2016-2017 CredTrans by Sarona (Complete)
2016-2017 CredTrans by Sarona (Complete)
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Credit Transactions Complete TSN 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
The CA reversed the decision and held that Kasunduan is not a lease contract ceases to be a commodatum. (1941a)
contract but a commodatum because the agreement is not for a price
certain. This is what happened in Pajuyo vs. CA. It turned out that it was not essentially
gratuitous because there was an obligation on the part of the bailee. Not really
ISSUE: W/N the Kasunduan entered into between Pajuyo and Guevarra monetary in nature, but still it made the contract not gratuitous in nature. And
was a commodatum. therefore it could not be considered as a contract of commodatum.
If the bailor should have urgent need of the thing, he may demand its It is not required that the bailor in a commodatum is the owner of the thing.
return for temporary use. If the use of the thing is merely tolerated by the Why? Because there is no transfer of ownership. As long as he has possessory
bailor, he can demand the return of the thing at will, in which case the rights, such as that of a usufructuary or a lessee who is not prohibited to
contractual relation is called a precarium, a kind of commodatum. sublease the property or let other people use it, then he could still have a valid
contract of commodatum.
The Kasunduan reveals that the accommodation accorded by Pajuyo to
Guevarra was not essentially gratuitous. While the Kasunduan did not As we have mentioned, a commodatum is an informal contract as it is not
require Guevarra to pay rent, it obligated him to maintain the property in required to be in writing to be valid. But do remember the provisions under the
good condition. The imposition of this obligation makes the Kasunduan a Statute of Frauds (Article 1403). If it would be performed after one year from
contract different from a commodatum. the execution of the contract, then it has to be in writing but for purposes of
being enforceable and not for validity.
The effects of the Kasunduan are also different from that of a
commodatum. Case law on ejectment has treated relationship based on It is also obvious that since this is a gratuitous contract, it is therefore similar to
tolerance as one that is akin to a landlord-tenant relationship where the a donation as it confers benefit to a recipient.
withdrawal of permission would result in the termination of the lease.
The tenant’s withholding of the property would then be unlawful. 1935 emphasizes the purpose of a commodatum, the use of the thing loaned.
However, it doesn’t extend to the fruits of the thing, unless stipulated by the
Even assuming that the relationship between Pajuyo and Guevarra is one parties. The purpose here is the use but it has to be emphasized, it is only a
of commodatum, Guevarra as bailee would still have the duty to turn over temporary use of the subject matter excluding the fruits unless otherwise
possession of the property to Pajuyo, the bailor. The obligation to deliver agreed upon by the parties.
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 Art. 1936.
received. Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for
Having freely entered into the Kasunduan, Guevarra cannot now impugn exhibition. (n)
the Kasunduan after he had benefited from it. The Kasunduan binds
Guevarra.
Art. 1937.
CHARACTERISTICS OF COMMODATUM
Movable or immovable property may be the object of commodatum. (n)
(1) Real
− Perfected by delivery
What do we mean by consumable goods? In 1936, it is mentioned that
(2) Unilateral
consumable goods maybe the subject of commodatum. But isn’t it that we
− You must have read on the subsequent provisions that
mentioned earlier that the subject matter in a commodatum refers only to non-
there would be obligations imposed. Nevertheless, those
consumable goods?
obligations don’t necessarily mean that it gives rise to a
bilateral contract. But rather, the obligations mentioned
in the subsequent articles on the part of the bailor, are PRODUCERS BANK vs. CA
just necessary consequences of commodatum. FACTS:
(3) Nominate Sanchez asked PR Franklin Vives to deposit in a bank a certain amount of
(4) Principal money in the bank account of Sterela Marketing and Services for purposes of
− Not dependent to another contract its incorporation. Relying on the assurances and representations of Sanchez
(5) Informal in nature and Doronilla, PR Vives deposited P200k in the Producers Bank in favor of
− It is not required to be in writing or in any particular form Sterela.
in order to be valid
(6) Essentially gratuitous Later on, Vives found out that Sterela was no longer holding office in the
− Once it stops to be gratuitous, it is not a commodatum address previously given to him. They went to the bank to verify if their
anymore. money was still intact. They were informed that part of the money was
already withdrawn by Doronilla and only P900k was left in the account. They
could not however withdraw the money because they had to answer for the
CHAPTER 1. COMMODATUM postdated checks issued by Doronilla. They further found out that Doronilla
SECTION 1. NATURE OF COMMODATUM was able to obtain a loan worth P175k.
Art. 1935.
PR Vives demanded the return of his money from Doronilla. When Doronilla
The bailee in commodatum acquires the used of the thing loaned but not its
failed to do so, PR Vives instituted an action for recovery of sum of money.
fruits; if any compensation is to be paid by him who acquires the use, the
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Credit Transactions Complete TSN 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Be careful with this case. If ever this would be asked for the purposes of the bar
Petitioner Producers Bank contended the transaction between Vives and exam, you can cite this case but be very specific that the facts of this case is
Doronilla was a simple loan or mutuum since all the elements of a mutuum same with that of the Producer’s Bank case looking at the intention of the
are present: parties. Otherwise, you could make the contract a mutuum. That is the better
1. What was delivered by Vives to Doronilla was money, a view in lieu of the obligation of the bailee to return the equivalent, not the
consumable thing; and exact thing that was borrowed. Take note of the uniqueness of this case as it
2. The transaction was onerous as Doronilla was obliged to pay took primordially the intention of the parties.
interest.
In mentioning Article 1936, a contract of commodatum generally involves a
PR Vives countered that the transaction between him and Doronilla was not a non-consumable thing. But pwede ring consumable as long as it is not
mutuum but an accommodation since he did not actually part with the consumed. Example, a bottle of wine or money which will be used for purposes
ownership of his money. In fact, he asked his wife to deposit said amount in of exhibition.
the account of Sterela so that a certification can be issued to the effect that
Sterela had sufficient funds for purposes of its incorporation.
Article 1937.
ISSUE: W/N the transaction between Vives and Doronilla was a commodatum. Movable or immovable property may be the object of commodatum. (n)
RULING: YES Now Article 1937 emphasizes that you could have, even a real property a
subject matter in a commodatum as what happened in the case of Mina vs.
Article 1993 of the CC seems to imply that if the subject of the contract is a Pascual. What happened in this case?
consumable thing, such as money, the contract would be a mutuum.
However, there are some instances where a commodatum may have for its MINA vs. PASCUAL
object a consumable thing as provided under Article 1936. FACTS:
Francisco Fontanilla acquired a lot. Later on, with his consent, his brother
If consumable goods are loaned only for purposes of exhibition, or when the Andres Fontanilla erected a warehouse on a portion of the lot. When
intention of the parties is to lend consumable goods and to have the very Francisco died, Mina inherited the lot while Ruperta Pascual acquired the
same goods returned at the end of the period agreed upon, the loan is a building as the successor of Andres.
commodatum and not a mutuum.
Later on, Ruperta, as the guardian of her minor children, sought for court
The rule is that the intention of the parties thereto shall be accorded authorization to sell a portion of the warehouse. Mina opposed alleging that
primordial consideration in determining the actual character of a contract. In the lot where the warehouse stood belongs to them.
case of doubt, the contemporaneous and subsequent acts of the parties shall
be considered in such determination. The trial court granted the sale at public auction of the warehouse and the lot
where it stood. Mina then presented an agreement the 9th paragraph thereof
In this case, Vives merely accommodated Doronilla by lending his money, provides that there existed and still exists a commodatum by virtue of which
without consideration, as a favor to his good friend Sanchez. It was however the guardianship had and has the use, and the plaintiffs the ownership of the
clear to the parties that the money would not be removed from Sterela’s property.
savings account and would be returned to Vives after the lapse of 30 days.
ISSUE: W/N there exist a commodatum between the parties.
The fact that Doronilla’s attempts to return to Vives the amount of P200k
which the latter deposited in Sterela’s account together with an additional RULING: NO
P12k, allegedly representing interest on the mutuum, did not convert the The phrase implies that while finding the Minas to be the owners of the lot,
transaction from a commodatum into a mutuum because such was not the the Pascuals only have the use of the lot. Furthermore, the SC found that:
intent of the parties. Furthermore, the additional P12k corresponds to the (1) Andres Fontanilla, Pascual’s predecessor, erected the warehouse
fruits of the lending of the P200k. Article 1935 of the CC expressly states that on the lot some thirty years ago with the explicit consent of his
the bailee acquires only the use of the thing loaned but not its fruits. Hence, it brother Francisco, Mina’s predecessor;
was only proper for Doronilla to remit to private respondent the interest (2) The plaintiffs and the defendants are the co-owners of the
accruing to the latter’s money deposited with petitioner. warehouse;
(3) Neither Andres Fontanilla nor his successors paid any consideration
Why would it matter if it is a commodatum or a mutuum? Remember one of or price whatever for the use of the lot occupied by the warehouse
the distinctions between these 2 contracts is that in commodatum, there is no causing both parties to denominate Pascual’s use of the property
transfer of ownership while in mutuum there is a transfer of ownership. It was as a commodatum.
alleged that if the agreement or transaction here was a mutuum, Producer’s
Bank cannot be held liable to return the P200,000. However, the SC held that Although both litigating parties may have agreed in their idea of the
looking at the intention of the parties, the transaction was deemed to be a commodatum, contracts are not to be interpreted in conformity with the
commodatum as the money deposited in the account was specifically for the name that the parties thereto agree to give them, but must be construed, duly
purpose of making it appear that the firm had sufficient capitalization to form a considering their constitutive elements, as they are defined and denominated
corporation. by law.
Article 1936 was mentioned to which it emphasized pwede consumable goods It is an essential feature of the commodatum that the use of the thing
be subject of a commodatum as long as the purpose is not for consumption but belonging to another shall be for a certain period. Francisco did not fix any
for exhibition. However do take note that this case is very unique in nature. definite period or time during which Andres could have the use of the lot
Why? Again, distinction between mutuum and commodatum – in whereon the latter was to erect a stone warehouse of considerable value. Also
commodatum, the obligation of the bailee is to return the exact same thing that it is for the past thirty years that the lot has been used by both Andres and his
was borrowed. If you put money in the bank, let’s say for purposes of successors in interest.
commodatum, what would be the expectation if we say it’s a commodatum?
That the exact money you deposited, with the specific serial number will be It never entered Francisco's mind to limit the period during which his brother
returned to you since that is the exact same thing that you deposited and that is Andres was to have the use of the lot, because he expected that the
the obligation in commodatum. But of course in the transaction here, that warehouse would eventually fall into the hands of his son, Fructuoso, called
would not be expected because once you put money in the bank, that is the adopted son of Andres, which did not come to pass for the reason that
actually a contract of loan. Iba yung obligation ng bank to the depositor and the Fructuoso died before his uncle Andres. With that expectation in view, it
transaction between the depositor and from whom the money was transferred. appears more likely that Francisco intended to allow his brother Andres a
surface right; but this right supposes the payment of an annual rent, and
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Credit Transactions Complete TSN 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Andres had the gratuitous use of the lot. magsagot. (haha!)What do you think is the consideration before you enter in a
contract of commodatum? You take into consideration the character, the credit,
The present contention of the Minas that Cu Joco, now in possession of the the conduct of that person/bailee before you allow him to make use of the
lot, should pay rent for the use of the lot at the rate of P5 a month would property. That makes commodatum a purely personal contract, unlike in a
destroy the theory of the commodatum sustained by them since a mutuum. The difference here, in commodatum you do not expect anything in
commodatum is essentially gratuitous. return, gratuitous yan.
What’s the subject matter here? The land here is at issue but it must be Now in relation to the purely personal nature of a contract of commodatum,
distinguished from the warehouse. I want to emphasize it since here we have 2 one of its effects is that the death of either the bailor or the bailee extinguishes
different immovable properties. the contract. This would be an exception to Article 1178 under your obligations
and contract. Subject to the laws or rights acquired in virtue of an obligation are
Do we have a contract of commodatum? No. transmissible if there’s no stipulation to the contrary. However it may be
transmissible by a stipulation of the parties.
Is it necessary for parties in a commodatum to agree that the commodatum or
the contract or the bailee would be allowed to use for a specific period of time? Now do take not that if there are 2 or more bailees, death of 1 does not
What is required here for it to be considered a commodatum? For it to be a extinguish the contract. Exception, unless there is a stipulation.
commodatum, what must be agreed upon as to the period? That it is only for
temporary. We have the concept of procarium. They do not need to stipulate Very important to consider in Article 1939 is the second effect. The bailee
for a specific period for a procarium to exist. What must be clearly agreed upon cannot lend nor lease the object of the contract to a third person. Di mo pwede
by the parties is that the use is only temporary in nature for a certain period but ipahiram yung pinahiram sa iyo. There are only 2 exceptions. First, members of
it is not necessary that they have to specifically indicate until when the bailee is the bailee’s household. Exception to the exception is if there is a stipulation to
allowed to use. the contrary. In the absence of a stipulation, the nature of the thing forbids
such use. Example, damit. Siguro pinahiram sa iyo ang damit kasi kasya sa iyo.
So you mentioned here that it cannot be a commodatum. If it’s not a Wag ipilit na ipahiram sa kapatid, pinsan or kasama sa bahay kasi kasya din.
commodatum, what is the nature of the commodatum here? Contract of lease. Anong mangyari niyan? There will be liabilities on your part. Ang mali mo lang is
pinahiram mo na di ka nagpaalam.
What was the intention of the parties to determine that they intended to a
contract of lease and not a commodatum? The SC emphasized that the parties So again, take note, general rule, bailee cannot lend nor lease the object of the
considered it as a commodatum however the essential feature of commodatum contract to a third person. Exception, stipulation of the parties. Another
is that the use of the thing belonging to another shall be for a certain period but exception, with regard to the members of the bailee in the same household.
the original parties to the contract, Francisco, did not fix for a definite period Exception to the exception, stipulation prohibiting members of the same
which Andres could have used the lot. household to use the same or the nature of the thing forbids such.
It turns out that the present contention that the present possessor should pay
rent. If there’s rent, it should not be considered as a commodatum because Article 1940. A stipulation that the bailee may make use of the fruits of the
again, commodatum is essentially gratuitous. thing loaned is valid. (n)
The SC held that vis-à-vis with the evidence presented, it turns out that it never Article 1940 is with regard to the fruits. This is a stipulation that the bailee may
entered Francisco’s mind to limit the period. Why? Because he expected that make use of the fruits of the thing loaned is valid. So this is the exception we
the warehouse will eventually fall into the hands of his son which however did have mentioned before. General rule, the use of the thing refers to the thing
not come to pass. Why? Because patay na an son, si Fructoso. itself, it does not extend to the fruits. Exception, it may extend to the fruits
provided there is a stipulation as provided in Article 1940.
So again, go back to the intention of the parties. They never intended that
Andres would use the property for a specific period or temporarily. It appears The right to use is distinct from the right to enjoy the fruits of the thing. Parties
more likely that Francisco intended to allow Andres merely a surface right can stipulate the use of the fruits incidental to the use of the thing. Otherwise, if
supposing the payment of an annual rent. Therefore, with that intention very the use is the main cause of the contract, that is not commodatum but rather a
clear, they could not have entered into a commodatum but rather a contract of usufruct, the right to use the fruits thereof.
lease. So again, we have here an immovable property an object of a
commodatum also emphasizing the gratuitous nature of such contract. OBLIGATIONS OF THE BAILEE
What are the primary obligations of the bailee? You can still apply here the
obligations of the debtor that you have already learned in your obligations and
Article 1938. The bailor in commodatum need not be the owner of the thing contracts. First, to take care of the thing with the diligence of a good father of
loaned. (n) the family unless the law requires another standard of care or unless otherwise
Now Article 1938, the bailor in commodatum need not be the owner of the stipulated by the parties. What else? Since this is a commodatum, the parties
thing loaned. We have emphasized this before because again in commodatum, have entered into for the purpose of the temporary use, the bailee has the
ownership does not pass to the bailee. As long as you have a possessory obligation to use it for the purpose as agreed by them. Also we have learned
interest, like either as a lessee or a usufructuary, you can be a bailee in a that the bailee has the obligation to pay for ordinary expenses and its primary
commodatum. However, the bailee himself may not lend or lease to a third obligation is to return the thing that he has borrowed.
person. This is clear under Article 1939.
Now we have the case of Delos Santos vs. Jarra. What happened in this case?
Ok. Look at your seatmate, whether the one on your left or the one on your Since Jimenea was already, Delos Santos brought the action against Agustina
right. Look at the stuff that you have – libro, cellphone, ipad. Pahiramin mo ba Jarra, the administratrix of the estate of Jimenea.
sa seatmate mo? (awkward silence) Alam na natin. Alangin kayong lahat
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Credit Transactions Complete TSN 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
Jarra admitted that Jimenea asked Delos Santos to loan him ten carabaos, but which it has been loaned;
he only obtained three second-class animals, which were later on sold to (2) If he keeps it longer than the period stipulated, or after the
Jimenea. accomplishment of the use for which the commodatum has been
constituted;
The trial court ordered Agustina Jarra, as administratrix of the estate of (3) If the thing loaned has been delivered with appraisal of its value,
Jimenea, to return to Delos Santos the remaining six-second and third class unless there is a stipulation exempting the bailee from
carabaos, or the value thereof at the rate of P120 each, or a total of P720 with responsibility in case of a fortuitous event;
the costs. (4) If he lends or leases the thing to a third person, who is not a
member of his household;
ISSUE: W/N the transaction between Delos Santos and Jimenea was a (5) If, being able to save either the thing borrowed or his own thing,
commodatum. he chose to save the latter. (1744a and 1745)
RULING: YES Now please take note of Article 1942. The general rule is that the bailee is not
The carabaos loaned or given on commodatum to Jimenea were not returned liable for the loss of the thing. Why? Because owner bears the loss of the thing
to Delos Santos, and that it is not true that the carabaos were subsequently through a fortuitous event. Ownership is not transferred to the bailee. Owner
sold to Jimenea. Since the carabaos were not the property of the deceased bears the loss. 1942 provides for the exceptions wherein the bailee can be held
nor of any of his descendants, it is the duty of the administratrix of the estate liable even if the thing is lost due to a fortuitous event. What are these
to return them or indemnify the owner for their value. instances? Essentially, if you look at 1, 2, 4 and 5, these are due to the bailee’s
improper acts:
The obligation of the bailee or of his successors to return either the thing
loaned or its value is sustained by the Supreme tribunal of Spain. In its (1) If he devotes the thing to any purpose different from that for which it has
decision of March 21, 1895, it sets out with precision the legal doctrine been loaned;
touching commodatum as follows: This would show bad faith on the part of the bailee.
Although it is true that in a contract of commodatum the bailor (2) If he keeps it longer than the period stipulated, or after the accomplishment
retains the ownership of the thing loaned, and at the expiration of the use for which the commodatum has been constituted;
of the period, or after the use for which it was loaned has been That would show dealy on the part of the bailee.
accomplished, it is the imperative duty of the bailee to return the
thing itself to its owner, or to pay him damages if through the (4) If he lends or leases the thing to a third person, who is not a member of his
fault of the bailee the thing should have been lost or injured, it is household;
clear that where public securities are involved, the trial court, in Because again, a commodatum is purely personal in nature.
deferring to the claim of the bailor that the amount loaned be
returned him by the bailee in bonds of the same class as those (5) If, being able to save either the thing borrowed or his own thing, he chose to
which constituted the contract, thereby properly applies law 9 of save the latter.
title 11 of partida 5. Because this shows gratitude.
When Delos Santos demanded for the return of the carabaos to him, Jimenea (3) If the thing loaned has been delivered with appraisal of its value, unless there
or Jarra had the obligation to do so. However, since the object of the is a stipulation exempting the bailee from responsibility in case of a fortuitous
commodatum itself cannot be returned because only six carabaos were left, event;
Jarra is under obligation to indemnify the owner thereof by paying him their Number 3, however, shows that the bailee would still be liable even if there is
value. no bad faith on his part or no improper act on his part. As long as when the
thing was delivered, there was an appraisal as to how much was the value of
We have here a commodatum and it is emphasized that the carabaos delivered the thing. Why? Because having that appraisal, there is an intention that the
here, not being returned, there is an obligation to indemnify the owner by borrower shall be held liable unless of course, when there is a stipulation that
paying its value. It is imperative in commodatum that the bailee has the duty to would exempt him from the liability in case of a fortuitous event.
return the thing itself to its owner or to pay damages if through his fault, the
thing has been lost or injured. So the primary obligation of the bailee is What happened in the case of Republic vs. Bagtas?
emphasized here.
REPUBLIC OF THE PHILIPPINES vs. BAGTAS
In relation to the intransmissibility of a contract of commodatum, do not FACTS:
confuse it with the liability of the estate. The commodatum here was not Jose Bagtas borrowed from the Republic of the Philippines through the
extinguished by the mere death of Magdaleno. The liability extends to the Bureau of Animal Industry three bulls for a period of one year for breeding
estate. Whatever the heirs of Magdaleno may receive can be used to pay of the purposes subject to a government charge of breeding fee of 10% of the book
liability of Magdaleno in relation to the damages which he should be held liable value of the bulls.
to the bailor Delos Santos.
Upon the expiration of the term, Bagtas asked for a renewal thereof for
another year. However, the Secretary of Agriculture only approved the
SECTION 2. - OBLIGATIONS OF THE BAILEE renewal for one bull and requested the return of the other two.
Article 1941. The bailee is obliged to pay for the ordinary expenses for the use
and preservation of the thing loaned. (1743a) Bagtas wrote to the Director of Animal Industry of his desire to purchase the
three bulls. The Director denied the request and reiterated the demand for
With that, Article 1941 also emphasizes another obligation of the bailee which the return of the bulls or the payment of their book value.
is to pay for the ordinary expenses for the use and preservation of the thing
loaned. When Bagtas failed to do so, the Republic filed a case against him praying that
Bagtas be ordered to return the three bulls loaned to him or to pay their book
Why is it that the bailee is liable for the ordinary expenses? Because he acquires value in the total sum of P3,241.45 and the unpaid breeding fee in the sum of
the use of the thing and these ordinary expenses are in relation to the use of P199.62, both with interests.
the thing. For example, if the subject matter of the commodatum is the use of
the car. So that would include fuel or magpa-carwash. So these are ordinary While the case was pending, Bagtas died and was substituted by her wife as
expenses which should be shouldered by the bailee. the administratrix of the estate. The wife alleged that the two bulls were
Article 1942. The bailee is liable for the loss of the thing, even if it should be already returned. Hence, she could no longer be held liable thereof. She
through a fortuitous event: further contended that the third bull was accidentally killed from a gunshot
(1) If he devotes the thing to any purpose different from that for wound inflicted during a Huk raid. According to her, such death was due to
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Credit Transactions Complete TSN 2016-2017
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force majeure thereby she is relieved from the duty of returning the bull or Now we have here the case of Catholic v Court of Appeals
paying its value.
CATHOLIC VICAR vs. CA
ISSUES: FACTS:
(1) W/N there was a contract of commodatum. Petitioner Catholic Vicar filed an application for registration of Lots 1, 2, 3 and
(2) W/N the death of the third bull was a fortuitous event which 4. The heirs of Juan Valdez and the heirs of Egmidio Octaviano opposed the
would relieve Bagtas from returning or paying the value of the bull. registration of Lots 2 and 3 respectively, claiming ownership thereof.
Subsequently, they filed an action for recovery of possession of the two lots.
RULING: BOTH NO
A contract of commodatum is essentially gratuitous. If the breeding fee will be Petitioner Catholic Vicar alleged that they acquired the two lots by purchase.
considered as a compensation, the contract cannot be considered as a The trial court granted the registration. However, the CA reversed the
commodatum. However, the contract would be a lease of the bull. Under decision and ruled that there was absolutely no documentary evidence to
Article 1671 of the CC, the lessee would be subject to the responsibilities of a support the allege purchase of the property.
possessor in bad faith, because she had continued possession of the bull after
the expiry of the contract. The CA further ruled that the that the predecessors of the heirs of Valdez and
heirs of Octaviano were possessors of Lots 2 and 3, with claim of ownership in
Even assuming that the contract was a commodatum, Bagtas would still be good faith from 1906 to 1951. Moreover, the Catholic Vicar was in possession
liable based on Article 1942 paragraph 2 and 3 of the CC. as borrower in commodatum up to 1951, when it repudiated the trust by
declaring the properties in its name for taxation purposes. When it applied for
The original period of the loan was one year which was later on renewed for registration of Lots 2 and 3 in 1962, it had been in possession in concept of
another year. However, Bagtas kept and used the bull despite the expiration owner only for 11 years. Ordinary acquisitive prescription requires possession
of the period granted to him and until it was killed by stray bullets. for 10 years, but always with just title. Extraordinary acquisitive prescription
Furthermore, Bagtas was appraised of the book value of the bulls and it was requires 30 years.
not stipulated that in case of loss of the bull due to fortuitous event, Bagtas
would be exempt from liability. ISSUES:
(1) W/N the Catholic Vicar held Lots 2 and 3 in commodatum.
Since Bagtas already returned the two bulls to the Republic, the estate is only (2) W/N the Catholic Vicar successfully repudiated the ownership of
liable for the sum of P859.63, or the value of the bull which has not been the two lots.
returned because it was killed while in the custody of the administratrix.
RULING: YES and NO
First thing that you should to consider here is that there is no contract of First issue
commodatum. Why? Because the contract was not gratuitous in nature. There The heirs of Valdez and Octaviano were able to prove that their predecessors'
was a compensation, the breeding fee. And therefore, you apply the laws of a house was merely borrowed by Catholic Vicar after the church and the
contract of lease wherein the lessee would still be liable. convent were destroyed. They never asked for the return of the house, but
when they allowed its free use, they became bailors in commodatum and the
Nevertheless, even if it is considered a commodatum, you apply, 1942. The Catholic Vicar as the bailee.
bailee would still be liable for the loss of the thing through a fortuitous event, as
alleged by the wife, when one of the bulls was eventually killed. Nevertheless, Second issue
Bagtas kept the bulls longer than the period agreed upon and it has been The bailee's failure to return the subject matter of commodatum to the bailor
delivered with the appraisal of its value. Therefore, the estate should be held did not mean adverse possession on the part of the borrower. The bailee held
liable for the value of the bull that was not returned to the Republic. in trust the property subject matter of commodatum. The adverse claim of
petitioner came only in 1951 when it declared the lots for taxation purposes.
The action of petitioner Vicar by such adverse claim could not ripen into title
Article 1943. by way of ordinary acquisitive prescription because of the absence of just
The bailee does not answer for the deterioration of the thing loaned due only title.
to the use thereof and without his fault. (1746)
The Catholic Vicar is in bad faith. By its the very admission, Lots 2 and 3 were
Now, Article 1943 refers to deterioration. This refers to the ordinary wear and owned by Valdez and Octaviano since 1906. When petitioner Vicar was
tear or depreciation. This must be borne by the bailor. The bailee would only notified of the oppositor's claims, the parish priest offered to buy the lot from
be held liable if he is at fault or negligent, example if he holds the thing for a Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar
purpose different from that agreed upon by the parties. only in 1962 which is a clear sign of bad faith. Hence, they must acquire
ownership thereof for a period of at least 30 years.
AYALA Hence, the predecessors-in-interest and PR heirs were possessors under claim
November 15, 2016 of ownership in good faith from 1906 while that of petitioner Vicar was only a
Part 3 of 3 bailee in commodatum; and that the adverse claim and repudiation of trust
Art. 1944. came only in 1951.
The bailee cannot retain the thing loaned on the ground that the bailor owes
him something, even though it may be by reason of expenses. However, the So it repudiated its title as a bailee of a property it now alleged ownership over
bailee has a right of retention for damages mentioned in Article 1951. (1747a) the property so it is only from 1951 from adverse possession from acquisitive
prescription began to ran. Because before 1951 Catholic was only allowed the
So the Bailee as a general rule has no right to retain or hold on to the thing Free Use of the property. They are only considered as a bailee in a contract of
loaned or to the subject matter of the commodatum as security for claims he commodatum. Their failure to return the subject matter did not mean adverse
has against the bailor. Later on would say that extra ordinary expenses that the possession on their part and adverse possession only began in 1951 when it
bailor would be held liable kung si bailee na nagbayad sa extra-ordinary repudiated the trust and declared the properties in its name.
expenses and then he would now seek reimbursement from the bailor and the
bailor refuses to reimburse the bailee can the bailee hold on, refuse to return You do not become an owner of a property even how long you possess it in the
the pay on the ground na wala pa siya na reimburse ni bailor? 1944 is clear, he concept of a bailee.
has no right to retain it. He has the obligation to return it to the bailor but of
course he can still demand for reimbursement as to the expenses that should
be shouldered by the bailor. The only exception is the clause that is provided in Art. 1945.
Article 1951. When there are two or more bailees to whom a thing is loaned in the same
contract, they are liable solidarily. (1748a)
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stipulated or accomplishment of its purpose. What is clear here is that the use is
Now why do we have this provision? It’s to safeguard effectively the rights of only for a certain period or for a certain time. When can the bailor demand for
the lender. the return, temporary use of the thing, for urgent need such as a sick family
member pinaghiram ng sasakyan? Sa kanyang kapitbahay ngayong kailangan
Because remember you take into account the personal integrity and niya kasi he will have to bring a family member to the hospital. Now that would
responsibility of all the bailees and not just one. Its impossible na hindi ipahiram fall under urgent need.
sa iyo kung wala yung isang bailee. Now that’s why the liabilities or obligations
of the bailees would be solidary in nature. Now take note this is an exception to Now what is the effect if the use by the bailor as in the instance is only
the general rule wherein the presumption is that debtors are presumed to be temporary in nature? The effect is that the commodatum is suspended, while
jointly liable. The exceptions for joint obligation is when expressly stipulated the thing is in the possession of the bailor and then it would be lifted once he
and when provided by law. Here it is very clear that article 1945 provides for returns it back to the bailee wherein tapos na yung urgent need niya.
the solidary liability for 2 or more bailees.
With regard to commodatum take note that there are 2 kinds of commodatum,
So in these provisions what are the obligations of bailees? we have the ordinary commodatum and we have precarium. What is a
(1) The bailee is liable for ordinary expenses the borrower should defray precarium?
the expenses for the use and preservation of the thing loaned for
after all, he acquires the use of the same and he is supposed to
return the identical thing Art. 1947. The bailor may demand the thing at will, and the contractual
(2) The borrower must take good care of the thing with the diligence of relation is called a precarium, in the following cases:
a good father of a family (due diligence) (1) If neither the duration of the contract nor the use to which the
(3) Generally, the borrower would not be liable for the loss of a thing thing loaned should be devoted, has been stipulated; or
due to a fortuitous event but he would be liable in case of the (2) If the use of the thing is merely tolerated by the owner. (1750a)
following circumstances:
(a) If he devotes the thing to any purpose different from that QUINTOS vs. BECK
for which it has been loaned; FACTS:
(b) If he keeps it longer than the period stipulated, or after Beck occupied the house of Quintos as tenant. Upon the novation of the
the accomplishment of the use for which contract of lease, Quintos gratuitously granted Beck the use of the furniture
the commodatum has been constituted; subject to the condition that Beck would return them to Quintos upon her
(c) If the thing loaned has been delivered with appraisal demand.
of its value, unless there is a stipulation exemption the
bailee from responsibility in case of a fortuitous event; Later on, Quintos sold the house and demanded from Beck the return of the
(d) If he lends or leases the thing to a third person, who is furniture. However, Beck wrote a letter to Quintos saying that he could not
not a member of his household; give up the three gas heaters and the four electric lamps because he would
(e) If, being able to save either the thing borrowed or his still use them until the expiration of contract of lease.
own thing, he chose to save the latter.
(JPSP: should be considered as an exemption. This is Later on, before vacating the house, Beck deposited with the Sheriff all the
actually based on ingratitude. Nonetheless, this provision furniture belonging to Quintos. The furniture was then placed in a warehouse
tends to control one’s instinct for self preservation) in the custody of the sheriff.
(4) The bailee is not liable for the deterioration of the thing loaned due
only to the use thereof and without his fault The trial court ruled that Quintos failed to comply with her obligation to get
(5) He cannot retain the thing loaned on the ground that the bailor the furniture when they were offered to her. Hence, she must bear the
owes him something, even though it may be for the consequence and the expenses thereof.
reason of expenses. He can have the right to retain though for
damages as mentioned in Article 1951—“The bailor who, knowing ISSUES:
the flaws of the thing loaned, does not (1) W/N the contract between the parties was a commodatum.
advise the bailee of the same, shall be liable to the latter for the (2) W/N Beck complied with his obligation to return the furniture to
damages which he may suffer by reason thereof”. Quintos.
(6) When there are two or more bailees to whom a thing is loaned in the
same contract, they are liable solidarily to the bailor RULING: YES and NO
(a) To safeguard effectively the rights of the lender b. Law First issue
presumes that the bailor takes into account the personal The contract entered into between the parties is one of commodatum. Under
integrity and responsibility of all the bailees and that, the contract, Quintos gratuitously granted the use of the furniture to Beck,
therefore, he would not have constituted the reserving for herself the ownership thereof, while Beck bound himself to
commodatum is there were only one liable return the furniture to Quintos upon demand.
The only obligation of a bailor is a consequence of the nature of the Second issue
commodatum when in fact some of these emphasize not only obligation but The obligation voluntarily assumed by Beck to return the furniture upon the
rather rights. Quintos’s demand means that he should return all of them to Quintos at the
her residence or house. Beck did not comply with this obligation when he
merely placed them at the disposal of Quintos, retaining for his benefit the
SECTION 3. OBLIGATIONS OF THE BAILOR three gas heaters and the four eletric lamps.
Art. 1946.
The bailor cannot demand the return of the thing loaned till after the Since Beck had voluntarily undertaken to return all the furniture to Quintos,
expiration of the period stipulated, or after the accomplishment of the use upon the latter's demand, the Court could not legally compel her to bear the
for which the commodatum has been constituted. However, if in the expenses occasioned by the deposit of the furniture at Beck’s behest. Beck, as
meantime, he should have urgent need of the thing, he may demand its bailee, was not entitled to place the furniture on deposit; nor was Quintos
return or temporary use. under a duty to accept the offer to return the furniture, because Beck wanted
to retain the three gas heaters and the four electric lamps.
In case of temporary use by the bailor, the contract of commodatum is As to the value of the furniture, we do not believe that Quintos is entitled to
suspended while the thing is in the possession of the bailor. (1749a) the payment thereof by Beck in case of his inability to return some of the
furniture because under paragraph 6 of the stipulation of facts, Beck has
So the primary Obligation of the bailor due to the nature of the commodatum is neither agreed to nor admitted the correctness of the said value. Should Beck
to allow the bailee to use the thing loaned for the duration of the period fail to deliver some of the furniture, the value thereof should be later
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determined by the trial court through the evidence which the parties may contrary. (1751a)
desire to present.
So we are already clear that when it comes to ordinary expenses it is the bailee
The costs in both instances should be borne by Beck because Quintos is the who should shoulder it. 1949 covers extraordinary expenses. There are 2 kinds.
prevailing party. Beck was the one who breached the contract of If it refers to extraordinary expenses for the preservation of the thing loaned
commodatum, and without any reason he refused to return and deliver all the like for example the roof of a house subject of commodatum that was damaged
furniture upon Quintos’s demand. In these circumstances, it is just and by a typhoon. Who will bear the expenses? It will be the bailor as it will be the
equitable that he pay the legal expenses and other judicial costs which bailor who will profit from the said expenses. If the bailee who has incurred
Quintos would not have otherwise defrayed. these extraordinary expenses the bailor must refund the bailee provided that
the bailee inform the bailor before incurring them. It is possible that the bailor
There is a precarium where the bailor may demand the thing at will, the did not want to have it repaired baka masabi niya “its not worth it anymore
contract by which the owner of the thing at the request of another person gives (hugot)” however as an exception to the notice, notice to the bailor is not
the latter the thing for use as long as the owner shall please. So the bailor may required if it is urgent in nature. Again extraordinary expenses for preservation
demand the return in time. borne against the bailor.
If there is no duration of the contract or no purpose to which it is devoted or There are also extraordinary expenses which arise from ordinary use of the
when the use is merely tolerated by the bailor we have a precarium. In the case thing for example sasakyan, nabangga who will bear the loss? 50-50 Equally by
of Quintos v Beck there was a gratuitous grant of the furnature to the both the bailor and bailee unless there is a stipulation to the contraty. Take
defendant so that would be commodatum but specifically it is a precarium note of these extraordinary expenses.
because the furniture would be returned only upon the demand of the bailor
now the refusal to return everything would be violation of the obligation of the For other types of expenses you have article 1950.
bailee.
What would be the effect? Even if he were ready to return the furniture other Art. 1950.
than the gas lamps, the refusal of quintos to accept the delivery of the furniture If, for the purpose of making use of the thing, the bailee incurs expenses
subsequently deposited to the sheriff was valid because the agreement was to other than those referred to in Articles 1941 and 1949, he is not entitled to
return everything. Applying the general rules on Obligations and Contracts you reimbursement. (n)
cannot compel the creditor to accept partial delivery. With that you will be
liable for the expenses incurred of the deposit of the furniture. It will not be the Example mga ostentatious expenses like in a car, the tires or for example a
bailor. The bailee is liable when demanded by the bailor. spare tire. Di man yan mahulog sa ordinary or extraordinary expenses so it will
be shouldered by the bailee. He is not entitled to reimbursement.
In Ordinary commodatum the possession of the bailee is secured, he has the
right to retain the thing loaned until the expiration of the period agreed
between them or upon the accomplishment of the use for which the We mentioned in 1944 that an exception to the right to retain is article 1951.
commodatum has been constituted,
Art. 1951.
Do take note however in 1947 (2) merely tolerated by the owner, be careful of The bailor who, knowing the flaws of the thing loaned, does not advise the
that word owner because again we have emphasized it is not required that the
bailee of the same, shall be liable to the latter for the damages which he may
bailor be the owner of the thing. The bailor has suppository interest over the suffer by reason thereof. (1752)
property.
This is the instance, the only instance wherein the bailee may hold the thing or
subject of commodatum. What are the requisites of 1951.
Art. 1948. (1) There is a flaw or defect;
The bailor may demand the immediate return of the thing if the bailee (2) It is hidden or latent;
commits any act of ingratitude specified in Article 765. (n)
(3) The bailor must be aware of such defect,
(4) Despite such knowledge the bailor does not advice the bailee of the
There is similarity between commodatum and donation, we are gratuitous in said flaw or defect; and
nature to which we can apply 765 in relation to acts of ingratitude. Because in (5) Because of that defect the bailee suffers damages.
the case of commodatum similar to that of donation the bailee is still unworthy If all of these are present the bailee has the right to hold on and retain the thing
of the trust imposed upon him by the bailor. until damages are paid. Because here the bailor is in bad faith. The right given
here is only to retain the thing but not to sell the thing to recover expenses for
Art. 765. The donation may also be revoked at the instance of the donor, by the damages.
reason of ingratitude in the following cases:
1. If the donee should commit some offense against the person, the For example the brake is not working, or may defect sa engine. The bailee
honor or the property of the donor, or of his wife or children under would suffer damages, apply 1951.
his parental authority;
2. If the donee imputes to the donor any criminal offense, or any act However if the bailee could have known of the defect after inspection the bailor
involving moral turpitude, even though he should prove it, unless the cannot be held liable and article 1951 cannot be applied.
crime or the act has been committed against the donee himself, his
wife or children under his authority; If the bailor is not aware of the hidden defect he will not also be liable and there
3. If he unduly refuses him support when the donee is legally or morally is no right to retain the thing.
bound to give support to the donor. (648a)
Art. 1952.
Art. 1949. The bailor cannot exempt himself from the payment of expenses or damages
The bailor shall refund the extraordinary expenses during the contract for the by abandoning the thing to the bailee. (n)
preservation of the thing loaned, provided the bailee brings the same to the
knowledge of the bailor before incurring them, except when they are so Whats the reason behind this provision? The expenses or damages may exceed
urgent that the reply to the notification cannot be awaited without danger.
the value of the thing loaned, and it would be unfair if the bailor would just
choose “Sige dili na nako bayaran imoha na na” because it would turn out in the
If the extraordinary expenses arise on the occasion of the actual use of the absence of 1952 the bailor would just abandon the thing instead of paying
thing by the bailee, even though he acted without fault, they shall be borne
kawawa naman yung bailee. He cannot abandon the thing to exempt himself for
equally by both the bailor and the bailee, unless there is a stipulation to the
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the damages for example the extraordinary expenses in 1949 or the damages Q: What is a Mutuum?
that would arise from the incidents mentioned in article 1951. A: Mutuum is a contract where one party delivers to another money or other
consumable thing with the understanding that the same amount will be paid to
(1) The primary obligation of the bailor is to allow the bailee the use of the creditor.
the thing loaned for the duration of the period stipulated or until the
accomplishment of the purpose for which the commodatum was Q: In the case of Yong Chan we have a Commodatum or a Mutuuum?
constituted A: Mutuum ma’am.
(a) However, the lender may demand its return or temporary
use if he has the urgent need of the thing or if the Q: What happened in this case?
borrower commits an act of ingratitude
YONG CHAN KIM vs. PEOPLE
(2) PRECARIUM: a kind of commodatum where the bailor may demand FACTS:
the thing at will. In this kind of commodatum, the lender may Petitioner Yong Chan Kim was employed as a researcher at the SEAFDEC,
demand at will the return of thing under the following which requires him to travel to various selected provinces in the country. Yong
circumstances: Chan was issued a first travel order where he received P6,438.00 as cash
(a) If neither the duration of the contract nor the use to advance to defray his travel expenses. Another travel order was issued to him
which the thing loaned should be devoted, has been where he received another cash advance of P495.00.
stipulated; or The dispute arose when Yong Chan allegedly failed to return P1,230.00 out of
(b) If the use of the thing is merely tolerated by the owner. the cash advance which he received under the first travel order. Yong Chan
(c) the law recognizes the urgency as well as it is gratuitous. argued that he has no obligation to return the excess of the cash advanced to
(d) Take note that in precarium, there is no stipulated period him for the same was intended as loan.
or the use is merely tolerated
Nevertheless, for the alleged failure of Yong Chan to return the amount, he
(3) He may demand the immediate return of the thing if the bailee was charged with the crime of estafa under Article 315, paragraph 1(b) of the
commits any act of ingratitude RPC. In order to be convicted of the crime, it must be proven that Yong Chan
(a) If the bailee should commit some offenses against the had the obligation to deliver or return the same money, good or personal
person, honor or the property of the bailor, or of his property that he had received from respondent SEAFDEC.
wife, and children under his parental authority
(b) If the bailee imputes to the bailor any criminal offense or ISSUES:
any act involving moral turpitude, even though he should (1) W/N Yong Chan is under obligation to return the cash advance he
prove it, unless the crime or act has been committed had received from SEAFDEC. NO
against himself, his wife and children under his authority (2) W/N there was transfer of ownership of the cash advance to Yong
(c) If the bailee unduly refuses the bailor support when the Chan. YES
bailee is legally or morally bound to give support (3) W/N Yong Chan could be held liable for estafa. NO
(4) He has the obligation to refund extraordinary expenses for the RULING:
preservation of the thing loaned—it is him who profits from the said First issue
expenses anyway. Yong Chan merely has the obligation to liquidate his expenses but not to
(a) As a rule, notice is required because it is possible that the return the cash advanced to him by SEAFDEC.
bailor may not want to incur the extraordinary
expenses at all Liquidation simply means the settling of an indebtedness. An employee who
(b) An exception of course is where there is urgency that the liquidates a cash advance is in fact paying back his debt in the form of a loan
reply to the notification cannot be awaited without of money advanced to him by his employer, as per diems and allowances.
danger
(c) you have to determine if its ordinary or extraordinary If the amount of the cash advance he received is less than the amount he
(d) why would you advance for the extraordinary spent for actual travel, he has the right to demand reimbursement from his
expenses when you can return the thing and make the employer the amount he spent coming from his personal funds. In other
lender pay for the expenses? words, the money advanced by either party is actually a loan to the other.
Hence, Yong Chan was under no legal obligation to return the same cash or
(5) Regarding, extraordinary expenses arising from the actual use of the money, i.e., the bills or coins, which he received from SEAFDEC.
thing, the division of liability between the bailor and bailee is 50-50.
This is the default rule but the parties may stipulate for a different Second issue
apportionment. The ownership of the money was transferred to Yong Chan. Based on the
(6) For expenses other than ordinary expenses and expenses for the cross examination of the witness, it was found that the transfer of ownership
preservation and use of the thing, the bailor is not liable for the was subject to a suspensive condition that Yong Chan liquidates the amount of
same. cash advance upon return to station and completion of the travel.
(7) He is liable to the bailee for damages in case he has knowledge of Third issue
flaws of the thing loaned, and he didn't advise the bailee of the Since ownership of the money (cash advance) was transferred to Yong Chan,
same no fiduciary relationship was created. Absent this fiduciary relationship
(a) There is flaw or defect in the thing loaned between Yong Chan and SEAFDEC, which is an essential element of the crime
(b) The flaw or defect is hidden of estafa by misappropriation or conversion, Yong Chan could not have
(c) The bailor is aware thereof committed estafa.
(d) He doesn't advise the bailee of the same
(e) The bailee suffers damages by reason of the said flaw or Q: What do you mean by liquidation here?
defect A: Liquidation means the settling of an indebtedness. An employee, such as
herein petitioner, liquidates a cash advance is in fact paying back his debt in the
(8) He cannot excuse himself from liability for any expense or damages form of a loan of money advanced to him by his employer.
by abandoning the thing to the bailee
Q: What would be the nature of a contract, whether it is a commodatum or
mutuum, that is relevant in determining the liability for estafa?
III. Mutuum and Usury Law A: It is relevant maam because if it is a contract of mutuum, then the ownership
was already transferred to Kim.
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Q: So? What if it is transferred? What is its relation to the case of estafa? On September 13, 1982, BPIIC released to ALS and Litonjua P7,146.87,
A: There is no fiduciary relationship ma’am. purporting to be what was left of their loan after full payment of Roa’s loan.
Q: What is the nature of the criminal liability? However, BPIIC instituted foreclosure proceedings against ALS and Litonjua on
A: ahhm the ground that they failed to pay the mortgage indebtedness from May 1,
1981 to June 30, 1984.
Q: Essentially what happens in estafa? Why is it in a contract of mutuum, the
borrower cannot be held liable for estafa as in this case? ALS and Litonjua argued that they were not in arrears in their payment, but in
A: In this case maam, fiduciary relationship is an essential element of estafa, fact made an overpayment as of June 30, 1984. They maintained that they
where there is a misappropriation or conversion with that Kim cannot be held should not be made to pay amortization before the actual release of the
liable for estafa. P500k loan in August and September 1982.
Ma’am: Alright. Thank you. So here, again recall your Criminal law. What The CA ruled that a simple loan existed between the parties which was
happens in estafa? In this case, estafa is by means of misappropriation or perfected only upon the delivery of the object of the contract which was on
conversion wherein a sum of money or property is entrusted to the person September 13, 1982. Evidence further showed that there was overpayment on
liable for estafa. In this case, it was determined that there can be no liability for the part of ALS and Litonjua. Hence, there was no basis for BPIIC to extra-
estafa because the liability of the petitioner arose from a contract of mutuum. judicially foreclose the mortgage by reason of the ALS and Litonjua’s alleged
Again, take note of the features of a mutuum. One of which is that there is no delinquency in payment of their loan.
obligation to return the exact same thing but only the value thereof. Moreover
and more importantly, in mutuum there is a transfer of ownership. Being the BPIIC appealed the decision arguing that a contract of loan is a consensual
owner thereof he can do whatever he want with the money. His obligation is contract, and a loan contract is perfected at the time the contract of mortgage
only to liquidate and report. Kung kulang, what would be the effect? Kung is executed on March 31, 1981. Hence, the amortization and interests on the
kulang ang binnigay sa kanya nap era, he could seek reimbursement. Kung loan should be computed from said date.
sobra naman his obligation would be to return the excess not in the form of
commudatum but base on his obligation to repay as that of the contract of ISSUES:
mutuum. The liquidation or the obligation of the petitioner here to liquidate is (1) W/N a simple loan is a consensual contract which is perfected by
simply means settling of the indebtedness. An employee, such as herein mere consent. NO
petitioner, who liquidates a cash advance is in fact paying back his debt in the (2) W/N there was delay on the part of ALS and Litonjua. NO
form of a loan of money advanced to him by his employer. So if the amount of
the cash advance he received is less than what he has travelled, he has the right RULING:
to demand for reimbursement from his employer to which the amount advance First issue
is actually a loan. Therefore there has no obligation to return the exact same A loan contract is not a consensual contract but a real contract. It is perfected
cash which he received from his employer. So with that, there was transfer of only upon the delivery of the object of the contract.
ownership and there was no fiduciary relationship transferred to the petitioner
by virtue of the cash advances, he cannot be held liable for the crime of estafa In this case, the contract of loan between BPIIC and ALS and Litonjua was
by misappropriation or conversion. So again take note of that feature of loan. perfected only on September 13, 1982, the date when BPIIC released the
purported balance of the P500k loan after deducting therefrom the value of
Roa’s indebtedness. Following the intentions of the parties, the payment of
CHAPTER 2. SIMPLE LOAN OR MUTUUM the monthly amortization should commence only on October 13, 1982, a
Art. 1953. month after the perfection of the contract, despite their express agreement
A person who receives a loan of money or any other fungible thing acquires that payment shall commence on May 1, 1981.
the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality. (1753a) Second issue
A contract of loan involves a reciprocal obligation, wherein the obligation or
So, again when we talk of simple loan or mutuum, it is a contract whereby one promise of each party is the consideration for that of the other.
of the parties delivers to another money or other consumable thing with the
understanding that the same amount of the same kind or quality shall be paid. In this case, the consideration for BPIIC in entering into the loan contract is
So again, ang nasa Art. 1953 is “to pay” hindi “to return”. It involves the return the promise of ALS and Litonjua to pay the monthly amortization. For the
of the equivalent only and not the identical thing because again ownership has latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations,
already been transferred to the borrower to which he can dispose of the thing neither party incurs in delay if the other does not comply or is not ready to
borrowed and his act will not be considered misappropriation as to constitute comply in a proper manner with what is incumbent upon him. Only when a
estafa. party has performed his part of the contract can he demand that the other
party also fulfills his own obligation and if the latter fails, default sets in.
So with that, we should also take into consideration what are the characteristics
of a simple loan or mutuum. Similar to commodatum, it is unilateral, it is also Therefore, ALS and Litonjua did not incur in delay when they did not
nominate. It is also a principal contract as it can stand on its own. It is informal commence paying the monthly amortization on May 1, 1981, as it was only on
because it does not require a particular form for its perfection. However, unlike September 13, 1982 when BPIIC fully complied with its obligation under the
commodatum which is essentially gratuitous, in mutuum it may be gratuitous or loan contract. Therefore, in computing the amount due as of the date when
onerous. But of course we all know both of them are real contracts perfected by BPIIC extra-judicially caused the foreclosure of the mortgage, the starting date
delivery. So we have the case of BPI. is October 13, 1982 and not May 1, 1981.
BPI INVESTMENT CORPORATION vs. CA Q: why is it necessary to determine when the contract of loan is perfected?
FACTS: A: it is necessary maam for the foreclosure by the bank to be justified.
Frank Roa obtained a loan from AIDC, the predecessor of petitioner BPIIC, for
the construction of a house. The house and lot were mortgaged to AIDC to Q: When was it perfected?
secure the loan. Later on, Roa sold the house and lot to ALS and Antonio A: September 13, 1982
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then in the currency which is legal tender in the Philippines. upon which the interest for the next period is calculated. GENERAL
RULE : compound interest cannot be collected unless agreed upon
The delivery of promissory notes payable to order, or bills of by the parties.
exchange or other mercantile documents shall produce the (3) Legal interest- that which the law directs to be charged in the
effect of payment only when they have been cashed, or when absence of any agreement as to the rate between the parties.
through the fault of the creditor they have been impaired. (4) Lawful Interest - Interest, which the law allows or does not prohibit;
that which is the maximum interest allowed by law.
In the meantime, the action derived from the original (5) Unlawful Interest or Usurious – Interest rate stipulated that is
obligation shall be held in the abeyance. beyond the maximum rate allowed by law.
In the absence of express declaration we cannot apply Article 1250. EASTERN SHIPPING LINES vs. CA
FACTS:
If what was loaned is a fungible thing pay the lender thing of the same kind, A vessel owned by petitioner Eastern Shipping Lines delivered for shipment two
quantity and quality. What if it is impossible to do so? Pay its value at the time fiber drums of riboflavin from Japan. The shipment was insured by Mercantile
of perfection of the loan. Insurance Company.
Later on, the shipment was discharged unto arrastre operator’s custody Metro
Art. 1956. Port Service, Inc. which observed that one drum was in bad order. When Allied
No interest shall be due unless it has been expressly stipulated in writing. Brokerage withdrew the shipment from Metro Port, one drum was found
(1755a) opened without seal but the contents thereof was intact. Finally, when the
drums reached the consignee, one drum was found with adulterated/faked
The article is very short but the rest of the cases we have under mutuum falls contents.
under that article revolving around interest. So very INTERESTING!
MIC contended that due to the losses/damage sustained by the drum, the
First thing you should take note is that the requirement here to impose interest consignee suffered losses totaling P19,032.95, due to the fault and negligence
must be expressly stipulated in writing. Take note also that this article is only of Eastern Shipping, Metro Port and Allied Brokerage. As a consequence, MIC
applicable in simple loan or mutuum. We cannot apply it to interests arising was compelled to pay the consignee so that it became subrogated to all the
from damages because we have a separate provision governing torts or rights of action of the consignee against them.
damages.
Eastern Shipping, Metro Port and Allied Brokerage denied liability.
Interest may be paid either as compensation for the use of money (monetary
interest) referred to in Article 1956 or imposed by law or by courts as penalty or The lower court ruled Eastern Shipping (carrier), Metro Port (arrastre operator),
indemnity for damages (compensatory interest) under Articles 2209 and 2212 and Allied (broker) solidarily liable and ordered them to pay MIC for the losses
for breach of contractual obligations. it suffered with the present legal interest of 12% per annum from the date of
filing of this complaints.
What are the kinds of interest:
(1) Simple interest – that which is paid for the principal at a certain rate Eastern appealed the decision arguing that they should be held liable of the
fixed or stipulated by the parties. interest only from the date of the decision of the trial court and only at the rate
(2) Compound interest – that which is imposed upon interest due and of 6 percent per annum because MIC’s claim is indisputably unliquidated.
unpaid. The accrued interest is added to the principal sum and the
whole (principal and accrued interest) is treated as new principal ISSUE:
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(1) W/N Eastern, Metro Port and Allied are solidarily liable. YES finality until its satisfaction, this interim period being
(2) W/N Eastern, Metro Port and Allied may be held to pay the 12% deemed to be by then an equivalent to a forbearance of
interest per annum from the date of filing of this complaints. NO credit.
RULING: So please take note of the guidelines in this case of Eastern Shipping. Eastern
First issue Shipping is reiterated in the succeeding cases.
The losses/damages were sustained while in the respective and/or successive
custody and possession of Eastern, Metro Port and Allied Brokerage and So what are the rules here? Pls. Take note.
therefore they are liable to MIC as subrogee for the amount it paid to the (1) Obligations, regardless of its source, can be held liable for damages,
consignee. you apply the provisions on damages as provided in the Civil Code.
While the award of interest in the concept of actual and
Second issue compensatory damages, are as follows:
In the "first group of cases", the basic issue focuses on the application of either - If there's a breach in an obligation, and it consists in a payment
the 6% (under the Civil Code) or 12% (under the Central Bank Circular) interest of a sum of money, loan, or forbearance of money, interest is
per annum. stipulated in writing, and interest due shall earn legal interest
from the time it is judicially demanded.
In these cases, there has been a consistent holding that the Central Bank - In the absence of stipulation, 12% per annum from default,
Circular imposing the 12% interest per annum applies only to loans or from judicial of extrajudicial demand.
forbearance of money, goods or credits, as well as to judgments involving such
loan or forbearance of money, goods or credits. (2) Obligations not constitution loan or forbearance of money is
breached. An interest in the amount of damages may be imposed at
On the other hand, the 6% interest under the Civil Code governs when the 6% per annum. No interest, however, shall be adjudged in
transaction involves the payment of indemnities in the concept of damage unliquidated claims or damages, except where the demand can be
arising from the breach or a delay in the performance of obligations in general. ascertained with reasonable certainty.
A common time frame in the computation of the 6% interest per annum has
been applied which is from the time the complaint is filed until fully paid. Where the demand is established with reasonable certainty, interest
shall begin to rum from the time the claim is made judicially or
The "second group", did not alter the pronounced rule on the application of the extrajudicially. But when such certainty cannot be so reasonably
6% or 12% interest per annum. However, varied on the commencement of the established at the time the demand is made, interest begins to run
running of the legal interest. from the date of judgement is made. Actual base of the computation
of interest shall be from the amount adjudged.
Hence, the SC laid down the following rules of thumb for future guidance by
way of clarification and reconciliation. (3) When the judgement awarding a sum of money becomes final and
executory, the interest shall be 12% from finality until satisfaction.
I. When an obligation, regardless of its source: law, contracts, quasi-
contracts, delicts or quasi-delicts is breached, the contravenor can So in this case, 6% from decision, and 12% upon finality and until satisfaction.
be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of I am emphasizing this because this has been asked in the bar. Yan talaga ang
recoverable damages. answer na ine-expect ng SC.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as However, you should take note that the legal interest rate has already been
the accrual thereof, is imposed, as follows: changed to 6%, effective July 1, 2013.
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of Any decision or obligation prior to July 1, 2013, we apply the guidelines and
money, the interest due should be that which may have ruling in Eastern Shipping- 12% if what you have is a loan or forbearance of
been stipulated in writing. Furthermore, the interest due money, goods, or credit. 6% - otherwise.
shall itself earn legal interest from the time it is judicially M: What do we mean by forbearance?
demanded. The absence of stipulation, the rate of S: A forbearance is a contractual obligation of a creditor to refrain from, during
interest shall be 12% per annum to be computed from a period of time, from requiring the debtor to repay the amount that was lent.
default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the CC What happened in Crismina Garments vs. CA?
2. When an obligation, not constituting a loan or CRISMINA GARMENTS vs. CA
forbearance of money, is breached, an interest on the FACTS:
amount of damages awarded may be imposed at the Crismina was engaged in the export of girls' denim pants. It contracted the
discretion of the court at the rate of 6% per annum. No services of Norma Siapno for the sewing of 20,762 pieces of assorted girls’
interest, however, shall be adjudged on unliquidated denims. By virtue of which, Crismina was obliged to pay Norma an amount of
claims or damages except when or until the demand can P76,410.00 for her services. However, despite the delivery of the sewed
be established with reasonable certainty. Accordingly, materials, Crismina failed to pay Norma.
where the demand is established with reasonable
certainty, the interest shall begin to run from the time Norma demanded payment from Crismina. However, Crismina alleged that
the claim is made judicially or extra-judicially (Article 6,164 pairs of the sewed jeans were defective and demanded a refund of
1169, CC) but when such certainty cannot be so P49,925.51 or the value of the damaged pairs of denim pants from Norma.
reasonably established at the time the demand is made,
the interest shall begin to run only from the date the Norma filed for the collection of the principal amount of P76,410.00 against
judgment of the court is made (at which time the Crismina. The trial court ordered Crismina to pay Norma the amount with
quantification of damages may be deemed to have been interest at 12% per annum, to be counted from the filing of the complaint until
reasonably ascertained). The actual base for the fully paid.
computation of legal interest shall, in any case, be on the
amount finally adjudged. Crismina appealed the decision arguing that the complaint was an action for
3. When the judgment of the court awarding a sum of the enforcement of an obligation for payment of money arising from a contract
money becomes final and executory, the rate of legal for a piece of work. Hence, the interest rate should be 6% pursuant to Article
interest, whether the case falls under paragraph 1 or 2209 of the CC.
paragraph 2, above, shall be 12% per annum from such
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Norma countered that the 12% per annum interest rate based on CBC should reasonable certainty. However, once the judgment becomes final and
apply since the money sought to be recovered by her is in the form of executory, the interim period from the finality of judgment awarding a
forbearance. monetary claim and until payment thereof, is deemed to be equivalent to a
forbearance of credit. Thus, the rate of 12% per annum should be imposed, and
ISSUES: to be computed from the time the judgment became final and executory on
1. W/N the obligation was a forbearance of money. November 26, 1993 until fully satisfied. The actual base for the computation of
2. W/N the 12% per annum interest rate should be imposed. this 12% interest after the judgment in this damage suit became final shall be
the amount adjudged (P98,691.90).
RULING: BOTH NO
First issue PILIPINAS BANK vs. COURT OF APPEALS
Forbearance, in the context of the usury law, is a contractual obligation of FACTS:
lender or creditor to refrain, during a given period of time, from requiring the Greatland Realty executed a Dacion en Pago covering several parcels of land in
borrower or debtor to repay a loan or debt then due and payable. Using this favor of petitioner Pilipinas Bank. Greatland assigned P2.3M out of the total
standard, the obligation in this case was obviously not a forbearance of money, consideration of the dacion en pago to respondent Lilia Echaus. However,
goods or credit. despite her repeated demands for payment, petitioner failed to pay the
assigned amount.
Second issue
The amount due arose from a contract for a piece of work, not from a loan or The trial court ordered petitioner to pay the respondent the amount due with
forbearance of money. Hence, the legal interest of 6% per annum should be interest plus damages. Upon payment, petitioner applied the 6% interest rate.
applied. Respondent Echaus opposed alleging that the interest rate imposed should be
12% per annum pursuant to CBC 416. Upon respondent’s motion for
Furthermore, since the amount of the demand could be established with clarification, the CA ruled that the legal interest rate should be 12% per annum
certainty when the complaint was filed, 6% interest should be computed from in accordance with the CBC 416 since the transaction between the parties
the filing of the complaint until the finality of the judgment. But after the involves forbearance of money.
judgment becomes final and executory until the obligation is satisfied, the
interest should be reckoned at 12% per year. Petitioner appealed the decision arguing that Article 2209 of the CC should
apply. It further contended that the CA should have ordered respondent to pay
Again, when an obligation not constituting a loan or forbearance of money is interest at the rate of 12% on the overpayment collected by her pursuant to
breached, the interest rate imposed at the discretion of the court, is at the rate the advance execution of the judgment.
of 6% per annum. However, in this case, it does not involve a loan or
forbearance of money or judgement, as it arose from a contract of sale, so the ISSUE: W/N the 12% interest rate should be imposed.
applicable rate is 6% and 12% from the time the judgement becomes final and
executory until fully satisfied. RULING: NO
The P2.3M is a portion of the amount which petitioner is obligated to pay
PNB vs. IBARROLA Greatland Realty for the sale of several parcels of land. The said obligation
FACTS: therefore arose from a contract of purchase and sale and not from a contract of
The Province of Isabela issued several checks drawn against its account with loan or mutuum. Hence, what is applicable is the rate of 6% per annum as
petitioner PNB for the payment of the medicines it purchased from Lyndon provided in Article 2209 of the CC and not the rate of 12% per annum as
Pharmaceuticals Laboratories, a business operated by respondent Ibarrola. provided in Circular 416.
However, 23 checks amounting to P98,691.90 were not delivered to Ibarrola.
For her failure to receive the full payment for the medicines, Ibarrola filed an Private respondent was paid in advance the amount of P5,517,707.00 by
action for collection of sum of money against the Province of Isabela, its petitioner to the order for the execution pending appeal of the judgment of the
Treasurer, the two agents and PNB. trial court. On appeal, the CA reduced the total damages to P3,619,083.33,
leaving a balance of P1,898,623.67 to be refunded by private respondent to
The trial court ordered that the Province of Isable, the two agents and the PNB petitioner. In an execution pending appeal, funds are advanced by the losing
are solidarily liable to pay Ibarrola the amount of P98,691.90 with interest at party to the prevailing party with the implied obligation of the latter to repay
the legal rate from the date of the filing of the complaint until the entire former, in case the appellate court cancels or reduces the monetary award.
amount is fully paid.
In the case at bar, the excess amount ordered to be refunded by private
However, the decision did not specify whether the legal rate of interest respondent falls within the ruling in Viloria and Buiser that Circular No. 416
referred to in the judgment is 6% or 12%. When the decision became final and applies to cases where money is transferred from one person to another and
executory, the sheriff computed the interest at 12%. PNB opposed arguing that the obligation to return the same or a portion thereof is subsequently
the 6% legal interest should be applied. adjudged.
RULING: So again, 12% if the obligation arises from a loan or forbearance of money,
First issue goods or credit. However, in this case, the P2.3M obligation arose from a
The transaction does not involve a loan, forbearance of money or judgment contract of purchase and sale, and not from a contract of loan or mutuum. So
involving a loan or forbearance of money as it arose from a contract of sale what was applied was the 6% interest rate per annum. Also take note that there
whereby Ibarrola did not receive full payment for her merchandise. was a judgement here regarding the alleged excess amount. The SC here
ordered that the alleged excess amount now falls within the Central Bank
Second issue Circular. Where money is transferred from one person to another, and the
When an obligation arises from a contract of purchase and sale and not from a obligation to return the same subsequently adjudged. So with that, the SC held
contract of loan or mutuum, the applicable rate is 6% per annum as provided in that the amount of P2.3M to be paid by petitioner shall earn 6% per annum.
Article 2209 of the NCC and not the rate of 12% per annum as provided in CBC Then the excess amount to be refunded by respondent shall earn 12% per
No. 416. annum, because such falls within the term of forbearance.
Furthermore, the 6% interest rate shall be computed from the time of the filing ESTORES vs. SPOUSES SUPANGAN
of the complaint considering that the amount adjudged can be established with FACTS:
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Petitioner Estores and respondent spouses Supangan entered into a conditions were fulfilled. They have therefore allowed or granted forbearance
Conditional Deed of Sale involving a parcel of land in the sum of P4.7M. to the seller (petitioner) to use their money pending fulfillment of the
However, despite the lapse of seven years from the execution of the contract conditions. They were deprived of the use of their money for the period
and notwithstanding payment of P3.5M on the part of spouses Supangan, pending fulfillment of the conditions and when those conditions were
Estores still failed to comply with her obligations. As a result, the spouses breached, they are entitled not only to the return of the principal amount paid,
Supangan demanded with the return of their money plus 12% interest rate but also to compensation for the use of their money. And the compensation for
compounded annually. the use of their money, absent any stipulation, should be the same rate of legal
interest applicable to a loan since the use or deprivation of funds is similar to a
Estores is willing to return the principal amount of P3.5M but she insists that loan.
she is not bound to pay the 12% interest rate because it was not agreed upon.
According to her, the Conditional Deed of Sale only provided for the return of Petitioner’s unwarranted withholding of the money which rightfully pertains to
the downpayment in case of her failure to comply with her obligations. respondent-spouses amounts to forbearance of money which can be
considered as an involuntary loan. Thus, the applicable rate of interest is 12%
The spouses Supangan countered that it is only fair that an interest be imposed per annum.
to Estores considering that she failed to return the principal amount upon
demand and that she had been using the money for her benefit. Since the date of demand which is September 27, 2000 was satisfactorily
established during trial, then the interest rate of 12% should be reckoned from
The trial court ruled that spouse Supangan are entitled to legal interest but only said date of demand until the principal amount and the interest thereon is fully
at the rate of 6% per annum from the date of the transaction (October 1993) satisfied.
until fully paid.
Alright, so here, the SC emphasized that it is proper to impose interest
The CA modified the decision and ruled that the 6% interest rate is proper but it notwithstanding the absence of stipulation in the contract.
will be computed from the date when spouses Supangan formally demanded
the return of their money (September 2000) until full payment thereof. Take note in this case, the contract involved was not a loan, but a conditional
deed of sale. The contract, however, provides that the seller must return the
ISSUES: payment made by the buyer if the conditions are not fulfilled. It has not been
1. W/N it is proper to impose an interest in the absence of stipulation fulfilled, and notwithstanding demand from the buyer, the seller has failed to
of the parties. YES return the money, and should be considered in default. Even if the transaction
2. W/N the 12% interest rate should be imposed. YES involved here is a conditional deed of sale, the SC imposed 12%. Why? Again,
take note of the definition of forbearance. It is not limited to a contract of loan
RULING: BOTH YES or mutuum.
First issue
Interest may be imposed even in the absence of stipulation in the contract as A forbearance is a contractual obligation of a creditor to refrain from, during a
provided under Article 2210 of the CC. period of time, from requiring the debtor to repay the amount due and
demandable.
Petitioner Estores is legally obligated to return the P3.5M because of her failure
to fulfill the obligation under the Conditional Deed of Sale, despite demand. The SC says that forbearance of money, goods, or credit is different from a loan.
Petitioner enjoyed the use of the money from the time it was given to her Forbearance of money, goods, or credit refer to arrangements other than loans.
hence she is already in default of her obligation from the date of demand
(September 2000). So take into consideration from what kind of contract the obligation arose from.
Second issue Also consider the nature of the obligation, because in this case, it was a
The interest at the rate of 12% is applicable in the instant case. The general rule conditional deed of sale, but the obligation was to return the money because
is that the applicable rate of interest "shall be computed in accordance with the the condition was not fulfilled. The respondents parted with their money before
stipulation of the parties." the condition was fulfilled. They have therefore allowed the forbearance of
money, and to use their money. They were deprived the use of their money
Absent any stipulation, the applicable rate of interest shall be 12% per annum pending fulfilment of the conditions. When those conditions were breached,
"when the obligation arises out of a loan or a forbearance of money, goods or they were entitled not only to the return of the principal amount paid, but also
credits. In other cases, it shall be 6%." In this case, the parties did not stipulate for the compensation for allowing the use of their money. So that would be
as to the applicable rate of interest. interest. And the compensation for the use of their money, absent any
stipulation, should be the same rate of legal interest applicable to a loan.
The contract involved in this case is not a loan but a Conditional Deed of Sale. Petitioner's unwarranted withholding of the money, which rightfully pertains to
However, the contract provides that the seller (petitioner) must return the the respondents amounts to a forbearance of money, which can be considered
payment made by the buyer (respondent-spouses) if the conditions are not as an involuntary loan.
fulfilled.
So the applicable interest rate is 12% per annum from the date of demand, until
In the case at bar, petitioner Estores failed to comply with her obligations and is the principal amount and the interest thereof is fully paid.
considered in default from the time the demand to return the money was
made on September 2000. Hence, even if the transaction involved a You have to take note when would the 12% interest be applied, as held in the
Conditional Deed of Sale, the stipulation governing the return of the money can case of Eastern Shipping. -- loan or forbearance of money, or from finality of
be considered as a forbearance of money which required payment of interest judgement.
at the rate of 12%.
So with that, you memorize the guidelines in Eastern Shipping.
The phrase "forbearance of money, goods or credits" is meant to have a
separate meaning from a loan, otherwise there would have been no need to You should know forbearance of money so you can apply the correct interest
add that phrase as a loan is already sufficiently defined in the Civil Code. rate. Memorize the definitions, memorize the distinctions, memorize the
elements and requisites so you can apply it in a given set of facts.
Forbearance of money, goods or credits should therefore refer to
arrangements other than loan agreements, where a person acquiesces to the So take note as of July 1, 2013, the applicable interest rate is already 6%.
temporary use of his money, goods or credits pending happening of certain However, take note that there were old cases that were decided before. So you
events or fulfillment of certain conditions. have to distinguish what is considered as legal interest, as distinguished from
lawful interest or unlawful interest, because this is in relation to the Usury Law.
In this case, the respondent-spouses parted with their money even before the
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Maam: What is this Usury Law? Forbearance in the context of Usury law – a contractual obligation of the
The Usury Law imposed a ceiling in the interest. creditor to refrain, for a given period of time, from requiring the borrower to
pay the amount that is due and demandable.
ISSUE: W/N the interest rate stipulated by the parties is valid. So, that is still the relevance why we still have to discuss the Usury law because
it is only suspended. Suspension can be lifted anytime. Although since 1982,
RULING: NO nothing has been done to lift.
The stipulated rate of interest at 5.5% per month on the P500k loan is
excessive, iniquitous, unconscionable and exorbitant. However, the rate On the case of Medel, the SC deemed that the 5.5% interest per month was not
cannot be considered "usurious" because the CBC adopted on December 22, deemed usurious because of the suspension of the Usury Law, which is now
1982, has expressly removed the interest ceilings prescribed by the Usury Law legally nonexistent. Nevertheless, the SC held that such 5.5% interest per month
and that the Usury Law is now legally inexistent. or 66% interest per annum which is stipulated by the parties, in other words, it
complies with the requirement under Article 1956.
Nevertheless, the interest at 5.5% per month, or 66% per annum, stipulated
upon by the parties in the promissory note is iniquitous or unconscionable, Being contrary to morals, if not against the law, the stipulation is void. But it
and, hence, contrary to morals ("contra bonos mores"), if not against the law. does not mean that the borrower will not pay interest anymore, but the Court
Being such, the stipulation is void. The courts shall reduce equitably liquidated will just reduce equitably the said interest rate. As in this case, the rate was
damages, whether intended as an indemnity or a penalty if they are iniquitous reduced to 12% per annum plus 1% penalty charge per month as stipulated
or unconscionable. damages. This is based on what is reasonable under the circumstances.
Consequently, the CA erred in upholding the stipulation of the parties. Rather, So what happen in the case of Chua vs. Timan?
we agree with the trial court that, under the circumstances, interest at 12%
per annum, and an additional 1% a month penalty charge as liquidated CHUA vs. TIMAN
damages until the entire amount is paid in full may be more reasonable. FACTS:
Petitioners Chua granted respondents Timan several loans evidenced by
Q: So with that the 5.5% per month is valid and legally binding? promissory notes with interest rates of 7% per month, which was later
A: No ma’am since such interest rate was still considered iniquitous, reduced to 5% per month.
unconscionable, excessive and exorbitant. Such interest rate ma’am was
considered contrary to law ma’am. Later on, respondents filed a complaint questioning the validity of the agreed
interest rates. They invoked the case of Medel arguing that the stipulated
Q: Is it contrary to law? There’s no more Usury Law! interest rates of 7% and 5% per month are iniquitous, unconscionable and
A: Contrary to morals (?), ma’am. exorbitant. Thus, they are entitled to the return of the excessive interest paid.
Q: So what rate was imposed? Or was there any interest rate imposed? Petitioners countered that the stipulated interest of 5% monthly and higher
A: The court agreed with the trial court ma’am that the legal interest of 12% per cannot be considered unconscionable because these rates are not usurious by
annum and additional 1% month penalty charge as liquidated damages was virtue of CBC No. 905-82 which had expressly removed the interest ceilings
more reasonable. prescribed by the Usury Law. Petitioners add that respondents were in pari
delicto since they agreed on the stipulated interest rates of 7% and 5% per
Usury – Contracting form to receive something in excess of the amount allowed month.
by law for loan and forbearance of money. The taking of more interest for the
use of money more than the law allow. There can be no Usury, if there is no ISSUE: W/N the stipulated interest rates by the parties are iniquitous,
loan or forbearance of money to speak of. unconscionable and exorbitant.
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RULING: YES
The stipulated interest rates of 7% and 5% per month imposed on Under Article 2209 of the CC, the appropriate measure for damages in case of
respondents’ loans must be equitably reduced to 1% per month or 12% per delay in discharging an obligation consisting of the payment of a sum of
annum. money is the payment of penalty interest at the rate agreed upon in the
contract of the parties. In the absence of a stipulation of a particular rate of
We need not unsettle the principle we had affirmed in a plethora of cases that penalty interest, payment of additional interest at a rate equal to the regular
stipulated interest rates of 3% per month and higher are excessive, iniquitous, monetary interest becomes due and payable. Finally, if no regular interest had
unconscionable and exorbitant. Such stipulations are void for being contrary been agreed upon by the contracting parties, then the damages payable will
to morals, if not against the law. While CBC No. 905-82 effectively removed consist of payment of legal interest which is 6%, or in the case of loans or
the ceiling on interest rates for both secured and unsecured loans, regardless forbearances of money, 12% per annum. It is only when the parties to a
of maturity, nothing in the said circular could possibly be read as granting contract have failed to fix the rate of interest or when such amount is
carte blanche authority to lenders to raise interest rates to levels which would unwarranted that the Court will apply the 12% interest per annum on a loan
either enslave their borrowers or lead to a hemorrhaging of their assets. or forbearance of money.
Hence, the stipulated interest rates of 7% and 5% per month are void for The written agreement entered into between the parties clearly provides for
being excessive, iniquitous, unconscionable and exorbitant and should be an interest at the current bank lending rate in case of delay in payment and
reduced to 12% per annum. Petitioners are also ordered to refund the the promissory note charged an interest of 18%. In other words, in case of
respondents all interest payments in excess of 12% per annum. default, the consent of the respondent is not needed in order to impose
interest at the current bank lending rate in accordance with the contract.
Q: What do you mean by Carte Blanche Authority?
A: It is at will ma’am. They can just readily imposed interest rates at whatever The promissory note, although declared void by the lower courts because it
the creditors want. did not express the real intention of the parties, is substantial proof that the
bank lending rate at the time of default was 18% per annum. Absent any
So here, do take note, that the CB Circular suspending the Usury law. It may evidence of fraud, undue influence or any vice of consent exercised by
seem that the contracting parties may establish such stipulations, clauses, terms petitioners against the respondent, the interest rate agreed upon is binding on
and conditions as they may deemed convenient. Provided that they are not them.
again contrary to law, morals, customs, public order and public policy. But as
emphasized in this case of Chua vs. Timan, nothing in the said circular can Q: Was there any agreement as to the adjustment of the price of the parties?
possibly be read as grant carte blanche authority to lenders to raise interest A: Yes. It is stated in their contract that as may deemed applicable, it may
rates to levels which would either enslave their borrowers or lead to a unilaterally raise such interest rate. So, Pan Pacific allowed Equitable to do so.
hemorrhaging of their assets.
Q: What do you call that? What kind of clause?
So, they do not have a free hand or blanket authority to say just as high of the A: It is an escalation clause.
said interest rate to be imposed. As the SC can still reduce interest rates that are
deemed excessive, iniquitous or exorbitant. Again, such interest rates as Q: Was the basis here a contract of loan? Because it appears there’s a
mentioned in the case of Medel and Chua, the stipulated interest was not promissory note?
deemed usurious. Nevertheless, the SC equitably reduced the interest rates A: It is a breach of contract ma’am.
stipulated by the parties. In this case, it was reduced to 1% per month or 12%
per annum. Q: What about the promissory note? What is the ruling of the Supreme Court as
regards as to the promissory note? Was there a real contract of loan as
So what happened in the case of Pan Pacific? evidenced by the promissory note? What was the reason why it was issued?
A: It was issued so that Pan Pacific can continue with the project. However, it
PAN PACIFIC vs. EQUITABLE was treated as advance payment of what was Pan Pacific was supposed to
FACTS: collect from Equitable.
Petitioner Pan Pacific and respondent Equitable Bank entered into a contract
of mechanical works. The parties stipulated that in case of increase in labor Atty. Jazzie: In Other words, there was no consideration of the contract of loan.
costs and prices of materials, Pan Pacific shall be entitled to a price But rather than an advance payment.
adjustment.
We have here, the SC pointed out that in their agreement, with regard to the
Later on Pan Pacific claimed price adjustment in accordance with the contract. escalation clause: price adjustment in case of increase of the labor cost and
Instead of granting petitioner’s request, respondent offered Pan Pacific a loan prices of materials. Furthermore, as stated in the agreement it was also
of P1.8M. Pan Pacific reluctantly agreed to the loan and was constrained to stipulated that in the delay of payment, consent of the responded was not
execute a promissory note as security for the loaned amount. Upon maturity needed for the imposition of the interest at the current bank lending rate.
of the loan, respondents demanded payment plus interest and penalty.
However, petitioner refused to pay the loan. Do remember, as the parties have agreed, even if it was not a true contract of
loan but rather a contract of mechanical works and air conditioning system. The
The CA ruled that although the contract provides for an interest at the current parties have stipulated as to what interest rate should be imposed: current bank
bank lending rate in case of delay in payment and the promissory note lending rate. The promissory note was taken into consideration as an evidence
charged an interest of 18%, such provision does not authorize petitioner to as to what is considered as to what lending rate. And based on that promissory
unilaterally raise the interest rate without the other party’s consent. note, it was 18% per annum. So here, the SC ordered the respondent paid the
Petitioner never informed nor sought the approval of the respondent for the interest at the bank lending rate of 18% until the amount it fully paid.
imposition of 18% interest on the adjusted price. To unilaterally increase the
interest rate of the adjusted price would be violative of the principle of So what happened on the case of Solid Bank vs. Permanent Homes?
mutuality of contracts.
ISSUE: W/N the 18% bank lending rate should be applied. SOLIDBANK vs. PERMANENT HOMES
FACTS:
RULING: YES Solidbank granted Permanent Homes a loan worth P60M covered by three
A review of the contract shows that the consent of the respondent is not promissory notes. In the promissory notes, Permanent Homes stipulated that
needed for the imposition of the 18% current bank lending rate, which occurs it authorizes Solidbank to increase or decrease at any time the interest rate
upon any delay in payment. When the terms of a contract are clear and leave agreed upon on the basis of, among others, prevailing rates in the local or
no doubt as to the intention of the contracting parties, the literal meaning of international capital markets. The interest rates shall be effective from the
its stipulations governs. In these cases, courts have no authority to alter a date indicated in the written notice to be sent by the bank, or if no date is
contract by construction or to make a new contract for the parties. indicated, from the time the notice was sent. Furthermore, if Permanent
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Homes failed to pay the amount with the interest rate within 30 days from the Q: Can we not say that the increasing the interest rate is dependent on the will
receipt by anyone of us of the written notice, they shall be deemed to have of Solidbank?
given their consent to the interest rate adjustment. A: No. Because the court did not find that there was a coercion and both parties
mutually agreed to increase the interest rate.
Contrary, however, to the specific provisions of the promissory note, there
was a standing agreement between the parties that any increase or decrease So again, the SC emphasized that the Usury Law deem ineffective. So the parties
in interest rates shall be subject to their mutual agreement. may now again, agree on any interest that may be charged on the loan. The
limitation is that it should not be iniquitous, excessive, exorbitant or
Later on, Permanent Homes filed a complaint for the annulment of the unconscionable. It appears to this case that Permanent Homes irrevocably
increase in interest rates on the loans it obtained alleging that Solidbank authorize Solidbank to increase or decrease the interest rate.
unilaterally and arbitrarily accelerated the interest rates without any notice to
Permanent Homes in violation of the principle of mutuality of agreement of The SC said that this, remember in ObliCon in relation to escalation clause, a
the parties. It also prayed for the fixing of the interest rates at the applicable contract subject to a condition which makes it fulfillment depended upon the
interest rate. sole will of one of the contracting parties is void. What do you call that
condition? Potestative. So we all already know, that potestative condition
Solidbank countered that by virtue of the promissory notes, it was authorized dependent on the sole will of the debtor is considered void that was the basis
to periodically adjust the interest rates upon due notice to Permanent Homes. here. But the SC held here that the interest rate here, was not purely dependent
Hence, Permanent Homes should not be allowed to renege on its contractual on the part of Solidbank. For the imposition of interest rates, please take note of
obligations, it freely and voluntarily bound itself to the provisions of the the requisites: if there is an escalation clause, there should also be a descalation
Omnibus Credit Line and the promissory notes. clause, which appears on their agreement: which is the “increase or to
decrease”.
ISSUES: W/N the increases in the interest rates are void for having been
unilaterally imposed without basis. Second, that it must be peg in the prevailing market rates. Third, there is an
agreement between the parties as what happened in this case.
RULING: NO
Upon the suspension of the Usury Law the parties are allowed to agree on any So here the stipulation of the interest rate or pricing was valid:
interest that may be charged on a loan. However, although interest rates are
no longer subject to a ceiling, the lender still does not have an unbridled The stipulations on interest rate repricing are valid because:
license to impose increased interest rates. The lender and the borrower (1) The parties mutually agreed on said stipulations;
should agree on the imposed rate, and such imposed rate should be in writing. (2) Repricing takes effect only upon Solidbanks written notice to
The stipulations on interest rate repricing are valid because: Permanent of the new interest rate; and
1. The parties mutually agreed on said stipulations; (3) Permanent has the option to prepay its loan if Permanent and
2. Repricing takes effect only upon Solidbank’s written notice to Solidbank do not agree on the new interest rate.
Permanent of the new interest rate; and
3. Permanent has the option to prepay its loan if Permanent and It appears that you need the consent of the debtor or Permanent. The phrases
Solidbank do not agree on the new interest rate. irrevocably authorize, at any time and adjustment of the interest rate shall be
effective from the date indicated in the written notice sent to us by the bank, or
The phrases "irrevocably authorize," "at any time" and "adjustment of the if no date is indicated, from the time the notice was sent, emphasize that
interest rate shall be effective from the date indicated in the written notice Permanent should receive a written notice from Solidbank as a condition for the
sent to us by the bank, or if no date is indicated, from the time the notice was adjustment of the interest rates.
sent," emphasize that Permanent should receive a written notice from
Solidbank as a condition for the adjustment of the interest rates. So what was the reason of repricing here? Again it was not deemed
unconscionable as it was during the hype of the Asian Financial Crisis of 1997.
A contract containing a condition which makes its fulfillment dependent Considering there was an agreement that the new interest rate will be effective
exclusively upon the uncontrolled will of one of the contracting parties is void. upon receipt of the written notice from Solidbank that was deemed the ruling of
However, in the case at bar, there was no showing that either Solidbank or the court. Again take note of the requisites of a valid escalation clause and
Permanent coerced each other to enter into the loan agreements. The terms change of interest rates imposed by the creditor in a contract of loan.
of the Omnibus Line Agreement and the promissory notes were mutually and
freely agreed upon by the parties. So what happened in the case of Toledo?
Moreover, Solidbank’s range of lending rates were consistent with "prevailing TOLEDO vs. HYDEN
rates in the local or international capital markets." The repriced interest rates FACTS:
were not unconscionably out of line with the upper range of lending rates to Petitioner Jocelyn Toledo obtained several loans from respondent Marilou
other borrowers. The interest rate repricing happened at the height of the Hyden in the total amount of P290k with an interest rate of 6% to 7% per
Asian financial crises in late 1997, when banks clamped down on lendings month.
because of higher credit risks across industries, particularly the real estate
industry. Later on, they executed a document entitled Acknowledgment of Debt
representing the principal consolidated amount of P290k. However, after
Solidbank admitted that it did not promptly send Permanent written repriced honoring several checks, Jocelyn filed for the annulment of the document
rates, but rather verbally advised Permanent’s officers over the phone at the contending that Marilou forced, threatened and intimidated her into signing
start of the period. Therefore, the interest due from Permanent Homes should the document and the application of her total payment of P528,550.00 to
be adjusted to take effect only upon Permanent Homes’ receipt of the written interest alone is illegal, unfounded, unjust, oppressive and contrary to law
notice from Solidbank. because there was no written agreement to pay interest.
Q: Is the Escalation Clause: Increase or Decrease based prevailing rates in the Marilou countered that Jocelyn voluntarily obtained the loans knowing fully
local or international capital markets on the Promissory Note considered valid? well that the interest rate was at 6% to 7% per month. In fact, a 6% to 7%
A: Yes. advance interest was already deducted from the loan amount given to
Jocelyn.
Q: What makes the revising of the interest rate valid?
A: It was valid since it is consistent to the prevailing rates in the local or The trial court ruled that the Acknowledgment of Debt is valid and ordered
international capital markets. As what have stipulated by the parties. Jocelyn to pay Marilou in the amount of P271k with a 12% interest per annum
or 1% interest per month until such time that the said amount shall have been
fully paid.
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was NOT deemed excessive. So here now, the SC take into consideration the
Jocelyn appealed arguing that even assuming that the execution of the circumstances of each case. The Medel case was clearly not applied on the case
document was not attended with vices of consent, it must nevertheless be of Toledo, as pointed out in Medel, the spouses never able to pay their
declared null and void for being contrary to law and public policy by the fact indebtedness. As in this case of Toledo there was no urgency to need the money
that the payments in the total amount of P778k was applied to interest as this was used to make advance payment for prospective clients of
payment alone. This only proves that the transaction was iniquitous, educational plans to increasing her sales production entitling her to 50% rebate
excessive, oppressive and unconscionable. on her sales and this continued for 5 years. Jocelyn religiously paid the agreed
amount of interest until she ordered for stop payment on some of the checks
ISSUE: W/N the interest rate of 6% to 7% per month is contrary to law, issued to Marilou.
morals, good customs, public order or public policy.
Further, Jocelyn know fully well that the same carried 6% to 7% monthly
RULING: NO interest. Yet she did not complain. In fact, when she availed of such loans, the
Upon the suspension of the Usury Law ceiling on interests, parties to a loan said interest was already deducted from the said amount. After years of availing
agreement have wide latitude to stipulate interest rates. Nevertheless, such the proceeds, Jocelyn cannot go to court and question the validity of the interest
stipulated interest rates may be declared as illegal if the same is rates. Here the SC emphasized the maxims of equity (1) he who seeks equity
unconscionable. must do equity, and (2) he who comes into equity must come with clean hands.
Also, the SC emphasized the principle of estoppel in relation to that the SC also
In this case, the disputed 6% to 7% monthly interest rate cannot be upheld the issuance of the acknowledgement of debt. There was no evidence
considered to be iniquitous or unconscionable. that she was coerced and witnesses are presented to testify its due execution
wherein Jocelyn know fully well the nature of the contract she entered into. And
There was no urgency of the need for money on the part of Jocelyn, the she’s not forced from impugning the validity of such debt.
debtor, which compelled her to enter into said loan transactions. She used the
money from the loans to make advance payments for prospective clients of So what happened in the case of Prisma?
educational plans offered by her employer. In this way, her sales production
would increase, thereby entitling her to 50% rebate on her sales. This is the PRISMA vs. MENCHAVEZ
reason why she did not mind the 6% to 7% monthly interest. Notably too, a FACTS:
business transaction of this nature between Jocelyn and Marilou continued for PRISMA, thru Pantaleon, obtained a loan with a monthly interest of P40k
more than five years. Jocelyn religiously paid the agreed amount of interest payable for six months from respondent Menchavez. PRISMA executed a r
until she ordered for stop payment on some of the checks issued to Marilou. note as security for the loan. PRISMA made several payments but it still has
The checks were in fact sufficiently funded when she ordered the stop remaining unpaid balance. When PRISMA failed to pay, Menchavez filed a
payment and then filed a case questioning the imposition of a 6% to 7% case to enforce payment to the unpaid balance plus 4% monthly interest.
interest rate for being allegedly iniquitous or unconscionable and, hence,
contrary to morals. The CA ruled that the parties agreed to a 4% monthly interest pursuant to a
board resolution. Nevertheless, it reduced the interest rate at 12% per annum
It was clearly shown that before Jocelyn availed of said loans, she knew fully computed from the filing of the complaint until finality of judgment should be
well that the same carried with it an interest rate of 6% to 7% per month, yet applied.
she did not complain. In fact, when she availed of said loans, an advance
interest of 6% to 7% was already deducted from the loan amount, yet she The petitioners admitted the loan but denied the 4% monthly interest arguing
never uttered a word of protest. that the same was not provided nor stipulated in the promissory note. Even
assuming that the loan is subject to 4% monthly interest, it covers the period
After years of benefiting from the proceeds of the loans bearing an interest of 6 months only and cannot be interpreted to apply beyond it.
rate of 6% to 7% per month and paying for the same, Jocelyn cannot now go
to court to have the said interest rate annulled on the ground that it is The respondent countered that the petitioners are estopped from assailing
excessive, iniquitous, unconscionable, exorbitant, and absolutely revolting to the 4% monthly interest, since they agreed to pay the 4% monthly interest on
the conscience of man. In other words, Jocelyn is now estopped to assail the the principal amount under the promissory note and the board resolution.
validity of the interest rates.
ISSUES:
Q: How do you reconcile this case with the other case which the imposition of 1. W/N the parties agreed to the 4% monthly interest on the loan. NO
6% to 7% interest deemed valid? 2. W/N the P40k monthly interest rate applies only to the period of 6
A: The SC made a distinction regarding the circumstances of the case. In the months. YES
case of Medel, the spouses never paid their indebtedness from the very
beginning and because of their unpaid obligation it ballooned to a staggering RULING:
sum and the creditors action should fail. However in this case, there is no really First issue
urgency of the need for money on Jocelyn, the debtor, because, it has to be The parties agreed that loan shall earn an interest of P40k per month for the
noted that the money here that was used by Jocelyn was for the reason of her six-month period. Although the P40k can be computed at 4% interest per
sale production to increase. If such increase, it will entitled her to 50% of her month, no rate of interest was stipulated in the promissory note; rather a
sales. This is the reason why she didn’t mind the 6% to 7% interest until it fixed sum equivalent to this rate was agreed upon. The facts show that the
continued to more than 5 years. So it has to be noted that there was initial parties agreed to the payment of a specific sum of money of P40k per month
payment and Jocelyn has religiously paid the amount of interest until she for six months, not to a 4% rate of interest payable within a 6-month period.
ordered for the stop for payment. It was clearly shown that Jocelyn availed for
the said loan with knowing fully well that such was the imposition of the Second issue
interest. Yet she did not complain. The case of Medel finds no application in the present case where no other
stipulation exists for the payment of any extra amount except a specific sum
Q: How about to the issue of the acknowledgement of debt signed by Jocelyn? of P40k per month on the principal of a loan payable within six months.
Why such issue raised? Additionally, no issue on the excessiveness of the stipulated amount of P40k
A: Such acknowledgement was made through force, threat or intimidation for per month was ever put in issue by the petitioners; they only assailed the
being contrary to law and public policy. The SC held that the 6% to 7% was not application of a 4% interest rate, since it was not agreed upon.
contrary to law and public policy because of the specific circumstances that was
present in the case at bar. Article 1956 of the CC specifically mandates that no interest shall be due
unless it has been expressly stipulated in writing. Under this provision, the
Notice here, in the previous cases, we have seen: 5.5% per month deemed payment of interest in loans or forbearance of money is allowed only if: (1)
excessive, the other case 7% per month and 5 % per month, deemed also there was an express stipulation for the payment of interest; and (2) the
excessive. But this time, in the case of Toledo, the 6% to 7% per month interest agreement for the payment of interest was reduced in writing. The
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concurrence of the two conditions is required for the payment of interest at a delay and default in payment.
stipulated rate.
The CA fixed the respondents’ liability at 12% per annum and an additional 1%
Applying Article 1956, the interest of P40k per month corresponds only to the penalty charge per month.
6-month period of the loan as agreed upon by the parties in the promissory
note. Thereafter, the interest on the loan should be at the legal interest rate ISSUES:
of 12% per annum. 1. W/N the 5% interest rate is iniquitous, unconscionable, and
exorbitant. YES
Therefore, as agreed by the parties, the loan shall earn P40k per month for a 2. W/N the 5% interest rate for two months should be applied. YES
period of six months. Thereafter, interest at the rate of 12% per annum shall 3. W/N the spouses Japor are entitled to the surplus. NO
apply.
RULING:
Q: Why 12%? What is the basis of imposition of the legal interest? What have
we learned? First issue
A: It is because in the absence of the stipulation of the parties, it is deemed at Although the parties to a contract of loan may agree upon the interest rates,
12% being a forbearance of goods, money or credit. the court may, nevertheless, reduce the same if it finds it to be iniquitous,
unconscionable, and exorbitant, and hence, contrary to morals (contra bonos
So here, there was an issue, whether the 4% monthly interest loan should be mores), if not against the law. What is iniquitous, unconscionable, and
applied. What was the basis? It appears that they agree that the loan shall be exorbitant shall depend upon the factual circumstances of each case. In the
subject to an interest of 40,000 per month for the 6 month period. The SC, there case at bar, the interest and penalty rates in the Deed are excessive, hence
was no agreement or stipulation of the parties that the legal interest rate is to legally impermissible and should therefore be reduced.
be imposed is 4% interest until fully paid by the debtor. What was clearly agreed
upon was the 40,000 interest per month for the 6 month period. Second issue
Even if the agreed interest rate is deemed excessive, the respondents are now
Notice, even if it is really computed on the 4% per month, the SC upheld such estopped from claiming otherwise because evidence shows that it was them
validity for the 6 months period. It is a fixed sum agreed upon by the parties who proposed the 5% interest rate per month for two months. However, for
which was only imposed for only such period. Remember the imposition of the the succeeding period after the two months, the interest rate should be
loans or forbearance of money. First requirement under 1956, express reduced to 12% per annum and the penalty rate to 1% per month, in
stipulation for the payment of interest and such same provision require that accordance with Article 2227 of the CC.
such agreement will be reduced into writing. These two must exist. What only
exist in the case at bar is the 40,000 interest per month for the 6 months. Third issue
There is no "surplus" to speak of. In adjusting the interest and penalty rates to
Beyond that, wala ng stipulation between parties. So after the 6 months after equitable and conscionable levels, what the Court did was merely to reflect
due date, the interest rate to be imposed to the loan is the legal interest rate of the true price of the land in the foreclosure sale. No surplus in the purchase
12% per annum. Again what we have here is a loan. Why is Medel not price was thus created to which the respondents as the mortgagors have a
applicable? Medel finds no application to the present case where no other vested right.
stipulation exists for the payment of the extra amount except for the 40,000 per
month on the loan in the period of 6 months. Additionally, it’s excessiveness was In conclusion, the interest rate for the subject loan owing to QDB, or whoever
not raise or put into issue. They only assail the 4% interest until payment. Since is now the party mortgagee, is hereby fixed at 5% for the first two months
it was not agreed upon. following the date of execution of the Deed of Real Estate Mortgage, and 12%
for the succeeding period. The penalty rate is fixed at 1% per month.
So what happen in the case of Dio? Petitioner Dio is free of any obligation to return to the respondents Spouses
Japor any surplus in the foreclosure sale price.
DIO vs. SPOUSES JAPOR
FACTS: Q: Was the agreement really of 5% interest until fully paid?
Respondents spouses Japor obtained a loan amounting to P128k from the A: In this case, what the respondents admit, that they maintain that the REM is
Quezon Development Bank (QDB) as evidenced by a duly executed Deed of null and void since it does not really intend the true agreement of the parties.
Real Estate Mortgage. The spouses failed to pay their loan obligations. According to them, they only agreed for the 5% interest rate for 2 months.
However, before the foreclosure of the property, the spouses Japor offered to However, they did not provide penalties or other charges in case of default or
mortgage their properties to petitioner Teresita Dio after obtaining from her a delay?
loan worth P350k. A new Deed of Real Estate Mortgage was executed in favor
of petitioner Dio. Q: So what was the ruling of the court? was the 5% interest really upheld?
A: In this case mam, the SC only applied 5% for the first 2 months. With regard
Under the terms of the deed, the respondents agreed to pay petitioner a 5% to the penalty, it was pegged at 12% per annum.
interest rate per month for a period of two months with an additional 5%
penalty rate for every month in case of default or delay. Q: Why 12%?
A: Since in this case one what we have is loan or forbearance of money.
However, despite repeated demands, respondents failed to pay causing
petitioner to foreclose the mortgage. Q: Aside from the 12%, was there any other interest imposed?
A: There was also a penalty rate imposed at 1% per month.
The respondents filed a petition for the fixing of their contractual obligation.
They alleged that the Deed of Real Estate Mortgage was null and void since it So here, what was agreed upon by the parties, respondents agreed to pay
did not state the true intent of the parties, which limited the 5% interest rate interest of 5% per month in the period of 2 months. In the event of default,
to only two months from the date of the loan and which did not provide for additional interest of the amount due will be charged by them. The SC upheld
penalties and other charges in the event of default or delay. Respondents the 5% interest per month for 2 months. Repondents proposed the 5% for the 2
vehemently contend that they never consented to the said stipulations and month period. Having agreed they are now estopped from claiming otherwise.
hence, should not be bound by them. For the succeeding period, the CA correctly reduced it 12% per annum and a
penalty rate of 1% per month.
Petitioner countered that the upon the suspension of the Usury Law, interest
rates may accordingly be pegged at such levels or rates as the lender and the So, again take not here, what did you notice with regard to interest rate of 7%,
borrower may agree upon. Petitioner further points out that the 5% interest 6% or 5% per month that was upheld by the court that were not deemed
rate was proposed by the respondents and have only themselves to blame if excessive or unconscionable? STIPULATED ON A FIXED PERIOD. Okay, that is
the interests and penalties ballooned to its present amount due to their willful one of the things that you would notice. Second, there was a case where the
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excessiveness was never put into issue. Okay, on the other case, it was upheld
due to the circumstances wherein applying the principle of estoppel how the RULING:
money borrowed was used by debtor. First issue
The backwages should be computed from the time petitioner was illegally
With that, it is clear, that THERE IS NO FIXED RATE. All of this cases, it is true dismissed on January 24, 1997 up to the time when the SC resolution became
that there is a number of cases that the SC applying the ruling in Medel wherein final and executory on May 27, 2002. The re-computation of the consequences
the 5% per month was deemed iniquitous or unconscionable. It is not a fixed of illegal dismissal upon execution of the decision does not constitute an
rate. That in all instances when the creditor imposes a 5% interest per month it alteration or amendment of the final decision being implemented. The illegal
is already deemed iniquitous or unconscionable. Why? Because the SC will dismissal ruling stands; only the computation of monetary consequences of this
always take into consideration the factual circumstances of each case. dismissal is affected, and this is not a violation of the principle of immutability
of final judgments.
There is no law, since there is no more Usury law, that being suspended. Which
states what is deemed lawful interest. Furthermore there is no ruling by the SC Second issue
which again state what is deemed iniquitous, unconscionable, or excessive. In the landmark case of Eastern Shipping vs. CA, the Court laid down the
Again always based on the circumstances of each case. In exercising the power guidelines regarding the manner of computing legal interest. However, the BSP
to determine what is iniquitous or unconscionable courts must consider the Monetary Board amended Section 2 of Circular No. 905 and the issued Circular
circumstances of each case. Since what could be iniquitous in one case may be No. 799 which took effect on July 1, 2013. The Circular provides that the rate of
totally just and equitable on the other. interest for the loan or forbearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of
interest, shall be 6% per annum.
Dulay
November 24, 2016 By virtue of such amendment, in the absence of an express stipulation as to the
Part 1 of 1 rate of interest that would govern the parties, the rate of legal interest for loans
Review or forbearance of any money, goods or credits and the rate allowed in
Last time we discussed the different kinds of interest, so you have simple and judgments shall no longer be 12% per annum but will now be 6% per annum
compound. At present, with the suspension of the usury law, we do not refer to effective July 1, 2013.
interest whether they are lawful or unlawful because there is no more
maximum or ceiling rates for interest rates to be imposed. As to guidelines as to It should be noted, nonetheless, that the new rate could only be applied
what interest rates are to be imposed we take into consideration the ruling in prospectively and not retroactively. Consequently, 12% per annum legal
Eastern Shipping. But again, it is only effective until June 30, 2013. Moreover, interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of
we have also discussed that even if the parties have expressly stipulated in 6% per annum shall be the prevailing rate of interest when applicable.
writing the imposition of an interest, if it is iniquitous, excessive, exorbitant or
unconscionable, the courts may reduce the same as we have mentioned in the To recapitulate and for future guidance, the guidelines laid down in the case of
case of Medal and the succeeding cases. Eastern Shipping are accordingly modified to embody BSP-MB Circular No. 799,
as follows:
Now, we mentioned that the Eastern Shipping is only effective until June 30, I. When an obligation, regardless of its source, i.e., law, contracts,
2013; the reason for this is the Resolution No. 796 dated May 16, 2013 of the quasi-contracts, delicts or quasi-delicts is breached, the contravenor
Monetary Board which approved the revisions governing the rate of interests in can be held liable for damages. The provisions under Title XVIII on
the absence of stipulation in loan contracts thereby amending the Section 2 of "Damages" of the Civil Code govern in determining the measure of
Circular No. 905 series of 1982 wherein now it states that the rates of interest recoverable damage.
for the loan or forbearance of any money, goods or credits and the rate allowed II. With regard particularly to an award of interest in the concept of
in judgements in the absence of an express contract as to such rate of interest, actual and compensatory damages, the rate of interest, as well as
shall be six percent (6%) per annum. So this was applied in the case f Nacar vs. the accrual thereof, is imposed, as follows:
Gallery Frames. What happened in this case? 1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
NACAR vs. GALLERY FRAMES money, the interest due should be that which may have
FACTS: been stipulated in writing. Furthermore, the interest due
Petitioner Dario Nacar filed a complaint for constructive dismissal against shall itself earn legal interest from the time it is judicially
respondents Gallery Frames. On October 15, 1998, the LA ruled that petitioner demanded. In the absence of stipulation, the rate of
was illegally dismissed thereby awarding him backwages and separation pay in interest shall be 6% per annum to be computed from
the amount of P158,919.92 computed only up to promulgation of the decision. default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil
Petitioner filed a motion for the re-computation of the monetary award Code.
(backwages) from the date of his dismissal on January 24, 1997 up to the finality 2. When an obligation, not constituting a loan or
of the Resolution of the SC on May 27, 2002 and to include the appropriate forbearance of money, is breached, an interest on the
interests. amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
Respondent opposed alleging that re-computation is no longer allowed since interest, however, shall be adjudged on unliquidated
the decision was already final and executory. Respondent insists that since the claims or damages, except when or until the demand can
decision clearly stated that the separation pay and backwages are "computed be established with reasonable certainty. Accordingly,
only up to the promulgation of this decision," and considering that petitioner no where the demand is established with reasonable
longer appealed the decision, petitioner is only entitled to the award as certainty, the interest shall begin to run from the time the
computed by the LA in the total amount of P158,919.92. claim is made judicially or extra-judicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably
The LA granted the motion for re-computation but held that it is the October established at the time the demand is made, the interest
15, 1998 Decision that should be enforced considering that it was the one that shall begin to run only from the date the judgment of the
became final and executory. Since petitioner already received P147,560.19, he court is made (at which time the quantification of
is only entitled to the balance of P11,459.73. damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal
ISSUE: interest shall, in any case, be on the amount finally
1. W/N a re-computation of the LA’s original computation of the adjudged.
awards is proper. YES 3. When the judgment of the court awarding a sum of
2. W/N legal interest should be paid. YES money becomes final and executory, the rate of legal
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interest, whether the case falls under paragraph 1 or ISSUE: W/N the reimbursement is proper with 6% interest rate.
paragraph 2, above, shall be 6% per annum from such
finality until its satisfaction, this interim period being RULING: YES
deemed to be by then an equivalent to a forbearance of The SC modified the CA’s decision by reducing the interest imposable after
credit. finality from 12% to 6%.
The judgments that have become final and executory prior to July 1, 2013 shall There is no doubt that petitioner ECE incurred in delay in delivering the subject
not be disturbed and shall continue to be implemented applying the rate of condominium unit, for which reason the award of interest to the respondent
interest fixed therein. from the filing of his complaint is proper. There being no stipulation as to
interest, under Article 2209 of the NCC, the imposable rate is 6% by way of
In conclusion, the SC ruled that since the original case was decided in 2002, the damages as laid down in the landmark case of Eastern Shipping vs. CA.
applicable interest rate is 12% per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 but the 6% per annum interest Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest,
rate shall accrue from July 1, 2013 until payment thereof is fully satisfied. if proper, and the applicable rate, as follows:
1. The 12% per annum rate under CBC No. 416 shall apply only to loans
Ma’am: So what is the issue with regard to the amount? or forbearance of money, goods, or credits, as well as to judgments
Student: The issue here is what interest should be applied. From 2002, when involving such loan or forbearance of money, goods, or credit;
the decision became final up to only June 31 2. The 6% per annum under Article 2209 of the CC applies when the
transaction involves the payment of indemnities in the concept of
M: Walang 31 ang June. Be careful of that. Why? In fairness di ka nag-iisa. I damage arising from the breach or a delay in the performance of
already had exam notebooks checked that says up to June 31, 2013. Kahit leap obligations in general;
year, walang 31 and June. Continue. 3. The application of both rates is reckoned from the time the
S: Until June 30, 2013, the basis should be the ruling and guidelines in Eastern complaint was filed until the adjudged amount is fully paid.
Shipping. 4. In either instance, the reckoning period for the commencement of
the running of the legal interest shall be subject to the condition that
M: What’s the difference between the guidelines in Eastern Shipping and here the courts are vested with discretion, depending on the equities of
in the case of Nacar? each case, on the award of interest.
S: The difference is that in Eastern Shipping, if it is a forbearance on credit, the
interest applied should be 12%, and if not, it would be 6%. And upon finality of But since July 1, 2013, the rate of 12% per annum from finality of the judgment
judgment it should be 12%. However, the said Central Bank Circular passed on until satisfaction has been brought back to 6% pursuant to Resolution No. 796
July 1, 2013 . . . of the BSP Monetary Board. Thus, the rate of interest to be imposed from
M: It was passed on May but took effect on July 1, 2013 finality of judgments is now back at 6%, the rate provided in Article 2209 of the
S: . . . made no distinction. So whether or not it is a forbearance on credit or any CC.
other liability under the Civil Code. So since this was decided in August 13, 2013,
the 12% interest on monetary award for damages should only be applicable up Petitioner ECE Realty is ordered to pay the total amount paid by respondent
until June 30, 2013. Hernandez plus 6% interest per annum from the filing of the complaint
(September 2007) until finality of the decision, and an interest rate of 6% per
M: What interest rate should that be? annum shall likewise be imposed from finality of the decision until fully paid.
S: 12% interest rate. Subsequently up to its finality it would be 6%.
S: The issue in this case is Whether or not there should be reimbursements
Discussion done by . . .
So notice no how did the new circular changing the legal interest rate to 6%, M: In relation to our topic, what is the issue that we should take into
effective July 1, 2013, affect or modify the ruling in Eastern Shipping. Again, the consideration?
difference is just that with regard to loans or forbearance of money, instead of S: Regarding the reimbursement . . .
12%, it should now be 6% per annum and with regard to judgment which has
become final and executory, instead of 12% per annum, it is now deemed to be M: Whether or not there is entitlement to reimbursement?
6% per annum. Again, effective July 1, 2013. S: Yes
So, do not totally disregard the items provided in Eastern Shipping because M: Are you sure?
again that is in effect until June 30, 2013. While Eastern Shipping is, of course, S: With the interest
very easy to remember because only one fixed rate per annum, 6% per annum,
no need to distinguish whether it is a loan or forbearance of money or M: What interest rate should be imposed?
otherwise, again we have to take note of the case in Eastern Shipping or the S: It should be 6% per annum.
guidelines in Eastern Shipping because again that’s the same guideline or that’s
the same basis for the imposition of interest rate until June 30, 2013. So take M: Why 6%?
note of that. We also have the case of ECE Realty. What happened in this case? S: 6% per annum since although in their contract there was no stipulation as to
how much interest should be paid but we are referring here on the indemnity of
ECE REALTY vs. HERNANDEZ damages due to the delay that has been incurred by the respondent because
FACTS: they were so . . .
Respondent Hernandez and Petitioner ECE entered into a Contact to Sell
involving a condominium unit. However, despite paying the required M: When is that 6% interest rate to be imposed?
downpayment, petitioner failed to deliver the unit. Respondent found out that S: It should be imposed as to the . . .
petitioner already sold the unit to another. This caused respondent to file a
complaint praying that petitioner be ordered to accept the payment of the M: When? From what time until when?
balance without interest and that he be awarded damages. In case the unit is no S: Well since we are talking about breach of . . .
longer available, respondent prayed that petitioner reimburse him the total
amount he paid plus legal interest. M: It’s in the dispositive portion
S: It should be
The CA ordered petitioner to reimburse the amount paid by respondent with
6% interest citing Eastern Shipping vs. CA since the transaction is neither a loan M: From when?
nor a forbearance of money, goods or credit. However, from the finality of the S: When the delay is incurred
decision until full payment, the interest rate shall be 12%.
M: Until?
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In 1955, we refer to the principal thing, whether it is a loan of money or loan of First issue
fungible thing. Article 1958 is specific as to interest. Interest which is payable in The promissory note expressly provides for the imposition of both interest and
kind and not in money. Instead of paying money, and interest is for example, penalties in case of default on the part of the petitioner in the payment of the
yung harvest sa farm. How would value it? At the time and place of payment. So subject restructured loan.
take note of that and again distinguish it from Article 1955.
The stipulated14% per annum interest charge until full payment of the loan
Now, also last meeting we have emphasized the distinction between simple and constitutes the monetary interest on the note and is allowed under Article 1956
compound interest. And compound interest is what is referred to under 1959. of the NCC. On the other hand, the stipulated 2% per month penalty is in the
Please read Article 1959. form of penalty charge which is separate and distinct from the monetary
interest on the principal of the loan.
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Second issue S: In the promissory note it expressly provided for the imposition of both
Penalty on delinquent loans may take different forms. In GSIS vs. CA, the SC interest and penalties in case of default on the part of the petitioner in the
ruled that the NCC permits an agreement upon a penalty apart from the payment of the restructures loan and
monetary interest. If the parties stipulate this kind of agreement, the penalty
does not include the monetary interest, and as such the two are different and M: Now how about the allegation here of the petitioner that the compounding
distinct from each other and may be demanded separately. Furthermore, in of interest is deemed eliminated applying the ruling in the case of NAPOCOR?
Equitable Banking vs. Liwanag, it was ruled that a stipulation about payment of How did the SC rule as to the said allegation of the petitioner that the ruling in
an additional interest rate partakes of the nature of a penalty clause which is NAPOCOR must be applied to the instant case? What happened in NAPOCOR?
sanctioned by law, more particularly under Article 2209 of the NCC. Why was it cited by petitioner? And why should it not be applied here? Take
your seat.
In this case, the penalty charge of 2% per month began to accrue from the time
of default by the petitioner. There is no doubt that the petitioner is liable for M: What happened in the case of NAPOCOR that was cited by petitioner here
both the stipulated monetary interest and the stipulated penalty charge. The and whether the same is applicable or not? Remember this is one of the
penalty charge is also called penalty or compensatory interest. contention of the petitioner. Why was the case of National Power Corporation
vs. National Merchandising Corporation shall not applicable? Did you read the
Third issue case or did you read the digest which did not include the citation. Take your
Penalty clauses can be in the form of penalty or compensatory interest. Thus, seat.
the compounding of the penalty or compensatory interest is sanctioned by and
allowed pursuant to Article 1959 of the NCC considering that: Discussion
1. There is an express stipulation in the promissory note permitting the Alright, what happened in this case? So whether the compounding interest on
compounding of interest. The fifth paragraph of the said promissory the surcharges is proper. There are two issues: imposition of the compounding
note provides that: "Any interest which may be due if not paid shall interest as well as to the penalties. Now, do remember that the Civil Code
be added to the total amount when due and shall become part permits an agreement upon a penalty apart from the monetary interest. So the
thereof, the whole amount to bear interest at the maximum rate agreement with regard to whether it is simple or compound interest refers to
allowed by law." Therefore, any penalty interest not paid, when due, monetary interest. We have discussed this before. With regard to penalty, as in
shall earn the legal interest of 12% per annum in the absence of this case, the parties agreed to a penalty charge of 2% per month, the same is
express stipulation on the specific rate of interest, as in the case at also valid and such penalty charge is considered as a compensatory interest.
bar. Penalty clauses in the form of penalty or compensatory interest and the
2. Article 2212 of the NCC provides that "interest due shall earn legal compounding of the penalty or the compensatory interest is sanctioned and
interest from the time it is judicially demanded, although the allowed as provided in Article 1959 provided it has been expressly stipulated,
obligation may be silent upon this point." In the instant case, interest also, in writing by the parties. Again you have to connect Article 1959 with the
likewise began to run on the penalty interest upon the filing of the requirement in 1956 by stipulation, of course, it must also be in writing because
complaint in court by respondent CCP on August 29, 1984. Hence, we are still referring to interest here, although compounded.
the courts a quo did not err in ruling that the petitioner is bound to
pay the interest on the total amount of the principal, the monetary In this case, there is an express stipulation in the promissory note for making
interest and the penalty interest. the compounding of interest. Any interest which may be due, if not paid, shall
be added to the total amount when due and shall become part thereof. The
Fourth issue whole amount of bear interest at the maximum rate allowed by law. Therefore,
Equity cannot be considered inasmuch as there is a contractual stipulation in any penalty interest not paid when due, shall earn the interest of 12% per
the promissory note whereby the petitioner expressly agreed to the annum in the absence of an express stipulation of a specific rate of interest as in
compounding of interest in case of failure on his part to pay the loan at the case at bar. So interest likewise began to run on the penalty interest upon
maturity. Inasmuch as the said stipulation on the compounding of interest has the filing of the complaint in court citing Article 2212.
the force of law between the parties and does not appear to be inequitable or
unjust, the said written stipulation should be respected. With regard to the allegation as to the applicability of the NAPOCOR case
wherein the compounded interest was eliminated the SC said the same is not
Fifth issue applicable. The elimination of the compounded interest rate in the case of
There appears to be a justification for a reduction of the penalty charge. NAPOCOR was based on equitable considerations and on the fact that the said
Inasmuch as petitioner has made partial payments which showed his good faith, case lasted for 25 years through no fault of the defendant. In this case, equity
a reduction of the penalty charge from 2% per month on the total amount due, cannot be considered in as much as there is a contractual stipulation in the
compounded monthly, until paid can be justified under Article 1229 of the NCC. promissory note whereby the petitioner expressly agreed to the compounding
The continued monthly accrual of the 2% penalty charge on the total amount of interest in case of failure on his part to pay the loan at maturity. In as much
due is unconscionable inasmuch as the same appeared to have been as the said stipulation on the compounding interest has the force of law
compounded monthly. between the parties and does not appear to be inequitable and unjust, the said
written stipulation should be respected. Do take note, however, while the
In conclusion, considering petitioner’s several partial payments and the fact he agreement as to the penalty charge is 2% per month, notice that the SC reduced
is liable under the note for the 2% penalty charge per month on the total it 12% p.a. starting Aug. 28, 1996. So that would be 1% penalty charge per
amount due, compounded monthly, for 21 years since his default in 1980, it is month. What was the reason? Because of the good faith on the part of the
fair and equitable to reduce the penalty charge to a straight 12% per annum on debtor, there were partial payments made.
the total amount due starting August 28, 1986, the date of the last Statement of
Account. What happened in the case of Spouses Albos?
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Estate Mortgage. They allege that the foreclosure sale is void. They also
contend that the imposition of a 5% compounded interest on the loan without M: Are you sure? There was no express stipulation for the payment of interest .
their consent or knowledge is fraudulent and contrary to public morals. . . of compounding the interest. It was not sufficiently complied with for the
imposing of compounded interest because what happened here? There was an
Respondents, on the other hand, insisted that the compounding of the interest express stipulation in writing but what does it contain? Isn’t it that the SC that
was agreed upon as a condition for the third and final extension of time given there is an ambiguity whether such compounded interest is readily agreed upon
for the petitioners to make good their promise to pay. by the parties. And that’s why the SC ruled here that having unilaterally
imposed a compounded interest rate and having failed to clarify the same, they
The CA ruled that the agreement to compound the interest was just and cannot charge interest at a compounded rate. So what is the effect of that if the
reasonable. It added that it was precisely the petitioners’ repeated non- stipulation is ambiguous with regard to the imposition of compounding of
compliance which prompted the imposition of a compounded interest rate and, interest? What did the SC say? Take your seat.
therefore, petitioners could no longer feign ignorance of its imposition.
Pre-Discussion
ISSUE: W/N the compounding of the loan’s interest is erroneous. How long was your day today? Got an exam? Got other requirements? Hundred
cases? Everybody has four hours, di man siguro five hours ang klase niyo ngayon
RULING: YES no?
It is undisputed that the parties have agreed and stipulated in writing for the
loan to earn 5% monthly interest. The same stipulation was carried over when
the period for payment was extended. However, by the third extension of the Discussion Proper
loan, respondent spouses decided to alter the agreement by changing the Alright, in this case, there was no express stipulation in writing or the imposition
manner of earning interest rate by compounding it. of the compounding of interest. The requirement does not only entail reducing
in writing the interest rate to be earned but also the manner of earning the
As a result, the first requisite that there be an express stipulation for the same, if it is to be compounded. In default of any stipulation on the manner of
payment of interest under Article 1956 is not sufficiently complied with, for earning interest, simple interest shall accrue provided it is in writing. It appears
purposes of imposing compounded interest on the loan. The requirement does here that there was ambiguity in the contract. Any ambiguity in a contract
not only entail reducing in writing the interest rate to be earned but also the whose terms are susceptible of different interpretations must be read against
manner of earning the same, if it is to be compounded. Nevertheless, the failure the party who drafted it. Here, respondent spouses, having imposed,
to specify the manner of earning interest does not automatically render the unilaterally at that, the compounded interest rate, had the correlative duty of
stipulation imposing the interest rate void since it is readily apparent from the clarifying and reducing in writing how the said interest shall be earned. Having
contract itself that the parties herein agreed for the loan to bear interest. failed to do so, the silence of the agreement on the manner of earning interest
Instead, in default of any stipulation on the manner of earning interest, simple is a valid argument for prohibiting them from charging interest at a
interest shall accrue. compounded rate. Therefore, in default of any unequivocal wording in the
contract, the legal interest stipulated by the parties should be understood to be
Respondents, having imposed unilaterally the compounded interest rate, had simple, not compounded.
the correlative duty of clarifying and reducing in writing how the said interest
shall be earned. Having failed to do so, the silence of the agreement on the So, tingnan niyo muna bago kayo, whether you determine the interest rate is
manner of earning interest is a valid argument for prohibiting them from excessive or unconscionable know first if it has complied with the requirement
charging interest at a compounded rate. Therefore, in default of any that it is expressly stipulated in writing. Wag kayo mag-diretso doon, excited,
unequivocal wording in the contract, the legal interest stipulated by the parties excessive, and exorbitant. Bago niyo yan I-address, tingnan niyo muna if the
should be understood to be simple, not compounded. same is in writing. Nevertheless, as in this case, even if there was such an
agreement that it will be compounded, the 5% monthly rate, would be
Nevertheless, even if there was such an agreement that interest will be considered void for being too exorbitant. The imposition of an unconscionable
compounded, the 5% monthly rate, be it simple or compounded, written or rate of interest on a money debt, even if knowingly and voluntarily assumed, is
verbal, is void for being too exorbitant, thus running afoul of Article 1306 of the immoral and unjust. It has no support in law. So with that, the interest rate to
NCC. The imposition of an unconscionable rate of interest on a money debt, be imposed here is nullified for being unconscionable, and in fact, could not be
even if knowingly and voluntarily assumed, is immoral and unjust. compounded because it was not expressly stipulated in writing. So what was
In conclusion, the 5% interest rate imposed is nullified for being imposed is only a simple interest of 12% interest p.a.
unconscionable. In lieu thereof, a simple interest of 12% per annum should be
imposed. In view of the nullity of the interest imposed on the loan which Now, what is the effect of the reduction of the interest rate here, very
affected the total arrearages upon which foreclosure was based, the foreclosure important, the nullity or it nullified the foreclosure proceedings. The SC
of mortgage is rendered void. emphasized here that a judgment ordering a foreclosure sale is conditioned
upon a finding on the correct amount of the unpaid obligation and the failure of
M: With that, what is the issue in relation to our topic? the debtor to pay the said amount citing the Espiritu case. Why? Because if the
S: In relation to our topic, the issue here is that whether or not the imposition of computation of the creditor when it collected from the debtor an amount, if it
a 5% monthly interest, whether compounded or simple, is valid. And the ruling was compounded when it’s not have been compounded or the interest rate is
here is No, it is unconscionable . . . deemed unconscionable, it could have been reduced; the debtor could have
paid the same and therefore, the foreclosure would not have taken place. So as
M: Before it was rules by the SC as to unconscionable, again before we deem on in this case, the extra-judicial foreclosure is declared null and void and of no
whether it is in excess (excessive) or unconscionable, what is the first thing that legal effect.
you would look at? What is required under the law?
S: According to the law, what is required is a written consent
Art. 1960.
M: You call that written consent. Express stipulation by the parties in writing. Is If the borrower pays interest when there has been no stipulation therefor,
that present here? the provisions of this Code concerning solutio indebiti, or natural obligations,
S: No. It was not . . . shall be applied, as the case may be. (n)
M: So there was no express stipulation of the parties with regard to payment of M: What is solutio indebiti?
any interest rate? S: Solutio indebiti is a . . . it applies when there is a payment . . . when payment
S: Yes. is made then there is no binding . . . (INAUDIBLE codal definition is Art. 2154. If
something is received when there is no right to demand it, and it was unduly
M: Are you sure? Was there express stipulation that there be payment of delivered through mistake)
compounding of interest?
S: Yes, there was express stipulation. However, it was not reduced into writing.
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M: Or as we have learned in obligations and contracts, solutio indebiti is interest. The case at bar involves petitioner’s claim for monetary interest.
payment by?
Chorus: Mistake. Further, the compensatory interest is not chargeable in the instant case
because it was not duly proven that respondent defaulted in paying the loan.
M: Alright, what happened in the case of Sigaan? Also, no interest was due on the loan because there was no written agreement
SIGA-AN vs. VILLANUEVA as regards payment of interest. The principle of solutio indebiti applies where
FACTS: 1. A payment is made when there exists no binding relation between
Respondent Villanueva filed a complaint for sum of money against petitioner the payor, who has no duty to pay, and the person who received the
Sebastian Siga-an. According to her, petitioner offered to loan her the amount payment; and
of P540k as capital for her business transactions with the PNO. However, the 2. The payment is made through mistake, and not through liberality or
loan agreement was not reduced in writing and there was no stipulation as to some other cause.
the payment of interest for the loan.
It was duly established that respondent paid interest to petitioner without the
Respondent paid a total of P1.2M without any receipt issued to her. Petitioner duty to do so because there was no express stipulation in writing to that effect.
told her that the excess thereof will be applied as payment for the interest. The payment was clearly a mistake. Since petitioner received something when
After consulting a lawyer, respondent filed a complaint against petitioner for there was no right to demand it, he has an obligation to return it.
the reimbursement of the excess payment she made.
In conclusion, petitioner’s obligation arose from a quasi-contract of solutio
Petitioner insisted that there was no overpayment because respondent indebiti and not from a loan or forbearance of money. Thus, an interest of 6%
admitted in the promissory note that her obligation amounted to P1.2M per annum should be imposed on the amount to be refunded as well as on the
inclusive of interest. He maintained that to rule in favor of respondent is damages awarded and on the attorney’s fees, to be computed from the time of
tantamount to concluding that the loan was given interest-free. the extra-judicial demand up to the finality of the decision. In addition, the
The trial court ruled that respondent’s obligation was only to pay the loaned interest shall become 12% per annum from the finality of this decision up to its
amount and that the alleged interests due should not be included in the satisfaction.
computation of respondent’s total monetary debt because there was no
agreement between them regarding payment of interest. Since respondent M: So what is the effect of payment of interest wherein there was no express
made an excess payment through mistake, petitioner should return the amount stipulation in writing?
to respondent pursuant to the principle of solutio indebiti. S: When there was no express stipulation in writing, under the concept of
solutio indebiti, the petitioner must return he excess amount to the
Petitioner appealed the decision arguing that the application of Article 1956 respondent.
should not be absolute and an exception to this is when the borrower admits
that a specific rate of interest was agreed upon such as when respondent M: Now, would the return or with the obligation of the creditor to return the
admitted in the BP 22 cases that there was an agreed 7% rate of interest on the excess payment is subject to interest? Based on what we have learned.
loan. He further contended that the principle of solutio indebiti does not apply. S: Yes.
Thus, he cannot be compelled to return the alleged excess amount paid by
respondent as interest. M: What rate?
S: monetary interest rate of 6%.
ISSUE: W/N reimbursement is proper pursuant to the principle of solution
indebiti. M: Are you sure?
S: Yes.
RULING: YES
Monetary interest is the interest fixed by the parties as a compensation for the M: 6% from what? Depending if it is?
use or forbearance of money. On the other hand, compensatory interest is the S: 6% depending if it is. . .
interest imposed by law or by courts as penalty or indemnity for damages. The
right to interest arises only by virtue of a contract or by virtue of damages for M: Again, only stick into consideration the ruling in the case of Eastern Shipping
delay or failure to pay the principal loan on which interest is demanded. Hence, and Nacar. The obligation to return excess payments. So we have discussed that
the collection of interest without any stipulation in writing is prohibited by law in one case already. It was subject to interest rate. How much was the interest
pursuant to Article 1956 of the CC. rate imposed? 6 or 12? 6 if when?
S: June 30, 2013
In this case, although petitioner and respondent entered into a valid oral
contract of loan, they did not agree nor intended the payment of interest for M: Effective July 1, 2013 but prior to that, that is considered as a forbearance of
the loan. Neither was there convincing proof of written agreement between the money. So it is subject to 12% interest. Okay, thank you.
two regarding the payment of interest. It is evident that respondent did not
really consent to the payment of interest for the loan and that she was merely Discussion
tricked and coerced by petitioner to pay interest. Hence, it cannot be gainfully So in the case of Sigaan, take note what is the effect if interest is collected by
said that such promissory note pertains to an express stipulation of interest or the creditor even if there was no express stipulation in writing. We apply Article
written agreement of interest on the loan between petitioner and respondent. 1960. If the borrower pays interest when there has been no stipulation
therefor, the provisions of The Civil Code concerning solutio indebiti shall be
In the BP 22 cases, the respondent merely testified that petitioner ordered her applied. The principle of solutio indebiti is based on the principle no one shall
to pay interest. She did not categorically declare that she and petitioner made unjustly enrich himself at the expense of another. It applies where a payment is
an express stipulation in writing as regards payment of interest at the rate of made when (1) there is no binding relation between the payor, has no duty to
7%. pay, and the person who received the payment and (2) the payment was made
through mistake and not through the liberality or some other cause.
An interest may be imposed even in the absence of express stipulation, verbal
or written, regarding payment of interest pursuant to Article 2209 of the CC. Let’s just finish this with the last case - Dela Paz. What happened in this case?
Likewise, Article 2212 of the CC provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be DELA PAZ vs. L&J DEVELOPMENT
silent on this point. FACTS:
Rolando lent P350k without any security to L&J Development. The loan, with no
Nevertheless, the interest under these two instances may be imposed only as a specified maturity date, carried a 6% monthly interest.
penalty or damages for breach of contractual obligations. It cannot be charged
as a compensation for the use or forbearance of money. In other words, the When L&J failed to pay despite repeated demands, Rolando filed a complaint
two instances apply only to compensatory interest and not to monetary alleging that Atty. Salonga tricked him into parting with his money without the
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loan transaction being reduced into writing. He insisted that the 6% monthly will not exempt Rolando from a ruling that the rate is void.
interest rate could not be unconscionable as in the first place, the interest was
not imposed by the creditor but was in fact offered by the borrower, who also M: Who should pay the Php 226,000?
dictated all the terms of the loan. He stressed that in cases where interest rates S: Rolando, the creditor.
were declared unconscionable, those meant to be protected by such
declaration are helpless borrowers which is not the case here. M: Can we not apply the principle of estoppel that he is now estopped or it is
now L&J Development is now estopped to question the interest rate
L&J insisted that the 6% monthly interest rate is unconscionable and immoral. considering that it has already paid the interest of 6% per month before?
Hence, the 12% per annum legal interest should have been applied from the S: the SC cited the case of Ching v. Nicdao that the daily payments of the
time of the constitution of the obligation. At 12% per annum interest rate, it debtor to the lender were considered as payment and that the interest
asserted that the amount of interest paid over and above what is due should be payments . . .
applied or set off to the principal loan resulting to its complete payment.
M: So my question is whether the principle of estoppel is applicable or not.
The CA ruled that the parties failed to stipulate in writing the imposition of S: The SC said that the estoppel cannot give validity to an act that is prohibited
interest on the loan. Hence, no interest shall be due pursuant to Article 1956 of by law or one that is against public policy.
the CC. And even if payment of interest has been stipulated in writing, the 6%
monthly interest is still outrightly illegal and unconscionable because it is M: Alright because here, clearly, the collection of interest not in writing is
contrary to morals, if not against the law. Being void, this cannot be ratified and prohibited by law. Now with regard to the . . . Assuming that it is expressly
may be set up by the debtor as defense. For these reasons, Rolando cannot stipulated in writing, would the 6% interest be considered excessive and
collect any interest even if L&J offered to pay interest. Consequently, he has to unconscionable?
return all the interest payments to L&J. S: The SC held that just as ruled in a plethora of cases that stipulated interest
rates of 3% per month or higher are excessive, iniquitous, unconscionable and
ISSUE: exorbitant.
1. W/N the 6% interest rate cannot be applied for failure of the parties
to stipulate it in writing. YES M: Now, how would you reconcile that with the previous cases we have
2. W/N L&J is guilty of fraud. NO discussed before that interest rates of 5 to 7 percent per month were actually
3. W/N the 6% interest rate if stipulated in writing is unconscionable or upheld by the SC? What was the guideline or ruling that was stressed here by
excessive. YES the court? And we have actually discussed this before. Did the SC stipulate a fix
rate to be deemed as excessive or unconscionable? Alright, so what’s the
RULING: guideline? It’s there. Such rate shall be invalidated and reduced only in cases
First issue (diba sabi natin before based on factual circumstances of each case) in this case,
The lack of a written stipulation to pay interest on the loaned amount disallows where the terms of loans are open-ended and where the interest rates are
a creditor from charging monetary interest pursuant to Article 1956. It is applied for an indefinite period. That’s why we have emphasized before, recall
undisputed that the parties did not put down in writing their agreement. Thus, the case, it was also mentioned here, yung 40,000 for 6 months, yung 5% per
no interest is due. The collection of interest without any stipulation in writing is month for 2 months, were upheld by the courts.
prohibited by law.
Now, with regard to the Php 226,000 to be returned by the creditor, would it be
The fact that L&J continued paying the 6% monthly interest does not mean that subject to interest rate?
they are estopped from assailing its validity. Estoppel cannot give validity to an S: Yes.
act that is prohibited by law or one that is against public policy.
M: How much?
Second issue S: 6% per annum when the . . .
There was no deception on the part of L&J and Atty. Salonga. For one, despite
the lack of a document stipulating the payment of interest, L&J nevertheless M: From what time until what time?
devotedly paid interests on the loan. It only stopped when it suffered from S: From the finality of the decision until fully paid.
financial difficulties that prevented it from continuously paying the 6% monthly
rate. For another, regardless of Atty. Salonga’s profession, Rolando who is an M: Why 6% and not 12?
architect and an educated man himself could have been a more reasonably S: Because this case was decided after June 30, 2013 it was decided on
prudent person under the circumstances. To top it all, he admitted that he had September 8, 2014.
no prior communication with Atty. Salonga. Despite Atty. Salonga being a
complete stranger, he immediately trusted him and lent his company a Discussion
significant amount. Moreover, as the creditor, he could have requested or So here, it is undisputed that the parties did not put down in writing their
required that all the terms and conditions of the loan agreement, which include agreement, so therefore, no interest is due. The collection of interest without
the payment of interest, be put down in writing to ensure that he and L&J are any stipulation in writing is prohibited by law. Moreover, estoppel is not
on the same page. Rolando had a choice of not acceding and to insist that their applicable as it cannot give validity to an act that is prohibited by law. What is
contract be put in written form as this will favor and safeguard him as a lender. prohibited? Collection of interest which is not expressly stipulated in writing or
Unfortunately, he did not. one that is against public policy. Even so, the interest rate of 6% per month here
was deemed iniquitous, unconscionable and exorbitant. Even if the SC noted
Third issue that time and again, in a plethora of cases that stipulated interest rates of 3%
Even if the payment of interest has been reduced in writing, a 6% monthly per month and higher, are excessive, iniquitous, unconscionable, again, such
interest rate on a loan is unconscionable, regardless of who between the parties statement does not mean that that is the fixed rate that once 3% per month,
proposed the rate. excessive na. Because again the Court stresses that these rates shall be
invalidated and shall be reduced only in cases where the terms of the loans are
Time and again, it has been ruled in a plethora of cases that stipulated interest open-ended, and where the interest rates are applied for an indefinite period.
rates of 3% per month and higher, are excessive, iniquitous, unconscionable and Moreover, the obligation of Rolando to return the excess payment s of Php
exorbitant. Such stipulations are void for being contrary to morals, if not against 226,000 is based on solutio indebiti under Article 1960 and subject to an
the law. The Court, however, stresses that these rates shall be invalidated and interest of 6% p.a. from the finality of this decision. Why? Because this was
shall be reduced only in cases where the terms of the loans are open-ended, promulgated on September 8, 2014, so we apply the ruling in Nacar. If it was
and where the interest rates are applied for an indefinite period. prior to the effectivity of the new legal interest rate, it would have been? What
interest rate? Eastern Shipping 12% yung finality of judgments. So take note of
In this case, there is no specified period as to the payment of the loan. Hence, this cases.
levying 6% monthly or 72% interest per annum is definitely outrageous and
inordinate. The situation that it was the debtor who insisted on the interest rate
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And the last Article 1961, a usurious contract, again as we have mentioned respondent’s peso current account at prevailing conversion rates. It explained
before, usury is now legally non-existent because of its suspension. that the sum was disposed of in this manner:
1. $2000 was sold on December 29, 1975 and the peso proceeds
amounting to P14,920 were deposited to respondent’s current
Balgoa account per deposit slip accomplished by Garcia; and
November 29, 2016 2. The remaining $1000 was sold on February 3, 1976 and the peso
Part 1 of 3 proceeds amounting to P8,350 were deposited to his current
DEPOSIT account per deposit slip also accomplished by Garcia.
I. Deposit in General & Its Different Kinds
The bank further argued that the contract embodied in the document is the
Title XII. – DEPOSIT. contract of depositum under Article 1962 which banks do not enter into. The
CHAPTER 1. - DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS bank alleges that Garcia exceeded his powers when he entered into the
Art. 1962. transaction. Hence, the bank cannot be liable under the contract, and the
A deposit is constituted from the moment a person receives a thing belonging obligation is purely personal to Garcia.
to another, with the obligation of safely keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal purpose of the ISSUE: W/N the parties entered into a contract of deposit.
contract, there is no deposit but some other contract. (1758a)
RULING: YES
The characteristics of a contract of deposit are the following: he cause of action was based on an actionable document. It was therefore
(1) It is a real contract (like commodatum and mutuum) because it is incumbent upon the bank to specifically deny under oath the due execution of
perfected by the delivery of the subject matter. the document. However, no sworn answer denying the due execution of the
(2) It may be unilateral contract because only the depositary document, or questioning the authority of Garcia to bind the bank, or denying
(depositorio) has an obligation. the bank's capacity to enter into the contract, was ever filed. Hence, the bank
(3) But when the deposit is for compensation, the juridical relation is deemed to have admitted not only Garcia's authority, but also the bank's
created becomes bilateral because it gives rise to obligations on the power, to enter into the contract in question.
part of both the depositary and depositor (depositante).
(4) It is a nominate contract because it is given a name under the law. The object of the contract between the respondent and COMTRUST was
(5) It is principal in nature. foreign exchange. Hence, the transaction was covered by CBC No. 20, which
provides that within one business day upon taking ownership or receiving
Two parties in a contract of deposit: payment of foreign exchange the aforementioned persons and entities shall
(1) The Depositary or the depositorio who is the recipient, or the one sell such foreign exchange to the authorized agents of the Central Bank.
who receives the subject of the contract of deposit belonging to
another; and In the case at bar, the document which embodies the contract states that the
(2) the Depositor or the depositante or the giver. $3000 was received by the bank for safekeeping. The subsequent acts of the
parties also show that the intent of the parties was really for the bank to
Under 1962, it is not required that the depositor be the owner of the thing and safely keep the dollars and to return it to respondent at a later time upon
there is no transfer of ownership from the depositor to the depositary upon the demand. However, the parties did not intended to sell the US dollars to the
delivery of the thing. Central Bank within one business day from receipt. Otherwise, the contract of
depositum would never have been entered into at all.
Remember that the principal purpose of a contract of deposit is merely for
safekeeping. If safekeeping is only an accessory obligation of the contract, that Since the mere safekeeping of the greenbacks, without selling them to the
would not be considered a contract of deposit or depositum, but some other Central Bank within one business day from receipt, is a prohibited transaction
contract. For example, a lawyer who keeps a title of land for his client, which is not authorized by CBC No. 20, it must be considered as one which
safekeeping is merely an accessory obligation in a contract of agency, since the falls under the general class of prohibited transactions. Hence, pursuant to
lawyer represents the client in that case. Article 5 of the CC, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties
DISTINCTIONS OF A CONTRACT OF DEPOSIT AND MUTUUM a cause of action against the other. When the nullity proceeds from the
DEPOSIT MUTUUM illegality of the cause or object of the contract, and the act constitutes a
Principal Purpose is For consumption criminal offense, both parties being in pari delicto, they shall have no cause of
safekeeping action against each other pursuant to Article 1411of the NCC. The only
Depositor can demand for Must wait for the remedy is one on behalf of the State to prosecute the parties for violating the
the return of the thing at expiration of period law.
will granted to the Debtor
Subject matter can be Money or consumable Q: Do we have a deposit or a mutuum?
movable or immovable things A: Deposit.
Parties are depositor and Lender and borrower
depositary Q: Who is the depositor?
Generally gratuitous Subject to compensation A: Zshornack, ma’am.
No transfer of ownership There is transfer of
Q: Who is the depositary?
ownership
A: The bank, ma’am.
BPI vs. IAC Q: Why was it considered a deposit?
FACTS: A: The document which embodies the contract states that the US$3,000.00 was
Respondent Zshornack maintained in COMTRUST a dollar savings account and received by the bank for safekeeping. The subsequent acts of the parties also
a peso current account. Respondent entrusted to COMTRUST $3000 cash for show that the intent of the parties was really for the bank to safely keep the
safekeeping. The agreement was embodied in a document where COMTRUST, dollars and to return it to Zshornack at a later time
thru its Assistant Manager Garcia, acknowledged the receipt of the amount.
However, despite demands, the bank refused to return the money. This Q: What is the effect now that the contract is determined to be a contract of
caused the respondent to file a complaint against the bank. deposit?
A: Since the mere safekeeping of the greenbacks, without selling them to the
COMTRUST did not deny the authenticity and due execution of the Central Bank within one business day from receipt, is a transaction which is not
instrument. However, it alleged that the $3000 was properly credited to the authorized by CB Circular No. 20, it must be considered as one which falls under
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the general class of prohibited transactions. Hence, pursuant to Article 5 of the Through the will of the Court Through the will of the parties
Civil Code, it is void.
Ensures the right of the party to a
property or to recovery for a For custody and safekeeping
Q: What is the effect of a void contract?
favourable judgment
A: It produces no effect and there is no corresponding obligation.
Generally involves immovable
Movable property only
Q: Can Zhornack demand for damages from the bank? property
A: No, ma’am. When the nullity proceeds from the illegality of the cause or Always onerous Generally gratuitous, possibly onerous
object of the contract, and the act constitutes a criminal offense, both parties Thing returned upon order of the Returned upon demand on the
being in pari delicto, they shall have no cause of action against each other. . ." Court or when obligation has ended depositor
[Art. 1411, New Civil Code.] Safekeeping is made on behalf of the
On behalf of the depositor, or --
persons who has the right
It was clearly agreed upon by the parties that these US dollars shall be received
by the bank for safekeeping. With that purpose, it is clear that they entered into
a contract of deposit. The subsequent acts of the parties also showed that the
Art. 1965.
intent was the safekeeping of the dollars and to return it to Zshornack at a later A deposit is a gratuitous contract, except when there is an agreement to the
time. With the intention to safekeep the foreign exchange and return it later to contrary, or unless the depositary is engaged in the business of storing goods.
Zshornack, the SC emphasized that the mere safekeeping of the greenbacks or
dollars by the bank without selling them to the Central Bank is a transaction
A contract of deposit is generally gratuitous, except--
which is not authorized. It is considered as a void transaction. There was no
(1) Where there is contrary stipulation. — The first exception is
intention by the parties to sell the dollars to the Central bank. Otherwise, it will
recognized in the general rule in contracts that the parties may
not be anymore considered as a contract of deposit.
establish any stipulation they may deem convenient provided it is
not contrary to law, morals, good customs, public order, or public
Take note of the effect here. Since such contract of deposit is not allowed by
policy.
law—what we have here is a bank with the obligation to sell the dollars to the
(2) Where depositary engaged in business of storing goods. — The
central bank—the contract is void and the parties are deemed in pari delicto.
second exception is based on the fact that the depositary is engaged
Therefore, Zshornack is not allowed to recover even if he entered into a contract
in the business of storing goods (as in the case of a warehouseman)
of deposit because such arrangement between the depositor and the bank is not
for compensation and not out of pure generosity.
allowed by law.
(3) Where property saved from destruction without knowledge of the
owner. — In involuntary deposit, where property is saved from
Take note also of the distinctions between deposit and mutuum.
destruction during a calamity by another person without the
knowledge of the owner, the latter is bound to pay the former just
DISTINCTIONS BETWEEN DEPOSIT AND COMMODATUM
compensation.
DEPOSIT COMMODATUM
Principal Purpose is
Transfer of the use
safekeeping Art. 1966.
May be gratuitous Essentially and always gratuitous Only movable things may be the object of a deposit.
(Extrajudicial Deposit) Only
This means that if what we have is extrajudicial deposit, the subject property
movable or corporeal things Both movable and immovable
refers to movable things. Only movables or personal property may be the object
may be the object
of extrajudicial deposit, whether it is voluntary or necessary, for the purpose of
safekeeping. The possibility that the subject property may disappear, or may be
lost or stolen, is not present in a real property.
Art. 1963.
An agreement to constitute a deposit is binding, but the deposit itself is not However, in judicial deposits, it may cover not only movables, but also
perfected until the delivery of the thing. immovable properties.
Why? A contract of deposit is a real contract perfected by delivery. If there is Take note that since what is covered under extrajudicial deposits is a movable
already an agreement that the parties may enter into a contract of deposit and property, they are referring to corporeal things. It does not embrace incorporeal
that the property will be delivered tomorrow for safekeeping, that is still a property since it follows the person or the owner wherever he goes.
binding consensual contract BUT for the rules of deposit to apply, there must be
delivery.
Art. 1967.
An extrajudicial deposit is either voluntary or necessary.
Art. 1964.
A deposit may be constituted judicially or extrajudicially. Deposit is generally voluntary. It becomes necessary in the three cases
mentioned in Articles 1996 and 1998, i.e., when made in compliance with a
Kinds of deposit: legal obligation, on the occasion of any calamity, or by travelers in hotels and
(1) judicial or one which takes place when an attachment or seizure of inns.
property in litigation is ordered (Arts. 2005-2008.); or
(2) extrajudicial (Art. 1967.) which may be— The deposit of goods made by travelers or passengers with common carriers
(a) voluntary or one wherein the delivery is made by the will may also be regarded as necessary.
of the depositor or by two or more persons each of whom
believes himself entitled to the thing deposited (Arts.
1968-1995.); or
(b) necessary or one made in compliance with a legal
obligation, or on the occasion of any calamity, or by II. Voluntary Deposit
travelers in hotels and inns (Arts. 1996-2004.) or by
travelers with common carriers. (Arts. 1734-1735.)
CHAPTER 2. - VOLUNTARY DEPOSIT
DISTINCTIONS BETWEEN JUDICIAL AND EXTRAJUDICIAL DEPOSIT SECTION 1. - GENERAL PROVISIONS
JUDICIAL EXTRAJUDICIAL Art.1968.
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A voluntary deposit is that wherein the delivery is made by the will of the what you have learned under Contracts. Persons who are capable cannot allege
depositor. A deposit may also be made by two or more persons each of the incapacity of those who executed the contract. Here, the depositary who is
whom believes himself entitled to the thing deposited with a third person, capacitated cannot be allowed to go to court and allege that he cannot be
who shall deliver it in a proper case to the one to whom it belongs. subject to the obligations agreed upon saying that the contract is voidable due
to the incapacity of the depositor.
DISTINCTIONS BETWEEN VOLUNTARY AND NECESSARY DEPOSITS
VOLUNTARY NECESSARY
The scenario is different under 1971.
Depositor has complete freedom in Lack of free choice in the depositary
choosing the depositary in the part of the depositor Art. 1971.
If the deposit has been made by a capacitated person with another who is
Article 1968 defines what a voluntary deposit is. Delivery is made by the will of not, the depositor shall only have an action to recover the thing deposited
the depositor. He gets to choose who will be the depositary. That choice is not while it is still in the possession of the depositary, or to compel the latter to
present in a necessary deposit. pay him the amount by which he may have enriched or benefited himself
with the thing or its price. However, if a third person who acquired the thing
Under a voluntary deposit, two persons are ordinarily involved. However, it is acted in bad faith, the depositor may bring an action against him for its
possible that three people may be involved in a voluntary deposit under the 2 nd recovery.
sentence of 1968.Here, 2 persons are alleging that they have a right over the
movable property. Pending the settlement of their dispute, they can agree to This time the depositary is incapacitated. Remember, if the depositor is
deposit the thing to a third person. capacitated he will be obliged to the obligations of the depository, regardless of
the incapacity of the depositary. If the depositary is incapacitated, we apply
There may also be a case where one of the depositors is not the owner. The article 1971. He does not incur the obligation of a depositary, but (1) he shall be
action to compel the depositors to settle their conflicting claims among liable for the return of the thing deposited while still in his possession, or (2) to
themselves would be in the nature of an interpleader Whenever conflicting pay the depositor the amount by which he may have benefited himself with the
claims upon the same subject matter are or may be made against a person who thing or its price subject to the right of any third person who acquired the thing
claims no interest whatever in the subject matter, or an interest which in whole in good faith.
or in part is not disputed by the claimants, he may bring an action against the
conflicting claimants to compel them to interplead and litigate their several What if the thing deposited was delivered to a third person by the incapacitated
claims among themselves. depositary and the third person is in bad faith (in the sense that he has
knowledge of the incapacity of the depositary or he has knowledge that the
Do take note of the main distinction between a voluntary and necessary deposit. thing was in the possession of the depositary only for the purpose of
Again, in voluntary deposit the depositor gets to choose who will be the safekeeping)? The depositor may recover the thing from the third person in bad
depositary. BUT in necessary deposits there is no choice as to who will be the faith.
depositary.
If the third person is in good faith (he has no knowledge of the incapacity of the
With regard to contractual deposits, it is possible that the depositor is not the depositary or he has no knowledge that the thing was in the possession of the
owner thereof. For example, we can have a carrier, the agent, or the lessee, depositary only for safekeeping), the depositor’s action is only against the
where they may temporarily deposit goods in their possession, even if they are depositary. In this case, the depositor may compel depositary to return the thing
not the owner thereof. or the amount by which he may have been benefited.
What if the incapacitated depositary destroyed the thing and he may have been
Art. 1969. benefited? No liability. Under Obligations and Contracts, the incapacitated
A contract of deposit may be entered into orally or in writing. depositary acquires no liability in case of loss or destruction of the thing.
Of course, for its perfection, as mentioned in 1963, there must be delivery. With
that, we apply the general rule under article 1356, that contracts shall be CHIU
obligatory in whatever form they may have been entered into, provided all the November 29, 2016
essential requisites for their validity are present. Except for the delivery of the Part 2 of 3
thing, there are no other formalities required for the existence of a valid Article 1972 states the obligation of a depositary. The primary obligation of the
contract of deposit. depositary is to:
1.) Keep the thing safe
2.) Return it when required by the depositor
Art. 1970. 3.) With regards to safekeeping, he should not use the thing.
If a person having capacity to contract accepts a deposit made by one who is
incapacitated, the former shall be subject to all the obligations of a Article 1972.
depositary, and may be compelled to return the thing by the guardian, or The depositary is obliged to keep the thing safely and to return it, when
administrator, of the person who made the deposit, or by the latter himself if required, to the depositor, or to his heirs and successors, or to the person who
he should acquire capacity. may have been designated in the contract. His responsibility, with regard to
the safekeeping and the loss of the thing, shall be governed by the provisions
Under 1970, the depositary, the one who [pays] it, is capacitated. The depositor of Title I of this Book.
is incapacitated. If there is mistake or he is a minor, what is the status of the
contract? Voidable. We apply 1970. The depositary is capacitated, so therefore If the deposit is gratuitous, this fact shall be taken into account in determining
he is subject to the obligation of a depositary, regardless of the incapacity of the the degree of care that the depositary must observe.
depositor. Even if the depositor is incapacitated the depositary must return the
property to the legal representative or to the depositor himself if he should The degree of care required here would be the same diligence he would
acquire capacity. exercise over his own property. In a contract of deposit, it involves the
depositor’s confidence in the good faith and trustworthiness of the depositary.
Again, what is the effect if the depositary returns the thing to the depositor who In a contract of deposit, even if it subject for compensation, the purpose should
is still incapacitated? It will not extinguish his obligation because capacity must still be for safekeeping as agreed upon. The depositary cannot excuse himself
be present for payment or performance to extinguish the obligation. from liability in case of loss by claiming that he exercised the same amount of
care towards the thing deposited as towards his own property. In relation to
Here, the legal representative of the incapacitated, or the incapacitated who has Oblicon, the default standard of care is the diligence of a good father of a
now regained his capacity can demand the return. Do take note, however, of family, unless stipulated by the parties or a different degree of diligence
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required by law (Ex. Common Carriers). Take note that whether the deposit is Discussion: In this case, Moreman deposited the construction materials in the
gratuitous or onerous, the depositary is liable if the latter did not exercise the warehouse of Chan. During the pendency of the case between Moreman and
diligence required. However, the liability will be lesser if the contract of deposit Maceda, Maceda ordered the petitioners to return the things that Moreman
is gratuitous compared to an onerous one. deposited. The obligation of a depositary is to safekeep the thing deposited and
to return it to depositor. However, there was no obligation in the part of
CHAN vs. MACEDA petitioners to Maceda. When there is no privity of contract, there is likewise no
FACTS: obligation to speak about and thus no cause of action arises. The records are
Respondent Maceda entered into a building construction contract with bereft of any contract of deposit between Chan and Maceda. Respondent is not
Moreman Builders. Later on, respondent purchased various construction even an heir, successor or a person who was designated in the contract.
materials and equipment. Moreman, in turn, deposited them in the warehouse Granting that there was a contract between Petitioners and Moreman, it was
of petitioners Wilson and Lily Chan. The deposit was free of charge. still incumbent for respondent to prove its existence and was executed in favor
of respondent. Actually, there was no more construction materials in
However, Moreman failed to finish the construction as agreed upon causing petitioner’s warehouse when respondent demanded for it.
respondent to file an action for rescission and damages against Moreman.
Pending litigation, respondent ordered petitioners to return to him the
construction materials and equipment which Moreman deposited in their Article 1973.
warehouse. Petitioners, however, told them that Moreman already withdrew Unless there is a stipulation to the contrary, the depositary cannot deposit
those construction materials. the thing with a third person. If deposit with a third person is allowed, the
depositary is liable for the loss if he deposited the thing with a person who is
The trial court ruled in favor of responding reasoning that the inventory of manifestly careless or unfit. The depositary is responsible for the negligence
other materials, aside from the steel bars and cement is found highly reliable of his employees.
based on first, the affidavit of Moreman’s personnel officer that he was
assigned with others to guard the warehouse; secondly, the inventory shows General Rule: Depositary is not allowed to deposit the thing to a 3rd person
deposit of assorted materials; thirdly, that there were items in the warehouse because the basis of a contract of deposit is trust and confidence.
as shown in the balance sheet of Moreman's stock clerk.
Exception – Unless authorized by express stipulation.
ISSUE:
1. W/N respondent was able to prove that the construction materials The effect when the depositary allows the thing to be deposited to a 3rd person
and equipment were actually in petitioners' warehouse when the is that the depositary will be liable for the loss under the following
demand for turn over was made. NO circumstances:
2. W/N respondent have the right to demand the release of the (1) He transfers the thing deposited to a 3rd person without authority
materials and equipment or claim for damages. NO although there is no fault or negligence of the 3rd party;
(2) Deposits the thing to a 3rd person who is manifestly careless or unfit
RULING: BOTH NO even though authorized;
(3) The thing lost was due to the negligence of the employee whether or
First issue not the employee was careless
Under Article 1311 of the CC, contracts are binding upon the parties (and their The depositary will be exempted from liability when the thing is lost without the
assigns and heirs) who execute them. When there is no privity of contract, negligence of the 3rd person whom he has allowed to deposit the thing if such
there is likewise no obligation or liability to speak about and thus no cause of 3rd person is not manifestly careless or unfit.
action arises.
In an action against the depositary, the burden is on the plaintiff to prove the Article 1974.
bailment or deposit and the performance of conditions precedent to the right
The depositary may change the way of the deposit if under the circumstances
of action. A depositary is obliged to return the thing to the depositor, or to his he may reasonably presume that the depositor would consent to the change if
heirs or successors, or to the person who may have been designated in the
he knew of the facts of the situation. However, before the depositary may
contract. make such change, he shall notify the depositor thereof and wait for his
decision, unless delay would cause danger.
In the present case, the record is bereft of any contract of deposit, oral or
written, between petitioners and respondent. If at all, it was only between
As a rule here, the depositary may change the manner of deposit if there are
petitioners and Moreman.
circumstances indicating that the depositor would consent to the change.
Depositary therefore, should first notify the depositor in his decision except
Granting arguendo that there was indeed a contract of deposit between
such delay would cause danger.
petitioners and Moreman, it is still incumbent upon respondent to prove its
existence and that it was executed in his favor. However, respondent miserably
failed to do so. The only pieces of evidence respondent presented to prove the
contract of deposit were the delivery receipts. However, they are unsigned and Article 1975.
not duly received or authenticated by either Moreman, petitioners or The depositary holding certificates, bonds, securities or instruments which
respondent or any of their authorized representatives. Hence, those delivery earn interest shall be bound to collect the latter when it becomes due, and to
receipts have no probative value at all. take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law.
Moreover, respondent also failed to prove that there were construction
materials and equipment in petitioners' warehouse at the time he made a The above provision shall not apply to contracts for the rent of safety deposit
demand for their return. boxes.
Second issue If the thing deposited should earn interest, the additional obligation of the
Considering that respondent failed to prove (1) the existence of any contract of depositary is to collect the interest as it becomes due as well as to take steps to
deposit between him and petitioners, nor between the petitioners and preserve the value corresponding to them.
Moreman in his favor, and (2) that there were construction materials in
petitioners' warehouse at the time of respondent's demand to return the This shall not apply for the rent of safety deposit boxes.
same, petitioners have no corresponding obligation or liability to respondent
with respect to those construction materials. As a consequence, respondent CA AGRO-INDUSTRIAL vs. CA
has no right whatsoever to claim for damages. FACTS:
Petitioner CA Agro and the spouses Pugaos entered into an agreement for the
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purchase of two parcels of land. They further agreed that the TCTS of the two a good father of a family is to be observed. Hence, any stipulation exempting
lots shall be deposited in a safety deposit box of any bank, which could be the depositary from any liability arising from the loss of the thing deposited on
withdrawn only upon the joint signatures of a representative of the petitioner account of fraud, negligence or delay would be void for being contrary to law
and the Pugaos upon full payment of the purchase price. and public policy.
The parties rented a safety deposit box of respondent Security Bank. For this The two provisions are inconsistent with the respondent Bank's responsibility
purpose, both signed a contract of lease with the conditions that: as a depositary under Section 72(a) of the General Banking Act. Both exempt
1. The bank is not a depositary of the contents of the safe and it has the latter from any liability except as contemplated in condition 8 thereof
neither the possession nor control of the same. which limits its duty to exercise reasonable diligence only with respect to who
2. The bank has no interest whatsoever in said contents, except herein shall be admitted to any rented safe.
expressly provided, and it assumes absolutely no liability in
connection therewith. Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has neither
After the execution of the contract, two renter's keys were given to Aguirre (for the possession nor control of the contents of the box since in fact, the safety
the petitioner) and the other to the Pugaos. A guard key remained in the deposit box itself is located in its premises and is under its absolute control;
possession of the respondent Bank. The safety deposit box has two keyholes, moreover, the respondent Bank keeps the guard key to the said box. As stated
one for the guard key and the other for the renter's key, and can be opened earlier, renters cannot open their respective boxes unless the Bank cooperates
only with the use of both keys. Petitioner claims that the certificates of title by presenting and using this guard key. Clearly then, the conditions in the
were placed inside the said box. contract are void and ineffective.
Later on, Aguirre (petitioner), accompanied by the Pugaos went to the In the instant case, the respondent Bank's exoneration cannot be based on or
respondent to open the safety deposit box and get the certificates of title in proceed from a characterization of the impugned contract as a contract of
order to effect a sale to another buyer. However, when it was opened, the box lease, but rather on the fact that no competent proof was presented to show
did not contain the certificates. that respondent Bank was aware of the agreement between the petitioner and
the Pugaos to the effect that the certificates of title were withdrawable from
As a result, the petitioner filed a case against the respondent bank alleging that the safety deposit box only upon both parties' joint signatures, and that no
regardless of nomenclature, the contract for the rent of the safety deposit box evidence was submitted to reveal that the loss of the certificates of title was
is actually a contract of deposit and that the respondent Bank is liable for the due to the fraud or negligence of the respondent Bank. This in turn flows from
loss of the certificates. It further argues that the two conditions in the contract this Court's determination that the contract involved was one of deposit. Since
are contrary to law and public policy and should be declared null and void both the petitioner and the Pugaos agreed that each should have one renter's
under Article 1306. key, it was obvious that either of them could ask the Bank for access to the
safety deposit box and, with the use of such key and the Bank's own guard key,
The CA ruled that the contract between the petitioner and respondent Bank is could open the said box, without the other renter being present.
in the nature of a contract of lease by virtue of which the petitioner and its co-
renter were given control over the safety deposit box and its contents while SIA vs. COURT OF APPEALS
the Bank retained no right to open the said box because it had neither the FACTS:
possession nor control over it and its contents. As such, the contract is Petitioner Sia rented the safety deposit box of respondent Security Bank where
governed by Article 1643 of the CC. he placed his collection of stamps. However, his stamp collection were
damaged due to floods in 1985 and 1986. Petitioner claimed damages against
ISSUE: W/N the contract between CA Agro and the bank is a contract of the bank.
deposit.
The bank denied liability for the damaged stamps collection on the bases of
RULING: YES but a special kind of deposit paragraphs 9 and 13 of their Contract of Lease.
The contract in the case at bar is a special kind of deposit. It cannot be 1. The bank alleged that by reason of the lease under paragraph 9, its
characterized as an ordinary contract of lease under Article 1643 because the liability is limited to the exercise of the diligence to prevent the
full and absolute possession and control of the safety deposit box was not opening of the safe by any person other than the Renter, his
given to the joint renters who are the petitioner and the Pugaos. The guard key authorized agent or legal representative; and
of the box remained with the respondent Bank; without this key, neither of the 2. Under paragraph 13, the Bank is not a depository of the contents of
renters could open the box. On the other hand, the respondent Bank could not the safe and it has neither the possession nor the control of the
likewise open the box without the renter's key. In this case, the said key had a same. The Bank has no interest whatsoever in said contents, except
duplicate which was made so that both renters could have access to the box. as herein provided, and it assumes absolutely no liability in
connection therewith.
Neither could Article 1975 be invoked. The first paragraph thereof cannot apply
to a depositary of certificates, bonds, securities or instruments which earn The bank also contended that its contract with the plaintiff was one of lease
interest if such documents are kept in a rented safety deposit box. It is clear and not of deposit and, therefore, governed by the lease agreement which
that the depositary cannot open the box without the renter being present. should be the applicable law. It further claimed that the destruction of the
petitioner’s stamps collection was due to a fortuitous event which is beyond its
The prevailing rule is that the relation between a bank renting out safe-deposit obligation to notify the petitioner since there was no showing of respondent’s
boxes and its customer with respect to the contents of the box is that of a participation in the aggravation of the loss or injury.
bailor and bailee, the bailment being for hire and mutual benefit.
ISSUE:
Note that the primary function is still found within the parameters of a contract W/N a contract of deposit exists between the parties to hold the bank liable for
of deposit, the receiving in custody of funds, documents and other valuable the damaged stamp collections.
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. RULING: YES
A contract of deposit may be entered into orally or in writing and, pursuant to The SC cited the case of CA Agro. It observed that the two provisions in the
Article 1306, the parties thereto may establish such stipulations, clauses, terms contract of lease are strikingly familiar as well as the limitation on the scope of
and conditions as they may deem convenient, provided they are not contrary the exercise of due diligence by the banks which would seem that the bank is
to law, morals, good customs, public order or public policy. Accordingly, the not bound to exercise diligence of any kind at all. Hence, as held in the case of
depositary would be liable if, in performing its obligation, it is found guilty of CA Agro, such provisions must be stricken down for being contrary to law and
fraud, negligence, delay or contravention of the tenor of the agreement. In the public policy as they are meant to exempt the respondent from any liability for
absence of any stipulation prescribing the degree of diligence required, that of damage, loss or destruction of the contents of the safety deposit box which
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may arise from its own or its agents' fraud, negligence or delay. Accordingly, Now, GENERAL RULE, the depositary may commingle grain or other articles of
respondent cannot take refuge under the said conditions. the same kind and quality. Various depositors of the commingled goods shall
own the entire mass in common in proportionate shares.
It is true that the damage to the stamp collection was due to a fortuitous event.
However, the respondent failed to consider that it was guilty of negligence. The For example, you have a warehouse, there are 100 sacks of rice. You deposited
bank was aware of the floods of 1985 and 1986; it also knew that the there 10. If there is a fortuitous event, there is a loss, each depositor shall be
floodwaters inundated the room where the safe deposit box was located. In entitled to such portion of the entire mass. (The depositors will suffer the loss
view thereof, it should have notified the petitioner in order that the box could proportionately.) However, if the parties stipulate otherwise, commingling is
have been opened to retrieve the stamps, thus saving the same from further not allowed.
deterioration and loss. In this respect, it failed to exercise the reasonable care Again, this is another exception. If subject of the deposit is grain or other
and prudence expected of a good father of a family, thereby becoming a party articles of the same kind and quality, pwede ihalo, unless otherwise stipulated.
to the aggravation of the injury or loss. Accordingly, the fourth characteristic of If it is allowed to be commingled, in the absence of stipulation, what will be
a fortuitous event is absent pursuant to Article 1170 of the CC which provides returned by the depositary is ‘the same kind and quality’ na. That is allowed in a
that those who in the performance of their obligation are guilty of fraud, contract of deposit.
negligence, or delay, and those who in any manner contravene the tenor
thereof, are liable for damages. If it is not of the same kind and quality, the duty of the depositary is to keep
them separate or at least identifiable. He must return to the depositor the
The destruction or loss of the stamp collection which was the product of 27 identical article delivered.
years of patience and diligence caused the petitioner pecuniary loss; hence, he
must be compensated therefor.
Art. 1977.
Discussion: (In comparing the cases of Sia and Agro): A safety deposit box in a The depositary cannot make use of the thing deposited without the express
bank is a special kind of deposit and not an ordinary one. It is not an ordinary permission of the depositor. Otherwise, he shall be liable for damages.
contract because the full control and the possession of the safety box is within However, when the preservation of the thing deposited requires its use, it
the premises of the bank and the renters cannot open it at will. This can be seen must be used but only for that purpose. (1767a)
when the bank has records on who can access it and the bank is in possession of
a guard key for which without it, the renter cannot open the safety deposit box. Deposit is for safekeeping and not for use. Unauthorized use may make the
Going back to Art 1975 paragraph 2, this sentence would mean that the safety depositary liable for damages. BUT, the depositary may use the thing even
deposit boxes is not governed by the rules on deposit and even in the rules on without the express permission of the depositor? When? If such use is
lease. The SC adopted from an American jurisprudence which essentially states necessary for the preservation of the thing. Of course, it is limited for that
that the relationship between a bank, with regards to a safety deposit box and purpose only.
its customer concerning the former’s contents is that of a bailor-bailee.
What property requires use for its preservation? Dba, sasakayan. Paandarin mo
In the case of Agro, there was no showing that the bank was made aware of any yan. Wag mo lang i-drive from Davao to Panabo.
agreement between Agro and the spouses. As to the bank, it only had What else? Appliances. Paandarin mo yan para hindi madali masira.
knowledge as to who is allowed to access the safety deposit box, which was an
authorized representatives of Agro or the spouses. The bank here, was not held Now, what happened in the case of Baron vs David.
liable since it did not know that both the representative and one of the spouses
should be present in opening the box. Take note that there is no change of BARON vs. DAVID
relation even if the bank is not aware of the content. Even if the stipulation FACTS:
absolving the bank’s liability is void, it does not automatically mean that the Respondent David is engaged in running a rice mill where petitioners Silvestra
bank is the one liable. The seeking for relief should prove that the bank Baron and Guillermo Baron placed a quantity of their palay. Silvestra
committed fraud, negligent or was made aware of the agreement between Agro deposited 1000 cavans and 24 kilos while Guillermo placed 1,800 cavans and
and the spouses. 43 kilos.
In the case of Sia, the bank was held liable because the safety deposit box which On January 17, 1921, a fire occurred that destroyed the mill and its contents.
kept the stamps was in the lower portion of the premises. There was a flood As a result, petitioner sought the recovery of the value of the palay. Petitioner
because at the first instance that it had happened, it should have informed Sia alleged that the palay which they delivered was sold to respondent.
of the said flood since the bank cannot open the safety deposit box without the
presence of the depositor. The bank here was clearly guilty of negligence. So, Respondent countered that the palay was merely deposited to him subject to
any stipulation exempting the bank from liability is not binding. The bank was future withdrawal by the depositors or subject to some future sale which was
aware of the flood, knew that the flood waters affected the room where the never effected by virtue of the fire in January 1921. As a consequence of the
safety deposit boxes were located, it should have notified Sia about the flood fire, he is relieved from all responsibility.
and could have saved it from further deterioration or loss. The bank failed to
exercise the reasonable care and prudence expected of a good father of a ISSUE: W/N a contract of deposit exists between the parties.
family hence it is liable for the deterioration or loss. The obligor must be free
from any participation in the aggravation or the injury resulting to the creditor. RULING: NO (the SC said that it could be commodatum or mutuum under
Article 1768 but actually it is a contract of sale since the plaintiffs are seeking
the proceeds of their palay)
DEIPARINE
Novemver 29,2016 Under article 1768 of the Civil Code, when the depository has permission to
Part 3 of 3 make use of the thing deposited, the contract loses the character of mere
Art. 1976. deposit and becomes a loan or a commodatum; and of course by
Unless there is a stipulation to the contrary, the depositary may commingle appropriating the thing, the bailee becomes responsible for its value.
grain or other articles of the same kind and quality, in which case the various
depositors shall own or have a proportionate interest in the mass. (n) In this case, petitioner placed the palay in question in the respondent’s mill
with the understanding that the respondent was at liberty to convert it into
Alright, remember the general rule in a contract of deposit. What’s the rice and dispose of it at his pleasure. The mill was actively running during the
obligation of the depositary? To return the exact same thing deposited. entire season thus it was impossible to keep the petitioner’s palay segregated.
In fact the respondent admits that the petitioner’s palay was mixed with that
Article 1976 is an exception wherein the thing deposited can now be of others.
commingled with the same kind and quality.
Considering the fact that the defendant milled and thereafter sold the
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plaintiffs' palay prior to the date of the fire, he should be bound to account for former.
its value, and his liability was not extinguished by the occurrence of the fire.
When the obligation became due, the defendants went to the plaintiff’s office
As to the argument of the defendant’s lawyer that in order for the plaintiffs to begged the plaintiff for an extension of time for the payment thereof but this
recover, it is necessary that they should be able to establish that the plaintiffs' time, the ‘deposit’ was subject interest.
palay was delivered in the character of a sale, and prove that the delivery to
the defendant was made in the character of deposit, the Supreme Court held Later on, the plaintiff sued the defendants to collect the amount deposited
that for even supposing that the palay may have been delivered in the together with its interest.
character of deposit, subject to future sale or withdrawal at plaintiffs'
election, nevertheless if it was understood that the defendant might mill the ISSUE: W/N there was a contract of deposit.
palay and he has in fact appropriated it to his own use, he is of course bound
to account for its value under article 1768 of the Civil Code. RULING: NO
Article 1768 provides that “When the depository has permission to make use
What is the agreement of the parties to make it ‘not’ a contract of deposit? You of the thing deposited, the contract loses the character of a deposit and
have to determine what is the obligation here of the petitioner. becomes a loan or bailment.
The agreement was that it can be converted. So, to convert the palay into rice. In this case, when defendant Lim went to the office of the plaintiff asking for
What will be the obligation of the defendant? It would be the payment of the an extension of one year neither himself nor the other defendant were able to
palay. return the amount deposited, for which reason he agreed to pay interest at
the rate of 15 per cent per annum, it was because, as a matter of fact, he did
Was there a conversion of contract of deposit to sale? Or was there really a not have in his possession the amount deposited, he having made use of the
contract of sale? Was the purpose really for safekeeping in the first place? same in his business and for his own profit; and the plaintiff, by granting them
the extension, evidently confirmed the express permission previously given to
DISCUSSION: use and dispose of the amount stated as having been deposited.
So here, the understanding between the parties is that the defendant was at
liberty to convert the palay that was delivered, into rice, and dispose of it at his For this reason it must be understood that the debtors were lawfully
pleasure. It was not really for safekeeping. authorized to make use of the amount deposited, which they have done, as
subsequent shown when asking for an extension of the time for the return
Moreover it was impossible to keep the plaintiff’s palay segregated, and it was thereof, inasmuch as, acknowledging that they have subjected the letter, their
quite certain that the plaintiff’s palay had already been milled and disposed creditor, to losses and damages for not complying with what had been
prior to the fire. Considering that the defendant had milled and sold the palay stipulated, and being conscious that they had used, for their own profit and
prior to the fire, he is bound to account for its value and his liability was not gain, the money that they received apparently as a deposit, they engaged to
extinguished by the occurrence of the fire. Value---money. Genus never pay interest to the creditor from the date named until the time when the
perishes. refund should be made. Such conduct on the part of the debtors is
unquestionable evidence that the transaction entered into between the
Even supposing that the palay had been delivered in the character of a deposit interested parties was not a deposit, but a real contract of loan.
subject to future sale, nevertheless, it was understood that the defendant might
mill the palay and he has in fact appropriated it to his own use, he is bound to Why is it a loan and not a deposit? Isn’t it that the contract referred to a
account for its value. contract of deposit?
Can we say that at the renewal of the contract there was conversion to loan?
Art. 1978. No, ma’am. The SC said there was no renewal of the contract. In this case
When the depositary has permission to use the thing deposited, the contract ma’am, the petitioner received the money by virtue of the loan and they were
loses the concept of a deposit and becomes a loan or commodatum, except authorized to dispose it.
where safekeeping is still the principal purpose of the contract.
Why is it the SC considered it as a loan? What was the obligation of Lim here?
The permission shall not be presumed, and its existence must be proved.
(1768a) The obligation of Lim here is to return the same amount ma’am, and not the
exact thing that was given. Alright!
So here, there was no intention for safekeeping, even if it was a deposit. xxx
inaudible xxx DISCUSSION:
So here, remember, the parties initially referred to the agreement as a deposit
So here (referring to Baron case), the obligation is not extinguished by the and even the obligation referred to as the obligation to return.
happening of a fortuitous event, because AGAIN, MONEY is the subject matter.
It is a generic thing. Genus never perishes. But actually, the subsequent contract entered into show that the true intention
from the very beginning was a real loan of money with interest.
Now, do take note, if the things deposited is not consumable, and the Notwithstanding that they referred to it as a contract of deposit.
depositary is allowed to use, it will now lose its character as a deposit and
become commodatum despite being denominated as a deposit. There was no obligation to return the exact same thing of which the amount
Unless if safekeeping was the principal purpose of the contract. deposited consisted. And they could have accomplished the return, agreed
upon by the delivery of a sum equal to the one received by them.
If what was deposited is a money or consumable thing, and the depositary is
allowed to use, it will result into consumption. It will convert the contract to a So take note of the distinction of a deposit and a loan.
simple loan or mutuum.
Debtors are lawfully authorized to make use of the amount deposited, which
However, if the safekeeping is still the principal purpose, it will now be they have done. The creditor, by granting them the extension, confirmed the
considered as an irregular deposit, which will be discussed under Article 1980. express permission previously given them to use and dispose of the amount
But before that, we have the case of Javellana vs Lim. stated as having been deposited.
JAVELLANA vs. LIM There was no renewal of the deposit converted into loan because again the
FACTS: defendants from the very beginning received the said amount by virtue of a
Defendants Lim and plaintiff Javellana entered into a contract of deposit loan under the name of a deposit. But again it is actually a contract of loan.
whereby the latter deposited, without interest, the sum of P2686 to the
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Always look at the intention of the parties and not at the nomenclature that are ISSUE: W/N a contract of loan exists between the parties.
used.
RULING: YES
Although petitioner repeatedly calls it a deposit, the contract between him
Art. 1979. and respondent is a contract of loan. Furthermore, he cannot maintain his
The depositary is liable for the loss of the thing through a fortuitous event: claim of deposit in view of the fact that the instrument provides for the
(1) If it is so stipulated; payment of interest.
(2) If he uses the thing without the depositor's permission; There are three points of difference between a loan and an irregular deposit
(3) If he delays its return; according to Manresa.
(4) If he allows others to use it, even though he himself may have 1. In an irregular deposit the only benefit is that which accrues to the
been authorized to use the same. (n) depositor, while in loan the essential cause for the transaction is
the necessity of the borrower. The contract in question does not
So, general rule, the depositary is not liable for loss during a fortuitous event, fulfill this requirement. It is very apparent that the contract was
without his fault. We have 4 exceptions under 1979: so stipulated, he uses the not for the sole benefit of petitioner but it was for the benefit of
thing without permission, he delays its return and he allows others to use it, both parties. The benefit which respondent received was the use of
even though he himself may have been authorized to use the same. the money while the benefit which petitioner received was the
interest of his money.
Relate that to Article 1973. 2. In an irregular deposit the depositor has a preference over other
creditors in the distribution of the debtor's property
Art. 1973. 3. In an irregular deposit, the depositor can demand the return of the
Unless there is a stipulation to the contrary, the depositary article at any time, while a lender is bound by the provisions of the
cannot deposit the thing with a third person. If deposit with a contract and cannot seek restitution until the time for payment, as
third person is allowed, the depositary is liable for the loss if provided in the contract, has arisen. It is apparent from the terms
he deposited the thing with a person who is manifestly of the document that the petitioner could not demand his money
careless or unfit. The depositary is responsible for the at any time. He was bound to give notice of his desire for its return
negligence of his employees. (n) and then to wait for six months before he could insist upon
payment.
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to declare it as a preferred creditor. Petitioner alleged that it delivered P10k Lim's own account who are the rightful owners thereof. They further
to Mariano Velasco & Co. They agreed that the amount will earn an interest at contended that by virtue of the Holdout Agreement, petitioner has the duty to
the rate of 6% per annum until its full payment for the term of three months. debit the account of the respondent under the promissory note to set off the
According to petitioner, the said transaction was at least a contract of loan even though the same has no fixed maturity.
irregular deposit. As proof thereof, petitioner presented a receipt in writing
and the testimony of the manager of the respondent partnership. ISSUE: W/N BPI can demand payment of the loan despite the existence of the
Holdout Agreement.
ISSUE: W/N the claim of petitioner should be considered a deposit.
RULING: YES
RULING: NO but it was a contract of loan It is clear from the Holdout Agreement that BPI had every right to demand
The claim of the petitioner should not be considered a deposit and a preferred from respondents the payment of the promissory note. However, it has no
claim. The P10k delivered by petitioner to Mariano Velasco and Co. cannot de duty to apply or to set off the deposit to the payment of a loan for such is
regarded as a technical deposit. As ruled in the case of Javellana, the receipt in merely a privilege which the bank has the option to exercise.
writing is actually a real contract of loan of money with interest
notwithstanding the fact that in the original document executed by the The Holdout Agreement further provides that petitioner is not precluded from
debtors it is called a deposit. Not only this, they engaged to pay interest to the demanding payment from Eastern and from instituting an action to recover
creditor from the date named until the time when the refund should be made. payment of the loan, which are alternative actions. Hence, when petitioner
demanded payment of the debt directly from Eastern and Lim, clearly it had
In the case of Rogers vs. Smith, Manresa made three distinctions between an opted not to exercise its right to apply part of the deposit subject of the
irregular deposit and a loan which are not present in the present case. For Holdout Agreement to the payment of the promissory note. The "suspensive
one, the transaction in question was clearly not for the sole benefit of the condition" theory of the petitioner is, therefore, untenable.
Compania Agricola but it was evidently for the benefit of both parties. Neither
could the alleged depositor demand payment until the expiration of the term Important ruling
of three months. Pursuant to Article 1980, bank deposits are in the nature of irregular deposits.
They are really loans because they earn interest. The relationship then
Why is this a contract of loan and not an irregular deposit? That is exactly the between a depositor and a bank is one of creditor and debtor. The deposit
point of this case. Using the distinction mentioned in the case, why is this not under the questioned account was an ordinary bank deposit. Hence, it was
deposit? First, in an irregular deposit, the only benefit is that which accrues to payable on demand of the depositor.
the depositor, while in a loan the essential cause for the transaction is the
necessity of the borrower. What else? In an irregular deposit, the depositor can The account was proved and established to belong to Eastern even if it was
demand the return of the thing at any time while the lender is bound by the deposited in the names of Lim and Velasco. As the real creditor of the bank,
provisions of the contract and cannot seek restitution until the time of payment Eastern has the right to withdraw it or to demand payment thereof. BPI
as provided in the contract has arisen. In this case, the purpose is not for the cannot be relieved of its duty to pay Eastern simply because it already allowed
sole benefit of Compania Agricola. It was for the benefit of both parties. Neither the heirs of Velasco to withdraw the whole balance of the account. The
can the alleged depositor demand the return of the thing until the expiration of petitioner should not have allowed such withdrawal because it had admitted
the term of three months. So here, we have a contract of loan without in the Holdout Agreement the questioned ownership of the money deposited
preference, which is one of the distinctions which was also mentioned in the in the account really belongs to Eastern.
case of Rogers v. Smith. So an irregular deposit enjoys preference while a simple
loan does not. Moreover, the order of the court in the estate proceeding merely authorized
the heirs of Velasco to withdraw the account. BPI was not specifically ordered
What about in the case of BPI v. Court of Appeals, Roel? to release the account to the said heirs.
BPI vs. COURT OF APPEALS Because the ownership of the deposit remained undetermined, BPI, as the
FACTS: debtor with respect thereto, had no right to pay to persons other than those
Respondents Eastern Plywood Corporation and Lim hold one joint account in whose favor the obligation was constituted or whose right or authority to
with the Commercial Bank. Mariano Velasco opened a joint checking account receive payment is indisputable. The payment made by BPI to the heirs of
with Lim in the amount of P120k with funds withdrawn from the account of Velasco, even if done in good faith, did not extinguish its obligation to the true
Eastern and/or Lim. depositor, Eastern.
Later on, Velasco died leaving an outstanding balance of P662,522.87 in the In conclusion, respondents are ordered to pay the petitioner the promissory
account. Lim then transferred one-half of the balance amount to the bank note for P73k with interest at 14% per annum on the principal, computed
account of Eastern. from the date the loan was obtained (August 1978) until payment and 12%
per annum on the interest which had accrued up to the date of the filing of
Thereafter, Eastern obtained a loan with interest at 14% per annum from the complaint, computed from that date until payment pursuant to Article
COMTRUST evidenced by a promissory note. In addition, Eastern and Lim, and 2212 of the CC. The award of P331,264.44 in favor of the private respondents
COMTRUST signed a Holdout Agreement in the joint name of Lim and Velasco. shall bear interest at the rate of 12% per annum computed from the filing of
In the meantime, the court in the proceeding for the settlement of the estate the counterclaim.
of Velasco authorized Velasco’s heir to withdraw the whole remaining balance
in the joint account of Velasco and Lim. So here, the Supreme Court mentioned Article 1980.
Later on, petitioner filed a case against Lim and Eastern demanding payment Art. 1980. Fixed, savings, and current deposits of money in banks and similar
of the promissory note. Lim and Eastern, in turn, filed a counterclaim against institutions shall be governed by the provisions concerning simple loan. (n)
BPI for the return of the balance in the joint account subject of the Holdout
Agreement and the interests thereon after deducting the amount due on the Bank deposits are in the nature of irregular deposits. They are really loans. We
promissory note. apply the rule on loans because they earn interest and the relationship is that of
Petitioner contended that the Holdout Agreement was subject to a suspensive a creditor-debtor. The deposit under the questioned account is an ordinary
condition that the balance shall become a security for Lim’s promissory note bank deposit and it was payable on the demand of the depositor- in this
only if respondents interests to that amount are established as a result of a instance, Eastern.
final and definitive judicial action or a settlement between and among the
contesting parties thereto. What happened in the case of Metrobank?
Respondents denied that a suspensive condition exists since the money METROBANK vs. BA FINANCE
deposited in the joint account of Velasco and Lim came from Eastern and FACTS:
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Bitanga obtained a loan from respondent BA Finance. As a security thereof, What happened in the case of Reyes v. Court of Appeals?
Bitanga mortgaged his car. In the contract, Bitanga has the duty to insure the
mortgaged car and that in case of loss shall be payable to BA Finance. Bitanga REYES vs. COURT OF APPEALS
insured the car to Malayan Insurance Co. FACTS:
In view of the 20th Asian Racing Conference to be held in Sydney, Australia,
The car was stolen causing Malayan Insurance to issue a check as payment petitioner Reyes applied to respondent Far East Bank for a foreign exchange
thereof. However, without the indorsement or authority of his co-payee BA demand draft in Australian dollars.
Finance, Bitanga deposited the check to his account with the Asianbank
Corporation, which is now merged with petitioner Metrobank. Bitanga At first, the application was denied because respondent did not have an
subsequently withdrew the entire proceeds of the check. Australian dollar account in any bank in Sydney. Nevertheless, petitioner
asked if there could be a way for respondent bank to accommodate PRCI's
Upon knowledge thereof, respondent BA Finance demanded the payment of urgent need to remit Australian dollars to Sydney. The respondent bank then
the value of the check from Asianbank. However, Asianbank failed to do so. informed them of a roundabout way of effecting the requested remittance to
This caused respondent to file a complaint against Asianbank and Bitanga Sydney. Respondent explained that it would draw a demand draft against
alleging that it is entitled to the entire proceeds of the check. Westpac Bank in Sydney and have the latter reimburse itself from the US
dollar account of the respondent in Westpac Bank in New York. Petitioner
Petitioner denied liability alleging that BA Finance has no cause of action since agreed to such arrangement in order to effect the urgent transfer of
it has no legal right and title to the check considering that the check was not Australian dollars
delivered to BA Finance.
The trial court ruled that Asianbank was negligent in allowing Bitanga to The respondent bank approved the said application of PRCI and issued Foreign
deposit the check to his account and to withdraw the proceeds thereof Exchange Demand Draft. However, upon due presentment of the foreign
without his co-payee BA Finance having either indorsed it or authorized him exchange demand draft, it was dishonored because the respondent bank has
to indorse it in its behalf. It further ordered Asianbank and Bitanga jointly and no deposit dollar account with the drawee Wespac-Sydney.
severally liable to BA Finance in the sum of P224,500 with interest thereon at
the rate of 12% from the date of the demand (September 25, 1992) until fully Later on, when petitioners went to Sydney to attend the said racing
paid. conference, they could not register because the foreign exchange demand
draft for their registration fee had been dishonored. As a result, petitioners
ISSUES: filed a case against the respondent bank.
1. W/N petitioner is liable to respondent BA Finance. YES
2. W/N the 12% interest rate is proper. NO The CA ruled that there is no basis to hold the respondent bank liable for
damages for the reason that the had done what an ordinary prudent person is
RULING: required to do in the particular situation, although petitioners expect the Bank
First issue to have done more. The Bank having done everything necessary or usual in
In the present case, Bitanga is authorized to indorse the check as the drawer the ordinary course of banking transaction, cannot be held liable for any
names him as one of the payees. Moreover, his signature is not a forgery nor embarrassment and corresponding damage that petitioners may have
has he or anyone forged the signature of the representative of BA Finance incurred.
Corporation. No unauthorized indorsement appears on the check.
The petitioners contend that due to the fiduciary nature of the relationship
Clearly, petitioner, through its employee, was negligent when it allowed the between the respondent bank and its clients, the respondent should have
deposit of the crossed check, despite the lone endorsement of Bitanga, exercised a higher degree of diligence than that expected of an ordinary
ostensibly ignoring the fact that the check did not carry the indorsement of BA prudent person in the handling of its affairs as in the case at bar. The appellate
Finance. court, according to petitioners, erred in applying the standard of diligence of
an ordinary prudent person only.
As has been repeatedly emphasized, the banking business is imbued with
public interest such that the highest degree of diligence and highest standards ISSUE: W/N the bank is liable for failure its to exercise higher degree of
of integrity and performance are expected of banks in order to maintain the diligence as required.
trust and confidence of the public in general in the banking sector.
RULING: NO
Second issue In Philippine Bank of Commerce vs. CA, it was ruled that the degree of
Nevertheless, the trial court’s grant of legal interest of 12% per annum on the diligence required of banks, is more than that of a good father of a family
value of the check is not proper. The obligation in this case did not arise out of where the fiduciary nature of their relationship with their depositors is
a loan or forbearance of money, goods or credit. Hence, Article 1980 of the CC concerned. In other words banks are duty bound to treat the deposit accounts
does not apply since the nature of the relationship between BA Finance and of their depositors with the highest degree of care. However, such applies
petitioner is one of agency whereby petitioner, as collecting bank, is to collect only to cases where banks act under their fiduciary capacity, that is, as
for BA Finance the corresponding proceeds from the check. depositary of the deposits of their depositors. The same higher degree of
diligence is not expected to be exerted by banks in commercial transactions
Not being a loan or forbearance of money, the interest should be 6% per that do not involve their fiduciary relationship with their depositors.
annum computed from the date of extrajudicial demand on September 25,
1992 until finality of judgment; and 12% per annum from finality of judgment In the present case, the respondent bank was not required to exert more than
until payment, conformably with Eastern Shipping Lines vs. Court of Appeals. the diligence of a good father of a family in regard to the sale and issuance of
the subject foreign exchange demand draft.
The Supreme Court emphasized that what we have here is a contract of Agency.
The bank is a collecting bank to collect for the BA finance for the corresponding The case at bar does not involve the handling of petitioners' deposit, if any,
proceeds of the check. As to the diligence, the same degree of diligence is with the respondent bank. Instead, the relationship involved was that of a
required from the bank with that in a contract of agency and even in a simple buyer and seller, between the respondent bank as the seller of the subject
deposit. foreign exchange demand draft, and PRCI as the buyer, with the 20th Asian
Racing conference Secretariat in Sydney as the payee thereof. The said foreign
With regard to the application interest, the Supreme Court emphasized that exchange demand draft was intended for the payment of the registration fees
Article 1980 does not apply because not being a loan or forbearance of money, of the petitioners as delegates of the PRCI to the 20th Asian Racing Conference
we have a contract of agency, and the interest should be 6% per annum from in Sydney.
the date of the extrajudicial demand and 12% per annum from the finality of
judgment. The evidence shows that the respondent bank did everything within its power
to prevent the dishonor of the subject foreign exchange demand draft. The
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erroneous reading of its cable message to Westpac-Sydney by an employee of fixed, savings, or current are to be treated as loans and are to be covered by
the Westpac-Sydney could not have been foreseen by the respondent bank. If the law on loans.
there was mistake committed by Westpac-Sydney in decoding the cable
message which caused the Bank's message to be sent to the wrong Hence, the relationship between PR David and the NSLS is that of creditor and
department, the mistake was Westpac's, not the Bank's. debtor. Consequently, the ownership of the amount deposited was
transmitted to the Bank upon the perfection of the contract and it can make
In conclusion, the dishonor of the subject foreign exchange demand draft is use of the amount deposited for its banking operations, such as to pay
not attributable to any fault of the respondent bank, whereas the petitioners interests on deposits and to pay withdrawals.
are estopped from denying the said arrangement or procedure, which have
been a long standing practice in banking to facilitate international commercial While the Bank has the obligation to return the amount deposited, it has no
transactions. obligation to return or deliver the same money that was deposited. And, the
failure of the Bank to return the amount deposited will not constitute estafa
The degree of diligence required of banks is more than that of a diligence of a through misappropriation punishable under Article 315(1)(b) of the RPC, but it
good father of a family where the fiduciary relationship with their depositors is will only give rise to civil liability over which the City Fiscal has no jurisdiction.
concerned – in the case for example of irregular deposits. The banks are duty-
bound to treat the deposit accounts of their depositor with the highest degree Even assuming that the failure of the bank to pay the time and savings
of care. Again, this applies only where the banks act under their fiduciary deposits of PR David would constitute estafa, novation resulted when
capacity- that is as depositary of the deposits of their depositors. The same high petitioners assumed the obligation of the bank to PR David thereby converting
degree of diligence is not expected to be exercised by banks in their commercial the original trust relation between the bank and PR David into an ordinary
transactions that do not involve the fiduciary relationship with their depositor. debtor-creditor relation between the petitioners and David. Consequently, the
failure of the bank or petitioners to pay the deposits of PR David would not
While it may be true that the spouses Reyes are depositors of the respondent constitute a breach of trust but would merely be a failure to pay the obligation
bank- they have money in the bank, the transactions involved here between the as a debtor.
bank and Reyes does not involve the fiduciary relationship. Therefore, the
respondent bank is not required to exert more than the diligence of a good What is the nature of the contract involved when David put his money in the
father of a family because what is involved here is the sale and issuance of the Time deposit? It was considered as a simple loan or Mutuum and not of a
subject Foreign Exchange Demand Draft. The relationship here is just that of a contract of deposit for the purpose of safekeeping wherein the bank is expected
buyer and seller. So the bank is not required to exercise extraordinary diligence. to return the exact same thing that he deposited in the bank. Again the
The bank here was able to prove that they exercised ordinary diligence and was Supreme Court emphasized that current savings ad deposits in banks and
in good faith. similar institutions are not true deposit. They are really loans because they earn
interest. Failure of the bank to honor the deposits is failure of the bank to pay
Daphny, how about in the case of Guingona? its obligation as a debtor.
GUINGONA vs. CITY FISCAL Remember the effect of a loan – transfer of the ownership of the thing upon
FACTS: delivery. While the bank has the obligation to return the amount deposited, it
PR David, together with his sister, invested and deposited with the Nation has no obligation to return the very same money that was deposited. Failure of
Savings and Loan Association (NSLA) certain amounts of money. However, the the bank to return the amount deposited will not amount to Estafa through
bank was placed under receivership on March 1981. Nevertheless, upon the misappropriation. It will only give rise to civil liability. In order for a person to be
request of PR David, petitioners Guingona assumed the bank’s obligation to held liable for Estafa through misappropriation, it must be proven that he has
PR David by executing a joint promissory note in his favor thereby the obligation to return the same money or personal property that he received.
acknowledging the bank’s indebtedness. The amount of indebtedness Petitioners in this case have no such obligation to return the same money.
assumed appeared to be bigger than the original claim because of the added
interest and the inclusion of other deposits of PR’s sister. Dorothy, how about in the case of Province of Bataan?
When petitioners failed to pay the remaining balance of the investment, PR
David charged petitioners Guingona with estafa and for violation of the PROVINCE OF BATAAN vs. VILLAFUERTE
regulations on foreign exchange transactions. PR alleged that petitioners FACTS:
misappropriated the said amounts. A real property referred as the BASECO property was advertised for auction
sale. No bidder vied for the property thus the Province of Bataan acquired
Petitioners denied any criminal liability. They alleged that because NSLA was ownership thereof.
urgently in need of funds and at David's insistence, his investments were
treated as special- accounts with interest above the legal rate. In other words, Later on, the Province of Bataan entered into a 10-year contract of lease with
the transactions between David and NSLA were simple loans which is a purely 7-R Port Services for a minimum escalating annual rental of P18M. Another
civil obligation. Being such, the case should be dismissed for lack of contract of lease was also entered into between the Province of Bataan and
jurisdiction. Marina Port Services.
The City Fiscal of Manila denied the motion to dismiss. However, the auction sale of the BASECO property was subsequently declared
null and void by court order. The Province of Bataan was ordered to reconvey
ISSUE: W/N a contract of deposit exists between the parties to hold the property to the Republic of the Philippines including all the proceeds
petitioners liable for estafa. and/or the fruits that they have or may have receive from the property.
RULING: NO but a contract of loan or mutuum exists Not only this, upon learning of the lease contracts entered into by the
Petitioners’ liability is civil in nature and therefore the City Fiscal of Manila petitioner, the PCGG filed a petition to enjoin petitioner from collecting rental
does not have jurisdiction over the charge of estafa. payments from the lessees.
When PR David invested his money with the bank, the contract that was The trial court granted the petition and the Province of Bataan ordered to
perfected was a contract of simple loan or mutuum and not a contract of remit the lease rentals it may receive from the 7-R Port Services and the
deposit. Thus, pursuant to Article 1980, it should be noted that fixed, savings, Marina Port Services and to deposit it with the Land Bank of the Philippines in
and current deposits of money in banks and similar institutions are not true the name and/or account of the Court to be held in escrow for the person or
deposits but are considered simple loans and, as such, are not preferred persons, natural or juridical, who may be finally adjudged lawfully entitled
credits. thereto.
Furthermore, bank deposits are in the nature of irregular deposits. They are The Province of Bataan appealed the decision arguing that the trial court, or
really loans because they earn interest. All kinds of bank deposits, whether any court for that matter, is not authorized to issue such escrow order,
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whether as a provisional or permanent remedy absent any legal basis. Fault on the part of the depositary is presumed, unless there is proof to the
contrary.
ISSUE: W/N the order to deposit in escrow the rental payments pertaining to
the Province of Bataan is erroneous. As regards the value of the thing deposited, the statement of the depositor
shall be accepted, when the forcible opening is imputable to the depositary,
RULING: NO should there be no proof to the contrary. However, the courts may pass upon
An escrow is a written instrument which by its terms imports a legal obligation the credibility of the depositor with respect to the value claimed by him.
and which is deposited by the grantor, promisor, or obligor, or his agent with
a stranger or third party, to be kept by the depositary until the performance of When the seal or lock is broken, with or without the depositary's fault, he
a condition or the happening of a certain event, and then to be delivered over shall keep the secret of the deposit. (1769a)
to the grantee, promisee, or obligee.
While originally, the doctrine of escrow applied only to deeds by way of grant, Art. 1982.
or instruments for the conveyance of land, under modern theories of law, the When it becomes necessary to open a locked box or receptacle, the depositary
term escrow is not limited in its application to deeds, but is applied to the is presumed authorized to do so, if the key has been delivered to him; or
deposit of any written instrument with a third person. when the instructions of the depositor as regards the deposit cannot be
executed without opening the box or receptacle. (n)
Particular instruments which have been held to be the subject of an escrow
include bonds or covenants, deeds, mortgages, oil and gas leases, contracts These articles include additional obligations on the part of the depositary in
for the sale of land or for the purchase of personal property, corporate stocks relation to the nature of what has been delivered.
and stock subscriptions, promissory notes or other commercial paper,
insurance applications and policies, contracts for the settlement of will- If the thing delivered is closed and sealed, the depositary has the obligation to
contest cases, indentures of apprenticeship, receipts assigning concessions the return the thing exactly - closed and sealed. However, if the seal or lock
and discontinuances and releases of causes of action. Moreover, it is no should be broken, he should be liable for damages and there is a presumption
longer open to question that money may be delivered in escrow. that he is at fault, that he is the reason why the seal or lock has been broken,
and he has to show proof that he is not be liable for damages.
Applying the foregoing principles and considering the peculiarities of the
instant case, the lower court, in the course of adjudicating and resolving the Also, Article 1981, if the seal or lock is broken, regardless of whether the
issues presented in the main suit, is clearly empowered to control the depositary is at fault or not, the depositary has the obligation to keep sacred
proceedings therein through the adoption, formulation and issuance of orders the deposit. This obligations are emphasized, otherwise there's a violation of
and other ancillary writs, including the authority to place the properties in the trust reposed on the depositary. Remember, he must respect the secrets
custodia legis, for the purpose of effectuating its judgment or decree and the depositors desires to keep and guard, and this intention is because of the
protecting further the interests of the rightful claimants of the subject nature of the thing delivered - it is sealed and locked.
property.
As regards to the value deposited, statements of the value by the depositor
The courts’ authority proceeds from its jurisdiction and power to decide, shall be accepted. But this is only a prima facie evidence, as provided in the
adjudicate and resolve the issues raised in the principal suit. Stated third paragraph of Article 1981: the courts may pass upon the credibility of the
differently, the deposit of the rentals in escrow with the bank, in the name of statements made by the depositor with regard to the value claimed by him.
the lower court, is only an incident in the main proceeding. In conclusion, the
escrow orders of the lower court were upheld. Under Article 1982, when can the depositary be allowed to open a locked box
or receptacle delivered to him for safety? Only in two instances:
I included this case so you can familiarize yourselves with the term Escrow. As (a) a presumed authority which can arise if, for example, a key is given
defined, an escrow is a written instrument which by its terms imports a legal to him, or
obligation and which is deposited by the grantor (so what you have here is a (b) through necessity, when there were instructions given by the
contract of deposit), promisor, or obligor, or his agent with a stranger or third depositor and they cannot be executed without opening the box.
party, to be kept by the depositary (so its for the purpose of safekeeping) until
the performance of a condition or the happening of a certain event (take note
of that. That is one of the distinctions of an escrow arrangement), and then to
Art. 1983.
be delivered over to the grantee, promisee, or obligee. However, escrow is not The thing deposited shall be returned with all its products, accessories and
limited in its application to deeds, but is applied to the deposit of any written accessions.
instrument with a third person and money may be delivered to an escrow as
well. So what takes place here? Money subject to escrow for the purposes of Should the deposit consist of money, the provisions relative to agents in
safekeeping. But this cannot be considered as an irregular deposit because here article 1896 shall be applied to the depositary. (1770)
there is a specific purpose to which it will be kept by the depositary. The
arrangement for escrow, we have here the bank again with the condition that it
So who owns the products, accessories, and accessions of specific things? The
will be released upon the happening of a certain condition or event. Just take
owner. So the depositor, as the owner, or the representative or who represents
note of this escrow case.
the owner, he (the owner) should also be entitled to the return of the products,
accessories, and accessions. These are consequences of ownership. If what was
deposited was not money, the depositary has no right to make use of thereof,
FULGAR
otherwise it's not a contract of deposit anymore, and there is no liability to pay
December 6, 2016
interest. Recall Article 1978. Otherwise, if it involves money, we apply 1980 -
Part 1 of 3
irregular deposit. Likewise, you can also apply the rules with regard to agency
We emphasized the relevance of Article 1980, that when it comes to fixed,
under Article 1896.
savings, and current deposits of money in banks and similar institutions, they
shall be governed by the provisions concerning simple loan and not of the civil
Now, if the depositary is in delay or has used the money, he will be liable for
code provisions governing deposits.
interest as indemnity. He owes interest on the sums he has applied to his own
use, from the day on which he did so and those which he still owes after the
extinguishment of the deposit. In other words, no need for demand for you to
Art. 1981. be liable for interest.
When the thing deposited is delivered closed and sealed, the depositary must
return it in the same condition, and he shall be liable for damages should the
seal or lock be broken through his fault.
Art. 1984.
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The depositary cannot demand that the depositor prove his ownership of the
thing deposited. When there is solidarity or the thing does not admit of division, the
provisions of Articles 1212 and 1214 shall govern. However, if there is a
Nevertheless, should he discover that the thing has been stolen and who its stipulation that the thing should be returned to one of the depositors, the
true owner is, he must advise the latter of the deposit. depositary shall return it only to the person designated. (1772a)
If the owner, in spite of such information, does not claim it within the period
of one month, the depositary shall be relieved of all responsibility by Recall your obligations and contracts. Divisibility or indivisibility of a thing is
returning the thing deposited to the depositor. different from an obligation being solidary. That is also emphasized here in
1985. If the thing deposited is divisible, for example sacks of rice, and the
If the depositary has reasonable grounds to believe that the thing has not depositors are not solidary, in other words there is no stipulation that they will
been lawfully acquired by the depositor, the former may return the same. be solidarily liable, there is no law which provides that they are solidarily liable,
(1771a) and the obligations does not provide for solidarity, what would be the effect?
The depositary can only demand his proportionate share. But what if the
Ownership on the part of the depositor is not required for the validity of the obligation is solidary, or that there is a stipulation that the obligation is solidary;
deposit. Likewise, the depositary cannot require the depositor to prove that he or the thing deposited is not divisible, like a car. So obligation solidary or thing
owns the thing delivered because ownership is not required. Otherwise, this deposited not divisible. Article 1985 tells us that the rule on active solidarity
may open the door to bad faith on the part of the depositary. Why? Because of shall apply, so you have article 1212, 1214.
the pretense of requiring proof of ownership. Di ko to ibalik sayo unless you
show proof that you really own this subject matter. Then he can use that as a However, even if the depositors are solidary and it is stipulated that the
reason to retain or keep the thing, which again has no basis because ownership depositary is bound to return it to a specific or designated depositor, the
is not required for the perfection of the contract of deposit. depositary has to return the subject matter to him, although that person has
not made any demand for its return.
Article 1984 covers an instance wherein the depositary discovers that the thing
has been stolen and he knows who is thetrue owner. This imposes an obligation For example, Pedro and Juan deposited a car. Indivisible thing. They have
upon him, provided this two requisites are present. What are the steps he stipulated that Pedro is the one who is entitled to the return of the thing. If Juan
should take if he has knowledge that the thing in his possession for safekeeping made the demand, is the depositary obligated to return the thing to Juan? No,
has been stolen, and he knows who the true owner is? because of the stipulation. If there is a stipulation that the thing should be
returned to one of the depositors, the depositary shall return it only to the
First, he must advise the true owner that he is in possession of the thing subject person designated.
of the contract of deposit, and he will give the true owner a period of one
month to claim. The true owner has one month to claim. This 30 day period is
for the protection of the depositary. Art. 1986.
If the depositor should lose his capacity to contract after having made the
The true owner can recover through other legal process. What do you mean by deposit, the thing cannot be returned except to the persons who may have
that? If naglampas na yung 30 days form the time the true owner was informed the administration of his property and rights. (1773)
that the depositary was in the possession of the stolen thing, the depositary can
return the same to the depositor without any obligation to the true owner. The Do not confuse this with Article 1970. In Article 1970, at the time the contract
true owner cannot go after the depositary ("habulin kita for damages. Bakit gi of deposit was perfected, the depositor was already capacitated. As we learned
release mo doon sa depositor knowing that it has been stolen.") The defense of in Article 1970, the property must be returned to his, guardian, administrator,
the depositary "i informed you, but within 30 days you failed to claim. Under or to him, the depositor, should he acquire capacity.
the law I am authorized to release it to the depositor." On the part of the true
owner, he has other legal means to go after the depositor to recover the thing Article 1986 tells us that at the time of perfection, both were capacitated.
that was stolen. Subsequently, the depositor loses his capacity. 1986 imposes an obligation to
the depositary that the subject of the deposit must be returned to his legal
Also provided under 1984, last paragraph, if the depositary has reasonable representative. Article 1986 does not state that the obligation is suspended. So
grounds that the thing has not been lawfully acquired by the depositor, in other the obligation of the depositary continues plus the obligation that he return it
words, it may be stolen, but he does not know who the true owner is. What is to the legal representative of the depositor who has already lost his capacity.
the obligation here on the part of the depositary? He can return the thing to the
depositor. Also notice, he has no obligation to report it to the police, unless of
course, if by itself, it is an illegal substance. Kunwari drugs diay to. So I think it's Art. 1987.
best if i-report niya. Pero if the thing itself is lawfully required, the depositary If at the time the deposit was made a place was designated for the return of
has Article 1984 as his defense. the thing, the depositary must take the thing deposited to such place; but the
expenses for transportation shall be borne by the depositor.
The problem here may arise wherein it is not covered by 1984. What if he
knows who is the true owner, and he informs the true owner thereof that he If no place has been designated for the return, it shall be made where the
can claim within 30 days. Kaso bago pa nag-lapse ng 30 days, the depositor now thing deposited may be, even if it should not be the same place where the
demands for the return of the thing. Can the depositary refuse to return it to deposit was made, provided that there was no malice on the part of the
the depositor on the ground na "you'll wait for 30 days diba?" since he claims depositary. (1774)
that he is the true owner. There's actually no provision in the civil code
regarding this instance. But if you look at the nature of the contract of deposit, Compare this with Article 1251, the general rules with regard to ----- obligations.
if the depositor demands the return of the thing, the depositary has the
Of course, if you have a stipulation that will govern in the absence of stipulation
obligation to return the thing to the depositor. Otherwise, it would be contrary you have to consider whether the subject matter is a determinate thing or not.
to the nature of a contract of deposit. You can also use it as a defense as with
If it is a determinate thing, then it should be where the thing was at that time
regard to the true owner that the true owner has other legal remedies available the contract was perfected; which is different here because it states that even if
under the law, as long as here, ang depensa lang naman on the party of the it should not be the same place where the original deposit was made, where
depositary, is that he has performed his duties as a depositary. And under the
the thing deposited might be.
rules on depositary, he has the obligation to return it upon the demand of the
depositor, and in a succeeding article, even if it subject to a period.
Art. 1988.
The thing deposited must be returned to the depositor upon demand, even
Art. 1985. though a specified period or time for such return may have been fixed.
When there are two or more depositors, if they are not solidary, and the
thing admits of division, each one cannot demand more than his share.
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This provision shall not apply when the thing is judicially attached while in the should be given to the depositor. That is the obligation under 1990. Otherwise,
depositary's possession, or should he have been notified of the opposition of the depositary would unjustly enrich himself at the expense of the depositor.
a third person to the return or the removal of the thing deposited. In these
cases, the depositary must immediately inform the depositor of the
attachment or opposition. (1775) Art. 1991.
The depositor's heir who in good faith may have sold the thing which he did
This is the article referred to earlier, wherein the depositary has the obligation not know was deposited, shall only be bound to return the price he may have
to return the thing upon demand of the depositor. Remember the general rule: received or to assign his right of action against the buyer in case the price has
the depositor can demand the return of the thing deposited at will whether a not been paid him.
period has been stipulated or not. Whenever a period is agreed to, the same is
for the benefit of the depositor, but it may be validly waived by him. But what if The first thing you should take note here is that this refers to the depositary's
the deposit is subject to compensation. For example, the deposit is good for one heirs, not the depositor's heirs, because were talking about possession, and
year and then you have agreed that the compensation that the depositary is who is in possession? The depositary. So namatay yung depositary, and one of
entitled to is 1000/month. If the depositor demands for the return of the thing, his heirs noticed that there is this thing in the possession or among the things of
the depositor has the obligation to pay the depositary for the whole period the depositary. So the depositary dies, the object is left to the heirs and then
agreed upon. So bayaran niya yung 1000 per month for the whole year, that the heirs in good faith, sells it to another person. What is the obligation of the
was the agreement. The depositary is entitled to the compensation heirs? He must return the price received or if wala pa na-collect, assign to the
corresponding to the entire period agreed upon. depositor to collect the same if it has not been paid, and what is to be collected
is the purchase price and not the value of the thing. However, if the heir is in
The exception to the general rule: if the thing is judicially attached while in the bad faith, to which he acknowledges that the object is the subject matter of this
depositary's possession, of course he cannot return it upon demand of the deposit, the heir could be liable for damages. If the heir had knowledge of the
depositor. Otherwise, the depositary would be disobeying the judicial order of contract of deposit, any --- or appropriation of the thing deposited constitutes
he court. Another instance would be if he is notified of the opposition of a third estafa. Kasi alam man niya that it is subject to the safekeeping, but despite of
person to the return or the removal of the thing deposited. So the depositary that he sells the same to another person.
should only be authorized in case of conflicting claims. This is an exception to
which the depositary can continue to retain the thing if there is a third person The articles enumerate the obligations of the depositary. 1972 - to keep the
opposing the right of the depositor as to the return of the thing. The better step things safely, to return the thing as a general rule upon demand. 1989 - if
to be taken on the part of the depositary is to file before the court for an action gratuitous the depositary can return the same provided there is justifiable
for interpleader. This third person, magsamok samok lang. What could happen reason, the depositary likewise has the obligation to return the thing plus
is that the depositary can go and file before the court and file an action for products, accessories, and accession; if the thing is lost through a force majeure
interpleader, so that it will be resolved. Otherwise, forever niya ihold, to the or government order and he receives money or another thing in its place, the
detriment of the depositor, just because of a third person presupposing it depositary has the obligation to deliver the sum or the thing to the depositor.
without the filing of any case. So for the depository to be safe, it is better that Where to be delivered? By agreement, in the absence thereof, where the thing
the conflicting claims be submitted to the court to which the depositary can file is deposited; obligation not to deposit to a third person unless authorized;
an action for an interpleader. obligation under 1974 to change the way of deposit; the earning of interest
which we distinguished from the rent of safety deposit boxes; the obligation not
to comingle things if stipulated or if the things are of different kind and quality;
Art. 1989. obligation not to make use of the thing deposited unless authorized; liability for
Unless the deposit is for a valuable consideration, the depositary who may loss in cases of fortuitous events - what are those instances? Those are
have justifiable reasons for not keeping the thing deposited may, even before exceptions to the general rule; obligations when the thing deposited is closed or
the time designated, return it to the depositor; and if the latter should refuse sealed; obligation to pay interest to sum converted to personal use if deposit
to receive it, the depositary may secure its consignation from the court. consists of money; obligation to advise the true owner when discovered that
the thing deposited was stolen.
Sa 1988, the depositor demands the return of the thing. Sa 1989, the depositary
will be the one who will initiate the return of thing. With that, you determine if On the part of the depositor what are his general obligations? To pay expenses
the deposit is gratuitous or subject to compensation. If it is gratuitous, the for preservation, and to pay for losses incurred by the depositary due to the
depositary may return the thing deposited notwithstanding that a period has character of the thing deposited.
been fixed, but it must be for a justifiable reason. If the depositor refuses to
receive the thing, the depositary, as his remedy, can deposit the thing to a
judicial authority, through an action for consignation. When there is refusal to SECTION 3. - OBLIGATIONS OF THE DEPOSITOR
accept delivery, consignation may be resorted to. Art. 1992.
If the deposit is gratuitous, the depositor is obliged to reimburse the
Kasi gratuitous ito, so the law allows the depositary kasi wala namang depositary for the expenses he may have incurred for the preservation of the
ginabayad sa kanyan ang depositor, provided it is for a justifiable reason. If it is thing deposited.
for a valuable consideration, the depositary has no right to return the thing
deposited before the expiration of the time designated, even if he suffers This applies to a gratuitous deposit. The rule here is based on equity. Why?
inconvenience. Because form the very beginning, he already knew of the nature Becasue the depositor would have incurred expenses for preservation just the
and that it will be subject to compensation. same. Otherwise, the depositor would unjustly enrich himself at the expense of
the depositary. This is different from commodatum, Article 1941. In Article
1992, the depositor is the one obliged to reimburse the depositary. It covers the
Art. 1990. right to reimbursement from the depositor, covers all expenses for
If the depositary by force majeure or government order loses the thing and preservation, whether ordinary or extraordinary, as long as it is for necessary
receives money or another thing in its place, he shall deliver the sum or other expenses. Recall commodatum, you have to distinguish whether it is ordinary or
thing to the depositor. extraordinary. If it is extraordinary, is it for preservation of the thing or did it
arise from the use of the thing. In Article 1992, walang distinction. However, it is
Article 1972 - the obligation of the depositary to return the exact same thing also clear that with regard to useful expenses or charges for pure luxury or pure
that was deposited. Article 1990 provides the exception to which the thing was pleasure, these are not governed.
lost by force majeure or by government order. Of course the obligation of the
depositary will be extinguished. However, if the depositary receives money or What if the deposit is for compensation? The general rule is that the expenses
other things, he has the obligation to deliver the same to the depositor. If for shall be borne by the depositary. Why? Because these expenses are deemed
example, it’s not that often that a personal property may be expropriated, but already included in the consideration agreed upon by the parties. Of course, as
for example it is expropriated so may just compensation. The just compensation an exception, stipulation between the parties.
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Art. 1287.
NARCA Compensation shall not be proper when one of the debts
December 6, 2016 arises from a depositum or from the obligations of a
Part 2 of 3 depositary or of a bailee in commodatum.
Article 1993.
The depositor shall reimburse the depositary for any loss arising from the Neither can compensation be set up against a creditor who
character of the thing deposited, unless at the time of the constitution of the has a claim for support due by gratuitous title, without
deposit the former was not aware of, or was not expected to know the prejudice to the provisions of paragraph 2 of Article 301.
dangerous character of the thing, or unless he notified the depositary of the (1200a)
same, or the latter was aware of it without advice from the depositor. (n)
Now if the deposit is gratuitous, death of either depositor or depositary
The general is that a depositary must be reimburse for loss suffered by him extinguishes the deposit. Again noh, because here the depositary is not obliged
because of the character of thing deposited. It is possible that the thing to continue with the contract of deposit.
deposited is flammable or may chemical bah. So if there is a loss suffered by the
depositary, the depositor shall be held liable. However, take note of the four But if it is compensation, death of either party will not extinguish the deposit as
exceptions: the deposit is onerous and not personal as compared to a gratuitous deposit to
(1) If at the time of the constitution of the deposit, the depositor was which the rights and obligations may be transmitted to the respective heirs BUT
not aware of the character of thing deposited. the heirs have a right to terminate the deposit even before the expiration of the
(2) The depositor was not expected to know the dangerous character of term.
the thing.
(3) The depositary was notified of the character of the thing.
(4) The depositary was aware of it even if without any advice from the
depositor. III. NECESSARY DEPOSIT
Those four instances the depositary cannot seek reimbursement from any loss We continue with the NECESSARY DEPOSIT.
suffered.
Sabi natin 2 types of necessary deposit: VOLUNTARY and NECESSARY.
Art. 1994.
The depositary may retain the thing in pledge until the full payment of what CHAPTER 3. - NECESSARY DEPOSIT
may be due him by reason of the deposit. (1780) Art. 1996.
A deposit is necessary:
What is placed here is a pledge created by law wherein the thing subject of the (1) When it is made in compliance with a legal obligation;
deposit is retained by the depositary and serves as security for the payment of (2) When it takes place on the occasion of any calamity, such as fire,
what may due to the depositary by reason of the deposit. storm, flood, pillage, shipwreck, or other similar events. (1781a)
Like for example, the depositor shall be liable for the expenses for preservation
if the deposit is gratuitous. So meron na incur si depositary pwede siyang Art. 1997.
magpareimburse, hindi man magbayad si depositor so pwede i-hold or i-retain The deposit referred to in No. 1 of the preceding article shall be governed by
as a form of security. the provisions of the law establishing it, and in case of its deficiency, by the
rules on voluntary deposit.
What if may utang si depositor kay depositary? Pwede ba i-hold ni depositary
ang thing subject of a deposit? NO because it can only be retained by the The deposit mentioned in No. 2 of the preceding article shall be regulated by
depositary for whatever may be due to him by reason of the deposit not for any the provisions concerning voluntary deposit and by Article 2168. (1782)
other reason.
Remember the distinction between VOLUNTARY and NECESSARY deposit. Sa
Another thing that you should take note of, what if the subject of the thing is VOLUNTARY deposit, the depositor has the free will to choose who will be the
already returned to the depositor but the depositor did not reimburse the depositary but such freedom is absent in this contract of NECESSARY deposit.
depositary and sabihin natin may iba pang gamit in the possession of the Articles 1996 enumerates TWO NECESSARY DEPOSITS.
depositary. Again ibang obligation naman yun or ibang nature sa..ahh..not in
relation to the demand for reimbursment. So it cannot be retained by the The first one: “When it is made in compliance with a legal obligation”
depositary at that instance, so the thing to be retained must be by virtue of the
expenses in relation to the same contract of deposit. Not from other kind of The second one: “When it takes place on the occasion of any calamity, such as
obligation. Not from other kind of deposit. fire, storm, flood, pillage, shipwreck, or other similar events.” Also knows as
MISERABLE DEPOSIT because you have there acts of calamity.
Art. 1995. A deposit its extinguished: Other instances are those which are covered in Art.1998, travelers in motels
(1) Upon the loss or destruction of the thing deposited; and inns. And the other one is Art.1754 so transportation law na yan,
(2) In case of a gratuitous deposit, upon the death of either the passengers with common carriers.
depositor or the depositary. (n)
Take this list is not exclusive for there are other causes of extinguishment of a Art. 1998.
deposit: The deposit of effects made by the travellers in hotels or inns shall also be
(1) Return of the thing regarded as necessary. The keepers of hotels or inns shall be responsible for
(2) Novation them as depositaries, provided that notice was given to them, or to their
(3) Merger employees, of the effects brought by the guests and that, on the part of the
(4) Expiration of the term latter, they take the precautions which said hotel-keepers or their substitutes
(5) Fulfillment of the resolutory condition advised relative to the care and vigilance of their effects. (1783)
However, recall COMPENSATION cannot be a ground for the extinguishment of Art. 1754.
a deposit as provided under Article 1287. The provisions of Articles 1733 to 1753 shall apply to the
passenger's baggage which is not in his personal custody or in
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that of his employee. As to other baggage, the rules in The deposit here takes place by accident or fortuitous event. The law imposes
Articles 1998 and 2000 to 2003 concerning the responsibility on the recipient the obligations of a bailee. Here, remember, the depositor does
of hotel-keepers shall be applicable. not yet choose who will save his things in case there is fortuitous event. The
more immediate object here is to save the property rather than its safekeeping.
The first one: “When it is made in compliance with a legal obligation”
Legal obligations under Art.1996 (1), this shall be governed primarily by the law, The owner of the house has left for a vacation. There is fire. The neighbor
upon default we apply the rules on voluntary deposit. rescues some of the things of the former who is in vacation. In the meantime na
rescue niya, hindi naman possession yan dahil binigay sa kanya or i-deniliver sa
What are the instances of legal obligation? kanya for safekeeping but again more to save the property and necessary
(a) Art. 538. It is a Property provision. Judicial deposit of a thing the deposit takes place because if ____ pending the return of his neighbor.
possession of which is being disputed in a litigation by two or more
persons. You have here a quasi-bailment, voluntary bailment, or involuntary deposit, as
mentioned earlier miserable deposit or deposit of miserable, causal relation
Art. 538. between the calamity and the constitution of the deposit.
Possession as a fact cannot be recognized at the same time in
two different personalities except in the cases of co- So governing rules we have rules on voluntary deposit as well as Art. 2168
possession. Should a question arise regarding the fact of (Quasi-Contract)
possession, the present possessor shall be preferred; if there
are two possessors, the one longer in possession; if the dates Art. 2186.
of the possession are the same, the one who presents a title; Every owner of a motor vehicle shall file with the proper
and if all these conditions are equal, the thing shall be placed government office a bond executed by a government-
in judicial deposit pending determination of its possession or controlled corporation or office, to answer for damages to
ownership through proper proceedings. (445) third persons. The amount of the bond and other terms shall
be fixed by the competent public official. (n)
(b) Deposit with a bank or public institutions of public bonds or
instruments of credit payable to order or bearer given. So we already know that. Otherwise there will be unjust enrichment.
Art. 586.
Should the usufructuary fail to give security in the cases in We have Articles 1998 and 1999.
which he is bound to give it, the owner may demand that the
immovables be placed under administration, that the Art. 1998.
movables be sold, that the public bonds, instruments of The deposit of effects made by the travellers in hotels or inns shall also be
credit payable to order or to bearer be converted into regarded as necessary. The keepers of hotels or inns shall be responsible for
registered certificates or deposited in a bank or public them as depositaries, provided that notice was given to them, or to their
institution, and that the capital or sums in cash and the employees, of the effects brought by the guests and that, on the part of the
proceeds of the sale of the movable property be invested in latter, they take the precautions which said hotel-keepers or their substitutes
safe securities. advised relative to the care and vigilance of their effects. (1783)
Furthermore, the owner may, if he so prefers, until the So you have here the phrase travellers and guests there are used synonymously.
usufructuary gives security or is excused from so doing, retain It refers to transients not borders. Non-transients including borders are not
in his possession the property in usufruct as administrator, governed under the rules on necessary deposit but rather on the rules on
subject to the obligation to deliver to the usufructuary the contracts of lease.
net proceeds thereof, after deducting the sums which may be
agreed upon or judicially allowed him for such Also the terms ‘hotel keeper’ and ‘inn keeper’ they are used synonymously.
administration. (494) Strictly speaking there may be difference but di naman masyado inaaply when
we refer to a hotel we have a building of many rooms, for overnight
(c) So under pledge na ito. Deposit of a thing pledged when a creditor accommodation for transients and several floors and elevators usually with a
uses the same without authority of the owner or misuses it without large open lobby.
any other way.
If you are talking about an INN, it is a public house where the lodging of
Art. 2104. travelers for compensation and until capacity is ___ public entertainment
The creditor cannot use the thing pledged, without the essentially.
authority of the owner, and if he should do so, or should
misuse the thing in any other way, the owner may ask that it And then you have also MOTEL. Saan galing ang word na motel? Motorist hotel
be judicially or extrajudicially deposited. When the yan siya. (HAHAHA). What makes it a motorist hotel? 2 floors lang yan siya
preservation of the thing pledged requires its use, it must be tapos sa labas grahe na. (Expert si maam..Hmmm). it is an establishment that
used by the creditor but only for that purpose. (1870a) provides for lodging and parking in which the rooms are accessible from an
outdoor parking area.
(d) Another those suits required under the Rules of Court.
So general rule, motel keepers are held responsible as depositaries with regard
(e) Those constituted to guarantee contracts with the government to the effect of their guest. This is the THIRD KIND OF NECESSARY DEPOSIT.
wherein the deposit arises from an obligation of public or
administrative character. Provided these TWO REQUISITES are present:
(1) They have been previously informed about the effect brought by the
The second one: “When it takes place on the occasion of any calamity, such as guests; and
fire, storm, flood, pillage, shipwreck, or other similar events.” (2) The guests have taken precautions prescribed regarding safekeeping.
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who then would assign one of its employees to accompany the guest and assist In the case at bar, there is no showing that the act of the thief or robber was
him in opening the safety deposit box with the two keys. done with the use of arms or through an irresistible force to qualify the same as
force majeure.
At some point in time, McLoughlin discovered that some of the items inside his
safety deposit box were missing. He confronted Lainez and Payam who Article 2002 presupposes that the hotel-keeper is not guilty of concurrent
admitted that Tan opened the safety deposit box three times with the key negligence or has not contributed in any degree to the occurrence of the loss. A
assigned to him. Tan also admitted that she had stolen McLoughlin's key and depositary is not responsible for the loss of goods by theft, unless his actionable
was able to open the safety deposit box with the assistance of Lopez, Payam negligence contributes to the loss.
and Lainez. Thereafter, Lopez executed a promissory note in favor of
McLoughlin. Nevertheless, McLoughlin insisted that it must be the hotel who In the case at bar, the responsibility of securing the safety deposit box was
must assume responsibility for the loss he suffered. 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
Lopez refused to accept the responsibility relying on the conditions for renting hotel employees, the loss would not have occurred. Thus, Tropicana was guilty
the safety deposit box entitled Undertaking For the Use Of Safety Deposit Box of concurrent negligence in allowing Tan, who was not the registered guest, to
specifically paragraphs (2) and (4) thereof which provides that: open the safety deposit box of McLoughlin, even assuming that the latter was
(1) Tropicana Apartment Hotel is released from any liability arising from also guilty of negligence in allowing another person to use his key.
any loss in the contents and/or use of the said deposit box for any
cause whatsoever, including but not limited to the presentation or To rule otherwise would result in undermining the safety of the safety deposit
use thereof by any other person should the key be lost; and boxes in hotels for the management will be given imprimatur to allow any
(2) To return the key and execute the release in favor of Tropicana upon person, under the pretense of being a family member or a visitor of the guest,
giving up the use of the box. 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
McLoughlin alleged that YHT Realty Corporation, Lopez, Lainez, Payam and Tan will allow the hotel to evade responsibility for any liability incurred by its
acted with gross negligence in the performance and exercise of their duties and employees in conspiracy with the guest's relatives and visitors.
obligations as innkeepers and were therefore liable to answer for the losses he If only petitioners exercised due diligence in taking care of McLoughlin's safety
incurred. He further contend that the conditions for the use of the safety deposit box, they should have confronted him as to his relationship with Tan
deposit box are null and void for being contrary to the express mandate of considering that the latter had been observed opening McLoughlin's safety
Article 2003 of the NCC and against public policy. deposit box a number of times at the early hours of the morning. Tan's acts
should have prompted the management to investigate her relationship with
On the other hand, petitioners anchor their defense on Article 2002 which McLoughlin. Then, petitioners would have exercised due diligence required of
exempts the hotel-keeper from liability if the loss is due to the acts of his guest, them. Failure to do so warrants the conclusion that the management had been
his family, or visitors. remiss in complying with the obligations imposed upon hotel-keepers under the
law.
ISSUES:
(1) W/N the condition for the use of the safety deposit box are null and What additional factors that the court considered that the management by the
void. YES hotel were clearly negligent? When was the safety deposit box accessed?
(2) W/N YHT Realty acted with gross negligence in the performance and Suspicious circumstances, early hours in the morning AND they just rely that he
exercise of their duties and obligations as innkeepers and thus liable is a friend of the depositor.
for the loss. YES
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employer or its employees facilitated the consummation of a crime committed Art. 2009.
by the registered guests relatives or visitor? Should the law exculpate the hotel As to matters not provided for in this Code, judicial sequestration shall be
from liability since the loss was due to the act of the visitor of the registered governed by the Rules of Court.
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 EXTRA-JUDICIAL
occurrence of the loss. A depositary is not responsible for the loss of goods by JUDICIAL DEPOSIT
DEPOSIT
theft, unless his actionable negligence contributes to the loss. How it happens By the will of the court By the will of the
parties (contract)
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 Security For the safekeeping of
keys are necessary to open the safety deposit box. Without the assistance of (secure the right of the the property
hotel employees, the loss would not have occurred. Thus, Tropicana was guilty party in case of a
of concurrent negligence in allowing Tan, who was not the registered guest, to favorable judgement)
open the safety deposit box of McLoughlin, even assuming that the latter was Subject matter Generally immovable Only movable property
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
Remuneration Always onerous May be gratuitous or
hotels for the management will be given imprimatur to allow any person, under
subject to
the pretense of being a family member or a visitor of the guest, to have access
compensation
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
For whom In behalf of the person In behalf of the
hotel to evade responsibility for any liability incurred by its employees in
who in judgment has a depositor or third party
conspiracy with the guests, relatives and visitors.
right who deposited
Right of return Through the order of the Upon demand of the
court or when litigation depositor
Art. 2004.
has ended
The hotel-keeper has a right to retain the things brought into the hotel by the
guest, as a security for credits on account of lodging, and supplies usually
What is Notice of lis pendens? It serves as a notice to third persons that the
furnished to hotel guests.
property is under litigation.
So, there is a right to retain. This is another instance wherein contract of pledge
LOS BAÑOS vs. AFRICA
is created by operation of law. The hotel-keepers must compensate them due
FACTS:
to the liabilities impose to them by law. The bailee in commodatum may
The TCT registered in the name of respondent Pacita Africa was destroyed
likewise return the thing loaned by reason of the hidden defects thereof.
when a fire razed the ROD. The TCT was reconstituted and was again
registered in the name of respondent. However, while the reconstituted title
Do remember however that an act obtaining accommodation, food, etc without
was in Macy’s possession, she allegedly forged Pacita’s signature on a DAS
paying constitutes estafa. So, there is a right to retain with regard to civil and
purporting to transfer ownership of the property to Macy.
estafa with regard to criminal liability.
By virtue of the forged DAS, Macy caused the issuance of a TCT in her name,
without the knowledge of the respondents. Later on, the respondents
discovered that Macy mortgaged the property to petitioner Los Baños. To
IV. Sequestration and Necessary Deposit
protect their interests, respondents sought the annulment of the TCT in the
name of Macy, the DAS and the mortgage. However, pending litigation,
CHAPTER 4. - SEQUESTRATION OR JUDICIAL DEPOSIT
petitioner foreclosed the property. This caused respondents to file a writ of
Art. 2005.
preliminary injunction to stop the respondent bank from consolidating title to
A judicial deposit or sequestration takes place when an attachment or seizure
the subject property.
of property in litigation is ordered. (1785)
Petitioner contended that respondents are not entitled to the relief prayed for
Since it is judicial, it is ordered by the court. Attachment by sheriff, receiver by because they caused the annotation of a notice of lis pendens at the back of
the court, Replevin. The properties here may be attached by the sheriff upon TCT registered in the name of Macy. Thus, the said notice provided ample
the filing of a complaint or a receiver may be appointed by the court to protection of their rights and interests.
administer and preserve the property in litigation. If it is a personal property, it
may be seized by the sheriff in actions such as replevin or manual delivery of ISSUE: W/N the notice of lis pendens provided ample protection of the rights
personal property. The depositary here is appointed by the court. and interests of petitioner.
RULING: NO
Art. 2006. A notice of lis pendens serves as an announcement to the whole world that a
Movable as well as immovable property may be the object of sequestration. particular real property is in litigation and as a warning that those who acquire
(1786) an interest in the property do so at their own risk -- they gamble on the result
of the litigation over it. However, the cancellation of such notice may be
ordered by the court that has jurisdiction over it at any given time. Its
Art. 2007. continuance or removal -- like the continuance or the removal of a preliminary
The depositary of property or objects sequestrated cannot be relieved of his attachment or injunction -- is not contingent on the existence of a final
responsibility until the controversy which gave rise thereto has come to an judgment on the action and ordinarily has no effect on the merits thereof.
end, unless the court so orders. (1787a) Thus, the notice of lis pendens does not suffice to protect herein respondents’
rights over the property. It does not provide complete and ample protection.
Since the notice of lis pendens merely serves as a warning that the property is
Art. 2008. involved in litigation and that two requisites for the issuance of the writ of
The depositary of property sequestrated is bound to comply, with respect to preliminary injunction were satisfied, the issuance thereof is proper and the
the same, with all the obligations of a good father of a family. (1788) petitioner bank is enjoined from consolidating title over the subject property.
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agent who issues it, a statement of the fact that advances have been
made or liabilities incurred and the purpose thereof is sufficient.
ACT NO. 2137 - THE WAREHOUSE RECEIPTS LAW A warehouseman shall be liable to any person injured thereby for all damages
Purpose: caused by the omission from a negotiable receipt of any of the terms herein
(1) To regulate the status, rights, and liabilities of a person in a required.
warehousing contract;
(2) To protect those who in good faith and for value, acquire negotiable Sec. 3. Form of receipts. — What terms may be inserted. — A warehouseman
warehouse receipts by negotiation; may insert in a receipt issued by him any other terms and conditions provided
(3) To render the title to and right of possession of property stored in that such terms and conditions shall not:
warehouses more easily convertible; (a) Be contrary to the provisions of this Act.
(4) To facilitate the use of warehouse receipts as documents of title; (b) In any wise impair his obligation to exercise that degree of care in
(5) To place greater responsibility on the warehouseman the safe-keeping of the goods entrusted to him which is reasonably
careful man would exercise in regard to similar goods of his own.
Sec. 58. Definitions. —
(a) In this Act, unless the content or subject matter otherwise requires: Sec. 4. Definition of non-negotiable receipt. — A receipt in which it is stated
that the goods received will be delivered to the depositor or to any other
"Action" includes counterclaim, set-off, and suits in equity as specified person, is a non-negotiable receipt.
provided by law in these islands.
Sec. 5. Definition of negotiable receipt. — A receipt in which it is stated that
"Delivery" means voluntary transfer of possession from one person the goods received will be delivered to the bearer or to the order of any person
to another. named in such receipt is a negotiable receipt.
"Fungible goods" means goods of which any unit is, from its nature No provision shall be inserted in a negotiable receipt that it is non-
by mercantile custom, treated as the equivalent of any other unit. negotiable. Such provision, if inserted shall be void.
"Goods" means chattels or merchandise in storage or which has Sec. 6. Duplicate receipts must be so marked. — When more than one
been or is about to be stored. negotiable receipt is issued for the same goods, the word "duplicate" shall be
plainly placed upon the face of every such receipt, except the first one issued. A
"Holder" of a receipt means a person who has both actual possession warehouseman shall be liable for all damages caused by his failure so to do to
of such receipt and a right of property therein. any one who purchased the subsequent receipt for value supposing it to be an
original, even though the purchase be after the delivery of the goods by the
"Order" means an order by indorsement on the receipt. warehouseman to the holder of the original receipt.
"Owner" does not include mortgagee. Sec. 7. Failure to mark "non-negotiable." — A non-negotiable receipt shall have
plainly placed upon its face by the warehouseman issuing it "non-negotiable,"
"Person" includes a corporation or partnership or two or more or "not negotiable." In case of the warehouseman's failure so to do, a holder of
persons having a joint or common interest. the receipt who purchased it for value supposing it to be negotiable, may, at his
option, treat such receipt as imposing upon the warehouseman the same
To "purchase" includes to take as mortgagee or as pledgee. liabilities he would have incurred had the receipt been negotiable.
"Receipt" means a warehouse receipt. This section shall not apply, however, to letters, memoranda, or written
acknowledgment of an informal character.
"Value" is any consideration sufficient to support a simple
contract. An antecedent or pre-existing obligation, whether for OBLIGATIONS AND RIGHTS OF WAREHOUSEMEN UPON THEIR RECEIPTS
money or not, constitutes value where a receipt is taken either in Sec. 8. Obligation of warehousemen to deliver. — A warehouseman, in the
satisfaction thereof or as security therefor. absence of some lawful excuse provided by this Act, is bound to deliver the
goods upon a demand made either by the holder of a receipt for the goods or
"Warehouseman" means a person lawfully engaged in the business by the depositor; if such demand is accompanied with:
of storing goods for profit. (a) An offer to satisfy the warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such
(b) A thing is done "in good faith" within the meaning of this Act when indorsements as would be necessary for the negotiation of the
it is in fact done honestly, whether it be done negligently or not. receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an
Sec. 2. Form of receipts; essential terms. — Warehouse receipts need not be acknowledgment that they have been delivered, if such signature is
in any particular form but every such receipt must embody within its written requested by the warehouseman.
or printed terms:
(a) The location of the warehouse where the goods are stored, In case the warehouseman refuses or fails to deliver the goods in compliance
(b) The date of the issue of the receipt, with a demand by the holder or depositor so accompanied, the burden shall be
(c) The consecutive number of the receipt, upon the warehouseman to establish the existence of a lawful excuse for such
(d) A statement whether the goods received will be delivered to the refusal.
bearer, to a specified person or to a specified person or his order,
(e) The rate of storage charges, Sec. 9. Justification of warehouseman in delivering. — A warehouseman is
(f) A description of the goods or of the packages containing them, justified in delivering the goods, subject to the provisions of the three following
(g) The signature of the warehouseman which may be made by his sections, to one who is:
authorized agent, (a) The person lawfully entitled to the possession of the goods, or his
(h) If the receipt is issued for goods of which the warehouseman is agent;
owner, either solely or jointly or in common with others, the fact of (b) A person who is either himself entitled to delivery by the terms of a
such ownership, and non-negotiable receipt issued for the goods, or who has written
(i) A statement of the amount of advances made and of liabilities authority from the person so entitled either indorsed upon the
incurred for which the warehouseman claims a lien. If the precise receipt or written upon another paper; or
amount of such advances made or of such liabilities incurred is, at (c) A person in possession of a negotiable receipt by the terms of which
the time of the issue of, unknown to the warehouseman or to his the goods are deliverable to him or order, or to bearer, or which has
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been indorsed to him or in blank by the person to whom delivery to them as reasonably careful owner of similar goods would exercise, but he
was promised by the terms of the receipt or by his mediate or shall not be liable, in the absence of an agreement to the contrary, for any loss
immediate indorser. or injury to the goods which could not have been avoided by the exercise of
such care.
Sec. 10. Warehouseman's liability for misdelivery. — Where a warehouseman
delivers the goods to one who is not in fact lawfully entitled to the possession Sec. 22. Goods must be kept separate. — Except as provided in the following
of them, the warehouseman shall be liable as for conversion to all having a right section, a warehouseman shall keep the goods so far separate from goods of
of property or possession in the goods if he delivered the goods otherwise than other depositors and from other goods of the same depositor for which a
as authorized by subdivisions (b) and (c) of the preceding section, and though separate receipt has been issued, as to permit at all times the identification and
he delivered the goods as authorized by said subdivisions, he shall be so liable, redelivery of the goods deposited.
if prior to such delivery he had either:
(a) Been requested, by or on behalf of the person lawfully entitled to a Sec. 23. Fungible goods may be commingled if warehouseman authorized. —
right of property or possession in the goods, not to make such If authorized by agreement or by custom, a warehouseman may mingle fungible
deliver; or goods with other goods of the same kind and grade. In such case, the various
(b) Had information that the delivery about to be made was to one not depositors of the mingled goods shall own the entire mass in common and each
lawfully entitled to the possession of the goods. depositor shall be entitled to such portion thereof as the amount deposited by
him bears to the whole.
Sec. 14. Lost or destroyed receipts. — Where a negotiable receipt has been lost
or destroyed, a court of competent jurisdiction may order the delivery of the Sec. 24. Liability of warehouseman to depositors of commingled goods. — The
goods upon satisfactory proof of such loss or destruction and upon the giving of warehouseman shall be severally liable to each depositor for the care and
a bond with sufficient sureties to be approved by the court to protect the redelivery of his share of such mass to the same extent and under the same
warehouseman from any liability or expense, which he or any person injured by circumstances as if the goods had been kept separate.
such delivery may incur by reason of the original receipt remaining
outstanding. The court may also in its discretion order the payment of the Sec. 25. Attachment or levy upon goods for which a negotiable receipt has
warehouseman's reasonable costs and counsel fees. been issued. — If goods are delivered to a warehouseman by the owner or by a
person whose act in conveying the title to them to a purchaser in good faith for
The delivery of the goods under an order of the court as provided in this value would bind the owner, and a negotiable receipt is issued for them, they
section, shall not relieve the warehouseman from liability to a person to whom can not thereafter, while in the possession of the warehouseman, be attached
the negotiable receipt has been or shall be negotiated for value without notice by garnishment or otherwise, or be levied upon under an execution unless the
of the proceedings or of the delivery of the goods. receipt be first surrendered to the warehouseman or its negotiation
enjoined. The warehouseman shall in no case be compelled to deliver up the
Sec. 16. Warehouseman cannot set up title in himself . — No title or right to actual possession of the goods until the receipt is surrendered to him or
the possession of the goods, on the part of the warehouseman, unless such title impounded by the court.
or right is derived directly or indirectly from a transfer made by the depositor at
the time of or subsequent to the deposit for storage, or from the Sec. 26. Creditor's remedies to reach negotiable receipts. — A creditor whose
warehouseman's lien, shall excuse the warehouseman from liability for refusing debtor is the owner of a negotiable receipt shall be entitled to such aid from
to deliver the goods according to the terms of the receipt. courts of appropriate jurisdiction, by injunction and otherwise, in attaching such
receipt or in satisfying the claim by means thereof as is allowed at law or in
Sec. 17. Interpleader of adverse claimants. — If more than one person claims equity in these islands in regard to property which can not readily be attached
the title or possession of the goods, the warehouseman may, either as a or levied upon by ordinary legal process.
defense to an action brought against him for non-delivery of the goods or as an
original suit, whichever is appropriate, require all known claimants to Sec. 27. What claims are included in the warehouseman's lien. — Subject to
interplead. the provisions of section thirty, a warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his hands, for all lawful charges for
Sec. 18. Warehouseman has reasonable time to determine validity of claims. storage and preservation of the goods; also for all lawful claims for money
— If someone other than the depositor or person claiming under him has a advanced, interest, insurance, transportation, labor, weighing, coopering and
claim to the title or possession of goods, and the warehouseman has other charges and expenses in relation to such goods, also for all reasonable
information of such claim, the warehouseman shall be excused from liability for charges and expenses for notice, and advertisements of sale, and for sale of the
refusing to deliver the goods, either to the depositor or person claiming under goods where default had been made in satisfying the warehouseman's lien.
him or to the adverse claimant until the warehouseman has had a reasonable
time to ascertain the validity of the adverse claim or to bring legal proceedings Sec. 30. Negotiable receipt must state charges for which the lien is claimed. —
to compel claimants to interplead. If a negotiable receipt is issued for goods, the warehouseman shall have no lien
thereon except for charges for storage of goods subsequent to the date of the
Sec. 19. Adverse title is no defense except as above provided. — Except as receipt unless the receipt expressly enumerated other charges for which a lien
provided in the two preceding sections and in sections nine and thirty-six, no is claimed. In such case, there shall be a lien for the charges enumerated so far
right or title of a third person shall be a defense to an action brought by the as they are within the terms of section twenty-seven although the amount of
depositor or person claiming under him against the warehouseman for failure the charges so enumerated is not stated in the receipt.
to deliver the goods according to the terms of the receipt.
Sec. 35. Other methods of enforcing lien. — The remedy for enforcing a lien
Sec. 20. Liability for non-existence or misdescription of goods. — A herein provided does not preclude any other remedies allowed by law for the
warehouseman shall be liable to the holder of a receipt for damages caused by enforcement of a lien against personal property nor bar the right to recover so
the non-existence of the goods or by the failure of the goods to correspond much of the warehouseman's claim as shall not be paid by the proceeds of the
with the description thereof in the receipt at the time of its issue. If, however, sale of the property.
the goods are described in a receipt merely by a statement of marks or labels
upon them or upon packages containing them or by a statement that the goods Sec. 36. Effect of sale. — After goods have been lawfully sold to satisfy a
are said to be goods of a certain kind or that the packages containing the goods warehouseman's lien, or have been lawfully sold or disposed of because of their
are said to contain goods of a certain kind or by words of like purport, such perishable or hazardous nature, the warehouseman shall not thereafter be
statements, if true, shall not make liable the warehouseman issuing the receipt, liable for failure to deliver the goods to the depositor or owner of the goods or
although the goods are not of the kind which the marks or labels upon them to a holder of the receipt given for the goods when they were deposited, even if
indicate or of the kind they were said to be by the depositor. such receipt be negotiable.
Sec. 21. Liability for care of goods. — A warehouseman shall be liable for any Sec. 40. Who may negotiate a receipt. — A negotiable receipt may be
loss or injury to the goods caused by his failure to exercise such care in regard negotiated:
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(a) By the owner thereof, or What is the scope of the Warehouse Receipts Law? It covers all types of
(b) By any person to whom the possession or custody of the receipt has warehouses whether public or private warehouses bonded or not bonded.
been entrusted by the owner, if, by the terms of the receipt, the However there is a special law towards bonded warehouses (General Bonded
warehouseman undertakes to deliver the goods to the order of the Warehouse Act).
person to whom the possession or custody of the receipt has been
entrusted, or if, at the time of such entrusting, the receipt is in such GBWA regulates and supervises warehouses which puts up a bond. While the
form that it may be negotiated by delivery. WRL, describes mutual duties and rights of a warehouseman who issues
warehouse receipts to the depositor; and covers all warehouses whether
Sec. 41. Rights of person to whom a receipt has been negotiated. — A person bonded or not.
to whom a negotiable receipt has been duly negotiated acquires thereby:
(a) Such title to the goods as the person negotiating the receipt to him Applicability of the WRL: it applies to warehouse receipts issued by a
had or had ability to convey to a purchaser in good faith for value, warehouseman as defined under Section 58 of the WRL. The civil code
and also such title to the goods as the depositor or person to whose (specifically provisions on documents of title) is applied to all other instances
order the goods were to be delivered by the terms of the receipt had where the receipt is not issued by the warehouseman. This is in connection to a
or had ability to convey to a purchaser in good faith for value, and contract of deposit wherein you deliver the goods to a warehouse man for the
(b) The direct obligation of the warehouseman to hold possession of the purpose of security. However, a depositary is not necessarily a holder of a
goods for him according to the terms of the receipt as fully as if the warehouse receipt.
warehouseman and contracted directly with him.
Warehouse receipts are considered as a negotiable document of title, as
Sec. 42. Rights of person to whom receipt has been transferred. — A person to distinguished from your negotiable instruments. Warehouseman is a person
whom a receipt has been transferred but not negotiated acquires thereby, as lawfully engaged in the business of storing goods for profit. Warehouse, on the
against the transferor, the title of the goods subject to the terms of any other hand, is defined as a building or place where the goods are deposited and
agreement with the transferor. stored for profit.
If the receipt is non-negotiable, such person also acquires the right to notify the Take note of what is described as a warehouse receipt. It is a written
warehouseman of the transfer to him of such receipt and thereby to acquire the acknowledgment by a warehouseman that he has received and holds certain
direct obligation of the warehouseman to hold possession of the goods for him goods therein described in store for the person whom it is issued. As document
according to the terms of the receipt. of title. It is provided under Art 1636.
Prior to the notification of the warehouseman by the transferor or transferee of It therefore has a threefold nature:
a non-negotiable receipt, the title of the transferee to the goods and the right (1) A contract – a contract of deposit or a contract of carriage
to acquire the obligation of the warehouseman may be defeated by the levy of (2) Evidence of receipt of goods
an attachment or execution upon the goods by a creditor of the transferor or by (3) Operates as a transferable document of title
a notification to the warehouseman by the transferor or a subsequent
purchaser from the transferor of a subsequent sale of the goods by the Negotiable Instruments Law Warehouse Receipt Law
transferor. Subject matter is money Subject matter is goods
Object of value is the instrument Object of value refers to the
Sec. 44. Warranties of a sale of receipt. — A person who, for value, negotiates itself goods deposited
or transfers a receipt by indorsement or delivery, including one who assigns for There are parties secondarily No parties that are secondarily
value a claim secured by a receipt, unless a contrary intention appears, liable liable
warrants: An original bearer instrument will An original bearer instrument
(a) That the receipt is genuine, always be considered a bearer subsequently indorsed, it
(b) That he has a legal right to negotiate or transfer it, instrument, thus can be becomes an order instrument
(c) That he has knowledge of no fact which would impair the validity or negotiated by mere delivery
worth of the receipt, and There is a concept of holder in There is no concept of holder
(d) That he has a right to transfer the title to the goods and that the due course who has a better title in due course In negotiable
goods are merchantable or fit for a particular purpose whenever than the transferor instruments, an originally
such warranties would have been implied, if the contract of the bearer instrument, can still be
parties had been to transfer without a receipt of the goods negotiated by delivery even if
represented thereby. it has been indorsed.
Sec. 45. Indorser not a guarantor. — The indorsement of a receipt shall not
make the indorser liable for any failure on the part of the warehouseman or CANDOLITA
previous indorsers of the receipt to fulfill their respective obligations. December 8, 2016
Part 1 of 1
Sec. 46. No warranty implied from accepting payment of a debt. — A V. Trust Receipts Law
mortgagee, pledgee, or holder for security of a receipt who, in good faith,
demands or receives payment of the debt for which such receipt is security, TRUST RECEIPTS LAW
whether from a party to a draft drawn for such debt or from any other person, Now, under The Trust Receipts Law you have Section 4. Under section 4 of the
shall not, by so doing, be deemed to represent or to warrant the genuineness of trust receipt law trust receipt is defined as a written document signed by the
such receipt or the quantity or quality of the goods therein described. trustee in favor of the entruster whereby the latter releases the goods to the
possession of the former upon the trustee‘s promise to hold the said goods in
Sec. 49. Negotiation defeats vendor's lien. — Where a negotiable receipt has trust for the entruster (the one who delivered the goods) to sell or dispose of
been issued for goods, no seller's lien or right of stoppage in transitu shall the goods and to return the proceeds thereof to the extent of the amount
defeat the rights of any purchaser for value in good faith to whom such receipt owing to the entruster or to return the goods if unsold or not otherwise
has been negotiated, whether such negotiation be prior or subsequent to the disposed.
notification to the warehouseman who issued such receipt of the seller's claim
to a lien or right of stoppage in transitu. Nor shall the warehouseman be Purpose of the law:
obliged to deliver or justified in delivering the goods to an unpaid seller unless To punish dishonesty and abuse of confidence of one who tends in
the receipt is first surrendered for cancellation. the handling of money or goods to the prejudice of the owner
regardless of whether or not the latter is the owner. (crime of
estafa);
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To encourage and promote the use of trust receipts as an additional (2) Entitled to the return of the goods if unsold
and convenient aid to commerce and trade; (3) As against an innocent purchaser for value of the goods subject to a
To regulate of trust receipts transactions in order to assure the trust receipts agreement. As against an innocent purchaser for value,
protection of the rights and enforcement of obligations of the the entruster is not preferred. As against the creditors of the
parties involved therein; entrustee, the entruster is preferred. (Section 11)
To declare the misuse and/or misappropriation of goods or proceeds (4) The entruster has the right to transfer the trust take possession of
realized from the sale of goods, released under trust receipts as a the goods and to sell the goods in a public sale (Section 12)
criminal offense punishable under the revised penal code. (Art. 315) (5) The entruster likewise has the right to purchase the same goods at
the intended public sale(Section 7)
Under section 4 of the same law the trust receipt need not be in any particular
form however it must substantially contain the following essential terms: Obligations of an entruster
a description of the goods, value of the goods, undertaking or a (1) to give possession of the goods to the entrustee and to give at least
commitment of the entrustee to hold in trust for the entruster the 5 day notice to the entrusteeof the intention to sell the goods at an
goods; intended public sale. The entrustee on the other hand has the right
to dispose of them in the manner provided for in the trust receipt; to receive the surplus in case of a public sale as provided under
and section 7.
to turn over the proceeds of the sale of the goods (2) To have possession of the goods as a condition for his liability.
In a trust receipt transaction, no agency relationship is established. However, as Obligations of the entrustee
you have learned in Criminal Law, an entrustee‘s breach of trust may subject (1) To hold the goods or the sale proceeds;
him to criminal liability like for estafa as well as civil liability. (2) To return the goods in the event of non-sale or upon demand of the
entruster;
What is the coverage of a trust receipt agreement? It applies to items destined (3) To comply with his alternative obligation to return the proceeds or
for sale, process as a component of a product ultimately sold and the goods. The return of the proceeds- entre garla. The obligation to
manufactured, and used to repair equipment used to maintain in business. return the goods unsold- vevol vera;
Under the same section, section 4, the trust receipt law does not cover the sale (4) To ensure against loss of the goods;
of goods, document or instruments by a person in the business of selling goods, (5) To keep the goods and sale proceeds separate and identifiable;
documents or instruments for profit who has general property rights in such (6) If there are other conditions provided under the trust receipt,
goods documents or installments or sells the same to the buyer on credit observe those conditions.
retaining title and other interest as security of the payment of the purchase
price. ROSARIO TEXTILE vs. HOME BANKERS
So you have to distinguish a trust receipt transaction from other arrangements. FACTS:
RTMC filed with the Home Bankers an application for a credit line in the
There is no trust receipt transaction if the agreement is for mere consignment amount of P10M, but only P8M was approved. RTMC then made withdrawals
of goods with the obligation on the part of the person to whom it is delivered to from this credit line and issued several promissory notes and trust receipts in
remit proceeds of the sale or return when unsold. favor of the bank. Yujuico signed a surety agreement in favor of the bank
binding himself solidarily liable with RTMC.
Distinguish a trust receipt transaction from a contract of pledge. In a trust
receipt transaction, there is a person who is being financed, possesses the However, despite the lapse of the respective due dates under the promissory
property. In a contract of pledge, it is the financer that possesses the property notes and notwithstanding the bank’s demand letters, RTMC failed to pay its
as a form of security. loans. Hence, the bank filed a complaint for sum of money against RTMC and
Yujuico.
In a trust receipt transaction there is no contract of sale. In a trust receipt, there
is no lien created over the goods that were delivered unlike that of a chattel RTMC and Yujuico denied any liability claiming that the importation of raw
mortgage which subjects the property to lien. materials under the credit line was with a grant of option to them to turn-over
to the bank the imported raw materials should these fail to meet their
In a trust receipts you have three parties. However the seller does not retain manufacturing requirements. However, when they turned it over, the bank
title to the property. Compare it to consignment, you have the consignor and refused to accept the materials until a fire destroyed it.
the consignee, bipartite, where the consignor retains ownership of the
property. So who are essentially the parties here? You have the seller, Hence, according to petitioners, under the trust receipt contracts between the
entruster and entrustee. These three are the parties in a true trust receipt parties, they merely held the goods described therein in trust for respondent
agreement. However, the seller here is not strictly a party to a trust receipt Home Bankers who are the real owners of the said goods. Since the ownership
transaction but he is a party to the contract of sale wherein he is the seller and of the goods remains with the bank, it should bear the loss in accordance with
who is the buyer? It is the buyer/importer-entrustee. Now you have here the the principle of res perit domino. With the destruction of the goods by fire,
entruster. The entruster here is the lender or the financier. He is the person petitioners should have been relieved of any obligation to pay.
holding title over the goods. He holds title over the goods but he is not the
owner of the good but actually, he is merely a holder of security interest. ISSUE: W/N the transaction between the parties is trust receipts.
On the other hand you have the entrustee, the borrower, the buyer, the RULING: NO but it is a contract of loan
importer, to whom the goods are delivered for sale or processing in trust with A credit line is that amount of money or merchandise which a banker,
the obligation to return the proceeds of the sale or to return the goods if merchant, or supplier agrees to supply to a person on credit and generally
unsold. So essentially the entrustee here is considered as the owner of the agreed to in advance. Hence, the principal transaction between petitioner
goods. While the entruster holds title as a form of security. So the law imposes RTMC and the bank is a contract of loan. RTMC used the proceeds of this loan
on the entrustee the risk of loss of the goods. to purchase raw materials from a supplier abroad. In order to secure the
payment of the loan, RTMC delivered the raw materials to the bank as
So take note here it is a unique arrangement. As a general rule, res perit collateral. Trust receipts were executed by the parties to evidence this security
domino. Owner bears the loss. But here, if you take into consideration the arrangement. Simply stated, the trust receipts were mere securities.
entruster holds title of the goods but you cannot say if the goods were lost due
to a fortuitous event, the entruster would be the one who would suffer the loss. A trust receipt is a security transaction intended to aid in financing importers
and retail dealers who do not have sufficient funds or resources to finance the
So take note that in a true trust receipt agreement covered by the trust receipts importation or purchase of merchandise, and who may not be able to acquire
law, what are the rights available to the entruster? credit except through utilization, as collateral, of the merchandise imported or
(1) Entitled to the proceeds purchased. A trust receipt, therefore, is a security agreement, pursuant to
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which a bank acquires a ‘security interest’ in the goods. It secures an obligation to deliver it (entregarla) to the owner of the merchandise
indebtedness and there can be no such thing as security interest that secures sold.
no obligation. (2) The second is covered by the provision referring to merchandise
If under the trust receipt, the bank is made to appear as the owner, it was but received under the obligation to return it (devolvera) to the owner.
an artificial expedient, more of legal fiction than fact, for if it were really so, it
could dispose of the goods in any manner it wants, which it cannot do, just to Under the Trust Receipts Law, intent to defraud is presumed when:
give consistency with purpose of the trust receipt of giving a stronger security (1) The entrustee fails to turn over the proceeds of the sale of goods
for the loan obtained by the importer. To consider the bank as the true owner covered by the trust receipt to the entruster; or
from the inception of the transaction would be to disregard the loan feature (2) When the entrustee fails to return the goods under trust, if they are
thereof. Thus, petitioners cannot be relieved of their obligation to pay their not disposed of in accordance with the terms of the trust receipts.
loan in favor of the bank.
In all trust receipt transactions, both obligations on the part of the trustee exist
The contract between the parties is a loan. What respondent bank sought to in the alternative – the return of the proceeds of the sale or the return or
collect as creditor was the loan it granted to petitioners. Petitioners’ recourse is recovery of the goods, whether raw or processed.
to sue their supplier, if indeed the materials were defective.
When both parties enter into an agreement knowing that the return of the
Q: How is security interest defined in trust receipt law? goods subject of the trust receipt is not possible even without any fault on the
A: Security Interest means a property interest in goods, documents, or part of the trustee, it is not a trust receipt transaction penalized under Section
instruments to secure performance of some obligation of the entrustee or of 13 of PD 115. In such case, the only obligation actually agreed upon by the
some third persons to the entruster and includes title, whether or not parties would be the return of the proceeds of the sale transaction. This
expressed to be absolute, whenever such title is in substance taken or retained transaction becomes a mere loan, where the borrower is obligated to pay the
for security only. bank the amount spent for the purchase of the goods.
Q: How do you reconcile it with the fact that the trust receipts were executed as Pursuant to Article 1371 of the CC, the contemporaneous actions of the parties
security for the contract of loan? Why is it that there is no violation even if it may be examined in order to understand the transaction through their intent
were trust receipts issued as security or collateral? rather than to rely purely on the trust receipts that they signed.
A: (Si maam nagsagot sa sarili nyang tanong) The trust receipts executed were
mere securities. No violation because security sya for the contract of loan, In the present case, LBP knew that ACDC was in the construction business and
wherein the obligation of Rosario Textiles is isa lang: To pay. If under the Trust that the materials that it sought to buy under the letters of credit were to be
receipt, the bank was made to appear as the owner, more of legal fiction that in used for construction projects. LBP was aware of the fact that there was no
fact, it could not be considered as owner of the raw materials. The Supreme way it could recover the buildings or constructions for which the materials
Court held, here the trust receipt was issued by the bank, so the bank was subject of the trust receipts had been used. Nevertheless, LBP had authorized
deemed the entruster/lender/financier. To consider the bank as the true owner the delivery of these materials to a construction site of two government
from the inception of the transaction would be to disregard the loan feature projects for which they were used. When it had done so, LBP should have been
thereof. Because again, the bank here is considered the holder of the title aware that it could not possibly recover the processed materials as they would
merely for purpose of security. If the materials were indeed defective, RT could become part of government projects. As an immovable property, the
not go after the bank kasi di naman ang bank ang nag supply sa kanila. ownership of whatever was constructed with those materials would
presumably belong to the owner of the land, under Article 445 of the CC.
LAND BANK vs. PEREZ
FACTS: Even if we consider the vague possibility that the materials, consisting of
LBP extended a credit accommodation to ACDC through the execution of an cement, bolts and reinforcing steel bars, would be used for the construction of
Omnibus Credit Line Agreement. ACDC used the Letters of Credit/Trust a movable property, the ownership of these properties would still pertain to
Receipts Facility of the Agreement to buy construction materials. The the government and not remain with the bank as they would be classified as
respondents then executed trust receipts in connection with the construction property of the public domain under Article 420 of the CC.
materials.
Furthermore, despite the allegations in the affidavit-complaint wherein LBP
. Later on, the trust receipts matured, but ACDC failed to return to LBP the sought the return of the construction materials, its demand letter actually
proceeds of the construction projects or the construction materials subject of sought the payment of the balance but failed to ask, as an alternative, for the
the trust receipts. When ACDC failed to pay upon demand, LBP filed a return of the construction materials or the buildings where these materials had
complaint for estafa against ACDC. been used.
ACDC denied criminal liability alleging that the trust receipt documents actually The following scenarios are in contrast with trust receipt transaction because it
pertains as security to the contract of loan it entered into with petitioner. It is fundamental in a trust receipt transaction that the person who advanced
further alleged that it cannot be held liable for estafa since its clients for the payment for the merchandise becomes the absolute owner of said
construction projects have not yet paid them. Thus, ACDC had yet to receive merchandise and continues as owner until he or she is paid in full, or if the
the proceeds of the construction materials that were the subject of the trust goods had already been sold, the proceeds should be turned over to him or to
receipts. As there were no proceeds received from these clients, no her.
misappropriation thereof could have taken place.
In the case of Colinares, the SC ruled that goods sold in retail are often within
The CA ruled that the case did not involve a trust receipt transaction, but a the custody or control of the trustee until they are purchased. In the case of
mere loan. The construction materials, which are the subject of the trust materials used in the manufacture of finished products, these finished products
receipt transaction, were delivered to ACDC even before the trust receipts – if not the raw materials or their components – similarly remain in the
were executed. LBP did not offer proof that the goods were received by ACDC, possession of the trustee until they are sold. But the goods and the materials
and that the trust receipts did not contain a description of the goods, their that are used for a construction project are often placed under the control and
invoice value, the amount of the draft to be paid, and their maturity dates. custody of the clients employing the contractor, who can only be compelled to
return the materials if they fail to pay the contractor and often only after the
ISSUE: W/N the transactions between LBP and ACDC were trust receipts to requisite legal proceedings. The contractor’s difficulty and uncertainty in
render ACDC liable for estafa. claiming these materials (or the buildings and structures which they become
part of), as soon as the bank demands them, disqualify them from being
RULING: NO, not trust receipts but a mere loan covered by trust receipt agreements.
There are two obligations in a trust receipt transaction: Based on these premises, the agreements between the parties in this case to
(1) The first is covered by the provision that refers to money under the be trust receipt transactions because
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(1) From the start, the parties were aware that ACDC could not possibly delivered way before petitioner signed the corresponding trust receipts. Not
be obligated to reconvey to LBP the materials or the end product for only this, petitioner argued that Metrobank knew all along that the
which they were used; and construction materials subject of the trust receipts were not intended for
(2) From the moment the materials were used for the government resale but for personal use of Supermax relating to its construction business.
projects, they became public, not LBP’s, property.
ISSUE: W/N Metrobank’s previous knowledge that the goods (construction
Since these transactions are not trust receipts, an action for estafa should not materials) subject of the trust receipts were never intended to be sold but only
be brought against the respondents, who are liable only for a loan. for use in the entrustee’s construction business is a valid defense against
estafa.
Even assuming that the transactions were trust receipts, the complaint should
still be dismissed. The Trust Receipts Law punishes the dishonesty and abuse of RULING: YES
confidence in the handling of money or goods to the prejudice of another, In determining the nature of a contract, the intention of the parties by their
regardless of whether the latter is the owner or not. The law does not conduct, words, actions and deeds should govern and not the title they give to
singularly seek to enforce payment of the loan, as "there can be no violation of such contract.
the right against imprisonment for non-payment of a debt."
The dealing between petitioner and Metrobank was not a trust receipt
In this case, the misappropriation could be committed if the entrustee fails to transaction but one of simple loan. Petitioner’s admission that he signed the
turn over the proceeds of the sale of the goods covered by the trust receipt trust receipts does not conclusively prove that the transaction was, indeed, a
transaction or fails to return the goods themselves. In the present case, trust receipts transaction. In contrast to the nomenclature of the transaction,
respondents could not have failed to return the proceeds since their allegations the parties really intended a contract of loan.
that the clients of ACDC had not paid for the projects it had undertaken with
them at the time the case was filed had never been questioned or denied by The fact that the entruster bank knew even before the execution of the trust
LBP. What can only be attributed to the respondents would be the failure to receipt agreements that the construction materials covered were never
return the goods subject of the trust receipts. intended by the entrustee for resale or for the manufacture of items to be sold
is sufficient to prove that the transaction was a simple loan and not a trust
Q: In this case what is the obligation of the officers of ACDC? receipts transaction.
A: To pay the loan acquired from Landbank.
A trust receipt transaction is one where the entrustee has the obligation to
Q: Was there a violation of the trust receipt law? deliver to the entruster the price of the sale, or if the merchandise is not sold,
A: No, there was none. The obligation of ACDC was to pay the loan and not to return the merchandise to the entruster.
return the materials.
Nonetheless, when both parties enter into an agreement knowing fully well
In Land Bank of the Philippine vs Perez et al, wherein what is the effect thereof? that the return of the goods subject of the trust receipt is not possible even
There was a demand or in this case, a complaint was filed against the entrustee without any fault on the part of the trustee, it is not a trust receipt transaction
for estafa. But the Supreme Court held therein that this was not the trust penalized under Section 13 of PD 115 in relation to estafa under the RPC, as the
receipt agreement covered under the trust receipts law to be held liable for only obligation actually agreed upon by the parties would be the return of the
estafa. Because the arrangement here was that the trust receipt was issued proceeds of the sale transaction. This transaction becomes a mere loan, where
merely to secure the contract of loan by virtue of the letter of credit. So read the borrower is obligated to pay the bank the amount spent for the purchase of
that case for you to understand more when to make a person liable for estafa the goods.
under the trust receipt law and when is he not liable. Because, if you take into In the case of Ng vs. People, the Court ruled that the Trust Receipts Law was
consideration criminal liability for estafa for violation of the trust receipts law, created to aid in financing importers and retail dealers who do not have
the entrustee fails to turn over the proceeds of the sale of goods covered by the sufficient funds or resources to finance the importation or purchase of
trust receipt to the entruster. Or the entrustee fails to return the goods under merchandise, and who may not be able to acquire credit except through
the trust agreement if not disposed in accordance with the agreement of the utilization, as collateral, of the merchandise imported or purchased.
trust receipt. But if you take a look at the true nature of this kinds of Following the precept of the law, such transactions affect situations wherein
transaction, on the part of X, his obligation is not really to return the goods the entruster, who owns or holds absolute title or security interests over
subject of the trust receipt if it is not sold or if it is sold to remit the proceeds. specified goods, documents or instruments, releases the subject goods to the
His obligation is just to pay the loan and the trust receipt was issued as a form possession of the entrustee. The release of such goods to the entrustee is
of security-interest. conditioned upon his execution and delivery to the entruster of a trust receipt
wherein the former binds himself to hold the specific goods, documents or
Do also take note that in this case the SC also enumerated the elements of instruments in trust for the entruster and to sell or otherwise dispose of the
estafa in relation to the trust receipts law, in this case no dishonesty or abuse of goods, documents or instruments with the obligation to turn over to the
confidence is present in the handling of the construction of materials. entruster the proceeds to the extent of the amount owing to the entruster or
the goods, documents or instruments themselves if they are unsold. The
HUR TIN YANG vs. PEOPLE entruster is entitled only to the proceeds derived from the sale of goods
FACTS: released under a trust receipt to the entrustee.
Supermax is engaged in construction business. Metrobank extended several
commercial letters of credit to Supermax. These commercial LCs were used by As ruled in the case of Land Bank vs. Perez, when both parties enter into an
Supermax to pay for the delivery of several construction materials which will be agreement knowing that the return of the goods subject of the trust receipt is
used in their construction business. Thereafter, Metrobank required petitioner not possible even without any fault on the part of the trustee, it is not a trust
to sign 24 trust receipts as security for the construction materials and to hold receipt transaction. The only obligation actually agreed upon by the parties
those materials or the proceeds of the sales in trust for Metrobank to the would be the return of the proceeds of the sale transaction. This transaction
extent of the amount stated in the trust receipts. becomes a mere loan, where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods.
The 24 trust receipts fell due but Supermax failed to pay or deliver the goods or
proceeds to Metrobank. As a consequence, Metrobank filed a case for estafa The practice of banks of making borrowers sign trust receipts to facilitate
against petitioner Hur Tin Yang as the representative and VP of Supermax’s collection of loans and place them under the threats of criminal prosecution
internal affairs. should they be unable to pay it may be unjust and inequitable. if not
reprehensible. Such agreements are contracts of adhesion which borrowers
Petitioner admitted that he signed the trust receipts. However, he argued that have no option but to sign lest their loan be disapproved. The resort to this
said trust receipts were demanded by Metrobank as additional security for the scheme leaves poor and hapless borrowers at the mercy of banks and is prone
loans it extended to Supermax for the purchase of construction equipment and to misinterpretation.
materials. In fact, the construction materials covered by the trust receipts were
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Q: In other words, when could the issuance of a trust receipt be considered credit, drafts were drawn and issued by Nissho which were all paid by
within the scope of the trust receipt law? petitioner bank.
A: When the goods will be delivered to the entrustee, the intention should be
to sell, which is not present in the cases we discussed. The intention was only Upon the arrival of the machineries, the petitioner bank indorsed the shipping
for loan. No intention of resale of the goods, which is why not covered by Trust documents to respondent which accepted the delivery. To enable the
Receipt Law. respondent to take delivery of the machineries, it executed a trust receipt in
favor of petitioner bank.
It has been the practice of banks to make borrowers sign trust receipts to
facilitate collection of loans and then place them under the criminal threat for Later on, respondent ceased business operation. However, its obligation arising
estafa should they be unable to pay. The SC said this is unjust and equitable from the letter of credit and the trust receipt remained unpaid and
since these agreements are contracts of adhesion. The mere fact that there are unliquidated despite the repeated demands of petitioner bank.
trust receipts issued does not automatically make it covered under the trust
receipts law or that the entrustee would be liable for estafa. In this case the The IAC ruled that the relationship existing between the petitioner and
bank knew even before the execution of the trust receipt agreement that the respondent is governed by specific contracts, namely the application for letters
construction materials covered were never intended for resale or for the of credit, the promissory note, the drafts and the trust receipt. It further ruled
manufacture of items to be sold. It was a simple loan. that respondent could only be held liable for the 2 drafts because only these
appear to have been accepted by the latter after due presentment. However,
So you look at the intention. And look at WON the entrustee has the alternative the liability for the remaining 10 drafts did not arise because the same were
obligation to deliver the proceeds of the sale of the goods covered by the trust not presented for acceptance. The IAC concluded that acceptance of the drafts
receipts or to return the goods unsold. The transaction becomes a mere loan by Philippine Rayon was indispensable to make it liable.
where the borrower is obligated to pay the bank the amount spent for the
purchase of goods. ISSUE: W/N respondent Philippine Rayon is liable on the basis of the trust
receipt.
Now notice here that the information of this case were all dated March 15,
2002, and as we have read or hopefully read, we have here a “try and try until RULING: YES
you succeed”, because why? The trial court would find them guilty, the Court of A letter of credit is defined as an engagement by a bank or other person made
appeals would uphold the decision, and the SC even initially dismissed the case. at the request of a customer that the issuer will honor drafts or other demands
Tingnan nyo, 2002 gi-file ang criminal action until 2013 na-dismiss na lahat ng for payment upon compliance with the conditions specified in the credit.
criminal liability for estafa.
Through a letter of credit, the bank merely substitutes its own promise to pay
for one of its customers who in return promises to pay the bank the amount of
funds mentioned in the letter of credit plus credit or commitment fees
mutually agreed upon.
VI. LETTERS OF CREDIT
In the instant case, by virtue of the Application and Agreement for Commercial
How about letters of credit? LOC in Code of Commerce specifically Articles 567 Letter of Credit, petitioner bank as under obligation to pay through its
to 572. correspondent bank in Japan the drafts that Nissho Company periodically drew
against said letter of credit pursuant to petitioner's contract with respondent.
In turn, respondent was obligated to pay petitioner bank the amounts of the
Art. 567 drafts drawn by Nissho Company against petitioner together with any accruing
Letters of credit are those issued by one merchant to another or for the commercial charges, interest, etc. pursuant to the terms and conditions
purpose of attending to a commercial transaction. stipulated in the Application and Agreement of Commercial Letter of Credit.
However, this definition has become obsolete, since nowadays, LOC are strictly Hence, the drawee was necessarily the petitioner bank. It was to the petitioner
bank-to-bank transactions. It is issued by a bank that guarantees its clients that the drafts were presented for payment. In fact, there was no need for
ability to pay for imported goods or services. The underlying idea of a letter of acceptance as the issued drafts are sight drafts. Presentment for acceptance is
credit is to ensure certainty of payment. Seller is assured of payment because necessary only in the cases expressly provided for in Section 143 of the NIL.
the bank intervenes and makes the commitment to pay. The idea behind it is
like your credit card. You walk into a department store and they sell to you on Furthermore, respondent not only have presumably put said machinery to
credit although you’re a total stranger because you show your credit card, good use and have profited by its operation and/or disposition but respondent
which means that the bank which issued the credit card tells the seller that it already sold the machinery covered by the trust receipt to Yupangco Cotton
will pay the goods being bought. Mills. Clearly, respondent willfully violated their duty to account for the
whereabouts of the machinery covered by the trust receipt or for the proceeds
A basic principle in letters of credit is that the bank deals with documents only. of any lease, sale or other disposition of the same that they may have made,
Aside from certain conditions, the seller will be required to submit certain notwithstanding demands therefor.
documents together with the draft that he will draw in order to collect. These
documents shall be negotiated and agreed upon between the buyer and the Q: Is there a contract of sale here?
seller. Normally, the seller would have to submit together with the draft a bill of A: Yes, between Phil. Rayon and Nissho.
lading, packing list, commercial invoice. As banks deal with documents only,
they are not qualified to deal with goods. They’re not competent to deal with a Q: Will the validity of the sale be affected by the letter of credit arrangement
thousand and one type of goods. They will act on the basis of the documents between Phil. Rayon and Prudential?
only. A: No, maam.
A letter of credit is also not a contract of guarantee or suretyship, because it Q: So, when will the obligation of the bank to Nissho arise?
entails a primary liability on the part of the issuer-borrowee in default. And Q: Can it refuse to pay on the ground of breach of contract or on the ground
moreover, it is not a negotiable instrument. that the goods delivered were not in accordance with what was agreed
between Phil. Rayon and Nissho?
PRUDENTIAL BANK vs. IAC Q: Do we have here a true trust receipt transaction covered by the trust receipt
FACTS: law?
Respondent Philippine Rayon applied for a commercial letter of credit with
petitioner Prudential Bank to effect payment for the importation of So here, Phil. Rayon immediately became liable upon payment of Prudential to
machineries with Nissho Company. By virtue of the application, the petitioner Nissho. A different conclusion would invalidate the principle upon which a
bank opened a Letter of Credit in favor of respondent. Against this letter of commercial letter or credit is founded.
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Once the letter of credit is established, the seller ships the goods to the buyer Once the credit is established, the seller ships the goods to the buyer and in the
and in the process secures the required shipping documents and documents of process secures the required shipping documents or documents of title. To get
title. To get paid, the seller executes a draft and presents it together with the paid, the seller executes a draft and presents it together with the required
required documents to the issuing bank. documents to the issuing bank. The issuing bank redeems the draft and pays
cash to the seller if it finds that the documents submitted by the seller conform
The issuing bank redeems the draft and pays cash to the seller if it finds that the with what the letter of credit requires. The bank then obtains possession of the
documents submitted by the seller conform with what the letter of credit documents upon paying the seller.
requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when the buyer reimburses the issuing The transaction is completed when the buyer reimburses the issuing bank and
bank and acquires the documents entitling him to the goods. The seller gets acquires the documents entitling him to the goods. Under this arrangement,
paid only if he delivers the documents of title over the goods while the buyer the seller gets paid only if he delivers the documents of title over the goods,
acquires the said documents and control over the goods only after reimbursing while the buyer acquires said documents and control over the goods only after
the bank. reimbursing the bank.
ISSUES: As an advising or notifying bank, petitioner did not incur any obligation more
(1) W/N the Bank of America is a mere advising bank under the letter of than just notifying Inter-Resin of the letter of credit issued in its favor, let alone
credit hence it cannot be held liable. YES to confirm the letter of credit. The bare statement of the bank employees on
(2) W/N the Bank of America may recover against Inter-Resin under the the authenticity of the letter of credit did not have the effect of novating the
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letter of credit and petitioner's letter of advise, nor can it justify the conclusion part with his goods before he is paid, and a buyer, who wants to have control of
that the bank must now assume total liability on the letter of credit. the goods before paying.
Indeed, Inter-Resin itself cannot claim to have been all that free from fault. As The transaction is completed when the buyer reimburses the issuing bank and
the seller, the issuance of the letter of credit should have obviously been a acquires the documents entitling him to the goods. Under this arrangement, the
great concern to it. It would have, in fact, been strange if it did not, prior to the seller gets paid only if he delivers the documents of title over the goods, while
letter of credit, enter into a contract, or negotiated at the every least, with the buyer acquires said documents and control over the goods only after
General Chemicals. In the ordinary course of business, the perfection of reimbursing the bank.
contract precedes the issuance of a letter of credit.
The engagement of the issuing bank to pay the seller of the draft and the
Bringing the letter of credit to the attention of the seller is the primordial required shipping documents are presented to it. So that’s what happened in
obligation of an advising bank. The view that Bank of America should have first regard to Bank of America.
checked the authenticity of the letter of credit with bank of Ayudhya, by using In relation thereto, please take note of the INDEPENDENCE PRINCIPLE. The
advanced mode of business communications, before dispatching the same to bank determines compliance with the letter of credit only by examining the
Inter-Resin finds no real support in Article 18 of the UCP which states that: shipping documents presented; it is precluded from determining whether the
"Banks assume no liability or responsibility for the consequences arising out of main contract is actually accomplished or not. So, whether there was a
the delay and/or loss in transit of any messages, letters or documents, or for perfected sale, whether actual delivery took place, whether there is a breach of
delay, mutilation or other errors arising in the transmission of any warranty.. That issues are independent with regard to the compliance of the
telecommunication. As advising bank, petitioner is bound only to check the Letter of Credit.
"apparent authenticity" of the letter of credit, which it did.
Also in this case, the SC mentioned that there would at least be three (3)
Second issue parties:
The kind of transaction between the parties is what is commonly referred to as (a) the BUYER, who procures the letter of credit and obliges himself to
a discounting arrangement. This time, Bank of America has acted reimburse the issuing bank upon receipts of the documents of title;
independently as a negotiating bank, thus saving Inter-Resin from the hardship (b) the bank issuing the letter of credit, which undertakes to pay the
of presenting the documents directly to Bank of Ayudhya to recover payment. seller upon receipt of the draft and proper document of titles and to
As a negotiating bank, Bank of America has a right to recourse against the surrender the documents to the buyer upon reimbursement; and,
issuer bank and until reimbursement is obtained, Inter-Resin, as the drawer of (c) the seller, who in compliance with the contract of sale ships the
the draft, continues to assume a contingent liability thereon. goods to the buyer and delivers the documents of title and draft to
the issuing bank.
Inter-Resin admits having received P10,219,093.20 from bank of America on
the letter of credit and in having executed the corresponding draft. The It may be increased as there maybe services of an advising (notifying) bank may
payment to Inter-Resin has giventhe Bank of America the right of be utilized to convey to the seller the existence of the credit; or, of a confirming
reimbursement from the issuing bank, Bank of Ayudhya which, in turn, would bank which will lend credence to the letter of credit issued by a lesser known
then seek indemnification from the buyer (the General Chemicals of Thailand). issuing bank; or, of a paying bank, which undertakes to encash the drafts drawn
Since Bank of Ayudhya disowned the letter of credit, however, Bank of America by the exporter.
may now turn to Inter-Resin for restitution.
In this case, Bank of America was only an advising and nor a confirming bank, as
The fact that Inter-Resin sent waste instead of its products, is really of no clearly provided in the letter of advice. As an advising or notifying bank, Bank of
consequence. In the operation of a letter of credit, the involved banks deal only America did not incur any obligation more than just notifying Inter-Resin of the
with ƒdurdocuments and not on goods described in those documents. Hence, letter of credit issued in its favor, let alone to confirm the letter of credit. As an
Inter-Resin is ordered to refund to petitioner Bank of America. advising bank, the Bank of America is bound only to check the apparent
authenticity of the Letter of Credit, in which it did.
M: Who applied for the Letter of Credit?
S: General Chemicals Ltd., Inc May Bank of America then recover what it has paid under the letter of credit
when the corresponding draft for partial availment thereunder and the required
M: Who issued the Letter of Credit? documents were later negotiated with it by Inter-Resin? Yes, to which the SC
S: Bank of Ayudhya from Thailand held that such transaction is considered as a discounting arrangement.
M: In whose favor was the Letter of Credit supposed to be? Bank of America has acted independently as a negotiating bank, saving Inter-
S: Inter-Resin through Bank of America. Resin from the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. As a negotiating bank, Bank of America has a
This is more or less similar to Prudential Bank. The difference, however, is here, right to recourse against the issuer bank and until reimbursement is made. And
ang nag-issue is from another country. Unlike in Prudential Bank, the letter of in this case, Inter-Resin is considered as the drawer of the draft, continues to
credit was issued here in the Philippines. assume a contingent liability.
M: What is the role here of Bank of America? Bank of America, as a notifying bank, did not assume the responsibility of a
S: As an advising bank, its role is only to advise or notify Inter-Resin that a confirming bank.
Letter of Credit was issued in the latter’s favor. The Bank cannot confirm the
authenticity thereof. ESSENTIAL CONDITIONS OF A LETTER OF CREDIT
(1) It is issued in favor of a definite person and not to order. When you
M: Is Inter-Resin liable to Bank of America? had negotiable instruments, letters of credit is not a negotiable
S: Yes. Bank of America already released the money assming that the Letter of instrument because it is payable to a specific person.
Credit was genuine. (2) Limited to fixed or specified amount, or to one or more
undetermined amounts, but with maximum stated limit.
M: What do you mean by Independence Principle?
S: It states that the bank determines compliance with the letter of credit only Also, in relation to letters of credit, as mentioned in the Bank of America, we
by examining the shipping documents presented; it is precluded from have three parties: buyer, issuing bank, and the seller. And then as an
determining whether the main contract is actually accomplished or not. additional party, we have either advising, notifying, confirming or paying bank.
So here, the SC defined a LETTER OF CREDIT as financial device developed by In this transaction involving letters of credit, there are separate independent
merchants as a convenient and relatively safe mode of dealing with sales of contracts involved. Of course, there would be a Contract of Sale between the
goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to
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buyer and the seller. And then the contract of the buyer would be with the
issuing bank and then there is a letter of credit proper. December 13, 2016
As mentioned in the case of Bank of America, take note of the Independence PART VII: GUARANTY & SURETYSHIP
Principle in a letter of credit. A bank, in determining compliance of the terms of (Article 2047-2084)
a letter of credit, is required only to examine only the shipping documents
presented by the seller. And, again, it is precluded from determining whether
I. NATURE AND EXTENT
the main contract is actually accomplished or not. Independent ‘yun. This
arrangement assures the seller from payment, independent of a breach of the
ARTICLE 2047. By guaranty a person, called the guarantor, binds himself to
sales contract.
the creditor to fulfill the obligation of the principal debtor in case the latter
should fail to do so.
Now, RULE OF STRICT COMPLIANCE IN THE LETTER OF CREDIT TRANSACTION.
If a person binds himself solidarily with the principal debtor, the
That the documents tendered by the seller or the beneficiary must strictly
provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In
conform to the terms of the letter of credit. So naka-specify na ‘yan sa letters
such case the contract is called a suretyship. (1822a)
of credit. A corresponding bank, which departs from what has been stipulated
under the letter of credit as when it accepts a faulty tender, acts on its own risk,
Classifications of a Guaranty
and it may not thereafter be able to recover from the buyer or issuing
A) In a Broad Sense (Article 2047, par. 1)
bank, as the case may be, the money thus paid to the beneficiary.
1. Personal Guaranty or Security
- There is no object involved. You just have this person who
Another term where you should also be familiar with as the STAND-BY LETTER
acts a guaranty or surety and the creditor takes into
OF CREDIT. This is a bank issued option on the loan involving three parties: the
consideration the reputation, credit and standing of the
bank issues the credit, the party requesting for such issuance, and then we have
guarantor without preference to any other object.
the beneficiary. The beneficiary has the right to trigger(?) the loan option if the
- Essentially unsecured because you only rely on the promise
party fails to fulfill its commitment, the standby letter of credit, meron nang
to pay or the personal commitment of the guarantor or the
maximum amount specified therein in which case the issuing bank disburses a
surety.
specified sum to the beneficiary and books an equivalent loan. It will consider it
2. Real Securities
as a loan of its customer. Such standby letter of credit may support one
- Contracts of pledge, mortgage and antichresis
financial obligation such as those of bidder. Yung mag-bid ka specially for those
- There is a real contract of security because you have a
which involve huge amounts. So kung mag-bid ka, hindi ka pa man maglabas
property which acts a security or a collateral, not just a
ng pera pero dapat meron kang available na pera. As a proof you can have a
mere promise for the obligation.
standby letters of credit. Or financial obligations as those of borrowers. Do
take note that standby letters of credit may be considered as a security
B) As to its origin (Art. 2051, par. 1.)
arrangement but they are not considered or converted contracts of guarantee.
1. Conventional. — One constituted by agreement of the parties
The bank doesn’t act as a guarantor.
2. Legal. — One imposed by virtue of a provision of law; or
3. Judicial. — One required by a court to guarantee the eventual right
TYPES OF LETTER OF CREDIT
of one of the parties in a case.
(1) Irrevocable
− Obligates the issuing bank to honor trust drawn in
C) As to consideration (Art.2048.)
compliance with the credit and cannot be cancelled
1. Gratuitous. — One where the guarantor does not receive any price
− It cannot be modified without the consent of all the
or remuneration for acting as such or
parties including the beneficiary-exporter.
2. Onerous. — One where the guarantor receives valuable
(2) Revocable
consideration for his guaranty.
− It can be cancelled or amended at any time before
payment and intended to serve as a means of arranging
D) As to the person guaranteed (Art. 2051, par. 2.)
payment, but it is not a guarantee of payment
1. Single. — One constituted solely to guarantee or secure
(3) Confirmed
performance by the debtor of the principal obligation; or
− Both banks are obligated to honor drafts drawn in
2. Double or sub-guaranty. — One constituted to secure the
compliance with the credit
fulfillment by the guarantor of a prior guaranty.
(4) Unconfirmed
− Obligation only of the issuing bank and issued if exporter
E) As to its scope and extent (Art. 2055, par. 2.)
has doubts about the foreign banks ability to be paid.
1. Definite. — One where the guaranty is limited to the principal
Such doubts may arise if the exporter is unsure of the
obligation only, or to a specific portion thereof; or
financial standing of the foreign bank or if political or
2. Indefinite or simple. — One where the guaranty includes not only
economic conditions of the foreign country are unstable.
the principal obligation but also all its accessories (e.g., interests)
A confirming bank is better able to judge the credibility of
including judicial costs.
a bank issuing a letter of credit
(5) Non-revolving
Note:Guaranty may also be continuing or not. (see Art. 2053.)
− Valid only for one transaction.
(6) Revolving
Contract of Guaranty and Suretyship
− Valid for several transactions over a given period of time.
In both of these contracts, you have two (2) parties – the principal
Most revolving letters of credit are revocable in form
debtor or principal creditor and the guarantor or surety.
(7) Cumulative
− Undrawn amounts can be carried over to future periods
Characteristics of a Guaranty
(8) Non-cumulative
1. Consensual – perfected by mere consent.
− A revolving letter of credit maybe non-cumulative, in
2. Nominate – because the law provide as a name for it.
which case, any amount not used by the beneficiary
3. Accessory – cannot stand on its own; there must be a principal
during a specified period, may not be drawn against a
obligation
latter periods
4. Subsidiary – takes effect only when the principal cannot pay his
obligation
-Case Digests by GUMBOC
5. Not a primary obligation – the obligation is subject to a condition;
END OF FIRST EXAM COVERAGE
when the principal debtor fails to pay or fulfill his condition; only
when his condition is fulfilled that the obligation of the guarantor
arises;
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6. Unilateral – because the obligation is only upon the guarantor; no expressly seeks to relieve obligors of any and all liability arising from their said
obligation is imposed upon the creditor as he only has to wait if the joint and several undertaking with Falcon," and for the "sureties" to
principal debtor cannot pay; thereafter, you can now proceed to "irrevocably agree and undertake to assume all of obligors said guarantees to
the guarantor. PDCP."
7. Guarantor must be distinct from the personal debtor – a person
cannot be a personal guarantor of himself ISSUES:
1. W/N a contract of suretyship exists between the Escaño group and
Suretyship (Article 2047, par. 2) the Ortigas group. NO
2. W/N petitioners were solidarily liable on the basis of the 1982
Suretyship may be defined as a relation which exists where one person undertaking. NO but they are jointly liable
(principal or obligor) has undertaken an obligation and another person (surety)
is also under a direct and primary obligation or other duty to a third person RULING:
(obligee), who is entitled to but one performance, and as between the two who
are bound, the one rather than the other should perform. First issue
The surety, engages to be answerable to a third person for the debt, A suretyship requires a principal debtor to whom the surety is solidarily
default, or miscarriage of another known as the principal. bound by way of an ancillary obligation of segregate identity from the
If a person binds himself solidarily with the principal debtor, the contract is obligation between the principal debtor and the creditor. The suretyship does
called suretyship and the guarantor is called a surety. bind the surety to the creditor, inasmuch as the latter is vested with the right
to proceed against the former to collect the credit in lieu of proceeding
Surety vs. Solidary Co-debtor (Escano vs. Ortigas) against the principal debtor for the same obligation.
As provided in Article 2047 in a surety agreement, the surety undertakes
Surety (Fiador in solidum) Solidary Co-debtor to be bound solidarily with the principal debtor. Thus, a surety agreement is
Outside of the liability he assumes Has no other rights than those an ancillary contract as it presupposes the existence of a principal contract. In
to pay the debt before the bestowed upon him in Section 4, the case at bar, the mere utilization of the term "SURETIES" could not work to
property of the principal debtor Chapter 3, Title I, Book IV of the Civil effect the Undertaking as a contract of surety, especially as it does not appear
has been exhausted, retains all Code. who exactly is the principal debtor whose obligation is "assured" or
the other rights, actions and "guaranteed" by the surety. The use of the term "sureties" cannot be deemed
benefits which pertain to him by as a conclusive indication of the existence of a surety agreement that in turn
reason of the fiansa. gives rise to a solidary obligation to pay Ortigas. Otherwise, it would lay down
A guarantor who binds himself in corresponding set of rights and obligations as between the "SURETIES" which
solidum with the principal debtor under petitioners and Matti did not clearly intend.
the provisions of the second paragraph
does not become a solidary co-debtor Presumption of joint obligation
to all intents and purposes. In case of concurrence of two or more creditors or of two or more
debtors in one and the same obligation, and in the absence of express and
What happened in the case of Escano vs. Ortigas? indubitable terms characterizing the obligation as solidary, the presumption is
that the obligation is only joint. It thus becomes incumbent upon the party
ESCAÑO vs. ORTIGAS alleging that the obligation is indeed solidary in character to prove such fact
(June 29, 2007) with a preponderance of evidence.
FACTS: The Undertaking does not contain any express stipulation that the
petitioners agreed "to bind themselves jointly and severally" in their
In 1980, PDCP entered into a loan agreement with Falcon whereby the obligations to the Ortigas group, or any such terms to that effect. Hence, such
Ortigas group executed an Assumption of Solidary Liability binding their selves obligation established in the Undertaking is presumed only to be joint.
solidary liable with Falcon for the due and punctual payment of the said loan. Ortigas, as the party alleging that the obligation is in fact solidary, bears the
In the meantime, two separate guaranties were executed to guarantee burden to overcome the presumption of jointness of obligations but he failed
the payment of the same loan one of which was executed by petitioners to discharge such burden.
Escaño, Silos et al (Escaño group).
Two years later (1982), the Ortigas group assigned their shares to the Distinction between surety and solidary co-debtor
Escano group in consideration that the Escaño group will assume all liabilities
of the Ortigas group arising from their previous joint and several undertakings Surety Solidary co-debtor
with Falcon, including those related to the loan with PDCP. Thus, a 1982 Outside of his liability, he assumes The creditor can compel any one of
Undertaking was executed between the Escano group as "SURETIES," on one to pay the debt before the property the joint and several debtors or the
hand, and Ortigas group as "OBLIGORS," on the other. of the principal debtor has been surety alone to answer for the
Nevertheless, Falcon defaulted in its payment causing PDCP to file a exhausted, retains all the other entirety of the principal debt
complaint for sum of money against Ortigas and the Escaño group. In his rights, actions and benefits which
answer, Ortigas filed a cross-claim against his co-defendants Falcon and the pertain to him by reason of the
Escaño group on the basis of the 1982 Undertaking. fiansa
Later on, Ortigas entered into a compromise agreement with PDCP Even as the surety is solidarily The solidary debtor who effected
whereby he agreed to pay PDCP P1.3M as full satisfaction of the PDCP’s claim bound with the principal debtor to the payment to the creditor may
against him, in exchange that PDCP will release him from any liability or claim the creditor, the surety who does claim from his co-debtors only the
arising from the Falcon loan agreement. Nevertheless, he maintained his pay the creditor has the right to share which corresponds to each,
cross-claim against the Escaño group. recover the full amount paid, and with the interest for the payment
Petitioners dispute that they are liable to Ortigas on the basis of the 1982 not just any proportional share, already made.
Undertaking. However, assuming that they are indeed liable, petitioners from the principal debtor or
argue that they are only jointly liable and not solidarily since the Undertaking debtors. The guarantor who pays is
did not provide for express solidarity pursuant to Article 1207 of the NCC. subrogated by virtue thereof to all
Ortigas countered that petitioners are solidarily liable for the Undertaking the rights which the creditor had
as the language used in the agreement clearly shows that it is a surety against the debtor
agreement between the obligors (Ortigas group) and the sureties (Escaño Such right to full reimbursement Such solidary debtor will not be
group). Ortigas points out that the Undertaking uses the word "SURETIES", falls within the other rights, actions able to recover from the co-
which was repeated 13 times, in describing the parties. It is further contended and benefits which pertain to the debtors the full amount already
that the principal objective of the parties in executing the Undertaking cannot surety by reason of the subsidiary paid to the creditor, because the
be attained unless petitioners are solidarily liable since the Undertaking obligation assumed by the surety. right to recovery extends only to
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obligation contracted by the principal. Nevertheless, although the contract Respondent insurance company was not automatically released from any
of a surety is in essence secondary only to a valid principal obligation, his liability when petitioner resorted to the rescission of the principal contract for
liability to the creditor or promisee of the principal is said to be direct, failure of the other party to perform its undertaking. Precisely, the liability of
primary and absolute; in other words, he is directly and equally bound with the surety arising from the surety contracts comes to life upon the solidary
the principal. obligor’s default. It should be emphasized that petitioner had to choose
Suretyship, in essence, contains two types of relationship: rescission in order to prevent further loss that may arise from the delay of the
1. The principal relationship between the obligee (petitioner) and progress of the project. Without a doubt, Lucky Star’s unsatisfactory progress in
the obligor (Lucky Star), and the drilling work and its failure to complete it in due time amount to non-
2. The accessory surety relationship between the principal (Lucky performance of its obligation.
Star) and the surety (respondent). In fine, respondent should be answerable to petitioner on account of Lucky
Star’s non-performance of its obligation as guaranteed by the performance
In this arrangement, the obligee accepts the surety’s solidary bond.
undertaking to pay if the obligor does not pay. Such acceptance, however, Finally, Article 1217 of the New Civil Code acknowledges the right of
does not change in any material way the obligee’s relationship with the reimbursement from a co-debtor (the principal co-debtor, in case of suretyship)
principal obligor. Neither does it make the surety an active party to the in favor of the one who paid (the surety). Thus, respondent is entitled to
principal obligee-obligor relationship. Thus, the acceptance does not give the reimbursement from Lucky Star for the amount it may be required to pay
surety the right to intervene in the principal contract. The surety’s role arises petitioner arising from its bonds.
only upon the obligor’s default, at which time, it can be directly held liable
by the obligee for payment as a solidary obligor. Now how do we distinguish a contract of guaranty from a contract of
In this case, when Lucky Star failed to finish the drilling work within the suretyship?
agreed time frame despite petitioner’s demand for completion, it was
already in delay. Due to this default, Lucky Star’s liability attached and, as a CASTELLVI DE HIGGINS vs. SELLNER
necessary consequence, respondent’s liability under the surety agreement FACTS:
arose.
Undeniably, when Lucky Star reneged on its undertaking with the Respondent Sellner wrote a letter to petitioner Mrs. Higgins if the
petitioner and further failed to return the P575k downpayment that was promissory note executed by Keystone is not paid at maturity, then, within
already advanced to it, respondent, as surety, became solidarily bound with 15 days after notice of such default and upon surrender to him of the 3k
Lucky Star for the repayment of the said amount to petitioner. The clause, shares of Keystone Mining Company stock, he will assume joint and several
"this bond is callable on demand," strongly speaks of respondent’s primary liability with Keystone.
and direct responsibility to the petitioner.1avvphil Petitioner Mrs. Higgins argues that Sellner is a surety while Sellner
Accordingly, after liability has attached to the principal, the obligee or, argues that he is merely a guarantor.
in this case, the petitioner, can exercise the right to proceed against Lucky
Star or respondent or both based on Article 1216. Contrary to the trial ISSUE: W/N Sellner is a surety.
court’s ruling, respondent insurance company was not automatically
released from any liability when petitioner resorted to the rescission of the RULING: NO but he is a mere guarantor
principal contract for failure of the other party to perform its undertaking.
Precisely, the liability of the surety arising from the surety contracts comes Distinction between a surety and a guarantor
to life upon the solidary obligor’s default. It should be emphasized that
petitioner had to choose rescission in order to prevent further loss that may Surety Guarantor
arise from the delay of the progress of the project. Without a doubt, Lucky Each promises to answer for the debt or default of another
Star’s unsatisfactory progress in the drilling work and its failure to complete Assumes liability as a regular party The liability as a regular party to
it in due time amount to non-performance of its obligation. to the undertaking upon an independent agreement
to pay the obligation if the primary
Q: What is the nature of his alleged liability? pay or fails to do so
A: As a surety. Charged as an original promissory Collateral undertaking
Obligation is primary Obligation is secondary
Q: Who are the parties to the contract of suretyship?
A: The principal debtor is Lucky Star. The principal creditor is Asset Builders. The It is perfectly clear that the obligation assumed by defendant was simply
surety is Stronghold. that of a guarantor. Sellner is not bound with the principals by the same
instrument executed at the same time and on the same consideration, but
Q: Is Stronghold liable as a surety? his responsibility is a secondary one found in an independent collateral
A: Yes. agreement, Neither is Sellner jointly and severally liable with the principal
debtors.
Discussion: When the note became due, it is admitted that the shares of stock used
as collateral security were selling at par. Notice that the note had not been
Remember that a surety’s undertaking is contractual and accessory but paid was not given to and when the Keystone stock was worthless.
direct. Defendant, consequently, through the laches of plaintiff, has lost possible
As provided in Article 2047, the surety undertakes to be bound solidarily chance to recoup, through the sale of the stock, any amount which he might
with the principal obligor. That undertaking makes a surety agreement an be compelled to pay as a surety or guarantor. The "indulgence," as this word
ancillary contract as it presupposes the existence of a principal contract. is used in the law of guaranty, of the creditors of the principal, as evidenced
Although the contract of a surety is in essence secondary only to a valid by the acceptance of interest, and by failure promptly to notify the
principal obligation, the surety becomes liable for the debt or duty of another guarantor, may thus have served to discharge the guarantor.
although it possesses no direct or personal interest over the obligations nor
does it receive any benefit therefrom. Let it be stressed that notwithstanding Q: Who is the principal debtor?
the fact that the surety contract is secondary to the principal obligation, the A: Keystone Mining.
surety assumes liability as a regular party to the undertaking.
Nevertheless, although the contract of a surety is in essence secondary Q: Who is the principal creditor?
only to a valid principal obligation, his liability to the creditor or promisee of A: Macleod and Higgins.
the principal is said to be direct, primary and absolute; in other words, he is
directly and equally bound with the principal. Q: Who is the alleged surety?
The surety’s role arises only upon the obligor’s default, at which time, it can A: Sellner.
be directly held liable by the obligee for payment as a solidary obligor.
Discussion:
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contract is merely an accessory contract, which cannot exist without a valid sureties. That’s why the benefit of excussion cannot be invoked. In practice,
obligation. Thus, the surety may avail itself of all the defenses available to what usually happens is that the creditors sue both the principal debtor and the
the principal debtor and inherent in the debt at is, the right to invoke the surety para isang kaso nalang.
arbitration clause in the Purchase Agreement. What about the interest? Respondents alleged that its failure to demand
was due to the advise of One Virtual that petitioner allegedly breached its
ISSUE: W/N UCPB can invoke the arbitration clause as a surety. undertaking. However, record was bereft of proof to show that UCPB’s delay
was justified by these circumstances. Having been held that the surety, upon
RULING: NO demand, fails to pay, it can be held liable for interest even if the whole liability
becomes more than the principal obligation because the increase in the liability
The acceptance of a surety agreement, does not change in any is not because of the contract but rather the default or failure of the surety to
material way the creditor’s relationship with the principal debtor nor does pay upon demand and the necessity of judicial collection. So here the interest
it make the surety an active party to the principal creditor-debtor accrued from the time of extra-judicial demand. Notice that the interest rate
relationship. In other words, the acceptance does not give the surety the here is 6% because the obligation arose NOT from a loan or forbearance of
right to intervene in the principal contract. The surety’s role arises only money.
upon the debtor’s default, at which time, it can be directly held liable by
the creditor for payment as a solidary obligor." Hence, the surety remains a PALMARES vs. CA
stranger to the Purchase Agreement. The respondent cannot invoke in its FACTS:
favor the arbitration clause in the Purchase Agreement, because it is not a
party to that contract. An arbitration agreement being contractual in Respondent MB Lending extended a loan credit to spouses Azarraga.
nature, it is binding only on the parties thereto, as well as their assigns and The loan was secured by a promissory note where petitioner Palmares
heirs. Arbitration laws mandate that no court can compel arbitration, bound herself solidarily liable. When the balance of the loan remained
unless a party entitled to it applies for this relief. Further, it can only be unpaid, respondent filed a complaint against petitioner to the exclusion of
demanded by one who is a party to the arbitration agreement. Considering spouses Azarraga by reason of their insolvency. Palmares alleged that she
that neither petitioner nor One Virtual has asked for a referral, there is no offered to pay the balance of the loan, but it was respondent who refused
basis for the CA’s order to arbitrate. to receive the same.
Furthermore, a referral to arbitration may only take place "if at least The RTC ruled that the promissory note was a contract of adhesion and
one party so requests not later than the pre-trial conference, or upon the petitioner is only secondarily liable thereto. The CA reversed the decision
request of both parties thereafter." Respondent has not presented even an and ruled that petitioner was a surety and even assuming that the
iota of evidence to show that either petitioner or One Virtual submitted its promissory note was a contraction of adhesion, it is not void per se.
contesting claim for arbitration. Palmares appealed the decision arguing that he is only a guarantor for
Lastly, sureties do not insure the solvency of the debtor, but rather the the following reasons:
debt itself. They are contracted precisely to mitigate risks of non- 1. The words "jointly and severally or solidarily liable" are technical
performance on the part of the obligor. This responsibility necessarily and legal terms which are not fully appreciated by an ordinary
places a surety on the same level as that of the principal debtor. The effect layman like her;
is that the creditor is given the right to directly proceed against either 2. The rule on reasonable construction applies to him;
principal debtor or surety. This is the reason why excussion cannot be 3. The promissory note is a contract of adhesion since respondent
invoked. To require the creditor to proceed to arbitration would render the alone prepared it;
very essence of suretyship nugatory and diminish its value in commerce. 4. Upon the grant of an extension for her to pay, her obligation
was extinguished.
Additional notes
In order for the debtor (in this case, the surety) to be in default, it is ISSUE: W/N Palmares is a surety.
necessary that the following requisites be present:
1. That the obligation be demandable and already liquidated; RULING: YES
2. That the debtor delays performance; and
3. That the creditor requires the performance judicially or Surety distinguished from guarantor
extrajudicially.
Surety Guarantor
Having held that a surety upon demand fails to pay, it can be held liable for A surety is an insurer of the debt A guarantor is an insurer of the
interest, even if in thus paying, its liability becomes more than the principal solvency of the debtor
obligation. The increased liability is not because of the contract, but A suretyship is an undertaking A guaranty, an undertaking that
because of the default and the necessity of judicial collection. In the that the debt shall be paid the debtor shall pay
absence of an agreement as to interests, the Court ordered UCPB to pay A surety promises to pay the A guarantor agrees that the
legal interest at the rate of 6% per annum from 5 June 2000 until the principal's debt if the principal will creditor, after proceeding against
satisfaction of its obligation under the Suretyship Contract. not pay the principal, may proceed
against the guarantor if the
Discussion: principal is unable to pay
A surety binds himself to perform A guarantor, on the other hand,
So here, we have UCPB acting as a surety of the obligation of One Virtual in if the principal does not, without does not contract that the
favour of Gilat Satelite. Now remember that here, UCPB becomes liable upon regard to his ability to do so principal will pay, but simply that
mere failure of the principal debtor, One Virtual, to make prompt payment. And he is able to do so
Gilat Satelite would not be ordered to a separate claim against One Virtual A surety undertakes directly for A guarantor contracts to pay if, by
before proceeding against the surety, UCPB. Remember the obligation of the the payment and is so responsible the use of due diligence, the debt
surety is joint an solidary with the principal debtor. Its liability to the creditor or at once if the principal debtor cannot be made out of the
promise of the principal is said to be direct, primary, and absolute. So a surety is makes default principal debtor
directly and equally bound with the principal. Therefore, a surety is NOT
entitled to a separate notice of default or to the benefit of excussion. In fact, it She did understand "jointly and severally or solidarily liable"
can be sued separately or together with the principal debtor. If there is no doubt upon the intention of the contracting parties, the
With regard to the Arbitration clause, UCPB remains a stranger to the literal meaning of its stipulation shall control. Petitioner expressly bound
purchase agreement which involves the arbitration clause. Therefore, UCPB herself to be jointly and severally or solidarily liable with the principal
cannot invoke the said provision in its favor. Why? Because UCPB is not a party maker of the note. The terms of the contract are clear, explicit and
to the said contract. Further, the Supreme Court emphasized that the sureties unequivocal that petitioner's liability is that of a surety. Her contention is
do not ensure the solvencies of the debtors but the debt itself. So, the creditor opposed to her manifestation in the contract that she "fully understood
has the right to directly proceed against either the principal debtor or the the contents" of the promissory note and that she is "fully aware" of her
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solidary liability with the principal maker. Petitioner admits that she per se. In numerous occasions, such contracts have binding effect and upheld.
voluntarily affixed her signature thereto; ergo, she cannot now be heard to What is important is that the parties signing the contract clearly understood the
claim otherwise. provisions therein. In this instance, we have there that the co-maker is fully
Having entered into the contract with full knowledge of its terms and aware. It is clear and unequivocal that Palmares’ liability is that of a surety. This
conditions, petitioner is estopped to assert that she did so under a is also affirmed by the subsequent acts of Palmares. She admitted that she
misapprehension or in ignorance of their legal effect, or as to the legal voluntarily signed it.
effect of the undertaking. The rule that ignorance of the contents of an The SC again emphasized that the surety is the insurer of the debt. On the
instrument does not ordinarily affect the liability of one who signs it also other hand, the guarantor is the insurer of the solvency of the debtor. A
applies to contracts of suretyship. And the mistake of a surety as to the suretyship is an undertaking that the debt shall be paid while a guarantee is an
legal effect of her obligation is ordinarily no reason for relieving her of undertaking that the debtor shall pay. A surety binds himself to perform if the
liability. principal debtor does not without regard to his ability to do so. A guarantor, on
the other hand, does not contract that the principal will pay but simply that he
Reasonable construction is able to do so. A surety undertakes directly for the payment and so response le
Petitioner erroneously invokes the rule on strictissimi juris, which holds at once if the principal debtor defaults. A guarantor agrees to pay if by the use
that when the meaning of a contract of indemnity or guaranty has once of due diligence, the debt cannot be made out of the principal debtor.
been judicially determined under the rule of reasonable construction Another defenses on the part of Palmares is that a contract if suretyship
applicable to all written contracts, then the liability of the surety, under his must be strictly construed. However the SC emphasized that such rule may only
contract, as thus interpreted and construed, is not to be extended beyond apply if it has been definitely ascertained that the contract is that of a
its strict meaning. The rule, however, will apply only after it has been suretyship and not a guarantee. Also, a surety is not entitled, as a matter of
definitely ascertained that the contract is one of suretyship and not a right, to be given notice of the principal’s default.
contract of guaranty. It cannot be used as an aid in determining whether a Also take note, the fact that the creditor was lenient in demanding for the
party's undertaking is that of a surety or a guarantor. payment or performance of the obligation does not constitute an extension of
To judge the intention of the contracting parties, their time of payment to release a surety. When you talk about extension of time,
contemporaneous and subsequent acts shall also be principally considered. there must be an agreement between the creditor and the principal debtor
1. When petitioner was informed about the failure of the principal wherein the debtor is given additional time to pay within a definite period
debtor to pay the loan, she immediately offered to settle the given. A mere delay on the part of the creditor is not the extension of time
account with respondent corporation. Obviously, in her mind, contemplated under the law. The mere fact that the corporation gave the
she knew that she was directly and primarily liable upon default principal debtors an extended period to comply with their obligation did not
of her principal. effectively absolve the surety, Palmares, from the consequences of her
2. Petitioner presented the receipts of the payments already undertaking.
made, from the time of initial payment up to the last, which So again, in these cases we have discussed the distinction between these
were all issued in her name and of the Azarraga spouses. This two contracts.
can only be construed to mean that the payments made by the In a contract of guarantee, is not solidary with that of the principal debtor.
principal debtors were considered by respondent corporation as Only if the principal debtor cannot pay and the creditor has exhausted the
creditable directly upon the account and inuring to the benefit properties of the principal debtor and where there is no more property to
of petitioner. answer the obligation, only then can the creditor go after the guarantor. Sa
3. The concomitant and simultaneous compliance of petitioner's suretyship naman, the obligation of the surety is solidary to that of the principal
obligation with that of her principals only goes to show that, debtor. So the creditor can proceed against the surety without the benefit of
from the very start, petitioner considered herself equally bound excussion. A surety is primarily liable. A guarantor is secondarily liable.
by the contract of the principal makers. Another distinction that you should take note of is in relation to the
Statutes of Fraud. The Statute of Fraud does not apply to contracts of suretyship
Contract of adhesion to which the surety is primarily liable. It is not a collateral undertaking or
Even assuming arguendo that the promissory note executed between promise to pay the obligation of another person. It may be proven by mere oral
the parties is a contract of adhesion, it has been the consistent holding of evidence. While a guarantee must be in writing in order to be enforceable.
the Court that contracts of adhesion are not invalid per se and that on Another distinction is with that of an endorser, contract of guarantee is a
numerous occasions the binding effects thereof have been upheld. contract of security but an endorsement is not for security. It is a mode of
transferring. In a contact of guarantee, the liability is more extensive than that
The grant of extension of an endorser. The guarantor cannot be sued a promisor but an endorsement
In order to constitute an extension discharging the surety, it should can be sued as such.
appear that the extension was for a definite period, pursuant to an Also distinguish warranty from guarantee. In warranty, there is an
enforceable agreement between the principal and the creditor, and that it undertaking that the title, quality, and quantity of the subject matter is what
was made without the consent of the surety or with a reservation of rights has been represented in the deed. is what has been represented Sa guarantee
with respect to him. The contract must be one which precludes the creditor naman, you do not refer to the quality or character of the subject matter. But
from, or at least hinders him in, enforcing the principal contract within the rather we have a person who is bound to another for the fulfilment or payment
period during which he could otherwise have enforced it, and which of the obligation. What is only similar under these two is that both contain
precludes the surety from paying the debt. undertakings by one party to another to indemnify against some possible
None of these elements are present in the instant case. Verily, the mere default or defence.
fact that respondent corporation gave the principal debtors an extended
period of time within which to comply with their obligation did not JANUARY 10, 2017
effectively absolve herein petitioner from the consequences of her
undertaking. Besides, the burden is on the surety, herein petitioner, to Recap: We started with 2047 already, and last meeting we have emphasized the
show that she has been discharged by some act of the creditor, herein distinctions bet. A contract of guaranty and a contract of suretyship again take
respondent corporation, failing in which we cannot grant the relief prayed note of this distinctions. We also mentioned Alaxai(?) with regard to the Statute
for. of Frauds, the same is applicable to the contract of guaranty which means that
the contract of guaranty must be in writing in order for it to be enforceable.
Discussion: That the promise of a surety or an original promisor may be proved by parol
evidence. We already discussed the cases, Palmares and Gilat Satellite.
So what do we have here. One of the defenses of Palmares is that the
contract here was a contract of adhesion. We all know what is a contract of Now let’s proceed to the next article.
adehesion. It is a contract or a document prepared by one party and the other
party merely affixes his signature signifying his adherence to the provisions Article 2048. A guaranty is gratuitous, unless there is a stipulation to the
therein. So take it or leave it. But remember that in several rulings of the SC the
contrary.
mere fact that the contaract is a contract of adhesion does not make it invalid
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The general rule obviously is that guaranty is gratuitous unless stipulation by A: It was executed in 1979.
the parties that is considered onerous.
Q: When was the principal obligation demanded from Willex perfected?
Now we have also emphasized before, a contract of guaranty is an accessory
contract. And being a contract, it must have all the essential elements for its A: Perfected on the year 1981.
validity. So you must have consent, object and consideration.
Q: Can we just say, that it can refuse to pay on the account that it executed the
Q: What’s the consideration in a contract of guaranty? Is it necessary for the continuing guaranty, it did not receive anything arising from the principal
guarantor to receive something in return for the contract of guaranty? obligation, the loan from inter-resin? What’s the consideration of the accessory
contract of guaranty or suretyship?
WILLEX PLASTIC, INC. V. CA, INTERNATIONAL CORPORATE
Facts:Inter Resin opened a letter of credit with Manila Banking. To secure A: The consideration of the principal contract ma’am is the same as that of the
payment, Inter Resin and IUCP executed two Continuing Surety Agreement in guaranty or suretyship.
1978 binding themselves solidarily liable to pay Manila Bank.
Then in 1979, Inter Resin and Willex executed a Continuing Guaranty in favor The consideration necessary to support a surety obligation need not pass
of IUCP binding themselves solidarily liable to IUCP for the payment it made directly to the surety, so it cannot be a defense on the part of the surety that it
to Manila Bank. However, neither of them paid causing IUCP to file a claim did not receive anything in exchange for agreeing as a guarantor or surety. A
against them. consideration moving to the principal alone being sufficient. For a "guarantor or
Willex argues that under the "Continuing Guaranty," surety is bound by the same consideration that makes the contract effective
1. Its liability is for sums obtained by Inter-Resin from Interbank, not between the principal parties thereto. It is never necessary that a guarantor or
for sums paid by the latter to Manila bank for the account of surety should receive any part or benefit, if such there be, accruing to his
Inter-Resin. principal."
2. Being an accessory contract, cannot legally exist because of the
absence of a valid principal obligation. So take note of that in relation to Article 2048. Parties may agree to some
3. It cannot be retroactively applied so as to secure payments made consideration that the guarantor or surety may agree to be such in exchange for
by Interbank under the two Continuing Surety Agreements since it a consideration but even if the parties did not make such arrangement. Again, a
must be applied prospectively. contract of guaranty being an accessory contact is existence dependent upon
4. It cannot it cannot be proceeded against without first exhausting the principal obligation.
all property of Inter-Resin claiming the benefit of excussion.
In the absence of its specific consideration agreed upon by the parties then the
Issue: W/N Willex may be held solidarily liable with Inter Resin for the cause or consideration of the guaranty or suretyship is the same cause of the
amount paid by Interbank to Manila Bank. principal obligation. But of course if the principal contract has no cause or
Held: YES consideration principal contract is void, accessory contract of guaranty or
As to the consideration suretyship is likewise void. Because again you already learn, accessory follows
The consideration necessary to support a surety obligation need not pass the principal.
directly to the surety, a consideration moving to the principal alone being
sufficient. For a guarantor or surety is bound by the same consideration that Article 2049. A married woman may guarantee an obligation without the
makes the contract effective between the principal parties thereto. It is husband's consent, but shall not thereby bind the conjugal partnership,
never necessary that a guarantor or surety should receive any part or except in cases provided by law.
benefit, if such there be, accruing to his principal.
Remember the Civil Code was enacted 1950s, it emphasized that, patriarchal in
As to the contention of prospective application nature, the right of the married woman to enter into a contract of guaranty.
The parties to the "Continuing Guaranty" clearly provided that the Remember with regard to the properties, the general rule applying the Family
guaranty would cover "sums obtained and/or to be obtained" by Inter-Resin Code, to the absence of any stipulation it will be the absolute community of
Industrial from Interbank. Furthermore, by no means was it meant in the property. What would happen here? A married woman agree to be a guarantor
case of Diño vs. CA that in all instances a contrast of guaranty or suretyship of an obligation. If the principal debtor fails to pay then the married woman
should be prospective in application. Lastly, although a contract of suretyship who acted as the guarantor and she has separate property then the contract of
is ordinarily not to be construed as retrospective, in the end the intention of guaranty may refer to her separate and personal property of the married
the parties as revealed by the evidence is controlling. woman. But what if the married woman has no separate property of her own,
As to the right of excussion can the creditor go after the absolute community property of the spouses? Take
There was an express renunciation of the right of excussion when the note, it has to be taken in consideration whether the act being a guarantor of
Continuing Guaranty provides that if default be made in the payment of the the married woman redounded to the benefit of the family. Then the principal
guaranteed, the principal may directly proceed against Willex in the same obligation, the right to demand against the married woman is enforceable to
manner as if all such liabilities constituted are direct and primary. Not only the absolute community property. So it’s the same thing with regard to the
this, Willex also expressly bound itself solidarily liable with Inter-Resin under husband. Husband also has a prohibition under the Civil Code to act as a
the agreement as expressed in the following terms, “We hereby jointly and guarantor or surety.
severally and unconditionally guarantee unto you and/or your principal/s,
successor/s and assigns the prompt and punctual payment at maturity of the
Article 2050. If a guaranty is entered into without the knowledge or consent,
NOTE/S issued by the DEBTOR/S.”
or against the will of the principal debtor, the provisions of articles 1236 and
1237 shall apply.
Q: So by saying that there is a continuing guaranty, are we saying that Willex
here now is a continuing guarantor? Now do remember that in a contract of guaranty or suretyship, you do not need
the consent of the principal debtor for its validity. Essentially, it is only between
A: No maam, the intention of the parties is that of the suretyship. the guarantor and the principal creditor. Consent of the principal debtor is not
necessary to the validity of the guaranty and suretyship but again we take in to
Q: What makes it a suretyship and not a contract of guaranty? consideration what we have already learned in obligations and contracts under
Articles 1236 and 1237.
It is very clear on the agreement: “Willex together with the Inter Resin agree
jointly and severally guaranteed the prompt and punctual payment to the notes Article 1236. The creditor is not bound to accept payment or performance by a
issued by the debtors...” third person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary. Whoever pays for another may demand
Q: So here, when was the continuing guaranty is executed? from the debtor what he has paid, except that if he paid without the
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knowledge or against the will of the debtor, he can recover only insofar as the Now another important provision here in guaranty and suretyship is Article
payment has been beneficial to the debtor. (1158a) 2053:
So let us say Ysmael borrowed money from Emilio, si Ronald maraming pera Article 2053. A guaranty may also be given as security for future debts, the
“ako na magbayad sa utang ni Ysmael”. Kelangan pa ba nya magpaalam kay amount of which is not yet known; there can be no claim against the
Ysmael na siya mag bayad? Hndi na. Pero ano ang effect nito?1236 and 1237. guarantor until the debt is liquidated. A conditional obligation may also be
First, Ronald cannot force Emilio to accept the payment, because again the 1 st secured. (1825a)
paragraph is clear, not bound to accept payment by a third person who has no
interest in the fulfillment of the obligation. But if Emilio accepts the payment, Article 2053 is in relation to contracts of continuing guaranty and suretyship.
no problem, what are the rights available on the part of this third person Ronald
paying the obligation of Ysmael? We take into consideration whether the Q: What is contracts of continuing guaranty and suretyship?
payment is made with the knowledge or consent of the principal debtor. Here,
you recall, beneficial reimbursement and subrogation. A: The surety or guarantor guarantees the liabilities that are already existing
and all the future liabilities that are obtained.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in DINO vs. CA
his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) FACTS: In 1977 Uy Tiam Enterprises obtained a letter of credit from
Metrobank. To secure the payment thereof, Norberto Uy and Jacinto
If Ronald pay against the will or without the knowledge of Ysmael, Ronald can Diño executed Continuing Suretyship in favor of Metrobank. Under
seek a reimbursement to the extent Ysmael has benefited. Let us say 10,000 the agreement, Norberto Uy agreed to pay Metrobank any
php pero naan a diay partial payment na 2,000 php pero gibayaran lahat yun ni indebtedness up to the aggregate sum of P300k while Diño agreed to
Ronald. Siyempre si Emilio tinanggap nya ung whole 10,000 php. But can Ronald be bound up to the aggregate sum of P800k. It was further stipulated
demand the whole 10,000 for reimbursement from Ysmael? On the part of that the Continuing Suretyship shall remain in full force and effect
Ysmael, he can raise a defense, na may partial payment na 2,000 php. Kung until written notice have been received by Metrobank that it has
meron man ako obligation sayo only upto 8,000 php lang. To differentiate it, if been revoked by the sureties.
Ronald paid with the consent of Ysmael, Ronald will be entitled to the rights In 1979, when the same was paid, Uy Tiam obtained another
available as the same as that of the creditor Emilio. For example, Ysmael letter of credit from Metrobank but without the participation of
executed a mortgage, pwede din yun mahabol ni Ronald. Or let us say, Carra Norberto Uy and Jacinto Diño as they did not sign the document.
who acted as surety or guarantor of Ysmael, ano mangyari yan? C Ronald who Also, they were not asked to execute any suretyship to guarantee its
paid with the consent of Ysmael pede rin habulin ni Ronald si Carra as a payment. Neither did Metrobank or Uy Tiam inform them that the
guarantor or surety of the principal debtor. Again that’s the effect of 1979 Letter of Credit has been opened and the Continuing
subrogation to be distinguished from beneficial reimbursement if the third Suretyships separately executed in 1977 shall guarantee its payment.
person who paid the obligation did so without consent or against the will of the When Uy Tiam failed to pay, Metrobank demanded payment
principal debtor. So that is what is emphasized it there in 2050. from Norberto Uy and Diño. However, they denied any liability
alleging that the obligation which they guaranteed in 1977 has been
Article 2051. A guaranty may be conventional, legal or judicial, gratuitous, or extinguished since it has already been paid in the same year.
by onerous title. It may also be constituted, not only in favor of the principal Accordingly, the Continuing Suretyships executed in 1977 cannot be
debtor, but also in favor of the other guarantor, with the latter's consent, or availed of to secure Uy Tiam's Letter of Credit obtained in 1979
without his knowledge, or even over his objection. (1823) because a guaranty cannot exist without a valid obligation. It was
further argued that they cannot be held liable for the obligation
Okay, so the first paragraph mentions what we have discussed before in contracted in 1979 because they are not privies thereto as it was
relation to the classifications of a contract of guaranty. Second paragraph refers contracted without their participation. Even assuming that the
to what we call “double guaranty or sub-guaranty”. So you have a guarantor, agreements were in full force and effect at the time the 1979 credit
who guarantees the performance of the principal obligation and the obligation was obtained, they cannot be held liable for an amount over and
of the guarantor is guaranteed by another person who is considered as a sub- above what they guaranteed upon since the obligations of a surety
guarantor. cannot extend beyond what is stipulated in the agreement.
Metrobank argued that Uy and Diño, as sureties, bound
themselves as solidary obligors of Uy Tiam of both existing
Article 2052. A guaranty cannot exist without a valid obligation. Nevertheless,
obligations and future ones. Furthermore, the agreement was in full
a guaranty may be constituted to guarantee the performance of a voidable or
force and effect at the time the letter of credit was obtained in 1979
an unenforceable contract. It may also guarantee a natural obligation. (1824a)
since they, as sureties, did not exercise their right to revoke it by
giving notice to the bank.
This article, emphasized again that the contract of guaranty is an accessory ISSUE:W/N the Uy and Diño can be held liable as sureties for the
contract. It cannot exist without a valid obligation. So valid contracts may 1979 credit by virtue of the Continuing Suretyship Agreement signed
include defective contracts which are nevertheless valid. The voidable contracts in 1977.
valid it can be annulled. Unenforceable contracts, valid but unenforceable. You RULING: YES but only for the amount they agreed to guarantee
also have rescsissible contracts valid but can be rescinded. These type of Continuing guaranty
defective contracts can be the principal contracts subject of contract of surety A continuing guaranty is one which is not limited to a single
and guaranty. Of course, the time of guaranty and suretyship was entered into, transaction, but which contemplates a future course of dealing,
those defective contracts were still considered as valid. For example, it’s a covering a series of transactions, generally for an indefinite time or
voidable contract it has not yet annulled. Because otherwise, it has been until revoked. It is prospective in its operation and is generally
annulled at the the time they entered into a contract of guaranty, wala ng valid intended to provide security with respect to future transactions
contract to speak of. But of course if the prinicipal obligation is a void contract within certain limits, and contemplates a succession of liabilities, for
then you could not have a valid accessory contract of guaranty or suretyship. which, as they accrue, the guarantor becomes liable.
Now Article 2052, also tells us that the natural obligation maybe guaranteed. As Otherwise stated, a continuing guaranty is one which covers all
you have already learned in natural obligation is an obligation not based on law transactions, including those arising in the future, which are within
but on equity and natural law. It does not grant the right of action to enforce the description or contemplation of the contract, of guaranty, until
their performance but after a voluntary fulfillment by the obligor, the the expiration or termination thereof.
authorized the retention of what has been delivered or by reason thereof. It A guaranty shall be construed as continuing when by the terms
cannot be enforce, but it may still be the object of a guaranty. Once there is thereof it is evident that the object is to give a standing credit to the
performance, the debtor cannot demand to take back what he has given or principal debtor to be used from time to time either indefinitely or
paid. until a certain period, especially if the right to recall the guaranty is
expressly reserved. Hence, where the contract of guaranty states
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that the same is to secure advances to be made "from time to time" Q: When was the contract of continuing suretyship executed by Uy and Dino?
the guaranty will be construed to be a continuing one.
Expression used A: 1977 ma’am.
The use of particular words and expressions such as payment of
"any debt," "any indebtedness," "any deficiency," or "any sum," or Q: Can Uy and Dino still be held liable? Under the same continuing suretyship
the guaranty of "any transaction" or money to be furnished the agreement?
principal debtor "at any time," or "on such time" that the principal
debtor may require, have been construed to indicate a continuing A: The SC held that YES, the Supreme Court define what is a continuing
guaranty. guaranty, it is one which is not limited to a single transaction, but which
Paragraph I of the Continuing Suretyship Agreement executed by contemplates a future course of dealing, covering a series of transactions,
Diño contains identical provisions except with respect to the generally for an indefinite time or until revoked. Hence, where the contract of
guaranteed aggregate principal amount which is P800k. Also, the guaranty states that the same is to secure the advances made from time to
requirement of written notice for the revocation unequivocally time. The Guaranty will be construed to be a continuing ma’am. So in this case,
reveal that the suretyship agreements are continuing in nature. it was not revoked, hence ma’am the continuing guaranty exists ma’am.
Petitioners do not deny this. In fact, they candidly admitted it.
Neither have they denied the fact that they had not revoked the Q: What provision or statement or terms in the continuing suretyship
suretyship agreements. Undoubtedly, the purpose of the execution agreement executed by Uy and Dino made them liable to the 1979 obligation?
of the Continuing Suretyships was to induce Metrobank to grant any
application for credit accommodation Uy Tiam may desire to obtain. A: It was also held by the SC, that the use of particular words and expressions
By its terms, each suretyship is a continuing one which shall remain such as payment of "any debt," "any indebtedness," "any deficiency," or "any
in full force and effect until the bank is notified of its revocation. sum," or the guaranty of "any transaction" or money to be furnished the
Non-existence of obligation at the time agreement was executed principal debtor "at any time," or "on such time" that the principal debtor may
It is true that a guaranty cannot exist without a valid obligation require, have been construed to indicate a continuing guaranty.
under Article 2052. However, the succeeding article provides that a
guaranty may also be given as security for future debts, the amount Q: In this case, what where the specific terms used?
of which is not yet known. Also, Article 2052 speaks about a valid
obligation, as distinguished from a void obligation, and not an A: In this case ma’am, the terms used, I will read nlang ma’am. “For and in
existing or current obligation. consideration of any existing indebtedness to the BANK of UY TIAM (hereinafter
As to the amount of liability called the "Borrower"), for the payment of which the SURETY is now obligated
The limit of the petitioners respective liabilities must be to the BANK, either as guarantor or otherwise, and/or in order to induce the
determined from the suretyship agreement each had signed. It is BANK, in its discretion, at any time or from time to time hereafter, to make
undoubtedly true that the law looks upon the contract of suretyship loans or advances or to extend credit in any other manner to, or at the request,
with a jealous eye, and the rule is settled that the obligation of the or for the account of the Borrower”.
surety cannot be extended by implication beyond its specified limits.
To the extent, and in the manner, and under the circumstances Q: Is there any limitation on the said continuing suretyship agreement on the
pointed out in his obligation, he is bound, and no farther. The part of the liability of Uy and Dino? You have to take it to consideration because
Continuing Suretyship Agreements signed by Uy and Diño fix the of the amount demanded from them?
aggregate amount of their liability. The law is clear that a guarantor
may bond himself for less, but not for more than the principal A: Continuing Suretyship Agreements signed by petitioner Diño and petitioner
debtor, both as regards the amount and the onerous nature of the Uy fix the aggregate amount of their liability, at any given time, at P800,000.00
conditions. and P300,000.00, respectively.
Payment of interest
Nevertheless, they are liable for payment of interest and judicial So here the total is 815,000 so it is still within the limitation to the amount that
cost under Article 2055 of the CC. Creditors suing on a suretyship they agreed to be guaranteed.
bond may recover from the surety as part of their damages, interest
at the legal rate even if the surety would thereby become liable to Article 2053 emphasizes the validity of continuing suretyship or continuing
pay more than the total amount stipulated in the bond. The theory is guaranty even if at the time of its execution there is as yet, no principal
that interest is allowed only by way of damages for delay upon the obligation. In the case of Dino vs. CA, the SC discuss that the guarantee maybe
part of the sureties in making payment after they should have done given to secure even future debts, the amount of which may yet be known at
so. The payment thereof shall begin to run from the date when the the continuing guaranty is executed. The continuing guaranty or suretyship is
complaint was filed in court. one which is not limited to single transaction but a future course of dealing,
In other words the surety is made to pay interest, not by reason covering a series of transactions, generally for an indefinite time or until
of the contract, but by reason of its failure to pay when demanded revoked. It is prospective in its operation and is generally intended to provide
and for having compelled the plaintiff to resort to the courts to security with respect to future transactions within certain limits, and
obtain payment. contemplates a succession of liabilities.
Conclusion
Since the complaint was filed on 1982, it is obvious that on that The liability to be demanded from the guarantor or surety should be within the
date, the outstanding principal obligation of Uy Tiam, secured by the description or contemplation of the contract, of guaranty, until the expiration or
petitioners' Continuing Suretyship Agreements, was less than termination thereof. Where the contract of guaranty states that the same is to
P613,339.32. Such amount may be fully covered by the Continuing secure advances to be made "from time to time" the guaranty will be construed
Suretyship Agreement executed by Diño which stipulates an to be a continuing one. Other terms: "any indebtedness," "any deficiency," or
aggregate principal sum of not exceeding P800k, and partly covered "any sum," or the guaranty of "any transaction" or money to be furnished the
by that of Uy which pegs his maximum liability at P300k. principal debtor "at any time," or "on such time" that the principal debtor may
Uy and Diño are liable only up to the maximum limit of their require, have been construed to indicate a continuing guaranty.
respective Continuing Suretyship Agreement of the remaining unpaid
balance Uy Tiam under the 1979 letter of credit together with the So here: either as guarantor or otherwise, and/or in order to induce the BANK,
interest due thereon from the date of the filing of the complaint as in its discretion, at any time or from time to time hereafter, any and all such
well as the adjudged attorney's fees and costs. instruments in full force and effect until written notice shall have been received
by the bank that it has been revoked by the Surety.
Q: Here the principal obligation is perfected again on what date? So, while it is true that the guaranty cannot exist without a valid obligation
under 2052, again if what was entered into is a continuing suretyship or
A: 1979 mam. guaranty that is expressly covered and considered valid under Article 2053.
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Q: What’s the purpose? Why do parties enter into these types of contracts of A: The SC held that still such is misguided because it is covered under Article
continuing guaranty or suretyship? What happen in the case of Atok? 2053. Here it is not necessary that a principal obligation exists at the time of the
execution of the continuing suretyship agreement.
ATOK vs. CA
FACTS: Q: Again, what is the purpose of the parties in executing such kind of
In 1979, Sanyu Trading, spouses Halili and Bermudo (sureties) executed a agreement?
Continuing Suretyship which provides that:
They jointly and severally unconditionally guarantee to Atok A: To secure future debts without executing further contracts. Unless revoked
Finance (creditor) the full, faithful and prompt payment and discharge provided in their agreement.
of any and all indebtedness of Sanyu Chemical (principal). The word
"indebtedness"includes any and all advances, debts, obligations and Here, Comprehensive or continuing surety agreements are in fact quite
liabilities of Principal now or hereafter made, incurred or created, common place in present day financial and commercial practice. By executing
whether due or not due, absolute or contingent, liquidated or such an agreement, the principal places itself in a position to enter into the
unliquidated, or whether recovery upon such indebtedness may be or projected series of transactions with its creditor; with such surety agreement,
hereafter become barred by any statute of limitations, or whether such there would be no need to execute a separate surety contract or bond for each
indebtedness may be or otherwise become unenforceable. loan or financing or credit accommodation extended to the principal debtor.
This is a continuing suretyship relating to any indebtedness, Less time, Less effort and much easier on both parties for the release of the
including that arising under successive transactions which shall either loan or for the execution of the subsequent principal obligation.
continue the indebtedness from time to time or renew it after it has
been satisfied. In this case, we also have a continuing suretyship agreement, considered valid.
In 1981, Sanyu Chemical assigned its trade receivables to Atok Finance Even if at the time of its execution, no pre-existing obligation was yet due. It is
thru a Deed of Assignment. However, on the same year, Atok Finance filed an clear on the said agreement that it relates to any indebtedness including that
action against Sanyu Chemical and the sureties alleging that Sanyu Chemical arising under successive transactions which shall either continue the
failed to collect and remit the amount due under the trade receivables. indebtedness from time to time or renew it after it has been satisfied. It’s very
Sanyu Chemical and the sureties alleged that the Continuing Suretyship clear what we have here is a continuing suretyship agreement which is valid
Agreement, being an accessory contract, was null and void since, at the time under Article 2053.
of its execution, Sanyu Chemical had no pre-existing obligation due to Atok
Finance. We also have the case of RCBC vs. Judge Arro.
The CA ruled that the Agreement cannot be enforced because (1) the
contract, just like guaranty, cannot exist without a valid obligation; (2) RCBC vs. JUDGE ARRO
although it may be given as security for future debt the obligation FACTS: Chua and Enrique Go, Sr. executed Comprehensive Surety
contemplated cannot be considered "future debt"; and (3) There is no proof Agreements to guaranty any existing indebtedness of DAICOR and/or induce
that when the suretyship agreement was entered into, there was a pre- the bank at any time or from time to time thereafter, to make loans or
existing obligation which served the principal obligation between the parties. advances or to extend credit in other manner to, or at the request, or for the
ISSUE: W/N the sureties can be held liable under the Continuing Suretyship account of the Borrower (DAICOR) upon which they held themselves liable
Agreement. provided that the liability shall not exceed the aggregate principal sum of
RULING: YES P100k.
It is true that a guaranty or a suretyship agreement is an accessory When the promissory note was not paid, petitioner RCBC filed a
contract in the sense that it is entered into for the purpose of securing the complaint of sum of money against DAICOR, Enrique Go Sr. and Chua. Chua
performance of the principal obligation. It is also true that Article 2052 of CC alleged that he cannot be held liable under the promissory note because it
states that "a guarantee cannot exist without a valid obligation." However, a was only Enrique Go, Sr. who signed the same in behalf of DAICOR and in his
guaranty may also be given as security for future debts the amount of which own personal capacity.
is not yet known under Article 2053. On the other hand, RCBC argued that by virtue of the execution of the
Of course, a surety is not bound under any particular principal obligation comprehensive surety agreement, Chua is liable because said agreement
until that principal obligation is born. But there is no theoretical or doctrinal covers not merely the promissory note subject of the complaint, but is
difficulty inherent in saying that the suretyship agreement itself is valid and continuing; and it encompasses every other indebtedness the Borrower may,
binding even before the principal obligation intended to be secured thereby from time to time incur with petitioner. In other words petitioner argues that
is born, any more that there would be in saying that obligations which are when Go and Chua signed the Comprehensive Continuing Agreement, they
subject to a condition precedent are valid and binding before the occurrence bound themselves as solidary debtors of DAICOR not only to existing
of the condition precedent. obligations but to future ones.
Comprehensive or Continuing Surety Agreement ISSUE:W/N Chua may be held liable to pay the promissory note, which he did
Comprehensive or continuing surety agreements are in fact quite not sign, pursuant to the Comprehensive Continuing Agreement.
common place in present day financial and commercial practice. A bank or a RULING: YES
financing company which anticipates entering into a series of credit The comprehensive surety agreement was jointly executed by Enrique
transactions with a particular company, commonly requires the projected Go and Chua to cover existing as well as future obligations which DAICOR
principal debtor to execute a continuing surety agreement along with its may incur with the petitioner bank, subject only to the proviso that their
sureties. By executing such an agreement, the principal places itself in a liability shall not exceed at any one time the aggregate principal sum of
position to enter into the projected series of transactions with its creditor. P100k.
With such surety agreement, there would be no need to execute a separate The agreement was executed obviously to induce petitioner to grant any
surety contract or bond for each financing or credit accommodation application for a loan DAICOR may desire to obtain from petitioner bank. The
extended to the principal debtor. This is precisely what happened in the case guaranty is a continuing one which shall remain in full force and effect until
at bar. the bank is notified of its termination.
The obligations of the sureties under the Continuing Suretyship At the time the promissory note was executed, the comprehensive
Agreement, were activated by the resulting obligations of Sanyu Chemical as surety agreement was admittedly in full force and effect. The loan was,
solidary obligor under each of the assigned receivables by virtue of the therefore, covered by the said agreement, and Chua, even if he did not sign
operation of the Deed of Assignment. the promissory note, is liable by virtue of the surety agreement. The only
condition that would make him liable thereunder is that the Borrower "is or
may become liable as maker, endorser, acceptor or otherwise". There is no
Q: What is the ruling of the court with regard to the contention of the private doubt that DAICOR is liable on the promissory note evidencing the
respondent that continuing suretyship agreement is null and void because there indebtedness.
was no existing obligation to Atok Finance? The surety agreement which was earlier signed by Enrique Go, Sr. and
private respondent, is an accessory obligation, it being dependent upon a
principal one which, in this case is the loan obtained by DAICOR as evidenced
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by a promissory note. What obviously induced petitioner bank to grant the obligation existing.
loan was the surety agreement whereby Go and Chua bound themselves ISSUE: W/N a suretyship agreement may secure future obligations.
solidarily to guaranty the punctual payment of the loan at maturity. By terms RULING: YES
that are unequivocal, it can be clearly seen that the surety agreement was Comprehensive or continuing surety agreements
executed to guarantee future debts which DAICOR may incur with petitioner, Comprehensive or continuing surety agreements are in fact quite
as is legally allowable under the Civil Code. commonplace in present day financial and commercial practice. A bank or
financing company which anticipates entering into a series of credit
transactions with a particular company, commonly requires the projected
Q: What is the specific provision in the continuing suretyship agreement in refer principal debtor to execute a continuing surety agreement along with its
to future obligations? sureties. By executing such an agreement, the principal places itself in a
position to enter into the projected series of transactions with its creditor;
A: “and/or in order to induce, you in your discretion, at any time or from time to with such suretyship agreement, there would be no need to execute a
time hereafter, to make loans or advances or to extend credit in any other separate surety contract or bond for each financing or credit accommodation
manner to, or at he request or for the account of the Borrower” extended to the principal debtor.
Of course, a surety is not bound under any particular principal obligation
Q: In this case, there was another condition, aside from the limitation up to until that principal obligation is born. But there is no theoretical or doctrinal
100,000 php. When will the sureties, Go and Chua be liable for the obligation of difficulty inherent in saying that the suretyship agreement itself is valid and
Daicor? binding even before the principal obligation intended to be secured thereby
is born, any more than there would be in saying that obligations which are
A: In this case, the condition that the borrower is liable as maker, drawer, subject to a condition precedent are valid and binding before the occurrence
indorser, acceptor or otherwise. The SC, Daicor is liable on the promissory note of the condition precedent.
as maker of the promissory note. The surety undertakings executed by Chua and Rodrigueza were
continuing guaranties or suretyships covering all future obligations of
Here, the guaranty is a continuing one which shall remain in full force and effect Fortune Motors with Filinvest. This is evident from the written contract itself.
until the bank is notified of its termination. It’s very clear again on the Petitioners were aware of the purpose of the contract
comprehensive surety agreement. Moreover, Rodrigueza and Chua knew exactly where they stood at the
time they executed their respective surety undertakings in favor of Fortune.
To guaranty among others, any existing indebtedness, which already exists at Both sureties knew the purpose of the surety undertaking which they signed
the time of the constitution of the agreement, and/or induce the bank at any and they must have had an estimate of the amount involved at that time.
time or from time to time thereafter, so including future obligations, to make Their undertaking by way of the surety contracts was critical in enabling
loans or advances or to extend credit in other manner to, or at the request, or Fortune to acquire credit facility from Filinvest and to procure cars for resale,
for the account of the Borrower, which was the business of Fortune. Respondent Filinvest, for its part, relied
on the surety contracts when it agreed to be the assignee of CARCO with
So, another thing that you would notice here in the cases, the suretyship respect to the liabilities of Fortune with CARCO. After benefiting therefrom,
agreement can be limited by the parties. There is an aggregate sum or principal petitioners cannot now impugn the validity of the surety contracts on the
to what extent they can act as a surety. In this case, 100,000 php. ground that there was no preexisting obligation to be guaranteed at the time
said surety contracts were executed. They cannot resort to equity to escape
The loan was, therefore, covered by the said agreement, and private liability for their voluntary acts, and to heap injustice to Filinvest, which
respondent, even if he did not sign the promisory note, is liable by virtue of the relied on their signed word.
surety agreement. The only condition that would make him liable thereunder is This is a clear case of estoppel by deed. By the acts of petitioners,
that the Borrower "is or may become liable as maker, endorser, acceptor or Filinvest was made to believe that it can collect from Chua and/or Rodrigueza
otherwise". There is no doubt that Daicor is liable on the promissory note in case of Fortune's default. Filinvest relied upon the surety contracts when it
evidencing the indebtedness. Issuing the promissory note as the maker. demanded payment from the sureties of the unsettled liabilities of Fortune.
A refusal to enforce said surety contracts would virtually sanction the
Even if it is just an accessory obligation, again it is considered valid as it covers perpetration of fraud or injustice.
future debts as contemplated under Article 2053.
Another case is Fortune Motors. Q: Chua and Rodriqueza are liable in what capacity surety or guarantor?
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So here, they are considered as suretyship, they entered into a continuing The SC emphasized Article 2053 of the Civil Code which allows the suretyship
suretyship agreement. The written contract stated: the words absolutely, agreement to secure future loan even if the amount is not yet known. A surety
unconditionally and solidarily guarantee(d) to Respondent Filinvest and its is not bound under any particular principal obligation until that principal
affiliated and subsidiary companies the full, faithful and prompt performance, obligation is born.
payment and discharge of any and all obligations and agreements. Both sureties
knew the purpose of the surety undertaking which they signed and they must As mentioned, no theoretical or doctrinal difficulty inherent in saying that the
have had an estimate of the amount involved at that time. suretyship agreement itself is valid and binding even before the principal
obligation intended to be secured thereby is born, any more than there would
So with Article 2053, the sureties and guaranties are not (inaudible) because at be in saying that obligations which are subject to a condition precedent are
the time they signed they already knew they would answer for future debts as valid and binding before the occurrence of the condition precedent.
well. Their undertaking by way of the surety contracts was critical in enabling
Fortune to acquire credit facility from Filinvest and to procure cars for resale, The SC also pointed out here the effect of an assignment of credit. So what
which was the business of Fortune. happens in an assignment of credit? There is an agreement y virtue of which
the owner of a credit, known as the assignor, by a legal cause, such as sale,
SOUTH CITY HOMES vs. BA FINANCE dacion en pago, exchange or donation, and without the consent of the debtor,
In 1983, Fortune Motors, Palawan Lumber and South City Homes, transfers his credit and accessory rights to another, known as the assignee, who
represented by Chua, Tan, Rodrigueza, Baltazar, and Tablante (sureties) acquires the power to enforce it to the same extent as the assignor could
executed three Continuing Suretyship Agreements whereby they jointly and enforce it against the principal debtor. So, the third party, the assignee, steps
severally unconditionally guaranteed the full, faithful and prompt payment into the shoes of the original creditor or the assignor. So with that, the
and discharge of any and all indebtedness of Fortune Motors in favor of BA obligations of the sureties were not extinguished by any assignment of credit.
Finance. Consent is not necessary in order that assignment may fully produce legal
Six moths thereafter, CARCO drew 6 Drafts in its own favor, payable 30 effects and does not depend on the consent of the debtor.
days after sight, charged to the account of Fortune Motors. Thereafter,
Fortune Motors executed trust receipts covering the motor vehicles What the law requires in an assignment of credit is not the consent of the
delivered to it by CARCO under which it agreed to remit to CARCO the debtor but merely notice to him. Notice here would be relevant as to effect of
proceeds of any sale and immediately surrender the remaining unsold payment. Because if the principal debtor were not informed of the assignment
vehicles. The drafts and trust receipts were assigned to BA Finance under of credit, and they paid to the original creditor, would that extinguish the
Deeds of Assignment executed by CARCO. obligation? YES, because they were not notified of the assignment. It would
When Fortune Motors failed to pay and remit the proceeds or return the have been different if the assignment of credit has already taken place, the
motor vehicles unsold, BA Finance demanded payment from the sureties. principal debtor were informed thereof but still they paid to the original
Petitioners contend that the suretyship agreements are null and void for creditor. In that instance, the original creditor is not entitled anymore to
having been entered into without an existing principal obligation; and that payment, and payment made to him does not extinguish the obligation.
being such sureties does not make them solidary debtors. They stressed that Remember, under Obligations and Contract, payment must be made to the
their obligations to the creditor (CARCO) was extinguished by the assignment creditor at the time of payment and not at the time of the constitution of the
of the drafts and trust receipts to BA Finance without their knowledge and obligation. A creditor may, therefore, validly assign his credit and its
consent, and pursuant to legal provision on conventional subrogation a accessories without the debtors consent.
novation was effected, thereby extinguishing the liability of the sureties.
ISSUES: W/N there was a novation of the obligation as to extinguish the Again, take note of the nature of a continuing guarantee or suretyship. It may
liabilities of the sureties. be constituted upon a specific obligation but also future obligation, even those
RULING: NO obligations which are not liquidated, not yet determined at the time of the
An assignment of credit is an agreement by virtue of which the owner of execution of such continuing suretyship or guarantee.
a credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor, However, at the time that it is demanded, the principal debtor and the sureties
transfers his credit and accessory rights to another, known as the assignee, or guarantors, the amount is already fixed or ascertained, or demandable.
who acquires the power to enforce it to the same extent as the assignor
could enforce it against the debtor.As a consequence, the third party steps What happens if the amount is not yet liquidated? You wait, noh? The parties
into the shoes of the original creditor as subrogee of the latter. Petitioners' liable will wait until the amount is liquidated. After that, the creditor can now
obligations were not extinguished. enforce against the guarantor the payment of the amount that has been
In assignment, the debtor's consent is not essential for the validity of the determined.
assignment, his knowledge thereof affecting only the validity of the payment
he might make. Also pointed out in Article 2053 last sentence, a conditional obligation can also
Article 1626 also shows that payment of an obligation which is already be a subject of a guarantee. So the contract of guarantee could not be enforced
existing does not depend on the consent of the debtor. It, in effect, unless the condition has already happened. Once it has been fulfilled, the
mandates that such payment of the existing obligation shall already be made obligation of the guarantor can now be enforced. If a condition is attached to
to the new creditor from the time the debtor acquires knowledge of the the principal obligation, (?) as to be observed to the accessory contract of
assignment of the obligation. guarantee or suretyship.
The law is clear that the debtor had the obligation to pay and should
have paid from the date of notice whether or not he consented. Article 2054. A guarantor may bind himself for less, but not for more than
Consent is not necessary in order that assignment may fully produce the principal debtor, both as regards the amount and the onerous nature of
legal effects. Hence, the duty to pay does not depend on the consent of the the conditions.
debtor. Otherwise, all creditors would be prevented from assigning their Should he have bound himself for more, his obligations shall be reduced to
credits because of the possibility of the debtor's refusal to give consent. the limits of that of the debtor.
What the law requires in an assignment of credit is not the consent of
the debtor but merely notice to him. A creditor may, therefore, validly assign
his credit and its accessories without the debtor's consent. The purpose of So this a consequence of the suretyship or guarantee as to the excess of the
the notice is only to inform that debtor from the date of the assignment, contract.
payment should be made to the assignee and not to the original creditor.
Therefore, the sureties are liable for the 6 drafts and the trust receipts. As such accessory contracts may constitute an amount that is less than the
Note: They are held liable under the Continuing Surety Agreement. The ruling principal obligation but not more than the principal obligation. The principal
in Fortune Motors was reiterated. Please check the case. obligation may be P1M, but in the contract of continuing suretyship, it may
indicated that it is only up to the aggregate amount of P500,000. Pwede ‘yun.
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If the debt of the principal is only P10,000, the guarantor can guarantee up to Robert had been made aware by the terms of the undertaking of future
P10,000 and even below. But you cannot guarantee more than P10,000 changes in the terms and conditions governing the issuance of the credit card
because, again, that would be an absurd situation wherein the accessory to his wife and that, notwithstanding, he voluntarily agreed to be bound as a
contract is more onerous than the principal obligation. surety. As in guaranty, a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known.
But what happens if it is not a continuing guarantee and the principal obligation A guarantor or surety does not incur liability unless the principal debtor
is P10,000 and it is simply a contract of suretyship or guarantee where you is held liable. It is in this sense that a surety, although solidarily liable with
agree to be bound up to P20,000. Of course, the guarantor or surety cannot be the principal debtor, is different from the debtor. It does not mean, however,
demanded to pay the whole P20,000kay P10,000 lang man ‘yung utang. But that the surety cannot be held liable to the same extent as the principal
that does not make the guaranty or suretyship void. The obligation that can be debtor. The nature and extent of the liabilities of a guarantor or a surety is
enforced against the guarantor or surety will only be up to the principal determined by the clauses in the contract of suretyship.
obligation of P10,000.
What if the obligation, let us say, is P150,000? And then we have a contract of A guarantor’s undertaking which is actually a surety’s undertaking where the
guaranty or suretyship up to the amount of P100,000. What if nagbayad na si husband acted as a surety agreed to be jontly ans severally liable together with
principal debtor ng P100,000? So out of the principal obligation, the wife with Pacific Bank in relation to the use of a Pacific credit card or
P50,000nalang. Now, what if the creditor will now demand from the guarantor renewals thereof. Even if the limit that was indicated is P2,000 per month, in
or surety na “uy di makabayad si principal debtor, magbayad ka na ng the same undertaking it was provided that “any changes of or novation in the
P50,000.” Can the surety or guarantor say na “ay di na ako magbayad kasi terms and conditions or any extension shall not in any manner release me/us
‘yung P100,000 na limitation ko kay ‘yun na ang gibayaran ni principal debtor.” (so that refer to the husband as well) it being understood that I fully agree to
Is that an excuse available to the guarantor or surety? such charges, novation or extension, and that this understanding is a continuing
one until the liabilities of Celia has been fully satisfied or paid.”
Of course not! Kasi mawala ‘yung essence sa accessory contract of guaranty or
suretyship. So that argument is not valid. In fact, we can relate it to application So here the husband was deemed to be a surety of the said obligation. While it
of payment. In application of payment, saan muna i-apply ‘yung obligation? is true that Art 2054 provides that the guarantor may bind himself for less, but
Choice ni debtor. Kung wala nag choose ang debtor, si creditor. Kung wala gi- not for more than the principal debtor, it is also clear that the credit limit
choose ang debtor and creditor, samost onerous. So pwede mo siya i-relate granted to Celia was P2,000 per month, but nevertheless, Celia succeeded in
doon. In relation to that, the payment shall be applied first to those which are using the same beyond the its effectivity. With that, it cannot be limited to
more onerous. So in that P150,000, P100,000 is guaranteed and the P50,000 is P2,000 per month as the husband expressly bound himself to the extent of the
not guaranteed. Then what will be the effect? So i-una mo siya apply sa debtor’s indebtedness expressly waiving any discharge in case of any change or
walang security. Para ang P50,000pwede mo pa ma collect sa guarantor or novation of the terms and conditions in connection of the issuance of the credit
surety. card.
PACIFIC BANKING v. IAC So the obligation on the part of Roberto here was a continuing surety binding
Robert Regala executed a Guarantor’s Undertaking in favor of Pacific upon himself until all the liabilities of Celia had been fully paid.
Bank whereby he bound himself jointly and severally liable to pay any and all
indebtedness, obligations, charges or liabilities due and incurred by his wife MOLINO VS. SECURITY DINERS INTERNATIONAL
Celia with the use of the Pacificard issued to her by Pacific Bank. The Security Diners issues two types of credit cards, the Regular (Local)
It was also agreed that any changes of or novation in the terms and Card and the Diamond (Edition) Card. One of the requirements for the
conditions in connection with the issuance or use of the Pacificard, or any issuance of either of these cards is that an applicant should have a surety.
extension of time to pay such obligations, charges or liabilities shall not in Hence, when Danilo applied for a Regular card, he got his sister-in-law
any manner release him from responsibility, it being understood that he fully Molino as his surety.
agree to such charges, novation or extension, and that the agreement is a Under the Surety Undertaking, Molino bound herself jointly and
continuing one and shall subsist and bind him until the liabilities of his wife severally with Danilo to pay Security Diners all the obligations and charges
Celia have been fully satisfied or paid. including but not limited to fees, interest, attorney's fees and all other costs
When Celia failed to pay, Pacific Bank demanded payment from Robert. incurred by Danilo in connection with the use of the card. Further, any
Robert admitted that he executed the Guarantor’s Undertaking but alleged change or novation in the agreement or any extension of time granted by
that his liability is only limited to P2k per month. Security Diners to pay such obligations, charges and fees, shall not release
ISSUE: W/N Robert is liable under the Guarantor’s Undertaking. her from the Surety Undertakings, it being understood that the undertaking
RULING: YES is a continuing one and shall subsist and bind her until all such obligations,
The undertaking signed by Roberto although denominated Guarantor's charges and fees have been fully paid and satisfied.
Undertaking, was in substance a contract of surety. As distinguished from a Later on, Danilo’s card was upgraded Diamond card with the approval of
contract of guaranty where the guarantor binds himself to the creditor to Molino. However, he defaulted in payment causing Security Diners to
fulfill the obligation of the principal debtor only in case the latter should fail demand payment from Molino.
to do so, in a contract of suretyship, the surety binds himself solidarily with Molino contended that her liability under the Surety Undertaking is
the principal debtor. limited to P10k and that she did not expressly give her consent to be bound
As a surety he bound himself jointly and severally with the debtor Celia as surety under the upgraded card. The note she signed registering her
to pay the Pacific Bank upon demand, any and all indebtedness, obligations, approval to the same renders the Surety Undertaking she signed under the
charges or liabilities due and incurred by Celia with the use of Pacificard or terms of the previous card without probative value, immaterial and
renewals thereof issued in her favor by Pacific Bank. This undertaking was irrelevant as it covers only the liability of the surety in the use of the regular
also provided as a condition in the issuance of the Pacificard to Celia. credit card by the principal debtor. Further, since the principal debtor,
As to the extent of liability Danilo, was not held liable, having been dropped as a defendant, she could
It is true that under Article 2054 of the CC, a guarantor may bind himself not be said to have incurred liability as surety. Being merely a surety, a
for less, but not for more than the principal debtor, both as regards the pronouncement should first be made declaring the principal debtor liable
amount and the onerous nature of the conditions. It is likewise not disputed before she herself can be proceeded against.
by the parties that the credit limit granted to Celia was P2k per month and ISSUE:W/N Molino is liable for the upgrade of the card pursuant to the
that Celia succeeded in using the card beyond the original period of its Surety Undertaking.
effectivity. However, Robert’s liability should not be limited to that extent RULING: YES
since as surety of his wife, he expressly bound himself up to the extent of the Novation, as a mode of extinguishing obligations. There is no doubt that
debtor's (Celia) indebtedness likewise expressly waiving any discharge in case the upgrading was a novation of the original agreement covering the first
of any change or novation of the terms and conditions in connection with the credit card issued to Danilo, basically since it was committed with the intent
issuance of the Pacificard. Robert, in fact, made his commitment as a surety a of canceling and replacing the said card. However, the novation did not serve
continuing one. to release Molino from her surety obligations because in the Surety
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Undertaking she expressly waived discharge in case of change or novation in outstanding and unpaid at any time may exceed the aggregate
the agreement governing the use of the first credit card. principal sum of P10M.
It must be noted that the extent of the credit cardholder's indebtedness,
under the clear terms of the Guarantor's Undertaking that the surety signed Asianbank repeatedly extended the maturity of the loan granted to
with the credit card company. Gateway until it was consolidated with the Dollar Promissory Note under the
The Surety Undertaking expressly provides that petitioner's liability is Omnibus Credit Line. Nevertheless, Gateway still defaulted causing
solidary. A surety is considered in law as being the same party as the debtor Asianbank to finally demand payment from Gateway and its sureties.
in relation to whatever is adjudged touching the obligation of the latter, and Later on, Gateway was declared insolvent. As a result thereof, Geronimo
their liabilities are interwoven as to be inseparable. Although the contract of prays that the claim against him be also extinguished.
a surety is in essence secondary only to a valid principal obligation, his Asianbank argues that the stay of the collection suit against Gateway is
liability to the creditor is direct, primary and absolute; he becomes liable for without bearing on the liability of Geronimo as a surety since claims against a
the debt and duty of another although he possesses no direct or personal surety may proceed independently from that against the principal debtor.
interest over the obligations nor does he receive any benefit therefrom. Being such, Geronimo may not invoke the insolvency of Gateway as a
There being no question that Danilo incurred debts in credit card defense to evade liability.
advances, an obligation shared solidarily by petitioner, Security Diners was Geronimo counters that his liability as a surety cannot be separated from
certainly within its rights to proceed singly against petitioner, as surety and Gateway’s liability. As surety, he is entitled to avail himself of all the defenses
solidary debtor, without prejudice to any action it may later file against pertaining to Gateway, including its insolvency, suggesting that if Gateway is
Danilo, until the obligation is fully satisfied. eventually released from what it owes Asianbank, he, too, should also be so
Petitioner is a graduate of business administration, and possesses relieved pursuant to Article 2054 of the CC. Otherwise, his liability becomes
considerable work experience in several banks. She knew the full import and more onerous and burdensome since he is precluded as from seeking
consequence of the Surety Undertaking that she executed. She had the recourse against the insolvent corporation. Lastly, he argues that the deed of
option to withdraw her suretyship when Danilo upgraded his card to one that suretyship covers only the P10M export packing loan but not the additional
permitted unlimited purchases, but instead she approved the upgrading. loans consolidated under the Dollar Promissory Notes which maturity date
While we commiserate in the financial predicament she now faces, it is also was repeatedly extended by Asianbank without his knowledge and consent.
evident that the liability she incurred is only the legitimate consequence of ISSUE:W/N Geronimo is held liable under the Surety Undertaking despite the
an undertaking that she freely and intelligently obliged to. insolvency of Gateway.
RULING: YES
As to the insolvency proceeding
Here, there was an allegation that novation made the obligation of the surety A creditor’s right to proceed against the surety exists independently of
more onerous. In fact, it was alleged that upgrading of the card should not be his right to proceed against the principal. Clearly, Asianbank’s right to collect
covered by the surety. payment for the full amount from Geronimo, as surety, exists independently
of its right against Gateway as principal debtor. It could thus proceed against
While it is concluded that the upgrade was a novation, it did not release the one of them or file separate actions against them to recover the principal
petitioner from her surety obligations because in the same surety undertaking, debt covered by the deed on suretyship, subject to the rule prohibiting
she expressly waived discharge in case of change or novation in the agreement. double recovery from the same cause. Hence, a suit against the surety,
insofar as the surety’s solidary liability is concerned, is not affected by an
The SC emphasized several provisions in the surety’s undertaking emphasizing insolvency proceeding instituted by or against the principal debtor.
the extent of the liability of the sister-in-law. She is a surety as she found The transfer of Gateway’s property to the insolvency assignee, if this be
herself jointly and severally with Danilo to pay SDIC. She declared that any the case, does not negate Geronimo’s right of subrogation, for such right
change or novation in the Agreement or any extension to pay such obligation may be had or exercised in the insolvency proceedings. The possibility that
shall not release her from this Surety Undertaking. Even if there was novation, he may only recover a portion of the amount he is liable to pay is the risk he
she’s not released because of the waiver. assumed as a surety of Gateway. Such loss does not, however, render
ineffectual, let alone invalidate, his suretyship.
Moreover, the undertaking is a continuous one and shall subsist and bind her As to the extinguishment of his liability
until all obligations have been fully paid. The indication of a credit limit, the Article 2054 enunciates the rule that the obligation of a guarantor may
P10,000, shall not relieve her of liability for all other amounts voluntarily be less, but cannot be more than the obligation of the principal debtor. The
incurred by the cardholder in excess of said credit limit. rule, however, cannot plausibly be stretched to mean that a guarantor or
surety is freed from liability as such guarantor or surety in the event the
With these cases, so far, what is the lesson to be learned? When you sign a principal debtor becomes insolvent or is unable to pay the obligation. This
document acting as a co-maker and guarantor, the first thing that you should do interpretation would defeat the very essence of a suretyship contract which,
is read it first. by definition, refers to an agreement where one person, the surety, engages
to be answerable for the debt, default, or miscarriage of another known as
Who are usually the sureties or guarantors especially in a continuing the principal.
agreement? You have officers of corporations. Usually what will happen is that As to the coverage of the suretyship agreement
they sign the contract as authorized representative of the corporation and in By its nature, a continuing suretyship covers current and future loans,
their personal capacity. With that, they can be held solidarily liable and it provided that, with respect to future loan transactions, they are, within the
depends when we say continuing agreement. description or contemplation of the contract of guaranty.
The Deed of Suretyship Geronimo signed envisaged a continuing
GATEWAY vs. ASIANBANK suretyship when, by the express terms of the deed, he warranted payment of
Gateway obtained an Domestic export packing loan from Asianbank. To the P10M credit loan and the loan under the Dollar PN.
secure payment thereof, Geronimo and Andrew executed separate but Evidently, under the deed of suretyship, Geronimo undertook to secure
almost identical deeds of suretyship in favor of Asianbank. The undertaking all obligations obtained under the Domestic Bills Purchased Line and
provides that: Omnibus Credit Line, without any specification as to the period of the loan.
1. They warrant the due and faithful performance by the debtors of The suretyship Geronimo assumed did not limit itself to a specific loan
all obligations to be performed under any contracts evidencing document to the exclusion of another. The suretyship document merely
indebtedness/obligations and any supplements, amendments, mentioned the Domestic Bills Purchased Line and Omnibus Credit Line as
changes or modifications made thereto; evidenced by "all notes, drafts contracted/incurred by Gateway in favor of
2. Their liability shall be solidary, direct and immediate and not Asianbank. Such credit facilities are not loans by themselves. Thus, the Deed
contingent upon the pursuit by the Asianbank (creditor) of of Suretyship was intended to secure future loans for which these facilities
whatever remedies it may have against Gateway or the securities were opened in the first place.
or liens it or they may possess; As to the grant of extensions
3. They agree to be and remain bound upon the suretyship, Such contention is unacceptable as it glosses over the fact that the
notwithstanding that all obligations of Gateway to Asianbank waiver to be notified of extensions is embedded in surety document itself.
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Geronimo verily waived his right to notice of the maturity of notes, drafts, modify the nature and scope of the original credit accommodation, without
overdraft, and other credit obligations for which Gateway shall become informing or getting the consent of respondent who was solidarily liable.
indebted. This waiver necessarily includes new agreements resulting from It should also be observed that the Credit Approval Memorandum clearly
the novation of previous agreements due to changes in their maturity dates. shows that the bank did not have absolute authority to unilaterally change
the terms of the loan accommodation. Indeed, it may do so only upon notice
to the borrower.
No discussion. Construction of suretyship agreements
A contract of surety cannot extend to more than what is stipulated. It is
SECURITY BANK vs. CUENCA strictly construed against the creditor, every doubt being resolved against
In 1980, Roldolfo Cuenca executed an Indemnity Agreement in favor of enlarging the liability of the surety. It is a well-settled legal principle that if
Security Bank binding himself solidarily liable with SMIC for the payment of there is any doubt on the terms and conditions of the surety agreement, the
anP8M credit loan facility and whatever amount including the substitutions, doubt should be resolved in favor of the surety. Ambiguous contracts are
renewals, extensions, increases, amendments, conversions and revivals of construed against the party who caused the ambiguity. In the absence of an
the aforesaid credit accommodations upon demand and without the benefit unequivocal provision that respondent waived his right to be notified of or to
of excussion. The loan shall effective until 30 November 1981 and that the give consent to any alteration of the credit accommodation, we cannot
bank reserves the right to amend any of the terms and conditions of the loan sustain petitioner’s view that there was such a waiver. Otherwise, his liability
upon written notice to the Borrower. would thus be more burdensome than that of the SMIC. Such untenable
In 1985, Cuenca resigned as President and Chairman of SMIC. theory is contrary to the principle that a surety cannot assume an obligation
Subsequently, his shareholdings were sold in public auction and was bought more onerous than that of the principal.
by Angala. Being an onerous undertaking, a surety agreement is strictly construed
Meanwhile, SIMC repeatedly availed of its credit line and obtained 6 against the creditor, and every doubt is resolved in favor of the solidary
other loans with Security Bank evidenced by Promissory Notes. Later on, debtor. The fundamental rules of fair play require the creditor to obtain the
Security Bank and SMIC agreed to restructure the past due obligations of consent of the surety to any material alteration in the principal loan
SMIC. This was done without notice to or the prior consent of Cuenca. The agreement, or at least to notify it thereof. Hence, petitioner bank cannot
restructured loan provides that the P6M loan which was the only loan hold herein respondent liable for loans obtained in excess of the amount or
incurred prior to the expiration of the P8M-Credit Loan and the only one beyond the period stipulated in the original agreement, absent any clear
covered by the Indemnity Agreement was not segregated from but was stipulation showing that the latter waived his right to be notified thereof, or
instead lumped together with, the other loans which were not secured by to give consent thereto. This is especially true where, as in this case,
said Indemnity Agreement. Pursuant thereto, SMIC executed promissory respondent was no longer the principal officer or major stockholder of the
notes in 1989 covering the total principal amount of P12.2M. corporate debtor at the time the later obligations were incurred. He was thus
However, SMIC defaulted in its payment causing Security Bank to no longer in a position to compel the debtor to pay the creditor and had no
demand payment from Cuenca who refused to pay. more reason to bind himself anew to the subsequent obligations.
Security Bank argues that there was no novation which resulted to the Lastly, that the Indemnity Agreement is a continuing surety does not
extinguishment of Cuenca’s obligation since the 1989 Agreement did not authorize the bank to extend the scope of the principal obligation
change the original loan in respect to the parties involved or the obligations inordinately.
incurred. Further, the terms thereof were not more onerous. Not only this,
Cuenca impliedly gave his consent to any modification of the credit Q: Now what was the limitation of the obligation here of Cuenca as a surety?
accommodation or otherwise waived his right to be notified of, or to give A: the loan agreement in 1981 and beyond the limitation in the agreement
consent to, the same as provided under the Indemnity Agreement. Hence,
the novation of the original credit accommodation by the 1989 Loan Q: How about the ruling of the court that Cuenca here was no longer an
Agreement is merely its "renewal," which "connotes cessation of an old employee. Can he use such defense wherein the surety at the time he acted as
contract and birth of another one. such executed the agreement was still the president, officer, or major stock
ISSUE: W/N Cuenca may be held liable for the 1989 Agreement. holder of the corporation. But subsequently he was no longer a stockholder, will
RULING: NO there be a release of the liability as a surety?
As to novation
The 1989 Loan Agreement extinguished the obligation obtained under A: No, maam. The obligation of the surety while he was an officer subsists even
the 1980 credit accommodation. While the 1980 credit accommodation had if he is no longer an officer.
stipulated that the amount of loan was not to exceed P8M, the 1989
Agreement provided that the loan was P12.2M. The periods for payment Q: So in this case, why did the SC rule that Cuenca was no longer liable as he
were also different. Since the 1989 Loan Agreement had extinguished the was not an officer anymore? SC held “there was no logic for the bank to assume
original credit accommodation, the Indemnity Agreement, an accessory that he would still agree to act as a surety in the 1989 indebtedness because at
obligation, was necessarily extinguished also, pursuant to Article 1296 of the that time, he was no longer an officer or stockholder of the debtor-
Civil Code. corporation.”
As to the contention that 1989 Agreement was a mere renewal
The 1989 Loan Agreement expressly stipulated that its purpose was to A: Because again you go back to the stipulations in the indemnity agreement.
"liquidate," not to renew or extend, the outstanding indebtedness. Least likely his obligations last up until 1981. In the execution of the 1989
Moreover, respondent did not sign or consent to the 1989 Loan Agreement, agreement, it was said that the 1981 agreement was extinguished. In other
which had allegedly extended the original P8M credit facility. Hence, his words, hindi porke’t hindi na sya stockholder sa corporation, he would be
obligation as a surety should be deemed extinguished, pursuant to Article immediately released of his obligation. We have to take that in the light of the
2079 of the CC. circumstances in this case. When you sign a document, you sign as a surety, not
The theory behind Article 2079 is that an extension of time given to the because you are a stockholder or officer of the corporation.
principal debtor by the creditor without the surety’s consent would deprive
the surety of his right to pay the creditor and to be immediately subrogated So here unlike in other agreements that there was an expressed waiver in the
to the creditor’s remedies against the principal debtor upon the maturity obligation, nothing indicated that there was any waiver to any change or any
date. The surety is said to be entitled to protect himself against the modification of said principal obligation. It was emphasized in this case that the
contingency of the principal debtor or the indemnitors becoming insolvent surety agreement is strictly construed
during the extended period. or any doubt would be resolved in favor of the solidary debtor.
As to the alleged waiver of consent
An essential alteration in the terms of the Loan Agreement without the The fundamental rules of fair play require the creditor to obtain the consent of
consent of the surety extinguishes the latter’s obligation. While respondent the surety to any material application in the loan agreement or notify him
held himself liable for the credit accommodation or any modification thereof, thereof. The Bank here cannot hold Cuenca liable for loans obtained in excess of
such clause should be understood in the context of the P8M limit and the the amount or beyond the period stipulated in the agreement absent of any
November 30, 1981 term. It did not give the bank or SMIC any license to stipulation that Cuenca will be notified or gave consent thereto.
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obligation, but also all its accessories, including the judicial costs, provided
This is especially true here wherein respondent was no longer an officer or with respect to the latter, that the guarantor shall only be liable for those
major stock holder. Parang additional fact or circumstance considered so that costs incurred after he has been judicially required to pay. (1827a)
Cuenca was not held liable anymore. The 1989 loan agreement extinguished the
1981 credit accommodation. This is clear from the explicit provision of to
liquidate the principal and the interest the earlier indebtedness. Alright, 2055 is very clear that the contract of guaranty isnot presumed. In other
words, it must be expressed andcannot extend to more than what is stipulated.
The 1989 loan agreement expressedly stated that is purpose was to liquidate So, we havehere the case of Piczon vs Piczon.
not to renew or extend the outstanding indebtedness. Respondent did not sign
the 1989 document which prejudice extended to the original 10million credit. PICZON vs. PICZON
It’s not really any extension but merely a posting was merely to the old Sosing-Lobos Co. obtained a loan from Consuelo Piczon. Estaban Piczon,
obligation na naextinguish. as the President of the company, bound himself as guarantor of the loan.
When Sosing Lobos defaulted, Consuelo demanded payment from Esteban as
It is fundamental in the law of suretyship that any agreement between the surety including the payment of interest.
debtor and principal creditor, which essentially varies from the terms used in ISSUE: W/N Esteban is a surety.
the first contract without the consent the surety will release the surety from RULING:NO but only a guarantor
liability. While respondent made himself liable to the credit accommodation. Piczon expressly bound himself only as guarantor, and there are no
Such clause would be understood to be in the context of the 8 million limit and circumstances in the record from which it can be deduced that his liability
the 1981 term. It did not give respondent any license to modify the nature and could be that of a surety. A guaranty must be express pursuant to Article
scope of the original credit accommodation without informing or getting the 2055 and it would be violative of the law to consider a party to be bound as a
consent of Cuenca. surety when the very word used in the agreement is "guarantor”.
He accepted the express assumption of liability by Sosing-Lobos for the
A contract of surety can not extend to more than what was stipulated. It is payment of the obligation in question, thereby modifying their original
strictly construed against the creditor, every doubt resolved against enlarging posture that inasmuch as that corporation did not exist yet at the time of the
the obligation of the surety. agreement, Piczon necessarily must have bound himself as insurer.
As to the interest
Here, the surety agreement contained an equivocal stipulation, no express Piczon is also liable for 12% interest from the date of execution of the
stipulation compare this to another case which was the case of PhilAmGen. In guaranty. In the case at bar, the "interest agreed upon" by the parties was to
that case, there was a clear stipulation that there was no stipulation as to the commence from the execution of said document. f the contract stipulates
waiver. from what time interest will be counted, said stipulated time controls, and,
therefore interest is payable from such time, and not from the date of the
But in the present case, there was an expressed stipulation. At most, the alleged filing of the complaint.
basis of the respondent is deemed uncertain and confers no clear obligation to
Sta. Ines to notify the Bank of its indebtedness in the original obligation.
Q: So who is the principal debtor here?
A continuing guaranty is one which covers all transaction, including those
arising in the future, as long as it is within the description or contemplation of A: Sosing-Lobos and Co., Inc.
the contract of guaranty until the expiration or termination thereof but still
subject to the stipulations of the loan agreement as held in this case. Further, Q: Why could he (Esteban Piczon) be considered as a surety?
just because you are not a stockholder, it does not exonerate you from any
liabilities because if you sign as a surety, you do so in your own personal A: He is not considered as a surety here because under the terms of the
capacity not because you are the officer or major stock holder. In this case, contract, he expressly bound himself only as a guarantor.
hindi siya liable dahil beyond the limitation yung obligation that is being
demanded. Q: So, when would it happen that a person is liable as a surety even if he is
referred as a guarantor in an agreement?
Art. 2054. A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous nature of the A: If he binds himself jointly and severally liable.
conditions.
Q:Alright, together with the principal debtor. But in this case, that circumstance
Should he have bound himself for more, his obligations shall be reduced to is not present.
the limits of that of the debtor. (1826)
Here Piczon expressly bound himself only as guarantor and there are no
Should he have bound himself for more, his obligationsshall be reduced to the circumstances in the record from which it can deduce that his liability could be
limits of that of the debtor. that of a surety. Under 2055, a guaranty must be expressed and it would be
violative of the law to consider a party to be bound as a surety when the (???
So in the cases of Pacific Banking and Molino that we already discussed, again, if noisy) used in the agreement is the guarantor. But again, the mere use of the
there is an express waiver for any novation or change in the principal contract word guarantor or guaranty does not necessarily mean that the person only
and to which the surety agreed to such novation, then you cannot subsequently bound himself only as a guarantor and not as a surety, if there are
question any change. For example in those cases, nag exceed sa limit noh, credit circumstances that would point out that he bound himself solidarily liable with
limit in the credit cards that were issued. Nevertheless, the securities in those the principal debtor.
cases were still held to be liable. Also, take note that with regard to contracts of
securities, it must be strictly interpreted against the creditor and to which we So here, with regard to a contract of guaranty, there is no presumption as to its
have also discussed the case of Cuenca wherein in that case, it was stipulated existence. The terms of the contract must be stipulated in such a way that
that the 1989 loan agreement extinguished the previous obligation to which the there's no doubt that there exist a contract of a guaranty and that he promised
surety secured and also we have taken into consideration the limits for each or undertakes to answer for the obligation of another. In addition, with regards
contracts of security, for example its only up to 8 million or its only for a limited to the existence of a surety, if a person bound himself only to be a guarantor
period, then that should also be taken into consideration. then he could not expressly bound himself to be a guarantor, it could not be
interpreted that he bound himself solidarily liable with the principal debtor.
Now with respect to the guarantor, he shall be obliged to pay for the costs only
Art. 2055. A guaranty is not presumed; it must be express and cannot from the time when the guaranty was made and cannot be faulted for the delay
extend to more than what is stipulated therein. of the debtor. As we have mentioned last time, if upon demand to the
If it be simple or indefinite, it shall compromise not only the principal guarantor and he did not pay then he will be liable for all costs from the time
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the demand was made upon the guarantor. The guarantor could not be held Q: So, it's an accessory contract. What would be the principal obligation? Who
liable for other costs incurred or interests incurred from the time the principal entered into that contract of loan?
debtor was in delay, otherwise, that would be unfair to the said guarantor.
A: Gebbs International ma'am.
So again, the guarantor shall answer only for such judicial costs as have been
incurred after he has been judicially required to pay otherwise here, you would Q: Alright, Gaytano doing business under Gebbs International to which the
have a harsh necessity wherein the guarantor would be paying another's debt Gaytano spouses executed a deed of suretyship. now under the facts of this
without any benefit whatsoever for himself. case, can we say that there was a double guaranty or a double suretyship?
BA FINANCE vs. CA Q: Why not? Supposedly, what was the transaction or document executed here
Renato Gaytano, doing business under the name Gebbs Int’l. obtained a by Philip Wong?
P60k loan from Traders Royal Bank. As security for the payment of said loan,
the Gaytano spouses executed a deed of suretyship whereby they agreed to A: A contract of guaranty ma'am.
pay jointly and severally to respondent bank the amount of the loan
including interests, penalty and other bank charges. Wong as credit Q: Specifically, it was alleged that Philip Wong, as credit administrator of BA
administrator of BA Finance, undertook to guarantee the loan of the Gaytano Finance, guaranteed the loan, in this instance, the obligation of Gaytano
spouses. spouses when they executed that deed of suretyship. But again here, was BA
However, the Gaytanos refused to pay the balance of the loan causing Finance liable?
TRB to file complaint for sum of money against the Gaytano spouses and
petitioner BA Finance. A: No, BA Finance was not liable ma'am because the letter of guaranty was
BA Finance contends that the letter guaranty is ultra vires, and therefore invalid because it was beyond the authority of Philip Wong to issue guaranties.
unenforceable; that said letter-guaranty was issued by its employee beyond
the scope of his authority since the petitioner itself is not even empowered Alright, so here, although Wong was authorized to approve loans even up to
by its articles of incorporation and by-laws to issue guaranties. Petitioner also P350,000 without any security requirement, nothing in the said memorandum
submits that it is not guilty of estoppel to make it liable under the letter- expressly vests upon him as credit administrator the power to issue guaranties.
guaranty because petitioner had no knowledge or notice of such letter- The contention that there was this phrase contingent commitment does not
guaranty; that the allegation of Wong, credit administrator, that there was mean that he had the authority to enter as a guarantor for and in behalf of BA
an audit was not supported by evidence of any audit report or record of such Finance.
transaction in the office files.
ISSUE: W/N BA Finance may be held liable as a guarantor. Remember here, again applying 2055, guaranty is not presumed, it must be
RULING: NO expressed and cannot be extended beyond its specified limits. Okay, is there a
Although Wong was clearly authorized to approve loans even up to requirement that the acceptance here be made express or in writing?
P350k without any security requirement, which is far above the amount
subject of the guaranty in the amount of P60k, nothing in the said Now recall in your Obligations and Contracts that as to the creditor, the
memorandum expressly vests on the credit administrator power to issue acceptance of a payment need not be express or in writing. But what about in
guarantees. We cannot agree with respondent's contention that the phrase the existence of a contract of guaranty? Is it required that the creditor accepts
"contingent commitment" set forth in the memorandum means guarantees. the contract of guaranty or the promise of guaranty by the guarantor?
It has been held that a power of attorney or authority of an agent should not
be inferred from the use of vague or general words. Guaranty is not AGLIBOT vs. SANTIA
presumed, it must be expressed and cannot be extended beyond its specified Santia granted a P2.5M loan to Pacific Lending thru petitioner Aglibot. As
limits. a guaranty or security for the payment of the note, Aglibot issued and
The sole allegation of the credit administrator in the absence of any delivered to Santia 11 post-dated personal checks drawn from her own.
other proof that he is authorized to bind petitioner in a contract of guaranty However, the checks were dishonored upon presentment to the bank
with third persons should not be given weight. The representation of one causing Santia to demand payment from Pacific and Aglibot and to file a
who acts as agent cannot by itself serve as proof of his authority to act as criminal charge against Aglibot under BP 22.
agent or of the extent of his authority as agent. Aglibot admitted that she obtained a loan from Santia but claimed that
Wong's testimony that he had entered into similar transactions of she did so in behalf of Pacific, the true borrower. According to her, before
guaranty in the past for and in behalf of the petitioner, lacks credence due to granting the loan, Santia demanded and obtained from her a security for the
his failure to show documents or records of the alleged past transactions. repayment thereof in the form of the aforesaid checks, but with the
The rule is clear that an agent who exceeds his authority is personally liable understanding that upon remittance in cash of the face amount of the
for damages. checks, Santia would correspondingly return to her each check so paid. But
As to estoppel despite having already paid the said checks, Santia refused to return them to
TRB had not shown any evidence aside from the testimony of the credit her, although he gave her assurance that he would not deposit them.
administrator that the disputed transaction of guaranty was in fact entered Maintaining that she was a mere guarantor of the said debt of Pacific when
into the official records or files of petitioner corporation, which will show she agreed to issue her own checks, Aglibot insists that Santia failed to
notice or knowledge on the latter's part and its consequent ratification of the exhaust all means to collect the debt from Pacific, the principal debtor, and
said transaction. In the absence of clear proof, it would be unfair to hold therefore he cannot now be permitted to go after her subsidiary liability. In
petitioner corporation guilty of estoppel in allowing its credit administrator other words, she claims the benefit of excussion.
to act as though the latter had power to guarantee. ISSUE: W/N Aglibot is entitled to the benefit of excussion.
RULING: NO
Benefit of excussion
Q: What was the principal obligation here? It is settled that the liability of the guarantor is only subsidiary, and all
the properties of the principal debtor, PACIFIC, must first be exhausted
A: Payment of the loan ma'am. before the guarantor may be held answerable for the debt. Thus, the creditor
may hold the guarantor liable only after judgment has been obtained against
Q: Who entered into that contract of loan? What was the document entered the principal debtor and the latter is unable to pay, for obviously the
into by the Gaytano spouses? ‘exhaustion of the principal’s property’, the benefit of which the guarantor
claims, cannot even begin to take place before judgment has been obtained.
A: A deed of suretyship. This rule is contained in Article 2062 of the CC, which provides that the
action brought by the creditor must be filed against the principal debtor
alone, except in some instances mentioned in Article 2059, then the action
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may be brought against both the guarantor and the principal debtor. On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued by the
Application of Statute of Frauds Texas Company (P.I.), Inc. for the recovery of money for the unpaid balance
The Court must, however, reject Aglibot’s claim for want of proof, in of the Leonora S. Bantug’s account.
view of Article 1403(2) of the CC, embodying the Statute of Frauds. Under its
provisions concerning a guaranty agreement, which is a promise to answer
The CFI of Cebu sentenced Bantug and Alonso to pay jointly and severally to
for the debt or default of another the law clearly requires that it, or some
the Texas Company. The CA modified the judgment; Bantug was held solely
note or memorandum thereof, be in writing. Otherwise, it would be
liable for the payment of the aforesaid sum of money.
unenforceable unless ratified although under Article 1358 a contract of
guaranty does not have to appear in a public document
On the other hand, Article 2055 of the CC also provides that a guaranty is Meanwhile, Tomas argues that the CA erred in holding that there was merely
not presumed, but must be express, and cannot extend to more than what is an offer of guaranty on the part of the respondent, Tomas Alonso, and that
stipulated therein. This is the obvious rationale why a contract of guarantee the latter cannot be held liable thereunder because he was never notified by
is unenforceable unless made in writing or evidenced by some writing. For as the Texas Company of its acceptance.
pointed out by Santia, Aglibot has not shown any proof, such as a contract, a
secretary’s certificate or a board resolution, nor even a note or Issue: WON there was merely an offer of guaranty on the part of Alonso.
memorandum thereof, whereby it was agreed that she would issue her
personal checks in behalf of the company to guarantee the payment of its
debt to Santia. Certainly, there is nothing shown in the Promissory Note Held: YES. The Court of Appeals has placed reliance upon our decision in
signed by Aglibot herself remotely containing an agreement between her and National Bank vs. Garcia, while the petitioner invokes the case of National
PACIFIC resembling her guaranteeing its debt to Santia. And neither is there a Bank vs. Escueta. In the first case, it was held that there was merely an offer
showing that PACIFIC thereafter ratified her act of "guaranteeing" its to give bond and, as there was no acceptance of the offer, this court refused
indebtedness by issuing her own checks to Santia. to give effect to the bond. In the second case, the sureties were held liable
Accommodation party under their surety agreement which was found to have been accepted by the
An accommodation party is one who has signed the instrument as creditor, and it was therein ruled that an acceptance need not always be
maker, drawer, indorser, without receiving value therefor and for the express or in writing. For the purpose of this decision, it is not indispensable
purpose of lending his name to some other person. Such person is liable on for us to invoke one or the other case above cited. The Court of Appeals
the instrument to a holder for value, notwithstanding such holder, at the found as a fact, and this is conclusive in this instance, that the bond in
time of the taking of the instrument knew him to be only an accommodation question was executed at the request of the petitioner by virtue of the
party. In lending his name to the accommodated party, the accommodation following clause of the agency contract:
party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part Additional Security. — The Agent shall whenever requested by the
of the consideration for the instrument but assumes liability to the other Company in addition to the guaranty herewith provided, furnish further
parties thereto because he wants to accommodate another. guaranty or bond, conditioned upon the Agent's faithful performance of
The relation between an accommodation party and the party this contract, in such individuals of firms as joint and several sureties as
accommodated is, in effect, one of principal and surety — the shall be satisfactory to the Company.
accommodation party being the surety. It is a settled rule that a surety is
bound equally and absolutely with the principal and is deemed an original
promisor and debtor from the beginning. The liability is immediate and In view of the foregoing clause which should be the law between the parties,
direct. t is not a valid defense that the accommodation party did not receive it is obvious that, before a bond is accepted by the petitioner, it has to be in
any valuable consideration when he executed the instrument; nor is it such form and amount and with such sureties as shall be satisfactory hereto;
correct to say that the holder for value is not a holder in due course merely in other words, the bond is subject to petitioner's approval. The logical
because at the time he acquired the instrument, he knew that the indorser implication arising from this requirement is that, if the petitioner is satisfied
was only an accommodation party. with any such bond, notice of its acceptance or approval should necessarily
Unlike in a contract of suretyship, the liability of the accommodation be given to the property party in interest, namely, the surety or guarantor. In
party remains not only primary but also unconditional to a holder for value, this connection, we are likewise bound by the finding of the CA that there is
such that even if the accommodated party receives an extension of the no evidence in this case tending to show that the respondent, Tomas Alonso,
period for payment without the consent of the accommodation party, the ever had knowledge of any act on the part of petitioner amounting to an
latter is still liable for the whole obligation and such extension does not implied acceptance, so as to justify the application of our decision in National
release him because as far as a holder for value is concerned, he is a solidary Bank vs. Escueta.
co-debtor.
Conclusions Where there is merely an offer of, or proposition for, a guaranty, or merely a
The mere fact, then, that Aglibot issued her own checks to Santia made conditional guaranty in the sense that it requires action by the creditor
her personally liable to the latter on her checks without the need for Santia before the obligation becomes fixed, it does not become a binding obligation
to first go after PACIFIC for the payment of its loan. It would have been until it is accepted and, unless there is a waiver of notice of such acceptance
otherwise had it been shown that Aglibot was a mere guarantor, except that is given to, or acquired by, the guarantor, or until he has notice or knowledge
since checks were issued ostensibly in payment for the loan, the provisions of that the creditor has performed the conditions and intends to act upon the
the NIL must take primacy in application. guaranty. The acceptance need not necessarily be express or in writing, but
may be indicated by acts amounting to acceptance. Where, upon the other
hand, the transaction is not merely an offer of guaranty but amounts to
TEXAS COMPANY vs. ALONSO direct or unconditional promise of guaranty, unless notice of acceptance is
made a condition of the guaranty, all that is necessary to make the promise
binding is that the promise should act upon it, and notice of acceptance is
Facts: Leonor Bantug was an agent of Texas Company. On the other hand,
not necessary, the reason being that the contract of guaranty is unilateral.
Tomas Alonso bound himself joint-severally liable for the liability of Leonor in
connection with the agency contract with the Texas Company. Tomas Alonso
signed the following:
Q: Does it mean that for the perfection of the validity of a contract of a
guaranty, there must be acceptance or notice of acceptance by the creditor?
For value received, we jointly and severally do hereby bind ourselves and
each of us, in solidum, with Leonor S. Bantug the agent named in the A: Yes ma'am.
within and foregoing agreement, for full and complete performance of
same hereby waiving notice of non-performance by or demand upon Q: Now, take note there must be a distinction from a offer of guaranty and from
said agent, and the consent to any and all extensions. a-?
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A: Acceptance? WHEREFORE, we, sps. Danilo Ibajan and Mila Ibajan and the VISAYAN
SURETY & INSURANCE CORP., of Cebu, Cebu, with branch office at
Q: No, because if it is an offer, notice of acceptance is required,.However, if Manila, jointly and severally bind ourselves in the sum of Three Hundred
what we have is an unconditional promise of guaranty, notice of acceptance is Thousand Pesos (P300,000.00) for the return of the property to the
not required anymore. In this instance, why is it considered merely an offer of defendant, if the return thereof be adjudged, and for the payment to the
guaranty, and not an unconditional promise of guaranty? defendant of such sum as he/she may recover from the plaintiff in the
action.
A: Because it required a further action ma'am from the creditor before the Dominador V. Ibajan, father of plaintiff Danilo Ibajan, filed with the trial court
obligation becomes fixed. a motion for leave of court to intervene, stating that he has a right superior
to the plaintiffs over the ownership and possession of the subject vehicle
Q: What is your basis? which the court granted. Later, the trial court issued an order granting the
motion to quash the writ of replevin and ordering plaintiff Mila Ibajan to
A: The bond in question was executed at the request of the petitioner, and - return the subject jeepney to the intervenor Dominador Ibajan. The trial
court issued a writ of replevin in favor of intervenor Dominador Ibajan but it
Q: So would that be sufficient that it is merely an offer and not an unconditional was returned unsatisfied.
promise of guaranty? What is the clause that you're referring to as the basis Intervenor Dominador Ibajan filed with the trial court a motion/application
that this is merely an offer. Please read. for judgment against plaintiffs bond. The RTC granted the motion.
Issue: WON the surety is liable to an intervenor on a replevin bond posted by
A: Additional Security. — The Agent shall whenever requested by the Company petitioner in favor of respondents.
in addition to the guaranty herewith provided, furnish further guaranty or bond, Held: NO.
conditioned upon the Agent's faithful performance of this contract, in such Intervenor. An intervenor is a person, not originally impleaded in a
individuals of firms as joint and several sureties as shall be satisfactory to the proceeding, who has legal interest in the matter in litigation, or in the
Company. success of either of the parties, or an interest against both, or is so situated
as to be adversely affected by a distribution or other disposition of property
Alright, so in other words, by virtue of that provision it is clear here that what in the custody of the court or of an officer thereof.
you have is merely an offer which requires acceptance for the guarantor to be A contract of surety is an agreement where a party called the surety
liable as well on the obligation. Otherwise, if this was an unconditional promise guarantees the performance by another party called the principal or obligor
of guaranty such notice of acceptance would not have been necessary. of an obligation or undertaking in favor of a third person called the oblige.
Specifically, suretyship is a contractual relation resulting from an agreement
So here, the bond was subject to the petitioner's approval and this is clear in whereby one person, the surety, engages to be answerable for the debt,
the additional security clause. default or miscarriage of another, known as the principal.
The obligation of a surety cannot be extended by implication beyond
Nakalagay diyan, the agent shall whenever requested by the Company in its specified limits. When a surety executes a bond, it does not guarantee
addition to the guaranty herewith provided, furnish further guaranty or bond, that the plaintiffs cause of action is meritorious, and that it will be
conditioned upon the Agent's faithful performance of this contract, in such responsible for all the costs that may be adjudicated against its principal in
individuals of firms as joint and several sureties as shall be satisfactory to the case the action fails. The extent of a suretys liability is determined only by
Company. the clause of the contract of suretyship. A contract of surety is not presumed;
it cannot extend to more than what is stipulated.
So, the bond will be still be subject to the approval of the petitioner here. If the Since the obligation of the surety cannot be extended by implication, it
petitioner is satisfied of such bond, notice of its acceptance or approval should follows that the surety cannot be held liable to the intervenor when the
necessarily given to the proper party in interest, namely the surety or the relationship and obligation of the surety is limited to the defendants
guarantor. So what we have here is merely an offer of proposition for a specified in the contract of surety.
guaranty. Where there is a merely an offer or proposition for a guaranty, or Q: What do you mean by intervenor?
merely a conditional guaranty in the sense that it requires action by the creditor
before the obligation becomes fixed, it does not become a binding obligation A: An intervenor is a person, not originally impleaded in a proceeding, who has
until it is accepted and unless there is a waiver of notice, until notice of such legal interest in the matter in litigation, or in the success of either of the parties,
acceptance is given to or acquired by the guarantor or until he has notice or or an interest against both, or is so situated as to be adversely affected by a
knowledge that the creditor has performed the condition and intends to act distribution or other disposition of property in the custody of the court or of an
upon the guaranty. The acceptance need not necessarily be express or in officer thereof.
writing but be may be indicated by acts amounting to acceptance.
Q: What is the basis that the RTC ordered the delivery of said jeepneys?
On the other hand, if the transaction is not merely an offer of guaranty but
amounts to a direct or unconditional promise of guaranty, unless notice of A: The basis is that Dominador Ibajan was the registered owner of said
acceptance is made a condition of a guaranty, all that is necessary to make the jeepneys.
promise binding is that the promisor should act upon it and notice of
acceptance is not necessary., The reason being that a contract of guaranty is Q: So with the surety, to whom can Visayan Surety be made liable?
unilateral in nature. So take note, if it is merely an offer and there is no waiver,
there must be notice of acceptance. Otherwise, if it is an unconditional promise, A: To the defendant since the surety was filed by the plaintiff in this case. So if
notice of acceptance is not necessary because a contract of guaranty is the plaintiff would lose in this case, then the defendant can invoke as to the
unilateral. bond filed by the plaintiff.
Alright, so what we have here, you have complainants whofiled an action for
What happened in the case of Visayan? replevin to recover the possession of a jeepney and the plaintiffs here, the
Spouses Ibajan, filed a replevin bond, so that they can acquire possession of the
VISAYAN SURETY vs. CA property. Now the replevin bond will answer for damages in case it is found
Facts: The spouses Danilo Ibajan and Mila Ambe Ibajan filed with the RTC a that the spouses are not really entitled to the possession of this property but
complaint against spouses Jun and Susan Bartolome, for replevin to recover rather it would still be spouses Bartolome that would be entitled thereto.
from them the possession of an Isuzu jeepney, with damages. Ibajan alleged
that they were the owners of an Isuzu jeepney which was forcibly and However, it turns out that the registered owner is Dominador Ibajan, the father
unlawfully taken by defendants Jun and Susan Bartolome while parked at of the plaintiff Danilo, and therefore he has superior right to possess the
their residence. In line with this, filed a replevin bond through petitioner property. He intervened in the said case and he is considered an intervenor
Visayan Surety & Insurance Corporation. The contract of surety provided because he is a person not originally impleaded as a party in the proceeding and
thus: nevertheless he has legal interest in the matter in litigation or in the success of
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either the parties or an interest against both, or is so situated as to be adversely ESTATE OF HEMADY vs. LUZON SURETY CO., INC.
affected by a distribution or otherdisposition of property in the custody of the
court or of an officer thereof. [G.R. No.L-8437. November 28, 1956.]
By Angel Deparine and Julian Sabrido Of the three exceptions fixed by Article 1311, the nature of the obligation of the
surety or guarantor does not warrant the conclusion that his peculiar individual
qualities are contemplated as a principal inducement for the contract. Luzon
Art. 2056. One who is obliged to furnish a guarantor shall present a person
Surety merely expects a reimbursement of the moneys that it might have to
who possesses integrity, capacity to bind himself, and sufficient property to
disburse on account of the obligations of the principal debtors. Luzon Surety Co.
answer for the obligation which he guarantees. The guarantor shall be subject
was indifferent that the reimbursement should be made by Hemady himself.
to the jurisdiction of the court of the place where this obligation is to be
complied with. The third exception to the transmissibility of obligations under Article 1311
exists when they are “not transmissible by operation of law”. By contract, the
These are the qualifications mentioned in 2056. articles of the Civil Code that regulate guaranty or suretyship contain no
provision that the guaranty is extinguished upon the death of the guarantor or
When we talk about integrity, we are talking about the good reputation of the the surety.
person.
The lower court sought to infer such a limitation from Art. 2056, to the effect
that “one who is obliged to furnish a guarantor must present a person who
Capacity to bind himself --- that he is of legal age, that he has not been
possesses integrity, capacity to bind himself, and sufficient property to answer
convicted with a crime that carries with it the penalty of civil interdiction.
for the obligation which he guarantees”. It will be noted, however, that the law
requires these qualities to be present only at the time of the perfection of the
Sufficient property--- that these properties are equivalent to the amount of the
contract of guaranty. It is self-evident that once the contract has become
debt involved.
perfected and binding, the supervening incapacity of the guarantor would not
operate to exonerate him of the eventual liability he has contracted; and if that
However, take note, that these requirements may be waived by the creditor.
be true of his capacity to bind himself, it should also be true of his integrity,
Even if not all these are present, the creditor can, nevertheless, accept a person
which is a quality mentioned in the article alongside the capacity.
to act as a guarantor to a principal obligation.
Based on article 2057, it should be immediately apparent that the supervening
Absent one qualification does not make the contract of guarantee VOID, as long dishonesty of the guarantor (that is to say, the disappearance of his integrity
as accepted by the creditor. after he has become bound) does not terminate the contract but merely
entitles the creditor to demand a replacement of the guarantor. But the step
It is a contract between a creditor and guarantor. remains optional in the creditor it is his right, not his duty be may waive it if he
chooses, and hold the guarantor to his bargain. Hence Article 2057 of the
The second sentence of 2056 refers to jurisdiction. present Civil Code is incompatible with the trial court’s stand that the
requirement of integrity in the guarantor or surety makes the latter’s
The place of performance- that is the court which has undertaking strictly personal, so linked to his individuality that the guaranty
jurisdiction over the case in case litigation will commence. Of automatically terminates upon his death.
course when it comes to jurisdiction and venue with the regard
Our conclusion is that the solidary guarantor’s liability is not extinguished by his
to the case to be filed, then we have the Rules of Court.
death, and that in such event, the Luzon Surety Co., had the right to file against
the estate a contingent claim for reimbursement.
Art. 2057. If the guarantor should be convicted in first instance of a crime
involving dishonesty or should become insolvent, the creditor may demand Discussion:
another who has all the qualifications required in the preceding article. The
case is excepted where the creditor has required and stipulated that a Recall Oblicon Art 1311 regarding the Principle of Relativity.
specified person should be the guarantor.
Art. 1311. Contracts take effect only between the parties, their assigns and
This emphasizes that if the qualifications in 2056 are present, this is at the time heirs, except in case where the rights and obligations arising from the contract
of inception of the contract of guarantee (??? Confusing ang sentence ni are not transmissible by their nature, or by stipulation or by provision of law.
ma’am) The heir is not liable beyond the value of the property he received from the
decedent.
If subsequently one of the requisites in 2056 is not present anymore, then it will
not affect the validity of the contract of guarantee.
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Applying that provision, even if the surety Hemady already died, his estate Held: Yes.Firstly, the individual petitioners do not deny that they executed the
could still be held liable. His death did not extinguish the obligation from the Continuing Surety Agreement, wherein they “jointly and severally with the
contract of surety. PRINCIPAL [Yulim], hereby unconditionally and irrevocably guarantee full and
complete payment when due, whether at stated maturity, by acceleration, or
Once the contract has become perfected and binding, the supervening otherwise, of any and all credit accommodations that have been granted” to
incapacity of the guarantor would not operate to exonerate him of the eventual Yulim by iBank, including interest, fees, penalty and other charges. Under
liability he has contracted; and if that be true of his capacity to bind himself, it Article 2047 of the Civil Code, these words are said to describe a contract of
should also be true of his integrity, which is a quality mentioned in the article suretyship.
alongside the capacity 2056.
In a contract of suretyship, one lends his credit by joining in the principal
This apparent that the supervening dishonesty of the guarantor, disappearance debtor’s obligation so as to render himself directly and primarily responsible
of his integrity, does not terminate the contract but merely entitles the creditor with him without reference to the solvency of the principal. According to the
to demand a replacement of the guarantor. But this is optional as to the above Article, if a person binds himself solidarily with the principal debtor, the
creditor, it is his right, not his duty, he may waive it if he chooses, and hold the provisions of Articles 1207 to 1222, or Section 4, Chapter 3, Title I, Book IV of
guarantor to his bargain. the Civil Code on joint and solidary obligations, shall be observed. Thus, where
there is a concurrence of two or more creditors or of two or more debtors in
The contracts of suretyship entered into by Hemady is not being rendered one and the same obligation, Article 1207 provides that among them, “[t]here is
intransmissible due to the nature of the undertaking, nor by the stipulations of a solidary liability only when the obligation expressly so states, or when the law
the contracts themselves, nor by provision of law, his eventual liability there or the nature of the obligation requires solidarity.”
under necessarily passed upon his death to his heirs.
“A surety is considered in law as being the same party as the debtor in relation
But again the heirs will only be liable to the extent of the share or the to whatever is adjudged touching the obligation of the latter, and their liabilities
inheritance that they will received from the Estate of Hemady, beyond that they are interwoven as to be inseparable.”And it is well settled that when the obligor
cannot be held personally liable to the creditor of Hemady. or obligors undertake to be “jointly and severally” liable, it means that the
obligation is solidary, as in this case. Article I of the Continuing Surety
So, again, the requirements under 2056 are required only at the inception and Agreement executed by the individual petitioners clearly provides that they
perfection of the contract; and not required to continue to subsist afterwards. bound themselves as sureties.
Even if the surety or guarantor becomes subsequently insolvent…or has been Thereunder, in addition to binding themselves “jointly and severally” with Yulim
convicted involving dishonesty, it will not necessarily make the contract void. It to “unconditionally and irrevocably guarantee full and complete payment” of
will not operate to exonerate the guarantor of the eventual liability he has any and all credit accommodations that have been granted to Yulim, the
contracted the contract of guaranty continues. The creditor can choose to petitioners further warrant that their liability as sureties “shall be direct,
demand for another guarantor. immediate and not contingent upon the pursuit [by] the BANK of whatever
remedies it may have against the PRINCIPAL of other securities.” There can thus
be no doubt that the individual petitioners have bound themselves to be
YULIM INTL COMPANY LTD., JAMES YU, JONATHAN YU, AND ALMERICK TIENG
solidarily liable with Yulim for the payment of its loan with iBank.
LIM vs. INTL EXCHANGE BANK (NOW UNION BANK OF THE PHILIPPINES)
As to the Deed of Assignment. What the letter accepted was only the
G.R. No. 203133, February 18, 2015 collaterals provided for the loans, as well as the consolidation of the petitioners’
various PN’s under one PN for their aggregate amount of P4,246,310.00.
Facts: iBank, a commercial bank, granted Yulim, a domestic partnership, an
Omnibus Loan, as evidenced by a Credit Agreement which was secured by a Nowhere can it be remotely construed that the letter even intimates an
Chattel Mortgage over Yulim’s inventories. As further guarantee, the partners, understanding by iBank that the Deed of Assignment would serve to extinguish
namely, James, Jonathan and Almerick, executed a Continuing Surety the petitioners’ loan. Otherwise, there would have been no need for iBank to
Agreement in favor of iBank. mention therein the three “collaterals” or “supports” provided by the
petitioners, namely, the Deed of Assignment, the Chattel Mortgage and the
Yulim availed of its aforesaid credit facility with iBank and executed a PN to Continuing Surety Agreement executed by the individual petitioners. In fact,
mature. Yulim defaulted on the said note. iBank sent demand letters to Yulim, Section 2.01 of the Deed of Assignment expressly acknowledges that it is a mere
through its President, James, and through Almerick, but without success. iBank “interim security for the repayment of any loan granted and those that may be
then filed a Complaint for Sum of Money with Replevinagainst Yulim and its granted in the future by the BANK to the ASSIGNOR and/or the BORROWER, for
sureties. compliance with the terms and conditions of the relevant credit and/or loan
documents thereof.”30 The condominium unit, then, is a mere temporary
The RTC ordered Yulim alone to pay iBank and dismissed the complaint. The CA security, not a payment to settle their promissory notes.
found the records bereft of any evidence to show that Yulim had fully settled its
obligation to iBank, Accordingly, the appealed decision is MODIFIED in that To stress, the assignment being in its essence a mortgage, it was but a security
[petitioners] James Yu, Jonathan Yu and A[l]merick Tieng Lim are hereby held and not a satisfaction of the petitioners’ indebtedness.34 Article 125535 of the
jointly and severally liable with defendant-appellant Yulim for the payment o Civil Code invoked by the petitioners contemplates the existence of two or
the monetary awards. more creditors and involves the assignment of the entire debtor’s property, not
a dacion en pago.36 Under Article 1245 of the Civil Code, “*d]ation in payment,
The petitioners insist that they have paid their loan to iBank. They maintain that whereby property is alienated to the creditor in satisfaction of a debt in money,
the letter of iBank to them, which “expressly stipulated that the petitioners shall be governed by the law on sales.” Nowhere in the Deed of Assignment can
shall execute a Deed of Assignment over one condominium unit xxx” was with it be remotely said that a sale of the condominium unit was contemplated by
the understanding that the Deed of Assignment, which they in fact executed, the parties, the consideration for which would consist of the amount of
delivering also to iBank all the pertinent supporting documents, would serve to outstanding loan due to iBank from the petitioners.
totally extinguish their loan obligation to iBank. In particular, the petitioners
state that it was their understanding that upon approval by iBank of their Deed Discussion:
of Assignment, the same “shall be considered as full and final payment of the
petitioners’ obligation.” They further assert that iBank’s May 4, 2001 letter It’s clear here that the petitioners are sureties jointly and severally liable due to
expressly carried the said approval. the continuing surety agreement.
Issue: WON James Yu et.al are liable as sureties. Now they alleged that the obligation has already been extinguished since they
executed a deed of assignment involving a condominium unit.
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However, while the contract was denominated as a deed of assignment, a Tanglao merely mortgaged his property and did not bind himself as a surety.
careful examination of the contract would show that it was solely to act as a David used said power of attorney only to mortgage the property and did not
security. enter into contract of suretyship. Nothing is stated in the compormse
agreement that Tanglao became David's surety for the payment of the sum in
Nowhere can it be remotely construed that the letter intimidates an question. Neither is this inferable from any of the clauses thereof, and even if
understanding by iBank, that the deed of assignment would serve to extinguish this inference might be made, it would be insufficient to create an obligation of
the loan. Otherwise, there would be no need for ibank to mention therein in the suretyship which, under the law, must be express and cannot be presumed.
deed the three collaterals or supports provided by the petitioners: the deed of
assignment, mortgage and continuing surety agreement. The only obligation which the compromise agreement has created to Tanglao, is
that resulting from the mortgage of a property belonging to him to secure the
So the deed of assignment was only an interim security for the repayment of payment of said P640. However, a foreclosure suit is not instituted in this case
any loan granted or those that may be granted in the future for compliance of against Tanglao, but a purely personal action for the recovery of the amount
the terms and conditions of the relevant credit and/or loan documents. still owed by David.
So the condominium unit was not assigned as Dacion en Pago to the bank. It The Benefit of Excussion. At any rate, even granting that defendant Tanglao
was a mere temporary security, not a payment to settle their promissory notes. may be considered as a surety under the compromise agreement, the action
This could also be further evidenced by the subsequent section of the Deed of does not yet lie against him on the ground that all the legal remedies against
Assignment that as soon as the title to the condo has been issued, they would the debtor have not previously been. The plaintiff has in its favor a judgment
execute a deed of real estate mortgage. So if there was really an intention to against debtor David for the payment of debt. It does not appear that the
use that condo as a special form of payment to extinguish the obligation, there execution of this judgment has been asked for and it shows that David has two
would have been no need for that section for the execution of the mortgage. pieces of property the value of which is in excess of the balance of the debt the
payment of which is sought of Tanglao in his alleged capacity as surety.
The parties really intended to constitute that condo as a REM. Considering that
the assignment, in its essence, is a mortgage and not a security and not a DISCUSSION
satisfaction of the petitioner’s indebtedness. Nowhere in the deed can it be
remotely said that the sale of the condo was contemplated by the parties. The The power of attorney was only to mortgage the property and they did not
consideration for which consists of the amount outstanding loan due to the enter into a contract of suretyship.
bank of the petitioners. So no dacion en pago.
Do take note that this is a 1936 case, there is no clear distinction yet as between
II. EFFECTS OF GUARANTY a surety and guarantor. So the usage of the surety here referred to that of a
guarantor.
BENEFIT OF EXCUSSION OR EXHAUSTION
So here the contract of surety or guaranty must be EXPRESS and cannot be
Art. 2058. The guarantor cannot be compelled to pay the creditor unless the presumed.
latter has exhausted all the property of the debtor, and has resorted to all the
legal remedies against the debtor. Here, Tanglao could not have contracted any personal responsibility for the
payment of the sum of P640.
The Benefit of Excussion or the Benefit of Exhaustion.
At any rate, even granting that defendant Tanglao may be considered as a
-The creditor shall first exhaust the available remedies before claiming from the surety or a guarantor, with this case a guarantor, he action does not yet lie
guarantor. against him since he is entitled to the benefit or excussion; legal remedies
against the debtor have not previously been exhausted.
WISE & CO., INC. vs. DIONISIO P. TANGLAO
When we say ‘resorted to available legal remedies’, it’s not sufficient to just
make a demand. You have to resort to all legal remedies against the debtor.
Facts: Cornelio David was an agent of Wise & Co. David failed to liquidate to
Wise & Co. Thereafter, Wise & Co. instituted civil case against Cornelio C. David
As a general rule, you proceed first against the debtor, exhausting all the
for the recovery of a certain sum of money in the CFI.
properties of the debtor and resorting to all the legal remedies against the said
debtor.
Wise & Co. obtained a preliminary attachment of David's property. To avoid the
execution of said attachment, David succeeded in having his Attorney Tanglao
execute, a power of attorney (Exhibit A) in his favor, with the following clause: PBCOM VS.CA, JOSEPH L.G. CHUA AND JALECO DEV’T, INC.
To sign for me as guarantor for himself in his indebtedness to Wise & Company Facts: On April 14, 1976, Fortune Motors (Phils.), Inc. executed a Surety
of Manila, which indebtedness appears xxx and to mortgage my lot, to Agreement in favor of Philippine Bank of Communications (PBCOM) with Joseph
guarantee the said obligations to the Wise & Company, Inc., of Manila. L.G. Chua, as one of the sureties. Meanwhile, on March 6, 1981, Forte Merchant
Finance, Inc., executed a Surety Agreement in favor of PBCOM with Joseph L.G.
Subsequently, David made a compromise agreement with the Wise&Co. to pay Chua again as one of the sureties.
for the sum of P640, payable at the rate of P80 per month and he pledged the
lot owned by the Atty. Dionisio Tanglao as a guaranty for the balance. On October 24, 1983 Chua executed a Deed of Exchange transferring a parcel of
land with improvements to JALECO Dev., Inc. As a result, the title over the land
David paid the sum of P343.47 to Wise & Co., on account of the P640 which he was issued in the name of JALECO. Thereafter, on November 2, 1983, Chua sold
bound himself to pay under the compromise agreement, leaving an unpaid 6,000 shares of JALECO to Mr. Chua Tiong King and another 6,000 shares of
balance of P296.53. JALECO to Guillermo Jose, Jr. and Caw Le Ja Chua, wife of Chua sold the 6,000
share of JALECO to Chua Tiong King.
Wise & Co. now institutes this case against Tanglao for the recovery of said
balance of P296.53. In the meanwhile, for failure of both Fortune Motors and Forte Merchant
Finance, Inc. to meet their respective financial obligations with PBCOM, the
Issue: WON Tanglao is liable for the remaining balance. latter filed Civil Case against Fortune Motors, Joseph L. G. Chua et. al. and Civil
Case against Forte Merchant Finance, Inc., Joseph L. G. Chua et. al. with the
Held: NO. RTC, both for Sum of Money with Writ of Preliminary Attachment where
PBCOM was able to obtain a notice of levy on the properties of Fortune Motors.
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When PBCOM was able to locate Chua's former property which was already An accion pauliana can be resorted to, to rescind or impugn the contract or
transferred to JALECO by virtue of the Deed of Exchange dated October 24, alienation made by debtor in fraud of the creditor. Xxx The creditor can file his
1983, PBCOM filed Civil Case for annulment of Deed of Exchange with the RTC. action before proceeding against the creditor.
The CA said that the annulment case is premature since the main case against In application of the Benefit of Excussion, an accion pauliana must be first made
Fortune and Forte are still pending. before we proceed against the guarantor.
Chua admitted the Deed of Exchange in favor of JALECO and contended that it PRUDENTIAL BANK vs.IAC, PHILIPPINE RAYON MILLS, INC. and ANACLETO R.
CHI
was done in good faith and in accordance with law.
Issue: WON the annulment case is premature because if the pendency of the G.R. No. 74886 December 8, 1992
case against Fortune and Forte.
Facts: Philippine Rayon Mills Inc. entered into a contract with Nissho Co., Ltd. of
Held: NO.For failure of both Fortune Motors and Forte Merchant.to pay their Japan for the importation of textile machineries. Philippine Rayon applied for a
obligations with the petitioner, the latter filed the two civil cases against commercial letter of credit with the Prudential Bank and Trust Company in favor
of Nissho. Nissho withdrew twelve drafts against the letter of credit which
Fortune Motors. and Forte Merchant and respondent Chua. The petitioner was
granted a writ of attachment as a result of which properties belonging to Prudential Bank paid to the Bank of Tokyo but only two of these drafts were
Fortune Motorswere attached. It turned out, however, that the attached accepted by Anacleto Chi, the president of Philippine Rayon.
properties of Fortune Motors were already previously attached/mortgaged to
prior lien holders. As regards Forte Merchant, it appears that it has no property Upon the arrival of the machineries, the Prudential Bank indorsed the shipping
to satisfy the debts it incurred with PBCOM. The record further shows that as documents to the defendant- appellant which accepted delivery of the same.
regards Chua, the property subject of the Deed of Exchange between him and They executed, a trust receipt which was signed by Anacleto Chi to enable
JALECO was his only property. Under these circumstances, the petitioner's Philippine Rayon Mills to take delivery of the machines.
petition for annulment of the deed of exchange on the ground that the deed
was executed in fraud of creditors, despite the pendency of the two other civil At the back of the trust receipt is a printed form to be accomplished by two
cases is well-taken. sureties who, by the very terms and conditions thereof, were to be jointly and
severally liable to the Prudential Bank should the defendant-appellant fail to
As surety for the financial obligations of Fortune Motors and the Forte pay the total amount or any portion of the drafts issued by Nissho and paid for
Merchant with the petitioner, respondent Chua bound himself solidarily liable by Prudential Bank. The defendant- appellant was able to take delivery of the
with the two principal debtors. (Article 2047, Civil Code) The petitioner may textile machineries and installed the same.
therefore demand payment of the whole financial obligations of Fortune
Motors and Forte Finance from Chua, if the petitioner chooses to go directly The obligation of the defendant-appellant arising from the letter of credit and
after him. Hence, since the only property of Chua was sold to JALECO after the the trust receipt remained unpaid and unliquidated. Repeated formal demands
debts became due, the petitioner has the right to file an annulment of the deed for the payment of the said trust receipt yielded no result. Hence, the present
of exchange between Chua and JALECO wherein Chua sold his only property to action for the collection of money against Phil. Rayon and Anacleto R. Chi. In
JALECO to protect his interests and so as not to make the judgments in the two their respective answers, the defendants interposed that the complaint states
cases illusory. no cause of action; if there is, the same has prescribed; and the plaintiff is guilty
of laches.
While it is necessary that the credit of the plaintiff in the accion pauliana must
be prior to the fraudulent alienation, the date of the judgment enforcing it is Issues: WON Chi is jointly and severally liable with Philippine Rayon.
immaterial. Even if the judgment be subsequent to the alienation, it is merely
declaratory, with retroactive effect to the date when the credit was constituted. Held. NO. Chi is merely a guarantor. Chi's signature in the dorsal portion of the
trust receipt did not bind him solidarily with Philippine Rayon. The statement at
Parenthetically, the appellate court's observation that the petitioner's interests the dorsal portion of the said trust receipt, which petitioner describes as a
are sufficiently protected by a writ of attachment on the properties of Fortune "solidary guaranty clause", reads:
Finance has neither legal nor factual basis.Discussion:
In consideration of the PRUDENTIAL BANK AND TRUST COMPANY complying
DISCUSSION with the foregoing, we jointly and severally agree and undertake to pay on
demand to the PRUDENTIAL BANK AND TRUST COMPANY all sums of money
It is not sufficient to say that as long as the debtor is insolvent you can now go which the said PRUDENTIAL BANK AND TRUST COMPANY may call upon us to
after the guarantor. You must resort to all remedies against the debtor. pay xxxx
In this case, while it is true that Chua is a surety to which the benefit of PHILIPPINE RAYON MILLS, INC.
excussion is not available, I included this case to emphasize a remedy that is
available to the creditor in relation to the benefit of excussion---which is accion
(Sgd.) Anacleto R. Chi
pauliana.
In this case, the only property of Chua was sold to JALECO, after the debts ANACLETO R. CHI
became due, and then the petitioner here had the right to file an annulment of
the deed of exchange between Chua and JALECO, wherein Chua sold his only The obligation of Chi is only that of a guarantor. This is further bolstered by the
property to JALECO, to protect his interest, so as not to make the judgments in last sentence which speaks of waiver of exhaustion, which, nevertheless, is
the two cases illusory. ineffective in this case because the space therein for the party whose property
may not be exhausted was not filled up. Under Article 2058 of the Civil Code,
Another instance here is that Chua continued to stay in the property and the defense of exhaustion (excussion) may be raised by a guarantor before he
evidence contains that Chua and his immediate family controlled JALECO. may be held liable for the obligation. Petitioner likewise admits that the
questioned provision is asolidary guaranty clause, thereby clearly distinguishing
So the deed of exchange executed had for its subject the sale of the only it from a contract of surety.
property of Chua at the time when his financial obligations became due and
demandable. Despite the sale, Chua continued to stay in the same property. It, however, described the guaranty as solidary between the guarantors; this
would have been correct if two guarantors had signed it. The clause "we jointly
Xxx and severally agree and undertake" refers to the undertaking of the two parties
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who are to sign it or to the liability existing between themselves. It does not Also here what we have is a contract of adhesion that was prepared by the
refer to the undertaking between either one or both of them on the one hand bank, so with regard to the interpretation, any doubt will be strictly construed
and the petitioner on the other with respect to the liability described under the against the one who prepared the said contract. Here, even if it was only Chi
trust receipt. who signed the clause it did not make his act and idle ceremony or render the
clause totally meaningless. By his signing he became the sole guarantor to
Neither can We agree with the reasoning of the public respondent that this which he is entitled the benefit of excussion.
solidary guaranty clause was effectively disregarded simply because it was not
signed and witnessed by two persons and acknowledged before a notary public. Now also take note here excussion is not a condition sine qua non for the
While indeed, the clause ought to have been signed by two guarantors, the fact institution of an action against a guarantor. so in other words, the guarantor,
that it was only Chi who signed the same did not make his act an idle ceremony can be impleaded as a party, in the claim for the collection of sum of money by
or render the clause totally meaningless. By his signing, Chi became the sole the creditor. It is based on trial convenience and is designed to permit the
guarantor. joinder of plaintiffs or defendants whenever there is a common question of law
or fact. It will save the parties unnecessary work, trouble and expense.
The attestation by witnesses and the acknowledgement before a notary public
are not required by law to make a party liable on the instrument. With respect Art. 2059. The excussion shall not take place:
to a guaranty, which is a promise to answer for the debt or default of another,
the law merely requires that it, or some note or memorandum thereof, be in (1) If the guarantor has expressly renounced it;
writing. Otherwise, it would be unenforceable unless ratified. While the
acknowledgement of a surety before a notary public is required to make the (2) If he has bound himself solidarily with the debtor;
same a public document, a contract of guaranty does not have to appear in a
public document. (3) In case of insolvency of the debtor;
Issue: WON Chi is liable. (4) When he has absconded, or cannot be sued within the Philippines unless
he has left a manager or representative;
Held:NO. The remaining issue to be resolved concerns the propriety of the
dismissal of the case against Chi. Chi he cannot be bound as a simple guarantor (5) If it may be presumed that an execution on the property of the principal
pursuant to Article 2058 of the Civil Code. He cannot be compelled to pay until debtor would not result in the satisfaction of the obligation.
after petitioner has exhausted and resorted to all legal remedies against the
principal debtor, Philippine Rayon. The records fail to show that petitioner had GR: Guarantor shall be entitled the benefit of excussion.
done so. Simply stated, there is as yet no cause of action against Chi.
EXCEPTION: Artcle 2059.
Excussion is not a condition sine qua non for the institution of an action against
a guarantor. However, Chi's liability is limited to the principal obligation in the 1. Waiver (expressly renounces)
trust receipt plus all the accessories xxx; with respect to the latter, he shall only
be liable for those costs incurred after being judicially required to pay xxx This benefit of excussion is a privilege granted to a guarantor. Like
any other right, this can be waived. It is solely the guarantor can
DISCUSSION waive this right as this is a personal right. So this cannot be waived
by the creditor. No specific form for this waiver as long as it is
So, we have here Phil Rayon as the principal debtor, and we also have Chi who express.
affixed his signature in tax receipt. However in affixing his signature, it did not
make her a solidary liable with Phil Rayon. 2. If he has bound himself solidarily
While it is true that they have that phrase ‘jointly and severally undertake’, who He is now considered as a surety primarily liable with the debtor.
are the signatories in said document? It was only Chi. The intention of that is to
3. Insolvency
have Solidary Guarantee Clause.
Here, there is no need for a judicial decree or declaration of
Under the Solidary Guarantee Clause, the one who signs the contract is not
bankruptcy. However, the insolvency here must be actual. Recall the
necessarily solidary bound to the principal debtor. xxx
case of Machetti. wherein the mere declaration of insolvency is not
sufficient to go after the guarantor. There must be first a final
The intention is that you have guarantors, and among themselves, they are
liquidation. Why? Because when we say that the debtor is insolvent
solidarily bound. This is different from the obligation of a surety, because a
it does not necessarily mean that he has no assets remaining at all. It
surety is still solidarily bound together with the principal debtor.
is just that he may still have assets but are not sufficient to pay of all
his obligations. So in the liquidation proceedings there will be
So, when you have a guarantor, you have benefit of excussion. You can have
concurrence and preference of credits. Restitution or liquidation of
several guarantors, and you have the benefit of excussion to each and every
the remaining assets to pay off his obligations. Puwede preferred
one of them.
yung creditors, pabayarin siya. Puwede pro-rata ang creditor so may
portion mabayaran si creditor. So therefore if that liquidation has
It is also possible that between and among these guarantors, they are solidarily
still to take place then the creditor has no right yet to go after the
bound, wherein they (creditor?) would still be entitled to the benefit of
guarantor just because the debtor has already been declared
excussion. But as long as 2058 is resorted to, na exhaust na lahat wala pa rin
insolvent.
masingil, so pwede na masingil ang guarantors. Any one of them pwede na
masingil ang whole amount because of the Solidary Guarantee Clause.
3. Absconded or cannot be sued within the Philippines
But in this case, it is only Chi who signed.
It is not expected to the creditor should first proceed against his
principal debtor because in this case it would not become impossible
There is a provision on waiver of exhaustion. But the SC held this is ineffective
for him to enforce the court decision against the principal debtor
because the space therein where the property may not be exhausted was not
since the principal debtor has left the country. Remember that court
filled up.
processes are jurisdictional. It cannot be enforced outside the
Philippine territory unless what we have is subject matter involving
So the defense of exhaustion may be raised by the guarantor before he may be
res—property here in the Philippines. You have to consider the Rules
held for the obligation, which Chi did.
of Court.
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4. The principal debtor has not more property BITANGA VS. PYRAMID
So you need not wait for the excussion of the properties of the G.R. No. 173526 August 28, 2008
principal debtor because it is already clear that you cannot pay. You
can now proceed against the guarantor. It would be useless to Facts: On March 26, 1997, Pyramid Construction Engineering Corporation
proceed against the principal debtor. entered into an agreement with Macrogen Realty of which Benjamin Bitanga is
the president. Pyramid is to construct in favor of Macrogen a commercial
building. Pyramid commenced the construction project on May 1997. However,
Now aside from the exceptions under 2059 we also have to take into Macrogen Realty failed to settle Pyramid's progress billings, which resulted to
consideration other provisions of the law. the suspension of the work. Pyramid then instituted a case against Macrogen
Realty seeking payment from the latter for the unpaid billings and project costs.
Pledge or mortgage- because you have to resort first to the
foreclosure of the property mortgaged. Before the arbitration case could be set for trial, both parties entered into a
When we go to 2084, on judicial bondsmen and subsurety. compromise agreement whereby Macrogen Realty agreed to pay the total
amount of P6,000,000 in six equal monthly installments. Bitanga guaranteed
Art 2084.A judicial bondsmen cannot demand the exhaustion of the property of the obligations of Macrogen Realty under the compromise agreement by
the principal debtor. executing a Contract of Guaranty in favor of Pyramid, by virtue of which he
irrevocably and unconditionally guaranteed the full and complete payment of
A sub surety in the same case, cannot demand the exhaustion of the property the principal liability of Macrogen Realty.
of the debtor or of the surety.
However, contrary to petitioner’s assurances, Macrogen Realty failed and
1. There must be compliance with the requirements in refused to pay all the monthly installments agreed upon in the Compromise
article 2060. Agreement. Hence, on 7 September 2000, respondent moved for the issuance
of a writ of execution against Macrogen Realty, which was granted.
Art. 2060. In order that the guarantor may make use of the benefit of excussion
he must set it up against the creditor upon the latter’s demand for payment for On 29 November 2000, the sherifffiled a return stating that he was unable to
him, and point out to the creditor available property of the debtor within locate any property of Macrogen Realty, except its bank deposit of P20,242.33,
Philippine territory, sufficient to cover the amount of the debt. with the Planters Bank, Buendia Branch.
The other one is if he fails to to point out specific properties of the principal Held:NO. Under a contract of guarantee, the guarantor binds himself to the
debtor that are available in the Philippines to cover the amount of the debts. creditor to fulfill the obligation of the principal debtor in case the latter should
fail to do so. The guarantor who pays for a debtor, in turn, must be indemnified
Requisites in 2060: by the latter. However, the guarantor cannot be compelled to pay the creditor
unless the latter has exhausted all the property of the debtor and resorted to all
(Before you can avail of the benefit of excussion of the guarantor: ) the legal remedies against the debtor. This is what is otherwise known as the
1. He must allege this benefit. benefit of excussion.
2. If a demand is made against him he must set this as a defense, that
there is no cause of action against him because he has the benefit of Article 2060 of the Civil Code imposes a condition for the invocation of the
the excussion. defense of excussion. Article 2060 of the Civil Code clearly requires that in order
3. The guarantor must able to point out specific properties of the for the guarantor to make use of the benefit of excussion, he must set it up
principal debtor available in the Philippines. against the creditor upon the latter’s demand for payment and point out to the
creditor available property of the debtor within the Philippines suffiecent to
So it does not cover properties that are located outside the Philippines. Why? cover the amount of the debt.
Because it would be legally impossible for the creditor to proceed against this
property. Chances are, the cost of going after this properties would be more It must be stressed that despite having been served a demand letter at his
than the amount of the obligation therefore rendering the action nugatory. It office, petitioner still failed to point out to the respondent’s properties
must be sufficient to cover the amount of debt, the properties must also be sufficient to cover its debt as required under Article 2060 of the Civil Code. Such
sufficient to cover the amount of debt.
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failure on petitioner’s part forecloses his right to set up the defense of paying the obligation once demand is made on him. Excussion, after all, is a
excussion. right granted to him by law and as such he may opt to make use of it or waive it.
PhilGuarantees waiver of the right of excussion cannot prevent it from
Worthy of note as well is the Sheriffs return stating that the only property of demanding reimbursement from petitioners. The law clearly requires the
Macrogen Realty which he found was its deposit of P20,242.23 with the debtor to indemnify the guarantor what the latter has paid.
Planters Bank. Article 2059(5) of the Civil Code thus finds application and
precludes petitioner from interposing the defense of excussion. The guarantee was only up to 17 December 1980. JNs obligation with TRB fell
due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08
Bitanga had not genuinely controverted the return made by Sheriff Joseph F. October 1980. That payment was actually made only on 10 March 1981 does
Bisnar, who affirmed that, after exerting diligent efforts, he was not able to not take it out of the terms of the guarantee. What is controlling is that default
locate any property belonging to the Macrogen Realty, except for a bank and demand on PhilGuarantee had taken place while the guarantee was still in
deposit with the Planters Bank at Buendia, in the amount of P20,242.23. It is force.
axiomatic that the liability of the guarantor arises when the insolvency or
inability of the debtor to pay the amount of debt is proven by the return of the As to the extension of time. The requirement that the guarantor should
writ of execution that had not been unsatisfied. consent to any extension granted by the creditor to the debtor under Art. 2079
is for the benefit of the guarantor. As such, it is likewise waivable by the
guarantor. Thus, even assuming that extensions were indeed granted by TRB to
DISCUSSION JN, PhilGuarantee could have opted to waive the need for consent to such
extensions. Indeed, a guarantor is not precluded from waiving his right to be
notified of or to give his consent to extensions obtained by the debtor.
So here, we have Bitanga who acted as a guarantor. However, he cannot avail of
the benefit of excussion. The guarantor cannot be compelled to pay the creditor
unless the latter has exhausted the property of the debtor and resoted to all the DISCUSSION
legal remedies against the debtor. As provided under Article 2060, the
guarantor must set up the benefit of excussion against the creditor upon the Excussion may only be invoked where the legal remedies against the creditor
latter’s demands for payment. Despite having been served a demand letter the has been expanded. He creditor must first obtain a judgement against the
petitioner still failed to point out properties of Macrogen Properties which shall principal debtor before assuming to run after the guarantor. Obviously,
cover its debt. With that, such failure on the petitioner’s part forecloses its right exhaustion cannot even take place before judgment have been obtained. To
to set up the defence of exculsion. In addition, the last paragraph of 2059 is also which, in relation to 2016, we have stated that the guarantor must set up the
applicable. Sheriff submitted that the only property of Macrogen Property is defence of this benefit upon demand from guarantor. Again, excussion is a right
only P20,422 with the bank. So it may be presumed that the execution on the granted to the guarantor by law and as such he may opt to make use of it or
property of the principal debtor did not result to the satisfaction of the waive it. Phil Guarantee’s waiver of the benefit of excussion cannot prevent the
obligation kasi yun nalang yung property. And you have to take note na when it petitioner from demanding reimbursement from the principal debtor. A
comes to corporation, it has a separate personality so you can not go after the guarantor is not precluded from waiving his right to be notified.
personal assets of the corporators.
Phil Guarantee did not invoke the benefit of excussion. There was only express
JN DEVELOPMENT CORP., and SPS. RODRIGO and LEONOR STA. ANA vs. PHIL renunciation of such benefit. And remember, it is only the guarantor who can
EXPORT AND FOREIGN LOAN GUARANTEE CORP G.R. No. 151060, August 31, invoke this benefit at his discretion. Phil Guarantee did not avail of the
2005 defenses. So naghanap lang talaga ng palusot ditto ang principal debtor. He
could still be held liable.
Facts: JN Development Corporation and Traders Royal Bank entered into an
agreement whereby TRB would extend to JN Credit Line for P2M. The loan was Article 2061. The guarantor having fulfilled all the conditions required in the
covered by several securities, including an REM from PhilGuarantee. With preceding article, the creditor who is negligent in exhausting the property
PhilGuarantee issuing a guarantee in favor of TRB, JN, petitioner spouses Sta. pointed out shall suffer the loss, to the extent of said property, for the
Ana and petitioner Narciso Cruz executed a Deed of Undertaking to assure insolvency of the debtor resulting from such negligence.
repayment to PhilGuarantee.
So here, the creditor failed to proceed against the properties of the principal
JN failed to pay the loan to TRB upon maturity; thus, on Oct. 7, 1980, TRB debtor and went after the guarantor. However, despite being informed of the
requested PhilGuarantee to make good its guarantee. PhilGuarantee paid TRB. available properties by the guarantor, the creditor negligently refuses to
Subsequently, PhilGuarantee made several demands on JN, but the latter failed proceed against this properties. Subsequently, the that debtor becomes
to pay. Thereafter, PhilGuarantee filed a Complaint for collection of money and insolvent, or naunahan ng ibang creditor. What will be the effect of the
damages against herein petitioners. negligence of the creditor? The creditor shall suffer the loss to the extent of
such properties. So hindi nya na pwedeng balikan si guarantor because the
guarantor complied with the requirements under Article 2060. Creditor will
Issue: WON petitioners are liable to reimburse PhilGuarantee.
suffer the loss.
It is clear that excussion may only be invoked after legal remedies against the
So the creditor files an action for collection of sum of money. It must be against
principal debtor have been expanded. Thus, it was held that the creditor, as a the principal debtor. But there is no legal impediment that would join or
condition precedent, must first obtain a judgment against the principal debtor
implead the guarantor in the action. Ofcourse during the case, the guarantor
before assuming to run after the alleged guarantor. The guarantor must set it must set up this defense of excussion. But as to the fact of filing, walang
up against the creditor upon the latters demand for payment and point out to
problema. What is required here is that the court must notify the guarantor of
the creditor available property of the debtor within the Philippines sufficient to
the action. Meaning, there is an obligation to notify the guarantor. He may also
cover the amount of the debt. appear in the case. Notify lang yun. With that notification, the guarantor has
two choices: to appear in the case or not to appear. If he appears, he may set
While a guarantor enjoys the benefit of excussion, nothing prevents him from up the defense of excussion. He can also set up defenses available for the
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principal debtor. In fact, even if he voluntarily appears in the case, the defense for the entire 90,000 pesos? Because of the rule in 2065 for benefit of division,
of excussion is NOT deemed waived. extend of liability of each guarantor is only 30,000 pesos.
Do take note, however, that the guarantor CANNOT be sued alone before the Notice here that what you have are guarantors but the nature of liability among
principal debtor has been held liable. Pwede, pero principal debtor muna. Pero them is joint. Of course the exemption here is if they have an agreement that
hindi pwede na hindi ka pa nagfile against the principal debtor, sa guarantor ka they are solidarily bound to the obligation of the debtor.
na agad. What do you mean that “solidary sila? Pwede ba yon guarantor pero solidary?”
“Pwede, guarantor sila with regards sa debt ni debtor, so ang obligation nila
Article 2063. A compromise between the creditor and the principal debtor when it comes to him is hindi solidary but subsidiary lang and accessory. But as
benefits the guarantor but does not prejudice him. That which is entered into to among themselves they are considered solidary debtors by their agreement
between the guarantor and the creditor benefits but does not prejudice the wherein if the creditor after exhaustion of the properties of the debtor, if
principal debtor. creditor demands from any of them(guarantors) they can compel them to pay
for the entire 90,000 obligation, again that is if the have agreed to be solidary
Compromise is the more preferred mode. It is possible that a compromise can guarantors; but if in the absence of any agreement or stipulation that they are
happen between the creditor and the principal debtor. And the rule is that it solidary guarantors, they would only be considered as joint guarantors of the
should benefit the guarantor. Kung ang 100K nagging 50K nalang, that should principal debtor in which they cannot be compelled to pay more than their
also benefit the guarantor. If despite the compromise agreement, then the proportionate shares in the obligation of the principal debtor.
guarantor shall be liable for the reduced amount. So the compromise may
Please take note of the benefit of division, “iba sya from excussion; both of
benefit but NOT prejudice the guarantor.
them exist in a contract of guaranty pero the benefit of division exist when 1.
You have several guarantors (at least 2); 2. Involving one debtor; 3. For one
Article 2064. The guarantor of a guarantor shall enjoy the benefit of excussion, debt or obligation
both with respect to the guarantor and to the principal debtor.
MIRA HERMANOS V. MANILA
This another article that deals with double guarantee. The obligations of a
guarantor can alsobe guaranteed by a sub-guarantor to which the sub- Petitioner Mira Hermanos delivered merchandise on consignment to
guarantor may not be held liable without the benefit of excussion not only as respondent Manila Tobacconists to be sold by the latter. To secure the
against the creditor but also the guarantor. Articles applicable to the guarantor obligation, petitioner required respondent a bond of P3k which was executed
shall also be available to the sub-guarantor. by Provident Insurance.
However, the business of respondent increased so that the merchandise it
Article 2065. Should there be several guarantors of only one debtor and for the received from petitioner exceeded the P3k bond. Hence, an additional bond of
same debt, the obligation to answer for the same is divided among all. The P2k was executed by Manila Compañia with the same terms and conditions
creditor cannot claim from the guarantors except the shares which they are (except as to the amount) as the bond of the Provident.
respectively bound to pay, unless solidarity has been expressly stipulated. Upon final and complete liquidation, respondent has an unpaid balance of
P2,272.79 to petitioner. When it failed to pay, petitioner demanded payment
The benefit of division against the co-guarantors ceases in the same cases and from the two surety companies.
for the same reasons as the benefit of excussion against the principal debtor.
Provident paid only P1,363.67, which is 60% of the amount owed by respondent
alleging that the remaining 40% should be paid by Manila Compañia. However,
JANUARY 19, 2017 Manila Compañia refused to pay the balance contending that so long as the
liability of the respondent did not exceed P3k, it was not bound to pay anything
Article 2065. Should there be several guarantors of only one debtor and for the because its bond referred only to the obligation of the respondent in excess of
same debt, the obligation to answer for the same is divided among all. The P3k and up to P5k.
creditor cannot claim from the guarantors except the shares which they are
respectively bound to pay, unless solidarity has been expressly stipulated.
ISSUE: W/N Provident Insurance is entitled to the benefit of division.
The benefit of division against the co-guarantors ceases in the same cases and
for the same reasons as the benefit of excussion against the principal debtor. RULING: NO
What we have here is the benefit of division. The benefit of division refers to several sureties of only one debtor for the same
debt. In the instant case, although the two bonds on their face appear to
What is the scenario here? guarantee the same debt co-extensively up to P2k — that of the Provident
You have several guarantors for only one debtor involving only one debt. alone extending beyond that sum up to P3k — it was pleaded and conclusively
proven that in reality said bonds, or the two sureties, do not guarantee the
Illustration: same debt because the Provident guarantees only the first P3k while the Manila
Compañia, only the excess over and above said amount up to P5k. Hence, the
(90,000) benefit of division does not apply in this case. Otherwise, there would have
Debtor Creditor been no need for the additional bond of P2k if its purpose were to cover the
first P2k already covered by the P3k bond of the Provident.
If the purpose of the additional bond of P2k were to cover not the excess over
and above P3k but the first P2k of the obligation of the principal debtor like the
bond of P3k which covered only the first P3k of said obligation, then it would
result that had the obligation of the respondent exceeded P3k, neither of the
G1 G2 G3 two bonds would have responded for the excess, which was precisely the event
against which petitioner Mira Hermanos wanted to protect itself by demanding
30K 30K 30K the additional bond of P2k.
Let’s us say the money borrowed by the debtor from the creditor is 90,000 For instance, suppose that the obligation of the principal debtor Tobacconists
pesos. There are 3 guarantors. Now as guarantors we know that their liability is amounted to P5k. If both bonds were co-extensive up to P2k, like what
subsidiary, the guarantor can go only after them as long as the assets of the Provident is contending, the result would be that the first P2k of the obligation
debtor has already been exhausted, unless there is an exemption. would have to be divided between and paid equally by the two surety
Let us say “na exhaust na” “pwede na maningil si creditor” how much can the companies, which should pay P1k each, and of the balance of P3k the Provident
creditor collect from one guarantor? Can he force one of the creditors to pay
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would have to pay only P1k more because its liability is limited to the first P3k, No. 2 you are talking about legal interest, take note from the time the payment
thus leaving the plaintiff in the lurch as to the excess of P2k. was made known to the debtor even though it did not earn interest to the
creditor. In other words, here liable si debtor ng interest kay guarantor even if si
That was manifestly not the intention of the parties. As a matter of fact, when guarantor hindi liable ng interest kay creditor. The interest covered here is of
the Provident gave its bond and fixed the premiums thereon it assumed an course not the interest in contemplation of a contract of loan which must be in
obligation of P3k in solidum with the Tobacconists without any expectation of writing, yung interest by stipulation. Legal interest in the sense of damages or in
any benefit of division with any other surety. The additional bond of P2k was, case of default or delay on the part of the payment. So what would happen
more than a year later, required by the creditor of the principal debtor for the here? The creditor was paid by the guarantor upon due date or wala nag collect
protection of said creditor and certainly not for the benefit of the original si creditor ng interest for any delay. But the guarantor himself can collect for
surety, which was not entitled to expect any such benefit. legal interest against the principal debtor from the time the guarantor made
Take note of the facts in Mira, in this case you cannot apply benefit of division known to the debtor such payment. So even if the guarantor did not pay
as provided in 2065. While you have here 2 sureties (2065 can be applicable for interest to the creditor, he (guarantor) nevertheless notified the debtor of the
both guarantors and sureties) and one debtor which Manila Tobacconists, payment, but despite notification wala nag bayad si debtor and therefore there
however the obligation guaranteed by Provident and Manila Compania de is delay on his part. And delay will be liable for interest from the time of notice,
Seguros are different. For provident the first 3,000 and for Manila Compania legal interest shall now accrue in favor of the guarantor
“ang sobra sa 3,00” up to 5,000 pesos. In other words, you cannot apply here What’s the premise here?
‘yung rue of division. Do remember yung 3 requisites.
This is because kung hindi binayaran ni guarantor si creditor, the guarantor
3 requisites of the benefits of division: could have use the money for some other purpose (pinahiram sa and could
(1) There must be one debtor; have earned interest, could have bought something and enjoyed it) so that is
(2) Several guarantors; and the basis for the recovery of interest
(3) One obligation. Also the right to be indemnified for expenses incurred, in this case despite
Do you remember that case we discussed last time? Prudential, yung isa lang notice to the debtor for the obligation, wala, because of that si guarantor nag
yung nag perma. Yung intention nun is guarantor sila and they will be solidary barrow sya ng pera, liable xa ng interest dun sa hiniraman nya ng pera that
an exemption to the benefit of division, since by agreement they gave their would be considered interest expense on the part of the guarantor. Pwede rin
consent to be solidariliy be bound as guarantors. nya rin yan ipa reimburse sa principal debtor. If he incuse expenses in collecting
and demanding payment (travel expenses) those expenses can be part of the
Requisites for 2065 to apply: action for reimbursement, also for damages, dahil nag bayad si guarantor kay
creditor tapos hindi sya agad binayaran ni debtor, what happened, the
(1) There must be one debtor with several guarantors of the same guarantor parang law student sleepless nights, mental anguish so he can be
obligation; entitled for damages.
(2) It must be claimed by guarantor should the co-guarantors __ in the
manner; Article 2067. The guarantor who pays is subrogated by virtue thereof to all the
(3) Solidarity must not have been expressly stipulated. rights which the creditor had against the debtor.
Take note that unlike the benefit of excussion, the benefit of division cannot be If the guarantor has compromised with the creditor, he cannot demand of the
expressly renounced. In other words it Is either joint or solidary talaga ang debtor more than what he has really paid.
obligation ng several guarantors or sureties, only solidary by agreement. If there
is no agreement joint, as provided in 2065. What is involved in 2067 is that the guarantor paid with the knowledge of the
principal debtor. If the guarantor guaranteed the obligation without the
Take note also that in regards to the guarantors themselves, they are co- knowledge or the consent of the principal debtor, remember in our previous
guarantors hindi sila sub guarantors. With regard to these co-guarantors hindi discussion he is entitled only to beneficial reimbursement kung wala syang
required yung application ng 2060. What is 2060? Yun allege the right to the consent from the principal debtor na e guaranty yon. But if the debtor gave his
benefit of excussion, point out specific properties of the debtor available in the consent for that guarantor to guaranty his obligation such guarantor is entitled
Philippines. Guarantor 1 cannot refuse to pay on the ground na mag point out not just for beneficial reimbursement but he has the right to be subrogated to
sya ng properties ni guarantor 2 and 3. 2060 is not applicable to co-guarantors the rights that were previously available to the creditor. So all rights which the
but you can apply it to sub-guarantors and of course the guarantor himself. creditor had against the debtor, the guarantor is subrogated thereto (mortgage,
SECTION 2 pledge or penalty imposed by reason of agreement) the guarantor is entitled to
Effects of Guaranty Between the Debtor and the Guarantor such rights as held because of the benefit of subrogation.
This rights use 2067, however are available to a paying guarantor because a
Article 2066. The guarantor who pays for a debtor must be indemnified by the
contract of guaranty is a contract of indemnity. So the guarantor who pays is
latter.
subrogated by virtue to all the right which the creditor had against the debtor
The indemnity comprises: and if he had compromise with the creditor he cannot demand reimbursement
to the debtor more than what he has actually paid, now that provision is to
(1) The total amount of the debt; prevent collusion between the creditor and the guarantor, in the sense na maka
(2) The legal interests thereon from the time the payment was made ginansya pa si guarantor kay he paid for a lesser amount doon sa creditor but he
known to the debtor, even though it did not earn interest for the creditor demanded for the original obligation from the principal debtor. Now, with
regard to knowledge of principal debtor dito sa 2067, may knowledge and
(3) The expenses incurred by the guarantor after having notified the consent si debtor kay guarantor.
debtor that payment had been demanded of him;
Article 2068. If the guarantor should pay without notifying the debtor, the latter
(4) Damages, if they are due. may enforce against him all the defenses which he could have set up against the
creditor at the time the payment was made.
2066, we have here the rights of a guarantor. Take note that we have here the
term indemnify, in other words here the right to collect what is covered of this When it comes to payment we have 2068;
indemnity is available only to a guarantor who pay.
So what happens? The guarantor paid the obligation but did not tell the debtor
Remember a contract of guaranty is a contract of indemnity, in which the that he will pay the obligation. What is the right available for the debtor? He
guarantor can recover only what he has paid, he cannot be indemnified by may set up defenses which he could have enforced against the creditor at the
something he did not pay. Indemnity mean reimbursement. Now what can the time the obligation became due. Dahil hindi sinabihan ni guarantor si debtor na
guarantor recover or collect from the principal debtor. Obviously he can collect mag bayad na sya. Guarantor paid for the obligation in full, now he seeks
the total amount of the obligation because this is the amount the guarantor reimbursement from the debtor, debtor refuses to pay on the ground that
guaranteed to pay the creditor. there was already payment or there was for example dation en pago or the
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obligation had already prescribed, this are defenses that can be used by the rather sa creditor Solutio Indebiti payment by mistake , but article 2070 tells us
principal debtor as against the guarantor. So that the guarantor cannot compel that na its possible for guarantor to seek reimbursement from the debtor
the principal debtor to pay. The guarantor has to suffer here. Why? Kasi nagpa himself in case there is double payment as long as the following requisites are
hawod hawod nagpa hero hero. Again here what is involved in 2068 is that he present
(guarantor) did not notify the debtor of the payment; this is different from
getting the consent of the debtor for you to guaranty the obligation, ditto sa (1) It must be a gratuitous guaranty –the guarantor acted as such
2068 it is still possible that you are entitled to subrogation because at the time without receiving any consideration, he agreed to be a guarantor
you agreed to be a guarantor the principal debtor gave his consent thereto he just out of his liberality
has knowledge ang problema lang is that at the time of payment mag bayad
kana hindi mo sya (debtor) sinabihan, ngayon si debtor nag bayad na or did not (2) The guarantor was prevented by a fortuitous event in notifying the
pay it because the obligation has already prescribed. Nevertheless, the debtor – so here there was urgency to pay the obligation and he
guarantor cannot seek reimbursement from the debtor because of such cannot notify the debtor because there is a fortuitous event or he
defenses even if at the time he agreed to be a guarantor he has the consent of cannot contact (calamity, off communication system) but he wants
the principal debtor. So again it is possible that the guarantor acted as such with to pay already because the obligation is due and demandable,
the knowledge and consent of the debtor but he did not inform the debtor at nevertheless hindi nya na notify si principal debtor.
the time of payment, therefore debtor may set up as against the guarantor
(3) The creditor becomes insolvent – remember the 1st remedy here of
those he could have set up as against the principal creditor if the guarantor pay
the guarantor in case of double payment is to go after the principal
without notifying the debtor. It just shows here that the guarantor has the
creditor, seek for the return of the payment base on Solutio Indebiti.
obligation to notify the debtor that he is going to pay kasi kungna notify nya
Now if it turns out na wala na palang property si creditor at the time
then he will know if there is prescription or previous payment and therefore
the guarantor seeks return of the payment – the creditor becomes
hindi na sya magbayad now if part of the obligation has already prescribe then
insolvent, as long as the guaranty is gratuitous and the guarantor
yung part lang na yun ang hindi liable for reimbursement si principal debtor.
was prevented by a fortuitous event from notifying the debtor and
The flaw that is covered in 2168 is that the debtor in not notified before the
the creditor becomes insolvent – if all this are present then the
guarantor paid.
guarantor can seek reimbursement from the principal debtor. Kulang
But what if, gave consent, notified before payment, debtor did not say anything, ng isa the guarantor cannot seek reimbursement from the principal
upon reimbursement the principal debtor raises prescription so as not to incur debtor.
liability. Can the guarantor compel him to pay considering na may consent and
Notice if you look at 2070 it does not matter kung sino ang unang nagbayad it is
there was notification of payment?
possible nauna nagbayad si guarantor and the subsequently si debtor.
Not anymore. Its not there but you can apply principle of estoppel. So by his
silence or by his acts he is deemed to have waived to raise these defenses. Art. 2071. The guarantor, even before having paid, may proceed
against the principal debtor:
Article 2069. If the debt was for a period and the guarantor paid it before it
(1) When he is sued for the payment;
became due, he cannot demand reimbursement of the debtor until the
expiration of the period unless the payment has been ratified by the debtor. (2) In case of insolvency of the principal debtor;
Alright! So what do we have here? we have an exited guarantor. The obligation (3) When the debtor has bound himself to relieve him from the
is not yet due, the principal creditor cannot obviously enforce the obligation or guaranty within a specified period, and this period has expired;
demand for the payment thereof. But the guarantor paid before the debt was
due because as mentioned he is excited, of course even if the guarantor paid (4) When the debt has become demandable, by reason of the
before the debt became due he cannot yet ask reimbursement from the expiration of the period for payment;
debtor. Why? Because his payment was premature, so wala pa syang right to (5) After the lapse of ten years, when the principal obligation has no
reimbursement. The guarantor simply has to wait until the obligation become fixed period for its maturity, unless it be of such nature that it
due and demandable only exception is he can demand it from debtor if debtor cannot be extinguished except within a period longer than ten
ratifies such premature payment or such payment is made with the consent of years;
the debtor, if it has been ratified by the debtor then this means that the debtor
waived the benefit of the period and in other words pwede na maka seek ng (6) If there are reasonable grounds to fear that the principal debtor
reimbursement si guarantor sa kanya even if the obligation has not yet mature. intends to abscond;
Article 2070. If the guarantor has paid without notifying the debtor, and the (7) If the principal debtor is in imminent danger of becoming insolvent.
latter not being aware of the payment, repeats the payment, the former has no
In all these cases, the action of the guarantor is to obtain release from the
remedy whatever against the debtor, but only against the creditor.
guaranty, or to demand a security that shall protect him from any proceedings
Nevertheless, in case of a gratuitous guaranty, if the guarantor was prevented
by the creditor and from the danger of insolvency of the debtor. (1843a)
by a fortuitous event from advising the debtor of the payment, and the creditor
becomes insolvent, the debtor shall reimburse the guarantor for the amount Alright, remember the general rule that a contract of guaranty is a contract of
paid. indemnity. Therefore it is only when the guarantor proceed and collect against
the principal debtor. For reimbursement to whatever he has made the expenses
In relation to 2070 we go back to 2068, why notice to debtor is important one he has incurred and damages he has suffered kung meron.
of the effects is that of 2010, as we had discussed in 2068, the guarantor must
1st notify the debtor so that the debtor may properly notify the guarantor of But under 2071. What we have here is a guarantor, who have not been paid.
payment or his defences available , but in 2070 we have a guarantor who paid But the law clearly provides him the right to proceed against the principal
without notice of the debtor, so again the debtor does not know of such debtor.
payment then anong nanyari? Nagbayad din si debtor kay creditor, si creditor
Take note in 2071. While the guarantor is allowed to proceed against the
naman tanggap lang din nang tanggap. In this scenario, you will see that it is
principal debtor, it is not for reimbursement. Still cannot seek reimbursement,
necessary that if you are the guarantor you notify the debtor of your intent to
because he can only seek reimbursement if there has been payment. Wala pa
pay for the obligation. Such payment is for the benefit of the guarantor as well
naman sigurong tao na nag hingi ng reimbursement na hindi naman siya mismo
of the debtor, so that the debtor will not repeat payment. Now what happens if
ang nag labas ng pera.
si guarantor nagbayad without notice to debtor and si debtor nagbayad din. Can
the guarantor seek reimbursement from the debtor considering na he did not The proceeding here may be instituted by the guarantor after he has made
give notice to the debtor of his intended payment. Article 2070 tells us that the liable. But again not before payment.
guarantor cannot seek reimbursement from debtor. Why? Because he did not
advise debtor. Malay ba naman sa debtor na magbayad talaga si guarantor, What was the purpose in 2071?
debtor in good faith bayad din sya ng kanyang utang. What is the remedy here This enables the guarantor, by allowing him to proceed against the principal
of the guarantor? The guarantor should go not against the principal debtor but debtor despite wala pang nabayaran, enables the guarantor to take measures
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for the protection of his own interest in view of the probability that he would be any amount spent by the Government in the continuation of the work, in excess
called upon to pay. of the contract price, will be charged against the surety bond furnished by the
plaintiff. Also, the laborers of the said construction project filed a complaint
(1) Probably, he would be called upon to pay. He would be liable if he is sued for against Batu Construction and Manila Surety for unpaid wages amounting to
payment. P5,960.10.
In case of insolvency of the principal debtor, we know under 2059, that as to
the guarantor, the benefit of excussion is not available anymore. Therefore, By reason thereof, plaintiff brought an action against the defendants
2071 it is for protecting own interest alleging that defendants are in imminent danger of becoming insolvent and that
they be ordered to deliver to the plaintiff such sufficient security as shall protect
(3) There is already breach of obligation with respect to the guarantor. There plaintiff from the any proceedings by the creditors on the Surety Bond.
was an agreement that the guaranty was for a specific period. So it presupposes
that within that agreed period that the principal debtor will pay. However, the The defendants denied any liability alleging that they were not in imminent
period has lapsed/expired but the principal debtor did not pay. So 2071 gives danger of insolvency, neither did they remove or dispose of their properties
the right to the guarantor to proceed against the principal debtor. with intent to defraud their creditors. They further argued that there has been
no liquidation yet of the expenses incurred in the construction of the Bacarra
(4) The obligation has become due and demandable because the period has
already expired, again the guarantor is allowed to proceed against the debtor. Bridge and not until after such liquidation shall have been made could their
liability be determined and fixed. Lastly, they argued that the remedy provided
(5) Gen. rule: after 10 yrs. if the obligation has no fixed period. Supposed to be, for in the last paragraph of article 2071 of the NCC may be availed of by the
or rather, the obligations subject to a period, if it expires, it is covered under guarantor only and not by a surety.
number 4. Pero kung walang period stipulated by the parties, the rule to be
applied is 10 years. If the obligation cannot be performed until after 10 yrs. then ISSUES:
what would happen is that after 10 yrs. it cannot be enforced. For example if
they entered into a contract and the contract should be performed in the 11 yr. 1.W/N a surety may avail of the remedy under the last paragraph of article 2071
or after 10 yrs., so w/in the 10 yr. period the obligation cannot be enforced. of the NCC. YES
(6) Here mag abscond or the reasonable grounds that the debtor intends to 2.W/N plaintiff’s cause of action falls under Article 2071. YES
abscond. Intention is sufficient. Of course, if there is reasonable grounds that
the debtor will abscond. To protect its own interest, he need not wait na maka RULING: BOTH YES
layas c principal debtor, so 2071 is given as a remedy.
(7) Take note imminent danger of insolvency on the part of the principal debtor. First issue
So under number 7, the fact of insolvency is not required, imminent danger of
becoming insolvent. Probability that the debtor will become insolvent, 2071 is The reason which could be invoked for the non-availability to a surety of
an available remedy. the provisions of the last paragraph of Article 2071 would be the fact that
guaranty, like commodatum, is gratuitous. But guaranty could also be for a price
So what happens, what is the action here of the guarantor? What is his prayer? or consideration as provided for in Article 2048. So, even if there should be a
in other words in this complaint. The guarantor obviously cannot demand consideration or price paid to a guarantor for him to insure the performance of
reimbursement. What he seeks under 2071 is either to an obligation by the principal debtor, the provisions of article 2071 would still
be available to the guarantor.
release him from the guaranty or
demand another security to protect him from the proceedings
In suretyship the surety becomes liable to the creditor without the benefit
Remember however that the contract of guaranty is between the guarantor &
of the principal debtor's exclusion of his properties, for the surety maybe sued
the creditor.
independently. Hence, he is an insurer of the debt and as such he has assumed
In case there is release, take note that release is not effective unless there is
or undertaken a responsibility or obligation greater or more onerous than that
consent from the creditor. Without consent of the creditor, isang remedy lang
of guarantor. Such being the case, the provisions of Article 2071, under
ang maiwan: demand security to protect the guarantor from the said
guaranty, are applicable and available to a surety. The reference in Article 2047
proceedings.
to, the provisions of Section 4, Chapter 3, Title 1, Book IV of the NCC, on solidary
MANILA SURETY VS. BATU or several obligations, does not mean that suretyship which is a solidary
May 21, 1957 obligation is withdrawn from the applicable provisions governing guaranty.
FACTS:
Second issue
Defendant Batu Construction, as principal, and the plaintiff Manila Surety,
as surety, executed a surety bond for the sum of P8,812.00 to insure faithful The plaintiff's cause of action does not fall under:
performance of the former's obligation as contractor for the construction of the
Bacarra Bridge. 1.Article 2071(2) because there is no proof of the defendants' insolvency. The
fact that the contract was annulled because of lack of progress in the
On the same date, Batu Constrction and the defendants Carlos Baquiran construction of the bridge is no proof of such insolvency.
and Gonzales Amboy executed an indemnity agreement in favor of plaintiff
Manila Surety which provides that: 2.Article 2071(3) because the defendants have not bound themselves to relieve
the plaintiff from the guaranty within a specified period which already has
The defendants would "indemnify the COMPANY for any damage, loss, expired, because the surety bond does not fix any period of time and the
costs, or charges, or expenses of whatever kind and nature, including counsel or indemnity agreement stipulates one year extendible or renewable until the
attorney's fees, which the COMPANY may, at any time, sustain or incur, as a bond be completely cancelled by the person or entity in whose behalf the bond
consequence of having become surety upon the above mentioned bond; said was executed or by a Court of competent jurisdiction.
attorney's fees shall not be less than fifteen (15%) per cent of the total amount
claimed in any action which the COMPANY may institute against the 3.Article 2071(4), because the debt has not become demandable by reason of
undersigned (the defendants except Andres Tunac) in Court," and that "Said the expiration of the period for payment.
indemnity shall be paid to the COMPANY as soon as it has become liable for the
payment of any amount, under the above-mentioned bond, whether or not it 4.Article 2071(5) because of the lapse of 10 years, when the principal obligation
shall have paid such sum or sums of money, or any part thereof," has no period for its maturity, etc., for 10 years have not yet elapsed.
Later on, however, plaintiff received a notice from the Director of Public 5,Article 2071(6), because there is no proof that there are reasonable grounds
Works the annulment of the construction contract because of its failure to to fear that the principal debtor intends to abscond.
make satisfactory progress in the execution of the works with the warning that
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6.Article 2071(7), because the defendants, as principal debtors, are not in action against the debtor even if he has not yet paid the creditor. The guarantor
imminent danger of becoming insolvent, there being no proof to that effect. of course cannot demand reimbursement.
So what does he entitled under 2071? To seek for release or for him to be
Nevertheless, the plaintiff's cause of action comes under Article 2071(1), release from the guaranty. Although we have emphasized that for this to take
because the action brought by the laborers for the collection of unpaid wages place it must be made to the consent of the creditor. Because again the debtor
amounting to P5,960.10, is in connection with the construction of the Bacarra has no power to release the guarantor from the guaranty in the absence of the
Bridge undertaken by the Batu Construction, and one of the defendants therein creditor’s consent. Because essentially, the contract of guaranty is between the
is the herein plaintiff Manila Surety. creditor and the guarantor.
Article 2071(1) provides that the guarantor, even before having paid, may Under 2071, aside from release with the consent of the creditor, if such
proceed against the principal debtor "to obtain release from the guaranty, or to cannot be sought he can nevertheless demand another security from the
demand a security that shall protect him from any proceedings by the creditor debtor to protect him from the proceedings. Now last meeting, we have
or from the danger of insolvency of the debtor, when he (the guarantor) is sued discussed the case of Manila Surety, wherein Article 2071 is applicable to a
for payment. It does not provide that the guarantor be sued by the creditor for contract of suretyship as well.
the payment of the debt. It simply provides that the guarantor of surety be sued
for the payment of an amount for which the surety bond was put up to secure Although we pointed out that in the Special Steel Case in 2004, there is
the fulfillment of the obligation undertaken by the principal debtor. statement there by the SC that it does not apply to the surety. Nevertheless, if
you look at the decision, the remedy that was suggested there was to file an
Hence, the suit filed by the laboeres in the Justice of the Peace Court of action instituting an action to demand security. So again, if you look at 2071
Laoag, province of Ilocos Norte, for the collection of unpaid wages earned in that is one of the things that the guarantor can demand from the debtor.
connection with the work done by them in the construction of the Bacarra
Bridge, Project PR-72(3), is a suit for the payment of an amount for which the So if we try to reconcile these two cases of Manila Surety and Special Steel
surety bond was put up or posted to secure the faithful performance of the case, essentially it just points out that for you to avail of Article 2071 you have
obligation undertaken by the principal debtors (the defendants) in favor of the to file a separate action. You cannot just withheld any property of the debtor in
creditor, the Government of the Philippines. order to secure the eventual payment of the guarantor to the creditor. So, again
please try to read the case of Specialty Steel.
SC emphasized that the provisions of 2071 under guaranty are applicable and
available to a surety. Even if the surety here has not yet paid the principal TUASON vs. MACHUCA
creditor, he can avail of the remedies under 2071—either to obtain release or FACTS:
ask for another security from the principal debtor.
Manila Compaña executed a bond of P9,663 in favor of Universal
Among the instances in 2071, plaintiff’s cause of action comes under par. 1 of Trading Company (UTC) for the payment of its imported sundry goods.
2071 because the action he brought for the collection of unpaid wages is in However, before paying the said sum, Manila Compaña obtained from UTC
connection of the construction and one of the defendants is Manila Surety. and Tuason Co. a solidary note for the same amount. As a consequence
thereof, UTC and its president Machuca bound themselves solidarily to
Again, under par. 1, “when he is sued for payment.”
pay, reimburse, and refund to the company all such sums or amounts of
Take note of the case of Special Steel v. Villareal (GR No. 143304, July 8, 2004). money as it, or its representative, may pay or become bound to pay, upon
In this case, SC expressly stated that since there is no guaranty in the its obligation with Manila Compaña whether or not it shall have actually
circumstances in this case, 2071 does not apply to a surety. It also held that the paid such sum or sums or any part thereof.
surety in this case could not just unilaterally withheld the respondents’ wages Manila Compaña paid the value of the sundry goods. Later on,
as a preliminary remedy under 2071. However, further readings of the decision however, UTC was declared insolvent causing Manila Compaña to file a
of the court, it tackled on the remedy for a surety, which is by instituting an complaint against Tuason recover the value of the note with interest in the
action to demand for security. The court here did not outrightly or expressly total sum of P12,197.27. By final judgment, Tuason was ordered to pay
overturn the Manila Surety case. Although this case expressly stated that “2071 Manila Compaña the said sum.
does not apply to a surety,” the 2 cases could still be reconciled. On the other hand, Tuason sought recovery of the said sum to
defendant Machuca plus attorney’s fees, court’s costs and sheriff fees plus
There is no conflict and 2071 should still be applicable because of that ruling in interest in the total sum of P15,353.19. It must be noted, however, that
Special Steel wherein the remedy given to the surety is to file a separate civil plaintiff Tuason was not yet able to pay Manila Compaña the said sum.
action—which is the intention of 2071. I think the emphasis here is that the
surety could not, in the same action, exercise the remedy that may have been ISSUE: W/N Tuason may also recover the litigation expenses it incurred
available under 2071. with Manila Compaña by virtue of the note executed by Machuca.
They could only demand a security since there still no actual payment.
RULING:NO
What is the intention in 2071? To require a security from the principal debtor.
So, I think that 2071 can still be applicable even in contracts of suretyship, not The action cannot be held to come under Article 1843 of the CC since
just in contracts of guaranty. the payment was not yet made by plaintiff Tuason. It is true that, under
Article 1843, an action lies against the principal debtor even before the
Thus, although not expressly stated in this 2004 case, that can still be reconciled surety pays the debt, but it clearly appears in the complaint that this is not
with the Manila Surety case. the action brought by plaintiff. At any rate this article does not provide for
the reimbursement of any amount, as is sought by the plaintiff.la
Recap: Benefit of division available to several guarantors of only one debtor Nevertheless,
of the same obligation. It must be claim on a timely manner. It is only available Nevertheless, plaintiff Tuason is entitled to the relief sought. According
unless solidarity is expressly stipulated. 2066 the rights of the guarantor to what to the document executed solidarily by Machuca and the UTC, defendant
extent can he asked for indemnification. 2067 with regard to a guarantor who is Machuca bound himself to pay the plaintiff as soon as the latter may have
entitled to subrogation.2068 you relate that to 2070 with regard to the effect of become bound and liable, whether or not it shall have actually paid. It is
absence of notice by the guarantor to the debtor for paying the creditor. 2069 indisputable that the plaintiff became bound and liable by a final judgment
the effect of the guarantor who paid before the obligation was due. to pay the value of the note it executed in favor of Manila Compañia.
Hence, the plaintiff has the right to recover from the defendant the
And we have Article 2071, we have emphasized the proceeding here is not sum of P9,663, or the value of the note executed by the plaintiff in favor of
reimbursement, as the guarantor did not yet paid, do remember that the Manila Compañia which the plaintiff is under obligation to pay by virtue of
contract of guaranty is a contract of indemnity. Such indemnity takes place if final judgment. However, the defendant cannot be obliged to pay the
the guarantor paid the principal creditor. But in 2071, the guarantor can file an plaintiff the expenses incurred by it in the litigation between it and Manila
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Compañia. That litigation was originated by the plaintiff having failed to property of Chung Chu Sing. Kuenzle moved to set aside the judgment on
fulfill its obligation with Manila Compañia, and it cannot charge the the ground that the four judgments were obtained by collusion and fraud,
defendant with expenses which it was compelled to make by reason of its because the debtor did not owe anything to Tan Sunco at the time the four
own fault. It is entitled, however, to the expenses incurred by it in this judgments were secured and that Tan Sunco had not yet paid the said
action brought against the defendant, which are fixed at P1,653.65 as sums for which he had become surety.
attorney's fees.
ISSUE: W/N Article 1843 (now 2071) is applicable in this case.
Q: What is the relief that they are seeking from the court?
RULING: YES
A: That he will be reimbursed or refunded by the Universal Credit Company. But
since the company became insolvent He is going against Antonio Machuca. Article 1838 (now 2066) distinguished from Article 1843 (now 2071)
Q: When you say reimbursement, has actual payment already taken place? Article 1838 (now 2066) Article 1843 (now 2071)
Provides for the enforcement of Provides for the surety’s
A: None. the right of the surety against the protection before he has paid but
debtor after he has paid the debt after he has become liable to do
Q: Is article 2071 be resorted? Is the remedy sort for covered in such article? so
What is the basis of his action? Gives a right of action after Gives a protective remedy before
payment payment
So here, you cannot have 2066, this is not an action for reimbursement. Why? In the nature of substantive right In the nature of preliminary
Because actual payment has not yet taken place. Is 2071 here applicable? remedy
Which is 1843 of the Old Civil Code. What is the remedy being sought? Release Gives a right of action which, Purposes of obtaining for the
from guaranty or demand a security. But if you look at the action filed. It is not. without the provisions of the of surety relief from the burden of
What is the basis of the action? The agreement that the defendant bound the other, might be worthless. his suretyship or a guaranty to
himself to pay the plaintiff as soon as the latter may have become bound and defend him against any
liable whether or not he should have actually paid. So that must be the basis of proceedings of the creditor and
the claim here. There was already a final judgement wherein the plaintiff is from the danger of insolvency of
bound to pay the note executed in favor of Manila Compania de Seguros. So the debtor.
even if there no actual payment. Pwede na siya mag file ng action because of The surety is past the point where To give to the surety a remedy in
there express stipulation. Plaintiff became bound and liable by a final judgment a preliminary protective remedy is anticipation of the payment of the
to pay the value of the note to "Manila Compañia de Seguros." of any value to him. debt, which debt, being due, he
could be called upon to pay at any
Also do take note here the issue of expenses where being claim. However in the time, it remains only to say, in this
regards the SC held that, that litigation was originated by the plaintiff having connection, that the only
failed to fulfill its obligation with "Manila Compañia de Seguros," and it cannot procedure known under our
charge the defendant with expenses which it was compelled to make by reason present practice to enforce that
of its own fault. So only the principal obligation. Not the litigation expenses. right is by action
Q: Now what are the distinctions of 2066 and 2071? Defendant Sunco availed himself of that right against the debtor. The
methods he employed were unusual but the evidence adduced is entirely
Article 2066 Article 2071 insufficient to establish such fraud and collusion that would justify the
contract of indemnity, a Not reimbursement but for the setting aside of judgment assailed.
demand for reimbursement release from the guaranty or Nevertheless, while the surety has the right to obtain as he did the
security of the performance to judgments against the principal debtor, he ought not to be allowed to
protect the surety from realize the said judgments to the point of actual collection of the same
obligations until he has satisfied or caused to be satisfied the obligation which he
available as a remedy after the before the guarantor has paid assures. Otherwise, a great opportunity for collusion and improper
guarantor has paid but after he has become liable practices between the surety and his principal would be offered which
a right of action after payment Preventive remedy before might result to the injury and prejudice of the creditor who holds the claim
payment against them. In other words, Sunco shall not execute said judgments
substantive right preliminary against the property of the judgment debtor until he has paid the debt for
remedy which he stands as surety.
a right of action, which without seeks to obtain for the
the provisions of the other, guarantor release from the Q: Which provision is applicable here? 2066 or 2071?
might be worthless guarantee or the security to
protect him from any A: The article applicable here ma’am is 2071.
proceedings by the creditor and
from the danger of insolvency So take note of the distinctions between Article 2066 previously 1838 and
by the debtor Article 2071 previously 1843. 2066, again, provides for the enforcement for the
rights of the surety or guarantor against the debtor after he has paid the debt
and Article 2071 provides for the protection after he has paid but after he has
KUENZLE vs. SUNCO become liable to do so. Now on the other hand, 2066 is a right of action after
payment. 2071 is a protective remedy before payment. 2066 is a substantive
FACTS: right while 2071 is a preliminary remedy. 2066 right of action which without the
provisions of 2071 might be worthless. The remedy given by 2071 is to obtain
Plaintiff Kuenzle instituted an action against Chung Chu Sing for relief from the burder of his suretyship or guaranty to defend him against any
payment of debt. However, before the plaintiff could secure a judgment, proceedings of the creditor from the danger of insolvency. 2066 has no such
defendant Tan Sunco instituted four separate actions against Chung Chu purpose, when the surety’s right under this article become available, he is past
Sing alleging that he was a surety for Chung Chu Sing for the payment of the point where a preliminary protective remedy is of any value to him.
certain merchandise purchased by the latter evidenced by four invoices in
varying amounts. Chung Chu Sing confessed judgment in favor of Tan So the purpose of 2071, is to give surety a remedy in anticipation of the
Sunco. payment of the debt which if it becomes due he may called upon to pay at any
Tan Sunco then caused to be levied upon under execution all of the time. The only procedure is to enforce that right despite action. As soon as he
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availed himself of that right under 2071 against the debtor. The methods consequent payment extensions granted by Banque Indosuez and PCI Capital
employed are that unusual but not of themselves fraudulent. So, the action in TIDCORP’s favor without their consent extinguished their obligations
filed by Sunco is actually under 2071. However the SC emphasized, that while under the Surety Bonds pursuant to Article 2079.
surety has the But while the surety has the right to obtain as he did the The CA upheld the decision but modified it to the extent of holding
judgments against the principal debtor, he ought not to be allowed to realize ASPAC, PICO, and Balderrama liable to TIDCORP for attorney’s fees since the
the said judgments to the point of actual collection of the same until he has payment of thereof was stipulated by the parties in the Deed of Undertaking.
satisfied or caused to be satisfied the obligation the payment of which he ISSUE: W/N the bonding companies’ liabilities to TIDCORP under the Surety
assures. Otherwise, a great opportunity for collusion and improper practices Bonds were extinguished by virtue of the Restructuring Agreement.
between the surety and his principal would be offered which might result to the RULING: NO
injury and prejudice of the creditor who holds the claim against them. So, Sunco The theory behind Article 2079 is that an extension of time given to the
shall not execute said judgments against the property of the judgment debtor principal debtor by the creditor without the surety’s consent would deprive
until he has paid the debt for which he stands surety. the surety of his right to pay the creditor and to be immediately subrogated
to the creditor’s remedies against the principal debtor upon the maturity
ARTICLE 2072. If one, at the request of another, becomes a guarantor for date. The surety is said to be entitled to protect himself against the
the debt of a third person who is not present, the guarantor who satisfies contingency of the principal debtor or the indemnitors becoming insolvent
the debt may sue either the person so requesting or the debtor for during the extended period.
reimbursement. In the case at bar, the payment extensions granted by the foreign banks
to TIDCORP under the Restructuring Agreement did not have the effect of
Here, we have a third person who is not a party to the contract, not the debtor, extinguishing the bonding companies’ obligations to TIDCORP under the
not the creditor, not the guarantor. But, he’s the person who request the Surety Bonds, notwithstanding the fact that said extensions were made
guarantor to become as such. What would happen here? So let’s say Julian without their consent. This is because Article 2079 refers to a payment
would borrow money from JC. So Julian debtor and JC creditor. Let us say, you extension granted by the creditor to the principal debtor without the consent
have here, Vanessa concerned citizen, sabi nya “Uy hanap ako ng guarantor si of the guarantor or surety. In this case, the Surety Bonds are suretyship
Julian”. So she approaches Celeste as the guarantor sa utang ni Julian kay JC. So contracts which secure the debt of ASPAC, the principal debtor, under the
what do we have here, we have third person Vanessa who is not a party to the Deeds of Undertaking to pay TIDCORP, the creditor, the damages and
contract of guaranty not a party to the principal obligation. But 2072 gives a liabilities it may incur under the Letters of Guarantee, within the bounds of
cause of action against her. To which she can be held liable. Again, because she the bonds’ respective coverage periods and amounts. No payment extension
made that request to another person to act as a guarantor.So if, Celeste was, however, granted by TIDCORP in favor of ASPAC in this regard. Hence,
makabayad siya kasi di nagbayad c Julian, meron course of action c Celeste Article 2079 should not be applied with respect to the bonding companies’
against Vanessa. The third person cannot raise the defense that she cannot be liabilities to TIDCORP under the Surety Bonds.
sued because she is not a privy to the contract. 2072 is the basis, the law The payment extensions granted by the foreign banks pertain to
provides such a third person can be made liable. TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP)
irrevocably and unconditionally guaranteed full payment of ASPAC’s loan
TIDCORP vs. ASIA PACES CORP obligations to the banks in the event of its (ASPAC) default. In other words,
Respondents Asia Paces Corporation (ASPAC) and Paces Industrial the Letters of Guarantee secured ASPAC’s loan agreements to the banks.
Corporation (PICO) entered into a sub-contracting agreement with the Under this arrangement, TIDCORP therefore acted as a guarantor, with
Electrical Projects Company of Libya (ELPCO) ASPAC as the principal debtor, and the banks as creditors.
To finance its working capital requirements, ASPAC obtained loans from There are two sets of transactions that should be treated separately and
foreign banksBanque Indosuez and PCI Capital. distinctly from one another following the civil law principle of relativity of
The loans were secured by several Letters of Guarantee issued by contracts "which provides that contracts can only bind the parties who
petitioner TIDCORP whereby it irrevocably and unconditionally guaranteed entered into it, and it cannot favor or prejudice a third person, even if he is
full payment of ASPAC’s loan obligations to the foreign banks in the event of aware of such contract and has acted with knowledge thereof."
ASPAC’s default. Verily, as the Surety Bonds concern ASPAC’s debt to TIDCORP and not
However, as a condition precedent to the issuance by TIDCORP of the TIDCORP’s debt to the banks, the payments extensions (which conversely
Letters of Guarantee, ASPAC, PICO, and ASPAC’s President, respondent concern TIDCORP’s debt to the banks and not ASPAC’s debt to TIDCORP)
Balderrama had to execute several Deeds of Undertaking, binding would not deprive the bonding companies of their right to pay their creditor
themselves to jointly and severally pay TIDCORP for whatever damages or (TIDCORP) and to be immediately subrogated to the latter’s remedies against
liabilities it may incur under the Letters of Guarantee. the principal debtor (ASPAC) upon the maturity date. It must be stressed that
In the same light, ASPAC, as principal debtor, entered into surety these payment extensions did not modify the terms of the Letters of
agreements (Surety Bonds) with Paramount, Phoenix, Mega Pacific and Guarantee but only provided for a new payment scheme covering TIDCORP’s
Fortune (bonding companies), as sureties, also holding themselves solidarily liability to the banks.
liable to TIDCORP, as creditor, for whatever damages or liabilities the latter In fine, considering the inoperability of Article 2079 in this case, the
may incur under the Letters of Guarantee. bonding companies’ liabilities to TIDCORP under the Surety Bonds – except
ASPAC eventually defaulted on its loan obligations. TIDCORP and its those issued by Paramount and covered by its Compromise Agreement with
various creditor banks Banque Indosuez and PCI Capital, forged a TIDCORP – have not been extinguished. Since these obligations arose and
Restructuring Agreement extending the maturity dates of the Letters of have been duly demanded within the coverage periods of all the Surety
Guarantee. However, the bonding companies were not privy to the Bonds, TIDCORP’s claim is hereby granted.
Restructuring Agreement and, hence, did not give their consent to the
payment extensions granted by Banque Indosuez and PCI Capitalin favor of
TIDCORP. SECTION 3
Following new payment schedules, TIDCORP fully settled its obligations EFFECTS OF GUARANTY AS BETWEEN CO-GUARANTORS
under the Letters of Guarantee to both Banque Indosuez and PCI Capital.
TIDCOPR, in turn, filed a collection case against: ARTICLE 2073. When there are two or more guarantors of the same debtor
(a) ASPAC, PICO, and Balderrama on account of their obligations and for the same debt, the one among them who has paid may demand of
under the deeds of undertaking; and each of the others the share which is proportionately owing from him.
(b) The bonding companies on account of their obligations under If any of the guarantors should be insolvent, his share shall be borne
the Surety Bonds seeking payment for the damages and by the others, including the payer, in the same proportion.
liabilities it had incurred under the Letters of Guarantee. The provisions of this article shall not be applicable, unless the
payment has been made in virtue of a judicial demand or unless the
The RTC partially granted TIDCORP’s complaint and thereby found principal debtor is insolvent.
ASPAC, PICO, and Balderrama jointly and severally liable to TIDCORP
pursuant to the terms of the Deeds of Undertaking, but absolved the bonding Remember the benefit of division, we have at least 2 guarantors who are co-
companies from liability on the ground that the moratorium request and the guarantors for the same debtor for one and the same obligation. Now as a
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guarantor for the benefit of division, you cannot compelled to pay the entire
obligation. As you will only be held liable to pay your own share. Q: Death of the debtor? Would that extinguish the obligation? Why?
So, as we have discussed before, if you have a creditor, lend money to the A: No ma’am. Because generally ma’am, obligations arising from contracts are
debtor the amount of 120,000 and you have 4 guarantors. Applying the benefit transmissible. Second, by stipulation of the parties or nature of the obligation
of division, each will only be held liable for 30,000. Now, 2073 tell us that if a making it transmissible or the law provides it so.
guarantor made to pay for the whole obligation, then he can seek
reimbursement for the other parties. STRONGHOLD vs. REPUBLIC
FACTS:
Please take not when to apply 2073, payment has been made in virtue of
judicial demand or the principal debtor is insolvent. In this instance if guarantor Respondent Republic-Asahi entered into a contract of construction
1 is to pay the whole 120,000, he can seek reimbursement for the respective with Santos, the proprietor of JDS. To guarantee the faithful and
proportionate of his co-guarantors which is 30,000 each. Remember he still has satisfactory performance of its undertakings, JDS posted a performance
to shoulder his share. Now assuming, one of them is insolvent, si guarantor 4. bond of P795k executed, jointly and severally with petitioner Stronghold.
However, respondent rescinded the contract upon being dissatisfied
Look at the second paragraph of 2073, his share shall be borne by the others with the progress of the work undertaken by JDS. Nevertheless, pursuant
including the payer of the same proportion. to Article XV of the contract, such rescission shall not be construed as a
waiver of respondent’s right to recover damages from JDS and its sureties.
So notice this is different form your joint obligation general rules on obligations As a result thereof, respondent sought payment of the bond from
and contracts. Kasi the general rule on joint obligations, if one of the debtors is petitioner.
insolvent the others will not shoulder his share dba? But here 2073 is specific, Petitioner countered that it was automatically released from any
so this is applicable, one of them pays and one of them turns out to be liability under the bond upon the death of Santos as the bond principal.
insolvent, his proportionate share would be shoulder by the rest. To which Even assuming that it was not the case, petitioner was released from
30,000 share of the insolvent guarantor will be divided amongst the rest of the liability under the performance bond because there was no liquidation,
co-guarantors so tag 40,000 cla. Kung c guarantor 1 ang nagbayad sa whole with the active participation and/or involvement of the surety and Santos
120,000 and c guarantor 4 ang insolvent, he can seek reimbursement from hence, there was no ascertainment of their corresponding liabilities under
guarantor 2 and 3 for the 40,000 share. Again, take note, this is only applicable the performance bond. In other words, respondent can no longer prove its
if payment has been made by virtue of a judicial demand or unless the principal claim for damages in view of the death of Santos.
debtor has already become insolvent.
ISSUE: W/N petitioner’s liability under the performance bond was
ARTICLE 2074. In case of the preceding article, the co-guarantors may set automatically extinguished by the death of Santos, the principal.
up against the one who paid, the same defenses which would have
pertained to the principal debtor against the creditor, and which are not RULING: NO
purely personal to the debtor.
As a general rule, the death of either the creditor or the debtor does
So here, co-guarantors can raise a defense that may have been available to the not extinguish the obligation. Obligations are transmissible to the heirs,
principal debtor. For example, guarantor 1 may hold liable for 120,000 and then except when the transmission is prevented by the law, the stipulations of
he will proceed reimbursement to guarantor 2 can raise the defenses of the parties, or the nature of the obligation. Only obligations that are
prescription, payment or other modes of distinguishing the principal obligation. personal or are identified with the persons themselves are extinguished by
Of course, these guarantors cannot set up defenses which are purely personal death.
to the principal debtor. If the debtor was insane or minor at that time the In the present case, the liability of petitioner is contractual in nature,
obligation was entered into, then these co-guarantors cannot raise those because it executed a performance bond. Whatever monetary liabilities or
defenses when reimbursement has been sought from them under 2073. They obligations Santos had under his contracts with respondent were not
can only raise defenses which pertain to the obligation and not to the person of intransmissible by their nature, by stipulation, or by provision of law.
the principal debtor. Hence, his death did not result in the extinguishment of those obligations
or liabilities, which merely passed on to his estate. Death is not a defense
ARTICLE 2075. A sub-guarantor, in case of the insolvency of the guarantor that he or his estate can set up to wipe out the obligations under the
for whom he bound himself, is responsible to the co-guarantors in the performance bond. Consequently, petitioner as surety cannot use his death
same terms as the guarantor. to escape its monetary obligation under its performance bond. As a surety,
petitioner is solidarily liable with Santos.
So it’s possible here even if we have several guarantors, that one of them or all The surety’s obligation is not an original and direct one for the
of them have sub-guarantors. Now, the guarantor should first be made to pay performance of his own act, but merely accessory or collateral to the
before the sub-guarantor should be held liable. So if, however, as an example obligation contracted by the principal. Nevertheless, although the contract
here, G4 become insolvent. The sub guarantor will be the one, who becomes is of a surety is in essence secondary only to a valid principal obligation, his
hold into the place of the guarantor who is insolvent. To which he will be liable liability to the creditor or promisee of the principal is said to be direct,
for the proportionate share. primary and absolute; in other words, he is directly and equally bound with
the principal.
EXTINGUISHMENT OF GUARANTY Under the law and jurisprudence, respondent may sue, separately or
together, the principal debtor and the petitioner, in view of the solidary
ARTICLE 2076. The obligation of the guarantor is extinguished at the same nature of their liability. The death of the principal debtor will not work to
time as that of the debtor, and for the same causes as all other obligations. convert, decrease or nullify the substantive right of the solidary creditor.
Evidently, despite the death of the principal debtor, respondent may still
Modes of extinguishment of obligations: sue petitioner alone, in accordance with the solidary nature of the latter’s
1. Payment or performance; liability under the performance bond.
2. Loss of the thing due;
3. Condonation or remission of the debt; A: Can seek to the heirs of Santos.
4. Confusion or merger of the rights of creditor and debtor;
5. Compensation; and Q: To what extent?
6. Novation.
A: To the extent of the estate of Santos ma’am.
So those modes along with the other modes of extinguishment of obligation
such as happening of a resolutory condition, prescription, those are also Do take note, general rule obligations are transmissible. Unless otherwise
applicable here to a contract of guaranty. stipulated by parties, or by law, or nature of the obligations. Or the obligations
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are personal in nature. None of the exceptions are present on this case. Santos FBPC embodied in a letter-advise. One of the documents essential for the
has liabilities that are not intransmissible. So his death could not be the cause of credit facility was a Continuing Guaranty, which covers any and all existing
the extinguishment of his obligation. Which maybe pass through his estate. As indebtedness of, and such other loans and credit facilities which may be
such, Stronghold cannot use Santos’ Death and escape their obligation under granted to FBPC. Petitioner-spouses Toh and respondent-spouses Li signed
the performance bond. Now also take note, as we have pointed out earlier, the Continuing Guaranty, binding their selves solidarily liable to petitioner.
novation is a mode of extinguishing an obligation. Would it necessary extinguish It provides:
as well the accessory contract of guaranty or suretyship? Now we have to take
into consideration whether the novation constitutes a material alteration which The Continuing Guaranty set forth no maximum limit
varies the term of the principal contract without the consent of the guarantor on the indebtedness that respondent FBPC may incur and
or surety. If such is a material alteration, the surety or guarantor will be for which the sureties may be liable. It also contained a de
released from the liability as if it would constitute novation or change of the facto acceleration clause if "default be made in the
principal contract which is already extinguished. payment of any of the instruments, indebtedness, or other
obligation" guaranteed by petitioners and respondents.
ARTICLE 2077. If the creditor voluntarily accepts immovable or other And to strengthen said security, the Continuing Guaranty
property in payment of the debt, even if he should afterwards lose the waived rights of the sureties against delay or absence of
same through eviction, the guarantor is released. notice or demand on the part of respondent Bank, and
gave future consent to the Bank's action to "extend or
So what happen here? We have dacion en pago – Article 1245. As you have change the time payment, and/or the manner, place or
known, dacion en pago is a special form of payment and is also considered as a terms of payment," including renewal, of the credit facility
form of novation. Wherein the old obligation which is monetary in nature is or any part thereof in such manner and upon such terms
extinguished by delivery of the property for extinguishing the obligation of as the Bank may deem proper without notice to or further
course with the consent of creditor. Now, with that dacion en pago the delivery assent from the sureties.
of the property, the principal obligation is extinguished, and being an accessory
contract, the surety or guaranty is likewise extinguish. The effectivity of the Continuing Guaranty was not
contingent upon any event or cause other than the
But what happens if the creditor is evicted from the property subject of that written revocation thereof with notice to the Bank that
dacion en pago. Now the debt of course, is already extinguish, so wala na ung may be executed by the sureties.
relationship under the new loan. With the eviction it will not revived the
contract of guaranty or suretyship. In other words, the creditor, despite eviction Later on, respondent Bank received information that respondent-
cannot go after anymore the guarantor or surety. spouses Li had fraudulently departed from their conjugal home. Hence it
demanded payment from petitioners invoking the acceleration clause and
This has to be taken into consideration by the creditor when he accepts the Continuing Guaranty.
property as a form of payment from the debtor. Because again, once he accepts
this arrangement, dacion en pago, even if subsequently he would be evicted, he Petitioners argued that the Continuing Guaranty was void by virtue of
cannot go after the surety or guarantor anymore. But of course, he still has the extension of the due dates of the letters of credit without the required
recourse against the principal debtor. 25% partial payment per extension; the approval of another letter of
credit, L/C 93-0042, even after respondent-spouses Li had defaulted on
ARTICLE 2078. A release made by the creditor in favor of one of the their previous obligations; and, the unmistakable pattern of fraud.
guarantors, without the consent of the others, benefits all to the extent of
the share of the guarantor to whom it has been granted. ISSUES:
1. W/N the Continuing Guaranty was valid. YES
The creditor release one of the guarantors without the consent of the others, 2. W/N the unilateral extensions made by petitioner bank
we have here the debtor and several guarantors. Then let us say, sabihan ni extinguished the liability of petitioner spouses Toh. YES
creditor kay Guarantor 1, wag muna bayaran ang share mo. What is the effect,
will be the remaining co-guarantors be burden with the proportionate share of RULING: BOTH YES
the first guarantor when he was realeased? Of course not. Because these co
guarantors did not gave their consent to the release. They should not be First issue
prejudiced. The Continuing Guaranty is a valid and binding contract of petitioner-
spouses as it is a public document that enjoys the presumption of
In other words, if they would eventually be held liable, applying the benefit of authenticity and due execution. Petitioner-spouses Toh voluntarily affixed
division, they would only be liable for their proportionate share. Otherwise, if their signatures on the surety agreement and were thus at some given
we allow it, it will be prejudicial. point in time willing to be liable under those forms.
Again the scenario here, the release was made by the creditor in favor of one of Nothing in the Continuing Guaranty restricts their contractual
the guarantors without the consent of the co-guarantors. But of course, all of undertaking so long as they were corporate officers and stockholders of
them give consent, then they will shoulder the proportionate share of the FBPC. In fact the obligations assumed by them therein subsist "upon the
guarantor was released. If not all of them gave their convent, who will shoulder undersigned, the heirs, executors, administrators, successors and assigns of
is those guarantors who gave their consent to such release. the undersigned, and shall inure to the benefit of, and be enforceable by
you, your successors, transferees and assigns," and that their commitment
But it’s a different scenario of course, if what was release by the creditor is the "shall remain in full force and effect until written notice shall have been
principal debtor. Because if such will be so, the principal obligation is received by the Bank that it has been revoked by the undersigned." Verily,
extinguished, accessory obligation of guaranty or suretyship is likewise if petitioners intended not to be charged as sureties after their withdrawal
extinguished. from FBPC, they could have simply terminated the agreement by serving
the required notice of revocation upon the Bank as expressly allowed
ARTICLE 2079. An extension granted to the debtor by the creditor without therein.
the consent of the guarantor extinguishes the guaranty. The mere failure
on the part of the creditor to demand payment after the debt has become Second issue
due does not of itself constitute any extension of time referred to herein. However, even if the petitioner spouses Toh were bound to the surety
agreement they signed, respondent bank is also bound to its
SPOUSES TOH vs. SOLID BANK representations in the "letter-advise" particularly as to the extension of the
FACTS: due dates of the letters of credit, which was subject to conditions as
stipulated in the Continuing Guaranty.
Respondent Solid Bank extended an omnibus credit line in favor of
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Although it was stipulated that respondent Bank "may at any time, or specific period of time to be able to pay his obligation. So it must be based on
from time to time, in its discretion change the time payment," such waiver an agreement.
is confined per se to the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-advise." In other words, So if the obligation is payable in installments, and an extension is given to one
the authority of the Bank to defer collection contemplates only authorized or two installments, it will not affect the liability of the surety or the guarantors.
extensions, that is, those that meet the terms of the "letter-advise." But, if for example, there is an acceleration clause, wherein default, failure to
pay two installments, the obligation shall become due, and then the creditor
Certainly, while the Bank may extend the due date at its discretion extends or renews the period of payment for the debtor without the
pursuant to the Continuing Guaranty, it should nonetheless comply with guarantor's consent, then you apply the first sentence in 2079. The guarantor is
the requirements that domestic letters of credit be supported by 15% released from his obligation, no matter how short the extension is. In fact, you
marginal deposit extendible three times for a period of 30 days for each don't even take into consideration whether there is actual prejudice to the
extension, subject to 25% partial payment per extension. any doubt on the guarantor or surety by virtue of such extension.
terms and conditions of the surety agreement should be resolved in favor
of the surety. It must be noted that petitioner spouses Toh are only Extension by virtue of a new agreement without consent of the guarantor
accommodation sureties for they received nothing out of the security extinguishes the guaranty.
contract they signed.
ARTICLE 2080. The guarantors, even though they be solidary, are released
The foregoing extensions of the letters of credit made by respondent from their obligation whenever by some act of the creditor they cannot be
Bank without observing the rigid restrictions for exercising the privilege are subrogated to the rights, mortgages, and preference of the latter.
not covered by the waiver stipulated in the Continuing Guaranty. Evidently,
they constitute illicit extensions prohibited under Article 2079 of the CC. Two or more guarantors are entitled to the benefit of division, unless it is
This act of the Bank is not mere failure or delay on its part to demand expressly stipulated that they will be solidarily liable. However, 2080 provides,
payment after the debt has become due, as was the case in unpaid 5 whether they be joint or solidary, the guarantors may be released when the
letters of credit which the Bank did not extend, defer or put off, but creditor, through his act, cannot subrogate the guarantor to the rights,
comprises conscious, separate and binding agreements to extend the due mortgages, and preferences of the said creditor. This presupposed that the
date, as was admitted by the Bank itself. As a result of these illicit guarantor acted with the knowledge and consent of the principal debtor.
extensions, petitioner-spouses Toh are relieved of their obligations as
sureties of respondent FBPC under Article 2079 of the CC. Why? Becau se we are talking about subrogation here. So kung hindi ma
subrogate ang guarantors sa rights ng creditors, then you apply 2080, to which
Article 2079 is clear. Even the extensions granted by the creditor to the debtor, guarantors will be released.
without the consent of the guarantor or surety, will release the guarantor or
surety. But here, the surety bonds or suretyship contracts which secured the If in the first place, the guarantors are not entitled to subrogation, then 2080 is
debts under the deeds of undertaking to pay.. So ano yung covered sa surety not applicable. So here, what would be an example? Let's say a mortgage was
bonds? Obligation ng ASPAC as debtor to TIDCORP as the creditor, and then the executed in favor of a creditor, and the creditor was negligent because he
surety companies are the sureties. No payment, however, or no extension turned out that it was not in a public instrument, hindi yan ma foreclose, hindi
granted by TIDCORP in favor of ASPAC in this regard. What are the extensions yan basta basta mahabol ni creditor. So failure to comply with that
given here? The extensions given were, by virtue of which..sino ang debtor? requirement, debtor did not pay, creditor proceeded against the guarantors.
ASPAC.Sino ang creditor?PCI.and then you have TIDCORP as guarantor. And the But considering that the guarantors cannot be subrogated with the rights of the
obligation of TIDCORP in that transaction wherein the banks are the creditor. creditor, they can be released under 2080. What's the reason behind this
The coverage or the scope of their surety obligation (solidary obligation) is to provision? It should not prejudice the guarantors, and this would also avoid
which wherein TIDCORP is the creditor. What are covered in this extensions are opportunity for collusion between the creditor and the debtor to prejudice the
those to which the creditor are the banks. It is said here that there are two sets guarantors.
of transactions, dated separately. The extension given in one, should not be
given to the other. PNB vs. MANILA SURETY
FACTS:
We have to emphasize what is the principal obligation involved in the
extension. Is it the same one covered in the suretyship agreement. These Petitioner PNB opened a letter of credit in favor of Edgington Oil for 8k
payments in the extensions did not modify the terms. It provides only new tons of hot asphalt. Of this amount, 2k tons worth P279k were released
payments covering TIDCORP's liability..but again, it's not covered by the surety and delivered to ATACO under a trust receipt guaranteed by respondent
bond. (Maam: pls read the full text, don't rely on the digest) Manila Surety up to the amount of P75k.
Under Article 2079, the extension is given to the debtor without the consent of Later on, ATACO executed a deed of assignment authorizing petitioner
the guarantor or the surety. The guaranty is extinguished because such bank to receive and collect from the Bureau of Public Works the amount to
extension is given without the consent of the guarantor or surety. It may be be applied as payment for the asphalt it owed.
beyond the contemplation of the guarantor or surety, because later on the
guarantor might become insolvent. When the debtor becomes insolvent, to ATACO delivered to the Bureau asphalt amounting to P431,466.52. Of
whom will the guarantor proceed? So again, such extension without the this amount petitioner collected P106,382.01 for 8 months until for
consent shall be prejudicial to the guarantor. In effect, such kind of extension unexplained reasons, petitioner ceased to collect. It was later found that
will release the guarantor and the surety from the obligation. So again, the that more moneys were payable to ATACO from the Public Works office,
extension must be without consent for the guarantor to be released. because the latter had allowed mother creditor to collect funds due to
ATACO under the same purchase order to a total of P311,230.41.
If the guarantor gave consent, or for example, as what was stated earlier, there
was a waiver to any extension given in favor of the guarantor, it is implied that This caused petitioner to file a claim against the principal debtor
the guarantor or surety agreed to the extension, to which he will shoulder the (ATACO) and the surety (respondent) to recover the balance of
risk until the grant of such extension. However, do take note that this extension P158,563.18.
is not applicable if there is a mere failure of the creditor to demand payment
after the obligation has become due. The CA found petitioner bank negligent in having stopped collecting
from the Bureau the moneys falling due in favor of the principal debtor,
So the extension contemplated here is not mere failure to collect. If there is ATACO before the debt was fully collected, thereby allowing such funds to
mere failure to make demand, any extension of time will not release a be taken and exhausted by other creditors to the prejudice of the surety.
guarantor from his obligation. The requirement here is there must be an Such negligence of petitioner bank resulted in the exoneration of
agreement between the debtor and the creditor that the debtor is given a respondent Manila Surety.
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Petitioner bank countered that the power of attorney it obtained from Okay, this is similar to the previous articles, whatever defenses available to the
ATACO was merely in additional security in its favor, and that it was the principal debtor are also available to the guarantor. Prescription..among others,
duty of the surety, and not that of the creditor, owed see to it that the you have 2068, 2074, and 2081.
obligor fulfills his obligation, and that the creditor owed the surety no duty
of active diligence to collect any, sum from the principal debtor. LEGAL AND JUDICIAL BONDS
ISSUE: W/N petitioner’s negligence in collecting the debt exonerated ARTICLE 2082. The bondsman who is to be offered in virtue of a provision
respondent Manila Surety. of law or of a judicial order shall have the qualifications prescribed in article
2056 and in special laws.
RULING: YES
Okay, so we have here a bond. It is an undertaking that is sufficiently secured
The CA did not hold the Bank answerable for negligence in failing to wherein the bondsman acts as a surety, maybe a corporation or a juridical
collect from the principal debtor but for its neglect in collecting the sums person.
due to the debtor from the Bureau of Public Works, contrary to its duty as
holder of an exclusive and irrevocable power of attorney to make such All the bonds, including judicial bonds are contractual in nature. They are
collections, since an agent is required to act with the care of a good father merely as special class of contracts of guaranty, characterized by the fact that
of a family and becomes liable for the damages which the principal may they are given in virtue of a judicial order.
suffer through his non-performance.
Certainly, the Bank could not expect that the Bank would diligently ARTICLE 2083. If the person bound to give a bond in the cases of the
perform its duty under its power of attorney, but because they could not preceding article, should not be able to do so, a pledge or mortgage
have collected from the Bureau even if they had attempted to do so. It considered sufficient to cover his obligation shall be admitted in lieu
must not be forgotten that the Bank's power to collect was expressly made thereof.
irrevocable, so that the Bureau of Public Works could very well refuse to
make payments to the principal debtor itself, and a fortiori reject any So we already know that guaranties and suretyships are contracts of personal
demands by the surety. security. And then we have pledges and mortgages which are contracts of real
security. Now pledges and mortgages are sufficient to cover obligations with
Even if the assignment with power of attorney from the principal legal or judicial bonds as may be allowed.
debtor were considered as mere additional security still, by allowing the
assigned funds to be exhausted without notifying the surety, the Bank ARTICLE 2084. A judicial bondsman cannot demand the exhaustion of the
deprived the former of any possibility of recoursing against that security. property of the principal debtor.
The Bank thereby exonerated the surety, pursuant to Article 2080 of the A sub-surety in the same case, cannot demand the exhaustion of the
Civil Code. property of the debtor or of the surety.
The demand letter informing the debtor its outstanding balance was Ok, so a judicial bondsman is solidarily liable with the principal debtor. Sub-
P156,374.83 has no bearing on the issue whether the Bank has exercised surety, is likewise solidarily liable. That means that these judicial bondsmen and
due diligence in collecting from the Bureau of Public Works, since the letter sub-surety are not entitled to the benefit of exhaustion.
was addressed to ATACO, and the funds were to come from elsewhere. As
to the letter of demand on the Public Works office, it does not appear that CONTRACT OF PLEDGE
any reply thereto was made; nor that the demand was pressed, nor that
the debtor or the surety were ever apprised that payment was not being As we have discussed before, contracts of guaranty and suretyship are contracts
made. The fact remains that because of the Bank's inactivity the other of personal security. No property is involved to actually secure the payment or
creditors were enabled to collect P173,870.31, when the balance due to performance of the principal obligation. Although, we have mentioned that as a
appellant Bank was only P158,563.18. The finding of negligence made by qualification for guaranty or surety, as well in bondsmen, you must have
the Court of Appeals is thus not only conclusive on us but fully supported sufficient property.
by the evidence.
The security itself is not the properties, but the undertaking, or the promise of
Maam: How was PNB negligent here? the guarantor to pay when the debtor cannot pay.
Ans: PNB was negligent because it did not collect from the Bureau.
Maam: Why did it result to negligence? Why and how is 2080 applicable? What Now, what about pledge? When it comes to pledge, or even mortgages, the
happened to the Bureau? PNB was allowed to collect from the Bureau. property itself is the security, and not the promise of the owner of the property.
So when we talk about pledge and mortgages, these are contracts of security.
So here there was already an assignment with power of attorney from the
principal debtor, ATACO, in favor of PNB. But here, to apply 2080, you have to What is a contract of pledge?
consider how is it that the creditor is considered negligent? It already had the
authority to collect from the bureau. But it was negligent in actually collecting It is a contract of security but it is specifically a real security in the sense that
from the bureau. In fact, at the time the assignment was executed, meron pang what acts as a security is the property itself. So a contract of pledge, mortgage,
funds ang bureau, but PNB did not act upon it. And what happened? Other antichresis, these are accessory contracts of real security for the property and
creditors were able to collect. So binigyan na sila ng power, wala silang ginawa. not the promise of the owner acts as a security for the obligation.
That is the precise situation covered in 2080. It allowed the assigned funds to be
exhausted without notifying the surety, which the bank deprived the surety of So a pledge is a contract by virtue of which the debtor delivers to the creditor or
any possibility of recoursing against the security. to which the bank exonerated any third person a movable or document evidencing incorporeal rights for the
the surety pursuant to Art. 2080. purpose of securing the fulfillment of a principal obligation with the
understanding that when the obligation is fulfilled, the thing delivered shall be
There was a letter that was sent by PNB to the debtor ATACO..but it does not returned along with all its goods and accessories.
appear that any reply was made or that the demand was pressed. The fact
remains that because ofthe bank's inactivity, other creditors were able to So in this type of contract it may be a personal or movable property, or a
collect. So in effect, Manila Surety is released from its obligation applying Art. document evidencing real or incorporeal rights acting as a security for the
2080. principal or for the fulfillment of the principal obligation. In case the obligation
is not fulfilled, the creditor may proceed against the movable or incorporeal
ARTICLE 2081. The guarantor may set up against the creditor all the right. But if the obligation is paid, then the creditor is responsible for returning
defenses which pertain to the principal debtor and are inherent in the the property subject of the pledge, as well as its accessions and accessories
debt; but not those that are personal to the debtor. must be returned to its owner.
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2. Incorporeal/intangible properties – while it cannot be seen, it 3. That the persons constituting the pledge or mortgage have the free
nevertheless exists by fiction of law. So for it to be a subject matter disposal of their property, and in the absence thereof, that they be
in a contract of pledge, what you deliver is the evidence of such legally authorized for the purpose.
security.
CALIBO vs. CA
So here, we are talking about real securities. There are 4. The pledge, mortgage, FACTS:
chattel mortgage, and antichresis. In these contracts, the intention is to secure
the performance of the principal obligation by subjecting these properties. Respondent Pablo was the owner of a tractor, which he left in the
safekeeping of his son Mike. Mike kept the tractor in the garage of the
You also have real estate mortgage. It is the same concept as pledge, as a house he was leasing from petitioner. However, Mike defaulted in the
security in a principal obligation, but the subject here is different. You have a payment of his rent and electric and water bills. Mike promised to settle his
real or immovable property, securing the fulfilment of the obligation. If the obligation to petitioner and offered the tractor as security.
debtor cannot pay, then the creditor may proceed against the property, have it
foreclosed, and apply the proceeds to the principal obligation. Later on, respondent Pablo sought claim and possession of the tractor.
When petitioner refused to give the tractor, respondent instituted an
Now these Articles. 2085, and onwards..pls take note, there are provisions that action for replevin against petitioner.
are common to both pledge and mortgage, and there are also provisions that
are specifically applicable to pledge. So you have to take note the distinction petitioner claims that the tractor in question was validly pledged to
between pledge and mortgage. him by private respondent's son Mike Abella to answer for the latter's
monetary obligations to petitioner. In the alternative, petitioner asserts
Real Estate Mortgage Pledge that the tractor was left with him, in the concept of an innkeeper, on
The subject is a matter is an Movable property or incorporeal deposit and that he may validly hold on thereto until Mike Abella pays his
immovable rights obligations. Even if Mike was not the owner of the tractor, a principal-
Delivery is not required Delivery to the creditor is required. agent relationship may be implied between Mike and his father respondent
Pablo. Hence, Pablo was bound by the pledge, even if it were beyond the
Take note in a contract of pledge, authority of his son to pledge the tractor, since he allowed his son to act as
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though he had full powers to do so. So again, take note of this 2nd requisite- the pledgor or mortgagor must be the
absolute owner of the thing pledged. A pledge or motgage executed by one
ISSUES:W/N there was a valid pledge of the tractor to petitioner. who is not an owner thereof is without legal existence.
RULING: NO Now, also under 2085, under the 3rd paragraph, that it is not necessary that the
pledgor or mortgagor is the principal debtor. What is important is that the
In a contract of pledge, the creditor is given the right to retain his pledgor or mortgagor is the absolute owner of the property. For this 3rd
debtor's movable property in his possession, or in that of a third person to paragraph to apply, valid consent from the pledgor or mortgagor, who is the
whom it has been delivered, until the debt is paid. For the contract to be absolute owner of the thing pledged, must be present. The fact that the loan
valid, it is necessary that: was solely for the benefit of the debtor would not invalidate the pledge or
1. The pledge is constituted to secure the fulfillment of a principal mortgage. Ofcourse, the creditor would be required to exercise due care and
obligation; prudence in making proper inquiry as to whether the person is the absolute
2. The pledgor be the absolute owner of the thing pledged; and owner of the property.
3. The person constituting the pledge has the free disposal of his
property, and in the absence thereof, that he be legally In this case, the pledgor or mortgagor shall not be liable, as will be discussed
authorized for the purpose. later on..he cannot be further liable for any deficiency.. because the extent of
this obligation is only to the value of the property pledged or mortgaged.
The pledgor Mike was not the absolute owner of the tractor that was
allegedly pledged to petitioner. The tractor was owned by his father who THIRD REQUISITE: That the persons constituting the pledge or mortgage have
left the equipment with him for safekeeping. Clearly, the second requisite the free disposal of their property, and in the absence thereof, that they be
for a valid pledge, that the pledgor be the absolute owner of the property, legally authorized for the purpose.
is absent in this case. Hence, there is no valid pledge.
As we have mentioned, in this contract of pledge and mortgage, are acts of
As to petitioner’s argument of agency, Article 1869 of CC provides that ownership..so they must have the capacity or authority to dispose of the thing.
for an agency relationship to be deemed as implied, the principal must Free disposal means that the property must not be subject of any lien or
know that another person is acting on his behalf without authority. Here, encumbrance. Also relate this in a provision in the Revised Penal Code, estafa or
respondent categorically stated that the only purpose for his leaving the other forms of deceit. Also there must be any pending case involving the
subject tractor in the care and custody of Mike was for safekeeping, and property. It must not be a subject of any litigation.
definitely not for him to pledge or alienate the same. If it were true that
Mike pledged respondent’s tractor to petitioner, then Mike was acting not Now remember these are additional, essential requisites for a valid contract
only without respondent’s authority but without the latter's knowledge as because we still of course have to have Consent, Object and Consideration.
well. Plus these three absence of any of which will result into a void pledge or
mortgage.
Article 1911, on the other hand, mandates that the principal is
solidarily liable with the agent if the former allowed the latter to act as Already I discussed the case of Calibo, How about the case of development?
though he had full powers. Again, in view of respondent’s lack of Development bank?
knowledge of Mike's pledging the tractor without any authority from him,
it stands to reason that the former could not have allowed the latter to
DEVELOPMENT BANK V PRUDENTIAL BANK
pledge the tractor as if he had full powers to do so.
There is likewise no valid deposit in this case. In a contract of deposit, a Litex executed trust receipts in favor of respondent Prudential Bank
person receives an object belonging to another with the obligation of involving 5k spindles to be used for its textile mill. Later on, Litex obtained a
safely keeping it and of returning the same. Petitioner himself states that foreign currency loan with petitioner DBP. As security thereof, Litex executed
he received the tractor not to safely keep it but as a form of security for the real estate and chattel mortgages in favor of DBP including the articles
payment of Mike’s obligations. There is no deposit where the principal covered by the trust receipts.
purpose for receiving the object is not safekeeping. Upon learning of Litex’s rehabilitation, Prudential informed DBP that it
was the absolute and juridical owner of the various items covered by the
Q: Can we say that there is a contract of agency here? trust receipts and they were thus not part of the mortgaged assets that could
A: No maam. The court also said that there was no contract of agency. be legally ceded to DBP.
However, DBP extra-judicially foreclosed the mortgages including the
Q: can you see that there is a deposit here wherein the lessor will be allowed to articles claimed by Prudential and subsequently acquired ownership thereof.
retain the property? Nevertheless, DBP requested documents from Prudential to enable it to
A: there was no contract of deposit here. Calibo did not receive the property for evaluate Prudential’s claim. However, without the knowledge of Prudential,
safekeeping, but as a form of security. DBP sold the Litex textile mill, as well as the machineries and equipment
therein, to Lyon. As a result, Prudential filed a complaint for a sum of money
So here, take note, there was no valid contract of pledge. There was a subject, with damages against DBP. Prudential argued that even if Litex mortgaged
the tractor, however, one of the requisites that the pledgor must be the the items to DBP and the latter foreclosed on such mortgage, DBP was duty-
absolute owner of the thing pledged is not present in this case. Mike, the son, bound to turn over the proceeds to Prudential, being the party that advanced
was not the absolute owner of the tractor for it was owned by his father. So the payment for them.
there was no valid contract of pledge. DPB argued that the transactions between Litex and Prudential were not
trust receipt transactions because the spindles were procured by Litex not to
There can also be no contract of agency because the SC emphasized that there sell them but or the exclusive use of its textile mills.
was no evidence that there was a contract of agency that was executed in favor The RTC ordered DBP, as a trustee ex maleficio, to pay Prudential. The CA
of Mike by the father. Again, agency requires the consent of the principal. further found that DBP was not a mortgagee in good faith.
Obviously, there was also no valid deposit. The purpose of deposit is for ISSUE: W/N the chattel mortgage executed by Litex in favor of DBP validly
safekeeping, and it is clear from the facts of the case that the tractor was included the goods covered by the trust receipts.
delivered to Calibo not for safekeeping, but as a security for Mike’s obligation. RULING: NO
In a trust receipt transaction, the release of the goods to the entrustee,
What is the remedy here of Calibo? He can still go after the obligation of Mike, on his execution of a trust receipt, is essentially for the purpose of their sale
but Ofcourse, he cannot retain the tractor. or is necessarily connected with their ultimate or subsequent sale.
Here, Litex was not engaged in the business of selling spinning
machinery, its accessories and spare parts but in manufacturing and
producing textile and various kinds of fabric. The articles were not released
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to Litex to be sold. Nor was the transfer of possession intended to be a for the goods. The execution of the trust receipt transaction of the goods or
preliminary step for the said goods to be ultimately or subsequently sold. machineries covered therein are actually owned by prudential bank, which is
Instead, the contemporaneous and subsequent acts of both Litex and only in the physical possession of litex textiles. And therefore even with the
Prudential showed that the imported articles were released to Litex to be execution of the chattel mortgage involving the said equipment’s there can be
installed in its textile mill and used in its business. DBP itself was aware of no valid mortgage because those machineries were still owned by prudential
this. bank. No valid mortgage, no valid foreclosure to which DBP cannot be
The articles were owned by Prudential and were only held by Litex in considered in a purchaser in good faith because they were made aware of the
trust. While it was allowed to sell the items, Litex had no authority to dispose trust receipts.
of them or any part thereof or their proceeds through conditional sale,
pledge or any other means. M: What is a doctrine of a mortgagee in good faith?
Article 2085(2) of the CC requires that, in a contract of pledge or
mortgage, it is essential that the pledgor or mortgagor should be the
CAVITE DEV’T BANK vs. SPS LIM
absolute owner of the thing pledged or mortgaged. Further, Article 2085(3)
mandates that the person constituting the pledge or mortgage must have the
free disposal of his property, and in the absence thereof, that he be legally Rodolfo Guansing obtained a loan from petitioner CDC. As security
authorized for the purpose. thereof, Rodolfo mortgaged a parcel of land in favor of CDC. When Rodolfo
Here, Litex had neither absolute ownership, nor free disposal, nor the defaulted in its payment, CDC foreclosed the mortgage and subsequently
authority to freely dispose of the articles. Hence, it could not have subjected acquired title thereto.
them to a chattel mortgage. Their inclusion in the mortgage was void and Later on, Lim offered to purchase the property from CDC. However, Lim
had no legal effect. Since there can be no valid mortgage, there could also be discovered that Rodolfo fraudulently secured title over the subject property
no valid foreclosure or valid auction sale. Thus, DBP could not be considered from his father Perfecto who successfully restored his previous title thereto.
either as a mortgagee or as a purchaser in good faith. By virtue of the alleged misrepresentation of CDC, Lim filed an action for
It must be noted that no one can transfer a right to another greater than specific performance and damages against CDC.
what he himself has. Nemo dat quod non habet. Hence, Litex could not Petitioner alleged that it is a mortgagee in good faith as a mortgagee
transfer a right that it did not have over the disputed items. Corollarily, DBP bank, it is not required to make a detailed investigation of the history of the
could not acquire a right greater than what its predecessor-in-interest had. title of the property given as security before accepting a mortgage.
The spring cannot rise higher than its source. DBP merely stepped into the ISSUE: W/N CDC was a mortgagee in good faith.
shoes of Litex as trustee of the imported articles with an obligation to pay RULING: NO
their value or to return them on Prudential’s demand. By its failure to pay or CDB's acceptance of Lim's offer to purchase, a contract of sale was
return them despite Prudential’s repeated demands and by selling them to perfected and, indeed, partially executed because of the partial payment of
Lyon without Prudential’s knowledge and conformity, DBP became a trustee the purchase price. There is, however, a serious legal obstacle to such sale,
ex maleficio. rendering it impossible for CDB to perform its obligation as seller to deliver
and transfer ownership of the property.
Pursuant to Article 2085 of the CC, in a contract of mortgage or pledge, it
is required that the mortgagor or pledgor be the absolute owner of the thing
You have a mortgage, what would be the principal obligation? In relation to pledged or mortgaged in anticipation of a possible foreclosure sale should
the mortgage the mortgagor default in the payment of the loan. Here, Rodolfo was not the
owner of the mortgage land. Nemo dat quod non habet. One cannot give
The Principal Obligation was the payment of the 498. . . in favor of Prudential what one does not have. Hence, CDC did not validly acquire ownership
bank. thereof.
Nevertheless, there could a situation where, despite the fact that the
M: You have a valid mortgage? The Said Machineries mortgagor is not the owner of the mortgaged property, his title being
fraudulent, the mortgage contract and any foreclosure sale arising therefrom
The Supreme Court held that there was no valid mortgage applying Article 2085 are given effect by reason of public policy. This is the doctrine of "the
of the Civil Code: Emphasizing on the second requisite and that the pledgor mortgagee in good faith" based on the rule that all persons dealing with
should be the absolute owner of the thing which is pledged maam. In this case property covered by a Torrens Certificate of Title, as buyers or mortgagees,
maam since there is a valid trust receipt agreement then the ownership of the are not required to go beyond what appears on the face of the title. The
spindle was that to prudential bank and not that to litex. So litex was not the public interest in upholding the indefeasibility of a certificate of title, as
absolute owner of the spindle so there was no valid mortgage. evidence of the lawful ownership of the land or of any encumbrance thereon,
protects a buyer or mortgagee who, in good faith, relied upon what appears
on the face of the certificate of title.
M: How about the allegation that the bank here is considered as a mortgagee
However, CDC cannot be considered as a mortgagee in good faith. While
or or purchaser in good faith.
it is not expected to conduct an exhaustive investigation on the history of the
mortgagor's title, it cannot be excused from the duty of exercising the due
In this case maam the court held that actually the bank was not in good faith diligence required of banking institutions especially so if there might be
because at the time that it required. Yes ma’am because they know of the fact circumstances apparent on the face of the certificate of title which could
that those goods. . . “Cough Cough” “Cough” excite suspicion as to prompt inquiry.
It is standard practice for banks, before approving a loan, to send
M: Why is it that DBP cannot be considered a mortgagee in good faith representatives to the premises of the land offered as collateral and to
investigate who are real owners thereof, noting that banks are expected to
Because DBP had a knowledge that the goods had been under a trust receipt exercise more care and prudence than private individuals in their dealings,
before the foreclosure of the sale. even those involving registered lands, for their business is affected with
public interest.
There is no evidence that CDB observed its duty of diligence in
M: Okay Thank you.
ascertaining the validity of Rodolfo’s title. It appears that Rodolfo Guansing
obtained his fraudulent title by executing an Extra-Judicial Settlement of the
So here, again now emphasis on the second requisite under 2085 the pledgor or Estate With Waiver where he made it appear that he and Perfecto Guansing
mortgagor must be the absolute owner of the thing pledged or mortgaged, in were the only surviving heirs entitled to the property, and that Perfecto had
this instance we have a trust receipt transaction and we have emphasized what waived all his rights thereto. This self-executed deed should have placed CDB
happens in this kind of transaction we have goods which are released by the on guard against any possible defect in or question as to the mortgagor's
entruster. who owns or holds absolute title or security interest for the said title. Moreover, the alleged ocular inspection report by CDB's representative
goods. The entruster here is prudential and the goods are released to the was never formally offered in evidence. Indeed, petitioners admit that they
entrustee and the latter execution and delivery to the entruster of the trust are aware that persons were occupying the subject land other than Rodolfo
receipt. So here the trust receipt evidences absolute title or a security interest
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and that said persons, who are the heirs of Perfecto, contest the title of and not mortgagors.
Rodolfo. Respondents deny that any fraud was employed since the spouses were
Therefore, the sale by CDB to Lim of the property mortgaged in 1983 by fully advised and compensated for the use of their property as collateral.
Rodolfo must be deemed a nullity for CDB did not have a valid title to the ISSUE: W/N the third party mortgage undertaken by spouses Jayme in favor
said property. To be sure, CDB never acquired a valid title to the property of Neri was valid.
because the foreclosure sale, by virtue of which, the property had been RULING: YES
awarded to CDB as highest bidder, is likewise void since the mortgagor was The DREM entered into by the spouses Jayme partakes of a Third Party
not the owner of the property foreclosed. Mortgage under Article 2085(3) of the CC.
Clearly, the law recognizes instances when persons not directly parties to
a loan agreement may give as security their own properties for the principal
Maam: Is there a Valid Mortgage? transaction. In this case, the spouses should not be allowed to disclaim the
D: None maam because the bank is not the real owner. validity of a transaction they voluntarily and knowingly entered into for the
Maam: The bank is not the real owner of the property? simple reason that such transaction turned out prejudicial to them later on.
D: No the mortgagor is not the real owner of the property. So long as valid consent was given, the fact that the loans were solely for
Maam: Who is the Mortgagor here the benefit of the debtor would not invalidate the mortgage with respect to
D: Rodolfo Maam, and Perfecto is the true owner. petitioner’s property. In consenting thereto, even granting that petitioner
Maam: Now what about the issue, Is Cavite Development bank considered a may not be assuming personal liability for the debt, her property shall
mortgagor in good faith? nevertheless secure and respond for the performance of the principal
D: No maam, as a banking institution it should exert not ordinary diligence but obligation.
extra ordinary diligence in order to secure the title that the owner of the In this case, no fraud attended the execution of the deed of mortgage.
mortgaged property is the real owner of the property and in this case the court With the assistance of a lawyer and consultation with their literate children,
said that it appears not that Rodolfo guansing obtained his fraudulent title by the spouses though illiterate could not feign ignorance of the stipulations in
executing a extrajudicial settlement of the estate where he made it appear that the deed. Patently, theirs was not a vitiated consent. It could not now be
he and Perfecto Guansing were the only surviving heirs entitled to the Property. justifiably asserted that the Jayme spouses only intended to be bound as
This self-executed deed should have alerted the Bank against any possible guarantors and not as mortgagors.
defect in the mortgage. In this jurisdiction, when the property of a third person which has been
D: The Bank also did not have an ocular inspection over the property. expressly mortgaged to guarantee an obligation to which the said person is a
M:Again a requirement here is that the mortgagor must be the owner of the stranger, said property is directly and jointly liable for the fulfillment thereof,
property is required for a valid mortgage. Even if there was a title registered in in the same manner as the mortgaged property of the debtor himself.
the name of Rodolfo, it turned out he was not the true owner thereof because In the case at bar, when Asiancars failed to pay its obligations with
it was a fraudulently secured by Rodolfo. The title is merely an evidence of Metrobank, the properties given as security (one of them being the land
ownership but the mere fact you are in possession of the title does not mean owned by the Jaymes) became subject to foreclosure. When several things
you own the property mismo. are given to secure the same debt in its entirety, all of them are liable for the
debt, and the creditor does not have to divide his action by distributing the
Cavite alleged the defense that it is considered a mortgagee in good faith. debt among the various things pledged or mortgaged. Even when only a part
The Doctrine of Mortgagee in Good Faith is based on the rule that all persons of the debt remains unpaid, all the things are liable for such balance.
dealing with property covered by Torrens Certificate of Title are not required to At the time of the foreclosure, Asiancars had a remaining balance. Thus,
go beyond what appears on the face of the title. Mortgagee has the right to rely Metrobank had every right to effect the extrajudicial foreclosure of the
on the face of the title. mortgaged properties to satisfy its claim.
Metrobank is also a purchaser in good faith. It had no knowledge of the
stipulation in the lease contract. Although the same lease was registered and
An innocent purchaser for value therefore, who relies on the title is protected.
duly annotated on the TCT of the Lot, Metrobank was charged with
However the mortgagee bank cannot claim to be a mortgagee in good faith
constructive knowledge only of the fact of lease of the land and not of the
because he cannot be excused from exercising the due diligence required from
specific provision stipulating transfer of ownership of the building to the
Banking Institutions. It is a standard practice of Banking Institutions to send
Jaymes upon termination of the lease. There was no annotation on the title
representatives to the premises of the land and investigate who the real owners
of any encumbrance. While the alienation was in violation of the stipulation
are thereof.
in the lease contract between the Jaymes and Asiancars, Metrobank’s own
rights could not be prejudiced by Asiancars’ actions unbeknownst to
Also take note as we have discussed last time the third paragraph in 2085 Metrobank. Thus, the transfer of the building in favor of Metrobank was p
wherein you can have 3rd persons who are not parties to the principal obligation valid and binding.
who may secure the principal obligation by mortgaging or pledging their own Petitioners however, are not without recourse for the loss of their
property. It is not necessary that the pledgor or mortgagor is the principal property. Although they cannot go after respondent, they have in their favor
debtor at the same time. What is required is that such pledgor or mortgagor is the undertaking executed by Neri and other members of his family. The
the absolute owner thereof. undertaking also bound respondent Asiancars, as well as its officers who
were signatories to the aforesaid Undertaking, to reimburse petitioners for
VDA DE JAYME vs. CA the damages they suffered by reason of the mortgage.
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Art. 2086. The provisions of Article 2052 are applicable to a pledge or time deed of assignment was executed, said loans were non-existent yet. The
mortgage. (n) deed of assignment was executed in 1964 while the promissory notes in
A guarantee cannot exist without a valid obligation nevertheless a guarantee 1966.
may be constituted to guarantee the performance of a voidable or At most, it was a dation in payment for P10k, the amount of credit from
unenforceable contract. It may also guarantee a natural obligation. Just like petitioner bank indicated in the deed of assignment. At the time the
guarantee and suretyship, pledge and mortgage, the principal obligation must assignment was executed, there was no obligation to be extinguished except
also be valid as they are mere accessory contracts. the amount of P10k. Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it
Art. 2087. It is also of the essence of these contracts that when the principal be so declared in unequivocal terms, or that the old and the new obligations
obligation becomes due, the things in which the pledge or mortgage be on every point incompatible with each other.
consists may be alienated for the payment to the creditor. (1858) Obviously, the deed of assignment was intended as collateral security for
the bank loans of respondents, as a continuing guaranty for whatever sums
would be owing by them to petitioner, as stated in stipulation No. 9 of the
deed.
MANILA BANKING vs. TEODORO In case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
In 1964, Teodoro Jr. executed a Deed of Assignment Receivables from transmission of rights and interests.
the EEA in favor of petitioner bank. The Deed of Assignment provided that: An assignment to guarantee an obligation is in effect a mortgage and not
1. It was for and in consideration of certain credits, loans, overdrafts, an absolute conveyance of title which confers ownership on the assignee.
and their credit accommodations in the sum of P10k extended to Second issue
respondents by petitioner bank as security for the payment of The obligation of respondents under the promissory notes not having
said sum and interest thereon; been released by the assignment of receivables, they remain as the principal
2. Respondents, as assignors, remise, release, and quitclaim to debtors of petitioner bank rather than mere guarantors. The deed of
assignee bank all their rights, title and interest in and to the assignment merely guarantees said obligations. That the guarantor cannot be
accounts receivable assigned; compelled to pay the creditor unless the latter has exhausted all the property
3. The assignment would also stand as a continuing guaranty for of the debtor, and has resorted to all the legal remedies against the debtor,
future loans of respondents to petitioner bank and under Article 2058 of the NCC does not therefore apply to them. It is of
correspondingly the assignment shall also extend to all the course of the essence of a contract of pledge or mortgage that when the
accounts receivable, respondent shall also obtain in the future, principal obligation becomes due, the things in which the pledge or mortgage
until the consideration on the loans secured by respondents from consists may be alienated for the payment to the creditor pursuant to Article
petitioner bank shall have been fully paid by them. 2087 of the NCC. In the instant case, respondents are both the principal
debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to
In 1966, respondents entered into a contract with Emergency the other.
Employment Administration (EEA), now Philippine Fisheries Commission Petitioner bank did try to collect on the pledged receivables. As the EEA
(PFC). By virtue thereof, petitioner bank extended loans to respondents which issued the receivables had been abolished, the collection had to be
Teodoro Sr. and his son Teodoro Jr. evidenced by 3 promissory notes they coursed through the Office of the President which disapproved the same.
executed in favor of the bank in 1966. The receivable became virtually worthless leaving respondents’ loans from
Petitioner banks took steps to collect from the PFC but no collection was petitioner bank unsecured. It is but proper that after their repeated demands
effected. Hence, it filed its claim against respondents. made on respondents for the settlement of their obligations, petitioner bank
The respondents argue that petitioner’s claim is already considered paid should proceed against respondents. It would be an exercise in futility to
by the Deed of Assignment which Teodoro Jr. executed. They further claim proceed against a defunct office for the collection of the receivables pledged.
that the deed of assignment is a quitclaim in consideration of their
indebtedness to petitioner bank and not mere guaranty.
ISSUES: What do you mean by assignment, under the law?
1. W/N the assignment of receivables extinguish the loan obligations
of respondents to petitioner. NO
2. W/N petitioner must first exhaust all legal remedies against PFC What is the effect if this deed of assignment is merely a pledge?
before it can proceed against respondents for collections of loan Since it is only a pledge it is only as a security of an obligation which is the
under the promissory notes. NO promissory note
RULING: BOTH NO What happens to the Obligation? What is the action here of Manila Bank?
First issue
Assignment of credit is an agreement by virtue of which the owner of a You’re Correct there is only a deed of assignment where the intention is merely
credit, known as the assignor, by a legal cause, such as sale, dation in to constitute the pledge over the receivables covered therein. So what is the
payment, exchange or donation, and without the need of the consent of the effect if it is a mere pledge?
debtor, transfers his credit and its accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same extent as the What is the action here? Filed by the bank against the debtors? What happens
assignor could have enforced it against the debtor. in a pledge? Is the Obligation extinguished?
It may be in the form of a sale, but at times it may constitute a dation in
payment, such as when a debtor, in order to obtain a release from his debt,
Since the obligation is not extinguished, the bank could not contend that the
assigns to his creditor a credit he has against a third person, or it may
mere assignment of the receivables will extinguish the obligation in the said
constitute a donation as when it is by gratuitous title; or it may even be
promissory note because it is acting as a collateral security.
merely by way of guaranty, as when the creditor gives as a collateral, to
secure his own debt in favor of the assignee, without transmitting ownership.
The character that it may assume determines its requisites and effects. Do take note, what do we mean of assignment of credit? An agreement by
Its regulation, and the capacity of the parties to execute it; and in every case, which of which the owner of the credit, known as the assignor by legal cause
the obligations between assignor and assignee will depend upon the judicial such as sale dacion in payment exchange or donation and without the need of
relation which is the basis of the assignment. the consent of the debtor, transfers his credit and his accessory rights to
In the case at bar, it is evident that the assignment of receivables another, known as the assignee, who acquires the power to enforce it to the
executed by respondent in 1964 did not transfer the ownership of the same extent as the assignor could have enforced it against the debtor it may be
receivables to petitioner bank and release respondents from their loans with in the form of sale or it may constitute a dacion in payment wherein you could
the bank incurred under promissory notes. It did not result from a sale have properties whether personal or real properties delivered to the creditor in
transaction nor was constituted by virtue of a dation in payment since at the lieu of the monetary obligation for the purpose of extinguishing the obligation,
the deed of assignment covering the receivables covering from the emergency
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employment association did not transfer the ownership of these receivables to A: It means ma’am that the thing was pledged or mortgaged by way of securing
the bank and release the appellants from their loans. It is clear that the deed of an obligation in which it is provided that in case the debtor fails to pay within a
assignment was merely a security for the payment of the sum of interest in the certain period the thing pledged or mortgaged ma’am will automatically be
promissory note. appropriated to the creditor.
Again how do we interpret the contracts? Not by the language used by the ALCANTARA VS. ALINEA
parties in the document but by their intention. The supreme court also pointed
out in that the interpretation of contracts that whether the transaction is a Facts:
ALINEA and BELARMINO borrowed from ALCANTARA P480. It was
pledge or dacion in payment, the presumption is in favor of pledge and the agreed by them that in case of non-payment, it would be understood that
latter being the lesser involving the lesser transmission of rights and interests. the house and lot owned by ALINEA and shall be considered as absolutely
Property, personal property is merely used as a collateral or a security for the sold to ALCANTARA for the said sum.
principal obligation. Walang transfer of ownership as compared to dacion in
payment. Which has a greater transmission of rights kasi may transfer of Despite non-payment by ALINEA and BELARMINO, the latter failed to deliver
ownership. the property.
So here the deed of assignment was intended as a collateral security for the ALCANTARA filed a complaint praying that judgment be rendered in his
bank loans of the appellants and as a continuing guarantee for whatever sums behalf ordering ALINEA and BELARMINO to deliver to him the house and lot,
will be owing by defendants to plaintiff. among others.
In this case the bank demanded for the payment from the debtors and the Issue: WON THE CONTRACT OF LOAN AND A PROMISE OF SALE OF A HOUSE
debtors are still held liable because their obligations were not extinguished by AND LOT IS VALID. YES.
those receivables covered in the deed of assignment as those merely acted as a
security for their obligation.
Held:
Either one of the contracts are perfectly legal and both are authorized.
No article of the Civil Code prohibits expressly, or by inference, that an
In relation to 2087 please take note of 2088 very important provision in relation
agreement could not be made in the form in which the same has been
to contracts of pledge and mortgage.
executed. Contracts shall be binding, whatever may be the form in which
they may have been executed, provided the essential conditions required for
2088 states that the creditor cannot appropriate the things given by way of their validity exist.
pledge or mortgage and dispose of them. Any stipulation to the contrary is null
and void. This 2088 refers to what we have already learned before. Pactum
PACTUM COMMISSORIUM INDICATES THE EXISTENCE OF THE CONTRACTS OF
Commissorium.
MORTGAGE OR OF PLEDGE OR THAT OF ANTICHRESIS, none of which have
coincided in the loan indicated herein.
What happens in Pactum Commissorium?
THE HOUSE AND LOT, DOES NOT APPEAR MORTGAGED IN FAVOR OF
Automatic appropriation of property to the creditor in case of the debtors ALCANTARA, because in order to constitute a valid mortgage it is
default. Automatic appropriation is prohibited by 2088. indispensable that the instrument be registered in the Register of Property
and the document of contract does not constitute a mortgage, nor could it
HECHANOVA vs. ADIL possibly be a mortgage, for the reason of said document is not vested with
the character and conditions of a public instrument.
Jose Servando obtained a loan worth P20k from his cousin, Pio Servando
secured by a mortgaged of 3 parcels of land. The agreement was evidenced There could also be NO PLEDGE, not being personal property, and
by a private document whereby it was stipulated that if Jose fails to redeem notwithstanding the said double contract, ALINEA and BELARMINO
the property within 10 years, Pio shall become the sole owner thereof. continued in possession thereof and the said property has never been
Later on, Jose sold the 3 parcels of land to Hechanova by virtue of a deed occupied by ALCANTARA.
of sale. Pio now sought the annulment of the sale or, in the alternative, that
Jose be ordered to pay the loan plus interest and damages. There is NO CONTRACT OF ANTICHRESIS, inasmuch as the ALCANTARA has
Petitioner argued that Pio has no cause of action against them nor was never been in possession thereof, nor has he enjoyed the said property, nor
he a real party in interest since as a mere mortgagee, he had no standing to for one moment ever received its rents.
question the validity of the sale. Further, the mortgage was embodied in a
private document and not registered with the ROD. It was agreed between the parties herein that if ALINEA and BELARMINO
ISSUE: W/N Pio, as mortgagee, may question the validity of the sale. should not pay the loan in January, 1905, the property belonging to the latter
RULING: NO should remain sold for the aforesaid sum, and such agreement must be
Pio has no cause of action and has no standing to question the validity of complied with, inasmuch as there is no ground in law to oppose the
the deed of sale executed by the decease Jose in favor of Hechanova and compliance with that which has been agreed upon, having been so
Masa. No valid mortgage has been constituted Pio’s favor, the alleged deed acknowledged by the obligated parties.
of mortgage being a mere private document and not registered. Moreover, it
contains a stipulation (pacto comisorio) which is null and void under Article
2088 of the CC. Even assuming that the property was validly mortgaged to
So here, again the reason of the prohibition against pactum commissorium
Pio, his recourse was to foreclose the mortgage, not to seek annulment of
arrangement is that it is contrary to law, public policy, and morals. It is
the sale.
ordinarily the loan is less than the value of the property that was pledged or
mortgaged. On the part of the debtor, his/her choices are limited and
sometimes they are really in need of money, they have no other option or
FEBRUARY 2, 2017 better option but to agree to that automatic appropriation.
By: Manilyn Pascioles So in the case of Alcantara vs Alinea, we have to take note that there is no
pactum commissorium in this instance because the property does not appear to
Article 2088 defines Pactum Commissorium. We have already learned what a have been mortgaged because we our talking of real property here. It could not
pactum commissorium is. be considered as a pledge, not being a personal property. Neither was there a
contract of antichresis.
Q: Again what do you understand about this term?
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The property belonging to the defendant should remain sold for the said sum And even granting that the original agreement between the parties had the
and agreement complied with as there is no ground to oppose the compliance badges of pactum commissorium, the deed of assignment does not suffer the
which was agreed upon having been acknowledge by the parties. same fate as this was executed pursuant to a valid judgment.
So what is prohibited is the automatic appropriation. If an act is still required for SPS: They must be exempted from the ruling of CA that their failure to deny
the parties to consummate the transfer of the property from the debtor to the the genuineness and due execution of the deed of assignment was deemed
creditor, then that is not a pactum commissorium. Because that additional act an admission thereof since the basis for this exception is the SPOUSES'
would mean that the appropriation is not automatic. insistence that the deed of assignment having been borne out of pactum
commissorio is not subject to ratification and its invalidity cannot be waived.
Under Article 2088, we emphasize that there must be a pledge or mortgage.
There are 2 requisites emphasized in the case of Uy Tong vs CA.
The SPOUSES failed to deny under oath and specifically the genuineness and
due execution of the said deed. Perforce, under Section 8, Rule 8 of the
SPS. UY TONG VS. CA Revised Rules of Court, the SPOUSES are deemed to have admitted the
deed's genuineness and due execution. Besides, they themselves admit that
Facts:
Uy Tong and Kho Po Giok (SPOUSES) purchased from Bayanihan the contract was duly executed and that the same is genuine.
Automotive (BAYANIHAN) seven motorcycles for P47,700. This was
evidenced by a written agreement, stating among others that if for any SPS: They contend that the deed is unenforceable because the disposition
reason the SPS should fail to pay their obligation, BAYANIHAN shall become portion of civil case requires BAYANIHAN to pay the SPS the sum of P 3,535.
automatically the owner of the the SPS’ apartment with the only obligation To buttress their claim of non- compliance, they invoke the receipt issued by
on BAYANIHAN to pay P3,535, and in such event the SPS shall execute the them to show that BAYANIHAN was P535 short of the complete payment.
corresponding Deed of absolute Sale in favor of the VENDOR and or the
Assignment of Leasehold Rights (The SPS are owners of the apartment and
UNMERITORIOUS. Inasmuch as the decision in the case imposed upon the
the lease-hold rights over the land on which the building stands).
parties correlative obligations which were simultaneously demandable so
much so that if BAYANIHAN refused to comply with its obligation under the
The SPS failed to pay, prompting BAYANIHAN to file an action for specific judgment to pay the sum of P 3,535 then it could not compel the SPS to
performance. comply with their own obligation to execute the deed of assignment over the
subject premises. The fact that the SPS executed the deed of assignment
TC: In favor of BAYANIHAN. An order for execution pending appeal was with the assistance of their counsel leads to no other conclusion that private
issued. Thus, a deed of assignment was executed by the Sps. The latter also respondent itself had paid the full amount.
acknowledged their receipt of P3,000 paid by BAYANIHAN pursuant to the
judgment.
ELEMENTS FOR PACTUM COMMISSORIUM
Despite the execution, SPS remained in possession of the premises, even
after the expiration of the period in which they are allowed to stay. 1. that there should be a pledge or mortgage wherein a property is
BAYANIHAN filed an ejectment case, which was dismissed, and subsequently, pledged or mortgaged by way of security for the payment of the
an action for recover of possession. principal obligation; and
2. that there should be a stipulation for an automatic appropriation by
Issue: WON THE DEED OF ASSIGNMENT IS NULL AND VOID BECAUSE IT IS IN the creditor of the thing pledged or mortgaged in the event of non-
THE NATURE OF A PACTUM COMMISSORIUM AND/OR WAS BORNE payment of the principal obligation within the stipulated period.
OUTOFTHESAME. No.
In this case, there is no indication of any contract of mortgage entered into by
the parties and there is no case of automatic appropriation of property because
Held:SPS: The agreement is in the nature of a pactum commissorium which is what happened here is that the Sps. Uy Tong elected to execute Deed of
null and void, hence, the deed of assignment which was borne out of the Assignment pursuant to a judgment. No automatic appropriation because it
same agreement suffers the same fate. took the intervention of the Trial Court. The case was filed to exact the
fulfilment of the obligation.
Article 2088 of the CC furnishes two elements for pactum commissorium:
1. that there should be a pledge or mortgage wherein a property is In this connection, especially to those who have Sales, do not forget Article
pledged or mortgaged by way of security for the payment of
the 1602 which refers to Equitable Mortgage. Even if what was executed before the
principal obligation
court, for example is a Deed of Absolute Sale, and any of the circumstances is
2. that there should be a stipulation for an automatic
appropriation present, that despite the execution thereof the buyer still remains in possession
by the creditor of the thing pledged or mortgaged in the event of of the property and it was sold for unusual amount. Then that would constitute
non-payment of the principal obligation within the stipulated as an equitable mortgage and there could be no automatic transfer by such
period.
deed of absolute sale, otherwise that would still be considered a pactum
commissorium which again is prohibited under Article 2088.
There is NO BASIS FOR THE APPLICATION OF THE PACTUM COMMISSORIUM. Now, why is it that parties or creditors resort to this arrangement of pactum
First, there is no indication of 'any contract of mortgage entered into by the commissorium or automatic appropriation or the execution or the execution of
parties. It is a fact that the parties agreed on the sale and purchase of trucks. deed of sale instead of pledging or mortgaging the properties? Because it is
easier for them as a form of security. If they would require for the execution of
mortgage or pledge, they would still have to sell the properties and comply for
Also, there is NO CASE OF AUTOMATIC APPROPRIATION of the property by
the requirements for a valid public auction. Compare it to automatic
BAYANIHAN. When the SPOUSES defaulted in their payments of the second
appropriation or the execution of the deed of sale, it would be easier on the
and third installments of the trucks they purchased, BAYANIHAN filed an
part of the creditor to effect payment to extinguish the obligation of the debtor.
action in court for specific performance. The trial court rendered favorable
judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of
Now also do take note, that any waiver of Article 2088, is not valid and any
their obligation and in case of failure to do so, to execute a deed of
stipulation to the contrary is null and void. In fact even if there is no vitiation of
assignment over the property involved in this case. The SPOUSES elected to
consent, even if the debtor himself voluntarily offer, that would still constitute a
execute the deed of assignment pursuant to said judgment.
pactum commissorium under Article 2088.
Clearly, there was no automatic vesting of title on BAYANIHAN because it PHILNICO VS. PMO
took the intervention of the trial court to exact fulfillment of the obligation. Facts: Privatization and Management Office (PMO), Philnico Mining
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(PHILNICO) and Philnico Processing Corporation (PPC) executed an Amended and/or ignore the Pledge Agreement so as to evade the prohibition against
and Restated Definitive Agreement (ARDA), which laid down the terms and pactum commissorium.
conditions of the purchase and acquisition by PHILNICO from PMO of PMO: There is no valid Pledge Agreement, arguing that PHILNICO could not
22,500,000 shares of stock of PPC, as well as receivables of PMO from PPC. have validly pledged the PPC shares of stock because it is not yet the absolute
Under the ARDA, PHILNICO agreed to pay PMO the peso equivalent of owner of said shares. The sale of the PPC shares of stock to PHILNICO is
US$333,762,000 as purchase price, payable in installments and in accordance subject to the resolutory condition of non-payment by PHILNICO of the
with the schedule set out. installments due on the purchase price.
It was agreed by the parties, PHILNICO shall pledge the shares to PMO and UNMERITORIOUS. Among the requirements of a contract of pledge is that
shall also pledge to PMO the Converted Shares and the New Shares as the pledgor is the absolute owner of the thing pledged. Based on the
security for the payment of the purchase price upon the issuance of such provisions of the ARDA, ownership of the PPC shares of stock had passed on
shares in the name of PHILNICO. It was also stipulated that, in case of to PHILNICO, hence, enabling PHILNICO to pledge the very same shares to
default, the title to the Existing Shares and the Converted Shares shall ipso PMO.
facto revert to PMO without need of demand. PMO cannot maintain that the ownership of the PPC shares of stock did not
On account of the huge financial cost of building a new nickel refinery plant, pass on to PHILNICO, but in the same breath claim that non-payment by
coupled with the economic problems, PMO, PHILNICO, and PPC executed an PHILNICO of the installments due on the purchase price is a resolutory
Amendment Agreement providing for the restructuring of the payment condition for the contract of sale – these two arguments are actually
terms of the entire obligation under the ARDA. contradictory. So that it could invoke the resolutory condition of
Three years later, PHILNICO had defaulted in its payment. Before the last the nonpayment of an installment, PMO must necessarily concede that its
deadline of the extended period of payment, PHILNICO filed a Complaint for contract with PHILNICO was a one of sale and that ownership of the PPC
Prohibition against Reversion of Shares with Prayer for Writ of Preliminary shares of stock had indeed passed on to PHILNICO. And even then, having
Injunction and/or Temporary Restraining Order, Suspension of Payment and lost ownership of the shares, PMO cannot automatically recover the same
Fixing of Period of Payment, against PMO, PPC, and the PPC Corporate without taking steps to set aside the contract of sale.
Secretary.
Issue: WON THE ARDA ON IPSO FACTOOR AUTOMATIC REVERSION OF THE
Take note that the 2 elements of Pactum Commissorium are again emphasized
PPC SHARES OF STOCK TO PMO IN CASE OF DEFAULT BY PHILNICO
in this case. As pointed out, remember that they even executed a Pledge
CONSTITUTES PACTUM COMMISSORIUM. Yes.
Agreement, in which one of the requirements is that the pledgor must be the
Held:
Pactum commissorium is among those contractual stipulations that
owner thereof. PMO is there for estopped to say otherwise that there was no
are deemed contrary to law. It is defined as "a stipulation empowering the
transfer of ownership and that Philnico is not the owner thereof. The ownership
creditor to appropriate the thing given as guaranty for the fulfillment of the
of the shares stocks was passed on PIC, enabling PIC to pledge the said shares of
obligation in the event the obligor fails to live up to his undertakings, without
stocks to PMO. The ARDA, PMO had transferred to PIC all rights, title, and
further formality, such as foreclosure proceedings, and a public sale
interests in and to the PPC shares of stock, and delivered to PIC the certificates
ART. 2088. The creditor cannot appropriate the things given by way of pledge
for said shares for cancellation and replacement of new certificates already in
or mortgage, or dispose of them. Any stipulation to the contrary is null and
the name of PIC. In addition, the ARDA explicitly declares that PIC as buyer shall
void.
exercise all the rights, including the right to vote, of a shareholder in respect of
There are two elements for pactum commissoriumto exist:
the PPC shares of stock. PMO cannot maintain that the ownership of the PPC
1. that there should be a pledge or mortgage wherein a property is shares of stock did not pass on to PIC, but in the same breath claim that non-
pledged or mortgaged by way of security for the payment of the payment by PIC of the installments due on the purchase price is a resolutory
principal obligation;
condition for the contract of sale
2. that there should be a stipulation for an automatic appropriation
by the creditor of the thing pledged or mortgaged in the event of
nonpayment of the principal obligation within the stipulated Take note also the distinction of Pactum Commissorium and Dation en pago.
period.
Pactum Commissorium Dacion en Pago
Both elements of pactum commissorium are present in the instant case:
VOID Valid special form of
1. By virtue of the Pledge Agreement, PHILNICO pledged its PPC
payment for properties
shares of stock in favor of PMO as security for the fulfillment of
alienated to the creditor by
the former’s obligations under the ARDA and the Pledge
debtor in payment of the
Agreement itself; and
debt (Art 1245)
2. There is automatic appropriation as under Section 8.02 of the
There is an original contract of There is just a simple
ARDA, in the event of default by PHILNICO, title to the PPC shares
pledge, mortgage or obligation of a contract of
of stock shall ipso facto revert from PHILNICO to PMO without
antichresis loan and not necessarily an
need of demand.
accessory contract of
security
CA: The ARDA and the Pledge Agreement are entirely separate and distinct
contracts. Neither contract contains both elements of pactum commissorium:
Property is alienated to the
the ARDA solely has the second element, while the Pledge Agreement only
creditor for the payment of
has the first element. Thus, there is no pactum commissorium.
the debt.
UNMERITORIOUS. The agreement of the parties may be embodied in only
The property upon non- The creditor has other
one contract or in two or more separate writings. In case of the latter, the
payment is deemed remedies.
writings of the parties should be read and interpreted together in such a way
automatically appropriated to
as to render their intention effective.
the creditor if the principal There is no automatic
The agreement between PMO and PHILNICO is the sale of the PPC shares of
debtor cannot pay appropriation.
stock by the former to the latter, to be secured by a pledge on the very same
shares of stock. The ARDA and the Pledge Agreement herein, although Even if the parties agree to the Consent of both parties is
executed in separate written instruments, are integral to one another. The Pactum Commissorium required for its validity.
Pledge Agreement secures, for the benefit of PMO, the performance by stipulation, or even if they
PHILNICO of its obligations under both the ARDA and the Pledge Agreement mutually consent, still void. The creditor can refuse to
itself. It is with the execution of the Pledge Agreement that PHILNICO turned (Void WON there is consent) accept the property offered
over possession of its certificates of shares of stock in PPC to PMO. There had as payment of the debt
already been a shift in the relations of PMO and PHILNICO, from mere seller Do not confer title Law on Sale is applied,
and buyer, to creditor-pledgee and debtor-pledgor. Having enjoyed the there is a need of sale
security and benefits of the Pledge Agreement, PMO cannot now insist on which confers title
applying Section 8.02 of the ARDA and conveniently and arbitrarily exclude It will not extinguish the Extinguishes the obligation
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obligation Neither can the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have not
been paid.
From these provisions is expected the case in which, there being several things
SPS. ONG VS. ROBAN LENDING
given in mortgage or pledge, each one of them guarantees only a determinate
Facts:
Sps ONG obtained several loans from Roban Lending (ROBAN) for portion of the credit.
P4M secured by REM on their parcels of land.
Subsequently, the parties amended the REM by consolidating the loan The debtor, in this case, shall have a right to the extinguishment of the pledge
inclusive of charges which totaled P 5,916,117.50. On the same date, they or mortgage as the portion of the debt for which each thing is specially
executed a Dacion in Payment Agreement where Sps ONG assigned the answerable is satisfied. (1860)
properties covered by the properties subject to the REM to ROBAN in
settlement of their total obligation.
Sps ONG filed a complaint for declaration of mortgage contract as Article 2089 emphasizes that contracts of pledge and mortgage are indivisible.
abandoned, annulment of deeds, illegal exaction, unjust enrichment, What are the effects if these contracts are indivisible?
accounting, and damages, alleging that the Memorandum of Agreement and
the Dacion in Payment executed are void for being pactum commissorium. 1. Let’s say that A borrowed money from B worth 100, 000.00 wherein
ROBAN answered that if the voluntary execution of the Memorandum of a property is mortgage. Even if A has already paid 50,000.00 to the
Agreement and Dacion in Payment Agreement novated the REM then the creditor B, A cannot seek release of that 50,000.00 by saying that
allegation of Pactum Commissorium has no more legal leg to stand on. It also pwede ba irelease ng creditor ang 50% ng property. So hindi pwede
alleged that the Dacion in Payment is lawful and valid and that the yun. The mortgage can be released upon full payment of the
accumulated charges and interest were reasonable and valid. obligation because again it is indivisible in nature.
RTC: No pactum commisorium.
CA: Affirmed. 2. Another effect, in case A dies and let us say that he has heirs(W,X,Y
Issue: WON THE AGREEMENT CONSTITUTES PACTUM COMMISSORIUM. YES. and Z), his estate can be held liable for his obligation. The liability of
Held:
The elements of pactum commissorium, which enables the mortgagee the heirs is only to the extent of what they have received. So kung 4
to acquire ownership of the mortgaged property without the need of any sila, tag ¼ sila sa share sa properry and sa obligation. What if W pays
foreclosure proceedings, are: B 25,000.00, still he cannot seek release of that 25% of the property.
1. there should be a property mortgaged by way of security for the Dapat bayaran nila ang full amount.
payment of the principal obligation, and
2. there should be a stipulation for automatic appropriation by the 3. What if B, the creditor, dies and he has heirs(C and D). What if A paid
creditor of the thing mortgaged in case of non-payment of the C 50,000.00. C cannot release the corresponding 50% of the
principal obligation within the stipulated period
mortgage property. Again because of the indivisible nature of
mortgage or pledge.
In the case at bar, THE MEMORANDUM OF AGREEMENT AND THE DACION IN
PAYMENT CONTAIN NO PROVISIONS FOR FORECLOSURE PROCEEDINGS NOR Also emphasized in the same article, if for example the thing was mortgaged or
REDEMPTION. Under the Memorandum of Agreement, the failure by Sps pledged, for example 100,000.00. What if there was a pledged ring worth
ONG to pay their debt within the one-year period gives ROBAN the right to 75,000.00 and a watch worth 25,000.00. Same rule applies. Even if A has
enforce the Dacion in Payment transferring to it ownership of the properties already paid 25,000 to B, A cannot ask for the return of the watch because
covered by the same. ROBAN, in effect, automatically acquires ownership of again, contracts of pledge and mortgage are indivisible.
the properties upon Sps ONG’s failure to pay their debt within the stipulated
period.
It is a different thing if first, A borrowed from B 75,000 delivering the ring as
security. Subsequently A borrowed another 25,000 from B delivering a watch as
In a true dacion en pago, the assignment of the property extinguishes the security. If A paid the 75,000, remember that the ring was constituted as
monetary debt. In the case at bar, the alienation of the properties was by security only for this obligation, so if such amount was paid, then A can seek for
way of security, and not by way of satisfying the debt. The Dacion in Payment the return of the ring because these are two separate obligation.
did not extinguish Sps ONG’s obligation On the contrary, under the
Memorandum of Agreement executed on the same day as the Dacion in Those are the scenarios contemplated under Art. 2089.
Payment, petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year. Article 2090. The indivisibility of a pledge or mortgage is not affected by the
fact that the debtors are not solidarily liable. (n)
So again take note of the distinction of between Pactum Commissorium and
Dacion en Pago
So you should already know that solidarity is different from indivisibility.
Indivisibility refers to subject or object while solidarity or joint refers to the
What is the effect if we have a pactum commissorium? What is considered void juridical tie existing between the parties. So it does not mean that just because
is only the stipulation of automatic appropriation. The pledge and mortgage the tie between the parties is solidary it is divisible or when they are jointly
itself will still be valid, provided all the elements required for its validity are liable it is divisible. Again these are not the same.
present. It can still be enforced, again provided that all the required elements
for its validity are present. What is void is merely the automatic appropriation
or forfeiture of property in favor of the creditor. Which means the remedy of
the creditor is to foreclose the property and sell it to a public auction. Article 2091. The contract of pledge or mortgage may secure all kinds of
obligations, be they pure or subject to a suspensive or resolutory condition.
Article. 2089. A pledge or mortgage is indivisible, even though the debt may (1861)
be divided among the successors in interest of the debtor or of the creditor.
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This present action was brought by the sheriff against Go Juna and Pedro
Martinez to determine the rights of the parties.
Article 2092. A promise to constitute a pledge or mortgage gives rise only
to a personal action between the contracting parties, without prejudice to Pedro Martinez alleged as a defense that the pledge which said document
the criminal responsibility incurred by him who defrauds another, by was intended to constitute had not been made effective by delivery of the
offering in pledge or mortgage as unencumbered, things which he knew property pledged, as required by article 1863 of the CC, and therefore, there
were subject to some burden, or by misrepresenting himself to be the existed no preference in favor of Go Juna.
owner of the same. (1862)
Court: ruled in favor of Pedro Martinez. An appeal was taken therefrom.
So for example sa pledge, for its validity the thing must be delivered to the Issue: WON there was a pledge.
pledgee/creditor. So what if there is only a promise to enter into pledge or
mortgage? For example there is a promise to enter into a pledge but the thing Held: No. The conclusion of the court below that the property was not
was not yet delivered, that would still be considered a valid contract, a delivered in accordance with the provisions of article 1863 of the CC is
consensual contract. But such could not be considered a pledge because of the sustained by the proofs. It appears, however, that the document of pledge is a
absence of delivery. It is only a consensual contract with a promise to constitute public document which contains an admission of indebtedness. In other
a pledge. That is nevertheless enforceable but what we have there is only a words, while it is intended to be a pledge, it is also a credit which appears in a
personal action against the promisor. Unlike if you have already the essential public document. Article 1924 (3)(a), is therefore applicable; and, said public
requisites for a valid pledge or mortgage then you could have real action against document antedating the judgment of defendant Martinez, takes preference
the property covered by the said contracts of pledge or mortgage. A promise to thereover.
constitute a contract of pledge or mortgage if accepted gives rise only a
personal right binding upon the parties and does not create a real right over As the validity of the indebtedness of Aniversario. The validity of that
the property. Remember these two: personal right against a specific person and document in so far as it shows an indebtedness have not, however, been
real right against the whole world. What exist in this instance is only a right of determined. Anniversario is not a party to this action. No judgment can be
action to compel the fulfillment of the promise but there could be as yet no rendered affecting her rights or liabilities under said instrument. Otherwise, it
valid pledge or mortgage in the absence of its essential requisites. It is also would be wholly unjust. That would be to require her to pay a debt which has
referred in 2092 the right to compel in relation to such promise. Recall your not only not been shown to be enforceable against her but which, as a
Revised Penal Code where estafa may be committed by a person who pretends witness for the defendant Martinez on the trial of this cause, she expressly
to be the owner of a real property and pledges or mortgages the same, and and vehemently repudiated as a valid claim against her.
turns out that he is not the owner, or when he is the owner and represents that
it is unencumbered, free from liens and encumbrances, then pledged or
mortgaged the same to creditor/pledgee, but it turns out that it was already SC emphasized the requirement of delivery for a valid contract of pledge.
sold to a 3rd party. With such instance, he can be liable for estafa under the RPC.
Notice also that there was this document of credit which was a public
February 7, 2017 document. Nonetheless, in the absence of delivery there could be no valid
pledge.
B. Provisions Applicable Only to Pledge
A pledge of personal property to secure an indebtedness is without force or
Art. 2093. In Addition to the requisites prescribed in 2085, it is necessary, in effect UNLESS the property pledged is delivered to the pledgee or some third
order to constitute the contract of pledge, that the thing pledged be placed in person agreed upon by the parties.
the possession of the creditor, or of a third person by common agreement.
In this case, although we have a public document, it may only b considered as
In pledge and mortgage, aside from the essential element of consent, object, an evidence of indebtedness BUT the pledge would still eb considered as VOID
and consideration, we emphasize also the essential requisites under 2085— for failure of delivery.
2085. The following requisites are essential to the contracts of pledge and As an effect of such pledge in a public instrument, such debt is preferred over a
mortgage: judgment secured against the pledger subsequent to the date of the said public
instrument.
1. That they be constituted to secure the fulfilment of a principal
obligation When talking about delivery, as a general rule, we are talking about actual
2. That the pledger or mortgagor be the absolute owner of the possession. Thus, there must be ACTUAL DELIVERY of the personal property to
thing pledged or mortgaged; which the creditor will hold possession of the thing, or to a third person by
3. that the persons constituting the pledge or mortgage have the agreement.
free disposal of their property, and in the absence thereof, that
they be legally authorized for the purpose; SYMBOLIC/CONSTRUCTIVE DELIVERY
In relation to pledge, we have the additional essential requisite which is Can you still have a valid contract of pledge even if there was no actual
DELIVERY. Meaning, pledge is a real contract since delivery is required for its delivery? YES. When talking of pledge, it does not only cover personal
perfection wherein the property itself must be placed in the possession of the properties, but it also involves intangible properties evidenced by a document
creditor. In the absence of such delivery no valid contract of pledge is entered or incorporeal rights evidenced by documents.
into.
Example: goods which are covered by Warehouse Receipts. As evidence of the
JOSE McMICKING vs. PEDRO MARTINEZ and GO goods being stored in the warehouse, the warehouseman issues a warehouse
G.R. No. L-5219 February 15, 1910 receipt. If said goods will be pledged to the creditor, instead of delivering the
goods to the creditor, and the creditor storing it back to the sid warehouse,
Facts: Some time during the year 1908, Pedro Martinez obtained judgment in what is instead delivered to the creditor is the warehouse receipt. By virtue
the CFI against one Maria Aniversario. Thereafter, execution was issued upon thereof, the delivery of the warehouse receipt will be sufficient to give rise to a
said judgment and the sheriff levied upon a pailebot, Tomasa, alleged to be perfected contract of pledge.
the property of said Maria Aniversario. Thereupon, Go Juna intervened and
claimed a lien upon said boat by virtue of a pledge of the same to him by the Art. 2094. All movables which are within commerce may be pledged, provided
said Maria Aniversario made on the 27th day of February, 1907, which said they are susceptible to possession.
pledge was evidenced by a public instrument bearing that date.
VALID SUBJECT MATTER IN PLEDGE
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Personal property. Things which are valid subject of pledge are those within products. Any doubt as to whether the CTDs were delivered as payment for
commerce of men and susceptible of possession. the fuel products or as a security has been dissipated and resolved in favor of
the latter by petitioner's own authorized and responsible representative
You could have incorporeal rights as subject of pledge under 2095— himself.
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, bills of Under the Negotiable Instruments Law, an instrument is negotiated when it is
lading, shares of stock, bonds, warehouse receipts, and similar documents transferred from one person to another in such a manner as to constitute the
may also be pledged. The instrument proving the right pledged shall be transferee the holder thereof, 21 and a holder may be the payee or indorsee of
delivered to the creditor, and if negotiable, must be indorsed. a bill or note, who is in possession of it, or the bearer thereof. 22 In the
present case, however, there was no negotiation in the sense of a transfer of
Aside from warehouse receipts, you could also have negotiable instruments, the legal title to the CTDs in favor of petitioner in which situation, for obvious
bills of lading, bonds, etc. as valid subject matters of pledge. reasons, mere delivery of the bearer CTDs would have sufficed. Here, the
delivery thereof only as security for the purchases of Angel de la Cruz could at
Take note that the subject of a pledge are not the document itself but the the most constitute petitioner only as a holder for value by reason of his lien.
incorporeal rights covered by the said documents. Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
REQUIREMENTS FOR A PLEDGE TO BIND THIRD PERSONS subsequent disposition of such security, in the event of non-payment of the
principal obligation, must be contractually provided for.
Art. 2096. A pledge shall not take effect against third persons if a description
of the thing pledged and the date of the pledge do not appear in a public Where the holder has a lien on the instrument arising from contract, he is
instrument. deemed a holder for value to the extent of his lien. As such holder of
collateral security, he would be a pledgee but the requirements therefor and
Requisites for a pledge to bind third persons: the effects thereof, not being provided for by the NIL, shall be governed by
the Art. 2095 and Art. 2096 of the Civil Code on pledge of incorporeal rights.
1. There must be a description of the thing pledged;
2. The date of the pledge must appear on a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
Why is it that the pledge must describe the thing pledge, as well as the date? factual findings of respondent court quoted at the start of this opinion show
that petitioner failed to produce any document evidencing any contract of
So that it would not be easy for the pledger to pledge the thing several times pledge or guarantee agreement between it and Angel de la
since the contract of pledge actually discloses such information. Cruz. Consequently, the mere delivery of the CTDs did not legally vest in
petitioner any right effective against and binding upon respondent bank. The
IMPORTANT: It must be in a public instrument. Therefore, it must be duly requirement under Article 2096 aforementioned is not a mere rule of
notarized. Take note that there must also be delivery to the creditor of the adjective law prescribing the mode whereby proof may be made of the date
subject matter. When such details are in a public instrument, remember that of a pledge contract, but a rule of substantive law prescribing a condition
you subscribe and swear to the truthfulness of what is indicated therein. without which the execution of a pledge contract cannot affect third persons
adversely.
What is the effect if this requirement is not complied with?
CALTEX, INC, vs.CA and SEBTC What is the objective of this requirement? Essentially, it is to forestall fraud on
G.R. No. 97753 August 10, 1992 the part of the debtor who will attempt to conceal his properties from creditors
by alleging that his properties are already subject of a pledge.
Facts: Security Bank, a commercial banking institution issued 280 certificates Art. 2097. With the consent of the pledgee, the thing pledged may be
of time deposit (CTDs) in favor of Angel dela Cruz who deposited with herein alienated by the pledger or owner, subject to the pledge. The ownership of
defendant the aggregate amount of P1,120,000.00. Angel dela Cruz delivered the thing pledged is transmitted to the vendee or transferee as soon as the
the said certificates of time (CTDs) to Caltex in connection with his purchased
pledgee consents to the alienation, but the latter shall continue in possession.
of fuel products from the latter. Subsequently, Angel dela Cruz negotiated and
obtained a loan from defendant bank. On the same date, said depositor
In pledge, there is no transfer of ownership. It is merely a lien over the thing; it
executed a notarized Deed of Assignment of Time Deposit which surrenders
is merely an encumbrance. It does not dispossess the pledger of the ownership
to defendant bank full control of the CTD and to apply the said time deposits
over the thing as he still remains to be the owner.
to the payment of whatever amount due upon the maturity of the loan.
However, 2097 provides a condition that the pledgee must consent to the
SEBTC received a letter from herein plaintiff formally informing it of its alienation.
possession of the CTDs in question and of its decision to pre-terminate the
same. Accordingly, defendant bank rejected the plaintiff's demand and claim Remember, possession is in the hands of the creditor-pledgee. If there is a sale,
for payment of the value of the CTDs. there is a valid contract of sale and there is no need for a consent under 2097.
BUT to bind the pledgee with regard to the sale, you must give such consent.
The loan of Angel dela Cruz with SEBTC matured and fell due. The latter set-
off and applied the time deposits in question to the payment of the matured In the absence of the consent of the pledgee on the sale and subsequent
loan. In view of the foregoing, plaintiff filed the instant complaint, praying transfer of ownership, then he could not assert ownership over the said
that defendant bank be ordered to pay it. property subject of the pledge. Moreover, this is also relevant in the sense that
even if there ahs already been a sale, the rights of the pledgee would still
prevail over the rights of the buyer, PROVIDED that there is compliance with the
Issue: Who has the better right between Caltex and Security Bank in the requirement under 2095 (in a public instrument, c the date of the pledge, as
CTDs? well as the description of the thing pledged.
Held: Caltex. Unfortunately for petitioner, although the CTDs are bearer ESTATE OF GEORGE LITTON vs. CIRIACO B. MENDOZA and COURT OF
instruments, a valid negotiation thereof for the true purpose and agreement APPEALS
between it and De la Cruz, as ultimately ascertained, requires both delivery
and indorsement. For, although petitioner seeks to deflect this fact, the CTDs
were in reality delivered to it as a security for De la Cruz' purchases of its fuel
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G.R. No. L-49120 June 30, 1988 To allow the assignor, in this case Tan, to dispose or alienate the security
without notice and consent of Litton, the very purpose of such pledge is
rendered nugatory.
Facts: Mendoza issued two checks in favour of Tan. Tan had the two checks
discounted but were later returned with words ‘stop payment’. It appears it
It is also very important to note that Mendoza was already aware of the deed of
was ordered by Mendoza for failure of the spouses to deposit sufficient funds
assignment, which is actually a pledge in favor of Litton. Private respondent is
for the check issued by the spouses in his favour.
estopped from entering a compromise agreement involving the same litigated
credit without notice to and consent of the assignee because of knowledge on
Tan sued Mendoza while the spouses brought an action for interpleader for his part.
not knowing whom to pay. Pendente lite, Tan assigned in favour of Littion, Sr
his litigatious credit (in action of spouses) against Mendoza, duly submitted to Considering that this was already subject of the pledge, you could also relate
the court, with notice to the parties. this with what you have already learned under Obligations and Contracts that
payment must be made to the creditor at the time of the payment for a valid
Mendoza entered into Compromise Agreement with Tan wherein the latter extinguishment of the obligation.
recognized that his claims against Mendoza had been settled and because of
that, both waives any claim against the other; with a provision that it no way RIGHTS AVAILABLE TO THE PLEDGEE
affects Tan’s right to go against the spouses.
Art. 2098. The contract of pledge gives a right to the creditor to retain the
thing in his possession or in that of a third person to whom it has been
Mendoza filed MFR saying that there was the compromise agreement which
delivered, until the debt is paid.
absolved him from liability.
Alright the right to retain b the pledge of the thing subject to pledge.
Tan opposed this saying the Compromise agreement was null and void Remember sa commudatum , no right to retain even if meron pang obligation
because of the deed of assignment executed in favour of Litton, Sr.; he says except hidden flaws. But here the pledgee has the right to retain the thing as
that with such, he has no more right to alienate said credit; long as the debt has not been paid and once the obligation has been paid the
pledge has now the obligation to return the thing to the pledgor,
Issue: WON there was a valid compromise. notwithstanding that the debtor has already contracted another debt (ex.
Jewelries were delivered to secure the payment of a 100,000 obligation. Now
subsequently nangutang nanaman si debtor ng another 50,000 pesos,
Held:NO. The validity of pledge/guaranty in favour of Liiton has not been nabayaran na ni debtor yung 100,000 pesos secured by the jewelry. In this case
questioned. The deed of assignment fulfils the requirements of a valid pledge since there is already payment , the pledge has the obligation to return the
or mortgage. jewelry to pledgor he cannot use as a ground na hindi ko pa esauli kasi may
utang kappa na 50,000 pesos. Pwede ang gawin nila is they will enter into
Although it is true that Tan may validly alienate the litigatious credit as ruled another contract of pledge wherein the 50,000 will be secured by that jewelry.
by the appellate court, citing Article 1634 of the Civil Code, said provision But unless it has been stipulated that that thing pledge is subject to another
should not be taken to mean as a grant of an absolute right on the part of the obligation then upon full payment of the obligation to which the thing secures
assignor Tan to indiscriminately dispose of the thing or the right given as then the pledge should return the thing.
security. The Court rules that the said provision should be read in consonance
with Article 2097 of the same code. Although the pledgee or the assignee, Under 2098, the pledgee has the right to possess the thing. Once the debt has
Litton, Sr. did not ipso facto become the creditor of private respondent been paid, he has the obligation to return to the pledger the thing pledged
Mendoza, the pledge being valid, the incorporeal right assigned by Tan in notwithstanding that the debtor contracts another debt.
favor of the former can only be alienated by the latter with due notice to and
consent of Litton, Sr. or his duly authorized representative. To allow the Take note, for a valid pledge, you must secure a principal obligation. If the
assignor to dispose of or alienate the security without notice and consent of principal obligation has already been fully paid, the pledgee must return the
the assignee will render nugatory the very purpose of a pledge or an property. Even if she still has another debt, UNLESS if they enter into another
assignment of credit. contract stipulating that the same property will now be used to secure the
second obligation.
Moreover, under Article 1634, the debtor has a corresponding obligation to
The pledgee cannot say that he will continue to retain it once the principal
reimburse the assignee, Litton, Sr. for the price he paid or for the value given
obligation secured by the thing pledged has already been fulfilled.
as consideration for the deed of assignment. Failing in this, the alienation of
the litigated credit made by Tan in favor of private respondent by way of a
RIGHT TO RETENTION--
compromise agreement does not bind the assignee, petitioner herein.
Limited only to the principal obligation for which the pledge was created.
Here, there was a deed of assignment executed by Tan in favor of Litton, the Art. 2099. The creditor shall take care of the thing pledged with the diligence
subject if which is the credit of Mendoza in favor of Tan. Even if they executed a of a good father of a family; he has the right to the reimbursement of the
deed of assignment, it was really for the purpose of securing or guaranteeing expenses made for its preservation, and is liable for its loss or deterioration, in
Tan’s obligation in favor of Litton. conformity with the provisions of this code.
The validity of such pledge is not in question. Such deed fulfills the requisite for This refers to the obligation on the part of the creditor to take good care of the
a valid pledge or mortgage. thing with the diligence of a good father of a family.
After the execution of the deed of assignment, Mendoza and Tan entered into a Remember, there is no transfer of ownership to the pledgee, so he cannot just
compromise agreement. Remember, Tan has already pledged the credits due sue it in any manner that he would want to. Not being the owner thereof, he
from Mendoza. With that, we apply article 2097. has to subsequently return it. In the mean time, he has to take good care of it.
Although the pledgee, Litton, did not ipso facto become the creditor of If the thing requires preservation, expenses should be advanced by the pledgee
Mendoza, the pledge being valid, the incorporeal right assigned by tan in favor but he is entitled to reimbursement.
of Litton can only be alienated by tan with due notice and consent of Litton or
his duly authorized representative, none of which is present in this case. Art. 2100. The pledgee cannot deposit the thing pledged with a third person,
unless there is a stipulation authorizing him to do so.
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The pledgee is responsible for the acts of his agents or employees with respect Art. 2104. The creditor cannot use the thing pledged, without the authority of
to the thing pledged. the owner, and if he should do so, or should misuse the thing in any other
way, the owner may ask that it be judicially or extrajudicially deposited. When
General Rule: Another obligation on the part of the creditor-pledgee: he cannot the preservation of the thing pledged requires its use, it must be used by the
deposit the thing to a third person. creditor but only for that purpose.
Exception: if there is a stipulation authorizing him to do so. What is being entrusted to the creditor-pledgee is the possession of the thing.
The pledgee shall be responsible for the acts of his agents or employees since General rule: The pledgee cannot use the thing without consent or permission
their acts, in legal effect, are also deemed his acts. of the pledgor (similar rule with deposit). The same rule applies with the fruits,
accessions, and accessories of the thing pledged.
Art. 2101. The pledger has the same responsibility as a bailor in commodatum
in the case under 1951. Exception: If the use of the thing is allowed for a certain way, then the pledgee
shall use the thing only in that way.
Recall 1951—
If, however, it uses the thing in any other manner different from what they
Art. 1951. The bailor who, knowing the flaws of the thing loaned, does not had stipulated, what is the remedy of the pledgor?
advise the bailee of the same, shall be liable to the latter for the damages
which he may suffer by reason thereof. He may ask that it be judicially or extrajudicially deposited, NOT demand he
return of the thing pledged.
The pledgee has the right to retain the thing until the pledgor reimburses him
for the damages that he has suffered. When do you avail of the right to have the thing deposited?
In case of a pledge of animals, their offspring shall pertain to the pledgor or (1) When creditor uses thing pledged without authority of the owner;
owner of the animals pledged, but shall be subject to the pledge, if there is no (2104)
stipulation to the contrary. (2) When creditor misuses the thing in any other way; (2104)
(3) When thing pledged is in danger of being lost or impaired because of
Assuming that the thing pledged earns interest, dividends, or shares of stocks, the negligence or willful act of the pledgee (2106)
who shall own these? Still, it is the pledgor being the owner of the thing. To the
owner belongs the __ accession or accessory. Art. 2105. The debtor cannot ask for the return of the thing pledged against
the will of the creditor, unless and until he has paid the debt and its interest,
Under 2102, the pledgee is given the right to apply these interests or dividends with expenses in a proper case.
in payment of the loan or obligation. In effect, these interests or dividends
would still redound to the benefit of the owner-pledgor to the extent that his This emphasizes the rule that thing will not be returned unless there has been
obligation would be reduced, or extinguished. full payment. The debtor cannot ask for the return of the thing unless the debt
has already been paid.
How about animals? Again, there is no transfer of ownership so the pledgor-
owner continues to own including the fruits or the offspring of animals. This 2104 does not demand the return of the thing but only to have it deposited.
would therefore mean that animals are personal properties which could be Therefore, the only reason for the return of the thing is the extinguishment of
the subject of a pledge. the obligation.
Under 2102 said offspring of the animals can still be subject to the pledge if
Art. 2106. If through the negligence or willful act of the pledgee, the thing
there is no stipulation to the contrary.
pledged is in danger of being lost or impaired, the pledgor may require that it
be deposited with a third person.
Art. 2103. Unless the thing pledged is expropriated, the debtor continues to
be the owner thereof.
This is the third instance wherein the thing may be deposited.
Nevertheless, the creditor may bring the actions which pertain to the owner
Cannot demand for the return of the thing, but the thing will only be deposited
of the thing pledged in order to recover it from, or defend it against a third
to a third person. This is in relation to the duty of the pledgee to take care of
person.
the thing with the diligence of a good father of a family.
This is till in line with the principle that in pledge there is no transfer of 2106 and 2104 provide for the instances wherein the pledgee can demand that
ownership. In this instance, what if the thing pledged is expropriated? the thing be deposited.
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DISTINGUISH 2106 FROM 2107 Neither the acceptance by the pledger or owner nor the return of the thing
pledge is necessary, the pledgee becoming a depositary.
2106 2107
As to existence With the fault of Without the fault This is an instance wherein even if the pledgee continues to be in possession of
of fault pledgee of pledgee the thing pledge, but the pledge is already deemed extinguished. Remember a
As to remedy Deposit the thing Pledgor may pledge is a personal right on the part of the pledgee which he can waive. Here,
pledged with a demand the return the pledge makes a statement in writing that he renounces or abandons the
third person of the thing pledge.
pledged, offering
in place of the
thing another thing
in pledge which is Art. 2109. If the creditor is deceived on the substance or quality of the thing
of the same kind pledged, he may either claim another thing in its stead, or demand immediate
and not of inferior payment of the principal obligation. (n)
quality
Requisites for 2107 to apply: Art. 2111. A statement in writing by the pledgee that he renounces or
abandons the pledge is sufficient to extinguish the pledge. For this purpose,
(1) The pledgor has reasonable grounds to fear the destruction or neither the acceptance by the pledgor or owner, nor the return of the thing
impairment of the thing pledged; pledged is necessary, the pledgee becoming a depositary. (n)
(2) No fault on the part of the pledgee;
(3) Pledgor is offering in place of the thing another thing in pledge which
To apply 2111, it must be an abandonment or renunciation in writing. Verbal is
is of the same kind and not of inferior quality; and
not applicable, although it is not required to be in a public instrument. In fact, it
(4) That the pledgee does not choose to exercise his right to cause the
is not required even that the pledger be notified of such abandonment or
thing pledged to be sold at a public auction (2108).
renunciation. The pledge will be deemed extinguished even if the pledgee
remains in possession of the thing pledged.
Art. 2108. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may cause the
Since wala nang pledge, what would be the obligation here of the pledgee? He
same to be sold at a public sale. The proceeds of the auction shall be a
would be made as a depositary subject to the obligations of the depositary.
security for the principal obligation in the same manner as the thing originally
What is deemed abandoned here? It is only the pledge, to extinguish the
pledged.
pledge, not necessarily the principal obligation, unless otherwise stipulated.
The ground under 2107 and 2108 are the same. However, in 2108 does not
Art. 2112. The creditor to whom the credit has not been satisfied in due time,
provide that the pledgor demand the return of the thing in substitute of
may proceed before a Notary Public to the sale of the thing pledged. This sale
another thing. Rather, the pledgee is given the right to cause the thing pledged
shall be made at a public auction, and with notification to the debtor and the
to be sold at a public sale.
owner of the thing pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not sold, a second
Under 2108, the thing pledges is in danger of destruction, impairment or
one with the same formalities shall be held; and if at the second auction there
diminution in value, still, without the fault of the pledgee. However, under
is no sale either, the creditor may appropriate the thing pledged. In this case
2108, the pledgee has the right to sell thing at the auction
he shall be obliged to give an acquittance for his entire claim. (1872a)
How can we reconcile 2110 and 2108? Which is preferred? 2018, kasi sabi dun
sa 2107, without prejudice of the right of the pledgee under the provisions of 2112 provides for the procedure to be observed by the creditor when he
the following article. decides to sell the thing, when the obligation becomes due and demandable,
and the debtor fails to pay his obligation. Here, the debtor is given the right to
see the thing pledged at the public auction.
Art. 2110. If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary shall be
Take of the requirement here that the pledgee must notify the owner of the
void.
thing pledge. It is not sufficient that there is a public auction. There must be
notice as well, to the debtor and the owner of the thing pledge as provided
If subsequent to the perfection of the pledge, the thing is in the possession of
under 21112.
the pledgor or owner, there is a prima facie presumption that the same has
been returned by the pledgee. This same presumption exists if the thing
The sale is conducted by a notary public. It is extrajudicial in nature. Since it is a
pledged is in the possession of a third person who has received it from the
public auction, the people may bid, the highest bidder is given the thing pledge
pledgor or owner after the constitution of the pledge. (n)
and the proceeds will be for the payment of the obligation.
The right of the pledgee to have the thing sold at the public auction as provided However, if at the first public auction the thing is not sold, to which there is only
in 2108 is superior than the right of the pledgor provided in 2107 to demand the one bidder, the creditor-pledgee himself, there must be a second public
return of the thing in substitute of another thing. Therefore, the pledgor can auction. And if the thing is not yet sold, or you only have the creditor-pledgee as
only exercise his right under 2107 if the pledgee does not exercise his right to the only bidder, this time the said pledgee may appropriate the thing in
sell the thing at the public auction as provided in 2108. To which he debtor may payment of the obligation.
now demand the return of the thing, subject that he offers something in
substitution. There is no pactum commissorium here, because there is no automatic
appropriation.
Take note that in 2108, if the pledgee decides to sell the property being sold, it
will not yet extinguish the obligation. Why? Because the proceeds would then Formalities under 2112:
be used or acts as a security for the principal obligation.Kasi di pa man ito due
and demandable.Bakit man ito binenta?Kasi in danger of destruction, 1. debt is due and unpaid
impairment or diminution in value. So ibenta nalang and it will act as a security, 2. Sale is made in a public auction
because the obligation is not yet due. The pledgee will hold the proceeds in the 3. There must notice to the owner and the pledgor stating the amount
meantime. due
4. The sale must be made in the intervrntion of a notary public.
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If you look at 2112, it only requires notice to the pledger and owner. It does not against a third person.
require posting of the notice of sale or publication. It is different when it comes
to the extrajudicial foreclosure of mortgage. Notice to the pledgor and owner is
As to Novation. Neither did petitioner acquire the shares by virtue of a
sufficient.
novation of the contract of pledge. Novation is defined as "the
extinguishment of an obligation by a subsequent one which terminates it,
LIM TAY vs. CA either by changing its object or principal conditions, by substituting a new
debtor in place of the old one, or by subrogating a third person to the rights
Facts: Respondent-Appellee Sy Guiok secured a loan from Lim Tay payable of the creditor." 26 Novation of a contract must not be presumed. "In the
within 6 months. To secure the payment of the aforesaid loan and interest absence of an express agreement, novation takes place only when the old and
thereon, Respondent Guiok executed a Contract of Pledge in favor of Lim Tay the new obligations are incompatible on every point." 27
whereby he pledged his 300 shares of stock in the Go Fay & Company Inc.,
Respondent Corporation, for brevity's sake. On the same date, Alfonso Sy Lim In the present case, novation cannot be presumed by (a) respondents'
also secured a loan from Lim Tay payable in 6 months. To secure the payment indorsement and delivery of the certificates of stock covering the 600 shares,
of his loan, Sy Lim executed a "Contract of Pledge" covering his 300 shares of
(b) petitioner's receipt of dividends from 1980 to 1983, and (c) the fact that
stock in Respondent Corporation. respondents have not instituted any action to recover the shares since 1980.
Under said "Contracts of Pledge," Guiok and Sy Lim covenanted, inter alia, As to the Delivery of Shares. Respondents' indorsement and delivery of the
that: certificates of stock were pursuant to paragraph 2 of the contract of pledge
which reads:
3. In the event of the failure of the PLEDGOR to pay the amount within a
period of 6 months from the date hereof, the PLEDGEE is hereby 2. The said certificates had been delivered by the PLEDGOR endorsed in
authorized to foreclose the pledge upon the said shares of stock hereby blank to be held by the PLEDGEE under the pledge as security for the
created by selling the same at public or private sale with or without
payment of the aforementioned sum and interest thereon
notice to the PLEDGOR, at which sale the PLEDGEE may be the purchaser accruing.
at his option; and the PLEDGEE is hereby authorized and empowered at
his option to transfer the said shares of stock on the books of the
corporation to his own name and to hold the certificate issued in lieu This stipulation did not effect the transfer of ownership to petitioner. It was
thereof under the terms of this pledge, and to sell the said shares to issue merely in compliance with Article 2093 of the Civil Code, 29 which requires
to him and to apply the proceeds of the sale to the payment of the said that the thing pledged be placed in the possession of the creditor or a third
sum and interest, in the manner hereinabove provided; person of common agreement; and Article 2095, 30 which states that if the
thing pledged are shares of stock, then the "instrument proving the right
pledged" must be delivered to the creditor.
However, Respondent Guiok and Sy Lim failed to pay their respective loans
and the accrued interests. The petitioner filed a "Petition for Mandamus"
against Respondent Corporation, with the SEC entitled "Lim Tay versus Go Fay
INSULAR LIFE VS. YOUNG
& Company. Inc.
January 16, 2002
Issue: WON Lim Tay is the owner of the shares. Facts: Young obtained a short-term loan of P170,000,000.00 from Interbank
for the purchase of shares of stocks. Young's loan from Interbank became
due, causing his serious financial problem. Consequently, he engaged the
Petitioner's contention that he is the owner of the said shares is completely services of Asian Oceanic, a domestic company owned and controlled by
without merit. another petitioner, Insular Life, to look for possible sources of capital.
At the outset, it must be underscored that petitioner did not acquire Through the intervention of Asian Oceanic, Young and Insular Life entered
ownership of the shares by virtue of the contracts of pledge. Article 2112 of into a Credit Agreement. Under its provisions, Insular Life extended a loan to
the Civil Code states: Young in the amount of P200,000,000.00. To secure the loan, Young executed
on the same day a Deed of Pledge over 1,324,864 shares which represented
99.82% of the outstanding capital stock of the Bank. The next day, he also
The creditor to whom the credit has not been satisfied in due time, may executed a PN in favor of Insular. The Credit Agreement further provides that
proceed before a Notary Public to the sale of the thing pledged. This sale Insular Life shall have the prior right to purchase the Schedule I Shares
shall be made at a public auction, and with notification to the debtor and (owned by Young) and the Schedule II Shares (owned by the other
the owner of the thing pledged in a proper case, stating the amount for stockholders of the Bank).
which the public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and if at the On October 21, 1991, Young signed a letter stating that due to business
second auction there is no sale either, the creditor may appropriate the reverses, he shall not be able to pay his obligations under the Credit
thing pledged. In this case he shall be obliged to give an acquittance for Agreement between him and Insular Life. Forthwith, Insular Life instructed its
his entire claim. counsel to foreclose the pledge constituted upon the shares. The latter then
sent Young a notice informing him of the sale of the shares in a public auction
scheduled on October 28, 1991, and in the event that the shares are not sold,
There is no showing that petitioner made any attempt to foreclose or sell the
a second auction sale shall be held the next day, October 29.
shares through public or private auction, as stipulated in the contracts of
pledge and as required by Article 2112 of the Civil Code. Therefore, ownership On October 28, 1991, only Insular Life submitted a bid, hence, the shares
of the shares could not have passed to him. The pledgor remains the owner were not sold on that day. The next day, a second auction was held. Again,
during the pendency of the pledge and prior to foreclosure and sale, as Insular Life was the sole bidder. Since the shares were not sold at the two
explicitly provided by Article 2103 of the same Code: public auctions, Insular Life appropriated to itself, not only the original
1,324,864 shares, but also the 250,000 shares subsequently issued by the
Unless the thing pledged is expropriated, the debtor continues to be the Bank and delivered to Insular Life by way of pledge. Thus, Insular Life gave
owner thereof. Young an acquittance of his entire claim. Thereafter, title to the said shares
was consolidated in the name of Insular Life.
Nevertheless, the creditor may bring the actions which pertain to the Young and his associates filed with the RTC a complaint against the Bank,
owner of the thing pledged in order to recover it from, or defend it Insular Life and its counsel, Atty. Jacinto Jimenez, petitioners, for annulment
of notarial sale, specific performance and damages. The complaint
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alleges, inter alia, that the notarial sale conducted by petitioner Atty. Jacinto Very important provision. What is the effect of such sale? It will extinguish the
Jimenez is void as it does not comply with the requirement of notice of the principal obligation, whether the price of the sale more or less than the amount
second auction sale. due.
Issue: WON the foreclosure sale is valid. What happens if there is an excess, or if there is a deficiency?
Held: YES. Notably, the Deed of Pledge which secured the Credit Agreement
MANILA SURETY vs. RODOLFO R. VELAYO
between the parties, covered not only 1,324,864 shares which then
G.R. No. L-21069 October 26, 1967
constituted 99.82% of the total outstanding shares of petitioner Bank, but
also the 250,000 shares subsequently issued. Consequently, when Young
waived in his letter the period granted him under the said agreement and
manifested his inability to pay his obligation, the loan extended by petitioner Facts: Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed
Insular Life became due and demandable. Definitely, petitioners merely a bond for P2,800.00 for the dissolution of a writ of attachment obtained by
exercised the right granted to them under the law, which is to foreclose the one Jovita Granados in a suit against Rodolfo Velayo in the Court of First
pledge constituted on the shares, in satisfaction of respondent Young's loan Instance of Manila.
The Court of Appeals also erred in declaring that the auction sale is void since
petitioners failed to send a separate notice for the second auction. Article As "collateral security and by way of pledge" Velayo also delivered four pieces
2112 of NCC provides for the law applicable to the auction sale of jewelry to the Surety Company "for the latter's further protection", with
power to sell the same in case the surety paid or become obligated to pay any
Clearly, there is no prohibition contained in the law against the sending of one amount of money in connection with said bond, applying the proceeds to the
notice for the first and second public auction as was done here by petitioner payment of any amounts it paid or will be liable to pay, and turning the
Insular Life. The purpose of the law in requiring notice is to sufficiently apprise balance, if any, to the persons entitled thereto, after deducting legal expenses
the debtor and the pledgor that the thing pledged to secure payment of the and costs.
loan will be sold in a public auction and the proceeds thereof shall be applied
to satisfy the debt. When petitioner Insular Life sent a notice to Young Since the execution having been returned unsatisfied, the surety company
informing him of the public auction scheduled on October 28, 1991, and a was forced to pay P2,800.00 that it later sought to recoup from Velayo; and
second auction on the next day, October 29, in the event that the shares are upon the latter's failure to do so, the surety caused the pledged jewelry to be
not sold on the first auction, the purpose of the law was achieved. We thus sold, realizing therefrom a net product of P235.00 only. Thereafter and upon
reject respondents' argument that the term "second one" refers to a separate Velayo's failure to pay the balance, the surety company brought suit in the
notice which requires the same formalities as the first notice. Municipal Court. Velayo countered with a claim that the sale of the pledged
jewelry extinguished any further liability on his part under Article 2115 of the
Civil Code.
Art. 2113. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same terms as the highest Issue: WON Velayo is liable for the balance.
bidder.
Held: No.
The pledgee may also bid, but his offer shall not be valid if he is the only
bidder. (n)
Article 2115, in its last portion, clearly establishes that the extinction of the
principal obligation supervenes by operation of imperative law that the
Who can bid? Anybody – the public, the pledgee, even the pledgor.
parties cannot override: If the price of the sale is less, neither shall the creditor
be entitled to recover the deficiency notwithstanding any stipulation to the
The pledgor or owner should have a better right if he should offer the same
contrary.
terms as the highest bidder. So only for the same terms.
The pledgee or pledger may be allowed to bid but, not valid if he is the only The provision is clear and unmistakable, and its effect can not be evaded. By
bidder and related to article 2112. So if in the first auction sale, he is the only electing to sell the articles pledged, instead of suing on the principal
bidder, then there is no valid auction sale, a second may be conducted. If he obligation, the creditor has waived any other remedy, and must abide by the
remains to be the only bidder, then that is the time that he can appropriate the results of the sale. No deficiency is recoverable
thing for himself and apply the proceeds to the obligation.
Again, there is no pactum commissorium there because there is no automatic Q: How about the rule with regard to excess? What if the thing pledge is sold in
appropriation. excess of the principal obligation? what happens to the excess?
Art. 2114. All bids at the public auction shall offer to pay the purchase price at A: If the price of the sale is more than said amount, the debtor shall not be
once. If any other bid is accepted, the pledgee is deemed to have been entitled to the excess, unless it is otherwise agreed.
received the purchase price, as far as the pledgor or owner is concerned. (n)
Pwede may stipulation sa excess, pero sa deficiency, hindi pwede. Any
If you are the highest bidder, the rule is you at once, you pay in cash to the stipulation will be void to compel the creditor to hold a honest public sale.
pledgee or creditor.
Why is it that the pledgee is not allowed to demand the deficiency anymore?
The pledgee, however, may receive payment not in full or not in cash. But, as The foreclosure sale of the thing pledged is only one of the remedies available
far as the debtor or the owner of the thing pledged is concerned, the principal to the pledgee. He may also file an action for collection for sum of money. In
obligation is deemed extinguished, as well as the pledge. other words, he decides not to foreclose on the thing pledged.
In an action for collection for sum of money, he can have the thing pledged
attached. If he does so, he is not exercising his right as a pledgee. If the property
pledged will be attached and the court finds that the decbtor is liable , then that
Art. 2115. All bids at the public auction shall offer to pay the purchase price at
property will eb sold through an execution sale and the proceeds will eb used to
once. If any other bid is accepted, the pledgee is deemed to have been
pay off the obligation.
received the purchase price, as far as the pledgor or owner is concerned. (n)
What deos that mean? On the part of the pledgee, he has to discern. Mas
mabilis sa 2112, because it is an extrajudicial foreclosure. But he has to take
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into consideration if he can sell it, at the very least, equivalent to the principal The articles cited refer to the right of indemnity available to the said pledger
obligation. Kapag alanganin siya, he may choose to file a collection of sum of and whatever remedies the principal debtor can present against the creditor, as
money because he can really collect the amount form the debtor, to which he well as the defenses he can interpose against the creditor.
will just attach the property. Pag benta niyan sa execution sale, pwede niya
pang mahabol yung interest.
Art. 2116. After the public auction, the pledgee shall promptly advise the Art. 2121. Pledges created by operation of law, such as those referred to in
pledgor or owner of the result thereof. (n) articles 546, 1731, and 1994, are governed by the foregoing articles on the
possession, care and sale of the thing as well as on the termination of the
Dalawang notice – before the sale and after the public auction. You let the pledge. However, after payment of the debt and expenses, the remainder of
pledger know that the pledge was done according to law, to which the pledgor the price of the sale shall be delivered to the obligor. (n)
must be advised promptly. This is to enable him to take steps for the protection
of his rights if he has reasonable grounds to believe that the sale was not an What we have here is a legal pledge.
honest one on the part of the pledgor.
LEGAL PLEDGES—
Art. 2117. Any third person who has any right in or to the thing pledged may
satisfy the principal obligation as soon as the latter becomes due and Article 546 – Where a possessor in good faith may retain the property until he is
demandable. (n) reimbursed for the necessary and useful expenses of the owner of the property.
Right of the possessor in good faith is the same as that of a pledgee. He cannot
Who can discharge the principal obligation? The principal debtor makes the be ordered to return the thing until there is full payment or reimbursement.
obligation. Third persons can pay the obligation. Remember in obligation and The possessor in good faith may also sell the property if he is not paid the
contracts, who can compel the creditor to accept payment? Debtor, his heirs or necessary and useful expenses.
successors, assignees, and persons who have an interest in the obligation – that
would include a third person. Article 1731 – He who has executed work upon a moveable has a right to retain
it by way of pledge until he is paid. If he is not paid, he is given the right to sell
If a pledger, who is not the debtor, pays the obligation, he can compel the the thing at a public auction applying the law on pledge.
creditor to accept such payment, to which he can demand reimbursement from
the debtor. Article 1994 – On deposit. The depositary may retain the thing in pledge until
full payment of what may be due him by reason of the deposit.
Third person may be a person, who is not a debtor of the obligation, who has
any right to the thing pledged and pay the obligation when the same is due and Article 612 – Usufruct
demandable.
Article 1912 -1914 – Right to hold of the agent
Art. 2118. If a credit which has been pledged becomes due before it is
Article 1951—Excess will be returned to the debtor.
redeemed, the pledgee may collect and receive the amount due. He shall
apply the same to the payment of his claim, and deliver the surplus, should
there be any, to the pledgor. (n) Art. 2122. A thing under a pledge by operation of law may be sold only after
demand of the amount for which the thing is retained. The public auction shall
take place within one month after such demand. If, without just grounds, the
Here, for example, receivables. The debtor can pledge his receivables, and the
creditor does not cause the public sale to be held within such period, the
pledgee can collect the amount due. To which the pledgee will now be
debtor may require the return of the thing. (n)
obligated to apply the amount collected and received.
However, the creditor-pledgee may receive the amount due. In other words, it There has to be demand has to the amount for which the thing is to be
is not obligatory on his part to collect and receive the amount. He has right, but obtained.
not the obligation.
Demand is required because in pledge by operation of law or legal pledge, there
has to be a demand first to fix the period of payment. In contrast with
Art. 2119. If two or more things are pledged, the pledgee may choose which
conventional pledge, there is already a period for payment.
he will cause to be sold, unless there is a stipulation to the contrary. He may
demand the sale of only as many of the things as are necessary for the
After making the demand, and after fixing the period, if the sale is not made
payment of the debt. (n)
within the period stipulated in the demand, then the pledgee can sell the thing
in a public auction.
Let us say there are two things pledged for an amount loaned. Who has the
right to choose which of the two will be sold first? As soon as the debt becomes
Take note of the distinctions between 2122 and 2112.
due and demandable, and the debtor fails to pay, the creditor has the right to
sell the things, and to choose which of them will be sold first. But the creditor
The public auction shall take place within one month after such demand. If,
can only sell such property as equal to the amount of the obligation.
without just grounds, the creditor does not cause the public sale to be held
within such period, the debtor may require the return of the thing.
If for example one of the things pledged was sold for more than the amount of
the obligation, the creditor does not have to sell the other thing anymore, since
However, although the debtor may demand the return of the thing, his
it is already sufficient to cover the obligation. The creditor, then, would have
obligation is not yet extinguished.
the obligation to return the other thing pledge not sold to the debtor.
Art. 2123. With regard to pawnshops and other establishments, which are
Art. 2120. If a third party secures an obligation by pledging his own movable
engaged in making loans secured by pledges, the special laws and regulations
property under the provisions of article 2085 he shall have the same rights as
concerning them shall be observed, and subsidiarily, the provisions of this
a guarantor under articles 2066 to 2070, and articles 2077 to 2081. He is not
Title. (1873a)
prejudiced by any waiver of defense by the principal obligor. (n)
Pawnshop regulation Act is the primarily law with regards to pawnshops, and is
If you look at these articles, it does not cover the benefit of excussion or the
regulated by the Bangko Sentral ng Pilipinas.
benefit of remission. Said third person does not have the benefit of excussion or
the benefit of remission.
END OF SECOND EXAM COVERAGE
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REAL ESTATE MORTGAGE (1) WON private respondent spouses Celebrada and Abner Mangubat should be
ordered to pay petitioner DBP their loan obligation due under the mortgage
It is a contract whereby the debtor secures to the creditor the fulfillment contract executed between them and DBP.
of a principal obligation, specially subjecting to such security immovable (2) WON petitioner should reimburse respondent spouses the purchase price of
property OR real rights over immovable property which obligation shall the property and the amount of P11, 980.00 for taxes and expenses for the
be satisfied with the proceeds of sale of said property or rights in case relocation Survey.
the principal obligation is not complied with at the time stipulated.
This is one of the contracts of real security. HELD 1: YES
Considering that neither party questioned the legality and correctness of the
Characteristics: judgment of the court a quo, as affirmed by respondent court, ordering the
a) It is a contract of real security annulment of the deed of absolute sale, such decreed nullification of the
b) It is an accessory contract document has already achieved finality.
o Its existence and validity depends upon the principal obligation.
c) As a contract, it has to have the elements of consent, object and In its legal context, the contract of loan executed between the parties is entirely
consideration. different and discrete from the deed of sale they entered into. The annulment
o It may have a different consideration from the principal contract. of the sale will not have an effect on the existence and demandability of the
loan. One who has received money as a loan is bound to pay to the creditor an
o But even if it does not have a different consideration, it will still have equal amount of the same kind and quality.
the same consideration as that of the principal contract from which it
receives its life and without which it cannot exist as an independent The fact that the annulment of the sale will also result in the invalidity of the
contract, although the obligation is secured or incurred by a third mortgage does not have an effect on the validity and efficacy of the principal
person. obligation, for even an obligation that is unsupported by any security of the
debtor may also be enforced by means of an ordinary action. Where a mortgage
o So even if we have a third person that acts as a mortgagor who is is not valid, as where it is executed by one who is not the owner of the
allowed under Art. 2085, even if there is no separate consideration in property, or the consideration of the contract is simulated or false, the principal
favor of that third person-mortgagor, still such mortgage is valid obligation, which it guarantees, is not thereby rendered null and void. That
provided all the other elements are present. The consideration will be obligation matures and becomes demandable in accordance with the
that of the principal contract. It will be valid if the principal obligation is stipulations pertaining to it.
valid and cannot be avoided on the ground of lack of consideration.
Under the foregoing circumstances, what is lost is only the right to foreclose the
mortgage as a special remedy for satisfying or settling the indebtedness, which
DBP VS. CA and SPS. MANGUBAT is the principal obligation. In case of nullity, the mortgage deed remains as
(G.R. No. 110053, October 16, 1995) evidence or proof of a personal obligation of the debtor, and the amount due to
the creditor may be enforced in an ordinary personal action.
FACTS: On April 27, 1965, Pacifico Chica mortgaged the land to DBP to secure a
loan of P6, 000.00. However, he defaulted in the payment of the loan, hence HELD 2: DBP should reimburse the spouses for the purchase price but not for
DBP caused the extrajudicial foreclosure of the mortgage. taxes and expenses for relocation.
In the auction sale held on September 9, 1970, DBP acquired the property as
the highest bidder and was issued a certificate of sale on September 17, 1970 A contract, which the law denounces as void, is necessarily no contract
by the sheriff. Pacifico Chica failed to redeem the property, and DBP whatever, and the acts of the parties in an effort to create one can in no wise
consolidated its ownership over the same. bring about a change of their legal status.
On October 14, 1980, respondent spouses offered to buy the property for P18, As a general rule, if one buys the land of another, to which the latter is
599.99. DBP made a counter- offer of P25, 500.00 which was accepted by supposed to have a good title, and, in consequence of facts unknown alike to
respondent spouses. The parties further agreed that payment was to be made both parties, he has no title at all, equity will cancel the transaction and cause
within six months thereafter for it to be considered as cash payment. the purchase money to be restored to the buyer, putting both parties in status
quo.
On July 20, 1981, the deed of absolute sale, which is now being assailed herein,
was executed by DBP in favor of respondent spouses. Thereafter, respondent Thus, on both local and foreign legal principles, the return by DBP to
spouses applied for an industrial tree-planting loan with DBP. The latter respondent spouses of the purchase price, plus corresponding interest thereon,
required the former to submit a certification from the Bureau of Forest is ineluctably called for. However, despite that admission of respondent
Development that the land is alienable and disposable. However, on October spouses’ list of damages as evidence, the Court agrees with petitioner that the
29, 1981, said office issued a certificate attesting to the fact that the said same cannot constitute sufficient legal basis for an award of P4, 000.00 and P7,
property was classified as timberland, hence not subject to disposition. The loan 980.00 as reimbursement for land taxes and expenses for the relocation survey,
application of respondent spouses was nevertheless eventually approved by respectively. Respondent spouses prepared the list of damages extrajudicially
DBP in the sum of P140, 000.00, despite the aforesaid certification of the by themselves without any supporting receipts as bases thereof or to
bureau. substantiate the same. That list, per se, is necessarily self-serving and, on that
account, should have been declared inadmissible in evidence as the factum
To secure payment of the loan, respondent spouses executed a real estate probans.
mortgage over the land on March 17, 1982, which document was registered in
the Registry of Deeds pursuant to Act No. 3344. However, DBP did not release Notwithstanding that the mortgage is null and void since the mortgagor
the entire amount of the loan ostensibly because the release of the land from thereof was not the owner of the property. What could be the use of said Real
the then Ministry of Natural Resources had not been obtained. On July 7, 1983, Estate Mortgage? Does the REM still have relevance?
respondent spouses, as plaintiffs, filed a complaint against DBP in the trial court SC said that such mortgage would nevertheless be used as an evidence of the
seeking the annulment of the subject deed of absolute sale on the ground that obligation.
it belongs to the lands of the public domain.
Discussion:
RTC rendered judgment in favor of respondent spouses, annulling the deed of Here, there was no valid sale because the sale involved a timberland,
absolute sale. CA affirmed. which is an inalienable property of the public domain and not a valid subject
matter of a sale. By the nullity of said sale, ownership would not have
ISSUES: transferred to Sps. Mangubat here, and therefore, they could not have
executed a valid mortgage in favor of DBP. So null and void ang sale, null and
void din yung mortgage.
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However, the SC emphasized that the principal obligation of the contract (6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of
of loan supposedly secured by the REM is separate and distinct from the nullity similar nature, in case their owner has placed them or preserves them with the
of the sale. intention to have them permanently attached to the land, and forming a
permanent part of it; the animals in these places are included;
The fact that the sale will also result in the invalidity of the mortgage does
not have an effect on the validity and the efficacy of the principal obligation, for (7) Fertilizer actually used on a piece of land;
even an obligation that is unsupported by any security of the debtor may also
be enforced by means of an ordinary action. Why? Because in the end, (8) Mines, quarries, and slag dumps, while the matter thereof forms part of the
nakahiram parin nang pera yung Sps. Mangubat. So no valid mortgage but the bed, and waters either running or stagnant;
loan is nevertheless valid. The principal obligation, which it guarantees, is not
thereby rendered null and void by the nullity of the mortgage. (9) Docks and structures which, though floating, are intended by their nature
and object to remain at a fixed place on a river, lake, or coast;
What is lost is only the right to foreclose the mortgage as a special remedy
for satisfying or settling the indebtedness, which is the principal obligation. (10) Contracts for public works, and servitudes and other real rights over
While the mortgage is null and void, it remains as evidence or proof of a immovable property. (334a)
personal obligation of the debtor, and the amount due to the creditor may be
enforced in an ordinary personal action. SORIANO vs. SPOUSES GALIT
(G.R. No. 156295, September 23, 2003)
Additional characteristics of a mortgage aside from being accessory in nature,
it is: FACTS: Respondent Ricardo Galit contracted a loan from petitioner Marcelo
a) Subsidiary- similar to the other security contracts we have discussed. Soriano amounting to P480,000.00. This loan was secured by a REM over a
b) Unilateral- the obligation is only on the part of the creditor who must free parcel of land covered by OCT. No. 569. When respondent defaulted in his
the property from the encumbrance once the obligation is fulfilled. obligation, Soriano filed a complaint for sum of money against him with the RTC
of Balanga City.
Three kinds of Mortgages:
1. Voluntary Mortgage Upon failure of the respondent spouses Galit to file their answer, the trial court
A conventional mortgage agreed between the parties and declared the spouses in default and it thereafter rendered judgment in favor of
constituted with the will of the owner of the property of which it is petitioner Soriano ordering the respondents to pay. The judgment became final
created and executory. Deputy Sheriff Renato E. Robles levied on the following real
2. Legal Mortgage properties of the Galit spouses:
Such required by the law to be executed in favor of certain (1) A parcel of land covered by OCT No. T-569 (Homestead Patent
persons. No. 14692)
3. Equitable Mortgage (2)STORE/HOUSE – CONSTRUCTED on Lot No. 1103; and
Article 1602 gives the circumstances. Such equitable mortgage (3)BODEGA – constructed on Lot 1103.
lacks the proper formalities or other requisites of a mortgage
required by law. Nevertheless, it reveals the intention of the On December 23, 1998, petitioner emerged as the highest and only bidder with
parties to burden a real property as a security for a debt a bid price of P483,000.00. Thus, on February 4, 1999, Deputy Sheriff Robles
(inaudible) it’s nothing impossible or contrary to law. issued a Certificate of Sale of Execution of Real Property. On April 23, 1999,
petitioner caused the registration of the “Certificate of Sale on Execution of Real
Valid objects of a Real Estate Mortgage Property” with the Registry of Deeds.
Article 2124. Only the following property may be the object of a contract of 10 months from the time the Certificate of Sale on Execution was registered
mortgage: with the Registry of Deeds, petitioner moved for the issuance of a writ of
(1) Immovables; possession, which was granted by the RTC. This was, however, subsequently
(2) Alienable real rights in accordance with the laws, imposed upon nullified by the Court of Appeals because it included a parcel of land (OCT No. T-
immovables. 40785) which was not among those explicitly enumerated in the Certificate of
Nevertheless, movables may be the objects of a chattel mortgage. Sale issued by the Deputy Sheriff, but on which stand the immovables (the
(1874a) BODEGA and STORE/HOUSE) covered by the said Certificate. Petitioner
contends that the sale of these immovables necessarily encompasses the land
(1) Immovables; on which they stand.
(5) Machinery, receptacles, instruments or implements intended by the owner In this case, considering that what was sold by virtue of the writ of execution
of the tenement for an industry or works which may be carried on in a building issued by the trial court was merely the storehouse and bodega constructed on
or on a piece of land, and which tend directly to meet the needs of the said the parcel of land covered by Transfer Certificate of Title No. T- 40785, which by
industry or works; themselves are real properties of respondent spouses, the same should be
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regarded as separate and distinct from the conveyance of the lot on which they
stand. Also, under Art. 2124 what does the word “ONLY” mean?
These 2 objects mentioned are the only valid subject matters of a
(2) YES. No reason has been offered how and why the questioned entry was mortgage.
subsequently intercalated in the copy of the certificate of sale subsequently Meaning the list under said article is EXCLUSIVE.
registered with the Registry of Deeds. Absent any satisfactory explanation as to
why said entry was belatedly inserted, the surreptitiousness of its inclusion However, if what you have are movable properties, then what you have there is
coupled with the furtive manner of its intercalation casts serious doubt on the a chattel mortgage.
authenticity of petitioner’s copy of the Certificate of Sale. Thus, it has been held
that while a public document like a notarized deed of sale is vested with the In relation to Art. 2085, one of the essential requisites to the contract of
presumption of regularity, this is not a guarantee of the validity of its contents. mortgage is that the mortgagor must be the absolute owner of the thing
mortgaged, so:
It must be pointed out in this regard that the issuance of a Certificate of Sale is
an end result of judicial foreclosure where statutory requirements are strictly General Rule: Future property cannot be a valid subject matter of a mortgage.
adhered. Among these requirements is an explicit enumeration and correct Because if it is not yet in existence, how could one possibly own the same.
description of what properties are to be sold stated in the notice. An incorrect
title number together with a correct technical description of the property to be MENDOZA, also doing business under the name and style of ATLANTIC
sold and vice versa is deemed a substantial and fatal error, which results in the EXCHANGE PHILIPPINES, vs. CA, PNB. Et.al
invalidation of the sale. (G.R. No. 116710, June 25, 2001)
The certificate of sale is an accurate record of what properties were actually FACTS: Danilo D. Mendoza is engaged in the domestic and international trading
sold to satisfy the debt. The strictness in the observance of accuracy and of raw materials and chemicals. He operates under the business name Atlantic
correctness in the description of the properties renders the enumeration in the Exchange Philippines (Atlantic).
certificate exclusive. Thus, subsequently including properties, which have not
been explicitly mentioned therein for registration purposes under suspicious Sometime in 1978 he was granted by respondent PNB a 500,000.00 credit line
circumstances smacks of fraud. The explanation that the land on which the and a 1,000,000.00 Letter of Credit/Trust Receipt (LC/TR) line.
properties sold is necessarily included and, hence, was belatedly typed on the
dorsal portion of the copy of the certificate subsequently registered is at best a As security for the credit accommodations and for those that may
lame excuse unworthy of belief. thereinafter be granted, petitioner mortgaged to respondent PNB 3 parcels of
land with improvements; his house and lot and several pieces of machinery and
The appellate court correctly observed that there was a marked difference in equipment in his Pasig cocochemical plant.
the appearance of the typewritten words appearing on the first page of the
copy of the Certificate of Sale registered with the Registry of Deeds and those Petitioner executed in favor of respondent PNB 3 promissory notes covering the
appearing at the dorsal portion thereof. P500, 000.00 credit line. Petitioner made use of his LC/TR line to purchase raw
materials from foreign importers.
Underscoring the irregularity of the intercalation is the clearly devious attempt
to let such an insertion pass unnoticed by typing the same at the back of the On March 9, 1981, he wrote a letter to respondent PNB requesting for the
first page instead of on the second page which was merely half-filled and could restructuring of his past due accounts into a five-year term loan and for an
accommodate the entry with room to spare. additional LC/TR line of P2, 000,000.00. He reasoned that because of the
shutdown of his end-user companies and the huge amount spent for the
Discussion: expansion of his business, petitioner failed to pay to respondent bank his LC/TR
Here, the SC emphasized that in the foreclosure of a mortgage and the accounts as they became due and demandable. PNB Mandaluyong replied on
subsequent sale thereof, it must include an explicit enumeration and correct behalf of the respondent bank and required petitioner to submit documents:
description of what properties are sold. This must be stated in the notice of Audited Financial Statements for 1979 and 1980; Projected cash flow (cash in -
foreclosure. cash out) for 5 years detailed yearly; and the List of additional machinery and
equipment and proof of ownership thereof.
In fact, an incorrect title number together with a correct technical
description of the property to be sold and vice versa is deemed a substantial On September 25, 1981, petitioner sent another letter addressed to PNB Vice-
and fatal error, which results in the invalidation of the sale. Here, subsequently President Jose Salvador, regarding his request for restructuring of his loans. He
including properties, which have not been explicitly mentioned therein for offered respondent PNB the following proposals:
registration purposes under suspicious circumstances smacks of fraud. 1) The disposal his house and lot and a vacant lot in order to pay the
overdue trust receipts;
Also in this case, the land itself is separate from the building and vice 2) Capitalization and conversion of the balance into a 5-year term
versa. What was subject in the mortgage here is the storehouse and the loan payable semi-annually or on annual installments;
bodega, and hindi kasama yung land. SC emphasized that a mortgage of land 3) a new P2,000,000.00 LC/TR line in order to enable Atlantic
necessarily includes, in the absence of stipulation of the improvements thereon, Exchange Philippines to operate at full capacity.
buildings. But still a building by itself, like in this case a bodega and a
storehouse, may be mortgaged apart from the land on which it has been built. Fernando Maramag, PNB Executive Vice- President, disapproved the proposed
Such mortgage would be still a real estate mortgage for the building would still release of the mortgaged properties and reduced the proposed new LC/TR line
be considered an immovable property even if dealt with separately and apart P1,000,000.00. Petitioner claimed that he was forced to agree to these changes
from the land. and that the respondent PNB approved his proposal. He further claimed that he
and his wife were asked to sign 2 blank promissory note forms. And that they
What was sold by virtue of the writ of execution was merely the were made to believe that the blank promissory notes were to be filled out by
storehouse and bodega constructed on the parcel of land which by themselves respondent PNB to conform with the 5-year restructuring plan allegedly agreed
are real properties of respondent spouses, the same should be regarded as upon.
separate and distinct from the conveyance of the lot on which they stand.
Petitioner testified that respondent PNB allegedly contravened their verbal
(2) Alienable real rights in accordance with the laws, imposed upon agreement by affixing dates on the 2 subject promissory notes to make them
immovables. mature in 2 years instead of 5 years as supposedly agreed upon.
Rights over the immovables; right to use such property such as
usufruct. Upon their failure to make good of the said loans PNB extra-judicially foreclosed
It is not the property itself but your right over the property. the real and chattel mortgages, and the mortgaged properties were sold at
A real right over a real property can be a subject of a mortgage
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public auction to respondent PNB, as highest bidder, for a total of P3, that the said inventory of the store would constitute or form part of the
798,719.50. mortgage, it is still a valid subject matter thereof.
ISSUE: WON the foreclosure sale was proper. Also, it is an established rule that a mortgage constituted on an
HELD: YES immovable includes not only the land but also the buildings, machinery and
The court found out that PNB did not categorically agree to accessories installed at the time the mortgage was constituted as well as the
petitioner’s proposal to extend the credit line to five years. buildings, machinery and accessories belonging to the mortgagor, installed after
the constitution thereof. So even if you have machinery, which you can describe
On the substantive issue of mortgage: as a movable property, still, go back to what are considered as immovable
Petitioner did not present any proof as to when he acquired the subject properties under the law. If bolted yung movable, yung intention dyan,
movables and hence it is not to be believe that the same were "after acquired" magiging immovable na sya by destination.
chattels not covered by the chattel and real estate mortgages.
Pledge Real Estate Mortgage
In asserting its rights over the subject movables, respondent PNB relies on a Involves personal property Involves real properties
common provision in the 2 subject Promissory Notes which is clear, however Requires delivery for its perfection Does not require delivery for
that respondent bank is authorized, in case of default, to sell "things of value" perfection
belonging to the mortgagor "which may be on its hands for deposit or Pledgee has possession of the thing It is not required that the mortgagee
otherwise belonging to me/us and for this purpose." pledge will possess the real property
Extrajudicial foreclosure Judicial or extrajudicial foreclosure
Besides, the petitioner executed not only a chattel mortgage but also a real Pledgee has the right to receive the Such right is not available to the
estate mortgage to secure his loan obligations to respondent bank. fruits and apply the same to the mortgagee in the REM unless
obligation otherwise stipulated by the parties
A stipulation in the mortgage, extending its scope and effect to after-acquired
property is valid and binding where the after-acquired property is in renewal of, General Rule: The mortgagor retains possession of the property mortgaged as
or in substitution for, goods on hand when the mortgage was executed, or is security for the payment of the sum borrowed from the mortgagee.
purchased with the proceeds of the sale of such goods. The debtor merely subjects the property to a lien but ownership is not
parted with.
More importantly, respondent bank makes a valid argument for the retention of
the subject movables. PNB asserts that those movables were in fact XPN: The parties may stipulate that pending the performance or payment of the
"immovables by destination" under Art. 415 (5) of the Civil Code. It is an obligation, the mortgagee will have possession of the mortgaged property.
established rule that a mortgage constituted on an immovable includes not only
So pwede by stipulation but not required for validity ha.
the land but also the buildings, machinery and accessories installed at the time
The reason for this is that it is not an essential requisite of the contract of
the mortgage was constituted as well as the buildings, machinery and
mortgage that the property remains in possession of the mortgagor.
accessories belonging to the mortgagor, installed after the constitution thereof.
The mortgagor may deliver the property to the mortgagee without
altering the nature of the contract.
What is the intention of the parties here?
Those properties will secure the mortgage and authorizing the bank to sell the
Article 2085. xxx
same in case there is failure to pay.
Third persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property. (1857)
What are after-acquired properties?
Those properties acquired after the execution of the mortgage.
So, a third person can act as a mortgagor. Sometimes, what will happen is
Can this be a valid subject of a mortgage? that, this owner will execute an SPA in favor of the principal debtor to which the
Yes, where the after-acquired property is in renewal of, or in substitution for, principal debtor is the one who will sign the REM. Pwede ba yan? Actually, YES.
goods on hand when the mortgage was executed, or is purchased with the
proceeds of the sale of such goods. What do you have to make sure, especially if you are a creditor, it must be
clearly stipulated therein that he signs the same for and in behalf of the owner
Is this definition of after-acquired properties applicable in this case? mortgagor. Because even if the said debtor is actually authorized by the owner-
Yes these properties according to the SC are immovables. Under Article 415, if mortgagor, if the REM signed by the debtor not indicating that he is only acting
these machineries are intended by the owner of the tenement for an industry in behalf of said third person who is the owner-mortgagor or as an agent, who is
or works which may be carried on in a building or on a piece of land, and which considered as the mortgagor is still the principal debtor not the true owner of
tend directly to meet the needs of the said industry or works, then it is the property.
considered as an immovable by destination.
EFFECT: The mortgagor is not the true owner of the property mortgaged, so
Discussion: there is no valid mortgage to speak of.
Here, the bank was authorized to sell "things of value" belonging to the
mortgagor "which may be on its hands for deposit or otherwise belonging to SPOUSES VIOLA vs. EQUITABLE
me/us and for this purpose." The petitioner here executed not only a chattel (2008)
mortgage but also a real estate mortgage to secure his loan obligations to
respondent bank. FACTS: March 31, 1997 Spouses Viola of Leo-Mers Commercial, Inc. obtained a
loan through a credit line facility in the maximum amount of P 4,700,000.00
The SC emphasized that after-acquired properties or properties acquired from Equitable PCI Bank, Inc. The Agreement stipulated that the loan would
after the execution of a mortgage may still be valid subject matter of a bear interest at the "prevailing PCI Bank lending rate" per annum on the
mortgage where the after-acquired property is in renewal of, or in substitution principal obligation and a "penalty fee of three percent (3%) per month on the
for, goods on hand when the mortgage was executed, or is purchased with the outstanding amount."
proceeds of the sale of such goods. With that definition, this more pertains to
movable or personal properties. To secure the payment of the loan, an REM over their 2 parcels of land in favor
of PCI Bank was executed. Spouses Viola made partial payments which totaled P
For example: Inventory sa tindahan. Those goods that are part of the inventory 3,669,210.67; PCI Bank contends however, that Spouses Viola made no further
could be a subject of a chattel mortgage. What will happen? Since part sya sa payments since Nov. 24, 2000 despite demand they failed to pay their
tindahan, mabenta sya then i-replenish naman ng inventory. Notwithstanding outstanding obligation which as of September 30, 2002.
that you have used stocks in the inventory, the fact that you have stipulated
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Thus, PCI Bank extrajudicially foreclosed the mortgage before the Regional Trial
Court (RTC) and that the mortgaged properties were sold at a public auction. Such absence is significant as it creates an ambiguity between the two
contracts, which ambiguity must be resolved in favor of petitioners and against
Respondent contended that the absence of stipulation in the mortgage contract respondent who drafted the contracts. Again, as stressed by the Court in
securing the payment of 15% interest per annum on the principal loan, as well Philippine Bank of Communications:
as the 3% penalty fee per month on the outstanding amount, is immaterial
since the mortgage contract is "a mere accessory contract which must take its A mortgage and a note secured by it are deemed parts of one transaction and
bearings from the principal Credit Line Agreement." are construed together, thus, an ambiguity is created when the notes provide for
the payment of a penalty but the mortgage contract does not. Construing the
ISSUE: WON the mortgage contract also secured the penalty fee per month on ambiguity against the petitioner, it follows that no penalty was intended to be
the outstanding amount as stipulated in the Credit Line Agreement. covered by the mortgage. Plainly, the petitioner can be as specific as it wants to
be, yet it simply did not specify nor even allude to, that the penalty in the
HELD: NO. A mortgage must "sufficiently describe the debt sought to be promissory notes would be secured by the mortgage. This can then only be
secured, which description must not be such as to mislead or deceive, and an interpreted to mean that the petitioner had no design of including the penalty in
obligation is not secured by a mortgage unless it comes fairly within the terms the amount secured.
of the mortgage.
Therefore, the "penalty fee" per month of the outstanding obligation is
The Real Estate Mortgage contract states its coverage, thus: That for and in excluded in the computation of the amount secured by the Real Estate
consideration of certain loans, credit and other banking facilities obtained x xx Mortgage executed by petitioners in respondent’s favor.
from the Mortgagee, the principal amount of which is PESOS FOUR MILLION
SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00) Philippine Currency, and Discussion:
for the purpose of securing the payment thereof, including the interest and bank The SC here emphasized that a mortgage must sufficiently describe the
charges accruing thereon, xxx debt sought to be secured, which description must not be such as to mislead or
deceive, and an obligation is not secured by a mortgage unless it comes fairly
The immediately quoted provision of the mortgage contract does not within the terms of the mortgage.
specifically mention that, aside from the principal loan obligation, it also secures
the payment of "a penalty fee of three percent (3%) per month of the Clearly, there was a distinction between what was provided under the
outstanding amount to be computed from the day deficiency is incurred up to Credit Line Agreement and under the REM. While it is true that the Spouses
the date of full payment thereon,” here agreed to pay the obligation, collection expenses, and the penalty of 3%
per month, it does not automatically mean that they have the same coverage
Since an action to foreclose "must be limited to the amount mentioned in the under the REM. Because the REM here only states that the sale was for the
mortgage" and the penalty fee of 3% per month of the outstanding obligation is purpose of securing the payment of the principal obligation including the
not mentioned in the mortgage, it must be excluded from the computation of interest and bank charges. So it was not mentioned in the REM that it would
the amount secured by the mortgage. cover the 3% per month penalty.
Regarding CA decision that the phrase "including the interest and bank charges" An action to foreclose must be limited to the amount mentioned in the
in the mortgage contract "refers to the penalty charges stipulated in the Credit mortgage and the penalty fee of 3% per month of the outstanding obligation is
Line Agreement" is unavailing. not mentioned in the mortgage, it must be excluded from the computation of
the amount secured by the mortgage.
"Penalty fee" is entirely different from "bank charges." The phrase "bank
charges" is normally understood to refer to compensation for services. A Also, in this case, the SC differentiated bank charges and penalty fee
"penalty fee" is likened to a compensation for damages in case of breach of the since bank charges were included in the REM.
obligation. Being penal in nature, such fee must be specific and fixed by the
contracting parties, unlike in the present case which slaps a 3% penalty fee per Bank Charges Penalty fee
month of the outstanding amount of the obligation. Compensation for services. Compensation for damages in case
of break;
Moreover, the "penalty fee" does not belong to the species of obligation
enumerated in the mortgage contract, namely: "loans, credit and other banking It is penal in nature;
facilities obtained x xx from the Mortgagee, . . . including the interest and bank
charges, . . . the costs of collecting the same and of taking possession of and Such fee must be specific and fixed
keeping the mortgaged properties, and all other expenses to which the by the contracting parties.
Mortgagee may be put in connection with or as an incident to this mortgage . .
." In this case, there such stipulation for penalty fee in the REM is absent. So
the effect is that the penalty fee should be excluded from the computation of
In Philippine Bank of Communications v. Court of Appeals, which raised a similar the amount secured by the Real Estate Mortgage executed by petitioners in
issue, this Court held: respondent’s favor.
The court held, indeed, a mortgage must sufficiently describe the debt sought to
be secured, which description must not be such as to mislead or deceive, and an February 21 – Pabalan
obligation is not secured by a mortgage unless it comes fairly within the terms of
the mortgage. Art. 2124. Only the following property may be the object of a contract of
mortgage:
Under the rule of ejusdem generis, where a description of things of a particular (1) Immovables;
class or kind is "accompanied by words of a generic character, the generic words (2) Alienable real rights in accordance with the laws, imposed upon
will usually be limited to things of a kindred nature with those particularly immovables.
enumerated . . . " A penalty charge does not belong to the species of obligations
enumerated in the mortgage, hence, the said contract cannot be understood to Nevertheless, movables may be the object of a chattel mortgage. (1874a)
secure the penalty.
Regarding Respondent’s contention that absence of stipulation for the penalty Art. 2125. In addition to the requisites stated in Article 2085, it is
fee in the mortgage contract is of no consequence as the deed of mortgage is indispensable, in order that a mortgage may be validly constituted, that the
merely an “accessory contract” that "must take its bearings from the principal document in which it appears be recorded in the Registry of Property. If the
Credit Line Agreement,".
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instrument is not recorded, the mortgage is nevertheless binding between Hence, even if the mortgagor is not the rightful owner of, or does not have a
the parties. valid title to, the mortgaged property, the mortgagee in good faith is
nonetheless entitled to protection.
The persons in whose favor the law establishes a mortgage have no other right
than to demand the execution and the recording of the document in EXCEPTIONS:
which the mortgage is formalized. (1875a) (This was discussed by Atty. Sarona in the later part of the lecture. I just placed
it here for a better flow.)
You have to distinguish mortgage from a contract of pledge. In a contract of
pledge, registration is not needed to bind third parties. 1.Where the purchaser or mortgagee has knowledge of a defect or lack of title
in the vendor
CASE: 2.The mortgagee does not directly deal with the registered owner of real
property. or
G.R. No. L-38745 August 6, 1975
TAN vs. VALDEHUEZA 3.The mortgagee was aware of sufficient facts to induce a reasonably prudent
man to inquire into the status of a property in litigation.
Facts:
4. When the purchaser or mortgagee is a bank or financing institution, the
The Valdehuezas have executed two documents of DEED OF PACTO DE RETRO general rule that a purchaser or mortgagee of land is not required to look
SALE (Deed of Sale with right to repurchase) in favor of the LUCIA TAN of two further than what appears on the face of the title does not apply. A mortgagee-
portions of a parcel of land. bank is expected to exercise greater care and prudence before entering into a
mortgage contract even those involving registered lands in its dealings than
Despite the execution of the Deed of Sale with right to repurchase, the private individuals as their business is impressed with public interest.
Valdehuezas remained in the possession of the land; that land taxes to the said
land were paid by the same said defendants. As such, the contracts which
purported to be pacto de retro transactions are presumed to be equitable CASE:
mortgages. At issue is the equitable mortgage that was not registered.
G.R. No. 115548. March 5, 1996
The controversy arose when a suit was filed by Tan to foreclose the STATE INVESTMENT HOUSE INC vs. CA
unregistered mortgage.
Facts:
The Valdehuezas argued that no suit lies to foreclose an unregistered
(equitable) mortgage. A contract to sell was executed between Spouses Oreta, and Solid Homes. The
sale involved a parcel of land (511 sq. m.).
Issue:
Whether or not an unregistered mortgage may be foreclosed Upon signing of the contract, Spouses Oreta made payment with the agreement
that the balance shall be paid in installments. The sale of the property was
Whether or not an unregistered mortgage is binding between the parties however not registered.
We have to compare this case to the earlier case of Hechanova vs. Adil where Spouses Oreta after a few years filed a complaint before the HLURB against
the Court held that no valid mortgage is constituted where the alleged deed of Solid and State for failure on the part of Solid to execute the necessary absolute
mortgage is a mere private document and, therefore, is not registered. deed of sale as well as to deliver title to property subject of the contract to sell
despite full payment.
If a mortgage is in a private document, it could not be registered. The creditor
may nevertheless recover the loan, although the mortgage evidenced in the Solid alleged that its obligations under the contract have become so difficult for
loan was not registered being a private document. However the creditor has performance.
the right to compel the debtor to execute a contract of mortgage in a public
document. Solid, in effect, asked to be partially released from its obligations by delivering
another parcel of land in substitution to the subject of the sale.
If the mortgage is in a public instrument but the mortgage is not registered, the
mortgage is nevertheless binding on the parties as provided in Article 2125, and State Investment, on the other hand averred that unless Solid pays the
the registration will only operate as a notice on the mortgage to third persons redemption price, it has a right to hold on to the foreclosed properties.
but it neither adds to the validity nor does it convert a valid mortgage into a However, HLURB ordered State to execute a deed of conveyance in favor of
valid one. complainants and deliver the title to the land.
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Ruling: On October 24, 1994 the rural bank where she worked cancelled its lien on
Corpuzs title, she having incurred no liability to her employer. Without Corpuzs
Spouses Oreta have the better right over the subject property. knowledge and consent, however, Natividad Alano, the rural banks manager,
turned over Corpuzs title to Julita Camacho and Amparo Callejo.
State Investment’s registered mortgage right over the property is inferior to
that of respondents' unregistered right. The unrecorded sale is preferred for the Conniving with someone from the assessors office, Alano, Camacho, and Callejo
reason that if the original owner (Solid) had parted with the ownership of the prepared a falsified deed of sale, making it appear that on February 23, 1995
thing sold, he would no longer have the free disposal of it and would not be Corpuz sold her land to one Mary Bondoc for P50,000.00. They caused the
able to mortgage it. Registration of the mortgage is not important since it is registration of the deed of sale, resulting in the the issuance of a TCT in Bondocs
understood to be without prejudice to the rights of third persons. name. About a month later or on March 27, 1995 the trio executed another
fictitious deed of sale with Mary Bondoc selling the property to the spouses
As a general rule, where there is nothing in the title to indicate any cloud or Rufo and Teresa Palaganas for only P15,000.00. This sale resulted in the
vice in the ownership thereof, the purchaser is not required to explore further. issuance of TCT 63466 in favor of the Palaganases.
An exception to this is when the mortgagee or purchaser has knowledge of a Nine days later or on April 5, 1995 the Palaganases executed a deed of sale in
defect or lack of title on the part of the vendor or that he was aware of favor of spouses Virgilio and Elena Songcuan for P50,000.00, resulting in the
sufficient facts to induce a reasonably prudent man to inquire further. issuance of TCT 63528.
In this case, State Investment knows full well that Solid Holmes is engaged in Finally, four months later or on August 10, 1995 the Songcuans took out a loan
selling subdivision lots. Therefore, as founded on jurisprudence, it should have of P1.1 million from petitioner Philippine National Bank (PNB) and, to secure
taken necessary precautions to ascertain any flaw. payment, they executed a real estate mortgage on their title. Before granting
the loan, the PNB had the title verified and the property inspected.
Moreover, the uniform practice of financing institutions is to investigate,
examine, and assess real property offered as security. State Investment is On November 20, 1995 respondent Corpuz filed, through an attorney-in-fact, a
therefore not a mortgagee in good faith. complaint before the Dagupan Regional Trial Court (RTC) against Mary Bondoc,
the Palaganases, the Songcuans, and petitioner PNB, asking for the annulment
STATE’s registered mortgage right over the property is inferior to that of of the layers of deeds of sale covering the land, the cancellation of TCTs 63262,
respondents-spouses unregistered right. The unrecorded sale between 63466, and 63528, and the reinstatement of TCT 32815 in her name.
respondents-spouses and SOLID is preferred for the reason that if the original
owner (SOLID, in this case) had parted with his ownership of the thing sold then Issue:
he no longer had ownership and free disposal of that thing so as to be able to
mortgage it again.[ Whether or not petitioner PNB is a mortgagee in good faith
The above information in turn should have driven the PNB to look at the deeds
CASE: of sale involved. It would have then discovered that the property was sold for
ridiculously low prices: Yet the PNB gave the property an appraised value of
P781,760.00.
G.R. No. 180945 February 12, 2010
PHILIPPINE NATIONAL BANK vs. CORPUZ
Anyone who deliberately ignores a significant fact that would create suspicion in
an otherwise reasonable person cannot be considered as an innocent
* FACTS are from full text, in toto
mortgagee for value.
Facts:
Facts:
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A 200k check was released, and Canlas received it as payment of the parcels of
Leonardo and Leon Castillo are siblings. Leon and his wife own a poultry land he sold to Mañosca.
business. The spouses later on obtained a loan from Security Bank. As a security
of such loan, they mortgaged 11 parcels of land co-owned by the Castillo The loan was not paid so the mortgage was foreclosed. Canlas wrote to ASB,
siblings, including Leonardo. Eventually, the spouses failed in their obligation to saying that the execution of the mortgage was without their authority, so steps
Security Bank, thus the mortgages involving the 11 parcels of land were should be taken to annul the mortgage. Canlas also wrote the sheriff to cancel
foreclosed. The spouses however were able to redeem the properties except the auction sale; however, the sale pushed through.
the portion which was supposed to be the share of Leonardo. Sps. Canlas instituted a case for annulment of deed of real estate
mortgage [REM], with prayer for the issuance of a writ of preliminary injunction.
Leonardo then filed an action to annul the real estate mortgage. Leonardo RTC issued an order restraining the sheriff from issuing the Certificate of
asserts that his signature in the SPA authorizing his brother, Leon, to mortgage Sheriff’s Sale, and it annulled the REM. CA reversed RTC, holding that the REM
his property was forged/falsified. He claims that he was in America at the time was valid, that Sps. Canlas are not entitled to relief because of their negligence.
of its execution. As proof of the forgery, he focuses on his alleged CTC used for CA said ASB exercised due diligence in granting loan application, and that it did
the notarization of the SPA on May 5, 1993 and points out that it appears to not act with bad faith.
have been issued on January 11, 1993 when, in fact, he only obtained it on May
17, 1993. Issue:
Whether or not Security Bank is a mortgagee in good faith? Whether the Doctrine of Last Clear Chance is applicable
Ruling: Ruling:
Allegations of forgery, like all other allegations, must be proved by clear, The efforts exerted by the bank to verify the identity of the couple posing as
positive, and convincing evidence by the party alleging it. It should not be Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank
presumed, but must be established by comparing the alleged forged signature to observe more than the diligence of a good father of a family.
with the genuine signatures.11 Here, Leonardo simply relied on his self-serving
declarations and refused to present further corroborative evidence, saying that The negligence of respondent bank was magnified by the fact that the previous
the falsified document itself is the best evidence.12 He did not even bother deed of mortgage (which was used as the basis for checking the genuineness of
comparing the alleged forged signature on the SPA with samples of his real and the signatures of the supposed Canlas spouses) did not bear the tax account
actual signature. What he consistently utilized as lone support for his allegation number of the spouses, as well as the Community Tax Certificate of Angelina
was the supposed discrepancy on the date of issuance of his CTC as reflected on Canlas.
the subject SPA’s notarial acknowledgment.
But such fact notwithstanding, the bank did not require the impostors to submit
Thus, failing to prove such forgery, the presumption of regularity applies to the additional proof of their true identity.
SPA.
Under the doctrine of last clear chance, which is applicable here, the
Atty. Sarona reads a part of the ruling in toto: respondent bank must suffer the resulting loss. In essence, the doctrine of last
clear chance is to the effect that where both parties are negligent but the
True, banks and other financing institutions, in entering into mortgage negligent act of one is appreciably later in point of time than that of the other,
contracts, are expected to exercise due diligence. The ascertainment of the or where it is impossible to determine whose fault or negligence brought about
status or condition of a property offered to it as security for a loan must be a the occurrence of the incident, the one who had the last clear opportunity to
standard and indispensable part of its operations. In this case, however, no avoid the impending harm but failed to do so, is chargeable with the
evidence was presented to show that SBC was remiss in the exercise of the consequences arising therefrom. Stated differently, the rule is that the
standard care and prudence required of it or that it was negligent in accepting antecedent negligence of a person does not preclude recovery of damages
the mortgage. SBC could not likewise be faulted for relying on the presumption caused by the supervening negligence of the latter, who had the last fair chance
of regularity of the notarized SPA when it entered into the subject mortgage to prevent the impending harm by the exercise of due diligence.
agreement.
Here the court emphasized that the degree of diligence required of banks is
CASE: more than that of a good father of a family; in keeping with their responsibility
to exercise the necessary care and prudence in dealing even on a registered or
G.R. No. 112160 February 28, 2000 titled property. The business of a bank is affected with public interest, holding
OSMUNDO S. CANLAS and ANGELINA CANLAS, vs. COURT OF APPEALS and in trust the money of the depositors, which bank deposits the bank should
ASIAN SECURITY BANK (ASB) guard against loss due to negligence or bad faith, by reason of which the bank
would be denied the protective mantle of the land registration law, accorded
Facts: only to purchasers or mortgagees for value and in good faith.
In the case under consideration, from the evidence on hand it can be gleaned
Canlas and Mañosca decided to venture in business. To raise capital, Canlas unerringly that respondent bank did not observe the requisite diligence in
executed an SPA authorizing Mañosca to mortgage 2 parcels of land. Eventually, ascertaining or verifying the real identity of the couple who introduced
Canlas agreed to sell these to Mañosca for 850k. Canlas delivered the TCTs, and themselves as the spouses Osmundo Canlas and Angelina Canlas. It is worthy to
Mañosca issued postdated checks (40k, 460k), but the check for 460k was not note that not even a single identification card was exhibited by the said
sufficiently funded. impostors to show their true identity; and yet, the bank acted on their
Mañosca was able to mortgage the parcels of land to an Atty. Magno representations simply on the basis of the residence certificates bearing
with the help of impostors who misrepresented themselves as Sps. Canlas signatures which tended to match the signatures affixed on a previous deed of
[fake couple]. Mañosca was granted a 500k loan by Asian Savings Bank [ASB] mortgage to a certain Atty. Magno, covering the same parcels of land in
with the involvement of the fake couple. [TOWARDS THE END OF THE CASE, it question.
was said that Canlas was with Mañosca when the latter submitted documents As stated by Atty Sarona from the case in toto:
for the loan application. Mañosca showed Canlas several TCTs, which were
collaterals for the loan, and Canlas was confident that his parcels of land were The efforts exerted by the bank to verify the identity of the couple posing as
not involved. However, Mañosca used Sps. Canlas’ parcels of land as collaterals. Osmundo Canlas and Angelina Canlas fell short of the responsibility of the bank
to observe more than the diligence of a good father of a family.
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opposed the petition on the ground that he is owner of a part of the property in
The negligence of respondent bank was magnified by the fact that the previous question; that the granting of the motion or the registration of the mortgage
deed of mortgage (which was used as the basis for checking the genuineness of would operate to his prejudice, as he has not participated in the mortgage cited
the signatures of the supposed Canlas spouses) did not bear the tax account in the motion.
number of the spouses, as well as the Community Tax Certificate of Angelina
Canlas. Issue: Whether or not he registration and annotation of the mortgage passes on
its invalidity or effect
But such fact notwithstanding, the bank did not require the impostors to submit
additional proof of their true identity. Ruling: as discussed by Atty. Sarona
No. The proceeding to register the mortgage does not purport to determine the
supposed invalidity of the mortgage or its effect. Registration is a mere
As applied in this case, in the DOCTRINE OF LAST CLEAR CHANCE ministerial act by which a deed, contract or instrument is sought to be inscribed
in the records of the Office of the Register of Deeds and annotated at the back
The respondent bank must suffer the resulting loss. In essence, the doctrine of of the certificate of title covering the land subject of the deed, contract or
last clear chance is to the effect that where both parties are negligent but the instrument.
negligent act of one is appreciably later in point of time than that of the other,
or where it is impossible to determine whose fault or negligence brought about The registration of a lease or mortgage, or the entry of a memorial of a lease or
the occurrence of the incident, the one who had the last clear opportunity to mortgage on the register, is not a declaration by the state that such an
avoid the impending harm but failed to do so, is chargeable with the instrument is a valid and subsisting interest in land; it is merely a declaration
consequences arising therefrom. that the record of the title appears to be burdened with the lease or mortgage
described, according to the priority set forth in the certificate.
Stated differently, the rule is that the antecedent negligence of a person does
not preclude recovery of damages caused by the supervening negligence of the The mere fact that a lease or mortgage was registered does not stop any party
latter, who had the last fair chance to prevent the impending harm by the to it from setting up that it now has no force or effect.
exercise of due diligence.
February 23 – Andrea
A contract of mortgage must be constituted only by the absolute owner on
the property mortgaged; a mortgage, constituted by an impostor is void. Recap:
Doctrine of a mortgagee in good faith. Take note of the general rule and
Considering that it was established indubitably that the contract of mortgage the exceptions therein. Among which, remember the diligence observed by
sued upon was entered into and signed by impostors who misrepresented banking institutions, more that of a good father of a family (inaudible). Now
themselves as the spouses Osmundo Canlas and Angelina Canlas, the Court is of with regard to registration, again, we also have to emphasize that it is a mere
the ineluctible conclusion and finding that subject contract of mortgage is a ministerial act, since again noh, the register of deeds has no discretion to refuse
complete nullity. registration on such mortgage. Moreover, registration is not a requirement for
the validity of the mortgage. Even if it’s registered, it can still be subsequently
Atty. Sarona reviews: questioned if all the essential requisites for a valid mortgage are not present.
Again, take note of the Doctrine of Mortgagee in Good Faith. This does not
apply when the title is in the name of the lawful or rightful owner and the Now as discussed in persons and sales. If you recall your person under the
mortgagor is a person different, pretending to be the owner of the property. family code, whether it’s absolute community or conjugal partnership of gains,
EXCEPTIONS to the Doctrine of Mortgagee in Good Faith: the requirement for any disposition or encumbrance requires the written
consent of the other spouse or the authority of the court otherwise the sale will
1.Where the purchaser or mortgagee has knowledge of a defect or lack of title be considered void. Notice there the phrase noh, “any disposition or
in the vendor encumbrance”. So disposition, mahulog yung sale. What about encumbrance? It
will include mortgages. So in other words, if what was involved is a conjugal
2.The mortgagee does not directly deal with the registered owner of real property or covered by absolute community, there must be written consent of
property. or the other spouse, otherwise the said encumbrance will be void. So we have the
case of Ross vs. PNB.
3.The mortgagee was aware of sufficient facts to induce a reasonably prudent
man to inquire into the status of a property in litigation. ROSS vs. PNB
4. When the purchaser or mortgagee is a bank or financing institution, the Q: Oh since what you have here is an encumbrance, what is required here
general rule that a purchaser or mortgagee of land is not required to look under the law?
further than what appears on the face of the title does not apply. A mortgagee- A: The consent of the wife.
bank is expected to exercise greater care and prudence before entering into a
mortgage contract even those involving registered lands in its dealings than Q: What kind of consent? Is it required to be in writing? What was applicable
private individuals as their business is impressed with public interest. here?
A: At that time, the Civil code was applied.
With regard to REGISTRATION OF MORTGAGE:
Q: Why?
Registration of mortgage does not to its validity. Proceedings for registration do A: The mortgage took place on 1983.
not determine validity of mortgage or its effect.
Once a mortgage has been signed in due form, the mortgagee is entitled to its Q: What is required under the civil code for a valid mortgage?
registration as a matter of right. So we have the case of A: The husband may alienate the conjugal property with the consent of the wife
G.R. No. L-13313 April 28, 1960
Q: We’re not talking about alienation here. Alienation lang ba?
AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF HINIGARAN vs. A: And encumbrance.
ESTANISLAO YULO YUSAY
Q: What is the effect if the wife will not give her consent to such
Facts: encumbrance?
Rafaela Yulo executed in favor of ‘Agricultural” a mortgage. A motion was A: It will only be voidable. Meaning it is valid until annulled.
presented to the court by ‘Agricultural’ demanding the surrender of the owner's
duplicate certificate of title that he may annotate said mortgage at the back of Q: What are the requisites for it to be annulled..without the consent of the
the certificate. And register it. Estanislao Yusay, a part owner of the lot, wife? When can you question it?
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A: Within 10 years during the execution of the contract and during the existence the principal debtor as to the obligation unless of course there is a novation
of the marriage. wherein the subsequent purchaser, will now be the one who will pay the
principal obligation.
Q: So in this instance, did the wife give her consent to the mortgage?
A: No maam. Article 2127. The mortgage extends to the natural accessions,
to the improvements, growing fruits, and the rents or income
not yet received when the obligation becomes due, and to the
Again noh, take into consideration that mortgage is regarded as an amount of the indemnity granted or owing to the proprietor
encumbrance. In this case the Civil Code was applied because the encumbrance from the insurers of the property mortgaged, or in virtue of
took place before the effectivity of the Family Code. The Civil Code provides expropriation for public use, with the declarations,
that the husband cannot alienate or encumber any property without the amplifications and limitations established by law, whether the
consent express or implied of the wife. Should the husband do so, the contract estate remains in the possession of the mortgagor, or it passes
is voidable. into the hands of a third person. (1877)
Again noh, make a distinction between the civil code and the family code. Ok so this is another provision showing that a mortgage is inseparable
In this case, do also take note that the wife or the spouse who did not give from the property. This provision tells us what the extent of this mortgage is.
consent can go to court within: The mortgage extends to all its accessions, improvements, income, as well as
proceeds of insurance if the property is subsequently destroyed. It also extends
1.) 10 years within the execution of the contract; and to the just compensation received if it is subsequently expropriated. How about
2.) During the existence of the marriage. the fruits? If the fruits were harvested before the obligation is due and
demandable it will not be part of the mortgage that will be foreclosed. But if it
However, in this instance, the Supreme Court ruled that the documents is still attached to the property when the obligation becomes due then part siya
were acknowledged by the notary public and therefore there is a prima facie sa mortgage. To exclude the fruits, accessions, etc among others there must be
evidence of a valid execution thereof and cannot be disproved by the mere an express stipulation in the mortgage contract. Otherwise the following are
denial of the wife. Moreover, the petitioners also admitted in their deemed included. Accrued and paid interest etc. belonging to the mortgaged
memorandum that Ross forged the wife’s signature, to which Ross cannot use debtor installed. Also includes all objects permanently attached even if placed
that as a defense for the nullity of the contract because remember the spouses after the execution of the mortgage. Now in this instance, included in the
were who questioned and filed for the annulment of the mortgage. foreclosure unless otherwise excluded.
Now, what about if the husband already died? What is the right of the Now we also have to distinguish this becayse 2127 tells us what is the
wife with regard to the property? Can she mortgage the same? Under the laws extent of the mortgage. Ano yung pwede iforlcose. So I think before we
on succession, she can validly mortgage, alienate, or encumber her mentioned after acquired properties, improvements subsequently attached to
proportionate share therein. So remember this is a conjugal property. At the the property. So again no we apply 2127. What are the obligations covered by
time of the death, the surviving spouse is entitled to her ½ share. To which she the mortgage. As a general rule noh an action to foreclose the mortgage must
can subject her undivided share or interest in the property, encumber it and be limited to the amount mentioned therein. However, as an exception, the
have it mortgaged and subsequently have it registered to bind 3rd persons. Now amount as a consideration in a contract of mortgage do no limit the amount for
do take note in these instances, without the consent of the wife or absence of which the mortgage may stand as long as there is an intention to secure the
the consent of the other spouse, the status that is affected is the accessory fulfillment of future loans, advancements, and other indebtedness.
contract. What is considered void is only the accessory contract that is the
mortgage and not the loan. The principal obligation/loan is still valid and PRODUCERS BANK vs. EXCEALSA
standing. What is lost is the right of the creditor to foreclose the mortgage. And
in fact, the mortgage executed by the other spouse can be used as an evidence Facts: Excelsa applied for a credit advance with Producers
of the existence of the obligation. which was supported by a letter of credit issued by Kwang Ju
Bank. Producers later approved the credit line. Prior to this,
Article 2126. The mortgage directly and immediately subjects Excelsahad already obtained a loan with Produces secured by
the property upon which it is imposed, whoever the possessor a real estate mortgage over the properties of Excelsa.
may be, to the fulfillment of the obligation for whose security Thereafter, Excelsa presented to Producers drafts drawn under
it was constituted. (1876) the letter or credit from Kwang Ju. Producer purchased the
drafts and export documents. Producers demanded for the
payment for the equivalent of the export documents they
Okay. So again noh, a registered mortgage creates a real right. It is have already purchased. Excelsa was not able to pay so
inseparable from the property and therefore being a real right it is enforceable Producers extrajudicially foreclosed the mortgaged real
against the whole world. The mortgage itself attaches to the property and properties. Excelsa argues that the REM over their properties
therefore the mortgage follows the property wherever it goes notwithstanding was merely to secure the existing debts and not their future
any change in the ownership. The personality of the owner is disregarded and debts they have accumulated.
whoever acquires or subsequently acquires the property carries with him the
obligation to observe the mortgage of course provided the mortgage is Issue: WON the real estate mortgage also served as security
registered. Subsequent purchasers must then respect the registered for the drafts from Kwang Ju Bank, or future debts.
mortgage…even in the absence of registration but has personal knowledge of Ruling: Yes, there was a dragnet clause.
such mortgage. So there is no prohibition for the mortgagor to sell his property The court held that dragnet clause operates as
to another person because in a mortgage again walang transfer of ownership. convenience to the parties so that there would be no need to
Now, if he sells it to another person and prior to the sale, the property was execute an additional security. As to the validity of the
mortgaged which was duly registered. If the mortgagor fails to pay his foreclosure, it was held to be valid. The requirement of
obligation, the creditor mortgagee will be entitled to foreclose the property and publication was complied with. Xxx
the subsequent purchaser cannot question the said foreclosure. He cannot say
“hindi na yan sa mortgagor/debtor ang may ari” “akin na ito”. Again, as long as PRUDENTIAL vs. ALVIAR
the mortgage was registered, the subsequent purchaser must respect the
mortgage to which the mortgagee is entitled to foreclose the same Facts: Spouses Alviar are the registered owners of a piece of
notwithstanding that the property was already sold to another person. land and they executed a REM in favor of Prudential to secure
the payment of a loan worth Php250,000. For this, they
However, of course the subsequent buyer cannot be personally liable for executed a promissory note secured by a REM containing a
any subsequent (inaudible) Kung baga yung sa kanya lang, to the extent lang dragnet clause.
nung property na nasa kanya. Hindi na siya pwede habulin for any deficiency of
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Alviar executed another promissory note signifying that it was the Supreme Court. You have a valid mortgage clause, and then subsequent
secured by a hold-out agreement. Another one was executed loans are entered into with separate collaterals or security.
by the spouses with a clean face-out deed of assignment. The
spouses paid the first loan for Php250,000 covering the first PCSO vs NEW DAGUPAN
security which was secured by the REM. The bank then moved
for the extrajudicial foreclosure of the property since Facts: Purita Peralta is a registered owner of a
according to them, the spouses had a total obligation of parcel of land. To secure payment for lottery tickets, she
Php1M for their obligations covered under the 3 promissory mortgaged the land. There was a stipulation that it cannot be
notes executed by the spouses. sold during the lifetime of the mortgage. However, Peralta
sold her property to New Dagupan. When PCSO found out
Spouses Alviar filed for a writ of preliminary injunction about this, it caused the annotation of the mortgaged lien on
claiming that they have already paid the principal loan of the TCT of the property. It also applied for extrajudicial
Php250,000 and thus the foreclosure was invalid. The bank foreclosure over the land and obtained a certification that the
maintains that because of the dragnet clause in the REM, it land belonged to it. New Dagupan filed for the annulment of
expressly covers not only the Php250,000 but also the 2 other TCT in the name of PCSO and contended that it was a buyer in
promissory notes. good faith. PCSO argues that it had the authority to foreclose
the property in lieu of the unpaid tickets obtained by Galang.
Issue: WON the dragnet clause applies even in the subsequent
advancement for which other securities were intended Issue: WON there was a dragnet clause in the REM
Ruling: No. It is clear in the mortgage executed that
Ruling: The dragnet clause will not be applied using the it only covered the Php450,000 amount of the tickets obtained
reliance on security test. The parties having conformed to the by Galang. It was found in the records that this was already
blanket mortgage clause or dragnet clause, it is reasonable to paid by Galang, as supported also by testimonies of the PCSO
conclude that they also agreed to an implied understanding officers. This means that the mortgaged property no longer
that subsequent loans need not be secured by other securities, covers as security for future debts that may incurred by
as the subsequent loans will be secured by the first mortgage. Galang.
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the car incentive plan and loan privileges offered by the bank. principal obligation. So accessory follows the principal. With the extinguishment
The arrangement was made to appear as a lease agreement of the mortgage, wala na rin yung dragnet clause which could have covered the
requiringonly the payment of monthly rentals. Accordingly, the consumption loan. With the the consumption loan or the same property cannot
lease would be terminated in case of employee’s resignation again answer for the obligation in a subsequent consumption loan.
or retirement prior to full payment of the price. Meanwhile, as
for theloans, he obtained 3 separate loans. In foreclosure, the mortgaged property is subjected to the proceedings for
the satisfaction of the obligation. The mortgage was extinguished with the
The first loan involved a real estate mortgage loan foreclosure and sale of the mortgaged property and what remains is the right of
evidenced by a promissory note 0142. The second loan was a redemption provided by law. Since the mortgaged contract is already
consumption loan (P/N 0143) and the third loan a salary loan. extinguished, the bank can no longer rely on its provisions even if it included the
When he resigned, he was given the option to either return dragnet clause. The bank cannot refer to the % on interest which was allegedly
the vehicle without any further obligation or retain the unit covered by the terms of the contract. Neither can the bank use the
and pay its remaining book value. His obligations, aside from consummated contract on the rest of the obligations which are not included
the purchase or return of the vehicle, are the Php100,000.00 when there was a foreclosure proceeding. It cannot be allowed to use the same
as consumption loan, Php421,800.00 as real estate loan and security to collect from the other loans for to do so would be akin to foreclosure
Php16,250 as salary loan. of an already foreclosed property. Rather than relying on an expired contract,
the bank should have collected on the excluded loans by instituting the proper
On the other hand, the petitioner owed Tuble actions by action to recover sums of money. Petitioner should have ran after
hispro-rata share in the DIP, which was to be issued after the Tuble separately instead of the property used to secure the debts. The bank
bank had given the resigned employee’s clearance, and here cannot alter that right by imposing additional charges and the power to
Php25,797.35 representing his final salary and corresponding decide whether or not to foreclose is also the prerogative of the mortgagee. But
13thmonth pay. one a decision is made, which is to have the property mortgaged foreclosed, the
act shall be governed by mortgage laws.
Tuble claimed that since he and the bank were
debtors and creditors of each other, theoffsetting of loans The dragnet clause does not justify the imposition of the 80% interest but
could legally take place. However, the bank sent him a in this instance there was no specific mention of interest to be added in case of
demand letter obliging him to pay his debts and to return the either default or redemption. Also take note again the Supreme Court discussed
vehicle. As for the real estate loan, a petition for extra- judicial the reliance on the security test.
foreclosure was filed but was redeemed by Tuble for
Php1,318,401.91. After payment of such amount, Tuble ARTICLE 2128. The mortgage credit may be alienated or
questioned how the foreclosure basis of Php421,800.00 assigned to a third person, in whole or in part, with the
ballooned to Php1,318,401.91 in a matter of 1 year. formalities required by law. (1878)
ISSUE/S:
1. W/N Asiatrust should recover the other So the subject in this article is the mortgaged credit. The right of the mortgagee
obligations of Tuble to the real estate mortgage. itself over the property may be alienated or assigned to a 3rd person in whole or
2. W/N Asiatrust is justified in reposing the 18% in part.
annual interest of the redemption price by way of the dragnet
clause. If the creditor mortgagee assigns his right to a 3rd person what is the effect? It
transfers his right to a 3rd person. If the debtor fails to pay when the obligation
HELD: In Spouses Romero v. Court of Appeals, SC it due, the assignee can foreclose the property subject of the mortgage. Do
held that the mortgage indebtedness was extinguished with remember here that alienation or transfer of the mortgaged credit is valid even
the foreclosure and sale of the mortgaged property, and that if it is not registered.
what remained was the right of redemption granted by law.
Now how about the mortgaged property itself? Can the mortgagor alienate the
Consequently, since the Real Estate Mortgage same? Can he sell it? Yes. We have seen that in the cases because again in a
Contract is already extinguished, petitioner can no longer rely mortgage there is no transfer of ownership, in fact as we will see later on, a
on it or invoke its provisions, including the dragnet clause stipulation saying that upon non-payment the property will be automatically
stipulated therein. It follows that the bank cannot refer to the forfeited in favor of the mortgagee is Void. Moreover, as we will see later, a
18% annual interest charged in Promissory Note No. 0143, an stipulation which prohibits a mortgagor from transferring property to another
obligation allegedly covered by the terms of the Contract. person would also be considered void.
Neither can the bank use the consummated VEGA vs. SSS
contract to collect on the rest of the obligations, which were
not included when it earlier instituted the foreclosure FACTS: Magdalena Reyes owned a piece of titled land. On
proceedings. It cannot be allowed to use the same security to August 17, 1979, she got a housing loan from SSS for which
collect on the other loans. To do so would be akin to she mortgaged her land. Late 1979, Reyes asked the Sps. Vega
foreclosing an already foreclosed property. to assume the loan and buy her house and lot since she was to
emigrate. An employee at SSS said, however, that SSS did not
approve of members transferring their mortgaged homes.
Q: So with that we have a valid mortgage with dragnet clause? But the Sps Vega (Vegas) could make a private arrangement
A: Yes. Issue is won they may still use the same security in order to cover the with Reyes provided that they pay the monthly amortizations
other loans. on time. Vegas agreed for Reyes to execute in their favor a
deed of assignment of real property with assumption of
mortgage and paid Reyes P20,000 after she undertook to
So here, first there was a loan. With the mortgage containing the dragnet update the amortizations before leaving the country. The
clause and the dragnet clause is valid. Subsequent to that other loans were Vegas took possession of the house in January 1981. Reyes did
entered into such as the construction loan. Now with the first loan, the debtor not execute the deed of assignment.
in that instance failed to pay his obligation, the mortgage covering the first loan
was foreclosed. And when the property was thereafter sold, nag bayad ng She left the country and left her sister (Julieta Ofilada) a special
redemption price, notwithstanding that by virtue of the forclosure the REM was power of attorney to convey ownership of property. Sometime
extinguished because that foreclosure had the purpose of extinguishing the between 1983 and 1984, Ofilada executed the deed of
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assignment in favor of the Vegas, kept the original and gave the mortgagor would want to sell the property, and then there is an agreement
the Vegas two copies, one to be given to the Home with the mortgagee that if he decides to do so he may first offer it to the
Development Mortgage Fund and kept the other. A storm in creditor-mortgagee, then such is considered as a valid stipulation and that is not
1984 resulted in flood and destroyed their personal copy. contrary to Art. 2130.
ISSUE/S: Whether Reyes validly sold her SSS mortgaged Now, we have also emphasized last time that the registration of the mortgage is
property to the Vegas given a provision in the mortgage required to bind third persons. Such registration serves as a constructive notice
agreement that she could not do so without the written to the whole world and as a General Rule he is not obliged to look beyond the
consent of SSS. title. Of course we have to take note of the exceptions. If the same is not
registered, the mortgage can nevertheless become valid between the parties
HELD: Yes. The Vegas were able to present adequate proof of but not as against third person.
Reye’s sale of the property to them. The Vegas proved the loss
of the deed of assignment in their favor and what it contained, It is also possible that mortgages are not registered but third persons would still
they offered strong corroboration of the fact of Reyes’ sale of be bound by such mortgage if they have actual knowledge. Now we have the
the property to them. They took possession of the house and case of Pineda.
lot after they bought it.
Pineda vs CA, GR 114172, August 25, 2003
They also paid for the amortizations to the SSS. And when SSS Reporter: Suico
wanted to foreclose the property, the Vegas sent a manager’s
check for the balance of the loan. Article 1237 of the Civil Code Facts (from cdasia): On 4 January 1982, the Spouses Virgilio and Adorita Benitez
cannot apply in this case since the debtor (Reyes) consented to mortgaged a house and lotcovered by TCT 8361 in favor of Juanita P. Pineda
the transfer of ownership of the mortgaged property to the and Leila P. Sayoc. Spouses Benitez delivered TCT 8361 to Pineda, but did not
Vegas. register the said mortgage with the Register of Deeds. Later, with the consent of
Pineda, Spouses Benitez sold the houseto Olivia G. Mojica. Mojica, in turn, filed
Although Paragraph 4 of the mortgage agreement which states a petition for the issuance of a second owner's duplicate of TCT 8361 by alleging
that Reyes must secure the consent of SSS before selling the that it was lost. Thus, the trial court granted the petition.
property, is valid and binding in the sense that SSS cannot be On 12 December 1983, spouses Benitez sold the lotcovered by TCT 8361 to
compelled to recognize the sale before the loan is completely Mojica, and TCT 13138 in replacement of TCT 8361 was issued in the name of
paid, it does not absolutely forbid her, as owner, from selling Mojica. On 22 February 1985, Mojica mortgaged the said property to Teresita A.
the property while the loan remained unpaid. Such stipulation Gonzales. The latter caused the annotation of said mortgage on TCT 13138. On
is against public policy, being an undue impediment or 8 May 1985, Pineda and Sayoc filed a complaint for the cancellation of the
interference on the transmission of property. second owner's duplicate of TCT 8361. On 18 August 1986, they caused an
annotation of notice of lis pendens on the original of TCT 8361 with the Register
Article 2129 of the Civil Code gives SSS the option of collecting of Deeds. Thereafter, the trial court rendered judgment declaring the second
from the third person in possession of the mortgaged owner's duplicate of TCT 8361 as null and void.
property. Meanwhile, Mojica defaulted in paying her obligation to Gonzales, hence, the
latter extrajudicially foreclosed the mortgage, purchased the said property at
public auction, and for failure of Mojica to redeem, consolidated its title.
Consequently, the Register of Deeds cancelled TCT 13138 and issued TCT 16084
So you take note of this case because this is very common with regard to in the name of Gonzales. On appeal, the Court of Appeals affirmed the trial
financial institutions like those persons who borrow from pag-ibig or sss then court's decision. However, the writ of execution was returned unsatisfied since
they execute a REM in favor of said institutions however later on it turns out di the Register of Deeds had already cancelled TCT 8361 and issued TCT 16084 in
pala nila kaya bayaran. So what they do is that they enter into a contract of sale the name of Gonzales. Later, the trial court issued an order declaring void the
with the assumption of mortgage in favor of a 3rd person, which is what original and the owner's duplicate of TCT 16084 in the name of Gonzales. When
happened in this case. Now, notice also here that there was a provision in the Gonzales raised this issue to the Court of Appeals, the appellate court declared
mortgage contract that consent of sss (mortgagee) was required for the sale the said order of the trial court as null and void. Hence, this petition.
thereof. This cannot be interpreted as absolutely. Issue1: WON Pineda can still validly sell the subject property in favor of Mojica
considering that it was mortgaged. YES
Held1: SC said that Spouses Pineda still have the right to sell the property since
February 28 – Kadz a mortgage is simply an encumbrance on the property. It is still the spouses
Pineda who are the owners of the property
REVIEW: We already discussed Article 2130. Issue2: Can Gonzales be considered a purchaser in good faith? YES.
Held2: SC said that Gonzales is a purchaser in good faith because Gonzales does
Article 2130. A stipulation forbidding the owner from alienating the not have any knowledge of the mortgage and also that the said mortgage was
immovable mortgaged shall be void. (n) not registered. Since it was not registered, it cannot bind 3rd persons as
Any stipulation forbidding the owner from alienating the mortgaged property registration is required to bind third persons.
will be void. We have emphasized this in the case of SSS vs. Vega, a stipulation Q: But isn’t it that the title that was issued by Mojica was declared void by the
requiring the consent will circumvent what is required in Art. 2130 to which, in court?
effect, nevertheless the said sale will be valid as held in the case of Vega vs SSS. A: Yes, ma’am.
Now also, we have pointed out a second mortgagor is entitled to purchase the Q: Why was it declared void?
property or pay the first mortgagee for the release of the first mortgage. A: Because in acquiring the title, Mojica presented the second owner’s
Usually, the second mortgagee, if he is really interested with the property will duplicate copy which… ≠
pay the first mortgagee so that he would now be the preferred mortgagor.
Q: Again again now, why is it considered void? Why is the title in favor of
Remember the second mortgage is still valid although it does not usually Mojica wherein the same title was presented to Gonzales for the Mortgage
happen that often because the mortgagee will hesitate to have a property that considered void?
has already been previously mortgaged. Pero pa rin siya and being a mortgagee, A: It is void ma’am because in acquiring the same TCT, Mojica presented the
he will be considered as one having an interest to the obligation to which he deed of sale and the second owner’s duplicate copy which Mojica acquired
can force the creditor to accept the payment. through fraud.
Now Art. 2130, a stipulation forbidding the owner from the selling the property Q: What was the allegation regarding the second owner’s duplicate title, it
shall be void. Any agreement with regard to the right to first refusal is valid. If was in the name of?
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A: In the name of Spouses Pinedas, ma’am. was not registered. But if the sale is registered, the subsequent purchaser must
the sale. And what if the effect if the property is subsequently foreclosed? If it is
Q: How did Mojica acquire the said title? registered, the property will be foreclosed and the mortgagee will have a better
A: On February 9 mam, when the lot was sold to him, Mojica alleged that the right over the subsequent purchaser but of course the purchaser cannot be held
owner’s duplicate of title was delivered to him. However, in acquiring the be held liable for any further deficiency.
second owner’s duplicate, Mojica alleged that it was lost.
With regard to dragnet clause which we discussed last time and with the
Q: Where is the title? dragnet clause, we have a mortgage which can cover future obligations which
A: It was with Pineda and Sayoc, Ma’am. must be clearly stipulated in the Real Estate Mortgage (REM). Do not confuse
dragnet clause from after acquired properties. Dragnet clause, and scope niyan,
Q: What is the effect of the void title in relation to the sale in favor of Mojica? future obligations with the same property mortgaged, but it can cover past and
A: The SC held that the nullity of the said title does not affect the validity of the future obligations. With regard to after acquired properties, ang scope ng
sale in favor of Mojica since there was an execution of a deed of sale which mortgage, ano ang pwedeng I-foreclose ng mortgage?
serves as an actual or physical delivery in favor of Mojica so there is a transfer
of ownership. General Rule: After acquired properties cannot be mortgaged because the
requirement is that at the time of the mortgage, you must be the absolute
Q: Now since the title was void and the mortgage of Gonzales was registered owner thereof. You cannot execute a REM that any property that I own from
in the said void title, did it not affect the mortgage in favor or Gonzales? this day forward will be and can be used as a security for my obligation to you.
A: The SC held ma’am that the annotation of the mortgage on the void title Hindi pwede. You must specify the property.
does not mean that the mortgage was also void but to be considered as a valid Exception: However, if what you have as your mortgage are inventories, that
mortgage… the annotation of the mortgage was considered an annotation in could be a valid subject matter for mortgage wherein the inventory will be
good faith. replenished from time to time. But these are chattel mortgage kasi personal
property man siya. So at the time that you executed the mortgage, siyempre iba
Atty. Jazzie: So here, take note, Benitez mortgaged the property in favor of man ‘yung inventories mo. When the time it was already due and demandable,
Pineda and Sayoc and title was delivered to Pineda. Thereafter, Benitez sold the nabenta na ‘yung stocks at the time that the mortgage was executed but
property to Mojica. The sale is valid because the mortgage was merely an nevertheless, if is provided that the inventory will cover whatever you have in
encumbrance and it does not divest the mortgagor to sell the property. Now do your store, that would be considered valid under after acquired properties.
take note that the mortgage in favor of Pineda and Sayoc was not registered. So
when Mojica applied for the issuance of a new title in favor of the alleged lost And we have also discussed last time, what is the extent. ‘di ba fruits,
one, but actually hindi naman siya nawala, the new title that was issued was improvements among others. Let’s have Article 2131.
actually void because the court had no jurisdiction to issue the said title
because the title was not actually lost. Article 2131. The form, extent and consequences of a mortgage, both as to its
constitution, modification and extinguishment, and as to other matters not
Notwithstanding such fact, SC emphasized that the sale is nevertheless valid included in this Chapter, shall be governed by the provisions of the Mortgage
because you also have to consider that what is void is only the TCT and not the Law and of the Land Registration Law.
title over the property. Title in favor of Mojica was validly transferred by virtue You may have notice that there are only few Civil Code provisions with respect
of the execution of the deed of sale as Certificate of Title is not equivalent to to REM. So, with regard to extrajudicial foreclosure, we have a special law, Act.
title itself. So there was a valid transfer of ownership to Mojica to which since 3135. We also have the General Banking Law of 2000. We could also apply the
Mojica is the owner, she can now validly mortgage the property in favor of Land Registration Law and with regard to judicial foreclosure, we have Rule 68
Gonzales. of the Rules of Court.
The prior mortgage in favor of Pineda and Sayoc did not prevent the spouses Now what happens if the debtor fails to pay his obligation?
Benitez to sell the property to Mojica because a mortgage is merely an
encumbrance and thus will not extinguish the title of a debtor who does not The creditor of mortgagee has two rights:
lose his principal attribute as the owner. Pointing out Art. 2130, the law even 1. He can foreclose the property; or
considers void a stipulation prohibiting the owner from selling the mortgaged 2. He can file a collection for sum of money.
immovable. However, the nullity of the second owner’s title did not affect the Now these remedies are alternative in nature. Of course the foreclosure
validity of the sale between Benitez and Mojica. The rule is that a mortgage may be extrajudicial or judicial depending on the circumstances of each case.
annotated in a void title is valid. But once he chooses foreclosure, he cannot file an action for collection of sum
of money because again these are alternative in nature. Otherwise if may
So the mortgage is valid if it was registered in good faith. Gonzales registered collection and foreclosure, applying your civil procedure, you can file a motion
the mortgage in good faith as he had no knowledge of the previous mortgage in to dismiss for splitting the cause of action.
favor of Pineda and Sayoc considering that the same was not registered. To bind
third parties to an unregistered encumbrance, the law requires valid notice. In So with that, we have foreclosure. Foreclosure is a remedy available to the
this instance, no registration, no actual notice. mortgagee by which he subjects the mortgaged property to the satisfaction of
the obligation to secure which the mortgage has given (sic). Mortgage may be
When Gonzales purchased the property in the action sale, Pineda already foreclosed only when the debt remains unpaid at the time it is due. Do take
annotated the lis pendens. However, the mortgage was validly registered prior note that foreclosure proceedings have in their favor the presumption of
to the annotation of the lis pendens. Pineda and Sayoc were considered regularity and the burden of evidence to rebut the same is within the party that
negligent in not registering their mortgage. Gonzales on the other diligently seeks to challenge the said proceedings.
exercised her right to foreclose the property. The unregistered mortgage of
Pineda and Sayoc was extinguished upon foreclosure of Gonzales’ mortgage. We have two (2) kinds of foreclosure:
1. Judicial Foreclosure - is a foreclosure filed before the court and is governed
Even assuming assuming for the sake of argument that the latter mortgage was by Rule 68 of Special Civil Actions.
unregistered. Between two unregistered mortgagees both being in good faith, 2. Extrajudicial Foreclosure - we will take more of extrajudicial foreclosure
the first to foreclose mortgage prevails over the other. Of course while Pineda under Act 3135. This foreclosure is done without the aid of the court. Meaning
and Sayoc cannot foreclose the property anymore, the mortgage is deemed walang hearing at judge, this is through the clerk of court or the sheriff.
extinguished, the principal obligation still exists to which said Pineda and Sayoc
can still go after Benitez for the unpaid principal obligation. The TCT issued in However, let us take into consideration judicial foreclosure so that we can be
the name of Gonzales is considered as valid. able to distinguish it from extrajudicial foreclosure. Under judicial foreclosure
we have Rule 68. What is important and what I want you to take note in judicial
So again registration is required to bind third persons. With regard to the sale, it foreclosure is what we have there which is what we call Equity of Redemption.
is valid despite the mortgage even if the mortgage was registered and the sale We have have the case of Spouses Rosales.
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So in this case of Sps. Rosales, it was a judicial foreclosure after the court upheld
Spouses Rosales vs Spouses Suba, GR 137792, August 12, 2003 that the mortgage was an equitable one. When the foreclosure is judicially
Reporter: Campaner effected, no equivalent right of redemption exists. No such right is recognized in
a judicial foreclosure except only when the mortgagee is the PNB or a bank or a
Facts: There was this final decision by the RTC of Manila which required the banking institution.
Spouses Rosales to deposit to the Clerk of Court payment to Macaspac. From
Cdasia Synopsis - After the petitioners-judgment debtors failed to pay the The right of redemption is not recognized in a judicial foreclosure. The right of
judgment debt, the trial court issued a writ of execution ordering the sale of the the defendant mortgagor to extinguish the mortgage and retain ownership is by
property subject of litigation for the satisfaction of the judgment. The property paying the secured debt within the 90-day period after the judgment becomes
was sold at public auction and the Spouses Suba were the highest bidders. The final or even after the foreclosure sale but prior to its confirmation. This is the
trial court issued an order confirming the sale of the property to the Spouses mortgagors equity not right of redemption which may be exercised by him even
Suba and subsequently granted respondent's prayer for a writ of beyond the 90-day period from date of the service of order even after
possession. foreclosure sale provided again it is before the order of confirmation.
The Spouses Rosales filed a motion for reconsideration of the trial court's
orders, but were denied. The CA dismissed their petition for certiorari for lack of In this instance they only had an equity of redemption. It is simply their right to
merit, holding that there is no right of redemption in case of judicial foreclosure extinguish the mortgage and retain ownership by paying the secured obligation
of mortgage. Hence, this petition for review. prior to the confirmation of the sale. However, instead of exercising this equity
Issue: WON Spouses Rosales can still redeem the property even through this of redemption, petitioners chose to delay the proceedings by filing several
was a judicial foreclosure. NO. manifestations (?) in the court. So take note of the General Banking Law which
Held: In denying the petition, thereby affirming the CA decision on appeal, the provides for the exception - 1 year redemption period as long as the mortgagee
Supreme Court ruled that since the parties' transaction is an equitable is a banking institution.
mortgage and the trial court ordered its foreclosure, execution of judgment is
governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as So essentially, what happens in a judicial foreclosure? You file an
amended. There is no right of redemption in case of a judicial foreclosure of a action/petition with the court. Court ito ha which has jurisdiction over the
mortgage. location of the subject matter. Court can order the payment within the 90-120
The only exemption is when the mortgagee is the Phil. National Bank or a bank days. In the meantime, tatakbo na ang equity of redemption. If no payment, the
or a banking institution. Since the mortgagee in this case is not one of those court orders the sale of the subject matter to the highest bidder after which the
mentioned, no right of redemption exists in favor of petitioners. They merely parties will be called for a confirmation of the sale. Now once there has been a
have an equity of redemption which is their right, as mortgagor, to extinguish confirmation of the sale, the mortgagor cannot anymore enforce or demand
the mortgage and retain ownership of the property by paying the secured debt that his payment be received.
prior to the confirmation of the foreclosure sale. Petitioners, in this case, failed
to exercise this equity of redemption. Now, in this instance of judicial foreclosure, there is a hearing for the
Q: What is the difference between right of redemption and equity of confirmation of the sale. Why is that required? So that the mortgagor has the
redemption? What happens in right of redemption? opportunity to assail the validity of the action sale. So again, in judicial
A: In right of redemption ma’am, there is already a foreclosure which has been foreclosure, it is possible that even after the sale, equity of redemption is
held. However in equity of redemption, the original owners can only take their available as long as there is no confirmation. If you want to exercise this Equity
property again if they exercise this right before the confirmation of the of Redemption, you have to pay the amount of the debt/obligation an not the
foreclosure sale… ≠ purchase price.
Q: Only before the confirmation? What is the period provided under Rule 68? Who can redeem? Under the the Rules of Court:
A: 90 days ma’am after the judgment becomes final. 1. The mortgagor or one who is in privity of title with the mortgagor
2. The successors-in-interest; it could be
Q: How is it different from right of redemption? a) The person whom which the debtor has transferred his right
A: In right of redemption, the original owners may redeem the property even b) The person whom the debtor conveyed his interest for the subject
after foreclosure for a 1 year period. matter
c) The one who succeeds to interest of the debtor
Q: What about the exemption that you mentioned? What is that? d) The joint debtors or joint owners of the subject matter
A: The only exemption is when the mortgagee is the PNB or a bank or ≠ e) Compulsory heirs
Q: That is an exemption with regard to what type of foreclosure? What happens if there is a deficiency? If the property was judicially foreclosed
A: Judicial foreclosure ma’am. and sold but nevertheless the proceeds are not sufficient to pay the obligation.
- The creditor can still recover within 10 years (the prescriptive period
Atty. Jazzie: Under judicial foreclosure, under the Civil Code from the time right of action accrues.) He may
General Rule: Equity of Redemption recover even within the period of Equity of Redemption. He may also
Exception as provided in the General Banking Law: When the mortgagee is a pray that the deficiency judgment be incorporated in the judicial
bank or a banking institution foreclosure. Just take note of that because you will discuss more on
Judicial Foreclosure in your Special Civil Action.
What do we mean by Equity of Redemption? After the entry of judgment of
foreclosure wherein you file a petition for foreclosure before the court and now Now let us take into consideration extrajudicial foreclosure under Act 3135. As I
the court says that the foreclosure is proper, the order becomes final and there mentioned, if you have the book by de Leon, you have copy at the appendix.
is now an entry of judgment. Under Rule 68, Redeem but not less than 90 days Otherwise you should have a copy of this special law. It is an old law but this is
but more than 120 days from the entry of judgment, mortgagor or debtor is still the same law that is applied today but of course there are slight deviations
ordered by the court to pay the obligation, interests and expenses incurred. specially with regard to fees pero with regard to the more important provisions,
it is the same.
Under Section 2 of Rule 68, Even if the rule says not more than 120 days, you
may still exercise this equity of redemption as long as the sale is not yet How does extrajudicial foreclosure take place? Of course the mortgagor would
confirmed. That would also mean that if you have judicial foreclosure is have to execute a deed of real estate mortgage (REM). For an extrajudicial
available. When you say right of redemption, the redemption period is 1 year. In foreclosure to be availed of by the mortgagee, the mortgage contract must
judicial foreclosure after the sale has been confirmed, the mortgagor cannot contain an authorization by the mortgagor given to the mortgagee to
anymore redeem the property. The exemption is provided in the General extrajudicially foreclose the property. So the Deed of REM must contain a
Banking law wherein the mortgagee is a bank, then the mortgagor has a right of special power authorizing the mortgagee, that in case the obligation is not paid,
redemption - the one year redemption period. the property will be sold and the proceeds will be applied to pay for the
obligation. Now this is very important because if you executed a REM and it
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does not contain this authority, this clause or this special power given to the to the amount of the debt secured by the REM, because of the several notice
mortgagee, then you cannot extrajudicially foreclose the property. So what is and the publication, they still failed to raise a question or attend the foreclosure
the remedy of the creditor? Judicial foreclosure or mag-file siya ng collection for sale… ≠
sum of money.
This would also be relevant in the sense that extrajudicial foreclosure Q: What time is the redemption period counted?
proceeding is faster kasi hindi ka magdaan ng hearing, hindi ka magdaan ng A: From October 29, 1993 because it was the registry of the sale.
court. Simply file a petition in the office of the Clerk of Court and the sheriff.
Walang hearing but you have to comply with the requirements of notice of sale Q: Was there sufficient evidence showing that indeed there was an extension
and publication, public action takes place. Ganun lang. Mas mabilis siya. And, it given to the petitioners in this case?
does not require lawyers. So lesser fees, no more filing fees and faster time to A: No, ma’am.
the advantage of the creditor-mortgagee.
Q: Assuming that there was an agreement for an extension, will it stop the
Do remember that this authorization is essentially an agency wherein the running of the one year redemption period?
mortgagor is the principal and the mortgagee is the agent. Under the rules of A: It will not stop the one year redemption period ma’am.
agency, the general rule is that when the principal dies, the agency is
extinguished. So what happens if the obligation has already become due and Q: Why not? Because this is provided under the law. With regard to the period
demandable but the at time of the application for foreclosure, namatay na si of redemption, it must be 1 year from the date of?
mortgagor, will that be ground to question the REM? Hindi. No such A. The registration ma’am.
extinguishment because the power given to the mortgagee to foreclose the
property covered by the REM is for the benefit of the mortgagee. It is not for Q: In this instance was there are offer to pay or redeem on the part of Spouses
the interest of the mortgagor but rather the mortgagee. So notwithstanding the Landrito?
death of the mortgagor or debtor, the mortgagee may still extrajudicially A: According to the the SC, Spouses Landrito never exercised their right to
foreclose the property wherein the agency or authorization given therein is not redeem the property.
extinguished for this is considered to be an agency coupled with interest.
Q: What about any action filed for the annulment of the foreclosure
Now sabi natin, what is available in judicial foreclosure is equity of redemption proceeding would it stop the one year redemption period?
as a general rule. But what about extra judicial foreclosure? We have the right A: No, ma’am.
of redemption. Naferteri, what happened in the case of Spouses Landrito?
Q: So what happens if the 1 year period already expired?
Spouses Landrito vs CA, GR 133079, August 9, 2005 A: After the 1 year period already expired, the party who is redeeming the
Reporter: Kuit property is barred from redeeming it ma’am.
Facts: Spouses Landrito obtained a loan of P350,000 from Carmencita San Atty. Jazzie: Very important dito ang redemption because when you say
Diego. To secure such loan, they executed a REM in favor of San Diego. redemption, the mortgagor may force the mortgagee or the highest bidder to
Sometime thereafter, they made several payments, however it was not yet sell back the property to the mortgagor. But once na nag-lapse na yan, absolute
complete. A subsequent loan was made by spouses Landrito, this time na ang ownership. You cannot again force the highest bidder to sell it to the
amounting to P1,000,000. To secure the payment of the loan, they executed an mortgagor.
amended REM stipulating that the loan be paid within 6 months from Sept. 16,
1991 and if not paid within the said period, the mortgagee will have the right to Here, you have an extrajudicial foreclosure, they applied Act 3135.
declare the debt to and immediately foreclose the REM either judicially or
extrajudicially in accordance with law. In Extrajudicial Foreclosure:
General Rule: Right of Redemption
It appears here that the Sps. Landrito defaulted in payment and despite the Exception: if the mortgagor is juridical entity, such as a corporation, the 1 year
notice sent by San Diego, they still failed to pay which prompted San Diego to period does not apply
send a final notice of demand. Now this time the obligation already amounted
to P1.9M and they still failed to pay which prompted Carmencita to file an What you need to take note of here, huwag I-partner ang dalawang E. Kapag
extrajudicial foreclosure of the property which they used to acquire the said extrajudicial, Right. Kapag judicial, Equity of Redemption. Ang right of
loan. redemption under Act 3135, ang nakalagay diyan date of sale. But jurisprudence
has been consistent that the one year period shall start from the registration of
Subsequenty, the sheriff sent several notices to the parties announcing the sale. the sheriff’s certificate of sale. Act 3135 says “1 year from and after the date of
On August 11, 1993, the date of sale, the Sps. Landrito did not attend the sale” which should be interpreted from the time the certificate of sale is
foreclosure sale and a certificate of sale was given to San Diego being the registered.
highest bidder. The amount of the property became P2M.
In this instance, there was no sufficient evidence that redemption was made or
On October 29, 1993, San Diego registered the Certificate of the Sale after that that there was an extension. Even if there was, you cannot circumvent the right
within the 1 year redemption period, still the Spouses Ladrito failed to redeem of redemption available under Act 3135. When the period allowed to redeem
the said property. Instead On November 1994, the spouses sought for the will lapse, the action to enforce redemption will not prosper anymore even if
annulment to the said foreclosure sale. They allege that it was null and void the action is brought within the prescriptive period.
because it failed to comply with the requirement of Act 3135 of the publication
and notice and that the foreclosure should have been limited to the amount of Period of redemption is not a prescriptive period but a condition precedent
the debt. In this case, it should only have been 1M but the sale already provided by law to restrict the right of the person exercising the redemption. If
amounted to P1.95M. the person exercising this right has offered to redeem the property within the
period fixed, he is considered to have complied with this condition.
The husband of San Diego gave the Spouses Landrito an extension which
allowed them to pay the obligation until November 11, 1994. Spouses San Moreover, the period is not suspended by the institution of an action to
Diego here sought for the dismissal of the case which was granted by the RTC foreclose/annul the foreclosure sale. Petitioner have lost any right or interest
and upheld by the CA. over the subject property primarily because of their failure to redeem the same
in the manner and within the period prescribed by law. Just take note the
Issue: Can Spouses Landrito still redeem the property? NO. general rule on the right of redemption, if you want to redeem the property,
pay the mortgagee this time the purchase price plus expenses and interest
Held: SC held that Spouses Landrito can no longer redeem the property because incurred. Again from the date of the confirmation of sale ang 1 year period.
as found by the CA, even if the amount of the foreclosure sale should be limited
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Do take note that of the exception under the general banking law wherein even would result in the impairment of obligations of contracts
if the mortgagee is a bank, if the mortgagor is juridical entity, such as a and would violate the equal protection clause under the
corporation, the 1 year period does not apply. Under section 47, juridical constitution.
persons whose properties are sold can redeem until the registration of
foreclosure or 3 months after the foreclosure whichever is earlier. You take The RTC dismissed the action of the petitioner ruling that
note of that ha which is under the General Banking Law. This is sometimes redemption was made belatedly and that there was no
referred to as equity of redemption, but this is different from the equity of redemption made at all. The Court of Appeals affirmed the
redemption under Rule 68. RTC.
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The concept of police power is well-established in this There was no violation of the non-impairment clause. There is an impairment if
jurisdiction. It has been defined as the "state authority to a subsequent law changes the terms of the contract between the parties. In this
enact legislation that may interfere with personal liberty or case, Section 47 did not divest juridical persons of the right to redeem their
property in order to promote the general welfare." Its scope, foreclosed properties but only modified the time for the exercise of such right
ever-expanding to meet the exigencies of the times, even by reducing the one-year period originally provided in Act No. 3135.
to anticipate the future where it could be done, provides
enough room for an efficient and flexible response to With regard to the alleged violation of the equal protection clause— The
conditions and circumstances thus assuming the greatest difference in the treatment of juridical persons and natural persons was
benefits. based on the nature of the properties foreclosed – whether these are used
as residence, for which the more liberal one-year redemption period is retained,
The freedom to contract is not absolute; all contracts and all or used for industrial or commercial purposes, in which case a shorter term is
rights are subject to the police power of the State and not deemed necessary to reduce the period of uncertainty in the ownership of
only may regulations which affect them be established by the property and enable mortgagee-banks to dispose sooner of these acquired
State, but all such regulations must be subject to change from assets.
time to time, as the general well-being of the community
may require, or as the circumstances may change, or as A corporation has limited liability. The stockholders, the directors, cannot be
experience may demonstrate the necessity. Settled is the personally liable for the unpaid subscription. But if you are a natural person,
rule that the non-impairment clause of the Constitution must you can be held personally liable, the shorter period is fair because it will be
yield to the loftier purposes targeted by the Government. The easier for the corporation to dispose of properties because of its limited feature
right granted by this provision must submit to the demands of liability.
and necessities of the State’s power of regulation.
SC also took into consideration when the General Banking Law was crafted, and
Such authority to regulate businesses extends to the in essence, the right of redemption that is provided under Section 47 is
banking industry which, as this Court has time and again therefore constitutional.
emphasized, is undeniably imbued with public interest.
Having ruled that the assailed Section 47 of R.A. No. 8791 is Sometimes this provision in sec. 47 can be technically referred to as Equity of
constitutional, we find no reversible error committed by the Redemption but the period provided under sec. 47 is different from the 90 to
CA in holding that petitioner can no longer exercise the 120 days period provided under the Rules of Court’s Equity of Redemption in
right of redemption over its foreclosed properties after the case of judicial foreclosure. For right of redemption, the period is one year from
certificate of sale in favor of respondent had been registered the date of registration.
Q: What is this provided period in the General Banking Law? G.R. No. 171033 August 3, 2010
A: In the case of juridical persons which are allowed to exercise the right of CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF
redemption, the period is only "until, but not after, the registration of the QUEZON CITY, and ALVIN EMERSON S. YU vs. RIZAL
certificate of foreclosure sale" and in no case more than three (3) months after COMMERCIAL BANKING CORPORATION
foreclosure, whichever comes first.
Facts: The spouses Roberto and Monette Naval obtained a
Q: Is Goldenway correct in its contention? loan from respondent Rizal Commercial Banking Corporation,
A: No since Goldenway is a juridical person what should apply is the ____. In secured by a real estate mortgage of properties covered by
this case, the period within which the right of redemption was exercised was Transfer Certificate of Title (TCT) Nos. N-167986, N167987,
way beyond the allowable period. and N-167988. In 1998, the real estate mortgage was later
foreclosed and the properties were sold at public auction with
Q: What about the Constitutional issues that were raised by Goldenway here? respondent as the highest bidder. The corresponding
A: The Supreme Court said that it was not unconstitutional. Certificates of Sale were issued in favor of respondent on
August 4, 1998. However, the certificates of sale were
Q: Would it not be a violation of the equal protection clause? allegedly registered only on February 10, 2004.
A: There is no violation of the equal protection clause because Goldenway as a
juridical person was given an opportunity to redeem the property it’s just that Meanwhile, on May 30, 2003, an auction sale of tax delinquent
as to juridical persons the period is shorter. properties was conducted by the City Treasurer of Quezon
City. Included in the properties that were auctioned were two
Q: Why is there a necessity to treat juridical persons differently from natural (2) townhouse units covered by TCT Nos. N-167986 and N-
persons? What is the basis for it to be shorter? 167987 and the parcel of land covered by TCT No. N-167988.
A: The difference in the treatment of juridical persons and natural persons For these delinquent properties, Alvin Emerson S. Yu was
was based on the nature of the properties foreclosed – whether these are adjudged as the highest bidder. Upon payment of the tax
used as residence, for which the more liberal one-year redemption period is delinquencies, he was issued the corresponding Certificate of
retained, or used for industrial or commercial purposes, in which case a shorter Sale of Delinquent Property.
term is deemed necessary to reduce the period of uncertainty in the ownership
of property and enable mortgagee-banks to dispose sooner of these acquired On February 10, 2004, the Certificate of Sale of Delinquent
assets. Property was registered with the Office of the Register of
Deeds of Quezon City.
The exemption with regard to an extrajudicial foreclosure where the mortgagor
is a juridical person— even if the mortgagee is a bank, as long as the mortgagor On June 10, 2004, respondent tendered payment for all of the
is a juridical person, we apply Sec. 47 of RA 8791, the General Banking Law of assessed tax delinquencies, interest, and other costs of the
2000 which states that: Notwithstanding Act 3135, juridical persons whose subject properties with the Office of the City Treasurer,
property is being sold pursuant to an extrajudicial foreclosure, shall have the Quezon City. However, the Office of the City Treasurer refused
right to redeem the property in accordance with this provision until, but not to accept said tender of payment.
after, the registration of the certificate of foreclosure sale with the applicable
Register of Deeds which in no case shall be more than 3 months after Undeterred, on June 15, 2004, respondent filed before the
foreclosure, whichever is earlier. Owners of property that has been sold in a Office of the City Treasurer a Petition for the acceptance of its
foreclosure sale prior to the effectivity of this Act shall retain their redemption tender of payment and for the subsequent issuance of the
rights until their expiration. certificate of redemption in its favor. Nevertheless,
respondent’s subsequent tender of payment was also denied.
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Consequently, respondent filed a Petition for Mandamus with therein who shall remain in the possession of the owner or
Prayer for Issuance of a Temporary Restraining Order and a person having legal interest therein who shall be entitled to
Writ of Preliminary Injunction3 before the RTC. Petitioners the income and other fruits thereof.
contended, among other things, that it had until February 10,
2005, or one (1) year from the date of registration of the The local treasurer or his deputy, upon receipt from the
certificate of sale on February 10, 2004, within which to purchaser of the certificate of sale, shall forthwith return to
redeem the subject properties, pursuant to Section 78 of the latter the entire amount paid by him plus interest of not
Presidential Decree (P.D.) No. 464 or the Real Property Tax more than two percent (2%) per month. Thereafter, the
Code. property shall be free from all lien of such delinquent tax,
interest due thereon and expenses of sale.”
After the parties filed their respective pleadings, the RTC
initially denied the petition in the Order4 dated December 6, From the foregoing, the owner of the delinquent real property
2004. In denying the petition, the RTC opined that or person having legal interest therein, or his representative,
respondent’s reliance on Section 78 of P.D. No. 464 as basis of has the right to redeem the property within one (1) year from
the reckoning period in counting the one (1) year period within the date of sale upon payment of the delinquent tax and other
which to redeem the subject properties was misplaced, since fees.
P.D. No. 464 has been expressly repealed by Republic Act
(R.A.) No. 7160, or the Local Government Code. Verily, the period of redemption of tax delinquent properties
should be counted not from the date of registration of the
It has to be noted that in this case Quezon City has an certificate of sale, as previously provided by Section 78 of P.D.
ordinance which provides that he one-year redemption period No. 464, but rather on the date of sale of the tax delinquent
should be counted from the date of the annotation of the sale property, as explicitly provided by Section 261 of R.A. No.
of the property at the proper registry. 7160.
The owner or any person holding a lien or claim over a tax To harmonize the provisions of the two laws and to maintain
delinquent property sold at public auction has one (1) year the policy of the law to aid rather than to defeat the owners
from the date of registration of sale to redeem the property. right to redeem his property, Section 14 (a), Paragraph 7 of
However, since the passing of R.A. No. 7160, such is no longer City Ordinance No. SP-91, S-93 should be construed as to
controlling. The issue of whether or not R.A No. 7160 or the define the phrase one (1) year from the date of sale as
Local Government Code, repealed P.D. No. 464 or the Real appearing in Section 261 of R.A. No. 7160, to mean one (1)
Property Tax Code has long been laid to rest by this Court. year from the date of the annotation of the sale of the
property at the proper registry.
Jurisdiction thrives to the effect that R.A. No. 7160 repealed
P.D. No. 464. From January 1, 1992 onwards, the proper basis Consequently, the counting of the one (1) year redemption
for the computation of the real property tax payable, including period of property sold at public auction for its tax
penalties or interests, if applicable, must be R. A. No. 7160. delinquency should be counted from the date of annotation of
the certificate of sale in the proper Register of Deeds. Applying
Inasmuch as the crafter of the Local Government Code clearly the foregoing to the case at bar, from the date of registration
worded the above-cited Section to repeal P.D. No. 464, it is a of the Certificate of Sale of Delinquent Property on February
clear showing of their legislative intent that R.A. No. 7160 was 10, 2004, respondent had until February 10, 2005 to redeem
to supersede P.D. No. 464. As such, it is apparent that in case the subject properties. Hence, its tender of payment of the
of sale of tax delinquent properties, R.A. No. 7160 is the subject properties tax delinquencies and other fees on June
general law applicable. Consequently, as regards redemption 10, 2004, was well within the redemption period, and it was
of tax delinquent properties sold at public auction, the manifest error on the part of petitioners to have refused such
pertinent provision is Section 261 of R.A. No. 7160, which tender of payment.
provides:
Absent an ordinance in any other case involving real property
“Section 261. Redemption of Property Sold. Within one (1) tax delinquency, RA 7160 applies.
year from the date of sale, the owner of the delinquent real
property or person having legal interest therein, or his Section 7. In any sale made under the provisions of this Act,
representative, shall have the right to redeem the property the purchaser may petition the Court of First Instance of the
upon payment to the local treasurer of the amount of province or place where the property or any part thereof is
delinquent tax, including the interest due thereon, and the situated, to give him possession thereof during the
expenses of sale from the date of delinquency to the date of redemption period, furnishing bond in an amount equivalent
sale, plus interest of not more than two percent (2%) per to the use of the property for a period of twelve months, to
month on the purchase price from the date of sale to the date indemnify the debtor in case it be shown that the sale was
of redemption. Such payment shall invalidate the certificate of made without violating the mortgage or without complying
sale issued to the purchaser and the owner of the delinquent with the requirements of this Act. Such petition shall be made
real property or person having legal interest therein shall be under oath and filed in form of an ex parte motion in the
entitled to a certificate of redemption which shall be issued by registration or cadastral proceedings if the property is
the local treasurer or his deputy. registered*, or in special proceedings in the case of property
registered under the Mortgage Law or under section one
From the date of sale until the expiration of the period of hundred and ninety-four of the Administrative Code, or of any
redemption, the delinquent real property shall remain in the other real property encumbered with a mortgage duly
possession of the owner or person having legal interest registered in the office of any register of deeds in accordance
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with any existing law, and in each case the clerk of the court
shall, upon the filing of such petition, collect the fees specified G.R. No. 129572 June 26, 2000
in paragraph eleven of section one hundred and fourteen of
Act Numbered Four hundred and ninety-six, as amended by PHILBANCOR FINANCE, INC. AND VICENTE HIZON, JR. vs.
Act Numbered Twenty-eight hundred and sixty-six, and the COURT OF APPEALS, THE HONORABLE DEPARTMENT OF
court shall, upon approval of the bond, order that a writ of AGRARIAN REFORM ADJUDICATION BOARD (DARAB),
possession issue, addressed to the sheriff of the province in ALFREDO PARE, PABLO GALANG and AMADO VIE
which the property is situated, who shall execute said order
immediately FACTS: Private respondents Alfredo Pare, Pablo Galang and
Amado Vie, as plaintiffs, filed with the Provincial Agrarian
DISCUSSION Reform Adjudication Board (PARAB) a complaint for
maintenance of possession with redemption and tenancy right
Q: What period is provided under the Local Government Code (LGC)? of pre-emption against petitioners Philbancor Finance, Inc. and
A: Under the LGC it is now 1 year from the date of the sale. Vicente Hizon, Jr. Private respondents alleged, inter alia, that
petitioner Vicente Hizon, Jr. is the owner of the disputed
Q: Does it have the same interpretation in ACT 3135 wherein even if the agricultural lands and that they (private respondents) are the
provision stated that it is to be reckoned from the date of sale, it should be legitimate and bona fide tenants thereof; that on October 13,
interpreted as from the date of the registration of the sale? 1983, petitioner Hizon, without their knowledge, mortgaged
A: No. It is to be reckoned from the date of the sale itself. the disputed lots to petitioner Philbancor Finance, Inc.; that
petitioner Hizon failed to pay his obligations to petitioner
Q: In this case was the tender of payment made within the said period, 1 year Philbancor, which eventually led to the sale of the mortgaged
from the date of sale? lots to the latter; that they came to know of the transaction
A: In this case, the ordinance states that it should be reckoned from the date of only when they were notified by petitioner Philbancor to
the annotation vacate the lots; that they have been tenants on the lots for
more than fifty (50) years; that petitioner Philbancor
Q: Is that not contrary to what is provided in the LCG? Which will prevail the threatened to take from them the actual or physical
ordinance of the LGC? possession of the agricultural lots; that unless the threatened
A: NO. The interpretation of the ordinance because aside from the liberal acts of petitioner are restrained, they will suffer substantial
construction in order to protect the rights of the redemptioner, the rule in and irreparable injury.
Statutory Construction is that if there is a general law and a special law, the
special law should prevail. In this case, since the ordinance of Quezon City is a In his answer, petitioner Hizon admitted that private
specific law then it should prevail over the LGC. respondents are his bonafide and legitimate tenants but he
averred, by way of affirmative defenses, that he is not
The first thing to take note is that this involves not a judicial foreclosure sale but threatening to take possession of the disputed lots as he is no
a tax delinquency sale for failure to pay the real property taxes which gives the longer the owner thereof after said lots were foreclosed by
local government the right to sell tax delinquent properties to pay off the petitioner Philbancor; that private respondents were aware
unpaid taxes. I decided to include this so you will not get confused with the when he mortgaged the lots as they were with him when he
redemption period. tried to negotiate for payment of his loan to petitioner
Philbancor.
First thing that was alleged was the provision in PD 464, 1 year from the date of
registration. However, inasmuch as in the LGC there is a showing that the Philbancor alleged, among others, that it has no tenancy or
legislative intent of RA 7160 was to supersede PD 464 in case of sale of tax agricultural relationship with private respondents considering
delinquent properties. RA 7160 is now the general law applicable to which sec. that it acquired ownership over the disputed lots by virtue of
261 shall be applied within 1 year from the date of sale. The phrase within 1 an extra-judicial foreclosure sale pursuant to Act 3135, as
year from the date of sale should not be interpreted in the same way as we amended; that it is not an agricultural lessor as contemplated
interpret ACT 3135. This is from the date of actual sale and not of registration. in Section 10 of Republic Act (RA) No. 3844, as amended; that
assuming private respondents have the right to redeem the
Why is it that in this case, redemption was still allowed 1 year from the date of lots in question, such right has already expired in accordance
annotation or registration? with Section 12 of R.A. 3844, which states that the right of
redemption may be exercised within two (2) years from the
It is because of the city ordinance which explicitly stated that the one year registration of the sale.
period should be counted as within 1 year from the annotation of the sale of
the property at the property registry. Provincial adjudicator rendered a decision in favor of the
private respondents. Petitioners filed with the Court of
The SC discussed the statutory construction. “A general law and a special law Appeals a petition for review of the decision of the DARAB. CA
on the same subject should be accordingly read together and harmonized, if dismissed said petition.
possible, with a view to giving effect to both. Where there are two acts, one of
which is special and particular and the other general which, if standing alone, ISSUE: Whether or not the private respondents could still
would include the same matter and thus conflict with the special act, the special exercise their right of redemption of the parcels of land sold at
must prevail, since it evinces the legislative intent more clearly than that of the public auction due to foreclosure of the mortgages thereon
general statute and must be taken as intended to constitute an exception to the considering that they invoked their right to redeem only on
rule.” July 14, 1992, seven years after the date of registration of the
certificate of sale with the Register of Deeds.
Furthermore, “the law protects the original owner. It is the policy of the law to
aid rather than to defeat the owners’ right. Therefore, redemption should be HELD: Yes. Republic Act No. 3844, Section 12, provides as
looked upon with favor and where no injury will follow, a liberal construction follows:
will be given to our redemption laws, specifically on the exercise of the right to
redeem.” In case the landholding is sold to a third person without the
knowledge of the agricultural lessee, the latter shall have the
Take note of the law or ordinance applicable to a specific city or municipality. In right to redeem the same at a reasonable price and
the absence of any ordinance similar to this in Quezon City, the redemption consideration. Provided, that the entire landholding sold must
period fora tax delinquent sale of property should be 1 year from the date of be redeemed. Provided further, that where there are two or
sale as provided in the LGC. more agricultural lessees, each shall be entitled to said right of
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redemption only to the extent of the area actually cultivated because DBP and ERHC signed an agreement to postpone the
by him. The right of redemption under this section may be 12 August 1986 auction sale. ERHC, however, disputes the
exercised within two (2) years from the registration of the sale authority of Jaime Nuevas who signed the agreement for
and shall have priority over any other right of legal ERHC.
redemption.
In a letter dated 24 November 1986, ERHC informed DBP of its
In this case, the certificate of sale of the subject property, intention to lease the foreclosed properties.
which was sold at public auction, was registered with the
Register of Deeds of Pampanga on July 31, 1985. The two-year On 22 December 1986, ERHC filed with the Regional Trial Court
redemption period thus expired on July 31, 1987. The of Iriga City a complaint for annulment of the foreclosure sale
complaint for redemption was filed by respondents only on of the personal and real properties. Subsequently, ERHC filed a
July 14, 1992, five (5) years after expiration of the redemption Supplemental Complaint. ERHC alleged that the foreclosure
period prescribed by law. was void mainly because (1) DBP failed to comply with the
procedural requirements prescribed by law; and (2) the
Nonetheless, private respondents may continue in possession foreclosure was premature.
and enjoyment of the land in question as legitimate tenants
because the right of tenancy attaches to the landholding by
operation of law. The leasehold relation is not extinguished by ISSUES and RULING:
the alienation or transfer of the legal possession of the 1. Whether DBP complied with the posting and publication
landholding. requirements under applicable laws for a valid foreclosure.
Q: What is RA 3844? DBP insists that the non-execution of the certificate of posting
A: The Agricultural Land Reform Act of the auction sale notices did not invalidate the foreclosure.
CORRECT.
Q: What is the period of redemption provided therein? Is it one year?
A: No, the period of redemption is 2 years from the registration of the sale. A certificate of posting is not required, much less considered
indispensable for the validity of an extrajudicial foreclosure
“In this case, the certificate of sale of the subject property, which was sold at sale of real property under Act No. 3135. In the present case,
public auction, was registered with the Register of Deeds of Pampanga on July the foreclosing sheriffs failed to execute the certificate of
31, 1985. The two-year redemption period thus expired on July 31, 1987. The posting of the auction sale notices. However, this fact alone
complaint for redemption was filed by respondents only on July 14, 1992, five does not prove that the sheriffs failed to post the required
(5) years after expiration of the redemption period prescribed by law. notices. As held in Bohanan, the fact alone that there is no
certificate of posting attached to the sheriff's records is not
Nonetheless, private respondents may continue in possession and enjoyment of sufficient to prove the lack of posting.
the land in question as legitimate tenants because the right of tenancy attaches
to the landholding by operation of law. The leasehold relation is not Based on the records, DBP presented sufficient evidence to
extinguished by the alienation or transfer of the legal possession of the prove that the sheriffs posted the notices of the extrajudicial
landholding.” sale.
Here, do take note that the procedure to be followed in relation to extrajudicial In the absence of contrary evidence, as in this case, the
foreclosure proceedings must be strictly complied with. The importance of presumption prevails that the sheriffs performed their official
notice and publication, in an extrajudicial proceeding is emphasized. For duty of posting the notices of sale. Consequently, we hold that
example, the property must be clearly identified, if in the as publication, the the non-execution of the certificate of posting cannot nullify
title number or description of boundaries is wrong, then the foreclosure the foreclosure of the chattel and real estate mortgages in the
proceedings will not be valid. instant case.
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3. Is it possible to only have ONE PUBLISHED NOTICE A: No. The auction sale is a public auction so if only the parties agree to the
OF SALE, but the subsequent RESCHEDULED sale will be valid foreclosure date, it becomes a private sale.
without need of another publication?
“Publication, therefore, is required to give the foreclosure sale a reasonably
YES. If the first notice of sale EXPRESSLY STATES AND ALLOWS wide publicity such that those interested might attend the public sale. To allow
the holding of a rescheduled auction sale without reposting or the parties to waive this jurisdictional requirement, result in converting into a
republication of the notice. However, the rescheduled auction private sale what ought to be a public auction.”
sale will only be valid if the rescheduled date of auction is
clearly specified in the prior notice of sale. The rescheduled Q: When is it possible that the sale would still comply with the requirement of
dates must be SPECIFIED. The absence of this information in publication without the need for republication despite transfer of the
the prior notice of sale will render the rescheduled auction scheduled date of the sale?
sale void for lack of reposting or republication. If the notice of A: The rescheduled auction sale will only be valid if the rescheduled date of
auction sale contains this particular information, whether or auction is clearly specified in the prior notice of sale. The absence of this
not the parties agreed to such rescheduled date, there is no information in the prior notice of sale will render the rescheduled auction sale
more need for the reposting or republication of the notice of void for lack of reposting or republication. If the notice of auction sale contains
the rescheduled auction sale. this particular information, whether or not the parties agreed to such
rescheduled date, there is no more need for the reposting or republication of
The Office of the Court Administrator issued Circular No. the notice of the rescheduled auction sale.
72002 pursuant to the 14 December 1999 Resolution of this
Court in A.M. No. 99-10-05-0, as amended by the Resolutions This is based on Circular No. 7-2002 pursuant to the 14 December 1999
of 30 January 2001 and 7 August 2001. The Court issued these Resolution of this Court in A.M. No. 99-10-05-0, as amended by the Resolutions
Resolutions for two reasons. of 30 January 2001 and 7 August 2001.
First, the Court seeks to minimize the expenses which the With the added information in the notice of sale, the mortgagee need not cause
mortgagee incurs in publishing the notice of extrajudicial sale. the reposting and republication of the notice of the rescheduled auction sale.
With the added information in the notice of sale, the There is no violation of the notice requirements under Acts Nos. 3135 and 1508
mortgagee need not cause the reposting and republication of precisely because the interested parties as well as the public are informed of
the notice of the rescheduled auction sale. There is no the schedule of the next auction sale, if the first auction sale does not proceed.
violation of the notice requirements under Acts Nos. 3135 and Therefore, the purpose of a notice of sale, which is to notify the mortgagor and
1508 precisely because the interested parties as well as the the public of the foreclosure sale, is satisfied.
public are informed of the schedule of the next auction sale, if
the first auction sale does not proceed. Therefore, the purpose In the instant case, there is no information in the notice of auction sale of any
of a notice of sale, which is to notify the mortgagor and the date of a rescheduled auction sale. Even if such information were stated in the
public of the foreclosure sale, is satisfied. notice of sale, the reposting and republication of the notice of sale would still
be necessary because Circular No. 7-2002 took effect only on 22 April 2002.
Second, the Court hopes to deter the practice of some There were no such guidelines in effect during the questioned foreclosure.
mortgagors in requesting postponement of the auction sale of
real properties, then later attacking the validity of the Clearly, DBP failed to comply with the publication requirement under Act No.
foreclosure for lack of republication. This practice will only 3135. There was no publication of the notice of the rescheduled auction sale of
force mortgagees to deny outright requests for postponement the real properties. Therefore, the extrajudicial foreclosure of the real estate
by mortgagors since it will only mean added publication mortgage is void.
expense on the part of mortgagees. Such development will
eventually work against mortgagors because mortgagees will DBP, however, complied with the mandatory posting of the notices of the
hesitate to grant postponements to mortgagors. auction sale of the personal properties. Under the Chattel Mortgage Law, the
only requirement is posting of the notice of auction sale. There was no
In the instant case, there is no information in the notice of postponement of the auction sale of the personal properties and the
auction sale of any date of a rescheduled auction sale. Even if foreclosure took place as scheduled. Thus, the extrajudicial foreclosure of the
such information were stated in the notice of sale, the chattel mortgage in the instant case suffers from no procedural infirmity.
reposting and republication of the notice of sale would still be
necessary because Circular No. 7-2002 took effect only on 22 Here you have to distinguish the requirement of posting as required in Act 3135
April 2002. There were no such guidelines in effect during the and the certificate of posting issued with the sheriff. The certificate of posting is
questioned foreclosure. not required for the validity of an extrajudicial foreclosure. The fact alone that
there is no certificate of posting attached to the sheriff’s record is not sufficient
DISCUSSION to prove the lack of posting. What the law requires is the posting of the notice
of sale, which is present in this case, and not the execution of the certificate of
Q: What is the requirement? posting. Moreover, the presumption prevails that the sheriffs performed their
A: Publication, and posting of the notice of sale in conspicuous public places official duty of posting the notices of sale.
Q: Was the requirement of posting duly complied with? Now, about the issue with regard to the publication. There was a publication of
A: Yes. The sheriff posted the notices of the sale in places where the property is the sale here in 3 different dates in a newspaper of general circulation but the
situated, and further there is a presumption of regularity of in the exercise of date provided therein is different from the date of the actual date of sale
the official function of the sheriff. because they moved the said sale.
Q: How about the issue to the publication? We could apply the same rule here with regard to extrajudicial foreclosure so
A: It was not complied with. “The Court held recently in Ouano v. Court of that there would be less expenses for publication. But in this instance, there is
appeals that republication in the manner prescribed by Act No. 3135 is no provision in the notice of sale that in case the first sale or first schedule the
necessary for the validity of a postponed extrajudicial foreclosure sale. Another sale will not push through, the sale will be transferred to another specific date.
publication is required in case the auction sale is rescheduled, and the absence That is not present in the case. That is not compliance with the foreclosure
of such republication invalidates the foreclosure sale.” proceedings which made it invalid.
Q: Assuming that there was already an agreement between the mortgagor The Court, with this notice, hopes to deter the practice of some mortgagors in
and mortgagee, would it not be sufficient to make the publication not requesting postponement of the auction sale of real properties, then later
required anymore? attacking the validity of the foreclosure for lack of republication. This practice
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will only force mortgagees to deny outright requests for postponement by requiring it being held applicable to subsequent sales as well
mortgagors since it will only mean added publication expense on the part of as to the first advertised sale of the property.
mortgagees.
The principal object of a notice of sale in a foreclosure of
Moreover, differentiate this with the Chattel Mortgage Law. Under the Chattel mortgage is not so much to notify the mortgagor as to inform
Mortgage Law, the only requirement is posting of the notice of auction sale. In the public generally of the nature and condition of the
this case, there was no postponement of the auction sale of the personal property to be sold, and of the time, place, and terms of the
properties and the foreclosure took place as scheduled. Thus, the extrajudicial sale. Notices are given to secure bidders and prevent a
foreclosure of the chattel mortgage in the instant case suffers from no sacrifice of the property. Clearly, the statutory requirements of
procedural infirmity. posting and publication are mandated, not for the mortgagors
benefit, but for the public or third persons. In fact, personal
Take note in this case of strict compliance with the requirement of notice of notice to the mortgagor in extrajudicial foreclosure
publication as provided under Act 3135. proceedings is not even necessary, unless stipulated. As such,
it is imbued with public policy considerations and any waiver
thereon would be inconsistent with the intent and letter of Act
FIRST DIVISION [G.R. No. 129279. March 4, 2003] No. 3135.
ALFREDO M. OUANO, petitioner, vs. COURT OF APPEALS, and
HEIRS OF JULIETA M. OUANO Publication, therefore, is required to give the foreclosure sale
a reasonably wide publicity such that those interested might
Facts: On June 8, 1977, respondent Julieta M. Ouano (Julieta), attend the public sale. To allow the parties to waive this
now deceased, obtained a loan from the Philippine National jurisdictional requirement would result in converting into a
Bank (PNB) in the amount of P104, 280.00. As security for said private sale what ought to be a public auction.
loan, she executed a real estate mortgage over two parcels of
land located at Opao, Mandaue City. She defaulted on her 2. Whether publication may be waived as agreed by the
obligation. On September 29, 1980, PNB filed a petition for parties
extrajudicial foreclosure with the City Sheriff of Mandaue City.
It cannot be waived. The principal object of a notice of sale in a
On November 4, 1980, the sheriff prepared a notice of sale foreclosure of mortgage is not so much to notify the
setting the date of public auction of the two parcels of land on mortgagor as to inform the public generally of the nature and
December 5, 1980 at 9:00 a.m. to 4:00 p.m. He caused the condition of the property to be sold, and of the time, place,
notice to be published in the Cebu Daily Times, a newspaper of and terms of the sale. Notices are given to secure bidders and
general circulation in Mandaue City, in its issues of November prevent a sacrifice of the property. Clearly, the statutory
13, 20 and 27, 1980. He likewise posted copies thereof in requirements of posting and publication are mandated, not for
public places in Mandaue City and in the place where the the mortgagors benefit, but for the public or third persons. In
properties are located. fact, personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not even necessary, unless
However, the sale as scheduled and published did not take stipulated. As such, it is imbued with public policy
place as the parties, on four separate dates, executed considerations and any waiver thereon would be inconsistent
Agreements to Postpone Sale (Agreements). These with the intent and letter of Act No. 3135.
Agreements were addressed to the sheriff, requesting the
latter to defer the auction sale to another date at the same 3. Whether the Rules of Court applies to an extrajudicial
time and place, without any further republication of the foreclosure sale, specifically, Rule 39, Section 24
Notice. Petitioner, however, insists that there was substantial Adjournment of Sale: By written consent of debtor and
compliance with the publication requirement, considering that creditor, the officer may adjourn any sale upon execution
prior publication and posting of the notice of the first date to any date agreed upon in writing by the parties. Without
were made such agreement, he may adjourn the sale from day to day,
if it becomes necessary to do so for lack of time to
ISSUES: complete the sale on the day fixed in the notice.
1. Whether the rescheduled extrajudicial foreclosure sale was
valid despite absence of republication of the Notice, No. At the outset, distinction should be made of the three
despite agreement between parties to do away with the different kinds of sales under the law, namely: an ordinary
republication execution sale, a judicial foreclosure sale, and an extrajudicial
foreclosure sale.
NO. The governing law for extrajudicial foreclosures is Act No.
3135 as amended by Act No. 4118. The provision relevant to An ordinary execution sale is governed by the pertinent
this case is Section 3, which provides: provisions of Rule 39 of the Rules of Court. Rule 68 of the
Rules of Court applies in cases of judicial foreclosure sale.
SEC. 3. Notice shall be given by posting notices of
the sale for not less than twenty (20) days in at On the other hand, Act No. 3135, as amended by Act No. 4118
least three public places of the municipality or city otherwise known as An Act to Regulate the Sale of
where the property is situated, and if such property Property under Special Powers Inserted in or Annexed to Real
is worth more than four hundred pesos, such notice Estate Mortgages applies in cases of extrajudicial foreclosure
shall also be published once a week for at least sale.
three consecutive weeks in a newspaper of general
circulation in the municipality of city. A different set of law applies to each class of sale mentioned.
It is a well-settled rule that statutory provisions governing The cited provision in the Rules of Court hence does not apply
publication of notice of mortgage foreclosure sales must be to an extrajudicial foreclosure sale.
strictly complied with, and that even slight deviations
therefrom will invalidate the notice and render the sale at 4. Whether or not Julieta’s act of requesting the
least voidable. Where required by the statute or by the terms postponement and repeatedly signing the Agreements
of the foreclosure decree, public notice of the place and time (WAIVER) had placed her under estoppel, barring her from
of the mortgage foreclosure sale must be given, a statute challenging the lack of publication of the auction sale.
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set aside the portion of the assailed right since there was no redemption of the foreclosed
RTC Orders that declared the DARIOs’ prayer for writ of property and the TRO expired upon dismissal of the complaint.
preliminary injunction as moot and academic. UNIONBANK’s UNIONBANK need not have informed private respondent that
motion for reconsideration of the abovementioned decision it was consolidating its title over the property, upon the
was likewise rejected for lack of merit on 7 April 1998. expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, the
UNIONBANK’s contention: came to this Court claiming to be a ownership of the property sold becomes consolidated in the
mortgagee in good faith and for value with a right to purchaser. Notice to the mortgagors and with more reason, to
consolidate ownership over the foreclosed property with the the DARIOs who are not even parties to the mortgage contract
redemption period having expired and there having been no nor to the extrajudicial sale is not necessary.
redemptioners. UNIONBANK contends that the TRO which
provisionally enjoined the tolling of the redemption period In real estate mortgage, when the principal obligation is not
was automatically dissolved upon dismissal of the complaint paid when due, the mortgage has the right to foreclose the
on 17 October 1994. mortgage and to have the property seized and sold with a view
Conformably, consolidation of title in its name and the to applying the proceeds to the payment of the principal
issuance of TCT No. 120929 rendered further proceedings on obligation. Foreclosure may be effected either judicially or
the application for injunction academic. Moreover, the alleged extrajudicially.
fraudulent mortgage was facilitated through the DARIOs’
negligence so they must bear the loss. It also contends that In a public bidding during extra-judicial foreclosure, the
since the DARIOs had filed several pleadings, due process, creditor-mortgagee, trustee, or other person authorized to act
being an opportunity to be heard either through pleadings or for the creditor may participate and purchase the mortgaged
oral arguments, was observed. property as any other bidder. Thereafter the mortgagor has
one year within which to redeem the property from and after
Dario’s contention: that UNIONBANK’s consolidation of the registration of sale with the Register of Deeds. In case of non-
title in its name was in bad faith, vitiated a standing court redemption, the purchaser at foreclosure sale shall file with
order, and is against the law, thus void ab initio. The the Register of Deeds, either a final deed of sale executed by
application for preliminary injunction was not rendered moot the person authorized by virtue of the power of attorney
and academic by consolidation, which took place during the embodied in the deed or mortgage, or his sworn statement
lifetime of the TRO, and did not follow the proper legal attesting to the fact of non-redemption; whereupon, the
procedure due to the surreptitious manner it was Register of Deeds shall issue a new certificate of title in favor
accomplished. By treating the application for preliminary of the purchaser after the owner’s duplicate of the certificate
injunction as moot and academic and denying the motion for has been previously delivered and cancelled. Thus, upon
indirect contempt without hearing, the RTC order ran afoul failure to redeem foreclosed realty, consolidation of title
with the requirements of due process. becomes a matter of right on the part of the auction buyer,
and the issuance of a certificate of title in favor of the
ISSUE: Whether or not the consolidation of title in purchaser becomes ministerial upon the Register of Deeds.
UNIONBANK’s name proper. YES
HELD: UNIONBANK’s consolidation of title over the property
on 24 October 1994 was proper, though precipitate. Contrary DISCUSSION
to the DARIOs’ allegation UNIONBANK violated no standing
court order. The only bar to consolidation was the temporary Q: In the filing of the case on Oct. 4, did it stop the one year period from
restraining order issued by Justice Lipana-Reyes on 10 October running? Did it prevent the consolidation of the sale?
1994 which effectively halted the tolling of the redemption A: No. It did not prevent the consolidation.
period 7 days short of its expiration. When the DARIOs’
original complaint was dismissed on 17 October 1994 for Q: Would it not prejudice the mortgagor if eventually the annulment of the
failure to append a certification of non-forum shopping, the foreclosure sale will be granted? Will the consolidation of the title in the name
TRO, as an ancillary order that cannot stand independent of of the highest bidder prejudice the right of the mortgagor owner of the
the main proceeding, became functus officio. Thus the tolling property in case the annulment of the foreclosure will be granted?
of the 12-month redemption period, interrupted by the filing A: No. THE CONSOLIDATION OF OWNERSHIP OVER THE MORTGAGED PROPERTY
of the complaint and the TRO, recommenced and eventually IN FAVOR OF PETITIONER AND THE ISSUANCE OF A NEW TITLE IN ITS NAME
expired 7 days thereafter or on 24 October 1994, the date of DURING THE PENDENCY OF THE ACTION FOR ANNULMENT AND
the disputed consolidation. RECONVEYANCE WILL NOT CAUSE IRREPARABLE INJURY TO PRIVATE
RESPONDENTS; THE NOTICE OF LIS PENDENS ANNOTATED ON PETITIONERS
The motion for reconsideration and to amend complaint filed TITLE SUBJECT TO THE OUTCOME OF THE LITIGATION, SUFFICIENTLY PROTECTS
by private respondent on 20 October 1994 was of no moment, THE INTEREST OF PRIVATE RESPONDENTS IN THE PROPERTY.
this Court recognizing that “a dismissal, discontinuance or non-
suit of an action in which a restraining order or temporary To be entitled to the injunctive writ, movant must show that there exists a right
injunction has been granted operates as a dissolution of the to be protected which is directly threatened by an act sought to be enjoined.
restraining order or temporary injunction,” regardless of Furthermore, there must be a showing that the invasion of the right is material
whether the period for filing a motion for reconsideration of and substantial and that there is an urgent and paramount necessity for the
the order dismissing the case or appeal therefrom has expired. writ to prevent a serious damage. The injunctive remedy prevents a threatened
The rationale therefor is that even in cases where an appeal is or continuous irremediable injury to some of the parties before their claim can
taken from a judgment dismissing an action on the merits, the be thoroughly investigated and advisedly adjudicated; it is resorted to only
appeal does not suspend the judgment, hence the general rule when there is a pressing necessity to avoid injurious consequences which
applies that a temporary injunction terminates automatically cannot be remedied under any standard compensation.
on the dismissal of the action.
In the case at bar, the consolidation of ownership over the mortgaged property
We disagree with the appellate court’s observation that in favor of UNIONBANK and the issuance of a new title in its name during the
consolidation deprived the DARIOs of their property without pendency of an action for annulment and reconveyance will not cause
due process. It is settled that the buyer in a foreclosure sale irreparable injury to private respondents who are plaintiffs in the said action
becomes the absolute owner of the property purchased if it is that will merit the protection of the court through the writ of preliminary
not redeemed during the period of one year after the injunction.
registration of the sale. Consolidation took place as a matter of
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This is because as purchaser at a public auction, UNIONBANK is only substituted increased by P1, 800,000, making the amount P5, 000,000. For
to and acquires the right, title, interest and claim of the judgment debtors or failure of petitioners to pay the full amount of the outstanding
mortgagors to the property at the time of levy. Perforce, the judgment in the loan upon demand, private respondent applied for the
main action for reconveyance will not be rendered ineffectual by the extrajudicial foreclosure of the real estate mortgage.
consolidation of ownership and the issuance of title in the name of
UNIONBANK. TRIAL COURT: Granted respondent’s motion for a declaration
of general default and allowed them to present evidence ex
More importantly, with the main action for reconveyance pending before the parte.
RTC, the notice of lis pendens, which despite consolidation remains annotated COURT OF APPEALS: Petitioners appealed. However, it was
on UNIONBANKs transfer certificate of title subject to the outcome of the dismissed since the counsel for petitioners failed to indicate
litigation, sufficiently protects private respondents’ interest over the property. the updated PTR Number in the said petition, which is a
A transferee pendente lite stands exactly in the shoes of the transferor and is ground for outright dismissal under B.M 1132. The court held
bound by any judgment or decree which may be rendered for or against the that a proceeding for the issuance of a writ of possession is ex
transferor. Once a notice of lis pendens has been duly registered, any parte in nature.
cancellation or issuance of the title of the land involved as well as any
subsequent transaction affecting the same, would have to be subject to the ISSUES: Whether the writ of possession was properly issued
outcome of the litigation. In other words, upon the termination of the litigation despite the pendency of a case questioning the validity of the
there can be no risk of losing the property or any part thereof as a result of any extrajudicial foreclosure sale even when petitioners were
conveyance of the land or any encumbrance that may be made thereon declared in default.
posterior to the filing of the notice of lis pendens.
HELD/REASON: The Supreme Court held that since the private
Q: To what extent will be the right of the highest bidder, as in this case, Union respondent had purchased the property at the foreclosure
Bank? sale, their right over the said property became absolute,
A: A buyer in a foreclosure sale becomes the absolute owner of the property if vesting in it the corollary right of possession. -Petitioners
it is not redeemed during the one year redemption period. Consolidation takes cannot oppose or appeal the court’s order granting the writ of
place as a matter of right since there was no redemption of the foreclosed possession in an ex parte proceeding. The remedy of
property. More so, when the TRO expired upon the dismissal of the complaint. petitioners is to have the sale set aside and the writ of
Union bank need not inform the private respondents that it was consolidating possession cancelled in accordance with Section 8 of Act No.
its title over the property. Consolidation is a matter of right as to the highest 3135, as amended: SEC. 8. The debtor may, in the proceedings
bidder. Notice to the mortgagor-owner, to the private respondents who are not in which possession was requested, but not later than thirty
even parties to the parties in the extrajudicial sale is not necessary. The days after the purchaser was given possession, petition that
mortgagee has the right to foreclose the mortgage, have the property seized the sale be set aside and the writ of possession cancelled,
and sold, with the view to apply the proceeds to the principal obligation. The specifying the damages suffered by him, because the
mortgagor has one year to redeem the property from the registration of the mortgage was not violated or the sale was not made in
sale, and upon failure to redeem consolidation becomes a matter of right on the accordance with the provisions hereof.
part of the auction buyer, and the issuance of the certificate of title in favor of
the purchaser becomes ministerial upon the register of deeds. The PETITION DISMISSED.
consolidation of ownership in favour of Union Bank and his issuance of new title
in its name during the pendency of an action for annulment and reconveyance
will not cause irreparable injury to the private respondents. DISCUSSION:
After the sale has already taken place, the sheriff will now issue a provisional
certificate of sale because there is still the 1 year redemption period. Q: How about within the 1 year redemption period can the highest bidder file
Thereafter, the sale will be registered in the Registry of Deeds. for a writ of possession even if the 1 year period has not yet lapsed?
A: Yes. Sec. 7 of Act 3135, which provides that there is a need to file for a bond,
How to validly redeem? but the bond is only required if he wants to possess the property during the
redemption period.
You must pay within the redemption period as provided under the law. You pay
the purchase price plus one percent (1%) interest per month and taxes from Q: Is there a violation of due process with this petition for writ of possession
date of registration of sale until date of redemption. (One percent because this when the mortgagors were declared in default?
was the previous legal interest rate. But with the new interest, six percent (6%), A: No, because after the 1 year redemption period, it is already a ministerial
legal interest rate effective July 1, 2013, then you apply the appropriate interest duty for the court to issue a writ of possession.
rate effective from that date.) Payment is made to the redemptioner or to the
sale officer or the sheriff. The written official redemption must be served on Q: Because what is the nature of this writ of possession?
the officer who made the sale and a duplicate with the Register of Deeds. If no A: It is ex-parte.
redemption is made, the sheriff will issue a final certificate of sale.
MALLARI vs. GOVERNMENT SERVICE INSURANCE SYSTEM
During the 1 year redemption period or even thereafter, who gets to have
possession of the property?
FACTS: In 1968, the petitioner obtained two loans totalling
P34, 000.00 from respondent GSIS. To secure the
G.R. No. 169190 / February 11, 2010 performance, he mortgaged two parcels of land registered
CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO vs. under his and his wife Marcelina Mallari’s names. However, he
HON. HILARIO L. LAQUI paid GSIS about ten years after contracting the obligations
only P10, 000.00 and P20, 000.00.
Doctrine: The right to possession of a purchaser at an
extrajudicial foreclosure sale is not affected by a pending case Nearly three years later (1984), GSIS applied for the
questioning the validity of the foreclosure proceeding. The extrajudicial foreclosure of the mortgage by reason of his
latter is not a bar to the former. failure to settle his account. He requested an updated
computation of his outstanding account. He persuaded the
FACTS: November 1994: Philippine Bank of Communication sheriff to hold the publication of the foreclosure to await
(respondent) loaned P3, 200,000 to the petitioners. To secure action on his pending request for final accounting (that is,
the loan, petitioners executed in favor of private respondent a taking his payments of P30, 000.00 made in 1978 into
Deed of Real Estate Mortgage. account). GSIS responded to his request. It finally commenced
August 1997: the mortgage was amended, and the loan was extrajudicial foreclosure proceedings against him because he
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had meanwhile made no further payments. Deeds."36 This construction was due to the fact that the
The petitioner sued GSIS (prelim injunction). The RTC decided sheriff’s sale of registered (and unregistered) lands did not
in his favor, nullifying the extrajudicial foreclosure and auction take effect as a conveyance, or did not bind the land, until the
sale. GSIS appealed to the CA, which reversed the RTC. sale was registered in the Register of Deeds.
Petitioner elevated the CA decision to this Court via petition
for review on certiorari. Desiring to avoid any confusion arising from the conflict
between the texts of the Rules of Court (1940 and 1964) and
This Court denied his petition for review and motion for Act No. 3135, on one hand, and the jurisprudence clarifying
reconsideration. As a result, the CA decision became final and the reckoning of the redemption period in judicial sales of real
executory, rendering unassailable both the extrajudicial property, on the other hand, the Court has incorporated in
foreclosure and auction sale. Section 28 of Rule 39 of the current Rules of Court (effective
on July 1, 1997) the foregoing judicial construction of
Because of the petitioner’s request for an extension of time to reckoning the redemption period from the date of the
vacate the properties, GSIS acceded to the request. Yet, the registration of the certificate of sale, to wit:
petitioner did not voluntarily vacate the properties, but
instead filed a MR and/or to quash the writ of execution and Sec. 28. Time and manner of, and amounts payable on,
motion to hold GSIS in contempt of court for painting the successive redemptions; notice to be given and filed. — The
fence of the properties during the pendency of his said judgment obligor, or redemptioner, may redeem the property
motion. from the purchaser, at any time within one (1) year from the
date of the registration of the certificate of sale, by paying the
ISSUE: W/N the petitioner, as defaulting mortgagor, was not purchaser the amount of his purchase, with one per centum
entitled under Act 3135, as amended, and its pertinent per month interest thereon in addition, up to the time of
jurisprudence to any prior notice of the application for the redemption, together with the amount of any assessments or
issuance of the writ of possession. taxes which the purchaser may have paid thereon after
purchase, and interest on such last named amount at the same
HELD: No. The petitioner, as defaulting mortgagor, was not rate; and if the purchaser be also a creditor having a prior lien
entitled under Act 3135, as amended, and its pertinent to that of the redemptioner, other than the judgment under
jurisprudence to any prior notice of the application for the which such purchase was made, the amount of such other lien,
issuance of the writ of possession. with interest.
A writ of possession, which commands the sheriff to place a Property so redeemed may again be redeemed within sixty
person in possession of real property, may be issued in: (60) days after the last redemption upon payment of the sum
paid on the last redemption, with two per centum thereon in
(1) Land registration proceedings under Section 17 of Act No. addition, and the amount of any assessments or taxes which
496; the last redemptioner may have paid thereon after
(2) Judicial foreclosure, provided the debtor is in possession of redemption by him, with interest on such last-named amount,
the mortgaged property, and no third person, not a party to and in addition, the amount of any liens held by said last
the foreclosure suit, had intervened; redemptioner prior to his own, with interest. The property
(3) Extrajudicial foreclosure of a real estate mortgage, pending may be again, and as often as a redemptioner is so disposed,
redemption under Section 7 of Act No. 3135, as amended by redeemed from any previous redemptioner within sixty (60)
Act No. 4118; and days after the last redemption, on paying the sum paid on the
(4) Execution sales, pursuant to the last paragraph of Section last previous redemption, with two per centum thereon in
33, Rule 39 of the Rules of Court. addition, and the amounts of any assessments or taxes which
the last previous redemptioner paid after the redemption
Anent the redemption of property sold in an extrajudicial thereon, with interest thereon, and the amount of any liens
foreclosure sale made pursuant to the special power referred held by the last redemptioner prior to his own, with interest.
to in Section 132 of Act No. 3135, as amended, the debtor, his
successor-in-interest, or any judicial creditor or judgment Written notice of any redemption must be given to the officer
creditor of said debtor, or any person having a lien on the who made the sale and a duplicate filed with the registry of
property subsequent to the mortgage or deed of trust under deeds of the place, and if any assessments or taxes are paid by
which the property is sold has the right to redeem the the redemptioner or if he has or acquires any lien other than
property at any time within the term of one year from and that upon which the redemption was made, notice thereof
after the date of the sale, such redemption to be governed by must in like manner be given to the officer and filed with the
the provisions of Section 464 to Section 466 of the Code of registry of deeds; if such notice be not filed, the property may
Civil Procedure, to the extent that said provisions were not be redeemed without paying such assessments, taxes, or liens.
inconsistent with the provisions of Act 3135. (30a) (Emphasis supplied).
In this regard, we clarify that the redemption period Accordingly, the mortgagor or his successor-in-interest must
envisioned under Act 3135 is reckoned from the date of the redeem the foreclosed property within one year from the
registration of the sale, not from and after the date of the sale, registration of the sale with the Register of Deeds in order to
as the text of Act 3135 shows. Although the original Rules of avoid the title from consolidating in the purchaser. By failing to
Court (effective on July 1, 1940) incorporated Section 464 to redeem thus wise, the mortgagor loses all interest over the
Section 466 of the Code of Civil Procedure as its Section 25 foreclosed property.38 The purchaser, who has a right to
(Section 464); Section 26 (Section 465); and Section 27 possession that extends beyond the expiration of the
(Section 466) of Rule 39, with Section 27 still expressly redemption period, becomes the absolute owner of the
reckoning the redemption period to be "at any time within property when no redemption is made, that it is no longer
twelve months after the sale;" and although the Revised Rules necessary for the purchaser to file the bond required under
of Court (effective on January 1, 1964) continued to provide in Section 7 of Act No. 3135, as amended, considering that the
Section 30 of Rule 39 that the redemption be made from the possession of the land becomes his absolute right as the land’s
purchaser "at any time within twelve (12) months after the confirmed owner. The consolidation of ownership in the
sale," the 12-month period of redemption came to be held as purchaser’s name and the issuance to him of a new TCT then
beginning "to run not from the date of the sale but from the entitles him to demand possession of the property at any time,
time of registration of the sale in the Office of the Register of and the issuance of a writ of possession to him becomes a
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matter of right upon the consolidation of title in his name. third person and as a third person he cannot be liable for any deficiency but if
you say judicial foreclosure, the mortgagee can still recover from the deficiency.
The court can neither halt nor hesitate to issue the writ of If will be part of the judgment that if the there is a deficiency, the mortgagee
possession. It cannot exercise any discretion to determine may still proceed against the debtor for the deficiency. As to extrajudicial
whether or not to issue the writ, for the issuance of the writ to foreclosure, under Act 3135, there is no provision which explicitly states that
the purchaser in an extrajudicial foreclosure sale becomes a the debtor will be liable for the deficiency. But the SC has been consistent in its
ministerial function. Verily, a marked distinction exists ruling that the mortgagee may still demand from the debtor the deficiency.
between a discretionary act and a ministerial one. A purely
ministerial act or duty is one that an officer or tribunal What if there is an excess?
performs in a given state of facts, in a prescribed manner, in Whether it is a judicial or extra-judicial, foreclosure, if there is an excess, it shall
obedience to the mandate of a legal authority, without regard be returned to the mortgagor.
to or the exercise of his own judgment upon the propriety or
impropriety of the act done. If the law imposes a duty upon a What about if the sale or if the purchase price during the sale is inadequate?
public officer and gives him the right to decide how or when Under obligations and contract, gross inadequacy of the price will not
the duty shall be performed, such duty is discretionary, not necessarily invalidate the sale unless there is fraud or other vitiation of consent.
ministerial. The duty is ministerial only when its discharge In an extra-judicial foreclosure sale or judicial foreclosure sale, if the price of the
requires neither the exercise of official discretion nor the thing is grossly inadequate, can the foreclosure sale be rescinded on the ground
exercise of judgment. that it is inadequate? Take note it is more liberal when it comes to redemption.
Why? Because with regard to whether it is equity of redemption—which is
The proceeding upon an application for a writ of possession is before the sale or before the confirmation of the sale, but essentially with these
ex parte and summary in nature, brought for the benefit of two foreclosure proceedings, if the price is grossly inadequate, as a general rule,
one party only and without notice being sent by the court to it will not justify the rescission of the sale. Why? Because if the price is
any person adverse in interest. The relief is granted even inadequate, it will be in favor of the mortgagor redemptioner. So as we have
without giving an opportunity to be heard to the person seen in some cases that we have discussed, the loss with be liberally construed
against whom the relief is sought. Its nature as an ex parte in favor of the redemptioner. Exception to the exception is if the inadequacy is
petition under Act No. 3135, as amended, renders the shocking to the conscience of man. But unless it can be proven that it is
application for the issuance of a writ of possession a non- shocking to the conscience, mere inadequacy of the price will not invalidate the
litigious proceeding. sale because it is in favour of the redemptioner.
It is clear from the foregoing that a non-redeeming mortgagor In relation to foreclosure proceedings, we also have to take note of equitable
like the petitioner had no more right to challenge the issuance mortgage provided under Art. 1602 wherein a deed of sale or a deed of sale
of the writ of execution cum writ of possession upon the ex with right to repurchase or an absolute sale could be deemed as an equitable
parte application of GSIS. He could not also impugn anymore mortgage. One of the instances provided in Article 1602 is when the price of the
the extrajudicial foreclosure, and could not undo the sale with the right to repurchase is unusually inadequate. So no sale but what
consolidation in GSIS of the ownership of the properties we have is an equitable mortgage. So again that would be in favor of the owner
covered by TCT No. 284272-R and TCT No. 284273-R, which of the property because it would only be subject to a lien and thereafter we
consolidation was already irreversible. Hence, his moves could seek for the reformation. Reformation is the remedy here if what was
against the writ of execution cum writ of possession were executed was a deed of sale but the intention was to have that property secure
tainted by bad faith, for he was only too aware, being his own the principal obligation. So the owner of the property can seek for reformation
lawyer, of the dire consequences of his non-redemption within of the said contract. Why? There was an agreement but not deed of sale, only a
the period provided by law for that purpose. mortgage.
But what if the mortgagee, based on that pacto de retro sale or deed of
absolute sale, will file an action for recovery of possession against the owner of
DISCUSSION
the property?
Q: So aside from the fact that the provision of Mallari was denied, what was
That would be the time that the owner of the property can raise the defense
ruling of the court?
that what they had was not a deed of sale or a deed of absolute sale or a pacto
A: Mallari as a lawyer was guilty of misconduct because he delayed the
de retro sale but rather an equitable mortgage by showing that there was a
proceedings.
principal obligation and any of the circumstances in Article 1602 are present.
But with that defense and if it is duly proven, the owner of the property would
The extrajudicial foreclosure was filed in 1984 but there were several
still continue in possession of that property and the mortgagee would not be
extensions, motions, cases of contempt of court, because as a lawyer, Mallari
entitled thereto but he will be entitled to foreclose the property if there is
would not incur attorney’s fees. Even if it was very clear that the foreclosure is
failure to pay the obligation.
proper, nevertheless, it was extended up to 2010. The SC pointed out that not
only was his petition denied but he was also found guilty of misconduct.
March 7 – Kaye
It’s a petition for writ of possession where the property is located and the
Last meeting we discussed the relevant provisions with regard to real estate
nature of this petition is ex-parte. In other words, notice to the mortgagor is not
mortgage in relation to Act 3135. Under the said law, it requires posting and
required and it does not violate the right to due process of the mortgagor in this
publication. We have emphasized in our past discussions the relevance of such
kind of petition. Second, it is ministerial. As long as the requisites have been
posting at conspicuous public places and we also have the publication wherein
complied with.
failure to comply of these requirements will invalidate the foreclosure. Let us
check the case of Ramirez which emphasizes this notice requirement.
A writ of possession will be granted when the following requisites are
complied with:
1. There was an extra judicial foreclosure proceeding; JOSE T. RAMIREZ v. THE MANILA BANKING
2. petitioner is the highest bidder; and CORPORATIONG.R.
No. 198800, December 11, 2013
3. that there was consolidation and title was already issued in
petitioner’s name. Reporter: Guinomla
Facts:
What about if there is a deficiency?
If the sale took place however the proceeds are not sufficient to extinguish the Ramirez obtained a loan from Manila Banking and mortgaged
obligation, can the creditor mortgagee proceed against the debtor for the his property. In their contract of mortgage, it was expressly
deficiency? -- Not necessarily the mortgagor. Because the mortgagor will be the stipulated that:
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“All correspondence relative to this MORTGAGE, to comply with this contractual provision for the contract is still obligated (? not
including demand letters, summons, subpoenas or clear). It’s not really an additional obligation imposed by law. But it is an
notifications of any judicial or extrajudicial actions shall obligation by virtue of the contract between the parties. So unless the parties
be sent to the MORTGAGOR” stipulate personal notice to the mortgagor in extrajudicial foreclosure
Ramirez defaulted in his obligation thus Manila Banking proceedings is not necessary.
proceeded with the extrajudicial foreclosure of the mortgaged
property without giving notice to Ramirez, contrary to what
they have stipulated as mentioned above. We also pointed out last meeting that if there is failure to redeem the property
Issue: What is the legal effect of violating an express within the 1 year period, the mortgagee may submit an affidavit of
stipulation of the deed of mortgage which requires personal consolidation and cancel the old title and a new one will be issued in favor of
notice to the petitioner–mortgagor by the respondent– the highest purchaser to which after the title has been consolidated, the highest
mortgagee bank? purchaser will now be entitled to possession thereof. And in fact, during the
period of redemption, the highest bidder is also entitled to the possession.
The extrajudicial foreclosure sale is NULL AND VOID. However, it is required to post a bond.
Personal notice to the mortgagor in extrajudicial foreclosure Now how about in this case of Sps Dulnuan v Metrobank
proceedings is not necessary because Section 3 of Act No.
3135 only requires the posting of the notice of sale in three SPS. DULNUAN v METROBANK
public places and the publication of that notice in a newspaper GR 19864 July 8, 2015
of general circulation HOWEVER, if there is an additional Reporter: Lagat
requirement as to the manner of giving notice as agreed by
the parties, IT MUST BE COMPLIED WITH, otherwise the Facts:
extrajudicial foreclosure sale will be The Sps entered into a contract of loan with Metrobank. To
void. secure the obligation, they instituted a real estate mortgage in
their property. The spouses defaulted in their obligation so
The Act only requires: Metrobank sought the extrajudicial foreclosure of their
(1) the posting of notices of sale inthree public places, and property wherein it emerged as the highest bidder. After the
(2) the publication of the same in a newspaper of general lapse of the period of redemption period without the Sps
circulation. redeeming their property, Metrobank sought the
consolidation of title in its favor. The Sps opposed such by
Personal notice to the mortgagor is not necessary. filing a complaint for annulment of the mortgage contending
Nevertheless, the parties to the mortgage contract are not that consolidation was not proper because it was made during
precluded from exacting additional requirements. the redemption period.
SECTION 4. The sale shall be made at public auction, between The courts decided in favor of Metrobank stating that in
the hours or nine in the morning and four in the afternoon; forclosure proceedings the highest bidder whether the
and shall be under the direction of the sheriff of the province, mortgagee or not is entitled to possession. And during the
the justice or auxiliary justice of the peace of the municipality redemption period, there has to be a bond that must be
in which such sale has to be made, or a notary public of said issued.
municipality, who shall be entitled to collect a fee of five pesos
each day of actual work performed, in addition to his Issue: WON Metrobank as the highest bidder entitled to
expenses. possession despite non-posting of the bond?
Yes
SECTION 6. In all cases in which an extrajudicial sale is made It is an established rule that the purchaser in an extra-judicial
under the special power hereinbefore referred to, the debtor, foreclosure sale is entitled to the possession of the property
his successors in interest or any judicial creditor orjudgment and can demand that he be placed inpossession of the same
creditor of said debtor, or any person having alien on the either during (with bond) or after the expiration (without
property subsequent to the mortgage or deed of trust under bond) of the redemption period therefor. 20 The non-
which the property is sold, may redeem the same at any time expiration of the period of redemption shall not preclude the
within the term of one year from and after the date of the purchaser from taking possession of the property provided
sale; and such redemption shall be governed by the provisions that the necessary is posted. The buyer can in fact demand
of sections four hundred and possession of the land even during the redemption period
except that he has to post a bond in accordance with Section 7
21 of Act No. 3135, as amended. In the case at bar, Metrobank
Q: Does Act 3135 require notice to the mortgagor for the foreclosure sale? manifested its willingness to post a bond but its application for
A: No Maam. the issuance of the writ of possession was unjustly denied by
the RTC.
Q: So what is the effect of that stipulation?
A: According to the Supreme court, the general rule is that notification is not Q: So in this case, was the possession prayed for by Metrobank made during the
required in the foreclosure of properties. However, the parties are not barred period of redemption?
to stipulate such in their contract of mortgage. And in case, there is such A: Yes Maam
stipulation, the parties must comply with such.
Q: Did Metrobank post the required bond? As you said, as a requirement, the
Q: So what is the effect of failing to do so? highest bidder must post a bond. What was the basis of the the SC’s ruling in
A: Failure to do so will render the foreclosure of the mortgage void. favor of Metrobank? Is Metrobank entitled to possession?
A: No Maam, no bond was posted by MB
Atty Sarona: So again now take note, that under Act 3135, personal notice to
the mortgagor is not necessary, it only requires the posting of the notice in Q: So why as it entitled to possession when no bond was posted? What does
conspicuous public places and the publication in a newspaper of general Sec 7 of Act 3135 provide?
circulation. However, if the parties stipulate that the mortgagor must be
notified for the foreclosure proceeding as what happened in this case of Atty Sarona: Yes that is there is a difference if the possession is prayed for
Ramirez, then such must be complied with. The respondents have no choice but during the redemption period because in that case, bond is required
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Q: You said that Metrobank did not post a bond. But why was it that it was still The possession may be granted to the buyer either
entitled to possession in this case? (a)within the one-year redemption period, upon the filing by
A: Because the RTC denied their application for writ of possession. the purchaser of a bond, or
(b) after the lapse of the redemption period, without need of a
Q: What is the effect of the action of the Sps Dulnuan in relation to the prayer bond.
for possession?
2. Whether or not a pending action for the annulment of the
Atty Sarona: So here even before the redemption period, the highest purchaser writ stays the issuance of the writ of possession.
in the foreclosure sale can still be entitled to possession. He can demand that
he be given possession of the same even during but with a bond. After NO.
expiration of the redemption period, this time without a bond. The expiration of As a GENERAL RULE:
the period of redemption shall not preclude the purchaser from taking It is settled that a pending action for annulment of mortgage
possession of the property provided that the necessary bond is posted. The or foreclosure sale does not stay the issuance of the writ of
buyer may in fact demand possession of the land even during the redemption possession. The trial court, where the application for a writ of
period except that he has to post a bond. possession is filed, does not need to look into the validity of
the mortgage or the manner of its foreclosure. The purchaser
In this case, Metrobank did not actually post a bond. But in its petition for is entitled to a writ of possession without prejudice to the
possession, it manifested its willingness to post a bond. But its application for outcome of the pending annulment case.
issuance was denied by the RTC. Secondly, the pendency of the action filed by
the Sps stating the validty of the mortgage again does not bar the issuance of As an EXCEPTION:
the writ of possession. The ministerial duty of the court to issue an ex parte writ of
possession ceases once it appears that there is a third party in
From the FT of the case The pendency of the action assailing the validity of the possession of the property, who is a stranger to the mortgage
mortgage should not bar the issuance of the writ of possession. A pending and who claims a right adverse to that of the debtor/
action for annulment of mortgage or foreclosure does not stay the issuance of a mortgagor.
writ of possession. Regardless of the pendency of such suit, the purchaser
remains entitled to a writ of possession, without prejudice, of course, to the For the EXCEPTION TO APPLY:
eventual outcome of the pending annulment case. The property need not only be possessed by a third party, but
also held by the third party adversely to the
DARCEN v GONZALES debtor/mortgagor.
GR 199747 April 3, 2015
Reporter: Mangadlao Basis:
Facts Section 33, Rule 39 of the Rules of Court provides that in an
The Darcens including the spouse are heirs to parcels of land execution sale, the possession of the property shall be given to
which they inherited from their patriarch. The wife, obtained a the purchaser or last redemptioner, unless a third
loan from Gonzales Credit and mortgaged the inherited party is actually holding the property adversely to the
properties. Since she was not able to pay her obligation, judgment obligor.
Gonzales Credit initiated an extrajudicial foreclosure
proceeding on the mortgaged property. There was a console The application of the above Section has been extended to
dation of ownership of the said extrajudicial foreclosure sales pursuant to Section 6 of ActNo.
properties under Gonzales Credit. The heirs were not able to 3135, to wit:
redeem the said properties within the redemption period.
Thereafter, a writ of possession was issued in favor of Sec. 6. In all cases in which an extrajudicial sale is made under
Gonzales. the special power hereinbefore referred to, the debtor, his
CLAIM OF DARCENS: successors in interest or any judicial creditor or judgment
creditor of said debtor, or any person having alien on the
The issuance of the writ of possession is improper as they are property subsequent to the mortgage or deed oftrust under
in adverse possession of the property. The issuance of the writ which the property is sold, may redeem the same at any time
shouldn’t have been ministerial. Thus the Darcens filed an within the term of one year from and after the date of sale;
action for the annulment of the writ. and such redemption shall be governed by the provisions of
section four hundred and sixty-four to fourhundred and sixty-
ISSUES: six, inclusive, of the Code of CivilProcedure, in so far as these
1. Whether or not it is ministerial for the court toissue a writ are not inconsistent with the
of possession after consolidation of the ownership of the provisions of this Act.
property in the name of the buyer.
In this case, the DARCENS, were not able to prove that they
YES. The long-settled rule in extrajudicial foreclosure ofreal are adverse party claimants thus the issuance of the writ may
estate mortgage is that after consolidation of ownership of the be done ministerially.
foreclosed property, it is the ministerial duty of the court to
issue, as a matter of right, an ex parte writ of possession to the
buyer.
Section 8. The debtor may, in the proceedings in which
The established rule is that the purchaser in an extrajudicial possession was requested, but not later than thirty days after
foreclosure sale becomes the absolute owner of the property the purchaser was given possession, petition that the sale be
if no redemption is made within one (1) year from the set aside and the writ of possession cancelled, specifying the
registration of the certificate of sale by those who are entitled damages suffered by him, because the mortgage was not
to redeem. Possession being a recognized essential attribute violated or the sale was not made in accordance with the
of ownership, after consolidation of title the purchaser may provisions hereof, and the court shall take cognizance of this
demand possession as a matter of right.29 Under Section 7 of petition in accordance with the summary procedure provided
Act No. 3135, as amended by Act No. 4118, the issuance of the for in section one hundred and twelve of Act Numbered Four
writ is merely a ministerial function of the RTC, which the new hundred and ninety-six; and if it finds the complaint of the
owner may obtain through an ex parte motion. debtor justified, it shalldispose in his favor of all or part of the
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bond furnished by Either of the parties may appeal from the RTC granted the writ in favor of the Yansons
order of the judge in accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but the order of Issue: WON the subsequent buyer of the property is entitled
possession shall continue in effect during the pendency of the to the issuance of the writ of possession
appeal.
Respondent is entitled to the issuance of writ of possession.
Section 9. When the property is redeemed after the purchaser
has been given possession, the redeemer shall be entitled to Petitioners insist that respondent is not entitled to the
deduct from the price of redemption any rentals that said issuance of the writ of possession under Section 7 of Act No.
purchaser may have collected in case the property or any part 3135 as he is only a buyer of the subject properties in a
thereof was rented; if the purchaser occupied the property as contract of sale subsequently executed in his favor by the
his own dwelling, it being town property, or used it gainfully, it actual purchaser, PNB. To them, it is only the actual purchaser
being rural property, the redeemer may deduct from the price of a property at the public auction sale who can ask the court
the interest of one per centum per month provided for in and be granted a writ of possession.
section four hundred and sixty-five of the Code of Civil
Procedure. This argument is not tenable. Respondent, as a transferee or
successor-in-interest of PNB by virtue of the contract of sale
between them, is considered to have stepped into the shoes of
Q: What’s the significance of adverse possession in relation to the petition for PNB. As such, he is necessarily entitled to avail of the
writ of possession? provisions of Section 7 of Act No. 3135, as amended, as if he is
A: Here Maam, as an exception to the general rule is in an adverse possession PNB. This is apparent in the Deed of Absolute Sale 46 between
of a third person, the issuance of a writ of possession will cease to be a the two, viz.:
ministerial duty of the courts?
Q: Who are in possession of the property? 1. The Vendor hereby sells, transfer[s] and convey[s]
A: The Darcens unto [and] in favor of the Vendee, and the latter's
Q: Are they considered possessors having adverse rights to the morgagors? assigns and successors-in-interest, all of the former's
A: Here Maam, they failed to establish that they are the adverse parties rights and title to, interests and participation in the
Q: By what right then are they possessing the property? Property on an "AS IS, WHERE IS" basis. It is thus
A: understood that the Vendee has inspected the Property
Q: Who are they, by the way? and has ascertained its condition.
A: They are the children of mortgagor
Atty Sarona: So therefore, they are not adverse 3rd parties because being 2. The Vendor is selling only whatever rights and title to,
successors in interest, the right emanate from the mortgagor not adverse to the interests and participation it has acquired over the
said mortgagor . therefore, we apply the general rule that the issuance of the Property, and the Vendee hereby acknowledges full
writ of possession is ministerial knowledge of the nature and extent of the Vendor's
So here, not even the annulment of mortgage will stay the execution of the writ rights and title to, [and] interests and participation in
of possession. Again, as a general rule, it is a ministerial duty of the court to the Property.
issue an ex-parte writ for possession.
As an exception, such ministerial duty ceases when it appears that there is a 3 rd 3. The Vendee further agrees to undertake, at
party in possession of the property who is a stranger to the mortgage and its/his/herexpense, the ejectment of any occupant of
whose rights are adverse to the debtor or mortgagor. the Property.
Case at bar (Emphases in the original)
So in this case, there is no proof that the petitioners are adverse 3rd party
claimants. There is also no evidence that their right emanate from another Verily, one of the rights that PNB acquired as purchaser of the
owner adverse to the mortgagor. In fact, it was established that they were heirs subject properties at the public auction sale; which it could
or successors in interest of the said mortgagors. And therefore, they are bound validly convey by way of its subsequent sale of the same to
by the said mortgage. And they cannot question the issuance of writ of respondent, is the availment of a writ of possession. This can
possession by the courts. It is its ministerial duty. be deduced from the above-quoted stipulation that "[t]he
[v]endee further agrees to undertake, at . . . his expense, the
ejectment of any occupant of the [p]roperty." Accordingly,
respondent filed the contentious ex parte motion for a writ of
SPS GATUSLAO v YANSON possession to eject petitioners therefrom and take possession
GR 191540 August 26, 2014 of the subject properties.
Reporter: Campaner
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parties who have a right contrary to that of the mortgagor, the trial court is
justified in issuing the writ. So the writ of possession may be issued ex-parte.
And being ex-parte, no notice is required to be issued to the petitioners who are
in possession of the subject property. The ex-parte nature of the proceedings Q: So is Okabe entitled to the writ of possession?
does not deny due process to the petitioners because the issuance of the same A: It is only required when the third person is an adverse possessor.
does not prevent a separate case for annulment of mortgage and foreclosure
sale. The court may grant the petition even without the petitioner’s Q: What do you mean by adverse possessor?
participation. A: Because in this case, Okabe brought the property from PNB, hence Okabe
was subrogated the rights of PNB to file the writ of possession.
Case at bar
The record show that the petitioners were able to be heard or were actually Atty Sarona: So take note the general rule for the issuance or writ of
heard on their side of the controversy so there is no violation of due process. possession. It is ministerial in nature. With regard to the court, it must issue the
With regard to the right of respondent, remember, Yanson was not the highest writ of possession provided that the following requisites are present.
bidder at the foreclosure sale. It was PNB. And PNB sold the same to the 1. Foreclosure sale
respondent. As transferee or successor in-interest of PNB, respondent is to be 2. The petitioner who is the highest bidder in the foreclosure sale
considered to also step into the shoes of PNB and necessarily entitled to avail of 3. Title has been consolidated and registered in his name
the provisions of Sec 7 of Act 3135. When all of those are duly presented, then the court has the ministerial duty to
issue the writ of possession. Moreover, the proceeding is ex-parte. So there is
One of the rights that can be applied as a purchaser is that it could validly no need for the participation of motgagor or his heirs or any party in possession
convey by way of its subsequent sale of the same to respondent in the thereof whose title is not adverse to that of the debtor mortgagor.
availment of the writ of possession. However, take note the SC further noted that the remedy of the writ of
possession that is available to the mortgagee is made available to its
OKABE v SATURNINO subsequent purchaser.
GR 196040 August 26, 2014
Reporter: Borbe Is hearing required?
IT DEPENDS
Facts Hearing is required to determine who is in possession of the property. Unlike if
The subject of this case is a 81 sq. m. property that was the purchaser is the mortgagee or 3rd party during the redemption period
donated in Makati. The said property was registered in the wherein a writ of possession may issue ex-parte or without hearing.
same of the wife of Ernesto Saturnino, respondent. HEARING IS REQUIRED
1. Acquired by 3rd party
The Sps Saturnino obtained a loan from PNB and the loan was 2. After redemption period
secured by the said property. However, they failed to settle If the purchaser is a third party who acquired the property after the redemption
their loan obligation. So PNB consolidated the property. The period, a hearing is conducted to determine whether who is in possession of the
Spss were not able to redeem the property during the subject property is still the mortgagor or is already in the possession of a 3 rd
redemption period . party holding the property adverse to the defaulting debtor or mortgagor.
Why?
PNB, without taking possession of the property sold it to Fe Because if it is in possession of the mortgagor, then a writ of possession can be
Okabe, petitioner. Petitioner now filed an ex-parte issuance of issued.
a writ of possession of the subject property. However, this was But if it is in possession of a third person whose title is adverse to the
opposed by Saturnino(mortgagor debtor) mortgagor, the issuance of the writ of possession is not proper.
What is the remedy here of the subsequent purchaser?
RTC ruled in favor of Okabe. It held that the issuance of a writ File an action for ejectment.
is a ministerial duty of the court 1. Unlawful detainer
2. Recovery of possession: if it is more than 1 year na
Issue Between the action for ejectment and the writ of possession, mas mabilis talaga
WON an ex-parte petition for the issuance of a writ of ang writ of possession kasi nga it’s ministerial and ex-parte. But you have to
possession was the proper remedy of the petitioner in take into possession, who is in possession of the property.
obtaining possession of the subject property. So there is no inconsistency between the case of Gatuslao and the present case
of Okabe. The SC here just elucidated that hearing is needed to determine who
YES is in possession thereof .If the one in possession does not hold the property
adverse from the mortgagor. When we say adverse, his right does not emanate
Purchaser in the foreclosure sale may apply for a writ of from the mortgagor. Example he purchased or inherited it from another person
possession during the redemption period, 30 upon an ex parte or the tenants under the tenancy laws. In these case, the remedy is not a writ of
motion and after furnishing a bond. I n GC Dalton Industries, possession. You really have to file an action for ejectment whether it is
Inc. v. Equitable PCI Bank, 31 the Court held that the issuance summary or more than 1 year.
of a writ of possession to a purchaser in an extrajudicial
foreclosure is summary and ministerial in nature as such
proceeding is merely an incident in the transfer of title. Also, in SPS GUEVARA v THE COMMONER LENDING
China Banking Corporation v. Ordinario, 32 we held that under GR 204672
Section 7 of Act No. 3135, the purchaser in a foreclosure sale Reporter: Del Rosario
is entitled to possession of the property.
Facts
Case at Bar Sps Guevara obtained a 320k loan from PCLC which was
Here, petitioner does not fall under the circumstances of the secured by a real estate mortgage over a land situated in Iloilo
aforequoted case and the provisions of Section 7 of Act No. from a free patent granted to them.
3135, as amended, since she bought the property long after
the expiration of the redemption period. Thus, it is PNB, if it When the Sps defaulted in their payments, PCLC extrajudicially
was the purchaser in the foreclosure sale, or the purchaser foreclosed the mortgage in accordance with Act 3135. PCLC
during the foreclosure sale, who can file the ex-parte petition emerged as the highest bidder. So a certificate of sale was
for the issuance of writ of possession during the redemption issued to them. And the same was registered. Sps. Guevara
period, but it will only issue upon compliance with the failed to redeem within 1 year so a new TCT was issued to
provisions of Section 7 of Act No. 3135. PCLC. When PCLC applied for writ of possession, the Sps
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opposed the same . The challenged the validity of the Section 6 of Act No. 3135 in relation to the proper redemption price when the
foreclosure contending that PCLC failed to observe the proper mortgagee is a bank, or a banking or credit institution. 58
procedure. And they also assailed the issuance of the final
deed of sale saying that it is premature since they are still Nonetheless, the Court cannot subscribe to TCLC's contention that it is entitled
entitled to redeem the property within 5 years from the to its total claims under the promissory note and the mortgage contract 59 in
expiration of the 1 year redemption period. view of the settled rule that an action to foreclose must be limited to the
amount mentioned in the mortgage. Hence, amounts not stated therein must
So the Sps Guevara filed an action for redemption maintaining be excluded, like the penalty charges of three percent (3%) per month included
that they still have 5 years to redeem the property . in TCLC's claim. 61 A penalty charge is likened to a compensation for damages in
case of breach of the obligation. Being penal in nature, it must be specific and
RTC while it granted the writ of possession and notice to fixed by the contracting parties.
vacate in favor of TCLC, it also granted the petition in the
cadastral case filed by the Sps Guevara. The RTC also Moreover, the Court notes that the stipulated three percent (3%) monthly
recognized the right to repurchase of the Sps within the 5 year interest is excessive and unconscionable. In a plethora of cases, the Court has
period provided under Sec 119 of the Public land act(CA 141) affirmed that stipulated interest rates of three percent (3%) per month and
higher are excessive, iniquitous, unconscionable, and exorbitant
Issue: What is the correct redemption period that must be
followed? Atty Sarona: I gave you this case because you have here a different redemption
period. While we have the general rule under Act 3135 , we also have to take
Lending/ Credit Institution has 1 year into consideration if what was foreclosed is a registered land under a free
patent. So redemption period is:
In an extra-judicial foreclosure of registered land acquired 1. Rural bank = 2 years
under a free patent, the mortgagor may redeem the property 2. Otherwise=apply Act 3135 ; 1 year from the registration of the sale
within two (2) years from the date of foreclosure if the land is However, there is an addition of 5 years. The 5 years should be counted from
mortgaged to a rural bank under Republic Act No. (RA) 720, 41 the expiration of the redemption period.
as amended, otherwise known as the Rural Banks Act, or What is this 5 years?
within one (1) year from the registration of the certificate of The right to repurchase on the part of the mortgagor within the said period
sale if the land is mortgaged to parties other than rural banks This is because the land here was acquired through a free patent and the
pursuant to Act No. 3135. 42 If the mortgagor fails to exercise applicable law is Sec 119 of the Public Land Act.
such right, he or his heirs may still repurchase the property In the case at bar, the Sps Guevara had until Aug 26, 2006 to redeem the
within five (5) years from the expiration of the property. The tender of purchase price is not necessary for the preservation of
aforementioned redemption period 43 pursuant to Section the right because in this case they filed the action within the 5 day period. So
119 of the Public Land Act, which states: that is already a formal offer to redeem. Since it was entitled to redeem, the
SEC. 119. Every conveyance of land acquired under the court also took into consideration that the PCLC(mortgagee) does not have the
free patent or homestead provisions, when proper, freedom to determine the price.
shall be subject to repurchase by the applicant, his As emphasized by the courts, PCLC is entitled to its claims as provided in the
widow, or legal heirs, within a period of five years from promissory note and the mortgage contract in view of the settled rule that the
the date of the conveyance. action to foreclose must be limited to the amount of the mortgage. So exclude
ang penalty charge
Case at bar: Ang interest pwede ba?
In this case, the subject property was mortgaged to and Yes but the SC said in this case that the 3% interest was excessive and
foreclosed by TCLC, which is a lending or credit institution, and unconscionable. And so it was reduced to 1 % per month.
not a rural bank; hence, the redemption period is one (1) year
from the registration of the certificate of sale on August 25,
2000, or until August 25, 2001. Given that Sps. Guevarra failed March 9 – del Rosario
to redeem the subject property within the aforestated
redemption period, TCLC was entitled, as a matter of right, to Chapter 4
consolidate its ownership and to possess the same. 44 ANTICHRESIS
Nonetheless, such right should not negate Sps. Guevarra's
right to repurchase said property within five (5) years from the Antichresis is a contract of real security.
expiration of the redemption period on August 25, 2001, or
until August 25, 2006, in view of Section 119 of the Public Land Art. 2132. By the contract of antichresis the creditor acquires the right to
Act as above-cited. receive the fruits of an immovable of his debtor, with the obligation to apply
them to the payment, of the interest, if owing, and thereafter to the principal of
Q: So what is the redemption period in this case? Is it 1 year or 2 years? his credit.
A: 1 year Maam because TCLC is a credit institution and not a Rural Bank. So the
Sc also said that after the expiration of the 1 year period, PCL also have the right It is an accessory contract. It secures the performance of the principal obligation
but such should not negate the right of the Sps to redeem within the 1 year and it is very clear under Art. 2132 that it is also a nominate contract.
period
Take note: delivery of the property of the immovable to the creditor is not
Q: Counted from the? necessary for the perfection of antichresis. However, delivery is required so that
A: Counted from August 25, 2005 or until August 25, 2006 the creditor can receive the fruits and apply the same to the interest yet owing
and thereafter to the principal. Normally, the contract of antichresis covers all
Q: August 25, 2005 is what? the fruits of an immovable property but the parties can stipulate otherwise.
A: It is the registration of the certificate of sale
Do not confuse antichresis for pledge. While both are contracts of security and
Q: How about the contention with regard to the purchase price? What was the in both instances, the debtor loses control over the property, they admit of
ruling of the court? several differences:
From the FT of the case regarding the Purchase price Antichresis vs. Pledge
The Court has, however, ruled 56 that redemptions from lending or credit ANTICHRESIS PLEDGE
institutions, like TCLC, are governed by Section 78 57 of the General Banking
Act(now Section 47 of the General Banking Law of 2000), which amended As to subject Real property Personal property
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matter RIGHT TO RECEIVE THE FRUITS OF THE PROPERTY OF HIS DEBTOR WITH THE
As to the kind of It is a formal contract which It is a real contract wherein OBLIGATION TO APPLY THEM TO THE PAYMENT OF INTEREST, IF ANY ID DUE
contract requires to be in writing in delivery is required for its AND THEN TO THE PRINCIPAL OF HIS CREDIT.
order to be perfected. perfection.
Nowhere in the contract in question does the character of antichresis appear.
Antichresis vs. Mortgage
ANTICHRESIS MORTGAGE Dela Vega s. Ballilos - while the contract is called mortgage by the parties, the
court held that it is really a contract of antichresis. The contract stipulated that
As to Subject matter is Delivery is not
the debtor assigned and transfer the ownership and possession of the land to
delivery delivered to the required or
the creditor for his management and enjoyment as a profit from the amount for
creditor not for the possession of the
which it had been mortgaged.
perfection thereof but property to the
for the creditor to apply mortgagee
THE RIGHT OF REDEMPTION NOT HAVING BEEN EXERCISED WITHIN THE
the fruits to the
PERIOD OF 10 YEARS, THE TITLE OF ALEGATA, OR HIS HEIRS HAS BEEN
obligation
CONSOLIDATED. The action was brought in January 1922, 15 years after the
As to the The creditor acquires no Creates real rights
contract was entered into. The contract provided that the redemption will be
right to the real right to receive the although the
until Juana Mabaquiao, or her heirs has the means. Whether or not this is
fruits fruits of the property. mortgagee or
considered a period, it is clear that the title transmitted to Nicolas Alegata has
creditor although
been consolidated, According to article 1508 of the Civil Code, when no period
the mortgagee does
of redemption is fixed it shall last four years, and if it is fixed, it shall not
not have rights to
exceed ten years. The right of redemption not having been exercised within the
receive the fruits
period of ten years, the title of Nicolas Alegata, or his heirs, has by this fact
unless agreed upon.
alone been consolidated at any events.
As to the Creditor is obliged to Such obligation is
obligation pay the taxes and not present in
to pay charges upon the estate mortgage.
Q: What is the period applicable to the right of repurchase? What was the
taxes and unless there is a
agreement of the parties regarding the right to repurchase? When can it be
charges stipulation to the
repurchased?
upon the contrary.
A: When she has the means. Under obligations and contracts it is an obligation
estate
with a period.
As to the The creditor shall apply No such obligation
application the fruits to the interest exists in a Q: So applying the law in sales in the period of redemption, what it the
of the fruits if owing then thereafter mortgage.
applicable period here?
to the apply to the principal A: The period shall not exceed 10 years.
interest obligation.
When it comes to civil law do not forget to relate it to your other civil subjects.
In this case, you can relate it to obligations and contracts and with regard to
Now let’s go to the case of Alojado. sale, redemption.
ALOJADO VS. SIONGCO For an antichresis to exist, the parties must agree that the creditor has the right
GR 27084, December 31, 1927 to receive the fruits of the property with the obligation to apply them to the
payment of the interest. No such intention exists in Alojado. What is clear is
Facts: that there was an agreement with the right to repurchase in which Juana could
Mabaquiao sold a parcel of land to Alegata for P7,744. The land was included in repurchase the land when she had the means. With that, it has been 15 years
the settlement of his estate thus was adjudicated to hs only heirs, Lim Eng after the contract was entered into and no right to repurchase was exercised.
Teeng and Lim Kang Sang. They sold it to Lim Ponso & Co. with the right to
repurchase for the period of 1 year which expired without the right being If no period was fixed it shall last 4 years. Because of the phrase “when she had
exercised. Lim Ponso & Co. transferred this land unconditionally to Siongco and the means,” we already know that that refers to a period, the period of
Kingko. redemption should not exceed 10 years. Since the period of 10 years has
already lapsed, the right to repurchase the property is not available anymore.
Alojado, as the administrator of Mabaquiao, brings this action against Siongco,
Kingko and Lim Ponso & Co. and prays that he be declared the absolute owner Again, for an antichresis to exist, there must be an express agreement entered
of this land with the improvements thereon, and that the defendants be into by the creditor and the debtor, that the creditor, having been given the
ordered to restore and respect his right of ownership, possession and usufruct possession of a property as security, is to apply the fruits to the payment of the
of the property; and, moreover, that other pronouncements be made as prayed interest if owing, and thereafter to the principal to the credit.
for in his complaint. The court absolved the defendants from the complaint and
plaintiff appealed from this judgment. Art. 2133. The actual market value of the fruits at the time of the application
thereof to the interest and principal shall be the measure of such application.
Alojado contends that the contract executed by Mabaquiao and Alegata was
not a contract of sale with the right to repurchase, but a contract of antichresis. Take note here: market value at the time the fruits will be applied to the
obligation. Not the market value at the time of the perfection of the
Issue: Is the contract executed by Mabaquiao and Alegata a contract of antichresis.
antichresis?
The purpose of the provision is to forestall the use of antichresis for usury.
Ruling: Notwithstanding that the usury law has been suspended, you still apply the
THE CONTRACT IS THAT OF SALE WITH A RIGHT OF REPURCHASE. It clearly same provision. <stopped at 10:16>
talks about a sale and the conveyance of land with the right to repurchase, and
the character of the contract is that of a sale with the right to repurchase. But, Now take note of Article 2134.
examining it as a whole, it clearly appears that it was the parties' intention that
the vendor could repurchase the land without delay when he had the means to
Art. 2134. The amount of the principal and of the interest shall be specified in
pay the purchase price.
writing; otherwise, the contract of antichresis shall be void.
CONTRACT OF ANTICHRESIS IS ONE WHERE THE CREDITOR ACQUIRES THE
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Issue: Is the contract that of antichresis? Q: Why can’t Art. 2134 be applied? Why is it in this case, the contract was still
considered as a contract of antichresis?
Ruling: A: Because it is a 1917 case. Art. 2134 is a new provision in the New Civil Code
IT IS AN ANTICHRESIS. In spite of the fact that the agreement between the which was effective on August 30, 1950.
creditor and the debtors was not in writing, due to the relationship that they
have, it may safely be assumed that the debtors have limited themselves to give Take note that before the new civil code the contract of antichresis was
to the creditor the right to collect his credit from the fruits of the hacienda of informal. Now, it is formal as it is required that it be in writing.
Balintagac. As he was given the possession of the property, but the dominion of
which was not transferred to him. The possession of the Balintagac hacienda was taken by voluntary assignment
Art. 1881 provides: with the express consent of the heirs of the debtor. The agreement they
“By antichresis a creditor acquires a right to receive the fruits of real entered into was a contract of antichresis. The debtors have limited themselves
property of his debtor, with the obligation to apply them to the to give to the creditor the right to collect his credit from the fruits of the
payment of the interest, if due, and afterwards to the principal of his hacienda – there was no transfer of ownership.
credit.”
Since this is an old case, the ruling of the court was that the agreement or the
ALTHOUGH ART. 1884 PROVIDES THAT THE CREDITOR DOES NOT ACQUIRE verbal stipulation which lead to the facts proved deserves in law the name of
THE OWNERSHIP OF THE PROPERTY DELIVERED BY VIRTUE OF AN antichresis. But again, reconcile that with Art. 2134 which is a new provision in
ANTICHRESIS, ART. 1883 PROVIDES THAT THE DEBTOR CANNOT RECOVER THE the Civil Code. With the effectivity of the New Civil Code, a contract of
USE OF IT. The debtor must first fully pay the creditor, who in case of insolvency antichresis must be in writing wherein the amount of the principal with interest
may ask for the sale of the real property which he possesses. are clearly specified, otherwise, it shall be void.
Since it is not shown that the debtors have delivered the whole hacienda to the How about in the case of Bangis?
creditor by assignment of the property, it is to be presumed that the debtors
delivered not only one half, but the whole hacienda with a view that the BANGIS VS. HEIRS OF SERAFIN
creditor might collect by usufruct his credit with the accrued interests. GR 190875, June 13, 2012
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Ruling: Art. 2136. The debtor cannot reacquire the enjoyment of the immovable
THERE NEITHER AN ANTICHRESIS NOR A SALE. For the contract of antichresis to without first having totally paid what he owes the creditor.
be valid, Article 2134 of the Civil Code requires that “the amount of the But the latter, in order to exempt himself from the obligations
principal and of the interest shall be specified in writing; otherwise the contract imposed upon him by the preceding article, may always compel the debtor to
of antichresis shall be void.” enter again upon the enjoyment of the property, except when there is a
stipulation to the contrary.
In this case, the Heirs of Adolfo were indisputably unable to produce any
document in support of their claim that the contract between Adolfo and Bangis The first paragraph is very clear, the debtor cannot demand the return of the
was an antichresis, hence, the CA properly held that no such relationship possession of the immovable property until the debt is totally paid.
existed between the parties.
So let’s have the case of Macapinlac.
The bare testimony of one of the Heirs of Bangis, Rodolfo Bangis, that the
subject document was only handed to him by his father, Aniceto, with the MACAPINLAC VS. REPIDE
information that the original thereof “could not be found” was insufficient to GR 18574, September 20, 1922
justify its admissibility. The identification made by Notary Public Atty. Valentin Facts:
Murillo that he notarized such document cannot be given credence as his On and prior to August 22, 1916, Jose Macapinlac was the owner of the
conclusion was not verified against his own notarial records. Hacienda Dolores, a property located in Pampanga. This property had been
registered and a Torrens certificate of title had been issued.
In sum, the Heirs of Bangis failed to establish the existence and due execution
of the subject deed on which their claim of ownership was founded. On the date above stated, Macapinlac was indebted to Bachrach Motor
Company for the price of an automobile and its accessories, purchased upon
Q: So if there is no antichresis nor sale, what was the contract entered into by credit; and as evidence of this indebtedness he executed 14 promissory notes
the parties? (PNs) payable to Bachrach amounting to the sum of P12,960.
A: At least it is a mortgage. Even if there is no written agreement there can still Contemporaneously with the delivery of the PNs, Macapinlac executed what
be a valid mortgage. purports to be a deed of sale, with privilege of repurchase, to be exercised on or
before October 2, 1917 (due date of the debt). This transfer covered the
Q: Why was there an issue with regard to the nature of the contract i.e. Hacienda Dolores. In this conveyance E. M. Bachrach is named as transferee.
whether it was a sale, a mortgage, or an antichresis? Who was in possession
of the property? On November 8, 1917, Francisco Repide acquired, for the sum of P5,000, all the
A: The heirs of Bangis were in possession. Bangis is the mortgagee. The effect of rights of E. M. Bachrach in the property which had been conveyed to the latter.
the possession of the mortgagee even for a number of years such will not Repide was well aware that the transfer of the property to Bachrach had been
transfer the possession of the property. made by the Macapinlac for the purpose of securing a debt owing to Bachrach
Company, and he was also aware that part of the debt has been paid and there
Relate these cases to the previous subjects that you have already taken. was only balance of less than one-half of the sum of P12,960.
There is no antichresis here for failure to comply with the requirement under After Repide had acquired the interest in the hacienda in question, he
Art. 2134. The principal or interest must be in writing otherwise the contract of processed the certificate of title to be transferred to his own name.
antichresis is void. There is also no proof that a contract of sale exists. The SC
held that at the very least the contract that they had is that of mortgage. To accomplish this, it was necessary to make it appear that the contract of sale
In a contract of mortgage, even if the mortgagee is in possession of the with pacto de retro noted in the original Torrens certificate was really and truly
property for a number of years, such possession is not in the concept of an what it appeared to be, that is, a contract of sale, not a mere mortgage, and
owner. Therefore, acquisitive prescription does not apply. The title remained that the ownership had consolidated in the purchaser by reason of the failure of
with Adolfo and the upon his demise transferred to his heirs. Moreover, even if the seller to repurchase the property before the expiration of the time allowed
the property has been in the possession of the heirs of Adolfo for 28 years, the for redemption. Inasmuch as it appeared that the ownership had then
long period of time should not be taken against the true owners of the consolidated in the purchaser, he directed the ROD of Pampanga to register the
mortgagors in this case. property in the name of Francisco Gutierrez Repide and to issue to him a new
certificate of transfer, which was accordingly done.
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tender? He said that he was willing to pay but without indicating how much
At the time of the filing of this complaint, Repide was in actual possession of the he was willing to pay. What was the ruling of the court?
property in question, and that he had in effect been enjoying possession since A: There is still a need to account for the ample amount that Macapinlac has to
August 1917. pay to Repide as the antichretic creditor.
Again, SC discussed an antichresis. However, take note that the term here
Issue: Is there an equitable mortgage? What contract governs between which was used by the Court was mortgagee. But actually, it still refers to an
Macapinlac and Repide (as successor in interest of Bachrach) if the original antichretic creditor based on the intention of the parties.
contract was an equitable mortgage?
Considering that there was an antichresis and not just an equitable mortgage,
Ruling: the one in possession of the property or the creditor can continue to retain the
THE ESTATE OF REPIDE OCCUPIES SUBSTANTIALLY THE POSITION OF A same until all the claims are satisfied. In the complaint, the plaintiff had made
MORTGAGEE IN POSSESSION. The question then arises as to what are the legal an offer – Macapinlac offered to pay Repide all debts and charges. However it
rights of the plaintiff as against the Repide estate.
The solution of this problem was Repide who refused to accept. It was alleged that no valid tender of
is to be found in the application of the doctrine formulated in Barretto vs. payment was made that considering that there was no indication of a specific
Barretto. In that case the heirs of a mortgagee of an estate were found in sum. Notwithstanding, the SC noted that in this instance that tender was not
possession of mortgaged property more than thirty years after the mortgage necessary because the amount cannot be known until an accounting is had –
had been executed; and it was shown that the mortgage had never been And the accounting can be made on the part of the creditor with regard to the
foreclosed. Upon this state of facts it was in effect held that the rights of the fruits (i.e. how much were the fruits, how was it applied, to what extent has it
parties, heirs of the mortgagor and mortgagee, were essentially the same as been applied to the obligation of the debtor.)
under the contract of antichresis.
Now, that’s a common issue regarding a contract of antichresis.
By reference to the appropriate provisions of the Civil Code (arts. 1881-1884), in
the chapter dealing with antichresis, it will be at once seen that while non- In connection with the obligation of the creditor to apply the fruits to the
payment of the debt does not vest the ownership of the property in the interest if owing, and thereafter to the principal, he has to liquidate or make an
creditor, nevertheless the debtor cannot recover the enjoyment of the property accounting of how much is the value of the fruits and whether it was applied to
without first paying in full what he owes to his creditor. At the same time, the interest and principal.
however, the creditor is under obligation to apply the fruits derived from the
estate in satisfaction, first, of the interest on the debt, and secondly, to the If creditor does not want to pay taxes and expenses
payment of the principal. From this is necessarily deduced the obligation of the Under Art.2136, also take note of the 2nd paragraph. Remember under Art. 2135
creditor to account to the debtor for said fruits and the corresponding right of that as a general rule, the creditor has the obligation to pay the taxes and
the debtor to have the same applied in satisfaction of the mortgage debt. expenses mentioned therein. If the creditor does not want to pay the taxes and
incur expenses as mentioned in Art. 2135, he may compel the debtor to
The respective rights and obligations of the parties to a contract of antichresis reacquire the enjoyment of the same, except when there is a contrary
may be taken to be established, namely: stipulation.
that if the mortgagee acquires possession in
any lawful manner, he
is entitled to retain such possession until the indebtedness is Art. 2137. The creditor does not acquire the ownership of the real estate for
satisfied and the property redeemed; non-payment of the debt within the period agreed upon.
that the non-payment of the debt within the term agreed does not Every stipulation to the contrary shall be void. But the creditor may
vest the ownership of the property in the creditor;
petition the court for the payment of the debt or the sale of the real property.
that the general duty of the mortgagee in possession towards the In this case, the Rules of Court on the foreclosure of mortgages shall apply.
premises is that of the ordinary prudent owner;
that the mortgagee must account for the rents and profits of the If the obligation is not paid, we are already clear that the debtor is not entitled
land, or its value for purposes of use and occupation, any amount to the possession of the same.
thus realized going towards the discharge of the mortgage debt;
that if the mortgagee remains in possession after the mortgage Let us also be clear that failure to pay on the part of the debtor does not mean
debt has been satisfied, he becomes a trustee for the mortgagor as that the creditor will now acquire ownership over the property. Again what the
to the excess of the rents and profits over such debt; and
creditor only acquires in a contract of antichresis is the right to receive the fruits
that the mortgagor can only enforce his rights to the land by an – There is no transfer of ownership.
equitable action for an account and to redeem.
What happened in the case of Ramirez?
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The trial court ordered the cancellation of the original certificate of title. The Art. 2138. The contracting parties may stipulate that the interest upon the debt
Court of Appeals affirmed the decision. be compensated with the fruits of the property which is the object of the
antichresis, provided that if the value of the fruits should exceed the amount of
Issue: Can an antichretic creditor acquire land of debtor by prescription? interest allowed by the laws against usury, the excess shall be applied to the
principal.
Ruling: NO.
AN ANTICHRETIC CREDITOR CANNOT ACQUIRE THE LAND OF A DEBTOR BY
PRESCRIPTION. AN ANTICHRETIC CREDITOR IS NOT A POSSESSOR IN THE The antichretic creditor again is under the obligation to apply the fruits of the
CONCEPT OF OWNER BUT A MERE HOLDER PLACED IN POSSESSION OF THE property in satisfaction of the interest, if owing, and then to the principal.
LAND BY ITS OWNERS. Thus, possession of an antichretic creditor cannot serve
as a title for acquiring dominion. The court, from other cases like Trillana v. Art. 2139. The last paragraph of Article 2085, and Articles 2089 to 2091 are
Manansala, Valencia v. Acala and Barretto v. Barretto, held that the antichretic applicable to this contract.
creditor cannot ordinarily acquire by prescription the land surrendered to him
by the debtor. Holding: The decision appealed from is affirmed with a We already know that the last paragraph of Art. 2085 allows third persons who
modification that the respondents are ordered to pay the petitioners the are not parties to the contract to secure the principal obligation with the
amount of P400.00 as principal for the contract of antichresis, the fruits pledgee or mortgagee with their own property. In this case, subject their
obtained from the possession of the land having been applied to the interests property to a contract of antichresis.
on the loan.
Under Articles 2089 to 2091, we have emphasized that contracts of pledge and
Q: So first, it is established that you have here a contract of antichresis. Who is mortgage are indivisible – so the same with antichresis. A contract of antichresis
in possession of the property? is also indivisible.
A: The antichretic creditor.
Under Art. 2091, it can also secure all kinds of obligation. Again, similar to a
Q: For how long? What is the effect of the possession of the creditor? pledge or mortgage: such obligation can be a pure obligation or subject to a
A: The prescriptive period will not run. Acquisitive prescription will only run condition.
when such possession is in the concept of an owner.
It is not that common at present that the parties enter into a contract of
Q: Is there a repudiation of the petitioner’s of their right as creditors? antichresis. Rarely do you see or do you encounter a parties who would want to
A: No. enter such contract.
If there is a contract of antichresis the mortgagee creditors are only in Aside from a mortgage, what is the other agreement that may be entered into
possession as creditors. They are not in possession thereof as owner – This by the parties?
would be relevant to acquisitive prescription. Whether it is 10 years in good They will enter into a contract of mortgage, na para din siyang antichresis.
faith or 30 years in bad faith, possession must be in the concept of an owner. In Mortgage siya because it is a real estate mortgage provided that they all have
relation to Land Titles, such possession in concept of an owner must be open, requisites present. But there is a stipulation between the parties that the
continuous, exclusive, notorious, and adverse. Such must be present so the mortgagee will be given the possession of the property, to which he will be
acquisitive prescription shall run. given the right to apply the fruits of the property to the obligation (i.e.
harvest.) So para din siyang antichresis – not strictly an antichresis, not strictly a
In this case, Petitioners are only antichretic creditors and it was admitted that mortgage but nevertheless valid between the parties.
there was no repudiation for acquisitive prescription to run. The antichretic
creditor cannot ordinarily acquire by prescription the lands surrendered to him Another instance will be: a real estate mortgage where there is no transfer of
by the debtor. Here, the Petitioners are not possessors in the concept of an possession but there is an agreement that the harvest wil be applied to the
owner but mere holders placed in possession of the land by its owners. Their obligation. Minsan ang harvest pwede nilang paghatian (i.e. ½, 2/3.) The harvest
possession cannot serve as a title for acquiring possession. that will go to the creditor will be applied to the obligation and the same will
continue until the obligation is fulfilled.
Even if there is a stipulation that there is an acknowledgement that the creditor
is in possession by virtue of an antichresis and that if the creditor continues to Again, as long as all the valid requirements are present, an agreement is valid
be in possession of the same for 30 years, he will become the owner thereof, between the parties. So though it may not be strictly an antichresis it will still be
the such will be considered as void. considered a valid contract.
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2. Both contracts involve personal properties. Section 1. The short title of this act shall be “The Chattel Mortgage Law.”
3. Both contracts are indivisible.
4. Both contracts constitute a lien on the property. Sec. 2. All personal property shall be subject to mortgage, agreeably to the
5. In both contracts, the creditor cannot appropriate the property to provisions of this Act, and a mortgage executed in pursuance thereof shall be
himself in case the debtor defaults in the payment. termed a chattel mortgage.
6. Both will be extinguished upon the fulfillment of the principal
obligation or by the destruction of the property pledged or Sec. 3. Chattel mortgage defined.- A chattel mortgage is a conditional sale of
mortgaged. personal property as security for the payment of a debt, or the performance of
some other obligation specified therein, the condition being that the sale shall
Differences: be void upon the seller paying to the purchaser a sum of money or doing some
other act named. If the condition is performed according to its terms the
CHATTEL MORTGAGE PLEDGE mortgage and sale immediately becomes void, and the mortgagee is thereby
Under Art. 2140, the Registration is not divested of his title.
As to registration is required for validity.
registration required for validity. Sec. 4. Validity.- A chattel mortgage shall not be valid against any person except
the mortgagor, his executors or administrators, unless the possession of the
No delivery is It is a real contract property is delivered to and retained by the mortgagee or unless the mortgage
required. If there is wherein there must is recorded in the office of the Register of Deeds of the province in which the
As to mortgagor resides at the time of making the same, or if, he resides within the
delivery, it will be be delivery.
delivery Philippines, in the province in which the property is situated: Provided,
considered as a
pledge. however, That if the property is situated in a different province in which the
Sale of the Act No. 1508 or the Art. 2112 of the CC mortgagor resides, the mortgage shall be recorded in the office of the Register
property in Chattel Mortgage Law applies. of Deeds of both the province in which the mortgagor resides and that in which
case of applies. the property is situated, and for the purposes of this Act, the City of Manila shall
default be deemed to be a province.
The creditor can still The creditor cannot
sue for the deficiency sue for the balance. Sec. 5. Form. - A chattel mortgage shall be deemed to be sufficient when made
except if what is While the debtor on substantially in accordance with the following form, and shall be signed by the
involved is a sale of the other hand, person or persons executing the same, in the presence of two witnesses, who
personal property or does not also get shall sign the mortgage as witnesses to the execution thereof, and each
on installment. In the excess unless mortgagor and mortgagee, or in the absence of the mortgagee, his agent or
other words, Art. 1484 there is a stipulation attorney, shall make and subscribe an affidavit in substance as hereinafter set
of the Recto Law is to the contrary forth, which affidavit, signed by the parties to the mortgage as above-stated,
applicable. The debtor and the certificate of the oath signed by the authority administering the same,
is entitled to the shall be appended to such mortgage and recorded therewith.
excess.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
“This mortgage made this ____ day of ______19____ by _______________, a
resident of the municipality of ______________, Province of ____________,
Art. 2141. The provisions of this Code on pledge, insofar as they are not in Philippine Islands mortgagor, to ____________, a resident of the municipality of
conflict with the Chattel Mortgage Law, shall be applicable to chattel ___________, Province of ______________, Philippine Islands, mortgagee,
mortgages. witnesseth:
What laws apply to Chattel Mortgage? “That the said mortgagor hereby conveys and mortgages to the said mortgagee
all of the following- described personal property situated in the municipality of
1. Act No. 1508 or the Chattel Mortgage Law – principally
______________, Province of ____________ and now in the possession of said
2. Provisions of Pledge under the CC – suppletorily
3. There are other laws that can be applied depending on the subject mortgagor, to wit:
(Here insert specific description of the property mortgaged.)
matter:
a. Vessels: Ship Mortgage Decree
b. Revised Administrative Code “This mortgage is given as security for the payment to the said ______,
mortgagee, of promissory notes for the sum of ____________ pesos, with (or
c. Revised Penal Code – on criminal liablity: Art. 319 on
Estafa, (1) for knowingly removing any personal property without, as the case may be) interest thereon at the rate of ___________ per
centum per annum, according to the terms of __________, certain promissory
mortgaged under the Chattel Mortgage Law to any
notes, dated _________, and in the words and figures following (here insert
province or city other than the one where it was located
and at the time of the execution of the mortgage, without copy of the note or notes secured).
the written consent of the mortgagee; (2) for selling or
“(If the mortgage is given for the performance of some other obligation aside
pledging personal property already mortgage or any part
thereof under the terms of the Chattel Mortgage Law from the payment of promissory notes, describe correctly but concisely the
obligation to be performed.)
without the consent of the mortgagee written on the
back of the mortgage duly recorded in the Chattel
“The conditions of this obligation are such that if the mortgagor, his heirs,
Mortgage Register.
executors, or administrators shall well and truly perform the full obligation (or
Criminal liability must be distinguished from civil liability. This means that the obligations) above stated according to the terms thereof, then this obligation
shall be null and void.
mortgagor shall not necessarily be relieved of his criminal liability even if the
subsequently pays the mortgagee. He can still be liable under the provisions of
“Executed at the municipality of _________, in the
Article 319 of the RPC. Moreover, if the mortgaged property is sold, the same is
Province of ________, this _____ day of 19_____
valid provided all the requisites for a valid sale are present even if no written
consent was obtained from the mortgagee. But the mortgagor or the one who ____________________ (Signature of mortgagor.)
sold the property can be criminally liable under Art. 319 of the RPC.
“In the presence of
THE CHATTEL MORTGAGE LAW
“_________________ “_________________
Act No. 1508, as amended
(Two witnesses sign here.)
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Ma’am: Registration with the Motor Vehicles Office now the Land Regardless of the nature of the property subject of a chattel mortgage, even if it
Transportation Office is really just an additional requirement to bind 3 rd indicates as a subject matter a real property, the RoD has no right to refuse the
persons. registration of the same on the ground that he finds that the properties actually
are real properties as his duties with respect to such instruments are ministerial
Again we have a prior mortgage registered under the Chattel Mortgage Law but only.
was not registered in the Motor Vehicles Office. Its subsequent registration by
virtue of a sale with the Motor Vehicles Office accompanied by actual As between the parties, if a real property – as you have discussed in Property,
possession. Article 415 wherein those considered as real properties are enumerated, if the
same are made subject matter in a chattel mortgage, it will not necessarily
The SC held that the RML is a special legislation to amend and compile the laws invalidate the chattel mortgage as between the parties. As long as it is deemed
relative to motor vehicles while the Chattel Mortgage Law is a general law to be the agreement between the parties, and no 3rd parties are prejudiced, the
covering mortgages of all kinds of personal property. The Chattel Mortgage was mortgage will actually be upheld.
not repealed by the Revised Motor Vehicles Law. It does not state that the
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This is also an application of the principle of estoppel. The parties themselves ISSUE: Whether or not the properties levied are covered by the mortgage.
designated, deemed the property a personal property although it is a real YES.
property. They cannot later on impugn the validity of the contract as void as it
did not comply with the requirements of the law to constitute a chattel HELD: Section 7 of Act No. 1508, commonly and better
mortgage. The parties cannot say that the contract is void because it does not known as the Chattel Mortgage Law, does not demand a minute and specific
comply with the provisions of the law but instead they will be estopped from description of every chattel
questioning the same. But as to third parties, it will necessarily bind them when mortgaged in the deal of mortgage but only requires that the description of the
the mortgaged property is real instead of personal. The chattel mortgage will no properties be such "as to enable the parties in the mortgage, or any other
doubt be held effective against 3rd persons. person, after reasonable inquiry and investigation to identify the same".
But in the case of Standard Oil this was not ruled upon by the Courts because Gauged by this standard, general description have been
the issue therein was the duty of the RoD to have the mortgage registered. This held by this Court. The description in the mortgage must point out its subject
shouldn’t stop you from memorizing Art. 415 of the CC. matter so that such person may identify the chattels observed, but it is not
essential that the description be so specific that the property may be identified
As mentioned earlier, if you have incorporeal properties it can be considered as by it alone, if such description or means of identification which, if pursued will
a valid subject matter in a contract of chattel mortgage. As I mentioned earlier, disclose the property conveyed.
shares of stock as an evidence of incorporeal right, registration is required both
in the principal place of business of the corporation and where the stockholder The specifications in the chattel mortgage contract in the
resides. instant case, we believe, in substantial compliance with the "reasonable
description rule" fixed by the Chattel Mortgage Act. We may notice in the
Now what about a subject matter described and identified in a chattel agreement, moreover, that the phrase in question is found after an
mortgage – what’s the rule there? What happened in the case of Saldaña? enumeration of other specific articles. It can thus be reasonably inferred
therefrom that the "furnitures, fixture and equipment" referred to are
Reasonable Description Rule: properties of like nature, similarly situated or similarly used in the restaurant of
the mortgagor located in front of the San Juan de Dios Hospital at Dewey
SALDAÑA VS. PHILIPPINE GUARANTY Boulevard, Pasay City, which articles can be definitely pointed out or ascertain
GR L-13194, January 29, 1960 by simple inquiry at or about the premises. A contrary view would unduly
Facts: Josefina in order to secure a loan executed a chattel mortgage covering impose a more rigid condition than what the law prescribes, which is that the
properties described as follows: description be only such as to enable identification after a reasonable inquiry
A building of strong materials, used for restaurant business, located in front and investigation.
of the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the
following personal properties therein contained: Q: What is the issue here? What was included in the chattel mortgage
contracts? Did it include all the properties of the mortgagor? What is the
1 Radio, Zenith, cabinet type.
reasonable description rule? What does it require? Does the same specific
1 Cooler. description in a real estate mortgage contract? What phrase in the chattel
1 Electric range, stateside, 4 burners.
mortgage?
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
Section 7 does not demand a specific description of every chattel or personal
8 Tables, stateside. property mortgage. In the deal of mortgage only requires that description of the
32 Chromium chairs, stateside.
property be such as to enable the parties in a mortgage or any other person,
1 Sala set upholstered, 6 pieces.
after reasonable inquiry and investigation to identify the same. That is the
1 Bedroom set, 6 pieces.
reasonable description rule to which general description have been upheld by
the Court.
And all other furniture's, fixtures or equipment found in the said premises.
So as against third persons, the description must point out a subject matter so
Subsequent to the execution of the mortgage, a writ of execution was duly that such person may identify the chattels observed. But it is not essential that
issued as a result of a civil case instituted by Hospital de San Juan de Dios the description be so specific that the property may be identified by him alone
against Josefina Eleazar; whereupon the following properties of Josefina Eleazar in such description or by means of identification which if pursued will disclose
were levied upon: the property conveyed.
8 Tables with 4 (upholstered) chairs each.
The phrase “and all other furnitures, fixtures, and equipment found in the said
1 Table with 4 (wooden) chairs.
premises,” placed after the enumeration of other specific articles, which makes
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8 tubes).
it reasonably inferred that the furniture, picture and equipment referred to are
2 Showcases (big, with mirrors).
properties of like nature similarly situated or similarly used in the restaurant of
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .
the mortgagor, which articles can be definitely pointed out or ascertained after
1 Wooden drawer.
a simple inquiry about the premises.
1 Tocador (brown with mirror).
1 Aparador .
Again, under Section 7, like or subsituated properties made reference to those
2 Beds (single type). thereafter acquired by the mortgagor and placed in the same depository as a
1 Freezer (deep freeze).
property originally mortgaged.
1 Gas range (magic chef, with 4 burners).
1 Freezer (G.E.). So take note of this rule with regard to the description of the personal property
mortgaged. Notice the difference when compared to a real estate mortgage
On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim contract. Since in the latter, a mistake or typo in the number of the title will
asserting that the above-described properties levied are subject to his chattel invalidate the subsequent foreclosure proceeding. It must be really specific. But
mortgage of May 8, 1953. In virtue thereof, the sheriff released only some of here, there is leeway as long as it can be reasonably determined.
the property originally included in the levy of January 28, 1957, to wit: 1 radio, 8
tables, 32 chromium chairs, 1 G.E. Freezer. Affidavit of Good Faith
With regard to a chattel mortgage, there is a requirement for the execution of
Appellant claims that the phrase “ and all other furnitures, fixtures and an affidavit of good faith. This is an oath in a contract of a chattel mortgage
equipment found in the said premises," validly and sufficiently covered within wherein the parties (mortgagor and mortgagee) severely swear that the
its terms the personal properties disposed of in the auction sale. mortgage is made for the purpose of securing the obligations specified in the
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conditions thereof and for no other purposes and that the same is a just and Asiatic shall not be registered or transferred to Robert Ong until complete
valid obligation and not entered into for the purpose of fraud. payment.”
Thereafter, Ong obtained possession of the subject vessel so he
You have the case of Lilius vs. Manila Railroad. could begin deriving economic benefits therefrom. He, likewise, obtained copies
of the unnotarized deed of sale allegedly to be shown to the banks to enable
LILIUS VS. MANILA RAILROAD him to acquire a loan to replenish his (Ong’s) capital. The aforequoted
GR 42551, September 4, 1935 condition, however, which was handwritten on the original deed of sale, does
Facts: not appear on Ong’s copies.
In G.R. No. L-39587, Aleko E. Lilius, and his wife Sonja Maria Lilius, and Brita Contrary to the aforementioned agreements and without the
Marianne Lilius, met an accident, wherein their Studebaker car, collided with knowledge of Ang Tay, Ong had his copies of the deed of sale (on which the
locomotive No. 713, Manila Railroad’s train. They were awarded by the SC aforementioned prohibition does not appear) notarized on 18 May 1987. Ong
damages including interests and costs. presented the notarized deed to the Philippine Coast Guard which subsequently
issued him a Certificate of Ownership and a Certificate of Philippine Register
In G.R. No. 42551, Laura Shuman, the Manila Wine Merchants, Ltd., the Bank of over the subject vessel on 27 May 1987. Ong also succeeded in having the name
the Philippine Islands and the Manila Motor Co., Inc. (creditors of the spouses of the vessel changed to LCT “Orient Hope.”
Lilius) have appealed from the order of the CFI of Manila fixing the degree of On 29 October 1987, Ong acquired a loan from petitioner in the
preference of the claimants distributing the proceeds of the judgement of the amount of P496,008.00 to be paid in instalments as evidenced by a promissory
this court in the case of Lilius vs. Manila Railroad. note of even date. Eventually, he defaulted in his payments.
Manila Motor claims that the lower court erred in not holding their claims, Issue: Is there a valid chattel mortgage?
evidenced by public document and final judgement, as preferred over all other
claims against Aleko E. Lilius. The public document refers to a mortgage Ruling:
appearing in the evidence as the basis of its judgement, without mentioning the THE CHATTEL MORTGAGE CONTRACT BETWEEN CEBU INTERNATIONAL AND
date of execution of the exhibit. ONG IS VALID AND SUBSISTING. It cannot be disputed that it was Dy who was
the seller and Ong the buyer of the vessel. Petitioner is the creditor-mortgagee
Issue: Is there a valid chattel mortgage as alleged by Manila Motor? and not the owner-seller. The mortgage contract which expresses the true
nature of the transaction between petitioner and Ong: that it is a simple loan
Ruling: YES. with chattel mortgage. The amount that was loaned to Ong does not represent
UNDER SECTION 5 OF ACT NO. 1507, AS AMENDED BY ACT NO. 2496, A the balance of any purchase price since the documents state that Ong is already
CHATTEL DOES NOT HAVE TO BE ACKNOWLEDGED BEFORE A NOTARY PUBLIC. the absolute owner of the subject vessel.
As against creditors and subsequent encumbrances, the law does require an
affidavit of good faith appended to the mortgage and recorded with it. A chattel CEBU INTERNATIONAL IS A MORTAGEE IN GOOD FAITH WHOSE RIGHTS MUST
mortgage may, however, be valid as between the parties without such an BE RESPECTED. The prevailing jurisprudence is that “a mortgagee has a right to
affidavit of good faith. The rule is expressly stated that as between the parties rely in good faith on the certificate of title of the mortgagor to the property
and as to third persons who have no rights against the mortgagor, no affidavit given as security and in the absence of any sign that might arouse suspicion, has
of good faith is necessary. It will thus be seen that under the law, a valid no obligation to undertake further investigation. Hence, even if the mortgagor
mortgage may exist between the parties without its being evidenced by a public is not the rightful owner of or does not have a valid title to the mortgaged
document. property, the mortgagee or transferee in good faith is nonetheless entitled to
protection.” Although this rule generally pertains to real estate property,
Q: Do you have a valid chattel mortgage here? particularly registered land, it may also be applied by analogy to personal
A: Yes. Because the Court said that the chattel does not need to be property, in this case specifically, since ship owners are, likewise, required by
acknowledged before a notary public. As against creditors and subsequent law to register their vessels with the PCG.
encumbrances, the law requires an affidavit of good faith.
PETITIONER FAILED TO COMPLY WITH THE SPECIAL AFFIDAVIT OF GOOD FAITH
Q: What is the effect if there is no affidavit of good faith? AS REQUIRED IN SEC. 4 OF PD 1521. The special affidavit of good faith, is
A: According to the Court, the mortgage is still valid despite the absence of the required only for the purpose of transforming an already valid mortgage into a
affidavit of good faith. “preferred mortgage.” Thus, the abovementioned affidavit is not necessary for
the validity of the chattel mortgage itself but only to give it a preferred status.
Q: Why do we still need an affidavit of good faith?
A: Without it, the mortgage wouldn’t be binding against third parties who were As between two innocent persons, the mortgagee and the owner of the
prejudiced or who have rights against the property. mortgaged property, one of whom must suffer the consequence of a breach of
trust, the one who made it possible by his act of confidence must bear the loss,
The absence of an affidavit of good faith does not affect the validity of a it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the
mortgage. The parties will still be bound by the mortgage as well as third consequences thereof. They are considered bound by the chattel mortgage on
persons who have no rights against the mortgagor or have no rights as against the subject vessel.
the property. But with regard to 3rd persons who will be prejudiced by such
mortgage or have rights against the mortgagor, an affidavit of good faith is Q: Before it was registered, what did he do? What was the requirement
necessary. A valid mortgage may still exist between the parties, in fact, even before it can be registered? What did he do to the copies of the deed of sale?
without it being evidenced by a public document. However, for it to be A: He had them notarized.
registered, the RoD will require that the same be notarized.
Ma’am: Yes because if it is not notarized, it will not be registered.
How about the case of Cebu International?
Q: Was there an affidavit of good faith here?
CEBU INTERNATIONAL FINANCE VS. CA A: None. But then the Court said that the affidavit of good faith is not necessary
GR 107554, February 13, 1997 because it would just add value to the mortgage but it would still be valid
Facts: On 4 March 1987, Jacinto Dy executed a Special Power of Attorney in between the parties. It’s effect aside from adding value, it turns…
favor of private respondent Ang Tay, authorizing the latter to sell the cargo
vessel Owned by Dy and christened LCT “Asiatic.” You have a mortgagee in good faith. While it was true that there was yet no
On 28 April 1987, through a Deed of Absolute Sale, Ang Tay sold the valid deed of sale, or duly executed sale in favor of Ong, it appears that he was
subject vessel to private respondent Robert Ong (Ong) for P900,000.00. Ong able to have the same notarized and registered it. Remember with regard to
paid the purchase price by issuing three (3) checks in the following amounts: vessels that the Certificate of Ownership and Certificate of Philippine Registry
P150,000.000, P600,000.00 and P150,000.00. However, since the payment was must be duly registered with the Philippine Coast Guard. In this instance, you
not made in cash, it was specifically stipulated in the deed of sale that the “LCT have a mortgagee who relied in good faith on the Certificate of Title of the
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mortgagor to which the title was given as security – which had no sign that Additionally, the chattel mortgage has not been registered. Therefore,
might arouse suspicion. Therefore, Cebu International had no obligation to the same is null and void under Article 2125 of the New Civil Code
undertake further investigation, applying mortgagee in good faith. Even if the
mortgagor is not the rightful owner does not have the valid title to the Issue: WON the failure to record the deed makes the latter null and void
mortgaged property, the mortgagee or transferee is nonetheless entitled to
protection. Ruling: NO.
As regards the second assignment of error, we agree with the petitioner
The mortgagee in good faith that we have discussed in real estate mortgage that a mortgage is a mere accessory contract and, thus, its validity would
was applied in this instance by analogy to personal properties since the vessel depend on the validity of the loan secured by it. We, however, reject the
was duly registered in the Philippine Coast Guard. petitioner's argument that since the chattel mortgage involved was not
registered, the same is null and void. Article 2125 of the Civil Code clearly
Notice that there was no affidavit of good faith here but the SC still upheld the provides that the non-registration of the mortgage does not affect the
mortgage in favor of Cebu International because the purpose of the affidavit of immediate parties. It states:
good faith is not only to bind third persons (although it cannot be applied to a Art. 2125. In addition to the requisites stated in article 2085, it is
mortgagee in good faith) but it can also, as an additional effect thereof is that it indispensable, in order that a mortgage may be validly constituted that
may be considered as a preferred mortgage. So when you to concurrence and the document in which it appears be recorded in the Registry of Property.
preference of credits, when we say preferred mortgage and it turns out that the If the instrument is not recorded, the mortgage is nevertheless binding
debtor is insolvent and you have these vessels subject to a mortgage, if there is between the parties.
an affidavit of good faith, the proceeds of the sale of that vessel will be applied xxxxxxxxx
first to the mortgagee. If the mortgage does not have an affidavit of good faith, The petitioner cannot invoke the above provision to nullify the chattel
you will not have any preference over the proceeds of the sale of the vessel. mortgage it executed in favor of respondent DBP.
You will be joined with the other creditors and any of the remaining proceeds of
the sale of the vessel will be shared pro rata if hindi applicable yung hierarchy as Discussion on the case:
to the preference of claims. Article 2125 is a provision under real estate mortgage, but in this case of
Filipinas, it applied the same provision to a chattel mortgage, wherein it was
I think you have the sample form in Art. 1508 and both parties will execute such ruled that even if it was not recorded, it is nevertheless binding between the
affidavit. Its purpose is to secure the fulfillment of the obligation and not parties.
executed to defraud third persons. Its absence will only depreciate the
mortgage, will not bind the mortgagees as against 3rd persons who will be Filipinas cannot invoke the provision to nullify the chattel mortgage it executed
prejudiced thereby and it will not transform an already valid mortgage into a in favor of DBP.
preferred mortgage. Such affidavit is not necessary for the validity of the
mortgage. Again such absence of the affidavit will still leave the mortgage as Discussion on the provision/topic:
valid between the parties but not binding as against third persons who have 2140 does not automatically or necessarily say that if it is not recorded, the
rights against the mortgagor the contract is not valid. The credits secured by the mortgage is void. Although in the discussions, it is mentioned that for validity,
mortgage will also not assume the position of a preferred credit in the absence the registration is indispensable. If you try to reconcile that with Filipinas case,
of such affidavit. applying 2125, SC emphasized that it is still valid despite the absence of
registration. There are no cases which repealed or superseded the ruling on
Importance of an Affidavit of Good Faith Filipinas which applied 2125 on a chattel mortgage.
Very important ang affidavit of good faith, because remember, in a chattel
mortgage, the property is not delivered to the mortgagee-creditor. It remains in Previously, we discussed that we apply the ruling in the case of Saldana wherein
possession of the debtor-mortgagor. Because once it is delivered to the debtor- it was ruled that: unlike in REM, in Chattel Mortgage Law, it does not require a
mortgagor, it is not considered as a mortgage anymore but a pledge. What is specific description. It only requires the description of the mortgaged property
the relevance there? For example, hahabulin yan kasi may iba ka pang utang, sufficient to identify the same after a reasonable investigation and inquiry.
tapos mamaya magexecute tayo ng mortgage para walang makukuha sayo.
With the affidavit of good faith, this is also to prevent fraud in the sense na Absence of affidavit of good faith: chattel mortgage is still valid. However,
magexecute tayo ng chattel mortgage para hindi ma-sheriff or habulin. With the absence thereof will vitiate mortgage only against third persons without notice,
execution of the affidavit of good faith, you attest that the obligation is true and creditors, and subsequent encumbrancers. Moreover, its absence will convert
it exists na may utang ka talaga. Because with an affidavit, you attest to the the chattel mortgage to a preferred credit.
truthfulness that the there is a valid obligation which exists and that the
mortgage is not entered into to defraud creditors. Similar to continuing guaranty, with regard to mortgage, as long as a mortgage
has a valid blanket clause, it will also secure even future debts.
Definition of Chattel Mortgage:
Art. 2140. By a chattel mortgage, personal property is But what about chattel mortgage?
recorded in the Chattel Mortgage Register as a security for the ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs. HON.
performance of an obligation. If the movable, instead of being COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and
recorded, is delivered to the creditor or a third person, the REGIONAL SHERIFF OF CALOOCAN CITY
contract is a pledge and not a chattel mortgage. [G.R. No. 103576. August 22, 1996]
A property subject of a chattel mortgage is not delivered to Facts: ACME obtained a P3M loan (1978) secured by a chattel mortgage
the creditor, otherwise, it may be considered as a pledge. from Producers Bank, which the latter granted. The said loan was fully
paid.
In relation to the requirement of recording, let’s look at the case of: “In case the MORTGAGOR executes subsequent promissory note or notes
FILIPINAS MABLE CORPORATION vs. THE HONORABLE INTERMEDIATE either as a renewal of the former note, as an extension thereof, or as a
APPELLATE COURT new loan, or is given any other kind of accommodations such as
[G.R. No. L-68010 May 30, 1986] overdrafts, letters of credit, acceptances and bills of exchange, releases of
import shipments on Trust Receipts, etc., this mortgage shall also stand as
Facts: DBP granted a 5M loan to Filipinas. To secure the said loan, it security for the payment of the said promissory note or notes and/or
executed a deed of mortgage (chattel) and deed of assignment in favor of accommodations without the necessity of executing a new contract and
DBP. this mortgage shall have the same force and effect as if the said
Filipinas seeks to annul the deed of assignment and deed of mortgage promissory note or notes and/or accommodations were existing on the
because allegedly the loan was never delivered to them. date thereof. This mortgage shall also stand as security for said
Filipinas’ contention: obligations and any and all other obligations of the MORTGAGOR to the
There was no valid loan contract for failure of consideration, the MORTGAGEE of whatever kind and nature, whether such obligations have
mortgage cannot exist or stand by itself being a mere accessory contract. been contracted before, during or after the constitution of this mortgage.”
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The bank again extended a P1M loan (1984) to ACME. However, the P1M "x x x (the) mortgage is made for the purpose of securing the obligation
loan was not settled. Hence, Producers Bank applied for an extrajudicial specified in the conditions thereof, and for no other purpose, and that the same
foreclosure of the chattel mortgage which secured the P3M loan. is a just and valid obligation, and one not entered into for the purpose of fraud."
Issue: WON chattel mortgage may cover future debts That the mortgage was executed to secure the fulfillment of an obligation,
which is a true obligation, and it is not executed to defraud third persons.
Ruling: NO.
While a pledge, real estate mortgage, or antichresis may exceptionally In other words, you really have to expressly and specifically provide that at the
secure after-incurred obligations so long as these future debts are time the mortgage was executed, there exists a true obligation. Remember,
accurately described, a chattel mortgage, however, can only cover that the property here is not delivered to the possession of the mortgage. It
obligations existing at the time the mortgage is constituted. Although remains in the possession of the debtor. The latter, in the event the other
a promise expressed in a chattel mortgage to include debts that are yet to creditors foreclose the property, cannot say that he does not own the property
be contracted can be a binding commitment that can be compelled upon, or that it was mortgaged to avoid the foreclosure, there must be a chattel
the security itself, however, does not come into existence or arise until mortgage executed and there is an affidavit of good faith, so as not to defraud
after a chattel mortgage agreement covering the newly contracted debt is third persons.
executed either by concluding a fresh chattel mortgage or by amending
the old contract conformably with the form prescribed by the Chattel Discussion on the topic:
Mortgage Law. Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an In REM, does it cover the fruits of the mortgaged property? Yes, unless there is
act of default on the part of the borrower of the financing agreement an agreement to the contrary.
whereon the promise is written but, of course, the remedy of foreclosure
can only cover the debts extant at the time of constitution and during the How about with regard to personal properties?
life of the chattel mortgage sought to be foreclosed. General Rule: It does not cover subsequently acquired personal properties.
Exception: inventories are mortgage – e.g sari sari store, etc.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law If we’re talking of goods in the ordinary course of business, it can be
itself. One of the requisites, under Section 5 thereof, is an affidavit of replenished and to which it can be a valid subject in a contract of chattel
good faith. While it is not doubted that if such an affidavit is not mortgage. The after-acquired properties, since it can be replenished, may be
appended to the agreement, the chattel mortgage would still be valid used to fulfill an obligation, even if at the time the chattel mortgage was
between the parties (not against third persons acting in good faith]), the executed, the exact properties were not yet present.
fact, however, that the statute has provided that the parties to the
contract must execute an oath that - Can a creditor of a chattel mortgage assign his rights to a third person? YES,
same rule with REM. The creditor can assign his credit to some other person to
"x x x (the) mortgage is made for the purpose of securing the obligation which if the debtor fails to pay his obligation, the third person can hold the
specified in the conditions thereof, and for no other purpose, and that same as against the debtor. If debtor fails to pay, the assignee can foreclose the
the same is a just and valid obligation, and one not entered into for the property.
purpose of fraud."
Is it required that the assignment be registered to bind debtor? NO because of
makes it obvious that the debt referred to in the law is a current, not an 1240.
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract Art. 1240. Payment shall be made to the person in whose favor the
was the P3,000,000.00 loan which petitioner corporation later fully paid. obligation has been constituted, or his successor in interest, or any
By virtue of Section 3 of the Chattel Mortgage Law, the payment of the person authorized to receive it. (1162a)
obligation automatically rendered the chattel mortgage void or
terminated. Even if you merely registered the assignment credit and the same is without the
knowledge of the debtor, payment results to the extinguishment of the
Q: Do you have a provision in the mortgage which covers future debts? obligation. Why? Because as to the debtor, the creditor is still the creditor at
A: Yes (see italicized portion of the case). the time of payment. So, what is required is personal knowledge. Mere
registration is not sufficient without the actual knowledge of the debtor. The
Q: Is the provision valid? debtor cannot be prejudiced by the assignment. The remedy of the third person
A: Yes but they must execute a new chattel mortgage or amend the old one. is to go after the creditor. If the debtor has knowledge, even if not registered,
Otherwise, it is without any effect. he has to pay to the assignee to extinguish the obligation.
Discussion on the case: Who may redeem? Technically speaking, when we’re talking about a chattel
Ma’am reads ruling (see 1st paragraph in the ruling). In this instance, 1978 mortgage, we’re not talking about the right of redemption. But, who may pay
chattel mortgage already ceased to exist with the full payment of the P3M loan. the obligation to the creditor before it is sold?
Remember, when the principal obligation is extinguished, the accessory 1) Mortgagor;
obligation is also extinguished. Therefore, there were no more chattel mortgage 2) a person holding a subsequent mortgage;
that could cover the loans concluded thereafter. Take note of this distinction 3) or a subsequent attaching creditor.
(compared to pledge, REM, and guaranties and securities), that a chattel
mortgage may only cover obligations existing at the time the mortgage is In other words, if a second mortgagee is allowed in REM, the same is also
constituted. Even if there is a promise, as in the case of Acme, the security itself allowed in a chattel mortgage.
does not come into existence until they will execute a new chattel mortgage or
amend the old one, specifically stating that in this personal property there is a However, in a chattel mortgage, the second mortgage cannot foreclose the
new obligation and it acts as a security for this specific new obligation. property before the first mortgagee. What can he do? Pay debtor’s obligation
to first mortgagee, but of course, the debtor’s obligation to the second
A deed of chattel mortgage shall be void if it provides that the security stated mortgagee will increase (plus obligation to first mortgagee).
is for the payment of any and all obligations contracted. Void in the sense that
it is without any effect until it will be amended or a new mortgage contract will A second mortgagee is allowed, However, the latter cannot foreclose the
be contracted. mortgage. What he can do is to redeem the property from the first mortgagee,
pay off the latter and in effect the second mortgagee will be entitled to the
What is the purpose of affidavit of good faith? mortgage.
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What about possession of the property? We mentioned in our REM discussion redemption.
that the property need not be delivered to the mortgagee, unless agreed
otherwise. Evangelista spouses now claim that their right over the
mortgaged chattels as purchasers at the public sale in
How about in chattel mortgage? execution of their judgment against their debtor, Tunaya,
1) Before default/foreclosure, the mortgagee is not entitled to the should not be held subordinate to the mortgage lien of Cabral
possession of the property. Otherwise, it would be considered a spouses as mortgagees, by virtue of prescription and laches on
pledge. the part of said mortgagees as well as of their having
2) After default, if the mortgagee desires to foreclose the property, the purchased the chattels at a public sheriffs sale.
creditor can take possession of the property. However, it is not in
the concept of an owner, but for purposes of selling the property. Issues:
(1) Has the right of Cabral Spouses to recover the
If the mortgagor, after default, refuses to deliver the property, the mortgagee properties prescribed? NO.
can file a judicial foreclosure for purposes of sale. (2) Did the Certificate of Sale give the Evangelista Spouses
superior right against the Cabral Spouses? NO.
We also apply the rule (pactum commissorium) that the mortgagor cannot
automatically appropriate the property to himself. Ruling:
(1) This 30-day period is the minimum period after violation
If there is another party who is in possession of the property, the mortgagee of the mortgage condition for the mortgage creditor to
can implead those who are claiming possession or ownership of the same. So, cause the sale at public auction of the mortgaged
the creditor shall implead all persons claiming possession or ownership over the chattels, with at least ten days’ notice to the mortgagor
property mortgaged. and posting of public notice of the time, place and
purpose of such sale, and is a period of grace for the
Now Act No. 1508 (page 48) provides for the proceeding of the foreclosure of a mortgagor, who has no right of redemption after the
chattel mortgage to which the mortgagee must discharge the mortgage in the sale is held, to discharge the mortgage obligation.
manner provided in the said law. Otherwise, he can be held liable for damages
by any person entitled to redeem the property. The prescription period for recovery of movables for
foreclosure purposes such as in the present case is eight
It is the same with pledge and real estate mortgage. What takes place here is a years as provided in Article 1140 of the Civil Code, and
public sale – a public auction. So again, the creditor has no right to appropriate here plaintiffs had timely filed their action within 8
to himself the personal property. months from the mortgage debtor's default.
If you take a look at Act No. 1508, more or less, the procedure prescribed By the same token , neither could laches properly be
therein is more or less the same with a foreclosure of a mortgage. But you will imputed against plaintiffs, who filed their action
notice the difference in the number of days in absence of we call the right promptly after they had been advised by Tunaya of the
redemption. public auction sale on June 24, 1960 of the chattels, at
the instance of Evangelista as his judgment creditor.
Although, same with Art. 2135, the mere fact that the mortgagee was sole
bidder for the mortgaged property in a public sale – so it must be really in a (2) Evangelista spouses’ purchase of the mortgaged
public sale, does not warrant that the transaction was attended with fraud. It is chattels at the public sheriff's sale and the delivery of
not sufficient that one alleges fraud, it requires full and convincing evidence. the chattels to them with a certificate of sale did not
give them a superior right to the chattels as against the
Take a look at Section 14 of Act No. 1508: there is a 30 day period stated Cabral spouses.
therein. What is this 30 day period? We have the case of Cabral.
It has long been settled by this Court that “The right of
those who acquire said properties should not and
CABRAL VS. EVANGELISTA cannot be superior to that of the creditor who has in his
G.R. L-26860, July 30, 1969 favor an instrument of mortgage executed with the
Facts: formalities of the law, in good faith, and without the
On 12 Dec 1959, George had executed in favor of Cabral least indication of fraud.
Spouses a chattel mortgage covering a Morrison English piano
and a Frigidaire GM Electric Stove as security for payment to In another case case between two mortgagees, we held
the latter of a promissory note in the sum of P1k executed on that "As between the first and second mortgagees,
the same date in the Chattel Mortgage Register of Rizal on 14 therefore, the second mortgagee has at most only he
Dec 1959. Meanwhile, the Evangelista spouses obtained a final right to redeem, and even when the second mortgagee
money judgment against Tunaya in a Civil Case. They caused goes through the formality of an extrajudicial
the levy in execution on Tunaya’s personal properties, foreclosure, the purchaser acquires no more than the
including the piano and the stove mortgaged to Cabral right of redemption from the first mortgagee.
spouses.
The superiority of the mortgagee's lien over that of a
The said mortgage chattels, together with other personal subsequent judgment creditor is now expressly
properties of the judgment debtor, were sold at public auction provided in Rule 39, section 16 of the Revised Rules of
to Evangelista spouses as the highest bidders. The judgment Court, which states with regard to the effect of levy on
credit of Evangelista spouses, as creditors in the said Civil Case, execution as to third persons that "The levy on
was considered paid up and the Sheriff issued the execution shall create a lien in favor of the judgment
corresponding certificate of sale in their favor. creditor over the right, title and interest of the
judgment debtor in such property at the time of the
Subsequently, 8 months after the maturity of Tunaya’s levy, subject to liens or encumbrances then existing."
promissory note and his having defaulted in the payment
thereof, Cabral spouses filed their complaint against Tunaya
and the Evangelista spouses, alleging that the Evangelista Q: What was the understanding of the Spouses Cabral in that provision?
spouses had refused their demands to pay the amount due to A: According to Spouses Evangelista, the 30 day period is a prescriptive period
Tunaya’s promissory note or to exercises their right of for Spouses Cabral to cause the foreclosure of the mortgage. However the Court
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ruled that the 30-day period is actually a the minimum period for the mortgage- are security for the chattel mortgage. Northern Motors filed
creditor to cause the sale or auction of the mortgaged property after the an intervention on December 18, 1974; however, the levied
condition has been violated. In other words, the said 30 day period serves as a taxicabs were sold the same day at 2pm although agreement
period for the mortgagor-payor Tunaya to discharge his obligations. shows that it should have happened at 4pm. Indemnity bond
was posted by TROPICAL, but the bond was cancelled after the
Q: How about right of redemption, is it present in a chattel mortgage? sale without notice to Northern Motors.
Because, recall, in real estate mortgage, the general rule is that you have that
1 year from registration of sale to redeem the property. Do we have a similar A second levy was made upon 35 taxicabs, 7 of which are
provision in a chattel mortgage? What was the ruling of the court here? Can mortgaged to Northern Motors. The taxies were levied and
the property be redeemed by the mortgagor after the sale has already taken sold at an auction sale. The auction sale proceeded and the
place? purchasers were of unknown addresses, hence the 8 taxicabs
The 30-day period provided in Section 14 is the minimum period after the cannot be recovered. The proceeds of the auction were
violation of the mortgage condition. Ang sabi diyan, “mortgagee may after 30 contested by Northern Motors. Moreover, the sheriff
days from the condition broken,” in other words from the time of default, you deducted the expenses of the execution sale from the
count the 30 days. From that you can now have the mortgaged property sold at proceeds.
a public auction, provided that there is compliance with the requirement: at
least 10 days notice to the mortgagor prior to the sale; and posting of the public Honesto Ong and City Sheriff of Manila filed a motion for the
notice of the time, the place and the purpose of such sale. reconsideration contending that the lien of Northern Motors,
Why is it required under the law that these notices be given to the mortgagor? as chattel mortgagee, over certain taxicabs is not superior to
So within the 10 day period, he can redeem a property. the levy made on the said cabs by Honesto Ong, the assignee
of the unsecured judgment creditor of MYT.
Why would that be relevant? Because after the personal property is sold in a
public auction, no right of redemption is available. Take note of this distinction On the other hand, Northern Motors prayed that the sheriff
as to real estate mortgage. This 10-day period is a grace period for the should be required to deliver to it the proceeds of the
mortgagor who has no right of redemption after the sale is held to discharge execution sale of the mortgaged taxicabs without deducting
the mortgage obligation. the expenses of execution.
So the 30-day period is not a prescriptive period. In this case, the SC pointed out ISSUES:
that the prescriptive period to foreclosure of mortgages or chattel mortgages 1. WON the expenses for the execution sale should be
is 8 years and we apply Art. 1140. deducted from the proceeds thereof. NO
2. WON the purchaser has a better right than the
There could have been no laches. Moreover, the SC mentioned that the creditor/mortgagee. NO
purchase of the properties at the public sale and the delivery to them with the
certificate of sale did not give them a superior right to the chattels. Why? HELD:
Because again it was already mortgaged. The sale conveys to the purchaser all THOSE CABS CANNOT BE SOLD AT AN EXECUTION SALE
the right which the debtor had in such property on the day the execution or BECAUSE THE LEVY THEREON WAS WRONGFUL.
attachment was levied.
Ong had no right to levy upon the mortgaged taxicabs and
The sale that was conducted here was an execution sale – not the foreclosure that he could have levied only upon the mortgagor's equity
sale contemplated. If you apply the foreclosure sale in relation to a chattel of redemption. The essence of the chattel mortgage is that
mortgage, then you apply Act No. 1508. the mortgaged chattels should answer for the mortgage credit
and not for the judgment credit of the mortgagor's unsecured
The right of those who acquired said properties cannot and should not be creditor. The mortgagee is not obligated to file an
superior to that of the creditor. In this case, there was an instrument of "independent action" for the enforcement of his credit. To
mortgage executed with the formalities of the law in good faith without any require him to do so would be a nullification of his lien and
indication of fraud. would defeat the purpose of the chattel mortgage which is to
give him preference over the mortgaged chattels for the
Again, the 30 day period is not a prescriptive period. Right of redemption and satisfaction of his credit. (See art. 2087, Civil Code).
equity of redemption: these are the terms we have used in real estate
mortgage. In a chattel mortgage the debtor has 10 days from notice of the Ong's theory that Manila Yellow Taxicab's breach of the
order of foreclosure but he has no right of redemption after the sale. chattel mortgage should not affect him because he is not privy
of such contract is untenable. The registration of the chattel
What are the remedies of the creditor-mortgagee? Even if there is a chattel mortgage is an effective and binding notice to him of its
mortgage, he can file an action for collection of the obligation. When he files existence or a lien which, being recorded, follows the chattel
the said case, he deemed to have abandoned his right to foreclose the property. wherever it goes.
He can attach the same property in his action for collection of sum of money
but he will be required to produce a bond. Otherwise he will have to wait until His contention that Northern Motors was negligent because it
hearing can be conducted and the judgement will be rendered in his favor so did not sue the sheriff within the 120-day period provided for
that he can execute all the properties of the debtor including that which was in section 17, Rule 39 of the Rules of Court is not correct. Such
covered by the chattel mortgage. action was filed on April 14, 1975. However, instead of
The remedies available to the creditor-mortgagee are alternative in nature Honesto Ong, his assignor Tropical Commercial Corporation,
and not cumulative. If he files an action for mortgage he cannot later on file an was impleaded as a defendant therein. That might explain his
action for foreclosure. unawareness of the pendency of such action.
NORTHERN MOTORS VS. COQUIA
G.R. L-40018, December 15, 1975 Ong admits "that the mortgagee's right to the mortgaged
Facts: property is superior to that of the judgment creditor". But he
Manila Yellow Taxicab, executed a chattel mortgage over contends that the rights of the purchasers of the cars at the
several taxicabs in favor of Northern Motors. TROPICAL is a execution sale should be respected. He reasons out they were
judgment creditor of Yellow Taxicab which assigned the credit not parties to the mortgage and that they acquired the cars
to ONG. prior to the mortgagee's assertion of its rights thereto.
The third-party claim filed by Northern Motors, Inc. should
MYT failed to pay its loan so On December 12 1974, Sheriff have alerted the purchasers to the risk which they were taking
then levied upon 20 taxicabs in favor of Tropical, 8 of which when they took part in the auction sale. Moreover, at an
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In 1998, SEC dismissed the petition, but granted it upon reconsideration. It held (3) Claims of laborers, masons, mechanics and other workmen, as well
that Cordova was the owner of the CSPI shares by virtue of a confirmation sale as of architects, engineers and contractors, engaged in the
(which was considered as a deed of assignment) issued to him by Philfinance. construction, reconstruction or repair of buildings, canals or other
But since the shares had already been sold and proceeds commingled with works, upon said buildings, canals or other works;
other assets of Philfinance, Cordova’s status was converted into that of an (4) Claims of furnishers of materials used in the construction,
ordinary creditor for the value of such shares. reconstruction, or repair of buildings, canals or other works, upon
said buildings, canals or other works;
ISSUES: (5) Mortgage credits recorded in the Registry of Property, upon the real
1. whether petitioner should be considered as a preferred (and secured) estate mortgaged;
creditor of Philfinance; (6) Expenses for the preservation or improvement of real property when
2. whether petitioner can recover the full value of his CSPI shares or merely the law authorizes reimbursement, upon the immovable preserved
15% thereof like all other ordinary creditors of Philfinance or improved;
(7) Credits annotated in the Registry of Property, in virtue of a judicial
HELD: petitioner had become an ORDINARY creditor of Philfinance. Certainly, order, by attachments or executions, upon the property affected,
petitioner had the right to demand the return of the shares. He filed a and only as to later credits;
complaint in the liquidation proceedings. He sought instead to recover their (8) Claims of co-heirs for warranty in the partition of an immovable
monetary value. among them, upon the real property thus divided;
(9) Claims of donors or real property for pecuniary charges or other
The CSPI shares were specific or determinate movable properties. But after they conditions imposed upon the donee, upon the immovable donated;
were sold, the money raised from the sale became generic and were (10) Credits of insurers, upon the property insured, for the insurance
commingled with other assets of Philfinance. Unlike shares of stock, money is premium for two years. (1923a)
generic. This means that once a certain amount is added to the cash balance,
one can no longer pinpoint the specific amount included which then becomes
part of a whole mass of money. First, taxes due upon the building. Again that is the priority. All the rest will
concur.(same concept under Art. 2241) *repeats the illustration under Art. 2241
It thus became impossible to identify the exact proceeds of the sale of the CSPI but changed subject property from a car to a house and lot.
shares. Petitioner’s only remedy was to file a claim on the whole mass of these Using the same example let’s say instead of a car, we have a parcel of land.
assets, to which unfortunately all other creditors of Philfinance also had a claim. Fair market value is 1.5m,
Real property Taxes is 500k,
Petitioner’s right of action against Philfinance was a “claim” properly to be unpaid price of 200k,
litigated in the liquidation proceedings. He had a right to the payment of the REM of 500k,
value of his shares. His demand was of a pecuniary nature since he was claiming unpaid laborers, architects, etc is 300k.
the monetary value of his shares. It was in this sense that he was a creditor of If these are the credits in relation to a specific real or immovable property, and
Philfinance. then this property is sold for 1.5m again, walang problema. Bayaran silang
lahat. But what if let us say, meron pang unpaid laborers 500k. so kulang ito.
Like all the other ordinary creditors or claimants against Philfinance, he was Again, priority, real property taxes, you still have 1m remaining, but the
entitled to a rate of recovery of only 15% of his money claim. remaining credit is 1.2m. so anong mangyari ditto? 200k over 1m. 200k x1m.
1/6 over 1m. yung portion nay un pambayad. What about the remaining
Q1: what would be the advantage if Cordova is deemed a preferred creditor? balance of this 200 kasi di man sya manfully-paid. Mahulug siya dun sa other
A1: the advantage would be---if he would be an ordinary creditor the governing credits if under 2244 or 2245 kung di siya mag-apply sa 2244. If the proceeds in
law would be 2245 which merely provides for pro-rata, unlike if a preferred relation to the sale of specific immovable or movable property are not sufficient
creditor which is entitled to the value of his claim. for specially preferred credits, it does not mean that it will not be paid with the
Q2: What was the ruling of Court? Is Cordova an ordinary creditor in which 2245 remaining balance at all. Because the latter is pwede masalo sa 2244 or 2245.
will apply or 2241? Again, that is if meron pang properties si debtor which can be sold to pay of the
A2: He is an ordinary creditor, and hence he has no preference under Article other credits.
2245:Credits of any other kind or class, or by any other right or title not Also take note of this term, refectionary credit. A refectionary credit is an
comprised in the four preceding articles, shall enjoy no preference. This being indebtedness incurred for the repair or reconstruction of something previously
so, Article 2251 (2) states that: Common credits referred to in Article 2245 shall made such as a repair or construction made necessary by the deterioration or
be paid pro rata regardless of dates.Like all the other ordinary creditors or destruction of the property. This credit may be applied to Art. 2241 and 2242,
claimants against Philfinance, he was entitled to a rate of recovery of only 15% yung expenses for improvements and repairs.
of his money claim.
So here we have Cordova who is deemed as an ordinary creditor of PhiFinance Now we have the case of Barretto vs Villanueva-
and not as a preferred creditor. While it is true that shares of petitioner were
specific or determinate, it must be noted that the same is already sold. He BARRETO vs VILLANUEVA
cannot claim preference or priority over the proceeds of the said shares.
However, the effect is that the money raised from the said sale became generic. FACTS: Rosario Cruzado sold all her right, title, and interest and that of her
And as such were commingled with the assets of PhilFinance. So here, children in the house and lot herein involved to Villanueva for P19K. The
remember to apply 2241, it must refer to a specific movable property. While purchaser paid P1,500 in advance, and executed a promissory note for the
money is a movable property, it is not specific or determinate. It is already a balance. However, the buyer could only pay P5,500 on account of the note, for
generic thing, so the claim of Cordova was for the payment of money. Therefore which reason the vendor obtained judgment for the unpaid balance. In the
2241 is not applicable, but rather 2245 and is deemed an ordinary creditor. meantime, the buyer Villanueva was able to secure a clean certificate of title
What is the difference here? Because if mahulog 2245, common credits shall be and mortgaged the property to Barretto to secure a loan of P30K, said mortgage
paid pro-rata regardless of the dates. And you only have to consider kung having been duly recorded.
meron bang maiwan na assets si debtor after the payment of the credits under
2241, 2242, and later on 2244. Kung wala na matira, wala ng paghatian ang Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
common creditors under 2245. Under the facts of this case, konti nalang naiwan foreclosed the mortgage in her favor, obtained judgment, and upon its
in which like all creditors, the rate of recovery is only 15% of their respective becoming final asked for execution. Cruzado filed a motion for recognition for
money claims. her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new Civil
Article 2242. With reference to specific immovable property and real rights of Code. After hearing, the court below ordered the "lien" annotated on the back
the debtor, the following claims, mortgages and liens shall be preferred, and of the title, with the proviso that in case of sale under the foreclosure decree
shall constitute an encumbrance on the immovable or real right: the vendor's lien and the mortgage credit of appellant Barretto should be
(1) Taxes due upon the land or building; paid pro rata from the proceeds.
(2) For the unpaid price of real property sold, upon the immovable sold;
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This explains the rule of Article 2243 of the new Civil Code that — On August 26, 1968, a decision was rendered in Civil Case No. 69228 in favor of
The claims or credits enumerated in the two preceding articles" shall be the private respondent and against the spouses. A writ of execution was
considered as mortgages or pledges of real or personal property, or liens within accordingly issued but was returned unsatisfied.
the purview of legal provisions governing insolvency.
As the spouses did not have any properties to satisfy the judgment in Civil Case
And the rule is further clarified in the Report of the Code Commission, as No. 69228, the private respondent addressed a letter to the petitioner for the
follows: delivery to him (private respondent) of his pro-rata share in the value of the
The question as to whether the Civil Code and the insolvency Law can be duplex-apartment in accordance with Article 2242 of the Civil Code. The
harmonized is settled by Article 2243. The preferences named in Articles 2261 petitioner refused to pay the pro-rata value prompting the private respondent
and 2262 (now 2241 and 2242) are to be enforced in accordance with the to file the instant action. A decision was rendered in favor of the private
Insolvency Law." Respondent.
Thus, it becomes evident that one preferred creditor's third-party claim to the ISSUE: whether or not Ramos is entitled to claim a pro-rata share in the value of
proceeds of a foreclosure sale (as in the case now before us) is not the the property in question? NO
proceeding contemplated by law for the enforcement of preferences under
Article 2242, unless the claimant were enforcing a credit for taxes that enjoy RULING: Concurrence of credits occurs when the same specific property of the
absolute priority. If none of the claims is for taxes, a dispute between two debtor or all of his property is subjected to the claims of several creditors. The
creditors will not enable the Court to ascertain the pro-rata dividend concurrence of credits raises no questions of consequence were the value of
corresponding to each, because the rights of the other creditors likewise" the property or the value of all assets of the debtor is sufficient to pay in fall all
enjoying preference under Article 2242 cannot be ascertained. the creditors. However, it becomes material when said assets are insufficient
for then some creditors of necessity will not be paid or some creditors will not
There being no insolvency or liquidation, the claim of the appellee, as unpaid obtain the full satisfaction of their claims. In this situation, the question of
vendor, did not require the character and rank of a statutory lien co-equal to preference will then arise, that is to say who of the creditors will be paid the all
the mortgagee's recorded encumbrance, and must remain subordinate to the of the others.
latter.
The proceedings in the court below do not partake of the nature of the
So what I want to emphasize here, under Art. 2242 no priority for those credits insolvency proceedings or settlement of a decedent’s estate. The action filed by
mentioned therein except for taxes. The recurring theme as can be observed in Ramos was only to collect the unpaid cost of the construction of the duplex
the cases is to be able to apply the rules, there must be a proceeding where the apartment. It is far from being a general liquidation of the estate of the Tabligan
claims of the creditors may be validly adjudicated. In the absence of insolvency spouses.
proceedings (or other equivalent general liquidation of the debtor's estate), the
conflict between the parties now before us must be decided pursuant to the Insolvency proceedings and settlement of a decedent’s estate are both
well established principle concerning registered lands; that a purchaser in good proceedings in rem which are binding against the whole world. All persons
faith and for value (as the appellant concededly is) takes registered property having interest in the subject matter involved, whether they were notified or
free from liens and encumbrances other than statutory liens and those not, are equally bound. Consequently, a liquidation of similar import or "other
recorded in the certificate of title. There being no insolvency or liquidation, the equivalent general liquidation’ must also necessarily be a proceeding in rem so
claim of the appellee, as unpaid vendor, did not require the character and rank that all interested persons whether known to the parties or not may be bound
of a statutory lien co-equal to the mortgagee's recorded encumbrance, and by such proceeding.
must remain subordinate to the latter.
In the case at bar, although the lower court found that "there were no known
creditors other than the plaintiff and the defendant herein", this cannot be
PHILIPPINE SAVINGS vs LANTIN conclusive. It will not bar other creditors in the event they show up and present
their claims against the petitioner bank, claiming that they also have preferred
FACTS:Involved in this case is a duplex-apartment house on a lot covered by TCT liens against the property involved. Consequently, Transfer Certificate of Title
No. 86195 situated at San Diego Street, Sampaloc, Manila, and owned by the No. 101864 issued in favor of the bank which is supposed to be indefeasible
spouses Filomeno and Socorro Tabligan. would remain constantly unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although it considers claims and
The duplex-apartment house was built for the spouses by private respondent credits under Article 2242 as statutory liens. Neither does the De Barretto case
Candido Ramos, a duly licensed architect and building contractor, at a total cost sanction such instability.
of P32,927.00. The spouses paid private respondent the sum of P7,139.00 only.
Hence, the latter used his own money, P25,788.50 in all, to finish the Q1: what kind of proceeding is required to apply these provisions (2241,
construction of the duplex-apartment. 2242)?
A1: it is not necessary to be an insolvency proceeding, but a proceeding that
Meanwhile, the spouses Tabligan obtained from petitioner Philippine Savings would adjudicate the claims of all the creditors. It may cover a proceeding
Bank three (3) loans in the total amount of P35,000.00, the purpose of which regarding the estate of a deceased person, for example.
was to complete the construction of the duplex-apartment. Q2: was there such kind of proceeding here?
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A2: None. The proceedings did not partake of the nature of the insolvency proper?
proceedings or settlement of a decedent’s estate. The action filed by Ramos
was only to collect the unpaid cost of the construction of the duplex apartment.
It is far from being a general liquidation of the estate of the Tabligan spouses. HELD: There is no contractor’s lien in favor of petitioners.
Again take note, Concurrence of credits occurs when the same specific property Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
of the debtor or all of his property is subjected to the claims of several preference with respect to specific personal or real property of the debtor.
creditors. The concurrence of credits raises no questions of consequence were Specifically, the contractor’s lien claimed by petitioners is granted under the
the value of the property or the value of all assets of the debtor is sufficient to third paragraph of Article 2242 which provides that the claims of contractors
pay in fall all the creditors. However, it becomes material when said assets are engaged in the construction, reconstruction or repair of buildings or other
insufficient for then some creditors of necessity will not be paid or some works shall be preferred with respect to the specific building or other
creditors will not obtain the full satisfaction of their claims. In this situation, the immovable property constructed.
question of preference will then arise, that is to say who of the creditors will be
paid the all of the others. 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
As emphasize in the Barretto case and here in the case of Philippine Savings, claims of several creditors and the value of such property of the debtor is
there must be some proceeding where the claims of all the preferred creditors insufficient to pay in full all the creditors. In such a situation, the question of
may be bindingly adjudicated such as an insolvency proceeding or settlement of preference will arise, that is, there will be a need to determine which of the
estate or other liquidation proceedings. Now here it is merely an action for creditors will be paid ahead of the others. Fundamental tenets of due process
collection. Although the lower court found that there were no known creditors will dictate that this statutory lien should then only be enforced in the context
other than Philippine Savings and Ramos, this cannot be conclusive. It will not of some kind of a proceeding where the claims of all the preferred creditors
bar other creditors to show up and present their claims against the bank may be bindingly adjudicated, such as insolvency proceedings.
claiming also they have preferred liens.
This is made explicit by Article 2243 which states that the claims and liens
In this case, the foreclosure was proper. Now both these cases of Barretto and enumerated in articles 2241 and 2242 shall be considered as mortgages or
Philippine Savings emphasize the indefeasibility of a certificate of Torrens title. pledges of real or personal property, or liens within the purview of legal
So, it is indefeasible and to rule otherwise in favor of applying these rules on provisions governing insolvency.
preference of credits would make the title to one's property unstable and
questionable. Because anytime somebody would alleged that I have this The action filed by petitioners in the trial court does not partake of the nature
preferred claim under Art. 2242. So here it is emphasizes the principle that the of an insolvency proceeding. It is basically for specific performance and
purchaser in good faith and for value takes registered land free from liens and damages. Thus, even if it is finally adjudicated that petitioners herein actually
encumbrances, other than statutory lien and those recorded on the certificate stand in the position of unpaid contractors and are entitled to invoke the
of title, in respecting the indefeasibility of such title. So those enumerated contractor’s lien granted under Article 2242, such lien cannot be enforced in the
under Art. 2241 and 2242 would be considered as mortgages or pledges in a present action for there is no way of determining whether or not there exist
sense that is really a lien or encumbrance of a specific property. And this Art. other preferred creditors with claims over the San Antonio Public Market. The
2243 is the basis. So what we have discussed earlier, the taxes in relation to the records do not contain any allegation that petitioners are the only creditors
property are preferred. It shall be satisfied first. All the rest will concur. 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
J.L. BERNARDO VS CA involved.
FACTS: Sometime in 1990, the municipal government of San Antonio, Nueva Q1: How about the fact that there were no other creditors or 3rd parties
Ecija approved the construction of the San Antonio Public Market. asserting claims over the markert?
A1: Although there were no other claims over the market, it does not bar other
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay, creditors from subsequently claiming because this is a specific performance
submitted its bid together with other qualified bidders. After evaluating the case and not adjudication of claims.
bids, the municipal pre-qualification bids and awards committee, headed by In this case although it is stated under paragraph 3(of Art. 2242), it only applies
respondent Jose L. Salonga (then incumbent municipal mayor of San Antonio) when there is concurrence of credits and as defined here in this case, there is
as Chairman, awarded the contract to petitioners. On June 8, 1990, a concurrence of credits if the same specific property of the debtor is subjected to
Construction Agreement was entered into by the Municipality of San Antonio the claims of several creditors and the value of such property of the debtor is
thru respondent Salonga and petitioner J.L. Bernardo Construction. insufficient to pay in full all the creditors in such a situation. The question of
preference will arise if there is a need to determine which among the creditors
It is claimed by petitioners that under this Construction Agreement, the should be paid ahead of the others. However in this case, due process dictates
Municipality agreed to assume the expenses for the demolition, clearing and that this statutory lien will only be enforced in the context of some proceeding
site filling of the construction site in the amount of P1,150,000 and, in addition, where the claims of all preferred creditors will be bindingly adjudicated such as
to provide cash equity of P767,305.99 to be remitted directly to petitioners. an insolvency proceeding. In this case the action filed by J.L. Bernardo does not
partake the nature of an insolvency proceeding because it is only an action for
Petitioners allege that, although the whole amount of the cash equity became specific performance and there is no way in determining whether or not other
due, the Municipality refused to pay the same, despite repeated demands and preferred creditors exist.
notwithstanding that the public market was more than ninety-eight percent
(98%) complete as of July 20, 1991. 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
On July 31, 1991, J.L. Bernardo Construction filed a complaint for breach of damages. Thus, even if it is finally adjudicated that petitioners herein actually
contract, specific performance, and collection of a sum of money, with prayer stand in the position of unpaid contractors and are entitled to invoke the
for preliminary attachment and enforcement of contractors lien against the contractors lien granted under Article 2242, such lien cannot be enforced in the
Municipality of San Antonio, Nueva Ecija and Salonga, in his personal and present action for there is no way of determining whether or not there exist
official capacity as municipal mayor. other preferred creditors with claims over the San Antonio Public Market. The
records do not contain any allegation that petitioners are the only creditors
On September 5, 1991, the Regional Trial Court issued the writ of preliminary with respect to such property. The fact that no third party claims have been
attachment prayed for by plaintiffs. It also granted J.L. Bernardo Construction filed in the trial court will not bar other creditors from subsequently bringing
the right to maintain possession of the public market and to operate the same. actions and claiming that they also have preferred liens against the property
involved.
ISSUE: Whether or not the grant of writ of attachment and the contractor’s lien
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Similar to the earlier case of Philippine Savings Bank. So do take note here that Even though we call this contractor’s lien, it does not create a lien or interest
it does not mean that the obligation in favor of the contractor will now be over the subject property. Now, 2242 cannot be applied in this case. . The
extinguished. This case just tells us that we cannot use 2242 to assert Complaint merely asked for the payment of construction services and materials
contractor’s lien over the proceeds of the sale of the property. The trial court plus damages, without mentioning -- much less asserting -- a lien or an
can still rule that the contractor as in this case is still entitled to be paid. But it encumbrance over the property. Verily, it was a purely personal action and a
would still depend if there are other properties of the debtor that can be simple collection case. It did not contain any material averment of any
executed to pay the obligation. enforceable right, interest or lien in connection with the subject property.
Moreover again, in similar cases, Article 2242 finds application when there is a
Atlantic vs. Herbal Cove 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
FACTS: the debtor is insufficient to pay in full all the creditors. In such a situation, the
In 1996, Atlantic Erectors (AE) and Herbal Cove (HCC) entered into a contract to question of preference will arise, that is, there will be a need to determine
construct townhouses. HCC was not able to complete the project in time. AE which of the creditors will be paid ahead of the others. Fundamental tenets of
then filed for damages and won the suit. HCC was ordered to pay in damages due process will dictate that this statutory lien should then only be enforced in
and fees. The cause of action is a money claim by only one creditor. In 1997, the context of some kind of a proceeding where the claims of all the preferred
AE caused a notice of lispendens on several TCTs, which carried over when the creditors may be bindingly adjudicated, such as insolvency proceedings.
lots were further divided into 50 lots. In 1998, HCC filed a motion to cancel the Neither Article 2242 of the Civil Code nor the enforcement of the lien
notice of lispendens, as AE’s action is purely a personal action to collect a sum thereunder is applicable here, because petitioners Complaint failed to satisfy
of money and damages, and does not directly affect title to, use or possession the foregoing requirements. Nowhere does it show that respondents property
of real property. was subject to the claims of other creditors or was insufficient to pay for all
In opposition, AE argued that the money claim constitutes a lien that can be concurring debts. Moreover, the Complaint did not pertain to insolvency
enforced to secure payment for the said obligations. It argues that, to preserve proceedings or to any other action in which the adjudication of claims of
the alleged improvement it had made on the subject land, such annotation on preferred creditors could be ascertained.
the property titles of respondent is necessary. On the other hand, HCC argues
that the annotation is bereft of any factual or legal basis, because the action Development Bank vs. CA
does not directly affect the title to the property, or the use or the possession
thereof. The annotation is baseless and cannot be made through the FACTS:
enforcement of a contractor’s lien under Art. 2242 as said provision applies only
to cases in which there are several creditors carrying on a legal action against an Marinduque Mining-Industrial Corporation obtained from PNB and DBP various
insolvent debtor. loan accommodations. To secure the loans, Marinduque Mining mortgaged to
PNB and DBP all its real and personal properties. Marinduque Mining failed to
ISSUE: settle its loan obligations, thus PNB and DBP instituted sometime on July and
WON money claims representing cost of materials and labor are proper liens for August 1984 extrajudicial foreclosure proceedings over the mortgaged
annotations of lispendens on the property title. properties.
In the meantime, between July 1982 to October 1983, Marinduque Mining
RULING: purchased and caused to be delivered construction materials and other
No. merchandise from Remington Industrial Sales Corporation The purchases
As a general rule, the only instances in which a notice of lispendens may be remained unpaid as of August 1, 1984 when Remington filed a complaint for a
availed of are as follows: (a) an action to recover possession of real estate; (b) sum of money and damages against Marinduque Mining for the value of the
an action for partition; and (c) any other court proceedings that directly affect unpaid construction materials and other merchandise purchased by
the title to the land or the building thereon or the use or the occupation Marinduque Mining. Remington's original complaint was later amended to
thereof. implead PNB and DBP in view of the foreclosure by the latter of the real and
A careful examination of petitioner's Complaint, as well as the reliefs it seeks, chattel mortgages).
reveals that no such lien or interest over the property was ever alleged. The
Complaint merely asked for the payment of construction services and materials ISSUE:
plus damages, without mentioning -- much less asserting -- a lien or an WON Remington can enforce its claim (for the payment of the construction
encumbrance over the property. Verily, it was a purely personal action and a materials purchasedby Marinduque Mining) against DBP.
simple collection case. It did not contain any material averment of any
enforceable right, interest or lien in connection with the subject property. RULING: No.
Even assuming that petitioner had sufficiently alleged such lien or encumbrance Remington cannot enforce its lien against DBP because there was no liquidation
in its Complaint, the annotation of the Notice of Lis Pendens would still be proceeding. The liquidation proceeding contemplated by the CC is not the
unjustified, because a complaint for collection and damages is not the proper extrajudicial foreclosure done by DBP over Marinduque Mining’s properties.
mode for the enforcement of a contractor's lien. Fundamental tenets of due The kind of proceeding contemplated is where the claims of all the preferred
process will dictate that this statutory lien should then only be enforced in the creditors may be bindingly adjudicated, such as insolvency, the settlement of
context of some kind of a proceeding where the claims of all the preferred decedent's estate under Rule 87 of the Rules of Court, or other liquidation
creditors may be bindingly adjudicated, such as insolvency proceedings. proceedings of similar import. The extrajudicial foreclosure instituted by PNB
Article 2242 finds application when there is a concurrence of credits, i.e., when and DBP is not the liquidation proceeding contemplated by the Civil Code; thus,
the same specific property of the debtor is subjected to the claims of several Remington cannot claimits pro rata share from DBP and PNB.
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, Q1: what’s the role of DBP here?
that is, there will be a need to determine which of the creditors will be paid A1: it is a preferred creditor.
ahead of the others. In this case, there is no concurrence of credit since there is Q2: but there’s no proceeding?
only one creditor. A2: Here, Remmington can only go after---
Q3: What’s the basis of DBP’s rights over the proceeds over the properties?
Because again, it is a mortgagee who foreclosed the property. That
Q1: Was the notice of lis pendens here proper or not? SC notes of the instances foreclosure proceeding is not the one contemplated by law to apply the rules
when notice of lispendensmay be availed of; these are, on preference of credits.
a) In an action to recover possession of real estate; In relation to concurrence and preference of credits, again it is emphasized that
b) An action for partition; in the absence of any liquidation proceeding, the claim of the creditor cannot
c) Any other court proceedings that directly affect the title to the be enforced against any mortgagee in good faith. As in the extrajudicial
land or the building thereon or the use of the occupation foreclosure executed by PNB and DBP is not the liquidation proceeding
thereof. contemplated by the Civil Code, then Remington cannot claim its pro-rata share
from DBP.
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conjunction with the pertinent provisions of the Civil Code and the Insolvency
Take note when to apply Arts. 2241 and 2242. Now let’s take a look at Art. Law to the extent that piece-meal distribution of the assets of the debtor is
2244. It refers to ordinary preferred credits. Unlike to Arts. 2241 and 2241, Art. avoided.
2244 must be in order.
A declaration of bankruptcy or a judicial liquidation must be present before the
Art. 2244. With reference to other property, real and personal, of the debtor, worker's preference may be enforced. Thus, Article 110 of the Labor Code and
the following claims or credits shall be preferred in the order named: its implementing rule cannot be invoked by the respondents in this case absent
a formal declaration of bankruptcy or a liquidation order.
1) Proper funeral expenses for the debtor, or children under his or
her parental authority who have no property of their own, when A preference applies only to claims which do not attach to specific properties. A
approved by the court; lien creates a charge on a particular property. The right of first preference as
2) Credits for services rendered the insolvent by employees, regards unpaid wages recognized by Article 110 does not constitute a lien on
laborers, or household helpers for one year preceding the the property of the insolvent debtor in favor of workers. It is but a preference of
commencement of the proceedings in insolvency; credit in their favor, a preference in application. On the other hand, DBP
3) Expenses during the last illness of the debtor or of his or her anchors its claim on a mortgage credit. A mortgage directly and immediately
spouse and children under his or her parental authority, if they subjects the property upon which it is imposed, whoever the possessor may be,
have no property of their own; to the fulfillment of the obligation for whose security it was constituted. It
4) Compensation due the laborers or their dependents under laws creates a real right which is enforceable against the whole world. It is a lien on
providing for indemnity for damages in cases of labor accident, or an identified immovable property, which a preference is not. A recorded
illness resulting from the nature of the employment; mortgage credit is a special preferred credit under Article 2242 (5) of the Civil
5) Credits and advancements made to the debtor for support of Code on classification of credits. The preference given by Article 1l0, when not
himself or herself, and family, during the last year preceding the falling within Article 2241 (6) and Article 2242 (3), of the Civil Code and not
insolvency; attached to any specific property, is all ordinary preferred credit although its
6) Support during the insolvency proceedings, and for three months impact is to move it from second priority to first priority in the order of
thereafter; preference established by Article 2244 of the Civil Code.
7) Fines and civil indemnification arising from a criminal offense; Maam: How do you reconcile the preference mentioned in Art. 110 of the Labor
8) Legal expenses, and expenses incurred in the administration of the Code and those provisions here under the Civil Code in relation to concurrence
insolvent’s estate for the common interest of the creditors, when and preference of credits?
properly authorized and approved by the court; Sir J: The SC ruled that it did not take preference or no. 1 preference or making
9) Taxes and assessments due the national government, other than better or higher the or should I say superior than the tax preference or dues. In
those mentioned in Articles 2241, No. 1, and 2242, No. 1; fact, the tax dues would always be preferred first, however, in relation to what
10) Taxes and assessments due any province, other than those (*interrupted)
referred to in Articles 2241, No. 1, and 2242, No. 1; Mam: In relation to what? We have to be specific..
11) Taxes and assessments due any city or municipality, other than Sir J: In relation to taxes that is found under Arts. 2241(1) and 2242(1) the SC
those indicated in Articles 2241, No. 1, and 2242, No. 1; held that these would not be preferred given that the obligation would fall
12) Damages for death or personal injuries caused by a quasi-delict; under Art. 2241(6) and Art. 2242(3). Also what really happened was that the
13) Gifts due to public and private institutions of charity or legislature enacted this law it complicate 2 things because in Art. 2243 there are
beneficence; still limitation within the 1 year prior the insolvency (inaudible) 1st it removed
14) Credits which, without special privilege, appear in (a) a public that 1 year limitation and 2nd it gained a superior order and upgraded
instrument; or (b) in a final judgment, if they have been the preference from a second priority to first priority but only second to taxes
subject of litigation. These credits shall have preference among falling under Art. 2241(1)
themselves in the order of priority of the dates of the instruments Mam: To distinguish it from Arts. 2241 and 2242. Alright. You are already
and of the judgments, respectively. familiar with Art. 110 of the Labor Code referring to worker preference in case
So it is clear that Art. 2244 emphasizes order of preference in the order named. of bankruptcy. The employers and workers shall enjoy 1st preference as regards
However, we have to take note of these services rendered by employees, to their unpaid wages and other monetary claims any provision of the law to
labourers, and household helpers, we have the case of DBP v NLRC. the contrary notwithstanding. Such unpaid wages and monetary claims shall be
paid in full before the claims of the government and other creditors may be
paid. Now first thing that was emphasized in this case is that in the absence of
DBP vs. NLRC any proceedings to enforce the rule as to the preference and concurrence of
credit notwithstanding the absence thereof, the SC nevertheless discussed the
FACTS: applicability or the non-applicability of Art. 110 of the LC and how it relates with
Leonor Ang is an employee of petitioner Tropical Philippine Woods Industries, the other provisions in the Civil Code specifically concurrence and preference of
Inc. (TPWII). credits. Art. 110 did not necessarily repeal the provisions in Arts. 2241, 2242,
and 2244. In other words, the preference mentioned in Art. 110 did not alter
DBP, a mortgagee of TPWII foreclosed the latter’s plant, equipments , and Arts. 2241 and 2242. In other words, in those articles, taxes in relation to the
facilities. As a result, the operations of stopped and Leonor Ang was verbally specific property or those duties in favor of the government would still to be
terminated. preferred and then now the claims of the labourers in relation to that work of
the specific property will share pro-rata with the other credits.
On December 14, 1987 aggrieved by the termination of her employment, How is this Art. 110 to be applied? That is in relation to Art. 2244. Now, the
private respondent filed with the Labor Arbiter a complaint for separation pay, effect of Art. 110 is that hindi pwede yung no. 2 is that the credit rendered in
13th month pay, vacation and sick leave pay, salaries and allowances against services is insolvent by the labourers or household helpers will now become the
TPWII, its General Manager, and Tropical. no. 1 noh, first preference followed by the proper funeral expenses so that is
the first effect. The second effect is that tinanggal na yung 1 year proceeding,
Tropical was held subsidiarily liable by LA for the unpaid wages applying Art. the commencement of the proceeding in insolvency. So here what happened?
110 of the Labor Code. Thus, Tropical now questions the application of said Eto na yung preference of a worker’s preference ahead of the taxes and duties
labor code provision which refers to worker preference in case of bankruptcy or in favour of the government because here tax dues are nos. 9, 10, and 11.
liquidation of an employer's business against a mortgage. Again, very relevant ang Art. 2244 in the sense that you should take note to the
order as mentioned here and to which the application of course is very much
ISSUE: WON Article 110 of the Labor Code is applicable in the case. different as compared to Arts. 2241 and 2244. Here again there was no
liquidation proceeding, no declaration of a bankruptcy and judicial litigation so
RULING: it would be first premature to enforce the worker’s preference. Now preference
NO applies only to claims attached to the specific property is the right of the first
Art. 110 should not be treated apart from other laws but applied in preference is recognized in Art. 110 again does not constitute a lien on the
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property of the insolvent debtor in favour of workers, a preference of credit in term which he asserts does not include the separation pay claimed by the
their favour. Moreover, Art. 110 does not purport to create a lien in favour of Unions. "Separation pay," the Solicitor General contends, is given to a laborer
employees’ unpaid wages even upon all properties or any particular property for a separation from employment computed on the basis of the number of
owned by their employers. Here DBP anchored its claim to mortgage credit. The years the laborer was employed by the employer; it is a form of penalty or
properties subjected thereto it creates a real right which is enforceable against damage against the employer in favor of the employee for the latter's dismissal
the whole world. Lien on the identified movable property which again must be or separation from service.
distinguish from a preference. The preference given by Art. 110 when not falling ISSUE 1: WON the above-enumerated claims of USTC and FOITAF ("Unions")
under Art. 2241(6) and Art. 2242(3) is an ordinary preferred credit although its for separation pay of their respective members embodied in final awards of
impact move to second priority to the first priority under Art. 2244 of the Civil the National Labor Relations Commission were to be preferred over the claims
Code. Again, no conflict ang Art. 110 from Art. 2244. Take note of the order of of the Bureau of Customs and the Bureau of Internal Revenue.
preference which must be followed under Art. 2244. So anong mangyari dito? HELD 1: Article 97 (f) of the Labor Code defines "wages" in the following
There are other properties which can be sold and the proceeds would be terms:
applied in the order provided under Art. 2244. Another scenario would be for Wage' paid to any employee shall mean the remuneration or earnings, however
example specific property would be sold tapos mabayaran na ang specific credit designated, capable of being expressed in terms of money, whether fixed or
tapos meron pang proceeds pano iapply yang proceeds? Lahat ng proceeds na ascertained on a time, task, piece, or commission basis, or other method of
sobra na naiwan will be applied in the order of credits enumerated in Art. 2244. calculating the same, which is payable by an employer to an employee under a
Of course again, the second preference for the worker’s lien on unpaid wages written or unwritten contract of employment for work done or to be done, or
moved to no. 1 and move expenses to no.2 hanggang maubos. Remember this for services rendered or to be rendered, and includes the fair and reasonable
is not pro-rata, it is in the order provided. value, as determined by the Secretary of Labor, of board, lodging, or other
Now notice also here that we have taxes and assessments due to the facilities customarily furnished by the employer to the employee. 'Fair and
government so magkasunod yan sila nauna ang favor sa National Gov’t then sa reasonable value' shall not include any profit to the employer or to any person
province then sa City and Municipality. What would be the examples of taxes in affiliated with the employer.
favour of the National Gov’t? Income taxes (not covered to specific property). We are unable to subscribe to the view urged by the Solicitor General. For the
Take note that these refers to free property not subject to 2241 and 2242 and specific purposes of Article 110 and in the context of insolvency termination or
applied the order enumerated under 2244 in consideration of Art. 110 of the LC. separation pay is reasonably regarded as forming part of the remuneration or
Take note under no. 14 – Eg. Promissory note that is duly notarized. It is a public other money benefits accruing to employees or workers by reason of their
instrument, it does not enjoy special privilege in the absence of real estate having previously rendered services to their employer; as such, they fall within
mortgage and among these credits in the public instrument of judgment they the scope of "remuneration or earnings — for services rendered or to be
will be in the order of priority of the dates of the instruments and judgments, rendered — ." Liability for separation pay might indeed have the effect of a
respectively. penalty, so far as the employer is concerned. So far as concerns the employees,
however, separation pay is additional remuneration to which they become
Art. 2245. Credits of any other kind or class, or by any other right or title not entitled because, having previously rendered services, they are separated from
comprised in the four preceding articles, shall enjoy no preference. the employer's service. The relationship between separation pay and services
What if the debtor still has proceeds of the sale of his assets and all the credits rendered is underscored by the fact that separation pay is measured by the
mentioned under Arts. 2241, 2242 and 2244 having paid. May sobra pa meron amount (i.e., length) of the services rendered. This construction is sustained
pang common credits na hindi nabayaran. Now this time, they will share pro- both by the specific terms of Article 110 and by the major purposes and basic
rata. No preference and common credits shall be paid pro-rata regardless of the policy embodied in the Labor Code. It is also the construction that is suggested
dates. by Article 4 of the Labor Code which directs that doubts — assuming that any
We have the case of Republic v Peralta substantial rather than merely frivolous doubts remain-in the interpretation of
the provisions of the labor Code and its implementing rules and regulations
shall be "resolved in favor of labor."
Republic vs. Peralta Article 110 must be read in relation to the provisions of the Civil Code
FACTS: concerning the classification, concurrence and preference of credits, which
In the voluntary insolvency proceedings commenced in May 1977 by Quality provisions find particular application in insolvency proceedings where the
Tobacco Corporation (the "Insolvent"), the following claims of creditors were claims of all creditors, preferred or non-preferred, may be adjudicated in a
filed: binding manner.
(i) P2,806,729.92, by the USTC Association of Employees and workers Union- Those provisions may be seen to classify credits against a particular insolvent
PTGWO USTC as separation pay for their members. This amount plus an into three general categories, namely: (a) special preferred credits listed in
additional sum of P280,672.99 as attorney's fees had been awarded by the Articles 2241 and 2242, (b) ordinary preferred credits listed in Article 2244; and
National Labor Relations Commission in NLRC Case No. RB-IV-9775-77. (c) common credits under Article 2245.
(ii) P53,805.05 by the Federacion de la IndustriaTabaquera y OtrosTrabajadores Turning first to special preferred credits under Articles 2241 and 2242, it should
de Filipinas ("FOITAF), as separation pay for their members, an amount similarly be noted at once that these credits constitute liens or encumbrances on the
awarded by the NLRC in the same NLRC Case. specific movable or immovable property to which they relate. Article 2243
(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection makes clear that these credits "shall be considered as mortgages or pledges of
fees covering the period 1 October 1967 to 28 February 1973; real or personal property, or liens within the purview of legal provisions
(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable governing insolvency." It should be emphasized in this connection that "duties,
on various importations by the Insolvent. These obligations appear to be taxes and fees due [on specific movable property of the insolvent] to the State
secured by surety bonds. 2 Some of these imported items are apparently still in or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the
customs custody so far as the record before this Court goes. insolvent's land or building (2242 [1])"stand first in preference in respect of the
In its questioned Order of 17 November 1980, the trial court held that the particular movable or immovable property to which the tax liens have attached.
above-enumerated claims of USTC and FOITAF ("Unions") for separation pay of Article 2243 is quite explicit: "[T]axes mentioned in number 1, Article 2241 and
their respective members embodied in final awards of the National Labor number 1, Article 2242 shall first be satisfied." The claims listed in numbers 2 to
Relations Commission were to be preferred over the claims of the Bureau of 13 in Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes
Customs and the Bureau of Internal Revenue. The trial court, in so ruling, relied in order of precedence; such claims enjoy their privileged character as liens and
primarily upon Article 110 of the Labor Code which reads thus: may be paid only to the extent that taxes have been paid from the proceeds of
Article 110. Worker preference in case of bankruptcy — In the event of the specific property involved (or from any other sources) and only in respect of
bankruptcy or liquidation of an employer's business, his workers shall enjoy first the remaining balance of such proceeds. What is more, these other (non-tax)
preference as regards wages due them for services rendered during the period credits, although constituting liens attaching to particular property, are not
prior to the bankruptcy or liquidation, any provision of law to the contrary preferred one over another inter se. Provided tax liens shall have been satisfied,
notwithstanding. Union paid wages shall be paid in full before other creditors non-tax liens or special preferred credits which subsist in respect of specific
may establish any claim to a share in the assets of the employer. movable or immovable property are to be treated on an equal basis and to be
The Solicitor General, in seeking the reversal of the questioned Orders, argues satisfied concurrently and proportionately. Put succinctly, Articles 2241 and
that Article 110 of the Labor Code is not applicable as it speaks of "wages," a 2242 jointly with Articles 2246 to2249 establish a two-tier order of preference.
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The first tier includes only taxes, duties and fees due on specific movable or for laborers' wages, on the goods manufactured or the work done;" or by
immovable property. All other special preferred credits stand on the same Article 2242, number 3: "claims of laborers and other workers engaged in the
second tier to be satisfied, paripassu and pro rata, out of any residual value of construction, reconstruction or repair of buildings, canals and other works,
the specific property to which such other credits relate. upon said buildings, canals or other works." To the extent that claims for unpaid
Credits which are specially preferred because they constitute liens (tax or non- wages fall outside the scope of Article 2241, number 6 and 2242, number 3,
tax) in turn, take precedence over ordinary preferred credits so far as concerns they would come within the ambit of the category of ordinary preferred credits
the property to which the liens have attached. The specially preferred credits under Article 2244.
must be discharged first out of the proceeds of the property to which they Applying Article 2241, number 6 to the instant case, the claims of the Unions for
relate, before ordinary preferred creditors may lay claim to any part of such separation pay of their members constitute liens attaching to the processed leaf
proceeds. tobacco, cigars and cigarettes and other products produced or manufactured by
If the value of the specific property involved is greater than the sum total of the the Insolvent, but not to other assets owned by the Insolvent. And even in
tax liens and other specially preferred credits, the residual value will form part respect of such tobacco and tobacco products produced by the Insolvent, the
of the "free property" of the insolvent — i.e., property not impressed with liens claims of the Unions may be given effect only after the Bureau of Internal
by operation of Articles 2241 and 2242. If, on the other hand, the value of the Revenue's claim for unpaid tobacco inspection fees shall have been satisfied out
specific movable or immovable is less than the aggregate of the tax liens and of the products so manufactured by the Insolvent.
other specially preferred credits, the unsatisfied balance of the tax liens and Article 2242, number 3, also creates a lien or encumbrance upon a building or
other such credits are to the treated as ordinary credits under Article 2244 and other real property of the Insolvent in favor of workmen who constructed or
to be paid in the order of preference there set up. repaired such building or other real property. Article 2242, number 3, does not
In contrast with Articles 2241 and 2242, Article 2244 creates no liens on however appear relevant in the instant case, since the members of the Unions
determinate property which follow such property. What Article 2244 creates to whom separation pay is due rendered services to the Insolvent not (so far as
are simply rights in favor of certain creditors to have the cash and other assets the record of this case would show) in the construction or repair of buildings or
of the insolvent applied in a certain sequence or order of priority. other real property, but rather, in the regular course of the manufacturing
Only in respect of the insolvent's "free property" is an order of priority operations of the Insolvent. The Unions' claims do not therefore constitute a
established by Article 2244. In this sequence, certain taxes and assessments also lien or encumbrance upon any immovable property owned by the Insolvent, but
figure but these do not have the same kind of overriding preference that rather, as already indicated, upon the Insolvent's existing inventory (if any of
Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on processed tobacco and tobacco products.
the taxpayer's property. Under Article 2244, Article 110 of the Labor Code did not sweep away the overriding preference
(a) taxes and assessments due to the national government, excluding those accorded under the scheme of the Civil Code to tax claims of the government or
which result in tax liens under Articles 2241 No. 1 and 2242 No. 1 but including any subdivision thereof which constitute a lien upon properties of the Insolvent.
the balance thereof not satisfied out of the movable or immovable property to It is frequently said that taxes are the very lifeblood of government. The
which such liens attached, are ninth in priority; (b) taxes and assessments due effective collection of taxes is a task of highest importance for the sovereign. It
any province, excluding those impressed as tax liens under Articles 2241 No. 1 is critical indeed for its own survival. It follows that language of a much higher
and 2242 No. 1, but including the balance thereof not satisfied out of the degree of specificity than that exhibited in Article 110 of the Labor Code is
movable or immovable property to which such liens attached, are tenth in necessary to set aside the intent and purpose of the legislator that shines
priority; and through the precisely crafted provisions of the Civil Code. It cannot be assumed
(c) taxes and assessments due any city or municipality, excluding those simpliciter that the legislative authority, by using in
impressed as tax liens under Articles 2241 No. I and 2242 No. 2 but including Article 110 the words "first preference" and "any provision of law to the
the balance thereof not satisfied out of the movable or immovable property to contrary notwithstanding" intended to disrupt the elaborate and symmetrical
which such liens attached, are eleventh in priority. structure set up in the Civil Code. Neither can it be assumed casually that Article
ISSUE 2: 110 intended to subsume the sovereign itself within the term "other creditors"
What is the impact Article 110 of the labor Code has had on those provisions in stating that "unpaid wages shall be paid in full before other creditors may
of the Civil Code? establish any claim to a share in the assets of employer." Insistent
HELD 2: A. Claim of the Bureau of Customs for Unpaid Customs Duties and considerations of public policy prevent us from giving to "other creditors" a
Taxes- Under Section 1204 of the Tariff and Customs Code. linguistically unlimited scope that would embrace the universe of creditors save
Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes only unpaid employees.
enjoys the status of a specially preferred credit under Article 2241, No. 1, of the We, however, do not believe that Article 110 has had no impact at all upon the
Civil Code. only in respect of the articles importation of which by the Insolvent provisions of the Civil Code. Bearing in mind the overriding precedence given to
resulted in the assessment of the unpaid taxes and duties, and which are still in taxes, duties and fees by the Civil Code and the fact that the Labor Code does
the custody or subject to the control of the Bureau of Customs. The goods not impress any lien on the property of an employer, the use of the phrase "first
imported on one occasion are not subject to a lien for customs duties and taxes preference" in Article 110 indicates that what Article 110 intended to modify is
assessed upon other importations though also effected by the Insolvent. the order of preference found in Article 2244, which order relates, as we have
Customs duties and taxes which remain unsatisfied after levy upon the seen, to property of the Insolvent that is not burdened with the liens or
imported articles on which such duties and taxes are due, would have to be encumbrances created or recognized by Articles 2241 and 2242. We have noted
paid out of the Insolvent's "free property" in accordance with the order of that Article 2244, number 2, establishes second priority for claims for wages for
preference embodied in Article 2244 of the Civil Code. Such unsatisfied customs services rendered by employees or laborers of the Insolvent "for one year
duties and taxes would fall within Article 2244, No. 9, of the Civil Code and preceding the commencement of the proceedings in insolvency." Article 110 of
hence would be ninth in priority. the Labor Code establishes "first preference" for services rendered "during the
B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees — period prior to the bankruptcy or liquidation, " a period not limited to the year
Under Section 315 of the National Internal Revenue Code ("old Tax Code") immediately prior to the bankruptcy or liquidation. Thus, very substantial effect
It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco may be given to the provisions of Article 110 without grievously distorting the
inspection fees constitutes a claim for unpaid internal revenue taxes which framework established in the Civil Code by holding, as we so hold, that Article
gives rise to a tax lien upon all the properties and assets, movable and 110 of the Labor Code has modified Article 2244 of the Civil Code in two
immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, respects: (a) firstly, by removing the one year limitation found in Article 2244,
2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given number 2; and (b) secondly, by moving up claims for unpaid wages of laborers
preference over any other claim of any other creditor, in respect of any and all or workers of the Insolvent from second priority to first priority in the order of
properties of the Insolvent. preference established I by Article 2244.
C. Claims of the Unions for Separation Pay of Their Members — Article 110 of Accordingly, and by way of recapitulating the application of Civil Code and Labor
the Labor Code does not purport to create a lien in favor of workers or Code provisions to the facts herein, the trial court should inventory the
employees for unpaid wages either upon all of the properties or upon any properties of the Insolvent so as to determine specifically: (a) whether the
particular property owned by their employer. Claims for unpaid wages do not assets of the Insolvent before the trial court includes stocks of processed or
therefore fall at all within the category of speciallypreferred claims established manufactured tobacco products; and (b) whether the Bureau of Customs still
under Articles 2241 and 2242 of the Civil Code, except to the extent that such has in its custody or control articles imported by the Insolvent and subject to
claims for unpaid wages are already covered by Article 2241, number 6. "claims the lien of the government for unpaid customs duties and taxes.
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Credit Transactions Complete TSN 2016-2017
Based on the Lectures of ATTY. JAZZIE M. SARONA, CPA
In respect of (a), if the Insolvent has inventories of processed or manufactured movables, exclude all others to the extent of the value of the personal
tobacco products, such inventories must be subjected firstly to the claim of property to which the preference refers.
theBureau of Internal Revenue for unpaid tobacco inspection fees. The In relation thereto, we have Art. 2247
remaining value of such inventories after satisfaction of such fees (or should
such inspection fees be satisfied out of other properties of the Insolvent) will be Art. 2247. If there are two or more credits with respect to the same specific
subject to a lien in favor of the Unions by virtue of Article 2241, number 6. In movable property, they shall be satisfied pro rata, after the payment of
case, upon the other hand, the Insolvent no longer has any inventory of duties, taxes and fees due the State or any subdivision thereof.
processed or manufactured product, then the claim of the Unions for “pro-rata” this is our basis that 2-14 of Art. 2244 is pro-rata
separation pay would have to be satisfied out of the "free property" of the
Insolvent under Article 2244 of the Civil Code. as modified by Article 110 of the Art. 2248. Those credits which enjoy preference in relation to specific real
Labor Code. property or real rights, exclude all others to the extent of the value of the
Turning to (b), should the Bureau of Customs no longer have any importations immovable or real right to which the preference refers.
by the Insolvent still within customs custody or control, or should the
importations still held by the Bureau of Customs be or have become insufficient Art. 2249. If there are two or more credits with respect to the same specific
in value for the purpose, customs duties and taxes remaining unpaid would real property or real rights, they shall be satisfied pro rata, after the payment
have only ninth priority by virtue of Article 2244, number 9. In respect therefore of the taxes and assessments upon the immovable property or real right.
of the Insolvent's "free property, " the claims of the Unions will enjoy first Arts. 2248-2249 are similar to Arts. 2246-2247 it is just that this Arts. 2248-2249
priority under Article 2244 as modified and will be paid ahead of the claims of refer to immovable properties. Still the same.
the Bureau of Customs for any customs duties and taxes still remaining
unsatisfied.
It is understood that the claims of the Unions referred to above do not include
the 10% claim for attorney's fees. Attorney's fees incurred by the Unions do not Art. 2250. The excess, if any, after the payment of the credits which enjoy
stand on the same footing as the Unions' claims for separation pay of their preference with respect to specific property, real or personal, shall be added
members. to the free property which the debtor may have, for the payment of the other
Mam: First, do we have a liquidation proceeding/insolvency proceeding that is credits. (1928a)
required by law in this case?
Cid: There was a voluntary proceeding. Other credits here refer to the enumerations under Art. 2244 in the order made
Mam: Yes this time, we already have a proceeding to which we can apply all taking into consideration Art. 110 of the LC.
these articles.
***
Mam: Remember, we apply Art. 2241 to specific movable property. In this case,
what is the specific movable property in relation to the claim of the BOC? Art. 2251. Those credits which do not enjoy any preference with respect to
Cid: The imported goods Mam specific property, and those which enjoy preference, as to the amount not
Mam: Okay in relation to that of Tabacco paid, shall be satisfied according to the following rules:
***
Mam: Here this time, we already have insolvency __ proceeding involving (1) In the order established in Article 2244;
voluntary __ proceeding involving the claims of several creditors, unions
including separation pay for workers Tobacco fees in favour of the BIR, customs
duties and taxes payable on various importations by the BOC. (2) Common credits referred to in Article 2245 shall be paid pro rata
The SC emphasized that taxes in favour of BOC and the BIR mentioned here in regardless of dates.
relation to specific movable properties and therefore Art. 2241(1) shall be
applied these customs duties and taxes in favour of BOC enjoy the status of a
specially preferred credit only in respect of the articles importation. The goods Again, it emphasized the order in Art. 2244 and if there still remaining proceeds
imported on one location are not subject again for customs duties and taxes it shall be applied to common credits as mentioned under Art. 2245 but this
assessed upon other importations. Customs duties and taxes which remained time pro-rata regardless of the dates.
unsatisfied after levy upon the imported articles on which such duties and taxes
are due will now then be paid up of the insolvent’s free property under Art. This rule on preference of credits is not often ask in the bar exams, some say
2244. So kung kulang yung imported goods to pay off the customs duties in that hindi na daw siya ganun ka-relevant but it is not just common why?
favour of the BOC, then saan mahulog? Art. 2244(9) in favour of the Because you apply this only when there is a proceeding. I requires a liquidation
government because that is a National tax. As to the claim of the BIR for __ and insolvency proceedings or the settlement of one’s estate, in the absence of
inspection fees Art. 2241 is also applicable even in respect of any properties that you cannot apply rules on concurrence and preference of credits. But once
insolvent in relation to Art. 2241. you have the proceeding, that’s the time when you can apply these rules on
Separation pay – construed in favour of the labor unions. Claims for unpaid concurrence and preference of credits. Among the proceedings mentioned,
wages do not fall within the catergory of specially preferred claims under Arts. nothing in the said proceedings made mention who among the creditors will be
2241 and 2242 unless it is covered by par. 6 of Art. 2241 and par. 3 of Art. 2242. preferred, that would be answered by these rules.
Now again in those provisions, wala silang preference to share together with all
other credits after taxes. Act No. 1508
SC pointed out that it cannot be assumed that the legislative authority by using
in Article 110 the words "first preference" and "any provision of law to the
contrary notwithstanding" intended to disrupt the elaborate and symmetrical END OF THIRD EXAM COVERAGE
structure set up in the Civil Code. Neither can it be assumed casually that Article
110 intended to subsume the sovereign itself within the term "other creditors"
in stating that "unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of employer." Again, it only indicates
that it is only intended to modify the order of preference in Art. 2244 to which
from No. 2 it will now be first in the preference and the 1 year period will be
removed. So the effect first is removing the 1 year limitation and moving
unclaimed wages of labourers and workers from 2nd to 1st priority as provided
under Art. 2244.
SC also pointed out that the claims as to the attorney’s fees are not deemed
included for separation pay.
Art. 2246. Those credits which enjoy preference with respect to specific
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