G.R. No.
143304 July 8, 2004 Immediately, petitioner ordered respondents to render an
SPECIAL STEEL PRODUCTS, INC., petitioner,
vs.
LUTGARDO VILLAREAL AND FREDERICK
SO, respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
May an employer withhold its employees wages and benefits
as lien to protect its interest as a surety in the latters car loan
and for expenses incurred in a training abroad? This is the
basic issue for our resolution in the instant case.
At bar is a petition for review on certiorari under Rule 45 of the
1997 Rules of Civil Procedure, as amended, assailing the
Decision1 dated October 29, 1999 and Resolution 2 dated May
8, 2000 of the Court of Appeals in CA-G.R. SP No. 50957,
entitled "Special Steel Products, Inc. vs. National Labor
Relations Commission, Lutgardo Villareal and Frederick So."
The factual antecedents as borne by the records are:
Special Steel Products, Inc., petitioner, is a domestic
corporation engaged in the principal business of importation,
sale, and marketing of BOHLER steel products. Lutgardo C.
Villareal and Frederick G. So, respondents, worked for
petitioner as assistant sales manager and salesman,
respectively.
Sometime in May 1993, respondent Villareal obtained a car
loan from the Bank of Commerce, with petitioner as surety, as
shown by a "continuing suretyship agreement" and "promissory
note" wherein they jointly and severally agreed to pay the
bank P786,611.60 in 72 monthly installments. On January 15,
1997, respondent Villareal resigned and thereafter joined Hi-
Grade Industrial and Technical Products, Inc. as executive
vice-president.
Sometime in August 1994, petitioner "sponsored" respondent
Frederick So to attend a training course in Kapfenberg, Austria
conducted by BOHLER, petitioners principal company. This
training was a reward for respondent Sos outstanding sales
performance. When respondent returned nine months
thereafter, petitioner directed him to sign a memorandum
providing that BOHLER requires trainees from Kapfenberg to
continue working with petitioner for a period of three (3) years
after the training. Otherwise, each trainee shall refund to
BOHLER $6,000.00 (US dollars) by way of set-off or
compensation. On January 16, 1997 or 2 years and 4 months
after attending the training, respondent resigned from
petitioner.
accounting of its various Christmas giveaways 3 they received.
These were intended for distribution to petitioners customers.
In protest, respondents demanded from petitioner payment of
their separation benefits, commissions, vacation and sick leave
benefits, and proportionate 13th month pay. But petitioner
refused and instead, withheld their 13thmonth pay and other
benefits.
On April 16, 1997, respondents filed with the Labor Arbiter a
complaint for payment of their monetary benefits against
petitioner and its president, Augusto Pardo, docketed as NLRC
NCR Case No. 04-02820-97.
In due course, the Labor Arbiter rendered a Decision dated
February 18, 1998, the dispositive portion of which reads:
"WHEREFORE, decision is hereby rendered ordering
the respondents, Special Steel Products, Inc. and Mr.
Augusto Pardo to pay, jointly and severally,
complainants Frederick G. So and Lutgardo C.
Villareal the amounts of Seventy One Thousand Two
Hundred Seventy Nine Pesos and Fifty Eight
Centavos (P71,279.58) and One Hundred Sixty Four
Thousand Eight Hundred Seventy Three Pesos
(P164,873.00), respectively, representing their
commissions, retirement benefit (for Villareal),
proportionate 13th month, earned vacation and sick
leave benefits, and attorneys fees.
xxx
SO ORDERED."
On appeal, the National Labor Relations Commission (NLRC),
in a Decision dated June 29, 1998, affirmed with modification
the Arbiters Decision in the sense that Pardo, petitioners
president, was exempted from any liability.
On September 11, 1998, petitioner filed a motion for
reconsideration but was denied.
Hence, petitioner filed with the Court of Appeals a petition for
certiorari.
On October 29, 1999, the Court of Appeals rendered a
Decision dismissing the petition and affirming the assailed
NLRC Decision, thus:
"At the outset, the Court notes that despite its
Seventh Assignment of Error, petitioner does not
question the NLRCs decision affirming the labor
arbiters award to private respondents of
commissions, proportionate 13th month pay, earned
vacation and sick leave benefits and retirement
benefit (for Villareal). It merely asserts that it was
withholding private respondents claims by reason of
their pending obligations.
Petitioner justifies its withholding of Villareals
monetary benefits as a lien for the protection of its
right as surety in the car loan. It asserts that it would
1
release Villareals monetary benefits if he would
cause its substitution as surety by Hi-Grade. It further
asserts that since Villareals debt to the Bank is now
due and demandable, it may, pursuant to Art. 2071 of
the New Civil Code, demand a security that shall
protect him from any proceeding by the creditor and
from the danger of insolvency of the debtor.
Petitioners posture is not sanctioned by law. It may
only protect its right as surety by instituting an action
x x x to demand a security (Kuenzle and Streiff vs.
Tan Sunco, 16 Phil 670). It may not take the law into
its own hands. Indeed, it is unlawful for any person,
directly or indirectly, to withhold any amount from the
wages of a worker or induce him to give up any part
of his wages by force, stealth, intimidation, threat or
by any other means whatsoever without the workers
consent (Art. 116, Labor Code).
Moreover, petitioner has made no payment on the car
loan. Consequently, Villareal is not indebted to
petitioner. On the other hand, petitioner owes Villareal
for the decreed monetary benefits. The withholding of
Villareals monetary benefits had effectively prevented
him from settling his arrearages with the Bank.
With regard to Sos money claims. We find no cogent
reason to disturb the findings of the NLRC. x x x.
Sos all-expense paid trip to Austria was a bonus for
his outstanding sales performance. Before his sojourn
to Austria, petitioner issued him a memorandum (or
memo) stating that Bohler is now imposing that
trainees coming to Kapfenberg to stay with the local
representative for at least three (3) years after
training, otherwise, a lump sum compensation of not
less than US $6,000.00 will have to be refunded to
them by the trainee. So did not affix his signature on
the memo. However, nine (9) months after coming
back from his training, he was made to sign the
memo. In his letter to Augusto Pardo dated July 18,
1997, So stated that his signature was needed only
as a formality and that he was left with no choice but
to accommodate Augusto Pardos request. The labor
arbiter gave credence to such explanation.
Assuming arguendo that the memo is binding on So,
his more than two years post-training stay with
petitioner is a substantial compliance with the
condition. Besides, So tendered his resignation
effective February 16, 1997. Instead of asking So to
defer his resignation until the expiration of the three-
year period, petitioner advanced its effectivity by one
month - as of January 16, 1997. This means that
petitioner no longer needed Sos services, particularly
the skill and expertise acquired by him from the
training. More importantly, the party entitled to claim
the US $6,000.00 liquidated damages is BOHLER
and not petitioner. Consequently, petitioner has no
right to insist on payment of the liquidated damages,
much less to withhold Sos monetary benefits in order
to exact payment thereof.
With regard to the Christmas giveaways. We agree
with the findings of the labor arbiter (affirmed by the
NLRC) that there is no existing memorandum
requiring the accounting of such giveaways and that
no actual accounting has ever been required before,
as in the case of then Sales Manager Benito Sayo
whose resignation took effect on December 31, 1996
but was not required to account for the Christmas
giveaways. To make So account now for said items
would amount to discrimination. In any event, the
matter of accounting of the giveaways may be
ventilated in the proper forum.
Finally, petitioner may not offset its claims against
private respondents monetary benefits. With
respect to its being the surety of Villareal, two
requisites of compensation are lacking, to wit: that
each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other and that (the two debts) be liquidated and
demandable (Art. 1279 (1) and (4), New Civil Code).
And in respect to its claim for liquidated damages
against So, there can be no compensation because
his creditor is not petitioner but BOHLER (Art. 1278,
New Civil Code).
Consequently, the NLRC committed no grave abuse
of discretion.
WHEREFORE, the petition is DISMISSED while the
assailed decision of the NLRC is AFFIRMED.
SO ORDERED."
On December 15, 1999, petitioner filed a motion for
reconsideration but was denied by the Appellate Court in a
Resolution dated May 8, 2000.
Hence, this petition for review on certiorari. Petitioner contends
that as a guarantor, it could legally withhold respondent
Villareals monetary benefits as a preliminary remedy pursuant
to Article 2071 of the Civil Code, as amended. 4 As to
respondent So, petitioner, citing Article 113 of the Labor Code,
as amended,5 in relation to Article 1706 of the Civil Code, as
amended,6 maintains that it could withhold his monetary
benefits being authorized by the memorandum he signed.
Article 116 of the Labor Code, as amended, provides:
"ART. 116. Withholding of wages and kickbacks
prohibited. It shall be unlawful for any person,
directly or indirectly, to withhold any amount from
the wages (and benefits) of a worker or induce him
to give up any part of his wages by force, stealth,
intimidation, threat or by any other means
whatsoever without the workers consent."
The above provision is clear and needs no further elucidation.
Indeed, petitioner has no legal authority to withhold
respondents 13th month pay and other benefits. What an
employee has worked for, his employer must pay.7Thus, an
employer cannot simply refuse to pay the wages or benefits of
its employee because he has either defaulted in paying a loan
guaranteed by his employer; or violated their memorandum of
agreement; or failed to render an accounting of his employers
property.8
Nonetheless, petitioner, relying on Article 2071 (earlier cited),
contends that the right to demand security and obtain release
from the guaranty it executed in favor of respondent Villareal
2
may be exercised even without initiating a separate and
distinct action.
There is no guaranty involved herein and, therefore, the
provision of Article 2071 does not apply.
A guaranty is distinguished from a surety in that a guarantor is
the insurer of the solvency of the debtor and thus binds himself
to pay if the principal is unable to pay, while a surety is the
insurer of the debt, and he obligates himself to pay if the
principal does not pay.9
Based on the above distinction, it appears that the contract
executed by petitioner and respondent Villareal (in favor of the
Bank of Commerce) is a contract of surety. In fact, it is
denominated as a "continuing suretyship agreement." Hence,
petitioner could not just unilaterally withhold respondents
wages or benefits as a preliminary remedy under Article 2071.
It must file an action against respondent Villareal. Thus, the
Appellate Court aptly ruled that petitioner "may only protect its
right as surety by instituting an action to demand a security."
As to respondent So, petitioner maintains that there can be a
set-off or legal compensation between them. Consequently, it
can withhold his 13th month pay and other benefits.
For legal compensation to take place, the requirements set
forth in Articles 1278 and 1279 of the Civil Code, quoted below,
must be present.
"ARTICLE 1278. Compensation shall take place when
two persons, in their own right, are creditors and
debtors of each other.
"ARTICLE 1279. In order that compensation may be
proper, it is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of
the other;
(2) That both debts consist in a sum of money, or if
the things due are consumable, they be of the same
kind, and also of the same quality if the latter has
been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor."
In the present case, set-off or legal compensation cannot take
place between petitioner and respondent So because they are
not mutually creditor and debtor of each other.
A careful reading of the Memorandum10 dated August 22, 1994
reveals that the "lump sum compensation of not less than US
$6,000.00 will have to be refunded" by each trainee to
BOHLER, not to petitioner.
In fine, we rule that petitioner has no legal right to withhold
respondents 13th month pay and other benefits to recompense
for whatever amount it paid as security for respondent
Villareals car loan; and for the expenses incurred by
respondent So in his training abroad.
WHEREFORE, the petition is DENIED. The Decision dated
October 29, 1999 and Resolution dated May 8, 2000 of the
Court of Appeals in CA-G.R. SP No. 50957 are hereby
AFFIRMED.
SO ORDERED.
G.R. No. 147561 June 22, 2006
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,
vs.
REPUBLIC-ASAHI GLASS CORPORATION, Respondent.
DECISION
PANGANIBAN, CJ:
Asurety companys liability under the performance bond it
issues is solidary. The death of the principal obligor does not,
as a rule, extinguish the obligation and the solidary nature of
that liability.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules
of Court, seeking to reverse the March 13, 2001 Decision2 of
the Court of Appeals (CA) in CA-GR CV No. 41630. The
assailed Decision disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by
the lower court is REVERSED and SET ASIDE. Let the records
of the instant case be REMANDED to the lower court for the
reception of evidence of all parties."3
The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass
Corporation (Republic-Asahi) entered into a contract with x x x
Jose D. Santos, Jr., the proprietor of JDS Construction (JDS),
for the construction of roadways and a drainage system in
Republic-Asahis compound in Barrio Pinagbuhatan, Pasig
City, where [respondent] was to pay x x x JDS five million three
hundred thousand pesos (P5,300,000.00) inclusive of value
added tax for said construction, which was supposed to be
completed within a period of two hundred forty (240) days
beginning May 8, 1989. In order to guarantee the faithful and
satisfactory performance of its undertakings x x x JDS, shall
post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and
severally with [petitioner] Stronghold Insurance Co., Inc. (SICI)
Performance Bond No. SICI-25849/g(13)9769.
3
"On May 23, 1989, [respondent] paid to x x x JDS seven
hundred ninety five thousand pesos (P795,000.00) by way of
downpayment.
"Two progress billings dated August 14, 1989 and September
15, 1989, for the total amount of two hundred seventy four
thousand six hundred twenty one pesos and one centavo
(P274,621.01) were submitted by x x x JDS to [respondent],
which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work
supposed to be undertaken by x x x JDS under the terms of
the contract.
"Several times prior to November of 1989, [respondents]
engineers called the attention of x x x JDS to the alleged
alarmingly slow pace of the construction, which resulted in the
fear that the construction will not be finished within the
stipulated 240-day period. However, said reminders went
unheeded by x x x JDS.
"On November 24, 1989, dissatisfied with the progress of the
work undertaken by x x x JDS, [respondent] Republic-Asahi
extrajudicially rescinded the contract pursuant to Article XIII of
said contract, and wrote a letter to x x x JDS informing the
latter of such rescission. Such rescission, according to Article
XV of the contract shall not be construed as a waiver of
[respondents] right to recover damages from x x x JDS and
the latters sureties.
"[Respondent] alleged that, as a result of x x x JDSs failure to
comply with the provisions of the contract, which resulted in the
said contracts rescission, it had to hire another contractor to
finish the project, for which it incurred an additional expense of
three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner]
SICI filing its claim under the bond for not less
than P795,000.00. On March 22, 1991, [respondent] again
sent another letter reiterating its demand for payment under
the aforementioned bond. Both letters allegedly went
unheeded.
"[Respondent] then filed [a] complaint against x x x JDS and
SICI. It sought from x x x JDS payment of P3,256,874.00
representing the additional expenses incurred by [respondent]
for the completion of the project using another contractor, and
from x x x JDS and SICI, jointly and severally, payment
of P750,000.00 as damages in accordance with the
performance bond; exemplary damages in the amount
of P100,000.00 and attorneys fees in the amount of at
least P100,000.00.
"According to the Sheriffs Return dated June 14, 1991,
submitted to the lower court by Deputy Sheriff Rene R.
Salvador, summons were duly served on defendant-appellee
SICI. However, x x x Jose D. Santos, Jr. died the previous year
(1990), and x x x JDS Construction was no longer at its
address at 2nd Floor, Room 208-A, San Buena Bldg. Cor.
Pioneer St., Pasig, Metro Manila, and its whereabouts were
unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging
that the [respondents] money claims against [petitioner and
JDS] have been extinguished by the death of Jose D. Santos,
Jr. Even if this were not the case, [petitioner] SICI had been
released from its liability under the performance bond because
there was no liquidation, with the active participation and/or
involvement, pursuant to procedural due process, of herein
surety and contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and
SICI under the performance bond. At this point in time, said
liquidation was impossible because of the death of Santos,
who as such can no longer participate in any liquidation. The
unilateral liquidation on the party (sic) of [respondent] of the
work accomplishments did not bind SICI for being violative of
procedural due process. The claim of [respondent] for the
forfeiture of the performance bond in the amount
of P795,000.00 had no factual and legal basis, as payment of
said bond was conditioned on the payment of damages which
[respondent] may sustain in the event x x x JDS failed to
complete the contracted works. [Respondent] can no longer
prove its claim for damages in view of the death of Santos.
SICI was not informed by [respondent] of the death of Santos.
SICI was not informed by [respondent] of the unilateral
rescission of its contract with JDS, thus SICI was deprived of
its right to protect its interests as surety under the performance
bond, and therefore it was released from all liability. SICI was
likewise denied due process when it was not notified of
plaintiff-appellants process of determining and fixing the
amount to be spent in the completion of the unfinished project.
The procedure contained in Article XV of the contract is against
public policy in that it denies SICI the right to procedural due
process. Finally, SICI alleged that [respondent] deviated from
the terms and conditions of the contract without the written
consent of SICI, thus the latter was released from all liability.
SICI also prayed for the award of P59,750.00 as attorneys
fees, and P5,000.00 as litigation expenses.
"On August 16, 1991, the lower court issued an order
dismissing the complaint of [respondent] against x x x JDS and
SICI, on the ground that the claim against JDS did not survive
the death of its sole proprietor, Jose D. Santos, Jr. The
dispositive portion of the [O]rder reads as follows:
ACCORDINGLY, the complaint against the defendants Jose D.
Santos, Jr., doing business under trade and style, JDS
Construction and Stronghold Insurance Company, Inc. is
ordered DISMISSED.
SO ORDERED.
"On September 4, 1991, [respondent] filed a Motion for
Reconsideration seeking reconsideration of the lower courts
August 16, 1991 order dismissing its complaint. [Petitioner]
SICI field its Comment and/or Opposition to the Motion for
Reconsideration. On October 15, 1991, the lower court issued
an Order, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Motion for
Reconsideration is hereby given due course. The Order dated
16 August 1991 for the dismissal of the case against
Stronghold Insurance Company, Inc., is reconsidered and
hereby reinstated (sic). However, the case against defendant
Jose D. Santos, Jr. (deceased) remains undisturbed.
4
Motion for Preliminary hearing and Manifestation with Motion
filed by [Stronghold] Insurance Company Inc., are set for
hearing on November 7, 1991 at 2:00 oclock in the afternoon.
SO ORDERED.
"On June 4, 1992, [petitioner] SICI filed its Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant
Jose D. Santos, Jr.) reiterating its prayer for the dismissal of
[respondents] complaint.
"On January 28, 1993, the lower court issued the assailed
Order reconsidering its Order dated October 15, 1991, and
ordered the case, insofar as SICI is concerned, dismissed.
[Respondent] filed its motion for reconsideration which was
opposed by [petitioner] SICI. On April 16, 1993, the lower court
denied [respondents] motion for reconsideration. x x x."4
Ruling of the Court of Appeals
The CA ruled that SICIs obligation under the surety agreement
was not extinguished by the death of Jose D. Santos, Jr.
Consequently, Republic-Asahi could still go after SICI for the
bond.
The appellate court also found that the lower court had erred in
pronouncing that the performance of the Contract in question
had become impossible by respondents act of rescission. The
Contract was rescinded because of the dissatisfaction of
respondent with the slow pace of work and pursuant to Article
XIII of its Contract with JDS.
The CA ruled that "[p]erformance of the [C]ontract was
impossible, not because of [respondents] fault, but because of
the fault of JDS Construction and Jose D. Santos, Jr. for failure
on their part to make satisfactory progress on the project,
which amounted to non-performance of the same. x x x
[P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-
performance of said [C]ontract on the part of JDS
Construction."5
Hence, this Petition.6
Issue
Petitioner states the issue for the Courts consideration in the
following manner:
"Death is a defense of Santos heirs which Stronghold could
also adopt as its defense against obligees claim."7
More precisely, the issue is whether petitioners liability under
the performance bond was automatically extinguished by the
death of Santos, the principal.
The Courts Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Suretys Liability
Petitioner contends that the death of Santos, the bond
principal, extinguished his liability under the surety bond.
Consequently, it says, it is automatically released from any
liability under the bond.
As a general rule, the death of either the creditor or the debtor
does not extinguish the obligation.8 Obligations are
transmissible to the heirs, except when the transmission is
prevented by the law, the stipulations of the parties, or the
nature of the obligation.9 Only obligations that are personal10 or
are identified with the persons themselves are extinguished by
death.11
Section 5 of Rule 8612 of the Rules of Court expressly allows
the prosecution of money claims arising from a contract
against the estate of a deceased debtor. Evidently, those
claims are not actually extinguished.13 What is extinguished is
only the obligees action or suit filed before the court, which is
not then acting as a probate court.14
In the present case, whatever monetary liabilities or obligations
Santos had under his contracts with respondent were not
intransmissible by their nature, by stipulation, or by provision of
law. Hence, his death did not result in the extinguishment of
those obligations or liabilities, which merely passed on to his
estate.15 Death is not a defense that he or his estate can set up
to wipe out the obligations under the performance bond.
Consequently, petitioner as surety cannot use his death to
escape its monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it
executed a performance bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena
Building, contractor, of Shaw Blvd., Pasig, MM Philippines, as
principal and the STRONGHOLD INSURANCE COMPANY,
INC. a corporation duly organized and existing under and by
virtue of the laws of the Philippines with head office at Makati,
as Surety, are held and firmly bound unto the REPUBLIC
ASAHI GLASS CORPORATION and to any individual, firm,
partnership, corporation or association supplying the principal
with labor or materials in the penal sum of SEVEN HUNDRED
NINETY FIVE THOUSAND (P795,000.00), Philippine
Currency, for the payment of which sum, well and truly to be
made, we bind ourselves, our heirs, executors, administrators,
successors and assigns, jointly and severally, firmly by these
presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC
ASAHI GLASS CORPORATION represented by
_________________, to fully and faithfully. Comply with the
site preparation works road and drainage system of Philippine
Float Plant at Pinagbuhatan, Pasig, Metro Manila.
5
"WHEREAS, the liability of the Surety Company under this
bond shall in no case exceed the sum of PESOS SEVEN
HUNDRED NINETY FIVE THOUSAND (P795,000.00)
Philippine Currency, inclusive of interest, attorneys fee, and
other damages, and shall not be liable for any advances of the
obligee to the principal.
"WHEREAS, said contract requires the said principal to give a
good and sufficient bond in the above-stated sum to secure the
full and faithfull performance on its part of said contract, and
the satisfaction of obligations for materials used and labor
employed upon the work;
"NOW THEREFORE, if the principal shall perform well and
truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of said contract during the original
term of said contract and any extension thereof that may be
granted by the obligee, with notice to the surety and during the
life of any guaranty required under the contract, and shall also
perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of any and all
duly authorized modifications of said contract that may
hereinafter be made, without notice to the surety except when
such modifications increase the contract price; and such
principal contractor or his or its sub-contractors shall promptly
make payment to any individual, firm, partnership, corporation
or association supplying the principal of its sub-contractors with
labor and materials in the prosecution of the work provided for
in the said contract, then, this obligation shall be null and void;
otherwise it shall remain in full force and effect. Any extension
of the period of time which may be granted by the obligee to
the contractor shall be considered as given, and any
modifications of said contract shall be considered as
authorized, with the express consent of the Surety.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials for
the prosecution of the work hereinbefore stated, to institute
action on the penal bond, pursuant to the provision of Act No.
3688, is hereby acknowledge and confirmed."16
As a surety, petitioner is solidarily liable with Santos in
accordance with the Civil Code, which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor,
the provisions of Section 4,17 Chapter 3, Title I of this Book
shall be observed. In such case the contract is called a
suretyship."
xxxxxxxxx
"Art. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others,
so long as the debt has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of
Appeals18 stated thus:
"x x x. The suretys obligation is not an original and direct one
for the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally bound
with the principal. x x x."19
Under the law and jurisprudence, respondent may sue,
separately or together, the principal debtor and the petitioner
herein, in view of the solidary nature of their liability. The death
of the principal debtor will not work to convert, decrease or
nullify the substantive right of the solidary creditor. Evidently,
despite the death of the principal debtor, respondent may still
sue petitioner alone, in accordance with the solidary nature of
the latters liability under the performance bond.
WHEREFORE, the Petition is DENIED and the Decision of the
Court of Appeals AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 154183 August 7, 2003
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners,
vs.
SOLID BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG
LI, respondents.
BELLOSILLO, J.:
RESPONDENT SOLID BANK CORPORATION AGREED TO
EXTEND an "omnibus line" credit facility worth P10 million in
favor of respondent First Business Paper Corporation (FBPC).
The terms and conditions of the agreement as well as the
checklist of documents necessary to open the credit line were
stipulated in a "letter-advise" of the Bank dated 16 May 1993
addressed to FBPC and to its President, respondent Kenneth
Ng Li.1 The "letter-advise"2 was effective upon "compliance with
the documentary requirements."3
The documents essential for the credit facility and submitted
for this purpose were the (a) Board Resolution or excerpts of
the Board of Directors Meeting, duly ratified by a Notary Public,
authorizing the loan and security arrangement as well as
designating the officers to negotiate and sign for FBPC
specifically stating authority to mortgage, pledge and/or assign
the properties of the corporation; (b) agreement to purchase
Domestic Bills; and, (c) Continuing Guaranty for any and all
amounts signed by petitioner-spouses Luis Toh and Vicky Tan
Toh, and respondent-spouses Kenneth and Ma. Victoria Ng
Li.4 The spouses Luis Toh and Vicky Tan Toh were then
Chairman of the Board and Vice-President, respectively, of
FBPC, while respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li were President and General Manager,
respectively, of the same corporation.5
6
It is not disputed that the credit facility as well as its terms and
conditions was not cancelled or terminated, and that there was
no prior notice of such fact as required in the "letter-advise," if
any was done.
On 10 May 1993, more than thirty (30) days from date of the
"letter-advise," petitioner-spouses Luis Toh and Vicky Tan Toh
and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
signed the required Continuing Guaranty, which was embodied
in a public document prepared solely by respondent
Bank.6 The terms of the instrument defined the contract arising
therefrom as a surety agreement and provided for the solidary
liability of the signatories thereto for and in consideration of
"loans or advances" and "credit in any other manner to, or at
the request or for the account" of FBPC.
The Continuing Guaranty set forth no maximum limit on the
indebtedness that respondent FBPC may incur and for which
the sureties may be liable, stating that the credit facility "covers
any and all existing indebtedness of, and such other loans and
credit facilities which may hereafter be granted to FIRST
BUSINESS PAPER CORPORATION." The surety also
contained a de facto acceleration clause if "default be made in
the payment of any of the instruments, indebtedness, or other
obligation" guaranteed by petitioners and respondents. So as
to strengthen this security, the Continuing Guaranty waived
rights of the sureties against delay or absence of notice or
demand on the part of respondent Bank, and gave future
consent to the Bank's action to "extend or change the time
payment, and/or the manner, place or terms of payment,"
including renewal, of the credit facility or any part thereof in
such manner and upon such terms as the Bank may deem
proper without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent
upon any event or cause other than the written revocation
thereof with notice to the Bank that may be executed by the
sureties.
On 16 June 1993 respondent FBPC started to avail of the
credit facility and procure letters of credit. 7 On 17 November
1993 FBPC opened thirteen (13) letters of credit and obtained
loans totaling P15,227,510.00.8 As the letters of credit were
secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria
Ng Li and Redentor Padilla as signatories executed a series of
trust receipts over the goods allegedly purchased from the
proceeds of the loans.9
On 13 January 1994 respondent Bank received information
that respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li
had fraudulently departed from their conjugal home.10 On 14
January 1994 the Bank served a demand letter upon FBPC
and petitioner Luis Toh invoking the acceleration clause 11 in the
trust receipts of FBPC and claimed payment for
P10,539,758.68 as unpaid overdue accounts on the letters of
credit plus interests and penalties within twenty-four (24) hours
from receipt thereof.12 The Bank also invoked the Continuing
Guaranty executed by petitioner-spouses Luis Toh and Vicky
Tan Toh who were the only parties known to be within national
jurisdiction to answer as sureties for the credit facility of
FBPC.13
On 17 January 1994 respondent Bank filed a complaint for
sum of money with ex parte application for a writ of preliminary
attachment against FBPC, spouses Kenneth Ng Li and Ma.
Victoria Ng Li, and spouses Luis Toh and Vicky Tan Toh,
docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig
City.14 Alias summonses were served upon FBPC and spouses
Luis Toh and Vicky Tan Toh but not upon Kenneth Ng Li and
Ma. Victoria Ng Li who had apparently absconded.15
Meanwhile, with the implementation of the writ of preliminary
attachment resulting in the impounding of purported properties
of FBPC, the trial court was deluged with third-party claims
contesting the propriety of the attachment.16In the end, the
Bank relinquished possession of all the attached properties to
the third-party claimants except for two (2) insignificant items
as it allegedly could barely cope with the yearly premiums on
the attachment bonds.17
Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint
answer to the complaint where they admitted being part of
FBPC from its incorporation on 29 August 1991, which was
then known as "MNL Paper, Inc.," until its corporate name was
changed to "First Business Paper Corporation." 18 They also
acknowledged that on 6 March 1992 Luis Toh was designated
as one of the authorized corporate signatories for transactions
in relation to FBPC's checking account with respondent
Bank.19 Meanwhile, for failing to file an answer, respondent
FBPC was declared in default.20
Petitioner-spouses however could not be certain whether to
deny or admit the due execution and authenticity of the
Continuing Guaranty.21 They could only allege that they were
made to sign papers in blank and the Continuing Guaranty
could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for
them to have freely and consciously executed the surety on 10
May 1993, the date appearing on its face 22 since beginning
March of that year they had already divested their shares in
FBPC and assigned them in favor of respondent Kenneth Ng Li
although the deeds of assignment were notarized only on 14
June 1993.23 Petitioners also contended that through FBPC
Board Resolution dated 12 May 1993 petitioner Luis Toh was
removed as an authorized signatory for FBPC and replaced by
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li and
Redentor Padilla for all the transactions of FBPC with
respondent Bank.24 They even resigned from their respective
positions in FBPC as reflected in the 12 June 1993 Secretary's
Certificate submitted to the Securities and Exchange
Commission25 as petitioner Luis Toh was succeeded as
Chairman by respondent Ma. Victoria Ng Li, while one Mylene
C. Padilla took the place of petitioner Vicky Tan Toh as Vice-
President.26
Finally, petitioners averred that sometime in June 1993 they
obtained from respondent Kenneth Ng Li their exclusion from
the several surety agreements they had entered into with
different banks, i.e., Hongkong and Shanghai Bank, China
Banking Corporation, Far East Bank and Trust Company, and
herein respondent Bank.27As a matter of record, these other
banks executed written surety agreements that showed
respondent Kenneth Ng Li as the only surety of FBPC's
indebtedness.28
7
On 16 May 1996 the trial court promulgated its Decision in Civil
Case No. 64047 finding respondent FBPC liable to pay
respondent Solid Bank Corporation the principal of
P10,539,758.68 plus twelve percent (12%) interest per
annum from finality of the Decision until fully paid, but
absolving petitioner-spouses Luis Toh and Vicky Tan Toh of
any liability to respondent Bank.29 The court a quo found that
petitioners "voluntarily affixed their signature[s]" on the
Continuing Guaranty and were thus "at some given point in
time willing to be liable under those forms," 30although it held
that petitioners were not bound by the surety contract since the
letters of credit it was supposed to secure were opened long
after petitioners had ceased to be part of FBPC.31
The trial court described the Continuing Guaranty as effective
only while petitioner-spouses were stockholders and officers of
FBPC since respondent Bank compelled petitioners to
underwrite FBPC's indebtedness as sureties without the
requisite investigation of their personal solvency and capability
to undertake such risk.32 The lower court also believed that the
Bank knew of petitioners' divestment of their shares in FBPC
and their subsequent resignation as officers thereof as these
facts were obvious from the numerous public documents that
detailed the changes and substitutions in the list of authorized
signatories for transactions between FBPC and the Bank,
including the many trust receipts being signed by persons
other than petitioners,33 as well as the designation of new
FBPC officers which came to the notice of the Bank's Vice-
President Jose Chan Jr. and other officers.34
On 26 September 1996 the RTC-Br. 161 of Pasig City denied
reconsideration of its Decision.35
On 9 October 1996 respondent Bank appealed the Decision to
the Court of Appeals, docketed as CA-G.R. CV No.
55957.36 Petitioner-spouses did not move for reconsideration
nor appeal the finding of the trial court that they voluntarily
executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and
held that by signing the Continuing Guaranty, petitioner-
spouses became solidarily liable with FBPC to pay respondent
Bank the amount of P10,539,758.68 as principal with twelve
percent (12%) interest per annum from finality of the judgment
until completely paid.37 The Court of Appeals ratiocinated that
the provisions of the surety agreement did not "indicate that
Spouses Luis and Vicky Toh x x x signed the instrument in their
capacities as Chairman of the Board and Vice-President,
respectively, of FBPC only." 38 Hence, the court a quo deduced,
"[a]bsent any such indication, it was error for the trial court to
have presumed that the appellees indeed signed the same not
in their personal capacities."39 The appellate court also ruled
that as petitioners failed to execute any written revocation of
the Continuing Guaranty with notice to respondent Bank, the
instrument remained in full force and effect when the letters of
credit were availed of by respondent FBPC.40
Finally, the Court of Appeals rejected petitioners' argument that
there were "material alterations" in the provisions of the "letter-
advise," i.e., that only domestic letters of credit were opened
when the credit facility was for importation of papers and other
materials, and that marginal deposits were not paid, contrary to
the requirements stated in the "letter-advise."41 The simple
response of the appellate court to this challenge was, first, the
"letter-advise" itself authorized the issuance of domestic letters
of credit, and second, the several waivers extended by
petitioners in the Continuing Guaranty, which included
changing the time and manner of payment of the
indebtedness, justified the action of respondent Bank not to
charge marginal deposits.42
Petitioner-spouses moved for reconsideration of the Decision,
and after respondent Bank's comment, filed a
lengthy Reply with Motion for Oral Argument.43 On 2 July 2002
reconsideration of the Decision was denied on the ground that
no new matter was raised to warrant the reversal or
modification thereof.44 Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the
Court of Appeals denied them due process when it did not
grant their motion for reconsideration and without "bother[ing]
to consider [their] Reply with Motion for Oral Argument." They
maintain that the Continuing Guaranty is not legally valid and
binding against them for having been executed long after they
had withdrawn from FBPC. Lastly, they claim that the surety
agreement has been extinguished by the material alterations
thereof and of the "letter-advise" which were allegedly brought
about by (a) the provision of an acceleration clause in the trust
receipts; (b) the flight of their co-sureties, respondent-spouses
Kenneth Ng Li and Ma. Victoria Ng Li; (c) the grant of credit
facility despite the non-payment of marginal deposits in an
amount beyond the credit limit of P10 million pesos; (d) the
inordinate delay of the Bank in demanding the payment of the
indebtedness; (e) the presence of ghost deliveries and fictitious
purchases using the Bank's letters of credit and trust receipts;
(f) the extension of the due dates of the letters of credit without
the required 25% partial payment per extension; (g) the
approval of another letter of credit, L/C 93-0042, even after
respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had
defaulted on their previous obligations; and, (h) the
unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the
appellate court is presumed to have passed upon all points
raised by petitioners' Reply with Motion for Oral Argument as
this pleading formed part of the records of the appellate court.
It also debunks the claim of petitioners that they were
inexperienced and ignorant parties who were taken advantage
of in the Continuing Guaranty since petitioners are astute
businessmen who are very familiar with the "ins" and "outs" of
banking practice. The Bank further argues that the notarization
of the Continuing Guaranty discredits the uncorroborated
assertions against the authenticity and due execution thereof,
and that the Decision of the trial court in the civil case finding
the surety agreement to be valid and binding is now res
judicata for failure of petitioners to appeal therefrom. As a final
point, the Bank refers to the various waivers made by
petitioner-spouses in the Continuing Guaranty to justify the
extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners' claim that the
Court of Appeals deprived them of their right to due process
when the court a quo did not address specifically and explicitly
their Reply with Motion for Oral Argument. While
the Resolution of the appellate court of 2 July 2002 made no
mention thereof in disposing of their arguments on
reconsideration, it is presumed that "all matters within an issue
8
raised in a case were laid before the court and passed upon
it."45 In the absence of evidence to the contrary, we must rule
that the court a quo discharged its task properly. Moreover, a
reading of the assailed Resolution clearly makes reference to a
"careful review of the records," which undeniably includes
the Reply with Motion for Oral Argument, hence there is no
reason for petitioners to asseverate otherwise.
This Court holds that the Continuing Guaranty is a valid and
binding contract of petitioner-spouses as it is a public
document that enjoys the presumption of authenticity and due
execution. Although petitioners as appellees may raise issues
that have not been assigned as errors by respondent Bank as
party-appellant, i.e., unenforceability of the surety contract, we
are bound by the consistent finding of the courts a quo that
petitioner-spouses Luis Toh and Vicky Tan Toh "voluntarily
affixed their signature[s]" on the surety agreement and were
thus "at some given point in time willing to be liable under
those forms."46 In the absence of clear, convincing and more
than preponderant evidence to the contrary, our ruling cannot
be otherwise.
Similarly, there is no basis for petitioners to limit their
responsibility thereon so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing Guaranty
restricts their contractual undertaking to such condition or
eventuality. In fact the obligations assumed by them therein
subsist "upon the undersigned, the heirs, executors,
administrators, successors and assigns of the undersigned,
and shall inure to the benefit of, and be enforceable by you,
your successors, transferees and assigns," and that their
commitment "shall remain in full force and effect until written
notice shall have been received by [the Bank] that it has been
revoked by the undersigned." Verily, if petitioners intended not
to be charged as sureties after their withdrawal from FBPC,
they could have simply terminated the agreement by serving
the required notice of revocation upon the Bank as expressly
allowed therein.47 In Garcia v. Court of Appeals[48] we ruled
Regarding the petitioner's claim that he is liable only
as a corporate officer of WMC, the surety agreement
shows that he signed the same not in representation
of WMC or as its president but in his personal
capacity. He is therefore personally bound. There is
no law that prohibits a corporate officer from binding
himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to
protect the stockholder by immunizing him from
personal liability for the corporate debts, he may
nevertheless divest himself of this protection by
voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take
refuge in this doctrine that he has by his own acts
effectively waived.
But as we bind the spouses Luis Toh and Vicky Tan Toh to the
surety agreement they signed so must we also hold
respondent Bank to its representations in the "letter-advise" of
16 May 1993. Particularly, as to the extension of the due dates
of the letters of credit, we cannot exclude from the Continuing
Guaranty the preconditions of the Bank that were plainly
stipulated in the "letter-advise." Fairness and justice dictate our
doing so, for the Bank itself liberally applies the provisions of
cognate agreements whenever convenient to enforce its
contractual rights, such as, when it harnessed a provision in
the trust receipts executed by respondent FBPC to declare its
entire indebtedness as due and demandable and thereafter to
exact payment thereof from petitioners as sureties.49 In the
same manner, we cannot disregard the provisions of the
"letter-advise" in sizing up the panoply of commercial
obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that
respondent Bank "may at any time, or from time to time, in [its]
discretion x x x extend or change the time payment," this
provision even if understood as a waiver is confined per se to
the grant of an extension and does not surrender the
prerequisites therefor as mandated in the "letter-advise." In
other words, the authority of the Bank to defer collection
contemplates only authorized extensions, that is, those that
meet the terms of the "letter-advise."
Certainly, while the Bank may extend the due date at its
discretion pursuant to the Continuing Guaranty, it should
nonetheless comply with the requirements that domestic letters
of credit be supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of thirty (30)
days for each extension, subject to twenty-five percent (25%)
partial payment per extension. This reading of the Continuing
Guaranty is consistent with Philippine National Bank v. Court of
Appeals50 that any doubt on the terms and conditions of the
surety agreement should be resolved in favor of the surety.
Furthermore, the assurance of the sureties in the Continuing
Guaranty that "[n]o act or omission of any kind on [the Bank's]
part in the premises shall in any event affect or impair this
guaranty"51 must also be read "strictissimi juris" for the reason
that petitioners are only accommodation sureties, i.e., they
received nothing out of the security contract they
signed.52 Thus said, the acts or omissions of the Bank
conceded by petitioners as not affecting nor impairing the
surety contract refer only to those occurring "in the premises,"
or those that have been the subject of the waiver in the
Continuing Guaranty, and stretch to no other. Stated otherwise,
an extension of the period for enforcing the indebtedness does
not by itself bring about the discharge of the sureties unless
the extra time is not permitted within the terms of the waiver,
i.e., where there is no payment or there is deficient settlement
of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the
sureties. Under Art. 2055 of the Civil Code, the liability of a
surety is measured by the terms of his contract, and while he is
liable to the full extent thereof, his accountability is strictly
limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the
trial court that several letters of credit were irrevocably
extended for ninety (90) days with alarmingly flawed and
inadequate consideration - the indispensable marginal deposit
of fifteen percent (15%) and the twenty-five percent (25%)
prerequisite for each extension of thirty (30) days. It bears
stressing that the requisite marginal deposit and security for
every thirty (30) - day extension specified in the "letter-advise"
were not set aside or abrogated nor was there any prior notice
of such fact, if any was done.
9
Moreover, these irregular extensions were candidly admitted
by Victor Ruben L. Tuazon, an account officer and manager of
respondent Bank and its lone witness in the civil case
Q: You extended it even if there was no marginal
deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the
insufficiency partial payment requirement?
A: I would say yes.53
The foregoing extensions of the letters of credit made by
respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver
stipulated in the Continuing Guaranty. Evidently, they
constitute illicit extensions prohibited under Art. 2079 of the
Civil Code, "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the
guaranty." This act of the Bank is not mere failure or delay on
its part to demand payment after the debt has become due, as
was the case in unpaid five (5) letters of credit which the Bank
did not extend, defer or put off,54 but comprises conscious,
separate and binding agreements to extend the due date, as
was admitted by the Bank itself
Q: How much was supposed to be paid on 14
September 1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14
September 1993. We rolled it over, extended it to
December 13, 1993 but they made partial payment
that is why we extended it.
Q: The question to you now is how much was
paid? How much is supposed to be paid on
September 14, 1993 on the basis of the original
amount of P1,655,675.13?
A: Whenever this obligation becomes due and
demandable except when you roll it over so there is
novation there on the original
obligations55 (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis
Toh and Vicky Tan Toh are relieved of their obligations as
sureties of respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate
against the enforcement of the Continuing Guaranty against
the accommodation sureties. Firstly, the guaranty was
executed more than thirty (30) days from the original
acceptance period as required in the "letter-advise." Thereafter,
barely two (2) days after the Continuing Guaranty was signed,
corporate agents of FBPC were replaced on 12 May 1993 and
other adjustments in the corporate structure of FBPC ensued
in the month of June 1993, which the Bank did not investigate
although such were made known to it.
By the same token, there is no explanation on record for the
utter worthlessness of the trust receipts in favor of the Bank
when these documents ought to have added more security to
the indebtedness of FBPC. The Bank has in fact no information
whether the trust receipts were indeed used for the purpose for
which they were obtained.56 To be sure, the goods subject of
the trust receipts were not entirely lost since the security officer
of respondent Bank who conducted surveillance of FBPC even
had the chance to intercept the surreptitious transfer of the
items under trust: "We saw two (2) delivery vans with Plates
Nos. TGH 257 and PAZ 928 coming out of the compound x x x
[which were] taking out the last supplies stored in the
compound."57 In addition, the attached properties of FBPC,
except for two (2) of them, were perfunctorily abandoned by
respondent Bank although the bonds therefor were
considerably reduced by the trial court.58
The consequence of these omissions is to discharge the
surety, petitioners herein, under Art. 2080 of the Civil Code,59 or
at the very least, mitigate the liability of the surety up to the
value of the property or lien released
If the creditor x x x has acquired a lien upon the
property of a principal, the creditor at once becomes
charged with the duty of retaining such security, or
maintaining such lien in the interest of the surety, and
any release or impairment of this security as a
primary resource for the payment of a debt, will
discharge the surety to the extent of the value of the
property or lien released x x x x [for] there
immediately arises a trust relation between the
parties, and the creditor as trustee is bound to
account to the surety for the value of the security in
his hands.60
For the same reason, the grace period granted by respondent
Bank represents unceremonious abandonment and forfeiture
of the fifteen percent (15%) marginal deposit and the twenty-
five percent (25%) partial payment as fixed in the "letter-
advise." These payments are unmistakably additional
securities intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC becomes
insolvent during the extension period. Compliance with these
requisites was not waived by petitioners in the Continuing
Guaranty. For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its unauthorized
extensions to pay granted to FBPC, petitioner-spouses Luis
Toh and Vicky Tan Toh are discharged as sureties under the
Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent
Bank in failing to safe-keep the security provided by the
marginal deposit and the twenty-five percent (25%)
requirement results in the material alteration of the principal
contract, i.e., the "letter-advise," and consequently releases the
surety.61 This inference was admitted by the Bank through the
testimony of its lone witness that "[w]henever this obligation
becomes due and demandable, except when you roll it over,
(so) there is novation there on the original obligations." As has
10
been said, "if the suretyship contract was made upon the
condition that the principal shall furnish the creditor additional
security, and the security being furnished under these
conditions is afterwards released by the creditor, the surety is
wholly discharged, without regard to the value of the securities
released, for such a transaction amounts to an alteration of the
main contract."62
WHEREFORE, the instant Petition for Review is GRANTED.
The Decision of the Court of Appeals dated 12 December 2001
in CA-G.R. CV No. 55957, Solid Bank Corporation v. First
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng
Li, Luis Toh and Vicky Tan Toh, holding petitioner-spouses Luis
Toh and Vicky Tan Toh solidarily liable with First Business
Paper Corporation to pay Solid Bank Corporation the amount
of P10,539,758.68 as principal with twelve percent (12%)
interest per annum until fully paid, and its Resolution of 2 July
2002 denying reconsideration thereof are REVERSED and
SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City
in Civil Case No. 64047, Solid Bank Corporation v. First
Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng
Li, Luis Toh and Vicky Tan Toh, finding First Business Paper
Corporation liable to pay respondent Solid Bank Corporation
the principal of P10,539,758.68 plus twelve percent (12%)
interest per annum until fully paid, but absolving petitioner-
spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Solid Bank Corporation is REINSTATED and
AFFIRMED. No costs.
SO ORDERED.
G.R. No. L-20567 July 30, 1965
PHILIPPINE NATIONAL BANK, petitioner,
vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT
OF APPEALS (Second Division), respondents.
Besa, Galang and Medina for petitioner.
De Santos and Delfino for respondents.
REYES, J.B.L., J.:
The Philippine National Bank petitions for the review and
reversal of the decision rendered by the Court of Appeals
(Second Division), in its case CA-G.R. No. 24232-R,
dismissing the Bank's complaint against respondent Manila
Surety & Fidelity Co., Inc., and modifying the judgment of the
Court of First Instance of Manila in its Civil Case No. 11263.
The material facts of the case, as found by the appellate Court,
are as follows:
The Philippine National Bank had opened a letter of credit and
advanced thereon $120,000.00 to Edgington Oil Refinery for
8,000 tons of hot asphalt. Of this amount, 2,000 tons worth
P279,000.00 were released and delivered to Adams & Taguba
Corporation (known as ATACO) under a trust receipt
guaranteed by Manila Surety & Fidelity Co. up to the amount of
P75,000.00. To pay for the asphalt, ATACO constituted the
Bank its assignee and attorney-in-fact to receive and collect
from the Bureau of Public Works the amount aforesaid out of
funds payable to the assignor under Purchase Order No.
71947. This assignment (Exhibit "A") stipulated that:
The conditions of this assignment are as follows:
1. The same shall remain irrevocable until the said
credit accomodation is fully liquidated.
2. The PHILIPPINE NATIONAL BANK is hereby
appointed as our Attorney-in-Fact for us and in our
name, place and stead, to collect and to receive the
payments to be made by virtue of the aforesaid
Purchase Order, with full power and authority to
execute and deliver on our behalf, receipt for all
payments made to it; to endorse for deposit or
encashment checks, money order and treasury
warrants which said Bank may receive, and to apply
said payments to the settlement of said credit
accommodation.
This power of attorney shall also remain irrevocable
until our total indebtedness to the said Bank have
been fully liquidated. (Exhibit E)
ATACO delivered to the Bureau of Public Works, and the latter
accepted, asphalt to the total value of P431,466.52. Of this
amount the Bank regularly collected, from April 21, 1948 to
November 18, 1948, P106,382.01. Thereafter, for unexplained
reasons, the Bank ceased to collect, until in 1952 its
investigators found that more moneys were payable to ATACO
from the Public Works office, because the latter had allowed
mother creditor to collect funds due to ATACO under the same
purchase order to a total of P311,230.41.
Its demands on the principal debtor and the Surety having
been refused, the Bank sued both in the Court of First Instance
of Manila to recover the balance of P158,563.18 as of
February 15, 1950, plus interests and costs.
On October 4, 1958, the trial court rendered a decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered as follows:
1. Ordering defendants, Adams & Taguba Corporation
and Manila Surety & Fidelity Co., Inc., to pay plaintiff,
Philippines National Bank, the sum of P174,462.34 as
of February 24, 1956, minus the amount of P8,000
which defendant, Manila Surety Co., Inc. paid from
March, 1956 to October, 1956 with interest at the rate
of 5% per annum from February 25, 1956, until fully
paid provided that the total amount that should be
paid by defendant Manila Surety Co., Inc., on account
of this case shall not exceed P75,000.00, and to pay
the costs;
2. Orderinq cross-defendant, Adams & Taguba
Corporation, and third-party defendant, Pedro A.
11
 Taguba, jointly and severally, to pay cross and third-
party plaintiff, Manila Surety & Fidelity Co., Inc.,
whatever amount the latter has paid or shall pay
under this judgment;
3. Dismissing the complaint insofar as the claim for
17% special tax is concerned; and
4. Dismissing the counterclaim of defendants Adams
& Taguba Corporation and Manila Surety & Fidelity
Co., Inc.
From said decision, only the defendant Surety Company has
duly perfected its appeal. The Central Bank of the Philippines
did not appeal, while defendant ATACO failed to perfect its
appeal.
The Bank recoursed to the Court of Appeals, which rendered
an adverse decision and modified the judgment of the court of
origin as to the surety's liability. Its motions for reconsideration
having proved unavailing, the Bank appealed to this Court.
The Court of Appeals found the Bank to have been negligent in
having stopped collecting from the Bureau of Public Works the
moneys falling due in favor of the principal debtor, ATACO,
from and after November 18, 1948, before the debt was fully
collected, thereby allowing such funds to be taken and
exhausted by other creditors to the prejudice of the surety, and
held that the Bank's negligence resulted in exoneration of
respondent Manila Surety & Fidelity Company.
This holding is now assailed by the Bank. It contends the
power of attorney obtained from ATACO was merely in
additional security in its favor, and that it was the duty of the
surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the
surety no duty of active diligence to collect any, sum from the
principal debtor, citing Judge Advocate General vs. Court of
Appeals, G.R. No. L-10671, October 23, 1958.
This argument of appellant Bank misses the point. The Court
of Appeals did not hold the Bank answerable for negligence in
failing to collect from the principal debtor but for its neglect in
collecting the sums due to the debtor from the Bureau of Public
Works, contrary to its duty as holder of an exclusive and
irrevocable power of attorney to make such collections, since
an agent is required to act with the care of a good father of a
family (Civ. Code, Art. 1887) and becomes liable for the
damages which the principal may suffer through his non-
performance (Civ. Code, Art. 1884). Certainly, the Bank could
not expect that the Bank would diligently perform its duty under
its power of attorney, but because they could not have
collected from the Bureau even if they had attempted to do so.
It must not be forgotten that the Bank's power to collect was
expressly made irrevocable, so that the Bureau of Public
Works could very well refuse to make payments to the principal
debtor itself, and a fortiori reject any demands by the surety.
Even if the assignment with power of attorney from the
principal debtor were considered as mere additional security
still, by allowing the assigned funds to be exhausted without
notifying the surety, the Bank deprived the former of any
possibility of recoursing against that security. The Bank thereby
exonerated the surety, pursuant to Article 2080 of the Civil
Code:
ART. 2080. The guarantors, even though they be
solidary, are released from their obligation whenever
by come act of the creditor they cannot be subrogated
to the rights, mortgages and preferences of the latter.
(Emphasis supplied.)
The appellant points out to its letter of demand, Exhibit "K",
addressed to the Bureau of Public Works, on May 5, 1949, and
its letter to ATACO, Exhibit "G", informing the debtor that as of
its date, October 31, 1949, its outstanding balance was
P156,374.83. Said Exhibit "G" has no bearing on the issue
whether the Bank has exercised due diligence in collecting
from the Bureau of Public Works, since the letter was
addressed to ATACO, and the funds were to come from
elsewhere. As to the letter of demand on the Public Works
office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety
were ever apprised that payment was not being made. The fact
remains that because of the Bank's inactivity the other
creditors were enabled to collect P173,870.31, when the
balance due to appellant Bank was only P158,563.18. The
finding of negligence made by the Court of Appeals is thus not
only conclusive on us but fully supported by the evidence.
Even if the Court of Appeals erred on the second reason it
advanced in support of the decision now under appeal,
because the rules on application of payments, giving
preference to secured obligations are only operative in cases
where there are several distinct debts, and not where there is
only one that is partially secured, the error is of no importance,
since the principal reason based on the Bank's negligence
furnishes adequate support to the decision of the Court of
Appeals that the surety was thereby released.
WHEREFORE, the appealed decision is affirmed, with costs
against appellant Philippine National Bank.
G.R. No. 120528 January 29, 2001
ATTY. DIONISIO CALIBO, JR., petitioner,
vs.
COURT OF APPEALS and DR. PABLO U.
ABELLA, respondents.
QUISUMBING, J.:
Before us is the petition for review on certiorari by petitioner
Dionisio Calibo, Jr., assailing the decision of the Court of
Appeals in CA-G.R. CV No. 39705, which affirmed the decision
of the Regional Trial Court of Cebu, Branch 11, declaring
private respondent as the lawful possessor of a tractor subject
of a replevin suit and ordering petitioner to pay private
respondent actual damages and attorney's fees.
The facts of the case, as summarized by respondent court, are
undisputed.
12
"on January 25, 1979, plaintiff-appellee [herein
petitioner] Pablo U. Abella purchased an MF 210
agricultural tractor with Serial No. 00105 and Engine
No. P126M00199 (Exhibit A; Record, p.5) which he
used in his farm in Dagohoy, Bohol.
Sometimes in October or November 1985, Pablo
Abella's son, Mike abella rented for residential
purpose the house of defendant-appellant Dionosio R.
Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out his
aforementioned tractor from his farm in Dagohoy,
Bohol, and left it in the safekeeping of his son, Mike
Abella, in Tagbilaran City. Mike kept the tractor in the
garage of the house he was leasing from Calibo.
Since he started renting Calibo's house, Mike had
been religiously paying the monthly rentals therefor,
but beginning November of 1986, he stopped doing
so. The following month, Calibo learned that Mike had
never paid the charges for electric and water
consumption in the leased premises which the latter
was duty-bound to shoulder. Thus, Calibo confronted
Mike about his rental arrears and the unpaid electric
and water bills. During this confrontation, Mike
informed Calibo that he (Mike) would be staying in the
leased property only until the end of December 1986.
Mike also assured Calibo that he would be settling his
account with the latter, offering the tractor as security.
Mike even asked Calibo to help him find a buyer for
the tractor so he could sooner pay his outstanding
obligation.1wphi1.nt
In January 1987 when a new tenant moved into the
house formerly leased to Mike, Calibo had the tractor
moved to the garage of his father's house, also in
Tagbilaran City.
Apprehensive over Mike's unsettled account, Calibo
visited him in his Cebu City address in January,
February and March, 1987 and tried to collect
payment. On all three occasions, Calibo was unable
to talk to Mike as the latter was reportedly out of town.
On his third trip to Cebu City, Calibo left word with the
occupants of the Abella residence thereat that there
was a prospective buyer for the tractor. The following
week, Mike saw Calibo in Tagbilaran City to inquire
about the possible tractor buyer. The sale, however,
did not push through as the buyer did not come back
anymore. When again confronted with his outstanding
obligation, Mike reassured Calibo that the tractor
would stand as a guarantee for its payment. That was
the last time Calibo saw or heard from Mike.
After a long while, or on November 22, 1988, Mike's
father, Pablo Abella, came to Tagbilaran City to claim
and take possession of the tractor. Calibo, however,
informed Pablo that Mike left the tractor with him as
security for the payment of Mike's obligation to him.
Pablo offered to write Mike a check for P2,000.00 in
payment of Mike's unpaid lease rentals, in addition to
issuing postdated checks to cover the unpaid electric
and water bills the correctness of which Pablo said he
still had to verify with Mike. Calibo told Pablo that he
would accept the P2,000.00-check only if the latter
would execute a promissory note in his favor to cover
the amount of the unpaid electric and water bills.
Pablo was not amenable to this proposal. The two of
them having failed to come to an agreement, Pablo
left and went back to Cebu City, unsuccessful in his
attempt to take possession of the tractor."1
On November 25, 1988, private respondent instituted an action
for replevin, claiming ownership of the tractor and seeking to
recover possession thereof from petitioner. As adverted to
above, the trial court ruled in favor of private respondent; so
did the Court of Appeals when petitioner appealed.
The Court of Appeals sustained the ruling of the trial court that
Mike Abella could not have validly pledged the subject tractor
to petitioner since he was not the owner thereof, nor was he
authorized by its owner to pledge the tractor. Respondent court
also rejected petitioner's contention that, if not a pledge, then a
deposit was created. The Court of Appeals said that under the
Civil Code, the primary purpose of a deposit is only
safekeeping and not, as in this case, securing payment of a
debt.
The Court of Appeals reduced the amount of actual damages
payable to private respondent, deducting therefrom the cost of
transporting the tractor from Tagbilaran, Bohol, to Cebu City.
Hence, this petition.
Essentially, petitioner claims that the tractor in question was
validly pledged to him by private respondent's son Mike Abella
to answer for the latter's monetary obligations to petitioner. In
the alternative, petitioner asserts that the tractor was left with
him, in the concept of an innkeeper, on deposit and that he
may validly hold on thereto until Mike Abella pays his
obligations.
Petitioner maintains that even if Mike Abella were not the
owner of the tractor, a principal-agent relationship may be
implied between Mike Abella and private respondent. He
contends that the latter failed to repudiate the alleged agency,
knowing that his son is acting on his behalf without authority
when he pledged the tractor to petitioner. Petitioner argues
that, under Article 1911 of the Civil Code, private respondent is
bound by the pledge, even if it were beyond the authority of his
son to pledge the tractor, since he allowed his son to act as
though he had full powers.
On the other hand, private respondent asserts that respondent
court had correctly ruled on the matter.
In a contract of pledge, the creditor is given the right to retain
his debtor's movable property in his possession, or in that of a
third person to whom it has been delivered, until the debt is
paid. For the contract to be valid, it is necessary that: (1) the
pledge is constituted to secure the fulfillment of a principal
obligation; (2) the pledgor be the absolute owner of the thing
pledged; and (3) the person constituting the pledge has the
free disposal of his property, and in the absence thereof, that
he be legally authorized for the purpose.2
13
As found by the trial court and affirmed by respondent court,
the pledgor in this case, Mike Abella, was not the absolute
owner of the tractor that was allegedly pledged to petitioner.
The tractor was owned by his father, private respondent, who
left the equipment with him for safekeeping. Clearly, the
second requisite for a valid pledge, that the pledgor be the
absolute owner of the property, is absent in this case. Hence,
there is no valid pledge.
"He who is not the owner or proprietor of the property
pledged or mortgaged to guarantee the fulfillment of a
principal obligation, cannot legally constitute such a
guaranty as may validly bind the property in favor of
his creditor, and the pledgee or mortgagee in such a
case acquires no right whatsoever in the property
pledged or mortgaged."3
There also does not appear to be any agency in this case. We
agree with the Court of Appeals that:
"As indicated in Article 1869, for an agency
relationship to be deemed as implied, the principal
must know that another person is acting on his behalf
without authority. Here, appellee categorically stated
that the only purpose for his leaving the subject
tractor in the care and custody of Mike Abella was for
safekeeping, and definitely not for him to pledge or
alienate the same. If it were true that Mike pledged
appeellee's tractor to appellant, then Mike was acting
not only without appellee's authority but without the
latter's knowledge as well.
Article 1911, on the other hand, mandates that the
principal is solidarily liable with the agent if the former
allowed the latter to act as though he had full powers.
Again, in view of appellee's lack of knowledge of
Mike's pledging the tractor without any authority from
him, it stands to reason that the former could not have
allowed the latter to pledge the tractor as if he had full
powers to do so."4
There is likewise no valid deposit in this case. In a contract of
deposit, a person receives an object belonging to another with
the obligation of safely keeping it and of returning the
same.5 Petitioner himself states that he received the tractor not
to safely keep it but as a form of security for the payment of
Mike Abella's obligations. There is no deposit where the
principal purpose for receiving the object is not safekeeping.6
Consequently, petitioner had no right to refuse delivery of the
tractor to its lawful owner. On the other hand, private
respondent, as owner, had every right to seek to repossess the
tractor, including the institution of the instant action for
replevin.1wphi1.nt
We do not here pass upon the other assignment of errors
made by petitioner concerning alleged irregularities in the raffle
and disposition of the case at the trial court. A petition for
review on certiorari is not the proper vehicle for such
allegations.
WHEREFORE, the instant petition is DENIED for lack of merit,
and the decision of the Court of Appeals in CA-G.R. CV No.
39705 is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 143772 November 22, 2005
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
PRUDENTIAL BANK, Respondent.
DECISION
CORONA, J.:
Development Bank of the Philippines (DBP) assails in this
petition for review on certiorari under Rule 45 of the Rules of
Court the December 14, 1999 decision1 and the June 8, 2000
resolution of the Court of Appeals in CA-G.R. CV No. 45783.
The challenged decision dismissed DBPs appeal and affirmed
the February 12, 1991 decision of the Regional Trial Court of
Makati, Branch 137 in Civil Case No. 88-931 in toto, while the
impugned resolution denied DBPs motion for reconsideration
for being pro forma.
In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable
commercial letter of credit with respondent Prudential Bank for
US$498,000. This was in connection with its importation of
5,000 spindles for spinning machinery with drawing frame,
simplex fly frame, ring spinning frame and various accessories,
spare parts and tool gauge. These were released to Litex
under covering "trust receipts" it executed in favor of Prudential
Bank. Litex installed and used the items in its textile mill
located in Montalban, Rizal.
On October 10, 1980, DBP granted a foreign currency loan in
the amount of US$4,807,551 to Litex. To secure the loan, Litex
executed real estate and chattel mortgages on its plant site in
Montalban, Rizal, including the buildings and other
improvements, machineries and equipments there. Among the
machineries and equipments mortgaged in favor of DBP were
the articles covered by the "trust receipts."
Sometime in June 1982, Prudential Bank learned about DBPs
plan for the overall rehabilitation of Litex. In a July 14, 1982
letter, Prudential Bank notified DBP of its claim over the
various items covered by the "trust receipts" which had been
installed and used by Litex in the textile mill. Prudential Bank
informed DBP that it was the absolute and juridical owner of
the said items and they were thus not part of the mortgaged
assets that could be legally ceded to DBP.
For the failure of Litex to pay its obligation, DBP extra-judicially
foreclosed on the real estate and chattel mortgages, including
the articles claimed by Prudential Bank. During the foreclosure
sale held on April 19, 1983, DBP acquired the foreclosed
properties as the highest bidder.
Subsequently, DBP caused to be published in the September
2, 1984 issue of the Times Journal an invitation to bid in the
public sale to be held on September 10, 1984. It called on
14
interested parties to submit bids for the sale of the textile mill
formerly owned by Litex, the land on which it was built, as well
as the machineries and equipments therein. Learning of the
intended public auction, Prudential Bank wrote a letter dated
September 6, 1984 to DBP reasserting its claim over the items
covered by "trust receipts" in its name and advising DBP not to
include them in the auction. It also demanded the turn-over of
the articles or alternatively, the payment of their value.
An exchange of correspondences ensued between Prudential
Bank and DBP. In reply to Prudential Banks September 6,
1984 letter, DBP requested documents to enable it to evaluate
Prudential Banks claim. On September 28, 1994, Prudential
Bank provided DBP the requested documents. Two months
later, Prudential Bank followed up the status of its claim. In a
letter dated December 3, 1984, DBP informed Prudential Bank
that its claim had been referred to DBPs legal department and
instructed Prudential Bank to get in touch with its chief legal
counsel. There being no concrete action on DBPs part,
Prudential Bank, in a letter dated July 30, 1985, made a final
demand on DBP for the turn-over of the contested articles or
the payment of their value. Without the knowledge of
Prudential Bank, however, DBP sold the Litex textile mill, as
well as the machineries and equipments therein, to Lyon
Textile Mills, Inc. (Lyon) on June 8, 1987.
Since its demands remained unheeded, Prudential Bank filed a
complaint for a sum of money with damages against DBP with
the Regional Trial Court of Makati, Branch 137, on May 24,
1988. The complaint was docketed as Civil Case No. 88-931.
On February 12, 1991, the trial court decided2 in favor of
Prudential Bank. Applying the provisions of PD 115, otherwise
known as the "Trust Receipts Law," it ruled:
When PRUDENTIAL BANK released possession of the subject
properties, over which it holds absolute title to LITEX upon the
latters execution of the trust receipts, the latter was bound to
hold said properties in trust for the former, and (a) to sell or
otherwise dispose of the same and to turn over to
PRUDENTIAL BANK the amount still owing; or (b) to return the
goods if unsold. Since LITEX was allowed to sell the properties
being claimed by PRUDENTIAL BANK, all the more was it
authorized to mortgage the same, provided of course LITEX
turns over to PRUDENTIAL BANK all amounts owing. When
DBP, well aware of the status of the properties, acquired the
same in the public auction, it was bound by the terms of the
trust receipts of which LITEX was the entrustee. Simply stated,
DBP held no better right than LITEX, and is thus bound to turn
over whatever amount was due PRUDENTIAL BANK. Being a
trustee ex maleficio of PRUDENTIAL BANK, DBP is
necessarily liable therefor. In fact, DBP may well be considered
as an agent of LITEX when the former sold the properties
being claimed by PRUDENTIAL BANK, with the corresponding
responsibility to turn over the proceeds of the same to
PRUDENTIAL BANK.3 (Citations omitted)
The dispositive portion of the decision read:
WHEREFORE, judgment is hereby rendered ordering
defendant DEVELOPMENT BANK OF THE PHILIPPINES to
pay plaintiff PRUDENTIAL BANK:
a) P3,261,834.00, as actual damages, with interest thereon
computed from 10 August 1985 until the entire amount shall
have been fully paid;
b) P50,000.00 as exemplary damages; and
c) 10% of the total amount due as and for attorneys fees.
SO ORDERED.
Aggrieved, DBP filed an appeal with the Court of Appeals.
However, the appellate court dismissed the appeal and
affirmed the decision of the trial court in toto. It applied the
provisions of PD 115 and held that ownership over the
contested articles belonged to Prudential Bank as entrustor,
not to Litex. Consequently, even if Litex mortgaged the items to
DBP and the latter foreclosed on such mortgage, DBP was
duty-bound to turn over the proceeds to Prudential Bank, being
the party that advanced the payment for them.
On DBPs argument that the disputed articles were not proper
objects of a trust receipt agreement, the Court of Appeals ruled
that the items were part of the trust agreement entered into by
and between Prudential Bank and Litex. Since the agreement
was not contrary to law, morals, public policy, customs and
good order, it was binding on the parties.
Moreover, the appellate court found that DBP was not a
mortgagee in good faith. It also upheld the finding of the trial
court that DBP was a trustee ex maleficio of Prudential Bank
over the articles covered by the "trust receipts."
DBP filed a motion for reconsideration but the appellate court
denied it for being pro forma. Hence, this petition.
Trust receipt transactions are governed by the provisions of PD
115 which defines such a transaction as follows:
Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree
as entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the
possession of the entrustee upon the latters execution and
delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the
designated goods, documents or instruments in trust for the
entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount
owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are
unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods or
procure their sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale: Provided, That, in the case of
goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the
entruster shall retain its title over the goods whether in its
original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) to load,
unload, ship or tranship or otherwise deal with them in a
manner preliminary or necessary to their sale; or
15
2. In the case of instruments, (a) to sell or procure their sale or
exchange; or (b) to deliver them to a principal; or (c) to effect
the consummation of some transactions involving delivery to a
depository or register; or (d) to effect their presentation,
collection or renewal.
xxxxxxxxx
In a trust receipt transaction, the goods are released by the
entruster (who owns or holds absolute title or security interests
over the said goods) to the entrustee on the latters execution
and delivery to the entruster of a trust receipt. The trust receipt
evidences the absolute title or security interest of the entruster
over the goods. As a consequence of the release of the goods
and the execution of the trust receipt, a two-fold obligation is
imposed on the entrustee, namely: (1) to hold the designated
goods, documents or instruments in trust for the purpose of
selling or otherwise disposing of them and (2) to turn over to
the entruster either the proceeds thereof to the extent of the
amount owing to the entruster or as appears in the trust
receipt, or the goods, documents or instruments themselves if
they are unsold or not otherwise disposed of, in accordance
with the terms and conditions specified in the trust receipt. In
the case of goods, they may also be released for other
purposes substantially equivalent to (a) their sale or the
procurement of their sale; or (b) their manufacture or
processing with the purpose of ultimate sale, in which case the
entruster retains his title over the said goods whether in their
original or processed form until the entrustee has complied
fully with his obligation under the trust receipt; or (c) the
loading, unloading, shipment or transshipment or otherwise
dealing with them in a manner preliminary or necessary to their
sale.4Thus, in a trust receipt transaction, the release of the
goods to the entrustee, on his execution of a trust receipt, is
essentially for the purpose of their sale or is necessarily
connected with their ultimate or subsequent sale.
Here, Litex was not engaged in the business of selling spinning
machinery, its accessories and spare parts but in
manufacturing and producing textile and various kinds of
fabric. The articles were not released to Litex to be sold. Nor
was the transfer of possession intended to be a preliminary
step for the said goods to be ultimately or subsequently sold.
Instead, the contemporaneous and subsequent acts of both
Litex and Prudential Bank showed that the imported articles
were released to Litex to be installed in its textile mill and used
in its business. DBP itself was aware of this. To support its
assertion that the contested articles were excluded from goods
that could be covered by a trust receipt, it contended:
First. That the chattels in controversy were procured by DBPs
mortgagor Lirag Textile Mills ("LITEX") for the exclusive use of
its textile mills. They were not procured -
(a) to sell or otherwise procure their sale;
(b) to manufacture or process the goods with the
purpose of ultimate sale.5 (emphasis supplied)
Hence, the transactions between Litex and Prudential Bank
were allegedly not trust receipt transactions within the meaning
of PD 115. It follows that, contrary to the decisions of the trial
court and the appellate court, the transactions were not
governed by the Trust Receipts Law.
We disagree.
The various agreements between Prudential Bank and Litex
commonly denominated as "trust receipts" were valid. As the
Court of Appeals correctly ruled, their provisions did not
contravene the law, morals, good customs, public order or
public policy.
The agreements uniformly provided:
Received, upon the Trust hereinafter mentioned from the
PRUDENTIAL BANK (hereinafter referred to as BANK) the
following goods and merchandise, the property of said
BANK specified in the bill of lading as follows:
Amount of Bill Description of Security Marks & Nos.
and in consideration thereof, I/We hereby agree to hold said
goods in trust for the BANK and as its property with liberty
to sell the same for its account but without authority to make
any other disposition whatsoever of the said goods or any part
thereof (or the proceeds thereof) either by way of conditional
sale, pledge, or otherwise.
x x x x x x x x x6 (Emphasis supplied)
The articles were owned by Prudential Bank and they were
only held by Litex in trust. While it was allowed to sell the
items, Litex had no authority to dispose of them or any part
thereof or their proceeds through conditional sale, pledge or
any other means.
Article 2085 (2) of the Civil Code requires that, in a contract of
pledge or mortgage, it is essential that the pledgor or
mortgagor should be the absolute owner of the thing pledged
or mortgaged. Article 2085 (3) further mandates that the
person constituting the pledge or mortgage must have the free
disposal of his property, and in the absence thereof, that he be
legally authorized for the purpose.
Litex had neither absolute ownership, free disposal nor the
authority to freely dispose of the articles. Litex could not have
subjected them to a chattel mortgage. Their inclusion in the
mortgage was void7 and had no legal effect.8There being no
valid mortgage, there could also be no valid foreclosure or
valid auction sale.9 Thus, DBP could not be considered either
as a mortgagee or as a purchaser in good faith.10
No one can transfer a right to another greater than what he
himself has.11 Nemo dat quod non habet. Hence, Litex could
not transfer a right that it did not have over the disputed items.
Corollarily, DBP could not acquire a right greater than what its
predecessor-in-interest had. The spring cannot rise higher than
its source.12 DBP merely stepped into the shoes of Litex as
trustee of the imported articles with an obligation to pay their
value or to return them on Prudential Banks demand. By its
failure to pay or return them despite Prudential Banks
repeated demands and by selling them to Lyon without
Prudential Banks knowledge and conformity, DBP became a
trustee ex maleficio.
16
On the matter of actual damages adjudged by the trial court
and affirmed by the Court of Appeals, DBP wants this Court to
review the evidence presented during the trial and to reverse
the factual findings of the trial court. This Court is, however, not
a trier of facts and it is not its function to analyze or weigh
evidence anew.13 The rule is that factual findings of the trial
court, when adopted and confirmed by the CA, are binding and
conclusive on this Court and generally will not be reviewed on
appeal.14 While there are recognized exceptions to this rule,
none of the established exceptions finds application here.
With regard to the imposition of exemplary damages, the
appellate court agreed with the trial court that the requirements
for the award thereof had been sufficiently established.
Prudential Banks entitlement to compensatory damages was
likewise amply proven. It was also shown that DBP was aware
of Prudential Banks claim as early as July, 1982. However, it
ignored the latters demand, included the disputed articles in
the mortgage foreclosure and caused their sale in a public
auction held on April 19, 1983 where it was declared as the
highest bidder. Thereafter, in the series of communications
between them, DBP gave Prudential Bank the false impression
that its claim was still being evaluated. Without acting on
Prudential Banks plea, DBP included the contested articles
among the properties it sold to Lyon in June, 1987. The trial
court found that this chain of events showed DBPs fraudulent
attempt to prevent Prudential Bank from asserting its rights. It
smacked of bad faith, if not deceit. Thus, the award of
exemplary damages was in order. Due to the award of
exemplary damages, the grant of attorneys fees was proper.15
DBPs assertion that both the trial and appellate courts failed to
address the issue of prescription is of no moment. Its claim
that, under Article 1146 (1) of the Civil Code, Prudential Banks
cause of action had prescribed as it should be reckoned from
October 10, 1980, the day the mortgage was registered, is not
correct. The written extra-judicial demand by the creditor
interrupted the prescription of action. 16 Hence, the four-year
prescriptive period which DBP insists should be counted from
the registration of the mortgage was interrupted when
Prudential Bank wrote the extra-judicial demands for the turn
over of the articles or their value. In particular, the last demand
letter sent by Prudential Bank was dated July 30, 1988 and this
was received by DBP the following day. Thus, contrary to
DBPs claim, Prudential Banks right to enforce its action had
not yet prescribed when it filed the complaint on May 24, 1988.
WHEREFORE, the petition is hereby DENIED. The December
14, 1999 decision and June 8, 2000 resolution of the Court of
Appeals in CA-G.R. CV No. 45783 are AFFIRMED.
G.R. No. 131679 February 1, 2000
CAVITE DEVELOPMENT BANK and FAR EAST BANK AND
TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT
OF APPEALS, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision1 of the
Court of Appeals in C.A. GR CV No. 42315 and the order
dated December 9, 1997 denying petitioners' motion for
reconsideration.
The following facts are not in dispute.
Petitioners Cavite Development Bank (CDB) and Far East
Bank and Trust Company (FEBTC) are banking institutions
duly organized and existing under Philippine laws. On or about
June 15, 1983, a certain Rodolfo Guansing obtained a loan in
the amount of P90,000.00 from CDB, to secure which he
mortgaged a parcel of land situated at No. 63 Calavite Street,
La Loma, Quezon City and covered by TCT No. 300809
registered in his name. As Guansing defaulted in the payment
of his loan, CDB foreclosed the mortgage. At the foreclosure
sale held on March 15, 1984, the mortgaged property was sold
to CDB as the highest bidder. Guansing failed to redeem, and
on March 2, 1987, CDB consolidated title to the property in its
name. TCT No. 300809 in the name of Guansing was
cancelled and, in lieu thereof, TCT No. 355588 was issued in
the name of CDB.1wphi1.nt
On June 16, 1988, private respondent Lolita Chan Lim,
assisted by a broker named Remedios Gatpandan, offered to
purchase the property from CDB. The written Offer to
Purchase, signed by Lim and Gatpandan, states in part:
We hereby offer to purchase your property at #63
Calavite and Retiro Sts., La Loma, Quezon City for
P300,000.00 under the following terms and
conditions:
(1) 10% Option Money;
(2) Balance payable in cash;
(3) Provided that the property shall be
cleared of illegal occupants or tenants.
Pursuant to the foregoing terms and conditions of the offer, Lim
paid CDB P30,000.00 as Option Money, for which she was
issued Official Receipt No. 3160, dated June 17, 1988, by
CDB. However, after some time following up the sale, Lim
discovered that the subject property was originally registered in
the name of Perfecto Guansing, father of mortgagor Rodolfo
Guansing, under TCT No. 91148. Rodolfo succeeded in having
the property registered in his name under TCT No. 300809, the
same title he mortgaged to CDB and from which the latter's title
(TCT No. 355588) was derived. It appears, however, that the
father, Perfecto, instituted Civil Case No. Q-39732 in the
Regional Trial Court, Branch 83, Quezon City, for the
cancellation of his son's title. On March 23, 1984, the trial court
rendered a decision2 restoring Perfecto's previous title (TCT
No. 91148) and cancelling TCT No. 300809 on the ground that
the latter was fraudulently secured by Rodolfo. This decision
has since become final and executory.
Aggrieved by what she considered a serious misrepresentation
by CDB and its mother-company, FEBTC, on their ability to sell
the subject property, Lim, joined by her husband, filed on
August 29, 1989 an action for specific performance and
damages against petitioners in the Regional Trial Court,
Branch 96, Quezon City, where it was docketed as Civil Case
17
No. Q-89-2863. On April 20, 1990, the complaint was amended
by impleading the Register of Deeds of Quezon City as an
additional defendant.
On March 10, 1993, the trial court rendered a decision in favor
of the Lim spouses. It ruled that: (1) there was a perfected
contract of sale between Lim and CDB, contrary to the latter's
contention that the written offer to purchase and the payment
of P30,000.00 were merely pre-conditions to the sale and still
subject to the approval of FEBTC; (2) performance by CDB of
its obligation under the perfected contract of sale had become
impossible on account of the 1984 decision in Civil Case No.
Q-39732 cancelling the title in the name of mortgagor Rodolfo
Guansing; (3) CDB and FEBTC were not exempt from liability
despite the impossibility of performance, because they could
not credibly disclaim knowledge of the cancellation of Rodolfo
Guansing's title without the admitting their failure to discharge
their duties to the public as reputable banking institutions; and
(4) CDB and FEBTC are liable for damages for the prejudice
caused against the Lims.3 Based on the foregoing findings, the
trial court ordered CDB and FEBTC to pay private
respondents, jointly and severally, the amount of P30,000.00
plus interest at the legal rate computed from June 17, 1988
until full payment. It also ordered petitioners to pay private
respondents, jointly and severally, the amounts of P250,000.00
as moral damages, P50,000.00 as exemplary damages,
P30,000.00 as attorney's fees, and the costs of the suit.4
Petitioners brought the matter to the Court of Appeals, which,
on October 14, 1997, affirmed in toto the decision of the
Regional Trial Court. Petitioners moved for reconsideration, but
their motion was denied by the appellate court on December 9,
1997. Hence, this petition. Petitioners contend that
1. The Honorable Court of Appeals erred when it held
that petitioners CDB and FEBTC were aware of the
decision dated March 23, 1984 of the Regional Trial
Court of Quezon City in Civil Case No. Q-39732.
2. The Honorable Court of Appeals erred in ordering
petitioners to pay interest on the deposit of THIRTY
THOUSAND PESOS (P30,000.00) by applying Article
2209 of the New Civil Code.
3. The Honorable Court of Appeals erred in ordering
petitioners to pay moral damages, exemplary
damages, attorney's fees and costs of suit.
I.
At the outset, it is necessary to determine the legal relation, if
any, of the parties.
Petitioners deny that a contract of sale was ever perfected
between them and private respondent Lolita Chan Lim. They
contend that Lim's letter-offer clearly states that the sum of
P30,000,00 was given as option money, not as earnest
money.5 They thus conclude that the contract between CDB
and Lim was merely an option contract, not a contract of sale.
The contention has no merit. Contracts are not defined by the
parries thereto but by principles of law.6 In determining the
nature of a contract, the courts are not bound by the name or
title given to it by the contracting parties. 7 In the case at bar,
the sum of P30,000.00, although denominated in the offer to
purchase as "option money," is actually in the nature of earnest
money or down payment when considered with the other terms
of the offer. In Carceler v. Court of Appeals,8 we explained the
nature of an option contract, viz.
An option contract is a preparatory contract in which
one party grants to the other, for a fixed period and
under specified conditions, the power to decide,
whether or not to enter into a principal contract, it
binds the party who has given the option not to enter
into the principal contract with any other person
during the period; designated, and within that period,
to enter into such contract with the one to whom the
option was granted, if the latter should decide to use
the option. It is a separate agreement distinct from the
contract to which the parties may enter upon the
consummation of the option.
An option contract is therefore a contract separate from and
preparatory to a contract of sale which, if perfected, does not
result in the perfection or consummation of the sale. Only when
the option is exercised may a sale be perfected.
In this case, however, after the payment of the 10% option
money, the Offer to Purchase provides for the payment only of
the balance of the purchase price, implying that the "option
money" forms part of the purchase price. This is precisely the
result of paying earnest money under Art. 1482 of the Civil
Code. It is clear then that the parties in this case actually
entered into a contract of sale, partially consummated as to the
payment of the price. Moreover, the following findings of the
trial court based on the testimony of the witnesses establish
that CDB accepted Lim's offer to purchase:
It is further to be noted that CDB and FEBTC already
considered plaintiffs' offer as good and no longer
subject to a final approval. In his testimony for the
defendants on February 13, 1992, FEBTC's Leomar
Guzman stated that he was then in the Acquired
Assets Department of FEBTC wherein plaintiffs' offer
to purchase was endorsed thereto by Myoresco
Abadilla, CDB's senior vice-president, with a
recommendation that the necessary petition for writ of
possession be filed in the proper court; that the
recommendation was in accord with one of the
conditions of the offer, i.e., the clearing of the property
of illegal occupants or tenants (tsn, p. 12); that, in
compliance with the request, a petition for writ of
possession was thereafter filed on July 22, 1988
(Exhs. 1 and 1-A); that the offer met the requirements
of the banks; and that no rejection of the offer was
thereafter relayed to the plaintiffs (p. 17); which was
not a normal procedure, and neither did the banks
return the amount of P30,000.00 to the plaintiffs.9
Given CDB's acceptance of Lim's offer to purchase, it appears
that a contract of sale was perfected and, indeed, partially
executed because of the partial payment of the purchase price.
There is, however, a serious legal obstacle to such sale,
18
rendering it impossible for CDB to perform its obligation as
seller to deliver and transfer ownership of the property.
Nemo dat quod non habet, as an ancient Latin maxim says.
One cannot give what one does not have. In applying this
precept to a contract of sale, a distinction must be kept in mind
between the "perfection" and "consummation" stages of the
contract.
A contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the
contract and upon the price.10 It is, therefore, not required that,
at the perfection stage, the seller be the owner of the thing sold
or even that such subject matter of the sale exists at that point
in time.11 Thus, under Art. 1434 of the Civil Code, when a
person sells or alienates a thing which, at that time, was not
his, but later acquires title thereto, such title passes by
operation of law to the buyer or grantee. This is the same
principle behind the sale of "future goods" under Art. 1462 of
the Civil Code. However, under Art. 1459, at the time of
delivery or consummation stage of the sale, it is required that
the seller be the owner of the thing sold. Otherwise, he will not
be able to comply with his obligation to transfer ownership to
the buyer. It is at the consummation stage where the principle
of nemo dat quod non habet applies.
In Dignos v. Court of Appeals,12 the subject contract of sale
was held void as the sellers of the subject land were no longer
the owners of the same because of a prior sale. 13 Again,
in Nool v. Court of Appeals,14 we ruled that a contract of
repurchase, in which the seller does not have any title to the
property sold, is invalid:
We cannot sustain petitioners' view. Article 1370 of
the Civil Code is applicable only to valid and
enforceable contracts. The Regional Trial Court and
the Court of Appeals rules that the principal contract
of sale contained in Exhibit C and the auxiliary
contract of repurchase in Exhibit D are both void. This
conclusion of the two lower courts appears to find
support in Dignos v. Court of Appeals, where the
Court held:
Be that as it may, it is evident that when
petitioners sold said land to the Cabigas
spouses, they were no longer owners of the
same and the sale is null and void.
In the present case, it is clear that the sellers no
longer had any title to the parcels of land at the time
of sale. Since Exhibit D, the alleged contract of
repurchase, was dependent on the validity of Exhibit
C, it is itself void. A void contract cannot give rise to a
valid one. Verily, Article 1422 of the Civil Code
provides that (a) contract which is the direct result of a
previous illegal contract, is also void and inexistent.
We should however add that Dignos did not cite its
basis for ruling that a "sale is null and void" where the
sellers "were no longer the owners" of the property.
Such a situation (where the sellers were no longer
owners) does not appear to be one of the void
contracts enumerated in Article 1409 of the Civil
Code. Moreover, the Civil Code itself recognizes a
sale where the goods are to be acquired . . . by the
seller after the perfection of the contract of sale,
clearly implying that a sale is possible even if the
seller was not the owner at the time of sale, provided
he acquires title to the property later on.
In the present case, however, it is likewise clear that
the sellers can no longer deliver the object of the sale
to the buyers, as the buyers themselves have already
acquired title and delivery thereof from the rightful
owner, the DBP. Thus, such contract may be deemed
to be inoperative and may thus fall, by analogy, under
item No. 5 of Article 1409 of the Civil Code: Those
which contemplate an impossible service. Article 1459
of the Civil Code provides that "the vendor must have
a right to transfer the ownership thereof [subject of the
sale] at the time it is delivered." Here, delivery of
ownership is no longer possible. It has become
impossible.15
In this case, the sale by CDB to Lim of the property mortgaged
in 1983 by Rodolfo Guansing must, therefore, be deemed a
nullity for CDB did not have a valid title to the said property. To
be sure, CDB never acquired a valid title to the property
because the foreclosure sale, by virtue of which, the property
had been awarded to CDB as highest bidder, is likewise void
since the mortgagor was not the owner of the property
foreclosed.
A foreclosure sale, though essentially a "forced sale," is still a
sale in accordance with Art. 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes
obliged to transfer the ownership of the thing sold to the
highest bidder who, in turn, is obliged to pay therefor the bid
price in money or its equivalent. Being a sale, the rule that the
seller must be the owner of the thing sold also applies in a
foreclosure sale. This is the reason Art. 2085 16 of the Civil
Code, in providing for the essential requisites of the contract of
mortgage and pledge, requires, among other things, that the
mortgagor or pledgor be the absolute owner of the thing
pledged or mortgaged, in anticipation of a possible foreclosure
sale should the mortgagor default in the payment of the loan.
There is, however, a situation where, despite the fact that the
mortgagor is not the owner of the mortgaged property, his title
being fraudulent, the mortgage contract and any foreclosure
sale arising therefrom are given effect by reason of public
policy. This is the doctrine of "the mortgagee in good faith"
based on the rule that all persons dealing with property
covered by a Torrens Certificate of Title, as buyers or
mortgagees, are not required to go beyond what appears on
the face of the title.17 The public interest in upholding the
indefeasibility of a certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance thereon, protects
a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title.
This principle is cited by petitioners in claiming that, as a
mortgagee bank, it is not required to make a detailed
investigation of the history of the title of the property given as
security before accepting a mortgage.
19
We are not convinced, however, that under the circumstances
of this case, CDB can be considered a mortgagee in good
faith. While petitioners are not expected to conduct an
exhaustive investigation on the history of the mortgagor's title,
they cannot be excused from the duty of exercising the due
diligence required of banking institutions. In Tomas
v. Tomas,18 we noted that it is standard practice for banks,
before approving a loan, to send representatives to the
premises of the land offered as collateral and to investigate
who are real owners thereof, noting that banks are expected to
exercise more care and prudence than private individuals in
their dealings, even those involving registered lands, for their
business is affected with public interest. We held thus:
We, indeed, find more weight and vigor in a doctrine
which recognizes a better right for the innocent
original registered owner who obtained his certificate
of title through perfectly legal and regular
proceedings, than one who obtains his certificate from
a totally void one, as to prevail over judicial
pronouncements to the effect that one dealing with a
registered land, such as a purchaser, is under no
obligation to look beyond the certificate of title of the
vendor, for in the latter case, good faith has yet to be
established by the vendee or transferee, being the
most essential condition, coupled with valuable
consideration, to entitle him to respect for his newly
acquired title even as against the holder of an earlier
and perfectly valid title. There might be circumstances
apparent on the face of the certificate of title which
could excite suspicion as to prompt inquiry, such as
when the transfer is not by virtue of a voluntary act of
the original registered owner, as in the instant case,
where it was by means of a self-executed deed of
extra-judicial settlement, a fact which should be noted
on the face of Eusebia Tomas certificate of title.
Failing to make such inquiry would hardly be
consistent with any pretense of good faith, which the
appellant bank invokes to claim the right to be
protected as a mortgagee, and for the reversal of the
judgment rendered against it by the lower court.19
In this case, there is no evidence that CDB observed its duty of
diligence in ascertaining the validity of Rodolfo Guansing's title.
It appears that Rodolfo Guansing obtained his fraudulent title
by executing an Extra-Judicial Settlement of the Estate With
Waiver where he made it appear that he and Perfecto
Guansing were the only surviving heirs entitled to the property,
and that Perfecto had waived all his rights thereto. This self-
executed deed should have placed CDB on guard against any
possible defect in or question as to the mortgagor's title.
Moreover, the alleged ocular inspection report20 by CDB's
representative was never formally offered in evidence. Indeed,
petitioners admit that they are aware that the subject land was
being occupied by persons other than Rodolfo Guansing and
that said persons, who are the heirs of Perfecto Guansing,
contest the title of Rodolfo.21
II.
The sale by CDB to Lim being void, the question now arises as
to who, if any, among the parties was at fault for the nullity of
the contract. Both the trial court and the appellate court found
petitioners guilty of fraud, because on June 16, 1988, when
Lim was asked by CDB to pay the 10% option money, CDB
already knew that it was no longer the owner of the said
property, its title having been cancelled.22 Petitioners contend
that: (1) such finding of the appellate court is founded entirely
on speculation and conjecture; (2) neither CDB nor FEBTC
was a party in the case where the mortgagor's title was
cancelled; (3) CDB is not privy to any problem among the
Guansings; and (4) the final decision cancelling the
mortgagor's title was not annotated in the latter's title.
As a rule, only questions of law may be raised in a petition for
review, except in circumstances where questions of fact may
be properly raised.23 Here, while petitioners raise these factual
issues, they have not sufficiently shown that the instant case
falls under any of the exceptions to the above rule. We are
thus bound by the findings of fact of the appellate court. In any
case, we are convinced of petitioners' negligence in approving
the mortgage application of Rodolfo Guansing.
III.
We now come to the civil effects of the void contract of sale
between the parties. Article 1412(2) of the Civil Code provides:
If the act in which the unlawful or forbidden cause
consists does not constitute a criminal offense, the
following rules shall be observed:
xxx xxx xxx
(2) When only one of the contracting parties is at fault,
he cannot recover what he has given by reason of the
contract, or ask for the fulfillment of what has been
promised him. The other, who is not at fault, may
demand the return of what he has given without any
obligation to comply with his promise.
Private respondents are thus entitled to recover the
P30,000,00 option money paid by them. Moreover, since the
filing of the action for damages against petitioners amounted to
a demand by respondents for the return of their money, interest
thereon at the legal rate should be computed from August 29,
1989, the date of filing of Civil Case No. Q-89-2863, not June
17, 1988, when petitioners accepted the payment. This is in
accord with our ruling in Castillo v. Abalayan24 that in case of
avoid sale, the seller has no right whatsoever to keep the
money paid by virtue thereof and should refund it, with interest
at the legal rate, computed from the date of filing of the
complaint until fully paid. Indeed, Art. 1412(2) which provides
that the non-guilty party "may demand the return of what he
has given" clearly implies that without such prior demand, the
obligation to return what was given does not become legally
demandable.
Considering CDB's negligence, we sustain the award of moral
damages on the basis of Arts. 21 and 2219 of the Civil Code
and our ruling in Tan v. Court of Appeals25 that moral damages
may be recovered even if a bank's negligence is not attended
with malice and bad faith. We find, however, that the sum of
P250,000.00 awarded by the trial court is excessive. Moral
damages are only intended to alleviate the moral suffering
undergone by private respondent, not to enrich them at the
20
expenses of the petitioners.26 Accordingly, the award of moral
damages must be reduced to P50,000.00.
Likewise, the award of P50,000.00 as exemplary damages,
although justified under Art. 2232 of the Civil Code, is
excessive and should be reduced to P30,000.00. The award of
P30,000.00 attorney's fees based on Art. 2208, pars. 1, 2, 5
and 11 of the Civil Code should similarly be reduced to
P20,000.00.
WHEREFORE, the decision of the Court of Appeals is
AFFIRMED with the MODIFICATION as to the award of
damages as above stated.1wphi1.nt
SO ORDERED.
G.R. No. 128669 October 4, 2002
MAMERTA VDA. DE JAYME,
and her children and/or heirs of the late GRACIANO
JAYME, namely: WILFREDO, MARCIAL, MANUEL,
ANTONIO, all surnamed JAYME;
the heirs of DOMINADOR JAYME, namely: SUPREMA
(surviving spouse) and his children, namely: ARMANDO,
NICANOR, ZENAIDA, CATHERINE, ROSALINE, DORIS,
VICKY and MARILYN, all surnamed JAYME;
and the heirs of the late NILIE JAYME SANCHEZ, namely,
INOCENCIO SANCHEZ (surviving spouse) and her
children: ELSA, CONCEPCION, CLEOFE, ALEJANDRO,
EFREN and MACRINA, all surnamed SANCHEZ;
and FLORA JAYME RAVANES, assisted by her husband,
CESAR RAVANES, petitioners,
vs.
HON. COURT OF APPEALS, SIXTEENTH DIVISION, CEBU
ASIANCARS INC.,
GEORGE NERI, CONNIE NERI, WILLIAM LEONG KOC
LEE,
EDUARD JAMES LEE, ROBERTO UY KIM, AND CHARLES
UY KIM;1
METROPOLITAN BANK AND TRUST COMPANY, RENE
NATIVIDAD AND/OR JOHN DOE in substitution of MAXIMO
PEREZ,
sued in his capacity as City Sheriff of Mandaue
City, respondents.
DECISION
QUISUMBING, J.:
This petition assails the decision2 dated September 19, 1996,
of the Court of Appeals in CA-G.R. CV No. 46496 and its
resolution3 dated February 21, 1997, denying the motion for
reconsideration. Said decision had affirmed that of the
Regional Trial Court of Cebu City, Branch 15, in Civil Case No.
CEB-21369 for Annulment of Contract and Damages with
Prayer for the Issuance of Preliminary Injunction. 4
The following facts are borne by the records:
The spouses Graciano and Mamerta Jayme are the registered
owners of Lot 2700, situated in the Municipality of Mandaue
(now Mandaue City), Cebu, consisting of 2,568 sq.m. and
covered by Transfer Certificate of Title No. 8290.
On January 8, 1973, they entered into a Contract of
Lease5 with George Neri, president of Airland Motors
Corporation (now Cebu Asiancars Inc.), covering one-half of
Lot 2700. The lease was for twenty (20) years.
The terms and conditions of the lease contract 6 stipulated that
Cebu Asiancars Inc. (hereafter, Asiancars) may use the leased
premises as a collateral to secure payment of a loan which
Asiancars may obtain from any bank, provided that the
proceeds of the loan shall be used solely for the construction of
a building which, upon the termination of the lease or the
voluntary surrender of the leased premises before the
expiration of the contract, shall automatically become the
property of the Jayme spouses (the lessors).
A Special Power of Attorney7 dated January 26, 1974, was
executed in favor of respondent George Neri, who used the lot
to secure a loan of P300,000 from the General Bank and Trust
Company. The loan was fully paid on August 14, 1977.8
In October 1977, Asiancars obtained a loan of P6,000,000 from
the Metropolitan Bank and Trust Company (MBTC). The entire
Lot 2700 was offered as one of several properties given as
collateral for the loan. As mortgagors, the spouses signed a
Deed of Real Estate Mortgage9 dated November 21, 1977 in
favor of MBTC. It stated that the deed was to secure the
payment of a loan obtained by Asiancars from the bank.
To assure the Jayme spouses, Neri and the other officers of
Asiancars, namely Benny Liongben Lee, William Leong Koc
Lee, Connie U. Neri, Edward James Lee, Roberto Uykim and
Charles P. Uykim, executed an undertaking10 dated November
7, 1977. In it they promised, in their personal capacities and/or
in representation of Cebu Asiancars, Inc., "to compensate Mr.
& Mrs. Graciano Jayme for any and all or whatever damage
they may sustain or suffer by virtue and arising out of the
mortgage to MBTC of the aforestated parcel of land."11 In
addition, Neri wrote a letter dated September 1,
198112 addressed to Mamerta Jayme acknowledging her
"confidence and help" extended to him, his family and
Asiancars. He promised to pay their indebtedness to MBTC
before the loan was due.
Meeting financial difficulties and incurring an outstanding
balance on the loan, Asiancars conveyed ownership of the
building on the leased premises to MBTC, by way of "dacion
en pago."13 The building was valued at P980,000 and the
amount was applied as partial payment for the loan. There still
remained a balance of P2,942,449.66, which Asiancars failed
to pay.
Eventually, MBTC extrajudicially foreclosed the mortgage. A
public auction was held on February 4, 1981. MBTC was the
highest bidder for P1,067,344.35. A certificate of sale was
issued and was registered with the Register of Deeds on
February 23, 1981.
21
Meanwhile, Graciano Jayme died, survived by his widow
Mamerta and their children. As a result of the foreclosure,
Gracianos heirs filed a civil complaint, 14 in January of 1982, for
Annulment of Contract with Damages with Prayer for Issuance
of Preliminary Injunction, against respondent Asiancars, its
officers and incorporators and MBTC. Later, in 1999, Mamerta
Jayme also passed away.
Petitioners claim that Neri and Asiancars did not tell them that
the indebtedness secured by the mortgage was for P6,000,000
and that the security was the whole of Lot 2700. Petitioners
allege that the deed presented to the Jayme spouses was in
blank, without explanation on the stipulations contained
therein, except that its conditions were identical to those of the
stipulations when they mortgaged half the lots area previously
with General Bank. Petitioners also alleged that the Jayme
spouses were illiterate and only knew how to sign their names.
That because they did not know how to read nor write, and had
given their full trust and confidence to George Neri, the
spouses were deceived into signing the Deed of Real Estate
SO ORDERED.15
Mortgage. Their intention as well as consent was only to be
bound as guarantors.
Petitioners and respondent MBTC elevated the case to the
Court of Appeals, which affirmed the ruling of the RTC, with
Respondents deny that any fraud was employed, nor was
modifications stated in this wise:
there a scheme to make the spouses sign as mortgagors
instead of guarantors. They aver that the spouses were fully
advised and compensated for the use of their property as
collateral with MBTC; that they voluntarily signed the deed of
mortgage upon the request of George Neri, whom they
previously trusted and who fulfilled his promise to pay the loan
to General Bank and who obtained the release of the same
property by faithfully paying his indebtedness with General
Bank.
After trial, the RTC rendered a decision, disposing as follows:
WHEREFORE, in view of the foregoing evidences, arguments
and considerations, this Court hereby renders judgment as
follows:
1. Declaring the Real Estate Mortgage executed
by the Jaymes in favor of Metrobank as valid and
binding;
2. Declaring the Undertaking executed by George
Neri, Benny Leongben Lee already deceased, William
Leong Koc, Connie U. Neri, Edward James Lee,
Roberto Uykim, and Charles P. Uykim on November
7, 1977 to be valid and binding as well upon the
signatories thereof;
3. Allowing the Jaymes to redeem the mortgaged
property, Lot 2700 covered by TCT 8290 of the
Register of Deeds of Mandaue City for the amount of
P2,942,448.66 plus interest at the rate of 6% per
annum within ninety (90) days from date of finality of
this judgment until paid. However, if the plaintiffs fail
to redeem said property, then let a Certificate of
Sale/definite Deed of Sale be issued in favor of
Metropolitan Bank and Trust Co. covering said Lot
2700;
4. Holding the defendants George Neri, William Leong
Koc, Connie U. Neri, Edward James Lee, Roberto
Uykim, and Charles Uykim jointly liable on their
Undertaking dated November 7, 1977 as they are
hereby required to reimburse the Jaymes the amount
that the Jaymes will pay to Metropolitan Bank and
Trust Co. for the redemption;
5. Requiring the defendants George Neri, William
Leong Koc, Connie U. Neri, Edward James Lee,
Roberto Uykim and Charles Uykim to pay jointly
attorneys fees to the Jaymes in the amount of
P50,000.00;
6. Requiring the defendants George Neri, William
Leong Koc, Connie U. Neri, Edwards James Lee,
Roberto Uykim and Charles Uykim to pay jointly the
cost of this suit.
1. Declaring valid and binding the Real Estate
Mortgage executed by plaintiffs in favor of defendant
MBTC;
2. Declaring valid the foreclosure of the mortgage and
the foreclosure sale;
3. Declaring that the period to redeem Lot 2700 had
expired on February 23, 1982 without plaintiffs
redeeming it;
4. Ordering the Sheriff of Mandaue City to issue a
definite Deed of Sale covering Lot 2700 in favor of
defendant MBTC;
5. Declaring valid and binding the dacion en pago
executed by defendant Asiancars in favor of
defendant MBTC;
6. Declaring defendant MBTC as owner of the
building on Lot 2700;
7. Ordering defendant MBTC to pay to plaintiffs the
amount of P92,083.33 for the use of the land from
December 18, 1981 to February 23, 1982, with six
percent (6%) interest per annum until paid;
8. Ordering defendant Asiancars, Neris, Uykims, Lee
and Koc to pay jointly and severally the plaintiffs the
(a) actual value of the lot in the amount of
P3,852,000.00; (b) P400,000.00 moral damages; (c)
P150,000.00 exemplary damages and P100,000.00
attorneys fee, all with six percent (6%) interest per
annum until fully paid;
22
 9. Cost against defendants Asiancars, Neris, Uykims,
Lee and Koc.
SO ORDERED.16
Petitioners filed a motion for reconsideration, which the CA
denied. Hence, this petition which assigns the following errors:
I OVERPAID, THUS MBTC ALSO VIOLATED ARTS. 2142,
THAT WITH GRAVE ABUSE OF DISCRETION, AMOUNTING
TO EXCESS OF JURISDICTION, THE LOWER COURT
GROSSLY AND SERIOUSLY ERRED IN DECLARING VALID
AND BINDING THE REAL ESTATE MORTGAGE EXECUTED
BY THE PLAINTIFFS IN FAVOR OF THE MBTC, FOR SAID
DECLARATION IS ILLEGAL AND NOT WELL-FOUNDED IN
LAW BECAUSE IT ULTIMATELY VIOLATED ARTS. 2058,
2076 AND 2077, CIVIL CODE OF THE PHILIPPINES, SINCE
THE REAL ESTATE MORTGAGE, EXH. "G", IS NOT
LEGALLY A REAL ESTATE MORTGAGE, BUT RATHER A
DEED OF GUARANTY, CONSIDERING THAT THE
PLAINTIFF MAMERTA VDA. DE JAYME AND HER HUSBAND
GRACIANO JAYME, NOW DECEASED, SIGNED
INNOCENTLY THE SAID DOCUMENT AS
GUARANTORS/ACCOMODATORS ONLY AND DEFINITELY
NOT AS DEBTORS/MORTGAGORS;
II
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER
COURT ERRED IN DECLARING THE PERIOD TO REDEEM
LOT NO. 2700 HAD EXPIRED ON FEBRUARY 23, 1982,
WITHOUT THE PLAINTIFFS REDEEMING IT FOR SUCH
DECLARATION IS NOT WELL-FOUNDED IN LAW AND IN
FACT;
III
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER
COURT ERRED IN DECLARING VALID AND BINDING THE
DACION EN PAGO EXECUTED BY DEFENDANT CEBU
ASIAN- CARS IN FAVOR OF DEFENDANT MBTC, FOR SAID
DECLARATION IS ILLEGAL AND IS CLEARLY FOUNDED ON
WANTON BAD FAITH COMMITTED BY BOTH PARTIES, IN
VIOLATION OF ART. 1312, CIVIL CODE OF THE
PHILIPPINES AND SEC. 10, ART. III, CONSTITUTION OF
THE PHILIPPINES;
IV
GRANTING ARGUENDO THAT THE DACION EN PAGO IS
VALID, STILL THE LOWER COURT COMMITTED GRAVE
ABUSE OF DISCRETION, BY NOT DECLARING THAT THE
P574,690.00 INDEBTEDNESS, INCLUDING INTEREST AND
ADDITIONAL CHARGES OF CEBU ASIANCARS WAS
COMPLETELY EXTINGUISHED OR PAID OFF, BY WAY OF
DACION EN PAGO PURSUANT TO ARTS. 1255, 2076 AND
2077 OF THE CIVIL CODE OF THE PHILIPPINES.
V may secure the latter by pledging or mortgaging their own
THAT THE LOWER COURT COMMITTED GRAVE ABUSE OF
DISCRETION, AMOUNTING TO EXCESS OF JURISDICTION,
IN DECLARING VALID AND BINDING THE MORTGAGE AND
THE CORRESPONDING FORECLOSURE, FOR SAID
DECLARATION IS ILLEGAL, IN VIOLATION OF ARTS. 1231
(5), 1245 AND 1255, CIVIL CODE AND BY THE INDUBITABLE
EVIDENCE OF ALL THE PARTIES TESTIMONIAL AND
DOCUMENTARY, TO THE EFFECT THAT THE SIX (6)
MILLION INDEBTEDNESS OF CEBU ASIANCARS WAS
CIVIL CODE OF THE PHILIPPINES;
VI
THAT WITH GRAVE ABUSE OF DISCRETION, THE LOWER
COURT ERRED BY VIOLATING EXH. "C", THE CONTRACT
OF LEASE, WHICH IS THE LAW BETWEEN THE PARTIES,
AND INSTEAD, DELIBERATELY DECLARED VALID AND
BINDING THE MORTGAGE EXH. "G", AND THE
FORECLOSURE OF MORTGAGE, AND IN NOT ORDERING
MBTC TO VACATE THE PREMISES UPON THE
TERMINATION OF THE CONTRACT OF LEASE ON
JANUARY 9, 1993 PURSUANT TO EXH. "C", AND LIKEWISE
PAY RENTAL THEREAFTER, FOR ITS USE AT P96,300.00
MONTHLY UNTIL MBTC ACTUALLY VACATES THE
PREMISES.17
On March 13, 2002, the Court set a hearing on this petition,
and parties were given thirty days for simultaneous submission
of their respective memoranda. Petitioners additionally
submitted "reply/rejoinder" and respondent MBTC also
submitted its "rejoinder sur-rejoinder."
Two main issues are for our resolution. First, whether or not
the REM should be annulled on the ground of vitiated consent;
and second, whether or not the dacion en pago by Asiancars in
favor of MBTC is valid and binding despite the stipulation in the
lease contract that ownership of the building will vest on the
Jaymes at the termination of the lease.
The facts show that the spouses affixed their signature on the
Deed of Real Estate Mortgage, in the presence of two
instrumental witnesses, and duly notarized by Atty. Rodolfo Y.
Cabrera. As a notarized document, it has in its favor the
presumption of regularity, and to overcome this presumption,
there must be evidence that is clear, convincing and more than
merely preponderant that there was irregularity in its execution;
otherwise, the document should be upheld.18
The Deed of Real Estate Mortgage entered into by the Jayme
spouses partake of a Third Party Mortgage under Art. 2085 (3)
of the Civil Code which reads:
The following requisites are essential to the contracts of pledge
and mortgage: xxx (3) That the persons constituting the pledge
or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the
purpose.
Third persons who are not parties to the principal obligation
property.
23
In the case of Lustan vs. CA, et al.,19 this Court recognized the
abovecited provision and held that "so long as valid consent
was given, the fact that the loans were solely for the benefit of
(the debtor) would not invalidate the mortgage with respect to
petitioners property. In consenting thereto even granting that
petitioner may not be assuming personal liability for the debt,
her property shall nevertheless secure and respond for the
performance of the principal obligation."
Clearly, the law recognizes instances when persons not
directly parties to a loan agreement may give as security their
own properties for the principal transaction. In this case, the
spouses should not be allowed to disclaim the validity of a
transaction they voluntarily and knowingly entered into for the
simple reason that such transaction turned out prejudicial to
them later on.
Both the trial and appellate courts found that no fraud attended
the execution of the deed of mortgage. This is a factual finding
that binds this Court. Further, the records clearly show that the
spouses Jayme agreed to use their property as collateral for
Neris loan because Neri had their full trust and confidence.
Mamerta herself testified that she and her husband were
assured by Neris promise that he would take full responsibility
for whatever happens to the property of the spouses and that
he would comply with his obligations to the bank.20
The spouses were assisted by their own lawyer, Atty. Cirilo
Sanchez, in all their transactions, including the ones with
Asiancars and MBTC. Atty. Sanchez even signed as an
instrumental witness to a Special Power of Attorney executed
by the spouses in favor of Neri, authorizing the latter to
mortgage the same property to MBTC. Although the said SPA
was eventually not used because MBTC required that the
spouses themselves execute the REM, still, the fact remains
that the spouses were already set on allowing the mortgage. In
addition, we note that Nelia Sanchez, the daughter of the
spouses and one of the petitioners herein, admitted that their
parents consulted her and her siblings before their parents
executed the Deed.21
With the assistance of a lawyer and consultation with their
literate children, the spouses though illiterate could not feign
ignorance of the stipulations in the deed. Patently, theirs was
not a vitiated consent. It could not now be justifiably asserted
by petitioners that the Jayme spouses only intended to be
bound as guarantors and not as mortgagors.
In this jurisdiction, when the property of a third person which
has been expressly mortgaged to guarantee an obligation to
which the said person is a stranger, said property is directly
and jointly liable for the fulfillment thereof, in the same manner
as the mortgaged property of the debtor himself.22
In the case at bar, when Asiancars failed to pay its obligations
with MBTC, the properties given as security (one of them being
the land owned by the Jaymes) became subject to foreclosure.
When several things are given to secure the same debt in its
entirety, all of them are liable for the debt, and the creditor
does not have to divide his action by distributing the debt
among the various things pledged or mortgaged. Even when
only a part of the debt remains unpaid, all the things are liable
for such balance.23
At the time of the foreclosure, Asiancars had a remaining
balance of P2,010,633.28. Thus, MBTC had every right to
effect the extrajudicial foreclosure of the mortgaged properties
to satisfy its claim.
The appellate court found that the spouses lost their right to
redeem their property. Under Section 78 of the General
Banking Act then in force,24 the mortgagor or debtor whose real
property has been foreclosed and sold at public auction, has
the right to redeem the property within one year from the sale
of the real estate as a result of the foreclosure. The reckoning
date in the case of a registered land is from the date of
registration of the certificate of sale.25 If no redemption is timely
made, the buyer in a foreclosure sale becomes the absolute
owner of the property purchased.26 In this case, the certificate
of sale was registered on February 23, 1981, giving petitioners
until February 23, 1982 to redeem the property. This they failed
to do, hence, ownership of the property already vested in the
purchaser, private respondent MBTC.
Much as we sympathize with petitioners plight, we are unable
to find merit in their plea for the annulment of the deed of sale
covering Lot 2700 as a result of foreclosure of mortgage.
Petitioners failed to show the required quantum of evidence
that they were fraudulently made to sign as mortgagors. As
early as Vales v. Villa, 35 Phil. 769 (1916), this Court has
sounded a note of warning to litigants:
The law furnishes no protection to the inferior simply
because he is inferior any more than it protects the strong
because he is strong. The law furnishes protection to both alike
to one no more or less than the other. It makes no distinction
between the wise and the foolish, the great and the small, the
strong and the weak. The foolish may lose all they have to the
wise; but that does not mean that the law will give it back to
them again. Courts cannot follow one every step of his life and
extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or annul the
effects of foolish acts.27
Petitioners however, are not without recourse for the loss of
their property. Although they cannot go after respondent
MBTC, they have in their favor the undertaking executed by
George Neri and other members of his family. The undertaking
also bound respondent Asiancars, as well as its officers who
were signatories to the aforesaid Undertaking, to reimburse
petitioners for the damages they suffered by reason of the
mortgage.
The alienation of the building by Asiancars in favor of MBTC for
the partial satisfaction of its indebtedness is, in our view, also
valid. The ownership of the building had been effectively in the
name of the lessee-mortgagor (Asiancars), though with the
provision that said ownership be transferred to the Jaymes
upon termination of the lease or the voluntary surrender of the
premises. The lease was constituted on January 8, 1973 and
was to expire 20 years thereafter, or on January 8, 1993. The
alienation via dacion en pago was made by Asiancars to MBTC
on December 18, 1980, during the subsistence of the lease. At
this point, the mortgagor, Asiancars, could validly exercise
rights of ownership, including the right to alienate it, as it did to
MBTC.
24
Dacion en pago is the delivery and transmission of ownership WHEREFORE, the assailed decision of the Court of Appeals is
of a thing by the debtor to the creditor as an accepted AFFIRMED with the MODIFICATION that private respondent
equivalent of the performance of the obligation. 28 It is a special MBTC is ordered to pay petitioners rentals in the total amount
mode of payment where the debtor offers another thing to the of P602,083.33, with six (6) percent interest per annum until
creditor who accepts it as equivalent of payment of an fully paid. In all other respects, the assailed decision and
outstanding debt. The undertaking really partakes in one sense resolution of the Court of Appeals are AFFIRMED.
of the nature of sale, that is the creditor is really buying the
thing or property of the debtor, payment for which is to be SO ORDERED.
charged against the debtors debt. As such, the essential
elements of a contract of sale, namely, consent, object certain,
and cause or consideration must be present. In its modern
concept, what actually takes place in dacion en pago is an
objective novation of the obligation where the thing offered as
an accepted equivalent of the performance of an obligation is
considered as the object of the contract of sale, while the debt
is considered as the purchase price. In any case, common
consent is an essential prerequisite, be it sale or novation, to
have the effect of totally extinguishing the debt or obligation.29

We also find that the Court of Appeals did not err in

considering MBTC as a purchaser in good faith. MBTC had no
knowledge of the stipulation in the lease contract. Although the
same lease was registered and duly annotated on the
certificate of title of Lot 2700, MBTC was charged with
constructive knowledge only of the fact of lease of the land and
not of the specific provision stipulating transfer of ownership of
the building to the Jaymes upon termination of the lease. There
was no annotation on the title of any encumbrance. 30 While the
alienation was in violation of the stipulation in the lease
contract between the Jaymes and Asiancars, MBTCs own
rights could not be prejudiced by Asiancars actions
unbeknownst to MBTC. Thus, the transfer of the building in
favor of MBTC was properly held valid and binding by
respondent Court of Appeals.

One point, however, has to be cleared. The appellate court

ordered MBTC to pay rentals to petitioners at the rate of
P25.00 monthly per square meter. For the Asiancars building
stood on the lot owned by the petitioners, until the time MBTC
also consolidated its ownership over the lot. Rentals would
have to be paid starting on December 18, 1980, when the
buildings ownership was transferred to MBTC, until February
23, 1982, when MBTC finally consolidated its ownership over
Lot 2700. Hence, we agree that there was error in the
computation of rentals by the CA. 31 From December 18, 1980
until February 23, 1982, is a period of 1 year, 2 months and 5
days. Thus, MBTC should pay to petitioners rentals for the use
of the occupied lot,32 consisting of 1,700 sq. m. at the monthly
rate of P25.00 per sq. m. for that period, in the total amount of
P602,083.33, with six (6) percent interest per annum until fully
paid.

Finally, we are in agreement that bad faith attended Asiancars

transfer of the building to MBTC. Asiancars was well aware of
its covenant with the Jaymes that the buildings ownership was
to be transferred to the Jaymes upon termination of the lease.
Indeed, petitioners suffered mental anxiety and nervous shock
upon learning that the ownership of the building standing on
their property had already been transferred to MBTC. The
apparent disregard of petitioners right by Asiancars and other
private respondents provides enough basis for an award of
moral as well as exemplary damages33 by the appellate court.

25
 HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II,
Court of First Instance of Iloilo, THE PROVINCIAL
SHERIFF OF ILOILO, and PIO SERVANDO, respondents.

YAP, J.:

Petitioners seek the annulment of various orders issued by the

respondent Presiding Judge of Branch II, Court of First
Instance of Iloilo, in Civil Case No. 12312 entitled "Pio
Servando versus Jose Y. Servando et al." A temporary
restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision
rendered by the respondent Judge in said case.

The case under review is for the annulment of a deed of sale

dated March 11, 1978, executed by defendant Jose Y.
Servando in favor of his co-defendants, the petitioners herein,
covering three parcels of land situated in Iloilo City. Claiming
that the said parcels of land were mortgaged to him in 1970 by
the vendor, who is his cousin, to secure a loan of P20,000.00,
the plaintiff Pio Servando impugned the validity of the sale as
being fraudulent, and prayed that it be declared null and void
and the transfer certificates of title issued to the vendees be
cancelled, or alternatively, if the sale is not annulled, to order
the defendant Jose Servando to pay the amount of
P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private
document evidencing the alleged mortgage (Annex A), which is
quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando,

the sole owner of three parcel of land under
Tax Declaration No. 28905, 44123 and
31591 at Lot No. 1, 1863-Portion of 1863 &
1860 situated at Sto. Nino St., Arevalo,
Compania St. & Compania St., Interior Molo,
respectively, have this date mortgaged the
said property to my cousin Pio Servando, in
the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a
period not exceeding ten (10) years, the
mortgage amount bearing an interest of 10%
per annum.

I further certify that in case I fail to redeem

the said properties within the period stated
above, my cousin Pio Servando, shall
become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

G.R. No. L-49940 September 25, 1986 WITNESSES:

GEMMA R. HECHANOVA, accompanied by her husband, (Sgd) Ernesto G. Jeruta

NICANOR HECHANOVA, JR., and PRESCILLA R. MASA,
accompanied by her husband, FRANCISCO (Sgd) Francisco B. Villanueva
MASA, petitioners,
vs.

26
The defendants moved to dismiss the complaint on the
grounds that it did not state a cause of action, the alleged
mortgage being invalid and unenforceable since it was a mere
private document and was not recorded in the Registry of
Deeds; and that the plaintiff was not the real party in interest
and, as a mere mortgagee, had no standing to question the
validity of the sale. The motion was denied by the respondent
Judge, in its order dated June 20, 1978, "on the ground that
this action is actually one for collection."
On June 23, 1978, defendant Jose Y. Servando died. The
defendants filed a Manifestation and Motion, informing the trial
court accordingly, and moving for the dismissal of the
complaint pursuant to Section 21 of Rule 3 of the Rules of
Court, pointing out that the action was for. recovery of money
based on an actionable document to which only the deceased
defendant was a party. The motion to dismiss was denied on
July 25, 1978, "it appearing from the face of the complaint that
the instant action is not purely a money claim, it being only
incidental, the main action being one for annulment and
damages."
On August 1, 1978, plaintiff filed a motion to declare
defendants in default, and on the very next day, August 2, the
respondent Judge granted the motion and set the hearing for
presentation of plaintiff's evidence ex-parte on August 24,
1978.
On August 2, 1978, or the same day that the default order was
issued, defendants Hechanova and Masa filed their Answers,
denying the allegations of the complaint and repeating, by way
of special and affirmative defenses, the grounds stated in their
motions to dismiss.
On August 25, 1978, a judgment by default was rendered
against the defendants, annulling the deed of sale in question
and ordering the Register of Deeds of Iloilo to cancel the titles
issued to Priscilla Masa and Gemma Hechanova, and to revive
the title issued in the name of Jose Y. Servando and to deliver
the same to the plaintiff.
The defendants took timely steps to appeal the decision to the
Court of Appeals by filing a notice of appeal, an appeal bond,
and a record on appeal. However, the trial court disapproved
the record on appeal due to the failure of defendants to comply
with its order to eliminate therefrom the answer filed on August
2, 1978 and accordingly, dismissed the appeal, and on
February 2, 1978, issued an order granting the writ of
execution prayed for by plaintiff.
We find the petition meritorious, and the same is hereby given
due course.
It is clear from the records of this case that the plaintiff has no
cause of action. Plaintiff has no standing to question the
validity of the deed of sale executed by the deceased
defendant Jose Servando in favor of his co-defendants
Hechanova and Masa. No valid mortgage has been constituted
plaintiff's favor, the alleged deed of mortgage being a mere
private document and not registered; moreover, it contains a
stipulation (pacto comisorio) which is null and void under
Article 2088 of the Civil Code. Even assuming that the property
was validly mortgaged to the plaintiff, his recourse was to
foreclose the mortgage, not to seek annulment of the sale.
WHEREFORE, the decision of the respondent court dated
August 25, 1973 and its Order of February 2, 1979 are set
aside, and the complaint filed by plaintiff dated February 4,
1978 is hereby dismissed.
SO ORDERED.
G.R. No. L-53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA
TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First
Instance of Manila, Branch XVII in Civil Case No. 78178 for
collection of sum of money based on promissory notes
executed by the defendants-appellants in favor of plaintiff-
appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered
(a) sentencing defendants, Anastacio
Teodoro, Jr. and Grace Anna Teodoro jointly
and severally, to pay plaintiff the sum of
P15,037.11 plus 12% interest per annum
from September 30, 1969 until fully paid, in
payment of Promissory Notes No. 11487,
plus the sum of P1,000.00 as attorney's fees;
and (b) sentencing defendant Anastacio
Teodoro, Jr. to pay plaintiff the sum of
P8,934.74, plus interest at 12% per annum
from September 30, 1969 until fully paid, in
payment of Promissory Notes Nos. 11515
and 11699, plus the sum of P500.00 an
attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with
Anastacio Teodoro, Sr., jointly and severally,
executed in favor of plaintiff a Promissory
Note (No. 11487) for the sum of P10,420.00
payable in 120 days, or on August 25, 1966,
at 12% interest per annum. Defendants
failed to pay the said amount inspire of
repeated demands and the obligation as of
27
September 30, 1969 stood at P 15,137.11 (6) The Assignor
including accrued interest and service guarantees the existence
charge. and legality of said
accounts receivable, and
On May 3, 1966 and June 20, 1966, the due and punctual
defendants Anastacio Teodoro, Sr. (Father) payment thereof unto the
and Anastacio Teodoro, Jr. (Son) executed in assignee, ... on
favor of plaintiff two Promissory Notes (Nos. demand, ... and further,
11515 and 11699) for P8,000.00 and that Assignor warrants the
P1,000.00 respectively, payable in 120 days solvency and credit
at 12% interest per annum. Father and Son worthiness of each and
made a partial payment on the May 3, 1966 every account.
promissory Note but none on the June 20,
1966 Promissory Note, leaving still an (7) The Assignor does
unpaid balance of P8,934.74 as of hereby guarantee the
September 30, 1969 including accrued payment when due on all
interest and service charge. sums payable under the
contracts giving rise to the
The three Promissory Notes stipulated that accounts receivable ...
any interest due if not paid at the end of including reasonable
every month shall be added to the total attorney's fees in enforcing
amount then due, the whole amount to bear any rights against the
interest at the rate of 12% per annum until debtors of the assigned
fully paid; and in case of collection through accounts receivable and
an attorney-at-law, the makers shall, jointly will pay upon demand, the
and severally, pay 10% of the amount over- entire unpaid balance of
due as attorney's fees, which in no case said contract in the event
shall be leas than P200.00. of non-payment by the
said debtors of any
monthly sum at its due
It appears that on January 24, 1964, the Son
date or of any other default
executed in favor of plaintiff a Deed of
by said debtors;
Assignment of Receivables from the
Emergency Employment Administration in
the sum of P44,635.00. The Deed of xxx xxx xxx
Assignment provided that it was for and in
consideration of certain credits, loans, (9) ... This Assignment
overdrafts and other credit accommodations shall also stand as a
extended to defendants as security for the continuing guarantee for
payment of said sum and the interest any and all whatsoever
thereon, and that defendants do hereby there is or in the future
remise, release and quitclaim all its rights, there will be justly owing
title, and interest in and to the accounts from the Assignor to the
receivables. Further. Assignee ...

(1) The title and right of In their stipulations of Fact, it is admitted by

possession to said the parties that plaintiff extended loans to
accounts receivable is to defendants on the basis and by reason of
remain in the assignee, certain contracts entered into by the defunct
and it shall have the right Emergency Employment Administration
to collect the same from (EEA) with defendants for the fabrication of
the debtor, and fishing boats, and that the Philippine
whatsoever the Assignor Fisheries Commission succeeded the EEA
does in connection with after its abolition; that non-payment of the
the collection of said notes was due to the failure of the
accounts, it agrees to do Commission to pay defendants after the
as agent and latter had complied with their contractual
representative of the obligations; and that the President of plaintiff
Assignee and in trust for Bank took steps to collect from the
said Assignee ; Commission, but no collection was effected.

xxx xxx xxx For failure of defendants to pay the sums

due on the Promissory Note, this action was
instituted on November 13, 1969, originally

28
 against the Father, Son, and the latter's wife.
Because the Father died, however, during
the pendency of the suit, the case as against
him was dismiss under the provisions of
Section 21, Rule 3 of the Rules of Court. The
action, then is against defendants Son and
his wife for the collection of the sum of P
15,037.11 on Promissory Note No. 14487;
and against defendant Son for the recovery
of P 8,394.7.4 on Promissory Notes Nos.
11515 and 11699, plus interest on both
amounts at 12% per annum from September
30, 1969 until fully paid, and 10% of the
amounts due as attorney's fees.
Neither of the parties presented any
testimonial evidence and submitted the case
for decision based on their Stipulations of
Fact and on then, documentary evidence.
The issues, as defined by the parties are: (1)
whether or not plaintiff claim is already
considered paid by the Deed of Assign.
judgment of Receivables by the Son; and (2)
whether or not it is plaintiff who should
directly sue the Philippine Fisheries
Commission for collection.' (Record on
Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment adverse
to defendants. On June 8, 1972, defendants filed a motion for
reconsideration (Record on Appeal, p. 33) which was denied
by the trial court in its order of June 14, 1972 (Record on
Appeal, p. 37). On June 23, 1972, defendants filed with the
lower court their notice of appeal together with the appeal bond
(Record on Appeal, p. 38). The record of appeal was forwarded
to the Court of Appeals on August 22, 1972 (Record on Appeal,
p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12),
appellants raised a single assignment of error, that is
THAT THE DECISION IN QUESTION
AMOUNTS TO A JUDICIAL REMAKING OF
THE CONTRACT BETWEEN THE
PARTIES, IN VIOLATION OF LAW; HENCE,
TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION.
As the appeal involves a pure question of law, the Court of
Appeals, in its resolution promulgated on March 6, 1980,
certified the case to this Court (Rollo, p. 24). The record on
Appeal was forwarded to this Court on March 31, 1980 (Rollo,
p. 1).
In the resolution of May 30, 1980, the First Division of this
Court ordered that the case be docketed and declared
submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case
has been pending with the Court and to determine whether
supervening events may have rendered the case moot and
academic, the Court resolved (1) to require the parties to
MOVE IN THE PREMISES within thirty days from notice, and
in case they fail to make the proper manifestation within the
required period, (2) to consider the case terminated and closed
with the entry of judgment accordingly made thereon (Rollo, p.
40).
On April 27, 1988, appellee moved for a resolution of the
appeal review interposed by defendants-appellants (Rollo, p.
41).
The major issues raised in this case are as follows: (1) whether
or not the assignment of receivables has the effect of payment
of all the loans contracted by appellants from appellee bank;
and (2) whether or not appellee bank must first exhaust all
legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collections of loan
under the promissory notes which are plaintiffs bases in the
action for collection in Civil Case No. 78178.
Assignment of credit is an agreement by virtue of which the
owner of a credit, known as the assignor, by a legal cause,
such as sale, dation in payment, exchange or donation, and
without the need of the consent of the debtor, transfers his
credit and its accessory rights to another, known as the
assignee, who acquires the power to enforce it to the same
extent as the assignor could have enforced it against the
debtor. ... It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor, in order
to obtain a release from his debt, assigns to his creditor a
credit he has against a third person, or it may constitute a
donation as when it is by gratuitous title; or it may even be
merely by way of guaranty, as when the creditor gives as a
collateral, to secure his own debt in favor of the assignee,
without transmitting ownership. The character that it may
assume determines its requisites and effects. its regulation,
and the capacity of the parties to execute it; and in every case,
the obligations between assignor and assignee will depend
upon the judicial relation which is the basis of the assignment:
(Tolentino, Commentaries and Jurisprudence on the Civil Code
of the Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of
receivables executed by appellants in favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by
appellants on January 24, 1964 did not transfer the ownership
of the receivables to appellee bank and release appellants
from their loans with the bank incurred under promissory notes
Nos. 11487,11515 and 11699.
The Deed of Assignment provided that it was for and in
consideration of certain credits, loans, overdrafts, and their
credit accommodations in the sum of P10,000.00 extended to
appellants by appellee bank, and as security for the payment
of said sum and the interest thereon; that appellants as
assignors, remise, release, and quitclaim to assignee bank all
their rights, title and interest in and to the accounts receivable
assigned (lst paragraph). It was further stipulated that the
assignment will also stand as a continuing guaranty for future
29
loans of appellants to appellee bank and correspondingly the
assignment shall also extend to all the accounts receivable;
appellants shall also obtain in the future, until the consideration
on the loans secured by appellants from appellee bank shall
have been fully paid by them (No. 9).
The position of appellants, however, is that the deed of
assignment is a quitclaim in consideration of their
indebtedness to appellee bank, not mere guaranty, in view of
the following provisions of the deed of assignment:
... the Assignor do hereby remise, release
and quit-claim unto said assignee all
its rights, title and interest in the accounts
receivable described hereunder. (Emphasis
supplied by appellants, first par., Deed of
Assignment).
... that the title and right of possession to
said account receivable is to remain in said
assignee and it shall have the right to collect
directly from the debtor, and whatever the
Assignor does in connection with the
collection of said accounts, it agrees to do so
as agent and representative of the Assignee
and it trust for said Assignee ...(Ibid. par. 2 of
Deed of Assignment).' (Record on Appeal, p.
27)
The character of the transactions between the parties is not,
however, determined by the language used in the document
but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section
50) said:
The characters of the transaction between
the parties is to be determined by their
intention, regardless of what language was
used or what the form of the transfer was. If
it was intended to secure the payment of
money, it must be construed as a pledge.
However, even though a transfer, if regarded
by itself, appellate to have been absolute, its
object and character might still be qualified
and explained by a contemporaneous writing
declaring it to have been a deposit of the
property as collateral security. It has been Id
that a transfer of property by the debtor to a
creditor, even if sufficient on its farm to make
an absolute conveyance, should be treated
as a pledge if the debt continues in existence
and is not discharged by the transfer, and
that accordingly, the use of the terms
ordinarily exporting conveyance, of absolute
ownership will not be given that effect in
such a transaction if they are also commonly
used in pledges and mortgages and
therefore do not unqualifiedly indicate a
transfer of absolute ownership, in the
absence of clear and ambiguous language
or other circumstances excluding an intent to
pledge. (Lopez v. Court of Appeals, 114
SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from
a sale transaction. It cannot be said to have been constituted
by virtue of a dation in payment for appellants' loans with the
bank evidenced by promissory note Nos. 11487, 11515 and
11699 which are the subject of the suit for collection in Civil
Case No. 78178. At the time the deed of assignment was
executed, said loans were non-existent yet. The deed of
assignment was executed on January 24, 1964 (Exh. "G"),
while promissory note No. 11487 is dated April 25, 1966 (Exh.
'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it
was a dation in payment for P10,000.00, the amount of credit
from appellee bank indicated in the deed of assignment. At the
time the assignment was executed, there was no obligation to
be extinguished except the amount of P10,000.00. Moreover,
in order that an obligation may be extinguished by another
which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other
(Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral
security for the bank loans of appellants, as a continuing
guaranty for whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge, the
latter being the lesser transmission of rights and interests
(Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the
defendant in the contracts of lease of two buildings as well as
her rights, title and interest in the land on which the buildings
were constructed to secure an overdraft from a bank
amounting to P110,000.00 which was increased to
P150,000.00, then to P165,000.00 was considered by the
Court to be documents of mortgage contracts inasmuch as
they were executed to guarantee the principal obligations of
the defendant consisting of the overdrafts or the indebtedness
resulting therefrom. The Court ruled that an assignment to
guarantee an obligation is in effect a mortgage and not an
absolute conveyance of title which confers ownership on the
assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126
[1937]).
II
As to whether or not appellee bank must have to exhaust all
legal remedies against the Philippine Fisheries Commission
before it can proceed against appellants for collection of loans
under their promissory notes, must also be answered in the
negative.
The obligation of appellants under the promissory notes not
having been released by the assignment of receivables,
appellants remain as the principal debtors of appellee bank
rather than mere guarantors. The deed of assignment merely
guarantees said obligations. That the guarantor cannot be
compelled to pay the creditor unless the latter has exhausted
all the property of the debtor, and has resorted to all the legal
remedies against the debtor, under Article 2058 of the New
Civil Code does not therefore apply to them. It is of course of
30
the essence of a contract of pledge or mortgage that when the
principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment
to the creditor (Article 2087, New Civil Code). In the instant
case, appellants are both the principal debtors and the
pledgors or mortgagors. Resort to one is, therefore, resort to
the other.
Appellee bank did try to collect on the pledged receivables. As
the Emergency Employment Agency (EEA) which issued the
receivables had been abolished, the collection had to be
coursed through the Office of the President which disapproved
the same (Record on Appeal, p. 16). The receivable became
virtually worthless leaving appellants' loans from appellee bank
unsecured. It is but proper that after their repeated demands
made on appellants for the settlement of their obligations,
appellee bank should proceed against appellants. It would be
an exercise in futility to proceed against a defunct office for the
collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and
the appealed decision of the trial court is affirmed in toto.
SO ORDERED.
G.R. No. 3227 March 22, 1907
PEDRO ALCANTARA, plaintiff-appellee,
vs.
AMBROSIO ALINEA, ET AL., defendants-appellants.
S.D. Reyes for appellants.
J. Gerona for appellee.
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a complaint
in the Court of First Instance of La Laguna, praying that
judgment be rendered in his behalf ordering the defendants to
de liver to him the house and lot claimed, and to pay him in
addition thereto as rent the sum of 8 pesos per month from
February of that year, and to pay the costs of the action; and
the plaintiff alleged in effect that on the 29th day of February,
1904, the defendants, Ambrosio Alinea and Eudosia
Belarmino, borrowed from him the sum of 480 pesos, payable
in January of said year 1905 under the agreement that if, at the
expiration of the said period, said amount should not be paid it
would be understood that the house and lot, the house being
constructed of strong materials, owned by the said defendants
and located in the town of San Pablo on the street of the same
name, Province of La Laguna, be considered as absolutely
sold to the plaintiff for the said sum; that the superficial extent
and boundaries of said property are described in the complaint;
and that, notwithstanding that the time for the payment of said
sum has expired and no payment has been made, the
defendants refuse to deliver to plaintiff the said property,
openly violating that which they contracted to do and depriving
him to his loss of the rents which plaintiff should received, the
same counting from February, 1905.
The defendants, after the overruling of a demurrer to the
complaint herein, answered denying generally and specifically
all the allegations contained in the complaint, except those
which were expressly admitted, and alleged that the amount
claimed included the interest; and that the principal borrowed
was only 200 pesos and that the interest was 280 pesos,
although in drawing the document by mutual consent of the
parties thereto the amount of indebtedness was made to
appear in the sum of 480 pesos; and that as their special
defense defendants alleged that they offered to pay the plaintiff
the sum of 480 pesos, but the plaintiff had refused to accept
the same, therefore they persisted in making said offer and
tender of payment, placing at the disposal of the plaintiff the
said 480 pesos first tendered; and defendants asked for the
costs of action.
After having taken the evidence of both parties and attaching
the documents presented in evidence to the record, the judge
on November 27, 1905, rendered a judgment ordering the
defendants to deliver to the plaintiff the house and lot, the
object of this litigation, and to pay the costs of the action, not
making any finding upon the question of loss or damages by
reason of the absence of proof on these points. The
defendants duly took exception to this decision, and asked for
a new trial of the case on the ground that the findings of the
court below in its decision were plainly contrary to law, which
motion was overruled and from which ruling defendants also
excepted.
We have in this case a contract of loan and a promise of sale
of a house and lot, the price of which should be the amount
loaned, if within a fixed period of time such amount should not
be paid by the debtor-vendor of the property to the creditor-
vendee of same.
Either one of the contracts are perfectly legal and both are
authorized respectively by articles 1451, 1740, and 1753, and
those following, of the Civil Code. The fact that the parties
have agreed at the same time, in such a manner that the
fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced
any charge in the nature and legal conditions of either contract,
or any essential defect which would tend to nullify the same.
If the promise of sale is not vitiated because, according to the
agreement between the parties thereto, the price of the same
is to be the amount loaned and not repaid, neither would the
loan be null or illegal, for the reason that the added agreement
provides that in the event of failure of payment the sale of
property as agreed will take effect, the consideration being the
amount loaned and not paid. No article of the Civil Code, under
the rules or regulations of which such double contract was
executed, prohibits expressly, or by inference from any of its
provisions, that an agreement could not be made in the form in
which the same has been executed; on the contrary, article
1278 of the aforesaid code provides that "contracts shall be
binding, whatever may be the form in which they may have
been executed, provided the essential conditions required for
their validity exist." This legal prescription appears firmly
sustained by the settled practice of the courts.
The property, the sale of which was agreed to by the debtors,
does not appear mortgaged in favor of the creditor, because in
31
order to constitute a valid mortgage it is indispensable that the
instrument be registered in the Register of Property, in
accordance with article 1875 of the Civil Code, and the
document of contract, Exhibit A, does not constitute a
mortgage, nor could it possibly be a mortgage, for the reason
of said document is not vested with the character and
conditions of a public instrument.
By the aforesaid document, Exhibit A, said property could not
be pledged, not being personal property, and notwithstanding
the said double contract the debtor continued in possession
thereof and the said property has never been occupied by the
creditor.
Neither was there ever nay contract of antichresis by reason of
the said contract of loan, as is provided in articles 1881 and
those following of the Civil Code, inasmuch as the creditor-
plaintiff has never been in possession thereof, nor has he
enjoyed the said property, nor for one moment ever received
its rents; therefore, there are no proper terms in law, taking into
consideration the terms of the conditions contained in the
aforesaid contract, whereby this court can find that the contract
was null, and under no consideration whatever would it be just
to apply to the plaintiff articles 1859 and 1884 of the same
code.
The contract ( pactum commissorium) referred to in Law 41,
title 5, and law 12, title 12, of the fifth Partida, and perhaps
included in the prohibition and declaration of nullity expressed
in articles 1859 and 1884 of the Civil Code, indicates the
existence of the contracts of mortgage or of pledge or that
of antichresis, none of which have coincided in the loan
indicated herein.
It is a principle in law, invariably applied by the courts in the
decisions of actions instituted in the matter of compliance with
obligations, that the will of the contracting parties is the law of
contracts and that a man obligates himself to that to which he
promises to be bound, a principle in accordance with Law 1,
title 1, book 10 of the Novisima Recopilacion, and article 1091
of the Civil Code. That which is agreed to in a contract is law
between the parties, a doctrine established, among others, in
judgments of the supreme court of Spain of February 20, 1897,
and February 13, 1904.
It was agreed between plaintiff and defendants herein that if
defendants should not pay the loan of 480 pesos in January,
1905, the property belonging to the defendants and described
in the contract should remain sold for the aforesaid sum, and
such agreement must be complied with, inasmuch as there is
no ground in law to oppose the compliance with that which has
been agreed upon, having been so acknowledged by the
obligated parties.
The supreme court of Spain, applying the aforementioned laws
of Spanish origin to a similar case, establishes in its decision of
January 16, 1872, the following legal doctrine:
Basing the complaint upon the obligation signed by
the debtor, which judicially recognized his signature;
and after confessing to have received from the
plaintiff a certain amount, binding himself to return
same to the satisfaction of the plaintiff within the term
of four years, or in case of default to transfer direct
domain of the properties described in the obligation
and to execute the necessary sale; and the term
having expired and the aforesaid amount not having
been paid, said plaintiff has his right free from
impediment to claim same against the heirs of the
debtor.
The document of contract has been recognized by the
defendant Alinea and by the witnesses who signed same with
him, being therefore an authentic and efficacious document, in
accordance with article 1225 of the Civil Code; and as the
amount loaned has not been paid and continues in possession
of the debtor, it is only just that the promise of sale be carried
into effect, and the necessary instrument be executed by the
vendees.
Therefore, by virtue of the reasons given above and accepting
the findings given in the judgment appealed from, we affirm the
said judgment herein, with the costs against the appellants.
After expiration of twenty days from the date of the notification
of this decision let judgment be entered in accordance herewith
and ten days thereafter let the case be remanded to the court
from whence it came for proper action. So ordered.
G.R. No. 77465 May 21, 1988
SPOUSES UY TONG & KHO PO GIOK, petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE
BIENVENIDO C. EJERCITO, Judge of the Court of First
Instance of Manila, Branch XXXVII and BAYANIHAN
AUTOMOTIVE CORPORATION, respondents.
Platon A. Baysa for petitioner.
Manuel T. Ybarra for respondents.
CORTES, J.:
In the present petition, petitioners assail the validity of a deed
of assignment over an apartment unit and the leasehold rights
over the land on which the building housing the said apartment
stands for allegedly being in the nature of a pactum
commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho Po
Giok (SPOUSES) used to be the owners of Apartment No. 307
of the Ligaya Building, together with the leasehold right for
ninety- nine (99) years over the land on which the building
stands. The land is registered in the name of Ligaya
Investments, Inc. as evidenced by Transfer Certificate of Title
No. 79420 of the Registry of Deeds of the City of Manila. It
appears that Ligaya Investments, Inc. owned the building
which houses the apartment units but sold Apartment No. 307
32
and leased a portion of the land in which the building stands to
the SPOUSES.
In February, 1969, the SPOUSES purchased from private
respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven
(7) units of motor vehicles for a total amount of P47,700.00
payable in three (3) installments. The transaction was
evidenced by a written "Agreement" wherein the terms of
payment had been specified as follows:
That immediately upon signing of this
Agreement, the VENDEE shall pay unto the
VENDOR the amount of Seven Thousand
Seven Hundred (P7,000.00) Pesos,
Philippine Currency, and the amount of
Fifteen Thousand (P15,000.00) Pesos shah
be paid on or before March 30, 1969 and the
balance of Twenty Five Thousand
(P25,000.00) Pesos shall be paid on or
before April 30, 1969, the said amount again
to be secured by another postdated check
with maturity on April 30, 1969 to be drawn
by the VENDEE;
That it is fully understood that should the two
(2) aforementioned checks be not honored
on their respective maturity dates, herein
VENDOR will give VENDEE another sixty
(60) days from maturity dates, within which
to pay or redeem the value of the said
checks;
That if for any reason the VENDEE should
fail to pay her aforementioned obligation to
the VENDOR, the latter shall become
automatically the owner of the former's
apartment which is located at No. 307,
Ligaya Building, Alvarado St., Binondo,
Manila, with the only obligation on its part to
pay unto the VENDEE the amount of Three
Thousand Five Hundred Thirty Five
(P3,535.00) Pesos, Philippine Currency; and
in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in
favor of the VENDOR and or the Assignment
of Leasehold Rights. [emphasis supplied].
(Quoted in Decision in Civil Case No. 80420,
Exhibit "A" of Civil Case No. 1315321].
After making a downpayment of P7,700.00, the SPOUSES
failed to pay the balance of P40,000.00. Due to these unpaid
balances, BAYANIHAN filed an action for specific performance
against the SPOUSES docketed as Civil Case No. 80420 with
the Court of First Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in
favor of BAYANIHAN in a decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby
rendered, ordering the defendants, jointly
and severally, to pay the plaintiffs, the sum of
P40,000.00, with interest at the legal rate
from July 1, 1970 until full payment. In the
event of their failure to do so within thirty
(30) days from notice of this judgment, they
are hereby ordered to execute the
corresponding deed of absolute sale in favor
of the plaintiff and/or the assignment of
leasehold rights over the defendant's
apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the
payment by the plaintiff to the defendants of
the sum of P3,535.00. [emphasis supplied].
Pursuant to said judgment, an order for execution pending
appeal was issued by the trial court and a deed of assignment
dated May 27, 1972, was executed by the SPOUSES [Exhibit
"B", CFI Records, p. 127] over Apartment No. 307 of the
Ligaya Building together with the leasehold right over the land
on which the building stands. The SPOUSES acknowledged
receipt of the sum of P3,000.00 more or less, paid by
BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the
SPOUSES remained in possession of the premises.
Subsequently, they were allowed to remain in the premises as
lessees for a stipulated monthly rental until November 30,1972.
Despite the expiration of the said period, the SPOUSES failed
to surrender possession of the premises in favor of
BAYANIHAN. This prompted BAYANIHAN to file an ejectment
case against them in the City Court of Manila docketed as Civil
Case No. 240019. This action was however dismissed on the
ground that BAYANIHAN was not the real party in interest, not
being the owner of the building.
On February 7, 1979, after demands to vacate the subject
apartment made by BAYANIHAN's counsel was again ignored
by the SPOUSES, an action for recovery of possession with
damages was filed with the Court of First Instance of Manila,
docketed as Civil Case No. 121532 against the SPOUSES and
impleading Ligaya Investments, Inc. as party defendant. On
March 17, 1981, decision in said case was rendered in favor of
BAYANIHAN ordering the following:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff and against the
defendants spouses UY TONG and KHO
GIOK and defendant Ligaya Investment,
Inc., dismissing defendants' counterclaim
and ordering:
1. The defendants spouses UY TONG and
KHO PO GIOK and any andlor persons
claiming right under them, to vacate,
surrender and deliver possession of
Apartment 307, Ligaya Building, located at
64 Alvarado Street, Binondo, Manila to the
plaintiff;
2. Ordering defendant Ligaya Investment,
Inc. to recognize the right of ownership and
possession of the plaintiff over Apartment
No. 307, Ligaya Building;
33
 3. Ordering Ligaya Investment, Inc. to
acknowledge plaintiff as assignee-lessee in
liue of defendants spouses Uy Tong and Kho
Po Giok over the lot on which the building
was constructed;
4. Ordering the defendants spouses Uy Tong
and Kho Po Giok to pay to the plaintiff the
sum of P200.00 commencing from June,
1971 to November 30, 1972, or a total
amount of P3,400.00 as rental for the
apartment, and the sum of P200.00 from
December 1, 1972 until the premises are
finally vacated and surrendered to the
plaintiff, as reasonable compensation for the
use of the apartment; and
5. Ordering the defendants spouses Uy Tong
and Kho Po Giok to pay P3,000.00 as and
for attorney's fees to the plaintiff, and the
costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the
Court of Appeals. On October 2,1984, the respondent Court of
Appeals affirmed in toto the decision appealed from [Petition,
Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of
the said decision was denied by the respondent Court in a
resolution dated February 11, 1987 [Petition, Annex "C", Rollo,
pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of
the Court of Appeals rely on the following reasons:
I. The deed of assignment is null and void
because it is in the nature of a pactum
commissorium and/or was borne out of the
same.
II. The genuineness and due Prosecution of
the deed of assignment was not deemed
admitted by petitioner.
III. The deed of assignment is unenforceable
because the condition for its execution was
not complied with.
IV. The refusal of petitioners to vacate and
surrender the premises in question to private
respondent is justified and warranted by the
circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore
the contract entered into by the parties whereby petitioner Kho
Po Giok agreed that the apartment in question will
automatically become the property of private respondent
BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of
a pactum commissorium which is null and void, hence, the
deed of assignment which was borne out of the same
agreement suffers the same fate.
The prohibition on pactum commissorium stipulations is
provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of the same. Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements
for pactum commissorium to exist: (1) that there should be a
pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no
basis for the application of the pactum
commissorium provision. First, there is no indication of 'any
contract of mortgage entered into by the parties. It is a fact that
the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the
property by BAYANIHAN. When the SPOUSES defaulted in
their payments of the second and third installments of the
trucks they purchased, BAYANIHAN filed an action in court for
specific performance. The trial court rendered favorable
judgment for BAYANIHAN and ordered the SPOUSES to pay
the balance of their obligation and in case of failure to do so, to
execute a deed of assignment over the property involved in
this case. The SPOUSES elected to execute the deed of
assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN
because it took the intervention of the trial court to exact
fulfillment of the obligation, which, by its very nature is ". .
anathema to the concept of pacto commissorio" [Northern
Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973,
49 SCRA 392]. And even granting that the original agreement
between the parties had the badges of pactum commissorium,
the deed of assignment does not suffer the same fate as this
was executed pursuant to a valid judgment in Civil Case No.
80420 as can be gleaned from its very terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy
Tiong also known as Henry Uy and Kho Po
Giok, both of legal age, husband and wife,
respectively, and presently residing at 307
Ligaya Bldg., Alvarado St., Binondo, Manila,
and hereinafter to be known and called as
the ASSIGNORS, in favor of Bayanihan
Automotive Corporation, an entity duly
organized and existing under the laws of the
Philippines, with principal business address
at 1690 Otis St., Paco, Manila and
hereinafter to be known and called the
ASSIGNEE;
34
-witnesseth-
WHEREAS, the ASSIGNEE has filed a civil
complaint for "Specific Performance with
Damages" against the ASSIGNORS in the
Court of First Instance of Manila, Branch V,
said case having been docketed as Civil
Case No. 80420;
WHEREAS, the ASSIGNEE was able to
obtain a judgment against the ASSIGNOR
wherein the latter was ordered by the court
as follows, to wit:
WHEREFORE, judgment
is hereby rendered
ordering the defendants,
jointly and severally to pay
the plaintiff the sum of
P40,000.00, with interest
at the legal rate from July
31, 1970 until full payment.
In the event of their failure
to do so within thirty (30)
days from notice of this
judgment, they are hereby
ordered to execute the
corresponding deed of
absolute sale in favor of
the plaintiff and/or the
assignment of leasehold,
rights over the defendants'
apartment located at No.
307 Ligaya Building,
Alvarado Street, Binondo,
Manila, upon the payment
by the plaintiff to the
defendants the sum of P
3,535.00. The defendants
shall pay the costs.
WHEREAS, the court, upon petition by
herein ASSIGNEE and its deposit of
sufficient bond, has ordered for the
immediate execution of the said decision
even pending appeal of the aforesaid
decision;
WHEREAS, the ASSIGNORS have elected
to just execute the necessary deed of sale
and/or assignment of leasehold rights over
the apartment mentioned in the decision in
favor of the herein ASSIGNEE;
NOW, THEREFORE, for and in
consideration of the foregoing premises, the
ASSIGNORS have transferred assigned and
ceded, and by these presents do hereby
transfer, assign and cede all their rights and
interests over that place known as Apartment
No. 307 at the Ligaya Building which is
located at No. 864 Alvarado St., Binondo,
Manila, together with the corresponding
leasehold rights over the lot on which the
said building is constructed, in favor of the
hererein ASSIGNEE, its heirs or assigns.
IN WITNESS WHEREOF, We have hereunto
signed our names this 27th day of May, 1971
at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-
001620
Manila March 3, 1965
This being the case, there is no reason to impugn the validity
of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of
Appeals that their failure to deny the genuineness and due
execution of the deed of assignment was deemed an
admission thereof. The basis for this exception is the
SPOUSES' insistence that the deed of assignment having
been borne out of pactum commissorio is not subject to
ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned
ruling of the appellate court. Considering this Court's above
conclusion that the deed of assignment is not invalid, it follows
that when an action founded on this written instrument is filed,
the rule on contesting its genuineness and due execution must
be followed.
That facts reveal that the action in Civil Case No. 121532 was
founded on the deed of assignment. However, the SPOUSES,
in their answer to the complaint, failed to deny under oath and
specifically the genuineness and due execution of the said
deed. Perforce, under Section 8, Rule 8 of the Revised Rules
of Court, the SPOUSES are deemed to have admitted the
deed's genuineness and due execution. Besides, they
themselves admit that ". . . the contract was duly executed and
that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They
cannot now claim otherwise.
III. The SPOUSES also question the enforceability of the deed
of assignment. They contend that the deed is unenforceable
because the condition for its execution was not complied with.
What petitioners SPOUSES refer to is that portion of the
disposition in Civil Case No. 80420 requiring BAYANIHAN to
pay the former the sum of P 3,535.00. To buttress their claim of
non- compliance, they invoke the following receipt issued by
the SPOUSES to show that BAYANIHAN was P535.00 short of
the complete payment.
RECEIPT
This is to acknowledge the fact that the
amount of THREE THOUSAND (P3,000.00)
PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasquez,
35
 Presiding Judge of the Court of First
Instance of Manila, Branch V, in Civil Case
entitled "Bayanihan Automotive Corp. v. Pho
(sic) Po Giok, etc." and docketed as Civil
Case No. 80420 has been applied for the
payment of the previous rentals of the
property which is the subject matter of the
aforesaid judgment. [emphasis supplied.]
August 21, 1971
The issue presented involves a question of fact which is not
within this Court's competence to look into. Suffice it to say that
this Court is of the view that findings and conclusion of the trial
court and the Court of Appeals on the question of whether
there was compliance by BAYANIHAN of its obligation under
the decision in Civil Case No. 80420 to pay the SPOUSES the
sum of P3,535.00 is borne by the evidence on record. The
Court finds merit in the following findings of the trial court:
... Defendants 'contention that the P
3,535.00 required in the decision in Civil
Case No. 80420 as a condition for the
execution of the deed of assignment was not
paid by the plaintiff to the defendants is
belied by the fact that the
defendants acknowledged payment
P3,000.00, more or less, in a receipt dated
August 21, 1971. This amount was expressly
mentioned in this receipt as indicated in the
judgment of the Honorable Conrado
Vasquez, presiding Judge of the CFI of
Manila, Branch V, in Civil Case entitled
Bayanihan Automotive Corp. versus Kho Po
Giok, docketed as Civil Case No. 80420, and
also expressly mentioned as having been
applied for the payment of the previous
rentals of the property subject matter of the
said judgment. Nothing could be more
explicit. The contention that there is still a
difference of P535.00 is had to believe
because the spouses Kho Po Giok and Uy
Tong executed the deed of assignment
without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended
by the plaintiff, for it to refuse to pay this
small amount and thus gave defendants a
reason not to execute the Deed of
Assignment. is hard to believe Defendants
further confirm by the joint manifestation of
plaintiff and defendants, duly assisted by
counsel, Puerto and Associates, dated
September, 1971, Exhibit "O", wherein it was
stated that plaintiff has fully complied with its
obligation to the defendants caused upon it
(sic) by the pronouncement of the judgment
as a condition for the execution of their (sic)
leasehold rights of defendants, as evidenced
by the receipt duly executed by the
defendants, and which was already
submitted in open court for the consideration
of the sum of P3,535.00. [Emphasis
supplied]. [Decision, Civil Case No. 121532,
pp. 3-4].
This Court agrees with private respondent BAYANIHAN's
reasoning that inasmuch as the decision in Civil Case No.
80420 imposed upon the parties correlative obligations which
(Sgd.) Pho
were
(sic)simultaneously
Po Glok demandable so much so that if private
respondent refused to comply with its obligation under the
judgment
(Sgd.) Henry Uy to pay the sum of P 3,535.00 then it could not
compel petitioners to comply with their own obligation to
execute the deed of assignment over the subject premises.
The fact that petitioners executed the deed of assignment with
the assistance of their counsel leads to no other conclusion
that private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to
vacate the premises subject of this litigation on the following
grounds:
(a) The deed of assingnment is in the nature
of a pactum commissorium and, therefore,
null and void.
(b) There was no full compliance by private
respondent of the condition imposed in the
deed of assignment.
of (c) Proof that petitioners have been allowed
to stay in the premises, is the very admission
of private respondent who declared that
petitioners were allowed to stay in the
premises until November 20, 1972. This
admission is very significant. Private
respondent merely stated that there was a
term-until November 30, 1972-in order to
give a semblance of validity to its attempt to
dispossess herein petitioners of the subject
premises. In short, this is one way of
rendering seemingly illegal petitioners
'possession of the premises after November
30, 1972.
The first two classifications are mere reiterations of the
arguments presented by the petitioners and which had been
passed upon already in this decision. As regards the third
ground, it is enough to state that the deed of assignment has
vested in the private respondent the rights and interests of the
SPOUSES over the apartment unit in question including the
leasehold rights over the land on which the building stands.
BAYANIHAN is therefore entitled to the possession thereof.
These are the clear terms of the deed of assignment which
cannot be superseded by bare allegations of fact that find no
support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit
and the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
36

G.R. No. 172592 July 9, 2008
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-
ONG, Petitioners,
vs.
ROBAN LENDING CORPORATION, Respondent.
AUSTRIA-MARTINEZ,*
DECISION
CARPIO MORALES, J.:
On different dates from July 14, 1999 to March 20, 2000,
petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These
loans were secured by a real estate mortgage on petitioners
parcels of land located in Binauganan, Tarlac City and covered
by TCT No. 297840.1
On February 12, 2001, petitioners and respondent executed an
Amendment to Amended Real Estate Mortgage2consolidating
their loans inclusive of charges thereon which
totaled P5,916,117.50. On even date, the parties executed a
Dacion in Payment Agreement3 wherein petitioners assigned
the properties covered by TCT No. 297840 to respondent in
settlement of their total obligation, and a Memorandum of
Agreement4 reading:
That the FIRST PARTY [Roban Lending Corporation] and the
SECOND PARTY [the petitioners] agreed to consolidate and
restructure all aforementioned loans, which have been all past
due and delinquent since April 19, 2000, and outstanding
obligations totaling P5,916,117.50. The SECOND PARTY
hereby sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms
xxx an integral part of this document), with a promise to pay
the FIRST PARTY in full within one year from the date of the
consolidation and restructuring, otherwise the SECOND
PARTY agree to have their "DACION IN PAYMENT"
agreement, which they have executed and signed today in
favor of the FIRST PARTY be enforced[.]5
In April 2002 (the day is illegible), petitioners filed a
Complaint,6 docketed as Civil Case No. 9322, before the
Regional Trial Court (RTC) of Tarlac City, for declaration of
mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages,
alleging that the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum commissorium.7
Petitioners alleged that the loans extended to them from July
14, 1999 to March 20, 2000 were founded on several uniform
promissory notes, which provided for 3.5% monthly interest
rates, 5% penalty per month on the total amount due and
demandable, and a further sum of 25% attorneys fees
thereon,8 and in addition, respondent exacted certain sums
denominated as "EVAT/AR."9 Petitioners decried these
additional charges as "illegal, iniquitous, unconscionable, and
revolting to the conscience as they hardly allow any borrower
any chance of survival in case of default."10
Petitioners further alleged that they had previously made
payments on their loan accounts, but because of the illegal
exactions thereon, the total balance appears not to have
moved at all, hence, accounting was in order.11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and
its amendments x x x as null and void and without
legal force and effect for having been renounced,
abandoned, and given up;
b) Declaring the "Memorandum of Agreement" xxx
and "Dacion in Payment" x x x as null and void for
being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and
attorneys fees assessed and loaded into the loan
accounts of the plaintiffs with defendant as unjust,
iniquitous, unconscionable and illegal and therefore,
stricken out or set aside;
d) Ordering an accounting on plaintiffs loan accounts
to determine the true and correct balances on their
obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: --
e.1 Moral damages in an amount not less
than P100,000.00 and exemplary damages
of P50,000.00;
e.2 Attorneys fees in the amount of
P50,000.00 plus P1,000.00 appearance fee
per hearing; and
e.3 The cost of suit.12
as well as other just and equitable reliefs.
In its Answer with Counterclaim,13 respondent maintained the
legality of its transactions with petitioners, alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement
and Dacion in Payment Agreement novated the Real Estate
Mortgage then the allegation of Pactum Commissorium has no
more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is
recognized x x x under Art. 1245 of the Civil Code as a special
form of payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of their
monetary obligation;
37
The accumulated interest and other charges which were
computed for more than two (2) years would stand reasonable
and valid taking into consideration [that] the principal loan
is P4,000,000 and if indeed it became beyond the Plaintiffs
capacity to pay then the fault is attributed to them and not the
Defendant[.]14
After pre-trial, the initial hearing of the case, originally set on
December 11, 2002, was reset several times due to, among
other things, the parties efforts to settle the case
amicably.151avvphi1
During the scheduled initial hearing of May 7, 2003, the RTC
issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the
ground that he is in Manila and he is attending to a very sick
relative, without objection on the part of the defendants
counsel, the initial hearing of this case is reset to June 18,
2003 at 10:00 oclock in the morning.
Just in case [plaintiffs counsel] Atty. Concepcion cannot
present his witness in the person of Mr. Wilfredo Ong in the
next scheduled hearing, the counsel manifested that he will
submit the case for summary judgment.16(Underscoring
supplied)
It appears that the June 18, 2003 setting was eventually
rescheduled to February 11, 2004 at which both counsels were
present17 and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at
10:00 oclock in the morning. However, the counsels are
directed to be ready with their memorand[a] together with all
the exhibits or evidence needed to support their respective
positions which should be the basis for the judgment on the
pleadings if the parties fail to settle the case in the next
scheduled setting.
x x x x18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels
appeared but only the counsel of respondent filed a
memorandum.19
By Decision of April 21, 2004, Branch 64 of the Tarlac City
RTC, finding on the basis of the pleadings that there was
no pactum commissorium, dismissed the complaint.20
On appeal,21 the Court of Appeals22 noted that
x x x [W]hile the trial court in its decision stated that it was
rendering judgment on the pleadings, x x x what it actually
rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue,
or otherwise admits the material allegations of the adverse
partys pleading. However, a judgment on the pleadings would
not have been proper in this case as the answer tendered an
issue, i.e. the validity of the MOA and DPA. On the other hand,
a summary judgment may be rendered by the court if the
pleadings, supporting affidavits, and other documents show
that, except as to the amount of damages, there is no genuine
issue as to any material fact.23
Nevertheless, finding the error in nomenclature "to be mere
semantics with no bearing on the merits of the case", 24the
Court of Appeals upheld the RTC decision that there was
no pactum commissorium.25
Their Motion for Reconsideration26 having been
27
denied, petitioners filed the instant Petition for Review on
Certiorari,28 faulting the Court of Appeals for having committed
a clear and reversible error
I. . . . WHEN IT FAILED AND REFUSED TO APPLY
PROCEDURAL REQUISITES WHICH WOULD
WARRANT THE SETTING ASIDE OF THE
SUMMARY JUDGMENT IN VIOLATION OF
APPELLANTS RIGHT TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL
IN THIS CASE IS NECESSARY BECAUSE THE
FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD
THAT THE MEMORANDUM OF AGREEMENT (MOA)
AND THE DACION EN PAGO AGREEMENT (DPA)
WERE DESIGNED TO CIRCUMVENT THE LAW
AGAINST PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE NULL AND VOID
FOR BEING CONTRARY TO LAW AND PUBLIC
POLICY.29
The petition is meritorious.
Both parties admit the execution and contents of the
Memorandum of Agreement and Dacion in Payment. They
differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
This Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which is
prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void."
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
without the need of any foreclosure proceedings, 30 are: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.31
In the case at bar, the Memorandum of Agreement and the
Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of
38
Agreement, the failure by the petitioners to pay their debt
within the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it ownership of
the properties covered by TCT No. 297840. Respondent, in
effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.
Respondent argues that the law recognizes dacion en pago as
a special form of payment whereby the debtor alienates
property to the creditor in satisfaction of a monetary
obligation.32 This does not persuade. In a true dacion en pago,
the assignment of the property extinguishes the monetary
debt.33 In the case at bar, the alienation of the properties was
by way of security, and not by way of satisfying the debt. 34 The
Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in
Payment, petitioners had to execute a promissory note
for P5,916,117.50 which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of
Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not involve the
issue of pactum commissorium.38
That the questioned contracts were freely and voluntarily
executed by petitioners and respondent is of no
moment, pactum commissorium being void for being prohibited
by law.39
Respecting the charges on the loans, courts may reduce
interest rates, penalty charges, and attorneys fees if they are
iniquitous or unconscionable.40
This Court, based on existing jurisprudence,41 finds the
monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This
Court finds too the penalty fee at the monthly rate of 5% (60%
per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to
and becoming part of the principal and likewise bearing interest
at the same rate, compounded monthly42 unconscionable
and reduces it to a yearly rate of 12% of the amount due, to be
computed from the time of demand. 43 This Court finds the
attorneys fees of 25% of the principal, interests and interests
thereon, and the penalty fees unconscionable, and thus
reduces the attorneys fees to 25% of the principal amount
only.44
The prayer for accounting in petitioners complaint requires
presentation of evidence, they claiming to have made partial
payments on their loans, vis a vis respondents denial
thereof.45 A remand of the case is thus in order.
Prescinding from the above disquisition, the trial court and the
Court of Appeals erred in holding that a summary judgment is
proper. A summary judgment is permitted only if there is no
genuine issue as to any material fact and a moving party is
entitled to a judgment as a matter of law.46 A summary
judgment is proper if, while the pleadings on their face appear
to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not
genuine.47 A genuine issue, as opposed to a fictitious or
contrived one, is an issue of fact that requires the presentation
of evidence.48 As mentioned above, petitioners prayer for
accounting requires the presentation of evidence on the issue
of partial payment.
But neither is a judgment on the pleadings proper. A judgment
on the pleadings may be rendered only when an answer fails
to tender an issue or otherwise admits the material allegations
of the adverse partys pleadings.49 In the case at bar,
respondents Answer with Counterclaim disputed petitioners
claims that the Memorandum of Agreement and Dation in
Payment are illegal and that the extra charges on the loans are
unconscionable.50Respondent disputed too petitioners
allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals Decision is
REVERSED and SET ASIDE. The Memorandum of Agreement
and the Dacion in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared
NULL AND VOID for being pactum commissorium.
In line with the foregoing findings, the following terms of the
loan contracts between the parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per
annum, is reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount
due and demandable is reduced to 12% per annum,
to be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the
principal amount only.
Civil Case No. 9322 is REMANDED to the court of origin only
for the purpose of receiving evidence on petitioners prayer for
accounting.
SO ORDERED.
G.R. No. 199420 August 27, 2014
PHILNICO INDUSTRIAL CORPORATION, Petitioner,
vs.
PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.
x-----------------------x
G.R. No. 199432
PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner,
vs.
PHILNICO INDUSTRIAL CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
39
Before the Court are the consolidated Petitions for Review on
Certiorari under Rule 45 of the Rules of Court involving the
Decision1 dated January 31, 2011 and Resolution2 dated
November 18, 2011 of the Court of Appeals in CA-G.R. SP. No.
111108, which affirmed the Order3 dated August 25, 2009 of the
Regional Trial Court (R TC), Branch 64 of Makati City in Civil
Case No. 03-114.
THE PARTIES
The Petition in G.R. No. 199420 was filed by Philnico Industrial
Corporation (PIC). It is a corporation duly organized under the
laws of the Philippines and which, together withPhilnico
Processing Corporation (PPC) and Pacific Nickel Philippines,
Inc. (PNPI), form the Philnico Group. The Philnico Group is
engaged in nickel mining and refining business. PIC and PNPI
hold a Mineral Production Sharing Agreement over nickel
mining areas in Nonoc and Dinagat Islands inSurigao, while
PPC owns a nickel refinery complex also in Nonoc Island.4
The Petition in G.R. No. 199432 was filed by the Privatization
and Management Office (PMO), an attached agency of the
Department of Finance. PMO succeeded the Asset
Privatization Trust (APT), when the latters life ended on
December 31, 2000.5 The PMO serves as the marketing arm of
the Government with respect to Transferred Assets,
Government Corporations and other properties assigned to it
by the Privatization Council (PrC) for disposition. Together, the
mission of the PMO and PrC is to take title to and possession
of, conserve, provisionally manage, and dispose of assets
previouslyidentified for privatization; and, in the process,
reduce the Governments maintenance expense on
nonperforming assets, generating maximum cash recovery for
the National Government.6
ANTECEDENT FACTS
The Development Bank of the Philippines and Philippine
National Bank, by virtue of foreclosure proceedings, became
the holders of all the shares of stock in PPC (then still the
Nonoc Mining and Industrial Corporation). The banks
eventually transferred their PPC shares of stock to PMO (then
still the APT) in 1987.
On May 10, 1996, PMO, PIC (then still the Philnico Mining and
Industrial Corporation), and PPC executed a contract,
denominated as the Amended and Restated Definitive
Agreement (ARDA), which laid down the terms and conditions
of the purchase and acquisition by PIC from PMO of
22,500,000 shares of stock of PPC (representing 90% of
ownership of PPC), as well as receivables of PMO from PPC.
Under the ARDA, PIC agreed to pay PMO the peso equivalent
of US$333,762,000.00 as purchase price, payable in
installments and in accordance with the schedule also set out
in the ARDA.7
Among the provisions of the ARDA relevant to the instant
cases are Sections 2.04 and 2.07, which govern the rights and
obligations of the parties as regards the PPC shares of stock,
viz: 2.04 Security
(a) As security for the payment of the Purchase Price
in accordance with the terms of this Agreement, the
Buyer shall pledge the Shares to the Seller and
execute a pledge agreement (the "Pledge
Agreement") in favor of the Seller in substantially the
form of Annex A. The Buyer shall also pledge to the
Seller the Converted Shares and the New Shares as
security for the payment of the Purchase Price upon
the issuance of such shares in the name of the Buyer.
xxxx
2.07 Closing
(a) The closing of the sale and purchase of the
Shares and the Tranche B Receivables under this
Agreement shall take place on the Closing Date and
at such place as may be agreed between the Buyer
and the Seller upon the fulfillment of all of the
conditions precedent specified in Sections 4.01 and
4.02 (unless any such condition precedent shall have
been waived by the Buyer or the Seller, as the case
may be). At the closing, the following transactions
shall take place:
(1) the Seller shall execute and deliver to the
Buyer the necessary deed of sale
transferring to the Buyer all of the Sellers
right, title and interest in and to the Shares
and deliver to the Buyer the stock certificates
representing such shares, each duly
endorsed, or with separatestock transfer
powers attached, in favor of the Buyer
together with the duly executed resignations
of the directors of the Company named in
Schedule 6;
(2) the Company shall issue in the name of,
and deliver to, the Buyer new stock
certificates representing the Shares;
(3) the Buyer shall execute and deliver the
Pledge Agreement covering the Shares and
deliver to the Seller the stock certificates
representing such shares;
xxxx
(b) From and after the Closing Date, the Buyer shall
exercise all the rights (including the right to vote) of a
shareholder in respect of the Shares (subject to the
negative covenants contained in the Pledge
Agreement).8
Also worthy of note herein is Section 8 of the ARDA on default,
which states:
SECTION 8. DEFAULT AND DEFAULT REMEDIES
8.01 Events of Default
Subject to any applicable curing period, each of the following
events shall constitute an Event of Default hereunder:
40
 (a) The Buyer shall, subject tothe provisions of
Section 2.03(b), fail to pay any two consecutive
installments on the Purchase Price in accordance with
the terms of Section 2.03.
(b) The Buyer shall fail to complywith or observe any
other material term, obligation or covenant contained
in this Agreement or in the Pledge Agreement.
(c) The Buyer shall commit any act of bankruptcy or
insolvency, or shall file any petition or action for relief
under any bankruptcy, reorganization, insolvency or
moratorium law or other law or laws for the relief of
debtors.
8.02 Consequence of Default
At any time after the happening of an Event of Default, and
provided that the same shall not have been remedied within
ninety (90) days from receipt by the Buyer of written notice
from the Seller, the Seller may declare the buyer in default and,
asa consequence thereof, exercise such rights and remedies
as it may have under this Agreement and applicable laws
(including the cancellation of these Agreement); provided that
in case of default under Section 8.01(a), the title to the Existing
Shares and the Converted Shares shall ipso facto revertto the
Seller without need of demand in case such payment default is
not remedied by the Buyer within ninety (90) days from the due
date of the second installment. (Emphasis supplied.)9
In accordance with the ARDA, PMO executed and delivered to
PIC the necessary documents to transfer the formers rights,
title, and interests to and in the PPC shares of stock to the
latter; and PPC issued new certificates for the same shares of
stock in the name of PIC and/or its nominees.
On May 2, 1997, PIC and PNPI as pledgors and PMO as
pledgee executed a Pledge Agreement10 which began with
"Whereas Clauses" that read:
WHEREAS, [PIC] and the [PMO] have entered into an
Amended and Restated Definitive Agreement, dated May 10,
1996, involving the purchase by the [PIC] from the [PMO] of
22,500,000 shares of common stock of [PPC] and certain
receivables of the [PMO] from said corporation; and
WHEREAS, to secure the obligation of [PIC] to pay the
purchase price and all other amounts due the [PMO] under the
aforesaid Definitive Agreement and the performance by [PIC]
of its other obligations thereunder and under this Pledge
Agreement, the [PIC and PNPI] have agreed to execute and
deliver thisPledge Agreement, giving unto the [PMO] a good
and valid pledge over the pledge[d] shares[.]11
Sections 3.01 and 3.02 of the Pledge Agreement expressly
acknowledged that PIC delivered its certificates of shares of
stock in PPC and that PMO received said certificates.12 Section
5 of the same Agreement covered default and the available
remedies in case thereof, thus: SECTION [5]. DEFAULT
REMEDIES, ETC.
5.01 Events of Default
The following shall be considered Events of Default under this
Pledge Agreement:
(a) [PIC] shall fail to pay when duethe obligations after
giving effect to any applicable period of grace; or
(b) [PIC] or PNPI shall fail to comply with or observe
any other material term, obligation or covenant
contained in this Pledge Agreement or the Definitive
Agreement; or
(c) [PIC] or PNPI shall commit any act of bankruptcy
or insolvency, or shall file any petition or action for
relief under any bankruptcy, reorganization,
insolvency or moratorium law or other x x x laws for
the relief of debtors; or
(d) The priority of the lien of or the security interest
granted by this Pledge Agreement shall be impaired,
or this Pledge Agreement shall cease to be a first and
preferred lien upon the Pledged Shares.
5.02 Consequences of Default
If an Event of Default shall have occurred, then at any time
thereafter, if any such event shall then be continuing after the
applicable grace period, if any, the [PMO] is hereby authorized:
(a) To sell in one or more sales, either public or
private, at any time the whole or any part of the
Pledged Shares in such order and number as the
[PMO] may elect at its place of business or elsewhere
and the [PMO] may, in all allowable cases, be the
purchaser of any or all Pledged Shares so sold and
hold the same thereafter in its own right free from any
claim of [PIC] or any right of redemption;
(b) To issue receipts and to execute and deliver any
instrument or document or do any act necessary for
the transferand assignment of all rights, title and
interest of [PIC] in the Pledged Shares to the
purchaser or purchasers thereof; and
(c) To apply, at the [PMOs] option, the proceeds of
any said sale, as well as all sums received orcollected
by the [PMO] from or on account of such Pledged
Shares to (i) the payment of expenses incurred or
paid by the [PMO] in connection with any sale,
transfer or delivery of the Pledged Shares and (ii) the
payment of the Obligations or any part thereof.13
In the meantime, the nickel refinery complex of PPC, which last
operated in the 1980s, had become obsolete and much of the
facilities therein were already scrap. The estimated cost in
2003 for building an entirely new refinery plant based on new
technology was about US$1 Billion. The Philnico Group, which
had already invested at least US$60 Million, was inviting and
negotiating withprospective foreign investors who could assist
in its business.
On account of the huge financial cost of building a new nickel
refinery plant, coupled with the economic problems then
41
affecting the AsiaPacific Region, PMO, PIC, and PPC executed
an Amendment Agreement14 on September 27, 1999 which
provided for the restructuring of the payment terms of the
entire obligation under the ARDA, the repayment of advances,
the conditions for borrowings or financing, a new cash break-
even formula, and the adoption of an investment plan.
Three years later, in a letter dated November 6, 2002, PMO
notified PIC that the latter had defaulted in the payment of its
obligations and demanded that PIC settle its unpaid
amortizations in the total amount of US$275,000.00 within 90
days, or on or about February 5, 2003, or else the PMO would
enforce the automatic reversion of the PPC shares of stock
under Section 8.02 of the ARDA. PIC replied in a letter dated
January 7, 2003 requesting PMO to set aside its notice of
default; to not rescind the sale of the PPC shares of stock; and
to give PIC an opportunity to conclude its fund-raising efforts
for its business, particularly with a group of investors from
China. In another letter dated January 22, 2003 to PIC, PMO
clearly indicated its intention to enforce Section 8.02 of the
ARDA should PIC fail to settle its outstanding obligations after
February 5, 2003.
On February 4, 2003, a day before the deadline for payment
set by PMO in its letters, PIC filed beforethe RTC a Complaint
for Prohibition against Reversion of Shares with Prayer for Writ
of Preliminary Injunction and/or Temporary Restraining Order,
Suspension of Payment and Fixing of Period of Payment,
against PMO, PPC, and the PPC Corporate Secretary.
On February 7, 2003, PIC filed an Amended Complaint raising,
among other arguments, the need for mutual restitution in case
the ARDAis rescinded by the RTC. Ultimately, PIC prayed of
the RTC that:
(a) Upon the filing of this complaint, a temporary
restraining order be issued under Sec. 5 of Rule 58 of
[the] 1997 Rules of Civil Procedure prohibiting [PMO,
PPC, and the PPC Corporate Secretary] from
reverting the 22,500,000 shares covered by Stock
Certificate Nos. 018, 022, 024, 025, 026, 027, 028,
030 and 031 x x x in the name of [PIC] to defendant
PMO.
(b) After hearing
(i) A writ of preliminary injunction be issued prohibiting
[PMO, PPC, and the PPC Corporate Secretary] from
effecting the reversion of the aforementioned shares
in favor of defendant PMO until further orders from
the Court; and thereafter,
(c) Judgment issue
(i) Making the injunction permanent and ordering the
suspension of the payment of the amortizations as
provided for in the ARDA and fixing a reasonable
period within which said payment should be due; and
(d) Or in the alternative, in the remote possibility that
the ARDA x x x be considered rescinded, mutual
restitution be ordered by the Honorable Court as
provided by the Civil Code relative to reciprocal
obligations.
[PIC] prays for such further and equitable relief as may be just
and equitable in the premises.15
After the summary hearing held on February 7, 2003, the RTC
issued a temporary restraining order (TRO), effective for 20
days, restraining PMO, PPC, and the PPC Corporate
Secretary from effecting the reversion of the 22,500,000
shares of stock of PPC.
The RTC then conducted hearings on the prayer of PIC for the
issuance of a writ of preliminary injunction. The RTC
subsequently issued an Order16 on February 27, 2003 finding
PIC entitled to the issuance of such a writ for the following
reasons:
While the failure of [PIC] to meet its amortization with respect
to the smaller portion of the purchase price cannot be denied,
said default cannot automatically result in the reversion of the
shares of stocks to PMO. The provision in the ARDA providing
for ipso facto reversion of the shares of stock is null and void
for being a pactum commissorium. x x x.
xxxx
The automatic reversion of the shares of stock is by itself
automatic appropriation of the thing pledged, which is contrary
to good morals and public policy. It would alsoresult in unjust
enrichment on the part of defendant PMO. Even in case of
rescission, mutual restitution is allowed so as not to enrich one
party to the prejudice of the other. It would be tantamount to
confiscation ofproperty without due process. The seller had the
option of foreclosing the property pledged. The seller cannot
automatically appropriate the same to himself when the
ownership is already transferred to [PIC]. Thus, even for the
time being when foreclosure of the shares pledge[d] isbeing
considered, and the question of rescission is being deliberated,
[PIC] has a right to be protected and therefore entitled to the
relief of preliminary injunction.
Regarding the provision on referral to arbitration, granting that
the case is proper for arbitration, [PIC] isnonetheless entitled to
the writ of preliminary injunction pending the arbitration
proceeding.
xxxx
One of the requirements for the issuance of the writ of
preliminary injunction is when there is an urgent and
paramount necessity for the writ to prevent an irreparable
damage. Irreparable means one that can not be rectified. [PIC]
is in danger of losingits investment in the project without any
recourse if PMO will be allowed the automatic reversion of the
ownership of the 22,500,000 shares. The right of [PIC] will be
prejudiced if the writ of preliminary injunction will not be issued
in the meantime.17
The RTC thus decreed:
42
WHEREFORE, premises considered, the Writ of Preliminary
Injunction is GRANTED.
Until further Order from this Court,and subject to [PICs] filing
of a bond in the amount of P100,000,000.00 to pay for all the
damages which [PMO, PPC, and the PPC Corporate
Secretary] may sustain by reason of the injunction if the Court
will finally decide that [PIC] is not entitled thereto, defendants
Privatization and Management Office (PMO), Philnico
Processing Corporation (PPC), and the Corporation Secretary
of PPC are enjoined from effecting the reversion to PMO of the
22,500,000 shares purchased by plaintiff Philnico Industrial
Corporation and from selling the same to any third party.18
PMO filed a Motion for Reconsideration of the RTC Order
dated February 27, 2003, insisting that the provision on ipso
factoreversion in the ARDA did not constitute pactum
commissoriumand would not result in unjust enrichment on the
part of PMO. PMO likewise filed a Motion to Dismiss on the
ground that the complaint of PIC did not state a cause of
action. In its Order19 dated June 19, 2003, the RTC found no
merit in both Motions and held that:
1. The Motion for Reconsideration is DENIED. This Court
maintains that [PIC] is entitled to the issuance of the Writ of
Preliminary Injunction.
[PIC] has already acquired ownership of the 22,500,000 shares
when the ARDA was executed between the parties. The ARDA
merely provides for the transfer of the subject shares to [PIC].
As a matter of fact, [PIC] has executed a Pledge Agreement as
a security for the payment of [PICs] obligation with defendant
PMO.
xxxx
Under the ARDA, the relationship of [PIC] and defendant PMO
is that of a pledgor and pledgee and no longer as a buyer and
seller. As such, the ipso facto reversion of the shares in the
ARDA constitutes pactum commissorium. The execution of the
Pledge Agreement is precisely made to secure the payment of
[PICs] obligation with defendant PMO. The automatic
reversion of the shares if allowed will in fact constitute
automatic appropriation of the thing pledged which is
proscribed being pactum commissorium. The automatic
appropriation itself will prejudice the investment made by [PIC]
in the said project and all improvements will inure to defendant
PMO which the law abhors. Even in case of rescission, mutual
restitution is allowed so as not to enrich one party at the
expense of the other. This forfeitureclause in the ARDA is
contrary to law, good morals and public policy.
2. With respect to the Motion To Dismiss, the same is DENIED.
Cause of action is the act or omission by which a party violates
a right of another (Sec. 2, Rule 2 of the 1997 Rules on Civil
Procedure). As already stated in the resolution of the motion
for reconsideration, the ipso facto reversion of the shares
pursuant to Section 8.02 of the ARDA constitute[s] pactum
commissorium, and therefore null and void being contrary to
morals, law and public policy. As such, the ipso facto reversion
of the shares will result inunjust enrichment on the part of
defendant PMO for the reason that all investment of [PIC] with
the said project will inure to the benefit ofdefendant PMO with
[PIC] getting nothing.
The present case does not violate the principles of autonomy
of contract[s]. [PIC] seeks to prohibit the implementation of the
ipso facto reversion clause in the ARDA, which is contrary to
law being a pactum commissorium. This is a limitation imposed
by law, which is considered to be part of a contract. Contracts
must respect the law, for the law forms part of the contract.
While the contract is the law between the parties, the Court
may stop its enforcement if it is contrary to law, morals, good
customs or public policy (San Andres vs. Rodriguez, 332
SCRA 69).
While the ARDA provides for arbitration as mode of settlement
of the dispute (Section 9.05), the present complaint involves
interpretation of the provisions of the ARDA. Interpretation of
contracts is within the domain of the Court. The ipso facto
reversion of the shares in the ARDA can never be subject of
arbitration but it is within the domain of the court to declare
whether or not the same is valid or null and void.20
In the same Order, the RTC directed PMO, PPC, and the PPC
Secretary to file their answer to the complaint of PIC. PMO no
longer challenged the RTC Orders dated February 27, 2003
and June 19, 2003 before the appellate courts. Instead, PMO
complied with the RTC directive and already filed with the said
trial court its Answer and Amended Answer to the complaint of
PIC. The RTC proceeded to pre-trial when the parties failed to
arrive at an amicable settlement. On February 6,2009, the RTC
issued its Pre-trial Order21 in which it enumerated the
respective issues for resolution submitted by PIC and PMO, to
wit:
ISSUES ([PIC])
1. Whether or not the ipso facto reversion clause in
the ARDA is valid, and, whether or not it is a specie[s]
of pactum commissoriumwhich is outlawed.
2. Whether or not [PIC] is in default under the terms of
the ARDA which clearly contemplates the actual
operation of the plant before the subsequent
installments after the third year will be due, as it even
recognizes deferment of payment of installment if the
Nonoc mining plant and refinery is not yet in full
operation and has not produced sufficient cash
equivalent for payment to seller.
3. Even assuming that the schedule of payment is not
modified by the other terms of the ARDA (as actual
operation of the plant and refinery), whether or not
[PIC] may be considered as in default considering the
fortuitous events which are unforeseen and beyond
the control of [PIC] which had prevented [PIC] from
complying with its obligation under the scheduled
amortization. 4. Whether or not [PIC] is entitled to be
reimbursed what it had already paid and spent to
implement the contract, in the remote event that
APT/PMO may be allowed to exercise right [of]
rescission.
43
 5. Whether or not plaintiff [PIC] is required to resort to
arbitration to enforce its cause of action in the
complaint.
ISSUES ([PMO])
and (7) PMO thought it prudent to no longer assail the RTC
Orders dated February 27, 2003 and June 19, 2003 before the
appellate courts believing that such a move would only cause
further delay in the resolution of the case and cause more
irreparable damage to the

1. Whether or not defendant PMO may be prohibited
from ipso facto reverting the shares pursuant to the
ARDA considering that [PIC] defaulted in its payment
and there is an express provision in the ARDA
providing for the said provision.
National Government. PMO sought several reliefs from the
RTC in its Omnibus Motion, quoted as follows:
(1) That the Writ of Preliminary Injunction be
dissolved;

2. Whether or not the terms and modes of payments (2) That a representative of defendant PMO be
as provided in the ARDA may be suspended or fixed appointed to the PPCs and PNPIs board of directors
anew by reason of unforeseen events cited by [PIC]. or management; and

3. Whether or not defendant PMO may be enjoined by
this Honorable Court in the performance of its
functions and duties in connection with the sale or
disposition of assets transferred to it pursuant to
Proclamation No. 50-A.22 (Emphases supplied.)
(3) That [PIC] be required to submit an accounting of
its books and financial reports from the year 2003 to
2008.
Other just and equitable reliefs are also prayed for.23

PIC filed a Manifestation and Motion praying for the
modification of the foregoing Pre-trial Order dated February 6,
2009 of the RTC by deleting Issue Nos. 1 and 5 in the
Statement of Issues of PIC. PIC posited that these two issues
were already resolved by the RTC in the Order dated June 19,
2003 and should no longer be among the issuesto be tried in
the course of subsequent proceedings.
Following hearings and exchange ofpleadings by the parties,
the RTC collectively resolved the pending motions of PIC and
PMO in its Order dated August 25, 2009.
The RTC determined that there was sufficient basis to grant
the Manifestation and Motion of PIC to delete two issues from
the Pre-Trial Order dated February 6, 2009:

PMO countered in its Comment/Opposition that the RTC

The Court will not disturb the earlier findings of the previous
Orders dated February 27, 2003 and June 19, 2003 concerned
judge that the ipso factoreversion clause in the ARDA is invalid
only the issuance of the Writ of Preliminary Injunction; and the
and that it constitute[s] pactum commissorium. The Court finds
findings and conclusions of the trial court on the propriety of
no legal and factual reasons to change the previous findings of
the issuance of the injunctive writ are premised on initial and
the Honorable Delia H. Panganiban that [PIC] has already
incomplete evidence, which should be considered merely as
acquired ownership of the 22,500,000 shares sold to it and that
provisional. Said RTC Orders should not bind the trial court in
the ARDA is merely a scheme for the transfer of the said share
its determination of the merits of the caseand to hold otherwise
to the latter. As such, the relation between [PIC] and defendant
would result in the prejudgment of the case or disposition of
PMO has become that ofa mortgagor and mortgagee.
the main case without a fullblown trial. Consequently, PMO
Accordingly, the proviso in the ARDA for the ipso
prayed that the RTC deny the Manifestation and Motion of PIC.
factoreversion constitutes pactum commissorium.

PMO also successively filed an Omnibus Motion and a

The Court disagrees with [PMO] that the said finding is merely
Supplement to Omnibus Motion, asserting that: (1) the Writ of
initiatory as it was a finding on a legal issue. No other evidence
Preliminary Injunction was issued in 2003 by the RTC without
is needed to change the same. In fact, said issue was
jurisdiction and was therefore void, because there was no
extensively and exhaustively argued by the parties in their
compliance with the arbitration clause in the ARDA; (2) the
respective pleadings in relation thereto. It is presumed that the
continuance of the Writ of Preliminary Injunction is causing
previous Presiding Judge of this Court has considered all the
irreparable damage to the National Government; (3) since the
arguments raised by the parties.Section 3(o) of Rule 131 of the
issuance of the Writ of Preliminary Injunction six years before,
Revised Rules of Court provides: that all matters within an
PIC had effectively achieved and obtained the reliefs it had
issue raised in a case were laid before the court and passed
prayed for in its complaint as it was able to suspend the
upon by it. In addition, based on the personal analysis of its
payment of monthly amortization and prevent the reversion, or
new Presiding Judge, the Court is judiciously convinced of the
even the selling, of the PPC shares of stock in the event of
soundness of its earlier findings. More importantly, it appears
default; (4) the amount of injunction bond is insufficient and
from the records that defendant PMO never challenged such
grossly disproportionate to the enormity of the damages that
finding in a higher judicial arena. Thus, this Court deems its
PMO stands to suffer; (5) the injunctive writ is supposed to be
resolution to be incontestable at this stage. Consequently,
a "strong arm of equity" and should not be used as an
since the said finding has attained finality, any error that
instrument of perpetrating injustice against the National
thisCourt may have committed in resolving the said issue may
Government; (6) in accordance with Rule 58, Section 6 of the
only be raised in an appeal to be made by the adverse party.
Rules of Court, PMO is signifying its intention to post a
counterbond that would answer for the damages PIC might
suffer by the dissolution of the Writ of Preliminary Injunction;

44
This Court also finds merit [i]n plaintiffs prayer for the deletion
of the fifth issue raised during the pre-trial of this case. The
denial of the motion to dismiss previously filed by defendant
PMO also [constitutes] as an adjudication on the issue as to
whether or not the subject matter of this case is a proper
subject of arbitration proceedings as provided for in ARDA. The
Court reached the said conclusion based on jurisprudential law
which up to this date is unchanged. Said conclusionhas also
become immutable when [PMO, PPC, and the PPCCorporate
Secretary] similarly failed to challenge the same.24
As for the Omnibus Motion and Supplement to Omnibus
Motion of PMO, the RTC only conceded to requiring PIC to
submit accounting and financial reports to PMO:
On defendant PMOs omnibus motion and its supplemental
thereto, the Court resolves the first motion in the negative. As
stated above[,] this instant case does not involve matters which
can be adjudicated through arbitration. It involves the
interpretation of contract which falls within the jurisdiction of
this Court. This Court agrees with [PIC] that there can be no
damage whenwhat is being restrained is an illegal act. It need
not be said that no right can emanate from an illegal act. In this
instant case, what is being restrained by the Writ is the
enforcement by defendant PMO of the reversion clause in the
ARDA. Having unequivocally declared such reversion clause
illegal, the Court has no reason to terminate the efficacy of the
Writ it issued. The Court notes that defendant PMO did not lift
a finger during the time that it should have done so. Thus, the
delay, if there be any, is not solely attributable to [PIC]. Having
impliedly consented thereto, defendant PMO must suffer the
consequences of its inaction. The same is true on the
allegation of insufficiency of the injunction bond filed by [PIC].
The defendant PMOs failure to question the same
withinreasonable time the amount of the injunction bond
posted by [PIC] is fatal to its cause as it galvanized the
resolution of the Court on the matter.
The Court will not act on defendant PMOs prayer for the
appointment of a representative in [PICs] Board of Director[s].
As stated by [PIC] in its opposition to the pending incident, that
it is not preventing defendant PMO to appoint a representative
[in the] former, the Court will no longer discuss the said motion.
The parties, however, are directed to notify this Court of the
appointmentby [PMO] of a representative in [PICs] Board of
Director[s]. Ondefendant PMOs motion to submit accounting
report, while it may be true that [PIC] is submitting its financial
statements to the Bureau ofInternal Revenue and the
Securities and Exchange Commission, the Court finds no legal
obstacle not to direct [PIC] to submit a copy of the said
documents to [PMO]. Lastly, on the motion of [PMO] to post
counter bond, the Court finds the same to [be] without
merit.The Court cannot allow, even if a bond is posted, [PMO]
to commit an act which it has declared to be illegal. There is no
premium for an illegal act.25
The dispositive portion of the RTC Order dated August 25,
2009 reads:
WHEREFORE, premises considered, the Court GRANTS the
following motion:
1. Manifestation [and] Motion filed by [PIC] and
hereby DELETES issues numbers 1 and 5 in pages 5
and 6 of its Pre-Trial Order of February 6, 2009.
2. The Omnibus Motion on requiring [PIC] to submit
an accounting and financial reportto the defendant
[PMO], and submit to this Court a manifestation of its
compliance thereto; and DENIESthe following:
1. The dissolution of the Writ of Preliminary
Injunction for lack of merit.
2. The appointment of a representative of
[PMO to the] Board of Directors for lack of
merit.
3. The posting of counter bond for lack of
merit.26
PMO assailed the RTC Order dated August 25,2009 before the
Court of Appeals viaa Petition for Certiorari, averring that:
I.
PUBLIC RESPONDENT COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN HOLDING THAT
THE IPSO FACTOREVERSION CLAUSE IN THE
ARDA IS A SPECIE[S] OF PACTUM
COMMISSORIUMAND SUCH DISPOSITION IS A
FINAL DETERMINATION OF THE COURT WHICH
CAN ONLY BE QUESTIONED ON APPEAL; AND
II.
PUBLIC RESPONDENT COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN DENYING
[PMOS] MOTION TO DISSOLVE THE WRIT OF
PRELIMINARY INJUNCTION AND MOTION TO FILE
A COUNTERBOND FOR THE DISSOLUTION
THEREOF.27
The Court of Appeals, in itsDecision dated January 31, 2011,
disagreed with the finding of the RTC that the instant case
involves a pactum commissorium, but still affirmed the denial
by the RTC of the motion of PMO to dissolve the Writ of
Preliminary Injunction issued in 2003.
According to the Court of Appeals, Section 8.02 of the ARDA
does not constitute pactum commissorium:
The elements of pactum commissoriumare: (1) that there
should be a pledge or mortgage wherein a property is pledged
or mortgaged by way of security for the payment of the
principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of nonpayment of the
principal obligation within the stipulated period.
45
In the instant case, the subject ARDA basically pertains to the
contract of sale of shares of stock. There was nothing given by
way of pledge or mortgage in said contract, through which
[PMO] could have appropriated the shares to itself should
default in the payment thereof arise.
At this point, We have to agree with [PMO] that the ARDA is
separate and distinct from the Pledge Agreement. The two
agreements have separate terms and conditions, especially
concerning the consequences of default. Under the ARDA,
[PMO] may effect the ipso factoreversion of the title over the
sharesof stock of [PIC], without need of demand. On the other
hand, under the Pledge Agreement, [PMO] may conduct a
public or private sale of the shares of stock of [PIC], wherein it
may opt to buy the same.
Furthermore, the first element of pactum commissoriumonly
holds true under the Pledge Agreement whilethe second
element with respect to the stipulation for automatic
appropriation can be found under the ARDA. Thus, it is plainly
irreconcilable how pactum commissoriumcan be made to apply
in the present case, absentthe two elements concurring in one
contract.28
Notwithstanding its aforequotedpronouncements, the Court of
Appeals still declared the ipso factoreversion clause in the
ARDA invalid:
Nevertheless, the questioned provision on automatic reversion
of shares still cannot be held valid. While the contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, they should,
however, be not contrary to law, morals, good customs, public
order, or public policy.
In a contract of sale involving shares of stock, ownership is
deemed transferred upon the issuance ofcertificate of stock.
Section 63 of the Corporation Code provides that "shares of
stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized
to make the transfer."
The word "transfer," as contemplatedin that particular section
of the Corporation Code, means any act by which the share of
stock of one person is vested in another, that is, he is divested
and another acquires ownership of such stock.
Applying these principles, ownership over the stock of shares
was already transferred to [PIC] when it was issued new
certificates of stock. [PMO] cannot oblige [PIC] to automatically
part with its ownership over the shares in favor of the former on
the occasion of default or nonpayment, even if they have
previously agreed upon the same. Such stipulation contained
in the ARDA is contraryto law, hence, null and void.
It bears stressing that what is being declared null and void here
is the "automatic reversion of shares" clause and not the
provision for the rescission/cancellation of ARDA, as what has
been impressed by [PMO] in its arguments.
Accordingly, [PIC] is entitled to be protected of his rights
through the issuance of the Writ of Preliminary Injunction. And
it is but proper to deny the dissolution of said writ. Itshould be
of no moment that it has been in effect for several years now.
Until the matter has been settled on whether [PIC] has
substantially breached its obligation as to constitute default,
then, the shares of stock cannotas yet be foreclosed and sold,
in accordance with the terms and conditionsof the Pledge
Agreement, to satisfy [PMOs] alleged claims. 29 (Citations
omitted.)
The Court of Appeals accordingly ruled in the end:
In view of all the foregoing, We simply cannot ascribe grave
abuse of discretion to public respondent. While We may have a
different take on the matter at hand, it is axiomatic thatnot
every erroneous conclusion of law or fact is abuse of
discretion.
WHEREFORE, premises considered, the instant petition is
DENIED. The assailed Order dated 25 August 2009 issued by
public respondent, Hon. Judge Gina M. Bibat-Palamos of RTC
Makati, Branch 64, in Civil Case No. 03-114 is hereby
AFFIRMED.30 (Citation omitted.)
PIC filed a Motion for Partial Reconsideration, while PMO filed
a Motion for Reconsideration of the Decision dated January 31,
2011 of the Court of Appeals, which the appellatecourt both
denied in its Resolution dated November 18, 2011.
Hence, the instant Petitions.
In its Petition in G.R. No. 199420, PICassigned the following
errors on the part of the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS COMMITTED
GROSS ERROR, ACTED WITH GRAVE ABUSE OF
DISCRETION WHEN IT DECIDED A QUESTION OF
SUBSTANCE NOT IN ACCORD WITH LAW AND
ESTABLISHED JURISPRUDENCE BY HOLDING THAT THE
ESSENTIAL ELEMENTS OFPACTUM COMMISSORIUM,
NAMELY, 1) THAT THERE SHOULD BE A [PLEDGE] OR
[MORTGAGE] WHEREIN A PROPERTY PLEDGED OR
MORTGAGED BY WAY OF SECURITY FOR THE PAYMENT
OF THE PRINCIPAL OBLIGATION; AND 2) THAT THERE
SHOULD BE A STIPULATION FOR AN AUTOMATIC
APPROPRIATION BY THE CREDITOR OF THE THING
PLEDGED OR MORTGAGED IN THE EVENT OF
NONPAYMENT OF THE PRINCIPAL OBLIGATION WITHIN
THE STIPULATED PERIOD, MUST CONCUR OR BE
PRESENT IN ONE CONTRACT UNLIKE IN THE CASE AT
BENCH WHERE ONE ELEMENT PURPORTEDLY APPEARS
IN THE ARDA WHILE THE OTHER APPEARS INTHE
PLEDGE AGREEMENT.
II
THE HONORABLE COURT OF APPEALS COMMITTED
GROSS ERROR, ACTED WITH GRAVE ABUSE OF
DISCRETION AND NOT IN ACCORD WITH LAW AND
46
ESTABLISHED JURISPRUDENCE WHEN IT GAVE DUE
COURSE AND RULED ON [PMOS] PETITION FOR
CERTIORARI ASSAILING THE ORDER ISSUED BY THE
TRIAL COURT ON FEBRUARY 27, 2003 HOLDING THAT
THE IPSO FACTOOR AUTOMATIC REVERSION TO PMO OF
THE PLEDGED SHARES OF STOCK UNDER SECTION 8.02
OF THE ARDA IS PACTUM COMMISSORIUMWHEN SAID
ORDER HAD LONG BECOME FINAL AND THEREFORE THE
PETITION ASSAILING IT IS TIME-BARRED AND SHOULD
HAVE BEEN DISMISSED OUTRIGHT.31
On the other hand, PMO raised the following arguments in its
Petition in G.R. No. 199432:
I thing pledged or mortgaged in the event of nonpayment of the
THE HONORABLE COURT OF APPEALS ERRED IN RULING
THAT THE IPSO FACTOREVERSION CLAUSE OF THE
ARDA IS CONTRARY TO LAW IN THE ABSENCE OF ANY
LAW ALLEGEDLY VIOLATED BYTHE SAID CLAUSE.
II
THE HONORABLE COURT OF APPEALS ERRED IN
DENYING [PMOS] PRAYER FOR THE DISSOLUTION OF
THE WRIT OF PRELIMINARY INJUNCTION EVEN IF THE
PURPOSE FOR WHICH IT WAS ISSUED HAD ALREADY
BEEN MET AND ITS CONTINUED IMPLEMENTATION
DEPRIVED [PMO] OF REMEDIES UNDER THE LAW AND
THE ARDA.
III
THE DISSOLUTION OF THE WRIT AFTER THE LAPSE OF
ALMOST NINE (9) YEARS IS IN ORDER AND IN THE
INTEREST OF EQUITABLE JUSTICE.32
RULING OF THE COURT
The allegations and arguments of PIC and PMO in their
respective Petitions essentially boil down to two fundamental
issues: (1) Whether Section 8.02 of the ARDA on ipso factoor
automatic reversion of the PPC shares of stock to PMO in case
of default by PIC constitutes pactum commissorium; and (2)
Whether the Writ of Preliminary Injunction should be dissolved.
The Court resolves the first issue in the positive and the
second issue in the negative.
Section 8.02 of the ARDA constitutes pactum commissorium
and, thus, null and void for being contrary to Article 2088 of the
Civil Code.
Article 1305 of the Civil Code allowscontracting parties to
establish such stipulation, clauses, terms,and conditions
asthey may deem convenient, provided, however, that theyare
not contrary to law, morals, good customs, public order, or
public policy.
Pactum commissoriumis among the contractual stipulations
that are deemed contrary to law. It is defined as "a stipulation
empowering the creditor to appropriate the thing given as
guaranty for the fulfillment of the obligation in the event the
obligor fails to live up to his undertakings, without further
formality, such as foreclosure proceedings, and a public
sale."33 It is explicitly prohibited under Article 2088 of the Civil
Code which provides:
ART. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation
to the contrary is null and void.
There are two elements for pactum commissoriumto exist: (1)
that there should be a pledge or mortgage wherein a property
is pledged or mortgaged by way of security for the payment of
the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the
principal obligation within the stipulated period.34
Both elements of pactum commissoriumare present in the
instant case: (1) By virtue of the Pledge Agreement dated May
2,1997, PIC pledged its PPC shares of stock in favor of PMO
as security for the fulfillment of the formers obligations under
the ARDA dated May 10, 1996 and the Pledge Agreement
itself; and (2) There is automatic appropriation as under
Section 8.02 of the ARDA, in the event of default by PIC, title to
the PPC shares of stock shall ipso factorevert from PIC to
PMO without need of demand.
The Court of Appeals, in ruling that there is no pactum
commissorium, adopted the position of PMO that the ARDA
and the Pledge Agreement are entirely separate and distinct
contracts. Neither contract contains both elements of pactum
commissorium: the ARDA solely has the second element, while
the Pledge Agreement only has the first element.
The Court disagrees.
In Blas v. Angeles-Hutalla,35 the Court recognized that the
agreement of the parties may be embodied in only one
contract or in two or more separate writings. In case of the
latter, the writings of the parties should be read and interpreted
together in sucha way as to render their intention effective.
The agreement between PMO and PIC isthe sale of the PPC
shares of stock by the former to the latter, to besecured by a
pledge on the very same shares of stock. The ARDA and the
Pledge Agreement herein, although executed in separate
written instruments, are integral to one another. On one hand,
Section 2.04 of the ARDA explicitly requires the execution of a
pledge agreement as security for the payment by PIC of the
purchase price for the PPC shares of stock and receivables,
and even provides the form for said pledge agreement in
Annex A thereof. Section 2.07 of the ARDA also states that the
closing of the sale and purchase of the PPCshares of stock
and receivables shall take place on the same date that PIC
shall execute and deliver the pledge agreement, together with
the certificates of shares of stock, to PMO. On the other hand,
the "Whereas Clauses" of the Pledge Agreement expressly
mentions the ARDA and explains that the Pledge Agreement is
being executed to securepayment by PIC of the purchase price
and all other amounts due to PMO under the ARDA, aswell as
the performance by PIC of its other obligations under the
ARDA and the Pledge Agreement itself. Clearly, itwas the
47
intention of the parties to enter into and execute both contracts
for a complete effectuation of their agreement.
To reiterate, the Pledge Agreement secures, for the benefit of
PMO, the performance by PIC of its obligations under both the
ARDA and the Pledge Agreement itself. It is withthe execution
of the Pledge Agreement that PIC turned over possession of its
certificates of shares of stock in PPC to PMO. As the RTC
pertinently observed in its Order dated June 19, 2003, there
had already been a shift in the relations of PMO and PIC, from
mere seller and buyer, to creditor-pledgee and debtor-pledgor.
Having enjoyed the security and benefits of the Pledge
Agreement, PMO cannot now insist on applying Section 8.02
of the ARDAand conveniently and arbitrarily exclude and/or
ignore the Pledge Agreement so as to evade the prohibition
against pactum commissorium.
More importantly, the Court, in determining the existence of
pactum commissorium, had focused more on the evident
intention of the parties, rather than the formal or written form.
In A. Francisco Realty and Development Corporation v. Court
of Appeals,36 therein petitioner similarly denied the existence of
pactum commissoriumbecause the proscribed stipulation was
found in the promissory note and not in the mortgage deed.
The Court held that:
The contention is patently without merit. To sustain the theory
of petitioner would be to allow a subversion of the prohibition in
Art. 2088.
In Nakpil v. Intermediate Appellate Court, which involved the
violation of a constructive trust, nodeed of mortgage was
expressly executed between the parties in that case.
Nevertheless, this Court ruled that an agreement whereby
property held in trust was ceded to the trustee upon failure of
the beneficiary to pay his debt to the former as secured by the
said property was void for being a pactum commissorium. It
was there held:
The arrangement entered into between the parties, whereby
Pulong Maulapwas to be "considered sold to him (respondent)
x x x" incase petitioner fails to reimburse Valdes, must then be
construed as tantamount to a pactum commissoriumwhich is
expressly prohibited by Art. 2088 of the Civil Code. For, there
was to be automatic appropriation of the property by Valdez in
the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondents manifestations, all
the elements of a pactum commissoriumwere present: there
was a creditordebtor relationship between the parties; the
property was used as security for the loan; and, there was
automatic appropriation by respondent of Pulong Maulap in
case of default of petitioner.
Similarly, the Court has struck down such stipulations as
contained in deeds of sale purporting to be pacto de retrosales
but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of
the circumstancesenumerated in Art. 1602 of the New Civil
Code is sufficient to declare a contract of sale with right to
repurchase an equitable mortgage. This is so because pacto
de retrosales with the stringent and onerous effects that
accompany them are not favored. In case of doubt, a contract
purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in
the contract providing that complete and absolute title shall be
vested on the vendee should the vendors fail to redeem the
property on the specified date. Such stipulation that the
ownership of the property would automatically pass to the
vendee in case no redemption was effected within the
stipulated period is void for being a pactum
commissoriumwhich enables the mortgagee to acquire
ownership of the mortgaged property without need of
foreclosure. Its insertion in the contract is an avowal of the
intention to mortgage rather that to sell the property.
Indeed, in Reyes v. Sierra, this Court categorically ruled that a
mortgagees mere act of registering the mortgaged property in
his own name upon the mortgagors failure to redeem the
property amounted to the exercise of the privilege of a
mortgagee in a pactum commissorium. Obviously, from the
nature of the transaction, applicants predecessor-in-interest is
a mere mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The mortgagee,
however, may recover the loan, although the mortgage
document evidencing the loan was nonregistrable being a
purely private instrument. Failure ofmortgagor to redeem the
property does not automatically vest ownership of the property
to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which
reads:
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose by them. Any stipulation to the
contrary is null and void.
The act of applicant inregistering the property in his own name
upon mortgagorsfailure to redeem the property would amount
to a pactum commissoriumwhich is against good moralsand
public policy.
Thus, in the case at bar, the stipulations in the promissory
notes providing that, upon failure of respondent spouses to pay
interest, ownership of the property would be automatically
transferred to petitioner A. Francisco Realty and the deed of
sale in its favor would be registered, are in substance a pactum
commissorium. They embody the two elements of pactum
commissoriumas laid down in Uy Tong v. Court of Appeals, x x
x. (Citations omitted.)
Appreciating the ARDA together with the Pledge Agreement,
the Court can only conclude that Section 8.02 of the ARDA
constitutes pactum commissoriumand, therefore, null and void.
PMO though insists that there is no valid Pledge Agreement,
arguing that PIC could not have validly pledged the PPC
shares of stock because it is not yet the absolute owner of said
shares. According to PMO, the sale of the PPC shares of stock
to PIC is subject to the resolutory condition of nonpayment by
PIC of the installmentsdue on the purchase price.
Again, the Court is unconvinced.
48
Among the requirements of a contract ofpledge is that the
pledgor is the absolute owner of the thing pledged. 37Based on
the provisions of the ARDA, ownership of the PPC shares
ofstock had passed on to PIC, hence, enabling PIC to pledge
the very same shares to PMO. In accordance with Section
2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to
PIC all rights, title, and interests in and to the PPC sharesof
stock, and delivered to PIC the certificates for said shares for
cancellation and replacement of new certificates already in the
name ofPIC. In addition, Section 2.07(b) of the ARDA explicitly
declares that PIC asbuyer shall exercise all the rights,
including the right to vote, of a shareholder in respect of the
PPC shares of stock.
PMO cannot maintain that the ownership of the PPC shares of
stock did not pass on to PIC, but in the same breath claim that
non-payment by PIC of the installments due on the purchase
price is a resolutory condition for the contract of sale these
two arguments are actually contradictory. As the Court clearly
explained in Heirs of Paulino Atienza v. Espidol38:
Regarding the right to cancel the contract for nonpayment of
an installment, there is need to initially determine if what the
parties had was a contract of sale or a contract to sell. In a
contract of sale, the title to the property passes to the buyer
upon the delivery of the thing sold. In a contract to sell, on the
other hand, the ownership is, by agreement, retained by the
seller and is not to pass to the vendee until full payment of the
purchase price. In the contract of sale, the buyers nonpayment
of the price is a negative resolutory condition;in the contract to
sell, the buyers full payment of the price is a positive
suspensive condition to the coming into effect of the
agreement. In the first case, the seller has lost and cannot
recover the ownership of the property unless he takes action to
set aside the contract of sale.In the second case, the title
simply remains in the seller if the buyer does not comply with
the condition precedent of making payment at the time
specified in the contract. x x x. (Emphases supplied, citation
omitted.)
So that it could invoke the resolutory condition of nonpayment
of an installment, PMO must necessarily concede that its
contract with PIC was a one of sale and that ownership of the
PPC shares of stock had indeed passed on to PIC. And even
then, having lostownership of the shares, PMO cannot
automatically recover the same without taking steps to set
aside the contract of sale.
Moreover, the general rule is that in the absence of a
stipulation, a party cannot unilaterally and extrajudicially
rescind a contract. A party must invoke the right to rescind a
contract judicially.39 It is also settled that the rescission of a
contract based on Article 1191 of the Civil Code requires
mutual restitution to bring back the parties to their original
situation prior to the inception of the contract.
Rescissioncreates the obligation to return the object of the
contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore.40
Even though PMO had previouslyacknowledged the need for
restitution or restoration following rescission, it also qualified
that such restitution or restoration shall still be "subject x x x to
the fair determination of the amount to be restored asmay be
deemed reasonable and substantiated."41
Section 8.02 of the ARDA provides for the ipso factoreversion
of the pledged shares of PIC to PMO in case ofdefault on the
part of the former, which as explained above, is prohibited by
Article 2088 of the Civil Code. The said Section does not
mention the broader concept of rescission of the entire ARDA.
In its Petition in G.R. No. 199432, PMO is asking the Court,
among other things, to already declare the ARDA
rescinded.1wphi1 The Court cannot grant or deny such
prayer at this point for there are questions of fact and law
which are still under litigation before the RTC.
There is no basis for dissolving the Writ of Preliminary
Injunction.
The Court emphasizes that the Writ of Preliminary Injunction
was granted in the RTC Order dated February 27, 2003; and
the Motion for Reconsideration of the issuance of saidWrit filed
by the PMO was denied in the RTC Order dated June 19, 2003
both of which are interlocutory orders. Under Rule 65 of the
Rules of Court,the PMO only had 60 days from notice to file
with the Court of Appeals a petition for certiorariassailing said
orders. However, PMO did not file such a petition and lost the
right to avail itself of the remedy.
PMO, in challenging the RTC Order dated August 25, 2009,
cannot be allowed to revive the issues of pactum
commissoriumand the arbitration clause, together with its
opposition to the Writ of Preliminary Injunction, which were
already settled and ruled upon six years before in the RTC
Orders dated February 27, 2003 and June 19, 2003. The
removal of said issues from those submitted for trial before the
R TC is thus justified. That the R TC issued the
aforementioned Orders of 2003 based only on initial and
incomplete evidence is incorrect. The issues of pactum
commisorium and arbitration clause are questions of law that
do not require the review or evaluation of evidence. The RTC,
before issuing said Orders of 2003, conducted hearings and
required the submission of pleadings, so the parties were given
the opportunity to present their arguments on said questions of
law. In particular, the ruling of the RTC that Section 8.02 of the
ARDA constitutes pactum commissorium, cannot be set aside
and the Writ of Injunction issued based on such ruling cannot
be dissolved, even if there be changes in the factual
circumstances of the parties, for as long as the applicable law
remains the same.
There are still several remaining issues in the Pre-Trial Order
dated February 6, 2009 that the RTC needs to resolve, among
others, the alleged default under the ARDA. They involve both
questions of fact and law, so their resolution requires further
hearings for presentation of evidence by the parties. Hence,
PMO cannot claim pre-judgment of its case with the issuance
by the RTC of the Orders dated February 27, 2003 and June
19, 2003. Despite the declaration that Section 8.02 of the
ARDA is null and void as it constitutes pactum commissorium,
PMO and PIC shall have the opportunity to thresh-out other
49
issues between them which are not resolved in these cases, (2) DENIES the Petition for Review of PMO in G.R.
such as the issue of default, during the trial on the merits No. 199432 for lack of merit; and
before the RTC. WHEREFORE, premises considered, the
Court: (3) DIRECTS the RTC to resolve Civil Case No. 03-
114 with utmost dispatch.
(1) GRANTS the Petition for Review of PIC in G.R.
No. 199420 by declaring that Section 8.02 of the SO ORDERED.
ARDA constitutes pactum commissorium and, thus,
null and void;

50