REVIEWER

CREDIT TRANSACTIONS

TOPIC: CASES ON PLEDGE

The Manila Banking Corporation vs. Anastacio Teodoro

G.R. No. L-53955 January 13, 1989

Facts: Three promissory notes were executed by Anastacio Teodoro and Grace Anna Teodoro in favor of
Manila Banking Corporation on separate times in 1966. The latter failed to pay the amounts stated in the
promissory notes despite repeated demands. However, in 1964, Anastacio Teodoro executed in favor of Manila
Banking a Deed of Assignment of Receivables from the Employment Emergency Administration (EEA). The
deed provided that it was for and in consideration of certain credits, loans, overdrafts and other credit
accommodations extended to the Teodoros as security for the payment of said sum and the interest thereon,
and that they remise, release and quitclaim all their rights, title, and interest in and to the accounts
receivables; and that the title and right of possession to said accounts receivable is to remain in the assignee,
and it shall have the right to collect the same from the debtor, and whatsoever the assignor does in
connection with the collection of said accounts, it agrees to do as agent and representative of the assignee
and in trust for said assignee. Further, it stated that the assignment shall also stand as a continuing guarantee
for any and all whatsoever there is or in the future there will be justly owing from the assignor to the
assignee. It was admitted in the stipulation of facts that Manila Banking extended loans to the Teodoros due
to certain contracts entered into by the defunct EEA (now Philippine Fisheries Commission) with them for the
fabrication of fishing boats; that non-payment of the notes was due to the failure of the Commission to pay
the Teodoros after the latter had complied with their contractual obligations; and that the President of Manila
Banking took steps to collect from the Commission, but no collection was effected. For failure of the Teodoros
to pay the sums due on the promissory notes, Manila Banking instituted a collection suit.

Issue: Whether or not the assignment of receivables has the legal effect of payment of all the loans
contracted by the Teodoros from Manila Banking?

Ruling: No. It is evident that the assignment of receivables executed by the Teodoros did not transfer the
ownership of the receivables to Manila Banking and release the former from their loans with the bank incurred
under promissory notes. 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. A transfer of property
by the debtor to a creditor, even if sufficient on its face 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 unambiguous language or other
circumstances excluding an intent to pledge. Obviously, the deed of assignment was intended as collateral
security for the bank loans of the Teodoros, as a continuing guaranty for whatever sums would be owing by
them to the bank. 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.
 General Insurance and Surety vs. Marakayan
G.R. No L-28764, November 29, 1973

Facts: The complaint alleges that by virtue of a contract to sell, J.M. Tuason, Inc. represented by his
agent, Gregorio Araneta, Inc. was bound to convey private respondents its ownership over a lot upon receipt
of the total purchase price which was payable by installment. Meanwhile, they were given possession of the
lot, and had built a house thereon. Even before complete payment of the purchase price, private respondents
through the help of petitioner, General Insurance and Surety Corporation, obtained from the Philippine Bank of
Commerce a loan of P4,000.00 documented by a promissory note wherein petitioner signed as accommodation
co-maker. In view thereof, the parties entered into indemnity agreements whereby they mortgaged to the
latter the house as well as the lot. However, the mortgage of the lot, did not meet the approval of the agent
because the same had not yet been fully paid for by private respondents. On this account, they executed in
the favor of the petitioner a "Deed of Sale with Right of Repurchase" (in lieu of the real estate mortgage)
whereby they sold to the latter all their rights and interests over the lot, that subsequently, private
respondents again obtained through an additional loan of P600.00 from the Philippine Bank of Commerce,
likewise with petitioner as accommodation co-maker of the corresponding promissory note.

Eventually thereafter, petitioner paid the balance of the purchase price of the lot to the agent and
thereby succeeded in obtaining from the latter a deed of sale thereof in its favor, and later on an owner's title
over the property. While, the additional loan has already been liquidated by private respondents, and as
regards the original loan, the truth was that only P1,000 was received by them and the rest was used by
petitioner in paying the agent for the balance of the purchase price. Although, the aforesaid instrument
executed by private respondents over the lot in question was on its face a deed of sale with right of
repurchase, between the parties the real contract was one of mortgage which made the petitioner holding the
title to the property in question, as a trustee and for the benefit of the private respondents.

Issue: Whether or not there was a valid mortgage or pledge.

Ruling: No.

The respondents' assertion that paragraph 8 of the Amended Answer is a substantial amendment and a
complete turnabout from its original stand is unwarranted, as evidenced by the Deed of Sale with Right of
Repurchase executed by no less than the petitioner and respondents themselves, clearly showing that it was
the agent, and not herein petitioner which required the execution of the said Deed of Sale with Right of
Repurchase. Pertinent portion of the said Deed of Sale besides, no valid mortgage could have been executed
between the parties as the respondents were not the absolute owners of the land as required by Article 2085
of the New Civil Code.

In paragraphs 15 and 16 of the original answer, the petitioner specifically denies the respective
allegations contained in paragraphs 15 and 16 of the Complaint, thus controverting all the allegations in the
latter pleading. It denies that it is holding the title of the property in question as a trustee for the benefit of
the respondent.

Case No. 45
G.R. No. L-34404 June 25, 1980
PHILIPPINE NATIONAL BANK, petitioner, vs.
THE HON. COURT OF APPEALS (SPECIAL FIRST DIVISION), PEDRO BITANGA et al.

Facts:
This case commenced when the respondents Pedro, Fernando, Gregorio, Guillermo and Clarita, all surnamed
Bitanga, filed a complaint against the PNB, the Register of Deeds of Ilocos Norte and Felizardo Reyes, for
reconveyance of real property and damages, with a prayer to prohibit the Register of Deeds from registering
the sale in favor of Felizardo Reyes. The property involved was originally owned by spouses Iigo Bitanga and
Rosa Ver as their conjugal property. However, when Iigo Bitanga died, a year after that, Rosa Ver mortgaged
the entire property in favor of PNB for the amount of 500 pesos. Because Rosa Ver failed to settle her
obligation with the PNB, the latter sold at public auction the whole lot that the former had mortgaged to it,
and in the same auction sale, the PNB emerged as the highest bidder. The trial Court ordered the Register of
Deeds of the Province of Ilocos Norte to cancel the owner's duplicate certificate of title and to issue a new
owner's duplicate certificate of title in the name of the PNB. Sometime later, the PNB sold the property in
question to Felizardo Reyes.
Issue:
Whether or not the mortgage deed is valid and existing only with respect to the one-half portion of the lot
belonging to the mortgagor Rosa Ver as her share in the conjugal partnership.
Ruling:
Yes, the mortgage was simply one-half () of the entire property. Under Article 2085, New Civil Code (Art.
1857, Old Civil Code), one of the essential requisites to the contract of pledge and mortgage is that the
pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. And under Article 493, New
Civil Code (Art. 399, Old Civil Code), each co-owner shall have the full ownership of his part and of the fruits
and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute
another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or
the mortgage, with respect to the co-owners, shall be limited to the portion which may be allotted to him in
the division upon the termination of the co-ownership.
Hence, what the Philippine National Bank had acquired from Rosa Ver by virtue of the mortgage was simply
one-half () of the entire property, for this was all she had in her power to convey the other half being, as
it still is, the lawful share of the plaintiffs-appellees as inheritance from their father, Iigo Bitanga. Nemo date
quod non habet One cannot give what is not his. Applying the provisions of the Old Civil Code, the law in
force at the time of Inigo Bitanga's death in 1935, Rosa Ver, as surviving spouse, cannot take part legally in
the sharing of the estate left by her deceased husband with respect to which she only had usufructuary rights.
"The usufructuary not being an owner, cannot alienate or dispose of the objects included in the usufruct.
Thus, he cannot mortgage or pledge the thing.

(46) Llanto v. Alzona

GR 150730 January 31, 2005

FACTS: Maria Sales was the registered owner of a parcel of land in Laguna which she acquired under a free
patent. Until they died, she and her husband (Bernardo) lived on the said land in the house w/c they
constructed. Maria died in August 1986. In January 1990, a real estate mortgage contract (REM) was
purportedly executed by Maria in favor of Dominador Alzona. Estela Pelongco (one of the daughters of Maria
and Bernardo) signed as witness. Ernesta Alzona (brother of Dominador) admitted that his name does not
appear in the REM although he was a co-mortgagee. The mortgage was foreclosed and was sold in a
mortgage sale to Ernesto. In January 1992, he executed a Consolidation of Ownership over the property and
a Transfer Certificate of Title was issued in his name. Mila Llanto (another daughter of Maria and Bernardo)
and the rest of her brothers and sisters caused the inscription of an adverse claim on the title to the property.
They filed for a complaint for Annulment of Mortgage and Auction Sale with Reconveyance of Title. However,
the RTC and CA both ruled in favor of Alzona.

ISSUE/S: Whether or not the Alzonas were mortgagees in good faith.

HELD: One of the essential requisites of mortgage is that the mortgagor should be the absolute owner of
property to be mortgaged, otherwise the mortgage is null and void. To be considered as mortgagees in good
faith, jurisprudence require that they should take the necessary precaution expected of a prudent man to
ascertain the status and condition of properties offered as collateral and to verify the persons they transact
businesses with. In the case, the RTC gave credence to Ernestos testimony that he conducted a credit
investigation before he approved the loan sought and the property mortgaged. A perusal testimony proved
that he exercised the necessary precautions to ascertain the status of the property to be mortgaged. Llanto
never disputed Ernestos claim that he met the petitioners at the house built on the parcel of land. It was
Estela and the persons who represented themselves as Bernardo and Maria who perpetrated the fraud.
Ernesto cannot be faulted if he was led into believing that the old man and woman he met in November 1989
and January 1990 are 2 different persons.
Cavite Development Bank vs. Spouses Cyrus Lim and Lolita Chan Lim
G.R. No. 131679 February 1, 2000

Facts: In 1983, Rodolfo Guansing obtained a loan from Cavite Development Bank (CDB) to secure which he
mortgaged a parcel of land. As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage.
At the foreclosure sale, the mortgaged property was sold to CDB as the highest bidder. Guansing failed to
redeem so CDB consolidated title to the property in its name. In 1988, Lolita Chan Lim offered to purchase the
property from CDB. After Lim paid CDB Option Money, Lim discovered that the subject property was originally
registered in the name of Perfecto Guansing, father of mortgagor Rodolfo Guansing. Perfecto also instituted an
action for the cancellation of his sons title which the trial court granted in 1984. With these, Lim filed an
action for specific performance and damages against CDB. In its defense, CDB contends that there was no
perfected contract of sale between it and Lim. The trial court ruled that there was perfected contract of sale
but it is impossible for CDB to perform its obligation as seller to because at the time of delivery or
consummation stage of the sale, it is required that the seller be the owner of the thing sold. Since CBD never
really acquired title to the property in the foreclosure sale as the mortgagor was not the owner of the
property, the sale by CBD to Lim must, therefore, be deemed a nullity.

Issue: Whether or not CDB acquired the property by virtue of the foreclosure sale given that the mortgagor
was not the real owner of the property?

Ruling: No. A foreclosure sale, though essentially a "forced sale," is still a sale 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 Article 2085 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.
However, under the doctrine of "the mortgagee in good faith," the mortgage contract and any foreclosure sale
arising therefrom are given effect by reason of public policy 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, In this case, however, CBD cannot be considered as mortgagee in good
faith because 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 the 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. In this case, there is no evidence
that CDB observed its duty of diligence.

Cojuangco vs. Gonzales

G.R. No L-4505 and L-5228, September 15, 1953

Facts: This case pertains to the consolidation of two cases filed by the Cojuangcos against Manuel
Gonzales. The first case entails the demand of indebtedness amounting to P19, 400 with 10% interest as of
March 31, 1949 while the second case deals with the recovery of rentals of rice land in Tarlac leased to
Gonzales from March 1, 1941 at P6,000 annually with 12% interest per annum. In the first case, Gonzales
admits an original indebtedness of P10,000 on June 30, 1947 plus an additional amount of P9,400.68, but
denies the alleged obligation to pay interest thereon. Gonzales claimed that the above amounts were part of a
transaction entered into and mentioned in the other case, and expressed willingness to pay the amount
actually due, but that upon deposit thereof the Cojuangcos should be required to return the real estate
described in the complaint in the second action. In his answer in the second case, Gonzales alleged that the
land claimed to have been leased to him was conveyed by him to the Cojuangcos to secure the payment of an
original loan of P20, 000. Said contract was made to appear as a sale with right to repurchase and a lease.
Moreover, said loan was subsequently increased to P60,000; that Gonzales paid interests on the said loan from
the year 1933 to 1942. However, in 1942 to 1945, the Cojuangcos refused to accept the interests. In 1943
and 1944 Gonzales offered to redeem the property, but the plaintiff refused. Also by way of counterclaim,
respondentwould pay all of his indebtedness, but that plaintiffs must execute a deed of resale of the land in
his favor. In reply to this counterclaim for the resale of the property, plaintiffs-appellees allege that
defendant's right to purchase the property had expired in the year 1937 and, therefore, they prayed that
Gonzales demand be denied.Plaintiffs claimed that they were the owners thereof since the year 1932, while
the defendant denied this alleged ownership, pretending that the conveyance of the land in favor of plaintiffs
was merely as a security for the payment of indebtedness, hence, this petition.

Issue: Whether or not the subsequent modification on the original mortgage contract was valid.

Ruling: Yes.

The Supreme Court stated that the doctrine in Macapinlac v Gutierrez prohibits the parties from making
stipulations that would tend to destroy the contract of its essence as a mortgage and deprive the debtor of the
equitable right of redemption. The stipulations that are prohibited are those executed or made simultaneously
with the original contract, not those subsequently entered into. The principle does not prohibit modification of
the original contract by subsequent agreements such as the parties may see fit to adopt. In the case at bar,
the array of facts and circumstances adduced to support Gonzales contention may support conclusively the
fact that the original contract was a mere equitable mortgage, which is not disputed. But they do not support
the proposition that the contract was always a mortgage, in view of the positive acts of both parties indicative
of a novation of the contract. The intent of the Cojuangcos to terminate the original contract was evident from
the time they executed the affidavit of consolidation. It was shown that they had the land transferred to their
names in the tax records, and the land taxes were no longer charged against Gonzales. Gonzales acquiesced
in this consolidation when he made his Memorandum admitting that his right to repurchase had been lost. His
acquiescence was expressly admitted by him in the trial.

Case No. 49
G.R. No. 128669 October 4, 2002
MAMERTA VDA. DE JAYME, and her children and/or heirs of the late GRACIANO JAYME, petitioners, vs
HON. COURT OF APPEALS, SIXTEENTH DIVISION, CEBU ASIANCARS INC et al.
Facts:
The spouses Jayme entered into a Contract of Lease with George Neri, president of Airland Motors Corporation
(now Cebu Asiancars Inc.), covering one-half of Lot 2700 which they own. The terms and conditions of the
lease contract 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. 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
Mortgage in favor of MBTC.
Eventually, MBTC extrajudicially foreclosed the mortgage because of financial difficulties. As a result of the
foreclosure, Gracianos heirs filed a civil complaint against respondent Asiancars, its officers and 2
incorporators and MBTC. Petitioners allege that the deed presented to the Jayme spouses was in blank,
without explanation on the stipulations contained therein. Petitioners also alleged that the Jayme spouses
were illiterate and only knew how to sign their names. 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 Mortgage.
Issue:
Whether or not the Real Estate Mortgage should be annulled on the ground of vitiated consent.
Ruling:
No, the Real Estate Mortgage is valid and binding. 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 states that 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 may
secure the latter by pledging or mortgaging their own property.
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. 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.

(50) BELO vs. PNB

G.R. 134330 March 1, 2001

FACTS: Eduarda Belo owned an agricultural land located in Timpas, Capiz. A portion of the land was leased to
spouses Marcos and Arsenia Eslabon (respondents) in connection with their sugar plantation business. The
spouses then obtained a loan from PNB which was secured by a real estate mortgage on their four residential
houses including the land leased to them by Eduarda Belo. The assent of Eduarda Belo to the mortgage was
acquired through a special power of attorney which she executed in favor Marcos Eslabon. Since the spouses
Eslabon failed to pay the loan, PNB instituted extrajudicial foreclosure proceedings against the mortgaged
properties and at the auction sale, PNB was the highest bidder. PNB appraised Eduarda Belo of the sale at
public auction of her agricultural land as well as the registration of the Certificate of Sheriffs Sale in its favor
and the one year period to redeem the land. However, Eduarda Belo sold her right of redemption to spouses
Enrique and Florencia Belo (petitioners) under a deed of absolute sale of proprietary and redemption rights.
Spouses Belo tendered payment for the redemption of the agricultural land that included the bid price of PNB.
However PNB rejected the payment because the redemption price should be the total claim of the bank on the
date of the auction sale and custody of property plus charges accrued and interests. The spouses disagreed
and did not pay the total claim of PNB.

ISSUE/S: 1. W/N the SPA, real estate mortgage contract, foreclosure proceedings and auction sale of
Eduarda Belos property is valid?
2. W/N petitioner spouses are required to pay the redemption price which was the entire claim of PNB
(P2,779,978.72)?

HELD: 1. The Court ruled that it is valid. The SPA was not created to make Eduarda Belo a co-obligor of the
principal contract of loan between PNB and Spouses Eslabon.The accommodation real estate mortgage over
her property is merely an accessory contract. Eduarda Belo consented to be an accommodation mortgagor
that she signed the SPA to authorize Spouses Eslabon to execute a mortgage on her land. An accommodation
mortgage is not necessarily void simply because the accommodation mortgagor did not benefit from the same.
Under Article 2085 of the Civil Code, third persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property.
2. The Court ruled that Spouses Belo are only made to pay the bid price less the corresponding loan value of
the foreclosed residential lots of Spouses Eslabon and to redeem only the property of Eduarda Belo which was
mortgaged. The indivisibility concept under Article 2089of the Civil Code cannot be applied in the case at bar
because the spouses Belo are assignees of an accommodation mortgagor (Eduarda Belo). The indivisibility
principle applies only when there is a debtor and creditor relationship.
 Caltex (Philippines), Inc. vs. Court of Appeals
G.R. No. 97753 August 10, 1992

Facts: Security Bank and Trust Company issued 280 certificates of time deposit (CTDs) in favor of Angel Dela
Cruz who deposited with the same bank the aggregate amount of 1,120,000. Dela Cruz delivered the said
certificates to Caltex in connection with his purchase of fuel products from the latter. Consequently, Dela Cruz
informed Security Bank that he lost all the CTDs. Security Bank advised Dela Cruz to execute and submit a
notarized Affidavit of Loss. Dela Cruz submitted the required affidavit and Security Bank issued 280
replacement CTDs. In 1982, Dela Cruz negotiated and obtained a loan from Security Bank. On the same date
he executed a notarized Deed of Assignment of Time Deposit which stated that he surrenders to the bank full
control of the indicated time deposits from and after date of the assignment and further authorizes said bank
to pre-terminate, set-off and apply the said time deposits to the payment of whatever amount or amounts may
be due on the loan upon its maturity. The Credit Manager of Caltex went to Security Bank and presented for
verification the CTDs declared lost by Dela Cruz and alleged that the same were delivered to Caltex as security
for purchases made with Caltex. Caltex made a demand and claim for payment of the value of the CTDs from
Security Bank which the latter rejected. Meanwhile, the loan of Dela Cruz with Security Bank matured and fell
due and the latter set off and applied the time deposits in question to the payment of the matured loan. Caltex
claims that it has better right over the CTDs than Security Bank and the latter should pay the amount of the
CTDs to the former.

Issue: Whether or not Caltex can recover the amount of the CTDs from Security Bank?

Ruling: No. Where the holder of a negotiable instrument has a lien on the instrument arising from contract,
he is deemed a holder for value to the extent of his lien. As such holder of collateral security, he would be a
pledgee and the requirements and effects thereof shall be governed by the Civil Code. Article 2095 provides
that incorporeal rights, evidenced by negotiable instruments may also be pledged. The instrument proving the
right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Article 2096 also provides
that a pledge shall not take effect against third persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument. In this case, Caltex failed to prove that the CTDs were
indorsed to it and failed to produce any document evidencing any contract of pledge or guarantee agreement
between it and De la Cruz. Consequently, the mere delivery of the CTDs did not legally vest in Caltex any right
effective against and binding upon the bank. The requirement under Article 2096 is a rule of substantive law
prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely.
Thus, Caltex cannot recover the amount of the CTDs from Security Bank.

Yuliongsiu vs. PNB

G.R. No L-4505, February 17, 1968

Facts:

Diosdado Yuliongsiu was an owner of two ships in Cebu (M/S Surigao, and M/S Don Dino valued at
P109,925.78 and P63,000, respectively), which he acquired another ship (FS-203 valued at P210,672.24) from
Philippine Shipping Commission on installment basis.
With regard to newly acquired vessel, Yuliongsiu already made an initial payment for it and the balance
purchase price was payable on or before the end of that year. To pay the balance price of his newly acquired
ship, he obtained a loan amount of P50,000.00 from Philippine National Bank in Cebu.

To guarantee its payment, plaintiff pledged the said ships and its equity in the FS-203 to the defendant bank,
as evidenced by the pledge contract.

Yuliongsiu effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by
the execution of two (2) promissory notes in the favor of PNB. However, these two notes were never paid at
all by plaintiff on their respective due dates which made the defendant bank sue the plaintiff for estafa.

Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of
three pledged vessels while they were at the Port of Cebu, and after the first note fell due and was not paid,
the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of
the pledge contract, executed a document of sale.

The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission
which rescinded the sale to plaintiff for failure to pay the remaining instalments on the purchase price thereof.
The other two boats, the M/S Surigao and the M/S Don Dino were then sold by defendant bank to third
parties.

Yuliongsiu commenced action to recover the three vessels or their value and damages from defendant bank
claiming that it was a chattel mortgage contract so that the creditor defendant could not take possession of
the chattels object thereof until after there has been default.

However, both the lower and the appellate court ruled in favour of the defendant bank, hence, this petition.

Issue: Whether or not there was an existing pledge considering that the subject of the pledge is in the
possession of the pledgor and not the pledgee.

Ruling: Yes.

While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his
possession was expressly made "subject to the order of the pledgee." The provision of Article 2110 of the
present Civil Code being new cannot apply to the pledge contract here which was entered into on June 30,
1947.

On the other hand, there was an authority supporting the proposition that the pledgee can temporarily entrust
the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case,
the pledgor is regarded as holding the pledged property merely as trustee for the pledgee.

The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said
property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the
objects pledged, i.e. vessels used in maritime business, such delivery is sufficient.

Case No. 53
G.R. No. L-27132 April 29, 1971
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs
MANILA INVESTMENT & CONSTRUCTION, INC. and CIPRIANO S. ALLAS defendants-appellants.

Facts:
A decision was rendered by the CFI of Manila on December 26, 1957 ordering Manila Investment &
Construction Inc. (MIC Inc.), jointly and severally, to pay Philippine National Bank (PNB). In case of non-
payment of the amounts adjudged, the decision also provided for the sale at public auction of the personal
properties covered by the chattel mortgage executed by the defendants in favor of the plaintiff Bank, and for
the disposition of the proceeds in accordance with law. After the decision had become executory, instead of
having the mortgaged personal properties sold at public auction, the parties agreed to have them sold, and
were in fact sold, at a private sale. The net proceeds obtained therefrom were applied to the partial
satisfaction of the above judgment.
More than five years but less than ten years from the date when the decision aforesaid became executory, the
Philippine National Bank filed in the same Court of First Instance of Manila an action to revive it. After the
parties had submitted their respective memorandum, the court rendered the appealed decision which
dismissed the defense of MIC Inc. and orders MIC Inc. to pay PNB the remaining balance of the obligation
incurred on the 1957 decision.
Issue:
Whether or not the PNB is entitled to the collection of the deficiency.
Ruling:
Yes, PNB is entitled to collect the balance. The rule set forth in Art 2115 which extinguishes the obligation
cannot be applied to the case at bar. Art 2115 provides that the sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case. If the price of the sale is less, the creditor is not entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.
The applicable law is Art. 2141, which provides that the provisions of the Code on pledge, insofar as they are
not in conflict with the Chattel Mortgage Law, shall be applicable to chattel mortgages. It is clear from Article
2141 that the provisions of the New Civil Code on pledge shall apply to a chattel Mortgage only in so far as
they are not counter to any provision of the Chattel Mortgage Law, otherwise the provisions of the latter will
not apply. Here, the provisions of the Chattel Mortgage with regard to the effects of the foreclosure of a
chattel mortgage are precisely contrary to the provisions of Article 2115 which were applied by the trial Court.
Specifically the right of the mortgagee to recover any deficiency due to foreclosure, which right is not
expressly nor impliedly prohibited in the Chattel Mortgage Law. Thus such contradiction between the two laws
renders Art. 2115 inapplicable and, in effect, does not extinguish the principal obligation.