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LAW 107: CREDIT Case Reviewer

Professor Gerard Chan
Second Semester, 2019-2020

CASE TITLE SUMMARY DOCTRINE/S and OTHER REMARKS

The "credit" of an individual means his ability to borrow

money by virtue of the confidence or trust reposed by a lender
that he will pay what he may promise. A "loan" means the
delivery by one party and the receipt by the other party of a
given sum of money, upon an agreement, express or implied, to
Venancio Concepcion, President of the PNB, authorized an extension of credit in favor of "Puno y repay the sum loaned, with or without interest. The concession
Concepcion, S. en C.". This special authorization was essential in view of the memorandum order of of a "credit" necessarily involves the granting of "loans" up to
President Concepcion limiting the discretional power of the local manager at Aparri, Cagayan, to grant the limit of the amount fixed in the "credit".
loans and discount negotiable documents. Pursuant to this authorization, credit was granted the firm of
People v. Concepcion
"Puno y Concepcion, S. en C.," the only security required consisting of six demand notes. The notes,
together with the interest, were taken up and paid. Venancio Concepcion, as President of the Discounts are favored by bankers because of their liquid
Philippine National Bank and as member of the board of directors of this bank, was charged in the CFI nature, growing, as they do, out of an actual, live, transaction.
with a violation of Section 35 of Act No. 2747 and was found guilty. But in its last analysis, to discount a paper is only a mode of
loaning money, with, however, these distinctions: (1) In a
discount, interest is deducted in advance, while in a loan,
interest is taken at the expiration of a credit; (2) a discount is
always on double-name paper; a loan is generally on single-
name paper.

LOAN

Rica Marie S. Thio borrowed twice from Carolyn M. Garcia with interest thereon. For both loans,
A loan is a real contract, not consensual, and is perfected only
Thio received from Garcia 2 crossed checks payable to the order of a certain Marilou Santiago. For
upon the delivery of the object of the contract. Delivery is the
Garcia v. Thio both loans, no promissory note was executed since Garcia and Thio were close friends at the time.
act by which the res or substance thereof is placed within the
Thio paid the stipulated monthly interest for both loans but on their maturity dates, she failed to pay
actual or constructive possession or control of another.
the principal amounts despite repeated demands

Saura Import & Export Saura, Inc. obtained a P500k loan from Rehabilitation Finance Corp. for the construction of a factory Where an application for a loan of money was approved by
Co. v. DBP for making jute sacks (supposedly to be made by 100% local produce, kenaf). Saura, Inc. also resolution of the creditor corporation and the corresponding
executed a mortgage on the factory land and building to secure the same. The loan was approved, but mortgage was executed and registered, there arises a perfected-
because of the information that there is an insufficient supply of kenaf, RFC added as a condition for consensual contract of loan.
the loan, a certificate from the Department of Agriculture and Natural Resources attesting to the
availability of kenaf supply, as well as its sufficient production to support the operations of Saura, Inc. Where after approval of the loan, the borrower, instead of
However, in a letter, Saura, Inc. admitted that there are not enough raw materials in the vicinity for its insisting for its release, asked that the mortgage given as
operations. It requested RFC to guarantee the payment of its importations for the purpose. RFC security be cancelled and the creditor acceded thereto, the
refused saying this isn’t in line with the reason for the approval of the loan. Realizing that it cannot action taken by both parties was in the nature of mutual
comply with the conditions of the loan, Saura, Inc. desisted from demanding its release and instead desistance—what Manresa terms “mutuo disenso”—which is a
asked for the cancellation of the mortgage. RFC complied delivering the deed of cancellation to mode of extinguishing obligations. It is a concept that derives
Ramon Saura. from, the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its
Nine years following the cancellation, Saura, Inc. filed a complaint against RFC (succeeded by DBP) extinguishment.
for breach of contract, for its failure to release the loan as applied and approved. CFI ruled in favor of

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Saura, Inc. ordering DBP to pay. HELD - reversed. There is no breach of contract in this case. While
the loan contract was perfected, the same was also extinguished by mutual desistance of the parties.

Frank Roa obtained a loan at 16 1/4% interest rate per annum from Ayala Investment and A loan contract is not a consensual contract but a real contract.
Development Corporation. For security, Roa's house and lot were mortgaged. Later, Roa sold the It is perfected upon delivery of the object of the contract.
house and lot to ALS and Antonio Litonjua, who assumed Roa's debt to Ayala Investment. Ayala Although a perfected consensual contract can give rise to an
Investment, however, granted a new loan to be applied to Roa's debt, secured by the same property at action for damages, it does not constitute a real contract which
a different interest rate of 20% per annum. When ALS and Litonjua failed to pay, BPIIC, successor to requires delivery for perfection. A perfected real contract gives
Ayala Investment, filed for foreclosure of mortgage. The Court held that a contract of loan is NOT a rise only to obligations on the part of the borrower.
consensual contract. The payment of amortization should accrue from the time BPIIC released the
BPI v. CA loan amount to ALS and Litonjua because it was only at that time (the delivery of the amount -- the A contract of loan involves a reciprocal obligation, wherein the
object of the contract) that the loan contract was perfected. obligation or promise of each party is the consideration for that
of the other. It is a basic principle in reciprocal obligations that
neither party incurs in delay, if the other does not comply or is
not ready to comply in a proper manner with what is incumbent
upon him. Only when a party has performed his part of the
contract can he demand that the other party also fulfills his own
obligation and if the latter fails, default sets in.

Pantaleon was a holder of an AMEX card. While he and his family were in Europe, they experienced
Focusing particularly on the LOAN contract, the new creditor-
difficulty transacting with the Coster Diamond House. They were on a guided tour, and during the
debtor relationship will only exist once there is offer (holder
stopover at the Diamond House, they were supposed to be ready to leave by 9:30. However, when
Pantaleon v. American swipes the card for his payment) and acceptance (company
they tried to purchase, the transaction took 78 minutes, delaying their tour group and missing the next
approves the use of the credit card for the transaction). Only
Express destination. The family also went to USA and experienced two delays in their purchase using the same
after the company approves the purchase requests that the
credit card. Humiliated, Pantaleon demanded from AMEX an apology to which it refused to, so
parties enter into a binding loan contracts, pursuant to Article
Pantaleon filed an action for damages. In 2009, the Court ruled that AMEX was guilty of mora
1319, NCC.
solvendi, then this MR was filed. MR was granted by the court. AMEX is NOT liable for damages.

Commodatum

Upon request of a friend, Franklin Vives accommodated Arturo Doronilla by opening a savings
account for Sterela Marketing, in coordination with Producer's Bank assistant branch manager, Rufo
Atienza. The purpose was for incorporation, and the agreement was that the money would not be
removed from Sterela's savings account and returned to Vives after thirty (30) days. Later, however,
part of the money had been withdrawn by Doronilla who also opened a current account and authorized
the bank to debit the savings account to cover overdrawing in the current account. Vives filed a case If consumable goods are loaned only for purposes of
for recovery of sum of money and both the trial court and the appellate court ruled on the solidary exhibition, or when the intention of the parties is to lend
Producers Bank v. CA liability of Producers Bank to Vives. Hence, this appeal by Producers, contending that the transaction consumable goods and to have the very same goods returned at
between Doronilla and Vives being a simple loan, it cannot be made liable for the return of Vives’s the end of the period agreed upon, the loan is a commodatum
money. and not a mutuum.
HELD: The Court affirmed the appealed decision. The transaction was a commodatum and not a
simple loan, as proven by the records. Under Art. 2180 of the Civil Code, employers shall be held
liable for damages caused by their employees acting within the scope of their assigned tasks. The
Bank, through its employee Atienza, was partly responsible for the loss of Vives' money and is liable
for its restitution.

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Colito T. Pajuyo paid ₱400 to a certain Pedro Perez for the rights over a 250-square meter lot in Barrio In a contract of commodatum, one of the parties delivers to
Payatas, Quezon City. Pajuyo then constructed a house made of light materials on the lot. Pajuyo and another something not consumable so that the latter may use
his family lived in the house from 1979 to 7 December 1985. Pajuyo and Eddie Guevarra executed a the same for a certain time and return it. An essential feature of
Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for commodatum is that it is gratuitous. Another feature of
free provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra commodatum is that the use of the thing belonging to another is
promised that he would voluntarily vacate the premises on Pajuyo’s demand. Pajuyo informed for a certain period. Thus, the bailor cannot demand the return
Guevarra of his need of the house and demanded that Guevarra vacate the house. Guevarra refused. of the thing loaned until after expiration of the period
Pajuyo v. CA stipulated, or after accomplishment of the use for which the
commodatum is constituted. If the bailor should have urgent
need of the thing, he may demand its return for temporary use.
If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the
contractual relation is called a precarium. Under the Civil
Code, precarium is a kind of commodatum.

Jose V. Bagtas borrowed from the Republic of the Philippines through the Bureau of Animal Industry A contract of commodatum is essentially gratuitous. If the
three bulls for breeding purposes subject to a government charge of breeding fee of 10% of the book breeding fee be considered a compensation, then the contract
value of the bulls. Upon the expiration of the contract, the borrower asked for a renewal for another would be a lease of the bull. Under Article 1671 of the Civil
period of one year. However, the Secretary of Agriculture and Natural Resources approved a renewal Code the lessee would be subject to the responsibilities of a
thereof of only one bull for another year and requested the return of the other two. Jose V. Bagtas possessor in bad faith, because she had continued possession of
failed to pay the book value of the three bulls or to return them. Sometime later, the third bull died the bull after the expiry of the contract. And even if the
from gunshot wound inflicted during a Huk raid. contract be commodatum, still the appellant is liable, because
Article 1942 of the Civil Code provides that a bailee in a
Republic v. Bagtas contract of commodatum is liable for loss of the things, even if
it should be through a fortuitous event:

(2) If he keeps it longer than the period stipulated

(3) If the thing loaned has been delivered with

appraisal of its value, unless there is a stipulation
exempting the bailee from responsibility in case of a
fortuitous event;

Quintos v. Beck Beck was a tenant of Quintos and as such occupied the latter's house. Upon the novation of the The contract entered into between the parties is one of
contract of lease, the former gratuitously granted to the latter the use of the furniture, subject to the commadatum, because under it Quintos gratuitously granted
condition that Beck would return them to Quintos upon the latter's demand. Quintos sold the property the use of the furniture to Beck, reserving for herself the
to Maria Lopez and Rosario Lopez and these three notified Beck of the conveyance, giving him sixty ownership thereof; by this contract the Beck bound himself to
days to vacate the premises under one of the clauses of the contract of lease. Quintos also required return the furniture to Quintos, upon the latter’s demand.
Beck to return all the furniture transferred to him for them in the house where they were found. Beck
wrote to Quintos reiterating that she may call for the furniture in the ground floor of the house. Beck The obligation voluntarily assumed by Beck to return the
wrote another letter to Quintos informing her that he could not give up the three gas heaters and the furniture upon Quintos' demand, means that he should return
four electric lamps because he would use them until the 15th of the same month when the lease in due all of them to Quintos at the latter's residence or house. The
to expire. Quintos refused to get the furniture in view of the fact that Beck had declined to make Beck did not comply with this obligation when he merely
delivery of all of them. placed them at the disposal of Quintos, retaining for his benefit

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the three gas heaters and the four electric lamps.

As Beck had voluntarily undertaken to return all the furniture

to Quintos, upon the latter's demand, the Court could not
legally compel her to bear the expenses occasioned by the
deposit of the furniture at the Beck's behest. The latter, as
bailee, was not entitled to place the furniture on deposit; nor
was Quintos under a duty to accept the offer to return the
furniture, because the Beck wanted to retain the three gas
heaters and the four electric lamps.

As to the value of the furniture, Quintos is not entitled to the

payment thereof by Beck in case of his inability to return some
of the furniture because Beck has neither agreed to nor
admitted the correctness of the said value. Should Beck fail to
deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the
parties may desire to present.

The costs in both instances should be borne by Beck because

Quintos is the prevailing party (section 487 of the Code of
Civil Procedure). Beck was the one who breached the contract
of commodatum, and without any reason he refused to return
and deliver all the furniture upon Quintos' demand. In these
circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which Quintos would not
have otherwise defrayed.

Simple Loan

Article 1953 of the same Code provides that a person who

receives a loan of money or any other fungible thing acquires
112 cases of qualified theft was filed before the RTC Iloilo against the respondents. They allegedly the ownership thereof, and is bound to pay to the creditor an
stole and carried away the sum of P15,000.00, to the damage and prejudice of the said bank in the equal amount of the same kind and quality. Therefore,
People v. Puig & aforesaid amount. RTC dismissed the cases and refused to issue a warrant of arrest against Puig and depositors who place their money with the bank are considered
Porras because they did not find the existence of probable cause. The information failed to allege the
Porras element of taking w/o the consent of owners + the phrase alleging dependence, guardianship or creditors of the bank. The Bank acquires ownership of the
vigilance between the respondents and the offended party that would have created a high degree of money deposited by its clients; and the employees of the Bank,
confidence between them which the respondents could have abused. who are entrusted with the possession of money of the Bank
due to the confidence reposed in them, occupy positions of
confidence.

BPI Family Bank v. Tevesteco Arrastre-Stevedoring Co., Inc. (Tevesteco) opened a savings and current account with BPI There is a debtor-creditor relationship between a bank and its
Franco Family Savings Bank (BPI-FB) San Francisco Del Monte (SFDM) branch. First Metro Investment depositor.
Corporation (FMIC) also opened a time deposit account at BPI-FB. Funding of Franco’s deposit was
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part of the P80M debited by BPI-FB from FMIC’s time deposit account and credited to Tevesteco’s
current account pursuant to an Authority to Debit purportedly signed by FMIC’s officers. Wanting to
protect the bank’s interest in light of FMIC’s forgery claim, BPI-FB debited Franco’s savings and
current accounts for the amounts remaining therein.

Frias owns a house and lot in Muntinlupa. He acquired it via deed of sale. Frias and Diego-Sison The payment of regular interest constitutes the price or cost of
entered into a Memorandum of Agreement (MOA) which stated that Diego-Sison has 6 months from the use of money and thus, until the principal sum due is
the date of the execution of the MOA within which to notify Frias of her intention to purchase the land returned to the creditor, regular interest continues to accrue
and improvements thereon. in case Frias has no other buyer within the first 6 months from the since the debtor continues to use such principal amount. It has
Frias v. San Diego- execution of the MOA, no interest shall be charged by Diego-Sison, however, in the event that on the been held that for a debtor to continue in possession of the
6th month the latter would decide not to purchase the property, Frias has a period of another 6 months principal of the loan and to continue to use the same after
Sison to pay provided that the said amount shall earn compounded bank interest for the last 6 months only. maturity of the loan without payment of the monetary interest,
Under this circumstance, the amount given by Diego-Sison shall be treated as a loan and the property would constitute unjust enrichment on the part of the debtor at
shall be considered as the security for the mortgage which can be enforced in accordance with law. the expense of the creditor.
Diego-Sison informed Frias of his decision not to purchase the property and requested the return of the
money, but Frias failed.

Under Article 1960 of the Civil Code, if the borrower of loan

pays interest when there has been no stipulation therefor, the
provisions of the Civil Code concerning solutio indebiti shall
Villanueva filed a complaint for sum of money against Siga-an because Siga-an allegedly approached be applied. 
her inside the PNO and offered to loan her the amount of P540,000.00 of which the loan agreement
was not reduced in writing and there was no stipulation as to the payment of interest for the loan.
Villanueva issued a check worth P500,000.00 to Siga-an as partial payment of the loan.  She then Article 2154 of the Civil Code explains the principle of solutio
issued another check in the amount of P200,000.00 as payment of the remaining balance of the loan of indebiti.  Said provision provides that if something is received
which the excess amount of P160,000.00 would be applied as interest for the loan.  when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises.  In such a
Siga-an v. Villanueva
case, a creditor-debtor relationship is created under a quasi-
Not satisfied with the amount applied as interest, Siga-an pestered her to pay additional interest and contract whereby the payor becomes the creditor who then has
threatened to block or disapprove her transactions with the PNO if she would not comply with his the right to demand the return of payment made by mistake,
demand. Thus, she paid additional amounts in cash and checks as interests for the loan.  She asked for and the person who has no right to receive such payment
receipt for the payments but was told that it was not necessary as there was mutual trust and becomes obligated to return the same. It harks back to the
confidence between them. According to her computation, the total amount she paid to petitioner for ancient principle that no one shall enrich himself unjustly at the
the loan and interest accumulated to P1,200,000.00. expense of another. 

Spouses Juico v. China Spouses Ignacio F. Juico and Alice P. Juico obtained a loan from China Banking Corporation for the Escalation clauses refer to stipulations allowing an increase in
Banking Corp. sums of ₱6,216,000 and ₱4,139,000, respectively. The loan was secured by a Real Estate Mortgage the interest rate agreed upon by the contracting parties. This
over petitioners’ property located at 49 Greensville St., White Plains, Quezon City. When petitioners Court has long recognized that there is nothing inherently
failed to pay the monthly amortizations due, CBC demanded the full payment of the outstanding wrong with escalation clauses which are valid stipulations in
balance with accrued monthly interests. The amount due totaled ₱19,201,776.63 representing the commercial contracts to maintain fiscal stability and to retain
principal, interests, penalties and attorney’s fees. On the same day, the mortgaged property was sold at the value of money in long term contracts. Hence, such
public auction, with CBC as highest bidder for the amount of ₱10,300,000. The spouses Juico stipulations are not void per se.
received a demand letter from CBC for the payment of ₱8,901,776.63, the amount of deficiency after
applying the proceeds of the foreclosure sale to the mortgage debt. Nevertheless, an escalation clause "which grants the creditor an
unbridled right to adjust the interest independently and

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upwardly, completely depriving the debtor of the right to assent

to an important modification in the agreement" is void. An
escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of
interest without the express conformity of the debtor. Such
unbridled right given to creditors to adjust the interest
independently and upwardly would completely take away from
the debtors the right to assent to an important modification in
their agreement and would also negate the element of mutuality
in their contracts.

While a ceiling on interest rates under the Usury Law was

already lifted under Central Bank Circular No. 905, nothing
therein "grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead
to a hemorrhaging of their assets."

For an escalation clause to be valid, a detailed billing statement

based on the new imposed interest with corresponding
computation of the total debt should have been provided by the
respondent to enable petitioners to make an informed decision.
An appropriate form must also be signed by the petitioners to
indicate their conformity to the new rates.

Spouses Silos v. PNB Spouses Silos have been in business for about two decades of operating a department store and buying Contract changes must be made with the consent of the
and selling ready-to-wear apparel. Spouses Silos then secured a revolving credit line with Philippine contracting parties. The minds of all the parties must meet as to
National Bank (PNB) through a real estate mortgage as a security. After two years, their credit line the proposed modification, especially when it affects an
increased. They then signed a Credit Agreement, which was also amended 2 years later, and several important aspect of the agreement. In the case of loan contracts,
Promissory Notes (PN) as regards their Credit Agreements with PNB. The said loan was initially it cannot be gainsaid that the rate of interest is always a vital
subjected to a 19.5% interest rate per annum.  component, for it can make or break a capital venture. Thus,
any change must be mutually agreed upon, otherwise, it is
In the Credit Agreements, Spouses Silos bound themselves to the power of PNB to modify the interest bereft of any binding effect.
rate depending on whatever policy that PNB may adopt in the future without need of notice upon
them. Thus, the said interest rates played from 16% to as high as 32% per annum.  Spouses Silos
acceded to the policy by pre-signing a total of 26 PNs leaving the individual applicable interest rates at
hand blank since it would be subject to modification by PNB. Spouses Silos regularly renewed and
made good on their PNs, religiously paid the interests without objection or fail. However, during the
1997 Asian Financial Crisis, Spouses Silos faltered when the interest rates soared. The 26th PN
became past due and despite repeated demands by PNB, they failed to make good on the note. Thus,
PNB foreclosed and auctioned the involved security for the mortgage. 

Spouses Silos instituted an action to annul the foreclosure sale on the ground that the succeeding

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interest rates used in their loan agreements was left to the sole will of PNB, the same fixed by the
latter without their prior consent and thus, void. 

Sps. Salvador and Alma Abella (Petitioners) filed a Complaint for sum of money and damages with Where interest was stipulated in writing by the debtor and
prayer for preliminary attachment against respondents Sps. Romeo and Annie Abella (Respondents). creditor in a simple loan or mutuum, but no exact interest rate
Petitioners alleged that respondents obtained a loan from them in the amount of P500,000.00, was mentioned, the legal rate of interest shall apply. At present,
evidenced by an Acknowledgement Receipt (AR) dated March 22, 1999 and was payable within one this is 6% per annum, subject to Nacar's qualification on
(1) year. Petitioners add that respondents were only able to pay P200,000-- leaving an unpaid balance prospective application.
of P300,000. Interest in this respect is used as a surrogate for the parties'
intent, as expressed as of the time of the execution of their
contract. In this sense, the legal rate of interest is an affirmation
Abella v. Abella In their Answer with counterclaim and motion to dismiss, respondents alleged that the amount was not of the contracting parties' intent; that is, by their contract's
a loan from petitioners but was part of the capital for a joint venture involving the lending of money. silence on a specific rate, the then prevailing legal rate of
According to respondents, petitioners gave them the P500k to manage and loan out. The two spouses interest shall be the cost of borrowing money. This rate, which
would split the 5% interest that they would charge their debtors. Respondent spouses would then have by their contract the parties have settled on, is deemed to
to remit petitioner’s 2.5% share every month. The one year averred by petitioners was not a deadline persist regardless of shifts in the legal rate of interest. Stated
for payment but the term within which they were to return the money placed by petitioners should the otherwise, the legal rate of interest, when applied as
joint venture prove to be not lucrative. After lending out the P500,000, in accordance with their agreed conventional interest, shall always be the legal rate at the time
terms and conditions, petitioners suddenly terminated the joint venture and prompted respondents to the agreement was executed and shall not be susceptible to
return the full amount. However, as respondents were only able to P200k, a balance of P300k remains. shifts in rate.

The question of whether a penalty is reasonable or iniquitous

can be partly subjective and partly objective. Its resolution will
depend on such factors as, but not confined to, the type, extent
and purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like, the
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of P120,000.00 application of which, by and large, is addressed to the sound
from Security Bank and Trust Co. The obligation matured and the bank granted an extension. Despite discretion of the court.
several demands from the Bank, petitioners failed to settle the debt which then amounted to
Ligutan v. CA
P114,416.10. The Bank sent a final demand letter however petitioners still defaulted on their The stipulated interest of 15.189% per annum, does not appear
obligation. The Bank then filed a complaint for recovery of the due amount with 15.189% interest and as being excessive. The essence or rationale for the payment of
the penalty of 3% per month. interest, quite often referred to as cost of money, is not exactly
the same as that as a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an
agreement to that effect, the two being distinct concepts which
may separately be demanded. The interest prescribed in loan
financing arrangements is a fundamental part of the banking
business and the core of a bank’s existence.

Eastern Shipping Lines Eastern Shipping Lines delivered two fiber drums of riboflavin from Yokohama, Japan to Manila, (See blue diagram)
v. CA Philippines. Upon arrival, the drums were transferred to the custody of Metro Port Service, Inc. MPSI
excepted 1 drum because it was said to be in bad order, which damage was unknown to Eastern.
Allied Brokerage Corp. received the shipment from MPSI, with one drum opened and without seal.
ABC delivered the shipment to the consignee, but with one drum excepted which contained spillages,
while the rest of the contents was unadulterated/fake. Due to the losses/damage to the drum, the

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consignee lost P19,032.95.

The SC introduced the recently issued Bangko Sentral ng

Pilipinas - Monetary Board Resolution No. 796, which stated
that the rate of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of interest,
shall be 6% per annum (before, it was 12%). This resolution is
an amendment to the guidelines set in Eastern Shipping Lines
Dario Nacar filed a complaint for constructive dismissal at the National Labor Relations Committee v. CA.
against Gallery Frames and/or Felipe Bordey, Jr. The NLRC ruled in favor of Nacar, finding that the
Nacar v. Gallery latter had been dismissed without a valid of just cause. Nacar was awarded backwages (computed However, it should be noted that the new rate could only be
Frames from the date of dismissal until the date of the decision by the Labor Arbiter) and separation pay applied prospectively and not retroactively. Consequently, the
(computed from the date of hire until the date of the decision by the Labor Arbiter) in lieu of 12% per annum legal interest shall apply only until June 30,
reinstatement in the amount of ₱158,919.92. 2013. Come July 1, 2013 the new rate of 6% per annum shall
be the prevailing rate of interest when applicable. Therefore,
with regard to those judgments that have become final and
executory prior to July 1, 2013, said judgments shall not be
disturbed and shall continue to be implemented applying the
rate of interest fixed therein.

(See red diagram)

Estores v. Spouses Estores and spouses Supangan entered into a Conditional Deed of Sale  whereby Estores offered to It is proper to impose interest notwithstanding the absence of
Supangan sell, and the spouses offered to buy, a parcel of land. After almost seven years from the time of the stipulation in the contract. Article 2210 of the Civil Code
execution of the contract and notwithstanding the partial payment on the part of the spouses, Estores expressly provides that "[i]nterest may, in the discretion of the
still failed to comply with her obligation as expressly provided in the contract. Hence, the spouses court, be allowed upon damages awarded for breach of
demanded the return of the amount. contract."

Even if the transaction involved a Conditional Deed of Sale,

the stipulation governing the return of the money can be
considered as a forbearance of money which required payment
of interest at the rate of 12%.

In Crismina Garments, Inc. v. Court of Appeals, "forbearance"

was defined as a "contractual obligation of lender or creditor to
refrain during a given period of time, from requiring the
borrower or debtor to repay a loan or debt then due and
payable." This definition describes a loan where a debtor is
given a period within which to pay a loan or debt. In such case,
"forbearance of money, goods or credits" will have no distinct
definition from a loan. However, the phrase "forbearance of
money, goods or credits" is meant to have a separate meaning
from a loan, otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined in the Civil
Code. Forbearance of money, goods or credits should therefore

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refer to arrangements other than loan agreements, where a

person acquiesces to the temporary use of his money, goods or
credits pending happening of certain events or fulfillment of
certain conditions.

UCPB v. Samuel & UCPB granted the Spouses Beluso a Promissory Notes Line (PNL) under a Credit Agreement The interest rate provisions in the case at bar are illegal not
Beluso whereby they could avail of the credit of up to a maximum amount of 1.2 million pesos for one year. only because of the provisions of the Civil Code on mutuality
The Spouses executed promissory notes and a real estate mortgage to secure the obligation. The credit of contracts, but also, as shall be discussed later, because they
line agreement was amended to increase the amount of the PNL to 2.35 million pesos and extend the violate the Truth in Lending Act. Not disclosing the true
period to another year. UCPB charged interest on the Spouses’ debt, ranging from 18% to 34%, finance charges in connection with the extensions of credit is,
however, the Spouses Beluso failed to make any payment. UCPB demanded payment from the furthermore, a form of deception which we cannot
Spouses, but the latter failed to comply which led to the former’s foreclosure of the mortgaged countenance. It is against the policy of the State as stated in the
properties to it. Truth in Lending Act:

Sec. 2. Declaration of Policy. - It is hereby declared to be the

policy of the State to protect its citizens from a lack of
awareness of the true cost of credit to the user by assuring a full
disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national
economy.

Sec. 6. (a) Any creditor who in connection with any credit

transaction fails to disclose to any person any information in
violation of this Act or any regulation issued thereunder shall
be liable to such person in the amount of P100 or in an amount
equal to twice the finance charge required by such creditor in
connection with such transaction, whichever is the greater,
except that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by
such person within one year from the date of the occurrence of
the violation, in any court of competent jurisdiction. In any
action under this subsection in which any person is entitled to a
recovery, the creditor shall be liable for reasonable attorney's
fees and court costs as determined by the court.

(c) Any person who willfully violates any provision of this Act
or any regulation issued thereunder shall be fined by not less
than P1,000 or more than P5,000 or imprisonment for not less
than 6 months, nor more than one year or both.

As can be gleaned from Section 6(a) and (c) of the Truth in

Lending Act, the violation of the said Act gives rise to both
criminal and civil liabilities. Section 6(c) considers a criminal
offense the willful violation of the Act, imposing the penalty
therefor of fine, imprisonment or both. Section 6(a), on the

UP LAW G2023
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other hand, clearly provides for a civil cause of action for

failure to disclose any information of the required information
to any person in violation of the Act. The penalty therefor is an
amount of P100 or in an amount equal to twice the finance
charge required by the creditor in connection with such
transaction, whichever is greater, except that the liability shall
not exceed P2,000.00 on any credit transaction. The action to
recover such penalty may be instituted by the aggrieved private
person separately and independently from the criminal case for
the same offense.

In the case at bar, therefore, the civil action to recover the

penalty under Section 6(a) of the Truth in Lending Act had
been jointly instituted with (1) the action to declare the interests
in the promissory notes void, and (2) the action to declare the
foreclosure void.

Advocates for Truth in Advocates for Truth in Lending, Inc. (AFTIL) is a non-profit, non-stock corporation organized to The CB-MB merely suspended the effectivity of the Usury
Lending Inc. v. BSP- engage in pro bono concerns and activities relating to money lending issues. It was incorporated on Law when it issued CB Circular No. 905. The power of the CB
MB July 9, 2010, and a month later, it filed this petition, joined by its founder and president, Eduardo B. to effectively suspend the Usury Law pursuant to P.D. No.
Olaguer, suing as a taxpayer and a citizen, questioning the authority of BSP-MB in continuing to 1684 has long been recognized and upheld in many cases.
enforce Central Bank Circular No. 905 which suspended the Usury Law. Thus, according to the Court, by lifting the interest ceiling, CB
Circular No. 905 merely upheld the parties’ freedom of
contract to agree freely on the rate of interest. It cited Article
1306 of the New Civil Code, under which the contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public
policy.

The lifting of the ceilings for interest rates does not authorize
stipulations charging excessive, unconscionable, and iniquitous
interest. Nothing in CB Circular No. 905 grants lenders a carte
blanche authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of
their assets. Stipulations authorizing iniquitous or
unconscionable interests have been invariably struck down for
being contrary to morals, if not against the law. Indeed, under
Article 1409 of the Civil Code, these contracts are deemed
inexistent and void ab initio, and therefore cannot be ratified,
nor may the right to set up their illegality as a defense be
waived.

Nonetheless, the nullity of the stipulation of usurious interest

does not affect the lender’s right to recover the principal of a

UP LAW G2023
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loan, nor affect the other terms thereof. Thus, in a usurious loan
with mortgage, the right to foreclose the mortgage subsists, and
this right can be exercised by the creditor upon failure by the
debtor to pay the debt due. The debt due is considered as
without the stipulated excessive interest, and a legal interest of
12% per annum will be added in place of the excessive interest
formerly imposed.

Petitioners borrowed from Eleanor Chua and Elma Dy Ng P175,000.00, payable within six (6) months A usurious loan transaction is not a complete nullity but
with an interest rate of six percent (6%) per month. To secure the payment of the loan, petitioners defective only with respect to the agreed interest. The Usury
mortgaged their residential house and lot situated at San Francisco, Magarao, Camarines Sur. Law, by its letter and spirit, did not deprive the lender of his
Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was right to recover from the borrower the money actually loaned to
extrajudicially foreclosed and the mortgaged property sold at a public auction. The house and lot was and enjoyed by the latter. The principal obligation subsists
awarded to respondents, who were the only bidders, for P367,457.80. despite the nullity of the stipulated interest
Carpo v. Chua & Dy
Ng Despite the issuance of the TCT, petitioners continued to occupy the said house and lot, prompting Since the mortgage contract derives its vitality from the
respondents to file a petition for writ of possession with the RTC. Petitioners filed a complaint for validity of the principal obligation, the invalid stipulation on
annulment of real estate mortgage and the consequent foreclosure proceedings. Petitioners claim that interest rate is similarly insufficient to render void the ancillary
following the Court's ruling in Medel v. Court of Appeals, the rate of interest stipulated in the mortgage contract.
principal loan agreement is clearly null and void. Consequently, they also argue that the nullity of the
agreed interest rate affects the validity of the real estate mortgage. (In  Medel, the Court found that the
interest stipulated at 5.5% per month or 66% per annum was so iniquitous or unconscionable as to
render the stipulation void.)

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

UP LAW G2023
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12%  from of finality
Follow stipulated
Yes of judgment until its
interest.
satisfaction
Is there a stipulated
Yes
interest rate?
12%  from of finality
No 12% from default of judgment until its
satisfaction
Is the obligation a
loan or forbearance
of money?
12%  from of finality
6% from time of
Yes of judgment until its
demand
satisfaction
Is demand
No established with
certainty?
12%  from of finality
6% from date of
No of judgment until its
judgment
satisfaction

6%  from of finality
Follow stipulated
Yes of judgment until its
interest.
satisfaction
Is there a stipulated
Yes
interest rate?
6%   from of finality
No 6% from default of judgment until its
satisfaction
Is the obligation a
loan or forbearance
of money?
6%   from of finality
6% from time of
Yes of judgment until its
demand
satisfaction
Is demand
No established with
certainty?
6%   from of finality
6% from date of
No of judgment until its
judgment
satisfaction

DEPOSIT

Voluntary Deposit

BPI v. IAC & Rizaldy Zshornack entrusted to COMTRUST, thru Virgilio V. Garcia, Assistant Branch Manager of Since the mere safekeeping of the greenbacks, without selling
Zshornack COMTRUST Quezon City, US $3,000.00 cash (popularly known as greenbacks) for safekeeping, and them to the Central Bank within one business day from receipt,
that the agreement was embodied in a document, a copy of which was attached to and made part of the is a transaction which is not authorized by CB Circular No. 20,

UP LAW G2023
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complaint. It was also alleged in the complaint that despite demands, the bank refused to return the it must be considered as one which falls under the general class
money. of prohibited transactions. Hence, pursuant to Article 5 of the
Civil Code, it is void, having been executed against the
provisions of a mandatory/prohibitory law. More importantly,
During trial, it was established that on December 8, 1975 Zshornack indeed delivered to the bank US it affords neither of the parties a cause of action against the
$3,000 for safekeeping. When he requested the return of the money on May 10, 1976, COMTRUST other. "When the nullity proceeds from the illegality of the
explained that the sum was disposed of in this manner: US$2,000.00 was sold on December 29, 1975 cause or object of the contract, and the act constitutes a
and the peso proceeds amounting to P14,920.00 were deposited to Zshornack's current account per criminal offense, both parties being in pari delicto, they shall
deposit slip accomplished by Garcia; the remaining US$1,000.00 was sold on February 3, 1976 and have no cause of action against each other. . ." [Art. 1411, New
the peso proceeds amounting to P8,350.00 were deposited to his current account per deposit slip also Civil Code.] The only remedy is one on behalf of the State to
accomplished by Garcia. prosecute the parties for violating the law.

CA Agro Industrial Petitioner (through its President, Sergio Aguirre) and the spouses Ramon and Paula Pugao entered into The contract for the rent of the safety deposit box is not an
Development Corp. v. an agreement whereby the former purchased from the latter two (2) parcels of land for a consideration ordinary contract of lease as defined in Article 1643 of the
CA & Security Bank of P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the balance was covered Civil Code. However, the same is not a contract of deposit that
by three (3) postdated checks. Among the terms and conditions of the agreement embodied in a is to be strictly governed by the provisions in the Civil Code on
Memorandum of True and Actual Agreement of Sale of Land were that the titles to the lots shall be deposit; the contract in the case at bar is a special kind of
transferred to the petitioner upon full payment of the purchase price and that the owner's copies of the deposit. It cannot be characterized as an ordinary contract of
certificates of titles thereto shall be deposited in a safety deposit box of any bank. The same could be lease under Article 1643 because the full and absolute
withdrawn only upon the joint signatures of a representative of the petitioner and the Pugaos upon full possession and control of the safety deposit box was not given
payment of the purchase price. to the joint renters — the petitioner and the Pugaos.

Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No. 1448 of Article 1975, relied upon by the respondent Court, cannot be
Security Bank and Trust Company. For this purpose, both signed a contract of lease which invoked as an argument against the deposit theory. Obviously,
contains, inter alia, the following conditions: the first paragraph of such provision cannot apply to a
depositary of certificates, bonds, securities or instruments
13. The bank is not a depositary of the contents of the safe and it has neither the possession which earn interest if such documents are kept in a rented
nor control of the same. safety deposit box. It is clear that the depositary cannot open
the box without the renter being present.
14. The bank has no interest whatsoever in said contents, except herein expressly provided,
and it assumes absolutely no liability in connection therewith. Under American jurisprudence, the prevailing rule is that the
relation between a bank renting out safe-deposit boxes and its
customer with respect to the contents of the box is that of a bail
After the execution of the contract, two (2) renter's keys were given to the renters — one to Aguirre or and bailee, the bailment being for hire and mutual benefit.
(for the petitioner) and the other to the Pugaos. A guard key remained in the possession of the Bank. This is just the prevailing view because the relation between a
bank, safe-deposit company, or storage company, and the
Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two (2) lots at a renter of a safe-deposit box therein, is often described as
price of P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a deed of sale contractual, express or implied, oral or written, in whole or in
which necessarily entailed the production of the certificates of title. In view thereof, Aguirre, part. But there is apparently no jurisdiction in which any rule
accompanied by the Pugaos, then proceeded to the respondent Bank to open the safety deposit box and other than that applicable to bailments governs questions of the
get the certificates of title. However, when opened in the presence of the Bank's representative, the liability and rights of the parties in respect of loss of the
box yielded no such certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos contents of safe-deposit boxes. 
withdrew her earlier offer to purchase the lots; as a consequence thereof, the petitioner allegedly failed
to realize the expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a In the context of our laws which authorize banking institutions
complaint for damages against the Bank with the CFI. to rent out safety deposit boxes, it is clear that in this
jurisdiction, the prevailing rule in the United States has been

UP LAW G2023
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adopted. Note that the primary function is still found within the
parameters of a contract of deposit, i.e., the receiving in
custody of funds, documents and other valuable objects for
safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this
principal function.

Any stipulation exempting the depositary from any liability

arising from the loss of the thing deposited on account of fraud,
negligence or delay would be void for being contrary to law
and public policy. In the instant case, petitioner maintains that
conditions 13 and 14 of the questioned contract of lease of the
safety deposit box are void as they are contrary to law and
public policy.

Roman Catholic Bishop In the year 1898 the books Father De la Peña, as trustee, showed that he had on hand as such trustee Although the Civil Code states that "a person obliged to give
of Jaro v. Dela Pena the sum of P6,641, collected by him for the charitable purposes aforesaid. He deposited in his personal something is also bound to preserve it with the diligence
account P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and during the war pertaining to a good father of a family" (art. 1094), it also
of the revolution, Father De la Peña was arrested by the military authorities as a political prisoner, and provides, following the principle of the Roman law, major
while thus detained made an order on said bank for the sum thus deposited in said bank. The arrest of casus est, cui humana infirmitas resistere non potest, that "no
Father De la Peña and the confiscation of the funds in the bank were the result of the claim of the one shall be liable for events which could not be foreseen, or
military authorities that he was an insurgent and that the funds thus deposited had been collected by which having been foreseen were inevitable, with the exception
him for revolutionary purposes. The money was taken from the bank by the military authorities by of the cases expressly mentioned in the law or those in which
virtue of such order, was confiscated and turned over to the Government. the obligation so declares."

By placing the money in the bank and mixing it with his

personal funds De la Peña did not thereby assume an obligation
different from that under which he would have lain if such
deposit had not been made, nor did he thereby make himself
liable to repay the money at all hazards. If it had been forcibly
taken from his pocket or from his house by the military forces
of one of the combatants during a state of war, it is clear that
under the provisions of the Civil Code he would have been
exempt from responsibility. The fact that he placed the trust
fund in the bank in his personal account does not add to his
responsibility. Such deposit did not make him a debtor who
must respond at all hazards.

There was no law prohibiting him from depositing it as he did

and there was no law which changed his responsibility be
reason of the deposit. While it may be true that one who is
under obligation to do or give a thing is in duty bound, when he
sees events approaching the results of which will be dangerous
to his trust, to take all reasonable means and measures to
escape or, if unavoidable, to temper the effects of those events,

UP LAW G2023
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we do not feel constrained to hold that, in choosing between

two means equally legal, he is culpably negligent in selecting
one whereas he would not have been if he had selected the
other.

Necessary Deposit

Art. 1962. A deposit is constituted from the moment a person

See arrived and checked in at the City Garden Hotel in Makati corner Kalayaan Avenues, Makati City receives a thing belonging to another, with the obligation of
before midnight, and its parking attendant, Justimbaste got the key to said Vitara from See to park it. safely keeping it and returning the same. If the safekeeping of
On May 1, 2002, at about 1:00 o’clock in the morning, See was awakened in his room by [a] the thing delivered is not the principal purpose of the contract,
telephone call from the Hotel Chief Security Officer who informed him that his Vitara was carnapped there is no deposit but some other contract.
while it was parked unattended. Since the Vitara has not yet been recovered since July 23, 2002 as
evidenced by a Certification of Non- Recovery issued by the PNP TMG, Pioneer paid the
Durban Apartments v. ₱1,163,250.00 money claim of See and mortgagee ABN AMRO Savings Bank, Inc. as indemnity for Art. 1998. The deposit of effects made by travelers in hotels or
the loss of the Vitara. inns shall also be regarded as necessary. The keepers of hotels
Pioneer Insurance and
or inns shall be responsible for them as depositaries, provided
Safety Corp. that notice was given to them, or to their employees, of the
Pioneer alleges that the Vitara was lost due to the negligence of Durban Apartments and Justimbaste effects brought by the guests and that, on the part of the latter,
because it was discovered during the investigation that this was the second time that a similar incident they take the precautions which said hotel-keepers or their
of carnapping happened in the valet parking service of Durban Apartments and no necessary substitutes advised relative to the care and vigilance of their
precautions were taken to prevent its repetition; Durban Apartments was wanting in due diligence in effects.
the selection and supervision of its employees particularly Justimbaste; and Justimbaste and Durban
Apartments failed and refused to pay its valid, just, and lawful claim despite written demands.

YHT Realty Corp. v. CA McLoughlin stayed at Tropicana Hotel upon the recommendation of Tan and rented a safety deposit Article 2003 was incorporated in the New Civil Code as an
box. The safety deposit box could only be opened through the use of 2 keys, one of which is given to expression of public policy precisely to apply to situations such
the registered guest, and the other remaining in the possession of the management of the hotel. as that presented in this case. The hotel business like the
McLoughlin found out that some of his properties went missing. Eventually, he confronted the hotel common carrier's business is imbued with public interest.
staff who admitted that Tan opened the safety deposit box with the key assigned to him. The hotel Catering to the public, hotelkeepers are bound to provide not
staff refused to accept responsibility relying on the conditions for renting the safety deposit box only lodging for hotel guests and security to their persons and
entitled “Undertaking For the Use of Safety Deposit Box”. belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public
to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms
imposed by hotel keepers on guests for their signature. To hold
hotelkeepers or innkeeper liable for the effects of their guests,
it is not necessary that they be actually delivered to the
innkeepers or their employees. It is enough that such effects are
within the hotel or inn. With greater reason should the liability
of the hotelkeeper be enforced when the missing items are
taken without the guest's knowledge and consent from a safety
deposit box provided by the hotel itself,

Article 2002 presupposes that the hotel-keeper is not guilty of

concurrent negligence or has not contributed in any degree to

UP LAW G2023
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the occurrence of the loss. A depositary is not responsible for

the loss of goods by theft, unless his actionable negligence
contributes to the loss.

Warehouse Receipts

Noah’s Ark Sugar Refinery issued on several dates, Warehouse Receipts (Quedans) endorsed to Imperative is the right of the warehouseman to demand
Ramos and Zoleta. Ramos and Zoleta then used the quedans as security for two loan agreements — payment of his lien at this juncture, because, in accordance
one for 15.6 million and the other for P23.5 million — obtained by them from the Philippine National with Section 29 of the Warehouse Receipts Law, the
Bank. The aforementioned quedans were endorsed by them to the Philippine National Bank. warehouseman loses his lien upon goods by surrendering
possession thereof. In other words, the lien may be lost where
When Ramos and Zoleta failed to pay their loans upon maturity, the Philippine National Bank wrote the warehouseman surrenders the possession of the goods
PNB v. Se without requiring payment of his lien, because a
to Noah’s Ark Sugar Refinery demanding delivery of the sugar stocks covered by the quedans
endorsed to it by Zoleta and Ramos. Noah’s Ark Sugar Refinery refused to comply with the demand warehouseman’s lien is possessory in nature.
alleging ownership thereof, for Manila a verified complaint for "Specific Performance with Damages
and Application for Writ of Attachment" against Noah’s Ark Sugar Refinery, Alberto T. Looyuko,
Jimmy T. Go and Wilson T. Go, the last three being identified as the sole proprietor, managing
partner, and Executive Vice President of Noah’s Ark, respectively.

SECURED TRANSACTIONS

Letters of Credit

Transfield Philippines Transfield Philippines and Luzon Hydro Corporation (LHC) entered into a Turnkey Contract whereby By definition, a letter of credit is a written instrument whereby
v. Luzon Hydro Transfield, as Turnkey Contractor, undertook to construct, on a turnkey basis, a 70-Megawatt hydro- the writer requests or authorizes the addressee to pay money or
Corporation Australia electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur. Transfield was deliver goods to a third person and assumes responsibility for
given the sole responsibility for the design, construction, commissioning, testing and completion of payment of debt therefor to the addressee. A letter of credit,
the Project. however, changes its nature as different transactions occur and
if carried through to completion ends up as a binding contract
To secure performance of Transfield’s obligation on or before the target completion date, Transfield between the issuing and honoring banks without any regard or
opened in favor of LHC 2 standby letters of credit. In the course of the construction of the project, relation to the underlying contract or disputes between the
petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to parties thereto.
several factors which prevented the completion of the Project on target date, such as force majeure
occasioned by typhoon Zeb, barricades and demonstrations. LHC denied the requests, however. Article 3 of the Uniform Customs and Practice (UCP) provides
that credits, by their nature, are separate transactions from the
LHC sent notice to Transfield that pursuant to the Turnkey Contract, it failed to comply with its sales or other contract(s) on which they may be based and
obligation to complete the Project. Despite the letters of Transfield, however, both banks informed banks are in no way concerned with or bound by such
Transfield that they would pay on the Securities if and when LHC calls on them. contract(s), even if any reference whatsoever to such
contract(s) is included in the credit. Consequently, the
undertaking of a bank to pay, accept and pay draft(s) or
negotiate and/or fulfill any other obligation under the credit is
not subject to claims or defenses by the applicant resulting
from his relationships with the issuing bank or the beneficiary.
A beneficiary can in no case avail himself of the contractual
relationships existing between the banks or between the

UP LAW G2023
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applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or

beneficiary of the credit once the draft and the required
documents are presented to it. The so-called "independence
principle" assures the seller or the beneficiary of prompt
payment independent of any breach of the main contract and
precludes the issuing bank from determining whether the main
contract is actually accomplished or not. Under this principle,
banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect
of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for
the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any
documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person
whomsoever.

The independent nature of the letter of credit may be: (a)

independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the
underlying agreement like for instance a typical standby; or (b)
independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is
identical with the same obligations under the underlying
agreement. In both cases the payment may be enjoined if in the
light of the purpose of the credit the payment of the credit
would constitute fraudulent abuse of the credit.

Trust Receipts

Colinares & Veloso v. Colinares and Veloso were contracted by the Carmelite Sisters of Cagayan de Oro City to renovate the Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust
CA latter’s convent at Camaman-an, Cagayan de Oro City. Petitioners obtained materials from CM receipt transaction as any transaction by and between a person
Builders Centre for the construction project. The following day, petitioners applied for a commercial referred to as the entruster, and another person referred to as
letter of credit with the Philippine Banking Corporation in favor of CM Builders Centre. PBC the entrustee, whereby the entruster who owns or holds
approved the letter of credit to cover the full invoice value of the goods. Petitioners signed a pro-forma absolute title or security interest over certain specified goods,
trust receipt as security. documents or instruments, releases the same to the possession
of the entrustee upon the latter’s execution and delivery to the
PBC debited from Petitioners’ marginal deposit as partial payment of the loan and then wrote  to entruster of a signed document called a "trust receipt" wherein
Petitioners demanding that the amount be paid within seven days from notice. Instead of complying the entrustee binds himself to hold the designated goods,
with PBC’s demand, Veloso confessed that they lost a certain amount in the Carmelite Monastery documents or instruments with the obligation to turn over to the
Project and requested for a grace period to settle the account. Petitioners proposed  that the terms of entruster the proceeds thereof to the extent of the amount

UP LAW G2023
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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.

There are two possible situations in a trust receipt transaction.

The first is covered by the provision which refers
to money received under the obligation involving the duty to
payment of the loan be modified, but nevertheless, PBC continued to demand payment of the balance. deliver it (entregarla) to the owner of the merchandise sold.
The second is covered by the provision which refers to
Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article merchandise received under the obligation to "return" it
315 of the Revised Penal Code. (devolvera) to the owner.

Failure of the entrustee to turn over the proceeds of the sale of

the goods, covered by the trust receipt to the entruster or to
return said goods if they were not disposed of in accordance
with the terms of the trust receipt shall be punishable as estafa
under Article 315 (1) of the Revised Penal Code, without need
of proving intent to defraud.

Guaranty

Jose C. Tupaz IV and Petronila C. Tupaz were Vice-President for Operations and Vice- Under Article 2058 of the Civil Code, the defense of
President/Treasurer, respectively, of El Oro Engraver Corporation. El Oro Corporation had a contract exhaustion (excussion) may be raised by a guarantor before he
with the Philippine Army to supply the latter with 'survival bolos. To finance the purchase of the raw may be held liable for the obligation. However, the benefit of
materials for the survival bolos, petitioners, on behalf of El Oro Corporation, applied with BPI for 2 excussion may be waived. Excussion is not a pre-requisite to
commercial letters of credit in favor of El Oro Corporation's suppliers, Tanchaoco Manufacturing secure judgment against a guarantor. The guarantor can still
Incorporated and Maresco Rubber and Retreading Corporation. BPI granted petitioners' application demand deferment of the execution of the judgment against
Tupas IV & Tupaz v. and issued the letters of credit. Petitioners signed, in their corporate capacities, a trust receipt him until after the assets of the principal debtor shall have been
corresponding to one of the letter of credits, while Jose C. Tupaz IV signed in his personal capacity exhausted.
CA & BPI the other, both in favor of BPI. He bound himself to sell the goods covered by the letter of credit and
to remit the proceeds to BPI, if sold, or to return the goods, if not sold. When petitioners did not The clause "we jointly and severally agree and undertake"
comply with their undertaking under the trust receipts, BPI made several demands for payments but El refers to the undertaking of the two (2) parties who are to sign
Oro Corporation made partial payments only. Upon demand, El Oro Corporation replied that it could it or to the liability existing between themselves. It does not
not fully pay its debt because the AFP had delayed paying for the survival bolos. BPI charged refer to the undertaking between either one or both of them on
petitioners with estafa under Section 13, Presidential Decree No. 115 (Section 13) or Trust Receipts the one hand and the petitioner on the other with respect to the
Law (PD 115). liability described under the trust receipt.

Surety

Security Bank v. Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging operations. It was a holder of a The restructuring of the principal obligation was tantamount to
Cuenca Timber License Agreement issued by the DENR. Security Bank and Trust Co. granted Sta. Ines a a grant of an extension of time to the debtor without the
credit line to assist the latter in meeting the additional capitalization requirements of its logging consent of the surety. Under Article 2079 of the Civil Code,
operations. The Credit Approval Memorandum expressly stated that the loan shall be effective until 30 such extension extinguished the surety.
November 1981. To secure the payment of the amounts drawn by SIMC from the above-mentioned
credit line, SIMC executed a Chattel Mortgage over some of its machinery and equipment in favor of
SBTC. As additional security for the payment of the loan, Rodolfo M. Cuenca executed an Indemnity

UP LAW G2023
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Agreement in favor of SBTC whereby he solidarily bound himself with SIMC. Days prior to the
expiration of the period of effectivity of the loan, SIMC made a first drawdown from its credit line. To
cover said drawdown, SIMC duly executed a promissory note for said amount.

SIMC, however, encountered difficulty in making the amortization payments on its loans and
requested SBTC for a complete restructuring of its indebtedness. SBTC accommodated SIMC’s
request and signified its approval in a letter wherein SBTC and Sta. Ines, without notice to or the prior
consent of Cuenca, agreed to restructure the past due obligations of Sta. Ines. In so doing, the
promissory note, which was the only loan incurred prior to the expiration of the loan on 30 November
1981 and the only one covered by the Indemnity Agreement, was not segregated from, but was instead
lumped together with the other loans obtained by dSta. Ines which were not secured by said Indemnity
Agreement.

A surety is an insurer of the debt, whereas a guarantor is an

insurer of the solvency of the debtor. A suretyship is an
undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated differently, a
surety promises to pay the principal's debt if the principal will
Pursuant to a promissory note, M.B. Lending Corporation extended a loan to the spouses Osmeña and not pay, while a guarantor agrees that the creditor, after
Merlyn Azarraga, together with Estrella Palmares. On four occasions after the execution of the proceeding against the principal, may proceed against the
promissory note and even after the loan matured, Palmares and the Azarraga spouses were able to pay guarantor if the principal is unable to pay. A surety binds
a total of P16,300.00, thereby leaving a balance of P13,700.00. No payments were made after the last himself to perform if the principal does not, without regard to
payment on September 26, 1991.2 his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to
Palmares v. CA & M.B. Consequently, on the basis of Palmares' solidary liability under the promissory note, M.B. Lending do so.20 In other words, a surety undertakes directly for the
Lending Corp. filed a complaint against Palmares as the lone party-defendant, to the exclusion of the principal payment and is so responsible at once if the principal debtor
debtors, allegedly by reason of the insolvency of the latter. The RTC rendered judgment dismissing makes default, while a guarantor contracts to pay if, by the use
the complaint based on the findings that, among others, Palmares as co-maker is only secondarily of due diligence, the debt cannot be made out of the principal
liable on the instrument. The CA reversed the decision of the trial court and declared that Palmares is debtor.
a surety since she bound herself to be jointly and severally or solidarily liable with the principal
debtors, the Azarraga spouses, when she signed as a co-maker. As such, Palmares is primarily liable Quintessentially, the undertaking to pay upon default of the
on the note and hence may be sued by M.B. Lending for the entire obligation. principal debtor does not automatically remove it from the
ambit of a contract of suretyship. A contract of suretyship, to
repeat, is that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render himself directly
and primarily responsible with him, and without reference to
the solvency of the principal.

E Zobel Inc. v. CA Spouses Raul and Elea Claveria, doing business under the name "Agro Brokers," applied for a loan A contract of surety is an accessory promise by which a person
with Consolidated Bank and Trust Corporation (now SOLIDBANK) to finance the purchase of 2 binds himself for another already bound, and agrees with the
maritime barges and 1 tugboat which would be used in their molasses business. The loan was granted creditor to satisfy the obligation if the debtor does not. A
subject to the condition that the spouses execute a chattel mortgage over the 3 vessels to be acquired contract of guaranty, on the other hand, is a collateral
and that a continuing guarantee be executed by Ayala International Philippines, Inc., now E. Zobel, undertaking to pay the debt of another in case the latter does
Inc., in favor of SOLIDBANK. The spouses agreed to the arrangement. Consequently, a chattel not pay the debt.
mortgage and a Continuing Guaranty were executed.
Strictly speaking, guaranty and surety are nearly related, and

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many of the principles are common to both. However, under

our civil law, they may be distinguished thus: A surety is
usually bound with his principal by the same instrument,
executed at the same time, and on the same consideration. He is
an original promissor and debtor from the beginning, and is
held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere
indulgence of the creditor to the principal, or by want of notice
of the default of the principal, no matter how much he may be
injured thereby. On the other hand, the contract of guaranty is
the guarantor's own separate undertaking, in which the
principal does not join. It is usually entered into before or after
that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal.
The spouses defaulted in the payment of the entire obligation upon maturity. Hence, SOLIDBANK The original contract of his principal is not his contract, and he
filed a complaint for sum of money with a prayer for a writ of preliminary attachment against the is not bound to take notice of its non-performance. He is often
spouses and E. Zobel. E. Zobel moved to dismiss the complaint on the ground that its liability as discharged by the mere indulgence of the creditor to the
guarantor of the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It principal, and is usually not liable unless notified of the default
argued that it has lost its right to be subrogated to the first chattel mortgage in view of SOLIDBANK's of the principal.
failure to register the chattel mortgage with the appropriate government agency.
Simply put, a surety is distinguished from a guaranty 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.

The use of the term "guarantee" does not ipso facto mean that
the contract is one of guaranty. Authorities recognize that the
word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an
intention to be bound by a primary or independent obligation.
As aptly observed by the trial court, the interpretation of a
contract is not limited to the title alone but to the contents and
intention of the parties.

Philippine Blooming Ching was the Senior Vice President of Philippine Blooming Mills, Inc. ("PBM"). In his personal Under the Civil Code, a guaranty may be given to secure even
Mills & Ching v. CA capacity and not as a corporate officer, Ching signed a Deed of Suretyship binding himself as primary future debts, the amount of which may not be known at the
obligor and not as mere guarantor to the loan of PBM from Traders Royal Bank ("TRB"). TRB time the guaranty is executed. This is the basis for contracts
granted PBM letters of credit on application of Ching in his capacity as Senior Vice President of PBM. denominated as continuing guaranty or suretyship. A
Ching later accomplished and delivered to TRB trust receipts, which acknowledged receipt in trust for continuing guaranty is one which is not limited to a single
TRB of the merchandise subject of the letters of credit. Under the trust receipts, PBM had the right to transaction, but which contemplates a future course of dealing,
sell the merchandise for cash with the obligation to turn over the entire proceeds of the sale to TRB as covering a series of transactions, generally for an indefinite
payment of PBM's indebtedness. Ching further executed an Undertaking for each trust receipt. PBM time or until revoked. It is prospective in its operation and is
defaulted in its payment. generally intended to provide security with respect to future
transactions within certain limits, and contemplates a

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succession of liabilities, for which, as they accrue, the
guarantor becomes liable. Otherwise stated, a continuing
guaranty is one which covers all transactions, including those
arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration
or termination thereof. A guaranty shall be construed as
continuing when by the terms thereof it is evident that the
object is to give a standing credit to the principal debtor to be
PBM and Ching filed a petition for suspension of payments with the Securities and Exchange used from time to time either indefinitely or until a certain
Commission ("SEC"). The SEC placed all of PBMs assets, liabilities, and obligations under the period; especially if the right to recall the guaranty is expressly
rehabilitation receivership of Kalaw, Escaler and Associates. Months after the SEC placed PBM under reserved. Hence, where the contract states that the guaranty is
rehabilitation receivership, TRB filed with the trial court a complaint for collection against PBM and to secure advances to be made "from time to time," it will be
Ching. TRB asked the trial court to order defendants to pay solidarily. Ching denied liability as surety construed to be a continuing one.
and accommodation co-maker of PBM.
In other jurisdictions, it has been held that the use of particular
words and expressions such as payment of "any debt," "any
indebtedness," or "any sum," or the guaranty of "any
transaction," or money to be furnished the principal debtor "at
any time," or "on such time" that the principal debtor may
require, have been construed to indicate a continuing guaranty.

Escano & Silos v. Private Development Corporation of the Philippines (PDCP) entered into a loan agreement with A guarantor who binds himself in solidum with the principal
Ortigas Falcon Minerals, Inc. (Falcon) whereby PDCP agreed to make available and lend to Falcon the debtor under the provisions of the second paragraph does not
amount of US$320,000.00, for specific purposes and subject to certain terms and conditions. On the become a solidary co-debtor to all intents and purposes. There
same day, 3 stockholders-officers of Falcon, namely: Rafael Ortigas, Jr. (Ortigas), George A. Scholey is a difference between a solidary co-debtor and a fiador in
and George T. Scholey executed an Assumption of Solidary Liability whereby they agreed "to assume solidum (surety). The latter, outside of the liability he assumes
in [their] individual capacity, solidary liability with [Falcon] for the due and punctual payment" of the to pay the debt before the property of the principal debtor has
loan contracted by Falcon with PDCP. In the meantime, 2 separate guaranties were executed to been exhausted, retains all the other rights, actions and benefits
guarantee the payment of the same loan by other stockholders and officers of Falcon, acting in their which pertain to him by reason of the fiansa; while a solidary
personal and individual capacities. 1 Guaranty was executed by Salvador Escaño (Escaño), while the co-debtor has no other rights than those bestowed upon him in
other by Mario M. Silos (Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Section 4, Chapter 3, Title I, Book IV of the Civil Code.
Joaquin J. Rodriguez (Rodriguez).
The second paragraph of Article 2047 is practically equivalent
Two years later, an agreement developed to cede control of Falcon to Escaño, Silos and Joseph M. to the contract of suretyship. The civil law suretyship is,
Matti (Matti). Thus, contracts were executed whereby Ortigas, George A. Scholey, Inductivo and the accordingly, nearly synonymous with the common law
heirs of then already deceased George T. Scholey assigned their shares of stock in Falcon to Escaño, guaranty; and the civil law relationship existing between the
Silos and Matti. Part of the consideration that induced the sale of stock was a desire by Ortigas, et al., co-debtors liable in solidum is similar to the common law
to relieve themselves of all liability arising from their previous joint and several undertakings with suretyship.
Falcon, including those related to the loan with PDCP.
In the case of joint and several debtors, Article 1217 makes
Falcon eventually availed of the credit line extended by PDCP. It would also execute a Deed of plain that the solidary debtor who effected the payment to the
Chattel Mortgage over its personal properties to further secure the loan. However, Falcon creditor "may claim from his co-debtors only the share which
subsequently defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there corresponds to each, with the interest for the payment already
remained a subsisting deficiency of ₱5,031,004.07, which Falcon did not satisfy despite demand. In made." Such solidary debtor will not be able to recover from
order to recover the indebtedness, PDCP filed a complaint for sum of money against Falcon, Ortigas, the co-debtors the full amount already paid to the creditor,
Escaño, Silos, Silverio and Inductivo. Escaño, Ortigas and Silos each sought to seek a settlement with because the right to recovery extends only to the proportional

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share of the other co-debtors, and not as to the particular

proportional share of the solidary debtor who already paid. In
contrast, even as the surety is solidarily bound with the
principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not
just any proportional share, from the principal debtor or
debtors. Such right to full reimbursement falls within the other
rights, actions and benefits which pertain to the surety by
reason of the subsidiary obligation assumed by the surety.

What is the source of this right to full reimbursement by the

surety? We find the right under Article 2066 of the Civil Code,
which assures that "[t]he guarantor who pays for a debtor must
PDCP. The first to come to terms with PDCP was Escaño, who entered into a compromise agreement be indemnified by the latter," such indemnity comprising of,
whereby he agreed to pay the bank ₱1,000,000.00. In exchange, PDCP waived or assigned in favor of among others, "the total amount of the debt." Further, Article
Escaño one-third (1/3) of its entire claim in the complaint against all of the other defendants in the 2067 of the Civil Code likewise establishes that "[t]he
case. The compromise agreement was approved. Ortigas entered into his own compromise agreement guarantor who pays is subrogated by virtue thereof to all the
with PDCP, allegedly without the knowledge of Escaño, Matti and Silos. Ortigas agreed to pay PDCP rights which the creditor had against the debtor."
₱1,300,000.00 as "full satisfaction of the PDCP’s claim against Ortigas," in exchange for PDCP’s
release of Ortigas from any liability or claim arising from the Falcon loan agreement, and a Articles 2066 and 2067 explicitly pertain to guarantors, and one
renunciation of its claims against Ortigas. Silos and PDCP entered into a Partial Compromise might argue that the provisions should not extend to sureties,
Agreement whereby he agreed to pay ₱500,000.00 in exchange for PDCP’s waiver of its claims especially in light of the qualifier in Article 2047 that the
against him. provisions on joint and several obligations should apply to
sureties. We reject that argument, and instead adopt Dr.
In the meantime, after having settled with PDCP, Ortigas pursued his claims against Escaño, Silos and Tolentino’s observation that "[t]he reference in the second
Matti, on the basis of the Undertaking. He initiated a third-party complaint against Matti and Silos, paragraph of [Article 2047] to the provisions of Section 4,
while he maintained his cross-claim against Escaño. The RTC issued the Summary Judgment, Chapter 3, Title I, Book IV, on solidary or several obligations,
ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the amount of ₱1,300,000.00. however, does not mean that suretyship is withdrawn from the
The Court of Appeals dismissed the appeals and affirmed the Summary Judgment. applicable provisions governing guaranty." For if that were not
the implication, there would be no material difference between
the surety as defined under Article 2047 and the joint and
several debtors, for both classes of obligors would be governed
by exactly the same rules and limitations.

Accordingly, the rights to indemnification and subrogation as

established and granted to the guarantor by Articles 2066 and
2067 extend as well to sureties as defined under Article 2047.
These rights granted to the surety who pays materially differ
from those granted under Article 1217 to the solidary debtor
who pays, since the "indemnification" that pertains to the latter
extends "only [to] the share which corresponds to each [co-
debtor]."

Pledge and Mortgage

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Lydia P. Cuba is a grantee of a Fishpond Lease Agreement from the Government. She obtained loans The elements of pactum commissorium are as follows: (1)
from the DBP, and as security for said loans, Cuba executed two Deeds of Assignment of her there should be a property mortgaged by way of security for the
Leasehold Rights. She failed to pay her loan on the scheduled dates thereof. Without foreclosure payment of the principal obligation, and (2) there should be a
proceedings, whether judicial or extra-judicial, DBP appropriated the Leasehold Rights of Cuba over stipulation for automatic appropriation by the creditor of the
DBP v. CA
the fishpond in question and sold it by Deed of Conditional Sale of the Leasehold Rights in favor of thing mortgaged in case of non-payment of the principal
Cuba. Cuba offered to repurchase the fishponds and DBP accepted. When Cuba failed to pay the obligation within the stipulated period.
amortizations stipulated in the Deed of Conditional Sale, DBP sent a Notice of Rescission thru
Notarial Act and then sold the property to Caperal.

Contracts have the force of law between the contracting parties

and must be complied with in good faith. There are, however,
certain exceptions to the rule, specifically Article 1306 of the
Rosel entered into a loan agreement with the Bustamantes. When the loan was about to mature, Rosel Civil Code, which provides:
proposed to buy the 70 square meters parcel of land given as collateral to guarantee payment of the
loan. Bustamante, however, refused to sell and requested for extension of time to pay the loan and
Article 1306. The contracting parties may establish such
offered to sell to Rosel another residential lot. Rosel refused to extend the payment of the loan and to
stipulations, clauses, terms and conditions as they may deem
Bustamante v. Rosel accept the lot as it was occupied by squatters and the Bustamantes were not the owners thereof but
convenient, provided they are not contrary to law, morals, good
were mere land developers. Hence, Bustamante tendered payment of the loan to Rosel which the latter
customs, public order, or public policy.
refused to accept, insisting on the Bustamantes signing a prepared deed of absolute sale of the
collateral. Nevertheless, Rosel sent a demand letter asking Bustamante to sell the collateral pursuant to
the option to buy embodied in the loan agreement. A scrutiny of the stipulation of the parties reveals a subtle
intention of the creditor to acquire the property given as
security for the loan. This is embraced in the concept of pactum
commissorium, which is proscribed by law.

Respondent argues that the law recognizes dacion en pago as a

special form of payment whereby the debtor alienates property
Spouses Ong obtained several loans from Roban Lending Corporation. These loans were secured by a to the creditor in satisfaction of a monetary obligation. This
Ong v. Roban Lending real estate mortgage on the Ongs' parcels of land. The parties executed an Amendment to Amended does not persuade. In a true dacion en pago, the assignment of
Corp. Real Estate Mortgage consolidating their loans inclusive of charges thereon, and a Dacion in Payment the property extinguishes the monetary debt. In the case at bar,
Agreement wherein the Ongs assigned the properties to RLC in settlement of their total obligation. the alienation of the properties was by way of security, and not
by way of satisfying the debt. The Dacion in Payment did not
extinguish petitioners' obligation to respondent.

Real Estate Mortgage

Prudential Bank v. Spouses Don A. Alviar and Georgia B. Alviar are the registered owners of a parcel of land in San A "blanket mortgage clause," also known as a "dragnet clause"
Alviar & Alviar Juan, Metro Manila. They executed a deed of real estate mortgage in favor of Prudential Bank to in American jurisprudence, is one which is specifically phrased
secure the payment of a loan. The spouses executed the corresponding promissory note covering the to subsume all debts of past or future origins. Such clauses are
said loan, which provides that the loan matured and that the note is secured by a real estate mortgage. "carefully scrutinized and strictly construed." Mortgages of this
Significantly, the real estate mortgage contained the following clause: "the Mortgagor does hereby character enable the parties to provide continuous dealings, the
transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of nature or extent of which may not be known or anticipated at
land which are described in the list inserted on the back of this document, and/or appended hereto, the time, and they avoid the expense and inconvenience of
together with all the buildings and improvements now existing or which may hereafter be erected or executing a new security on each new transaction. A "dragnet
constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all clause" operates as a convenience and accommodation to the
liens and incumbrances..." borrowers as it makes available additional funds without their
having to execute additional security documents, thereby
saving time, travel, loan closing costs, costs of extra legal

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services, recording fees, et cetera. Indeed, it has been settled in
When the spouses were not able in full, Prudential Bank moved for the extrajudicial foreclosure of the a long line of decisions that mortgages given to secure future
mortgage on the property. The spouses filed a complaint for damages with a prayer for the issuance of advancements are valid and legal contracts, and the amounts
a writ of preliminary injunction, which the trial court dismissed the complaint. The spouses sought named as consideration in said contracts do not limit the
reconsideration of the decision, and the trial court issued an Order setting aside its earlier decision and amount for which the mortgage may stand as security if from
awarded attorney's fees to the spouses. According to the trial court, the "blanket mortgage clause" the four corners of the instrument the intent to secure future
relied upon by Prudential Bank applies only to future loans obtained by the mortgagors, and not by and other indebtedness can be gathered.
parties other than the said mortgagors, such as Donalco Trading, Inc., for which the spouses merely
signed as officers thereof. Under American jurisprudence, two schools of thought have
emerged on the question of whether the "blanket mortgage"
clause applies even to subsequent advancements for which
other securities were intended. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover all
other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is
secured by another mortgage. The contrary thinking maintains
that a mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after
exhausting the security specified therein, such deficiency being
an indebtedness within the meaning of the mortgage, in the
absence of a special contract excluding it from the
arrangement.

The latter school represents the better position. The parties

having conformed to the "blanket mortgage clause" or "dragnet
clause," it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be
secured by other securities, as the subsequent loans will be
secured by the first mortgage. In other words, the sufficiency of
the first security is a corollary component of the "dragnet
clause." But of course, there is no prohibition, as in the
mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor
takes another loan for which another security was given it
could not be inferred that such loan was made in reliance solely
on the original security with the "dragnet clause," but rather, on
the new security given. This is the "reliance on the security
test."

Hence, based on the "reliance on the security test," the

California court in the cited case made an inquiry whether the
second loan was made in reliance on the original security
containing a "dragnet clause." Accordingly, finding a different
security was taken for the second loan no intent that the parties
relied on the security of the first loan could be inferred, so it

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was held. The rationale involved, the court said, was that the
"dragnet clause" in the first security instrument constituted a
continuing offer by the borrower to secure further loans under
the security of the first security instrument, and that when the
lender accepted a different security he did not accept the offer.

In another case, it was held that a mortgage with a "dragnet

clause" is an "offer" by the mortgagor to the bank to provide
the security of the mortgage for advances of and when they
were made. Thus, it was concluded that the "offer" was not
accepted by the bank when a subsequent advance was made
because (1) the second note was secured by a chattel mortgage
on certain vehicles, and the clause therein stated that the note
was secured by such chattel mortgage; (2) there was no
reference in the second note or chattel mortgage indicating a
connection between the real estate mortgage and the advance;
(3) the mortgagor signed the real estate mortgage by her name
alone, whereas the second note and chattel mortgage were
signed by the mortgagor doing business under an assumed
name; and (4) there was no allegation by the bank, and
apparently no proof, that it relied on the security of the real
estate mortgage in making the advance.

Indeed, in some instances, it has been held that in the absence

of clear, supportive evidence of a contrary intention, a
mortgage containing a "dragnet clause" will not be extended to
cover future advances unless the document evidencing the
subsequent advance refers to the mortgage as providing
security therefor.

Atlantic Gulf & Pacific Company of Manila sold and assigned all its rights in the Dahican Lumber The stipulation about “after-acquired properties” is common
concession to DALCO. DALCO obtained various loans from the People's Bank & Trust Company, and logical in all cases where the properties given as collateral
and in addition, a loan from the Export-Import Bank of Washington D.C., evidenced by five are perishable or subject to inevitable wear and tear or were
promissory notes. As security, DALCO executed in favor of the BANK a deed of mortgage covering 5 intended to be sold, or to be used — thus becoming subject to
parcels of land together with all the buildings and other improvements existing thereon and all the the inevitable wear and tear — but with the understanding —
People’s Bank & Trust personal properties of the mortgagor located in its place of business. DALCO also executed a second express or implied — that they shall be replaced with others to
Company & Atlantic mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of be thereafter acquired by the mortgagor. Such stipulation is
the sale price of the lumber concession. Both deeds contained a provision extending the mortgage lien neither unlawful nor immoral, its obvious purpose being to
Gulf and Pacific Co. v. to properties to be subsequently acquired — referred to hereafter as "after acquired properties" — by maintain, to the extent allowed by circumstances, the original
Lumber Company the mortgagor. After the date of execution of the mortgages, DALCO purchased various machineries, value of the properties given as security. Indeed, if such
equipment, spare parts and supplies in addition to, or in replacement of some of those already owned properties were of the nature already referred to, it would be
and used by it on the date aforesaid. The BANK, in its own behalf and that of ATLANTIC, demanded poor judgment on the part of the creditor who does not see to it
that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, that a similar provision is included in the contract.
ATLANTIC and the BANK, commenced foreclosure proceedings. The Court ordered the sale of all
the machineries, equipment and supplies of DALCO, and the same were subsequently sold.

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Law and jurisprudence provide and guide that even if not
expressly so stated, the mortgage extends to the improvements.

Article 2127 of the Civil Code provides:

Art. 2127. The mortgage extends to the natural accessions, to

Paper City applied for and was granted loans and credit accommodations in peso and dollar the improvements, growing fruits, and the rents or income not
denominations by RCBC. The loans were secured by 4 Deeds of Continuing Chattel Mortgages on its yet received when the obligation becomes due, and to the
machineries and equipments found inside its paper plants. A unilateral Cancellation of Deed of amount of the indemnity granted or owing to the proprietor
Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade was executed by RCBC from the insurers of the property mortgaged, or in virtue of
through its Branch Operation Head Joey P. Singh and Asst. Vice President Anita O. Abad over the expropriation for public use, with the declarations,
merchandise and stocks-in-trade covered by the continuing chattel mortgages. RCBC, Metrobank and amplifications and limitations established by law, whether the
Union Bank entered into a Mortgage Trust Indenture (MTI) with Paper City. Paper City acquired an estate remains in the possession of the mortgagor, or it passes
additional loan from the creditor banks in addition to the previous loan from RCBC. The new loan into the hands of a third person.
obligation would be secured by the same 5 Deeds of Real Estate Mortgage and additional real and
Star Two (SPV-AMC) v. personal properties.
Paper City Corp. The real estate mortgage over the machineries and equipments
is even in full accord with the classification of such properties
Paper City was able to comply with its loan obligations at first, but economic crisis ensued which by the Civil Code of the Philippines as immovable property.
made it difficult for Paper City to meet the terms of its obligations leading to payment defaults. Thus:
Consequently, RCBC filed a Petition for Extrajudicial Foreclosure over the 8 parcels of land including
all improvements thereon. During the interim, Paper City filed with the trial court a Manifestation
with Motion to Remove and/or Dispose Machinery on reasoning that the machineries located inside Article 415. The following are immovable property:
the foreclosed land and building were deteriorating. It posited that since the machineries were not
included in the foreclosure of the real estate mortgage, it is appropriate that it be removed from the (1) Land, buildings, roads and constructions of all kinds
building and sold to a third party. adhered to the soil;

(5) Machinery, receptacles, instruments or implements intended

by the owner of the tenement for an industry or works which
may be carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said industry or
works;

Garcia v. Villar Galas was the original owner of a piece of property. Galas, with her daughter, Pingol, as co-maker, Villar’s purchase of the subject property did not violate the
mortgaged the subject property to Villar as security for a loan. Galas, again with Pingol as her co- prohibition on pactum commissorium. The power of attorney
maker, mortgaged the same subject property to Garcia to secure her other loan. Galas sold the subject provision above did not provide that the ownership over the
property to Villar and declared in the Deed of Sale that such property was "free and clear of all liens subject property would automatically pass to Villar upon
and encumbrances of any kind whatsoever." The Deed of Sale was registered and, consequently, the Galas’s failure to pay the loan on time. What it granted was the
TCT was issued in the name of Villar. Both Villar’s and Garcia’s mortgages were carried over and mere appointment of Villar as attorney-in-fact, with authority
annotated at the back of Villar’s new TCT. Garcia subsequently amended his petition to a Complaint to sell or otherwise dispose of the subject property, and to
for Foreclosure of Real Estate Mortgage with Damages, alleging that when Villar purchased the apply the proceeds to the payment of the loan. This provision is
subject property, she acted in bad faith and with malice as she knowingly and willfully disregarded the customary in mortgage contracts, and is in conformity with
provisions on laws on judicial and extrajudicial foreclosure of mortgaged property. Garcia further Article 2087 of the Civil Code, which reads:
claimed that when Villar purchased the subject property, Galas was relieved of her contractual
obligation and the characters of creditor and debtor were merged in the person of Villar. Therefore, Art. 2087. It is also of the essence of these contracts that when
Garcia argued that he as the second mortgagee, was subrogated to Villar’s original status as first the principal obligation becomes due, the things in which the
mortgagee, which is the creditor with the right to foreclose. pledge or mortgage consists may be alienated for the payment

UP LAW G2023
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to the creditor.

Filkor Business Integrated, Inc. (Filkor) borrowed money from Korea Exchange Bank. In addition, Section 1, Rule 68 of the 1997 Rules of Civil Procedure on
Filkor executed 9 trust receipts in favor of Korea Exchange, but Filkor failed to turn over the proceeds foreclosure of real estate mortgage provides:
from the sale of the goods, or the goods themselves as required by the trust receipts in case Filkor
could not sell them. Filkor also negotiated to Korea Exchange the proceeds of 17 letters of credit SECTION 1. Complaint in action for foreclosure. — In an
issued by the Republic Bank of New York and the Banque Leumi France, S.A. to pay for goods which action for the foreclosure of a mortgage or other encumbrance
Filkor sold to Segerman International, Inc. and Davyco, S.A. When Korea Exchange tried to collect upon real estate, the complaint shall set forth the date and due
the proceeds of the letters of credit by presenting the bills of exchange drawn to collect the proceeds, execution of the mortgage; its assignments, if any; the names
they were dishonored because of discrepancies. and residences of the mortgagor and the mortgagee; a
description of the mortgaged property; a statement of the date
Korea Exchange Bank Prior to all the foregoing, in order to secure payment of all its obligations, Filkor executed a Real of the note or other documentary evidence of the obligation
Estate Mortgage over the improvements belonging to it. As Filkor failed to make good on its secured by the mortgage, the amount claimed to be unpaid
v. Filkor Business
obligations, Korea Exchange filed a civil case, praying that (a) it be paid by respondents under its thereon; and the names and residences of all persons having or
Integrated, Inc. et al. twenty-seven causes of action; (b) the property mortgaged be foreclosed and sold at public auction in claiming an interest in the property subordinate in right to that
case respondents failed to pay petitioner within ninety days from entry of judgment; and (c) other of the holder of the mortgage, all of whom shall be made
reliefs just and equitable be granted. defendants in the action.

The trial court then rendered judgment in favor of Korea Exchange, granting its prayers but failing to
order that the property mortgaged by Filkor be foreclosed and sold at public auction in the event that
Filkor fails to pay its obligations. Korea Exchange filed a motion for partial reconsideration of the trial
court’s order, but the trial court denied said motion, ruling that Korea Exchange, in opting to file a
civil action for the collection of defendants obligations, has abandoned its mortgage lien on the
property subject of the real estate mortgage.

SMGI instituted a civil case as mortgagee-assignee of a loan amounting to P8.5 million obtained by The claim that the mortgagor is entitled to the beneficial
Huerta Alba from Intercon. In a complaint for judicial foreclosure of mortgage SMGI sought the provisions of Section 78 of R.A. No. 337 — since the
Huerta Alba Resort, foreclosure of 4 parcels of land mortgaged by Huerta Alba to Intercon, which was granted by the CA. mortgagee is a credit institution — is in the nature of a
SMGI was declared the highest bidder during the auction sale and the Certificate of Sale was issued in compulsory counterclaim which should have been averred in
Inc. v. Court of Appeals its favor. in opposition to the Motion for Issuance of Writ of Possession, Huerta Alba filed a Motion to the mortgagor's answer to the complaint for judicial
Compel SMGI to Accept Redemption, invoking for the very first time its alleged right to redeem foreclosure. Failing to invoke it in a timely fashion shall bar a
subject properties under to Section 78 of R.A. No. 337 (General Banking Act). person from claiming its benefits in later part of proceedings.

Grand Farms, Inc. & Grand Farms filed a civil case for annulment and/or declaration of nullity of the extrajudicial The omission of personal notice of the extrajudicial foreclosure
Philippine Shares foreclosure proceedings over their mortgaged properties, with damages, against Banco Filipino to the mortgagor prior thereto rendered the foreclosure
Corporation v. Court of Savings and Mortgage Bank. Banco Filipino countered that Grand Farms was notified of the auction defective and irregular for being contrary to the express
sale by the posting of notices and the publication of notice in the Metropolitan Newsweek, a provisions of the mortgage contract. The foreclosure may be
Appeals, et al.
newspaper of general circulation in the province where the subject properties are located. According annulled solely on the basis of such defect.
to Grand Farms, the foreclosure was violative of the provisions of the mortgage contract, specifically
paragraph (k) thereof which provides:

k) All correspondence relative to this Mortgage, including demand letters, summons, subpoena or
notifications of any judicial or extrajudical actions shall be sent to the Mortgagor at the address given
above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee, and
the mere act of sending any correspondence by mail or by personal delivery to the said address shall

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be valid and effective notice to the Mortgagor for all legal purposes, and the fact that any
communication is not actually received by the Mortgagor, or that it has been returned unclaimed to the
Mortgagee, or that no person was found at the address given, or that the address is fictitious, or cannot
be located, shall not excuse or relieve the Mortgagor from the effects of such notice;

What is divested from the mortgagor is only his "full right as

owner thereof to dispose (of) and sell the lands," in effect,
merely clarifying that the mortgagor does not have the
unconditional power to absolutely sell the land since the same
is encumbered by a lien of a third person which, if unsatisfied,
could result in a consolidation of ownership in the lienholder
but only after the lapse of the period of redemption. What is
delimited is not the mortgagor's jus disponendi, as an attribute
of ownership, but merely the rights conferred by such act of
disposal which may correspondingly be restricted.

A mortgage contract does not involve a transfer, cession or

The spouses Dolinos, alarmed of losing their right of redemption over their lot from Mr. Juan conveyance of the property but only constitutes a lien thereon.
Gandioncho, purchaser of the aforesaid lot at the foreclosure sale of the previous mortgage in favor of There is no obstacle to the legal creation of such a lien even
Cebu City Development Bank, went to Teotimo Abellana to obtain a loan. Prior thereto, their son after the auction sale of the property but during the redemption
Teofredo Dolino filed a similar loan application with the same lot offered as security. When the loan period, since no distinction is made between a mortgage
became due and demandable without the spouses paying the same, the mortgage was extrajudicially constituted over the property before or after the auction sale
foreclosed. After the posting and publication requirements were complied with, the land was sold at thereof.
public auction to City Savings Bank being the highest bidder. One year later, no redemption having
Medida, et al. v. Court been effected by the spouses, the ownership was consolidated under City Savings Bank.
of Appeals Thus, a redemptioner is defined as a creditor having a lien by
attachment, judgment or mortgage on the property sold, or on
The spouses then filed the complaint for the annulment of the sale at public auction, claiming that the some part thereof, subsequent to the judgment under which the
same was held in violation of Act No. 3135, as amended, and prayed, inter alia, for the cancellation of property was sold. Of course, while in extrajudicial foreclosure
TCT issued in favor of City Savings Bank. The CA declared the real estate mortgage in question null the sale contemplated is not under a judgment but the
and void for the reason that the mortgagor spouses, at the time when the said mortgage was executed, proceeding pursuant to which the mortgaged property was sold,
were no longer the owners of the lot, having supposedly lost the same when the lot was sold to a a subsequent mortgage could nevertheless be legally
purchaser in the foreclosure sale under the prior mortgage. constituted thereafter with the subsequent mortgagee becoming
and acquiring the rights of a redemptioner, aside from his right
against the mortgagor.

In either case, since the mortgagor remains as the absolute

owner of the property during the redemption period and has the
free disposal of his property, there would be compliance with
the requisites of Article 2085 of the Civil Code for the
constitution of another mortgage on the property. To hold
otherwise would create the inequitable situation wherein the
mortgagor would be deprived of the opportunity, which may be
his last recourse, to raise funds wherewith to timely redeem his
property through another mortgage thereon.

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The spouses Tomas Tirambulo and Salvacion Estorco (Tirambulos) are the registered owners of What the law proscribes is the foreclosure of only a portion of
several parcels of land. They executed a Real Estate Mortgage over Lots 1, 4, 5, 6 and 8 in favor of the the property or a number of the several properties mortgaged
Rural Bank of Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc. (DRBI), to secure a loan corresponding to the unpaid portion of the debt where before
extended by the latter to them. Later, the Tirambulos obtained a second loan and also executed a Real foreclosure proceedings partial payment was made by the
Estate Mortgage over Lots 3 and 846 in favor of the same bank. Subsequently, the Tirambulos sold all debtor on his total outstanding loan or obligation. This also
seven mortgaged lots to the spouses Dy and the spouses Maxinos without the consent and knowledge means that the debtor cannot ask for the release of any portion
of DRBI. Because the Tirambulos defaulted, DRBI extrajudicially foreclosed the mortgage and had of the mortgaged property or of one or some of the several lots
Lots 1, 4, 5, 6 and 8 sold at public auction where DRBI was proclaimed the highest bidder. 12 days mortgaged unless and until the loan thus, secured has been
Spouses Yap v. Spouses after the sale was registered, DRBI sold Lots 1, 3 and 6 to the spouses Yap under a Deed of Sale with fully paid, notwithstanding the fact that there has been a partial
Dy, et al. Agreement to Mortgage. fulfillment of the obligation. Hence, it is provided that the
debtor who has paid a part of the debt cannot ask for the
The Yaps were able to redeem Lots 1, 3 and 6 in their favor. Roughly a month before the one-year proportionate extinguishment of the mortgage as long as the
redemption period was set to expire, the Dys and the Maxinos attempted to redeem Lots 1, 3 and 6. debt is not completely satisfied. However, nothing in the law
They tendered a partial amount to DRBI and the Yaps, but both refused, contending that the prohibits the piecemeal redemption of properties sold at one
redemption should be for the full amount of the winning bid plus interest for all the foreclosed foreclosure proceeding. In fact, in several early cases decided
properties. The Yaps refused to take delivery of the redemption price arguing that one of the by this Court, the right of the mortgagor or redemptioner to
characteristics of a mortgage is its indivisibility and that one cannot redeem only some of the lots redeem one or some of the foreclosed properties was
foreclosed because all the parcels were sold for a single price at the auction sale. recognized.

Suico v. Philippine Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the Philippine National Bank (PNB) The disposition of the proceeds of the sale in foreclosure shall
National Bank secured by a real estate mortgage on real properties in the name of the former. The spouses were be as follows:
unable to pay their obligation prompting the PNB to extrajudicially foreclose the mortgage. The
spouses thereafter filed a Complaint against the PNB for Declaration of Nullity of Extrajudicial (a) first, pay the costs
Foreclosure of Mortgage. The spouses claimed that during the foreclosure sale of the subject
properties, PNB, as the lone bidder, offered a bid in the amount of P8,511,000.00. PNB did not pay to
the Sheriff who conducted the auction sale the amount of its bid or give an accounting of how said (b) secondly, pay off the mortgage debt
amount was applied against the spouses' outstanding loan, which amounted only to P1,991,770.38.
Since the amount of the bid grossly exceeded the amount of the outstanding obligation as stated in the (c) thirdly, pay the junior encumbrancers, if any in the
extrajudicial foreclosure of mortgage, it was the legal duty of the winning bidder, PNB, to deliver to order of priority
the Sheriff the bid price or what was left thereof after deducting the amount of the spouses'
outstanding obligation. PNB failed to deliver the amount of their bid to the Sheriff or, at the very least, (d) fourthly, give the balance to the mortgagor, his agent
the amount of such bid in excess of the spouses' outstanding obligation. or the person entitled to it.

Based on the foregoing, after payment of the costs of suit and

satisfaction of the claim of the first mortgagee/senior
mortgagee, the claim of the second mortgagee/junior
mortgagee may be satisfied from the surplus proceeds. The
application of the proceeds from the sale of the mortgaged
property to the mortgagor's obligation is an act of payment, not
payment by dacion; hence, it is the mortgagee's duty to return
any surplus in the selling price to the mortgagor. Perforce, a
mortgagee who exercises the power of sale contained in a
mortgage is considered a custodian of the fund and, being
bound to apply it properly, is liable to the persons entitled
thereto if he fails to do so. And even though the mortgagee is
not strictly considered a trustee in a purely equitable sense, but

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as far as concerns the unconsumed balance, the mortgagee is

deemed a trustee for the mortgagor or owner of the equity of
redemption. Thus it has been held that if the mortgagee is
retaining more of the proceeds of the sale than he is entitled to,
this fact alone will not affect the validity of the sale but simply
give the mortgagor a cause of action to recover such surplus.

Since the foreclosed property was not redeemed, the purchaser

had acquired an absolute right to the writ of possession. It had
become the ministerial duty of the lower court to issue the writ
of possession upon mere motion pursuant to Section 7 of Act
No. 3135, as amended. Moreover, once ownership has been
consolidated, the issuance of the writ of possession becomes a
Petitioners obtained a loan from Philippine Bank of Communication. To secure the loan, petitioners ministerial duty of the court, upon proper application and proof
executed a Deed of Real Estate Mortgage over their property. For failure of petitioners to pay the full of title. The application for the issuance of a writ of possession
amount of the outstanding loan upon demand, the Bank applied for the extrajudicial foreclosure of the is in the form of an ex parte motion. It issues as a matter of
real estate mortgage. Upon receipt of a notice of the extrajudicial foreclosure sale, petitioners filed a course once the requirements are fulfilled. No discretion is left
Cua Lai Chu, et al. v. petition to annul the extrajudicial foreclosure sale with a prayer for temporary restraining order. The to the court.
Lacqui & Philippine extrajudicial foreclosure sale did not push through as originally scheduled because the trial court
granted petitioners’ prayer for TRO. The trial court subsequently lifted the TRO and reset the
Bank of No one can oppose or appeal the court’s order granting the writ
extrajudicial foreclosure sale. At the foreclosure sale, the Bank emerged as the highest bidder. After
Communications of possession in an ex parte proceeding. The remedy is to have
the lapse of the one-year redemption period, the Bank filed an affidavit of consolidation to consolidate
the sale set aside and the writ of possession cancelled in
its ownership and title to the foreclosed property which was granted. When the Bank applied for the
accordance with Section 8 of Act No. 3135, as amended, to wit:
issuance of a writ of possession of the foreclosed property, petitioners filed an opposition. The trial
court granted the Bank’s motion for a declaration of general default and allowed the Bank to present
evidence ex parte. SEC. 8. The debtor may, in the proceedings in which
possession was requested, but not later than thirty days after the
purchaser was given possession, petition that the sale be set
aside and the writ of possession cancelled, specifying the
damages suffered by him, because the mortgage was not
violated or the sale was not made in accordance with the
provisions hereof. x x x

Spouses Tolosa v. Spouses Tolosa entered into a Credit Agreement with UCPB for the purpose of availing of the latter's A purchaser at an extrajudicial foreclosure sale is entitled to a
United Coconut credit facilities. To secure their credit availments, the Spouses Tolosa executed deeds of real estate writ of possession as a matter of right after consolidation of
Planters Bank mortgage over four properties. For failure of the Spouses Tolosa to pay their principal obligation, ownership for failure of the mortgagor to redeem the property.
UCPB foreclosed the mortgage on the aforesaid realties and filed a petition for the extra-judicial sale The foregoing rule admits of a few jurisprudential exceptions:
thereof. After the due notice and publication, the mortgaged properties were sold at a public auction
where UCPB tendered the highest bid . The proceeds of the sale were credited towards the partial (a) In Cometa v. Intermediate Appellate Court, the
satisfaction of the Spouses Tolosa's mortgage obligation. For failure of the Spouses Tolosa to exercise judgment debtor filed a separate action to invalidate
their right of redemption within the prescribed one year period, UCPB went on to consolidate its the auction sale of properties approximately worth
ownership over the subject realties. UCPB filed an ex-parte petition for issuance of a writ of P500,000.00 for the unusually low price of
possession. P57,396.85. Citing equitable considerations, this
Court upheld the deferment of the issuance of the
Notified of the filing of the petition, the Spouses Tolosa filed their opposition, calling the RTC's writ of possession sought by the judgment creditor on
attention to the pendency of the complaint for declaration of nullity of promissory notes, foreclosure the ground that the validity of the auction sale is an

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issue that requires pre-emptive resolution to avoid

injustice.

of mortgage and certificate of sale as well as accounting and damages which they instituted against (b) In the case of Barican v. Intermediate Appellate
UCPB. The complaint alleged that the Spouses Tolosa were misled by UCPB into signing the Credit Court, on the other hand, the Court ruled that the duty
Agreement, Promissory Notes and Real Estate Mortgage sued upon. In addition to not releasing the ceases to be ministerial where the property
full amount of their loans, UCPB was likewise faulted for supposedly failing to disclose the actual mortgaged had been, in the meantime, sold to third
interests it charged and for causing the extrajudicial foreclosure of the mortgage despite the Spouses parties who had assumed the mortgagor's
Tolosa's overpayment of their loans. The RTC issued an order, holding in abeyance the issuance of the indebtedness and took possession of the property.
writ of possession sought by UCPB, citing equity and substantial justice as reasons for its disposition.
While conceding that the issuance of a writ of possession is ministerial as a general rule, the RTC held (c) In Sulit v. Court of Appeals, the mortgagee's failure
that said function ceases to be of said nature where the grant of the writ "will prejudice another to deliver the surplus from the proceeds of the
pending case for the nullification of the auction sale" and "might work inequity and injustice to foreclosure sale equivalent to at least 40% of the
mortgagors." mortgage debt was likewise found sufficient
justification for the non-issuance of the writ of
possession sought.

BPI Family Savings CEDEC Transport, Inc. (CEDEC) mortgaged two parcels of land in favor of BPI Family to secure a The general rule is that a purchaser in a public auction sale of a
Bank, Inc. v. Golden loan. CEDEC obtained from BPI Family additional loans and again mortgaged the same properties. foreclosed property is entitled to a writ of possession and, upon
Power Diesel Sales Despite demand, CEDEC defaulted in its mortgage obligations so BPI Family filed a verified petition an ex parte petition of the purchaser, it is ministerial upon the
for extrajudicial foreclosure of real estate mortgage over the properties. During the sale, BPI Family trial court to issue the writ of possession in favor of the
Center
acquired the properties as the highest bidder. The one-year redemption period expired without CEDEC purchaser. There is, however, an exception. Section 33, Rule 39
redeeming the properties. Thus, the titles to the properties were consolidated in the name of BPI of the Rules of Court provides:
Family. However, despite several demand letters, CEDEC refused to vacate the properties and to
surrender possession to BPI Family. BPI Family filed an Ex-Parte Petition for Writ of Possession over Section 33. Deed and possession to be given at expiration of
the properties which the trial court granted and issued. Golden Power Diesel Sales Center, Inc. and redemption period; by whom executed or given. - x x x
Renato C. Tan filed a Motion to Hold Implementation of the Writ of Possession, alleging that they are
in possession of the properties which they acquired from CEDEC. They argued that they are third
persons claiming rights adverse to CEDEC, the judgment obligor and they cannot be deprived of Upon the expiration of the right of redemption, the purchaser or
possession over the properties. They also disclosed that they filed a complaint for the cancellation of redemptioner shall be substituted to and acquire all the rights,
the Sheriffʼs Certificate of Sale and an order to direct BPI Family to honor and accept the Deed of title, interest and claim of the judgment obligor to the property
Absolute Sale between them and CEDEC. as of the time of the levy. The possession of the property shall
be given to the purchaser or last redemptioner by the same
officer unless a third party is actually holding the property
adversely to the judgment obligor.

Therefore, in an extrajudicial foreclosure of real property, when

the foreclosed property is in the possession of a third party
holding the same adversely to the judgment obligor, the
issuance by the trial court of a writ of possession in favor of the
purchaser of said real property ceases to be ministerial and may
no longer be done ex parte. The procedure is for the trial court
to order a hearing to determine the nature of the adverse
possession. For the exception to apply, however, the property

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need not only be possessed by a third party, but also held by the
third party adversely to the judgment obligor.

Antichresis

It is not an essential requisite of a mortgage that

possession of the mortgaged premises be retained by the
mortgagor. To be antichresis, it must be expressly agreed
between creditor and debtor that the former, having been
given possession of the properties given as security, is to
Fernando executed a deed of mortgage in favor of Diego over two parcels of land registered
apply their fruits to the payment of the interest, if owing,
in his name to secure a loan. After the execution of the deed, possession of the mortgaged
and thereafter to the principal of his credit; so that if a
Diego v. Fernando properties were turned over to the mortgagee. The debtor having failed to pay the loan after
contract of loan with security does not stipulate the
four years, Diego made several demands upon him for payment; and as the demands were
payment of interest but provides for the delivery to the
unheeded, Diego filed the action for foreclosure of mortgage.
creditor by the debtor of the property given as security, in
order that the latter may gather its fruits, without stating
that said fruits are to be applied to the payment of
interest, if any, and afterwards that of the principal, the
contract is a mortgage and not antichresis.

Pledge

The right of redemption under Rule 39 of the Rules of Court

applies only to execution sales, more precisely execution sales
Respondents owned shares of stock in a corporation known as the Quirino-Leonor- of real property. The right of redemption over mortgaged real
Rodriguez Realty Inc. They secured by way of pledge of some of their shares of stock to property sold extrajudicially is established by Act No. 3135, as
Bonifacio and Faustina Paray the payment of certain loan obligations. When the Parays amended. The said law does not extend the same benefit to
attempted to foreclose the pledges on account of respondents’ failure to pay their loans, personal property.
respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions
Paray & Espeleta v. sought the declaration of nullity of the pledge agreements. However the RTC dismissed the
Rodriguez, et al. complaint and gave "due course to the foreclosure and sale at public auction of the various No law or jurisprudence establishes or affirms such right over
pledges subject of these two cases." Respondents then received Notices of Sale which personal property. Indeed, no such right exists. The right to
indicated that the pledged shares were to be sold at public auction. However, before the redeem property sold as security for the satisfaction of an
scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of unpaid obligation does not exist preternaturally. Neither is it
Court of various amounts. It was claimed that respondents had attempted to tender these predicated on proprietary right, which, after the sale of property
payments to the Parays, but had been rebuffed. on execution, leaves the judgment debtor and vests in the
purchaser. Instead, it is a bare statutory privilege to be
exercised only by the persons named in the statute.

Personal Property Security Agreement

Makati Leasing & To obtain financial accommodations from Makati Leasing and Finance Corporation, Wearever Textile The characterization of the subject machinery as chattel is
Finance Corporation v. Mills, Inc. discounted and assigned several receivables with the former under a Receivable Purchase indicative of intention and impresses upon the property the
Wearever Textile Mills, Agreement. To secure the collection of the receivables assigned, Wearever executed a Chattel character determined by the parties. One who has so agreed is
Mortgage over certain raw materials inventory as well as a machinery described as an Artos Aero estopped from denying the existence of the chattel mortgage.
Inc.
Dryer Stentering Range. When Wearever defaulted, MLFC filed a petition for extrajudicial
foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the

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foreclosure failed to gain entry into Wearever’s premises and was not able to effect the seizure of the
aforedescribed machinery. MLFC thereafter filed a complaint for judicial foreclosure with the Court
of First Instance of Rizal.

An 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
Anastacio Teodoro Jr. executed a Deed of Assignment of Receivables in favor of Manila Banking the need of the consent of the debtor, transfers his credit and its
Corporation. It is stipulated in the Deed that, among others, the title and right of possession to the accessory rights to another, known as the assignee, who
Manila Banking receivables are retained by Teodoro. Additionally, said Deed will stand as a continuing guaranty for acquires the power to enforce it to the same extent as the
Corporation v. future loans that may be contracted by the Teodoros. Years later, Anastacio Jr., his father, and his wife assignor could have enforced it against the debtor.
Teodoro, Jr. and contracted loans from the MBC. Because these loans were unpaid, Manila Banking Corp. filed a
Teodoro collection suit against all three, but because the father died, only Anastacio Jr. and his wife were sued The character of the transactions between the parties is not,
as defendants. however, determined by the language used in the document but
by their intention. 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.

As the collateral was also money or an exchange of

"peso for peso," the provision in Article 2112 of the Civil
Code for the sale of the thing pledged at public auction to
convert it into money to satisfy the pledgor's obligation,
did not have to be followed. All that had to be done to
convert the pledgor's time deposit certificates into cash
Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading Enterprises,
was to present them to the bank for encashment after
Inc.. To guaranty payment for her cement withdrawals, she executed in favor of Cams
due notice to the debtor.
Trading deeds of assignment of her time deposits in the Family Savings Bank. Cams Trading
notified the Bank that Mrs. Chu had an unpaid account with it and asked that it be allowed to
Yau Chu v. CA et al. The encashment of the deposit certificates was not
encash the time deposit certificates. After verbally advising Mrs. Chu of the assignee's
a pacto commissorio which is prohibited under Art. 2088
request to encash her time deposit certificates and obtaining her verbal conformity thereto,
of the Civil Code. A pacto commissorio is a provision for
the Bank agreed to encash the certificates. Upon being informed of the encashment, Mrs.
the automatic appropriation of the pledged or mortgaged
Chu demanded from the Bank and Cams Trading that her time deposit be restored.
property by the creditor in payment of the loan upon its
maturity. Where, as in this case, the security for the debt
is also money deposited in a bank, the amount of which
is even less than the debt, it was not illegal for the
creditor to encash the time deposit certificates to pay the
debtors' overdue obligation, with the latter's consent.

PCI Leasing & Trojan Metal Industries, Inc. (TMI) came to PCI Leasing and Finance, Inc. (PCILF) to seek a In a true financial leasing, whether under RA 5980 or RA
Finance, Inc. v. Trojan loan. Instead of extending a loan, PCILF offered to buy various equipment TMI owned. Hard- 8556, a finance company purchases on behalf of a cash-
Metal Industries Inc., et pressed for money, TMI agreed. PCILF and TMI then entered into a lease agreement, strapped lessee the equipment the latter wants to buy

UP LAW G2023
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but, due to financial limitations, is incapable of doing so.
The finance company then leases the equipment to the
lessee in exchange for the latter’s periodic payment of a
fixed amount of rental. Since the transaction between
PCILF and TMI involved equipment already owned by
TMI, it cannot be considered as one of financial leasing,
as defined by law, but simply a loan secured by the
whereby the latter leased from the former the various equipment it previously owned. various equipment owned by TMI.
Pursuant to the lease agreement, TMI issued postdated checks representing 24 monthly
installments. The lease agreement required TMI to give PCILF a guaranty deposit, which Section 14 of Act No. 1508, otherwise known as the
would serve as security for the timely performance of TMI’s obligations under the lease Chattel Mortgage Law, provides:
agreement, to be automatically forfeited should TMI return the leased equipment before the
expiration of the lease agreement. Further, TMI’s President and Vice-President executed in Section 14. Sale of property at public auction; officer’s
favor of PCILF a Continuing Guaranty of Lease Obligations. Under the continuing guaranty, return; fees; disposition of proceeds. x x x The proceeds
al.
they agreed to immediately pay whatever obligations would be due PCILF in case TMI failed of such sale shall be applied to the payment, first, of the
to meet its obligations under the lease agreement. costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such
To obtain additional loan from another financing company, TMI used the leased equipment mortgage, and the residue shall be paid to persons
as temporary collateral. PCILF considered the second mortgage a violation of the lease holding subsequent mortgages in their order, and the
agreement. PCILF sent TMI a demand letter for the payment of the latter’s outstanding balance, after paying the mortgages, shall be paid to the
obligation. PCILF’s demand remained unheeded. mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles

the debtor-mortgagor to the balance of the proceeds,
upon satisfaction of the principal loan and costs.
Prevailing jurisprudence also holds that the Chattel
Mortgage Law bars the creditor-mortgagee from retaining
the excess of the sale proceeds.

Citibank, N.A. & Sabeniano obtained a loan from Citibank. This loan was followed with several other loans – Art. 1278. Compensation shall take place when two
Investors Finance some were paid, while some were not. Those that were not paid upon maturity were rolled persons, in their own right, are creditors and debtors of
Corporation v. over. These loans were secured by Sabeniano’s money market placements with FNCB each other.
Sabeniano Finance through a Deed of Assignment plus a Declaration of Pledge which states that all
present and future fiduciary placements held in her personal and/or joint name with Citibank Art. 1279. In order that compensation may be proper, it is
Switzerland, will secure all claims that Citibank may have or, in the future, acquire against necessary;
her. The Deeds of Assignment were duly notarized, while the Declaration of Pledge was not
notarized and Citibank’s copy was undated. Since Sabeniano failed to pay her obligations to (1) That each one of the obligors be bound
Citibank, the latter sent demand letters to request payment. Still failing to pay, Citibank principally, and that he be at the same time a
executed the Deeds of Assignment and used the proceeds of Sabeniano’s money market principal creditor of the other;
placement from FNCB Finance and her deposits with Citibank to set-off her loan. Since the
loan remains unpaid, Citibank proceeded to execute the Declaration of Pledge and remitted
(2) That both debts consist in a sum of money, or if
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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
from Sabeniano’s Citibank-Geneva accounts to off-set the loan. and communicated in due time to the debtor.

Sabeniano's money market placements were with FNCB

Finance. As to these money market placements,
Sabeniano was the creditor and FNCB Finance the
debtor; while, as to the outstanding loans, Citibank was
the creditor and Sabeniano the debtor. Consequently,
legal compensation, under Article 1278 of the Civil Code,
would not apply since the first requirement for a valid
compensation, that each one of the obligors be bound
principally, and that he be at the same time a principal
creditor of the other, was not met.

The right of redemption under Rule 39 of the Rules of Court

Respondents owned shares of stock in a corporation known as the Quirino-Leonor- applies only to execution sales, more precisely execution sales
of real property. The right of redemption over mortgaged real
Rodriguez Realty Inc. They secured by way of pledge of some of their shares of stock to
property sold extrajudicially is established by Act No. 3135, as
Bonifacio and Faustina Paray the payment of certain loan obligations. When the Parays amended. The said law does not extend the same benefit to
attempted to foreclose the pledges on account of respondents’ failure to pay their loans, personal property.
respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions
Paray & Espeleta v. sought the declaration of nullity of the pledge agreements. However the RTC dismissed the No law or jurisprudence establishes or affirms such right over
Rodriguez, et al. complaint and gave "due course to the foreclosure and sale at public auction of the various personal property. Indeed, no such right exists. The right to
pledges subject of these two cases." Respondents then received Notices of Sale which redeem property sold as security for the satisfaction of an
indicated that the pledged shares were to be sold at public auction. However, before the unpaid obligation does not exist preternaturally. Neither is it
scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of predicated on proprietary right, which, after the sale of property
Court of various amounts. It was claimed that respondents had attempted to tender these on execution, leaves the judgment debtor and vests in the
payments to the Parays, but had been rebuffed. purchaser. Instead, it is a bare statutory privilege to be
exercised only by the persons named in the statute.

INSOLVENCY

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Concurrence & Preference of Credits

De Barreto, et al. v.
Villanueva, et al.

J. L. Bernardo
Construction v. Court
of Appeals

Cordova v. Reyes
Daway Lim Bernardo
Lindo Rosales Law
Offices, et al.

Suspension of Payments

Rehabilitation

Viva Shipping Lines,

Inc. v. Keppel
Philippines Mining

Bureau of Internal
Revenue, et al. v.
Lepanto Ceramics, Inc.

Rizal Commercial
Banking Corporation v.
Intermediate Appellate
Court

Sobrejuanite v. ASB
Development
Corporation

Town and Country

Enterprises, Inc. v.
Quisuming, et al.

Metropolitan
Waterworks &
Sewerage System v.
Daway and Maynilad
Water Services, Inc.

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Panlilio, et al. v.
Regional Trial Court

Philippine Asset
Growth Two, Inc. &
Planters Development
Bank v. Fastech
Synergy Philippines,
Inc., et al.

Pyrce Corporation v.
China Banking
Corporation

Liquidation

Consuelo Metal
Corporation v. Planters
Development Bank &
Maningas

Yngson v. Philippine
National Bank

UP LAW G2023