SECURITY TRANSACTIONS

Mortgage

Q: A loaned to B money for which B pledged shares of stock. It was agreed on that if B
failed to pay the loan within 4 years, A is authorized to foreclose on the shares of
stock. B delivered possession of the shares to A. The loan was not paid on time. After
the 4 years, may the shares of stock be deemed owned by A or not? Explain.

A: No. Foreclosure is necessary. The creditor cannot appropriate the things given by
way of pledge (Art. 2088, NCC). Even if it was stipulated that A becomes the owner of
the shares upon default, such stipulation is void for being pactum commissorium.

Q: To secure a loan obtained from B-Bank, A assigned her leasehold rights over a public
market stall in favor of B-Bank. The deed provides that, in case of default, B-Bank
shall have the right to sell A’s rights as her attorney-in-fact, and apply the proceeds to
the payment of the loan.

Q(1): Was the assignment of leasehold rights a mortgage or a cession? Why?

A: The assignment was a mortgage of the leasehold rights. A cession would have
transferred ownership to the bank. The grant of authority to the bank to sell the
leasehold rights in case of default is proof that ownership was not transferred and
that a mere encumbrance was constituted. There would be no need for such
authority if it were a cession.

Q(2): Assuming the assignment to be a mortgage, does the provision giving B-Bank
the power to sell A’s rights constitute pactum commissorium or not? Why?

A: No, the clause is not a pactum commissorium. It is pactum commissorium when

default in the payment of the loan automatically vests ownership of the encumbered
property in the bank. In this case, B-Bank does not automatically become owner of
the property upon default of the mortgagor. The bank has to sell the property and
apply the proceeds to the indebtedness.

Q: A bought a residential condominium unit from B and paid the price in full. A moved
into the unit, but was not given the Condominium Certificate of Title covering the
property. Unknown to A, B subsequently mortgaged the entire condominium building
to C-Bank as security for a loan. B failed to pay the loan and the bank foreclosed the
mortgage. At the foreclosure sale, the bank acquired the building. When A learned
about this, he filed an action to annul the foreclosure sale insofar as his unit was
concerned. C-Bank argued that it relied on the clean condominium certificates of title
presented by B, and therefore, it was a mortgagee in good faith. Is this defense
tenable or not? Why?

A: C-Bank’s defense is untenable. As a rule, an innocent purchaser for value acquires a

good and a clean title to the property. However, one who closes his eyes to facts that
should put a reasonable man on guard is not an innocent purchaser for value. C-
Bank is expected, as a matter of standard operating procedure, to have conducted
an ocular inspection of the premises before granting any loan. Had C-Bank followed
such, it should have discovered that the condominium unit was already occupied and
 could have led it to make further inquiries. Under the circumstances, C-Bank cannot
be considered a mortgagee and buyer in good faith.

Usury Law

Q: A borrowed a P300,000 housing loan from the bank at 18% per annum. The
promissory note expressly states the bank “reserves the right to increase the interest
within the limits allowed by law.” By virtue of such proviso, and over the objections of
A, the bank increased the interest rate periodically until it reached 48% per annum. A
filed an action questioning the right of the bank to such increases. The bank argued
that the Central Bank had already suspended the Usury Law. Will the action prosper
or not? Why?

A: The action will prosper. While it is true that that interest ceilings set by the Usury Law
are no longer in force, it has been held that PD No. 1684 and CB Circular No. 905
merely allow contracting parties to stipulate freely on any adjustment in the interest
rate on a loan or forbearance of money, but do not authorize a unilateral increase of
the interest rate by one party without the other’s consent (PNB v. CA, 238 SCRA 20
(1994)). To say otherwise will violate the principle of mutuality of contracts under Art.
1308 of the NCC. Therefore, to be valid, any changes of interest must be mutually
agreed upon by the parties (Dizon v. Magsaysay, 57 SCRA 250 (1974)). In the
present problem, the increase is void because the debtor has not given his consent
to the increase.

Antichresis

Q: A owns a plantation which she can no longer properly manage due to illness. Since A
is indebted to B, she asks B to manage the plantation and apply the harvest to the
payment of her obligation to him, principal and interest, until her indebtedness shall
have been fully paid. B agrees.

Q(1): What kind of contract is entered into between A and B? Explain.

A: A contract of antichresis was entered into between A and B. Under Art. 2132 of the
NCC, by a contract of antichresis, the creditor acquires the right to receive the fruits
of an immovable of his debtor, with the obligation to apply the same to the payment
of the interest, and thereafter, to the principal of his credit.

Q(2): What specific obligations are imposed by law on B as a consequence of

their contract?

A: B must pay taxes and charges upon the land and bear the necessary expenses for
preservation and repair which he may deduct form the fruits (Art. 2135, NCC).

Q(3): Does the law require any specific form for the validity of their contract?
Explain.

A: The amount of the principal and interest must be specified in writing, otherwise the
antichresis will be void (Art. 2134, NCC).
 Q(4): May A re-acquire the plantation before her entire indebtedness shall have
been fully paid? Explain.

A: No. Art. 2136 provides that the debtor cannot re-acquire the enjoyment of the
immovable without first having totally paid what he owes the creditor. However, it is
potestative on the part of the creditor to do so in order to exempt him from his
obligation under Art. 2135 NCC. The debtor cannot re-acquire the enjoyment unless
B compels A to enter again the enjoyment of the property.

PARTNERSHIP

Q: A and B formed a partnership to operate a car repair shop. A provided the capital
while B contributed his labor and industry. On the other side of the shop, A operated a
coffee shop, while on the other side, B put up a car accessories store. May they
engage in such separate businesses? Why?

A: A, the capitalist partner, may engage in the coffee shop business because it is not the
same kind of business the partnership is engaged in. On the other hand, B may not
engage in any other business, unless their partnership expressly permits him to do
so, because as an industrial partner, he has to devote his full time to the business of
the partnership (Art. 1789, NCC).

Q: A, B and C formed a business partnership for the purpose of engaging in advertising

for 5 years. A assigned to D her interest in the partnership. When B and C learned of
the assignment, they decided to dissolve the partnership before the expiration of its
term as they previously had an unproductive business relationship with D. Unaware of
the move of B and C, but sensing their negative reaction to his acquisition of A’s
interest, D simultaneously petitioned for the dissolution of the partnership.

Q(1): Is the dissolution done by B and C without A and D’ consent valid? Explain.

A: Under Art. 1830 (1) (c) of the NCC, the dissolution by B and C is valid and did not
violate the contract of partnership, even if A and D did not consent to it. A’s consent
is not necessary because she had already assigned her interest to D. D’s consent is
not also necessary because the assignment to him of A’s interest did not make him
a partner under Art. 1813 of the NCC.

Q(2): Does D have any right to petition for the dissolution of the partnership before
the expiration of its specified term? Explain.

A: No, D has no right to petition for dissolution because he does not have the standing
of a partner (Art. 1812, NCC).

AGENCY

Q: A executed a special power of attorney authorizing B to secure a loan from any bank
and to mortgage his property covered by the owner’s OCT. In securing the loan from
C-Bank, B did not specify that he was acting for A in the transaction with the said
bank. Is A liable for the bank loan? Why or why not?
A: A is liable for the bank loan because he authorized the mortgage on his property to
secure the loan contracted by B. If B defaults and fails to pay the loan, A is liable to
pay. However, his liability is limited to the extent of the value of the said property.

Q: As an agent, A was given a guarantee commission, in addition to his regular

commission, after he sold 20 units of refrigerators to a customer, B-Hotel. B-Hotel
failed to pay for the units sold. A’s principal, X demanded from A payment for the
customer’s accountability. A objected, on the ground that his job was only to sell and
not to collect payment for units bought by the customer. Is A’s objection valid? Can X
collect from him or not?

A: No. A’s objection is not valid and X can collect form him. Since A accepted a
guarantee commission, in addition to his regular commission, he agreed to bear the
risk of collection and to pay the principal the proceeds of the sale on the same terms
agreed upon by the purchaser (Art. 1907, NCC).

Q: A sold a large parcel of land to B for P100 Million payable in annual installments over
a period of ten years, but title will remain with A until the purchase price is fully paid.
To enable B to pay the price, A gave him a power of attorney authorizing him to
subdivide the land, sell the individual lots, and deliver the proceeds to A, to be
applied to the purchase price. Five years later, A revoked the power of attorney and
took the sale of the subdivision lots himself. Is the revocation valid or not? Why?

A: The revocation is not valid. The power of attorney given to the buyer is irrevocable
because it is coupled with an interest: the agency is the means of fulfilling the
obligation of the buyer to pay the price of the land (Art 1927, NCC). In other words, a
bilateral contract (contract to buy and sell the land) is dependent on the agency.
(2001)

Q. A asked B to buy some groceries for her in the supermarket. Was there a nominate
contract entered into between A and B? In the affirmative, what was it? Explain.

A. YES. There was a nominate contract. On the assumption that B accepted the request
of A to buy some groceries for her in the supermarket, what they entered into was
the nominate contract of Agency. Art. 1868 of the New Civil Code provides that by
the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of
the latter.

ALTERNATIVE ANSWER: YES. There entered into a nominate contract of lease of

service in the absence of relation of principal and agent between them (Art. 1644,
NCC).

LEASE

Q: A leased the fishpond of B for a period of 3 years with an option to purchase the
same during the period of the lease. After the expiration of the 3-year period, B
allowed A to remain in the leased premises at the same rental rate. Later, A tendered
the amount to B and demanded that the latter execute a deed of absolute sale of the
fishpond in his favor. B refused, on the ground that A no longer had an option to buy
 the fishpond. A filed an action for specific performance. Will the action prosper or
not? Why?

A: No. the action will not prosper. The implied renewal of the lease on a month to month
basis did not have the effect of extending the life of the option to purchase which
expired at the end of the original lease period. The lessor is correct in refusing to sell
on the ground that the option had expired.