cf;

I
.t !

I i

I.

A.

Dcfinitiolr of Crcdit or Sccurlty 'I'ronrrctionc

Credit trsnsactions include all lransactions) involving thc purchase or loan of Eoods, services or money in the present with e promise to pay or deliver in the firture. Witliout a promise to pay or deliver in the future, there cin be no security lransaction.

B. B. I
i

Kinds of Bailmeut Contract

Those lor lhe sole benefit of the bailor
I

l.l .2

gratuitous deposit mandatqrn

i

'Ii;
t I I
I I

Btz B.3 . C, C,l

'l'hosc tirr tlrc sole bencfir ofthc bailec

2.1 2.2
3. t 3.2 3 :l

commodalum gratuitous mutuum

Those tbr the benefit of borh panies

tlclxrsit lbr u cornl)crrsntion; involuntary deposit plcdgc boilnrcnts frrr hire

Loan in

Gcneral
ahe

, l.

thc

conltrct (Aniblc

I ' ; r.l i.i ---,^ Real Contract because the delivery of the thing loancd is rEccas[ri ior.thc perfcction of 'i ,
.:
;

Chsrlctcristic! of

Conlroct

.ril

1934; sec

ilso Aniclc t316 of the-Civil

Code).

'

i:

inot a conisnsual contract but 8 rral contrscl is' Frerfected only upon the delivery of the objecr of the contrait Thc ,Eal contract of lobn reguircs the delivery of the objeci of thc contracttfor it, perfcation and gives risc rrr obligotions only on thc pait ofthe borrower. .A loan contrad

ii

2...

.tjnilateral Coniract becouse once the subject motter has bcen delivered, obligatiorrs on tlrc pnrt ol'only one olthe pani,es, i.e.l thd borrower.
IttCO Samole Protrlem
I

it

creates

. +

chalrelmortla3oand.iurotyship rcat estotc mortgage and dcposit .Lceal Basis: Artictcs 1934 and 2o93.ofthe Civil Codc

c. o.

Examples of real bailment contracts sr: g onrichrcsis and guaranty b. commodatum and ple{ge

'l

MCO Samole Ploblem

An exunrple of6 tailnent contract which is alrvays gr0tuitous is:

a. b. c. .:. d. .a. b. ::. cd. C.3

deposit ant ichresis

commo&tum
sale

B,uirntnty

lr

othcrwise, il bccomes a contract of: usuttuct

lease rnortg,age

l,euul

!]g$s: Artislcs 1933 und 1935 of ths Ciyil Codc

Dlsalrction$ bctwcn Commodatuur 8rd

Mutuum

I
money

subjecr matter is non-consumable

things

l. 2.
3. 4.

subject

;*i

,l

or

other

2. owrrcrship rcttirrcd hy lenrJcr 3. cssentially gratuirous 4. borrower must return tlie same thing -

owncrship tronsfe*c{ to borrowcr

J, orr.ro* may6e grot,ritotr. -l

loancd

lrroa ooly pay tha . samc arnount of rla sa,mo rJna'aia qual;tyborrower

5. may involvc rcal or pcrsonal property 6. loan for use or temporary possession 7. 'loaned righl to demand ihe re$rn of the thing
case ofurgent
8.

before the expiration of term

need

in

the

loss is shouldered by beitor since he

owner

c,4
t.

i"-;;r;; iv a fortuitous evcnt l Distinctions betweer Commodatum (Elram) and r -gro (Upr) " ,
l

is'

5. involves only perlon"l piropgrty . 6. loan for consumption 7. no riEht to acmana the return of the thing Toancd bcfore the lapse of the term ,g.id upon g. borrowelsuffc5 tlrg loss even if 3tre loss
:

'

Commodatum is o rcol contract. whcreas tease is g conscncual controct The objeqt of commoaatri* is a nonconsumable (nonfirngiblc) thing; whircss the object of lease may eved be work or service. i' i Conr;rodatum is essentially gratuitous, whereas lease is not

.
.

gratuitorrs.

C-r

C.S

Dislinctionc bciwecn Com modaium nnd Usufruct I1998 Bnr Exan Ouestion'l
Com rnode tum

. Irrufruct
t.
constitutcd by law or by coirtradt, by testamentary successiori or bi prescription
creates q real

l.

conslitured by law or by conract

crcatqs a purely personal right to ltsc irnot hcr's property

olrvays or css!:ttt
4. :i.
i.r

2. 3. 4.

righl to the fruits

of

another's property
may be onerous consensual contnict

lly gratuitous
the

real cr'rnlntct

.'l

brilcu rrrrly ucquires usc ol'

thing l0aned but nol its frrrits

5.

usufrudtuary abquiies lhe righr lo the usa and lfruits of proPeny subjecr of usufiuir

(i.

consurnable . goods may be the subjecr only \yhcn the purpose of the contract is merely for exhibition

6.

may . be- :con3titutcd.

consumables like moneY

over

U..

COMIVIODA'IUM
Chlr[ctclistics i, i I
i

l.

r)us. othcrwise it is a lease (Aflible Grltuirr'rus,

1935). 1935).

Paiuvo vr.

The Kasunduan reveals thet tbt eccommodation accordcd L. ,i Guevarra was not essentia[y gratuitous. While thd Kasundusn di{ not require ".i*o Guevarra to pay rent, it obliptcd him to mainrain thc propc.hy in good condition. 'l'he imposilion of.this obtigation makcs thc Kasurduan . contrdGt di fferent from a commo&tuin. Thi efGcts, of thc Kasunduan arc 4so diffrrcnt from that ot' a commo&tum. Case law o4 ejectment has Eat?d rclationship based on tolerance as one thot is akin to s tandlord-tenant retationship wherc the withdrawsl of pennission would result in the termination of thc lcase. The tenant's -withholding of the propertyrwould then be unlawful. This is setdcd
. Even assuning that the relationship bctwecn Pajuyo and Gudnerra is onc Gucvarra as bailc r,raould still havc thc duty to turn'ovcr possession ofl the to Pajuyo, the bailor,

..

(43O

CourLofApneals SCRA.492)

ii I I r

t
i

i
I

- commodatum, of

commissir>n. odnrinistration and

2.

Purposc is thc rcmporary usc of the thing loaned (Anicle 1935).

(-:r.

Catholic \licar Andstolic of the Mounteln

W.,i

Privatc rgsrDndents werc able to provc that their prcdcccssors' house was borrowed by petitioncr Vicar aftcr thc church ; aod thc @Dvcnt were
destroyed.

.:i.

pctitioner. canre only in 195.1 rvhen it declored the lots.for taxation purposes. 'l'lrc action of lxtitioner Vicar by such adverse claim could not ripen into title by
3.

rvayofordinaryacquisitive.prescriptionbecauseofthe'absenceofjusttitl;.. ...

urrless thc-re is a stipulation ro the cootrary

..1.

Bailcc's righr ro use is limired to the thing loaned and not to iqrfru;ts (ert;cte t93j) (Anicle l94O). ,
.,1

sut)jccr nxlttcr is gcnerally non-consunrable things but may covi:r; cor.sumabls puryDse ol'llre contract is for exhibition.
Producers B$nk ofthc Philippines vs. Courtof Arrpeals (397 SCRA 6sr)

; r;

ir

the

Foct$: Sonrcaimc in 1979, private respondent Franklin Vives wps:astced Uy tlls neighbor and tiiend Angeles Sanchez to help her friend and iorvnmate -iol. Arturo Doronilla in incorporating his, businlss, thc Stcrcla M;kdng aird Serviccs ("Stcrela", for brcvity). Sanchez asked Vives to depqsil a Clrt"in amounr of moncy in the bank accouat of Ster_cie f<irr lncorporation and asspred that hi could withdraw, the satne time. Vives issued a check in the amormt of p2oo,Qoo.oo ia fav"it? SLiii" ,"a instructed his wife to accompany Doronilla and Senchez i" ,rb"ings account in the name of Stcrela in proiucers Bank. Subseoucntir. "p""iiigi ,IJ" leamiis that Srcrcln rvas 4o longer hblding ofiice in thc oddrcss pf.r-it,rflj 6 lhem, M.r.. and Mrs. Vives went to the bbnk but thc assiitant Urinl Si*" ira"ager thcm thar pari of thc moncy in Stcrelais Savings Account Nd, l0_l j-67 It:,y.,j hud bccrr rvirhdnrrvn by Doronilla *t *r" ,"muinirg ifr,OOO.OO abutd not be rvlthdrawr because it had to answcr for somc ooitaatca cheks issucd bv Doronilla. "I'hc bank likcwisc informed trem Urat incr f"frs. Vi"L" ini S"".frL opcn-ed Suvings Acciount No. lo-1567, Doroirilla opcned current Account No. l0-o320 lor Sierela snd suthorized thc Lank'to debit'the said savings uc"o""ifo, the amounts neccssary to cover overdrawings in said currcnt account and was ablc to obrain a loan otp|75,000.00 from prJducers Bonk.
I

or

Issue: Is tire transaction commodatum'l

between

lives

and Doronila a contract of muiuum

I

t. and not a rlutuum.

and not a mrtuum,

'I'hc cvidence. shows that Vites aqrcea, io deoosit his monlv in the ,1.::11"1 of Stcrela spcc_i.fical ly ro, i[, prrp"r" Jr ::::..fl -aking it lp#ar -that promlse II Ji il li

2.

ii

c.r

the arnount shall be retumed within thirty (10) i days.- Vives merely

"accommodated" Doronilla by lending his moncy witlout considcretiorl as a thvor to bis good fricnd Sanchez. It wag horrcvcr clcar to th. perties to the transaction that the money would not be rcsoovcd frtim Stcrcla's savings account snd would bc rctumed to Vives aftcr thify day.i. i Doronilla's attcmpts to rctum to viveg tlrc amoLt of pOOpo[.oo o,fri.f, the laner depositcd in Stercla's account together wilh ad ad4itioual PI2,OOO.Oo, allegedly representing intcrest on the mutuum, did ngt coDvcrt tbo tranCaction' frorn a commodaturn into a mutuum becriusc tho.additisDal PI2,O0O.0O corrcsponrls to the fruirs of thc lending of the B2O0,O0O.O0. . Articlq t 935 of the Civil Code expressli states that thc bailec in commodatum acarldrds the use of the thinq loaned but not its fruits. Hencc, it was only prope.r for Dorodlla to renrir ro Vives the interest accruing to the latter's m6ney deposited with,

3.

Producr:rs

Bank.

5. 6.

Bailor need noi be the owrrer; it is suflicient thst he has posscssory interesi over subject matter (Article 1938). .

Conrmodaturn is purely personal in character hence dcath extinguishes the contract (Article 1939).

ofcithd

tha bailor or the bailec

MCO Samnle Problem The death of either the bailor or the bailee extinguishcs the. contract of commodatum
because commodatum ts a:
;

a. b. + c. d.

. bilateral contract purely personal contract ieal contract

consensual contract

",,,.' ':1, 'lil

i'i

,1 ,l .,I ,.1 .i .!

7. .,

. i' General Rule: Bailec can neither lend nor legsc .thc
Member of bsilc"'s

Legal

Basis: Anicle lg3g of the Civil cod"

to a third ',| ;

tl

,li

' ' Exceprion:

,l

ho*.notd .'

'l
.:j
,1,..

,i

Exception ro the exccption:

a) b)
B.

there iS a contrary stipulation naturc ofthing forbids such use.

'1,'

l.

i, Bailee is liable for ordinary e>.penses for the use and prcsc ation ofthe thing loaned. General Rule: Bailee is not liab'ie for loss o, d"|r,ig. due to a fortuiious evcnt (because t ,rc bailor retains owncrship,over lhe ttring loaned). Exceptions: a) b)

Obligations of the B.itec

'

:,

c)

d).
e)

t993 Bar Exam Ouestion

A, upon requcsr, loaned his passcngcr jccpnoy to B to cnablo B ro bring hie sick wifo from Paniqui, Tarlsc to thc. Philippine Gocral Hospital ia ldaaila.for trcatqnqtt" On the way back to Paniqui, aftcr lcoving his wifo 8t the hospitsl, pooplo 3toppcd tho passcnger Jcopncy, B . stoppcd for rhcm and allowpd thcm to ri& on boand, acccpting paymcnt froE them just.as in tlrc cese of ordinary posscnger jccpncys plying tbcir.rouio. .As B was orossing Birmbaq thcre $,as onrush of lahar from Mt. Pinatubo. Tlrc jecp that was toaned to him was wH ,

l. 2. .f.

What do you call thc contract that was eirtred into by A and B witlr .respect to the Psssen8erjeepney thsl was loaned by A to B to transport the lattcr's sick wife to Manila? ls li ohlilrcrl t() l)uy A for thc use ofthe prssehger jcepney? Is l] liable ro A lbr rhc loss of thc jeepney?

Answer: I. Commodatum (Art. 1993, Civil Code) 2. B is not obliged to p8y,l foll!: u:: oflhe. passenger jegfney because comrnodaturn is cssL'ntr:rll\ Brirtuit()us. (n rt. I933, Civil Code) -). lt is liablc lrcc$usc.lru dovotcd thc thing to o purposc dill'crcnl lrom that for which.it hus beerr hxrncd (/\rr. 1942, par. 2, Civil Codc)

Allernalivc Anslvcr: B is not liBble because an obiigation which consists in the delivery ofa determinate thing shall be extinguished if it should be lost or destroyed without the fsutr;i the debtor, and befo[ he has incurred in delay. (Art. 1252, Civil Codc) i
L

Answer:

own thing, he chos to save the

A is liable for ihe loss of B's truck. The bailec in commodatum is liable for the loss of the thing looned even if the loss. is due to a fortuitous cvcnt wherc, being fble to gave it or-his

ii

lutcr.

f.

contract
Note:

Bailies orc solidarily lioblc whcn thc thing is loancd to two or'morc bailccg in the samo

I:,

!
I

::

l.

Bailee is not liable for ord.inagr wear and.tear due to use of Ote thing loanedExceptions: :a. if he is guilty offsult or ncgigencc i b. if he devotcs thing ti any purpgsc diffcrent from that for which has becn loancd

it'

2 Bailee cannot rcrain dr! thiog loancd as sccurity for claims be may havg Egpinst th bailcr, even though by reason of extrsordinary expcnscs. l. To nllorv ihc builee.the usc of the thing loaned for the duration of per;oa stipulatcd or untiltheaccon:plishrnentoll'hcpurposeforwh[hcommodatunrwasconstitu.tcd. ,,'
{i

\'

,:
1r

Exception:

g.

b.

urgcnt nccd during whictr timC the commodatum is suspcndcd prccarium - if dtEation of thc conrect has not bccn stiPulated b.l b.2 if use or purpose ofthc tlung hds not bccn stiPulated b.3 if usc of thing is merely toleratcd bylhe bailor

r;l

Ti

!ij

'

:,
l:

r'

:,1

MCO Samnle.Problem
Prccarium arises:

a. b. a. {. d.

ifthe use ofthe thing pledged hBs not been stipulsted by'the pattis ifthe druation ofthe contract of mutuun has not been stlpirlated by the partica ifthe purpose of the thing subject ofdgposit hss not bccn slipulated by the pafiies ifthe use ofthe thing subject ofcornmodatum is merely tolerated by lhe bailor. - Le,zal Basis: Article 1974 of the Civil Code
,

'',

?. To refund extraordinary expcnsis for thc preservation ofthe thing loqned provided bailor is notified beforc the expens.s were incuned. Excrption:
urgent nced hence no notice is necessaDif
:

3. To rcfrurd 5ooZ of the extraordinary .*perrs"e" arising from actual use of'thc thing toaned (i.e. caused by fortuitous cvent).
.

Exception: 4. l.

contraD,

stipulation 1

..
i

'I'o pay damagcs to bailee for known hidden flaws jn the thing,k oned

Bailor has the right to dcmand return

of, th

any oct of ingrati:tude: thing if bailec commits ,: :

III.
A.
Definition
Ml-tuum is a contract whcreby bne of thc parties delivers tb another Frrty, nroney or oaher consumable things wirh thc underctanding rhar rhe same amouirt of.lhe same hind and quality shall be paid.

Borrower acquires owncrship tif the thing and can. thcrcfore dispose borrowed. There is no iriminal liability for failurc to pay one's debt.
Gercie vs. Thio (sl8 scRA 433)

B. l.

Cbarscteristica

of

the thing

A loan is a real contract, not consnsual, and as such is pcrfccted only upon the delivery of thc object of thc contract. Upgn delivcry of thc object of the contract of lonn (in thig caso thc moricy reccivod by tho .dobtor whcn tho checks werc cnc8hcd), thc dcbtor acquircs owncrship of such mony or Ioan proce,eds and is bound to pay the creditor an equal rmount.
Delivery is the act by wtiich thc /er or substance thereof is placed within actual or donstruitive possessiorr or control of another.
.

\ ii

bound to pay to thc creditor an equol amcjunt of thc4ame lcind and quatity.,' Hcncc, pctitioncr Ocampo corrctly argucd that thc NALGTU funds shcd thcir.. public characEr whcn thcy were tnt to LTFI as it acquired ownership of thi .. funds with an obligation to repay the Province of Tarlac the arnount borrowed. . The relationship between the Province of Tarlac and the LTFI is that of a creditor and debtor. Failure to pay the indebtedness would give rise to a collection suit-

. _An. 1953 of thc Civil Cod provids thot "[a] pc*on who receives a loan of moncl)r br any gthor fungiblc thing acquircs the qwnonihip thercof, and is.

i i :: .rl

.i

gcampo III vs. People (543SCRA487)

i

bethevalueofthecurrencyatthotimcofthecrcationoftheobli!atioli.
If,fungible rhing wds loancd, thc borrower the same kind, quality irnd qu.ntity.

payment must be mode in tbo currency,which is lbgbl tender in the Philippines and in casc of cxtraordinary deflition or inflstion,.the.6irsis of paynrgnt itratt.
I

2.

'i '; lf the'thing loanod is money,

I I Tho DBP aontcnds that thc Spccial Loan. progrgm (SLp) is ..mercly' a noimgl loan trimsactioa, akin to thc lo6n granted by thc GSIS, SSS snd tha DBp Pr<ividcnt Fund. Thc rccords show othcrwise. In a loan traBbction oi rnutuum, thc Eorrower br debtor acquircs ownership of the arnount borrowed.. As the o,ine!, the dcbtor is then free o aispose -oror,.,tiiiJ'irr";*--h; i";";;; subjcct to the condition that he shoutd latcr rbturn thc amirunt with thc sripulatcd . interdst to lhc crcditor. In contrast, tge'amount borrowed by a qualified employee under tlre SLP was n"t .""" iLi""".J t" fri-. It merelij allowed the deblor-employee to "borrof' a portion of his graruity sotely for t-tie purpose 6f investing it in certsin instruments specifie4 by DBp. ihe de6tor-ernployel could npt dispose ofor utilize thc loan in any othci way and never had any iontrol or custody of the Emount he supposedly b-orrowed.
I
i

, i ,I

(422 SC?A 459)

3.

i!

obliged lo pay lhe lendor anorhor rhing

,.

of

'

(383 SCRA 47r)

AIl aoknowledgment reccipl in th nature of a promissory note is valid and binding between the panies who executed it, as a documeni evidcncing the loan ogreement they had entercd into. Soid docutnonl rcsds:.
.

i , "fhis ii to acknowledEe receipr (of) the sum of five hun&ed thousand pesos,(F50q,000.00) from (?) broken down as follows: ,,!
I

3/t6te.o---P3oo,0o0.0oZlL9JW_ed&_L6!Bl_1_4

7/14/90

,i.ti

6vo. pcrr,cnt (5Vi Wt month duc and peyable every I 56 day of thc month for a pcriod of six months.".

Totel amt.

lr -

P2oO,oOO.OO .

1..

+ ILqO_QOQ ------:-

DSOO,oOo,OO,

with corrcspondingi intercat at

The 'statement of the interdst payments negates thc allcgation that it is mercly an acknowledgment rcceip and not a irromissory note..

:l

jtl,

,il

i,. ] ii{
.|,

C.

Dbtinctions between Mutuuo (Utang) snd Lease (Upt)

I

In mutuum, thc objccl is money or ony consumablc (fungible) thing, whereos in leasc, the ob.iect may be any thing, whether movable or immovable, fungiblc. or nonfrrngible.

l.

,,1

2.

In mirtuum, thc thing loaned

becomes the property

of the debtor, whercas in leasc, the

Lilvanrq

v.s. Court of Apperli 281 SCRA 225,(1997)

. Neithcr can the Eansaction be considered a loarl sincd in a Contract of loan once thc money is received by the debtor, ownership ,over. the sri(ne is ransfcrred. : Being the ownei, thc borrowei can disposc of it for.whatevar purpcise hc may dccm propcr. In thc instant petition, howwer, it ii cvidenr that Liwanag could not dispose of thc moncy as she .pteascd.bccause it l^/as only delivered to her for a single purpose, namely, tbr the. purchase of cigatittes; snd if this was not possible then io retum thc money to Rosalcs. Since irithis cosi there was no transfer ofownership ofthc moncy delivered. Liwonag is liable b conversion underArt.315, par. l(b) ofthe Rcvised Penol Code. 3.
l

'

lcase, thc relationship thot is crcotcd is that of tsndlord snd tenant or.lcssoi unrl lcssuc vs. Gonzaresj 50 Phil. 558).

In mutuum, the relationship which is created is that ol creditor and debtor,

whe'reas in

(folcntino

..1 i Ilsup: i Is pc'titioncr PBTC subsidiarily tiablc with Corazon for thc poymcnt thc balancc ofthc purchasc pricc to Liway\vay?

Prudential Bank and Trusi Comoanv (noif, Bank of the Philiooine Islonds) vs: Abaiolo I (611 SCRA36A , it: Facts: . The heirs of Leonor Rosalca authorizcd. Liwavwav AbasolL to selt thJ propcrties of the deceased in Sta- Cruz, Laguna.'Coirron Mirasigan, an interEsted buyer, prgposcd to Liwa) ray to mortgagc tlrc subject pi to aubject pioperties pelitioner peuuoner pelitiorrer Prudcntial Prudcntiat Bank and Trust Trust company Trist Company (enfC; (pBTc) tb tir which wnic[ 'rcspondent ^ agreed on the conditiori.that the procceds wqutd bc paid dirccrly io hci. in rhe proccss, PBTC employee Noiberto Mcndiola adviscd Liwayway to trorrstbr tirst the prgperties to Corazon for the immcdiEte proccssing 6f tic toan wirh the assurancc that the proceeds would be dirEctly paid to her. Withour requesting for a bank guuranlcc, rcspondent acceded to tlre profDsst. tJpon Crirrrz.on's cxr:culi<rn of l| rcul (:slolc tnorlgargc on suhjcct prol^-rtics lo sr:cut.lj lltc lotn. Pl3'l C upproved the loun and rstcused the procccds to her. Lcanrirrg ol' the release df the proceeds to Corazon, Liwayway demanded payment t'rom the latter. Corazon fsiled to fully pay the purchase price ofthe properties prompting Liwayway to file a complai[t for coltectiotr of sum of money ond annulnrcrrt of sale with damogcs ugainst Corszon and PBTC with the Regional 'l'riul Court of Sta. Cruz, Laguna. The trial coun decided in Liwayway,s favor and tbund PBTC subsidiarily liable. On oppeal. the Court of Appesls atlinned rhc trial court's decision, hcncc the prescni petition. .

t'!

l "t
I
tt

,I
I

"l

of

':lt { '1i
::11

i{uiinc: Nb, PBTC

is not subsidiarily liable.

'tt

' .

policics anrt soun<l lcntling practiccs ors csscnt,rl io 1^-rlirnh its lcn<ling lirrrulion clTcctivcly ond nrinirnizu thc tisli itrhcrort.in any cxtcnsion ofurcdit.

thc scllcr l.irvoyrvay. I--titi()nsr ltas trrr ittlrcrcnl r,rtrligation t() rclcasc rlrc pr0cccds of thc lotrn to hcr, lo u banking institrrti()n, rvoll-(lslinc(l lcndillg

ln thc absr'ncc ol a luntlgr-borrorvcr rclationship b!:lrvccn l^-titl()ncr iltr(l

For Lirvaywoy. to prove her claim agoinsl petitioner, a clear ond... dclibcratc act ofconferring ! favor upon her musl bc present. A written rcquesti. . rvould have sufTiced to prove this, givcu the naiur! ol'a banking business, not to menlion the amount involved. Under this fold lblls the issuance by i bank ola gusrantee which is essentially a promise to iepay the liabilities ot'dcbtor, in this case Corazon. lr would be contrary to established bankiitg practibe if Meadiola issued a bank guarantee, evbn if no request to that ell'ccr was made. Since it has not been established. that petitioner had an obligation to Liw;yway. thcre is nr.) . . breach to spcak ol'. Liwayway's clailn shoukl only be dirccted aguinst Cbruzon. . ' Petirionercannolthusbeheldsubsidiarilyliable.

,t

'

Clribank. N.A. vs. Sabeniano

Although thc Suprcmc C()urt conccdcs that lll thi: l'hilippinu t>rarrchcs ol' Citibank should be treated as odc unit wirh its bcad ollice. il c:rDrrot [)c pcrsuaded lo declcre thnl thcsc l,hilippinc ['rrirrrclr!:s urc likcrvisc u silrglc unit .' rvith ths Genevu brlnsh - thc ollicttints ,(rr c()rnpcnliltiorl ol'o boirowcr's loarts with Ciribsnk-Mlnila using hcr dolllr uca()unts with Cititxurk-(ir:rrsva currrrot tr: effected. 1'he panies carnot tc considsrcd prirrcipul qrodiaor ol'rlrc olhcr. As lor the dollar accounts, respondcnt. was the creditor und Ciribank-Ceneva was the.,' debtor; and as for the outstanding loans,. petitioncr Citibank, panicularli : Citibank-Manila, was ahe crcditor and respondent rVas the debtorr Since legal
:

compensation was not possible, petitioner Citibank aould only use rcspondcnt's dollar accounts with Ciiibank-Ceneva to liquidare hir loans ilshc tiad expressly : authorized it to do so by contract.

Citibsnk. N,A. vs, Crlbrlmonsnn .. (48r SCRA 517).

The timc dcposit subject matter of hcrcin pctirion is o sirnplc loan. 'Ihc provisions of thc New Civil Cgdc on simple loan govcrn the contracl betwecn a bank and its dcpositor. Spccifically, Art. 1980 ihercof catsgonoarly providss lhal "... savings . . . deposits of money in banks and similar institutions 5hall bc governed by thc provisions concerning simple lorn." Thus, the relationship betrveen a bank and.its depositor is that. ofa debtor-crcditor, thc depositor being the creditor as it lends thc bank money, and the bank'is the debtor which agrees to pay the dcpositor on demand.
t

996

Brr

Exam Ouetlon

In the provinoc, a farmcr couplc borrowed money lrom the tocal lnerchant. Tb guarantee psymint, they lcft thc Torrcns titlc oftheir lana with the merchant, for hinr to hold uniil thcy poy the loan. Is there a a, b. c. d.

contract of plcdge, contract of mortgage, contracl of antichresis, or none 9f the Above?

ii
ri

il,

f, il

Explain.

propnywasgiventothecrcdilor(Art.2l32)_l'hcrclirrc,tlrcanslvcrisnoneol'.hcub()i,c.
[Jnite(l Coconrlt I,lB ntcrs llrn k vs. llclrrso (530 S(.)lrA s67)

movable by itself, but not of the land which rhe tirlc rcprescnts. There is nd mong:rgc hccausc no dced ot conlract was executcd in the mannBr requirbd by low lbr D mortg0gc.(Aniclcs 2085 to 2092, 7121. to 2 l l l ). 'l'hcrc is tr() c()ntract ol' onaichrcsis bccuusc no righa to tlrc litrits ot' tlrc

Answer; There is no pleclge. because only movahlc propeny may. he plcdged (Ari. 209-1, NCC). If at all; therc was a pledgc ol'thc papcr or docunrcir! cortstiruliilg thc:'l'orrcns rirlu, as a

OpcninB a crcdit line docs not crc.arc a cfedit transaition ol'Ioan or ,nutuutn, since rhe lbrmer is mcrely a prcparatory contrhct tg the iontract of laail. er nrutt.tr,n - under such crcdit line. thc bunk is nr'erely gbliged,.lbr thu ponsiderations specilied therefor, to lend ro the oafief party amounts not
-l

D. l.
t

Rutes on

lntcrc$t

956).

In order that intercst may be charged, it. rnust bc cxprcssly stipulatcd in rvriting lAniclc

-',-'

o) (iarcia vs. 'l'hio, 5l ll S('ltA 4-13 (2(x)8, . b) Ching vs. Nicdao, 522 Si('l{A I t6 (l(X)l{) c) I'hilrpprnc l,lrosplratu licrlilizcr ( ()tlx)r:rtr(,,r Is K;ltrirlig l{csorrtccs. ltre.5.1{) sctt^ 139 (2008) d) Ilcpublic ur. Uni,r'r"* lvlrcro-l.llcclrorrics (irrrl)l l, S.llt SL'ltA l9 (20O'Z)
U\c('ptiot]s: l.
f{i

l)ctrtol in dclay is liablc to lxly lcgal intcrurit us indcrrrnity lirr thrrragcs cvcrr in thc abscncc ol'sripulation lbr thc payrhcnr ()l'intcrcsi (n rliclc
2?O9).

:,
i.

a)

Eusebio-Calderon vs. People,44l SCRA b). Diio vs. Jardines, 481 SCRA 226 (2006) c) ' Ongson vs.

137 (2OO5l

d)
e)

d
t:

Peopte,466 SCRA 656 (2006) Citibank N.A. vs. Cabamongan, 488 SCttA 5l? (2OO7) . JL lnvestnrent and' Developmcnl,. lnc. vs. 'l'cntlon Philippincs, Inc., 5 l2 SCRA 84 (2OO7) Development Barrk of thc Philippincs vs. Coun of

8)

United Coconui Pllnlcrs lhnk vs. Bcluso, 530 SCIiA 567 (20os)

2.
ii,

'is

lnterest tiue shall eam intcrest unterest is compounde<I frorn the tiinc it judicially demanded although the obligation may be silent uJrcn rhis point (Article 2212) or when theie ii express stipulation iArticle r e59)!.

llPl I;rrnilv Ssvines Dank. lnc.

r,,tt#tt-

vs. First Mctro

whcn the obligaiion is breache<J, ancl it consisis in the pay;nent ol'a sum or lorbeaiancc of mo[cy,.thJ intcrest duc should be that which rna), have lrecn stipulated in writing, and the in(eresl dur: sholl itsclf eirrn legal interest from the time it is judicially demanded.

ol

mone1", i.e., a loan

li
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.til
Toring vs. Ganzon-Olrn (568 SqRA 37O
'il j.l

il
|:
ii
i

In a loan or forbcarancc of moncy, thc intcrcst duo sbould.b lhst' stipulated in writing, and in the abscnce thcrcof, thc ratc sholl be 12o/o per.

i'
I

,]

annum.
E.

_i

Relevnnt Jurisprudence bn Mutuum

i i

E-l

lntcrest

Rates

(2o2 SC.RA
I
:

r19)

xxx The legal rate of intercst is six (67o) pcrcent per aru:um, and not tlvelve ( l2oz) percent,. where a judgment award is based <.rn an action for damages for personal injury, not use or forharance of money, goods or credit.
I

(sr2
The .l2o/o rate of interest is loans or forbearanoe of money, in the the obligotion is othenvise, as in this. computed from the time of this ruling, thc entire amount due shall satisfaction.

ll

ii
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l

":ll

ril

,*_"fiI
Almedr rl!. Ceriio

l.
.,

inrposcd at thc court's discrctionlst thc r8tc of67o pcr

3.

annum. .

*...i; oi, -iudgmnt Uo{oln- find and o**rr* linality iti l2yc.q",I from such !rl--i1frr"1,"hrb.* salisfaction, the iiterim periodibcing cquivalcnt to a forbeararte of
yh:n.th
monoy

ry-*

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ll

i
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l',

,
P*ot. rr. lutu"it.,
(365SCRA

ls6)

. ,l' , .r :

,lt'' ,,,: ..

WhBn the judgment of lhe Court award.ing a suri? of money becomes llnal and executory, thc ratc ol'legal intcrst sholl be l27o per annum liont such linality rrntil irs sntisfaction. The intcrcsr ihould this be iompurcd liorn rhi ,ime ol'lhc [inolity ol'thc dccision, ond not'liorn thc liling ot'thc crirnpluint
against accused-appcllant.

Sclrmilz'fransoort & Itrokcrtsc

(loinorgtidn

' .

.i:

As for rhe court a quo's award of interest on the amount claimerd, the samc calls for nrodificntion following the rul.ing in Eastern Shipping. L.incs,... lnc. vs. Court of Apprrls that when the demsnd cannot bc reasonably cstablishcd a! the time the demand is mgde, the interiit shall'bcgin to ryn not r tiom the timc thc claim is made judicially or extraj,.rdicially br,t fror4 the.dalc '. the judgmenr of the court is made (at which timc thc quaniification oi damage '] may be dcemed to have becn reasonably ascertained).

,t
,i

Legat interest of 60/o p.a. on rhe inroutit of damages. in litior ot:r liiigant should commcncc frorn rendition ofjudgr)lcrrt ol'thc trial court:instead of the dare of filing of rhe complainr.

'l

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il li[ k tr li
:t:

lio{r(l 'J'crminsl. lnc. vs. (:(}u.rl ir0At)t)clrls (262 SCRA 339) i

rnd

eirs of lenscie Apuilar-Reves vs. Miieres (4ro scRA 97)

When 8n obligetion not. constitutinL t(run. .;, tbrbcarancc oI nroncy is " breached, then an. intercst on the amounl of durnagcs awordcd may tic inr;x>scd at the discretion of the coun at the rate of 6910 yxr arrnum in accor&nCe rvith Art. 2209 of the Civil Code. lndeed. the monbtory judgmenr in favor of private. rcspondent does not involve i loon or forbeorsnce ilf, money, hencc thc proper imposable rate of intercst is six (60lo) percnt. Howcver, as declorcd in the case rofEastem Shipping Lines, Inc. vs. CA (234 SCRA 78), the interim pedod from .he finality of the judgment awarding a monetaqi blaim'and until paymcnt thereof, is deemed to be equivalent to a lbrbearancc of credit. 'Ihus, from thc time the judgmenl becomes final until ils full satisfaction, the applicablc rate of Iegal inlerest shall be twclve percent ( l2olo).

Peiitioncr ltood 'l'crminal was ortlcrcd to pay thc privatu rcspondcnl actual damages, ulrcarncd profits and alaomcy's l'ccs. 'l'hesc amounts shall eurn interest at the rate of StX PERCENT (6010) pcr annirm liom May I J. . 1984 until lutly sstiJficd. but bcforc judgmcnt becomes final. [:rom rhc dare of rinalily of thc judgment until thc obligarion is totslly paid by pctltioner; a TWELVE PERCENT (127o) interesr, in lieu of rhc SIX PI]RCENT (60Z) intcrest, shall be
imposed.

r3

Philiunine Airtlncs. Inc, vs. Court ofAoneals (27s SCRA'621)

and

'

Lim vr- Court of Apocals (37lSc.RA394)

We agree, however, with the dntention rhat the intcresl oi6Z imposed bv respondcni court should be computg{ from the date ofrendition ofjudgin;nt and not tionr {hc tiling of the complaint. The rule has bech laid dbwn in Easterri Shipping Lines, lne. vs. Court ofAppeals, et al. (234 SCRA 78) that: :

"When an obligation, not constituting a loan or forbeerance ofnioney, is . breaclrud, an interest on the amount of damagc's .msy bc imposet! at the' discretion of the court al lhe rate of 6%o pt annum. No intcrcst, hbwever, shall be adjudged on unliquidated claims or damages'exacpl when or until ,thci demand can b establishcd with ressonable ccrrii;ty.. Acpordingly.. w,here thi' dcmand is qroblishcd with reasonable;aerhinty, thc intcrcst shall bigin to run from the timc the claim is made judicia[y or extrajudicially .(Art. I169, Civil i Code) but when such certainty cannot be so reasonably estabtished at Oie time the demand is made, the interest shall begin to run only frorn the date the judgment of the court is made (at which time the quantification of damages may. be deemed to havc ben reasonably irlccrtained).. The octrid basb for thl computation of legal intcrst shall, i{ any case, be on tha ahount fin&tly
I I

ollcr ihe prcsentotion ofproofthereof,,

'l'his ir bas.ousc Bt tlrc tirno of tho filing ol'rlis complnint, tho omoun't of damagcs to which plaintiffmay be cngirled remains unliquidated and not known, until it is delinitcly osccrtaincd, ossegsed and dbtermined by thc cour! an<I <inly

.'

.l:

I
'l;

Eastem Shipping Lincs, Iirc. -v. Court of Appcets, this Coun..' formulatcd the ruts on thc imposition of ihc propcr intcrci'i on arnounts. duc, and at no instancc wali intcrcst to run until dcmand hac bcco m.& .ahni ari5l
agreement betwcn the

In

.l.i..l

vr. Court of A rrncflli (437 SCRA r)

parties.

- t

I I

(441 SCFA 472) and Euseblo-Catddron vs. Peonle (441 SCRA r37)
I

. .In the absencc of agreement, ArJ tegat rate of interst Ehall prcvait. Th. - intcrcst legal for toan as forbcarancc of moncy is l2ji pct ennum toibc computed from dcftul! Lc.; ftom judicial or cxir.aiudiolat drmaDd lrndor ind subjecr ro thc provision of Articte I 169 bf tbe Civil eo&. , I

l4
I

r.,: *
i...

ti ;ij
ji

Mxtqrrco. lnc. vs. Firrt l,Bndlink Asi:t Development Cortroration (539 SCRA 226)
despite the fact th&t it was not prayed ltrr in thc C()tnploint.

The trial coun is vested rvith discretion ro award the legal inreresr

Sumnrurion:

Ihu Sttprcllrc ('orrrl rulc(l thlt thc lirllt,rrrrtg inlcrust rittqs arc uxccssive. ,,,,a,,,,t.,,,,,,4,,. ond inor.dinatc and thc courts rvill tcnrrri inlcrcst ratcs rvl]c|r nccessary .

i\) bt c) d) c) l) g) ' h) i) j) k)

4o/o lrr

month or

4.8olo

fxrr annunl ( []ulos, Jr. vs. Yasun'ra, .527 SCftA 727

6910

[?008])
i Oo/o

Pcople,

lOo/o intcrest per monrh (Svendsn vs. l)coplc, 546 SCRA 659 J2O08l) 36yo per annum (l'oltan vs. 8Pl Family Savings Elank, lnc.. 517'SCliA 430

p.r monih and cvcn rhs reduccd rare of 5l I SCRA 40o [2oo8])

pcr nronth (Macalalag vs.

loo/o and 87o interest rates per month on a one-million-peso i<ian (Cuaton v's. Salud,421 SCRA 278 [200s]) lO%o compounded mdnthly interesr and l0oZ surcharge p-er month and 36Yo interest per annum (Ruiz vs. Coun of Appcals, 40.1 SCRA 4 I O [2004]) . 37o and 3.81% per month interesr ('l'oring vs. Canzon-Olan, 568 SCRA 376 [20oe])

(Diflo vs. Jardines, 481 SCRA 226 [2006]) A combined intcrcst and penahy ralc at lOVo per month or 1207o ;rcr annunr (Dio vs. Japor,463 SCRA t70 [2006J) 160/o per month and a penalty chrrgc ol'57o pl:r month in a.-klition to regular interest and attorney's fecs (lmpcrial vs. Jaucian, a27 SCRA;5 l 7 120051)

pr annum (lrade and lnvcslment Dcvelopmenf Cofp(rnrtion ' vs. Roblett Induslrial Construction Corporarion,490 SCRA I [20071, 9Yo per month or 108% per annum or loYo pcr imonth or 1207o pcr annum
I

[2o0E])
Eo/o

Solnnuon vs. Sllnzlr (360 SCRA 379)

A stipulatcd intcresr rate of 6o/0 Wt month or 72o/o pet annum is clcfinitely outrageous and inordinate - an interest.of l29/o per anrium is dccnEd fair and reasonable.
Ruiz vs. Court of (40r scRA
l,
!!i
1.,

4r0)

Anneals

!
1

,l,r

'i:

l it i:
,i

Thp Supreme Court struck down as invhlid the l0oZ compoun&<t monthly intcrest and rhc l0olo surcharg,c fEr month stipulatid in the proJnissory nQteq and equitably reduced the 37o pcr monlh oi 36Yo per snnum intercst presenl in all four (4) promissory notes to l?,o per mbnth or l2olc per annum ,nteresi. The Highest Tribunal. has previously invali&ted.a stipulatcd S.5yo.qcr' tnonth or 657o per annuln interest on a P500,000.0O. Ioan in Medel vs. Court of, Appeals (299 SCRA 481) and o,6%o pI month or TZoh Wt annum intcrest on a P60,O00.00 loan in Spouses Solangon vs. Salazar (360 SCRA 379).tbr bin! excessive, iniquitous, trnconscionable and exorbitant. ln boih cases, the Supreme Coun reduced,the interest rate to l2o/o per'onnum. The, l% penalty

..

surchargeonrheprincipilloantbreverymonthofdgfaultisvalid.-'

i
I

'l,i
,,ii
.ii

t5

tc,u:'

Imnerlal vs. Jruclsn (427 SCRA srD

'

l. 2

An intcrcst rstc of 16 perccnt per month is iniquitouc. urrconscignoblg

A pcnalty charge ofs prcent per month, in addition tb rcgular interesti. dnd attomey's fccs, is iniquitous and [nconscionable,
Cuaton yE-Salud (42r SCRA 278) lntcrcsi r.rles &l loo/o and 87o per month on a one-niillion.peso loan is excessive, iniquitous, snconscionable andexorbitant a4d their redugtion b l2cy'o . pr'annum is fair and rcasonablc. Stipulatlons lulhorizing iniquitirirs' or' unconscionable interests are contrary td morals, ifnot against thc law.

tffii
Usury Law

:I

Th Court of Appeals ordered Quiio a p4y' Zo/cintcrist pcr month on the pl5,O00 loan from Rcnato, compurcd from t i April 199O. Thrs amoimts to 84olo intercsl pcr A.nnum, which is u,nconscionobie. This . Court .dccms jt equitable to rcduce this iiterest rate to lSoZ per annum.
i

(s.r4scRA608)
Tle-Usury

Law had bectr rendered tggalty ineffectiie by Rcsolution No. . - 3 Dcccmbcr ^224 dated 1982 of the Monetary tioard of tte Clntnil fiant- ana later by Central Bank Circular No. 905 whichtook iftect on I JanJary tggi and removed the ceiling on interest rates for sbcured an unsecured loens regardlesi. ol maturity. The effect of these circulars is to allow'the parrics to agree*on any interesr rhrit may b,e chargcd on a loah. The virtuat repeil oi the Usury f,a," i'" within the range ofjudicial notioe whioh.courts are bound.to takc into-account. Atlerall, the fundamental tent.is that the lcw is deeined pan of th oontract

Medcl
.r'

(zgaEcRA4sl-

yg._Cgu4.oflloocais '

Thc sripulared ratE of interest at S.Syo;lor month,on the pS0O,rrOO.OO . loan is excessive, iniquitous, unconscionable lurd exg.rbirdnt, Howcvcl ihc rate cannot be considcred 'uswious" becauie the Suprime qiurl has consistcntly hefd that Circular No. 9O5 of the Central Bank, aA'opiea on Dec ernber 22, lgBZ,
i

hrs csprcssly rern('vcd thc intr.:r'cst ecilirrg prcscritrcd by thc t,sury l.arv und thut rlre trsury [,arv is norv "lcg:rlly inr:xistcnt".

I<egional l rial C]ou( ol' Makati, Brarrch 6 I, thc Coun hcld thnt CB Circulur No. '905 did not rc1rcal nor. in any rvay amcnd tlrc Usury l.aw but simply suspcndcd thc l.rltcr's cll'cctivity. A Central Bank Circular can not repeal a larv. Only a la\v can repcat snothir larv. [n lhe recerit case of Florendo vs. Courl of Appeals, the f-:ourl reilerated .. the ruling that by vinue of CB Circul4r 905, the Usury.Lari has be.en rendered ' ineffective. Usury has been legally non-existenl in our jurisdiction. Interest ciln now be charged as lender and hdrrowcr may agrci ugitin. . . Security
Bacolor vs. Banco Filinino Ssvinsli and Mortpsue Bank. Dnsunan Citv Brflnch

ln

lla[k and 'l rust Conrpany ,s.

(srss(:R^

7e, ,'

.'

24o/o interesr raic ogrecd upon.by thc.parties does iior ,iolarc tltc Usury Larv, as amendcd by P.D. I 16. For sornctime'now, u3ury has hi:cn legally non-exrslcnt and that inlerest can now be charged as lender and borrorvcr may agree upon. By no tncans is an intcrcsl rttle <tf ?4o/o pc,r r,,razzr agrcid ulxrn by the panies considered unconscionablc or cxccssivc. ,

'l'he

't'oring vs. Glrnzon-()l:ln (s68 SCtrA 376)

while the partics art tiee to sripulatc on the i;terest to dc imposed bn monetary obligations, the Court will temper interesl fates if ihey ate unconscionable. . Even il'the tJsury l.arv'has bccn suspcndcd by Ccntral Uank , Circular No. 9O5-E2, and partics to a liran egreempnt havg'bccn givcn widc latitude to agree on any interest ratb, we have helditnat stipulated. interest rates are illegal ifthey orc unconscionable. Consequentii. in our view,ithc,Coun of . Appals erred in suslaining the trial coun's deciiion uphplding thc stiptulotcd interest of 3%o and, 3.81o/o (per mgnth). Thus, we-.are unhnimoui now in our ruling to reducc the abovc slipulsted interest nitrls to l7o pei month, in conformity.with our ruling in Ruiz v. Court of Aplrali,401 SCRA'4lO (2003). I\iothing in CB Ciriular No. 9O5, Series of 1.982'grants lenders cartc blonchc , authority to raise interest rates to lcvels which will eitlEr cn'slave their ' borrorvers or lead to s hemorrhoging of.their trssets.

'

'

Securiw Banksnd Trust Comnrnv vs. llTC-ltlakrti. llnrnch 6l (263 SCRA .183) . '

.: 'B-nliog: l.

lssue: Do the Couns have the discrction to aibitrarily overridg stipulated interest rates of promissory notes and thereby im&se a l2oz inlirest on lhe . loans, in the. absence of evidence justi$ing the ir.riposition of a higlrer rate? 'Stared otherwise, the sole issue to be settled in this piition is rryhether dr not thc 23o/o re'le of intercst pcr annrulr agrced Upon by pctitionci bank und respondcnls is sllowable and not againsa the Usury l.aw.
From the cxamination of the records. it appcars lhst indicd thB agreed rate of interest as stipulated on thi three (3) prqmissory notes i3 23?6 per annum. Cenlral Bank Circular No. 9O5.which took elTect on 22 Dccembcr.l982 allows contracting parties to .itipulate freely' regaiding any subsequenl adjustmeni in lhe interest rite that shall occrue ort a loan or'f6rbiarance of.

.!.I

money, goods or crcdits. ln ii,re, they can agree to a6just. upwbrd or downrvard, thc interest prcviously stipulated-

2. All thc promissory noas wcr signcd in 1983. artd . rhrerbrc, .:!l,erc elrcady covcrcd by CB Circular No. 9o5. Conuary to thc cl6im of rcspondot court, this circular did not rcpcal n6r in any woy arr|.nd tfrc Uiury Law but simply suspcndcd thc lancr's cffectivity. 3.
The rate ofintercst was agreed upon'by the p6rties frcely. Significantly, respondent did not question that rale. It is not for respondcnl court a quo to ' change the stipulation in th6 controct where it is not illegal. . Frrthirmore, Article 1306 of thc Ncw Civil Code provides that contracting. parties may establish such stipulations, ilauses, terms 'and condirions as ihey may deem convenient, providcd they ari not contrary to lew, morals, gdod customs, public order, or public,policy. Wc find no valid reason for the respondent cburt.a.guo to impose a 129lc rata of intercst on the principal balEnce oiving to the.ptitioner. by resFpndent in tho prcscnbc ofa valid stipulotion. In a.loan pr forbeamnic of money, the intcrcst duc should be t]hai stipulated in w?itin& snd in the absence thercof, the ntc shsll bc 12?6 por annum. Hencc, only iil rhc sbsenci of a stipulation can the court imposc the 129lo ratc of intcrcat.

I
I

.,,ii
:,

., l i:

itl
l,
,.1

Dovctopnrcpt llpnk of thc ihllinplncr vr. ien:z (442 SCRA 238)

.ri

In usurious loans, thc entire obligation does not become void becnuse of an agreement for usurious interstt thc iDpaid principal debt still stands and rcmains valid, bui thc stiputotion as to the usurious intcrcsr ie void,. ' Caroo vs, Chua (47r SCrtA {7r)

t. il
i
:

lrli jil

iili
tiil
ii d

A usurious loan trans&ction is not a completc, nullity but deiective only

with rcspct to the agreed interest.
Since the mortgage contract derives its vitality ftom the validity of the principal obligation, tlic invalid stipulatioqr on iotercst rate is similarly insufficient to ren&r void lhe ancillary morlgage contrsct.

,.

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l{.}

r!l
r.{
I

PNB vs. CA (238 SCRA 20)

Presidcntial Decree No. I684 and CB Circular No. 905 did not authorize eitlrer party to unilaterally raise the intcrest rate without the other's consent.

!,1 :
,l

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Escalation ClsuEG

tl ii.tho rulo thet cscalatlon clauscs sre vclid stipulalions in comrnorcial contracts to msiittain fiscal Etlblltty Bnd to retaln tho valuo of monoy in long term contrictr. However; the cnforcement of such siipularions oI! subjcct lo ccrtain condiiions.
irt,.,

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l8

Banco Flllpino vs. NrYario (ls2 scRA 346)

PNB vs. Intcrmedlrtc ADncllrte Coura (183 SCRA r33)

rnd

An escalstion clause con bc valid only if it 6lsb inclraites a dc'cscatati-on clause or I stipulstion that thc ratc of interest agrecd upon rhall'bc teduaed i ' the eveni thai the merimum rate of interest is r;ducod by law or by.thc
Monetury Board.

l,lorin

vs. Court of ADDeals (2r8 SCRA 436)

reduction or de-.scalation of interest for said olausi tO b v8lid. PNB

An escalation clause must be bilateial hencc lt must provide for

vt 999{l pf4Ppcqh (196 SCRA s3O

.l

ln order that obligations ariging from contracB 'may-havc thi: force of law betwceir the parties, there must bc mutuality bctwBcil thc parties based on their essential equatity. A contract containing a condition vyhich makes its fulfillment dependent exclusively upori thc uncontrollcd will'df thc conttacting parties, is void. Hehce, even assuming tliat thc loan agregniint betwccn the PNB and the private rcspondent gave the PNB a liccnsc (although in fact thcre wi1,s rtorrc) to increose the interest rate ht will durinE the term.of ths loan, tha! liccrrsc rvotrld huvc bccn rrull and void tbr being vlolotlvo.of thc principlc of rnutuality essential in contracts. It would havc invcsted. tho.lon hgrecment with the clraracter ofa contract ofadhcsion, whefc thc Frttie3. do nol batSlin on cqual li.x)tin6,, rlrc rvcukcr purty':r (thc dobto.) porticlpolion balng furucod to thc altenrative "to take it or leave it". Such a contract is a'vcritabfc traP for the weaker party whom the courts of justice must protict agpifut a6usc and
Almedr. w.,Court of .Arrpcels (256SCRA 292) .
I

Morcovcr. rcsFrndcn! bonk's rcliance on C:R Circuler No. 9O5. Seticr ol' 1982 ditl not outhorize the bank, or any lending institution for thal mettcr, to progressively increase interest rates on borrowings. to. an cxtcnt rirhich would have rnrdc it virtunlly impossible for debtors. t6 oomply with rhcir own obligations. True, escalation clsuses ih credit agreemenB arc pcrfcctly valid
and do not contravene public policy. Such clauses,,however, (as arc stipulatioiG in other contracts) are nonetheless stilt subjeci to laws and provisions goVerning agreements between parties, u/hich agrcementg while thcy may be thc law between the contracting parties - implicitty incorporatc irovisions ofcxisting law. Consequently, while the Usury L,aw ceiling on intcrcst ratcs was lifted by C,B. Circular No. 905, nothing ia the said circular could possibly bc rczrd as granting rcspondent bank carac blanchc authority to raisa intcrcst rstcs to lcvls which would eirhei enslqlre its borrowqrs or lcad. to a hcmonhaging of their

grouncls. Here, as clearly demonstrated above, not only (are) the increases

[scalation clauses are not basically wrong .or legitly objectionabtci sd long as they are nol solely potestative but based on reasonable and valid

ri

of

the interest rates on thc basis of thc escala(ion clause patenlly unrcosorrcblc arxj unconscionable; but also lhere sre no valid and reasonable shndards uPorr r|hic-h the increases arc a[chored.

!'loirendo. .lr. vs. l\letrorrolitln anrt 't'rusl ('0m rr,lnv (5f,2 S(:RA 4J)

lhnk
" :1

Pelitioncr conlends thot the "escalotion ctausc:' in the promiss,rry notc imposing 15.4460/o interest on ihe loan "for the firsl 30 doys r'ulrjc.'t .t() upward jtktv,nl.rnl udjrtstuenl avcry 30 du.y's ttrcrcu/iir" is illcgal, cxcussivd and arbitrary. The dclcrmination to increase or decrease sudh interest rate is primarily left to the discretion of rcspondcni banh. We agrce. we hold thot thc incrcascs of inlerest rate unilotcnrlly irnposcd .by rcspondcnt Lrank withoul prjtitioocr's asscna arc violotivc ol' thc principlc ol: mutuality ol' contri.lc(s ordained in Anicle I 308 of the Civil Codc.

It would be cgnverting lhe ioan agreement'into u,"ont.o"t of adhesion rvhere thc panics do not bargain on equal lboring, thc wcaker pany's. (pctitioner's) panicipatior being reduccd lo thc altcrnqlive "lo takc:ii or lccvc it." Whilc rhe Usury Law cciling on intcrcsl rate was lifted by Ccnrral Bank Circular No. 905, nothing thcrcin could possibly bc rcad as grdnting respbndcnt bank crrrrs bltt cht' tlr )toriay to ralise int!.rcst ratc to lsvels r.i,hich would cithcr' enslave its borrower (prtitioner herein) or lead to hcmorrhoging of his assets.

E.4

Peoslty Chrrgca

---iffiffi^

l.itrutan vs. Court of A Dncrls

-i6,D

''

l. A pcnalty clause, expressly irccognized 'iry lurr, i* u,l u"""r"u.y undertaking to assutne greater liability on thc pah of the obligor in olasc of. breach ofan oblig&tion. lt functions to srrcngthcn thc coercivcl forbc of thc obligation and to providc, in cfFcct, for what could be the tiqui&ted damagcs resulting from such a breach. The obligoi would,then be boundr to pay lhe 'stipulated indcmnity \i,ilhour the nqcessity of proof on thc eiistence and on the measure of dsmages caused by fhc breach. A slipuloled pcnally, neverlheless; nray be equitably reduccd by the couns it'it is irritluitousor unconsoionublc or il' the princ;pal obligarion has bccn ponly or irrqgularly iomplied wirh.
The siipulsted interest of ls.t\yo l)|lt annum i$ not cxccssive. 'fhe essence or rationale for the paymcnt of intercst, quite oflclr referrdd to as cost of money, is. not exactly the same as that of a surcharge or a penalty. A rreqahY stir:ulqtion is no( neces@n agreernen( lo

2.

that effegt..thi two beinq disiinct cqnceots which mav seglratelv be demanded.
:

Issues: l. Can a dcbror bc made liable for both the stipulated nlonthly interesr and thc sripulalcd penalty charge?

2.
hy larv?

Is crlmpounding

oflhe penalty or cornpcnsatory inlcrest sanctioncd

?o

c_J

The promissory note exprcssly provides for the imposition of both intcrest end lrnaltics in case of default on thc port of thc pctitioncr.in thc paymeni of the subjcct restructured loan. Penalty on delinqucnt loins may lake different forms. In GSIS vs. CA. this Court has ruled that thc Ncw Civil Codc permits an agrecment upon a penalty ap6n from the monclary intcrBt also callcd pflalty or compcnsatory intcrcst. Such a stipulition about paymcnt.of an additional interst rate panakes of thc nature of a pcoalty clausc which: is sanctioned by law, more particularly under Article 2209 of the Ncw Civil Code.

lleld; l.

2. The contracting parties may by stipulation capitatize the interest clrre ond unpaicl. rvhich as adde<t principol, shall eam ncw interest. The c,rrlrpxrrrrrdirrg ol' ths ponul(y or compcn$rtory intercsl ii sanctioned by and ailowed pursuant to Article 1959 of the New Civil Corr..
Siate fnvestmeni House. Inc. v!. Copnt of Apperl! (361 SCRA 20r) . '

Peririoner was no longer entitled to the iioymcnt of fhC defiiiency irrnount of P6OO,OOO.0O after the cxtra.iudicial forcclosurc lale whcre respondcnt's properties were sold for P4.2Mbecausc thc principal obligation of respondent rvould not havc ballooned to F4-8M if not for thc penalty charge of oZ per morrth or 360/o per annurn. The disEllowancc of thc paymcnt Of 3 deficiency was in effect merely a redltction of thg pcnaltl chdrges and not a deletion of the prenalties as contnded by the petitioner. I
t

li.5

Nature ofan Action to Arfnul a Contract of

Loan

Chun vs. Totat Otlicd Product! ond Servlcer (Tooros)'. Inc. (471 SCRASoO) I

An action to arrnul a contract of loatr aoa: mortgage is a pcrsonal action In a pcrsonal qai

it!

damages. A real action is an action affccfing titlc to ttd prypcrty (,r for thc recovery of posscssion, or for portition or condemniirtlon ofi o; foraclosune of mortgage on, real propcrty.
The rule on reat sctions only mcntions an.nction for forcclorure of.a rcal estotc mortgoge: it docs not include an oction fo, the'canccltation ot'rnnulment ol'a rcal cstata moitgagc. The place where thc partie; rcsidc is thc pro'per venue for an action to nulli$ a toan and real estate mortgage co'ntract.

f,.6

Assignment of Credit

Aouintev vs. Tlbonp (5r1 SCRA 4r4)', An assignment of credit is an agreemcnt by vhtr.rc of which thc owner of a crcdit.. known os the nssignor, by a legal cousc, suoh 6s ralo. dstion in

payment, exchahge or doBrtion, and wilhou[ fhc oonscnt of thc &b.tor, traasfers. his credit and acccssory rights to aiother, known as thc asrigrrcc, who acquircs lhe power to enforce it to the samc extent as the assignor cotrld enforcc it against the debtor.

i/
Irr an &ssigrrrtrcnt.)l'crcdit, llrc conscr)t ()l'thc dcbt()r is troi csscrrtial liri perlbotion - thc krrowlcdgc thursol' or lask of it al'lccting orrly thc efTicaciousness or inel'licaciousness of any paymcnt ihat might have bccn rrrade.

-^.1*{:i!..:'d

r.ltr!:

-'

its

p.,ffit#Hii,,n
(s26 St:RA

379)

..

Although it rnoy bc said that.tlrc sll'cct olf ths assi'gnrnsrtl ol'crcdit is to subrogstc lhe assigncc in thc rights o{'tlrc original cicditor, thc C()urt still cairn(rt rlcfinitivcly rule thilt assiBnmctrt ol'cfcdit aird sonvcntional sut)r()gutton ais orr(:. and the samc. Whal the larv rcquires in an assignrnent'of cicdit i:; not lhc conscnt of thc debtor, but mcrely notice to lrim as ihe assignment takcs clllct only.ltom lhc tinrc hc has krrorvlcdgs thcrcol'rvlrils.conventional sut)roBotion , roqurres an agrsctlent among thc partics conccrnq_U - iho original creilitor, thc. dcbtor, and thc ncw crcditor The Supreme Coun hos alrcady noted previously fhat thcrc docs Dol appar to bc anything in lrhilippinc slalures or juiisprudcncc whictr. pr.ohitrits a crcdilor, without thc crinscna.ol'rhe dcbbr, liom moking sn sssignhrcnl o,'his credit and rhc righs sccessory therelo. Even if the consent of qhe dcbtor is unnecessaq/ for the validity and entbrceability of the assignrnent ol'crcdii, nonelheless, he must have knotvledge, acquired eithcr by forrnal no(icc or.sonrc orlrer- megns, olthe assignmenr so that he rnay pay the rjebt to the proF r parly; rvhich shall nory be the assignee. i
Rossrio rs. PCL J,gr.S!.rrrr q$d l.'intncc. Inc (474 SCRA sOO) There is ne lacrual basis for thc pctitioncrs' claim that CarMcrchants. lnc. had assigned its rights to collecl thc balancc of the purchaqc pricc to thc. respondcnt end thal rs assigncc, rcslx)ndcnt rvui proscribctl frirrn collccting . ;iom pclitioners the bal&ncc of thc purchose pricc,of thc vehiclc alicr hirving taken posscssion. oi thc. chartel tbr purposes ol' lbrcclosure. 't-hi: t:rcr ol' ttr,i matter is that petitioners admitted in their pctition ihot they werc dcclared in . default snd failed to'provc such cloim. 'fhc uvidcncc.on rccord clcarly shows that thc ptitionrs securcd o loan from ihc rcspondent lrCl l:casing and Finance, lnc. to psy the Pf9O,O0O.0O balonce lo CarMerchonrs, lnc., ancl cven exccuted a pmmissory nole evidcncing their loan in l'avor ol the respondenl. Petitioncrs fonhwith eiccuted a chattel mortgage in fovor of rhe respondcnr over the vchiClc as security tbr the payment of thcir loon arrd the intcrests thereon. lt bears stressing that under Article 1625 of the Ncw Civil (todc, an assignmenl af credit, right or action must appcar in a public docurnent to bind third prscins. Therg is no evidence on record to prove thel C:rrMcrchants, tnc. executed stch a deed, assigning its right to collect thc bilance of thc purchasc price of tha vehicle from the. ptitioners, in favor ol'rdsponilenr.
8.7

Ii
rl
i:.1

Payment by Third Pcrsons

Cnfnndrne

vs,

JJSir-+gf-gujLiFo rte Guznrnn (soa s(:tr^ {69)

Arricles 1236 and 1237 of the Civil Code are clear that, even in cases' where ihe dcblor has no knowledge ol paymenr by a third pers rL and even in case where the third ;.rcrson paid against thc will of the dobror- such paynrcnt rryould produce a debt in l'avor ol'the payints third pcrson. ln J'act. rhs only
')',

i.l

for failure to inform or get the consent of the' debtor 'are the. onty insofar as rhi payqrcnt has'been ' folldwing: ( I ) lhe third p.*". "un-i6"'"r person ii not subtogarcd to rhc rights (2) and the third the debtori beneficia-l to
consequence

ofthe creditor, such as those arising from a mortgage, guarantcb or penalty'

Credir Cards
.l

8.8

Aznrr v!. Citib.nid N.A. (Philippln6l (s19 SCRA 284

A stipulation in a credit card agreemeht which limits the card companyls liability to l)1,000 or the actual damage Provcn, whichever is lcssrir' canno! be considerecl as valid for being .-"o*"ilonibl" osit precludes paymcnt ofa larger
amount even though damag; may be ciearly provenE.9 Mendoze vs. Court of ADDeaIS (3s9 SCRA 438)

.1.

Under the doctrine of p:omi"Jry ..topp"i, 11 est9@-Py 4"" A9t rhe making of a promise, everit though t"itto"i ir"*ia"ti tio; if it ias intended that the promisc-should bc relied upon and in fact it was re[cd. upon',Bnd if a refusal to enforcb it rvould be virtually 1o sanction the perpgtration of &aud or 'arould resulr in othcr injusrice. In oider to make out a claim of promissory estoppel, a parry bears tlie burden of egtabtishing the followinS'elements: (l) i pro*i." r"utonably expected to inducd action or forbearancc; (]) such Promise

did in fact induce such.action or forbeapnce; and (3) thc' party sullerid
detriment as a

resiilt,...,

ppu{gplv BtoPPel t'rom the foregoing that the doctfinc.ot doglrinc.of'ppuligp.ry It is clear tt clcer tiom 9"toPP"l presupposes thc existence.ofa promise on the pgitjdf onc agdins.*ihorn cstoppet is clairrred. Thc promise must be plain and pnamQiguous apd- iufliciently
PNB pfan, he.mtist li5st' pr.ovc .that r."pond"r,t .PNB lisd promiJed to approvc -tt e piao in cxcbangc for thc submission of the proposal. As discr"rciscd barlicr;'no strch prombc was iroven, for thereforecbusc.of action sction .&r therefore, the docirinc bar. .A. .A cougc,of doctrinc dos not aDDtv apply to thc casc at 8t barpromissory g'stoppel dos not lie where an allegcd oral promise s,as conditionsl, so tlut rc'liunce upon it wos not reqgonablc. tt does not opcroto to crcatc liabilily rvhere it does not otben^,ise exist.
tlre promise according to its terms. '1I is cstoppcd to deny the five-yeor rt
E,,f

,i

Gross or lntermedirtion Sprad

Nctd SamnaEuita Builderu Constructlon. Inc.

(43s SCRA s65)

The diffcrcnce betwen thc intcrest and other servicc fbcs chargcd by a bank to its borrowers and clients and the intercst it pays to its depositors.and other suppliers'of t'unds is the "gross or intermdiation sprcad." .
:

No penslty chargi6 or incr.eases thercof appear cithcr in thc Disclosurc spadard Statements or in any of thc clauscs in ihe credit agrcomcnB. agrccorcnB. Wbilc a stan&rd penalty charge of 6.percent per annum,has been imposed on th amounts statd

,ii
I

.,

23

lt

in all three Promissory Notes still remaining unpaid or unrenewed when they fell due, thcre is no stiputation thcrein that would justiry ariy increasc in -that chaiges. The effcct, ihercfore, when thc borrower is nol ctearly informcd of the . DisJlosurc Ststomcnts -- prior to thc consummatl6n of thc availment or . drawdown --- is that tltr lcn&r wilt havo no riglrt to collect uPon such ehsige-or incrcascs thercof, vcn if stipulatcd in thc Noies- The timc is now ripc to giw ": ti igrrc.rcd forty-one-ycar old "Truth in Lending Acf' and thus ' ..itf, t" if," "n transform it ftom isnivelling paper tiger to a Srowling financisl rvatchtlog of ' hapless bolTowcrs,
I

MCO SamDle Problem

'its The difference.betw.t'en thd interest and other service fees charged by. a bank to borrowcrs and clients ind the interest it pays to its deposiiors and other.suppliers of'funds
is t}le:

.l

b. + ;. d.

i'ntermcdiciot sp.ead . gross refinancing diflerential te.gal-Elasls: New Sampaguita Buildbrs Construction, Inc. vs. Philippine NaJional Bank
(435 SCI{A 56s)

Sross credit diffe,rential

the national economy.':

B.
B.

Definition of Terma . . As uscd in thc Truth in Lending Att,'thc following tcrms arc defined "Credit" mcans any:
.

as follorvs:

a. b. c.

d. rental - purchase contractl e. contract or airangcment for ihe hire, bailment' or leasing or property; f. option; demand,Iicn, pledge, or other claim against' or for the delivery ot-' ProPerty or money; g. p*oirlsc or aoquisition of sny credit upon the security of sny obligiotion arising out of . any oftlrc forogoing traruactions; and . ."i, tr-.actioi- or ioics of trarBaltions having a simil8r Purpose or effiect.. [Section t.
3(2) ofR.A" 376s1

loarL mortgpgc, deed oftrusl, advance or discount; conditional salcs contract; contract to sell, or sale or contract of sale.of property or services, either'for Present or future delivdry;

8.2
B.3

other "Finance charge" includes intlrest" feeg service chargeg discounts' and-such of Bank Central B_oarrt the Monetaiy of ore&ias charges incide;a to the extension ^ofthe 3(3) ofR'A' 3765] prescribe.
the PihiliPpines rrray by regulation

[Section

credit (lvhich "Creditoi' refers to any person enlaged in the business of extending or rents orsells includes any prson ,utto'* o t"gulibu"ine"s Practice ftakes loans

propcrty or services on a tin)s, crcdit or irlstallmsnl basis, either as princigrt (x as :r8'eni) itho .eiuir"s as an incidcnt lo thc extension of crodit' the payment ol'a finaltce chargc Isection 3(a) o[R.l\. 3765 ]

('.

Obligrlion of ('rcditor lo llorrower unrler lhc 't'rulh in t,cndinS Ac' - prior to thL. consumlrrali()n ol'thc transacti(rr, thc crcditor is oblipc'r'l to l'urllish rr, cac;' pcrson lo rvhom crcdit is e\tcndcd e clcar stolcmcnt. in wrilihg sellinU fonh th.: follorving
infornration:
I

Cash or delivered Price

olthe scryicc t>r propcny ro.be scquired to as dou'nPoyrnr-nl and/or trade-in' il'thqre bc any hc cr;ditcd AmounVs The difference betlveen the cash'delivered price and downgraymenr'trade--in ',:,i:li*-ztiy ir:ii,tzz3 ci'=;3=s rrtrith are ro bc pid in cfi&sctisr r'irh $c rarrsrnist '/,''t.ct) 'a:a |sz irr:;'z::'-;' *e <'-r:r:sl*r of Sc crcdit '; dAt '.::L ):fi,i)'tt= l'.:=:t:=i ? tr,zt.rr- ciarg: ,n ltrrt arl csltazr,os. zfd 'lhe fr-tcamaBe that rhc financc chargc bcari io rhe iorat aafiounr to bc l'inanced cxprc::.:d as an annual rate on thc out$anding uirpoid baloide ol' \hc otrligrtion. lsection J of R.A. i7651 [!niic(l Coconut Plfntcrs l]rnk r's. Bcluso (53O SCrrA s67)

Thc inlcrest ralu provisions in.thc cas.^ at brr arc illcgal'mrt r.rnly hccarrsc ol' lhc prr>visirrns ol' lhe. Civil Crxtc on rrrulttitlily or'conlracls. rbul lrlslr hccurrsc lhcy violate thc 'l rutlr irr l.cirdirrg Acl. N.)l tlisclosing thc lrrrc linilnc(: chirrgcs in crrnnscti(rn ',vith tlrc cNlcusi()ns ol'crcdit is. l'trrthcrrrnrre , rr lirrrrt ol <lccr:liliorr rvhtch wc cilDnol coUt)lcnilncc.
Section 4 of the l'ruth in l,ending Act clearly providcs that the discl()surc statcment must bc furnislrcd prior to thi consuinpation of thc tSaniacrion. 'l hc rationale of this provision is io prolect users of credit. from a lock of awarcncss of the true cost thereof, proceeding from thc experience thst boqks arc able to conceal such true cost by hidden charges, uncertainty of interest rdtcs, dcducrion of interests from the loancd arnount, arid the like. Thc law thercby,s6g15 1. r)rolect debrors by peimining thcm to lully oppreciaic the true cost of their loan, to enable them to g,ve full conscnt ao thc contract, rind to propr:rly dvoluatc their options in arriving at business decisions. t.lpholdinA UCPB's. claim ol' substantial compliancc would dcfeat thcse purposes of rhe Truth in Lending Acr. 'l'he beleted disccivery of'rhe true eost of credil rvill too ollen not bb ablc to revcrsc the ill effects ofan alrcady consutnmltcd busincss decisir>n.

'

finanie charge be-a.rs to the arnourir to be financed. expressed ss a simple annual rare on the ouBranding unpaid balance of the obligation." tsurthcrmore. lhe spouses Beluso's prayer "for suih othcr relicfs just lnd cquitablc in.the premises'' should he decmcd to includc the civil F:nslty lrrcvidcd for in Scction 6(a) ot'the 'fruth in Lending Act.

lix the intcrcst rates certuinly alsa) means that thc pr{)tnissory n()tus do not conlain a "clcai sutement in writing" ot"'(6) thc finunce chargc expressed in terms of pcsos and cen_tavos; ahd (7) the percentag,e that the
unilaterally

'l'hc allcg|iir.rn tl'rot lhc pr(,lrriss()ry n()lcs gr.lt]t

tr('lrll the powcr

t(,

D. . l.

Consequences of Non-Compliance with the 'f ruth in Lcnding Act

lo whon) credit is cxtended the required informatiorr urder the Truth in t.cnding Act shall be

Any creditor rvho in cdnnection rvith any credit transaction fails to disclose to any person

l5

liablc to such person in tlre amount of Onc Hundred Pesos (F100.0O) or ip an arnount eqtr3l to requircd by such oreditor, whichcvcr is highcr but shsll not exceed Two l-housand Pesos (F2,OOO.Oo), plus anorney's fces and cburt cosls, pruvided thc action to recover such pnslty is brought within onc (l) year from thc dato of occuircnce of thp stid violatioir, but thc validity or enforccabitity ofthc contract is Dot alfcctcd [Scotions 6(a) and 6@) ofRA 3765]

t\ icc thc finrncc chargc

2. be flncd not lcss thsn One Thousand 2. Willful violutors of the Truth in Lending Act shall b.flttcd Pesos (Pl,O0O.0O) nor more than Five Thousand Pcsos (P5,000.00) or imprisonmcnt of not less
:

New Samunsuitr Builder3 Constructlon. foc'. vs. Philiooipe National Donk (435 SCRA 56s)

No penalty gharges or increases thereof apflar Slatements or in any of the clauses in thc crcdit agpp

Wbils

*ririaarci

charge- The effecl thercfore, when the borrowcr is not clearly infoirmed of the Disclosure Statcments -- prior to the consummation of lhe avdilment or charge or such ch'arge drarvdo',m --- is thet the lenier drarvdo,,m lender will have no right ro to collect upon suci, ri;re to give increascs thereot even if stipulated in the Notcs. The tirne is now rirr. t}rus tceth lo the b{len ignored forty-one-yesr old "Truth in Lending Acti'aod r}rus hlrnsform it from a sniveling papcr tiier to a growling finaniial watchdog of

,ti

rv. pEPosrr
A. Definition
with thi obliAation of safely keeping it and of rrtuminS thb sam.

!l A degrosit iE constitutcd frorh thc rromcnt s porson rcccivcs c thirig tiloitging io anothcq
: ,

ll i t,
,|: ii
'I
i

Durlirn.Aprrtnrcntt Corooratlon vr. Plonecr

rl tr
The contrEct of dcposit was pcrfcclcd whn thc hot to the hotet's parking attcndant the tccys to his vchicla, whicli rh with the obligation of safely keeping and returning it.
:

;:'

:ili
B.

, j:; i,

l.
2_

i .;
-l!
.

.i $
.;

t.

,in

il
ll
ll
:i

,li 'ril,
26

i!

:
4.

C.
l.
't

Distinctions t etween Deposit and Mutuum

Dcnosit

Muturtnr
.

Principal Rsrunr Objcct

custody
rctum at

Safekeeping

or dlcre :
.

Consumption subject rharter

ol'

thc

[)cB)sitor ciln dcrnand. .

'Lcnde

will

r must. wait lbr the cxpimtiorr ol' thr; V,rn.y-l or

I

.siipulatciJ. pcriod

3.

Movablc (cxtir-judicial
and immovable

(udiciul)
D.

) , propcrly

thrrrg,

rrngiblc

Distinctions betwcen Dcposit and Commodaaum Deposit

r

Cqnimodn aum
Tronsfer of usc
'

l.
2.

Principal
Prrrlrcse

Safekeeping
:

Nature

May be gratuitous

Always '
.

gratuilous

E.

Kinds of
.

Dep6sir

t.
2.

JudiciaI

a. b.

ExrraJudiciat Voluntary Neccssary

3.

Distinctions berwecn Exrrajudicial ohd Judici.rl .Dctx)sits

L An extrajudicial
judicial dcposit

is constitutcd by virtuc

dcposit is constituted by lhe will of the iontracring panies while a ofa coun ordcr.

2. In the fir5r, the object musr bc movable

proprty, whcreas in the second, thc object may be cither movablc or immovable prot*-rty.

Tlre purpose of arr extrajudicial deposit is thc salbkccping ol'thc thing derx)sitcd whereas the main purposc of a judicial defDsit is to sccurc or protcct thc owncr's
right.
4.
5.

The first is, as a generol rule, grotuitous, whereas lhe second is always onerous.

ln an extrejudicial dcposir, ihc dcp:sitary is obligcd lo rcturn the thing deposite<.| ugrn dEmond mrdo by lho dopoxltor rvhoroqc ln o Judlolol doporlt, tho lhlng rholl tto delivered only upon ordcr of rlrc court.

F. I.

\/olu nte ry Deposit Defined as one wherein the delivery is macle by the lvill ofihe depositor.

,i!
.t.,.
it....i:

.: , , ,'.;', "
I

1.':.

2. 3. G.

Although generally the owner, the depositor need not be the owner ofthe thing:dcposi!!*! May be oral or in

witing.

'I . :

.l ri

i:rl

specified tcrm may havc bccn stipulatcd in tho eoDtract.

l.

Obligatloar of thc Depoait ry Dcpositsry is obligcd to t'ccp th ihing safcly and return it wten requircd cven though a' ,
Chnn vs. Maceda. Jr. iaoz scna rszl
'
:

' ln un actirrn againsa ahe depositary, lhe brrden is on the ptointiffto prove the btlilmcnt or deposit and the performance ofconditions piecedent to the right of actron. A depositary is obliged td return the thing to the depositor, or to his. hoirs or succcssors,. or to the person who may bs,ve been desigaated in the
In the prcsent case, thc record is bereft oi'any.orrr*"t of defbsit, oral or bct$aoen 'pctitioncrs and rcspotrdcnt. If at 8ll, it was ori,ly between ptitioners and Moreman. And granting arguendo that ther rvas indeed a contract of deposit between petitioners and Moreman, it is still incumbiht upon respondent to prove its existenge and that it was cxecuted iri his favor. Howcver, respondBnt miserably failed to do so. Tbe only pieces of evidence respondenl presented to irove the contrbcr ofdeposit ivcra thi: dclivery receipts. Significantly, they are unsigned and not duly received or authcnticatad by either Moreman, pctitioners or rcspondent or any of thcir authorizcrt reprcsentativcs, Hence, those dclivery reccidts have no p,iobative value at all. ,

rvritlen,

.
2..

.. . Depositary is liable if the loss occurs through his fault or Degligenpe. Loss of the thing while in the depositary's possession raises i presumption jof fault. Required degrei of care ii greater if the defosit is for comperrsation tha:i when it is gratuitous. i CA Asro-Industriat Dcvetopment Corporrtion vs. Court of ADDesls
I

<it

sffitE-

'' .

The contrat for thc rcnt of a safety dcposit'box caanot be ciassifiea as an ordinary sorltrsct of lcase. under ertict;. tOig of tbc Civil Codc becausc thc full and absoluto possassion and control ofthc sofcty &pgsit.box is not givcn to the renter. Ncithcr is it a contrad of deposif that is 6 bc-siricily govcrred by the provisions of the Civil Code on deposit The contraot for the ient of a safety, deposit box is a special kind'ofdeposit.

With respect to property deposited in a safedeposit box by a iustomer. is a coritractual onc, may by.special conqact define their respeotive duties or provide for incieasing or limiting rhe li8bility of the deposit lompany, pr6vided iuch contraot k.nor i; violation-of law or pubtic poticy. Any stipitlatio; xqmping thc depositr"j, t"any.liability from the loss bi the thing &posiiod on acoo-uirt of nn"4 . ' negligcnce orarising dchy wouldrbc void for boing oo-ntrary to hw nnd publio polloy,

of a

sat'e dcposit company, the parties, since tha relati,on

.i

i':ir;
i:,.i

br, ogents or servonB, and if a provision of the contract may ba const ucd a! an attempt to do so, it wiU be held ineffective for the piurpose. Although it has been held thar rhe ressor of a safedepoiit box cannot rimi; its liability ior loss oflthe

The company, in renring safe-dcposit tioxes, cannot exemp,t iBelf from -. Iiabilitl, for loss of the corrtentl by its.own fraud or ncgligence tbot of irs

,,1-

,1,1,,

contents thereof through its orvn negligcncc, tlrc view his bcr:n rakcn thai such a lessor may limit its liabilily to some extent by agrcement or stipulalion.
Sia vs.

(:ourt of Auucals (222 SCRA 24)

A controct for the use ofa safety deposit box is a sSrciul tlind rif dcgrsir and the relationship bctrveen the panies thcrclo, tvith rgspect lo thc contcnls (),' thc box, is that ol'a bailor ancl bailcc, thu l)ailrncnt bcing lirr hirc and mutual bcnelit. Conditions in a l,ease ngrcement covcring a safery ileposit box rvhich cxenrpt thc bank liorn any liability lirr danrugc, loss or rlcstruction ol' thc contents thereof ari5ing liom. its own or its tgedt'S.fraud, ncgligcncc r2r dclay ar considercd null and void, lbr beinB contrary to latv,:i1d public policy.

.from funher deterioration and loss.

ln the instant casc, Sccurity Llank urrd 'l'rust CoDipany (SB'I'C) rvas guilty of negligence. SBTC's negligence sggravated the injury or damnge rq rhc lxtitioner which resultcd from the loss or dcstnrction of thc stanrpi collcction. SB-I'C was aware of the floods of 1985 and l9p6; ir olso kneiv that rhL. floodwaters inundatcd the room where Sal'e Dcposir ilox No. 5.1 rvas locatcd.. ln vicw thereof, it shoukl havc lost no tims in notifyihg rhc l^;riti{)ncr iri onli:r that thc box could hqvc [reqn oprcncd to rctricvs tlrc stantps, thus stving thc sanrc

t987 Bar Exanr

Ouestion

'

Ana rented a sat'cty deposir'box ar rhe Alto llan(, paid lhe renral ,'cc and rvas given the put hcr jewdlry and gold coins in the.box. Days afler, lhree anned rncn gained entry Ana !."y. into the Alto Bank, opcning its vault and scvcral salcty:dcposit boxcs, inclurJing Ana's ancl emptied them of their contents. ir
Explain. Answer:

Could Ana hold the Alto Bank liahte for the tosi of rhe conteirs oi^ her dcoosit

.box?.

.\lto Bank is not liable for thc loss ol'the conlents.of Ana's deposir box because under Anicle I99O of lhe Civil Code, if the depository by force majcure toses ttie rhing ond receives money- or another thing in is place, treitatl a-etiver rh! suri or other thing to-thc depositor.. There-being. no showing thar there lriything received in place .of the thirigi deposirei, Alto -rvas saiety Bank is nor liable for the contents ofthe b6x. :
_

Allernative Ansrver:

Alro Bank is nor lirible bccause ihe contracr bclwccn Ana and Alto Llank is not a dcpo-sit but a rental of the safety deposit boi. I'lence, Alto tlank is not liablc lirr thc loss of rhc conrcnts ofthe box in the absence of fault, clelay or ncgligencc on ats part.

3. 4. .
!.

Deposirary is not allowed to deposit the rhing rvith

thirct;rcrsc;t.

Depositaqr is liable for rhe loss ofthe thing deposired i t': 4.1 he transfcrs the deposit \A.ith a third person. without authority alihough rheic is no ncgligence on his parl and rhe rhird person;

' 4.2 he deposits the thing rvith a third person wlro is mani(bsily careless or unlir' . although {uthorizerl, even.in the absence ofnegligence: or

i
I

le

{.1

tlrarri fesrly corcless or nol

thc thing is lost through thc ncgligcncc ol'his crnployccs rvhcthcr rhc laircr arc

Noac: l)cpositary is not rcsponsiblc lor loss ol'thc thing \yirhour ncgligcncc of tlic tlrir<J 1^-iion lvith rvhom he rras ollos'cd to deposit thc thing il such rhird pcrson is nol nts,iil'csrly
carcless or unfit.

5..-.
will

change the way or manner ofthe

Depositsry is obliged ro first notity rhc dgposir()r ancj rvait liir rhc lsrrcr's <tccision il'hc

deposil

Exccption:

delay will cause dangcr

lf thc thing dePositcd slroutd c'arn intcrust, thc dcpositary is urittcr obligation ( l) ro c()llcct lhe inlerest as it bccomes duc and (2) to takc such stcps as rnay bc nuccssarl. to prcscrvc irs valuc and the rights corrcsponding lo it. 'l'he dcpositary is bound ro collccr nor ()nly rhc intr-rc$t bul also the capiol itself when due.

6.

7. 8.

t)eposiury has the obligation not to commingle things deposired il'so sripulatc<t, evcn il' thcy arc of the same kind and qualily (Anicls 1976). .
:

damages.

Depositary is under obligaiion not 10 muke usc ol'thr: thing dcgrsiiil lbccausc dctx)sit is for safekceping of the subject mancr and nor for its use): otherwisc tic shall bc liabtc tbr
Exceptions:

a) b)

exprcss t^-nnission ol'the dcpositor

prcscrvation
usc

(Arliclc

of the thing dcFositcd

re<1uiru.s'irs

1977 )

l. -Irlhe rhing depositcd is non-consunrable- and thc depositary has perrnissibn to qse.rhc lhing, the coniract bccomcs onc ol'commodarum.
lhe thing dcPosited is moncy or othcr consurnablc. thing, thc c;ntract simple loan or mutuun. Exception:

If

',:

is.

convcned inlo a

Wherc srl'ckccping is still thc principal purposc oli tlrr: contract, lh9 .iarnc shall hg considered an irrcgular dcposit.

3.

Depositary is liable for loss through a fonuitous event even without his ihulr:

b) If he uses the thing wirhour rhg depoiitor,s permission; c) lf hc dclsys irs rerumi d) lf he allows oihcrs to use it, evcn though hc himsclf rnay havc bccn autlr()rizud ro
use the same

(Arlicle

1979).

MCO Sgmnle Problem

leave for the united states for a medical check-up with insiruciions rhat y may use rhe co, in of urgent nced. A wcek oner during one srormy night, y snd his brorhcr Z had to uring rheir ailing father (A) ro st. Luke;s llospitally drove ttic.o"r *irt Z rn<t A on board. on rhc rvoy. y suddenly expcricno:d an aluck of vcniBo which constraincd him ro rc(tuclr z. tir rcplucu hini ar ttc srecring rvheel. Bccause of slrong rvinds, a hig trcc lbll r>n top ol'tlic l'ronr prrtirin ()l'lhc c a totally rvrecking ils enginc beyond rcpair. li Y liabls t(, X lbr tlomagcs aris,ng liorn tlrc car's dristrircrion,
case

a 'r b. c. d.

Ycs, b6catrse an obligation which consist in thc dclivCry oia dctcrnrinlle thing shall be extinguished if it shall be lost or dcstroyed rvithOur the fault of thc debroi and bclbrc. hc hus incurrr:d in dcluy. Ycs, trccause Y allorvcd anotlrcr pcrs()n to use it cvcn though lhe dcpositary nray have bccn authorized to usc thc sam!.. No, because bailee (Y) lent lhe car to Z rvho is a memhr of the former's houschold. No, because thc loss ofthc object ofdeposit wris baused by fortuitous event.

l.csal

Basis:

Depositary is liable lbr losS through fonuitous event even withoul his t'ault. il'thc dcfnsilary allows othcrs to usc the thin! <.lcgrsitr:d cvcn th()ugh hc hirnscll'rnay havc bccn autlrorizcd ti) usc thc sanrc (Articlu 1979, Civil
C()dc).

4.

' :' : l. Depository has the obtigation io: (a) return the thing depositcd rvhen dclivercd closcd ani! sqarc<t. in the same con<lition; (b) pBy for damages shoul<l .thc seal or iock be broktih rhrougti hi: l'ault u,hich is prcsumed unlcss provcn othcnvisc: and (c) keep thc secrct ()f lhc deposit rvhcn tlrc scal .(ir lock is brokcn; rviih or rvithr>ut his
:.

'fault

Note: Depositary is authorized to open rhe rhing.dcpositcd rvhich is closcd and scaled
rhere is:

$,hdn

(a) rb)
5.

presumcd authority (keys having been dclivercd to depositary), or

in the case ol'nccussity.

I

Dcpositsry has lhc obligation to return not orrly thc thing brit also its product, acccssions and accessories rvhich are a consccluence of ownership.

lt.

Persons to whom Relurn of Thing

Deposited Must Be Msde

l.

lf thc dcpositor rvos incapacitatcd ut thc time olrnaking thc dclxrsit. thc propcny rnust bs rclumed io his guardian or odministralor or lhe pcrs(rn ryho rnadc tho dcp(rsil or to thc dcprisitor himsclf should he acquire capaciry larricte teZO1.

2.

3.
l. l.

(Article I 986).

Even if the depositor had capaciry at thc rirne of'nraking the dci'rosit but he subscquently loses his capaciry during the dcposit, the thing must be. returned lo his legal rcprcsentativc
Place of Return

ofThing Deposited
ptnics, and

ar thc placc agrced up()n hy thc

2. irt thc sbscncc ol' stipul:rti()n. sl thc pltrcc rvlrcrc tlrc thing <Icpitsitr:tl rnight irc cvun il it should not be thc attme pllcc rvhcrc thc orlginttl dcfx)rit wos rnodo pflrvidsd thc tr$nsl'sr ryulr acconrplished without malicc on tha pan ofthc dcposilury. Nole:
f)cpositor shoulders the c\l)cnscs firr triinsJxrrtation

'a

(ieneral

Rulc: o)
b)

lpon dcmand or irt rvill, whcthcr ()r not

pcri()d hus bccrr stipulatsd.

fixceplions:

thing isjudicially aitachcd rvhilc in rhe degrsitary's posscssion dcpositary rvas notificd of the opposition of o rhird pcrson to the rclutn. or rhc rcrnoval ot'rhc thing dcfx)sitcd (Aniclc 1988)

K.

RiBht of Dcposilrry lo Rcturn l'hing l)elxrsilcd

l. 2.

it'dsposii is gratuitotrs, antl justifiable rcosons exist for its rcturn

Notes Otherwise, deposirary may hvail ol'consignarion therefore rherc is, no righl to return beFore expiration ol the tcrm dcsignarcd il' the dcposit is lbr valuablc consjdcration (Anicle 1989). l

lf in good faith, heir nray cilhcr rctunr thu pricc lrr"'rcccivcd or assign his righr against rhe buyer in ca'se rhe price has nor been paid.

L. L

Alteration by Deposihry's

llcir

,,

ol action

2. Itt.

If in bad faith, heir

is liablc for damagcs and rnay lrc sucd for csral'a.

Relstion between Bank onrt l)epositoi

Deposits of moncy in banls, whether fixcd, savings and curren!, arc govbrned by the provisions on muluum and the relation betwceq a depositor and a bank is thar ofa credit6r and a debtor. (lonsoli<tated Bank nrid Trust Cornorntion vg. Court of Anncals (4to scRA 562)

Thc contract bctrveen th; bank and ils depositors is governed by the proviiions of thc Civil Code on simple loan. Thc law imposes on banks high standards in vierv ol ihc fialuciary notrrrc of bunking which rcrluircs honks to assumc a dcgrce of diligence higher. than lhal ola good fither of a lbinily. This fiduciary relaiionship mcnns that thc lrank's obligation to obscrve "high sundards of intqgrity and perlormance" is decmcd writtcn into every dcp:sit
agreemeni between a bank and its <tcposiror.

MCO Samnle Problcnr

X Corporation borrowed nrbney from Y Llank arxl rvas required to. surrendsr to Y Bilnk the original of its.cenificate of time deposit (C'fD) wirh said bank by way of sccurir). X Corporation repeaedly defaulted on jts loan thereby comlplting Y Bank to cncash sqbjcct C'fD upon its maturity. The bant's Action is:

a. b. .l. c. d. '

unlavl'ul because the.bank is only a deposirary of thc CTI) unlawfirl bccauso it amounts lo psctum commissorium lawful under the prlnciple of compensation . , lawful becatrsd it amounls to dabiou cn pago

l.cual Uasis: Arriclc 1980.

('iril

('rr<ic: el. rrlsrr

lll)l

vs. C'n

(2:il S('ltA lO2,

,I

.il

Reesons: l. -T

Tltere is no pactuln gotrr tn issoriutrt in this case. l)cPosits of Inotlcy in banks and similar insritutions are governe<t [:y the p.rvisioirs on. simple loans (An. 198o. Civil Code). The relutionship bctween thc dcl)ositor. rnd o,bank is rhtt of crc'ditor and' <tebtor. 'Ihis is esscntially a rhatlcr ol' conrpcnsotiotr as .all tlrc clstrrctrts ol' compcnsution arc prcscnt in this case (ul'l vs. cn.232 scRA 3d2).
Where the security lbr the dcbt is also money deposiled in a bank' it ii:not illegal for the creditor to encash the time deposit cehificaies to pay the deblor's txerdue obligation. (Chrr vs. Cn, ct. al., G.ll. 7tl5 19. !,icptcmber 26' 1989).

'2.

'

Scrrlno vs. (lcitrnl (9(r S(:lU\ 9(r)

lllirk

its. obligation as a lo return thc failurc a dgp.ositary's from debtor and not a breach of trust arising matrer ofthe deposit. subject I ,i

A bank's failurc to honor a deposit is l'ailurc to pay

(iuinsonl while the bank

vs.

(litv ljiscllt of lvt nitr

(r28 SCRA s77)

il has' deposited' tha! the money was deliver saine horvever' no obligation to rcturn or
has rhe obligation to retum the amount deposited'

will nol bonslitute est.lb through misappropriation punishablc unicr Aniclc 315 (paragraph I tbl) ofihc Revised Pcnal Code. A bank's
t'ail.ure to.return money on dePosit
,,

|.

tt has bcen held thar suspension of a 6innk rvhich ha<l t'allcn into a "rjistressed finari!:ial siruation" by ordcr ot'the 'Central Bonk cahnot excusc it from its obligations to depositors rvho had nolh.ing whstsoever lo do'with thc Central Bank aclualion or the evgnts leuding to thc bank's distrcssed statc.

Fidelitv Savinqs vs. (lcnzon (r84 SCRA t4l) .

The obligation ofi bank to pay interest on a deposit ceases the moment the operations ol the bank is compietely suspended by the Central Bank- The deposit is not e itled to interest during the period the bank is not allowed to
operate.

snd

N. l. 2.

Obligetion! of Dcpositor He is obliged to pay expensei for rhe preservatloh of lhe thing deposited, il'dcposit
gratuitous.

is

lle is obliged to pay fbr

losses incurred due to the clraracter ol'the thing deposited'

Exceptions: '

a) trrrlcss dcPositor was nol aware thcrcof b) deposiror was nol expccted to know thc dan8,crous charactcr ttl c) d)
rhing unloss hc notilied thc dcfrosit&ry ttf lhe satic, or dcpositary wos arvarc of it without dcPositor's advicc ( Articlg
l 9t)-3

ihc
'

1
.

Notc: Dspositary o.
l

has thc rilht to rcrain the rhing dcpoSircd in plcdgc until full paymi;-rit- ol'shat may be due him by reason (rfthc deposit (Article 1994). :

Necessury Deposil
Nccessary dcposit in conrpliancc rvirlr a lcgal obligation

'Ihc judicial dsp(rsit ol'a thing, thc posscssion I I litig,ation by two or morc pcrsons (nrticlti 538):

of ivhich
:

is

'fhe dcposil with a bank or public institution ol' public lxrnds or itlstrurncnls ot' io order or bearer givin in usuliuct whcn'dhc usuliudru:rry docs nol givc "riair sccurity for ibeir conservalion (Arliclc ,86): . proper i
poyaUt;

1.2

The deposit ol'o thing plctlgcd rvhen llK' crudit()r ttscs Ihc sittns with()ut lhc auihority of thB owner or misuscs it in any othcr way (Artiqlc 2 tCt4 ):

1.3

Those constitulctt lo guaranrcc contracts wilh lhe g,ovcrnttrcnl. In this rhe deposit arises fiom an obllgation ofpublic or administrative character.
I

1.4 1.5

Those required in suits as provided in lhc ltulcs ofCour.; and

!

l sl (

sc,

2. 3.

Ngcessary deposit made on the occasion

ofa calamity.

Dcposit by travelers in.hotels and inns

I -3.3
3.

They have becn prcviously informed abourtlre elli:cts lrrought by lhe guaYitsi aDd The lotter hnvc tnkcr) thc prgcauli(rns ptcscril)cd rcgt:rdirtg lht:ir strti:kccping

Notc:

l.

tlotelkeepcr is liqblc ir:gardlcss of thc orn(ruDt ol'carc uxcrciscd in thc tirllorving sulies: . . a) Thc loss oi.iniury is csused by his servonri br employees os wcll as by srangers (Anicle 2@O) provided ihat notice hss becn given and propr precautipns uken (Article
1998): and

b) 2.

The loss is caused by the act of a thicf or robber done wilhout the use of arms and. irresistible force (Ahicle 200'l ) for in rhis case, the lotelkeepcr is apparently negligent.

Hotelkccpcr is not liable in the following cases:

Thc loss or injury is caused by force majeurc tikc flirod,. fire (Anicle 2000), then or robbbry by a stranger (not hy horelkecper's servant or employee) with the usc of arms or irresislible forcc (Articlb 20Ol ), etc., unless he is guilty of fault or negligcncc in failing to providc against thc loss or injury liorn said cousc (sce.Aniclca I l7O, I174)',

a)

b)
2002
).

't'hc loss is duc ro thc Bcts of tho gut:sls, his. lirrrrilyr scrvilrls ()r visitors (Articlc
'l'hcj loss aris,J5 lirrttl ll)c cllarircte r trl llrc tltittgs lrrouEllt trtto llru h()lcl (Articl!: )l
1

c)
?O{

lr' "ti!

a.

.:.

b. c. d.

Leeal Basis:
3.

Anicle 2ool, civil code

4.

expenses and supplies.

P.

Hotclkeegrr has a right to

the things
:

.Jurlici:rl Deposit or Sequetration

Judiclat
Cause Purpose

by will of couit

j udgment

to recovbr in case, of a favorable

party

to secure the rigtrt

ofa

Subject Matter Remuneratiolr

movable , and immovable p-roperty

oncrous

Beneficiary

pcrson with favorable judgmcnt.

v.
A.

Delinition

Guaranty is a conr:ract whereby a prson binds himself to the cieditor obligation of the principal tlebtor in case the latter should fail to.do so.

to tuIfill

the

B,
l.

Cha rncteristics accessory

Prpde!l!iE!-!G!rarsntec nitd Assurrnce vs. ,\nscor Land. Inc. (630 SCRA 36E)

I[c.

'l'hc Pcrfrrnnrrr t. iitin.i issued by thc pelitioncr Wilg nrcant to guarantcc the supply of labor, r: raierials, tools, equipment, and nccessa5/ supcrvision.to complete the cor.Btruction projer:t. A guarantee or a surety contract under Article

35

':5
204? of the Civil Code ofthe Philippines is an accessory contract because it is dependent for its existence upon thc principal obligation Suaranteed by it. In fact; the primary and only reason behind the acquisition of tlre performance bond by Kraft Realty and Development CorPoration (KRDC) was td guarantee to Ansaor Land, fi;. (ALI) thai the consdruction project would proccbd in accordancc with thc co ract trms and conditions. ID cfraat, thc pcftbrrnancc bond bcomca liablc for the complction bf the construction projcct in thc cvent KRDC fails in its contractual undertalting. . Becausc of tbe performance boud, the co[struction. contract between ALt and KRDC is guaranteed to be performed even if KRDC fails in its

:. :..

obligation. In practice, :r perfomrance bond is usually a condilion or a rrbcissary component of construction contracts. In the case at bar, the perforrnance bond \vas so connected with the construction contract that the former was agreed by rhe parties to b a condition for the latter to push through and at lhe same time, tlre lbrmer is relianl on the latter for its existence as an socessory co[trrct. . . .'
2. 3. 4

subsidiary and conditional

requires thot lhc guarantor must be a pcrson distinct from the dcbtor:

rrnilaterol

l.

I)isti ncllr,ns bcl\r'ccn G'urrrlrnty und ,surctysltil)

G

ul rnn tv

Suretvship

C;ul(rnlor is secondarily liable.

l.

2.

Guarsntor binds himself to. pay only when the princiial cannot pay.

2.

3.

Guarantor

debtor's insolvency.

is ad insurer of

ihe

Surety.is an insurer of the debt.

vs. Eauinox Lrnd Corooratidn (s33 SCRA 257)

Arlicle 2o,t7 of the Civil Code provides that sureryship arises upon the solidary binding ola person deemed the surety with the principal-deboifor the. purpose of fultill ing an obligation. . In Castellvi de Higgins and Higgtns v, s^a-linen 4t Phil. 142 (1920), we held that while a surety and a guarantor arc alike in that each promises to answei for the debt or dafault of another, thel surety assumes. liAbility as a regular party to the underbking and hend its i obligation is primaly. '
I

Pnlmrres ve ('ourt of ADpegls

..,

(288 trcRA

422)

A surety is ar insurer of the debt, whereas a gusnnlgr ie an insurer of . the solvency ofthe dc )tor.' A suretysiJp is an undertaling that ttre debt sha[ be paid; a guaranty, an ul 'dertaking that the debtor shall pay. Statcd diffeiently, a
36

C!t

,i
surety promises td pay the princiPal's debt if tbe principal will not gr-o.tior agrees thaithe cieaitoi, afle: prooecding- against thc p.i froceed against thc guarantor if thi principal is unablc to Ptyi- .4 irimself tJpcrform if thc principal d&s not without teSara to hls so. A guaramor, on the othcr bind, docs not cootraqt th.tl, plio but simFly thal he is ablc to do so. In othcr words' psy, while a incipel, r.nay swcty binds ability to do

x**

xxx i,.i

blvjn il'it were otherwise, demand on the sureties is not necLssary before trrirrging suir against tlrem, since the commencement o-f the suit is a isuflicient (.!.,rr,,,.I On this Poinl, it may be-worth mentioning^that o s!..!l+11:rn?t:;t:Yfl g!l-!ftl!!L rrs a tnulter ol'right, to be uivcn notice ot the Dnnc.lpal-q dpr4ull' l,,,-"*tl as the credilor owes no duly of active diligence ro. takp care o{ the i"rffi',igt' i"l tr'" interest or the s*rety. r'i. *"L^i"ii,i'3 of (tiiclargiFg. the effect surcrv c,f thc clelauli ol the principal cannot have ihe idifat+t qnd- te pf priacipal's Ihe is bound to notice the surcty takc surery. perlirrrrr thc oblrgation. He cannot complain that the crcditor hqi noi notifiedirirrr in the abseirce of a special agrcetr".,t to that effect in tlid cdntract of

; ;;i;;;fA;;

'

Thc alleged failure of respgndent corporation ito'ptor"l th,J f."t of .lcnrlrrrl l'rr tlrs l)rirrsipcl debtors, by Dot attaching copies thcrcto !o {ts pleodings, is likcrvise inrnruterial. lrr thc absence ofa statutory or contrdctual Ir is llol ncccss r !- rhur p yment or performance of' $is bblibr Jcnraudcd rrl' thu principal, cspecially where deirand woirld havp nor is it a requisite, before proceedingi against the sutetiis, ihat cal led on to account. The underly-ing principte thercfore is that,

of lhem simultaneously. T?re rulc, thercfore, is that if tho oblig!.tion is joiBt and severol, the crcditor hai the right to procecd even against thc surety alone. Since, genemlly, it is not necessa4/ for a Creditor to proced against a principal irr ortlcr t(, hold tlre surcty liable, where, by thc tcrmg of thc dontracl, thc olrlrgar.ir.rn ol'the surety is the samb as that of th9 principal, then as soon as the
Perforce, in accordance wirh the rule that, in the absenc of statute er agreement otherlvise, u suiety is primarily liable, and with the rrile that his proper remedy is to pay ihe debt and pursue the principal for reimburscment, lLc aurew cannot at larv, unless pcrmitted by statute and in the absencc of any agroemcnt limiting the application of the security, bcforc procecding olloirrst lhc surcly.

C.i

.furispru{tence on Distinctions betwecn Guaran$r aad

Fi.'st Distinctiou

A guartnior is secobdorily llable wblle a is plimarily liable ond is tbercfore not entitled to the betrefit of excussion or exhaustiotr of the propertics of the principal debtor. .. i
rll
,i

37

1::'\

iN l)cryelorment Corporrtion vs- Plrilipoilc. Eroort enrl Forciqn Lo{rn Guerartcc Corborition

(468SCRAsss)

Under a contract ofgrrarantcc. t}e 8uarnntor binds himsclfro rbc crEditor k, t'ultilt rhc obl,gtlion of r* prircipl ttc6tor irr casc -thc hllcr slrorlu fail to do so, though it c griranor carr""t bc ;-mfillcd to poy thc crcditor r11lc.ss tp-"ilg crcditor-has cx-iraustod stl Ulc property of rhc dcbror and rcsortcd tb atl lcgst remedies against Ore Ocbror. excussion may onty E ilvokcd aftcr lcgal rcmedies ag[inst the principal debtor have becn exharstod. i i. ,,, 'fhe rcquirement that tt e gnatantor should' conscnt t9 Ty 9le":9" gnmtut by thc creditor to rhs debb; under Articte 2O79 -is for the bcnefit of the not pro-hibir dlc psyment by 8' [""*"i"t' trt " con waive it. The taw docs of &e bencfit o-f excussion 'I]re law volition, hecdless own his [uar:rntor on 7..-e"irrr th. ;ght of s gua;tor to rEtover Yrbsr it has pa!$ evcn if trc p.1"i""r was ma& before ttre dcbt becomes due' oi if oadc lvirhou noticer lo 'j .: the debtor, subjcct to some conditiotls. .
I

Pbitirrrinc Netionrt Benk vs. Court of inbceb

(r9ESCBA767). i ,:i

]i i

'

is dirccrly, primarily and be direcl primary and abaolule. In orhcr words, 'hc attilgug[ ir" pos".s."i promllsor original as @ "o dircct or pcrsonal intcrssl over ahc lritter's obligatiom n<,r docs hc. receive any bcnefits rherefrom. I . i. i

effiid

ii,i

lrctween atr aoco[u[dation porty atld rhe aciommodate<t pany is one of principol and surety - rhc accommodation Frry bciDg th sfiety. As such, he is dccrned an original promissor and dcbtor &om tlro bcginnilg bc is corisirJcrcd in taw ss rie. samc p.rq/ as rt deblor in rcladon to rvbarcvcr is a judged touching thc obligition of the tatter sire thcir liabilities ,arc inlerurovcn as to be inscparablc"

'llrc retati,rn

tili

;ii

with rh prirtcirl. As an'oquivalcut of a rcgular ftv !o tc u&itaking a snrBly bccorncs liobte ro UE dcbt ad duty of the prirc.iDd obligor cvcn withot4 grsscssing ir direct or fr:rsonal interest in the obliSsti,ons nor docs lrc rcceivc
any bencfit. thcrcfrom-

ljndcr tlle law,

uJxrn tlrc malurity

dcmand. tlrc collatcntl sccurity,

or, if applicoble, subrogate himself in the place of thc craditor with tbe rigbt to enforce the guaranry agains tlre orlrer signcrs of l$c nole for tre reimbursernent ol' wlurl hr: is coritlcd. l.r rccovcr from thcm. Rcgrcitably. nonc of these wcre' prtx.lentty done by ptitio.rcr. Whcn hc u/as first ndtificd by rhc bonk somctimc in 1982 rcgErding his accouotabilitics . rmder thc pr.oruissory ootcs' hc lucli,$dri*icully rulicd on Antonio Ang Eng l.iong. who ]EFE snrcd O|8l ho would take csrc of rlE niducr, iostcad of directly coomuqic-ting wilh ltlc bsnk for its scttlcmcnt. 'Ihus, pctiti;ner caruxlt ttow it"i- rut t" rms pcjuaicca by thc supposed *cxlcnsion offirrre" givcn Dy tfre bank lo his co-dcbtor38

if rhcre bc any, lnd disposc of it ro his benefiL

of thc note,

a surcty may pay the debt,

L1,

Since the liability of an accommoddtion party rcmains not only primary but also uncbnditienal io a holder for value, cvcn if the accommodated party receives an extension of the period for payment without thc consent of'ttre. ut.ornrnoaatlon party, the latter is still tiaflj for ttre wholc cibtigation and such extension does not rilease him becausc as far as a holdcr for valuc is concemc4 he is a solidary co-dcbtor. Ir is a recogpizid doctrinc in thc maucr of surctyship that with rcspct to the surety, the creditor is rmdci no obllladon to displsy any diiigence in thc enforcemcnt of his rights &e a crcdito-r. - His EGIE 'iDactio,\ pasiir.ness or dclay in proceeding against thc princitnl dc$tor, constitute no defense at all for thc surety.

MCO Samnlc Problem

is entitled to lhe benefit ofexcussion, B di(l not pcrsonally benefit fronr A's loan. c. A is rrot insolvcnt. rl. 13 is not a.judicial bondsmun.
.r.

Il

llq,tse!:
Secoirr!

(iuarantor has the benefit ofexcussion.

,

l)istinction

'

A gusraDtor binrlslhimself io psy onty when the principat crnnot psy. On the contrary, a surety rseumei lif,bility as a regular party to the undertaki[g sqd undertakes lo pay if the pritrcipal does Dot

P8y.

'

A$c@, I nsu rtnce Comoanv. Incorooratcd @t,,

'

Although the contract of surety is in essence secorflaqr oaty o a valid principal obligation, the surety becomes liable ficr the debt or duty,of a0 other although it poss(:sscs no dircct or pcrsonal interest ovsr the obligrtio nor docs it rcc,cive arry bcnctit thurclir.rqr. Notwithstanding .thc faot thst. thc aurcty contract is sccondi.rry to (hc prirrcipfll < bligatiorr, the surcty assumcs liability as a regular pany to the undr:nalcing.
Srrretyship, in essence, contains two types of relationship - the principal relationship between the obligee Qtititioner) and the obligor (Lucky Star), arrd thc accessory surety relatio. rship between the principal (Lucky Star) and lhe surety (respontlenl). In thir arrangement, the obligee accepts i the surety's solidary undertaking to pay if the obligor does not p6y Suoh acocptatrce, holever, does not chahge in any material way the obligcc's relationship. with the principal olligor. Neitho does.it makc thc surety rn ectivo party to the principal obligec-obllgor, rcla ionship, Thus. thc acooptqoo doot not glvr thc surety the right to intcrvenc I n the principal contract Tltc surctv'3 role arises onl], uoon the oblieor's dcfau

with the principal obligor. That undertaking makes a: sirrcly agrceFreDt an ancillary contracl ai' it prcsuppos6 thc cxistcncc .of a pdncipel colrtract.

As provided in Article 2047, the sucty undcnakqslto bc bdund soti&rily

'

39

' o'
Philionine Bank of Communications vs. Lim

(4ssscRA714)

Suretyship ariscs upon thc solidary binding of a perscn - deemed the surety - with the principal debtor, for the purposc of fulfilling an obligatio-n. t he prcstation is not an oriilinal and dirccr obligation for tho pcrformaircc ofihe surety's own sct, but merely acccssory or collatcral to fh obligstion contractid by.rhe principal. Although lhe surcty contract is sccondary to thc princifil obligation, the surety assumes liability as a regular party to thB undertaking.. -, In enforcing a surcty conirBct, the "complementarj.-co tracts-construedtogerher" doctrine finds application According to this ppinciple, an accbssory contract nlust be rcad in its enrirety and together with iho priicipal agieemeni. 'l'his principle is used in construing contractual stipulations in oider to. arrive,at their true meaning; certain stipulations oannot be segrbgatpd and then inade to
c

on I r(rl,

ljnder the suretyship conlract entered into by petitioners-spouss. wilh: rcspondent bank, the former obligated ttremsclves to be soridariry bound with rhe principal debror Baliwag Mahogany Corporation CBMC) for the payment of rrs clcl)rs to rcspondent bank amounting to F5,O0O,OOO.OO. Undcr aniclJ l216 of th: C-lvil Code, respondenr,bank as crcditor may procce.d agajnst p.titiofrerS_ spouses as sureues despite the execution of the Memorandum of Agreement (MOA) which provided for rhe suspension of pa).mcnt and filing .of colleciion suits againsl BMC. Resoondent bank's rieht to-c; eit oavmeni fo; ir,.-Ji.*J
'for pavment on the orinciojl-dibtoT

The provisions of the-MOA regarding the snspcnsion of paymcnts by of cbllection srliq Uv-trr, uu"*" pJrtii" t6 lY9:"j 9" no^n-fiting "r"ai-t"" in the- rehabititaion rbq- principat debtor BMC. . Firsrln ""ry 11: .p."ryfy_.of. tiled_by BMC, only the propertics of BMd nrcrc mentioned in the Iec.e-lvershlp pctltronwiti the $ccurities and Exchange Comrnission (SEC). therc rs norhrng in lhc lv{OA rhat involvca thc li8biliti6 if *t Socondlvsurti""' ,r}ro"" propcrti* arc separBtc 8nd distinct from that or tnc'acutoiErrrc.-i";dr;-d; signed by the creditoi-Uautrs'ur"s approrea 6y d,c ll91 whose -"J:-"-re.!XBYc."l9 )cu Jurisdiction is limited only to corporotions and corporate assas. It hasnojurisdictionoverthep'op.'ties6fBMc,;fii;;;;;;;il."
Bancqde Oro.EPCL Inc. vs. JApRL

DeveloDmentCorporatlon
(ssr scRA 342)
.

Under the. Interim Rules of procedurc on Cor;nrate Rchsbilitatiorl a stay order defers all actions or ctaims againsi tfi'corp"ratio" s.eti"! q" .qp of its issuancc-unittiii-a.iii*sat of the petition or -Ir, fI?:l:I':1I^g,hq.Th*jTpli-"" proceeaings. ,r"drr",; jil;"ffi ;i l::i::li:"
"_f

40

The surety obtigates himsclf to pay tbe debt if thc priirciqal dc-tior.vill
not PaY,

th: sur{Y, {!T:t 1l-c ;it;;i;@qinsl priqr demard. is ma{i on thc' paytr no sopc"t imd is aSlc to

ffi.rril?it"bt*t
principal debtor.

Although a surety contract is sccondary to thc ptinciPal- oUtiSallol tltl liabiliry of the-surety is iirect, primary and absolute; -or equivalcnt to that of a the sarne i"g"l"i p""v to the ;dertaking. a trltity is considered in law !o b on the against is adjudged whatdver to relati6n in principal debtoi d;ii"g;" ihe
la t rL'r.

G*tcwnv Elcctronic-!r Co4ograiion vs' AsiabaBk CorDorirtlon (s74 SCRA 698)

undertBkes directty for,t" poy-.rrt ind is so. r+,ponsibic principal debtor makcs dcfault If thc obligation ls joint imcl scveral, once il'tlrc the crcditor has the riSht ro procecd even againsl the surcty atonc. ' . -

A srrety

gi

E. Zobcl. Inc. vs. Couft of

(zgoscner)

AnDesls

.,

surety is usually bound wirh his principel by the sa+p' itstrugtcnt' originsl executed at th; samc ti-i, iiJo]'' ti. *-J -Helis-an "o*iJ.t*on: hld, orditrarily, to k ow cvcry promissor ahd debtor.ftom thc beginning; and'is default of his principal. Usually, he will aot bc dischargpq cittc( !f th9 gereindulgence ofihe creditor to rto pniooipot, or by want of notico o{thc ddault of the p;incipal, no matter how much hc may bc injurcd thcrc.by. ;On thc. othcr hand, the conlract ofguaranty is the Susrantor's cwn scPa.?to ulldcrtaxrng, ln wlricir thc principul ttis not join. lt ii tisuully entcrcd lnto boforo or aftcr thot ' of the principal,'and is ollen supportcd on a- sePaiatc considcradon lioT qI supponing thL contract ofthe prin;ipal. The originat contraa of his prinoipal-i! notiis and he is not'bound to take noti-ce of its non:performarqe. H discharged by the mere indulgence ofthe creditor to the principal' and is is often "o-rrtruct, usually riot 'liable un'less notifred of the default ofttrc principol- Simply pu!- a surety is distinguished from a guaranty in thst I sualgtltor i! lh: iltiurer.?g qe

thc nrincioal does not pav.

4l

ti

rf,.,

.0
Secu

rltv?acilic Assurance Cornoratlon

(468 SCRA 526)

vs.

TrIi-Infente

liabilitics rrc intcrwovn and inseparablc.

Ouiamco vs. Csnitat Insurance & SurdtV Co.. fnc. (s6s scRA 146)
-fhe parties entered into a contraci of suretyship wherein respondent as suret), bound itself solidarily with ptitioners (the principal debtors).to fulfiil ar, otrligation, The obligation was to pay the mongiqD/ eward in'ihe labor casc should thc decision.become final and executory agoinst petitioners.
, .

From the moment the contract is perfected, the parties Uorna',o "r" Uy ttre cornplv with wh-qt is.exprcssly stipularcd as wett as wittr w-nst is requlrea narure ofthe obligation in kceping with good faith, usage and the taw.' a surpty is cdnsidered in law to be on the same footing as the principal debtor in rclation to rvhatever is adjudged against the latter. Accordingly, as iurety of petitioners; respondent was obliged to pay on the bOnd- when a wril of cxebuiion was scrve<i orr it. Consequently, il now ,has the right to seek full reimbursement from petifoners for th amount paid spiriall| in view of 4n indemnity agreement executed by ptitioners in favor of respoirdent.

(52O SCRA 317)

ro whatever :gl.uligl Irabrltties

adjudged as are intcrwovcn rs to b inscparable.

i:

tou*iing@
Contract
i

tn

D.

Coosrrucaloo of Guaranty/Suretyship

't'lu

lttopR(ilnLv!.-M$trobank
(498 SCRA 246)

liability of a surety is determined. . and conditions sel out in tho surety agrcement.

'f!l

stricily on the basis of rhe terms

the is direct, primary and abjbtute; a iuray bcco-is tiabie do debl snd duty of tho principal obiigor even *itirout poiscssing a direot or lhe personal intcrcst in lhc obligttion consdauted by rhc lattrr,'
,..

.. - ... Allhgugh a surety contract is secondaDr to rhe principal obligatiorL liabitity of the surety

42

vs. Y.P. Euseblo Constructlon. Jtrc. (434 SCRA 2O2) ,

'

Thot thc guarantec: issucd by the petitioner is uirconditional gnd' irrcvrxublc docs n'ot makc the pctitioner a iurety, As a guaranty, it i$ still' charactcrized by its subsidiary ard oonditional qudity bccrusc it docs not t8ke effect until thc fulfillmcnt oi the condition" nalbcly,- that. thc'principal obligor tbe time .anA in thc form he bound himsIf. In should fail in his obligation 8t 'd;i"; to trtc ioidition. oei'the . iJ other worJs, an unconlitional "cii ""u:.ct first befgrel resort to the' principal deblor shou.ld default in his obligation
gt,,],runtor could be had.

A conditional gusranty,

as opposed toian unconditional

i
Besides,
1

:i ri
'+

'

the contruct becomes one ofsuretvshiD,

i
I

Otbes vs. China Bonkins Cdr'rror;tlon (484 SCRA 33O)

bLrli)rc

No liability aftaches under a contracoof suretyship for il is cntercd itrlo unless an intcnt to be so liable is

;d. In an old but

ts-- Foeister (49

strll very much applicable case oFBank of the Philippine Phil 843), it rvas ruled that althollqh n confrast ofslllet} bv the evidence is controllins.
l1
,: :

(s71 SCRA 5r2)

A surcty's involvement is marginal to the defendsnt and the pla.intiff; hencc,

principal adrecmcnt

Stronshold Insurance Comr'snv. Inc. vs. . Rdpublic Asahi-Glass Coiporrtlon . (4e2 SCRA r79) extinguish the obligation. Obligations are transmissiblc to lhc heirs, pxccpt when the. the trayrsmissio;r transmissior ii. is prevented orevented by bv the law, law- thc ihc .stipulationsl stioulstions'of oarties- 6r or of the parties, the nature of the obligation. Since death is ri6t i dcfcnsc ihatia parqr or his estate can set up to wifre out the obligstions under'a
surely cannot use such party's death to escape its ynonetarSr
I

43

Thereforc, a surct,,r companv's liabilitv under thb pcrfomrJnce bond it lssues is solitlury. 'I'he dcath of thc nrincioal obliqor does irot. as ii rulq. extinguish rhc oblicalion snd the sotiCerv nsture of qhat liability
De los Sqntos Ys. Vibar (5ss scRA 437)

Ilggg: Wherher lhcrc cxisrs a contract of guarsnly to hold pctitioncr 'liablc for
i Cecilia's conduct in the course of the negotiations aEd contact signing sho$s that she consented to b a guBrantor ofthe loan as witnessed by everyone prescnt. l'ler acl of "nodding her head," and at th same time even smiling, expressed her voluntary assent to the insertion ofthe word "guarqntbr" after her . sigoarurc. Il is the same as saying the,t she agreed !o thc inge4ion Also, Ceciliq's octs ol'nraking the partial payrnent oiDl5,00O and writing the letter to the Register of Deeds sBstain thc nrling tMt Cecilia afffrmed her obligalion irs' de [,eon's guarantor to the loan. Thus,,Cecilia is now. estopped fronr denying thst sllc is o guarantor. the loan ofrhc princiPal dcbtor. i -.

'

(s6s scRA 146)

. Contracts are perfected by niere conscnt. This is m'anifested by the rncctirrs oir ihe oll'cr and tbe acccptance upon the object and causb which are to corrsritute the contract. Here, the objegt of the contract was the ispuance of the bond. 'I hc cause or consideration consisted of the premiums paid. The bond rvas.issued after petitioners oornplied \ ritit the requiremenE. At this point, the
Petitioners cannot insist that the contract .ur* *U.y".t J j ,.rr**i"" . condition, rhat is, the stay of the judgmeni.of the fabor arbircr. This wis nota, condition for the perfcction of thc contract but merrly a stdiement of thc purpos of tbe bond in its .Vherdas,; clauses. Aside fr6m this! thcre was ao mentioh of the condition that beforc the contract could . beco'me valid and binding, perfection of thc appeal.was nccessaq/. If the intention *as to make it a susJ:ensive condition, then the parties shoutd havs madc it clear in certaia and
'rnarDbiguous terms.

E. Zobel. Iqc' y+ of Aoocrlr =Court (290 SCRA r)

The use of the term "guarantee" does not ipso facto meah that the contracl js one of lguaranty. Authorities recognize that thc word ..guaranlee', is lic(lucnlly umplol,url in husincss trsnsoctions to dcscribc not fhc seiurity of the debt but an intenrron to be.bound by a primary or indepcndcnt obligati6n. As aptly observed by the trial court, the interpretation ofa iontract is n6t limited to the title dlone but J,o ths e6nlgnts and inteation ofthe parties.
(4ss scRA 714)

ln en forcinl J a surbty c()ntract, the ..complemntaBrconlracts-construed_ toSelher" docrrinr: finds applicarion. According ro this principle, an Bccessory conlract must be njad in its entircty and togeth-r with the principal ugr"e*.rri.
44

This principle is used irr construing conractual stipulations ln ory{ to arriyc at th.it t.u" mbaning; certain stiputations cannot be segrcgatcd and theri made to control.

E.

Rutes Covernins thc Nraur ,nd Ertent of Guf,mntv Guaranty is generally gratuitous

l.

Exception:

conttarystiPulation

Garcia. Jr. vi. Court of Aooe al,s .(r91 SCRA 493) 'Ihe pcculiar nature ofa guaranty or sur$ty' agrdement is that it is regirrde(l as valid despilc the absence ofany diiect considiration received by the gualantor or sulety cither from the principal debtor. or Fom thc.clditor. While a conlract of ouaraDlv. or surety.. like. any oltle,r gontrBcJ;. mu4 AenerFlly- te
wilL stuUise. The guarantor or surety, therefore, beconies liable duly of irnother olthough he possesses no diregt oB pcrconal the debt or over the

ohligations nor does he redeive any benetit therefrom.

W
n
!hgs!.:.

surety is one rvho is rolidarily liable with the princi.pal, Petitioners cannot clainr that they did not persoirally receivc any oorsideration fo1. the conlract lor well-entrenched is the rirle that thb considerotion necessary. to suppoit .r surcty ubligntion nccd not pass directly to thc awoty, a coniidcration moving to the principa.l aloni being sufficient,

\Yillex Plastic Ipdurtries Corporstlon vs. Coura of Appcrll

-lrs6

scRA

4tq=

. 2.
I

Put in another way, the corsideration ncccssary to ,arpdoa a surety obligation nced not pass directly to thc surety, & eol.lderation boving to thc principal alone being sufficient. For a "guarantoi or sutEtla is bound by the; same consideration that makes the conti.act effeclive bctw@n the principal parties thereto...:.. It is never necessarv that a euaftnto[ or sirretv should Iegejyg-anv part or br:hefit. if such there be. accruins to his pri|rcilEl." xrc(

Guaranty is an accessory contract therefore there must be a valid principal obligation for guaranty to be valid. Cuaro rtor may secure the performance of voi&ble, rmenforceable, natural, conditional and t'uture obligr tions (Article 2052).

Eserflo Ys. Ortiisg {.s26 SCRA 26)

A srrretyship. r.:quiies a principal debtor to whom the snrety is.solidarily bound b:/ way of e.n ancillary obligation of segregate idcntity from the oblig.rtion hsnveen th,: principal debtor and the creditor, In the case ofjoint and
45

several debtors, Articte l2l T makes Plain that thc solidsry debtor wh<i effected the payment to the creditor "may claim *oq |tli oodebtors only the share . whiJh iorresponds to each, with the interest foi thc payment already made," even as the surety is solidarily bounld with the pqincipal lrhil", ir, "ont*"t, who does not pay the Greditor I as lhe right to the surety to the creditor, debtoi -and not just Eny ProPortiolal gharc; from rhe rccovcr the full smount paid, principal dcbtor or dcbtors. The rights o in&rpification-.and. sulgCutj :. T. Lstablished and grantcd to thc guarantor by Artiolcs 2066 and 2067 of Civil Code extend os !;lt to surctics as defined undcr Arti clc 2M7.

Dlgmond Builders Conslomeratton vs. CountrY

Anicle 2047 ofthe Civil Code specifically calls for the application ofthe provisions on solidary obtiSations to suretyship contraots' ln Partioular' Artjcle j2tz ofthc Civil Code recognizes the right of reimbuEmcnt from a co-debtor. (the principal codcbtor, in casc of surciyehip) ia favql. 9f ttir 9n9 qtq pard (r.e., itr. s'*.tyj. In oontrast, Articlc l2l8 of Oc CiviL Coilo ic dafnitivc o1 whgn rcimbursement is unavailing, such that only ttosc. polm5nts obligation has prescribed br bccame illcgal shall not cntltlo a reimbursoment.

tn lhe recnt cgse of Escairo vs, Orligas (G.R No. '151953,'June 29' zooT,526 SCRA 26), we elucidated on the distirrcrion bctwcen a srireqr as a co' debtor under a suretyship.agreement ard a joint and solidary codcbtor, thus:
I

"(A)s indicatcd by Articlc 2047, I sutctyship rcquirob a principal dcblor to whom tho surety is solidarity bound by way of an anci[ary obligatiop of , . scgrogare identity froo tho obligntiou botwcca tho prisaiPal dobtor and tho i sreditor. The surctyship doos not bind thc sursty to tho ctodltoi' inasnuch as . the latier is vostsd with thc dghl to procecd against tho fqrircr to collect thc i crc.dit in liau of p,rrccoding ngainsr tho principsl d.btor b, drc sarlo obligotlon. i Ar rhc samc timc' ihcrc is also a legal tic crcatod?bstrvsrn dio rui"oty iurd thc prircipa! dcbtor to wbich thc crcditor is not privy br psty to, Tho'tnoqreot tho . surcty fully answcrs to the crcditor for the obligation a:!6stod by tho principa! _ dsbtor, sucb obligation is oxtinguishcd, At tho easro tinir, tho suicty tnay !.ck . rcirnbursGment Eom thc prinoipal dobtot for drc rimouat patd' for lhc alroty ' does in f&t *bcomc Bubrogatcd to illtho rights ald tcrncdict oftbo crEditor."
, ;

3.

Guarantor's liability cannot exceed the principal obligetior (Articlc 2054).

W
4.
cotnJrcnsnlcd srrrctics.

(421 SCRA 367)

lf a surety uoon demand lails to pav- he.can be held liable for interesteven if in.thus paying, its Iiability becqmes more than thc principal obligation. 'fhe increased liability is not because of the contract but becarEe of the default and the necessiw ofiudicial collection
I

Guaranty cannot be presumed. If there is any doubt ori thc terms and conditions of the guaranly or surety agreemenls, the doubt should bc rcaolvqd in favor of thc guapirtor or surcty (Philippine Nalional Bank vs. Court of: Appeels, 198 SCRA 767). Hor.v"Vor tho rulo of striclissirni juris commonly refers'to an accomrnodation surty and is not apirlied in casc of

46
:

!i

Visavan

Su

retv

vs.

& Ingursnce Cornorrtion Court of Anneals (3s scRA 63r) ..

by defbndents while parked at thcir rcsidncc. Pliintiflb frlcd a rcplevin bond thru petitioncr Visayan Surcty & lqsurance Corporation and tt trial cdun issued lhe writ. Consequently,theshcriffseizedsubject.vehicleandtuincdov,el' the same to plaintiff spouses Ibajan. Spouses Bartolome filcl a motion to quash the.B,rit of replcvin. Meanwhile, Dominador Ibajan, father.of.plaintiff Danilo, lilccl a nrotion lirr lcavc oIcourt to intbrvene, stating that he has a riglrt puperior r(, lhu l)Lrin(ill:s (,vcr llte owncrslrip uid posscssion of tbe subjcct vchiclc'iThc tricl court granted the [rotion to iniervene. The trial court issucd an Qrder Branting the nr(r(ion to aluash the writ ofreplevin and directing plaintitT to return the srrl>jcdt jeepney to thc intervenor Dominador. .The trial cgurt ordcrcd the is.,r,,,rc-c ol'a ri,rit .rl'r'cplevin diiecririg the sheriff to tirke into'his citstodi the subjeci rrotor vehicle and to deliver the same to thc iritcrvcoor rlvho was the registered orvner. The trial court issuid a writ of rcplwin in favor-gf inteniOnor Dominador but it was retumed unsatisfied. Intcrvcoor Domiiador filed d rrrbtion/lpplicatiorr for j udgment agairut plaintiffs" bond which was ganted.
-bsu-c,U

Spouses Danilo and Mila lbajan tiled with the Rcgional Trial Court a agairrst spouses Jun and.Susan Bartolomc for rcplcvin lo recover "oorptuini From them the possession of an Isuzu jccPney, with damalcs. Plaintiff lbajan ulleged that they were the owncrs ofan Isuzu jccPney which was forcibly taken

Il4gEi

'

l)ostcd [)y pctitioner in lirvor ofrespondents.

l.

Whether the surety is liable to an intervenor on a replevin bond

more than what is stipulated. Since the obliaation of the surbw cannot be extended b'i inrolication. it follows that the surctir calnot bc hcld liabte to the intervenor when the relationship and obliqation of the suretv is limited to the defendants specified in the contrast ofsurety.

5.

The qualifications ofa guarantor arc:

5.3 6.

lle

has

sulficient property to answer for the obligation which he guarantees.

grrarantor; the substitution of guarantor rnay not Le dcmq;ded (Aiticle 2057) bacause io such a 9ase lhe selection of the guarantor is a tcrm of the agtement and. as a party, thc crcditor b, thcic(bre, bound thercby (see Anicles I t59, f3O6).

\Mhere the creditor has required dnd stiputated,.tbat

a spccified person should be:a

F.

f)oclrinc of Continuing (;u!runty

,i 47

:1"

t:

,l

,,'i.,;

#!q,n1
I

+.,:e

Bank of Commerce vs. Floreb (637 SCRA s63) conlinuing guaranty is a recognizcd exception to the rule that an action to foreclosc i'riortgugi must bc li;ircd to lhe amount mntioncd.in (i moltEsge Gontract. undcf-Aniclc 2053 of lhc civil codc. I qusrrnty m8v !e
time the guarantv is cxecuted' This. is the basis for contracis dcnominsted gl a xxx In other words, e continuing grrffanfy is @ip. onc 1h:.r c-oiers al I'transactions, including those orising in the hrture, which irre lvithin the de.scription or contemptation of the contract of guaranty' until the . expiration or tenninalion thereof.
,

A gusranty shall be construed Bs continuing wheq by thc iirms ti'rereof, it is svident thot the object is to give a standing credit to the principal debtor to
bc
trsr,:d l'nirn tinlo to time oilhcr indgfinitely or urnil o ccrtain Jrcriod espccially il'tlre right to rccall the guarsnty is cxpressly rcservbd.

Totanet v$. Chin! Bsnkinq CorDorrtlon t, (576 SCRA 323) '

r().-11-rq-c-\ss.c!i-greIlbe-promissory

.t

lllr'

lhct that lhc cont ract ol'suretvshin was sisned bv thc Dtitioner Drior note does not nesate the former's liabilitY.

A bank or tinzrncing which anticipatcs enlering into a series bf "o-p.n! company, Aormally i:quires the projected crcdit trar'rsactions with a partitular prirrcipal debtor to execute s continuing surety agrcement along wilh its tureties. By cxecuting such an agreement, the prinoipal plac* itsclf ii a po,irition to cnt r inro the projected series of transactions with .its- crcdior; with such surctysbip agreement, lhere woutd be no need to execute a iepanto sucty coltract or hohd ' lbr each financirrg or credit accommodation exbndcd o the ptaciEat dcbtor-

..'i..,

dotcwgv Etectronlcs Cornoratlor Asirbsnk CorDorstion (374SCRA698)

vs. '

Comprehcnsive or conainuing surety agrecmcntg arE in fact quite commonplaoe in prcsent day financial andicotnmercill practicc. . A bank oi financing com;mny which anticipots cntcring inlo s scrics of crcdit tansactions wilh a partic(rlar c6mpany, commonly rcquircs .thc projcctcd prjncipal debtor to executc o continuing surcty agreement Blong with its guraties. By executing such nn tlgrecmenl, thc principal places itself in a position to enter into the projected series of transaotions with its oreditor; with 5uch suetyship .agreeinent, lhgls? would E, no need to execute s. seoarate suretll contract or bond for cach

A continuing guarenty is one which iovers all transsctions, including thosc arising in the frrture. which arc within thd descripion or contmplation of the conlraot of guaranty, until the cxpiration of tcrmination thereof. -

48

A continuirtg guaranty is one wlrich is nbt limited to s.single transaction' toii.t"t a future course of dealing; -covcriig a scries -of g"n"t"lly for an indefinite time or unti! revok9d' It is prospcctive truno.tion.,"ont in its operaii6n and is gcnerally intended to provid sccutity with respect to tirture ;mnsactions witliin certain limits and conitcmplatcs a succession of liabilities. foi which, as thcy accrue, th gunrantor becomca lisblc'

but *iich

A gu:rr&nt!' shall be construed as continuing wherr by the tcnhs thercof it is cviilcnrihat thi object is to give a standing credlt to the nrinc-iryl debtor t6 be uscd tlonl time to time eittrer indefinitely oi until .i certain period; especidlly if it e right to recall the guaranty is expre-ssly reserved. W!leq'' the pontracj of

E. Zobel.Inc. vs. Court of ADbcdb (29OSCRA 1)

'
:

I-laving rhus established thar pc'titiorrr is a surcty, Aniclc 2o8o of the Civil Cocle, relied upon by petitionlr, finds no application to t:r cas at bar' ID llic:ol Stvings l,r<l i.o,rn Association vs. Guinhawa (l88 SCRA Olil' we trave rr"rlcd tlrat n diclc 2030 ol'ths New Civil Codc does not aDDlv where the liability
irjrs_4_sue!y,-!o_!

ss_e_CUaf4E!g!

lirihrru to rtrgiSter lhc chatt;l mortgag did not release pgtitioner'surety from the obligation. ltr the Continuing Guaranty executed in favor of SOLIDBANK' petitioner bounrl itself to the contract irrespective of rhc cxistcnce of any L'ollatcral. [t even relcased SOLIDBANK from any'fault or negligence that may ' impair tlrc contract as may be gleanbd from the stipulation'No gct o.r omission ot'any kind 6n the part of the Bank in the premisei shall in anyievent Bffect or impair this guaranty xxx".

[]ut even.assuming that Arti;le 2o8O is applicable, SOI.IDBANK's

.,

Phili'oine Floon '

'rin's

Mills. Inc. vs. Court of (4r3 scRA.445)

Antr.L
'

The law expre'ssly allows a suretyship for -'ftrturc dcbts-. Artictc 2053 of thc Civil Code provides: "A guaranty may ilso. bc givcn as scquritv {or lirtu&jgb!!. the amount of which is not.yet known; thcrc can bc ho clBim oguinst llru guuranlor until thc dcbt is Iiquidutcd. A conditionol obligation may also be secured-': (Emphasis supplied) Furthermore, this Court has ruled in Diio v. Court of Appeals that: Under the Civil Code, a Suaranty may be given to secure even futuie debts, the amount of which may not be known st the time the guararrty is executqd.. This is'the basis. for contracts dendminated as

coDlcruplirtci a succcssion .Jf liabilities, for rvhich, as they accrue, thc guarantor becomes liablc.

until rcvokcd, It is proslrcctive in its oDeration and is.gencrally intendcd to grrovide scctrrity with rust**ct to future transactions within ccriain limits, and

49

G.

Effects of Guaronty betwcen thb Guaraotor and the Creditor

Guarantor has the right to the benefit ofexcussion or exhaustion of the debtor:s proprty beforc he can be compellcd to pay Exccptions:

l.

a)

if guaranlor has expressly renounced

excussion

Trroaz vs, Court of Anoeals (47s SCRA 98)

Rcslxrnderrt bank's suit againsl pstitioner Jose Tupaz stands despite thb Court's lirrding th{tt lrc is liable as guarantor only, First, excu;sion is not a pterequisile to sccure judgment against a guaianfor. The guaranto.r .con..still dcmand dclermenl of the execution of the judgment againsi him until after thu Issr:ls ofthe principal debtor shall h6ve been exhaustcd. Second, the bn;fit of cxcussion may be waived. Under th trust reccipt ilatc<t ltt September I9o I, pctili(nrcr Josc l'uFoz waived excussion whcn he agreod that his '.liabilify in thc Lirarirnty shall be direct and immediate; without any tecd whatsocvcr on xxx thc part of rcspondent bank to takc any stcp! or exhaust any legal remedies xxx.." Petitioner clearlv rvdived the benefit ofexcussion ulder his guarantee. b)
e)

d)
:

a)
i I
i
I

'ifgrtrantordoes.notsetupthe.benefitofexcuslionandfaiisto.lrcintouttotheiredior,
tvailablo pronerry ofrhc dabror \ /irhin the

ir'guarantor hls bound himself soligarily u/ith the debtor (surerystrip) of debtor's insolvency \.!lrcn guarantor has absconded or cannot be sued within tl:e philippincs unless he left a In.uoger or representtlive -;;;;;e it j9 fray b; ;at an eiicution on the debtbr's property virill not satisfy the obligarion
rrr case

phi/ippines

Rlt,ansa vs, pr.rsmid Co

&ffirffi"

Petitioner cann,)t avail himself of the benefit of excussion. Under a . cgllrac! of grrarantcc, 'he guarantor binds himielf to thc crcditor tq futfitt the obligstion of the princ;pal debor in case the latter should fail to do so. The guo.rantor who pays fo-, a debtor, in tnrn, must be indemnificd by thc latter, I-lowaver, the guarantor cannot be compeltid to pay thc crcditor dnliss the lattcr has xhaxsted all the pr.,prty of the debtor and iesbrted ro. all the legal remedies against the debtor. This s ra,hat is otherwise known as the benefit ofexcussion.

Article 2060.c. the CiviliCode clearly requires that in order for the guarantor to make usc irf the benefit ot'exouision, he must set it up against thc creditor upon the latte 's demand for. payment and point out to th; crEditor available proprty of the debtor wirhin-,rhe philipp\is sufiicicnt to cover th amount of the -debf It must be sucsse,C that despitc traviag bcen servcd a demand lottc-r his officc, petitioner stil f&ifcd o ioint -its out 6 tho raspondcnt -at qroryrti91 _of Macrogen, Realty sufficient to cover debt as requirci under Anicle 2o60 of the Civfl Code. Such failu:e on pelitioncr's pa.n forccloses his right to set up the defense ofex;ussion.

!i ' .1,i r' I I li

.',,,|:
50

r',-,

t,,

s) h)

0
198O

is a judicill bondsman and sub-surcty i ' ; : where rt pledgc or mortBage }tas been given by the guarantor as a spcial securily if guarantor fails to interpose it as a defense before judglncnt is ren&rcd against hirrr (Saavcdra vs. Price, 68 Phil. 669)

ifhe

.i,r

llar Exom Ouestior

svcr8lly, to "FF" an<t "GG" cxccutcd s promissory uote binding tbcmselvcs, pay "x" Bank 81o,00o.00 within 90 &ys from January lO: 1979. 'fF? si8nd thc note as principal and "GC"as guarantor. Upon failure to poy the notc on dric data.,"X" Bant iBlcd.'IFFD and "GG" for payrrrctrt. "GG" interposed the defensc that he was jusr a gu+rartor'and the Ehnk '

i,l,' jolitly'ard

mustfir.rtcxhaustalttheremediesagainstth.principal..FF''il..
:

"Ci(l's'" ds{'cnse is not tenable. Had he not bound himself solidarily Iilift 'FF" to pay the obligation, rrntiorrlrtcdly i$ guaranlor, hc could have availed himself of the defensc ofhenefit of excussiorr. i:r cithur rvords, he cannot be compelled to pay the crcditor the lottcr has clilraust!:ci irll tlrc Dn)f,e rty of the (lstrlor orrd has resorted lo Bll the leg[l ics ogainst lhc suid .lul)lor. llur llr!:r iD rll(: prurrrissory rtote, lic bound hitnse I fjointly.and y with "F'l:" to pr:ry . tlre obligltion t() tlre creditor. The defense o(excussion belirg invokcd by is not available ro r surcr\ (n [rrclcs 2{)6t{ &Dd.20-59, Civil Code).

,l

2. A compromise between the creditor and the principal debtorthe guarantor but does not prejrrdicr: hitn. A cornpromisc wlrich is entered into bctweerr tlie guarantor and the creditor benelits l)ut does not prejudice the principal debtor (Article 2063).
Cuirrarrtor is likcrvise entitlcd to the benefit ofdivision where there ajrc several guarantors of only one ci,-'t):t)r and for the same debt. 6uaranror's liability is onty joi{t therefore-, they arc not liable bey()nd the shares which they are respfctively bound to pay (AniclS 2065). .
1

.3.

Exccpri<.rns:

Natg: Article

2o8O provides: The guaranto*, cven though they be sofidary, arc ictcgsed from. their obligation whenever by some act of the crediior they csnnot b subrogatod to thc rights, montsRges, and prefeiences ofthc latter. ]

a) solidarity . b) if any of the iiroumstances i

in Articlc 2057 should itake pfacc

'

iI

Cuaranty is a contract of indemnity. The guarantor who pays for a dcbtor must bc indcmnified bv rhc lancr. The indcmniry comprises:

I{, l.

El'fects of (;unnrrrty betwc.en the Debtor and the

Guarantor

'l.l l'hc toral amgunt of thc debt; i L2 'l'he legal inlcrest thereon from the time the paymcnt was matlc known to th dcbtor, even tlrough it did not eam interest for the creditor; 1.3 'l'hc expenses incdrred by the guarantor after having notified the debtor thar paymcnt had been demandcd of himi 1.4 l)anrages, ifthey are due (Anicle 2066).
.

Exceptions: a)

l))

Where the guaranty k constituted without thc knowicdge or against the rvill of the principol dcbtor, the guarantor csn rccovcr onty inSofar irs the pa.yment had ben beneficial ro rhc debtor (Arricla ,O5O). I,oymont b_y a rhlrd person who docs not lnt nd to bc icimburscd by tle debtor is deemed to bc a donatioir, whicl\ howsvcr, rcquires the debrtor's

5t

':.-

ab.

consbnt. Bul the payment is in any cas vatid as to thc creditor who has accePred it (Article 1238): c) The right toaemand rcimbursement'iq subjcbt ro waiver. i. 2. Guarantor has the rigbr of subrogation agEinst itrc &btor to cnable him to enforce th(i inctcrnrrity granted in Article 2066 and he csnnot demand morc tlEn what he actually paid (Adicle 2067).

3.

' Cuarantor has lhe riSht following inslanccs:

to pro:eed ogainst thc &b!or cvcn .bcforc paymclrt in $ic

3.I
3.2 3.3

3.4 3.5 3.6 3.7 ' .

him liom thc guarslty within a specific lrriod, an<! this pcriotl has'expired Whcn the deht has bccoire dernand.rble by reason.of the expiration of thi lxriod lbr payment Arlcr the lapse oltcn years, yvhen the principgl obligation has no fixed preriod for its maturity, unless it be bf such nature tha! it cEnnot bc extinguishcd excipt within a prriod longcr than ten ycars lflhere arc reasonable grounds to fear that tlrc principsl dcli'toi intends to abscond lf lhe princifrol debtor is in immincnt dangcr of bccor.ning ir8olveDt (Article 2O7t).

When he is sued ltrr the pryrnent ln case ofinsolvency olthc principal debtor When the debtor has bound himself to relieve

Guarantor may eithcr obtein release from ihe guananty or-demand a'security tbat shall protcct hinr fronr any prooeedings by the creditor and from ths dengcr of debtor:s insolvency lArtir:1,: ?O7l )

The obligation of several guarantors of the same dcb,tor aud for thc same debt is joint and bound only to pay his proportionate sbare'. Thcrcforc, one who h;s p6id thc ntire dcbt rnay seek reimbursemcnl from each of his co-guarantors tho sharc which.ig proportionatly owir,g hinr. i Requisitus:
each

I. l.

Effccts of Guartnty os between Co-guaraDtors

ii

a) b) J.. l.

pa)rment must have becn made by virtug of because the principal debtor is insolvebt

judicial &rrsnd or

Extingulshmcnt of Guar.rty Ilcirrg accessory and subsidiary, guarsnty is tcrminat d whcn thc principal obligation is
extinguished by: a) b) c) d) e) payment or perfonnarrce loss ofthe thing due condonation or rgmission ofthe dcbt confi.rsion or merger of ttre yights ofthe creditor and debtor compensation novation

f)

Molino vs, Security Diners Corporrtion (3(i1 SCRA 3s8)

Facts: On July 24, 1987, Danilo Alro applied for. a Rcgular Qard witb SDIC. He got as his surety his owrr sister-in-lavi Jeanette Molino Attri. Thus, thc two siljned the Surety Undertaking. SDIC issued to Danilo 6 Regular Card with the

s,

(5.

.; latter used. On February 8, 1988, Danilo vvrote. SDIC a letter requesting it to rupgrrdc his Rcgulnr Card to l Diamond Edition with Jeancttc's approval' Oui.it.r't ruqucsf rvus grunted. Orir Octobcr t, t988' Dunilo dbfaulted in tho paymcnl of his obligation lssue: was the upgrading a novation of the original agrcem;nt goveming thc usc of Donilo Alto's first crcdit card, as to cxtinguish that obliEEtion and the Surety Undertaking rvhich was simply accessory to il?
agrccmcnt covcrillg thc first it was committed with the card issued to Dnnilo.Alto, basically since credit intcnt ()f cancelling and rcpkicing itre sai<t Jard: I-Iowever, the novation did not sen/e te relcase pilitionei fro,r.l,er surety obligations because in the Surety' Un.lcrtrliing, slrc expressly rvaived discharge in case of chinge or novation in tlre i!!Ie!:mcnl governing use ofthe first credit_card

..o

Held: Upgrading was a novation of the oriAinal

(486 SCnA 205') .

Facts: Lodovica applied -she for a credit card with BP.I Expriuq C8id, wiih OnEkeko -When zrc-ri'ig a. rvos originally given a ii:,OtiO.0O crcditilimir "urery. Lo<lovica's car<I expired in ltg l, ii ias rcnci.vcd hnd hi crc&t limit was increased to P10,000.00. As of 12 May 1996, Lodovica had an outstanding -of money sgainst balance of P22,4?6.61. BPI brought an abtion for lum Lodovica and Ongkeko. Ongkeko tiled his Answer alleging that hc can only be hcld liablc fbr the original credit limit of P3,00O.00, and that -the renelrral of the credit cur<l rvitlrout his c()nscnt extinguished his undertaking.
.

.:

'

'

.l&Ld: In Molino vs. Security

Dinefp Internationol Corporation (363 SCRA 358), the Supreme Coun ruled that suretyship under thcse circumstances is a continuing one and thc sureqt is bound by the liabilities of thb principal until i! Iras beeu futly paid.
I

Ongkeko solidarily obligcd himself to pdy rcapondcnt iU tlle liabilitiei incurred under the credit card account, whether undei thc principal,.rcnewal, or exlcnsion card issued, regardless of the changeb or novation id thc tcrqls and conditions in the issuance and use of thc credit Card $gkcko's liability shall .be extinguished onlj when the obligations are fully paid ind satisficd.

'

Although petitioner'a surei rindertakiag pottFko thc noturc of a contract ofadhesion in that stipulations wrc unilatcrally prcparGd nd imposcd. by.respondent on a take,at-or-tievc-it basis, tho CoUn nitca arat ruch a oontract is "as binding As ordinary contracts, the reason being that the parly who adheres to the contract is tiee to reject it entirely.

if the creditor had released the guarantor although the principal obligation remains (Anicle 2O78\ or. in casg of material alteratiorl rvhich imposes a new obligation or added burdea on the party prornising or rvhich takes away some obligation alrcady imposcd, chnnging the legal e1't'ect of the original contract and not. merely thc form tbcrcdf. (NASSCO vs. Torrento, 20 SCRA 427 n9671).
Note: Guaranty may also be extinguished

2 Reiease of one guarantgr by'the crEd.itor without tho colscot of thc othcr guarantors benefits all to rhe extent ofthe sh'arc ofth guarantor.rcleiascd (Aniclc 2O7t 1.

53

I,

An extension of the term grantea Uy the creditor to the dcbtor without' guarontor's 3. l""""nir*un!"itr,t" ttrc guaronty (A-rticle 202-9).
i

Toh

@
[495:

vs&!!{E!.E-e,s.r!sEl!s

Rcspondcnt Solid Bank Corporation agrccd to cxtend n crcdit facility worth PlO million in favor of rspondent First Busincss. Papcr Corporation (titlPC) ls evidenccd by u lctter sdvise datcd t6 May 1993. Pctitioneis Luis Toh and Vicky Tan Toh rvho are the Chairman of thc Board and Vice-President, .more respectively, of FBPC, executed a continuing guaranty io favor of FBPC tlran thirty (30) days from the original acceptance period.as required in:the " lettc r-artv isc". The continuing guaranty stipulates that Solidbank "may at ant tirrrc, or liom tirne to tirne, in (its) discretion xxx eitend or change the lime
payrnent". FBI>C defuultetl.

ls rlrc Rarrk's nurhority to extend the due <tate at its discrction pursu:tnt to tlrc lli)rcq(r()lc(l provisiort of continuing guuronty absolut? .ii tlel<t: I. The oforequoted provision cven if unders{ood as a sraiver is'conirned [ri -*c to thc grant of an cxtcnsion and does not gurrcndcr thcr prcrequisites iheretbr as mandated in the "letter-aavise". In other words, the suthority of the Bank to deler collection contemplates only iuthorizcd ixtcrisions, that is, those that meet the terms of the "letter.advise", While fhe Bank may extend the due date &t its discretioD pursuant to thc Qontinuing Guaranty, it phould nonetheless comply wilh the requiremenb that domestic lettcrs of credii be supported by fifteen percent ( I 57o) maryinal deposit extendible three (3) times for a pcriod of (3o) days for each extension, subject to 25o/o putial pa).ment per thi(y 'extension,

!$sug

2.

pennitted lvithin the terms of thc waiver, i.e., where therp is no ba)ment of therc is dcficient settlement of thc marginal dcposit and the twenfy.five petcent (257o) consideration,inwhichcasctheillicitextensionreleascsthesr]reties.

An extension of the period for enforcing the indebtedness doeS not by ilssll' trring .rtoul the discharge of the suretiei untess the extra time is not

3.

Illicit extenSions arc pfohibited un&r Articlc 20?9 of thc CMt Co{c, which provides: "(a)n cxtcosion graotcd to the dcbror by thc crcditor without the consent ofthe guarantor cxtinguishcs thc guarang". Tlo omi*cion or negligenco of Solid Bank in failing to srife-kecp the Sccurity p,rovidcd by thc rnarginal dcposit ond thc twenty fivc pcrccnt (25clo) rcquircment rcsults in tho matcrial alter&lion in the principal aontract, i.e.,'the "letter-advise", and consequcotly relciuscs thc surcty.
'l ailedo vs- Allied llenkins Corrtoratirn

The amendatory agrement betwcen the respondent AUicd Banking Corporation .and Cheng Bcn Yek & Co., Inc. cxtonded thc maturity of the prornissory notgs wilhout notice or consent of thc petitioncr as surcty. of the obligations, However, the "continuing guarante" cxeouted by thc pctitioner Emilio Tafredo providcd;thad he conscnts.and agrces tbat the bank may, at any time or fronr the timc to timc e!(ggl or changc the timc of paymcirts endor thc manner, place or terms of paymenl of all such instrunents, loans, advances,
74

cl'cdils ol othcr obligations guar&ntced by the surcty. lfe toans aia not rele

ii
i
'

Even if the "continuing guarantee" werc considcicd as od we firrd the contract of "surety; valid because petitioner wirs *fre9 to rejeci it entircly." Petitioner was a srockholdcr entirely." siockholdcr and oflicc? dcbtoriChcng Ban oflicci of,thc of.thc dcbtorl Yek and Co., Inc. .and il was common business and bartiog praeticc to require

,1.'l

ol' I lru

the rirnc the dcbt t'alls drre does not discharge the burety, cvcn'if such delay continrres until the principal becomes insolvent. The raison d'etrd f6r the ri-rle ii thrt thcrs is noihing lo prevent the crcditor from proceediitg lagainst the principal at any rime. At any rute, if ,the surety is dissatisficd with-ti.rJdeg,iee of activity displnyccl by rhc crediror in the pursuit of his ppngip{, [c inay pay the hinrselJ'.and become subrogated io all rhe rig,iris oria: reingaies Lies of the q? *re crcditor. l,eniency shown to s debtcir in default, by delay ted blr the crediror rvithout change in the tim6 w;hen the debt might ba d bois not ionstilute an exrcnsion of the time of payment, which woqld tbc sirety.' ln order to constitute an exlension discharging thc surcty the exlension was for a definite period, pusuaht to.an,t between the principal and the creditor, ana *rat it was maOc oF the surety or with a reservation of righis with rcspcii ti Inust bc one rvhich precludes the crcditor from,- oi triin ;in, lt lgast which !!fg*r! enforcing the principal contract within the period during hc ioulj othenvise have enforced it, and prcilurtes the surety from paying the debt. i

cr,>rnprehensive srrrety agreernent, we. rule that ,thc cxt .[qlon: of, timc grirrrrerl to t-ilipinas .texrlte lvtilli ro pay is obligAtion aia iot refd{e de iurety Villirnucvl lrorrr his liahility. The oegtect ofthc crcditoi tb sue tliq'princii:al at

conditions

'

'

Liability of Conjugat partnersbip

''!lr

i. vl '';

.t' I :ll

Securitv Bank irnd Trust Cornoenv

,i I

Issus: May

the conjugal partnership be held liable for an indemnitlr entercd inro by the husband to accorhmodate a third party?

conjugal

where the husband suctr obligation.roaoirndi ti p."y.npri"i P::i1::":",1":",1'_," !:gd bencfit of the conjugol po(nership, but 11a1 if the money oi scrviccs 1re givin to a_nolher person or cntity.and tlc husband actcd gnly as I 3ufcty or giafaitor, ihc transaction cannot by ittclf bc dccmcd on obfldafiori for itro binont of ths

I li contmcts an obtigation oo b"hdf LJ ,nl Jrr,, !l ' I i

rLornln,

tli
i

,I

partncrship. :-"-'-'-?' , . J . ,,

,l ii \l:l '.. I i
lrl
i

. To hold the conjugal partnership liable for an obligation pertaining to the husband alone delbats the objective of the Civil Code to protect the solidarity and rvell.being oflhe family as a unit. The underlying concem of the law is the conservation of the conjugal ponnership. Hcncc, it limits the liability of the conjugal pannerchip only to debts and obligations contractcd by the husband, fior the bcnefii ofthe conjugal panncrship. Chinp vs. Court ol Aoncats (423 SCRA 356)

,:llt j

The signing as surety is certainly not an exercise of an induitry4 or profession-no matter how onen an exeoutive acted on or is persuaded to.act as surety lbr his own employer, this should not be taken to mean that he thereby
errtrarked in the business of suretyship or guaranty.

: I

. L.

'l'o nrake a conjugal partnership responsible for a liability that should. appertaa,r alone to one of rhe spouses is to frustrBte tbe objecrive of the New Civil C:ode 'to show thc ulmost boncem for the solidority and wcll-being.of the lhmily as r unit-the husband is therefore dcnied thc power to assume unnecessary and unwsrronted risks to thi finahcial stability of the conjugal partncrship. The'bonk fsilcd to provc that the conjugnl partnersbip of the prtitioircrs rrtrs lrcrulitcd try p:titioncr husbund's act of clccuting a bonlintiing guarsrty and suretyship tgreement with the bank in his capacity. as EVP of Philippine []krorning Mills Company, Inc. No presumption can bc inferrcd from llrc lir(:t tll t rvhcrr thc ht$hirnd etrtcrs into rn accotDmrxlation agreonrent or n ( ()ot!irct (|l su[r:t-y, tlto u(,rr jrrglll pnrolo,rship woultl therCby br: bcnclitcd. ']'hc trank hircl rhe burden to estilblish ihat such benefit redourded to the conj ugal partncrship. flncrsnrp, tJn. On. rne the orlrer otlrer nano, hand, when the husband conlracts contracts obllgattons, obligations. on on behall'of behall' hall' of tha the farnily farnilv business, business- rhe law, presumes Dresurnes that thet sucb such obligation ohlionrinn urr|rld the la.w wduld redound lound to ttrc benefft ofthe conjugal partnership. partnership. | j. . I ijl
Legat and aud Judicial Jtrdicial

llonds Bonds

; |

because they are not mere guarBntons, guamntors, but surettes sureties whose liabiuty tiabilltjr is ir primary and alrd solidary.

A judicial brndsman and the sub-surcty-are

Florc.. S*

i, ;i il . i li iiiri,', . ,. , i I i I I l, ;'r, not cntitlcd to rhil thil **tit **tit lf lr.r*b.r*ro' r#

:
:.

, I

St"orr-hoti Irrsrrrncc Co.. ".. (50r scRA 563)

Inc. ] i

|
i

. I

An applicarion for damages against thc bonds must bc filcd in the samc case rvhcrc the bond was issucd. cither (a) beforc Eial or @) bcforc rtrc appcit pert'ccled or (c) before Judgment becomcs executory. Theb;ncipal parry'and his surcty or surerics rnusr bc norilied of seiil application. Thc rulb is mandatory.i In
entcrcd
an_d

is

executed asainst it.

Yu vs. Nqo Yet Te (srd sctrA 423)

ln Matuyon h lv.taluyah lnsurunce lnsurance ComJuny, Com1,any, Itc. Ini. vs. vs. fulas Salas (90 SCRA 25, 252- 119791\we held nerq that suretv wa.r urnq oi.r.'. noticc;hdthc n^ri.. uh.h ;r.iJ:.; urat if tt. thc if. gven $rc surety waar noi not giren noticc whe! ,hthc bleim cleim for'damCges for damdges a$inE! lho prlncipql in tho roplor.in bond. wBt.hoard. thon ar a imlttlr of prooedural due proccss ggprrty is ,:ntitled to be hrsrd'$rbri rhe ;udgment'for daqaSSs. against thc prifcipal is sc,,rght to Le enforccd 8geinst- th; surcty's
replevin bond.

5ti

(]j

VI.
A.

PI,E,DGE
Definition

Pledge is a contract by vinu of whioh thc debtor dclivcE to thc crbditor or to a third person a movable (Article 2094) or documcnt evidcncing incorporcd rights (Article 2095) fot the purpose of securing the tidfillmcnt of a principal obligation with the rmdersrandiiili that.whep the obligation is fullilled, the thing delivered shall be retumed with all its liuits and aJcessions.

I{cQ.Sarulle-Prq-[le-nr
sp,rrrscs X irnd Y trorrorved a surn of money frorn z and in ordcr to guarantec the l)uvrrurrl o! tltc l<,ittt, tltc spouscs cnarusted to Z the aransfer cenificate of tirle of their oaicel ot' &griculturitl lorrd. lt was agreed that the Torrcns title shall only be ietumed by Z to'tle bbrrowers upon lirll l)ir\ rrtcrrl (rl' tlrc l()itrr. No writteri docunrctlt was iJrawn up bctureen thc parties. Whai contract wns co[stitured by the parties?

rr. h. - c. + (1.
B. l.
(lha rnc

ll,cal csl.rtc nr(lr(g gc ofthe purccl oFtund subject ofthe Toiiens C'hatrcl mofltsage of the Tornins title as a movable by itself
l,lodgrc crt'rhe Torrens title as a movable bJ itsetf I)(.f(!sil ol'thc Torrens title as a movatrle 6y itself
ac

ti0c

risric.s

sgreemenl;

A ro l c()ntrucl hccitusc tl is pertbcted by the delivery of the rhing plcdged.by rhe debtor who is callcd rhc plcdgor ro thc creditor \,vho. is the ptedgce, or to a third person. by common
i

H.'l'ambuntiis Pawirshop.i fllc. v!. Commirsionpr of fntbrral Rbvenue (s84 SCRA 44t
Truc, the parvn. tickit -is neither a security lror a printcil evidence of indebredncss. But, precisely bcing a receipr 1[or a iwn, it Oocumcnrs ttre oicaseA ptedge is o real cbnrract, hence,.it ii necesiary in or&r to ;*titil;-fi; contracl of pledge, thst the rhing pledged be ptecca in ttrc posstssioniof thi . crediror, or of a rhird person by common agrcement conrcqu;til i;"r"; ot the .lrawn. ticket by the pewDshop mcans thai fiq rhing ilcagii th; t"s atrcaav been ptaccd in its possession and thar thc pJedgc has becn Ioirstit-itcd . - -'

2. :i

An accessorv contract Secause it

has

no independent existence ofits ownl

A .unilatclal contract beca,,se it creates an obligation solely on the part of the creditor to retum the rhing subjecr lhereof upon the fulfillment of [e principai --

"tfig"tiir; ".i---

ofthe principal obligation wlrich is secured.

ln 1982' Sreve borrorved ixoo,ooo.oo from Danny, co[otcrized by a pledge of sharcs of stock of concepcion corporation rrortt lsoo,ooo.oo. I;i983, becauseif tire eionomi. t],e value of the shares predgerr felt to only p100,000.00. Ca,' t",-t al--u"J-[rt crisis, st""a surrender other shares worth p7OO,OO0.OO?

(j

Alternativc Answcrs:
r:ontract and Stcvc is stilt indcbtcd to DBnny for the amount of value ofl the stocks pledgcd.

a)

No.

Bilatcral contracts cannot bc changcd unilatcrally- -l^n-l9a-g1 !s o$V -a sp.9i.ai15f P4O0,OOO.OO. &sPits tlrc fall ln rhc

No. Danny's.right as ptedgcc is to sell the ptedged sharcs at a public salo an{-kccp thc pioceeds as co aGrai f6r the l,oan ln case Steye dcfaults. There is no showing that th.fall in thc vuluc ol'thc plcdgr:J prolrrty wos.rrtributtrblc to thc PlcdSor's foult oi fraud' On thq bontiory. rhc economici crisis ."os the cause ibr its decline in value. There ii likewise no showing thai-the plcclgcc hatJ lrcel r.locoivcd as t(, rlrc sut)stonco or <;uality ol'thc Plcdgcd shtrrcs ofsltlck irr rvhicli h. r,r,91116 6ave had the right to claim tnother thing in their' place or to the .immcdiate "u.", payment of tlrc obligation

b)

(:hinn I|ankinq Corporation vs. Courtof Apnenls (270 SCRA s03)

The contracting Barties to a pledge agreoment mdi stiPulate tliat thc sai4 pledgc will also stand as security for any future advancemcnts .(or renewals ihereot) thai the pledgor may procure from the pladge.

L 2. 3.
and

The pledge is consrilured to secure the fulfillment ofa principal obligation.

l-

The pledgor or mortgagor is the absolute or,r,ner ofthe thing pledged or

mortgaged.

.The persons constituling the pledge or mortgade have thc freo disposet oftheir ProPerty; in the {rbsence thereof, that they be legally aurhorized for the pur.pose

4. The thing agreement. . facts:

pledged nlust be delivered to the creditor or to a third person by comriron

!

Calibo. Jr. vr. Courl of Aopests (3so scRA 424

'

Pablo Abclla purchascd a tractor end lcff it in tlrc'safckecpjng ofhis son Mike. Mike kept the traotor in the grirago of thc housc he is rcotiog from Calibo. MiLc lcfl rcntrl orruarug,c!. on Culibo's hdusc ond offotd tho trsctor as scouriSr. Pablo Abclla rrigd to rske posscssioo of tho tractor from Calibo and ftlcd so action for r-plcvin. The trial court and tlie CA ruled in fevor of PaFIo Abclla. Calibo claims that the tractpr was pledged to him by Mike Abella or in the alternative, the tractor was left with him in the concepl of deposit. He further allcged'that even if Mike were not the owner of the tractor, Pablo Abella failed

to (epudiete the alleged agency since he allowed his son to act as though he had full porvers.

Eg.!d: In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his;rossession, or in that ofa third person to whom it hai ben delivered, until the debt is Faid. For the cont act to be valid; it is necessary thau (l).the plcdge is constituled to socuro tfc ftlfillmcnt of a
principal obligation; (2) the pledgor be the absolute owncr ofthe thing plcdged; and (3) tlre pei'son constituting thc plcdlle h8s thc frce disposal of his propcrty, and in the lbsencc thcreof, that he be leEolly outhorized for thc purpose.

58

c'')
I
t

As founiJ by the trial court and aflirmed by respondcdt Coun of Appgals,' the pledgor in this case, Mike Abella, was not th; ablolutc owner of the tractor ihat was allegedly pledged to petitioner. Tha tractor was owncd by his father, privste respondent, who left the equipment with him for safckcicping Clearly the scond rcquisite for a valid pledge, rlrat thc pledgor bc thc absoltnc owncr of the propeny, is absent in this case. Hence, there is no valid plcdge, i . : '

He rvho is not tbe owncr or pnoprietor of thc propcrty pledgct or mortgaged tci guarantee the fulfillment ofa principo.l obligatioq cannot legally constilure suoh a guarant-v as may validly bind thc propeny in favor of.lris crr:clitor, and thc pledgee or mortgagee in such a case acquires. no.right rvha(s0cvt:r ill th(' pr()pcrty plcdged irr nrortgaged,
:

'

Ir a contr ct of clcposit, a person receives an object betonging to anothcr with the obligation of salely keeping it and of returning the same. Petitioner. 'hirrrscl l' stales that hc reccivcd the tractor not to saf,ely kcep.it bui as o fonh oF secrrrirl' lirr thc payrrrenr of Mike Abella's obligotions. Thcrc is . no deposit lyhere the princilxl purposc lbr receiving the object is not fot qaGkc?xng. , :
tract()r,includingtheinslitutionoltheinstantactiohforrcplevin.
Ctrnsequcnrly, Caliho had no right io refuse delivcry of thc tractor to its l:rrvtirl trrv[sr. l,rrtrlo Atrclln as owncr had every nght to siik to repossess thc

CorrtrMt nray l^.- constituted only by the absolute owner of ihe thing pledged or rngrtgaBed otherrvise rhe pledge or mortgage is void, such as that constitutcd by an impostor. (see De, Lara vs. Ayroso, 95 Phil. 185 [1954]; Parqui vs. Philippinc National Bank,96 phil. 157

!). l.

.(.iirn rrron l'royisions (;over[ing Pledgc or- Mortgage

lres4l)..

ol-the entire propcny. (Philippine National Bank vs. Courr'of

2.

: l'i,l:,1' .A nrortgag,c of corrjugal property by one of the spouses is rialid only 'to one-hblf
,

l.

Apn*5,

eg

SCnl

as

( t /2)

2OZ.tl98OI

Whilc it is truo tlrst undcr nrticle 2085 it is cssential thot thc mong[aor be the absolute of thc propcrty r.rortgaged, a'mortgagee has the right to rcly up<in wnat .appears in the certificate oI'titlc and does not have to inquire further. Statcd differcntly, an innoclnt purchaser fbr value (like a rnortgogei) relying. on -a Torrens title i$urd iJ pmtectcd. (Duran vs.
owne_r

3.

lntermediare Appellare Coun, 138 SCRA 491

tl985l)

1. -_ | stipulation whereby rhe thing spledgcd or mortgagcd or. undcr antichrosis (Articlc 2137)shauautbmaticallybecomethcpropertyofrhecicditorinthccrrcntofnonpaymcniofthc. debt within the term tixed is known as pactun comrnissorium or flaclo comniiisorio which is fcrbidden b1, law and declared null and void q61"1" 2088; see Vda. de Reyes.vs. De Leon,20 S.CRA 389 [967]; Hechanova vs. A<til, I44 SCRA 450 [1986]) .
;

PNB Is. Sa"o. (292 SCRA 202)

J.-

The creditor, in a .contnict of real security, like pledgc,' cannot appropriate. without foreclosure the things grvcn b.y way of plcddc. -Any 'Thc stipulution to t6 the contror1,, contraqr, termcd pactum commissorium, 6-iissoriuio, is irull ;dl aad void. Thc aaa jn order to law requires fdrcrlosurr forcclosure lir gir@ by way of t6 atlow a transfer of ofthi tho good girryo of securily from its pledgor, and bbforg any sricb forcclosurc] the lleieoainofthe plcdgec, is the owncr ofttre goodsi , i i
'.

59

.l
Fort Bonifacio Dcveloomcnt Coroorotion vs, Yllas Lendins CorDorotion (s67 SCRA {s4)

I 1

cJl

i l
i

'

fgElg: On 24 April 1998, Fort Bonifacio Devclopmcnt Corpriration ("FBDC") leascd ono of its unir at the Entcrtainment Ccnter of thc Bonificio Global City in Taguig in fnvor of Tirrcno, Inc, ("Tirrcno") which usod *i lcascd prcmiscs as restaurant and bar. Duc to Tirrcno'g dcfault in its lcasc .payments, FBDC entcrd and occupied the leascd premiscs on 29 Scptcmbcr 2000. and appropriated the equipment and pioperties left behind by Tirreno pursuant to Slttion 22 of their Contract of Lease as partial payment for Tirreno's unpaid obligarions. On 9 November 2000, Tirrno executed a deed ofchattel mortgagie over the restaurrnt equipment, furnitures and fixtures in favol of respon-deqt Yllas Lending Corporation as spcurity tbr a Pl.5 .Million loan, On 4 M:rrch 2002, Yllas l.cnding Corporltion caused the sheriff to serve an alias writ of seizurc againsr I.'IJDC arising from a complaint for Forcclosure of Chattt Mortgagei I:BDC filect a riotion to.intcrvene and to adroit iomptaint in intervcntion in the said foreclosurc prooccdings wtiic[r fho frial cilun'denied.on the ground that Scction 22 of the subjact Lcase Conract is void under Article 2088 ol'thc Civil Crxlc for being a palctum commissorium. j

or not Section 22 of the subject Lease. Conrac| is a paclum coturni.\i\oriltrt. Who has a better right over Tirreno's properties?
.!g5gg:- Whether

!lg!!:

.Section 2?

of (he le^se contrait provides:

"Section 22. Lien on rhe Properties ofthe Lessee. Upon ihe termination of this Contract or the expir4tion of the Liase Period \vithgut the rentals, charges and/or demages, if any,. being fully paid or seftled, the LESSOR shall have the riglil to retain possssi;n of the propenies of the LESSEE ised or situated in thd Lased premises ana *r" GS-SEE n"."U" authorizcs the LESSOR to offset the prwailing value thcrcof as appraise{ by thi LESSOR againsr rny unpaid rcntals, chargcs and/or damagas. lf tfr" I-ESSOR does not.want lo use said propertics, it cray instsd sell tllo-sttBc o third partie.s and apply the procecds thereof against any utpaid rTtals, cbarges and/or -

darn:rges."

Respondenrs, as well as the trial court, cont ad tf,.tiS"rtion Zi constitutcs a p4_crun, commissoriurn, a void stiputation in a ooaUact ofptcagc.. Petitioner FBDC, on the other hand, statcs thet Scition 22 is Etarly a daiion-en P.tgo.

of the lease contract or thj oxpiration of the lease period and there are unpaid rentCs, charges, or damages. The existence of a contmct. of plcdgc, horvever, does not arise just because FBDC has means of sollecting past due rent from Tirreno othcr than <tirect.payment. The trial coutt concluded that Sqcrion 22 constilutes I pledge Uecaust of the Drcpcncc of ihe -properties

Section 22, a5 rvordcd, givcs FBDC a means to co ect payment frorn the Iesse 'fineito in case of termination

firsl three reguisites of a plcdgb: Tirreno's in the ltaslcd premises secure Tirieno's lease poymenas; Tirreno is the absoluto owncr of thc ssid properties; and the pprsors represnting Tirreno hivo lcgal iruthcrity ti constitutc tho pledge. However, thc fourth requtrlt., ahta lh-e thlag ptcigert is phrced in the possession of the crcditor, is abrcot Thcrc is noncomplinlrce with thc fourth requisite even if Tirrcno's pEonal propenies arc found iu FBDC's real propcny. Tirreno's pcrsonal propirties ani'i" paOC'i resl property bcouse df the Contract ofLease, which gives Tirrcno possession

60.

Ii,

Cl,

of th'i pl:rsonal properties. Since Sction 22 is not a contract of pleig", tha.. is nD ?dctnt,, c<tntniisoriunt. Section 22 is a forfeiturc clatise rind iuthorizcd FBDC to takc whatever propertics that Tirreno Ieft to pay thi lattci'i obligations afler terminating the lease conract urithout judicial intewcnti.on' i ,l; MCO Sample

Prohlem

' i

ll.:',:

i ,

X Corporarion leased a building to A Corporalion which rhc t"tt"r Jritt irsc as a car shapr The Lease Contract cxprcssly contains a stipulation authorizing X Qorporation to rctain possession of or to scll the movable machincries found in thc shop ;n. the evcnr'.-the lessee dcfaults in its rental obligations and to apply the sale proceeds of said movables ab paymi4t for the aforcnrsnr iorrcd obligations. After A Corporation failed to rernit several rental paymentSr X Corporation t()ok possession ofand appropriated the machinerics withoutjudicial iirtervention. Is X Cblporation lcgalt5, lrllowed to do so pursuant to the aforementioned.contractual stipulation?

rr
b.

':.

e.

d.

e;uiZ rtifutrtion constitutcs the law ir.t\rcl; hre paaiis and should trc respecled, not being contrary to law, morals, good customs, public order and
tt

::lill;';iil ilI;',lr:itT,I y"r,'trl"u,,"*

public policy.

No. hecrusc thc sitid contr8ctuul stipulittion constitutes I prrctum comtnissoriunr u,hioh is a void stipulation in a contract ofpledde. Ycs, hecuuse said contractual stipulation constitut$'a daciotlpn Fgo. 'r'os, l)cc.rusi.i ssid contractual stipulotion opcratcil as a foifgiturc clausc in thc lease *""":" co'rporotion a

""'"ry "*r"i';ln'

'

Rcaggl: E. . 2.
I

Wlrcrc thc contract is not one of pledge but mcrely a -".h. to coliect payment from thr lessec in c.rsc of lermination of thel leaie contmct and ther6 are dhpaid rentals, tlrere is
no pacturrr corr unissoriurn.

.Distirctions bct*een Fle<lge and Re;l

Nlortgage l. ,

. movable property '

'

Pledee
the
2. 3.

n.rt MJ.tqae. i -_,i l: i i; immovablc pioperty ,.

I i

,i
:

delivery of the object pledged to pledgec or R third person

3.

pledge is not valid againsr. thiriCpersons unless a description of thE thing pledged and the date of the plcdgc ap;rcar in a public instrurnent
Provisions Api)licablc only to

i lt II i Thc pledgor retains his ownership of the thing pledged. Fie maj,, therbfore, ieil the same provided the ple<lgee consents to tlre s4le. As soon as the pledgei gives his con.sents, the ownersltip ol tlre thing pledged is transferred to the vendee subject to ihe rights of the pledgce, namely, tlirt the rhing sold may be alicnated to satisfy the obligation (Article 2112) and that the pledgee nrust continte in possession during the existence of the pledge (A.gticles 2093 and 2096).
,

F.
t.

Ptedge

'

2,

'I'he possession of thc pledgee constitutes his security. rlcnci, tho dobtor cannot demand its return until the dcbt secured by it is paid. (see Articlc 2lo5 and Scrrano vs. court of Appeals,' 196 SCRA lo7 [99])). Buf the righr of retentlon ls llmltod only to'rho tulfltlmcnr 6f lht principul obligutron Iirr which lhc plcdgc was crcuted (Arlicte 2O98). ! i

6l

l:!

Citibnnk, N,.4. vs, Sabenigno

(so4

scBA 378)

substantial deposits and moncy markt placcments with.borh

E4c!s: Petitioner Citibank, N.A. is a banking ,corporation duly aurhorizcd and cxisting undcr tho.laws of thc USA aod liccnscd to do comm:crcigl baoking activitics in the Phitippines, Petitioner Investors Finarcc CorporatiorL whic.h docs busincsc undcr the iamc snd'stylc of FNCB Finnnao, is an aflitiatc of ptitioner Citibank and handlcs moncy rnarkct placctoents for its clients, Rcspondcnt Modcsta Sabcniano is a client of both pctitioncrs and : h3d
Respondent Sabenrano obtained

for rtlrich she exccuted promissory notes securcd by a) o Declaration ofPledge r>l' ttcl dollur acc()unts irr Citibtrrk-Cencva, and b) Decds of Assignment of her rnorrev market plncemenrs with pctitioner FNCB Finance. When responc.lent tiriled to pay her loons, pctitioncr Citibank cxercised its rigltt to, off-set or c()mpcnsate respondent's outstanding loons with her dcpositS and money markit i)laccrrlurrts prlrsrDnt to thc aforemcnt,oned Decloration of Pledge ond Deeil.of

] , ,', , several toans from ptitioner CitibL*, I

'

cntitics.'

.
'

.,
Petitioner Citibank was only acting upon thc autbority grsuted to it uoder thc [)eerl of Assil;nrnc.rl ryhcn it finully uscd thc procceds of trN Nos. 20138 8nd 20139, poid by petilioncr I'NCB Finonce, ro parfly poy for respondent Sabeniano's outstatrding loans. Strictly spaking, it did not effect a legsl cornlrerrsotioh or off-set under Articlc 12?B of rh; Civil Codc, but rather,- it purtly uxtinguishcd rcspondent's obligations through thp application of lhe sccurity giverr l)y lhc rcsp()ndcnt jbi her loans. Alahough the pertinent documents were cntitled Decds of Assignmcnt, they werc, in redlity, nrorE 6l a ql9{qc by respondent to peririoner Citipank of her credit due .froin petitloner. FNCII l"-inancc by virtue of her monel market plaocments wirh ti,e titter. According ro Arricle 2t t8 of the Civit Codc: *Arr. 2218. Ifa credit u,hich has been pledged Uecomcs due before it.is redeemed, the ptcdgee'may iollect.ind receive thc Bmount due. He shall apply the same to the paymcni bf his ctaim,

Eqkl:

anddeliverthcsurplus,shouIdrherebeany'1othepledgor.','i
i'ather or the

Pledgee hos-the obtigaiion to take csrc ofthe thing pledgcd with rhc diligcnde ofa good familvl.He is entitled to reimburscment orrlE ixpc-nses incurrea ror-its pres.*irion und he is liablc for ldss or detcrioration by reqson of fraud. nig.igcnce, dclay or vioiation of the tcrms of rhe contracr (Aniclcs I I 74, I l7O). li 4. Pledgee is not authorizd to transfcr posscssion ofthe trring prcdgcd L a third:peison.

?.

Exception: stipulation aulhorizing plcdgec to transfcr

possession (Article 2l

OO)

The pledgec has no right to use rhe thing pledged or to appropriate rhe fruirs thareof /irhoul the aulhoriry of the owner (Article 2l 04; ;ee ariicte 1977).' - B& the pledgee can apply the fruits, inconre, dividends or interests earned or produced by thathing pledged ti trre laymenr of interest, if owing, and theresfler ro the principar of his credii lsec nrtiiL zrizl.
\

5.

Exccpti<tn: c()ntnlrystip lation

on January I, f983, A borowed plo,OOO ftom B payabld on December t, tfS:. es th1efoJ, A pledgcd h;s caf to B with an agree-errt ihat.B coutd usc it. On June 30,. ::c^rIiq 1983, A offcred to pay
the loan in full ar:d aslied for-the raum ofhis crr.

62

Can A compel B to accept ihe payment and to retun the car? Why? AJrswer:

No. A can[ot compel B to accept thc payment atrd to rctdm thc car. Undcr the agreement with A, B is authorized to usc the car. The crcditor may usc thc thing plcdged with.th consctrt of the owncr (Aniclc 2lo4). A pcriod for the poymcnt of thc obligation was also stipulatcd. Undr Article f 196, it is presumed that whncvcr a reriod is dcsignatcd, it is prcsirmcd to havo been established for thc benefit of both the crcditor aird the dcbtor.- Hencc, A iannot.prcpay the loan and demand thc retum of the pledged properfy until the term had arrived.

'6.

The pledgor may ask that the thing pledged be deposited j udiiially 6r extrajJdicially:

6.1 il'tlrc cruditor uscs thc thing without authority; 6.2 il hc ruisrrscs thc thing in rny other way (Artigle 2104) 6.3 it' thc thing is in dunger of being lost orimpaircd because
\villful act ofrhc pledgei lArticlc 2106).

of the negligicnce or

7.

l>lctlgor cannol .rsk lbr ths rcturn of the thing pledged until suid gbligation is fully paid inclucling itlrcr,r.-t <lrre lhcrc'on irn<l expenscs incurrcd for its preservatiDD (+rticle 2099).

b:xccption:

Pledgor is allowed to substitute the thing pledged which is in dangcr of destruction or impairmbnt with anothe; thing of thc same kind and quality
(

Articlc 2l07).

-l'hc gxrsscssion ol'ttrc rhing plcdged tby the dbbtor or owner subsequcnt to the perl'cction of the pleclge gives rise to a pI!-!Et_&S& presurrption thit the thing.has been returned and lhat the pledgc has been extinguished.

li.

9
1274).

accessory obligatidn

Whsn the rhing plcrtgcd is lorcr founA in th': hands of lhc ptedgor or the owner, onty ihe of pledge is presumed remitled, not the prihcip8l obligation itself (Aniclc

lO. The salc of the thing pledgej extinguishes thelprincipal oblig!1ion rvhether the pricc thc slllc is rrroLc t>r lcss lhulr tlis arnount due, a) lf

of

lh(J pricc oi'the sale is more than thc amount due the creditar,.rlre debtor is not entitled to rhe exceis urrless the contrary is providcd

b) tn thc sarne w6y, if the price of thc satc is lcss, ncithcr is the
rccovr the dcficiency. A contrary stipulation is void (Articlc 2l l5). 1986 Bai Exarrr Ouestion

crcditor entitled to,

Mr. Matunod lent Mr. Maganaka the amount of PIOO,OOO.OO. As security of the paymeat of said amount, Maganaka delivered to Matunod two rings in plcdgc. When Maganaka flilcd to Pay, Matunod foreclosed, and had the'iings sold at.auction.. The proceeds of the sale, aftgr deducting cxpcnscs, amountcd ro oirly P70,000.O0.

'

(a) May Matunod demanh

the deficiency from Maganaka? Explain,

PIsO,OOO.OO;

(b) Assurpe that thc procccds, aftcr deducting cxpcnsc3, had pomc up to Would Mrrunod hovc been cntitlcd to tha cxocss? Explain,
:.1

(c)

Suppose the rings, instead.of being plcdged, had bcen mortgaged to Matunod, would Matunod have becn entitled to the deficicncy if thc salc's proceeds wcre lqss'lhan thc indebtedness or to the excess, if the proceedi were more? Explain.

6?

?:
Answer:

Article 2ll5 of the Civil Codo exprcslly provides thct thc forcclosure of thc plcdge cxtinguishes the principaf obligetion, whethcr the procceds of thc salc Ite molg or lcs's lhiin the obligation. Thereforc: (a) Matumxl cairrot rccovcr thc

dcficiency.

-.,

..

(b) Matunod is entitled to kecp the exccss, unless there is s stiPulatibn to thg'contipry.

(c)

lf it is a clrattel mortgage,

Matunod can still recover the dcficiency as there is no prohibition in the Chattel Mortgage Law similar to pledgc snd thc bxcess, if any,
should be retumed to the morlgagor

Maganaka.

q.

Rccent ,Iu ri$prudence on Fledge Son(lnvon vs. P.J. Lhuiller. fn.c,

Eagls: Petilioner Gloria Sondayon pledged her Patek Philippe sblid gold watch rvorrh F25O,0O0.OO to respondcnt pawnshop P.J. Lhuillcr, Inc. to.segure a loan she obiainert from the latter. The.said watch was one of the jewelry items stolen in rr robhery perpetrared by the respondenl-pswnshop's hired security guard. 'l'!rt: srolcrr.icrvclrv ilcrlr plcdgcd to tlre said pawnihop includirrg said walch \vcI,s llol insrrrcd by rcspondcnt-pawnshop against fire aad burglary as rcguired by rlrc Pawnshop Regulation Act. Ptitioner filed a complaint for recovgry of ;xrsscssion ol' personsl property with prayer for preliminory atlachment Agoinst hcrcin respondcnts which was diiimisscd by th Rcgionat : Trial CoqrJ .of Paraflaque on the ground that the loss of the thing plcdged rvas Cuc to fortuitous event. On ippeal, the Cou6 of Ap.peals allirmed thi rriat cpun's dcciiioir . llcnoe, the in;t&nt. pctition. -

, ,

.bsug: Whot is rcspondunt-pownshoy's liability to petitioncr in nor ihsuririg lattcr's gold wutch rr8oinst. tire and burglary? '.
i

th.

conrmilted by thc scurity guard. the answci is simplc: had rcspondcnt company itrsured thc srticlcs pledgcd agpinst burglary, pctitioncr ruould havc.bccn compensated compens&ted for thc loss from the burglary. Rcsirondcnt compstry's comDatrv's fally-c burelarv. Rcsirndcnt failurc to insurc thc articles is, thcreforc, 8 contribBtoi cauic ro pctitioner's lloss. Considering, however, that ptitioner agreed to a valuation of PIS,OOO for th'c article pledged in case of loss, the replacem6nt value for failure to insrire is .likewise limired ro PI5,000.

As to the qausdl connection beiween rcspondent conrpany's violatiln of thc lcgul ol)ligalion to insure the articles plcdged ond thc hcist homicidc

MCO S0mpld Probtem By way of lecurity for a loan he obtoined, Z plebged his Rolex watch worth PIO0,OOO.OO to Y Pawnshop. The said watch was one of tha items stolen in a robbery pcrptratcd by Y Pawnshop's cmployec. Thc stolin jcwelry items including subJea uratch rverc not insurcd by Y Pawnshop againsl firo end burglary ts required by the Pawnshop Rcgulation Act. Z signod e pawnshop ticket limiting the lidbility of Y Pownshop to its spprsisd veluc of Pl5,OOO.0O in case of loss of thc articlc. Is Y Pawnshop liablc to Z 6nd if so, for how much? j

a.

Y Pawnsh(rp is liable to Z for P100,000.00; had Y Pawnshop insured the pledgcd 'article against burglary, Z would have bedi compensated for the loss.

64

l.

.t c. d.

Z for P100,000.00 bccausc the burgfarf rya1,peryIfg by irs empllyee therefore Y is presumed to have been negligent in the .selectlon and engagement of its Personnel. v pawirJtrop l. iiri't-t" Z for p15,00o.0o bccausc z agrvn to a valuation of Y
Parvnshop is liable to
P I 5,0OO.OO

for thc snicle pledged in casc of loss' pawnshop is not liabli beJsuse thc loss of thc plcdgcd articlc lYas due fortuitous evcnt.
Sondayorr vs. P. J.

t0

Iesal liasis:

Lhuillicr' lnc. (547 SCRA

16)

contributory cause to tl'e Reason: A pa\ynshop's t'ailure to insure an article pledged to it is apledged' i:torrr"r'u loss. Liability is lilnited to the agreed valuaiion ofthe thing
l

(,''orn

l.'I'l|rnbuntine PnwnshoD. Inc. vs. missioner of lntcrnal Reveirue

(584 SCRA

44s)

Commissioneroflntertrtl.Rcvcnrle
(s66 SCRA 57)
i

Antam Pawnshoo CorDorrtion

Vs.

i .i

F'irst Plantrs PawnshoD. Inc. v3. Commissioner of Internal Revenue (s60:scRA 606)
i

-ond-

Michel J. Lhulllier Pswnrhoo. Incvs' Commissio;,rer of fntern$l ReyeFue (,189 SCRA 147)

!ggp:

Are pavtrn tickets subject to docutnentary stamP tax?

i
].'

i, in
.i

Section 195 of the NIRC jmposcs, among othcrs, a DST o,o pledge o-f personal property made as a security for th payment of a $ro of motrc'y' Apledge may be defined os an eccessory, resl, and unilatcral.co.ntsact by virtuc' of wtrictr ttri debtor or a third ocrson deli'ver to th. creditor o.r third pcrson pcrformancc of thc pt a"ipal obligation' movuble propcny gs security - tor' the upon luliiltmeni of which the thinli pledged with all its accessions and acc*:ssories shall be returrred to the debioi or t-hird person. Seciioir 3 of P.p. No. I l{ rlclincs a gxrvnslrop os rr prson or cntily enlaged in the business oflending money dn personal property delivered as security tbr loans. Thus, in essence, a parvnshop enters into a contract ofpledge with the pa:wnel or thc borrower. The pawn ticket is evidently a proofofa oontract of plcdgc. Wc agree rvith petitioncr thot thc law does not considcr the pawE tickct as a sccurity nor a printed evidence of indebtedness. llowever, whit is subject to DST is not the iicket itself but thc privilcge of entering inio 6 conttact of plcdgc xxx xxx xxx.
,

tl rl,

't,

ll ' !i

it
tit irl
j.:ll

A documcntar! stamP tax is in the. naturc of an Gxcisc tax. It i3 not imposed upon the business- iransactcd but is ao cxcise uPon -try privilcgc' ,rpirortr,rrity or focility offered at exchanges for the transoctidn of-the.business ti is un cxiisc upon rilc l'ucilities used in lhc tronsaction of tho busincslt scpordtc and apart from-the business itself. In gcneral, ilocurlentary stlulp taxes are

,ur.

til

levied on the exercise by persons of certain privileges conferred by law for the. creation, revision, or termination of specific legal rclationships. lhrough the execution of specific instrutnents. Examples of suoh Fivileges, the excrcise of which, ns cffected through tha issuanco of particular documents, are subject to thc paymnt of documcntary sta$p taxes are lcascr. of lsnds. mortg8.gcs, pledges, and trusts and conveyangps of rrsl property. Tf,us, thcre is no bosis for pctitioncr's asscrtion that a DST is lircrally a 6x ou llrc il'oc'rpncnt and ihat'no tax mlry bc imposed on the p'awn ticket. C()mmissioner of fnternrl Revenue (610 SCIiA s14)

A Docurncntary Stamps Tax (DST) i6 pn excise tax dn the exercise of a rieht or privileRc to tr.&nsler obligetioDs, rights or properties incident thereto. Pledue is amons the orivileues- the exercise of vihich is Slrbject tci DST. A'
pledge may be defined an os accssory, reel and uuilatgral contract by vi4ue. bf or a third person delivers to thd geditor or td'& third ptson. rnovablc propeny os security for the pcrformanca frf.tlrc principal obligation, utx,n thc lirlfillmcnt of which lhe thing ptedged, with all its riccbslidns'and accessories, shall be returoed to the debtor or tg. tbc third linson. This is, esscntiolly the business of pawnshops which arc defincd undei Section 3 of Presirlential Decree No. I14, or the Pawnshop Rcgulatioo Act, as persons or entities eng.rged in lending tnoney on personal property delivered as securiry for
\,,vhich the debtor lolurs.

Scction J ol' thr- l)awnshop Regulation Act defines, a pawn ticket os tblloi.vs: "Pawn tickeC' is the pawnbrokers' receipt for a pri'wn. It is neither a security nor a printed evidence of indebtedncss. Truo, tlie law does not consider ' said ticket os sn evidence of security or indcbtdness, I Iowever. for ourooses bf . ..:-

!rED9!e49!3.EAra4!l!9Le!

lr.

Forcclosu re df Pleelge

I'arav vs. Rodrlqucz

(4?9 SCRA

sTl)

Prelimirrarily, it must bc clarifi.d tliat thc rubjcct salc of thc ptcdgcd shares was an extajudicial salc, specifically a notirial salc, as distingiishgd from a-judigial sale as typified by an cxecutioir salo. Under lhc.Civil Code, t5e foreclosure of a pledge occurs extrajudicially, withbut intervcntion by the 'couns. All tha crediror needs to do, if the crcdit has not becn satisfied in due time,.is to proceed before a Notary Public to the sale of the thing pledgd.

The right of redemption . over mortgaged.rcal propcrqr sold extrajudlcially is established by Act No. 3135, as amended, The said law does not cxtend the samc bencfit to pcrsonal propcrty. In foci thcre is no lsw in our statute bcioks which vests the right of re&mption ovcr personal propcrty, since that law govcrns thc cxtrqiudicial salo of mortga.ged pcrsonel property, but the slstute is definitely silent on that point. And Section 39 of the 1997 Rulcs of Civil Proced uie, extensively retied upon by the Court of Appials, starkly utters that the righl of redemption applies to real propcrtics, not pcrsonal propcrties, sold on execrrtion.
66

No provisron irr thc Rules of iourt or in any law requires that Plcdged propcrties sold at auction be sold separately.

ffi
''
!

Scction 13 ofl Presidcntial Decrcc (P.D.).114 othcrWigc known as thc .. I,awnshop Regulation Act, and evcn the terms and conditions of thc pledgi .irselt', uscQrd the puwner n 9o-day groce pcriod from thc.&tc bf mafirrity of;tfrc' loan obligation within which to rdeem the pawn. But cvcn bcfore the lapsr) bf the 90-diy period, the same Decree rcquires the pawnbroker 10 potiry the dct-aulrinB dehtor ofthe proposed auction sale
Ovcr and above the foregoing prescription is the manCatory requircment for ths l)ul.)lication ol- such notice once in at least twg daily nel spapers during rlrc rYccL Preccc.ling thc date ofthe proposed auction sale.

,t n()rice ornn aucrion sale made on ths viry schedulid auction day itscif deltats rhe purpose ofthe notice, which is to inform a powner beforchand that a
.sal<r is rr)

()ccuI s() (hat he may have that last chance to rcdecm his pa'wned items.
l

VII. III'AIA. .

N4OR'I'GAGIi
I

l)efinition

Real mortgag,e is a contract whc.eb)4 thc debtor seourcs to the cld.itor the firlfillment.of a principal obligation, specially subjecting toisuch sccwity immovablc property or red rights ovcr immovabre propeftv *'o'| a*he stipurated l'lme 'r

.-'t

** *";:::':""rn':":::"i:::,::ricd

' ,

conrract of rnortgage are: (a) that it be constituted to secure the iirlfillment of a principll obligation,.(b) rhat the mo$dagor be the absolute owner of the thing mongaged; and (c) that the persons constituting thc mortgagE have the frcc disposal of their property, and in: the absencc thercof, lhat lhqf be legolly authorized for the purpose.

, i i , Under Article 2085. of the; Civil Codb, the csscntiat ircqirisites. of a

.

(4s7,scRA2z4),

In their memorandum, petitioncrS cite our ruling in Statc Invcstmcnt House, Inc. v. Court of Appeals to the effect thEt an unregbtertid sale is pret'errcd over r registcred mortggge over the sBme prbperty. The citation is
misplaccd.

' . '

. A contract of .sale and a contract to sell are worl& apart. S6ic lnvcstmqrt I lorrsc clcurly pertained to a contract of salc, not to a coitract to scll which was what Oakl&nd arid petitioners hacl. I tn Statc lnv*tment Housc, ownership had passid completety to thc buycrs and thcrcfot, tho fprmcr owncr no long<lr had any tcgal right io ,nortgBgc thc propcrty, notwithstanding thc fact thet thc ncw owtrcr-buyF htd nol rgistrcd the sslc, In tlr casc boforc us, Oaf<land retaincd dbsolute owncrshlp ovcr tho propcrty undor tlro controot to sll and thcrcforc had every right to mortglgc it. Gcnato's regisfcrcd mortgngo was superior to petitioners; co-ntract to Jll]subject to aay liibilitics Oakhq? may have incurred in favor ol petitioners by irresponsibly mortgaging the property to Ocrruto dcspirc its commilme[ts to petitiotrers under their contragt to sell,

67

Mercgdo vs. Altied Bsnkine Corooration (s28 SCRA 444)

The following requisiles are csseitisl to thc contracts qf pledge and mortgage: (l) That thcy be constituted to seture thc fuIfillment of a principal obligation; (2) Thar lhc plcdgor or mortgagor bc the absolut owncr ofthe thing pled-gccl or nrorlguged; (S) Tf,st thc pcrso;s constituting thc pledgcror inongagc have the free dispo-sal of their prope4y, and in the absence rhercof, that thcy -qg legally authorized for thc purpose.

A special power of attomey is necessary in cases where real rights over immovable property are created or conveyed. .'
Where the mortgagee does not directly dcal with rhe registered owner of real property, thc law requires that I hi8fier degree. of pnrderrcc be exercibed by the mortgage. Tho. principlc is applied morc strcnuously when the mortga.gee iS' a borrk or o bunking institution.
.

DevelbDment Batrk of thc Phllinnines vs. Prudenflal Bahk

and

llcirs of liduardo Mnnhnal

vs.

Court oI Aoneals

For o pcrson to validly constitule a valid mongage on real estate, he must be the. absolute owner thcrcof as .rec[uired by Anicla 208J of thc Ncw Civil Code. Thd mbrtgagor must be ihe owner, othenvise thc mortgage is -void. In a contract of mortgage, the mortgagor remains 1o. be tho o$ncr of the. propcrtj, although the property is subjected to a lieh. A rirongagc-is reggrded as noihing. more than a merc lien, cncumbrancc, or sccurity for s dcbt, and lasses n<i titlc or estale lo the mortgagee and gives him no right or claim to the posscssion'of the property. ln this kind of contract, the prop.rty mortgagcd is mercly delivcred to the rn()ngagcc io.secure the fulfillment of the principal oblig8tion. Such delivery does not empowcr tlle m,ilngagee to convey any ponion therebf in favor of anothEr prson as thc righ( to disposc is an attributo of oq,ncBbip. Thc right to dispose includes the righf io donat, to sell, to pledgc or mortgage. Thus thc morlgagcc, not being thc owner of the propeny, csnnot disposc of thc wholc or para thcreof nor aausc thc impaimcnt of thc sccuri$y in any ,Dannr without violating the foregoing rulc- The mongagee only owns'thi mortgagA credit, not the property itself

,:

DBP vs. Court of Apoeals (2s3 SCRA 4t4)

With regard to the validity of the mongage conlrats entered into the parties, Aniclc 2085, paragraph 2, of the New Civil Co& spcciflrcally requircs that tha pledgor or mortgagor bc the absolute owncr of thc thing pledged or rnortgaged. Thus, sincc thc dispurcd proprti/ was ,lot orvncd by thc Olidiana spouses when thy rqorrSsgcd it to petltionr, thc corr,trunr of morrgngo aad otl their subsequcnt lcgal corlsqueoccs as rcgards Lot No. 2029 (Pls.'61) arc null end void. . In a much earlier case (V&. de Birirtista vs. Marcos, 3 SCRA 434), we held that it *as an esscntiql requisite for the validity of a mortgagc that lhe mortgagor be the absolute owner of a property mongsged, and it appearing that
6E

I I I

explicitl; iequiris an imperative for tie validity -of a .morlga8e that '
mongagor be the absolute owner of what is

the

.:

mortglgcd

Vds. de Jsvmc va Court of AoocrlE

(39oSCnA38o)

'fhe Deed of Reat Estate Mortgage entercd into'by the .Iaime sPouses partake ofa Third Party Mortgage under Art 2085 (3) of the Civil Codel . The ' iaw rc<.rgrriz.cs insltrtrccs rvhcn persons not direclly parties to a lodn agrebment . trapaction. [n ur this rrtrD propenies for r(,r url''Prrrlsrlr.r the principal .r..lr5ar.u(,rr. tlreir own orvn proPcrucs us sccurlty security tllclr ma1 givc mfl) !!rvc os trirnsbction trunsaction of the validiqi validiti to disclaim not be allowed thu th" spouses should case, .oti, they' voluri-tarily and knowingly entered into for the simple rgaspn thtisuch ' transaction lurned out prejudicial to them later on.

I i,

lix,.rn Oueslir)n l99l ll,tr ::!--.::]l!L!l-wE!!:z!!

i i

i
i

Bruce is the registerd owner of-a parcel of land.with a bi;ifOng tirdcoj ariU 1s ip n1c1ruI possession thereof. He pays thc ieal caiatc taxes and.collecls tbo rri:qfals;ithqrft6n., Il,tcr, . whcl! hc, mlsrcPres9D$ng to pe tnc atrorney- ' tlre only brother ofBruce, orBruce, tllcd filcd a petition whcrc cotalino, the Catatino, in-fact of Brrrce and falsely alleging that the cenificatc oftitlc was lgst, prrycecdep in obtaining'a second orvner's duplicate copy of the title and then had the same transfdrred in his name tfuough a simuiatcd deed of sale in his favor. Catalino then mongagcd tle PrpPerty to'Desiderio who had ths nro gagc annotated on the title- Upon learning of thc fraudulent trarrsaction, Bruce filed a complaint againsr Caralino and Desiderio ro'have the-tiite of Catalino and tlte mortgage in favor

Ii

ol'l)cJitlcrio

Jc<:larccl rrrrll untJ

yoirJ.

sustained? Answer:

.Will the complaint prosper, or will the title of--"li;i-' Catalino and *r. q,o!gug" io Desiderio bc

I i

The complaint for the annulment bf Calalino's titlc is mcrit ; thc sccond owner'ss copy of ot'-thri firi title secured by him.from islvoid him irom thp Cduit thg Land Registration Registrition CLidljg the owne-r's copy thereof not having bicn lost i Funhermore, said ilccond s qopy of the title was fraudulently procurcd ahd improvideitly issued by thc Courl' mb.fr;,nsfir Cortilicate of Title procurcd by Catalino is equolly null'and void it baving bccn ijssircd onl thc basiS of a simulated or forged Deed of Sule. A forgcd dccd is an absolub nullity and conv?s no titlc.
The mortgagc in favor of Desiderio is Iikewise nulf ana voia UJuic th" olortg.gor is oot the orvner of the mortgaged property. Although it may -ofbc contended thad a buydr or mortgagcc has t}e rigfrt to rely on what ippeari oA the Certificate Title, and in the absen{ of anyhing to excile suspicion, is under no obligation to look beyond the certificate and.investigate the mortgagor's title, this rule does rlot find application in the instant casi bbcause'Catalino's title suftbrs frorn two fatal inliimities, namely: ''

rr,i,iliiiii j ,i
,

'

' ,l

i,,il lilil

'

That it was derived from a fraudulently procurcd or improvidcntiy Lsucd'sccond owncr'g copy,.the real owner's copi being still intact and in thc possession of thc true owner, Brucc.

a) b)

That it emanatcd fronr a forged deed of a simulated.

sale;

,.

The mortgagc to pcsidirio should trc canccllcd without prcjudioe to his right to suc Catalinoand,/orthegovemmentforcompensationfromtlicAssuranceEund.

:,
:

69

lsets: RIir- Enlcryxiltcs, fnc. (-RttL:, for brcvity) Cp."; ; prawir hatchcry rrd lcascd ltom Nclly Bodrejo ('lcssof).a prccl of l8nd wtcra thc operalions nrrG conducted- RBL subscqucotty obtsined a lo.o ofS2,00O,OO9.OO 'from Philippinc National Blrrk (-.PllB", for brcrrity) rvtich *zs.sccrred by a real estate morrgEgp iu favor of PNB owr two (2) parEls. of laad uadcr tbc name of RBL, Iocatcd ar Bago City, Ncgros Occidcotsl and anotbcr rcal anS chatrel mongage ovcr thc hatchcry facilitics locared in thc lcascd foperf-y df lhc , lcs.s{)r. PNI! Ftniolly n:lcascd to RBt- lhc sum of Pl,Ofi),O0O.OO lcss' the advancc irrtrerests, which amourt R.BL userl for introduciog improvemehts oa i the lqrsed property wbere the hatchery business lias 'locati:d During rhe I conslruction of lhc improvenrenls, PNB rcfused to rclease tlrc ,balance of PI,OOO,OOO.OO bccause R-EIL failed to comply with PNB'q requircrnprrt that tha lL'ssor should exr:cute an urdertaking or socure a lcssor's conformity proi,ided in. lhe real estale and chatrcl mong.gc controct, PNB- forecloscd thc, mortgaged properties for failure of RBL lo comply with the additioaal requircment a4d ro -, pay rhc amount of
r

3l,ooo,ooo.oo.

Issue: Was PNB justified.in'rrct

: . ,l r 1,,r, re.leasing fhe b6lancc of rhe'loan?

''

,.

I{aving relcased |ifty pe-rcent ofthe Ioan procccds on the basis of lhc sigrred loan and mortgage contracls, pctitioner can no loDgcr'require the borrouers to securc the lessor's conformity to thc Mort8Ege Contract as a ' coniiition precedent to rtie relcase ofrtc locrn bstancc, Nowhersuras ii explicitly sbtcd rhal the release of the second hatf of rhe lcitr fscility was subjcct to lhe ' mortgagor's procurement of tlre lessor's conformity tol rbe mortgage contract The conformity of rhc k*sor ty&s nol necessaDr to prolcg-t thc bank's intercs! .t trecaus rBspon&nts were unqwstionably the ahotrdc owtrcrs of the'mortgigcd proprty. The lcssor was rrcvei a pgr$/ to. the loan or tlrc mcrigBge cbntract ' Furthcrmorc, the registrotion of the mortgage contract creotid a rB{t right to rhe profr:rtics *hich, in subsequcnt trrlsfers by fttc mongagor, the irarrsfcrccs arc legally bound lo respecti
I

tleld:

(47O

SCR^ 3s2)
:

Only thc executor or odministztor of fhc cstafc moy be authorizcd by lhe inlcslatc .:stats court to modgAAs rEot cdstc bctonging fo drc Btalc.. Unlcss arx, unril rhe rcal est8tc mortgrgc oontnaell rlrc appr,otcd by rha intcstsrc csrdc ' courl. the same canool havc any binding cflct udo; thc csbc nor scrvc as basis for'any action agrinst tlle estate and aerainst rbc parccls of l.n.{ di&ribed ir tbe said conEscrs belonging to it

Any mortgage of realty of tho estate wirhout th appropriate authority the cstate court has no legal support and is void
Gozun vr- Mercado

of

(srr scRA3txr)

facc purpr>rt to bs ma&, signcd and sealed in. thc nsinc of thc pri;ipal; othcrwise, it will bind the agent ody. It is nor: enotigh merely rhar trre agent i^.;

ll is a gcnerat nrlc in thc law ol'agency rlral in or.rsr to birx, lhe qt*ipul by a mongagc on rcal properqr cxrcutcd by an agcnt, it musr upolr its

70

in thct authorized to make the mortgage, if he has not aaed in the name of the
principal.

""*'""'lilg*dffi "ft'd "' li'i"i

A spccial powEr of attorncy is necessar5r to creatc or co-nvcy. lial rights' over immovabte propcfiy. Furticrmorc, the special pourcr of attomy Euqt appear in a pubfic aocumcnt. In the abscnce oi a special powcr of attomcy in' favor of the president of the corporation, no valid mortgagc ,could bc q<ccurod by hinr. Petiiioner should have ihecked if the person he was dealing with had tlie atrthority to mortgage the property bing oflered as collateral. ,.
San Pedro vs. One

(s69 SCRA 767)

on the subject propertics based oir . ln Velo3o and Rdsals v. La ab irlitio. are void lirlse ancl fraudulenl SPAs Urbana, 5E Phil. 681, 683 (1993), the Court ruled thai the forgcd porvcrs of attorne)' are wilhout force and etfect anct, thus, nullified Ot6 mortgage constitutcd on thc strength tlrereof;
l hc real estate moflgages conslituted

.
.

'

'

Ar(iclc l714 ol'thc Civil Code and undcr the Torrefls Act in li)rc in this jrrrisdiction, thc forged t'owe1s of sttorney prepa-red by Del Mar werc without tbrce end effect aid that the regiitration o( the mongages conslituted by virtue thereof were likewise null and voicl anq without fiorcc and effebt, and that they could ih any way prejudici: the rights of the plaintiffs as the registered.oir,ner'of her

"ln vicu' of the fi,rregoing facts, the court hcld that pursuant to

Consc(lrlcntty, thc forcclosurc procccdings on thc m,ort gi.ged, Pt-oPorlic3 initio. Since Ong cannot be deemed o mcirtgagce-in-goodfuith nor an innocent purchospr for valuc of the sribject propcrticsiat tho auction sale thereof, his claim to the sdid properties cannot prcvail ovtir rhat of San
are likervise voi.J ab

Pedro.'fheCourt'sruling,however,jswithoutprejudicctotlrcrilbtofOngto
proceed against those who prpctrated the fraud to his

prejudice.

,
.

B.

Chaiacteristlcs

l.
Reoublic vs. Lim (462 SCRA 26s)

A mortgage is merely on accessory contract intendcd to secure the pclfbnrrance of thc prirrcipll obligation. Onc of its ohafactcristias is that it is inseparable liom the property. lt adhcres to tbc property rcgardlcss of who.its. owner may subsequently be. Respondcnt must havc knowtr thal cvcn ifl,ot 932 is ultimatily expropriaied by thi Repubfic, still, his right as a mortgagrie- is proiecrcd pursuant to Artlplo 2127 oftbo Clvil Code,

'71

Na!uiat vs. Court of Arrperls

(4 12

SCRA s91)

sa,nrc as that of the principal contract from which it reccivcs lifc, and witlrod *'hich it catrnot axist as an'indcpcnd.nt contrfct. A moilgsgo contrabt bciog a mcrc acccssory conlrBct, its validity would depcnd on thc validity ofrhe lonn socurid by it.

'Thc considcration of the mortgag contract is tirc

DcllalonDant Djra! of thelhllioplnds vs. Court of

Anneels

'..

'l lre Court of Aplxals sus(ained the validity of 8 loan obligation but anrrullcd thc mortgogc sucuring it on the ground of failtrre <if cbnsideration. -l-his is erroneous. A lno(gage is merely an aacessory contract and its vslidity rvould depr:nd on the validity ofthe loan secured by it. Henoe, the consideration ofthe mongage contact is the same as that of the principel bontraot from which it receives lifc, tnd without ivhich it cannot exist as an indcpcndent contract. The dsbtor cannot escape the consequerrces of thc mohgagc ibntract once the validity ofthe loan is upheld.

Philir)rrinc Natiotral Btnk vs. Binotro (s84 SCRA 95)

A mortgage is merely an accessory agreemcnt end does not affect the principal contract of loan. The nrortgqges, whilc void, can siiU'be considered is instrurnents evidencing the indebtedncss of defendants-rcspondents to the Philippine National Bank in a propcr case for the'collcctiod ol the defendants-respondents'
loan.

Llnited Oversess Bank of th. Philiooiieg vt. Rosemoor Mlning nnd Develonmbnt Corooritlon . (s34 SCRA s28).',. I

An allcgation that .the mortgsgee comoittcd fraudulcat octs in th constitution of the Real pstate MortgEEes is actualty ao attapk oo the mortgale contracB, and not just on thc forceloiuics of theso rionjrgg* - tho nultity oi the foreclosurcs, thsrefore, was mcrcly a ncccssqry consoqcaoo of tho inslidity of th,e ,mortgagcs. Thc moagagor's failurc to particularly pny for tho nuUification of the RGrl Ebtrr Mortgages may bc considercd & merily an ovorsight. which is deemed curod when it asked from thc cqurt a qtro for Buch othcr rclicfs and remedies as may bc deemed just and cquitablc in.thc promisca.

?.

1l is also unilateral because it creates only an obligation on the par of the creditor who must free the propeny from the encumbrance once the obli gaticin is t-ulfilled.

3-

The mongagor, as a generol rule, retains possession of thc proprty mortgaged as security for the paymeot of the sum borrowed from the mortgagce, and piya tho latter a certain percent thereof as interost on his principal by way of compensation for his saariftcc in ddpriving himself of the use of said money and the enjoyment of its fruits, in ordor to givc thcm to thc mortgegor.

AdllwFn

(233 SCRA 64s)

tlrlgltrg

By mortgaging a piece of properry, a debtoi merely subjeots it to a lien . but ownership. thereof is not parted with.
72

F I
)

Pineda Ys. Court of ADPc.b . (409 scRA 438)

4.

'I'he olrjcct pf a real mortgrrge are immovables (Article 415). and alienable real rights imposccl upon Irnrnovables.

is merely an encumbrancc on the proPcrty and dos not . Mortgagc -title of the debtor who does not lose his prirrcipal sttributc. as extinguish tli'e Yoid a stipularion o*n.i to dispose of the property. Tto law cven considcrs inrmovable. thc mortgagcd alicnating from pi"pJrry io.i'iaaingthl o*r,., "i,t'.
'

'l'irc contractor's right to mortggge. and encumber- iti 14t3 |Td intercsts ang thc in the Finuncial and -fechnical Assistancc' Aifeemeng (fTer{)' miricral thc well as as Products introduced'' inl-ftrsrnrcturc untl inrprover.nents on the .*,*",.,t, is not objultionouri pei se. otainarily, bdnks lcad noionly goods of .""riiry'-.o" ,no.tgu-g"t on fixed ossets, but otio on e-ncumbranccs to applied can be pr.rcluo-e,l that can-eisily be sold and converted into cash thai of-sccounts qn scurity the ih* ,.p"y,,r"'n, of lhe lrrans. Banks. even lend ,ec.iuibic that arc colleclible within bp days. It is not uncorngron to [ind that a tiebtor corporati()n has executed deeds' of assignment "by way 9f security'' over the proclrrction for the nBxt twelve months and/or the proceds of the sale. thcrdol'- or the corrcsponding account$ receivable; if sold on tenns - in fav-or -of .irs crc<Jitor barlks. Such dce<li may inalude authoriiing the creditors to sell the products themselves and t6 collect tJre sales procee& and/or 'the accountg.
ieceivablc.

.-

.t

. '

,',

Nole: whilc a mortgdge of lnnd necessarily includes, in thc abscncc of stipylation' lt .thg ifri-rove,ne,rrs rhereori u-lcuilcling by irself maf bc mortgaged ainrt frorh thc land on-which it lrrrilt. lsoriorio vs. crrlir, 4l I si'raA 631) P<isscssory iight* ovc-r soid lpmprry. bcforc titlc ir vesGd on the 8,rantee rnay be validly rransfcrred or conwycd as in 1 -dj:eg -9f mortgsge' qr*a."tiaf Banf vs. panis, I53 SCRA i9O [1987]; Nartslca vs- cStS, 156 SCRA 2O5 pq87l)

'

5. tn order that a mortgage may bc validly constitutc4 it must rpPear in a Public gocument duly recorded in the Regist! 6f Property (sec Gaotian vs. Gaffu4 24 SCRA 706 [1969])'
Cuvco vs. Cuvco (48? SCRA 613)
a public althqugh te document, <lenominaiing the agr'r:clnent u" ott" oi -o.tgage, camot bc considered as it is not susceptitle ol iiscription in the property regi'stry. A mortgege in legel form is not consiituted by r piivate documcnt, cvln ifsuch moagpgc bo acco-mnatul{ with <Ielivery of pdss,;ision of thc mortgaS,ed propcrty. What thc perties gould have done in or&r to bind the reatty fol the iaairicnat loam was io exccutc s ncw rcul cslnlc morlg.$ge or ro amcnd the otd mdrtSogc conforniably with th.c form prescribed by th-e' iaw. Failing to do so, the rcalt canDbt bc bound by such additironal loans, which may be rebovered by the respotlrlents in an ordinary action for collect ion of surnj of money.

rlocument, besides being recordedl 6. provision in a pri

ln order to ccnstilute a legal mortgage, it must bc cxccutcd in

'

.l

.t

II$ge: Whether or not lhe rnongagc and its foreclosutc was valid inasmuch as
subject propcrties had olready been prcviously sold to pctitioncrs Dcla Mcrccd,

'

Hcld: Thc

rcgistercd right of thc mortga8c of the proPcrty is inferior to the unregistercd riglrt of the buyer to whom thc property was carficr convcycd. - ..

Whcn the purchaser or mortgsgee is a financing instittrtion, the general rule that a purchascr or morlgagee of land is not requircd to look further'than \,vlliil irl)l)cars orr thc facc ()l'thc title does not apply.
1'he consrrr,rctivb knowledge.of the mortgagee of the detbct in the title of ' the subject property, or lsck of such hrowtedge dueio its negtigenie; takes th.e place ol registration of the rights of a party to whom the property had been earlier sold.

DSM Con3aruction rnd Devlopment Corporflaion vs. Court of Aooenls (478 SCRA 618)
lasslrorr(lcnt's reliance on jurisprudence holding that buyer's rights of orvrrcrshrll ovr:r .cr.>rrdtlrrr i n iurtr urrils evcrr il' unrugislcrcd are su;rcrior ovcr registercd encumbrances is misplaced. The cases cited clearli indicated that -the p.rrlics involved rvsre condominium buyers and mortgage creditors. A mortgage crcditor is not sylronyrn()us to a judgment criditor contrary to what respondent 'asserts. Whilc the law expects a mortgege creditor to inquire as a reasonably . prudent ma$ would regarding the encunbranccs on the property in question, no such knowledge is imputed to a judgment creditor who merely seeks tht: satisfaction ofthejudgment awardcd in his favorl
i

Rodllsuc? yLggurl. gl^pnclts (49s SCRA 49o)

The deed df sote wittr asswnption of mortgage is a rcgisirable instrumcnt. It must bc rcgistcrcd with the Of6ce of the Rcgistcr of Decds in order to bind third porties.
lr[g3g: ,

If thc insriument oF- mongage. ncvcnhcless binding between th parties.

is not recordd, thc mortgage

is

Far East Bsnk rnd Trust Comnanv vs. Shembbrq. Mqiketinq Corp, (5ro scRA s6)_
incerpable

Where tbe issue involves the validity of a mortgage, the action is one of pecuoiary estimatio

6.

A ,rrortgagc creates a rcal right (sce Tuazon vs. Orosco, 5 Phil. 596 [9O5]), a licn. inseparable from the propcrty .Erortgaged. which is cnforceablc sgeinst the wholc world. Untll discharged, it follows the property wherevcr it goes and subsists notwithstanding changes of ownership.

74

(364 SCIrA 8r2)

In r suit to nullify sn cxisting Torrcns crtificac of TiOo (TgD in a which rcal estatc mortgage is annotated, thc mortglgrcc is an trytispcosab]e party. In such suit, a dccision caocelung the TCT ahd rhc mortg{!9 ltttoPtipi i" ruUj"r, to a pctition for annutmert ofjudpcnq bcoausc tbo non-joindcr of the m6rtgagce deprived the court ofjurisdiction to pass upon the contro". coy.-. .
Although a mortgage affects the .land itsctf and not mcrely the -TCT covcrirrg it. thl cancellatlon of thc TCT ind the mortgage annotirtibn exPoscd petition-cr to reel prejudice, because its rights over thq mortgEgicd prop-erty rv,.rulci no lQngel bo knorvn and respected by third parties. Necessarily, thcrefore' rlrc nrrllilicatiorr of 'l'C'I' No. v-4l3lg adversely a{Tectcd its proPerty rigbts, consiJurirrg that l rcal fi(rrtgagc is a real right and a rea! property by itself'
.

. Frr l:rst Bsnk & Trust

Co. vs. Msrou.ez ({2O SCRA 349)

UrlJcr PD 957, the mortgage of a sub<tivilion lot or a conddminium rinit is void, it'cxeculcd b1, o propert! d-iveloper rvilhout thc pfor writtei.approval of the Llousing and Land Use Regulatory Board. That an'cncumbranie has bcen' constirrrted over :rn entin: property, of which the subject lot or unit is merely a part, does not affect the invalidity ofthe lien over lhe spccific pprtion at issue. Develonment Bank of the Philiopincg vs. Court of Aooetls (44s SCRA soo)
j

.t:: I-ike sn aatochmcnt licn, a m6rtgage lien is a vpstd intercst, an ?ctud and substantial security, affording specific secuftty for the satisfaction of the dcbt put in suit which constitutes a cloud on the legal title.

'

'-

Trnchrn

vs.

Allied Bankins Corporrdo (s71 SCRA s12)

.l

mortgagc creditor has o singlc causc of action againet a mortgagor debtor, rvhich is to recovcr the debq but it h!3 tho option of cithcr filing a personal action for collection of sum of .Eoncy 'or tBtitutinB r rcaL action to forcclosc on thc mortga.ge sccurity, An cloc'tion of the frst bars recourse to thc iccond; otherwisc, therc woutd bc muttipllcity oflsuits in wbich the dcblor would be tosscd from one venue to anothor,' depen{ing on the location of the mortgaged properties and the riqidencc ot lhe pani$. On the other hand, a creditor who elects to foreclosq on the mottgBge may )'.)t file an independent civil action for recovery of whatever deficiency may remain in the outstanding obligation of the debtor, after deducting the price obtained in lhe srrlc ol'{ltc rlrortgrrgcct nropcrties oi Public auction. 'Fhc complaint, though, musi specilically alletse that whot is being sought is thc recovery of thc dcficicncy, or that in the pre-trial, such claim bc raised as an issuc.

Phllinnine Veterans Bank vs. Monitlar (sso scRA 25r)

Settled in this jurisdiction is the doctrine that a prior registration ofa lien crcates.a preference; hence, the subsequent anndtation of ai adverse claim cannot dcl'cat the rights of the mortgaBee, or thi purchaser at the auction sale

75

Irhose rights u/ere derived from s prior mortgage validly rcgistcred. A conuary rule will make s prior registration of a mortgage or any licn nugatory. or meaningless. The doctrine applies with greater forcQ in this case considering that lhe 8motation of thc nodce of lis pendens was madc not ot y aftcr the rcgis[ation of the mortgagc, but irlso, and much latcr, a0cr thc conolusion of thc loibclosune solc, Furthermore, the mortg3gco itsclf, PrrB, is lhc purptraser ofthc subject prolirtiee in thc forcclosurc salc,

PVB cannot be considered to havc slcpt on its rights when it only registered thc Sherit?s certificate of sale aticr the laPsc of almost 15 yeers, because, as already discussed, it registctpd lls Prior mo(gag and had already lorecloseil oD the aame. Pelitioner, thereforc, had cvdry. rcason to expcct tlat its rights were amply protectcd. The mortgagor was even benfrtd by this late registration of thc Sheriffs Sale, becsuse then, he would still have a chqnce to redee- the propcrty. Laches, being a doctrinc in cquity, camot bb invoked to. resist tlre eoforcemertt of a lcgal right. Furthcrmorc, ofl-rcPeatcd is the rule that the foreclosure salo retroacts to the datc of the redistration of the mortgage. Thus, it no longer mattcrs that tlle onnotstion of ihc shcriff3 certificate o(sale and tlrc rrlfidavit of oonsolidation of ownershi| was made subsequcnt to the annotilti()n (rf the notice of li.s pencler,:.
1989

'

llr.r

Exn nr

Oucstiof

Distinguish betrver,n a conlract of real estate mongade and a conEact bf sale with a right of repurchase.

, Rcltl listntc M0rlsruc

l.
2. 3.

Sale with n Rlsht to Reourchssc

I

an accessory contraqt no transfer of title no transfer of possession

l.
2.
3.

4.
5.

..

crcditor hos no right to the fruits upon dcfault, the creditor is not lhe owner

4.
5.

a principal contraci . involves ir conditional title , involves a conditional' transfer of i . title vcndce is entitlcd to the fruits uyon consoli&tion, tho vcndce is the owner

Nole:

a)

lf the mortgrgor sctls the mortgaged propgrty. thc propcrty remains subject to thi fulfillment of thc olrligotion sccurd by iL (sG Bourcvio vs. Qourt of Appcals, 125 SCRA f22 [983]). All subsequcnt purchasers of thc propcrty inust rcspcct thc mqrtgage, 'lvhcther thc transfer to them is.with or without the consent. of tha mortgBgee. But thc mortgagc must.bc registcred (Article 2125) or, if not registered, thc buycr must know of its existence.) (see Phil. National Barrk & Trust Corp. vs. Court of Appeals, !93.SCRA 158 U99I]. The mortgagor may not be the principal dcbtor (Article 2O85, 2E paregraph).
State Invcstment IIouse. lnc,

.t

o,iffi

STATE's rcgistc.xcd mortgogc right ovor thc propcrty ir infarioi to thrt respondent!.spoBci' urucglstcrcd righr Tlc Bryecordd salc bctwaco respondcnB-spouscg and SOLID is prcfcrrcd for.tho rcason that if thc original owner (SOLID, in this oasc) had pait d with his owncrship of tha thing sold then he no longj.er ltad ownership and frea disposal. bf that dring so as to bc able

of

J 76

.:
i

Registration of the mortgage is of no momcDt sirrce it is understood ro be withour prcjudi<r to tle bttr right ofthird partics. i ,

to mortgage it

again

'

cncumtrrancc tlrereon, tlrc purchascr is not rcquircd to or1rlorc fiirtlE rhan whar the Torrcns Titlc upon its fsce iDdicatB in $B[ for aoy hiaf.g dcfcct or inchoate right thaf oay subscqucntly dcfcat hi! righ rbcrcto. lhis rulc, however, admirs of an exccFion as wficre ttc prctnscr or mortgagoe, hai. knowledge of a defcct or lack of titlc in his vendor, (t tb.t hc r*as .altare of sufficicnt t'acts to induce a rcasonably prudent man to itrquire into tire sta s of

As a general rule, wherc trerc is nothing in the catifcaE of tille to indicatc any cloud or vicc in thc ownership of Ub propcqg, or nrai

Pctilioner's constructive knowledge of rhe defect in rhc tit.le of rlre subjcrct properly, or lack of such knowlcdge due to ils negligencc, takes the place of registration of the rights of respon&nts-spoirsesr Bsponded court thup correctly rulcd the petitiorEr rvas corectly gr ulorl8agEc rr.as not a purchascr qr u itr good faitlt hencc. f,c nencc. rroni:r can nol sotely solely rely oq yhst ;retitioncr mereJy alirqrs on t.b tb facc of thc yhat 'l'orrcrs litlc. 'rhe right or lien ofon ionoccnr moriga.gec for vaftiirupon rb morliJgj propcrtv rirust t bc rcspected and Prolccted, cvcn if the mortgagor obtained f,k tittc ilrough tiaDd- 'fhe remcdy ofthc p|rsons prcjudiccd is lo bring an action for itamages again$ rhe person 11116 carised &e fiaud and tt'thc laltcr- is irrsolvcnq ur actiorr ag."inst thc'freasurBr of ltt Philappines may be filed for thc

,:

ii

rccovcr-./ ol' <lanugcs atlrinst th(: Assufitnce Fund- (philipphe National Bank vs. Appea,s, 1 87 SCITA 735 I99Ol)

court of

Bank of Comrnirtc vr- Sen Ptbto. (s22 SCRA 713) .

.i:

Jr.

In cases where the moragagde does not dircctty.deal with tlte redstered rhe taw rcqu-ircs ilrar a high6 degree pq pru&nae bc ::1l :i lel-,nrorrcrr1, exenciscd by rhe mortgagr-. As irc. havc cninciiltcd in rhc casd tf ,l bul .vs. (iuinh* 465 SCRA 356 (2&5): Whilc one rvho bilvs from rhe rchd*cred owncr docs nor nccd to look behind rhe..certificatc of tiil4;E who buysrfrom jne who is rkrl a rcgistcred owner is expccted to cxa,mirrc not only Orc ccfiificat, of tiile but all the factual circumstarc rnocssory for [olrc]. fodacrmind if ftst ; any flaws in the tirlc of 'tbc tranbferpr, or irr 1ttr1 c*acr.ty ro tnusfcr ttc L.a Although rhe insrant cose doca not involvc a ilc Uu'ody-a norr3Egc, rule applies inasmuch as the law itsclf includs ,i"rrg"g;;'G Orc sarnc t ri.

.i:i'i:.

,il
I

-purchascr-"

"

.:''I

lsoffir8s),Under Article 2O85 of the Civil Code" onc of ttc essentisl rEquisites of thc cont act of mong4lie is tha rhe mortgagor shbdd be th absolute owner of the pr_o-perty to bc moreage4 othe*ise, tbe ,Dortfnge i! oorrsidc[Ed null and cxc:ption to lhis rulc is thc docrrinc of -moigagcc in. good I9if .I9I1"*,.4n larth." Under rhis doctine, even if thc mortgsgd it Dot tbe -oJocr Oi tfr proF_rtyr ttc mortgrg. contirct and erq/ forElo.urs erising T-"lqo8*l ulerelrom arc givim effcqt b,/ reason of prrblic poticy. .fbls prirciplc alo ls bosd oi ur_e rulc thsa all pcrsom dcaling with propcrty cowred by a Torrcns Certificarc of -l'itlc, as bu)rcrs mongl,,gccs, are;ot ;cq,iir"a go ro b;/orod whar appcars on _or the facc of lhe dtle_ Thil is lhe same rl.le Oat indjlit^s tle p:i[iple of "irrnocent purcl.tsers for vrJue-. . 77

Llttrto

Ys-

Alzottt

The prcvailing jurisprudence is that a mortgagee hos & right to -rely in good t'aith on the certilicate of title of the mortgagor to fhc property given as iecurity and in the absence of ariy sigrr that might arousc suspicion, hP no obligrtion to undertakc furthcr inveitigalion' Hencc, even ifthc mortgagor is not the ;ghtful owner of, or.docs not havc a valid titla to, th. mortgBgcd Pr,gp9rty' the mortgagee in good faith is, nonclhelgss, entitlcd to protcctioo.
.

'

For pe6ons, morc particularty those who arj cngagad in itat cstatc or financirng business, to bc considered 8s mortgagees in good fgith' ju{sprudcncq requireslhat thcy should take the necessB4r precaudion expcctod of a prudcnt man to ascertain the status and condition of the properties offered as collateral and to verifo the identity of the persons they transact business with' particularly, those rvho claim to be the registered pioperty owners.
UY vs.

Court of ADncsts (3s9 SCRA 262)

8-!!slr-. llcspondonts De Guzrnan were bwncrs of thtep lots in Greenhills Subdivision. trr 1971, they constructcd a house on two bf thc lots,' 'fhese lots have a conrbined arca of I,626 squtre rneters. In i987, the market valui of lhe lors iilready rangc ttom PIT to p5T pcr square meter whilc tha hous wbs lvorth about PtoM. tn ISSZ, Nicanor De Guzman Jr. decided to run for'tha'Positign of Representative of the Fourth District of Nueve.Eoija. Hlwbver, hii cirmpaign
'fhe t)e Guzmon spouses were requirpd to sign, as a collateral, a deed of sale datcd April lO, l9A7 After its exticution, De Guzman wirs able to obt4in several morc loarrs frorn Siochi. No sdditional collateral was required.. Despite the "dced of sale," however, the De Guzmans remained in posbession of thq propcrty. 'l'hc Dc Guzrnans agreed with Siochi to h6Ve thcir iscant loJ (which had alriady been "sold" to Siochi under the Apri! lO, 1987 dccd of sale), sol4,
t'und hegan to run dry so he was compelled to borrow P2.5M from

Marib Siochi.

In the meairtimc, and without the knowledge of the De.Guzraan spoustis, Siochi had the titles to th; lots oancclled, and had ne'w Torrens titlix issued in his name. In June 1987, Siochi sofd the two lots and the irnprovenlcnts tlrereon for ' Pl2.75M lo pctitioncrs. Thercafter, petitioners had Siochi's titles ove; thc.lots cancelled and secured new titles. In July 1988, pctitiorrrs i entered into 9 contract of lcase with option to buy with Roberto Salapontan, who was unable to obtain possession of thc lots sincp ttie premises wcre occupied. tiy the Dc Guzman spousqs. Salapantan fited a complaint for ejectment in August 1988 against the Dc Gu:rnans, It was only at this timc lh81 the De Guzrnans discovcred tha sale by Siqchi. The Dc Guzrnans filcd a complaint agBinst Siochi, Salapsnt8n, and petitioncr Uy, secking the rcfoniration of thc April lo, l987DeedofAbsolu1rSaleandreconv9yanccofownershipErrdtitles' !5gg9: Whether or .rot petitioners are innbcent purchasers in good faith and for
value.

t,
i
I

:,

Hetcl: While it is

tru,e ,no, u O"J*n dealing with registcred lands need not go beyond tlre certificte oftitle, it is likewise a well.scttlcd rule that a purahaser or mortgagee cannot ct.:"sc his eyes to ,facis which should put a reaaonablc man on his guard, and then claim that he acted in good faith under ih belief that there was no defect in th title of the vendor or niortgbgor. His n,crc rfusal to'faf, to the fact that sucb def(-Et cxists, or his witlfut closing ofhis eyas to the possibility of the existcno of r, dafegt in the vend6r's or rnortgBgor's tirle, till Dot mat" him on innocent purchaser for valu, if it afterwards dcvelops th3t the litlc was in fact defective,'a r'd it appears that he h8d such noticc of thc.defect as would

78

have lcd ro its discovcry had he acted with the measure of precaution which may be required ofa prudent man in u like situation.

Th circurnstslrce thal the original transoction was 3ubsequcntly dcclsr-ed to be an equitable mortgagc must mian that tlrc titlc to th.c tubjc6't land which had been tisnsferrbd toliiuot. respondents aciuslly rcmaincd or is transfcrred bock to pctitioncrc herein ai owner-mortgagors, conformably witb thc urcllcstablish;d doctrine lhat the mortgagee does not bccomc fhc owner of thc bccausc the oin-rstrip rcmains wi0i the mortgagor. the mortgoged propeny -certificate of title in Siochi's favor did not vcst upon. him issuairce oi o o*,nership of the property. Neither did it validate thc sale made by Sigchi. to petirione;, which. is null and void. Article 2088 of the Civil Cgdg provides that l'(he crc,litor cannot appropriate the tlrings given by way ofpledgc 6r mcirtgage, 'neing null and void, lhe sale by Siochi of the questioned or disposc t>t'rlrerrt." property to px,titioners, rvho are not innocent pgrchasers, Producgd no legal i ctlccts whatsoevcr.

(4s7 SCRI\ 167)

w'hile thc cases cited by pctitioner held tha( thc mort'gagcc is not under otrligatiorr to look beyorrd the certificate of title, whbn on its fabe,'it \r/as free llom licn or encrunbrances, the mortBagees therein werc considered in good t:ritir ar; thcy were totally innoceht and free from negligonce or wrongdoing in the transrction. ln this case, petitioner knew that th loan it was ex'ending to Carc ia/'l'rlnsAmerican was for rhe ptirposc of the developmci\t of the eight-unit to\ynhoqses. Petitioncr's insistence that prior to the approval of the loari, it 'uhdcrtook a. thororgh check on the pi,operty dnd fuund thc titles ft,ee from'liens and encumbrances would not suflice. It was incumbe4t upon petitioner to inquire into the status of the lots which includes vcrification on whethcr Garcia. had secured the authority from the HLURB ;t9: oortgage lhe subjcct lots. Petitiorrer fiiled to do so. We likewise find pctitioner ncgti$ent in frilinb to .qvcn. lsccrtrriu fiorrr (iurciu if thcrc urc buycrr of thc lots.who;iumcd out lo b priyate respondents. Petitioner's want of knowlcdge due to its pcgligcnce iakcs the pluce ol registrotion, thus it is presumed to know the righti of respondenls ovcr thc lot. 'l'hc..c0nvcrsion of thc stutus of pctitjorrcr Trqm mortgagc to buyer-owner will not lessen the impdrtance of such krtowlcdge. Ncither will the convcrsion set asidc the conscqucn-e of its negligencc ss e mortgigee.

Jurlicial notice can bc token of tho uniform practic of banks to investitssle, exanrine and assess the ral agtata offcrcd as gccurity for. ihc application ofa loan. The Bank cannot barefacddly arguc thct sirhply becausc the title or titles offered as security were clean of any encur:rbrances or lien, th&t it w.rs thcrcby relieved of tAking any o(lrer siep to verify the over-reaching implications shoutd rhe subdivision be auctioned on loreclosure.

tlural'Bank ol'Siaton (Neeros Oriental). Inc.

(495 SCRA

127r'

vs.

Mrcsiilos.
:

While a mortgagee is not expectcd to conduct an cxhaustivc invesl.igution on the history of the mongagoPs titlc, a banking institution mugt. huvc at least bxercised due diligence before cntcring into such conlrao*atlks are expectcd to cx.ercise more care and prudencc than.privarc individuals in their dbalings bicause their business is imprCssed with public interest

79

(,' Tlre issuc of good faith or bad faith ofa buyer is relcvant only where tbc sub.iact of the sale is a registered land but not where-the property is an urrregistcrcd land-.-onc rvho purchascs an unrigistercd lond does so at his peril. RBSI bought the property during the auction sale at its orrn pcril and must sufftr the consequenoes of its failurc lo invcstigate thc truc owncrs of subject propcrty.
GSIS vs, Sontiaso (4r4 SCRA s63) and

Aqru vs. Alnh$ Financine Corooration (4o7 SCRA 602)

' Petitioner CSIS is not an ordinary mortgagee. It is a government financial institution and,. like banks, is expected to. extircise greater care and prudence in its dcalings, iricluding those involving registered lands.. Due diligence required of banks extend even to personlr,. or inslituiions like the pctiri()ner, regularly engaged in the business of lcnding money secured by reol
estate nrorlgages.

'

Adrinno vs. Parr:ilinan (373 SCRA s44)

IOg!$: Guillernro Adriano is the registered oiner of a parcel of land in Montalbarr, Rizal covered by TC'f Nq. 337942. ln November 1990, petitioner entrusted the original owner's copy ofthe aforesaid Transfer Certificate of Titla to Angelirra Salvadoi, a distant relative, for the purpose of secriring a mortgage . loan. without the knowledge and consnt of petitioner; Salvador mortgaged the Subjcct property to rcspondent. After i time, petitioner vcrified thc stdtus of his title with the Register of Dccds and was surprised to disooier that a First Real.' Estste Mortgage was annotated in the .TCT pufpo.rtedly cxccuted. by him ill 'favor of respondent, for i5o,ooo.oo. Peiitionci dd*ca tnii te cicr executd thc deed and dlnounccd hfu signatuti, tf,crenn as g'forgcry, Petilipnei thcrcoftcr demarided that respondent retum or rdconvcy to him.hic titlc and:whcn ignored, he instituted the presnt suit. Resliondeot tcstified tb8i he is .i busiressman engraged in buying . and selling as ryell as qr the ltrortglgc of real estati properties; that Salvirdor together with a persoh uAo'introdrrced himsclf as Guillermo Adriano came to his house apd upon vcrifioation of papcn, hc 'executed the subject real estatc rnortgage,. aird.ficn had it noterizcd and registered with the Register of Deeds. Respondcnt claimcd that petitioncr volur(nrily cntrustcd his titlc to the. subjpt property to Salvador for the purposc of securing a loan, thereby creating a principal-agent relationship between the t!vo. 'fhus, according to respondent, the execution ofthe real estate mortgage. was within the scope of the Buthoiity granted to Salvadorl that in any event, the 'ICT and other docuinents came to his possession in the rcgular course of business; and that since the said TCT has remained ui'ith petitioner, the latter has rto curtsc ol uctiorr f<rr rcconvcyonce ogainsl hinr. The trial court ruled in favor of petitioner'.

Issues: l. Is the real estate mortgagc in favor of respondent Parigilinan valid?

2. Wus pctitioner negligent in entrusting and delivering his TCT to a relative who was suppo'scd to hclp hiin find a moncy lendcr? If so, was such negligence su flicient to deprive him of his property?

i ri

80

tlglsl

Petirioner's act of entrusting and dclivering his TCT and Residonce C"ttiti.nt" to Salvador was only ioi the purpose of hetping him find a -money lender. Not having exccuted a Cpeoiat power of attomcy in hcr favor *dT 4'1t 1878 (7) and (12)-of thc Civil eode, hc clcarly did not authorizc hcr o bc his og"nt irtp.o"uii"g the mortgage. He- only asked hcr to look for. possiblc molp.y lJnders. As between petitionir and respondent, we hold that the failure of the lattcr to veri$, esscntial facts was thi immediate cause of his.predicament' Ifhe rverc rrn ordinary inrtiviclual without any expertise or expericnce,in mortgages arrd rcrrl estate ilenlings, we would probably understand his failure to veriry essenrial l'aurs. I Iowevcr, hc has been in the rnbrtgage business fOr seven years. 1'hus, assuming inirt bottr parties rvere negligbnt' the Court oPines- that respcin<.lent shoild bear the 1ois. His superior knowledge of thc matter-should haie nrade lrint more cautious before releasing thb toan And acceptin lhe

' '

l}rtlr larv lntl equity favor petitioner Adriano. iiot, rt c riievatd legal provisiorr, Articlq 2otl5 of the Civit Code, requires that the "mort3agor be the alrsolrrtc orvner <,[ the thing x x x morlgaged." Hcre, the mortgrgor u'as an inrp():il(,r \\'h(, uNeculed tlrc cotllract withoul the knowledge -and consnt of the r.rrr'rrcr |iccorrd, crluity (lictutss lh&t ir l()ss brought obout by thc concurrent ncglig,crrcc ol rrvo'pcisons sllall bc'borne try one wtro was in lhe rmmediute, priin.,v ,rn.l .rverriding Jrosition to prgvent it: Herein resi:ondcnt -ii, engagcd in itre br.,iiness ol'lending ,roney secured by real estate mortgageg - hc could have easity avoided the losi.by simply cxercising due ncgligence iri ascerrainiug the identity of thc impostor who claimed to bc the owner of the proPerty being ' mortgaged. Finally, the equity merely:supPlements, not supplants, the law. The
Effcct 0f

C. l.

lUortgage

only upon paynrJni of ihe obligation. (Tormes vs. Ltanes, 384 SCRA 561). The only riSht of a nrortgrigee in crse of non-payment of a debt secured by real mortgagE would tie to foreclose the mortgage and have the entumtrered prgirerty sotd ro saiis$ thc outstanding indebtedness. (Guanzon vs. Argel,33 SCRA 474 [970])

T'he mortgage subsists penrJing and until aftef thc sat:sfaction of tbc dcbt, to be dischbrged

A l'nortg.age musl su{ficiently describe thc debt sought to be secured, r.vhich description must not be such as 1o mislead or deceive, and an obligation

not l)elong to thc slpcies of obligations enumcralcd in the mortgage, hence, the -slid c{)ntruct cannot bo ihdcrstood to s:cure thc pcnalty.

is rrot secrrre(l by a ,lortgaBe unless it comes fairly withiri the terms of the rn(rrtgage. ltr tlris cnsc, tltc lnortgtge c(,nlruct provides tlul it sccurcs notr:c stld other evidenbes of indebtedncss, under the rule of ejusdem gerteris, whcrl ? description of things of I partiiula.r class or kind is "accompanicd by wdrds of a generic charactbr, the gencric worils will usuilty bc limited to things of a kindrid nature with thos particularly cnumcratdd ..." A peoalty chalgi, doca
.

8t

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Chiens vs. Santos (s3l scRA 730)

Facts: To serve as sccurity for the loan thcy obtained, nispondcnts executed in Favor ofthc pctitioner I rnortgagB ovcr thcir propcfy and issucd sevcral checks to petitioncr. Sonre ofthe chccks wcrc dishonorcd which compellcd pctilioner to suc rcspondcnl Eulogio l'or violarion oi'BP 22, which casca. wcrc subgcqucntly settled through o compromise agrecrnent. Respondcnt Eulogio .violatcd said compromise agrecnent prompting pxititioner to forcclogc thc mortgage. The trisl corrrr orrlcrc<l rcslx)ndcnls to poy petilioncr. On appcul, the Court of Appcals rcvcrsccl tlre said dccision und ruled lhat since petitioner alreudy iued rssporrdent Eulogio for violation of BP 22 which is equivalbnt to a collection suii, hc is alrenrty borred from instituting an action for forcclosuie of mongage. I lcncc this uppc l.

'

lssue: Whether or not a criminal action for viotation of BP 22 is equivaldtrt to a collcction suit rvhich bars o mortgagc-crcditor from suing for forcclosure of rcal estale morlSlrge.

IleltI: A mongage-creditor may, in the recovery of s debt sccured by a real estats nrortgage, institute sg,sinst the mongage-dcbtor eithcr o personal action l'or cls't)t or a reul astion to foreclose'the mortgage. Thesc remedies avtrilable to the nrortgoge-creditor arc deemed alterrntive and not cumulativc. An election of onc rernedy operates as a waiver of the otlrer. A rcmedy is ileemed chosen upon thc' liling by the mortgage-creditor of ttre suit for colliction oillpon his filing of the complaint in an action for foreclosirre of mortgage, irursuant tc thb.. provisions of Rule 68 of the Rulcs of Court. When the mortgage-creditor files a. criminal case for violotion of BP 22 aliainst the mortgagodcbior, he is deeiaed to have already availed himself of the remedy of collagtion. suit, and following the rule on altornative remedies of a mortgagc-creditor, he is berred from' subscquently resorting to an action for forecloSurc. Howcver, it should be stressed thal respondcnts have not yet frlly fraid. the toan In fapq respondents theirselves admittcd that they still owe petitioncr tho bdtoncc of the iosn. To allow respondenis to benefit. hom the Io; without paying its wholc amount to pcliaioncr, and tr.i preclurle the pctitioner from recovering thc remaining balance .of thg loan, would constitute unjust enrichmont at thc Gxpcnsc of pctilioner. The principle of unjust enrichment obligbs the respondcirti to pay the reinaining balance ofthe loan plus interesi. Relieving the respondcnE of thcir obligation to pay the balancc of the loon would, indcc4 bc lo sanction dhjust eMichmcnt in favor of rbspcindcnts arrd csus unjust poverty to pctitioncr. .
'I'inchan vs. Allied Brnkins Coroorrtion (s7l scRA s12)
r

A mortgage creditbr has a single cause of action against a rortgagor debtor, which is to recover the debtt but it has the optiori of either filing a personal aotion for collection of sum bf moncy br insituting a rcal "ction-to forectose on thc mortgagc security. An clcciion of th first bars rccourse to the seiond; othcrwise, ther woulil be multiplicity of sults in which thc debtor would be tosscd fnrm one *cnuc to anothcr, dcpcnding on thc locetion of thc mongegsd proportis aw! thc rcsidenoo of tho partiorl Qn tho othor hrnd. r creditor rtho elects to fo.teclosc on thc mortgagi may yst filc an i[dcpcndent civil action for recovery,of whatcvcr dcficicnay may rcmain in thc outsbnding obligation of the debror, aftcr deducting thc pricc. bbtainod in the sate of thi mongaged propcnies , n public auction. The comCaint, though, must
82

specifically allege thet what is being sought is thc reCovery of the deficiency, gr I tlrat. in the pre-trial, such claim bc raiscd as an issue.

Yrln v!. EiBt &Bank Corrroration

So as not to create any misundcrstanding; howcvcr, the point should be ' underscored thht the creditor's obvious purposc when il forecloses on mortgaged property is to obtaio plymetrt for a loa! whioh ttrc dcbtor is unablE o, trniuslifiably rcl'uscs to pay. Tlie rationale is the sami ifthe creditor opts to sue thc debtor Ibr collcction. Thus, it is but logical thet a crcditor who obtains a personal .iudg,mcnl against the debtor on a loan wgives his right to foreclose onllls nrortLlagc securing tlre loan. Otherwise, the.creditor bec6mes guilty of splittirrl3 u sirrglc oluso ol'action for the debtor's inabilily (or unjustified refusal) to t)uy I)is debt, Ncao clvbet bit vexqre Pro unu et ea.lem ca&14. No man shall' be lrvi!:c vexed li)r orle alld the same cause. tlre debtor rails (dr unjustly refuscs) to pay his dcbt when it falls due is secrrred by a rirortgagc ond by a chctk, thc creditor has tbrec opaions aglinst Lhe debtor ond tlrc cxcrcise of ooc will bar thc q<ercise of the oihos. I lc rnfly prrrsue either of thc threc but not all or a combinition of them. 1.,/l\'/. (lrc cricdil.rr nriry lilc a collection suil ugoinst ltrc debtor. This will open up all thc propcrtics ()l'the dcbtor to uttachmcnt and cxecution,'even the rhort8,agcd property itselfl S?ctrzl,l, the cteditor may opt to foreclose on the mortgaged l)ropcr'(v. ln casc the debt is not flrlly satisfied, he may. sue the. debtor for <Jclir. icrrcy jtr<Jgnrcnt (rx)t a colteolion cusc f<rr the wholc indebtedne,ss), in which case, oll tlre properties of the debtor, other than the mortgaged propcrty, are again opened up for the satisfaction pf the dcficieniy. Lastly, the creditor may opt to sue the debtor for violation of BP 22 ifthc checks securing the obligation bounce. Circular 57-97 and.Section I (b), Rule 111 of thc Rul6 of Court both provide thet the criminal'action for violotion. of BP 22 shall be &cmed to neoussgrily includs the corrcsponding civil actioh., i.a, a collcction iuit.

lf

and

lrr.: di.:ht

'i

!)c |rrs Srrntos vr, Court of Anpcnls .._....:........(278 SCRA 629)

Upon poyment of the loarl'thcre is no mortgsge to which thc property covered by the title is subjcct and thercforo tlrcre cxisu nb bssis for the mortg gec's rcfu-sol to return the title to the petitioncr monga.gor.

Yctrooolitrn ,Bank rnd Trust Cornornv. Inc. vs.-SLELEs!C!!s,lr-&

(533 SCR/. 516)

. A rnortBagc contract is,. by nuture,' indivisible. Consequent to this feature, a debtor cannot ask for the release of any portion of the mortgaged property or ofone or some of the several properties mortgagcd unless and until the loan thus secured has becn firlly paid, notwithstanding th faot that there has been partial. fultitlment of thc obligation. Hcncc, it is providcd that thc dcbtor w[o has paid a part ofthe dcbt c.ntrot ask for thc ptoportionatc cxtingirishmcnts of the mortgag as long as tttc dcbt k not completcly satisficd.
Generally, the divisibility of the principal obligation is not affected by mortgage voluntarily constitutud by thc dutrror (ASB) on ths lots or units is one and indivisible. ln tlris cirsc, thc rnortgogc contract cxecuted between ASB and thc pelitioner banks

thc intlivisibility of the mortgage..The rcol csr6t!

tl

83

is considered indivisibie, that is, it cannot bc divided among the clitlerent birildings or units of th Proje.ct. Necessarily, partial extinguishments of the
mortgage cannot be a.llowed.

Yu vs. P,hilioolne Commercirl International psnk (.as scRA so What thc law proscribes is thc foreclosure of only 3 Portion of thc property or a number of th sevcral propcrties morlgaged corresponding to thc unpaid portion of the debt where, before foreclosure Proceedings, partial payment was made by the debtor on his total outstanding loan or'obligationthe debtor who hos paid a pan of the dcbt cnnnot ask ,br the Prof,orlion tc extinguishments of the mortgage as long as the debt is not completely satistlcd. In essence, indivisibility means that the mortgagO obligation cennoi be dividecl among the differcnt lots, ergo, eaih and every pardel undei rnortgage answers for the totality ofthc debt.

Metronolitrn Brnk and Trust Co. vs. Pascual fggtg: During t]:e lawful union of Nicholson Pascual and Florencio-Nevalga, the ialter bought a lot with improvement from the Sering spouses which was subsequently rcgistered in the name of Florencia married to Nelson Pascual a.k.a. Nicholson Pascual with the Registry , of Deeds of Mak8ti City as evidenced by Transfcr Certificarc of Title (TCT) No. 156283.' On July 31, 199-5 Florencia Nevalga obtaincd a decree of nullity of her marriage lvith Nicholson under Article 36 of the Family Code. Without first liquidating their proprtigs, Florcncia together with Spouses Norbeno and'Elvira Niveros obtained a F58 Million loan from petitioner Met obank and consequenaly executcd several real cstate mortgagcs (REM) on their, prope(ies including the .abovementioned re:rl proprty subject of TCT No. 15'6233 to secure said loansj Florenoia arrd thc trtir,.r.ir sp6uses failed to pay their loon obligation an<l as a result ihtrcof. Merobank foreclosed the mortg3gcd properties. Metrobonk was the highest
.

bidder at the fo.cctosure sale on ianuary 2l,2OOO. Nicholson, on June 28,i2000 filed a complaint to.declare the nullity of the mortgage with the RTC of Makati City and alleged thst the property, whioh is still conjuga.l propbrty wus mortgaged without his consenl. Thc RTC ruled in favor of Nicholson. and declared the REM on the propcrty covered by TCT No. 156283 and rhe loreclosure proceedlngs null and void. On appeal, the Coun of Appeals. affirmed thc RTC dccision with modification dcleting thc award of danrages and attorneys fees. Hence the presnr appeal to lhe Suprcmc Court.

lssue: ts subject propcny conjugat property df Nicholson ond Florencia or is it paraphernal property of Florencia? The effect of the slienstion or the mortgagc' with respect to the coowners; ghall bo lldited to the portion which may be rllotted to hlm ln the divisioo upon thc tcrmlDatlon of the co-ownersbip. In th casc at bar, Florencia constifiJtcd tho mortgagc on thc disputed lot on.April 30, 1997, or a littlc lcss than two ycars aftrr thc dissolution of the conjugal partnrship on July 31, 1995, but bc&ra thc liquidation of thc ponrrcrship. Bc thla 6s it may. what govemcd thc Proporty rolstlon. of thg formor rpoutor whcir tho monrtlgo tvnr given is thc aforcquotcd ArL 493. Undcr it, Florcncia.has the ri8ht to mortgage or cvcn sell hcr onc-half (%) undivided intcrest in the disputcd property even without the consent of Nicholson. Howevcr, the righB of Metiobank, as mortgagee, are limited only to the % undivided portion that Florencia owned.
84

.ill

Acc<.rrdingly, the mortS,age contract insofar as it covenid the remaining- % oftnJ tit is null and void, Nicholson not haYing consented to ""Ji"io"a-iJ,rti"n the mongage of his undivided half.

'

Produccn Bnnk of the PhillDDIn$ vs' Court of ADDetls

365SCRA326

!of: F Forcclosurc is but s nccessut ' coru;equcncc of non-bgyrncnt nr()rtgagc irrdebtednessr--the mortgage can be forecloscd only when .9-t d:bl rema-ins- unpaid at the rinre it is due. where respondents have nat yt defiiulled

in tltc paytnctrt ot'thcir loons and their loan was nol yet due and demandable' the rrpPlir:ation l-or lirrcclosttre ot' rnortgage is premature.

. of a co-owned properry ownerslrip .A c()-(twrler do$s not los his 1iatt without thc fomcr's {jo'owncr by another is nlortgagcd his sharc rvhcrc ji k lrrvlcrigc lnd o(rlsenlr

Iucrca(lo vs. Court of ADoetls (2cOScRA 616), ' :

,t

ocamno vs. Ocanrbo :?r, scR/. s4s)

't'he ct'ttct of a rnortBage by a co-orvner shall be limited to th9 portion that nray be allotted to rhat plrion dpon the termination ofthe qo'ownership. 't., Fer Etst Bsnkqrid Trust Co. vs. Plozsr ' .I :

'

@:

.i:

,i

:'.

An action to conrpel the mortgagee to,accept Paympntisnd for the conscqucnt canocltation of a real cstatc mortgage is a persodal ,action if the mortg,s8,cc lros nol forcclosed the mortgsgc ond the mortgagor ls in possesiion of thl premises sirlce ncilher the mortgagor's title to rior. pqSsqssion of the i propert) is in question. ' . ,

2.

The mortgsgor's default does not olprate to. vcat in'thc mongagpo thc owncrship.of the cncumbered propcrty. His failurc to rcdccrir thc prgpcrty doos not futotditicglly vcst ownctship of th; property to ihc mortgngce which would 6rant tbo lrttcr thc rlght to sirpropriatc thc proprti or .ti*p.r". of it for i,rit, .ff.q is againstlublic policy. as cnunciatcd by Articte 2088. (Reyes vs. Sicrra,93 SCRA 472; Ramirez vs. Cdurt of Appcals' 4O9 SCRA 133) l{eirc of Jose Reves. Jr. vs. Reve3 (6?j9 SCRA 7s8) The creditor cannot appropriate the things given by way of pledgc or mortgage, or dispose of them, and any stipulation to the contrary is null and void.

'
2.1,

It is the duty of rcspondents, a-s mongagccs, to foteclosc thc mortgagc if he rvishes to securc a pgrfcct title to thc mortg;8cd. ptoPorry lf bo buyr lt in tbo foreclosuie salc.
P uc t un r Contm i ssolir.rrz

stipulatlon is void.

.35

Olea vs. Court of ADrresls (247 SCRA 274)

stipulation that the owncrship of thc PloPglty .would ruomaticEJly pass to rhc Gndec in case no rcdemption is cffcqtcd withio e stipulated pcriod is voict for being o poctum commissorium which enablos thc mortgagcc to acquirc owncrship ofthc morlgogcd propcrty without ncpd of forcclosure.

a)

whcrc thc contract contains a stipulation that ufon Payment ui' irr" b) vcrrdor of the purchosc price within a crtain pcriod thc documenl shall become' null and void and have no legal force and et?bct, the, pqportad salc should be
consiclered a mongage

uontraCt.

c) d)

In cdse of doubt, a contract purponing to be e sale with right. of

.rcprtrohuseslrallbeconsi<leredanequitablcmortgagi. A nrortgagc acliorr prescribcs after ten years.

l.,ccnsoi vs. ()qg (4s9 SCRA r22)

,i
:

i,

A stipulation that should the vendor foil to comPly with the tgrms and ctrrrrlitions ol tlrc puqnrtr:d contract of salc, thcn thc property shall by virtue tl)clc()l' lrcconrc tllc pt()tNrty ol'the tenclce is contrary to the nature of a true pocto dc rctro solc - it is considered a pactunr commissorium, enJbling tlre m()rtgtgee lo scquire owncrship ofthe mortgaged proPrties without thc need of tbrsclosure proccedings, which is a huUity being contrary to the Provisions of Aniclc 2088 of the Civil Code. The inclusion of such stipulation in the decd j shows the intehtion to mongagi rat}er than to sell.

MCO Samole

Problem

i
i

',.

money from Y with his perccl of land as security for the payment of said loan. The pacto de retro sale exccuted by the parties cxprssly stipulatc that in the event X fails to exercise his right to rqlurchasc thc lanil wi6in nincty (90) itays from ciecution of thc galc, said property shall ioso facto becomc tlre prcpcrty of Y without nced lo pcrforEr any.firttbcr abtion or documcnt. X dcfaulM. Can X still recovcr subjcct propcrqr?

X borrowed

a. ':. b. c. . d.

No, bccause X's.priod to rcpurahasc thc proparty undcr thc c,ontract has alicady
lepsed.

Ycs, because the said stipulation is void, bcing

in the nature of Pactum gommissorium. Yes, because the contract,is actually s'n equitable nrortgage and subiest proPe4y has not been foreclosed. No, becouse ownership of the property has already been transferred to Y who is now (lrc rightful owncr pursuont to the contract which constilutes the lsw betwccn lhe partics.
scRA
2088 of th Civil Codc; cf. also Olea vs. Court of Appeals (247
27.1)

!.cccl-Bsjs: Anicle

llcason:

A siipulation iD u pacto dc retro solo thot should thc vendor foil to conrply with thd lcnnx th('r'col'. tlrc proJrrty slroll becoms thc prop(y of thc vendee without necd of forcclosuro ProcccrliDtaE rs rrrrll Atrr,l v$i..1, bcrrrg lt lrtrclunl u9lttr$lrrorltlltr.
86

2.2 ,

Equitable Mortgagc

Alvero v!. Ternlda (479 SCRA 288)

Di[o

vs. Jordlnca (48r SCRA 22O

rntl Develooment Coroorgtion (so0 scRA s26)

and

flobcrts vE. Papio (sis SCRA 346)

frrnn or lvords, or other requigites demanded lly a Statule, ncvcr-tlr(: lcsri rcvculs tllc intention of the partics !o charge rcal property as sl.'culily fbr a debt, and conto,ins nothing impossible or contrary to law, Fof the 1>resumption of an equitable mortgage to arise, t\ro rcquisites must cdncur: (l) lhar thc parties entered into R controct denominated as sale; altd (2) that their intcntior) wns to secure an existing {ebt by way of a mortgagc, Consequently, thc nonpaymenr of the debt when due gives thc mortgagee.tbE right to forr:close the nrodgage, sell the property and apply the procee& of the sale to the lilnrlirlrr\,.
While Jhere is no iingle conclusive test to dctermine whethcr a decd absolute on its face is really a . simple loan accommodatidn securcd by b t'IrortB.rBcr horvcvcr, Anicle l602 of thc Civil Ccite cnumiratcs.scv;al instances when a contract is cloihed with tlre prcsumption.th&t it is an cqUitable mongggc, io wit: ( I ) When the price of a sale with right to repurchisc .is unusrially inndc<;uttc: (2). Whcn thc vcndor rcmains in posscssion as lcss?c or othcrwis;; (3) whcn upon or allsi rhc cxpiration of thc ri8ht to roptiiphas anothcr instrurncnt extending the period of rcdmptioo or grdDting a ncw pcriod is cxecutcd; (!) Wher ihe purchoscr rctains for himsclf a part o.f thc puchss price; (5) Whcn thc vcndor bindr himsctf to p6y thc trxB;n tbo'tbing -solq (6) In s.ny other oases wherc it may.bc fairly inferred that thc reel. intention of thc ponics is thut the trunso'ction shall sccurc the paymcnt of a dabt or thc pert'rrrmance ol' any other obligation.
Romulo vs. I-avus. .Ir. 1sor SCRA-6A

n n equitable mortgage is defined as onc which atthouglr lJc.lring

or

ir

some

of equitabte mortgaBe to artsc, two requisitca must namely: that the parties entered into a controct dcnominatcd as a contract ofsale and that their intention was to sccure an cxisting debt by way of mortgage. 'l'hc court lras tro( hcsilotcd (o dcclurc o purportcd contaaca of gal as an equita.ble mortg8gc cven whcn only onc of the ehumeratcd circurnstanccs under Article 1602 is proved.

For the presumption . bc satisfied,

87

'
rcnuins

I-acorte vs. Court of Aoneals (286 SCRA 24)

expirarion of thc rieht to rcpurchasc aDother instrumcnt cxtandlag thc Period rcdcrrrption or gronting o new pcriod is sxecutcd.
l98O

' A contract i3 prcsuned to b on cguitablc mortgago whcn thc vcndor in posrcicion os lcssoc or othcrwiso or whotl uPon or'aftar thc

of

llar lixtm
"S"

Ouestion

of Absolute Sale of a parcel of land in favor of "T" reservjng for rcpurchase to thc same within five years from the date 6f the contract. The right hin)sell'rlrc contract pr()\ridod that during tlre repurchase priod, "Sf' will retain possessron of the'land as lessec and pxy thc l$nd tores thcrcorr. The consideiation for thc ssle was PlO,0OO:O0 but the laad rvts rvorh .hrrrlrk' tlrr. pricc. "S" flited to repurchose the l'Bnd withln the'ogreed period and "T"' appliucl tu rlrs L'(rrnl lix tli!: corsolidirti<xr ol'his titlc. "S" opprscd lh.: opplicotign nrtd claimed that he had lhc righl to rpurchasc the land.
e.recuted a Deed
,

Whosc stand should be upheld?

The contract in the instsqt c&se is an equitable mortgage. The land is mcrely the iollateral or securiry for rhe payment -that of a ioan oi P[O,OO0.OO. This is clcsr from the dced of sal itsclf. -S" will retain posscssion of thc land as ls.*rc; morEover, it stipulatcs Firstly, it provides ttrat'S:.', the vendor, shall pay the taxes thercoq furtbcrmore, fhe purchasc pric is unlrsually inadequste. Under thc Civil Code, the prcsence of any of.thcse will be suflicicnt to raise thc presumption that the contract is an equitabte rJrort8Bge.. (Art. 1602, Civil Coda; Gardner vs. CA, 80 SCRA 399;.Gloria.Diaz vs. CA,84 SCRA 483; Labasan vs. Lacusta,86 SCRA 16).

D.

Extent of Mortgoge

Gcneral Rule: A mortgagc constituted on immoveblc pr"*ny is .not limircd to .ttlc property itself but also extends 1o all its accessions, improvcments, gpi"ir,g fruits and renls or income (see Anicle 2t02) as wetl as to the proceeds of insurencd should thi property be destroyed or the expropristion value of the p-party should it be cxpropriated.

Exception:

contrarystipulotioD

E,

BlaBketMortgagc/DragnetClausc
Bank of Commerce-vs. Flores (637 SCRA s63) Traders Roval Bank vs, C'sgtaf,erca (636 SCRA 5r9)
Producers Bank of thc Ptrillonlna vs. Etcelsa Ipdustrles. Itrc. (s87 SCRA 37O)

88

;':
Reoublic Planters Bank vs. Sarmieoto (s37 SCRA 3O3) snd

Prudential Bank vr Alvisr (464 SCR/\ 353)

mortgsge clause," olso krioqn as a "dragnct clausol. in Arrcrican jtirisprudence, is one .which is spccificatly phragcd to su-bsumc a[ . debts ol'past dr future origins. Such clauses are ':cirefutty scrutinized and : strictly corrstrued." Mortgages of this. cheracter enable the parties to.piovide .co,rlinuous dealings, the nature or extent of which mdy not be.knowrr or anticipated at the time, and they avoid the expense and inconvenience of. executing a new securily on each new transaction. A "dragnet clause" operates as a convcnier)ce and accommodati<in to the borrOwers as it makes available tdclitiooal t'un(ls wilhoul their having to execute additiorial security docriments, thereby saving time, trovel, loan closing costs, 6osts of extra legal sewices, recording tbes, etc. lndeed, ir has been settlcd iir a long line of;dccisions that morlgagcs given to secure future advancemdnts are valid and.tggat contracts, and the amounts 'named as consideration in said contracrs dcii not limit the ilmoult fi)r which the mortgaBc may stand as securit5r if from thc four comqrs of tlre instrumcrrl the intent to secure future snd other indebtcdncai can be

A *tlankct

In the obsencc ol'clear, supportive evidence ofa contrary intention, a nr(,rtg.r8c corrtaining a "dregnet clause', will not be extendqd to coi,er..future advarrces unlcss thc document bvidencing the subsequent actvance refers to the mortgage as providing security therefor.

I ,

(47r SCRA

7sl)

A.mortgage liability is usuatiy limited to th amount mcntioned ii thc c(xrtract, but where the intcnt Of lhe controcting parties is manifest tliat the rrr()(guge prol-+rty shall also answer for. future loans or advancemcnas, the saire is vulid und tlinding lrclwccn thc purtics. A ..blunkct morlgrge clause,"'also known as a "drignet clause" in American jurispnrdcnce;is-.one whioh is specilically phrased ro. subsume all dcbts of pait'oi futurc.o;gini, enabling thc parties to provide continuous dcalings, thc naturc or cxtcttrt ofiAich may n6t bc known or. anticipated at the ti'ne, ana they avoid thc c:rpcoso and iactinvcnicncc ofcxecuting a new security on each ncw Lansaction.

(487 SCRA 693)

and

Ouintrnilla

vs. Court of Aopcrtg (279 SCR.A 397) .

S3 ooruldorrtion ln r oontrBal of nrortgage do not limit the amounf for which thb mbngagc may stand as security il' t'r,rrr thc l'our corners of thc ir*trumenr thc intcnt -to-sccuri, r"ro,' u"a oriii', indebredness can be gathered is valid and binding. It is known il A;.;;; jurisprLrdence as the "blanket mortgage clause,"-atso known as ..&agnet

A stipulation ttmt thc amount'namod

89'

'.

glausc" and operates as a convAn;ence and accommodation to the borrowers as it nrakcs available addilional funds without their having to exicute additional security documents,. thercby saving time,.trevI, loan closing,costs, costs'of c\lra legol services, rccording fees, etc. While a real estate mortgage may excepionslly securc l'uture loons or advanccmcnts, these future dbts must bc suffiiichtly described in the mongage contract. An obligation is not secured by' .r nr(rrtgugc unlcss il comcs firidy within thc lerms ofrhc rirortgage controct, '
'profrerty mny be charged not only for the mortgage debt but also for thc intdfcst, otl,i.. chu, gc.* urr.l coJs opprovei by the cor.rrt. I '

Itulc 68, Sccrion 2 of the ttulcs (|l' Court pDvidcs that thc

mortgrgc

'

..\lienition or Assignnrent of IUortgage li. l. Sirr.l irssrllrrnrcul is v:rlitl anrl tlrc assigncc rrrrry ' lirroclosq thc rnortg;lgc in cass of n()npirvt'l'rclr (ll lhc m()rlBoge indsbtcdncss. (Sanli.lgo vs. l)ioncer Savirrgs and l-oiu Bilnk, 157 s('lln I0(, {r')881)
B(rrromeo vs. Court of
A rreg!!-lg

rlrr\ p!'rsorl olhcr lhan lhc credilor-mortgagee or its assigns.

'l'hc right of foreclosure cannot be exercised against the mongagor by

Dlll, v!. Court of Aurreols

(28d SCRA 14)

lrr l,c'o1>lc'.s l-]arrk & .l'rust Co. vs. Odonr (64 phil. I26), this Court harl thc ocsrrsiorr ro rule that an assignirrent (of leaschold rights) to guarantee an oblig$tion is in cffbct s mortgage.
'I'he elements of pactum commissoriurn are as follows: (1.) tbere ihould bc ll Prolrrty tnortgaged by way ol security for the payment of fhc principal ()t)ligllti(Il, ond (2) there shorrld bu o stipulalion for sutomalic appropriatiOn by thc crcditor ol tlre thing.mortguged in. cosc of non-paymsnt of the principal otrliglrrion wirlrin the stipulBted perlod..

Condition No. l2 did.not provide that the ownrship over the leasehold riglls would automstically pass to DBP upbn the mortglgor's failure to pay the lQ:rn on lirne. lt mrcly provided for the oppointsncnf oi DBP as anomcy-inl'trct with suthorityr amorig other thingr, ro sell or otherwise dispose of thc said rerl righls, in case ofdefault by thc mortgagor, and to Ep,ply the proeecds to the payment of the loan. This provision is a standard condition in mortgage contr cts nnd is in conformity with Article 2087 of tlre Civil Code which
arr(lroriz.cs the Inodgagee to foreclose the mor.lgage and alienate the mortgaged prop{:rty for the payment ofthe principal obligation.

'l'hc l'uct llrat the morlgagor hm transferred the mortgsged property to a thirct person d(rcs not relieve him from his obligation to pay the debt to the mortgage creditor in the absence of novntion (McCrrllough & Co. vs. Scma,4l Phil. 1 [192I]).

2. 3.

M()ntsBgc cre<tit being.a rpot right wllich follows tho pmporb,. thc oraditor moy dcmcnd l'rortt ilrrv lirssussor tlrc fxtyment of thc crcdii secured by soid propcrty. Il is necesssryr howcver, tlrill Prior !l(:[!rlrrJ ]irr l)uyrncnt lnust hovc bccn rrruclc ()rt tlrc dcblor ond tlrc latter lirilcd to pay,

(llrrn\ ol'llh' l'lril lslrrrrils vs. ConccJrcion & I liios. lrrc.. 5ll l,hil. 906 [19291; Nuftcz vs. OSIS I rttrrlr ltrrrrL. .l /) li('l{A .l(}5 l.:{XXrl).
90
I

Develooment Bank of the Philipnines vs. Licurnin (sr6 scRA 644)

'

Thq issue of whether demand wag made bifoie the: forcctosurc was cll'cctsd is essenlirt. tf rlcrnand wus mde ana arty received by ihc respondents and the lattcr still did not pay, thcn they wcre alrcady in default and. forcclosurc was proper. I{owevcr, if-dimand wai not made, ihcn tho loans had not yct becomc due lnd demandable. This meant that resporidents had not defaulted in their payments and the foreclosure by petitioner wds prcmaturc. FOreclosure.is valid onlv r.r,hen the debtor is in default in the payment ofhis obligation. '

'

[inlsss dctnand is provcn, one cannot be hcld in defedt. Petitioner's cousc ()l'lction did not acarue on the maturity dates stated in the'promissory rr()(!:r. lt is orrlt rvhcn dcnrund to pay is rnodc strd subicilucntly rer''used that .. respc,irients can be considered in default and petitionir'obtains. the right to file 1n nc(ion to collect the dcbt or foreclose the tnortgagg.
.

Sin('L' (lcnr$nd, u,hich is rrecessary to makc.rspondents guil$/ of defoult, \\irii r('\('r rnit(lc on tcsllrlrdcnls. lhs Sul)rcurc C(rrt rulcd thnt tlrc ,i)ruclosure \\'ls llcnrtlurc arrd void. ll,cspondcnrs calnot bc held liublc lb.r tlic duliciincy cltlinr. \\'lrilc it is truc that in extrajudicial foreclosure of mortgage, the rrr(rrl!i:tllr(' h.rs llrc riBlrt to rccovct the deficicDcy frorir the dltitor; this l)r.s l)t)()scs thtt thc l'orcclosurc nlust ,lrst bc validrr

Luzorr Dcveloomcit llank vs. Conouitla (47O SCR/| s33)

.,!n acceleration clause is a stipulation stating.that, on the occasion of the mortgagor's defsult, the whblc sum remaining unpaid automaticdly bdcomes rhrc nrrd paynblc.

;.:

{.

/\,

.ssig,ce canrol ocquire greater rights than thbse perraining ito."n u""ignoa (Koa

vq.

qffi#
It is trasic ond fundsmentat thot the first rhortgagcc has supcrior rights over.irrnior nrortgagees or lttaching creditors
l,cc vs. llcrtakok Bank public Comrrnnv. t,lmited (642 SCR/I 447)

Bank as attaching creditor, the former has a superioiri-ghl over the latter b-eing the first to annotate its l:i:n on the titles ofthe properties.

the tirst mortgage r:reditor or mortgagee over the'mongagcd .properti-es are supcrior to those of a subsequent attaching creditor and othirjunior mortgagees. lrr this cflse, it is e fust thot the REM w4S annotated on tlrc titlcs of the iubject .q.ntipolo propenies ahead of the writs of preliminary attachmcnt issucd in fa-vor ol Bangkr'rk Bank. ln focl it was admirted by Bangkok Bank that it onfy tcnew ol' thc cxisting morlgs.ge rhot has already been oinotatod Bt tho baof of iho srrbje,,:t titlcs_._rvhen ii lought the annotation of th_c writs of preliminary xttachnrenr. 'I'herelbre, as between Asiatrust as mortgagc,crcditor a;d Bangkoi

is cviderrtly a well-scttled and elerncntaDr principle that the rights

of

9l

c.

Saipulaaion Forbtdding AlienatioD of Morrgaged Property

transl'eree is hound to.rBpact thc catcumbrancc because bcing ! rc6l right. the. propirty rcmains subject to the futlillmint 6fthc obligation for whose guarantl' it tfs oonstituted (Anicle 2126)'

Suuh

u stipulution is void. llowcver, if the

mdrtgagor rtienates

ihe propeny, the

l'etitioners insist that the tenancy conlract was illegal as the mortgagor' sp.rrrs.s cannot. validly enter into in agricultural leasc ogr-ectnent ai-ttr rcsporr,Jent <iuring lhe ei'l'ectivity of the mongag,e conlr:tct. We disagree. The Coirrr of Apprals-correctly applied Article 2130 olthe Civil Code wtiich rend.e.rs !!'rd---0!D-,{ii!ultljet!--ttlbjddjn& the orvner from alienating tle imrnbvable lt' is scttled lhat a real estate .,.r,,;f g,-rrl,,-rl- iLl-.'r. tiu4,raric -tloi's nor cxtiruuish thc litle of ahe debtor. rle docs nor lose his righl ro usc rir ilispose of tlre rnortgagecl property 0us disponcndi) which is one ofthe 1)rirrcipirl allribules t'rl'ownership. 'lhus, in lhc css et bar, thgJll)4gagqL spouses rvere rvcll rvitlrin their rishts whe4-thev constituled resoondenla.s. iln tigdguiil,nll t.sia. and the legqlitv of the lensehold contract cannol be validlv
15;l-ijgg!_1p
th i

. ..

s urr,rur rd.

@
lo

vcsn vs. Socisl Securitv Svstent (SSS)

. Although a stipulation in the mortgage contrdot requiring the mortgagor securc the mortgagee's consent before selling is valid arld binding' in the sense thot the lsfiei6nnot be comPelled while. the loan is unpaid to recognize thc sole. it cannoi be interpreled as absoluteli forbidding the mortgagor' as (rrvner <if ahc mortgaged property, from selling thc stme, while. her.loan. rcrrrrincd unpoid. Srili stipulaiio; aonlrarencs piblio Policy, being an uiduc irrrlEdilncnt or. interference on the transmission oF prciperty.
Wlren rr mbngagor sills the mortgaged prqFrny to a $ird person' the our-y rlqnrnrtl litrm strch .third fx:rson lhc fuymcrll uf thc principul ()l)l itsi.]t i{rrr lhc tlt('rtgagc crcdit is u rorll riglrt, whish lirllows thc pr(rpcrty r,',hcrevt r it tsocs, evan if its ownership changes.
('r

crlitr{

Arrir:lc 2129 ol'thc Civil Code gives thc tnortgiige (ijSS) the option of c(rllccling l'r()nr (he (hird person in possession of the moitgeged ProPerry in. the r'oll\'clll rrl orvrrcr Mrircovcr, thc rrr()rl!'.i8(]r-.lwll('r's s|llc (lI tlrc prolrcrty docs rrot llust tltu rigltt r.,l tlrc tcgistcrr:d rt)oragutlec lu lirtucloss ott tlts slltrts qvcn il' ils rrrvrtcrship had been translerred to anothcr person.'l-he lollicr is hound by the rcf:rsh'rcrl llr.lr tp.rl:c (,lr lhc tillc lre rlctltlircrl.

u.

Foreclocure of Mortgage

Rlztl ComIEgfggLESIlElllrLCorDorttig

i63rscR 55T
'
his tibligrrrir,rr, lt is r necessary consequencc of non-paynrcnt of mortgagc indchtedness. As a rule, the mortgage can be foreclosed 'rnly when the debt
J

1"()rcclosire is valid only whcn thc debtor is in defitrrlr in the payment oi'

92

rctrruins unpaid at thc time it is clue. In t real estatc mortgEgc, when the orincioal oblieation is not paid whbn duc, the mortgagcc has the rigbt to 6.;;i;;" on trr-. -o.tg"g., to'have the property scizcd and sold and to apply rhc
proceeds. to the

obliSation.

Respondent's passbooks indicatc that RCBC co;tinucd to rccciw his puy-.rrt" elen after ii rnade demands for him to pay his pat due rborrtrts' aod even after thc auction sale. - .'
even w4en it claims O--ral the .RCBC cannot dcny receipt of the paymcnts, -respondent's fault that RCBC did not deposiis wcre "nol tvithtliawn."'It is not *iih,lra* th" -ot ey he deposited. His obligation undcr the-mongage ai-eement was to deposit hiJ paymint in the savings account he had opcned for that purp()sc, iri orlcr rh;t ifCBC n"ray dcbit th-c arhount of his monthly liabilities therefrom. He complied with his part of the agreement.

This bolstcrs the conclusion of drc Court of Appetiis that rGspo{dcnt }iad no unpaid installmcnts and was not in difault as would fnariant the applicatign oi thiacceleration ctause and the subsequent forcctosure and auction salc of thc property. ,.

Sctcgnr Mln$qement ond Dgvelooment Corporation vs. UCPB (489 SCRA r25)
and

flouitabte PCf iBsnk vs..tr'ernendez

Foreclosdre is proper wheh the debtors arc in default of thc peyment
I

their

obligation.

of

Iu Sgruscs Estarcs vs. CA 459 SCRA 604 (2005), wc did not find any justit'lcation to.grant a preliminary injunctibn, cvcn when the mortSogors were disputing.the amount being sought from them, Wc hcld in lhat case,that "uPon thc nonpoyment ofihe loan, which was sccuted by thc mortglgc, the mongaged propcriy is propcrly subject to a forcclosrire satc."
:

A laie partial paymenl could not have po*sibly forcstalled a long'cxpired maturity date.
St. James Colleqe of Parataouc vs. Equit$Ele PCI Esnk (627 SCRA 328)

EPCIB |las clearly establishcd its status as unpaid mortgagee-creditor entitled to foreclose the mortgage, a remedy provided by law and thc mortgage corltruct itselt'. On the other han4 pctitiorrcrs can hardly claim a rillrr, much less a clear and unmistakable onc, which the intendcd forcclosure salc would violate ifl not eqioined. Surely, the foreclosure of mortgage does not by itself constitute a violation ofthe righrg ofs dcfauldng mortgagor.

93

Prorlrrcers GJ.nk of the Pllilint)itrB v!" Court ol ApDcals "--*(365 .sclrA 326)
Whcro rcslDn(lunls hrvrJ nol yct dslbultcd ()n thu pryment ol'their loans arril tlrcir tilan wos n()l ycl duc untl dcmondablc, lhe lpplication fol lorcclosure ol' nrrirlgagc is prcmalure.

Tanrbuntinq. Jr. vs. Sumabat (47O SCRA 92) ,\,r :r. ii.rr t.r r-'nlilrct'rr righl trising from a m()rlgagc should be enforccd \', . jr,r t\'d \,t .rr'.r lilllll llru tiriru lt)e riltht (,t'rrr,:liotr '.rucrues. ( )tlterwisc, it will tc i':rr-.i lri l,r.:,('rrIrrr,ll rrrrrl thu rrrt'r'lg^gc crcrlitor will krsc ilis rigllis utrd(,r (hc
4r
.:

l,-'I

.:C

eg_n&l's._gbzo (sr I SCtr.\ 7{ I )

r'!1rr.lgag!' aciiorr prr:suribes irr rdn ( l0) ycars liorn the tirne ihe right ot' :.r'lr(rri:rc!ilr('s. llrrlt is li()nr th'i) tirnc thc nlortg:tgor dcfatrlts irr tlre paynrent O,' lr,r rri'lr$ttio'r l{.) thu nt(trtgitliuc, no( l'rorlt thc drtlc (rl'ihe morlgage conlract.
ir

lr '(.L\:, '!lll( !'I('l,l(.rn Ar action t() lbrcclosc fl rcat cstate mortgpge prescribes in:
al-

.:.

t) c.

il i

len ( lO) years ,ionr the time the nrortgagor reoeives a demand from the mortgagee to scltlL. his obligalioD lc,r ( l0) ),{.:nrs fiorn lhc date olexecuiion oflhe mortgage contract lcn (10) yeors liom the time the mortgagor defaults in the payment of his rrlrligar ion t.r tlll,: nrortgogee lc,r ( l ()) yunrli lionr itrc dotc ot'notarization of thc mortgog,e controct
ggg!. J-)-qS!$:

Nu sz vs. GSIS Family llank (475 SCRA 3O5) Crndr.r vs. Olazo (5 | 8 SCRA 74 I )
I|&ncoge OrtrEPCl. Ipc. vs. Daguna (57o SC R,t f,8E)

l'rior to forcclosrrre salc,

An aclion for the release

of the mortgage is a

/-r.'r'rrr.,, posscssion und orvnerhip over the properties subject of the mortgage lrlrving rcnraine\l rvith, in this caso respondent-morlgagor. Since Fletitioner had,

in thc interregrrum, fbreclosed the mortgoge, respondent had to withdraw its action ltrr release ol mortgagc and filc the appropriate action for annulment of the firrr-.closurc irt rhe proper venue, which is Manila where the moltgaged l)ropertres are locared. As the Makati RTC still rlained jurisdiction over the ltnrphint li)r damogcs, which is a personol action, it properiy rcinstated it 0,s the s1lbject ol'rcspondeqt's Sec,ond Amendcd Cornplai t. Thire is no gainsaying tlrun tlrirt rlrc acrion in Makati is ditlbrcnt and distinor fro[r rhc action tn Ma;ils, irrtolvirrg rlil'l'crctrt Pcriods ol'tinrc, sutricct rnlltcr, nd issucs.

,4

iVICO SamDle Problem

An action to annul a real estate mortgage is:

r6.

.4.

a.

- a personal action which shall bc frled whcre the parties reside

url
c.

that tlri triai corrrt is vested with jurisdiction over'the ;;t ,a"ir";;iiT"i"E;fficient "*tt,l*isdi.tiot
srrb.jeci rnatter.

u"ti""

ouasi in rem unO ut

o,ct thc p'rsort of the petitioner':j

a r<ja} action u'hich shoulcl trc tiled where the nrortgagcd roIrl Pr(!pc-n)' is locatcd-

d.

an aotion in rem if the mortgagee has not foreclosed thc mortgage and thc
mortgagor is in possession of the mortgagCd Property

':

:.
:'

Leeal

Bssis:

Chua vs. Total Oftice Producls and Services (ToprQr')' ln.c'.(47t-:9Y 500, 509)l Hemandez vs. Rural Bank of Lucerra, Inc' (81 S(IRA75)and . Biaco vs. i'rritippine Countryside Rurat Bsnk (515 SCR A I 06)

't
r-'

proper remedy to seek reversai of judgnrent in an action for' foreclosure of r;al estate mortgage is not b petition for annulment ofjudgment but an appeal from the judgmeniitself or from the order con{inning rhe sale of thc lorecioscd reql estate. Sincc rretitionerispouscs t'ailed to avail r>l'nppcal without surlicient justification, thcy clnnot convenicntly rcs()rt lo tlrt' itcliorr lirr u"iul-""i for otirerwise they wiuld bencfit from iheir otu" inu ion rnd

fhe

negligence.

l.

Judicial foreclosure is govemed by Rule 68 ofthe Rules ofCoun.

Monzo[ vJ. Relovs (56s scRA 514)

Unlikc ltule 6ti, which grwerns judiciql lirrcclosttre salcs' rrcilhcr Act .No. 3135 as ameided, norA.M. No.99-lO-05-0 grants tb.itttrior t"(trnthlltnccts tlre right to reccive thc balance of the puictmse price 'Ihc only nghl giYcn to sccon-d mortgagees in said issuances .is thc right t() rcdcr'nr thq lirrccloscd property pursuant to Section 5 of ActNo.3l35 as amended bv Act N'.! 'll ls'
ap1:lic'l ttt givcn to second be cau only right such mortgages, extrajudicial foieclosure of mortlagees who are made partiei to the (iuiricial) lorcclosrrrc- Wlrilr rr scc.,d ,irongagee is a propcr and in a scnse evcn a neccssary Patty to a l"r(r(cc(lirrg t() foreclote a first mortgage on real property, he is not an indispensotrlc p'rrty' because a valid decreE may be made, as between the mortgagor a d rhe tirstmortgagor, without rgBrd tA the seaond mortgagei bul the cuts':'ltcnte of fcituielo make the sec6ml mortgagee a Party lo tlrc Procee.lirqa is tlt' lha lie-n o1t rhe second mortgagee on tie iquiry of redemptktn is nol aflccted h-r' rhe decrce o/foreqlosure.

'

Even

iq for thc sake of 'argument' Rule 68 is to tx'

The judicial fbreclosurc procecding instituted by ruspondenl .Phililpine Countryside Rural Bank undoubtedty vested the trial court ivith j urisi i(:rion over the rsJ. A judicial foreol6sure proceedingr is an action qua$i in r'i''l' As such,

jurisdiction over the person.oF petitioner is not roquired,.ir being srrfTicient that ihe trial court is vrisiecl with jurisdiction over the subject rrratter. Iu this case, rvhile the trisl court acquired jurisdiction over the res, its juriscliction is limited to a rcndition ofjudgment on lhe res. It cannot cxtcnd its jutisdiclion beyond tl)c res and issue a judlmenr enforcing pctitioncr's lrrsonal liability ln doing so wirhout l'irbt having acquircd jurisdiction ovcr the person oi lretitioner' as it did, the trisl court violated her constitutiorurl riSlrt to Juc Proocss' warranting. the annulment ofthejudgrncnt rendered in thc case.

ffi8fiffi'
. As :r llcrreral rulc, there is no right ol- redcmplion in l.iirilicial foreclosure rrtr,rtliritgc:. 'l-ltc ot)il' cxcntption is.rvhc'n thc nrorlLli!111.".: i:r thc l)hilippinc' ol ' Nirrirr|lrrl []rUrL undcr. ,,\ot Nos. 2'?4:t a,rd 2()31{ or' u lrnt)kirrLl in,.ititution undcr t{cprtblic Acl No. i37. 'I'lrese laws .conlbr on the rnongatl)!" lris successor! in inlr:rcst or anv jrdgrncnt creditor ol the lnortg&gor, t1," ';ght to rcdecm thc foleclosure l)r()Dcrl\ soltl on tirrcclosurc - aller conlirrnlli.)n l)y tlrc c()r,r'l ol'tlle ( \'r:ar' i courrted gx;rirx.l of r:tr'; ) rr11ht tttal within rr bc cxcrcised salr' rYlriclr
l'rrlrrr llrc (txlc r 'i' rcgislration ol'the cenificnte r.tl'salc in tllc Ilcgi:ilt'v of l)r()Perty.

Sittcc thc llrortgrrgec itr this case is lr()l (rrlc rrl'tlro!'c lllc:lli(rned' no right ol' r cdcrrrption c\ists irt I'avor 0f petitionct s. l'h.:v tncr(-!r' lrlrvc an cquity ol' tc(l(:rnl)liort rrlrielt is lltc riglll rtf thc dc,l'cttrlarrt trr.rrtg:rL:()r Io c,rtinguislr thc nr()rtgi.igc irnr.l rutain orvnership of the propctly by payirri; tltc secirrcd. debt rvitlri-n'[hc nincty-day perio<I ailer the judgnlent beconres t'ilnl, in accordance rvith Rule 5tl, or even atler the tbreclosure sale but prior to ils contlrmation.

..

DeJclooment, Fank odJ[p Phi.lippines yS: We.st Nesros Colleee. Irrc. (391 SCRA 33O)

Whcrc lhe rcal propcrty is mortBtgcd lo ilnd ,i)rccl(rsc'-l judicially or cxtrajudicial llr by thc Development Bank of thc Philipirirlcs, ahe right of redemption nray tre exercised only by payirrg to "thr: Banl: rrll amount he owed thc latter on lhe date of sale, with it crest on the total indebtedrrgss at thc rate agreed upon in the obligation ftom said date, utrless lhe bidder has taken rrraterial possession of the propcrty or unless this hud trccrr d,:livered to him, in rvhich case the proceds of the propeny shall comp:nsatt: ihe interest." This rule spplies whether the foreclosed property is sold lo thc Dut> or another l)urs(rrr ol tho public auclion, provided ofcottrs:c thill lhe p(rperl-v w.rs mortgaged to t)l3l'. Wlrerc tlrc propcrty is sold to pirrs()r'ts ()tllcr thall tlrs |llortgagcc' thc procedure is lbr the DBP "in cise of redcrnption, [io] return to the bidder the amounl ii reeeived from him as a resrrlt of the auction sale with tlre corresponding interest paid by the debtor."

2.

Extiaju<Iicial foreclosure is govenied by Act No. 3135, ;rg ainended, mortgagee is given a speci fic power or express aulhority to do so Pbilionine Naiional llank vs. (j*hatinr3,gl (s57 SCRA 426)

if

arrd whcn the

Act 3135 regulirtes the extrajudicial salc ol'rnortgaged rcal propertiEs by prescribing a procedure which effectively safeguarcls rhe rights of both debtor and crcditor. Thus, its constrrrction (or interpretation) fliusl be equally and nrutually bencficial to hoth parties.
J.

96

,I

A cretlitor may foreclose olr a real estate ol'xtgagc only il the debtor fails to pa]' rhe principal obtigation when it lhlls due Nonctheless, the Ibreclosure ola -ongag. does not iPsotrtct() sxtinguiih a di:l,tor's obligation to

his creditor. The proceeds of o sule st put lic auclion ma) ;lot be sufficicpt to exainguish thv liability of the l'ormer to tlrc lstter. For ihis renson,.we favor a constiuction ol Section 4 of Act 3135 that flllbrds tl,c creditor grealer (4)poflunity to sntisly his claim.wilhout urrtltrly rcrvttrtlingl thc dcbtor far not paying his just tlebt.
,.\ sal(: at public attction held rvithin thc interverring 'periocl provided by ia*' (..i.c.. at an1,.. time lrorn 9:0O a.m. until 4:0o p.m.) is valid' "vithout regard to llrc durtti(Ir or lengr,th r>l'tinrc it took the iluctiotlcer t() condrlrt lire proceedings

llouitsble PCI Irank. Ir.:. \'s. (lJ-M$;k f radinq. tnq (628 SCnA 7r)
:

c()ntrli'ls iurrl protniss.rrl'rl(,tcs that the nt(trtglttrcc is a'.rthrrizr:rl lo lbreclosc th(, nlor lLlirlrr:rl g-rr'o;rcltics irr r'lsc of del'lult lr)' tltc rrrr)rt!-',llilrrs, lit!: llr(ralg.l8ee has il e ieirr liglrt lo lirrr:clo-srtru itr sasc (r,'tlelirult, trrukirtg the i:i\r:tlltuc ol'a Writ of l'rclir!rilllr) Ir!.iurrctiorr ilrproFr. [n thcs.: cases, ul]stlbstalltilttsd allegations ol' .lcrrial cl ,.luc p()cess and pr']tnilturity ol'a loan arc not sut'jicicnr to defeat the lili)r rg,rgcrr's unmislakabls right to an exlrajudicial iirtcclosurc.
Ilcclucsts by dcbt(rfs-mortglrgors l'or cxtcrrsiolls to pay and proposals for restructuring o,'the loans, without a6ceptancc by tlre creditc,r-mort8agee, remain ss rha.t. Without more, those proposals rreither novated thc partics' mortgage contrdct nor suspende<l its eKecution. In the same vcin, negotiations for scttlcrrrcnt of the mortgaBe debt by claciorr cn pegtt do nor cxtinguish the sarne rr()r li,rcstsll tlrc crcdilor-mortgagL'e's cxercise ot' its right to floreclose. as provirled in thc nrortgage contract.

. \\'hci,; thc pilrlics sripulaled irt tlrcir crtclit r4;t+ctrrcnts'

mortgage

l,CK- lndustrig lnc-. vs. l'llntcnr l)tvclotrnrt:ul llnrrk 538 SClr,l (r34)

A nrortg,agee who exrcises the lxrrver of sale conuritlcd in a mortgagc is ' corrsitlured a custodian of the Fund, aqrd, bcing bound to lpply it properln is liable to the persons entitled thereto if he fails to do so. Extrairrdicial foreclosure sllcs ure proper only rvhen so provi<lecl trnder a slrccial power inserted in or uxchcd lo thc r ortg.rgc co[tracl. 'l'he lnortgagcc u.t custrrdian of the proceeds ftom the lorcclosure sale has no legal right to retlrin the exccss of the bid price, lnd is under clear obligation to retum thc samc to lhc rnort*ugor.

tl
1

Et*tt'trn*#*
The duty to . r:xominer nrl applicatiorr for r.:xrojutiicial foreclosure to dctcrnrine whether the deed of mortgage contains or incorporntes a spcial pr'rrvc; authorizing the mortgagee to extra.ludicially {breclose the mortga.ge in the e\.cnt (,f nonpayrnent o,'the loan by the mortBagor dsvolved upon the Clerk of ('r!Url. r()t,rrr llri: n:sporrtlent ShCriff.

j
rl

97

ln l)evcloPn.ent uunk c/'rhe Pltilippines vs. ()out't .,!'APPeals <4O3 SCRA 460). the rcpublication of the Notice of Sherilfs Sale of a postponpd exuajudicirl sale it nccssary'lor the lattet's validity. laespondcnt shcrir[ failad
to publish in .a ncwspoper of general circulatioo thc notice of the rescheduled auction solc oi ttrc m6agaged rcal propcrry.
Cnsnno vs. Mar:lra (374 SCRA s08)
.

l(eslxlllJcnt ihslill is irdllr inislluiivcly liablc lirt l),r)ccc(littB witlr thc extrtriudicial lbreclosurc sule not\yithstanding thc ahsenoe ol' thc rcquisite \Pc(iirl lxr\r'cr in tlrc rslrl cstirtc nrortgage c()n(racl .Irtlr()rizillll lhc moilgaS,ee to lt wals lirrcelrrsr, tlru rrrorlglgc cxt ll.irrrliciolly itt gitsc ol narl- [tarytlt(..'t tl rcspondcnl Shrlritl"s sp{juilic duty to exarnirru ''vlrcthcr thc lrtlti(:lrcd real estate mortgage contraot contained the rcquasite spccial powcr uthorizirlg the nrortgagce to e)rtrajudicially lbreclose the mortgaic in case of non-paymenl of
t

he rrrorrqagc indcbledncss

a)

Puhlic auction ruust be conducted in lhe provincc wltere thc profrcrty is siruaied
BenEuet lttonalrcmcrlt Coro(,ratiorr vs. Court of Aorreals (41r pcR/\ 347)

'fhe applicant in an cxtrajudicial fore'closure covering pioperties in dill'crent 1>rovinccs is requircd to pay only orrc filing fcc regardless gf the nurrrber olpropcrtics to t)e. foreclosed so long us thc upplicatioo covers only one transaction or indebtedness. Thq venue, however, of the extrajudicial forecltisure proceedings is the placc where.each of the mortgaged property is
loclrted. Posting ofnotice ofsale in ar least thrcc (3) public places therein

.,:

b)

f)evclorrsrent Brnk of the Philirruines vs. Corrrt of Anneals (403 SCRA 460)

A certiffcate of posting. is not required much iess considercd indispensable foi thc validity of an extrajudicial foreclosu-e sale of real property undcr Act No. 3t35. What thc luw requires is thc posting olthe noticc of salq, which is present in this casc, and not the exculion of the cenificate of posting. In the absence of contrary cvidence, the prdsumption prevails that the sheriffs perfirrmed thcir.official duty of posting the notices of sale. .The non-execution of the.certificate of posting cannol nulliry the foreclosure of the chattel and feal
esl.ate tnortg,ages

Under thb Chattcl Mortgage Law, the (rnly requirernent is posting of the noticc of auction salc. Therc was no postponcmirrrt of tlrc $uction sale of the personal propcrties snd thc foreclosure took place as schedulcd. fhus, thc cxtrsjudiciol forccl<isure of ttu chattel mo(gagc suffers liom no proccdural in firmity.

98

n
i. ' ,: 'i.' .i
.

:-

:,

; Ir' i.r.-"r'i. -t'

l ..;

rl
i. .: ).i..: i'

ii

The discrepancy betwecn the amount of the Petitioncr's obligation as reflcted in ttri Nolce of Sale and the sirounr actually due and collected from the octitioncB sl thc timc of thc euction salc docs nol conslitutc frsud which renlcrs th6 crttrjudicial forcotosur salc null and void. Pctitioncrs feilcd to convincc this Coun that thc diffetncc bctwcen the am(runt statcd in thc Norice of Sale and thc amount of PNB's bid resulted in discouraging br mislcading biddors, dcPteciatcd lhe valuc of the propcrty or Prevenled it from commanding a fair Pricc.

@
. the notice

Phitintrine Nationol Bsnk vs. Mnr:rvn..Ir-

Irrdeed, one of tlre fnost imPortant requiremsnts of Act Flo.3l35 is that of the dme and place of sald shall be given. If tlre slreritT acts \Yithout no(ice, or ut u lime 0od place other thart that dcsignated in the notice, the sheriff

acts witlrout \\,arrant of law. Publication is required to give the cxtrajudicial tbret'losure salu a reosorrably wide publicity such thal those interested 'might attcn(l tlre prrtrlic srlc. 'l'o allow the parties to lvaive lhis jurisdictional rcquirenrcnl would result ih converting into o privale sitlc rvhal oughl to bc a putrl ic auction,
( )rrrrrrrr vs.

(-otrrl of ;\ trrrr'rrls (3e8 SGRA 52s)

liailurc to adverlisc a mortgage forcclosurc salc in compliance with . statutory requirements constitutes a jurisdictional defect inrtrlidating the sale. Conscqlrcnlly, sr.rch defect rnders the sale absolutely void;.nd no title Passes.
' ltcPrrtrlrcotion ill thq rronncr prescrit-rcd hy Acl No. 3lJ5 rs nccessary for 'l'lre panics haVe Jx)stp()ncd extrqiudicial lbrcclostrrc solc. ubsolutcly no ri8hl to waivc the postinB and publicstion rcquircrrents of Act.No. 3t35.

thc vrlli(lity ()l'a

The mongagee's inaction on the scheduled datc of sale and bcldted filing of rcquests ro postlone may bc decmed as an abandonmcnl ol the pctition to foreclose it tilcd with the sheriff, making its righl to foreclose bascd on said

petition lo have lapsed.

Tho parties havc absolutely no right to woive lhe posting and Publication requircmcnts of Aot No. 3135.

Philionine National Bank vs. Nepomuceno Prortuctions. Inc.

(394 SCRA 4os)

Istlg!

Can ttre partics to the mortgagc vaiidly waivc lhe posting and publication requiremchts nrandated by Act No. 31357

not so rlruch to notily thc morlgagor os to infi)rnr ths public g,encrally of the nature and'condition ofthe pfoperly to b sold, and ofthe tirnc. placn, and terms of the salc. Noticcs are g,iven t6. sccurc bidders and prcvent a sacriftcd of thE propeny.. Clearty, the statutory requirEments of posting and publication arc mandatcd, no( lorthe morlgagbr'i banefit, but for the public or third persons. In tirct, prersonal noticc to the mortg,agor in extrajudicial foreclosurc proceedings is n(',t even necesssry, unless stipulated. As such, it is irnbued with public policy
to0

Hcld: The principol object of a notiee of sale in a floreclr,surc of

mongage is

considerations and any waiver thcreon would be inconsistent with the intent arld letter of Act No. 3135. Moreovcr, statutory provisions govcming publication of notice of mort8,age foreclosure seles lnust be strictly complied witli and slight deviations therefiom will invalidrte the notice and render thc sale at the very least voidable.

Mctropolitrn Brnk & Trust Co, v3. Nikko Sourcct Internatlotrtl Corp.
(604 SCRA 336) and

N-l'hil.. tnc.

vs.

Metrooolittrr thnk &'l'ros; C()mtlnnv

(569 SCRA 4s9)

: .

Strrrrtoty provisions governitrg publicntion of noticc of mortguge loreclosure sales must bc strictly complied with and thet evan slight deviaticrrrs thercliorn will iovalidatc tlrc noiice. .The reason was explained. in Olizon v. CA; 236 SCR^ f48(f994): l'he object ofa notice of sslc is.to inform the public ol' the nnture and conditiou of thc propcrty to bc sold,.ond of thc time, placc and terrrrs ol'the salc. !.loticcs are given for. the purpose of s+curing biddcrc and'to prevcrrl ll sacrilice of the propny. lf these objGcts &re attained, immaterial crn>rs lnrl nrislirkcs will not affect the sufliciency. ot'tlrc n(rticc: but if.mistakcs or. r.rrrrissions. occur in the noticei bf sale, rvlrich are culculatcd to deter'trr rnislcad tricldcrs, to dcprccirtc thc value of the propcny, or lo prcvent it from brirrging a lhir priee, such mistakes qr oririssioni wi be fi.tal to the validity of the noticc, cnd olso to the sale made'.pursuont thereto. Thc validity ofa noticc of sale is not affected by immaterial errors; only subsrintial errors will invatidate it. Unlpss it rvas calculated to detcr or misleed bidders, to depreciatc the vaiue of the propeny. or to pri:vent it from bringing a fair price, tlie discrrepancy bctwen the anrouni of.ihe obligation as reflcated in thc notice of sale and the amount.octually dui and collectcd during the bidding does not constitutc a substantial crror that should invalidlte the notice.
Centurv Srvingr Brnk vs. Somonte ,ur: scB,A 26r)
Marceto vs. Pblllnblnc Conmcrclel

Intefn.tlotrrl B.nk (PCIB)

(607 SCRA 77E)

.B;nk of the Phili;rolile Islrnds vs. Puzon

.1,:

(606 SCRA 51)

Chila Bnnkinq Corr)ortltion vs. Ilterti4

(s99 SCRA (;72)

aid
Bsluvut vs. Poblete (514.SCR/t.37O) The Court takes judicial notice oi the fac( that nervspuler publications have more far-reaching effects than posting on bulletin boards in prrblic places .= hence, the publication of the noticc of salc in the nerrspaper of gcneral

lol

circulation alone is more than sutTicient compliance with tlrc notice-posting requitement of the law.
Presidential becree l0z9 requires o newspaper of gcnerat eirculation. A newspaper oi gcneral circulation is published for the di$scinination of locdl rrcrvs and gneral information: il hos a.bona llide subsoriptior list of paying subscribers; nnd it is publishcd !t regular intcrvols. 'l'hc ncrvspupcr must not also be dvoted to the intcrest or publishcd lbr thc entertainmcnt ol'a pa(icular class, profession, tradc, calling, race or rcligious denomination. 1'he ncwspapgr necd lrot have the largest circulation so long as it is of general circulatioir. Prcsidcntilll Dccrcc 1079, howcver, does n()t ret;trire accrcditalion; 'I'he rcquirement ol' accredilation rvas imposed by lhe Court only in 2001, thr-ough A.M. No. 0l-l-07-SC or lhe (;ui.lelines in lhe .4ccredil.,lion oJ'New,tpapers <tnd l'crtutlicul.s SeL:king kt l'uhlish .ludici4l urul l.a14al Noticc.v tutl ()tlt.'r Sinilar tl nnotncerlrcnls utd in the llaflle 'fherettf,

Thc Al'lidnvit ol' Prrblicatiorr executed by thc accou[t cxccutive of the ncrvsl\rte-r' irr lhc plrrcc wlrcte iho profrcrtics arc l.)cotcd .,ituaing thot, soid riewsp.rpcr' is ol'gcrrcrul circulution and is publishcd in ihe suid lrrulity is prirna thcie proofthrt the newspoper is generally circulated in said nlasc.
(:lo3 SC?"A 460)

Rcl)dtllicalion in thc manner priscribpd by nct No. 3135 is nccessary for the validity of a postponed extrajudicial foreclosurc sale of rcal propcrty uuder Act No. 3135. Anothcr publication is required in cnse thr: auction sale is ieschedulo<J, anrl the absence of such iepublication invalidatcs the lirreclosure sale. 'fhe panies hove no right to waive the publication requiremcnt in.\ct No.

3135.

this particular information. whethcr or not thc parties .grgcd to such rcschcdulcd date, there is no more nced for thc rcposting or republication ot'the noticc of the rescheduled suction salc.

-of a rescheduled auction sale without rposting or republication of the noticc. I lorvcvcr, thc rcsclrcdulud suction sole will only bc valid if lhe reschcduled date of auction is cleririy specitied in the piior notice of salc. The absence of this information in the prior notice of sala will rcnder the rescheduled auction sale void lor lack of repostihg or republicatiort lfthe noticc ofauction sale contains

The lusl poragraph of the prescribed notice of sale irllows the holding

Deielopment Bank of thc PhilipDines I/s. Aquirrc (364 SCRA 7ss)

Lack

published darc ofthe sale, void..

of

republication rendirs thc dale held rwo rnonllrs after the

d)

Personal notice 6 mortgagor is not required (Bonnevie ./s. Coirrt of Appeals, 125 SCRA 122 11983]; GSIS vs. Court of Appeals, l7O SCRA 533 [1989]; Villavicencio v. M6jares; 398 SCRA 314 [2004]) hence.npt I ground to set asidc the forcclosure salc (Ardicntc vs, Provinolol Shcriff, 436 Sq,RA 6jS),

t02

':t'

'-

;*.-,...
IYletroDolllon l,anl('c r rusl, r-o1ll l,LuY (5yu PY--ri+ rdo, ..-:

, ,., , , i ::.','':':

isnot

. :. stipulated.' ""; .:- .;i.''"i ; .i: i.ii-.]; ,. . .,i i.. .I 'l'h" stipriation it ttre'i mortgage agrement requiring notice -tb I't mortsaqor of extraiudicial 'iitions 'to'be tdken operates as a cohtrach
necessary unless

personal ,roii"" go *re itrorrgiiibr i,t cxtraju<ticial forcclosure nroccedll

,:'

u"J"i,u-6ng for th! iaUer's s6le benefit, sirqh that the mortgagee ib mandaled
. .r 1 .at..

1trt :
-:";t

;fi.:. ;,: 'l, 15: i . t ,.:

,i''
I |, !

:''.-

.'. ..,

tli pestihs or notic'" o public places, and (2) the Pii6l'icati.o.4.e{'thc s.rmc 1"-Yytry,t-?f.-gil! '.'".. circulation, Persodal noticti to theimbrtbago.r' is not necessaiy' Nevel I 1: ,: I the.parties to the m6rtgage contrai:i'irre. igot prccluded from exacting ad

''

Act No.

, .,t' i: :.,i{-:, ::;(1f?sgs6oP} i.i " ,irt ,ii-l i'1.ef_?,fff,H'oai ,:l orls'l!'in ,i;" *a;t"i-ffiilI"
i'

i. r; -1 add Trust comDanv vs' Metrobolitan Bsnk MetiAirotjtan Brrll(=qBg H:y"s9l*pm,9flpyysj

ir

:r-

: :' ;:' wone ,', ''

,:

:/\',;

'.- .. No.'.3135 'ii,os.'fsFt t9 tlre vdidity oflthg f6rcclo No.'.3135 of.fct .undcr:scction 3 of.Act . .undrir:scction ;,' : ii ' ' ', 'i: . .', pioceedingi. .. . .' .. ,l' ., Proceedrngs. .' i'; .. '.i'i | .., ." ... .. liir:1 ,il;':. : ,i .!i .. ",..', r\ i:i:t.j..', 'i.,.:, .t. . r,. ,, .. ;; ,, ,, ,i, ' ii:i-!+.li _' il:i-+.ti-_,,
.

.rttl-i.i.ioing stiputation'is! to ripprise respondenGf ;any action'1Y i'r. ' ''j i".p"t" petitioner iake ion the. subjpiJ :iProperty,,. thus according to :':.:.,':, :.. ';il ,,i ' bpportirnit!,mieht to: safegliCa his riehs. i ill{h.- ?a petitigngr failed-to send thejoti ' to'.Jpspondenti he cgJiil+itted a contructual b'reacn sunlcle .foreclojure sale ..' i.i,.: iji..r. .', :. . rendcr the foreclo.sulc sale nutl ana,N.ojA{.} ., ..,. : t ; i},.1':.....rendcr1heforecl","liu:n.l.,.,"oi}i.ffi_.,...,.' i.'., ,.ii .;.:.:-,i'+!*A--..: :i., i , iYith the posting reqr
, h,!,!",1

piovision requiring. all notices to bt-' se.4t t9 the mo+SlacoJ: Precis

Petitioner Metrobank:s. non+omirliancc

1..;

' r''B(: B'rik vi . Y '.. ."'-: , .. i.,,.,r i , On thc matiler. of \nbticc. cbmitaioat t cannot Plausibly bd .trcarl [i t . '. compliin abour not?travingl.peen personally notificd or givcn a copy,'(f tha thc iusi, ol'rtre nltice, of-thl sheliffs sale' Exiant rules. do not rqir-ir^ tt i ce: :' un{er. ceF requirement unqr. m<irtgagee be so no1ified, nbiifiea, alfieit atieit such notification is a requirEment r m<irtgagee. sa s foreclosure foreclglure qbrtgdgor in an extrajudicial witliiesircct to the qbrtgdS;or wi$'iesircct mbrtgdgor tances *itli'iesircct t, circumstandes -, . t' i:: i ] ,i''I'i 'i-i Ia'I, ':" r' l'" "' prot of or foreclosur! rorecrosure teqqii"-tnt" the tJ";;, e).:.':: Burden of Droof "':*':i6$gi*:;ffi "[fi,iil;-riiu""iwith rl l I -; iiif,i,. llg#;,,f; :io':"':""* if;'g;i lr--':--:.'---,;f;{.ki"r-:-.r.lJ;

;, ' l. '
"1:

:
.

'

:'i'":@E9

r'r

M{,fg.uez
.

' l'
.i

ii:'"tr.'::r'ls j R6';ti nf rh. Phllirrnirca , i, : ,i -i.ttnfn-I^ii;;'ri) , ri ii. ri' ,,i Fi*-ii$;,' lffi,iffi .,i.i:,.u-..:i-"}(6oJtSCRA168) ''. .'. ' i.Sr{i isl,ttr i'i: ... \i -fiisltt, i'i.'. ' ,, ** ,*,,,oj;ii',i, ,"*i;o***ffi[,,;ffi[ffi$]"o,' i:l *, l&fii$jlri *+;6.4*' i:i' ;p.,iria*; petitioncrs' 'dciia[i:6f claims; a' rbspondents respondents to to1' thcir' ii:..,.ii::'. ..r-]g'''
.! ..t

#
:

l*.dli-f <r .'

,f.: I I,i: :'i ::'' 1
.i

l,

l :

':.

,. fo,EqIbJ i ' pi6vc.r wip'Aot 3135. we proceedings.wcie pioceeaing!.wcri!fui4v ""nsi.u"t"ajebdiiitent qni''itdqt (he who asserts, not tre who dqn tticumbir lrdtatiddui'dtit'ibn must prove). . Thd bqrden of proof that foleilosure proceedings on tle yh

aiiafii
;

:,

,:l ] :

-:i

t,! t-.

claimine such. Wc hovc constst ,.rpon .rriom rests thc uYrden .9{'

Court

of

Appeals

*rji

*,at ' i1i! '

,lii

517):

Tb(, iling of

bars tbe

'

Uvnilcblnd vs, Oulsmco

(slo scRA 1?2)

c)

EfFect ofexcessive, iniquitous and exorbitant interst rates

TIeirs of Zoilo Esoiritu vs. Lindrito (52O SCRA 383)

p.,

P874,125.00 cannoi: bc considered as i valid rjemand for prymcnt, For gq obligation to bec6mc duc, there' must. bc a valid demand. Nor, can the loreclosure proceedingis be Considriied ,'valid sirice lhe total amount of thi' ' indebtedness during tf,e forecidsure proceedirigs was pegged or n874,125.06, which included interest and which this Cciurt now nullilies for being eicessive, irritluilorrs.uxl cxorl)itonl. Il'thc loreclosurc procccdings wcrc considr:rcd valir.l; tlris rvoultl icsult irt orr irrc(luilublc situutiorr wlrurcin lhc Slxrrrscs l-i,drito will havs their hnd lbreclosbtl for failurelo pay an over-inflsted loan only a smal!

Sirrcr: the debt due is limitid to the Frincipal of 935o,OOo.OO with l?<h. ,r,,rrrn os lcg,al intercst, thc prr:viqus-dcniantt ior paynrcnt of thc aftount gf

, ;i,1i
.!,

I
i

Since the Spousbs Landrito, tilp debtors in this case, were not Siveil ei oppoffunity ro settle thcir debt, at the correct amounl and without the iniquitouS interest imposed,'no foreclosure procaedings. may be instituted. A judperii ordering a forcclo5r.tre sale ii conditioned 'upon a'finding on the correct amount of the unlxid obligation arrd the failure oi.the debtor to pay the said omount ln this cn'se, it.hls not yet becn shown that thc Spouses l,andrito had alrcady failed to puy lhc corrcct qmount ofthc debt end, rhereford, rr lbrcclosure sale'cohnot bg conducted _ in ordci' to answbi for, the unpa.id debt Tbc forcclosuc sale conducrid'upon their failurc to pay S87,4,125.OO i; l99O should bi nutlified sincc the irnouni Aixnanifea ttri oBtstanding loan was o\rrstaiad-; "" the mortgigors - ttre Spoirscs Laodritdi consequentty it hair not.becn-shown'tha1 .have failed to pay their outgaandinfi obligation Mo.eover, if fhc proccpds ofthc salc togcther with its rcasonable rares of iitrcsts u/erc applicd to thc obligltion, only o, srnall .port of its origintl loans wuuld actuslty remoio outshndin& but because ofthc uncOnsciordble interest rates, thc largcr part coresponded to saia excessive and iniquitous interest-

:
.
.

.Philinnine

Nrtional Bank vs. t&camors

(600

scRA 39s)

105

!.t .*

Filipino case, aoy increase in the rate of inierist made pursuant to an Csqrlalioe clause muca bc ihe rcsult of an ogrcerBcDt bciween the pirtlca; Thc minds of all thc panics must mcct on thc proposed modification as this modilication affects an important asircct of thc agrcemcnt. There can bc'no contracl in thc true scnse iri thc absence oflhe elcmenl ofan egreemint, /.e.. thc panics' mutual consent. Thus, any chrnge must bc mutually agreeil upou, '. oaherwhc? thc change corrles no bindlng effect.
Even rvith a de-escalation clause, no rnatter how ilabr;rarely rvorded, an unconsenled increase in interest rates is ineffective if. its transgresses the priniiplc of nrtrtu lity ol'contracts. Philippine Nalional Bonk's firilure to secure lhc slxrrscs llo(:otnontrs consctrt to the incicllst:rl inlcrcsl rrt(js pr()mptcd lhc lowcr c(rurts ao dcclurc csccssivc ond illegul lhe intcrcsl ratss itrrp(rscd. Itmeito vs, Court of r\rrrrinLr (383 SCRA r 8s)
llror IU|lllc coolt:rCl is irrr.rrlirl.

unbridled right to adjust interest rates unilaterally. As we said in the same Banco

'l'lrc frrrcclosurc $/hich stcms lronr thc cirlbrcerrrcrrt ol'fl

Cruz vs. tlnrrcont tairrancc (l0rnrlr:atirr[ (379 SCRA 490)

rrsrrrious

, h)

An absolutely sirnulated or"u,. is void ab inirio and transfers no "orr,.!", ownership right. The purported buyer, not being the 6wler, cannot validly mortgoge the subjebt property. Corisequently, neither does the buyer at thl tbreclosure sule acquire any title thereto.
Grounds for annulment of.foreclosure s&le

Llnited Coconut PIanteB Bank vs" Bcluro (s3o scRA s67)

The groundb for the proper. annulment.of thc foreclosure salc arc lhe following: (l) thst thciE rras fraud collusibn, aocidrt, mulual mislako, breaoh of trust or miscoDduct by thc gurobaser; (2) tlDt lhc EEb h.d not bcca Aidy aDd rcgularly conducled; or (3) that thc price was inado{uatc 8nd ttlc inadequacy was so grat ?s to ghock the conscicncc of the court. Hi-Ccment Cornorntion vs. Insular Bank of Asir anal r\mcrica (s34 SCRA 269)

Mcre inadequ8cy of tlre price obtaincd at the sherifPs sale, unlcss shocking to the conscience, was not sufficient to sel aside thc sale if there was no. showing that, in thc event of a regular sale, o bettr price con be obtained.
Nool vt. Court of Apoo{h

, In the. absence ofproofof gross inadequacy offhe price, the fact that rhe sale was made with what might appear as an inadequate consideration. does not make tlre contract one of mortgage,
l06

(-enturv Savinqs Bank vs. Srmonte (63{ SCRA 26r )

The mortgagor is already estopped from challenging the validity of thc foreclosure salc, efter entcring into a Contract of Lcssc with ths buyer ovcr one of the forcclos<! propcrtiei - thc tittc of the lardlord is a cbnclusivc presumption as against ihe tcnant or tcsscc' The juridical rlationshiP Hwcen pctitioncr us lcssoi and rcspondents ris lessees carries with it u recognition ofthi lessor's title.
Cebrr Rionic Builders Sunnlv. lnc. vs. Dcvelonnicnt Bank of the Philil}pines (63s SCRA 13)

Ii'
1:

Nore: This righr to recovdr deficiency had been catcgorically resolvcd in Statc Investment vs. Cqurt of apfrals (217 SCRA 32 tl-9931). Ergo, thc mortgagpe is- cntitled .to recovcr the deficiency in case-the sale proceeis arl not lufficient to cover tbe debt in extrajudicial
foreclosures. (Cufiada vs. Drilon,.432 SCRA 618)

1.

'l'lrnnte

vs. C6urt of Aooeals (241 SCRA 2s4)

a mortgagec may recover any deficiency in the rlortgage account which is not rcalized in a foreclosure salc 8od tllat the action for rc-co.-very ol'that dcficiency inay be filed cvcn during the redemption period'

tt is a seftled rule that

(lo)

1'he action.to rccover o dcficiency after florcclosure prcscribes a'ter ten years l'rorn tirc tinre the right of iction accrucs s! ptovided in Artiele i t++iz) ortne clvil co.re (Dwlopmont Bonk orthc Philippines vs. T-omcl&n. l0l SCRA l7l: Quirino'Gonzalcs Logging Concessionaire vs. Court of Appeals (4O2 SCRA l8 t )

107

,r;
:.l

4.,

.1

In a forccloiuici'thd dcficicncy iq determincd by simple computstion immadiatclj aftcr.tha foreclosure.

il, e. non-

Rcmcdlcs of an

of

.i:

Suico Ratt&n

& Buri Interiorc. Inc. vs. Court of ADDealg

(49O SCRA 560)

The fact that the mongagcd Propcrty is sold at an amJunt lcss than its sctuol v&luc should not militati oguinst thc right to such rccovery--a rnortgagoi shnds to guin with o rcduce<I price becouse hc lxrsscsscs the right of
redemption.

n rlr()rt8lgc crcditor nray, in the recovcry (]f a debt sccured by o real estaie mortgage. institute againit the mortgag,e debtor cither a personr.l aciion lirr a de bt oi Jreat action ttloreclose the mortgage. These remedies are debmed sltcrn:rtivc .lrrd n()t cunrulirtivc. An clection ol'one retrrcdy opcraics as a waiver
()l'tllc
()t lrcr'.

A Icrnedy is deelrlcd chOsen uPon thc tiling of the suit lbr collcction or upon the liling of the complaint in an action for. foriclosure of mortgage' pursulult tri the provisions of Rulc 68 of the Rulcs of Court.
As to extrajudicial tbreclosure, such remedy is deemed elected by the mortgage c;editor upon filingi of thc petition not with any coun ofjuitice but with the oflice of the sherifl of the province wherc the sale is to be made, in accordance with the provisions ofAct No- 3 t 35, as amended by At No. 4l l8'
Where the mortgagee avails of lhe remedy ofextrajudicial foreclosure, it is deemed to have waived its right to lilb an ordinary case for collectioir-

whcre the rnortgage creditor chooses thc rcmedy of foreclosure and the procecds of the foreclosure sale are insuflicient to cover the debt, the nlortgagee
rnorlgsB,or's cntirc obli gstion.

is entitlcd to cleim the deficiency from the debtor. This rule is based on the principle that the.mortgage ii only a seourity and not a satisfaction of the

'

l"aots: Spouscs Antonio und Asuncioo Chua wcre the owners of a parcel of death, the probate coun appointcd his son Allan as special administrator of Antonio's intestate estate. The'court also authorized. Allan to obtein a loan accommo&tion of P550,OO0.OO from Philippine National Bank lo be scc'ured by a reat oitate mortgsge ovcr thc irforcmentioncd parcel of land. ln 1989, Alldn obtained a loan ofPI50,O0O.O0 from PNB and exccuted'a deecl of reat estate mortgage on the aforesai<l parcel ofland. tn 199O, f,or failure to pay the loan in full, PNB extrajudicially foreclosed the real estate mortgage. During the auction, PNB was thc highest bidder with a bid price of 8306,360.00. Since PNB'S total claim as ol thb date of the auction sale was 1579,185.63, the loan had o payable balance of P372,825.63. To claim this deficiency, PNB instituted an action against Asuncion and Allan. Both the trial court and the Court of Appeals dismissd th complaint.

land. Upon Antonio's

lssue: Whethcr pctitioner PNB may still pursue by civil action thl rccovery thc balance of indabicdncss aftcr hnving forccloscd tlro mongrgod propcrty
the deccased.

of of

Fleld: Section

7 ol'Rule 86 of the Rules bf Court grants to the mortgogee three distinct, indedendent and mutually exclusive remedies that can be CigIEAIf4ly pursued by the mortgage creditor for the satisfaction of his credit irr case the

109

mortgagor {ies, among them: (l) to waive the mortgage and claim the entire debt from the estatc of-the mortgagor as an ordinary claim; (2) to foreclose thi mortgag judicially and prove any deficiency as an ordinary claim and (3)-to rely on the mortgagc exclusively, forecl6sing the same at any tinre beforc it is barrid by prcscription without right to filc a claim for any deficiency.

Thc plain rcsult of odopting thc tast mortc of foreclosurc is that the crcditor wrivcs his right to recover sny daficicrlcy from tlre csbre. Following the ruling in Perez vs. PNB (17 SCRA 833) that rhe third mode includs extrajudicial t-oreclosure soles, the risult of extrajudicial foreclosrrre is lhat the creditor rvaives any further deficiency claim. luortgagor'$ ltight to the Excess in the Proceeds of F-oreclosure Sale

Wlrcrc rhere is an excess amount ofthc proceeds ofthe firreclosure salb, the sarne must be relurned lo the mortgagor- The cxcess amount to be retumed to the mofigagor earas.lcgal interest, al the rate of six pcrcefi (6yo) per annum from the time of the filinig of the complaint unril finaliry ofjudgment.
Once the judgrnent becon)es final and executory, the intcrest ol- l2%o per ttrturtn\ slioul<l hc intlmscd, to be conrpulcd fi.()nr thc limc thc judgmbnt. bccorlcs linol antl executory until fully sarislied..
I

A foreclosure sale buyer, having acceptert payment liom persons. claiming right to redoem foreclosed propeiry, hai the obligation to account for such paynrcnt, to retum thc exccss, ifany, and to allow redemption.
Suico v!* Ph iltoptile. tfa"tigra I B*nk (531 SCRA sr4)
.

. ' M. l.

the mortgage is retaining more of rhc proceeds oflhe sale than he is cntitled to, this fact alohe \vill not affect thc validiry ofthc sale. but simply gives the mortgagor a causc ofaction to recover such surplus.

lf

Kinds of Redemptlon

Equity of redentption or the right of the mortBagor to redeem the mortgaged property afte; his delault in the performance ofthe conditions of the mortgage bur beforelhe saie of the rnortgsgcd propcrty or conlimraliorr t)f the sale (scc Top-llalc Intirrnationul Services, Inc. vs. lntermediate Appellote court, 142 scRA 467 [t986]). The rnongagor's equity of redemprion is simply the right of the.mortgagbr to extinguish thc mongage and;tain ownership of the proprty by paying the sccured debt within the 90-day period after the judgment becomes final, in accordance with Scction 2, Rule 68 of lhe Rulcs of Court or even aftci the foreclosurc salc but prior to its confirmation, (Limpin vs. Inrennediate Appellare Courr, t66 SCRA S7 tt986l),
2.

within

a certain pcriod after

Right of redemption or the right of the mortgagor to redeem thc mortgoged property it was sbld. for lhe satisfactioir ofrhe mortgaged debt.

ll0

cases of extrojudicial salc, the mortS,a8or may redeem -the properq at.any time term of one year from and after rhe date of registration of the sale (sce Scction 6, Act within the No. 3135; Reyes vs. Tolentino, 42 SCRA 363 ll97ll', Landrito' Jr' vs. Court of Appcals' 466 scRA l 07[2006] ).

N. l.

Right of Redemption

In all

De

l,e Pbfir vs. Alon".O (s9r scRA 646)

. ln cxtr.rjudiciai foreolosure, \ rl'Et is cxlanl is thc right of redemption-or the right of rhe rrrortgagor io redeem the property rvithin one year from and after thc' datc <>l' salc.

t.,nder Scction .63 of Presi<tenrial Dccree No. 1529 orherwise known as the Property Registration Decree, ifno right of redcmption exists, thc ceiificate ot'titlc ol'the m()ngagor slrall bc cancelled, and a new certificate issued in tlre namc of the purchaser. lJu! rvhere the right of redemption exists, the certificate of titlc ol'the mortgagor slrall not be cancelled, but the certificate of sale and the order corrfinnirrg the sale shall be iegistercd by bricf memorandum thereof nrade by thc lLegister of Dceds uponi the certificate of title. ln the event the property is tedeemed, the certificate or deed of redemption shall be filed.with the Regisler 6f Deeds, and a brief memorandum theleof shall be made by thg' ff.egister of Deeds orr the ccnificate ofditle.

It is therefore clear thrit in foreclosure sale, there 'is no actual transfer of the mortgaged real prolrny until after the expimtion ofthe one-yar redemption
period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagce in case of non-redemption. ln the interim, thc mortga.gor is given the option whetlrer or not to red@m the real proprfy. The issuance ofthe Certificate of Sale does not by itself transfer ownership. Considcrirrg that hercin trctitioncrs-mortgugors exercised their right of redemption betbrc the expiration of th.statutory one-ycar period, pclltioner bank is not liablc to pay the capital gBins tax due on the extrajudicial foreclosure sale. There was no actual transfer of titlc from the o\ mers-mortgagors to the foreclosing bank. Henoe, the inclusion ofthe said charge in thc total redemption price rvas unwarranted and the corresponding amount paid by the Petitionersrnortgagors should bc rcturncd to them.
1989 Bar Exam Ouestion

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*X" Januury 20,.196(), l'trr P3,5(!0 with thc I,Nt) os thc highest birldcr. On Jnnrrory 20, 1970, offered to rcdcenr thc proprty in the amount of p3,500. He i:nclorcd I posial money order for pl,ooQ 6s pnrtial poymoni ond siotird thot ths bolBnae ir ro be poid in 12 monthly inatrllmonlt' The.PNB then discovered that the sherifPs certificate of stile prepared aller the public auction of .the land was nol regis3ered so that it caused the same to be registercd on January 30, 1970. Thc PNB refused the offcr of"X" contending that the offer to redcem was beyond the one-year period proviited undcr. Act No. 3 1 35. In view of the reflusal of the PNB, "X" filed an action to repurchase on licbruary 20, 197O. Will thc action prospcr? Cive your reasons.

"Xi' rrrorl*ng(.(l his lnnd lo thc Philippinc Nllion:rl tlrrnk (PNB) l() secure a proinissory note, tlc dcl'$ultcd iu llrrj puynro[t ol- tlrc loun so tlrat tlrc land wus sold ut public auction on

t*. lt
_: ;-. -i_r_

lll

Answer:

Yes, the action shoutd be given due course. The one (l) iqr period of counted from thc registt{tion of the sherilfs ce(ificate of sals bcnac.fhc.actiq
prescribed.

[isan

Dav i]tanufacturinq Coro. vs. I)v.

Redemption has been dennei as the "right of a debor, of s debtor's other creditors, to repurchase from d buyer at a fori:ed.Sble,I: ' :'l'. propcrty of thc dcbtor that rvas seized and sold in sati'sfactioii bf a judgmpnt g}-ti.'. ii:li-i-i: irrtri', cini,rr ugilinst thc dctrtor, which'right is usually limitcd lg foiedlsale;'of ::'l; -; ,r..-. prrrllljrlr,.'i Sccti(lir l"opcrly'I..1x-<)qrl9)prov^idr;s.thot thq ....: ....i .,'; ., lcirl prrr1rr.r11,." Cqrlc) proiidcs.thst tl;q Scctioir 7tl ol'l'l) 4(>4 (llcol l"opcrly'l'ax iighl of redemPtiorl .: .; [)!'r'iod wi(hiu rvhiph thc rcdcrnptioncr ntay exercisc hiVlrei is one (l) year from thedateof registration ofthe sale. : 'i,. . : ' ;'"::,' i

-i..o-",irlli:{

t.,;ffi

we lrnvc established in jurisirudence thBt in cases;involving iederirprionl ,. rhe lir\v lir()lcr'.ls tlrc origirrll owner. lt is the policy of the law..lo aid iather than t() (lqlunt rho olrrcrrs riglrt: 'fherctbre "redemption shoilld b loirki! with faVor lrrr.l rvlrqc uo irrjury rvill lbllow, a libcral construction will bn given to qur rcdcrul)tion luws, specilictlly on lhc exercise of the. righr td rcdeam." iln' l)or<tn illu v:t. yt s.luez, 72 Pll.lil.. 572' (1941), this Couri allowed the .rcdcrnptigF :t. in cenain coses even .after the lapse of the one ( I )-year penod in ordcr io : pr()nr()lc justice. This Court even went further in Delos Rqres-vs. lflermedialq : Appclhtc (lourt, 176 SCRA 394 (1989) when the rulq on {e,ilemption.was , . li'berally inlerpreted in favor of liberally pro-p:rty to of.the the original original owner of thq the pro$6y Srv: l+|?} lo give l+m -owne-r. another opportunity to recover his propgrty, should his fortuncs.imprgye: ;'1. ;t...

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Rightot'redemptionisthepreiogotivetoreacquirdamortiagedpropci-tilt.''1, atler regiitration. of tire focclosure sale. lt cxists onty in tf,t -cu"i, oi = ' 'rr; ii' .. , ',: extraj udicial for&losurc of ihe mortgoge. No such rigiit is reaogniTgd i4 a .
To constitute valid redemption,. thc mount tcndrcd must comply \ rith . the following requirements:,( l) it should gonstititg the full ariroruit pejd by $g purchaser; (2) wilh one prcent pcr month interst on thd purchase prtae iti addition, up tb the time of redemption; (3) tgderher with rhi amo}nt of any 'l asscssments or taxes \ /hich the purchaser may have paid thereon after purchaSe; ii (4) interesl on the taxes paid b1 the purchaser at the rate ofone pelgent month, up to thc time of the redemption; and (5) if the purchaser bc orcdiior luving a prior lierlto that of the redemptioner, othcr than fhe judE undcr which such purchas6 was.made,. the amount of suoh otlier. lien . interest. [n exercising the right of redemption, the tender of payment mu for the full amount of the purchase price. Otherwise, to allgw inslo.llments would be. to allow the indefinite extinsion. of thc period.

tt2

Villeqss ys. l.insan (s26SC, RA 69) ,

Where the rcdemption is made under a Eoprty rcgimc con;ugal partnership bf gains, Articte 109 of thc FaDily Co property acquired by right of rc&inption. is the cxclusivc
spouses redeeming the property.

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Ramirez vs. Couit of Aoneals

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J.it
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. '.t:: Aclon vs. Court of Appeali (387 SCRA 4t5)

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foreclosure sale is precluded from doing so by conduct sullicient to bring operation the doctrines of waiver and cstoPpel.

Mctroooritan Bank.s?q:Tiit!! gomDrnv.vt Ter (s69 SCRA 8I4)

In a real estai mongage when the principal otligation is not paid when due, the mongagee has the right to foreclose tho mortgagc and'to [avc thc property seized and sold u/ith the view ofapplying the protreds to the payment

..

olthc

ohligation

.. r.

1'he period within which to redeem the proPerty.:sold st a sheriffs sale is l no{ suspendcd by the instirution ofan action tp an4ul the foreblosure. silel

I'hc onc-ycar redenrption period should be counted not from the ilate 9l . l'orecl()sure salc, lrut from t'hc time the certificate of iaie is registered with t]re' llcgislry (,l'I)ccrls.

The general rule in redemption is that it is not sufticient ttiar u p.rsot otTering to redeem manifcsts hivtrtr dcsirc to do so, Thc. stsicheollof intention nrust l'rc irccomprnicd by an actual end simultancous tcndcr of paymeni. This constitules the exercisc of the right to repurahase. Bona lide redemption neoessarily implies a reasonable and valid tender. of the cntire purchase price; ()therwise the rule on the redempt"ion period fixed by law. can easily.be circurrrvenled. There is no cogent repson for requiring'the vEndee to accePl. payment by installmerits from the redemptioner, as it nrould ultimately result, in on indefinitc extension ofthe redemption period. , i ..i
The trial court, ciring State hvCstment Housb, Inc. v. Coun of Rppeals, 2l,s SCRA 734 (1992), Belisario v. intermediate AppeltaSd Court, 165 SCRA I O I ( I 988), and Hi-Yield Realty, Inc. v. Couit 1of .Ai;peals, 388 SCR4 655 (20o2), declu.rcd that thc filing of the CivillCompldint has the effect of freczing the redemption Jreriod and preserves the rights ofi the. aon*tor',to rbdecm. thc l)r()pcrty l'rrrccloscd, ond thot thc filing of,thc colrl action to cnfoice the cqrect redemption price.is equivoleht to s-fornal offer. to rcdecm. Sudh rule has no application in the instanr case. Such rub applies only when the complaint'to' cnforce a repurchasc is filed withio'thc perlod of redcoptlou i4 which'case,, the same will b. equivelent. to an offcr to reCm.6nd bava thc effeat of.

i:.1'rl

preservingtherightofredemption.Intheeecgbeforeur'thecompIaiot.for, redempllon (Spedilic Petformance) wrc lilb{ beyond the o:tFygsr redemptlon gcilod or on 12 SepteEber.l997, oore thsn twelve yixB lroqg l 20 June 1985 whlcb ls the l.st day of said porfod. Wo do not consider the' complairit filed by respondents on. ll December 1984,. docketed as Civil Case ' No. 85-33933; for Annulment and Cancetlation of Extnjudicial Foreclosirre
.

Sale to bc an action for judicial redemption becausc its purpose was not for rcdcmPtionbutfornullificationofextrajudicialf6teclosuresale.

Chinn tlan kine Corporation vs. Mortir (599 SCRA 67i)

the running

:.

'fhe inctitutiori of cn .tion to r,nnul g forsololurc relo docs not sr.[pnd. ofthe redemption period.

114

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.',, ! rcdeegr, ri8Fl.ofb !q judicial thcre e,.,tfieS-i rEat mortgagp, estala forcclosure of 2. ln foryct*I9 f"i; ani" scrt;ooiriudgnatt;f cquiry of idemption which b"-;-;;;b"; -i Ft vr..r ho dos 8o bcforc lhc.forrclos-ure' period and lrvlial even thcrcallcr lrlsllrr.rul;t por.idod ftrhin rnc ttrc nllEry<Illy iinetyday and l^.ltnln an(l P(:ffxl arts -c6.ut (Anderson vs. Rqrcs, 54 PhiL 944). c;oofiirr atio-P of.thc satc.if : , . sate is confirmcd fi rfre ;ghe or i-"tcL*s of oc m6rre!pr td of rtc.-Portgsliec mortgoged rcal propcrty ""r" "rr*JiG" irf ro&mpriJn-in rbc pop11il-and,vests..1' o,ittt ri"nr O* ,"O ftiorrs trotding uriacr hi- u"a tifc Aac of Qp safc. tt is a.final, 'brdir.; not t.l th"- in th" p,r*hi... Confirmation rctroacts to"q"ity inrerlrrcutory. (Ocampo vs. Domalanta. 20 SCRA 1136 11967);. BinPIbaE4I Estate Inc- . vs, Garuslao, z6 pi,ir. rzi It946]; villar vs. Javier,97 Phil.604 1l955li f-oozqma YslAIxigr?s, 134 t scRA 386 lressl). , ' .t, 'l , Flowever, if the properqr has Ueen mor,tgaged in favor of the f,trevelpirrnent Exccption: Bank of the Philippioes (CA a59) Philippine National Bank (RA 1300), banks, banking and crcdit institutio4s (RA 337, o1 the Gineral. Banking Act) or rural banks (RA'26?O), rc<icrnption is lallo\rrcd wilhin one year from thc registration of tlre salg. (Gonzalcs vs. Ptfl. Nmiorrat Banlq 48 Phil. 824 t 19261). The redemption mus be made within one yehr dner the s lc if thc mortgagec is a bank, banking br crcdit institutioo (Section 78, R.A. No. 337; PiaLno vs- Cayanong, sup-a). Uodcr.tlrc Rcvised Charter of the PNB, tlre period is one yr:ar from re regisraricin'tif the foreclosure
s:rle.

' -' l the priod prescribcd b5r law. Their belsred attmpLs to qucstion tbc legality ald valirtity of ihe foreclosire proceedings and public lrctiori must ac<iordingt, fail. ;

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Requisirc for \y'alad LcdctDptioB 'flre redemption

the sale.

vs.

Court of Aoricelr
(.1{[r

scRA er)

-l'he right of rc<Icrnption should bc exercised witbin t$e st'ccifrcd time linrir, which is one year form the date of rcgistratiori of the certificate of sale..
li

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payment-

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'folentino vs. Couft of Apncols (s17 SCRA 732)

snd

Tolentino vs. ShentoB Rcalty Coroorqtlon (s90 scRA 24)

ln Hi-Yield Realty, lnc. vs. Court ofAppeals,388'SCRA 655 (2092),w.e held rhar.rhe action for j;diciat redcmptioi si;ufd & Bted on timp ana in goda thith, the redemption price is finelly dertcrmiued and. paid within a reasonable tirne, and the rights oithe panies arc rcspected. Steted citherwisc, ihe foregoing interprctcti()n lus ttrrec critioal dirncnsions: (t) tim!ly redcmption or rcdemption by cxpiration dolel (2) good failh os alwlys, mbaning, lhe filing rof the action nrust havc been for the sole purpose of dctermining thc redemptiop,price.dn! not to stretch the redemptive period indefinitely; and (3) once the redemption price is detcnnined lvithin a reasonable time, the redempti'oner rnust make prornpt Paynrent in full. . ,. -'" I

IlPl Ihnrilv Snvinsg Pnnk, lnc, vr, Vgloro (4J6 SCR/! !)

snd

.,

r't,:ri rrs iri i it'; J; must bc occomponied by on aciual and simultnneous. tandcr of pay{ent. Tbis constitutes the exercis pf the right to repurchasc. Otherwisc, the offcr to rddeenr is incffectual,

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;". fi i'i;i*-;il ;i ii"ntd;

I t6

De Roble! Ys.

Court of ADDeale

subject property, what thcy had r*ts thc riSht of rrdemption drsntcd to therr by' law. But thty losr thc right whcn thry failcd to excrciso it wilhin ihc prascribcd pcriod. Petitioners offcred to rdocm thc subject proparty only on Dcccmbcr 199O, morc than six (6) years aftcr th forcclosurc salc of May 15, 1984: Evideirtty, that was a belated Btteript at exercising a righr which had lodg crpirecl. 'l'o rllorv redenrption at such a late time would simply be urireasonable and rvoukl rvork an irrjustice on respondent spouses. l.,cv vs. t,nion llank ofthe |ttiilinrrines (s2o scRA 369) .'. . ,

As of May 31, 19q4, petitioacrs wcrc rcdcmptioDcrs. As thcir mortgagc indebredness was extingrrishcd with the foreclosuro arid salc of tbc mortglgpd

Ir is only upon the expiration of the rqrfq;Ptio.n. peribd, without the judgnrent debtor having made use of his right of redemptionr docs orrnership of the land sold becorne consolidated in the purchasei.
.

Javclosa Ys. Court of Appeals (26s SCRA 493) Under the Rules, it the nrortgaged property is not rededmed within ohe year from the tbreclosure sale, the pirrchaser at public aucti<fn is entitled to' possession ofthe property. To obtoin possession, lhc vendee oi purchascr'may cithcr usk li)r a writ of possession or bring an sppropriotc ind"pcndcnt aclJon, Suclrasust|itlbrcjectnrent,whichPrivdterespondentsdid.

price of rhe propgrty pllp'l% inteT:t pcr.mooth togelher wirh lhc tuxcs lhcrcorr, il'urry, by thc purchascr witlr the s6tno rote of intercst computcd from the i . t.f lale of .tf renistririrrn or'rhe sale. sela date registration.ot'the
r

2. I Payment ol'the purchase paid

'i!;

Allic(l lldnkini! Corrrorrlion vs. Mrlco

(58a SCRA 538)

ll

The generat rule in redernption i3 thaf it is. Dot sufEcicnt that a persotr . ofGring to redcem manifcsts hig dcsirc to do so. i'Thc atatemcnt of intcntion ' tnust bc uccompa.nied by an octual and simultsnco'us tcnder of psyment This constitutes the. exercise of thc right.to repurbhasc. In scvcral cascs decidcd by the Court where the right to repurchase was hcld to have bcen propcrly exercised, there was an unequivocal tender ofpayment for the full amount ofthe repurchase price. Othenvise, the offer to redeem is ineffectual, Bona fidc redemption necessarily implies a reasonable and valid tender of the entire tepurchase price, otherwisJthe rul;6n the redemption period fixcd by law can
.

easily be circumvented.

Estxnislao vs. Court of Aobcalr (362 SCRA 229)

by law. The tender of payment must bc for thc full arnount of thc purcbasc price. Otherwisr:, to allow payment by installments wbuld bc to allow thi 'l

'l'hc right of ictlcntption slrould trc cxcrci""a,',ritt in ft e pcriod prcscribcd

tt7

indefinite extension of the redemPtion pciiod' Consegucntly' the payment tendered bv Dctitioners on 4 Juni 199i, while madc \rithin tho period of redcmption 13tS &ys), was ineffcctive since the amormt offcrcd did aot inoludc thc intcrcst.but was limitcd o the purohase price. ,'

"

The interest rare on thi auction price should bc computcd not ftom thc dare of thc sale, but from thc rcgistration thireof Since the Pcriod-Of redcmption begins only from thc daic of the registration ofthe ce*ificate of.sale in the'Regisrry-of Oeeds, the computation of the intirest on the purchase. plic should also be made to commence from that date'

lleirs of Norberto.l. Q!r!sul! bjgg-Y&

l'hitinn!rclNaf (576 SCRA 762)

'.

whetlrer thc redemption is being made undcr..A'ct No. i!35 o( the General Banking Act, as amcndcd by Prcsidc-ntial Dccrcc.No. I8J8, or undcr P.D. No. 694, the mortSogor or his assigncc is rcquirod to tcndci Payment to nmkc slirl rc(tcirlplion vulid soutclhirtg which lrctitiirrrcrk Prcdcccssot fuilcd lo do. -t'hc only instance when this rule may be conslrued liberolly, i'e,: al'loiv the non-simullaneous tander of payment, is if a jucticiil actioD is institutcd by thb
Iudcr)r [)ti(]trcr. r.nay pre serve his

,vilhill ihc one-yeur 1>criod of rcdemption. 1'hc liling of|r courl octiort ro enfprci:. iedemption, being equivalent.to a formdl offer 1o redeem, would havc the ef,fect of presewing his iedirnptive rights snd "freezing" ttre cxpiraiion oa,nt orlelyeal ' peiioa,, pciioa. ooia fidc rendir ol th- re&;mption priec, iwithi; ttre preserie the righl redemplion for. forrl is only essential to presgrve righJ of red;mptiotr beyond such priod of rcdcrnption aird within thc Bcriod aotion by the statute of limitetions. J r'hcrc tho.right to through judicial action within the reglementaDr pcriod, the acconponied by a bona fide tender of the redcrnptio4 pgcc, while proper, may

ln case of disagieement or", th" redemption price, thg redenrptioner right rif rcdemption through judiiial aciion which must bc.filed

(s88 SCRA

s3E)

'I

Petilioner being a banking institutiorL .the <iptcrminalion of the redemption price for the forq:losed property slrould be govemed by Scction 78 of the Genersl Banking Acti Scction 78 of thc General Banking Act had the ctl'est of smending Scciion 6 of Act No. 3135 insotlr os the rcdemption price'is concerned when tf,e mongagee is a bank or a banking credit institution. The amount at which the foreclosed. prof.)rty is redeemable is the amount duc, under the mortgrge deed, or the oriGtsnding .obligation of the mortgegor plus interest.and cxpcnsis in accordoncc r ith Sction 78 of' rhe ( icrrc.rul llnrrlilg A!'t. ll wtr$ rrrurrilbcl errur lirr thc C(iurt of Ap1:culs to opply in thc casc st bar the provisions (lI Scctiotr 3O of ltule 39 of tho Rulcr of Cou4 in fixing thc redemptiin priie ofitrc subja:t foreclosed propcrty.

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Development Bank of the Phillppineg vs. Environmcntsl Aouatlcr. fnc. (634 SCRA zrs)

Scction 16 of Executive Order (EO) No. 8l st8te3 that tbc rcdimotibn price for propcrties mongBged to and foreclosdd by Dcvctopracnt Sdnk oi rhe Philippines (DBP; is equivaient ro rhe remaining boianoc of tic loan.
:,-

When the DBP resorts to Act No. 3135 in ordei to.seil the mortgaged property extrajudicially, it does so merely to find a proceedingrfor tlre sali. Even assuming that DBP chose Act No. 3 135 as the goveming law for. thb extrajudicial foreclosure, the redemption pricc would |till be equivalent to the : remaining balance of the loan. EO No. 81, being a special and subsequent law, amended Acl No. 3 135 insot'ar as the redemption p-rice is concemed
.

Bnluvut vs. Poblctc (sr4 scRA 37O)

ll lrcr['s trr n(ttc.tlllrt tirc lrrrrlrosc ltrr r.ct;rriring lhe puruhus+] lo furrrislr copics ol thc an)ounts as assessments or taxes which he iray hav.e paid is to intbrnr thc mortgagor or redernptiorrer of tlre actual an-iount wh'i"t fr. S[o"fa pry r lr casc'hc in casL' rc chooscs cho(,scs to t(, cxcrcise cxcrc,se his right ofredem of reclcmptio. p. If no such notice is given, the oni), effect is that rhe property may be iediemed ivithout. paying- such assessnrent or taxes.

.: :

)fiot! ion must be served on thc oEccr officcr who made the sale and a -"a. inl ", ter of Deeds. (Rosaleii vs. Yb<ia, 120 SCRA 369'tt983l). ,;l 'l'!

Guill6n vs..Court of Aooeols. (589 SCRA.399) I.

.1"'!,,r:l

i, 1,

i ,, , .
i
.

norice. is indispersable, actuat knowlcdge or,r," "lia ""qiri*a somc ()thcr manners by the redemptioncr, notwithstanding. Hc Or shi is still entitled to wrifled notice, as exactd by thc codc to ,emorJ all uocenaioty as to the sale, rts terrns and its validity, and to quiet any,doubt that tho alieiation is not definitive. The law not heqllg providid for aity attcmatirra tc m"rfroa oi noti fications remains exclusi"elfio"sh rfr. CoaL d*;-il' &;;;- ;; panicular form of written notice no-r any distiuotivc m*ro& ror writtei noti tication of redemption.

wrilten

io

'.

'

I Petitioner-heirs hsve not lost their right to redeem, for in the absence of a rvrittcn rl(rtiljc&tion ol'thc salc by the vcnd-ors, the 3o-d;y perioct has not cvcn
Cnstro vs. llaauc (3s9 SCRA 23) lr
,

lTrj:^::*f:*:of.sah.whlcrr'wairegistcrcaw'tthth".-!;ri;;iE;;;;; 28 December t994. when the orectosuft iai. was already deceased. His son paul Mendoza scrved Notice of Redemption on 5 June t 995. On l4 June 1995, complainani "n'rc"ponacot. fiIeA an opp"siti"" contending that Paut Mendoza was just one oi several hcirs of tfrc ni6rtlaloi and therefore he iould not exerciselhe right of redemption for more i.hfii;; J

",rsLli-cifiiiitriil"ffi.,;;

119

share as an heir. Respondent issued a certificatc of redemption to paul Mendoza and enjoined complainant to occept thi rederdption money.
:

Isluc: Held:

Did respondent sheriff usurp judiciat fimction of thc Noticc of Rcdemption?

ii

resolving the tegality

Complainant's opposition ro the redcmption of ahc propert5r and his insistcncc on thp issuance to him. of a final decd of s6lc gave rise t<i'. a contentious matter. For this reasbn, respondent should have refrained fiom sealing the redemption by Paul Mendoza and should have advised the panies to scck rcdrlss in thc courts. Rcspondent had no authority to decide the matter. .

ltnion Rank

vs. Corrrt of ApoctE (J59 SCtrA {lto) '

l.acr! ln Mrrch lg9o, resfxlndents rnortgaged . thbir rcsictencc in favoi. of Uniorrbank to secuie rhe payment of a loair to Dclco for P2;0O0,000,O0. Respondcnts defaultcd so Unionbank extrajudicially forcclosed ihe mortgage nrrr.l strbrtrillcd thc.highcst bid of P3,29O,O0O.OO st the forecl6surc satJ, .q c'.;llrlicrllc ol'sllc wirs issrrcd to Unionbunk snd unnotuted ol| the ailtc on g Mav I 99 I . Prior ro dre e,\piration of the redcmption period on a 'M:ay 199i, rc'spondcrrts fi lccl a conrPlaint for d,nnrrlnrcnt of lnortgoge with the court on lhe gRrurrd lhat ahs Pnrprrty lvits corrslitutcd us a l'umily holtre as early as Octobcr 1989 and Article 158 of the Family Code prohibits rhe encumbrancL of a iamily horne without the written consent of majority of the beneficiaries thereof o-f legal age. Pelitioner contcnds that the property could not bc legally considered .as a family home because its actual value exceeded P3OO,OOO.OO, tie maxiinum value for s family horne in urban areas as stipulated in Article l5;/ of the Family t, '. Code 2.
Does the ccrion for annulment of mortgage suspend thi: runninj
:

of of
.

apphcable to respondcnt's family homc as ihc vslu of thc tstt irs olleged constitution cxcecded P3OO,OOO.OO.

HelC: - The mortg.g is valid

because

Articlc ljg of tir Family Code,is not

r;t

the timc

property.

Ttre institution ofan action questigning the vaiidity ofa mortgage does . not l()ll the running ol the one yesr perio<t of redemption. Responder,is'-fuilure to excrcise theirright of redemprion divcstid them ;fsaid right ergo petitioner. can proc@d.to have the title consolidated in its name and a irrit of possession issued in its favor. To rule otherwise, and allow rhe institution ;;;; quc-stioning lhc validity oI o tnortgage to suspend thc runnitlt! of the "f; one ygar' period, of redemption would constitute a dangeious,piccdent -A likcly offsiroot o, such e ruling is rhc institution of frivolous suilj for anDulment of mortgagc intended merely to give the mortgagor more timc to redccm ttre mortgigld

.-

Fn

.luun vs. Cou* olAnot:ets (363 SCRA 387)

I$sue: Can courts validly order the Register of Decds to annotste a

frnal Certificate of Sale in the Original Certificite of Title and to register such sale,

even.if the. registered owner-mortgagor

duplicate Certificate of Title?

refuses

to

surrendcr the ownerls

Salc in the The snnotation of Private rspondent'.s linal Certificstc of petitioncr's of prescntation iliAgin.r d"Jirot" oi ii,[e' "*n iiitLout- ihc a situation in- w$ch. a Jrpii"u,t was valid. i" *J!'o,ft"t*isc vrould rcsult it' his or hcr titlc to thc consotidatc ncver iJ'""i" ,"i"rl""tt in o fore"l.rsi--tapse of thc.1hegr "on pcriod' bccausc rcdemption thc of tt ;;;;"y "";" un"t certificatc " refussl or t'aiture of the for;i, o',rn". to submit th; latter'8 duplicate morigagor' ofthE mercy thc of titlc. T he mongagee-purchaser would tlen be at if the lattcr rvithoui any just cause withholds such duplicate'

Held:

writ 0l'l'osscssiolr
(s32 SCRA

124)

.iudgrnurt.

writ of exccu$on comrnanding the :hfl'ff-P undcr. thc entcr thc land and givc possession thercof to':the Pcrs6n entitled ''

A writ ol'

Posscssion is a

(608 SCRA 222) possession is detined as "a writ of execution employgd to-ert/itqe u.lutl!<rttc,tt l() rec()vet lhe possession o/ tyd' It-cohmands the sherif ,rr' .r,,,., il,u'irrnd untl give i* plssession lo the person entitletl under lhe juclgntent," There are trrree insta[cei when a writ of possession may be iisrred: 1? of Act No' 496; (b) in i"i'i.l".a ,"ji.trotiol, prbceedings underinsection of the mortgaged realty :'"i;"i"i i"*"rJr*., p.o.rid.d the &btor is possessio-n interveri:dt i"9 (t],i' had suit, to the foreclos-uii and no thrrd person, not a Party -real 7 of Act No' Section mortgagd estate extrajudicial foreclosure of a -under instnncc. third the falls under p**"t i**e cii. Th; Uv ect 3135, as anrendect The procedure for oUtai.tini.a oT it of possession in extrajudicial^forecloiure cases is found in Section T oi Act No. 3 1 35' as amendcd by Act 4 l l S'

A \vrit of

'

thc onc ycor rcdimption perioi. upon thc filing'of r bond' or (2) after the lapscol'the redemptio" p".io.t, ,rittto"t ncea of a bond. ln ordcr to otstlil i wrlt of po*scssion. ihc purchnscr in a forcclorure SttG mutt file r pctitlon'-in theior.r, of uri gr-Ea.rc,J!g$8, in the rcgbtrrtion or crdrstrtl proceedlngs of tb* .egiste.EdJ !@-Fhe reason whv this pleading, althougli denomin6ted ,,. . 1rJiti.r,.t. is act tiallv-,r.rnsidered a motion is best explained in Sps' Arquiii v' ( . 1. J5, scl{ A 75-l litttl-s; .vhcrc wc sirid: 'l'hc ccrtlflcolion agalnst forunr shoplring is requircd onty in o comPlaint or other lnltlatoty pleadhrg' The u 2.r.re pciiti,rr, firr the issurnce oi a *tit of pos"cnsion filcd by ttrc racltoodcnt is .r,rr'un iniai,.tury plcatting. Although tlre privule rcspondcnt denominated its pleading as a petido;, it is rilncthetesi, a motibn. Whot distinguishs a mbtion i.o* u fttition or other pteading is not its form ot the- titlc given by.thc party executing it, but rather its purpoie. Thc oflice ofa motion is not to initiate ncw titlgation] bur to bring u -it .i.l but incidental. matter arising in thc progre-ss of thJcasc in which the;otion is filcd. A motlon b not ln indepcndcnt rigbtor remedy, but is confined to incidentsl metters in thc progrcts of e cause' lt relst'es to some. question that i3 cotlaterol to the msin object of'the-actlon and is contreetei with and depbndent upon the principel remedy' An irpplicntion for a writ of possesiion is a mre incident in tbe registration.

Based on this provisiorl a writ of posscssion rnay-issuc

iither

(l)'within

t2l

.\

(6i@
.

,'
.:.

The petitioner, as defaulting mortgagor, ws not'entitled under Ac-t 3135, amended, and its pertinent jurisprudence to any prior notiqc ofthe applictition as '' ti)r thc issusrrca ol"the writ oipossession.
possession of real propeny, may be issued in: (l) land reqistration proceedings ' under Section l7 ofAct No. 496; (2)judfcial foreclosuro, frbvidpd,thc debtor is in grrsscssiorr ()l'lhs nr(trlgngcd propeny, ond no rhiid frcrsbn, nbt o pnrty to the lbrssl(rsurc suil, lrad irrlcrvcncd; (1) extrajudicisl lbrccloiurc of $ rctl _c.,qtg nrongage, pending pdemption under Section 7 ofAct. No. 3135, aslamended by "' Act Not 4l l8l and (4) execulion salcs, pursirant to thc.l8sr Pamgraiih of Section r 33 ol'llulc 39 ol'the l.Lulcs ol'Court.

A writ of

possession, which commancls the sheriff to place a person

in

,,

:il

i.

',',,'

llrttrrch 24. Ilif,rln. I Jri!lrrla' 5J2 SCRA roe) '

.

.l

ind i.

Yillnnueva vs. Cherdan Lendine Investors dorporirtion (633 SCRA r73) j

,

redemption period, th mortgagdr loscs all interest over thc forcclosed proPcny - the pEchdaGr, who.bas a rigtrt to po+*:ssion that.extcDde atcr tb; cxpiratiotr of the redmption pariod, bcoomcs the absolutC o\r{ncr'of thc Foptry whcn n9 redemption is rnade.

A writ ol lxrsscssioti is un order whcreby tho gharilT ir 'pommr.indcd'to place a person in possession of a ral or pirsordl propcrty. Aft+ the oneJcar

'

l.,j"l

:,

Thc procceding in a petition for'a -writ of pqssssion is'ex parte and, srrrnnrary in nature - ii is a procecding wtierein relief ia grantcd without givirig thc person againsl whom the relielis sought an opportunity to b heaid.

i.

W
and
':,

It

Servic.p Insurancb Svstbm

Mnllnri vr. Government

(5r1 SCBA 32)

,
,

Thc prr:cecding in a petition, for a writ of posscssion is ex parte and. summary in nan-ue.- it is a jtulicial proceeding brought for the benefrt of one
party only, and without notice lo, or consent by any person edversely interested.

122

The Regional Trial Court undcr rihich tbe application for, thc islrrance of a writ of posseision is pending cannot dcfcr the.issr:rnnoc of the said wrii due to foreclpsuri sale. the pendeincy of an octi;n ror i.r""ri"""i oi-"rtgtge

':

'.

""a

". $.

Sulit v3. Court of Aprtcrl!

(268SCRA441)

j.:.1

th9 sale application of the proceeds from thg sale of the;Eongo.Spd prgPerty to the payment, not lbj/detrt b.y datign;'!pnce, it-is obtigation is an act of paymin! mortgagor's obligation morrgagor's the mortgagees' duty to turn over any surplrts ' id .thi:.3clllng : Prip9. to thr lnortgagor- Perforce, a rnortgagec who cxcrbiss:th9,ibrvcr..:of salc"domaiined in
ihough rhc.mongagce is not strictly considered a truitce in a purely equitable sense, but as far as conccms the unconsurned balanbc, the mortgagce is deemed ir trustee for the mongagor or owner of the equity of rcdemptlon.
Saeuan vs. Philinninb Bapk of Cominunicaiions (s38 SCRA 390)
,

F'crnrndci vs. Esr)lno2r

(551 SCRA 135).

'

Cua l-bl Chu v. Led-ul (612 SCRA 227)".' and

I
I

lr. t.

vr. Cbcrdrn Lcndfnq . ' Villrnuevr lnvectoi! Corpontloo

(Gr3 SCRA

lzr)'

Within the redemption pcriod the prr"h""", in a foreclosurc salc may apply for a writ of posses5ibn by filing for that purpocc an cs ptirte molion under oath, in the corresponding registration or'cadastral procccAing in the case of propeny covi:red by a Torrens fitle. Upon. ttie filing of,an ei parte motion and the approval of the corresponding bond, thb coun is expressly directed to issue the order for a writ ofpossessiol.
On the other hand, ofter the lapse of thg,redemption pcriod, a writ of in favor of the purcholer in a foreclosure sale as the mortgag,or is now considered to have lost. intiresf over'lhe foreolosed propgrty: Consequently, the purchascr, who has a right ofposscssion tflcr thc xpiration of the rcdemprtign period, bccomes th9 absolute 6wner of thc ptppcrty whcn no redemption is mqdo. tn this regard, thc bond is no longcr nocdcdJ Tho purch63et can demand posscssion ht any time followiirg thc.'coirsolidsdbn of olrzncrship in his name and the isiuance to-him of a new fCT. ' Aftcr consolidatiori.bf title in thc purchascr's name for faiiurp of thc mortgogor to redccm the proPerty, the purchaser's right to possession ripens iirto the absoltite righi of a c6nlimied owner. At that poi:nt, the issua4ce of a writ of possession, upon proper
possession. may be issued

J
123

Metrooolltan Bank & Truat Co. vr. Llinb

(6r(15

SCT,A 159)

'Uttrheta qQ In SzIi, v. Court of Appeats. 258 SCRA 441 (lgg7),;-we deliver..t!issuancc of a writ ol posscsiiln bccsusc the mortgaga failcd' to surolus liorn thc procccds of thc foreclosure saki: which is cquivalent to ';i" rpproxirrratcly 4Oo of lhe totql mortgoge' debt' .tur,r- was. considered as al ' r'' to iho gencral rule that it is ministeribl upon the c. oqn to:issrle:8 writ ...' ,' "*c.1rti.rn possession eien during the period of reder-nirtio- n We .exp-lained that ' of cqulroblo cousirJcruaions pr&ailing in saiil case demind that a writ of possessibn t1
slrould not

issue.

:
'

ln the sutsequent case ofSagzan t. Phitippiie Bank o/Coimunications) 538 SCRA 390 (20b7) however, we clarified that the cxccption qude in' Sz,ir cxpirid or when apply when th. docs 'ot in favor of the ' consolidated propcrti bccn has already rtre orrercrslrip o"ei words, cvln if the mongagce-ptuql.ragir .fails to '."turi '"".,*J#-ir;Jt;;.*l^-;iil"r i-h" surptus, a writ of possession must'still'b; issued In th instanl case; the pcriod to iedeenr has already lapsed. Thus following the ruling in Sagua4 :. the issubnce ofa writ ofpossession in favor ofthe petitioner is in order'

;"-tiil'i;-;e;;;'h* "l;;i

_: -'_.: .
'i,i

Relatedly, we held in Su/r, that if the mortgigee is retaining more of the oroceeds of thi sale than he is entitled. to, this fact alone wiil not affeit tbe .validity of the lale but simpty givcs thi mortgagoi a caus.i of action to recover such surplul.

n9! challengc .tlrf Sagwi whcre the mqrtgegors mqrtgBgors diC not Unlikc in thc casc of SaaFari validity of the foreclosuie bui only dcman4gp lhc 1cturn Pf- tlt s:rPlus! responient in this case squght to s''rt asidc thb tqrccleuro i'alc'' tn fectt a Complaint for Nullification oi rorcctosurc Proeedings ana oarilsgcs w91- f{en before the RTC of Paranaque dockctd as Civil Case No. 0O-O513 and rafllpd,to Branch 194- Thc fiiinq df a seosrate case for the coltcction of surplus by 'imlropcr respondint rroutrt ilierifore bc .while . the onnulmcnt case is stili

'

of tha salc sinco ,not]ring.. decmed to havc affirmed thc validity rafter the dismissal of thc sale .has been made. It is only oomptaint for annulment or i,r,hen thc foredlosuib sile is declarcd valid that thc irrortgagor may recover thq surpluq in an action specifically brgugh! f9t 9" porpJ.J..uoo,iver, to avoid muitiplicily of suits, the bettr rcotuse is for .the mortgagor to file a case for ann,rl;eni Lf foreclbspre with anl altprnativc cause . '. of action for the retum ofthe surplus, ifariy. 'l
the mortgagor

It bcars strcssing that the.colleotion of $lrplus i8 inoonsistgnt with thc annulmcnt of forcclosure becguse in suing for tttc return ofthc sirrplus proccods'

is due ii

io

volid

ii

'.: When private respondent applied for thc ig;quairce of a rryrit of pos-se.ssiqD' it presented & ncw transfer certificate of titlc: is.sued in its name dated 8 J-uIy of private rcspondent to the possijssion dfthe property was th.us :obr. rtr" right loundcd orr -its ,igl.t ol' ownerslrlp.' As . the purphascr of the ProPcrty at the
t24

.,

Cua Lai Chu vs. Iroul (612 SCRA 227)

..ii.

!-

issued, the foreclosure sale, ii,r whose nomc title over the pr"p..fy *"" "*4, Vesting in it right of private respondent over the property had become'absolutc, the corollary right of posscssion.

Yullenco vs. Court of Appeals (393 SCRA r43)

ldolor vs. Corrrt of Aoneals (4s0 scRA 396)

Top Art Manufacturiirq. Incorporated vs. Metronoliian Bank and Trust Comnanv (s9s scRA 323)
.

and

Mrlhri vs. Covernment Scrvice Insurrnce Svstem (61r SCRA 32)

Pcnson vr.

(49r SCRA 396)

I

Mamnrn

Devetopmctrt Brtrk of the ihillpphc! vs. Prime Neishborhood A$ocletlon

snd --i-s56cE3s2)-

1'he foregoing iules, however, are not without cxccption Undcr Section ll5. llule 39 of tlie Rules of Court, whiph is made.supptctory to the extraiudicial lirrcclosrrrc of tral caautc mong,lgor by Ssciion 6 sfAct 3f 35; th podrclrion of the tllrrrtgugcd propcrry: may be awarded to a purchaser in tho exrraJudicial foreclosure unlcss a third party is.argtually holding thc propcrty advcr3cly lo the' jutlgrrrcrrr dcbt.,r. lrr PNB v. CA, 374 SCRA 22 (2OO2), the Court held that rhe obligation of a cburt to issue an ex parte writ of possbssion in favor gf ihe purchaser in an dxtrajudicial foreclosure sale deases io be ministbrial once ir
,.I

.,t

r25

app.rts that thcre is a third party in posscssion of the ProPcr-q/ right advcrse to that of the

debtor/mortgagor. ,''

*f,o

:i

ir"

a.,-,g'g
.

'
.

The fact that a person is not named in the writ. of posscssion d.ge.s 1ot:' : . render thc writ rurenforceable ag8inst him whcre hc was a P6rty to thc ' "" ' documcnts \^,hich werc the bases ofthc forcclosurc. .' Pbltipplne Nttional BrDk vr. Court of Appculs <374 SCRA.22) Yillnnueva vs. Cherdan Lendinp fnvestors Cornorgtion (633 SCRA r73)

I ti.

BPI Familv Savlnss BaIrIt. InL vs- Golben Power Dicscl Snles Cenibr. Inc.,t

:
,

. i
.:

'

(639 SCRA

4O5)

Issrre: Whether or.not an 6;-parte writ of posscssion issucd pursruint to Act No. Jtri us ainendcd. can be inforccrj against a third pcnon who: is in actual possession of the foreclosed property and who is ,iot i;l priwity wiih the '

't'

debtor/nrongagor.

, i

Held: The obligation of a court to isiue ao ex-parte writ ,of frssession in favor of the ptirchascr in an extrajudicial foreclosure sale ccases to bi mi4isteriat or.lce in possaCsion of te property who is_ sppears that is a third .it 'claiming a right there to that ofnarty theidebtor/mortgagbt. Under Article 433 of adversc lhc civi CoIc, one rvho clqims to bc thc own'er-of E ProPcny possessed b)1 another must bring the appropriate judicial actioh.for its Physical recovery.
.

An ex-porta Frtition tbr issuancc of a-'writ of possei.sion is a nonlitigious procclding autlrorized in an cxtrajurticiat foreclosurc of. morrgigc
pursuant to Act 3135,.as

amended.

\
rtt.rrlgug ulldar Luls 68

trnlikc uJurliuill lbrcclosuro ol'rEol srtlio Rules of Court" any property brought within thc bmbii of Ait 3l3l is forccloscd -"ot by the fiting oi iititiirn, *iif, ."v court of justico, but wid officc of thc " sheriff of thc provincc whete the.salo is to bc tnldc. iAq 8uch, a lhird pciloE itl ' possession of an cxtrajudicisUy foreclosed reslty;,who claims a right superior to thllt ol'the original rndrtgogor.. will havc no opfprtunity ta tro hcsrd on his claim in a proceeding.of this noturi- It stands to rcason, thorcfor, thst such third person may not be dfspossessed on the strength of'a mcre ex-parte possessory writ. since to do so would be tantamount 1o his summary ejectrnbnt, in violation of the basic tenets of due process. Besides, ,Article 433 of the Civil. Code reguires nothing iess than.an action for ejectrnent.lo be brought even by the true. owner. Afler all, the actual possessor ofttre propirty enjois a lcgal presunrption

ol'tlio

of just title in his favor which must be olprcome by the party claiming
otherwise,

l,
! I

126

I !

Davot vs. Sbelt Chemical (Phils.) (s2s scRA s3s)

Inf.

rnd
Policarolo vs. Actlve Biok (s66 SCRA 27)

'fhe obligation ol'a court to jssue a wii! oq pos.session in favor of the ' purchaser in an extrajudicial foreclosirre sale ofa niortg4ged,property geqsgq to 6c rninisteriol once it is shown thst there is s thiid Parly in posscssioli:of the property who is claiming a right adverse to that of thc .mortgagor. and that .such third party is a stranger to the foreclosure procecdings ih which thc d.J Palre writ of possussion was applied for.' i1

t,

Cgmscho vs. Philioolnc Netional Bank (363 SCRA 35r)

(386 SCRA r 17)
i

'

{'

aod

Bukidnon Doctorr' EoiJoitel. Inc. vs. Metrooolitan Bank & Trurt Cil' (463 SCRA 222r

t2?

.')
possession issues as a matter of course uion filing of thc proper motion and approval of thc corresponding bond. No discrction is left. to thc cciirrt.. Ahy question rcgsrding the regularity and validity of the salc (Brd thc cooscquent cancellation of thc wriQ is lcft to bc dctcrmined in a susbscqucnt procccdipg as outlined in Scction 8. Such qucstion is not to bc. relgcd as c justification ftir opposing thc issuancc of lhc \i/rit of possc*sion, since,.undcr ttc Act,'th9 procecding is cx pgrte.

Tonaclo vs, Banco Fllloino Savlnes and Mortsage Bank (63s SCRA

so)

Scction 6, Rule 39 of the Rules of Court finds apptication only to actions and not to special procecdings.

civil

Section 6, Rule 39 of the Rules of Court is not apgilicable tc qn er porie petition tbr the issuance of the $,rit of posscision as it is not in the noturc of a civ il actiorr. i .l 'l'hc duty of thc trial courr to grant a writ of possession is ministcrial;.thi rvrit issues as a nrllter of course upon the filing of the proper motion:and thi
i
I

'l'he issuance of a,writ of posseision to a purchaser in an eitrajua;Cia.i' foreclosure is summary ond ministeriAl in natuie as such proteeding is-mcrely an incident in the transfer oftitle.
Ravo vs. Metrooolltan bank and Trust Comnanv . (s39 SCT,A s7r) .

An cx purla petition for tt" i""ui.rr".'oi a writ oI pogsisioo unacr. Section 7 of Act No. 3t35 is not, strictly spcri[ing, a ..juAioia procixs". as contemplarcd in Article 433 of thc Civil Codc ;i it is a ju&cial'pa&c9ilin8 fof the enforcement ofone's right of possession a.< a purc}adlr in a fdrcclosurc sal6, nol an ordinary 6uit.filed in court by which oae p6r.ty .sucs anothcr for the entorcement ot a wrong or protectioi'.ofa right, or the pravention or redrcss ofa li virong-r'
I

The issuancc of the,writ of .posscssion bcing a ministerial function, and summary in nal.rre, it cannot be said to be 'a judg'rncnt on lhe me.rits. Ii is orily and irrcidcnt in the trrnsfcr of title. Hcnce, a sdparate casc for rinnulmcnt oi. mortgage and foreclosure sale cannot be. barred by litis pendenria.oi res .iutlic.tI.t
Eouite blc PCI B;nk. tnc. vs,
(627 SCRA r2s)

liNG Reattv

Aftcr thc consotidalion of tittc in thc buyer's na;ac for failurc of thc mortgagor rdeem, the writ ofposscpsion bec,omcs a maner of riglrt and the issuancc of-lo such writ of.possession to a'FrrchaseJ in an oxtrajudiclal -forcolosurc is tncrcly u rninistcriol frinction, Tho basis of this right to posscssion, is thc ' '- ' purchaser's or,rrircrship of the propcrty, :

128

Respondent's recourse to thc Court of appealr: v.la nurc OS ,rrs inappropriate even though thc Sheriff had demanded. that thcy vacatp the property. Section 8 of Act No. 3.t35 mandatcs. that even if an appcal .is interposed from an order granting a petition for e writ of possession, such order slrnll corrrinue to be in ellbct during the pendency ofan appcal. 1 .

li

l, r.t

I r

.i
l

Urnk of the Philiooine Ishnds L

(s24 SCRA 522)

'

and
!
:

Cua Lni Chu vs. Laoui

(6l2.SpRA 227)

.
i
I

Any question regarding ling thclvqli&ty thclvdidity of thc mr mortgai cannot be a legal ground for refusing tlie issuancigfa :
Baldueza vs. Court of Abnenli (s69 SCRA 13s) i .
Somron vs.

lijt

i i, .ll

(428SCRA759)

Rlvcri

129

of the mortgagor to

redeem the proPerty, entitlement to the

lwit of

possession

becomes ri matter of right. Rcgardless of whether or not therc is a pendiog suit for annuLner.rt of thq

-ong.e.

-";

po"sc-ssion, without prjudicc to thc onsuing outoomo of tho.othcr pqocccding.''

i

;i ih. fototo",r* itsclf, dp prirchasci ir

Pahanc vs. Vcstil (434'SCRA r39)

ontrled' tP

I .writ of '
t''

'

'

1'hc l'iling of an action by the redemPtioner to enforce his tight to redeem does nol suspend the running of the lututory Period to redeim ttre^ propcny, nor har the purchaser at public auction From procurilrg a wrlt ot p.rr..rr-i.r,, tllcr the . itaiirtory period of redemption had tapsed, without ' prejudice to the final outcome of such comPlaint tQ enfoice the right, of ' . .' retlcrnption.
The procccdings in r petition andor motion for tlre issuance of a writ possession, after the ta'pse ofitre stalutory pcriod for rddimpiion'' i! lummary

of
in

l;.

:r

necessary.
.

Any question rclarding the rcgularity and. vatidity of the sale, as well as thc conseque.nt cancellBtion of tne writ, is !o bd dctcrmined in a subsdqurcnt procccrJing as oullined in Section 8 of Act N6.'3135, as amended by Act N9. 4118. Such question is not to be raised as a jusdfication for opposing the

'130

issuance of the writ of possession. The pendency of a case for annulmett of the foreclosure proceedingi is not a bar to thL issuan-ce ofa writ of pos6ession.

Aroulze vs. Court bf

Apperls

i .

' .f ;

i,l

Aftcr thc coniolidation of titlc in thc tiuyer's aamc' for:Ibilure

i:t

issuance bing a ministerial funotion and srr"n'"Iery in naturc carnot b said to be a judgment on the meriB but simply an incident in thc transfer of titlc. .A separate case lor annulment of mortgage a d forbclosure sale cannot be birrred

'l hc pcrilionors litull the trial court lbr not dclving into tlr. ,Jtiaity of the tnortgagc and thd foreclosure proceeding before granting tlie petition for a writ ol possession. This contention is barren of legal bbsis, The judge !o wl:orn aI irpgrlicuIiorr lirr rvrit ol'posscssion is filcd necd ndt,look itito tlre validity of the l|r.)r'tl]rss r)r lhc rncnncr ol' its lbrcclosure. ln the issuancc of a writ bf prrsscssion, rxr discrctiorr is lull to thc trial courtDe Vera vs.

Asloro
',

(448 SCRA 2O3)

':

::,,

Podcrcs vs. CouIt of ArrDGal!

'(463SCRAs04).

a.

Remcdy of Terccrin

131

were securca by Resl Estate Mongages on their forty-five (45) parcets of land. TransAmerican. lo pay its loans, petitionci . foreclosed extrsjudicialty the three real estate mirtgegcs and tho morlgagcid propertici were sold at public auption for P38,o04305.o1 to ptitiotrar, trcing the tighqsg bidder. Thc trisl court grantcd the ex-partc vcrified pctition for. issuancc of urit of possession filed by fotirioner and iikewise approvcd thc paitioner's surciy bond. Respon&nE Mr. and ldrs. Ordipario filcd a motibn for rcconsidciation iraying ttrsi the parocl of land wr'th its improvement covercd by TCT No. 76-17 be excluded from thc obovc ordcr.

For failurc of

Con the superior right of the respondents as legitimate buyers prevail ovcr llrc l**lili()nsr's trxrdL{ogc lorcclosure?

.lj!!rc.
l-teld:

Under Section 33, Rule 39 of the 1997 Rules of Civil .Procedurg, 4s' amundcd, thc p()sscssion of the forectosed prope.rlyr rnay be awarded to the ' ' purchaser or highest bidder "unless a rhird p&rty is actually.holding the prgperty' adverscly to lhejudgnent debto(." Assuming arguendo.tbat rcspoddepi spoirses rr!. advcrse lhird frorties, as thcy so averred, Section 16 of,Rule 39- rcserves to lhcrrr tlrc rcrrrcdics ol'( I ) tcrecrio to dctcnrrine whclhcr thiJ shcrilT has iighlly or rwongly lskcn hold of the property not belonging to the judgment debtor oi olrligor rrrrcl (2) an independcnt "seporate oction" to vindicaG thair blaim of owncrship ond/or posscssion ovcr the forecloscd pany.

Under th6 above Rule, a third-party clairnant or

stranger

to

thc

"separalc agtion."

vrlr. ANTICHRESIS
A.
D(:finition (1989 Bar Exdm

i
Quesaion)
-.

Anrichresis is a contract whereby the oreditor acquires thc right to receive t}e fruits ofan rmmovable of hib debtor, with rhc obligati6n to apply them to thc paymcnt of the.interest, if

lt

is an acicssory contract bccaus

it

secures thc perfomiancc

ofa priacipal ;bligation.

t32

r-

C.

Obllgatlons of Atrtich retic Creditor

l.
.,

interest, ilowing, and thereallcr to the principal (Anicfe 2132) in accoi&ncc with 0id.provrsrons of Article 2133 or 2138. Hence, the duty of the creditor to r-ndcr ao occotmt of Said,fruits to thc dcbtor and thc correspr.rn<Jing right oi rhe latter rhat the jgid fiuits Se apptied to ttre iiebt: (Barretto vs. Barrerto, 37 Phil.234 [t917!; Diaz and Rubillos vs. De. Mendiioha, 48 phil. 666 [928]; Macapilac vs. Gutierrez Recipe 43 Phil. 770 11922))
1995

;:

'

Ilar Exam Ouestion

t.
2. 3. 4.

Does the law require any specific form for thc validity May Olivia re-acquire the plantation before her entiro paid? Explain.

3.

The.amount of the principal and intcrest nrrlichrqsis rvill hc voirl. (Articlc 2134, NCC) '

thc

D.

Sglicnt Points

l. Delivery of the propery to_the crcd.itor is rcquircd o,ly in ordcr that the d'reditor mry receive the lruits and not for the validity ofthe contradt. t',\ 2. It is not c$enriat that ths toan should cam lntorlrt fui ordc; *!t ft oln do suarutood wttli a contract of sntichresis. Antictiresis is susceptible of guarantccing all kl;ds ofoliig.tio"", pur" or conditionar. (J&vicr vs. Valliser, tcAI N. 24"8-R, ,c.iril ic; lga-ot at& RG;. N"u"; jso.c. 2741) | ../

133

Antichrcsis

L
2_

refers to real property

l.
2. 3.

pcrtbcted by mere
consensual

J.

consent oonlract

F. l.
1

DistinctioDs btweetr Antlchresb and

Rcll Mortg.ge

(199

BorBxar

QYesllo.E)

44!eEesle
property is delivered to the

creditor i

t.'
2:

-lusually debtor "rususfry

possession of the ProPer$t

"-._---7.--. i Lei* I j;tl

the,

.crcditor acrluires only the right to receivc thc liuits of thc propcrty, hence it does not produce. a real
right.

crditor docs not.havd.,egY,rigbq t9. rcccivc thc fruits,. but ,nqrtgEge .criate's d, reat right . oi,er l'lthE property which is ehforccablc iqainst-the whole world
I

3.

crcditor, unless therc is o stipulstion to thc contrery, is obliged to pay the laxes and'charges upon thc cstetc-

3.

crcditor ha{. no sugh obliSltio.n

i.

(A.ticlc

2 135)

4.

creditor given possession of tho property shall apply thc fruits

4.

mbrtpgee his no sucb obligation

thereof to the payment of iatercst, if owing, and .thcreafler to thc principal ofthe credit
Remody oiAoriehretic CreditoJln Case of Default .performarice to bring an action for specific

c, I. 2.

same manner as they ore allovyed in cohtracts of mortgagg"" tnd plcdge (sec Articlo I3O7; Tavcre' vs El Hogar Filipino, lnc. 68 Phil. 712 [1939]),

of the Ruies of coun. The

to petition for the salc ofthc real property as in a forcclocutc of mortgsgg uader Rulo 68

;;;s; ;;d;;, ;"i#;'

.*t'"iuaici*Iiiiccioswc in ut

t34

IX.

C}TATTEL MORTGAGE
De{inition
A chattel mortga8c is:

an accessory oontract bccausc l. principal obliBation;

it is for thc ptrrposc of sccuriir!-thc

pcrformance of-e'

As regards the chattel mortgage, it is settled that a mortgagc is.a merc accessory centract and its validity would depend on thc validity oT tle loan secured by it. The chattel mortgage constitutcd irvbr the subject-vehicle is dn accessory contract to the loan obligation as embodied in the proEissory notc, It cannol exist as an independent contragt since its considcration is the sanlc as that of the principal contract. A piincipal obligation -contractis ap indispenigble condition for the existence of au accessory Sinoc it hes b^een iu{ficiently establishcd that therc rrirs no cauisb or coasidcration ifor'tbe promissory note, it follows that the ctattel mo.4gEge has no. lcg 'to $aad on, . Hence, it must be extinguished and qannot havc a4y legat blfebt ii'n petitioners.
.

@i:

Sasuid vs. Securitv Finrncc.

Inc.'

.i .

2.
i

a formal contract becausc for its nolidity, rigistrati6n in tho ndispensable; however, dcspite irs non-rcgistratioti, it will.r;maii parties.

A mortgagc is a mere acccssory contract thus, ita talidi$r would dcpgnd on the validity of the loan secured by it. We, howevcr, reject the pctitioncr's argument that sirice the chattel mortgage involved, was not register6d lhc same is null and void. Article 2125 of the Civil Code ilearly provides that the nonregistration of the mortgage does not,aJfect the immediato ponies. lt states:

"Article 2125. ln addition to the requisites ip Artictc 2085, it i! i ndispensable, in ordeq that mortgage may be validl| ,constitutcd lthat thc clocurrrcrrt in whiclr il uplErrrs ltc rccordcd in fhe Rcgigtry of Proprty. If thc

'

lrnrtics."

instrument is not recorded, the mortgage is nev.ithclcss binding bctweqn the

\

The pgtitioner cdhnot invokc tlro abovc provision to odqry tho chgcci mortgage it exccuted in favor ofrqsnorrdcnt DBp, ,,

135

j\l CIO Stnrlrls lDroblenr The following credit transactions are formal contracts:
&.

b.

+d.
3.

c,

cornmodstum and ggaronty rcal estate mortgage and suretyship dgposit and pledgc chattcl mortgage and antichreiis

Leeal Basis: The Chattel Mortgage Law and Afiicle 2134

a unilateral contrBct because it produceS only. obligatibns on the part of the creditor to licc rhc thing ltont thc ctrcumbruncc upon fulfillment of the obliggtion.
,

1993 Bar Exanrination

Ouestion

sought ro recover possession and ownership ther!:of from tlie savlngs and loan.associaiibn.

Cthcnregisteredthecarinhisname.Tocompletetheneededamounr,cb,d;6wedPlo.0'30o.oo liorrr (lrc savings and loott sssociation in his office, constituting a chattol morlgage on thc car. For failure of c to pay the amounr owed, the savings and loai association nl'Jit ln tri.Rrc a complairtt for collection wirh application for issuancl ofa writ of replevin to obtain posiession of thc vshicle so that the chattel mortgage could bc foreslosed. The RTC issued thc writ.of . rcplevin. Thc car was then seized from C and'sold by the sheriffat pulilic auction at which the savings and loan association was the lone biddcr. Ascordingly, tho car was sold to ii. A few (lays later, A urrived l'rom his loreign assigrrment. upon lea;ing what happened to his car, A
Can A recbvcr his car from rhe savings and loan association? Explain your answer.

A, about to lesve the .country on a foreign assigninirit, cgtrusied to p his brand-ne,.w oar and its certificate of rcgistration. Falsifying A's signattuc, B sola A's car to c for pzoo,obo.oo:

.
.

..

A^swer:

.ti

'

Ycs. A aun rcuovcr his cur liirrn thc suvings un,l lqitn u*cot iulion. i a charr,.-t mortgtgo, 1n lhe rnortgagor mus! bc the absolute bwner oi tUc tfring {nortgaged. Fuitherruore, thc person constituting the mortgage must have the free dispoial of thi profo-rty, ana iir the'absencc ihcrcof.' must be legally outhorized for ihc pugrcsc. Irr thc case &r bar; thc ir-orrg"gor c did not havc.tlrc tice disPosal of th P,ropcrty and was -not legdly authoi'izcd f6r ttc purfri'thcreforc rhc chattcl mongage was not vslid' A can rhcrefore recovcr the &r from the iarrings and loan association provided he pays thc pricc 8t which'the savings and loan association b6ught thc car at pubtic auclion pursuant to Prcvailing Supreme Court rulings" Inasmuch as A rvas*unlawfirlly deprived of his car, A can recovcr it from any person in posstssion thereof But since'it was'6ougirt at a public auction in good faith by the spvings and loan association, hc must reimburse the lavings and lorn association thc piice it which thJ car was bought.
.

..'
t.

B.DistinctionsbetweenCltattelMortga!eandPtedge

l.

Chattel Mortqase delivery of parsonat propcrty

the mortgagec is nOl ncocssary

.,
pledqe

io

l.

delivcry is

ncccssary

.,

'

2.

re,gistration in thc ghattel Mortgage Register is necessary for its validiry

Property is not necesiaqr for its

136

procedure for sale of thc rnortgaged property is found in Scction t 4 of Artiile | 5O8, as
anrended

3.

' '" . .:11 plgdCqtf proccdure for sale of. __._. r.a_ _e property is found in Article 21 ' of thc Civil Code

{.

excess ovcr the a.mount duc goes to the debtor

if propeny is

foreclosed, thc

4.

not entitled to the excess

..

a) contrary stipulstion
(Article 2125)

Exccptions:

5.

if property is loreblosed, creditbr is enritled to recover the del'iciency from the debtor Exc'eption: if chanel nrortgagc is a security fior thc purchasb of personal property in installmilts (Aniclc 1484)
Offenses Involving Chartcl

thc cohtrary .\i (Articlo

:,i ':!

2l 15)
I

t' , I : ,i 't.
:1,

i..
.

Code).

Knowingly renroving any pcrsonal prdp..ty mortgaged under the Ciiattft Nfortgege Law l() any ,)rovirrcc or city other than the one in which it was located at lhe time of the execution of IlrC rrrortgugc wi{lt()ul wri ctr conscnl ol'thc mgrtgagcc; und ; I .ilt.. .l.l!. 2. Selling or pledging personal property alre&dy mortgaged, or any part thereot \rnder the tcrms of the Chattel Mongage Law without tha consent gf the mortgsgee wlitn on the back of the,nrortgagc and cluly r""oi i.,l in ihe Chattel Mortgago kegister (e4icle ate, Rcvised Penal

C. i

Mortgsge -.,

! i i .

l,

Note: The mortgagor is not rclieved of criminal liabiliiy even if thc nibrtgngc indcbtcdness is thcreafler paid in full (U.S. vs. Kilayko, 32 phil..6l [1915] or the mortgigor-scllcr informcd thp purclruscr thrt thc ihing, sold hod bcen mortglgcd, (Paoplc.vs. Alvarcs, 45 Phil. 472 U923D, But the sale is valid although no'writtcn conse;t wrs. obtahcd from tho mortgBgce b. ut thc mortgogor lsys himsell open to crimini prosccution. (Servicewidc Spcciatist, Ihc, vg. Intcrmcdi.rtc Appcllute CDurt, 174 SCRA 80 F989]; Dy, Jf. vs. Couh of Appeals, 198 SCRA 826 [ r ee r.l)
D. t.
2. 3.

Subject Mxtter of Chattel Mortgage

Shaies of stock in a corporation Interest in business

-1.

Machinery and house of mixed materials treated by panles as pcrsbnal propefty and no innoceni thircl persorr rvill be prcjudiced thereby (Makati teosing and Financc L'urponrtion vs. Wcavqr 'l'cxtile Mills, lnc., 122 SCRA 296 [l983]). Vessels,.the Guard in ,mortgage of which had been recordcd with thc Philippine Coast . (,rdur to t)c cfTi:ctivc irs ro third pcrsons. N'l()a()r vuhiclcs, rhc nror.t8,og,c of whiclr lrrtd bcctr rogitte.ed bqtlr . with the Land J'ranslrortation Commissicin and thc Chattel MortgBgc Rcgistry . in ordor .to. affect third

ii.

Persons
I

lorrsc rvlrich is irrtcn<lcd

tr>

bc

Growing crops and large cattle (Section 7, paragpphs 2 and 3, Act No. l5O8)

dcmolishcd

I I
I

'

137

.;

7of

1983 Bor Exflminatlon Ouestlon T'r, sccure the payment to B of a loan,' A, the owner ol s lot, executed a ctradet mo.rtiiigi builclirrg tre ericiect thereoir as rvell as on some newly-bought machinery stdred theiein o1 thc 'l'hereafler, a judglnent was rendered against A in favor.of cl who had the building arid nraclrinery lcvied upon. to satisS the judgment.
ls the chattel mortgage binding on C? ExPlain. Answer:

Tsai vs. Court of

ADrreals (366SCRA3ra)'

:
i .:

'

Petitioners contend that the nature of the disputed machineries, i.e'; ihat .they were heavy, bolted or cerpcn{ed on the real proPerty rirortgagetl:by EVERTEX to PBCom, make them ippo fbcto imrnovablc rurder Articlo 4f 5 (3) and (5) of the New Civil Cbde. This assertion, however, does not settle the issuc. Mere nuts snd bolts do not foreclose the contrpversy. We have tb lobk at tlrc panics' intent. Whilc il is true that th'c contrpverted ProPerlias aPPear to bc inrnrov0ble, o perusal ofthc contract. of Rial and Chattel MortdPg cxccuted by thc portics hercin i5ivcs us o conli.rry incliculion: Thc truc intcnti6n of PBCom lrrd thc owner EVERTEX,'is to trcst thc machinery ond cquipmenl as chatlals. Evcn if the propcrlies arc immovablc by natur, nothing detragts thc partiesfrom treating thlm'as ch{ftls to ibcure on obligation undcr thc principlc of. estoppcl. 1994 Bar Exrminatlon

Ouqstion

Vini constructed a building on a parcet of land hc lcased from An&ea- He chsttcl mongaged the land to Felicia, When he could not pay Fclicia, Felicia initiated forcclosure p.o..J".Iirlg.. Vini claimed that the buitding he had constructed tn the leased land cannot bc validly tbrec:losed because the building was, by law, in iinmovable.
ts

Vini correct?

3)

.',

The chanel mortglge is void and oannot be forecloscd becausc thc building immovable and cannot bc-thi object ofa chattel mortgag;. ".

is

an

It depends-. If the building is built of light . marerials, tha chottl mortgBge tBay bG' coirsidered valid a between thc parties and it may bc considercd in respcot to tbcB as mov8bla property, since it can be transfprred frrim onc Placc to another; But if thc building is of'st ong mBterial and is nor oapabie of beinB removed or transferred without being destroye4 the chattel mortgage is void and cannot be foreclosed. b)
138

.I

l! it \\'l:i tlrc

i)c \.oi.l,

lirnd rrvcr rvhit:lr Vini constitutcd a chuttcl tnortgagc, suclr tnottgsge would ()r'lt lo st lrncnl'(rrceablt, sincc hc doss not owtr said land.

I l' ir rvas thc brrilding r'.,hich rvas mlrde sulrject of thc chotlt mon8agc, said chstfel ,.ri:rri!i:r*e is Yrtitl as betrveen the piirties only, on grounds of estoppcl which would preclude t} e ,rror'!gi,.gor ltonr assniling llre contract on thc ground that ils subject mattcr is an immovable. vilti s <lsl'crrsc is urrtcnable and l:'elicia can foreclose the mortgage ovcr ahc building but is dutyhouncl rrr corrrplv rvith the procsdure prescribed for thc exccuticn of sale of a judgment debJor's iiirin<ir rhlc ,rnr.lcr {lulc 39, Ilules ol'Court, specifically, that the dotiae of auction sale should be l,i,:::.' , .1 ,ir .i ,t(:\\'sl)al)or ul'gurr.:ial circulation.

.r:i)t,,:( i rlllrllrI ol il Iurrl sst.rlc r(,rtgilgc and only un absolute ownef ol' real proPny lnay nrrJrts!i1.r. a ptrrr:cl rrt'iand. IArticle 2085(2) Civil Code]. It is submilted that there can be no
ri, ic r I, ': rr;,.:.

,1,

\'irrr tturrrrrl rulitlly errctrrrl'ror lancl by \vay of chsttel rnortgage. Land can only lre the

ll{rrr';r'ur. (}rr thc asslrrrrption that what was rnortgaged by wuy of chattel was the builtling ,,;: iLrlr,.'.i lillirl. rlrerr {hc t)srtics e(rrsidcrcd the building as clrattel. A building that is not rncrcly ' rr ir,-'rirr rr, rxrd on thc Bround but is constructed thcrorr in such a manner that it cannot be :.i!r',ov((l rritlrout tlcrslroving the sanre is an immovable propcrty. Ergo, a chattel mortgage on -,ri.l irrrrl<ling is legtilly void but the parties cannot be allowed to disavow their contract on i|r'(-.Liir1 r,l .jst()l)pel lrv dcccl. I lorvcvcr, if third p{rtics arc involved, such chatlel ,nortgage is. r.,r,t iirrrl i,irs rto et'l'ccl.

i.

( r cirtiolr (rf I| Chottcl ltlortgage

l. .'l lrc larv as it now stands providcs for onty one wdy for executing valid chattel mortgage, i.c., il)c rcg.irr!!-ution of the personal prorrty in the Chattel Mortgage Register as security for the pt:r'lbnnarrc:c oi'an obligation. (Article 2140; see Article 2085) Under the Chattel Mortgage La% i1" t!i,: irrt:l)crtv is sitrrxled in a diiTerent province f'rom that in which the mortgagor resides, the re lir:.ir.rlir,n [)c ir! l)r,tlr r!:g.istcr$ (Scctiotr 4, Act No. l5O8): otherwise, the chattel mongage 'lrrrsl I \'(!! (!

:. lt hus [,can rulud houcvcr rhat if the chattel mortgage is not recorded, it is nevertheless binrh:rg between the parties. (Filipinas Marble Corporation vi. lntermediate Appcllate Court, l-12 S('RA l6O [966]; Arliclc 2 t25.) lr.
l.:

ffcct ot'Registratlon

'l
i [erliiors

llc r.rqislrrti()lr of thc chattel

3^14

ui)irtt{l \..'herc..,er it gocs. The registrarion gives the mortgagee symbolical possession. (No'them
Nloi()rs.
(

rnorigage is an elfectivc and bir:ding notice to other ot its existence and creates a real right or a lien which, being rccorde4 follows the
[19751)

lnc vs. Corluia, 68 SCRA

;. l. rlih

!legiiitrution ('f Assignrrtcnt ,hd Mortgsge, Optional

l lrcrc is no law cxprcssly rurluiring the rccording ol'the assignment ol'a mortgage. While l.:ri!;rrnrcnt mav b,: rccorded. the law is pcrnrissive and not man&tory.

i-h:' ussigncc is subrogatcd to the rights and obligations of thc assignor-rirongagee with shatlcl morlgagc s)nstituted in lavor of the latlcr. Conscqucntly, the assignee is i:,,r!!rrl l)\ tlrc renns ilrrd conditio,rs o[the chaucl mortgage execuled betwrcrr thc mortgagor aod :lie nr()ri!l!g(:c. (llA l;in:rrrce Corporalion vs. Court of Appeals,201 SCRA 157 U99.ll)
r'.-:sl.r.ri t() t,hi:.

139

!,

II.
l.

Affitlnvit of Goorl Fnith

'i-he a{Ildavit of good fsilh is an oath in a contraci of chattel mortgage

whcein thepartlCs

..ser.<.rally srvear that thJ mortgagc is made for the purpose of sccuring the obligation spqcified in iist th sBmo is a just snd valid obligarlo,n o;d lhst rlr:: ...rntliions rh,-. ...rntlliuns thcreof und foino for-n6 other purposc Durposc ond ,i,l onc rrnr! nol n6t entered i:rrleRld into for lhc the prrposc DrrrDosc of offraud." r.in(l

Secrion 5 of thc Chouel Mortgoge Low' in describing what. shall be dcem:d suflicicnt to" a good chattel nrongage,- i;cludca thc requircment of an affidavil of. good faith "o,rstitute But the absGnce of the aflidavit vitiates a appen,Jed ro Ih" -ongage ana iJoiOea th;rewith. rnongng,!- rrnlv as oguin", ILiJ- p;;";i ;til;"t ;otice like ' creditors and . strbseqirent .n.,,irtiron"".i. (LiliuJvs. Uaniia na'itroaa, Co., 82 Phil. 50 t19351; Phil. Refining vs. Jorque,6l Phil. 229 [ l9f 5] j Gibcrson vs. A.N. Jurreidini Bros., 44 Phil.21611922D

:.

,:,'

985

llar Examinstion Oucstion

.A constitutcd

in 1980 a real estate mortgage on his lot aird a chattel mortgage <in his car ofa debt ol'P2OO,000.00 wlich he then Owpd lo B, as well as othgr loans hc rrrn1, i-e,<'cii,e- from him in thc Futurc. A paid his debt of F2OO;oOO.OO hut not thc loan of tri().(x)O.0() rvhich hu obtaincd in 1982. .
io sccrrre rhc payment
.

N,Iay I") lbreclose hoth mortgages to satist'y

A's unpaid obligation to hirn?

l\git.'i()nI. .\ nstv,:t:

B can foreclose the real estate mortgage berause it covers future loaos. Ho*e,er' B ca'notforec[oseonthechattelmortgagebeiaGeoftheaffidavitofgoodfaithv!hichrequires that it he a jirst and vatid debt. A chattel mortgEge oannot cover futurg loans ard can orlly cover obligations existing ar rhe time the chattel niortgage is constitutcd. (Acmc Shoe Rubber and
Plostic Corporation v. CA,260 SCRA 714).

l.

'

:,

Cebu InLernationst Finence borporrtion I vr, (-oltrl of Ar'l)cnlr

(r6gEcrr,r

r?s)

r
thC
.l

chtitcl nrortgage itsctfbut bnly to give it a prefcrred

'fhe spc.ciol aEidovit of good faith is not necessary for thc validity of

st4tus.

;
I

'

A dccd ofchaltcl nrortgagc is void whcre it providcs that thc security surcd thercin'is for (hc plvrl1r.;nr ot'orry ond ott ibiigstions hcreinbeibrc contrasted ond which mAy hcrcaftcr bc r (rlrrirclc(l hv rlrc nrorlurrgor irr l'0vor ol'tlre morlgogsc." n mortgagc lhal contains a stipululion irr lcgirril ro rirrurc l.lrirr,Ics in thq crcdil will t8k-c;ffcbt only from tltc daib lhe same- are made lrrd riot liolrr lllc date ol'thc ,".rttg,"g;. ijr"o vs. Davao LurnbJr Co., I l3 SCIf n l07 [t982])

i.

l
:

IUCO SnmIJte Problenr This credit transaction can only cover obligations existing at the timc ofconstitution and csnnot i,alidty secure after-incurred obligations:
ai.

real estate mortgage

.j,

b.
!:.

' pledge

d.

chottel mongrge antichresis

tqcal Bgstis: Acme Sh'oe, Rubtjer and Plastic Corporation vs. Court of Appeals (260 scRA 714)
140

I.

Foreclosure of Chattct Mortgsge

|. Public Sule - i f rhc morlgaBor tlctaults in rhp paymcnt of the strirred ctcbr or otherwise lhils ro cornply with the conditions Li the mongage, thc treditOr has.no rilhi to apprdpriate io hinrsclf the lrrsonal profJerty (Articlcs 2141, 2088) because hc is permittcd only to recovr his crerlit from the proceeds of the sale of the property at public auction lhlough a lublic officcr in thg manner prescribed in Seciion t4 ofAcr No. 1508. (Mahoney vs. Tuason,39 Phi!.951 [t919]; Esguerra vs. Coun of Appeals, 173 SCRA I [1989])

Maena Financial Servicg Groun, Inc. vs. Colarinu (477 SCRA 24s)

Articlc 1484, paragraph 3, provides that if the vendor has availed hirrrseif of the right !o foreclose the chattel mortgage; "he shal.l have nb further act;on against the purchaser ro recover any unpaid balanee of the purchasc price. Any agreement to thc contrary shall bc void." ln othcr words, in all proccedingq for the forcclosurc of chattcl mortgagcs cxecuted oo chanils .which hriv; bbch sold o installment plan, the mortgagcc is limited to the propcrty included in the

nrortgage.

Since the petitioner has undeniably elected a remedy af foreclosure undcr Article 1484 (3) of thc Civil Code, it is bound by its elcction and thus may not be allorved to ciange what it has opted for nor to ask for more.
i

Allied Rankinq Corporation vs. Chene Yonn

(472 SCRA. I Or) Wherr rhc vcssel sank before the chattel nrortgage could be foreclosed, uninsured as it is, its loss must be bomi by the spousgs Ong who own the said

,I
I

. ''.; l.
!

'.,cssel. 2.
N()tc

Privatc Sale

iftherc is an express stipulation in the contract

Exccption:

fraud or duress

I. lhe nrortgagee may, after thiny (30) days frorn rt.. ti-" of thc :ondilio., broken, cause the rnongaged property to bc sold at public.aucrion by a public oflicer (Seition 14, Act No. l5(){i) f.
The 3o-day ps1l6d to foreclose a chottcl mortgage is the minimum period afler violation rt lcusa lcn (lO) doys noticc to thc nrong.rgor rmd posting of public notice of time, placc and purpose ofsuch sale, ancl is a period of grac.r lbr the nrortgagor, to discharge thc mortgage obli,ation. After the salc of the chattcl at public auction, the right of redemption is no longer available to the mortgagor. (Cabral v. Evnngelisra, 28 SCRA l0O0 [1969])

tt{'tlrc tn()rtgirBc condiiiorr for lhc rrrortgrge crcdil(rr witlr

Riz-al Commerciat Bankinp

vs.

Itovrl

Corooration Corporatlon (602 SCRA s4s)

CAr"qo

Section 13 of the Chattel Mortgage Law (Act 1508) allows thc would-be redemptioner thereunder to redeem the mortgaged propiny only before its sale. Unmist,rkably, the redemplion cited in Section 13 panakes of an equitSr of

l4l

,,.. ^i

redemption, rvhich is the right of the mortgagor to redeem the mortgaged' t)roperl], ofter his default in the perform&nce of the conditions of the rrorigage btrt betbre the sole of the property lo clear it from the encumbrance of the

.t.herighlorcguityofredcmptionisanincorporcolsndintangibleright) rlre value of which can ncither bc qu.ntified nor cquatcd wirh tha Ectual value of

,
,

-'

Thc ncgligonce or omission of a pany to exrcid its equity of.' rcdcrrrption rvithin a rcosonable time, or even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted. not to assert it.'.
siDcc (lrc loliistru(ion ol'u clrrttcl nr()rtgagc is an offeative an<! bincling rr()licc to othcr crcditors ol' its ciistence and creatus a real right or lien that li:'llows the property wherever it may be, the right of an sttaching creditor, or a prrrchlser at thc auction sale, is subordinate to the lien ofthe mortgagee who'has in his t'avor a volid chaltel mortgag,e.

(j(rrtrury tlrcn to lhc apPllate court's ruling, l,ctirioncr is noi liable for r:()nstr\rutive l-raud lbr procccding with the auction s,rlc hor for subseguently
selling the chattel. For tbreclosur suits may be initiated evgn during insolvency prr>ccedings, as long as leavc must first bc obtained from thc insolvency court.

! hc crc(litor rna) maintain an action for the deficiency although the Chattel Mortgage l.ir.rv ir; silcrrt on this point (Ablaza vs. Igrracio, [Unrep] 103 Phil. 1'151 [1959]; Garrido v.' 'i rrirs<rr!, 2.1 SCRA 7?7 ll96811Phil. National Bgnk vs. Manila Investment & Construction, Ino., srry'r',,; llrrrli ol'the t>hil. Islunrls vs. Olutnngo Ldmber C,, 47 Phil.20 924]). The action may be s.rrrr.lht rvithin tcn ( l0) ycars fronr the timc the ceuse ofc.ction accilrc$

.i. I

i).ight ef Mortgagee to Recover Dcficieney

SuDertinei TrepDortstion Comnany. lnc.

vs. l

. (396 SCRA s08)

i. lf in an extrr,judicial forerlosure of a chartcl Inortgagc a deficiency !'xists, an indcpendent civil tction may bc irEtituted for thc rccovery of said deficiency. To dcny the mortgagee the right to maintain an sction to recover thi deliciency after forecloSure of the chattel mortgagb would b to overlook the lirct that th chartel mortgBge is only given as sdurity and nol as patment fo{ lhe debr in case of failure of payment. Both the Chattel Mortgsge Law and Act .i I 35 B(,verning extrsjudicial loreclosure of real estatc tDongagc, do nbt contain an;, provision, expressly or imptiedly, precluding the mortgagee from : :covcring delicicncy of the principal obligatiou. 2.
tn the case of PAMECA ivood Treatment Planq Inc, vs. Court of Appeals (310 SCRA 281), this Court declared thar undr Scction 14 of the Chattel Mortgago Law' the mortgagor is.entitled to rccovcr thc balance of the proceeds, upon satisfaction of the principat obtigation and c,osts, thus there is a corollary obligation on the part of the debtor-mortgagor to pay rhc deficiency iri !:ase ofa reduction in the price nt public auction.
.

the chaltel mongog is constitutcd, whether by thi debtor-vendee or a third person, as i.c!.r it) ibr thc purchasc of prsonal property payable in installments, no deficiency judgment .l484) car: trc :skctl and any agreement to the contrary shall be void (Article

J.

lI

142

'l'l)c slrattcl mortgagec is entitled to. deficiency judgnreni in an action, for specifiC r)ur.ti)nntncc (Article l48ii 1-11; wnere the morigaled ProPerty is subsequently atta.ched and sold. jt h" e*.,c,rtion sale in such cise is not a foreclosure sale. (Industrial Finance Corporation vs;.

l.

:ij,,:rrcz, 77 SCRA

152

ll9?71)
Ros$rio vs. PCI l.caslnq end Flnancc. lnc. (.r74 SCRA soo)

l)etilioners maintain that by securing a writ of rcplwin' responderit had' to tbreclose the chattel mortgege under Article 1484 of the New Civil :ode thus it rvas uarrea iioiii.ui"g ioitt trnpaid ba.lance of the purctrase pi'ice r'l'thc vchic:le. The Supreme Coui ruted "thairespondeirts did not foreclose the
.r1:t,.:cl

eir:r(tcl nlortgaBe but opied (o sue the petitioners for the balance of their account . urilcr the ptiriit.oty note rvith a plea for a writ of replevin By sccuring a writ ' ol'rcPlcvin, rcspondent did not thereby foreclose thd chattel mortgale.

ir8,1 l!:rr r:xn rinntion

Ouestion

.:

.A boughl a trlck tiom B payable in installment sd:ured by a chattel rnortgsge executed rrr .r on rhe trirck. As adr,litiona! s.cirrity, A's brother, C, exCcuted a real estbte mortgage iri favor

ir.

iuplcvrir, rcn()ssc:,scd (he truck. and lbrccloscd,the chattel mortgage. Can

.{
n

r\

<IctaLrlrc<I

in the paymcnt ol several install;nents. conscquently, B filed an action for

Il

al to recover the deficiency, slYer:

proceed against thE other properties ofA and thc rcal eslate mongESg executed by ifany, after the chattel mortgage foreclosuro sblel ExpJqtn

'i

LJndcr. Article 1484, in a contract of sale of personal propctty the pricc of ryhich !s' liayabL: in installments, if rhe seller elects to.lbreclose a$er thc buyer di:faults, he shall .have no iirrther action against the purchaser to recover any unpa.id bolancc. Sinccl thc pringipal obligation is .:stinguishcd. tlre rnorlgage exccuted by C as secilrity therefor will also. nccessarily be releascd rArtre-1,: 1086). 'l'herelbrc, B nray nb longer recover thc Aeficiency after the chattel mortgage

:irlesl,irsUrc Sale.

Acme Shoe. Rubbr and Plastlc CorDorrtlon vs. Court of ADpcelr (260 SCRA 714)

IssuE: Would it bc valid and effertive to have a clausc in a chattei mortgage ilr.t p.,.port" to likewise extend its coverage to obligations yet to be. connactad
or irrt:rtrrcd'J
I lL:L!: Contracts ol'sccuriiy are cithcr prsonBl or rcal. tn gontracts of personal sccrrriiy, such us a guaraniy or a suretyship, the f.aithful performance of the otrligation by the principal debtor is secured by thc personal comrnitmcnt of :rnother (the guarantor or surety). In cohtracts of rcat security, such as a pledge, :r rnortgage or an antichresis, that fulfillment is secured by an encumbrance of property in pledge, the placing of movable property in thc possessibn of the urr-ditor'; in chattel morigage, by the execution of thc corresponding deed srrirstanti&lly in the form prescribed by law; in ral cstate mortgagc, by the execitlio|lofapublicinstrrrmentencumberingtherealpropertycoveredthereby t.rd in irntit:lrrqsis, by a 'written irrstrument granting to the creditor thc right to

t43

tc(civc thc' ll'trits ol'nn itnrnovable prop,lrty with the obligation to appiy such l'ruirs lo ths puyrnqnt ol'intcrcsl, if orving, and tlicrclfter to tha principal of his ' cr'{!lit uprn thc csscnlitl condilion thnt if thc principal obligation becomes du and the debtor dct'aults, then the propcrty cncumbered can bc alicnateri for the payment ofthe obligation, but that shoulh thc obligation bc <tuly paid' $en tho ' contract is {utomatic0lly xtinguishcd prooccding frorn thc accssory cheraclcr of'the agreement. As t6e low so Puts it, oncc th. obligation is compliOd wittx thcn theiontracl ()f security bccomcs, ipso facto, nult and void.
.

,.

2.

While a pledge, real estate mortgage, or sntichrelis may excePtionaliy sccurc after-incurred obligations so long as these future debts are accunitely :lcscritrccl (Mojica vs. Courl of APpeals,2l0 SCRA 517; Lim Julian vs. LuteJo, ' .19 Phil- ?03),; chattel mortgage, howevir, can only iover obligations existing ar rhe time tlre lnortgage iJ constituted. Although a promise expreised iq u chaltcl mongage to iriclude debts that are yet to be contraated can be a binding conrrnitment tliat can be compelled upon, the secuiity itself, however' doep not covcrinil :mcnt cd come into existencc or arise until allcr o chattel mortglge agrqemcnt. fresh chattel a fresh by. concluding 6 cithcr by. thc ncrvly ncrvlv c()rrtrirctcd debt is executcd cilhcr rn()rtgagcor by ar,rcnrling tlru old contracl conformubly with thc lbrm prcscribcd by the Chattcl Mortgogc Low (Act No. 1508). Refusal on the'Part of the [r,rlrorver to execute thc agrccnrent so as to covcr the a0er-incurreJ obligation c,itn corrstitutc &n uct ol'dcfoult on thc part ol'thc borrowcr ol;the financing agrecrlcnt lvhereon the promise is rwilten but, of course, the iemedy of l'trreclosurc can only cover the debts ext&ntat thc time ofconstitution and during rhc Ii I'c of rhe chatrel mongage sought to be foreclosed.
.

...

mortgage, as. hereinbcfore intimated: i must 'comply -i. suhstantially with the form prescribed,by the Chattel Morgage l-aw is9]{. png 'of the requisites, ulder Section 5 the#of, is an aflidavit of good faith. Whil it is net doubled that if sush on oftidavit is not appended to the agreement, the chattel mortgage woulcl still be valid between, the parties (nbt ;geinst rhird persdns acting in good faith), the fact, however;.that thc statutc h;s providcd that thc parties to the contract must cxecute an O&th that - . . :. , "xxx (rhe) mongage is made for the purpose of securing:thc otliguion specitied in tbe conditions thereot and for no other purpose, end thai thc samc is a just and valid obligation, and one not entered into for tlre purpose of.fraud."

A chattel

makes it obvious that bg {htli is vEt mcrclv oontcmplated. In the chottel mortgaBe hor6 involved thc only obligation specified in the chattel mortgage contract was thc P3,O0O,OOO.0O loan u,trictr lxtitioner corporation. later fuliy paid. By virtuc of Section 3 of the Chattel Mortgage La\ /, the payment of the obligstion automatically iendered the chattel mongage void or tenninated.

'

x. A.

obligations, su6ject to the exemptions provided by law.

.. 'l'hc debtor is liable rvith oll his propr.ty, present and futurc, for the fu!fillment of hjs
Exempt Properay

Liability for Obligat.ions

(n rticlL' l5-1, lrrrrrrily Codc):

l|. l.

.Farnily home constituted iointly by husband and wife or by uninarried head of a family

144

i::\ccpti()ns: a)

b) For debts incurred prior to the constitution of the family homc; L:) For debts secured by mortgages on the prcmisca bcforc or.ancr iuch' constitution; and d) for debts duc to hborers, nrschanics, architccB, buil&rs, materialmcn and othcrs whe havc rcndcred service or fui'nishid materiali for the
constnrction of the building.
.aS

For non-payment oftaxes

l. Righl to receive suppon as well as any money or propcrty obtained {,\rticlc ?05, Fanrily Code); l. ,l j ',
rir,i

.such support
:

'l'ools and implements necessarily used by him in his trade or employmcnt;

(,r(!inar\' occuFtrti(,l1;

'l'rvo horscs, or two cows, or two carabaos or other bbasts of btirdcn, such.as the debtor nray sclcct, not cxceeding one thousrand pesos in value and. nccessarily" used bj him in his
l.lis r)ccessary clothing ond that ofall his fanrily;
I

iii:hlor. suclr
Ilr

l()rrs!'h(lltl l'unriirrre and utcnsils nccissary tbr housekeeping a;rd uset for that purpose by as the debtor mav select, ofa value not exceeding one thousaDd pcsosl ()\,rst(rts lirr irrtlivitlLral

')r l'urnily usc $uflicicnt lbr thrce months:

i I l!.: Plrrl'cssiorral libraries ol' stton)eys, judges, physicians, pharmacists, dentiits, fllgi,rccrs, strrvcYors, olergyrrcrt, tcdchcrs ond other profcssionals not excccding three thousand ;:esos in value; 'r.
l

One fishing bonr and net, not exceeding the totat valuc of orr. thousarrd pcsos, the l)ropertv ol'any fishcrmen, by the larvful use ofwhich he earns a tiveliho<j<!

(,.
l.

Srr

prece<Jing

o| tlrc curning.s of rhc dcbror ror his pcrsonal scrvi;ca jrrrin '*r" rhe levy as are necessary for the support of his fa;ify;
.

111uc11

lnorrrt

l-ct riircd Braveslones:..

:.:. nroneys,-hnefits, privilegcs, or annuities accruing or in arry manncr growing out of ^.^ll cny . life insurarrce, if thc annual prcmiums paid do not exccld hindrod p.io, th.v 'Jxcec-d rhe sum, a like exc'mption sho.ll exist which shall bear thc 'tvc ""iir samc pnopofti;n to thc moocys, benefits- Jrrivileges and annuities so accruing or grorving out ol sucli insurance that said five trundrecl pesos bears to the whole premiums paid;
I

.i

.l

irdu::r()n ()r

lrc r ight l() rc(:civc lcgtrl srrpport, or nloney or properly obtoined [s such support, or any girrtuity liom tlts BovcrlrntcDt:

ll. 15.
(.

(lopyrighrs and orlrer propertics especialty exempted by law (Section 12, Rule 39);

I'ropcrty under legal custody and ofthc public dominion.

t.

Prcfcrrcd Creditr with llsrpect to Spccific Movtblo t,roporty urdor Arttctc 2Z{l
l.)trrics, litxcs ltnd lbes dur: tlrcreon to thc $ate or any subdivision thcrcof;

145.

(sr 1 scRA r23) Duties, taxes, and feos due the govcrnment enjoi plollv:11{ Yltei (I) of rlrcv are with refcrence to a specifio movable Propeny, undcr Article 2241 samc (l) the of 22a2 in"" Ci"if C.*", ot immovoblc Property, under Articlc property of the pcrsonal real and other L:,i.lr. iror"""*, with ret'crence to'the due assessments taics property"'the "free a-s Jchtor, somctimes relerred lo 1nd ihe Naiionol Govemnrent, othci tfran rt oss ln articte 2241 <1) and Atli'cle'2242 ( I ) ()f thc Civil Code, will come only in ninth place in t$c grder of preference'

S!'ttccic Allilncc l)cvcioonrcur,(hrirgrr lkrn

vs. Radstock Securities Limited (607 SCRA 413)
:

. assets beyond the ieach of its creditors.

( irrrstrrrction cirrporaiiort (PNCC), inclueting lha Ndtional Govbnrment. ond- ' \rol trs lhc lr..rt isi,rtrs (rl'tllo Civil CrxJc rrit c(tncurlcnr:c lttrd prufcrencc ^of crcrlits. l'his Coufl has lrsld that \vhils the Corporation Codp allovis the transfer ol' ull or substantiolly ali ol' thc &sscts of u corporotion' the trunsfcr should not Drsiudice the credirois of the assignor corPoration. Assuming that PNCC mtly iransttr all or substantially all itJassets, to allow PNCC to do so withouf the consent ot'its creditors or-wilhout requiring Radstock to assume PNCC's debts rvill dcfroud the other PNCC creditori.since the assignment will place PNCC's
The law, specifically Anicle 1387 of thi Civil Code' prcsumes that therp is alienated by the dcbtoi after judgment has is lraud of creditors when ptop.ny -Alienations by'-onerous titlo a,rc albo prcsumed [:een rendcred against him, thL: liaudulcnt rvhen made by pcrsons agajnst whom somc judgment k 9=tl rcnclcred in any instance'<ri some writ of attachmcnt has been issued. The decision or atlachmcnl need not retbr to thc proPerty alienoted' and need not lrave been obtained by the patty seeking rescissiog. -4s stlted earlier, Asiavest is a irrdsmenr credlior of pNic in G.R. No. 110263 aDd & court has already i..r"t *.it of executiori in its favor. Thus, when iNCC entered into thP "Compromise Agreement conveying several prime lots in favor of Radstock' by there is i lega! presumption thlt such conveyance is vzy'of ducionln pa.qo, -Article 1387 of the Civil Code. This Presumption is fiaudulent undcr strengthened by lhe t'acl that thc conveyance ltos virtually left PNCC'S. other crediiors, including rhe biggest creditor-l.he National Covemment - with no other asset to gamish or levy.

A!:llc(:rncnl

In giving priority and preference to Radstock,..th: .gotPIoPit: ls cc-rt:rinly iri frarrd of the othe?lcrcditors of Philippine National

Arnong the circurnstances indicating fraud is a transfer of all or nearly debtbr is greatly imbarrassed alt of the debtor's assets, especially when the fintncially. Accordingly, neiiher a dectaration 'of insolvency nor the institution
<rf insolvency is a co,rldition siqe

qua,loz for a'transfcr of all or nea y all of a debtor's ussits to be i:garded in fraud of crcditors. It is sufficicnt that a debtor
is greotly embarrassed linancially.

PNCC owes the National Govemment substantial taxas and fees anrountinE to billions. c,.'pesos. The P36 billion debt to thc National Government rvas ackr wlcclgcd by ihe PNiCC Board in the same board resolution that recognized rhe i'laruber, i loans. Since PNCC is clearly insolvent with a. huge u.u^-ii,r* nct w()rth, the govemment enjoys preferencc over Radstock in the
146

lirtisthction of PNCC'S liabitity arising from taxes and dutics, pursuant't9 S" . provisiorrs ofthc Civil Codc oir concuirence and preference of eredits. Articles ?.241,2242 ard 2243 of the Civit Code exp;essly mandetc thaf pxes an!-fe91 (lue tlrc Nationol Covernment "shall be preferred" and'lshall first bc satiified" .' o\,('r cl:tirrrs like thosc arising lrom the Murubeni loans which "shall enjoy po pret'crence" under Article 2244.
r

"

Claims arising from misappropriation, breach of trust, or malfcasance Uy publp officials commirtecl in thc performance of theii duties, on the movables, money or securities obtained by

l.

Clairns fbr tlre unpaid price of movable sold, on said movables; so long as they are in the p()sscs:ii()rr ()t:thc dcbtor, up to lhe value of the same; and if thc movablc has been resold 5y the dcbt()r and tlrc price is still'unpaid, the Iien rnay be enforced on thc pricc, this right is no! lost by rhe irrrnrotri liz;rtion of the thing by destination, provided.it has not los.t its forin, substarice ond i, icntii),: rrcrthcr is tho right lost by the sale of the thing toS,ether with othcr property for a lump -.,,,r'r, .*lr.,r tlrc 1'r'icc Ilrcriol'corr tr.'Jctcrrtincd proJnrtionally;

il.

4.

Crcdils Buerlntced with o ple<lge so long as the things Pl+Scd afe in the hands of the ursditor, or tlrosc gulranteed by a chattel nrortgagc, upon thc things morrlgagcd, up to the valuc rhcreoll

5. 6. 7'. It. i).

Crr:rlits lbr nruking rcpairs, safekeeping or preseiwation of personal Property, on thg

Cleims fbr laborer's wages, on the goodii manufactured or the work done;
.

rrrrlvahle thus made, repaired, kept or possessedi

lior cNpcrlsc:i t>l'sulvnge, upon thc goocls salvnged;

Crcdits bqtwecn the landlord &nd the tcnant, arising from the contract of ter.nncy on shlrcs, orr tlrc slrure ofeach in the tiuits or hsrvestl (-r'c(lits t'rrr iransgirtation. upon the goods carried, for the pricc irrcidcrrtal c\l)cnscs, until thcir dclivcry ond for thirty dsys thcrcatlcrl

of the contract

and

10. Clredits for lodging.antl supplies usuallt fumishcd to travolcrs by hotclkccpcrs, on thc rrrovlblcs lrclonging to tlrc gucsts.as long as such movtblcs ar in thc hotel, but not for monay loaned to the guests;
I l. Crc.Jiti lirr sccrls thc fruits harvcslcd:
arr<t

cxpenscs for cultivation and harvcst advancei to the debtor, upon'

12. Credits For rent for one year, upon the personal propgrty of the lessee existing on the imrrrovnble leased on the fruits ol'the same, but not on money or instruments of creditl
I

3.

irp<>n

Clairns in favor of the dcpositor if the depositary has wrongfutly sold the thing deposited, thc price of thc sale.

in the foregoing c&ses, if the movablcs to which thc licn or prefcrgnce attaches have bccn rvrongfullv trken, the creditor rnay demand them from any possessor, within thirly days from thc r.rn irrrr iirl scizurc.
Surtrqrun,:

il)

b) c)
(l) e)

taxcs

malversation by public ofliciols vcndor's lien pledge, charrel mortgage mechanic's lien
147

j) k) l) rcntals - one Yenr m) tleposit

lr. ! I -1. ,l

) 8) h) i)
l

lulrorcr's wa8,cs stllvlrgc tcn$ncy corrier's lien hotel's lien crop loan

':
i

'

-.

,r*rrtc,: f lrc tbrcg(rir',g cnumcration is not an ordcrof pretcrcnce (Articles

22414

-2249) .'.

t'r'cl'tllrrrrl C[cdils with tlest)ect to Spocific ttnmovnble Property under .\r tir'1,.: 22{2 l:r\cs duc rrpon thc land or btril<ting;
For the unymid Price ot'rcal propcrty sold, uPon the immov;ble soldi

Lllairns tbr laborers, masons, mechanics and other viorkmen, as well'as atchilacts, crrgineers and contractors, cngaged in the conStructi6n, rec6nstructiqn o.rl feparr Of buildings; .,,ii,,lr ,r, (,rl('r'r\'(nks. rrgrn sliil huiklings. connls or other works: clairrrs of' l'umishers of materials used in the construction, reconslruction or reParr bLrilriinl:s. canals anrl otlrer works, upon said buildings' canils or other works:
l./iorrgage credits recorded in the Registry of Propcrty, upon lhc real istate mortSage;

of

Consuelo Metal Cornoration.vs. Planters DeveloDrnent BaJ!k (sss scRA 46s)

In Rizal Commercial Banking CorPoration vs. lntermediate Appellate (irtrrt. 32o SCRA 279 (1999), we held that if rehibilitation is ng longer feasible [n(l llrc r]sscl:i (tf llrc corpornlion are finolly litlliidrllud. sccured creditors Sttgll crrjoy prcl'crerrce over urtsccurccl creditors, subjcct only lo thc provisio-ns of thc Civil Codr' on concurrencc and preference of credits. Creditors of securcd ()trliBxti()rrs nruy pursuc thcil security intcrest or I i-'n, or thcy moy choose to
ablri<ton thc pretbrcnbe and.prove thcir crediB Bs ordinaD' clailDs.
Scctrorr

l2.lll ol'tlrc Civil Codc providcs:

. llrosc crcdils which crrjoy prllerence in relation to specific real proPerty tir rcrl riglrts, cxcludc ull olhcrs to thc extcnt (rl'thc valuc ol'tlrc itrrmirvable or
real right to whioh the prelbrence refers.

\l)('cilic lrrorlBRgod prorlerty and has a riBht to lbrcclose thc mortgage under -.1?.M Sr'. trrrn ol' lhc C'ivil C<xle. 'l'hc credilor-nrortgugec hns the right to li,rr.:e losc tlrs rtrorlglgc ovcr u spccitic rcul Pr(rpcrty whcllrsr or nol tirc dcbto,'

ln (lris oltsc, t'tonlcfs lJrttrk,

u-s

sccurcd crcditor, cnjoys prcfcrcncc over a

rnortg{gor is undeiinsolvency or liquidation proceedings. The right to foreolosc suc h mong,rg,c is rnerely srtspcnded trPon the rppointment of a managemcnt uorrurrilluc .rr rclrtlri|i krlion rccciver ttgxut (hc issuuncc of u sluy orrJer try lhe r!'iirl c()(:rt. I lorvcver, th!' orcdit()r-m(trtgag,cc nrsy excrcisc lris right to forcclosc tlrc IronBage uFx)n the tennination of the rehabilitation proceedings or upon the
I

illi ng olthc stay order. i.

148

'\ti

f:'
r'i.
..

Fxpenses for rhe prcservation or improvemenl of real propcfly whea the law .aulhorizes idiqrbu r:ielrent, upon the imnrovable preserved or improvcd;

1r. s

a:redits annotated in thc Registry of Property, by virtuc of ajudicial order, by attachments. i r\,:. r:tions, upon thc propeny affected, and only as to latcr crcdiB;

(:laims of co-heirs for rvarranty in the partition of an immovable amgng them, upon the rr'l l f,r(,pcrtY thus dividcd;

r) 10.

a.'liiims ofdonors
C:redits

ofresl prope/ty for pecuniary chargca or other conditions imposed upon'

th() (lorrcc, uyxrn the immovablc donated:

of insurers, upon rhe property insured, for tbi insurance premium ior two years.
taxes

S.u-qr'111tr1.: a) b) c) d) e)
D

s)

h)

i)

i)

vendor's lien contractor's lien lien of materialmen mongage expenses of prescrvation recorded ane.chmcnls warranty in panition condilional donations prenriunrs lbr 2 year - insurers
i

lJ()[e: ] hc tbregoing enumeration is not

.
,
.e

ACCTA.63 SCrr.A

4lt

Bn

order

of

preference. (Carried Lumber Co. vs-

It9751).

|:eQ-s agrls_t ro_Elgrn Prormsition:. If rchabilitation is no ldnger

feasible. and the asscts of thc corporation are finally liquidtted, securerJ creditors shall , enjoi. prcference ovcr. unsecured creditorg subject only to the provisions of the Civil Codc on. conturrence and prefcrencc of credits- A crEditor-mortgagc hos thc right to forcclosc.thd mortgag ovcr a specific. real propcrty whether or not thc debtor-mortgaEor is uirder insolvency or
I

iquidation proceedings.

Plab-1":a:

X Corporation exccuted a 'real cstatc mortgagc ovcr itr ral prcpc4y in Makati City to il obtained from Y Corporation. X failcd to pay flte soid loFn whcn it maturcd. X Corrrralion tiled before the Securities and Exchangc Commission (SEC) I pctition lo be <leclared irl a stat of suspension of payments, tbr rhsbilitation tnd for thc appointmcnt of a managenrcnt committee which rhe SEC granted in.its Orddr of 5 January 2004, On 8 Msrch ?O0:r ut)on recommendation of the management committee appointed by it, the SEC ordered the dissolution and liquidation of X Corporation. Thercafter, Y Corporation commenced the cxtrltiudicial ibreulosure of the Maktrti propcny. Is Y Corporation's foreclosure valid and
sr:cure a loan lu.,vful?

a.
b.
c.

No, bccause there is no showing that thc forcclosurc is wiih thc knowledge and previous consent of the liquidator and other lien holders., No, trccutrsc the right to foreclos thc mortgagc is suspcnded upon the sppointment of b management corDmittac or rchabilitatlon recGivcr or upon tlrc issuance ofa stay order by the trial courL' Yes, because X Corporation fliled to pay thc ioan ot ligation thereforc Y Corporation has the right to foreclose the mortgagc.

149

.d.

Ycs, bccausc Y Corporation is a securcd creditor and enjoys preference over .. unscc'.urcd creditors apropos spccific mortgaged ProPerty under tbe rule on corlcunence and pret'erence of crcdits specially when rehabiliration is no.longcr
leasible.
-

t-r13r!.[lir51g: Constrelo Metal Corporation vs. Planters Development Bsnk (555 SCRA 465)

Orrjer of Pr"efercnce with Respcct to Otber Propertl.s.of thc Debtor utrdar Artlcic
x24.1

Proper funerol expenses tbr the debtor, or children undei his or L rvlro have no propeny of their own, wlren approved by the courtl

.?.

l'rcdits Iilr scrviccs rendcred the insolvent by employees. laboreri, or household lielicrs
of tho proceedingg in insclvency;

t'rrr onc Ycur preceding the commenccment

3. Experrses during the last illness of tha dcbtor or of his or her spouse und chiirtrcn his (rr her parenul authority, if th.ey have no propcrty of their owrtl -1.

undei

CornSrensation duc to the laborers or their dependents undr laws providing for indcmnity ii)i dr.mages in cmes of labor asuidenr nr illncss rcsulting from the fieture of the employmentl

.
l.

DBP vs. NLRC (236 SCRA

rla

'I'o the extent thal claims tbr unpaid wages fall outside Ore scope of Articles 224 I (6) and 2242(3), they would come within the a$bil of the
category of ordinery preferred credits under Anicle 2244.

2.

Thc right of first prefercpce as regards unpaid wagcs recobrizcd by Article I l0 of the l-abor Ccxle does not constitute a lien on the proplty of the insolvent debtor in favor of yorkers. It is i riglt to a first preference in the discharge ofthc fun& ofthc judgnrcnt dcbtor.
' t Dr vB. rt trt<a-DBPw.NLRC (229 SCRA 35o)

I l O of the Labor Codc as amendcd mnst be vicwed and rcod in conjunction with thc provisioos of the Civil Codc on concurrcncc aud prefcrence ofcredits.

Article

2. -3 5. 6. 7.

The Civil Cocte and Labor Code provisions require judicial proceedings in rem in odjudication of creditor's claims against ihe debtor's assets to
become operativ

RA 6715 expanded "worker prefernce" to covcr noi only unpaid wEges but also other monetary olsirns of laborers, to which cvetr.claims of the Govemment must be deemcd subordinate.

farnil-r,, during the last preccding insolvency;

Credits and odvanccmcnts made to thc debtor fof support of himself or herself, and
Support during thc insolvency procedings and for threc months thereafter;
Fines and

civil indemnifications arisiug.from

criminal offense;

150

;1. t-cga! expenses, arrd expenses incurred in the administration of the insolveot?s cstate for tlrc conrrno:) intcrcst of tlre creditors, when properly authorized and approvcd by tho ctiurt; ,. laxcs 3nd assessments tluc thc national govenuncni, other tlan thosc mc.ntioned in Ariiclc 2241, No. I and 2242,No. l:
l'.r. I ilr.l
I

!ir
l.

"l

irxcs ancl assL'ssmqnls <Jue any province, other than those mcntioneil in eniclcs 2241,
,12.12.

Nu. ll

'l-r:<(lr anii llsscssnlents ilue any city ,{rliclcs -124 i Nr.r. I and 2242, No. I;

or municipality other than those mentioned in

tlnal judgrrrenr,

12. il:!:irag.!:,s tirr iJcatl.r r'rr pen;ontl injuties causecl by a quasi-delict i3. tiiiis duc' to public and pri',ate institutions ofcharity or beneficence; !.1 ','r".iiit:r .,vhich !\itho'ut spccial privilege., appar in (a) a public instrumentl or (b) in the
.

if

.rr:r.:rrg rh,;rrr:;clies in the order ",'j:,1ecti',r.:ly ( A rticle 2244).

they have been the subjecr of litigarion. These credits shhll hsve prcferencc ol'priority of tlre dates of the instruments and of the judgrnents,
funr:ral expeuses
wages of imployees - one year expenses of last illness

::!,@.{y:

a)

t')
c) d) c) s)
h)

-0

i\
r)
).i..,

workmen's compensatioh support for one yeaf supPort duri[g insolvenCy. tincs in crimes legal expenses - administration
taxes

it
i(,.

k)

tort donations credits ap;r,:aring in public instrurncnt or final judgrnent

i. ln cootrast B'ith Artioies 2241 snd 2242, Atticle 2244creates no.licns on detcrminstc nrop+rrv v"hicb follow such property. what Artiele 2244 crcsI.q are sinrply rights in fbvor of certain crgditors to have thc cash and other asscts of thc insolvcnt apptid-ii s.;rtrin scqucncc or ordcl ol'priority (Republic vs. I,eralra, f50 SCRA 37 tl987I). '..
j .:.1il-rft

.A.rricle :1244 rclates to the property

":r:i:urrri.ri
r.r

ofthe insotvent Orat is not burdened with the liens or lircrr' crcatc(l or rccognizctl by Anicles 2?41 and 2242.
!::.!jIn!!Ur!!9g_Q"CS$IS4

a Istircd air ftrrcc captail, decidcd to go into the air transport business. He air,;ritll ili cush cxccpr lbr an outstanding balancc of p5oo,ooo.od, Hi: incurred an i'rciel)tcdii..:ss oi'P30o,000.00 lbr repairs rvith an aircrift repair compnny. He atso borrowed pl I.irilitr'r iir*n :r bank lbr additional capital r,rrcl constiauted a chanel- morlgage on thc aircraft to
Lri\1,rL:nce.
1'r.rrclrrscr.l urr
t.LU,rr

u llr,:

I.

r.'r

tVirilc or: a tcsl tlighr, thc aircrafl crashed causing physical injuries to s third party who awarCc'd darnages ofP2OO,000.00. "es

t5l

L.awrence's insurance claim for damage to the aircraft was denied lhus leaving him notlring else but the aircrafl which was then valued only at Pl Million. Lawrence wai declared
inso!r,ent.
,.-r"eilitors

Assuming ihat the aircrafi wa-s sold for Pl Million, givc the ordcr of prefctencc of tlie ol'l.awrencc &nd distribute the amount of Pl Million.
:

An:iwcr:
Assunring that subjcct aircrafl rvas sbld for Pl Million, there is no order of prefeience. Thr: entirc Fl lt/illion will go lo the bank as a chattel mortgagee becauser a chatfl mortgage uncler .Articlc 2241(4) NCC delbats damages tbr physical injuries coirsed by tort under z\rticle ??44(12\ and credits subject of a final judgmerlt under A.r:icle ?244(14). Article Z24l(3) covering vendor's lien aud Anicle 2241(5) covcring mechanic's liea are nol applicable because rhc arrcriil is no lorrger in thc posscssion ofrhe creditor.

-'

"

3. a)

Rclcvsnt Jurisprudence on Concurrence and Preferehcc ofCredits

A lbreclosing bank creditor cannot be held liable for unpaid wages and the like of the crnplol,ecs ol' tlrc mortgagor. 'I he employees should file their clainri in a procceding in hankruptcy on their employcr (Development Bank of the Philippincs vs- National Labor iielations Commission. 1 86 SCRA 84 1 [ 99O]).
l;r(,nl lllc provisions o,'Article I lO o,.the Labor Codc end Section 10, Rulc VIII, Book llt Rules end Regulstions Implementing the L&boi code, a declaEtion of bankuptcy r.,r' jrrrlicial liquidution nrust bc prescnt biforc lhc workor's prcference may bc cnforccd (i)evelop,rleni Bank of the Philippines vs. Santcs, l7l SCRA 138 [1989]). of
th,:-' Rc'r'ised

tr)

lll'l

r,!.. (:.)uri of At)neol$ (229 SCILA 223)

Whcnevcr a distrcssed corporation asks SEC for rchabilitation and suspension of payments, preferrcd creditors may no longer a-qsdrt such preferencc, but shall sland on equal footing with other crcditors. This Rule will c'rrablc thc rehabilitqtion receiver to effectively cxerciso his powcrs frce fiom j udicial and exlrajudicial inrert'ererrce thbt might unduly hinder r$ue of the
conlpany.

Those credits which enjoy prefercnce with respot to specific movublcs, cxclude all ()lhets lo the extent of tlre value of the personal property to which tbe prfcrenc referi (Article

F. l.

Order of Prefcrcoce of Creditr

22'l.6).
2.

..i

ll'there are trvo or mbre credits with respect to the sarne spccifio movable proprty, they :;!rall bc sat.isficd pro rala, aflcr the paynlent of duties, taxes and fees due thet State or any strbcliv isiorr thereof (Article 2247),

3. l'hose credits which enjoy preference in relation to spccific real property or ral righB, exclu,le all others to the cxtcnt of the value of the immovablc or real right to which the nrr' fcrcnce refers (Article 2248). .;
ll'!her,.: are two or more credits with respec: to the same specific real profrrty or reat iigirts, thcv shall be sstisfied pro rata, aller the payment of the taxes and assessments upon the iinrrovable property or real.right (Article 2249).

i,
I

.|;

rs2

5. . _ excess, i f any, after the payment of the credits ,which enjoy preierence with respect to s.1;t'cific pr<ipeny, real or personal, shall tre added to the fR:e properry wh;ch the debtor may have, Ii)r the pn),mcr1t ol-rhe other credits (Articlc 22SO).
'I'hc 'thosr'

6.

'l'hose credits which do not enjoy any prcferenco with respect ro specific propeily, and rvhich enjov prefbrenc", ur to ih* amo;nt nol paid, sfralt 'be saristied abcording io ttr. Iirii,.rw,ing rules:

'

'

llC-'ommott credits referretl to in Article 2245 phall en;oy no preference aird shall be paid pro rata regardlcss rrldates (Arlicle 22S l). . XI. TIIE INSOI.VENCY I-A,W (ACT NO. T956)

,,

*r"*"*

r*a,,*a
oI. the lack ofmeans ro pay ong's debt, or the condirion

of a person who is fall due. (Munion vi. vic corporation, 55 og 96i7 as cited in !l!.liooine Law Dictionary by Federico B. Moreno, Third Edition, l9Sg, p. 479)
uDable to pay his debts as they

'lhc inability

!1.
:t.
a rn
'

Purlroses of the Insolvcnc

Law (1949 arrd 1958

BarExams)
assets and/or properties

ii
!i

)11ll

'fo ciltrsc 8n cqtritablc distribution of the insolvent debtor's

llis urcditors; and

t'

ctischarge the insolvent dct)tor from his debts and financial liabilities ro afford hirn an opportunity to have a fresh beginning lvith the property set apart for him us exemptt.
a.
l:l

'lo

):'

Situatidns Addrcssed by the Insolvency Lalv

Suspension of Payments Voluntary lnsolvcncy I n volu ntttry Insolvency
m

c
t

(rlls llrr r f:xr

infltion Ouestion

Acr N(,. 1956, more known as l.he lnsolvency Lorv, denls wittr - l) suspcnsion (il.l)ayrrents.2) volunt:try lxrputarly insolvency and 3) involuutary irsolvcncy. ttrielly discuss ihc. saitl sul)iqcts an(l outline the procedure that will have to be undlrtakcn in conncction therewith.
.,\rtsr'.rr:

I)

Ittj(:)(J IS I'rES

payr)rctrts should r:omply with the following requircmcnts:

'et

FoR susPENSloN oF I,AYMENTS - A petirion for suspension of

. b) . c) d)

Pctition to befrled by u ncttural person whc: (l) possesses sufTicient property to cover all his debts, (2) foresees the impossibility of meeting them whan they respectivcly fall due,.and (3) 'presents a proposal to pay his oQligstions on datei later than due dates and petitions that he be dcclarcd in the sta,ic of suspension of payments (Petition need not be verified) I)ocumenrs tllat should ctccompany the perition: (I) verified schedule: (2) verified inventory; (3) lhe proposed agreement ae requestcd ofhis creditors. Vcnue: Regional Triol Court of the provincc or city in which thc debtor has rcsi<lcd for six (6) rnonths next preceding tha 6ling ofsuch pctition. (Section Z, Act l9s6) llrie/Sumtrutryoltthe procedure:

153

d.

l)

Filing of petition for suspension of payrfitnts accomSunied by an inventory of asiets and a detailed schpdule of obligalions, onlounts and their r'lue
dates.

l.

d.2) d.3) d.4) d.s) d.6) d.7)

The court issues an order stating the venue and.datc tbr the meeting of the pctitioncr's crcditors. Said order shatl be published in a newspapcr of general circulatior in the placc whcre the pclirion is.filed. The court shotl iause the service of summons to all creditors lisreC in lhe Petition. The creditors of the petitioner will meet and aPproyc dibtoras prpPosal by'. at least 2/3 of the creditors in number represenlinB, ar least 3/5 gf, the total Iiabilities. Objections, ifany, by the other preditors. The court orders the implementation of the agreement.

2)

l{t-.(luf SffES FOR . VOLUNTARY INSOLVENCY insolvcncy shall comply with thc follo\rying requircments:

- A petirion for

woluirtary

a)

b) c) d)

l/eri/ied Petition: fo be filed byan insolvcnt debtor(l) ora'ing debts exceeding in amount the sum of 91,000.00, and (2) setting forth in his petition, his place of rc:sidence, the pcriod of his residence therein immediately pricr lo the filing of the said petition, his inability ro pay all his debts in t'ull, his rvillingness.lo surrender all his propenies not exempt from execution for the benefil of his creditors, and an application to be adjudged an insolvent: I ).)cur ents k) acstmpa,ty tlrc pstiliona ( I ) verified schedule: arrd (2) virificd ll]ventory. I,'crrzt,: Regional 'l'rial Court of the province or city in which the debtbr has residod for six rrronths rrext preceding the filing of such Petition. (Section 14, Act I q56) llr i<.f Sunrnrary oJ'lhe Procedurc: d. I ) Filing of petition for voluntary insolvency accompanied by an invdn:tory of assels and schedule of liabilitiesi 'fhe court issues an ordbr declaring petitioner insolvenq d.2 r (!.i) Said ordcr shall bc prrtrlishcd in a trcwspapcr ol'gerr.rtal circulation in lhe place whcre thc l)etition is t'iledl d.4) 'l'hc court shall cause thc service of lhe order on th. creditcrs lisled in the frctiti(nr: d.5) Cre<titors shall rncct to choose an assigrrce by ek-'ction lo whom all the assets of.thc dcbtor shall bc delivered; d.6). Liclrridatir>n and paynrcntofcrc'ditots; c|.71 Composition (sgrecmcnt between dcttor and creditors), iIagrccd: d.8) Order ofdischarge ofthc insolverrt.
,

-i

ilrsrilvt:rrt:v shall comply with the fbllowing requirements:

ltbfJtjislTris FOI{ TNVOLUN-rAIiY INSOLVENLIY "- n petitit)n tbr

iirvoluntary

n) . b) c)

l'ctition: To

by three (3) oi rnore creditors, rcsidents ofthe Philippines, and none ofthem has become a creditor by assignment witnin thirty (30) days prior to tlre filing of the petitioir, (2) thcir credits accrued in the Philippincs- and has an aggregate amount of not less than P1,00O.0O, (3) onc or more acls of insolvency mentioned in Section 20 ofthc Insolvency Law arc set forth in thc petition; end (4) s&id pelition must b vcrificd by st lcagt thrc of tho politioning croditotl. _ l)ociments lo accompany the ieririon: Abond, approvcd by the court, with at least two sureties, in such pcnal sum as the court shall direcl. Venue: R5gional Trial Court of the province or city in which the debtor resides or has principal place of business (residency ol six months is not required) [Section 20, Acr 19561
be filed

(l)

t54

d)

l')ric.1l

Surnmary of lhe l,roccdrrrc:

) d.2)
d. I

d.3) d.4) d.5) d.6) rl.7) cl.li)

f\'_

asslgneei

Filing ofptition for involuntary insotvincy; . Court shall issue an order requiring the d;fendant tb show causc whi he should not be adjudged an insolventl Trial and order of the courr adjudging debtor as an insolvenr, if supported by thc facts; Publication bf the ordcr and scrvicc ofsaid order on all crEdilbrs: Crcditors shall elecr an assignec and conveyancc of debtor's asseiq !g said

Assets of the debtor shall be liquidaied and proceeds shall paid to defendant's creditors; Cornposition; Dischargc ofthc insolvcnt debtor.

l)isti!rctions Itetwr:erl Suspension of Payrnenls and fnsglvency

t.

lii,sltE ],r.s!o]! oF PA YMENTS l)chi()r has sulTicient assets but anticif:rtcs the imgrssibility of p:l'ing his,liabilities as they t:lll
d
r.:

.INSOLVENCY
t.

Dcbtor has insuflicient'

lo pay his liabilitics.

'assets

e.

of petition is to delay the l)aylIlcllt of his !iabilities.

;'urpose

2.

Purpose is to release/discharge the insolvenl debtor from the pa)ment of certain liabilities.
Some of thc crc<lit<;rs may reccivc less than their actual credits.

.\rrcr,ur ()t'iialrilities of dcbt()r is not

irllactc'.i.

tlrrmber of thc creditor/s or'

;i('r il,(),,r: r

the

dcbtor rs irrelevant.

4.

ln

involuntary insolQcncy, threg or more creditors arc needed.

flisiirqliorr:; llct\ /een Voluntrry Insolycrrcy n,|d lnvolunlAry iOsolvency

v(JIllr\{

d. ht,,r hirnsclf.

Ry INSOI.VENCY l)ctirion is tilcci by the insblvcnr

11\

IN\/OLUNTARY, INSOLVDNCY.

tetitioir ii fiied by tftree or more qualified crcditors of rhc irrsolvent

debtor.
the

Only onc crcditor

deb{or is

ol sullicicnt.

the insolvent
.

2. 'I'hree or more credilors of

insolvent d'ebtor are requircd.

jI

l!tdebtcdncss of the insolvent deblor !nust exceed one thousand fEsos (r!1.0()0.0o).
4.

3.
4.

. Indebtedness

debtor must not be less

thousand pesos (P I,0OO.0O).

oF the

ilEolvent
one

'l
!;

i,.
I

Acts ot' insolvency need not

l1)i,ri,rg {)r'

be

comnritred by thg insolvent dcbtor.

One or morc acts of insolvency must have ben committed by the

ins()lvent debtor.

<k'lrtor is tlot required.

lr bond by

insolvent

5.

Bond must be posted with the petition with at least two sureties
in such penal sum as thc court may direct.'

' l!

It: li !::
,1,

::
155

'li i

YI.
,\.

Suspcnsion of payments

I)cfiniaion

:,

Suspens'ion of payrnents is the postponement of payment of .thc debts of I debtor- \./ho, posscssing sufficicnt property to cover his debrs, forcsecs rhc impossibility of mccting thcm whcn rhey f'all due. ( 1965 Bar ExBm)

Pursuant to Scction 5.2 of Republic Act No. 8799 otherwise. known as "The Securities' licgulation Code", the Seourities and Exchange Commission's (SEC) jurisdiction over ill cases enumerated under Scction 5 ofPresidential Decree No. 902-4 (Reorganization of the SEC with Additional Powers and Placing the said Agency Under the Administrative Supcrvision of the ()l}ice ol'the Presideni) w&s transferred to the Courts of general jurisdiction or the appropriale I(cgiorral 'l rial Court which includes cases involving:

Itl.

Jurisdiction and Venue oyer Petitions for Suspension of

Pr,'mentr

$)

l',)

c) d)

Devices or schemes employed by or any acts, of the board of directors, business rissociates. its ofticcrs or partnership, arnounting to frnud ond m isrepresentotion which moy bc clstrirrrcnrll ((, thc intsrcst rll'thc publir: on(Uor ol'lhr: stockholdcr, plrlncrs, members of associttions or organizations registired wifh the Commission; C.)ntroversics arising out of intra-corporale or parhcrghip relations, between and among stockholders, nrenrbers or associates; bclwccn any or all of them and the corF,oration, pannership or association of which lhey.are stockholders, members or a-ssociates, respcctively; and botween such corporation, partnerchip or association and lhe state insol-ar as it concems their individual franphise or right to exist as such entity; Controversies in the election or appointnenls of directors, ttustees, ofTicers or managers of such corporations, partnerships or associations. Petitions of corporations, partnerships or associations to ba declured in the state of suspension of paymenls in cases where the corporation, partncrship or association possesses sulTicicnt property to cover all its debts but foresces tha imf,ossibility of rrleeting them. whcn they respcctively fall due or in cases.wherg the corporation, pannership or associatior. has no su{ficient assets to covcr its liabitities, 'but is under the management of a Rehabilitation .Receiver or Managcmcnt Commitlee crcirtccl purouanl to this.l)ccrcc. (As addcd by l)rc*idcnrial l)ccrcc No. 1758)

llrrdcr Adnrinistrstivc Molter N(t. O{)-8-|O-SC cntirlcd lntcrint Rutc.s .t{ l)rrrccctrrrc on 3 (..)l-Jxr.rlc ll ulrrrhi litation, vc,ruc ,i,r pcliti(rns fbr rchabilitation shull be tilert in thelRcgional Trial Cutrrt having jurisdiction over thc territory rvhere the debtor's principal ollce is located. This inciudes tn*tilions filed by corporotions, pannerships or ossociations for dccloration in n state of susp<:rrsion of paymcnts us hereinabove provided under Section 5.2(d) of R.A. No. 8799.
Chins vs. l,rrnrl llnnk .}f the Ph ili Dr):i.!!r's (2()t S( ]1,\ 9rr)

(Jrder Act No. 1956, otherwise koown as the lnsolvenoy La!\,, ,iurisdiction over proceedings for suspension of payments, voluntary and involuntary insolvency is exclusively vested in the regular courts. However, I'.I) No. 1758 issued in l98l sdded to rhe exclusive and original jurisdiction of
thc SEC, defincd and delinesrcd in Secrion 5 of p.D. 902-A, tho

.t

fo

owing:

"(d) Petitions of corporstions, p&rtnerships or associatigns to t)E dcclared in tho state ofsuspension of payments in cases where the corporation, psrtnership or association possesses suflicient
156

:j .l I
..{

ti

t:..

Rehabilitation Recciver
pursuant to this Decree."

property lo cover all irs debts but foresees fhe impossibility of meeling then'r when they respectively fall due or in cases where the corporatiorr, partnership or association has no.sullicient assets to cover its liabilities, but is under the management .of a

or

Maragemcnt Committec crcated

It is petitioner's contcntiou that ssid additiorral par. Gl) effectively rcpealed the Insolvency Lar,r, so as to transfer and confer upon the SEC jurisdiction therefore enjoyed by the regular courls ovcr proceedings for ' su:;pcnsion of payments and voluntary and involuntary insolvency. We do not. sharc such interpretation. .\xx xxx xxx xxx xxl
Section 5, par. (d) should be ionstrued as vesting upon the.SEC origiial and exclusive jurisdiction only over pctitions to be declared in a state of rstrspension of payments, which may either be: (a) simple petition for suspensign of pa1'ments based on the provisions of the Insolvency. Law, 'or (b) a.similar l^-liiiorr .rccornpanicd by a pr.rycr lirr lhc crcation/oplrintrncnt ol'u rnunuginrept cr>mrnittec andzbr rcliobi I i t:rii()n rcceiver based on ihe provisions of P.D- No. <)02-,.\. Saicl provision cannot bs stretched to include petitions lbr insolvcncy. '['hc reason is that under said Sccrion 5, par. (d) above-quoted, thejurisdibtion of rhe SEC over c:ises where the corporation, partnership Or association has no r;uflicier)t assEts to cover its liabilities, (dnd thcrcfore insolvent) is qualified by the ( onjunctive phrase "but is under the management of a Rehabilihtion I(eceivcr or Management Comrnittee created pursuant to this Decree." This qualification et.I'ectively circumscribes thejurisdiction of the SEC ovcr insolveni

c()rp(,rations, partnersllips ond associations, and conseqrrently, uvcr proi;eedings. li)r the dcclarfltion of insolvency. lt demonstrates beiond doub.t.rhst jurisdistion over insolvency proceedings pertains ncither,in the first instance nor exclusivcly to the SEC, but only in continuation of or as an incident to tJre exercise of its jurisdiction over petitions to be declared. in a state of suspensibn of payinents rvhcrein tlre petitioning corporution, partncrship or associotion had previously been placed urrder a re habilitation receiver or malragement committee by the

:itrC

itself,

xxx

xxx

xxx

xxx

irx

r'\s declared by the lar,r,itseif, these aie mercly ancillary powers to enable -SEC to effecrively exercise irs .iurisdiction. These additional ancillary powtrs can be exercised only in connection wi.th an action.perrding bcf.ore the SFI(.' arrcl therefore had to be viewcd in rclation. to Section 5 rvhich rtefines the SLi(."s original and exclusive jurisdiction. Scction 6 dos not enlarge oi add to tlrc.exclusive and original jurisdiction of the SEC as panicularly enumerated undcr Section 5 of said Presidcntirl I)ecr@, as arnendert.

tile

(s2s scR,\ 672)

pcri.d material, ample power under P.D. No. 902-A, as imended, to declare a corporetion insolvent as an incidenl of and in continuation of its already acquiled jurisdiction over the petition to be declarcd in the stato of suspen-sioir of payments in the two instances provided in Section j(d) thereof. Said Secrion 5(d) vests the SEC with exclusive ond original jurisdiction over ptitions for srrspension of payments which may either be: (a) a simpl- petition for suspension ofpayments based on the provisions of the Insolvency Law, i.e., the
,l
157

of insolvencv strictly lies with regular courts, the SEC possesscd, during

xxx Albeit jurisdiction over a petition to declare a corporation in a state

the

.!i
:

!.i

,-|

\tij

petitioning corporation has sufficient asscts to cover all its debts, but foresies rhe irnpossibility of meeting the obligations as they fall due, or (b) a similar petiti,ln filed by an insolvcnt corporation accomponied by a prayer for the , ,crili()n ol- a managcment committac andor rchabilitstion reccivcr bascd on the provisions of P.D. No. 902-A, a amended by P.D. No. 1758.

In thc cssc al bench, EYCO's pctition for suspension of poynrenls was, ai boltom, a mix of both situations adverted to above. For, whilc EYCO, in the said petition, allegcd being solvent brlt illiquid, it nonetheless plcaded for the cor)stitution of a rehabilitation receiver/committee, with an alternative prayer for liquidation, if warrahted. Clcarly then, the SEC has, from the start, jurisdiction. rrvur IIYCO's ptition tbr suspension ol paymenl, such jurisdictiorr, follovring (:hittg (2Ol SCRA 190), continuing for purposes of liquidation after it (SEC) decla,ed EYCO insolvent. 'I'hc SEC appeared to be aware of thc continuiti angle as it even ordered the remand to the SEC Hearing Ponel of SEC Case No. 09-97 -57& for purposes of liquidating and dissolving the FYCO.

'

group.

xxx

xxx

xxx

xxx

xxx

The Court is cerbinly aware of the transfer, effected by R-r\. No. 8799, !o the RTC of the SEC'5 jurisdiction defined under Section 5(d) of P.D. No. )02-A. Such transfer, howevcr, did not, as the petitioner and the RTC posit, divesr the SEC of its jurisdiction over SEC Case No. O9-97-5764,.given that it ira<l already issued, as early as Septentber 19, 1998, lhe sus;rnsion order a{ler it li)uncl the petition for susp,:nsion filed on Seftenbcr 1(>, l99tl to'be su{ficient in lbrm and substance. Subscction 5.2 of R.A. No. 8799 prcscribing the .iuris(liction tru,nsfer lnd thc rules on transition providcs ns follows:

"5.2. Thc [Securities and Exchange] Commission's jurisdiction over all of [P.D.] No. 902-A is hereby transferrcd to tho appropriate [RTC]: Provided that the Suprime Court . . . may dasignatc the [RTCI branchca that shall cxercise jurisdiction over these cass. x x x Thc
cases cnumeratcd undcr Section 5
l

Corrtmission shall rctsin jurisdiction oyer Oendlng ruspchslon of' pa y mcnt/rehabllitstaor cascs filed as of 3O Jrrric 2OOO unail tirarly disposed.
Words in bracket and emphasis a{ded.)"

l,

EYCO'S petition for suspension of payment was, for all intpnts and p(lrposesi still pnding with rhe SEC as of June 30, 20OO. According,ly, the SEC's jurisdiction thcrcon, by the exprcss teirns of R:A. No. 8999, still subsists ''unt il ,ttlE .\utpension ol puyment case and its inci&tnt.\ urel /i4ully tlislt<.t-se,/ "

flnion llrrnk of thc llhilinrrincs vs. Court of Alrneals

(29O

SCRA 198)

Since we have painstakingly probed said SEC rules but unearthcd Lrothing that squarely treats ofl a situation where an individuol and B corporate enti'v both filed togethcr g petition for suspension of payments, rccourse must then be had to th Rules of Coun which is cxpressly msde suppletory to the SflC rules. In this rcgard, we find Scction I l, Rule 3 of thc 1997 Rules of Civil Procedure applicablJwbicl: providcs: "Scc. I l. Misjoinder and non-joindcr.of pqrties. - Ncithcr misjoinder nor non-joindcr of panics is ground for dismisssl of an aotion, Parties may b dropped or added by order of the court on motion of any party or on its own initiative at any stage of the action and on such terms as are just. Any claim

i. i:
;

'i l,i

','
158
.": ,.,'

against a misjoined p,arty rnay be severed ana fioceeded with siparately." IIta lics supplied]

con)pelert

that thc ptition with .especl to EYCO shall subsist and may be validly acted r"rpon by the SEC. The Yutingcos, on the other hand, shall be dropped from.the petition and be requircd io pursrre thcir renredies in the regular courts.of
J

From thc foregoing, it is thus clear that rn u *. ofmisjoinilcr of panies v.,hich in this casc is the co-filing of the pctirion f6r susSrension of poymcnts i)'.. ixrth thc Yutingcos Dnd lllc I|YCO gr.rul, - lhc rgrncrly hrts rrcvcr bccrt to di-srriss thc petiaion in its ctrrirety but ao dismiss it only as against thc party upon r.vlrom the tribunal or body cannot acquirc jurisdiction. Thc result, theretbre, is..

urisdiction.

tJnder Section 2 of z\ct No. 1956 also known aS the "lnsolvency Laf', on irrdividual person, sooicd.rd or a corporution may file a petition in the regular cour-ts that he be declared in the state of suspnsion of paymcnts. T'tiis provision, huv,'cver, is deemed to have been impliedly rpealed or modified by p.D. No. 9O2-A, as amended, which now vests iurisdiction over.susrpnsior of osyments Itjcll bv corporations. Errtnershios and associarions with thc SEC.:I{cnce, indivicluals seeking to be declared irl a srate of suspension payrncnti.are the '()nlt ones rcquired now to filc thcir pctitions with thc rcgulurof courts.

('.

(lon.rcqucnccs of the F'iting of Petition for Suspension ofpryments

a) b) () iiotc \\rirh

Petitioner cannot disposc, in any manncr, ofany olhis propertylies except rhose rlccessary fbr the ordinary oper::.tions of the commerce or industry in tvhich he is crrgagcd. Petitioner cannot make any paymcnts except in the ordinary course of his business or industry, and

..-r.

to prior approval of the coun, Fending executions against the petitioner shall be staycd rvith tlrc cxception of exccution against propcrty/ies Cspecially.
aSubject

rnortgaged.

resp!-ct to distressed corporations, all clsims filed againsi incli:dirrg claims olsecured creditors; even lbrcclosures are slayed-

it

.rre suspended

Bank of the Philipoine Islands ys. Couri of ADDeals (229 SCR/\.223)

shall be disallowed so as not to prejudice otber creditors or causc discrimination among them. If foreclosure is undertaken dcspite the fact that a patition f;r rchat)ilitotion hos becn filcd, rhe certiticotes or sole shall nor be delivcrcd. Ircrrrjing rchohilitnti.n. lf this lr^s ulrcndy bccn d.nc, no ironifcr ccrrificorc of r irtc srra|l tikewisc bo ctlbcrBd wirhh rho b,erlod of rBh8bllltBrlon. l.ho ra orrale behinri PD 902-4, as amended, is to effect a feasiblc and viablc rEhabilitarion. 'fhis cannol be achievcd ifone creditor preferred is over *re others.
fi

('l)he doclrine in the l)ClB vs. Courr of Ap;>eals ( 172 SCRA 436) casc ln.llt:nar',t Sibal & Sons v- 1,.'lbiniu.,: (lt6 SCRA 94), / ittitc.y, lnc. v. (lourl o/ tllpeuls ( I 90 SCR A 262), .Ar<nera v- Court ol' Appat s (2 I I SCRA 390), ancl t?( tB( v. (t<turt tf 1prytis (l I I SCR.A 83oJ. rvc rrlrsirJy rulcd that whslrevcr a distrcsscrt corporatiur asks sEC tirr relrlbilitutiorr rrrC. suspcnsion of payments, prelerred creditors may no lonlger assert suph nrel-erencc, but shall stand on equal footing with other crcditors. Foreclosure

. li/;

has srn<;,: bccn abrogated.

t59

Rubberworld (Phils.). Inc. vs. NLRC (305 SCRA 72r ) "(U)pon the appointtncnt [by the SEC] of a mdnirgement cornmittee or a rchsbilitation reccivcr,i' all actions for claims agdinst the corPoration pcnding bet-ore any court, tribunal or board sheu ,pso jure V suspcnded'.Thc justification for thc automatic stay of all pending actions for claims "is to cn rblc ihe rnanagemcnt comlnittee or the rehabilitation rcceiver to etlectively exercise itsnris powers frec from any judicial or extrajudicial intcrference that lnight unduly hinder or prevent the 'rescue' of the debtor company. To allow sush' ottrer.rctions to continue would only add to the burden of the.management cornmittee or rehabilitotion receivcr, lvhose time, efForl arrd rcsourccs wor'rld he rvasted in defending claims against the corporation instcad ol being dirccted
Parentlretically, the rehabilitation of a financially. distressed corporatiori beriefits its employees, creditors, stockholders and, in a larger sense, the general public. And in considcrinB whether to rehabilitalc or not. the SEC gives preference to lhe interest of creditors, including employees. The rcason is that shareholders can recover their investments only upon liquidation of thc corporation, and only if tlrerb are asscts remaining after all porporate creditors are paid.

'

xxx xxx No exceprion in favor of labor claims is mentioned in rhe law. Since the law make no distinction or exemptions, neither should this Coui1. UAi lex nttn dislingguit nec nos dislinguere debemos. Allowing labor cases to proceed clearly defeats the purpose of the automatic stay and severely cncumbers the management commiltee's time and resourcbs. The. soid committec would need ' to defend against these suits, to the detrilnent of its prinary and urgent duty to rvork towards rehabilitating the coiporation and making it viable again. To rule otherwise rvould open the floodgates to other similarly situated glaim&nts and :)rcstall if not defeat thc rescue efforts- Besides, even if the NLRC awards the clairn of private respondents, as it did, iG ruling could not be enlorced as lorg as thc petitioner is under the managenrent committec.
i

(Jatplg$v Elcctronics Coroorltion vs' Ag!u.!!!.E!-Csr@.

--TtSCETE)

Catcway, hoving trccn dcclarcd insolvcnt, irrBucs lhlt jrtrisdiclion tlvcr thc insolvency court. Accordingly, Gateway adds, ciring Sec. 60 of Act No. 1956, as amended, ot the Insolvency Law, any pending action against ils Properties and assets must be dismissed, the claimanl relegated to thc insolvencv proceedings for the claimant's relief.

all clairns against all.of its properties and ossets proprcrly Pcrlains.to

The aontention, as formulated, is in a qualified sense meritoriotls. Under Sec. 18 of Ac! No. 1956, as couched, the issuance of an order declanug lhe pelitioner insolvcnt after lhc insolvency court finds the corrcsponding Petition for insolvency to be meritorious shall stay all pending civil actions ogainst thc petitioncr's property. For rcference, said Sc. 18, setting forth thc effects dnd contents ofa votuntary insolvency order, pertinently provides,

Upon receiving and filing said petition, schedule' and inventory, the court x x x shall make an order declaring the petitioner insolvent' ancj directing the sheriff of the province or city in which the petition is filed to

"section

18.

160

take possession of, and safely keep, r,rntil the appoimment of a receiver or assignee, all the deeds, vouchers, books of account, paPrs, notes, bonds, bills' anC scculities of the debtor and all his real and personal propcrty, estatg. and effects x x x. Said order shall l'urther forbid the payment to ihe creditor of any dqlrts due to him ond thc delivery to thc dcbtor, or to any person,for him, ofany propray belonging to him, and the transfer of any ProPcrty by him, and shall tbnher appoini a iime and place for a.meeting of the oftdirors tb choose an assignee bithe estate. Said order shatl tbc publi;hedl x x x. Upon the grrnting of said order, all civil procecdingr pend[pg agsinst the srld lmolvctrt 3h!ll be stayed. Whcn a receiver is sppointe4 cir an assignce chosen, as providcd in this Act, the sherilT shall thereupon deliver to such receiver or assignec, as the case nr.ry be all the property, asscts, and belongings of the insolvent which have. conre into his posscssiorr x x x." (Emphasis supplied.)
Complementing Sec. l8 which appropriately cotnes into play "upon the granting of [the] order" of insolvency is the succeeding Sec. 60 which properly apl)lics to thc l)criod "afler thc commencement of proceedings in insolvency.i'' 'I he I wc) prt>visions may be hrrmonizcd as follows: Upon the tilinS of the petition lor insolvency, lrnding civil actions aBainst. thc .propcity of thc petitioncr arc nol ipsolrcb stayed, but the insolvent mry apply with thc court in rvhich the actions are pending for a stay of the actions against the insolvent's irr rpcrty. lf the court grants such application, pending civil actions againS thc petitioner's property shall be stayed: otherwise, thcy shall continue. Oirce. an order of insolvency nevcrtheless issues, all civil proceodings aSsinst thc petitioner's nroperq, are, by statutory command, automatically staycd, Sp. 60 is' rcproduccd below:

li
.,

I.

rti

,I

"SECTION 60. Creclitctrs proving cl<tir;s cannol sue: Stuy of action No creditor proving his dcbt or claim, shall be allorved to maintain any suit therefor against the debtor, but shall be deemed to have waived all rigltt of action and suit against him and. all proceedings already commEnced, or any
unsarisfied judgment Blready obtained thereon, shall be deemed to be di3charged

. ti

il

irnd surrsndered thereby; and after the debtor's discharge, upon pioper

.rpplication and prool to the corlrt having jurisdiction, all such proceedings shall l)e, disryrissed, and such unsatistied judgments satisfied of iecord: Providid xx x. A creditor proving lris debt or claim shall not be held to havc waived lris right ol action or suit ag,ainst the debtor whgn a discharge lras been refused or ithe proccedings have becn ddrermined to thc lvithoui a dischargc. No crerliior rvhosc rlcbt is provnhlc rrndcr this Act shall bc allo*ed, rftcr the cornrncnccnrcnt of procecditrgs in insolvcncy, to prosecute to tinrl Judglnettt any action therefor agrlnst the dcbtor until the questlon of thc dcbtor't di.scharge sholl have bcen determiDed, snd any sucb suit procedin8 slllll. rrl)ou th(' npplicttion of thc (tcbi(lr or nny crcditor, or thc nssignec. be stayc(t to await tlre dcterminution of the court on thc qucstion of dischtrrgc: l'ntvieled, That if the amount.duc the creditor is irr tlispute. the suit, by leavc (,1' lhc corrrt in insolvcncy, nray procced (o ju(lgore t (or purposc of nsccrtrirring tbe amouot rluc, which anlount, rvhcn adjudge<.l may be allowed in the insolvency proceedings, but. eiecution shall be steyed aforeaid." { Errr plrasis sul)pl ied.)

llj , t-.

Applying the aforequoted provisions, it can rightfully be said that the issrtance of the. insolvency order of Deccmber 2, 2OO4 had &e offcct of autornatically staying thc civil action fior a sum of moncy {ilcd by Asionbank againsi Gateway. ln nct efifct, the proceedings before the CA in L-A-G.R. CV No. 80734, but only insofar as the claim against Gateway was conccmcd, wa:i, or ought to have been, suspended afler December 2,2OO4, Asianbank hoving bcen duly notified ofand in fact was a participant in the insolvency proccedirrgs.

t6l

i"'
Coun ofcourse takes stock ol'thg proviso in SeclO0 ofAct No. 1955 which in a way provided the CA With a justifling tool to conlinue and procced to judgrncnr in CA-G.R. CV No. 80?34, bur only for thc purpose ol 0scerroining the airount duo from Gateway. At any event, on.thc pogtul$e thot tha iurisdiction ovcr thc proJrrties of the irrsolvcnt - dcctanjd Gaiervay lics with the rn.;olvcrrcy gourt, exccution ol'thc CA insolvency judgmcnt ogoinst Gotc*&y oan only bc pursucd bcfore the insolvency courl. xxx;'
-Ihe

\/lt. A.

\/oluntrtrylnsolvency

Del'initiou

,l

Voluntary insolvency is. the_sir.uation of a debtor, who having debls exceeding p1,000.00, cannot discharge all ofthem with.all of his existing aisets, and rvho -as a consequencJ voluntarily goes t() court to havo himself declared as an insolvenr so thnt his assets may be cquirably clistritruted rn'tong his creditors. ( 1953 tlar as ciled irlBar Review. Materiuls in Comrnsrci;l L&;, 'l'hirtcsrrth tjdirion, 2005 by Jorge V. Miravite, p, 936) fl-sscntial Allegations ,:l o Pctition for voruntary lnsotvenly (seition - -. l I q56, ,is amended)
'l

t4 of Act

No.

t.

i(ioner's ploce of residence; I'eriod trf his residence thercin whiclr slrould be at leasr. six (6) morrths imme<Iiately prior to tlie l-jling oflhe Petition for Voluntary Insolvency; Petitioner's inability to pay all his detrts in full; . llis willirrl;ttcss 1r) surrcn(lcr rtll his Dlojrcrly, clitolc ond qlliir;ts rxrl crcnlpl l'rrirn cxgcutiorr ,i)r rhe benetit of his creditors; An application to be adjudged an insolvent.
Pet

,i

.,
iil!i
.

C.

Annexes to the Petition for Voluntary Insotvency (Section 14 of Adt No. 1956, as smended)
r,/e ri

,;ilij :,li i
''ii-ii' .11il
,

t.
1

Verit'icd Schcdule fied Inyenlory

(-'.

| i.

(lontents of thc Schedule (Section l5 of Act No. I956, os nmenrted) Full and true slatemenr of au his debts and liabitities, togerher wirh a risr of a lhose to whom, lo lhe hcst ol'lris knorvlcdgc Ilnd l^-ti;f, *ii, .lelrts or liobilitics nrc
dr.rc:

..,
.tl

{i

i!:

Place of residcnce of his creditors and thc sum dire each oreditor; ]"he naturc of thc indebtedness or liability and rvhether fbunded on rvrirten security,
5.

,"!
L 'll l

6. 7.

True cause and consideration of the indebtedness or liability; Time and place wlren and wherc such irrdcbtedness or liabiiiiy accruedt A doclaration of any existing pledge, Iien, mongage, judgnient, or other secudty - . -. for the payment ofthe debt or liability; and nn .outline of the facts giving rise or which might give risc to a cause of action against such insolvent debtor.
( :ontents of the

obl igation, contract or otherwisc;

',!:'
iilli

rlI;
llil

{'.2

l.
2. 3.

Invclrtory (Section 16 of Act No. 1956, is rmcndcd) An acclrate description of all the real and pcrsonal proprty, estate, and effects of
the petitioncr, including his homestcad,

estate, and efects and irs Iocation; A statemcnt of thc encumbrance ot'said property, estate, and effbcts;

A statement of the value of each item of said property,

ifa;yl

162

{. 5.
i'"crtc:
-l
i

property exempt by law from execution lGth a statement of its valuation, localion and encumbrances thereof; and An outline of the thcts giving rise, or which might give rlse to a right of action in favor ofthe insolvent debtor
ir

All

ii-,r:i

hr' r;rerc iiling of a petition for voluntary insolvency .shall be an acl of insolvency iori I 4, Aqt No. I 956, as arncnded)

l;. i. .'

!(:tiort of (-'ourt utro[ llcct'ipt of the. P.]titio[ (Section 18, Act No. 1956, as amended)
issue r.ir order declaring thc petitioner insolvent which order is mandatory; L)ir('cr thc shcritTtrf tlre provincc or ciry in which the petition is fil;d to take possession of', anci rat-ely keep all the deeds. vouclrers, books ofaccount, p6pers: notes. bonds, bills, an,.i scluritigs ol thc dcbtor and all his real and personal property, estate, and eflbcls cxccl)t such as rnay bc cxempt by law from execution, until.the appoinrmenl ofa receiver or assignee; Issue an order forbidding the payment to the debtor of drydebts due him and the delivery to the debtor or to any penron for him, of any property by him: Appoint o timc and place for a meetirig of the crCilors lo.choosc on asslgnee of the cst a tc: l)esignate a rrewspapcr of general circulation published in the province or city in which rhe petition is t'iled, if there be one, and if there be none, in a ne$.spaper which, in the opinion ol'thejudge, will ,livc lrcst notice to the crqditors oflhc said insolvr:rrl, nnd in tlre nclvspallcr s(, designatcd said oxlor shnll,bc published as otlcn as tnuy bc prescribeC by lhc l.:()u,t ()r lhcjudgc ll)crc()ri

:i 4. 5

i.'..

tiffects (;f :r .rrrdgment in Irr$oll,ency (t991 B r lixrmi Ser:tions t8 rnd 24, Act No.
!

956. !!s rr rnr:n rlod)

'i'he deciaration of insolvency bv the court, atler hearing or defhult,.shall have the
rirllou,irrg ef)ects:

'i

i. L i

iirihitl the p.ry rcnt to thc ds[)re. ol'any dcbt due hirn prol)c{y belonging to him; lrorbiJ the transfer ofany property by him; and Stay of'all civil proceedings ag&inst the insolvent.
tnyoluntary lnsolvency

un<-l

tlrc dclivery to lrirn ol'any

: i! r. i
1.1

vtll. ,\. i. 'I

' ,..i:'i 'j,

l
I

Perions or Entities Who may Petition for Adjudicstlon of Involuntary Insolvercy.Of a Nntural Person - tlrree or more creditors who are residenls of ihe Philippines,.whose crr:<Jits or demands accrued in the Philippines ond the amount of rvhich are in the af{:regatc sum 01'not less than one thousiu:d pcsos (P1,000.00)- iSectiorr 20, Act No.
l()51i, its arncndecll
(

,, :Il
,I
it

.i.

)! ii i'itrtnorship

b) three or more crdditors rvho are residents of the Philippines, whose credits or demands accrued in the Philippines and d.e
amendedl an officer

the pa.tnct's (rr &ny ofthenr, br

amount of which are in the iggregate sum of nol less than one lhous&nd pesoB (P1,000.00). [Section 51, Act No. 1956, as

l.

Ofa Corporation -- a)

b)

ola corporation authorized by its board of directors or trustces or by the writtcn assent of a mojority of its board of directors or trusteca, or three or more creditors who .re residenis of the PhilipPines' whose credits or demands accrued in the Philippines and the amount of rvhioh are in the aggregate sum cf not less than one
I

.i
163

.ia

.lJ

:)

lhousand pesos (F I,0O0.O0).r lscsti(

amcr)dcdl

n 5?. Act No. 1956, as

: :

Slalqllrraeglment llouse- Inc. vs. Citlbsnk. N.,

l,) petition for insolvcncy can scarcely bc disputed and is not in truth dispurcd by pctitioners. The lar', plainly grants to a juridical pcrson,, whether it be a r)ank or not or (v,,he-ther) it be a foreign or dornestic corporation, as 10 natural J:crsons as wel[, such rr powcr to petition for the adjudication of bankruptcy of sny person, nalural orjuridical, provided th,at it is a resident. corporation aild joins.rt least. lw(, (,lil.jr residents in prescnting the pctition to the Bsnkruptcy Cr)urt.
dt.'r,t','tic hankt the same power, although their capacity
,l$cn vs. Dnvno l,rrmber Cornlrrnv (r 13 scRA ro7)

There is no substantive law granting/ore ign banks the prwer to petition adjudication of a Philippine Corporation as a barrlcrupt. This is inconsequential, for neither is there any legal provision e' pressly giving.

tbr the

rhis omission, respondent lumber company, in its opposition to the motion for. reconsideration of ihe order of execution pending appeal, tried to point out that' the sale of tr,r'o Chevrolet trucks of Urbano Jaca and their t'ailure to fil.: a counterbond indicate that they are without sufficient assets. This later attempt to substantiate a baseless allegation in the motion for execution pending appal is t'utile. The trucks alleged to be sold are not properties of petitioner Urbano Jaca. They are paraphemal propenies ol his wife, Florentina Perez, and: the same ' trucl.:s were in f'act sold by hcr. And even if said trucks were owne<! tiy Urbano .laca. their sale lo Atty. Raul Nengasca does not totally indicate insolvency. As has l-rcen repeatedly obscrved, pctitioner Urbaio Jaca ii engaged in business. Sal!- of property used in business does not eslablish insolvency. The sale rnay have lreen prompted by the need for more modern equipmenl on account of obs()lcsccnce, or the necd of oash to bc direcrcd to more profitable endeovor. 'I-[re ssme reason applies lo their failurq to frle a counterbond. Thr, cash ndeded Irrr the counterbond may be utilizcd for thc tontinuanpe of the business or to increasc business profits. ln short, the acts ol'petitioners cannot always be interpreted as signs of fisolvency but may also indicate sound business judgnrent prompted by thc need to have a liquid reserve ofcash.
B.

'I he third rcason Elated is the fact thal ptitioners hove no propenics and asscts to satis$, the judgment. The basis of respondent judge's conclusion that petitioners do not have suflicient assets is an unsrrbslanli&ted allegation in lhe rr()lir)l| tirr cxcouli(][ Pcrtrlirrg tt|1lcol (rl' rcslx)rr(lcnl lurrttrcr oorrrllrrty, 'l'o rr)ctily

,1

.,tc,s of lnvoluntsry lnsotvenq/ (Section 20, Act No, 1956, as amended)

I.
.1.

-l'irlt such person is about to depan or

Jcj r;rud his creditors;
tr: :'rlt i
a

has departed from the Philippines,

with intent to

'I'hat being absent from lhe Phili.ppines, with intent to defiaud his crcditors, he rernains

.1.

5.

iut he conceals himsclf to avoid the scrvice of legal process tbr the purpose of hindering or dolaying or dcflaudlng hls credltors; 1'hat he conceals, or is removingr ony of his property to avoid its br:ing attached or taken on legal process; l-hat he has suffered his propeny to remain under attachment or legal Process for three days ibr the purpose ofhindering or delaying or defrauding his creditors;
'f

:i }-

164

.,ii

ii'

,i

t; ". ';. !i ().

',

l.

i2
i.l.
.c,tc

rat hr: has canfessed or ofTered to allorv judgment in favorof any creditor or claims.nt tbr thc purposc ofhindering or delaying or detiauding any creditor or claimant; ['i)at ire has willfully suflered judgmeut to be token against him by dofault for the purpose ,rf hindering or delaying or defrauding his creditors; l hat hc has suffcrcd or procurcd his proFrcrty to bc taken on legal process with intent to give a preference to one or more of his crcditors and therbby hinder, delay or defraud any one of his creditorst 'lhal he has madc any assignnrent, gift, salc, conveyance'or transfer of his'estate, propcrty, rights or crediis with intenr to delay, defraud or hindbr his creditorsl l'hat ire has, in conlemplation of insolvency, made any payment, gitl, grant, sale, conveyance or transfer of his estate, proprty, rights 9r credits; I'hat being a merchant or tradesman, he has.generally defaulted in the payment of his
demand. ro pay .,ry moneys deposited th lrirn or rcccived by him in a fiduoiary capacity; and 'fhat an cxscutiorr, having been issued against hint on final judgment for.rnoney, he bhall have been fou d to be without sumcient property subject to execirtion to satisfy the
r,',i
i

:#,::!:,":';'"?i:T:,t!i,i.r;?i:,ii13rll,f;.o",
urlgn rcnt.

t-)nu (ir liror-e

ol lhe aforc-enumeratert acts of insolvency. shoutd bc sEted in the petition.

(.

.,\ction uf rhe Court on the Petition for Involuntary lnsolvcncy (Sectioo 21, Act 1i56, :t:.i amendcd) 'l'hc c()urt sht!ll issuc trrr orclcr rcqtriring rhc dcfcndant dcbt('r. to shb.*, crusc, ot a limc and place to bc fixed by the court, why he should not be adjudged an insolvent debtor. Ar thc same time, or thereafter, upon good cause shorvn therefor, lhe court may nrake arr order forbidding the payment of any debts, and the delivery of any p;operty belonging to such debtor to him or to any other person for his use or benefit or the rrrtnsll.r ol'an), propeny by hirn.

t.\. ;1.
.:

.\s,slfii\

l.iE

Qufl I ir'icsti.rns (Section 30,

Act No. 1956,

as amended)

r.
l:.

:\1usr hc clcctcd by majority, troth in number tnd amount, of thc crqditors who have Ii:()vc't I l'reir clltims; lilrorrlii lilc rvith the court, withirr llvc days, unless thc tinle bc extetxJed by lhe court, .r l).,nd in i:n atnoutrt to be lixecl by the courq Shoull have lwo or mole sureties, approved by the court and conditioned upon the laithlirl F:rtbrmance of the duties devolving trpon him.

/rl)lir-,,irti(r s ol' A tr ,tssigncc 'l 1) r erkc a Iist or inventory of tbe assbts of the insolvent debtor; 'i o r.ecover, collect and gather all the assets ot'the said debtor; 'i o liquefy said assets ' , to cash: -i-o be responsible for all the monies he has received and paid out; and -fo allocale and distribute the said assets to the insolvcnt ddbtor's creditors.

C.
I

uth(,rities of an Assignee (Sectlon 36, Act No. 1956, as gmendcd) 'Io suc and recover all asscts belonging to or due the insol.rent debtor; 'l o take inlo his possession all the assels ofthe insolvent debtor except those set aside by iary to be exempt;
A

.:
IJ

r65

Hi

Eri

6.
7.

nonresidcnt or absconding or cdncculed dcbtor, to clctrrttntl rtrr<.1 rcccive OI' every sherifl'who shall have any of th;properly.of such debtor, or who sh.ll have iir his p..rsscssion any moneys orising f()m thc sale ofsuch ProPcrty: it'o sell oa p.,6lic a,ition o ltJr udvenisemcnt and pursuant to Rulc 39 ol'the llules olC-.orrrr For lxccution bf Jur1gmcrtt, any of the osscis of the insolvcnt dcbto.r under thc assignec's po$ression: 'fo redeem atl void lnongages and conditional contracts' all valid pledges of persgnal pr()perq1 and to satisfy any .iudgments which may be an engumbranoe on any Propeny ' sold by him: or to sell such property, subicct io such rnortgage, contracts, pledgcs. J u(ltsnrcnts or' li.;trsi ib lenle all matters and Bccounts between the insolvent debtor and his dcbtors; -fo compound with any pcrson indebted to thg insolvent debtor and thereupon dischargc all demands aga.inst suoh person: and 'fo recovcr itom any pcrson receiving a conveyancei gift, transfer' paypent'. or assignmcnt, madc OontrBry to any brovision of Act No. 1956 the proPerty translerred or assigned or the valuc thereof.

lri

casq

ofa

D.

I'rocedure to be observed by the Assignec from his Qualification until his.Dischargc To inventory all the assets ofthe insolvent debtor; 'Io take poJsession all the said assets which includes instituting legal actions to collect the insolvent deblor's credit, lo recover his Properlies and to redeem his nroigagesi 'T'o liquefo deblor,s properties converting them iillo cash and in proper cases, sell them at
auction. To remit t(, the credjtors rheir proportionate sh.rre of lhe net assets of lhe insolvent debtor after first satisrying fhe costs ofthe insolvency action and other prelerred-credits; and . 'lo submit an elcoirntirrg to the court of all aisets received by him including all expenses tuld pa),menls hc madc to crcdilors.

l.
?.

-1.

5.

E.

Iiffect of thc Assignment to the Assigncc of lnsolvcnt Debtor's I'ropcrtics The assignee shall hold the assets and properties of lhe insolvenl debtor ilr trust ii)r both the ins6lvent debtor and his creditors. He is considered a representativ.e- of ihe insolvent debtor in irccurnulating alld collecting the laiter's assets and is li&ewi-se considered a represen6tive of thJcreditors in assuring that the assets gathered shall be
proportionately and equitably disrributed among thc said crcdiiors'

r.
I
:,'.

i)cbts rnd tlebllities Provrble against the Insolvent'! Estate I)cbts and liabilities which'arc due and payable at the lime of rtre adjudic&tion of the
rrs()lvcrrcy pelition; I)e[]ts and liabilities that are eiisting but not yet dtre; Debt and liabilities arising from guaranty atrd surety of the insol\4rtt debtor; l)cbts and liabililies that are contingent;
i

{.

Dcbt$ ond Lisbiritic$ tloprovrbtc agairsa thc lnsolvcnt's E'Btftc

I

2.

Debts and liabilities that have already prescribed; Debts and liabilities which are unliqui&ted; Debts and liabilities which were prlviously given ftaudulent pretbrcnce by the insolvent

4.
5.

3iSllii *n,.n

Attachments month preceding the petition.

"* ar levieo, judgmenls cntered and exocptions issued more than one that
-

scured where the cieditors opted to enforcc the securitvr

and

156

l{.
l.
2.

Preference of Paymcnt in lnsolvency Proceedings (section 50; Act No. 1956 as smendcd by Article 2244, Civil Code)
Courl-approved funcral cxpenses ofthe dbtor or his wii'e or childrcn untler liis parenta! autilority who have no propeny of their own; Dcbts fbr sewices rendered the insolvent by ernployec!, .laborers, or houschold hclpers fbr onc ycar preccding lhe commcrrccrnent of thc ipsolverrcy procceding^s; F-xpcnses <Iuring the last illnes:i of the dabtor or of his or her spouse and children under l.ris or her parental authority, ifthey havc ho propergr ofthtir own; Conrpensati,:n due the laborers or their clependents under taws providing for indemnity fbr darnages in'cases of labor accidents, or illness resu,lting liom thc nature of the employrrrent; Credits and advancements made to the debtor for suppon of himsclf anri family duri4g tlre last year preceding the insolvency; Suppo( during the insolvency proceedings, and for three mG.nths thercafter; I:incs and civil indemnifications arising from a criminil offense; I-egal expenses and exirenses incurrcd in ttre administratiotr of thc insolvent's estate for the common intercst of the crcditors; 'l axes ancl asscssmcnts duc tlrc national goverrrn)cnt: 'faxes and assqssmcnts duc tlrc provincial govcrnmentl -l axes and asscs:'-mcnts duc tlro city or municiprl governnrcr,t; Damages for death or personal injuries caused by a huasi-delict; Gifts to public or private institutions of charity or beneficierrce; Credits which, without special privilege, appear in (a) a public instrumcnt; or (b) in a firral j udgment;
l

4.

5.

6.
7. .).

to. I t.
't?-.

I .i.

14.

t.

(irrn posilion, dclined

'-

lr is a proceeding wlrich is voluntary between the debtor ind his creditors wlrereby the fomler offers to pay his creditors a certailr peroentage oflheir claims for the discharge of the <lebtor from his obligations to them. It is valid and binding betdcen the parties hom thc moment a majority of the creditors reprssenting a ma.iority iri number ilnd amounl t)l'the claims agrcc lo the conrposition.
Dischnrge. dcfinerl

.t.

lt is thc release <if thc insolvent debtor tiom aU his debts and liabilities statcd in the schedule and from all those claims which were or might have been firoved against lhe estatc in insirlvcncy (S'ection 69, Act No. 1956)
.r.

Wh(, mey ask for Discharge? I,

2.

Natural persons C('rporations are noi entitled to be discharged (Section 52, Aot No. !956)

.t

-2

t)el)t an(t LiaLilitics that al.e not Dischargett

t.
2.

,l

3.

T;rxes or assessments $,hich are due the national and local govemments; Debts or liabilities brought about or arising from fraudulent acts, nlisaPPropriation or defalcation of the insolvent debtor; ()bligalions and liatriiities of thc debior with &nother rvhererin lhe insolvent debtor is solidarily &ccountable;

4.
5.

Alintony or support:

6.

Corporate debts and liabilities; and Debts and liabilities which are not lislcd in the sohedule submitted by the insolvcnt debtor.

167

,r.3

Iiffects ofs Discharge on the Insolvent Debtor

L
2.

ll.:lcoscs thc ins(llvcDl dclrt()r l'r.rnt thc li$trilitius urxl rlcbt.s listc(l in thc sclrcdulc lrc submitted to lhe courl including those which have becn provcd in the insolvcncy
proceedings. bcrves lo ilease thc insolvent debtor of his person a.nd of his futurc ocquisitions.

XII.
.\.
(: Y

OIJASI-CONTRACTS
Defiuition

()uasi-oontracts ate juridical relations ariging from lawfrJl, v(,luntary nnd unilateral acts of iriilivicjuals blsed on the premise thal no one should bc unjustly enriched or benelited at thc
nc,)se r)t arrl(rlllcf.

lI vatt Elevators lnd Escalators Cornoration vs. C4lltcdrsl Heights Buildina Complcx Associntion. lnc
(636 SCRA 40r )

his Court disagrees with tlre tindings of the CA that the claims. of pctilioner are questionable, because the date of the salcs invoicc nnd the datc .jl:rlc(l iD thc. corrcsryrtrding clclivcry fcccifrt lrrc t(xr litr ltlxrrt. ll is tr{tt ot! uoci)rnrn()n pr.rcticc tbr conlroctors to dclivcr trretcrials and to bill tlr.: clictrt itt u latcr date, espccially since thc panies in thc p.esent aotion hnvo n existing Ijervice Agreement.

-I

Withal, it is indisputable that the repairs madc on the elevatorg

fa-ll

Se1111inlv

be uniustlv enriched or benefited at the exrpn.se of anothci."'lt would be unjust for resp (rnlf, to refuse pavment because the papers submited were not in order.

Bermanclt Conc_ !,E (26

SCRA 332)

jjgl5:

Clementina Vds, de Guison engaged the services of Donato Teodoro of tltc'l'codoro & Associates lo constntcl a btrilding tbr her frrr o contr$ct price of P.4.l,'JOO.0O subject io the stipukltion that lnbor and rnirrcrials slrall be for tlrc iir:count of. the conlractor. Teodoro ordercd and rcceived fioln Permanent (.]()ncrrrle l)roducts, lnc. hollorv [rlricks amrrunlirrg tr) I1759.811, rvhiclr were usecl in tlru conslruction ol'the said building. Thc corrtraclor rctirsed to pay the said arrr.;unt and alleged that paytnent thereof is thc obligation ofthc building orvncr.
!11.:tte.: Who shorrld pay for the cost of the hollorv blocks, the building owner or the conlractor?

i!rg: By virtue of the conlract betwcen Guison and 'I'eodoro, the lotter cxpressly assumcd lhe cost of the materials by undertaking that "Alt of said labor and materials shall be supplied by me," and this logically hecause rhe contracl rvas for the construction ofa building for which Guison agried to pay a ttrtal lump sum.
l,!!!l

168

It is true that the installation of the hollow blocks in the house of Guison rcdounded to her bcnefit. It does not thereby follow" however, that she was enrichcd nt thc expense of the ptaintiff. The contract betwccn her and the e(,ntractor was for a lump sum of F14,000.00, ivith the lattcr assumin8 the obligatiorr to fumish all labor and matcrials. In the abscnc of proof that he l'ailed to comply rvith her covenanl to pay Fl4,oOO.Od ro thL' contrador; lhe latter is legally obliged to make good its orvn undertaking to fumish a// malerials and labor.
Lrv vs. Public Estatcs

(s89 SCRA r )

Authoritv

Ndither can we hold the l'ublic Esbtes Authorily (PEA) liable based on. $elutio indebiii, the legal maxim that no one shoul,l enrich itself at the expense of another. As we explained in l)owtorr Conglomerale, lnc. v. Ag:colicol (40O' SCIT/\ 523 [2003]), the princigrlc of unjust enrichtnent cudnot bc vulidly invoked by the resl)ondcnt who, tlrrouglr his own oct irr ornission, took thc risk of being, dcniccl paynrcnt flor additional costs by not giving the petitioners prior nolice of such costs and/or by not securing their lwitlen consent thctEto, as rcquired by ia \,!' arrd their contract. Uy cannot, therefore, claim frilm PEA thc costs of the additional hauling distance of topsoil,.and of the mobilization of watcl trucks.

'

Bsnk of Americo. NT & SA v!. Assoclnted Citiz.ens Bnnl( (s88 SCR.A sr)

It.is well-settled that a person who had not given value for the monev r)aid to him has no riqht to retain the monev he received. This Court, therefore, .quotes with appr<ival tlre ruling of the Coun of AppeBls in its decision:

"lt ,llrlrcrrirg, howcver, tiofi thc cvidcncc irn rcc(rrd lhol since lring LJy Scng urll/or Uy Chung Guarr Seng rcceivcd the procer:ds of the ch..:cks as they wc.e dcposiled in tlreir personal joint account with ..\ssi.)ciolcd llirDk, thcy shorrld, thercfbre. bc obligcd to rohrrhrrsc ,'rssocibtecl l3rurk ti>r il)e r [() rt it has to poy to Bank 6f Americo, in li[c \vith the rulc that no llet son should bc allorved to unju$ly enrigh himsclf oi the expensc of anothcr."
(.

l)c l-con yg. l)c l-eort

.' (s93 SCRA 768)

final consideration, the Court agrecs with the Court ofAppeals that tiic salc ol' one-lralf of thc corrjugal property witlrout litlui<laliirn ol' thc p4rtnership is void. Pr'ior.to the liquidation of the conjugal partnershiP, the interest of each spouse in the conjugal assets is inchoate, a merc expcctancy, which constitutes neither a legal nor an equitable estate, and docs not ripen into a title until it appears that there arc assets in the community as a rsult of the liquidation and settlement. The interest of eoch spousc is limited to.the net remainder ot "remanente liquido" (habcr gtnancia[) resulting from the liquidation of thc affairs of the portnership after its dissolution. Thtrs, the right of the husband or wife to one-half of the conjugal assets does not vest until the dissolution and liquidation ofthe conjugal pannership, otafier dissolution of the marriage, when it is finally detennined that, after settlemcnt of conjugal obli:jations, there are net assets left which can be divided between the spouses ()r thqir respcctivc hciri.
nsa 169

,1

Thcrefore, even on the supposition that llonilacio only sold his portion conjugal partnership, the sale is stitl theorctical'ty void, ior. as previously slrted, the right of the husband or the wifc to .rnc-half of thc conjugal assets docs not vcst until rhe liquidarion olthe conjugal por4ncrship.
<.,1'the

Ncvcrthcless, this Court is mindful oi' th fact that th Tarrosas paid a valuable consideration in thc amour ofPl9,000.(10 for thc property in question. Thus, as a matter of faimess and equity, the shsre of Bonit'Bcio afier thc liquidation of the partnership should bC liabfe to reimburse th.c amount paid by the Tarrosas. 1,. is well-setlled principle that no person shoutd unjusly enrich himself at lhe expense ofanother.
.

't ypcs of Qunsi-(lonrracts

Nom inate

't.

lnnominatc
Nonr inate Quasi-Contracts

rn.
l.

Itinds:

Negotiorum Cestio Solutio Indebiti

tlcrinitirrn of Ncgoaiorunl (;csti., Ncg()tiorum Ceistio refers to the juridical relation rvhiclr arises rvlren a pcrsol) voluntarily takss charge of tlre agency or management of the business or property of another, without arry pQwer fiom the laner, as a consequence of which he is obliged to continuc the sarne until the lermination of the affair and its incidents, or to.require the person conccrned to substituti: hinr, if the o\vner is in a position to do so. (Article 2144, Civil Code)

Ii-

<:. l. 2. f. 4. 5.
D.

Requisit$
'l-hcre is no.meeting of the minils between the gestor :rnd lhe orvner of tlre business or propeny. -l lre gestor voluntarily assumed the agency or management ofthe business or property of another. T!:c business or propeny must have been neglccted or abatrdoned try the owrrer. 'fhe owner did nol aulhorize, either expressly or impliedly, thc agcncy or nranagemenl of his business 'or propcfiy. The gestor assumed the agency or nlanagenlsnt ofthe business or properry in good faith.

Distinctions Between Negotiorunr Ccstio and Implietl ..tgency Neqotiorum Ccstio Imnlierl .{gencv

'l'he officious manager

should never have bcen authorized in any manncr 1.o assumc lh agency or management of thc busincss or property of anothcr.

l.

The irnplied agent has

been

authorized to assumc the agency by vinue of the acls of the owner or'by virtuc of his silence or inuctlon or hrs fallurc t.i rpudlato

lhc lgenci. knowing thol the inrplied agerrt is octing on lris

behalf wirhout any authority.

170

i
1

+[

'l'hc brrsincss

pr<)f,crty st!bicct (,1' volurrtary rnanagcment should eitlrcr have been ncglected or ubandoned.
[rusiness or property does nol krruw that arclher pcrson is acting on lris

()r

It is not rrcccssary for thc business or Propcrly to t)c llc'Sluctcd or

abandoned:

l.

1;() long

as the owner of

the

).

From ihe very moment the owner

juridical

behalf without authority, thc rclat ion of negotiorum

gestio Rxists-

ot' thc busincss or ProP-e-rty becomes aware that another Derson is acting on his behalf

ivithout his airthority and he still does not repudiate the aots of that person. negotorium gestio ceases io cxist and the juridical rclrtionslrip lrcsotrtcs ()tlr': 9l: implied agency.

ir. L :i. i
4.

tnslances whcrc tbe officious mEnrger onder,lrticle 214? (,f the Civil Code:

as

linbtc evcn in crses of fortuitous vcnts

manager undertakes risky operations rvbich the owner was not ilecrist([ncd to cmbark tlP(rn: lf tlre ol'ficious manager has prel'erred his own interest to that of rhe ownerl lf thc r:flicious managcr l-ails tr return the propsrty or business a1cr dcmand by the

lf the officious

tlwnc r; antl

il tlrc olficious rlanager assulrred the

taith

management

of the business or property in

bad

IixcsPt w'lrcrr tllc lnfllrrlgclnclrl wirs . ttssumcd l() suvo thc prolt)ny or trttsincss lrom irnnrirrent danger, the gestor sha-ll be liable tbr ibrtuitous evcnts if a) he is monit-cstly unlit to carry on rhe m-anagemint or b) by his intervention, he prevented a more competent person fiom . ta k ing; up the nlanagcmcnt.

l\', .\.

Solut io

In

tlc

tl

iti

i)cfirr ition of Solutio lndcbiti

\t,lrr(i(r lrrrlcbiti rcl'crs l() thc .irrrirlic l rcl tiorr rvlriclr ariscs rvlrcncvcr a l,crslrtr ttnduly ilclivr:r:i it thirrg tr1' trrist.rkc to ltrr()thcr wll(t tras no right l(, delllalrd it' (Arliclc i! l5J ' Ci ''il eoclc)
ltt.
?,

It(.rtlrisilcs '['llere rnust be payment or delivery made by onc person to another and the l'rttcr received lllc pirymcnt or <Jelivcry. 'l'hc plrson to whom tlie payntent or delivcry w.rs ctlbcted hud no right tr'r dcnran-d it' -l he payment or delivery was e t-fccted by reason of a mistake eithcr of fact or of law' 't itan-lkctlu Construction & l)cveltlt, rnent Cr)rnoration

firsl entered into a contract lbr a piece oi work when they exccuted the supplemental agreement. Petitioner as contrdctor bound itself to e};.ccute the proje;t for t spo-nd.t t, the owner/devetopcr, in consideration of a price certain (pt:O,OOO.OIi). The supplemental agreement was reciprocal .in nature because the obligation of res-Ptndent to'pay the entire contract price
'l he Parties

l7l

<Jc1>urrctod

vur:tt).

()n thc ol)ligilti(xr ol' Pctitiotrer to colDplctc thc pro.ical (atrd vrcc

Thereafrer, th parties erttered into a second contract. Ttrey agrecd to cxtinguish thc supplcmental agrecmcnt as evidenced by tha October 12, t995 letter-agreemcnt which was duly acknowledged 'by their respecrive
[cpresentatives.
Bccause. th parties agreed to extinguish thc supPlemental agreernent' they werc no longii required to t'ully Pertbnn their respective obligations. Petitioner was rclieved of iis obligation to comPlete the pro.iect rvhile rcspon(lcnt was frccd of its otrligarion lo Pay tlrs cntirc contracl Pric':. I lo*cvcr' respondent, by executihg thc June 30,' 1994 deed of absolute sale, vr'as deemed ro have paid pl 12,416,716.88. Nevcrtlreless, because Petitioner applied part of what it received to rcspondent's oulstandini liabilities, it admitled overpayrnent.

Because ptitioner acknowledged lhat it llad been overpaid, it was obliged to retum the cxcess to respondent. Embo<lying tha Principle of. -tolutict itt lL: lt iri..^rriclc 2154 of lhc C-'ivil Code providcs:

il and il

"Arii;lq 2154. ll'sotncthing

is roceivod whcr lhcro is l!.) riBlll to dr:trrruxl was unduly dclivere<l through tnistakq ths obligstioo lo rcturtr it

lr(-rr tlrc extra-contracil,xrl obligation ol' st>lulttt in.lcb,ti lo .Irisc, tlrc fbllowing requisites musi be proven:

L 2.

efa riglrt to collccl tho exccss surrrs iutd ths payment was nrade by mistnke.
the absence

with regard tb the first requisile, because the supplemental sgreemenl had been extinguishd by the nrutual agreement of tlre panies, Pet:tioner becalng entitlcd only to lhc cosa of scrwices it actually rendercd (i.e., thst fruction of the pr({eot co:,t in profrortion to the percentage of its actual occomplishllrent in the Jrro.iect). lt was nol entitled to lhe sxccss (or extent ofoverPaymenl). . il
On the second requisite, Anicle 2163 of the Civil Code providr:s:

"nrticlo 2163. lt is jrrcsumed ihot ahcrc was rt nrilttrkc itr th.' Piymcnf somerhtng whlch hed ncvcr bcn duc or had Eln:ady bcc paid wlr delivercdi but, hc liom.whorn the return is clairned lrlay pruvc that lho delivcry rvas rrrado out ofliberality or tbr ary otlrer-iusl cause." (c.tnphssis sltpplicd)

ln this instance, rcspondent paid pan of the oontract prioe undcr the iissur.rption thal pctitioncr rvould conrplete the pr({ccl rvilhin tltc stipulalr'(l perioC. I-lowever, atler the supplemental agrement was extillguished, petitioner ceased vjorking on the project. Therefore, the compensation petitioner received in cxcess of lhe cost of its actual accomplishnrent as of October 12, 1995 was nevcr due. The condominiunr units and parking slots corresponding lo the said sxccss were mistakenly delivered by respondent and were thi:reforc not due to petitioner.
Stated simpty, respondunl crroneously delivcred exccss uttils to .pelitioner and the l6tter, pursuant to Article 2154, rvas obliged to rcturn them to
rosponden I.

Bank ofthe Philipnine Islands - vs. Sarmiento

,

laal ,scm

zer)

Peiitioner insists thot its paymcnt of respondent;s salary rras by misiake ', since respondent who chose not to rcport foi work was not entitted tg it. rinder the principlc of "no work, no pa.y," thus he has the obligation to return the same.: :r. Petiiionei based such contenti6n on tire prinoipte if soluiio inbgb t uiQsl .''l Article 2154 of the Civil Code. ,,. . . . There is solutio indebiti where: (1) payment is made whbn there exists no binding relation between the payor, who has no dut! to pay, and the person who received the payment; and (2) the payment is made through mistake, and not through .liberality or some other causb. x x x Tho quasi-conlraat of sblulio . in<lebili is based on lhe ancient principle that no one shall enrich himself unjustly at the expense of anotlrer. Both elcmcnts are lacking in the present base. Mr. Cascarro, thelffeaa of Branches Division :nvestigation Unit, had categorically staied that respondent was only terminated fiom service on Aulust 26, 1988. Respondent was not stispended from oflice- Consequdntly, during the.period in qr.leition, there still existed an employer-employbe relationship betwen pctitioncr and respondent which entitled respondent to thc payment of hci salary during the said period. Thus, therc can be no mistaken paymcn! in this case.' Mcireover, it hds treen shown that the poyment of rcsporident's salari, was with thi knowledge' and approval of rcspondent's immediate superior otlicers. Hence, the principle; of solutio indebiti finds no application in this case;

the

..

i'.
Uniwide, as the owner who did pay the coniiactor for suchiadditional works even if they hhd not been authoriied in rvriting hss to esiabliih its.own right to reirnbuisemenl not under Art. 1724, btrt under a different prdvisioD of l.rw. (rniwide's burden of eslahlishing its legol right to reimbrirsenrent,becomes cvull llr(r'c errrcirrl itl tlx.: ligltl rll tlrc gcrtcrrrl Prcstr rllir,rr corrllirrcrl irt Sce:liorr 3( I), I{ule l3 I ot the Rules of Coun that "nlodey paid by one to snother was due to the latter."
^

,l

Uniwide undertakcs suoh a task belbrc this Court, citing thc provisions solurio indebiti ,.jnder Ans. 2154 and 2156 of the Civil Code. Howevir, it is not enough to prove that the payments made by Uniwide to Titan wcre "not due" because there was no prior authorization or agreement with respect to additional wcirks. There .is a further rcquirement that the payrnent by lhe debtor was made either through mistake oi.under s cloud of doubt..In shoi, for tire prorisiois bn sotutto indebiti to appty, therc has to be cvidgnca establfuhing the frame of mind of the payor at the time thc payment as madt. \ Note: When the peyment wss not by mistakc but was madc by virtuc of th coorciye groccss of thc uzrit of execution, solurto indebiri does not apply. [fu{anlla Surety and Fldelity Co,, Inc. v.. Lim, GR I--9343, December 29, t9.59 as cited in the Prc-Week. Hondbook in Civil Lorv by Edgardo L. Paras (Fifth Edition, 2007)l i '
ot7

'

,,

.."|t:

,'i

t.

;
i

173

,tof'' o[ rn()nrhs llcr, A parlially paid B in the anlounl of p100,000.00 follorved by another payrlcnt P8o,cl0o.o0. A loter on tealizcd thol he overpaid B by P30,00O.00. a dirianiled i"i; p rtE rcrurn ol'P30,000.00 but B contends.rhar the P30,00O.0O represents lhe inlcrcst chaigei..on !h4..
.

. .',.. ::,, : t.' 'fhc .rhiffi.iil ()[)t$incd agrecd'6n'tffir,. never loan rn the onrount of Fl5O,0Oo.oo. n u liorn lJ Panies . "+ l: ,,' ratc ol'intcrcst to be paid on the said loan and thot the ssme rvas not rcduced in wrifinS. A few. "+,1
.

l\'l (

lO Sullrrrlc I'ro]rlcnr

'

l.:;
v,

. .:i..

'*tlr.

a. b. c. .:. d.

li .,

.r.;:, .,:,.:

Yes, because wlrat A and B t'ailed to stipulate on is the rate of interest to bc paid on],,. ' the loan but not the non-paytnent of interest rvhich can be implied from A's excess. '. final paymenl to B. Ycs, because thc ovcrpayrrrcnt is due to A's neglig'ence and the.latrer'is nowl csloppcd to clairrr its rcturn. .. No, bocousu payment of intcrcst cainot be implied and must be-exprcssly'agreed r ' upon by thc parlics. i ].io, bciausc'U is obliged to rcturn lhe undue interest errdneously paid by A to hin!. : under the principlc ofs()lutio indebiti. i: .
.

}!-Utg!::

Siga-air vs. Villarrueva (576 SCRA

696)

I'hiliDrtinc (; colhcrnr't l. lnc. vs. (:(lmmissioner of I nlernal Rcvcnue (46s SCRA 3O8)
1!.

LJnder the principle of,st utkt in<!qbiii, the govemmena ha! tp restofe to petitioncr the sums representing, erroneius payments 9i' tal9i. lt is of: no mor'ncnt whethcr the National Power' Corporation (NPC) 'had already rcimbursed pctitioner or not bccause in this case,. there should. hdve, been.no Value Added Tax (VAT) paid at all. i

1:

: ']
rl.

of Paymcnts ancl Otficial Receipts issued by d.supplier is n(rt a reliable hasis.lbr determining thc VAT payments of said supplier. The (.'()rrrt ol' 'l'a\ nppcals (CTA) grossly nr isapprecirited -thc cvidenee" and crrr.rncously conclrrclcd in this casc that Nt C.paid the V T. The CTA shoqld Irarc rclicd on tlrc VA I' llctrrrrrs lilctl t,y thc tuxpaycr lo detcmlinc lhe ocluol irrrounl rcrnillr:rl l0 tlrc llrrrc rr (|l' lntcrnal Rcvcnuc f(rr thc purpose ol asccrtaining thc rel'und duc. l'hc p(cscnlatiorr of thc VAT Retums is'corisidered strl'l'icicnt to rscerloin thp aniount ol'thc rcl'und. '[hus, upon tinding that the strltplv ol'slcoJrr t(! Nl,C is cxcrnpt l'ronr VAT, thc C'fA should htve ordered tcslrrlttfcnl l() rci,ribursc pctiti()r)cr thc lull amounl ol' P39,328,775.41 as. crroncouslv paid VA'f.
Stn

"I'hc Sumrndry

tgl,r n(l lnvcstmcnt (lornorrition vs. (:omntissiollcr of lnlcrnsrl. llcvcnue (s42 SCRA ! t !t)

Irr ortlcr t(t sh(rw thlt it \\1)uld h vc bcen inrpossiblc lbr lxtirionei ro ulrlr./.c lhc csccss crcdit in taxahlc ycar 1999, it atruchcd iis tCaC and 2OOO irrrnrral rnconlc tox rclurns in its trrolion lbr rcconsidcr4tion lilcd with the Coun (rl' li.r\ n nt^*'al$. 'l hcsc shorv thlrt pctitioncr incurrecl. lbsses in 1999 in the ilrrdunr ()l'P-l-'i,C1(l.O3lt.rr. Clcarly, petitioncr has no tax liability in 1999 to r,vlrieh thc l()97 cxccsi tax crctlits could bc upplicd or utilized. This Courl.has Itcl!l llltlt il ir l!\pitvgr sLrl'l'crcd a ncl l()ss itr a subsequcnt ycar, incurring no tax lrrrlrilitr to rrlriclr a prcviotrs ycur's lirx crcdit coulci he applieci, there is.no
r74

reason for the Bureau of Intcrnal Revcnuc (BlR) to withhold thb.tax'.refunA which rightfully belongs to the taxpayer.

li

Substantial jusrice, aquity and llair play are on the side.of petitioher. 'fechnicalities and legalisms, however exaltcd, shouid not be misuscd by rhe government to keep money not belonging ro it, thereby, cniiching itielfat rht expcnse of irs law-abiding citizens. Under the principlc of $;lirio in<lcbiti provided in Arl. 2 154, Civil Code, the BtIl. received someihing l..when the_r'i [rvas] no right to demand it," and rhus, it has the obligarion to rerurn ir. Heavilyl nrilitating against respondent Commissioner is the ancient principle that no one, not even the state, shall cnrich oncselfat thr: cxpensc.of agother. lndicd, simplc justice requires the specdy rel'trnd of the tvrongly.held taxei ..

Note: Payment by a joint co-debtor for rhc bcnefit soluto in.lebiti but a payment by a pcrson inteiesied Anicle I 236. I Mo e ..lc l.riadod v. llodrigo, 63 I'lti!. Cir,,il Law by Edgardo L. Paras (Fifih Edirion, 2007)j
t

nnom inste Qussi-Conrracis Governe<t bv A

rticics

2l-64

io 2l7s .l ii

ttre Civii. Cor.tc -

t.
2.

4.
5.

uppon given by s strdntscr (n rricl'.: 2 I 64 ) : Funeral expenses bome by a rhird pcrson (Aniclc 2 I65). Suppon given by a third pcrson ro an orphan, insane or indigent rvhose suppon rvas ,.. unjustly refused by the pcrson obliged to do so (Ahictc ?.166)Payment for rnedical services rcnclerqd to a pcrson injured ol seriously ill rvlio was. or , treated rvhile he was not in a condition io .r i give e\Irrslrr 'ii 'r ru.Ervs , consent (Aniclc 2lr u 2167) tAr..li,rs _rur, I Orvner's obligation lo pay just compensation to a. third person ,who saved'|ris property liom destruct-ion *;ttroui tris knowltdge during a. fire,' hood, storm or other. ;ararnirv (n rticle 2 168) '
S

.--

6.

8. 9.
10.

l.

12.

necessary rvork and such person fails to cornply with hcjtth or" safoty regulations conceming property (Arricle 2 169). Commingling or confusion of movobles sepsrately p,enaih'iilg tti two or more p.:rsons,' through accident or fonuitous evint (Article 2l 7O). . ' ', Rights and obligatibns of the fiirder ol lost personol property are\governed by Arlicles 7'19 and 72O (Article 2 I 7l ). Right ofa possessor ih goo<t faith to reirlrbursement for,necessary ond useful exp'enses is govemed by Anicle 546 (Anicle 2172). .\ Payment ofa debt by a rhird person wirhout rhe kndwledge ofthe debtor (Arriile 2173) .. Liability ofa person to pay his share in the expensii foithe implcmentation ofine.sures for protection against lawlessness, fire, Ilood; storm or. othcr caiamity who.objccts to the plan br.rt has benefited rhercfrom (Ataicle 2174\ Reimbursenrent of a pcrson who was constrained to pay the taxes of anothgr (Anicle

2t75)