Bank of America to have the letter of credit confirmed. The bank did The following issues are raised by Bank of America: (a) whether it has warranted the
not. Reynaldo Dueñas, bank employee in charge of letters of credit, however, explained to genuineness and authenticity of the letter of credit and, corollarily, whether it has acted merely
Atty. Tanay that there was no need for confirmation because the letter of credit would not have as an advising bank or as a confirming bank; (b) whether Inter-Resin has actually shipped the
been transmitted if it were not genuine. ropes specified by the letter of credit; and (c) following the dishonor of the letter of credit by
Between 26 March to 10 April 1981, Inter-Resin sought to make a partial availment under the Bank of Ayudhya, whether Bank of America may recover against Inter-Resin under the draft
letter of credit by submitting to Bank of America invoices, covering the shipment of 24,000 executed in its partial availment of the letter of credit. 8
bales of polyethylene rope to General Chemicals valued at US$1,320,600.00, the In rebuttal, Inter-Resin holds that: (a) Bank of America cannot, on appeal, belatedly raise the
corresponding packing list, export declaration and bill of lading. Finally, after being satisfied issue of being only an advising bank; (b) the findings of the trial court that the ropes have
that Inter-Resin's documents conformed with the conditions expressed in the letter of credit, actually been shipped is binding on the Court; and, (c) Bank of America cannot recover from
Bank of America issued in favor of Inter-Resin a Cashier's Check for P10,219,093.20, "the Inter-Resin because the drawer of the letter of credit is the Bank of Ayudhya and not Inter-
Peso equivalent of the draft (for) US$1,320,600.00 drawn by Inter-Resin, after deducting the Resin.
costs for documentary stamps, postage and mail issuance." 1 The check was picked up by If only to understand how the parties, in the first place, got themselves into the mess, it may be
Inter-Resin's Executive Vice-President Barcelina Tio. On 10 April 1981, Bank of America well to start by recalling how, in its modern use, a letter of credit is employed in trade
wrote Bank of Ayudhya advising the latter of the availment under the letter of credit and transactions.
sought the corresponding reimbursement therefor. A letter of credit is a financial device developed by merchants as a convenient and relatively
Meanwhile, Inter-Resin, through Ms. Tio, presented to Bank of America the documents for the safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a
second availment under the same letter of credit consisting of a packing list, bill of lading, seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have
invoices, export declaration and bills in set, evidencing the second shipment of goods. control of the goods before paying. 9 To break the impasse, the buyer may be required to
Immediately upon receipt of a telex from the Bank of Ayudhya declaring the letter of credit contract a bank to issue a letter of credit in favor of the seller so that, by virtue of the latter of
fraudulent, 2 Bank of America stopped the processing of Inter-Resin's documents and sent a credit, the issuing bank can authorize the seller to draw drafts and engage to pay them upon
telex to its branch office in Bangkok, Thailand, requesting assistance in determining the their presentment simultaneously with the tender of documents required by the letter of
authenticity of the letter of credit. 3 Bank of America kept Inter-Resin informed of the credit. 10 The buyer and the seller agree on what documents are to be presented for payment,
developments. Sensing a fraud, Bank of America sought the assistance of the National Bureau but ordinarily they are documents of title evidencing or attesting to the shipment of the goods
of Investigation (NBI). With the help of the staff of the Philippine Embassy at Bangkok, as to the buyer.
well as the police and customs personnel of Thailand, the NBI agents, who were sent to Once the credit is established, the seller ships the goods to the buyer and in the process secures
Thailand, discovered that the vans exported by Inter-Resin did not contain ropes but plastic the required shipping documents or documents of title. To get paid, the seller executes a draft
strips, wrappers, rags and waste materials. Here at home, the NBI also investigated Inter- and presents it together with the required documents to the issuing bank. The issuing bank
Resin's President Francisco Trajano and Executive Vice President Barcelina Tio, who, redeems the draft and pays cash to the seller if it finds that the documents submitted by the

59
seller conform with what the letter of credit requires. The bank then obtains possession of the under the "letter of credit," Bank of America has incurred any liability to the "beneficiary"
documents upon paying the seller. The transaction is completed when the buyer reimburses the thereof, an issue that largely is dependent on the bank's participation in that transaction; as a
issuing bank and acquires the documents entitling him to the goods. Under this arrangement, mere advising or notifying bank, it would not be liable, but as a confirming bank, had this
the seller gets paid only if he delivers the documents of title over the goods, while the buyer been the case, it could be considered as having incurred that liability. 22
acquires said documents and control over the goods only after reimbursing the bank. In Insular Life Assurance Co. Ltd. Employees Association — Natu vs. Insular Life Assurance
What characterizes letters of credit, as distinguished from other accessory contracts, is the Co., Ltd., 23 the Court said: Where the issues already raised also rest on other issues not
engagement of the issuing bank to pay the seller of the draft and the required shipping specifically presented, as long as the latter issues bear relevance and close relation to the
documents are presented to it. In turn, this arrangement assures the seller of prompt payment, former and as long as they arise from the matters on record, the court has the authority to
independent of any breach of the main sales contract. By this so-called "independence include them in its discussion of the controversy and to pass upon them just as well. In brief,
principle," the bank determines compliance with the letter of credit only by examining the in those cases where questions not particularly raised by the parties surface as necessary for
shipping documents presented; it is precluded from determining whether the main contract is the complete adjudication of the rights and obligations of the parties, the interests of justice
actually accomplished or not. 11 dictate that the court should consider and resolve them. The rule that only issues or theories
There would at least be three (3) parties: (a) the buyer, 12 who procures the letter of credit and raised in the initial proceedings may be taken up by a party thereto on appeal should only refer
obliges himself to reimburse the issuing bank upon receipts of the documents of title; (b) to independent, not concomitant matters, to support or oppose the cause of action or defense.
the bank issuing the letter of credit, 13 which undertakes to pay the seller upon receipt of the The evil that is sought to be avoided, i.e., surprise to the adverse party, is in reality not existent
draft and proper document of titles and to surrender the documents to the buyer upon on matters that are properly litigated in the lower court and appear on record.
reimbursement; and, (c) the seller, 14 who in compliance with the contract of sale ships the It cannot seriously be disputed, looking at this case, that Bank of America has, in fact, only
goods to the buyer and delivers the documents of title and draft to the issuing bank to recover been an advising, not confirming, bank, and this much is clearly evident, among other things,
payment. by the provisions of the letter of credit itself, the petitioner bank's letter of advice, its request
The number of the parties, not infrequently and almost invariably in international trade for payment of advising fee, and the admission of Inter-Resin that it has paid the same. That
practice, may be increased. Thus, the services of an advising (notifying) bank 15 may be Bank of America has asked Inter-Resin to submit documents required by the letter of credit
utilized to convey to the seller the existence of the credit; or, of a confirming bank 16 which and eventually has paid the proceeds thereof, did not obviously make it a confirming bank.
will lend credence to the letter of credit issued by a lesser known issuing bank; or, of a paying The fact, too, that the draft required by the letter of credit is to be drawn under the account of
bank, 17 which undertakes to encash the drafts drawn by the exporter. Further, instead of going General Chemicals (buyer) only means the same had to be presented to Bank of Ayudhya
to the place of the issuing bank to claim payment, the buyer may approach another bank, (issuing bank) for payment. It may be significant to recall that the letter of credit is an
termed the negotiating bank, 18 to have the draft discounted. engagement of the issuing bank, not the advising bank, to pay the draft.
Being a product of international commerce, the impact of this commercial instrument No less important is that Bank of America's letter of 11 March 1981 has expressly stated that
transcends national boundaries, and it is thus not uncommon to find a dearth of national law "[t]he enclosure is solely an advise of credit opened by the abovementioned correspondent
that can adequately provide for its governance. This country is no exception. Our own Code of and conveys no engagement by us." 24This written reservation by Bank of America in limiting
Commerce basically introduces only its concept under Articles 567-572, inclusive, thereof. It its obligation only to being an advising bank is in consonance with the provisions of U.C.P.
is no wonder then why great reliance has been placed on commercial usage and practice, As an advising or notifying bank, Bank of America did not incur any obligation more than just
which, in any case, can be justified by the universal acceptance of the autonomy of contract notifying Inter-Resin of the letter of credit issued in its favor, let alone to confirm the letter of
rules. The rules were later developed into what is now known as the Uniform Customs and credit. 25 The bare statement of the bank employees, aforementioned, in responding to the
Practice for Documentary Credits ("U.C.P.") issued by the International Chamber of inquiry made by Atty. Tanay, Inter-Resin's representative, on the authenticity of the letter of
Commerce. It is by no means a complete text by itself, for, to be sure, there are other credit certainly did not have the effect of novating the letter of credit and Bank of America's
principles, which, although part of lex mercatoria, are not dealt with the U.C.P. letter of advise, 26 nor can it justify the conclusion that the bank must now assume total
In FEATI Bank and Trust Company v. Court of Appeals, 19 we have accepted, to the extent of liability on the letter of credit. Indeed, Inter-Resin itself cannot claim to have been all that free
their pertinency, the application in our jurisdiction of this international commercial credit from fault. As the seller, the issuance of the letter of credit should have obviously been a great
regulatory set of rules. 20 In Bank of Phil. Islands v. De Nery, 21 we have said that the concern to it. 27 It would have, in fact, been strange if it did not, prior to the letter of credit,
observances of the U.C.P. is justified by Article 2 of the Code of Commerce which expresses enter into a contract, or negotiated at the every least, with General Chemicals. 28 In the
that, in the absence of any particular provision in the Code of Commerce, commercial ordinary course of business, the perfection of contract precedes the issuance of a letter of
transactions shall be governed by usages and customs generally observed. We have further credit.
observed that there being no specific provisions which govern the legal complexities arising Bringing the letter of credit to the attention of the seller is the primordial obligation of an
from transactions involving letters of credit not only between or among banks themselves but advising bank. The view that Bank of America should have first checked the authenticity of
also between banks and the seller or the buyer, as the case may be, the applicability of the the letter of credit with bank of Ayudhya, by using advanced mode of business
U.C.P. is undeniable. communications, before dispatching the same to Inter-Resin finds no real support in U.C.P.
The first issue raised with the petitioner, i.e., that it has in this instance merely been advising Article 18 of the U.C.P. states that: "Banks assume no liability or responsibility for the
bank, is outrightly rejected by Inter-Resin and is thus sought to be discarded for having been consequences arising out of the delay and/or loss in transit of any messages, letters or
raised only on appeal. We cannot agree. The crucial point of dispute in this case is whether documents, or for delay, mutilation or other errors arising in the transmission of any

60
telecommunication . . ." As advising bank, Bank of America is bound only to check the No judgment of civil liability against the other defendants, Francisco Trajano and other
"apparent authenticity" of the letter of credit, which it did. 29 Clarifying its meaning, Webster's unidentified parties, can be made, in this instance, there being no sufficient evidence to
Ninth New Collegiate Dictionary 30 explains that the word "APPARENT suggests appearance warrant any such finding.
to unaided senses that is not or may not be borne out by more rigorous examination or greater WHEREFORE, the assailed decision is SET ASIDE, and respondent Inter-Resin Industrial
knowledge." Corporation is ordered to refund to petitioner Bank of America NT & SA the amount of
May Bank of America then recover what it has paid under the letter of credit when the P10,219,093.20 with legal interest from the filing of the complaint until fully paid.
corresponding draft for partial availment thereunder and the required documents were later No costs.
negotiated with it by Inter-Resin? The answer is yes. This kind of transaction is what is SO ORDERED.
commonly referred to as a discounting arrangement. This time, Bank of America has acted
independently as a negotiating bank, thus saving Inter-Resin from the hardship of presenting
the documents directly to Bank of Ayudhya to recover payment. (Inter-Resin, of course, could
have chosen other banks with which to negotiate the draft and the documents.) As a
negotiating bank, Bank of America has a right to recourse against the issuer bank and until
reimbursement is obtained, Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon. 31
While bank of America has indeed failed to allege material facts in its complaint that might
have likewise warranted the application of the Negotiable Instruments Law and possible then
allowed it to even go after the indorsers of the draft, this failure, 32/ nonetheless, does not
preclude petitioner bank's right (as negotiating bank) of recovery from Inter-Resin itself. Inter-
Resin admits having received P10,219,093.20 from bank of America on the letter of credit and
in having executed the corresponding draft. The payment to Inter-Resin has given, as
aforesaid, Bank of America the right of reimbursement from the issuing bank, Bank of
Ayudhya which, in turn, would then seek indemnification from the buyer (the General
Chemicals of Thailand). Since Bank of Ayudhya disowned the letter of credit, however, Bank
of America may now turn to Inter-Resin for restitution.
Between the seller and the negotiating bank there is the usual relationship
existing between a drawer and purchaser of drafts. Unless drafts drawn in
pursuance of the credit are indicated to be without recourse therefore, the
negotiating bank has the ordinary right of recourse against the seller in the
event of dishonor by the issuing bank . . . The fact that the correspondent
and the negotiating bank may be one and the same does not affect its
rights and obligations in either capacity, although a special agreement is
always a possibility . . . 33
The additional ground raised by the petitioner, i.e., that Inter-Resin sent waste instead of its
products, is really of no consequence. In the operation of a letter of credit, the involved banks
deal only with documents and not on goods described in those documents. 34
The other issues raised in then instant petition, for instance, whether or not Bank of Ayudhya
did issue the letter of credit and whether or not the main contract of sale that has given rise to
the letter of credit has been breached, are not relevant to this controversy. They are matters,
instead, that can only be of concern to the herein parties in an appropriate recourse against
those, who, unfortunately, are not impleaded in these proceedings.
In fine, we hold that —
First, given the factual findings of the courts below, we conclude that petitioner Bank of
America has acted merely as a notifying bank and did not assume the responsibility of
a confirming bank; and
Second, petitioner bank, as a negotiating bank, is entitled to recover on Inter-Resin's partial
availment as beneficiary of the letter of credit which has been disowned by the alleged issuer
bank.

61
[G.R. No. 160732. June 21, 2004] To secure the concessionaires performance of its obligations under the Concession
METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs. HON. Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank
REYNALDO B. DAWAY, IN HIS CAPACITY AS PRESIDING JUDGE OF guarantee or other security acceptable to MWSS.
THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 90 AND In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-
MAYNILAD WATER SERVICES, INC.,respondents. year facility with a number of foreign banks, led by Citicorp International Limited, for the
DECISION issuance of an Irrevocable Standby Letter of Credit [6] in the amount of US$120,000,000 in
AZCUNA, J.: favor of MWSS for the full and prompt performance of Maynilads obligations to MWSS as
On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, aforestated.
made a determination that the Petition for Rehabilitation with Prayer for Suspension of Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism
Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed by which it hoped to recover the losses it had allegedly incurred and would be incurring as a
substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it
Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order[1] which states, in desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended
part, that the court was thereby: the payment of the concession fees. In an effort to salvage the Concession Agreement, the
xxxxxxxxx parties entered into a Memorandum of Agreement (MOA) [7] on June 8, 2001 wherein
2. Staying enforcement of all claims, whether for money or otherwise and whether Maynilad was allowed to recover foreign exchange losses under a formula agreed upon
such enforcement is by court action or otherwise, against the petitioner, its between them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice
guarantors and sureties not solidarily liable with the petitioner; and, since MWSS could not agree with the terms of said Notice, the matter was referred on
3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing August 30, 2001 to the Appeals Panel for arbitration. This resulted in the parties agreeing to
in any manner any of its properties except in the ordinary course of business; resolve the issues through an amendment of the Concession Agreement on October 5, 2001,
4. Prohibiting the petitioner from making any payment of its liabilities, known as Amendment No. 1, [8] which was based on the terms set down in MWSS Board of
outstanding as at the date of the filing of the petition; Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees Resolution No.
xxxxxxxxx 487-2001,[9]which provided inter alia for a formula that would allow Maynilad to recover
Subsequently, on November 27, 2003, public respondent, acting on two Urgent Ex foreign exchange losses it had incurred or would incur under the terms of the Concession
Parte motions[2] filed by respondent Maynilad, issued the herein questioned Order [3]which Agreement.
stated that it thereby: As part of this agreement, Maynilad committed, among other things, to:
1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for a) infuse the amount of UD$80.0 million as additional funding support from its
the payment by the banks of US$98 million out of the US$120 million standby letter of credit stockholders;
so the banks have to make good such call/drawing of payment of US$98 million by MWSS b) resume payment of the concession fees; and
not later than November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative c) mutually seek the dismissal of the cases pending before the Court of Appeals
of the above-quoted sub-paragraph 2.) of the dispositive portion of this Courts Stay Order and with Minor Dispute Appeals Panel.
dated November 17, 2003. However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of
2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the Termination, claiming that MWSS failed to comply with its obligations under the Concession
written certification/notice of draw to Citicorp International Limited dated November 24, 2003 Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover
and DECLARES void any payment by the banks to MWSS in the event such written Maynilads foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early
certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by Termination of the concession, which was challenged by MWSS. This matter was eventually
virtue of the aforesaid standby letter of credit. brought before the Appeals Panel on January 7, 2003 by MWSS.[10] On November 7, 2003, the
Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or
filed this petition for review by way of certiorari under Rule 65 of the Rules of Court 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the
questioning the legality of said order as having been issued without or in excess of the lower concession fees that had fallen due.
courts jurisdiction or that the court a quo acted with grave abuse of discretion amounting to The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter,
lack or excess of jurisdiction.[4] submitted a written notice[11] on November 24, 2003, to Citicorp International Limited, as
ANTECEDENTS OF THE CASE agent for the participating banks, that by virtue of Maynilads failure to perform its obligations
On February 21, 1997, MWSS granted Maynilad under a Concession Agreement a under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit
twenty-year period to manage, operate, repair, decommission and refurbish the existing and thereby demanded payment in the amount of US$98,923,640.15.
MWSS water delivery and sewerage services in the West Zone Service Area, for which Prior to this, however, Maynilad had filed on November 13, 2003, a petition for
Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said rehabilitation before the court a quo which resulted in the issuance of the Stay Order of
agreement[5] which, among other things, consisted of payments of petitioners mostly foreign November 17, 2003 and the disputed Order of November 27, 2003.[12]
loans. PETITIONERS CASE
Petitioner hereby raises the following issues:

62
1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR seeking the payment of the concession fees from the banks that issued the Irrevocable Standby
ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF Letter of Credit in its favor and for the account of respondent Maynilad?
JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate
AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the
CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE banks that issued it. The section reads in part that jurisdiction over those affected by the
ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE proceedings is considered acquired upon the publication of the notice of commencement of
PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION. proceedings in a newspaper of general circulation and goes further to define rehabilitation as
2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR an in rem proceeding. This provision is a logical consequence of the in rem nature of the
EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN proceedings, where jurisdiction is acquired by publication and where it is necessary that the
HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE assets of the debtor come within the courts jurisdiction to secure the same for the benefit of
BANKS WERE NOT SOLIDARY IN NATURE. creditors. The reference to all those affected by the proceedings covers creditors or such other
3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN persons or entities holding assets belonging to the debtor under rehabilitation which should be
ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL reflected in its audited financial statements. The banks do not hold any assets of respondent
OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL. Maynilad that would be material to the rehabilitation proceedings nor is Maynilad liable to the
In support of the first issue, petitioner maintains that as a matter of law, the US$120 banks at this point.
Million Standby Letter of Credit and Performance Bond are not property of the estate of the Respondent Maynilads Financial Statement as of December 31, 2001 and 2002 do not
debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by
court. respondent Maynilads own admission it is not. In issuing the clarificatory order of November
Petitioner argues that a call made on the Standby Letter of Credit does not involve any 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor
asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its
Credit cannot also be considered a claim falling under the purview of the stay order as alleged jurisdiction.
by respondent as it is not directed against the assets of respondent Maynilad. Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules
Petitioner concludes that the public respondent erred in declaring and holding that the that supports its claim that the commencement of the process to draw on the Standby Letter of
commencement of the process for the payment of US$98 million is a violation of the order Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of
issued on November 17, 2003. public respondent.
RESPONDENT MAYNILADS CASE Respondent Maynilad would persuade us that the above provision justifies a leap to the
Respondent Maynilad seeks to refute this argument by alleging that: conclusion that such an enforcement is prohibited by said section because it is a claim against
a) the order objected to was strictly and precisely worded and issued after carefully the debtor, its guarantors and sureties not solidarily liable with the debtor and that there is
considering/evaluating the import of the arguments and documents referred to by Maynilad, nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that
MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions, would show or require the obligation of the banks to be solidary with the respondent
pleadings and/or pertinent records[13] and that public respondent had the authority to issue the Maynilad.
same; We disagree.
b) public respondent never considered nor held that the Performance bond or assets of the First, the claim is not one against the debtor but against an entity that respondent
issuing banks are part or property of the estate of respondent Maynilad subject to rehabilitation Maynilad has procured to answer for its non-performance of certain terms and conditions of
and which respondent Maynilad has not and has never claimed to be; [14] the Concession Agreement, particularly the payment of concession fees.
c) what is relevant is not whether the performance bond or assets of the issuing banks are part Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of
of the estate of respondent Maynilad but whether the act of petitioner in commencing the all claims against guarantors and sureties, but only those claims against guarantors and
process for the payment by the banks of US$98 million out of the US$120 million sureties who are not solidarily liable with the debtor. Respondent Maynilads claim that the
performance bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay banks are not solidarily liable with the debtor does not find support in jurisprudence.
order dated November 17, 2003; We held in Feati Bank & Trust Company v. Court of Appeals [16] that the concept of
d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad guarantee vis--vis the concept of an irrevocable letter of credit are inconsistent with each
but also over persons and assets of all those affected by the proceedings x x x upon publication other. The guarantee theory destroys the independence of the banks responsibility from the
of the notice of commencement;[15] and contract upon which it was opened and the nature of both contracts is mutually in conflict with
e) the obligations under the Standby Letter of Credit are not solidary and are not exempt from each other. In contracts of guarantee, the guarantors obligation is merely collateral and it arises
the coverage of the stay order. only upon the default of the person primarily liable. On the other hand, in an irrevocable letter
OUR RULING of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as
We will discuss the first two issues raised by petitioner as these are interrelated and an engagement by a bank or other person made at the request of a customer that the issuer
make up the main issue of the petition before us which is, did the rehabilitation court sitting as shall honor drafts or other demands of payment upon compliance with the conditions specified
such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from in the credit.[17]

63
Letters of credit were developed for the purpose of insuring to a seller payment of a herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the
definite amount upon the presentation of documents [18] and is thus a commitment by the issuer agent a written certification substantially in the form Annex B of the Letter of Credit. It
that the party in whose favor it is issued and who can collect upon it will have his credit provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and
against the applicant of the letter, duly paid in the amount specified in the letter. [19]They are in subsisting, the Banks shall honor any written Certification made by MWSS in accordance with
effect absolute undertakings to pay the money advanced or the amount for which credit is Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to
given on the faith of the instrument. They are primary obligations and not accessory contracts such Written Certification arose.[29]
and while they are security arrangements, they are not converted thereby into contracts of Taking into consideration our own rulings on the nature of letters of credit and the
guaranty.[20] What distinguishes letters of credit from other accessory contracts, is the customs and usage developed over the years in the banking and commercial practice of letters
engagement of the issuing bank to pay the seller once the draft and other required shipping of credit, we hold that except when a letter of credit specifically stipulates otherwise, the
documents are presented to it. [21] They are definite undertakings to pay at sight once the obligation of the banks issuing letters of credit are solidary with that of the person or entity
documents stipulated therein are presented. requesting for its issuance, the same being a direct, primary, absolute and definite undertaking
Letters of Credits have long been and are still governed by the provisions of the Uniform to pay the beneficiary upon the presentation of the set of documents required therein.
Customs and Practice for Documentary Credits of the International Chamber of Commerce. In The public respondent, therefore, exceeded his jurisdiction, in holding that he was
the 1993 Revision it provides in Art. 2 that the expressions Documentary Credit(s) and competent to act on the obligation of the banks under the Letter of Credit under the argument
Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the
bank acting at the request and on instructions of a customer or on its own behalf is to make letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in
payment against stipulated document(s) and Art. 9 thereof defines the liability of the issuing enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a
banks on an irrevocable letter of credit as a definite undertaking of the issuing bank, provided clear right under the law and the terms of said Standby Letter of Credit, public respondent
that the stipulated documents are presented to the nominated bank or the issuing bank and the acted in excess of his jurisdiction.
terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for ADDITIONAL ISSUES
sight payment.[22] We proceed to consider the other issues raised in the oral arguments and included in the
We have accepted, in Feati Bank and Trust Company v. Court of Appeals [23] andBank of parties memoranda:
America NT & SA v. Court of Appeals,[24] to the extent that they are pertinent, the application in 1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy
our jurisdiction of the international credit regulatory set of rules known as the Uniform under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion
Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber or motu proprio, terminate, modify or set conditions for the continuance of the stay order or
of Commerce, which we said in Bank of the Philippine Islands v. Nery [25] was justified under relieve a claim from coverage thereof. We find, however, that the public respondent had
Art. 2 of the Code of Commerce, which states: already accomplished this during the hearing set for the two Urgent Ex Parte motions filed by
Acts of commerce, whether those who execute them be merchants or not, and whether respondent Maynilad on November 21 and 24, 2003, [30] where the parties including the
specified in this Code or not should be governed by the provisions contained in it; in their creditors, Suez and Chinatrust Commercial presented their respective arguments. [31] The public
absence, by the usages of commerce generally observed in each place; and in the absence of respondent then ruled, after carefully considering/evaluating the import of the arguments and
both rules, by those of the civil law. documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank
The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein and Suez in relation to the admissions, the pleadings, and/or pertinent portions of the records,
petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of this court is of the considered and humble view that the issue must perforce be resolved in
the debtors whose obligations are not solidary with the debtor. The participating banks favor of Maynilad.[32] Hence to pursue their opposition before the same court would result in
obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an the presentation of the same arguments and issues passed upon by public respondent.
absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtors Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective
assets. These are the same characteristics of a surety or solidary obligor. remedy questioning the orders of the rehabilitation court since they are immediately executory
Being solidary, the claims against them can be pursued separately from and and a petition for review or an appeal therefrom shall not stay the execution of the order unless
independently of the rehabilitation case, as held in Traders Royal Bank v. Court of restrained or enjoined by the appellate court. In this situation, it had no other remedy but to
Appeals[26] and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,[27] where we seek recourse to us through this petition for certiorari.
said that property of the surety cannot be taken into custody by the rehabilitation receiver In Silvestre v. Torres and Oben,[33] we said that it is not enough that a remedy is available
(SEC) and said surety can be sued separately to enforce his liability as surety for the debts or to prevent a party from making use of the extraordinary remedy of certiorari but that such
obligations of the debtor. The debts or obligations for which a surety may be liable include remedy be an adequate remedy which is equally beneficial, speedy and sufficient, not only a
future debts, an amount which may not be known at the time the surety is given. remedy which at some time in the future may offer relief but a remedy which will promptly
The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy -- not
the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the mere absence -- of all other legal remedies and the danger of failure of justice without the
the request of and for the account of Maynilad Water Services, Inc., in favor of the writ, that must usually determine the propriety of certiorari.[34]
Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt
performance of the obligations by the concessionaire under the Concession Agreement [28] and

64
2. Respondent Maynilad argues that by commencing the process for payment under the
Standby Letter of Credit, petitioner violated an immediately executory order of the court and,
therefore, comes to Court with unclean hands and should therefore be denied any relief.
It is true that the stay order is immediately executory. It is also true, however, that the
Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the
rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be
considered a violation of the Stay Order.
3. Respondents claim that the filing of the petition pre-empts the original jurisdiction of
the lower court is without merit. The purpose of the initial hearing is to determine whether the
petition for rehabilitation has merit or not. The propriety of the stay order as well as the
clarificatory order had already been passed upon in the hearing previously had for that
purpose. The determination of whether the public respondent was correct in enjoining the
petitioner from drawing on the Standby Letter of Credit will have no bearing on the
determination to be made by public respondent whether the petition for rehabilitation has
merit or not. Our decision on the instant petition does not pre-empt the original jurisdiction of
the rehabilitation court.
WHEREFORE, the petition for certiorari is GRANTED. The Order of November 27,
2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND
VOID and SET ASIDE. The status quo Order herein previously issued is hereby LIFTED. In
view of the urgency attending this case, this decision is immediately executory.
No costs.
SO ORDERED.

65
[G.R. No. 116863. February 12, 1998] KENG HUA PAPER PRODUCTS CO. INC., petitioner, metric tons more than the remaining balance; that if defendant were to accept the
vs. COURT OF APPEALS; REGIONAL TRIAL COURT OF MANILA, BR. 21; and SEA-LAND shipment, it would be violating Central Bank rules and regulations and custom and tariff
SERVICE, INC., respondents. laws; that plaintiff had no cause of action against the defendant because the latter did
DECISION
not hire the former to carry the merchandise; that the cause of action should be against
PANGANIBAN, J.:
the shipper which contracted the plaintiffs services and not against defendant; and that
What is the nature of a bill of lading? When does a bill of lading become binding on a
the defendant duly notified the plaintiff about the wrong shipment through a letter dated
consignee? Will an alleged overshipment justify the consignees refusal to receive the goods
January 24, 1983 (Exh. D for plaintiff, Exh. 4 for defendant, p. 5.Folder of Exhibits).
described in the bill of lading? When may interest be computed on unpaid demurrage charges?
As previously mentioned, the RTC found petitioner liable for demurrage, attorneys fees
Statement of the Case
and expenses of litigation. The petitioner appealed to the Court of Appeals, arguing that the
These are the main questions raised in this petition assailing the Decision [1] of the Court
lower court erred in (1) awarding the sum of P67,340 in favor of the private respondent, (2)
of Appeals[2] promulgated on May 20, 1994 in C.A.-G.R. CV No. 29953 affirming in toto the
rejecting petitioners contention that there was overshipment, (3) ruling that petitioners
decision[3] dated September 28, 1990 in Civil Case No. 85-33269 of the Regional Trial Court
recourse was against the shipper, and (4) computing legal interest from date of extrajudicial
of Manila, Branch 21. The dispositive portion of the said RTC decision reads:
demand.[5]
WHEREFORE, the Court finds by preponderance of evidence that Plaintiff has
Respondent Court of Appeals denied the appeal and affirmed the lower courts
proved its cause of action and right to relief. Accordingly, judgment is hereby
decision in toto. In a subsequent resolution, [6] it also denied the petitioners motion for
rendered in favor of the Plaintiff and against Defendant, ordering the Defendant to
reconsideration.
pay plaintiff:
Hence, this petition for review.[7]
1. The sum of P67,340.00 as demurrage charges, with interest at the legal rate from the date of
The Issues
the extrajudicial demand until fully paid;
In its memorandum, petitioner submits the following issues:
2. A sum equivalent to ten (10%) percent of the total amount due as Attorneys fees and
I. Whether or not petitioner had accepted the bill of lading;
litigation expenses.
II. Whether or not the award of the sum of P67,340.00 to private respondent was proper;
Send copy to respective counsel of the parties.
III. Whether or not petitioner was correct in not accepting the overshipment;
SO ORDERED.[4]
IV. Whether or not the award of legal interest from the date of private respondents
The Facts
extrajudicial demand was proper;[8]
The factual antecedents of this case as found by the Court of Appeals are as follows:
In the main, the case revolves around the question of whether petitioner was bound by
Plaintiff (herein private respondent), a shipping company, is a foreign corporation
the bill of lading. We shall, thus, discuss the above four issues as they intertwine with this
licensed to do business in the Philippines. On June 29, 1982, plaintiff received at its
main question.
Hong Kong terminal a sealed container, Container No. SEAU 67523, containing
The Courts Ruling
seventy-six bales of unsorted waste paper for shipment to defendant (herein petitioner),
The petition is partly meritorious. We affirm petitioners liability for demurrage, but
Keng Hua Paper Products, Co. in Manila. A bill of lading (Exh. A) to cover the
modify the interest rate thereon.
shipment was issued by the plaintiff.
Main Issue: Liability Under the Bill of Lading
On July 9, 1982, the shipment was discharged at the Manila International Container
A bill of lading serves two functions. First, it is a receipt for the goods shipped. Second,
Port. Notices of arrival were transmitted to the defendant but the latter failed to
it is a contract by which three parties, namely, the shipper, the carrier, and the consignee
discharge the shipment from the container during the free time period or grace
undertake specific responsibilities and assume stipulated obligations. [9] A bill of lading
period. The said shipment remained inside the plaintiffs container from the moment the
delivered and accepted constitutes the contract of carriage even though not signed, [10] because
free time period expired on July 29, 1982 until the time when the shipment was
the (a)cceptance of a paper containing the terms of a proposed contract generally constitutes
unloaded from the container on November 22, 1983, or a total of four hundred eighty-
an acceptance of the contract and of all of its terms and conditions of which the acceptor has
one (481) days. During the 481-day period, demurrage charges accrued. Within the
actual or constructive notice.[11] In a nutshell, the acceptance of a bill of lading by the shipper
same period, letters demanding payment were sent by the plaintiff to the defendant who,
and the consignee, with full knowledge of its contents, gives rise to the presumption that the
however, refused to settle its obligation which eventually amounted to
same was a perfected and binding contract. [12]
P67,340.00. Numerous demands were made on the defendant but the obligation
In the case at bar, both lower courts held that the bill of lading was a valid and perfected
remained unpaid. Plaintiff thereafter commenced this civil action for collection and
contract between the shipper (Ho Kee), the consignee (Petitioner Keng Hua), and the carrier
damages.
(Private Respondent Sea-Land). Section 17 of the bill of lading provided that the shipper and
In its answer, defendant, by way of special and affirmative defense, alleged that it
the consignee were liable for the payment of demurrage charges for the failure to discharge the
purchased fifty (50) tons of waste paper from the shipper in Hong Kong, Ho Kee Waste
containerized shipment beyond the grace period allowed by tariff rules. Applying said
Paper, as manifested in Letter of Credit No. 824858 (Exh. 7. p. 110.Original Record)
stipulation, both lower courts found petitioner liable. The aforementioned section of the bill of
issued by Equitable Banking Corporation, with partial shipment permitted; that under
lading reads:
the letter of credit, the remaining balance of the shipment was only ten (10) metric tons
17. COOPERAGE FINES. The shipper and consignee shall be liable for,
as shown in Invoice No. H-15/82 (Exh. 8, p. 111, Original Record); that the shipment
indemnify the carrier and ship and hold them harmless against, and the carrier
plaintiff was asking defendant to accept was twenty (20) metric tons which is ten (10)
66
shall have a lien on the goods for, all expenses and charges for mending In the instant case, (herein petitioner) cannot and did not allege non-receipt of its
cooperage, baling, repairing or reconditioning the goods, or the van, trailers or copy of the bill of lading from the shipper. Hence, the terms and conditions as
containers, and all expenses incurred in protecting, caring for or otherwise made well as the various entries contained therein were brought to its knowledge.
for the benefit of the goods, whether the goods be damaged or not, and for any (Herein petitioner) accepted the bill of lading without interposing any objection as
payment, expense, penalty fine, dues, duty, tax or impost, loss, damage, to its contents. This raises the presumption that (herein petitioner) agreed to the
detention, demurrage, or liability of whatsoever nature, sustained or incurred by entries and stipulations imposed therein.
or levied upon the carrier or the ship in connection with the goods or by reason of Moreover, it is puzzling that (herein petitioner) allowed months to pass, six (6)
the goods being or having been on board, or because of shippers failure to procure months to be exact, before notifying (herein private respondent) of the wrong
consular or other proper permits, certificates or any papers that may be required at shipment. It was only on January 24, 1983 that (herein petitioner) sent (herein
any port or place or shippers failure to supply information or otherwise to comply private respondent) such a letter of notification (Exh D for plaintiff, Exh. 4 for
with all laws, regulations and requirements of law in connection with the goods of defendant; p. 5, Folder of Exhibits). Thus, for the duration of those six months
from any other act or omission of the shipper or consignee: (Underscoring (herein private respondent never knew the reason for (herein petitioners) refusal
supplied.) to discharge the shipment.
Petitioner contends, however, that it should not be bound by the bill of lading because it After accepting the bill of lading, receiving notices of arrival of the shipment,
never gave its consent thereto. Although petitioner admits physical acceptance of the bill of failing to object thereto, (herein petitioner) cannot now deny that it is bound by
lading, it argues that its subsequent actions belie the finding that it accepted the terms and the terms in the bill of lading. If it did not intend to be bound, (herein petitioner)
conditions printed therein.[13] Petitioner cites as support the Notice of Refused or On Hand would not have waited for six months to lapse before finally bringing the matter
Freight it received on November 2, 1982 from private respondent, which acknowledged that to (herein private respondents attention. The most logical reaction in such a case
petitioner declined to accept the shipment. Petitioner adds that it sent a copy of the said notice would be to immediately verify the matter with the other parties involved. In this
to the shipper on December 29, 1982. Petitioner points to its January 24, 1983 letter to the case, however, (herein petitioner) unreasonably detained (herein private
private respondent, stressing that its acceptance of the bill of lading would be tantamount to an respondents) vessel to the latters prejudice.[19]
act of smuggling as the amount it had imported (with full documentary support) was only (at Petitioners attempt to evade its obligation to receive the shipment on the pretext that this may
that time) for 10,000 kilograms and not for 20,313 kilograms as stated in the bill of lading and cause it to violate customs, tariff and central bank laws must likewise fail. Mere apprehension
could lay them vulnerable to legal sanctions for violation of customs and tariff as well as of violating said laws, without a clear demonstration that taking delivery of the shipment has
Central Bank laws.[14] Petitioner further argues that the demurrage was a consequence of the become legally impossible,[20] cannot defeat the petitioners contractual obligation and liability
shippers mistake of shipping more than what was bought. The discrepancy in the amount of under the bill of lading.
waste paper it actually purchased, as reflected in the invoice vis--vis the excess amount in the In any event, the issue of whether petitioner accepted the bill of lading was raised for the
bill of lading, allegedly justifies its refusal to accept the shipment. [15] first time only in petitioners memorandum before this Court. Clearly, we cannot now entertain
Petitioner Bound by the Bill of Lading an issue raised for the very first time on appeal, in deference to the well-settled doctrine that
We are not persuaded. Petitioner admits that it received the bill of lading immediately (a)n issue raised for the first time on appeal and not raised timely in the proceedings in the
after the arrival of the shipment [16] on July 8, 1982.[17] Having been afforded an opportunity to lower court is barred by estoppel. Questions raised on appeal must be within the issues framed
examine the said document, petitioner did not immediately object to or dissent from any term by the parties and, consequently, issues not raised in the trial court cannot be raised for the first
or stipulation therein. It was only six months later, on January 24, 1983, that petitioner sent a time on appeal.[21]
letter to private respondent saying that it could not accept the shipment. Petitioners inaction In the case at bar, the prolonged failure of petitioner to receive and discharge the cargo
for such a long period conveys the clear inference that it accepted the terms and conditions of from the private respondents vessel constitutes a violation of the terms of the bill of lading. It
the bill of lading. Moreover, said letter spoke only of petitioners inability to use the delivery should thus be liable for demurrage to the former.
permit, i.e. to pick up the cargo, due to the shippers failure to comply with the terms and In The Apollon,[22] Justice Story made the following relevant comment on the nature of
conditions of the letter of credit, for which reason the bill of lading and other shipping demurrage:
documents were returned by the banks to the shipper. [18] The letter merely proved petitioners In truth, demurrage is merely an allowance or compensation for the delay or
refusal to pick up the cargo, not its rejection of the bill of lading. detention of a vessel. It is often a matter of contract, but not necessarily so. The
Petitioners reliance on the Notice of Refused or On Hand Freight, as proof of its very circumstance that in ordinary commercial voyages, a particular sum is
nonacceptance of the bill of lading, is of no consequence. Said notice was not written by deemed by the parties a fair compensation for delays, is the very reason why it is,
petitioner; it was sent by private respondent to petitioner in November 1982, or four months and ought to be, adopted as a measure of compensation, in cases ex delicto.What
after petitioner received the bill of lading. If the notice has any legal significance at all, it is to fairer rule can be adopted than that which founds itself upon mercantile usage as
highlight petitioners prolonged failure to object to the bill of lading. Contrary to petitioners to indemnity, and fixes a recompense upon the deliberate consideration of all the
contention, the notice and the letter support not belie the findings of the two lower courts that circumstances attending the usual earnings and expenditures in common
the bill of lading was impliedly accepted by petitioner. voyages? It appears to us that an allowance, by way of demurrage, is the true
As aptly stated by Respondent Court of Appeals: measure of damages in all cases of mere detention, for that allowance has
reference to the ships expenses, wear and tear, and common employment. [23]

67
Amount of Demurrage Charges the loading of the container while the carrier was oblivious to the contents of the
Petitioner argues that it is not obligated to pay any demurrage charges because, prior to shipment. Petitioners remedy in case of overshipment lies against the seller/shipper, not
the filing of the complaint, private respondent made no demand for the sum against the carrier.
of P67,340. Moreover, private respondents loss and prevention manager, Loi Gillera, Payment of Interest
demanded P50,260, but its counsel, Sofronio Larcia, subsequently asked for a different Petitioner posits that it first knew of the demurrage claim of P67,340 only when it
amount of P37,800. received, by summons, private respondents complaint. Hence, interest may not be allowed to
Petitioners position is puerile. The amount of demurrage charges in the sum of P67,340 run from the date of private respondents extrajudicial demands on March 8, 1983 for P50,260
is a factual conclusion of the trial court that was affirmed by the Court of Appeals and, thus, or on April 24, 1983 for P37,800, considering that, in both cases, there was no demand for
binding on this Court.[24] Besides such factual finding is supported by the extant evidence. interest.[30] We agree.
[25]
The apparent discrepancy was a result of the variance of the dates when the two demands Jurisprudence teaches us:
were made. Necessarily, the longer the cargo remained unclaimed, the higher the 2. When an obligation, not constituting a loan or forbearance of money, is breached, an
demurrage. Thus, while in his letter dated April 24, 1983, [26]private respondents counsel interest on the amount of damages awarded may be imposed at the discretion of the court at
demanded payment of only P37,800, the additional demurrage incurred by petitioner due to its the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or
continued refusal to receive delivery of the cargo ballooned to P67,340 by November 22, damages except when or until the demand can be established with reasonable
1983. The testimony of Counsel Sofronio Larcia as regards said letter of April 24, 1983 certainty. Accordingly, where the demand is established with reasonable certainty, the interest
elucidates, viz: shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Q Now, after you sent this letter, do you know what happened? Civil Code) but when such certainty cannot be so reasonably established at the time the
A Defendant continued to refuse to take delivery of the shipment and the shipment stayed demand is made, the interest shall begin to run only from the date the judgment of the court is
at the port for a longer period. made (at which time the quantification of damages may be deemed to have been reasonably
Q So, what happened to the shipment? ascertained). The actual base for the computation of legal interest shall, in any case, be on the
A The shipment incurred additional demurrage charges which amounted to P67,340.00 as amount finally adjudged.
of November 22, 1983 or more than a year after - almost a year after the shipment 3. When the judgment of the court awarding a sum of money becomes final and executory, the
arrived at the port. rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
Q So, what did you do? 12% per annum from such finality until its satisfaction, this interim period being deemed to be
A We requested our collection agency to pursue the collection of this amount. [27] by then an equivalent to a forbearance of credit. [31]
Bill of Lading Separate from Other Letter of Credit Arrangements The case before us involves an obligation not arising from a loan or forbearance of
In a letter of credit, there are three distinct and independent contracts: (1) the contract of money; thus, pursuant to Article 2209 of the Civil Code, the applicable interest rate is six
sale between the buyer and the seller, (2) the contract of the buyer with the issuing bank, percent per annum. Since the bill of lading did not specify the amount of demurrage, and the
and (3) the letter of credit proper in which the bank promises to pay the seller pursuant to the sum claimed by private respondent increased as the days went by, the total amount demanded
terms and conditions stated therein. Few things are more clearly settled in law than that the cannot be deemed to have been established with reasonable certainty until the trial court
three contracts which make up the letter of credit arrangement are to be maintained in a state rendered its judgment. Indeed, (u)nliquidated damages or claims, it is said, are those which are
of perpetual separation.[28] A transaction involving the purchase of goods may also require, not or cannot be known until definitely ascertained, assessed and determined by the courts
apart from a letter of credit, a contract of transportation specially when the seller and the buyer after presentation of proof. [32] Consequently, the legal interest rate is six percent, to be
are not in the same locale or country, and the goods purchased have to be transported to the computed from September 28, 1990, the date of the trial courts decision. And in accordance
latter. with Philippine Natonal Bank[33] and Eastern Shipping,[34] the rate of twelve percent per annum
Hence, the contract of carriage, as stipulated in the bill of lading in the present case, shall be charged on the total then outstanding, from the time the judgment becomes final and
must be treated independently of the contract of sale between the seller and the buyer, and the executory until its satisfaction.
contract for the issuance of a letter of credit between the buyer and the issuing bank. Any Finally, the Court notes that the matter of attorneys fees was taken up only in the
discrepancy between the amount of the goods described in the commercial invoice in the dispositive portion of the trial courts decision. This falls short of the settled requirement that
contract of sale and the amount allowed in the letter of credit will not affect the validity and the text of the decision should state the reason for the award of attorneys fees, for without such
enforceability of the contract of carriage as embodied in the bill of lading.As the bank cannot justification, its award would be a conclusion without a premise, its basis being improperly left
be expected to look beyond the documents presented to it by the seller pursuant to the letter of to speculation and conjecture.[35]
credit,[29] neither can the carrier be expected to go beyond the representations of the shipper in WHEREFORE, the assailed Decision is hereby AFFIRMED with
the bill of lading and to verify their accuracy vis--vis the commercial invoice and the letter of the MODIFICATION that the legal interest of six percent per annum shall be computed from
credit. Thus, the discrepancy between the amount of goods indicated in the invoice and the September 28, 1990 until its full payment before finality of judgment. The rate of interest shall
amount in the bill of lading cannot negate petitioners obligation to private respondent arising be adjusted to twelve percent per annum, computed from the time said judgment became final
from the contract of transportation. Furthermore, private respondent, as carrier, had no and executory until full satisfaction. The award of attorneys fees is DELETED.
knowledge of the contents of the container. The contract of carriage was under the SO ORDERED.
arrangement known as Shippers Load And Count, and the shipper was solely responsible for

68
EN BANC drafts presented by the J.B. Distributing Company, plus commission thereon, and, thereafter,
G.R. No. L-24821 October 16, 1970 endorsed and forwarded all documents to the Bank of the Philippine Islands.
BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee, In the meantime, as each shipment (covered by the above-mentioned letters of credit) arrived
vs. in the Philippines, the De Reny Fabric Industries, Inc. made partial payments to the Bank
DE RENY FABRIC INDUSTRIES, INC., AURORA T. TUYO and AURORA amounting, in the aggregate, to P90,000. Further payments were, however, subsequently
CARCERENY alias AURORA C. GONZALES, defendants-appellants. discontinued by the corporation when it became established, as a result of a chemical test
Aviado and Aranda for plaintiff-appellee. conducted by the National Science Development Board, that the goods that arrived in Manila
S. Emiliano Calma for defendants-appellants. were colored chalks instead of dyestuffs.
The corporation also refused to take possession of these goods, and for this reason, the Bank
caused them to be deposited with a bonded warehouse paying therefor the amount of
CASTRO, J.:. P12,609.64 up to the filing of its complaint with the court below on December 10, 1962.
This is an appeal from the decision of the Court of First Instance of Manila ordering the On October 24, 1963 the lower court rendered its decision ordering the corporation and its co-
defendants-appellants to pay to the Bank of the Philippine Islands (hereinafter referred to as defendants (the herein appellants) to pay to the plaintiff-appellee the amount of P291,807.46,
the Bank), jointly and severally, the value of the credit it extended to them in several letters of with interest thereon, as provided for in the L/C Agreements, at the rate of 7% per annum from
credit which the Bank opened at the behest of the defendants appellants to finance their October 31, 1962 until fully paid, plus costs.
importation of dyestuffs from the United States, which however turned out to be mere colored It is the submission of the defendants-appellants that it was the duty of the foreign
chalk upon arrival and inspection thereof at the port of Manila. correspondent banks of the Bank of the Philippine Islands to take the necessary precaution to
The record shows that on four (4) different occasions in 1961, the De Reny Fabric Industries, insure that the goods shipped under the covering L/Cs conformed with the item appearing
Inc., a Philippine corporation through its co-defendants-appellants, Aurora therein, and, that the foregoing banks having failed to perform this duty, no claim for
Carcereny alias Aurora C. Gonzales, and Aurora T. Tuyo, president and secretary, respectively recoupment against the defendants-appellants, arising from the losses incurred for the non-
of the corporation, applied to the Bank for four (4) irrevocable commercial letters of credit to delivery or defective delivery of the articles ordered, could accrue.
cover the purchase by the corporation of goods described in the covering L/C applications as We can appreciate the sweep of the appellants' argument, but we also find that it is nestled
"dyestuffs of various colors" from its American supplier, the J.B. Distributing Company. All hopelessly inside a salient where the valid contract between the parties and the internationally
the applications of the corporation were approved, and the corresponding Commercial L/C accepted customs of the banking trade must prevail. 1
Agreements were executed pursuant to banking procedures. Under these agreements, the Under the terms of their Commercial Letter of Credit Agreements with the Bank, the
aforementioned officers of the corporation bound themselves personally as joint and solidary appellants agreed that the Bank shall not be responsible for the "existence, character, quality,
debtors with the corporation. Pursuant to banking regulations then in force, the corporation quantity, conditions, packing, value, or delivery of the property purporting to be represented
delivered to the Bank peso marginal deposits as each letter of credit was opened. by documents; for any difference in character, quality, quantity, condition, or value of the
The dates and amounts of the L/Cs applied for and approved as well as the peso marginal property from that expressed in documents," or for "partial or incomplete shipment, or failure
deposits made were, respectively, as follows:. or omission to ship any or all of the property referred to in the Credit," as well as "for any
Date Application Amount Marginal deviation from instructions, delay, default or fraud by the shipper or anyone else in connection
& L/C No. Deposit with the property the shippers or vendors and ourselves [purchasers] or any of us." Having
Oct. 10, 1961 61/1413 $57,658.38 P43,407.33 agreed to these terms, the appellants have, therefore, no recourse but to comply with their
Oct. 23, 1961 61/1483 $25,867.34 19,473.64 covenant. 2
Oct. 30, 1961 61/1495 $19,408.39 14,610.88 But even without the stipulation recited above, the appellants cannot shift the burden of loss to
Nov. 10, 1961 61/1564 $26,687.64 20,090.90 the Bank on account of the violation by their vendor of its prestation.
TOTAL .... $129,621.75 P97,582.75 It was uncontrovertibly proven by the Bank during the trial below that banks, in providing
By virtue of the foregoing transactions, the Bank issued irrevocable commercial letters of financing in international business transactions such as those entered into by the appellants, do
credit addressed to its correspondent banks in the United States, with uniform instructions for not deal with the property to be exported or shipped to the importer, but deal only with
them to notify the beneficiary thereof, the J.B. Distributing Company, that they have been documents. The Bank introduced in evidence a provision contained in the "Uniform Customs
authorized to negotiate the latter's sight drafts up to the amounts mentioned the respectively, if and Practices for Commercial Documentary Credits Fixed for the Thirteenth Congress of
accompanied, upon presentation, by a full set of negotiable clean "on board" ocean bills of International Chamber of Commerce," to which the Philippines is a signatory nation. Article
lading covering the merchandise appearing in the LCs that is, dyestuffs of various colors. 10 thereof provides: .
Consequently, the J.B. Distributing Company drew upon, presented to and negotiated with In documentary credit operations, all parties concerned deal in documents
these banks, its sight drafts covering the amounts of the merchandise ostensibly being and not in goods. — Payment, negotiation or acceptance against
exported by it, together with clean bills of lading, and collected the full value of the drafts up documents in accordance with the terms and conditions of a credit by a
to the amounts appearing in the L/Cs as above indicated. These correspondent banks then Bank authorized to do so binds the party giving the authorization to take
debited the account of the Bank of the Philippine Islands with them up to the full value of the up the documents and reimburse the Bank making the payment,
negotiation or acceptance.

69
The existence of a custom in international banking and financing circles negating any duty on
the part of a bank to verify whether what has been described in letters of credits or drafts or
shipping documents actually tallies with what was loaded aboard ship, having been positively
proven as a fact, the appellants are bound by this established usage. They were, after all, the
ones who tapped the facilities afforded by the Bank in order to engage in international
business.
ACCORDINGLY, the judgment a quo is affirmed, at defendants-appellants' cost. This is
without prejudice to the Bank, in proper proceedings in the court below in this same case
proving and being reimbursed additional expenses, if any, it has incurred by virtue of the
continued storage of the goods in question up to the time this decision becomes final and
executory.

70
SECOND DIVISION majeure to justify the extension of time sought by petitioner; and [2) whether LHC had the
G.R. No. 146717 November 22, 2004 right to terminate the Turnkey Contract for failure of petitioner to complete the Project on
TRANSFIELD PHILIPPINES, INC., petitioner, target date.
vs. Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent
LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING provisions of the Turnkey Contract,12 petitioner—in two separate letters13 both dated 10 August
GROUP LIMITED and SECURITY BANK CORPORATION, respondents. 2000—advised respondent banks of the arbitration proceedings already pending before the
CIAC and ICC in connection with its alleged default in the performance of its obligations.
Asserting that LHC had no right to call on the Securities until the resolution of disputes before
DECISION the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or
disposition of the Securities in favor of LHC or any person claiming under LHC would
constrain it to hold respondent banks liable for liquidated damages.
As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to
TINGA, J.: Clause 8.214 of the Turnkey Contract, it failed to comply with its obligation to complete the
Subject of this case is the letter of credit which has evolved as the ubiquitous and most Project. Despite the letters of petitioner, however, both banks informed petitioner that they
important device in international trade. A creation of commerce and businessmen, the letter of would pay on the Securities if and when LHC calls on them. 15
credit is also unique in the number of parties involved and its supranational character. LHC asserted that additional extension of time would not be warranted; accordingly it
Petitioner has appealed from the Decision1 of the Court of Appeals in CA-G.R. SP No. 61901 declared petitioner in default/delay in the performance of its obligations under the Turnkey
entitled "Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al.," promulgated on 31 Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay
January 2001.2 beginning 28 June 2000 until actual completion of the Project pursuant to Clause 8.7.1 of the
On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) Turnkey Contract. At the same time, LHC served notice that it would call on the securities for
entered into a Turnkey Contract3 whereby petitioner, as Turnkey Contractor, undertook to the payment of liquidated damages for the delay. 16
construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for
Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner temporary restraining order and writ of preliminary injunction, against herein respondents as
was given the sole responsibility for the design, construction, commissioning, testing and defendants before the Regional Trial Court (RTC) of Makati. 17 Petitioner sought to restrain
completion of the Project.4 respondent LHC from calling on the Securities and respondent banks from transferring, paying
The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The
June 2000, or such later date as may be agreed upon between petitioner and respondent LHC RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case
or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled was docketed as Civil Case No. 00-1312 and raffled to Branch 148 of the RTC of Makati.
to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending
which are variations, force majeure, and delays caused by LHC itself. 5 Further, in case of the temporary restraining order for a period of seventeen (17) days or until 26 November
dispute, the parties are bound to settle their differences through mediation, conciliation and 2000.18
such other means enumerated under Clause 20.3 of the Turnkey Contract. 6 The RTC, in its Order19 dated 24 November 2000, denied petitioner's application for a writ of
To secure performance of petitioner's obligation on or before the target completion date, or preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable
such time for completion as may be determined by the parties' agreement, petitioner opened in injury to justify the issuance of the writ. Employing the principle of "independent contract" in
favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for
to as "the Securities"), to wit: Standby Letter of Credit No. E001126/8400 with the local liquidated damages. It debunked petitioner's contention that the principle of "independent
branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank) 7and contract" could be invoked only by respondent banks since according to it respondent LHC is
Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere
(SBC)8 each in the amount of US$8,988,907.00.9 custodians of the funds and as such they were obligated to transfer the same to the beneficiary
In the course of the construction of the project, petitioner sought various EOT to complete the for as long as the latter could submit the required certification of its claims.
Project. The extensions were requested allegedly due to several factors which prevented the Dissatisfied with the trial court's denial of its application for a writ of preliminary injunction,
completion of the Project on target date, such as force majeure occasioned by typhoon Zeb, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65,
barricades and demonstrations. LHC denied the requests, however. This gave rise to a series of with prayer for the issuance of a temporary restraining order and writ of preliminary
legal actions between the parties which culminated in the instant petition. injunction.20 Petitioner submitted to the appellate court that LHC's call on the Securities was
The first of the actions was a Request for Arbitration which LHC filed before the Construction premature considering that the issue of its default had not yet been resolved with finality by
Industry Arbitration Commission (CIAC) on 1 June 1999.10 This was followed by another the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had
Request for Arbitration, this time filed by petitioner before the International Chamber of no right to draw on the Securities for liquidated damages.
Commerce (ICC)11 on 3 November 2000. In both arbitration proceedings, the common issues Refuting petitioner's contentions, LHC claimed that petitioner had no right to restrain its call
presented were: [1) whether typhoon Zeb and any of its associated events constituted force on and use of the Securities as payment for liquidated damages. It averred that the Securities

71
are independent of the main contract between them as shown on the face of the two Standby of documentary and testimonial evidence came out through the use of different modes of
Letters of Credit which both provide that the banks have no responsibility to investigate the discovery available in the ICC Arbitration. It contends that after the filing of the petition facts
authenticity or accuracy of the certificates or the declarant's capacity or entitlement to so and admissions were discovered which demonstrate that LHC knowingly misrepresented that
certify. petitioner had incurred delays— notwithstanding its knowledge and admission that delays
In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary were excused under the Turnkey Contract—to be able to draw against the Securities.
restraining order, enjoining LHC from calling on the Securities or any renewals or substitutes Reiterating that fraud constitutes an exception to the independence principle, petitioner urges
thereof and ordering respondent banks to cease and desist from transferring, paying or in any that this warrants a ruling from this Court that the call on the Securities was wrongful, as well
manner disposing of the Securities. as contrary to law and basic principles of equity. It avers that it would suffer grave irreparable
However, the appellate court failed to act on the application for preliminary injunction until damage if LHC would be allowed to use the proceeds of the Securities and not ordered to
the temporary restraining order expired on 27 January 2001. Immediately thereafter, return the amounts it had wrongfully drawn thereon.
representatives of LHC trooped to ANZ Bank and withdrew the total amount of In its Manifestation dated 8 September 2003,24 LHC contends that the supplemental pleadings
US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00. filed by petitioner present erroneous and misleading information which would change
On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate petitioner's theory on appeal.
court expressed conformity with the trial court's decision that LHC could call on the Securities In yet another Manifestation dated 12 April 2004,25 petitioner alleges that on 18 February
pursuant to the first principle in credit law that the credit itself is independent of the 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon
underlying transaction and that as long as the beneficiary complied with the credit, it was of the Securities and that petitioner was entitled to the return of the sums wrongfully taken by
no moment that he had not complied with the underlying contract. Further, the appellate court LHC for liquidated damages.
held that even assuming that the trial court's denial of petitioner's application for a writ of LHC filed a Counter-Manifestation dated 29 June 2004, 26 stating that petitioner's Manifestation
preliminary injunction was erroneous, it constituted only an error of judgment which is not dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001
correctible by certiorari, unlike error of jurisdiction. Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt
Undaunted, petitioner filed the instant Petition for Review raising the following issues for only with the issue of whether injunction could issue to restrain the beneficiary of an
resolution: irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other
WHETHER THE "INDEPENDENCE PRINCIPLE" ON LETTERS OF CREDIT proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled "Transfield Philippines Inc. v.
MAY BE INVOKED BY A BENEFICIARY THEREOF WHERE THE Luzon Hydro Corporation," in which the parties made claims and counterclaims arising from
BENEFICIARY'S CALL THEREON IS WRONGFUL OR FRAUDULENT. petitioner's performance/misperformance of its obligations as contractor for LHC; and (2)
WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE Civil Case No. 04-332, entitled "Transfield Philippines, Inc. v. Luzon Hydro Corporation"
SECURITIES BEFORE THE RESOLUTION OF PETITIONER'S AND LHC'S before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of
DISPUTES BY THE APPROPRIATE TRIBUNAL. the ICC's partial award mentioned in petitioner's Manifestation of 12 April 2004.
WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN In its Comment to petitioner's Motion for Leave to File Addendum to Petitioner's
RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE Memorandum, LHC stresses that the question of whether the funds it drew on the subject
BEING NOTIFIED THAT LHC'S CALL THEREON IS WRONGFUL. letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds
WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND that the action to enforce the ICC's partial award is now fully within the Makati RTC's
IRREPARABLE DAMAGE IN THE EVENT THAT: jurisdiction in Civil Case No. 04-332. LHC asserts that petitioner is engaged in forum-
A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK shopping by keeping this appeal and at the same time seeking the suit for enforcement of the
AND SECURITY BANK ARE ALLOWED TO RELEASE, THE arbitral award before the Makati court.
REMAINING BALANCE OF THE SECURITIES PRIOR TO THE Respondent SBC in its Memorandum, dated 10 March 200327 contends that the Court of
RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND Appeals correctly dismissed the petition for certiorari. Invoking the independence principle,
LHC. SBC argues that it was under no obligation to look into the validity or accuracy of the
B. LHC DOES NOT RETURN THE AMOUNTS IT HAD certification submitted by respondent LHC or into the latter's capacity or entitlement to so
WRONGFULLY DRAWN FROM THE SECURITIES.21 certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and
Petitioner contends that the courts below improperly relied on the "independence principle" on the present petition would no longer serve any remedial purpose.
letters of credit when this case falls squarely within the "fraud exception rule." Respondent In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003 28 posits
LHC deliberately misrepresented the supposed existence of delay despite its knowledge that that its actions could not be regarded as unjustified in view of the prevailing independence
the issue was still pending arbitration, petitioner continues. principle under which it had no obligation to ascertain the truth of LHC's allegations that
Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of
to the principle against unjust enrichment and that, under the premises, injunction was the Credit No. E001126/8400 had been fully drawn, petitioner's prayer for preliminary injunction
appropriate remedy obtainable from the competent local courts. had been rendered moot and academic.
On 25 August 2003, petitioner filed a Supplement to the Petition22 and Supplemental
Memorandum,23 alleging that in the course of the proceedings in the ICC Arbitration, a number

72
At the core of the present controversy is the applicability of the "independence principle" and credit, not only between or among banks themselves but also between banks and the seller or
"fraud exception rule" in letters of credit. Thus, a discussion of the nature and use of letters of the buyer, as the case may be, the applicability of the UCP is undeniable.
credit, also referred to simply as "credits," would provide a better perspective of the case. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the
The letter of credit evolved as a mercantile specialty, and the only way to understand all its sales or other contract(s) on which they may be based and banks are in no way concerned with
facets is to recognize that it is an entity unto itself. The relationship between the beneficiary or bound by such contract(s), even if any reference whatsoever to such contract(s) is included
and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting in the credit. Consequently, the undertaking of a bank to pay, accept and pay draft(s) or
of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a negotiate and/or fulfill any other obligation under the credit is not subject to claims or
third-party beneficiary contract, because the issuer must honor drafts drawn against a letter defenses by the applicant resulting from his relationships with the issuing bank or the
regardless of problems subsequently arising in the underlying contract. Since the bank's beneficiary. A beneficiary can in no case avail himself of the contractual relationships existing
customer cannot draw on the letter, it does not function as an assignment by the customer to between the banks or between the applicant and the issuing bank.
the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once
entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, the draft and the required documents are presented to it. The so-called "independence
because it is not payable to order or bearer and is generally conditional, yet the draft presented principle" assures the seller or the beneficiary of prompt payment independent of any breach
under it is often negotiable.29 of the main contract and precludes the issuing bank from determining whether the main
In commercial transactions, a letter of credit is a financial device developed by merchants as a contract is actually accomplished or not. Under this principle, banks assume no liability or
convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of
irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a any documents, or for the general and/or particular conditions stipulated in the documents or
buyer, who wants to have control of the goods before paying. 30 The use of credits in superimposed thereon, nor do they assume any liability or responsibility for the description,
commercial transactions serves to reduce the risk of nonpayment of the purchase price under quantity, weight, quality, condition, packing, delivery, value or existence of the goods
the contract for the sale of goods. However, credits are also used in non-sale settings where represented by any documents, or for the good faith or acts and/or omissions, solvency,
they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings performance or standing of the consignor, the carriers, or the insurers of the goods, or any
have come to be known as standby credits.31 other person whomsoever.39
There are three significant differences between commercial and standby credits. First, The independent nature of the letter of credit may be: (a) independence in toto where the credit
commercial credits involve the payment of money under a contract of sale. Such credits is independent from the justification aspect and is a separate obligation from the underlying
become payable upon the presentation by the seller-beneficiary of documents that show he has agreement like for instance a typical standby; or (b) independence may be only as to the
taken affirmative steps to comply with the sales agreement. In the standby type, the credit is justification aspect like in a commercial letter of credit or repayment standby, which is
payable upon certification of a party's nonperformance of the agreement. The documents that identical with the same obligations under the underlying agreement. In both cases the payment
accompany the beneficiary's draft tend to show that the applicant has not performed. The may be enjoined if in the light of the purpose of the credit the payment of the credit would
beneficiary of a commercial credit must demonstrate by documents that he has performed his constitute fraudulent abuse of the credit.40
contract. The beneficiary of the standby credit must certify that his obligor has not performed Can the beneficiary invoke the independence principle?
the contract.32 Petitioner insists that the independence principle does not apply to the instant case and
By definition, a letter of credit is a written instrument whereby the writer requests or assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand,
authorizes the addressee to pay money or deliver goods to a third person and assumes contends that it would be contrary to common sense to deny the benefit of an independent
responsibility for payment of debt therefor to the addressee. 33 A letter of credit, however, contract to the very party for whom the benefit is intended. As beneficiary of the letter of
changes its nature as different transactions occur and if carried through to completion ends up credit, LHC asserts it is entitled to invoke the principle.
as a binding contract between the issuing and honoring banks without any regard or relation to As discussed above, in a letter of credit transaction, such as in this case, where the credit is
the underlying contract or disputes between the parties thereto. 34 stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the
Since letters of credit have gained general acceptability in international trade transactions, the beneficiary provided that the stipulated documents are presented and the conditions of the
ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for credit are complied with.41 Precisely, the independence principle liberates the issuing bank
Documentary Credits to standardize practices in the letter of credit area. The vast majority of from the duty of ascertaining compliance by the parties in the main contract. As the principle's
letters of credit incorporate the UCP.35 First published in 1933, the UCP for Documentary nomenclature clearly suggests, the obligation under the letter of credit is independent of the
Credits has undergone several revisions, the latest of which was in 1993. 36 related and originating contract. In brief, the letter of credit is separate and distinct from the
In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc., 37 this Court ruled that the underlying transaction.
observance of the UCP is justified by Article 2 of the Code of Commerce which provides that Given the nature of letters of credit, petitioner's argument—that it is only the issuing bank that
in the absence of any particular provision in the Code of Commerce, commercial transactions may invoke the independence principle on letters of credit—does not impress this Court. To
shall be governed by usages and customs generally observed. More recently, in Bank of say that the independence principle may only be invoked by the issuing banks would render
America, NT & SA v. Court of Appeals,38 this Court ruled that there being no specific nugatory the purpose for which the letters of credit are used in commercial transactions. As it
provisions which govern the legal complexities arising from transactions involving letters of is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.

73
Letters of credit are employed by the parties desiring to enter into commercial transactions, have to establish that fact in litigation. During the litigation, the surety holds the
not for the benefit of the issuing bank but mainly for the benefit of the parties to the original money and the beneficiary bears most of the cost of delay in performance.
transactions. With the letter of credit from the issuing bank, the party who applied for and In the standby credit case, however, the beneficiary avoids that litigation burden and
obtained it may confidently present the letter of credit to the beneficiary as a security to receives his money promptly upon presentation of the required documents. It may be
convince the beneficiary to enter into the business transaction. On the other hand, the other that the applicant has, in fact, performed and that the beneficiary's presentation of
party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured those documents is not rightful. In that case, the applicant may sue the beneficiary in
of being empowered to call on the letter of credit as a security in case the commercial tort, in contract, or in breach of warranty; but, during the litigation to determine
transaction does not push through, or the applicant fails to perform his part of the transaction. whether the applicant has in fact breached the obligation to perform, the beneficiary,
It is for this reason that the party who is entitled to the proceeds of the letter of credit is not the applicant, holds the money. Parties that use a standby credit and courts
appropriately called "beneficiary." construing such a credit should understand this allocation of burdens. There is a
Petitioner's argument that any dispute must first be resolved by the parties, whether through tendency in some quarters to overlook this distinction between surety contracts and
negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in standby credits and to reallocate burdens by permitting the obligor or the issuer to
essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a litigate the performance question before payment to the beneficiary. 42
clear distinction between a letter of credit and a guarantee in that the settlement of a dispute While it is the bank which is bound to honor the credit, it is the beneficiary who has the right
between the parties is not a pre-requisite for the release of funds under a letter of credit. In to ask the bank to honor the credit by allowing him to draw thereon. The situation itself
other words, the argument is incompatible with the very nature of the letter of credit. If a letter emasculates petitioner's posture that LHC cannot invoke the independence principle and
of credit is drawable only after settlement of the dispute on the contract entered into by the highlights its puerility, more so in this case where the banks concerned were impleaded as
applicant and the beneficiary, there would be no practical and beneficial use for letters of parties by petitioner itself.
credit in commercial transactions. Respondent banks had squarely raised the independence principle to justify their releases of
Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: the amounts due under the Securities. Owing to the nature and purpose of the standby letters
The standby credit is an attractive commercial device for many of the same reasons of credit, this Court rules that the respondent banks were left with little or no alternative but to
that commercial credits are attractive. Essentially, these credits are inexpensive and honor the credit and both of them in fact submitted that it was "ministerial" for them to honor
efficient. Often they replace surety contracts, which tend to generate higher costs the call for payment.43
than credits do and are usually triggered by a factual determination rather than by Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant
the examination of documents. provisions of the Contract read, thus:
Because parties and courts should not confuse the different functions of the surety 4.2.1. In order to secure the performance of its obligations under this Contract, the
contract on the one hand and the standby credit on the other, the distinction between Contractor at its cost shall on the Commencement Date provide security to the
surety contracts and credits merits some reflection. The two commercial devices Employer in the form of two irrevocable and confirmed standby letters of credit (the
share a common purpose. Both ensure against the obligor's nonperformance. They "Securities"), each in the amount of US$8,988,907, issued and confirmed by banks
function, however, in distinctly different ways. or financial institutions acceptable to the Employer. Each of the Securities must be
Traditionally, upon the obligor's default, the surety undertakes to complete the in form and substance acceptable to the Employer and may be provided on an
obligor's performance, usually by hiring someone to complete that performance. annually renewable basis.44
Surety contracts, then, often involve costs of determining whether the obligor 8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to
defaulted (a matter over which the surety and the beneficiary often litigate) plus the the Employer by way of liquidated damages ("Liquidated Damages for Delay") the
cost of performance. The benefit of the surety contract to the beneficiary is obvious. amount of US$75,000 for each and every day or part of a day that shall elapse
He knows that the surety, often an insurance company, is a strong financial between the Target Completion Date and the Completion Date, provided that
institution that will perform if the obligor does not. The beneficiary also should Liquidated Damages for Delay payable by the Contractor shall in the aggregate not
understand that such performance must await the sometimes lengthy and costly exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for
determination that the obligor has defaulted. In addition, the surety's performance Delay for each day of the delay on the following day without need of demand from
takes time. the Employer.
The standby credit has different expectations. He reasonably expects that he will 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
receive cash in the event of nonperformance, that he will receive it promptly, and the amount of such damages from any monies due, or to become due to the
that he will receive it before any litigation with the obligor (the applicant) over the Contractor and/or by drawing on the Security."45
nature of the applicant's performance takes place. The standby credit has this A contract once perfected, binds the parties not only to the fulfillment of what has been
opposite effect of the surety contract: it reverses the financial burden of parties expressly stipulated but also to all the consequences which according to their nature, may be in
during litigation. keeping with good faith, usage, and law.46 A careful perusal of the Turnkey Contract reveals
In the surety contract setting, there is no duty to indemnify the beneficiary until the the intention of the parties to make the Securities answerable for the liquidated damages
beneficiary establishes the fact of the obligor's performance. The beneficiary may occasioned by any delay on the part of petitioner. The call upon the Securities, while not an
exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon

74
the happening of the contingency for which the Securities have been proffered. Thus, even pressing necessity to avoid injurious consequences which cannot be remedied under any
without the use of the "independence principle," the Turnkey Contract itself bestows upon standard compensation.54
LHC the right to call on the Securities in the event of default. In the instant case, petitioner failed to show that it has a clear and unmistakable right to
Next, petitioner invokes the "fraud exception" principle. It avers that LHC's call on the restrain LHC's call on the Securities which would justify the issuance of preliminary
Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there injunction. By petitioner's own admission, the right of LHC to call on the Securities was
is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined contractually rooted and subject to the express stipulations in the Turnkey Contract. 55Indeed,
by the arbitral tribunals. It asserts that the "fraud exception" exists when the beneficiary, for the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw
the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2,
that contain, expressly or by implication, material representations of fact that to his knowledge thus:
are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available 4.2.5 The Employer shall give the Contractor seven days' notice of calling upon any
to it. of the Securities, stating the nature of the default for which the claim on any of the
Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is Securities is to be made, provided that no notice will be required if the Employer
not without limits and it is important to fashion those limits in light of the principle's purpose, calls upon any of the Securities for the payment of Liquidated Damages for Delay or
which is to serve the commercial function of the credit. If it does not serve those functions, for failure by the Contractor to renew or extend the Securities within 14 days of their
application of the principle is not warranted, and the commonlaw principles of contract should expiration in accordance with Clause 4.2.2. 56
apply. 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct
It is worthy of note that the propriety of LHC's call on the Securities is largely intertwined the amount of such damages from any monies due, or to become due, to the
with the fact of default which is the self-same issue pending resolution before the arbitral Contractor and/or by drawing on the Security.57
tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is The pendency of the arbitration proceedings would not per se make LHC's draws on the
imperative to resolve, among others, whether petitioner was in fact guilty of delay in the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate
performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule that the parties intended that all disputes regarding delay should first be settled through
upon the issue of default—such issue having been submitted by the parties to the jurisdiction arbitration before LHC would be allowed to call upon the Securities. It is therefore premature
of the arbitral tribunals pursuant to the terms embodied in their agreement. 47 and absurd to conclude that the draws on the Securities were outright fraudulent given the fact
Would injunction then be the proper remedy to restrain the alleged wrongful draws on the that the ICC and CIAC have not ruled with finality on the existence of default.
Securities? Nowhere in its complaint before the trial court or in its pleadings filed before the appellate
Most writers agree that fraud is an exception to the independence principle. Professor Dolan court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an
opines that the untruthfulness of a certificate accompanying a demand for payment under a injunction.58 What petitioner did assert before the courts below was the fact that LHC's draws
standby credit may qualify as fraud sufficient to support an injunction against payment. 48 The on the Securities would be premature and without basis in view of the pending disputes
remedy for fraudulent abuse is an injunction. However, injunction should not be granted between them. Petitioner should not be allowed in this instance to bring into play the fraud
unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or
independent purpose of the letter of credit and not only fraud under the main agreement; and arguments not brought out in the proceedings below will ordinarily not be considered by a
(c) irreparable injury might follow if injunction is not granted or the recovery of damages reviewing court as they cannot be raised for the first time on appeal. 59 The lower courts could
would be seriously damaged.49 thus not be faulted for not applying the fraud exception rule not only because the existence of
In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a fraud was fundamentally interwoven with the issue of default still pending before the arbitral
total extension of two hundred fifty-three (253) days which would move the target completion tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the
date. It argued that if its claims for extension would be found meritorious by the ICC, then courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable
LHC would not be entitled to any liquidated damages. 50 right to prevent LHC's call upon the Securities.
Generally, injunction is a preservative remedy for the protection of one's substantive right or Of course, prudence should have impelled LHC to await resolution of the pending issues
interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier
main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely
remedy to secure the rights of a party in a pending case is entirely within the discretion of the enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts
court taking cognizance of the case, the only limitation being that this discretion should be have the force of law between the contracting parties and should be complied with in good
exercised based upon the grounds and in the manner provided by law. 51 faith.60 More importantly, pursuant to the principle of autonomy of contracts embodied in
Before a writ of preliminary injunction may be issued, there must be a clear showing by the Article 1306 of the Civil Code,61petitioner could have incorporated in its Contract with LHC, a
complaint that there exists a right to be protected and that the acts against which the writ is to proviso that only the final determination by the arbitral tribunals that default had occurred
be directed are violative of the said right. 52It must be shown that the invasion of the right would justify the enforcement of the Securities. However, the fact is petitioner did not do so;
sought to be protected is material and substantial, that the right of complainant is clear and hence, it would have to live with its inaction.
unmistakable and that there is an urgent and paramount necessity for the writ to prevent With respect to the issue of whether the respondent banks were justified in releasing the
serious damage.53 Moreover, an injunctive remedy may only be resorted to when there is a amounts due under the Securities, this Court reiterates that pursuant to the independence

75
principle the banks were under no obligation to determine the veracity of LHC's certification Considering the seriousness of the charge of forum-shopping and the severity of the sanctions
that default has occurred. Neither were they bound by petitioner's declaration that LHC's call for its violation, the Court will refrain from making any definitive ruling on this issue until
thereon was wrongful. To repeat, respondent banks' undertaking was simply to pay once the after petitioner has been given ample opportunity to respond to the charge.
required documents are presented by the beneficiary. WHEREFORE, the instant petition is DENIED, with costs against petitioner.
At any rate, should petitioner finally prove in the pending arbitration proceedings that LHC's Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days
draws upon the Securities were wrongful due to the non-existence of the fact of default, its from notice.
right to seek indemnification for damages it suffered would not normally be foreclosed SO ORDERED.
pursuant to general principles of law.
Moreover, in a Manifestation,62 dated 30 March 2001, LHC informed this Court that the
subject letters of credit had been fully drawn. This fact alone would have been sufficient
reason to dismiss the instant petition.
Settled is the rule that injunction would not lie where the acts sought to be enjoined have
already become fait accompli or an accomplished or consummated act. 63 In Ticzon v. Video
Post Manila, Inc.64 this Court ruled that where the period within which the former employees
were prohibited from engaging in or working for an enterprise that competed with their former
employer—the very purpose of the preliminary injunction —has expired, any declaration
upholding the propriety of the writ would be entirely useless as there would be no actual case
or controversy between the parties insofar as the preliminary injunction is concerned.
In the instant case, the consummation of the act sought to be restrained had rendered the
instant petition moot—for any declaration by this Court as to propriety or impropriety of the
non-issuance of injunctive relief could have no practical effect on the existing
controversy.65 The other issues raised by petitioner particularly with respect to its right to
recover the amounts wrongfully drawn on the Securities, according to it, could properly be
threshed out in a separate proceeding.
One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two
occasions. First, in its Counter-Manifestation dated 29 June 200466 LHC alleges that petitioner
presented before this Court the same claim for money which it has filed in two other
proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC
of Makati. LHC argues that petitioner's acts constitutes forum-shopping which should be
punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioner's
Motion for Leave to File Addendum to Petitioner's Memorandum dated 8 October 2004, LHC
alleges that by maintaining the present appeal and at the same time pursuing Civil Case No.
04-332—wherein petitioner pressed for judgment on the issue of whether the funds LHC drew
on the Securities should be returned—petitioner resorted to forum-shopping. In both instances,
however, petitioner has apparently opted not to respond to the charge.
Forum-shopping is a very serious charge. It exists when a party repetitively avails of several
judicial remedies in different courts, simultaneously or successively, all substantially founded
on the same transactions and the same essential facts and circumstances, and all raising
substantially the same issues either pending in, or already resolved adversely, by some other
court.67 It may also consist in the act of a party against whom an adverse judgment has been
rendered in one forum, of seeking another and possibly favorable opinion in another forum
other than by appeal or special civil action of certiorari, or the institution of two or more
actions or proceedings grounded on the same cause on the supposition that one or the other
court might look with favor upon the other party.68 To determine whether a party violated the
rule against forum-shopping, the test applied is whether the elements of litis pendentia are
present or whether a final judgment in one case will amount to res judicata in
another.69 Forum-shopping constitutes improper conduct and may be punished with summary
dismissal of the multiple petitions and direct contempt of court. 70

76
THIRD DIVISION 4. Certification from Han-Axel Christiansen, Ship and Merchandise Broker, stating
G.R. No. 94209 April 30, 1991 that logs have been approved prior to shipment in accordance with terms and
FEATI BANK & TRUST COMPANY (now CITYTRUST BANKING conditions of corresponding purchase Order. (Record, Vol. 1 pp. 11-12)
CORPORATION), petitioner, Also incorporated by reference in the letter of credit is the Uniform Customs and Practice for
vs. Documentary Credits (1962 Revision).
THE COURT OF APPEALS, and BERNARDO E. VILLALUZ, respondents. The logs were thereafter loaded on the vessel "Zenlin Glory" which was chartered by
Pelaez, Adriano & Gregorio for petitioner. Christiansen. Before its loading, the logs were inspected by custom inspectors Nelo Laurente,
Ezequiel S. Consulta for private respondent. Alejandro Cabiao, Estanislao Edera from the Bureau of Customs (Records, Vol. I, p. 124) and
representatives Rogelio Cantuba and Jesus Tadena of the Bureau of Forestry (Records, Vol. I,
pp. 16-17) all of whom certified to the good condition and exportability of the logs.
GUTIERREZ, JR., J.: After the loading of the logs was completed, the Chief Mate, Shao Shu Wang issued a mate
This is a petition for review seeking the reversal of the decision of the Court of Appeals dated receipt of the cargo which stated the same are in good condition (Records, Vol. I, p. 363).
June 29, 1990 which affirmed the decision of the Regional Trial Court of Rizal dated October However, Christiansen refused to issue the certification as required in paragraph 4 of the letter
20, 1986 ordering the defendants Christiansen and the petitioner, to pay various sums to of credit, despite several requests made by the private respondent.
respondent Villaluz, jointly and severally. Because of the absence of the certification by Christiansen, the Feati Bank and Trust Company
The facts of the case are as follows: refused to advance the payment on the letter of credit.
On June 3, 1971, Bernardo E. Villaluz agreed to sell to the then defendant Axel Christiansen The letter of credit lapsed on June 30, 1971, (extended, however up to July 31, 1971) without
2,000 cubic meters of lauan logs at $27.00 per cubic meter FOB. the private respondent receiving any certification from Christiansen.
After inspecting the logs, Christiansen issued purchase order No. 76171. The persistent refusal of Christiansen to issue the certification prompted the private respondent
On the arrangements made and upon the instructions of the consignee, Hanmi Trade to bring the matter before the Central Bank. In a memorandum dated August 16, 1971, the
Development, Ltd., de Santa Ana, California, the Security Pacific National Bank of Los Central Bank ruled that:
Angeles, California issued Irrevocable Letter of Credit No. IC-46268 available at sight in . . . pursuant to the Monetary Board Resolution No. 1230 dated August 3, 1971, in
favor of Villaluz for the sum of $54,000.00, the total purchase price of the lauan logs. all log exports, the certification of the lumber inspectors of the Bureau of Forestry . .
The letter of credit was mailed to the Feati Bank and Trust Company (now Citytrust) with the . shall be considered final for purposes of negotiating documents. Any provision in
instruction to the latter that it "forward the enclosed letter of credit to the beneficiary." any letter of credit covering log exports requiring certification of buyer's agent or
(Records, Vol. I, p. 11) representative that said logs have been approved for shipment as a condition
The letter of credit further provided that the draft to be drawn is on Security Pacific National precedent to negotiation of shipping documents shall not be allowed. (Records, Vol.
Bank and that it be accompanied by the following documents: I, p. 367)
1. Signed Commercial Invoice in four copies showing the number of the purchase Meanwhile, the logs arrived at Inchon, Korea and were received by the consignee, Hanmi
order and certifying that — Trade Development Company, to whom Christiansen sold the logs for the amount of $37.50
a. All terms and conditions of the purchase order have been complied with per cubic meter, for a net profit of $10 per cubic meter. Hanmi Trade Development Company,
and that all logs are fresh cut and quality equal to or better than that on the other hand sold the logs to Taisung Lumber Company at Inchon, Korea. (Rollo, p. 39)
described in H.A. Christiansen's telex #201 of May 1, 1970, and that all Since the demands by the private respondent for Christiansen to execute the certification
logs have been marked "BEV-EX." proved futile, Villaluz, on September 1, 1971, instituted an action for mandamus and specific
b. One complete set of documents, including 1/3 original bills of lading performance against Christiansen and the Feati Bank and Trust Company (now Citytrust)
was airmailed to Consignee and Parties to be advised by Hans-Axel before the then Court of First Instance of Rizal. The petitioner was impleaded as defendant
Christiansen, Ship and Merchandise Broker. before the lower court only to afford complete relief should the court a quo order Christiansen
c. One set of non-negotiable documents was airmailed to Han Mi Trade to execute the required certification.
Development Company and one set to Consignee and Parties to be advised The complaint prayed for the following:
by Hans-Axel Christiansen, Ship and Merchandise Broker. 1. Christiansen be ordered to issue the certification required of him under the Letter
2. Tally sheets in quadruplicate. of Credit;
3. 2/3 Original Clean on Board Ocean Bills of Lading with Consignee and Parties to 2. Upon issuance of such certification, or, if the court should find it unnecessary,
be advised by Hans Axel Christiansen, showing Freight Prepaid and marked Notify: FEATI BANK be ordered to accept negotiation of the Letter of Credit and make
Han Mi Trade Development Company, Ltd., Santa Ana, California. payment thereon to Villaluz;
Letter of Credit No. 46268 dated June 7, 1971 3. Order Christiansen to pay damages to the plaintiff. (Rollo, p. 39)
Han Mi Trade Development Company, Ltd., P.O. Box 10480, Santa Ana, California On or about 1979, while the case was still pending trial, Christiansen left the Philippines
92711 and Han Mi Trade Development Company, Ltd., Seoul, Korea. without informing the Court and his counsel. Hence, Villaluz, filed an amended complaint to
make the petitioner solidarily liable with Christiansen.
The trial court, in its order dated August 29, 1979, admitted the amended complaint.

77
After trial, the lower court found: The defendant BANK, in insisting upon the certification of defendant
The liability of the defendant CHRISTIANSEN is beyond dispute, and the plaintiffs CHRISTIANSEN as a condition precedent to negotiating the letter of credit,
right to demand payment is absolute. Defendant CHRISTIANSEN having accepted likewise in the Court's opinion acted in bad faith, not only because of the clear
delivery of the logs by having them loaded in his chartered vessel the "Zenlin Glory" declaration of the Central Bank that such a requirement was illegal, but because the
and shipping them to the consignee, his buyer Han Mi Trade in Inchon, South Korea BANK, with all the legal counsel available to it must have known that the condition
(Art. 1585, Civil Code), his obligation to pay the purchase order had clearly arisen was void since it depended on the sole will of the debtor, the defendant
and the plaintiff may sue and recover the price of the goods (Art. 1595, Id). CHRISTIANSEN. (Art. 1182, Civil Code) (Rollo, pp. 29-31)
The Court believes that the defendant CHRISTIANSEN acted in bad faith and deceit On the basis of the foregoing the trial court on October 20, 1986, ruled in favor of the private
and with intent to defraud the plaintiff, reflected in and aggravated by, not only his respondent. The dispositive portion of its decision reads:
refusal to issue the certification that would have enabled without question the WHEREFORE, judgment is hereby rendered for the plaintiff, ordering the
plaintiff to negotiate the letter of credit, but his accusing the plaintiff in his answer defendants to pay the plaintiff, jointly and severally, the following sums:
of fraud, intimidation, violence and deceit. These accusations said defendant did not a) $54,000.00 (US), or its peso equivalent at the prevailing rate as of the time
attempt to prove, as in fact he left the country without even notifying his own payment is actually made, representing the purchase price of the logs;
lawyer. It was to the Court's mind a pure swindle. b) P17,340.00, representing government fees and charges paid by plaintiff in
The defendant Feati Bank and Trust Company, on the other hand, must be held liable connection with the logs shipment in question;
together with his (sic) co-defendant for having, by its wrongful act, i.e., its refusal to c) P10,000.00 as temperate damages (for trips made to Bacolod and Korea).
negotiate the letter of credit in the absence of CHRISTIANSEN's certification (in All three foregoing sums shall be with interest thereon at 12% per annum from
spite of the Central Bank's ruling that the requirement was illegal), prevented September 1, 1971, when the complaint was filed, until fully paid:
payment to the plaintiff. The said letter of credit, as may be seen on its face, d) P70,000.00 as moral damages;
is irrevocable and the issuing bank, the Security Pacific National Bank in Los e) P30,000.00 as exemplary damages; and
Angeles, California, undertook by its terms that the same shall be honored upon its f) P30,000.00 as attorney's fees and litigation expense.
presentment. On the other hand, the notifying bank, the defendant Feati Bank and (Rollo, p. 28)
Trust Company, by accepting the instructions from the issuing bank, itself assumed The petitioner received a copy of the decision on November 3, 1986. Two days thereafter, or
the very same undertaking as the issuing bank under the terms of the letter of credit. on November 5, 1986, it filed a notice of appeal.
xxx xxx xxx On November 10, 1986, the private respondent filed a motion for the immediate execution of
The Court likewise agrees with the plaintiff that the defendant BANK may also be the judgment on the ground that the appeal of the petitioner was frivolous and dilatory.
held liable under the principles and laws on both trust and estoppel. When the The trial court ordered the immediate execution of its judgment upon the private respondent's
defendant BANK accepted its role as the notifying and negotiating bank for and in filing of a bond.
behalf of the issuing bank, it in effect accepted a trust reposed on it, and became a The petitioner then filed a motion for reconsideration and a motion to suspend the
trustee in relation to plaintiff as the beneficiary of the letter of credit. As trustee, it implementation of the writ of execution. Both motions were, however, denied. Thus, petitioner
was then duty bound to protect the interests of the plaintiff under the terms of the filed before the Court of Appeals a petition for certiorari and prohibition with preliminary
letter of credit, and must be held liable for damages and loss resulting to the plaintiff injunction to enjoin the immediate execution of the judgment.
from its failure to perform that obligation. The Court of Appeals in a decision dated April 9, 1987 granted the petition and nullified the
Furthermore, when the defendant BANK assumed the role of a notifying and order of execution, the dispositive portion of the decision states:
negotiating BANK it in effect represented to the plaintiff that, if the plaintiff WHEREFORE, the petition for certiorari is granted. Respondent Judge's order of
complied with the terms and conditions of the letter of credit and presents the same execution dated December 29, 1986, as well as his order dated January 14, 1987
to the BANK together with the documents mentioned therein the said BANK will denying the petitioner's urgent motion to suspend the writ of execution against its
pay the plaintiff the amount of the letter of credit. The Court is convinced that it was properties are hereby annulled and set aside insofar as they are sought to be enforced
upon the strength of this letter of credit and this implied representation of the and implemented against the petitioner Feati Bank & Trust Company, now Citytrust
defendant BANK that the plaintiff delivered the logs to defendant CHRISTIANSEN, Banking Corporation, during the pendency of its appeal from the adverse decision in
considering that the issuing bank is a foreign bank with whom plaintiff had no Civil Case No. 15121. However, the execution of the same decision against
business connections and CHRISTIANSEN had not offered any other Security for defendant Axel Christiansen did not appeal said decision may proceed unimpeded.
the payment of the logs. Defendant BANK cannot now be allowed to deny its The Sheriff s levy on the petitioner's properties, and the notice of sale dated January
commitment and liability under the letter of credit: 13, 1987 (Annex M), are hereby annulled and set aside. Rollo p. 44)
A holder of a promissory note given because of gambling who indorses the A motion for reconsideration was thereafter filed by the private respondent. The Court of
same to an innocent holder for value and who assures said party that the Appeals, in a resolution dated June 29, 1987 denied the motion for reconsideration.
note has no legal defect, is in estoppel from asserting that there had been In the meantime, the appeal filed by the petitioner before the Court of Appeals was given due
an illegal consideration for the note, and so, he has to pay its value. course. In its decision dated June 29, 1990, the Court of Appeals affirmed the decision of the
(Rodriguez v. Martinez, 5 Phil. 67). lower court dated October 20, 1986 and ruled that:

78
1. Feati Bank admitted in the "special and negative defenses" section of its answer The petitioner interposes the following reasons for the allowance of the petition.
that it was the bank to negotiate the letter of credit issued by the Security Pacific First Reason
National Bank of Los Angeles, California. (Record, pp. 156, 157). Feati Bank did THE RESPONDENT COURT ERRONEOUSLY CONCLUDED FROM THE
notify Villaluz of such letter of credit. In fact, as such negotiating bank, even before ESTABLISHED FACTS AND INDEED, WENT AGAINST THE EVIDENCE AND
the letter of credit was presented for payment, Feati Bank had already made an DECISION OF THIS HONORABLE COURT, THAT PETITIONER BANK IS
advance payment of P75,000.00 to Villaluz in anticipation of such presentment. As LIABLE ON THE LETTER OF CREDIT DESPITE PRIVATE RESPONDENTS
the negotiating bank, Feati Bank, by notifying Villaluz of the letter of credit in NON-COMPLIANCE WITH THE TERMS THEREOF,
behalf of the issuing bank (Security Pacific), confirmed such letter of credit and Second Reason
made the same also its own obligation. This ruling finds support in the authority THE RESPONDENT COURT COMMITTED AN ERROR OF LAW WHEN IT
cited by Villaluz: HELD THAT PETITIONER BANK, BY NOTIFYING PRIVATE RESPONDENT
A confirmed letter of credit is one in which the notifying bank gives its assurance OF THE LETTER OF CREDIT, CONFIRMED SUCH CREDIT AND MADE THE
also that the opening bank's obligation will be performed. In such a case, the SAME ALSO ITS OBLIGATION AS GUARANTOR OF THE ISSUING BANK.
notifying bank will not simply transmit but will confirm the opening bank's Third Reason
obligation by making it also its own undertaking, or commitment, or guaranty or THE RESPONDENT COURT LIKEWISE COMMITTED AN ERROR OF LAW
obligation. (Ward & Hatfield, 28-29, cited in Agbayani, Commercial Laws, 1978 WHEN IT AFFIRMED THE TRIAL COURT'S DECISION. (Rollo, p. 12)
edition, p. 77). The principal issue in this case is whether or not a correspondent bank is to be held liable
Feati Bank argues further that it would be considered as the negotiating bank only under the letter of credit despite non-compliance by the beneficiary with the terms thereof?
upon negotiation of the letter of credit. This stance is untenable. Assurance, The petition is impressed with merit.
commitments or guaranties supposed to be made by notifying banks to the It is a settled rule in commercial transactions involving letters of credit that the documents
beneficiary of a letter of credit, as defined above, can be relevant or meaningful only tendered must strictly conform to the terms of the letter of credit. The tender of documents by
with respect to a future transaction, that is, negotiation. Hence, even before actual the beneficiary (seller) must include all documents required by the letter. A correspondent
negotiation, the notifying bank, by the mere act of notifying the beneficiary of the bank which departs from what has been stipulated under the letter of credit, as when it accepts
letter of credit, assumes as of that moment the obligation of the issuing bank. a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer
2. Since Feati Bank acted as guarantor of the issuing bank, and in effect also of the or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of
latter's principal or client, i.e. Hans Axel-Christiansen. (sic) Such being the case, strict compliance.
when Christiansen refused to issue the certification, it was as though refusal was In the United States, commercial transactions involving letters of credit are governed by the
made by Feati Bank itself. Feati Bank should have taken steps to secure the rule of strict compliance. In the Philippines, the same holds true. The same rule must also be
certification from Christiansen; and, if the latter should still refuse to comply, to hale followed.
him to court. In short, Feati Bank should have honored Villaluz's demand for The case of Anglo-South America Trust Co. v. Uhe et al. (184 N.E. 741 [1933]) expounded
payment of his logs by virtue of the irrevocable letter of credit issued in Villaluz's clearly on the rule of strict compliance.
favor and guaranteed by Feati Bank. We have heretofore held that these letters of credit are to be strictly complied with
3. The decision promulgated by this Court in CA-G.R. Sp No. 11051, which which documents, and shipping documents must be followed as stated in the letter.
contained the statement "Since Villaluz" draft was not drawn strictly in compliance There is no discretion in the bank or trust company to waive any requirements. The
with the terms of the letter of credit, Feati Bank's refusal to negotiate it was terms of the letter constitutes an agreement between the purchaser and the bank. (p.
justified," did not dispose of this question on the merits. In that case, the question 743)
involved was jurisdiction or discretion, and not judgment. The quoted Although in some American decisions, banks are granted a little discretion to accept a faulty
pronouncement should not be taken as a preemptive judgment on the merits of the tender as when the other documents may be considered immaterial or superfluous, this theory
present case on appeal. could lead to dangerous precedents. Since a bank deals only with documents, it is not in a
4. The original action was for "Mandamus and/or specific performance." Feati Bank position to determine whether or not the documents required by the letter of credit are material
may not be a party to the transaction between Christiansen and Security Pacific or superfluous. The mere fact that the document was specified therein readily means that the
National Bank on the one hand, and Villaluz on the other hand; still, being guarantor document is of vital importance to the buyer.
or agent of Christiansen and/or Security Pacific National Bank which had directly Moreover, the incorporation of the Uniform Customs and Practice for Documentary Credit
dealt with Villaluz, Feati Bank may be sued properly on specific performance as a (U.C.P. for short) in the letter of credit resulted in the applicability of the said rules in the
procedural means by which the relief sought by Villaluz may be entertained. (Rollo, governance of the relations between the parties.
pp. 32-33) And even if the U.C.P. was not incorporated in the letter of credit, we have already ruled in the
The dispositive portion of the decision of the Court of Appeals reads: affirmative as to the applicability of the U.C.P. in cases before us.
WHEREFORE, the decision appealed from is affirmed; and accordingly, the appeal In Bank of P.I. v. De Nery (35 SCRA 256 [1970]), we pronounced that the observance of the
is hereby dismissed. Costs against the petitioner. (Rollo, p. 33) U.C.P. in this jurisdiction is justified by Article 2 of the Code of Commerce. Article 2 of the
Hence, this petition for review. Code of Commerce enunciates that in the absence of any particular provision in the Code of

79
Commerce, commercial transactions shall be governed by the usages and customs generally own according to the terms and conditions of the credit. (Agbayani, Commercial Laws of the
observed. Philippines, Vol. 1, pp. 81-83)
There being no specific provision which governs the legal complexities arising from Hence, the mere fact that a letter of credit is irrevocable does not necessarily imply that the
transactions involving letters of credit not only between the banks themselves but also correspondent bank in accepting the instructions of the issuing bank has also confirmed the
between banks and seller and/or buyer, the applicability of the U.C.P. is undeniable. letter of credit. Another error which the lower court and the Court of Appeals made was to
The pertinent provisions of the U.C.P. (1962 Revision) are: confuse the obligation assumed by the petitioner.
Article 3. In commercial transactions involving letters of credit, the functions assumed by a
An irrevocable credit is a definite undertaking on the part of the issuing bank and correspondent bank are classified according to the obligations taken up by it. The
constitutes the engagement of that bank to the beneficiary and bona fide holders of correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank.
drafts drawn and/or documents presented thereunder, that the provisions for In case of a notifying bank, the correspondent bank assumes no liability except to notify
payment, acceptance or negotiation contained in the credit will be duly and/or transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc.
fulfilled,provided that all the terms and conditions of the credit are complied with. v. Public National Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import
An irrevocable credit may be advised to a beneficiary through another bank (the Banking, p. 292, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76). A
advising bank) without engagement on the part of that bank, but when an issuing negotiating bank, on the other hand, is a correspondent bank which buys or discounts a draft
bank authorizes or requests another bank to confirm its irrevocable credit and the under the letter of credit. Its liability is dependent upon the stage of the negotiation. If before
latter does so, such confirmation constitutes a definite undertaking of the confirming negotiation, it has no liability with respect to the seller but after negotiation, a contractual
bank. . . . relationship will then prevail between the negotiating bank and the seller. (Scanlon v. First
Article 7. National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p. 293,
Banks must examine all documents with reasonable care to ascertain that they cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
appear on their face to be in accordance with the terms and conditions of the credit," In the case of a confirming bank, the correspondent bank assumes a direct obligation to the
Article 8. seller and its liability is a primary one as if the correspondent bank itself had issued the letter
Payment, acceptance or negotiation against documents which appear on their face to of credit. (Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of
be in accordance with the terms and conditions of a credit by a bank authorized to the Philippines, Vol. 1, p. 77)
do so, binds the party giving the authorization to take up documents and reimburse In this case, the letter merely provided that the petitioner "forward the enclosed original credit
the bank which has effected the payment, acceptance or negotiation. (Emphasis to the beneficiary." (Records, Vol. I, p. 11) Considering the aforesaid instruction to the
Supplied) petitioner by the issuing bank, the Security Pacific National Bank, it is indubitable that the
Under the foregoing provisions of the U.C.P., the bank may only negotiate, accept or pay, if petitioner is only a notifying bank and not a confirming bank as ruled by the courts below.
the documents tendered to it are on their face in accordance with the terms and conditions of If the petitioner was a confirming bank, then a categorical declaration should have been stated
the documentary credit. And since a correspondent bank, like the petitioner, principally deals in the letter of credit that the petitioner is to honor all drafts drawn in conformity with the
only with documents, the absence of any document required in the documentary credit justifies letter of credit. What was simply stated therein was the instruction that the petitioner forward
the refusal by the correspondent bank to negotiate, accept or pay the beneficiary, as it is not its the original letter of credit to the beneficiary.
obligation to look beyond the documents. It merely has to rely on the completeness of the Since the petitioner was only a notifying bank, its responsibility was solely to notify and/or
documents tendered by the beneficiary. transmit the documentary of credit to the private respondent and its obligation ends there.
In regard to the ruling of the lower court and affirmed by the Court of Appeals that the The notifying bank may suggest to the seller its willingness to negotiate, but this fact alone
petitioner is not a notifying bank but a confirming bank, we find the same erroneous. does not imply that the notifying bank promises to accept the draft drawn under the
The trial court wrongly mixed up the meaning of an irrevocable credit with that of a confirmed documentary credit.
credit. In its decision, the trial court ruled that the petitioner, in accepting the obligation to A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
notify the respondent that the irrevocable credithas been transmitted to the petitioner on behalf relationship is only with that of the issuing bank and not with the beneficiary to whom he
of the private respondent, has confirmed the letter. assumes no liability. It follows therefore that when the petitioner refused to negotiate with the
The trial court appears to have overlooked the fact that an irrevocable credit is not private respondent, the latter has no cause of action against the petitioner for the enforcement
synonymous with a confirmed credit. These types of letters have different meanings and the of his rights under the letter. (See Kronman and Co., Inc. v. Public National Bank of New
legal relations arising from there varies. A credit may be an irrevocable credit and at the same York, supra)
time a confirmed credit or vice-versa. In order that the petitioner may be held liable under the letter, there should be proof that the
An irrevocable credit refers to the duration of the letter of credit. What is simply means is that petitioner confirmed the letter of credit.
the issuing bank may not without the consent of the beneficiary (seller) and the applicant The records are, however, bereft of any evidence which will disclose that the petitioner has
(buyer) revoke his undertaking under the letter. The issuing bank does not reserve the right to confirmed the letter of credit. The only evidence in this case, and upon which the private
revoke the credit. On the other hand, a confirmed letter of credit pertains to the kind of respondent premised his argument, is the P75,000.00 loan extended by the petitioner to him.
obligation assumed by the correspondent bank. In this case, the correspondent bank gives an
absolute assurance to the beneficiary that it will undertake the issuing bank's obligation as its

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The private respondent relies on this loan to advance his contention that the letter of credit was What actually transpires in an irrevocable credit is that the correspondent bank does not
confirmed by the petitioner. He claims that the loan was granted by the petitioner to him, "in receive in advance the sum of money from the buyer or the issuing bank. On the contrary,
anticipation of the presentment of the letter of credit." when the correspondent bank accepts the tender and pays the amount stated in the letter, the
The proposition advanced by the private respondent has no basis in fact or law. That the loan money that it doles out comes not from any particular fund that has been advanced by the
agreement between them be construed as an act of confirmation is rather far-fetched, for it issuing bank, rather it gets the money from its own funds and then later seeks reimbursement
depends principally on speculative reasoning. from the issuing bank.
As earlier stated, there must have been an absolute assurance on the part of the petitioner that Granting that a trust has been created, still, the petitioner may not be considered a trustee. As
it will undertake the issuing bank's obligation as its own. Verily, the loan agreement it entered the petitioner is only a notifying bank, its acceptance of the instructions of the issuing bank
into cannot be categorized as an emphatic assurance that it will carry out the issuing bank's will not create estoppel on its part resulting in the acceptance of the trust. Precisely, as a
obligation as its own. notifying bank, its only obligation is to notify the private respondent of the existence of the
The loan agreement is more reasonably classified as an isolated transaction independent of the letter of credit. How then can such create estoppel when that is its only duty under the law?
documentary credit. We also find erroneous the statement of the Court of Appeals that the petitioner "acted as a
Of course, it may be presumed that the petitioner loaned the money to the private respondent guarantor of the issuing bank and in effect also of the latter's principal or client, i.e., Hans Axel
in anticipation that it would later be paid by the latter upon the receipt of the letter. Yet, we Christiansen."
would have no basis to rule definitively that such "act" should be construed as an act of It is a fundamental rule that an irrevocable credit is independent not only of the contract
confirmation. between the buyer and the seller but also of the credit agreement between the issuing bank and
The private respondent no doubt was in need of money in loading the logs on the ship "Zenlin the buyer. (See Kingdom of Sweden v. New York Trust Co., 96 N.Y.S. 2d 779 [1949]). The
Glory" and the only way to satisfy this need was to borrow money from the petitioner which relationship between the buyer (Christiansen) and the issuing bank (Security Pacific National
the latter granted. From these circumstances, a logical conclusion that can be gathered is that Bank) is entirely independent from the letter of credit issued by the latter.
the letter of credit was merely to serve as a collateral. The contract between the two has no bearing as to the non-compliance by the buyer with the
At the most, when the petitioner extended the loan to the private respondent, it assumed the agreement between the latter and the seller. Their contract is similar to that of a contract of
character of a negotiating bank. Even then, the petitioner will still not be liable, for a services (to open the letter of credit) and not that of agency as was intimated by the Court of
negotiating bank before negotiation has no contractual relationship with the seller. Appeals. The unjustified refusal therefore by Christiansen to issue the certification under the
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship letter of credit should not likewise be charged to the issuing bank.
between the seller and the negotiating bank, viz: As a mere notifying bank, not only does the petitioner not have any contractual relationship
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no with the buyer, it has also nothing to do with the contract between the issuing bank and the
contractual duty toward the person for whose benefit the letter is written to discount buyer regarding the issuance of the letter of credit.
or purchase any draft drawn against the credit. No relationship of agent and The theory of guarantee relied upon by the Court of Appeals has to necessarily fail. The
principal, or of trustee and cestui, between the receiving bank and the beneficiary of concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each
the letter is established. (P.568) other.
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held In the first place, the guarantee theory destroys the independence of the bank's responsibility
liable. Absent any definitive proof that it has confirmed the letter of credit or has actually from the contract upon which it was opened. In the second place, the nature of both contracts
negotiated with the private respondent, the refusal by the petitioner to accept the tender of the is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is
private respondent is justified. merely collateral and it arises only upon the default of the person primarily liable. On the other
In regard to the finding that the petitioner became a "trustee in relation to the plaintiff (private hand, in an irrevocable credit the bank undertakes a primary obligation. (SeeNational Bank of
respondent) as the beneficiary of the letter of credit," the same has no legal basis. Eagle Pass, Tex v. American National Bank of San Francisco, 282 F. 73 [1922])
A trust has been defined as the "right, enforceable solely in equity, to the beneficial enjoyment The relationship between the issuing bank and the notifying bank, on the contrary, is more
of property the legal title to which is vested to another." (89 C.J.S. 712) similar to that of an agency and not that of a guarantee. It may be observed that the notifying
The concept of a trust presupposes the existence of a specific property which has been bank is merely to follow the instructions of the issuing bank which is to notify or to transmit
conferred upon the person for the benefit of another. In order therefore for the trust theory of the letter of credit to the beneficiary. (See Kronman v. Public National Bank of New
the private respondent to be sustained, the petitioner should have had in its possession a sum York, supra). Its commitment is only to notify the beneficiary. It does not undertake any
of money as specific fund advanced to it by the issuing bank and to be held in trust by it in assurance that the issuing bank will perform what has been mandated to or expected of it. As
favor of the private respondent. This does not obtain in this case. an agent of the issuing bank, it has only to follow the instructions of the issuing bank and to it
The mere opening of a letter of credit, it is to be noted, does not involve a specific alone is it obligated and not to buyer with whom it has no contractual relationship.
appropriation of a sum of money in favor of the beneficiary. It only signifies that the In fact the notifying bank, even if the seller tenders all the documents required under the letter
beneficiary may be able to draw funds upon the letter of credit up to the designated amount of credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be
specified in the letter. It does not convey the notion that a particular sum of money has been held liable for its only engagement is to notify and/or transmit to the seller the letter of credit.
specifically reserved or has been held in trust.

81
Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be
forced to pay the amount under the letter. As we have previously explained, there was a failure
on the part of the private respondent to comply with the terms of the letter of credit.
The failure by him to submit the certification was fatal to his case.1âwphi1 The U.C.P. which
is incorporated in the letter of credit ordains that the bank may only pay the amount specified
under the letter if all the documents tendered are on their face in compliance with the credit. It
is not tasked with the duty of ascertaining the reason or reasons why certain documents have
not been submitted, as it is only concerned with the documents. Thus, whether or not the buyer
has performed his responsibility towards the seller is not the bank's problem.
We are aware of the injustice committed by Christiansen on the private respondent but we are
deciding the controversy on the basis of what the law is, for the law is not meant to favor only
those who have been oppressed, the law is to govern future relations among people as well. Its
commitment is to all and not to a single individual. The faith of the people in our justice
system may be eroded if we are to decide not what the law states but what we believe it should
declare. Dura lex sed lex.
Considering the foregoing, the materiality of ruling upon the validity of the certificate of
approval required of the private respondent to submit under the letter of credit, has become
insignificant.
In any event, we affirm the earlier ruling of the Court of Appeals dated April 9, 1987 in regard
to the petition before it for certiorari and prohibition with preliminary injunction, to wit:
There is no merit in the respondent's contention that the certification required in
condition No. 4 of the letter of credit was "patently illegal." At the time the letter of
credit was issued there was no Central Bank regulation prohibiting such a condition
in the letter of credit. The letter of credit (Exh. C) was issued on June 7, 1971, more
than two months before the issuance of the Central Bank Memorandum on August
16, 1971 disallowing such a condition in a letter of credit. In fact the letter of credit
had already expired on July 30, 1971 when the Central Bank memorandum was
issued. In any event, it is difficult to see how such a condition could be categorized
as illegal or unreasonable since all that plaintiff Villaluz, as seller of the logs, could
and should have done was to refuse to load the logs on the vessel "Zenlin Glory",
unless Christiansen first issued the required certification that the logs had been
approved by him to be in accordance with the terms and conditions of his purchase
order. Apparently, Villaluz was in too much haste to ship his logs without taking all
due precautions to assure that all the terms and conditions of the letter of credit had
been strictly complied with, so that there would be no hitch in its negotiation. (Rollo,
p. 8)
WHEREFORE, the COURT RESOLVED to GRANT the petition and hereby NULLIFIES and
SETS ASIDE the decision of the Court of Appeals dated June 29, 1990. The amended
complaint in Civil Case No. 15121 is DISMISSED.
SO ORDERED.

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SECOND DIVISION Romblon or Cebu; and (f) nearly causing the loss of petitioner's rights over its Cebu claims;
G.R. No. L-68010 May 30, 1986 and that instead of helping petitioner get back on its feet, DBP completely abandoned the
FILIPINAS MABLE CORPORATION, petitioner, petitioner's project and proceeded to foreclose the properties mortgaged to it by petitioner
vs. without previous demand or notice.
THE HONORABLE INTERMEDIATE APPELLATE COURT, THE HONORABLE In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and
CANDIDO VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT deed of assignment which it executed in favor of DBP in order to secure the $5,000,000.00
BANK OF THE PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. loan because it is petitioner's contention that there was no loan at all to secure since what DBP
(Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO PALILEO, ALVARO "lent" to petitioner with its right hand, it also got back with its left hand; and that, there was
TORIO, JOSE T. PARDO, ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff failure of consideration with regard to the execution of said deeds as the loan was never
NORVELL R. LIM, respondents. delivered to the petitioner. The petitioner further prayed that pending the trial on the merits of
Vicente Millora for petitioner. the case, the trial court immediately issue a restraining order and then a writ of preliminary
Jesus A. Avencena and Bonifacio M. Abad for respondents. injunction against the sheriffs to enjoin the latter from proceeding with the foreclosure and
sale of the petitioner's properties in Metro Manila and in Romblon.
Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under
GUTIERREZ, JR., J.: Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of
This petition for review seeks to annul the decision and resolution of the appellate court which petitioner had already amounted to P123,801,265.82 as against its total obligation of
upheld the trial court's decision denying the petitioner's prayer to enjoin the respondent from P151,957,641.72; that under the same decree, no court can issue any restraining order or
foreclosing on its properties. injunction against it to stop the foreclosure since Filipinas Marble's arrearages had already
On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification reached at least twenty percent of its total obligations; that the alleged non-receipt of the loan
of deeds and damages with prayer for a restraining order and a writ of preliminary injunction proceeds by the petitioner could, at best, be accepted only in a technical sense because the
against the private respondents. In its complaint, the petitioner alleged in substance that it money was received by the officers of the petitioner acting in such capacity and, therefore,
applied for a loan in the amount of $5,000,000.00 with respondent Development Bank of the irrespective of whoever is responsible for placing them in their positions, their receipt of the
Philippines (DBP) in its desire to develop the fun potentials of its mining claims and deposits; money was receipt by the petitioner corporation and that the complaint does not raise any
that DBP granted the loan subject, however, to sixty onerous conditions, among which are: (a) substantial controversy as to the amount due under the mortgage as the issues raised therein
petitioner shall have to enter into a management contract with respondent Bancom Systems refer to the propriety of the manner by which the proceeds of the loan were expended by the
Control, Inc. [Bancom]; (b) DBP shall be represented by no less than six (6) regular directors, petitioner's management, the allegedly precipitate manner with which DBP proceeded with the
three (3) to be nominated by Bancom and three (3) by DBP, in Filipinos Marble's board, one of foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights.
whom shall continue to be the chairman of the board; (c) the key officers/executives [the After a hearing on the preliminary injunction, the trial court issued an order stating:
President and the officers for finance, marketing and purchasing] to be chosen by Bancom for The Court has carefully gone over the evidence presented by both parties,
the corporation shall be appointed only with DBP's prior approval and all these officers are to and while it sympathizes with the plight of the plaintiff and of the pitiful
be made directly responsible to DBP; DBP shall immediately designate Mr. Alvaro Torio, condition it now has found itself, it cannot but adhere to the mandatory
Assistant Manager of DBP's Accounting Department as DBP's Comptroller in the firm whose provisions of P.D. 385. While the evidence so far presented by the plaintiff
compensation shall be borne by Filipinas Marble; and (d) the $5 Million loan shall be secured corporation appears to be persuasive, the same may be considered material
by: 1) a final mortgage on the following assets with a total approved value of and relevant to the case. Hence, despite the impressive testimony of the
P48,630,756.00 ... ; 2) the joint and several signatures with Filipinas Marble of Mr. Pelagio M. plaintiff's witnesses, the Court believes that it cannot enjoin the defendant
Villegas, Sr., Trinidad Villegas, and Jose E. Montelibano and 3) assignment to DBP of the Development Bank of the Philippines from complying with the mandatory
borrower firm's right over its mining claims; that pursuant to these above- mentioned and provisions of the said Presidential Decree. It having been shown that
other "take it or leave it" conditions, the petitioner entered into a management contract with plaintiff's outstanding obligation as of December 31, 1982 amounted to
Bancom whereby the latter agreed to manage the plaintiff company for a period of three years; P151,957,641.72 and with arrearages reaching up to 81 % against said
that under the management agreement, the affairs of the petitioner were placed under the total obligation, the Court finds the provisions of P.D. 385 applicable to
complete control of DBP and Bancom including the disposition and disbursement of the the instant case. It is a settled rule that when the statute is clear and
$5,000,000 or P37,600,000 loan; that the respondents and their directors/officers mismanaged unambiguous, there is no room for interpretation, and all that it has to do is
and misspent the loan, after which Bancom resigned with the approval of DBP even before the to apply the same.
expiration date of the management contract, leaving petitioner desolate and devastated; that On appeal, the Intermediate Appellate Court upheld the trial court's decision and held:
among the acts and omissions of the respondents are the following. (a) failure to purchase all While petitioner concedes 'that Presidential Decree No. 385 applies only
the necessary machinery and equipment needed by the petitioner's project for which the where it is clear that there was a loan or where the loan is not denied' (p.
approved loan was intended; (b) failure to construct a processing plant; (c) abandonment of 14-petition), it disclaims receipt of the $5 million loan nor benefits derived
imported machinery and equipment at the pier, (d) purchase of unsuitable lot for the therefrom and bewails the onerous conditions imposed by DBP Resolution
processing plant at Binan; (e) failure to develop even a square meter of the quarries in No. 385 dated December 7, 1977, which allegedly placed the petitioner

83
under the complete control of the private respondents DBP and Bancom financial institution concerned. This shall be without prejudice to the
Systems Control Inc. (Bancom, for short). The plausibility of petitioner's exercise by the government financial institution of such rights and/or
statement that it did Dot receive the $5 million loan is more apparent than remedies available to them under their respective contracts with their
real. At the hearing for injunction before the counsel for DBP stressed that debtors, including the right to foreclose on loans, credits,
$2,625,316.83 of the $5 million loan was earmarked to finance the accommodations, and/or guarantees on which the arrearages are less than
acquisition of machinery, equipment and spare parts for petitioner's twenty percent (20%).
Diamond gangsaw which machineries were actually imported by Section 2. No restraining order, temporary or permanent injunction shall
petitioner Filipinas Marble Corporation and arrived in the Philippines. be issued by the court against any government financial institution in any
Indeed, a summary of releases to petitioner covering the period June 1978 action taken by such institution in compliance with the mandatory
to October 1979 (Exh. 2, Injunction) showed disbursements amounting to foreclosure provided in Section 1 hereof, whether such restraining order,
millions of pesos for working capital and opening of letter of credits for temporary or permanent injunction is sought by the borrower(s) or any
the acquisition of its machineries and equipment. Petitioner does not third party or parties, except after due hearing in which it is established by
dispute that releases were made for the purchase of machineries and the borrower, and admitted by the government financial institution
equipment but claims that such imported machineries were left to the concerned that twenty percent (20%) of the outstanding arrearages has
mercy of the elements as they were never delivered to it. been paid after the filing of foreclosure proceedings.
xxxxxxxxx Presidential Decree No. 385 was issued primarily to see to it that government financial
Apart from the foregoing, petitioner is patently not entitled to a writ of institutions are not denied substantial cash inflows, which are necessary to finance
preliminary injunction for it has not demonstrated that at least 20% of its development projects all over the country, by large borrowers who, when they become
outstanding arrearages has been paid after the foreclosure proceedings delinquent, resort to court actions in order to prevent or delay the government's collection of
were initiated. Nowhere in the record is it shown or alleged that petitioner their debts and loans.
has paid in order that it may fall within the exception prescribed on The government, however, is bound by basic principles of fairness and decency under the due
Section 2, Presidential Decree No. 385. process clause of the Bill of Rights. P.D. 385 was never meant to protect officials of
Dissatisfied with the appellate court's decision, the petitioner filed this instant petition with the government lending institutions who take over the management of a borrower corporation,
following assignments of errors: lead that corporation to bankruptcy through mismanagement or misappropriation of its funds,
1. There being 'persuasive' evidence that the $5 million proceeds of the and who, after ruining it, use the mandatory provisions of the decree to avoid the
loan were not received and did not benefit the petitioner per finding of the consequences of their misdeeds.
lower court which should not be disturbed unless there is grave abuse of The designated officers of the government financing institution cannot simply walk away and
discretion, it must follow that PD 385 does not and cannot apply; then state that since the loans were obtained in the corporation's name, then P.D. 385 must be
2. If there was no valid loan contract for failure of consideration, the peremptorily applied and that there is no way the borrower corporation can prevent the
mortgage cannot exist or stand by itself being a mere accessory contract. automatic foreclosure of the mortgage on its properties once the arrearages reach twenty
Additionally, the chattel mortgage has not been registered. Therefore, the percent (20%) of the total obligation no matter who was responsible.
same is null and void under Article 2125 of the New Civil Code; and In the case at bar, the respondents try to impress upon this Court that the $5,000,000.00 loan
3. PD 385 is unconstitutional as a 'class legislation', and violative of the was actually granted and released to the petitioner corporation and whatever the composition
due process clause. of the management which received the loan is of no moment because this management was
With regard to the first assignment of error, the petitioner maintains that since the trial court acting in behalf of the corporation. The respondents also argue that since the loan was
found "persuasive evidence" that there might have been a failure of consideration on the extended to the corporation, the releases had to be made to the then officers of that borrower
contract of loan due to the manner in which the amount of $5 million was spent, said court corporation.
committed grave abuse of discretion in holding that it had no recourse but to apply P.D. 385 Precisely, what the petitioner is trying to point out is that the DBP and Bancom people who
because the application of this decree requires the existence of a valid loan which, however, is managed Filipinas Marble misspent the proceeds of the loan by taking advantage of the
not present in petitioner's case. It likewise faults the appellate court for upholding the positions that they were occupying in the corporation which resulted in the latter's devastation
applicability of the said decree. instead of its rehabilitation. The petitioner does not question the authority under which the
Sections 1 and 2 of P.D. No. 385 respectively provide: loan was delivered but stresses that it is precisely this authority which enabled the DBP and
Section 1. It shall be mandatory for government financial institutions after Bancom people to misspend and misappropriate the proceeds of the loan thereby defeating its
the lapse of sixty (60) days from the issuance of this Decree, to foreclose very purpose, that is, to develop the projects of the corporation. Therefore, it is as if the loan
the collaterals and/or securities for any loan, credit accommodation, and/or was never delivered to it and thus, there was failure on the part of the respondent DBP to
guarantees granted by them whenever the arrearages on such account, deliver the consideration for which the mortgage and the assignment of deed were executed.
including accrued interest and other charges, amount to at least twenty We cannot, at this point, conclude that respondent DBP together with the Bancom people
(20%) of the total outstanding obligations, including interest and other actually misappropriated and misspent the $5 million loan in whole or in part although the trial
charges, as appearing in the book of accounts and/or related records of the court found that there is "persuasive" evidence that such acts were committed by the

84
respondent. This matter should rightfully be litigated below in the main action. Pending the The above conditions lend credence to the petitioner's contention that the "original loan had
outcome of such litigation, P.D. 385 cannot automatically be applied for if it is really proven been converted into 'equity shares', or preferred shares; therefore, to all intents and purposes,
that respondent DBP is responsible for the misappropriation of the loan, even if only in part, the only 'loan' which is the subject of the foreclosure proceedings is the $5 million loan in
then the foreclosure of the petitioner's properties under the provisions of P.D. 385 to satisfy the 1978. "
whole amount of the loan would be a gross mistake. It would unduly prejudice the petitioner, As regards the second assignment of error, we agree with the petitioner that a mortgage is a
its employees and their families. mere accessory contract and, thus, its validity would depend on the validity of the loan secured
Only after trial on the merits of the main case can the true amount of the loan which was by it. We, however, reject the petitioner's argument that since the chattel mortgage involved
applied wisely or not, for the benefit of the petitioner be determined. Consequently, the extent was not registered, the same is null and void. Article 2125 of the Civil Code clearly provides
of the loan where there was no failure of consideration and which may be properly satisfied by that the non-registration of the mortgage does not affect the immediate parties. It states:
foreclosure proceedings under P.D. 385 will have to await the presentation of evidence in a Art. 2125. In addition to the requisites stated in article 2085, it is
trial on the merits. As we have ruled in the case of Central Bank of the Philippines vs. Court of indispensable, in order that a mortgage may be validly constituted that the
Appeals, (1 39 SCRA 46, 5253; 56): document in which it appears be recorded in the Registry of Property. If
When Island Savings Bank and Sulpicio M. Tolentino entered into an the instrument is not recorded, the mortgage is nevertheless binding
P80,000.00 loan agreement on April 28, 1965, they undertook reciprocal between the parties.
obligations, the obligation or promise of each party is the consideration for xxxxxxxxx
that of the othe. (Penacio vs. Ruaya, 110 SCRA 46 [1981]; ... The petitioner cannot invoke the above provision to nullify the chattel mortgage it executed in
xxxxxxxxx favor of respondent DBP.
The fact that when Sulpicio M. Tolentino executed his real estate We find no need to pass upon the constitutional issue raised in the third assignment of error.
mortgage, no consideration was then in existence, as there was no debt yet We follow the rule started in Alger Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45).
because Island Savings Bank had not made any release on the loan, does We see no necessity of passing upon the constitutional issues raised by
not make the real estate mortgage void for lack of consideration. It is not respondent Northern. This Court does not decide questions of a
necessary that any consideration should pass at the time of the execution constitutional nature unless absolutely necessary to a decision of a case. If
of the contract of real mortgage (Bonnevie vs. Court of Appeals, 125 there exists some other grounds of construction, we decide the case on a
SCRA 122 [1983]. It may either be a prior or subsequent matter. But when non- constitutional determination. (See Burton vs. United States, 196 U.S.
the consideration is subsequent to the mortgage, the mortgage can take 283; Siler vs. Luisville & Nashville R. Co., 123 U.S. 175; Berta College
effect only when the debt secured by it is created as a binding contract to vs. Kentucky, 211 U.S. 45).
pay (Parks vs. Sherman, Vol. 2, pp. 5-6). And, when there is partial failure WHEREFORE, IN VIEW OF THE FOREGOING, the petition is GRANTED. The orders of
of consideration, the mortgage becomes unenforceable to the extent of the Intermediate Appellate Court dated April 17, 1984 and July 3, 1984 are hereby
such failure (Dow, et al. vs. Poore Vol. 172 N.E. p. 82, cited in Vol. 59, ANNULLED and SET ASIDE. The trial court is ordered to proceed with the trial on the merits
1974 ed. C.J.S. p. 138). ... of the main case. In the meantime, the temporary restraining order issued by this Court on July
Under the admitted circumstances of this petition, we, therefore, hold that until the trial on the 23, 1984 shall remain in force until the merits of the main case are resolved.
merits of the main case, P.D. 385 cannot be applied and thus, this Court can restrain the SO ORDERED.
respondents from foreclosing on petitioner's properties pending such litigation.
The respondents, in addition, assert that even if the $5 million loan were not existing, the
mortgage on the properties sought to be foreclosed was made to secure previous loans of the
petitioner with respondent and therefore, the foreclosure is still justified.
This contention is untenable. Two of the conditions imposed by respondent DBP for the
release of the $5 million loan embodied in its letter to petitioner dated December 21, 1977
state:
A. The interim loan of $289,917.32 plus interest due thereon which was
used for the importation of one Savage Diamond Gangsaw shall be
liquidated out of the proceeds of this $5 million loan. In addition, FMC
shall also pay DBP, out of the proceeds of above foreign currency loan, the
past due amounts on obligation with DBP.
xxxxxxxxx
B. Conversion into preferred shares of P 2 million of FMCs total
obligations with DBP as of the date the legal documents for this
refinancing shall have been exempted or not later than 90 days from date
of advice of approval of this accommodation.

85
[G.R. No. 128669. October 4, 2002] compensate Mr. & Mrs. Graciano Jayme for any and all or whatever damage they may sustain
MAMERTA VDA. DE JAYME, and her children and/or heirs of the late GRACIANO or suffer by virtue and arising out of the mortgage to MBTC of the aforestated parcel of land.
[11]
JAYME, namely: WILFREDO, MARCIAL, MANUEL, ANTONIO, all In addition, Neri wrote a letter dated September 1, 1981 [12] addressed to Mamerta Jayme
surnamed JAYME; the heirs of DOMINADOR JAYME, namely: SUPREMA acknowledging her confidence and help extended to him, his family and Asiancars. He
(surviving spouse) and his children, namely: ARMANDO, NICANOR, promised to pay their indebtedness to MBTC before the loan was due.
ZENAIDA, CATHERINE, ROSALINE, DORIS, VICKY and MARILYN, all Meeting financial difficulties and incurring an outstanding balance on the loan,
surnamed JAYME; and the heirs of the late NILIE JAYME SANCHEZ, Asiancars conveyed ownership of the building on the leased premises to MBTC, by way
namely, INOCENCIO SANCHEZ (surviving spouse) and her children: of dacion en pago.[13] The building was valued at P980,000 and the amount was applied as
ELSA, CONCEPCION, CLEOFE, ALEJANDRO, EFREN and MACRINA, all partial payment for the loan. There still remained a balance of P2,942,449.66, which Asiancars
surnamed SANCHEZ; and FLORA JAYME RAVANES, assisted by her failed to pay.
husband, CESAR RAVANES, petitioners, vs. HON. COURT OF APPEALS, Eventually, MBTC extrajudicially foreclosed the mortgage. A public auction was held
SIXTEENTH DIVISION, CEBU ASIANCARS INC., GEORGE NERI, on February 4, 1981. MBTC was the highest bidder for P1,067,344.35. A certificate of sale
CONNIE NERI, WILLIAM LEONG KOC LEE, EDUARD JAMES LEE, was issued and was registered with the Register of Deeds on February 23, 1981.
ROBERTO UY KIM, AND CHARLES UY KIM; [1] METROPOLITAN BANK Meanwhile, Graciano Jayme died, survived by his widow Mamerta and their children.
AND TRUST COMPANY, RENE NATIVIDAD AND/OR JOHN DOE in As a result of the foreclosure, Gracianos heirs filed a civil complaint, [14] in January of 1982, for
substitution of MAXIMO PEREZ, sued in his capacity as City Sheriff of Annulment of Contract with Damages with Prayer for Issuance of Preliminary Injunction,
Mandaue City, respondents. against respondent Asiancars, its officers and incorporators and MBTC. Later, in 1999,
DECISION Mamerta Jayme also passed away.
QUISUMBING, J.: Petitioners claim that Neri and Asiancars did not tell them that the indebtedness secured
This petition assails the decision [2] dated September 19, 1996, of the Court of Appeals in by the mortgage was for P6,000,000 and that the security was the whole of Lot 2700.
CA-G.R. CV No. 46496 and its resolution [3] dated February 21, 1997, denying the motion for Petitioners allege that the deed presented to the Jayme spouses was in blank, without
reconsideration. Said decision had affirmed that of the Regional Trial Court of Cebu City, explanation on the stipulations contained therein, except that its conditions were identical to
Branch 15, in Civil Case No. CEB-21369 for Annulment of Contract and Damages with those of the stipulations when they mortgaged half the lots area previously with General
Prayer for the Issuance of Preliminary Injunction. [4] Bank. Petitioners also alleged that the Jayme spouses were illiterate and only knew how to
The following facts are borne by the records: sign their names. That because they did not know how to read nor write, and had given their
The spouses Graciano and Mamerta Jayme are the registered owners of Lot 2700, full trust and confidence to George Neri, the spouses were deceived into signing the Deed of
situated in the Municipality of Mandaue (now Mandaue City), Cebu, consisting of 2,568 sq.m. Real Estate Mortgage. Their intention as well as consent was only to be bound as guarantors.
and covered by Transfer Certificate of Title No. 8290. Respondents deny that any fraud was employed, nor was there a scheme to make the
On January 8, 1973, they entered into a Contract of Lease [5] with George Neri, president spouses sign as mortgagors instead of guarantors. They aver that the spouses were fully
of Airland Motors Corporation (now Cebu Asiancars Inc.), covering one-half of Lot 2700. The advised and compensated for the use of their property as collateral with MBTC; that they
lease was for twenty (20) years. voluntarily signed the deed of mortgage upon the request of George Neri, whom they
The terms and conditions of the lease contract [6] stipulated that Cebu Asiancars Inc. previously trusted and who fulfilled his promise to pay the loan to General Bank and who
(hereafter, Asiancars) may use the leased premises as a collateral to secure payment of a loan obtained the release of the same property by faithfully paying his indebtedness with General
which Asiancars may obtain from any bank, provided that the proceeds of the loan shall be Bank.
used solely for the construction of a building which, upon the termination of the lease or After trial, the RTC rendered a decision, disposing as follows:
the voluntary surrender of the leased premises before the expiration of the contract, WHEREFORE, in view of the foregoing evidences, arguments and considerations, this Court
shall automatically become the property of the Jayme spouses (the lessors). hereby renders judgment as follows:
A Special Power of Attorney [7] dated January 26, 1974, was executed in favor of 1. Declaring the Real Estate Mortgage executed by the Jaymes in favor of
respondent George Neri, who used the lot to secure a loan of P300,000 from the General Bank Metrobank as valid and binding;
and Trust Company. The loan was fully paid on August 14, 1977.[8] 2. Declaring the Undertaking executed by George Neri, Benny Leongben Lee
In October 1977, Asiancars obtained a loan of P6,000,000 from the Metropolitan Bank already deceased, William Leong Koc, Connie U. Neri, Edward James Lee,
and Trust Company (MBTC). The entire Lot 2700 was offered as one of several properties Roberto Uykim, and Charles P. Uykim on November 7, 1977 to be valid and
given as collateral for the loan. As mortgagors, the spouses signed a Deed of Real Estate binding as well upon the signatories thereof;
Mortgage[9] dated November 21, 1977 in favor of MBTC. It stated that the deed was to secure 3. Allowing the Jaymes to redeem the mortgaged property, Lot 2700 covered by
the payment of a loan obtained by Asiancars from the bank. TCT 8290 of the Register of Deeds of Mandaue City for the amount of
To assure the Jayme spouses, Neri and the other officers of Asiancars, namely Benny P2,942,448.66 plus interest at the rate of 6% per annum within ninety (90)
Liongben Lee, William Leong Koc Lee, Connie U. Neri, Edward James Lee, Roberto Uykim days from date of finality of this judgment until paid. However, if the plaintiffs
and Charles P. Uykim, executed an undertaking [10] dated November 7, 1977. In it they fail to redeem said property, then let a Certificate of Sale/definite Deed of Sale
promised, in their personal capacities and/or in representation of Cebu Asiancars, Inc., to be issued in favor of Metropolitan Bank and Trust Co. covering said Lot 2700;

86
4. Holding the defendants George Neri, William Leong Koc, Connie U. Neri, THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED IN
Edward James Lee, Roberto Uykim, and Charles Uykim jointly liable on their DECLARING THE PERIOD TO REDEEM LOT NO. 2700 HAD EXPIRED ON
Undertakingdated November 7, 1977 as they are hereby required to reimburse FEBRUARY 23, 1982, WITHOUT THE PLAINTIFFS REDEEMING IT FOR SUCH
the Jaymes the amount that the Jaymes will pay to Metropolitan Bank and DECLARATION IS NOT WELL-FOUNDED IN LAW AND IN FACT;
Trust Co. for the redemption; III
5. Requiring the defendants George Neri, William Leong Koc, Connie U. Neri, THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED IN
Edward James Lee, Roberto Uykim and Charles Uykim to pay jointly DECLARING VALID AND BINDING THE DACION EN PAGO EXECUTED BY
attorneys fees to the Jaymes in the amount of P50,000.00; DEFENDANT CEBU ASIAN- CARS IN FAVOR OF DEFENDANT MBTC, FOR SAID
6. Requiring the defendants George Neri, William Leong Koc, Connie U. Neri, DECLARATION IS ILLEGAL AND IS CLEARLY FOUNDED ON WANTON BAD FAITH
Edwards James Lee, Roberto Uykim and Charles Uykim to pay jointly the COMMITTED BY BOTH PARTIES, IN VIOLATION OF ART. 1312, CIVIL CODE OF THE
cost of this suit. PHILIPPINES AND SEC. 10, ART. III, CONSTITUTION OF THE PHILIPPINES;
SO ORDERED.[15] IV
Petitioners and respondent MBTC elevated the case to the Court of Appeals, which GRANTING ARGUENDO THAT THE DACION EN PAGO IS VALID, STILL THE
affirmed the ruling of the RTC, with modifications stated in this wise: LOWER COURT COMMITTED GRAVE ABUSE OF DISCRETION, BY NOT
1. Declaring valid and binding the Real Estate Mortgage executed by plaintiffs in DECLARING THAT THE P574,690.00 INDEBTEDNESS, INCLUDING INTEREST AND
favor of defendant MBTC; ADDITIONAL CHARGES OF CEBU ASIANCARS WAS COMPLETELY
2. Declaring valid the foreclosure of the mortgage and the foreclosure sale; EXTINGUISHED OR PAID OFF, BY WAY OF DACION EN PAGO PURSUANT TO ARTS.
3. Declaring that the period to redeem Lot 2700 had expired on February 23, 1982 1255, 2076 AND 2077 OF THE CIVIL CODE OF THE PHILIPPINES.
without plaintiffs redeeming it; V
4. Ordering the Sheriff of Mandaue City to issue a definite Deed of Sale covering THAT THE LOWER COURT COMMITTED GRAVE ABUSE OF DISCRETION,
Lot 2700 in favor of defendant MBTC; AMOUNTING TO EXCESS OF JURISDICTION, IN DECLARING VALID AND BINDING
5. Declaring valid and binding the dacion en pago executed by defendant THE MORTGAGE AND THE CORRESPONDING FORECLOSURE, FOR SAID
Asiancars in favor of defendant MBTC; DECLARATION IS ILLEGAL, IN VIOLATION OF ARTS. 1231 (5), 1245 AND 1255,
6. Declaring defendant MBTC as owner of the building on Lot 2700; CIVIL CODE AND BY THE INDUBITABLE EVIDENCE OF ALL THE PARTIES
7. Ordering defendant MBTC to pay to plaintiffs the amount of P92,083.33 for the TESTIMONIAL AND DOCUMENTARY, TO THE EFFECT THAT THE SIX (6) MILLION
use of the land from December 18, 1981 to February 23, 1982, with six INDEBTEDNESS OF CEBU ASIANCARS WAS OVERPAID, THUS MBTC ALSO
percent (6%) interest per annum until paid; VIOLATED ARTS. 2142, CIVIL CODE OF THE PHILIPPINES;
8. Ordering defendant Asiancars, Neris, Uykims, Lee and Koc to pay jointly and VI
severally the plaintiffs the (a) actual value of the lot in the amount of THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER COURT ERRED BY
P3,852,000.00; (b) P400,000.00 moral damages; (c) P150,000.00 exemplary VIOLATING EXH. C, THE CONTRACT OF LEASE, WHICH IS THE LAW BETWEEN
damages and P100,000.00 attorneys fee, all with six percent (6%) interest per THE PARTIES, AND INSTEAD, DELIBERATELY DECLARED VALID AND BINDING
annum until fully paid; THE MORTGAGE EXH. G, AND THE FORECLOSURE OF MORTGAGE, AND IN NOT
9. Cost against defendants Asiancars, Neris, Uykims, Lee and Koc. ORDERING MBTC TO VACATE THE PREMISES UPON THE TERMINATION OF THE
SO ORDERED.[16] CONTRACT OF LEASE ON JANUARY 9, 1993 PURSUANT TO EXH. C, AND
Petitioners filed a motion for reconsideration, which the CA denied. Hence, this petition LIKEWISE PAY RENTAL THEREAFTER, FOR ITS USE AT P96,300.00 MONTHLY
which assigns the following errors: UNTIL MBTC ACTUALLY VACATES THE PREMISES.[17]
I On March 13, 2002, the Court set a hearing on this petition, and parties were given thirty
THAT WITH GRAVE ABUSE OF DISCRETION, AMOUNTING TO EXCESS OF days for simultaneous submission of their respective memoranda. Petitioners additionally
JURISDICTION, THE LOWER COURT GROSSLY AND SERIOUSLY ERRED IN submitted reply/rejoinder and respondent MBTC also submitted its rejoinder sur-rejoinder.
DECLARING VALID AND BINDING THE REAL ESTATE MORTGAGE EXECUTED BY Two main issues are for our resolution. First, whether or not the REM should be
THE PLAINTIFFS IN FAVOR OF THE MBTC, FOR SAID DECLARATION IS ILLEGAL annulled on the ground of vitiated consent; and second, whether or not the dacion en pago by
AND NOT WELL-FOUNDED IN LAW BECAUSE IT ULTIMATELY VIOLATED ARTS. Asiancars in favor of MBTC is valid and binding despite the stipulation in the lease contract
2058, 2076 AND 2077, CIVIL CODE OF THE PHILIPPINES, SINCE THE REAL ESTATE that ownership of the building will vest on the Jaymes at the termination of the lease.
MORTGAGE, EXH. G, IS NOT LEGALLY A REAL ESTATE MORTGAGE, BUT RATHER The facts show that the spouses affixed their signature on the Deed of Real Estate
A DEED OF GUARANTY, CONSIDERING THAT THE PLAINTIFF MAMERTA VDA. DE Mortgage, in the presence of two instrumental witnesses, and duly notarized by Atty. Rodolfo
JAYME AND HER HUSBAND GRACIANO JAYME, NOW DECEASED, SIGNED Y. Cabrera. As a notarized document, it has in its favor the presumption of regularity, and to
INNOCENTLY THE SAID DOCUMENT AS GUARANTORS/ACCOMODATORS ONLY overcome this presumption, there must be evidence that is clear, convincing and more than
AND DEFINITELY NOT AS DEBTORS/MORTGAGORS; merely preponderant that there was irregularity in its execution; otherwise, the document
II should be upheld.[18]

87
The Deed of Real Estate Mortgage entered into by the Jayme spouses partake of a Third At the time of the foreclosure, Asiancars had a remaining balance of P2,010,633.28.
Party Mortgage under Art. 2085 (3) of the Civil Code which reads: Thus, MBTC had every right to effect the extrajudicial foreclosure of the mortgaged properties
The following requisites are essential to the contracts of pledge and mortgage: xxx (3) That the to satisfy its claim.
persons constituting the pledge or mortgage have the free disposal of their property, and in the The appellate court found that the spouses lost their right to redeem their property.
absence thereof, that they be legally authorized for the purpose. Under Section 78 of the General Banking Act then in force, [24] the mortgagor or debtor whose
Third persons who are not parties to the principal obligation may secure the latter by pledging real property has been foreclosed and sold at public auction, has the right to redeem the
or mortgaging their own property. property within one year from the sale of the real estate as a result of the foreclosure. The
In the case of Lustan vs. CA, et al.,[19] this Court recognized the abovecited provision and reckoning date in the case of a registered land is from the date of registration of the certificate
held that so long as valid consent was given, the fact that the loans were solely for the benefit of sale.[25] If no redemption is timely made, the buyer in a foreclosure sale becomes the
of (the debtor) would not invalidate the mortgage with respect to petitioners property. In absolute owner of the property purchased. [26] In this case, the certificate of sale was registered
consenting thereto even granting that petitioner may not be assuming personal liability for the on February 23, 1981, giving petitioners until February 23, 1982 to redeem the property. This
debt, her property shall nevertheless secure and respond for the performance of the principal they failed to do, hence, ownership of the property already vested in the purchaser, private
obligation. respondent MBTC.
Clearly, the law recognizes instances when persons not directly parties to a loan Much as we sympathize with petitioners plight, we are unable to find merit in their plea
agreement may give as security their own properties for the principal transaction. In this case, for the annulment of the deed of sale covering Lot 2700 as a result of foreclosure of
the spouses should not be allowed to disclaim the validity of a transaction they voluntarily and mortgage. Petitioners failed to show the required quantum of evidence that they were
knowingly entered into for the simple reason that such transaction turned out prejudicial to fraudulently made to sign as mortgagors. As early as Vales v. Villa, 35 Phil. 769 (1916), this
them later on. Court has sounded a note of warning to litigants:
Both the trial and appellate courts found that no fraud attended the execution of the deed The law furnishes no protection to the inferior simply because he is inferior any more than it
of mortgage. This is a factual finding that binds this Court. Further, the records clearly show protects the strong because he is strong. The law furnishes protection to both alike to one no
that the spouses Jayme agreed to use their property as collateral for Neris loan because Neri more or less than the other. It makes no distinction between the wise and the foolish, the great
had their full trust and confidence. Mamerta herself testified that she and her husband were and the small, the strong and the weak. The foolish may lose all they have to the wise; but that
assured by Neris promise that he would take full responsibility for whatever happens to the does not mean that the law will give it back to them again. Courts cannot follow one every
property of the spouses and that he would comply with his obligations to the bank. [20] step of his life and extricate him from bad bargains, protect him from unwise investments,
The spouses were assisted by their own lawyer, Atty. Cirilo Sanchez, in all their relieve him from one-sided contracts, or annul the effects of foolish acts. [27]
transactions, including the ones with Asiancars and MBTC. Atty. Sanchez even signed as an Petitioners however, are not without recourse for the loss of their property. Although
instrumental witness to a Special Power of Attorney executed by the spouses in favor of Neri, they cannot go after respondent MBTC, they have in their favor the undertaking executed by
authorizing the latter to mortgage the same property to MBTC. Although the said SPA was George Neri and other members of his family. The undertaking also bound respondent
eventually not used because MBTC required that the spouses themselves execute the REM, Asiancars, as well as its officers who were signatories to the aforesaid Undertaking, to
still, the fact remains that the spouses were already set on allowing the mortgage. In addition, reimburse petitioners for the damages they suffered by reason of the mortgage.
we note that Nelia Sanchez, the daughter of the spouses and one of the petitioners herein, The alienation of the building by Asiancars in favor of MBTC for the partial satisfaction
admitted that their parents consulted her and her siblings before their parents executed the of its indebtedness is, in our view, also valid. The ownership of the building had been
Deed.[21] effectively in the name of the lessee-mortgagor (Asiancars), though with the provision that
With the assistance of a lawyer and consultation with their literate children, the spouses said ownership be transferred to the Jaymes upon termination of the lease or the voluntary
though illiterate could not feign ignorance of the stipulations in the deed.Patently, theirs was surrender of the premises. The lease was constituted on January 8, 1973 and was to expire 20
not a vitiated consent. It could not now be justifiably asserted by petitioners that the Jayme years thereafter, or on January 8, 1993. The alienation via dacion en pago was made by
spouses only intended to be bound as guarantors and not as mortgagors. Asiancars to MBTC on December 18, 1980, during the subsistence of the lease. At this point,
In this jurisdiction, when the property of a third person which has been expressly the mortgagor, Asiancars, could validly exercise rights of ownership, including the right to
mortgaged to guarantee an obligation to which the said person is a stranger, said property is alienate it, as it did to MBTC.
directly and jointly liable for the fulfillment thereof, in the same manner as the mortgaged Dacion en pago is the delivery and transmission of ownership of a thing by the debtor to
property of the debtor himself.[22] the creditor as an accepted equivalent of the performance of the obligation. [28] It is a special
In the case at bar, when Asiancars failed to pay its obligations with MBTC, the mode of payment where the debtor offers another thing to the creditor who accepts it as
properties given as security (one of them being the land owned by the Jaymes) became subject equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of
to foreclosure. When several things are given to secure the same debt in its entirety, all of them the nature of sale, that is the creditor is really buying the thing or property of the debtor,
are liable for the debt, and the creditor does not have to divide his action by distributing the payment for which is to be charged against the debtors debt. As such, the essential elements of
debt among the various things pledged or mortgaged. Even when only a part of the debt a contract of sale, namely, consent, object certain, and cause or consideration must be
remains unpaid, all the things are liable for such balance. [23] present. In its modern concept, what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of sale, while the debt

88
is considered as the purchase price. In any case, common consent is an essential prerequisite,
be it sale or novation, to have the effect of totally extinguishing the debt or obligation. [29]
We also find that the Court of Appeals did not err in considering MBTC as a purchaser
in good faith. MBTC had no knowledge of the stipulation in the lease contract. Although the
same lease was registered and duly annotated on the certificate of title of Lot 2700, MBTC
was charged with constructive knowledge only of the fact of lease of the land and not of the
specific provision stipulating transfer of ownership of the building to the Jaymes upon
termination of the lease. There was no annotation on the title of any encumbrance. [30] While
the alienation was in violation of the stipulation in the lease contract between the Jaymes and
Asiancars, MBTCs own rights could not be prejudiced by Asiancars actions unbeknownst to
MBTC. Thus, the transfer of the building in favor of MBTC was properly held valid and
binding by respondent Court of Appeals.
One point, however, has to be cleared. The appellate court ordered MBTC to pay rentals
to petitioners at the rate of P25.00 monthly per square meter. For the Asiancars building stood
on the lot owned by the petitioners, until the time MBTC also consolidated its ownership over
the lot. Rentals would have to be paid starting on December 18, 1980, when the buildings
ownership was transferred to MBTC, until February 23, 1982, when MBTC finally
consolidated its ownership over Lot 2700. Hence, we agree that there was error in the
computation of rentals by the CA. [31] From December 18, 1980 until February 23, 1982, is a
period of 1 year, 2 months and 5 days. Thus, MBTC should pay to petitioners rentals for the
use of the occupied lot,[32] consisting of 1,700 sq. m. at the monthly rate of P25.00 per sq. m.
for that period, in the total amount of P602,083.33, with six (6) percent interest per annum
until fully paid.
Finally, we are in agreement that bad faith attended Asiancars transfer of the building to
MBTC. Asiancars was well aware of its covenant with the Jaymes that the buildings
ownership was to be transferred to the Jaymes upon termination of the lease. Indeed,
petitioners suffered mental anxiety and nervous shock upon learning that the ownership of the
building standing on their property had already been transferred to MBTC. The apparent
disregard of petitioners right by Asiancars and other private respondents provides enough basis
for an award of moral as well as exemplary damages[33] by the appellate court.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED with the
MODIFICATION that private respondent MBTC is ordered to pay petitioners rentals in the
total amount of P602,083.33, with six (6) percent interest per annum until fully paid. In all
other respects, the assailed decision and resolution of the Court of Appeals are AFFIRMED.
SO ORDERED.

89
[G.R. No. 133079. August 9, 2005] With the petitioners having failed to redeem their property within the 1-year redemption
SPS. MAXIMO LANDRITO, JR. and PACITA EDGALANI, petitioners, vs. THE period from the date of inscription of the sheriffs certificate of sale, as provided for in Act No.
HONORABLE COURT OF APPEALS; SPS. BENJAMIN SAN DIEGO and 3135, as amended, the San Diegos caused the consolidation of title over the foreclosed
CARMENCITA SAN DIEGO; The EX-OFFICIO SHERIFF and CLERK OF property in their names.
COURT of the Regional Trial Court, Makati City; and the REGISTER OF Then, on 09 November 1994, before the Regional Trial Court at Makati City, petitioners
DEEDS, Makati City, respondents. filed their complaint for annulment of the extrajudicial foreclosure and auction sale, with
DECISION damages. In their complaint, thereat docketed as Civil Case No. 94-2950, petitioners alleged
GARCIA, J.: that (1) said foreclosure and auction sale were null and void for failure to comply with the
Herein petitioners, the spouses Maximo Landrito, Jr. and Pacita Landrito, have come to requirements of notice and publication, as mandated by Act 3135, as amended; (2) the
this Court via this petition for review on certiorari under Rule 45 of the Rules of Court to seek mortgaged property was illegally foreclosed in the light of the settled rule that an action to
the reversal and setting aside of the decision dated 12 December 1997 [1] and resolution dated foreclose a mortgage must be limited to the amount mentioned in the mortgage document, in
10 March 1998[2] of the Court of Appeals in CA-G.R. CV No. 48896, affirming an earlier this case, P1,000,000.00, which amount was allegedly bloated by respondent Carmencita San
order of the Regional Trial Court at Makati City which granted the motion to dismiss filed by Diego to P1,950,000.00; and (3) the San Diegos application for consolidation of title was
the herein private respondents, the spouses Benjamin San Diego and Carmencita San Diego, in premature because the husband, Benjamin San Diego, allegedly granted them an extension of
its Civil Case No. 94-2950, a complaint for annulment of extrajudicial foreclosure and auction the period of redemption up to 11 November 1994.
sale, thereat commenced by them against the San Diegos, the ex-officio sheriff and the To the complaint, respondents interposed a Motion to Dismiss, therein alleging that said
Register of Deeds of Makati City. complaint failed to state a cause of action as no primary right of the petitioners had been
The facts: violated since they actually failed to exercise their right of redemption within the one-year
In July 1990, petitioners obtained a loan of P350,000.00 from respondent Carmencita redemption period, adding that petitioners never took any action which may stall the running
San Diego. To secure payment thereof, petitioners executed on 02 August 1990 in favor of the of the same period, thereby leaving them no further right or interest in the property in
same respondent a deed of real estate mortgage over their parcel of land located at Bayanan, question.
Muntinlupa, Rizal and registered in their names under Transfer Certificate of Title No. In an order dated 13 January 1995, the trial court granted respondents motion to dismiss
(432281) S-21000. and accordingly dismissed petitioners complaint, saying that the latters cause of action, if any,
After making substantial payments, petitioners again obtained and were granted by is already barred by laches on account of their failure or neglect for an unreasonable length of
Carmencita San Diego an additional loan of One Million Pesos (P1,000,000.00). To secure this time to do that which, by exercising due diligence, could or should have been done earlier.
additional loan, the parties executed on 13 September 1991 an Amendment of Real Estate Further, the trial court ruled that petitioners inaction constituted a waiver on their part.
Mortgage, whereunder they stipulated that the loan shall be paid within six (6) months from Therefrom, petitioners went on appeal to the Court of Appeals in CA-G.R. CV No.
16 September 1991, and if not paid within said period, the mortgagee shall have the right to 48896.
declare the mortgage due and may immediately foreclose the same judicially or extrajudicially, As stated at the outset hereof, the appellate court, in its decision of 12 December 1997,
in accordance with law. dismissed petitioners appeal and affirmed in toto the trial courts order of dismissal. With their
It appears that petitioners defaulted in paying their loan and continuously refused to motion for reconsideration having been denied by the same court in its resolution of 10 March
comply with their obligation despite repeated demands therefor, prompting respondent 1998,[3] petitioners are now with us via the present recourse, faulting the Court of Appeals, as
Carmencita San Diego to send them on 27 April 1993, a final notice of demand requiring them follows:
to settle their financial obligation which, by then, already amounted to P1,950,000.00. 1. The Court of Appeals gravely erred in avoiding to resolve in the assailed
On 30 June 1993, after her efforts to collect proved futile, respondent Carmencita San Decision and in the questioned Resolution the basic issue as to
Diego filed with the Office of the Clerk of Court and Ex-Officio Sheriff of RTC-Makati, a whether or not the extra-judicial foreclosure and public auction sale
petition for the extrajudicial foreclosure of the mortgage. of the subject parcel of land are valid and lawful when the amount
On 06 July 1993, said office sent to the parties a Notice of Sheriffs Sale, therein stated in letter-request or the petition for extra-judicial foreclosure
announcing that petitioners mortgaged property will be sold in a public auction to be and in the notice of sheriff sale doubled the amount stipulated in the
conducted on 11 August 1993 at 10:00 oclock in the morning, copies of which notice were Amendment of Real Estate Mortgage;
posted in several conspicuous places within the sheriffs territorial jurisdiction. 2. The Court of Appeals has similarly committed serious error in considering
As announced, on 11 August 1993, at 10:00 oclock in the morning, the public auction that the complaint of the petitioner is a complaint for redemption
sale was held and the mortgaged property sold to respondent Carmencita San Diego as the when in the caption; in the body; and in the prayer of the complaint,
highest bidder for P2,000,000.00, as evidenced by the Sheriffs Certificate of Sale issued in her petitioner spouses have sought the nullity as void ab initio the extra-
favor on 07 October 1993. judicial foreclosure and auction sale of the subject property;
On 29 October 1993, respondent San Diego caused the registration of the same sheriffs 3. The respondent Appellate Court likewise incredulously erred to have
certificate of sale with the Office of the Register of Deeds, Makati City, and duly inscribed on resolved the admissibility and probative value of the statement of
the same date at the dorsal side of the petitioners TCT No. (432281) S-21000. account attached as Annex E of the complaint when it was not yet
presented in evidence; because the stage of the case at the time the

90
assailed dismissal order was issued, was yet in the period of had slept on their rights and are therefore guilty of laches, which is defined as the failure or
pleadings; neglect for an unreasonable or explained length of time to do that which, by exercising due
4. The Court of Appeals has grievously erred in affirming the assailed diligence, could or should have been done earlier, failure of which gives rise to the
dismissal order by declaring petitioner spouses to have been guilty of presumption that the person possessed of the right or privilege has abandoned or has declined
laches in failing to redeem during the legal period of redemption the to assert the same. (Words in bracket added.)
foreclosed parcel of land; when the cause of the failure to redeem was For sure, in the very petition they filed in this case, petitioners have not offered any valid
the illegal increase by 100% of the original obligation, stated in the excuse why, despite notice to them of the petition for extrajudicial foreclosure filed by the
Amendment of Real Estate Mortgage and bloating of the redemption respondents, they failed to attend the proceedings and there voiced out what they are now
price from Two Million Pesos (P2,000,000.00) to Three Million Four claiming. Truly, laches has worked against them.
Hundred Ninety One Thousand Two Hundred Twenty Five & 98/100 The law on redemption of mortgaged property is clear. Republic Act No. 3135 (An Act
Pesos (P3,491,225.98). to Regulate the Sale of Property Under Special Powers Inserted In Or Annexed to Real Estate
We DENY. Mortgages), as amended by Republic Act No. 4118, provides in Section 6 thereof, thus:
The records indubitably show that at the time of the foreclosure sale on 11 August 1993, Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
petitioners were already in default in their loan obligation to respondent Carmencita San referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor of
Diego. said debtor, or any person having a lien on the property subsequent to the mortgage or deed of
Much earlier, or on 27 April 1993, a final notice of demand for payment had been sent to trust under which the property is sold, may redeem the same at any time within the term of
them, despite which they still failed to pay. Hence, respondent Carmencita San Diegos resort one year from and after the date of the sale; xxx (Emphasis supplied)
to extrajudicial foreclosure, provided no less in the parties Amendment of Real Estate In a long line of cases[5], this Court has consistently ruled that the one-year redemption
Mortgage. period should be counted not from the date of foreclosure sale, but from the time the
The rule has been, and still is, that in real estate mortgage, when the principal obligation certificate of sale is registered with the Register of Deeds. Here, it is not disputed that the
is not paid when due, the mortgagee has the right to foreclose on the mortgage and to have the sheriffs certificate of sale was registered on 29 October 1993.
mortgaged property seized and sold with the view of applying the proceeds thereof to the And under Article 13 of the New Civil Code [6], a year is understood to have three
payment of the obligation.[4] hundred sixty-five (365) days each. Thus, excluding the first day and counting from 30
Here, the validity of the extrajudicial foreclosure on 11 August 1993 was virtually October 1993 (under paragraph 3 of Article 13 of the New Civil Code), and bearing in mind
confirmed by the trial court when it dismissed petitioners complaint, and rightly so, what with that 1994 was a leap year, petitioners had only until 29 October 1994, the 365 th day after
the fact that petitioners failed to exercise their right of redemption within the 1-year period registration of the sheriffs certificate of sale on 29 October 1993, within which to redeem the
therefor counted from the registration of the sheriffs certificate of sale. foreclosed property in accordance with law. And since 29 October 1994 fell on a Saturday,
It is petitioners main submission, however, that the very reason why they did not avail of petitioners had until the following working day, 31 October 1994, within which to exercise
their redemption right is because Mrs. San Diego bloated their original loan of P1,000,000.00 their right of redemption.
to P1,950,000.00, an issue supposedly not considered and/or addressed by the appellate court From the foregoing, it is clear as day that even the complaint filed by the petitioners
in the decision under review. In this regard, petitioners argue that the Court of Appeals, in with the trial court on 09 November 1994 was instituted beyond the 1-year redemption period.
sustaining the extrajudicial foreclosure proceedings, thereby go against the established In fact, petitioners no less acknowledged that their complaint for annulment of extrajudicial
jurisprudence that an action for foreclosure must be limited to the amount mentioned in the foreclosure and auction sale was filed about eleven (11) days after the redemption period had
mortgage document, P1,000,000.00 in this case. already expired on 29 October 1994 [7]. They merely harp on the alleged increase in the
We do not take issue with petitioners submission that a mortgage may be foreclosed only redemption price of the mortgaged property as the reason for their failure to redeem the same.
for the amount appearing in the mortgage document, more so where, as here, the mortgage However, and as already pointed out herein, they chose not, despite notice, to appear during
contract entered into by the parties is evidently silent on the payment of interest. the foreclosure proceedings.
However, contrary to petitioners claim, the appellate court did pass upon the legal issue Of course, petitioners presently insist that they requested for and were granted an
raised by them, albeit ruling that petitioners had been barred by laches from raising the same. extension of time within which to redeem their property, relying on a handwritten note
We quote from the challenged decision: allegedly written by Mrs. San Diegos husband on petitioners statement of account, indicating
[Petitioners] next argued that the mortgaged property was illegally foreclosed since it is a well therein the date 11 November 1994 as the last day to pay their outstanding account in full.
settled rule that an action to foreclose a mortgage must be limited to the amount mentioned in Even assuming, in gratia argumenti, that they were indeed granted such an extension, the hard
the mortgage. reality, however, is that at no time at all did petitioners make a valid offer to redeem coupled
The argument is without merit. with a tender of the redemption price.
It appears from the evidence on record that despite due notice and publication of the same in a Even on this score, petitioners case must fall.
newspaper of general circulation (Exhs. 5, 5-A and 5-B, pp. 53-55, Record), [petitioners] did For, in Lazo v. Republic Surety & Insurance Co., Inc. [8], this Court has made it clear that
not bother to attend the foreclosure sale nor raise any question regarding the propriety of the it is only where, by voluntary agreement of the parties, consisting of extensions of the
sale. It was only on November 9, 1994, or more than one year from the registration of the redemption period, followed by commitment by the debtor to pay the redemption price at
Sheriffs Certificate of Sale, that [petitioners] filed the instant complaint. Clearly, [petitioners]

91
a fixed date, will the concept of legal redemption be converted into one of conventional
redemption.
Here, 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.
It must be remembered that the period of redemption is not a prescriptive period but a
condition precedent provided by law to restrict the right of the person exercising redemption.
Correspondingly, if a person exercising the right of redemption has offered to redeem the
property within the period fixed, he is considered to have complied with the condition
precedent prescribed by law and may thereafter bring an action to enforce redemption. If, on
the other hand, the period is allowed to lapse before the right of redemption is exercised, then
the action to enforce redemption will not prosper, even if the action is brought within the
ordinary prescriptive period. Moreover, the period within which to redeem the property sold at
a sheriffs sale is not suspended by the institution of an action to annul the foreclosure sale. [9] It
is clear, then, that petitioners have lost any right or interest over the subject property primarily
because of their failure to redeem the same in the manner and within the period prescribed by
law. Their belated attempts to question the legality and validity of the foreclosure proceedings
and public auction must accordingly fail.
WHEREFORE, the instant petition is DENIED and the challenged decision and
resolution of the Court of Appeals AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

92
SECOND DIVISION That the VENDOR (Cristita R. Moneset) offers to SELL and the VENDEE
accepts to BUY at the agreed lump sum price of P130,000.00 payable on the
installment basis as follows:

1. That on the date of the signing of this agreement, the VENDEE will
WINIFREDA URSAL, G.R. No. 142411 tender an earnest money or downpayment of P50,000.00 to the VENDOR, and
by these presents, the latter hereby acknowledges receipt of said amount from
Petitioner, the former;

Present: 2. That the balance of the selling price of P80,000.00 shall be paid by the
VENDEE to the VENDOR in equal monthly installments of P3,000.00 starting
PUNO, Chairman, the month of February, 1985, until said balance of the selling price shall be
- versus - AUSTRIA-MARTINEZ, fully paid;
CALLEJO, SR.,
TINGA, and 3. That if the VENDEE shall fail or in default to pay six (6) monthly
CHICO-NAZARIO, JJ. installments to the VENDOR the herein agreement is deemed cancelled,
terminated and/or rescinded and in such event, the VENDEE (sic) binds to
COURT OF APPEALS, THE RURAL BANK refund to the VENDOR (sic) the deposit of P50,000.00 and with the latters (sic)
OF LARENA (SIQUIJOR), INC. and obligation to pay the former (sic) as a corresponding refund for cost of
SPOUSES JESUS MONESET and CRISTITA Promulgated: improvements made in the premises by VENDEE;
MONESET,
Respondents. October 14, 2005 4. That on the date of receipt of the downpayment of P50,000.00 by the
VENDOR, it is mutually agreed for VENDEE to occupy and take physical
x-----------------------------------------------------------x possession of the premises as well as for the latter (VENDEE) to keep and hold
in possession the corresponding transfer certificate of title No. ______ of the
land in question which is the subject of this agreement;

DECISION 5. That on the date of final payment by the VENDEE to the VENDOR, the
latter shall execute at her expense the corresponding document of DEED OF
ABSOLUTE SALE for the former as well as the payment of realty clearances,
BIR Capital Gain Tax, sales tax or transfer fees and attorneys fees; that, for the
AUSTRIA-MARTINEZ, J.: issuance of title in VENDEEs name shall be the exclusive account of said
VENDEE.[4]

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court seeking the
reversal of the Decision[1] of the Court of Appeals (CA) dated June 28, 1999 and the Petitioner paid the down payment and took possession of the property. She immediately built a
Resolution dated January 31, 2000 denying petitioners motion for reconsideration. [2] concrete perimeter fence and an artesian well, and planted fruit bearing trees and flowering
plants thereon which all amounted to P50,000.00. After paying six monthly installments,
These are the facts: petitioner stopped paying due to the Monesets failure to deliver to her the transfer certificate
of title of the property as per their agreement; and because of the failure of the Monesets to
turn over said title, petitioner failed to have the contract of sale annotated thereon. [5]
The spouses Jesus and Cristita Moneset (Monesets) are the registered owners of a 333-square
meter land together with a house thereon situated at Sitio Laguna, Basak, Cebu City covered
by Transfer Certificate of Title No. 78374. [3] On January 9, 1985, they executed a Contract to Unknown to petitioner, the Monesets executed on November 5, 1985 an absolute deed of sale
Sell Lot & House in favor of petitioner Winifreda Ursal (Ursal), with the following terms and in favor of Dr. Rafael Canora, Jr. over the said property for P14,000.00.[6] On September 15,
conditions: 1986, the Monesets executed another sale, this time with pacto de retro with Restituto
Bundalo.[7] On the same day, Bundalo, as attorney-in-fact of the Monesets, executed a real
estate mortgage over said property with Rural Bank of Larena (hereafter Bank) located in
Siquijor for the amount of P100,000.00.[8] The special power of attorney made by the

93
Monesets in favor of Bundalo as well as the real estate mortgage was then annotated on the was done without notice to the plaintiff. As provided in Art. 1170 of the
title on September 16, 1986. [9] For the failure of the Monesets to pay the loan, the Bank served New Civil Code, those who are guilty of fraud in the performance of their
a notice of extrajudicial foreclosure dated January 27, 1988 on Bundalo. [10] obligation --- and those who in any manner contravene the tenor thereof,
are liable for damages.

On September 30, 1989, Ursal filed an action for declaration of non-effectivity of mortgage
and damages against the Monesets, Bundalo and the Bank. She claimed that the defendants Another ground for liability under this article is when there is fraud/deceit.
committed fraud and/or bad faith in mortgaging the property she earlier bought from the In the instant case, there was fraud/deceit on the part of the defendant
Monesets with a bank located in another island, Siquijor; and the Bank acted in bad faith since spouses Moneset when they executed the Deed of Sale to Dr. Canora; the
it granted the real estate mortgage in spite of its knowledge that the property was in the Deed of Sale with Pacto de Retro to Bundalo and the Special Power of
possession of petitioner.[11] Attorney for Bundalo to execute for and in their behalf the Real Estate
Mortgage with the Rural Bank of Larena knowing fully well that the
Contract to Sell house and lot, Exh. A was still existing notwithstanding
The Monesets answered that it was Ursal who stopped paying the agreed monthly installments their violation to the provisions thereto. It is therefore crystal clear that
in breach of their agreement. [12] The Bank, on the other hand, averred that the title of the defendant spouses Moneset are liable for damages. [15]
property was in the name of Cristita Radaza Moneset married to Jesus Moneset and did not
show any legal infirmity.[13]
As to the real estate mortgage, the trial court held that the same was valid and the
Bank was not under any obligation to look beyond the title, although the present controversy
Bundalo, meanwhile, was not served summons because he could no longer be found could have been avoided had the Bank been more astute in ascertaining the nature of
at his given address.[14] petitioners possession of the property, thus:

The Real Estate Mortgage and the Foreclosure Proceedings cannot be


Trial on the merits proceeded. Thereafter, the Regional Trial Court of Cebu City, Branch 24, considered null and void in the sense that per se the formalities required
rendered its decision finding that Ursal is more credible than the Monesets and that the by law were complied with except for the fact that behind their execution
Monesets are liable for damages for fraud and breach of the contract to sell: there was fraud, deceit and bad faith on the part of defendant spouses
Moneset and Bundalo.

The evidence of [Ursal] show that she was the first to acquire a The defendant Rural Bank of Larena for its part could have avoided this
substantial interest over the lot and house by virtue of the execution of the situation if the bank appraiser who made the ocular inspection of the
Contract to Sell (Exh. A). After the execution of Exh. A plaintiff took subject house and lot went deeper and investigated further when he
possession of the questioned lot and houseafter she made a downpayment learned that the owner is not the actual occupant. He was however told by
of P50,000.00. [S]he paid the installments for six (6) months without fail. Moneset that the actual occupant was only a lessee. Banking on this
[However] plaintiff (stopped) paying the installment because defendant information that the actual occupant was only a lessee with no other right
spouses failed to give her the Transfer Certificate of Title over the lot and over and above such, the bank approved a loan of P100,000.00 in favor of
house despite repeated demands. It is evident then that the first to violate Moneset through Bundalo their attorney-in-fact.
the conditions of Exh. A were the defendants Spouses Moneset. This is the
reason why plaintiff was not able to annotate Exh. A on the TCT. The
evidence of plaintiff show that there was no intention on her part to Likewise the Rural Bank of Larena had the right to rely on what appeared
discontinue paying the installments. In a reciprocal obligation, one cannot on the certificate of title of the Monesets and it was under no obligation to
be compelled to do if the other party fails to do his part (Art. 1169, New look beyond the certificate and investigate the title of the mortgagor
Civil Code). appearing on the face of the certificate.

The approval of the P100,000.00 loan from the Rural Bank of Larena was
The acts of defendant Spouses Moneset in selling again the lot and house made possible through the deception and bad faith of defendant spouses
in question to Dr. Canora by executing a Deed of Absolute Sale; in selling Moneset and Bundalo but the pertinent documents were per se in order.
the same on pacto de retro to defendant Bundalo; and in mortgaging the The court is of the honest belief that the case against the defendant bank
same to defendant Rural Bank of Larena are plainly and clearly fraudulent be dismissed for lack of merit. The court however believes that for reasons
because they were done while Exh. A was still existing and the transaction

94
of equity the bank should give the plaintiff Ursal the preferential right to
redeem the subject house and lot.[16] That with grave abuse of discretion amounting to excess of
jurisdiction, the Honorable Court of Appeals erred in rendering a
decision and Resolution NOT in accordance with law and the
The trial court then disposed of the case as follows: applicable rulings of the Supreme Court.[22]

Petitioner claims that: the Bank was duly informed through its appraiser that the
Wherefore premises considered, judgment is hereby rendered in favor of house and lot to be mortgaged by Monesets were in the possession of a lessee; the Bank
the defendant Rural Bank of Larena dismissing the complaint against it for should have taken this as a cue to investigate further the Monesets right over the same; the
lack of merit and against the defendant spouses Moneset ordering them to: case of Embrado vs. Court of Appeals (233 SCRA 335) held that where a purchaser neglects to
make the necessary inquiry and closes his eyes to facts which should put a reasonable man on
1. reimburse to plaintiff Ursal the following: his guard to the possibility of the existence of a defect in his vendors title, he cannot claim that
a.) downpayment of P50,000.00 he is a purchaser in good faith; Sec. 50 of Act 496 provides that where a party has knowledge
b.) monthly installments for six months at P3,000.00 of a prior existing interest which is unregistered at the time he acquired the land, his
per month --- P18,000.00 knowledge of that prior unregistered interest has the effect of registration as to him and the
c.) expenses improvements P61, 676.52 Torrens system cannot be used as a shield against fraud; following Art. 2176 of the Civil Code,
respondent Bank is obliged to pay for the damage done. [23]
2. pay to plaintiff the following:
a.) moral damages ----------------- P30,000.00 Petitioner then prayed that the Deed of Real Estate Mortgage be declared as non-effective and
b.) exemplary damages ----------- P20,000.00 non-enforceable as far as petitioner is concerned; that she be declared as the absolute owner of
c.) litigation expenses------------- P 5,000.00 the house and lot in question; that the Monesets be ordered to execute a deed of absolute sale
d.) attorneys fees ----------------- P10,000.00 covering the subject property; and that the Bank be ordered to direct the collection or payment
e.) costs of the loan of P100,000.00 plus interest from the Monesets for they were the ones who
3. order the defendant Rural Bank of Larena to give the received and enjoyed the said loan.[24]
plaintiff the preferential right to redeem the subject house On the other hand, respondent Bank in its Comment argues that: its interest in the property
and lot. was only that of mortgagee and not a purchaser thus its interest is limited only to ascertaining
that the mortgagor is the registered owner; the case cited is inapplicable at bar since it involves
SO ORDERED.[17] the purchase of real property; Ursal was purportedly only a lessee of the property, thus as
mortgagor who is not entitled to possess the mortgaged property, they no longer considered
Both Ursal and the Monesets appealed the decision to the CA. Ursal alleged that the Bank was the lease in the processing and approval of the loan; Sec. 50 of Act No. 496 is also
guilty of bad faith for not investigating the inapplicable since the alleged prior existing interest was only that of a lessee; in any case, it
presence of Ursal on the property in question, while the Monesets claimed that the trial court was the Monesets who lied to the Bank anent the real nature of the encumbrance, thus, it is the
erred in giving preferential right to Ursal to redeem the property and in ordering them to pay Monesets who are guilty of fraud and not the Bank.[25]
damages.[18]

The CA affirmed in toto the decision of the trial court. It held that the Bank did not have prior In her Rejoinder,[26] petitioner argued that: under the law on mortgage, the mortgagor must be
knowledge of the contract to sell the house and lot and the Monesets acted fraudulently thus the owner of the property he offers as security of his loan; the mortgagee like herein Bank
they cannot be given preferential right to redeem the property and were therefore correctly which neglects to verify the ownership of the property offered as security of the loan runs the
ordered to pay damages.[19] risk of his folly; the Banks negligence is not excusable because an adverse claim and notice
of lis pendens were already annotated on the certificate of title when the mortgage was
constituted or when the deed of real estate mortgage was annotated; it would be unfair to put
The Monesets filed a motion for reconsideration which was denied outright for having been the blame on petitioner who was innocent of the transaction; the trial court found that the Bank
filed out of time.[20] Ursals motion for reconsideration was denied by the CA on January 31, even provided its appraiser the amount of P15,000.00 to redeem the pacto de retrosale
2000 for lack of merit.[21] allegedly executed in favor of Dr. Canora; this should have aroused the Banks suspicion and
prompted it to investigate further the property; the trial court recognized the bad faith
committed by the Monesets and ordered them to pay the sum of P126,676.52 in damages but
Hence, the present petition raising the sole error: exonerated the Bank who is equally guilty of bad faith; the Monesets cannot pay the damages
as they have no money and property thus if the decision of the trial court as affirmed by the

95
CA is to be enforced, they will only be holding an empty bag while the Bank which is equally is expected to exercise due diligence before entering into a mortgage contract.
guilty will go free; what would be fair is to let the The ascertainment of the status or condition of a property offered to it as
two respondents bear jointly and severally the consequences of their transaction and let the security for a loan must be a standard and indispensable part of its operations.
innocent petitioner ultimately own the house and lot in question. [27] [34]

The petitioner, in her Memorandum dated July 31, 2005, raised the issues of: (1)
Whether or not the document captioned: Contract to Sell Lot and House (Exh. A) is valid and Our agreement with petitioner on this point of law, notwithstanding, we are
binding so much so that the herein Petitioner who is the Vendee is the lawful and true owner of constrained to refrain from granting the prayers of her petition, to wit: that the Deed of Real
the lot and house in question; (2) Whether or not the herein respondents spouses Jesus Estate Mortgage be declared as non-effective and non-enforceable as far as petitioner is
Moneset and Cristita Moneset who were the vendors and/or mortgagors together with concerned; that she be declared as the absolute owner of the house and lot in question; that the
respondent Restituto Bundalo were conniving and acting in bad faith; and (3) Whether or not Monesets be ordered to execute a deed of absolute sale covering the subject property; and that
respondent Rural Bank of Larena measured up to the strict requirement of making a thorough the Bank be ordered to direct the collection or payment of the loan of P100,000.00 plus
investigation of the property offered as collateral before granting a loan and be considered as interest from the Monesets for they were the ones who received and enjoyed the said loan. [35]
innocent mortgagee and entitled to the protection of the law. [28] Petitioner reiterated her
arguments in support of the first and third issues raised in the Memorandum while she merely
adopted the CA findings in support of the second issue, i.e., when the Monesets encumbered
the Transfer Certificate of Title (TCT) to Dr. Canora and thereafter to Bundalo, they The reason is that, the contract between petitioner and the Monesets being one of Contract to
committed bad faith or fraud since the contract to sell with Ursal was still valid and subsisting. Sell Lot and House, petitioner, under the circumstances, never acquired ownership over the
[29]
property and her rights were limited to demand for specific performance from the Monesets,
which at this juncture however is no longer feasible as the property had already been sold to
other persons.
Respondent Bank, in its Memorandum dated July 20, 2005, reiterated the arguments
it made in its Comment that: the case cited by petitioner requiring extra ordinary diligence is
inapplicable in this case since what is involved here is mortgage and not sale; as mortgagee, its A contract to sell is a bilateral contract whereby the prospective seller, while
interest is limited only to determining whether the mortgagor is the registered owner of the expressly reserving the ownership of the subject property despite delivery thereof to the
property whose certificate of title showed that there were no existing encumbrances thereon; prospective buyer, binds himself to sell the said property exclusively to the prospective buyer
and even with unregistered encumbrances, the Bank has priority by the registration of the loan upon fulfillment of the condition agreed upon, that is, full payment of the purchase price. [36]
documents.[30]

In such contract, the prospective seller expressly reserves the transfer of title to the
No memorandum is filed by respondent Monesets. prospective buyer, until the happening of an event, which in this case is the full payment of the
purchase price. What the seller agrees or obligates himself to do is to fulfill his promise to sell
the subject property when the entire amount of the purchase price is delivered to him. Stated
The crux of petitioners contention is that the Bank failed to look beyond the transfer certificate differently, the full payment of the purchase price partakes of a suspensive condition, the non-
of title of the property for which it must be held liable. fulfillment of which prevents the obligation to sell from arising and thus, ownership is retained
by the prospective seller without further remedies by the prospective buyer. [37]

We agree. Banks cannot merely rely on certificates of title in ascertaining the status of
mortgaged properties; as their business is impressed with public interest, they are expected to It is different from contracts of sale, since ownership in contracts to sell is reserved
exercise more care and prudence in their dealings than private individuals. [31] Indeed, the rule by the vendor and is not to pass to the vendee until full payment of the purchase price, while
that persons dealing with registered lands can rely solely on the certificate of title does not in contracts of sale, title to the property passess to the vendee upon the delivery of the thing
apply to banks.[32] sold. In contracts of sale the vendor loses ownership over the property and cannot recover it
unless and until the contract is resolved or rescinded, while in contracts to sell, title is retained
by the vendor until full payment of the price. [38] In contracts to sell, full payment is a positive
As enunciated in Cruz vs. Bancom:[33] suspensive condition while in contracts of sale, non-payment is a negative resolutory
condition.[39]

Respondent is not an ordinary mortgagee; it is a mortgagee-bank. As such,


unlike private individuals, it is expected to exercise greater care and prudence A contract to sell may further be distinguished from a conditional contract of sale,
in its dealings, including those involving registered lands. A banking institution in that, the fulfillment of the suspensive condition, which is the full payment of the purchase

96
price, will not automatically transfer ownership to the buyer although the property may have (the vendees) instead of being vigilant and diligent in asserting
been previously delivered to him. The prospective vendor still has to convey title to the their rights over the subject property had failed to assert their rights when
prospective buyer by entering into a contract of absolute sale. While in a conditional contract the law requires them to act. Laches or stale demands is based upon
of sale, the fulfillment of the suspensive condition renders the sale absolute and affects the grounds of public policy which requires, for the peace of society, the
sellers title thereto such that if there was previous delivery of the property, the sellers discouragement of stale claims and unlike the statute of limitations, is not
ownership or title to the property is automatically transferred to the buyer. [40] a mere question of time but is principally a question of the inequity or
unfairness of permitting a right or claim to be enforced or asserted.

Indeed, in contracts to sell the obligation of the seller to sell becomes demandable The legal adage finds application in the case at bar. Tempus enim
only upon the happening of the suspensive condition, that is, the full payment of the purchase modus tollendi obligations et actiones, quia tempus currit contra desides
price by the buyer. It is only upon the existence of the contract of sale that the seller becomes et sui juris contemptoresFor time is a means of dissipating obligations and
obligated to transfer the ownership of the thing sold to the buyer. Prior to the existence of actions, because time runs against the slothful and careless of their own
the contract of sale, the seller is not obligated to transfer the ownership to the buyer, even if rights.[49]
there is a contract to sell between them. [41]

In this case, petitioner instituted an action for Declaration of Non-Effectivity of


In this case, the parties not only titled their contract as Contract to Sell Lot and House but Mortgage with Damages four years from the date of her last installment and only as a reaction
specified in their agreement that the vendor shall only execute a deed of absolute sale on the to the foreclosure proceedings instituted by respondent Bank. After the Monesets failed to
date of the final payment by vendee.[42] Such provision signifies that the parties truly intended deliver the TCT, petitioner merely stopped paying installments and did not institute an action
their contract to be that of contract to sell.[43] for specific performance, neither did she consign payment of the remaining balance as proof
of her willingness and readiness to comply with her part of the obligation. As we held in San
Lorenzo Development Corp. vs. Court of Appeals, [50] the perfected contract to sell imposed on
Since the contract in this case is a contract to sell, the ownership of the property the vendee the obligation to pay the balance of the purchase price. There being an obligation to
remained with the Monesets even after petitioner has paid the down payment and took pay the price, the vendee should have made the proper tender of payment and consignation of
possession of the property. In Flancia vs. Court of Appeals,[44]where the vendee in the contract the price in court as required by law. Consignation of the amounts due in court is essential in
to sell also took possession of the property, this Court held that the subsequent mortgage order to extinguish the vendees obligation to pay the balance of the purchase price. [51] Since
constituted by the owner over said property in favor of another person was valid since the there is no indication in the records that petitioner even attempted to make the proper
vendee retained absolute ownership over the property.[45] At most, the vendee in the contract to consignation of the amounts due, the obligation on the part of the Monesets to transfer
sell was entitled only to damages.[46] ownership never acquired obligatory force.

Petitioner attributes her decision to stop paying installments to the failure of the In other words, petitioner did not acquire ownership over the subject property as she
Monesets to comply with their agreement to deliver the transfer certificate of title after the did not pay in full the equal price of the contract to sell. Further, the Monesets breach did not
down payment of P50,000.00. On this point, the trial court was correct in holding that for such entitle petitioner to any preferential treatment over the property especially when such property
failure, the Monesets are liable to pay damages pursuant to Art. 1169 of the Civil Code on has been sold to other persons.
reciprocal obligations.[47]

As explained in Coronel vs. Court of Appeals:[52]


The vendors breach of the contract, notwithstanding, ownership still remained with
the Monesets and petitioner cannot justify her failure to complete the payment.
In a contract to sell, there being no previous sale of the
property, a third person buying such property despite the fulfillment
In Pangilinan vs. Court of Appeals,[48] the vendees contended that their failure to pay of the suspensive condition such as the full payment of the purchase
the balance of the total contract price was because the vendor reneged on its obligation to price, for instance, cannot be deemed a buyer in bad faith and the
improve the subdivision and its facilities. In said case, the Court held that the vendees were prospective buyer cannot seek the relief of reconveyance of the
barred by laches from asking for specific performance eight years from the date of last property. There is no double sale in such case. Title to the property will
installment. The Court held that: transfer to the buyer after registration because there is no defect in the
owner-sellers title per se, but the latter, of course, may be sued for
damages by the intending buyer.[53] (Emphasis supplied)

97
In this case, the lower courts found that the property was sold to Dr. Canora and then
to Bundalo who in turn acted as attorney-in-fact for the Monesets in mortgaging the property
to respondent Bank. The trial court and the CA erred in giving petitioner the preferential right
to redeem the property as such would prejudice the rights of the subsequent buyers who were
not parties in the proceedings below. While the matter of giving petitioner preferential right to
redeem the property was not put in issue before us, in the exercise of our discretionary power
to correct manifest and palpable error, we deem it proper to delete said portion of the decision
for being erroneous.[54]

Petitioners rights were limited to asking for specific performance and damages from
the Monesets. Specific performance, however, is no longer feasible at this point as explained
above. This being the case, it follows that petitioner never had any cause of action against
respondent Bank. Having no cause of action against the bank and not being an owner of the
subject property, petitioner is not entitled to redeem the subject property.

Petitioner had lost her right to demand specific performance when the Monesets
executed a Deed of Absolute Sale in favor of Dr. Canora. Contrary to what she claims,
petitioner had no vested right over the property.

Indeed, it is the Monesets who first breached their obligation towards petitioner and
are guilty of fraud against her. It cannot be denied however that petitioner is also not without
fault. She sat on her rights and never consigned the full amount of the property. She therefore
cannot ask to be declared the owner of the property, this late, especially since the same has
already passed hands several times, neither can she question the mortgage constituted on the
property years after title has already passed to another person by virtue of a deed of absolute
sale.

At this point, let it be stated that the courts below and even this Court have no
jurisdiction to resolve the issue whether there was bad faith among the Monesets, Canora and
Bundalo. Canora was never impleaded. Bundalo has not been served with summons.

WHEREFORE, the petition is DENIED. The decision of the Regional Trial Court of
Cebu City, Branch 24, promulgated on February 5, 1993 and the decision of the Court of
Appeals dated June 28, 1999 are hereby AFFIRMED. However, in the higher interest of
substantial justice, the Court MODIFIES the same to the effect that the portion ordering the
Rural Bank of Larena (Siquijor), Inc. to give petitioner the preferential right to redeem the
house and lot covered by Transfer Certificate of Title No. 78374 is DELETED for lack of
legal basis.

98
[G.R. No. 133841. August 15, 2003] the improvements on the property, causing damages amounting to Five
CAROLINA P. RAMIREZ, FERDINAND P. RAMIREZ, FRANCIS P. RAMIREZ, Hundred Thousand (P500,000.00) Pesos which petitioners must pay and be
FREDERIC P. RAMIREZ, AND THE INTESTATE ESTATE OF FRANCISCO liable for; and
RAMIREZ, JR., PETITIONERS, VS. HON. COURT OF APPEALS, HON. (3) private respondents were forced to litigate in order to protect their rights and
JUAN A. BIGORNIA, JR., IN HIS CAPACITY AS PRESIDING JUDGE OF interests over the property, hence, petitioners must be held liable for actual
THE REGIONAL TRIAL COURT OF ILAGAN, ISABELA, BRANCH 18 damages and expenses of litigation.[8]
AND SPOUSES LORETO CLARAVALL AND VICTORIA H. Petitioners filed a motion[9] to dismiss private respondents complaint, alleging that since
CLARAVALL, RESPONDENTS. the issue of rentals [was] raised in [Civil Case No. 2043], but not favorably acted upon in
DECISION favor of [private respondents], the latter are barred from raising anew the same issue in
CARPIO-MORALES, J.: another litigation.[10] Further, petitioners alleged that the complaint does not state a cause of
It appears that on December 29, 1965, private respondents spouses Loreto Claravall and action since prior to the date when redemption was to be effected, the registered owners of the
Victoria Claravall executed a deed of sale in favor of the spouses Francisco Ramirez, Jr. and property were the spouses Ramirez who were entitled to the rentals and fruits thereof, and
Carolina Ramirez covering a parcel of land, including improvements thereon, situated in under our law on succession, debt or liability is not passed to the heirs of a decedent. [11]
Ilagan, Isabela. On even date, another instrument was executed granting the spouses Claravall By Order of June 7, 1995, [12] Branch 18 of the Ilagan RTC deferred the resolution of
an option to repurchase the property within a period of two years from December 29, 1965 but petitioners Motion to Dismiss upon a finding that the grounds raised therein did not appear
not earlier nor later than the month of December, 1967. [1] indubitable. Petitioners motion[13] for reconsideration of said order having been denied, [14] they
At the expiration of the two-year period, the Claravalls failed to redeem the property, filed a petition[15] for certiorari before this Court, which referred it to the Court of Appeals,
[16]
prompting them to file a complaint against the spouses Francisco Ramirez, Jr. and Carolina imputing grave abuse of discretion amounting to lack of jurisdiction on the part of the trial
Ramirez to compel the latter to sell the property back to them. [2] court in not dismissing private respondents complaint.
The complaint of Claravall and his wife, herein private respondents, against the spouses Finding that the trial courts order denying the motion to dismiss cannot be the basis of a
Ramirez was docketed as Civil Case No. 2043 at the Ilagan, Isabela Regional Trial Court petition for certiorari and that private respondents complaint is not barred by prior judgment,
(RTC).[3] the appellate court dismissed the petition by Decision [17] of October 21, 1997. Their Motion for
After trial, judgment was rendered in favor of the spouses Ramirez which was, on Reconsideration[18] having been denied by Resolution [19] of May 13, 1998, petitioners filed the
appeal, affirmed by the Court of Appeals. On review, however, this Court, finding that the present Petition[20] for Review on Certiorari under Rule 45 faulting the appellate court with
Deed of Absolute Sale with option to repurchase executed by private respondents in favor of I.
the spouses Ramirez was one of equitable mortgage, reversed the decision of the appellate GRAVE ABUSE OF DISCRETION . . . IN NOT DISMISSING THE PRESENT
court by Decision of October 15, 1990[4] the dispositive portion of which reads: COMPLAINT INSOFAR AS IT SEEKS TO RE-LITIGATE THE ISSUES OF
WHEREFORE, the decision of respondent Court promulgated on April 22, 1976 and its RENTALSBECAUSE IT IS CRYSTAL CLEAR THAT THE PRESENT ACTION
resolution of June 22, 1977 are hereby reversed and set aside. The Deed of Absolute Sale FOR RECOVERY OF RENTALS IS BARRED BY PRIOR JUDGMENT
between the parties with the option to repurchase is declared an equitable mortgage and, BETWEEN THE SAME PARTIES ON THE SAME MATTER IN CIVIL CASE
petitioners [Claravalls] are declared entitled to redeem the mortgaged property which shall be NO. 2043[21] [AND]
effected upon the payment of their mortgage debt to private respondents [Ramirezes] in the II.
amount of P85,000.00 with legal rate of interest from December 31, 1967, the time the loan GRAVE ABUSE OF DISCRETION . . . IN NOT DISMISSING THE
matured until it is fully paid.[5] (Emphasis supplied) COMPLAINT FOR LACK OF CAUSE OF ACTION. CONSIDERING (1) THAT
The decision of this Court having become final and executory, [6] possession of the PRIOR TO REDEMPTION THE REGISTERED OWNERS OF THE PROPERTY
property was turned over to private respondents after they settled their obligation to the WAS THE LATE FRANCISCO RAMIREZ, JR. AND PETITIONER CAROLINA
spouses Ramirez. RAMIREZ WHO WERE ENTITLED TO THE FRUITS AND (2) THAT THE
Following the death of Francisco Ramirez, Jr. or on November 21, 1994, private CLAIMS OF PRIVATE RESPONDENTS, IF ANY, SHOULD BE FILED IN THE
respondents filed a complaint[7] before the RTC of Ilagan for accounting and damages against SPECIAL PROCEEDINGS FOR THE SETTLEMENT OF THE ESTATE OF
herein petitioners, namely, Ramirezs Intestate Estate, his widow Carolina P. Ramirez, and their THE LATE FRANCISCO RAMIREZ, JR., AND NOT IN AN ORDINARY CIVIL
children Ferdinand P. Ramirez, Francis P. Ramirez and Frederic P. Ramirez. The complaint, ACTION FOR DAMAGES AGAINST HIS HEIRS BECAUSE THE LIABILITY
docketed as Civil Case No. 834, alleged, inter alia, that: FOR DAMAGES MAY NOT BE PASSED ON TO THE HEIRS BY
(1) the spouses Ramirez acted fraudulently and in bad faith in refusing and INHERITANCE.[22](UNDERSCORING SUPPLIED)
obstructing the redemption of the property by private respondents from At the outset, it must be stressed that only questions of law may be raised in petitions for
January 1, 1968 up to December 31, 1993 during which petitioners were review before this Court under Rule 45 of the Rules of Court. [23] It was thus error for
receiving rentals from the tenants of the property which must be accounted for petitioners to ascribe to the appellate court grave abuse of discretion. This procedural lapse
and returned to private respondents; notwithstanding, in the interest of justice, this Court shall treat the issues as cases of reversible
(2) before the possession of the property was turned over to private respondents, error.[24]
petitioners vandalized, destroyed and carried away many portion[s]/parts of

99
Petitioners insist that the complaint in Civil Case No. 834 is barred by prior judgment Petitioners furthermore allege that since the action in Civil Case No. 834 was for
insofar as it seeks to re-litigate the issue of rentals, it having already been put in issue in Civil recover[y of] damages and for rent[als, t]he action does not survive Francisco Ramirez, Jr.,
Case No. 2043 which was not favorably acted upon in favor of private respondents. [25] hence, the claims of private respondents should have been filed in the special proceedings for
In their complaint in Civil Case No. 834, aside from the recovery of rentals, private the settlement of his estate, and not in an ordinary civil action for damages against his heirs,
respondents raised the issue of damages arising from petitioners alleged destruction of some liability for damages not being passed on to the heirs by inheritance. [34]
improvements on the property, which latter issue was not touched upon in petitioners Motion Private respondents complaint, however, is not only for the recovery of rentals. As
to Dismiss. priorly discussed, the complaint alleges a second cause of action, i.e., for the recovery of
The issue of damages arising from the alleged destruction of improvements on the damages as a result of alleged destruction and vandalism to the improvements on the property.
property could not of course have been raised in Civil Case No. 2043 for such issue arose only The complaint clearly alleges that the destruction of and vandalism to the property were
upon the execution of this Courts final decision in said case. Thus, private respondents caused by the defendants, herein petitioners, and not by Francisco Ramirez, Jr. alone.
complaint in Civil Case No 834 alleges: Assuming that this allegation is true, [35] private respondents have a cause of action against
xxx Franciscos widow Carolina and their children Ferdinand, Francis and Frederic Ramirez in
[W]hen [petitioners] abandoned the commercial property abovedescribed for the sheriff to turn their personal capacities. On this score alone, the complaint stands.
over the possession thereof to [private respondents, petitioners] vandalized, destroyed and WHEREFORE, the instant petition is hereby DENIED.
carried away many portion/parts of said building. . .[26] SO ORDERED.
xxx
In other words, the fourth of the following requisites of res judicata, to wit: (1) the
former judgment must be final; (2) it must have been rendered by a court having jurisdiction
over the subject matter and the parties; (3) it must be a judgment on the merits; and (4) there
must be between the first and second action identity of parties, identity of subject matter, and
identity of causes of action,[27] is not present, there being no identity of causes of action
between the two cases. For while the cause of action in Civil Case No. 2043 arose from
the spouses Ramirezs alleged refusal to allow redemption of the property, one of the causes of
action in Civil Case No. 834 arose from the alleged damage to the improvements on the
property attributed to petitioners before it was turned over to the sheriff upon execution of the
final judgment in the first case. In fine, Civil Case No. 834 is not barred by the judgment in
Civil Case No. 2043.
At all events, petitioners aver that the complaint in Civil Case No. 834 alleges no cause
of action because it was they who were entitled to the fruits of the property and not private
respondents as, prior to the redemption thereof, the registered owners were the spouses
Ramirez and not private respondents.[28]
The flaw in petitioners argument stems from their submission that the spouses Ramirez,
as vendees, were the owners of the property after it was registered in their names following the
execution of the deed of sale in their favor. The declaration, however, by this Court in the first
case that the deed of sale with option to repurchase entered into by the spouses Ramirez and
private respondents was an equitable mortgage necessarily takes the deed out of the ambit of
the law on sales and puts into operation the law on mortgage. [29]
It is a well-established doctrine that the mortgagors default does not operate to vest the
mortgagee the ownership of the encumbered property [30] and the act of the mortgagee in
registering the mortgaged property in his own name upon the mortgagors failure to redeem the
property amounts to pactum commissorium,[31] a forfeiture clause declared by this Court as
contrary to good morals and public policy and, therefore, void. [32] Before perfect title over a
mortgaged property may thus be secured by the mortgagee, he must, in case of non-payment
of the debt, foreclose the mortgage first and thereafter purchase the mortgaged property at the
foreclosure sale.[33]
In fine, the ownership of the property was not vested to the spouses Ramirez upon
private respondents failure to pay their indebtedness, the registration of the property in the
formers names notwithstanding, absent any showing that they foreclosed the mortgage and
purchased the property at a foreclosure sale.

100
[G.R. No. 116710. June 25, 2001] Ceferino D. Cura, Branch Manager of PNB Mandaluyong replied on behalf of the
DANILO D. MENDOZA, also doing business under the name and style of ATLANTIC respondent bank and required petitioner to submit the following documents before the bank
EXCHANGE PHILIPPINES, petitioner, vs. COURT OF APPEALS, would act on his request: 1) Audited Financial Statements for 1979 and 1980; 2) Projected
PHILIPPINE NATIONAL BANK, FERNANDO MARAMAG, JR., RICARDO cash flow (cash in - cash out) for five (5) years detailed yearly; and 3) List of additional
G. DECEPIDA and BAYANI A. BAUTISTA, respondents. machinery and equipment and proof of ownership thereof. Cura also suggested that petitioner
DECISION reduce his total loan obligations to Three Million Pesos (P3,000,000.00) "to give us more
DE LEON, JR., J.: justification in recommending a plan of payment or restructuring of your accounts to higher
Before us is a petition for review on certiorari of the Decision[1] dated August 8, 1994 of authorities of the Bank."[9]
the respondent Court of Appeals (Tenth Division) in CA-G.R. CV No. 38036 reversing the On September 25, 1981, petitioner sent another letter addressed to PNB Vice-President
judgment[2] of the Regional Trial Court (RTC) and dismissing the complaint therein. Jose Salvador, regarding his request for restructuring of his loans. He offered respondent PNB
Petitioner Danilo D. Mendoza is engaged in the domestic and international trading of the following proposals: 1) the disposal of some of the mortgaged properties, more
raw materials and chemicals. He operates under the business name Atlantic Exchange particularly, his house and lot and a vacant lot in order to pay the overdue trust receipts; 2)
Philippines (Atlantic), a single proprietorship registered with the Department of Trade and capitalization and conversion of the balance into a 5-year term loan payable semi-annually or
Industry (DTI).Sometime in 1978 he was granted by respondent Philippine National on annual installments; 3) a new Two Million Pesos (P2,000,000.00) LC/TR line in order to
Bank (PNB) a Five Hundred Thousand Pesos (P500,000.00) credit line and a One Million enable Atlantic Exchange Philippines to operate at full capacity; 4) assignment of all his
Pesos (P1,000,000.00) Letter of Credit/Trust Receipt (LC/TR) line. receivables to PNB from all domestic and export sales generated by the LC/TR line; and 5)
As security for the credit accommodations and for those which may thereinafter be maintenance of the existing Five Hundred Thousand Pesos (P500,000.00) credit line.
granted, petitioner mortgaged to respondent PNB the following: 1) three (3) parcels of The petitioner testified that respondent PNB Mandaluyong Branch found his proposal
land[3] with improvements in F. Pasco Avenue, Santolan, Pasig; 2) his house and lot in Quezon favorable and recommended the implementation of the agreement. However, Fernando
City; and 3) several pieces of machinery and equipment in his Pasig coco-chemical plant. Maramag, PNB Executive Vice-President, disapproved the proposed release of the mortgaged
The real estate mortgage[4] provided the following escalation clause: properties and reduced the proposed new LC/TR line to One Million Pesos (P1,000,000.00).
[10]
(f) The rate of interest charged on the obligation secured by this mortgage as well as the Petitioner claimed he was forced to agree to these changes and that he was required to
interest on the amount which may have been advanced by the Mortgagee in accordance with submit a new formal proposal and to sign two (2) blank promissory notes.
paragraph (d) of the conditions herein stipulated shall be subject during the life of this contract In a letter dated July 2, 1982, petitioner offered the following revised proposals to
to such increase within the rates allowed by law, as the Board of Directors of the Mortgagee respondent bank: 1) the restructuring of past due accounts including interests and penalties
may prescribe for its debtors. into a 5-year term loan, payable semi-annually with one year grace period on the principal; 2)
Petitioner executed in favor of respondent PNB three (3) promissory notes covering the payment of Four Hundred Thousand Pesos (P400,000.00) upon the approval of the proposal;
Five Hundred Thousand Pesos (P500,000.00) credit line, one dated March 8, 1979 for Three 3) reduction of penalty from 3% to 1%; 4) capitalization of the interest component with
Hundred Ten Thousand Pesos (P310,000.00); another dated March 30, 1979 for Forty interest rate at 16% per annum; 5) establishment of a One Million Pesos (P1,000,000.00)
Thousand Pesos (P40,000.00); and the last dated September 27, 1979 for One Hundred Fifty LC/TR line against the mortgaged properties; 6) assignment of all his export proceeds to
Thousand Pesos (P150,000.00). The said 1979 promissory notes uniformly stipulated: "with respondent bank to guarantee payment of his loans.
interest thereon at the rate of 12% per annum, until paid, which interest rate the Bank may, at According to petitioner, respondent PNB approved his proposal. He further claimed that
any time, without notice, raise within the limits allowed by law xxx." [5] he and his wife were asked to sign two (2) blank promissory note forms. According to
Petitioner made use of his LC/TR line to purchase raw materials from foreign petitioner, they were made to believe that the blank promissory notes were to be filled out by
importers. He signed a total of eleven (11) documents denominated as "Application and respondent PNB to conform with the 5-year restructuring plan allegedly agreed upon. The first
Agreement for Commercial Letter of Credit," [6] on various dates from February 8 to September Promissory Note,[11]No. 127/82, covered the principal while the second Promissory Note,
[12]
11, 1979, which uniformly contained the following clause: "Interest shall be at the rate of 9% No. 128/82, represented the accrued interest.
per annum from the date(s) of the draft(s) to the date(s) of arrival of payment therefor in New Petitioner testified that respondent PNB allegedly contravened their verbal agreement by
York. The Bank, however, reserves the right to raise the interest charges at any time depending 1) affixing dates on the two (2) subject promissory notes to make them mature in two (2) years
on whatever policy it may follow in the future."[7] instead of five (5) years as supposedly agreed upon; 2) inserting in the first Promissory Note
In a letter dated January 3, 1980 and signed by Branch Manager Fil S. Carreon Jr., No. 127/82 an interest rate of 21% instead of 18%; 3) inserting in the second Promissory Note
respondent PNB advised petitioner Mendoza that effective December 1, 1979, the bank raised No. 128/82, the amount stated therein representing the accrued interest as One Million Five
its interest rates to 14% per annum, in line with Central Bank's Monetary Board Resolution Hundred Thirty Six Thousand Four Hundred Ninety Eight Pesos and Seventy Three Centavos
No. 2126 dated November 29, 1979. (P1,536,498.73) when it should only be Seven Hundred Sixty Thousand Three Hundred
On March 9, 1981, he wrote a letter to respondent PNB requesting for the restructuring Ninety Eight Pesos and Twenty Three Centavos (P760,398.23) and pegging the interest rate
of his past due accounts into a five-year term loan and for an additional LC/TR line of Two thereon at 18% instead of 12%.
Million Pesos (P2,000,000.00).[8] According to the letter, because of the shut-down of his end- The subject Promissory Notes Nos. 127/82 and 128/82 both dated December 29, 1982 in
user companies and the huge amount spent for the expansion of his business, petitioner failed the principal amounts of Two Million Six Hundred Fifty One Thousand One Hundred
to pay to respondent bank his LC/TR accounts as they became due and demandable. Eighteen Pesos and Eighty Six Centavos (P2,651,118.86) and One Million Five Hundred

101
Thirty Six Thousand Seven Hundred Ninety Eight and Seventy Three Centavos clients, resulting in actual damages amounting to Two Million Four Thousand Four Hundred
(P1,536,798.73) respectively and marked Exhibits BB and CC respectively, were payable on Sixty One Pesos (P2,004,461.00).
equal semi-annual amortization and contained the following escalation clause: On March 16, 1992, the trial court rendered judgment in favor of the petitioner and
x x x which interest rate the BANK may increase within the limits allowed by law at any time ordered the nullification of the extrajudicial foreclosure of the real estate mortgage, the
depending on whatever policy it may adopt in the future; Provided, that, the interest rate on Sheriffs sale of the mortgaged real properties by virtue of consolidation thereof and the
this note shall be correspondingly decreased in the event that the applicable maximum interest cancellation of the new titles issued to PNB; that PNB vacate the subject premises in Pasig and
rate is reduced by law or by the Monetary Board. In either case, the adjustment in the interest turn the same over to the petitioner; and also the nullification of the extrajudicial foreclosure
rate agreed upon shall take effect on the effectivity date of the increase or decrease in the and sheriff's sale of the mortgaged chattels, and that the chattels be returned to petitioner
maximum interest rate. x x x Mendoza if they were removed from his Pasig premises or be paid for if they were lost or
It appears from the record that the subject Promissory Notes Nos. 127/82 and 128/82 rendered unserviceable.
superseded and novated the three (3) 1979 promissory notes and the eleven (11) 1979 The trial court also ordered respondent PNB to restructure to five-years petitioner's
Application and Agreement for Commercial Letter of Credit which the petitioner executed in principal loan of Two Million Six Hundred Fifty One Thousand One Hundred Eighteen Pesos
favor of respondent PNB. and Eighty Six Centavos (P2,651,118.86) and the accumulated capitalized interest on the same
According to the petitioner, sometime in June 1983 the new PNB Mandaluyong Branch in the amount of Seven Hundred Sixty Thousand Three Hundred Eighty Nine Pesos and
Manager Bayani A. Bautista suggested that he sell the coco-chemical plant so that he could Twenty Three Centavos (P760,389.23) as of December 1982, and that respondent PNB should
keep up with the semi-annual amortizations. On three (3) occasions, Bautista even showed up compute the additional interest from January 1983 up to October 15, 1984 only when
at the plant with some unidentified persons who claimed that they were interested in buying respondent PNB took possession of the said properties, at the rate of 12% and 9% respectively.
the plant. The trial court also ordered respondent PNB to grant petitioner Mendoza an additional
Petitioner testified that when he confronted the PNB management about the two (2) Two Million Pesos (P2,000,000.00) loan in order for him to have the necessary capital to
Promissory Notes Nos. 127/82 and 128/82 (marked Exhibits BB and CC respectively) which resume operation. It also ordered respondents PNB, Bayani A. Bautista and Ricardo C.
he claimed were improperly filled out, Bautista and Maramag assured him that the five-year Decepida to pay to petitioner actual damages in the amount of Two Million One Hundred
restructuring agreement would be implemented on the condition that he assigns 10% of his Thirteen Thousand Nine Hundred Sixty One Pesos (P2,113,961.00) and the peso equivalent of
export earnings to the Bank. [13] In a letter dated August 22, 1983, petitioner Mendoza Six Thousand Two Hundred Fifteen Dollars ($6,215.00) at the prevailing foreign exchange
consented to assign 10% of the net export proceeds of a Letter of Credit covering goods rate on October 11, 1983; and exemplary damages in the amount of Two Hundred Thousand
amounting to One Hundred Fourteen Thousand Dollars ($114,000.00). [14] However, petitioner Pesos (P200,000.00).
claimed that respondent PNB subsequently debited 14% instead of 10% from his export Respondent PNB appealed this decision of the trial court to the Court of Appeals. And
proceeds.[15] the Court of Appeals reversed the decision of the trial court and dismissed the
Pursuant to the escalation clauses of the subject two (2) promissory notes, the interest complaint. Hence, this petition.
rate on the principal amount in Promissory Note No. 127/82 was increased from 21% to 29% It is the petitioners contention that the PNB management restructured his existing loan
on May 28, 1984, and to 32% on July 3, 1984 while the interest rate on the accrued interest per obligations to a five-year term loan and granted him another Two Million Pesos
Promissory Note No. 128/82 was increased from 18% to 29% on May 28, 1984, and to 32% (P2,000,000.00) LC/TR line; that the Promissory Notes Nos. 127/82 and 128/82 evidencing a
on July 3, 1984. 2-year restructuring period or with the due maturity date December 29, 1984 were filled out
Petitioner failed to pay the subject two (2) Promissory Notes Nos. 127/82 and 128/82 fraudulently by respondent PNB, and contrary to his verbal agreement with respondent PNB;
(Exhibits BB and CC) as they fell due. Respondent PNB extra-judicially foreclosed the real hence, his indebtedness to respondent PNB was not yet due and the extrajudicial foreclosure
and chattel mortgages, and the mortgaged properties were sold at public auction to respondent of his real estate and chattel mortgages was premature. On the other hand, respondent PNB
PNB, as highest bidder, for a total of Three Million Seven Hundred Ninety Eight Thousand denies that petitioner's loan obligations were restructured to five (5) years and maintains that
Seven Hundred Nineteen Pesos and Fifty Centavos (P3,798,719.50). the subject two (2) Promissory Notes Nos. 127/82 and 128/82 were filled out regularly and
The petitioner filed in the RTC in Pasig, Rizal a complaint for specific performance, became due as of December 29, 1984 as shown on the face thereof.
nullification of the extra-judicial foreclosure and damages against respondents PNB, Fernando Respondent Court of Appeals held that there is no evidence of a promise from
Maramag Jr., Ricardo C. Decepida, Vice-President for Metropolitan Branches, and Bayani A. respondent PNB, admittedly a banking corporation, that it had accepted the proposals of the
Bautista. He alleged that the Extrajudicial Foreclosure Sale of the mortgaged properties was petitioner to have a five-year restructuring of his overdue loan obligations. It found and held,
null and void since his loans were restructured to a five-year term loan; hence, it was not yet on the basis of the evidence adduced, that "appellee's (Mendoza) communications were mere
due and demandable; that the escalation clauses in the subject two (2) Promissory Notes Nos. proposals while the bank's responses were not categorical that the appellee's request had been
127/82 and 128/82 were null and void, that the total amount presented by PNB as basis of the favorably accepted by the bank."
foreclosure sale did not reflect the actual loan obligations of the plaintiff to PNB; that Bautista Contending that respondent PNB had allegedly approved his proposed five-year
purposely delayed payments on his exports and caused delays in the shipment of materials; restructuring plan, petitioner presented three (3) documents executed by respondent PNB
that PNB withheld certain personal properties not covered by the chattel mortgage; and that officials. The first document is a letter dated March 16, 1981 addressed to the petitioner and
the foreclosure of his mortgages was premature so that he was unable to service his foreign signed by Ceferino D. Cura, Branch Manager of PNB Mandaluyong, which states:

102
x x x In order to study intelligently the feasibility of your above request, please submit the by the respondent PNB which is admittedly a banking corporation. Only an absolute and
following documents/papers within thirty (30) days from the date thereof, viz: unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract.
[16]
1. Audited Financial Statements for 1979 and 1980; If anything, those correspondences only prove that the parties had not gone beyond the
2. Projected cash flow (cash in - cash out) for five years detailed yearly; and preparation stage, which is the period from the start of the negotiations until the moment just
3. List of additional machinery and equipment and proof of ownership thereof. before the agreement of the parties.[17]
We would strongly suggest, however, that you reduce your total obligations to at least P3 There is nothing in the record that even suggests that respondent PNB assented to the
million (principal and interest and other charges) to give us more justification in alleged five-year restructure of petitioners overdue loan obligations to PNB. However, the trial
recommending a plan of payment or restructuring of your accounts to higher authorities of this court ruled in favor of petitioner Mendoza, holding that since petitioner has complied with the
bank. conditions of the alleged oral contract, the latter may not renege on its obligation to honor the
The second document is a letter dated May 11, 1981 addressed to Mr. S. Pe Benito, Jr., five-year restructuring period, under the rule of promissory estoppel. Citing Ramos v. Central
Managing Director of the Technological Resources Center and signed by said PNB Branch Bank,[18] the trial court said:
Manager, Ceferino D. Cura. According to petitioner, this letter showed that respondent PNB The broad general rule to the effect that a promise to do or not to do something in the future
seriously considered the restructuring of his loan obligations to a five-year term loan, to wit: does not work an estoppel must be qualified, since there are numerous cases in which an
xxx estoppel has been predicated on promises or assurances as to future conduct. The doctrine of
At the request of our client, we would like to furnish you with the following information promissory estoppel is by no means new, although the name has been adopted only in
pertinent to his accounts with us: comparatively recent years. According to that doctrine, an estoppel may arise from the making
xxx of a promise, even though without consideration, if it was intended that the promise should be
We are currently evaluating the proposal of the client to re-structure his accounts with us into a relied upon and in fact it was relied upon, and if a refusal to enforce it would be virtually to
five-year plan. sanction the perpetration of fraud or would result in other injustice. In this respect, the reliance
We hope that the above information will guide you in evaluating the proposals of Mr. Danilo by the promisee is generally evidenced by action or forbearance on his part, and the idea has
Mendoza. been expressed that such action or forbearance would reasonably have been expected by the
xxx promissor. xxx
The third document is a letter dated July 8, 1981 addressed to petitioner and signed by The doctrine of promissory estoppel is an exception to the general rule that a promise of
PNB Assistant Vice-President Apolonio B. Francisco. future conduct does not constitute an estoppel. In some jurisdictions, in order to make out a
xxx claim of promissory estoppel, a party bears the burden of establishing the following elements:
Considering that your accounts/accommodations were granted and carried in the books of our (1) a promise reasonably expected to induce action or forebearance; (2) such promise did in
Mandaluyong Branch, we would suggest that your requests and proposals be directed to fact induce such action or forebearance, and (3) the party suffered detriment as a result. [19]
Ceferino Cura, Manager of our said Branch. It is clear from the forgoing that the doctrine of promissory estoppel presupposes the
We feel certain that Mr. Cura will be pleased to discuss matters of mutual interest with you. existence of a promise on the part of one against whom estoppel is claimed. The promise must
xxx be plain and unambiguous and sufficiently specific so that the Judiciary can understand the
Petitioner also presented a letter which he addressed to Mr. Jose Salvador, Vice- obligation assumed and enforce the promise according to its terms. [20] For petitioner to claim
President of the Metropolitan Branches of PNB, dated September 24, 1981, which reads: that respondent PNB is estopped to deny the five-year restructuring plan, he must first prove
Re: Restructuring of our Account into a 5-year Term Loan and Request for the Establishment that respondent PNB had promised to approve the plan in exchange for the submission of the
of a P2.0 Million LC/TR Line proposal. As discussed earlier, no such promise was proven, therefore, the doctrine does not
Dear Sir: apply to the case at bar. A cause of action for promissory estoppel does not lie where an
In compliance with our discussion last September 17, we would like to formalize our proposal alleged oral promise was conditional, so that reliance upon it was not reasonable. [21] It does not
to support our above requested assistance from the Philippine National Bank. operate to create liability where it does not otherwise exist. [22]
xxx Since there is no basis to rule that petitioner's overdue loan obligations were restructured
Again we wish to express our sincere appreciation for your open-minded approach towards the to mature in a period of five (5) years, we see no other option but to respect the two-year
solution of this problem which we know and will be beneficial and to the best interest of the period as contained in the two (2) subject Promissory Notes Nos. 127/82 and 128/82, marked
bank and mutually advantageous to your client. as Exhibits BB and CC respectively which superseded and novated all prior loan documents
xxx signed by petitioner in favor of respondent PNB. Petitioner argues, in his memorandum, that
Petitioner argues that he submitted the requirements according to the instructions given "respondent Court of Appeals had no basis in saying that the acceptance of the five-year
to himand that upon submission thereof, his proposed five-year restructuring plan was deemed restructuring is totally absent from the record." [23] On the contrary, the subject Promissory
automatically approved by respondent PNB. Notes Nos. 127/82 and 128/82 are clear on their face that they were due on December 29,
We disagree. 1984 or two (2) years from the date of the signing of the said notes on December 29, 1982.
Nowhere in those letters is there a categorical statement that respondent PNB had Petitioner claims that the two (2) subject Promissory Notes Nos. 127/82 and 128/82
approved the petitioners proposed five-year restructuring plan. It is stretching the imagination were signed by him in blank with the understanding that they were to be subsequently filled
to construe them as evidence that his proposed five-year restructuring plan has been approved out to conform with his alleged oral agreements with PNB officials, among which is that they

103
were to become due only after five (5) years. If petitioner were to be believed, the PNB It is basic that there can be no contract in the true sense in the absence of the element of
officials concerned committed a fraudulent act in filling out the subject two (2) promissory agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who
notes in question. Private transactions are presumed to be fair and regular. [24] The burden of contracts, his act has no more efficacy than if it had been done under duress or by a person of
presenting evidence to overcome this presumption falls upon petitioner. Considering that unsound mind.
petitioner imputes a serious act of fraud on respondent PNB, which is a banking corporation, Similarly, contract changes must be made with the consent of the contracting parties. The
this court will not be satisfied with anything but the most convincing evidence. However, apart minds of all the parties must meet as to the proposed modification, especially when it affects
from petitioner's self-serving verbal declarations, we find no sufficient proof that the subject an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that
two (2) Promissory Notes Nos. 127/82 and 128/82 were completed irregularly. Therefore, we the rate of interest is always a vital component, for it can make or break a capital venture.
rule that the presumption has not been rebutted. It has been held that no one receiving a proposal to change a contract to which he is a
Besides, it could be gleaned from the record that the petitioner is an astute businessman party is obliged to answer the proposal, and his silence per se cannot be construed as an
who took care to reduce in writing his business proposals to the respondent bank. It is acceptance.[28]Estoppel will not lie against the petitioner regarding the increase in the
unthinkable that the same person would commit the careless mistake of leaving his subject two stipulated interest on the subject Promissory Notes Nos. 127/82 and 128/82 inasmuch as he
(2) promissory notes in blank in the hands of other persons. As the respondent Court of was not even informed beforehand by respondent bank of the change in the stipulated interest
Appeals correctly pointed out: rates. However, we also note that the said two (2) subject Promissory Notes Nos. 127/82 and
Surely, plaintiff-appellee who is a C.P.A and a Tax Consultant (p. 3 TSN, January 9, 1990) will 128/82 expressly provide for a penalty charge of 3% per annum to be imposed on any unpaid
insist that the details of the two promissory notes he and his wife executed in 1982 should be amount when due.
specific to enable them to make the precise computation in the event of default as in the case Petitioner prays for the release of some of his movables [29] being withheld by respondent
at bench. In fact, his alleged omission as a C.P.A. and a Tax Consultant to insist that the two PNB, alleging that they were not included among the chattels he mortgaged to respondent
promissory notes be filled up on important details like the rates of interest is inconsistent with bank.However, petitioner did not present any proof as to when he acquired the subject
the legal presumption of a person who takes ordinary care of his concerns (Section 3 (c), Rule movables and hence, we are not disposed to believe that the same were after-acquired chattels
131, Revised Rules on Evidence). not covered by the chattel and real estate mortgages.
As pointed out by the Court of Appeals, Orlando Montecillo, Chief, Loans and Discounts, In asserting its rights over the subject movables, respondent PNB relies on a common
PNB Mandaluyong Branch, testified that the said Promissory Notes Nos. 127/82 and 128/82 provision in the two (2) subject Promissory Notes Nos. 127/82 and 128/82 which states:
were completely filled out when Danilo Mendoza signed them (Rollo, p. 14). In the event that this note is not paid at maturity or when the same becomes due under any of
In a last-ditch effort to save his five-year loan restructuring theory, petitioner contends the provisions hereof, we hereby authorized the BANK at its option and without notice, to
that respondent PNB's action of withholding 10% from his export proceeds is proof that his apply to the payment of this note, any and all moneys, securities and things of value which
proposal had been accepted and the contract had been partially executed. He claims that he may be in its hands on deposit or otherwise belonging to me/us and for this purpose. We
would not have consented to the additional burden if there were no corresponding hereby, jointly and severally, irrevocably constitute and appoint the BANK to be our true
benefit. This contention is not well taken. There is no credible proof that the 10% assignment Attorney-in-Fact with full power and authority for us in our name and behalf and without prior
of his export proceeds was not part of the conditions of the two-year restructuring notice to negotiate, sell and transfer any moneys securities and things of value which it may
deal. Considering that the resulting amount obtained from this assignment of export proceeds hold, by public or private sale and apply the proceeds thereof to the payment of this note.
was not even enough to cover the interest for the corresponding month, [25] we are hard-pressed It is clear, however, from the above-quoted provision of the said promissory notes that
to construe it as the required proof that respondent PNB allegedly approved the proposed five- respondent bank is authorized, in case of default, to sell things of value belonging to the
year restructuring of petitioners overdue loan obligations. mortgagor which may be on its hands for deposit or otherwise belonging to me/us and for this
It is interesting to note that in his Complaint, petitioner made no mention that the purpose. Besides the petitioner executed not only a chattel mortgage but also a real estate
assignment of his export proceeds was a condition for the alleged approval of his proposed mortgage to secure his loan obligations to respondent bank.
five-year loan restructuring plan. The Complaint merely alleged that "plaintiff in a sincere A stipulation in the mortgage, extending its scope and effect to after-acquired property is
effort to make payments on his obligations agreed to assign 10% of his export proceeds to valid and binding where the after-acquired property is in renewal of, or in substitution for,
defendant PNB." This curious omission leads the court to believe that the alleged link between goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale
the petitioners assignment of export proceeds and the alleged five-year restructuring of his of such goods.[30] As earlier pointed out, the petitioner did not present any proof as to when the
overdue loans was more contrived than real. subject movables were acquired.
It appears that respondent bank increased the interest rates on the two (2) subject More importantly, respondent bank makes a valid argument for the retention of the
Promissory Notes Nos. 127/82 and 128/82 without the prior consent of the petitioner. The subject movables. Respondent PNB asserts that those movables were in fact "immovables by
petitioner did not agree to the increase in the stipulated interest rate of 21% per annum on destination" under Art. 415 (5) of the Civil Code. [31] It is an established rule that a mortgage
Promissory Note No. 127/82 and 18% per annum on Promissory Note No. 128/82. As held in constituted on an immovable includes not only the land but also the buildings, machinery and
several cases, the unilateral determination and imposition of increased interest rates by accessories installed at the time the mortgage was constituted as well as the buildings,
respondent bank is violative of the principle of mutuality of contracts ordained in Article 1308 machinery and accessories belonging to the mortgagor, installed after the constitution thereof.
of the Civil Code.[26] As held in one case:[27] [32]

104
Petitioner also contends that respondent PNBs bid prices for this foreclosed properties in
the total amount of Three Million Seven Hundred Ninety Eight Thousand Seven Hundred
Nineteen Pesos and Fifty Centavos (P3,798,719.50), were allegedly unconscionable and
shocking to the conscience of men. He claims that the fair market appraisal of his foreclosed
plant site together with the improvements thereon located in Pasig, Metro Manila amounted to
Five Million Four Hundred Forty One Thousand Six Hundred Fifty Pesos (P5,441,650.00)
while that of his house and lot in Quezon City amounted to Seven Hundred Twenty Two
Thousand Pesos (P722,000.00) per the appraisal report dated September 20, 1990 of Cuervo
Appraisers, Inc.[33] That contention is not well taken considering that:
1. The total of the principal amounts alone of petitioners subject Promissory Notes
Nos. 127/82 and 128/82 which are both overdue amounted to Four Million
One Hundred Eighty Seven Thousand Nine Hundred Seventeen Pesos and
Fifty Nine Centavos (P4,187,917.59).
2. While the appraisal of Cuervo Appraisers, Inc. was undertaken in September
1990, the extrajudicial foreclosure of petitioners real estate and chattel
mortgages have been effected way back on October 15, 1984, October 23,
1984 and December 21, 1984.[34] Common experience shows that real estate
values especially in Metro Manila tend to go upward due to developments in
the locality.
3. In the public auction/foreclosure sales, respondent PNB, as mortgagee, was not
obliged to bid more than its claims or more than the amount of petitioners loan
obligations which are all overdue. The foreclosed real estate and chattel
mortgages which petitioner earlier executed are accessory contracts covering
the collaterals or security of his loans with respondent PNB. The principal
contracts are the Promissory Notes Nos. 127/82 and 128/82 which superseded
and novated the 1979 promissory notes and the 1979 eleven (11) Applications
and Agreements for Commercial Letter of Credit.
Finally, the record shows that petitioner did not even attempt to tender any redemption
price to respondent PNB, as highest bidder of the said foreclosed real estate properties, during
the one-year redemption period.
In view of all the foregoing, it is our view and we hold that the extrajudicial foreclosure
of petitioners real estate and chattel mortgages was not premature and that it was in fact legal
and valid.
WHEREFORE, the petition is hereby DENIED. The challenged Decision of the Court
of Appeals in CA-G.R. CV No. 38036 is AFFIRMED with modification that the increase in
the stipulated interest rates of 21% per annum and 18% per annum appearing on Promissory
Notes Nos. 127/82 and 128/82 respectively is hereby declared null and void.
SO ORDERED.

105
THIRD DIVISION RCBC. The latter, subsequently advised plaintiff to communicate and arrange
matters with her buyers and customers in Belgium. After persistent demand for
G.R. No. 101747 September 24, 1997 reimbursement, from Bank Brussels Lambert-Belgium, defendant, RCBC, returned
PERFECTA QUINTANILLA, petitioner, and reimbursed the total sum of US $20,721.70 to Bank Brussels Lambert-Belgium.
vs. RCBC, then proceeded to revert the credit and debit entries on plaintiff's current
COURT OF APPEALS ** and RIZAL COMMERCIAL BANKING account, which it supposedly paid to promissory note nos. 84/614 and 84/615 and
CORPORATION, respondents. demanded payments from the plaintiff, the whole amount, including the amount of
P25,000.00, it collaterized by the real estate mortgage, Exh. "A". 1
FRANCISCO, J.: For failing to comply with the demands, RCBC sought to foreclose the real estate mortgage,
The antecedents, as found by the trial court and affirmed by the Court of Appeals (CA), are as not only for the amount of P25,000.00 but also for the amount of P500,994.39 which
follows: represents petitioner's subsequent credit accommodations. RCBC alleged that the latter
Defendant, . . . (respondent RCBC) is a commercial banking institution, organized amount was likewise secured under the mortgage contract.
under existing laws, doing business through its duly accredited offices in the City of Rejecting RCBC's claim, petitioner filed an action for specific performance, damages and
Cebu. attorney's fees with prayer for a writ of preliminary injunction, alleging that the obligation for
On 12 July 1983, plaintiff (petitioner) executed a Real Estate Mortgage on a parcel which the mortgage was executed was only for the maximum amount of P45,000.00 and that
of land, situated in the City of Cebu, under TCT No. 39409, in favor of defendant, petitioner had already paid her other unsecured loans. RCBC filed an answer denying
RCBC, to secure a credit line in the amount of P45,000.00. Plaintiff availed, from petitioner's claim and set up a counterclaim for the payment of all her other outstanding loans
this collateralized credit line, the amount of P25,000.00 only, secured and evidenced — totalling P500,694.39.
by promissory note no. 84/615 in the said sum of P25,000.00, with interest at the After trial, the RTC rendered judgment, the dispositive portion of which reads:
rate of 38% per annum, on 23 October 1984. WHEREFORE, the writ or preliminary injunction, issued by this Court is hereby
Plaintiff, Perfecta Quintanilla, who is engaged in business, under the name and style, lifted. The defendant, RCBC, and defendant's may proceed to foreclose the real
Cebu Cane Products, exports rattan products abroad. In connection therewith, she estate mortgage for the satisfaction of plaintiff's obligation of P25,000.00 plus
established with defendant, RCBC, advance credit line, for her export bills against stipulated interests thereon in accordance with the terms thereof, but not to satisfy
Letters of Credit from her customers abroad. the other obligation of the plaintiff in excess thereof, which the said mortgage did
Also, on an even date, 23 October 1984, plaintiff secured from defendant, RCBC, a not secure, therefor. No pronouncement as to costs.
loan or P100,000.00, against her advance export credit line, secured by promissory SO ORDERED.2
note no. 84/614, on a maturing period, one month from thence. RCBC appealed to the CA imputing error to the trial court in not granting its counterclaim and
Again on November 8, 1984, plaintiff secured another advance credit of in ruling that the foreclosure of the mortgage was limited to the P25,000.00 availed of by
P100,000.00 against her advance export credit line, which she again secured by petitioner. The CA affirmed the RTC ruling in so far as the foreclosure was limited to the
another promissory note no. 84/032, of even date. amount of P25,000.00 but modified the same by granting the counterclaim. The dispositive
On 20 November 1984, plaintiff shipped stocks of her Cane Products to her buyer in portion of the CA decision provides:
Belgium, upon a Letter of Credit, under Export Bill No. 84/199, in the amount of US Premises considered, We affirm the appealed decision with the modification
$10,638.15. Defendant, RCBC, received the proceeds of this export shipment, in the consisting of ordering the appellee to pay the appellant, on the latter's counter-
amount of P208,630.00, from Bank Brussels Lambert-New York. claims, the sum of P500,694.39 due as of May 22, 1987 plus interest on the principal
The full amount of the proceeds, was therefore credited to plaintiff's Current sum of P298,097.47 at the rate of 18% per annum from May 23, 1987 and penalty
Account No. 218 with defendant bank. Defendant RCBC, then debited plaintiff's charges of 12%, per annum from the same date, until fully paid, and the sum of
current account, in the amount of P125,000.00 as payment for the latter's loan of P8,000.00 as reasonable attorney's fees plus the costs.
P100,000.00 to promissory note no. 84/614 and P25,000.00 to promissory note no. SO ORDERED.3
84/615. The latter amount was what plaintiff secured by the Real Estate Mortgage, Aggrieved, petitioner moved for a partial reconsideration, arguing for the first time that
Exhibit "A". respondent RCBC's counterclaim is permissive in nature for which the trial court has not
On November 27, 1984, plaintiff made another shipment from her Cebu Cane acquired jurisdiction due to the non-payment of the docket fees. Petitioner's motion was
Products, under Export Bill No. 84-205 for US $10,083.00. Consequently, RCBC denied by the CA, though it amended its earlier decision by ordering respondent RCBC to pay
sent the export documents to the issuing bank for collection of this, latter export docket fees on the
shipment. counterclaim.4 Hence this petition.
However, on November 28, 1984, the issuing bank, Brussels Lambert-Belgium, The pivotal issue is whether respondent RCBC's counterclaim is compulsory or permissive in
refused payment on Export Bill No. 84-199, and demanded reimbursement from nature, the resolution of which hinges on the interpretation of the following provision in the
defendant, RCBC, the amount of US $20,721.70, invoking its right for immediate real estate mortgage which reads:
reimbursement, under Art. 16 of the International Chamber of Commerce (ICC) That for and in consideration of certain loans overdrafts and other credit
Publication 400 through telex, to which plaintiff was so notified by defendant, accommodations obtained from the mortgagee by the same and those that hereafter

106
be obtained, the principal of all of which is hereby fixed at forty-five Thousand Having determined that the mortgage contract extends even to petitioner's other advances in
Pesos (P45,000.00), Philippine Currency, as well as those that the mortgagee may excess of the P25,000.00, RCBC's counterclaim for such other advances cannot but be
extend to the mortgagor including interest and expenses of any other obligation considered as compulsory in nature. Such counterclaim necessarily arises out of the
owing to the mortgagee, whether direct or indirect, principal or secondary, as transaction or occurrence that is the subject matter of petitioner's claim which is to enjoin the
appears in the accounts, books and records of the mortgagee, the mortgagor does foreclosure of the latter's other credit accommodations in excess of P25,000.00. It thus
hereby transfer and convey by way of mortgage unto the mortgagee . . . (emphasis satisfies the "compelling test of compulsoriness" which requires "a logical relationship
supplied).5 between the claim and counterclaim, that is, where conducting separate trials of the respective
We disagree with the CA's ruling that RCBC's counterclaim is permissive. In Ajax Marketing claims of the parties would entail a substantial duplication of effort and time by the parties and
& Development Corporation vs. Court of Appeals,6 a substantially similar provision appears, the court."11 Both claims are merely offshoots of the same basic controversy. 12 Moreover,
to wit: RCBC's counterclaim does not require for its adjudication the presence of third parties upon
That for and in consideration of credit accommodations obtained from the whom the court cannot acquire jurisdiction and the court has jurisdiction to entertain the
MORTGAGEE (Metropolitan Bank and Trust Company), by the MORTGAGOR claim. 13
and/or AJAX MKTG. & DEV. CORP./AJAX MARKETING COMPANY/YLANG- RCBC's counterclaim being compulsory in nature, there is no need to pay docket fees therefor.
YLANG MERCHANDISING COMPANY detailed as follows: Nevertheless, RCBC is still bound to pay the docket fees as ordered by the CA in its August
Nature Date Granted Due Amount or Line 19, 1991 Resolution, having failed to appeal therefrom. The entrenched procedural rule in this
Date jurisdiction is that a party who has not himself appealed cannot obtain from the appellate court
Loans and/or P600,000.00 any affirmative relief other than those granted in the decision of the lower court. 14
Advances in 150,000.00 Finally, even granting that RCBC's counterclaim is permissive where the trial court has
current account 250,000.00 no/cannot exercise jurisdiction over said claim unless/until the corresponding docket fees
and to secure the payment of the same and those that may hereafter be obtained therefor have been paid, petitioner is however barred by estoppel from challenging the trial
including the renewals or extension thereof. court's jurisdiction. We quote with approval the CA's observation in this matter.
xxx xxx xxx . . . The record clearly shows that never once, during the proceedings below, was the
the principal of all of which is hereby fixed at question of docket fees and of jurisdiction raised by the appellee. Not only did
(P600,000.00/P150,000.00/P250,000.00). . . as well as those that the MORTGAGEE appellee not bother to answer counterclaim but she did [not] even hint at it in her
may have previously extended or may later extend to the MORTGAGOR, including memorandum, notwithstanding that the Bank adduced the required evidence to
interest and expenses or any other obligation owing to the MORTGAGEE, whether prove the counterclaim which was included in the Bank's former (sic) offer of
direct or indirect, principal or secondary, as appears in the accounts, books and evidence (EXG. C, Record, pp. 114-117). Neither was the issue raised in appellee's
records of the MORTGAGEE, the MORTGAGOR hereby transfer and convey by brief, again notwithstanding the fact that the counterclaim is the subject of the first
way of mortgage unto the MORTGAGEE, . . . . and second errors of the brief of the Bank, against which appellee did not raise a
This Court in the "Ajax" case, in upholding the validity of the extra-judicial foreclosure of single argument. The issue surfaced for the first time in the motion for partial
mortgage which included the loans obtained in excess of the amount fixed in the mortgage reconsideration filed by the appellee.
contract as expressed in said proviso, ruled that: The objection should have been raised more seasonably, before the trial court or at
An action to foreclose a mortgage is usually limited to the amount mentioned in the the very least in appellee's brief. In the circumstances appellee is barred by laches
mortgage, but where on the four corners of the mortgage contracts, as in this case, from raising the question of jurisdiction at this very late stage (Vide Maersk vs.
the intent of the contracting parties is manifest that the mortgage properly shall also Court of Appeals, 187 SCRA 646).15
answer for future loans or advancements, then the same is not improper as it is valid In addition, it has been consistently held by this Court that while jurisdiction may be assailed
and binding between the parties.7 (Emphasis supplied). at any stage, a party's active participation in the proceedings before a court without jurisdiction
The amount stated in the mortgage contract between petitioner and RCBC does not limit the will estop such party from assailing such lack of it. It is an undesirable practice of a party
amount for which it may stand as security considering that under the terms of that contract, the participating in the proceedings and submitting his case for decision and then accepting the
intent to secure future indebtedness is apparent. It would have been different if the mortgage judgment, only if favorable, and attacking it for lack of jurisdiction, when adverse. 16
contract in the case at bar simply provides that it was intended only "to secure the payment of WHEREFORE, save for the modification anent the nature of RCBC's counterclaim and its
the same and those that may hereafter be obtained the principal of all of which is hereby fixed related incidents, the decision of the Court of Appeals promulgated October 31, 1990 as
at P45,000.00. . ."8 Yet the parties to the mortgage contract further stipulated: ". . . as well as amended by its Resolution promulgated August 19, 1991 is hereby AFFIRMED in all other
those that the Mortgagee may extend to the Mortgagor". 9 The latter phrase clearly means that respects.
the mortgage is not limited to just the fixed amount but also covers other credit SO ORDERED.
accommodations in excess thereof. Thus, the general rule that mortgage must be limited to the
amount mentioned in the mortgage cannot be applied herein. Rather by specific provision and
agreement of the parties, the mortgage contract was designed to secure even future
advancements.10

107
[G.R. No. 122079. June 27, 1997] and, after the cancellation of the title in the name of the Concepcions, a new transfer certificate
SPOUSES ANTONIO E.A. CONCEPCION and MANUELA S. of title (No. 090-R) was issued in the name of Home Savings Bank and Trust Company.
CONCEPCION, petitioners, vs. HON. COURT OF APPEALS, HOME On 31 July 1987, the bank executed a Deed of Absolute Sale in favor of Asaje Realty
SAVINGS BANK AND TRUST COMPANY, and as nominal party-defendants, Corporation and a new certificate of title was issued in the latter's name.
THE SHERIFF ASSIGNED TO SAN JUAN, METRO MANILA, and who Meanwhile, on 29 July 1987, the Concepcions filed an action against Home Savings
conducted the auction sale and the REGISTER OF DEEDS or his Bank and Trust Company, the Sheriff of San Juan, Metro Manila, and the Register of Deeds of
representative of San Juan, Metro Manila, and ASAJE REALTY San Juan, Metro Manila, for the cancellation of the foreclosure sale, the declaration of nullity
CORPORATION, respondents. of the consolidation of title in favor of the bank, and the declaration of nullity of the unilateral
DECISION increases of the interest rates on their loan. The spouses likewise claimed damages against the
VITUG, J.: defendants. The Concepcions, having learned of the sale of the property to Asaje Realty
The spouses Antonio E.A. Concepcion and Manuela S. Concepcion assail, via the instant Corporation, filed an amended complaint impleading the realty corporation and so praying as
petition for review on certiorari, the decision,[1] dated 15 September 1995, of the Court of well for the cancellation of the sale executed between said corporation and the bank and the
Appeals, affirming with modification the judgment of the Regional Trial Court ("RTC"), cancellation of the certificate of title issued in the name of Asaje.
[2]
Branch 157, of Pasig City,[3] that dismissed the complaint of herein petitioners against On 31 August 1992, the trial court found for the defendants and ruled:
private respondents. "In view of all the foregoing premises, this Court finally concludes that the plaintiffs have no
The facts, hereunder narrated, are culled from the findings of the appellate court. cause of action either against defendant Home Savings Bank & Trust Company or defendant
On 17 January 1979, the Home Savings Bank and Trust Company (now Insular Life Asaje Realty Corporation; and under the circumstances of this case, it deems it just and
Savings and Trust Company) granted to the Concepcions a loan amounting equitable that attorney's fees and expenses of litigation should be recovered by said
to P1,400,000.00. The Concepcions, in turn, executed in favor of the bank a promissory note defendants.
and a real estate mortgage over their property located at 11 Albany St., Greenhills, San Juan, "WHEREFORE, judgment is hereby rendered dismissing the amended complaint of plaintiffs
Metro Manila. The loan was payable in equal quarterly amortizations for a period of fifteen Spouses Antonio E.A. Concepcion and Manuela S. Concepcion against the defendants for lack
(15) years and carried an interest rate of sixteen percent (16%) per annum. The promissory of merit, and ordering the said plaintiffs to pay attorney's fees and expenses of litigation in the
note provided that the Concepcions had authorized - sum of P30,000.00 to defendant Home Savings Bank & Trust Company and in the amount
"x x x the Bank to correspondingly increase the interest rate presently stipulated in this of P25,000.00 to defendant Asaje Realty Corporation, in addition to their respective costs of
transaction without advance notice to me/us in the event the Central Bank of the Philippines suit.
raises its rediscount rate to member banks, and/or the interest rate on savings and time deposit, "SO ORDERED."[5]
and/or the interest rate on such loans and/or advances." [4] The Concepcions went to the Court of Appeals.
In accordance with the above provision, the bank unilaterally increased the interest rate from On 15 September 1995, the appellate court affirmed the trial court's decision, with
16% to 21% effective 17 February 1980; from 21% to 30% effective 17 October 1984; and modification, as follows:
from 30% to 38% effective 17 November 1984, increasing the quarterly amortizations "Under the facts and circumstances of the case at bench, the award of attorney's fees, expenses
from P67,830.00 to, respectively, P77,619.72, P104,661.10, and P123,797.05 for the periods of litigation and costs of suit in favor of defendant-appellee should be deleted. It is not a sound
aforestated. The Concepcions paid, under protest, the increased amortizations of P77,619.72 policy to place a penalty on the right to litigate, nor should counsel's fees be awarded
and P104,661.10 until January 1985 but thereafter failed to pay the quarterly amortization everytime a party wins a suit (Arenas vs. Court of Appeals, 169 SCRA 558).
of P123,797.05 (starting due date of 17 April 1985). "WHEREFORE, the appealed judgment is AFFIRMED with the modification that the award
In a letter, dated 15 July 1985, the bank's President made a demand on the Concepcions of attorneys fees, litigation expenses and costs of suit in favor of defendant-appellees are
for the payment of the arrearages. The Concepcions failed to pay, constraining the bank's deleted from the dispositive portion.
counsel to send a final demand letter, dated 26 August 1985, for the payment of P393,878.81, "SO ORDERED."[6]
covering the spouses' due account for three quarterly payments plus interest, penalty, and The Concepcions forthwith filed with this Court a petition for review on certiorari,
service charges. Still, no payment was received. contending that they have been denied their contractually stipulated right to be personally
On 14 April 1986, the bank finally filed with the Office of the Provincial Sheriff of Pasig notified of the foreclosure proceedings on the mortgaged property.
City a petition for extrajudicial foreclosure of the real estate mortgage executed by the There is some merit in the petition.
Concepcions. A notice of sale was issued on 15 May 1986, setting the public auction sale on The three common types of forced sales arising from a failure to pay a mortgage debt
11 June 1986. The notice was published in the newspaper "Mabuhay." A copy of the notice include (a) an extrajudicial foreclosure sale, governed by Act No. 3135; (b) a judicial
was sent to the Concepcions at 59 Whitefield St., White Plains Subdivision, Quezon City foreclosure sale, regulated by Rule 68 of the Rules of Court; and (c) an ordinary execution
and/or at 11 Albany St., Greenhills Subdivision, San Juan, Metro Manila.The public auction sale, covered by Rule 39 of the Rules of Court. [7] Each mode, peculiarly, has its own
sale went on as scheduled with the bank emerging as the highest bidder. A Certificate of Sale requirements.
was issued in favor of the bank. In an extrajudicial foreclosure, such as here, Section 3 of Act No. 3135 [8] is the law
The Concepcions were unable to exercise their right of redemption within the one-year applicable;[9] the provision reads:
period provided under Act No. 3135. The bank thus consolidated its title over the property

108
"Sec. 3. Notice shall be given by posting notices of the sale for not less than twenty days in at actual meeting of the minds of the parties, or that the arrangement left the price to be
least three public places of the municipality or city where the property is situated, and if such determined arbitrarily by one party so that the contract lacked mutuality. In most instances,
property is worth more than four hundred pesos, such notice shall also be published once a however, these attacks have been unsuccessful.
week for at least three consecutive weeks in a newspaper of general circulation in the "The Court further finds as a matter of law that the cost of living index adjustment, or
municipality or city." escalator clause, is not substantively unconscionable.
The Act only requires (1) the posting of notices of sale in three public places, and (2) the "Cost of living index adjustment clauses are widely used in commercial contracts in an effort
publication of the same in a newspaper of general circulation. [10] Personal notice to the to maintain fiscal stability and to retain `real dollar' value to the price terms of long term
mortgagor is not necessary.[11] Nevertheless, the parties to the mortgage contract are not contracts.The provision is a common one, and has been universally upheld and
precluded from exacting additional requirements. enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in
In the case at bar, the mortgage contract stipulated that - tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits
"All correspondence relative to this Mortgage, including demand letters, summons, subpoenas, and labor contracts negotiated by most of the major labor unions are other examples. That
or notifications of any judicial or extrajudicial actions shall be sent to the Mortgagor at the inflation, expected or otherwise, will cause a particular bargain to be more costly in terms of
address given above or at the address that may hereafter be given in writing by the Mortgagor total dollars than originally contemplated can be of little solace to the plaintiffs." [20]
to the Mortgagee, and the mere act of sending any correspondence by mail or by personal In Philippine National Bank vs. Court of Appeals,[21] the Court further elucidated, as follows:
delivery to the said address shall be valid and effective notice to the Mortgagor for all legal "It is basic that there can be no contract in the true sense in the absence of the element of
purposes, and fact that any communication is not actually received by the Mortgagor, or that it agreement, or of mutual assent of the parties. If this assent is wanting on the part of one who
has been returned unclaimed to the Mortgagee, or that no person was found at the address contracts, his act has no more efficacy than if it had been done under duress or by a person of
given, or that the address is fictitious or cannot be located, shall not excuse or relieve unsound mind.
Mortgagor from the effects of such notice."[12] "Similarly, contract changes must be made with the consent of the contracting parties. The
The stipulation, not being contrary to law, morals, good customs, public order or public policy, minds of all the parties must meet as to the proposed modification, especially when it affects
is the law between the contracting parties and should be faithfully complied with. [13] an important aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that
Private respondent bank maintains that the stipulation that "all correspondence relative the rate of interest is always a vital component, for it can make or break a capital
to (the) Mortgage x x x shall be sent to the Mortgagor at the address given above or at the venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding
address that may hereafter be given in writing by the Mortgagor to the Mortgagee" [14] gives the effect.
mortgagee an alternative to send its correspondence either at the old or the new address given. "We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
[15]
This stand is illogical. It could not have been the intendment of the parties to defeat the unbridled right to unilaterally upwardly adjust the interest on private respondents' loan. That
very purpose of the provision referred to which is obviously to apprise the mortgagors of the would completely take away from private respondents the right to assent to an important
bank's action that might affect the property and to accord to them an opportunity to safeguard modification in their agreement, and would negate the element of mutuality in
their rights. The Court finds the bank's failure to comply with its agreement with petitioners an contracts. In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545
inexcusable breach of the mortgagee's covenant. Neither petitioners' subsequent opportunity to (1991) we held -
redeem the property nor their failed negotiations with the bank for a new schedule of "`x x x (T)he unilateral action of the PNB in increasing the interest rate on the private
payments,[16]can be a valid justification for the breach. respondent's loan violated the mutuality of contracts ordained in Article 1308 of the Civil
The foregoing notwithstanding, petitioners may no longer seek the reconveyance of the Code:
property from private respondent Asaje Realty Corporation, the latter having been, evidently, "`ART. 1308. The contract must bind both contracting parties; its validity or compliance
an innocent purchaser in good faith. [17] The realty corporation purchased the property when the cannot be left to the will of one of them.'
title was already in the name of the bank. It was under no obligation to investigate the title of "In order that obligations arising from contracts may have the force or law between the parties,
the bank or to look beyond what clearly appeared to be on the face of the certificate. [18] there must be mutuality between the parties based on their essential equality. A contract
Private respondent bank, however, can still be held to account for the bid price of Asaje containing a condition which makes its fulfillment dependent exclusively upon the
Realty Corporation over and above, if any, the amount due the bank on the basis of the uncontrolled will of one of the contracting parties, is void x x x. Hence, even assuming that
original interest rate, the unilateral increases made by the bank having been correctly the x x x loan agreement between the PNB and the private respondent gave the PNB a license
invalidated by the Court of Appeals. (although in fact there was none) to increase the interest rate at will during the term of the
The validity of "escalation" or "escalator" clauses in contracts, in general, was upheld by loan, that license would have been null and void for being violative of the principle of
the Supreme Court in Banco Filipino Savings and Mortgage Bank vs. Hon. Navarro and Del mutuality essential in contracts. It would have invested the loan agreement with the character
Valle.[19] Hence: of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's
"Some contracts contain what is known as an `escalator clause,' which is defined as one in (the debtor) participation being reduced to the alternative `to take it or leave it' x x x. Such a
which the contract fixes a base price but contains a provision that in the event of specified cost contract is a veritable trap for the weaker party whom the courts of justice must protect against
increases, the seller or contractor may raise the price up to a fixed percentage of the abuse and imposition. (Citations omitted.)"[22]
base. Attacks on such a clause have usually been based on the claim that, because of the open Even if we were to consider that petitioners were bound by their agreement allowing an
price-provision, the contract was too indefinite to be enforceable and did not evidence an increase in the interest rate despite the lack of advance notice to them, the escalation should

109
still be subject, as so contractually stipulated, to a corresponding increase by the Central Bank
of its rediscount rate to member banks, or of the interest rate on savings and time deposit, or of
the interest rate on such loans and advances. The notices sent to petitioners merely read:
Letter of 19 July 1984:
"Please be informed that the Bank has increased the interest rate of your existing loan
from 21 to 30% per annum beginning October 17, 1984. This increase of interest rate is in
accordance with the provision of Section 2 of Presidential Decree No. 1684 [23] amending Act
No. 2655. This provision of the decree is reiterated under paragraph 1 of your Promissory
Note. Your quarterlyamortization has been increased to P104,661.10.
"We trust that you will be guided accordingly."[24]
Letter of 14 November 1984:
"On account of the prevailing business and economic condition, we are compelled to
increase the interest rate of your existing loan from 30% to 38% per annum effective
November 17, 1984.This increase is in accordance with your agreement (escalation clause) in
your promissory note/s.
"In view of this increase in the interest rate of your loan, your Quarterly amortization
correspondingly increased to P123,797.05 commencing on April 17, 1985.
"We trust that you will understand our position and please be guided accordingly." [25]
Given the circumstances, the Court sees no cogent reasons to fault the appellate court in its
finding that there are no sufficient valid justifications aptly shown for the unilateral increases
by private respondent bank of the interest rates on the loan.
WHEREFORE, the decision of the appellate court is AFFIRMED subject to the
MODIFICATION that private respondent Home Savings Bank and Trust Company shall pay
to petitioners the excess, if any, of the bid price it received from Asaje Realty Corporation for
the foreclosed property in question over and above the unpaid balance of the loan computed at
the original interest rate. This case is REMANDED to the trial court for the above
determination. No costs.
SO ORDERED.

110
FIRST DIVISION 11. 02-052-961464 12 December 1996 240,000
12. 02-052-961498 19 December 1996 164,000
13. 02-052-961542 27 December 1996 200,000
BPI FAMILY SAVINGS G.R. No. 167724 14. 02-052-970018 3 January 1997 120,000
BANK, INC.,
15. 02-052-970052 10 January 1997 185,000
Petitioner, Present:
16. 02-052-970078 15 January 1997 80,000
PANGANIBAN, C.J., Chairperson, 17. 02-052-970087 17 January 1997 170,000
YNARES-SANTIAGO, 18. 02-052-970131 23 January 1997 180,000
- versus - AUSTRIA-MARTINEZ, 19. 02-052-970163 31 January 1997 220,000
CALLEJO, SR., and 20. 02-052-970190 7 February 1997 110,000
CHICO-NAZARIO, JJ. 21. 02-052-970215 13 February 1997 170,000
22. 02-052-970254 20 February 1997 140,000
MARGARITA VDA. DE Promulgated: 23. 02-052-970293 28 February 1997 130,000
COSCOLLUELA, 24. 02-052-970345 7 March 1997 90,000
Respondent. June 27, 2006
25. 02-052-970367 13 March 1997 50,000
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
26. 02-052-970402 21 March 1997 160,000
DECISION 27. 02-052-970422 26 March 1997 190,000
28. 02-052-970453 4 April 1997 82,000
29. 02-052-970478 11 April 1997 150,000
CALLEJO, SR., J.: 30. 02-052-970502 17 April 1997 80,000
31. 02-052-970539 25 April 1997 145,000
32. 02-052-970558 30 April 1997 135,000
Assailed before this Court is a Petition for Review under Rule 45 of the Rules of Court of the 33. 02-052-970589 8 May 1997 54,000
Decision[1] of the Court of Appeals (CA) in CA-G.R. SP No. 69732 granting respondents 34. 02-052-970770 25 June 1997 646,492
petition for certiorari, and its resolution denying petitioners motion for reconsideration. 35. 02-052-970781 27 June 1997 160,000
36. 02-052-970819 4 July 1997 250,000
The Antecedents
Respondent Margarita Coscolluela and her husband Oscar Coscolluela obtained an agricultural 37. 02-052-970852 11 July 1997 350,000
sugar crop loan from the Far East Bank & Trust Co. (FEBTC) Bacolod City Branch (later 38. 02-052-970926 1 August 1997 170,000
merged with petitioner Bank of the Philippine Islands) for crop years 1997 and 1998. 39. 02-052-970949 5 August 1997 200,000
[2]
However, in the book of FEBTC, the loan account of the spouses was treated as a single 40. 02-052-970975 8 August 1997 120,000
account,[3] which amounted to P13,592,492.00 as evidenced by 67 Promissory 41. 02-052-970999 15 August 1997 150,000
Notes[4] executed on various dates, from August 29, 1996 to January 23, 1998, to wit: 42. 02-052-971028 22 August 1997 110,000
43. 02-052-971053 29 August 1997 130,000
Promissory Note Date Amount 44. 02-052-971073 4 September 1997 90,000
No. (in Phil. Peso) 45. 02-052-971215 12 September 1997 160,000
1. 02-052-960971 29 August 1996 148,000 46. 02-052-971253 19 September 1997 190,000
2. 02-052-961095 23 September 1996 1,200,000 47. 02-052-971280 26 September 1997 140,000
3. 02-052-961122 27 September 1996 550,000 48. 02-052-971317 2 October 1997 115,000
4. 02-052-961205 11 October 1996 180,000 49. 02-052-971340 10 October 1997 115,000
5. 02-052-961231 18 October 1996 155,000 50. 02-052-971351 15 October 1997 700,000
6. 02-052-961252 24 October 1996 190,000 51. 02-052-971362 16 October 1997 90,000
7. 02-052-961274 30 October 1996 115,000 52. 02-052-971394 24 October 1997 185,000
8. 02-052-961310 8 November 1996 90,000 53. 02-052-971407 29 October 1997 170,000
9. 02-052-961373 21 November 1996 125,000 54. 02-052-971449 6 November 1997 105,000
10. 02-052-961442 6 December 1996 650,000 55. 02-052-971464 13 November 1997 170,000
111
56. 02-052-971501 20 November 1997 150,000 balance, interest and penalty, covered by promissory notes from 1 to 33, except nos. 2 and 10.
[9]
57. 02-052-971527 25 November 1997 620,000
58. 02-052-971538 28 November 1997 130,000
59. 02-052-971569 4 December 1997 140,000 While the extrajudicial foreclosure proceeding was pending, petitioner FEBTC filed a
complaint[10] with the Regional Trial Court (RTC) of Makati City, Branch 64, against
60. 02-052-971604 12 December 1997 220,000
respondent for the collection of the principal amount of P8,794,492.00 plus interest and
61. 02-052-971642 18 December 1997 185,000 penalty, or the total amount of P12,672,000.31, representing the amounts indicated in the rest
62. 02-052-971676 23 December 1997 117,000 of the promissory notes, specifically Promissory Note Nos. 34 to 67, as well as those dated
63. 02-052-971688 29 December 1997 100,000 December 6, 1996 and September 23, 1996:
64. 02-052-980019 7 January 1998 195,000
65. 02-052-980032 8 January 1998 170,000 PN No. Date Amount Annex
66. 02-052-980064 15 January 1998 225,000 2-052-980079 January 02, 1998 176,000.00 A
67. 02-052-980079 23 January 1998 176,000 2-052-980064 January 15, 1998 225,000.00 B
The promissory notes listed under Nos. 1 to 33 bear the maturity date of February 9, 1998, 2-052-980032 January 08, 1998 170,000.00 C
with a 30-day extension of up to March 11, 1998, while those listed under Nos. 34 to 67 2-052-980019 January 07, 1998 195,000.00 D
bear December 28, 1998 as maturity date. 2-052-971688 December 29, 1997 100,000.00 E
2-052-971676 December 23, 1997 117,000.00 F
Meanwhile, on June 13, 1997, the spouses Coscolluela executed a real estate mortgage in
2-052-971642 December 18, 1997 185,000.00 G
favor of FEBTC over their parcel of land located in Bacolod Citycovered by Transfer
Certificate of Title (TCT) No. T-109329 as security of loans on credit accommodation 2-052-971604 December 12, 1997 220,000.00 H
obtained by the spouses from FEBTC and those that may be obtained by the mortgagees 2-052-971569 December 04, 1997 140,000.00 I
which was fixed at P7,000,000.00, as well as those that may be extended by the mortgagor to 2-052-971538 November 28, 1997 130,000.00 J
the mortgagees.[5] 2-052-971527 November 25, 1997 620,000.00 K
2-052-971501 November 20, 1997 150,000.00 L
Under the terms and conditions of the real estate mortgage, in the event of failure to pay the 2-052-971464 November 13, 1997 170,000.00 M
mortgage obligation or any portion thereof when due, the entire principal, interest, penalties 2-052-971449 November 06, 1997 105,000.00 N
and other charges then outstanding, shall become immediately due; upon such breach or 2-052-971407 October 29, 1997 170,000.00 O
violation of the terms and conditions thereof, FEBTC may, at its absolute discretion foreclose 2-052-971394 October 24, 1997 185,000.00 P
the same extrajudicially in accordance with the procedure prescribed by Act No. 3135, as
2-052-971362 October 16, 1997 90,000.00 Q
amended, and for the purpose appointed FEBTC as its attorney-in-fact with full power and
authority to enter the premises where the mortgaged property is located and to take actual 2-052-971351 October 15, 1997 700,000.00 R
possession and control thereof without need of any order of any court, nor written permission 2-052-971340 October 15, 1997 115,000.00 S
from the spouses, and with special power to sell the mortgaged property at a public or private 2-052-971317 October 02, 1997 115,000.00 T
sale at the option of the mortgagee; and that the spouses expressly waived the term of 30 days 2-052-971280 September 26, 1997 140,000.00 U
or any other terms granted by law as the period which must elapse before the mortgage 2-052-971253 September 19, 1997 190,000.00 V
agreement may be foreclosed and, in any case, such period has already lapsed. 2-052-971215 September 12, 1997 160,000.00 W
2-052-971073 September 04, 1997 90,000.00 X
The mortgage was registered with the Registry of Deeds of Bacolod and was 2-052-971053 August 29, 1997 130,000.00 Y
annotated in the title of the land on June 20, 1997.[6] Meantime, Oscar died intestate and was 2-052-971028 August 22, 1997 110,000.00 Z
survived by his widow, herein respondent.
2-052-970999 August 15, 1997 150,000.00 AA
2-052-970975 August 08, 1997 120,000.00 BB
For failure to settle the outstanding obligation on the maturity dates, FEBTC sent a final
demand letter[7] to respondent on March 10, 1999 demanding payment, within five days from 2-052-970949 August 05, 1997 200,000.00 CC
notice, of the principal of the loan amounting to P13,481,498.68, with past due interests and 2-052-970926 August 01, 1997 170,000.00 DD
penalties or in the total amount of P19,482,168.31 as of March 9, 1999. [8] Respondent failed to 2-052-970852 July 11, 1997 350,000.00 EE
settle her obligation. 2-052-970819 July 04, 1997 250,000.00 FF
2-052-970781 June 27, 1997 160,000.00 GG
On June 10, 1999, FEBTC filed a petition for the extrajudicial foreclosure of the 2-052-970770 June 25, 1997 646,492.00 HH
mortgaged property, significantly only for the total amount of P4,687,006.68 exclusive of 2-052-961442 December 06, 1996 650,000.00 II
112
2-052-961095 September 23, 1996 1,200,000.00 JJ[11] Petitioner presented Emmanuel Ganuelas, its loan officer in its Bacolod City Branch, as sole
witness. He testified that the spouses Coscolluela were granted an agricultural sugar loan
which is designed to finance the cultivation and plantation of sugar farms of the borrowers.
[14]
Borrowers were allowed to make successive drawdowns or availments against the loan as
their need arose. Each drawdown is covered by a promissory note with uniform maturity dates.
[15]
The witness also testified that the loan account of the spouses was a single loan account. [16]
Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:
After petitioner rested its case, respondent filed a demurrer to evidence [17]contending, among
WHEREFORE, it is respectfully prayed that, after trial, judgment be
others, that, with Ganuelas admission, there is only one loan account secured by the real estate
rendered in its favor and against defendants ordering them to pay the
mortgage, that the promissory notes were executed as evidence of the loans. Plaintiff was thus
following:
barred from instituting a personal action for collection of the drawdowns evidenced by
Promissory Note Nos. 2, 10, and 34 to 67 after instituting a petition for extrajudicial
a. The amount TWELVE MILLION SIX HUNDRED SEVENTY-TWO
foreclosure of the real estate mortgage for the amount covered by Promissory Note Nos. 1, 3
THOUSAND PESOS and 31/100 (P12,672,000.31), with additional
to 9, and 11 to 33. Respondent insisted that by filing a complaint for a sum of money,
stipulated interest and penalty equivalent to one (1%) percent of the
petitioner thereby split its cause of action against her; hence, the complaint must perforce be
amount due for every thirty (30) days or fraction thereof, until fully paid;
dismissed on the ground of litis pendentia.
b. Expense of litigation amounting to P50,000.00;
Petitioner opposed the demurrer arguing that while the loans were considered as a single
account, each promissory note executed by respondent constituted a separate contract. It
c. The amount of P500,000.00 as attorneys fees.
reiterated that its petition for the extrajudicial and foreclosure of the real estate mortgage
before the Ex-Oficio Provincial Sheriff involves obligations different and separate from those
Other reliefs just and equitable in the premises are similarly prayed for. [12]
in its action for a sum of money before the court. Thus, petitioner could avail of the personal
action for the collection of the amount evidenced by the 36 promissory notes not subject of its
In her answer, respondent alleged, by way of special and affirmative defense, that the
petition for the extrajudicial foreclosure of the real estate mortgage. Petitioner insists that the
complaint was barred by litis pendentia, specifically, the pending petition for the extrajudicial
promissory notes subject of its collection suit should be treated separately from the other set of
foreclosure of the real estate mortgage, thus:
obligations, that is, the 31 promissory notes subject of its extrajudicial foreclosure petition. [18]
8) That plaintiff is guilty of forum shopping, in that some of the
In its Order[19] dated January 10, 2002, the trial court denied the demurrer on the ground that
promissory notes attached to plaintiffs complaint are also the same
the promissory notes executed by respondent and her deceased husband contained different
promissory notes which were made the basis of the plaintiff in their
amounts, and each note covered a loan distinct from the others. Thus, petitioner had the option
extrajudicial foreclosure of mortgage filed against the defendant-spouses
to file a petition for the extrajudicial foreclosure of the real estate mortgage covering 31 of the
and also marked in evidence in support of their opposition to the issuance
promissory notes, and, as to the rest, to file an ordinary action for collection. Petitioner, thus,
of the preliminary injunction in Civil Case No. 99-10864;
merely opted to institute an action for collection of the debt on the 36 promissory notes, and
waived its action for the foreclosure of the security given on these notes.
9) That plaintiff-bank has not only charged but over charged the
Respondent filed a motion for reconsideration, [20] which the trial court denied in its February
defendant-spouses with excessive and exorbitant interest over and above
19, 2002 Order,[21] prompting her to file a certiorari petition[22] under Rule 65 with the CA,
those authorized by law. And in order to add more injury to the
assailing the January 10, 2002 and February 19, 2002 Orders of the trial court. Respondent
defendants, plaintiff also included other charges not legally collectible
alleged that:
from the defendant-spouses;
1. PUBLIC RESPONDENT GRAVELY ABUSED HER DISCRETION
10) That the act of the plaintiff-bank in seeking to collect twice on the
TANTAMOUNT TO LACK AND/OR EXCESS OF JURISDICTION IN
same promissory notes is not only unfair and unjust but also condemnable
HOLDING THAT THE RESPONDENT BANK CAN FILE
as plaintiff seek to unjustly enrich itself at the expense of the defendants;
SIMULTANEOUS ACTIONS FOR FORECLOSURE AND FOR
COLLECTION.
11) That there is another action pending between the same parties for the
same cause;
Meanwhile, on January 6, 2003, the parcel of land subject of the aforementioned real estate
mortgage was sold at public auction where petitioner emerged as the highest bidder. [23]
12) That the claim or demand set forth in the plaintiffs complaint has
On September 30, 2004, the CA rendered its Decision [24] granting the petition, holding, under
either been waived, abandoned or otherwise extinguished. [13]
prevailing jurisprudence, the remedies either a real action to foreclose the mortgage or a

113
personal action to collect the debt of a mortgage creditor are alternative and not The issues raised in this case are (1) whether the petition for certiorari under Rule 65 of the
cumulative. Since respondent availed of the first one, it was deemed to have waived the Rules of Court filed by respondent in the CA was the proper remedy to assail the January 10,
second. Further, the filing of both actions results in a splitting of a single cause of 2002 Order of the trial court; (2) whether the appellate court issued its January 10, 2002 Order
action. Thus, in denying her Demurrer to Evidence, the RTC committed grave abuse of with grave abuse of its discretion amounting to excess or lack of jurisdiction.
discretion as it overruled settled judicial pronouncements. The dispositive part of the decision
states: Petitioner avers that the January 10, 2002 Order of the RTC denying the Demurrer to Evidence
of respondent was interlocutory, and as such could not be the subject of a petition
WHEREFORE, the instant petition is GRANTED. The assailed Orders for certiorari.[30] The RTC did not commit a grave abuse of its discretion in issuing its January
dated January 10, 2002 and February 19, 2002 are SET ASIDE. 10, 2002 Order. Petitioner maintains that respondent executed 67 separate loan obligations
evidenced by 67 separate promissory notes, with different amounts and maturity dates. It avers
SO ORDERED. that each of the loans, as evidenced by each of the promissory notes, may properly be the
subject of a separate action; thus, each promissory note is an actionable document. Moreover,
The CA cited the ruling of this Court in Bachrach Motor Co., Inc. v. Esteban Icaragal and the real estate mortgage executed by the spouses secured an obligation only to a fixed amount
Oriental Commercial Co., Inc.[25] of P7,000,000.00 which is covered by Promissory Note Nos. 1 to 31, whereas the loans
secured by the spouses covered by the Promissory Note Nos. 32 to 67 for the total amount
Aggrieved, petitioner filed a motion for reconsideration [26] on October 12, of P12,672,000.31 were not secured by the real estate mortgage. Petitioner insists that it was
2004. Respondent filed her opposition[27] to the motion on October 26, 2004. The CA proper to file the petition for extrajudicial foreclosure of the real estate mortgage only for
thereafter denied the motion in a resolution promulgated on April 6, 2005.[28] respondents loan account covered by the 36 promissory notes for the amount
of P7,755,733.64. It was not barred from filing a separate action for the collection of
Petitioner filed the instant petition for review on certiorari, alleging that: the P12,672,000.31 against respondent in the RTC for the drawdowns as evidenced by
Promissory Note Nos. 34 to 67. What should apply, petitioner asserts, is the ruling of this
I. Court in Caltex Philippines, Inc. v. Intermediate Appellate Court [31] and Quiogue v. Bautista,
[32]
THE COURT OF APPEALS ERRED IN GRANTING THE PETITION and not the ruling of this Court in Bachrach which involves only one promissory note.
FOR CERTIORARI OF RESPONDENT ON THE GROUND OF GRAVE
ABUSE OF DISCRETION. Petitioner insists that, although respondent and her husband had a joint account with
it, they had separate loan obligations as evidenced by the promissory notes; hence, it had
xxxx separate causes of action for each and every drawdown evidenced by a promissory note.

The Trial Court did not commit grave abuse of discretion amounting to For her part, respondent admits having executed the promissory notes. However, as testified to
lack or excess of jurisdiction in denying the Demurrer to Evidence filed by Ganuelas, the witness for petitioner, she and her husband only have one loan account with
by the respondents. Petitioner, in instituting a petition for the Extra petitioner, hence, the latter had only one cause of action against her either for the collection of
Judicial Foreclosure of the Mortgage of respondents based on 31 the entire loan account or for the extrajudicial foreclosure of the real estate mortgage, also for
promissory notes executed by respondents and another action to collect the entire amount of the loan.Petitioner cannot split her single loan account by filing a simple
on a separate set of 36 promissory notes, did not split their cause of collection suit and a petition for extrajudicial foreclosure of the real estate mortgage without
action. violating the rule against splitting a single cause of action.

xxxx Respondent asserts that the real estate mortgage executed by respondent and her deceased
husband was a security not only of their loan account in the amount of P7,000,000.00 but for
The trial court did not commit grave abuse of discretion amounting to all other loans that may have been extended to them in excess of that amount.
lack or excess of jurisdiction when it denied respondents Demurrer to The petition is unmeritorious.
Evidence. In this wise, the Petition for Certiorari filed by respondents
should not have been granted.[29] On the first issue, we agree with petitioners contention that the general rule is that an order
denying a motion to dismiss or demurrer to evidence is interlocutory and is not
During the pendency of this appeal, petitioner filed with this Court on December 2, 2005 a appealable. Consequently, defendant must go to trial and adduce its evidence, and appeal, in
manifestation and joint motion for substitution, informing the court that petitioner bank has due course, from an adverse decision of the trial court. However, the rule admits of
assigned to the Philippine Asset Investment, Inc. all its rights, title and interest over its non- exceptions. Where the denial by the trial court of a motion to dismiss or demurrer to evidence
performing loan accounts pursuant to Republic Act No. 9182 entitled The Special Purpose is tainted with grave abuse of discretion amounting to excess or lack of jurisdiction, the
Vehicle Act of 2002. aggrieved party may assail the order of dismissal on a petition for certiorari under Rule 65 of
the Rules of Court. A wide breadth of discretion is granted in certiorari proceedings in the

114
interest of substantial justice and to prevent a substantial wrong. [33] As the Court held It was held in the case of Bendernagle v. Cocks, 19 Wend. 207 (32
in Preferred Home Specialties, Inc. v. Court of Appeals:[34] Am.Dec. 448), that where a party had several demands or existing causes
of action growing out of the same contract or resting in matter of account,
It bears stressing that a writ of certiorari is of the highest utility and which may be joined and sued for in the same action, they must be joined;
importance for curbing excessive jurisdiction and correcting errors and and if the demands or causes of action be split up, and a suit brought for
most essential to the safety of the people and the public welfare. Its scope part only, and subsequently a second suit for the residue is brought, the
has been broadened and extended, and is now one of the recognized first action may be pleaded in abatement or in bar of the second action. x x
modes for the correction of errors by this Court.The cases in which it will x[41]
lie cannot be defined. To do so would be to destroy its comprehensiveness
and limit its usefulness. The rule against splitting causes of action is not altogether one of original legal right
but is one of interposition based upon principles of public policy and of equity to prevent the
The appropriate function of a certiorari writ is to relieve aggrieved parties inconvenience and hardship incident to repeated and unnecessary litigation. [42]
from the injustice arising from errors of law committed in proceedings
affecting justiciable rights when no other means for an adequate and It is not always easy to determine whether in a particular case under consideration, the cause
speedy relief is open. It is founded upon a sense of justice, to release of action is single and entire or separate. The question must often be determined, not by the
against wrongs otherwise irreconcilable, wrongs which go unredressed general rules but by reference to the facts and circumstances of the particular case. Where
because of want of adequate remedy which would be a grave reproach to deeds arising out of contract are distinct and separate, they give rise to separate cause of action
any system of jurisprudence.[35] for which separate action may be maintained; but it is also true that the same contract may
give rise to different causes of action either by reason of successive breaches thereof or by
The aggrieved party is entitled to a writ of certiorari where the trial court commits a grave reason of different stipulations or provisions of the contract. [43] The true rule which determines
abuse of discretion amounting to excess or lack of jurisdiction in denying a motion to dismiss whether a party has only a single and entire cause of action for all that is due him, and which
a complaint on the ground of litis pendentia. An appeal while available eventually is must be sued for in one action, or has a severable demand for which he may maintain separate
cumbersome and inadequate for it requires the parties to undergo a useless and time- suits, is whether the entire amount arises from one and the same act or contract or the several
consuming and expensive trial. The second case constitutes a rude if not debilitating parts arise from distinct and different acts or contracts. [44]
imposition on the trial and the docket of the judiciary. [36]
Where there are entirely distinct and separate contracts, they give rise to separate causes of
In the present case, we agree with the ruling of the CA that the RTC acted with grave abuse of action for which separate actions may be instituted and presented. When money is payable by
discretion amounting to excess or lack of jurisdiction when it denied the Demurrer to Evidence installments, a distinct cause of action assails upon the following due by each installment and
of respondent and, in the process, ignored applicable rulings of this Court. Although they may be recovered in successive action.On the other hand, where several claims payable at
respondent had the right to appeal the decision of the trial court against her after trial, different times arise out of the same transactions, separate actions may be brought as each
however, she, as defendant, need not use up funds and undergo the tribulations of a trial and liability accounts. But where no action is brought until more than one is due, all that are due
thereafter appeal from an adverse decision. must be included in one action; and that if an action is brought to recover upon one or more
that are due but not upon all that are due, a recovery in such action will be a bar to a several or
Section 3, Rule 2 of the 1997 Rules of Civil Procedure provides that a party may not institute other actions brought to recover one or more claims of the other claims that were due at the
more than one suit for a single cause of action and, if two or more suits are instituted on the time the first action was brought.[45]
basis of the same cause of action, the filing of one on a judgment upon the merits in any one is
available as ground for the dismissal of the other or others. [37] A party will not be permitted to The weight of authority is that in the absence of special controlling circumstances, an open or
split up a single cause of action and make it a basis for several suits. [38] A party seeking to continuous running account between the same parties constitutes a single and indivisible
enforce a claim must present to the court by the pleadings or proofs or both, all the grounds demand, the aggregate of all the items of the account constituting the amount due. But the rule
upon which he expects a judgment in his favor. He is not at liberty to split up his demands and is otherwise where it affirmatively appears that the parties regarded the different items of the
prosecute it by piecemeal, or present only a portion of the grounds upon which special relief is account as separate transactions and not parts of an ordinary running account. And there may
sought, and leave the rest to be presented in a second suit if the first fails. [39] The law does not also be, even between the same parties, distinct and separate actions upon which separate
permit the owner of a single or entire cause of action or an entire or indivisible demand to actions may be maintained. [46] In fine, what is decisive is that there be either an express
divide and split the cause or demand so as to make it the subject of several actions. The whole contract, or the circumstances must be such as to raise an implied contract embracing all the
cause must be determined in one action. items to make them, when they arise, at different times, a single or entire demand or cause of
action.[47]
Indeed, in Goldberg v. Eastern Brewing Co.,[40] the New York Supreme Court
emphasized that: Decisive of the principal issue is the ruling of this Court in Bachrach Motor Co., Inc. v.
Esteban Icaragal and Oriental Commercial Co., Inc.[48] in which it ruled that on the

115
nonpayment of a note secured by a mortgage, the creditor has a single cause of action against extrajudicial foreclosure of the real estate mortgage, petitioner thereby waived its personal
the debtor. The single cause of action consists in the recovery of the credit with execution of action to recover the amount covered not only by said promissory notes but also of the rest of
the suit. In a mortgage credit transaction, the credit gives rise to a personal action for the promissory notes. This is so because when petitioner filed its petition before the Ex-Oficio
collection of the money. The mortgage is the guarantee which gives rise to a mortgage Provincial Sheriff on June 10, 1999, the entirety of the loan account of respondent under the
foreclosure suit to collect from the very property that secured the debt. [49] 67 promissory notes was already due. The obligation of respondent under Promissory Note
Nos. 1 to 33 became due on February 9, 1998 but was extended up to March 11, 1998,
The action of the creditor is anchored on one and the same cause: the nonpayment whereas, those covered by Promissory Note Nos. 34 to 67 matured on December 28,
by the debtor of the debt to the creditor-mortgagee. Though the debt may be covered by a 1998.Petitioner should have caused the extrajudicial foreclosure of the real estate mortgage for
promissory note or several promissory notes and is covered by a real estate mortgage, the the recovery of the entire obligation of respondent, on all the promissory notes. By limiting the
latter is subsidiary to the former and both refer to one and the same obligation. account for which the real estate mortgage was being foreclosed to the principal amount
of P4,687,006.68, exclusive of interest and penalties, petitioner thereby waived recovery of the
A mortgage creditor may institute two alternative remedies against the mortgage debtor, either rest of respondents agricultural loan account.
a personal action for the collection of debt, or a real action to foreclose the mortgage, but not
both. Each remedy is complete by itself. As explained by this Court: It must be stressed that the parties agreed in the Real Estate Mortgage that in the event that
respondent shall fail to pay the mortgage obligation or any portion thereof when due, the
We hold, therefore, that, in the absence of express statutory provisions, a entire principal, interest, penalties and other charges then outstanding shall become
mortgage creditor may institute against the mortgage debtor either a immediately due, payable and defaulted, thus:
personal action for debt or a real action to foreclose the mortgage. In other
words, he may pursue either of the two remedies, but not both. By such 3. The terms and conditions of the Mortgage have been violated when the
election, his cause of action can by no means be impaired, for each of the Mortgagors failed and/or refused to pay, notwithstanding repeated
two remedies is complete in itself. Thus, an election to bring a personal demands, the installment and/or maturity amount of the Mortgage
action will leave open to him all the properties of the debtor for obligation which became due and payable on the said date;
attachment and execution, even including the mortgaged property
itself.And, if he waives such personal action and pursues his remedy 4. Under the terms and conditions of the Mortgage Agreement, in the
against the mortgaged property, an unsatisfied judgment thereon would event the Mortgagors fail and/or refuse to pay the Mortgage obligation or
still give him the right to sue for a deficiency judgment, in which case, all any portion thereof when due, the entire principal, interest, penalties and
the properties of the defendant, other than the mortgaged property, are other charges then outstanding, shall, without need for demand, notice, or
again open to him for the satisfaction of the deficiency. In either case, his any other act or deed, become immediately due, payable and defaulted;
remedy is complete, his cause of action undiminished, and any advantages
attendant to the pursuit of one or the other remedy are purely accidental 5. The Mortgage Agreement provides that upon such breach or violation of
and are all under his right of election. On the other hand, a rule that would the terms and conditions thereof, the Mortgagee may, at its absolute
authorize the plaintiff to bring a personal action against the debtor and discretion foreclose the same extrajudicially in accordance with the
simultaneously or successively another action against the mortgaged procedure prescribed by Act No. 3135, as amended, and for the purpose
property, would result not only in multiplicity of suits so offensive to appointed the Mortgagee as its attorney-in-fact with full power and
justice (Soriano v. Enriques, 24 Phil. 584) and obnoxious to law and authority to enter the premises where the Mortgaged property is located
equity (Osorio v. San Agustin, 25 Phil. 404), but also in subjecting the and to take actual possession and control thereof without need of any order
defendant to the vexation of being sued in the place of his residence or of of any Court, nor written permission from the Mortgagors, and with
the residence of the plaintiff, and then again in the place where the special power to sell the Mortgaged Property at a public or private sale at
property lies.[50] the option of the Mortgagee.[53]

If the mortgagee opts to foreclose the real estate mortgage, he thereby waives the action for Petitioner cannot split the loan account of respondent by filing a petition for the extrajudicial
the collection of the debt and vice versa. [51] If the creditor is allowed to file its separate foreclosure of the real estate mortgage for the principal amount of P4,687,006.68 covered by
complaints simultaneously or successively, one to recover his credit and another to foreclose the first set of promissory notes, and a personal action for the collection of the principal
his mortgage, he will, in effect, be authorized plural redress for a single breach of contract at amount of P12,672,000.31 covered by the second set of promissory notes without violating the
so much costs to the court and with so much vexation and oppressiveness to the debtor. [52] proscription against splitting a single cause of action against respondent.

In the present case, petitioner opted to file a petition for extrajudicial foreclosure of the real The contention of petitioner that respondents loan account that was secured by the real estate
estate mortgage but only for the principal amount of P4,687,006.08 or in the total amount mortgage was limited only to those covered by the Promissory Note Nos. 1 to 33 or for the
of P7,755,733.64 covering only 31 of the 67 promissory notes. By resorting to the total amount of P7,000,000.00 is belied by the real estate mortgage and by its own evidence.

116
Under the deed, the mortgage was to secure the payment of a credit accommodation ATTY. MIRANO:
already obtained by respondent, the principal of all of which was fixed at P7,000,000.00, as For purposes of identification, we respectfully request that this phrase: that
well as any other obligation that may be extended to respondent, including interest and for and in consideration of the credit accommodation obtained from
expenses, to wit: the mortgagee be bracketed and mark as Exhibit 6-B. (Acting court
interpreter marking said phrase as Exhibit 6-B.)
That for and in consideration of credit accommodation obtained from the
MORTGAGEE, and to secure the payment of the same and those that may Q Now in accordance with the terms of this real estate mortgage, this real
hereafter be obtained, the principal of all of which is hereby fixed at estate mortgage was executed by the defendant spouses not only to
SEVEN MILLION PESOS ONLY (P7,000,000.00), Philippine Currency, secure the loan already obtained by the said spouses as of the time
as well as those that the MORTGAGEE may extend to the MORTGAGOR, of the execution of the mortgage on June 13, 1997 but also all other
including interest and expenses or any other obligation owing to the loans that may be extended by Far East Bank and Trust Company to
MORTGAGEE, whether direct or indirect, principal or secondary, as the defendant spouses after the execution of the mortgage as stated
appears in the accounts, books and records of the MORTGAGEE, the in this portion of the real estate mortgage which we quote: to secure
MORTGAGOR does hereby transfer and convey by way of mortgage unto the payment as and those that may hereafter be obtained, is that
the MORTGAGEE, its successors or assigns, the parcels of land which are correct?
described in the list inserted on the back of this document and/or appended A Yes, Sir.
herein, together with all the buildings and improvements now existing or
which may hereafter be erected or constructed thereon, of which the Q So from your statement, Mr. Witness, this real estate mortgage was
MORTGAGOR declares that he/it is the absolute owner free from all liens offered by the defendant spouses as a security for the loans they
and encumbrances. However, if the MORTGAGOR shall pay to the already secured as of the time of the execution of the mortgage but
MORTGAGEE, its successors or assigns, the obligation secured by this also for the loans that they will secure thereafter, is that correct?
mortgage when due, together with interest, and shall keep and perform all A Yes, Sir.[55] (Emphasis supplied)
and singular the covenants and agreements herein contained for the
MORTGAGOR to keep and perform, then this mortgage shall be void, As gleaned from the plain terms of the real estate mortgage, the real estate of respondent
otherwise, it shall remain in full force and effect. [54](Emphasis supplied) served as continuing security liable for future advancements or obligations beyond the amount
of P7,000,000.00. The mortgage partakes of the nature of contract for future advancements. As
The testimony of Ganuelas in the RTC relative to the real estate mortgage follows: explained by this Court in the early case of Lim Julian v. Lutero:[56]

Q The real estate mortgage states: That for and in consideration of credit The rule, of course, is well settled that an action to foreclose a mortgage
accommodation obtained from the mortgagee. This simply means, must be limited to the amount mentioned in the mortgage. The exact
Mr. Witness, that this mortgage is offered to secure loans already amount, however, for which the mortgage is given need not always be
obtained by the mortgagor from the mortgagee Far East Bank and specifically named. The amount for which the mortgage is given may be
Trust Company. I am referring only to that phrase, obtained from the stated in definite or general terms, as is frequently the case in mortgages to
mortgagee, is that correct? secure future advancements. The amount named in the mortgage does not
A Yes, Sir. limit the amount for which it may stand as security, if, from the four
corners of the document, the intent to secure future indebtedness or future
Q So from this phrase in the real estate mortgage, this mortgage was advancements is apparent. Where the plain terms, of the mortgage,
constituted to secure the credit accommodation already obtained by evidence such an intent, they will control as against a contention of the
the mortgagor, the defendant spouses, as of the time of the execution mortgagor that it was the understanding of the parties that the mortgage
of the real estate mortgage, is that correct? was security only for the specific amount named. (Citizens Savings Bank
A Yes, Sir. v. Kock, 117 Mich. 225). In that case, the amount mentioned in the
mortgage was $7,000. The mortgage, however, contained a provision that
Q Now since the loan secured by the defendants are evidenced by the mortgagors agree to pay said mortgagee any sum of money which they
promissory notes, will you agree with me, Mr. Witness, that this real may now or hereafter owe said mortgagee. At the time the action of
estate mortgage was executed for promissory notes already executed foreclosure was brought, the mortgagors owed the mortgagee the sum of
by the defendant spouses as of the time of the execution of the $21,522.The defendants contended that the amount to be recovered in an
mortgage on June 13, 1997, is that correct? action to foreclose should be limited to the amount named in the
A Yes, Sir. mortgage. The court held that the amount named as consideration for the

117
mortgage did not limit the amount for which the mortgage stood as Under a mortgage to secure the payment of future advancements, the mere
security, if, from the whole instrument the intent to secure future fact that the repayments on a particular day equal the amount of the
indebtedness could be gathered. The court held that a mortgage to cover mortgage will not discharge the mortgage before maturity so long as
future advances is valid. (Michigan Insurance Co. v. Brown, 11 Mich. 265; advancements may be demanded and are being received. (Luengo &
Jones on Mortgages, 1, sec. 373; Keyes v. Bumps Martinez v. Moreno, supra)[57]
Administrator, 59 Vt. 391; Fisher v. Otis, 3 Pin. 78; Brown v. Kiefer, 71
N.Y. 610; Douglas v. Reynolds, 7 Peters [U.S.] 113; Shores v. Doherty, 65 Moreover, the series of loan advancements herein cannot be likened to the credit line
Wis. 153) discussed in Caltex Philippines, Inc. v. Intermediate Appellate Court,[58] as petitioner posited in
its reply[59] filed before this Court. In Caltex, unlike the instant case, the real estate mortgage
Literal accuracy in describing the amount due, secured by a mortgage, is executed did not contain a dragnet clause [60] that would subsume all past and future debts. The
not required, but the description of the debt must be correct and full mortgage therein specifically secured only the loans extended prior to the mortgage. Thus, in
enough to direct attention to the sources of correct information in regard to the said case, the future debts were deemed as constituting a separate transaction from the past
it, and be such as not to mislead or deceive as to the amount of it, by the debts secured by the mortgage.
language used. Reading the mortgage before us from its four corners, we
find that the description of the debt is full enough to give information The ruling of the Court in Quiogue v. Bautista[61] is likewise inapplicable. In that
concerning the amount due. The mortgage recites that it is given to secure case, the Court deemed the loan transactions as separate, considering that those were two
the sum of P12,000, interest, commissions, damages, and all other separate loans secured by two separate mortgages. In this case, however, there is only one
amounts which may be found to be due at maturity. The terms of the mortgage securing all 67 drawdowns made by respondent.
contract are sufficiently clear to put all parties who may have occasion to
deal with the property mortgaged upon inquiry. The parties themselves In fine, for the failure of respondent to pay her loan obligation, petitioner had only one cause
from the very terms of the mortgage could not be in ignorance at any time of action arising from such non-payment. This single cause of action consists in the recovery
of the amount of their obligation and the security held to guarantee the of the credit with execution of the security. [62] Petitioner is proscribed from splitting its single
payment. cause of action by filing an extrajudicial foreclosure proceedings on June 10, 1999 with
respect to the amounts in the 31 promissory notes, and, during the pendency thereof, file a
When a mortgage is given for future advancements and the money is paid collection case on June 23, 1999, with respect to the amounts in the remaining 36 promissory
to the mortgagor little by little and repayments are made from time to notes.
time, the advancements and the repayments must be considered together Considering, therefore, that, in the case at bar, petitioner had already instituted extrajudicial
for the purpose of ascertaining the amount due upon the mortgage at foreclosure proceedings of the mortgaged property, it is now barred from availing itself of a
maturity. Courts of equity will not permit the consideration of the personal action for the collection of the indebtedness.
repayments only for the purpose of determining the balance due upon the
mortgage. (Luengo & Martinez v. Moreno, 26 Phil. 111)The mere fact that, IN VIEW OF ALL THE FOREGOING, the instant petition is DISMISSED for lack of
in contract of advancements, the repayments at any one time exceeds the merit. Costs against petitioner.
specific amount mentioned in the mortgage will not have the effect of
discharging the mortgage when the advancements at that particular time SO ORDERED.
are greatly in excess of the repayments; especially is this true when the
contract of advancement or mortgage contains a specific provision that the
mortgage shall cover all such other amounts as may be then due. Such a
provision is added to the contract of advancements or mortgage for the
express purpose of covering advancements in excess of the amount
mentioned in the mortgage. (Luengo & Martinez v. Moreno, supra)

The sum found to be owing by the debtor at the termination of the contract
of advancements between him and the mortgagee, during continuing
credit, is still secured by the mortgage on the debtors property, and the
mortgagee is entitled to bring the proper action for the collection of the
amounts still due and to request the sale of the property covered by the
mortgage. (Luengo & Martinez v. Moreno,supra; Russell v. Davey, 7
Grant Ch. 13; Patterson First National Bank v. Byard, 26 N.J. Equity 225)

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SECOND DIVISION In its 30 September 2003 Decision,6 the RTC, Branch 33 ruled that petitioner was not entitled
to judicial foreclosure of the mortgage. The RTC, Branch 33 found that the Deed was executed
by Edna without the consent and authority of Enrico. The RTC, Branch 33 noted that the Deed
was executed on 31 October 1995 while the Special Power of Attorney (SPA) executed
ARTURO SARTE FLORES, G.R. No. 183984 by Enrico was only dated 4 November 1995.
Petitioner,
Present: The RTC, Branch 33 further ruled that petitioner was not precluded from recovering the loan
from Edna as he could file a personal action against her. However, the RTC, Branch 33 ruled
CARPIO, J., that it had no jurisdiction over the personal action which should be filed in the place where the
Chairperson, plaintiff or the defendant resides in accordance with Section 2, Rule 4 of the Revised Rules on
- versus - NACHURA, Civil Procedure.
PERALTA,
ABAD, and Petitioner filed a motion for reconsideration. In its Order 7 dated 8 January 2004, the RTC,
MENDOZA, JJ. Branch 33 denied the motion for lack of merit.

SPOUSES ENRICO L. LINDO, JR. Promulgated: On 8 September 2004, petitioner filed a Complaint for Sum of Money with Damages against
and EDNA C. LINDO, respondents. It was raffled to Branch 42 (RTC, Branch 42) of the Regional Trial Court of
Respondents. April 13, 2011 Manila, and docketed as Civil Case No. 04-110858.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
Respondents filed their Answer with Affirmative Defenses and Counterclaims where they
admitted the loan but stated that it only amounted to P340,000. Respondents further alleged
DECISION that Enrico was not a party to the loan because it was contracted by Edna
without Enricos signature. Respondents prayed for the dismissal of the case on the grounds of
CARPIO, J.: improper venue, res judicata and forum-shopping, invoking the Decision of the RTC, Branch
33. On 7 March 2005, respondents also filed a Motion to Dismiss on the grounds of
The Case res judicata and lack of cause of action.

Before the Court is a petition for review1 assailing the 30 May 2008 Decision2 and the 4 The Decision of the Trial Court
August 2008 Resolution3 of the Court of Appeals in CA-G.R. SP No. 94003.
On 22 July 2005, the RTC, Branch 42 issued an Order8 denying the motion to dismiss. The
RTC, Branch 42 ruled that res judicata will not apply to rights, claims or demands which,
although growing out of the same subject matter, constitute separate or distinct causes of
The Antecedent Facts action and were not put in issue in the former action. Respondents filed a motion for
reconsideration. In its Order9 dated 8 February 2006, the RTC, Branch 42 denied respondents
The facts, as gleaned from the Court of Appeals Decision, are as follows: motion. The RTC, Branch 42 ruled that the RTC, Branch 33 expressly stated that its decision
did not mean that petitioner could no longer recover the loan petitioner extended to Edna.
On 31 October 1995, Edna Lindo (Edna) obtained a loan from Arturo Flores (petitioner)
amounting to P400,000 payable on 1 December 1995 with 3% compounded monthly interest Respondents filed a Petition for Certiorari and Mandamus with Prayer for a Writ of
and 3% surcharge in case of late payment. To secure the loan, Edna executed a Deed of Real Preliminary Injunction and/or Temporary Restraining Order before the Court of Appeals.
Estate Mortgage4 (the Deed) covering a property in the name of Edna and her
husband Enrico (Enrico) Lindo, Jr. (collectively, respondents). Edna also signed a Promissory
Note5 and the Deed for herself and for Enrico as his attorney-in-fact. The Decision of the Court of Appeals

Edna issued three checks as partial payments for the loan. All checks were dishonored for In its 30 May 2008 Decision, the Court of Appeals set aside the 22 July 2005 and 8 February
insufficiency of funds, prompting petitioner to file a Complaint for Foreclosure of Mortgage 2006 Orders of the RTC, Branch 42 for having been issued with grave abuse of discretion.
with Damages against respondents. The case was raffled to the Regional Trial Court of
Manila, Branch 33 (RTC, Branch 33) and docketed as Civil Case No. 00-97942. The Court of Appeals ruled that while the general rule is that a motion to dismiss is
interlocutory and not appealable, the rule admits of exceptions. The Court of Appeals ruled

119
that the RTC, Branch 42 acted with grave abuse of discretion in denying respondents motion unsatisfied judgment thereon would still give him the right to sue for deficiency
to dismiss. judgment, in which case, all the properties of the defendant, other than the
mortgaged property, are again open to him for the satisfaction of the deficiency. In
The Court of Appeals ruled that under Section 3, Rule 2 of the 1997 Rules of Civil Procedure, either case, his remedy is complete, his cause of action undiminished, and any
a party may not institute more than one suit for a single cause of action. If two or more suits advantages attendant to the pursuit of one or the other remedy are purely accidental
are instituted on the basis of the same cause of action, the filing of one on a judgment upon the and are all under his right of election. On the other hand, a rule that would authorize
merits in any one is available ground for the dismissal of the others. The Court of Appeals the plaintiff to bring a personal action against the debtor and simultaneously or
ruled that on a nonpayment of a note secured by a mortgage, the creditor has a single cause of successively another action against the mortgaged property, would result not only in
action against the debtor, that is recovery of the credit with execution of the suit. Thus, the multiplicity of suits so offensive to justice (Soriano v. Enriques, 24 Phil. 584) and
creditor may institute two alternative remedies: either a personal action for the collection of obnoxious to law and equity (Osorio v. San Agustin, 25 Phil. 404), but also in
debt or a real action to foreclose the mortgage, but not both. The Court of Appeals ruled that subjecting the defendant to the vexation of being sued in the place of his residence
petitioner had only one cause of action against Edna for her failure to pay her obligation and or of the residence of the plaintiff, and then again in the place where the property
he could not split the single cause of action by filing separately a foreclosure proceeding and a lies.15
collection case. By filing a petition for foreclosure of the real estate mortgage, the Court of
Appeals held that petitioner had already waived his personal action to recover the amount The Court has ruled that if a creditor is allowed to file his separate complaints simultaneously
covered by the promissory note. or successively, one to recover his credit and another to foreclose his mortgage, he will, in
effect, be authorized plural redress for a single breach of contract at so much costs to the court
Petitioner filed a motion for reconsideration. In its 4 August 2008 Resolution, the Court of and with so much vexation and oppressiveness to the debtor. 16
Appeals denied the motion. In this case, however, there are circumstances that the Court takes into consideration.

Hence, the petition before this Court. Petitioner filed an action for foreclosure of mortgage. The RTC, Branch 33 ruled that
petitioner was not entitled to judicial foreclosure because the Deed of Real Estate Mortgage
The Issue was executed without Enricos consent. The RTC, Branch 33 stated:

The sole issue in this case is whether the Court of Appeals committed a reversible error in All these circumstances certainly conspired against the plaintiff who has the burden
dismissing the complaint for collection of sum of money on the ground of multiplicity of suits. of proving his cause of action. On the other hand, said circumstances tend to support
the claim of defendant Edna Lindo that her husband did not consent to the mortgage
The Ruling of this Court of their conjugal property and that the loan application was her personal decision.

The petition has merit. Accordingly, since the Deed of Real Estate Mortgage was executed by defendant
Edna Lindo lacks the consent or authority of her husband Enrico Lindo, the Deed of
The rule is that a mortgage-creditor has a single cause of action against a mortgagor-debtor, Real Estate Mortgage is void pursuant to Article 96 of the Family Code.
that is, to recover the debt.10 The mortgage-creditor has the option of either filing a personal
action for collection of sum of money or instituting a real action to foreclose on the mortgage This does not mean, however, that the plaintiff cannot recover the P400,000 loan
security.11 An election of the first bars recourse to the second, otherwise there would be plus interest which he extended to defendant Edna Lindo. He can institute a personal
multiplicity of suits in which the debtor would be tossed from one venue to another depending action against the defendant for the amount due which should be filed in the place
on the location of the mortgaged properties and the residence of the parties. 12 where the plaintiff resides, or where the defendant or any of the principal defendants
resides at the election of the plaintiff in accordance with Section 2, Rule 4 of the
The two remedies are alternative and each remedy is complete by itself. 13 If the mortgagee Revised Rules on Civil Procedure. This Court has no jurisdiction to try such
opts to foreclose the real estate mortgage, he waives the action for the collection of the debt, personal action.17
and vice versa.14 The Court explained:
x x x in the absence of express statutory provisions, a mortgage creditor may
institute against the mortgage debtor either a personal action for debt or a real action Edna did not deny before the RTC, Branch 33 that she obtained the loan. She claimed,
to foreclose the mortgage. In other words, he may pursue either of the two remedies, however, that her husband did not give his consent and that he was not aware of the
but not both. By such election, his cause of action can by no means be impaired, for transaction.18 Hence, the RTC, Branch 33 held that petitioner could still recover the amount
each of the two remedies is complete in itself. Thus, an election to bring a personal due from Edna through a personal action over which it had no jurisdiction.
action will leave open to him all the properties of the debtor for attachment and
execution, even including the mortgaged property itself. And, if he waives such Edna also filed an action for declaratory relief before the RTC, Branch 93 of San Pedro
personal action and pursues his remedy against the mortgaged property, an Laguna (RTC, Branch 93), which ruled:

120
At issue in this case is the validity of the promissory note and the Real Estate
Mortgage executed by Edna Lindo without the consent of her husband. Article 124 of the Family Code of which applies to conjugal partnership property, is a
reproduction of Article 96 of the Family Code which applies to community property.
The real estate mortgage executed by petition Edna Lindo over their conjugal
property is undoubtedly an act of strict dominion and must be consented to by her Both Article 96 and Article 127 of the Family Code provide that the powers do not include
husband to be effective. In the instant case, the real estate mortgage, absent the disposition or encumbrance without the written consent of the other spouse. Any disposition or
authority or consent of the husband, is necessarily void. Indeed, the real estate encumbrance without the written consent shall be void. However, both provisions also state
mortgage is this case was executed on October 31, 1995 and the subsequent special that the transaction shall be construed as a continuing offer on the part of the consenting
power of attorney dated November 4, 1995 cannot be made to retroact to October spouse and the third person, and may be perfected as a binding contract upon the
31, 1995 to validate the mortgage previously made by petitioner. acceptance by the other spouse x x x before the offer is withdrawn by either or both offerors.

The liability of Edna Lindo on the principal contract of the loan however subsists In this case, the Promissory Note and the Deed of Real Estate Mortgage were executed on 31
notwithstanding the illegality of the mortgage. Indeed, where a mortgage is not October 1995. The Special Power of Attorney was executed on 4 November 1995. The
valid, the principal obligation which it guarantees is not thereby rendered null and execution of the SPA is the acceptance by the other spouse that perfected the continuing
void. That obligation matures and becomes demandable in accordance with the offer as a binding contract between the parties, making the Deed of Real Estate
stipulation pertaining to it. Under the foregoing circumstances, what is lost is merely Mortgage a valid contract.
the right to foreclose the mortgage as a special remedy for satisfying or settling the
indebtedness which is the principal obligation. In case of nullity, the mortgage deed However, as the Court of Appeals noted, petitioner allowed the decisions of the RTC, Branch
remains as evidence or proof of a personal obligation of the debtor and the amount 33 and the RTC, Branch 93 to become final and executory without asking the courts for an
due to the creditor may be enforced in an ordinary action. alternative relief. The Court of Appeals stated that petitioner merely relied on the declarations
of these courts that he could file a separate personal action and thus failed to observe the rules
In view of the foregoing, judgment is hereby rendered declaring the deed of real and settled jurisprudence on multiplicity of suits, closing petitioners avenue for recovery of the
estate mortgage as void in the absence of the authority or consent of petitioners loan.
spouse therein. The liability of petitioner on the principal contract of loan however
subsists notwithstanding the illegality of the real estate mortgage. 19 Nevertheless, petitioner still has a remedy under the law.

The RTC, Branch 93 also ruled that Ednas liability is not affected by the illegality of the real In Chieng v. Santos,20 this Court ruled that a mortgage-creditor may institute against the
estate mortgage. mortgage-debtor either a personal action for debt or a real action to foreclose the mortgage.
The Court ruled that the remedies are alternative and not cumulative and held that the filing of
Both the RTC, Branch 33 and the RTC, Branch 93 misapplied the rules. a criminal action for violation of Batas Pambansa Blg. 22 was in effect a collection suit or a
suit for the recovery of the mortgage-debt.21 In that case, however, this Court pro hac vice,
Article 124 of the Family Code provides: ruled that respondents could still be held liable for the balance of the loan, applying the
principle that no person may unjustly enrich himself at the expense of another. 22
Art. 124. The administration and enjoyment of the conjugal partnership property
shall belong to both spouses jointly. In case of disagreement, the husbands decision The principle of unjust enrichment is provided under Article 22 of the Civil Code which
shall prevail, subject to recourse to the court by the wife for proper remedy, which provides:
must be availed of within five years from the date of contract implementing such
decision. Art. 22. Every person who through an act of performance by another, or any other
means, acquires or comes into possession of something at the expense of the latter
In the event that one spouse is incapacitated or otherwise unable to participate in the without just or legal ground, shall return the same to him.
administration of the conjugal properties, the other spouse may assume sole powers
of administration. These powers do not include disposition or encumbrance without There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or
authority of the court or the written consent of the other spouse. In the absence of when a person retains money or property of another against the fundamental principles of
such authority or consent the disposition or encumbrance shall be void. However, justice, equity and good conscience.23 The principle of unjust enrichment requires two
the transaction shall be construed as a continuing offer on the part of the conditions: (1) that a person is benefited without a valid basis or justification, and (2) that such
consenting spouse and the third person, and may be perfected as a binding benefit is derived at the expense of another. 24
contract upon the acceptance by the other spouse or authorization by the court
before the offer is withdrawn by either or both offerors. (Emphasis supplied)

121
The main objective of the principle against unjust enrichment is to prevent one from enriching
himself at the expense of another without just cause or consideration. 25 The principle is
applicable in this case considering that Edna admitted obtaining a loan from petitioners, and
the same has not been fully paid without just cause. The Deed was declared void erroneously
at the instance of Edna, first when she raised it as a defense before the RTC, Branch 33 and
second, when she filed an action for declaratory relief before the RTC, Branch 93. Petitioner
could not be expected to ask the RTC, Branch 33 for an alternative remedy, as what the Court
of Appeals ruled that he should have done, because the RTC, Branch 33 already stated that it
had no jurisdiction over any personal action that petitioner might have against Edna.

Considering the circumstances of this case, the principle against unjust enrichment, being a
substantive law, should prevail over the procedural rule on multiplicity of suits. The Court of
Appeals, in the assailed decision, found that Edna admitted the loan, except that she claimed it
only amounted to P340,000. Edna should not be allowed to unjustly enrich herself because of
the erroneous decisions of the two trial courts when she questioned the validity of the Deed.
Moreover, Edna still has an opportunity to submit her defenses before the RTC, Branch 42 on
her claim as to the amount of her indebtedness.

WHEREFORE, the 30 May 2008 Decision and the 4 August 2008 Resolution of the Court of
Appeals in CA-G.R. SP No. 94003 are SET ASIDE. The Regional Trial Court of Manila,
Branch 42 is directed to proceed with the trial of Civil Case No. 04-110858.
SO ORDERED.

122
[A.M. No. P-02-1539. January 24, 2002] 3135, as amended, entitled An Act to Regulate the Sale of Property under Special Powers
RAMON C. CASANO, petitioner, vs. ARNEL C. MAGAT, Sheriff IV, RTC - Office of the Inserted in or Annexed to Real Estate Mortgages. As the title itself suggests and as provided in
Clerk of Court, Bian, Laguna, respondent. Sec. 1 of the Act, extrajudicial foreclosure sales are proper only when soprovided in the real
RESOLUTION estate mortgage contract.[6] Section 1 provides -
BELLOSILLO, J.: When a sale is made under a special power inserted in or attached to any real estate mortgage
RAMON C. CASANO, in a sworn Letter-Complaint dated 3 December 1998, charged hereafter made as security for the payment of money or the fulfillment of any other obligation,
respondent Arnel G. Magat, Sheriff IV, Office of the Clerk of Court, RTC, Bian, Laguna, with the provisions of the following sections shall govern as to the manner in which the sale or
Grave Abuse of Authority and/or Gross Ignorance of the Law in proceeding with the redemption shall be effected, whether or not provision for the same is made in the power.
extrajudicial foreclosure sale of a real property in Bian, Laguna, notwithstanding the fact that Respondent Sheriff is now being held administratively liable for allegedly disregarding
the real estate mortgage contract [1] contained no stipulation authorizing the mortgagee the foregoing provision, and for proceeding with the subject extrajudicial foreclosure sale
to extrajudicially foreclose the mortage in case of non-payment of the mortgage notwithstanding the absence of the requisite special power in the real estate mortgage contract
debt. Complainant alleged that he called respondent's attention to that fact in a letter dated 17 authorizing the mortgagee Teresita Manabat to foreclose the mortgage extrajudicially in case
November 1998 but to no avail.[2] of non-payment.
In his Comment dated 6 March 1999 respondent Sheriff alleged that he proceeded with For his defense, respondent Sheriff contended that he could not be held administratively
the sale notwithstanding complainant's letter-protest because it was his ministerial duty to do liable because it was his ministerial duty to act on the application filed by the
so; that upon apprising Atty. Reynaldo A. Cardeo, counsel for petitioner-mortgagee, of the mortgagee Teresita Manabat.
protest the latter told him to proceed with the sale and assured him that the mortgagors must The contention has no merit and cannot excuse respondent from administrative
secure a temporary restraining order first before they could enjoin the foreclosure sale liability. Although amendments have already been introduced to Administrative Order No. 3
scheduled on 1 December 1998; and that although the auction sale proceeded as scheduled the re Procedure in Extra-Judicial Foreclosure of Mortgage [7] making it now the specific duty of
effects thereof were "rendered of no force and effect"because of the mortgagee's failure to the Clerk of Court to examine applications for extrajudicial foreclosure of mortgages [8] during
submit the required Affidavit of Publication. the time material to the act complained of, pars. 2 and 2 [c] of Administrative Order No. 3
In our Resolution dated 6 December 2000 we required the parties to manifest, within ten specifically provide that it devolved upon the "Office of the Sheriff" to examine, upon receipt
(10) days from notice, whether they were submitting this case for resolution on the basis of the of an application for extrajudicial foreclosure of real estate mortgage, whether the applicant
pleadings already filed. Both complainant and respondent failed to comply within the period has complied with all the requirements under Act 3135. Thus when the application was filed in
which expired on 11 February 2001. Hence, we consider the case submitted for resolution the instant case it was respondent Sheriff's specific duty to examine whether the attached real
based on the pleadings already filed. estate mortgage contract contained the requisite special power authorizing the mortgagee
The record shows that on 30 October 1998 a Petition for extrajudicial foreclosure of real to extrajudicially foreclose the mortgage in case of non-payment of the mortgage
estate mortgage[3] was filed by Atty. Reynaldo A. Cardeo, counsel for TeresitaManabat, with indebtedness. Respondent should not have relied blindly, as he did, on the mortgagee-
the Office of the Provincial Sheriff, RTC-Bian, Laguna, alleging that a Deed of Real Estate applicant's assurance that there was such a power in the real estate mortgage contract. Counsel
Mortgage was executed in Manabat's favor by the spouses Ricardo and Justina Casano over for the mortgagors already told respondent that there was none, and besides, a copy of the Real
Lot 1508-A covered by TCT No. (T-43627) T-6108 of the Registry of Deeds of Laguna to Estate Mortgage contract was attached to the application itself as Annex "A" for respondent's
secure a mortgage indebtedness in the amount of P300,000.00; that the Deed contained a easy perusal. Assuming arguendo that respondent's duty to act on the application was merely
stipulation constituting Teresita Manabat as the mortgagors' attorney-in-fact for purposes of ministerial as contended we have already said in Machinery & Engineering Supplies, Inc. v.
filing an application for foreclosure under Act 3135; and, that the Casano spouses failed to pay Court of Appeals, et al.[9] that the ministerial duty of a sheriff should have its
the mortgage indebtedness despite formal demand and grace period given, hence, the limitations, i.e., he ought to know what is inherently right and inherently wrong. [10] We ruled in
application. that case that the provincial sheriff went beyond the scope of his authority when he seized,
Acting on the application for foreclosure of mortgage, respondent upon court order issued in a case for replevin, properties specified in the order notwithstanding
Sheriff Arnel G. Magat issued on the same day a Notice of Extrajudicial Sale[4] for the auction the fact that the defendant at the time of the intended seizure protested the same on the ground
sale on 1 December 1998 at 10:00 o'clock in the morning. that the properties sought to be seized were not personal properties. While the Court conceded
Complainant, acting on behalf of the Heirs of mortgagor Ricardo Casano, sent a letter that the issue might be a question of law too technical to be decided on the spot, it would not
dated 17 November 1998 protesting the sale on the ground that the real estate mortgage have cost the sheriff much time and difficulty to have brought the protest to the attention of the
contract did not contain any stipulation giving the mortgagee the right to foreclose the court concerned.
mortgage extrajudicially. The sale nevertheless proceeded as scheduled with the mortgagee as In the instant case, complainant's letter protesting the foreclosure sale was dated 17
the highest bidder.[5] Hence, this administrative complaint. November 1998 and received two (2) days later. The foreclosure sale was scheduled on 1
The Office of the Court Administrator recommended in its Memorandum that December 1998. As in the Machinery & Engineering Supplies, Inc. case, it would not have
respondent be adjudged guilty as charged and fined P5,000.00 with stern warning that cost respondent Sheriff much to have considered the question more thoroughly either by
repetition of a similar offense would be dealt with more severely. perusing the real estate mortgage contract himself, which clearly showed that there was in fact
We agree that respondent Sheriff is administratively liable but only for neglect of no special power inserted authorizing an extrajudicial foreclosure, or else, brought the protest
duty.Proceedings for the extrajudicial foreclosure of real estate mortgages are governed by Act to the attention of his superiors and solicited their help.Respondent did neither. Instead he

123
relied blindly on the assurances of counsel for the mortgagee that the latter was authorized
under the real estate mortgage contract to foreclose extrajudicially. Aside from the fact that
sheriffs are bound to discharge their duties with prudence, caution and attention which careful
men usually exercise in the management of their affairs, [11] respondent should have kept in
mind that he was an agent of the law and of the court, not of the parties. [12]
In Elizabeth A. Tiongco v. Sheriffs Rogelio S. Molina and Arnel G. Magat[13] we found
respondent Sheriff Magat guilty of Dereliction of Duty and Negligence and fined
him P5,000.00 with a "stern warning that a repetition of the same or similar act shall be dealt
with more severely." The decision was promulgated on 4 September 2001. Since respondent
Sheriff had not yet received the stern warning issued in Tiongco at the time the acts
complained of in this case were committed in November-December 1998, the penalty to be
imposed in this case could not be exacerbated by the warning in Tiongco.
WHEREFORE, for Neglect of Duty, respondent Sheriff Arnel C. Magat, RTC-Office
of the Clerk of Court, Bian, Laguna, is FINED P5,000.00 with WARNING that a repetition of
the same or similar act will be dealt with more severely.
SO ORDERED.

124
Republic of the Philippines provisions of the following sections shall govern as to the manner in
Supreme Court which the sale and redemption shall be effected, whether or not provision
Manila for the same is made in the power.

SECOND DIVISION Sec. 2. Said sale cannot be made legally outside of the province
in which the property sold is situated; and in case the place within said
SPOUSES HERMES P. OCHOA and ARACELI D. OCHOA, G.R. No. 192877 province in which the sale is to be made is the subject of stipulation, such
Petitioners, sale shall be made in said place or in the municipal building of the
Present: municipality in which the property or part thereof is situated. [5]

CARPIO, J., The case at bar involves petitioners mortgaged real property located
Chairperson, in Paraaque City over which respondent bank was granted a special power to foreclose extra-
- versus - NACHURA, judicially. Thus, by express provision of Section 2, the sale can only be made in Paraaque City.
BRION,* The exclusive venue of Makati City, as stipulated by the parties [6] and sanctioned by Section 4,
PERALTA, and Rule 4 of the Rules of Court, [7] cannot be made to apply to the Petition for Extrajudicial
ABAD, JJ. Foreclosure filed by respondent bank because the provisions of Rule 4 pertain to venue of
actions, which an extrajudicial foreclosure is not.
CHINA BANKING CORPORATION, Promulgated:
Respondent. Pertinent are the following disquisitions in Supena v. De la Rosa:[8]
March 23, 2011
Section 1, Rule 2 [of the Rules of Court] defines an action in this wise:
x------------------------------------------------------------------------------------x
"Action means an ordinary suit in a court of
justice, by which one party prosecutes another for the
RESOLUTION enforcement or protection of a right, or the prevention
or redress of a wrong."
NACHURA, J.:
Hagans v. Wislizenus does not depart from this definition when it states
that "[A]n action is a formal demand of one's legal rights in a court of
For resolution is petitioners motion for reconsideration [1] of our January 17, 2011 justice in the manner prescribed by the court or by the law. x x x." It is
Resolution[2] denying their petition for review on certiorari[3] for failing to sufficiently show clear that the determinative or operative fact which converts a claim into
any reversible error in the assailed judgment[4] of the Court of Appeals (CA). an "action or suit" is the filing of the same with a "court of justice." Filed
elsewhere, as with some other body or office not a court of justice, the
Petitioners insist that it was error for the CA to rule that the stipulated exclusive venue claim may not be categorized under either term. Unlike an action, an
of Makati City is binding only on petitioners complaint for Annulment of Foreclosure, Sale, extrajudicial foreclosure of real estate mortgage is initiated by filing a
and Damages filed before the Regional Trial Court of ParaaqueCity, but not on respondent petition not with any court of justice but with the office of the sheriff of
banks Petition for Extrajudicial Foreclosure of Mortgage, which was filed with the same the province where the sale is to be made. By no stretch of the imagination
court. can the office of the sheriff come under the category of a court of justice.
And as aptly observed by the complainant, if ever the executive judge
We disagree. comes into the picture, it is only because he exercises administrative
supervision over the sheriff. But this administrative supervision, however,
The extrajudicial foreclosure sale of a real estate mortgage is governed by Act No. 3135, as does not change the fact that extrajudicial foreclosures are not judicial
amended by Act No. 4118, otherwise known as "An Act to Regulate the Sale of Property proceedings, actions or suits.[9]
Under Special Powers Inserted In or Annexed to Real-Estate Mortgages." Sections 1 and 2
thereof clearly state:

Section 1. When a sale is made under a special power inserted in These pronouncements were confirmed on August 7, 2001 through A.M. No. 99-10-
or attached to any real-estate mortgage hereafter made as security for the 05-0, entitled Procedure in Extra-Judicial Foreclosure of Mortgage, the significant portions of
payment of money or the fulfillment of any other obligation, the which provide:
125
In line with the responsibility of an Executive Judge under
Administrative Order No. 6, date[d] June 30, 1975, for the management
of courts within his administrative area, included in which is the task
of supervising directly the work of the Clerk of Court, who is also the
Ex-Office Sheriff, and his staff, and the issuance of commissions to
notaries public and enforcement of their duties under the law, the
following procedures are hereby prescribed in extra-judicial foreclosure of
mortgages:

1. All applications for extrajudicial foreclosure of


mortgage whether under the direction of the sheriff or
a notary public, pursuant to Act 3135, as amended by
Act 4118, and Act 1508, as amended, shall be filed
with the Executive Judge, through the Clerk of Court
who is also the Ex-Officio Sheriff.

Verily then, with respect to the venue of extrajudicial foreclosure sales, Act No.
3135, as amended, applies, it being a special law dealing particularly with extrajudicial
foreclosure sales of real estate mortgages, and not the general provisions of the Rules of Court
on Venue of Actions.

Consequently, the stipulated exclusive venue of Makati City is relevant only


to actions arising from or related to the mortgage, such as petitioners complaint for Annulment
of Foreclosure, Sale, and Damages.
The other arguments raised in the motion are a mere reiteration of those already
raised in the petition for review. As declared in this Courts Resolution on January 17, 2011, the
same failed to show any sufficient ground to warrant the exercise of our appellate jurisdiction.

WHEREFORE, premises considered, the motion for reconsideration is


hereby DENIED.
SO ORDERED.

126
[G.R. No. 153571. September 18, 2003] added that dacion en pago should be preferred over the foreclosure of the collaterals because
BENGUET MANAGEMENT CORPORATION, petitioner, vs. COURT OF the other respondent banks are agreeable to such proposal.
APPEALS, KEPPEL BANK PHILIPPINES, INC., as Trustee for On the same date, the Regional Trial Court of Iba, Zambales issued a temporary
METROPOLITAN BANK AND TRUST COMPANY, UNITED COCONUT restraining order enjoining the sale at public auction of BMCs properties in Zambales. [12]
PLANTERS BANK, RIZAL COMMERCIAL BANKING CORPORATION, On February 6, 2002, KBPIs application for extrajudicial foreclosure of mortgage was
FAR EAST BANK AND TRUST COMPANY and BANK OF THE found to be sufficient in form and substance, and was granted. [13] BMC filed a motion for
PHILIPPINE ISLANDS under the Mortgage Trust Indenture, and THE reconsideration, which was denied on March 4, 2002.[14]
REGISTER OF DEEDS OF CALAMBA, respondents. Hence, BMC filed a petition for certiorari with the Court of Appeals,[15] reiterating its
DECISION arguments in EJF No. Sp-2546 (01) and assailing the validity of the foreclosure of its
YNARES-SANTIAGO, J.: properties in Laguna. It prayed for the issuance of a preliminary injunction and/or temporary
Assailed in this petition for certiorari under Rule 65 of the Revised Rules of Court is the restraining order to enjoin the scheduled sale of its properties in Laguna on March 19, 2002 at
Resolution of the Court of Appeals in CA-G.R. SP No. 69503 dated April 5, 2002, [1]which 10:00 pm. Since no injunction or restraining order was issued by the Court of Appeals, the
denied petitioners application for the issuance of a temporary restraining order, as well as its auction sale proceeded as scheduled with KBPI as the highest bidder.
May 28, 2002[2] Resolution denying the motion for reconsideration. To restrain the registration of the certificate of sale, [16] BMC filed a Supplemental
The antecedent facts reveal that on November 29, 1994, petitioner Benguet Management Petition[17] which was favorably acted upon by the Court of Appeals on March 22, 2002. [18] On
Corporation (BMC) and Keppel Bank Philippines, Inc. (KBPI), [3] acting as trustee of the other the same day, a temporary restraining order enjoining the registration of the certificate of sale
respondent banks, entered into a Loan Agreement and Mortgage Trust Indenture (MTI) was issued by the appellate court, albeit, late as the certificate was already registered at 2:15
whereby BMC, in consideration of the syndicated loan of P190,000,000.00, constituted in p.m. of March 22, 2002.
favor of KBPI a mortgage on several lots located in Alaminos, Laguna and Iba, Zambales. Subsequently, BMC filed with the appellate court an Amended Supplemental Petition,
[19]
On September 28, 2001, for failure of BMC to pay in full the installments due on the followed by an Urgent Manifestation [20] praying for the issuance of a writ of preliminary
Loan Agreement and Mortgage Trust Indenture, KBPI filed an application [4] for extra-judicial injunction and/or temporary restraining order to enjoin the consolidation of titles over the
foreclosure of mortgage before the Office of the Clerk of Court of the Regional Trial Court of foreclosed properties in the name of respondent banks. BMC contended that the foreclosure
Iba, Zambales. On October 29, 2001, a similar application [5] for extra-judicial foreclosure of sale should be annulled because (1) the bid price was grossly inadequate; (2) the sale was
mortgage was filed by KBPI with the Office of the Clerk of Court of the Regional Trial Court conducted in violation of Sections 2 and 3 of Act No. 3135 on the requirements of place of
of San Pablo City, docketed as EJF No. Sp-2546 (01).Accompanying the latter application was sale and posting of notice; and (3) the other creditor banks are amenable to the
a certification[6] from the Clerk of Court of the Regional Trial Court of Iba, Zambales, stating proposed dacion en pago instead of the foreclosure.
that KBPI had paid the corresponding foreclosure fees covering BMCs properties situated in In its Resolution dated April 5, 2002, the Court of Appeals denied BMCs prayer to
Zambales and Laguna. restrain the consolidation of title in the name of KBPI, thus:
On October 31, 2001, BMC filed with the Office of the Executive Judge of the Regional The petitioners filing of an Amended Supplemental Petition dated March 25, 2002, and an
Trial Court of San Pablo City a Request Not To Give Due Course To The Application for Urgent Manifestation dated March 27, 2002 is hereby noted.
Extra-Judicial Foreclosure[7] in EJF No. Sp-2546 (01). BMC claimed that the application However, we see no justifiable reason to grant an injunctive relief at this point in time, since
should be denied because it is insufficient in form and substance and there is no need to the acts sought to be restrained or enjoined are positive rights of a buyer in a foreclosure
proceed with the foreclosure of its properties situated in Laguna because it was willing to sale. Unless the petitioner could prove the nullity of such sale, there is no reason to stop the
execute a dacion en pago in place of the mortgaged properties.Subsequently, BMC filed a Register of Deeds concerned from performing its ministerial duty under the law.
Compliance and Supplementary Grounds to Disapprove Application for Extra-judicial WHEREFORE, the application for temporary restraining order in the Amended Supplemental
Foreclosure of Real Estate Mortgage [8] and a Memorandum.[9] BMC contended that the Petition is hereby DENIED.
application for foreclosure should be denied because KBPI included unauthorized penalties in The respondents are directed to also file their comment thereto within ten (10) days from
the statement of accounts and it did not comply with its obligation to give BMC a 60-day notice hereof. Should the parties prefer, the case shall be set for hearing to enable the parties to
grace period. BMC further claimed that the MTI securing the principal loan of P190 Million prove their respective positions as to issues in the petition as well as subsequent Supplemental
cannot be foreclosed because it was not registered with the Register of Deeds. Petition and Amended Supplemental Petition.
KBPI opposed the letter-request of BMC on the ground, inter alia, of wrong remedy and In the meantime, the Chief of the Mailing Section is directed to investigate and report to us
forum shopping.[10] within fifteen (15) days from notice, how and who made the unauthorized insertion of the
Meanwhile, on November 7, 2001, BMC filed with the Regional Trial Court of Iba, Register of Deeds of Laguna to the Courts Notice of Resolution of March 22, 2002.
Zambales, Branch 70, a complaint for damages, accounting and nullification of foreclosure of SO ORDERED.[21]
its properties in Zambales, with prayer for the issuance of a temporary restraining order, BMC filed a motion for reconsideration claiming, among others, that Section 47 of the
docketed as Civil Case No. RTC-1852-I. [11] BMC averred that the foreclosure of its properties General Banking Act (Republic Act No. 8791), which reduced the period of redemption for
should be annulled because KBPI imposed unauthorized penalties, interest and extra-judicially foreclosed properties of juridical persons from one year to until, but not after,
charges. Assuming that the amount claimed is due and demandable, BMC maintained that the the registration of the certificate of foreclosure salewhich in no case shall be more than three
same cannot be enforced because KBPI did not comply with the 60-day grace period. BMC

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(3) months after foreclosure, whichever is earlier, is unduly discriminatory and therefore foreclosed so long as the application covers only one transaction or indebtedness.The venue,
unconstitutional. however, of the extra-judicial foreclosure proceedings is the place where each of the
On May 28, 2002, the Court of Appeals denied BMCs motion for reconsideration. mortgaged property is located. Pertinent portion thereof states
[22]
Hence, BMC filed the instant petition, contending that Where the application concerns the extrajudicial foreclosure of mortgages of real estates
I and/or chattels in different locations covering one indebtedness, only one filing fee
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF DISCRETION IN corresponding to such indebtedness shall be collected. The collecting Clerk of Court shall,
DENYING PETITIONERS APPLICATION FOR TRO TO RESTRAIN THE apart from the official receipt of the fees, issue a certificate of payment indicating the amount
CONSOLIDATION OF TITLES AFTER IT HAD EARLIER RESTRAINED, ALBEIT TOO of indebtedness, the filing fees collected, the mortgages sought to be foreclosed, the real
LATE, THE REGISTRATION OF THE SHERIFFS CERTIFICATE OF SALE, estates and/or chattels mortgaged and their respective locations, which certificate shall serve
DEMONSTRATIVELY HAVING BEEN CONVINCED OF THE MERIT OF THE LEGAL the purpose of having the application docketed with the Clerks of Court of the places where
GROUNDS RAISED BY THE PETITIONER IN SUPPORT OF THE APPLICATION FOR the other properties are located and of allowing the extrajudicial foreclosures to proceed
TEMPORARY RESTRAINING ORDER. thereat.
II In Spouses Caviles v. Court of Appeals,[26] we recognized the predicament that confronts
THE NEW LAW (GENRAL BANKING LAW OF 2000) ABROGATING THE RIGHT TO a mortgagor seeking to restrain the extra-judicial foreclosure of mortgages arising from a
ONE YEAR REDEMPTION PERIOD OF CORPORATE MORTGAGORS IS single transaction but concerning properties found in different provinces.Thus
UNCONSTITUTIONAL. [W]e find it necessary to dwell on the issue of whether or not the act of petitioners in filing
III three civil actions - one with the RTC of Makati, another with the RTC of Bian, Laguna
ASSUMING THAT THE NEW LAW IS CONSTITUTIONAL, IT SHOULD BE GIVEN (Branch 24) and the third one, with the Bian Assisting Court, constitutes forum shopping.
PROSPECTIVE APPLICATION. The problem of petitioners is an off-shoot of the express provisions of B.P. Blg. 129, to wit:
IV Sec. 21. Original jurisdiction in other cases. - Regional Trial Courts shall exercise original
THE BID PRICE OF ONLY P162,354,329.46 FOR THE FOUNDRY PROJECT WITH A jurisdiction:
FAIR MARKET VALUE OF P444,184,000.00, SOUND VALUE OF P493,732,000.00 COST (1) In the issuance of writs of certiorari, prohibition, mandamus, quo warranto, habeas corpus
OF REPRODUCTION OF P989,605,000.00 IS SO GROSSLY INADEQUATE AS TO and injunction which may be enforced in any part of their respective regions; (Emphasis,
RENDER THE SALE NULL AND VOID IN LAW AND IN EQUITY. supplied)
V and Section 3, Rule 2 of the Rules of Court which provides that a party may not institute
THE AUCTION SALE CONDUCTED IN SAN PABLO CITY IS NULL AND VOID FOR more than one suit for a single cause of action. (Emphasis supplied)
BEING IN VIOLATION OF SECTION 2 OF ACT 3135, AS AMENDED AND THE In the said case, the mortgagors filed separate actions for breach of mortgage contract
EXPRESS PROVISION OF THE MORTGAGE TRUST INDENTURE THAT: IN ANY with injunction to restrain the extra-judicial foreclosure proceedings commenced by the
EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135, AS AMENDEDTHE AUCTION mortgagee in Makati and Bian, Laguna where the properties were situated. The Court did not
SALE SHALL TAKE PLACE IN THE CITY OR CAPITAL OF THE PROVINCE WHERE find the mortgagors guilty of forum shopping insofar as the cases filed with the Makati and
THE COLLATERAL IS SITUATED. Bian, Laguna (Branch 24) courts were concerned. The obvious reason is that since injunction
VI is enforceable only within the territorial limits of the trial court, the mortgagor is left without
THE REQUIREMENTS OF SECTION 3 OF ACT 3135, AS AMENDED, FOR POSTING OF remedy as to the properties located outside the jurisdiction of the issuing court, unless an
NOTICES WERE NOT COMPLIED WITH IN THE FORECLOSURE PROCEEDINGS IN application for injunction is made with another court which has jurisdiction over the latter
QUESTION. properties.
VII In the case at bar, BMC is not guilty of forum shopping precisely because the remedy
THE INTEREST BASED ON THE FLOATING RATE STIPULATED IN THE available to them under the law was the filing of separate injunction suits. It is mandated to
PROMISSORY NOTES IS NULL AND VOID FOR BEING POTESTATIVE IN file only one case for a single cause of action, e.g., breach of mortgage contract, yet, it cannot
CHARACTER AND FOR BEING VIOLATIVE OF THE PRINCIPLE OF MUTUALITY OF enforce any injunctive writ issued by the court to protect its properties situated outside the
CONTRACT, HENCE THE FORECLOSURE MAY PROCEED ONLY ONCE THE jurisdiction of said court. Besides, BMC was honest enough to inform the Zambales court in
CORRECT LEGAL AMOUNT OF THE LOAN IS DETERMINED AND ONLY IF THE the certification[27] of its complaint that it has a pending request not to give due course to the
MORTGAGOR CANNOT PAY FOLLOWING THAT DETERMINATION.[23] foreclosure proceedings with the San Pablo court, in the same manner that its petition
On June 26, 2002, a status quo order was issued enjoining the cancellation of titles over for certiorari with the Court of Appeals notified the appellate court of the pendency of its
the mortgaged properties in the name of BMC as well as the issuance of new titles and the complaint with the Zambales court. [28] It would therefore be unfair to dismiss the cases filed by
consolidation thereof in the name of private respondent banks [24] BMC on the ground of forum shopping where under the circumstances the law gives it no
We deem it proper to resolve the issue of forum shopping raised by private respondents. other remedy.
Under the Procedure on Extra-Judicial Foreclosure of Mortgage (A.M. No. 99-10-05-0), The issues involved in the instant petition for certiorari are not only limited to the
[25]
the applicant in an extra-judicial foreclosure covering properties located in different propriety of the Court of Appeals denial of BMCs prayer to enjoin the consolidation of title of
provinces is required to pay only one filing fee regardless of the number of properties to be the foreclosed properties in the name of private respondents. There are likewise raised factual

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issues, i.e., the validity of the foreclosure and the sale at public auction of its properties, which
are yet to be resolved by the Court of Appeals. Since this Court is not a trier of facts, the
remand of this case to the appellate court is necessary.
Anent the constitutional issue raised by BMC, we have repeatedly held that the
constitutionality of a law may be passed upon by the Court, where there is an actual case and
that the resolution of the constitutional question must be necessary in deciding the controversy.
[29]
In this case, the resolution of the constitutionality of Section 47 of the General Banking Act
(Republic Act No. 8791) which reduced the period of redemption of extra-judicially
foreclosed properties of juridical persons is not the very lis mota of the controversy. BMC is
not asserting a legal right for which it is entitled to a judicial determination at this time
inasmuch as it may not even be entitled to redeem the foreclosed properties. Until an actual
controversy is brought to test the constitutionality of Republic Act No. 8791, the presumption
of validity, which inheres in every statute, must be accorded to it.
WHEREFORE, in view of all the foregoing, the petition is PARTLY GRANTED. The
Resolutions of the Court of Appeals dated April 5, 2002 and May 28, 2002, in CA-G.R. SP
No. 69503, insofar as they denied BMCs application for temporary restraining order, are
REVERSED and SET ASIDE. The status quo order issued by the Court on June 26, 2002 shall
stand until further order of the Court, and the instant case is REMANDED to the Court of
Appeals for determination of the case on its merits. Petitioner BMC is ordered to inform the
appellate court of the present status of Civil Case No. RTC-1852-I, then pending with the
Regional Trial Court of Iba, Zambales, Branch 70, and if it had been decided and the decision
is on appeal in the Court of Appeals, the latter may consider its consolidation with CA-G.R.
SP No. 69503 if warranted.
No pronouncement as to costs.
SO ORDERED.

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THIRD DIVISION be published once a week for at least three consecutive weeks in a newspaper of general
G.R. No. 120859 June 26, 2001 circulation in the municipality and city."
METROPOLITAN BANK AND TRUST COMPANY, petitioner, During the pendency of the case, petitioner sold the disputed property to a certain Betty Ong
vs. Yu.
FRANCISCO Y. WONG, respondent. After hearing, the trial court decreed:
SANDOVAL-GUTIERREZ, J.: "WHEREFORE, IN VIEW OF ALL THE FOREGOING, judgment is hereby
It is bad enough that the mortgagor has no choice but to yield his property in a foreclosure rendered sentencing defendant Metropolitan Bank and Trust Company to pay
proceeding. It is infinitely worse, if prior thereto, he was denied of his basic right to be plaintiff the following amounts:
informed of the impending loss of his property. This is another instance when law and morals 1. Ten Million, Five Hundred Thousand (P10,500,000.00) Pesos
echo the same sentiment. representing the fair market value of the property as of the promulgation
This is a petition for review on certiorari seeking the reversal and setting aside of the decision of this decision, with interest of twenty four (24%) percent per annum
dated June 13, 1994 and resolution dated June 14, 1995 of the Court of Appeals in CA-G.R. thereof until fully paid;
CV No. 35615 entitled "Francisco Y. Wong versus Metropolitan Bank and Trust Company." 1 2. Moral damages of Two million (P2,000,000.00) Pesos;
The essential antecedents are: 3. Exemplary damages of Ten million (P10,000,000.00) Pesos;
Sometime in 1976, the Mindanao Grains, Inc. (MGI for brevity), through its officers 4. Attorney’s fee of Two Hundred Thousand (P200,000.00) Pesos, plus
Wenceslao Buenaventura and Faustino Go, applied for a credit accommodation with the Five Hundred (P500.00) Pesos for every hearing or court proceeding
Metropolitan Bank and Trust Company (herein petitioner) to finance its rice and corn actually attended by plaintiff’s counsel; and
warehousing business. As a security for such credit accommodation, respondent Francisco Y. 5. Costs of suit.
Wong, and his wife Betty C. Wong executed in favor of petitioner a real estate mortgage over a No monetary judgment can be rendered against defendant Register of Deeds of
parcel of land consisting of 31, 292 square meters located at Campo 7, Molave, Zamboanga Zamboanga del Sur in view of the absence of monetary claim in the complaint.
del Sur and registered in respondent’s name under Transfer Certificate of Title (TCT) No. Defendant bank’s counterclaim is hereby DISMISSED for lack of merit.
11758. SO ORDERED."2
On April 11, 1980, due to MGI’s failure to pay the obligation secured by the real estate On appeal by petitioner, the Court of Appeals affirmed the RTC decision with modification in
mortgage, petitioner filed an application for extra-judicial foreclosure under Act No. 3135. A the sense that the monetary awards were reduced, thus:
notice of foreclosure sale was published in Pagadian Times once, for three consecutive weeks "WHEREFORE, the judgment appealed from is hereby MODIFIED, directing the
(May 18-25, 1980, May 26-June 2, 1980 and June 2-8, 1980), setting the auction sale of the appellant to pay appellees the following amounts:
mortgaged property on June 5, 1980. No notice was posted in the municipality or city where 1. Four Million (P4,000,000.00) Pesos representing the fair market value
the mortgaged property was situated. of the subject property;
As a consequence, MGI, through its president, Simeon Chang (Chang), requested petitioner to 2. Moral damages of Five Hundred Thousand (P500,000.00) Pesos;
postpone the scheduled auction sale from June 5, 1980 to July 7, 1980. Petitioner granted the 3. Exemplary damages of One Million (P1,000,000.00) Pesos;
request. Thereafter, Chang and petitioner agreed that should MGI pay P20,000.00 on or before 4. Attorney's fees of Two Hundred Thousand (P200,000.00) Pesos, plus
the scheduled auction sale, the same would be postponed for a period of 60 days. Chang paid Five Hundred (P500.00) Pesos for every hearing or court proceeding
the amount on November 3, 1981. Despite such payment, Sheriff Deo Bontia proceeded with actually attended by plaintiff's counsel; and
the auction sale on November 23, 1981. Petitioner was adjudged the sole and highest bidder. 5. Costs of suit.
Thus, a certificate of sale was issued to petitioner. The sale was registered with the Registry of SO ORDERED."
Deeds on the same day. After the expiration of the one (1) year redemption period, ownership Twice thwarted, petitioner now comes before us imputing the following errors to the Court of
over the property was consolidated and TCT No. T-17853 was correspondingly issued in the Appeals:
name of petitioner. I
Respondent, unaware of the foregoing developments, applied for a credit accommodation with THE RESPONDENT COURT OF APPEALS ERRED IN RULING THAT
the Producers Bank of the Philippines, Iloilo City, using as security his TCT No. 11758. It was THE FORECLOSURE SALE CONDUCTED ON NOVEMBER 23, 1981 WAS
only then when he learned that his property was already foreclosed by petitioner and no longer LEGALLY INFIRM FOR NON – COMPLIANCE WITH THE STATUTORY
in his name. REQUIREMENTS OF POSTING AND PUBLICATION AS PROVIDED FOR
Feeling aggrieved, respondent filed with the Regional Trial Court, Branch 18, Pagadian City a IN ACT 3135, AS AMENDED.
complaint for reconveyance and damages against petitioner and the Register of Deeds of II
Zamboanga del Sur. Respondent, in his complaint, assailed the validity of the extra-judicial THE RESPONDENT COURT OF APPEALS ERRED IN AWARDING
foreclosure sale basically on the ground that petitioner did not comply with the requirements DAMAGES AND ATTORNEY’S FEES TO RESPONDENT WONG.
of Section 3, Act No. 3135 that "notice shall be given by posting notices of the sale for not less Petitioner places excessive reliance on the case of Olizon v. Court of Appeals3 in justifying its
than twenty days in at least three public places of the municipality or city where the property claims: (a) that its failure to comply with the posting requirement under Section 3 of Act No,
is situated, and if such property is worth more than four hundred pesos, such notice shall also 3135 did not necessarily result in the nullification of the foreclosure sale since it complied

130
with the publication requirement; and (b) that personal notice of the foreclosure proceedings annulling the aforementioned sale. We are not unaware of the rulings in some cases
to respondent is not a condition sine qua non for its validity. In assailing the monetary awards that, under normal situations, the statutory provisions governing publication of
to respondent, petitioner claims it was not guilty of bad faith in selling the disputed property to notice of extra-judicial foreclosure sales must be strictly complied with and that
Betty Ong Yu, the sale having been perfected even before respondent filed his action for failure to publish the notice of auction sale as required by the statute constitutes a
reconveyance and damages with the trial court. jurisdictional defect which invalidates the sale. However, the unusual nature of the
For its part, respondent argues that "the unusual nature of the attendant facts and the attendant facts and the peculiarity of the confluent circumstances involved in this
peculiarity of the confluent circumstances" involved in Olizon are not present in the instant case require that we rule otherwise.
case. Petitioners' cited authority on the requisite publication of notices is not so all-
The petition is bereft of merit. embracing as to deny justified exceptions thereto under appropriate situations. x x x
Succinct and unmistakable is the consistent pronouncement of this Court that it is not a trier of xxx
facts. And well-entrenched is the doctrine that pure questions of fact may not be the subject of Furthermore, unlike the situation in previous cases where the foreclosure sales were
appeal by certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as this mode of annulled by reason of failure to comply with the notice requirement under Section 3
appeal is generally confined to questions of law. Corollarily, non-compliance with the of Act No. 3135, as amended, what is allegedly lacking here is the posting of the
requirements of notice and publication in an extra-judicial foreclosure is a factual issue. The notice in three public places, and not the publication thereof in a newspaper of
resolution thereof by the lower courts is binding and conclusive upon this Court. 4 Thus, general circulation.
disregarding all factual issues which petitioner interjected in his petition, the only crucial legal We take judicial notice of the fact that newspaper publications have more far-
queries in this case are: first, is personal notice to respondent a condition sine qua non to the reaching effects than posting on bulletin boards in public places. There is a greater
validity of the foreclosure proceedings? and, second, is petitioner’s non-compliance with the probability that an announcement or notice published in a newspaper of general
posting requirement under Section 3, Act No. 3135 fatal to the validity of the foreclosure circulation, which is distributed nationwide, shall have a readership of more people
proceedings? than that posted in a public bulletin board, no matter how strategic its location may
In resolving the first query, we resort to the fundamental principle that a contract is the law be, which caters only to a limited few. Hence, the publication of the notice of sale in
between the parties and, that absent any showing that its provisions are wholly or in part the newspaper of general circulation alone is more than sufficient compliance with
contrary to law, morals, good customs, public order, or public policy, it shall be enforced to the the notice-posting requirement of the law. By such publication, a reasonably wide
letter by the courts. Section 3, Act No. 3135 reads: publicity had been effected such that those interested might attend the public sale,
"Se. 3. Notice shall be given by posting notices of the sale for not less than twenty and the purpose of the law had been thereby subserved."(Underlining added)
days in at least three public places of the municipality or city where the property is Obviously, as correctly pointed out by respondent, what prompted the Court to dispense with
situated, and if such property is worth more than four hundred pesos, such notice the posting requirement is the "unusual nature of the attendant facts and the peculiarity of the
shall also be published once a week for at least three consecutive weeks in a confluent circumstances" involvedin Olizon. It bears stressing that in the said case, the extra-
newspaper of general circulation in the municipality and city." judicial foreclosure sale sought to be annulled was conducted more than 15 years ago, thus,
The Act only requires (1) the posting of notices of sale in three public places, and (2) the even on the equitable ground of laches, the Olizons’ action for annulment of foreclosure
publication of the same in a newspaper of general circulation. Personal notice to the mortgagor proceedings and certificate of sale was bound to fail.
is not necessary. Nevertheless, the parties to the mortgage contract are not precluded from Unlike in Olizon where there was a valid publication of the notice of foreclosure sale, the
exacting additional requirements.5 In this case, petitioner and respondent in entering into a publication in the case at bar was defective. Not only did it fail to conform with the
contract of real estate mortgage, agreed inter alia: requirement that the notice must be published once a week for at least three consecutive weeks
"all correspondence relative to this mortgage, including demand letters, summonses, in a newspaper of general circulation, but also, there were substantial errors in the notice of
subpoenas, or notifications of any judicial or extra-judicial action shall be sent to the sale published in the Pagadian Times as found by the scrutinizing eyes of the trial court, thus:
MORTGAGOR at 40-42 Aldeguer St. Iloilo City, or at the address that may "As maybe noted, the published notice bespeaks of a Deed of Mortgage allegedly
hereafter be given in writing by the MORTGAGOR to the MORTGAGEE." executed by Mindanao Grains, Inc., signed by Faustino Go, Francisco Y. Wong,
Precisely, the purpose of the foregoing stipulation is to apprise respondent of any action which Wensceslao Buenaventura and Betty C. Wong on May 9, 1978 in favor of defendant
petitioner might take on the subject property, thus according him the opportunity to safeguard bank. The evidence, however showed that plaintiff never executed a Real Estate
his rights. When petitioner failed to send the notice of foreclosure sale to respondent, he Mortgage (REM) on May 9, 1978. Neither plaintiff had executed any REM whereby
committed a contractual breach sufficient to render the foreclosure sale on November 23, 1981 his co-mortgagors are MGI, Faustino Go, Wensceslao Buenaventura and his wife
null and void. Betty C. Wong. What plaintiff had actually executed were two REMS dated January
The second query must be answered in the affirmative. An incisive scrutiny of Olizon shows 18, 1977 and March 23, 1977 respectively. In other words the REM adverted to in
that this Court has not actually dispensed with the posting requirement under Section 3 of Act the published notice is a non-existent document, for there was no REM of the
No. 3135, thus: property in question actually executed and dated May 9, 1978.
"Neither can the supposed failure of respondent bank to comply with the posting The contention of defendant bank that the erroneous date of the REM as published
requirement as provided under the aforesaid Section 3, under the factual ambiance in the Pagadian Times was merely a clerical error would not cure the fatal defect and
and circumstances which obtained in this case, be considered a sufficient ground for invalidity of that published notice. No further evidence was shown that the glaring

131
error was corrected in the subsequent notice of publication. The court is in accord and a new title, TCT No. T-19,350, was issued in the name of Betty Ong
with the argument of the plaintiff that the order in the date of the REM published in Yu (Exhibits HH & HH-1). The transfer of ownership over the mortgaged
the Pagadian Times is not a harmless error. It did not give proper notice to the public property to the third person (Betty Ong Yu) who is not a party in this case
the correct nature of the REM which cover the properties being sold at public rendered moot and academic the reconveyance aspect of this case, clearly
auction. Considering the sizable amount of the properties being sold, over half a to the prejudice of the plaintiff.’
million pesos, a very big amount to businessmen based in the Province of Appellant’s contention that there was no need for them to secure leave of court for
Zamboanga del Sur, nobody would dare to buy such properties without first the sale of the property because there was no notice of lis pendens annotated in the
carefully scrutinizing the pertinent documents, foremost of which is the REM title of appellant nor was there a restraining order issued by the court enjoining them
allegedly violated by the plaintiff-mortgagor which gave rise to the foreclosure from conveying or transferring the property deserves scant consideration.
proceedings. Simply stated, serious prospective bidders just backed off upon A notice of lis pendens is an announcement to the whole world that a particular real
knowing the non-existence of that REM published in the Pagadian Times. For who property is in litigation, serving as a warning that one who acquires an interest over
would participate in the auction sale of the properties covered by REMS which are the said property does so at his own risk, or that he gambles on the result of the
non-existing? It is not surprising, therefore, to note that the defendant bank was the litigation over said property (People vs. Regional Trial Court of Manila, 178 SCRA
winning bidder, for the reason that it was the lone bidder. 299). The absence of a notice of lis pendens on the title of the appellant will not save
And lastly, not to be glossed over is the fact that there was no evidence in Olizon insinuating the day for the appellant. The latter and the Register of Deeds are being sued with
bad faith or collusion among the Sheriff who conducted the sale, the Register of Deeds and the regard to the property. x x x.
bank. In the present case, collusion is evident in the precipitate manner the foreclosure sale Note too that no less than the deputy Register of Deeds Ramon Balinton refused to
was conducted by Sheriff Bontia as well as in the sale made by petitioner to Betty Ong Yu register the property subject matter of the controversy because of the pending case
during the pendency of the case. as evidenced by the letter addressed to the Register of Deeds. Even when directed by
To stress that Olizon is an exception rather than the rule, this Court in the same case held: the Register of Deeds Pedro Jamero, he made a handwritten annotation in the
"x x x We are not unaware of the rulings in same cases that, under normal situations, document which reads: "Register per instruction of the Acting register of deeds this
the statutory provisions governing publication of notice of extrajudicial foreclosure 31st day of August 1984." The manner by which appellant deprived appellee of his
sales must be strictly complied with and that failure to publish the notice of auction property through irregular foreclosure proceedings and its well-orchestrated scheme
sale as required by the statute constitutes a jurisdictional defect which invalidates the to frustrate reconveyance of the property by selling the same to a third person during
sale. However, the unusual nature of the attendant facts and the peculiarity of the the pendency of the case entitles appellee to moral damages.
confluent circumstances involved in this case require that we rule otherwise." But while the amount of moral damages is a matter left largely to the sound discretion of the
While the law recognizes the right of a bank to foreclose a mortgage upon the mortgagor’s trial court, the same when found excessive, should be reduced to more reasonable amounts
failure to pay his obligation, it is imperative that such right be exercised according to its clear considering the attendant facts and circumstances. Moral damages, though incapable of
mandate. Each and every requirement of the law must be complied with, lest, the valid pecuniary estimation, are in the category of an award designed to compensate the claimant for
exercise of the right would end. It must be remembered that the exercise of a right ends when actual injury suffered and not to impose a penalty on the wrongdoer. Moral damages are not
the right disappears, and it disappears when it is abused especially to the prejudice of others. 6 intended to enrich a complainant at the expense of a defendant. They are awarded only to
Anent the award of moral damages, both the trial court and the Court of Appeals found that enable the injured party to obtain means, diversion or amusements that will serve to alleviate
petitioner acted in bad faith in extra-judicially foreclosing the real estate mortgage and in the moral sufferings he has undergone by reason of the defendant’s culpable action. The award
selling the mortgaged property during the pendency of the case in the trial court. To be sure, of moral damages must be proportionate to the sufferings inflicted. 7 Taking into consideration
petitioner bank’s bad faith caused serious anxiety, mental anguish and wounded feelings to its the attending circumstances here, we are convinced that the amount awarded by the Court of
client, respondent herein. He is thus entitled to moral damages. Appeals is exorbitant. Likewise, we find the exemplary damages and attorney’s fees quite
The Court of Appeals made a commendable ratiocination on the fact that petitioner acted in excessive.
bad faith, thus: WHEREFORE, the instant petition is hereby DENIED. The assailed Decision of the Court of
"There is no dispute that during the pendency of the reconveyance case, appellant Appeals is AFFIRMEDsubject to the MODIFICATION that the awards of moral damages
sold the subject property to one Betty Yu. In this regard, the trial court’s observation be reduced to P100,000.00 and the exemplary damages to P50,000.00. The award of
is worth mentioning: attorney’s fees is deleted.1âwphi1.nêt
‘Conversely,defendant bank’s most eloquent manifestation of bad faith, SO ORDERED.
deception, and fraud is its sale of the mortgaged property subject of the
reconveyance action while this case was already under trial. That sale was
without leave of court nor the knowledge of the plaintiff. At the stage of
the court proceedings when the defendants were in the process of
presenting their evidence, defendant bank sold the property in litigation to
Betty Yu of Molave, Zamboanga del Sur on August 8, 1984 (Exhibits FF,
FF-1,FF-2 & FF-3). Accordingly, the title of defendant bank was cancelled

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[G.R. No. 129279. March 4, 2003] ALFREDO M. OUANO, petitioner, vs. COURT OF Eight days later, on February 13, 1981, the parties executed and filed for the second time
APPEALS, and HEIRS OF JULIETA M. OUANO, respondents. a similar agreement moving the date of sale to February 28, 1981.[9] Again, on February 28,
DECISION 1981, no sale occurred.
AZCUNA, J.: Ten days later, on March 10, 1981, the parties executed and filed for the third time a
Before us is a petition for review on certiorari against the decision and resolution of the similar agreement moving the date of sale to March 30, 1981.[10] No sale occurred on this
Court of Appeals on CA-GR CV No. 33499 [1] affirming the decision of the Regional Trial date.
Court of Cebu, Branch 19, in Civil Case No. CEB-596, which set aside the extrajudicial On March 30, 1981, the parties executed for the fourth time a similar agreement moving
foreclosure proceedings involving respondents properties. the date of sale to May 29, 1981.[11] This agreement was filed with the sheriff on April 30,
From the documentary evidence and the Stipulation of Facts [2] filed by the parties before 1981.
the Regional Trial Court of Cebu, the facts of the case are, as follows: In all these postponements, no new notice of sale was issued, nor was there any
On June 8, 1977, respondent Julieta M. Ouano (Julieta), now deceased, obtained a loan republication or reposting of notice for the rescheduled dates.
from the Philippine National Bank (PNB) in the amount of P104,280.00. As security for said Finally, on May 29, 1981, the sheriff conducted the auction sale, awarding the two
loan, she executed a real estate mortgage over two parcels of land located at Opao, Mandaue parcels of land to PNB, the only bidder. He executed a Certificate of Sale certifying the sale
City.[3] She defaulted on her obligation. On September 29, 1980, PNB filed a petition for for and in consideration of P195, 510.50.[12]
extrajudicial foreclosure with the City Sheriff of Mandaue City. As Julieta failed to redeem the properties within the one year period from registration of
On November 4, 1980, the sheriff prepared a notice of sale setting the date of public sale, PNB consolidated its title on February 12, 1983. [13] On February 23 of the same year, it
auction of the two parcels of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m. [4] He caused conveyed the properties to herein petitioner Alfredo Ouano, the brother of Julieta, under a
the notice to be published in the Cebu Daily Times, a newspaper of general circulation in Deed of Promise to Sell payable in five years. [14]
Mandaue City, in its issues of November 13, 20 and 27, 1980. [5] He likewise posted copies On March 28, 1983, Julieta sent demand letters to PNB and petitioner, pointing out
thereof in public places in Mandaue City and in the place where the properties are located. [6] irregularities in the foreclosure sale. [15] On April 18, 1983, Julieta filed a complaint with the
However, the sale as scheduled and published did not take place as the parties, on four Regional Trial Court (RTC) of Cebu for the nullification of the May 29, 1981 foreclosure sale.
separate dates, executed Agreements to Postpone Sale (Agreements). [7] These Agreements [16]
Petitioner filed a motion for leave to intervene in said case, and filed his Answer in
were addressed to the sheriff, requesting the latter to defer the auction sale to another date at Intervention to protect his rights over the properties. [17]
the same time and place, without any further republication of the Notice. The first of the four While the case was pending, on February 25, 1986, PNB executed a Deed of Sale in
pro-forma Agreements reads, as follows: favor of petitioner.[18] The Register of Deeds of Mandaue City accordingly cancelled the TCTs
AGREEMENT TO POSTPONE SALE in PNBs name and issued in lieu thereof TCTs in the name of petitioner over the two parcels
Provincial Sheriff of land.[19]
Mandaue City On January 29, 1990, the Regional Trial Court of Cebu rendered a decision in favor of
Sir: Julieta, holding that the lack of republication rendered the foreclosure sale void. The
In accordance with this agreement of the parties in the above named case, it is respectfully dispositive portion of said decision states:
requested that the auction sale of the properties of the mortgagor, scheduled to take place WHEREFORE, judgment is hereby rendered,
on December 5, 1980 at 9:00 oclock in the morning at Office of the City Sheriff of Mandaue 1. declaring as null and void:
City be postponed to February 5, 1981, at the same time and place, without any further a) the auction sale by the City Sheriff of Mandaue City on May 29, 1981 over the
republication of the notice of sale as required by law. [italics supplied] aforesaid properties of plaintiff Julieta Ouano;
Cebu City, December 11,1980. b) the Certificate of Sale (Exhibit K) issued by the City Sheriff of Mandaue City on
PHILIPPINE NATIONAL BANK May 29, 1981, in favor of the Philippine National Bank;
(Mortgagee) c) the Deed of Sale (Exhibit L) executed by PNB to itself;
By: _____________________ d) the Deed of Promise to Sell (Exhibit O) executed by PNB on February 23, 1983 in
(SGD.) F.B. Briones favor of Alfredo Ouano
Cebu Branch e) the Deed of Sale (Exhibit 24) executed by PNB on February 5, 1986 in favor of
Branch Attorney Alfredo Ouano;
____________________ f) TCT No. 17929 (Exhibit M) and TCT No. 17930 (Exhibit N) in the name of PNB;
(SGD.)JULIETA M. OUANO g) TCT No. 21982 (Exhibit 21) and TCT No. 21987 (Exhibit 22) in the name of
(Mortgagor) Alfredo Ouano;
Address: Opao, Mandaue City 2. ordering the Register of Deeds of Mandaue City to cancel the aforementioned titles (TCT
On December 3, 1980, two days prior to the date of the sale as published, the parties Nos. 17929 and 17930, as well as TCT Nos. 21982 and 21987), and to reinstate TCT Nos.
executed and filed with the sheriff the Agreement to Postpone Sale moving the date of sale 15724 (5033) and 24377 (6876) in the name of Julieta Ouano;
from December 5, 1980 to February 5, 1981.[8] On February 5, 1981, however, no sale
occurred.

133
3. ordering the City Sheriff of Mandaue City to conduct a new auction sale strictly complying It is a well-settled rule that statutory provisions governing publication of notice of
with the requirements for publication and posting as required by Act 3135, as amended by Act mortgage foreclosure sales must be strictly complied with, and that even slight deviations
4118; therefrom will invalidate the notice and render the sale at least voidable. [26] In a number of
4. ordering PNB to return to Alfredo Ouano all amounts the latter has paid to the said bank; cases, we have consistently held that failure to advertise a mortgage foreclosure sale in
5. ordering Alfredo Ouano to vacate the premises in question and turn them over to Julieta compliance with statutory requirements constitutes a jurisdictional defect invalidating the sale.
[27]
Ouano; Consequently, such defect renders the sale absolutely void and no title passes. [28]
6. ordering PNB to pay the plaintiff the sum equivalent to 10% of the market value of the Petitioner, however, insists that there was substantial compliance with the publication
properties in question as indicated in Tax Declaration Nos. 01134 and 00510, as attorneys fees, requirement, considering that prior publication and posting of the notice of the first date were
and to pay the costs. made.
SO ORDERED.[20] In Tambunting v. Court of Appeals,[29] we held that republication in the manner
Not satisfied, PNB and petitioner brought the case to the Court of Appeals. [21] In its prescribed by Act No. 3135 is necessary for the validity of a postponed extrajudicial
decision dated February 17, 1997, said court affirmed the trial courts ruling on the same foreclosure sale. Thus we stated:
ground that there was no compliance with the mandatory requirements of posting and Where required by the statute or by the terms of the foreclosure decree, public notice of the
publication of notice of sale.[22] Petitioner filed a motion for reconsideration, which was denied place and time of the mortgage foreclosure sale must be given, a statute requiring it being held
for lack of merit by the same court on April 15, 1997. [23] applicable to subsequent sales as well as to the first advertised sale of the property.
PNB and petitioner filed their own petitions for review on certiorari before us. PNBs [underscoring supplied].
petition however was dismissed on July 21, 1997 for being filed out of time and for lack of Petitioner further contends that republication may be waived voluntarily by the parties.
certification of non-forum-shopping.[24] The petition herein remaining is the one filed by [30]

petitioner. This argument has no basis in law. The issue of whether republication may be waived is
Petitioner assigns the following errors: not novel, as we have passed upon the same query in Philippine National Bank v.
I. RESPONDENT COURT OF APPEALS ERRED IN SUSTAINING THE Nepomuceno Productions Inc,.[31] Petitioner therein sought extrajudicial foreclosure of
FINDING OF THE LOWER COURT THAT THE POSTPONED AUCTION SALE OF respondents mortgaged properties with the Sheriffs Office of Pasig, Rizal. Initially scheduled
SUBJECT PROPERTIES HELD ON MAY 29, 1981 UPON WRITTEN AGREEMENT on August 12, 1976, the auction sale was re-scheduled several times without republication of
OF THE PARTIES WAS NULL AND VOID FOR LACK OF PUBLICATION OF the notice of sale, as stipulated in their Agreements to Postpone Sale. Finally, the auction sale
NOTICE OF SALE ON THE SAID DATE ALTHOUGH THE REQUIREMENTS OF proceeded on December 20, 1976, with petitioner as the highest bidder. Aggrieved,
PUBLICATION OF NOTICE OF SALE ON THE ORIGINALLY INTENDED DATE respondents sued to nullify the foreclosure sale. The trial court declared the sale void for non-
[WERE] FULLY COMPLIED WITH. compliance with Act No. 3135. This decision was affirmed in toto by the Court of
II. RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE Appeals. Upholding the conclusions of the trial and appellate court, we categorically held:
PROVISION OF SEC. 24, RULE 39 OF THE RULES OF COURT WHICH ALLOWS Petitioner and respondents have absolutely no right to waive the posting and publication
THE SHERIFF TO ADJOURN ANY SALE UPON EXECUTION TO ANY DATE requirements of Act No. 3135.
AGREED UPON BY THE PARTIES IS NOT APPLICABLE TO THIS CASE. In People v. Donato, the Court expounded on what rights and privileges may be waived, viz.:
III. RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT xxx xxx xxx
JULIETA M. OUANO IS NOT ESTOPPED FROM CHALLENGING THE VALIDITY [T]he principle is recognized that everyone has a right to waive, and agree to waive, the
OF THE AUCTION SALE SINCE THE SALE WAS REPEATEDLY POSTPONED advantage of a law or rule made solely for the benefit and protection of the individual in his
UPON HER REQUEST AND WRITTEN AGREEMENT[S] THAT THERE WOULD private capacity, if it can be dispensed with and relinquished without infringing on any public
BE NO REPUBLICATION OF THE NOTICE OF SALE. right, and without detriment to the community at large.
IV RESPONDENT COURT OF APPEALS ERRED IN AFFIRMING THE xxx xxx xxx
DECISION OF THE LOWER COURT ALTHOUGH JULIETA M. OUANO FILED Although the general rule is that any right or privilege conferred by statute or guaranteed by
HER COMPLAINT AFTER ALMOST TWO YEARS FROM THE DATE OF THE constitution may be waived, a waiver in derogation of a statutory right is not favored, and a
AUCTION SALE.[25] waiver will be inoperative and void if it infringes on the rights of others, or would be against
The main issue before us is whether or not the requirements of Act No. 3135 were public policy or morals and the public interest may be waived.
complied with in the May 29, 1981 foreclosure sale. xxx xxx xxx
The governing law for extrajudicial foreclosures is Act No. 3135 as amended by Act No. The principal object of a notice of sale in a foreclosure of mortgage is not so much to notify
4118. The provision relevant to this case is Section 3, which provides: the mortgagor as to inform the public generally of the nature and condition of the property to
SEC. 3. Notice shall be given by posting notices of the sale for not less than twenty (20) days be sold, and of the time, place, and terms of the sale. Notices are given to secure bidders and
in at least three public places of the municipality or city where the property is situated, and if prevent a sacrifice of the property. Clearly, the statutory requirements of posting and
such property is worth more than four hundred pesos, such notice shall also be published once publication are mandated, not for the mortgagors benefit, but for the public or third persons. In
a week for at least three consecutive weeks in a newspaper of general circulation in the fact, personal notice to the mortgagor in extrajudicial foreclosure proceedings is not even
municipality of city.

134
necessary, unless stipulated. As such, it is imbued with public policy considerations and any Moreover, even assuming that the aforecited provision applies, all it authorizes is the
waiver thereon would be inconsistent with the intent and letter of Act No. 3135. adjournment of the execution sale by agreement of the parties. Nowhere does it state that
Publication, therefore, is required to give the foreclosure sale a reasonably wide republication and reposting of notice for the postponed sale may be waived. Thus, it cannot,
publicity such that those interested might attend the public sale. [32] To allow the parties to by any means, sanction the waiver in the case at bar.
waive this jurisdictional requirement would result in converting into a private sale what ought Next, petitioner maintains that Julietas act of requesting the postponement and
to be a public auction. repeatedly signing the Agreements had placed her under estoppel, barring her from
Moreover, assuming arguendo that the written waivers are valid, we find noticeable challenging the lack of publication of the auction sale. [38]
flaws that would nevertheless invalidate the foreclosure proceedings. First, the Agreements, as We rule otherwise. Julieta did request for the postponement of the foreclosure sale to
worded, only waived further republication of the notice of sale. Nothing in the Agreements extend the period to settle her obligation. [39] However, the records do not show that she
indicates that the parties likewise dispensed with the reposting of the notices of sale. As there requested the postponement without need of republication and reposting of notice of
was no reposting of notice of the May 29, 1981 sale, the foreclosure fell short of the sale. In Nepomuceno,[40] we held:
requirements of Act No. 3135. Second, we observe that the Agreements were executed and xxx To request postponement of the sale is one thing; to request it without need of compliance
filed with the sheriff several days after each rescheduled date. As stated in the facts, the first with the statutory requirements is another. Respondents, therefore, did not commit any act that
agreement was timely filed, two days prior to the originally scheduled sale on December 5, would have estopped them from questioning the validity of the foreclosure sale for non-
1980. The second agreement, however, was executed and filed eight days after the rescheduled compliance with Act No. 3135. xxx
sale on February 5, 1981. The third agreement was executed and filed ten days after the In addition, we observe herein that the Agreements prepared by the counsel of PNB
rescheduled sale on February 28, 1981. The fourth agreement was timely executed, but was were in standard forms of the bank, labeled as Legal Form No. 41.
filed with the sheriff one month after the rescheduled sale on March 30, 1981. On the The Nepomuceno[41]case likewise involved an Agreement to Postpone Sale that was in a
rescheduled dates, therefore, no public sale occurred, nor was there any request to postpone ready-made form, and the only participation of respondents therein was to affix or adhere their
filed with the sheriff, except for the first one. In short, the Agreements are clearly defective for signatures thereto. We there held that said agreement partakes of the nature of a contract of
having been belatedly executed and filed with the sheriff. The party who may be said to be at adhesion, i.e., one in which one of the contracting parties imposes a ready-made form of
fault for this failure, and who should bear the consequences, is no other than PNB, the contract which the other party may accept or reject, but cannot modify. One party prepares the
mortgagee in the case at bar. It is the mortgagee who causes the mortgaged property to be sold, stipulation in the contract, while the other party merely affixes his signature or his adhesion
and the date of sale is fixed upon his instruction. [33] We have held that the mortgagees right to thereto, giving no room for negotiation, and depriving the latter of the opportunity to bargain
foreclose a mortgage must be exercised according to the clear mandate of the law. Every on equal footing. [42] As such, their terms are construed strictly against the party who drafted it.
[43]
requirement of the law must be complied with, lest the valid exercise of the right would end.
[34]
PNBs inaction on the scheduled date of sale and belated filing of requests to postpone may More importantly, the waiver being void for being contrary to the express mandate of
be deemed as an abandonment of the petition to foreclose it filed with the sheriff. Act No. 3135, such cannot be ratified by estoppel. [44] Estoppel cannot give validity to an act
Consequently, its right to foreclose the mortgage based on said petition lapsed. that is prohibited by law or one that is against public policy. [45] Neither can the defense of
In a vain attempt to uphold the validity of the aforesaid waiver, petitioner asserts that the illegality be waived.[46]
Court of Appeals should have applied Rule 39, Section 24 of the Rules of Court, which allows Petitioner, moreover, makes much of the fact that Julieta filed her complaint with the
adjournment of execution sales by agreement of the parties. The said provision provides: trial court after almost two years from the May 29, 1981 auction sale, thus arguing that the
Sec. 24. Adjournment of Sale By written consent of debtor and creditor, the officer may delayed filing was a clear case of laches. [47]
adjourn any sale upon execution to any date agreed upon in writing by the parties. Without Laches is the failure or neglect, for an unreasonable and unexplained length of time, to
such agreement, he may adjourn the sale from day to day, if it becomes necessary to do so for do that which by exercising due diligence, could or should have been done earlier. [48] In the
lack of time to complete the sale on the day fixed in the notice. [35] case at bar, Julieta only realized the defect in the foreclosure sale upon conferring with her
Petitioner submits that the language of the abovecited provision implies that the written counsel who discovered the irregularity. [49] Thus, on March 25, 1983, Julieta filed her adverse
request of the parties suffices to authorize the sheriff to reset the sale without republication or claim with the Registrar of Deeds. [50] Three days after, she sent demand letters to PNB and
reposting.[36] petitioner.[51] Soon after they replied on April 6 and 7, 1983,[52] she promptly sued to nullify the
At the outset, distinction should be made of the three different kinds of sales under the foreclosure sale in the Regional Trial Court of Mandaue City on April 20, 1983. [53] She
law, namely: an ordinary execution sale, a judicial foreclosure sale, and an extrajudicial likewise filed a suit for forcible entry against petitioner in the Municipal Trial Court of
foreclosure sale. An ordinary execution sale is governed by the pertinent provisions of Rule 39 Mandaue City.[54] Considering all these, we find the delay of almost two years not
of the Rules of Court. Rule 68 of the Rules of Court applies in cases of judicial foreclosure unreasonable. Julieta cannot be guilty of laches. Her prompt actions upon discovering her
sale. On the other hand, Act No. 3135, as amended by Act No. 4118 otherwise known as An cause of action negate the claim that she has abandoned her right to claim the properties.
Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Besides, this defense lacks merit in light of the Civil Code stating that an action or defense for
Estate Mortgages applies in cases of extrajudicial foreclosure sale. A different set of law the declaration of the inexistence of a contract does not prescribe. [55]
applies to each class of sale mentioned. [37] The cited provision in the Rules of Court hence WHEREFORE, premises considered, the Decision dated February 17, 1997 in CA-
does not apply to an extrajudicial foreclosure sale. G.R. CV No. 33499 and the Resolution therein dated April 15, 1997 are AFFIRMED. No
costs. SO ORDERED.

135
line) P10,000,000.00 for a maximum aggregate principal amount of P17,000,000.00.[4] As
FIRST DIVISION provided for under the Agreement, drawings on the credit line are secured by a Continuing
Surety Agreement for the sum of P17,500,000.00 executed by the Suico spouses,[5] a Real
Estate Mortgage executed on September 5, 1991 by SRBII and the Suico spouses over
properties located at Brgy. Tabok, Mandaue City, Cebu and covered by Transfer Certificate of
Suico Rattan & Buri Interiors, G.R. No. 138145 Title (TCT) Nos. 21663 and 21665, and Fire Insurance policies over the properties duly
Inc. and Spouses Esmeraldo endorsed in favor of Metrobank. The Agreement expressly provides that the EBP/DP line is
and Elizabeth D. Suico Present: clean.[6]
Petitioners,
PANGANIBAN, CJ., Chairperson, Previous to the execution of the Agreement, the Suico spouses had already incurred
YNARES-SANTIAGO, loan obligations from Metrobank which are secured by separate Real Estate Mortgages
- versus - AUSTRIA-MARTINEZ, executed on May 8, 1986,[7] March 23, 1987[8] and August 24, 1987[9]over the same properties
CALLEJO, SR. and which are the subject of the Real Estate Mortgage executed on September 5,
CHICO-NAZARIO, JJ. 1991. Between June 13, 1991 and July 11, 1991, SRBII also incurred obligations with
Court of Appeals and Metrobank by entering into twelve negotiations for the purchase of export bills by the former
Metropolitan Bank and Trust Promulgated: from the latter. These obligations are evidenced by drafts drawn by SRBII in favor of
Co., Inc., Metrobank for a sum amounting to US$441,279.25 which has a peso equivalent
Respondents. June 15, 2006 of P12,218,866.23.[10] As a consequence of these negotiations, Metrobank issued various
x------------------------------------------------x checks in favor of petitioners totaling P12,194,443.23,[11] the last one of which was dated July
24, 1991.[12]

Subsequently, SRBII and the Suico spouses were unable to pay their obligations
DECISION prompting Metrobank to extra-judicially foreclose the four mortgages constituted over the
subject properties. Metrobank, being the lone and highest bidder, acquired the said properties
during the auction sale. A Certificate of Sale dated November 18, 1992 was then issued in its
favor.[13]
AUSTRIA-MARTINEZ, J.:
On November 5, 1992, Metrobank filed an action for the recovery of a sum of
money arising from the obligations of SRBII and the Suico spouses on their export bills
purchases incurred between June and July, 1991. [14] SRBII and the Suico spouses filed their
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court Answer contending that their indebtedness are secured by a real estate mortgage and that the
assailing the Decision[1] of the Court of Appeals (CA) dated January 14, 1999 in CA-G.R. CV value of the mortgaged properties is more than enough to answer for all their obligations to
No. 48320, which reversed and set aside the Decision [2] of the Regional Trial Court (RTC) Metrobank.[15]
of Cebu in Civil Case No. CEB-13156; and the CA Resolution dated April 6, 1999, denying
petitioners motion for reconsideration.[3] On June 8, 1993, the RTC issued a pre-trial order enumerating the parties claims,
testimonial and documentary evidence to be presented and the issues raised.[16] Thereafter, trial
ensued.
The facts of the case are as follows:
After trial, the RTC rendered judgment on September 26, 1994 with the following dispositive
Suico Rattan & Buri Interiors, Inc. (SRBII) is a domestic corporation engaged in the business portion:
of export of rattan and buri products. Spouses Esmeraldo and Elizabeth Suico (Suico spouses)
are officers of SRBII. On the other hand, Metropolitan Bank and Trust Co., Inc. (Metrobank) WHEREFORE, foregoing premises considered, the Complaint is
is a commercial banking corporation duly organized and existing under the laws of hereby dismissed. All obligations of defendants to plaintiffs incurred by
the Philippines. the former either as principal, surety or guarantor, which matured and had
become due and demandable on the date of the foreclosure of the Real
In the course of its business, SRBII applied for a credit line with Metrobank. On September 5, Estate Mortgage are hereby declared already fully paid by the mortgage
1991, SRBII and Metrobank, Mandaue branch, entered into a Credit Line Agreement security.
(Agreement) wherein the latter granted the former a discounting line amounting
to P7,000,000.00 and an export bills purchase or draft against payment line (EBP/DP SO ORDERED.[17]

136
VIEW OF THE TERMINATION OF THE PROCEEDINGS IN
Aggrieved by the decision of the RTC, Metrobank filed an appeal with the CA. EXTRAJUDICIAL FORECLOSURE SALE.

On January 14, 1999, the CA rendered a Decision disposing as follows: IV

WHEREFORE, the appealed decision is hereby REVERSED THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING
and SET ASIDE, and a new one rendered ordering appellees, jointly and THE PETITIONERS TO PAY SOLIDARILY THE AMOUNT
severally, to pay appellant the sum of P16,585,286.27 representing the OF P16,585,286.27 REPRESENTING THE PRINCIPAL OBLIGATION
principal obligations and interests as of October 31, 1992, plus interest on AND INTEREST AS OF OCTOBER 31, 1992 AND TO PAY AN
the principal sum of P12,218,866.23 at the rate of P26% per annum from INTEREST ON THE PRINCIPAL SUM OF P12,218,866,23 AT THE
November 1, 1992 until the said amounts are fully paid, the sum RATE OF 26% PER ANNUM FROM NOVEMBER 1, 1992 UNTIL THE
equivalent to two percent (2%) of the total amount due as and for SAID AMOUNTS ARE FULLY PAID.
attorneys fees, and to pay the costs.
V
SO ORDERED.[18]
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING
While the CA affirmed the trial courts ruling that under the provisions of the real estate THAT PETITIONERS SUICO SPOUSES ARE SOLIDARILY LIABLE
mortgage contracts executed by herein petitioners, the clear intent of the contracting parties is WITH PETITIONER CORPORATION FOR PAYMENT OF INTEREST
that the mortgages shall not be limited to the amount secured under the said contracts but shall PRIOR TO THE FILING OF THE COMPLAINT.
extend to other obligations that they may obtain from Metrobank, including renewals or
extensions thereof, the CA ruled that since the proceeds from the foreclosure sale of the VI
mortgaged properties amounted only to P10,383,141.63, the same is not sufficient to answer
for the entire obligation of petitioners to Metrobank and that the latter may still recover the THE RESPONDENT COURT OF APPEALS ERRED IN ORDERING
deficiency ofP16,585,286.27 representing the value of the export bills purchased by herein PETITIONERS TO PAY THE SUM EQUIVALENT TO TWO PERCENT
petitioners. (2%) OF THE TOTAL AMOUNT DUE AS AND FOR ATTORNEYS
FEES AND TO PAY THE COSTS.[20]
SRBII and the Suico spouses filed a Motion for Reconsideration but the same was denied by
the CA through its Resolution issued on April 6, 1999.[19] As to the first assigned error, petitioners claim that the Real Estate Mortgage
executed on September 5, 1991 answered for all their obligations to Metrobank. Petitioners
Hence, the present petition with the following Assignment of Errors: contend that the language of the subject mortgage contract is explicit in that it shall secure all
other obligations of petitioners of whatever kind or nature, whether direct or indirect, principal
I or secondary and whether said obligations have been contracted before, during or after the
execution of the said mortgage contract.Petitioners also contend that the secured obligations
THE RESPONDENT COURT OF APPEALS ERRED IN NOT shall include those which were incurred by petitioners from other branches of Metrobank
HOLDING THAT THE REAL ESTATE MORTGAGE because the properties covered by the subject mortgage contract had earlier been mortgaged to
DATED SEPTEMBER 5, 1991 SERVED AS THE COLLATERAL FOR the other branches of Metrobank. Petitioners argue that despite the existence of prior
ALL THE OBLIGATIONS OF THE PETITIONERS. mortgages, Metrobanks acceptance of the mortgaged properties as collateral for their Credit
Line Agreement only means that the value of the said properties is sufficient to answer for the
II previous and present obligations of petitioners and that Metrobank accepts the said properties
as continuing collaterals. Petitioners argue that Metrobank is now estopped from claiming that
THE RESPONDENT COURT OF APPEALS GRAVELY ERRED IN the subject mortgage contract does not answer for all of petitioners obligations in its favor.
DECIDING THE CASE BASED ON AN ISSUE NOT RAISED IN THE With respect to the second assigned error, petitioners contend that the CA erred in
PLEADINGS OR ADMISSIONS OF THE PARTIES. ruling that the banks cause of action is based on its claim for a deficiency judgment arising
from insufficient proceeds of the foreclosure sale of the mortgaged properties; Metrobanks
III cause of action is for a sum of money; at the time of the filing of the complaint, there is no
deficiency judgment to speak of because the complaint was filed on November 5, 1992 while
THE RESPONDENT COURT OF APPEALS ERRED IN NOT TAKING the foreclosure sale was only held on November 18, 1992; the complaint was not amended to
COGNIZANCE THAT RES JUDICATA HAD ALREADY SET IN, IN include recovery of the deficiency as part of its cause of action.

137
Anent the third assignment of error, petitioners assert that Metrobank is guilty of mortgage contracts executed by petitioners be considered as securing all of the latters
splitting a single cause of action when it filed its complaint for a sum of money on November obligations, including their export bills purchases, the fact remains that the foreclosure of the
5, 1992 and, thereafter, on November 18, 1992, foreclosed the properties subject matter of the mortgaged properties generated an amount which is insufficient to answer for all the
mortgage. Petitioners contend that in the event that a mortgage debtor fails to pay his obligations of petitioners to respondent bank. Respondent bank contends that under the law, it
obligation, the mortgage creditor has the option to file an action to collect the indebtedness or is not prevented from claiming the balance of petitioners obligation which was not covered by
to foreclose the property subject matter of the mortgage. However, the creditor may not pursue the proceeds of the foreclosure sale. Respondent bank also argues that it is erroneous for
both remedies. Petitioners contend that the present action for a sum of money is already barred petitioners to claim that just because it (Metrobank) did not require petitioners to put up
by res judicataby reason of the extrajudicial foreclosure sale of the mortgaged properties, as additional security when they availed of subsequent loans, the previous mortgages are already
evidenced by the execution of the Definite Deed of Sale in favor of Metrobank on January 21, sufficient to secure all their subsequent obligations.
1994.
Respondent bank further contends that the CA is correct in ruling that it (Metrobank)
As to the fourth assigned error, petitioners contend that the CA erred in holding that is entitled to deficiency judgment considering that petitioners themselves raised the issue that
they are still liable to pay the deficiency in their obligation which was not covered by the the real estate mortgages they executed secured all their obligations with respondent
proceeds of the sale of the foreclosed mortgaged properties. Petitioners assert that in bidding bank. Respondent argues that the issue on deficiency judgment necessarily arose because the
and in subsequently buying the subject mortgaged properties during the foreclosure sale for a proceeds of the foreclosure sale are not sufficient to answer for all the obligations of
price which is much lower than their market value, Metrobank effectively prevented petitioners to respondent bank.In any case, respondent bank contends that the CA is clothed
petitioners from paying their entire obligation. Petitioners claim that they are not interested in with ample authority to resolve an issue even if it is not raised if such resolution is necessary
the redemption of the foreclosed properties, rather they are more concerned with the payment in arriving at a just decision.
of their obligation considering that these properties are the only ones with which they expect
to settle their indebtedness. Hence, since Metrobank, in buying the foreclosed properties at a Respondent bank asserts that there is no splitting of cause of action because the
very low price, prevented petitioners from paying their entire obligation, it is already barred by complaint it filed against petitioners is simply for the purpose of collecting the balance of the
the principle of estoppel, equity and fair play from recovering the remaining balance of latters obligation which was not covered by the proceeds of the sale of the mortgaged
petitioners obligation to it. properties.

With respect to the fifth assigned error, the Suico spouses contend that the CA Respondent bank also contends that the Suico spouses are solidarily liable with
committed error in holding them solidarily liable with SRBII for the payment of the remaining SRBII because by reason of their execution of the Continuing Surety Agreement, the spouses
balance of the latters obligation plus interest on the ground that they are mere sureties and as liability became direct, primary and absolute.
such they can only be held liable if the principal does not pay. Absent any showing that SRBII
cannot pay, petitioners contend that they are not liable to pay. The Suico spouses also contend As to the attorneys fees awarded by the CA, respondent bank counters that
that, as sureties, they are liable to pay interest only at the time of the filing of the complaint. petitioners are guilty of fraud and misrepresentation when they gave their assurance and
warranty that documents such as letters of credit and commercial invoices are valid and
As to the last assigned error, petitioners contend that the CA erred in awarding existing when, in fact, they are not, thereby inducing respondent bank to grant and approve its
attorneys fees equivalent to 2% of the total amount due because petitioners did not act in bad transactions with petitioners involving the export bills purchases. By reason of such fraud and
faith nor did they willfully refuse to pay their obligation, which allegedly prompted Metrobank misrepresentation, respondent bank contends that it was compelled to incur expenses to
to litigate. Moreover, petitioners argue that the award of attorneys fees by the CA is contrary to protect its interest and enforce its claims.
the general rule that attorneys fees cannot be recovered as part of damages because of the
policy that no premium should be placed on the right to litigate. The Court finds the petition partly meritorious.

In its Comment, respondent bank contends that the export bills purchases made by The issues raised boil down to two basic questions: first, whether the mortgage
petitioners are not secured by any real estate mortgage. To support its argument respondent contract executed on September 5, 1991 serves as security for all the obligations of petitioners
bank cites the stipulation contained in the Credit Line Agreement that the export bills to respondent bank; and second, whether the foreclosure of the mortgaged properties precludes
purchases are clean or unsecured. Respondent bank further argues that the export bills respondent bank from claiming the sum of P16,585,286.27 representing the amount covered
purchases were availed of by petitioners through the banks Cebu Downtown Center Branch by the export bills purchased by herein petitioners between June and July 1991.
(otherwise referred to in the records as the Plaridel Branch) while the other loan obligations of As to the first question, the Court agrees with petitioners that all their obligations,
petitioners, which were secured by real estate mortgages, were obtained from its Mandaue including their indebtedness arising from their purchase of export bills, are secured by the
City Branch. Moreover, respondent bank asserts that petitioners obligations with the formers Real Estate Mortgage contract executed on September 5, 1991. We are not persuaded by
Mandaue City Branch are evidenced by documents which are distinct and separate from the respondent banks contention that the export bills purchases of petitioners from June 13, 1991
documents representing petitioners export bills purchases with the Metrobank Cebu to July 11, 1991 were not secured by any real estate mortgage because of the stipulation in the
Downtown Center Branch. In any case, respondent bank contends that even if the real estate

138
Agreement that the export bill purchase/draft against payment (EBP/DP) line is clean, which the Agreement was constituted. The parties could not have intended that the Agreement shall
means that it is unsecured. also pertain to the export bills purchases made by petitioners prior to its execution, that is,
between June and July 1991, considering that the maximum amount covered by the EBP/DP
The following provisions appear in the Agreement: LINE under the Agreement is only P10,000,000.00 while the outstanding obligation of
petitioners for the export bills purchases as of July 1991 already totaled US$441,279.25
which, at the time of the transactions, had a peso equivalent of P12,218,866.23.

WHEREAS, the CLIENT is desirous of obtaining credit On the other hand, pertinent portions of the Real Estate Mortgage executed on the
accommodations from the BANK and the latter is willing to extend such same date as the Agreement provide as follows:
credit accommodations to the CLIENT upon the terms and conditions
hereinafter stipulated.

NOW, THEREFORE, the CLIENT and the BANK, in That for and in consideration of certain loans and other
consideration of the following terms and conditions have agreed and credit accommodations obtained from the Mortgagee amounting
covenanted as follows: to SIX MILLION TWO HUNDRED FIFTY THOUSAND
(P6,250,000.00) PESOS ONLY Philippine Currency, and to secure the
1. The BANK hereby grants and shall make available to the payment of the same and those others that the Mortgagee may
CLIENT a credit line up to the aggregate principal amount of PESOS: heretofore have extended or hereafter extend to the Mortgagor and/or
SEVENTEEN MILLION ONLY (P17,000,000.00) PESOS in lawful SUICO RATTAN & BURI INTERIORS, INC., a domestic corporation
currency of the Republic of the Philippines, to be availed as follows: with principal office and place of business at Tabok, Mandaue City,
Philippines, hereinafter referred to, regardless of number, as the Borrower,
P 7,000,000.00 - DISCOUNTING LINE (REM) for one (1) including interest at the rate specified in the promissory note(s) or other
year, interest at prevailing rate, available by way of PNs not more than 360 days, evidence of indebtedness secured by this mortgage and expenses, and all
discounted. other obligations of the Mortgagor/Borrower to the Mortgagee of
10,000,000.00 - EBP/DP LINE (CLEAN) for one (1) year, whatever kind or nature, whether direct or indirect, principal or
interest at prevailing rate. secondary, as appear in the accounts, books and records of the
Mortgagee, whether such obligations have been contracted before,
2. Drawings on the line shall be secured by: during or after the constitution of this mortgage, the Mortgagor does
hereby transfer and convey by way of mortgage unto the Mortgagee, its
1. Continuing Suretyship of Spouses Esmeraldo successors or assigns, the parcels of land which are described in the list
Suico and Elizabeth D. Suico. inserted at the back of this document, or in a supplementary list attached
2. REM for P7.0 MM over TCT Nos. 21663 & 21665 hereto, together with all the buildings and improvements now existing or
w/ an aggregate area of 10,318 sq. m. and situated which may hereafter be erected or constructed thereon and all easements,
at Brgy. Tabok, Mandaue City, for item 1 only sugar quotas, agricultural or land indemnities, aids or subsidies, including
3. Fire Insurance policy(ies) duly endorsed in banks all other rights or benefits annexed to or inherent therein, now existing or
favor. which may hereafter exist, and also other assets acquired with the
proceeds of the loan hereby secured, all of which the Mortgagor declares
[21]
(Emphasis supplied) that he is the absolute owner free from all liens and encumbrances.
It is true that the terms contained in the Agreement provide that the EBP/DP LINE is clean and
[22]
that it is only those drawings made on the DISCOUNTING LINE which are secured by the (emphasis supplied)
mortgage constituted by petitioners spouses Suico over the subject properties. However, a
perusal of the entire Agreement shows that the credit line extended to petitioners refers only to From the language of the contract, it is clear that the mortgaged properties were intended to
transactions that the latter may enter into after the execution of the said Agreement. There is secure all loans, credit accommodations and all other obligations of herein petitioners to
nothing in the said document which shows that the credit line covered the export bill Metrobank, whether such obligations have been contracted before, during or after the
purchases incurred prior to the execution of the Agreement. In other words, the provision that constitution of the mortgage.
the EBP/DP LINE is clear or not covered by real estate mortgage simply refers to credit
accommodations which petitioners may avail from respondent bank subsequent to the The Court finds no conflict between the provisions of the Agreement and the Real
execution of the Agreement. It does not, in any way, refer to credit accommodations which Estate Mortgage contract both dated September 5, 1991, insofar as the export bills purchases
were already extended by respondent bank to petitioners prior to September 5, 1991, the date from June 13, 1991 to July 11, 1991 are concerned. The stipulations in the September 5, 1991

139
Agreement refer only to future export bill purchases, thus excluding those purchases made in agrees with the CA when it cited the case of Prudential Bank v. Martinez where the Court held
June and July, 1991; even as the provisions of the subject Real Estate Mortgage pertain to all as follows:
obligations of petitioners including those which were constituted even before the execution of
the said mortgage. Thus, although the Agreement does not refer to export bill purchases Moreover, the fact that the mortgaged property is sold at an
incurred prior to the execution of said Agreement, the Real Estate Mortgage encompasses all amount less than its actual market value should not militate against the
obligations incurred by petitioners, including the June and July 1991 export bill purchases but right to such recovery. We fail to see any disadvantage going for the
not the purchases made after September 5, 1991 under the Agreement. mortgagor. On the contrary, a mortgagor stands to gain with a reduced
Neither is the Court persuaded by respondent banks contention that petitioners obligations price because he possesses the right of redemption. When there is the right
arising from their purchase of export bills is separate and distinct from their other loan to redeem, inadequacy of price should not be material, because the
obligations with respondent bank because the export bills purchases were availed by judgment debtor may reacquire the property or also sell his right to redeem
petitioners through the banks Cebu Downtown Center/Plaridel branch while the other loan and thus recover the loss he claims to have suffered by the reason of the
obligations of petitioners were obtained from its Mandaue City branch. price obtained at the auction sale. (De Leon v. Salvador, L-30871,
December 28, 1970 and Bernabe v. Cruz, et. al., L-31603, December 28,
The Court quotes, with approval, the trial courts ratiocination on this matter: 1970; 36 SCRA 567).Generally, in forced sales, low prices are usually
offered and the mere inadequacy of the price obtained at the sheriffs sale
unless shocking to the conscience will not be sufficient to set aside a sale
if there is no showing that in the event of a regular sale, a better price can
It matters not that the EBP/DP line was availed of by defendants be obtained (Ponce de Leon v. Rehabilitation Finance Corporation, L-
with the Plaridel branch, because the Credit Line Agreement and the Real 24571, December 18, 1970, 36 SCRA 289).[24]
Estate Mortgages clearly indicate that defendants were indebted to plaintiff
bank and not to its Mandaue or Plaridel branch. This is clearly evident in the Hence, it is wrong for petitioners to conclude that when respondent bank supposedly bought
opening paragraph of the Credit Line Agreement and the Real Estate the foreclosed properties at a very low price, the latter effectively prevented the former from
Mortgages when plaintiff defines itself as a Commercial Banking satisfying their whole obligation. Petitioners still had the option of either redeeming the
Corporation organized and existing under and by virtue of the laws of the properties and, thereafter, selling the same for a price which corresponds to what they claim as
Republic of the Philippines, with principal offices and places of the properties actual market value or by simply selling their right to redeem for a price which
businessat Metrobank Plaza, Gil. J. Puyat Avenue, Makati, is equivalent to the difference between the supposed market value of the said properties and
Metro Manila. Clearly therefore, defendants were deemed to be indebted to the price obtained during the foreclosure sale. In either case, petitioners will be able to recoup
plaintiff with main office in Makati and not with its Mandaue or Plaridel the loss they claim to have suffered by reason of the inadequate price obtained at the auction
branch. sale and, thus, enable them to settle their obligation with respondent bank. Moreover,
petitioners are not justified in concluding that they should be considered as having paid their
[23]
obligations in full since respondent bank was the one who acquired the mortgaged properties
and that the price it paid was very inadequate. The fact that it is respondent bank, as the
It bears to note that the complaint for a sum of money was filed in the name of Metrobank mortgagee, which eventually acquired the mortgaged properties and that the bid price was low
alone, without impleading its Plaridel or Mandaue branches. By not impleading either of these is not a valid reason for petitioners to refuse to pay the remaining balance of their
branches, it only goes to show that respondent bank, itself, insofar as the present case is obligation. Settled is the rule that a mortgage is simply a security and not a satisfaction of
concerned, considers the whole Metrobank corporation as the aggrieved party. Hence, it is indebtedness.[25]
now estopped from claiming that the mortagaged properties secure only those transactions
entered into with its Mandaue branch simply because the mortgage contracts were entered into As to petitioners contention that they are not liable to pay since there is no showing
through the said branch. It does not matter that the export bills purchases of petitioners were that the principal debtor cannot pay, the time-honored rule is that the surety obligates himself
entered into through the facility of respondent banks Plaridel branch and evidenced by to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is
separate and distinct documents because in all these transactions there is only one creditor, financially capable to fulfill his obligation. [26] Thus, a creditor can go directly against the
which is the corporate entity known as Metrobank. surety although the principal debtor is solvent and is able to pay or no prior demand is made
On the other hand, the Court is not persuaded by petitioners claim that the on the principal debtor.[27] Although a surety contract is secondary to the principal obligation,
foreclosed properties command a market price of P50,000,000.00 at the time of the foreclosure the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party
sale. No evidence appears on record to prove this allegation. Granting that the mortgaged to the undertaking.[28] A surety is considered in law to be on the same footing as the principal
properties were sold during the auction for an amount which is way below their market price, debtor in relation to whatever is adjudged against the latter. [29]
the same does not place the petitioners at a disadvantage. On the contrary, the low price works
to their advantage because it would be easier for them to redeem the property sold. The Court Equally settled is the principle that contracts have the force of law between the
parties and are to be complied with in good faith. [30] From the moment the contract is

140
perfected, the parties are bound to comply with what is expressly stipulated as well as with elected the personal action for debt or the real action for foreclosure there is a need to
what is required by the nature of the obligation in keeping with good faith, usage and the law. determine when the respondent bank filed a petition for extrajudicial foreclosure.
[31]
In the present case, it is clear from the Continuing Surety Agreement [32] executed by the
Suico spouses that they hold themselves solidarily liable with SRBII in the payment of the The Certificate of Sale executed by the Ex-Officio Provincial Sheriff indicates that
latters obligations to respondent bank to the extent of P17,500,000.00, plus interests and other the extrajudicial foreclosure sale was conducted on November 17, 1992.[39] In the absence of
incidental charges such as penalties, costs and expenses in collecting their obligation. The evidence to the contrary, the Court presumes that the sheriff regularly performed his duties and
same principle applies with respect to the payment of interest. It is clear from the various that the ordinary course of business had been followed in the conduct of the auction sale.
[40]
letters executed by SRBII in favor of respondent bank that it agreed to pay interest in favor of Section 3 of Act No. 3135, as amended by Act No. 4118 provides:
respondent bank at the rate of 26% per annum based on the value of the draft, the same to be
reckoned after twelve days from the date of purchase or from the date of dishonor, whichever Sec. 3. Notice shall be given by posting notices of the sale for
is earlier, up to the date of final payment. [33]Since the Suico spouses obligated themselves to be not less than twenty days in at least three public places of the
solidarily bound with SRBII, it follows that they are also liable to pay interest as stipulated in municipality or city where the property is situated and if such property is
the above-cited letters. worth more than four hundred pesos, such notice shall also be published
once a week for at least three consecutive weeks in a newspaper of general
Having settled that the mortgaged properties served as security for all the petitioners circulation in the municipality or city. (Emphasis supplied)
obligations to Metrobank and that the formers liability is solidary, the next question to be
resolved is whether, under the facts and circumstances obtaining in the present case, the Hence, it is reasonable to assume that the requirements regarding notice and publication prior
respondent bank is precluded from recovering the amount representing the value of the export to the conduct of the sale have been complied with. Going back 20 days from November 17,
bills purchased by petitioners from it in June and July, 1991. 1992, which was the date the auction sale was conducted, the petition for extrajudicial
foreclosure could have been filed by respondent bank not later than October 27,
The rule is settled that a mortgage creditor may, in the recovery of a debt secured by 1992. Considering that the complaint for a sum of money was only filed on November 5,
a real estate mortgage, institute against the mortgage debtor either a personal action for debt or 1992, the only conclusion that can be arrived at is that respondent bank first elected to avail of
a real action to foreclose the mortgage. [34] These remedies available to the mortgage creditor the remedy of extrajudicial foreclosure. Thus, by availing of such remedy it is deemed to have
are deemed alternative and not cumulative. An election of one remedy operates as a waiver of waived its right to file an ordinary case for collection.
the other.[35] In sustaining the rule that prohibits mortgage creditors from pursuing both the
remedies of a personal action for debt or a real action to foreclose the mortgage, the Court held The question that remains then is: may the complaint for a sum of money filed by respondent
in the case of Bachrach Motor Co., Inc. v. Esteban Icarangal, et al. that a rule which would bank be considered as a suit for the recovery of deficiency in petitioners obligation?
authorize the plaintiff to bring a personal action against the debtor and simultaneously or
successively another action against the mortgaged property, would result not only in The Court rules in the negative.
multiplicity of suits so offensive to justice and obnoxious to law and equity, but also in
subjecting the defendant to the vexation of being sued in the place of his residence or of the It is undisputed that the suit filed by respondent bank with the trial court was a
residence of the plaintiff, and then again in the place where the property lies. [36] Hence, a personal action for the collection of a sum of money. The complaint was premised on the
remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the refusal of herein petitioners buyers to pay and accept the value of the drafts or bills of
complaint in an action for foreclosure of mortgage, pursuant to the provisions of Rule 68 of exchange and the subsequent failure of petitioners to answer for the value of the said drafts
the Rules of Court.[37] As to extrajudicial foreclosure, such remedy is deemed elected by the plus interest upon notice and demand sent by respondent bank. There was no mention, either
mortgage creditor upon filing of the petition not with any court of justice but with the office of in the body of the complaint or in the prayer, for the recovery of the balance of petitioners
the sheriff of the province where the sale is to be made, in accordance with the provisions of obligations which were not covered by the foreclosure sale. In fact, the foreclosure sale was
Act No. 3135, as amended by Act No. 4118.[38] not even mentioned. In other words, in filing the complaint with the RTC, respondent bank
was not suing for any deficiency. Understandably, the respondent bank could not have claimed
Records show that the complaint for a sum of money was filed with the RTC such deficiency because, as correctly observed by petitioners, at the time of the filing of the
on November 5, 1992. On the other hand, there is no direct evidence to show when respondent complaint on November 5, 1992, the foreclosure sale is yet to be conducted. Hence, the
bank filed a petition with the provincial sheriff of Cebu for the extrajudicial foreclosure of the complaint cannot, in any way, be construed as an action for the recovery of deficiency in
mortgaged properties. The petition for extrajudicial foreclosure of the mortgaged properties petitioners obligation. It is actually an ordinary action for collection which is barred by reason
was not presented in evidence. What appears on record is that the auction sale of the of respondents prior election of the remedy of foreclosure. Thus, the Court is left with no
foreclosed properties was conducted on November 17, 1992. However, as mentioned earlier, recourse but to sustain the dismissal of the complaint by the RTC subject to the right
the remedy of extrajudicial foreclosure is deemed chosen not on the date of foreclosure sale of Metrobank to recover the alleged deficiency, as will be discussed forthwith. It must be
but upon the filing of the petition for foreclosure with the office of the sheriff of the province emphasized that as aptly observed by petitioners, Metrobank did not amend its complaint
where the sale is to be made. Hence, for purposes of determining which remedy was first accordingly.

141
Given the fact that the proceeds of the auction sale were not sufficient to answer for
the entire obligation of petitioners to respondent bank, the latter still has the right to recover
the balance due it after applying the proceeds of the sale. We agree with the CA that where the
mortgage creditor chooses the remedy of foreclosure and the proceeds of the foreclosure sale
are insufficient to cover the debt, the mortgagee is entitled to claim the deficiency from the
debtor.[41] 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 at the
time of the foreclosure proceedings. [42] This rule is based on the principle earlier mentioned
that the mortgage is only a security and not a satisfaction of the mortgagors entire
obligation. Moreover, unlike in pledge[43] and chattel mortgage on a thing sold on installment,
[44]
where the Civil Code expressly forecloses the right of creditors to sue for any deficiency
resulting from the sale of the property given as a security for the obligation, there is nothing in
Act. No. 3135,[45] the law governing extrajudicial foreclosures, which expressly or impliedly
prohibits the recovery of such deficiency. If the legislature had intended to deny the creditor
the right to sue for any deficiency resulting from the foreclosure of a security given to
guarantee an obligation, the law would expressly so provide. [46] Absent such a provision in
Act. No. 3135, as amended, the creditor is not precluded from taking action to recover any
unpaid balance on the principal obligation simply because he chose to extrajudicially foreclose
the real estate mortgage.[47] Hence, in the present case, the Courts dismissal of the complaint
should be without prejudice to the filing of another action for the recovery of the balance left
in petitioners obligation after the foreclosure sale of the mortgaged properties.

The CA or this Court has no jurisdiction to rule on the amount of deficiency that is
yet to be claimed and proved in the proper forum by Metrobank.

WHEREFORE, the petition is partially GRANTED. The assailed Decision and


Resolution of the Court of Appeals in CA-G.R. CV No. 48320
are REVERSEDand SET ASIDE. The Decision of the Regional Trial Court of Cebu, Branch
8 in Civil Case No. CEB-13156 is REINSTATED with MODIFICATION to the effect that
the portion of the RTC Decision, declaring that all obligations of defendants to plaintiffs
incurred by the former either as principal, surety or guarantor, which matured and had become
due and demandable on the date of the foreclosure of the Real Estate Mortgage are considered
fully paid by the mortgage security, is DELETED subject to the right of Metropolitan Bank
and Trust Co., Inc. to recover the amount of deficiency in a proper action in the proper court.

No pronouncement as to cost.

SO ORDERED.

142
FIRST DIVISION despite demand, prompting BPI Family to institute before the Sheriff of Bais City extrajudicial
foreclosure proceedings over the mortgaged property, in accordance with Act No. 3135,
otherwise known as an Act to Regulate the Sale of Property under Special Powers Inserted in
BPI FAMILY SAVINGS BANK, INC., G.R. No. 175816 or Annexed to Real Estate Mortgages. At the public auction sale held on March 8, 1999, BPI
Petitioner, Family was the highest bidder for the foreclosed property. The bid price of P2,142,616.00 of
Present: BPI Family was applied as partial payment of the mortgage obligation of the spouses Avenido,
CORONA, C.J., which had amounted to P2,917,381.43 on the date of the public auction sale, thus, still leaving
Chairperson, an unpaid amount of P794,765.43. The Certificate of Sale dated March 8, 1999 was registered
LEONARDO-DE CASTRO, on TCT No. T-1216 on May 25, 1999.[5]
- versus - BERSAMIN,
DEL CASTILLO, and BPI Family prayed that the RTC order the spouses Avenido to pay the deficiency of
VILLARAMA, JR., JJ. their mortgage obligation amounting to P794,765.43, plus legal interest thereon from the date
of the filing of the Complaint until full payment; 15% as contractual attorneys
Promulgated: fees; P50,000.00 as litigation expenses; and costs of the suit. [6]
MA. ARLYN T. AVENIDO & PACIFICO A.
AVENIDO, December 7, 2011 The spouses Avenido filed their Answer with Special/Affirmative Defenses and
Respondents. Counterclaims on September 18, 2001. The spouses Avenido averred therein that they had
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x already paid a substantial amount to BPI Family, which could not be less than P1,000,000.00,
but due to the imposition by BPI Family of unreasonable charges and penalties on their
principal obligation, their payments seemed insignificant. Per the Notice of Extrajudicial Sale
DECISION dated February 4, 1999, the spouses Avenidos indebtedness to BPI Family only amounted to
less than P2,000,000.00, and such amount was already fully covered when the foreclosed
property was sold at the public auction for P2,142,616.00. The spouses Avenido sought the
dismissal of the Complaint for lack of merit, plus the award of P500,000.00 as moral damages
LEONARDO-DE CASTRO, J.: and P300,000.00 as exemplary damages given the prejudice and unnecessary expenses they
suffered because of the unjustified suit of BPI Family. [7]

This Petition for Review on Certiorari under Rule 45 of the Rules of Court assails Failing to reach an amicable settlement during the pre-trial conference, trial ensued.
the Decision[1] dated March 31, 2006 of the Court of Appeals in CA-G.R. CV No. 79008,
which affirmed the Decision [2] dated November 13, 2002 of the Regional Trial Court (RTC), BPI Family submitted the following computation in support of its claim for
Branch 58 of Cebu City, in Civil Case No. CEB-25629.The RTC dismissed the Complaint for deficiency mortgage obligation from the spouses Avenido:
Collection of Deficiency of Mortgage Obligation with Damages filed by petitioner BPI Family
Savings Bank (BPI Family) against respondent spouses Pacifico A. Avenido and Ma. Arlyn T. AUCTION SALE: MARCH 8, 1999
Avenido (spouses Avenido), following the extrajudicial foreclosure of the property given by
the latter as security for their loan. The instant Petition likewise challenges the Principal Balance P 1,918,722.47
Resolution[3]dated November 16, 2006 of the Court of Appeals in the same case denying the Interest 266,754.66
Motion for Reconsideration of BPI Family. Fire Insurance 1997-1998 6,725.00
1998-1999 6,725.00
The controversy arose from the following facts.
Unpaid MRI 10,720.00
On September 20, 2000, BPI Family filed with the RTC a Complaint for Collection Late Charges 37,425.46
of Deficiency of Mortgage Obligation with Damages against the spouses Avenido, docketed as Less: Unapplied (0.18)
Civil Case No. CEB-25629.
Sub-total 2,247,072.41
BPI Family alleged in its Complaint that pursuant to a Mortgage Loan
Agreement[4] dated April 25, 1996, the spouses Avenido obtained from the bank a loan in the Foreclosure Expenses
amount of P2,000,000.00, secured by a real estate mortgage on a parcel of land situated in
Bais City, which is covered by Transfer Certificate of Title (TCT) No. T-1216 Filing Fee P 5,719.60
(mortgaged/foreclosed property). The spouses Avenido failed to pay their loan obligation Sheriffs Fee 1,500.00
143
Cost of Publication 5,000.00 Dumaguete City Rural Bank to buy out their loan from BPI Family. Yet, in February 1999, the
Interest on Litigation Expenses 232.17 12,451.77 spouses Avenido learned of the foreclosure proceedings over their mortgaged property only
from court personnel. BPI Family never communicated with the spouses Avenido about the
2,259,524.18 foreclosure proceedings except when the former sent the latter a demand letter in July 2000 for
the P700,000.00 deficiency. Counsel for the spouses Avenido answered BPI Family through a
Contractual Penalties letter dated August 2, 2000, stating that the demand of the bank for deficiency was not only
surprising, but lacked basis in fact and in law, for the mortgaged property was already
foreclosed and sold at the public auction for P2,142,616.00, which was more than
Attorneys fees 338,928.63
the P1,918,722.47 loan obligation of the spouses Avenido. Next thing the spouses Avenido
Liquidated Damages 338,928.63 knew, BPI Family had filed Civil Case No. CEB-25629 against them. In addition, the spouses
Avenido had already fully paid their Motor Vehicle Loan in 1999, but BPI Family refused to
Total 2,937,381.43 release the Hi-Lux from the mortgage constituted thereon. BPI Family attached the Hi-Lux to
cover the deficiency of the spouses Avenido on their home loan obligation. Due to the
Total Appraised Value as of 03/05/99 2,678,270.00 aforementioned acts of BPI Family, Arlyn suffered sleepless nights and humiliation. Hence,
80% of TAV 2,142,616.00 she prayed for the award of moral and exemplary damages and attorneys fees and the release
of the Hi-Lux.[10]
Summary:
The RTC rendered its Decision on November 13, 2002.
Total Exposure as of 03/08/99 2,937,381.43
Bid Price 2,142,616.00 According to the RTC, the principal issue to be resolved was whether or not [BPI
(lower amt. between total exposure or 80% of TAV) Family] is entitled to deficiency judgment, which includes a determination of the existence of
the right to recover deficiency, and how much, if any. [11]
Deficiency 794,765.43
At the outset, the RTC recognized that in an extrajudicial foreclosure, the mortgagee
Portion of Principal covered by bid price to be retained in IL 0.00 [8] has a right to recover deficiency where the proceeds of the sale are insufficient to cover the
debt:
Although Act 3135 is silent on the mortgagees right to recover the
BPI Family presented as witness Alfred Rason (Rason), the Assistant Manager for deficiency where the proceeds of the sale is insufficient to cover the debt,
Operation, who was in charge of keeping track and collecting unpaid obligations of the it is now well-settled that said mortgagee has the right to recover the
bank. Rason testified that in the Petition for Extrajudicial Foreclosure, BPI Family reported deficiency. (PB Com v. De Vera, 6 SCRA 1026; DBP v. Vda. de Noel, 43
that the loan obligation of the spouses Avenido amounted to P1,918,722.47, inclusive of SCRA 82; DBP v. Zaragosa, 84 SCRA 668.). The reasons advanced are 1)
interest, penalty charges, insurance, foreclosure expenses, and others, as of November 16, Although Act 3135 discusses nothing as to the mortgagees right to recover
1998. However, as of the public auction sale of the foreclosed property on March 8, 1999, the such deficiency, neither is there any provision thereunder which expressly
total loan obligation of the spouses Avenido already reached P2,937,381.43. The foreclosed or impliedly prohibits such recovery; and 2) now Rule 68 on judicial
property was awarded to BPI Family as the highest bidder at the public auction sale foreclosure expressly grants to the mortgagee the right to recover
for P2,142,616.00. The bid price was arrived at by BPI Family following bank policy, i.e., deficiency and the underlying principle is the same for extra-judicial
total exposure of claim or 80% of the total appraised value of the foreclosed property, foreclosure that the mortgage is but a security and not a satisfaction of
whichever is lower. In a letter dated July 8, 2000, sent to the spouses Avenido through indebtedness.
registered mail, counsel for BPI family demanded payment of the deficiency balance
of P794,766.43 on the loan obligation of said spouses.[9] In the case of DBP v. Tomeldon, 101 SCRA 171, the Supreme Court ruled
that the action to recover the deficiency prescribes after ten (10) years
When respondent Ma. Arlyn T. Avenido (Arlyn) took the witness stand, she admitted from the time the right to action accrues x x x.
that she and her husband, co-respondent Pacifico A. Avenido (Pacifico), obtained from BPI
Family a Motor Vehicle Loan in 1995 and a Home Mortgage Loan in 1996. The Home Thus, in the case at bar the mortgagees right and the period the said right
Mortgage Loan was for P2,000,000.00, payable in 15 years through debit memos (or is enforced are not contested. What is essentially in controversy is whether
automatic debit arrangement), instead of post-dated checks. The spouses Avenido failed to there is a deficiency and how much.[12]
make some payments in 1998. The spouses Avenido subsequently deposited with their account
at BPI Family branch in Bais City, Negros Occidental, the amount of P250,000.00, which
would have been sufficient to cover their arrears; as well as made arrangements with
144
The RTC then determined the total amount of the loan obligation of the spouses
Avenido as follows: More than just reducing the total loan obligation of the spouses Avenido
to P2,598,452.80, the RTC, in the end, denied the claim for deficiency of BPI Family based on
In the Mortgage Loan Agreement (Exhibits A and I) the due execution and the following ratiocination:
genuineness of which are admitted by both parties, the [spouses Avenido]
obligated themselves as Borrower-Mortgagor to pay [BPI Family] the [T]he Court finds very significant the admission by [BPI Familys] witness
aggregate principal amount of TWO HUNDRED TWO MILLION PESOS that the appraised value of the foreclosed property is actually TWO
(P202,000,000.00) and interest on the unpaid balance from the date MILLION SIX HUNDRED SEVENTY[-]EIGHT THOUSAND TWO
thereof until paid in full on the repayment dates. It further provides that in HUNDRED SEVENTY PESOS (P2,678,270.00) but [BPI Family] bidded
case the mortgagee fails to pay any of the sums secured, the mortgagor has only for 80% of the value as a matter of bank policy (TSN Afredo Rason,
the right to declare the entire obligation due and payable and to foreclose Aug. 6, 2002, p. 17). In other words, the actual market value of the
the mortgage. Moreover, Exhibit A-2 shows that the proceeds of sale of property is more than the amount of TWO MILLION FIVE HUNDRED
the mortgaged property shall be applied as follows: a) to the payment of NINETY[-]EIGHT THOUSAND FOUR HUNDRED FIFTY[-]TWO
the expenses and cost of foreclosure and sale, including the attorneys fees PESOS AND EIGHTY CENTAVOS (P2,598,452.80).
as herein provided; b) to the satisfaction of all interest and charges
accruing upon the obligation herein and hereby secured; c) to the Under this circumstance, it would be inequitable to still grant the [BPI
satisfaction of the principal amount of the obligation herein and hereby Familys] prayer for deficiency as it will be in effect allowing it to unjustly
secured; d) to the satisfaction of all other obligation then owed to the bank enrich itself at the expense of the [spouses Avenido]. [14]
or any of its subsidiaries. The balance, if any, to be due to the
mortgagor. Finally, the attorneys fees stipulated is 15% of the total amount
claimed by the bank (Exhibit A-3). The Court, however, finds no Hence, the RTC decreed:
stipulation as regards liquidated damages.

xxxx Accordingly, the [BPI Familys] complaint and [spouses


Avenidos] counterclaim are DISMISSED.[15]
This Court is not convinced that [spouses Avenidos] total indebtedness
should only be ONE MILLION NINE HUNDRED EIGHTEEN Aggrieved by the RTC judgment, BPI Family filed an appeal before the Court of
THOUSAND SEVEN HUNDRED TWENTY[-]TWO [PESOS] AND Appeals, docketed as CA-G.R. CV No. 79008, with a lone assignment of error, to wit:
FORTY[-]SEVEN [CENTAVOS] (P1,918,722.47) because the Notice of
Extra-Judicial Sale (Exhibit 3) itself states x x x to satisfy the mortgaged THE LOWER COURT ERRED IN NOT HOLDING [THE SPOUSES
indebtedness which as of November 16, 1998 amount to ONE MILLION AVENIDO] LIABLE TO [BPI FAMILY] FOR DEFICIENCY OF THE
NINE HUNDRED EIGHTEEN THOUSAND SEVEN HUNDRED MORTGAGE OBLIGATION.[16]
TWENTY[-]TWO AND FORTY[-]SEVEN CENTAVOS (P1,918,722.47)
plus interest and penalty charges thereon from June 30, 1998 to date of the
foreclosure sale, attorneys fees and necessary expenses for foreclosure x x In its Decision promulgated on March 31, 2006, the Court of Appeals ruled:
x.
Foreclosure is not a single process and it is not therefore correct A careful scrutiny of the arguments presented in the case at bar
to conclude that what is material is the petition for extra-judicial sale nor yields no substantial and convincing reason for us to depart from the
the date of the filing of the application. ruling found by the trial court x x x.

Thus, the Court gives credence to [BPI Familys] Exhibit C but not xxxx
including the claim for liquidated damages in the sum of THREE
HUNDRED THIRTY[-]EIGHT THOUSAND NINE HUNDRED Indubitably, mortgagors whose properties a foreclosed and are
TWENTY PESOS AND SIXTY[-]THREE CENTAVOS (P330,920.63) purchased by the mortgagee as highest bidder at the auction sale are
because it has no basis whatsoever. Thus the total amount due is TWO decidedly at a great disadvantage because almost invariably, mortgagors
MILLION FIVE HUNDRED NINETY[-]EIGHT THOUSAND FOUR forfeit their properties at a great loss as they are purchased at a nominal
HUNDRED FIFTY[-]TWO PESOS AND EIGHTY CENTAVOS cost by the mortgagee himself, who ordinarily bids in no more than his
(P2,598,452.80). x x x.[13] credit or the balance thereof at the auction sale.

145
More importantly, the mortgage contract is also one of adhesion
as it was prepared solely by [BPI Family] and the only participation of the Hence, the present Petition for Review of BPI Family with the following assignment
[spouses Avenido] was the affixing of their signatures or adhesion of errors:
thereto. Under such contracts, which are common in the Philippines and
elsewhere, the lending institutions are free to require borrowers to provide I
assets, like real property, of much higher value than the desired loan
amount, as collateral. Being a contract of adhesion, the mortgage is to be WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS
strictly construed against [BPI Family], the party which prepared the COMMITTED A REVERSIBLE ERROR IN RENDERING ITS
agreement. DECISION (ANNEX A) AND RESOLUTION (ANNEX B)
DECLARING THAT [BPI FAMILY] IS NOT ENTITLED TO ITS
In the case at bar, the intent of [BPI Family] is manifest that the CLAIM AGAINST THE [SPOUSES AVENIDO] FOR DEFICIENCY OF
[spouses Avenido] shall assume liability not only for the entire obligation MORTGAGE OBLIGATION DESPITE THE EXPRESS PROVISIONS
mentioned in the mortgage but beyond, which is improper, as it will defeat OF THE MORTGAGE LAW AND NUMEROUS JURISPRUDENCE
the purpose of the foreclosure proceedings which is to answer or satisfy ENTITLING THE MORTGAGEE-[BPI FAMILY] TO THE SAME.
the principal obligation in case of default or non payment thereof.
II
Moreover, for all intents and purposes, we hold that [spouses
Avenido] shall not be liable to pay for the deficiency of their mortgage WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS
obligation because it will be at their great disadvantage considering that COMMITTED A REVERSIBLE ERROR WHEN IT BASED ITS
their property was purchased at a nominal cost by [BPI Family] at the FINDING THAT THERE IS NO MORE DEFICIENCY OF MORTGAGE
auction sale. As a matter [of] fact, there was an admission made by [BPI OBLIGATION BY COMPARING THE MARKET VALUE OF THE
Familys] witness that the amount of the bid was only 80% of the actual FORECLOSED PROPERTY AGAINST THE LOAN OBLIGATION OF
price of the property. This is unfair on the part of the [spouses Avenido]. THE MORTGAGORS-RESPONDENTS INSTEAD OF COMPARING
THE ACTUAL BID PRICE AT THE AUCTION SALE AGAINST THE
Besides, if mortgagees were allowed such right, the debtors LOAN OBLIGATION OF THE MORTGAGORS-[SPOUSES
would be at the mercy of their creditors considering the summary nature of AVENIDO].[19]
extrajudicial foreclosure proceedings. It is also worthy to note the limited
readership of auction sale notices which lead to the sale.
The primary issue posed before us is whether or not BPI Family is still entitled to
Accordingly, We upheld the ruling of the court a quo in collect the deficiency mortgage obligation from the spouses Avenido in the amount
absolving the [spouses Avenido] from any liability corresponding to the of P455,836.80, plus interest.
amount of deficiency of mortgage obligation as it will in effect be
allowing [BPI Family] to unjustly enrich itself at the expense of the We answer in the affirmative.
[spouses Avenido].[17]
It is settled that if the proceeds of the sale are insufficient to cover the debt in an
extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from
The dispositive of the Court of Appeals judgment reads: the debtor. While Act No. 3135, as amended, does not discuss the mortgagees right to recover
the deficiency, neither does it contain any provision expressly or impliedly prohibiting
recovery. If the legislature had intended to deny the creditor the right to sue for any deficiency
WHEREFORE, premises considered, the assailed Decision resulting from the foreclosure of a security given to guarantee an obligation, the law would
dated November 13, 2002 of the Regional Trial Court, Cebu City, expressly so provide. Absent such a provision in Act No. 3135, as amended, the creditor is not
7th Judicial Region, Branch 58, in Civil Case No. CEB-25629, is precluded from taking action to recover any unpaid balance on the principal obligation simply
hereby AFFIRMED. No pronouncement as to costs.[18] because he chose to extrajudicially foreclose the real estate mortgage. [20]

It is no longer challenged before us that the outstanding loan obligation of the


In its Resolution dated November 16, 2006, the Court of Appeals denied the Motion spouses Avenido amounted to P2,598,452.80, inclusive of interests, penalties, and charges, by
for Reconsideration of BPI Family since the arguments set forth therein were but a rehash, March 8, 1999. The controversy herein now only revolves around the value to be attributed to
repetition and/or reinstatement of the arguments/matters already passed upon and extensively the foreclosed property, which would be applied against the outstanding loan obligation of the
discussed by the appellate court in its earlier decision. spouses Avenido to BPI Family. BPI Family insists that it should

146
be P2,142,616.00, its winning bid price for the foreclosed property at the public auction sale, of sections four hundred and sixty-four to four hundred and sixty-six,
which, being less than the outstanding loan obligation of the spouses Avenido, will still leave a inclusive, of the Code of Civil Procedure, in so far as these are not
deficiency collectible by BPI Family from the spouses Avenido in the amount inconsistent with the provisions of this Act. (Emphasis ours.)
of P455,836.80. The spouses Avenido maintain that, as the RTC and the Court of Appeals
ruled, it should be P2,678,270.00, the fair market value of the foreclosed property, which,
being more than the outstanding loan obligation of the spouses Avenido, will already fully Republic Act No. 337, the General Banking Act, as amended, in force at the time of
settle their indebtedness. the herein transactions, had a specific provision on the redemption of property extrajudicially
foreclosed by banks, which reads:
The spouses Avenido, the RTC, and the Court of Appeals may not have said it
outright, but they actually consider the winning bid of BPI Family for the foreclosed property Sec. 78. Loans against real estate security shall not exceed
at the public auction sale to be insufficient. They took exception to the fact that the winning seventy percent (70%) of the appraised value of the respective real estate
bid of BPI Family was equivalent to only 80% of the appraised value of the mortgaged security, plus seventy percent (70%) of the appraised value of the insured
property. The RTC and the Court of Appeals even went as far as to refer to the amount of the improvements, and such loans shall not be made unless title to the real
winning bid of BPI Family as nominal and unfair and would unjustly enrich the bank at the estate shall be in the mortgagor. In the event of foreclosure, whether
expense of the spouses Avenido. So the RTC and the Court of Appeals disregarded the judicially or extrajudicially, of any mortgage on real estate which is
winning bid of BPI Family and applied instead the fair market value of the foreclosed property security for any loan granted before the passage of this Act or under the
against the outstanding loan obligation of the spouses Avenido. provisions of this Act, the mortgagor or debtor whose real property has
been sold at public auction, judicially or extrajudicially, for the full or
According to Section 4 of Act No. 3135, an extrajudicial foreclosure sale of a partial payment of an obligation to any bank, banking or credit institution,
mortgaged real property shall be conducted as follows: within the purview of this Act shall have the right, within one year after
the sale of the real estate as a result of the foreclosure of the respective
SEC. 4. Public Auction. - The sale shall be made at public mortgage, to redeem the property by paying the amount fixed by the court
auction, between the hours of nine in the morning and four in the in order of execution, or the amount due under the mortgage deed, as the
afternoon; and shall be under the direction of the sheriff of the province, case may be, with interest thereon at the rate specified in the mortgage,
the justice or auxiliary justice of the peace of the municipality in which and all the costs, and judicial and other expenses incurred by the bank or
such sale has to be made, or a notary public of said municipality, who shall institution concerned by reason of the execution and sale and as a result of
be entitled to collect a fee of five pesos for each day of actual work the custody of said property less the income received from the property.
performed, in addition to his expenses. However, the purchaser at the auction sale concerned in a judicial
foreclosure shall have the right to enter upon and take possession of such
property immediately after the date of the confirmation of the auction sale
Notably, the aforequoted provision does not mention any minimum bid at the public by the court and administer the same in accordance with law. (Emphasis
auction sale. There is no legal basis for requiring that the bid should at least be equal to the ours.)
market value of the foreclosed property or the outstanding obligation of the mortgage debtor.

We have consistently held in previous cases that unlike in an ordinary sale, If the foreclosed property is registered, the mortgagor has one year within which to
inadequacy of the price at a forced sale is immaterial and does not nullify the sale. In fact, in a redeem the property from and after registration of sale with the Register of Deeds. [21]
forced sale, a low price is more beneficial to the mortgage debtor for it makes redemption of
the property easier. We explained in Prudential Bank v. Martinez[22] that:

Section 6 of Act No. 3135 provides for the redemption of an extrajudicially [T]he fact that the mortgaged property is sold at an amount less than its
foreclosed property within a one-year period, to wit: actual market value should not militate against the right to such
recovery. We fail to see any disadvantage going for the mortgagor. On the
Sec. 6. Redemption. In all cases in which an extrajudicial sale is contrary, a mortgagor stands to gain with a reduced price because he
made under the special power herein before referred to, the debtor, his possesses the right of redemption. When there is the right to redeem,
successors-in-interest or any judicial creditor or judgment creditor of said inadequacy of price should not be material, because the judgment debtor
debtor, or any person having a lien on the property subsequent to the may reacquire the property or also sell his right to redeem and thus
mortgage or deed of trust under which the property is sold, may redeem recover the loss he claims to have suffered by the reason of the price
the same at any time within the term of one year from and after the obtained at the auction sale. Generally, in forced sales, low prices are
date of the sale; and such redemption shall be governed by the provisions usually offered and the mere inadequacy of the price obtained at the

147
sheriffs sale unless shocking to the conscience will not be sufficient to set benefit is derived at anothers expense or damage. [28] There is no unjust enrichment to speak of
aside a sale if there is no showing that in the event of a regular sale, a in this case. There is strong legal basis for the claim of BPI Family against the spouses
better price can be obtained.[23] (Citations omitted.) Avenido for the deficiency of their loan obligation.

BPI Family made an extrajudicial demand upon the spouses Avenido for the
We elucidated further in New Sampaguita Builders Construction Inc. v. Philippine deficiency mortgage obligation in a letter dated July 8, 2000 and received by the spouses
National Bank[24] that: Avenido on July 17, 2000. Consequently, we impose the legal interest of 12% per annum on
the deficiency mortgage obligation amounting to P455,836.80 from July 17, 2000 until the
In the accessory contract of real mortgage, in which immovable finality of this Decision. Thereafter, if the amount adjudged remains unpaid, it will be subject
property or real rights thereto are used as security for the fulfillment of the to interest at the rate of 12% per annumcomputed from the time the judgment became final
principal loan obligation, the bid price may be lower than the propertys and executory until fully satisfied.
fair market value. In fact, the loan value itself is only 70 percent of the
appraised value. As correctly emphasized by the appellate court, a low bid WHEREFORE, the Petition is hereby GRANTED. The assailed Decision dated
price will make it easier for the owner to effect redemption by March 31, 2006 and Resolution dated November 16, 2006 of the Court of Appeals in CA-G.R.
subsequently reacquiring the property or by selling the right to redeem and CV No. 79008, affirming the Decision dated November 13, 2002 of the Regional Trial Court,
thus recover alleged losses. x x x.[25] Branch 58 of Cebu City, in Civil Case No. CEB-25629, is REVERSED and SET ASIDE.
Respondent spouses Ma. Arlyn T. Avenido and Pacifico A. Avenido are ORDERED to pay
petitioner BPI Family Savings Bank, Inc. the deficiency of their mortgage obligation in the
In Hulst v. PR Builders, Inc.,[26] we reiterated that: amount of P455,836.80, plus legal interest of 12% per annum from July 17, 2000 until the
finality of this Decision. Thereafter, the amount adjudged shall be subject to legal interest of
[G]ross inadequacy of price does not nullify an execution sale. In an 12% per annum from the finality of this Decision up to its satisfaction.No cost.
ordinary sale, for reason of equity, a transaction may be invalidated on the
ground of inadequacy of price, or when such inadequacy shocks ones SO ORDERED.
conscience as to justify the courts to interfere; such does not follow when
the law gives the owner the right to redeem as when a sale is made at
public auction, upon the theory that the lesser the price, the easier it is for
the owner to effect redemption. When there is a right to redeem,
inadequacy of price should not be material because the judgment debtor
may re-acquire the property or else sell his right to redeem and thus
recover any loss he claims to have suffered by reason of the price obtained
at the execution sale. Thus, respondent stood to gain rather than be harmed
by the low sale value of the auctioned properties because it possesses the
right of redemption. x x x.[27]

In line with the foregoing jurisprudence, we refuse to consider the question of


sufficiency of the winning bid price of BPI Family for the foreclosed property; and affirm the
application of said winning bid in the amount of P2,142,616.00 against the total outstanding
loan obligation of the spouses Avenido by March 8, 1999 in the sum of P2,598,452.80, thus,
leaving a deficiency of P455,836.80. BPI Family may still collect the said deficiency without
violating the principle of unjust enrichment, as opined by the Court of Appeals.

There is unjust enrichment when a person unjustly retains a benefit to the loss of
another, or when a person retains money or property of another against the fundamental
principles of justice, equity and good conscience. Article 22 of the Civil Code provides that
every person who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground,
shall return the same to him. The principle of unjust enrichment under Article 22 requires two
conditions: (1) that a person is benefited without a valid basis or justification, and (2) that such

148
FIRST DIVISION
On February 5, 1976, Veterans Bank granted petitioner spouses Fernando and Angelina Edralin (Edralins)
SPOUSES FERNANDO and G.R. No. 168523 a loan in the amount of Two Hundred Seventy Thousand Pesos (P270,000.00). As security thereof,
ANGELINA EDRALIN, petitioners executed a Real Estate Mortgage (REM)[6]in favor of Veterans Bank over a real property
Petitioners, Present: situated in the Municipality of Paraaque and registered in the name of petitioner Fernando Edralin. The
mortgaged property is more particularly described in Transfer Certificate of Title (TCT) No. 204889. The
CORONA, C.J., Chairperson, REM was registered with the Registry of Deeds of the Province of Rizal.[7] The REM and its subsequent
VELASCO, JR., amendments[8] were all duly annotated at the back of TCT No. 204889.[9]
- versus - LEONARDO-DE CASTRO,
DEL CASTILLO, and The Edralins failed to pay their obligation to Veterans Bank. Thus, on June 28, 1983, Veterans Bank filed
PEREZ, JJ. a Petition for Extrajudicial Foreclosure[10] of the REM with the Office of the Clerk of Court and Ex-
Officio Sheriff of Rizal.
PHILIPPINE VETERANS BANK, Promulgated:
Respondent. March 9, 2011 In due course, the foreclosure sale was held on September 8, 1983, in which the Ex-Officio Sheriff of
x--------------------------------------------------------x Rizal sold the mortgaged property at public auction. Veterans Bank emerged as the highest bidder at the
said foreclosure sale and was issued the corresponding Certificate of Sale.[11] The said Certificate of
Sale was registered with the Registry of Deeds of the Province of Rizal and annotated at the back of TCT
DECISION No. 204889 under Entry No. 83-62953/T-No. 43153-A on October 25, 1983.[12]
Upon the Edralins failure to redeem the property during the one-year period provided under Act No. 3135,
Veterans Bank acquired absolute ownership of the subject property.Consequently, Veterans Bank caused
DEL CASTILLO, J.: the consolidation of ownership of the subject property in its name on January 19, 1994.[13] The Register of
Deeds of Paraaque, Metro Manila cancelled TCT No. 204889 under the name of Fernando Edralin and
The right to possess a property follows the right of ownership; consequently, it would be illogical to hold replaced it with a new transfer certificate of title, TCT No. 78332, [14] in the name of Veterans Bank on
that a person having ownership of a parcel of land is barred from seeking possession thereof. February 3, 1994.

Despite the foregoing, the Edralins failed to vacate and surrender possession of the subject property to
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,[1]assailing the Veterans Bank. Thus, on May 24, 1996, Veterans Bank filed an Ex-PartePetition for the Issuance of a
Decision[2] dated June 10, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 89248. The dispositive Writ of Possession, docketed as Land Registration Case (LRC) No. 06-060 before Branch 274 of the
portion of the assailed Decision reads: Regional Trial Court (RTC) of Paraaque City.The same, however, was dismissed for Veterans Banks
failure to prosecute.[15]
WHEREFORE, premises considered, the present petition is hereby GIVEN DUE
COURSE and the writ prayed for accordingly GRANTED. The assailed Orders On July 29, 2003, Veterans Bank again filed an Ex-Parte Petition for Issuance of Writ of Possession,
[16]
dated November 8, 2004 and January 28, 2005 dismissing the ex-parte petition for this time docketed as Land Registration Case No. 03-0121, before the RTC of Paraaque City. Veterans
issuance of writ of possession and denying petitioners motion for reconsideration, Bank divulged in its Certification against Forum-Shopping[17] that the earlier case, LRC No. 96-060,
respectively, are hereby ANNULLED and SET ASIDE. Respondent Judge is involving the same subject matter and parties, was dismissed.
hereby DIRECTED to issue the writ of possession prayed for by the petitioner The Edralins moved to dismiss[18] the petition on the ground that the dismissal of LRC No. 96-060
Philippine Veterans Bank over the subject property covered by TCT No. 78332 of constituted res judicata.
the Registry of Deeds for Paraaque City, Metro Manila.
Ruling of the Regional Trial Court
No pronouncement as to costs.
The trial court denied the motion to dismiss explaining that the ground of failure to present evidence is not
SO ORDERED.[3] a determination of the merits of the case hence does not constitute res judicata on the petition for issuance
of a writ of possession.[19]

Factual Antecedents Nevertheless, the trial court found no merit in the Veterans Banks application and dismissed the same in its
Order dated November 8, 2004.[20] The trial court explained that, under paragraph (d) of the REM, the
Veterans Bank agreed to take possession of the Edralins property without any judicial intervention. The
Respondent Philippine Veterans Bank (Veterans Bank) is a commercial banking institution created under court held that granting the writ of possession to the Veterans Bank will violate the contractual agreement
Republic Act (RA) No. 3518,[4] as amended by RA No. 7169.[5] of the parties.Paragraph (d) reads:

149
Act No. 3135, as amended, to sign all documents and perform any act requisite and
(d) Effective upon the breach of any condition of this mortgage and in addition to necessary to accomplish said purpose and to appoint its substitutes as such attorney-
the remedies herein stipulated, the Mortgagee is hereby likewise appointed in-fact with the same powers as above specified. x x x[23]
attorney-in-fact of the Mortgagor with full powers and authority, with the use of
force, if necessary to take actual possession of the mortgaged property, without
the necessity of any judicial order or any permission, or power, to collect rents, to The motion for reconsideration was set for hearing on January 28, 2005. Due to a conflict of schedule,
eject tenants, to lease or sell the mortgaged property or any part thereof, at a private Veterans Banks counsel moved[24] to reset the hearing on its motion. In apparent denial of the motion to
sale without previous notice or advertisement of any kind and execute the reset, the trial court proceeded to deny Veterans Banks motion for reconsideration in the Order dated
corresponding bills of sale, lease or other agreement that may be deemed January 28, 2005.[25] The trial court reiterated that paragraph (d) of the REM allowed Veterans Bank to
convenient, to make repairs or improvements on the mortgaged property and pay take immediate possession of the property without need of a judicial order. It would be redundant for the
for the same and perform any other act which the Mortgagee may deem court to issue a writ of possession in its favor.
convenient for the proper administration of the mortgaged property. The
payment of any expenses advanced by the Mortgagee in connection with the This prompted Veterans Bank to file a Petition for Mandamus with Prayer for Issuance of a Preliminary
purposes indicated herein is also guaranteed by this Mortgage and such amount Mandatory Injunction[26] before the CA.
advanced shall bear interest at the rate of 12% per annum. Any amount received
from sale, disposal or administration above-mentioned may be applied to the First among its arguments, Veterans Bank maintained that it was the trial courts ministerial duty[27] to grant
payment of the repairs, improvements, taxes and any other incidental expenses and a writ of possession to the mortgagee who has consolidated and registered the property in its name.
obligations and also the payment of the original indebtedness and interest
thereof. The power herein granted shall not be revoked during the life of this Veterans Bank then assailed the trial courts holding that its right to a writ of possession had already
mortgage, and all acts that may be executed by the Mortgagee by virtue of said prescribed. Respondent maintained that the writ can be issued at any time after the mortgagor failed to
power are hereby ratified. In addition to the foregoing, the Mortgagor also hereby redeem the foreclosed property.[28]
agrees, that the Auditor General shall withhold any money due or which may
become due the Mortgagor or debtor from the Government or from any of its Lastly, Veterans Bank argued that, contrary to the trial courts finding, it did not contract away its right to an
instrumentalities, except those exempted by law from attachment or execution, and extrajudicial foreclosure under Act No. 3135, as amended, by the inclusion of paragraph (d) in the
apply the same in settlement of any and all amount due to the Mortgagee;[21] REM. Veterans Bank pointed out that, as evidenced by paragraph (c) of the REM, it expressly reserved
the right to avail of the remedies under Act No. 3135.[29]

The trial court held that, assuming the contract allowed for the issuance of a writ of possession, Veterans Ruling of the Court of Appeals[30]
Banks right to seek possession had already prescribed. Without citing authority and adequate explanation,
the court held that Veterans Bank had only 10 years from February 24, 1983 to seek possession of the The appellate court ruled in favor of Veterans Bank.
property.

Veterans Bank moved for the reconsideration[22] of the adverse decision. It directed the courts attention to It held that the contractual provision in paragraph (d) to immediately take possession of the mortgaged
paragraph (c) of the real estate mortgage, which expressly granted the mortgagee the right to avail itself of property without need of judicial intervention is distinct from the right to avail of extrajudicial foreclosure
the remedy of extrajudicial foreclosure in case of the mortgagors default. Paragraph (c) reads: under Section 7 of Act No. 3135, which was expressly reserved by Veterans Bank in paragraph (c) of the
REM. The fact that the two paragraphs do not negate each other is evidenced by the qualifying phrase in
(c) If at any time the Mortgagor shall fail or refuse to pay the obligations herein addition to the remedies herein stipulated found in paragraph (c).
secured, or any of the amortizations of such indebtedness when due, or to comply
with any of the conditions and stipulations herein agreed, or shall, during the time Having availed itself of the remedy of extrajudicial foreclosure, Veterans Bank, as the highest bidder, has
this mortgage is in force, institute insolvency proceedings or be involuntarily the right to a writ of possession. This right may be availed of any time after the buyer consolidates
declared insolvent, or shall use the proceeds of this loan for purposes other than ownership. In fact, the issuance of the writ of possession is a ministerial function, the right to which
those specified herein, or if this mortgage cannot be recorded in the corresponding cannot be enjoined or stayed, even by an action for annulment of the mortgage or the foreclosure sale
Registry of Deeds, then all the obligations of the Mortgagor secured by this itself.
Mortgage and all the amortization thereof shall immediately become due, payable
and defaulted, and the Mortgagee may immediately foreclose this mortgage The trial courts ruling that Veterans Banks right to possess has prescribed is likewise erroneous. As
judicially in accordance with the Rules of Court, or extra-judicially in already stated, Veterans Banks right to possess the property is not based on their contract but on Act No.
accordance with Act No. 3135, as amended, and under Act 2612, as 3135.
amended. For the purpose of extra-judicial foreclosure the Mortgagor hereby
appoints the Mortgagee his attorney-in-fact to sell the property mortgaged under

150
Since the issuance of a writ of possession is a ministerial act of the trial judge, mandamus lies to compel We rule that mandamus is a proper remedy to compel the issuance of a writ of possession.The purpose of
the performance of the said duty. mandamus is to compel the performance of a ministerial duty. A ministerial act is one which an officer or
tribunal performs in a given state of facts, in a prescribed manner, in obedience to the mandate of legal
Petitioners immediately filed this petition for review. authority, without regard to or the exercise of his own judgment upon the propriety or impropriety of the
act done.[35]
Issues
The issuance of a writ of possession is outlined in Section 7 of Act No. 3135, as amended by Act No.
Petitioners submit the following issues for our consideration: 4118, which provides:

1. Whether mandamus was resorted to as a substitute for a lost appeal SEC. 7. In any sale made under the provisions of this Act, the
purchaser may petition the Court of First Instance of the province or place
2. Whether mandamus is the proper remedy to seek a review of the final orders of where the property or any part thereof is situated, to give him possession
the trial court thereof during the redemption period, furnishing bond in an amount equivalent to
the use of the property for a period of twelve months, to indemnify the debtor in
3. Whether the consolidation of ownership of the extrajudicially foreclosed case it be shown that the sale was made without violating the mortgage or without
property through a Deed of Sale is in accordance with law complying with the requirements of [this] Act. Suchpetition shall be made under
oath and filed in form of an ex parte motion x x x and the court shall, upon
4. Whether the issuance of a writ of possession under Act [No.] 3135 is subject to approval of the bond, order that a writ of possession issue, addressed to the
the statute of limitations[31] sheriff of the province in which the property is situated, who shall execute said
order immediately.

Our Ruling
During the period of redemption, the mortgagee is entitled to a writ of possession upon depositing the
Propriety of the Remedy of approved bond. When the redemption period expires without the mortgagor exercising his right of
Mandamus redemption, the mortgagor is deemed to have lost all interest over the foreclosed property, and the
purchaser acquires absolute ownership of the property.The purchasers right is aptly described thus:
Consequently, the purchaser, who has a right to possession after the expiration
Petitioners argue that Veterans Bank availed itself of the remedy of mandamus as a substitute for a lost of the redemption period, becomes the absolute owner of the property when
appeal.[32] Petitioners narrate the relevant dates that allegedly show the belatedness and impropriety of the no redemption is made. In this regard, the bond is no longer needed. The
petition for mandamus. Veterans Bank received the Order dated November 8, 2004 on November 18, purchaser can demand possession at any time following the consolidation of
2004, thus it had until December 3, 2004 to file a motion for reconsideration. Since December 3, 2004 ownership in his name and the issuance to him of a new TCT. After
was declared a non-working holiday, Veterans Bank filed its motion for reconsideration on the next consolidation of title in the purchasers name for failure of the mortgagor to redeem
working day, December 6, 2004. With the said dates, it had only one day left from receipt of the January the property, the purchasers right to possession ripens into the absolute right of a
28, 2005 Order, or until February 10, 2005, to file an appeal (citing Section 2, Rule 22) of the Rules of confirmed owner. At that point, the issuance of a writ of possession, upon
Court. Since Veterans Bank did not file an appeal on the following day, it had lost its right to appeal and proper application and proof of title becomes merely a ministerial
the assailed orders allegedly attained finality. function. Effectively, the court cannot exercise its discretion.
Respondent counters that the issuance of a writ of possession is not an ordinary action for which the rules
on appeal apply. The writ being a mere motion or an order of execution, appeal is not the proper remedy Therefore, the issuance by the RTC of a writ of possession in favor of the
to question the trial courts ruling. In fact, Section 1, Rule 41 of the Rules of Court provides that no appeal respondent in this case is proper. We have consistently held that the duty of the trial
may be taken from an order of execution, but Rule 65 special civil actions are available.[33] Given that the court to grant a writ of possession in such instances is ministerial, and the court may
issuance of the writ of possession is a ministerial act of the judge, respondent maintains that a petition for not exercise discretion or judgment x x x[36]
mandamus is the proper remedy.

Respondent adds that, even if appeal were available, the same is not the plain, speedy and adequate With the consolidated title, the purchaser becomes entitled to a writ of possession and the trial court has
remedy to compel the performance of the ministerial act.[34] Respondent maintains that Section 3 of Rule the ministerial duty to issue such writ of possession. [37] Thus, the remedy of mandamus lies to compel the
65 recognizes that the remedy of mandamus is available in conjunction with an appeal. The qualifying performance of [this] ministerial duty.[38]
phrase and there is no appeal [available], which appears in certiorari and prohibition petitions, is
conspicuously missing for petitions for mandamus. Does the charter of Veterans Bank
prohibit extrajudicial foreclosures?

151
Veterans Bank in the banks own favor during the consolidation of title constitutes a pactum
commissorium, which is prohibited under Article 2088 of the Civil Code.[44]
Petitioners then assail Veterans Banks power to extrajudicially foreclose on mortgages.They maintain that
the legislature intended to limit Veterans Bank to judicial foreclosures only, [39] citing Section 18 of the Respondent contends that petitioners never questioned the validity of the foreclosure proceedings or the
Veterans Banks charter, RA No. 3518, which provides: auction sale. The failure to do so resulted in the ripening of the consolidation of ownership.[45]

Section 18. Right of redemption of property foreclosed. The mortgagor There is no merit in petitioners argument.
shall have the right, within one year after the sale of the real estate as a result of the
foreclosure of a mortgage, to redeem the property by paying the amount fixed by Pactum commissorium is a stipulation empowering the creditor to appropriate the thing given as guaranty
the court in the order of execution, with interest thereon at the rate specified in the for the fulfillment of the obligation in the event the obligor fails to live up to his undertakings, without
mortgage, and all the costs and other judicial expenses incurred by the Bank by further formality, such as foreclosure proceedings, and a public sale.[46] The elements of pactum
reason of the execution and sale, and for the custody of said property. commissorium, which enable the mortgagee to acquire ownership of the mortgaged property without the
Respondent counters that the inclusion of the phrase fixed by the Court in Section 18 of RA No. 3518 need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security for
does not necessarily mean that only judicial foreclosures are available to Veterans Bank. Moreover, resort the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation
to an extrajudicial foreclosure was voluntarily entered into by the contracting parties in their REM.[40] by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period.[47]
There is no merit in petitioners contention.
The second element is missing to characterize the Deed of Sale as a form of pactum
The aforequoted Section 18 grants to mortgagors of Veterans Bank the right to redeem their judicially commissorium. Veterans Bank did not, upon the petitioners default, automatically acquire or appropriate
foreclosed properties. This provision had to be included because in judicial foreclosures, mortgagors the mortgaged property for itself. On the contrary, the Veterans Bank resorted to extrajudicial foreclosure
generally do not have the right of redemption unless there is an express grant by law.[41] and was issued a Certificate of Sale by the sheriff as proof of its purchase of the subject property during
the foreclosure sale. That Veterans Bank went through all the stages of extrajudicial foreclosure indicates
But, contrary to petitioners averments, there is nothing in Section 18 which can be interpreted to mean that that there was no pactum commissorium.
Veterans Bank is limited to judicial foreclosures only, or that it cannot avail itself of the benefits provided
under Act No. 3135,[42] as amended, allowing extrajudicial foreclosures. Does the right to a writ of possession
prescribe?
Moreover, the availability of extra-judicial foreclosure to a mortgagee depends upon the agreement of the
contracting parties. Section 1 of Act No. 3135 provides:
Petitioners assail the CAs ruling that the issuance of a writ of possession does not prescribe. [48] They
Section 1. When a sale is made under a special power inserted in or maintain that Articles 1139,[49] 1149,[50] and 1150[51] of the Civil Code regarding prescriptive periods cover
attached to any real-estate mortgage hereafter made as security for the payment of all kinds of action, which necessarily include the issuance of a writ of possession. Petitioners posit that, for
money or the fulfillment of any other obligation, the provisions of the following purposes of the latter, it is the five-year prescriptive period provided in Article 1149 of the Civil Code
sections shall govern as to the manner in which the sale and redemption shall which applies because Act No. 3135 itself did not provide for its prescriptive period. Thus, Veterans Bank
be effected, whether or not provision for the same is made in the power. (Emphasis had only five years from September 12, 1983, the date when the Certificate of Sale was issued in its favor,
supplied.) to move for the issuance of a writ of possession.[52]
Respondent argues that jurisprudence has consistently held that a registered owner of the land, such as the
buyer in an auction sale, is entitled to a writ of possession at any time after the consolidation of ownership.
[53]
In the case at bar, paragraph (c) of the parties REM granted Veterans Bank the special power as attorney-
in-fact of the petitioners to perform all acts necessary for the purpose of extrajudicial foreclosure under Act
No. 3135. Thus, there is no obstacle preventing Veterans Bank from availing itself of the remedy of We cannot accept petitioners contention. We have held before that the purchasers right to request for the
extrajudicial foreclosure. issuance of the writ of possession of the land never prescribes.[54] The right to possess a property merely
follows the right of ownership,[55] and it would be illogical to hold that a person having ownership of a
Was the consolidation of title done in parcel of land is barred from seeking possession thereof. In Calacala v. Republic of the Philippines,[56] the
accordance with law? Republic was the highest bidder in the public auction but failed for a long period of time to execute an
Affidavit of Consolidation and to seek a writ of possession. Calacala insisted that, by such inaction, the
Republics right over the land had prescribed, been abandoned or waived. The Courts language in rejecting
Petitioners argue that Veterans Bank is not entitled to a writ of possession because it failed to properly Calacalas theory is illuminating:
consolidate its title over the subject property. [43] They maintain that the Deed of Sale executed by the

152
[T]he Republics failure to execute the acts referred to by the petitioners within ten
(10) years from the registration of the Certificate of Sale cannot, in any way, operate
to restore whatever rights petitioners predecessors-in-interest had over the
same. For sure, petitioners have yet to cite any provision of law or rule of
jurisprudence, and we are not aware of any, to the effect that the failure of a buyer in
a foreclosure sale to secure a Certificate of Final Sale, execute an Affidavit of
Consolidation of Ownership and obtain a writ of possession over the property thus
acquired, within ten (10) years from the registration of the Certificate of Sale will
operate to bring ownership back to him whose property has been previously
foreclosed and sold. x x x

xxxx

Moreover, with the rule that the expiration of the 1-year redemption period
forecloses the obligors right to redeem and that the sale thereby becomes absolute,
the issuance thereafter of a final deed of sale is at best a mere formality and mere
confirmation of the title that is already vested in the purchaser. x x x[57]

Moreover, the provisions cited by petitioners refer to prescription of actions. An action is defined as an
ordinary suit in a court of justice, by which one party prosecutes another for the enforcement or protection
of a right, or the prevention or redress of a wrong.[58] On the other hand [a] petition for the issuance of the
writ, under Section 7 of Act No. 3135, as amended, is not an ordinary action filed in court, by which one
party sues another for the enforcement or protection of a right, or prevention or redress of a wrong. It is in
the nature of an ex parte motion [in] which the court hears only one side. It is taken or granted at the
instance and for the benefit of one party, and without notice to or consent by any party adversely
affected. Accordingly, upon the filing of a proper motion by the purchaser in a foreclosure sale, and the
approval of the corresponding bond, the writ of possession issues as a matter of course and the trial court
has no discretion on this matter.[59]

WHEREFORE, premises considered, the Petition is DENIED for lack of merit. The CA Decision
dated June 10, 2005 in CA-G.R. SP No. 89248 is AFFIRMED.

SO ORDERED.

153
FIRST DIVISION Aklan, in favor of Moneytrend Lending Corporation, as security for two
promissory notes.

VIOLA CAHILIG and ANTONIO G. G.R. No. 164470 On March 31, 1999, Moneytrend Lending Corporation assigned the
SIEL, JR., promissory notes and deeds of real estate mortgage to private respondent
Petitioners, Mercantile Credit Resources Corporation.
Present:
- versus - In view of the non-payment of the loans, private respondent caused the
CORONA, C.J., extrajudicial foreclosure of the mortgages. It then acquired the mortgaged
HON. EUSTAQUIO G. TERENCIO, Chairperson, property as the highest bidder. A certificate of sale was subsequently
Regional Trial Court of Kalibo, Aklan, LEONARDO-DE CASTRO, issued in favor of private respondent. Soterania Siel failed to redeem the
Branch 8; THE PROVINCIAL SHERIFF, BERSAMIN, property within the prescribed period and a final deed of sale was issued
Kalibo, Aklan; and MERCANTILE DEL CASTILLO, and by the Sheriff on March 19, 2001 in favor of private respondent.
CREDIT RESOURCES CORPORATION, VILLARAMA, JR., JJ.
Respondents. On May 2, 2001, private respondent filed with the Regional Trial Court,
Promulgated: Branch 8, Kalibo, Aklan an ex-parte motion for the issuance of a writ of
possession over the subject property. In an Order dated June 29, 2001,
November 28, 2011 respondent Judge granted the motion and directed the Sheriff to place
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x private respondent in possession of the subject property, ruling thus:

Jhett Tolentino, Corporate Secretary of the petitioner,


DECISION testified that from the time the mortgage was
constituted and thereafter assigned to the petitioner, it
was the mortgagor who remained in possession of the
mortgaged property. Lately, when he inspected the
LEONARDO-DE CASTRO, J.: property after it was foreclosed, it was Viola Cahilig,
the daughter of Soterania G. Siel, the previous owner,
who was in possession of the same.
In this petition for review on certiorari with a prayer for the issuance of a writ of preliminary
mandatory injunction under Rule 45 of the 1997 Rules of Civil Procedure, the Court is urged In the light of the foregoing, petitioner would want
to annul and set aside the Decision[1] dated July 23, 2003 as well as the Resolution[2] dated July now that a writ of possession be issued in its favor
9, 2004 both issued by the Court of Appeals in CA-G.R. SP No. 76475, entitled, Viola Cahilig citing the provisions of Sec. 7 of R.A. 3135.
and Antonio G. Siel, Jr. v. Hon. Eustaquio G. Terencio, Mercantile Credit Resources
Corporation and the Provincial Sheriff, Kalibo, Aklan. The July 23, 2003 Decision dismissed After a careful assessment of the evidence, the Court
for lack of merit the petition for certiorari filed by petitioners assailing the issuance of an alias is convinced that the petitioner has substantiated all its
writ of possession via an Order[3] dated December 20, 2002 by the Regional Trial Court (RTC) allegations in the petition that entitles the petitioner to
of Kalibo, Aklan, Branch 8 in SP. Proc. No. 6923, entitled In The Matter For Ex-Parte the issuance of the writ.
Issuance Of Writ Of Possession Covering Lot 402-Part, Being A Portion Of Lot 402, NR-06-
000001 (And Its Improvements Thereon) Malay Cadastre, Covered By ARP/TD No. 93-003- In IFC v. Nerta (19 SCRA 181) it was held that in
1674 (PIN-038-12-003-13-014), Pursuant To Section 7 Of Act No. 3135. The July 9, 2004 Extrajudicial Foreclosure of Real Estate Mortgage, the
Resolution, on the other hand, denied petitioners motion for reconsideration. possession of the property sold may be given to the
purchaser by the sheriff after the period of redemption
The facts of this case, as outlined in the Decision dated July 23, 2003 of the Court of had expired unless a third person is actually holding
Appeals, follow: the property adverse to the mortgagor. An ordinary
action for the recovery of possession is not necessary.
It appears that on April 14, 1997 and September 17, 1997, Soterania G.
Siel executed deeds of real estate mortgage covering a portion of Lot 402, From the evidence, it was shown that the property
consisting of 2,882 square meters, located at Barangay Balabag, Malay, sought to be possessed by the petitioner by virtue of
this petition is not in the possession of any third

154
person. The present possessor is the immediate Provincial Sheriff, accompanied by private respondents counsel and escorted by police
successor-in-interest of the mortgagor. officers, forcibly ejected petitioner Viola Cahilig from the subject property, injured the latter,
and destroyed the structures located therein.
A motion for reconsideration was filed by petitioner Viola Cahilig, for
herself and in behalf of the heirs of Soterania Siel, alleging that private In its July 23, 2003 Decision, the Court of Appeals pointed out that the principal issue to be
respondent is guilty of forum shopping in view of the pendency of the resolved in the case being appealed by the petitioners is whether or not petitioners are third
appeal in Civil Case No. 6247 involving the same parties and subject parties holding the subject property adversely to the judgment debtor which was the late
matter. The motion for reconsideration was denied in an Order dated Soterania Siel. The Court of Appeals ruled in the negative and dismissed the petition
October 18, 2001. for certiorari for lack of merit.

The writ of possession was implemented by Sheriff Victor B. Beluso on A motion for reconsideration was filed by petitioners but this was denied by the
January 21, 2002 by serving a notice to vacate on petitioner Viola Cahilig, Court of Appeals in its July 9, 2004 Resolution.
who manifested that she could turn over only her 1/6 share over the
property as the other shares do not belong to her. On March 11, 2002, the Hence, petitioners take this appeal wherein they put forth the following issues for
Sheriff received a third party claimants affidavit executed by petitioner consideration:
Antonio Siel, Jr., who claimed that he and his siblings bought the property
from their mother, Soterania Siel, on March 2, 1993, attaching thereto I
copies of the deeds of sale in their favor.
THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN
On November 25, 2002, private respondent filed a motion for the issuance NOT NULLIFYING THE ALIAS WRIT OF POSSESSION ISSUED BY
of an alias writ of possession. Said motion was opposed by petitioners THE TRIAL COURT CONSIDERING THAT PETITIONERS, BEFORE
Viola Cahilig and Antonio G. Siel, Jr. alleging that they and their siblings THEIR FORCIBLE EVICTION, HAVE ACTUALLY POSSESSED THE
have been the owners of the property since 1993, that is, before the SUBJECT PROPERTY AS THIRD [PARTIES] ADVERSE TO THE
mortgage was constituted. In an Order dated December 20, 2002, MORTGAGOR, SOTERANIA SIEL, AS EVIDENCED BY THE THIRD
respondent Judge granted the motion for the issuance of an alias writ of PARTY CLAIM AND THE NOTARIZED DEEDS OF SALE.
possession and directed the Sheriff to implement the same, with police
assistance if necessary. II

Petitioners motion for reconsideration, motion for inhibition and motion to THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
quash the alias writ of possession were denied in an Order dated March HOLDING THAT THE DEEDS OF SALE EXECUTED BY THE
21, 2003, although private respondent was ordered to post an indemnity PETITIONERS MOTHER, SOTERANIA SIEL, IN THEIR FAVOR AND
bond in the amount of P100,000.00 to answer for whatever damages THEIR SIBLINGS ARE FICTITIOUS AND WERE ONLY PREPARED
petitioners may suffer in the event that they would be able to vindicate TO THWART THE IMPLEMENTATION OF THE WRIT OF
their claim in the civil cases they filed against private respondent. An POSSESSION, MERELY RELYING ALONE ON THE ALLEGED
indemnity supersedeas bond was then filed by private respondent and ADMISSION OF PETITIONERS IN THEIR SUPPLEMENTAL
approved by respondent Judge.[4] PETITION FOR CERTIORARI THAT THEY HAVE INHERITED THE
SUBJECT PROPERTY FROM THEIR DECEASED MOTHER, BUT
OVERLOOKING THE CONSISTENT AND INSISTENT CLAIM OF
On March 28, 2003, petitioners instituted a special civil action for certiorarialleging grave PETITIONERS THAT THE ONE-SIXTH (1/6) PORTIONS OF THE
abuse of discretion on the part of respondent Judge Eustaqio G. Terencio for not quashing the PROPERTY WERE SOLD TO PETITIONERS AND THE SIBLINGS
alias writ of possession in view of their third-party claim and irregularities in the mortgage FOR A VALUABLE CONSIDERATION, AND CONSIDERING THAT
transactions as the loans were allegedly not obtained by Soterania Siel but by petitioner Viola SAID DOCUMENTS, BEING NOTARIZED, ARE ENTITLED TO THE
Cahilig and Shirley Candolita. Petitioners prayed for the issuance of a restraining order to PRESUMPTION OF REGULARITY AND ENTITLED TO BE GIVEN
enjoin the implementation of the alias writ of possession. [5] WEIGHT AND PROBATIVE VALUE.

This was followed by the filing of a Supplemental Petition for Certiorari with Preliminary III
Injunction with Leave of Court[6] on April 11, 2003 and a Second Supplemental Petition
for Certiorari with Prayer for Preliminary Mandatory Injunction with Leave of Court and THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE
Motion for Contempt of Court[7] on April 22, 2003. The latter pleading alleged that respondent MISAPPREHENSION OF FACTS AND GROSSLY MISSAPRECIATED

155
THE EVIDENCE IN GRANTING THE ISSUANCE OF AN ALIAS In fine, the focal issue of this case is whether or not the issuance of the writ of
WRIT OF POSSESSION DESPITE FATAL DEFECTS OF THE possession over the property subject of the foreclosure of the real estate mortgage is proper.
EXTRAJUDICIAL FORECLOSURE PROCEEDINGS AND IN
CONSIDERING AS OF NO MOMENT THE PENDENCY OF THE We previously held in Villanueva v. Cherdan Lending Investors Corporation[11] that:
APPEALED CASES BEFORE THE COURT OF APPEALS FOR
ANNULMENT AND/OR DECLARATION OF THE NULLITY OF THE A writ of possession is an order of the court commanding the
DEEDS OF REAL ESTATE MORTGAGE AND FORECLOSURE sheriff to place a person in possession of a real or personal property. It
PROCEEDINGS, INCLUDING THE CRIMINAL CASE FOR ESTAFA, may be issued in an extrajudicial foreclosure of a real estate mortgage
AND THAT THE ISSUANCE OF THE WRIT OF POSSESSION TO A under Section 7 of Act 3135, as amended by Act 4118, either 1) within the
PURCHASER IN AN EXTRAJUDICIAL FORECLOSURE SALE IS one-year redemption period, upon the filing of a bond, or 2) after the lapse
MERELY A MINISTERIAL FUNCTION OF THE COURT AND MAY of the redemption period, without need of a bond or of a separate and
NOT BE STAYED BY A PENDING ACTION FOR ANNULMENT OF independent action.[12]
MORTGAGE OR THE FORECLOSURE ITSELF.

IV The aforementioned provision of law, Section 7 of Act 3135 as amended, in turn,


states:
THE DECISION OF THE HONORABLE COURT OF APPEALS
DISREGARDED AND/OR FAILED TO RESOLVE THE VITAL ISSUES In any sale made under the provisions of this Act, the purchaser
RAISED BY PETITIONERS IN THEIR SECOND SUPPLEMENTAL may petition the Court of First Instance of the province or place where the
PETITION AND THE MOTION FOR CONTEMPT CONCERNING property or any part thereof is situated, to give him possession thereof
THE FORCIBLE EJECTMENT OF PETITIONER VIOLA CAHILIG during the redemption period, furnishing bond in an amount equivalent to
FROM THE SUBJECT PROPERTY, INJURING HER AND the use of the property for a period of twelve months, to indemnify the
DESTROYING THE STRUCTURES BELONGING TO HER AND debtor in case it be shown that the sale was made without violating the
OTHER OCCUPANTS ERECTED ON THE SUBJECT PROPERTY.[8] mortgage or without complying with the requirements of this Act. Such
petition shall be made under oath and filed in form of an ex parte motion
in the registration or cadastral proceedings if the property is registered, or
On the other hand, private respondent, in its Memorandum, [9] presented the in special proceedings in the case of property registered under the
following issues for resolution: Mortgage Law or under section one hundred and ninety-four of the
Administrative Code, or of any other real property encumbered with a
a. Whether or not the Petition had complied with the mandatory mortgage duly registered in the office of any register of deeds in
requirement of execution of non-forum shopping certification by accordance with any existing law, and in each case the clerk of the court
petitioners. shall, upon the filing of such petition, collect the fees specified in
paragraph eleven of section one hundred and fourteen of Act Numbered
b. Whether or not petitioner Viola Cahilig is a third-party claimant to Four hundred and ninety-six, as amended by Act Numbered Twenty-eight
the subject property adverse to the judgment debtor Soterania Siel. hundred and sixty-six, and the court shall, upon approval of the bond,
order that a writ of possession issue, addressed to the sheriff of the
c. Whether or not petitioner Viola Cahilig is bound by the Alias Writ of province in which the property is situated, who shall execute said order
Possession, as she was bound by the original Writ of Possession. immediately.

d. Whether or not the case at bar challenging the issuance and the
implementation of the Alias Writ of Possession can continue to Moreover, in Asia United Bank v. Goodland Company, Inc.,[13] we pointed out that:
survive after the issues on the validity of the mortgage and of the
foreclosure proceedings of the subject property had already been It is a time-honored legal precept that after the consolidation of
decided and rendered res judicata in favor of respondent Mercantile titles in the buyers name, for failure of the mortgagor to redeem,
Credit Resources Corporation and of its predecessor-in-interest. [10] entitlement to a writ of possession becomes a matter of right. As the
confirmed owner, the purchasers right to possession becomes
absolute. There is even no need for him to post a bond, and it is the
The petition is without merit. ministerial duty of the courts to issue the same upon proper application
and proof of title. To accentuate the writs ministerial character, the Court

156
has consistently disallowed injunction to prohibit its issuance despite a redemptioner by the same officer unless a third party is actually holding
pending action for annulment of mortgage or the foreclosure itself. the property adversely to the judgment obligor. (Emphasis supplied.)
[14]
(Emphasis supplied.)

In a number of cases, we have held that the obligation of the court to issue an ex
In the case at bar, there is no dispute that private respondent caused the extrajudicial parte writ of possession in favor of the purchaser in an extrajudicial foreclosure sale ceases to
foreclosure of the real estate mortgage pursuant to Section 7 of Act 3135, as amended by Act be ministerial once it appears that there is a third party in possession of the property who is
4118, over the property at issue after Soterania Siel defaulted on her loan payments when they claiming a right adverse to that of the debtor/mortgagor. [16]
became due under the promissory notes she had executed. It is likewise undisputed that private
respondent purchased the same property at the extrajudicial foreclosure sale and, as a result However, unlike in those cases, the third-party claim in the instant case was not
thereof, a certificate of sale was issued in its favor. Following Soterania Siels failure to redeem presented at the onset of litigation. In fact, it was not the original theory propounded by
the property within the prescribed period, a final deed of sale was issued by the Sheriff in the petitioners when they filed a motion for reconsideration of the Order [17] dated June 29, 2001
name of private respondent. issued by the trial court which first granted the writ of possession in private respondents
favor. More importantly, the judicial admissions made by petitioners in their motion were
Given this factual premise, private respondent acted well within its legal rights when wholly incompatible with their belated claim that they are actually vendees of Soterania Siels
it petitioned the trial court ex parte for the issuance of a writ of possession which the trial property.
court eventually granted. We note, too, that the trial court issued the alias writ of possession
only after giving due consideration to petitioners motion for reconsideration and, Judicial admissions are discussed in Section 4, Rule 129 of the Rules of Court which
subsequently, to their supposed third-party claim wherein petitioners allege that they and their states that:
other siblings had already bought the subject property from their mother, the now deceased
Soterania Siel, prior to the constitution of the mortgage and that they were in actual possession Sec. 4. Judicial Admissions. - An admission, verbal or written,
of the land in dispute. made by a party in the course of the proceedings in the same case, does
not require proof. The admission may be contradicted only by showing
It is on the strength of this third-party claim that petitioners doggedly oppose the that it was made through palpable mistake or that no such admission was
trial courts issuance of the said writ of possession arguing that under Section 33, Rule 39 of made.
the Rules of Court, which is made to apply suppletorily to the extrajudicial foreclosure of real
estate mortgages under Section 6 of Act 3135, as amended by Act 4118, [15] the possession of
the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure unless a In Maagad v. Maagad,[18] we explained:
third party is actually holding the property adversely to the judgment debtor, to wit:
It is well-settled that a judicial admission conclusively binds the
Sec. 33. Deed and possession to be given at expiration of party making it. He cannot thereafter take a position contradictory to, or
redemption period; by whom executed or given. - If no redemption be inconsistent with his pleadings. Acts or facts admitted do not require proof
made within one (1) year from the date of the registration of the certificate and cannot be contradicted unless it is shown that the admission was made
of sale, the purchaser is entitled to a conveyance and possession of the through palpable mistake or that no such admission was made. [19]
property; or, if so redeemed whenever sixty (60) days have elapsed and no
other redemption has been made, and notice thereof given, and the time
for redemption has expired, the last redemptioner is entitled to the In the case at bar, petitioners admitted in their Urgent Motion for
conveyance and possession; but in all cases the judgment obligor shall Reconsideration[20] dated July 23, 2001 that they opposed the issuance of the writ of possession
have the entire period of one (1) year from the date of the registration of over the subject property because of the pendency of Civil Case No. 6247 filed before the
the sale to redeem the property. The deed shall be executed by the officer RTC of Kalibo, Aklan, Branch 6. In the said civil case, petitioners, along with their other
making the sale or by his successor in office, and in the latter case shall siblings, sought the annulment of the real estate mortgage and the foreclosure proceedings
have the same validity as though the officer making the sale had continued affecting the subject property in their capacity as heirs of the now deceased Soterania Siel and
in office and executed it. not as vendees to an alleged sale of the land in dispute. It must be stressed that petitioners
raised for the first time their theory that they are third parties (vendees) holding the property
Upon the expiration of the right of redemption, the purchaser or adversely to the mortgagor only in their Opposition to the Motion for Issuance of Alias Writ of
redemptioner shall be substituted to and acquire all the rights, title, interest Possession, after the trial court had already issued the first order granting a writ of possession
and claim of the judgment obligor to the property as of the time of the to private respondent and after the above-mentioned Urgent Motion for Reconsideration (of
levy. The possession of the property shall be given to the purchaser or last the original order issuing a writ of possession) had been denied.

157
In light of this written admission in their pleading, petitioners cannot be allowed to
subsequently claim in the same proceedings that they oppose the issuance of the writ of
possession because they already owned the subject property prior to the constitution of the
mortgage without first showing that the contradictory admission was made through palpable
mistake or that no such admission was made.This petitioners failed to do and, worse, they
offer no explanation as to why they failed to adduce evidence of the purported sale of the
property in their favor at the earliest opportunity. As a consequence thereof, they must be
bound by their original admission that they are merely successors in interest of the mortgagor,
rather than adverse claimants.

Moreover, it is not disputed that the subject property is unregistered land and is
covered by a tax declaration in the name of Soterania Siel when the same was mortgaged by
her in 1997 in favor of private respondents predecessor-in-interest, Moneytrend Lending
Corporation. As correctly pointed out by the Court of Appeals, Section 113 of Presidential
Decree No. 1529 or the Property Registration Decree is applicable and the same provides
that (n)o deed, conveyance, mortgage, lease, or other voluntary instrument affecting land not
registered under the Torrens system shall be valid, except as between the parties thereto,
unless such instrument shall have been recorded in the manner herein prescribed in the office
of the Register of Deeds for the province or city where the land lies. x x x.

In the present case, petitioners failed to adduce evidence showing that the deeds of
sale in their favor were recorded in the office of the Register of Deeds or that they were
annotated on the tax declaration of Soterania Siel in order to affect the subject property insofar
as third persons are concerned, specially private respondent and its predecessor-in-
interest. Petitioners likewise failed to prove that private respondent and its predecessor-in-
interest had actual or constructive knowledge of the alleged sale of the subject property in
their favor prior to the filing of the third-party claim. Lastly, petitioners did not dispute the
testimony of private respondents Corporate Secretary, Jhett Tolentino, who stated that it was
Soterania Siel who was in possession of the subject property when the mortgage was
constituted, which was later assigned to private respondent, and that it was only after the
subject property was foreclosed that the same was possessed by petitioner Viola Cahilig. Thus,
in light of the foregoing, the alleged sale of the land in dispute, even if true, does not bind
private respondent.

All in all, we find that the Court of Appeals committed no reversible error when it
affirmed the trial courts issuance of a writ of possession in the present case, despite the
pendency of civil proceedings to annul the mortgage and the foreclosure sale and in light of
petitioners own failure to prove (a) their status as third parties to the mortgage, and (b) notice
to the mortgagee of the supposed sale of the subject property in their favor. As discussed
above, these actions on the part of the lower courts were in keeping with prevailing
jurisprudence.

WHEREFORE, premises considered, the petition is DENIED. The assailed


Decision dated July 23, 2003 as well as the Resolution dated July 9, 2004 of the Court of
Appeals in CA-G.R. SP No. 76475 are AFFIRMED.

SO ORDERED.

158
FIRST DIVISION III. MACHINERIES & EQUIPMENT situated, located and/or installed on the
G.R. No. 120098 October 2, 2001 above-mentioned lot located at . . .
RUBY L. TSAI, petitioner, (a) Forty eight sets (48) Vayrow Knitting Machines . . .
vs. (b) Sixteen sets (16) Vayrow Knitting Machines . . .
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R (c) Two (2) Circular Knitting Machines . . .
VILLALUZ, respondents. (d) Two (2) Winding Machines . . .
x---------------------------------------------------------x (e) Two (2) Winding Machines . . .
[G.R. No. 120109. October 2, 2001.] IV. Any and all replacements, substitutions, additions, increases and accretions to
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, above properties.
vs. xxx xxx xxx3
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan
VILLALUZ, respondents. was secured by a Chattel Mortgage over personal properties enumerated in a list attached
QUISUMBING, J.: thereto. These listed properties were similar to those listed in Annex A of the first mortgage
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. deed.
32986, affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in Civil Case After April 23, 1979, the date of the execution of the second mortgage mentioned above,
No. 89-48265. Also assailed is respondent court's resolution denying petitioners' motion for EVERTEX purchased various machines and equipments.
reconsideration. On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three docketed as SP Proc. No. LP-3091-P before the defunct Court of First Instance of Pasay City,
million peso (P3,000,000.00) loan from petitioner Philippine Bank of Communications Branch XXVIII. The CFI issued an order on November 24, 1982 declaring the corporation
(PBCom). As security for the loan, EVERTEX executed in favor of PBCom, a deed of Real insolvent. All its assets were taken into the custody of the Insolvency Court, including the
and Chattel Mortgage over the lot under TCT No. 372097, where its factory stands, and the collateral, real and personal, securing the two mortgages as abovementioned.
chattels located therein as enumerated in a schedule attached to the mortgage contract. The In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter
pertinent portions of the Real and Chattel Mortgage are quoted below: commenced extrajudicial foreclosure proceedings against EVERTEX under Act 3135,
MORTGAGE otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in
(REAL AND CHATTEL) or Annexed to Real Estate Mortgages" and Act 1506 or "The Chattel Mortgage Law". A Notice
xxx xxx xxx of Sheriff's Sale was issued on December 1, 1982.
The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, On December 15, 1982, the first public auction was held where petitioner PBCom emerged as
to the MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings the highest bidder and a Certificate of Sale was issued in its favor on the same date. On
and improvements now existing or which may hereafter exist thereon, situated in . . . December 23, 1982, another public auction was held and again, PBCom was the highest
"Annex A" bidder. The sheriff issued a Certificate of Sale on the same day.
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it.
PBCommunications — continued) In November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai for
LIST OF MACHINERIES & EQUIPMENT P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel to Tsai
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in for P9,000,000.00, including the contested machineries.
Hongkong: On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and
Serial Numbers Size of Machines damages with the Regional Trial Court against PBCom, alleging inter alia that the
xxx xxx xxx extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law.
B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan. EVERTEX claimed that no rights having been transmitted to PBCom over the assets of
xxx xxx xxx insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and should
C. Two (2) Circular Knitting Machines made in West Germany. reconvey the assets.
xxx xxx xxx Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the
D. Four (4) Winding Machines. contested properties, which were not included in the Real and Chattel Mortgage of November
xxx xxx xxx 26, 1975 nor in the Chattel Mortgage of April 23, 1979, and neither were those properties
SCHEDULE "A" included in the Notice of Sheriff's Sale dated December 1, 1982 and Certificate of Sale . . .
I. TCT # 372097 - RIZAL dated December 15, 1982.
xxx xxx xxx The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular
II. Any and all buildings and improvements now existing or hereafter to exist on the Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1
above-mentioned lot. Heatset Equipment.

159
The RTC found that the lease and sale of said personal properties were irregular and illegal THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
because they were not duly foreclosed nor sold at the December 15, 1982 auction sale since ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND
these were not included in the schedules attached to the mortgage contracts. The trial court EXPENSES OF LITIGATION — FOR WANT OF VALID FACTUAL AND
decreed: LEGAL BASIS.
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and V
against the defendants: THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN
1. Ordering the annulment of the sale executed by defendant Philippine Bank of HOLDING AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION AND
Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it LACHES.6
affects the personal properties listed in par. 9 of the complaint, and their return to the In G.R. No. 120098, PBCom raised the following issues:
plaintiff corporation through its assignee, plaintiff Mamerto R. Villaluz, for I.
disposition by the Insolvency Court, to be done within ten (10) days from finality of DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED
this decision; UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY
2. Ordering the defendants to pay jointly and severally the plaintiff corporation the OUTSIDE OF THE 1975 DEED OF REAL ESTATE MORTGAGE AND EXCLUDED
sum of P5,200,000.00 as compensation for the use and possession of the properties THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY PBCOM
in question from November 1986 to February 1991 and P100,000.00 every month DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTER-ACQUIRED
thereafter, with interest thereon at the legal rate per annum until full payment; PROPERTIES DURING THE LIFETIME OF THE MORTGAGE SHALL FORM PART
3. Ordering the defendants to pay jointly and severally the plaintiff corporation the THEREOF, AND DESPITE THE UNDISPUTED FACT THAT SAID MACHINERIES ARE
sum of P50,000.00 as and for attorney's fees and expenses of litigation; BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY MORTGAGED
4. Ordering the defendants to pay jointly and severally the plaintiff corporation the BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL ESTATE
sum of P200,000.00 by way of exemplary damages; TAX PURPOSES?
5. Ordering the dismissal of the counterclaim of the defendants; and II
6. Ordering the defendants to proportionately pay the costs of suit. CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN
SO ORDERED.4 GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision AS OF 1982 TOTALLED P9,547,095.28, WHO HAD SPENT FOR MAINTENANCE AND
dated August 31, 1994, the dispositive portion of which reads: SECURITY ON THE DISPUTED MACHINERIES AND HAD TO PAY ALL THE BACK
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED TO RETURN TO EVER
reduction of the actual damages, from P100,000.00 to P20,000.00 per month, from November THE SAID MACHINERIES OR IN LIEU THEREOF BE ASSESSED DAMAGES. IS THAT
1986 until subject personal properties are restored to appellees, the judgment appealed from is SITUATION TANTAMOUNT TO A CASE OF UNJUST ENRICHMENT?7
hereby AFFIRMED, in all other respects. No pronouncement as to costs. 5 The principal issue, in our view, is whether or not the inclusion of the questioned properties in
Motion for reconsideration of the above decision having been denied in the resolution of April the foreclosed properties is proper. The secondary issue is whether or not the sale of these
28, 1995, PBCom and Tsai filed their separate petitions for review with this Court. properties to petitioner Ruby Tsai is valid.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court: For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by
I treating the 1981 acquired units of machinery as chattels instead of real properties within their
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN earlier 1975 deed of Real and Chattel Mortgage or 1979 deed of Chattel
EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE Mortgage.8 Additionally, Tsai argues that respondent court erred in holding that the disputed
1981 ACQUIRED MACHINERIES AS CHATTELS INSTEAD OF REAL 1981 machineries are not real properties.9 Finally, she contends that the Court of Appeals erred
PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL in holding against petitioner's arguments on prescription and laches 10 and in assessing
MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE. petitioner actual damages, attorney's fees and expenses of litigation, for want of valid factual
II and legal basis.11
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN Essentially, PBCom contends that respondent court erred in affirming the lower court's
HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL judgment decreeing that the pieces of machinery in dispute were not duly foreclosed and could
PROPERTIES DEEMED PART OF THE MORTGAGE — DESPITE THE CLEAR not be legally leased nor sold to Ruby Tsai. It further argued that the Court of Appeals'
IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE pronouncement that the pieces of machinery in question were personal properties have no
SUPREME COURT. factual and legal basis. Finally, it asserts that the Court of Appeals erred in assessing damages
III and attorney's fees against PBCom.
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN In opposition, private respondents argue that the controverted units of machinery are not "real
DEEMING PETITIONER A PURCHASER IN BAD FAITH. properties" but chattels, and, therefore, they were not part of the foreclosed real properties,
IV rendering the lease and the subsequent sale thereof to Tsai a nullity. 12

160
Considering the assigned errors and the arguments of the parties, we find the petitions devoid considered a personal property if there is a stipulation as when it is used as security in the
of merit and ought to be denied. payment of an obligation where a chattel mortgage is executed over it, as in the case at bar.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage
certiorari under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to
law, not of fact, unless the factual findings complained of are devoid of support by the treat all properties included therein as immovable, and (2) attached to the said contract a
evidence on record or the assailed judgment is based on misapprehension of facts. 13 This rule separate "LIST OF MACHINERIES & EQUIPMENT". These facts, taken together, evince the
is applied more stringently when the findings of fact of the RTC is affirmed by the Court of conclusion that the parties' intention is to treat these units of machinery as chattels. A fortiori,
Appeals.14 the contested after-acquired properties, which are of the same description as the units
The following are the facts as found by the RTC and affirmed by the Court of Appeals that are enumerated under the title "LIST OF MACHINERIES & EQUIPMENT," must also be treated
decisive of the issues: (1) the "controverted machineries" are not covered by, or included in, as chattels.
either of the two mortgages, the Real Estate and Chattel Mortgage, and the pure Chattel Accordingly, we find no reversible error in the respondent appellate court's ruling that
Mortgage; (2) the said machineries were not included in the list of properties appended to the inasmuch as the subject mortgages were intended by the parties to involve chattels, insofar as
Notice of Sale, and neither were they included in the Sheriff's Notice of Sale of the foreclosed equipment and machinery were concerned, the Chattel Mortgage Law applies, which provides
properties.15 in Section 7 thereof that: "a chattel mortgage shall be deemed to cover only the property
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, described therein and not like or substituted property thereafter acquired by the mortgagor
bolted or cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso and placed in the same depository as the property originally mortgaged, anything in the
facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, mortgage to the contrary notwithstanding."
however, does not settle the issue. Mere nuts and bolts do not foreclose the controversy. We And, since the disputed machineries were acquired in 1981 and could not have been involved
have to look at the parties' intent. in the 1975 or 1979 chattel mortgages, it was consequently an error on the part of the Sheriff
While it is true that the controverted properties appear to be immobile, a perusal of the to include subject machineries with the properties enumerated in said chattel mortgages.
contract of Real and Chattel Mortgage executed by the parties herein gives us a contrary As the auction sale of the subject properties to PBCom is void, no valid title passed in its
indication. In the case at bar, both the trial and the appellate courts reached the same finding favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary principle
that the true intention of PBCOM and the owner, EVERTEX, is to treat machinery and of nemo dat quod non habet, one cannot give what one does not have.17
equipment as chattels. The pertinent portion of respondent appellate court's ruling is quoted Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a
below: nullity, she is nevertheless a purchaser in good faith and for value who now has a better right
As stressed upon by appellees, appellant bank treated the machineries as chattels; than EVERTEX.
never as real properties. Indeed, the 1975 mortgage contract, which was actually real To the contrary, however, are the factual findings and conclusions of the trial court that she is
and chattel mortgage, militates against appellants' posture. It should be noted that not a purchaser in good faith. Well-settled is the rule that the person who asserts the status of a
the printed form used by appellant bank was mainly for real estate mortgages. But purchaser in good faith and for value has the burden of proving such assertion. 18 Petitioner
reflective of the true intention of appellant PBCOM and appellee EVERTEX was the Tsai failed to discharge this burden persuasively.
typing in capital letters, immediately following the printed caption of mortgage, of Moreover, a purchaser in good faith and for value is one who buys the property of
the phrase "real and chattel." So also, the "machineries and equipment" in the another without notice that some other person has a right to or interest in such property and
printed form of the bank had to be inserted in the blank space of the printed contract pays a full and fair price for the same, at the time of purchase, or before he has notice of the
and connected with the word "building" by typewritten slash marks. Now, then, if claims or interest of some other person in the property. 19 Records reveal, however, that when
the machineries in question were contemplated to be included in the real estate Tsai purchased the controverted properties, she knew of respondent's claim thereon. As borne
mortgage, there would have been no necessity to ink a chattel mortgage specifically out by the records, she received the letter of respondent's counsel, apprising her of
mentioning as part III of Schedule A a listing of the machineries covered thereby. It respondent's claim, dated February 27, 1987.20 She replied thereto on March 9, 1987.21 Despite
would have sufficed to list them as immovables in the Deed of Real Estate Mortgage her knowledge of respondent's claim, she proceeded to buy the contested units of machinery
of the land and building involved. on May 3, 1988. Thus, the RTC did not err in finding that she was not a purchaser in good
As regards the 1979 contract, the intention of the parties is clear and beyond faith.
question. It refers solely to chattels. The inventory list of the mortgaged properties is Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed
an itemization of sixty-three (63) individually described machineries while the properties are located is equally unavailing. This defense refers to sale of lands and not to sale
schedule listed only machines and 2,996,880.50 worth of finished cotton fabrics and of properties situated therein. Likewise, the mere fact that the lot where the factory and the
natural cotton fabrics.16 disputed properties stand is in PBCom's name does not automatically make PBCom the owner
In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by of everything found therein, especially in view of EVERTEX's letter to Tsai enunciating its
the evidence on record, we find no compelling reason to depart therefrom. claim.
Too, assuming arguendo that the properties in question are immovable by nature, nothing Finally, petitioners' defense of prescription and laches is less than convincing. We find no
detracts the parties from treating it as chattels to secure an obligation under the principle of cogent reason to disturb the consistent findings of both courts below that the case for the
estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be reconveyance of the disputed properties was filed within the reglementary period. Here, in our

161
view, the doctrine of laches does not apply. Note that upon petitioners' adamant refusal to heed unrealized rental income of P20,000.00 a month, since November 1986, is more
EVERTEX's claim, respondent company immediately filed an action to recover possession realistic and fair.25
and ownership of the disputed properties. There is no evidence showing any failure or neglect As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of
on its part, for an unreasonable and unexplained length of time, to do that which, by exercising Appeals deleted. But according to the CA, there was no clear showing that petitioners acted
due diligence, could or should have been done earlier. The doctrine of stale demands would malevolently, wantonly and oppressively. The evidence, however, shows otherwise.It is a
apply only where by reason of the lapse of time, it would be inequitable to allow a party to requisite to award exemplary damages that the wrongful act must be accompanied by bad
enforce his legal rights. Moreover, except for very strong reasons, this Court is not disposed to faith,26 and the guilty acted in a wanton, fraudulent, oppressive, reckless or malevolent
apply the doctrine of laches to prejudice or defeat the rights of an owner. 22 manner.27 As previously stressed, petitioner Tsai's act of purchasing the controverted properties
As to the award of damages, the contested damages are the actual compensation, representing despite her knowledge of EVERTEX's claim was oppressive and subjected the already
rentals for the contested units of machinery, the exemplary damages, and attorney's fees. insolvent respondent to gross disadvantage. Petitioner PBCom also received the same letters
As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the of Atty. Villaluz, responding thereto on March 24, 1987.28 Thus, PBCom's act of taking all the
unpaid rentals of the contested properties based on the testimony of John Chua, who testified properties found in the factory of the financially handicapped respondent, including those
that the P100,000.00 was based on the accepted practice in banking and finance, business and properties not covered by or included in the mortgages, is equally oppressive and tainted with
investments that the rental price must take into account the cost of money used to buy them. bad faith. Thus, we are in agreement with the RTC that an award of exemplary damages is
The Court of Appeals did not give full credence to Chua's projection and reduced the award to proper.
P20,000.00. The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the
Basic is the rule that to recover actual damages, the amount of loss must not only be capable Civil Code provides that no proof of pecuniary loss is necessary for the adjudication of
of proof but must actually be proven with reasonable degree of certainty, premised upon exemplary damages, their assessment being left to the discretion of the court in accordance
competent proof or best evidence obtainable of the actual amount thereof. 23 However, the with the circumstances of each case.29 While the imposition of exemplary damages is justified
allegations of respondent company as to the amount of unrealized rentals due them as actual in this case, equity calls for its reduction. In Inhelder Corporation v. Court of Appeals, G.R.
damages remain mere assertions unsupported by documents and other competent evidence. In No. L-52358, 122 SCRA 576, 585, (May 30, 1983), we laid down the rule that judicial
determining actual damages, the court cannot rely on mere assertions, speculations, discretion granted to the courts in the assessment of damages must always be exercised with
conjectures or guesswork but must depend on competent proof and on the best evidence balanced restraint and measured objectivity. Thus, here the award of exemplary damages by
obtainable regarding the actual amount of loss. 24 However, we are not prepared to disregard way of example for the public good should be reduced to P100,000.00.
the following dispositions of the respondent appellate court: By the same token, attorney's fees and other expenses of litigation may be recovered when
. . . In the award of actual damages under scrutiny, there is nothing on record exemplary damages are awarded.30 In our view, RTC's award of P50,000.00 as attorney's fees
warranting the said award of P5,200,000.00, representing monthly rental income of and expenses of litigation is reasonable, given the circumstances in these cases.
P100,000.00 from November 1986 to February 1991, and the additional award of WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court
P100,000.00 per month thereafter. of Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners
As pointed out by appellants, the testimonial evidence, consisting of the testimonies Philippine Bank of Communications and Ruby L. Tsai are hereby ordered to pay jointly and
of Jonh (sic) Chua and Mamerto Villaluz, is shy of what is necessary to substantiate severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per month, as compensation
the actual damages allegedly sustained by appellees, by way of unrealized rental for the use and possession of the properties in question from November 1986 31 until subject
income of subject machineries and equipments. personal properties are restored to respondent corporation; (2) P100,000.00 by way of
The testimony of John Cua (sic) is nothing but an opinion or projection based on exemplary damages, and (3) P50,000.00 as attorney's fees and litigation expenses. Costs
what is claimed to be a practice in business and industry. But such a testimony against petitioners.
cannot serve as the sole basis for assessing the actual damages complained of. What SO ORDERED.
is more, there is no showing that had appellant Tsai not taken possession of the
machineries and equipments in question, somebody was willing and ready to rent
the same for P100,000.00 a month.
xxx xxx xxx
Then, too, even assuming arguendo that the said machineries and equipments could
have generated a rental income of P30,000.00 a month, as projected by witness
Mamerto Villaluz, the same would have been a gross income. Therefrom should be
deducted or removed, expenses for maintenance and repairs . . . Therefore, in the
determination of the actual damages or unrealized rental income sued upon, there is
a good basis to calculate that at least four months in a year, the machineries in
dispute would have been idle due to absence of a lessee or while being repaired. In
the light of the foregoing rationalization and computation, We believe that a net

162
EN BANC March 27, 1956, until such (time that) the premises is (sic) completely
vacated; plus attorney's fees of P100.00 and the costs of the suit. 5
G.R. No. L-30173 September 30, 1971 Defendants-appellants, in their answers in both the municipal court and court a quo impugned
GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees, the legality of the chattel mortgage, claiming that they are still the owners of the house; but
vs. they waived the right to introduce evidence, oral or documentary. Instead, they relied on their
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants. memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a)
Castillo & Suck for plaintiffs-appellees. the municipal court did not have jurisdiction to try and decide the case because (1) the issue
Jose Q. Calingo for defendants-appellants. involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to
prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court. 6
REYES, J.B.L., J.: During the pendency of the appeal to the Court of First Instance, defendants-appellants failed
Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason to deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered
that only questions of law are involved. in the decision of the municipal court. As a result, the court granted plaintiffs-appellees'
This case was originally commenced by defendants-appellants in the municipal court of motion for execution, and it was actually issued on 24 January 1957. However, the judgment
Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants regarding the surrender of possession to plaintiffs-appellees could not be executed because the
appealed to the court a quo (Civil Case No. 30993) which also rendered a decision against subject house had been already demolished on 14 January 1957 pursuant to the order of the
them, the dispositive portion of which follows: court in a separate civil case (No. 25816) for ejectment against the present defendants for non-
WHEREFORE, the court hereby renders judgment in favor of the payment of rentals on the land on which the house was constructed.
plaintiffs and against the defendants, ordering the latter to pay jointly and The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and
severally the former a monthly rent of P200.00 on the house, subject- withdrawal of deposited rentals was denied for the reason that the liability therefor was
matter of this action, from March 27, 1956, to January 14, 1967, with disclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited had to
interest at the legal rate from April 18, 1956, the filing of the complaint, be held until final disposition of the appeal.7
until fully paid, plus attorney's fees in the sum of P300.00 and to pay the On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive
costs. portion of which is quoted earlier. The said decision was appealed by defendants to the Court
It appears on the records that on 1 September 1955 defendants-appellants executed a chattel of Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a
mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. brief and this appeal was submitted for decision without it.
550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, Defendants-appellants submitted numerous assignments of error which can be condensed into
which were being rented from Madrigal & Company, Inc. The mortgage was registered in the two questions, namely: .
Registry of Deeds of Manila on 2 September 1955. The herein mortgage was executed to (a) Whether the municipal court from which the case originated had
guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within one year at jurisdiction to adjudicate the same;
12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to (b) Whether the defendants are, under the law, legally bound to pay rentals
July 1956, and the lump sum of P3,150 was payable on or before August, 1956. It was also to the plaintiffs during the period of one (1) year provided by law for the
agreed that default in the payment of any of the amortizations, would cause the remaining redemption of the extrajudicially foreclosed house.
unpaid balance to becomeimmediately due and Payable and — We will consider these questions seriatim.
the Chattel Mortgage will be enforceable in accordance with the (a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from
provisions of Special Act No. 3135, and for this purpose, the Sheriff of the which the case originated, and consequently, the appellate jurisdiction of the Court of First
City of Manila or any of his deputies is hereby empowered and authorized Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it would
to sell all the Mortgagor's property after the necessary publication in order follow that the extrajudicial foreclosure, and necessarily the consequent auction sale, are also
to settle the financial debts of P4,800.00, plus 12% yearly interest, and void. Thus, the ownership of the house still remained with defendants-appellants who are
attorney's fees... 2 entitled to possession and not plaintiffs-appellees. Therefore, it is argued by defendants-
When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, appellants, the issue of ownership will have to be adjudicated first in order to determine
and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As possession. lt is contended further that ownership being in issue, it is the Court of First
highest bidder, plaintiffs-appellees were issued the corresponding certificate of Instance which has jurisdiction and not the municipal court.
sale.3 Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds,
the municipal court of Manila, praying, among other things, that the house be vacated and its which are: (a) that, their signatures on the chattel mortgage were obtained through fraud,
possession surrendered to them, and for defendants-appellants to pay rent of P200.00 monthly deceit, or trickery; and (b) that the subject matter of the mortgage is a house of strong
from 27 March 1956 up to the time the possession is surrendered. 4 On 21 September 1956, the materials, and, being an immovable, it can only be the subject of a real estate mortgage and
municipal court rendered its decision — not a chattel mortgage.
... ordering the defendants to vacate the premises described in the On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-
complaint; ordering further to pay monthly the amount of P200.00 from appellants' contentions as not supported by evidence and accordingly dismissed the

163
charge,8 confirming the earlier finding of the municipal court that "the defense of ownership as attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao
well as the allegations of fraud and deceit ... are mere allegations." 9 Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a house
It has been held in Supia and Batiaco vs. Quintero and Ayala10 that "the answer is a mere belonging to a person stands on a rented land belonging to another person,
statement of the facts which the party filing it expects to prove, but it is not evidence;11 and it may be mortgaged as a personal property as so stipulated in the
further, that when the question to be determined is one of title, the Court is given the authority document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted,
to proceed with the hearing of the cause until this fact is clearly established. In the case of Sy however that the principle is predicated on statements by the owner
vs. Dalman,12 wherein the defendant was also a successful bidder in an auction sale, it was declaring his house to be a chattel, a conduct that may conceivably estop
likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA]
and raises an issue of fact which should be determined from the evidence at the trial." What 48 O.G. 5374): 22
determines jurisdiction are the allegations or averments in the complaint and the relief asked In the contract now before Us, the house on rented land is not only expressly designated as
for. 13 Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS
Moreover, even granting that the charge is true, fraud or deceit does not render a contract and TRANSFERS by way of Chattel Mortgage23 the property together with its leasehold rights
void ab initio, and can only be a ground for rendering the contract voidable or annullable over the lot on which it is constructed and participation ..." 24 Although there is no specific
pursuant to Article 1390 of the New Civil Code, by a proper action in court. 14 There is nothing statement referring to the subject house as personal property, yet by ceding, selling or
on record to show that the mortgage has been annulled. Neither is it disclosed that steps were transferring a property by way of chattel mortgage defendants-appellants could only have
taken to nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a meant to convey the house as chattel, or at least, intended to treat the same as such, so that
voidable contract which has not been voided fails. they should not now be allowed to make an inconsistent stand by claiming otherwise.
It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit Moreover, the subject house stood on a rented lot to which defendats-appellants merely had a
or trickery, the chattel mortgage was still null and void ab initio because only personal temporary right as lessee, and although this can not in itself alone determine the status of the
properties can be subject of a chattel mortgage. The rule about the status of buildings as property, it does so when combined with other factors to sustain the interpretation that the
immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc.,15cited parties, particularly the mortgagors, intended to treat the house as personalty. Finally unlike in
in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that — the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L. Strong
... it is obvious that the inclusion of the building, separate and distinct Machinery and Williamson, 26 wherein third persons assailed the validity of the chattel
from the land, in the enumeration of what may constitute real properties mortgage,27 it is the defendants-appellants themselves, as debtors-mortgagors, who are
(art. 415, New Civil Code) could only mean one thing — that a building is attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore
by itself an immovable property irrespective of whether or not said applies to the herein defendants-appellants, having treated the subject house as personalty.
structure and the land on which it is adhered to belong to the same owner. (b) Turning to the question of possession and rentals of the premises in question. The Court of
Certain deviations, however, have been allowed for various reasons. In the case of Manarang First Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged
and Manarang vs. Ofilada,17 this Court stated that "it is undeniable that the parties to a house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the
contract may by agreement treat as personal property that which by nature would be real lessor of the land on which the house stood. For this reason, the said court limited itself to
property", citing Standard Oil Company of New York vs. Jaramillo. 18 In the latter case, the sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27
mortgagor conveyed and transferred to the mortgagee by way of mortgage "the following March 1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January
described personal property." 19 The "personal property" consisted of leasehold rights and a 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees.
building. Again, in the case of Luna vs. Encarnacion,20 the subject of the contract designated Appellants mortgagors question this award, claiming that they were entitled to remain in
as Chattel Mortgage was a house of mixed materials, and this Court hold therein that it was a possession without any obligation to pay rent during the one year redemption period after the
valid Chattel mortgage because it was so expressly designated and specifically that the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants.
property given as security "is a house of mixed materials, which by its very nature is Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No.
considered personal property." In the later case of Navarro vs. Pineda,21 this Court stated that 1508.28 Section 14 of this Act allows the mortgagee to have the property mortgaged sold at
— public auction through a public officer in almost the same manner as that allowed by Act No.
The view that parties to a deed of chattel mortgage may agree to consider 3135, as amended by Act No. 4118, provided that the requirements of the law relative to notice
a house as personal property for the purposes of said contract, "is good and registration are complied with. 29 In the instant case, the parties specifically stipulated that
only insofar as the contracting parties are concerned. It is based, partly, "the chattel mortgage will be enforceable in accordance with the provisions of Special Act No.
upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 3135 ... ." 30(Emphasis supplied).
23 April 1958). In a case, a mortgaged house built on a rented land was Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-appellants
held to be a personal property, not only because the deed of mortgage herein) may, at any time within one year from and after the date of the auction sale, redeem the
considered it as such, but also because it did not form part of the land property sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the
(Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an purchaser of the property to obtain from the court the possession during the period of
object placed on land by one who had only a temporary right to the same, redemption: but the same provision expressly requires the filing of a petition with the proper
such as the lessee or usufructuary, does not become immobilized by Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion

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and the approval of the corresponding bond that the order for a writ of possession issues as a
matter of course. No discretion is left to the court. 33 In the absence of such a compliance, as in
the instant case, the purchaser can not claim possession during the period of redemption as a
matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised
Rules of Court 34 which also applies to properties purchased in extrajudicial foreclosure
proceedings.35 Construing the said section, this Court stated in the aforestated case of Reyes
vs. Hamada.
In other words, before the expiration of the 1-year period within which the
judgment-debtor or mortgagor may redeem the property, the purchaser
thereof is not entitled, as a matter of right, to possession of the same. Thus,
while it is true that the Rules of Court allow the purchaser to receive the
rentals if the purchased property is occupied by tenants, he is,
nevertheless, accountable to the judgment-debtor or mortgagor as the case
may be, for the amount so received and the same will be duly credited
against the redemption price when the said debtor or mortgagor effects the
redemption. Differently stated, the rentals receivable from tenants,
although they may be collected by the purchaser during the redemption
period, do not belong to the latter but still pertain to the debtor of
mortgagor. The rationale for the Rule, it seems, is to secure for the benefit
of the debtor or mortgagor, the payment of the redemption amount and the
consequent return to him of his properties sold at public auction.
(Emphasis supplied)
The Hamada case reiterates the previous ruling in Chan vs. Espe.36
Since the defendants-appellants were occupying the house at the time of the auction sale, they
are entitled to remain in possession during the period of redemption or within one year from
and after 27 March 1956, the date of the auction sale, and to collect the rents or profits during
the said period.
It will be noted further that in the case at bar the period of redemption had not yet expired
when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to
take possession under Section 7, Act No. 3135, as amended, which is the law selected by the
parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an
allegation to that effect. Since plaintiffs-appellees' right to possess was not yet born at the
filing of the complaint, there could be no violation or breach thereof. Wherefore, the original
complaint stated no cause of action and was prematurely filed. For this reason, the same
should be ordered dismissed, even if there was no assignment of error to that effect. The
Supreme Court is clothed with ample authority to review palpable errors not assigned as such
if it finds that their consideration is necessary in arriving at a just decision of the cases. 37
It follows that the court below erred in requiring the mortgagors to pay rents for the year
following the foreclosure sale, as well as attorney's fees.
FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one
entered, dismissing the complaint. With costs against plaintiffs-appellees.

165
SECOND DIVISION A motion for reconsideration of this decision of the Court of Appeals having been denied,
G.R. No. L-58469 May 16, 1983 petitioner has brought the case to this Court for review by writ of certiorari. It is contended by
MAKATI LEASING and FINANCE CORPORATION, petitioner, private respondent, however, that the instant petition was rendered moot and academic by
vs. petitioner's act of returning the subject motor drive of respondent's machinery after the Court
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF of Appeals' decision was promulgated.
APPEALS, respondents. The contention of private respondent is without merit. When petitioner returned the subject
Loreto C. Baduan for petitioner. motor drive, it made itself unequivocably clear that said action was without prejudice to a
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner. motion for reconsideration of the Court of Appeals decision, as shown by the receipt duly
Jose V. Mancella for respondent. signed by respondent's representative. 1 Considering that petitioner has reserved its right to
question the propriety of the Court of Appeals' decision, the contention of private respondent
DE CASTRO, J.: that this petition has been mooted by such return may not be sustained.
Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate The next and the more crucial question to be resolved in this Petition is whether the machinery
Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside in suit is real or personal property from the point of view of the parties, with petitioner arguing
certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the that it is a personality, while the respondent claiming the contrary, and was sustained by the
Court of First instance of Rizal Branch VI, issued in Civil Case No. 36040, as wen as the appellate court, which accordingly held that the chattel mortgage constituted thereon is null
resolution dated September 22, 1981 of the said appellate court, denying petitioner's motion and void, as contended by said respondent.
for reconsideration. A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this
It appears that in order to obtain financial accommodations from herein petitioner Makati Court, speaking through Justice J.B.L. Reyes, ruled:
Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc., Although there is no specific statement referring to the subject house as
discounted and assigned several receivables with the former under a Receivable Purchase personal property, yet by ceding, selling or transferring a property by way
Agreement. To secure the collection of the receivables assigned, private respondent executed a of chattel mortgage defendants-appellants could only have meant to
Chattel Mortgage over certain raw materials inventory as well as a machinery described as an convey the house as chattel, or at least, intended to treat the same as such,
Artos Aero Dryer Stentering Range. so that they should not now be allowed to make an inconsistent stand by
Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the claiming otherwise. Moreover, the subject house stood on a rented lot to
properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure which defendants-appellants merely had a temporary right as lessee, and
failed to gain entry into private respondent's premises and was not able to effect the seizure of although this can not in itself alone determine the status of the property, it
the aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure does so when combined with other factors to sustain the interpretation that
with the Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the the parties, particularly the mortgagors, intended to treat the house as
case before the lower court. personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza
Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
enforcement of which was however subsequently restrained upon private respondent's filing of Williamson, wherein third persons assailed the validity of the chattel
a motion for reconsideration. After several incidents, the lower court finally issued on mortgage, it is the defendants-appellants themselves, as debtors-
February 11, 1981, an order lifting the restraining order for the enforcement of the writ of mortgagors, who are attacking the validity of the chattel mortgage in this
seizure and an order to break open the premises of private respondent to enforce said writ. The case. The doctrine of estoppel therefore applies to the herein defendants-
lower court reaffirmed its stand upon private respondent's filing of a further motion for appellants, having treated the subject house as personality.
reconsideration. Examining the records of the instant case, We find no logical justification to exclude the rule
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private out, as the appellate court did, the present case from the application of the abovequoted
respondent and removed the main drive motor of the subject machinery. pronouncement. If a house of strong materials, like what was involved in the above Tumalad
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein case, may be considered as personal property for purposes of executing a chattel mortgage
private respondent, set aside the Orders of the lower court and ordered the return of the drive thereon as long as the parties to the contract so agree and no innocent third party will be
motor seized by the sheriff pursuant to said Orders, after ruling that the machinery in suit prejudiced thereby, there is absolutely no reason why a machinery, which is movable in its
cannot be the subject of replevin, much less of a chattel mortgage, because it is a real property nature and becomes immobilized only by destination or purpose, may not be likewise treated
pursuant to Article 415 of the new Civil Code, the same being attached to the ground by means as such. This is really because one who has so agreed is estopped from denying the existence
of bolts and the only way to remove it from respondent's plant would be to drill out or destroy of the chattel mortgage.
the concrete floor, the reason why all that the sheriff could do to enfore the writ was to take the In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of
main drive motor of said machinery. The appellate court rejected petitioner's argument that Appeals lays stress on the fact that the house involved therein was built on a land that did not
private respondent is estopped from claiming that the machine is real property by constituting belong to the owner of such house. But the law makes no distinction with respect to the
a chattel mortgage thereon. ownership of the land on which the house is built and We should not lay down distinctions not
contemplated by law.

166
It must be pointed out that the characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon the property the character
determined by the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil.
630, it is undeniable that the parties to a contract may by agreement treat as personal property
that which by nature would be real property, as long as no interest of third parties would be
prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property but was
merely required and dictated on by herein petitioner to sign a printed form of chattel mortgage
which was in a blank form at the time of signing. This contention lacks persuasiveness. As
aptly pointed out by petitioner and not denied by the respondent, the status of the subject
machinery as movable or immovable was never placed in issue before the lower court and the
Court of Appeals except in a supplemental memorandum in support of the petition filed in the
appellate court. Moreover, even granting that the charge is true, such fact alone does not
render a contract void ab initio, but can only be a ground for rendering said contract voidable,
or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in court.
There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed
that steps were taken to nullify the same. On the other hand, as pointed out by petitioner and
again not refuted by respondent, the latter has indubitably benefited from said contract. Equity
dictates that one should not benefit at the expense of another. Private respondent could not
now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited
therefrom,
From what has been said above, the error of the appellate court in ruling that the questioned
machinery is real, not personal property, becomes very apparent. Moreover, the case
of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said
court is not applicable to the case at bar, the nature of the machinery and equipment involved
therein as real properties never having been disputed nor in issue, and they were not the
subject of a Chattel Mortgage. Undoubtedly, the Tumalad case bears more nearly perfect parity
with the instant case to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby
reversed and set aside, and the Orders of the lower court are hereby reinstated, with costs
against the private respondent.
SO ORDERED.

167
EN BANC control, such credits or other personal property, or with, his agent, a copy of the order,
G.R. No. L-11139 April 23, 1958 and a notice that the debts owing by him to the defendant, and the credits and other
SANTOS EVANGELISTA, petitioner, personal property in his possession, or under his control, belonging to the defendant, are
vs. attached in pursuance of such order. (Emphasis ours.)
ALTO SURETY & INSURANCE CO., INC., respondent. However, the Court of Appeals seems to have been of the opinion, also, that the house of
Gonzalo D. David for petitioner. Rivera should have been attached in accordance with subsection (c) of said section 7, as
Raul A. Aristorenas and Benjamin Relova for respondent. "personal property capable of manual delivery, by taking and safely keeping in his custody",
CONCEPCION, J.: for it declared that "Evangelists could not have . . . validly purchased Ricardo Rivera's house
This is an appeal by certiorari from a decision of the Court of Appeals. from the sheriff as the latter was not in possession thereof at the time he sold it at a public
Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista, instituted Civil auction."
Case No. 8235 of the Court of First, Instance of Manila entitled " Santos Evangelista now seeks a review, by certiorari, of this decision of the Court of Appeals. In this
Evangelista vs. Ricardo Rivera," for a sum of money. On the same date, he obtained a writ of connection, it is not disputed that although the sale to the respondent preceded that made to
attachment, which levied upon a house, built by Rivera on a land situated in Manila and leased Evangelists, the latter would have a better right if the writ of attachment, issued in his
to him, by filing copy of said writ and the corresponding notice of attachment with the Office favor before the sale to the respondent, had been properly executed or enforced. This question,
of the Register of Deeds of Manila, on June 8, 1949. In due course, judgment was rendered in in turn, depends upon whether the house of Ricardo Rivera is real property or not. In the
favor of Evangelista, who, on October 8, 1951, bought the house at public auction held in affirmative case, the applicable provision would be subsection (a) of section 7, Rule 59 of the
compliance with the writ of execution issued in said case. The corresponding definite deed of Rules of Court, pursuant to which the attachment should be made "by filing with the registrar
sale was issued to him on October 22, 1952, upon expiration of the period of redemption. of deeds a copy of the order, together with a description of the property attached, and a notice
When Evangelista sought to take possession of the house, Rivera refused to surrender it, upon that it is attached, and by leaving a copy of such order, description, and notice with the
the ground that he had leased the property from the Alto Surety & Insurance Co., Inc. — occupant of the property, if any there be."
respondent herein — and that the latter is now the true owner of said property. It appears that Respondent maintains, however, and the Court of Appeals held, that Rivera's house is personal
on May 10, 1952, a definite deed of sale of the same house had been issued to respondent, as property, the levy upon which must be made in conformity with subsections (c) and (e) of said
the highest bidder at an auction sale held, on September 29, 1950, in compliance with a writ of section 7 of Rule 59. Hence, the main issue before us is whether a house, constructed the
execution issued in Civil Case No. 6268 of the same court, entitled "Alto Surety & Insurance lessee of the land on which it is built, should be dealt with, for purpose, of attachment, as
Co., Inc. vs. Maximo Quiambao, Rosario Guevara and Ricardo Rivera," in which judgment, immovable property, or as personal property.
for the sum of money, had been rendered in favor respondent herein, as plaintiff therein. It is, our considered opinion that said house is not personal property, much less a debt, credit
Hence, on June 13, 1953, Evangelista instituted the present action against respondent and or other personal property not capable of manual delivery, but immovable property. As
Ricardo Rivera, for the purpose of establishing his (Evangelista) title over said house, securing explicitly held, in Laddera vs. Hodges (48 Off. Gaz., 5374), "a true building (not merely
possession thereof, apart from recovering damages. superimposed on the soil) is immovable or real property, whether it is erected by the owner of
In its answer, respondent alleged, in substance, that it has a better right to the house, because the land or by usufructuary or lessee. This is the doctrine of our Supreme Court in Leung
the sale made, and the definite deed of sale executed, in its favor, on September 29, 1950 and Yee vs. Strong Machinery Company, 37 Phil., 644. And it is amply supported by the rulings of
May 10, 1952, respectively, precede the sale to Evangelista (October 8, 1951) and the definite the French Court. . . ."
deed of sale in his favor (October 22, 1952). It, also, made some special defenses which are It is true that the parties to a deed of chattel mortgage may agree to consider a house as
discussed hereafter. Rivera, in effect, joined forces with respondent. After due trial, the Court personal property for purposes of said contract (Luna vs. Encarnacion, * 48 Off. Gaz., 2664;
of First Instance of Manila rendered judgment for Evangelista, sentencing Rivera and Standard Oil Co. of New York vs. Jaramillo, 44 Phil., 630; De Jesus vs. Juan Dee Co., Inc., 72
respondent to deliver the house in question to petitioner herein and to pay him, jointly and Phil., 464). However, this view is good only insofar as the contracting parties are concerned.
severally, forty pesos (P40.00) a month from October, 1952, until said delivery, plus costs. It is based, partly, upon the principle of estoppel. Neither this principle, nor said view, is
On appeal taken by respondent, this decision was reversed by the Court of Appeals, which applicable to strangers to said contract. Much less is it in point where there has been no
absolved said respondent from the complaint, upon the ground that, although the writ of contract whatsoever, with respect to the status of the house involved, as in the case at bar.
attachment in favor of Evangelista had been filed with the Register of Deeds of Manila prior to Apart from this, in Manarang vs. Ofilada (99 Phil., 108; 52 Off. Gaz., 3954), we held:
the sale in favor of respondent, Evangelista did not acquire thereby a preferential lien, the The question now before us, however, is: Does the fact that the parties entering into a
attachment having been levied as if the house in question were immovable property, although contract regarding a house gave said property the consideration of personal property in
in the opinion of the Court of Appeals, it is "ostensibly a personal property." As such, the their contract, bind the sheriff in advertising the property's sale at public auction as
Court of Appeals held, "the order of attachment . . . should have been served in the manner personal property? It is to be remembered that in the case at bar the action was to collect
provided in subsection (e) of section 7 of Rule 59," of the Rules of Court, reading: a loan secured by a chattel mortgage on the house. It is also to be remembered that in
The property of the defendant shall be attached by the officer executing the order in the practice it is the judgment creditor who points out to the sheriff the properties that the
following manner: sheriff is to levy upon in execution, and the judgment creditor in the case at bar is the
(e) Debts and credits, and other personal property not capable of manual delivery, by party in whose favor the owner of the house had conveyed it by way of chattel mortgage
leaving with the person owing such debts, or having in his possession or under his and, therefore, knew its consideration as personal property.

168
These considerations notwithstanding, we hold that the rules on execution do not allow, auction, and the final deed executed by the sheriff in favor of respondent, the same became the
and, we should not interpret them in such a way as to allow, the special consideration that "legitimate owner of the house" in question; (2) that respondent "is a buyer in good faith and
parties to a contract may have desired to impart to real estate, for example, as personal for value"; (3) that respondent "took possession and control of said house"; (4) that "there was
property, when they are, not ordinarily so. Sales on execution affect the public and third no valid attachment by the plaintiff and/or the Sheriff of Manila of the property in question as
persons. The regulation governing sales on execution are for public officials to follow. neither took actual or constructive possession or control of the property at any time"; and (5)
The form of proceedings prescribed for each kind of property is suited to its character, not "that the alleged registration of plaintiff's attachment, certificate of sale and final deed in the
to the character, which the parties have given to it or desire to give it. When the rules Office of Register of Deeds, Manila, if there was any, is likewise, not valid as there is no
speak of personal property, property which is ordinarily so considered is meant; and when registry of transactions covering houses erected on land belonging to or leased from another."
real property is spoken of, it means property which is generally known as real property. In this manner, respondent claimed a better right, merely under the theory that, in case of
The regulations were never intended to suit the consideration that parties may have double sale of immovable property, the purchaser who first obtains possession in good faith,
privately given to the property levied upon. Enforcement of regulations would be difficult acquires title, if the sale has not been "recorded . . . in the Registry of Property" (Art. 1544,
were the convenience or agreement of private parties to determine or govern the nature of Civil Code of the Philippines), and that the writ of attachment and the notice of attachment in
the proceedings. We therefore hold that the mere fact that a house was the subject of the favor of Evangelista should be considered unregistered, "as there is no registry of transactions
chattel mortgage and was considered as personal property by the parties does not make covering houses erected on land belonging to or leased from another." In fact, said article 1544
said house personal property for purposes of the notice to be given for its sale of public of the Civil Code of the Philippines, governing double sales, was quoted on page 15 of the
auction. This ruling is demanded by the need for a definite, orderly and well defined brief for respondent in the Court of Appeals, in support of its fourth assignment of error
regulation for official and public guidance and would prevent confusion and therein, to the effect that it "has preference or priority over the sale of the same property" to
misunderstanding. Evangelista.
We, therefore, declare that the house of mixed materials levied upon on execution, In other words, there was no issue on whether copy of the writ and notice of attachment had
although subject of a contract of chattel mortgage between the owner and a third been served on Rivera. No evidence whatsoever, to the effect that Rivera had not been served
person, is real property within the purview of Rule 39, section 16, of the Rules of Court with copies of said writ and notice, was introduced in the Court of First Instance. In its brief in
as it has become a permanent fixture of the land, which, is real property. (42 Am. Jur. the Court of Appeals, respondent did not aver, or even, intimate, that no such copies were
199-200; Leung Yee vs. Strong Machinery Co., 37 Phil., 644; Republic vs. Ceniza, et al., served by the sheriff upon Rivera. Service thereof on Rivera had been impliedly admitted by
90 Phil., 544; Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.) the defendants, in their respective answers, and by their behaviour throughout the proceedings
The foregoing considerations apply, with equal force, to the conditions for the levy of in the Court of First Instance, and, as regards respondent, in the Court of Appeals. In fact,
attachment, for it similarly affects the public and third persons. petitioner asserts in his brief herein (p. 26) that copies of said writ and notice were delivered
It is argued, however, that, even if the house in question were immovable property, its to Rivera, simultaneously with copies of the complaint, upon service of summons, prior to the
attachment by Evangelista was void or ineffective, because, in the language of the Court of filing of copies of said writ and notice with the register deeds, and the truth of this assertion
Appeals, "after presenting a Copy of the order of attachment in the Office of the Register of has not been directly and positively challenged or denied in the brief filed before us by
Deeds, the person who might then be in possession of the house, the sheriff took no pains to respondent herein. The latter did not dare therein to go beyond making a statement — for the
serve Ricardo Rivera, or other copies thereof." This finding of the Court of Appeals is neither first time in the course of these proceedings, begun almost five (5) years ago (June 18, 1953)
conclusive upon us, nor accurate. — reproducing substantially the aforementioned finding of the Court of Appeals and then
The Record on Appeal, annexed to the petition for Certiorari, shows that petitioner alleged, in quoting the same.
paragraph 3 of the complaint, that he acquired the house in question "as a consequence of the Considering, therefore, that neither the pleadings, nor the briefs in the Court of Appeals,
levy of an attachment and execution of the judgment in Civil Case No. 8235" of the Court of raised an issue on whether or not copies of the writ of attachment and notice of attachment
First Instance of Manila. In his answer (paragraph 2), Ricardo Rivera admitted said attachment had been served upon Rivera; that the defendants had impliedly admitted-in said pleadings
execution of judgment. He alleged, however, by way a of special defense, that the title of and briefs, as well as by their conduct during the entire proceedings, prior to the rendition of
respondent "is superior to that of plaintiff because it is based on a public instrument," whereas the decision of the Court of Appeals — that Rivera had received copies of said documents; and
Evangelista relied upon a "promissory note" which "is only a private instrument"; that said that, for this reason, evidently, no proof was introduced thereon, we, are of the opinion, and so
Public instrument in favor of respondent "is superior also to the judgment in Civil Case No. hold that the finding of the Court of Appeals to the effect that said copies had not been served
8235"; and that plaintiff's claim against Rivera amounted only to P866, "which is much below upon Rivera is based upon a misapprehension of the specific issues involved therein and
the real value" of said house, for which reason it would be "grossly unjust to acquire the goes beyond the range of such issues, apart from being contrary to the aforementioned
property for such an inadequate consideration." Thus, Rivera impliedly admitted that his house admission by the parties, and that, accordingly, a grave abuse of discretion was committed in
had been attached, that the house had been sold to Evangelista in accordance with the making said finding, which is, furthermore, inaccurate.
requisite formalities, and that said attachment was valid, although allegedly inferior to the Wherefore, the decision of the Court of Appeals is hereby reversed, and another one shall be
rights of respondent, and the consideration for the sale to Evangelista was claimed to entered affirming that of the Court of First Instance of Manila, with the costs of this instance
be inadequate. against respondent, the Alto Surety and Insurance Co., Inc. It is so ordered.
Respondent, in turn, denied the allegation in said paragraph 3 of the complaint, but only " for
the reasons stated in its special defenses" namely: (1) that by virtue of the sale at public

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EN BANC Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters
Guaranty Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor,
G.R. No. L-40018 December 15, 1975 Tropical Commercial Corporation, was impleaded as a defendant therein. That might explain
NORTHERN MOTORS, INC., petitioner, his unawareness of the pendency of such action.
vs. The other arguments of Honesto Ong in his motion may be boiled down to the proposition that
HON. JORGE R. COQUIA, etc., et al., respondents, FILINVEST CREDIT the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail
CORPORATION, intervenor. over the chattel mortgage credit. That proposition is devoid of any legal sanction and is
RESOLUTION glaringly contrary to the nature of a chattel mortgage. To uphold that contention is to destroy
the essence of chattel mortgage as a paramount encumbrance on the mortgaged chattel.
AQUINO, J.: Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to
Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of that of the judgment creditor". But he contends that the rights of the purchasers of the cars at
this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of the execution sale should be respected. He reasons out they were not parties to the mortgage
Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made and that they acquired the cars prior to the mortgagee's assertion of its rights thereto.
on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should
chattel mortgagor, Manila Yellow Taxicab Co., Inc. have alerted the purchasers to the risk which they were taking when they took part in the
On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the auction sale. Moreover, at an execution sale the buyers acquire only the right of the judgment
same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the debtor which in this case was a mere right or equity of redemption. The sale did not extinguish
bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further the pre-existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros
prayed that the sheriff should be required to deliver to it the proceeds of the execution sale of and Provincial Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs.
the mortgaged taxicabs without deducting the expenses of execution. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103).
1. Respondents' motion for reconsideration. — Honesto Ong in his motion invokes his Some arguments adduced by Honesto Ong in his motion were intended to protect the interests
supposed "legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only of the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a
recourse was to levy upon the taxicabs which were in the possession of the judgment debtor, "respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution
Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc.
mortgagee, "has still an independent legal remedy" against the mortgagor for the recovery of "only to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab
the unpaid balance of the price. to" Northern Motors, Inc. That argument is not clear. Ong probably means that the installments
That contention is not a justification for setting aside the holding that Ong had no right to levy already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted
upon the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity from the proceeds of the execution sale. If that is the point which Ong is trying to put across,
of redemption. The essence of the chattel mortgage is that the mortgaged chattels should and it is something which does not directly affect him, then, that matter should be raised by
answer for the mortgage credit and not for the judgment credit of the mortgagor's unsecured Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of
creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of First Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc. versus Manila Yellow
his credit. To require him to do so would be a nullification of his lien and would defeat the Taxicab Co., Inc. et al."
purpose of the chattel mortgage which is to give him preference over the mortgaged chattels Ong's contention, that the writ of execution, which was enforced against the seven taxicabs
for the satisfaction of his credit. (See art. 2087, Civil Code). (whose sale at public auction was stopped) should have precedence over the mortgage lien,
It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of cannot be sustained. Those cabs cannot be sold at an execution sale because, as explained in
the chattel mortgage credit, realized that to vindicate its claim by independent action would be the resolution under reconsideration, the levy thereon was wrongful.
illusory. For that pragmatic reason, it was constrained to enter into a compromise with The motion for reconsideration of Ong and the sheriff should be denied.
Honesto Ong by agreeing to pay him P145,000. That amount was characterized by Northern 2. Petitioners motion for partial reconsideration. — The lower court in its order of January 3,
Motors, Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of 1975 cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters
Honesto Ong. Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled
Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not without notice to Northern Motors, Inc. as third-party claimant.
affect him because he is not privy of such contract is untenable. The registration of the chattel We already held that the cancellation of the bonds constituted a grave abuse of discretion but
mortgage is an effective and binding notice to him of its existence (Ong Liong Tiak vs. Luneta we previously denied petitioner's prayer for the reinstatement of the bonds because Northern
Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus Motors Inc. had given the impression that it had not filed any action for damages against the
ad rem, XI Enciclopedia Juridica Española 294) or a lien which, being recorded, follows the sheriff within the one hundred twenty-day period contemplated in Section 17, Rule 39 of the
chattel wherever it goes. Rules of Court.
Honesto Ong's contention that Northern Motors, Inc., was negligent because it did not sue the As already noted above, the truth is that such an action for damages was filed on April 14,
sheriff within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is 1975 against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the
not correct. Such action was filed on April 14, 1975 in the Court of First Instance of Rizal,

170
Court of First Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond
for P240,000 (No. 0032 posted on December 18, 1974).
It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of
Rizal at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a
replevin case (where an amended complaint dated January 15, 1975 was filed), the surety,
Filwriters Guaranty Assurance Corporation, was impleaded as a defendant by reason of its
bond for P240,000. Northern Motors, Inc. in that case prayed that the surety be ordered to pay
to it damages in the event that the eight taxicabs could not be surrendered to the mortgagee.
Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for
the reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said
bond is not reinstated or if the lower court's orders cancelling it are allowed to stand, the
aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions against
the surety. That injustice should be corrected. Hence, our resolution of August 29, 1975,
insofar as it did not disturb the lower court's orders cancelling the indemnity bonds, should be
reconsidered.
Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution
allowing the sheriff to deduct expenses from the proceeds of the execution sale for the eight
taxicabs which sale was held on December 18, 1974. It argues that Honesto Ong or Manila
Yellow Taxicab Co., Inc. should shoulder such expenses of execution.
We already held that the execution was not justified and that Northern Motors, Inc., as
mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have
been levied upon and sold at public auction to satisfy the judgment credit which was inferior
to the chattel mortgage. Since the cabs could no longer be recovered because apparently they
had been transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of
motion), the proceeds of the execution sale may be regarded as a partial substitute for the
unrecovarable cabs (See arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River
Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without
deduction of the expenses of execution.
WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's
motion for partial reconsideration is granted. The resolution of August 29, 1975 is modified in
the sense that the lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond
for P240,000 (as reaffirmed in its order of January 17, 1975), are set aside. The said indemnity
bond for P240,000 is regarded as in full force and Respondent Sheriff of Manila is further
directed to deliver to Northern Motors, Inc. the entire proceeds of the execution sale held on
December 18, 1974 for the eight taxicabs which were mortgaged to that firm.
SO ORDERED.

171
[G.R. No. 103576. August 22, 1996] petitioner's first motion for reconsideration but granted a second motion for reconsideration,
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, thereby reinstating the petition and requiring private respondent to comment thereon. [5]
vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE Except in criminal cases where the penalty of reclusion perpetua or death is
PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN imposed[6] which the Court so reviews as a matter of course, an appeal from judgments of
CITY, respondents. lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court
DECISION prescribing technical and other procedural requirements are meant to weed out unmeritorious
VITUG, J.: petitions that can unnecessarily clog the docket and needlessly consume the time of the
Would it be valid and effective to have a clause in a chattel mortgage that purports to Court. These technical and procedural rules, however, are intended to help secure, not
likewise extend its coverage to obligations yet to be contracted or incurred? This question is suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be
the core issue in the instant petition for review on certiorari. allowed to attain the prime objective for, after all, the dispensation of justice is the core reason
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, for the existence of courts. In this instance, once again, the Court is constrained to relax the
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a rules in order to give way to and uphold the paramount and overriding interest of justice.
chattel mortgage in favor of private respondent Producers Bank of the Philippines. The Contracts of security are either personal or real. In contracts of personal security, such as
mortgage stood by way of security for petitioner's corporate loan of three million pesos a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is
(P3,000,000.00). A provision in the chattel mortgage agreement was to this effect - secured by the personal commitment of another (the guarantor or surety). In contracts of real
"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by
the full obligation or obligations above-stated according to the terms thereof, then this an encumbrance of property - in pledge, the placing of movable property in the possession of
mortgage shall be null and void. x x x. the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal the form prescribed by law; in real estate mortgage,by the execution of a public instrument
of the former note, as an extension thereof, or as a new loan, or is given any other kind of encumbering the real property covered thereby; and in antichresis, by a written instrument
accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, granting to the creditor the right to receive the fruits of an immovable property with the
releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security obligation to apply such fruits to the payment of interest, if owing, and thereafter to the
for the payment of the said promissory note or notes and/or accommodations without the principal of his credit - upon the essential condition that if the principal obligation becomes
necessity of executing a new contract and this mortgage shall have the same force and effect due and the debtor defaults, then the property encumbered can be alienated for the payment of
as if the said promissory note or notes and/or accommodations were existing on the date the obligation,[7] but that should the obligation be duly paid, then the contract is automatically
thereof. This mortgage shall also stand as security for said obligations and any and all other extinguished proceeding from the accessory character [8] of the agreement. As the law so puts
obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether it, once the obligation is complied with, then the contract of security becomes, ipso facto, null
such obligations have been contracted before, during or after the constitution of this and void.[9]
mortgage."[1] While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
In due time, the loan of P3,000,000.00 was paid by petitioner corporation.Subsequently, incurred obligations so long as these future debts are accurately described, [10] a chattel
in 1981, it obtained from respondent bank additional financial accommodations totalling mortgage, however, can only cover obligations existing at the time the mortgage is
P2,700,000.00.[2] These borrowings were on due date also fully paid. constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan be contracted can be a binding commitment that can be compelled upon, the security itself,
of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 however, does not come into existence or arise until after a chattel mortgage agreement
each. Due to financial constraints, the loan was not settled at maturity. [3]Respondent bank covering the newly contracted debt is executed either by concluding a fresh chattel mortgage
thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, or by amending the old contract conformably with the form prescribed by the Chattel
with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action Mortgage Law.[11] Refusal on the part of the borrower to execute the agreement so as to cover
for injunction, with damages and a prayer for a writ of preliminary injunction, before the the after-incurred obligation can constitute an act of default on the part of the borrower of the
Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court financing agreement whereon the promise is written but, of course, the remedy of foreclosure
dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner can only cover the debts extant at the time of constitution and during the life of the chattel
corporation bound by the stipulations, aforequoted, of the chattel mortgage. mortgage sought to be foreclosed.
Petitioner corporation appealed to the Court of Appeals [4] which, on 14 August 1991, A chattel mortgage, as hereinbefore so intimated, must comply substantially with the
affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5
denied on 24 January 1992. thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not
The instant petition interposed by petitioner corporation was initially denied on 04 appended to the agreement, the chattel mortgage would still be valid between the parties (not
March 1992 by this Court for having been insufficient in form and substance. Private against third persons acting in good faith [12]), the fact, however, that the statute has provided
respondent filed a motion to dismiss the petition while petitioner corporation filed a that the parties to the contract must execute an oath that -
compliance and an opposition to private respondent's motion to dismiss. The Court denied

172
"x x x (the) mortgage is made for the purpose of securing the obligation specified in the The virtues of humility and of respect and concern for others must still live on even in an age
conditions thereof, and for no other purpose, and that the same is a just and valid obligation, of materialism.
and one not entered into for the purpose of fraud."[13] WHEREFORE, the questioned decisions of the appellate court and the lower court are
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet set aside without prejudice to the appropriate legal recourse by private respondent as may still
merely contemplated. In the chattel mortgage here involved, the only obligation specified in be warranted as an unsecured creditor. No costs.
the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in
fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation dealing with the courts.
automatically rendered the chattel mortgage void or terminated.In Belgian Catholic SO ORDERED.
Missionaries, Inc., vs. Magallanes Press, Inc., et al., [14] the Court said -
"x x x 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." [15]
The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan,
[16]
there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a specific finding on the amount of damages it has sustained "as
a result of the unlawful action taken by respondent bank against it." [17] This prayer is not
reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way
of moral damages.[18] In LBC Express, Inc. vs. Court of Appeals,[19] we have said:
"Moral damages are granted in recompense for physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury. A corporation, being an artificial person and having existence only in legal
contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience
physical suffering and mental anguish. Mental suffering can be experienced only by one
having a nervous system and it flows from real ills, sorrows, and griefs of life - all of which
cannot be suffered by respondent bank as an artificial person." [20]
While Chua Pac is included in the case, the complaint, however, clearly states that he has
merely been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's
cause. It instead turned out to be, however, a source of disappointment for this Court to read in
petitioner's reply to private respondent's comment on the petition his so-called "One Final
Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court
of Appeals should be required to justify its decision which completely disregarded the basic
laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law
and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is
wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring
justices.This is one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate jurisdiction."[21] (Italics
supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor;[22] thus:
"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due
to the courts of justice and judicial officers and x x x (to) insist on similar conduct by others.'
This respectful attitude towards the court is to be observed, `not for the sake of the temporary
incumbent of the judicial office, but for the maintenance of its supreme importance.' And it is
`through a scrupulous preference for respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers x x x.'" [23]

173
FIRST DIVISION and every succeeding month thereafter until the amount is fully paid. The
interest on the foregoing installments shall be paid on the same date that
G.R. No. 107554 February 13, 1997 the installments become payable and additional interest at the rate of
CEBU INTERNATIONAL FINANCE CORPORATION, petitioner, fourteen (14%) per cent per annum will be charged on all amounts,
vs. principal and interest, not paid on due date. 10 (Emphasis ours.)
COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents. Ong defaulted in the payment of the monthly installments. Consequently, on 11 May 1988,
petitioner sent him a letter 11 demanding delivery of the mortgaged vessel for foreclosure or in
KAPUNAN, J.: the alternative to pay the balance of P437,802.00 pursuant to paragraph 11 of the deed of
In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, chattel mortgage. 12
petitioner seeks to set aside the decision of the Court of Appeals in CA-G.R C.V. No. 26257 Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for
dated 2 July 1992 which affirmed the decision of the Regional Trial Court in Civil Case No. the purchase of the subject vessel bounced. Ang Tay's search for the elusive Ong and all
CEB-6919, declaring the chattel mortgage void and ordering petitioner and private respondent attempts to confer with him proved to be futile. A subsequent investigation and inquiry with
Robert Ong to pay damages to private respondent Ang Tay. The Court of Appeals' resolution the Office of the Coast Guard revealed that the subject vessel was already in the name of Ong,
dated 30 September 1992 is similarly impugned for denying petitioner's motion for in violation of the express undertaking contained in the original deed of sale.
reconsideration. As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for
Gleaned from the records are the following facts: rescission and replevin with damages against Ong and his wife (docketed as Civil Case No.
On 4 March 1987, Jacinto Dy executed a Special Power of Attorney 1 in favor of private CEB-6565) with the Regional Trial Court of Cebu . City, Branch 10. The trial court issued a
respondent Ang Tay, authorizing the latter to sell the cargo vessel Owned by Dy and christened writ of replevin and the subject vessel was seized and subsequently delivered to Ang Tay.
LCT "Asiatic." On 9 March 1988, petitioner filed a motion for intervention but withdrew the same on 29 April
On 28 April 1987, through a Deed of Absolute Sale,2 Ang Tay sold the subject vessel to private 1988. Instead, on 26 May 1988, petitioner filed a separate case for replevin and damages
respondent Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three against Ong and "John Doe" (Ang Tay) with the same trial court, docketed as Civil Case No.
(3) checks in the following amounts: P150,000.000, P600,000.00 and P150,000.00. However, CEB-6919.
since the payment was not made in cash, it was specifically stipulated in the deed of sale that The trial court granted petitioner's prayer for replevin. The vessel was seized and placed in the
the "LCT Asiatic shall not be registered or transferred to Robert Ong until complete custody of the trial court. However, Ang Tay posted a counterbond and the vessel was returned
payment." 3 Thereafter, Ong obtained possession of the subject vessel so he could begin to his possession.
deriving economic benefits therefrom. He, likewise, obtained copies of the unnotarized deed On 3 October 1990 in CEB-6565, the trial court rendered a decision in favor of Ang Tay and
of sale allegedly to be shown to the banks to enable him to acquire a loan to replenish his Jacinto Dy. The sale of the subject vessel was rescinded, the registration of the vessel with the
(Ong's) capital. The aforequoted condition, however,which was handwritten on the original Office of the Coast Guard and other government agencies in Ong's name nullified and the
deed of sale does not appear on Ong's copies. vessel's registration in Dy's name revived. Ong was, likewise, ordered to pay Jacinto Dy and
Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had Ang Tay actual damages for lost income, moral damages, attorney's fees and litigation
his copies of the deed of sale (on which the aforementioned prohibition does not appear) expenses.13
notarized on 18 May 1987.4 Ong presented the notarized deed to the Philippine Coast Guard The Court of Appeals affirmed the trial court's decision and Ong's petition for review before
which subsequently issued him a Certificate of Ownership5 and a Certificate of Philippine this Court was dismissed for lack of merit in a resolution dated 15 March 1993,
Register6 over the subject vessel on 27 May 1987. Ong also succeeded in having the name of On the other hand, in CEB-6919, the subject of the present appeal, the trial court in a decision
the vessel changed to LCT "Orient Hope." dated 14 February 1990, declared the chattel mortgage on the subject vessel null and void and
On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be ordered petitioner and Ong to pay Ang Tay damages. The dispositive portion states, thus:
paid in installments as evidenced by a promissory note of even date. 7 WHEREFORE, in view of all the foregoing, the chattel mortgage on the
As security for the loan, Ong executed a chattel mortgage over the subject vessel, 8 which vessel LCT ORIENT HOPE is declared null and void, rendering its
mortgage was registered with the Philippine Coast Guard and annotated on the Certificate of annotation and registration at the back of the Certificate of Ownership and
Ownership.9 In paragraph 3 of the Deed of Chattel Mortgage, it was stated that: Certificate of Philippine Registry respectively, to be of no force and effect.
3. The said sum of FOUR HUNDRED NINETY SIX THOUSAND EIGHT Plaintiff CIFC and defendant Robert Ong are hereby ordered to pay jointly
ONLY (496,008.00) represents the balance due on of MORTGAGOR(S) and severally to defendant Ang Tay the following amounts: P50,000.00 as
from the MORTGAGEE and is payable in the office of the MORTGAGEE unrealized income during the five-day period when the vessel was take
at Cebu City or in the office of the latter's assignee, in case the rights and from Ang Tay's possession; P100,000.00, representing the premiums Ang
interests of the MORTGAGEE in the foregoing mortgage are assigned to a Tay paid for the redelivery of the vessel to him and other expenses;
third person, under the terms of said promissory note, as follows: (a) P10,000.00 as actual expenses for the recovery of the vessel; P100,000.00
TWENTY THOUSAND SIX HUNDRED SIXTY SEVEN ONLY** as moral damages; P50,000.00 as exemplary damages; P40,000.00 as
Pesos (P20,667.00) on or before . . . . . . and (b) the balance in Twenty actual expenses in attending trials and litigation expenses; and P30,000.00
Four (24) equal successive monthly installments on the . . . . . . day of each as attorney's fees.

174
SO ORDERED. 14 ownership issued in Ong's name (which, along with the deed of sale, he submitted to petitioner
On 2 July 1992, the Court of Appeals affirmed in toto the above mentioned decision. 15 Hence, as proof that he is the owner of the ship he gave as security for his loan). It was plainly stated
the present petition for review on certiorari. therein that the ship LCT "Orient Hope" ex "Asiatic," by means of a Deed of Absolute Sale
Petitioner enumerates the alleged errors oft he Court of Appeals as follows: dated 28 April 1987, was "sold and transferred by Jacinto Dy to Robert Ong." 19 There can be
I no dispute then that it was Dy who was the seller and Ong the buyer of the subject vessel.
THE COURT OF APPEALS ERRED IN BASING ITS DECISION ON Coupled with the fact that there is no evidence euphony transaction between Jacinto Dy or
SPECULATION, CONJECTURE, AND SURMISE, WHEN IT Ang Tay and petitioner, it follows, therefore, that petitioner's role in the picture is properly and
DECLARED THAT THE CONTRACT BETWEEN CIFC AND ROBERT logically that of a creditor-mortgagee and not owner-seller. It is paragraph 2 of the mortgage
ONG WAS ONE OF SALE, AND NOT LOAN (MUTUUM) WITH contract 20 which accurately expresses the true nature of the transaction between petitioner and
MORTGAGE. Ong--that it is a simple loan with chattel mortgage. The amount petitioner loaned to Ong does
II not represent the balance of any purchase price since, as we have previously discussed, the
THE RULING OF THE COURT OF APPEALS IS CONTRARY TO aforementioned documents state that Ong is already the absolute owner of the subject vessel.
EXISTING AND WELL-SETTLED JURISPRUDENCE THAT A Obviously, therefore, paragraph 3 of the said contract was filled up by mistake. Considering
MORTGAGEE HAS THE RIGHT TO RELY ON WHAT APPEARS IN that petitioner used a form contract, it is not improbable that such an oversight may have been
THE CERTIFICATE OF OWNERSHIP (TITLE). committed--negligently but unintentionally and without malice. As testified to by Mr.
III Benjamin C. Alfaro, petitioner's Senior Vice President for Operations they only use one form
THE DECISION OF THE COURT OF APPEALS IS REPUGNANT TO for several kinds of transaction:
THE CLEAR RULING OF THE HONORABLE COURT THAT ATTY. UY: (TO WITNESS)
BETWEEN TWO INNOCENT Q: Mr. Alfaro, as a financing institution, Cebu
PERSONS, THE ONE WHO MADE THE DAMAGE POSSIBLE BY International finance Corporation, how many kinds of
HIS ACT OF CONFIDENCE MUST BEAR THE LOSS. 16 lending transaction do you have in a firm? Do you
We grant the petition. have financial leasing, discounting or whatever? Can
In upholding the nullity of the chattel mortgage on the subject vessel, the Court of Appeals you explain briefly to the Honorable Court?
declared thus: WITNESS:
In Par. 3 of the Chattel Mortgage Contract executed between appellants A: We have direct loan transaction. We have financing
CIFC and Robert Ong, it was made to appear that the subject vessel was transaction and we have leasing transaction. Now, in
sold by the plaintiff Cebu International Finance Corporation to Robert the leasing transaction, the document will show that
Ong on installment. However, there is no showing that appellant CIFC we are the owner of the equipment and we leased it
acquired the vessel in question from either Jacinto Dy or Ang Tay, the out. In the financing transaction, where we used the
owner of such vessel. Since, CIFC appears to have sold the vessel in same Chattel Mortgage instrument, there are three
question to Ong on installment basis, the said contract is null and void, parties involved, the seller of the equipment. And then,
because CIFC was never the owner of the vessel. the seller of the equipment would sell or assign the
Moreover, Robert Ong CIFC's mortgagor, did not acquire ownership of the contract with the financing company. That is the
vessel because of an express stipulation in the Deed of Sale that the vessel financing transaction. And in the simple loan
"shall not be registered or transferred to Robert Ong until complete transaction, there appears only two parties involved,
payment." (Exh. "7-C-1".) Since Ong clearly was not the owner of the the borrower and the lender.
vessel at the time of the execution of the mortgage, the said mortgage is ATTY. UY: (TO WITNESS)
null and void on that ground. Q: Now, Mr. Alfaro, the same document, Chattel
Furthermore, the evidence on record shows the chattel mortgage in Mortgage will apply also to financing transaction,
question did not comply with the requirements of P.D. 1521, The Ship leasing transaction and simple loan transaction?
Mortgage Decree of 1978. . . . 17 WITNESS:
The Court of Appeals nullified the chattel mortgage contract between petitioner and Ong A: Simple loan and financing transactions.
because paragraph 3 of the said contract (where it appeared that petitioner sold the subject ATTY. UY (TO WITNESS)
vessel to Ong on installment basis and that the amount supposedly loaned to Ong represented Q: Now, Mr. Alfaro, this paragraph 2 of Chattel
the balance due on the purchase price) seemed to indicate that the owner of the vessel Mortgage, can this apply to a financing transaction?
mortgaged was petitioner although it had been duly established that another party (Jacinto Dy) WITNESS:
was the true owner thereof. 18 A: No, the paragraph 3 will be the one that is
We disagree with the aforequoted ruling of the Court of Appeals. The chattel mortgage applicable to a financing transaction. (Witness reading
contract should not be viewed in such a myopic context. The key lies in the certificate of the document and after reading continued) Paragraph

175
2 applies to both financing and simple loan ATTY. LOGRONIO:
transaction. Q: And this refers to a direct borrower or lending
ATTY. UY: transaction.
Q: And paragraph 3? WITNESS:
WITNESS: A: Yes.
A: Paragraph 3 applies to both financing and lending ATTY. LOGRONIO:
transactions but paragraph 3 does not apply to Simple Q: No third party assignment has been involved so
lending transaction. far?
xxx xxx xxx 21 WITNESS:
ATTY. LOGRONIO: (TO WITNESS) A: No.
Q: You do not affirm the assertion made by your xxx xxx xxx 22
counsel that paragraph 3 arise only in case that your Accordingly, the chattel mortgage contract between petitioner and Ong is valid and
rights to a mortgage were assigned by you to a third subsisting.
person, do you agree that also? The next issue for our determination is whether or not petitioner is a mortgagee in good faith
WITNESS: whose lien over the mortgaged vessel should be respected.
A: This form of chattel mortgage, in fact, you will The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the
notice that the portion for mortgagor and mortgagee certificate of title of the mortgagor to the property given as security and in the absence of any
are all blank because this is the same form which is sign that might arouse suspicion, has no obligation to undertake further investigation. Hence,
used by the company, used for the parties when there even if the mortgagor is not the rightful owner of or does not have a valid title to the
is a dealer involved, when there is installment buyer mortgaged property, the mortgagee or transferee in good faith is nonetheless entitled to
involved and when we come in as third party protection. 23 Although this rule generally pertains to real property, particularly registered land,
purchaser of the document because as practiced by the it may also be applied by analogy to personal property, in this case specifically, since
different dealer, this is the same form used between shipowners are, likewise, required by law to register their vessels with the Philippine Coast
the buyer and the dealer of the motor vehicle. After Guard.
this is being consummated already, it is assigned to a Private respondent Ang Tay, however, contends that the aforementioned rule does not apply in
finance company and these are the same documents the case at bar in the face of the numerous "badges of bad faith" on the part of petitioner.
used. Now, in this particular case, this becomes Capitalizing on paragraph 3 of the chattel mortgage contract, Ang Tay argues as follows:
already . . . this is a direct transaction between the . . . The fraud and conspiracy by Robert Ong and some responsible
finance company and the borrower. We, the finance employees of CIFC against Jacinto Dy and Ang Tay are thus brought to
company becomes the direct lender and Mr. Ong the open by this stipulation. Since CIFC appears in the registered chattel
became the direct borrower. As I explained earlier, this mortgage to have sold the vessel in question to Robert Ong, the said
document is also the form used between a dealer of a contract is null and void because CIFC never for a second or a moment
motor vehicle and an installment buyer wherein after became the owner of the vessel. CIFC was the one who prepared the
paying the down payment, the unpaid balance which is chattel mortgage and the one who registered the same without
secured by the chattel mortgage, the promissory note, contemporaneous or subsequent correction or modification; it cannot, after
and the disclosure statement and this document is sold it notified the public by means of registration that it acquired the vessel
to a third party and that is the finance company by the and became its owner, now shy away from a stipulation which is the heart
dealer. and nerve-center of the contract and which it made and registered. This is
ATTY. LOGRONIO: both the essence and consequence of estoppel. Applicable is Article 1459
Q: Up to this point, when you had the transaction with of the Civil Code which provides inter-alia: ". . . the vendor must have a
Mr. Ong, this form that you executed, the Chattel right to transfer the ownership thereof (the thing sold) at the time it is
Mortgage was in what kind of form that was already delivered."
used by the company? 2. Robert Ong, CIFC's mortgagor, did not acquire ownership of the vessel
WITNESS: because of an express stipulation which he signed that the vessel "shall not
A: These are forms available to us. be registered or transferred to Robert Ong until complete payment." (Exh.
ATTY. LOGRONIO: "7-C-1".) This stipulation is expressly covered by Article 1478 of the Civil
Q: This is a form used when there is a buyer and a ... Code: "The parties may stipulate that ownership in the thing shall not pass
WITNESS: to the purchaser until he has fully paid the price." Since Ong clearly was
A: Third party or direct borrowing lender.

176
not the owner of the vessel at the time of the execution of the mortgage, Very material and it is important Your Honor as there
the said mortgage is null and void on that ground. 24 is a violation of the law. I am entitled to insist for the
Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel answer.
mortgage contract was erroneously but unintentionally filled up. The failure of petitioner to COURT:
exercise due care in filling up the necessary provisions in the chattel mortgage contract does Witness may answer, if he knows.
not, however, amount to bad faith. It was a mere oversight and not a deliberate and malicious (TO WITNESS)
act. Q: Did he tell you what was the purpose?
Petitioner's bad faith is further demonstrated, Ang Tay avers, by its failure to comply with the A: For the business of the boat.
following requirements of P.D. No. 1521 or the Ship Mortgage Decree of 1978: ATTY. LOGRONIO: (TO WITNESS)
1) The loan secured by the mortgaged vessel was not for any of purposes Q: That's all, that he is going to use the money for the
specified in Sec. 2 of P.D. No. 1521, i.e., "financing the construction, business of the boat?
acquisition, purchase of vessels or initial operation of vessels" 25 and that A: Yes.
petitioner failed to furnish the Central Bank a copy of the mortgage; 26 xxx xxx xxx 29
2) The special affidavit of good faith required in Sec. 4 of P.D. No. 1521 From the foregoing, therefore, it can be readily deduced that the loan was for the initial
was lacking; and operation of the subject vessel and thus falls under the purposes laid down in the Ship
3) Ong failed to disclose his creditors and lienors as provided in Sec. 6 of Mortgage Decree.
P.D. No. 1521. The special affidavit of good faith, on the other hand, is required only for the purpose of
There is no merit in private respondent's allegations. In the 9 November 1989 hearing, Ang transforming an already valid mortgage into a "preferred mortgage." 30 Thus, the
Tay confirmed his statement in his affidavit, executed in Civil Case No. CEB-6565, that Ong abovementioned affidavit is not necessary for the validity of the chattel mortgage itself but
wanted to obtain a loan to replenish his capital because he had used up his money in the only to give it a preferred status.
purchase of the subject vessel 27 and that the ship was delivered to Ong so that he could begin As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree, 31 it was intentional
deriving economic benefits therefrom. 28 Mr. Randolph Veloso petitioner's collector, on Ong's part not to inform petitioner that he had yet to pay in full the purchase price of the
processing clerk, credit investigator and appraiser, further testified as follows: subject vessel. Ong presented himself to petitioner as the absolute owner of the LCT "Orient
xxx xxx xxx Hope" ex "Asiatic." The Certificate of Ownership in Ong's name showed that the ship was
Q: Do you know the purpose for that loan conveyed to him by means of a Deed of Absolute Sale which gave the idea that the purchase
A: Yes. price had been fully paid and the sale completed.
Q: What was his purpose? Petitioner had every right to rely on the Certificate of Ownership and Certificate of Philippine
A: He was going to mortgage the vessel to us. Register duly issued by the Philippine Coast Guard in Ong's name. Petitioner had no reason to
Q: What was the purpose of the loan? doubt Ong's ownership over the subject vessel. The documents presented by Ong, upon
A: We don't usually ask our client what they will do petitioner's insistence before accepting the said vessel as loan security, were all in order and
with it. properly issued by the duly constituted authorities. There was no circumstance that might have
Q: You don't ask the purpose? aroused petitioner's suspicion or alerted it to any infirmity committed by Ong. It had no
A: It is understood that whenever a client approach the participation in and was not privy to the sale transaction between Jacinto Dy (through Ang
institution he usually has a purpose for the money. Tay) and Ong. Petitioner, thus, had no obligation to undertake further investigation since it had
Q: Did not the corporation was what need has he for the necessary documents to prove Ong's ownership. In addition petitioner even took pains to
the money? inspect the subject vessel which was in Ong's possession. Mr. Benjamin C. Alfaro testified
A: He is going to use it for his business in the boat. thus: . . .
Q: And that is his only statement? What was his xxx xxx xxx
specific statement? ATTY. LOGRONIO:
ATTY. UY: Q: In your credit investigation of Mr. Robert Ong did
Already answered. He will use it in the business of his you have a chance yourself or any of your employees
boat. to verify the condition and the location of the vessel at
ATTY. LOGRONIO: the very time?
What was the purpose. WITNESS:
ATTY. UY: A: Yes.
Already answered Your Honor and besides it is ATTY. LOGRONIO:
immaterial. Q: Will you tell the Court where was the vessel at the
ATTY. LOGRONIO: time that he applied for a loan with your bank?
WITNESS:

177
A: It was under finishing touches in the drydock in . . . . . . as between two innocent persons, the mortgagee and the owner of the
think in Lapulapu or Mandaue. mortgaged property, one of whom must suffer the consequence of a breach
ATTY. LOGRONIO: of trust, the one who made it possible by his act of confidence must bear
Q: So, more or less, you are sure that at the time that the loss. 36
he applied for a loan and you approved the same, this it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the
vessel was still at the drydock? consequences thereof. They are considered bound by the chattel mortgage on the
WITNESS: subject vessel.
A: Yes finishing touches. In fact, it had pictures to WHEREFORE, this Court GRANTS the Petition for Review and REVERSES the questioned
support the application. I don't know if we have it decision and resolution of the Court of Appeals. The validity of the chattel mortgage on the
now. vessel LCT ORIENT HOPE is hereby upheld without prejudice to whatever legal remedies
ATTY. UY: private respondent Ang Tay may have against private1 respondent Robert Ong in the premises.
We have. (Counsel producing a picture of a vessel and SO ORDERED.
handing it to the witness).
WITNESS: (Cont)
This is the picture of the vessel because we required
him to submit.
ATTY. LOGRONIO:
Q: You are referring to the picture which you asked
the Court to mark as Exhibit . . . .
ATTY. UY:
No, we are requesting now Your Honor. This has not
been marked yet. We asked that the picture showing
the back portion of the vessel, Orient Hope be marked
as Exhibit "I" and the picture showing the front
portion of the vessel as Exhibit "I-1".
COURT: (TO INTERPRETER)
Mark it.
ATTY. LOGRONIO: (TO WITNESS)
Q: So, at the time that the vessel was submitted to you
as collateral for the loan, the condition of the vessel
was as it is reflected in this exhibit? (Cross- examiner
referring to the picture).
WITNESS:
A: Yes.
xxx xxx xxx 32
Anent the last issue, although Ang Tay may also be an innocent person, a similar victim of
Ong's fraudulent machinations, it was his act of confidence which led to the present fiasco.
Ang Tay readily agreed to execute a deed of absolute sale in Ong's favor even though Ong had
yet to make a complete payment of the purchase price. It is true that in the copy of the said
deed submitted by Ang Tay there was an undertaking that ownership will not vest in Ong until
full payment.33 However, Ong was able to obtain several copies of the deed 34 with Ang Tay's
signature and had these notarized without the aforementioned undertaking as evidenced by the
copy of the deed of sale presented by petitioner. 35 The Deed of Absolute Sale consisted of two
(2) pages. The signatures of Ang Tay and Ong appeared only on the first page of the deed. The
Second page contained the continuation of the acknowledgment and the undertaking. Ong
could have easily reproduced the second page without the undertaking since this page was not
signed by the contracting parties. To complete the deception, Ang Tay unwittingly allowed
Ong to have possession of the ship. Hence, in consonance with our ruling that:

178
EN BANC On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that the
G.R. No. L-13194 January 29, 1960 above-described properties levied are subject to his chattel mortgage of May 8, 1953. In virtue
BUENAVENTURA T. SALDANA, plaintiff-appellant, thereof, the sheriff released only some of the property originally included in the levy of
vs. January 28, 1957, to wit:
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees. 1 Radio, Zenith, cabinet type.
Gatchalian & Padilla for appellant. 8 Tables, stateside.
Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees. 32 Chromiun chairs, stateside.
REYES, J.B.L., J.: 1 G.E. Deep freezer.
This case arose from a complaint for damages filed by Buenaventura Saldana (docketed as To proceed with the execution sale of the rest of the properties still under levy, the defendants-
Civil Case No. 32703 of the Court of First Instance of Manila) that was dismissed by order of appellees Hospital de San Juan de Dios, Inc. and the Philippine Guaranty Co., Inc., executed
the Court dated August 20, 1957, for lack of sufficient cause of action. In another order of an indemnity bond to answer for any damages that plaintiff might suffer. Accordingly, on
September 30, 1957 of the same court, plaintiff's motion for reconsideration was denied, and February 13, 1957, the said properties were sold to the defendant hospital as the highest
the case was appealed to this Court. bidder, for P1,500.00.
The facts are that on May 8, 1953, in order to secure an indebtedness of P15,000.00, Josefina Appellants claims that the phrase in the chattel mortgage contract — "and all other furnitures,
Vda. de Aleazar executed in favor of the plaintiff-appellant Buenaventura Saldana a chattel fixtures and equipment found in the said premises", validly and sufficiently covered within its
mortgage covering properties described as follows: terms the personal properties disposed of in the auction sale, as to warrant an action for
A building of strong materials, used for restaurant business, located in front of the damages by the plaintiff mortgagee.
San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and better
personal properties therein contained: known as the Chattel Mortgage Law, does not demand a minute and specific description of
1 Radio, Zenith, cabinet type. every chattel mortgaged in the deal of mortgage but only requires that the description of the
1 Cooler. properties be such "as to enable the parties in the mortgage, or any other person, after
1 Electric range, stateside, 4 burners. reasonable inquiry and investigation to identify the same". Gauged by this standard, general
1 Frigidaire, 8 cubic feet. description have been held by this Court. (See Stockholder vs. Ramirez, 44 Phil., 993; Pedro
1 G.E. Deepfreezer. de Jesus vs.Guam Bee Co., Inc., 72 Phil., 464).
8 Tables, stateside. A similar rule obtains in the United States courts and decisions there have repeatedly upheld
32 Chromium chairs, stateside. clauses of general import in mortgages of chattels other than goods for trade, and containing
1 Sala set upholstered, 6 pieces. expressions similar to that of the contract now before us. Thus, "and all other stones belonging
1 Bedroom set, 6 pieces. to me and all other goods and chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of the
And all other furniture's, fixtures or equipment found in the said premises. property of the said W.W. Allen used or situated upon the leased premises" (Dorman vs.Crooks
Subsequent to the execution of said mortgage and while the same was still in force, the State Bank, 64 A.L.R. 614); "all goods in the store where they are doing business in E. City,
defendant Hospital de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods, wares, stock, iron tools
Municipal Court of Pasay City, a judgment was duly Josewfina Vda. de Eleazar. A writ of manufactured articles and property of every description, being situated in or about the shop or
execution was duly issued and, on January 28, 1957, the same was served on the judgment building now occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec.
debtor by the sheriff of Pasay City; whereupon the following properties of Josefina Eleazar 368,) were held sufficient description, on the theory that parol evidence could supplement it to
were levied upon: render identification rule is expressed in Walker vs. Johnson (Mont.) 1254 A.L.R. 937:
8 Tables with 4 (upholstered) chairs each. The courts and textbook writers have developed several rules for determination of
1 Table with 4 (wooden) chairs. the sufficiency of the description in a chattel mortgage. The rules are general in
1 Table (large) with 5 chairs. nature and are different where the controversy is between the parties to the mortgage
1 Radio-phono (Zenith, 8 tubes). from the situation where third parties with out actual notice come in. In 11 C.J. 457,
2 Showcases (big, with mirrors). it is said: "Ad against third persons the description in the mortgage must point out its
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . subject matter so that such person may identify the chattels observed, but it is not
1 Wooden drawer. essential that the description be so specific that the property may be identified by it
1 Tocador (brown with mirror). alone, if such description or means of identification which, if pursued will disclose
1 Aparador . the property conveyed." In 5 R.C.L. 423 the rule is stated that a description which
2 Beds (single type). will enable a third person, aided by inquires which the instrument itself suggest to
1 Freezer (deep freeze). identify the property is sufficiently definite." In 1 Jones on Chattel Mortgages and
1 Gas range (magic chef, with 4 burners). Conditional Sales, Bowers Edition, at page 95 the writer says: "As to them (third
1 Freezer (G.E.). persons), the description is sufficient if it points to evidence whereby the precise
thing mortgaged may be ascertained with certainty." Here there is nothing in the

179
description "873 head of sheep" from which anyone, the mortgagee or third persons,
could ascertain with any certainty what chattels were covered by the mortgage.
In many instances the courts have held the description good where, though
otherwise faulty, the mortgage explicity states that the property is in the possession
of the mortgagor, and especially where it is the only property of that kind owned by
him.
The specifications in the chattel mortgage contract in the instant case, we believe, in
substantial compliance with the "reasonable description rule" fixed by the chattel Mortgage
Act. We may notice in the agreement, moreover, that the phrase in question is found after an
enumeration of other specific articles. It can thus be reasonably inferred therefrom that the
"furnitures, fixture and equipment" referred to are properties of like nature, similarly situated
or similarly used in the restaurant of the mortgagor located in front of the San Juan de Dos
Hospital at Dewey Boulevard, Pasay City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises. Note that the limitation found in the last
paragraph of section 7 of the Chattel Mortgage Law1 on "like or subsituated properties" make
reference to those "thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged", not to those already existing and originally included at the
date of the constitution of the chattel mortgage. A contrary view would unduly impose a more
rigid condition than what the law prescribes, which is that the description be only such as to
enable identification after a reasonable inquiry and investigation.
The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216, 219, cited by the appellees and
the lower court, cannot be likened to the case at bar, for there, what were sought to be
mortgaged included two stores wit all its merchandise, effects, wares, and other bazar goods
which were being constantly disposed of and replaced with new supplies in connection with
the business, thereby making any particular or definite identification either impractical or
impossible under the circumstances. Here, the properties deemed overed were more or less
fixed, or at least permanently situated or used in the premises of the mortgagor's restaurant.
The rule in the Jureidini case is further weakened by the court's observation that (44 Phil., p.
220) —
Moreover, if there should exist any doubts on the questions we have just discussed,
they should be treshed out in the insolvency proceedings,
which appears inconsistent with the definitive character of the rulings invoked.
We find that the ground for the appealed order (lack of cause of action) does not appear so
indubitable as to warrant a dismissal of the action without inquiry into the merits and without
the description in the deed of mortgage (Nico vs.Blanco, 81 Phil., 213; Zobel vs. Abreau, 52
Off. Gaz., 3592).
Wherefore, the orders appealed from are set aside and the case remanded to the lower court for
further proceedings. Costs against appellee.

180
FIRST DIVISION security for the obligation, Juniat executed a Continuing Surety Agreement[14] dated April 11, 1992 in
favor of petitioner;[15] that the loan remains unpaid;[16] and that the mortgaged motorized sewing machines
UNION BANK OF THE PHILIPPINES, G.R. No. 171569 areinsufficient to answer for the obligation.[17]
Petitioner,
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor
Present: of petitioner.[18] The writs were served by the Sheriff upon Nonwoven as it was in possession of the
motorized sewing machines and equipment.[19] Although Nonwoven was not impleaded in the complaint
filed by petitioner, the RTC likewise served summons upon Nonwoven since it was in possession of the
- versus- CORONA, C.J., Chairperson, motorized sewing machines and equipment.[20]

LEONARDO-DE CASTRO, On September 28, 1992, Nonwoven filed an Answer, [21] contending that the unnotarized
BERSAMIN, Chattel Mortgage executed in favor of petitioner has no binding effect on Nonwoven and that it has a
better title over the motorized sewing machines and equipment because these were assigned to it by Juniat

ALAIN JUNIAT, WINWOOD DEL CASTILLO, and pursuant to their Agreement[22] dated May 9, 1992.[23] Juniat, Winwood, and Wingyan, on the other hand,
APPAREL, INC., WINGYAN APPAREL, VILLARAMA, JR. JJ. were declared in default for failure to file an answer within the reglementary period.[24]
INC., NONWOVEN
FABRIC PHILIPPINES, Promulgated: On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin,
Respondents. August 1, 2011 [25]
praying that the motorized sewing machines and equipment be sold to avoid depreciation and
deterioration.[26] However, on May 18, 1993, before the RTC could act on the motion, petitioner sold the
x--------------------------------------------------------x
attached properties for the amount of P1,350,000.00.[27]
DECISION
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in good faith.[28]
DEL CASTILLO, J.:
Ruling of the Regional Trial Court
To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.[1]
On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in favor of
petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and
This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the June
the Agreement dated May 9, 1992 in favor of Nonwoven have no obligatory effect on third persons
23, 2005 Decision[3] and the February 9, 2006 Resolution[4] of the Court of Appeals (CA) in CA-G.R. CV
because these documents were not notarized.[31]However, since the Chattel Mortgage in favor of petitioner
No. 66392.
was executed earlier, petitioner has a better right over the motorized sewing machines and equipment
under the doctrine of first in time, stronger in right (prius tempore, potior jure).[32] Thus, the RTC disposed
Factual Antecedents
of the case in this wise:
Petitioner Union Bank of the Philippines (Union Bank) is a universal
WHEREFORE, above premises considered, judgment is hereby
banking corporation organized and existing under Philippine laws.[5]
rendered as follows:
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES,
domestic corporations engaged in the business of apparel manufacturing.[6]Both respondent corporations
as having the better right to the goods and/or machineries subject of the Writs of
are owned and operated by respondent Alain Juniat (Juniat), a French national based in Hongkong.
[7] Preliminary Attachment and Replevin issued by this Court on September 10, 1992.
Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the
manufacture and sale of various types of nonwoven fabrics.[8]
2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the
subject machineries in the amount of P1,350,000.00;
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch
57, a Complaint[9] with prayer for the issuance of ex-parte writs of preliminary attachment and replevin
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and
against Juniat, Winwood, Wingyan, and the person in possession of the mortgaged motorized sewing
Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for the
machines and equipment.[10] Petitioner alleged that Juniat, acting for and in behalf of Winwood and
deficiency between the proceeds of the sale of the machineries subject of this suit
Wingyan, executed a promissory note[11] dated April 11, 1992 and a Chattel Mortgage [12] dated March 27,
[P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the amount
1992 over several motorized sewing machines and other allied equipment to secure their obligation
arising from export bills transactions to petitioner in the amount of P1,131,134.35;[13] that as additional
181
of P569,907.03, with legal interest at the rate of 12% per annum from date of this Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of
judgment until fully paid; and the sale.[42] Although the Chattel Mortgage executed in its favor was not notarized, petitioner insists that it
is nevertheless valid, and thus, has preference over a subsequent unnotarized agreement. [43] Petitioner
4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and further claims that except for the said agreement, no other evidence was presented by Nonwoven to show
Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for the that the motorized sewing machines and equipment were indeed transferred to them by
amount of P50,000.00 as reasonable attorneys fees; and Juniat/Winwood/Wingyan.[44]

5.] Cost of this suit against the [respondents]. Respondent Nonwovens Arguments

SO ORDERED.[33] Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 1544[45] of the
Civil Code on double sale, which it claims can be applied by analogy in the instant case. [46] Nonwoven
Nonwoven moved for reconsideration[34] but the RTC denied the same in its contends that since its prior possession over the motorized sewing machines and equipment was in good
[35]
Order dated July 14, 1999. faith, it has a better title over the proceeds of the sale.[47] Nonwoven likewise maintains that petitioner has
no right over the proceeds of the sale because the Chattel Mortgage executed in its favor was unnotarized,
Ruling of the Court of Appeals unregistered, and without an affidavit of good faith.[48]

On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge Our Ruling
entered into between Juniat and Nonwoven is valid and binding, and that the motorized sewing machines
and equipment were ceded to Nonwoven by Juniat by virtue of a dacion en pago.[36] Thus, the CA The petition has merit.
declared Nonwoven entitled to the proceeds of the sale of the attached properties.[37] The fallo reads:
Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to
WHEREFORE, premises considered, the assailed decision is the Agreement it entered into with Juniat, to wit:
hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of the
Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines, Hong Kong, 9th May, 1992
Inc. P1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993
sale of the machineries to avoid deterioration during pendency of suit. No With reference to talks held this morning at the Holiday Inn Golden Mile Coffee
pronouncement as to costs. Shop, among the following parties:

SO ORDERED.[38] a. Redflower Garments Inc. Mrs. Maglipon


b. Nonwoven Fabrics Phils. Inc. Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S.
Petitioner sought reconsideration[39] which was denied by the CA in a Resolution[40] dated Juniat
February 9, 2006.
IT WAS AGREED THAT:
Issues
a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood
Hence, the present recourse where petitioner interposes the following issues: Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed through partial
payment by L/C with the balance to be settled at a later date for which
1. Whether x x x the Court of Appeals committed serious reversible error in setting Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap
aside the Decision of the trial court holding that Union Bank of the machines and 2 boilers, presently in the care of Redflower Garments Inc., to
Philippines had a better right over the machineries seized/levied upon in the the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile, Nonwoven
proceedings before the trial court and/or the proceeds of the sale thereof; will resume delivery to Winwood/Win Yang as usual.
2. Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven]
has a valid claim over the subject sewing machines.[41] x x x x[49] (Emphasis supplied.)

Petitioners Arguments It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over
the proceeds of the sale of the attached properties than petitioner, whose claim is based on an unnotarized
Chattel Mortgage.

182
We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan
and Winwood, in favor of petitioner does not bind Nonwoven. [50] However, it must be pointed out that
petitioners primary cause of action is for a sum of money with prayer for the issuance of ex-parte writs of
attachment and replevin against Juniat, Winwood, Wingyan, and the person in possession of the
motorized sewing machines and equipment.[51] Thus, the fact that the Chattel Mortgage executed in favor
of petitioner was not notarized does not affect petitioners cause of action. Petitioner only needed to show
that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the
writs prayed for. Considering that writs of attachment and replevin were issued by the RTC, [52] Nonwoven
had to prove that it has a better right of possession or ownership over the attached properties. This it failed
to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap
machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation. However, under
Article 2096 of the Civil Code, [a] pledge shall not take effect against third persons if a description of the
thing pledged and the date of the pledge do not appear in a public instrument. Hence, just like the chattel
mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind
petitioner.

Neither can we sustain the finding of the CA that: The machineries were ceded to THIRD
PARTY NONWOVEN by way of dacion en pago, a contract later entered into by
WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.[53] As aptly pointed out by petitioner, no
evidence was presented by Nonwoven to show that the attached properties were subsequently sold to it by
way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the
motorized sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the
Wingyans and Winwoods obligation. It bears stressing that there can be no transfer of ownership if the
delivery of the property to the creditor is by way of security. [54] In fact, in case of doubt as to whether a
transaction is one of pledge or dacion en pago, the presumption is that it is a pledge as this involves a
lesser transmission of rights and interests.[55]

In view of the foregoing, we are constrained to reverse the ruling of the CA.Nonwoven is not
entitled to the proceeds of the sale of the attached properties because it failed to show that it has a better
title over the same.

WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision
and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are
hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the Regional Trial Court of
Makati, Branch 145, is hereby REINSTATED and AFFIRMED.

SO ORDERED.

183
EN BANC (1) Ordering defendant George L. Tunaya and spouses Teodora Evangelista and Juan
G.R. No. L-26860 July 30, 1969 Evangelista, jointly and solidarily, to pay to plaintiff Alberta B. Cabral and Renato
ALBERTA B. CABRAL and RENATO CABRAL, plaintiffs-appellees, Cabral the sum of P1,000.00, with interest at 12% per annum, plus the costs of suit
vs. and attorney's fees at 15% of the whole amount due conformably to the provisions
TEODORA EVANGELISTA, and JUAN N. EVANGELISTA, defendants-appellants, of the chattel mortgage deed; and
and GEORGE L. TUNAYA, defendant. (2) In the event of their failure to pay, ordering defendants to deliver to the Sheriff of
Emilio D. Castellanes for plaintiffs-appellees. Manila the properties mortgaged to plaintiffs, for the sheriff to sell the same at
Manuel E. Reyes for defendants-appellants. public auction to satisfy the judgment debt.
TEEHANKEE, J.: The counterclaim 2 of defendant Teodora Evangelista and Juan Evangelista is
In this appeal from a decision of the Court of First Instance, and certified by the Court of dismissed.31äwphï1.ñët
Appeals to this Court upon agreement of the parties as involving only questions of law, we It should be noted that the lower Court rendered its above-quoted judgment only on February
reaffirm the well settled principle that the rights of a mortgage creditor over the mortgaged 22, 1965, since defendants-appellants, after the lower court denied their motion to affirm the
properties are superior to those of a subsequent attaching creditor. judgment of the City Court and to dismiss plaintiffs' appeal therefrom, moved further for the
On December 12, 1959, defendant George L. Tunaya had executed in favor of plaintiffs- remand of the case to the City Court and contested the lower court's jurisdiction to try the case
appellees a chattel mortgage covering a "MORRISON" English piano, made in England, as in contravention of Rule 40, section 10, of the Rules of Court. Upon denial by the lower
Concert model, Serial No. 6079 and a Frigidaire General Motors Electric Stove with four court of their motion for the remand of the case, defendants-appellants filed a petition for
burners and double oven bearing Serial No. 21009298, as security for payment to the certiorari and prohibition with this Court, docketed as Case L-20416, which writs this Court
plaintiffs-mortgagees of a promissory note in the sum of P1,000.00 executed on the same date denied in its decision of January 30, 1964, holding that "once (defendants-appellants) had
by said defendant Tunaya with his wife, Esperanza N. Angeles. The chattel mortgage deed was assented to the exercise of the court's jurisdiction, (they) are not permitted thereafter to alter
duly inscribed in the Chattel Mortgage Register of Rizal province on December 14, 1959. The the position thus voluntarily chosen, and to insist once that the case be returned to the
promissory note, which provided for payment of 12% interest per annum and of an additional Municipal Court. Any other rule would allow the parties to confuse and delay at will the
15% of the total amount due for attorney's fees and cost of collection was not paid within the course of litigation." 4
two-month maturity period therein provided. Defendants-appellants' appeal from the lower courts above-quoted judgment is now before us.
Meanwhile, defendants-appellants, the Evangelista spouses, obtained on January 4, 1960, a In their first four assignments of error, defendants-appellants claim that their right over the
final money judgment against defendant Tunaya in Civil Case No. 5550 of the Court of First mortgaged chattels as purchasers at the public sale in execution of their judgment against their
Instance of Rizal. They caused the levy in execution on personal properties of said defendant debtor, defendant Tunaya, should not be held subordinate to the mortgage lien of plaintiffs-
Tunaya, including the piano and stove mortgaged to plaintiffs. The said mortgaged chattels, appellees as mortgagees, by virtue of prescription and laches on the part of said mortgagees as
together with other personal properties of the judgment debtor, were sold at public auction on well as of their having purchased the chattels at a public sheriffs sale. We find no merit in
June 24, 1960, after the corresponding notice of sheriff's sale, to the defendants-appellants as these contentions. Appellants' contention of prescription is based on a patent reading of the
the highest bidders for the total sum of P2,373.00. The judgment credit of defendants- provisions of section 14 of the Chattel Mortgage Law (Act No. 1508) that "the mortgagee ...
appellants, as judgment creditors in said Civil Case No. 5550, was considered paid up to the may after thirty days from the time of condition broken, cause the mortgaged property, or any
said amount and the Sheriff of Rizal issued the corresponding certificate of sale in their favor. part thereof, to be sold at public auction." It does not follow from this provision, as wrongly
Subsequently, on October 11, 1960, or 8 months after the maturity of Tunaya's promissory contended by appellants, that failure on the part of plaintiff to immediately foreclose their
note and his having defaulted in the payment thereof, plaintiffs filed their complaint in the chattel mortgage within the 30-day period from February 12, 1960 (when the promisory note
City Court of Manila against Tunaya and the Evangelista spouses, alleging the above facts and matured) to March 12, 1960, resulted in the prescription of plaintiff's mortgage right and
that the Evangelista spouses had refused their demands to pay the amount due on Tunaya's action. This thirty-day period is the minimum period after violation of the mortgage condition
promissory note or to exercise their right of redemption and praying for judgment, ordering for the mortgage creditor to cause the sale at public auction of the mortgaged chattels, with at
the defendants, jointly and solidarity, to pay them the amounts stipulated on the note, and in least ten days notice to the mortgagor and posting of public notice of the time, place and
case of the failure to make such payment, to order defendants to deliver to the Sheriff of purpose of such sale, and is a period of grace for the mortgagor, who has no right of
Manila the mortgaged chattels for sale at public auction to satisfy their mortgage credit. redemption after the sale is held, to discharge the mortgage obligation. 5 The prescription
The City Court, on November 29, 1960, rendered judgment in favor of plaintiffs against the period for recovery of movables for foreclosure purposes such as in the present case is eight
mortgage debtor, Tunaya, on confession of the latter, but granted the motion to dismiss of the years as provided in Article 1140 of the Civil Code, 6 and here plaintiffs had timely filed their
defendants Evangelista spouses on the ground of failure to state a cause of action and action within 8 months from the mortgage debtor's default. By the same token, neither could
dismissed the complaint as against said spouses. laches properly be imputed against plaintiffs, who filed their action promptly after they had
On appeal from the City Court's adverse decision, the court a quo upheld the superior rights of been advised by their debtor, defendant Tunaya, of the public auction sale on June 24, 1960 of
plaintiffs-appellees as mortgage creditors to the personal properties in question, holding that the chattels at the instance of defendants-appellants as his judgment creditors. 7
defendants-appellants, "being subsequent judgment creditors in another case, have only the Defendants-appellants' purchase of the mortgaged chattels at the public sheriff's sale and the
right of redemption." 1 It therefore rendered the following judgment: delivery of the chattels to them with a certificate of sale did not give them a superior right to
the chattels as against plaintiffs-mortgagees. Rule 39, section 22 of the old Rules of Court

184
(now Rule 39, section 25 of the Revised Rules), cited by appellants precisely provides that expressly provide that the interest accrues from the date of the execution of the promissory
"the sale conveys to the purchaser all the right which the debtor had in such property on the note on December 12, 1959, is hereby affirmed. As the chattels have been disposed of to
day the execution or attachment was levied." It has long been settled by this Court that "The unknown persons, Paragraph 2 of the dispositive part of the judgment providing for the
right of those who so acquire said properties should not and cannot be superior to that of the delivery to the Sheriff of the mortgaged chattels in the event of defendants' failure to pay the
creditor who has in his favor an instrument of mortgage executed with the formalities of the judgment is eliminated. No pronouncement as to costs.
law, in good faith, and without the least indication of fraud. This is all the more true in the
present case, because, when the plaintiff purchased the automobile in question on August 22,
1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of
mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said
automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such
circumstances existed, it should be presumed that he did so, very much willing to respect the
lien existing thereon, since he should not have expected that with the purchase, he would
acquire a better right than that which the vendor then had." 8 In another case between two
mortgagees, we held that "As between the first and second mortgagees, therefore, the second
mortgagee has at most only he right to redeem, and even when the second mortgagee goes
through the formality of an extrajudicial foreclosure, the purchaser acquires no more than the
right of redemption from the first mortgagee." 9 The superiority of the mortgagee's lien over
that of a subsequent judgment creditor is now expressly provided in Rule 39, section 16 of the
Revised Rules of Court, which states with regard to the effect of levy on execution as to third
persons that "The levy on execution shall create a lien in favor of the judgment creditor over
the right, title and interest of the judgment debtor in such property at the time of the levy,
subject to liens or incumbrances then existing."
In the fifth assignment of error, appellants contend that the lower court erred in ordering them
to pay solidarity with defendant Tunaya the amount due on Tunaya's note in favor of plaintiffs,
and in the event of their failure to pay, to deliver the chattels to the Sheriff for sale at public
auction. Article 559 of the Civil Code providing that "If the possessor of a movable lost or of
which the owner has been unlawfully deprived, has acquired it in good faith at a public sale,
the owner cannot obtain its return without reimbursing the price paid therefor..." cited by
appellants has no application in the present case, for as pointed above, they acquired the
chattels subject to the existing mortgage lien of plaintiffs thereon. Appellants state in their
brief that they paid for the chattels the amount of P2,373.00. 10 As pointed out by appellees, the
record shows that defendants-appellants had disposed of the mortgaged chattels "to other
persons at a discounted rate" 11 and had, therefore, appropriated the same as if the chattels were
of their absolute ownership, in complete derogation of plaintiffs' superior mortgage lien and in
disregard of plaintiffs' demands to them prior to the filing of their complaint on October 11,
1960, to pay or exercise their right of redemption. Appellants by their act of disposition of the
mortgaged chattels, whose value were admittedly more than adequate to secure Tunaya's
mortgage obligation, have thus practically nullified plaintiffs' superior right to foreclose the
mortgage and collect the amount due them. Considering the long period that has elapsed since
October 11, 1960 when plaintiffs tried to enforce their claim and defendants-appellants'
adamant resistance thereof and unjust refusal to recognize plaintiffs' clearly superior right to
the chattels, which appellants admittedly disposed of without lawful right to other unknown
persons obviously to defeat plaintiffs' right over the same, we are satisfied that justice and
equity justify the lower court's judgment holding the defendants-appellants solidarily liable for
the amount due plaintiffs-appellees.
WHEREFORE, the lower Court's judgment ordering defendant Tunaya and the defendants-
appellants Teodora Evangelista, jointly and solidarity, to pay plaintiffs the sum of P1,000.00
with interest at 12% per annum, plus the costs of suit and attorney's fees at 15% of the whole
amount due, conformably to the provisions of the chattel mortgage deed, modified so as to

185
SECOND DIVISION is in favor of the plaintiff, and for the latter also to pay the costs. (pp. 3-4,
Petition; pp. 8-9, Rollo)
G.R. No. L-62415 August 20, 1990 On December 4, 1981, the City Court rendered a decision 1 in favor of the petitioner, ruling in
BICOL SAVINGS & LOAN ASSOCIATION, petitioner, part:
vs. It is undisputed that the obligation of both defendants under the
JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF THE COURT OF FIRST promissory note they executed in favor of the plaintiff is joint and several.
INSTANCE OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH That after the plaintiff foreclosed the chattel mortgage executed by
III, respondents. defendant Victorio Depositario there remains a deficiency which is now
Contreras & Associates for petitioner. the subject of this case. The right of the plaintiff to claim for the
Tirso P. Mariano for private respondent. deficiency resulting between the price obtained in the sale of the property
and the outstanding obligation at the time of the foreclosure is clear.
PARAS, J.: (Philippine Bank of Commerce vs. De Vera, 6 SCRA 1026). Under Art.
Sometime on June 19, 1980, Victorio Depositario together with private respondent Jaime 1216 of the Civil Code, as quoted by the plaintiff in its memorandum,
Guinhawa, acting as solidary co-maker, took a loan from petitioner Bicol Savings and Loan plaintiff has the right to proceed against any of the herein defendants who
Association (BISLA for brevity) in the sum of P10,622.00, payable at P535.45 every 19th day are solidary debtors or to both of them simultaneously. Said article further
of each month beginning July 1980 until maturity on June 19, 1982. provides that a demand made against anyone of the solidary debtors shall
To secure the payment of the foregoing loan obligation, the principal borrower Victorio not be an obstacle to those which may later on be directed against the
Depositario put up as security a chattel mortgage which was a Yamaha Motorcycle. Said others, so long as the debt has not been fully paid or collected. In the
motorcycle was eventually foreclosed by reason of the failure of Depositario and private present case, the plaintiff first foreclosed the mortgage put up by
respondent Guinhawa to pay the loan. As a result of the foreclosure, there was a deficiency in defendant Depositario but since the debt was not fully paid out of the
the amount of P5,158.06 as of July 31, 1981, where BISLA made a demand to pay the same. proceeds of the sale it is now proceeding against any or both of the
Thus, on August 6, 1981, petitioner BISLA (plaintiff therein) filed in the City Court of Naga, defendants herein. Article 1216 of the Civil Code gives the plaintiff in this
Branch II, a complaint for the recovery of a sum of money constituting the deficiency after case the option who among the defendants as solidary debtors, should be
foreclosure of the chattel mortgage put up by the principal borrower Depositario against the sued, the debt not being fully paid (PNB vs. Concepcion Mining Co., Inc.,
latter and his solidary co-maker Guinhawa (herein private respondent) as defendants. 5 SCRA 745). (pp. 35-36, Rollo)
Eventually, a stipulation of facts was entered into between BISLA and Guinhawa. They agreed On appeal to the respondent Court of First Instance of Camarines Sur, Branch III, it rendered a
to drop Depositario, as "his whereabouts being unknown now and he could not be served with decision reversing the said lower court's decision, ruling in part:
summons" (p. 8, Rollo). Said stipulation of facts reads: It is true that the assumed obligation by a co-maker is solidary in nature
1) That defendant admits that after the foreclosure of the chattel mortgage with respect to the principal debtor but when the creditor chose to
executed by defendant Victorio Depositario, the principal debtor, as foreclose the mortgage, it simply means that the creditor chose to collect
security for the payment of the loan, there is left a deficiency in the sum of from Depositario, one of the solidary debtors and not the appellant. If
P5,158.06 as of July 31, 1981, aside from the agreed interest thereon at there is any deficiency in payment, how can the herein appellant be made
17% per annum compounded monthly; to assume the deficiency since the appellee creditor choose to foreclose
2) That defendant is only a co-maker in the aforementioned loan but that, and collect through the mortgage of which the appellant in the first place
however, under the promissory note he jointly and severally promised with was not a party to the said mortgage
Victorio Depositario to pay plaintiff the said loan; that he is not a party to It is not disputed that a creditor can exact or collect payment of the
the chattel mortgage; and that the same was foreclosed without notice to indebtedness from any of the solidary debtors in a promissory note of
him; which a co-maker assumes a character of one, the appellant herein can not
3) That both parties agree that the only issue to be resolved is whether evade or ignore the collection if the creditor sued upon the promissory
defendant herein is liable to pay plaintiff the sums mentioned in paragraph note. But what did the creditor do? Instead of proceeding upon the
1 hereof; promissory note of which the appealing co-maker stands as solidary
4) That in view thereof, both parties agree to submit this case for decision debtor, the appellee chose the chattel mortgage and collect therefrom of
based on the foregoing stipulation of facts; which mortgage the appellant was never a party and having a deficiency
5) That should decision be in favor of the plaintiff the defendant agrees to therein, the creditor, the herein appellee, would like to collect from the
pay plaintiff not only the sums mentioned in paragraph I hereof but an promissory note. In a case of Identical setting, it was held that foreclosure
additional amount equivalent to 10% of the aggregate amount due the of mortgage precludes any further action against the debtor and his
plaintiff as attorney's fees and to pay the costs. Should the decision, guarantor (Pascual vs. Universal Motors, 61 SCRA 121). (p. 71, Rollo)
however, be in favor of the defendant, plaintiff will pay the defendant the Hence, this petition.
same amount of attorney's fees that defendant would have paid if decision The petition is impressed with merit.

186
In a number of cases, We already held that if in an extrajudicial foreclosure of a chattel
mortgage a deficiency exists, an independent civil action may be instituted for the recovery of
said deficiency. If the mortgagee has foreclosed the mortgage judicially, he may ask for the
execution of the judgment against any other property of the mortgagor for the payment of the
balance. To deny to 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 a security and not as payment for the debt in case of failure of
payment. (Bank of the Philippine Islands vn Olutanga Lumber Co., 47 Phil. 20; Manila
Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513.)
The case of Pascual, as cited by the respondent court, is not applicable in this instant case
because it was a case of sale on installment, where after foreclosure of the units the plaintiff
guarantors who had likewise executed a real estate mortgage of up to P50,000, cannot be held
answerable anymore for the deficiency. The conclusion therefore reached by the lower court
was erroneous because in the case at bar, the obligation contracted by the principal debtor
(Depositario) with a solidary co-maker (private respondent herein), was one of loan secured by
a chattel mortgage, executed by the principal debtor, and not a sale where the price is payable
on installments and where a chattel mortgage on the thing sold was constituted by the buyer
and, further, the obligation to pay the installments having been guaranteed by another.
Private respondent Guinhawa contends that he was not a party to the chattel mortgage
executed by Depositario but merely a co-maker on the promissory note executed by the latter
and therefore cannot be held liable for the deficiency.
Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against one of them shall not
be an obstacle to those which may subsequently be directed against the others, so long as the
debt has not been fully collected. And therefore, where the private respondent binds himself
solidarily with the principal debtor to pay the latter's debt, he may be proceeded against by the
principal debtor. Private respondent as solidary co- maker is also a surety (Art. 2047) and that
under the law, the bringing of an action against the principal debtor to enforce the payment of
the obligation is not inconsistent with, and does not preclude, the bringing of another action to
compel the surety to fulfill his obligation under the agreement.
Article 2080 2 of the Civil Code which is relied on by private respondent has no application to
the case at bar since his liability here is as a surety not as a guarantor.
WHEREFORE, the appealed decision dated October 12, 1982 is hereby REVERSED and SET
ASIDE and the decision of the City Court dated December 4, 1981 is hereby REINSTATED.
Costs against the private respondent.
SO ORDERED.

187
SECOND DIVISION cargo. Later, however, it agreed to add a footnote reading "Two container vans carried by the
SS Hangang Glory to complete the shipment of twelve containers under the bill of lading."
G.R. No. 110581 September 21, 1994 On June 29, 1979 the manifest was picked up from the office of respondent shipping agent by
TELENGTAN BROTHERS & SONS, INC. (LA SUERTE CIGAR & an employee of the IBC and filed with the Bureau of Customs. The manifest was approved for
CIGARETTE), petitioner, release on July 3, 1979. IBC wrote Smith, Bell & Co. to make of record that entry of the
vs. shipment had been delayed by the error in the manifest.
THE COURT OF APPEALS, KAWASAKI KISHEN KAISHA, LTD. and SMITH, BELL On July 11, 1979, when the IBC tried to secure the release of the cargo, it was informed by
& CO., INC., respondents. private respondents' collection agent, the CBCS Guaranteed Fast Collection Services, that the
Juan, Luces, Luna and Associates for petitioner. free time for removing the containers from the container yard had expired on June 26, 1979, in
Bito, Lozada, Ortega & Castillo for private respondents. the case of the SS Far East Friendship, and on July 9, in the case of the SS Hangang
Glory, 3 and that demurrage charges had begun to run on June 27, 1979 with respect to the 10
MENDOZA, J.: containers on the SS Far East Friendship and on July 10, 1979 with respect to the 2 containers
This is a petition for review of the decision of the Court of Appeals, 1 in CA-G.R. CV No. shipped on board the SS Hangang Glory.
09514, affirming with modification the decision of the Regional Trial Court in a case for On July 13, 1979, petitioner paid P47,680.00 representing the total demurrage charges on all
specific performance brought by petitioner. the containers, but it was not able to obtain its goods. On July 16, 1979 it was able to obtain
Private respondent Kawasaki Kishen Kaisha, Ltd. (K-Line) is a foreign shipping company the release of two containers and on
doing business in the Philippines, its shipping agent being respondent the Smith, Bell & Co., July 17, 1979 of one more container. It was able to obtain only a partial release of the cargo
Inc. It is a member of the Far East Conference, the body which fixes rates by agreement of its because of the breakdown of the arrastre's equipment at the container yard.
member-shipowners. The conference is registered with the U.S. Federal Maritime This matter was reported by IBC in letters of complaint sent to the Philippine Ports Authority.
Commission. 2 In addition, on July 16, 1979, petitioner sent a letter dated July 12, 1979 (Exh. I) to Smith, Bell
On May 8, 1979, the Van Reekum Paper, Inc. entered into a contract of affreightment with the & Co., requesting reconsideration of the demurrage charges, on the ground that the delay in
K-Line for the shipment of 468 rolls of container board liners from Savannah, Georgia to claiming the goods was due to the alleged late arrival of the shipping documents, the delay
Manila. The shipment was consigned to herein petitioner La Suerte Cigar & Cigarette Factory. caused by the amendment of the manifest, and the fact that two of the containers arrived
The contract of affreightment was embodied in Bill of Lading No. 602 issued by the carrier to separately from the other ten containers.
the shipper. The expenses of loading and unloading were for the account of the consignee. On July 19, 1979, petitioner paid additional charges in the amount of P20,160.00 for the
The shipment was packed in 12 container vans and loaded on board the carrier's vessel, period July 14-19, 1979 to secure the release of its cargo, but still petitioner was unable to get
SS Verrazano Bridge. At Tokyo, Japan, the cargo was transhipped on two vessels of the K- any cargo from the remaining nine container vans. It was only the next day, July 20, 1979, that
Line. Ten container vans were loaded on the SS Far East Friendship, while two were loaded it was able to have two more containers released from the container yard, bringing to five the
on the SS Hangang Glory. total number of containers whose contents had been delivered to it.
Shortly thereafter, the consignee (herein petitioner) received from the shipper photocopies of Subsequently, petitioner refused to pay any more demurrage charges on the ground that there
the bill of lading, consular invoice and packing list, as well as notice of the estimated time of was agreement for their payment in the bill of lading and that the delay in the release of the
arrival of the cargo. cargo was not due to its fault but to the breakdown of the equipment at the container yard. In
On June 11, 1979, the SS Far East Friendship arrived at the port of Manila. Aside from the all, petitioner had paid demurrage charges from June 27 to July 19, 1979, in the total amount
regular advertisements in the shipping section of the Bulletin Today announcing the arrival of of P67,840.00, computed as follows:
its vessels, petitioner was notified in writing of the ship's arrival, together with information A. Container demurrage paid on July 13, 1979
that container demurrage at the rate of P4.00 per linear foot per day for the first 5 days and 1. Far East Friendship (Exh. H-1) June 27 — July 13 (17 days)
P8.00 per linear foot per day after the 5th day would be charged unless the consignee took 1st 5 days @ P4/day/foot
delivery of the cargo within ten days. 5 days x P40 ft. x 10 ctrns. P 8,000.00
On June 21, 1979, the other vessel SS Hangang Glory, carrying petitioner's two other vans, Next 12 days @ P8/day/foot
arrived and was discharged of its contents the next day. On the same day the shipping agent 12 days x P8 x 40 ft. x 10 ctrns. P 38,400.00
Smith, Bell & Co. released the Delivery Permit for twelve (12) containers to the broker upon —————
payment of freight charges on the bill of lading. P 46,400.00
The next day, June 22, 1979, the Island Brokerage Co. presented, in behalf of petitioner, the 2. Hangang Glory (Exh. H) July 10 — July 13 (4 days)
shipping documents to the Customs Marine Division of the Bureau of Customs. But the latter 1st 4 days:
refused to act on them because the manifest of the SS Far East Friendship covered only 10 4 days x P4 x 40 ft. x 2 ctnrs. P 1,280.00
containers, whereas the bill of lading covered 12 containers. —————
The broker, therefore, sent back the manifest to the shipping agent with the request that the TOTAL PAID ON JULY 13 P 47,680.00
manifest be amended. Smith, Bell & Co. refused on the ground that an amendment, as (Exh. H-2)
requested, would violate §1005 of the Tariff and Customs Code relating to unmanifested B. Container demurrage paid on July 19, 1979

188
1. Far East Friendship expenses and any other sums whatsoever payable or chargeable to or for
a. on 2 containers released July 16 the account of the Merchant under this bill of lading . . . .
3 days x P8 x 40 ft. x 2 ctnrs. P 1,920.00 It likewise invoked clause 29 of the bill of lading which provided:
(Exh. L-2) 29. . . .The terms of the ocean carrier's applicable tariff, including tariffs
b. on 1 container released July 17 covering intermodal transportation on file with the Federal Maritime
4 days x P8 x 40 ft. x 7 cntrs. P 1,280.00 Commission and the Interstate Commission or any other regulatory body
(Exh. L-3) which governs a portion of the carriage of goods, are incorporated herein.
c. remaining 7 containers as of July 19 Rule 21 of the Far East Conference Tariff No. 28-FMC No. 12 Rules and Regulations, referred
6 days x P8 x 40 ft. x 7 cntrs. P 13,440.00 to above, provides:
(Exh. L-1) (D) Free Time, Demurrage, and Equipment Detention at Ports in the
2. Hangang Glory Philippines.
a. 5th day (July 14) Note: Philippine Customs Law prescribes all cargo discharged from
1 day x P4.00 x 40 ft. x 2 cntrs. P 320.00 vessels to be given into custody of the Government Arrastre Contractor,
b. July 15-19: appointed by Philippine Customs who undertakes delivery to the
5 days x P8.00 x 40 ft. x 2 cntrs. P 3,200.00 consignee.
(Exh. L) xxx xxx xxx
————— Demurrage charges on Containers with CY Cargo.
TOTAL P 20,160.00 1. Free time will commence at 8:00 a.m. on the first working calendar day
(Exh. L-4) following completion of discharge of the vessel. It shall expire at 12:00
————— p.m. (midnight) on the tenth working calendar day, excluding Saturdays,
OVERALL TOTAL P 67,840.00 Sundays and holidays.
========= Work stoppage at a terminal due to labor dispute or other force majeure as
On July 20, 1979 petitioner wrote private respondent for a refund of the demurrage charges, defined by the conference preventing delivery of cargo or containers shall
but private respondent replied on July 25, 1979 that, as member of the Far East Conference, it be excluded from the calculation of the free time for the period of the
could not modify the rules or authorize refunds of the stipulated tariffs. work stoppage.
Petitioner, therefore, filed this suit in the RTC for specific performance to compel private 2. Demurrage charges are incurred before the container leaves the carrier's
respondent carrier, through it s shipping agent, the Smith, Bell & Co., to release 7 container designated CY, and shall be applicable on the container commencing the
vans consigned to it free of charge and for a refund of P67,840.00 which it had paid, plus next working calendar day following expiration of the allowable free time
attorney's fees and other expenses of litigation. Petitioner also asked for the issuance of a writ until the consignee has taken delivery of the container or has fully striped
of preliminary injunction to restrain private respondents from charging additional demurrage. the container of its contents in the carrier's designated CY.
In their amended answer, private respondents claimed that collection of container charges was Demurrage charges shall be assessed hereunder:
authorized by §§ 2, 23 and 29 of the bill of lading and that they were not free to waive these Ordinary containers — P4.00 per
charges because under the United States Shipping Act of 1916 it was unlawful for any linear foot of the container per day
common carrier engaged in transportation involving the foreign commerce of the United for the first five days; P8.00 per
States to charge or collect a greater or lesser compensation that the rates and charges specified linear foot of the container per
in its tariffs on file with the Federal Maritime Commission. day, thereafter.
Private respondents alleged that petitioner knew that the contract of carriage was subject to the The RTC held that the bill of lading was the contract between the parties and, therefore,
Far East Conference rules and that the publication of the notice of reimposition of container petitioner was liable for demurrage charges. It rejected petitioner's claim of force majeure. It
demurrage charges published in the shipping section of the Bulletin held:
Today and Businessday newspapers from February 19 — February 25, 1979 was binding upon This Court cannot also accord faith and credit on the plaintiff's claim that
petitioner. They contended further that the collection of container demurrage was an the delay in the delivery of the containers was caused by the breaking
international practice which is widely accepted in ports all over the world and that it was in down of the equipment of the arrastre operator. Such claim was not
conformity with Republic Act No. 1407, otherwise known as the Philippine Overseas Shipping supported with competent evidence. Let us assume the fact that the
Act of 1955. arrastre operator's equipment broke down still plaintiff has to pay the
Thereafter, a writ was issued after petitioner had posted a bond of P50,000.00 and the corresponding demurrage charges. The possibility that the equipment
container vans were released to the petitioner. On March 19, 1986, however, the RTC would break down was not only foreseeable, but actually, foreseen, and
dismissed petitioner's complaint. It cited the bill of lading which provided: was not caso fortuito. 4
23. The ocean carrier shall have a lien on the goods, which shall survive The RTC, therefore, ordered:
delivery, for all freight, dead freight, demurrage, damages, loss, charges,

189
WHEREFORE, finding the preponderance of evidence in favor of the the implied obligation to load or unload the cargo with reasonable
defendants and against the plaintiff, judgment is hereby rendered dispatch, but only by the party to whom the duty is owed and only against
dismissing the complaint with costs against it. Plaintiff is hereby ordered one who is a party to the shipping contract.
to pay defendants the sum of P36,480.00 representing demurrage charges Whatever may be the merit of petitioner's contention as to the meaning of the word
for the detention of the seven (7) forty-footer container vans from July 20 "demurrage" in clause 23 of the bill of lading, the fact is that clause 29(a) also of the bill of
to August 7, 1979, with legal interest commencing on August 7, 1979 until lading, in relation to Rule 21 of the Far East Conference Tariff No. 28-FMC No. 12, as quoted
fully paid. And plaintiff has to pay the sum of P10,000.00, by way of above, specifically provides for the payment by the consignee of demurrage for the detention
attorney's fees. of containers and other equipment after the so-called "free time."
SO ORDERED. Now a bill of lading is both a receipt and a contract. As a contract, its terms and conditions are
On appeal, the case was affirmed with modification by the Court of Appeals as follows: conclusive on the parties, including the consignee. What we said in one case mutatis
WHEREFORE, modified as indicated above deleting the award of mutandis applies to this case:
attorney's fees, the decision appealed from is hereby AFFIRMED in all A bill of lading operates both as a receipt and a contract . . . As a contract,
other respects. it names the contracting parties which include the consignee, fixes the
Costs against plaintiff-appellant. route, destination, freight rate or charges, and stipulates the right and
SO ORDERED. 5 obligations assumed by the parties . . . . By receiving the bill of lading,
Hence, this petition for review in which it is contended: Davao Parts and Services, Inc. assented to the terms of the consignment
1 that no demurrage lies in the absence of any showing contained therein, and became bound thereby, so far as the conditions
that the vessels had been improperly detained or that named are reasonable in the eyes of the law. Since neither appellant nor
loss or damage had been incurred as a consequence of appellee alleges that any provision therein is contrary to law, morals, good
improper detention; customs, public policy or public order — and indeed we found none — the
2 that respondent Court's finding that private validity of the Bill of Lading must be sustained and the provisions therein
respondent Smith Bell had promptly and on the same properly applies to resolve the conflict between the parties. 8
day amended the defective manifest is contrary to the As the Court of Appeals pointed out in its appealed decision, the enforcement of the rules of
evidence of record. the Far East Conference and the Federal Maritime Commission is in accordance with Republic
3 that respondent Court manifestly over-looked Act No. 1407, §1 of which declares that the Philippines, in common with other maritime
undisputed evidence presented by petitioner showing nations, recognizes the international character of shipping in foreign trade and existing
that the breakdown in the facilities and equipment of international practices in maritime transportation and that it is part of the national policy to
the arrastre operator further delayed petitioner's cooperate with other friendly nations in the maintenance and improvement of such practices.
withdrawal of the cargo. 6 Petitioner's argument that it is not bound by the bill of lading issued by K-Line because it is a
Petitioner prays for a reversal of the decision of the Court of Appeals and the refund to it of contract of adhesion, whose terms as set forth at the back are in small prints and are hardly
the demurrage charges paid by it, with interest, as well as to pay attorney's fees and expenses readable, is without merit. As we held in Servando v. Philippine Steam Navigation: 9
of litigation. While it may be true that petitioner had not signed the plane ticket (Exh.
Our decision will be presently explained, but in brief it is this: petitioner is liable for 12), he is nevertheless bound by the provisions thereof. "Such provisions
demurrage for delay in removing its cargo from the containers but only for the period July 3 to have been held to be a part of the contract of carriage, and valid and
13, 1979 with respect to ten containers and from July 10 to July 13, 1979, in respect of two binding upon the passenger regardless of the latter's lack of knowledge or
other containers. assent to the regulation". It is what is known as a contract of "adhesion," in
First. With respect to petitioner's liability for demurrage, petitioner's contention is that the bill regards to which it has been said that contracts of adhesion wherein one
of lading does not provide for the payment of container demurrage, as Clause 23 of the bill of party imposes a ready made form of contract on the other, as the plane
lading only says "demurrage," i.e., damages for the detention of vessels, and here there is no ticket in the case at bar, are contracts not entirely prohibited. The one who
detention of vessels. Petitioner invokes the ruling in Magellan Manufacturing Marketing adheres to the contract is in reality free to reject it entirely; if he adheres,
Corp. v. Court of Appeals 7, where we defined "demurrage" as follows: he gives his consent. (Tolentino, Civil Code, Vol. IV, 1962 Ed., p.
Demurrage, in its strict sense, is the compensation provided for in the 462, citing Mr. Justice JBL Reyes, Lawyer's Journal, Jan. 31, 1951, p. 49).
contract of affreightment for the detention of the vessel beyond the time Second. With respect to the period of petitioner's liability, private respondent's position is that
agreed on for loading and unloading. Essentially, demurrage is the claim the "free time" expired on June 26, 1979 and demurrage began to toll on June 27, 1979, with
for damages for failure to accept delivery. In a broad sense, every respect to 10 containers which were unloaded from the SS Far East Friendship, while with
improper detention of a vessel may be considered a demurrage. Liability respect to the 2 containers which were unloaded from the SS Hangang Glory, the free time
for demurrage, using the word in its strictly technical sense, exists only expired on July 9, 1979 and demurrage began to run on July 10, 1979.
when expressly stipulated in the contract. Using the term in [its broader This contention is without merit. Petitioner cannot be held liable for demurrage starting June
sense, damages in the] nature of demurrage are recoverable for a breach of 27, 1979 on the 10 containers which arrived on the SS Far East Friendship because the delay

190
in obtaining release of the goods was not due to its fault. The evidence shows that because the ————
manifest issued by the respondent K-Line, through the Smith, Bell & Co., stated only 10 TOTAL DEMURRAGE DUE P 28,480
containers, whereas the bill of lading also issued by the K-Line showed there were 12 =======
containers, the Bureau of Customs refused to give an entry permit to petitioner. For this LESS: TOTAL PAID (P 67,840)
reason, petitioner's broker, the IBC, had to see the respondent's agent (Smith, Bell & Co.) on OVERPAYMENT (P 39,360)
June 22, 1979 but the latter did not immediately do something to correct the manifest. Smith, As shown above there is an overpayment of P39,360.00 which should be refunded to
Bell & Co. was asked to "amend" the manifest, but it refused to do so on the ground that this petitioner.
would violate the law. It was only on June 29, 1979 that it thought of adding instead a footnote WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED,
to indicate that two other container vans — to account for a total of 12 container vans ORDERING the private respondents to pay to petitioner the sum of P39,360.00 by way of
consigned to petitioner — had been loaded on the other vessel refund, with legal interest.
SS Hangang Glory. SO ORDERED.
It is not true that the necessary correction was made on June 22, 1979, the same day the
manifest was presented to Smith, Bell & Co. There is nothing in the testimonies of witnesses
of either party to support the appellate court's finding that the footnote, explaining the apparent
discrepancy between the bill of lading and the manifest, was added on June 22, 1979 but that
petitioner's representative did not return to pick up the manifesst until June 29, 1979. To the
contrary, it is more probable to believe the petitioner's claim that the manifest was corrected
only on June 29, 1979 (by which time the "free time" had already expired), because Smith,
Bell & Co. did not immediately know what to do as it insisted it could not amend the manifest
and only thought of adding a footnote on June 29, 1979 upon the suggestion of the IBC.
Now June 29, 1979 was a Friday. Again it is probable the correct manifest was presented to
the Bureau of Customs only on Monday, July 2, 1979 and, therefore, it was only on July 3 that
it was approved. It was, therefore, only from this date (July 3, 1979) that petitioner could have
claimed its cargo and charged for any delay in removing its cargo from the containers. With
respect to the other two containers which arrived on the SS Hangang Glory, demurrage was
properly considered to have accrued on July 10, 1979 since the "free time" expired on July 9.
The period of delay, however, for all the 12 containers must be deemed to have stopped on
July 13, 1979, because on this date petitioner paid P47,680.00. If it was not able to get its
cargo from the container vans, it was because of the breakdown of the shifter or cranes. This
breakdown cannot be blamed on petitioners since these were cranes of the arrastre service
operator. It would be unjust to charge demurrage after July 13, 1979 since the delay in
emptying the containers was not due to the fault of the petitioner.
Indeed, there is no reason why petitioner should not get its cargo after paying all demurrage
charges due on July 13, 1979. If it paid P20,180.00 more in demurrage charges after July 13,
1979 it was only because respondents would not release the goods. Even then petitioner was
able to obtain the release of cargo from five container vans. Its trucks were unable to load
anymore cargo and returned to petitioner's premises empty.
In sum, we hold that petitioner can be held liable for demurrage only for the period July 3-13,
1979 and that in accordance with the stipulation in its bill of lading, it is liable for demurrage
only in the amount of P28,480.00 computed as follows;
A. 10 containers ex Far East Friendship (July 3-13, 1979)
1. 1st 5 days @ P4.00/day/foot
5 days x P4 x 40 ft. x 10 ctnrs. P 8,000
2. Next 6 days @ P8.00/day/foot
6 days x P8 x 40 ft. x 10 cntrs. P 19,200 P 27,200
————
B. 2 containers ex Hangang Glory (July 10-13, 1979)
1st 4 days @ P4.00/day/foot
4 days x P4 x 40 ft. x 10 cntrs. P 1,280

191
EN BANC was holding as collateral security for each of the three 18,000-peso notes amounting to
G.R. No. L-16483 December 7, 1921 P54,000. the total amount of copra evidenced by the receipts withdrawn was 6,024.55 piculs,
PHILIPPINE TRUST COMPANY, as assignee of Salvador Hermanos, the declared value of which, shown on the face of such receipts, was P90,368.25. At the time
insolvent, plaintiff-appellant, of the withdrawal, the firm executed the following writing:
vs. We received from the Philippine National Bank the warehouse receipts issued by
PHILIPPINE NATIONAL BANK, defendant-appellee. Messrs. Nieva, Ruiz and Company, the contents of which are as follows:
Ross & Lawrence and Ewald E. Selph for appellant.
Roman J. Lacson for appellee. No. Date Sacks Piculs Declared Value
33 January 21/19 2,325 2,040.55 P30,608.25
36 January 23/19 2,175 1,992.00 29,880.00
JOHNS, J.: 39 January 25/19 2,335 1,992.00 29,880.00
The plaintiff and defendant are corporations organized under the laws of the Philippine Islands
and domiciled in the city of Manila.
Salvador Hermanos was a copartnership and during the month of January, 1919, executed to Total 6,835 6,024.55 90,368.25
the defendant eight promissory notes aggregating P156,000, payable on demand, and each We promise to return to his bank the warehouse receipts above cited on or
secured by a quedan, or warehouse receipt, issued by the firm of Nieva, Ruiz and Company, before the 27th instant. These warehouse receipts are guaranteed by the
Each note recites that it is payable on demand after date, for value received, and that the firm attached certificate of existence of the effects of the 8th of February, 1919,
has deposited "with the said bank as collateral security for the payment of this note, or any issued by us.
note given in extension or renewal thereof, as well as for the payment of any other liability or Manila, P.I., February 10, 1919.
liabilities of the undersigned to the said bank due or to become due, whether now existing or SALVADOR HERMANOS.
hereafter arising, the following property owned by the undersigned." The note then specifies Per (Sgd.) G. SALVADOR.
the number of the quedan and the amount of copra in piculs, and states that the quedan was to which was attached this writing:
issued by Nieva, Ruiz and Company. The note for P8,000, dated January 18, 1919, was MANILA, P. I., February 8, 1919.
secured by warehouse receipt No. 30; for P20,000, dated January 22, 1919, was secured by We hereby certify that there exist the following articles in our
receipt No. 35; for P20,000, dated January 24, 1919 was secured by receipt No. 38; for bodegas as follows:
P20,000, dated January 27, 1919, was secured by receipt No. 41; for P14,000, dated January Soler Bodega.
28, 1919 was secured by receipt No. 42; for P18,000, dated January 21, 1919, was secured by 100 tons kapok @ 200.00 .................. P20,000.00
receipt No. 33; for P18,000, dated January 23, 1919, was secured by receipt No. 36; and for 100 piculs hemp @ 60.00 .................. 6,000.00
P18,000, dated January 25, 1919, was secured by receipt No. 39, making a total of 16,051.10 20,000 sacks (empty) @ 0.30 ............ 6,000.00
piculs of copra, covered by the warehouse receipts of the firm of Nieva, Ruiz and Company 1 lot gum copal ................................... 1,900.00
issued to the firm of Salvador Hermano, and by that firm pledged as collateral to the defendant
1 lot gum elemi .................................... 1,700.00
to secure the payment of the eight above-described notes. Each of them further recites that "on
the nonperformance of this promise, or upon the non-payment of any of the liabilities above- 500,000 rattan @ 12.00 ....................... 6,000.00
mentioned, or upon the failure of the undersigned forthwith, with or without notice, to furnish Aceites y grasas ................................. 800.00
satisfactory additional securities in case of decline, as aforesaid, then and in either such case, 9,000 sacks common salt @ 2.00 ...... 18,000.00
this note and all liabilities of the undersigned, or any of them, shall forthwith become due and
payable, without demand or notice, and full power and authority are hereby given to said bank 60,400.00
to sell, assign, transfer and deliver the whole of the said securities, or any part thereof, or any Wise and Co. — Gagalañgin Bodega.
substitutes therefor or any additions thereto, or any other securities or property given unto or
left in the possession of or hereafter give unto or left in the possession of said bank by the 905 cas. Gs. in case @ 12.75 ............... P11,538.75
undersigned for safe keeping or otherwise, at any brokers' board or at public or private sale, at 77 Cas, Gs. in drums
4,989.60
the option of said bank or of its president or secretary, without either demand, advertisement 54 gals. 64.89 .................................
or notice of any kind, which are hereby expressly waived. At any such sale, the said bank may
itself purchase the whole or any part of the property sold, free from any right of redemption on 16,528.35
the part of the undersigned, which is hereby waived and released." Stamped in red ink across
the face of each quedan are the words "Negotiable Warrant," and each of them was in the usual
form of warehouse receipts. P76,928.35
On February 10, 1919, the firm of Salvador Hermanos withdrew from the defendant bank, by ========
and with its consent, warehouse receipts Nos. 33, 36, and 39 above described, which the bank
192
and promise that none of the above articles would be removed without {@ 53 gls. each}
6,415.20
consulting first with the Philippine National Bank. 80 drums Union gasoline {@1.485 gal. } .........
SALVADOR HERMANOS. 100 cases gasoline 14.00 cs. ............................. 1,400.00
Per (Sgd.) G. SALVADOR. 8 drums gasoline @ 54 gals, ea. 1.485 gl .......... 641.52
Neither writing was in any manner authenticated by a notary or by a competent public official. 10,000 piculs copra p. picul 14.50 ....................... 145,000.00
The writing of February 10 is in form a receipt from the firm of Salvador Hermanos to the
35 bales cardboard value ..................................... 1,451.52
Philippine National Bank of the quedans, or warehouse receipts, for the copra therein
described. The one of February 8 is, in legal effect, the certificate of Salvador Hermanos "that
there exist the following articles in our bodegas as follows:" (Here follows the described P179,326.64
property.) That is to say, that the firm certifies that the property described is in the warehouse The testimony is undisputed and conclusive that about May 3, 1919, Gregorio Salvador, a
of the firm. member of the firm of Salvador Hermanos, deliver certain goods, wares, and merchandise to
Act No. 1956 of the Philippine Legislature provides for the suspension of payments, the relief and in the warehouse of Nieva, Ruiz and Company, and requested that firm to issue its receipt
of insolvent debtors, the protection of creditors, and the punishment of fraudulent debtors. The therefor to and in favor of the Philippine National Bank, and that, pursuant to such request,
Act provides: that firm did issue eight quedans to the bank as follows:
SECTION 1. This Act shall be known and may be cited as The Insolvency Law, and No. 161 for 32 bales of hemp;
in accordance with its provisions every insolvent debtor may be permitted to No. 162 for 953 bundles of rattan;
suspend payments or be discharged from his debts and liabilities. No. 165 for 72 bundles of empty sacks;
Section 2 provides that debtor who possesses sufficient property to cover the debts, No. 167 for 136 sacks of gum;
be it an individual, firm or corporation, and who is unable to meet them at maturity, No. 168 for 1,461 bales of kapok;
"may petition that he be declared in the state of suspension of payments by the court, No. 175 for 288 packages of Talcum Powder;
or the judge thereof in vacation." No. 176 for 35 packages of cardboard; and
Section 3 enacts that upon the filing of the petition, the court shall make an order No. 185 for 134 bundles of empty sacks.
calling a meeting of creditors specifying the time and place; that notice thereof shall On and between May 6, 1919 and August 7, 1919, acting under the terms and provisions of its
be published in a newspaper, and that "said order shall further contain an absolute respective notes, the defendant bank sold all of the personal property for which it held
injunction forbidding the petitioning debtor from disposing in any manner of his warehouse receipts, or which had been surrendered to it by the Hermanos firm, save and
property, except in so far as concerns the ordinary operations of commerce or of except the property described in the three warehouse receipts, which were released and
industry in which the petitioner is engaged, and, furthermore, from making any surrendered to the firm on February 10, 1919.
payments outside of the necessary or legitimate expenses of his business or industry, Based upon its insolvency petition, and in the ordinary course of business, the firm of
so long as the proceedings relative for the suspension of payments are pendings, and Salvador Hermanos was adjudged insolvent, and on July 19, 1919, the Philippine Trust
said proceedings for the purposes of this Act shall be considered to have been Company was elected assignee of said firm and duly qualified. September 13, 1919, as such
instituted from the date of the filing of the petition." assignee, it made a demand upon the bank for the surrender and delivery of the property
Section 14, chapter 3, provides that any person owing debts exceeding P1,000 may described in all of the above receipts, and, upon the bank's refusal, commenced this action to
apply to be discharged from his debts and liabilities by petition to the Court of First recover its value alleged to be P242,579.61, claiming that on April 21, 1919, the firm of
Instance in which he has resided for six months preceding the filing of the petition. Salvador Hermanos was the sole and exclusive owner of the property, and that, as to the copra,
Section 18 enacts that upon receiving and filing of the petition, schedule, and about June 28, 1919, and after the filing of the insolvency petition, the bank unlawfully seized
inventory, the court, or the judge, shall make an order declaring the petitioner and converted the copra to its own use, the value of which was P192,260. For a second cause
insolvent, and "shall further forbid the payment to the debtor of any debts due to him of action, the plaintiff alleges that, as such assignee, it was the owner of the remaining
and the delivery to the debtor, or to any person for him, of any property belonging to personal property, and that, after the insolvency petition was filed, the defendant unlawfully
him, and the transfer of any property by him, and shall further appoint a time and seized and converted such property to its own use, and that it was of the value of P50,319.61.
place for a meeting of the creditors to choose an assignee of the estate." For answer, the bank makes a general denial, as to each cause of action, of all of the material
On April 21, 1919, Salvador Hermanos filed a petition of insolvency in the Court of First allegations of the complaint. This presents the question as to who is the owner and entitled to
Instance of the city of Manila. Article 5 of the petition recites: possession of the property. There is but little, if any, dispute as to the facts.
That the following property and merchandise are being pledged in favor of the It is conceded that in January, 1919, the firm of Salvador Hermanos executed to the Philippine
Philippine National Bank, as shown by a written document, on account of its credit National Bank the eight promissory notes above described, and that each note was secured by
which amounts to P175,563.19, which are described as follows: the quedan, or warehouse receipt, of Nieva, Ruiz and Company, issued to the firm of Salvador
81,904 kilos kapok @ 0.20 ko ............................ P16,380.80 Hermanos for so many piculs of copra. That the notes are of the same form, the only
521,600 pieces rattan split 11.00 m ................... 5,737.60 difference being the date and the amount of the note, and the number of the quedan, or
93.94 piculs almaciga value ............................... 2,300.00 warehouse receipt, and the amount of copra in piculs. Each warehouse receipt was duly
numbered, dated and signed by Nieva, Ruiz and Company, and recites "received from
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Salvador Hermanos the following packages of copra as specified below, which are stored in The second cause of action presents another and different question.
warehouse No. 2, situated at _______________, subject to the terms and conditions stated on February 10, 1919, for some unexplained reason, the bank surrendered and returned to
the face and back hereof, to be delivered unto Salvador Hermanos, or order," giving the Salvador Hermanos the three quedans, or warehouse receipts, Nos. 33, 36 and 39, which the
number of the warehouse where located, and the number of sacks, gross weight and the firm has pledged to it as collateral on January 21, 23, and 25, 1919, to secure the payment of
declared value; across the face of each receipt is stamped in red ink the words "Negotiable the three notes of P18,000 each, executed on those respective dates. In its receipt for them, the
Warrant." Among the conditions printed on the back of the receipt is paragraph 4, as follows: firm promised to return the quedans to the bank "on or before the 27th instant," meaning
4. This Company will deliver the packages noted hereon, on surrender to the January 27, 1919, and it was therein stated that such warehouse receipts "are guaranteed by the
Company of this warrant endorsed by the party who shall be for the time registered attached certificate of existence of the effects of the 8th of February, 1919, issued by us." The
in the books of the Company as the owner of the packages described hereon; and the legal effect of this receipt is a promise on the part of the firm to return the three quedans on or
production by the Company of this warrant shall at all times be conclusive proof that before January 27, 1919, and a statement that such receipts are guaranteed by the attached
the Company and shall exempt the Company from all responsibility in connection certificate of the existence in the warehouse of the property described in the certificate. The
with the said packages or goods. statement of February 8, recites "we hereby certify that there exist the following articles in our
Also the following: bodegas." Then follows a description of the property. This is nothing but a statement or
"Delivery is hereby authorized unto _____________________," opposite which some of the representation to the effect that the firm has the property in its warehouse. Nothing more. After
receipts were signed by the firm of Salvador Hermanos, and others were not signed by any describing the property, the certificate then says: "And promise that none of the above articles
one. would be removed without consulting first with the Philippine National Bank." There is no
The fact remains that at the time the eight promissory notes were executed, a given quedan, or statement or representation of any kind showing when or from whom the property was
warehouse receipt, was described and incorporated in the note as to its number, when and by received, or how it was held, or who was the owner, or when or to whom it would be
whom issued, and the property it represented, and each receipt was then delivered by the firm delivered. When analyzed, this writing is nothing more than a certificate of the firm that the
to the defendant bank, all of which was during the month of January, 1919. The bank never described property was then in its warehouse, and a promise that none of the "articles would
had the manual possession or the physical control of any of this property until after the be removed without consulting first with the Philippine National Bank." Such a writing would
insolvency petition was filed, and it is for such reason that the plaintiff claims that its was the not transfer the title of the property to the bank, or give it possession, either actual or
property of the firm, and that the defendant should account to the assignee. constructive. It will be noted that both the receipt of February 10 and the certificate and
Each quedan, or warehouse receipt, was specifically described in a given note, and was made a promise of February 8, are signed by the firm of Salvador Hermanos, and that the certificate
part of it, and the note recites that, for any breach of its terms or conditions, the bank has full says that the property was then in the firm's warehouse, and that neither instrument was in any
power and authority "to sell, assign, transfer and deliver the whole of the said security, or any manner authenticated by a notary or a competent public officials, as provided by article 1216
part thereof, etc.," and that "at any such sale, the said bank may itself purchase the whole any of the Civil code, and that the property was in the warehouse of the firm.
part of the property sold, free from any right of redemption on the part of the undersigned, Article 1863 of the Civil Code provides:
which is hereby waived and released." In addition to the requisites mentioned in article 1857, it shall be necessary, in order
In addition, the quedan itself was delivered to and held by the bank, and the warehouseman to constitute the contract of pledge, that the pledge be placed in the possession of the
recognized the bank as the owner of the property. Legally speaking, the owner of the quedans, creditor or of a third person appointed by common consent.
or warehouse receipts, was the owner of the property described in them, and the quedans were But here it appears from the certificate that the property was then in the possession of the firm,
given as collateral to secure promissory notes, which, for value received, were executed to the who made the certificate, and that it was in the possession of that firm when its insolvency
bank. petition was filed on April 21, 1919. It further appears that on May 3, 1919, Gregorio
The execution of the notes, the physical possession of the negotiable quedan, or warehouse Salvador, a member of the firm, appeared at the offices of Nieva, Ruiz and Company, and
receipt, and the recognition of ownership by the warehouseman, legally carried with it both the requested that firm to issue its warehouse receipts to the Philippine National Bank for certain
titled to, and the possession of, the property. In such a case, a title is not founded on a public goods, which on that date he placed in the warehouse of that company, and, in accord with his
instrument which should be authenticated by a notary or by competent public official. Legally request, Nieva, Ruiz and Company did issue to and in favor of the Philippine National Bank
speaking, the execution of the promissory notes and the pledging of the quedans, or warehouse the following quedans, or warehouse receipts:
receipts, as collateral, and the describing of them in the notes, and the manual delivery of the No. 161 for 32 bales of hemp, in warehouse No. 2, of the declared value of P880;
quedan, or warehouse receipt itself carries with it not only the title, but the legal possession of No. 162 for 953 bundles of rattan, in warehouse No. 2, of the declared value of P3,700.40;
the property. In other words, as to the property described in the quedans, or warehouse No. 165 for empty sacks, in warehouse No. 2, of the declared value P450;
receipts, which were pledged, as collateral, in January, 1919, to secure the eight respective No. 167 for 136 sacks, of almaciga, in warehouse No. 1, of the declared value of P2,300;
promissory notes, both the title and the possession of that property were delivered to and No. 168 for 1,461 bales of kapok, in warehouse No. 1, of the declared value of P14,571.48;
vested in the defendant bank in January, 1919. Three of those quedans, or warehouse receipts, No. 175 for 288 packages of talcum power, in warehouse No. 5, of the declared value of
were returned to the firm by the bank on February 10, 1919, but the bank still owned and held P15,582.26;
the notes, which were secured by those warehouse receipts, and no part of the debt itself was No. 176 for 35 packages of cartulina, in warehouse No. 5, of the declared value of P2,588.48;
paid by or through the surrender of the receipts. For such reason, as to the first cause of action, and
the plaintiff cannot recover, and, as to it, the judgment of the lower court should be affirmed.

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No. 185 for 134 bundles of empty sacks, in warehouse No. 2, of the declared value of P670, of the firm had any legal right to secure it after the petition was filed, and any attempt to do so
making a total declared value of the property evidenced by such receipts of P40,742.62. would be null and void.
In the second cause of action, the complaint alleges that the defendant took and converted 88 As to the first cause of action, we hold that in January, 1919, the bank became and remained
drums of gasoline and 100 cases of gasoline; none of which is included in the above receipts. the owner of the five quedans Nos. 30, 35, 38, 41 and 42; that they were in form negotiable,
Otherwise the property described in quedans Nos. 161 to 185, inclusive, correspond and are and that, as such owner, it was legally entitled to the possession and control of the property
identical with the property described in the second cause of action.1awphil.net therein described at the time the insolvency petition was filed and had a right to sell it and
The bank founds its rights to claim the property described in the quedans Nos. 161 to 185, apply the proceeds of the sale to its promissory notes, including the three notes of P18,000
inclusive, upon the firm's certificate of February 8, 1919, above quoted. By comparison, it will each, which were formerly secured by the three quedans Nos. 33, 36, and 39, which the bank
be found that the property described in such quedans, or warehouse receipts, does not surrendered to the firm. That is to say, the bank had a legal right to apply the proceeds from
correspond with the property described in the firm's certificate of February 8. In the certificate the property descried in the five remaining quedans to the payment of its eight promissory
of February 8, there are aceites y grasas, or oil and grease, valued at P800, and 9,000 sacks of notes.
common salt valued at P18,000 in the bodegas of the firm, and 905 cases of gasoline valued at As to the second cause of action, the judgment of the lower court is reversed, and one will be
P11,538.75, and 77 cases of gasoline in drums, 54 gallons, valued at P4,989.60, in the entered here in favor of the Philippine National Bank, the defendant, for P40,742.62, the
warehouse of Wise and Company, that are not described in the quedans Nos. 161 to 185 declared value of the property described in quedans Nos. 161 to 185, inclusive, and for the
inclusive. It also appears that Talcum Power in receipt No. 175 of the value of P17,140, and further sum of P7,631.40, the value of the gasoline sold in May, 1919, or a total of P48,374.02
cartulina in receipt No. 176 of the value of P2,847 are not included in the property described with interest thereon from September 22, 1919, at the rate of 6 per cent per annum, and for the
in the certificate of February 8, making a total value of the property described in those two costs and disbursements in this and the lower court. So ordered.
receipts, and which is not included in the certificate of February 8, of P19,987.
There is not any evidence of the actual market value of the property, but it does appear that at
the time quedans Nos. 161 to 185, inclusive, were issued, the bank itself placed a declared
value upon that property of P40,742.62. Those quedans do not include the gasoline which the
bank admits it sold on May 24, 1919, for P4,989.60, and the gasoline when it held on May 28,
1919, for the sum of P2,641.80, or P7,631.40 which it received for gasoline. It is true that it
appears from the sales report that the bank sold the property described in quedans Nos. 161 to
185, inclusive, for much less money than the valuation which it placed upon the property, but,
in legal effect, when the quedans were issued, the conversion of that property took place at the
time they were issued to and accepted by the bank, and it should be charged with the value of
the property at the time of its conversion, and in the absence of any testimony as to the market
value, it should be charged with the amount which it actually received from the sale of the
gasoline.
It will be noted that the promissory notes executed by the firm to the bank recite:
Full power and authority are hereby given to said bank to sell, assign, transfer and
deliver the whole of the said securities, or any part thereof, or any substitutes
therefor or any additions thereto, or any other securities or property given unto or
left in the possession of or hereafter given unto or left in the possession of the said
Bank by the undersigned.
Hence, the power and authority of the bank to sell, assign, or transfer is confined to property
which was given unto or left in its possession.
As we have pointed out none of the property described in the certificate of February 8 was
ever given unto or left in the possession of the bank.
The insolvency petition was filed April 21, 1919, and the plaintiff was duly elected and
qualified, as assignee, on July 19, 1919, and, as such, it represents both the creditors and the
firm. Although it was not appointed until July, 1919, yet when it did qualify its right and title
to all the property of the firm related back and became vested as of April 21, 1919, when the
insolvency petition was filed, and from that time it alone had the power and authority to act for
and represent the firm. Under the terms and provisions of Act No. 1956 of the Philippine
Legislature, after it was filed, the power of the firm or any member of it to deliver possession
of the property to secure a preexisting debt was suspended pending final adjudication. That is
to say, if the debt was not legally secured before the insolvency petition was filed, no member

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