Credit Reviewer Digests

Law 107 :: Credit Transactions
Atty. Stephanie V. Gomez-Somera

University of the Philippines | College of Law
Second Semester | AY 2008-2009
Weeks 1 to 4
Introduction Credit Transactions
1. Concept of Credit
2. Issues and Problems Relating to Credit: The 2008 Credit Crisis
3. Concept of Credit Transactions
Case:
PEOPLE vs. CONCEPCION
G.R. No. L-19190 | 29 November 1922
FACTS
1. PNP President and BOD member Venancio Concepcion authorized an extension
of credit (P300k) to a partnership capitalized at P100k (Puno y Concepcion, S. en
C.), half of which was owned by his wife Rosario San Agustin.
2. Anacleto Concepcion (P5k), Clara vda de Concepcion (P5k), Miguel S.
Concepcion (admin, P20k), Clemente Puno (P20k)
3. CFI Cagayan (Judge Enrique V. Filamor) declared him guilty of violating of Sec
35 of Act 2747 (1y6m imprisonment, P3k fine, with subsidiary imprisonment,
costs)
4. Act 2747 (Effective 20 February 1918)
a. Sec 35: The National Bank shall not, directly or indirectly, grant loans to any
of the members of the board of the bank nor to agents of the branch banks.
b. Sec 49: Any person who shall violate any of the provisions of this Act shall
be punished by a fine not to exceed P10k, or by imprisonment not to exceed
5y, or by both.
c. Above sections were in effect when alleged violation took place, but were
repealed by Act 2938 (app 30 Jan 1921)
ISSUE #1
Was the granting of credit to the copartnership a loan within the meaning of the
provision?
Defenses Contention: documents on record do not prove that authority to make a
loan was given, but only the concession of credit
HELD
NO. Defense is correct; exhibits speak of credit and not loan.
Credit: Ability to borrow money by virtue of the confidence or trust reposed by a
lender that he will pay what he may promise
Loan: Delivery by one party and the receipt by the other party of a given sum of
money, upon an agreement, express or implied, to repay the sum loaned, with or
without interest
The concession of a credit necessarily involves the granting of loans up to the limit of
the amount fixed in the credit.
ISSUE #2
Was the granting of credit to the co-partnership a loan or discount?
Defense: the provision prohibits granting of a loan, not a discount
Background Facts: H. Parker Willis, then NB President inquired of Insular Auditor
whether Sec 37 Act 2612 applied to discounts loans alone
DISCOUNT
Interest deducted in advance
Double-name paper
LOAN
Interest deducted at expiration of credit
Single-name paper
HELD
LOAN. In the last analysis, to discount a paper is only a mode of loaning money.
Interest on the demand notes signed by the copartnership was paid when notes fell
due, and single-name paper.
ISSUE #3
Was the granting of credit to co-partnership an indirect loan within meaning of
the provision?
HELD
YES. A loan to a partnership of which a wife of a bank director is a member is an
indirect loan to the director due to conjugal partnership.
Purpose of Provision: Erect a wall of safety against temptation for a bank
director (protection of stockholders, depositors and creditors of the bank)
Loan
4. General Provisions on Loan, Articles 1933 and 1934, Civil Code
5. Commodatum, Articles 1935 to 1952, Civil Code
6. Simple Loan, Articles 1953 to 1961, 1980, 2209, 2212, 2213,
Civil Code, Central Bank Circular No. 416
Cases:
REPUBLIC vs. BAGTAS
(G.R. No. L-17474 | 25 October 1962)
>> D2008 Credit Reviewer, p.3
QUINTOS vs. BECK

(G.R. No. L-46240 | 03 November 1939)
LAW 107 :: CREDIT TRANSACTIONS (Russ + Awi + Joyce + Happy + Judith) Page 1 of 22
SAURA IMPORT & EXPORT CO., INC. vs. DBP

(G.R. No. L-24968 | 27 April 1972)
GSIS vs. CA
G.R. No. L-52478 | 30 October 1986
FACTS
Sps. Medina applied for a loan with GSIS in the amount of P600,000. But only
P350,000 had been approved (BR 5041) subject to the conditions:
a. that 9% per annum shall be the interest rate, compounded monthly;
b. that the loan shall be repayable in 10 years at a monthly mortization of
P4,433.65 including principal and interest, and that any installment or
amortization due and unpaid shall bear an interest of 9%/12 per month.
The Office of the Economic Coordinator, in a 2nd Indorsement, further
reduced the approved amount to P295,000. The Medinas accepted the reduced
amount, executed a promissory note and a REM in favor of GSIS. On June 6, 1962,
the approved loan was restored to P350,000 and was denominated as Account No.
31055.
As a consequence, the Medinas subsequently executed an Amendment of
Real Estate Mortgage. Upon application by the Medinas, GSIS adopted Resolution
No. 121, as amended by Resolution No. 348, granting an additional loan of P230,000
on the security of the same mortgaged properties and additional properties. The loan
was denominated as Account No. 31442.
Beginning 1965, the Medinas defaulted in their payments and in 1967, they
began defaulting in the payment of their fire insurance premiums. On May 3, 1974,
GSIS informed the debtors that they had arrearages in the amount of P575,652.42 as
of April 18, 1974 and demanded payment within 7 days, otherwise, it would foreclose
the mortgage.
On Apr. 21, 1975, GSIS applied for foreclosure of the mortgage. The
Medinas filed a complaint, praying for the issuance of a restraining order or writ of PI,
but no such RO or WPI was issued in view of PD No. 385. On Apr. 25, 1975, the
Medinas made a last partial payment in the amount of P209, 662.80.
The properties of the medinas were sold at public auction with GSIS as the
highest bidder. Hence, the Medinas filed an amended complaint, praying for the
declaration of nullity of their 2 REM contracts with the GSIS, as well as of the EJ
foreclosure proceedings, and for the refund of excess payments, damages and AF.
TC: N&V + Medinas to pay GSIS P1,611.12 in fully payment of their
obligation with 9% p.a. interest from Dec. 11, 1975
CA: Affirmed: GSIS to reimburse P9,580 OP and pay Sp Medina P3,000 AF
and P1,000 litigation exp;
SC: PRC ; MR: due course
ISSUE # 1
WON the CA erred in holding that the amendment of the REM dated July 6, 1962
superseded the mortgage contract dated Apr. 4, 1962, particularly wrt the
compounding of interest
HELD
Said Amendment was never intended to completely supersede the mortgage
contract dated April 4, 1962. In fact, GSIS, as a matter of policy, imposes uniform
terms and conditions for all its real estate loans, particularly with respect to
compounding of interest.
GSIS: Did not supersede; amended only wrt the amount secured thereby and the
amount of monthly amortizations; others deemed rewritten
Medinas: no express stipulation on the compounded interest OP

o The difference in the computation lies in the inclusion of the compounded
interest as demanded by the GSIS on the one hand and the exclusion
thereof, as insisted by the Medinas on the other.
ISSUE # 2
WON the CA erred in sustaining the Sp. Medinas claim of OP, by crediting the
fire insurance proceeds in the sum of P11,152.02 to the total payment made by
said spouses as of Dec. 11, 1975
HELD
YES. The plaintiffs were not entitled to a credit of P19,381.07 as FI proceeds, as they
were only entitled to and were credited with P11,152.02.
ISSUE # 3
WON the CA erred in holding that the interest rates on the loan accounts of the
Medinas are usurious
HELD
NO. Usury Law applies only to interest by way of compensation for the use or
forbearance of money. Interest by way of damages is governed by Article 2209 of the
Civil Code
ISSUE # 4:
WON the CA erred in affirming the annulment of the subject EJ foreclosure and
sheriffs Certificate of Sale
HELD
Since the Medinas failed to settle their accounts with the GSIS, the latter had a
perfect right to foreclose the mortgage.
Reversed and set asideVALID.
LIGUTAN VS. CA
G.R. No. 138677 | 12 February 2002
FACTS
1. Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private
respondent Security Bank and Trust Company (PN, jointly and severally, P120k,
15.189% p.a., penalty of 5% every month on outstanding principal and interest in
case of default, 10% atty fees). Maturity date: 8 Sep 1981, extension till 29 Dec
1981.
2.
3.
4.
5.
Several demands from bank; as of 20 May 1982: P114,416.10

Final demand letter (full payment required): 30 Sep 1982; default
Bank filed a complaint for recovery: RTC Makati Br 143
a. Bank presented evidence, rested case
b. Petitioners reset on 2 occasions
1) Bank moved to declare petitioners in default granted
2) 2 years later, petitioners MRd denied
c. TC ruled in favor of plaintiff (P114,416, 15.189% p.a., 2% service charge,
5% p.m. penalty charge, commencing 20 May 1982 until fully paid, 10% atty
fees)
Petitioners appealed to CA
a. Assailed rejection of motion to present evidence, 2% service charge, 5%
p.m. penalty charge, 10% atty fees
b. CA affirmed except for 2% service charge (deleted pursuant to CB
Circular 783)
c. Petitioners MRd for reduction of 5% p.m. penalty charge for being
unconscionable
d. Bank MRd that payment of interest and penalty commences from time of
default (not filing of complaint)
e. CA: when obligation fell due, 5% p.m. penalty charge
f. Petitioners filed omnibus MR and to admit newlydiscovered evidence
alleging executing a real estate mortgage as security effect of novation
g. Mortgage foreclosed without notice; they did not credit them with proceeds
h. CA denied MR (R52 S2: no second MR allowed) and admission of newlydiscovered evidence (evidence known to them, not newly-discovered)
ISSUE # 1
Was penalty clause unconscionable?
RATIO
Impliedly NO, but reduced due to partial performance. SC agreed with CA that it
may be reduced due to partial performance and to allow petitioners to finally settle the
obligation. (Art 1229 CC)
Penalty Clause: Accessory undertaking to assume greater liability on the part of

an obligor in case of breach of an obligation
Function of Penalty Clause
o To strengthen the coercive force of the obligation;
o To provide, in effect, for what could be the liquidated damages resulting from
such a breach
ISSUE # 3
Did the execution of the mortgage novate the contract?
RATIO
NO. Petitioners acknowledge that there is no express stipulation that the mortgage is
intended to supersede the loan agreement.
(Besides, as we now know, mortgage is an accessory obligation! )
EASTERN SHIPPING LINES vs. CA

G.R. No. 97412 | 12 July 1994
FACTS
1. Contract of carriage between Eastern Shipping Lines & an unnamed shipper to
carry 2 fiber drums of riboflavin aboard SS Eastern Comet from Yokohama,
Japan to Manila, insured by respondent Mercantile Insurance Company
a. Arrastre operator Metro Port Service received one drum in bad order (others
OK)
b. Broker-forwarder Allied Brokerage Corporation received one drum opened
and without seal (others OK)
c. Consignees warehouse received one drum which contained spillages, while
the rest of the contents were adulterated/fake; losses: P19,032.95 which
insurance paid for
2. RTC held the defendants (common carrier) liable
3. CA affirmed
ISSUE
WON interest should commence at filing of complaint (12% p.a.) or at date of
TC decision (6% p.a.)
HELD
6% p.a. legal interest, then 12% p.a. from finality of decision till payment
1) loan or forbearance of money
a. as stipulated in writing, or
b. 12% p.a. from default (extra-judicial/judicial demand)
2) not loan or forbearance of money
a. reasonable certainty 6% p.a. from judicial/extra-judicial demand
b. no certainty 6% p.a. from date of judgment
3) legal interest 12% p.a. from finality till satisfaction
ISSUE # 2
Was the 15% p.a. interest unreasonable?
RATIO
NO. The interest on its face is not excessive.
Interest: Cost of money; fundamental part of banking business; core of banks

existence
PRODUCERS BANK OF THE PHILIPPINES vs. CA

(G.R. No. 115324 | 19 February 2003)
GARCIA vs. THIO

(G.R. No. 154878 | 16 March 2007)
Interest and penalty are distinct concepts which may separately be demanded.
PAJUYO vs. CA
G.R. No. 146364 | 03 June 2004
FACTS
Pajuyo paid P400 to a certain Pedro Perez for the rights over a lot in Quezon
City. Pajuyo then constructed a house made of light materials on the lot. Pajuyo and
his family lived in the house. On 8 December 1985, Pajuyo and private respondent
Guevarra executed a Kasunduan or agreement. Pajuyo, as owner of the house,
allowed Guevarra to live in the house for free provided Guevarra would maintain the
cleanliness and orderliness of the house. Guevarra promised that he would voluntarily
vacate the premises on Pajuyos demand. In September 1994, Pajuyo informed
Guevarra of his need of the house and demanded that Guevarra vacate the house.
Guevarra refused.
ISSUE
What is the contract entered into by Pajuyo with Guevarra? commodatum or
lease?
HELD
LEASE. In a contract of commodatum, one of the parties delivers to another
something not consumable so that the latter may use the same for a certain time and
return it. An essential feature of commodatum is that it is gratuitous. Another feature
of commodatum is that the use of the thing belonging to another is for a certain
period. Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which the
commodatum is constituted. If the bailor should have urgent need of the thing, he
may demand its return for temporary use. If the use of the thing is merely tolerated by
the bailor, he can demand the return of the thing at will, in which case the contractual
relation is called a precarium. Under the Civil Code, precarium is a kind of
commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo
to Guevarra was not essentially gratuitous. While the Kasunduan did not require
Guevarra to pay rent, it obligated him to maintain the property in good condition. The
imposition of this obligation makes the Kasunduan a contract different from a
commodatum. The effects of the Kasunduan are also different from that of a
commodatum. Case law on ejectment has treated relationship based on tolerance as
one that is akin to a landlord-tenant relationship where the withdrawal of permission
would result in the termination of the lease. The tenants withholding of the property
would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over possession of
the property to Pajuyo, the bailor. The obligation to deliver or to return the thing
received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum. These contracts certainly involve the obligation to
deliver or return the thing received.
CLASS NOTES >>
Maam made a comment that the contention that the Court was
incorrect when it said that the duty on the part of Guevarra to clean the house
constitutes consideration. It is incorrect because as a bailee, it is Guevarras duty

to clean and maintain the house in good condition.
BPI Family Bank v. Franco & CA

G.R. No. 123498 | 23 November 2007
ISSUE
WON BPI-FB can unilaterally freeze Francos accounts and preclude him from
withdrawing his deposits
HELD
NO. The deposit of money in banks is governed by the Civil Code provisions on
simple loan or mutuum. As there is a debtor-creditor relationship between a
bank and its depositor, BPI-FB ultimately acquired ownership of Francos
deposits, but such ownership is coupled with a corresponding obligation to
pay him an equal amount on demand.
Although BPI-FB owns the deposits in Francos accounts, it cannot prevent
him from payment of BPI-FBs obligation by drawing checks against his current
account, or asking for the release of the funds in his savings account. Thus, when
Franco issued checks drawn against his current account, he had every right as
creditor to expect that those checks would be honored by BPI-FB as debtor.
Furthermore, BPI-FB does not have a unilateral right to freeze the accounts of Franco
based on its mere suspicion that the funds therein were proceeds of the multi0-million
peso scam Franco was allegedly involved in. To grant BPI-FB, or any other bank for
that matter, the right to unilaterally freeze its depositors accounts would open
floodgates of public distrust in the banking industry.
PEOPLE vs. PUIG & PORRAS

G.R. No. 173654-765 | 28 August 2008
ISSUE
WON the 112 information for qualified theft sufficiently allege the element of
taking without the consent of the owner, and the qualifying circumstance of
grave abuse of discretion
HELD
YES. The Court has held in a line of cases that where the Informations merely
alleged the positions of the respondents; that the crime was committed with grave
abuse of confidence, with intent to gain and without the knowledge and consent of the
Bank, without necessarily stating the phrase being assiduously insisted upon by
respondents, of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree
of confidence between them, which respondents abused, and without employing
the word owner in lieu of the Bank were considered to have satisfied the test of
sufficiency of allegations.
Allegations in the Information that such employees acted with grave abuse
of confidence, to the damage and prejudice of the Bank, without particularly referring
to it as owner of the money deposits, as sufficient to make out a case of Qualified

Theft.
Depositors who place their money with the bank are considered creditors of
the bank.
Tellers, Cashiers, Bookkeepers and other employees of a Bank who come
into possession of the monies deposited therein enjoy the confidence reposed in
them by their employer. Banks, on the other hand, where monies are deposited, are
considered the owners thereof.
The relationship between banks and depositors has been held to be that of
creditor and debtor, by virtue of Art. 1980, CC, which provides that fixed, savings,
and current deposits of money in banks and similar institutions shall be governed by
the provisions concerning simple loans, and corollarily thereto, Art. 1953, CC
provides that a person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality.
Deposit
7. Concept of Deposit, Articles 1962 to 1967, Civil Code
8. Voluntary Deposit, Articles 1968 to 1995, Civil Code
9. Necessary Deposit, Article 1996 to 2004, Civil Code
10. Judicial Deposit, Articles 2005 to 2009, Civil Code
Cases:
BPI vs. IAC
(G.R. No. L-66826 | 19 August 1988)
BISHOP OF JARO vs. DE LA PENA

(G.R. No. L-6913 | 21 November 1913)
CA AGRO-INDUSTRIAL DEVT. CORP. vs. CA

(G.R. No. 90027 | 03 March 1993)
TRIPLE-V FOOD SERVICES, INC.

vs. FILIPINO MERCHANTS INSURANCE CO., INC.
(G.R. No. 160544 | 21 February 2005)
YHT REALTY CORP. vs. CA
G.R. No. 126780 | 17 February 2005

ISSUE:
WON a hotel may evade liability for the loss of items left with it for safekeeping
by its guests, by having these guests execute written waivers ("Undertaking
For The Use of Safety Deposit Box") holding the establishment or its
employees free from blame for such loss in light of Article 2003 of the Civil
Code which voids such waivers
HELD:
NO. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility
by posting notices to the effect that he is not liable for the articles
brought by the guest. Any stipulation between the hotel-keeper and
the guest whereby the responsibility of the former as set forth in
Articles 1998 to 2001 is suppressed or diminished shall be void.
In an early case, the Court of Appeals through its then Presiding Justice
(later Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers
or innkeeper liable for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is enough that such
effects are within the hotel or inn. With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by the hotel itself, as in
this case.
The New Civil Code is explicit that the responsibility of the hotelkeeper shall extend to loss of, or injury to, the personal property of the guests
even if caused by servants or employees of the keepers of hotels or inns as
well as by strangers, except as it may proceed from any force majeure.
Petitioners likewise anchor their defense on Article 2002 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or
visitors. Even a cursory reading of the provision would lead us to reject petitioners'
contention. The justification they raise would render nugatory the public interest
sought to be protected by the provision. What if the negligence of the employer or its
employees facilitated the consummation of a crime committed by the registered
guest's relatives or visitor? Should the law exculpate the hotel from liability since the
loss was due to the act of the visitor of the registered guest of the hotel? Hence, this
provision presupposes that the hotel-keeper is not guilty of concurrent
negligence or has not contributed in any degree to the occurrence of the loss.
A depositary is not responsible for the loss of goods by theft, unless his
actionable negligence contributes to the loss.
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two keys are
necessary to open the safety deposit box. Without the assistance of hotel employees,
the loss would not have occurred. Thus, Tropicana was guilty of concurrent
negligence in allowing Tan, who was not the registered guest, to open the
safety deposit box of McLoughlin, even assuming that the latter was also guilty
of negligence in allowing another person to use his key. To rule otherwise would
result in undermining the safety of the safety deposit boxes in hotels for the
management will be given imprimatur to allow any person, under the pretense of
being a family member or a visitor of the guest, to have access to the safety deposit
box without fear of any liability that will attach thereafter in case such person turns out
to be a complete stranger. This will allow the hotel to evade responsibility for any
liability incurred by its employees in conspiracy with the guest's relatives and visitors.
SEC. 2. Declaration of Policy. It is hereby declared to be the

policy of the State to protect its citizens from a lack of awareness of
the true cost of credit to the user by assuring a full disclosure of
such cost with a view of preventing the uninformed use of credit to
the detriment of the national economy.
Week 5
Moreover, while the spouses Beluso indeed agreed to renew the credit line,
the offending provisions are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory notes to cover the renewed
credit line, UCPB still reserved to itself the same two options (1) a rate indicative of
the DBD retail rate; or (2) a rate as determined by the Branch Head.
Special Commercial Laws

11. Merchants and Commercial Transactions, Articles 1-63, Code of
Commerce
12. Letters of Credit, Articles 567-5725, Code of Commerce
13. Trust Receipts Law
Case:
COLINARES & VELOSO vs. CA
(G.R. No. 90828 | 05 September 2000)
14. Truth in Lending Act

Case:
UCPB vs. SAMUEL & BELUSO
G.R. No. 159912 | 17 August 2007
FACTS
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line under
a Credit Agreement whereby the latter could avail from the former credit of up to a
maximum amount of P1.2 Million pesos for a term ending on 30 April 1997. In any
case, UCPB applied interest rates on the different promissory notes ranging from
18% to 34% which interest rate shall be determined by petitioners head office.
ISSUE
WON the stipulation as to interest by the parties is valid
HELD
NO. The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be discussed
later, because they violate the Truth in Lending Act. Not disclosing the true finance
charges in connection with the extensions of credit is, furthermore, a form of
deception which we cannot countenance. It is against the policy of the State as
stated in the Truth in Lending Act:
Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for
UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth in
Lending Act. UCPB challenges this imposition, on the argument that Section 6(a) of
the Truth in Lending Act which mandates the filing of an action to recover such
penalty must be made under the following circumstances:
SEC. 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall be
liable to such person in the amount of P100 or in an amount equal
to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability
shall not exceed P2,000 on any credit transaction. Action to
recover such penalty may be brought by such person within
one year from the date of the occurrence of the violation, in
any court of competent jurisdiction. x x x
The allegations in the complaint, much more than the title thereof, are
controlling. Other than that stated by the Court of Appeals, we find that the allegation
of violation of the Truth in Lending Act can also be inferred from the same allegation
in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic)
respondent bank has relied on the provision of their promissory
note granting respondent bank the power to unilaterally fix the
interest rates, which rate was not determined in the promissory
note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.
The allegation that the promissory notes grant UCPB the power to
unilaterally fix the interest rates certainly also means that the promissory notes do not
contain a clear statement in writing of (6) the finance charge expressed in terms of
pesos and centavos; and (7) the percentage that the finance charge bears to the
amount to be financed expressed as a simple annual rate on the outstanding unpaid
balance of the obligation. Furthermore, the spouses Belusos prayer for such other
reliefs just and equitable in the premises should be deemed to include the civil
penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of
the Truth in Lending Act has already prescribed is likewise without merit. The penalty
for the violation of the act is P100 or an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is greater,
except that such liability shall not exceed P2,000.00 on any credit transaction. As this
penalty depends on the finance charge required of the borrower, the borrowers
cause of action would only accrue when such finance charge is required. In the case
at bar, the date of the demand for payment of the finance charge is 2 September
1998, while the foreclosure was made on 28 December 1998. The filing of the case
on 9 February 1999 is therefore within the one-year prescriptive period.
The rationale of this provision is to protect users of credit from a lack of

awareness of the true cost thereof, proceeding from the experience that banks are
able to conceal such true cost by hidden charges, uncertainty of interest rates,
deduction of interests from the loaned amount, and the like. The law thereby seeks to
protect debtors by permitting them to fully appreciate the true cost of their loan, to
enable them to give full consent to the contract, and to properly evaluate their options
in arriving at business decisions. Upholding UCPBs claim of substantial compliance
would defeat these purposes of the Truth in Lending Act. The belated discovery of
the true cost of credit will too often not be able to reverse the ill effects of an already
consummated business decision.
Further, the fact that the rates are disclosed in the credit line does not create
a credit transaction of loan or mutuum, since the former is merely a preparatory
contract to the contract of loan or mutuum. Under such credit line, the bank is merely
obliged, for the considerations specified therefor, to lend to the other party amounts
not exceeding the limit provided. The credit transaction thus occurred not when the
credit line was opened, but rather when the credit line was availed of. In the case at
bar, the violation of the Truth in Lending Act allegedly occurred not when the parties
executed the Credit Agreement, where no interest rate was mentioned, but when the
parties executed the promissory notes, where the allegedly offending interest rate
was stipulated. UCPB further argues that since the spouses Beluso were duly given
copies of the subject promissory notes after their execution, then they were duly
notified of the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides that
the disclosure statement must be furnished prior to the consummation of the
transaction:
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As earlier
discussed, the interest rate provision therein does not sufficiently indicate with
particularity the interest rate to be applied to the loan covered by said promissory
notes.
SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the
following information:
(1) the cash price or delivered price of the
property or service to be acquired;
(2) the amounts, if any, to be credited as down
payment and/or trade-in;
(3) the difference between the amounts set forth
under clauses (1) and (2);
(4) the charges, individually itemized, which are
paid or to be paid by such person in
connection with the transaction but which are
not incident to the extension of credit
(5) the total amount to be financed
(6) the finance charge expressed in terms of
pesos and centavos; and
(7) the percentage that the finance bears to the
total amount to be financed expressed as a
simple annual rate on the outstanding unpaid
balance of the obligation.
15. The Usury Law

Case:
CARPO vs. CHUA & DY NG
G.R. Nos. 150773 & 153599 | 30 September 2005
FACTS
Sps. Carpo borrowed from respondents Eleanor Chua and Elma Dy Ng the sum of
P175,000, payable within 6 months with an interest rate of 6% per month, secured by
a mortgage the spouses executed over their residential house and lot. For failure to
pay, the said property was extra-judicially foreclosed and sold at public auction to the
respondents, who were the only bidders for the amount of P367,457.80. Upon failure
of the petitioners to exercise their right of redemption, a certificate of sale was issued
and the old title over the property was cancelled and a new one issued in the name of
respondents.
Petitioners continued to occupy the premises, prompting the respondents to
file a petition for writ of possession with the RTC, which was granted and an order
was issued on March 23, 1999.
It was only on July 23, 1999 that petitioners filed a complaint for annulment
of real estate mortgage and the consequent foreclosure proceedings, and thereupon
consigned the amount of P257,197.26 with the RTC.
ISSUE # 1
WON the invalidity of the stipulation on interest carries with it the invalidity of
the principal obligation
HELD
NO. The invalidation of the interest rate is congruent with the rule that a usurious loan
transaction is not a complete nullity but defective only with respect to the agreed
interest. Art. 1420, CC allows the severance of the illegal terms of a divisible contract,
thereby allowing the legal ones to be enforced.
In simple loan with stipulation of usurious interest, the prestation of the

debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil
Code) is not illegal. The illegality lies only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only should be deemed void, since it is the
only one that is illegal.
ISSUE # 2
WON the ancillary mortgage contract is rendered void by the invalid stipulation
on interest rate
HELD
NO. Since the principal obligation still stands and remains valid and the mortgage
contract derives its validity from the validity of the principal obligation, the invalid
stipulation on interest rate is similarly insufficient to render void the ancillary mortgage
contract.
ISSUE # 3
WON the petitioners can still assail the validity of the stipulated interest rates
HELD
NO. Since an excessive stipulated interest rate may be void for being contrary to
public policy, an action to annul said interest rate does not prescribe. Such indeed is
the remedy; it is not the action for annulment of the ancillary real estate mortgage.
Note that the general rule is that an action to annul an excessive stipulated
(usurious) interest does not provide, for such interest rate is void for being contrary to
public policy. However, in this case, since the petitioners assailed the validity of the
interest rate only when the writ of possession was issued, the Court held that the
petitioners slept on their rights.
16. The Warehouse Receipts Law and the General Bonded

Warehouse Act
face of the Warehouse Receipts as to the payment of storage fees. Even in the
absence of such a provision, law and equity dictate the payment of the
warehouseman's lien pursuant to Sections 27 and 31 of the Warehouse Receipts Law
(R.A. 2137).
After being declared not the owner, but the warehouseman, the decision
having been affirmed by us on December 1, 1993, private respondents cannot legally
be deprived of their right to enforce their claim for warehouseman's lien, for
reasonable storage fees and preservation expenses. Pursuant to Section 31, the
goods under storage may not be delivered until said lien is satisfied. Considering that
petitioner does not deny the existence, validity and genuineness of the Warehouse
Receipts on which it anchors its claim for payment against private respondents, it
cannot disclaim liability for the payment of the storage fees stipulated therein.
Petitioner is in estoppel in disclaiming liability for the payment of
storage fees due the private respondents as warehouseman while claiming to
be entitled to the sugar stocks covered by the subject Warehouse Receipts on
the basis of which it anchors its claim for payment or delivery of the sugar
stocks. The unconditional presentment of the receipts by the petitioner for payment
against private respondents on the strength of the provisions of the Warehouse
Receipts Law (R.A. 2137) carried with it the admission of the existence and validity of
the terms, conditions and stipulations written on the face of the Warehouse Receipts,
including the unqualified recognition of the payment of warehouseman's lien for
storage fees and preservation expenses. Petitioner may not now retrieve the sugar
stocks without paying the lien due private respondents as warehouseman.
While the PNB is entitled to the stocks of sugar as the endorsee of the
quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law,
the warehouseman loses his lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a
warehouseman's lien is possessory in nature.
Weeks 6 to 11
Case:
PNB vs. Se, et al.
G.R. No. 119231 | 18 April 1996
ISSUE
WON the warehouseman can enforce his warehouseman's lien before
delivering the sugar stocks as ordered by the Court of Appeals or need he file a
separate action first to enforce payment of storage fees
HELD
YES. It is not disputed, therefore, that, under the subject Warehouse Receipts
provision, storage fees are chargeable. Petitioner anchors its claim against private
respondents on the five (5) Warehouse Receipts issued by the latter to third-party
defendants Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese
Merchandising, which found their way to petitioner after they were negotiated to them
by Luis T. Ramos and Cresencia K. Zoleta for a loan of P39.1 Million. Accordingly,
petitioner PNB is legally bound to stand by the express terms and conditions on the
Security Transactions
17. Concept of Security Transactions
18. Guaranty, Articles 2047 to 2081, Civil Code
19. Surety, Articles 1207 to 1222, 2082 to 2084, Civil Code
Cases:
E. ZOBEL, INC. vs. CA
(G.R. No. 113931 | 06 May 1998)
>>D2008 Credit Reviewer, p.39
PHILIPPINE BLOOMING MILLS, INC. vs. CA

(G.R. No. 142381 | 15 October 2003)

INTERNATIONAL FINANCE CORP. vs.
IMPERIAL TEXTILE MILLS, INC.
G.R. No. 160324 | 15 November 2005
FACTS
International Finance Corporation (IFC) extended to Philippine Polyamide Industrial
Corporation (PPIC) a loan of US$7,000,000.00, payable in sixteen (16) semi-annual
installments of US$437,500.00 each. A Guarantee Agreement was also executed
with Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation
(Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee PPICs
obligations under the loan agreement.
The premise of the Guarantee Agreement is found in its preambular clause,
which reads:
Whereas,
(A) By an Agreement of even date herewith between
IFC and PHILIPPINE POLYAMIDE INDUSTRIAL
CORPORATION (herein called the Company), which
agreement is herein called the Loan Agreement, IFC
agrees to extend to the Company a loan (herein called the
Loan) of seven million dollars ($7,000,000) on the terms
therein set forth, including a provision that all or part of the
Loan may be disbursed in a currency other than dollars,
but only on condition that the Guarantors agree to
guarantee the obligations of the Company in respect of the
Loan as hereinafter provided.
(B) The Guarantors, in order to induce IFC to enter into
the Loan Agreement, and in consideration of IFC entering
into said Agreement, have agreed so to guarantee such
obligations of the Company.
The obligations of the guarantors are meticulously expressed in the following
provision:
notice of extra-judicial sale. IFC and DBP were the only bidders during the auction
sale. IFCs bid was for P99,269,100.00 which was equivalent to US$5,250,000.00 (at
the prevailing exchange rate of P18.9084 = US$1.00). The outstanding loan,
however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00.
PPIC failed to pay the remaining balance.
Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to
pay the outstanding balance. However, despite the demand made by IFC, the
outstanding balance remained unpaid.
ISSUE
WON ITM and Grandtex are sureties and therefore, jointly and severally liable
with PPIC, for the payment of the loan
HELD
YES. While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was jointly and severally liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary obligor, not a mere surety.
Those stipulations meant only one thing: that at bottom, and to all legal intents
and purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily liable with PPIC for the
latters obligations under the Loan Agreement with IFC. ITM thereby brought itself to
the level of PPIC and could not be deemed merely secondarily liable.
Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC.
ITMs liability commenced only when it guaranteed PPICs obligation. It became a
surety when it bound itself solidarily with the principal obligor. Thus, the applicable
law is as follows:
Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in case
the latter should fail to do so.
If a person binds himself solidarily with the principal
debtor, the provisions of Section 4, Chapter 3, Title I of this Book
shall be observed. In such case the contract shall be called
suretyship.
The aforementioned provisions refer to Articles 1207 to 1222 of the Civil
Code on Joint and Solidary Obligations. Relevant to this case is Article 1216, which
states:
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.
Section 2.01. The Guarantors jointly and severally,

irrevocably, absolutely and unconditionally guarantee, as primary
obligors and not as sureties merely, the due and punctual payment
of the principal of, and interest and commitment charge on, the
Loan, and the principal of, and interest on, the Notes, whether at
stated maturity or upon prematuring, all as set forth in the Loan
Agreement and in the Notes.
Pursuant to this provision, petitioner (as creditor) was justified in taking

action directly against respondent.
By virtue of PPICs failure to pay, IFC, together with DBP, applied for the
extra-judicial foreclosure of mortgages on the real estate, buildings, machinery,
equipment plant and all improvements owned by PPIC. The deputy sheriff issued a
No Ambiguity in the Undertaking

The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term jointly and severally, the use of the
word guarantor to refer to a surety does not violate the law. As Article 2047
provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. Likewise, the phrase in the Agreementas primary obligor and not
merely as suretystresses that ITM is being placed on the same level as PPIC.
Those words emphasize the nature of their liability, which the law characterizes as a
suretyship.
The use of the word guarantee does not ipso facto make the contract
one of guaranty. This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation. The very terms of a contract govern the obligations of the
parties or the extent of the obligors liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a Guarantors Undertaking
or a Continuing Guaranty.
20. Pledge and Mortgage, Common Provisions, Articles 2085 to

2092, Civil Code
7.
In the negotiation for repurchase, Cuba addressed two (2) letters to the Manager
DBP, Dagupan City. DBP thereafter accepted the offer to repurchase in a letter
addressed to Cuba;
8.
After the Deed of Conditional Sale was executed in favor of Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by
the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only,
excluding her husband;
9.
Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;
10. After Cuba failed to pay the amortization as stated in Deed of Conditional Sale,
she entered with the DBP a temporary arrangement whereby in consideration
for the deferment of the Notarial Rescission of Deed of Conditional Sale, Cuba
promised to make certain payments as stated in temporary Arrangement dated
February 23, 1982;
11. DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13,
Cases:
DBP vs. CA
G.R. No. 118367 & 118342 | 05 January 1998
>> D2008 Credit Reviewer, p.24 of 52
1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, DBP took possession of the Leasehold Rights of
the fishpond in question;
13. That after DBP took possession of the Leasehold Rights over the fishpond in
FACTS
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083
(new) dated 13 May 1974 from the Government;
question, DBP advertised in the SUNDAY PUNCH the public bidding dated
June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of
2.
Cuba obtained loans from the Development Bank of the Philippines (DBP) in the
amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated
in the Promissory Notes dated 06 September 1974; 11 August 1975; and 04 April
1977;
defendant Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No.
2083-A on December 28, 1984 by the Ministry of Agriculture and Food.
3.
As security for said loans, Cuba executed two (2) Deeds of Assignment of her
Leasehold Rights;
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pretrial order.
4.
Cuba failed to pay her loan on the scheduled dates thereof in accordance with
the terms of the Promissory Notes;
Cuba insisted on an affirmative resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.
5.
Without foreclosure proceedings, whether judicial or extra-judicial, defendant

DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question;
6.
After DBP has appropriated the Leasehold Rights of Cuba over the fishpond in
question, DBP, in turn, executed a Deed of Conditional Sale of the Leasehold
Rights in favor of Cuba over the same fishpond in question;
ISSUE
WON the act of DBP in appropriating to itself CUBAs leasehold rights over the
fishpond in question without foreclosure proceedings was contrary to Article
2088 of the Civil Code and, therefore, invalid
HELD
The SC Agreed with Cuba. THE ASSIGNMENT OF LEASEHOLD RIGHTS WAS A
MORTGAGE CONTRACT.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes,
there was a provision that: In the event of foreclosure of the mortgage securing this
notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency,
if any.
Simultaneous with the execution of the notes was the execution of
Assignments of Leasehold Rights where CUBA assigned her leasehold rights and
interest on a 44-hectare fishpond, together with the improvements thereon. As
pointed out by CUBA, the deeds of assignment constantly referred to the assignor
(CUBA) as borrower; the assigned rights, as mortgaged properties; and the
instrument itself, as mortgage contract.
Condition no. 22: It was provided that failure to comply with the terms and
condition of any of the loans shall cause all other loans to become due and
demandable and all mortgages shall be foreclosed.
Condition no. 33: provided that if foreclosure is actually accomplished, the
usual 10% attorneys fees and 10% liquidated damages of the total obligation shall be
imposed. There is, therefore, no shred of doubt that a mortgage was intended.
Peoples Bank & Trust Co. vs. Odom:

An assignment to guarantee an obligation is in effect a mortgage.
NOVATION
We find NO MERIT in DBPs contention that the assignment novated the
promissory notes in that the obligation to pay a sum of money the loans (under the
promissory notes) was substituted by the assignment of the rights over the fishpond
(under the deed of assignment).
As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. THE
OBLIGATION TO PAY A SUM OF MONEY REMAINED, (READ: NO NOVATION)
and the assignment merely served as security for the loans covered by the
promissory notes.
(ASSIGNMENT = ACCESSORY OF THE PROMISSORY NOTES)
There was a stipulation. The assignor further reiterates and states all terms,
covenants, and conditionsmaking said promissory note or notes, to all intent and
purposes, an integral part hereof.
PAYMENT BY CESSION
NO. Art.1255 contemplates the existence of TWO OR MORE CREDITORS and
involves the assignment of all the debtors property.
There was only one creditor, the DBP.
DATION IN PAYMENT/EN PAGO
NO. Art. 1245: Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales.
It bears stressing that the assignment, being in its essence a mortgage, was
but a security and not a satisfaction of indebtedness.
PACTUM COMMISSORIUM
NO. SC did not side with CUBA.
ELEMENTS:
(1) A property mortgaged by way of security for the payment of the principal
obligation; and
(2) Stipulation for automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated period
Condition no. 12: No automatic appropriation to DBP upon CUBAs failure
to pay the loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose
of the said real rights, in case of default by CUBA, and to apply the proceeds to
the payment of the loan. This provision is a standard condition in mortgage
contracts and is in conformity with Article 2087 of the Civil Code, which authorizes the
mortgagee to foreclose the mortgage and alienate the mortgaged property for the
payment of the principal obligation.
HOWEVER!!!
DBP EXCEEDED THE AUTHORITY IN COND. NO. 12. [w]ithout
foreclosure proceedings, whether judicial or extra-judicial, DBP appropriated the
[l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question. Its
contention that it limited itself to mere administration by posting caretakers is further
belied by the deed of conditional sale it executed in favor of CUBA.
DBP cannot take refuge in Cond. no. 12 of the deed of assignment to justify
its act of appropriating the leasehold rights. As stated earlier, Cond. no. 12 did not
provide that CUBAs default would operate to vest in DBP ownership of the said
rights. Besides, an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which confers ownership
on the assignee.
At any rate, DBPs act of appropriating CUBAs leasehold rights was
violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment of a
debt.
ESTOPPEL
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP
DID NOT ESTOP HER from questioning DBPs act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.
FALSE REPRESENTATION
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure.
Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and
Natural Resources and coursed through the Director of the Bureau of Fisheries and
Aquatic Resources, DBP declared that it had foreclosed the mortgage and
enforced the assignment of leasehold rights on March 21, 1979 for failure of
said spouses [Cuba spouces] to pay their loan amortizations. This only goes to
show that DBP was aware of the necessity of foreclosure proceedings.
APPROPRIATION OF LEASEHOLD RIGHTS
In view of the false representation of DBP that it had already foreclosed the mortgage,
the Bureau of Fisheries cancelled CUBAs original lease permit, approved the deed of
conditional sale, and issued a new permit in favor of CUBA. Said acts which were
predicated on such false representation, as well as the subsequent acts emanating
from DBPs appropriation of the leasehold rights, should therefore be SET ASIDE. To
validate these acts would open the floodgates to circumvention of Article 2088 of the
Civil Code.
BUSTAMANTE vs. ROSEL

G. R. No. 126800 | 29 November 1999
FACTS
1. 08 March 1987: Respondent Norma Rosel (CREDITOR) entered into a loan
agreement with petitioner Natalia Bustamante and her late husband Ismael C.
Bustamante (DEBTOR).
2.
Loan Conditions
a. Sps. Bustamante owned land along Congressional Ave. 423 sq.m.
b. Sps. Bustamante borrowed PhP100,000 payable in two (2) years, counted
from 01 March 1987.
c. Interest: 18%/annum
d. Guaranty: 70 sq.m. portion, inclusive of the apartment therein, of the
aforestated parcel of land served as a collateral
e. However, in the event the borrowers (Sps. Bustamante) fail to pay, the
lender has the OPTION TO BUY OR PURCHASE the collateral for a total
consideration of TWO HUNDRED THOUSAND (P200,000.00) PESOS,
inclusive of the borrowed amount and interest therein;
3.
Loan about to mature. Sps. Rosel proposed to buy at the pre-set price of
P200,000.00, the 70 sq.m. parcel of land covered by TCT No. 80667, given as
collateral to guarantee payment of the loan.
4.
Sps. Bustamante refused to sell and requested for extension of time to pay
the loan and offered to sell to respondents another residential lot located at
Road 20, Project 8, Quezon City, with the principal loan plus interest to be used
as down payment.
5.
Sps. Rosel refused to extend the payment of the loan and to accept the lot in
Road 20 as it was occupied by squatters and Sps. Bustamante were not the
owners thereof but were mere land developers entitled to subdivision shares
or commission if and when they develope at least one half of the subdivision
area.
6.
01 March 1989: Bustamante tendered payment. Sps. Rosel refused and insisted
on Sps. Bustamantes signing a prepared deed of absolute sale of the collateral.
7.
28 February 1990: Sps. Rosel filed with the RTC, Quezon City, a complaint for
specific performance with consignation against Bustamante and her spouse.
8.
04 March 1990: Sps. Rosel sent a demand letter asking petitioner to sell the
collateral pursuant to the option to buy embodied in the loan agreement.
9.
05 March 1990: Bustamante filed in the RTC, Quezon City a petition for
consignation, and deposited the amount of Php 153,000.00 with the City
Treasurer of Quezon City on 10 August 1990.
10. When Bustamante refused to sell the collateral and barangay conciliation failed,
Sps. Rosel consigned the amount of P47,500.00 with the RTC. In arriving at the
amount deposited, respondents considered the principal loan of P100,000.00
and interest of 18%/annum thereon, which amounted to P52,500.00. The
principal loan and the interest taken together amounted to P152,500.00, leaving
a balance of P 47,500.00.
ISSUE # 1
WON petitioner Bustamante failed to pay the loan at its maturity date
HELD
NO. Bustamante DID NOT FAIL to pay the loan. The loan was due for payment on 01
March 1989. On said date, Bustamante tendered payment to settle the loan which
respondents refused to accept, insisting that petitioner sell to them the collateral of
the loan.
When respondents refused to accept payment, petitioner consigned the
amount with the RTC
ISSUE # 2
WON the stipulation in the loan contract was valid and enforceable
HELD
THE SALE OF THE COLLATERAL IS AN OBLIGATION WITH A SUSPENSIVE
CONDITION. It is dependent upon the happening of an event, without which the
obligation to sell does not arise.
Since the event did not occur, Sps. Rosel DO NOT HAVE THE RIGHT TO
DEMAND fulfillment of Bustamante's obligation, especially where the same would not
only be disadvantageous to Bustamante but would also unjustly enrich respondents
considering the inadequate consideration (P200,000.00) for a 70 sq.m. property
situated at Congressional Ave., Quezon City.
Respondents Contention: Contracts have the force of law between the contracting
parties and must be complied with in good faith.
SC: Exceptions to the rule
NCC Art. 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy.
A scrutiny of the stipulation of the parties reveals a subtle intention of the
creditor (Sps. Rosel) to acquire the property given as security for the loan. This
is embraced in the concept of pactum commissorium, which is proscribed by law.
ELEMENTS OF PACTUM COMMISSORIUM
a. A property mortgaged by way of security for the payment of the principal
obligation; and
b. A stipulation for automatic appropriation by the creditor of the thing mortgaged in

case of non-payment of the principal obligation within the stipulated period.
Nakpil vs. IAC: The arrangement entered into between the parties, whereby Pulong
Maulap was to be "considered sold to him (respondent) . . . in case petitioner fails to
reimburse Valdes, must then be construed as tantamount to pactum commissorium
which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be
automatic appropriation of the property by Valdes in the event of failure of petitioner
to pay the value of the advances. Thus, contrary to respondent's manifestation, all the
elements of a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security for the loan; and
there was automatic appropriation by respondent of Pulong Maulap in case of default
of petitioner.
All persons in need of money are liable to enter into contractual relationships
whatever the condition if only to alleviate their financial burden albeit temporarily.
Hence, courts are duty bound to exercise caution in the interpretation and resolution
of contracts lest the lenders devour the borrowers like vultures do with their prey.
ONG vs. ROBAN LENDING CORP.

G.R. No.172592 | 09 July 2008
FACTS
1. 14 July 1999 20 March 2000: The Sps. Ong obtained several loans from
Roban Lending Corp. in the total amount of P4,000,000.00. These loans were
secured by a real estate mortgage on Sps. Ongs parcels of land located in
Binauganan, Tarlac City.
2. 12 February 2001: Sps. Ong and Roban executed an Amendment to Amended
Real Estate Mortgage consolidating their loans inclusive of charges thereon
which totaled P5,916,117.50.
3. On even date, the parties executed a
a. Dacion in Payment Agreement: Wherein Sps. Ong assigned the Tarlac
properties to Roban in settlement of their total obligation, and a
b. Memorandum of Agreement: Where the parties agreed to agreed to
consolidate and restructure all loans, all past due and delinquent since 19
April 2000, and outstanding obligations totaling P5,916,117.50.
1) Signs a promissory note amounting to the outstanding loan
2) Promise to pay: W/in 1 year otherwise the Sps. Ong agree to execute
the "DACION IN PAYMENT" agreement,
4. April 2002: The Sps. Ong filed a Complaint before the RTC of Tarlac City, for
declaration of mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages, alleging that the
Memorandum of Agreement and the Dacion in Payment executed are void for
being pactum commissorium.
5.
Respondents Contention:
If the voluntary execution of the Memorandum of Agreement and Dacion in
Payment Agreement novated the Real Estate Mortgage then the allegation of
Pactum Commissorium has no more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is

recognized x x x under Art. 1245 of the Civil Code as a special form of
payment whereby the debtor-Plaintiffs alienates their property to the
creditor-Defendant in satisfaction of their monetary obligation; x x x
ISSUE
Whether the MOA and Dacion in Payment contracts constitute pactum
commissorium or dacion en pago.
HELD
THE CONTRACTS CONSTITUTE PACTUM COMMISSORIUM.
The MOA and the DIP contain no provisions for foreclosure
proceedings nor redemption. Under the MOA, the failure by the petitioners to pay
their debt within the one-year period gives respondent the right to enforce the Dacion
in Payment transferring to it ownership of the properties covered by TCT No. 297840.
Respondent, in effect, automatically acquires ownership of the properties upon
petitioners' failure to pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property extinguishes
the monetary debt. In the case at bar, the alienation of the properties was by way of
security, and not by way of satisfying the debt. The Dacion in Payment did not
extinguish petitioners' obligation to respondent. On the contrary, under the MOA
executed on the same day as the Dacion in Payment, Sps.Ong had to execute a
promissory note for P5,916,117.50 which they were to pay within one year.
SIDE ISSUE: USURIOUS INTEREST
In a true dacion en pago, the assignment of the property extinguishes the
monetary debt.[33] In the case at bar, the alienation of the properties was by way of
[34]
security, and not by way of satisfying the debt.
The Dacion in Payment did not
extinguish petitioners' obligation to respondent. On the contrary, under the
Memorandum of Agreement executed on the same day as the Dacion in Payment,
petitioners had to execute a promissory note for P5,916,117.50 which they were to
pay within one year.
DISPOSITION
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and
SET ASIDE.
Civil Case No. 9322 is REMANDED to the court of origin only for the
purpose of receiving evidence on petitioners' prayer for accounting.
21. Pledge, Articles 2093 to 2123, Civil Code

Case:
PARAY & ESPELETA vs. RODRIGUEZ, ET AL.
G.R. NO. 132287 | 24 JANUARY 2006
ISSUE
WON the consignation made by the Respondents sufficiently acquitted them of
their principal obligation
HELD
NO. The pledged shares in this case, being personal property, are not subject
to redemption. Such being the case, the CA had no business invoking and applying
the inexistent right of redemption.
There is also nothing that prohibits the pledgee of several pledge
contracts from auctioning all of the pledged properties with a single purchase
price. Extra-judicial case.
The Court also said that the amounts consigned by the Respondents were
not sufficient to cover the interests due on the loans pegged at 5%/month or
60%/annum. Such being the case, the consignations could not have the effect of
extinguishing the pledge contracts since both the principal loan and the monthly
interests thereon should be satisfied.
22. Real Estate Mortgage, Articles 2124 to 2131, Civil Code, Rule
68, Rules of Court, Act No. 3135, as amended
Cases:
MEDIDA vs. CA
G.R. No. 98334 | 08 May 1992
ISSUE
WON a Mortgagor whose property had been extra-judicially foreclosed and sold
at the corresponding foreclosure sale may validly execute a mortgage contract
over the same property in favor of a third party during the period of redemption
HELD
YES. A mortgage does not involve a transfer, cession or conveyance of the subject
property but only constitutes a lien thereon. There is no obstacle to the legal
creation of such a lien even after the auction sale but during the redemption
period since no distinction is made between a mortgage constituted over the
property before or after the auction sale thereof. Such being the case, there would
be compliance with the requisites of Article 2085 of the Civil Code for constitution of
another mortgage over the property. A contrary holding would be inequitable for the
mortgagors.
Parenthetically, what actually is effected where redemption is seasonably
exercised by the judgment/mortgage debtor is not the recovery of ownership of his
land, which was never lost, but the elimination from his title thereto of the lien created
by levy or attachment or judgment or the registration of the mortgage thereon.
ISSUE
WON Huerta ALBA has the one-year right of redemption under Sec. 78 of the
General Banking Act
HELD
NO. What Huerta was adjudicated to have was only the equity of redemption.
The right of redemption in relation to mortgage exists only in case of
extra-judicial foreclosure. No such right is recognized in a judicial foreclosure
EXCEPT only where the mortgagee is the PHB or a bank/banking institution.
Instead, there is only equity of redemption which is the right of the mortgagor to
extinguish the mortgage and retain ownership if the property by paying the secured
debt within a period of not less than 90 days nor more than 120 days from the entry of
judgment or even after foreclosure but prior to confirmation. Afterwhich, no
redemption can be effected.
The further said that Huerta failed to seasonably invoke its purported right
under Sec. 78 of R.A. 337 which provides that "in case of a foreclosure of a
mortgage in favor of a bank, banking or credit institution, whether judicially or
extrajudicially, the mortgagor shall have the right, within one year after the sale
of the real estate as a result of the foreclosure of the respective mortgage, to
redeem the property." Huerta averred that since Intercon was a credit institution,
R.A. 337 should apply and it should be allowed one (1) year within which to redeem
its mortgage properties. It was only in May 1995 that it raised the said right. (The
auction happened in Spetember 1994.)
It also bears stressing that the applicability of the said law hinges on a
factual question whether Intercon was a credit institution which was never brought
until now. Huerta is estopped.
23. Chattel Mortgage, Articles 2140 to 2141, The Chattel Mortgage

Law (Act No. 1508, as amended)
Cases:
PEOPLE'S BANK & TRUST COMPANY
vs. DAHICAN LUMBER CO.
(G.R. No. L-17500 | 16 May 1967)
MAKATI LEASING & FINANCE CORP.

vs. WEAREVER TEXTILE MILLS, INC.
(G.R. No. L-58469 | 16 May 1983)
>> D2008 Credit Reviewer, p.29 of 52)
SUICO vs. PNB

(G.R. No. 170215 | 28 August 2007)
>> Hard Copy | D2008 Credit Reviewer, p.24 of 52
DY vs. CA
(G.R. No. 92989 | 08 July 1991)
HUERTA ALBA RESORT, INC. vs. CA

G.R. No. 128567 | 01 September 2000
PAMECA WOOD TREATMENT PLANT vs. CA

(G.R. No. 106435 | 14 July 1999)
When will concurrence and preference of credit apply?
ACME SHOE RUBBER AND PLASTIC CORP. vs. CA

(G.R. No. 103576 | 22 August 1996)
HELD
IT WILL APPLY ONLY DURING A PROCEEDING WHERE ALL THE PREFERRED
CREDITORS CLAIMS CAN BE PRESENTED AND BINDINGLY ADJUDICATED.
The vendor's lien, under Articles 2242 and 2243 of the new Civil Code of the
Philippines, can only become effective in the event of insolvency of the vendee, which
has not been proved to exist in the instant case; and
Under the system of the Civil Code of the Philippine, only taxes enjoy a
similar 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. Thus, Article 2249 provides:
SERVICEWIDE SPECIALIST, INC. V. CA

(G.R. No. 116363 | 10 December 1999)
24. Antichresis, Articles 2132 to 2139, Civil Code
Weeks 12 to 16
Insolvency and Rehabilitation
25. Concurrence and Preference of Credits, Articles 2241 to 2251,
Civil Code
26. Insolvency Law (Act No. 1956, as amended)
Cases:
DE BARRETTO vs. VILLANUEVA
G.R. No. L-14938 | 29 December 1962
FACTS
It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title,
and interest and that of her children in the house and lot herein involved to Pura L.
Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and executed a
promissory note for the balance of P17,500.00. However, the buyer could only pay
P5,500 on account of the note, for which reason the vendor obtained judgment for the
unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean
certificate of title and mortgaged the property to appellant Magdalena C. Barretto,
married to Jose G. Barretto, to secure a loan of P30,000.03, said mortgage having
been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The
latter foreclosed the mortgage in her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a motion
for recognition for her "vendor's lien" in the amount of P12,000.00 plus legal interest,
invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court
below ordered the "lien" annotated on the back of Certificate of Title No. 32526, with
the proviso that in case of sale under the foreclosure decree the vendor's lien and the
mortgage credit of appellant Barretto should be paid pro rata from the proceeds.
ISSUE
If there are two or more credits with respect to 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.
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must first some proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency, the settlement of a
decedent's estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that The claims
or credits enumerated in the two preceding articles shall be considered as mortgages
or pledges of real or personal property or liens within the purview of legal provision
governing insolvency and the rule is further clarified in the Report of the Code
Commission, as follows:
The question as to whether the Civil Code and the Insolvency Law
can be harmonized is settled by this Article (2243). The preferences
named in Articles now 2241 and 2242 are to be enforced in
accordance with the Involvency Law.
Thus, it becomes evident that one preferred creditor's third-party claim to the
proceeds of a foreclosure sale is not the proceeding contemplated by law for the
enforcement of preferences under Article 2242, unless the claimant were enforcing a
credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain the pro rata dividend
corresponding to each, because the rights of the other creditors likewise enjoying
preference under Article 2242 cannot be ascertained. Wherefore, the order of the
Court of First Instance of Manila now appealed from decreeing that the proceeds of
the foreclosure sale be apportioned only between appellant and appellee, is incorrect
and must be reversed.
J.L. BERNARDO CONSTRUCTION vs. CA

G.R. No. 105827 | 31 January 2000

ISSUE # 1
WON the Court of Appeals correctly assumed jurisdiction over the petition for
certiorari filed by respondents herein assailing the trial courts interlocutory
orders granting the writ of attachment and the contractors lien
HELD
NO. We hold that the petition for certiorari filed by Salonga and the Municipality with
the Court of Appeals questioning the writ of attachment issued by the trial court
should not have been given due course for they still had recourse to a plain, speedy
and adequate remedy - the filing of a motion to fix the counter-bond, which they in
fact filed with the trial court, the grant of which would effectively prevent the issuance
of the writ of attachment. Moreover, they could also have filed a motion to discharge
the attachment for having been improperly or irregularly issued or enforced, or that
the bond is insufficient, or that the attachment is excessive.12 [Rules of Court, Rule
57, sec. 13.] With such remedies still available to the Municipality and Salonga, the
filing of a petition for certiorari with the Court of Appeals insofar as it questions the
order of attachment was clearly premature.
ISSUE # 2
WON contractors lien should be awarded to the petitioners
HELD
NO. Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
preference with respect to specific personal or real property of the debtor.
Specifically, the contractors lien claimed by petitioners is granted under the third
paragraph of Article 2242 which provides that the claims of contractors engaged in
the construction, reconstruction or repair of buildings or other works shall be preferred
with respect to the specific building or other immovable property constructed.
However, Article 2242 only finds application when there is a concurrence of
credits, i.e. when the same specific property of the debtor is subjected to the claims of
several creditors and the value of such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question of preference will arise, that is,
there will be a need to determine which of the creditors will be paid ahead of the
others. Fundamental tenets of due process will dictate that this statutory lien should
then only be enforced in the context of some kind of a proceeding where the claims of
all the preferred creditors may be bindingly adjudicated, such as insolvency
proceedings. This is made explicit by Article 2243 which states that the claims and
liens enumerated in articles 2241 and 2242 shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions
governing insolvency.
The action filed by petitioners in the trial court does not partake of the
nature of an insolvency proceeding. It is basically for specific performance and
damages. Thus, even if it is finally adjudicated that petitioners herein actually
stand in the position of unpaid contractors and are entitled to invoke the
contractors lien granted under Article 2242, such lien cannot be enforced in
the present action for there is no way of determining whether or not there exist
other preferred creditors with claims over the San Antonio Public Market. The
records do not contain any allegation that petitioners are the only creditors
with respect to such property. The fact that no third party claims have been
filed in the trial court will not bar other creditors from subsequently bringing
actions and claiming that they also have preferred liens against the property
involved.
DBP vs. CA
G.R. No. 126200 | 16 August 2001
FACTS
Remington Industrial Supplies Sales Corporation, which sold and delivered
construction materials and other merchandise worth P921,755.95, which purchases
remained unpaid, sought to recover payment by filing a complaint for sum of money
and damages against the debtor, Marinduque Mining, and its creditors, PNB and
DBP, which extra-judicially foreclosed on the mortgages executed by Marinduque
over its assets, as well as, the corporations they formed to make use of the assets of
Marinduque.
ISSUE # 1
WON the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor
HELD
NO. There is nothing in the law that shows such limitations. If we are to interpret this
portion of the Code as intended only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits would be left without any rules to
govern them, and it would render purposeless the special laws on insolvency.
ISSUE # 2
What is the remedy of a preferred creditor under the articles on concurrence
and preference of credits?
HELD
HE CAN COLLECT HIS PRO RATA SHARE UNDER ART. 2249, which 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, in order to make
this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of them as have credits outstanding) must necessarily be
convened, and the import of their claims ascertained. It is thus apparent that the full
application of Articles 2249 and 2242 demands that there must be first some
proceeding where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of
the Rules of Court, or other liquidation proceedings of similar import.
An exception applies to taxes, which enjoy a similar absolute
preference. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend corresponding to each, because
the rights of the other creditors likewise enjoying preference under Article 2242 can
not be ascertained.
The extra-judicial foreclosure instituted by PNB and DBP is not the

liquidation proceeding contemplated by the Civil Code, so Remington cannot claim its
pro rata share from DBP.
*** WON the fact that some of the directors of the creditor corporation were also
directors of the debtor corporation sufficient to conclude the presence of
fraudulent preference in this case.
From Appellees Brief: Where one corporation was insolvent and indebted to
another, it has been held that the directors of the creditor corporation were
disqualified, by reason of self-interest, from acting as directors of the debtor
corporation in the authorization of a mortgage or deed of trust to the former to secure
such indebtedness x x x (page 105 of the Appellees Brief). In the same manner
that x x x when the corporation is insolvent, its directors who are its creditors cannot
secure to themselves any advantage or preference over other creditors. xxx If they
do, equity will set aside the transaction at the suit of creditors of the corporation or
their representatives, without reference to the question of any actual fraudulent intent
on the part of the directors, for the right of the creditors does not depend upon fraud
in fact, but upon the violation of the fiduciary relation to the directors xxx x x x
directors of insolvent corporation, who are creditors of the company, cannot secure to
themselves any preference or advantage over other creditors in the payment of their
claims. It is not good morals or good law.
27. Corporate Rehabilitation

a. Sections 5 (d), 6 (c), and 6(d) of Presidential Decree No. 902-A
Cases:
"Anent the contention that BENHAR should not take an

active participation in the management of petitioner corporation, the
same deserves scant consideration.
"While the Deeds of Assignment executed by creditors of
Ruby in favor of Benhar were all declared null and void, the
Revised Rehabilitation Plan, as herein approved by the
Commission, shows that Benhar will assign its credit lines/loan
proceeds or will act as financier whereby it re-lends the contracted
loan to Ruby thereby converting Benhar as a creditor of the
petitioner corporation once the Rehabilitation Plan is implemented.
In fact, as of 31 March 1990, it appears that Benhar had made
some advance payments to some creditors of Ruby further
strengthening its status as a creditor. We cannot, therefore, see
any reason why Benhar should not sit in the management team to
oversee the implementation of the Plan."
For its part, the Court of Appeals noted that the approved Revised
BENHAR/RUBY Plan gave undue preference to BENHAR. The records, indeed,
show that BENHAR's offer to lend its credit facility in favor of RUBY is conditioned
upon the payment of the amount it advanced to RUBY's creditors, thus:
"FUND SOURCING
RUBY INDUSTRIAL CORP. vs. CA

G.R. No. 124185-87 | 20 January 1998
FACTS
On 28 October 1988, the SEC Hearing Panel approved the BENHAR/RUBY
Rehabilitation Plan. The minority stockholders, thru private respondent Lim, appealed
the approval to the SEC en banc. On 15 November 1988, the SEC en banc
temporarily enjoined the implementation of the BENHAR/RUBY Plan. On 20
December 1988, after the expiration of the TRO, the SEC en banc granted the writ of
preliminary injunction against the enforcement of the BENHAR/RUBY Plan.
Before the SEC Hearing Panel approved the BENHAR/RUBY Plan on 28
October 1988, BENHAR had already implemented part of the plan by paying off Far
East Bank & Trust Company (FEBTC), one of RUBY's secured creditors. Thus, by 30
May 1988, FEBTC had already executed a deed of assignment of credit and
mortgage rights in favor of BENHAR. Moreover, despite the SEC en banc's TRO and
injunction, BENHAR still paid RUBY's other secured creditors who, in turn, assigned
their credits in favor of BENHAR.
ISSUE
WON BENHAR is guilty of indirect contempt
HELD
YES. Even the SEC en banc, in its 30 July 1993 Order affirming the approval of the
Revised BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds
of assignment. However, to justify its approval of the plan and the appointment of
BENHAR to the new management committee, it gave the lame excuse that BENHAR
became RUBY's creditor for having paid RUBY's debts. We quote the relevant portion
of the SEC's ruling, thus:
xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be
executed by Benhar in favor of Ruby, under pre-arrangement with
China Banking Corporation or by any other creditor-banks, and
upon payment by Ruby of such amount already advanced by
Benhar."
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million
credit facility to be extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency. When a distressed company is
placed under rehabilitation, the appointment of a management committee follows to
avoid collusion between the previous management and creditors it might favor, to the
prejudice of the other creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one from
obtaining an advantage or preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key phrase is equality in equity.
Once the corporation threatened by bankruptcy is taken over by a receiver, all the
creditors ought to stand on equal footing. Not any one of them should be paid ahead
of the others. This is precisely the reason for suspending all pending claims against
the corporation under receivership.
Parenthetically, BENHAR is a domestic corporation engaged in importing

and selling vehicle spare parts with an authorized capital stock of thirty million pesos.
Yet, it offered to lend its credit facility in the amount of sixty to eighty millions pesos to
RUBY. It is to be noted that BENHAR is not a lending or financing corporation
and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of
Incorporation. Significantly, Henry Yu, a director and a majority stockholder of RUBY
is, at the same time, a stockholder of BENHAR, a corporation owned and controlled
by his family. These circumstances render the deals between BENHAR and
RUBY highly irregular.
To justify its appointment in the new management committee and to dispute
that it will become a creditor of RUBY only on account of the proposed assignment of
its credit facility to RUBY, BENHAR avers that as early as 27 December 1988, it
already lent one million pesos (P1,000,000.00) to RUBY for the latter's working
capital.
The submission deserves scant consideration. To start with, this
argument was raised by BENHAR for the first time in its motion for reconsideration
before the Court of Appeals. The settled rule is that issues not raised in the court a
quo cannot be raised for the first time on appealin this case, in a motion for
reconsiderationfor being offensive to the basic rules of fair play, justice and due
process.
Moreover, when RUBY initiated its petition for suspension of payments
with the SEC, BENHAR was not listed as one of RUBY's creditors. BENHAR is a
total stranger to RUBY. If at all, BENHAR only served as a conduit of RUBY. As
aptly stated in the challenged Court of Appeals decision:
"Benhar's role in the Revised Benhar/Ruby Plan, as
envisioned by the majority stockholders, is to contract the loan for
Ruby and, serving the role of a financier, relend the same to Ruby.
Benhar is merely extending its credit line facility with China Bank,
under which the bank agrees to advance funds to the company
should the need arise. This is unlikely a loan in which the entire
amount is made available to the borrower so that it can be used
and programmed for the benefit of the company's financial and
operational needs. Thus, it is actually China Bank which will be the
source of the funds to be relent to Ruby. Benhar will not shell out a
single centavo of its own funds. It is the assets of Ruby which will
be mortgaged in favor of Benhar. Benhar's participation will only
make the rehabilitation plan more costly and, because of the
mortgage of its (Ruby's) assets to a new creditor, will create a
situation which is worse than the present. x x x."
RUBBERWORLD (PHILS.), INC. vs. NLRC, ET AL.

(G.R. NO. 126773 | 14 APRIL 1999)
b. Interim Rules of Procedure on Corporate Rehabilitation
Cases:
LECA REALTY CORP. vs. MANUELA CORP.
G.R. No. 166800 & 168924 | 25 September 2007

FACTS
The petition alleges that Respondent (Manuela) is a corporation duly organized and
existing under the laws of the Republic of the Philippines, primarily engaged in the
business of leasing to retailers commercial spaces in shopping malls. Its principal
office address is Alabang-Zapote Road, Pamplona, Las Pias City. Respondent is the
owner and operator of the malls. Respondent has assets valued at P12.43 billion and
total liabilities of P4.87 billion as of 31 December 2001.
However, due to reasons that shall be discussed below, respondent is now
having severe cash flow problems which prevent it from paying its debts as they fall
due.
On 05 February 2002, the trial court issued a Stay Order. x x x
(a) a stay in the enforcement of all claims, whether for money or otherwise
and whether such enforcement is by court action or otherwise, against
petitioner MANUELA, its guarantors and sureties not solidarily liable
with it;
(b) prohibiting MANUELA from selling, encumbering, transferring
or disposing in any manner any of its properties except in the
ordinary course of business;
(c) prohibiting MANUELA from making any payment of its liabilities
outstanding as of the filing of the instant petition;
(d) prohibiting MANUELAs suppliers of goods and services from
withholding supply of goods and services in the ordinary
course of business as long as MANUELA makes payments for
the goods and services supplied after the issuance of this Stay
Order; and
(e) directing the payment in full of all administrative expenses
incurred after the issuance of this Stay Order.
In the same Stay Order, the trial court appointed Marilou Adea, also a
respondent, as Rehabilitation Receiver. On July 28, 2003, the trial court issued an
Order approving the Rehabilitation Plan. However, Petitioner Leca, opposes the
approval of said rehabilitation plan contending that the approved Rehabilitation Plan
drastically altered the terms of its lease contract with respondent Manuela, hence,
should be declared void.
ISSUE
WON the rehabilitation receiver can alter the terms of the contract of lease
between Petitioner and Respondent
HELD
NO. There is a gross discrepancy between the amounts of rent agreed upon by the
parties and those provided in the Rehabilitation Plan.
In its Decision, the Court of Appeals rejected petitioners contention that the
approved Rehabilitation Plan impairs the obligation of contract, ratiocinating that the
automatic stay of all actions is sanctioned by Section 5 (c) of Presidential Decree
(P.D.) No. 902-A which provides that all actions for claims against corporations,
partnerships or associations under management or receivership pending before any
court, tribunal, board or body shall be suspended accordingly.
The amount of rental is an essential condition of any lease contract.

Needless to state, the change of its rate in the Rehabilitation Plan is not
justified as it impairs the stipulation between the parties. We thus rule that the
Rehabilitation Plan is void insofar as it amends the rental rates agreed upon by
the parties.
It must be emphasized that there is nothing in Section 5 (c) of P.D. No.
902-A authorizing the change or modification of contracts entered into by the
distressed corporation and its creditors.
Moreover, the Stay Order issued by the trial court directed respondent
Manuela to pay in full, after the issuance of such Order, all administrative expenses
incurred. Administrative expenses are costs associated with the general
administration of an organization and include such items as utilities, rents,
salaries, postages, furniture, and housekeeping charges.
Inasmuch as rents are considered administrative expenses and considering
that the Stay Order directed respondent Manuela to pay the rents in full, then it must
comply at the rates agreed upon
CLASS NOTES >>
Take note that in this case, the Petition for the approval Rehabilitation Plan
had been filed in the RTC.
CHAS REALTY AND DEVT. CORP. vs. TALAVERA

(G.R. No. 151925 | 06 February 2003)
RCBC vs. IAC
G.R. No. 74851 | 09 December 1999
ISSUE # 1:
WON RCBC, being a mortgaged creditor, is entitled to rely solely on its security
and to refrain from joining the unsecured creditors in SEC Case No. 002693, the
petition for rehabilitation filed by private respondent
HELD
YES. The issue of whether or not preferred creditors of distressed corporations stand
on equal footing with all other creditors gains relevance and materiality only upon the
appointment of a management committee, rehabilitation receiver, board, or body.
Insofar as petitioner RCBC is concerned, the provisions of Presidential Decree
No. 902-A are not yet applicable and it may still be allowed to assert its
preferred status because it foreclosed on the mortgage prior to the
appointment of the management committee on March 18, 1985. The Court,
therefore, grants the motion for reconsideration on this score. It is thus
adequately clear that suspension of claims against a corporation under rehabilitation
is counted or figured up only upon the appointment of a management committee or a
rehabilitation receiver. The holding that suspension of actions for claims against a
corporation under rehabilitation takes effect as soon as the application or a petition for
rehabilitation is filed with the SEC may, to some, be more logical and wise but
unfortunately, such is incongruent with the clear language of the law. To insist on
such ruling, no matter how practical and noble, would be to encroach upon legislative
prerogative to define the wisdom of the law plainly judicial legislation.
ISSUE # 2
WON an order of suspension of payments as well as actions for claims applies
only to claims of unsecured creditors and cannot extend to creditors holding a
mortgage, pledge, or any lien on the property
HELD
NO. SC, in this case, laid down the ff. rules:
1. All claims against corporations, partnerships, or associations that are pending
before any court, tribunal, or board, without distinction as to whether or not a
creditor is secured or unsecured, shall be suspended effective upon the
appointment of a management committee, rehabilitation receiver, board, or body
in accordance with the provisions of Presidential Decree No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but
enforcement of such preference is equally suspended upon the appointment of a
management committee, rehabilitation receiver, board, or body. In the event that
the assets of the corporation, partnership, or association are finally liquidated,
however, secured and preferred credits under the applicable provisions of the
Civil Code will definitely have preference over unsecured ones.
In other words, once a management committee, rehabilitation receiver,
board or body is appointed pursuant to P.D. 902-A, all actions for claims against a
distressed corporation pending before any court, tribunal, board or body shall be
suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a
secured creditor as compared to a totally unsecured creditor. P.D. 902-A does
not state anything to this effect. What it merely provides is that all actions for claims
against the corporation, partnership or association shall be suspended. This should
give the receiver a chance to rehabilitate the corporation if there should still be a
possibility for doing so. (This will be in consonance with Alemars, BF Homes,
Araneta, and RCBC insofar as enforcing liens by preferred creditors are concerned.)
However, in the event that rehabilitation is no longer feasible and claims
against the distressed corporation would eventually have to be settled, the secured
creditors shall enjoy preference over the unsecured creditors (still maintaining PCIB
ruling), subject only to the provisions of the Civil Code on Concurrence and
Preferences of Credit (our ruling in State Investment House, Inc. vs. Court of Appeals,
277 SCRA 209 [1997]).
The majority ruling in our 1992 decision that preferred creditors of distressed
corporations shall, in a way, stand on equal footing with all other creditors, must be
read and understood in the light of the foregoing rulings. All claims of both a secured
or unsecured creditor, without distinction on this score, are suspended once a
management committee is appointed. Secured creditors, in the meantime, shall not
be allowed to assert such preference before the Securities and Exchange
Commission. It may be stressed, however, that this shall only take effect upon the
appointment of a management committee, rehabilitation receiver, board, or body, as
opined in the dissent.
SOBREJUANITE vs. ASB DEVT. CORP.

(G.R. No. 165675 | 30 September 2005)
CLARION PRINTING HOUSE, INC. vs. NLRC

G.R. No. 148372 | 27 June 2005
ISSUE
WON the claim of rescission of contracts with damages is a claim within the
contemplation of PD 902-A
FACTS
On 16 September 1997, the EYCO Group of Companies of which CLARION formed
part filed with the SEC a "Petition for the Declaration of Suspension of Payment,
Formation and Appointment of Rehabilitation Receiver/ Committee, Approval of
Rehabilitation Plan with Alternative Prayer for Liquidation and Dissolution of
Corporation."
On 19 September 1997, the SEC issued a a Stay Order.
On 22 October 1997, the Assistant Personnel Manager of CLARION
informed Miclat by telephone that her employment contract had been terminated
effective 23 October 1997. No reason was given for the termination.
The following day or on 23 October 1997, on reporting for work, Miclat was
informed by the General Sales Manager that her termination was part of CLARIONs
cost-cutting measures.
On 17 November 1997, Miclat filed a complaint for illegal dismissal against
CLARION and Yutingco (Petitioners) before the NLRC.
On the other hand, petitioners claimed that they could not be faulted for
retrenching some of its employees including Miclat, they drawing attention to the
EYCO Group of Companies being placed under receivership, notice of which
was sent to its supervisors and rank and file employees via a Memorandum of July
21, 1997; that in the same memorandum, the EYCO Group of Companies advised
them of a scheme for voluntary separation from employment with payment of
severance pay; and that CLARION was only adopting the "LAST IN, FIRST OUT
PRINCIPLE" when it terminated Miclat who was relatively new in the company.
The Labor Arbiter, NLRC and the CA all held that Miclat was illegally
dismissed.
Take note that in a related case (Nikon Industrial Corp. et al. v. PNB et al),
the SEC disapproved the EYCO Group of Companies petition to be declared in
state of suspension of payment which was filed before Miclats termination, and
that the SECs consequently ordered for the group of companies dissolution
and liquidation.
HELD
YES. The Interim Rules define a claim as referring to all claims or demands, of
whatever nature or character against a debtor or its property, whether for
money or otherwise. (The definition is all encompassing.)
Although the petition for rehabilitation was filed PRIOR to the effectivity of
the Interim Rules, the same would still apply pursuant to Section 1 of Rule 1 thereof.
Even under the rulings in Finasia and Arranza, the complaint for
rescission with damages would still fall under the category of a claim
considering that it is for pecuniary considerations. In this case, the HLURB gave
undue preference to Sobrejuanite over other creditors of ASB.
METROPOLITAN BANK & TRUST COMPANY, INC.

vs. SLGT HOLDINGS, INC., ET AL.
(G.R. Nos. 175181-82, 175354 & 175387-88 |
14 September 2007)
PAL vs. CA
G.R. No. 123238 | 11 July 2005
ISSUE
WON a suspension of proceedings on a complaint for damages based on a
contract of carriage may be granted by virtue of the SECs order, appointing an
Interim Rehabilitation Receiver and enjoining the suspension of all claims for
payment against the petitioner
HELD
NO. Upon the appointment by the SEC of a management committee or a
rehabilitation receiver, all actions for claims against a corporation pending before any
court, tribunal or board shall ipso jure be suspended in whatever stage (and this
includes every other stage of the proceedings aside from the payment of claims
during the execution stage) such actions may be found. No other action may be
taken, including the rendition of judgment during the state of suspension.
The suspension of action for claims against a corporation under
rehabilitation receiver or management committee embraces all phases of the suit, be
it before the trial court or any tribunal or before this Court. Furthermore, the actions
that are suspended cover all claims against a distressed corporation whether for
damages founded on a breach of contract of carriage, labor cases, collection suits or
any other claims of a pecuniary nature.
ISSUE
WON the proceedings concerning Miclats labor claim can continue
HELD
YES. With the appointment of a management receiver in September 1997, however,
all claims and proceedings against CLARION, including labor claims, were deemed
suspended during the existence of the receivership. The Labor Arbiter, the NLRC, as
well as the CA should not have proceeded to resolve respondents complaint for
illegal dismissal and should instead have directed respondent to lodge her claim
before the then duly-appointed receiver of CLARION.
BUT!!!
To still require respondent, however, at this time to refile her labor
claim against CLARION under the peculiar circumstances of the casethat 8
years have lapsed since her termination and that all the arguments and
defenses of both parties were already ventilated before the labor arbiter, NLRC
and the CA; and that CLARION is already in the course of liquidationthis
Court deems it most expedient and advantageous for both parties that
CLARIONs liability be determined with finality, instead of still requiring

respondent to lodge her claim at this time before the liquidators of CLARION
which would just entail a mere reiteration of what has been already argued and
pleaded. Furthermore, it would be in the best interest of the other creditors of
CLARION that claims against the company be finally settled and determined so as to
further expedite the liquidation proceedings. For the lesser number of claims to be
proved, the sooner the claims of all creditors of CLARION are processed and settled.
The SC declared Miclats dismissal as legal as it was brought about by
business reverses but ordered CLARION however, to PAY her the following in
accordance with the foregoing discussions:
1. P6,500.00 as nominal damages for non-compliance with statutory due process;
2. P6,500.00 as separation pay; and
3. P3,250.00 as 13th month pay.
A copy of the SC Decision was ordered to be furnished to the SEC Hearing
Panel charged with the liquidation and dissolution of petitioner corporation for
inclusion, in the list of claims of its creditors, respondent Michelle Miclats claims, to
be satisfied in accordance with Article 110 of the Labor Code in relation to the Civil
Code provisions on Concurrence and Preference of Credits.
CLASS NOTES >>
Maam said that this is one case where the Supreme Court decided based
on equity. (Eight years had already passed; the claim of Miclat had long been
overdue.) The Supreme Court did the calculation of Miclats claims.
Clarion is already under liquidation BUT the Court allowed the proceedings
to continue so that it may determine the amount of Miclats claim. However, such
COULD NOT be enforced as her claim has to be first included in the list of
claims of creditors which would share in the proceeds of the liquidation
proceedings. Her labor claim shall then be satisfied in accordance with the
provisions on Concurrence and Preference of Credits.
ONG vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK

G.R. No. 160466 | 17 January 2005
FACTS
1. Petitioner-spouses, Alfredo and Susana Ong are the President and Treasurer,
respectively, of Baliwag Mahogany Corporation, a domestic corporation engaged
in the manufacture and export of finished wood products. In 1991, BMC needed
additional capital for its business and applied for various loans amounting to a
total of P5M with Philippine Commercial International Bank (now EquitablePhilippine Commercial International Bank or E-PCIB). The spouses acted as
sureties for these loans and issued 3 promissory notes for that purpose. Under
the terms of the notes, it was stipulated that the bank may consider BMC in
default and demand payment of the balance of the loan upon the levy,
attachment or garnishment of any of its properties, or upon BMCs insolvency, or
if it is declared to be in a state of suspension of payments. The bank thereafter
granted BMCs loan applications.
2.
On 22 November 1991, BMC filed a petition for rehabilitation and suspension of

payments with the SEC after its properties were attached by creditors. The bank
therefore considered BMC in default and sought to collect payment from the
spouses by filing a case for collection of a sum of money against the spouses
themselves on 20 April 1992.
3.
On 13 October 1992, a MOA was executed by BMC, the petitioner-spouses and

the consortium of creditor banks of BMC. This MOA took effect upon its approval
by the SEC on 27 November 1992, and on the basis of this MOA, as well as the
SECs declaration that BMC is in a state of suspension of payments, the spouses
moved to dismiss the complaint, for the benefits of the MOA should allegedly be
extended to the petitioners-spouses who acted as BMCs sureties.
4.
Petitioners-spouses claim for dismissal was hinged on the MOA, the SECs
declaration placing BMC under suspension of payments, under Article 2063,
which provides that a compromise between the creditor and the principal debtor
benefits the guarantor and under Article 2081, which provides that the guarantor
may set up against the creditor all the defenses which pertain to the principal
debtor.
ISSUE
WON the benefits of the MOA should be extended to the petitioners-spouses
who acted as BMCs sureties
HELD
NO. The SC ruled that the petitioners reliance on Articles 2063 and 2081 of the Civil
Code was misplaced as these provisions refer to contracts of guaranty only, and not
to suretyship contracts, for there are differences in the rights and liabilities of a
guarantor and a surety.
A guarantor insures the solvency of the debtor, while a surety is an
insurer of the debt itself, and that while the guarantors liability for the payment of
the obligation is subsidiary and solidary the principal debtors, that of the surety is
principal. A surety is directly, equally and absolutely bound with the principal debtor
for the payment of the debt and is deemed as an original promissory and debtor from
the beginning.
Therefore, under Article 1216 of the Civil Code, E-PCIB as creditor may
proceed against petitioners-spouses as sureties despite the execution of the
MOA which provided for the suspension of payment and filing of collection
suits against BMC. Furthermore, the provisions of the MOA regarding suspension of
payments by BMC and the non-filing of collection suits by the creditor banks pertain
only to the property of BMC and the SECs jurisdiction is limited only to corporations
and corporate assets. SEC has no jurisdiction over the properties of BMCs officers or
sureties. In view whereof, the Supreme Court dismissed the petition for lack of merit.
SY CHIM vs. SY SIY HO & SONS, INC.

(G.R. No. 164958 | 27 January 2006)
>> N/A
METROPOLITAN BANK & TRUST COMPANY

vs. ASB HOLDINGS, INC., ET AL.
(G.R. No. 166197 | 27 February 2007)
MWSS vs. DAWAY & MAYNILAD WATER SERVICES, INC.
G.R. No. 160732 | 21 June 2004
ISSUE # 1
WON the Rehabilitation Court acted in excess of its jurisdiction when it
enjoined MWSS from seeking payment of concession fees from the bank that
issued the Letter of Credit (LC) in its favor and for the account of Maynilad
HELD
YES. The reference to all those affected by the proceedings covers creditors or
such other persons or entities holding assets belonging to the debtor under
rehabilitation which should be reflected in its audited financial statements. The banks
do NOT hold any assets of Maynilad that would be material to the rehabilitation
nor is Maynilad liable to the banks at this point. Therefore, in issuing the disputed
clarificatory order which enjoined MWSS for claiming from an asset that did not
belong to the debtor and over which it did not have jurisdiction, the Rehabilitation
Court acted in excess of its jurisdiction.
ISSUE # 2
WON the LC is a solidary obligation and therefore does NOT fall under the
coverage of the Stay Order
HELD
THE LC IS SOLIDARY AND IS EXEMPT FROM THE STAY ORDER. LCs were
developed for the purpose of insuring to seller payment of a definite amount upon the
presentation of documents and is thus a commitment by the issuer that the party in
whose favor it is issued and who can collect upon it will have his credit against the
applicant of the LC duly paid of the amount specified therein. They are in effect
absolute undertakings. They are primarily obligations and not accessory contracts.
While they are security arrangements, they are not converted thereby into contracts
of guaranty. It is distinct from an accessory contract in that it engages the
issuing bank to pay the seller once he documents and draft are presented to it.
The prohibition in the rules does NOT apply to MWSS as the prohibition is on
the enforcement of claims against guarantors whose obligations are not
solidary with the debtor. The banks ibligations are solidary with Maynilad as it
is primarily, direct and definite and an absolute undertaking to pay and is not
conditioned on prior exhaustion of debtors assets.
Therefore, being a solidary obligation, the LC is excluded from the
jurisdiction of the Rehabilitation Court.

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Law 107 :: Credit Transactions

Atty. Stephanie V. Gomez-Somera

QUINTOS vs. BECK

>> D2008 Credit Reviewer, p.4

SAURA IMPORT & EXPORT CO., INC. vs. DBP

Medinas: no express stipulation on the compounded interest OP

Several demands from bank; as of 20 May 1982: P114,416.10

Penalty Clause: Accessory undertaking to assume greater liability on the part of

EASTERN SHIPPING LINES vs. CA

Interest: Cost of money; fundamental part of banking business; core of banks

PRODUCERS BANK OF THE PHILIPPINES vs. CA

GARCIA vs. THIO

constitutes consideration. It is incorrect because as a bailee, it is Guevarras duty

BPI Family Bank v. Franco & CA

PEOPLE vs. PUIG & PORRAS

to it as owner of the money deposits, as sufficient to make out a case of Qualified

BISHOP OF JARO vs. DE LA PENA

CA AGRO-INDUSTRIAL DEVT. CORP. vs. CA

TRIPLE-V FOOD SERVICES, INC.

YHT REALTY CORP. vs. CA

G.R. No. 126780 | 17 February 2005

SEC. 2. Declaration of Policy. It is hereby declared to be the

Special Commercial Laws

14. Truth in Lending Act

Liability for Violation of Truth in Lending Act

The rationale of this provision is to protect users of credit from a lack of

SEC. 4. Any creditor shall furnish to each person to whom credit is

15. The Usury Law

In simple loan with stipulation of usurious interest, the prestation of the

16. The Warehouse Receipts Law and the General Bonded

PHILIPPINE BLOOMING MILLS, INC. vs. CA

(G.R. No. 142381 | 15 October 2003)

Section 2.01. The Guarantors jointly and severally,

Pursuant to this provision, petitioner (as creditor) was justified in taking

No Ambiguity in the Undertaking

20. Pledge and Mortgage, Common Provisions, Articles 2085 to

1984, and which was received by plaintiff Lydia Cuba;

defendant Agripina Caperal on August 16, 1984;

Without foreclosure proceedings, whether judicial or extra-judicial, defendant

Peoples Bank & Trust Co. vs. Odom:

BUSTAMANTE vs. ROSEL

b. A stipulation for automatic appropriation by the creditor of the thing mortgaged in

ONG vs. ROBAN LENDING CORP.

The Dacion in Payment Agreement is lawful and valid as it is

21. Pledge, Articles 2093 to 2123, Civil Code

23. Chattel Mortgage, Articles 2140 to 2141, The Chattel Mortgage

MAKATI LEASING & FINANCE CORP.

SUICO vs. PNB

HUERTA ALBA RESORT, INC. vs. CA

PAMECA WOOD TREATMENT PLANT vs. CA

>> D2008 Credit Reviewer, p.31 of 52

When will concurrence and preference of credit apply?

ACME SHOE RUBBER AND PLASTIC CORP. vs. CA

>> D2008 Credit Reviewer, p.25 of 52

SERVICEWIDE SPECIALIST, INC. V. CA

24. Antichresis, Articles 2132 to 2139, Civil Code

If there are two or more credits with respect to specific real

J.L. BERNARDO CONSTRUCTION vs. CA

G.R. No. 105827 | 31 January 2000