SAN BEDA UNIVERSITY

COLLEGE OF LAW

CIVIL LAW REVIEW II

CASE DIGESTS
 Part Four – Credit Transactions

I. Loan
• Cases:
(1) Rose Packing Co., Inc. v. Court of Appeals, 16 SCRA 309
(2) Garcia v. Thio, G.R. No. 154878, March 16, 2007
(3) Tolentino v. Gonzales, 50 Phil. 558
(4) Dizon v. Magsaysay, 57 SCRA 250
(5) Philippine National Bank v. Court of Appeals, 238 SCRA 20
(6) Spouses Solangon v. Salazar
(7) Medel v. Court of Appeals, 29 SCRA 481
(8) Palanca v. Court of Appeals, 239 SCRA 593
(9) Spouses Pascual v. Spouses Ramos, G.R. No. 144712, July 4, 2002
(10) Private Development Corp. of the Philippines v. Intermediate Appellate Court, 213 SCRA 282
(11) Angel Jose Warehousing Co., Inc. v. Chelda Enterprises, 23 SCRA 119
(12) First Metro Investment Corp. v. Este Del Sol Mountain Reserve, Inc., G.R. No. 141811, November
15, 2001
(13) Nacar v. Gallery Frames, G.R. No. 189871, August 13, 2013
(14) Spouses Juico v. China Banking Corp., G.R. No. 187678, April 10, 2013

II. Deposit
• Cases:
(15) Bank of the Philippine Islands v. Court of Appeals, May 10, 1994
(16) Gullas v. National Bank, 62 Phil. 519
(17) CA Agro-Industrial Development Corp. v. Court of Appeals, March 3, 1993

III. Guaranty and Suretyship

• Cases:
(18) Villa v. Garcia Bosque, 49 Phil. 126
(19) Machetti v. Hospicio de San Jose, 43 Phil. 297
(20) Zeyson v. Rizal Surety & Insurance Co., 16 SCRA 551
(21) Fortune Motor (Philippines) Corp. v. Court of Appeals, 335 Phil. 315
(22) National Marketing Corp. v. Marquez, G.R. No. L-25553, January 31, 1969
(23) Reparations Commission v. Universal Deep Sea Fishing Corp., G.R. Nos. L-21901 & 21996,
January 31, 1969
(24) Babst v. Court of Appeals, G.R. No. 99398, January 26, 2001
(25) Wilex Plastic Industries Corp. v. Court of Appeals, 256 SCRA 478
(26) Asiatic Petroleum v. Hizon, 45 Phil. 534
(27) Toh v. Solid Bank Corp., 408 SCRA 544, 2003
(28) Southern Motors v. Barbosa, 99 Phil. 263
(29) Cawaling v. Merese, 709 SCRA 304
(30) Commissioner of Immigration v. Asian Surety & Insurance Co., Inc., G.R. No. L-22552, January
30, 1969

IV. Antichresis
• Cases:
(31) Diaz v. Mendezona, 48 Phil. 666
(32) Macapinlac v. Repide, 43 Phil. 770
(33) Ramirez v. Court of Appeals, G.R. No. 38185, September 24, 1986

V. Real Estate Mortgage

• Cases:
(34) Macapinlac v. Gutierrez Repide, 43 Phil. 781
(35) Samanilla v. Cajucom, 107 Phil. 432
(36) Belo v. Philippine National Bank, 353 SCRA 359
(37) Spouses De Vera v. Agloro, G.R. No. 155673, January 2005
(38) Philippine National Bank v. Heirs of Benedicto, G.R. No. 171865, October 12, 2016
(39) Prudential Bank v. Panis, G.R. No. 50008, August 31, 1987
(40) Philippine Industrial Co. v. El Hogar Filipino, 45 Phil. 336

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 (41) Danao v. Court of Appeals, G.R. No. 48276, September 30, 1987
(42) Development Bank v. Zaragosa, G.R. No. L-23493, August 31, 1978
(43) Dimasacat v. Court of Appeals, G.R. No. L-26575, February 27, 1969
(44) Dizon v. Gaborro, G.R. No. L-36821, June 22, 1987
(45) Villavicencio v. Mojares, 398 SCRA 314, 2003

VI. Pledge and Chattel Mortgage (NOTE: Personal Property Security Act [R.A. No. 11057] has
accordingly repealed, amended, or modified the provisions on Pledge and Chattel Mortgage, as
well as other provisions of the Civil Code of the Philippines [see Sec. 66]; nonetheless, since the
law’s implementation is conditioned upon the Electronic Registry being established and
operational [Sec. 68], and as of writing, said Registry is yet to be established, much less
operational, and the IRR has not yet been promulgated, existing laws are still applicable [Secs.
55{d} & 59])
• Cases:
(46) Dalay v. Aquiantin, 47 Phil. 941
(47) Spouses Pen v. Spouses Julian, G.R. o. 160408, January 11, 2016
(48) Manila Surety v. Velayo, 21 SCRA 515
(49) Serra v. Rodriguez, 56 SCRA 538
(50) Northern Motors, Inc. v. Coquia, 66 SCRA 415
(51) Standard Oil v. Jaranillo, 44 Phil. 630
(52) Meyers v. Thein, 15 Phil. 303
(53) Borloug v. Fortune Enterprises, G.R. No. L-9451, March 29, 1957
(54) Ablaza v. Ignacio, 103 Phil. 1151
(55) Acme Shoes, Rubber & Plastic Corp. v. Court of Appeals, 260 SCRA 714

VII. Concurrence and Preference of Credits (NOTE: Personal Property Security Act [R.A. No. 11057] has
accordingly repealed, amended, or modified Arts. 2243 and 2246-2247 of the Civil Code of the
Philippines [see Sec. 66]; nonetheless, since the law’s implementation is conditioned upon the
Electronic Registry being established and operational [Sec. 68], and as of writing, said Registry is
yet to be established, much less operational, and the IRR has not yet been promulgated, existing
laws are still applicable [Secs. 55{d} & 59])
• Cases:
(56) Lopez v. Orosa, 10 Phil. 98
(57) Barretto v. Villanueva, 6 SCRA 928
(58) Manabat v. Laguna Federation of Facomas, Inc., March 18, 1967
(59) Director of Public Works v. Sing Joco, 53 Phil. 205

Part Seven – January 2017 to December 2019

IV. Credit Transactions

• Cases:
(1) Prudential Bank (now Bank of the Philippine Islands) v. Rapanot, G.R. No. 191636, January 16,
2017
(2) Spouses Tapayan v. Martinez, G.R. No. 207786, January 30, 2017
(3) Puerto Azul Land, Inc. v. Export Industry Bank Inc., G.R. No. 213020, March 20, 2017
(4) Castro v. Mendoza, Sr., G.R. No. 212778, April 26, 2017
(5) Paradigm Development Corp. of the Philippines v. Bank of the Philippine Islands, G.R. No. 191174,
June 7, 2017
(6) Dadis v. Spouses De Guzman, G.R. No. 206008, June 7, 2017
(7) KT Construction Supply v. Philippine Savings Bank, G.R. No. 228435, June 21, 2017
(8) Bernal v. Villaflor, G.R. No. 213617, April 18, 2018
(9) FGU Insurance Corp. v. Spouses Roxas, G.R. Nos. 189526 & 189656, August 9, 2017
(10) Erma Industries, Inc. v. Security Bank Corp., G.R. No. 191274, December 6, 2017
(11) United Coconut Planters Bank v. Spouses Uy, G.R. No. 204039, January 10, 2018
(12) Spouses Miles v. Laob, G.R. No. 209544, November 22, 2017
(13) Security Bank Corp. v. Spouses Mercadob, G.R. Nos. 192934 & 197010, June 27, 2018
(14) Gotesco Properties, Inc. vs. Solidbank Corp., G.R. No. 209452, July 26, 2017
(15) Boston Equity Resources, Inc. v. Del Rosario, G.R. No. 193228, November 27, 2017
(16) Coca-Cola Bottlers Philippines, Inc, v. Spouses Soriano, G.R. No. 211232, April 11, 2018

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(17) Baring v. Elena Loan & Credit Co., Inc., G.R. No. 224225, August 14, 2017
(18) Spouses Teves v. Integrated Credit & Corporate Services Co. (now Carol Aqui) G.R. No. 216714,
April 4, 2018
(19) Philippine National Bank v. Abello, G.R. No. 242570, September 18, 2019
(20) Philippine National Bank v. Giron-Roque, G.R. No. 240311, September 18, 2019
(21) The Mercantile Insurance Co., Inc. v. DMCI-Laing Construction, Inc., G.R. No. 205007,
September 16, 2019
(22) Shemberg Marketing Corp. v. Citibank, N.A., G.R. No. 216029, September 04, 2019
(23) Vasquez v. Philippine National Bank, G.R. Nos. 228355 & 228397, August 28, 2019
(24) Tan v. United Coconut Planters Bank, G.R. No. 213156, July 29, 2019
(25) Velez, Jr. v. Santillan-Baens, Inc., G.R. Nos. 244182-83 & 244237 (Notice), June 03, 2019
(26) Philippine Commercial and International Bank v. William Golangco Construction Corp., G.R. Nos.
195372 & 195375, April 10, 2019
(27) Spouses Belleza v. Ventura, A.M. No. SB-18-25-P (Notice), April 03, 2019
(28) Hun Hyung Park v. Eung Won Choi, G.R. No. 220826, March 27, 2019
(29) Spouses Tan v. Dumlao, G.R. No. 204042 (Notice), March 06, 2019
(30) Spouses Celones v. Metropolitan Bank and Trust Co., G.R. No. 215691, November 21, 2018
(31) Republic v. Jose Gamir-Consuelo Diaz Heirs Association, Inc., G.R. No. 218732, November 12,
2018
(32) Rey v. Anson, G.R. No. 211206, November 07, 2018
(33) GSIS Family Bank v. Spouses Lim, G.R. No. 233734 (Notice), November 05, 2018
(34) Cabebe v. Baluyot, A.M. No. P-18-3874 (Notice), November 05, 2018
(35) Republic v. Heirs of Cruz, G.R. No. 208956, October 17, 2018
(36) Spouses Bautista v. Premiere Development Bank, G.R. No. 201881, September 05, 2018
(37) Enriquez v. The Mercantile Insurance Co., Inc., G.R. No. 210950, August 15, 2018
(38) Jugueta v. F.F. Cruz & Co., Inc., G.R. No. 197993 (Notice), August 08, 2018
(39) Villalon v. Rural Bank of Agoo, Inc., G.R. No. 239986, July 08, 2019
(40) Concorde Condominium, Inc. v. Philippine National Bank, G.R. Nos. 228354 & 228359, November
26, 2018
(41) Isla v. Estorga, G.R. No. 233974, July 02, 2018

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 LOAN
Loan

LOANS ARE RECIPROCAL CONTRACTS WHICH CANNOT BE ENFORCED AGAINT THE BORROWER
WHERE THE LENDER IS LIKEWISE IN DEFAULT; THE RULE ON INDIVISIBILITY OF MORTGAGES DO
NOT APPLY IN THESE CASES

1. Rose Packing Co. v. Court of Appeals

G.R. No. L-33084, November 14, 1988
Paras, J.

FACTS:
This is a petition for review on certiorari of the decision of the Court of Appeals which denied the appeal made
by petitioner Rose Packing Co. (RPC) against the order of the CFI approving the foreclosure of its properties.

Respondent bank (PCIB) approved several loan and credit accommodations in favor of RPC in 1962 which
were secured by various property mortgages. In 1966, RPC acquired additional loans from PCIB on the
condition that its prior debts of about P1.6M be consolidated. One of the additional loans was for P710,000.00
which was taken out to pay for a purchase of real property in Pasig City by RPC. The new loan was secured by
the Pasig properties. However, PCIB only released P300,000.00.

RPC later applied for a separate from the Development Bank of the Philippines (DBP). Immediately upon
receiving notice from DBP of the approval of its new loans, RPC advised respondent PCIB of the availability of
P800,000.00 to partially pay off its outstanding accounts and requested the release of the titles to its Pasig lots
so that the same may be delivered to DBP. PCIB verbally advised petitioner of its refusal, stating that all
obligations should be liquidated before the release of the titles to the Pasig properties.

PCIB later filed a complaint against petitioner for the collection of RPC’s total indebtedness. Thereafter, PCIB
gave also gave RPC notice that it would cause the foreclosure of all real estate mortgage made in its favor to
cover all outstanding liabilities of RPC to it. Consequently, RPC filed a separate case seeking to enjoin PCIB
from going through with the foreclosure of its properties as well as to ask the court to fix a new period for the
payment of its obligations to PCIB.

The CFI denied the prayer for preliminary injunction and so RPC filed a petition for certiorari with the CA with
prayer for a TRO and preliminary injunction. However, during the pendency of the case in the CA, the
foreclosure of the Pasig properties pushed through and the certificates of title were transferred to PCIB as
highest bidder after RPC failed to redeem the properties. The CA eventually dismissed the petition for
certiorari, hence this appeal to the SC.

RPC argues that PCIB’s foreclosure of the properties were invalid because PCIB foreclosed mortgages to
answer debts for which they were not given as security.

ISSUE:
Does PCIB have the right to the extrajudicial foreclose all of RPC's mortgages en masse to answer for its
separate and distinct debts to PCIB?

RULING:
No. PCIB’s act of foreclosing RPC’s mortgages en masse are abusive.

A contract of loan is not a unilateral contract. It is a reciprocal contract where the promise of the borrower to
pay is the consideration for the obligation of lender to furnish the loan. Thus, where the lender is in default, the
borrower cannot likewise be in default of his/her obligations.

In this case, PCIB was in default in fulfilling its reciprocal obligation under their loan agreement. By its own
admission it failed to release the P710,000.00 loan it had approved on October 13, 1966. There was thus
failure on the part of PCIB to deliver the consideration for which the corresponding mortgage was executed. As
a consequence, the real estate mortgage of RPC cannot be entirely foreclosed to satisfy its total debt to
respondent bank.

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It is contended that mortgages are indivisible even though the debt may be divided (Art. 2089, Civil Code). The
rule however is not applicable because the rule of indivisibility of mortgage cannot apply where there was
failure of consideration on the part of the mortgagee. For lack of consideration, the mortgage became
unenforceable. Hence, the foreclosure of the mortgage was premature and made without clear right.

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 LOAN
Loan

WHERE A CROSSED CHECK PAYABLE TO A THIRD PERSON IS DELIVERED IN ACCOMMODATION BY

THE LENDER TO THE BORROWER WHO MAY OR MAY NOT DELIVER THE SAME TO THE PAYEE, THE
OBJECT OF THE LOAN IS DELIVERED AND A CONTRACT PERFECTED

2. Garcia v. Thio
G.R. No. 154878, March 16, 2007
Corona, J.

FACTS:
At different times in 1995, Carolyn Garcia (“Garcia”) delivered to Rica Marie Thio (“Thio”) two crossed checks
for US$100,000 and P500,000, respectively, payable to the order of Marilou Santiago (“Santiago”). On the
other hand, in various times in 1995, Thio delivered to Garcia checks for a total of US$12,000 and P306,000.
Garcia also delivered a total of P80,000 in cash in a span of a few months. Later, Garcia filed a complaint for
sum of money and damages with the RTC claiming that she had lent US$100,000 and P500,000 to Thio,
evidenced by the two crossed checks she gave to Thio but the latter failed to pay the loans in full. She alleged
that they did not execute promissory notes to evidence the two loans as they were close friends at the time.
She alleged that the checks issued by Thio in her favor were for partial payment of the interest due from the
loans.

Thio denied that she contracted the two loans from Garcia. She claimed that Garcia merely asked her to deliver
the checks to Santiago although she admitted that Garcia did not personally know who Santiago is. As to the
checks she issued to Garcia, Thio also alleged that they were not as payment of interest but for
accommodation of Garcia whereby Thio paid the interest and then was reimbursed by Santiago. During trial, a
mutual friend of the parties testified that it was Thio’s plan to borrow money from Garcia at 3% interest and then
lend the same principal amount to Santiago for 5% interest thus realizing a profit of 2%. Thus, she instructed
that the checks be made payable to Santiago. Also, it was found during trial that when Santiago became
insolvent, Thio was listed as one of her creditors. RTC ruled that a loan exists and ordered Thio to pay the
principal amounts of the loan. The CA reversed RTC and ruled that there was no contract of loan between the
parties because the 2 checks were crossed and payable to the order of Santiago. As loans are real contracts,
the parties thereto are Garcia and Santiago.

ISSUE:
Is there a Contract of Loan between Garcia and Thio where the principal amount of the loan was delivered to a
third party, Santiago?

RULING:
Yes, the evidence proves that there is a loan between Garcia and Thio.

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

However, the evidence clearly suggests that the true parties to the loan are Garcia and Thio because the
amount was in fact delivered to Thio and not Santiago:
1. Thio admitted that Garcia did not know personally know Santiago. It is highly unlikely that Garcia would
enter into a loan with a complete stranger without requiring the execution of promissory notes or other
evidence of the loan, especially considering the huge amounts involved.
2. The witness testified to the accommodation agreement between Garcia and Thio where the intended
borrower was Thio and the money was effectively placed in the hands of Thio. Thio had control over
the money as she had the choice of not delivering the same to Santiago. Hence, she was the borrower
of the money and ownership thereof passed to her.
3. Third, Thio is listed as a creditor of Santiago in insolvency supporting ground #2 above.
4. Fourth, Thio’s allegation that she was merely accommodating Garcia and Santiago is incredible. There
is no showing why Thio would agree to pay for Santiago’s debts.

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 5. Lastly, Thio never presented Santiago as witness which gives rise to the presumption that Santiago’s
testimony is adverse to her case.

Hence, the CA erred and must be reversed.

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 LOAN
Loan

WHERE THE CONTRACT BETWEEN THE PARTIES IS ONE OF LEASE, THE RENTAL FEE IS NOT A
PAYMENT FOR THE USE OF MONEY AND IS THEREFORE NOT SUBJECT TO THE USURY LAW

3. Tolentino v. Gonzales
G.R. No. 26085. August 12, 1927
Johnson, J.

FACTS:
Severino Tolentino and Potenciana Manio purchased from Luzon Rice Mills, Inc., a parcel of land in Tarlac for
P25,000.00 to be paid in three installments. One of the conditions of the contract of purchase was that if
Tolentino and Manio failed to pay the balance of any of the installments on the date agreed upon, the property
bought would revert to the original owner. While there was partial payment, the balance was not paid after due.
After the vendor’s representative sent a demand, Tolentino and Manio borrowed money from Benito Gonzales
Sy Chiam to satisfy their indebtedness. Gonzales agreed to pay the P17,500 balance on the condition that the
land will be deemed sold to him with pacto de retro—the redemption price being P17,500. The sale includes, a
contract of lease whereby the “vendors” continued occupying the land but bound themselves as lessees and
pay rent of P375 per month and where "Default in the payment of the rent agreed for two consecutive months
will terminate this lease and will forfeit our right of repurchase, as though the term had expired naturally".

Tolentino failed to redeem the land when the term of the contract ended upon so Gonzales demanded the
delivery of the land as its absolute owner. Tolentino resisted however arguing that the pacto de retro sale is in
fact an equitable mortgage. Moreover, he argued that the “rent” they paid was in fact payment for usurious
interest on the loan. Thus, Gonzales filed an action before the Court of First Instance, which ruled in his favor.
Hence, this appeal by Tolentino.

The Supreme Court agreed with the lower court that the language of the deed between the parties clearly and
indubitably establish that the parties intended a sale with pacto de retro. It ruled that in the absence of any
indication from the words of the written contract or the conduct of the parties that the agreement was really a
loan with guaranty, it will not declare an equitable mortgage. The second issue is discussed below.

ISSUE:
When a property is under a sale with pacto de retro and lease, may the rent due on the lease invalidate the
contract as usurious when it is higher than the fair interest allowed on the redemption price?

RULING:
No. A contract of lease cannot be invalidated on the ground that the rent is “usurious”.

Usury, generally speaking, may be defined as contracting for or receiving something in excess of the amount
allowed by law for the loan or forbearance of money—the taking of more interest for the use of money than the
law allows. The collection of a rate of interest higher than that allowed by law is condemned by the Philippine
Legislature.

It will be noted however that the law imposes a penalty upon a "loan" or forbearance of any money, goods,
chattels or credits, etc. The central idea of said statute is to prohibit a rate of interest on "loans." A contract of
"loan," is very different contract from that of "rent". It never means the return of the same thing. It means the
return of an equivalent only, but never the same thing loaned. At all events, the money, goods or chattels, the
moment the contract is executed, cease to be the property of the former owner and becomes the absolute
property of the obligor.

In a contract of "rent" the owner of the property does not lose his ownership. He simply loses his control over
the property rented during the period of the contract. The thing still remains the property of the lessor. "Rent" is
that which is to paid for the use of land, whether in money, labor or other thing agreed upon. The value of
money, goods or credits is easily ascertained while the amount of rent to be paid for the use and occupation of
the property may depend upon a thousand different conditions: depending upon location, prices of
commodities, proximity to the market, etc.

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

In the present case the property in question was sold. It was an absolute sale with the right only to repurchase.
During the period of redemption, the purchaser was the absolute owner of the property. The relation which
existed between the vendor and the vendee was that of landlord and tenant. That relation can only be
terminated by a repurchase of the property by the vendor in accordance with the terms of the said contract. The
contract was one of rent. The contract was not a loan, as that word is used in Act No. 2655.

Hence, it would be erroneous to invalidate a contract of lease on the ground that the rent is “usurious”.

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 LOAN
Loan

SPECIAL AGREEMENTS BETWEEN PARTIES OF A LEASE CONTRACT WHICH ARE NOT GERMANE TO
A LESSEE’S RIGHT TO ENJOY AND POSSESS THE LEASED PROPERTY ARE NOT REVIVED BY
TACITA RECONDUCCION UNDER ARTICLE 1670

4. Dizon v. Magsaysay
G.R. No. L-23399. May 31, 1974
Makalintal, C.J.

FACTS:
On April 1, 1949 Ambrosio Magsaysay (lessor) and the late Bernardo M. Dizon (lessee) executed a written
contract of lease over a portion of the former’s land which the latter had been occupying as lessee since 1937
and on which he had constructed a residential house as well as a six-lane bowling alley. Despite the expiration
of the written lease in 1951, the lessor continued to occupy the leased premises, paying the same monthly
rental of P100.00, which the lessor accepted.

Two years later, on April 1953, the counsel of Magsaysay formally advised Dizon of the termination of the
existing lease by the end of that month. Dizon learned that as early as February 19, 1953 there were
negotiations for the sale of the entire lot to one Nicanor Padilla, which negotiations were concluded on March 7,
1953. An absolute deed of sale had already been executed in Padilla’s favor with a supplementary agreement
that should Magsaysay fail to completely eject all the tenants on the land within a stated period, the agreed
upon purchase price of P48,000.00 would be forfeited. Thus, Dizon communicated with Magsaysay and Padilla
inviting their attention to paragraph 9 of the original written lease contract which gave him a right of first refusal
under the same conditions as those offered by other buyers.

On March 25, 1953, Dizon commenced suit against Magsaysay and Padilla in the Court of First Instance of
Manila, praying that the deed of sale between the latter be declared null and void; that they be ordered to sell
the land to him. He insists that the implied new lease revived his preferential right of purchase under the written
contract.

The trial court rendered judgment, dismissing the complaint. On appeal to the Court of Appeals, the decision
was affirmed. Hence this petition for review.

ISSUE:
Is a right of refusal found in a written but expired contract of lease legally revived in an implied new lease (tacita
reconduccion)?

RULING:
No. A right of first refusal is not revived in an implied new lease under Article 1670 of the Civil Code.

"The other terms of the original contract" which are revived in the implied new lease under Article 1670 are only
those terms which are germane to the lessee's right of continued enjoyment of the property leased. This
is a reasonable construction of the provision, which is based on the presumption that when the lessor allows
the lessee to continue enjoying possession of the property for fifteen days after the expiration of the contract he
is willing that such enjoyment shall be for the entire period corresponding to the rent which is customarily paid
— in this case up to the end of the month because the rent was paid monthly. But no such presumption may be
indulged in with respect to special agreements which by nature are foreign to the right of occupancy or
enjoyment inherent in a contract of lease.

On this point the express agreement of the parties should govern. Thus, the right of first refusal was
extinguished upon the expiration of the written contract of lease.

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 LOAN
Loan

A STIPULATION ALLOWING A CREDITOR TO UNILATERALLY INCREASE INTEREST RATES ON A

LOAN IS NOT VALID FOR VIOLATING THE PRINCIPLE OF MUTUALITY OF CONTRACTS

5. Philippine National Bank v. Court of Appeals and Fernandez

G.R. No. 107569, November 08, 1994
Puno, J.

FACTS:
In 1982, a credit agreement for P50,000.00 was contracted by the owners of NACIDA with petitioner Philippine
National Bank (PNB), wherein certain properties were mortgaged. The parties agreed to amortize the loan over
a period of 3 years at 12% per annum interest rate. PNB reserved “the right to increase the interest rate within
the limits allowed by law at any time depending on whatever policy it may adopt in the future.” In 1983, an
additional P50,000 loan was secured with additional property being mortgaged. The two loans were
consolidated by agreement.

By 1984, PNB informed NACIDA that the interest rate on their loan was now “25% per annum plus a penalty of
6% per annum on past dues.” By 1985, the principal amount of the loan as still around P63,000 and NACIDA
requested to be reduced back to 12%. When PNB refused, NACIDA filed an action against PNB seeking
release of its mortgages.

The trial court dismissed the complaint but the CA reversed the trial court on appeal. Hence this petition by the
petitioner bank.

The owners of NACIDA contend that the increase of the interest rates was not validly accepted and thus were
not binding upon NACIDA. Philippine National Bank on the other hand contends that such increase was based
on the stipulation in the credit agreement and that NACIDA is estopped from questioning the same.

ISSUE:
Is the stipulation that PNB can “increase the interest rate within the limits allowed by law at any time depending
on whatever policy it may adopt in the future” a valid contractual stipulation?

RULING:
No. The stipulation allowing PNB to unilaterally increase the interest rates on the loan is invalid.

Under Presidential Decree No. 1684, the parties may validly stipulate the increase or decrease of the interest
rates for credit agreements and the like. However nowhere in the law allows for the unilateral increase of
interest rates.

It is basic that there can be no contract in the true sense in the absence of the element of agreement, or of
mutual assent of the parties. If this assent is wanting on the part of the one who contracts, his act has no more
efficacy than if it had been done under duress or by a person of unsound mind. Similarly, contract changes
must be made with the consent of the contracting parties. The minds of all the parties must meet as to the
proposed modification, especially when it affects an important aspect of the agreement. In the case of loan
contracts, it cannot be gainsaid that the rate of interest is always a vital component, for it can make or break a
capital venture. Thus, any change must be mutually agreed upon, otherwise, it is bereft of any binding effect.

The consent of the other party must be conclusively obtained. Mere silence is not acceptance of an increase in
interest rates. As such the validity of a contract cannot be based on only one of them. Such a stipulation
violates the mutuality of contracts.

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 LOAN
Loan

THE LIFTING OF A CEILING FOR INTEREST RATES UNDER THE USURY LAW MEANS THAT RATES
CANNOT BE USURIOUS UNDER THE USURY LAW. THAT DOES NOT MEAN HOWEVER THAT COURTS
CANNOT EQUITABLY REDUCED EXHORBITANT INTEREST RATES FOR BEING UNCONSCIONABLE
AND CONTRARY TO PUBLIC MORALS

6. Spouses Danilo Solangon and Ursula Solangon v. Jose Avelino Salazar

G.R. No.125944, June 29, 2001
Sandoval-Gutierrez, J.

FACTS:
The petitioner Spouses Solangon secured a loan from respondent Jose Salazar amounting to P60,000 with an
agreement to pay interest of 6% per month, payable within 4 months. A deed of real estate mortgage was also
instituted for this transaction.

Thereafter, the Sps. Solangon took two more loans from Salazar which were secured by the same property.
The first was for P136,512.00, payable within a period of one (1) year, with interest thereon at the legal rate per
month. The second was P230,000.00 payable within a period of four (4) months, with interest thereon at the
legal rate per month.

Although the first 2 loans were paid, the Sps. Solangon failed to repay their third loan. Hence, Salazar
commenced the foreclosure of the mortgage. To resist the foreclosure of the property, the Sps. Solangon filed
a complaint arguing that in truth, there was only one loan with real estate mortgage and the other succeeding
amounts were merely an addition to the principal of the first contract. Hence, the loan contracts were null and
void because it stipulated an unconscionable interest rate.

Both the trial court and the CA ruled to dismissed the complaint of the Sps. Solangon, hence this appeal.

ISSUE:
Was the rate of 6% per month usurious?

RULING:
No. It is not usurious. However, it must be equitably reduced.

While it is true that the ceiling on interest rates under the Usury Law has been lifted by C.B. Circular No. 905,
nothing in the said circular grants lenders carte blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their assets. As ruled by the Court in Medel v. CA,
while an interest rate may not be legally usurious, the same must be equitably reduced if it is iniquitous,
unconscionable, and exorbitant.

In the case at bench, petitioners stand on a worse situation. They are required to pay the stipulated interest
rate of 6% per month or 72% per annum which is definitely outrageous and inordinate. Surely, it is more
consonant with justice that the said interest rate be reduced equitably. An interest of 12% per annum is
deemed fair and reasonable.

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Loan

THE LIFTING OF A CEILING FOR INTEREST RATES UNDER THE USURY LAW MEANS THAT RATES
CANNOT BE USURIOUS. THAT DOES NOT MEAN HOWEVER THAT COURTS CANNOT EQUITABLY
REDUCED EXHORBITANT INTEREST RATES FOR BEING UNCONSCIONABLE AND CONTRARY TO
PUBLIC MORALS

7. Medel v. Court of Appeals

G.R. No. 131622, November 27, 1998
Pardo, J.

FACTS:
In a Petition for Review under Rule 45, Medel seeks to set aside the Decision of the Court of Appeals ordering
him to pay the sum of P500,000, plus 5.5% per month interest and 2% service charge per annum with 1% per
month of the total amount due and demandable as penalty charges.

Franco and Medel obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the
money lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00, payable
in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she retained P3,000.00, as
advance interest for one month at 6% per month. Franco and Medel executed a promissory note
for P50,000.00, to evidence the loan. Franco and Medel obtained from Veronica another loan in the amount
of P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note to evidence
the loan. On maturity of the two promissory notes, the borrowers failed to pay the indebtedness.

Franco and Medel secured from Veronica still another loan in the amount of P300,000.00, maturing in one
month, secured by a real estate mortgage over a property belonging to Leticia Makalintal Yaptinchay, who
issued a special power of attorney in favor of Leticia Medel, authorizing her to execute the mortgage.

Like the previous loans, Servando and Medel failed to pay the third loan upon maturity. The parties agreed to
consolidate all previous unpaid loans, and added an additional P60,000 for a new principal amount of
P500,000, with interest at 5.5% per month plus 2% service charge per annum.

When the debtors failed to pay, the respondents filed an action to collect. The petitioners contend that the rates
imposed are usurious. The RTC ruled that the “Usury Law had been repealed” but because “the interest
charged by the plaintiffs on the loans was unconscionable and ‘revolting to the conscience’", it is more
equitable to reduce the rate to 12% per annum.

On appeal, the CA reversed the trial court. It held that because the Usury Law became “legally inexistent” due
to CB Circular No. 905, there was no longer any ceiling on interest rates and the agreement of the parties must
be upheld. Hence, this appeal.

ISSUE:
Is the stipulated rate of interest of 5.5% per month on the loan in the sum of P500,000.00, that plaintiffs
extended to the defendants is usurious?

RULING:
No, it is not usurious. However, it is excessive, iniquitous, unconscionable and exorbitant which justifies its
reduction on the ground of equity and public morals.

As correctly held by the CA, the SC has consistently held that Circular No. 905 of the Central Bank, adopted on
December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law 14 and that the
Usury Law is now "legally inexistent".

Nevertheless, the interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not
against the law. The stipulation is void. In such cases, the courts shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are iniquitous or unconscionable.

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Loan

ESCALATION CLAUSES IN VIEW OF MONEY FLUCTUATIONS ARE NOT PROHIBITED EXCEPT THAT
THEY MUST NOT BE CONTRARY TO LAW

8. Palanca v. Court of Appeals

G.R. No. 106685 December 2, 1994
Quiason, J.

FACTS:
In a Petition for Review under Rule 45, Palanca seeks to set aside the Decision of the Court of Appeals
ordering Sanicas to pay the former P70,688.17.

Palanca and Jose S. Sanicas entered into a Contract to Sell on Installment of a parcel of land covered by TCT
No. T-6771766. Under the terms of the contract, private respondent agreed to pay petitioner the amount of
P9,851.00 as downpayment and the balance of P88,659.00 in 120 monthly installments with 14% interest per
annum on the outstanding balance. Jose S. Sanicas further agreed to pay the annual real property taxes, and
that should he fail to pay the said taxes, he would have to pay a yearly surcharge or penalty of 50% of the
taxes due plus 12% compounded interest per annum. Respondent Edgardo S. Sanicas later assumed the
account of his brother Jose and designated Jose as his authorized representative in dealing with petitioner.

Paragraph 11 of the Contract to Sell states that in the event of monetary fluctuation, the unpaid balance
account of the Sanicas shall be “increased proportionately on the basis of the present value of P6.72 to $1.00
US dollar.”

After Palanca demanded Sanicas to update his account, Sanicas requested a detailed statement. When
petitioner failed to furnish him with the statement, Sanicas hired an accountant to compute his obligations
under the contract. Thereafter, he tendered the amount of P44,955.87 in cash upon petitioner, which amount
included interest at 12% per annum. Palanca, however, refused to receive the amount tendered, prompting
private respondent to make a judicial consignment of the amount on May 29, 1987.

Private respondent then filed with the trial court a complaint for reconveyance with preliminary injunction,
praying that petitioner be restrained from cancelling private respondent's rights under the contract and from
ejecting him from the property. Petitioner justified his refusal to accept the amount of P44,955.87 by asserting
that private respondent's actual liability was P155,630.40, relying on the escalator clause in paragraph 11 of
the contract.

The trial court ruled that an escalation clause based on money fluctuation under Article 1250 requires the
happening of “extraordinary inflation or deflation.” There being none, paragraph 11 cannot apply. The CA
affirmed the trial court on this matter of law. Hence this appeal.

ISSUE:
May Palanca enforce a stipulation on automatic escalation in event of foreign exchange fluctuation which
allows him to demand the purchase price "in an amount of Philippine money” measured by a foreign coin or
currency?

RULING:
No, Paragraph 11 of the contract cannot be given effect.

Article 1250 of the Civil Code of the Philippines provides that in case 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.

In this case, the understanding of the parties is that there should be an upward adjustment of the purchase
price the moment there is a deterioration of the Philippine peso vis-a-vis the U.S. dollar. This is allowed under
Article 1250, such that a contract may contain an "escalator clause" providing that in the occurrence of certain

14
events, the contract price shall be increased to a fixed percentage of the base price. Nevertheless, the
autonomy of the parties to provide such escalator clauses may be limited by law.

The stipulation of the parties is in violation of R.A. No. 529, as amended, entitled "An Act to Assure Uniform
Value to Philippine Coin and Currency," otherwise as the Cuenco Law. Republic Act No. 529 mandates that the
money of obligation or payment to be stipulated in all contracts entered into in the Philippines shall be in
Philippine currency. Often lost sight of is the fact that the said law prohibits two things in all domestic contracts:
(1) giving the obligee the right to require payment in a specified currency other than Philippine currency; and (2)
giving the obligee the right to require payment "in an amount of money of the Philippines measured thereby.

When the parties stipulated that ". . . in the event of monetary fluctuation (meaning any change in the rate of
exchange of the Philippine peso to the U.S. dollar), the unpaid balance account of the herein vendee on the
aforesaid subdivision lot shall be increased proportionately on the basis of the present value of P6.72 to US$
1.00," the obligee was given the right to demand payment of the balance of the purchase price "in an amount of
money of the Philippines measured" by a foreign coin or currency.

While the balance of the purchase price is payable in Philippine currency measured by a foreign currency, no
foreign currency was directly involved in the transaction. The obligation should therefore be paid in the same
amounts of Philippine currency as stipulated in the contract without any adjustment based on the prevailing
exchange rate of the U.S. dollar to the Philippine peso. The transaction does not involve a loan in a foreign
currency stipulated to be payable in Philippine currency but measured by a foreign currency, in which case the
rate of exchange prevailing at the stipulated date of payment shall prevail.

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WHERE THERE IS NO EVIDENCE OF FRAUD, MISTAKE, COERCION, OR UNDUE INFLUENCE, OR

EQUITABLE REASONS, A HIGH INTEREST RATE FREELY AGREED UPON CANNOT BE IMPAIRED BY
THE COURT

9. Spouses Silvestre and Celia Pascual v. Rodrigo Ramos

G.R. No. 144712. July 4, 2002
Davide, Jr., C.J.

FACTS:
This case stemmed from the petition for consolidation of title or ownership filed on 5 July 1993 with the trial
court by respondent Rodrigo V. Ramos (“Ramos”) against the Spouses Silvestre and Celia Pascual (“Sps.
Pascual”). In his petition, Ramos alleged that on 3 June 1987, for and in consideration of P150,000, the Sps.
Pascual executed in his favor a Deed of Absolute Sale with Right to Repurchase over two parcels of land and
the improvements thereon located in Bulacan, covered by TCT No. 305626 of the Registry of Deeds of
Bulacan. This deed was annotated to the back of the title. The Sps. Pascual did not exercise their right to
repurchase the property within the stipulated one-year redemption period. Hence, Ramos prayed that the title
or ownership over the objects of the sale be consolidated in his favor.

The trial court found that the transaction between the parties was actually a loan which was secured by a
mortgage of the property covered by TCT No. 305626. It also found that the Sps. Pascual had already made
payments in the total sum of P344,000, and that with interest pegged at 7% per annum, the Sps. Pascual had
overpaid the loan by P141,500.

Ramos moved for the reconsideration of the decision, alleging that the trial court erred in using an interest rate
of 7% per annum in the computation of the total amount of obligation because what was expressly stipulated in
the Sinumpaang Salaysay was 7% per month. Therefore, the total interest due from 3 June 1987 to 3 April
1995 was P987,000. Deducting therefrom the payments made, the Sps. Pascual still owe P643,000 as interest
in addition to the principal amount.

Finding merit in Ramos’ motion for reconsideration, the trial court modified its decision by setting the interest at
5% per month instead. The Sps. Pascual in turn moved for reconsideration of the modified interest rate but was
denied; hence this appeal.

ISSUE:
Did the lower court err in reducing the interest rate from 7% per month to 5% per month?

RULING:
Yes. It is a basic principle in civil law that parties are bound by the stipulations in the contracts voluntarily
entered into by them. Parties are free to stipulate terms and conditions which they deem convenient provided
they are not contrary to law, morals, good customs, public order, or public policy.

The interest rate of 7% per month was voluntarily agreed upon by Ramos and the Sps. Pascual. There is
nothing from the records and, in fact, there is no allegation showing that petitioners were victims of fraud when
they entered into the agreement with Ramos. Neither is there a showing that in their contractual relations with
Ramos, the Sps. Pascual were at a disadvantage on account of their moral dependence, ignorance, mental
weakness, tender age or other handicap, which would entitle them to the vigilant protection of the courts as
mandated by Article 24 of the Civil Code.

With the suspension of the Usury Law and the removal of interest ceiling, the parties are free to stipulate the
interest to be imposed on loans. Absent any evidence of fraud, undue influence, or any vice of consent
exercised by Ramos on the Sps. Pascual, the interest agreed upon is binding upon them. This Court is not in a
position to impose upon parties’ contractual stipulations different from what they have agreed upon. Thus, we
cannot supplant the interest rate, which had in fact been reduced to 5% per month without opposition on the
part of Ramos.

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A DECLARATION THAT STIPULATED INTEREST RATES ARE USURIOUS ONLY RESULTS TO THE
DEBT BEING CONSIDERED AS HAVING BEEN TAKEN WITHOUT ANY STIPULATION AS TO INTEREST

10. Private Development Corporation of the Philippines v. The Intermediate Appellate Court and
Ernesto C. Del Rosario
G.R. No. 73198, September 2, 1992
Nocon, J.

FACTS:
On May 21, 1974, Davao Timber Corporation (“DATICOR”) and the Private Development Corporation (“PDCP”)
entered into a loan agreement whereby PDCP extended to DATICOR a loan in foreign currency equivalent to
US$ 265,000.00 and another in the amount of P2,500,000.00, which was about P4 Million in total.

It was stipulated in the loan agreement, that the foreign currency loan was to be paid with interest at the rate of
11.75% per annum while the interest on the principal of the peso loan shall be at the rate of 12% per annum,
commencing and maturing on the separate dates, in addition to a service fee of 1% per annum on the
outstanding balance of the peso loan to cover the cost of administering DATICOR’s account and supervision of
the project. The parties also stipulated on the payment of penalty charges at the rate of 2% per month on the
outstanding balance in case of delay.

Originally, the loans were secured by mortgages over various properties. After some of the mortgages were
released however, DATICOR agreed to PDCP’s request that the service fee be increased by 6% per annum.

A total of P3,000,000.00 was already paid to PDCP which however was sufficiently only to cover interests,
service fees, and penalty charges, such that according to PDCP, DATICOR still has an outstanding balance on
the principal loan of P10,887,856.99 as of May 15, 1983.

Del Rosario and Cuerva had filed a complaint on March 31, 1982 against the PDCP in the Court of First
Instance of Manila, docketed as Civil Case No. 82-8088 for violation of the Usury Law, annulment of contract
and damages with prayer for the issuance of a writ of preliminary injunction. On April 13, 1982, a restraining
order was issued by the Court of First Instance of Manila.

The CFI dismissed the complaint but was reversed on appeal. The IAC ruled declared as void the stipulations
of interest in the loan agreements.

ISSUE:
Did the IAC err in deleting the stipulations of penalty charges of 2% per month in the subject contracts?

RULING:
NO. The Usury law as amended by Presidential Decree 116, fixes all interest rates for all loans with maturity of
more than 360 days at twelve (12%) per cent per annum including premiums, fines, and penalties.

In the beginning, PDCP was charging a total of 19% interest per annum on the peso loan and 18.75% interest
on the foreign currency loan. On top of “interest”, penalties were imposed at the rate of 2% per month or an
effective rate of 24% per annum on the peso loan. Thus, PDCP was effectively charging a total of 42% per
annum on the peso loan. It is therefore very clear that PDCP has been charging and imposing interests in
violation of the prevailing usury laws.

The law should not be interpreted to mean that a charge of usury would result to the forfeiture of the principal
loan as that would be unjustly enriching the borrower. The unpaid principal debt still stands and remains valid
but the stipulation as to the usurious interest is void, consequently, the debt is to be considered without
stipulation as to the interest. As DATICOR obtained a loan of P4.4 million pesos and has paid a total of about
P3 million pesos, the remaining balance on the principal debt left unpaid is about P1.4 million pesos, to which
respondents must still pay the petitioner.

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IN A LOAN WITH USURIOUS INTEREST, THE LOAN IS REMAINS VALID AND ONLY THE STIPULATION
TO PAY USURIOUS INTEREST IS VOID

11. Angel Jose Warehousing Co., Inc. v. Chelda Enterprises

G.R. No. L-25704, April 24, 1968
Bengzon, J.

FACTS:
Plaintiff corporation filed suit in the Court of First Instance of Manila on May 29, 1964 against the partnership
Chelda Enterprises and David Syjueco, its capitalist partner, for recovery of alleged unpaid loans in the total
amount of P20,880.00, with legal interest from the filing of the complaint. Plaintiffs alleged that the post-dated
checks issued by defendants had been dishonored. They also allege that defendants’ industrial partner,
Chellaram I. Mohinani, had absconded and that they have removed or disposed of their property, or are about
to do so, with intent to defraud their creditors.

The defendants admitted that they obtained four loans from plaintiff in the total amount of P26,500.00, of which
P5,620.00 has already been paid, leaving a balance of P20,880.00. However, it alleged that the plaintiff
charged and deducted from the loan usurious interests thereon, at rates of 2% and 2.5% per month, and,
consequently, plaintiff should not be permitted to recover under the law.

Great reliance is made by appellants on Art. 1411 of the New Civil Code which states the principle of in pari
delicto. Since, according to the appellants, a usurious loan is void due to illegality of cause or object, so that
neither party can bring action against each other. However, the rule has an exception with respect to borrowers
who, under Article 1413, are allowed to recover interest paid “in excess of that allowed by law.”

ISSUE:
1. Does a usurious interest avoid the entire loan?
2. What is the usurious interest due for recovery under Article 1413?
3. Does the principal amount of the loan still earn interest?

RULING:
1. No, in usurious contracts, the loan is valid and only the usurious interest is void.

Article 1420 of the Civil Code provides that “In case of a divisible contract, if the illegal terms can be
separated from the legal ones, the latter may be enforced.”

In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt.
The cause of this portion of the contract is not illegal. The illegality lies only as to the prestation to pay the
stipulated interest. Hence, being separable, only the latter should be deemed void, since it is the only one
that is illegal. There still being a valid contract of loan with respect to the principal amount, the lender may
bring action to recover the amount he lent.

2. Since the entire stipulation to pay interest is void for being illegal, what is due to the borrower is not only
the “excess of that allowed by law” but the entire amount delivered as interest.

Thus, if the principal of the loan is P1,000, over which the usurious interest at 20% per annum is stipulated,
such that the borrower paid P200 as interest, what is void is the payment of the entire P200 pesos. Even if
the ceiling rate allowed by law is 12% per annum, it does not mean that the lender is only bound to return
P80, as if the P120 paid as interest is validly paid. As the entire stipulation is void, it is as if no interest was
stipulated upon.

3. Yes, in an action to collect the unpaid principal amount of the loan, the interest due on said principal
amount is not the void stipulated interest but the legal interest imposed as damages because the borrower
has incurred delay (Article 2209, Civil Code).

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Loan

WHERE THE LENDER REQUIRES THE EXECUTION OF UNRELATED CONTRACTS WHICH REQUIRE
PAYMENT OF FEES BY THE BORROWER AS A PRECONDITION TO THE GRANT OF THE PRINCIPAL
LOAN CONTRACT, SUCH CONTRACTS MAY BE USURIOUS INTERESTS IN DISGUISE

12. First Metro Investment Corp. v. Este del Sol Mountain Reserve Inc. et al
G.R. No. 141811, November 15, 2001
De Leon, Jr., J.

FACTS:
Petitioner FMIC granted Este del Sol a loan to finance a sports/resort complex in Montalban, Rizal. Under the
agreement, the interest was 16% p.a. based on the diminishing balance. In case of default, an acceleration
clause was provided for and the amount due is subject to a one-time penalty of 20% of the amount due and the
penalty shall bear interest at the highest rate permitted by law. Respondent also executed a real estate
mortgage, individual continuing suretyship, and an underwriting agreement whereby FMIC shall underwrite the
public offering of one P120,000 common shares of respondent’s capital stock for a one-time underwriting fee of
P200,000.

For failure to pay its obligation, FMIC caused the foreclosure of the mortgage in its favor. At the public auction,
FMIC was the highest bidder. Petitioner then filed an action to collect the alleged deficiency balance since it
failed to collect from the sureties. The trial court ruled in favor of FMIC so respondents appealed the case to the
CA. The CA reversed the trial court and held that the fees provided for in the “Underwriting and Consultancy
Agreements” were mere subterfuges to camouflage excessively usurious interest charges. The CA thus
ordered FMIC to reimburse the respondents the amount collected in excess of the principal loan. Hence this
appeal.

ISSUE:
Did the contract between the parties herein contain usurious stipulations of interests when it provided for the
payment of an “underwriting fee” for an unrelated service contract which the lender did not perform although
said contract was a precondition for the grant of the principal loan?

RULING:
Yes. An apparently lawful loan is usurious when it is intended that the “additional compensation” for the loan is
disguised through an ostensibly unrelated contract for the payment of some service by the lender which it did
not, in fact, perform; and when the execution of said unrelated contract is a pre-condition for the grant of the
loan.

Article 1957 of the Civil Code clearly provides: contracts and stipulations, under any cloak or device whatever,
intended to circumvent the law against usury shall be void. The borrower may recover in accordance with the
laws on usury.

All the foregoing established facts and circumstances clearly belie the contention of petitioner FMIC that the
“Loan, Underwriting and Consultancy Agreements” are separate and independent transactions. The
Underwriting and Consultancy Agreements which were executed and delivered contemporaneously with the
Loan Agreement on January 31, 1978 were exacted by petitioner FMIC as essential conditions for the grant of
the loan.

However, since only the usurious stipulations are void, the obligation of the borrower to pay the principal
amount of the loan subsists and must be paid.

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FROM JULY 1, 2013, UNSATISFIED MONEY JUDGMENTS WHICH HAD BECOME FINAL AND
EXECUTORY SHALL EARN LEGAL INTEREST AT 6% PER ANNUM UNTIL FULL SATISFACTION

13. Nacar v. Gallery Frames

G.R. No. 189871, August 13, 2013
Peralta, J.

FACTS:
On January 24, 1997, Dario Nacar was dismissed by his employer, Gallery Frames. In due course, the parties
litigated their respective claims until the case was finally decided by the Supreme Court, whose decision
became final and executory on May 27, 2002.

During execution proceedings, the parties disputed on the issues of whether the amount of separation pay and
backwages can be re-computed and whether the unsatisfied judgment can earn legal interest as a loan and
forbearance of money.

While the issues were pending in court, the Bangko Sentral ng Pilipinas issued, on July 1, 2013, BSP-MB
Circular No. 799 which lowered the legal interest for loans and forbearances of money from 12% p.a. to 6%
p.a.

This is the appeal to the Supreme Court regarding the new issues raised in the execution proceedings.

ISSUE/S:
What is the interest due on a money award in a labor case that had become final and executory in May 27,
2002 and is still unpaid?

RULING:
Where a judgment of the court awarding a sum of money becomes final and executory, the amount of the
award shall earn legal interest from such finality until the award’s satisfaction.

To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Lines are
accordingly modified to embody BSP-MB Circular No. 799, as follows:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is
breached, the contravenor can be held liable for damages. The provisions under Title XVIII on “Damages”
of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 6% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages, except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have

20
 been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 6% per annum
from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

In this case, it is the guideline II.3. which applies. There being a final and executory judgment on May 27, 2002,
the amount of the judgment award shall earn interest at 12% p.a. until June 30, 2013. This is because of the
issuance of BSP-MB Circular No. 799. Thus, the unpaid balance shall start to earn interest at 6% p.a. from July
1, 2013 until full satisfaction.

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CHANGES IN INTEREST RATES IMPOSED ON LOANS CANNOT BE MADE UNILATERALLY AND

WITHOUT PROPERLY OBTAINING THE CONSENT OF THE BORROWER OF SUCH CHANGES

14. Spouses Juico v. China Banking Corporation

G.R. No. 187678, April 10, 2013
Villarama, Jr., J.

FACTS:
Spouses Juico obtained a loan from respondent ChinaBank, evidenced by two promissory notes. The loan was
secured by a Real Estate Mortgage over the petitioners’ property located in White Plains, Quezon CIty. The
principal of the loan was agreed to earn interest of 15% p.a. However, it included an escalation clause allowing
the creditor to unilaterally increase or decrease the interest rate agreed upon.

Over time, the interest rates p.a. imposed on the unpaid loan increased and decreased as follows: 15%, 24.5%,
21.5%, 19.5%, 18%. A penalty charge of 1/10th of 1% per day was also imposed on the unpaid balance until
fully paid.

When petitioners failed to pay the monthly amortizations due, respondent demanded the full payment of the
outstanding balance with accrued monthly interests pursuant to the acceleration clause. The amount due on
the two promissory notes totaled Php 19,201,776.63 representing the principal, interests, penalties, and
attorney’s fees. The REM was foreclosed and the mortgaged property was sold at a public auction, with the
respondent as highest bidder for the amount of Php 10,300,000.00.

Petitioners, thereafter, received a demand letter from respondent for the payment of deficiency balance of
Php8,901,776.63. As its demand remained unheeded, respondent filed a collection suit in the trial court.
Petitioners argued that such deficiency cannot be enforced since it consists only of the penalty and/or
compounded interest on the accrued interest which is generally not favored under the Civil Code.

RTC ruled in favor of respondent. The CA affirmed the RTC’s decision.

ISSUE:
Were the interest rates of 15% to 24.5% per annum, and penalty charges of 1/10th of 1% per day imposed on
the Sps. Juico valid?

RULING:
NO. The Court consider as invalid the interest rates in excess of 15% charged by respondent against petitioner,
the rate charged for the first year.

It is true that there is no indication that petitioners were coerced in agreeing with the foregoing provisions of the
promissory notes. In fact, petitioner Ignacio, a physician engaged in the medical supply business, admitted
having understood his obligations before signing them.

This notwithstanding, the court held that unilateral escalation clauses are void because they grant the lender
the power to impose an increased rate of interest without a written notice to petitioners and their written
consent. Respondent’s monthly telephone calls to petitioners advising them of the prevailing interest rates
would not suffice. A detailed billing statement based on the new imposed interest with corresponding
computation of the total debt should have been provided by the respondent to enable petitioners to make an
informed decision. An appropriate form must also be signed by the petitioners to indicate their conformity to the
new rates. Compliance with these requisites is essential to preserve the mutuality of contracts.

Modifications in the rate of interest for loans pursuant to an escalation clause must be the result of an
agreement between the parties. one-sided impositions do not have the force of law between the parties,
because such impositions are not based on the parties’ essential equality. Unless such important change in the
contract terms is mutually agreed upon, it has no binding effect. In the absence of consent on the part of the
petitioners to the modifications in the interest rates, the adjusted rates cannot bind them.

22
 DEPOSIT
Deposit

BANK DEPOSITS ARE IN THE NATURE OF IRREGULAR DEPOSITS

15. Bank of the Philippine Islands v. Court of Appeals

G.R. No. 104612, May 10, 1994
Davide, Jr., J.

FACTS:
This petition for review seeks to set aside the CA decision granting the defendant’s counterclaim for
P331,261.44 which represents the outstanding balance of their account with the plaintiff.

Eastern Plywood Corporation (Eastern) and Benigno Lim (Lim), an officer and stockholder of Eastern, held at
least one joint bank account (“and/or account”) with the Commercial Bank and Trust Co. (CBTC), the
predecessor-in-interest of BPI. A joint checking account with Lim in the amount of Php 120,000.00 was opened
by Mariano Velasco with funds withdrawn from the “and/or account”. Various amounts deposited or withdrawn
from the joint account of Velasco and Lim were placed in the money market. Velasco died, thereafter, half of
the “and account” was provisionally released and transferred to one of the bank accounts of Eastern with
CBTC, by virtue of an Indemnity Undertaking executed by Lim. Eastern, thereafter, obtained a loan of
Php73,000.00 from CBTC evidenced by the Disclosure Statement, but which was not secured. Thereafter, the
parties signed a “Holdout Agreement” stating that as security for the loan, a holdout on said “and account” was
offered to and accepted by CBTC to the full extent of their alleged interests as a result and definitive judicial
action or a settlement between and among the contesting parties thereto. In the meantime, a judicial settlement
of Velasco’s estate ordered the withdrawal of the balance of Php331,261.44 in the Velasco and Lim account.

Claiming that the Holdout Agreement provides for the security of the loan obtained by Eastern and that it is the
duty of CBTC to debit the account of respondents to set off the amount of P73,000 covered by the promissory
note, BPI filed the instant petition for recovery. Eastern and Lim, however, countered that the amount deposited
in the joint account of Velasco and Lim came from Eastern and therefore rightfully belong to Eastern and/or
Lim. Since the Holdout Agreement covers the loan of P73,000, petitioner can only hold that amount against the
joint checking account and must return the rest.

ISSUE:
1. May a payment of the loan be demanded despite the existence of the Holdout Agreement?
2. Was the Creditor still liable to pay the debtor on the account subject of the withdrawal by the heirs?

RULING:
1. Yes, because the Holdout Agreement conferred on CBTC the power, not the duty, to set off the loan from the
account subject of the Agreement. CBTC was not in any way precluded from demanding payment from Eastern
and from instituting an action to recover payment of the loan. What it provides is an alternative, not an
exclusive, method of enforcing its claim on the note. When it demanded payment of the debt directly from
Eastern and Lim, BPI had opted not to express its right to apply part of the deposit subject of the Holdout
Agreement to the payment of the promissory note.

2. Yes, because payment made by the debtor to the wrong party does not extinguish the obligation as to the
creditor, who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to
the person of the creditor, or through error induced by fraud of a third person.

In Serrano vs. Central Bank of the Philippines, we held that bank deposits are in the nature of irregular
deposits; they are really loans because they earn interest. The relationship then between a depositor and a
bank is one of creditor and debtor. The deposit under the questioned account was an ordinary bank deposit;
hence, it was payable on demand of the depositor.

The account was proved and established to belong to Eastern even if it was deposited in the names of Lim and
Velasco. As the real creditor of the Bank, Eastern has the right to withdraw it or to demand payment thereof.
BPI cannot be relieved of its duty to pay Eastern simply because it allowed the heirs of Velasco to withdraw the
whole balance of the account. Moreover, the order of the court in the intestate proceedings merely authorized

23
the heirs of Velasco to withdraw the account. BPI was not specifically ordered to release the account to the
said heirs; hence, it was under no judicial compulsion to do so. Hence, the payment by BPI to the heirs of
Velasco, even if done in good faith, did not extinguish its obligation to the true depositor, Eastern.

24
 DEPOSIT
Deposit

A BANK HAS A RIGHT OF SET-OFF OF THE DEPOSITS IN ITS HANDS FOR THE PAYMENT OF ANY
INDEBTEDNESS OF THE DEPOSITOR

16. Gullas v. The Philippine National Bank

G.R. No. 43191. November 13, 1935
Malcolm, J.

FACTS:
This is an appeal from a judgment of the Court of First Instance of Cebu ordering the defendant to return to the
account of the plaintiff the sum of P509, with legal interest and costs and damages.

Paulino Gullas is a member of the Philippine Bar, resident in the City of Cebu. Philippine National Bank (PNB)
is a banking corporation with a branch in the same city. Atty. Gullas has had a current account with the bank.
On August 2, 1933, the Treasurer of the United States for the United States Veterans Bureau issued a warrant
in the amount of $361 or P722, payable to the order of Francisco Sabectoria Bacos. Paulino Gullas and Pedro
Lopez signed as indorsers of this check. Thereupon it was cashed by the PNB. Subsequently, the treasury
warrant was dishonored by the Insular Treasurer. At that time the outstanding balance of Atty. Gullas on the
books of the bank was P509. Against this balance he had issued certain checks which could not be paid when
the money was sequestered by the bank. The bank learned of the dishonor of the treasury warrant and sent
notices by mail to Mr. Gullas who was in Manila. PNB informed Gullas that the bank has applied the
outstanding balances of Gullas’ current accounts with the bank to the part payment of the dishonored check.
On the return of Atty. Gullas to Cebu on August 31, 1933, notice of dishonor was received and the unpaid
balance of the United States Treasury warrant was immediately paid by him.

ISSUE:
May a Bank set off the deposits in its hands for the payment of any indebtedness of the depositor?

RULING:
Yes, because compensation takes place when two persons are reciprocally creditor and debtor of each other
(Civil Code, article 1195). It has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. Hence, as a general rule, a bank has a right of set off of the deposits in its hands for the
payment of any indebtedness to it on the part of a depositor. Notwithstanding the rules of Louisiana, a civil law
jurisdiction, invoking the theory of confidential contracts arising from irregular deposits, the Court adopted the
present rule in harmony with modern banking practice.

However, in this case, the remedy of set-off was not properly enforced by PNB with respect to the deposit of
Gullas. The Negotiable Instruments Law contains provisions establishing the liability of a general indorser and
giving the procedure for notice of dishonor. The general indorser pays the amount thereof to the holder of a
negotiable instrument if it be dishonored and the necessary proceedings of dishonor be duly taken. In this
connection, it has been held by a long line of authorities that notice of dishonor is necessary in order to charge
an indorser, and that the right of action against him does not accrue until the notice is given. Prior to the mailing
of notice of dishonor, and without waiting for any action by Gullas, the bank made use of the money standing in
his account to make good for the treasury warrant. At his point recall that Gullas was merely an indorser and
had issued checks in good faith.

Hence, the remedy of set-off was not properly enforced.

25
 DEPOSIT
Deposit

A CONTRACT FOR RENT OF SAFETY DEPOSIT BOX IS A SPECIAL KIND OF DEPOSIT NOT STRICTLY
GOVERNED BY THE CIVIL CODE PROVISIONS ON DEPOSIT

17. CA Agro-Industrial Development Corp. v. CA

G.R. No. 90027, March 3, 1993
Davide, Jr., J.

FACTS:
In this petition for review, petitioner seeks the reversal of the CA decision maintaining that the contract between
the parties is in the nature of contract of lease.

Petitioner purchased two (2) parcels of land from the spouses Pugao. They both agreed that the owner's
copies of the certificates of titles, TCT Nos. 284655 and 292434, shall be deposited in a safety deposit box of
any bank. The same could be withdrawn only upon the joint signatures of a representative of the petitioner and
the Pugaos upon full payment of the purchase price. Petitioner and the Pugaos rented Safety Deposit Box No.
1448 of Security Bank and deposited the TCTs. For this purpose, both signed a contract of lease which
provides that (13) the bank is not a depositary of the contents of the safe and it has neither the possession nor
control of the same; and (14) it has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. Two (2) renter's keys were given to the renters —
one to petitioner and the other to the Pugaos. A guard key remained in the possession of the respondent Bank.
The safety deposit box has two (2) keyholes, one for the guard key and the other for the renter's key, and can
be opened only with the use of both keys. However, when the parties opened the safety deposit box, the box
yielded no such certificates. The petitioner filed a complaint for damages against the respondent Bank with the
RTC.

The RTC rendered a decision adverse to the petitioner which was affirmed by the CA. The RTC decided
principally on the theory that the contract executed by the petitioner and respondent Bank is in the nature of a
contract of lease by virtue of which the petitioner and its co-renter were given control over the safety deposit
box and its contents while the Bank retained no right to open the said box because it had neither the
possession nor control over it and its contents.

ISSUE:
Is the contractual relation between a bank and a depositor, in a contract of rent of a safety deposit box with
respect to its contents placed by the latter, one of bailor and bailee or one of lessor and lessee?

RULING:
It is a special kind of deposit. The contract for the rent of the safety deposit box is neither an ordinary
contract of lease as defined in Article 1643 of the Civil Code nor a contract of deposit strictly governed by the
provisions on deposit. The renting out of the safety deposit boxes is not independent from, but related to or in
conjunction with, the principal function found within the parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for safekeeping. Any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy.

The case at bar cannot be characterized as an ordinary contract of lease under Article 1643 because the full
and absolute possession and control of the safety deposit box was not given to the renters — the petitioner and
the Pugaos. The guard key of the box remained with the respondent Bank; without this key, neither of the
renters could open the box. The Bank could not likewise open the box without the renter's key. In this case, the
said key had a duplicate which was made so that both renters could have access to the box.
However, since no competent proof was presented to show that respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect that the certificates of title were withdrawable from the
safety deposit box only upon both parties' joint signatures, and that no evidence was submitted to reveal that
the loss of the certificates of title was due to the fraud or negligence of the respondent Bank, this in turn flows
from this Court's determination that the contract involved was one of deposit. Since both the petitioner
and the Pugaos agreed that each should have one (1) renter's key, it was obvious that either of them could ask

26
the Bank for access to the safety deposit box and, with the use of such key and the Bank's own guard key,
could open the said box, without the other renter being present.

27
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

WHERE A SURETY IS LIABLE FOR DIFFERENT PAYMENTS, SUCH AS INSTALLMENTS OF RENT, OR

UPON A SERIES OF PROMISSORY NOTES, AN EXTENSION OF TIME AS TO ONE OR MORE WILL NOT
AFFECT THE LIABILITY OF THE SURETY FOR THE OTHERS

18. Rosa Villa Monna v. Guillermo Garcia Bosque, F. H. Goulette, and R. G. France
G.R. No. L-24543, July 12, 1926
Street, J.

FACTS:
This is an appeal filed by defendants Guillermo Garcia Bosque (principal debtor), R.G. France and F.H.
Goulette (sureties) against the judgment rendered by CFI of Manila requiring them, jointly and severally, to pay.

Plaintiff Rosa Villa sold a printing establishment and bookstore to defendants Bosque and Ruiz (who were
declared in default) for the stipulated sum of P55,000, payable in four (4) installments. Defendants France and
Goulette obliged themselves as solidary sureties with the principal debtors to answer for any balance which
should remain due and unpaid after the dates stipulated for payment of said installments. The first installment
was paid conformably to agreement. However, the purchasers were unable to comply with their obligation
when the time came for the payment of the second installment. After negotiations, purchasers and Figueras
Hermanos, acting as attorney in fact for the plaintiff, reached an agreement for the payment of the second
installment whereby Figueras Hermanos accepted the initial payment of P5,800, and received for the balance
five (5) promissory notes payable on different dates. After all the installments in conformity with the original
contract has fallen due, plaintiff filed a case to recover the balance of the purchase price. CFI ruled in favor of
plaintiff; hence, this appeal.

France and Goulette (sureties) submitted exclusively the contention that they were discharged by the
agreement between the principal debtor and Figueras Hermanos whereby the period for the payment of the
second installment was extended, without the assent of the sureties.

ISSUE:
Are the sureties released from liability for the whole debt by the extension of time for payment of the second
installment granted by the creditor to the debtor without the consent of the sureties?

RULING:
No, where the surety is liable for different payments, an extension of time as to one or more will not affect the
liability of the surety for the others.

The execution of these new promissory notes undoubtedly constituted and extension of time as to the
obligation included therein, such as would release a surety, even though of the solidary type, under article 1851
of the Civil Code. Nevertheless, it is to be borne in mind that said extension and novation related only to the
second installment of the original obligation and interest accrued up to that time. Furthermore, the total amount
of these notes was afterwards paid in full, and they are not now the subject of controversy. It results that the
extension thus effected could not discharge the sureties from their liability as to other installments upon which
alone they have been sued in this action. The rule that an extension of time granted to the debtor by the
creditor, without the consent of the sureties, extinguishes the latter's liability is common both to Spanish
jurisprudence and the common law; and it is well settled in English and American jurisprudence that where a
surety is liable for different payments, such as installments of rent, or upon a series of promissory notes, an
extension of time as to one or more will not affect the liability of the surety for the others.

The contention of the sureties on this point is, therefore, untenable.

28
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

A GUARANTOR IS NOT AN INSURER OF THE DEBT GUARANTEED. HE CANNOT BE COMPELLED TO

PAY UNTIL IT IS SHOWN THAT THE DEBTOR IS UNABLE TO PAY

19. Romulo Machetti v. Hospicio De San Jose and Fidelity & Surety Company of the Philippine Islands
G.R. No. L-16666; April 10, 1922
Ostrand, J.

FACTS:
This is an appeal filed by Fidelity and Surety Company of the Philippine Islands (guarantor) against the
judgment rendered by the CFI in favor of Hospicio de San Jose requiring Fidelity to pay.

Romulo Machetti undertook to construct a building for Hospicio de San Jose. Machetti obtained the "guarantee"
of the Fidelity and Surety Company of the Philippine Islands as one of the conditions of the agreement. After
completion of the work, Machetti filed an action against Hospicio for the balance of the contract price not yet
paid. On its end, Hospicio presented a counterclaim for damages for the partial noncompliance with the terms
of the agreement because the work has not been carried out in accordance with the specifications of Hospicio.
After the issue was joined, Machetti, on petition of his creditors, was declared insolvent, and an order was
entered suspending the proceeding in the present case.

Hospicio filed a motion asking that the Fidelity and Surety Company be made cross-defendant to the exclusion
of Machetti and that the proceedings be continued as to said company, but still remain suspended as to
Machetti. This motion was granted. After trial, the CFI rendered judgment against the Fidelity and Surety
Company for P12,800 in accordance with the complaint.

ISSUE:
Can the guarantor be compelled to pay for the debt of the principal debtor?

RULING:
No, the guarantor cannot be compelled to pay until it is shown that the debtor is unable to pay.

While a surety undertakes to pay if the principal does not pay, the guarantor only binds himself to pay if the
principal cannot pay. One is the insurer of the debt, the other an insurer of the solvency of the debtor. This
latter liability is what the Fidelity and Surety Company assumed in the present case. The undertaking is
perhaps not exactly that of a fianza under the Civil Code, but is a perfectly valid contract, and must be given the
legal effect if ordinarily carries. The Fidelity and Surety Company having bound itself to pay only the event its
principal, Machetti, cannot pay it follows that it cannot be compelled to pay until it is shown that Machetti is
unable to pay. Such ability may be proven by the return of a writ of execution unsatisfied or by other means, but
is not sufficiently established by the mere fact that he has been declared insolvent in insolvency proceedings
under our statutes, in which the extent of the insolvent's inability to pay is not determined until the final
liquidation of his estate.

The judgment appealed from is, therefore, reversed.

29
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

THE CONTRACT MADE ON A FORM PREPARED BY THE SURETY MUST BE CONSTRUED AGAINST
THE SURETY AND IN FAVOR OF THE PROMISEE

20. Intestate Estate of Honofre Leyson v. Rizal Surety and Insurance Company
G.R. No. L-21250. March 31, 1966
Regala, J.

FACTS:
This is an appeal from the order of the CFI declaring respondent liable for P6,051.57 on its bond it had given in
behalf of Victorio L. Rodriguez.

Rodriguez was the administrator of the estate of Leyson. On December 27, 1951, the Manila Court of First
instance, in which the estate was at the time pending settlement, ordered Rodriguez relieved of his trust after
finding him guilty of maladministration. As Rodriguez appealed the order of relief, the court, as a measure of
"protection of this estate," required him to file an increased bond of P10,000 (which then was P500 only) to
answer for "the faithful execution of his trust as of the date of his appointment. Rodriguez filed a bond, given by
the appellant, stating inter alia, “we bind ourselves, our heirs, executors and administrators, jointly and
severally, firmly by these presents.” In its order of June 27, 1952 approving the bond. Despite several deadlines
given to him, Rodriguez failed to pay the money in court, for which reason he was ordered arrested and
declared in contempt. On November 8, 1962, despite several deadlines given to him, Rodriguez failed to pay
the money in court, for which reason he was ordered arrested and declared in contempt. acting on motion of
the new administratrix, ordered the confiscation of Rodriguez' bond for the satisfaction of the amount of
P6,051.57. It is from this order that the surety company appeals, arguing inter alia, that it was not given the
opportunity to be heard.

ISSUE:
May a bond cover violations of trust by the administrator before the filing of that bond?

RULING:
No, the rule is invoked that a contract of suretyship must be strictly construed and since the contract in this
case contains no provision making it expressly retroactive, the point is made that the bond cannot cover
violations of trust by the administrator before the filing of that bond. While it is indeed true that the bond does
not specify the date when it took effect, the fact is that both in its order requiring the administrator to file an
increased bond and in its subsequent order approving the bond, the court made plain that the bond would
answer "for the faithful execution of his (administrator's) trust as of the date of his appointment." Rodriguez'
appointment as administrator was made on December 8, 1947 and it was on this date that the bond must be
understood to have taken effect. That the court should require this condition is understandable, considering that
it had earlier found the former administrator guilty of maladministration and, as a consequence, ordered his
removal. The bond in question was required by the court "for the protection of (the) estate." in view of the fact
that Rodriguez had appealed the order of removal and, therefore, could not immediately be relieved of his
position of trust.

The contract made on a form prepared by the surety must be construed against the surety and in favor of the
promisee. The rationale of this doctrine is reasonable; an accommodation surety acts without motive of
pecuniary gain and, hence, should be protected against unjust pecuniary impoverishment by imposing on the
principal duties akin to those of a fiduciary. This cannot be said of a compensated corporate surety which is a
business association organized for the purpose of assuming classified risks in the medium of standardized
written contractual forms drawn by its representatives with the primary aim of protecting his own interest.

Hence, the nature of a surety's obligation on an administrator's bond makes him privy to the proceedings
against his principal. As such he is bound and concluded, in the absence of collusion, by a judgment against
his principal, even though the surety was not a party to the proceedings. Here, the record shows that the surety
was given an opportunity to be heard by the fact the surety itself filed its opposition to the motion to confiscate
said surety bond.

30
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

IN A CONTINUING GUARANTY, THE SURETY CANNOT ESCAPE LIABILITY ON THE LEGAL GROUND
THAT THE OBLIGATIONS WERE INCURRED SUBSEQUENT TO THE EXECUTION OF THE SURETY
CONTRACT

21. Fortune Motors (Phils.) Corporation and Edgar Rodrigueza v. Court of Appeals and Filinvest Credit
Corporation
G.R. No. 112191, February 7, 1997
Panganiban, J.

FACTS:
This petition for review seeks to set aside the CA decision in favor of the petitioners, ordering defendants to pay
the principal amount of the loan, attorney’s fees, damages and cost of suit.

Joseph L. G. Chua and Petitioner Edgar Lee Rodrigueza (Rodrigueza) each executed an undated "Surety
Undertaking" whereunder they "absolutely, unconditionally and solidarily guarantee" to Respondent Filinvest
Credit Corporation (Filinvest) and its affiliated and subsidiary companies the "full, faithful and prompt
performance, payment and discharge of any and all obligations and agreements" of Fortune Motors (Phils.)
Corporation (Fortune) "under or with respect to any and all such contracts and any and all other agreements
(whether by way of guaranty or otherwise)" of the latter with Filinvest and its affiliated and subsidiary
companies "now in force or hereafter made." The following year, Fortune, Filinvest and Canlubang Automotive
Resources Corporation (CARCO) entered into an "Automotive Wholesale Financing Agreement" ("Financing
Agreement") under which CARCO will deliver motor vehicles to Fortune for the purpose of resale in the latter's
ordinary course of business; Fortune, in turn, will execute trust receipts over said vehicles and accept drafts
drawn by CARCO, which will discount the same together with the trust receipts and invoices and assign them
in favor of Filinvest, which will pay the motor vehicles for Fortune. Under the same agreement, Fortune, as
trustee of the motor vehicles, was to report and remit proceeds of any sale for cash or on terms to Respondent
Filinvest immediately without necessity of demand. Subsequently, several motor vehicles were delivered by
CARCO to Fortune, and trust receipts covered by demand drafts and deeds of assignment were executed in
favor of Respondent Filinvest. However, when the demand drafts matured, not all the proceeds of the vehicles
which Petitioner Fortune had sold were remitted to Respondent Filinvest. Fortune likewise failed to turn over to
Filinvest several unsold motor vehicles covered by the trust receipts. Thus, Filinvest through counsel, sent a
demand letter to Fortune for the payment of its unsettled account. Despite said demands, the amount was not
paid. Hence, Filinvest filed in the RTC of Manila a complaint for a sum of money with preliminary attachment
against Fortune, Chua and Rodrigueza.

Filinvest presented testimonial and documentary evidence. Petitioners, instead of presenting their evidence, led
a "Motion for Judgment on Demurrer to Evidence" anchored principally on the ground that the Surety
Undertakings were null and void because, at the time they were executed, there was no principal obligation
existing. The RTC denied the motion and rendered its decision earlier cited ordering Fortune, Chua and
Rodrigueza to pay Filinvest the principal amount of the loan, attorney’s fees, damages and cost of suit.

ISSUE:
In the event the car dealer defaults in paying the financing company, may the surety escape liability on the
legal ground that the obligations were incurred subsequent to the execution of the surety contract?

RULING:
No. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future
course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. The surety
undertakings executed by Chua and Rodrigueza were continuing guaranties or suretyships covering all future
obligations of Fortune with Filinvest. This is evident from the written contract itself which contained the words
"absolutely, unconditionally and solidarily guarantee(d)" to Filinvest and its subsidiary companies the "full,
faithful and prompt performance, payment and discharge of any and all obligations and agreements" of Fortune
"under or with respect to any and all such contracts and any and all other agreements (whether by way of
guaranty or otherwise)" of the latter with Filinvest and its subsidiary companies "now in force or hereafter
made."

31
This is a clear case of estoppel by deed. By the acts of petitioners, Filinvest was made to believe that it can
collect from Chua and/or Rodrigueza in case of Fortune's default. Filinvest relied upon the surety contracts
when it demanded payment from the sureties of the unsettled liabilities of Fortune. A refusal to enforce said
surety contracts would virtually sanction the perpetration of fraud or injustice. It is obvious that Rodrigueza and
Chua were fully aware of the business of Fortune, an automobile dealer; Chua being the corporate president of
Fortune and even a signatory to the Financial Agreement with Filinvest. Both sureties knew the purpose of the
surety undertaking which they signed and they must have had an estimate of the amount involved at that time.
Their undertaking by way of the surety contracts was critical in enabling Fortune to acquire credit facility from
Filinvest and to procure cars for resale, which was the business of Fortune. After benefiting therefrom,
petitioners cannot now impugn the validity of the surety contracts on the ground that there was no preexisting
obligation to be guaranteed at the time said surety contracts were executed. They cannot resort to equity to
escape liability for their voluntary acts, and to heap injustice to Filinvest, which relied on their signed word.

32
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

WHEN A GUARANTY BOND PROVIDES THAT THE SURETY WAIVES ITS RIGHT TO DEMAND NOTICE
OF PAYMENT AND NONPAYMENT, DEMAND MADE TO THE PRINCIPAL CONSTITUTES A DEMAND TO
THE GUARANTOR

22. National Marketing Corporation v. Gabino Marquez et. al.

G.R. L-25553, January 31, 1969
Reyes, J.

FACTS:
This appeal made directly to the Supreme Court seeks to reverse the CFI decision condemning appellant to
pay to the National Marketing Corporation the principal sum, plus accrued interest, together with 10% on the
total amount due by way of attorney's fees and costs.
Marquez secured from the Philippine Relief and Trade Rehabilitation Administration (PRATRA) one tractor and
one rice thresher. He paid a downpayment, leaving a balance of P10,000. Marquez executed a promissory
note for the payment of the remaining balance. To guarantee full compliance with the aforementioned
obligation, Marquez, as principal, and defendant Plaridel Surety & Insurance Company (PSIC), as surety,
executed a Guaranty Bond in favor of the PRATRA, wherein they bound themselves, jointly and severally, to
pay. In this guaranty bond, the surety expressly waives its right to demand payment and notice of non-payment
and agrees that the liabilities of this guaranty shall be direct and immediate and not contingent upon the
exhaustion by the PRATRA of whatever remedies it may have against the principal. Marquez defaulted.

When a case was filed, the PSIC avers that a demand upon the debtor is no demand upon the surety, and that
the copies of the letters of demand upon the former do not constitute a demand upon the guarantor.

ISSUE:
Is demand upon the debtor considered a demand upon the surety?

RULING:
Yes. PSIC’s defense has no merit because (a) the liability of the appellant was expressly made joint and
several by the terms of the guaranty bond, and (b) for the reason that, in the latter document, "the surety also
waives its right to demand payment and notice of nonpayment". The words "demand payment" vis-a-vis the
creditor can only refer to "demand for payment." When a guarantor bond provides that the surety waives its
right to demand notice of payment and nonpayment, demand made to the principal constitutes demand to
guarantor. Mere delay of the creditor in proceeding against the principal debtor does not release the guarantor,
and much less will it relieve a surety, who is solidarily liable with the main debtor.

Moreover, while the guarantee was for the original amount of the debt of Gabino Marquez, the amount of the
judgment by the trial court in no way violates the rights of the surety. The judgment on the principal was only for
P10,000.00, while the remaining P9,990.91 represent the moratory interest due on account of the failure to pay
the principal obligation from and after the same had fallen due, and default had taken place. The contract of
guaranty executed by the appellant Company nowhere excludes this interest. Article 2055 of the Civil Code is
clearly applicable as it provides that if it (the guaranty) be simple or indefinite, it shall comprise not only the
principal obligation but also all its accessories, including judicial costs, provided with respect to the latter, that
the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.

33
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

PREMIUM IS THE CONSIDERATION FOR FURNISHING A PERFORMANCE BOND AND THE

OBLIGATION TO PAY THE SAME SUBSISTS FOR AS LONG AS THE LIABILITY OF THE SURETY
EXISTS

23. Reparations Commission v. Universal Deep-Sea Fishing Corporation

G.R. L-21901, June 27, 1978
Concepcion Jr., J.

FACTS:
In this appeal, defendant Universal Deep-Sea Fishing Corporation seeks the review of the CFI decision and
contends that there is an obscurity in the terms of the contracts in question which were caused by the plaintiff
as to the amounts and due dates of the first installments which should have been first fixed before a creditor
can demand its payment from the debtor.

The Reparations Commission awarded six (6) trawl boats to the Universal Deep-Sea Fishing Corporation
(Universal) which were delivered two at a time, each delivery being covered by a Contract of Conditional
Purchase and Sale providing for identical schedules of payments. All Contracts are covered by 10 equal
installments. To guarantee the faithful compliance with the obligations to pay, a performance bond with
Universal as principal and the Manila Surety & Fidelity Co., Inc., as surety, was executed in favor of the
Reparations Commission.

After demand and failure of Universal to pay, the Reparations Commission instituted the present action against
Universal and Manila Surety & Fidelity Co. to recover various amounts of money due under these contracts.
The surety company filed a cross-claim against Universal for the collection of accumulated and unpaid
premiums on the bonds with interest thereon.

The RTC did not award the amount for the premiums (total of P7,251.42) on the bonds.

ISSUE:
1. Were the first installments under the 3 contracts of conditional purchase and sale of reparations goods
already due and demandable when the complaint was filed?

2. Should Universal pay the premiums on the bonds executed by Manila Surety?

RULING:
1. Yes, the terms of the contracts for the purchase and sale of the reparations vessels are very clear and leave
no doubt as to the intent of the contracting parties. Thus, in the contract concerning the M/S UNIFISH 1 and
M/S UNIFISH 2, the parties expressly agreed that the first installment representing 10% of the purchase price
shall be paid within 24 months from the date of complete delivery of the vessel, and the balance to be paid in
ten 10% equal yearly installments. The amount of P56,597.20 due on May 8, 1962, which is, also claimed to be
a "first installment," is but the first of the ten (10) equal yearly installments of the balance of the purchase price.

2. Yes, because the payment of premiums on the bonds to the surety company had been expressly undertaken
by Universal in the indemnity agreements executed by it in favor of the surety company. The premium is the
consideration for furnishing the bonds and the obligation to pay the same subsists for as long as the liability of
the surety shall exist. Hence, Universal should pay the amount of P7,251.42 to the surety company.

Moreover, the rules contained in Articles 1252 to 1254 of the Civil Code apply to a person owing several debts
of the same kind to a single creditor. They cannot be made applicable to a person whose obligation as a mere
surety is both contingent and singular, which in this case is the full and faithful compliance with the terms of the
contract of conditional purchase and sale of reparations goods.

34
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

IF THE ORIGINAL OBLIGATION IS EXTINGUISHED, THE CONTRACT OF SURETYSHIP, BEING AN

ACCESSORY CONTRACT IS ALSO EXTINGUISHED

24. Babst v. Court of Appeals

G.R. 99398, January 26, 2001
Ynares-Santiago, J.

FACTS:
These consolidated petitions seek the review of the CA Decision ordering Elizalde Steel Consolidated Inc.
(ELISCON) to pay BPI the amount due on the promissory note, and the amount due on the three (3) domestic
letters of credit.

ELISCON obtained from Commercial Bank and Trust Company (CBTC) a loan. It defaulted from its payments
leaving an indebtedness of P2,795,240.67. Letters of credit were opened for ELISCON by CBTC using the
credit facilities of Pacific Multi-Commercial Corporation (MULTI). The ELISCON officers Chua and Babst
executed a Continuing Suretyship, whereby they bound themselves jointly and severally liable to pay any
existing indebtedness of MULTI to CBTC. The Bank of the Philippine Islands (BPI) and CBTC entered into a
merger where BPI, as surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank
of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of
dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness. On 1981, DBP
formally took over the assets of ELISCON, including its indebtedness to BPI. BPI instituted with the RTC a
complaint for sum of money against ELISCON, Multi and Babst to enforce payment of a promissory note and
three domestic letters of credit which ELISCON executed and opened with the CBTC.

Babst alleged that he signed the Continuing Suretyship on the understanding that it covers only obligations
which MULTI incurred solely for its benefit and not for any third party liability. The RTC ordered the Multi and
Babst to pay jointly and severally with defendant Eliscon all the charges awarded against ELISCON. The CA
substantially affirmed the decision that the debtors should pay BPI with some modifications from the RTC
decision.

ISSUE:
When does the obligation of the surety arise?

RULING:
While a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal
debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself
for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not. A surety
is an insurer of the debt; he promises to pay the principal's debt if the principal will not pay.

BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its
causes of action and legal recourse against the sureties of ELISCON. In the case at bar, there was no
indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of
ELISCON, was capable of payment. Its authorized capital stock was increased by the government. More
importantly, the National Development Company took over the business of ELISCON and undertook to pay
ELISCON’s creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI. Its
failure to register its objection can only mean an acquiescence in the assumption by DBP of ELISCON's
obligations.

The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and
MULTI, being accessory obligations, are likewise extinguished.

35
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

THE CONSIDERATION NECESSARY TO SUPPORT A SURETY OBLIGATION NEED NOT PASS

DIRECTLY TO THE SURETY, A CONSIDERATION MOVING TO THE PRINCIPAL ALONE IS SUFFICIENT

25. Willex Plastic Industries, Corporation v. Court of Appeals and International Corporate Bank
G.R. No. 103066, April 25, 1996
Mendoza, J.

FACTS:
This is a petition for review on certiorari assailing the decision of CA affirming the RTC which ordered
petitioner Willex Plastic Industries Corporation (Willex) and the Inter-Resin Industrial Corporation (Inter-Resin),
jointly and severally, to pay private respondent International Corporate Bank (ICB).

Inter-Resin opened a letter of credit with the Manila Banking Corporation. To secure payment of the credit
accommodation, Inter-Resin and the Investment and Underwriting Corporation of the Philippines (IUCP)
executed two documents, both entitled Continuing Surety Agreement whereby they bound themselves solidarily
to pay Manila Bank. The two agreements are the same in all respects, except as to the limit of liability of the
surety. Subsequently, Inter-Resin, together with Willex, executed a Continuing Guaranty in favor of IUCP up to
5 million pesos. Manila Bank then demanded from IUCP
the sum of P4,334,280.61 representing Inter-Resin’s outstanding obligation. Atrium (succeeded IUCP)
demanded from Inter-Resin and Willex the payment of what it had paid to Manilabank. As neither one of the
sureties paid, Atrium filed a case against them.

RTC ordered petitioners jointly and severally to pay to Interbank (succeeded Atrium). CA affirmed. Hence, this
petition for review on certiorari.

ISSUE:
1. Can a Continuing Guaranty, an accessory contract, legally exist despite absence of a valid principal
obligation?

2. Can Willex claim the benefit of excussion?

RULING:
1. Yes, the Continuing Guaranty can legally exist despite absence of valid principal obligation. Put in another
way the consideration necessary to support a surety obligation need not pass directly to the surety, a
consideration moving to the principal alone being sufficient. For a "guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties thereto. It is never necessary that
a guarantor or surety should receive any part or benefit, if such there be, accruing to his principal."

2. No, Willex cannot claim the benefit of excussion. The Civil Code provides that excussion shall not take place
if the guarantor has expressly renounced it, and if he has bound himself solidarily with the debtor. The pertinent
portion of the Continuing Guaranty executed by Willex Plastic and Inter-Resin Industrial in favor of IUCP
reads: If default be made in the payment of the NOTE/s herein guaranteed you and/or your principal/s may
directly proceed against Me/Us without first proceeding against and exhausting DEBTOR/s properties in the
same manner as if all such liabilities constituted My/Our direct and primary obligations. This stipulation
embodies an express renunciation of the right of excussion.

36
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

MATERIAL ALTERATION OF PRINCIPAL CONTRACT WILL DISCHARGE THE SURETY IF WITHOUT

KNOWLEDE AND CONSENT

26. The Asiatic Petroleum Company (Philippine Islands), Ltd. v. Francisco Hizon Y Singian and Justino
A. David
G.R. No. 20588, December 17, 1923
Street, J.

FACTS:
This is an appeal from the decision of RTC which ordered David and Hizon solidary liable to APC.

APC is a corporation lawfully engaged in the selling of petroleum products in the Philippine. In 1916 the APC
made a contract with David, whereby the later became the selling agent of the plaintiff in San Fernando,
Pampanga. The contract included an authority to extend over the neighboring places of Guagua, Angeles, San
Simon Capas, Magalang, and Mabalakat. David obtained debts to the plaintiff in the amount of nearly P60,000,
a sum which, by subsequent payments was reduced to P40,786.98.

Asiatic Petroleum Company (APC) filed a civil action against Justico A. David (principal) and Francisco Hizon
(surety) to recover a sum of money for the alleged balance due upon liquidation of accounts between APC and
David. RTC ruled in favor of APC. From this judgment Hizon and APC appealed. APC contended that the court
should have held Hizon jointly and severally liable for the entire sum adjudged against the principal debtor,
while Hizon claims that he should have been wholly absolved. The alleged liability of the appellant Hizon was
evidenced by a document which indicates his obligation to answer jointly and severally with David. However,
Hizon contends that his obligation is only to answer indebtedness incurred by David as an agent of San
Fernando and not of any other places.

ISSUE:
Will material alteration of the contract, without consent of the surety, release such surety from liability?

RULING:
Yes, because it is fundamental in the law of suretyship that any agreement between the creditor and the
principal debtor which essentially varies the terms of the principal contract, without the consent of the surety,
releases the surety from liability. It requires no argument to show that the increase of liability incident to the
extension of the agency to other places than San Fernando was prejudicial to the interest of the appellant, and
the change could not be lawfully made without his consent.

The trial judge was therefore not in error in holding that the appellant was in effect discharged from liability
under the contract of suretyship but his Honor nevertheless gave judgment against the defendant for the sum
of P5,000. In doing so he proceeded upon the idea that the defendant admitted that he intended to obligate
himself to the extent of P5,000, and his Honor concluded that by entering into the contract of suretyship the
defendant had induced the plaintiff to make the contract of agency — which appears to have been signed by
the representative of the plaintiff after it had been signed and acknowledged by David; for which reason his
Honor considered it just to hold the defendant to the extent at least in which he had intended to bind himself.
The validity of this conclusion cannot be admitted. The only obligation which was created on the part of the
defendant was the contract of suretyship, and when that obligation was nullified by the subsequent alteration of
the principal contract, the appellant was discharged was discharged in toto.

The judgment is reversed. Hizon is completely absolved from the complaint.

37
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

THE LIABILITY OF A SURETY IS MEASURED BY THE TERMS OF HIS CONTRACT, AND HIS
ACCOUNTABILITY IS STRICTLY LIMITED TO THAT ASSUMED BY ITS TERMS

27. Sps. Toh v. Solid Bank Corporation

G.R. No. 154183, August 7, 2003
Bellosillo, J.

FACTS:
In this petition for review, Sps. Luis Toh and Vicky Tan Toh argue that the CA denied them due process when it
did not grant their motion for reconsideration. They maintain that the Continuing Guaranty is not legally valid
and binding against them for having been executed long after they had withdrawn from FBPC.

Respondent Solid Bank Corporation (SBC) extended an credit line in favor of First Business Paper Corporation
(FBPC). All the terms and conditions were stipulated in a letter-advise of the Bank, which included a provision
which establishes a Continuing Guaranty for any and all amounts signed by Sps. Toh, and respondent-spouses
Kenneth and Ma. Victoria Ng Li. The Continuing Guaranty set forth no maximum limit on the indebtedness that
FBPC may incur and contained a de facto acceleration clause. To strengthen this security, the Continuing
Guaranty waived certain rights of the sureties such as the giving of future consent to the Bank's action to
"extend or change the time payment, and/or the manner, place or terms of payment. In addition, the parties
stipulated in the letter-advise that domestic letters of credit be supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five
percent (25%) partial payment per extension in order to avail of these rights.

On 1993, FBPC started to avail of the credit facility and secured letters of credit. A year after, FBPC received
information that spouses Ng Li had fraudulently departed from their conjugal home. The next day, the Bank
served a demand letter upon FBPC and petitioner Luis Toh invoking the acceleration clause, then filed a
complaint for sum of money. Spouses Toh contended that Luis Toh was removed as an authorized signatory
for FBPC and replaced by spouses Ng Li and Padilla for all the transactions of FBPC with respondent Bank.
They even resigned from their respective positions in FBPC. Finally, spouses Toh averred that they obtained
from spouses Ng Li their exclusion from the several surety agreements they had entered into.

ISSUE:
What is the limit of the liability of a surety?

RULING:
The liability of a surety is measured by the terms of his contract, and while he is liable to the full extent thereof,
his accountability is strictly limited to that assumed by its terms. As we bind the spouses Toh to the surety
agreement they signed so must we also hold respondent Bank to its representations in the "letter-advise".
Hence, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should
nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%)
marginal deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-
five percent (25%) partial payment per extension.

Furthermore, petitioners are only accommodation sureties, i.e., they received nothing out of the security
contract they signed. The foregoing extensions of the letters of credit made by respondent Bank without
observing the rigid restrictions for exercising the privilege are not covered by the waiver stipulated in the
Continuing Guaranty. Evidently, they constitute illicit extensions prohibited under Art. 2079 of the Civil Code,
"an extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the
guaranty." As a result of these illicit extensions, spouses Toh are relieved of their obligations as sureties of
FBPC under Art. 2079 of the Civil Code.

38
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

RIGHT OF GUARANTORS TO DEMAND EXHAUSTION OF THE PROPERTY OF THE PRINCIPAL

DEBTOR, EXISTS ONLY WHEN A PLEDGE OR A MORTGAGE HAS NOT BEEN GIVEN AS SPECIAL
SECURITY FOR THE PAYMENT OF THE PRINCIPAL OBLIGATION

28. Southern Motors, Inc. v. Eliseo Barbosa

G.R. No. L-9306, May 25, 1956
Concepcion, J.

FACTS:
This is an appeal from the decision of CFI ordering defendant Eliseo Barbosa (Barbosa) to pay to the Court, for
the plaintiff Southern Motors an amount computed on the basis of the amounts of the installments mentioned in
the mortgage and of the dates they respectively fell due, until fully paid.

Southern Motors brought an action against Barbosa to foreclose a real estate mortgage constituted by the
Barbosa in favor of the Southern Motors, as security for the payment of a sum extended by plaintiff to one
Alfredo Brillantes (Brillantes), because the latter failed to settle his obligation in accordance with the terms and
conditions corresponding with the deed of mortgage. Defendant filed an answer admitting the allegations of the
complaint and alleging by way of special and affirmative defense that he executed the deed of mortgage for the
sole purpose of guaranteeing the above mentioned debt of Brillantes and that therefore Southern Motors
cannot foreclose the mortgage property without a prior exhaustion of the principal’s properties.

After the case transferred from one judge to another, the trial court rendered judgment on the pleadings in favor
of plaintiff that prompted respondent to appeal before the CA who certified the case to the SC in view of the fact
that the appeal raises purely questions of law.

ISSUE:
Is Southern Motors required to exhaust Brillantes’ property before he can proceed to foreclose the mortgage?

RULING:
No, Southern Motors is not required to exhaust Brillantes’ property before he can proceed to foreclose the
mortgage. Barbosa’s invocation of Article 2058 of the Civil Code is misplaced because the right of the
guarantors to demand exhaustion of the property of the principal debtor under said provision exists only when a
pledge or mortgage has not been given as special security for the payment of the principal obligation. Although
an ordinary personal guarantor — not a mortgagor or pledgor — may demand the aforementioned exhaustion,
the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a
deferment of the execution of said judgment against him until after the properties of the principal debtor shall
have been exhausted to satisfy the obligation involved in the case.

Under the given facts of the case, a mortgage was executed as security for Brillantes’ debt, hence, defendant’s
reliance upon the aforementioned provision cannot be sustained, for what governs in this case are the
provisions under title XVI of the Civil Code concerning pledge and mortgages.

Hence, as mortgagor, Barbosa is not entitled to the exhaustion of the property of his principal debtor.

39
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

THE WHOLE ESSENCE OF REQUIRING THE FILING OF BOND FOR PERFECTION OF APPEAL IS
DEFEATED IF THE BOND ISSUED TURNED OUT TO BE INVALID DUE TO THE SURETY COMPANY'S
EXPIRED ACCREDITATION

29. Cawaling, et. al. v. Menese, et. al.

A.C. No. 9698, November 13, 2013
Peralta, J.

FACTS:
Complainants Cawaling, et. al. (Cawaling) were employees of Bacman Geothermal, Inc. (Bacman), who were
dismissed from their employment. They filed a complaint for illegal dismissal against Bacman. The Labor
Arbiter rendered a decision in favor of the complainants. Bacman appealed, and said appeal was raffled to the
Second Division of the NLRC where respondents Napoleon Menese, et. al. (Menese) were sitting as
Commissioners. There being a monetary award in the decision, Bacman posted a supersedeas bond issued by
Intra Strata Assurance Corporation (Intra Strata). Meanwhile, Intra Strata filed a Manifestation dated February
23, 2012 before the Regional Arbitration Branch of the NLRC. It stated therein that their certification of
accreditation and authority from the Supreme Court had expired on January 31, 2012, but their application for
renewal is pending before the Supreme Court.

Cawaling, in their Reply/Opposition to Respondent's Appeal, assailed the regularity of the surety bond. They
argued that considering that the certification of accreditation and authority given to Intra Strata had already
expired on January 31, 2012 as admitted in their Manifestation, it no longer has the authority to issue the surety
bond.

On the other hand, Menese raised that Intra Strata's filing of Manifestation informing the Commission of its
undertaking to submit the certification as soon as the certification is issued was a sign of good faith. Menese
also raised that it is a normal occurrence that accreditation of bonding companies takes weeks to process,
thus, the Commission allowed appeals secured by bonds issued by surety companies with pending application
for renewal of their authority to issue judicial bonds.

ISSUE:
Is the surety bond issued by Intra Strata on behalf of Bacman valid despite expiration of Intra Strata’s authority
to issue bonds?

RULING:
No, the surety bond is not valid. The rules are explicit that the filing of a bond for the perfection of an appeal is
mandatory and jurisdictional. The requirement that employers post a cash or surety bond to perfect their appeal
is apparently intended to assure workers that if they prevail in the case, they will receive the money judgment in
their favor upon the dismissal of the former’s appeal. However, the whole essence of requiring the filing of bond
is defeated if the bond issued turned out to be invalid due to the surety company's expired accreditation.

In the instant case, at the time of the filing of the supersedeas bond on behalf of Bacman, Intra Strata was no
longer an accredited surety company as it admitted in their Manifestation. Beyond January 31, 2012, Intra
Strata was no longer a reputable surety company possessing the authority to transact business relative to
issuing judicial bonds. The defense of good faith does not, in any way, render the issued bond valid. The fact
remains that due to the expired accreditation of Intra Strata, it has no authority to issue the subject bond. It was
improper to honor the appeal bond issued by a surety company which was no longer accredited by this Court.
Having no authority to issue judicial bonds not only does Intra Strata cease to be a reputable surety company –
the bond it likewise issued was null and void.

In addition, it must be emphasized that it is only the Supreme Court, through the Office of the Court
Administrator which can give authority and accreditation to surety companies to be able to transact business
involving judicial bonds.

40
 GUARANTY AND SURETYSHIP
Guaranty and Suretyship

THE RULE HOLDING SURETIES TO BE FAVORITES OF THE LAW, AND THEIR CONTRACTS TO BE
STRICTISSIMI JURIS, DOES NOT APPLY TO COMPENSATED SURETIES

30. Commissioner of Immigration v. Asian Surety & Insurance Company, Inc.

G.R. No. L-22552, January 30, 1969
Fernando, J.

FACTS:
This is an appeal by the Commissioner of Immigration on lower court’s decision which dismissed the complaint
of the Commissioner of Immigration to hold Asian Surety & Insurance Co., Inc. (Asian Surety) liable on the
bond issued to guarantee that Cua Giok Ke, a Chinese citizen admitted to the country temporarily as a non-
immigrant student, would actually depart from the Philippines on or before April 7, 1958, or within such period
the Commissioner of Immigration or his authorized representative may properly allow. After April 7, 1958, the
Bureau of Immigration extended the temporary stay of Cua Giok Ke, in several instances, without notifying the
defendant bonding company, Asian Surety.

Later, deportation proceedings were instituted. Plaintiff, simultaneous with the issuance of warrant of arrest,
informed the defendant, thru a letter, about the expiration of authorized stay of Cua Giok Ke at the end of the
1st semester of 1960-61 and his non-departure, which caused the bond’s term to be violated. The plaintiff
declared the confiscation of the bond and demanded payment of P7,000. Asian Surety took steps to cause Cua
Giok Ke’s surrender. Thereafter, Asian Surety requested the lifting of the order of confiscation, but such was
denied. The action on the bond followed.

The lower court found that the forfeiture of the bond was made to depend on the future of Cua Giok Ke to leave
the country upon expiration. It, however, found that Asian Surety should not be liable as it was not informed of
the extensions. Asian Surety did not deny that there was a breach of stipulation but claims that the various
extensions were made without its knowledge and consent. It claims that it was released from any obligation
under the bond.

ISSUE:
Can Asian Surety still be held liable under the bond considering the various extensions granted by the
Commissioner of Immigration made without its knowledge and consent?

RULING:
Yes, Asian Surety & Insurance Company, Inc. can be held liable. The rule holding sureties to be favorites of the
law, and their contracts to be strictissimi juris, does not apply to compensated sureties.

An accommodation surety acts without motive of pecuniary gain and, hence, should be protected against unjust
pecuniary impoverishment by imposing on the principal duties akin to those of a fiduciary. This cannot be said
of a compensated corporate surety which is a business association organized for the purpose of assuming
classified risks in large numbers, for profit and on an impersonal basis, through the medium of standardized
written contractual forms drawn by its own representatives with the primary aim of protecting its own interests.
Although calling themselves sureties, such corporations are in fact insurers, and in determining their rights and
liabilities as the rules peculiar to suretyship apply.

Here, Asian Surety admitted its failure to live up to the terms of the bond. Since it admitted the violation, it could
not thereafter in litigation seek refuge in the allegation that there were extensions granted of which it was not
notified. The obligation under such bond was the law between the parties. Hence, it must abide then by what
was covenanted. What it promised to do, something which it could comply with, should have been lived up to.
Since it was not true to its word, it must suffer the consequences.

Hence, Asian Surety should still be held liable.

41
 ANTICHRESIS
Antichresis

A MORTGAGEE IN POSSESSION STAND AS IF HE IS A CREDITOR IN THE CONTRACT OF

ANTICHRESIS; BY ANTICHRESIS, THE CREDITOR ACQUIRES THE RIGHT TO RECEIVE THE FRUITS
OF REAL PROPERTY BELONGING TO HIS DEBTOR, UNDER THE OBLIGATION OF APPLYING THEM
TO THE PAYMENT OF THE INTEREST, IF ANY, AND AFTERWARDS TO THE PRINCIPAL OF HIS
CREDIT

31. Vicente Diaz and Teodora Rubillos v. Secundino De Mendezona, et al.

G.R. No. 24824, January 30, 1926
Villamor, J.

FACTS:
Vicente Diaz and Teodora Rubillos commenced an action in the CFI for collection of a mortgage credit of P10,
000. Secundino De Mendezona was adjudged in default and court rendered judgment, ordering the sale of the
mortgaged properties. Before the expiration of the 90-day period granted by law for payment of the amount of
indebtedness, a writ of execution was issued and enforced by the sheriff, selling the mortgaged properties and
giving possession to Diaz and Rubillos in June 18, 1919. Upon motion of De Mendezona, the lower court
annulled all the proceedings under the writ including the sale (first) of the property.

Diaz and Rubillos appealed this order which was, however, affirmed. The record was remanded and
proceedings for the sale (second) of the mortgaged property pushed through and the same was sold to the
mortgage creditors. The court annulled the proceeding and the second sale to the mortgage creditor due to
irregularities. The plaintiffs appealed but the order was again affirmed. The record was remanded for the
second time upon which De Mendezona petitioned the court that the plaintiffs be ordered to render an
accounting from when they took possession of the properties in June 18, 1919. The court denied the motion
and for the third time, the property was ordered to be sold. The court approved and affirmed the sale and
adjudication of the properties in favor of the plaintiffs, Diaz and Rubillos. De Mendezona, hence, brings this
appeal on the aforementioned order.

ISSUE:
Did the defendant have a right to require the rendition of an accounting from the plaintiffs given that possession
of the mortgaged property was with the plaintiffs by virtue of sales that were annulled on account of
irregularities in the proceedings?

RULING:
Yes, the defendant has the right to require rendition of an accounting from the plaintiffs.

A purchaser at a foreclosure sale, which, by reason of some invalidity, fails to pass the interest of the
mortgagor acquires the interest of the mortgagee becomes, if he takes possession of the mortgaged property,
a mortgagee in possession, and the same has been held true as to one who takes possession under mesne
(intermediate) conveyances from a purchaser at a void foreclosure sale of a valid mortgage.

A mortgagee in possession, as held by the Supreme Court, stand as if he is a creditor in the contract of
antichresis and under the Civil Code, the creditor in antichresis does not acquire title to the property by the
failure of payment of the debt, nor can the debtor recover the possession and enjoyment thereof without first
paying the creditor all that he owes. On the other hand, the creditor is obliged to apply the fruits of the property
to the payment, first, of the interest upon the debt, if there is any, and then to the payment of the principal.
Hence, the duty of the creditor to render an account of said fruits to the debtor and the corresponding right of
the debtor that the said fruits be applied to the mortgage debt.

Here, the plaintiffs have been in possession of the mortgaged property since the date of the first sale which
was annulled and continued in said possession until the present time. This circumstance gave rise to the
right of the defendant- appellant to ask in turn that an account be rendered by the plaintiffs who had been in
possession of the mortgaged property by virtue of sales that were annulled on account of irregularities in the
proceedings.

42
 ANTICHRESIS
Antichresis

THE RIGHTS OF MORTGAGEE OF REAL PROPERTY WHO ACQUIRES POSSESSION OF THE

PROPERTY AND OF THE MORTGAGOR WHO HAD GIVEN CONSENT THERETO ARE GOVERNED BY
THE RULES APPLICABLE TO A CONTRACT OF ANTICHRESIS

32. Jose C. Macapinlac v. Francisco Gutierrez Repide, et al.

G.R. No. 18574, September 20, 1922
Street, J.

FACTS:
This is an appeal by plaintiff Jose Macapinlac assailing the order of the CFI which sustained a demurred
interposed by the defendant and at the same time dismissed the complaint.

Jose Macapinlac, plaintiff, was the owner of the Hacienda Dolores, a property located in Porac, Pampanga,
which was encumbered with certain debts and charges. The plaintiff was indebted to the Bachrach Garage &
Taxicab Company of Manila (Bachrach Garage) for an automobile purchased on credit and certain
accessories. Plaintiff executed 14 promissory notes payable to the Bachrach Garage. Contemporaneously with
the delivery of the notes and as guaranty, the plaintiff executed what on its face purported to be a deed of sale,
with privilege of repurchase, to be exercised on or before October 2, 1917. The transfer comprised properties
which included the Hacienda Dolores, subject to the encumbrances noted thereon. It named E.M. Bachrach as
transferee instead of the real creditor, Bachrach Garage. Defendant Francisco Repide acquired all the rights of
E.M. Bachrach in the property which was also conveyed to the latter. Repide sought to procure the certificate of
title to be transferred to his name. The matter was brought to the CFI which declared that the conveyance to
Bachrach was a contract of sale with pacto de retro and ordered a new certificate of transfer to be issued.
Repide has been in actual possession since August 24, 1917.

Macapinlac, thus, filed this case to secure a decree declaratory of his rights over the property, to nullify the
transfer to Repide and to recover the estate with damages. Macapinlac alleged that his apparent acquiescence
to the questioned transaction was procured by fraud. He also claims that since Repide had been in possession
of the property, this has been to his prejudice in the amount of P200, 000 per annum. Repide counters that the
Torrens certificate is unimpeachable and that the remedy to obtain relief has prescribed.

ISSUE:
Did the defendant Repide become the owner of the property and hence had acquired the rights pertaining to an
owner?

RULING:
No, Repide merely occupied a position of a mortgagee in possession with rights essentially the same as those
pertaining to a creditor in a contract of antichresis.

The Supreme Court held that contract of sale with pacto de retro, from which Repide based his rights over the
property, is actually a contract of mortgage, based on the real intention of the contracting parties. This is based
on the equitable doctrine, which provides that any conveyance intended as security for a debt will be held in
effect to be a mortgage, whether so actually expressed in the instrument or not, operates regardless of the form
of the agreement chosen by the contracting parties as the repository of their will.

It was held, instead, that estate of Repide occupies substantially the position of a mortgagee in possession.

The respective rights and obligations of the parties to a contract of antichresis, under the Civil Code, appear to
be similar and in many respects as incident to the position of a mortgagee in possession. In reference to which
the following propositions may be taken to be established, namely, that if the mortgagee acquires possession in
any lawful manner, he is entitled to retain such possession until the indebtedness is satisfied and the property
redeemed; that the non-payment of the debt within the term agreed does not vest the ownership of the property
in the creditor; that the general duty of the mortgagee in possession towards the premises is that of the
ordinary prudent owner' that the mortgagee must account for the rents and profits of the land, or its value for
purposes of use and occupation, any amount thus realized going towards the discharge of the mortgage debt;

43
that if the mortgagee remains in possession after the mortgage debt has been satisfied, he becomes a trustee
for the mortgagor as to the excess of the rents and profits over such debt; and, lastly, that the mortgagor can
only enforce his rights to the land by an equitable action for an account and to redeem.

From the complaint it appears that, even before acquiring the interest of Bachrach in the Hacienda Dolores, the
defendant Francisco Gutierrez Repide had taken over from the Archbishop of Manila a mortgage on the
property in favor of said Archbishop, paying therefor the sum of P35, 000; and it is inferred from the complaint
that Repide had probably discharged other liens on the property either before or after he acquired the interest
of Bachrach. If so, his executrix will be entitled to charge the plaintiff with the amount paid to free the property
from such liens, and to retain possession until all valid claims against the estate are satisfied, in obedience to
the maxim that he who seeks equity must do equity.

44
 ANTICHRESIS
Antichresis

AN ANTICHRETIC CREDITOR CANNOT ORDINARILY ACQUIRE BY PRESCRIPTION THE LAND

SURRENDERED TO HIM BY THE DEBTOR; AN ANTICHRETIC CREDITOR IS NOT A POSSESSOR IN
THE CONCEPT OF OWNER BUT MERE HOLDER PLACED IN POSSESSION OF THE LAND BY ITS
OWNERS

33. Hilario Ramirez v. Court of Appeals

G.R. No. L-38185, September 24, 1986
Gutierrez, Jr., J.

FACTS:
This is an appeal from the decision of the Court of Appeals which affirmed in toto the decision of the then Court
of First Instance of Rizal rendered in the petition for review of the decree of registration issued in Land
Registration to petitioners-spouses Hilario Ramirez and Valentina Bonifacio.

On September 15, 1959, petitioners-spouses filed an application for registration of a parcel of rice land in Rizal.
In their application for registration, they alleged that to the best of their knowledge and belief, there is no
mortgage or encumbrance of any kind whatsoever affecting said land and that they had acquired it by purchase
from certain Gregoria Pascual during the early part of the American regime but the corresponding contract of
sale was lost and no copy or record of the same was available. The Court found, however, that the applicants
are not the owners of the land sought to be registered. They were antichretic creditors - mere holders placed
in possession of the land by its owners as security for loan. The applicants were found guilty of fraudulent
misrepresentation and concealment when they declared that no other person had any claim or interest in the
said land.

ISSUE:
Can an antichretic creditor acquire land of the debtor by prescription?

RULING:
No. The petitioners are not possessors in the concept of owners, but mere holders placed in possession of land
by its owners. Thus, their possession cannot serve as a title for acquiring dominion.

The court below found that the petitioners are merely antichretic creditors. This finding and its factual bases
were affirmed by the Court of Appeals. Based on the evidence supporting this conclusion, this finding is binding
on us as it is not our duty to weigh evidence on this point all over again.

This court has on several occasions held that the antichretic creditor cannot ordinarily acquire by prescription
the land surrendered to him by the debtor. The petitioners are not possessors in the concept of owner, but
mere holders placed in possession of the land by its owners. Thus, their possession cannot serve as a title for
acquiring dominion (see Art. 540, Civil Code).

Note: In spite of the finding of an existing contract of antichresis between the parties, the two courts below did
not order the payment of the principal amount of mortgage. Under Article 2136 of the Civil Code, the debtor
cannot reacquire the enjoyment of the immovable without first having totally paid what he owes the creditor.

45
 REAL ESTATE MORTGAGE
Real Estate Mortgage

BASED ON THE REAL INTENTION OF THE CONTRACTING PARTIES, A CONVEYANCE (SALE)

ABSOLUTE ON ITS FACE MAY BE TREATED AS A MORTGAGE

34. Jose C. Macapinlac v. Francisco Gutierrez Repide, et al.

G.R. No. 18574, September 20, 1922
Street, J.

FACTS:
The case was instituted for the purpose of declaring plaintiff as owner of a real estate property and to nullify the
Torrens title, which was in respondent’s name. Plaintiff also wanted to recover possession over the property
with damages.

Plaintiff owned the real estate property located in Pampanga. Later, plaintiff acquired a loan to Bachrach
Garage & Taxicab for a price of an automobile. To secure payment, plaintiff executed 14 promissory notes: 11
in the hands of Bachrach and 3 in the hands of the payee of the company. As security and guaranty of
payment, plaintiff executed a deed of sale with a right to repurchase. More than a year later, respondent
acquired the rights of Bachrach over the properties by paying P5,000. Be it noted that during the conveyance of
rights, Repide knew of the purpose of the transfer of title to secure the debt owing to Bachrach by the plaintiff.
He also knew that the debt had been paid and that only a half of the debt existed. Afterwards, Repide caused
for the transfer of title into his name by making it appear that the purported sale was true. During those times,
respondent Repide was in actual possession of the property and was enjoying its fruits. Plaintiff filed a case to
recover possession in which the Court of First Instance decided in favour of respondent. Due to this, plaintiff
filed for a review of the case.

ISSUES:
Is the contract a sale de retro or a mortgage?

RULING:
The Supreme Court held that contract of sale with pacto de retro, from which Repide based his rights over the
property, is actually a contract of mortgage, based on the real intention of the contracting parties.

This is based on the equitable doctrine, which provides that any conveyance intended as security for a debt will
be held in effect to be a mortgage, whether so actually expressed in the instrument or not, operates regardless
of the form of the agreement chosen by the contracting parties as the repository of their will. When the
character of a mortgage has attached at the commencement of the transaction, so that the instrument,
whatever be its form, is regarded in equity as a mortgage, that character of mortgage must and will always
continue. If the instrument is in its essence a mortgage, the parties cannot by any stipulations, however
express and positive, render it anything but a mortgage, or deprive it of the essential attributes belonging to a
mortgage in equity. The debtor or mortgagor cannot, in the inception of the instrument, as a part of or collateral
to its execution, in any manner deprive himself of his equitable right to come in after a default in paying the
money at the stipulated time, and to pay the debt and interest ,and thereby to redeem the land from the lien
and encumbrance of the mortgage; the equitable right of redemption, after a default is preserved, remains in
full force, and will be protected and enforced by a court of equity, no matter what stipulations the parties may
have made in the original transaction purporting to cut off this right. Whenever a deed absolute on its face is
thus treated as a mortgage, the parties are clothed with all the rights, are subject to all the liabilities, and are
entitled to all the remedies of ordinary mortgagors and mortgagees. The grantee may maintain an action for the
foreclosure of the grantor's equity of redemption; the grantor may maintain an action to redeem and to compel
a reconveyance upon his payment of the debt secured. If the grantee goes into possession, he is in reality a
mortgagee in possession, and as such is liable to account for the rents and profits.

46
 REAL ESTATE MORTGAGE
Real Estate Mortgage

THERE IS A LEGAL PRESUMPTION OF SUFFICIENT CAUSE OR CONSIDERATION TO CONTRACTS

EVEN IF CAUSE IS NOT STATED THEREIN; VALIDITY OF MORTGAGE BETWEEN PARTIES NOT
AFFECTED BY ABSENCE OF REGISTRATION

35. Paz Samanilla v. Cenen Cajucom, et al.

G.R. No. L-13683, March 28, 1960
Reyes, J.B.L., J.

FACTS:
This is an appeal interposed by respondents Cenen A. Cajucom and Jose A. Cajucom from the order of the
Court of First Instance (CFI) in a Land Registration Case, requiring them to surrender Original Certificate of
Title within ten days either to the Register of Deeds or to the Court for the annotation of a mortgage executed
by them in favor of petitioner Paz Samanilla.

Cajucom executed a deed of real estate mortgage in favor of Samanilla. Before the mortgage could be
annotated and registered, Cajucom borrowed the original certificate of title from petitioner to whom it had been
delivered during the execution of the mortgage. Later the mortgagor refused to deliver said title to the
mortgagee for the proper annotation of the latter's right, contending that the mortgage was void ab initio for
want of consideration and that they cannot be compelled to surrender their title for registration of the mortgage
until they are given an opportunity to show its invalidity in an ordinary civil action, because registration is an
essential element of a real estate mortgage and the surrender of their title would complete this requirement of
registration. The CFI ordered Cajucom, et al. to surrender the title for purposes of registration.

ISSUES:
(1) Is the deed of mortgage void for having been executed without any consideration?
(2) Is registration an essential element of a real estate mortgage?

RULING:
(1) No. The presumption of the presence of consideration supporting a contract cannot be lightly set aside
especially when the contract itself states that consideration was given, and the same has been reduced into
a public instrument with all due formalities and solemnities as in this case.

There is a legal presumption of sufficient cause or consideration supporting a contract, even if such cause is
not stated therein (Art. 1354, Civil Code; Rule 123, Sec. 69 (r), Rules of Court). This presumption cannot be
overcome by a simple assertion of lack of consideration, especially when the contract itself states that
consideration was given, and the same has been reduced into a public instrument with all due formalities and
solemnities. To overcome the presumption of consideration, the alleged lack of consideration must be shown
by preponderance of evidence in a proper action.

(2) No. A mortgage, whether registered or not, is binding between the parties, registration being necessary only
to make the same valid against third persons (Art. 2125, Civil Code). In other words, registration only operates
as a notice of the mortgage to others, but neither adds to its validity nor converts an invalid mortgage into a
valid one between the parties.

Hence, the order appealed from is affirmed, without prejudice to appellants’ right to bring a separate action to
question the validity of the mortgage in question and ask for the cancellation of its registration. Costs against
appellants.

47
 REAL ESTATE MORTGAGE
Real Estate Mortgage

AN ACCOMMODATION MORTGAGE IS NOT NECESSARILY VOID SIMPLY BECAUSE THE

ACCOMMODATION MORTGAGOR DID NOT BENEFIT FROM THE SAME

THE WELL-SETTLED RULE THAT WITH RESPECT TO REDEMPTION PRICE, GENERAL BANKING ACT
AND P.D. NO. 694 SHALL PREVAIL OVER ACT NO. 3135 IS NOT APPLICABLE IF RIGHT OF
REDEMPTION IS EXERCISED BY AN ACCOMMODATION MORTGAGOR OR HIS/HER ASSIGNEE;
INDIVISIBILITY CONCEPT OF MORTGAGE DOES NOT APPLY TO THE RIGHT OF REDEMPTION OF AN
ACCOMMODATION MORTGAGOR AND HER ASSIGNEES

36. Spouses Belo v. Philippine National Bank

G.R. No. 134330, March 1, 2001
De Leon, Jr., J.

FACTS:
This is a petition for review on certiorari of the CA’s decision and resolution modifying RTC’s decision in a suit
for Declaration of Nullity of the Contract of Mortgage.

Eduarda Belo owned an agricultural land which she leased to spouses Marcos and Arsenia Eslabon
in connection with the said spouses’ sugar plantation business. To finance their business venture, the
spouses Eslabon obtained a loan from Philippine National Bank (PNB) secured by a real estate mortgage on
their own four residential houses as well as on the agricultural land owned by Eduarda, the latter’s consent
was obtained through a Special Power of Attorney (SPA) executed by Eduarda in favor of the spouses
which would in effect make Eduarda as an accommodation mortgagor.

The spouses Eslabon failed to pay their loan obligation, thus extrajudicial foreclosure proceedings were taken
against the properties whereby PNB emerged as the highest bidder. PNB informed Eduarda of the sale and the
latter’s one-year period to redeem the land. Eduarda eventually sold her right of redemption to spouses Enrique
and Florencia Belo. The latter spouses tendered payment for the redemption of the agricultural land equivalent
to the amount of the bid price of PNB plus interest and expenses, pursuant to Act. No. 3135. PNB rejected the
tender of payment contending that the redemption price should be the total claim of the bank on the date of the
auction sale and custody of property plus charges and accrued interests, pursuant to General Banking Act and
P.D. No. 694.

RTC held that mortgage and eventual foreclosure is valid. Same was affirmed by the CA. The latter, however,
provides that redemption price that must be paid should be the total claim of the bank. Hence, this petition. In
addition to the allegations on redemption price, Spouses Belo contends that accommodation mortgage is void
since their assignor (Eduarda) received no benefit from the said contract. PNB, on the other hand, contends
that to allow petitioners to redeem only the property belonging to their assignor would violate the principle of
indivisibility of mortgage contracts.

ISSUES:
(1) Is the accommodation mortgage void simply because the accommodation mortgagor did not benefit
from the same?
(2) In exercising right of redemption, should the accommodation mortgagor or his/her assignees pay
redemption price equivalent to the total claim/debt, pursuant to General Banking Act and P.D. no. 694?
(3) Is the indivisibility concept of mortgage violated if an accommodation mortgagor and his/her assignees
be allowed to exercise the right of redemption only over the property belonging to them?
RULING:
(1) No. An accommodation mortgage is not necessarily void simply because the accommodation mortgagor
did not benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085
of the New Civil Code which provides that "third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property." An accommodation mortgagor,
ordinarily, is not himself a recipient of the loan, otherwise that would be contrary to his designation as
such.

48
Further, it is not always necessary that the accommodation mortgagor be appraised beforehand of the
entire amount of the loan nor should it first be determined before the execution of the SPA. Mortgages
given to secure future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may stand as security if from
the four corners of the instrument the intent to secure future and other indebtedness can be gathered. A
mortgage given to secure advancements is a continuing security and is not discharged by repayment of
the amount named in the mortgage, until the full amount of the advancements are paid.

Here, Eduarda consented to be an accommodation mortgagor in the sense that she signed the SPA to
authorize respondents to execute a mortgage on her land. Petitioners themselves even acknowledged
that. The SPA form of the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda Belo's
land as additional collateral of the Eslabon spouses' loan from respondent PNB. Besides, Eduarda Belo
benefited, in signing the SPA, in the sense that she was able to collect the rentals on her leased property
from the Eslabons.

(2) No, Section 78 of the General Banking Act, as amended by P.D. No. 1828, is inapplicable to
accommodation mortgagors in the redemption of their mortgaged properties.

Pursuant to General Banking Act and P.D. No. 694, the debtor-mortgagors were required to pay as
redemption price their entire liability to the bank-mortgagee inasmuch as they were obligated to pay
their loan which is a principal obligation in the first place. However, accommodation mortgagors as
such are not in anyway liable for the payment of the loan or principal obligation of the debtor/borrower.
The liability of the accommodation mortgagors extends only up to the loan value of their mortgaged
property and not to the entire loan itself.

Hence, it is only just that they be allowed to redeem their mortgaged property by paying only the
winning bid price thereof (plus interest thereon) at the public auction sale, pursuant to Act. No. 3135.

(3) No. The indivisibility concept of mortgage does not apply to the right of redemption of an
accommodation mortgagor and her assignees.

Although it is true that a mortgage is indivisible as to the contracting parties and as to their successors
in interest (Article 1860, Civil code), it is not so with respect to a third person who did not take part in
the constitution thereof either personally or through an agent. The only liability of the accommodation
mortgagor is to the lien and not to the principal obligation secured by the mortgage. Such liability is not
direct but a subsidiary one.

From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-
creditor relationship. However, this relationship is wanting in this case in the sense that petitioners are
assignees of an accommodation mortgagor and not of a debtor-mortgagor.

49
 REAL ESTATE MORTGAGE
Real Estate Mortgage

THE RIGHT OF THE PURCHASER TO HAVE POSSESSION OF THE SUBJECT PROPERTY WOULD NOT
BE DEFEATED NOTWITHSTANDING THE PENDENCY OF A CIVIL CASE SEEKING THE ANNULMENT OF
THE MORTGAGE OR OF THE EXTRAJUDICIAL FORECLOSURE

37. Spouses De Vera v. Honorable Judge Agloro

G.R. No. 155673, January 14, 2005
Callejo, Sr., J.

FACTS:
Spouses Salvador F. De Vera and Feliza V. De Vera secured a loan in the amount of P1,200,000 from the BPI
Family Savings Bank, Inc. (the Bank, for brevity). To secure the payment thereof, the Spouses executed a Real
Estate Mortgage over their property located in Guiguinto, Bulacan. When Spouses De Vera defaulted in the
payment of the balance of their loan and failed to pay despite demands of the Bank, the latter filed a petition
with the ex-officio sheriff of the Regional Trial Court (RTC) for the extrajudicial foreclosure of the real estate
mortgage. At the public auction, the Bank was declared the highest bidder. The Sheriff thereafter executed a
certificate of sale in favor of the Bank. The Bank filed in the Office of the Register of Deeds an affidavit for the
consolidation of its ownership over the property. Thus, TCT No. T-133862 was issued in the name of the Bank.

Spouses De Vera filed a Complaint for the nullification of the real estate mortgage against the Bank and the
Sheriff with the RTC, as well as the extrajudicial sale of the property at public auction. Spouses De Vera filed in
LRC Case No. P-97-2000 an Urgent Motion to Suspend Proceedings to await the resolution of Civil Case No.
109-M-2000 or for the consolidation of the two cases. The trial court denied the motion of the Spouses. Citing
the case of Vda. de Zaballero v. CA, the trial court ruled that the purchaser of the foreclosed property, upon ex
parte application and the posting of the required bond, has the right to acquire possession of the foreclosed
property during the 12-month redemption period. According to the trial court, this is sanctioned under Section 7
of Act No. 3135, as amended by Act No. 4118. The trial court also declared that considering that the
redemption period had already expired, the Bank as purchaser, can, and with more reason, demand for a writ
of possession. Aggrieved, Spouses De Vera filed a Petition for Certiorari and mandamus. The CA ruled that the
respondent judge did not act with grave abuse of discretion when he denied the petitioners' motion to suspend
proceedings. It reasoned that since the subject parcel of land (with all its improvements) was not redeemed
within one (1) year from the registration of the extrajudicial foreclosure sale, it follows that the bank, as
purchaser thereof, acquired an absolute right to the writ of possession.

ISSUE:
Can a question regarding the validity of the mortgage or its foreclosure be a legal ground for refusing the
issuance of a writ of execution?

RULING:
No. As a rule any question regarding the validity of the mortgage or its foreclosure cannot be a legal ground for
refusing the issuance of a writ of execution. The right of the purchaser to have possession of the subject
property would not be defeated notwithstanding the pendency of a civil case seeking the annulment of the
mortgage or of the extrajudicial foreclosure. Indeed, under Section 8 of Act No. 3135, even if the mortgagor
files a petition assailing the writ of possession granted to the buyer and the sale at public auction within thirty
(30) days from the issuance of a writ of possession in favor of the buyer at public auction of the property, and
the court denies the same, the buyer may appeal the order of denial. However, the buyer at public auction
remains in possession of the property pending resolution of the appeal. It was consistently ruled that it is the
ministerial duty of the court to issue writ of possession in favor of the purchaser in a foreclosure sale. The trial
court has no discretion on this matter.

In the case of Philippine National Bank v. Adil, it was held that after the redemption period has expired, the
purchaser of the property has the right to be placed in possession thereof. Accordingly, it is the inescapable
duty of the Sheriff to enforce the writ of possession especially as in this case, a new title has already been
issued in the name of the purchaser.

50
 REAL ESTATE MORTGAGE
Real Estate Mortgage

IN ORDER FOR THE DRAGNET CLAUSES TO SECURE FUTURE AND OTHER LOANS, THE LOANS
THEREBY SECURED MUST BE SUFFICIENTLY DESCRIBED IN THE MORTGAGE CONTRACT

38. Philippine National Bank v. Heirs of Benedicto and Azucena Alonday

G.R. No. 171865, October 12, 2016
Bersamin, J.

FACTS:
In 1974, the Spouses Alonday obtained an agricultural loan by mortgaging their property in Davao covered by
OCT No. P-3599. Later, the Spouses Alonday obtained a commercial loan by mortgaging their residential lot
covered by TCT No. T-66139. Notably, the mortgage contracts both contained a dragnet clause, which state
that the “mortgage shall also stand as security for said obligations and any and all other obligations of the
Mortgagor to the Mortgagee of whatever kind and nature, whether such obligations have been contracted
before, during or after the constitution of this mortgage.”

The second loan was fully paid. The first loan, however, was not. Hence, petitioner foreclosed the property
mortgaged as a security for the first loan. But since the proceeds of the sale were not sufficient to cover the
balance of the first loan, petitioner also foreclosed the property mortgaged to secure the second loan.

The Spouses Alonday filed a complaint against petitioner recover damages and attorneys fees, averring that
the foreclosure was illegal. The RTC and CA ruled in favor of the Spouses Alonday.

ISSUE:
Could the dragnet clause in the first mortgage contract for the security of the first loan authorize the foreclosure
of the property under the mortgage to secure a second loan despite the full payment of the second loan.

RULING:
No. The dragnet clause in the first mortgage contract could not authorize foreclosure of the property under
mortgage to secure a second loan since the two mortgages and two loans are distinct from one another.

Indeed, that all-embracing or dragnet clauses have been recognized as valid means to secure debts of both
future and past origins. Even so, we have likewise emphasized that such clauses were an exceptional mode of
securing obligations, and have held that obligations could only be deemed secured by the mortgage if they
came fairly within the terms of the mortgage contract. For the all-embracing or dragnet clauses to secure future
loans, therefore, such loans must be sufficiently described in the mortgage contract. If the requirement could be
imposed on a future loan that was uncertain to materialize, there is a greater reason that it should be applicable
to a past loan, which is already subsisting and known to the parties.

Considering that the agricultural loan had been pre-existing when the mortgage was constituted on the property
covered by TCT No. T-66139, it would have been easy for the petitioner to have expressly incorporated the
reference to such agricultural loan in the mortgage contract covering the commercial loan. But the petitioner did
not. Being the party that had prepared the contract of mortgage, its failure to do so should be construed that it
did not at all contemplate the earlier loan when it entered into the subsequent mortgage.

Moreover, the mortgage contracts executed by the Spouses Alonday were contracts of adhesion exclusively
prepared by the petitioner. A contract of adhesion, albeit valid, becomes objectionable only when it takes undue
advantage of one of the parties the weaker party- by having such party just adhere to the terms of the contract.
Hence, the mortgage contracts in this case should be construed strictly against the petitioner as the party who
had drafted the same.

51
 REAL ESTATE MORTGAGE
Real Estate Mortgage

A BUILDING BY ITSELF MAY BE MORTGAGED APART FROM THE LAND ON WHICH IT HAS BEEN
BUILT

39. Prudential Bank v. Panis

G.R. No. 50008, August 31, 1987
Paras, J.

FACTS:
This is a petition for review on certiorari on CFI’s decision declaring that the deeds of real estate mortgage
executed by Spouses Fernando and Teodula Magcale in favor of Prudential bank are null and void.

Spouses Magcale obtained a P70,000 loan from Prudential Bank secured by Real Estate Mortgage on a 2-
storey building with warehouses which includes the right of occupancy on the lot where the above property is
erected. The agreement contains a rider provision which states that in the event the Sales Patent on the lot
applied for by the Mortgagors is released or issued by the Bureau of Lands, the Mortgagors hereby authorize
the Register of Deeds to hold the Registration of same until this Mortgage is cancelled, or to annotate this
encumbrance on the Title upon authority from the Secretary of Agriculture and Natural Resources, which title
with annotation, shall be released in favor of the herein Mortgagee.

Mortgagee (Prudential Bank) was at the outset aware of the fact that the mortgagors have already filed a
Miscellaneous Sales Application over the lot, possessory rights over which, were mortgaged to it.

Plaintiffs secured an additional loan from Prudential Bank for P20,000. To secure the additional loan, they
executed another deed of Real Estate Mortgage over the same properties previously mortgaged.

On April 24, 1973, the Secretary of Agriculture issued Miscellaneous Sales Patent No. 4776 over the parcel of
land, possessory rights over which were mortgaged to defendant Prudential Bank, in favor of plaintiffs. The real
estate mortgage was commenced by the Bank because of Spouses Magcale's failure to settle their obligations.
The auction sale was pushed through despite written letter by defendants' counsel to desist from the
foreclosure sale and thereafter the Bank was declared the highest bidder.

ISSUE:
Can a valid real estate mortgage be constituted on the building erected on the land belonging to another?

RULING:
Yes. The inclusion of building separate and distinct from land in Art. 415 can only mean that a building is by
itself an immovable property. While a mortgage of land necessarily includes buildings, still a building by itself
may be mortgaged apart from the land on which it has been built. Such a mortgage would still be a real estate
mortgage for the building will still be considered an immovable property even if dealt with separately and apart
from the land. Possessory rights thus over a building before title is vested on the grantee may be validly
transferred or conveyed as in a deed of mortgage.

It is therefore without question that the original mortgage was executed before the issuance of the final patent
and before the government was divested of its title to the land, an event which takes effect only on the issuance
of the sales patent and its subsequent registration in the Office of the Register of Deeds. It is evident that the
mortgage executed by private respondent on his own building which was erected on the land belonging to the
government is to all intents and purposes a valid mortgage.

But it is a different matter, as regards the second mortgage executed. It is evident that such mortgage executed
after the issuance of the sales patent and of the Original Certificate of Title, falls squarely under the
prohibitions/ restrictions on encumbrance or alienation stated in Sections 121, 122 and 124 of the Public Land
Act and Section 2 of Republic Act 730, and is therefore null and void.

52
 REAL ESTATE MORTGAGE
Real Estate Mortgage

AN AGREEMENT PROHIBITING SUBSEQUENT MORTGAGES IS VALID

40. Philippine Industrial Co. v. El Hogar Filipino

G.R. No. 20482, October 25, 1923
Villamor, J.

FACTS:
Defendants Salvador Vallejo executed a mortgage in favor of his co-defendant, El Hogar Filipino, upon a
certain real estate belonging to him. This mortgage contains a stipulation that the mortgagor cannot create any
legal right upon the realty in favor of a third person, and that in case the debt falls due for non-compliance, on
the part of the debtor, with any of the obligations mentioned in the contract, El Hogar Filipino is authorized to
proceed to the extrajudicial sale of the mortgaged property at a public auction.

After said mortgage was noted as a lien and encumbrance on the certificate of title of the property mortgaged,
a document was presented to the register of deeds whereby the debtor made a second mortgage in favor of
the plaintiff corporation, Philippine Industrial Co. The register of deeds refused to register said second
mortgage on the ground that it did not appear therein that El Hogar Filipino ever consented to the registration,
in accordance with the prohibiting clause of the mortgage previously recorded; and an administrative
proceeding having been instituted against the action of the register of deeds, the trial court ruled that the
validity or nullity of the prohibiting clause in question must be litigated in an ordinary action.

The first mortgage having fallen due, according to the terms thereof, El Hogar Filipino advertised the sale at
public auction of the property mortgaged and the plaintiff then brought this action, wherein it is prayed that the
prohibiting clause above mentioned be declared void. The trial court held that the prohibition to register the
second mortgage executed by the defendant Salvador Vallejo is of no effect and ordered the register of deeds
to register the same, and declared injunction previously issued to be final.

ISSUE:
Is the stipulation prohibiting the subject property from being subsequently mortgaged valid?

RULING:
Yes. It is evident that the mortgagor may obtain subsequent loans by means of subsequent and successive
mortgages of his property, but when the debtor voluntarily binds himself not to make any second mortgage
without the consent of the mortgagee, there’s no reason whatsoever why said debtor should not be bound to
comply with all the conditions of the contract.

Article 107 of the Mortgage Law, which expressly permits the registration of a subsequent mortgages executed
upon a real state previously mortgaged under the Mortgage Law, even if there is a stipulation that no other
mortgage should be made, has no application here because this is a case of a property registered in
accordance with the Torrens system prescribed by Act No. 496, Section 124 of which provides that the system
of registration established by the laws in force on the matter in the Philippine Islands should continue to be
applicable to properties not registered in accordance with this law, with the modifications established therein.

In addition, there exists no law prohibiting such kind of stipulation; and the debtor, having agreed not to make
any second mortgage without the consent of the creditor, is bound thereby.

Hence, the stipulation prohibiting the subject property from being subsequently mortgaged is valid.

53
 REAL ESTATE MORTGAGE
Real Estate Mortgage

A MORTGAGEE MAY INSTITUTE AGAINST THE MORTGAGOR EITHER A PERSONAL ACTION FOR
DEBT OR A REAL ACTION TO FORECLOSE THE MORTGAGE, BUT NOT BOTH

41. Spouses Pedro and Concepcion Danao v. Court of Appeals

G.R. No. L-48276, September 30, 1987
Paras, J.

FACTS:
These are two petitions for review on certiorari of the Court of Appeals (CA)’ decision affirming the CFI’s
decision.

Spouses Pedro and Concepcion Danao applied for a commercial credit line of P20,000 with the People’s Bank
and Trust Company (PBTC). The application having been granted, they executed a Commercial Credit
Agreement and a Mortgage, given as a security was a parcel of land in Baguio. One of the pertinent provisions
in the contract provides that in the event that mortgagor(s) should fail to pay, the mortgagee shall have the
right, at its election, to foreclose the mortgage extrajudicially. The spouses availed of the credit facility. The last
promissory note (related to the credit line) signed by Pedro was fully paid on July 5, 1968.

In 1963, it appears that Antonio Co Kit and Pedro signed a promissory note for P10,000 and agreed to pay the
note, jointly and severally. However, later, they failed to pay the balance, thus the bank sent a demand letter to
each of them (Co and Pedro). The demand being unheeded, PBTC filed a complaint but same was dismissed
for lack of interest on plaintiff’s part. Hence, PBTC informed Pedro that it shall foreclose the land and the same
will be sold at a public auction. However, PBTC later informed BPI (its successor) that Spouses Danao already
paid the obligation, thereby cancelling the mortgage. Due to this, Spouses Danao filed a complaint for damages
against BPI. The court hereby favored of the spouses and the same was affirmed by the CA.

Hence, these petitions. One of BPI’s contentions is the CA’s error in holding that PBTC, by filing a civil
complaint against Co Kit and Pedro for the collection "had waived" the remedy of extra-judicial foreclosure of
mortgage, and "such complaint barred the subsequent petition for foreclosure of mortgage."

ISSUE:
Does filing a complaint for the collection of promissory notes waive the remedy of extra-judicial foreclosure of
mortgage securing the said promissory notes?

RULING:
Yes. A mortgage creditor may elect to waive his security and bring, instead an ordinary action to recover the
indebtedness with the right to execute a judgment thereon on all the properties of the debtor including the
subject matter of the mortgage. However, the above rule is subject to the qualification that if he fails in the
remedy by him elected, he cannot pursue further the remedy he has waived.

In other words, the creditor in his action may make two demands - the payment of the debt and the foreclosure
of the mortgage. But both demands arise from the same cause, the non-payment of the debt, and, for that
reason, they constitute a single cause of action. Though the debt and the mortgage constitute separate
agreements, the latter is subsidiary to the former, and both refer to one and the same obligation.
Consequently, there exists only one cause of action for a single breach of that obligation. By allowing the
creditor to file two separate complaints simultaneously or successively, in effect, it be authorizing him plural
redress for a single breach of contract at much cost to the courts and with so much vexation and oppression to
the debtor.

Evidently, the prior recourse of the creditor bank in filing a civil action against the Spouses Danao and
subsequently resorting to the complaint of foreclosure proceedings, are not only a demonstration of the
prohibited splitting up of a cause of action but also of the resulting vexation and oppression to the debtor.

54
 REAL ESTATE MORTGAGE
Real Estate Mortgage

IN EXTRAJUDICIAL FORECLOSURE, WHERE THE PROCEEDS OF THE SALE ARE INSUFFICIENT TO

COVER THE DEBT, THE MORTGAGEE IS ENTITLED TO CLAIM THE DEFICIENCY FROM THE DEBTOR

PRIOR TO THE COMPLETION OF THE FORECLOSURE, THE MORTGAGOR IS LIABLE FOR THE
INTEREST ON THE MORTGAGE

42. Development Bank of the Philippines v. Jovencio and Avelina Zaragoza

G.R. No. L-23493, August 23, 1978
Antonio, J

FACTS:
This is an appeal from CFI’s judgment.

Zaragoza’s obtained a loan of P30,000 from DBP which was secured by a real estate mortgage. It was
stipulated that upon failure to pay the amortization due, DBP shall have the authority to foreclose extrajudicially
the property, pursuant to R.A. No. 3135, as amended. Conformably to this, upon breach of the mortgage
conditions, DBP foreclosed extrajudicially the mortgage and the Sheriff posted the requisite notice of the sale at
public auction. Later, the property was sold at public auction to DBP, after numerous transfers made of the date
of the sale upon requests of the Zaragoza’s. After applying the proceeds of the sale to satisfy the outstanding
balance of the indebtedness in the amount of P28,914.36, it was found the Zaragoza’s still owed DBP in the
amount of P7,779.36.

Suit for the deficiency with preliminary attachment was filed by DBP. In their answer, Zaragoza’s averred that
after an extrajudicial foreclosure, no deficiency judgment would lie and that from the date of the foreclosure to
the sale, the mortgagor is no longer liable for the interest on the loan since DBP held in abeyance the sale for 4
years, thus, they alone should suffer the consequences of delay; and that the debtor's liability in judicial
foreclosures is limited to the amount due at the time of the foreclosure and, therefore, such should also apply to
extrajudicial foreclosures.

The aforesaid contentions of appellants were overruled by the trial court. Hence, this appeal.

ISSUE:
(1) Is the mortgagee entitled to claim the deficiency in extrajudicial foreclosure of mortgage?
(2) Are additional interests properly chargeable on the balance of the indebtedness during the period from
notice of sale to actual sale?

RULING:
(1) Yes. In extrajudicial foreclosure of mortgage, where the proceeds of the sale are insufficient to cover the
debt, the mortgagee is entitled to claim the deficiency from the debtor. Under the Mortgage Law (R.A. No.
3135), the mortgagee has the right to claim for the deficiency resulting from the price obtained in the sale of
the real property at public auction and the outstanding obligation. If the legislature intended to foreclose the
right of a creditor to sue for deficiency resulting from the foreclosure of the security to guarantee the
obligation, it so expressly provides.

Thus, the mortgagee is entitled to claim the deficiency in extrajudicial foreclosure of mortgage.

(2) Yes, prior to the completion of the foreclosure, the mortgagor is liable for the interest on the mortgage. In
judicial and extrajudicial foreclosures, the "foreclosure" is not complete until the Sheriff's Certificate is
executed, acknowledged and recorded. In the absence of a Certificate of Sale, no title passes by the
foreclosure proceedings to the vendee. It is only when the foreclosure proceedings are completed, and the
mortgaged property sold to the purchaser that all interests of the mortgagor are cut off from the property.

In addition, here, each transfer is covered by a corresponding agreement for postponement, executed jointly
by contracting parties. Certainly, under such circumstances, the Zaragoza’s cannot take advantage of the
delay, which was their own making, to the prejudice of the other party.

55
 REAL ESTATE MORTGAGE
Real Estate Mortgage

CO-OWNERS CANNOT COMPEL REDEMPTION OF WHOLE PROPERTY FOR THEIR RIGHTS ARE
LIMITED TO THEIR RESPECTIVE SHARES

43. Pedro Dimasacat and Ernesto Robles v. Court of Appeals

G.R. No. L-26575, February 27, 1969
Concepcion, C.J.

FACTS:
This is a petition for review of the decision of the CA reversing that of the CFI which dismissed the complaint of
petitioners Robles and Dimasacat, denying them of their right to repurchase the entire property subject of the
case. Lagdameo was the registered owner of four (4) contiguous parcels of land situated in the Tagkawayan,
Quezon. He mortgaged said land to the Philippine National Bank (PNB), subject to the latter's right of
extrajudicial foreclosure should he default in payment. The deed of mortgage was duly registered and
annotated. A year later, Lagdameo sold a portion of the lot to Robles and another portion to Dimasacat. The
notarial deeds attesting to these sales were not registered. Due to non-payment of the debt to PNB, the
mortgage was foreclosed extra-judicially and sold at public auction to PNB.

After the lapse of the statutory period of one-year for the redemption of the property, the Sheriff executed the
deed of absolute sale to the Bank. Prior to the expiration of said period of redemption, Robles and Dimasacat
urged Lagdameo to repurchase the land to prevent it, particularly the portions sold to them, from becoming
property of the Bank, but Lagdameo told them that he would effect the redemption at any time he had money
therefor. Thereupon, Robles and Dimasacat offered to repurchase the property from the Bank, which rejected
the offer. This prompted the petitioners to commence a civil case to enforce their right to repurchase said
property. The CFI dismissed their complaint. The CA reversed the CFI’s decision holding that they can only
repurchase the portion of the land sold to them. Plaintiffs maintain that, having been held by the CA to be
"successors in interest of the mortgage debtor, in part of the property " said Court should have declared them
entitled to repurchase the entirety of said property, in line with Magno v. Viola, instead of limiting their right of
redemption to the portions sold by Lagdameo to each of them.

ISSUE:
Is an owner of a portion of a property entitled to redeem the entire property?

RULING:
No, the owner of a portion of a property is not entitled to redeem the same in its entirety.

It is true that our decision in Magno v. Viola made reference to some American cases in which it was held that
"one who owns a separate part of the land sold" at public auction "or has some interest therein," or "successors
in part" of said land "could not redeem at all, except redeeming the whole," but this was not the question
adjudicated in that case. On the contrary, it was held therein that said lawyer or his assignee, "had no right to
redeem the shares of his former clients" in the land in question, the buyer of said shares being "a part owner" of
said land. This case also pointed out that, although a "co-tenant may redeem the entire joint estate ... in so
doing he will be deemed to have acted for the benefit of all the co-tenants."

This point is particularly relevant to the case at bar, for plaintiffs had bought merely small portions of the land of
Lagdameo and had, at best, a personal right to demand from him a status of co-ownership over said property,
because the deeds of sale in their favor had not been registered, and the portions covered by said deeds had
not been surveyed, so that the precise boundaries thereof had not been delimited by metes and bounds, much
less segregated from the mass of Lagdameo's property. Hence, even if plaintiffs had succeeded in redeeming
the whole land, Lagdameo could have asserted the right to repurchase from them so much of the land as was
not included in said deeds of sale in their favour.

Thus, even if plaintiffs had managed to redeem the whole property, so much thereof as exceeded the portions
sold to them by Lagdameo could have been repurchased from them by Lagdameo and the title to said property
has meanwhile reverted fully to the latter, it follows that petitioners are now entitled to no more than the
consummation of the sales made by him in their favor.

56
 REAL ESTATE MORTGAGE
Real Estate Mortgage

RIGHT OF SUBSEQUENT PURCHASERS ARE SUBORDINATE TO LEVY OR ATTACHMENT

45. Ofelia Villavicencio, et al., v. Alejandro Mojares and Rodolfo Payumo

G.R. No. 142648, February 27, 2003
Quisumbing, J.

FACTS:
This petition for review seeks to set aside the decision of the CA denying the motion for reconsideration of
petitioners, the Villavicencios, and affirming the decision of the RTC which dismissed petitioners’ complaint for
annulment of sheriff’s sale and damages against respondents Mojares and Payumo.
nrob1es virtua1 1aw 1ibrary
Spouses Martell owned a house and lot located in Quezon City. They mortgaged the same to secure a loan
from the Home Bankers Savings and Trust Company (HBSTC). When the spouses defaulted, the mortgage
was foreclosed, and HBSTC acquired the subject house and lot at an auction sale. Meantime, the spouses
negotiated the sale of their hocked properties with Jose Villavicencio who paid earnest money. The parties
executed a deed of sale with assumption of obligation and presented this to HBSTC. Accordingly, HBSTC
executed in favor of Sps. Martell a Certificate of Redemption upon redemption of the subject property.

Meanwhile, Mojares, who had previously sued Sps. Martell in a civil case, had secured a writ of attachment on
the subject house and lot which was annotated on the property’s title. A decision was rendered in favor of
Mojares, and a writ of execution was issued. Pursuant thereto, the house and lot were set to be sold. Jose
Villavicencio timely filed an affidavit of third-party claim. Nonetheless, the execution sale proceeded with
Mojares as the highest and successful bidder. No redemption having been exercised, a Sheriff’s Certificate of
Sale was executed and was annotated. Petitioners, who are the legal heirs of Villavicencio, filed a complaint
for annulment of the sheriff’s sale.

Petitioners argue that the sheriff’s execution sale was null and void for lack of written notice of sale to the
judgment debtor. They also contended that that the levy/attachment is not binding on them since it was not
annotated in the copy of the title when the Villavicencios purchased the property. On the other hand,
respondents contend that the execution sale was valid as there was personal service of the notice of sale and
publication prior to the sale. They further claim that that the levy on attachment was duly recorded in the Office
of the Register of Deeds of Quezon City.

ISSUES: 1aw library

1. Is the sheriff’s execution sale invalid for lacking personal notice to the mortgagor?
2. Is the attachment/levy on the subject property binding on petitioners?

RULING:
1. No, the sheriff execution sale is valid.

It is well settled that in extrajudicial foreclosure sale, personal notice to the mortgagor is not necessary as
publication of notice in newspaper is more than sufficient compliance.

The CA found that petitioners’ arguments are mere unsubstantiated allegations not borne out by the evidence.
Foreclosure proceedings have in their favor the presumption of regularity and the burden of the evidence to
rebut the same is on the petitioners. In this case, petitioners have failed to prove the lack of service of notice of
sale. The Sheriff’s return, in itself, does not establish the non-compliance with the service of written notice of
sale. At most, it only shows the detailed proceedings of the service of the writ of execution. The fact that no
service of the written notice of sale is mentioned therein would not negate actual service of written notice of
sale to the judgment debtor.

2. Yes, the attachment is binding on the petitioners.

Since the attachment/levy preceded the sale made to petitioners, it necessarily follows that the attachment/levy
is a superior lien imposed on the property and subsequent purchasers are subject to such lien. The priority

57
enjoyed by the first levy on execution extended with full force and effect to the buyer at the auction sale
conducted by virtue of such levy. Further, an auction or execution sale retroacts to the date of levy of the lien of
attachment.

Thus, between petitioners and Mojares, Mojares has a superior right as the purchaser judgment creditor over
the right of petitioners who bought the property subject to the levy/attachment. In fine, the levy/attachment is
binding on petitioners as their right therein is subordinate to that of respondent Mojares.

58
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

A STIPULATION THAT A THE PROPERTY SHALL BE SOLD IF THE DEBT IS NOT PAID IS NOT VOID
PER SE IF SUCH SALE IS CONFIRMED BY THE DEBTOR

46. Juan Dalay v. Bernardo Aquiatin and Proceso Maximo

G.R. No. 20132, September 22, 1923
Romualdez, J.

FACTS:
Villarin obtained a loan from Gomez evidenced by a document (Ex. A), with a stipulation that if the former
cannot return the debt when the date agreed upon comes, that the same shall be paid with the six parcels of
land (all owned by Villarin) given as security, including the house and lot. When Villarin failed to pay the debt,
Gomez executed another document (Ex. C), in favor of Dalay for the sale and transfer of the lands of Villarin in
accordance with Ex. A and the title deeds of the aforesaid lands hereto attached.

Villarin, in an affidavit (Ex. B), acknowledged that the title to and possession of the aforesaid lands had been
transferred in a real and absolute sale to Eugenio Gomez. Fifteen days later, Villarin contracted a debt in favor
of Aquiatin (Aquiatin) for which he gave the note set forth in the latter’s complaint in a civil case filed in Laguna
CFI. After the judgment rendered in that case in favor of Aquiatin became final, execution was issued and
levied upon the six parcels of land.

Dalay brought this action against Aquiatin and the deputy sheriff to have himself declared owner of said lands,
and to forever prohibit the defendants from performing any act tending to carry out the attachment and
execution sale of said realties. In his answer, Aquiatin alleges that the sale upon which Dalay relies is
simulated and fraudulent, and that said plaintiff had not had exclusive possession of, nor title to, the said lands.

The trial court ruled that plaintiff had no cause of action for the reason that he was not, nor could he have been,
the owner of the properties given to him as security of the debt, and dismissed the complaint, ordering the
execution to be carried out upon the lands in question, and sentencing the plaintiff to pay the costs.

ISSUE:
Is the stipulation (in Ex. A) providing for the payment of the debt with the property given as security violative of
the provisions of the Civil Code against pactum commissorium?

RULING:
No, the said stipulation does not violate the provisions of the Civil Code against pactum commissorium.

Art. 1859 of the Civil Code prohibits two things: (a) the appropriation by the creditor of the properties pledged or
mortgaged; and (b) the disposition thereof by the same creditor.

The stipulation contained in Ex. A above does not authorize the creditor to appropriate the property. What it
says is merely a promise to pay the debt with such properties, if at its maturity it is not satisfied. It is merely a
promise made by the debtor to assign the property given as security in payment of the debt, which promise is
accepted by the creditor.

There is no doubt that a debtor may make an assignment of his properties in payment of a debt. (Art. 1175,
Civil Code.) And the assignment is not made unlawful by the fact that said properties are mortgaged, because
the title thereto remains in the debtor; nor is a promise to make such an assignment in violation of the law.

59
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

A VALID DACION EN PAGO IS DIFFERENT FROM A CONTRACT WHICH CONSTITUTES PACTUM

COMMISSORIUM

47. Spouses Roberto and Adelaida Pen v. Spouses Santos and Linda Julian
G.R. No. 160408, January 11, 2016
Bersamin, J.

FACTS:
This is a petition for review on certiorari seeking to set aside the decision of the CA which affirmed the RTC’s
decision declaring the deed of sale over Spouses Julian’s property void and inexistent.

Sps. Julian obtained three loans from Adelaida Pen (Adelaida), the total of which amounted to P110,000 with
6% interest per month. As security for the said loan, Sps. Julian executed a real estate mortgage over their
property under the name of Santos Julian. The spouses failed to pay when the loans became due and
demandable. To avoid the foreclosure of their property, they offered their mortgaged property as payment in
kind to which Adelaida agreed. Subsequently, the latter required the spouses to sign a one-page document
which was purportedly an “Absolute Deed of Sale.” Said document did not contain any consideration, and was
undated, unfilled, unnotarized.

Thereafter, Linda Julian (Linda) offered to pay appellant Adelaida the amount of Php 150,000. The latter
refused to accept the offer and demanded that she be paid the amount of Php 250,000. Unable to meet the
demand, Linda desisted from the offer and requested that she be shown the land title which she conveyed to
Adelaida, but the latter refused. Upon verification with QC Registry of Deeds, she was informed that the title to
the mortgage property had already been registered in the name of Adelaida.

Spouses Julian filed a suit for the cancellation of sale and title and for the recovery of possession of the land.
The complaint alleged that Adelaida, through obvious bad faith, unilaterally filled up, and caused to be
notarized the Deed of Sale earlier signed by the spouses.

The RTC ruled in favor of Spouses Julian. It concluded that the parties had not agreed on the consideration for
the sale at the time they signed the deed of sale; that in the absence of the consideration, the sale lacked one
of the essential requisites of a valid contract and hence the contract is void.

On appeal, the CA affirmed the RTC decision that the deed of sale is void, but not because of lack of
consideration. That the deed of sale is void because having been executed at the same time as the real estate
mortgage, which rendered the sale as a prohibited pactum commissorium.

ISSUE:
Was there pactum commissorium present in the execution of the deed of sale?

RULING:
Yes, there was pactum commissorium as the thing appropriated by the debtor to the creditor was given by way
of mortgage and the latter is prohibited from disposing of them.

The elements for pactum commissorium to exist are as follows, to wit: (a) that there should be a pledge or
mortgage wherein property is pledged or mortgaged by way of security for the payment of the principal
obligation; and (b) that there should be a stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period. The
first element was present considering that the property of the respondents was mortgaged by Linda in favor of
Adelaida as security for the farmer's indebtedness. As to the second, the authorization for Adelaida to
appropriate the property subject of the mortgage upon Linda's default was implied from Linda's having signed
the blank deed of sale simultaneously with her signing of the real estate mortgage. The haste with which the
transfer of property was made upon the default by Linda on her obligation, and the eventual transfer of the
property in a manner not in the form of a valid dacion en pago ultimately confirmed the nature of the transaction
as a pactum commissorium.

60
The petitioners have theorized that their transaction with the respondents was a valid dacion en pago by
highlighting that it was Linda who had offered to sell her property upon her default. Their theory cannot stand
scrutiny. Dacion en pago is in the nature of a sale because property is alienated in favor of the creditor in
satisfaction of a debt in money. For a valid dacion en pago to transpire, however, the attendance of the
following elements must be established, namely: (a) the existence of a money obligation; (b) the alienation to
the creditor of a property by the debtor with the consent of the former; and (c) the satisfaction of the money
obligation of the debtor. To have a valid dacion en pago, therefore, the alienation of the property must fully
extinguish the debt. Yet, the debt of the respondents subsisted despite the transfer of the property in favor of
Adelaida.

61
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

CREDITOR’S ELECTION TO SELL THE ARTICLES PLEDGED AMOUNTS TO A WAIVER ON THE PART
OF THE FORMER TO ANY OTHER REMEDY, AND MUST ABIDE BY THE RESULTS OF THE SALE

48. Manila Surety and Fidelity Company, Inc. vs. Rodolfo R. Velayo
G.R. No. L-21069, October 26, 1967
Reyes, J.B.L., J.

FACTS:
This is an appeal from the decision of the Manila CFI ordering Velayo to pay Manila Surety and Fidelity
Company (Manila Surety).

Manila Surety issued a bond worth Php 2,800 in favor of Velayo for the dissolution of a writ of attachment
obtained by Jovita Granados in a suit against Velayo. As collateral security and by way of pledge, Velayo also
delivered four pieces of jewelry to Manila Surety for the latter’s further protection, with power to sell the same in
case the surety paid or become obligated to pay any amount of money in connection with said bond, applying
the proceeds to the payment of any amounts it paid or will be liable to pay.

The court rendered judgment in favor of Granados, and with the execution of judgment having been returned
unsatisfied, Manila Surety was forced to pay Php 2,800. When the latter failed to recoup from Velayo the
amount, Manila Surety caused the pledged jewelry to be sold, with the net product only reached the amount of
Php 235 only. After Velayo failed to pay the balance, the surety company filed suit against the former with the
municipal court. As defense, Velayo claimed that the sale of the pledged jewelry extinguished any further
liability on his part under Art. 2115 of the 1950 Civil Code.

The municipal court disallowed Velayo’s claims and rendered judgment against him. Velayo appealed the
decision to the CFI, but the defense was once more overruled.

ISSUE:
Was the election of the surety company to sell the articles pledged a waiver on its part to file suit on the
principal obligation?

RULING:
Yes, the surety’s election to sell the articles pledged amounts to a waiver on the part of the former to any other
remedy, and must abide by the results of the sale.

Art. 2115 of the 1950 Civil Code provides, “The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest
and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled
to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled
to recover the deficiency, notwithstanding any stipulation to the contrary.”

The decision of the CFI further assumes that the extinctive effect of the sale of the pledged chattels must be
derived from stipulation. This is incorrect because Art. 2115, in its last portion, clearly establishes that the
extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override.
If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any
stipulation to the contrary. The provision is clear and unmistakable, and its effect cannot be evaded. By electing
to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable.

62
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

CHATTEL MORTGAGE DOES NOT TRANSFER TITLE OF THE PROPERTY MORTGAGED TO THE
CHATTEL MORTGAGEE

49. Eva Serra v. Honorable Manuel Loring, Jr., et al.

G.R. No. L-25546, April 22, 1974
Makasiar, J.

FACTS:
This is an appeal by certiorari praying for the nullification of order issued by the respondent Judge Rodriguez of
the CFI of Iloilo.

Spouses Loring filed a complaint against Spouses Enrique and Maria Ordoñez based on a promissory note.
Upon motion of Sps. Loring, a writ of preliminary attachment was issued and a notice of levy of said attachment
was registered covering the residential house and lot of Sps. Ordoñez. Because the value of the debtors' real
estate levied upon as aforestated was insufficient to satisfy the claim, their personal properties consisting of
pieces of furniture, chandeliers, silverware, electrical appliances, etc., were also attached.

Maria Ordoñez, without the prior consent of or authority from her husband, executed a deed of chattel
mortgage over the said personal properties in favor of petitioner Serra as security for a loan which was duly
registered. By virtue of said chattel mortgage, Serra filed a third-party claim over the attached personal assets
with the respondent provincial sheriff. By virtue of the said third-party claim, the provincial sheriff accordingly
informed Sps. Loring and required them to file a bond within three days from receipt, otherwise, he will be
obliged to turn over the personal properties to the third-party claimant. In a motion, Sps. Loring prayed for the
disapproval of the third-party claim of Serra as improper and invalid on the ground that Serra has neither title to
the personal assets of the debtors nor right of possession; because a chattel mortgagee is not entitled to the
possession of the mortgaged personal properties as the chattel mortgage is merely a security for the loan and if
possession is delivered to the chattel mortgagee, the contract becomes a pledge and ceases to be a chattel
mortgage.

Sustaining the position of Sps. Loring as creditors, respondent Judge issued the questioned order directing the
respondent provincial sheriff to re-attach the personal properties of Sps. Ordoñez as listed in the third-party
claim of petitioner Serra.

ISSUE:
Is a chattel mortgagee entitled to claim a property levied upon by a writ of attachment?

RULING:
No, a chattel mortgagee is not entitled to claim a property levied upon by a writ of attachment.

Under Section 14 of Rule 57 of the Revised Rules of Court, a third-party claimant to a property levied upon by a
writ of attachment must show that he has title thereto or right to the possession thereof. This excludes a chattel
mortgagee because a chattel mortgage is merely a security for a loan and does not transfer title of the property
mortgaged to the chattel mortgagee. Neither is a chattel mortgagee entitled to the possession of the property
upon the execution of the chattel mortgage for otherwise the contract becomes a pledge and ceases to be a
chattel mortgage.

In this case, Serra, as a chattel mortgagee has neither title nor right of possession over the said personal
properties attached in favor of Sps. Loring. The chattel mortgage executed in her favor was merely a security
for the loan obtained by Maria Ordoñez and did not transfer title of the said properties under Serra’s name.

63
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

RIGHT OF JUDGMENT OR ATTACHING CREDITOR, WHO PURCHASED THE MORTGAGED CHATTEL

AT AN EXECUTION SALE, IS SUBORDINATE TO THE LIEN OF THE MORTGAGEE WHO HAS IN HIS
FAVOR A VALID CHATTEL MORTGAGE

50. Northern Motors, Inc. v. The Honorable Jorge R. Coquia

G.R. No. L-40018, August 29, 1975
Aquino, J.

FACTS:
This is a motion for reconsideration of the Supreme Court’s decision denying Northern Motors’ petition for
review on certiorari.

Manila Yellow Taxicab Co., Inc., (Manilla Yellow) purchased on the installment plan from Northern Motors, Inc,
(Northern Motors) 200 Holden Torana cars. It executed chattel mortgages on the cars in favor of Northern
Motors, Inc. as security for the promissory notes covering the balance of the price. The notes and the chattel
mortgages for 172 cars were assigned to Filinvest Credit Corporation (Filinvest).

Tropical Commercial Co., Inc. (Tropical) obtained a judgment against Manila Yellow in a separate civil case. To
satisfy the judgment credit, the sheriff levied upon 20 taxicabs, which were mortgaged to Northern Motors and
Filinvest. Northern Motors and Filinvest filed the corresponding third-party claims with the sheriff. Tropical
posted indemnity bonds, which the trial court cancelled without notice to the third-party claimants upon the sale
of the cars at a public auction. Subsequently, the sheriff made an additional levy on thirty-five mortgaged
taxicabs to satisfy the unpaid balance of the judgment. When Northern Motors and Filinvest filed their third-
party claims, the lower court still refused to reinstate the indemnity bonds. This prompted Northern Motors to
file a petition for review on certiorari before the SC to stop the second auction sale.

The SC, in its previous decision, denied the petition. It ruled that the mortgagee's remedy is to vindicate its
claim in a proper action as provided in section 17, Rule 39 of the Rules of Court. Hence, this present motion for
reconsideration where Northern Motors contends that as chattel mortgagee and unpaid vendor it has the better
right to the possession of the mortgaged taxicabs and that claims should be resolved in the case where the writ
of execution was issued and not in a separate action which allegedly would be an ineffective remedy. It insists
that it is entitled to the possession of the taxicabs because the condition of the chattel mortgages had already
been broken and, for that reason, the Serra ruling does not apply to this case.

ISSUE:
Does Northern Motors, Inc., as chattel mortgagee and unpaid vendor, have a better right to the possession of
the taxicabs as well as the proceeds of the auction sale?

RULING:
Yes, Northern Motors as chattel mortgagee and unpaid vendor, has a better right to the possession of the
taxicabs as well as the proceeds of the auction sale.

Inasmuch as the condition of the chattel mortgages had already been broken and Northern Motors had in fact
instituted an action for replevin so that it could take possession of the mortgaged taxicabs, it has a superior,
preferential and paramount right to have possession of the mortgaged taxicabs and to claim the proceeds of
the execution sale.

Respondent sheriff wrongfully levied upon the mortgaged taxicabs and erroneously took possession of them.
He could have levied only upon the right or equity of redemption pertaining to the Manila Yellow chattel
mortgagor and judgment debtor, because that was the only leviable or attachable property right of the company
in the mortgaged taxicabs. To levy upon the mortgagor's incorporeal right or equity of redemption, it was not
necessary for the sheriff to have taken physical possession of the mortgaged taxicabs. It would have sufficed if
he furnished the chattel mortgagor, Manila Yellow with a copy of the writ of execution and served upon it a
notice that its right or equity of redemption in the mortgaged taxicabs was being levied upon pursuant to that
writ. Levying upon the property itself is distinguishable from levying on the judgment debtor's interest in it.

64
In this case what the sheriff could have sold at public auction was merely the mortgagor's right or equity of
redemption. The sheriff and the judgment creditor are deemed to have constructive notice of the chattel
mortgages on the taxicabs. As a consequence of the registration of the mortgages, Northern Motors, Inc. had
the symbolical possession of the taxicabs.

If the judgment creditor, Tropical, bought the mortgagor's equity of redemption at the auction sale, then it would
step into the shoes of the mortgagor, Manila Yellow Taxicab Co., Inc. and be able to redeem the vehicles from
Northern Motors, Inc., the mortgagee, by paying the mortgage debt.

Inasmuch as what remains to the mortgagor is only the equity of redemption, it follows that the right of the
judgment or attaching creditor, who purchased the mortgaged chattel at an execution sale, is subordinate to the
lien of the mortgagee who has in his favor a valid chattel mortgage.

65
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

DUTIES OF A REGISTER OF DEEDS IN RESPECT TO THE REGISTRATION OF CHATTEL MORTGAGE

ARE OF A PURELY MINISTERIAL CHARACTER

51. The Standard Oil Company Of New York v. Joaquin Jaramillo

G.R. No. L-20329, March 16, 1923
Street, J.

FACTS:
The present case is a demurrer interposed by Jaramillo, the register of deeds of Manila, to an original petition
of Standard Oil Company of New York (Standard Oil) seeking a peremptory mandamus to compel Jaramillo to
record in a proper register the chattel mortgage executed in favor of Standard Oil.

Gervasia de la Rosa, Vda. de Vera, (Gervasia) was the lessee of a parcel of land situated in Manila and owner
of the house of strong materials built thereon. She executed a chattel mortgage, purporting to convey to
Standard Oil both the leasehold interest in said lot and the building which stands thereon.

After said document had been duly acknowledged and delivered, Standard Oil caused the same to be
presented to Jaramillo, as register of deeds of the City of Manila, for the purpose of having the same recorded
in the book of record of chattel mortgages. Upon examination of the instrument, Jaramillo was of the opinion
that it was not a chattel mortgage, for the reason that the interest therein mortgaged did not appear to be
personal property, within the meaning of the Chattel Mortgage Law, and registration was refused on this ground
only.

ISSUE:
Can the register of deeds refuse to register a chattel mortgage on the ground that the interest appearing on the
said chattel mortgage is not of personal property?

RULING:
No, the register of deeds does not have the authority to refuse the registration of the chattel mortgage on the
said ground.

The duties of a register of deeds in respect to the registration of chattel mortgage are of a purely ministerial
character; and no provision of law can be cited which confers upon him any judicial or quasi-judicial power to
determine the nature of any document of which registration is sought as a chattel mortgage.

The efficacy of the act of recording a chattel mortgage consists in the fact that it operates as constructive notice
of the existence of the contract, and the legal effects of the contract must be discovered in the instrument itself
in relation with the fact of notice. Registration adds nothing to the instrument, considered as a source of title,
and affects nobody's rights except as a specifies of notice.

Articles 334 and 335 of the Civil Code supply no absolute criterion for discriminating between real property and
personal property for purpose of the application of the Chattel Mortgage Law. Those articles state rules which,
considered as a general doctrine, are law in this jurisdiction; but it must not be forgotten that under given
conditions property may have character different from that imputed to it in said articles. It is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature would be real property;
and it is a familiar phenomenon to see things classed as real property for purposes of taxation which on
general principle might be considered personal property.

In this case, it is a ministerial duty on the part of Jaramillo, as register of deeds, to record the chattel mortgage
executed by Gervasia in favor of Standard Oil and he does not have the authority to deny the same on the
ground that the interest thereon is not a personal property.

66
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

A CHATTEL MORTGAGE IS A SALE WITH PACTO DE RETRO UNDER ACT NO. 1508

52. J.W. Meyers v. William Thein, et al.

G.R. No. L-5577, February 21, 1910
Arellano, C.J.

FACTS:
This is an appeal from the judgment of the CFI granting to the defendant, Broto preference in the payment of
her claim and sentencing Thein, the other defendant, to pay said Broto the sum of P200, which sum must, as
far as possible, be paid to the former from the proceeds of the sale of the furniture made by the sheriff on the
petition of the plaintiff, Meyers.

Thein is indebted to Meyers for a loan of P1,000. As security, Thein mortgaged to Meyers certain furniture
owned by him which constitutes the fittings of a saloon situated in Calle Real, No. 124 owned by Broto, who
leased the place to Thein. Thein, as lessee, was also indebted to Broto in the sum of P215, for rent due. Later,
the furniture was removed by the sheriff from the premises at the request of Meyers despite the protest of
Broto. The said furniture was sold by the sheriff, and the proceeds of the sale amounted to P972.30.

Preference to payments from the sum is claimed on the one hand by Meyers, as mortgage creditor, or rather as
pledgee under contract, and on the other by Broto, as mortgage creditor by operation of the law. The contract
of mortgage, or rather of pledge, invoked by Meyers, appears in the record and was executed in accordance
with Act No. 1508. The mortgage or legal pledge invoked by Broto arises under article 1922 of the Civil Code
which provides: “With regard to specified personal property of the debtor, the following are preferred: xxx 7.
Credits rents and leases for one year with regard to the personal property of the lessee existing on the estate
leased and on the fruits therefore.” Paragraph 2 of said article also contains the following: “Credits secured by a
pledge which may be in the possession of the creditor, with regard to the thing pledged and to the extent of its
value.”

ISSUE:
Which between a claim for rent by a lessor and a credit secured by pledge executed and registered under Act
No. 1508 is preferred?

RULING:
The credit secured by pledge executed and registered under Act No. 1508 is preferred.

Sec. 3 of Act No. 1508 prescribes that "a chattel mortgage is a conditional sale of personal property as security
for the payment of a debt, or the performance of some other obligation specified therein, the condition being
that the sale shall be void upon the seller paying to the purchaser a sum of money or doing some other act
named. If the condition is performed according to its terms, the mortgage and sale immediately become void,
and the mortgagee is thereby divested of his title."

Thus, by the operation of Act No. 1508, the actual contract of pledge of the Civil Code degenerates into one of
sale by mutual consent and the chattel mortgage under the Act is a sale with pacto de retro. Hence, the
furniture belonging to Thein, which existed in the house leased from Broto, ceased to be the property of Thein
and passed to the dominion and juridical possession of Meyers. When Broto tried to collect the rent due, the
furniture that existed in the building was no longer the property of the Thein but belonged to the Meyers who
had acquired it as a pledge which, under the law, is a sale, and as such the ownership is transferable, although
conditionally and depending upon whether the debtor (the conditional seller) fulfills the condition subsequent,
and is similar to a sale with pacto de retro. The preference in the payment of rents due for one year, granted by
paragraph 7 of article 1922, refers to "personal property of the lessee;" hence, as the furniture existing in the
house leased no longer belongs to Thein but to Meyers, according to the public instrument recorded in the
public registry, the said right of preference has not existed since the date of the mortgage.

Hence, preferential payment shall be made to Meyers as mortgage creditor/pledgee under contract.

67
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

A MORTGAGE SHOULD BE REGISTERED BOTH IN THE CHATTEL MORTGAGE REGISTRY AND IN THE
MOTOR VEHICLES OFFICE IN ORDER TO AFFECT THIRD PERSONS

53. Olaf N. Borlough v. Fortune Enterprises Inc.

G.R. No. L-9451, March 29, 1957
Labrador, J.

FACTS:
This is an appeal by certiorari against a judgment of the CA.

United Car Exchange (United) sold a car to Fortune Enterprises, Inc. (Fortune). The same car was sold by
Fortune to Aguinaldo, and for not having paid it in full, the latter executed a promissory note. To secure the
payment of this note, Aguinaldo executed a deed of chattel mortgage over said car. The deed was duly
registered in the Office of the Register of Deeds. As Aguinaldo defaulted in the payment of the installments
due, counsel for Fortune addressed a letter requesting him to make the necessary payment and to keep his
account up to date so that no court action would be resorted to. Later, the car found its way again to United
which sold the same in cash to Borlough.

Fortune brought an action against Aguinaldo to recover the balance of the purchase price. Borlough filed a
third-party complaint, claiming the vehicle. Thereupon, Fortune amended its complaint, including Borlough as a
defendant and alleging that he was in connivance with Aguinaldo and was unlawfully hiding and concealing the
vehicle in order to evade seizure by judicial process. Borlough answered alleging that he was in legal
possession thereof, having purchased it in good faith and for the full price of P4,000, and that he had a
certificate of registration of the vehicle issued by the Motor Vehicles Office, and he prayed for the dismissal of
the complaint, the return of the vehicle and for damages against the plaintiff. The vehicle was seized by the
sheriff and was later sold at public auction.

ISSUE:
Which should prevail as between a prior mortgage executed over a motor vehicle, registered under the Chattel
Mortgage Law (CML) only, without annotation thereof in the Motor Vehicles Office, and a subsequent
registration of the vehicle in the Motor Vehicles Office accompanied by actual possession of the motor vehicle?

RULING:
The subsequent registration of the vehicle in the Motor Vehicles Office accompanied by actual possession of
the motor vehicle should prevail.

While the question can be resolved by the general principles found in the Civil Code and expressly stated in
Article 559, there is no need of resorting thereto in view of the express provisions of the Revised Motor
Vehicles Law (RMVL), which expressly and specifically regulate the registration, sale or transfer and mortgage
of motor vehicles. The RMVL is a special legislation enacted to "amend and compile the laws relative to motor
vehicles," whereas the CML is a general law covering mortgages of all kinds of personal property The former is
the latest attempt to assemble and compile the motor vehicle laws of the Philippines, all the earlier laws on the
subject having been found to be very deficient in form as well as in substance.

The RMVL did not repeal CML and its provisions on registration are not inconsistent with those of the CML.
Likewise, it does not state that the registration of the mortgage under the CML is to be dispensed with. The
recording provisions of the RMVL, therefore, are merely complementary to those of the CML. A mortgage in
order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the same
should also be recorded in the Motor Vehicles Office. And the failure of Fortune to report the mortgage
executed in its favor had the effect of making said mortgage ineffective against Borlough, who had his
purchase registered in the said Motor Vehicles Office.

The holder of a lien who is derelict in-his duty to comply with the statutory provisions acts at his own peril, and
must suffer the consequence of his own negligence; and accordingly, he is not entitled to the lien as against a

68
subsequent innocent purchaser or encumbrances, even though such lien had been previously filed as provided
by other chattel mortgage statutes.

Hence, Borlough’s right to the vehicle as against the previous and prior mortgagee Fortune, which failed to
record its lien in accordance with the RMVL, should be upheld. For the foregoing consideration, the judgment of
the Court of Appeals is hereby reversed and that of the Court of First Instance affirmed.

69
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

PROVISIONS OF THE NEW CIVIL CODE ON PLEDGE SHALL APPLY TO A CHATTEL MORTGAGE
ONLY IN SO FAR AS THEY ARE NOT IN CONFLICT WITH THE CHATTEL MORTGAGE LAW

54. Luis Ablaza v. Gabriel Ignacio

G.R. No. L-11466, May 23, 1958
Bautista Angelo, J.

FACTS:
This appeal pertains to an action for deficiency arising from a foreclosure of a chattel mortgage instituted when
the new Civil Code has already taken effect.

Ignacio obtained a loan from Ablaza. Ignacio executed a chattel mortgage on an Oldsmobile car to secure this
loan. Ignacio failed to pay the indebtedness on its date of maturity, thereby violating one of the conditions of the
mortgage. Thereupon, Ablaza proceeded to foreclose the mortgage extrajudicially and the mortgaged chattel
was sold at public auction for the amount of P700.00. Deducting this amount from, the total obligation, in
addition to the interest and liquidated damages agreed upon, the remaining balance was P2,675. To collect this
balance, Ablaza instituted a civil case against Ignacio.

The lower court dismissed the said case in spite of the fact that Ignacio was declared in default and Ablaza
presented enough evidence to support his claim because, being an action for deficiency on a chattel mortgage,
it opined that the mortgage creditor is no longer entitled to it under the provisions of the new Civil Code.

ISSUE:
Are the provisions of the new Civil Code on pledge applicable to a chattel mortgage?

RULING:
No, the provisions of the new Civil Code on pledge are not applicable to a chattel mortgage.

Considering that the provisions of the Chattel Mortgage law regarding the effects of the foreclosure of a chattel
mortgage are contrary to the provisions of Article 2115 of the new Civil Code, we find no plausible reason why
the latter should apply to the present case.

It is clear from Article 2141 that the provisions of the new Civil Code on pledge shall apply to a chattel
mortgage only in so far as they are not in conflict with the Chattel Mortgage Law. In other words, the provisions
of the new Civil Code on pledge can only apply if they do not run counter to any provision of the Chattel
Mortgage Law, otherwise, the provisions of the latter law shall apply. Here we find tint the provisions of the
Chattel Mortgage Law with regard to the effects of the foreclosure of a chattel mortgage are precisely contrary
to the provisions of Article 2115 which were applied by the trial court.

70
 PLEDGE AND CHATTEL MORTGAGE
Pledge and Chattel Mortgage

A CHATTEL MORTGAGE CAN ONLY COVER OBLIGATIONS EXISTING AT THE TIME THE MORTGAGE
IS CONSTITUTED

55. Acme Shoes, Rubber & Plastic Corp., and Chua Pac v. Court of Appeals
G.R. No. 103576, August 22, 1996
Vitug, J.

FACTS:
This case is a petition for review on certiorari.

Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation (Acme), executed a
chattel mortgage in favor of respondent Producers Bank of the Philippines (Producers Bank). The mortgage
stood by way of security for Chua Pac's corporate loan of P3,000,000.00. A provision in the chattel mortgage
contained a clause that provided for the mortgage to stand as security for all obligations and any and all other
obligations of whatever kind and nature, whether such obligations have been contracted before, during or after
the constitution of this mortgage.

The loan of P3,000,000.00 was paid by Acme. Subsequently, Acme obtained additional financial
accommodations totalling P2,700,000,00. These were also fully paid on the due date. Again, the bank
extended to Acme a loan P1,000,000.00 covered by four promissory notes for P250,000.00 each. Due to
financial constraints, the loan was not settled at maturity. Thereupon, the bank applied for an extra-judicial
foreclosure of mortgage.

The RTC ordered the foreclosure of the chattel mortgage. It held Acme bound by the stipulations, aforequoted,
of the chattel mortgage. Petitioners appealed to the CA. However, the same was denied.

ISSUE:
Did the chattel mortgage obtain by Acme covered the obligations incurred after the execution thereof?

RULING:
No, the chattel mortgage previously obtained by Acme did not cover the obligations incurred after the execution
of the said mortgage.

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debt or is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in pledge, the placing
of movable property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a
public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such
fruits to the payment of interest, if owing, and thereafter to the principal of his credit — upon the essential
condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be
alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it,
once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long
as these future debts are accurately described, a chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security
itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the
newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the
borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default

71
on the part of the borrower of the financing agreement whereon the promise is written but, of course, the
remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the
chattel mortgage sought to be foreclosed.

Given the foregoing, the chattel mortgage was terminated upon the payment of the P3,000,000.00 loan.
Therefore, there was no chattel mortgage to even foreclose at the time the bank instituted the extra-judicial
foreclosure.

72
 CONCURRENCE AND PREFERENCE OF CREDITS
Concurrence and Preference of Credits

MATERIALMAN'S LIEN DOES NOT EXTEND TO THE LAND SINCE THE BUILDING IS SEPARATE AND
DISTINCT FROM LAND

56. Lopez v. Orosa

G.R. Nos. L-10817-18, February 28, 1958
Felix, J.

FACTS:
Respondent Orosa invited petitioner Lopez to make an investment in the theatre business. It was intimated that
Orosa, his family and friends were organizing a corporation to be known as Plaza Theatre, Inc. Lopez
expressed his unwillingness to invest but he agreed to supply the lumber necessary for the construction of the
proposed theatre. Lopez delivered the lumber which was used for the construction of the Plaza Theatre. The
total cost of the materials amounting to P62,255.85, Lopez was paid only P20,848.50, thus leaving a balance of
P41,771.35.

The Plaza Theatre was erected on a piece of land formerly owned by Vicente Orosa, Jr., and was acquired by
the corporation later on. As Lopez was pressing Orosa for payment of the remaining unpaid obligation, the
latter and, the president of the corporation, promised to obtain a bank loan by mortgaging the properties of the
Plaza Theatre out of which said amount of P41,771.35 would be satisfied, to which assurance Lopez had to
accede. Unknown to him, the corporation already got a loan for from the Philippine National Bank with the
Luzon Surety Company as surety, and the corporation in turn executed a mortgage on the land and building in
favor of said company as counter-security.

Persistent demand from Lopez for the payment of the amount due him caused Vicente Orosa, Jr. to execute an
alleged "deed of assignment" of his 420 shares of stock of the Plaza Theater, Inc., at P100 per share or with a
total value of P42,000 in favor of the creditor, and as the obligation still remained unsettled, Lopez filed a
complaint with the Court of First Instance.

The lower court ruled that the defendants Vicente Orosa, Jr., and the Plaza Theatre, Inc., were jointly liable for
the unpaid balance of the cost of lumber used in the construction of the building and the plaintiff thus acquired
the materialman's lien over the same. The court ruled that lien was merely confined to the building and did not
extend to the land on which the construction was made, the trial judge took into consideration that the codal
provision (Art. 1923 of the old Spanish Civil Code) specifying that refection credits are preferred could refer
only to buildings which are also classified as real properties, upon which said refection was made. It was,
however, declared that plaintiff's lien on the building was superior to the right of the surety company. Plaintiff
tried to secure a modification of the decision in so far as it declared that the lien did not extend to the land, but
same was denied.

ISSUE:
Is a materialmen’s lien for the value of materials used in the construction of building attaches to said structure
alone?

RULING:
Yes. It is argued that in view of the employment of the phrase real estate, or immovable property, and
inasmuch as said provision does not contain any specification delimiting the lien to the building, said article
must be construed as to embrace both the land and the building or structure adhering thereto. We cannot
subscribe to this view, for while it is true that generally, real estate connotes the land and the building
constructed thereon, it is obvious that the inclusion of the building, separate and distinct from the land, in the
enumeration of what may constitute real properties could mean only one thing — that a building is by itself an
immovable property, a doctrine already pronounced by this Court in the case of Leung Yee vs. Strong
Machinery Co., 37 Phil., 644. Moreover, and in view of the absence of any specific provision of law to the
contrary, a building is an immovable property, irrespective of whether or not said structure and the land on
which it is adhered to belong to the same owner.

73
A close examination of the provision of the Civil Code invoked by appellant reveals that the law gives
preference to unregistered refectionary credits only with respect to the real estate upon which the refection or
work was made. This being so, the inevitable conclusion must be that the lien so created attaches merely to the
immovable property for the construction or repair of which the obligation was incurred. Evidently, therefore, the
lien in favor of appellant for the unpaid value of the lumber used in the construction of the building attaches only
to said structure and to no other property of the obligors.

Considering the conclusion thus arrived at, i.e., that the materialman's lien could be charged only to the
building for which the credit was made or which received the benefit of refection, the lower court was right in,
holding at the interest of the mortgagee over the land is superior and cannot be made subject to the said
materialman's lien.

74
 CONCURRENCE AND PREFERENCE OF CREDITS
Concurrence and Preference of Credits

CONCURRENCE AND PREFERENCE OF CREDITS ARE APPLICABLE NOT ONLY TO THE INSOLVENT
DEBTOR

57. De Barretto v. Villanueva

G.R. No. L-14938, January 28, 1961
Gutierrez David, J.

FACTS:
This is an appeal by Magdalena C. De Barretto against Jose G. Villanueva assailing the order of the CFI
confirming the sale in this case and directing the Register of Deeds of the City of Manila to issue to the
Barrettos the corresponding certificate of title, subject, however, to the order of August 18, 1958 concerning the
vendor's lien.

Rosario Cruzado as administratrix of estate of husband obtained from Rehabilitation Finance Corporation
(RFC) loan amounting to P 11,000. To secure payment she mortgaged a land. She failed to pay certain
installments on the loan and the mortgage was foreclosed. She was given rights to repurchase the same. The
land was sold back to her conditionally for P 14,000 payable in 7 years. Two years after, Cruzado was
authorized by the court with consent of RFC to sell the land with the improvements. Villanueva assumes to pay
to the RFC obligations of Cruzado and issued Promissory Note (PN) in favor of Cruzado and she was able to
secure Transfer Certificate of Title (TCT) in her name. Villanueva mortgaged the property to De Baretto as
security for a loan in the amount of P 30,000. Villanueva failed to pay the remaining installments on her PN so
Cruzado filed complaint for recovery. Pending trial, Lien was constituted on the property in favor of Cruzado,
this was annotated. Decision was rendered ordering Villanueva to pay Cruzados. Villanueva failed to pay the
debt to De Baretto, so the latter instituted a foreclosure of mortgage, impleading Cruzado. Decision absolved
Cruzados, sentencing Villanueva to pay. Baretto’s filed for issuance of writ of execution. In response, Cruzados
filed their Vendor’s lien.

The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered rights over the property. Appellants also argue that to give
the unrecorded vendor's lien the same standing as the registered mortgage credit would be to nullify the
principle in land registration system that prior unrecorded interests cannot prejudice persons who subsequently
acquire interests over the same property.

ISSUE:
Does Cruzado, as unpaid vendor, have the right to share pro rata with Barettos of the proceeds?

RULING:
Yes. Under the system of the Civil Code of the Philippines, only taxes enjoy absolute preference. All the
remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but
must be paid pro-rata, i.e., in proportion to the amount of the respective credits.

Article 2242 of the New Civil Code, which enumerates, the preferred claims, mortgages and liens on
immovables, specifically requires that — unlike the unpaid price of real property sold — mortgage credits, in
order to be given preference, should be recorded in the registry of property. If the legislative intent was to
impose the same requirement in the case of the vendor's lien, or the unpaid price of real property sold, the
lawmakers could have easily inserted the same qualification which now modifies mortgage credits. The fact
that the law makes no distinction between registered and unregistered vendor's lien, only goes to show that
any lien of that kind enjoys the preferred credit status.

The action was to recover the remaining obligation of promisor Pura Villanueva on the note, the fact remains
that Rosario P. Cruzado as guardian of her minor children was an unpaid vendor of the realty in question, and
the promissory note was, precisely, for the unpaid balance of the purchase price of the property bought by said
Pura Villanueva. Article 2242 of the New Civil Code enumerates the claims, mortgages and liens that constitute
an encumbrance on specific immovable property, and among them are for the unpaid price of real property
sold, upon the immovable sold and Mortgage credits recorded in the Registry of Property.

75
There is nothing in the Civil Code to show that the articles therein on concurrence and preference of credits are
applicable only to the insolvent debtor. Hence, herein appellee Rosario Cruzado as an unpaid vendor of the
property in question has the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

76
 CONCURRENCE AND PREFERENCE OF CREDITS
Concurrence and Preference of Credits

CREDITS TO THE SAME SPECIFIC REAL PROPERTY OR REAL RIGHTS, SHALL BE PAID PRO RATA
EXCEPT ART. 2242, SEC. 7, N.C.C

58. Manabat v. Laguna Federation of Facomas, Inc.

G.R. No. L-23888, March 18, 1967
Bengzon, J.P., J.

FACTS:
This is an appeal filed by Francisco C. Manabat, plaintiff-appellee, in his capacity as Provincial Sheriff of
Laguna, Branch I, against Laguna Federation of Facomas, Inc., Valeriana Lim-aco de Almeda and
Cosmopolitan Insurance Co., Inc., the appellees', assailing the decision of the Court of First Instance, that the
defendants-claimants are entitled to the proceeds of the sale in the order of preference in accordance with the
dates of the registration of their credits.

A suit was filed by Laguna Federation against Nieves Roxas, judgment was rendered by Manabat. Writ of
execution was issued and sheriff sold at public auction all rights, titles and interests of Roxas in 10 parcels of
land for total price of P 37,000. Sheriff discovered that parcels of land were subject to registered liens, that is,
writs of execution, attachments annotated at the back of the certificates of title. Sheriff instituted action for
interpleader for the different creditors/ lienholders to litigate among themselves and determine the rights to the
P 37,000 proceeds of the sale. Nature of annotations, date of registration of credit and amount of claims were
included in the claims of the 9 creditors. It appears that Laguna Federation of Facomas, Inc., Valeriana Lim-aco
de Almeda and Cosmopolitan Insurance Co., Inc registered their credits prior to Florentino Cayco and Jose
Fernandez Zorilla.

Appellants' reasoning is that this is an instance of several credits referring to the same specific real property;
and that the rule in such case is to satisfy all the aforesaid credits pro rata, following Article 2249 of the Civil
Code.

ISSUE:
Should distribution pro rata be the proper rule to follow in the satisfaction of the credits involved?

RULING:
No. The proper rule should be by preference in the order of dates of registration and not pro rata.

Article 2249 of the New Civil code provides that if there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real right. However, Article 2242, paragraph 7 of the same Code
provides further that, with reference to specific immovable property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and shall constitute an encumbrance on the immovable or real
right: xxx Credits annotated in the Registry of Property, in virtue of a judicial order, by attachments or
executions, upon the property affected, and only as to later credits.

It being expressly provided that said credits are preferred "only as to later credits", it follows that the same
limitation applies as to their preference among themselves, i.e., for purposes of satisfying several credits
annotated by attachments or executions, the rule is still preference according to priority of the credits in the
order of time.

It not being disputed that appellants' credit is "later" than those of appellees Laguna Federation of Facomas,
Inc., Valeriana Lim-aco de Almeda and Cosmopolitan Insurance Co., Inc., the appellees' credits must be
deemed preferred to that of appellants. To satisfy them pro rata could erase the difference between earlier and
later credits provided for by subpar. (7) of Article 2242 as aforementioned.

77
 CONCURRENCE AND PREFERENCE OF CREDITS
Concurrence and Preference of Credits

REFECTIONARY CREDIT ENJOYS PREFERENCE UNDER SUBSECTION 3 OR ARTICLE 1923 OF THE

CIVIL CODE (OLD CODE)

59. Director of Public Works v. Sing Joco

G.R. No. L-30181 July 12, 1929
Street, J.

FACTS:
This is an appeal filed by the Director of Public Works, plaintiff-appellee representing the Government of the
Philippines, against Sing Juco, Sing Bengco, Tanboontien and Mariano de la Rama Tanbunco for the amount
due to the Government. The Director of Public Works now assails the decision of the trial court in declaring that
the lien of the Government for the filing improvement was superior to the mortgage of PNB.

A contract was made between the Director of Public Works and the four owners, to use the land for dredging
operation conducted by the Bureau of Public Works where the latter agreed to deposit the material it dredged
from the Iloilo River upon the lot of the land for consideration. In connection with the making of the contract, the
Director of Public Works required a bond to be supplied by the owners. This bond was executed
contemporaneously with the main contract; and in connection therewith it should be noted that one of the
names appearing upon said contract was that of "Casa Viuda de Tan Toco," purporting to be signed by M. de
la Rama. The dredging operation were conducted by the Bureau of Public Works in substantial accomplice.
Demand was made upon them for the payment of the first instalment after the account with the owners were
liquidated and the amount due was determined. No such payment was made. This action was instituted by the
Director of Public Works on October 14, 1926, for the purpose of recovering the amount due to the Government
under the contract from the original owners of the property.

The owners of the property contended that the government has not complied with that contract, in that dredged
material deposited on the land had not been sufficient in quantity to raise the level of the land above high water,
and that. It is therefore asserted that the owners of the property are not obligated to pay the filling operation. It
further appears that the owners conveyed the property by way of mortgage to PNB for purpose of securing a
credit in current account on November 23, 1920. PNB, on its part, asserted that the mortgage credit pertaining
to the bank is superior to the Government’s lien for improvement.

ISSUE:
Is the indebtedness owing to the Government entitled to preference over the mortgage credit due to the
Philippine National Bank (PNB)?

RULING:
No. Priority must be conceded to the mortgage with PNB.

In the civil law the refectionary credit is primarily an indebtedness incurred in the repair or reconstruction of
something previously made, such repair or reconstruction being made necessary by the deterioration or
destruction as it formerly existed. The conception does not ordinarily include an entirely new work, though
Spanish jurisprudence appears to have sanctioned this broader conception.

The fact that the bank's mortgage was registered in the office of the Register of Deeds of the province of Iloilo
on November 26, 1920, while the filing contract was registered on January 8, 1924, that is to say, there is a
priority of more than three years, in point of time, in the inscription of the mortgage credit under the filling
contract was made an express lien upon the property which was the subject of improvement. The question
whether the credit we are considering falls precisely under the conception of the refectionary credit in the civil
law is in this case academic rather than practical, for the reason that by the express terms of the filling contract
the credit was constituted a lien upon the improved property. In the state of jurisprudence, that said credit is a
refectionary credit enjoying preference under subsection 3 or article 1923 of the Civil Code, then the mortgage
credit must be given priority under subsection 2 of the article 1927 of the same code, for the reason that the
mortgage was registered first.

78
The mortgage was created by the lawful owners at a time when no other competing interest existed in the
property. The lien of the mortgage therefore attached to the fee, or unlimited interest of the owners in the
property. On the other hand, the lien created by the filling contract was created after the mortgage had been
made and registered, and therefore, after the owners of the property had parted with the interest created by the
mortgage.

79
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

BANKS ARE REQUIRED TO EXERCISE THE HIGHEST DEGREE OF DILIGENCE IN THE CONDUCT OF
THEIR AFFAIRS

1. Prudential Bank (now Bank of the Philippine Islands) v. Ronald Rapanot and Housing & Land Use
Regulatory Board
G.R. No. 191636, January 16, 2017
Caguioa, J.

FACTS:
This is an appeal by Certiorari under Rule 45 of the Rules of Court seeking to reverse the Decision of Court of
Appeals insofar as it found that Prudential Bank (the Bank) cannot be deemed a mortgagee in good faith with
respect to Unit 2308-B2 mortgaged by Golden Dragon in its favour as collateral.

Golden Dragon is the developer of Wack-Wack Twin Towers Condominium. Rapanot paid Golden Dragon a
reservation fee for Unit 2308-B2 covered by Condominium Certificate of Title (CCT). The Bank extended a loan
to Golden Dragon to be utilized as additional working capital secured by a Mortgage Agreement in favor of the
Bank over several condominium units owned and registered under Golden Dragon's name, one of which was
Unit 2308-B2. The mortgage was annotated on the CCT.

Rapanot and Golden Dragon entered into a Contract to Sell covering Unit 2308-B2. After paying the full
purchase price, Rapanot sent several demand letters to Golden Dragon and the Bank demanding the delivery
of Unit free from all liens and encumbrances, but to no avail. The Arbiter ruled in favor of Rapanot declaring the
mortgage as null and void for violation of PD No. 957 and ordering respondent Bank to cancel the mortgage on
the subject unit.Thereafter, the Bank filed a Petition for Review with the HLURB alleging that it exercised due
diligence in entering into the Agreement stressing that prior to the approval of the loan, it deployed
representatives to ascertain that the properties being offered as collateral were in order and that the properties
offered as collateral were free from existing liens, mortgages and other encumbrances.

ISSUE:
Did the Bank exercise due diligence before it entered into the Mortgage Agreement with Golden Dragon and
when it accepted the properties as collateral?

RULING:
No. It failed to exercise the due diligence required of banks, thus, the mortgage agreement is null and void.

Under PD 957, no mortgage on any condominium unit may be constituted by a developer without prior written
approval of the National Housing Authority, now HLURB. PD 957 further requires developers to notify buyers of
the loan value of their corresponding mortgaged properties before the proceeds of the secured loan are
released. Thus, the Mortgage Agreement cannot have the effect of curtailing Rapanot's right as buyer of Unit
2308-B2, precisely because of the Bank's failure to comply with PD 957.

The Bank cannot be considered a mortgagee in good faith. It failed to ascertain whether Golden Dragon
secured HLURB's prior written approval as required by PD 957 before it accepted Golden Dragon's properties
as collateral. It also failed to ascertain whether any of the properties offered as collateral already had
corresponding buyers at the time the Mortgage Agreement was executed.

The SC stressed that banks are required to exercise the highest degree of diligence in the conduct of their
affairs. Banks may not simply rely on the face of the certificate of title. Hence, they cannot assume that, x x x
the title offered as security is on its face free of any encumbrances or lien, they are relieved of the responsibility
of taking further steps to verify the title and inspect the properties to be mortgaged. As expected, the
ascertainment of the status or condition of a property offered to it as security for a loan must be a standard and
indispensable part of the bank's operations. When the purchaser or the mortgagee is a bank, the rule on
innocent purchasers or mortgagees for value is applied more strictly. Being in the business of extending loans
secured by real estate mortgage, banks are presumed to be familiar with the rules on land registration. Since
the banking business is impressed with public interest, they are expected to be more cautious, to exercise a

80
higher degree of diligence, care and prudence, than private individuals in their dealings, even those involving
registered lands. Banks may not simply rely on the face of the certificate of title. The ascertainment of the
status or condition of a property offered to it as security for a loan must be a standard and indispensable part of
the bank's operations.

81
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

ABSENT ANY EVIDENCE TO SUPPORT THE CLAIM OF FORGERY, THE PRESUMPTION OF

REGULARITY ASCRIBED TO THE DEED OF UNDERTAKING SHALL LIE

2. Spouses Marcelian Tapayan and Alice Tapayan v. Ponceda M. Martinez

G.R. No. 207786. January 30, 2017
Caguioa, J.

FACTS:
This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the CA decision which upheld
that RTC against petitioners Spouses for Specific Performance with Damages.

Petitioner Alice Tapayan is the sister of Clark Martinez's (Clark) wife. Clark is Respondent's son. Respondent is
the registered owner of a parcel of land (Pingol Property). Two (2) mortgages were constituted over this
property - the first in favor of PNB (PNB Mortgage), and the second in favor of DBP (DBP Mortgage).

Respondent agreed to constitute the DBP Mortgage upon Clark's request to release the Pingol Property from
the PNB Mortgage. They agreed to utilize a portion of the proceeds of the DBP Loan to settle the remaining
balance of Respondent's PNB Loan.

The parties executed a Deed of Undertaking (DOU) in reference to the DBP Mortgage wherein Petitioners shall
execute a mortgage over their house and lot situated in Ozamiz City to pay the DBP Loan. The DBP Loan was
however not paid when it fell due.

Respondent filed a complaint for Specific Performance with Damages (Complaint) against Petitioners before
the RTC to compel Petitioners to constitute a mortgage over their house and lot situated in Ozamiz City in
accordance with the DOU. Since Petitioners failed to pay the DBP Loan, she and her children were constrained
to pay DBP to save the Pingol Property from foreclosure.

Petitioners argued that the proceeds of the DBP Loan were primarily used as capital for the construction
business that petitioner Marcelian put up with Clark, Mario Delos Reyes, and Richard Sevilla (collectively, Joint
Venturers). Petitioners claim that they are mere accommodation borrowers who applied for the DBP Loan for
and on behalf of the Joint Venturers, in furtherance of the verbal agreement between and among petitioner
Marcelian and the Joint Venturers. Thus, Petitioners aver that the liability arising from the non-payment of the
DBP Loan should be assumed not by Petitioners Marcelian and Alice, but by Petitioner Marcelian and the rest
of the Joint Venturers.

RTC ordered defendant spouses Atty. Marcelian and Alice Tapayan to execute the second mortgage of their
house and lot in favor of plaintiff Mrs. Ponceda Martinez, unless they reimburse the latter of the amount paid by
her to DBP for the redemption of the mortgage.

ISSUE:
Was the order to execute the mortgage over the house and lot in favour of plaintiff proper due to the non-
payment of the loan as agreed upon by the parties under the Deed of Undertaking?

RULING:
Yes. Petitioners are obliged under the Deed of Undertaking to execute the mortgage for the payment of the
DBP Loan.

Petitioner’s claim that the Deed of Undertaking is a forged instrument was not proven as petitioners waived
their right to object to the admission of the Deed of Undertaking on the basis of the best evidence rule. Also,
The Deed of Undertaking became a public document by virtue of its acknowledgment before a notary public.
Hence, it enjoys the presumption of regularity, which can only be overcome by clear and convincing evidence.

Moreover, Petitioners' claim that they are mere accommodation borrowers is not supported by sufficient
evidence. Petitioners' payment of the interest on the DBP Loan, the insurance premiums corresponding to the

82
Pingol Property, and other incidental fees solely on their account, without seeking reimbursement from the
alleged Joint Venturers, establishes Petitioners' direct interest in the DBP Loan, and negates the claim that
they are mere accommodation borrowers. Since the proceeds of the DBP Loan redounded to Petitioners'
benefit, they must bear the liability arising from its non-payment, and comply with the obligations imposed by
the Deed of Undertaking executed in connection therewith.

83
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

ACCOMMODATION MORTGAGEE’S PROPERTY CAN BE EXCLUDED FROM A STAY ORDER

3. Puerto Azul Land, Inc. v. Export Industry Bank Inc.

G.R. No. 213020, March 20, 2017
Peralta, J.

FACTS:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules of Court, seeking to reverse and set
aside the Order of the public respondent Executive Judge of the RTC Pasay City for Extrajudicial Foreclosure
of Real Estate Mortgage under Act No. 3135, and to enjoin the public respondent Clerk of Court and Ex-
Officio Sheriff from implementing the said Order.

Puerto Azul Land, Inc. (PALI) is the owner and developer of the Puerto Azul Complex. To finance its
operations, it obtained loans from various banks. PALI and its accommodation mortgagors secured the
loans. PALI started encountering problems when PSE rejected listing of its share in its initial public.
Aggravated by the 1997 Asian financial crisis, PALI was unable to keep up with the payment of its obligations.
One of its creditors, EIB, filed foreclosure proceedings on PALI’s mortgaged properties.

PALI filed a Petition for suspension of payments and rehabilitation with the RTC of Manila which issued a Stay
Order. In the meantime, the properties covered by TCT No. T-133164 were levied upon by the Treasurer's
Office of Pasay City for non-payment of realty taxes. EIB filed an Urgent Motion to order PALI and/or the
mortgagor TUI/rehabilitation receiver to pay all the taxes due on TCT No. T-133164. Rehabilitation court
modified the Stay Order. PALI filed an Urgent Motion for a status quo order, praying that the Stay Order be
maintained, and that the enforcement of the claim of Pasay City be held in abeyance pending the hearing of its
motion. EIB filed with the Court of Appeals (CA) a petition for review under Rule 42 as it was dissatisfied with
the rehabilitation plan and the qualifications of the rehabilitation receiver.

CA rendered a Decision declaring the properties covered by TCT No. T-133164 to be subject of the Stay Order
of the rehabilitation court.

ISSUE:
Was the rehabilitation court proper when it allowed the foreclosure of the accommodation mortgagee's property
and excluded the same from the coverage of the Stay Order?

RULING:
Yes. The rehabilitation court did not err in allowing the foreclosure of the accommodation mortgagee's property
and excluded the same from the coverage of the Stay Order.

There was no reversible error when the rehabilitation court removed TCT No. T-133164 from the coverage of
the Stay Order, since the Interim Rules on Corporate Rehabilitation only covers the suspension of the
enforcement of all claims against the debtors, its guarantors, and sureties not solidarity liable with the
mortgagor, and is silent on the enforcement of claims against accommodation mortgagors.

The court also ruled that it is pointless to require petitioners to file another action to recover the surplus of
extrajudicial foreclosure sale. To sustain private respondents' similar contention that the proper remedy to
determine whether there is indeed a surplus from the extrajudicial foreclosure sale in the filing of a separate
action for sum of money will only result in multiplicity of suits. Following private respondents' submission, the
court where the intended action would be filed would still have to wait and rely on the ruling of the rehabilitation
court as to the effect of an approved rehabilitation plan which requires a "50% haircut reduction" and
condonation of interest and penalties on PALI's obligation. In the same vein, Branch 231 of the RTC of Pasay
City would also have to decide first whether the LSPA executed by EIB in favor of PAC WIDE would further
equitably reduce PALI's obligation in accordance with Article 1634 of the New Civil Code on Assignment of
Credits and Other Incorporeal Rights. Suffice it to state that Section 6, Rule 63 provides that if before the final
termination of the case, a breach or violation of an instrument or a statute should take place, the action for

84
declaratory relief may thereupon be converted into an ordinary action, and the parties shall be allowed to file
such pleadings as may be necessary or proper.

Hence, the rehabilitation court did not err in allowing the foreclosure of the accommodation mortgagee's
property and excluded the same from the coverage of the Stay Order.

85
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

TENDER OR CONSIGNATION IS AN INDISPENSABLE REQUIREMENT TO THE PROPER EXERCISE OF

THE RIGHT OF REDEMPTION

4. Tedy Castro and Lauro Sebastian v. Pablito Mendoza, Sr.

G.R. No. 212778, April 26, 2017
Jardeleza, J.

FACTS:
This is a petition for review on certiorari under Rule 45 assailing the Decision of CA. CA reversed and set aside
issuances of the Provincial Agrarian Reform Adjudicator (PARAD) in connection with the execution of its
decision. Petitioners are agricultural tenants of the original Santos property. The controversy started when
Jesus (owner-heir) sold his share in the original Santos property to respondent Municipality for the expansion of
the Bustos public market.

Sales transaction between Jesus and Municipality were effected without issue from the petitioners. Municipality
began construction of the public market. After the inauguration, petitioners filed their complaint for Maintenance
of Peaceful Possession with prayer for Restraining Order/Preliminary Injunction; Pre-emption and Redemption;
and Damages before the PARAD against Municipality. Petitioners "categorically manifested their serious intent
to exercise their rights of pre-emption and redemption provided for under Sections 11 and 12, Republic Act No.
3884, as amended." Petitioners deposited the amount of P2,300.00 as redemption price for the property.
PARAD ruled in favor of the petitioners. DARAB affirmed but ruled that it is impractical to petitioners to redeem
it where there is no showing of petitioners' capacity to pay the redemption price and directed instead
Municipality to pay disturbance compensation to petitioners. Petitioners appealed to the CA. CA affirmed.
Private respondents directly sought relief from the CA questioning petitioners' belated and invalid tender of
payment of the P1.2 Million redemption price. CA ruled in the favor of the private respondents.

ISSUE:
Did the petitioners timely and validly exercised their right of redemption under Section 12 of Republic Act No.
3844, as amended by RA 6389?

RULING:
No. Petitioners failed to timely and validly exercised their right of redemption.

Jurisprudence dictates that tender or consignation is an indispensable requirement to the proper exercise of the
right of redemption by the agricultural lessee. An offer to redeem is validly effected through: (a) a formal
tender with consignation, or (b) a complaint filed in court coupled with consignation of the redemption
price within the prescribed period. In making a repurchase, it is not sufficient that a person offering to redeem
merely manifests his desire to repurchase. This statement of intention must be accompanied by an actual and
simultaneous tender of payment of the full amount of the repurchase price, i.e., the consideration of the
sale, otherwise the offer to redeem will be held ineffectual.

Petitioners belatedly tendered payment and effected consignation of the redemption price of P1.2 million
because original ruling of the PARAD became final and executory on November 27, 2003 and their tender of
payment was made on May 9 and 10, 2006, respectively, way beyond the 180-day prescriptive period provided
by law. Moreover, Petitioners tendered the amount of only P2,300.00 for the 2,132.42 square meters
landholding sold by Jesus to respondent Municipality. The discrepancy between the amounts of P2,300.00 and
P1.2 Million clearly calls to question petitioners' willingness and ability to pay.

It bears stressing that the right of redemption under Section 12 of RA 3844, as amended, is an essential
mandate of the agrarian reform legislation to implement the State's policy of owner-cultivatorship and to
achieve a dignified, self-reliant existence for small fanners. Such laudable and commendable policy, however,
is never intended to unduly transgress the corresponding rights of purchasers of land. Consequently, petitioners
cannot redeem the property and gain its ownership.

Hence, petitioners failed to timely and validly exercised their right of redemption.

86
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

THE REGISTRATION OF THE REAL ESTATE MORTGAGES, EVEN IF CONTRARY TO THE SUPPOSED
INTENT OF THE PARTIES, DID NOT AFFECT THE VALIDITY OF THE MORTGAGE CONTRACTS

5. Paradigm Development Corporation of the Philippines v. Bank of the Philippine Islands (BPI)
G.R. No. 191174, June 07, 2017
Reyes, J.

FACTS:
This is a Petition for Review on Certiorari filed under Rule 45 of the Rules of Court assailing the Decision and
Resolution of the CA which granted respondent Bank of the Philippine Islands' appeal and accordingly
dismissed the complaint filed by petitioner Paradigm Development Corporation of the Philippines (PDCP).

Sengkon Trading (Sengkon), a sole proprietorship owned by Anita Go, obtained a loan from Far East Bank and
Trust Company, now BPI, under a credit facility in the amount of P100 Million and an additional of Php 60
Million thereafter. Two real estate mortgage (REM) contracts were executed by PDCP President Anthony L. Go
(Go) to partially secure Sengkon's obligations. Sengkon defaulted in the payment of its loan obligations. Thus,
BPI demanded payment from PDCP and Sengkon failed to pay.

Upon verification with the Registry of Deeds, PDCP discovered that BPI extra-judicially foreclosed the first and
second mortgage without notice to it as mortgagor and sold the mortgaged properties to BPI as the lone bidder.
Thereafter, the corresponding Certificate of Sale was registered. PDCP filed a Complaint for Annulment of
Mortgage, Foreclosure, Certificate of Sale and Damages. PDCP alleged that BPI assured it that the mortgaged
properties will only secure the Credit Line sub-facility of the Omnibus Line (one line). With this understanding,
PDCP President allegedly agreed to sign on two separate dates a pro-forma and blank REM. PDCP, however,
claimed that it had no intent to be bound under the second REM, which was not intended to be a separate
contract, but only a means to reduce registration expenses. According to PDCP, when BPI registered both
REMs, even if the intent was only to register one, the validity of both REMs was vitiated by lack of consent.
PDCP claims that said intent is supported by the fact that the REMs were constituted merely as “partial
security” for Sengkon’s obligations and therefore there was really no intent to be bound under both – but only in
one – REM.

ISSUE:
Does the registration of the REMs, even if contrary to the supposed intent of the parties, not affect the validity
of the mortgage contracts?

RULING:
Yes. It is nevertheless binding between the parties.

The codal provision is clear and explicit. Even if the instrument were not recorded, “the mortgage is
nevertheless binding between the parties.” Hence, even assuming that the parties indeed agreed to register
only one of the two REMs, the subsequent registration of both REMs did not affect an already validly executed
REM if there was no other basis for the declaration of its nullity. That the REMs were intended merely as
“partial security” does not make PDCP’s argument more plausible because as aptly observed by the CA, the
PDCP’s act of surrendering all the titles to the properties to BPI clearly establishes PDCP’s intent to mortgage
all of the four properties in favor of BPI to secure Sengkon’s obligation under the Credit Line.

The registration of the REM contract is not essential to its validity under Article 2085, which provides the
following are essential to the contracts of pledge and mortgage: (1) That they be constituted to secure the
fulfilment of a principal obligation; (2) That the pledger or mortgagor be the absolute owner of the thing pledged
or mortgaged; (3) That he 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.
In relation thereto, Article 2125 of the Civil Code reads: In addition to the requisites stated in Article 2085, it is
indispensable, in order that a mortgage may be validly constituted, that the document in which it appears be
recorded in the Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding
between the parties.

87
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

IT IS INCUMBENT UPON MORTGAGEE TO EXERCISE GREATER CARE AND A HIGHER DEGREE OF

PRUDENCE IN DEALING WITH THE MORTGAGOR WHERE THE MORTGAGEE DOES NOT DIRECTLY
DEAL WITH THE REGISTERED OWNER

6. Delfin Domingo Dadis v. Spouses Magtanggol De Guzman and Nora De Guzman, and the Register of
Deeds of Talavera, Nueva Ecija
G.R. No. 206008, June 7, 2017
Peralta, J.

FACTS:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to annul the decision and
resolution of CA, which reversed and set aside the decision and order of the RTC, and, in effect, dismissed the
complaint filed by petitioner for reconveyance against respondent Spouses and the Register of Deeds.

Petitioner Delfin filed a Complaint for reconveyance and damages against respondents Spouses De Guzman,
among others, that: he and his deceased wife, Corazon Dadis, were the registered owners of a parcel of land;
their daughter, Marissa P. Dadis, entered into a contract of real estate mortgage (REM) over the subject
property in favor of Spouses Magtanggol to secure a loan obligation; the Spouses De Guzman made it appear
that Marissa was authorized by the Spouses Dadis by virtue of a Special Power of Attorney (SPA); the SPA
was a forged document because it was never issued by him or Corazon as the signatures contained therein are
not theirs, especially so since he was in the United States of America (USA) at the time.

The RTC established that Delfin was not in the Philippines during that time hence, he could not have signed the
SPA authorizing Marissa to mortgage the property. On appeal, the CA reversed and set aside the RTC
Decision and dismissed Delfin's complaint for lack of merit. It conceded that the SPA had been forged. As to
the issue of whether Spouses Magtanggol are mortgagees in good faith and for value, it resolved in the
affirmative.

ISSUE:
Were the Spouses De Guzman mortgagees in good faith when they entered into the loan transaction
considering that they did not directly deal with the registered owner of the real property?

RULING:
No. Spouses Magtanggol are not a mortgagees in good faith.

The case of Cavite Development Bank v. Spouses Lim explained the doctrine of mortgagee in good faith in this
wise: “There is, however, a situation where, despite the fact that the mortgagor is not the owner of the
mortgaged property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom
are given effect by reason of public policy. This is the doctrine of “the mortgagee in good faith” based on the
rule that all persons dealing with the property covered by a Torrens Certificate of Title, as buyers or
mortgagees, are not required to go beyond what appears on the face of the title. The public interest in
upholding the indefeasibility of a certificate of title, as evidence of lawful ownership of the land or of any
encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what appears on the face
of the certificate of title.”

The doctrine of mortgagee in good faith presupposes that the mortgagor, who is not the rightful owner of the
property, has already succeeded in obtaining a Torrens title over the property in his or her name and that, after
obtaining the said title, he or she succeeds in mortgaging the property to another who relies on what appears
on the said title.

In this case, Marissa is undoubtedly not the registered owner of the subject lot; and the certificate of title was in
the name of her parents at the time of the mortgage transaction. She merely acted as the attorney-in-fact of
Corazon and Delfin by virtue of the falsified SPA. The protection accorded by law to mortgagees in good faith
cannot be extended to mortgagees of properties that are not yet registered with the Register of Deeds, or are
registered but not under the mortgagor’s name.

88
Where the mortgagee does not directly deal with the registered owner of the real property, like an attorney-in-
fact of the owner, it is incumbent upon the mortgagee to exercise greater care and a higher degree of prudence
in dealing with such mortgagor.

89
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

ACCELERATION CLAUSE IS VALID AND PRODUCES LEGAL EFFECTS

7. KT Construction Supply v. Philippine Savings Bank

G.R. No. 228435, June 17, 2017
Leonen, J.

FACTS:
This petition for review on certiorari which seeks to reverse and set aside the Decision and Resolution of the
CA which affirmed with modification the Decision of the RTC.

KT Construction, through its VP William Go and Sec/Treasurer Nancy Go-Tan, signed and obtained a ₱2.5
million loan from PSBank, payable within a period of sixty (60) months. On January 3, 2011, PSBank sent a
demand letter to KT Construction asking the latter to pay its outstanding obligation in the amount of
₱725,438.81, excluding interest, penalties, legal fees, and other charges.

For its failure to pay despite demand, PSBank filed a complaint for sum of money against KT Construction.
RTC ruled that the promissory note expressly declared that the entire obligation shall immediately become due
and payable upon default in payment of any installment, hence the Go’s and KT Construction are solidarily
liable. CA affirmed the validity of the acceleration clause and that the promissory note was not a contract of
adhesion because KT Construction was not in any way compelled to accept the terms of the promissory note.

PSBank argued that Go and Go-Tan were solidarily liable with KT Construction because they signed the
promissory note in favor of PSBank as officers of the corporation and in their personal capacities. It averred
that the obligation was already due and demandable in view of the acceleration clause in the promissory note.
KT Construction, on the other hand, insists that Go and Go-Tan could not be held solidarily liable, as they were
not impleaded and that there was no allegation of default and demand being made against them.

ISSUE:
Was the acceleration clause, making the obligation due and demandable even without a demand, a valid
stipulation in the promissory note?

RULING:
Yes. The acceleration clause is a valid stipulation when parties agreed, in unequivocal terms, that the loan,
upon default, shall be due and demandable without need of demand.

An acceleration clause is valid and produces legal effects. The promissory note explicitly stated that default in
any of the installments shall make the entire obligation due and demandable even without notice or demand.
PSBank's complaint was neither premature on the ground that the loan was due only on October 12, 2011. KT
Construction’s entire loan obligation became due and demandable when it failed to pay an installment pursuant
to the acceleration clause.

Actually, PSBank had sent a demand letter dated February 3, 2011 asking KT Construction to pay the
remaining obligation within five (5) days from the receipt of the letter. Granting that the latter did not receive the
letter, the loan is still due and demandable because the parties expressly waived the necessity of demand.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

WHEN DEMAND IS NOT YET REASONABLY ASCERTAINED, INTEREST SHALL ONLY BEGIN TO RUN
FROM THE DATE THE JUDGMENT OF COURT IS MADE

8. Arch. Eusebio Bernal v. Dr. Vivencio Villaflor

G.R. No. 213617, April 18, 2018
Reyes, Jr., J.

FACTS:
This is a petition for review under Rule 45 filed by petitioner Arch. Bernal assailing the Court of Appeal’s
decision holding respondents Dr. Vivencio Villaflor and Dra. Gregoria Villaflor liable at a rate only of 6% interest
per annum on the monetary award of ₱1,710,271.

Petitioner demanded from the respondents the payment of sums allegedly left unpaid in relation to the
construction of the Medical Arts Building in Dagupan City for which the respondents obtained the expertise and
services of the petitioner sometime in 1995. The CA changed the rate and reckoning date of the interest on the
award, as it declared that the principal amount of ₱1,710,271 shall earn interest at the rate of 6% per annum
from date of finality of the judgment until full satisfaction.

Petitioner argues that the interest should be computed at the rate of 6% per annum from the time of either the
last extrajudicial demand on July 5, 1998 or judicial demand on November 16, 1998, plus 12% per annum
interest from the date of judgment until full payment.

ISSUE:
What is the interest rate and the reckoning point of the interest on monetary award?

RULING:
The interest is 6% computed from the promulgation of CA decision. In Eastern Shipping Lines, Inc. vs. Court of
Appeals, the Court provides that when an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except
when or until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

In this case, the award of interest is discretionary on the part of the court. The petitioner's original demand does
not equate to a loan or forbearance of money but pertains to the cost of construction and services, the amount
of which has not yet been determined with certainty even up to the time of the complaint's filing with the RTC.

In light of the pronouncement in Eastern Shipping that in such cases, interest shall begin to run from the time
the quantification of damages had been reasonably ascertained, the CA decision should then be modified, but
only in that the interest of 6% per annum on the award of ₱1,710,271 shall be reckoned from the time of the CA
Decision's promulgation on February 14, 2014.

91
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

SURETY MAY BE SUED BY THE CREDITOR SEPARATELY OR TOGETHER WITH THE PRINCIPAL IN
VIEW OF THE SOLIDARY NATURE OF ITS LIABILITY

9. FGU Insurance Corp. v. Sps. Floro and Eufemia Roxas

G.R. No. 189526 & 189656, August 9, 2017
Leonen, J.

FACTS:
This is a Petition for Review seeking to reverse and set aside the May 26, 2009 Decision and the September
14, 2009 Resolution of the Court of Appeals.

Spouses Roxas entered into a Contract of Building Construction with Rosendo P. Dominguez, Jr. and Philtrust
Bank to complete the construction of their housing project known as "Vista Del Mar Executive Houses." It was
also stipulated that Philtrust Bank may only release the funds for materials upon Dominguez's request and with
the Spouses Roxas' conformity. It was provided that in case of Dominguez's non-compliance of the terms and
conditions of the Contract, he would pay Philtrust Bank and/or the Spouses Roxas liquidated damages of
P1,000/day until he has complied with his obligation. On May 24, 1979, pursuant to the Contract of Building
Construction, Dominguez secured a performance bond, with face amount of P450,000, from FGU Insurance
Corporation. FGU and Dominguez bound themselves to jointly and severally pay Floro Roxas (Floro) and
Philtrust Bank the agreed amount in the event of Dominguez's non-performance of his obligation under the
Contract.

Spouses Roxas failed to make the three (3) payments of P30,000 each as agreed upon. Thus, on October 22,
1979, he formally demanded that they pay the amounts due plus the stipulated interest of 14% per annum, with
a warning that he would stop further work and withdraw his workers unless payment was received on or before
October 31, 1979.

Dominguez filed a Complaint against the Spouses and Philtrust Bank. RTC found that the Spouses breached
their obligation to Dominguez, hence it rendered an order in favor of Dominguez and ordered the cancellation
of the Performance Bond of FGU. CA reversed RTC and held that FGU, as surety, was obligated to pay the
Spouses and Philtrust Bank P450,000 for Dominguez;s non-completion of the construction project within the
stipulated period.

ISSUE:
Could FGU Insurance, as a surety, be held liable for non-payment of Dominguez and Philtrust?

RULING:
Yes. Under Section 175 of Presidential Decree No. 612 or the Insurance Code, a contract of suretyship is
defined as an agreement where "a party called the surety guarantees the performance by another party called
the principal or obligor of an obligation or undertaking in favor of a third party called the obligee." A
performance bond is a kind of suretyship agreement. It is "designed to afford the project owner security that the
. . . contractor, will faithfully comply with the requirements of the contract . . . and make good on the damages
sustained by the project owner in case of the contractor's failure to so perform."

Article 2047 of the Civil Code provides that suretyship arises upon the solidary binding of a person deemed the
surety with the principal debtor for the purpose of fulfilling an obligation. Although the surety's obligation is
merely secondary or collateral to the obligation contracted by the principal, this Court has nevertheless
characterized the surety's liability to the creditor of the principal as "direct, primary, and absolute; in other
words, the surety is directly and equally bound with the principal."

Moreover, Article 1216 in relation to Article 2047 of the Civil Code provides: The creditor may proceed against
any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them
shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt
has not been fully collected. Pursuant to the foregoing provisions, FGU, as surety, may be sued by the creditor
separately or together with Dominguez as principal, in view of the solidary nature of its liability.

92
It was undisputed that Dominguez failed to finish the construction work within the agreed time frame, triggering
FGU's liability under the Surety Bond. Dominguez's breach of the Contract of Building Construction gave the
Spouses Roxas and/or Philtrust Bank the immediate right to pursue FGU on the surety bond. Thus, FGU is
duty-bound to perform what it has guaranteed—to pay P450,000 upon notice of Dominguez's default.

93
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

WHETHER A PENALTY CHARGE IS REASONABLE OR INIQUITOUS IS ADDRESSED TO THE SOUND

DISCRETION OF THE COURTS / REDUCTION IS ESSENTIALLY DISCRETIONARY

DIFFERENCE BETWEEN AN ACCOMMODATION AND A COMPENSATED SURETY

10. Erma Industries, Inc. v. Security Bank Corporation

G.R. No. 191274. December 6, 2017
Leonen, J.

FACTS:
This Petition for Review is an appeal from the CA: (1) Decision which affirmed in toto the Decision RTC, Makati
City; and its (2) Resolution which denied petitioners' motion for reconsideration.

Erma Industries obtained from Security Bank a credit facility embodies in Credit Agreements. On the same
date, Spouses Ernesto (President) and Flerida Marcelo and Spouses Sergio (Vice President) and Margarita
Ortiz-Luis executed a Continuing Suretyship Agreement whereby they agreed to be bound as sureties, jointly
and severally liable with Erma in case the latter defaults in any of its payments with Security Bank. Erma
thereafter obtained various loans from Security Bank. Erma defaulted in the payment of its loans. So, it wrote a
letter to Security Bank, requesting for the restructuring of its obligations and offered a property as security.
Security Bank accepted the property and approved the partial restructuring of Erma’s loans. However, Erma
demanded that that entire obligation should be restructured since the property they offered as collateral could
answer for a far bigger amount than what Security Bank had recommended. To this, Security Bank disagreed
and demanded payment from Erma and the sureties of Erma's outstanding obligations. For failure to pay,
Security Bank filed a complaint with the RTC for payment of Erma's outstanding loan obligation plus interests
and penalties.

The interests and penalty prayed for by Security Bank are as follows: 1) Interest of 20% per annum on the peso
obligation and 7.5% per annum on the dollar obligation, compounded monthly and on top of that 2) Legal
interests on the accrued interest and on top of the that amount, 3) Penalty charges of 2% per month on the
total outstanding obligation and 4) Attorneys fees.

The RTC rendered a decision adjudging Erma liable to pay Security Bank the amounts of P17,995,214.47 and
US$289,730.10, inclusive of the stipulated interest and penalty plus legal interest of 12% per annum until full
payment is made. The RTC denied Security Bank's additional claims for interests and penalty charges for
being iniquitous, and imposed instead a 12% legal interest on the total outstanding obligation.

Hence, this appeal. Petitioners contend that since the trial and appellate courts found the stipulated interests
and penalty charges to be excessive and iniquitous, adjudged against them (which already incorporated the
interests and penalty charges) should have been reduced to the actual unpaid principals). Respondent Sergio
Ortiz-Luis, Jr. insists that he is not liable to Security Bank because he merely signed the Suretyship Agreement
as an accommodation party being the Administrative Vice President of Erma at that time; and there was
novation of the Credit Agreement.

ISSUE:
1. Should the interest and penalties be deleted (or the amounts awarded should be without interest and
penalties) since the lower courts found them to be excessive and iniquitous?

2. Is Respondent Sergio Ortiz-Luis, Jr. liable even though he merely signed as an accommodation party, being
the Administrative Vice President of Erma at that time?

RULING:
1. No. Conventional interest is allowed under the law and the courts are authorized to reduce it when found
iniquitous.

94
The stipulated 7.5% or 21% per annum interest constitutes the monetary or conventional interest for borrowing
money and is allowed under Article 1956 of the New Civil Code. On the other hand, the penalty charge of 2%
per month accrues from the time of Erma's default in the payment of the principal and/or interest on due date.
This 2% per month charge is penalty or compensatory interest (Article 2209) for the delay in the payment of a
fixed sum of money, which is separate and distinct from the conventional interest on the principal of the loan.
Furthermore, the promissory notes provide for monthly compounding of interest: "Interest not paid when due
shall be compounded monthly from due date." Compounding is sanctioned under Article 1959 of the Civil
Code.

The Regional Trial Court did not delete altogether the 2% monthly penalty charges and stipulated interests of
7.5% (on the dollar obligations) and 20% (on peso obligations). The trial court, in fact, adjudged petitioner Erma
liable to pay the amounts of P17,995,214.47 and US$289,730.10, inclusive of the stipulated interest and
penalty as of on the basis of Article 1308 of the Civil Code and jurisprudential pronouncements on the
obligatory force of contracts — not otherwise contrary to law, morals, good customs or public policy — between
contracting parties.

What the trial court did was to stop the continued accrual of the 2% monthly penalty charges and to thereafter
impose instead a straight 12% per annum on the total outstanding amounts due. In making this ruling, the
Regional Trial Court took into account the partial payments made by petitioners, their efforts to
settle/restructure their loan obligations and the serious slump in their export business in 1993. The Regional
Trial Court held that, under those circumstances, it would be" iniquitous, and tantamount to merciless forfeiture
of property" if the interests and penalty charges would be continually imposed.

The Regional Trial Court, as affirmed by the Court of Appeals, acted in accordance with Article 1229 of the
Civil Code, which allows judges to equitably reduce the penalty when there is partial or irregular compliance
with the principal obligation, or when the penalty is iniquitous or unconscionable.

Whether a penalty charge is reasonable or iniquitous is addressed to the sound discretion of the courts and
determined according to the circumstances of the case. The reasonableness or unreasonableness of a penalty
would depend on such factors as "the type, extent and purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening realities, the standing and relationship of the parties[.]

2. Yes. Respondent Sergio Ortiz-Luis, Jr. liable even though he merely signed as an accommodation party.

While respondent Ortiz signed the Credit Agreement as an officer of Erma, as shown by his signature under
Erma Industries, Inc. (Borrower), this does not absolve him from liability because he subsequently executed a
Continuing Suretyship agreement wherein he guaranteed the "due and full payment and performance" of all
credit accommodations granted to Erma and bound himself solidarily liable with Ernesto Marcelo for the
obligations of Erma.

Furthermore, respondent Ortiz's claim that he is a mere accommodation party is immaterial and does not
discharge him as a surety. He remains to be liable according to the character of his undertaking and the terms
and conditions of the Continuing Suretyship, which he signed in his personal capacity and not in representation
of Erma.

The Court has elucidated on the distinction between an accommodation and a compensated surety and
the reasons for treating them differently: The law has authorized the formation of corporations for the purpose
of conducting surety business, and the corporate surety differs significantly from the individual private surety.
First, unlike the private surety, the corporate surety signs for cash and not for friendship. The private surety is
regarded as someone doing a rather foolish act for praiseworthy motives; the corporate surety, to the contrary,
is in business to make a profit and charges a premium depending upon the amount of guaranty and the risk
involved. Second, the corporate surety, like an insurance company, prepares the instrument, which is a type of
contract of adhesion whereas the private surety usually does not prepare the note or bond which he signs.
Third, the obligation of the private surety often is assumed simply on the basis of the debtor's representations
and without legal advice, while the corporate surety does not bind itself until a full investigation has been made.
For these reasons, the courts distinguish between the individual gratuitous surety and the vocational corporate
surety. In the case of the corporate surety, the rule of strictissimi juris is not applicable, and courts apply the
rules of interpretation . . . of appertaining to contracts of insurance.

95
The nature and extent of respondent Ortiz's liability are set out in clear and unmistakable terms in the
Continuing Suretyship agreement. Under its express terms, respondent Ortiz, as surety, is "bound by all the
terms and conditions of the credit instruments." His liability is solidary with the debtor and co-sureties; and
the surety contract remains in full force and effect until full payment of Erma's obligations to the Bank.

96
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

THE INTENTION OF THE PARTIES IN AN ASSIGNMENT OF CREDIT SHOULD BE ASCERTAINED

11. United Coconut Planters Bank v. Spouses Uy

G.R. No. 204039. January 10, 2018
Martires, J.

FACTS:
This petition for review on certiorari seeks to reverse and set aside the Decision and Resolution of the CA
which affirmed with modification the Decision of the Office of the President (OP).

Prime Town Property Group, Inc. (PPGI) and E. Ganzon, Inc. were the joint developers of the Kiener Hills
Mactan Condominium Project (Kiener Hills). Spouses Uy (respondents) entered into a Contract to Sell with
PPGI for a unit in Kiener Hills. Thereafter, PPGI sold its receivables and assigned its rights and interests to
petitioner United Coconut Planters Bank (UCPB) in a MOA. By virtue of the said agreements, PPGI transferred
the right to collect the receivables of the buyers of units in Kiener Hills, which included respondents.
Respondents sued PPGI and UCPB before the HLURB for a sum of money and damages. They claimed that in
spite of their full payment of the purchase price, PPGI failed to complete the construction of their units in Kiener
Hills. During the pendency of the case, proceedings against PPGI were suspended in view of its corporate
rehabilitation

Petitioner UCPB claims that it is not solidarily liable with PPGI as the assignment of the receivables did not
make UCPB the developer of Kiener Hills, it being merely the assignee of the receivables under the contract to
sell but not the debtor with respect to the construction, development, and delivery of the subject condominium
units. Furthermore, it claims that in computing its liability, it was only bound to refund the amount it had actually
received from respondents and not the entire. Respondents, on the other hand, argue that UCPB solidarily
liable with PPGI because it stepped into the latter's shoes insofar as Kiener Hills is concerned pursuant to the
MOA between them, that UCPB is PPGI's successor-in-interest, such that the delay in the completion of the
condominium project could be attributable to UCPB and subject it to liability. Respondents also claim that
UCPB is already in estoppel since it sent demand letters to the buyers.

ISSUE:
Does a successor-in-interest, UCPB herein, become solidarily liable with PPGI by virtue of the Assignment of
Rights and Interest?

RULING:
No. UCPB is only jointly, and not solidarily liable to PPGI in reimbursing unit-owners of Kiener Hills since the
subject of the MOA was an assignment of credit and not subrogation.

This Court had definitely ruled on UCPB's liability to the purchasers of Kiener Hills in Spouses Choi v. UCPB
(Spouses Choi):

An assignment of credit has been defined as 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 or exchange or donation — and without need
of the debtor's consent, transfers that 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. In
every case, the obligations between assignor and assignee will depend upon the judicial relation which is the
basis of the assignment. An assignment will be construed in accordance with the rules of construction
governing contracts generally, the primary object being always to ascertain and carry out the intention of
the parties. This intention is to be derived from a consideration of the whole instrument, all parts of which
should be given effect, and is to be sought in the words and language employed.

The Agreement conveys the straightforward intention of Primetown to "sell, assign, transfer, convey and set
over" to UCPB the receivables, rights, titles, interests and participation over the units covered by the contracts
to sell. It explicitly excluded any and all liabilities and obligations, which Primetown assumed under the
contracts to sell.

97
UCPB is merely the assignee of the receivables under the contracts to sell to the extent that the assignment is
a manner adopted by which Primetown can pay its loan to the bank. xxx the assignment of receivables did not
make UCPB the owner or developer of the unfinished project to make it solidarily liable with Primetown.
Considering that UCPB is a mere assignee of the rights and receivables under the Agreement, UCPB did not
assume the obligations and liabilities of Primetown under its contract to sell with Spouses Choi.

In Liam v. UCPB (Liam), the Court maintained its position that the transaction between PPGI and UCPB was
merely an assignment of credit. Hence, what was transferred to UCPB was only the right to collect PPGI's
receivables from the purchases of Kiener Hills and not the obligation to complete the said condominium
project.

The provisions of the foregoing agreements between PPGI and UCPB are clear, explicit and unambiguous as
to leave no doubt about their objective of executing an assignment of credit instead of subrogation. The
last paragraph of the letter also confirms that UCPB's acquisition of PPGI's receivables did not involve any
changes in the Contract to Sell between PPGI and Liam (in Liam vs UCPB); neither did it vary the rights and
the obligations of the parties therein. Thus, no novation by subrogation could have taken place.

UCPB acquired PPGI's right to demand, collect and receive Liam's outstanding balance; UCPB was not
subrogated into PPGI's place as developer under the Contract to Sell.

The demand letters UCPB sent to the buyers, including herein respondents, only assured the completion of the
condominium project. Nevertheless, there was no representation on the part of the UCPB that it would continue
the construction of Kiener Hills or that it was the new owner thereof.

Guided by the previous pronouncements of this Court, it is settled that UCPB is only jointly liable with PPGI to
the disgruntled purchasers of Kiener Hills, including respondents. Thus, UCPB is only bound to refund the
amount it had unquestionably received from respondents.

98
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

TO BE A MORTGAGEE IN GOOD FAITH, IT IS NOT REQUIRED TO GO BEYOND THE FACE OF THE

TORRENS TITLE

12. Spouses Miles v. Lao

G.R. No.209544, November 22, 2017
Tijam, J.

FACTS:
In a Petition for Review on Certiorari, petitioners Spouses Ellis and Carolina Miles assailed the decision of the
CA which declared respondent Bonnie Lao as a mortgagee in good faith.

Petitioners filed a complaint against Spouses Ocampo, Spouses Jimenez, Bonnie Lao, et al. Petitioners
claimed that they become registered owners of a parcel of land in Makati, and before they left for the US, they
entrusted a duplicate TCT of the property to their niece Jimenez so that she may offer it to interested buyers;
they claimed that no written SPA to sell was given to Jimenez.

Petitioners alleged that Jimenez and spouses Ocampo conspired and made it appear that petitioners were
donating the said property to Spouses Ocampo, where title to the property is registered under their name. They
further alleged that spouses Ocampo executed a falsified real estate mortgage in favor of Lao with the property
as collateral in exchange of a loan. Since spouses Ocampo failed to pay the loan, respondent foreclosed the
mortgage.

Respondent alleged that she had no knowledge that the title thereon was defective, claiming that at the time of
the mortgage, the property was in the name of spouses Ocampo and there was nothing in the title which
suggested that it was fraudulently acquired.

ISSUE:
May Lao validly claim that she is a mortgagee in good faith by relying on the certificate of title?

RULING:
Yes, Lao may validly claim that she is a mortgagee in good faith by relying on the certificate of title.

There is indeed a situation where, despite the fact that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given
effect by reason of public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that
buyers or mortgagees dealing with property covered by a Torrens Certificate of Title are not required to go
beyond what appears on the face of the title. Indeed, a mortgagee has a right to rely in good faith on the
certificate of title of the mortgagor of the property given as security, and in the absence of any sign that might
arouse suspicion, the mortgagee has no obligation to undertake further investigation. This doctrine
presupposes, however, that the mortgagor, who is not the rightful owner of the property, has already
succeeded in obtaining Torrens title over the property in his name and that, after obtaining the said title, he
succeeds in mortgaging the property to another who relies on what appears on the title.

In this case, the title of the property under the name of spouses Ocampo was already registered as early as
May 6, 1998, while the real estate mortgage was executed December 16, 1998.

Hence, it is clear that respondent had every right to rely on the TCT presented to her insofar as the mortgagors'
right of ownership over the subject property is concerned.

99
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

STIPULATIONS ON PAYMENT OF INTEREST IS SUBJECT TO THE PRINCIPLE OF MUTUALITY OF

CONTRACTS

13. Security Bank (SBC) v. Spouses Mercado

G.R. No.192934 & 197010, June 27, 2017
Jardeleza, J.

FACTS:
In the consolidated petitions before the SC, petitioner Security Bank (SBC) seeks to nullify the CA’s decision
which modified the RTC’s decision nullifying the extrajudicial foreclosure sales over Spouses Mercado’s
properties and the interest rates imposed by petitioner.

Petitioner granted Spouses Mercado a credit line. There is an addendum to the agreement providing that
respondents agree to pay interest on outstanding availments based on annual rate computed and billed
monthly by SBC on the basis of its prevailing monthly rate; giving also their consent without need of additional
confirmation to the interests stipulated as computed by SBC. As security, respondents executed a REM over
their properties. When they defaulted in their payments, SBC filed for extra-judicial foreclosure. Respondents
offered to redeem the properties but SBC refused, so they filed a complaint for annulment of foreclosure sale.

The RTC declared the foreclosure sale void because publication issues and that the stipulation as to the
interest rate on the availments under the revolving credit line agreement "where the fixing of the interest rate is
the sole prerogative of the creditor/mortgagee, belongs to the class of potestative condition which is null and
void under [Article] 1308 of the New Civil Code.

SBC argues that the provision on interest rate observed the principle of mutuality of contracts. Absolute
discretion on its part is wanting because a ceiling on the maximum applicable rate is found in the addendum. It
is the market forces that dictate and establish the rate of interest to be applied

ISSUE:
Did the provisions on interest rate in the revolving credit line agreement and its addendum violate the principle
of mutuality of contracts.

RULING:
Yes, the provisions on interest rate violate the principle of mutuality of contracts.

Stipulations as to the payment of interest are subject to the principle of mutuality of contracts. As a principal
condition and an important component in contracts of loan, interest rates are only allowed if agreed upon by
express stipulation of the parties, and only when reduced into writing. Any change to it must be mutually agreed
upon, or it produces no binding effect.

First, the authority to change the interest rate was given to SBC alone as the lender, without need of the written
assent of the spouses Mercado. This unbridled discretion given to SBC is evidenced by the clause "I hereby
give my continuing consent without need of additional confirmation to the interests stipulated as computed by
[Security Bank]." Second, the interest rate to be imposed is determined solely by Security Bank for lack of a
stated, valid reference rate. The reference rate of "Security Bank's prevailing lending rate" is not pegged on a
market-based reference rate as required by the BSP.

Therefore, the provisions on the interest rate are null and void. Nevertheless, legal interest may be imposed on
the outstanding loan.

100
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

PLACE OF PRINTING IMMATERIAL TO THE VALIDITY OF PUBLICATION OF NOTICE OF SALE

ISSUANCE OF WRIT OF POSSESSION IS MINISTERIAL IF MORTGAGOR POSSESSES THE

FORECLOSED PROPERTY

14. Gotesco Properties v. Solid Bank Corp.

G.R. No.209452, July 26, 2017
Leonen, J.

FACTS:
In a petition for review on certiorari, petitioner Gotesco Properties (Gotestco) assailed the CA decision affirming
the RTC’s ruling which dismissed its complaint for the annulment of foreclosure proceedings.

Gotesco obtained from Solidbank a loan which was secured by several parcels of land. One of the lots
mortgaged was a property in Pampanga. When the loan matured, petitioner found it difficult to pay because of
the financial crisis. Gotesco sent a letter to Solidbank proposing to restructure the loan obligation. The loan
restructuring agreement proposed to extend the payment period to seven (7) years. When the loan became
due, Gotesco failed to pay. Solidbank filed a petition for extrajudicial foreclosure of the lot. Public auction was
held and Solidbank was declared the winning bidder. Gotesco filed a complaint for annulment of foreclosure
proceedings claiming that the jurisdictional requirements under Act No. 3135 were not complied with. The RTC
denied the annulment of the foreclosure.

Gotesco maintains that the foreclosure proceeding is null and void. It insists that respondent Solidbank agreed
to restructure its loan, granting a "payment period of seven (7) years with two (2) years grace period. Gotesco
also contends that the publication of the Notice of Sale in Remate was defective as it should have been
published in newspapers published, edited and circulated" in the same city or province where the foreclosed
property was located. The land being sold was situated at San Fernando, Pampanga and Remate was printed
and published in Manila.

ISSUES:
1. Is the publication of the Notice of Sale in Manila valid considering the subject land was situated at San
Fernando, Pampanga?
2. Is the issuance of writ of possession in favor of Solidbank, the winning bidder in the foreclosure sale,
ministerial?

RULING:
1. Yes, the publication of the Notice of Sale in Manila is valid.

The SC cited Bonnevie vs. CA where it held that the crucial factor is not where the newspaper is printed but
whether the newspaper is being circulated in the city where the property is located. Markedly, what the law
requires is the publication of the Notice of Sale in a "newspaper of general circulation," which is defined as: “To
be a newspaper of general circulation, it is enough that "it is published for the dissemination of local news and
general information; that it has a bona fide subscription list of paying subscribers; that it is published at regular
intervals" . . . The newspaper need not have the largest circulation so long as it is of general circulation.”

Verily, there is clear emphasis on the audience reached by the paper; the place of printing is not even
considered.

Therefore, the publication of notice of foreclosure sale in a newspaper of general circulation whether it is made
in Manila or in San Fernando, Pampanga, is vealid

2. Yes, the issuance of writ of possession in favor of Solidbank is ministerial.

The SC in China Banking Corp. v. Spouses Lozada discussed that when the foreclosed property is in the
possession of a third party, the issuance of a writ of possession in favor of the purchaser ceases to be

101
ministerial and may no longer be done ex parte. However, for this exception to apply, the property must be held
by the third party adversely to the mortgagor.

The Court of Appeals correctly held that this case does not fall under the exception. Here, it is the petitioner,
and not a third party, who is occupying the property.

Therefore, the issuance of the Writ of Possession is ministerial.

102
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

TWO-BIDDER RULE IS NOT REQUIRED IN EXTRAJUDICIAL FORECLOSURES

15. Boston Equity Resources v. Del Rosario

G.R. No. 193228, November 27, 2017
Bersamin, J.

FACTS:
In an appeal by certiorari, petitioner Boston Equity Resources, Inc. (Boston), assailed the CA decision holding
the extrajudicial foreclosure sale null and void for not complying with the two-bidder rule.

Boston is a private corporation duly registered and operating under the laws of the Philippines. Del Rosario and
Boston entered into a Real Estate Mortgage whereby the former, representing himself as single, mortgaged 8
parcels of land to Boston for P52 Million. Thereafter, Boston sent a Demand Letter to Del Rosario for the
payment of P52.9 Million, claiming it to be the principal amount Del Rosario owed to the former excluding
penalties and other charges. In response to Boston's demand letter, Del Rosario sent a Letter asking Boston to
furnish him an accurate and specific statement of account, so that he can properly settle his obligation.

Instead of heeding Del Rosario's requests for an accurate statement of account, Boston sent another Demand
Letter, Del Rosario asked for [an] additional time to settle his obligation. Boston did not grant Del Rosario's
request for time to settle his loan but proceeded to foreclose Del Rosario's properties
In the said sale, Boston was declared the sole bidder for the properties in the amount of P75 Million.

Edgardo brought his complaint for the declaration of the nullity of the extra judicial foreclosure of the REM and
the sheriff's sale. The CA opined that the extrajudicial foreclosure sale was further null and void for failure to
comply with the procedure mandated by A.M. No. 99-10-05-0 (Procedure in Extra-Judicial Foreclosure of
Mortgage) requiring at least two bidders during the public auction.

ISSUE:
Is the two-bidder rule required in extrajudicial foreclosure of mortgage?

RULING:
NO, the two-bidder rule is not required in extrajudicial foreclosure of mortgage.

Neither Act No. 3135 nor the previous circulars issued by the SC governing extrajudicial foreclosures provide
for a similar requirement. The two-bidder rule is provided under PD 1594 and its implementing rules with
respect to contracts for government infrastructure projects because of the public interest involved. Although
there is a public interest in the regularity of extrajudicial foreclosure of mortgages, the private interest is
predominant. The reason, therefore, for the requirement that there must be at least two bidders is not as
exigent as in the case of contracts for government infrastructure projects.

On the other hand, the new requirement will necessitate republication of the notice of auction sale in case only
one bidder appears at the scheduled auction sale. This is not only costly but, more impor-tantly, it would render
naught the binding effect of the publication of the originally scheduled sale. Prior publication of the extrajudicial
foreclosure sale in a newspaper of general circulation operates as constructive notice to the whole world.

Conformably with the foregoing, the foreclosure sale of the mortgaged properties at the public auction held on
June 27, 2007 could not be invalidated for its non-compliance with the two-bidder rule.

103
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

NON-REGISTRATION OF REAL ESTATE MORTGAGE IS IMMATERIAL AS TO ITS BINDING EFFECT

BETWEEN THE PARTIES THERETO

16. Coca-cola Bottlers Phils., Inc. v. Soriano

G.R. No. 211232, April 11, 2018
Tijam, J.

FACTS:
In a petition for review on certiorari, petitioner Coca-cola assailed the decision of the CA holding that the real
estate mortgage (REM) was not binding between the parties for failure to substantially comply with the form
required by law.

Spouses Efren and Lolita Soriano are engaged in the business of selling defendant-appellant’s Coca-Cola
products. Sometime in 1999, Coca-cola, thru Cipriano informed plaintiffs-appellees that the former required
security for the continuation of their business. Plaintiffs-appellees were convinced to hand over 2 certificates of
titles over their property and were made to sign a document. Defendant Cipriano assured plaintiffs-appellees
that it will be a mere formality and will never be notarized.

Subsequently, plaintiffs-appellees informed defendant-appellant Coca-Cola of their intention to stop selling

Coca-Cola products due to their advanced age. Thus, plaintiffs-appellees verbally demanded from defendant-
appellant the return of their certificates of titles. However, the titles were not given back to them. When
plaintiffs-appellees were contemplating on filing a petition for the issuance of new titles, they discovered for the
first time that their land was mortgaged in favor of defendant-appellant Coca-Cola. Worse, the mortgage land
was already foreclosed. Hence, plaintiffs-appellees filed a complaint for annulment of sheriff’s foreclosure sale.

ISSUE:
Is the REM binding between the parties although it was not notarized?

RULING:
YES. The REM is binding between the parties although it was not notarized.

As held in Mobil Oil Philippines, Inc. vs. Ruth R. Diocares, the codal provision is clear and explicit. Even if the
instrument were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot be
any clearer. Effect must be given to it as written. The mortgage subsists; the parties are bound. As between
them, the mere fact that there is as yet no compliance with the requirement that it be recorded cannot be a bar
to foreclosure.

Although Article 1358 of the New Civil Code requires that the form of a contract transmitting or extinguishing
real rights over immovable property should be in a public document, the failure to observe such required form
does not render the transaction invalid. The necessity of a public document for the said contracts is only for
convenience; it is not essential for its validity or enforceability. Consequently, when there is a defect in the
notarization of a document, the clear and convincing evidentiary standard originally attached to a duly-notarized
document is dispensed with, and the measure to test the validity of such document is preponderance of
evidence.

Thus, as between the parties to a mortgage, the non-registration of a REM deed is immaterial to its validity.

104
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

PURCHASER IN FORECLOSURE SALE BECOMES ABSOLUTE OWNER IF NO REDEMPTION IS MADE

WRIT OF POSSESSION MAY BE ISSUED IN FAVOR OF THE PURCHASER IN FORECLOSURE SALE

17. Norma I. Baring v. Elena Loan and Credit Company, Inc.

G.R. No. 224225, August 14, 2017
Peralta, J.

FACTS:
In a petition for review on certiorari, petitioner Norma Baring assailed the resolution of the CA granting the
application for an ex-parte writ of possession in favor of respondent Elena Loan and Credit Company, Inc.
(Elena Loan).

Baring and 3 others obtained a series of loans and other credit accommodations from Elena Loan, a duly
organized lending investor. Baring executed a Deed of Real Estate Mortgage (REM) over her registered parcel
of land, with improvements as a security for the said loan. In the REM, the parties agreed that Elena Loan, as
the mortgagee, may foreclose the mortgage extrajudicially in accordance with Act No. 3135 should Baring
default in the payment of her obligation. Subsequently, the debtors failed to pay their obligations despite
repeated demands.

Consequently, Elena Loan filed a Petition for Foreclosure under Act No. 3135, as amended. Elena Loan
participated in the public auction and emerged as the highest bidder and a certificate of sale was issued in its
favor. Eventually, the period of redemption expired without Baring exercising her right of redemption. As the
new owner of the subject property, Elena Loan sent a demand letter to Baring and her co-debtors requesting
them to vacate the subject property but the demand remained unheeded.

Thus, Elena Loan filed an ex parte petition praying for the issuance of a writ of possession directing the sheriff
to eject the mortgagor Baring and place it in complete possession of the subject property, which the RTC
granted and the CA affirmed. Petitioner appealed claiming that respondent is not authorized by the SEC to act
as a lending company and, accordingly, it is devoid of any authority and personality to file the petition for
foreclosure of the real estate mortgage and to request for the issuance of an ex-parte writ of possession in its
favor.

ISSUES:
1. Does the respondent, who won as highest bidder in the foreclosure sale, become the absolute owner of the
property if the mortgagor failed to exercise his/her right of redemption?
2. May the purchaser request for the issuance of an ex-parte writ of possession of the property?

RULING:
1. Yes, the highest bidder becomes the absolute owner of the property if the mortgagor failed to exercise
his/her right of redemption.

It is well-settled that the purchaser in an extrajudicial foreclosure of real property becomes the absolute owner
of the property if no redemption is made within one year from the registration of the certificate of sale by those
entitled to redeem.

Here, respondent foreclosed the subject property after petitioner and her co-debtors failed to pay their
obligation under the promissory notes despite repeated demands. Upon compliance with the legal
requirements, a public auction was held where respondent emerged as the highest bidder. A certificate of sale
was issued in respondent's favor and was registered with the Office of the Register of Deeds.

As petitioner did not exercise her right of redemption over the foreclosed property, the title to the property was
consolidated in the name of respondent.

2. Yes, the purchaser may request for the issuance of an ex-parte writ of possession of the property

105
Section 7 of Act No. 3135, as amended by Act 4118, governs the issuance of a writ of possession in cases of
extrajudicial foreclosure sales of real estate mortgage. Hence, a writ of possession may be issued in favor of a
purchaser in a foreclosure sale of a real estate mortgage either (1) within the one-year redemption period, upon
the filing of a bond; or (2) after the lapse of the redemption period, without need of a bond. Within the one-year
redemption period, a purchaser in a foreclosure sale may apply for a writ of possession by filing a petition in the
form of an ex-parte motion under oath for that purpose.

Since respondent is the absolute and registered owner of the subject property, and entitled to the possession
thereof, the CA correctly ruled that it was the RTC's ministerial duty to issue the writ of possession prayed for
by the respondent.

Therefore, respondent is entitled to all the rights of ownership over the property, including the right of
possession, or jus possidendi.

106
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

WHEN NO REDEMPTION IS MADE, BUYER BECOMES ABSOLUTE OWNER OF FORECLOSED

PROPERTY AND IS ENTITLED TO THE POSSESSION AND FRUITS THEREOF

18. Spouses Teves v. Integrated Credit & Corporate Services, Co. (now Carol Aqui)
G.R. No. 216714, April 4, 2018
Del Castillo, J.

FACTS:
This is a petition for review on certiorari of the decision of the Court of Appeals denying the petitioner’s motion
for reconsideration.

Standard Chartered Bank (Standard) extended various loans to petitioners Godfrey and Ma. Teresa Teves and
the petitioners mortgaged their property as security. Eventually, petitioners defaulted in their loan payments.
Standard extrajudicially foreclosed on the mortgage, and the property was sold to Integrated Credit and
Corporate Services Co. (ICCS). When the petitioners failed to redeem the subject property, ICCS filed a
petition for the issuance of a writ of possession. During the proceedings, ICCS was substituted by respondent
Carol Aqui (Aqui), who appears to have acquired the property from ICCS. The RTC granted the petition and
ordered petitioners to deliver the monthly rentals of the subject property to respondent.

Petitioners argued that Aqui should file an independent action to collect the back rentals, since (a) the RTC,
sitting as a land registration court, does not have jurisdiction to award back rentals or grant relief which should
otherwise be sought in an ordinary civil action; and (b) Act No. 3135, as amended by Act No. 4118, contains no
provision authorizing the award of back rentals to the purchaser at auction.

Respondent contended that what she is collecting from petitioners are not "back rentals" but rents collected by
the latter from tenants of the property, which she is entitled to as a matter of law - being the owner of the
subject property.

ISSUE:
May the respondent collect back rentals in an ex parte application for writ of possession under Act No. 3135?

RULING:
Yes. Respondent may collect back rentals in an ex parte application for writ of possession under Act No. 3135.

In China Banking Corporation v. Spouses Lozada, the SC recognized the rights acquired by the purchaser of
the foreclosed property at the public auction sale upon the consolidation of his title when no timely redemption
of the property was made and as the absolute owner, is entitled to its possession and to receive rents and fruits
thereof. It is thus settled that the buyer in a foreclosure sale becomes the absolute owner of the property
purchased if it is not redeemed during the period of one year after the registration of the sale.

In the eyes of the law, petitioners clearly had no right to collect rent from the lessee of the subject property;
they were no longer the owners thereof, yet they continued to collect and appropriate for themselves the rentals
on the property to which ICCS was entitled. This is a clear case of unjust enrichment that the courts may not
simply ignore.

Therefore, respondent is entitled to the back rentals of the foreclosed property.

107
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

CREDITOR-MORTGAGEE MUST ALLEGE THE MATURITY OF THE LOAN WHICH THE REAL ESTATE
MORTGAGE SECURES

19. Philippine National Bank v. Elenita V. Abello, et al.

G.R. No. 242570. September 18, 2019
Reyes, A., Jr., J.

FACTS:
In a petition for review on certiorari, Philippine National Bank assailed the Decision of the CA ordering the
cancellation of encumbrances annotated on TCT Nos. T-127632, T-82974 and T-58311.

In 2008, a Complaint for Cancellation/Discharge of Mortgage/Mortgage Liens was filed by Elenita Abello, et al.
(collectively, the respondents) against the petitioner before the RTC, involving parcels of land covered by TCT
Nos. T-127632, T-82974, and T-58311, all located at Bacolod City, registered under the names of Manuel and
Elenita (the Spouses Abello). Inscribed on the TCTs were various encumbrances. Manuel died on October 14,
1998, consequently, his heirs, the respondents, executed a Declaration of Heirship on June 5, 2003 authorizing
Elenita to act as administrator of the estate.

In their complaint, respondents sought for the cancellation of the inscriptions claiming that since the petitioner
made no action against them since 1975, the action has already prescribed.

In holding that prescription has already set in, the RTC reckoned the period of prescription from the date of
inscription on the TCT. Thus, it explained that the right to foreclose the mortgage (REM) on TCT No. T-127632
accrued on March 19, 1984, while those in TCT Nos. T-82974 and T-58311 on November 5, 1985. The CA
affirmed the decision of the RTC.

ISSUE:
Is the cancellation of the annotated encumbrances on the subject TCTs proper?

RULING:
No. The cancellation of the annotated encumbrances on the subject TCTs is not proper.

A REM is an accessory contract constituted to protect the creditor’s interest to ensure the fulfillment of the
principal contract of loan. By its nature, therefore, the enforcement of a mortgage contract is dependent on
whether or not there has been a violation of the principal obligation.30 Simply, it is the debtor's failure to pay
that sets the mortgage contract into operation. Prior to that, the creditor-mortgagee has no right to speak of
under the REM as it remains contingent upon the debtor's failure to pay his or her loan obligation. Thus,
contrary to the opinion of the CA, for an action to foreclose REM to prosper, it is crucial that the creditor-
mortgagee establishes his right by alleging the terms and conditions of the mortgage contract, particularly the
maturity of the loan which it secures. The respondents' failure to allege, much more prove these information,
renders the action dismissible for failure to prove their cause of action.

Respondents failed to adduce evidence to establish when the loan became due. Consequently, when the right
to foreclose the mortgage accrued. Indubitably, the presentation of the contracts evidencing the loan and
mortgage is necessary as their cause of action is anchored on these documents.

As respondents failed to adduce sufficient evidence to establish that prescription has set in, it is clear that the
action must be denied and the complaint dismissed for want of cause of action.

108
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

BANKS MUST OBSERVE EXTRAORDINARY DILIGENCE IN HANDLING TRANSACTIONS

20. Philippine National Bank v. Felina Giron - Roque

G.R. No. 240311, September 18, 2019
Perlas-Bernabe, J.

FACTS:
In a petition for review on certiorari, petitioner PNB assailed the CA Decision ordered respondents Spouses
Apostol to pay PNB the amount of P119,820, and deleted the award of attorney's fees in favor of respondent
Felina Giron-Roque.

In 1995, Felina obtained a credit line from PNB in the amount of P230,000, which was secured by a real estate
mortgage. On February 10, 1997, she availed of a P50,000 loan (first loan) from the credit line, as evidenced
by a promissory note of even date, with a due date on August 9, 1997. When Felina was in the USA sometime
between April to August 1997, she purportedly filed, through Gloria Apostol, a stand-by application for further
availment of the credit line in the amount of P120,000 (second loan). She discovered that Gloria withdrew from
her PNB account a check for the second loan for P119,820.

On December 10, 1998, Felina sent a letter to PNB and included therein a cashier's check in the amount of
P16,000.00 as full payment of the first loan, which the latter received on December 21, 1998. In response, PNB
wrote Felina a letter returning the aforesaid cashier's check as the same was insufficient to cover for the
amount, interests, and penalties of both loans.Thereafter, PNB proceeded with the extrajudicial foreclosure of
Felina's real property. Felina filed a complaint for annulment of foreclosure sale and reinstatement of unused
credit accommodation with damages.

The RTC ruled in favor of Felina. The CA affirmed and held that the foreclosure sale had no basis since the
loan of P120,000.00 was void, considering that the subject check was forged and Gloria was not duly
authorized to withdraw from PNB. It emphasized that, for being in an industry imbued with public interest, PNB
should have exercised extraordinary diligence in handling the transaction.

ISSUE:
Is the foreclosure of the property proper considering that PNB is remiss of diligence required in dealing with the
check for the second loan?

RULING:
No, the foreclosure of the property is improper.

As unanimously found by the courts a quo: (a) Felina did not avail of the second loan, as her signature in the
subject check was forged; (b) Gloria was not duly authorized to obtain the second loan from PNB; and (c) PNB
was remiss of the diligence required of a banking institution in allowing the withdrawal and encashment of the
subject check representing the second loan. Absent any cogent reason to overturn the aforesaid findings, the
Court is inclined to uphold the same.

In this light, and in the interest of substantial justice, the Court deems it prudent to give Felina a reasonable
opportunity to fully settle her remaining obligation to PNB, in the amount of P14,565.58, plus interests and
penalties from the date of the Statement of Account on September 15, 1998 until the date of PNB's receipt of
the cashier's check on December 21, 1998.

Thus, the Court affirms the annulment of the extrajudicial proceedings, without prejudice to PNB's availment of
the proper remedies, should Felina fail to settle her loan obligation despite being given the opportunity to do so.

109
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

SURETY’S LIABILITY ATTACHES THE MOMENT CREDITOR DEMANDS FOR PAYMENT

21. The Mercantile Insurance Co., Inc. v. DMCI-Laing Corporation, Inc.

G.R. No. 205007, September 16, 2019
Caguioa, J.

FACTS:
In a petition for review on certiorari, The Mercantile Insurance Co., Inc. (Mercantile) assails the CA Decision
which reversed the decision issued by Construction Industry Arbitration Commission (CIAC) Arbitral Tribunal
which, in turn, dismissed the claim filed by respondent DMCI-Laing Construction, Inc (DLCI) against Altech
Fabrication Industries, Inc. (Altech) and Mercantile.

In 1997, Rockwell entered into an agreement with DLCI for the contraction of The Condominium Towers and
associated external landscaping works of Hidalgo Place, etc. (the ‘Projects’). Part of the terms of the contract
was the appointment of Altech as Rockwell’s nominated sub-contractor to DLCI for the supply and installation
of glazed aluminium and curtain walling. Altech secured a Performance Bond from Mercantile, as surety, for its
scope of work in the Project.

Altech failed to satisfactorily finish its work, thus, on Sep 3, 1999, DLCI sent a letter to Mercantile demanding
liquidation of the performance bond (First Call). On March 28, 2000, Mercantile advised DLCI that since Altech
had informed them that negotiations were underway for an amicable settlement, they would hold further
evaluation of DLCI’s claim in abeyance. After negotiations between DLCI and Altech fell through, DLCI
reiterated its demand for liquidation on Nov 28, 2000. Mercantile denied DLCI’s claim on Feb 26, 2001 on the
ground that the performance Bond expired on March 5, 2000.

DLCI filed a complaint against Altech and Mercantile before the CIAC. CIAC held that Mercantile should be
released from its obligations under the Performance Bond pursuant to Article 2080 of the Civil Code, since
DLCI’s delay had deprived it of the opportunity to exercise its right of subrogation against Altech. CA reversed
the decision of CIAC.

ISSUE:
Is Mercantile liable to pay on the basis of the performance bond upon demand by the DLCI?

RULING:
YES. Mercantile is liable to pay on the basis of the performance bond upon demand by the DLCI.

Under the Performance Bond, Mercantile obligated itself to pay DLCI immediately upon demand,
notwithstanding any dispute as to the fulfilment of Altech’s obligations under the Sub-contract. The
performance Bond thus stand as a contact of surety under Art 2047 of the Civil Code. While the contract of
surety stands secondary to the principal obligation, the surety’s liability is direct, primary and absolute, albeit
limited to the amount for which the contract of surety is issued. The surety’s liability attaches the moment a
demand for payment is made by the creditor.

While the performance bond in this case is conditioned upon DLCI’s first demand, a close reading of its terms
unequivocally indicates that Mercantile’s liability thereunder consists of pure obligation since such liability
attaches immediately upon demand, and is neither dependent upon any future or uncertain event, nor a past
event unknown to the parties.

Thus, the performance bond is on that is callable on demand. Mercantile’s liability became due upon its receipt
of the First Call.

110
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

IF MORTGAGOR’S OUTSTANDING OBLIGATIONS ARE HIGHER THAN THE SECURED OBLIGATIONS,

MORTGAGEE CAN ENFORCE THE MAXIMUM AMOUNT OF MORTGAGE

22. Shemberg Marketing Corp. v. Citibank, N.A., Nemesio Solomon

G.R. No. 216029, Sept. 4, 2019
Inting, J.

FACTS:
This is a Petition for Review on Certiorari filed by petitioner Shemberg Marketing Corporation assailing the
decision of the CA reversing and setting aside the RTC Decision that declared the subject real estate mortgage
void for lack of consideration.

Shemberg executed a real estate mortgage (REM) over a parcel of land in favor of respondent Citibank to
secure loan accommodations. Shemberg defaulted in the payment of its outstanding obligation to Citibank, so
the latter commenced the extrajudicial foreclosure of the mortgaged properties. Upon learning of the
foreclosure sale, Shemberg filed a Complaint for rescission or declaration of nullity of the contract of REM
against Citibank, and alleged that Shemberg executed the subject REM in Citibank’s favor because it relied on
the representation that its credit line would be renewed. However, despite the execution of the mortgage,
Citibank refused to renew and increase Shemberg’s credit line.

Shemberg asserted that the REM was void for lack of consideration, given Citibank’s failure to comply with its
commitment to renew and increase its credit line with the bank.

Citibank countered that it required the execution of the REM in order to provide additional security/collateral to
augment Shemberg’s subsisting chattel mortgage due to the latter’s dire financial condition at the time. Citibank
also pointed out that the REM secured the various obligations of Shemberg to the bank up to the extent of
P28,242,000.00.

ISSUE:
Is the REM valid even if Shemberg’s outstanding obligation is significantly higher than the amount of secured
obligations?

RULING:
Yes, the REM is valid even if Shemberg’s outstanding obligation is significantly higher than the amount of
secured obligations.

The REM contract shows that the subject REM was executed to secure loan accommodations, as well as past,
present, and future obligations, of Shemberg to Citibank. Shemberg itself admitted that when the REM was
executed, it had an outstanding obligation totaling P58,238,200.00 with Citibank. The fact that Shemberg’s
outstanding obligation is significantly higher than the amount of secured obligations does not invalidate the
REM. It only means that in case of default, Citibank can enforce the mortgage to the maximum amount of
P28,242,000.00, which, notably, is simply the total liquidation value of the mortgaged properties.

Considering Shemberg’s failure to pay the balance under the promissory note it executed, Citibank was well
within its rights under the REM to initiate the foreclosure proceedings on the mortgaged properties.

111
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

A FLOATING INTEREST RATE SYSTEM IS VALID, PROVIDED THAT THE MARKET-BASED REFERENCE
RATE IS IN WRITING AND AGREED UPON BY THE PARTIES

23. Ricardo Vasquez v. Philippine National Bank

G.R. No. 228397, August 28, 2019
Caguioa, J.

FACTS:
Petitioner Ricardo Vasquez filed a Petition for Review on Certiorari against respondent Philippine National
Bank (PNB), partially assailing the CA decision. On the other hand, PNB filed a Petition for Review on
Certiorari against Vasquez, also praying for the reversal of the CA’s assailed decision.

PNB granted Vasquez a loan under Pangkabuhayan ng Bayan Program and another under the Revolving
Credit Line (RCL), secured by a Real Estate Mortgage (REM). Vasquez alleged that the interest rate agreed
upon is only 17% and up to 18% for three years, but he later suspended further payment when PNB unilaterally
escalated upwardly the interest rate without his conformity, placing him in a situation where he could no longer
pay his obligations. Hence, his properties were being subjected to foreclosure proceedings. In his complaint for
the annulment of foreclosure proceedings, the RTC held that the loan agreements were valid, while the CA
held that the unilateral imposition of increased interest rates which is violative of the principle of mutuality of
contract, and declared the same void.

Vasquez argues that the CA erred in imposing a 12% per annum interest on the subject loans as the interest
rate should be 6% per annum based on applicable jurisprudence.

PNB argues that the CA committed a serious and reversible error in arriving at the conclusion that the interests
applied on the subject loans were void.

ISSUE:
Are the interest rate schemes imposed by PNB on the loans valid?

RULING:
No, the interest rate schemes imposed by PNB on the loans are not valid.

There may be instances wherein an interest rate scheme which does not specifically indicate a particular
interest rate may be validly imposed. Such interest rate scheme refers to what is typically called a floating
interest rate system. Floating rates of interest refer to the variable interest rates stated on a market-based
reference rate agreed upon by the parties. Stipulations on floating rate of interest differ from escalation clauses.
Escalation clauses are stipulations which allow for the increase of the original fixed interest rate. In contrast, a
floating rate of interest pertains to the interest rate itself that is not fixed as it is dependent on a market-based
reference that was agreed upon by the parties.

In the proviso on the interest rate to be imposed on the Pangkabuhayan Loan, it indicated that “the Borrower
agrees to pay interest on the Loan at the rate per annum of Prime Rate plus Spread interest rate.” The loan
documents on record do not elaborate as to how the “Prime Rate plus Spread” is determined. There is no
reference rate on which the “Primate Rate plus Spread” is based. On the other hand, the proviso on the specific
interest rate to be imposed on the RCL obligation was left blank.

As there is absolutely no market-based reference rate indicated in the loan documents, the interest rate
scheme provided under the Credit Agreement and the promissory notes is null and void.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

IN CONTINUING GUARANTY, THE MORTGAGE SHALL NOT BE DISCHARGED UNTIL FULL PAYMENT
OF ALL DEBTS OBTAINED AND UNPAID

24. Mario and Erlinda Tan v. United Coconut Planters Bank

G.R. No. 213156, July 29, 2019
Reyes, J. JR, J.

FACTS:
Petitioners Spouses Tan assail through this Petition for Review on Certiorari the CA Decision which affirmed
the trial court’s dismissal of petitioner’s complaint for specific performance and damages against respondent
United Coconut Planters Bank (UCPB).

UCPB granted petitioners an omnibus credit line in an amount not exceeding P300 million, which was also
made available as an accommodation to several other parties. This was secured by a Surety Agreement and a
Real Estate Mortgage (REM) covering 2 parcels of land located in Caloocan. When the credit line expired,
UCPB granted petitioners another omnibus credit line in an amount not exceeding P500 million. The REM over
the Caloocan properties was carried over and a REM over the Paranaque properties was executed. When the
P500 million credit line expired, they were informed that UCPB could only grant a credit line in an amount not
exceeding P250 Million. Finding this unacceptable, Mario requested for the immediate release of the REMs.

UCPB reminded Mario that the REM over the Paranaque properties secured the payment of all loans and other
credit facilities obtained by Mario and the other parties, and that the Surety Agreement guaranteed full payment
of all sums payable by Beatriz (one of the several other parties). Since there were outstanding credit
accommodations to Beatriz, UCPB declined Mario’s request.

Spouses Tan argued that the REMs and the Surety Agreement secure only those obligations drawn from the
credit line agreements, the former being merely accessory to the latter. Thus, obligations incurred by Beatriz
which were not drawn from either the P300 million or P500 million credit line agreements were not secured by
the REMs and the Surety Agreement.

ISSUE:
May the REMs be cancelled upon the non-renewal of the credit line of petitioners?

RULING:
No. The REMs may not be cancelled upon the non-renewal of the credit line of petitioners.

In Bank of Commerce v. Sps. Flores, it was held that “Under Article 2053 of the Civil Code, a guaranty may be
given to secure even future debts, the amount of which may not be known at the time the guaranty is executed.
This is the basis for contracts denominated as a continuing guaranty or suretyship… In other words, a
continuing guaranty is one that covers all transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the expiration or termination thereof.”

Here, the terms of the REMs show that the mortgages are intended as security not only for the availments from
the P300 and P500 million credit lines, but as security for all amounts that spouses Tan may owe UCPB,
including accommodations which spouses Tan extended to other parties.

Thus, in the absence of proof that these obligations had been extinguished, UCPB cannot, as yet, be
compelled to release the REMs.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

IN THE ABSENCE OF STIPULATION, LEGAL INTEREST FOR LOANS OR FORBEARANCE OF MONEY,

GOODS OR CREDITS, AND RATE ALLOWED IN JUDGMENTS IS 6% PER ANNUM

25. Jose Mari Velez, Jr., v. Santillan-Baens, Inc.

G.R. Nos. 244182-83, June 3, 2019
Notice

FACTS:
In the petitions for review on certiorari, petitioners assail the resolution and decision of the CA in relation to a
complaint for annulment and/or declaration of nullity of the purported contracts and damages against Santillan-
Baens, Inc. (SBI)’s Treasurer De Castro, et al..

SBI is a closed family corporation established by Baens siblings. Their parents bought a parcel of land (subject
property). In 2001, a notarized Deed of Real Estate Mortgage (REM) was annotated on the TCTs for the
subject property which was supposedly used as collateral to secure a P15Million loan of SBI. The REM was
purportedly executed between mortgagor SBI, represented by De Castro (SBI Treasurer) and mortgagees
Navarez and Dimaculangan. After discovery of the existence of the REM, SBI and the Baens siblings filed a
complaint for annulment and/or declaration of nullity of the purported contracts and damage.

In a decision dated October 10, 2014, the RTC ruled in favor of SBI and the Baens siblings, and also decreed
on the cross-claims directing defendants Castro to reimburse defendant Navarez or her substituted heirs and
Dimaculangan the amount of P14 Million and P1 Million, respectively, with 12% interest per annum from the
filing of this complaint

ISSUE:
Is the interest rate of 12% per annum on the monetary awards granted by the RTC correct?

RULING:
No, the interest rate of 12% per annum on the monetary awards granted by the RTC is incorrect.

The Court modifies the appealed Decision as regards the interest rates on the monetary awards following the
guidelines laid down by the Court in Nacar v. Gallery Frames. In the absence of an express stipulation as to the
rate of interest that would govern the parties, the rate of legal interest for loans or forbearance of any money,
goods or credits and the rate allowed in judgments shall no longer be 12% per annum but will now be 6% per
annum effective July 1, 2013. It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively.

With regard to those judgments that have become final and executory prior to July 1, 2013, said judgments
shall not be disturbed and shall continue to be implemented applying the rate of interest fixed therein.

Consequently, the 12% per annum legal interest shall apply only until June 30, 2013. Come July 1, 2013 the
new rate of 6% per annum shall be the prevailing rate of interest when applicable.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

COMPENSATORY INTEREST ON UNLIQUIDATED CLAIMS IS RECKONED FROM THE DATE OF

JUDGMENT OF THE COURT OR QUASI-JUDICIAL BODY

26. Philippine Commercial and International Bank v. William Golangco Construction Corp.,
G.R. Nos. 195372 & 195375, April 10, 2019
Caguiao, J.

FACTS:
In two petitions for review on certiorari, both Philippine Commercial and International Bank (PCIB) and William
Golangco Construction Corp. (WGCC) assailed the CA Decision and Resolution in relation to an arbitration
case originally filed with the Construction Industry Arbitration Commission (CIAC).

WGCC and PCIB entered into a contract for the construction of the extension of PCIB Tower II. PCIB accepted
the turnover of the completed work by WGCC. Portions of the granite wash-out finish of the exterior walls of the
building began peeling off and falling from the walls. WGCC made minor repairs In 1994, PCIB entered into
another contract with another Corporation to re-do the entire granite wash-out finish after WGCC manifested
that it was "not in a position to do the new finishing work." PCIB filed an arbitration case with the CIAC for the
reimbursement of the repairs expenses.

WGCC interposed a counterclaim for material cost adjustment, which the CIAC granted. CIAC issued writ of
execution with the inclusion of legal interest of 6% on the principal award to PCIB computed from June 21,
1996 when the CIAC Decision was issued. Meanwhile, WGCC appealed the arbitration case which reached the
SC, and the SC ruled that WGCC is not liable to PCIB. Such decision became final on April 27, 2006. Thus,
WGCC claim that it is entitled to interest of 6% from June 21, 1996 until April 26, 2006 in addition to the 12%
interest from April 27, 2006 until full payment.

PCIB argued that its liability for interest should commence only on April 27, 2006, the date on which the SC
Decision that granted WGCC's appeal became final.

ISSUE:
Should PCIB’s liability for interest be computed from April 27, 2006 when the SC decision became final?

RULING:
No. PCIB’s liability for interest should be computed from June 21, 1996 when the CIAC Decision was issued.

Compensatory interest (i.e., interest awarded as damages under Articles 2209 to 2213 of the Civil Code) is that
which is "allowed in actions for breach of contract or tort for the unlawful detention of money already due." The
reckoning point for compensatory interest, when imposed on unliquidated claims, is set on the date of the
judgment of the court or quasi-judicial body granting the award since it is only at such time when the amount
claimed becomes "liquidated," that is, determined with reasonable certainty.

In this case, WGCC's claim became "liquidated" on June 21, 1996, the day the CIAC Decision awarding its
counterclaim amounting to P5,777,157.84 was issued.

Hence, WGCC is entitled to compensatory interest at the rate of 12% from June 21, 1996 to June 30, 2013,
and 6% interest from July 1, 2013 until finality of this Decision.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

WILLFUL FAILURE TO PAY “JUST DEBTS” IS A LIGHT OFFENSE

27. Sps. Serafin V. Belleza Iii and Cristine C. Belleza v. Wilhelmina L. Ventura
A.M. No. SB-18-25-P; April 3, 2019
Notice

FACTS:
This case stemmed from a Compaint-Affidavit filed by complainant-spouses Belleza chargin respondent
Ventura, a Court Stenographer IV from the Office of Associate Justice Roland Jurado of the Sandiganbayan,
with violation of Sec. 3(e), RA No. 3019 and Grave Misconduct.

Sometime in 2015, Ventura introduced herself to Cristine as the wife of a retired judge with a lending business
at the Sandiganbayan. The former represented that an investment would yield as much as 7-10% monthly
interest. Consequently, Cristine invested P50,000.00 in respondent’s venture. Thereafter, the spouses Belleza
jointly invested an additional amount of P200,000.00. However, the promised return never materialized and
thus, the spouses repeatedly demanded from respondent the return of their money. Due to Ventura’s failure to
comply, the spouses Belleza initiated the instant case. Ventura denied having a lending business and
explained that the P50,000 from Cristine was actually meant to pay off suppliers for her buy and sell business,
but Cristine expressed interest in joining her business as her partner, to which she agreed. However, when the
business encountered financial difficulties, Ventura was unable to pay back her obligations.

ISSUE:
Was Ventura guilty of willful failure to pay just debts?

RULING:
Yes, Ventura is guilty of willful failure to pay just debts.

Under Section 46(F)(9), Rule 10 of the Revised Rules on Administrative Cases in the Civil Service (RRACCS)
punishes the willful failure to pay just debts as a light offense. “Just debts” are defined as “claims the existence
and justness of which are admitted by the debtor.” In this case, there is no question that Ventura admitted
borrowing money from the spouses and only offered as an excuse for her non-payment the alleged financial
predicament she has after her business suffered losses. All the requisites for the offense of willful failure to pay
just debts are therefore present.

Anent the penalty, under Section 46(F)(9), Rule 10 of the RRACCS, the willful failure to pay just debts is
classified as a light offense punishable by reprimand for the first offense. Hence, considering that this is
Ventura’s first infraction, the penalty of reprimand is warranted under the circumstances.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

NO INTEREST DUE UNLESS EXPRESSLY STIPULATED IN WRITING; CREDITOR IS ENTITLED TO

INTEREST AS INDEMNITY FOR DAMAGES ARISING OUT OF DELAY

28. Hun Hyung Park v. Eung Won Choi

G.R. No. 220826, March 27, 2019
Caguioa, J.

FACTS:
This case is a petition for review on certiorari under Rule 45 of the Rules of Court filed by petitioner Park
against respondent Choi, assailing the CA Decision. This petition arose from a complaint for estafa and
violation of BP 22 filed by Park against Choi.

On June 28, 1999, Park who was engaged in the business of lending money, extended a loan to Choi in the
amount of P1,875,000 which was not reduced into writing. As payment thereto, Choi issued a PNB Check in
the same amount dated Aug. 28, 1999 in favor of Park. The latter attempted to deposit the same to his bank
account but was dishonored for having been drawn against a closed account. Thereafter, Park sent a letter to
Choi informing the latter of the dishonored check but Choi failed to resolve the same. This prompted Park to file
a complaint against Choi for estafa and violation of BP 22. In his Counter-Affidavit, Choi claims that what he
borrowed was only P1,500,000, and that the P375,000 pertains to 25% interest which Park required him to
include in the check.

ISSUE:
Is Choi liable to pay Park the principal amount and corresponding legal interests thereon?

RULING:
Yes. The Supreme Court held that it is clear that, Choi, in his Counter-Affidavit, already admitted that he
borrowed money from Park, arguing only regarding the extent of his liability – i.e. that what he owed was
P1,500,000, and not P1,875,000. Thus, Choi himself having admitted liability, the only question that remains for
the Court to resolve is the extent of such liability.

In accordance with Article 1956 of the Civil Code, no interest shall be due unless it has been expressly
stipulated in writing. As to the principal, the Court finds that Choi is liable for the face value of the check
amounting to P1,875,000 due of the absence of proof as to any express agreement that P375,000 of the
P1,875,000 pertains to interest. Additionally, Choi is liable to pay Park compensatory interest as indemnity for
the damages the latter suffered as a result of delay in the payment of the loan. Delay in this case begins to run
from the time Park extrajudicially demanded from Choi the fulfillment of his loan obligation, that is, on May 19,
2000.

There being no stipulation as to the rate of compensatory interest, the rate applied is 6% per annum pursuant
to Article 2209 of the Civil Code.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE INTEREST DEEMED NEVER AGREED UPON

29. Spouses Romeo Tan and Shirlyn Tan v. Gonzalo T. Dumlao, et al.
G.R. No. 204042; March 6, 2019
Notice

FACTS:
This is a petition for review on certiorari assailing the Decision of the CA which affirmed with modification the
Decision of the RTC of Quezon City.

In 1994, petitioners tried to borrow money from respondents Dumlao and Lim to save their properties from
foreclosure. Respondents advised petitioners to borrow from China Bank but the latter declined to extend
petitioners a loan. Respondents accommodated petitioners in three loans amounting in total to P9,500,000,
which were to be paid by petitioners by monthly amortizations with China Bank, but the petitioners thereafter
failed to pay prompting respondents to advance the payments amounting to P7,190,809. However, pursuant to
their agreement, respondents computed petitioners' total obligation at P9,847,410.26. Petitioners filed a
complaint for sum of money and damages against respondents, claiming that they already paid China Bank
P3,959,869.69. RTC dismissed the complaint, but sustained the counterclaim. The RTC annulled the alleged
stipulated interest of 3% per annum accommodation fee in addition to the bank's monthly interest, and the 3%
interest per month on the amortized loan as they were excessive, iniquitous, and unconscionable. In lieu
thereof, the RTC imposed the legal interest of 12% per annum but stated that it was bound by petitioners'
admission and will respect the imposition of the interests as stipulated up to May 29, 1997. CA affirmed but
modified that the reckoning date of the imposition of legal interest should be the date of petitioners’ admission
of liability.

ISSUE:
May the interest stipulated by the parties be imposed despite being declared excessive, iniquitous, and
unconscionable?

RULING:
No. The Court affirmed the CA's disposition with respect to the rate of interest to be applied on petitioners'
obligation. The RTC erred in ruling that the parties are still bound by the void stipulated interest rates up to May
29, 1997.

When the interest stipulated by the parties is declared to be excessive, iniquitous or unconscionable, it is
deemed as if it was never agreed upon and the legal rate of interest is applied instead. The CA held that the
stipulated interest rates cannot be given effect at any time even if voluntarily assumed by petitioners. Indeed,
the imposition of iniquitous and unconscionable interest rate renders the same void. Since the stipulation on the
interest rate is void, it is as if there was no express contract thereon, in which case, courts may reduce the
interest rate as reason and equity demand.

However, pursuant to the Monetary Board Resolution No. 796 dated May 16, 2013, the sum of P7,190,809.87
due to respondents shall earn interest at the rate of 12% per annum from May 29, 1997 until June 30, 2013
until finality of this Resolution. The total amount owing to respondents as set forth in this Resolution shall
further earn legal interest the rate of 6% per annum from its finality until full payment.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

ASSIGNEE CANNOT ACQUIRE GREATER RIGHT THAN THE ASSIGNOR

30. Spouses Celones v. Metrobank

G.R. No. 215691, November 21, 2018
Tijam, J.

FACTS:
This is a petition for review on certiorari filed by petitioners (Spouses Celones) against respondents (Metrobank
and Atty. Dionido), assailing the Decision and Resolution of the Court of Appeals reversing the Order of the
RTC, declaring the Memorandum of Agreement without force and effect and declaring that petitioners were the
ones who redeemed the mortgaged properties.

Spouses Celones together with their company, Processing Partners and Packaging Corporation (PPPC),
obtained various loans from Metrobank and for which they mortgaged various properties. The Spouses
defaulted in paying their loan which lead to Metrobank foreclosing all the mortgaged properties. Prior to the
expiration of the one-year redemption period, Metrobank filed petitions for issuance of writs of possession to
take possession of the foreclosed properties. Petitioners offered to redeem the properties from Metrobank. The
latter issued a Conditional Notice of Approval for Redemption (CNAR) stating that the offer of petitioners to
redeem the property in the amount of P55 Million has been approved. Spouses Celones found Atty. Dionido
who agreed to loan them the said amount. In lieu of executing a loan agreement, Spouses Celones, PPPC,
Metrobank and Atty. Dionido executed a Memorandum of Agreement (MOA) wherein the parties agreed for the
subrogation of Atty. Dionido to all the rights, interests of Metrobank over the loan obligation of Spouses
Celones and the foreclosed properties. Metrobank issued Payment Slips in favor of Spouses Celones and
caused the dismissal of the petitions for issuance of writs of possession on the ground that Spouses Celones
had already redeemed the properties. On the belief that they have redeemed the foreclosed properties, the
Spouses Celones demanded from Metrobank the issuance of a Certificate of Redemption. However, the latter
refused to issue the same on the ground that all its rights and interests over the foreclosed properties had been
transferred to Atty. Dionido, as such, he should be the one to issue the said certificate.

ISSUE:
Were Spouses Celones able to redeem the foreclosed properties through the loan obtained from Atty. Dionido?

RULING:
Yes. Under the MOA, Metrobank assigned all its rights and interests over the foreclosed properties to Atty.
Dionido. Atty. Dionido being an assignee of Metrobank, he merely steps into the shoes of the assignor,
Metrobank. He can acquire no greater right than that pertaining to his assignor. Thus, when Atty. Dionido
agreed to the assignment of Metrobank's rights and interests over the foreclosed properties under the MOA, he
acquires exactly the rights and interests over the foreclosed properties as of the date of the signing of the MOA.
Unfortunately for Atty. Dionido, he merely acquired what right Metrobank has, as of the date of the signing of
the MOA, which was the issuance of a Certificate of Redemption, because the foreclosed properties have
already been redeemed by Spouses Celones from Metrobank, as evidenced by the fact that as soon as
Metrobank was paid the redemption amount, the latter issued payment slips in the name of Spouses Celones.
Further, after the payment of the P55 Million, Metrobank caused the dismissal of the civil cases it filed for
issuance of writ of possession due to the fact that the foreclosed properties had already been redeemed by the
Spouses Celones. To accept the contention that the redemption period of the foreclosed properties had already
lapsed and that Spouses Celones has lost their right over the foreclosed properties is to go against the basic
principle of assigment of credit that the assignee cannot acquire no greater right than the assignor. The Court,
however, found that Spouses Celones should pay the amount of P55 Million to Atty. Dionido with legal interest
counted from the date of finality of the Decision.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

ABSENT A STIPULATION, LEGAL INTEREST SHALL NOT BE AWARDED IN VOLUNTARY SALE

31. Republic v. Jose Gamir-Consuelo Diaz

G.R. No. 218732, Novemeber 12, 2018
J. Reyes, Jr., J.

FACTS:
This case is a petition for review on certiorari seeking to set aside the CA Decision holding that the Deed of
Absolute Sale cannot be taken as a waiver of the payment of interest because the determination of just
compensation in eminent domain cases is a judicial function.

Jose Gamir-Consuelo Diaz Heirs Association, Inc. (respondent) is a duly incorporated corporation composed of
the heirs of Jose Gamir and Consuelo Diaz. It was the registered owner of a parcel of land. After a series of
negotiations, respondent and the Republic of the Philippines, through the DPWH, executed a Deed of Absolute
Sale where it was agreed that respondent would sell the land to petitioner in consideration of P275,099.24. The
land was eventually registered in petitioner's name after respondent's receipt of the full consideration.

Respondent filed a complaint before the RTC wherein it was alleged that the subject parcel of land was taken
by the DPWH sometime in 1957 and the value of P275,099.24 as just compensation was based on the value of
the property in 1957; it made verbal and written demands to petitioner for the payment of interest from 1957;
and it had a right to receive interest because the DPWH had not paid just compensation when it occupied the
property in 1957.

ISSUE:
Is respondent entitled to receive legal interest despite the absence of stipulation for its payment?

RULING:
No. The rationale for the payment of interest in expropriation cases is to compensate landowners for the
income they would have made had they been properly compensated for their properties at the time of taking.
However, interest payment should be viewed in a different light when there is a voluntary sale between the
landowner and the government. Expropriation and voluntary sale have different legal effects, especially
considering that in the latter, the parties could freely negotiate the terms and conditions of the contract, i.e.,
they could include a stipulation concerning the payment of interest. In the case at bar, petitioner and
respondent voluntarily and freely executed and entered into a deed of sale covering the latter's land, and which
purports to represent the will of the parties concerning the transaction after a series of negotiations. The award
of legal interest in cases where the government acquires private property through voluntary sale is not a matter
of law. In negotiated sale, there is an existing contract that governs the relations of the parties and determines
their respective rights and obligations. In turn, these contractual stipulations should be complied with in good
faith, unless they are contrary to law, morals, good customs, public order or public policies. Hence, the laws
relating to contracts should govern in case of controversy in their application.

In the present case, it is undisputed that the Deed of Absolute Sale between petitioner and respondent does
not contain any provision regarding the payment of interest. Petitioner agreed to convey its property upon full
payment of the purchase price without reservation for any claim of interest. In addition, respondent cannot rely
on its prior demand for payment of interest because the correspondence was made prior to the execution of the
Deed of Absolute Sale and was rejected by petitioner. Thus, it could be reasonably concluded that respondent
had abandoned its demand for interest after it acquiesced with the contract notwithstanding the lack of
stipulation concerning payment of interest.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

UNCONSCIONABLE RATES OF INTEREST ON A MONEY DEBT, EVEN IF KNOWINGLY AND

VOLUNTARILY ASSUMED, ARE IMMORAL AND UNJUST

32. Rosemarie Q. Rey v. Cesar G. Anson

G.R. No. 211206, November 7, 2018
Peralta, J.

FACTS:
This is a petition for review on certiorari of the CA Decision which ordered herein petitioner to pay respondent
the sum of P902,847.87, plus 12% interest per annum from September 1, 2013 until fully paid, and to pay legal
interest of 12% per annum on the total award due, from the time the judgment becomes final and executory
until the same is fully satisfied.

Petitioner Rey is the President and one of the owners of a computer school in Legazpi City. Rey needed a
quick infusion of cash for the said school so she was introduced to Cesar Anson by a friend. Rey borrowed
from Anson several loans, to wit: The FIRST LOAN, in the amount of 200,000, payable in one year, and subject
to a 7.5% interest per month. The SECOND LOAN, in the amount of 350,000, payable in 4 months, and subject
to 7% interest per month. The THIRD and FOURTH LOANS, both in the amount of P100,000, were not put in
writing, but the parties verbally agreed that the same would be subject to 3% and to 4% monthly interest,
respectively.

Rey failed to settle her obligations when they became due. Anson sent Rey a Statement of Account seeking full
payment of all four loans amounting to P2,214,587.50. Rey, through counsel, sent Anson a letter, stating that
the interest rates imposed on the loans were irregular, if not contrary to law. The 7.5% and 7% monthly interest
rates imposed on the first and second loans, respectively, were excessive and unconscionable and should be
adjusted to the legal rate. Moreover, no interest should have been imposed on the third and fourth loans in the
absence of any written agreement imposing interest. On the other hand, Anson sought the dismissal of the
complaint for lack of cause of action. He contended that with the suspension of the Usury Law, parties can
freely stipulate on the imposable rates of interest that shall accrue on a loan.

ISSUE:
Were the stipulated interest rates on the subject loans illegal despite that suspension of the Usury Law?

RULING:
Yes. As case law instructs, the imposition of an unconscionable rate of interest on a money debt, even if
knowingly and voluntarily assumed, is immoral and unjust. Notwithstanding that parties to a loan agreement
have wide latitude to stipulate on any interest rate in view of the circular suspending the Usury Law, interest
rates whenever unconscionable may still be declared illegal. The Court held that even if Rey initially suggested
the interest rate on the first loan, voluntariness does not make the stipulation on an interest, which is iniquitous,
valid. The monthly interest rates of 7.5% and 7% are excessive, unconscionable, iniquitous, and contrary to law
and morals; and, therefore, void ab initio. As to the THIRD and FOURTH LOANS, the Court of Appeals
correctly held that as the agreement was merely verbal and not put in writing, no interest was due thereon. This
is in accordance with Article 1956 of the Civil Code which provides that "[n]o interest shall be due unless it has
been stipulated in writing."

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

PERSONAL NOTICE TO THE MORTGAGOR IN EXTRAJUDICIAL FORECLOSURE PROCEEDINGS IS

NOT NECESSARY

33. GSIS Family Bank v. Spouses Lim

G.R. No. 233734, November 5, 2018
Notice

FACTS:
For review is the assailed Decision of CA which annulled and set aside the Resolution issued by the RTC.

In 2003, Marco Polo Medical Systems obtained a P15-million loan from petitioner GSIS Family Bank.
Respondents Spouses Lim represented Marco Polo in the loan transaction. Respondents executed
promissory notes on behalf of Marco Polo and executed a Joint and Solidary Agreement to pay GSIS Family
Bank. Respondents also, acting as accommodation mortgagors, entered into a real estate mortgage (REM)
with GSIS Family Bank and mortgaged their property in Pasig City. Marco Polo defaulted on its loan
payments. Despite the sending of several demand letters by GSIS Family Bank, Marco Polo and
respondents failed to pay. GSIS Family Bank applied for the extra-judicial foreclosure of the mortgage, and a
foreclosure sale was set. Subsequently, the RTC of Pasig City issued a temporary restraining order,
however, before it could be served, the foreclosure sale was concluded as scheduled; and a Certificate of
Sale was issued to GSIS Family Bank as the winning bidder.

GSIS Family Bank asserts that respondents have knowledge of the foreclosure sale; even assuming that it
failed to comply with its obligation to notify respondents, there is proof to show that respondents were
substantially notified; and that respondents are estopped from impugning the validity of the foreclosure
proceedings, foreclosure sale and certificate of sale when they proposed to buy the subject property after the
title of the property was consolidated in petitioner's name.

ISSUE:
Did the respondents have sufficient information and knowledge of the foreclosure sale; and that their acts
prior to and during the foreclosure sale are enough proof that they were duly notified?

RULING:
No, the respondents did not have sufficient information and knowledge of the foreclosure sale.

Unless the parties stipulate, "personal notice to the mortgagor in extrajudicial foreclosure proceedings is not
necessary" because Section 3 of Act 3135 only requires the posting of the notice of sale in three public places
and the publication of that notice in a newspaper of general circulation.

Indeed, the GSIS Family Bank sent demand letters to respondents. However, the said demand letters cannot
be deemed as substantial compliance to the notice that it ought to have sent to respondents with regard to
the foreclosure sale on December 14, 2006. The contract, the REM in this case, has specifically provided
that notice with regard to the extra-judicial foreclosure sale, if any, should be given to the respondents. A
contract is the law between the parties and, that absent any showing that its provisions are wholly or in part
contrary to law, morals, good customs, public order, or public policy, it shall be enforced to the letter by the
courts.

Clearly, the CA committed no reversible error in holding that the foreclosure proceedings are null and void
because of GSIS Family Bank's failure to comply with said contractual obligation.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

CLERK OF COURT'S FUNCTION IN FORECLOSURE PROCEEDINGS IS PURELY MINISTERIAL

34. Cabebe v. Baluyot

A.M. No. P-18-3874 (Notice), November 5, 2018
Notice

FACTS:
This case arose from a Complaint-Affidavit filed by Loida Cabebe as the duly authorized representative of
Philippine Investment One (PI One) against respondent Clerk of Court, Atty. Rovelyn B. Baluyot charging her
for Gross Ignorance of the Law, Gross Misconduct, and Gross Neglect of Duty.

Complainant alleges that Development Bank of the Philippines (DBP) conveyed all its rights, title, and
interests over the loan obligation of Diversified Plastic Film System, Inc. (Diversified) in favor of PI One, its
successors, and assigns. However, Diversified failed to pay its loan obligation despite demand. Thus, PI One
filed a petition for foreclosure of the Mortgage Trust Indenture (MTI). The day before the scheduled auction
sale, Diversified filed a petition for the issuance of a writ of preliminary injunction (WPI) and/or temporary
restraining order (TRO). Judge Silva granted the petition on the same day, issuing a 72-hour TRO, which
enjoined the scheduled auction sale. The 72-hour TRO expired and no WPI was issued. Thus, PI One re-
applied for the foreclosure sale with the OCC. The auction was re-scheduled. However, Judge Silva issued a
WPI. PI One questioned Judge Silva's Order before the Court of Appeals. Subsequently, PI One re-applied
for the foreclosure of the MTI. After compliance with the publication requirements and payment of fees the
foreclosure sale was re-scheduled.

Complainant was, however, perturbed that despite the RTC's confirmation of its status as trustee, the CA's
dissolution of the WPI, and compliance with the requirement of republication and payment of the required
fees therefor, respondent had to obtain the opinion of Judge Silva and Judge Quimboy if she should proceed
with the foreclosure. Complainant charges respondent, arguing that despite her ministerial function in
foreclosure proceedings, respondent exercised discretion and deliberately decided not to perform her duty to
the damage and prejudice of PI One.

ISSUE:
Is the clerk of court’s function in foreclosure proceedings ministerial?

RULING:
Yes. The clerk of court's function in foreclosure proceedings is purely ministerial. "A ministerial act is one
which an officer or tribunal performs in a given state of facts, in a prescribed manner, in obedience to the
mandate of legal authority, without regard to or the exercise of his own judgment upon the propriety or
impropriety of the act done." Hence, when an application for extra-judicial foreclosure is filed before the OCC,
it was incumbent upon the clerk of court to discharge her duties.

Specifically, when PI One filed a re-application for the extra-judicial foreclosure, it was incumbent upon
respondent to proceed with her duty to receive and re-docket the same, collect the necessary fees, examine
its compliance with all the requirements, re-schedule the auction sale, and even proceed with such sale with
or without notice of the pendency of a motion for reconsideration before the CA, unless there was an
authorized instruction to the contrary. As a ministerial officer, the clerk of court ought to know that it is his or
her duty, in the absence of any instructions to the contrary, to faithfully perform what is incumbent upon him
or her. CAD

Thus, contrary to the OCA's recommendation, respondent cannot be faulted for receiving PI One's re-
application, re-docketing the same, and accepting the re-publication fees therefor as she was merely
performing her ministerial duty. At that time, she had no reason to refuse acceptance of the PI One's re-
application as there was no manifestation or notice of any lawful instruction or court order to do otherwise.
Notably, records show that respondent was notified of the pendency of a motion for reconsideration before
the CA, only after having accomplished her aforesaid ministerial duty.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

COURTS ARE BOUND TO STRICTLY SCRUTINIZE COMPROMISE AGREEMENTS

35. Republic v. Heirs of Cruz

G.R. No. 208956, October 17, 2018
Caguioa, J.

FACTS:
In 1977, the Department of Public Works and Highways conducted the widening of Visayas Avenue, Quezon
City. The construction encroached upon a 4,757-square meter portion (Disputed Portion) of Lot 643 divided into
three lots belonging to Uichanco, Uichanco-Denoga and Cruz. The Disputed Portion was subdivided, and
registered in the name of the Republic, but no payment of just compensation was made.

A certain Oliquino filed a claim for just compensation on behalf of several heirs of Cruz. She engaged the
services of Atty. Borja and executed a Deed of Assignment ceding in his favor a portion of the amount to be
received. Oliquino later repudiated the deed, and the Republic released partial payment in her favor.

The Republic withheld further payments and demanded the claimants to settle their opposing claims through
litigation but they failed to do so. Republic was constrained to file an Interpleader, impleading: (1) Oliquino
group, as heirs of Eligio Cruz; (2) Agalabia group, as heirs of Eligio Cruz; (3) the Estate of V. Uichanco; and (4)
Atty. Borja. The De Leon group, also claiming as heirs of Eligio Cruz, filed a Motion for Intervention which was
granted. Thereafter, Atty. Pagui filed a Motion for Summary Judgment, for and on behalf of the Estate of V.
Uichanco.

The case was later referred to the Philippine Mediation Center for mediation. Thereafter, the Oliquino group
presented for approval, before the RTC, a Compromise Agreement which allocated the remaining balance of
just compensation among the defendants in the Interpleader, but only the Oliquino and Agalabia groups agreed
upon the allocation. The approval of the Compromise Agreement was opposed by the De Leon group and Atty.
Borja. The RTC issued a Partial Judgment approving the terms of the Compromise Agreement. The Oliquino
and Agalabia groups filed a Motion for Issuance of Writ of Execution which the RTC granted while denying
several motions for reconsideration and motion to dismiss filed by the other claimants.

ISSUE:
Was the order directing the immediate execution of the Partial Judgment based on partial compromise proper?

RULING:
No. Article 2028 of the Civil Code defines a compromise as a "contract whereby the parties, by making
reciprocal concessions, avoid litigation or put an end to one already commenced." Once stamped with
judicial imprimatur, a compromise agreement becomes more than a mere contract binding upon the parties
having the sanction of the court and entered as its determination of the controversy, it has the force and effect
of any other judgment. It has the effect and authority of res judicata, although no execution may issue until it
would have received the corresponding approval of the court where the litigation pends and its compliance with
the terms of the agreement is thereupon decreed. Before approving a compromise, courts are thus bound to
strictly scrutinize the same to ensure that the compromise and its execution are compliant with the law and
consistent with procedural rules.

The Court finds that the RTC failed to exercise the degree of scrutiny required by law and jurisprudence when it
ordered immediate execution of the Compromise Agreement. The allocation of the balance was determined in
the Compromise Agreement without participation of other claimants who are also parties to the Interpleader.
The immediate execution of the Partial Judgment approving the Compromise Agreement facilitates the
premature distribution of the Republic's remaining balance without affording the other of the opportunity to
establish their entitlement, if any, to compensation beyond the amounts unilaterally set by the Oliquino and
Agalabia groups. This defeats the very purpose for which the Republic's Interpleader had been filed, as it
opens the portals to protracted litigation not only among the opposing claimants, but also between said
claimants and the Republic.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

POSTING AND PUBLICATION REQUIREMENTS UNDER ACT 3135, MANDATORY AND JURISDICTIONAL

36. Spouses Bautista v. Premiere Development Bank

G.R. No. 201881, September 05, 2018
Bersamin, J.

FACTS:
The petitioners are the registered owners of the parcel of land located in Montalban, Rizal. The petitioners
obtained a loan of P500,000 from respondent for which they executed a promissory note, and a real estate
mortgage over the said land and its improvements. The loan agreement stipulated that the obligation would be
payable in three years through monthly amortizations of P20,412.51, subject to interest and penalty charges.

Due to the petitioners’ failure to settle their obligation in full, the sheriff sent the first notice of extrajudicial
foreclosure sale to them, informing that the mortgaged property would be sold in a public sale. The petitioners
requested for postponement. The sheriff prepared, sent, and caused the publication and posting of the notice of
the extrajudicial foreclosure sale to be held on January 15, 2002. However, the sale did not push through as
scheduled and was rescheduled to February 18, 2002.

The sheriff conducted the foreclosure sale on said date although no publication and posting of the notice of the
rescheduled date was made. The property of petitioners was struck off to Premiere Bank as the lone bidder
and thus, a certificate of sale in its name was issued, and the same was annotated on the original copy of TCT.

The petitioners redeemed the property within the required period by tendering payment, and the sheriff issued
the certificate of redemption in their name. However, Premiere Bank refused to accept the redemption price
because their total unpaid outstanding obligation had accumulated to P2,062,254.26.

The petitioners sued the respondents in the RTC to seek the annulment of the sheriff's foreclosure sale
held on February 18, 2002 on the ground of the failure of the respondents to comply with the
mandatory and jurisdictional requirements of publication and posting of the notice of sale in
accordance with Act No. 3135 The RTC rendered judgment dismissing the petitioners' complaint. CA
affirmed the validity of the foreclosure sale despite the non-posting and non-publication of the notice of the
rescheduled sale.

ISSUE:
Was the extrajudicial foreclosure sale valid despite failure to publish and post the notice of the rescheduled
sale?

RULING:
No. The extrajudicial foreclosure sale held on February 18, 2002 was void ab initio. The law specifically
mandates the publication of the notice in a newspaper of general circulation for at least three consecutive
weeks if the value of the property is more than P400,000. The requirements for the posting and publication of
the notice for the extrajudicial foreclosure sale set on January 15, 2002 were complied with. However, the
notice for the rescheduled foreclosure sale was not posted and published as required by Act No. 3135.

The requirements for posting and publication under Act No. 3135 are mandatory and jurisdictional. The
objective of the notice requirements is to achieve a reasonably wide publicity of the sale so that whoever may
be interested may know of and attend the same. To allow the parties to waive the jurisdictional requirement can
convert into a private sale what ought to be a public auction. The Court have already settled that the
compliance with the requirements for posting and publication of the notice of the rescheduled sale was
essential to the validity of the sale. The compliance could not be waived by either of the parties to the mortgage
by reason of its being based on public policy considerations. As such, the statutory requirements of posting and
publication of the notice were not intended for the protection of the parties to the mortgage but for the benefit of
third persons.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

A SURETY BOND REMAINS EFFECTIVE UNTIL THE ACTION OR PROCEEDING IS FINALLY DECIDED,
RESOLVED, OR TERMINATED

37. Enriquez v. The Mercantile Insurance Co., Inc.,

G.R. No. 210950, August 15, 2018
Leonen, J.

FACTS:
Petitioner Enriquez filed a Complaint for Replevin against Wilfred Asuten before the RTC for the recovery of her
Toyota Hi-Ace van. Enriquez applied for a replevin bond from respondent The Mercantile Insurance Co., Inc.,
who issued Bond No. 138 for ₱600,000 which had a period of one year or until February 24, 2004. Enriquez
also executed an indemnity agreement with respondent, where she agreed to indemnify the latter "for all
damages, payments, advances, losses, costs, taxes, penalties, charges, attorney's fees and expenses of
whatever kind and nature" that it would incur as surety.

The RTC issued an Order dismissing the complaint without prejudice due to Enriquez's continued failure to
present evidence. It found that Enriquez surrendered the van to BPI San Fernando Branch, but did not comply
when ordered to return it to the sheriff within 24 hours. She also did not comply with prior orders to prove
payment of her premiums on the bond, or to post a new bond. Thus, the RTC declared Bond No. 138 forfeited,
and respondent was given 10 days to produce the van or to show cause why judgment should not be rendered
against it. RTC held a hearing on the final forfeiture of the bond and issued an Order directing respondent to
pay Asuten the amount of ₱600,000.

Respondent wrote to Enriquez requesting the remittance of ₱600,000 to be paid on the replevin bond, but the
latter failed. Respondent paid Asuten in compliance with the RTC Order. It was also constrained to file a
collection suit against Enriquez. The RTC ruled in favor of respondent. The CA affirmed the RTC’s finding that
Enriquez was liable for the full amount of the replevin bond issued by the respondent.

ISSUE:
Was Enriquez liable for the full amount of the bond paid by respondent, as surety, in relation to the case for
replevin previously filed by her?

RULING:
Yes. Petitioner argues that she should not have been made liable for the bond despite her failure to return the
van, considering that it was effective only until February 24, 2004, and that she did not renew or post another
bond. De Guia v. Alto Surety & Insurance, Co. requires that any application on the bond be made after hearing
but before the entry of judgment. Otherwise, the surety can no longer be made liable under the bond. For this
reason, a surety bond remains effective until the action or proceeding is finally decided, resolved, or
terminated. This condition is deemed incorporated in the contract between the applicant and the surety,
regardless of whether they failed to expressly state it.

This replevin case is a rare instance where the writ of seizure is dissolved due to the dismissal without
prejudice, but the bond stands because the case has yet to be finally terminated by the RTC. The peculiar
circumstances arose when petitioner failed to return the van to Asuten, notwithstanding the dismissal of her
action. In its discretion, the RTC proceeded to rule on the forfeiture of the bond. As a result, respondent paid
Asuten twice the value of the van withheld by petitioner, despite the van only being worth half the amount of the
bond.

The rationale to the requirement that the bond for a writ of seizure in a replevin be double the value of the
property is that the bond functions to indemnify the defendant in case the property is lost, and to answer for any
damages that may be awarded by the court if judgment is rendered in defendant's favor.

126
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

DEMAND IS ONLY MATERIAL WHEN THERE IS NO STIPULATED INTEREST, AND WHEN LEGAL
INTEREST IS PROPERLY IMPOSABLE

38. Manuelito P. Jugueta v. F.F. Cruz & Co., Inc.

G.R. No. 197993, August 8, 2018
Notice

FACTS:
On January 13, 2003 and March 23, 2006, Jugueta and FFCCI entered into Equipment Rental Agreement
Contracts. Under the contracts, Jugueta leased to FFCCI an air compressor, two units chipping hammer, two
air hoses, and two moil points. Both contracts contained the stipulation that the lessee agrees to pay within
seven (7) days after presentation of Statement of Account or Invoice and failure to do so will make him liable
for Two (2%) percent interest per month or fraction thereof.

On September 21, 2006, FFCCI received a demand letter from Jugueta referring to two outstanding balances
of FFCCI in the amount of P118,005.00 and P4,646.86. FFCCI ignored the letter, prompting Jugueta's counsel
to send a formal demand letter which was likewise not heeded. Consequently, Jugueta filed the complaint for
sum of money against FFCCI before the MTC. In its answer, FFCCI averred that Jugueta failed to credit its
payment made on March 15, 2003 in the amount of P125,116.72 which was suficient to discharge its obligation
to the latter. Also, it claimed that Jugueta overbilled FFCCI for stand-by hours and interest in the amount of
P106,393.02.

After trial, the MTC rendered its Decision 14 dated March 17, 2009 finding FFCCI liable for the principal amount
of obligation of P13,378.22, subject to the 2% per month stipulated interest. It further held that the stipulated
interest is to be reckoned from the date of demand, on September 21, 2006, and awarded attorney's fees in the
amount of P10,000.00. RTC affirmed the MTC Decision with modifications. It disagreed with the MTC that a
demand must first be established before the stipulated interest runs. The CA denied FFCCI's petition for review
and afirmed with modification the RTC's Joint Decision.

ISSUE:
Is the deletion of legal interest on the interests due from the time of demand proper?

RULING:
No. Jugueta may no longer question the principal amount for his failure to appeal the RTC Decision.

In Eastern Shipping Lines, Inc. v. Court of Appeals, we laid down the following rules on the imposition of
interests:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum

127
 from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.

We modified the rules in Nacar v. Gallery Frames, where we applied Bangko Sentral ng Pilipinas Monetary
Board Resolution No. 796 dated May 16, 2013. Effective July 1, 2013, the applicable legal interest rate of 12%
was reduced to 6% per annum.

As this case involves a forbearance of money arising from the non-payment of equipment rentals, it calls for the
application of the first and third paragraphs laid down in Eastern Shipping Lines, Inc. as modified by Nacar.
Under the first paragraph, the principal amount shall earn the stipulated interest. If there is none, the principal
amount shall earn legal interest from the time of default, i.e., extrajudicial or judicial demand. Demand is only
material when there is no stipulated interest, and on the occasion when legal interest is properly imposable.
Here, the contracts determine the maturity date of the payment as seven days after presentation of statement
of account or invoice. The contracts explicitly state that FFCCI is liable for damages in the form of stipulated
interest from failure to pay on the maturity date. Thus, the stipulated interest of 2% per month began to run
from the date agreed upon by the parties. At this juncture, we uphold the stipulated rate of interest of 2% per
month or 24% per annum as reasonable.

While the CA erred in deleting the legal interest on the stipulated interest from judicial demand until finality of
judgment, the RTC also erred in determining when the legal interest accrues. The legal interest on the
stipulated interest is to run from judicial, and not extrajudicial, demand, i.e., from the time of the filing of
complaint on January 18, 2007.

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 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

MORTGAGE CREATED AHEAD IS PREFERRED THAN SUBSEQUENT MORTGAGES

39. Roma Fe C. Villalon v. Rural Bank of Agoo, Inc.

G.R. No. 239986, July 8, 2019
Peralta, J.

FACTS:
This is a petition for review on certiorari assailing the Decision of the Court of Appeals granting the appeal of
herein respondent Rural Bank of Agoo Inc. (RBAI) and setting aside the decision of the RTC.

On May 18, 1998, the spouses George and Zenaida Alviar obtained a loan from RBAI, in the amount of
P145,000, secured by a real estate mortgage over their residential lot and house located at San Fernando, La
Union. On the same date, the mortgage was registered with the Register of Deeds (RD) of La Union. The loan
became due and payable on February 10, 1999, and was renewed for four (4) times. Spouses Alviar borrowed
P400,000 from Villalon which was secured by a Real Estate Mortgage executed on July 30, 2000 over the
same residential lot and house. The real estate mortgage was registered with the RD on July 6, 2001. On
several dates, the Spouses Alviar obtained additional loan from RBAI in the amount of P50,000 and P30,000,
both secured by a real estate mortgage over the same residential lot and house.

For failure to pay their loan, an extrajudicial foreclosure was resorted to by RBAI. The foreclosure sale was
reset to several dates. Spouses Alviar likewise failed to pay their loan to Villalon. Thus, Villalon applied for the
extrajudicial foreclosure of the mortgaged realties. The foreclosure sale was conducted wherein Villalon was
declared as the highest bidder. A Certificate of Sale of Real Property was issued to Villalon and the same was
registered with the RD on July 5, 2002. On June 16, 2004, the foreclosure sale initiated by RBAI finally pushed
through. RBAI was the highest bidder and the corresponding Certificate of Sale was issued to it. On the other
hand, Villalon had the property declared for taxation purposes in her business name "Villalon Lending Investor,"
and had paid realty taxes for the same. Upon discovering this, RBAI filed a Complaint for recovery of sum of
money and damages before the RTC against Villalon and the Spouses Alviar. The RTC issued a Decision
ordering the Spouses Alviar to pay RBAI. The complaint against Villalon was dismissed. On appeal, the CA
granted RBAI's appeal and set aside the decision of the RTC.

ISSUE:
Is the pronouncement that the mortgage with RBAI prevails over the mortgage with Villalon correct?

RULING:
Yes, such pronouncement is correct.

In Hidalgo v. La Tondeña, the Court held that a mortgage created much ahead in point of time, but registered
later than a levy of execution similarly registered, is preferred over the said levy.

In the case at bar, it is clear that RBAI's mortgage was first constituted over the unregistered real properties of
the Spouses Alviar on May 18, 1998 and was, likewise, registered with the RD on the same day. On the other
hand, Villalon's mortgage over the said properties was executed on July 30, 2000 and registered with the RD
on July 6, 2001. Considering that RBAI's mortgage was created and registered much ahead of time than that of
Villalon, RBAI's mortgage should be preferred. Thus, as correctly pointed out by the CA, the proper foreclosure
of the first mortgage by RBAI gave, not only the first mortgagee, but also subsequent lienholders like Villalon,
the right to redeem the property within the statutory period.

129
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

BANKING INSTITUTIONS ARE EXPECTED TO EXERCISE DUE DILIGENCE BEFORE ENTERING INTO A
MORTGAGE CONTRACT

40. Concorde Condominium, Inc. v. Philippine National Bank

G.R. No. 228354, November 26, 2018
Gesmundo, J.

FACTS:
These are consolidated petitions under Rule 45 assailing the Decision and the Resolution of the CA.

Pulp and Paper, Inc. (PPI) is the owner/developer of a residential project known as the Concorde
Condominium. PPI executed a Master Deed with Declaration of Restrictions for the said project with the
Concorde Condominium, Inc. (CCI) to organize to own, hold title to, and manage the common areas, along with
two parcels of land. Without CCI's knowledge and consent, PPI applied with the HLURB for the alteration of the
Project's approved plan to exclude the uncovered parking area from the list of common areas. The HLURB
granted the request, giving PPI clearance for the amended master deed to be recorded with the Register of
Deeds (RD) of Makati. With the new TCT over the uncovered parking area, PPI executed a real estate
mortgage over the said property in favor of Philippine National Bank-International Finance Limited (PNB-IFL) as
security for a loan extended to PPI and two other corporations. The debtors-mortgagors defaulted on its loan
obligation, resulting in the foreclosure of the mortgage. Consequently, the property was sold at a public auction
to PNB.

CCI filed a complaint against PPI, PNB-IFL, and the RD for annulment of title, mortgage, and reconveyance.
HLURB Arbiter San Vicente declared as void and inexistent the mortgage. The HLURB Board dismissed CCI's
appeal for being moot and academic. The Office of the President dismissed the appeal. On appeal, the CA
declared valid the real estate mortgage over the uncovered parking area.

ISSUE:
Is PNB-IFL a mortgagee in good faith?

RULING:
No, PNB-IFL is not a mortgagee in good faith.

As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate
of title and is no longer required to look behind the certificate in order to determine the actual owner. However,
PNB-IFL is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is expected
to exercise greater care and prudence in its dealings, including those involving registered lands. A banking
institution is expected to exercise due diligence before entering into a mortgage contract.

In this case, PNB-IFL clearly failed to exercise the required degree of caution in readily accepting the collateral
offered by PPI, as per the loan documents submitted by PNB-IFL and PNB, and in approving the latter's
increased credit availments. PNB appears to be a mere accommodation mortgagee with two other corporations
as borrower and co-borrower. While it belatedly submitted an Inspection and Appraisal Report, the date of
inspection indicated therein, "November 23, 1998," only raised serious doubt whether any inspection was
conducted at all considering that the real estate mortgage was executed on May 23, 1997, more than a year
earlier. There was also no description of the premises or its physical condition. There was no statement that the
lot was directly at the back of the condominium building nor was it being used for parking. Moreover, no inquiry
on the recent history or background of TCT No. 208874 was made. Hence, PNB-IFL is not a mortgagee in
good faith.

130
 CASES DECIDED WITHIN JANUARY 2017 TO DECEMBER 2019
Credit Transactions

COURTS ARE ALLOWED TO EQUITABLY TEMPER INTEREST RATES THAT ARE FOUND TO BE
EXCESSIVE, INIQUITOUS, UNCONSCIONABLE AND/OR EXORBITANT

41. Catalina F. Isla v. Genevira Estorga

G.R. No. 233974, July 2, 2018
Perlas-Bernabe, J.

FACTS:
This is a petition for review on certiorari filed by petitioners Catalina F. Isla, Elizabeth Isla, and Gilbert F. Isla
assailing the Decision and the Resolution of the CA.

On December 6, 2004, petitioners obtained a loan in the amount of P100,000 from respondent, payable
anytime from 6 months to 1 year and subject to interest at the rate of 10% per month, payable on or before the
end of each month. As security, a real estate mortgage was constituted over a parcel of land located in Pasay
City, and registered under the name of Edilberto Isla, who is married to petitioner Catalina. When petitioners
failed to pay the said loan, respondent sought assistance from the barangay, and consequently, a Kasulatan ng
Pautang dated December 8, 2005 was executed. Petitioners, however, failed to comply with its terms,
prompting respondent to send a demand letter. Once more, petitioners failed to comply with the demand,
causing respondent to file a Petition for Judicial Foreclosure against them before the RTC.

For their part, petitioners maintained that the subject mortgage was not a real estate mortgage but a mere loan,
and that the stipulated interest of 10% per month was exorbitant and grossly unconscionable. They also
insisted that since petitioners were not the absolute owners of the subject property - as the same was allegedly
owned by Edilberto – they could not have validly constituted the subject mortgage thereon. The RTC granted
the Petition for Judicial Foreclosure, and directed petitioners to pay respondent the amount of P100,000 with
12% interest per annum from December 2007 until fully paid. On appeal, the CA affirmed with modification the
RTC Decision.

ISSUE:
Is the imposition of twelve percent (12%) interest on the principal obligation until full payment proper?

RULING:
Yes, it is proper.

In cases of monetary interest, the parties are free to stipulate their preferred rate. However, courts are allowed
to equitably temper interest rates that are found to be excessive, iniquitous, unconscionable, and/or exorbitant,
such as stipulated interest rates of 3% per month or higher. In such instances, it is well to clarify that only the
unconscionable interest rate is nullified and deemed not written in the contract; whereas the parties' agreement
on the payment of interest on the principal loan obligation subsists. It is as if the parties failed to specify the
interest rate to be imposed on the principal amount, in which case the legal rate of interest prevailing at the
time the agreement was entered into is applied by the Court. This is because, according to jurisprudence, the
legal rate of interest is the presumptive reasonable compensation for borrowed money.

In this case, petitioners and respondent entered into a loan obligation and clearly stipulated for the payment of
monetary interest. However, the stipulated interest of 10% per month was found to be unconscionable, and
thus, the courts a quo struck down the same and pegged a new monetary interest of 12% per annum, which
was the prevailing legal rate of interest for loans and forbearances of money at the time the loan was
contracted on December 6, 2004.

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