VII: PLEDGE, MORTGAGE AND ANTICHRESIS, CHATTEL Therefore, the debtor's heir who has paid a part of the
as paid a part of the debt
MORTGAGE
A. COMMON PROVISIONS;
Art. 2085 – 2092;
Art. 2085. The following requisites are essential to the
contracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of
a principal obligation;
(2) That the pledgor or mortgagor be the absolute
owner of the thing pledged or mortgaged;
(3) That the persons constituting the pledge
or mortgage have the free disposal of their
property, and in the absence thereof, that they be
legally authorized for the purpose.
Third persons who are not parties to the principal
obligation may secure the latter by pledging or
mortgaging their own property.
Art. 2086. The provisions of Article 2052 are applicable to a
pledge or mortgage.
Art. 2087. It is also of the essence of these contracts that
when the principal obligation becomes due, the things in
which the pledge or mortgage consists may be alienated for
the payment to the creditor.
Art. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation
to the contrary is null and void. (1859a)
Art. 2089. A pledge or mortgage is indivisible, even though
the debt may be divided among the successors in interest of
the debtor or of the creditor.
cannot ask for the proportionate extinguishment of the pledge
or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the
debt return the pledge or cancel the mortgage, to the prejudice
of the other heirs who have not been paid.
From these provisions is expected the case in which, there
being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the
extinguishment of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.
(1860)
Art. 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable.
(n)
Art. 2091. The contract of pledge or mortgage may secure all
kinds of obligations, be they pure or subject to a suspensive or
resolutory condition. (1861)
Art. 2092. A promise to constitute a pledge or mortgage gives
rise only to a personal action between the contracting parties,
without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as
unencumbered, things which he knew were subject to some
burden, or by misrepresenting himself to be the owner of the
same. (1862)
CASES:
DBP VS. CA, GR 118342, JANUARY 5, 1998;
FACTS: Lydia Cuba is a grantee from the government of a
Fishpond Lease Agreement for a 44-ha fishpond in Bolinao,
Pangasinan.
Cuba obtained loans from DBP and as security for the loans,
she executed two Deeds of Assignment of her Leasehold
Rights.
Cuba failed to pay her loans on time so the DBP, without
foreclosure proceedings, appropriated the Leasehold Rights of
Cuba over the fishpond.
After the appropriation, DBP executed a Deed of Conditional
Sale of the Leasehold Rights in favor of Cuba.
DBP accepted Cuba’s offer to repurchase.
After the Deed of Conditional Sale was executed in favor of
Cuba, a new Fishpond Lease Agreement was issued by the MAF
in favor of Cuba only, excluding her husband.
Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale so she entered with the DBP a Temporary
Arrangement whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale, Cuba promised
to make certain payments.
DBP sent the Notice of Rescission through Notarial Act and took
possession of the Fishpond Leasehold Rights.
DBP then conducted a public bidding to dispose of the
property, which Agripina Caperal won. DBP executed the Deed
of Conditional Sale in favor of Caperal and Caperal was
awarded the Fishpond Lease Agreement by the MAF.
Cuba filed a complaint before the RTC of Pangasinan against
DBP and Caperal. It sought (1) the declaration of nullity of
DBP’s appropriation of CUBA’s rights, title, and interests over
the fishpond, for violating Article 2088 of the Civil Code; (2)
the annulment of the Deed of Conditional Sale executed in her
favor by DBP; (3) the annulment of DBP’s sale of the subject
fishpond to Caperal; (4) the restoration of her rights, title, and
interests over the fishpond; and (5) the recovery of damages,
attorney’s fees, and expenses of litigation.
The principal issue before the TC was whether the act of DBP in
appropriating to itself CUBA’s leasehold rights over the
fishpond without foreclosure proceedings was contrary to
Article 2088 of the Civil Code and, therefore, invalid.
CUBA insisted that it was.
DBP stressed that it merely exercised its contractual right
under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Caperal sided with DBP.
The TC resolved the issue in favor of CUBA by declaring that
DBP’s taking possession and ownership of the property without
foreclosure was plainly violative of Article 2088, which states:
“The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.” It disagreed
with DBP’s stand that the Assignments of Leasehold
Rights were not contracts of mortgage because (1) they
were given as security for loans, (2) although the
“fishpond land” in question is still a public land, CUBA’s
leasehold rights and interest thereon are alienable
rights which can be the proper subject of a mortgage;
and (3) the intention of the contracting parties to treat
the Assignment of Leasehold Rights as a mortgage was
obvious and unmistakable; hence, upon CUBA’s default,
DBP’s only right was to foreclose the Assignment in
accordance with law.
The TC also declared invalid condition no. 12 of the Assignment
of Leasehold Rights for being a clear case of pactum
commissorium expressly prohibited and declared null and void
by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBA’s leasehold
rights, all acts of ownership and possession by the said bank
were void.
Accordingly, the Deed of Conditional Sale in favor of CUBA, the
notarial rescission of such sale, and the Deed of Conditional
Sale in favor of defendant Caperal, as well as the Assignment
of Leasehold Rights executed by Caperal in favor of DBP, were
also void and ineffective.
As to damages, the TC found “ample evidence on record” that
in 1984 the representatives of DBP ejected CUBA and her
caretakers not only from the fishpond area but also from the
adjoining big house; and that when CUBA’s son and caretaker
went there on 15 September 1985, they found the said house
unoccupied and destroyed and CUBA’s personal belongings,
machineries, equipment, tools, and other articles used in
fishpond operation which were kept in the house were missing.
The missing items were valued at about P550,000. It further
found that when CUBA and her men were ejected by DBP for
the first time in 1979, CUBA had stocked the fishpond with
250,000 pieces of bangus fish (milkfish), all of which died
because the DBP representatives prevented CUBA’s men from
feeding the fish. At the conservative price of P3.00 per fish, the
gross value would have been P690,000, and after deducting
25% of said value as reasonable allowance for the cost of
feeds, CUBA suffered a loss of P517,500. It then set the
aggregate of the actual damages sustained by CUBA at
P1,067,500.
The TC further found that DBP was guilty of gross bad faith in
falsely representing to the Bureau of Fisheries that it had
foreclosed its mortgage on CUBA’s leasehold rights. Such
representation induced the said Bureau to terminate CUBA’s
leasehold rights and to approve the Deed of Conditional Sale in
favor of CUBA. And considering that by reason of her unlawful
ejectment by DBP, CUBA “suffered moral shock, degradation,
social humiliation, and serious anxieties for which she became
sick and had to be hospitalized” the TC found her entitled to
moral and exemplary damages. The TC also held that CUBA
was entitled to P100,000 attorney’s fees in view of the
considerable expenses she incurred for lawyers’ fees and in
view of the finding that she was entitled to exemplary
damages.
CUBA and DBP appealed to the CA. CUBA sought an increase in
the amount of damages, while DBP questioned the findings of
fact and law of the lower court.
The CA ruled that (1) the TC erred in declaring that the deed of
assignment was null and void and that defendant Caperal could
not validly acquire the leasehold rights from DBP; (2) contrary
to the claim of DBP, the assignment was not a cession under
Article 1255 of the Civil Code because DBP appeared to be the
sole creditor to CUBA - cession presupposes plurality of debts
and creditors; (3) the deeds of assignment represented the
voluntary act of CUBA in assigning her property rights in
payment of her debts, which amounted to a novation of the
promissory notes executed by CUBA in favor of DBP; (4) CUBA
was estopped from questioning the assignment of the
leasehold rights, since she agreed to repurchase the said rights
under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA
for DBP to sell whatever right she had over the fishpond. It
also ruled that CUBA was not entitled to loss of profits for lack
of evidence, but agreed with the TC as to the actual damages
of P1,067,500. It, however, deleted the amount of exemplary
damages and reduced the award of moral damages from
P100,000 to P50,000 and attorney’s fees, from P100,000 to
P50,000.
The CA thus declared as valid the following: (1) the act of DBP
in appropriating Cuba’s leasehold rights and interest under
Fishpond Lease Agreement No. 2083; (2) the deeds of
assignment executed by Cuba in favor of DBP; (3) the deed of
conditional sale between CUBA and DBP; and (4) the deed of
conditional sale between DBP and Caperal, the Fishpond Lease
Agreement in favor of Caperal, and the assignment of
leasehold rights executed by Caperal in favor of DBP. And, it
ordered DBP to turn over possession of the property to Caperal
as lawful holder of the leasehold rights.
In its petition before the SC, DBP assails the award of actual
and moral damages and attorney’s fees in favor of CUBA. In
her petition, CUBA contends that the CA erred (1) in not
holding that the questioned deed of assignment was a pactum
commissorium contrary to Article 2088 of the Civil Code; (b) in
holding that the deed of assignment effected a novation of the
promissory notes; (c) in holding that CUBA was estopped from
questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of
conditional sale; and (d) in reducing the amounts of moral
damages and attorney’s fees, in deleting the award of
exemplary damages, and in not increasing the amount of
damages.
ISSUE/S: W/N the assignment of leasehold rights was a
mortgage contract (as contended by Cuba).
HELD:
Yes, In all of the promissory notes, there is a provision that “in
the event of foreclosure of the mortgage securing this note,
I/We further bind myself/ourselves, jointly and severally, to
pay the deficiency, if any.” Moreover, in Condition No. 22 of
the deed, it was provided that “failure to comply with the terms
and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be
foreclosed.” In the facts stipulated, it states that “As security
for loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her leasehold rights.”
SC finds no merit in DBP’s contention that the assignment
novated the promissory notes in that the obligation to pay a
sum of money the loans (under the promissory notes) was
substituted by the assignment of the rights over the fishpond
(under the deed of assignment). The said assignment merely
complemented or supplemented the notes; both could stand
together. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans
were granted. Also, the last paragraph of the assignment
stated: “The assignor further reiterates and states all terms,
covenants, and conditions stipulated in the promissory note or
notes covering the proceeds of this loan, making said
promissory note or notes, to all intent and purposes, an
integral part hereof.”
ISSUE: W/N condition no. 12 of the deed of assignment
constituted pactum commissorium?
HELD:
No, The elements of pactum commissorium are as follows: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.
Condition no. 12 did not provide that the ownership over the
leasehold rights would automatically pass to DBP upon CUBA’s
failure to pay the loan on time. It merely provided for the
appointment of DBP as attorney-in-fact with authority, among
other things, to sell or otherwise dispose of the said real rights,
in case of default by CUBA, and to apply the proceeds to the
payment of the loan. This provision is a standard condition in
mortgage contracts and is in conformity with Article 2087 of
the Civil Code, which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the
payment of the principal obligation.
BUSTAMANTE vs. ROSEL, GR 126800, 1999
FACTS: The case before the Court is a petition for review on
certiorari[1] to annul the decision of the Court of Appeals,[2]
reversing and setting aside the decision of the Regional Trial
Court,[3], dated November 10, 1992, Judge Teodoro P. Regino.
3 Quezon City, Branch 84, in an action for specific performance
with consignation.
On March 8, 1987, at Quezon City, Norma Rosel entered into a
loan agreement with petitioner Natalia Bustamante and her
late husband Ismael C. Bustamante, under the following terms
and conditions:
1. That the borrowers are the registered owners of a parcel of
land, evidenced by TRANSFER CERTIFICATE OF TITLE No.
80667, containing an area of FOUR HUNDRED TWENTY THREE
(423) SQUARE Meters, more or less, situated along
Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE
HUNDRED THOUSAND (P100,000.00) PESOS from the LENDER,
for a period of two (2) years, counted from March 1, 1987,
with an interest of EIGHTEEN (18%) PERCENT per annum, and
to guaranty the payment thereof, they are putting as a
collateral SEVENTY (70) SQUARE METERS portion, inclusive of
the apartment therein, of the aforestated parcel of land,
however, in the event the borrowers fail to pay, the lender has
the option to buy or purchase the collateral for a total
consideration of TWO HUNDRED THOUSAND (P200,000.00)
PESOS, inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and
conformity to the preceding paragraph, while the borrowers do
hereby confess receipt of the borrowed amount.[4]
When the loan was about to mature on March 1, 1989,
respondents proposed to buy at the pre-set price of
P200,000.00, the seventy (70) square meters parcel of land
covered by TCT No. 80667, given as collateral to guarantee
payment of the loan. Petitioner, however, refused to sell and
requested for extension of time to pay the loan and offered to
sell to respondents another residential lot located at Road 20,
Project 8, Quezon City, with the principal loan plus interest to
be used as down payment. Respondents refused to extend the
payment of the loan and to accept the lot in Road 20 as it was
occupied by squatters and petitioner and her husband were not
the owners thereof but were mere land developers entitled to
subdivision shares or commission if and when they developed
at least one half of the subdivision area.[5]
Hence, on March 1, 1989, petitioner tendered payment of the
loan to respondents which the latter refused to accept, insisting
on petitioners signing a prepared deed of absolute sale of the
collateral.
On February 28, 1990, respondents filed with the Regional Trial
Court, Quezon City, Branch 84, a complaint for specific
performance with consignation against petitioner and her
spouse.[6]
Nevertheless, on March 4, 1990, respondents sent a demand
letter asking petitioner to sell the collateral pursuant to the
option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the
Regional Trial Court, Quezon City a petition for consignation,
and deposited the amount of P153,000.00 with the City
Treasurer of Quezon City on August 10, 1990.[7]
When petitioner refused to sell the collateral and barangay
conciliation failed, respondents consigned the amount of
P47,500.00 with the trial court.[8] In arriving at the amount
deposited, respondents considered the principal loan of
P100,000.00 and 18% interest per annum thereon, which
amounted to P52,500.00.[9] The principal loan and the interest
taken together amounted to P152,500.00, leaving a balance of
P 47,500.00.[10]
After due trial, on November 10, 1992, the trial court rendered
decision holding:
WHEREFORE, premises considered, judgment is hereby
rendered as follows:
1. Denying the plaintiffs prayer for the defendants execution of
the Deed of Sale to Convey the collateral in plaintiffs favor;
2. Ordering the defendants to pay the loan of P100,000.00 with
interest thereon at 18% per annum commencing on March 2,
1989, up to and until August 10, 1990, when defendants
deposited the amount with the Office of the City Treasurer
under Official Receipt No. 0116548 (Exhibit 2); and
3. To pay Attorneys Fees in the amount of P 5,000.00, plus
costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10, 1992.
TEODORO P. REGINO
Judge[11]
On November 16, 1992, respondents appealed from the
decision to the Court of Appeals.[12] On July 8, 1996, the
Court of Appeals rendered decision reversing the ruling of the
Regional Trial Court. The dispositive portion of the Court of
Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from
is REVERSED and SET ASIDE and a new one entered in favor of
the plaintiffs ordering the defendants to accept the amount of P
47,000.00 deposited with the Clerk of Court of Regional Trial
Court of Quezon City under Official Receipt No. 0719847, and
for defendants to execute the necessary Deed of Sale in favor
of the plaintiffs over the 70 SQUARE METER portion and the
apartment standing thereon being occupied by the plaintiffs
and covered by TCT No. 80667 within fifteen (15) days from
finality hereof. Defendants, in turn, are allowed to withdraw
the amount of P153,000.00 deposited by them under Official
Receipt No. 0116548 of the City Treasurers Office of Quezon
City. All other claims and counterclaims are DISMISSED, for
lack of sufficient basis. No costs.
SO ORDERED.[13]
Hence, this petition.[14]
On January 20, 1997, we required respondents to comment on
the petition within ten (10) days from notice.[15] On February
27, 1997, respondents filed their comment.[16]
On February 9, 1998, we resolved to deny the petition on the
ground that there was no reversible error on the part of
respondent court in ordering the execution of the necessary
deed of sale in conformity the with the parties stipulated
agreement. The contract is the law between the parties thereof
(Syjuco v. Court of Appeals, 172 SCRA 111, 118, citing Phil.
American General Insurance v. Mutuc, 61 SCRA 22; Herrera v.
Petrophil Corporation, 146 SCRA 360).[17]
On March 17, 1998, petitioner filed with this Court a motion for
reconsideration of the denial alleging that the real intention of
the parties to the loan was to put up the collateral as
guarantee similar to an equitable mortgage according to Article
1602 of the Civil Code.[18]
On April 21, 1998, respondents filed an opposition to
petitioners motion for reconsideration. They contend that the
agreement between the parties was not a sale with right of re-
purchase, but a loan with interest at 18% per annum for a
period of two years and if petitioner fails to pay, the
respondent was given the right to purchase the property or
apartment for P200,000.00, which is not contrary to law,
morals, good customs, public order or public policy. [19]
Upon due consideration of petitioners motion, we now resolve
to grant the motion for reconsideration.
The questions presented are whether petitioner failed to pay
the loan at its maturity date and whether the stipulation in the
loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date,
petitioner tendered payment to settle the loan which
respondents refused to accept, insisting that petitioner sell to
them the collateral of the loan.
When respondents refused to accept payment, petitioner
consigned the amount with the trial court.
We note the eagerness of respondents to acquire the property
given as collateral to guarantee the loan. The sale of the
collateral is an obligation with a suspensive condition.[20] It is
dependent upon the happening of an event, without which the
obligation to sell does not arise. Since the event did not occur,
respondents do not have the right to demand fulfillment of
petitioners obligation, especially where the same would not
only be disadvantageous to petitioner but would also unjustly
enrich respondents considering the inadequate consideration
(P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.
Respondents argue that contracts have the force of law
between the contracting parties and must be complied with in
good faith.[21] There are, however, certain exceptions to the
rule, specifically Article 1306 of the Civil Code, which provides:
Article 1306. The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals,
good customs, public order, or public policy.
A scrutiny of the stipulation of the parties reveals a subtle
intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept of
pactum commissorium, which is proscribed by law.[22]
The elements of pactum commissorium are as follows: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should
be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.[23]
In Nakpil vs. Intermediate Appellate Court,[24] we said:
The arrangement entered into between the parties, whereby
Pulong Maulap was to be considered sold to him (respondent)
xxx in case petitioner fails to reimburse Valdes, must then be
construed as tantamount to pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there
was to be automatic appropriation of the property by Valdes in
the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondents manifestation, all the
elements of a pactum commissorium were present: there was
a creditor-debtor relationship between the parties; the
property was used as security for the loan; and there was
automatic appropriation by respondent of Pulong Maulap in
case of default of petitioner.
A significant task in contract interpretation is the
ascertainment of the intention of the parties and looking into
the words used by the parties to project that intention. In this
case, the intent to appropriate the property given as collateral
in favor of the creditor appears to be evident, for the debtor is
obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the
loan. In effect, the creditor acquires the collateral in the event
of non payment of the loan. This is within the concept of
pactum commissorium. Such stipulation is void.[25]
All persons in need of money are liable to enter into
contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily. Hence, courts
are duty bound to exercise caution in the interpretation and
resolution of contracts lest the lenders devour the borrowers
like vultures do with their prey.
WHEREFORE, we GRANT petitioners motion for reconsideration
and SET ASIDE the Courts resolution of February 9, 1998. We
REVERSE the decision of the Court of Appeals in CA-G. R. CV
No. 40193. In lieu thereof, we hereby DISMISS the complaint
in Civil Case No. Q-90-4813.
ONG vs. ROBAN LENDING CORP., GR 172592, 2008
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
FACTS: On various dates, petitioner Spouses Wilfredo N. Ong
and Edna Sheila Paguio-Ong obtained several loans from
respondent Roban Lending Corporation in the total amount of
P4, 000,000. These loans were secured by real estate
mortgage on Spouses Ong‘s parcel of lands.
Later Spouses Ong and Roban executed several agreements –
an amendment to the amended Real Estate Mortgage which
consolidated their loans amounting to P5, 916,117.50; dacion
in payment wherein spouses Ong assigned their mortgaged
properties to Roban to settle their total obligation and
Memorandum of Agreement (MOA) in which the dacion in
payment agreement will be automatically enforced in case
spouses Ong fail to pay within one year from the execution of
the agreement.
Spouses Ong filed a complaint before Regional Trial Court of
Tarlac City to declare the mortgage contract, dacion in
payment agreement, and MOA void. Spouses Ong allege that
the dacion in payment agreement is pactum commissorium,
and therefore void. In its Answer with counterclaim, Roban
alleged that the dacion in payment agreement is valid because
it is a special form of payment recognized under Article 1245 of
the Civil Code. RTC ruled in favor of Roban, finding that there
was no pactum commissorium. The Court of Appeals upheld
the RTC decision.
ISSUE: W/N the dacion in payment agreement entered into by
Spouses Ong and Roban constitutes pactum commissorium
HELD:
The Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which is
prohibited under Article 2088 of the Civil Code which provides
that the creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, are: (1) there
should be a property mortgaged by way of security for the
payment of the principal obligation, and (2) there should be a
stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.
Here, Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor
redemption. Under the Memorandum of Agreement, the failure
by the
petitioners to pay their debt within the one-year period gives
respondent the right to enforce the Dacion in Payment
transferring to it ownership of the properties covered by TCT
No. 297840. Respondent, in effect, automatically acquires
ownership of the properties upon Spouses Ong’s failure to pay
their debt within the stipulated period.
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
Here, the alienation of the properties was by way of security,
and not by way of satisfying the debt. The Dacion in Payment
did not extinguish Spouses Ong’s obligation to Roban. On the
contrary, under the Memorandum of Agreement executed on
the same day as the Dacion in Payment, petitioners had to
execute a promissory note for P5, 916, 117.50 which they
were to pay within one year
EDMUNDO T.
B. PLEDGE;
Art. 2093 – 2123
Art. 2093. In addition to the requisites prescribed in Article
2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement.
(1863)
Art. 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession. (1864)
Art. 2095. Incorporeal rights, evidenced by negotiable
instruments, bills of lading, shares of stock, bonds, warehouse
receipts and similar documents may also be pledged. The
instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed. (n)
Art. 2096. A pledge shall not take effect against third persons
if a description of the thing pledged and the date of the pledge
do not appear in a public instrument. (1865a)
Art. 2097. With the consent of the pledgee, the thing pledged
may be alienated by the pledgor or owner, subject to the
pledge. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon as the pledgee consents to
the alienation, but the latter shall continue in possession. (n)
Art. 2098. The contract of pledge gives a right to the creditor
to retain the thing in his possession or in that of a third person
to whom it has been delivered, until the debt is paid. (1866a)
Art. 2099. The creditor shall take care of the thing pledged
with the diligence of a good father of a family; he has a right to
the reimbursement of the expenses made for its preservation,
and is liable for its loss or deterioration, in conformity with the
provisions of this Code. (1867)
Art. 2100. The pledgee cannot deposit the thing pledged with
a third person, unless there is a stipulation authorizing him to
do so.
The pledgee is responsible for the acts of his agents or
employees with respect to the thing pledged. (n)
Art. 2101. The pledgor has the same responsibility as a bailor
in commodatum in the case under Article 1951. (n)
Art. 2102. If the pledge earns or produces fruits, income,
dividends, or interests, the creditor shall compensate what he
receives with those which are owing him; but if none are owing
him, or insofar as the amount may exceed that which is due,
he shall apply it to the principal. Unless there is a stipulation to
the contrary, the pledge shall extend to the interest and
earnings of the right pledged.
In case of a pledge of animals, their offspring shall pertain to
the pledgor or owner of animals pledged, but shall be subject
to the pledge, if there is no stipulation to the contrary. (1868a)
Art. 2103. Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from, or
defend it against a third person. (1869)
Art. 2104. The creditor cannot use the thing pledged, without
the authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it
be judicially or extrajudicially deposited. When the preservation
of the thing pledged requires its use, it must be used by the
creditor but only for that purpose. (1870a)
Art. 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
(1871)
Art. 2106. If through the negligence or wilful act of the
pledgee, the thing pledged is in danger of being lost or
impaired, the pledgor may require that it be deposited with a
third person. (n)
Art. 2107. If there are reasonable grounds to fear the
destruction or impairment of the thing pledged, without the
fault of the pledgee, the pledgor may demand the return of the
thing, upon offering another thing in pledge, provided the
latter is of the same kind as the former and not of inferior
quality, and without prejudice to the right of the pledgee under
the provisions of the following article.
The pledgee is bound to advise the pledgor, without delay, of
any danger to the thing pledged. (n)
Art. 2108. If, without the fault of the pledgee, there is danger
of destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale.
The proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.
Art. 2109. If the creditor is deceived on the substance or
quality of the thing pledged, he may either claim another thing
in its stead, or demand immediate payment of the principal
obligation. (n)
Art. 2110. If the thing pledged is returned by the pledgee to
the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in
the possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the
pledgor or owner after the constitution of the pledge. (n)
Art. 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish
the pledge. For this purpose, neither the acceptance by the
pledgor or owner, nor the return of the thing pledged is
necessary, the pledgee becoming a depositary. (n)
Art. 2112. The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary Public to
the sale of the thing pledged. This sale shall be made at a
public auction, and with notification to the debtor and the
owner of the thing pledged in a proper case, stating the
amount for which the public sale is to be held. If at the first
auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is
no sale either, the creditor may appropriate the thing pledged.
In this case he shall be obliged to give an acquittance for his
entire claim. (1872a)
Art. 2113. At the public auction, the pledgor or owner may
bid. He shall, moreover, have a better right if he should offer
the same terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he
is the only bidder. (n)
Art. 2114. All bids at the public auction shall offer to pay the
purchase price at once. If any other bid is accepted, the
pledgee is deemed to have been received the purchase price,
as far as the pledgor or owner is concerned. (n)
Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than
said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary. (n)
Art. 2116. After the public auction, the pledgee shall promptly
advise the pledgor or owner of the result thereof. (n)
Art. 2117. Any third person who has any right in or to the
thing pledged may satisfy the principal obligation as soon as
the latter becomes due and demandable.(n)
Art. 2118. If a credit which has been pledged becomes due
before it is redeemed, the pledgee may collect and receive the
amount due. He shall apply the same to the payment of his
claim, and deliver the surplus, should there be any, to the
pledgor. (n)
Art. 2119. If two or more things are pledged, the pledgee may
choose which he will cause to be sold, unless there is a
stipulation to the contrary. He may demand the sale of only as
many of the things as are necessary for the payment of the
debt. (n)
Art. 2120. If a third party secures an obligation by pledging
his own movable property under the provisions of Article 2085
he shall have the same rights as a guarantor under Articles
2066 to 2070, and Articles 2077 to 2081. He is not prejudiced
by any waiver of defense by the principal obligor. (n)
Art. 2121. Pledges created by operation of law, such as those
referred to in Articles 546, 1731, and 1994, are governed by
the foregoing articles on the possession, care and sale of the
thing as well as on the termination of the pledge. However,
after payment of the debt and expenses, the remainder of the
price of the sale shall be delivered to the obligor. (n)
Art. 2122. A thing under a pledge by operation of law may be
sold only after demand of the amount for which the thing is
retained. The public auction shall take place within one month
after such demand. If, without just grounds, the creditor does
not cause the public sale to be held within such period, the
debtor may require the return of the thing. (n)
Art. 2123. With regard to pawnshops and other
establishments, which are engaged in making loans secured by
pledges, the special laws and regulations concerning them shall
be observed, and subsidiarily, the provisions of this Title.
ESTATE OF LITTON vs. MENDOZA & CA, GR L 49120,
1988
FACTS: The present case stemmed from Civil Case No. Q-8303
1 entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action for
the collection of a sum of money representing the value of two
(2) checks which plaintiff Tan claims to have been delivered to
him by defendant Mendoza, private respondent herein, by way
of guaranty with a commission.
The record discloses that the Bernal spouses2 are engaged in
the manufacture of embroidery, garments and cotton
materials. Sometime in September 1963, C.B.M. Products, 3
with Mendoza as president, offered to sell to the Bernals textile
cotton materials and, for this purpose, Mendoza introduced the
Bernals to Alfonso Tan. Thus, the Bernals purchased on credit
from Tan some cotton materials worth P 80,796.62, payment
of which was guaranteed by Mendoza. Thereupon, Tan
delivered the said cotton materials to the Bernals. In view of
the said arrangement, on November 1963, C.B.M. Products,
through Mendoza, asked and received from the Bernals PBTC
Check No. 626405 for P 80,796.62 dated February 20, 1964
with the understanding that the said check will remain in the
possession of Mendoza until the cotton materials are finally
manufactured into garments after which time Mendoza will sell
the finished products for the Bernals. Meanwhile, the said
check matured without having been cashed and Mendoza
demanded the issuance of another check 4 in the same amount
without a date.
On the other hand, on February 28, 1964, defendant Mendoza
issued two (2) PNB checks5 in favor of Tan in the total amount
of P 80,796.62. He informed the Bernals of the same and told
them that they are indebted to him and asked the latter to sign
an instrument whereby Mendoza assigned the said amount to
Insular Products Inc. Tan had the two checks issued by
Mendoza discounted in a bank. However, the said checks were
later returned to Tan with the words stamped "stop payment"
which appears to have been ordered by Mendoza for failure of
the Bernals to deposit sufficient funds for the check that the
Bernals issued in favor of Mendoza.
Hence, as adverted to above, Tan brought an action against
Mendoza docketed as Civil Case No. Q-8303 6 while the
Bernals brought an action for interpleader docketed as Civil
Case No. 56850 7 for not knowing whom to pay. While both
actions were pending resolution by the trial court, on March 20,
1966, Tan assigned in favor of George Litton, Sr. his litigatious
credit * in Civil Case No. 56850 against Mendoza, duly
submitted to the court, with notice to the parties. 8 The deed
of assignment was framed in the following tenor:
DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA,
residing at No. 6 Kanlaon, Quezon City, doing business under
the name and style ALTA COMMERCIAL by way of securing or
guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by
these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto
the said Mr. GEORGE LITTON, SR., my claim against C.B.M.
Products, Inc., personally guaranteed by Mr. Ciriaco B.
Mendoza, in the amount of Eighty-Thousand Seven Hundred
Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the
balance of which, in principal, and excluding, interests, costs,
damages and attorney's fees now stands at P 76,000.00, P
4,796.62, having already been received by the assignor on
December 23, 1965, pursuant to the order of the court in Civil
Case No. 56850, C.F.I., Manila, authorizing Alfonso Tan to
withdraw the amount of P 4,796.62 then on deposit with the
court. All rights, and interests in said net amount, plus
interests and costs, and less attorney's fees, in case the
amount allowed therefor be less than the amounts claimed in
the relief in Civil Case 56850 (C.F.I., Manila) and Q-8503
(C.F.I., Quezon City) are by these presents covered by this
assignment.

I further undertake to hold in trust any and all amounts which
may hereafter be realized from the aforementioned cases for
the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to
him such amounts in application to my liability to him, as his
interest may then show, and I further undertake to cooperate
towards the successful prosecution of the aforementioned
cases making available myself, as witness or otherwise, as well
as any and all documents thereto appertaining. ...9
After due trial, the lower court ruled that the said PNB checks
were issued by Mendoza in favor of Tan for a commission in
the sum of P 4,847.79 and held Mendoza liable as a drawer
whose liability is primary and not merely as an indorser and
thus directed Mendoza to pay Tan the sum of P 76,000.00, the
sum still due, plus damages and attorney's fees. 10
Mendoza seasonably filed an appeal with the Court of Appeals,
dockted as C.A. G.R. No. 41900-R, arguing in the main that his
liability is one of an accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a decision
affirming in toto the decision of the lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the
said appeal, Mendoza entered into a compromise agreement
with Tan wherein the latter acknowledged that all his claims
against Mendoza had been settled and that by reason of said
settlement both parties mutually waive, release and quit
whatever claim, right or cause of action one may have against
the other, with a provision that the said compromise
agreement shall not in any way affect the right of Tan to
enforce by appropriate action his claims against the Bernal
spouses.12
On February 25, 1977, Mendoza filed a motion for
reconsideration praying that the decision of January 27, 1977
be set aside, principally anchored upon the ground that a
compromise agreement was entered into between him and Tan
which in effect released Mendoza from liability. Tan filed an
opposition to this motion claiming that the compromise
agreement is null and void as he was not properly represented
by his counsel of record Atty. Quiogue, and was instead
represented by a certain Atty. Laberinto, and principally
because of the deed of assignment that he executed in favor of
George Litton, Sr. alleging that with such, he has no more right
to alienate said credit.
While the case was still pending reconsideration by the
respondent court, Tan, the assignor, died leaving no properties
whatever to satisfy the claim of the estate of the late George
Litton, Sr.
In its Resolution dated August 30, 1977, 13 the respondent
court set aside its decision and approved the compromise
agreement.
As to the first ground invoked by Tan, now deceased, the
respondent court ruled that the non-intervention of Tan's
counsel of record in the compromise agreement does not affect
the validity of the settlement on the ground that the client had
an undoubted right to compromise a suit without the
intervention of his lawyer, citing Aro vs. Nanawa.14
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of the deed of
assignment states that the cession,assignment, transfer, bond
conveyance by Alfonso Tan was only by way of securing, or
guaranteeing his obligation to GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and dominion of the
credit (Par. 2, Art. 2085, Civil Code).
"Even considered as a litigations credit," which indeed
characterized the claims herein of Alfonso Tan, such credit may
be validly alienated by Tan (Art. 1634. Civil Code).
Such alienation is subject to the remedies of Litton under
Article 6 of the Civil Code, whereby the waiver, release, or
quit-claim made by plaintiff-appellee Alfonso Tan in favor of
defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to
George Litton, Sr. as assignee under the deed of assignment,
may entitle Litton to pursue his remedies against Tan.
The alienation of a litigatious credit is further subject to the
debtor's right of redemption under Article 1634 of the Civil
Code.
As mentioned earlier, the assignor Tan died pending resolution
of the motion for reconsideration. The estate of George Litton,
Sr., petitioner herein, as represented by James Litton, son of
George Litton, Sr. and administrator15 of the former's estate,
is now appealing the said resolution to this Court as assignee
of the amount sued in Civil Case No. Q-8303, in relation to Civil
Case No. 56850.
Before resolving the main issues aforementioned, the question
of legal personality of herein petitioner to bring the instant
petition for review, must be resolved.
As a rule, the parties in an appeal through a review on
certiorari are the same original parties to the case. 16 If after
the rendition of judgment the original party dies, he should be
substituted by his successor-in-interest. In this case, it is not
disputed that no proper substitution of parties was done. This
notwithstanding, the Court so holds that the same cannot and
will not materially affect the legal right of herein petitioner in
instituting the instant petition in view of the tenor of the deed
of assignment, particularly paragraph two thereof 17 wherein
the assignor, Tan, assumed the responsibility to prosecute the
case and to turn over to the assignee whatever amounts may
be realized in the prosecution of the suit.
We note that private respondent moved for the dismissal of the
appeal without notifying the estate of George Litton, Sr.
whereas the former was fully aware of the fact that the said
estate is an assignee of Tan's right in the case litigated. 18
Hence, if herein petitioner failed to observe the proper
substitution of parties when Alfonso Tan died during the
pendency of private respondent's motion for reconsideration,
no one is to blame but private respondent himself. Moreover,
the right of the petitioner to bring the present petition is well
within the concept of a real party-in-interest in the subject
matter of the action. Well-settled is the rule that a real party-
in-interest is a party entitled to the avails of the suit or the
party who would be injured by the judgment. 19 We see the
petitioner well within the latter category.
Hence, as the assignee and successor-in-interest of Tan,
petitioner has the personality to bring this petition in
substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate
controverted claims, 20 courts encourage the same. A
compromise once approved by final order of the court has the
force of res judicata between parties and should not be
disturbed except for vices of consent or forgery. 21
In this case, petitioner seeks to set aside the said compromise
on the ground that previous thereto, Tan executed a deed of
assignment in favor of George Litton, Sr. involving the same
litigated credit.
We rule for the petitioner. The fact that the deed of assignment
was done by way of securing or guaranteeing Tan's obligation
in favor of George Litton, Sr., as observed by the appellate
court, will not in any way alter the resolution on the matter.
The validity of the guaranty or pledge in favor of Litton has not
been questioned. Our examination of the deed of assignment
shows that it fulfills the requisites of a valid pledge or
mortgage. 22 Although it is true that Tan may validly alienate
the litigatious credit as ruled by the appellate court, citing
Article 1634 of the Civil Code, said provision should not be
taken to mean as a grant of an absolute right on the part of
the assignor Tan to indiscriminately dispose of the thing or the
right given as security. The Court rules that the said provision
should be read in consonance with Article 2097 of the same
code. 23 Although the pledgee or the assignee, Litton, Sr. did
not ipso facto become the creditor of private respondent
Mendoza, the pledge being valid, the incorporeal right assigned
by Tan in favor of the former can only be alienated by the
latter with due notice to and consent of Litton, Sr. or his duly
authorized representative. To allow the assignor to dispose of
or alienate the security without notice and consent of the
assignee will render nugatory the very purpose of a pledge or
an assignment of credit.
Moreover, under Article 1634, 24 the debtor has a
corresponding obligation to reimburse the assignee, Litton, Sr.
for the price he paid or for the value given as consideration for
the deed of assignment. Failing in this, the alienation of the
litigated credit made by Tan in favor of private respondent by
way of a compromise agreement does not bind the assignee,
petitioner herein.
Indeed, a painstaking review of the record of the case reveals
that private respondent has, from the very beginning, been
fully aware of the deed of assignment executed by Tan in favor
of Litton, Sr. as said deed was duly submitted to Branch XI of
the then Court of First Instance of Manila in Civil Case No.
56850 (in relation to Civil Case No. Q-8303) where C.B.M.
Products is one of the defendants and the parties were notified
through their counsel. 25 As earlier mentioned, private
respondent herein is the president of C.B.M. Products, hence,
his contention that he is not aware of the said deed of
assignment deserves scant consideration from the Court.
Petitioner pointed out at the same time that private respondent
together with his counsel were served with a copy of the deed
of assignment which allegation remains uncontroverted. Having
such knowledge thereof, private respondent is estopped from
entering into a compromise agreement involving the same
litigated credit without notice to and consent of the assignee,
petitioner herein. More so, in the light of the fact that no
reimbursement has ever been made in favor of the assignee as
required under Article 1634. Private respondent acted in bad
faith and in connivance with assignor Tan so as to defraud the
petitioner in entering into the compromise agreement.
WHEREFORE, the petition is GRANTED. The assailed resolution
of the respondent court dated August 30,1977 is hereby SET
ASIDE, the said compromise agreement being null and void,
and a new one is hereby rendered reinstating its decision dated
January 27, 1977, affirming in toto the decision of the lower
court. This decision is immediately executory. No motion for
extension of time to file a motion for reconsideration will be
granted.
MANILA BANKING CORP. vs. TEODORO JR. and TEODORO, GR
53955, 1989;
On April 25, 1966, defendants, together with Anastacio
Teodoro, Sr., jointly and severally, executed in favor of plaintiff
a Promissory Note (No. 11487) for the sum of P10,420.00
payable in 120 days, or on August 25, 1966, at 12% interest
per annum. Defendants failed to pay the said amount inspire of
repeated demands and the obligation as of September 30,
1969 stood at P 15,137.11 including accrued interest and
service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio
Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son)
executed in favor of plaintiff two Promissory Notes (Nos. 11515
and 11699) for P8,000.00 and P1,000.00 respectively, payable
in 120 days at 12% interest per annum. Father and Son made
a partial payment on the May 3, 1966 promissory Note but
none on the June 20, 1966 Promissory Note, leaving still an
unpaid balance of P8,934.74 as of September 30, 1969
including accrued interest and service charge.
The three Promissory Notes stipulated that any interest due if
not paid at the end of every month shall be added to the total
amount then due, the whole amount to bear interest at the
rate of 12% per annum until fully paid; and in case of
collection through an attorney-at-law, the makers shall, jointly
and severally, pay 10% of the amount over-due as attorney's
fees, which in no case shall be leas than P200.00.
It appears that on January 24, 1964, the Son executed in favor
of plaintiff a Deed of Assignment of Receivables from the
Emergency Employment Administration in the sum of
P44,635.00. The Deed of Assignment provided that it was for
and in consideration of certain credits, loans, overdrafts and
other credit accommodations extended to defendants as
security for the payment of said sum and the interest thereon,
and that defendants do hereby remise, release and quitclaim
all its rights, title, and interest in and to the accounts
receivables. Further.
(1) The title and right of possession to said accounts
receivable is to remain in the assignee, and it shall have the
right to collect the same from the debtor, and whatsoever the
Assignor does in connection with the collection of said
accounts, it agrees to do as agent and representative of the
Assignee and in trust for said Assignee ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality of
said accounts receivable, and the due and punctual payment
thereof unto the assignee, ... on demand, ... and further, that
Assignor warrants the solvency and credit worthiness of each
and every account.
(7) The Assignor does hereby guarantee the payment when
due on all sums payable under the contracts giving rise to the
accounts receivable ... including reasonable attorney's fees in
enforcing any rights against the debtors of the assigned
accounts receivable and will pay upon demand, the entire
unpaid balance of said contract in the event of non-payment by
the said debtors of any monthly sum at its due date or of any
other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the future
there will be justly owing from the Assignor to the Assignee ...
In their stipulations of Fact, it is admitted by the parties that
plaintiff extended loans to defendants on the basis and by
reason of certain contracts entered into by the defunct
Emergency Employment Administration (EEA) with defendants
for the fabrication of fishing boats, and that the Philippine
Fisheries Commission succeeded the EEA after its abolition;
that non-payment of the notes was due to the failure of the
Commission to pay defendants after the latter had complied
with their contractual obligations; and that the President of
plaintiff Bank took steps to collect from the Commission, but
no collection was effected.
For failure of defendants to pay the sums due on the
Promissory Note, this action was instituted on November 13,
1969, originally against the Father, Son, and the latter's wife.
Because the Father died, however, during the pendency of the
suit, the case as against him was dismiss under the provisions
of Section 21, Rule 3 of the Rules of Court. The action, then is
against defendants Son and his wife for the collection of the
sum of P 15,037.11 on Promissory Note No. 14487; and
against defendant Son for the recovery of P 8,394.7.4 on
Promissory Notes Nos. 11515 and 11699, plus interest on both
amounts at 12% per annum from September 30, 1969 until
fully paid, and 10% of the amounts due as attorney's fees.
Neither of the parties presented any testimonial evidence and
submitted the case for decision based on their Stipulations of
Fact and on then, documentary evidence.
The issues, as defined by the parties are: (1) whether or not
plaintiff claim is already considered paid by the Deed of Assign.
judgment of Receivables by the Son; and (2) whether or not it
is plaintiff who should directly sue the Philippine Fisheries
Commission for collection.' (Record on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment
adverse to defendants. On June 8, 1972, defendants filed a
motion for reconsideration (Record on Appeal, p. 33) which
was denied by the trial court in its order of June 14, 1972
(Record on Appeal, p. 37). On June 23, 1972, defendants filed
with the lower court their notice of appeal together with the
appeal bond (Record on Appeal, p. 38). The record of appeal
was forwarded to the Court of Appeals on August 22, 1972
(Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12),
appellants raised a single assignment of error, that is —
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL
REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN
VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR
EXCESS OF JURISDICTION.
As the appeal involves a pure question of law, the Court of
Appeals, in its resolution promulgated on March 6, 1980,
certified the case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March 31, 1980 (Rollo,
p. 1).
In the resolution of May 30, 1980, the First Division of this
Court ordered that the case be docketed and declared
submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case
has been pending with the Court and to determine whether
supervening events may have rendered the case moot and
academic, the Court resolved (1) to require the parties to
MOVE IN THE PREMISES within thirty days from notice, and in
case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed
with the entry of judgment accordingly made thereon (Rollo, p.
40).
On April 27, 1988, appellee moved for a resolution of the
appeal review interposed by defendants-appellants (Rollo, p.
41).
The major issues raised in this case are as follows: (1) whether
or not the assignment of receivables has the effect of payment
of all the loans contracted by appellants from appellee bank;
and (2) whether or not appellee bank must first exhaust all
legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collections of loan
under the promissory notes which are plaintiffs bases in the
action for collection in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause,
such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his
credit and its accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same
extent as the assignor could have enforced it against the
debtor. ... It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor, in
order to obtain a release from his debt, assigns to his creditor
a credit he has against a third person, or it may constitute a
donation as when it is by gratuitous title; or it may even be
merely by way of guaranty, as when the creditor gives as a
collateral, to secure his own debt in favor of the assignee,
without transmitting ownership. The character that it may
assume determines its requisites and effects. its regulation,
and the capacity of the parties to execute it; and in every case,
the obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the assignment:
(Tolentino, Commentaries and Jurisprudence on the Civil Code
of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of
receivables executed by appellants in favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by
appellants on January 24, 1964 did not transfer the ownership
of the receivables to appellee bank and release appellants from
their loans with the bank incurred under promissory notes Nos.
11487,11515 and 11699.
The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts, and their
credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment
of said sum and the interest thereon; that appellants as
assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable
assigned (lst paragraph). It was further stipulated that the
assignment will also stand as a continuing guaranty for future
loans of appellants to appellee bank and correspondingly the
assignment shall also extend to all the accounts receivable;
appellants shall also obtain in the future, until the
consideration on the loans secured by appellants from appellee
bank shall have been fully paid by them (No. 9).
The position of appellants, however, is that the deed of
assignment is a quitclaim in consideration of their indebtedness
to appellee bank, not mere guaranty, in view of the following
provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto
said assignee all its rights, title and interest in the accounts
receivable described hereunder. (Emphasis supplied by
appellants, first par., Deed of Assignment).
... that the title and right of possession to said account
receivable is to remain in said assignee and it shall have the
right to collect directly from the debtor, and whatever the
Assignor does in connection with the collection of said
accounts, it agrees to do so as agent and representative of the
Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed
of Assignment).' (Record on Appeal, p. 27)
The character of the transactions between the parties is not,
however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section
50) said:
The characters of the transaction between the parties is to be
determined by their intention, regardless of what language was
used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed as a
pledge. However, even though a transfer, if regarded by itself,
appellate to have been absolute, its object and character might
still be qualified and explained by a contemporaneous writing
declaring it to have been a deposit of the property as collateral
security. It has been Id that a transfer of property by the
debtor to a creditor, even if sufficient on its farm to make an
absolute conveyance, should be treated as a pledge if the debt
continues in existence and is not discharged by the transfer,
and that accordingly, the use of the terms ordinarily exporting
conveyance, of absolute ownership will not be given that effect
in such a transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the absence of clear and
ambiguous language or other circumstances excluding an
intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671
[1982]).
Definitely, the assignment of the receivables did not result
from a sale transaction. It cannot be said to have been
constituted by virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory note Nos. 11487,
11515 and 11699 which are the subject of the suit for
collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet.
The deed of assignment was executed on January 24, 1964
(Exh. "G"), while promissory note No. 11487 is dated April 25,
1966 (Exh. 'A), promissory note 11515, dated May 3, 1966
(Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh.
"C"). At most, it was a dation in payment for P10,000.00, the
amount of credit from appellee bank indicated in the deed of
assignment. At the time the assignment was executed, there
was no obligation to be extinguished except the amount of
P10,000.00. Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible
with each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral
security for the bank loans of appellants, as a continuing
guaranty for whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge, the
latter being the lesser transmission of rights and interests
(Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the
defendant in the contracts of lease of two buildings as well as
her rights, title and interest in the land on which the buildings
were constructed to secure an overdraft from a bank
amounting to P110,000.00 which was increased to
P150,000.00, then to P165,000.00 was considered by the
Court to be documents of mortgage contracts inasmuch as
they were executed to guarantee the principal obligations of
the defendant consisting of the overdrafts or the indebtedness
resulting therefrom. The Court ruled that an assignment to
guarantee an obligation is in effect a mortgage and not an
absolute conveyance of title which confers ownership on the
assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126
[1937]).
II
As to whether or not appellee bank must have to exhaust all
legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collection of loans
under their promissory notes, must also be answered in the
negative.
The obligation of appellants under the promissory notes not
having been released by the assignment of receivables,
appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely
guarantees said obligations. That the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal
remedies against the debtor, under Article 2058 of the New
Civil Code does not therefore apply to them. It is of course of
the essence of a contract of pledge or mortgage that when the
principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor (Article 2087, New Civil Code). In the instant
case, appellants are both the principal debtors and the
pledgors or mortgagors. Resort to one is, therefore, resort to
the other.
Appellee bank did try to collect on the pledged receivables. As
the Emergency Employment Agency (EEA) which issued the
receivables had been abolished, the collection had to be
coursed through the Office of the President which disapproved
the same (Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from appellee bank
unsecured. It is but proper that after their repeated demands
made on appellants for the settlement of their obligations,
appellee bank should proceed against appellants. It would be
an exercise in futility to proceed against a defunct office for the
collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the
appealed decision of the trial court is affirmed in toto.
CONCURRING:
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results
reached by my distinguished brother Bidin in respect of both of
the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point
made by Bidin, J., that "the character of the transactions
between the parties is not, however, determined by the
language used in the document but by their intention.' This
statement is basically not exceptionable, so far as it goes. It
might, however, be borne in mind that the intent of the parties
to the transaction is to be determined in the first instance, by
the very language which they use. The deed of assignment
contains language which suggest that the parties intended to
effect a complete alienation of title to and rights over the
receivables which are the subject of the assignment. This
language is comprised of works like "remise," "release and
quitclaim" and clauses like "the title and right of possession to
said accounts receivable is to remain in said assignee" who
"shall have the right to collect directly from the debtor." The
same intent is also suggested by the use of the words "agent
and representative of the assignee" in reffering to the assignor.
The point that appears to me to be worth making is that
although in its form, the deed of assignment of receivables
partakes of the nature of a complete alienation of the
receivables assigned, such form should be taken in conjunction
with, and indeed must be qualified and controlled by, other
language showing an intent of the parties that title to the
receivables shall pass to the assignee for the limited purpose of
securing another, principal; obligation owed by the assignor to
the assignee. Title moves from assignor to asignee but that
title is defeasible being designed to collateralize the principal
obligation. Operationally, what this means is that the assignee
is burdened with an obligation of taking the proceeds of the
receivables assigned and applying such proceeds to the
satisfaction of the principal obligation and returning any
balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an
absolute conveyance of title over the receivables assigned,
essentially for the convenience of the assignee. Without such
formally unlimited conveyance of title, the assignee would have
to treat the deed of assignment as no more than a deed of
pledge or of chattel mortgage. In other words, in such
hypothetical case, should the assignee seek to realize upon the
security given to him through the deed of assignment (which
would then have to comply with the documentation and
registration requirements of a pledge or chattel mortgage), the
assignee would have to foreclose upon the securities or credits
assigned and place them on public sale and there acquire the
same. It should be recalled that under the principle which
forbids a pactum commisorium Article 2088, Civil Code), a
mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as
security for the payment of a principal obligation. A deed of
assignment by way of security avoids the necessity of a public
sale impose by the rule on pactum commisorium, by in effect
placing the sale of the collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance,
the deed of assignment of receivables combines elements of
both a complete or absolute alienation of the credits being
assigned and a security arrangement to assure payment of a
principal obligation. Where the second element is absent, that
is, where there is nothing to indicate that the parties intended
the deed of assignment to function as a security device, it
would of course follow that the simple absolute conveyance
embodied in the deed of assignment would be operative; the
assignment would constitute essentially a mode of payment or
dacion en pago. Put a little differently, in order that a deed of
assignment of receivables which is in form an absolute
conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to
such effect must be found in the document itself and that
language, precisely, is embodied in the deed of assignment in
the instant case. Finally, it might be noted that that deed
simply follows a form in standard use in commercial banking.
CONCURRING:
FELICIANO, J., concurring:
I quite agree with the general reasoning of and the results
reached by my distinguished brother Bidin in respect of both of
the principal issues he addressed in his opinion.
I would merely wish to add a few lines in respect of the point
made by Bidin, J., that "the character of the transactions
between the parties is not, however, determined by the
language used in the document but by their intention.' This
statement is basically not exceptionable, so far as it goes. It
might, however, be borne in mind that the intent of the parties
to the transaction is to be determined in the first instance, by
the very language which they use. The deed of assignment
contains language which suggest that the parties intended to
effect a complete alienation of title to and rights over the
receivables which are the subject of the assignment. This
language is comprised of works like "remise," "release and
quitclaim" and clauses like "the title and right of possession to
said accounts receivable is to remain in said assignee" who
"shall have the right to collect directly from the debtor." The
same intent is also suggested by the use of the words "agent
and representative of the assignee" in reffering to the assignor.
The point that appears to me to be worth making is that
although in its form, the deed of assignment of receivables
partakes of the nature of a complete alienation of the
receivables assigned, such form should be taken in conjunction
with, and indeed must be qualified and controlled by, other
language showing an intent of the parties that title to the
receivables shall pass to the assignee for the limited purpose of
securing another, principal; obligation owed by the assignor to
the assignee. Title moves from assignor to asignee but that
title is defeasible being designed to collateralize the principal
obligation. Operationally, what this means is that the assignee
is burdened with an obligation of taking the proceeds of the
receivables assigned and applying such proceeds to the
satisfaction of the principal obligation and returning any
balance remaining thereafter to the assignor.
The parties gave the deed of assignment the form of an
absolute conveyance of title over the receivables assigned,
essentially for the convenience of the assignee. Without such
formally unlimited conveyance of title, the assignee would have
to treat the deed of assignment as no more than a deed of
pledge or of chattel mortgage. In other words, in such
hypothetical case, should the assignee seek to realize upon the
security given to him through the deed of assignment (which
would then have to comply with the documentation and
registration requirements of a pledge or chattel mortgage), the
assignee would have to foreclose upon the securities or credits
assigned and place them on public sale and there acquire the
same. It should be recalled that under the principle which
forbids a pactum commisorium Article 2088, Civil Code), a
mortgagee or pledgee is prohibited from simply taking and
appropriating the personal property turned over to him as
security for the payment of a principal obligation. A deed of
assignment by way of security avoids the necessity of a public
sale impose by the rule on pactum commisorium, by in effect
placing the sale of the collateral up front. (Emphasis supplied)
The foregoing is applicable where, as in the present instance,
the deed of assignment of receivables combines elements of
both a complete or absolute alienation of the credits being
assigned and a security arrangement to assure payment of a
principal obligation. Where the second element is absent, that
is, where there is nothing to indicate that the parties intended
the deed of assignment to function as a security device, it
would of course follow that the simple absolute conveyance
embodied in the deed of assignment would be operative; the
assignment would constitute essentially a mode of payment or
dacion en pago. Put a little differently, in order that a deed of
assignment of receivables which is in form an absolute
conveyance of title to the credits being assigned, may be
qualified and treated as a security arrangement, language to
such effect must be found in the document itself and that
language, precisely, is embodied in the deed of assignment in
the instant case. Finally, it might be noted that that deed
simply follows a form in standard use in commercial banking.
CHU vs. CA et al, GR L-78519, 1989
FACTS: Since 1980, Victoria Yau Chu had been purchasing
cement on credit from CAMS. To guaranty payment for her
cement withdrawals, she executed in favor of CAMS deeds of
assignment of her time deposits in Family Savings Bank. The
total amount came up to P320K. Except for serial numbers and
the dates of the time deposit certificates, the deeds of
assignment prepared by Victoria’s lawyer uniformly read:
That the assignment serves as a collateral or guarantee for the
payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from
said company, per separate contract executed between us.
In July 1980, CAMS notified the bank that Victoria had an
unpaid account with it in the sum of about P314K and
requested the encashment of the time deposit certificates
assigned to it by Victoria. As proof, it submitted to the bank a
letter from Victoria admitting her outstanding account with
CAMS reaching P404.5K. The bank verbally advised Victoria of
CAMS’ request and after she verbally agreed, the bank
encashed the certificates and delivered about P283K because
one time deposit lacked the proper signatures.
Victoria then turned around and demanded that the bank and
CAMS restore her time deposit. When both refused, she filed a
complaint to recover the sum from them before the RTC of
Makati. The RTC dismissed the complaint for lack of merit.
Court of Appeals affirmed. Before the Supreme Court she
argued that the encashment of her time deposit certificates
was pactum commissorium.
ISSUE: Did the encashment of Victoria’s time deposit
certificates amount to pactum commissorium? NO.
HELD: Petition denied.
Since the collateral in this case was also money, there was no
need to sell the thing pledged at public auction in order to
satisfy the pledgor’s obligation. All that had to be done to
convert the pledgor's time deposit certificates into cash was to
present them to the bank for encashment after due notice to
the debtor.
The encashment of the deposit certificates was not a pactum
commissorium as prohibited under Article 2088 of the Civil
Code. A pactum commissorium is a provision for the automatic
appropriation of the pledged or mortgaged property by the
creditor in payment of the loan upon its maturity. This
prohibition is intended to protect the obligor, pledgor, or
mortgagor against being overreached by his creditor who holds
a pledge or mortgage over property whose value is much more
than the debt.
Where, as in this case, the security for the debt is also money
deposited in a bank, the amount of which is even less than the
debt, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtors’ overdue obligation, with the
latter’s consent.
CITIBANK N.A. & INVESTORS FINANCE CORP. vs.
SABENIANO, GR 156132, 2006;
FACTS: On 16 October 2006, this Court promulgated its
Decision1 in the above-entitled case, the dispositive portion of
which reads –
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY
GRANTED. The assailed Decision of the Court of Appeals in CA-
G.R. No. 51930, dated 26 March 2002, as already modified by
its Resolution, dated 20 November 2002, is hereby AFFIRMED
WITH MODIFICATION, as follows –
1. PNs No. 23356 and 23357 are DECLARED subsisting and
outstanding. Petitioner Citibank is ORDERED to return to
respondent the principal amounts of the said PNs, amounting
to Three Hundred Eighteen Thousand Eight Hundred Ninety-
Seven Pesos and Thirty-Four Centavos (₱318,897.34) and Two
Hundred Three Thousand One Hundred Fifty Pesos
(₱203,150.00), respectively, plus the stipulated interest of
Fourteen and a half percent (14.5%) per annum, beginning 17
March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six
Hundred Thirty Two US Dollars and Ninety-Nine Cents
(US$149,632.99) from respondent’s Citibank-Geneva accounts
to petitioner Citibank in Manila, and the application of the same
against respondent’s outstanding loans with the latter, is
DECLARED illegal, null and void. Petitioner Citibank is
ORDERED to refund to respondent the said amount, or its
equivalent in Philippine currency using the exchange rate at
the time of payment, plus the stipulated interest for each of
the fiduciary placements and current accounts involved,
beginning 26 October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral
damages in the amount of Three Hundred Thousand Pesos
(₱300,000.00); exemplary damages in the amount of Two
Hundred Fifty Thousand Pesos (₱250,000.00); and attorney’s
fees in the amount of Two Hundred Thousand Pesos
(₱200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the
balance of her outstanding loans, which, from the respective
dates of their maturity to 5 September 1979, was computed to
be in the sum of One Million Sixty-Nine Thousand Eight
Hundred Forty-Seven Pesos and Forty Centavos
(₱1,069,847.40), inclusive of interest. These outstanding loans
shall continue to earn interest, at the rates stipulated in the
corresponding PNs, from 5 September 1979 until payment
thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an
Urgent Motion to Clarify and/or Confirm Decision with Notice of
Judgment on 20 October 2006; while, petitioners Citibank, N.A.
and FNCB Finance2 filed their Motion for Partial
Reconsideration of the foregoing Decision on 6 November
2006.
The facts of the case, as determined by this Court in its
Decision, may be summarized as follows.
Respondent was a client of petitioners. She had several
deposits and market placements with petitioners, among which
were her savings account with the local branch of petitioner
Citibank (Citibank-Manila3 ); money market placements with
petitioner FNCB Finance; and dollar accounts with the Geneva
branch of petitioner Citibank (Citibank-Geneva). At the same
time, respondent had outstanding loans with petitioner
Citibank, incurred at Citibank-Manila, the principal amounts
aggregating to ₱1,920,000.00, all of which had become due
and demandable by May 1979. Despite repeated demands by
petitioner Citibank, respondent failed to pay her outstanding
loans. Thus, petitioner Citibank used respondent’s deposits and
money market placements to off-set and liquidate her
outstanding obligations, as follows –
Respondent’s outstanding obligation (principal and interest as
of 26 October 1979) ₱ 2,156,940.58
Less: Proceeds from respondent’s money market placements
with petitioner FNCB Finance (principal and interest as of 5
September 1979) (1,022,916.66)
Deposits in respondent’s bank accounts with petitioner
Citibank (31,079.14)
Proceeds of respondent’s money market placements
and dollar accounts with Citibank-Geneva (peso equivalent as
of 26 October 1979) (1,102,944.78)
Balance of respondent’s obligation
₱ 0.00
Respondent, however, denied having any outstanding loans
with petitioner Citibank. She likewise denied that she was duly
informed of the off-setting or compensation thereof made by
petitioner Citibank using her deposits and money market
placements with petitioners. Hence, respondent sought to
recover her deposits and money market placements.
Respondent instituted a complaint for "Accounting, Sum of
Money and Damages" against petitioners, docketed as Civil
Case No. 11336, before the Regional Trial Court (RTC) of
Makati City. After trial proper, which lasted for a decade, the
RTC rendered a Decision4 on 24 August 1995, the dispositive
portion of which reads –
WHEREFORE, in view of all the foregoing, decision is hereby
rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the
defendant Bank [petitioner Citibank] of plaintiff’s [respondent
Sabeniano] dollar deposit with Citibank, Switzerland, in the
amount of US$149,632.99, and ordering the said defendant
[petitioner Citibank] to refund the said amount to the plaintiff
with legal interest at the rate of twelve percent (12%) per
annum, compounded yearly, from 31 October 1979 until fully
paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to
the defendant Bank [petitioner Citibank] in the amount of
₱1,069,847.40 as of 5 September 1979 and ordering the
plaintiff [respondent Sabeniano] to pay said amount, however,
there shall be no interest and penalty charges from the time
the illegal setoff was effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by
the parties against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC Decision to
the Court of Appeals, docketed as CA-G.R. CV No. 51930. On
26 March 2002, the appellate court promulgated its Decision,5
ruling entirely in favor of respondent, to wit –
Wherefore, premises considered, the assailed 24 August 1995
Decision of the court a quo is hereby AFFIRMED with
MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the
defendant-appellant Bank of the plaintiff-appellant’s dollar
deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering defendant-appellant Citibank to
refund the said amount to the plaintiff-appellant with legal
interest at the rate of twelve percent (12%) per annum,
compounded yearly, from 31 October 1979 until fully paid, or
its peso equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by
competent evidence the alleged indebtedness of plaintiff-
appellant, the set-off of ₱1,069,847.40 in the account of Ms.
Sabeniano is hereby declared as without legal and factual
basis;
3. As defendants-appellants failed to account the following
plaintiff-appellant’s money market placements, savings account
and current accounts, the former is hereby ordered to return
the same, in accordance with the terms and conditions agreed
upon by the contending parties as evidenced by the certificates
of investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes
NNPN No. 22526) issued on 17 March 1977, ₱318,897.34 with
14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes
NNPN No. 22528) issued on 17 March 1977, ₱203,150.00 with
14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes
NNPN No. 04952), issued on 02 June 1977, ₱500,000.00 with
17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes
NNPN No. 04962), issued on 02 June 1977, ₱500,000.00 with
17% interest per annum;
(v) The Two Million (₱2,000,000.00) money market placements
of Ms. Sabeniano with the Ayala Investment & Development
Corporation (AIDC) with legal interest at the rate of twelve
percent (12%) per annum compounded yearly, from 30
September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay
the plaintiff-appellant the sum of FIVE HUNDRED THOUSAND
PESOS (₱500,000.00) by way of moral damages, FIVE
HUNDRED THOUSAND PESOS (₱500,000.00) as exemplary
damages, and ONE HUNDRED THOUSAND PESOS
(₱100,000.00) as attorney’s fees.
Acting on petitioners’ Motion for Partial Reconsideration, the
Court of Appeals issued a Resolution,6 dated 20 November
2002, modifying its earlier Decision, thus –
WHEREFORE, premises considered, the instant Motion for
Reconsideration is PARTIALLY GRANTED as Sub-paragraph (V)
paragraph 3 of the assailed Decision’s dispositive portion is
hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is
AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as
modified by the Resolution of the same court, dated 20
November 2002, was still principally in favor of respondent,
petitioners filed the instant Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court. After giving due
course to the instant Petition, this Court promulgated on 16
October 2006 its Decision, now subject of petitioners’ Motion
for Partial Reconsideration.1awphi1.net
Among the numerous grounds raised by petitioners in their
Motion for Partial Reconsideration, this Court shall address and
discuss herein only particular points that had not been
considered or discussed in its Decision. Even in consideration of
these points though, this Court remains unconvinced that it
should modify or reverse in any way its disposition of the case
in its earlier Decision.
As to the off-setting or compensation of respondent’s
outstanding loan balance with her dollar deposits in Citibank-
Geneva
Petitioners’ take exception to the following findings made by
this Court in its Decision, dated 16 October 2006, disallowing
the off-setting or compensation of the balance of respondent’s
outstanding loans using her dollar deposits in Citibank-Geneva
– CITIBANK, N.A. in transit or in their possession, may without
Without the Declaration of Pledge, petitioner Citibank had no
authority to demand the remittance of respondent’s dollar
accounts with Citibank-Geneva and to apply them to her
outstanding loans. It cannot effect legal compensation under
Article 1278 of the Civil Code since, petitioner Citibank itself
admitted that Citibank-Geneva is a distinct and separate entity.
As for the dollar accounts, respondent was the creditor and
Citibank-Geneva is the debtor; and as for the outstanding
loans, petitioner Citibank was the creditor and respondent was
the debtor. The parties in these transactions were evidently not
the principal creditor of each other.
Petitioners maintain that respondent’s Declaration of Pledge,
by virtue of which she supposedly assigned her dollar accounts
with Citibank-Geneva as security for her loans with petitioner
Citibank, is authentic and, thus, valid and binding upon
respondent. Alternatively, petitioners aver that even without
said Declaration of Pledge, the off-setting or compensation
made by petitioner Citibank using respondent’s dollar accounts
with Citibank-Geneva to liquidate the balance of her
outstanding loans with Citibank-Manila was expressly
authorized by respondent herself in the promissory notes (PNs)
she signed for her loans, as well as sanctioned by Articles 1278
to 1290 of the Civil Code. This alternative argument is
anchored on the premise that all branches of petitioner
Citibank in the Philippines and abroad are part of a single
worldwide corporate entity and share the same juridical
personality. In connection therewith, petitioners deny that they
ever admitted that Citibank-Manila and Citibank-Geneva are
distinct and separate entities.
Petitioners call the attention of this Court to the following
provision found in all of the PNs7 executed by respondent for
her loans –
At or after the maturity of this note, or when same becomes
due under any of the provisions hereof, any money, stocks,
bonds, or other property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the books of
notice be applied at the discretion of the said bank to the full or
partial payment of this note.
It is the petitioners’ contention that the term "Citibank, N.A."
used therein should be deemed to refer to all branches of
petitioner Citibank in the Philippines and abroad; thus, giving
petitioner Citibank the authority to apply as payment for the
PNs even respondent’s dollar accounts with Citibank-Geneva.
Still proceeding from the premise that all branches of petitioner
Citibank should be considered as a single entity, then it should
not matter that the respondent obtained the loans from
Citibank-Manila and her deposits were with Citibank-Geneva.
Respondent should be considered the debtor (for the loans)
and creditor (for her deposits) of the same entity, petitioner
Citibank. Since petitioner Citibank and respondent were
principal creditors of each other, in compliance with the
requirements under Article 1279 of the Civil Code,8 then the
former could have very well used off-setting or compensation
to extinguish the parties’ obligations to one another. And even
without the PNs, off-setting or compensation was still
authorized because according to Article 1286 of the Civil Code,
"Compensation takes place by operation of law, even though
the debts may be payable at different places, but there shall be
an indemnity for expenses of exchange or transportation to the
place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known
as the General Banking Law of 2000, governing bank branches
are reproduced below –
SEC. 20. Bank Branches. – Universal or commercial banks may
open branches or other offices within or outside the Philippines
upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent
laws.
A bank may, subject to prior approval of the Monetary Board,
use any or all of its branches as outlets for the presentation
and/or sale of the financial products of its allied undertaking or
its investment house units.
A bank authorized to establish branches or other offices shall
be responsible for all business conducted in such branches and
offices to the same extent and in the same manner as though
such business had all been conducted in the head office. A
bank and its branches and offices shall be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines. – The entry of
foreign banks in the Philippines through the establishment of
branches shall be governed by the provisions of the Foreign
Banks Liberalization Act.
The conduct of offshore banking business in the Philippines
shall be governed by the provisions of Presidential Decree No.
1034, otherwise known as the "Offshore Banking System
Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. – In case of a
foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1) unit
for the purpose of this Act, and all references to the Philippine
branches of foreign banks shall be held to refer to such units.
SEC. 75. Head Office Guarantee. – In order to provide effective
protection of the interests of the depositors and other creditors
of Philippine branches of a foreign bank, the head office of such
branches shall fully guarantee the prompt payment of all
liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a
branch in the Philippines of a foreign bank shall have
preferential rights to the assets of such branch in accordance
with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks
Liberalization Law, lays down the policies and regulations
specifically concerning the establishment and operation of local
branches of foreign banks. Relevant provisions of the said
statute read –
Sec. 2. Modes of Entry. - The Monetary Board may authorize
foreign banks to operate in the Philippine banking system
through any of the following modes of entry: (i) by acquiring,
purchasing or owning up to sixty percent (60%) of the voting
stock of an existing bank; (ii) by investing in up to sixty
percent (60%) of the voting stock of a new banking subsidiary
incorporated under the laws of the Philippines; or (iii) by
establishing branches with full banking authority: Provided,
That a foreign bank may avail itself of only one (1) mode of
entry: Provided, further, That a foreign bank or a Philippine
corporation may own up to a sixty percent (60%) of the voting
stock of only one (1) domestic bank or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign
bank branches shall guarantee prompt payment of all liabilities
of its Philippine branches.
It is true that the afore-quoted Section 20 of the General
Banking Law of 2000 expressly states that the bank and its
branches shall be treated as one unit. It should be pointed out,
however, that the said provision applies to a universal9 or
commercial bank,10 duly established and organized as a
Philippine corporation in accordance with Section 8 of the same
statute,11 and authorized to establish branches within or
outside the Philippines.
The General Banking Law of 2000, however, does not make the
same categorical statement as regards to foreign banks and
their branches in the Philippines. What Section 74 of the said
law provides is that in case of a foreign bank with several
branches in the country, all such branches shall be treated as
one unit. As to the relations between the local branches of a
foreign bank and its head office, Section 75 of the General
Banking Law of 2000 and Section 5 of the Foreign Banks
Liberalization Law provide for a "Home Office Guarantee," in
which the head office of the foreign bank shall guarantee
prompt payment of all liabilities of its Philippine branches.
While the Home Office Guarantee is in accord with the principle
that these local branches, together with its head office,
constitute but one legal entity, it does not necessarily support
the view that said principle is true and applicable in all
circumstances.
The Home Office Guarantee is included in Philippine statutes
clearly for the protection of the interests of the depositors and
other creditors of the local branches of a foreign bank.12 Since
the head office of the bank is located in another country or
state, such a guarantee is necessary so as to bring the head
office within Philippine jurisdiction, and to hold the same
answerable for the liabilities of its Philippine branches. Hence,
the principle of the singular identity of that the local branches
and the head office of a foreign bank are more often invoked
by the clients in order to establish the accountability of the
head office for the liabilities of its local branches. It is under
such attendant circumstances in which the American
authorities and jurisprudence presented by petitioners in their
Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the
foreign bank can use the principle for a reverse purpose, in
order to extend the liability of a client to the foreign bank’s
Philippine branch to its head office, as well as to its branches in
other countries. Thus, if a client obtains a loan from the foreign
bank’s Philippine branch, does it absolutely and automatically
make the client a debtor, not just of the Philippine branch, but
also of the head office and all other branches of the foreign
bank around the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence
on the matter, this Court, just as what petitioners have done,
turns to American authorities and jurisprudence. American
authorities and jurisprudence are significant herein considering
that the head office of petitioner Citibank is located in New
York, United States of America (U.S.A.).
Unlike Philippine statutes, the American legislation explicitly
defines the relations among foreign branches of an American
bank. Section 25 of the United States Federal Reserve Act13
states that –
Every national banking association operating foreign branches
shall conduct the accounts of each foreign branch
independently of the accounts of other foreign branches
established by it and of its home office, and shall at the end of
each fiscal period transfer to its general ledger the profit or
loss accrued at each branch as a separate item.
Contrary to petitioners’ assertion that the accounts of Citibank-
Manila and Citibank-Geneva should be deemed as a single
account under its head office, the foregoing provision
mandates that the accounts of foreign branches of an American
bank shall be conducted independently of each other. Since the
head office of petitioner Citibank is in the U.S.A., then it is
bound to treat its foreign branches in accordance with the said
provision. It is only at the end of its fiscal period that the bank
is required to transfer to its general ledger the profit or loss
accrued at each branch, but still reporting it as a separate
item. It is by virtue of this provision that the Circuit Court of
Appeals of New York declared in Pan-American Bank and Trust
Co. v. National City Bank of New York14 that a branch is not
merely a teller’s window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of
Chartered Bank of India, Australia & China15 are closest to the
one at bar. In said case, the Chartered Bank had branches in
several countries, including one in Hamburg, Germany and
another in New York, U.S.A., and yet another in London, United
Kingdom. The New York branch entered in its books credit in
favor of four German firms. Said credit represents collections
made from bills of exchange delivered by the four German
firms. The same four German firms subsequently became
indebted to the Hamburg branch. The London branch then
requested for the transfer of the credit in the name of the
German firms from the New York branch so as to be applied or
setoff against the indebtedness of the same firms to the
Hamburg branch. One of the question brought before the U.S.
District Court of New York was "whether or not the debts and
the alleged setoffs thereto are mutual," which could be
answered by determining first whether the New York and
Hamburg branches of Chartered Bank are individual business
entities or are one and the same entity. In denying the right of
the Hamburg branch to setoff, the U.S. District Court
ratiocinated that –
The structure of international banking houses such as
Chartered bank defies one rigorous description. Suffice it to
say for present analysis, branches or agencies of an
international bank have been held to be independent entities
for a variety of purposes (a) deposits payable only at branch
where made; Mutaugh v. Yokohama Specie Bank, Ltd., 1933,
149 Misc. 693, 269 N.Y.S. 65; Bluebird Undergarment Corp. v.
Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319; (b) checks need
be honored only when drawn on branch where deposited;
Chrzanowska v. Corn Exchange Bank, 1916, 173 App. Div.
285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E.
877; subpoena duces tecum on foreign bank’s record barred;
In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign
branch separate for collection of forwarded paper; Pan-
American Bank and Trust Company v. National City Bank of
New York, 2 Cir., 1925, 6 F. 2d 762, certiorari denied 1925,
269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is
nothing innately unitary about the organization of international
banking institutions.
Defendant, upon its oral argument and in its brief, relies
heavily on Sokoloff v. National City Bank of New York, 1928,
250 N.Y. 69, 164 N.E. 745, as authority for the proposition that
Chartered Bank, not the Hamburg or New York Agency, is
ultimately responsible for the amounts owing its German
customers and, conversely, it is to Chartered Bank that the
German firms owe their obligations. The Sokoloff case, aside
from its violently different fact situation, is centered on the
legal problem of default of payment and consequent breach of
contract by a branch bank. It does not stand for the principle
that in every instance an international bank with branches is
but one legal entity for all purposes. The defendant concedes in
its brief (p. 15) that there are purposes for which the various
agencies and branches of Chartered Bank may be treated in
law as separate entities. I fail to see the applicability of
Sokoloff either as a guide to or authority for the resolution of
this problem. The facts before me and the cases catalogued
supra lend weight to the view that we are dealing here with
Agencies independent of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and
defendant were independent business entities, and the
attempted setoff may not be utilized by defendant against its
debt to the German firms obligated to the Hamburg Agency.
Going back to the instant Petition, although this Court
concedes that all the Philippine branches of petitioner Citibank
should be treated as one unit with its head office, it cannot be
persuaded to declare that these Philippine branches are
likewise a single unit with the Geneva branch. It would be
stretching the principle way beyond its intended purpose.
Therefore, this Court maintains its original position in the
Decision that the off-setting or compensation of respondent’s
loans with Citibank-Manila using her dollar accounts with
Citibank-Geneva cannot be effected. The parties cannot be
considered principal creditor of the other. As for the dollar
accounts, respondent was the creditor and Citibank-Geneva
was the debtor; and as for the outstanding loans, petitioner
Citibank, particularly Citibank-Manila, was the creditor and
respondent was the debtor. Since legal compensation was not
possible, petitioner Citibank could only use respondent’s dollar
accounts with Citibank-Geneva to liquidate her loans if she had
expressly authorized it to do so by contract.
Respondent cannot be deemed to have authorized the use of
her dollar deposits with Citibank-Geneva to liquidate her loans
with petitioner Citibank when she signed the PNs16 for her
loans which all contained the provision that –
At or after the maturity of this note, or when same becomes
due under any of the provisions hereof, any money, stocks,
bonds, or other property of any kind whatsoever, on deposit or
otherwise, to the credit of the undersigned on the books of
CITIBANK, N.A. in transit or in their possession, may without
notice be applied at the discretion of the said bank to the full or
partial payment of this note.
As has been established in the preceding discussion, "Citibank,
N.A." can only refer to the local branches of petitioner Citibank
together with its head office. Unless there is any showing that
respondent understood and expressly agreed to a more far-
reaching interpretation, the reference to Citibank, N.A. cannot
be extended to all other branches of petitioner Citibank all over
the world. Although theoretically, books of the branches form
part of the books of the head office, operationally and
practically, each branch maintains its own books which shall
only be later integrated and balanced with the books of the
head office. Thus, it is very possible to identify and segregate
the books of the Philippine branches of petitioner Citibank from
those of Citibank-Geneva, and to limit the authority granted for
application as payment of the PNs to respondent’s deposits in
the books of the former.
Moreover, the PNs can be considered a contract of adhesion,
the PNs being in standard printed form prepared by petitioner
Citibank. Generally, stipulations in a contract come about after
deliberate drafting by the parties thereto, there are certain
contracts almost all the provisions of which have been drafted
only by one party, usually a corporation. Such contracts are
called contracts of adhesion, because the only participation of
the party is the affixing of his signature or his "adhesion"
thereto. This being the case, the terms of such contract are to
be construed strictly against the party which prepared it.17
As for the supposed Declaration of Pledge of respondent’s
dollar accounts with Citibank-Geneva as security for the loans,
this Court stands firm on its ruling that the non-production
thereof is fatal to petitioners’ cause in light of respondent’s
claim that her signature on such document was a forgery. It
bears to note that the original of the Declaration of Pledge is
with Citibank-Geneva, a branch of petitioner Citibank. As
between respondent and petitioner Citibank, the latter has
better access to the document. The constant excuse forwarded
by petitioner Citibank that Citibank-Geneva refused to return
possession of the original Declaration of Pledge to Citibank-
Manila only supports this Court’s finding in the preceding
paragraphs that the two branches are actually operating
separately and independently of each other.
Further, petitioners keep playing up the fact that respondent,
at the beginning of the trial, refused to give her specimen
signatures to help establish whether her signature on the
Declaration of Pledge was indeed forged. Petitioners seem to
forget that subsequently, respondent, on advice of her new
counsel, already offered to cooperate in whatever manner so
as to bring the original Declaration of Pledge before the RTC for
inspection. The exchange of the counsels for the opposing
sides during the hearing on 24 July 1991 before the RTC
reveals the apparent willingness of respondent’s counsel to
undertake whatever course of action necessary for the
production of the contested document, and the evasive, non-
committal, and uncooperative attitude of petitioners’
counsel.18
Lastly, this Court’s ruling striking down the Declaration of
Pledge is not entirely based on respondent’s allegation of
forgery. In its Decision, this Court already extensively
discussed why it found the said Declaration of Pledge highly
suspicious and irregular, to wit –
First of all, it escapes this Court why petitioner Citibank took
care to have the Deeds of Assignment of the PNs notarized, yet
left the Declaration of Pledge unnotarized. This Court would
think that petitioner Citibank would take greater cautionary
measures with the preparation and execution of the
Declaration of Pledge because it involved respondent’s "all
present and future fiduciary placements" with a Citibank
branch in another country, specifically, in Geneva, Switzerland.
While there is no express legal requirement that the
Declaration of Pledge had to be notarized to be effective, even
so, it could not enjoy the same prima facie presumption of due
execution that is extended to notarized documents, and
petitioner Citibank must discharge the burden of proving due
execution and authenticity of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date
when the Declaration of Pledge was actually executed. The
photocopy of the Declaration of Pledge submitted by petitioner
Citibank before the RTC was undated. It presented only a
photocopy of the pledge because it already forwarded the
original copy thereof to Citibank-Geneva when it requested for
the remittance of respondent’s dollar accounts pursuant
thereto. Respondent, on the other hand, was able to secure a
copy of the Declaration of Pledge, certified by an officer of
Citibank-Geneva, which bore the date 24 September 1979.
Respondent, however, presented her passport and plane
tickets to prove that she was out of the country on the said
date and could not have signed the pledge. Petitioner Citibank
insisted that the pledge was signed before 24 September 1979,
but could not provide an explanation as to how and why the
said date was written on the pledge. Although Mr. Tan testified
that the Declaration of Pledge was signed by respondent
personally before him, he could not give the exact date when
the said signing took place. It is important to note that the
copy of the Declaration of Pledge submitted by the respondent
to the RTC was certified by an officer of Citibank-Geneva,
which had possession of the original copy of the pledge. It is
dated 24 September 1979, and this Court shall abide by the
presumption that the written document is truly dated. Since it
is undeniable that respondent was out of the country on 24
September 1979, then she could not have executed the pledge
on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The
pledge was in a standard printed form. It was constituted in
favor of Citibank, N.A., otherwise referred to therein as the
Bank. It should be noted, however, that in the space which
should have named the pledgor, the name of petitioner
Citibank was typewritten, to wit –
The pledge right herewith constituted shall secure all claims
which the Bank now has or in the future acquires against
Citibank, N.A., Manila (full name and address of the Debtor),
regardless of the legal cause or the transaction (for example
current account, securities transactions, collections, credits,
payments, documentary credits and collections) which gives
rise thereto, and including principal, all contractual and penalty
interest, commissions, charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee
being the same entity. Was a mistake made by whoever filled-
out the form? Yes, it could be a possibility. Nonetheless,
considering the value of such a document, the mistake as to a
significant detail in the pledge could only be committed with
gross carelessness on the part of petitioner Citibank, and
raised serious doubts as to the authenticity and due execution
of the same. The Declaration of Pledge had passed through the
hands of several bank officers in the country and abroad, yet,
surprisingly and implausibly, no one noticed such a glaring
mistake.
Lastly, respondent denied that it was her signature on the
Declaration of Pledge. She claimed that the signature was a
forgery. When a document is assailed on the basis of forgery,
the best evidence rule applies –
Basic is the rule of evidence that when the subject of inquiry is
the contents of a document, no evidence is admissible other
than the original document itself except in the instances
mentioned in Section 3, Rule 130 of the Revised Rules of
Court. Mere photocopies of documents are inadmissible
pursuant to the best evidence rule. This is especially true when
the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by
clear, positive and convincing evidence and the burden of proof
lies on the party alleging forgery. The best evidence of a forged
signature in an instrument is the instrument itself reflecting the
alleged forged signature. The fact of forgery can only be
established by a comparison between the alleged forged
signature and the authentic and genuine signature of the
person whose signature is theorized upon to have been forged.
Without the original document containing the alleged forged
signature, one cannot make a definitive comparison which
would establish forgery. A comparison based on a mere xerox
copy or reproduction of the document under controversy
cannot produce reliable results.
Respondent made several attempts to have the original copy of
the pledge produced before the RTC so as to have it examined
by experts. Yet, despite several Orders by the RTC, petitioner
Citibank failed to comply with the production of the original
Declaration of Pledge. It is admitted that Citibank-Geneva had
possession of the original copy of the pledge. While petitioner
Citibank in Manila and its branch in Geneva may be separate
and distinct entities, they are still incontestably related, and
between petitioner Citibank and respondent, the former had
more influence and resources to convince Citibank-Geneva to
return, albeit temporarily, the original Declaration of Pledge.
Petitioner Citibank did not present any evidence to convince
this Court that it had exerted diligent efforts to secure the
original copy of the pledge, nor did it proffer the reason why
Citibank-Geneva obstinately refused to give it back, when such
document would have been very vital to the case of petitioner
Citibank. There is thus no justification to allow the presentation
of a mere photocopy of the Declaration of Pledge in lieu of the
original, and the photocopy of the pledge presented by
petitioner Citibank has nil probative value. In addition, even if
this Court cannot make a categorical finding that respondent’s
signature on the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully suppressed the
presentation of the original document, and takes into
consideration the presumption that the evidence willfully
suppressed would be adverse to petitioner Citibank if
produced.
As far as the Declaration of Pledge is concerned, petitioners
failed to submit any new evidence or argument that was not
already considered by this Court when it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva
ordered refunded to respondent
In case petitioners are still ordered to refund to respondent the
amount of her dollar accounts with Citibank-Geneva,
petitioners beseech this Court to adjust the nominal values of
respondent’s dollar accounts and/or her overdue peso loans by
using the values of the currencies stipulated at the time the
obligations were established in 1979, to address the alleged
inequitable consequences resulting from the extreme and
extraordinary devaluation of the Philippine currency that
occurred in the course of the Asian crisis of 1997. Petitioners
base their request on Article 1250 of the Civil Code which
reads, "In case an extraordinary inflation or deflation of the
currency stipulated should supervene, the value of the
currency at the time of the establishment of the obligation shall
be the basis of payment, unless there is an agreement to the
contrary."
It is well-settled that Article 1250 of the Civil Code becomes
applicable only when there is extraordinary inflation or
deflation of the currency. Inflation has been defined as the
sharp increase of money or credit or both without a
corresponding increase in business transaction. There is
inflation when there is an increase in the volume of money and
credit relative to available goods resulting in a substantial and
continuing rise in the general price level.19 In Singson v.
Caltex (Philippines), Inc.,20 this Court already provided a
discourse as to what constitutes as extraordinary inflation or
deflation of currency, thus –
We have held extraordinary inflation to exist when there is a
decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in
the value of said currency, and such increase or decrease could
not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the
establishment of the obligation.
An example of extraordinary inflation, as cited by the Court in
Filipino Pipe and Foundry Corporation vs. NAWASA, supra, is
that which happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of
hyperinflation. In early 1921, the value of the German mark
was 4.2 to the U.S. dollar. By May of the same year, it had
stumbled to 62 to the U.S. dollar. And as prices went up
rapidly, so that by October 1923, it had reached 4.2 trillion to
the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola,
Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every
day, then every hour. Women were paid several times a day so
that they could rush out and exchange their money for
something of value before what little purchasing power was left
dissolved in their hands. Some workers tried to beat the
constantly rising prices by throwing their money out of the
windows to their waiting wives, who would rush to unload the
nearly worthless paper. A postage stamp cost millions of marks
and a loaf of bread, billions." (Sidney Rutberg, "The Money
Balloon", New York: Simon and Schuster, 1975, p. 19, cited in
"Economics, An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed.
The party alleging it must lay down the factual basis for the
application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that
the voluminous records and statistics submitted by plaintiff-
appellant proved that there has been a decline in the
purchasing power of the Philippine peso, but this downward fall
cannot be considered "extraordinary" but was simply a
universal trend that has not spared our country. Similarly, in
Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-
appellant's unsubstantiated allegation that the Aquino
assassination in 1983 caused building and construction costs to
double during the period July 1983 to February 1984. In Serra
vs. Court of Appeals, the Court again did not consider the
decline in the peso's purchasing power from 1983 to 1985 to
be so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also
raises as basis for the application of Article 1250 the Philippine
economic crisis in the early 1980s --- when, based on
petitioner's evidence, the inflation rate rose to 50.34% in
1984. We hold that there is no legal or factual basis to support
petitioner's allegation of the existence of extraordinary inflation
during this period, or, for that matter, the entire time frame of
1968 to 1983, to merit the adjustment of the rentals in the
lease contract dated July 16, 1968. Although by petitioner's
evidence there was a decided decline in the purchasing power
of the Philippine peso throughout this period, we are hard put
to treat this as an "extraordinary inflation" within the meaning
and intent of Article 1250.
Rather, we adopt with approval the following observations of
the Court of Appeals on petitioner's evidence, especially the
NEDA certification of inflation rates based on consumer price
index:
xxx (a) from the period 1966 to 1986, the official inflation rate
never exceeded 100% in any single year; (b) the highest
official inflation rate recorded was in 1984 which reached only
50.34%; (c) over a twenty one (21) year period, the
Philippines experienced a single-digit inflation in ten (10) years
(i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983
and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973,
1974, 1979, 1980, 1981, 1982, 1984 and 1989) when the
Philippines experienced double-digit inflation rates, the average
of those rates was only 20.88%; (e) while there was a decline
in the purchasing power of the Philippine currency from the
period 1966 to 1986, such cannot be considered as
extraordinary; rather, it is a normal erosion of the value of the
Philippine peso which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of
decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly
distinct from the phenomenon contemplated by Article 1250.
Moreover, this Court has held that the effects of extraordinary
inflation are not to be applied without an official declaration
thereof by competent authorities.
The burden of proving that there had been extraordinary
inflation or deflation of the currency is upon the party that
alleges it. Such circumstance must be proven by competent
evidence, and it cannot be merely assumed. In this case,
petitioners presented no proof as to how much, for instance,
the price index of goods and services had risen during the
intervening period.21 All the information petitioners provided
was the drop of the U.S. dollar-Philippine peso exchange rate
by 17 points from June 1997 to January 1998. While the said
figure was based on the statistics of the Bangko Sentral ng
Pilipinas (BSP), it is also significant to note that the BSP did not
categorically declare that the same constitute as an
extraordinary inflation. The existence of extraordinary inflation
must be officially proclaimed by competent authorities, and the
only competent authority so far recognized by this Court to
make such an official proclamation is the BSP.22
Neither can this Court, by merely taking judicial notice of the
Asian currency crisis in 1997, already declare that there had
been extraordinary inflation. It should be recalled that the
Philippines likewise experienced economic crisis in the 1980s,
yet this Court did not find that extraordinary inflation took
place during the said period so as to warrant the application of
Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil
Code is based on equitable considerations. Among the maxims
of equity are (1) he who seeks equity must do equity, and (2)
he who comes into equity must come with clean hands. The
latter is a frequently stated maxim which is also expressed in
the principle that he who has done inequity shall not have
equity.23 Petitioner Citibank, hence, cannot invoke Article
1250 of the Civil Code because it does not come to court with
clean hands. The delay in the recovery24 by respondent of her
dollar accounts with Citibank-Geneva was due to the unlawful
act of petitioner Citibank in using the same to liquidate
respondent’s loans. Petitioner Citibank even attempted to
justify the off-setting or compensation of respondent’s loans
using her dollar accounts with Citibank-Geneva by the
presentation of a highly suspicious and irregular, and even
possibly forged, Declaration of Pledge.
The damage caused to respondent of the deprivation of her
dollar accounts for more than two decades is unquestionably
relatively more extensive and devastating, as compared to
whatever damage petitioner Citibank, an international banking
corporation with undoubtedly substantial capital, may have
suffered for respondent’s non-payment of her loans. It must
also be remembered that petitioner Citibank had already
considered respondent’s loans paid or liquidated by 26 October
1979 after it had fully effected compensation thereof using
respondents deposits and money market placements. All this
time, respondent’s dollar accounts are unlawfully in the
possession of and are being used by petitioner Citibank for its
business transactions. In the meantime, respondent’s
businesses failed and her properties were foreclosed because
she was denied access to her funds when she needed them
most. Taking these into consideration, respondent’s dollar
accounts with Citibank-Geneva must be deemed to be
subsisting and continuously deposited with petitioner Citibank
all this while, and will only be presently withdrawn by
respondent. Therefore, petitioner Citibank should refund to
respondent the U.S. $149,632.99 taken from her Citibank-
Geneva accounts, or its equivalent in Philippine currency using
the exchange rate at the time of payment, plus the stipulated
interest for each of the fiduciary placements and current
accounts involved, beginning 26 October 1979.
As to respondent’s Motion to Clarify and/or Confirm Decision
with Notice of Judgment
Respondent, in her Motion, is of the mistaken notion that the
Court of Appeals Decision, dated 26 March 2002, as modified
by the Resolution of the same court, dated 20 November 2002,
would be implemented or executed together with this Court’s
Decision.
This Court clarifies that its affirmation of the Decision of the
Court of Appeals, as modified, is only to the extent that it
recognizes that petitioners had liabilities to the respondent.
However, this Court’s Decision modified that of the appellate
court’s by making its own determination of the specific
liabilities of the petitioners to respondent and the amounts
thereof; as well as by recognizing that respondent also had
liabilities to petitioner Citibank and the amount thereof.
Thus, for purposes of execution, the parties need only refer to
the dispositive portion of this Court’s Decision, dated 16
October 2006, should it already become final and executory,
without any further modifications.
As the last point, there is no merit in respondent’s Motion for
this Court to already declare its Decision, dated 16 October
2006, final and executory. A judgment becomes final and
executory by operation of law and, accordingly, the finality of
the judgment becomes a fact upon the lapse of the
reglementary period without an appeal or a motion for new
trial or reconsideration being filed.25 This Court cannot
arbitrarily disregard the reglementary period and declare a
judgment final and executory upon the mere motion of one
party, for to do so will be a culpable violation of the right of the
other parties to due process.
PARAY & ESPELETA vs. RODRIGUEZ et al, GR 132287,
2006
FACTS: Respondents were the owners of shares of stock in
Quirino-Leonor-Rodriguez Realty Inc. In 1979 to 1980,
respondents secured by way of pledge of some of their shares
of stock to petitioners Bonifacio and Faustina Paray (“Parays”)
the payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on
account of respondents’ failure to pay their loans, respondents
filed complaints with RTC of Cebu City. The actions sought the
declaration of nullity of the pledge agreements, among others.
However the RTC dismissed the complaint and gave due course
to the foreclosure and sale at public auction of the various
pledges. This decision attained finality after it was affirmed by
the Court of Appeals and the Supreme Court.
Respondents then received Notices of Sale which indicated that
the pledged shares were to be sold at public auction. However,
before the scheduled date of auction, all of respondents caused
the consignation with the RTC Clerk of Court of various
amounts. It was claimed that respondents had attempted to
tender payments to the Parays, but had been rejected.
Notwithstanding the consignations, the public auction took
place as scheduled, with petitioner Vidal Espeleta successfully
bidding for all of the pledged shares. None of respondents
participated or appeared at the auction.
Respondents instead filed a complaint with the RTC seeking the
declaration of nullity of the concluded public auction.
Respondents’ argument:
Respondents argued that their tender of payment and
subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts.
Petitioners’ argument:
Petitioners countered that the auction sale was conducted
pursuant to a final and executory judgment and that the tender
of payment and consignations were made long after their
obligations had fallen due.
They pointed out that the amounts consigned could not
extinguish the principal loan obligations of respondents since
they were not sufficient to cover the interests due on the debt.
They likewise argued that the essential procedural requisites
for the auction sale had been satisfied.
Ruling of RTC: The RTC dismissed the complaint, expressing
agreement with the position of the Parays. It held that
respondents had failed to tender or consign payments within a
reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal,
ruling that the consignations extinguished the loan obligations
and the subject pledge contracts; and the auction sale as null
and void. It (CA) chose to uphold the sufficiency of the
consignations owing to an imputed policy of the law that
favored redemption and mandated a liberal construction to
redemption laws. The attempts at payment by respondents
were characterized as made in the exercise of the right of
redemption.
CA likewise found fault with the auction sale, holding that there
was a need to individually sell the various shares of stock as
they had belonged to different pledgors.
ISSUES:
1. W/N right of redemption exists over personal properties
(such as the subject pledged shares).
2. W/N the consignations made by respondents prior to the
auction sale are sufficient to extinguish the loan obligations
and the subject pledged contracts.
3. W/N the act of respondents in consigning the payments
should be deemed done in the exercise of their right of
redemption owing to an imputed policy of the law that favored
redemption and mandated a liberal construction to redemption
laws.
4. W/N a buyer at a public auction ipso facto becomes the
owner of the pledged shares pending the lapse of the one-year
redemptive period
5. W/N there is a need to individually sell the various shares of
stock as they had belonged to different pledgors.
HELD:
1. No,
No law or jurisprudence establishes or affirms such right.
Indeed, no such right exists.
The right of redemption over mortgaged real property sold
extrajudicially is established by Act No. 3135, as amended. The
said law does not extend the same benefit to personal
property. In fact, there is no law in our statute books which
vests the right of redemption over personal property. Act No.
1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right
of redemption over personal property, since that law governs
the extrajudicial sale of mortgaged personal property, but the
statute is definitely silent on the point.
The right of redemption as affirmed under Rule 39 of the Rules
of Court applies only to execution sales, more precisely
execution sales of real property.
It must be clarified that the subject sale of pledged shares was
an extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by an execution
sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in due
time, is to proceed before a Notary Public to the sale of the
thing pledged.
In this case, petitioners attempted to proceed extrajudicially
with the sale of the pledged shares by public auction. However,
extrajudicial sale was stayed with the filing of Civil Cases which
sought to annul the pledge contracts. The final and executory
judgment in those cases affirmed the pledge contracts and
disposed them. Said judgment did not direct the sale by public
auction of the pledged shares, but instead upheld the right of
the Parays to conduct such sale at their own volition.
2. No, There is no doubt that if the principal obligation is
satisfied, the pledges should be terminated as well. Article
2098 of the Civil Code provides that the right of the creditor to
retain possession of the pledged item exists only until the debt
is paid. Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt
and its interest. At the same time, the right of the pledgee to
foreclose the pledge is also established under the Civil Code.
When the credit has not been satisfied in due time, the creditor
may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
In order that the consignation could have the effect of
extinguishing the pledge contracts, such amounts should cover
not just the principal loans, but also the monthly interests
thereon.
Rules of Court or in any law requires that pledged properties
sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and
not the pledgor, who is given the right to choose which of the
items should be sold if two or more things are pledged. No
similar option is given to pledgors under the Civil Code.
Moreover, there is nothing in the Civil Code provisions
governing the extrajudicial sale of pledged properties that
prohibits the pledgee of several different pledge contracts from
auctioning all of the pledged properties on a single occasion, or
from the buyer at the auction sale in purchasing all the pledged
properties with a single purchase price.

In the case at bar, while the amounts consigned by
respondents could answer for their respective principal loan
obligations, they were not sufficient to cover the interests due
on these loans, which were pegged at the rate of 5% per
month or 60% per annum.
The relative insignificance of ascertaining the definite
apportionments of the sale price to the individual shares lies in
the fact that once a pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever deficiency or
excess there may be between the purchase price and the
amount of the principal obligation.

3. No, The pledged shares in this case are not subject to RULING: Decision of the Court of Appeals is SET ASIDE and the
redemption. Thus, the consigned payments should not be decision of the RTC Cebu City is REINSTATED.
treated with liberality, or somehow construed as having been
made in the exercise of the right of redemption.

4. Yes, Obviously, since there is no right to redeem personal

property, the rights of ownership vested unto the purchaser at
the foreclosure sale are not entangled in any suspensive
condition that is implicit in a redemptive period.

5. No, This concern is obviously rendered a non-issue by the

fact that there can be no right to redemption in the first place.
Rule 39 of the Rules of Court does provide for instances when
properties foreclosed at the same time must be sold
separately, such as in the case of lot sales for real property
under Section 19. However, these instances again pertain to
execution sales and not extrajudicial sales. No provision in the