G.R. No.

74834 November 17, 1988 INSULAR BANK OF ASIA & AMERICA (NOW PHILIPPINE COMMERCIAL INTERNATIONAL BANK), petitioner, vs. HON. INTERMEDIATE APPELLATE COURT, THE PHILIPPINE AMERICAN LIFE INSURANCE CO., SPS. BEN MENDOZA & JUANITA M. MENDOZA, respondents. Balili, Parado, Cavada & Maamo for petitioner. Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent Spouses Mendozas. Francisco, Zulueta & Associates for respondent Philam Life.

obtained two (2) loans from respondent Philippine American Life Insurance Co. (Philam Life) in the total amount of P600,000.00 to finance the construction of their residential house at Mandaue City. The said loans, with a 14% nominal interest rate, were to be liquidated in equal amortizations over a period of five (5) years from March 1977 to March 1982. To secure payment, Philam Life required that amortizations be guaranteed by an irrevocable standby letter of credit of a commercial bank. Thus, the Mendozas contracted with petitioner Insular Bank of Asia and America (IBAA) for the issuance of two (2) irrevocable standby Letters of Credit in favor of Philam Life for the total amount of P600,000.00. The first L/C for P500,000.00 was to expire on 1 October 1981 (Exhibit "7", IBAA) and the second for P100,000.00 on 1 January 1982 (Exhibit "8", IBAA) These two (2) irrevocable standby L/Cs were, in turn, secured by a real estate mortgage for the same amount on the property of Respondent Spouses in favor of IBAA. On 11 May 1977, the Mendozas executed a promissory note (No. L-562/77) in favor of IBAA promising to pay the sum of P100,000.00 plus 19% p.a. interest on 31 May 1979. Again, on 3 June 1977, Respondent Spouses executed another Promissory Note (No. 564/77) binding themselves to pay IBAA P100,000.00 plus 19% p.a. interest on 23 June 1979. Both Notes authorized IBAA "to sell at public or private sale such securities or things for the purpose of applying their proceeds to such payments"

MELENCIO-HERRERA, J.: An appeal by certiorari under Rule 45 of the Rules of Court by petitioner, the Insular Bank of Asia and America (IBAA) [now the Philippine Commercial International Bank], from the judgment of the public respondent, then the Intermediate Appellate Court, * in CA-G.R. CV No. 03224. Briefly, the antecedent facts disclose that sometime in 1976 and 1977 respondent spouses Ben S. Mendoza and Juanita M. Mendoza (the Mendozas, for brevity),

of many particular obligation or obligations" the Mendozas may have to IBAA. (Exhibits "34" and "35"IBAA, Annex "D" p. 131, Rollo) The Mendozas failed to pay Philam Life the amortization that fell due on 1 June 1978 so that Philam Life informed IBAA that it was declaring both loans as "entirely due and demandable" and demanded payment of P492,996.30 (Exhibit "H"). However, because IBAA contested the propriety of calling ill the entire loan, Philam Life desisted and resumed availing of the L/Cs by drawing on them for five (5) more amortizations. On 7 September 1979, because the Mendozas defaulted on their amortization due on 1 September 1979, Philam Life again informed IBAA that it was declaring the entire balance outstanding on both loans, including liquidated damages, "immediately due and payable." Philam Life then demanded the payment of P274,779.56 from IBAA but the latter took the position that, as a melee guarantor of the Mendozas who are the principal debtors, its remaining outstanding obligation under the two (2) standby L/Cs was only P30,100.60. Later, IBAA corrected the latter amount and showed instead an overpayment arrived at as follows: Limit of Liability Less: P 600,000.00

a) Payment of Mendozas b) Payment of IBAA Overpayment by IBAA

P 280, 293.11 372,227.65 652,520.76 ( P 52,520.76)

On 21 April 1980 the Real Estate Mortgage, which secured the two (2) standby L/Cs. was extrajudicially foreclosed by, and sold at public auction for P775,000.00, to petitioner IBAA as the lone and highest bidder (Exhibit "17-Mendoza"). The bid price of P775,000.00 by petitioner IBAA was arrived at as follows: Principal (unpaid advances under the 2 standby LCs) plus interest & charges Add: P 432,386.07

a) Stipulated Attorney's fees (20%) b) Principals (clean loans) plus accrued interest under P/Ns Nos. 562/77 and 564/77

P 86,477.20

P 255,346.95

c) Expenses of foreclosure TOTAL

P 72.20 P 775,000.42

month as penalty interest from September 12, 1979 until the whole amount is fully paid, P10,000 as attorney's fees, and costs. (2) Plaintiff Philippine American Life Insurance Company to refund the sum of P22,420.16 to the defendant Insular Bank of Asia and America plus legal interest from March 31, 1980 until the whole amount is fully paid; and (3) Dismissal of the counterclaim and crossclaim filed by the defendants- spouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff. (pp. 28-29, Rollo) In so deciding, the Trial Court took the position that IBAA, "as surety" was discharged of its liability to the extent of the payment made by the Mendozas, as the principal debtors, to the creditor, Philam Life.

On a date that does not appear of record, Philam Life filed suit against Respondent Spouses and IBAA before the Regional Trial Court of Manila, Branch XXXXI, for the recovery of the sum of P274,779.56, the amount allegedly still owing under the loan. After trial, said Court rendered a Decision finding that IBAA had paid Philam Life only P342,127.05 and not P372,227.65, as claimed by IBAA, because of a stale IBAA Manager's check in the amount of P30,100.60, which had to be deducted. With this deduction, the Trial Court arrived at the following computation: Limit of Liability of IBAA Less: a) Payment by Mendozas b) Payment by IBAA Overpayment by IBAA Thus, the Trial Court ruled: ACCORDINGLY, judgment is hereby rendered ordering: (1) Defendants-spouses Ben S. Mendoza and Juanita M. Mendoza to pay plaintiff Philippine American Life Insurance Company the sum of P322,000.00 plus 2% per P 600,000.00 P 280, 293.11

Both Philam Life and Respondent Spouses appealed to respondent Appellate Court, which reversed the Trial P342,127.05 P 622,420.16 Court and ruled instead that IBAA's liability was not reduced by virtue of the payments made by the P 22,420.16 Mendozas. Accordingly, the Appellate Court decreed: WHEREFORE, premises considered, judgment is hereby rendered ordering: 1. Defendants-appellant spouses Ben S. Mendoza and Juanita M. Mendoza and defendant-appellee IBAA to pay jointly and severally plaintiff-appellant Philamlife, the sum

of P222,000.00 plus 2% per month as penalty interest from September 12, 1979 until the whole amount is fully paid; plus P25,000.00, as attorney's fees, and costs; however, defendant-appellee IBAA shall only be liable up to the amount of P296,294.05; 2. Dismissal of the claim by the IBAA for a refund of P22,420.16 from the Phil-American Life Insurance Co.; and 3. Dismissal of the counterclaim and cross-claim filed by the defendant- spouses against the plaintiff and the defendant IBAA, as well as the counterclaim filed by defendant IBAA against the plaintiff. No special pronouncement as to costs in this instance. (p. 51, Rollo). Availing of the instant Petition, IBAA seeks a reversal of the aforesaid judgment and the affirmance instead of that of the Trial Court. We resolved to give due course. The issues addressed, as posited by IBAA, are: 1. Whether or not the partial payments made by the principal obligors (respondent MENDOZAS) would have the corresponding effect of reducing the liability of the petitioner as guarantor or surety under the terms of the standby LCs in question. 2. Whether or not respondent Intermediate Appellate Court is correct in disregarding a documentary evidence

(O.R. No. 74323, Exhibit 28-IBAA) showing the amount paid by petitioner and which was admitted as evidence without objection on the paint of the counsel for the respondent Philam. 3. Whether or not the Intermediate Appellate Court is correct in passing sub-silencio the following points raised by the petitioner in its Brief to sustain the decision of the Trial Court on some other grounds. a. Effective rate of interest imposed by respondent Philam exceeded the allowable ceiling; b. Respondent Philam has no right to call in at one time the two standby letters of credit; c. Respondent Philam failed to follow the condition in the two (2) standby letters of credit: which could have otherwise altered the result of the decision. 4. Whether or not the award of attorney's fees to respondent Philam is proper in so far as petitioner is affected. (p. 15, Rollo) The pivotal issue is the first one. IBAA stresses that it has no more liability to Philam Life under the two (2) standby Letters of Credit and, instead, is entitled to a refund. Whereas Philam Life and the Mendoza spouses separately maintain that IBAA's obligation under said two

(2) L/Cs is original and primary and is not reduced by the direct payments made by the Mendozas to Philam Life. 1. In construing the terms of a Letter of Credit, as in other contracts, it is the intention of the parties that must govern. Letters of credit and contracts for the issuance of such letters are subject to the same rules of construction as are ordinary commercial contracts. They are to receive a reasonable and not a technical construction and although usage and custom cannot control express terms in letters of credit, they are to be construed with reference to all the surrounding facts and circumstances, to the particular and often varying terms in which they may be expressed, the circumstances and intention of the parties to them, and the usages of the particular trade of business contemplated. (International Banking Corp. vs. Irving National Bank, CCA N.Y. 283 F. 103, affirming DC 274 F. 122; Old Colony Trust Co. vs. Lawyers' Title and Trust Co., CAA NY, 297 F. 152, cited in Vol. 72, CJS sec. 178, pp. 387-388).<re||an1w> The terms of the subject Irrevocable Standby Letters of Credit read, in part, as follows: This credit secures the payment of any obligation of the accountee to you under that Loan Agreement hereto attached as Annex 'A' and made a part hereof, including those pertaining to (a) surcharges on defaulted account; stallments, (b) increased interest charges (in the event

the law should authorize this increase), and (c) liabilities connected with taxes stipulated to be for Accountee's and provided however, that our maximum liabilities hereunder shall not exceed the amount of P500,000.00 (Pl00.000.00 for the other LC). Each drawing under this credit shall be available at any time after one (1) day from due date of the obligations therein secured. Each drawing under this credit shall be accomplished by your signed statement in duplicate that the amount drawn represents payment due and unpaid by the accountee. (pp. 11-12, Decision, pp. 38-39, Rollo). [Emphasis our ]. Unequivocally, the subject standby Letters of Credit secure the payment of any obligation of the Mendozas to Philam Life including all interests, surcharges and expenses thereon but not to exceed P600,000.00. But while they are a security arrangement, they are not converted thereby into contracts of guaranty. That would make them ultra vires rather than a letter of credit, which is within the powers of a bank (Section 74[e], RA 337, General Banking Act). 1 The standby L/Cs are, "in effect an absolute undertaking to pay the money advanced or the amount for which credit is given on the faith of the instrument." (Scribner v. Rutherford, 22 N.W. 670, 65 Iowa 551; Duval v. Trask,, 12 Mass. 154, cited in 38 CJS, Sec. 7, p. 1142). They are primary obligations and not accessory contracts. Being separate and independent agreements, the payments made by the Mendozas cannot be added in computing IBAA's liability under its

own standby letters of credit. Payments made by the Mendozas directly to Philam Life are in compliance with their own prestation under the loan agreements. And although these payments could result in the reduction of the actual amount which could ultimately be collected from IBAA, the latter's separate undertaking under its L/Cs remains. Both the Trial Court and the Appellate Court found, as a fact, that there still remains a balance on the loan, Pursuant to its absolute undertaking under the L/Cs, therefore, IBAA cannot escape the obligation to pay Philam Life for this unexpended balance. The Appellate Court found it to be P222,000.00, arrived at by the Trial Court and adopted by the Appellate Court, as follows: ... In the summary of application of payments (Exhibit "KK") the plaintiff applied Pl,918.00 as commitment fee, P4,397.66 as surcharges, P199,683.40 as interests, and P320,000.00 on the principal. The P58,000.00 which is covered by OR No. 74396 was also applied "against the total loan." Since plaintiff applied P378,000.00 against the total indebtedness of P600,000.00 there still remains an outstanding balance on the principal P322,000.00 (should be P222,000.00) aside from the agreed penalty interest until the whole amount is fully paid. ... (Decision, Trial Court, p. 50, Rollo) The amount of P222,000.00, therefore, considered as "any obligation of the accountee" under the L/Cs will still have to be paid by IBAA under the explicit terms thereof,

which IBAA had itself supplied. Letters of credit are strictly construed to the end that the rights of those directly parties to them may be preserved and their interest safeguarded (Moss vs. Old Colony Trust Co., 140 N.E. 803, 246 Mass. 138, 152).<re||an1w> Like any other writing, it will be construed most strongly against the writer and so as to be reasonable and consistent with honest intentions. On the whole, the construction will be generally a strict one (Lamborn vs. National Park Bank of New York, 208 N.Y.S. 428, 212 App. Div. 25, affirming Id , 204 N.Y.S. 557,123 Misc. 211, affirmed Id.. 148 N.E. 664, 240 N.Y. 520). As found by the Appellate Court, however, the amount payable should not exceed P296,294,05 (P600,000.00 less P303,705.95, the total amount found by the Appellate Court to have been paid by IBAA to Philam Life). 2. The second issue as to whether or not documentary evidence was disregarded by the Appellate Court regarding the amount actually paid by IBAA to Philam Life, or P303,705.95 (not P342,127.05 as found by the Trial Court), questions a finding of fact, which should be accorded not only respect but even finality. It is not the function of this Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by lower Courts. 3. The third issue faults respondent Appellate Court with having passed sub-silencio over certain points raised by petitioner IBAA in his Brief sustaining the Decision of the

Trial Court. It is accepted judicial practice, however, that Courts are not required to resolve all issues raised in pleadings unless necessary for the resolution of the case. Apparently, respondent Appellate Court deemed it unnecessary to pass upon those points. Be that as it may, suffice it to state: a) It is a matter of common knowledge in lending procedures that the nominal interest is different from the effective rate of interest and that the discounting interest scheme as well as the principal amortization scheme are practices commonly resorted to by lending institutions. If IBAA disagreed with the computation scheme adopted by Philam Life, which could have been detected in the early stages of the controversy, IBAA could have interposed its objections. b) The right to call in at one time the two standby L/Cs was specifically provided for in the Loan Agreement, which was specifically made an integral part of the L/Cs Section 8 thereof read: ... 8. The Lender shall have the light to declare the entire balance of the loans and all obligations of the borrower to the lender as immediately due and payable in case the borrower fails for any reason to comply with any payment or other obligations of the Lender. (p. 248, Rollo) c) The omission by Philam Life to draw the required drafts on the standby L/Cs can be explained by the fact that all the drafts were pre-prepared, pre-dated and pre-

accepted by the Mendozas. Philam Life, therefore, could not have complied to the letter with the provision in the L/Cs that drawings therefrom were to be made by drafts for each due and unpaid amortization. Besides, the accelaration of the entire balance of the loan was sufficient notice of dishonor of the pre-drawn and preaccepted drafts. 4. Coming now to the award of attorney's fees of P25,000.00, the same appears reasonable under the circumstances of the case specially considering that in the foreclosure of the mortgage in its favor IBAA charged the Mendozas attorney's fees in the amount of P86,477.20, supra. As to the liability of the Mendozas to IBAA, it bears recalling that the Mendozas, upon their application for the opening and issuance of the Irrevocable Standby Letters of Credit in favor of Philam Life, had executed a Real Estate Mortgage as security to IBAA for any payment that the latter may remit to Philam Life on the strength of said Letters of Credit; and that IBAA had recovered from the Mendozas the amount of P432,386.07 when it foreclosed on the mortgaged property of said spouses in the concept of "principal (unpaid advances under the 2 standby L/Cs plus interest and charges)." In addition, IBAA had recovered P255,364.95 representing its clean loans to the Mendozas plus accrued interest besides the fact that it now has the foreclosed property. As between IBAA and the Mendozas, therefore, there has been full liquidation. The remaining obligation of P222,000.00 on the loan of

the Mendozas, therefore, is now IBAA's sole responsibility to pay to Philam Life by virtue of its absolute and irrevocable undertaking under the standby L/Cs. Specially so, since the promissory notes executed by the Mendozas in favor of IBAA authorized the sale of the mortgaged security "for the purpose of applying their proceeds to ... payments" of their obligations to IBAA. WHEREFORE, the Decision of respondent Intermediate Appellate Court, dated 20 December 1985, is hereby MODIFIED. Petitioner IBAA (now the Philippine Commercial International Bank) shall pay Philippine American Life Insurance Company the sum of P222,000.00 plus 2% per month as penalty interest from 12 September 1979 until the whole amount is fully paid, but in no case to exceed P296,294.05, plus P25,000.00 as attorney's fees. No costs. SO ORDERED. Paras, Sarmiento and Regalado, JJ., concur. Padilla, J., took no part.

1 "Section 74. No bank or banking institution shall enter directly or indirectly, into any contract of guaranty or surety, or shall guarantee the interest or principal of any obligation of any person, co-partnership, association, corporation or other entity. The provisions of this section shall, however, not apply to the following: (a) . . . (e) letters of credit transaction, including standby arrangements: x x x"

[G.R. No. 146717. November 22, 2004]

TRANSFIELD PHILIPPINES, INC., petitioner, vs. LUZON HYDRO CORPORATION, AUSTRALIA and NEW ZEALAND BANKING GROUP LIMITED and SECURITY BANK CORPORATION, respondents. DECISION

Footnotes * Penned by Justice Ramon B. Britanico and concurred in by Justices Porfirio V. Sison, Abdulwahid A. Bidin and Marcelino R. Veloso.

TINGA, J.: Subject of this case is the letter of credit which has evolved as the ubiquitous and most important device in international trade. A creation of commerce and

businessmen, the letter of credit is also unique in the number of parties involved and its supranational character. Petitioner has appealed from the Decision[1] of the Court of Appeals in CA-G.R. SP No. 61901 entitled Transfield Philippines, Inc. v. Hon. Oscar Pimentel, et al., promulgated on 31 January 2001.[2] On 26 March 1997, petitioner and respondent Luzon Hydro Corporation (hereinafter, LHC) entered into a Turnkey Contract[3] whereby petitioner, as Turnkey Contractor, undertook to construct, on a turnkey basis, a seventy (70)-Megawatt hydro-electric power station at the Bakun River in the provinces of Benguet and Ilocos Sur (hereinafter, the Project). Petitioner was given the sole responsibility for the design, construction, commissioning, testing and completion of the Project.[4] The Turnkey Contract provides that: (1) the target completion date of the Project shall be on 1 June 2000, or such later date as may be agreed upon between petitioner and respondent LHC or otherwise determined in accordance with the Turnkey Contract; and (2) petitioner is entitled to claim extensions of time (EOT) for reasons enumerated in the Turnkey Contract, among which are variations, force majeure, and delays caused by LHC itself.[5] Further, in case of dispute, the parties are bound to settle their differences through mediation, conciliation and such other means enumerated under Clause 20.3 of the Turnkey Contract.[6]

To secure performance of petitioners obligation on or before the target completion date, or such time for completion as may be determined by the parties agreement, petitioner opened in favor of LHC two (2) standby letters of credit both dated 20 March 2000 (hereinafter referred to as the Securities), to wit: Standby Letter of Credit No. E001126/8400 with the local branch of respondent Australia and New Zealand Banking Group Limited (ANZ Bank)[7] and Standby Letter of Credit No. IBDIDSB-00/4 with respondent Security Bank Corporation (SBC)[8] each in the amount of US$8,988,907.00.[9] In the course of the construction of the project, petitioner sought various EOT to complete the Project. The extensions were requested allegedly due to 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. This gave rise to a series of legal actions between the parties which culminated in the instant petition. The first of the actions was a Request for Arbitration which LHC filed before the Construction Industry Arbitration Commission (CIAC) on 1 June 1999.[10] This was followed by another Request for Arbitration, this time filed by petitioner before the International Chamber of Commerce (ICC)[11] on 3 November 2000. In both arbitration proceedings, the common issues presented were: [1) whether typhoon Zeb and any of its associated events constituted force majeure to justify the extension

of time sought by petitioner; and [2) whether LHC had the right to terminate the Turnkey Contract for failure of petitioner to complete the Project on target date. Meanwhile, foreseeing that LHC would call on the Securities pursuant to the pertinent provisions of the Turnkey Contract,[12] petitionerin two separate letters[13] both dated 10 August 2000advised respondent banks of the arbitration proceedings already pending before the CIAC and ICC in connection with its alleged default in the performance of its obligations. Asserting that LHC had no right to call on the Securities until the resolution of disputes before the arbitral tribunals, petitioner warned respondent banks that any transfer, release, or disposition of the Securities in favor of LHC or any person claiming under LHC would constrain it to hold respondent banks liable for liquidated damages. As petitioner had anticipated, on 27 June 2000, LHC sent notice to petitioner that pursuant to Clause 8.2[14] of the Turnkey Contract, it failed to comply with its obligation to complete the Project. Despite the letters of petitioner, however, both banks informed petitioner that they would pay on the Securities if and when LHC calls on them.[15] LHC asserted that additional extension of time would not be warranted; accordingly it declared petitioner in default/delay in the performance of its obligations under the Turnkey Contract and demanded from petitioner the payment of US$75,000.00 for each day of delay beginning 28 June 2000 until actual completion of

the Project pursuant to Clause 8.7.1 of the Turnkey Contract. At the same time, LHC served notice that it would call on the securities for the payment of liquidated damages for the delay.[16] On 5 November 2000, petitioner as plaintiff filed a Complaint for Injunction, with prayer for temporary restraining order and writ of preliminary injunction, against herein respondents as defendants before the Regional Trial Court (RTC) of Makati.[17] Petitioner sought to restrain respondent LHC from calling on the Securities and respondent banks from transferring, paying on, or in any manner disposing of the Securities or any renewals or substitutes thereof. The RTC issued a seventy-two (72)-hour temporary restraining order on the same day. The case was docketed as Civil Case No. 001312 and raffled to Branch 148 of the RTC of Makati. After appropriate proceedings, the trial court issued an Order on 9 November 2000, extending the temporary restraining order for a period of seventeen (17) days or until 26 November 2000.[18] The RTC, in its Order[19] dated 24 November 2000, denied petitioners application for a writ of preliminary injunction. It ruled that petitioner had no legal right and suffered no irreparable injury to justify the issuance of the writ. Employing the principle of independent contract in letters of credit, the trial court ruled that LHC should be allowed to draw on the Securities for liquidated damages. It debunked petitioners contention that the principle of independent contract could be invoked only by

respondent banks since according to it respondent LHC is the ultimate beneficiary of the Securities. The trial court further ruled that the banks were mere custodians of the funds and as such they were obligated to transfer the same to the beneficiary for as long as the latter could submit the required certification of its claims. Dissatisfied with the trial courts denial of its application for a writ of preliminary injunction, petitioner elevated the case to the Court of Appeals via a Petition for Certiorari under Rule 65, with prayer for the issuance of a temporary restraining order and writ of preliminary injunction.[20] Petitioner submitted to the appellate court that LHCs call on the Securities was premature considering that the issue of its default had not yet been resolved with finality by the CIAC and/or the ICC. It asserted that until the fact of delay could be established, LHC had no right to draw on the Securities for liquidated damages. Refuting petitioners contentions, LHC claimed that petitioner had no right to restrain its call on and use of the Securities as payment for liquidated damages. It averred that the Securities are independent of the main contract between them as shown on the face of the two Standby Letters of Credit which both provide that the banks have no responsibility to investigate the authenticity or accuracy of the certificates or the declarants capacity or entitlement to so certify. In its Resolution dated 28 November 2000, the Court of Appeals issued a temporary restraining order,

enjoining LHC from calling on the Securities or any renewals or substitutes thereof and ordering respondent banks to cease and desist from transferring, paying or in any manner disposing of the Securities. However, the appellate court failed to act on the application for preliminary injunction until the temporary restraining order expired on 27 January 2001. Immediately thereafter, representatives of LHC trooped to ANZ Bank and withdrew the total amount of US$4,950,000.00, thereby reducing the balance in ANZ Bank to US$1,852,814.00. On 2 February 2001, the appellate court dismissed the petition for certiorari. The appellate court expressed conformity with the trial courts decision that LHC could call on the Securities pursuant to the first principle in credit law that the credit itself is independent of the underlying transaction and that as long as the beneficiary complied with the credit, it was of no moment that he had not complied with the underlying contract. Further, the appellate court held that even assuming that the trial courts denial of petitioners application for a writ of preliminary injunction was erroneous, it constituted only an error of judgment which is not correctible by certiorari, unlike error of jurisdiction. Undaunted, petitioner filed the instant Petition for Review raising the following issues for resolution: WHETHER THE INDEPENDENCE PRINCIPLE ON LETTERS OF CREDIT MAY BE INVOKED BY A

BENEFICIARY THEREOF WHERE THE BENEFICIARYS CALL THEREON IS WRONGFUL OR FRAUDULENT. WHETHER LHC HAS THE RIGHT TO CALL AND DRAW ON THE SECURITIES BEFORE THE RESOLUTION OF PETITIONERS AND LHCS DISPUTES BY THE APPROPRIATE TRIBUNAL. WHETHER ANZ BANK AND SECURITY BANK ARE JUSTIFIED IN RELEASING THE AMOUNTS DUE UNDER THE SECURITIES DESPITE BEING NOTIFIED THAT LHCS CALL THEREON IS WRONGFUL. WHETHER OR NOT PETITIONER WILL SUFFER GRAVE AND IRREPARABLE DAMAGE IN THE EVENT THAT: A. LHC IS ALLOWED TO CALL AND DRAW ON, AND ANZ BANK AND SECURITY BANK ARE ALLOWED TO RELEASE, THE REMAINING BALANCE OF THE SECURITIES PRIOR TO THE RESOLUTION OF THE DISPUTES BETWEEN PETITIONER AND LHC.

THE SECURITIES.[21] Petitioner contends that the courts below improperly relied on the independence principle on letters of credit when this case falls squarely within the fraud exception rule. Respondent LHC deliberately misrepresented the supposed existence of delay despite its knowledge that the issue was still pending arbitration, petitioner continues. Petitioner asserts that LHC should be ordered to return the proceeds of the Securities pursuant to the principle against unjust enrichment and that, under the premises, injunction was the appropriate remedy obtainable from the competent local courts. On 25 August 2003, petitioner filed a Supplement to the Petition[22] and Supplemental Memorandum,[23] alleging that in the course of the proceedings in the ICC Arbitration, a number of documentary and testimonial evidence came out through the use of different modes of discovery available in the ICC Arbitration. It contends that after the filing of the petition facts and admissions were discovered which demonstrate that LHC knowingly misrepresented that petitioner had incurred delays notwithstanding its knowledge and admission that delays were excused under the Turnkey Contractto be able to draw against the Securities. Reiterating that fraud constitutes an exception to the independence principle, petitioner urges that this warrants a ruling from this Court that the call on the Securities was wrongful, as well as contrary to law and basic principles of equity. It avers

B. LHC DOES NOT RETURN THE AMOUNTS IT HAD WRONGFULLY DRAWN FROM

that it would suffer grave irreparable damage if LHC would be allowed to use the proceeds of the Securities and not ordered to return the amounts it had wrongfully drawn thereon. In its Manifestation dated 8 September 2003,[24] LHC contends that the supplemental pleadings filed by petitioner present erroneous and misleading information which would change petitioners theory on appeal. In yet another Manifestation dated 12 April 2004,[25] petitioner alleges that on 18 February 2004, the ICC handed down its Third Partial Award, declaring that LHC wrongfully drew upon the Securities and that petitioner was entitled to the return of the sums wrongfully taken by LHC for liquidated damages. LHC filed a Counter-Manifestation dated 29 June 2004,[26] stating that petitioners Manifestation dated 12 April 2004 enlarges the scope of its Petition for Review of the 31 January 2001 Decision of the Court of Appeals. LHC notes that the Petition for Review essentially dealt only with the issue of whether injunction could issue to restrain the beneficiary of an irrevocable letter of credit from drawing thereon. It adds that petitioner has filed two other proceedings, to wit: (1) ICC Case No. 11264/TE/MW, entitled Transfield Philippines Inc. v. Luzon Hydro Corporation, in which the parties made claims and counterclaims arising from petitioners performance/misperformance of its obligations as contractor for LHC; and (2) Civil Case No. 04-332, entitled Transfield Philippines, Inc. v. Luzon Hydro

Corporation before Branch 56 of the RTC of Makati, which is an action to enforce and obtain execution of the ICCs partial award mentioned in petitioners Manifestation of 12 April 2004. In its Comment to petitioners Motion for Leave to File Addendum to Petitioners Memorandum, LHC stresses that the question of whether the funds it drew on the subject letters of credit should be returned is outside the issue in this appeal. At any rate, LHC adds that the action to enforce the ICCs partial award is now fully within the Makati RTCs jurisdiction in Civil Case No. 04332. LHC asserts that petitioner is engaged in forumshopping by keeping this appeal and at the same time seeking the suit for enforcement of the arbitral award before the Makati court. Respondent SBC in its Memorandum, dated 10 March 2003[27] contends that the Court of Appeals correctly dismissed the petition for certiorari. Invoking the independence principle, SBC argues that it was under no obligation to look into the validity or accuracy of the certification submitted by respondent LHC or into the latters capacity or entitlement to so certify. It adds that the act sought to be enjoined by petitioner was already fait accompli and the present petition would no longer serve any remedial purpose. In a similar fashion, respondent ANZ Bank in its Memorandum dated 13 March 2003[28] posits that its actions could not be regarded as unjustified in view of the prevailing independence principle under which it had no

obligation to ascertain the truth of LHCs allegations that petitioner defaulted in its obligations. Moreover, it points out that since the Standby Letter of Credit No. E001126/8400 had been fully drawn, petitioners prayer for preliminary injunction had been rendered moot and academic. At the core of the present controversy is the applicability of the independence principle and fraud exception rule in letters of credit. Thus, a discussion of the nature and use of letters of credit, also referred to simply as credits, would provide a better perspective of the case. The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract, because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the draft presented under it is often negotiable.[29]

In commercial transactions, a letter of credit is a financial device developed by merchants as a convenient and relatively safe mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying.[30] The use of credits in commercial transactions serves to reduce the risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits in the non-sale settings have come to be known as standby credits.[31] There are three significant differences between commercial and standby credits. First, commercial credits involve the payment of money under a contract of sale. Such credits become payable upon the presentation by the seller-beneficiary of documents that show he has taken affirmative steps to comply with the sales agreement. In the standby type, the credit is payable upon certification of a party's nonperformance of the agreement. The documents that accompany the beneficiary's draft tend to show that the applicant has not performed. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract. The beneficiary of the standby credit must certify that his obligor has not performed the contract.[32] By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the addressee to pay money or deliver goods to a third person and

assumes responsibility for payment of debt therefor to the addressee.[33] A letter of credit, however, changes its nature as different transactions occur and if carried through to completion ends up as a binding contract between the issuing and honoring banks without any regard or relation to the underlying contract or disputes between the parties thereto.[34] Since letters of credit have gained general acceptability in international trade transactions, the ICC has published from time to time updates on the Uniform Customs and Practice (UCP) for Documentary Credits to standardize practices in the letter of credit area. The vast majority of letters of credit incorporate the UCP.[35] First published in 1933, the UCP for Documentary Credits has undergone several revisions, the latest of which was in 1993.[36] In Bank of the Philippine Islands v. De Reny Fabric Industries, Inc.,[37] this Court ruled that the observance of the UCP is justified by Article 2 of the Code of Commerce which provides that in the absence of any particular provision in the Code of Commerce, commercial transactions shall be governed by usages and customs generally observed. More recently, in Bank of America, NT & SA v. Court of Appeals,[38] this Court ruled that there being no specific provisions which govern the legal complexities arising from transactions involving letters of credit, not only between or among banks themselves but also between banks and the seller or the buyer, as the case may be, the applicability of the UCP is undeniable.

Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such 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 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 socalled 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.[39] 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.[40] Can the beneficiary invoke the independence principle? Petitioner insists that the independence principle does not apply to the instant case and assuming it is so, it is a defense available only to respondent banks. LHC, on the other hand, contends that it would be contrary to common sense to deny the benefit of an independent contract to the very party for whom the benefit is intended. As beneficiary of the letter of credit, LHC asserts it is entitled to invoke the principle. As discussed above, in a letter of credit transaction, such as in this case, where the credit is stipulated as irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary provided that the stipulated

documents are presented and the conditions of the credit are complied with.[41] Precisely, the independence principle liberates the issuing bank from the duty of ascertaining compliance by the parties in the main contract. As the principles nomenclature clearly suggests, the obligation under the letter of credit is independent of the related and originating contract. In brief, the letter of credit is separate and distinct from the underlying transaction. Given the nature of letters of credit, petitioners argumentthat it is only the issuing bank that may invoke the independence principle on letters of credit does not impress this Court. To say that the independence principle may only be invoked by the issuing banks would render nugatory the purpose for which the letters of credit are used in commercial transactions. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary. Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the commercial transaction does not

push through, or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately called beneficiary. Petitioners argument that any dispute must first be resolved by the parties, whether through negotiations or arbitration, before the beneficiary is entitled to call on the letter of credit in essence would convert the letter of credit into a mere guarantee. Jurisprudence has laid down a clear distinction between a letter of credit and a guarantee in that the settlement of a dispute between the parties is not a pre-requisite for the release of funds under a letter of credit. In other words, the argument is incompatible with the very nature of the letter of credit. If a letter of credit is drawable only after settlement of the dispute on the contract entered into by the applicant and the beneficiary, there would be no practical and beneficial use for letters of credit in commercial transactions. Professor John F. Dolan, the noted authority on letters of credit, sheds more light on the issue: The standby credit is an attractive commercial device for many of the same reasons that commercial credits are attractive. Essentially, these credits are inexpensive and efficient. Often they replace surety contracts, which tend to generate higher costs than credits do and are usually triggered by a factual determination rather than by the examination of documents. Because parties and courts should not confuse the

different functions of the surety contract on the one hand and the standby credit on the other, the distinction between surety contracts and credits merits some reflection. The two commercial devices share a common purpose. Both ensure against the obligors nonperformance. They function, however, in distinctly different ways. Traditionally, upon the obligors default, the surety undertakes to complete the obligors performance, usually by hiring someone to complete that performance. Surety contracts, then, often involve costs of determining whether the obligor defaulted (a matter over which the surety and the beneficiary often litigate) plus the cost of performance. The benefit of the surety contract to the beneficiary is obvious. He knows that the surety, often an insurance company, is a strong financial institution that will perform if the obligor does not. The beneficiary also should understand that such performance must await the sometimes lengthy and costly determination that the obligor has defaulted. In addition, the suretys performance takes time. The standby credit has different expectations. He reasonably expects that he will receive cash in the event of nonperformance, that he will receive it promptly, and that he will receive it before any litigation with the obligor (the applicant) over the nature of the applicants performance takes place. The standby credit has this opposite effect of the surety contract: it reverses the

financial burden of parties during litigation. In the surety contract setting, there is no duty to indemnify the beneficiary until the beneficiary establishes the fact of the obligors performance. The beneficiary may have to establish that fact in litigation. During the litigation, the surety holds the money and the beneficiary bears most of the cost of delay in performance. In the standby credit case, however, the beneficiary avoids that litigation burden and receives his money promptly upon presentation of the required documents. It may be that the applicant has, in fact, performed and that the beneficiarys presentation of those documents is not rightful. In that case, the applicant may sue the beneficiary in tort, in contract, or in breach of warranty; but, during the litigation to determine whether the applicant has in fact breached the obligation to perform, the beneficiary, not the applicant, holds the money. Parties that use a standby credit and courts construing such a credit should understand this allocation of burdens. There is a tendency in some quarters to overlook this distinction between surety contracts and standby credits and to reallocate burdens by permitting the obligor or the issuer to litigate the performance question before payment to the beneficiary.[42] While it is the bank which is bound to honor the credit, it is the beneficiary who has the right to ask the bank to honor the credit by allowing him to draw thereon.

The situation itself emasculates petitioners posture that LHC cannot invoke the independence principle and highlights its puerility, more so in this case where the banks concerned were impleaded as parties by petitioner itself. Respondent banks had squarely raised the independence principle to justify their releases of the amounts due under the Securities. Owing to the nature and purpose of the standby letters of credit, this Court rules that the respondent banks were left with little or no alternative but to honor the credit and both of them in fact submitted that it was ministerial for them to honor the call for payment.[43] Furthermore, LHC has a right rooted in the Contract to call on the Securities. The relevant provisions of the Contract read, thus: 4.2.1. In order to secure the performance of its obligations under this Contract, the Contractor at its cost shall on the Commencement Date provide security to the Employer in the form of two irrevocable and confirmed standby letters of credit (the Securities), each in the amount of US$8,988,907, issued and confirmed by banks or financial institutions acceptable to the Employer. Each of the Securities must be in form and substance acceptable to the Employer and may be provided on an annually renewable basis.[44] 8.7.1 If the Contractor fails to comply with Clause 8.2, the Contractor shall pay to the Employer by way of liquidated

damages (Liquidated Damages for Delay) the amount of US$75,000 for each and every day or part of a day that shall elapse between the Target Completion Date and the Completion Date, provided that Liquidated Damages for Delay payable by the Contractor shall in the aggregate not exceed 20% of the Contract Price. The Contractor shall pay Liquidated Damages for Delay for each day of the delay on the following day without need of demand from the Employer. 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due to the Contractor and/or by drawing on the Security.[45] A contract once perfected, binds the parties not only to the fulfillment of what has been expressly stipulated but also to all the consequences which according to their nature, may be in keeping with good faith, usage, and law.[46] A careful perusal of the Turnkey Contract reveals the intention of the parties to make the Securities answerable for the liquidated damages occasioned by any delay on the part of petitioner. The call upon the Securities, while not an exclusive remedy on the part of LHC, is certainly an alternative recourse available to it upon the happening of the contingency for which the Securities have been proffered. Thus, even without the use of the independence principle, the Turnkey Contract itself bestows upon LHC the right to call on the Securities in the event of default.

Next, petitioner invokes the fraud exception principle. It avers that LHCs call on the Securities is wrongful because it fraudulently misrepresented to ANZ Bank and SBC that there is already a breach in the Turnkey Contract knowing fully well that this is yet to be determined by the arbitral tribunals. It asserts that the fraud exception exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it. Citing Dolans treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principles purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the commonlaw principles of contract should apply. It is worthy of note that the propriety of LHCs call on the Securities is largely intertwined with the fact of default which is the self-same issue pending resolution before the arbitral tribunals. To be able to declare the call on the Securities wrongful or fraudulent, it is imperative to resolve, among others, whether petitioner was in fact guilty of delay in the performance of its obligation. Unfortunately for petitioner, this Court is not called upon to rule upon the issue of defaultsuch issue having been submitted by the parties to the jurisdiction of the arbitral

tribunals pursuant to the terms embodied in their agreement.[47] Would injunction then be the proper remedy to restrain the alleged wrongful draws on the Securities? Most writers agree that fraud is an exception to the independence principle. Professor Dolan opines that the untruthfulness of a certificate accompanying a demand for payment under a standby credit may qualify as fraud sufficient to support an injunction against payment.[48] The remedy for fraudulent abuse is an injunction. However, injunction should not be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might follow if injunction is not granted or the recovery of damages would be seriously damaged.[49] In its complaint for injunction before the trial court, petitioner alleged that it is entitled to a total extension of two hundred fifty-three (253) days which would move the target completion date. It argued that if its claims for extension would be found meritorious by the ICC, then LHC would not be entitled to any liquidated damages.[50] Generally, injunction is a preservative remedy for the protection of ones substantive right or interest; it is not a cause of action in itself but merely a provisional remedy, an adjunct to a main suit. The issuance of the writ of preliminary injunction as an ancillary or preventive

remedy to secure the rights of a party in a pending case is entirely within the discretion of the court taking cognizance of the case, the only limitation being that this discretion should be exercised based upon the grounds and in the manner provided by law.[51] Before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there exists a right to be protected and that the acts against which the writ is to be directed are violative of the said right.[52] It must be shown that the invasion of the right sought to be protected is material and substantial, that the right of complainant is clear and unmistakable and that there is an urgent and paramount necessity for the writ to prevent serious damage.[53] Moreover, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard compensation.[54] In the instant case, petitioner failed to show that it has a clear and unmistakable right to restrain LHCs call on the Securities which would justify the issuance of preliminary injunction. By petitioners own admission, the right of LHC to call on the Securities was contractually rooted and subject to the express stipulations in the Turnkey Contract.[55] Indeed, the Turnkey Contract is plain and unequivocal in that it conferred upon LHC the right to draw upon the Securities in case of default, as provided in Clause 4.2.5, in relation to Clause 8.7.2, thus: 4.2.5 The Employer shall give the Contractor seven days

notice of calling upon any of the Securities, stating the nature of the default for which the claim on any of the Securities is to be made, provided that no notice will be required if the Employer calls upon any of the Securities for the payment of Liquidated Damages for Delay or for failure by the Contractor to renew or extend the Securities within 14 days of their expiration in accordance with Clause 4.2.2.[56] 8.7.2 The Employer may, without prejudice to any other method of recovery, deduct the amount of such damages from any monies due, or to become due, to the Contractor and/or by drawing on the Security.[57] The pendency of the arbitration proceedings would not per se make LHCs draws on the Securities wrongful or fraudulent for there was nothing in the Contract which would indicate that the parties intended that all disputes regarding delay should first be settled through arbitration before LHC would be allowed to call upon the Securities. It is therefore premature and absurd to conclude that the draws on the Securities were outright fraudulent given the fact that the ICC and CIAC have not ruled with finality on the existence of default. Nowhere in its complaint before the trial court or in its pleadings filed before the appellate court, did petitioner invoke the fraud exception rule as a ground to justify the issuance of an injunction.[58] What petitioner did assert before the courts below was the fact that LHCs draws on the Securities would be premature and

without basis in view of the pending disputes between them. Petitioner should not be allowed in this instance to bring into play the fraud exception rule to sustain its claim for the issuance of an injunctive relief. Matters, theories or arguments not brought out in the proceedings below will ordinarily not be considered by a reviewing court as they cannot be raised for the first time on appeal.[59] The lower courts could thus not be faulted for not applying the fraud exception rule not only because the existence of fraud was fundamentally interwoven with the issue of default still pending before the arbitral tribunals, but more so, because petitioner never raised it as an issue in its pleadings filed in the courts below. At any rate, petitioner utterly failed to show that it had a clear and unmistakable right to prevent LHCs call upon the Securities. Of course, prudence should have impelled LHC to await resolution of the pending issues before the arbitral tribunals prior to taking action to enforce the Securities. But, as earlier stated, the Turnkey Contract did not require LHC to do so and, therefore, it was merely enforcing its rights in accordance with the tenor thereof. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.[60] More importantly, pursuant to the principle of autonomy of contracts embodied in Article 1306 of the Civil Code,[61] petitioner could have incorporated in its Contract with LHC, a proviso that only the final determination by the arbitral tribunals that default had occurred would justify the enforcement of the Securities. However, the fact is petitioner did not do so;

hence, it would have to live with its inaction. With respect to the issue of whether the respondent banks were justified in releasing the amounts due under the Securities, this Court reiterates that pursuant to the independence principle the banks were under no obligation to determine the veracity of LHCs certification that default has occurred. Neither were they bound by petitioners declaration that LHCs call thereon was wrongful. To repeat, respondent banks undertaking was simply to pay once the required documents are presented by the beneficiary. At any rate, should petitioner finally prove in the pending arbitration proceedings that LHCs draws upon the Securities were wrongful due to the non-existence of the fact of default, its right to seek indemnification for damages it suffered would not normally be foreclosed pursuant to general principles of law. Moreover, in a Manifestation,[62] dated 30 March 2001, LHC informed this Court that the subject letters of credit had been fully drawn. This fact alone would have been sufficient reason to dismiss the instant petition. Settled is the rule that injunction would not lie where the acts sought to be enjoined have already become fait accompli or an accomplished or consummated act.[63] In Ticzon v. Video Post Manila, Inc.[64] this Court ruled that where the period within which the former employees were prohibited from engaging in or working for an enterprise that competed with their former employerthe very

purpose of the preliminary injunction has expired, any declaration upholding the propriety of the writ would be entirely useless as there would be no actual case or controversy between the parties insofar as the preliminary injunction is concerned. In the instant case, the consummation of the act sought to be restrained had rendered the instant petition mootfor any declaration by this Court as to propriety or impropriety of the non-issuance of injunctive relief could have no practical effect on the existing controversy.[65] The other issues raised by petitioner particularly with respect to its right to recover the amounts wrongfully drawn on the Securities, according to it, could properly be threshed out in a separate proceeding. One final point. LHC has charged petitioner of forum-shopping. It raised the charge on two occasions. First, in its Counter-Manifestation dated 29 June 2004[66] LHC alleges that petitioner presented before this Court the same claim for money which it has filed in two other proceedings, to wit: ICC Case No. 11264/TE/MW and Civil Case No. 04-332 before the RTC of Makati. LHC argues that petitioners acts constitutes forum-shopping which should be punished by the dismissal of the claim in both forums. Second, in its Comment to Petitioners Motion for Leave to File Addendum to Petitioners Memorandum dated 8 October 2004, LHC alleges that by maintaining the present appeal and at the same time pursuing Civil Case No. 04-332wherein petitioner pressed for judgment on the issue of whether the funds LHC drew on the Securities should be returned

petitioner resorted to forum-shopping. In both instances, however, petitioner has apparently opted not to respond to the charge. Forum-shopping is a very serious charge. It exists when a party repetitively avails of several judicial remedies in different courts, simultaneously or successively, all substantially founded on the same transactions and the same essential facts and circumstances, and all raising substantially the same issues either pending in, or already resolved adversely, by some other court.[67] It may also consist in the act of a party against whom an adverse judgment has been rendered in one forum, of seeking another and possibly favorable opinion in another forum other than by appeal or special civil action of certiorari, or the institution of two or more actions or proceedings grounded on the same cause on the supposition that one or the other court might look with favor upon the other party.[68] To determine whether a party violated the rule against forum-shopping, the test applied is whether the elements of litis pendentia are present or whether a final judgment in one case will amount to res judicata in another.[69] Forum-shopping constitutes improper conduct and may be punished with summary dismissal of the multiple petitions and direct contempt of court.[70] Considering the seriousness of the charge of forumshopping and the severity of the sanctions for its violation, the Court will refrain from making any definitive ruling on this issue until after petitioner has been given ample opportunity to respond to the charge.

WHEREFORE, the instant petition is DENIED, with costs against petitioner. Petitioner is hereby required to answer the charge of forum-shopping within fifteen (15) days from notice. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur. [G.R. No. 160466. January 17, 2005]

SPOUSES ALFREDO and SUSANA ONG, petitioners, vs. PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent. DECISION PUNO, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February 17, 2003, affirming the decision of the trial court denying petitioners motion to dismiss. The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged in the manufacture and export of finished wood products. Petitioners-spouses Alfredo and Susana Ong are its President and Treasurer,

respectively. On April 20, 1992, respondent Philippine Commercial International Bank (now Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for collection of a sum of money[1] against petitionersspouses. Respondent bank sought to hold petitionersspouses liable as sureties on the three (3) promissory notes they issued to secure some of BMCs loans, totalling five million pesos (P5,000,000.00). The complaint alleged that in 1991, BMC needed additional capital for its business and applied for various loans, amounting to a total of five million pesos, with the respondent bank. Petitioners-spouses acted as sureties for these loans and issued three (3) promissory notes for the purpose. Under the terms of the notes, it was stipulated that respondent bank may consider debtor BMC in default and demand payment of the remaining balance of the loan upon the levy, attachment or garnishment of any of its properties, or upon BMCs insolvency, or if it is declared to be in a state of suspension of payments. Respondent bank granted BMCs loan applications. On November 22, 1991, BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. Respondent bank considered debtor BMC in default of its obligations and sought to collect payment thereof from petitionersspouses as sureties. In due time, petitioners-spouses

filed their Answer. On October 13, 1992, a Memorandum of Agreement (MOA)[2] was executed by debtor BMC, the petitionersspouses as President and Treasurer of BMC, and the consortium of creditor banks of BMC (of which respondent bank is included). The MOA took effect upon its approval by the SEC on November 27, 1992.[3] Thereafter, petitioners-spouses moved to dismiss[4] the complaint. They argued that as the SEC declared the principal debtor BMC in a state of suspension of payments and, under the MOA, the creditor banks, including respondent bank, agreed to temporarily suspend any pending civil action against the debtor BMC, the benefits of the MOA should be extended to petitioners-spouses who acted as BMCs sureties in their contracts of loan with respondent bank. Petitionersspouses averred that respondent bank is barred from pursuing its collection case filed against them. The trial court denied the motion to dismiss. Petitioners-spouses appealed to the Court of Appeals which affirmed the trial courts ruling that a creditor can proceed against petitioners-spouses as surety independently of its right to proceed against the principal debtor BMC. Hence this appeal. Petitioners-spouses claim that the collection case filed against them by respondent bank should be dismissed for three (3) reasons: First, the MOA provided

that during its effectivity, there shall be a suspension of filing or pursuing of collection cases against the BMC and this provision should benefit petitioners as sureties. Second, principal debtor BMC has been placed under suspension of payment of debts by the SEC; petitioners contend that it would prejudice them if the principal debtor BMC would enjoy the suspension of payment of its debts while petitioners, who acted only as sureties for some of BMCs debts, would be compelled to make the payment; petitioners add that compelling them to pay is contrary to Article 2063 of the Civil Code which provides that a compromise between the creditor and principal debtor benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code which provides that: the guarantor may set up against the creditor all the defenses which pertain to the principal debtor and are inherent in the debt; but not those which are purely personal to the debtor. Petitioners aver that if the principal debtor BMC can set up the defense of suspension of payment of debts and filing of collection suits against respondent bank, petitioners as sureties should likewise be allowed to avail of these defenses. We find no merit in petitioners contentions. Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is misplaced as these provisions refer to contracts of guaranty. They do not apply to suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMCs debts. There is a sea of difference in the rights and liabilities of a

guarantor and a surety. A guarantor insures the solvency of the debtor while a surety is an insurer of the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part of the guarantor. It is only after the creditor has proceeded against the properties of the principal debtor and the debt remains unsatisfied that a guarantor can be held liable to answer for any unpaid amount. This is the principle of excussion. In a suretyship contract, however, the benefit of excussion is not available to the surety as he is principally liable for the payment of the debt. As the surety insures the debt itself, he obligates himself to pay the debt if the principal debtor will not pay, regardless of whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor can go directly against the surety although the principal debtor is solvent and is able to pay or no prior demand is made on the principal debtor. A surety is directly, equally and absolutely bound with the principal debtor for the payment of the debt and is deemed as an original promissor and debtor from the beginning.[5] Under the suretyship contract entered into by petitioners-spouses with respondent bank, the former obligated themselves to be solidarily bound with the principal debtor BMC for the payment of its debts to respondent bank amounting to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,[6] respondent bank as creditor may proceed against petitioners-spouses as sureties despite the execution of the MOA which provided for the suspension

of payment and filing of collection suits against BMC. Respondent banks right to collect payment from the surety exists independently of its right to proceed directly against the principal debtor. In fact, the creditor bank may go against the surety alone without prior demand for payment on the principal debtor.[7] The provisions of the MOA regarding the suspension of payments by BMC and the non-filing of collection suits by the creditor banks pertain only to the property of the principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the properties of BMC were mentioned in the petition with the SEC.[8] Secondly, there is nothing in the MOA that involves the liabilities of the sureties whose properties are separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and signed by the creditor-banks was approved by the SEC whose jurisdiction is limited only to corporations and corporate assets. It has no jurisdiction over the properties of BMCs officers or sureties. Clearly, the collection suit filed by respondent bank against petitioners-spouses as sureties can prosper. The trial courts denial of petitioners motion to dismiss was proper. IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED.

Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur. .R. No. 160324 November 15, 2005 INTERNATIONAL FINANCE CORPORATION, Petitioner, vs. IMPERIAL TEXTILE MILLS, INC.,* Respondent. DECISION PANGANIBAN, J.: he terms of a contract govern the rights and obligations of the contracting parties. When the obligor undertakes to be "jointly and severally" liable, it means that the obligation is solidary. If solidary liability was instituted to "guarantee" a principal obligation, the law deems the contract to be one of suretyship. The creditor in the present Petition was able to show convincingly that, although denominated as a "Guarantee Agreement," the Contract was actually a surety. Notwithstanding the use of the words "guarantee" and "guarantor," the subject Contract was indeed a surety, because its terms were clear and left no doubt as to the intention of the parties. The Case Before us is a Petition for Review1 under Rule 45 of the

Rules of Court, assailing the February 28, 2002 Decision2 and September 30, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows: "WHEREFORE, the appeal is PARTIALLY GRANTED. The decision of the trial court is MODIFIED to read as follows: "1. Philippine Polyamide Industrial Corporation is ORDERED to pay [Petitioner] International Finance Corporation, the following amounts: (a) US$2,833,967.00 with accrued interests as provided in the Loan Agreement; (b) Interest of 12% per annum on accrued interest, which shall be counted from the date of filing of the instant action up to the actual payment; (c) P73,340.00 as attorneys fees; (d) Costs of suit. "2. The guarantor Imperial Textile Mills, Inc. together with Grandtex is HELD secondarily liable to pay the amount herein adjudged to [Petitioner] International Finance Corporation."4 The assailed Resolution denied both parties respective Motions for Reconsideration.

The Facts The facts are narrated by the appellate court as follows: "On December 17, 1974, [Petitioner] International Finance Corporation (IFC) and [Respondent] Philippine Polyamide Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a loan of US$7,000,000.00, payable in sixteen (16) semi-annual installments of US$437,500.00 each, beginning June 1, 1977 to December 1, 1984, with interest at the rate of 10% per annum on the principal amount of the loan advanced and outstanding from time to time. The interest shall be paid in US dollars semi-annually on June 1 and December 1 in each year and interest for any period less than a year shall accrue and be pro-rated on the basis of a 360-day year of twelve 30-day months. "On December 17, 1974, a Guarantee Agreement was executed with x x x Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing Corporation (Grandtex) and IFC as parties thereto. ITM and Grandtex agreed to guarantee PPICs obligations under the loan agreement. "PPIC paid the installments due on June 1, 1977, December 1, 1977 and June 1, 1978. The payments due on December 1, 1978, June 1, 1979 and December 1, 1979 were rescheduled as requested by PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC served a written notice of default to PPIC demanding the latter to

pay the outstanding principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and its interests. "By virtue of PPICs failure to pay, IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC, located at Calamba, Laguna, with the regional sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff of Calamba, Laguna issued a notice of extrajudicial sale. IFC and DBP were the only bidders during the auction sale. IFCs bid was for P99,269,100.00 which was equivalent to US$5,250,000.00 (at the prevailing exchange rate of P18.9084 = US$1.00). The outstanding loan, however, amounted to US$8,083,967.00 thus leaving a balance of US$2,833,967.00. PPIC failed to pay the remaining balance. "Consequently, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding balance. However, despite the demand made by IFC, the outstanding balance remained unpaid. "Thereafter, on May 20, 1988, IFC filed a complaint with the RTC of Manila against PPIC and ITM for the payment of the outstanding balance plus interests and attorneys fees. "The trial court held PPIC liable for the payment of the outstanding loan plus interests. It also ordered PPIC to

pay IFC its claimed attorneys fees. However, the trial court relieved ITM of its obligation as guarantor. Hence, the trial court dismissed IFCs complaint against ITM. xxxxxxxxx "Thus, apropos the decision dismissing the complaint against ITM, IFC appealed [to the CA]."5 Ruling of the Court of Appeals The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM from any obligation to IFC. According to the appellate court, ITM bound itself under the "Guarantee Agreement" to pay PPICs obligation upon default.6 ITM was not discharged from its obligation as guarantor when PPIC mortgaged the latters properties to IFC.7 The CA, however, held that ITMs liability as a guarantor would arise only if and when PPIC could not pay. Since PPICs inability to comply with its obligation was not sufficiently established, ITM could not immediately be made to assume the liability.8 The September 30, 2003 Resolution of the CA denied reconsideration.9 Hence, this Petition.10 The Issues Petitioner states the issues in this wise: "I. Whether or not ITM and Grandtex11 are sureties and

therefore, jointly and severally liable with PPIC, for the payment of the loan. "II. Whether or not the Petition raises a question of law.

a guarantor16 and not a surety. Moreover, any ambiguity in the Agreement should be construed against IFC -- the party that drafted it.17 Language of the

"III. Whether or not the Petition raises a theory not raised in the lower court."12 The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan. The Courts Ruling The Petition is meritorious. Main Issue: Liability of Respondent Under the Guarantee Agreement The present controversy arose from the following Contracts: (1) the Loan Agreement dated December 17, 1974, between IFC and PPIC;13 and (2) the Guarantee Agreement dated December 17, 1974, between ITM and Grandtex, on the one hand, and IFC on the other.14 IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to PPICs obligations proceeding from the Loan Agreement.15 For its part, ITM asserts that, by the terms of the Guarantee Agreement, it was merely

Contract The premise of the Guarantee Agreement is found in its preambular clause, which reads: "Whereas, "(A) By an Agreement of even date herewith between IFC and PHILIPPINE POLYAMIDE INDUSTRIAL CORPORATION (herein called the Company), which agreement is herein called the Loan Agreement, IFC agrees to extend to the Company a loan (herein called the Loan) of seven million dollars ($7,000,000) on the terms therein set forth, including a provision that all or part of the Loan may be disbursed in a currency other than dollars, but only on condition that the Guarantors agree to guarantee the obligations of the Company in respect of the Loan as hereinafter provided. "(B) The Guarantors, in order to induce IFC to enter into the Loan Agreement, and in consideration of IFC entering into said Agreement, have agreed so to guarantee such obligations of the Company."18 The obligations of the guarantors are meticulously

expressed in the following provision: "Section 2.01. The Guarantors jointly and severally, irrevocably, absolutely and unconditionally guarantee, as primary obligors and not as sureties merely, the due and punctual payment of the principal of, and interest and commitment charge on, the Loan, and the principal of, and interest on, the Notes, whether at stated maturity or upon prematuring, all as set forth in the Loan Agreement and in the Notes."19 The Agreement uses "guarantee" and "guarantors," prompting ITM to base its argument on those words.20 This Court is not convinced that the use of the two words limits the Contract to a mere guaranty. The specific stipulations in the Contract show otherwise. Solidary Liability Agreed to by ITM While referring to ITM as a guarantor, the Agreement specifically stated that the corporation was "jointly and severally" liable. To put emphasis on the nature of that liability, the Contract further stated that ITM was a primary obligor, not a mere surety. Those stipulations meant only one thing: that at bottom, and to all legal intents and purposes, it was a surety. Indubitably therefore, ITM bound itself to be solidarily21 liable with PPIC for the latters obligations under the Loan

Agreement with IFC. ITM thereby brought itself to the level of PPIC and could not be deemed merely secondarily liable. Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITMs liability commenced only when it guaranteed PPICs obligation. It became a surety when it bound itself solidarily with the principal obligor. Thus, the applicable law is as follows: "Article 2047. By guaranty, a person, called the guarantor binds himself to the creditor to fulfill the obligation of the principal in case the latter should fail to do so. "If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract shall be called suretyship."22 The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on "Joint and Solidary Obligations." Relevant to this case is Article 1216, which states: "The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected."

Pursuant to this provision, petitioner (as creditor) was justified in taking action directly against respondent. No Ambiguity in the Undertaking The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When qualified by the term "jointly and severally," the use of the word "guarantor" to refer to a "surety" does not violate the law.23 As Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- "as primary obligor and not merely as surety" -- stresses that ITM is being placed on the same level as PPIC. Those words emphasize the nature of their liability, which the law characterizes as a suretyship. The use of the word "guarantee" does not ipso facto make the contract one of guaranty.24 This Court has recognized that the word is frequently employed in business transactions to describe the intention to be bound by a primary or an independent obligation.25 The very terms of a contract govern the obligations of the parties or the extent of the obligors liability. Thus, this Court has ruled in favor of suretyship, even though contracts were denominated as a "Guarantors Undertaking" 26 or a "Continuing Guaranty."27 Contracts have the force of law between the parties,28

who are free to stipulate any matter not contrary to law, morals, good customs, public order or public policy.29 None of these circumstances are present, much less alleged by respondent. Hence, this Court cannot give a different meaning to the plain language of the Guarantee Agreement. Indeed, the finding of solidary liability is in line with the premise provided in the "Whereas" clause of the Guarantee Agreement. The execution of the Agreement was a condition precedent for the approval of PPICs loan from IFC. Consistent with the position of IFC as creditor was its requirement of a higher degree of liability from ITM in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and is now estopped from feigning ignorance of its solidary liability. The literal meaning of the stipulations control when the terms of the contract are clear and there is no doubt as to the intention of the parties.30 We note that the CA denied solidary liability, on the theory that the parties would not have executed a Guarantee Agreement if they had intended to name ITM as a primary obligor.31 The appellate court opined that ITMs undertaking was collateral to and distinct from the Loan Agreement. On this point, the Court stresses that a suretyship is merely an accessory or a collateral to a principal obligation.32 Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute; or equivalent to that of a regular party to the undertaking.33 A surety

becomes liable to the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter.34 ITMs Liability as Surety With the present finding that ITM is a surety, it is clear that the CA erred in declaring the former secondarily liable.35 A surety is considered in law to be on the same footing as the principal debtor in relation to whatever is adjudged against the latter.36 Evidently, the dispositive portion of the assailed Decision should be modified to require ITM to pay the amount adjudged in favor of IFC. Peripheral Issues In addition to the main issue, ITM raised procedural infirmities allegedly justifying the denial of the present Petition. Before the trial court and the CA, IFC had allegedly instituted different arguments that effectively changed the corporations theory on appeal, in violation of this Courts previous pronouncements.37 ITM further claims that the main issue in the present case is a question of fact that is not cognizable by this Court.38 These contentions deserve little consideration. Alleged Change of Theory on Appeal

Petitioners arguments before the trial court (that ITM was a "primary obligor") and before the CA (that ITM was a "surety") were related and intertwined in the action to enforce the solidary liability of ITM under the Guarantee Agreement. We emphasize that the terms "primary obligor" and "surety" were premised on the same stipulations in Section 2.01 of the Agreement. Besides, both terms had the same legal consequences. There was therefore effectively no change of theory on appeal. At any rate, ITM failed to show to this Court a disparity between IFCs allegations in the trial court and those in the CA. Bare allegations without proof deserve no credence. Review of Factual Findings Necessary As to the issue that only questions of law may be raised in a Petition for Review,39 the Court has recognized exceptions,40 one of which applies to the present case. The assailed Decision was based on a misapprehension of facts,41 which particularly related to certain stipulations in the Guarantee Agreement -- stipulations that had not been disputed by the parties. This circumstance compelled the Court to review the Contract firsthand and to make its own findings and conclusions accordingly. WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety

to Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International Finance Corporation the same amounts adjudged against PPIC in the assailed Decision. No costs. SO ORDERED. [G.R. No. 151060. August 31, 2005]

No. 61318, entitled Philippine Export and Foreign Loan Guarantee Corporation v. JN Development Corporation, et al., which reversed the Decision of the Regional Trial Court (RTC) of Makati, Branch 60. On 13 December 1979, petitioner JN Development Corporation (JN) and Traders Royal Bank (TRB) entered into an agreement whereby TRB would extend to JN an Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was covered by several securities, including a real estate mortgage[2] and a letter of guarantee from respondent Philippine Export and Foreign Loan Guarantee Corporation (PhilGuarantee), now Trade and Investment Development Corporation of the Philippines, covering seventy percent (70%) of the credit line.[3] With PhilGuarantee issuing a guarantee in favor of TRB,[4] JN, petitioner spouses Rodrigo and Leonor Sta. Ana[5] and petitioner Narciso Cruz[6] executed a Deed of Undertaking[7] (Undertaking) to assure repayment to PhilGuarantee. It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October 1980 TRB requested PhilGuarantee to make good its guarantee.[8] PhilGuarantee informed JN about the call made by TRB, and inquired about the action of JN to settle the loan.[9] Having received no response from JN, on 10 March 1981 PhilGuarantee paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and Thirty Four Centavos (P934,824.34).[10] Subsequently, PhilGuarantee made several demands on JN, but the latter failed to pay. On 30 May 1983, JN, through

JN

DEVELOPMENT CORPORATION, and SPS. RODRIGO and LEONOR STA. ANA, petitioners, vs. PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, respondent. [G.R. No. 151311. August 31, 2005]

NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and FOREIGN LOAN GUARANTEE CORPORATION, respondent. DECISION TINGA, J.: Before us are consolidated petitions questioning the Decision[1] of the Court of Appeals (CA) in CA-G.R. CV

Rodrigo Sta. Ana, proposed to settle the obligation by way of development and sale of the mortgaged property.[11] PhilGuarantee, however, rejected the proposal. PhilGuarantee thus filed a Complaint[12] for collection of money and damages against herein petitioners. In its Decision dated 20 August 1998, the RTC dismissed PhilGuarantees Complaint as well as the counterclaim of petitioners. It ruled that petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial to this holding was the courts finding that TRB was able to foreclose the real estate mortgage executed by JN, thus extinguishing petitioners obligation.[13] Moreover, there was no showing that after the said foreclosure, TRB had demanded from JN any deficiency or the payment of the difference between the proceeds of the foreclosure sale and the actual loan.[14] In addition, the RTC held that since PhilGuarantees guarantee was good for only one year from 17 December 1979, or until 17 December 1980, and since it was not renewed after the expiry of said period, PhilGuarantee had no more legal duty to pay TRB on 10 March 1981.[15] The RTC likewise ruled that Cruz cannot be held liable under the Undertaking since he was not the one who signed the document, in line with its finding that his signature found in the records is totally different from the signature on the Undertaking.[16] According to the RTC, the failure of TRB to sue JN

for the recovery of the loan precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and Cruz what it paid to TRB. Thus, PhilGuarantees payment to TRB amounts to a waiver of its right under Art. 2058 of the Civil Code.[17] Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate court reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred Thirty Four Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos (P934,624.34), plus service charge and interest.[18] In reaching its denouement, the CA held that the RTCs finding that the loan was extinguished by virtue of the foreclosure sale of the mortgaged property had no factual support,[19] and that such finding is negated by Rodrigo Sta. Anas testimony that JN did not receive any notice of foreclosure from PhilGuarantee or from TRB. [20] Moreover, Sta. Ana even offered the same mortgaged property to PhilGuarantee to settle its obligations with the latter.[21] The CA also ruled that JNs obligation had become due and demandable within the one-year period of effectivity of the guarantee; thus, PhilGuarantees payment to TRB conformed with its guarantee, although the payment itself was effected one year after the maturity date of the loan.[22] Contrary to the trial courts finding, the CA ruled that the contract of guarantee was not extinguished by the alleged lack of evidence on PhilGuarantees consent to the extensions granted by

TRB to JN.[23] Interpreting Art. 2058 of the Civil Code,[24] the appellate court explained that while the provision states that the guarantor cannot be compelled to pay unless the properties of the debtor are exhausted, the guarantor is not precluded from waiving the benefit of excussion and paying the obligation altogether.[25] Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his signature in the Undertaking, the evidence presented not being sufficient to overcome the presumption of regularity of the Undertaking which is a notarized document. [26] Petitioners sought reconsideration of the Decision and prayed for the admission of documents evidencing the foreclosure of the real estate mortgage, but the motion for reconsideration was denied by the CA for lack of merit. The CA ruled that the documentary evidence presented by petitioners cannot be considered as newly discovered evidence, it being already in existence while the case was pending before the trial court, the very forum before which it should have been presented. Besides, a foreclosure sale per se is not proof of petitioners payment of the loan to PhilGuarantee, the CA added.[27] So now before the Court are the separate petitions for review of the CA Decision. JN and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in interpreting Articles 2079, 2058, and 2059 of the Civil Code in its Decision.[28] Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that the CA

erred when it held that petitioners are liable to PhilGuarantee despite its payment after the expiration of its contract of guarantee and the lack of PhilGuarantees consent to the extensions granted by TRB to JN. Moreover, Cruz questions the reversal of the ruling of the trial court anent his liability as a signatory to the Undertaking.[29] On the other hand, PhilGuarantee maintains that the date of default, not the actual date of payment, determines the liability of the guarantor and that having paid TRB when the loan became due, it should be indemnified by petitioners.[30] It argues that, contrary to petitioners claim, there could be no waiver of its right to excussion more explicit than its act of payment to TRB very directly.[31] Besides, the right to excussion is for the benefit of the guarantor and is not a defense for the debtor to raise and use to evade liability.[32] Finally, PhilGuarantee maintains that there is no sufficient evidence proving the alleged forgery of Cruzs signature on the Undertaking, which is a notarized document and as such must be accorded the presumption of regularity.[33] The Court finds for PhilGuarantee. Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.[34] The guarantor who pays for a debtor, in turn, must be indemnified by the latter.[35] However, the guarantor cannot be compelled to pay the creditor unless the latter

has exhausted all the property of the debtor and resorted to all the legal remedies against the debtor.[36] This is what is otherwise known as the benefit of excussion. It is clear that excussion may only be invoked after legal remedies against the principal debtor have been expanded. Thus, it was held that the creditor must first obtain a judgment against the principal debtor before assuming to run after the alleged guarantor, for obviously the exhaustion of the principals property cannot even begin to take place before judgment has been obtained.[37] The law imposes conditions precedent for the invocation of the defense. Thus, in order that the guarantor may make use of the benefit of excussion, he must set it up against the creditor upon the latters demand for payment and point out to the creditor available property of the debtor within the Philippines sufficient to cover the amount of the debt.[38] While a guarantor enjoys the benefit of excussion, nothing prevents him from paying the obligation once demand is made on him. Excussion, after all, is a right granted to him by law and as such he may opt to make use of it or waive it. PhilGuarantees waiver of the right of excussion cannot prevent it from demanding reimbursement from petitioners. The law clearly requires the debtor to indemnify the guarantor what the latter has paid.[39] Petitioners claim that PhilGuarantee had no more obligation to pay TRB because of the alleged expiration of the contract of guarantee is untenable. The guarantee,

dated17 December 1979, states: In the event of default by JNDC and as a consequence thereof, PHILGUARANTEE is made to pay its obligation arising under the aforesaid guarantee PHILGUARANTEE shall pay the BANK the amount of P1.4 million or 70% of the total obligation unpaid .... This guarantee shall be valid for a period of one (1) year from date hereof but may be renewed upon payment by JNDC of the guarantee fee at the same rate of 1.5% per annum.[40] The guarantee was only up to 17 December 1980. JNs obligation with TRB fell due on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October 1980. That payment was actually made only on 10 March 1981 does not take it out of the terms of the guarantee. What is controlling is that default and demand on PhilGuarantee had taken place while the guarantee was still in force. There is likewise no merit in petitioners claim that PhilGuarantees failure to give its express consent to the alleged extensions granted by TRB to JN had extinguished the guarantee. The requirement that the guarantor should consent to any extension granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor. As such, it is likewise waivable by the

guarantor. Thus, even assuming that extensions were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the need for consent to such extensions. Indeed, a guarantor is not precluded from waiving his right to be notified of or to give his consent to extensions obtained by the debtor. Such waiver is not contrary to public policy as it is purely personal and does not affect public interest.[41] In the instant case, PhilGuarantees waiver can be inferred from its actual payment to TRB after the latters demand, despite JNs failure to pay the renewal/guarantee fee as indicated in the guarantee.[42] For the above reasons, there is no basis for petitioners claim that PhilGuarantee was a mere volunteer payor and had no legal obligation to pay TRB. The law does not prohibit the payment by a guarantor on his own volition, heedless of the benefit of excussion. In fact, it recognizes the right of a guarantor to recover what it has paid, even if payment was made before the debt becomes due,[43] or if made without notice to the debtor,[44] subject of course to some conditions. Petitioners invocation of our ruling in Willex Plastic Industries, Corp. v. Court of Appeals[45] is misplaced, if not irrelevant. In the said case, the guarantor claimed that it could not be proceeded against without first exhausting all of the properties of the debtor. The Court, finding that there was an express renunciation of the benefit of excussion in the contract of guarantee, ruled against the guarantor. The cited case finds no application in the case a

quo. PhilGuarantee is not invoking the benefit of excussion. It cannot be overemphasized that excussion is a right granted to the guarantor and, therefore, only he may invoke it at his discretion. The benefit of excussion, as well as the requirement of consent to extensions of payment, is a protective device pertaining to and conferred on the guarantor. These may be invoked by the guarantor against the creditor as defenses to bar the unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of these defenses when it paid its obligation according to the tenor of the guarantee once demand was made on it. What is peculiar in the instant case is that petitioners, the principal debtors themselves, are muddling the issues and raising the same defenses against the guarantor, which only the guarantor may invoke against the creditor, to avoid payment of their own obligation to the guarantor. The Court cannot countenance their self-seeking desire to be exonerated from the duty to reimburse PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves at the expense of PhilGuarantee. Petitioners assert that TRBs alleged foreclosure of the real estate mortgage over the land executed as security for the loan agreement had extinguished PhilGuarantees obligation; thus, PhilGuarantees recourse should be directed against TRB, as per the paripassu provision[46] in the contract of guarantee.[47] We disagree.

The foreclosure was made on 27 August 1993, after the case was submitted for decision in 1992 and before the issuance of the decision of the court a quo in 1998.[48] Thus, foreclosure was resorted to by TRB against JN when they both had become aware that PhilGuarantee had already paid TRB and that there was a pending case filed by PhilGuarantee against petitioners. This matter was not raised and proved in the trial court, nor in the appeal before the CA, but raised for the first time in petitioners motion for reconsideration in the CA. In their appellants Brief, petitioners claimed that there was no need for the defendant-appellee JNDC to present any evidence before the lower court to show that indeed foreclosure of the REM took place.[49] As properly held by the CA, Firstly, the documents evidencing foreclosure of mortgage cannot be considered as newly discovered evidence. The said documents were already subsisting and should have been presented during the trial of the case. The alleged foreclosure sale was made on August 23, 1993 while the decision was rendered by the trial court on August 20, 1998 about five (5) years thereafter. These documents were likewise not submitted by the defendants-appellees when they submitted their appellees Brief to this Court. Thus, these cannot be considered as newly discovered evidence but are more correctly ascribed as suppressed forgotten evidence Secondly, the alleged foreclosure sale is not proof of payment of the loan by defendant-appellees to the plaintiffs-appellants.[50]

Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its cause of action was premised on its payment of JNs obligation after the latters default. PhilGuarantee was well within its rights to demand reimbursement for such payment made, regardless of whether the creditor, TRB, was subsequently able to obtain payment from JN. If double payment was indeed made, then it is JN which should go after TRB, and not PhilGuarantee. Petitioners have no one to blame but themselves, having allowed the foreclosure of the property for the full value of the loan despite knowledge of PhilGuarantees payment to TRB. Having been aware of such payment, they should have opposed the foreclosure, or at the very least, filed a supplemental pleading with the trial court informing the same of the foreclosure sale. Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being parties to the said agreement. The clause is clearly for the benefit of the guarantor and no other. The Court notes the letter[51] of Rodrigo Sta. Ana offering, by way of settlement of JNs obligations to PhilGuarantee, the very same parcel of land mortgaged as security for the loan agreement. This further weakens the position of petitioners, since it becomes obvious that they acknowledged the payment made by PhilGuarantee on their behalf and that they were in fact willing to negotiate with PhilGuarantee for the settlement of the said obligation before the filing of the complaint a quo.

Anent the issue of forgery, the CA is correct in reversing the decision of the trial court. Save for the denial of Narciso Cruz that it was not his signature in the Undertaking and the perfunctory comparison of the signatures, nothing in the records would support the claim of forgery. Forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the burden of proof lies on the party alleging forgery.[52] Mere denial will not suffice to overcome the positive value of the Undertaking, which is a notarized document, has in its favor the presumption of regularity, and carries the evidentiary weight conferred upon it with respect to its due execution.[53] Even in cases where the alleged forged signature was compared to samples of genuine signatures to show its variance therefrom, this Court still found such evidence insufficient.[54] Mere variance of the signatures cannot be considered as conclusive proof that the same were forged.[55] WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 61318 is AFFIRMED. No pronouncement as to costs. SO ORDERED. Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur. G.R. No. L-43670 February 25, 1937

PEOPLE BANK AND TRUST COMPANY, plaintiffappellee, vs. W. J. ODOM, defendant-appellant. Gibbs, McDonough and Ozaeta for appellant. Ohnick and Opisso for appellee. IMPERIAL, J.: The plaintiff brought this action to recover from the defendant the balance of an overdraft owing to it from the latter, and to foreclose the mortgage of properties to guarantee his obligation. The defendant appealed from the judgment of the Court of First Instance of Manila ordering him to pay to the plaintiff the sum of P138,403.68, with 9 per cent interest per annum from January 4, 1934, until fully paid, plus P500 as attorney's fees, and the costs. The judgment decreed that the principal and interest should be paid within three months, failing which the mortgaged properties will be sold at public auction, consisting of the rights, title and interest of the defendant in the contracts of lease of the building known as the "Sugar News Co., Building" and "Edward J. Nell Co. Building" as well as his rights, title, and interest in the land on which the two buildings are constructed, and that the proceeds of the sale should be applied to the payment of the amount of the judgment. On January 12, 1927, the defendant entered into a contract with A. D. Gibbs (Exhibit E) whereby the latter authorized him to construct two concrete buildings of three floors each, upon his land on Loaisa Street, District

of Binondo, City of Manila, described in certificate of title No. 27584. Upon that date, the building known as the Sugar News Co. Building was completely constructed and its first floor was occupied by the People Bank and Trust Co., but the two upper floors were not fully equipped; the other building known as the "Edward J. Nell Co. Building" was then under construction. Under the contract the defendant bore all the expenses of consideration thereof Gibbs assigned to him all the rents which the building may produce for a period of eight (8) years from November 1, 1926, as to the first floor then already occupied, and as to the other floors to be equipped, from the date they are thus fully equipped. As to the other building, "Edward J. Nell Co. Building", the parties agreed that the defendant would also bear all the expenses of construction until it is fully completed, and in consideration thereof Gibbs assigned to him all the rent which it may produce for a period of the eight (8) years and three (3) months from the date of the termination of its construction; this period, however, to be counted from the completion of each floor in the event that the floors composing the building should not be completed and equipped at the same time. By virtue of contracts entered into with the plaintiff, the defendant obtained an overdraft from the former amounting to P110,000. To secure this overdraft, the defendant, on April 26, 1928, assigned to the plaintiff all his rights, title and interest in the contracts of lease with the Sugar News Company, Manila Machinery and Supply Co., Inc., and T. Yamamoto of the various portions of the

"Sugar News Company Building", as well as the rights, title and interest which he had acquired in the land on which the said building was constructed under the contract which he had with A. D. Gibbs. As additional security, the defendant also assigned to the plaintiff insurance policy No. 402894 for P100,000 issued by the Manufacturers Life Insurance Company (Exhibit C). The overdraft was increased to P150,000, and to secure the payment thereof the defendant executed Exhibit B on September 18, 1928, in favor of the plaintiff, whereby he assigned to the latter also by way of guaranty the same securities which he had given for the overdraft of P110,000. On January 20, 1931, the overdraft was again increased to P165,000, and to guarantee the payment thereof the defendant executed Exhibit D whereby he assigned to the plaintiff his rights, title and interest in the contracts of lease with Edward J. Nell Company, El Progreso, Inc., and France & Goulette of various portions of the "Edward J. Nell Company Building"; in whatever contracts of lease of any portion of the same building which he may enter not in the future, and the rights, title and interest which he had in the land occupied by the building according to his contract with A. D. Gibbs on January 12, 1927. On the same date, January 20, 1931, the plaintiff and the defendant executed Exhibit F, whereby the latter assigned to the former his right to collect the rents of the "Edward J. Nell Company Building" to secure the

payment of the overdraft of P165.000 with interest at 9 per cent per annum. The annual rentals then produced by the building were the following: from Edward J. Nell Company P1,3000, from El Progreso P300 and from the Lyric Film Exchange, Inc., successor of France & Goulette, P800. Pursuant to the aforesaid contracts, the defendant drew funds upon plaintiff by way of overdrafts, and on January 4, 1934, his account showed a balance against him in the amount of P138,403.68, including stipulated interest up to said date. The defendant contends in his first assigned error that the contract Exhibit D took the place of the previous conrtracts Exhibit B and C. To resolve this point, it is necessary to take into account the intention of the parties expressed in the contract Exhibit D and the terms in which it was drawn. It was executed, according to the contract itself, as a result of the increase of the overdraft to P165,000 as well as the additional guaranty given by defendant, consisting of the assignment by way of guaranty of his rights in his contracts of lease of the Edward J. Nell Company Building and of his rights in the land occupied by the same building. Clause 3 of said contract stipulated that the contract Exhibit C of April 26, 1928, was incorporated therein and also constituted a guaranty of the payment of the overdraft as increased to P165,000. In the light of these facts, it is evident that the intention of the parties was neither to set aside the previous contracts nor to substitute Exhibit D therefor.

In his second assignment of error the defendant contends that the court should have held that the obligation contracted by him was with a term, and the parties not having fixed the date of payment, the plaintiff should have first brought an action to fix said date under article 1128 of the Civil Code providing that, when it is to be inferred from the nature and circumstances of the obligation that it was intended to grant the debtor time to pay, and the term is not otherwise stated, the courts should fix the date of the maturity of the obligation. The contract Exhibit D is a complement of the contracts Exhibits B and C, hence, its language and the intention of the parties must be interpreted in relation to and jointly with those of the latter under the provisions of article 1285 of the same Code. It was expressly stipulated in Exhibits B and C that the obligation contracted by the defendant shall expire and be due upon demand of the plaintiff, and in view of the fact that the latter deed was incorporated in Exhibit D as above stated and that the defendant was required by the plaintiff to pay all his indebtedness, it is plain that the obligation was without a term and that it became due and is demandable. Wherefore, article 1128 of the Civil Code relied upon is not applicable. The subject of the third assignment of error is the ruling of the court that the contracts evidenced by Exhibits B, C and D are one of mortgage and that the plaintiff's action is for the foreclosure thereof. The defendant vigorously argues that none of the three contracts is one of mortgage, but an assignment of rights, because in none of said contracts did the parties intend to constitute a

mortgage. A careful examination of the documents shows, in our opinion, that they were really mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant, consisting of the overdrafts of the indebtedness resulting therefrom. It positively appears in each of them that the defendant assigned to the plaintiff all his rights in the contracts of lease, in the land, and in the insurance policy to guarantee his indebtedness resulting from the overdrafts. An assignment to guarantee an obligation as in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee. (Title Guaranty & Surety Co. vs. Witmire 195 Fed., 41, 44; Polhemus vs. Trainer, 30 Cal., 685; Campbell vs. Woodstock Iron Co., 83 Ala., 351; Dunham vs. Whitehead, 21 N. Y., 131; Woodward vs. Crump, 32 S. W., 195.) In Exhibits C and D it was stipulated, among other things, that if the defendant should comply with all the conditions of the contracts and should pay his indebtedness, together with interest at 9 per cent per annum, the assignments would become null and void, otherwise they would remain in full force. If the parties' intention as contended by the defendant were that the assignments are absolute, and not by way of guaranty or mortgage, the stipulation would not have been made because it would be inconsistent with the will of the contracting parties. Wherefore, we hold that the third assignment of error is untenable. As a corollary of his theory that the contracts are absolute conveyances, the defendant contends in his fourth and last assignment of error that his civil liability has ceased

and that he does not now owe the plaintiff anything. The conclusions that we have reached in resolving the next preceding assignment of error show that this last contention of the defendant is equally untenable. The assignments he made not being absolute, and the plaintiff having established that he has not paid his total overdraft, inasmuch as he still owes the amount of money above stated, with interest, it is evident that he is not yet relieved of his obligation. Before closing, it is necessary to pass upon an aspect of the case which substantially affects the rights of the defendant. Under the contracts, the plaintiff was authorized to collect the rents of the two buildings during the period, in turn, might be that fixed in the contract entered into between the defendant and A. D. Gibbs. We use the conditional form because the contracts of lease have not been put in evidence, hence, we cannot point out the duration thereof with precision. On the other hand, the plaintiff liquidated the account of the defendant up to January 4, 1934, only, and in the appealed judgment it was decreed that the mortgaged rights be sold at public auction should the defendant fail to pay his indebtedness within three months. If the indebtedness has already been paid with the rents which the plaintiff failed to account for, then there would be no ground to take this step. If the indebtedness has not yet been fully paid, neither would it be proper to sell any of the rights in the mortgage contracts of lease because the latter have already matured according to the contract with Gibbs. For this reason, it is necessary to provide for the one and the

other case. As to the insurance policy, nothing can be said about it as the appealed judgment is silent thereon. In view of the foregoing, we affirm the appealed judgment, except that part ordering the public sale of the mortgaged rights, with costs to the defendant and appellant. The plaintiff is ordered to account to the defendant for the rents received from two buildings which have not been included in its liquidation, Exhibit G-4, and within ten days from notice of this judgment by the court of origin, it shall file a written liquidation showing the final state of the account of the defendant. So ordered. Avancea, C.J., Villa-Real, Abad Santos, Diaz, Laurel and Concepcion, JJ., concur.

executed a promissory note for the same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the said date, with interest at the rate of 10% per annum. In addition to said promissory note, he executed Surety Bond No. 14164 in which he, as principal, and Philippine American General Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of Prudential Bank for the payment of the sum of P20,000.00. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind and nature which the Company shall or may at any time sustain or incur in consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from Certificate", which reads: This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age, married and with residence and postal address at Baguio City, Philippines, now and hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal offices at Wilson Building, Juan Luna, Manila, Philippines,

G.R. No. L-33157 June 29, 1982 BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., respondents.

GUERRERO, J.: On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the Prudential Bank and Trust Company. On the same date, he

now and hereinafter called the "ASSIGNEE-SURETY COMPANY" WITNESSETH That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK & TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the books of the within named military institute with full power of substitution in the premises. 2 With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it to Philamgen. It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon the posting

of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of the Bonding Department, to accommodate him in putting up the bond against the security of his shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank. On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to enforce payment on the promissory note plus interest. Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa regarding their commitment to buy the shares of stock of Lopez in the event that the latter failed to pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and Pio Pedrosa will buy the shares of stock

from it so that the proceeds could be paid to the bank, and in the meantime Philamgen will not pay the bank because it did not want payment under the terms of the bank. 3 Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name of Philamgen on November 17, 1961. The complaint was thereafter dismissed. But when no payment was still made by the principal debtor or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed the following letter to Philamgen: Dear Mr. Sumawang: This is with reference to yours of the 13th instant advising me of a complaint filed against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this connection, I would like to know what happened to my shares of stocks of Baguio Military Academy which were pledged to your goodselves to secure said obligation. These shares of stock I think are more than enough to

answer for said obligation. 4 On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89 which included the principal loan and accumulated interest and the Prudential Bank executed a subrogation receipt on the same date. On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the complaint holding: The contention of the plaintiff that the stock of the defendant were merely pledged to it by the defendant is not borne out by the evidence. On the contrary, it appears to be contradicted by the facts of the case. The shares of stock of the defendant were actually transferred to the plaintiff when it became clear after the plaintiff and the defendant had been sued by the Prudential Bank that plaintiff would be compelled to make the payment to the Prudential Bank, in view of the inability of the defendant Benito H. Lopez to pay his said obligation. The certificate bearing No. 44 was cancelled and upon request of the plaintiff to the Baguio Military Institute a new certificate of stock was issued in the name of the plaintiff bearing No. 171, by means of which plaintiff became the registered owner of the 4,000 shares originally belonging to the defendant.

It is noteworthy that the transfer of the stocks of the defendant in the name of the plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who promised to buy the same from the plaintiff. Now that these shares of stock of the defendant had already been transferred in the name of the plaintiff, the defendant has already divested himself of the said stocks, and it would seem that the remedy of the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the said stocks. To go after the defendant after the plaintiff had already become the owner of his shares of stock and compel him to pay his obligation to the Prudential Bank would be most unfair, unjust and illogical for it would amount to double payment on his part. After the plaintiff had already appropriated the said shares of stock, it has already lost its right to recover anything from the defendant, for the reason that the transfer of the said stocks was made without qualification. This transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5 Philamgen appealed to the Court of Appeals raising these assignments of errors: I The lower court erred in finding that the evidence does not bear out the contention of plaintiff that the shares of stock belonging to defendant were transferred by him to plaintiff by way of pledge.

II The lower court erred in finding that plaintiff company appropriated unto itself the shares of stock pledged to it by defendant Benito Lopez and in finding that, with the transfer of the stock in the name of plaintiff company, the latter has already been paid or reimbursed what it paid to Prudential Bank. III The lower court erred in not finding that the instant case is one where the pledge has abandoned the security and elected instead to enforce his claim against the pledgor by ordinary action. 6 On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen, thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null and void as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The dispositive portion of the said decision states: WHEREFORE, the decision of the lower court is hereby reversed, and another one is hereby entered ordering the

defendant to pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit. 7 The motion for reconsideration with prayer to set the same for oral argument having been denied, Lopez brought this petition for review on certiorari presenting for resolution these questions: a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to another, duly endorsed in blank, in consideration of a contingent obligation of the former to the latter, and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name, what is the juridical nature of the transaction-a dation in payment or a pledge? b) Where, as in this case, the debtor assigns the shares of stock to the creditor under an agreement between the latter and determinate third persons that the latter would buy the shares of stock so that the obligations could be paid out of the proceeds, was there a novation of the obligation by substitution of debtor? 8 Philamgen failed to file its comment on the petition for review on certiorari within the extended period which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9 Under the first assignment of error, Lopez argues in his

brief: That the Court of Appeals erred in holding that when petitioner "sold, assigned, transferred" and delivered shares of stock, duly endorsed in blank, to private respondent in consideration of a contingent obligation of the former to the latter and the obligation having thereafter arisen, the latter caused the shares of stock to be transferred to it, taking a new certificate of stock in its name, the transaction was a pledge, and in not holding instead that it was a dation in payment. 10 Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestiture of the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional conveyance. It is true that if Lopez should "well and truly perform and

fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would become null and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would necessarily become null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment.

The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez' loan to Prudential Bank. The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though

a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. 11 We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The appellate court is correct in ruling that the following requirements of a contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge has the free disposal of the property, and in the absence thereof, that he be legally authorized for the purpose. (Article 2085, New Civil Code).

Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge, mortgage, and antichresis) that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor, further supports the appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly ruled: In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement. (Art. 2093, N.C.C.) Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.) All these requisites are found in the transaction between the parties leading to the execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by the defendant in his letter of November 18, 1963, Exhibit G, already quoted above, where he asked what had happened to his shares of stock "which were pledged to your goodselves to secure the said obligation". The testimony of the defendant-appellee that it was their agreement or understanding that if he would be unable to pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or appropriate the same in full payment of its debt is a mere after-thought, conceived after he learned of the transfer of his stock to the plaintiff in the books of the Baguio Military Institute. We also do not agree with the contention of petitioner

that "petitioner's 'sale assignment and transfer' unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery, comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'". According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. Speaking of the concept of dation in payment, it is well to cite that: Dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing, but also of a real right (such as a usufruct) or of a credit against a third person. (Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held that the assignment to the creditor of the interest of the debtor in an inheritance in payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576) The modern concept of dation in payment considers it as a novation by change of the object, and this is to our mind the more juridically correct view. Our Civil Code,

however, provides in this article that, where the debt is in money, the law on sales shall govern; in this case, the act is deemed to be a sale, with the amount of the obligation to the extent that it is extinguished being considered as the price. Does this mean that there can be no dation in payment if the debt is not in money? We do not think so. It is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. There is a real novation with immediate performance of the new obligation. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which, extinguishes the original obligation, and the delivery is a mere performance of the new obligation. The dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement, express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished. (8 Manresa 324; 3 Valverde 174 fn Assignment of property by the debtor to his creditors, provided for in article 1255, is similar to dation in payment in that both are substitute forms of performance of an obligation. Unlike the assignment for the benefit of creditors, however, dation in payment does not involve plurality of creditors, nor the whole of the property of the debtor. It does not suppose a situation of financial

difficulties, for it may be made even by a person who is completely solvent. It merely involves a change of the object of the obligation by agreement of the parties and at the same time fulfilling the same voluntarily. (8 Manresa 324). 12 Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment. 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. Under American jurisprudence, A distinction might also be made between delivery of property in payment of debt and delivery of such property as collateral security for the debt. Generally, such a transfer was presumed to be made for collateral security, in the absence of evidence tending to show an intention on the part of the parties that the transfer was in

satisfaction of the debt. This presumption of a transfer for collateral security arose particularly where the property given was commercial paper, or some other 'specialty' chose of action, that conferred rights upon transfer by delivery of a different nature from the debt, whose value was neither intrinsic nor apparent and was not agreed upon by the parties. 13 Petitioner's argument that even assuming, arguendo that the transaction was at its inception a pledge, it gave way to a dation in payment when the obligation secured came into existence and private respondent had the stocks transferred to it in the corporate books and took a stock certificate in its name, is without merit. The fact that the execution of the stock assignment is accompanied by the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez which was cancelled does not amount to conversion of the stock to one's own use. The transfer of title to incorporeal property is generally an essential part of the delivery of the same in pledge. It merely constitutes evidence of the pledgee's right of property in the thing pledged. By the contract of pledge, the pledgor does not part with his general right of property in the collateral. The general property therein remains in him, and only a special property vests in the pledgee. The pledgee does not

acquire an interest in the property, except as a security for his debt. Thus, the pledgee holds possession of the security subject to the rights of the pledgor; he cannot acquire any interest therein that is adverse to the pledgor's title. Moreover, even where the legal title to incorporeal property which may be pledged is transferred to a pledgee as collateral security, he takes only a special property therein Such transfer merely performs the office that the delivery of possession does in case of a pledge of corporeal property. xxx xxx xxx

to make the security available in the manner prescribed by law or by the terms of the contract, ... . 14 In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding that since private respondent entered into an agreement with determinate third persons whereby the latter would buy the said shares so sold, assigned and transferred to the former by the petitioner for the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the obligation by substitution of debtor. We do not agree.

The pledgee has been considered as having a lien on the pledged property. The extent of such lien is measured by the amount of the debt or the obligation that is secured by the collateral, and the lien continues to exist as long as the pledgee retains actual or symbolic possession of the property, and the debt or obligation remains unpaid. Payment of the debt extinguishes the lien. Though a pledgee of corporation stock does not become personally liable as a stockholder of the company, he may have the shares transferred to him on the books of the corporation if he has been authorized to do so. The general property in the pledge remains in the pledgor after default as well as prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects the nature of the pledgee's rights concerning the property pledged, except that he then becomes entitled to proceed

Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the rights of the creditor. And in order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (Article 1292, N.C.C.) Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.) Commenting on the second concept of novation, that is,

substituting the person of the debtor, Manresa opines, thus: In this kind of novation it is pot enough to extend the juridical relation to a third person; it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation; the third person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first and the new debtor are considered obligated jointly. (8 Manresa 435, cited in Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, p. 360) In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was not established nor shown that Lopez would be released from responsibility, the same does not constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a purely private arrangement between them, not an agreement between (Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must be rejected.

In fine, We hold and rule that the transaction entered into by and between petitioner and respondent under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of the private respondentpledgee, and not a dacion en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation by substitution of debtor. The promise of Abello and Pedrosa to buy the shares from private respondent not having materialized (which promise was given to said respondent only and not to petitioner) and no action was taken against the two by said respondent who chose instead to sue the petitioner on the Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over the pledged properties and must, therefore, release or return the same to the petitioner-pledgor upon the latter's satisfaction of his obligation under the Indemnity Agreement. It must also be made clear that there is no double payment nor unjust enrichment in this case because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said: The appellant (Philam) is not enriching himself at the expense of the appellee. True, the stock certificate of the appellee had been in the name of the appellant but the

transfer was merely nominal, and was not intended to make the plaintiff the owner thereof. No offer had been made for the return of the stocks to the defendant. As the appellant had stated, the appellee could have the stocks transferred to him anytime as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank. Pending payment, plaintiff is merely holding the certificates as a pledge or security for the payment of defendant's obligation. The above holding of the appellate court is correct and We affirm the same. As to the third assignment of error which is merely the consequence of the first two assignments of errors, the same is also devoid of merit. WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby AFFIRMED in toto, with costs against the petitioner. SO ORDERED. Barredo (Chairman), Aquino, Concepcion, Jr., Abad Santos, De Castro and Escolin, JJ., concur. G.R. No. L-53955 January 13, 1989 THE MANILA BANKING CORPORATION, plaintiffappellee, vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee. Serafin P. Rivera for defendants-appellants.

BIDIN, J.: This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil Case No. 78178 for collection of sum of money based on promissory notes executed by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as follows: WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 an attorney's fees. With Costs against defendants.

The facts of the case as found by the trial court are as follows: On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the said amount inspire of repeated demands and the obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest and service charge. On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum. Father and Son made a partial payment on the May 3, 1966 promissory Note but none on the June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30, 1969 including accrued interest and service charge. The three Promissory Notes stipulated that any interest due if not paid at the end of every month shall be added to the total amount then due, the whole amount to bear interest at the rate of 12% per annum until fully paid; and in case of collection through an attorney-at-law, the makers shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in no case shall be leas than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts and other credit accommodations extended to defendants as security for the payment of said sum and the interest thereon, and that defendants do hereby remise, release and quitclaim all its rights, title, and interest in and to the accounts receivables. Further. (1) The title and right of possession to said accounts receivable is to remain in the assignee, and it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in connection with the collection of said accounts, it agrees to do as agent and representative of the Assignee and in trust for said Assignee ; xxx xxx xxx (6) The Assignor guarantees the existence and legality of said accounts receivable, and the due and punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignor warrants the solvency and credit worthiness of each and every account. (7) The Assignor does hereby guarantee the payment when due on all sums payable under the contracts giving rise to the accounts receivable ... including reasonable attorney's fees in enforcing any rights against the debtors

of the assigned accounts receivable and will pay upon demand, the entire unpaid balance of said contract in the event of non-payment by the said debtors of any monthly sum at its due date or of any other default by said debtors; xxx xxx xxx (9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoever there is or in the future there will be justly owing from the Assignor to the Assignee ... In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to defendants on the basis and by reason of certain contracts entered into by the defunct Emergency Employment Administration (EEA) with defendants for the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; that non-payment of the notes was due to the failure of the Commission to pay defendants after the latter had complied with their contractual obligations; and that the President of plaintiff Bank took steps to collect from the Commission, but no collection was effected. For failure of defendants to pay the sums due on the Promissory Note, this action was instituted on November 13, 1969, originally against the Father, Son, and the latter's wife. Because the Father died, however, during the pendency of the suit, the case as against him was

dismiss under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against defendants Son and his wife for the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of the amounts due as attorney's fees. Neither of the parties presented any testimonial evidence and submitted the case for decision based on their Stipulations of Fact and on then, documentary evidence. The issues, as defined by the parties are: (1) whether or not plaintiff claim is already considered paid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it is plaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record on Appeal, p. 29- 32). On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants filed with the lower court their notice of appeal together with the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record on Appeal, p. 42).

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error, that is THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION. As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1). In the resolution of May 30, 1980, the First Division of this Court ordered that the case be docketed and declared submitted for decision (Rollo, p. 33). On March 7, 1988, considering the length of time that the case has been pending with the Court and to determine whether supervening events may have rendered the case moot and academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from notice, and in case they fail to make the proper manifestation within the required period, (2) to consider the case terminated and closed with the entry of judgment accordingly made thereon (Rollo, p. 40). On April 27, 1988, appellee moved for a resolution of the appeal review interposed by defendants-appellants

(Rollo, p. 41). The major issues raised in this case are as follows: (1) whether or not the assignment of receivables has the effect of payment of all the loans contracted by appellants from appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collections of loan under the promissory notes which are plaintiffs bases in the action for collection in Civil Case No. 78178. Assignment of credit is an agreement by virtue of which the owner of a credit, known as the assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without the need of the consent of the debtor, transfers his credit and its accessory rights to another, known as the assignee, who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. ... It may be in the form of a sale, but at times it may constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has against a third person, or it may constitute a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without transmitting ownership. The character that it may assume determines its requisites and effects. its regulation, and the capacity of the parties to execute it; and in every case, the obligations between assignor and

assignee will depend upon the judicial relation which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-166). There is no question as to the validity of the assignment of receivables executed by appellants in favor of appellee bank. The issue is with regard to its legal effects. I It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not transfer the ownership of the receivables to appellee bank and release appellants from their loans with the bank incurred under promissory notes Nos. 11487,11515 and 11699. The Deed of Assignment provided that it was for and in consideration of certain credits, loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by appellee bank, and as security for the payment of said sum and the interest thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will also stand as a continuing guaranty for future loans of appellants to appellee bank and correspondingly the assignment shall also extend to all the accounts receivable; appellants

shall also obtain in the future, until the consideration on the loans secured by appellants from appellee bank shall have been fully paid by them (No. 9). The position of appellants, however, is that the deed of assignment is a quitclaim in consideration of their indebtedness to appellee bank, not mere guaranty, in view of the following provisions of the deed of assignment: ... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title and interest in the accounts receivable described hereunder. (Emphasis supplied by appellants, first par., Deed of Assignment). ... that the title and right of possession to said account receivable is to remain in said assignee and it shall have the right to collect directly from the debtor, and whatever the Assignor does in connection with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27) The character of the transactions between the parties is not, however, determined by the language used in the document but by their intention. Thus, the Court, quoting from the American Jurisprudence (68 2d, Secured Transaction, Section 50) said: The characters of the transaction between the parties is

to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge. However, even though a transfer, if regarded by itself, appellate to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been Id that a transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily exporting conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and ambiguous language or other circumstances excluding an intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]). Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be said to have been constituted by virtue of a dation in payment for appellants' loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"), while

promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in the deed of assignment. At the time the assignment was executed, there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Article 1292, New Civil Code). Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a continuing guaranty for whatever sums would be owing by defendants to plaintiff, as stated in stipulation No. 9 of the deed. In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v. Court of Appeals, supra). In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her rights, title and interest in the land on which the buildings were constructed to secure an overdraft from a bank amounting to P110,000.00 which was increased to P150,000.00, then to P165,000.00 was

considered by the Court to be documents of mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in effect a mortgage and not an absolute conveyance of title which confers ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]). II As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine Fisheries Commission before it can proceed against appellants for collection of loans under their promissory notes, must also be answered in the negative. The obligation of appellants under the promissory notes not having been released by the assignment of receivables, appellants remain as the principal debtors of appellee bank rather than mere guarantors. The deed of assignment merely guarantees said obligations. That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the essence of a contract of pledge or mortgage that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to

the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other. Appellee bank did try to collect on the pledged receivables. As the Emergency Employment Agency (EEA) which issued the receivables had been abolished, the collection had to be coursed through the Office of the President which disapproved the same (Record on Appeal, p. 16). The receivable became virtually worthless leaving appellants' loans from appellee bank unsecured. It is but proper that after their repeated demands made on appellants for the settlement of their obligations, appellee bank should proceed against appellants. It would be an exercise in futility to proceed against a defunct office for the collection of the receivables pledged. WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial court is affirmed in toto. SO ORDERED. Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

Separate Opinions

FELICIANO, J., concurring: I quite agree with the general reasoning of and the results reached by my distinguished brother Bidin in respect of both of the principal issues he addressed in his opinion. I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the character of the transactions between the parties is not, however, determined by the language used in the document but by their intention.' This statement is basically not exceptionable, so far as it goes. It might, however, be borne in mind that the intent of the parties to the transaction is to be determined in the first instance, by the very language which they use. The deed of assignment contains language which suggest that the parties intended to effect a complete alienation of title to and rights over the receivables which are the subject of the assignment. This language is comprised of works like "remise," "release and quitclaim" and clauses like "the title and right of possession to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor." The same intent is also suggested by the use of the words "agent and representative of the assignee" in reffering to the assignor.

The point that appears to me to be worth making is that although in its form, the deed of assignment of receivables partakes of the nature of a complete alienation of the receivables assigned, such form should be taken in conjunction with, and indeed must be qualified and controlled by, other language showing an intent of the parties that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal; obligation owed by the assignor to the assignee. Title moves from assignor to asignee but that title is defeasible being designed to collateralize the principal obligation. Operationally, what this means is that the assignee is burdened with an obligation of taking the proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor. The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables assigned, essentially for the convenience of the assignee. Without such formally unlimited conveyance of title, the assignee would have to treat the deed of assignment as no more than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case, should the assignee seek to realize upon the security given to him through the deed of assignment (which would then have to comply with the documentation and registration requirements of a pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned and

place them on public sale and there acquire the same. It should be recalled that under the principle which forbids a pactum commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply taking and appropriating the personal property turned over to him as security for the payment of a principal obligation. A deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up front. (Emphasis supplied) The foregoing is applicable where, as in the present instance, the deed of assignment of receivables combines elements of both a complete or absolute alienation of the credits being assigned and a security arrangement to assure payment of a principal obligation. Where the second element is absent, that is, where there is nothing to indicate that the parties intended the deed of assignment to function as a security device, it would of course follow that the simple absolute conveyance embodied in the deed of assignment would be operative; the assignment would constitute essentially a mode of payment or dacion en pago. Put a little differently, in order that a deed of assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the instant case. Finally, it might be noted that that deed simply follows a form in standard use in commercial banking.

G.R. No. L-60705 June 28, 1989 INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners, vs. PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF APPEALS, respondents. G.R. No. L-60907 June 28, 1989 OVERSEAS BANK OF MANILA, petitioner, vs. COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L. SANTOS, respondents.

REGALADO, J.: In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No. 60705), and Overseas Bank of Manila (G.R. No. 60907) appeal from the decision of the Court of Appeals, 1 the decretal portion of which states: WHEREFORE, with the modification that appellee Overseas Bank of Manila is ordered to pay to the appellant Raul Santos the sum of P 700,000.00 due under the time deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic) interest per annum from date of issue until fully paid, the appealed decision is affirmed in all other

respects. In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC and Raul L. Santos (hereafter, Santos) seek the dismissal of the complaint filed by the Philippine National Bank (hereafter, PNB), or in the event that they be held liable thereunder, to revive and affirm that portion of the decision of the trial court ordering Overseas Bank of Manila (hereafter, OBM) to pay IRC and Santos whatever amounts the latter will pay to PNB, with interest from the date of payment. 2 On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court insofar as it holds OBM liable for interest on the time deposit with it of Santos corresponding to the period of its closure by order of the Central Bank. 3 In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower court, 4 narrated the antecedents of this case in this wise: The facts of this case are not seriously disputed by any of the parties. They are set forth in the decision of the trial court as follows: Under date 11 January 1967 defendant Raul L. Santos made a time deposit with defendant OBM in the amount of P 500,000.00. (Exhibit-10 OBM) and was issued a Certificate of Time Deposit No. 2308 (Exhibit 1 Santos, Exhibit D). Under date 6 February 1967 defendant Raul

L. Santos also made a time deposit with defendant OBM in the amount of P 200,000.00 (Exhibit 11 OBM and was issued certificate of Time Deposit No. 2367 (Exhibit 2 Santos, Exhibit E). Under date 9 February 1967 defendant IRC thru its President-defendant Raul L. Santos, applied for a loan and/or credit line (Exhibit A) in the amount of P 700,000.00 with plaintiff bank. To secure the said loan, defendant Raul L. Santos executed on August 11, 1967 a Deed of Assignment (Exhibit C) of the two time deposits (Exhibits 1-Santos and 2 Santos, also Exhibits D and E) in favor of plaintiff. Defendant OBM gave its conformity to the assignment thru letter dated 11 August 1967 (Exhibit F). On the same date, defendant IRC thru its President Raul L. Santos, also executed a Deed of Conformity to Loan Conditions (Exhibit G). The defendant OBM after the due dates of the time deposit certificates, did not pay plaintiff PNB. Plaintiff demanded payment from defendants IRC and Raul L. Santos (Exhibit K) and from defendant OBM (Exhibit L). Defendants IRC and Raul L. Santos replied that the obligation (loan) of defendant IRC was deemed paid with the irrevocable assignment of the time deposit certificates (Exhibits 5 Santos, 6 Santos and 7 Santos). On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC and Santos the loan of P 700,000.00 with interest as well as attomey's fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos'

time deposit certificates with interest, plus exemplary and corrective damages, attorney's fees, and cost. In their answer to the complaint, IRC and Santos alleged that PNB has no cause of action against them because their obligation to PNB was fully paid or extinguished upon the' irrevocable' assignment of the time deposit certificates, and that they are not answerable for the insolvency of OBM They filed a counterclaim for damages against PNB and a cross-claim against OBM alleging that OBM acted fraudulently in refusing to pay the time deposit certificates to PNB resulting in the filing of the suit against them by PNB, and that, therefore, OBM should pay them whatever amount they may be ordered by the court to pay PNB with interest. They also asked that OBM be ordered to pay them compensatory, moral, exemplary and corrective damages. In its answer to the complaint, OBM denied knowledge of the time deposit certificates because the alleged time deposit of Santos 'does not appear in its books of account. Whereupon, IRC and Santos, with leave of court, filed a third-party complaint against Emerito B. Ramos, Jr., president of OBM and Rodolfo R. Sunico, treasurer of said bank, who allegedly received the time deposits of Santos and issued the certificates therefor. Answering the third-party complaint, Ramos and Sunico alleged that IRC and Santos have no cause of action

against them because they received and signed the time deposit certificates as officers of OBM that the time deposits are recorded in the subsidiary ledgers of the bank and are 'civil liabilities of the defendant OBM On November 18, 1970, OBM filed an amended or supplemental answer to the complaint, acknowledging the certificates of time deposit that it issued to Santos, and admitting its failure to pay the same due to its distressed financial situation. As affirmative defenses, it alleged that by reason of its state of insolvency its operations have been suspended by the Central Bank since August 1, 1968; that the time deposits ceased to earn interest from that date; that it may not give preference to any depositor or creditor; and that payment of the plaintiffs claim is prohibited. On January 30, 1976, the lower court rendered judgment for the plaintiff, the dispositive portion of which reads as foIlows WHEREFORE, judgment is hereby rendered, ordering: 1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the plaintiff, jointly and solidarily, the total amount of P 700,000.00 plus interest at the rate of 9% per annum from maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively (Exhibits M and I), plus 1-1/ 2% additional interest effective February 28, 1968 and additional penalty interest of 1% per annum of the Id amount of P

700,000.00 from the time of maturity of Id loan up to the time the said amount of P 700,000.00 is actually paid to the plaintiff; 2. The defendants topay l0% of the amount of P 700,000.00 as and for attorney's fees; 3. The defendant Overseas Bank of Manila to pay crossplaintiffs Integrated Realty Corporation and Raul L. Santos whatever amounts the latter will pay to the plaintiff with interest from date of payment; 4. The defendant Overseas Bank of Manila to pay crossplaintiffs Integrated Realty Corporation and Raul L. Santos the amount of P 10,000.00 as and for attorney's fees; 5. The third-party complaint and cross-claim dismissed; 6. The defendant Overseas Bank of Manila to pay the costs. SO ORDERED. 5 IRC Santos and OBM all appealed to the respondent Court of Appeals. As stated in limine, on March 16, 1982 respondent court promulgated its appealed decision, with a modification and the deletion of that portion of the judgment of the trial court ordering OBM to pay IRC and Santos whatever amounts they will pay to PNB with interest from the date of payment.

Therein defendants-appellants, through separate petitions, have brought the said decision to this Court for review. 1. The first issue posed before us for resolution is whether the liability of IRC and Santos with PNB should be deemed to have been paid by virtue of the deed of assignment made by the former in favor of PNB, which reads: KNOW ALL MEN BY THESE PRESENTS; I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661 Richmond St., Mandaluyong, Rizal for and in consideration of certain loans, overdrafts and other credit accommodations granted or those that may hereafter be granted to me/us by the PHILIPPINE NATIONAL BANK, have assigned, transferred and conveyed and by these presents, do hereby assign, transfer and convey by way of security unto said PHILIPPINE NATIONAL BANK its successors and assigns the following Certificates of Time Deposit issued by the OVERSEAS BANK OF MANILA, its CONFORMITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor of RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN HUNDRED THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, .... xxx xxx xxx

It is also understood that the herein Assignor/s shall remain hable for any outstanding balance of his/their obligation if the Bank is unable to actually receive or collect the above assigned sums , monies or properties resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. 6 xxx xxx xxx Respondent Court of Appeals did not consider the aforesaid assignment as payment, thus: The contention of IRC and Santos that the irrevocable assignment of the time deposit certificates to PNB constituted payment' of their obligation to the latter is not well taken. Where a certificate of deposit in a bank, payable at a future day, was handed over by a debtor to his creditor, it was not payment, unless there was an express agreement on the part of the creditor to receive it as such, and the question whether there was or was not such an agreement, was one of facts to be decided by the jury. (Downey vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and Banking, p. 200). 7 We uphold respondent court on this score. In Lopez vs. Court of appeals, et al., 8 petitioner Benito Lopez obtained a loan for P 20,000.00 from the

Prudential Bank and Trust Company. On the same day, he executed a promissory note in favor of the bank and, in addition, he executed a surety bond in which he, as principal, and Philippine American General Insurance Co., Inc. (Philamgen), as surety, bound themselves jointly and severally in favor of the bank for the payment of the loan. On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby he agreed to indemnify the company against any damages which the latter may sustain in consequence of having become a surety upon the bond. At the same time, Lopez executed a deed of assignment of his shares of stock in the Baguio Military Institute, Inc. in favor of Philamgen. When Lopez' obligation matured without being settled, Philamgen caused the transfer of the shares of stocks to its name in order that it may sell the same and apply the proceeds thereof in payment of the loan to the bank. However, when no payment was still made by the principal debtor or surety, the bank filed a complaint which compelled Philamgen to pay the bank. Thereafter, Philamgen filed an action to recover the amount of the loan against Lopez. The trial court therein held that the obligation of Lopez was deemed paid when his shares of stocks were transferred in the name of Philamgen. On appeal, the Court of Appeals ruled that Lopez was still liable to Philamgen because, pending payment, Philamgen was merely holding the stock as security for the payment of Lopez' obligation. In upholding the finding therein of the Court of Appeals, We held that:

Notwithstanding the express terms of the 'Stock Assignment Separate from Certificate', however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P 20,000.00 from Prudential Bank, Lopez executed a promissory note for P 20,000.00, plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full and faithful performance of his obligation under the promissory note with Philamgen as his surety. In return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not only an indemnity agreement but also a stock assignment. The indemnity agreement and stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P l,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale

for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. ... Along the same vein, in the case at bar it would not have been necessary on the part of IRC and Santos to execute promissory notes in favor of PNB if the assignment of the time deposits of Santos was really intended as an absolute conveyance. There are cogent reasons to conclude that the parties intended said deed of assignment to complement the promissory notes. In declaring that the deed of assignment did not operate as payment of the loan so as to extinguish the obligations of IRC and Santos with PNB, the trial court advanced several valid bases, to wit: a. It is clear from the Deed of Assignment that it was only by way of security; xxx xxx xxx b. The promissory notes (Exhibits H and I) were executed on August 16, 1967. If defendants IRC and Raul L. Santos, upon executing the Deed of Assignment on August 11, 1967 had already paid their loan of P 700,000.00 or otherwise extinguished the same, why were the promissory notes made on August 16, 1967 still executed by IRC and signed by Raul L. Santos as

President? c. In the application for a credit line (Exhibit A),the time deposits were offered as collateral. 9 For all intents and purposes, the deed of assignment in this case is actually a pledge. Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been absolute, its object and character might still be qualified and explained by a contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer, and that accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances

excluding an intent to pledge. 10 The facts and circumstances leading to the execution of the deed of assignment, as found by the court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the pledge have the free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. 11 The further requirement that the thing pledged be placed in the possession of the creditor, or of a third person by common agreement 12 was complied with by the execution of the deed of assignment in favor of PNB. It must also be emphasized that Santos, as assignor, made an express undertaking that he would remain liable for any outstanding balance of his obligation should PNB be unable to actually receive or collect the assigned sums resulting from any agreements, orders or decisions of the court or for any other cause whatsoever. The term "for any cause whatsoever" is broad enough to include the situation involved in the present case. Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and Santos should be held liable to PNB for the amount of the loan with the corresponding interest thereon.

2. We find nothing illegal in the interest of one and onehalf percent (1-1/2%) imposed by PNB pursuant to the resolution of its Board which presumably was done in accordance with ordinary banking procedures. Not only did IRC and Santos fail to overcome the presumption of regularity of business transactions, but they are likewise estopped from questioning the validity thereof for the first time in this petition. There is nothing in the records to show that they raised this issue during the trial by presenting countervailing evidence. What was merely touched upon during the proceedings in the court below was the alleged lack of notice to them of the board resolution, but not the veracity or validity thereof. 3. On the issue of whether OBM should be held liable for interests on the time deposits of IRC and Santos from the time it ceased operations until it resumed its business, the answer is in the negative. We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 13 that: It is a matter of common knowledge, which We take judicial notice of, that what enables a bank to pay stipulated interest on money deposited with it is that thru the other aspects of its operation it is able to generate funds to cover the payment of such interest. Unless a bank can lend money, engage in international transactions, acquire foreclosed mortgaged properties or their proceeds and generally engage in other banking and financing activities from which it can derive income, it

is inconceivable how it can carry on as a depository obligated to pay stipulated interest. Conventional wisdom dictated; this inexorable fair and just conclusion. And it can be said that all who deposit money in banks are aware of such a simple economic proposition petition. Consequently, it should be deemed read into every contract of deposit with a bank that the obligation to pay interest on the deposit ceases the moment the operation of the bank is completely suspended by the duly constituted authority, the Central Bank. We consider it of trivial consequence that the stoppage of the bank's operation by the Central Bank has been subsequently declared illegal by the Supreme Court, for before the Court's order, the bank had no alternative under the law than to obey the orders of the Central Bank. Whatever be the juridical significance of the subsequent action of the Supreme Court, the stubborn fact remained that the petitioner was totally crippled from then on from earning the income needed to meet its obligations to its depositors. If such a situation cannot, strictly speaking, be legally denominated as 'force majeure', as maintained by private respondent, We hold it is a matter of simple equity that it be treated as such. The Court further adjured that: Parenthetically, We may add for the guidance of those who might be concerned, and so that unnecessary litigations be avoided from further clogging the dockets of the courts, that in the light of the considerations

expounded in the above opinion, the same formula that exempts petitioner from the payment of interest to its depositors during the whole period of factual stoppage of its operations by orders of the Central Bank, modified in effect by the decision as well as the approval of a formula of rehabilitation by this Court, should be, as a matter of consistency, applicable or followed in respect to all other obligations of petitioner which could not be paid during the period of its actual complete closure. We cannot accept the holding of the respondent Court of Appeals that the above-cited decisions apply only where the bank is in a state of liquidation. In the very case aforecited, this issue was likewise raised and We resolved: Thus, Our task is narrowed down to the resolution of the legal problem of whether or not, for purposes of the payment of the interest here in question, stoppage of the operations of a bank by a legal order of liquidation may be equated with actual cessation of the bank's operation, not different, factually speaking, in its effects, from legal liquidation the factual cessation having been ordered by the Central Bank. In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65 Phil. 395, this Court held: As to the second assignment of error, this Court, in G.R. No. 43682, In re Liquidation of the Mercantile Bank of China, Tan Tiong Tick, claimant and appellant vs.

American Apothecaries, C., et al., claimants and appellees, through Justice Imperial, held the following: 4. The court held that the appellant is not entitled to charge interest on the amounts of his claims, and this is the object of the second assignment of error, Upon this point a distinction must be made between the interest which the deposits should earn from their existence until the bank ceased to operate, and that which they may earn from the time the bank's operations were stopped until the date of payment of the deposits. As to the firstclass, we hold that it should be paid because such interest has been earned in the ordinary course of the bank's businesses and before the latter has been declared in a state of liquidation. Moreover, the bank being authorized by law to make use of the deposits with the limitation stated, to invest the same in its business and other operations, it may be presumed that it bound itself to pay interest to the depositors as in fact it paid interest prior to the dates of the Id claims. As to the interest which may be charged from the date the bank ceased to do business because it was declared in a state of liquidation, we hold that the said interest should not be paid. The Court of Appeals considered this ruling inapplicable to the instant case, precisely because, as contended by private respondent, the said Apothecaries case had in fact in contemplation a valid order of liquidation of the bank concerned, whereas here, the order of the Central Bank of August 13, 1968 completely forbidding herein

petitioner to do business preparatory to its liquidation was first restrained and then nullified by this Supreme Court. In other words, as far as private respondent is concerned, it is the legal reason for cessation of operations, not the actual cessation thereof, that matters and is decisive insofar as his right to the continued payment of the interest on his deposit during the period of cessation is concerned. In the light of the peculiar circumstances of this particular case, We disagree. It is Our considered view, after mature deliberation, that it is utterly unfair to award private respondent his prayer for payment of interest on his deposit during the period that petitioner bank was not allowed by the Central Bank to operate. 4. Lastly, IRC and Santos claim that OBM should reimburse them for whatever amounts they may be adjudged to pay PNB by way of compensation for damages incurred, pursuant to Articles 1170 and 2201 of the Civil Code. It appears that as early as April, 1967, the financial situation of OBM had already caused mounting concern in the Central Bank. 14 On December 5, 1967, new directors and officers drafted from the Central Bank (CB) itself, the Philippine National Bank (PNB) and the Development Bank of the Philippines (DBP) were elected and installed and they took over the management and control of the Overseas Bank. 15 However, it was only on July 31, 1968 when OBM was excluded from clearing

with the CB under Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968, pursuant to Resolution No. 1290 of the CB OBM's operations were suspended. 16 These CB resolutions were eventually annulled and set aside by this Court on October 4, 1971 in the decision rendered in the herein cited case of Ramos. Thus, when PNB demanded from OBM payment of the amounts due on the two time deposits which matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to the faithful compliance by OBM of its liabilities thereunder. Consequently, for having incurred in delay in the performance of its obligation, OBM should be held liable for damages. 17 When respondent Santos invested his money in time deposits with OBM they entered into a contract of simple loan or mutuum, 18 not a contract of deposit. While it is true that under Article 1956 of the Civil Code no interest shall be due unless it has been expressly stipulated in writing, this applies only to interest for the use of money. It does not comprehend interest paid as damages. 19 OBM contends that it had agreed to pay interest only up to the dates of maturity of the certificates of time deposit and that respondent Santos is not entitled to interest after the maturity dates had expired, unless the contracts are renewed. This is true with respect to the stipulated interest, but the obligations consisting as they did in the payment of money, under Article 1108 of the Civil Code he has the right to recover damages resulting from the default of OBM and the measure of such

damages is interest at the legal rate of six percent (6%) per annum on the amounts due and unpaid at the expiration of the periods respectively provided in the contracts. In fine, OBM is being required to pay such interest, not as interest income stipulated in the certificates of time deposit, but as damages for failure and delay in the payment of its obligations which thereby compelled IRC and Santos to resort to the courts. The applicable rule is that legal interest, in the nature of damages for non-compliance with an obligation to pay a sum of money, is recoverable from the date judicial or extra-judicial demand is made, 20 Which latter mode of demand was made by PNB, after the maturity of the certificates of time deposit, on March 1, 1968. 21 The measure of such damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon in the certificates of deposit 22 Which is six and onehalf percent (6-1/2%). Such interest due or accrued shall further earn legal interest from the time of judicial demand. 23 We reject the proposition of IRC and Santos that OBM should reimburse them the entire amount they may be adjudged to pay PNB. It must be noted that their liability to pay the various interests of nine percent (9%) on the principal obligation, one and one-half percent (1-1/2%) additional interest and one percent (1%) penalty interest is an offshoot of their failure to pay under the terms of the two promissory notes executed in favor of PNB. OBM was never a party to Id promissory notes. There is,

therefore, no privity of contract between OBM and PNB which will justify the imposition of the aforesaid interests upon OBM whose liability should be strictly confined to and within the provisions of the certificates of time deposit involved in this case. In fact, as noted by respondent court, when OBM assigned as error that portion of the judgment of the court a quo requiring OBM to make the disputed reimbursement, IRC and Santos did not dispute that objection of OBM Besides, IRC and Santos are not without fault. They likewise acted in bad faith when they refuse to comply with their obligations under the promissory notes, thus incurring liability for all damages reasonably attributable to the non-payment of said obligations. 24 WHEREFORE, judgment is hereby rendered, ordering: 1. Integrated Realty Corporation and Raul L. Santos to pay Philippine National Bank, jointly and severally, the total amount of seven hundred thousand pesos (P 700,000.00), with interest thereon at the rate of nine percent (9%) per annum from the maturity dates of the two promissory notes on January 11 and February 6, 1968, respectively, plus one and one-half percent (11/2%) additional interest per annum effective February 28, 1968 and additional penalty interest of one percent (1%) per annum of the said amount of seven hundred thousand pesos (P 700,000.00) from the time of maturity of said loan up to the time the said amount of seven hundred thousand pesos (P 700,000.00) is fully paid to Philippine National Bank.

2. Integrated Realty Corporation and Raul L. Santos to pay solidarily Philippine National Bank ten percent (10%) of the amount of seven hundred thousand pesos (P 700,000.00) as and for attorney's fees. 3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos the sum of seven hundred thousand pesos (P 700,000.00) due under Time Deposit Certificates Nos. 2308 and 2367, with interest thereon of six and one-half percent (6-1/2%) per annum from their dates of issue on January 11, 1967 and February 6, 1967, respectively, until the same are fully paid, except that no interest shall be paid during the entire period of actual cessation of operations by Overseas Bank of Manila; 4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos six and one-half per cent (6-1/2%) interest in the concept of damages on the principal amounts of said certificates of time deposit from the date of extrajudicial demand by PNB on March 1, 1968, plus legal interest of six percent (6%) on said interest from April 6, 1968, until fifth payment thereof, except during the entire period of actual cessation of operations of said bank. 5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos ten thousand pesos (P l0,000.00) as and for attorney's fees. SO ORDERED.

Melencio-Herrera, (Chairperson), Paras, Padilla and Sarmiento, JJ., concur. G.R. No. L-78519 September 26, 1989 VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners, vs. HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC., respondents. Francisco A. Lara, Jr. for petitioner. D. T. Ramos and Associates for respondent Family Savings Bank. Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.: This is a petition for review on certiorari to annul and set aside the Court of Appeals' decision dated October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of the trial court in favor of the private respondents in an action to recover the petitioners' time deposits in the respondent Family Savings Bank. Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading Enterprises, Inc. (hereafter "CAMS Trading" for brevity).

To guaranty payment for her cement withdrawals, she executed in favor of Cams Trading deeds of assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank (hereafter the Bank). Except for the serial numbers and the dates of the time deposit certificates, the deeds of assignment, which were prepared by her own lawyer, uniformly provided ... That the assignment serves as a collateral or guarantee for the payment of my obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company, per separate contract executed between us. On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the sum of P314,639.75. It asked that it be allowed to encash the time deposit certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams Trading was P404,500. After verbally advising Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining her verbal conformity thereto, the Bank agreed to encash the certificates.It delivered to Cams Trading the sum of P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper signatures. Upon being informed of the encashment, Mrs. Chu demanded from the Bank and Cams Trading that her time deposit be restored. When neither complied, she filed a complaint to recover the sum of P283,737.75 from them. The case was docketed

in the Regional Trial Court of Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861. In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit. Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal of her complaint. In this petition for review, she alleges that the Court of Appeals erred: 1. In not annulling the encashment of her time deposit certificates as a pactum commissorium; and 2. In not finding that the obligations secured by her time deposits had already been paid. We find no merit in the petition for review. The Court of Appeals found that the deeds of assignment were contracts of pledge, but, 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 was to present them to the bank for encashment after due notice to the debtor. The encashment of the deposit certificates was not a

pacto commissorio which is prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property whose value is much more than the debt. 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. Whether the debt had already been paid as now alleged by the debtor, is a factual question which the Court of Appeals found not to have been proven for the evidence which the debtor sought to present on appeal, were receipts for payments made prior to July 18, 1980. Since the petitioner signed on July 18, 1980 a letter admitting her indebtedness to be in the sum of P404,500, and there is no proof of payment made by her thereafter to reduce or extinguish her debt, the application of her time deposits, which she had assigned to the creditor to secure the payment of her debt, was proper. The Court of Appeals did not commit a reversible error in holding that it was so. WHEREFORE, the petition for review is denied. Costs against the appellant.

SO ORDERED. Narvasa, Cruz and Medialdea, JJ., concur. Gancayco, J., took no part. G.R. No. 97753 August 10, 1992 CALTEX (PHILIPPINES), INC., petitioner, vs. COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents. Bito, Lozada, Ortega & Castillo for petitioners. Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.: This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by herein petitioner against respondent bank. The undisputed background of this case, as found by the court a quo and adopted by respondent court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280); CTD CTD Dates Serial Nos. Quantity Amount 22 Feb. 82 90101 to 90120 20 P80,000 26 Feb. 82 74602 to 74691 90 360,000 2 Mar. 82 74701 to 74740 40 160,000 4 Mar. 82 90127 to 90146 20 80,000 5 Mar. 82 74797 to 94800 4 16,000 5 Mar. 82 89965 to 89986 22 88,000 5 Mar. 82 70147 to 90150 4 16,000 8 Mar. 82 90001 to 90020 20 80,000 9 Mar. 82 90023 to 90050 28 112,000 9 Mar. 82 89991 to 90000 10 40,000 9 Mar. 82 90251 to 90272 22 88,000 Total 280 P1,120,000 ===== ======== 2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuel products from the latter (Original Record, p. 208). 3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost

CTDs (TSN, February 9, 1987, pp. 48-50). 4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561). 5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to preterminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62). 6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 5468).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-terminate the same. 8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564). 9. No copy of the requested documents was furnished herein defendant. 10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566). 11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131). 12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary

damages as well as attorney's fees. After trial, the court a quo rendered its decision dismissing the instant complaint. 3 On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer. 4 The instant petition is bereft of merit. A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involved in this recourse. SECURITY BANK AND TRUST COMPANY 6778 Ayala Ave., Makati No. 90101 Metro Manila, Philippines SUCAT OFFICEP 4,000.00 CERTIFICATE OF DEPOSIT Rate 16% Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____ This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS

Pesos, Philippine Currency, repayable to said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at the rate of 16% per cent per annum. (Sgd. Illegible) (Sgd. Illegible) AUTHORIZED SIGNATURES 5 Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows: . . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after the word "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" a certain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" on the period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not to whoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said depositor the amount indicated thereon at the stipulated date. 6 We disagree with these findings and conclusions, and

hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz. xxx xxx xxx Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificates states that it was Angel dela Cruz? witness: a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount. Atty. Calida: q And no other person or entity or company, Mr. Witness? witness: a None, your Honor. 7 xxx xxx xxx Atty. Calida: q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned? witness: a Angel dela Cruz is the depositor. 8

xxx xxx xxx On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. 9 In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said. 11 Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. If it was really the intention of respondent bank to pay the

amount to Angel de la Cruz only, it could have with facility so expressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transaction between them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12 The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz,

as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself. In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16 If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily said so, instead of using the words "to

guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be adverse if produced. 19 Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos: . . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom: The character of the transaction between the parties is to be determined by their intention, regardless of what language was used or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as a pledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself, appears to have been

absolute, its object and character might still be qualified and explained by contemporaneous writing declaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by the debtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debt continues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importing conveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used in pledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clear and unambiguous language or other circumstances excluding an intent to pledge. Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by reason

of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for. The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide: Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed. Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument. Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the

CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26 On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares: Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property. Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question. Finally, petitioner faults respondent court for refusing to

delve into the question of whether or not private respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28 On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not included in the stipulation of the parties and in the statement of issues submitted by them to the trial court. 29 The issues agreed upon by them for resolution in this case are: 1. Whether or not the CTDs as worded are negotiable instruments. 2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of the assignment (Annex "C"). 3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor's outstanding account with defendant, if any. 4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein. 5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other. As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31 Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact which they intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other questions on appeal. 32 To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised on a multitude of other legal

reasons and causes of action, of which respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pretrial delimitation of issues a useless exercise. 33 Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself. Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competent jurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well as in order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.) xxx xxx xxx The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but discretional. 34

The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and possibility. 36 Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent requirement therefor. WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is hereby AFFIRMED. SO ORDERED. ALLIED BANKING CORPORATION, Petitioner, vs. HON. SECRETARY SEDFREY ORDOEZ (Public Respondent) and ALFREDO CHING (Private Respondent), Respondents.

DECISION

same, if unsold within the stated period. Out of the said obligation resulted an overdue amount of P1,475,274.09. Despite repeated demands, PBM failed and refused to either turn over the proceeds of the sale of the goods or to return the same. On 7 September 1984, petitioner filed a criminal complaint against private respondent for violation of PD 115 before the office of the Provincial Fiscal of Rizal. After preliminary investigation wherein private respondent failed to appear or submit a counter-affidavit and even refused to receive the subpoena, the Fiscal found a prima facie case for violation of PD 115 on four (4) counts and filed the corresponding information in court. Private respondent appealed the Fiscal's resolution to the Department of Justice on three (3) grounds: 1. Lack of proper preliminary investigation; 2. The Provincial Fiscal of Rizal did not have jurisdiction over the case, as respondent's obligation was purely civil; 3. There had been a novation of the obligation by the substitution of the person of the Rehabilitation Receivers in place of both PBM and private respondent Ching. Then Secretary of Justice (now Senator) Neptali A. Gonzales, in a 24 September 1986 letter/resolution, 1 held: "Your contention that respondent's obligation was purely a civil one, is without any merit. The four (4) Trust

PADILLA, J.:

In this special civil action for Certiorari, the interpretation by the Department of Justice of the penal provision of PD 115, the Trust Receipts Law, is assailed by petitioner. The relevant facts are as follows: On 23 January 1981, Philippine Blooming Mills (PBM, for short) thru its duly authorized officer, private respondent Alfredo Ching, applied for the issuance of commercial letters of credit with petitioner's Makati branch to finance the purchase of 500 M/T Magtar Branch Dolomites and one (1) Lot High Fired Refractory Sliding Nozzle Bricks. Petitioner issued an irrevocable letter of credit in favor of Nikko Industry Co., Ltd. (Nikko) by virtue of which the latter drew four (4) drafts which were accepted by PBM and duly honored and paid by the petitioner bank.:- nad To secure payment of the amount covered by the drafts, and in consideration of the transfer by petitioner of the possession of the goods to PBM, the latter as entrustee, thru private respondent, executed four (4) Trust Receipt Agreements with maturity dates on 19 May, 3 and 24 June 1981 acknowledging petitioner's ownership of the goods and its (PBM'S) obligation to turn over the proceeds of the sale of the goods, if sold, or to return the

Receipt Agreements entered into by respondent and complainant appear regular in form and in substance. Their agreement regarding interest, not being contrary to law, public policy or morals, public order or good custom, is a valid stipulation which does not change the character of the said Trust Receipt Agreements. Further, as precisely pointed out by complainant, raw materials for manufacture of goods to be ultimately sold are proper objects of a trust receipt. Thus, respondent's failure to remit to the complainant proceeds of the sale of the finished products if sold or the finished products themselves if not sold, at the maturity dates of the trust receipts, constitutes a violation of P.D. 115." 2 A motion for reconsideration alleged that, as PBM was under rehabilitation receivership, no criminal liability can be imputed to herein respondent Ching. On 17 March 1987, Undersecretary Silvestre H. Bello III denied said motion. The pertinent portion of the denial resolution states::-cralaw "It cannot be denied that the offense was consummated long before the appointment of rehabilitation receivers. The filing of a criminal case against respondent Ching is not only for the purpose of effectuating a collection of a debt but primarily for the purpose of punishing an offender for a crime committed not only against the complaining witness but also against the state. The crime of estafa for violation of the Trust Receipts Law is a special offense or mala prohibita. It is a fundamental rule in criminal law that when the crime is punished by a special law, the act alone, irrespective of its motives,

constitutes the offense. In the instant case the failure of the entrustee to pay complainant the remaining balance of the value of the goods covered by the trust receipt when the same became due constitutes the offense penalized under Section 13 of P.D. No. 115; and on the basis of this failure alone, the prosecution has sufficient evidence to establish a prima facie case (Res. No. 671, s. 1981; Allied Banking Corporation vs. Reinhard Sagemuller, et al., Provincial Fiscal of Rizal, September 18, 1981). "Likewise untenable is your contention that 'rehabilitation proceedings must stay the attempt to enforce a liability in view of Section 4 of P.D. No. 1758.' Section 4 of P.D. No. 1758, provides, among others: '. . . Provided, further, that upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended accordingly. "You will note that the term 'all actions for claims' refer only to actions for money claims but not to criminal liability of offenders." 3 Another motion for reconsideration was filed by respondent on 9 April 1987 to which an opposition was filed by the petitioner. Private respondent also filed a supplemental request for reconsideration dated 28 December 1987 with two (2) additional grounds, namely:

". . . 3) there is no evidence on record to show that respondent was in particeps criminis in the act complained of; and 4) there could be no violation of the trust receipt agreements because the articles imported by the corporation and subject of the trust receipts were fungible or consummable goods and do not form part of the steel product itself. These goods were not procured to be sold in whatever state or condition they were in or were supposed to be after the manufacturing process." 4 Because of private respondent's clarification that the goods subject of the trust receipt agreements were dolomites which were specifically used for patching purposes over the surface of furnaces and nozzle bricks which are insulating materials in the lower portion of the ladle which do not form part of the steel product itself, Justice Secretary Sedfrey Ordoez, on 11 January 1988, "rectified" his predecessor's supposed reversible error, and held::-cralaw ". . . it is clear that what the law contemplates or covers are goods which have, for their ultimate destination, the sale thereof or if unsold, their surrender to the entruster, this whether the goods are in their original form or in their manufactured/processed state. Since the goods covered by the trust receipts and subject matter of these proceedings are to be utilized in the operation of the equipment and machineries of the corporation, they could not have been contemplated as being covered by PD 115. It is axiomatic that penal statutes are strictly construed against the state and liberally in favor of the accused (People vs. Purisima, 86 SCRA 542, People vs.

Terrado, 125 SCRA 648). This means that penal statutes cannot be enlarged or extended by intendment, implication, or any equitable consideration (People vs. Garcia, 85 Phil. 651). Thus, not all transactions covered by trust receipts may be considered as trust receipt transactions defined and penalized under PD 115. x x x Apparently, the trust receipt agreements were executed as security for the payment of the drafts. As such, the main transaction was that of a loan. . . . In essence, therefore, the relationship between the Bank and the corporation, consequently, the respondent herein likewise included, is that of debtor and creditor. x x x WHEREFORE, premises considered, our resolution dated September 24, 1986, recorded 119 Resolution No. 456, series of 1986, and that dated March 17, 1987, the latter being necessarily dependent upon and incidental to the former, are hereby abrogated and abandoned. You are hereby directed to move for the withdrawal of the informations and the dismissal of the criminal cases filed in court . . ." 5 This time, petitioner Allied Bank filed a motion for reconsideration of the Ordoez resolution, which was resolved by the Department of Justice on 17 February 1988, enunciating that PD 115 covers goods or components of goods which are ultimately destined for sale. It concluded that:

". . . The goods subject of the instant case were shown to have been used and/or consumed in the operation of the equipment and machineries of the corporation, and are therefore outside the ambit of the provisions of PD 115 albeit covered by Trust Receipt agreements . . . Finally, it is noted that under the Sia vs. People (121 SCRA 655 (1983), and Vintola vs. Insular Bank of Asia and America (150 SCRA 578 (1987) rulings, the trend in the Supreme Court appears to be to the effect that trust receipts under PD 115 are treated as security documents for basically loan transactions, so much so that criminal liability is virtually obliterated and limiting liability of the accused to the civil aspect only. WHEREFORE, your motion for reconsideration is hereby DENIED." 6 From the Department of Justice, petitioner is now before this Court praying for writs of Certiorari and prohibition to annul the 11 January and 17 February 1988 DOJ rulings, mainly on two (2) grounds: 1. public respondent is without power or authority to declare that a violation of PD 115 is not criminally punishable, thereby rendering a portion of said law inoperative or ineffectual.: nad 2. public respondent acted with grave abuse of discretion in holding that the goods covered by the trust receipts are outside the contemplation of PD 115. Private and public respondents both filed their comments on the petition to which a consolidated reply was filed.

After the submission of the parties' respective memoranda, the case was calendared for deliberation. Does the penal provision of PD 115 (Trust Receipts Law) apply when the goods covered by a Trust Receipt do not form part of the finished products which are ultimately sold but are instead, utilized/used up in the operation of the equipment and machineries of the entrusteemanufacturer? The answer must be in the affirmative, Section 4 of said PD 115 says in part: "Sec. 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entrustee, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a 'trust receipt' wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves, if they are unsold or not otherwise disposed of, in accordance with the terms and

conditions specified in the trust receipt, . . ." Respondent Ching contends that PBM is not in the business of selling Magtar Branch Dolomites or High Fired Refractory Sliding Nozzle Bricks, it is a manufacturer of steel and steel products. But PBM, as entrustee under the trust receipts has, under Sec. 9 of PD 115, the following obligations, inter alia: (a) receive the proceeds of sale, in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to him or as appears on the trust receipt; (b) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (c) return the goods, documents or instruments in the event of non-sale, or upon demand of the entruster; and (d) observe all other terms and conditions of the trust receipt not contrary to the provisions of said Decree. 7 The trust receipts, there is an obligation to repay the entruster. 8 Their terms are to be interpreted in accordance with the general rules on contracts, the law being alert in all cases to prevent fraud on the part of either party to the transaction. 9 The entrustee binds himself to sell or otherwise dispose of the entrusted goods with the obligation to turn over to the entruster the proceeds if sold, or return the goods if unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. A violation of this undertaking constitutes estafa under Sec. 13, PD 115. And even assuming the absence of a clear provision in

the trust receipt agreement, Lee v. Rodil 10 and Sia v. CA 11 have held: Acts involving the violation of trust receipt agreements occurring after 29 January 1973 (when PD 115 was issued) would render the accused criminally liable for estafa under par. 1(b), Art. 315 of the Revised Penal Code, pursuant to the explicit provision in Sec. 13 of PD 115. 12 The act punishable is malum prohibitum. Respondent Secretary's prognostication of the Supreme Court's supposed inclination to treat trust receipts as mere security documents for loan transactions, thereby obliterating criminal liability, appears to be a misjudgment. 13 In an attempt to escape criminal liability, private respondent claims PD 115 covers goods which are ultimately destined for sale and not goods for use in manufacture. But the wording of Sec. 13 covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in accordance with the terms of the trust receipts. Private respondent claims that at the time of PBM's application for the issuance of the LC's, it was not represented to the petitioner that the items were intended for sale, 14 hence, there was no deceit resulting in a violation of the trust receipts which would constitute a criminal liability. Again, we cannot uphold this contention. The nonpayment of the amount covered by a trust receipt is an act violative of the entrustee's obligation to pay. There is no reason why the law should not apply to all transactions covered by trust receipts, except those expressly excluded. 15

The Court takes judicial notice of customary banking and business practices where trust receipts are used for importation of heavy equipment, machineries and supplies used in manufacturing operations. We are perplexed by the statements in the assailed DOJ resolution that the goods subject of the instant case are outside the ambit of the provisions of PD 115 albeit covered by Trust Receipt Agreements (17 February 1988 resolution) and that not all transactions covered by trust receipts may be considered as trust receipt transactions defined and penalized under PD 115 (11 January 1988 resolution). A construction should be avoided when it affords an opportunity to defeat compliance with the terms of a statute.: nad "A construction of a statute which creates an inconsistency should be avoided when a reasonable interpretation can be adopted which will not do violence to the plain words of the act and will carry out the intention of Congress. In the construction of statutes, the courts start with the assumption that the legislature intended to enact an effective law, and the legislature is not to be presumed to have done a vain thing in the enactment of a statute. Hence, it is a general principle, embodied in the maxim, 'ut res magis valeat quam pereat,' that the courts should, if reasonably possible to do so without violence to the spirit and language of an act, so interpret the statute to give it efficient operation and effect as a whole. An interpretation should, if possible, be avoided, under which a statute or provision being construed is defeated, or as

otherwise expressed, nullified, destroyed, emasculated, repealed, explained away, or rendered insignificant, meaningless, inoperative, or nugatory." 16 The penal provision of PD 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product ultimately sold. To uphold the Justice Department's ruling would contravene not only the letter but the spirit of PD 115. "An examination of P.D. 115 shows the growing importance of trust receipts in Philippine business, the need to provide for the rights and obligations of parties to a trust receipt transaction, the study of the problems involved and the action by monetary authorities, and the necessity of regulating the enforcement of rights arising from default or violations of trust receipt agreements. The legislative intent to meet a pressing need is clearly expressed . . ." 17 WHEREFORE, the petition is granted. The temporary restraining order issued on 13 April 1988 restraining the enforcement of the questioned DOJ resolutions dated 11 January 1988 and 17 February 1988 directing the provincial fiscal to move for the dismissal of the criminal case filed before the RTC of Makati, Branch 143 and the withdrawal of IS-No. 84-3140, is made permanent. Let this case be remanded to said RTC for disposition in accordance with this decision.

SO ORDERED. Melencio-Herrera, Paras, Sarmiento and Regalado, JJ., concur.

G.R. No. 173905

April 23, 2010

ANTHONY L. NG, Petitioner, vs. PEOPLE OF THE PHILIPPINES, Respondent. DECISION VELASCO, JR. The Case This is a Petition for Review on Certiorari under Rule 45 seeking to reverse and set aside the August 29, 2003 Decision1 and July 25, 2006 Resolution of the Court of Appeals (CA) in CA-G.R. CR No. 25525, which affirmed the Decision2 of the Regional Trial Court (RTC), Branch 95 in Quezon City, in Criminal Case No. Q-99-85133 for Estafa under Article 315, paragraph 1(b) of the Revised Penal Code (RPC) in relation to Section 3 of Presidential Decree No. (PD) 115 or the Trust Receipts Law. The Facts Sometime in the early part of 1997, petitioner Anthony Ng, then engaged in the business of building and

fabricating telecommunication towers under the trade name "Capitol Blacksmith and Builders," applied for a credit line of PhP 3,000,000 with Asiatrust Development Bank, Inc. (Asiatrust). In support of Asiatrusts credit investigation, petitioner voluntarily submitted the following documents: (1) the contracts he had with Islacom, Smart, and Infocom; (2) the list of projects wherein he was commissioned by the said telecommunication companies to build several steel towers; and (3) the collectible amounts he has with the said companies.3 On May 30, 1997, Asiatrust approved petitioners loan application. Petitioner was then required to sign several documents, among which are the Credit Line Agreement, Application and Agreement for Irrevocable L/C, Trust Receipt Agreements,4 and Promissory Notes. Though the Promissory Notes matured on September 18, 1997, the two (2) aforementioned Trust Receipt Agreements did not bear any maturity dates as they were left unfilled or in blank by Asiatrust.5 After petitioner received the goods, consisting of chemicals and metal plates from his suppliers, he utilized them to fabricate the communication towers ordered from him by his clients which were installed in three project sites, namely: Isabel, Leyte; Panabo, Davao; and Tongonan. As petitioner realized difficulty in collecting from his client Islacom, he failed to pay his loan to Asiatrust. Asiatrust then conducted a surprise ocular inspection of petitioners

business through Villarva S. Linga, Asiatrusts representative appraiser. Linga thereafter reported to Asiatrust that he found that approximately 97% of the subject goods of the Trust Receipts were "sold-out and that only 3 % of the goods pertaining to PN No. 1963 remained." Asiatrust then endorsed petitioners account to its Account Management Division for the possible restructuring of his loan. The parties thereafter held a series of conferences to work out the problem and to determine a way for petitioner to pay his debts. However, efforts towards a settlement failed to be reached. On March 16, 1999, Remedial Account Officer Ma. Girlie C. Bernardez filed a Complaint-Affidavit before the Office of the City Prosecutor of Quezon City. Consequently, on September 12, 1999, an Information for Estafa, as defined and penalized under Art. 315, par. 1(b) of the RPC in relation to Sec. 3, PD 115 or the Trust Receipts Law, was filed with the RTC. The said Information reads: That on or about the 30th day of May 1997, in Quezon City, Philippines, the above-named petitioner, did then and there willfully, unlawfully, and feloniously defraud Ma. Girlie C. Bernardez by entering into a Trust Receipt Agreement with said complainant whereby said petitioner as entrustee received in trust from the said complainant various chemicals in the total sum of P4.5 million with the obligation to hold the said chemicals in trust as property of the entruster with the right to sell the same for cash and to remit the proceeds thereof to the entruster, or to return the said chemicals if unsold; but said petitioner

once in possession of the same, contrary to his aforesaid obligation under the trust receipt agreement with intent to defraud did then and there misappropriated, misapplied and converted the said amount to his own personal use and benefit and despite repeated demands made upon him, said petitioner refused and failed and still refuses and fails to make good of his obligation, to the damage and prejudice of the said Ma. Girlie C. Bernardez in the amount of P2,971,650.00, Philippine Currency. CONTRARY TO LAW. Upon arraignment, petitioner pleaded not guilty to the charges. Thereafter, a full-blown trial ensued. During the pendency of the abovementioned case, conferences between petitioner and Asiatrusts Remedial Account Officer, Daniel Yap, were held. Afterward, a Compromise Agreement was drafted by Asiatrust. One of the requirements of the Compromise Agreement was for petitioner to issue six (6) postdated checks. Petitioner, in good faith, tried to comply by issuing two or three checks, which were deposited and made good. The remaining checks, however, were not deposited as the Compromise Agreement did not push through. For his defense, petitioner argued that: (1) the loan was granted as his working capital and that the Trust Receipt Agreements he signed with Asiatrust were merely preconditions for the grant and approval of his loan; (2) the Trust Receipt Agreement corresponding to Letter of

Credit No. 1963 and the Trust Receipt Agreement corresponding to Letter of Credit No. 1964 were both contracts of adhesion, since the stipulations found in the documents were prepared by Asiatrust in fine print; (3) unfortunately for petitioner, his contract worth PhP 18,000,000 with Islacom was not yet paid since there was a squabble as to the real ownership of the latters company, but Asiatrust was aware of petitioners receivables which were more than sufficient to cover the obligation as shown in the various Project Listings with Islacom, Smart Communications, and Infocom; (4) prior to the Islacom problem, he had been faithfully paying his obligation to Asiatrust as shown in Official Receipt Nos. 549001, 549002, 565558, 577198, 577199, and 594986,6 thus debunking Asiatrusts claim of fraud and bad faith against him; (5) during the pendency of this case, petitioner even attempted to settle his obligations as evidenced by the two United Coconut Planters Bank Checks7 he issued in favor of Asiatrust; and (6) he had already paid PhP 1.8 million out of the PhP 2.971 million he owed as per Statement of Account dated January 26, 2000. Ruling of the Trial Court After trial on the merits, the RTC, on May 29, 2001, rendered a Decision, finding petitioner guilty of the crime of Estafa. The fallo of the Decision reads as follows: WHEREFORE, judgment is hereby rendered finding the petitioner, Anthony L. Ng GUILTY beyond reasonable

doubt for the crime of Estafa defined in and penalized by Article 315, paragraph 1(b) of the Revised Penal Code in relation to Section 3 of Presidential Decree 115, otherwise known as the Trust Receipts Law, and is hereby sentenced to suffer the indeterminate penalty of from six (6) years, eight (8) months, and twenty one (21) days of prision mayor, minimum, as the minimum penalty, to twenty (20) years of reclusion temporal maximum, as the maximum penalty. The petitioner is further ordered to return to the Asiatrust Development Bank Inc. the amount of Two Million, Nine Hundred Seventy One and Six Hundred Fifty Pesos (P2,971,650.00) with legal rate of interest computed from the filing of the information on September 21,1999 until the amount is fully paid. IT IS SO ORDERED. In rendering its Decision, the trial court held that petitioner could not simply argue that the contracts he had entered into with Asiatrust were void as they were contracts of adhesion. It reasoned that petitioner is presumed to have read and understood and is, therefore, bound by the provisions of the Letters of Credit and Trust Receipts. It said that it was clear that Asiatrust had furnished petitioner with a Statement of Account enumerating therein the precise figures of the outstanding balance, which he failed to pay along with the computation of other fees and charges; thus, Asiatrust did not violate Republic Act No. 3765 (Truth in

Lending Act). Finally, the trial court declared that petitioner, being the entrustee stated in the Trust Receipts issued by Asiatrust, is thus obliged to hold the goods in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipts; otherwise, he is obliged to return the goods in the event of non-sale or upon demand of the entruster, failing thus, he evidently violated the Trust Receipts Law. Ruling of the Appellate Court Petitioner then elevated the case to the CA by filing a Notice of Appeal on August 6, 2001. In his Appellants Brief dated March 25, 2002, petitioner argued that the court a quo erred: (1) in changing the name of the offended party without the benefit of an amendment of the Information which violates his right to be informed of the nature and cause of accusation against him; (2) in making a finding of facts not in accord with that actually proved in the trial and/or by the evidence provided; (3) in not considering the material facts which if taken into account would have resulted in his acquittal; (4) in being biased, hostile, and prejudiced against him; and (5) in considering the prosecutions evidence which did not prove the guilt of petitioner beyond reasonable doubt.1avvphi1 On August 29, 2003, the CA rendered a Decision affirming that of the RTC, the fallo of which reads: WHEREFORE, the foregoing considered, the instant

appeal is DENIED. The decision of the Regional Trial Court of Quezon City, Branch 95 dated May 29, 2001 is AFFIRMED. SO ORDERED. The CA held that during the course of the trial, petitioner knew that the complainant Bernardez and the other cowitnesses are all employees of Asiatrust and that she is suing in behalf of the bank. Since petitioner transacted with the same employees for the issuance of the subject Trust Receipts, he cannot feign ignorance that Asiatrust is not the offended party in the instant case. The CA further stated that the change in the name of the complainant will not prejudice and alter the fact that petitioner was being charged with the crime of Estafa in relation to the Trust Receipts Law, since the information clearly set forth the essential elements of the crime charged, and the constitutional right of petitioner to be informed of the nature and cause of his accusations is not violated.8 As to the alleged error in the appreciation of facts by the trial court, the CA stated that it was undisputed that petitioner entered into a trust receipt agreement with Asiatrust and he failed to pay the bank his obligation when it became due. According to the CA, the fact that petitioner acted without malice or fraud in entering into the transactions has no bearing, since the offense is punished as malum prohibitum regardless of the existence of intent or malice; the mere failure to deliver

the proceeds of the sale or the goods if not sold constitutes the criminal offense. With regard to the failure of the RTC to consider the fact that petitioners outstanding receivables are sufficient to cover his indebtedness and that no written demand was made upon him hence his obligation has not yet become due and demandable, the CA stated that the mere query as to the whereabouts of the goods and/or money is tantamount to a demand.9 Concerning the alleged bias, hostility, and prejudice of the RTC against petitioner, the CA said that petitioner failed to present any substantial proof to support the aforementioned allegations against the RTC. After the receipt of the CA Decision, petitioner moved for its reconsideration, which was denied by the CA in its Resolution dated July 25, 2006. Thereafter, petitioner filed this Petition for Review on Certiorari. In his Memorandum, he raised the following issues: Issues: 1. The prosecution failed to adduce evidence beyond a reasonable doubt to satisfy the 2nd essential element that there was misappropriation or conversion of subject money or property by petitioner. 2. The state was unable to prove the 3rd essential element of the crime that the alleged misappropriation or

conversion is to the prejudice of the real offended property. 3. The absence of a demand (4th essential element) on petitioner necessarily results to the dismissal of the criminal case. The Courts Ruling We find the petition to be meritorious. Essentially, the issues raised by petitioner can be summed up into onewhether or not petitioner is liable for Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. It is a well-recognized principle that factual findings of the trial court are entitled to great weight and respect by this Court, more so when they are affirmed by the appellate court. However, the rule is not without exceptions, such as: (1) when the conclusion is a finding grounded entirely on speculations, surmises, and conjectures; (2) the inferences made are manifestly mistaken; (3) there is grave abuse of discretion; and (4) the judgment is based on misapprehension of facts or premised on the absence of evidence on record.10 Especially in criminal cases where the accused stands to lose his liberty by virtue of his conviction, the Court must be satisfied that the factual findings and conclusions of the lower courts leading to his conviction must satisfy the standard of proof beyond reasonable doubt.

In the case at bar, petitioner was charged with Estafa under Art. 315, par. 1(b) of the RPC in relation to PD 115. The RPC defines Estafa as: ART. 315. Swindling (estafa).Any person who shall defraud another by any of the means mentioned hereinbelow x x x 1. With unfaithfulness or abuse of confidence, namely: a. x x x b. By misappropriating or converting, to the prejudice of another, money, goods, or any other personal property received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of or to return the same, even though such obligation be totally or partially guaranteed by a bond; or by denying having received such money, goods, or other property x x x.11 Based on the definition above, the essential elements of Estafa are: (1) that money, goods or other personal property is received by the offender in trust or on commission, or for administration, or under any obligation involving the duty to make delivery of or to return it; (2) that there be misappropriation or conversion of such money or property by the offender, or denial on his part of such receipt; (3) that such misappropriation or conversion or denial is to the prejudice of another; and (4) there is demand by the offended party to the offender.12

Likewise, Estafa can also be committed in what is called a "trust receipt transaction" under PD 115, which is defined as: Section 4. What constitutes a trust receipts transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following: 1. In the case of goods or documents: (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing

before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied full with his obligation under the trust receipt; or (c) to load, unload, ship or transship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments: (a) to sell or procure their sale or exchange; or (b) to deliver them to a principal; or (c) to effect the consummation of some transactions involving delivery to a depository or register; or (d) to effect their presentation, collection or renewal. The sale of good, documents or instruments by a person in the business of selling goods, documents or instruments for profit who, at the outset of transaction, has, as against the buyer, general property rights in such goods, documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and coverage of this Decree. In other words, a trust receipt transaction is one where the entrustee has the obligation to deliver to the entruster the price of the sale, or if the merchandise is not sold, to return the merchandise to the entruster. There are, therefore, two obligations in a trust receipt transaction: the first refers to money received under the obligation involving the duty to turn it over (entregarla) to the owner of the merchandise sold, while the second refers to the

merchandise received under the obligation to "return" it (devolvera) to the owner.13 A violation of any of these undertakings constitutes Estafa defined under Art. 315, par. 1(b) of the RPC, as provided in Sec. 13 of PD 115, viz: Section 13. Penalty Clause.The failure of an entrustee to turn over the proceeds of the sale of the goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal Code. x x x (Emphasis supplied.) A thorough examination of the facts obtaining in the instant case, however, reveals that the transaction between petitioner and Asiatrust is not a trust receipt transaction but one of simple loan. PD 115 Does Not Apply It must be remembered that petitioner was transparent to Asiatrust from the very beginning that the subject goods were not being held for sale but were to be used for the fabrication of steel communication towers in accordance with his contracts with Islacom, Smart, and Infocom. In

these contracts, he was commissioned to build, out of the materials received, steel communication towers, not to sell them. The true nature of a trust receipt transaction can be found in the "whereas" clause of PD 115 which states that a trust receipt is to be utilized "as a convenient business device to assist importers and merchants solve their financing problems." Obviously, the State, in enacting the law, sought to find a way to assist importers and merchants in their financing in order to encourage commerce in the Philippines. As stressed in Samo v. People,14 a trust receipt is considered a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased. Similarly, American Jurisprudence demonstrates that trust receipt transactions always refer to a method of "financing importations or financing sales."15 The principle is of course not limited in its application to financing importations, since the principle is equally applicable to domestic transactions.16 Regardless of whether the transaction is foreign or domestic, it is important to note that the transactions discussed in relation to trust receipts mainly involved sales. Following the precept of the law, such transactions affect

situations wherein the entruster, who owns or holds absolute title or security interests over specified goods, documents or instruments, releases the subject goods to the possession of the entrustee. The release of such goods to the entrustee is conditioned upon his execution and delivery to the entruster of a trust receipt wherein the former binds himself to hold the specific goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to the entruster or the goods, documents or instruments themselves if they are unsold. Similarly, we held in State Investment House v. CA, et al. that the entruster is entitled "only to the proceeds derived from the sale of goods released under a trust receipt to the entrustee."17 Considering that the goods in this case were never intended for sale but for use in the fabrication of steel communication towers, the trial court erred in ruling that the agreement is a trust receipt transaction. In applying the provisions of PD 115, the trial court relied on the Memorandum of Asiatrusts appraiser, Linga, who stated that the goods have been sold by petitioner and that only 3% of the goods remained in the warehouse where it was previously stored. But for reasons known only to the trial court, the latter did not give weight to the testimony of Linga when he testified that he merely presumed that the goods were sold, viz:

COURT (to the witness) Q So, in other words, when the goods were not there anymore. You presumed that, that is already sold? A Yes, your Honor. Undoubtedly, in his testimony, Linga showed that he had no real personal knowledge or proof of the fact that the goods were indeed sold. He did not notify petitioner about the inspection nor did he talk to or inquire with petitioner regarding the whereabouts of the subject goods. Neither did he confirm with petitioner if the subject goods were in fact sold. Therefore, the Memorandum of Linga, which was based only on his presumption and not any actual personal knowledge, should not have been used by the trial court to prove that the goods have in fact been sold. At the very least, it could only show that the goods were not in the warehouse. Having established the inapplicability of PD 115, this Court finds that petitioners liability is only limited to the satisfaction of his obligation from the loan. The real intent of the parties was simply to enter into a simple loan agreement. To emphasize, the Trust Receipts Law was created to "to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as

collateral, of the merchandise imported or purchased." Since Asiatrust knew that petitioner was neither an importer nor retail dealer, it should have known that the said agreement could not possibly apply to petitioner. Moreover, this Court finds that petitioner is not liable for Estafa both under the RPC and PD 115. Goods Were Not Received in Trust The first element of Estafa under Art. 315, par. 1(b) of the RPC requires that the money, goods or other personal property must be received by the offender in trust or on commission, or for administration, or under any other obligation involving the duty to make delivery of, or to return it. But as we already discussed, the goods received by petitioner were not held in trust. They were also not intended for sale and neither did petitioner have the duty to return them. They were only intended for use in the fabrication of steel communication towers. No Misappropriation of Goods or Proceeds The second element of Estafa requires that there be misappropriation or conversion of such money or property by the offender, or denial on his part of such receipt. This is the very essence of Estafa under Art. 315, par. 1(b). The words "convert" and "misappropriated" connote an act of using or disposing of anothers property as if it

were ones own, or of devoting it to a purpose or use different from that agreed upon. To misappropriate for ones own use includes not only conversion to ones personal advantage, but also every attempt to dispose of the property of another without a right.18 Petitioner argues that there was no misappropriation or conversion on his part, because his liability for the amount of the goods subject of the trust receipts arises and becomes due only upon receipt of the proceeds of the sale and not prior to the receipt of the full price of the goods. Petitioner is correct. Thus, assuming arguendo that the provisions of PD 115 apply, petitioner is not liable for Estafa because Sec. 13 of PD 115 provides that an entrustee is only liable for Estafa when he fails "to turn over the proceeds of the sale of the goods x x x covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust receipt x x x in accordance with the terms of the trust receipt." The trust receipt entered into between Asiatrust and petitioner states: In case of sale I/we agree to hand the proceeds as soon as received to the BANK to apply against the relative acceptance (as described above) and for the payment of any other indebtedness of mine/ours to ASIATRUST DEVELOPMENT BANK.19 (Emphasis supplied.)

Clearly, petitioner was only obligated to turn over the proceeds as soon as he received payment. However, the evidence reveals that petitioner experienced difficulties in collecting payments from his clients for the communication towers. Despite this fact, petitioner endeavored to pay his indebtedness to Asiatrust, which payments during the period from September 1997 to July 1998 total approximately PhP 1,500,000. Thus, absent proof that the proceeds have been actually and fully received by petitioner, his obligation to turn over the same to Asiatrust never arose. What is more, under the Trust Receipt Agreement itself, no date of maturity was stipulated. The provision left blank by Asiatrust is as follows: x x x and in consideration thereof, I/we hereby agree to hold said goods in Trust for the said Bank and as its property with liberty to sell the same for its account within ________ days from the date of execution of the Trust Receipt x x x20 In fact, Asiatrust purposely left the space designated for the date blank, an action which in ordinary banking transactions would be noted as highly irregular. Hence, the only way for the obligation to mature was for Asiatrust to demand from petitioner to pay the obligation, which it never did. Again, it also makes the Court wonder as to why Asiatrust decided to leave the provisions for the maturity

dates in the Trust Receipt agreements in blank, since those dates are elemental part of the loan. But then, as can be gleaned from the records of this case, Asiatrust also knew that the capacity of petitioner to pay for his loan also hinges upon the latters receivables from Islacom, Smart, and Infocom where he had ongoing and future projects for fabrication and installation of steel communication towers and not from the sale of said goods. Being a bank, Asiatrust acted inappropriately when it left such a sensitive bank instrument with a void circumstance on an elementary but vital feature of each and every loan transaction, that is, the maturity dates. Without stating the maturity dates, it was impossible for petitioner to determine when the loan will be due. Moreover, Asiatrust was aware that petitioner was not engaged in selling the subject goods and that petitioner will use them for the fabrication and installation of communication towers. Before granting petitioner the credit line, as aforementioned, Asiatrust conducted an investigation, which showed that petitioner fabricated and installed communication towers for well-known communication companies to be installed at designated project sites. In fine, there was no abuse of confidence to speak of nor was there any intention to convert the subject goods for another purpose, since petitioner did not withhold the fact that they were to be used to fabricate steel communication towers to Asiatrust. Hence, no malice or abuse of confidence and misappropriation occurred in this instance due to Asiatrusts knowledge of the facts.

Furthermore, Asiatrust was informed at the time of petitioners application for the loan that the payment for the loan would be derived from the collectibles of his clients. Petitioner informed Asiatrust that he was having extreme difficulties in collecting from Islacom the full contracted price of the towers. Thus, the duty of petitioner to remit the proceeds of the goods has not yet arisen since he has yet to receive proceeds of the goods. Again, petitioner could not be said to have misappropriated or converted the proceeds of the transaction since he has not yet received the proceeds from his client, Islacom. This Court also takes judicial notice of the fact that petitioner has fully paid his obligation to Asiatrust, making the claim for damage and prejudice of Asiatrust baseless and unfounded. Given that the acceptance of payment by Asiatrust necessarily extinguished petitioners obligation, then there is no longer any obligation on petitioners part to speak of, thus precluding Asiatrust from claiming any damage. This is evidenced by Asiatrusts Affidavit of Desistance21 acknowledging full payment of the loan. Reasonable Doubt Exists In the final analysis, the prosecution failed to prove beyond reasonable doubt that petitioner was guilty of Estafa under Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115 or the Trust Receipts Law; thus, his liability should only be civil in nature. While petitioner admits to his civil liability to Asiatrust, he

nevertheless does not have criminal liability. It is a wellestablished principle that person is presumed innocent until proved guilty. To overcome the presumption, his guilt must be shown by proof beyond reasonable doubt. Thus, we held in People v. Mariano22 that while the principle does not connote absolute certainty, it means the degree of proof which produces moral certainty in an unprejudiced mind of the culpability of the accused. Such proof should convince and satisfy the reason and conscience of those who are to act upon it that the accused is in fact guilty. The prosecution, in this instant case, failed to rebut the constitutional innocence of petitioner and thus the latter should be acquitted. At this point, the ruling of this Court in Colinares v. Court of Appeals is very apt, thus: The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation x x x.23 Such is the situation in this case. Asiatrusts intention became more evident when, on March 30, 2009, it, along with petitioner, filed their Joint

Motion for Leave to File and Admit Attached Affidavit of Desistance to qualify the Affidavit of Desistance executed by Felino H. Esquivas, Jr., attorney-in-fact of the Board of Asiatrust, which acknowledged the full payment of the obligation of the petitioner and the successful mediation between the parties. From the foregoing considerations, we deem it unnecessary to discuss and rule upon the other issues raised in the appeal. WHEREFORE, the CA Decision dated August 29, 2003 affirming the RTC Decision dated May 29, 2001 is SET ASIDE. Petitioner ANTHONY L. NG is hereby ACQUITTED of the charge of violation of Art. 315, par. 1(b) of the RPC in relation to the pertinent provision of PD 115. SO ORDERED. PRESBITERO J. VELASCO, JR. Associate Justice

[G.R. No. 90828. September 5, 2000]

MELVIN

COLINARES and LORDINO VELOSO, petitioners, vs. HONORABLE COURT OF APPEALS, and THE PEOPLE OF THE

PHILIPPINES, respondents. DECISION DAVIDE, JR., C.J.: In 1979 Melvin Colinares and Lordino Veloso (hereafter Petitioners) were contracted for a consideration of P40,000 by the Carmelite Sisters of Cagayan de Oro City to renovate the latters convent at Camaman-an, Cagayan de Oro City. On 30 October 1979, Petitioners obtained 5,376 SF Solatone acoustical board 2x4x!, 300 SF tanguile wood tiles 12x12, 260 SF Marcelo economy tiles and 2 gallons UMYLIN cement adhesive from CM Builders Centre for the construction project.[1] The following day, 31 October 1979, Petitioners applied for a commercial letter of credit[2] with the Philippine Banking Corporation, Cagayan de Oro City branch (hereafter PBC) in favor of CM Builders Centre. PBC approved the letter of credit[3] for P22,389.80 to cover the full invoice value of the goods. Petitioners signed a pro-forma trust receipt[4] as security. The loan was due on 29 January 1980. On 31 October 1979, PBC debited P6,720 from Petitioners marginal deposit as partial payment of the loan.[5] On 7 May 1980, PBC wrote[6] to Petitioners demanding that the amount be paid within seven days from notice. Instead of complying with PBCs demand,

Veloso confessed that they lost P19,195.83 in the Carmelite Monastery Project and requested for a grace period of until 15 June 1980 to settle the account.[7] PBC sent a new demand letter[8]to Petitioners on 16 October 1980 and informed them that their outstanding balance as of 17 November 1979 was P20,824.40 exclusive of attorneys fees of 25%.[9] On 2 December 1980, Petitioners proposed[10] that the terms of payment of the loan be modified as follows: P2,000 on or before 3 December 1980, and P1,000 per month starting 31 January 1980 until the account is fully paid. Pending approval of the proposal, Petitioners paid P1,000 to PBC on 4 December 1980,[11] and thereafter P500 on 11 February 1981,[12] 16 March 1981,[13] and 20 April 1981.[14] Concurrently with the separate demand for attorneys fees by PBCs legal counsel, PBC continued to demand payment of the balance.[15] On 14 January 1983, Petitioners were charged with the violation of P.D. No. 115 (Trust Receipts Law) in relation to Article 315 of the Revised Penal Code in an Information which was filed with Branch 18, Regional Trial Court of Cagayan de Oro City. The accusatory portion of the Information reads: That on or about October 31, 1979, in the City of Cagayan de Oro, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused entered into a trust receipt agreement with the Philippine Banking Corporation at Cagayan de Oro City wherein the

accused, as entrustee, received from the entruster the following goods to wit: Solatone Acoustical board Tanguile Wood Tiles Marcelo Cement Tiles Umylin Cement Adhesive with a total value of P22,389.80, with the obligation on the part of the accused-entrustee to hold the aforesaid items in trust for the entruster and/or to sell on cash basis or otherwise dispose of the said items and to turn over to the entruster the proceeds of the sale of said goods or if there be no sale to return said items to the entruster on or before January 29, 1980 but that the said accused after receipt of the goods, with intent to defraud and cause damage to the entruster, conspiring, confederating together and mutually helping one another, did then and there wilfully, unlawfully and feloniously fail and refuse to remit the proceeds of the sale of the goods to the entruster despite repeated demands but instead converted, misappropriated and misapplied the proceeds to their own personal use, benefit and gain, to the damage and prejudice of the Philippine Banking Corporation, in the aforesaid sum of P22,389.80, Philippine Currency.

Contrary to PD 115 in relation to Article 315 of the Revised Penal Code.[16] The case was docketed as Criminal Case No. 1390. During trial, petitioner Veloso insisted that the transaction was a clean loan as per verbal guarantee of Cayo Garcia Tuiza, PBCs former manager. He and petitioner Colinares signed the documents without reading the fine print, only learning of the trust receipt implication much later. When he brought this to the attention of PBC, Mr. Tuiza assured him that the trust receipt was a mere formality.[17] On 7 July 1986, the trial court promulgated its decision[18] convicting Petitioners of estafa for violating P.D. No. 115 in relation to Article 315 of the Revised Penal Code and sentencing each of them to suffer imprisonment of two years and one day of prision correccional as minimum to six years and one day of prision mayor as maximum, and to solidarily indemnify PBC the amount of P20,824.44, with legal interest from 29 January 1980, 12 % penalty charge per annum, 25% of the sums due as attorneys fees, and costs. The trial court considered the transaction between PBC and Petitioners as a trust receipt transaction under Section 4, P.D. No. 115. It considered Petitioners use of the goods in their Carmelite monastery project an act of disposing as contemplated under Section 13, P.D. No. 115, and treated the charge invoice[19] for goods issued by CM Builders Centre as a document within the

meaning of Section 3 thereof. It concluded that the failure of Petitioners to turn over the amount they owed to PBC constituted estafa. Petitioners appealed from the judgment to the Court of Appeals which was docketed as CA-G.R. CR No. 05408. Petitioners asserted therein that the trial court erred in ruling that they violated the Trust Receipt Law, and in holding them criminally liable therefor. In the alternative, they contend that at most they can only be made civilly liable for payment of the loan. In its decision[20] 6 March 1989, the Court of Appeals modified the judgment of the trial court by increasing the penalty to six years and one day of prision mayor as minimum to fourteen years eight months and one day of reclusion temporal as maximum. It held that the documentary evidence of the prosecution prevails over Velosos testimony, discredited Petitioners claim that the documents they signed were in blank, and disbelieved that they were coerced into signing them. On 25 March 1989, Petitioners filed a Motion for New Trial/Reconsideration[21] alleging that the Disclosure Statement on Loan/Credit Transaction[22] (hereafter Disclosure Statement) signed by them and Tuiza was suppressed by PBC during the trial. That document would have proved that the transaction was indeed a loan as it bears a 14% interest as opposed to the trust receipt which does not at all bear any interest. Petitioners further maintained that when PBC allowed them to pay in installment, the agreement was novated

and a creditor-debtor relationship was created. In its resolution[23]of 16 October 1989 the Court of Appeals denied the Motion for New Trial/Reconsideration because the alleged newly discovered evidence was actually forgotten evidence already in existence during the trial, and would not alter the result of the case. Hence, Petitioners filed with us the petition in this case on 16 November 1989. They raised the following issues: I. WHETHER OR NOT THE DENIAL OF THE MOTION FOR NEW TRIAL ON THE GROUND OF NEWLY DISCOVERED EVIDENCE, NAMELY, DISCLOSURE ON LOAN/CREDIT TRANSACTION, WHICH IF INTRODUCED AND ADMITTED, WOULD CHANGE THE JUDGMENT, DOES NOT CONSTITUTE A DENIAL OF DUE PROCESS. 2. ASSUMING THERE WAS A VALID TRUST RECEIPT, WHETHER OR NOT THE ACCUSED WERE PROPERLY CHARGED, TRIED AND CONVICTED FOR VIOLATION OF SEC. 13, PD NO. 115 IN RELATION TO ARTICLE 315 PARAGRAPH (I) (B) NOTWITHSTANDING THE NOVATION OF THE SOCALLED TRUST RECEIPT CONVERTING THE TRUSTOR-TRUSTEE RELATIONSHIP TO CREDITORDEBTOR SITUATION. In its Comment of 22 January 1990, the Office of the Solicitor General urged us to deny the petition for lack of

merit. On 28 February 1990 Petitioners filed a Motion to Dismiss the case on the ground that they had already fully paid PBC on 2 February 1990 the amount of P70,000 for the balance of the loan, including interest and other charges, as evidenced by the different receipts issued by PBC,[24] and that the PBC executed an Affidavit of desistance.[25] We required the Solicitor General to comment on the Motion to Dismiss. In its Comment of 30 July 1990, the Solicitor General opined that payment of the loan was akin to a voluntary surrender or plea of guilty which merely serves to mitigate Petitioners culpability, but does not in any way extinguish their criminal liability. In the Resolution of 13 August 1990, we gave due course to the Petition and required the parties to file their respective memoranda. The parties subsequently filed their respective memoranda. It was only on 18 May 1999 when this case was assigned to the ponente. Thereafter, we required the parties to move in the premises and for Petitioners to manifest if they are still interested in the further prosecution of this case and inform us of their present whereabouts and whether their bail bonds are still valid.

Petitioners submitted their Compliance. The core issues raised in the petition are the denial by the Court of Appeals of Petitioners Motion for New Trial and the true nature of the contract between Petitioners and the PBC. As to the latter, Petitioners assert that it was an ordinary loan, not a trust receipt agreement under the Trust Receipts Law. The grant or denial of a motion for new trial rests upon the discretion of the judge. New trial may be granted if: (1) errors of law or irregularities have been committed during the trial prejudicial to the substantial rights of the accused; or (2) new and material evidence has been discovered which the accused could not with reasonable diligence have discovered and produced at the trial, and which, if introduced and admitted, would probably change the judgment.[26] For newly discovered evidence to be a ground for new trial, such evidence must be (1) discovered after trial; (2) could not have been discovered and produced at the trial even with the exercise of reasonable diligence; and (3) material, not merely cumulative, corroborative, or impeaching, and of such weight that, if admitted, would probably change the judgment.[27] It is essential that the offering party exercised reasonable diligence in seeking to locate the evidence before or during trial but nonetheless failed to secure it.[28] We find no indication in the pleadings that the Disclosure Statement is a newly discovered evidence.

Petitioners could not have been unaware that the two-page document exists. The Disclosure Statement itself states, NOTICE TO BORROWER: YOU ARE ENTITLED TO A COPY OF THIS PAPER WHICH YOU SHALL SIGN.[29] Assuming Petitioners copy was then unavailable, they could have compelled its production in court,[30] which they never did. Petitioners have miserably failed to establish the second requisite of the rule on newly discovered evidence. Petitioners themselves admitted that they searched again their voluminous records, meticulously and patiently, until they discovered this new and material evidence only upon learning of the Court of Appeals decision and after they were shocked by the penalty imposed.[31] Clearly, the alleged newly discovered evidence is mere forgotten evidence that jurisprudence excludes as a ground for new trial.[32] However, the second issue should be resolved in favor of Petitioners. Section 4, P.D. No. 115, the Trust Receipts Law, defines a trust receipt transaction as any transaction by and between a person referred to as the entruster, and another person referred to as the entrustee, whereby the entruster who owns or holds absolute title or security interest over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a trust receipt wherein the entrustee binds himself to hold the

designated goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. 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 deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner.[33] 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,[34] without need of proving intent to defraud. A thorough examination of the facts obtaining in the case at bar reveals that the transaction intended by the parties was a simple loan, not a trust receipt agreement. Petitioners received the merchandise from CM Builders Centre on 30 October 1979. On that day, ownership over the merchandise was already transferred to Petitioners who were to use the materials for their

construction project. It was only a day later, 31 October 1979, that they went to the bank to apply for a loan to pay for the merchandise. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a security interest in the goods as holder of a security title for the advances it had made to the entrustee.[35] The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest.[36] To secure that the bank shall be paid, it takes full title to the goods at the very beginning and continues to hold that title as his indispensable security until the goods are sold and the vendee is called upon to pay for them; hence, the importer has never owned the goods and is not able to deliver possession.[37] In a certain manner, trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price.[38] Trust receipt transactions are intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.[39]

The antecedent acts in a trust receipt transaction consist of the application and approval of the letter of credit, the making of the marginal deposit and the effective importation of goods through the efforts of the importer.[40] PBC attempted to cover up the true delivery date of the merchandise, yet the trial court took notice even though it failed to attach any significance to such fact in the judgment. Despite the Court of Appeals contrary view that the goods were delivered to Petitioners previous to the execution of the letter of credit and trust receipt, we find that the records of the case speak volubly and this fact remains uncontroverted. It is not uncommon for us to peruse through the transcript of the stenographic notes of the proceedings to be satisfied that the records of the case do support the conclusions of the trial court.[41] After such perusal Grego Mutia, PBCs credit investigator, admitted thus: ATTY. CABANLET: (continuing) Q Do you know if the goods subject matter of this letter of credit and trust receipt agreement were received by the accused? A Yes, sir Q Do you have evidence to show that these goods subject matter of this letter of credit and trust receipt were delivered to the accused? A Yes, sir.

Q I am showing to you this charge invoice, are you referring to this document? A Yes, sir. xxx Q What is the date of the charge invoice? A October 31, 1979. COURT: Make it of record as appearing in Exhibit D, the zero in 30 has been superimposed with numeral 1.[42] During the cross and re-direct examinations he also impliedly admitted that the transaction was indeed a loan. Thus: Q In short the amount stated in your Exhibit C, the trust receipt was a loan to the accused you admit that? A Because in the bank the loan is considered part of the loan. xxx RE-DIRECT BY ATTY. CABANLET: ATTY. CABANLET (to the witness) Q What do you understand by loan when you were

asked? A Loan is a promise of a borrower from the value received. The borrower will pay the bank on a certain specified date with interest[43] Such statement is akin to an admission against interest binding upon PBC. Petitioner Velosos claim that they were made to believe that the transaction was a loan was also not denied by PBC. He declared: Q Testimony was given here that that was covered by trust receipt. In short it was a special kind of loan. What can you say as to that? A I dont think that would be a trust receipt because we were made to understand by the manager who encouraged us to avail of their facilities that they will be granting us a loan[44] PBC could have presented its former bank manager, Cayo Garcia Tuiza, who contracted with Petitioners, to refute Velosos testimony, yet it only presented credit investigator Grego Mutia. Nowhere from Mutias testimony can it be gleaned that PBC represented to Petitioners that the transaction they were entering into was not a pure loan but had trust receipt implications. The Trust Receipts Law does not seek to enforce payment of the loan, rather it punishes the dishonesty and abuse of confidence in the handling of money or

goods to the prejudice of another regardless of whether the latter is the owner.[45] Here, it is crystal clear that on the part of Petitioners there was neither dishonesty nor abuse of confidence in the handling of money to the prejudice of PBC. Petitioners continually endeavored to meet their obligations, as shown by several receipts issued by PBC acknowledging payment of the loan. The Information charges Petitioners with intent to defraud and misappropriating the money for their personal use. The mala prohibita nature of the alleged offense notwithstanding, intent as a state of mind was not proved to be present in Petitioners situation. Petitioners employed no artifice in dealing with PBC and never did they evade payment of their obligation nor attempt to abscond. Instead, Petitioners sought favorable terms precisely to meet their obligation. Also noteworthy is the fact that Petitioners are not importers acquiring the goods for re-sale, contrary to the express provision embodied in the trust receipt. They are contractors who obtained the fungible goods for their construction project. At no time did title over the construction materials pass to the bank, but directly to the Petitioners from CM Builders Centre. This impresses upon the trust receipt in question vagueness and ambiguity, which should not be the basis for criminal prosecution in the event of violation of its provisions.[46] The practice of banks of making borrowers sign trust receipts to facilitate collection of loans and place them under the threats of criminal prosecution should

they be unable to pay it may be unjust and inequitable, if not reprehensible. Such agreements are contracts of adhesion which borrowers have no option but to sign lest their loan be disapproved. The resort to this scheme leaves poor and hapless borrowers at the mercy of banks, and is prone to misinterpretation, as had happened in this case. Eventually, PBC showed its true colors and admitted that it was only after collection of the money, as manifested by its Affidavit of Desistance. WHEREFORE, the challenged Decision of 6 March 1989 and the Resolution of 16 October 1989 of the Court of Appeals in CA-GR. No. 05408 are REVERSED and SET ASIDE. Petitioners are hereby ACQUITTED of the crime charged, i.e., for violation of P.D. No. 115 in relation to Article 315 of the Revised Penal Code. No costs. SO ORDERED. Kapunan, and Pardo, JJ., concur. Puno, J., no part. Ynares-Santiago, J., on leave. G.R. No. 143772 November 22, 2005 DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. PRUDENTIAL BANK, Respondent. DECISION

CORONA, J.: Development Bank of the Philippines (DBP) assails in this petition for review on certiorari under Rule 45 of the Rules of Court the December 14, 1999 decision1 and the June 8, 2000 resolution of the Court of Appeals in CAG.R. CV No. 45783. The challenged decision dismissed DBPs appeal and affirmed the February 12, 1991 decision of the Regional Trial Court of Makati, Branch 137 in Civil Case No. 88-931 in toto, while the impugned resolution denied DBPs motion for reconsideration for being pro forma. In 1973, Lirag Textile Mills, Inc. (Litex) opened an irrevocable commercial letter of credit with respondent Prudential Bank for US$498,000. This was in connection with its importation of 5,000 spindles for spinning machinery with drawing frame, simplex fly frame, ring spinning frame and various accessories, spare parts and tool gauge. These were released to Litex under covering "trust receipts" it executed in favor of Prudential Bank. Litex installed and used the items in its textile mill located in Montalban, Rizal. On October 10, 1980, DBP granted a foreign currency loan in the amount of US$4,807,551 to Litex. To secure the loan, Litex executed real estate and chattel mortgages on its plant site in Montalban, Rizal, including the buildings and other improvements, machineries and equipments there. Among the machineries and equipments mortgaged in favor of DBP were the articles

covered by the "trust receipts." Sometime in June 1982, Prudential Bank learned about DBPs plan for the overall rehabilitation of Litex. In a July 14, 1982 letter, Prudential Bank notified DBP of its claim over the various items covered by the "trust receipts" which had been installed and used by Litex in the textile mill. Prudential Bank informed DBP that it was the absolute and juridical owner of the said items and they were thus not part of the mortgaged assets that could be legally ceded to DBP. For the failure of Litex to pay its obligation, DBP extrajudicially foreclosed on the real estate and chattel mortgages, including the articles claimed by Prudential Bank. During the foreclosure sale held on April 19, 1983, DBP acquired the foreclosed properties as the highest bidder. Subsequently, DBP caused to be published in the September 2, 1984 issue of the Times Journal an invitation to bid in the public sale to be held on September 10, 1984. It called on interested parties to submit bids for the sale of the textile mill formerly owned by Litex, the land on which it was built, as well as the machineries and equipments therein. Learning of the intended public auction, Prudential Bank wrote a letter dated September 6, 1984 to DBP reasserting its claim over the items covered by "trust receipts" in its name and advising DBP not to include them in the auction. It also demanded the turn-over of the articles or alternatively,

the payment of their value. An exchange of correspondences ensued between Prudential Bank and DBP. In reply to Prudential Banks September 6, 1984 letter, DBP requested documents to enable it to evaluate Prudential Banks claim. On September 28, 1994, Prudential Bank provided DBP the requested documents. Two months later, Prudential Bank followed up the status of its claim. In a letter dated December 3, 1984, DBP informed Prudential Bank that its claim had been referred to DBPs legal department and instructed Prudential Bank to get in touch with its chief legal counsel. There being no concrete action on DBPs part, Prudential Bank, in a letter dated July 30, 1985, made a final demand on DBP for the turn-over of the contested articles or the payment of their value. Without the knowledge of Prudential Bank, however, DBP sold the Litex textile mill, as well as the machineries and equipments therein, to Lyon Textile Mills, Inc. (Lyon) on June 8, 1987. Since its demands remained unheeded, Prudential Bank filed a complaint for a sum of money with damages against DBP with the Regional Trial Court of Makati, Branch 137, on May 24, 1988. The complaint was docketed as Civil Case No. 88-931. On February 12, 1991, the trial court decided2 in favor of Prudential Bank. Applying the provisions of PD 115, otherwise known as the "Trust Receipts Law," it ruled:

When PRUDENTIAL BANK released possession of the subject properties, over which it holds absolute title to LITEX upon the latters execution of the trust receipts, the latter was bound to hold said properties in trust for the former, and (a) to sell or otherwise dispose of the same and to turn over to PRUDENTIAL BANK the amount still owing; or (b) to return the goods if unsold. Since LITEX was allowed to sell the properties being claimed by PRUDENTIAL BANK, all the more was it authorized to mortgage the same, provided of course LITEX turns over to PRUDENTIAL BANK all amounts owing. When DBP, well aware of the status of the properties, acquired the same in the public auction, it was bound by the terms of the trust receipts of which LITEX was the entrustee. Simply stated, DBP held no better right than LITEX, and is thus bound to turn over whatever amount was due PRUDENTIAL BANK. Being a trustee ex maleficio of PRUDENTIAL BANK, DBP is necessarily liable therefor. In fact, DBP may well be considered as an agent of LITEX when the former sold the properties being claimed by PRUDENTIAL BANK, with the corresponding responsibility to turn over the proceeds of the same to PRUDENTIAL BANK.3 (Citations omitted) The dispositive portion of the decision read: WHEREFORE, judgment is hereby rendered ordering defendant DEVELOPMENT BANK OF THE PHILIPPINES to pay plaintiff PRUDENTIAL BANK: a) P3,261,834.00, as actual damages, with interest

thereon computed from 10 August 1985 until the entire amount shall have been fully paid; b) P50,000.00 as exemplary damages; and c) 10% of the total amount due as and for attorneys fees. SO ORDERED. Aggrieved, DBP filed an appeal with the Court of Appeals. However, the appellate court dismissed the appeal and affirmed the decision of the trial court in toto. It applied the provisions of PD 115 and held that ownership over the contested articles belonged to Prudential Bank as entrustor, not to Litex. Consequently, even if Litex mortgaged the items to DBP and the latter foreclosed on such mortgage, DBP was duty-bound to turn over the proceeds to Prudential Bank, being the party that advanced the payment for them. On DBPs argument that the disputed articles were not proper objects of a trust receipt agreement, the Court of Appeals ruled that the items were part of the trust agreement entered into by and between Prudential Bank and Litex. Since the agreement was not contrary to law, morals, public policy, customs and good order, it was binding on the parties. Moreover, the appellate court found that DBP was not a mortgagee in good faith. It also upheld the finding of the trial court that DBP was a trustee ex maleficio of

Prudential Bank over the articles covered by the "trust receipts." DBP filed a motion for reconsideration but the appellate court denied it for being pro forma. Hence, this petition. Trust receipt transactions are governed by the provisions of PD 115 which defines such a transaction as follows: Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case of goods delivered under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over the goods whether in its original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or necessary to their sale; or 2. In the case of instruments, (a) to sell or procure their sale or exchange; or (b) to deliver them to a principal; or (c) to effect the consummation of some transactions involving delivery to a depository or register; or (d) to effect their presentation, collection or renewal. xxxxxxxxx In a trust receipt transaction, the goods are released by the entruster (who owns or holds absolute title or security interests over the said goods) to the entrustee on the latters execution and delivery to the entruster of a trust receipt. The trust receipt evidences the absolute title or security interest of the entruster over the goods. As a consequence of the release of the goods and the execution of the trust receipt, a two-fold obligation is imposed on the entrustee, namely: (1) to hold the designated goods, documents or instruments in trust for the purpose of selling or otherwise disposing of them and

(2) to turn over to the entruster either the proceeds thereof to the extent of the amount owing to the entruster or as appears in the trust receipt, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt. In the case of goods, they may also be released for other purposes substantially equivalent to (a) their sale or the procurement of their sale; or (b) their manufacture or processing with the purpose of ultimate sale, in which case the entruster retains his title over the said goods whether in their original or processed form until the entrustee has complied fully with his obligation under the trust receipt; or (c) the loading, unloading, shipment or transshipment or otherwise dealing with them in a manner preliminary or necessary to their sale.4 Thus, in a trust receipt transaction, the release of the goods to the entrustee, on his execution of a trust receipt, is essentially for the purpose of their sale or is necessarily connected with their ultimate or subsequent sale. Here, Litex was not engaged in the business of selling spinning machinery, its accessories and spare parts but in manufacturing and producing textile and various kinds of fabric. The articles were not released to Litex to be sold. Nor was the transfer of possession intended to be a preliminary step for the said goods to be ultimately or subsequently sold. Instead, the contemporaneous and subsequent acts of both Litex and Prudential Bank showed that the imported articles were released to Litex to be installed in its textile mill and used in its business.

DBP itself was aware of this. To support its assertion that the contested articles were excluded from goods that could be covered by a trust receipt, it contended: First. That the chattels in controversy were procured by DBPs mortgagor Lirag Textile Mills ("LITEX") for the exclusive use of its textile mills. They were not procured (a) to sell or otherwise procure their sale; (b) to manufacture or process the goods with the purpose of ultimate sale.5 (emphasis supplied) Hence, the transactions between Litex and Prudential Bank were allegedly not trust receipt transactions within the meaning of PD 115. It follows that, contrary to the decisions of the trial court and the appellate court, the transactions were not governed by the Trust Receipts Law. We disagree. The various agreements between Prudential Bank and Litex commonly denominated as "trust receipts" were valid. As the Court of Appeals correctly ruled, their provisions did not contravene the law, morals, good customs, public order or public policy. The agreements uniformly provided:

Received, upon the Trust hereinafter mentioned from the PRUDENTIAL BANK (hereinafter referred to as BANK) the following goods and merchandise, the property of said BANK specified in the bill of lading as follows: Amount of Bill Description of Security Marks & Nos.

and in consideration thereof, I/We hereby agree to hold said goods in trust for the BANK and as its property with liberty to sell the same for its account but without authority to make any other disposition whatsoever of the said goods or any part thereof (or the proceeds thereof) either by way of conditional sale, pledge, or otherwise. x x x x x x x x x6 (Emphasis supplied) The articles were owned by Prudential Bank and they were only held by Litex in trust. While it was allowed to sell the items, Litex had no authority to dispose of them or any part thereof or their proceeds through conditional sale, pledge or any other means. Article 2085 (2) of the Civil Code requires that, in a contract of pledge or mortgage, it is essential that the pledgor or mortgagor should be the absolute owner of the thing pledged or mortgaged. Article 2085 (3) further mandates that the person constituting the pledge or mortgage must have the free disposal of his property, and in the absence thereof, that he be legally authorized for the purpose.

Litex had neither absolute ownership, free disposal nor the authority to freely dispose of the articles. Litex could not have subjected them to a chattel mortgage. Their inclusion in the mortgage was void7 and had no legal effect.8 There being no valid mortgage, there could also be no valid foreclosure or valid auction sale.9 Thus, DBP could not be considered either as a mortgagee or as a purchaser in good faith.10 No one can transfer a right to another greater than what he himself has.11 Nemo dat quod non habet. Hence, Litex could not transfer a right that it did not have over the disputed items. Corollarily, DBP could not acquire a right greater than what its predecessor-in-interest had. The spring cannot rise higher than its source.12 DBP merely stepped into the shoes of Litex as trustee of the imported articles with an obligation to pay their value or to return them on Prudential Banks demand. By its failure to pay or return them despite Prudential Banks repeated demands and by selling them to Lyon without Prudential Banks knowledge and conformity, DBP became a trustee ex maleficio. On the matter of actual damages adjudged by the trial court and affirmed by the Court of Appeals, DBP wants this Court to review the evidence presented during the trial and to reverse the factual findings of the trial court. This Court is, however, not a trier of facts and it is not its function to analyze or weigh evidence anew.13 The rule is that factual findings of the trial court, when adopted and confirmed by the CA, are binding and conclusive on this

Court and generally will not be reviewed on appeal.14 While there are recognized exceptions to this rule, none of the established exceptions finds application here. With regard to the imposition of exemplary damages, the appellate court agreed with the trial court that the requirements for the award thereof had been sufficiently established. Prudential Banks entitlement to compensatory damages was likewise amply proven. It was also shown that DBP was aware of Prudential Banks claim as early as July, 1982. However, it ignored the latters demand, included the disputed articles in the mortgage foreclosure and caused their sale in a public auction held on April 19, 1983 where it was declared as the highest bidder. Thereafter, in the series of communications between them, DBP gave Prudential Bank the false impression that its claim was still being evaluated. Without acting on Prudential Banks plea, DBP included the contested articles among the properties it sold to Lyon in June, 1987. The trial court found that this chain of events showed DBPs fraudulent attempt to prevent Prudential Bank from asserting its rights. It smacked of bad faith, if not deceit. Thus, the award of exemplary damages was in order. Due to the award of exemplary damages, the grant of attorneys fees was proper.15 DBPs assertion that both the trial and appellate courts failed to address the issue of prescription is of no moment. Its claim that, under Article 1146 (1) of the Civil Code, Prudential Banks cause of action had prescribed

as it should be reckoned from October 10, 1980, the day the mortgage was registered, is not correct. The written extra-judicial demand by the creditor interrupted the prescription of action.16 Hence, the four-year prescriptive period which DBP insists should be counted from the registration of the mortgage was interrupted when Prudential Bank wrote the extra-judicial demands for the turn over of the articles or their value. In particular, the last demand letter sent by Prudential Bank was dated July 30, 1988 and this was received by DBP the following day. Thus, contrary to DBPs claim, Prudential Banks right to enforce its action had not yet prescribed when it filed the complaint on May 24, 1988. WHEREFORE, the petition is hereby DENIED. The December 14, 1999 decision and June 8, 2000 resolution of the Court of Appeals in CA-G.R. CV No. 45783 are AFFIRMED. Costs against the petitioner. SO ORDERED. [G.R. No. 137232. June 29, 2005]

respondent. DECISION SANDOVAL-GUTIERREZ, J.: For our resolution is the petition for review on certiorari assailing the Decision[1] of the Court of Appeals dated March 31, 1998 in CA-G.R. CV No. 48708 and its Resolution dated January 12, 1999. The facts of the case as found by the Court of Appeals are: Sometime in 1989, Rosario Textile Mills Corporation (RTMC) applied from Home Bankers Savings & Trust Co. for an Omnibus Credit Line for P10 million. The bank approved RTMCs credit line but for only P8 million. The bank notified RTMC of the grant of the said loan thru a letter dated March 2, 1989 which contains terms and conditions conformed by RTMC thru Edilberto V. Yujuico. On March 3, 1989, Yujuico signed a Surety Agreement in favor of the bank, in which he bound himself jointly and severally with RTMC for the payment of all RTMCs indebtedness to the bank from 1989 to 1990. RTMC availed of the credit line by making numerous drawdowns, each drawdown being covered by a separate promissory note and trust receipt. RTMC, represented by Yujuico, executed in favor of the bank a total of eleven (11) promissory notes. Despite the lapse of the respective due dates under the

ROSARIO TEXTILE MILLS CORPORATION and EDILBERTO YUJUICO, petitioners, vs. HOME BANKERS SAVINGS AND TRUST COMPANY,

promissory notes and notwithstanding the banks demand letters, RTMC failed to pay its loans. Hence, on January 22, 1993, the bank filed a complaint for sum of money against RTMC and Yujuico before the Regional Trial Court, Br. 16, Manila. In their answer (OR, pp. 44-47), RTMC and Yujuico contend that they should be absolved from liability. They claimed that although the grant of the credit line and the execution of the suretyship agreement are admitted, the bank gave assurance that the suretyship agreement was merely a formality under which Yujuico will not be personally liable. They argue that the importation of raw materials under the credit line was with a grant of option to them to turn-over to the bank the imported raw materials should these fail to meet their manufacturing requirements. RTMC offered to make such turn-over since the imported materials did not conform to the required specifications. However, the bank refused to accept the same, until the materials were destroyed by a fire which gutted down RTMCs premises. For failure of the parties to amicably settle the case, trial on the merits proceeded. After the trial, the Court a quo rendered a decision in favor of the bank, the decretal part of which reads: WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of plaintiff and against defendants who are ordered to pay jointly and severally

in favor of plaintiff, inclusive of stipulated 30% per annum interest and penalty of 3% per month until fully paid, under the following promissory notes: 90-1116 P737,088.25 6-20-90 9-18-90

(maturity) 90-1320 7-13-90 P650,000.00 10-11-90 90-1334 7-17-90 P422,500.00 10-15-90 90-1335 7-17-90 P422,500.00 10-15-90 90-1347 7-18-90 P795,000.00 10-16-90 90-1373 7-20-90 P715,900.00 10-18-90 90-1397 7-27-90 P773,500.00 10-20-90 90-1429 7-26-90 P425,750.00 10-24-90 90-1540 8-7-90 P720,984.00 11-5-90 90-1569 8-9-90 P209,433.75 11-8-90 90-0922 5-28-90 P747,780.00 8-26-90 The counterclaims of defendants are hereby DISMISSED.

SO ORDERED. (OR, p. 323; Rollo, p. 73).[2] Dissatisfied, RTMC and Yujuico, herein petitioners, appealed to the Court of Appeals, contending that under the trust receipt contracts between the parties, they merely held the goods described therein in trust for respondent Home Bankers Savings and Trust Company (the bank) which owns the same. Since the ownership of the goods remains with the bank, then it should bear the loss. With the destruction of the goods by fire, petitioners should have been relieved of any obligation to pay. The Court of Appeals, however, affirmed the trial courts judgment, holding that the bank is merely the holder of the security for its advance payments to petitioners; and that the goods they purchased, through the credit line extended by the bank, belong to them and hold said goods at their own risk. Petitioners then filed a motion for reconsideration but this was denied by the Appellate Court in its Resolution dated January 12, 1999. Hence, this petition for review on certiorari ascribing to the Court of Appeals the following errors: I THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE ACTS OF THE PETITIONERS-DEFENDANTS WERE TANTAMOUNT

TO A VALID AND EFFECTIVE TENDER OF THE GOODS TO THE RESPONDENT-PLAINTIFF. II THE HONORABLE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF RES PERIT DOMINO IN THE CASE AT BAR CONSIDERING THE VALID AND EFFECTIVE TENDER OF THE DEFECTIVE RAW MATERIALS BY THE PETITIONERSDEFENDANTS TO THE RESPONDENT-PLAINTIFF AND THE EXPRESS STIPULATION IN THEIR CONTRACT THAT OWNERSHIP OF THE GOODS REMAINS WITH THE RESPONDENT-PLAINTIFF. III THE HONORABLE COURT OF APPEALS VIOLATED ARTICLE 1370 OF THE CIVIL CODE AND THE LONGSTANDING JURISPRUDENCE THAT INTENTION OF THE PARTIES IS PRIMORDIAL IN ITS FAILURE TO UPHOLD THE INTENTION OF THE PARTIES THAT THE SURETY AGREEMENT WAS A MERE FORMALITY AND DID NOT INTEND TO HOLD PETITIONER YUJUICO LIABLE UNDER THE SAME SURETY AGREEMENT. IV ASSUMING ARGUENDO THAT THE SURETYSHIP AGREEMENT WAS VALID AND EFFECTIVE, THE

HONORABLE COURT OF APPEALS VIOLATED THE BASIC LEGAL PRECEPT THAT A SURETY IS NOT LIABLE UNLESS THE DEBTOR IS HIMSELF LIABLE. V THE HONORABLE COURT OF APPEALS VIOLATED THE PURPOSE OF TRUST RECEIPT LAW IN HOLDING THE PETITIONERS LIABLE TO THE RESPONDENT. The above assigned errors boil down to the following issues: (1) whether the Court of Appeals erred in holding that petitioners are not relieved of their obligation to pay their loan after they tried to tender the goods to the bank which refused to accept the same, and which goods were subsequently lost in a fire; (2) whether the Court of Appeals erred when it ruled that petitioners are solidarily liable for the payment of their obligations to the bank; and (3) whether the Court of Appeals violated the Trust Receipts Law. On the first issue, petitioners theorize that when petitioner RTMC imported the raw materials needed for its manufacture, using the credit line, it was merely acting on behalf of the bank, the true owner of the goods by virtue of the trust receipts. Hence, under the doctrine of res perit domino, the bank took the risk of the loss of said raw materials. RTMCs role in the transaction was that of end user of the raw materials and when it did not accept those materials as they did not meet the manufacturing

requirements, RTMC made a valid and effective tender of the goods to the bank. Since the bank refused to accept the raw materials, RTMC stored them in its warehouse. When the warehouse and its contents were gutted by fire, petitioners obligation to the bank was accordingly extinguished. Petitioners stance, however, conveniently ignores the true nature of its transaction with the bank. We recall that RTMC filed with the bank an application for a credit line in the amount of P10 million, but only P8 million was approved. RTMC then made withdrawals from this credit line and issued several promissory notes in favor of the bank. In banking and commerce, a credit line is that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit and generally agreed to in advance.[3] It is the fixed limit of credit granted by a bank, retailer, or credit card issuer to a customer, to the full extent of which the latter may avail himself of his dealings with the former but which he must not exceed and is usually intended to cover a series of transactions in which case, when the customers line of credit is nearly exhausted, he is expected to reduce his indebtedness by payments before making any further drawings.[4] It is thus clear that the principal transaction between petitioner RTMC and the bank is a contract of loan. RTMC used the proceeds of this loan to purchase raw materials from a supplier abroad. In order to secure the payment of the loan, RTMC delivered the raw materials to the bank as collateral. Trust receipts were executed

by the parties to evidence this security arrangement. Simply stated, the trust receipts were mere securities. In Samo vs. People,[5] we described a trust receipt as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral, of the merchandise imported or purchased.[6] In Vintola vs. Insular Bank of Asia and America,[7] we elucidated further that a trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a security interest in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation.[8] Section 3 (h) of the Trust Receipts Law (P.D. No. 115) defines a security interest as follows: (h) Security Interest means a property interest in goods, documents, or instruments to secure performance of some obligation of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. Petitioners insistence that the ownership of the raw materials remained with the bank is untenable. In Sia vs. People,[9] Abad vs. Court of Appeals,[10] and PNB vs. Pineda,[11] we held that:

If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than fact, for if it were really so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof...[12] Thus, petitioners cannot be relieved of their obligation to pay their loan in favor of the bank. Anent the second issue, petitioner Yujuico contends that the suretyship agreement he signed does not bind him, the same being a mere formality. We reject petitioner Yujuicos contentions for two reasons. First, there is no record to support his allegation that the surety agreement is a mere formality; and Second, as correctly held by the Court of Appeals, the Suretyship Agreement signed by petitioner Yujuico binds him. The terms clearly show that he agreed to pay the bank jointly and severally with RTMC. The parole evidence rule under Section 9, Rule 130 of the Revised Rules of Court is in point, thus: SEC. 9. Evidence of written agreements. When the terms of an agreement have been reduced in writing, it is

considered as containing all the terms agreed upon and there can be, between the parties and their successors in interest, no evidence of such terms other than the contents of the written agreement. However, a party may present evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleading: (a) An intrinsic ambiguity, mistake, or imperfection in the written agreement; The failure of the written agreement to express the true intent and agreement of the parties thereto; The validity of the written agreement; or The existence of other terms agreed to by the parties or their successors in interest after the execution of the written agreement. x x x. Under this Rule, the terms of a contract are rendered conclusive upon the parties and evidence aliunde is not admissible to vary or contradict a complete and enforceable agreement embodied in a document.[13] We have carefully examined the Suretyship Agreement

signed by Yujuico and found no ambiguity therein. Documents must be taken as explaining all the terms of the agreement between the parties when there appears to be no ambiguity in the language of said documents nor any failure to express the true intent and agreement of the parties.[14] As to the third and final issue At the risk of being repetitious, we stress that the contract between the parties is a loan. What respondent bank sought to collect as creditor was the loan it granted to petitioners. Petitioners recourse is to sue their supplier, if indeed the materials were defective. WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 48708 are AFFIRMED IN TOTO. Costs against petitioners. SO ORDERED. Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ., concur.

(b)

(c) (d)

G.R. No. 73271 May 29, 1987 SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA, defendants-appellants, vs. INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellee.

MELENCIO-HERRERA, J.: This case was appealed to the Intermediate Appellate Court which, however, certified the same to this Court, the issue involved being purely legal. The facts are not disputed. On August 20, 1975 the spouses Tirso and Loreta Vintola (the VINTOLAS, for short), doing business under the name and style "Dax Kin International," engaged in the manufacture of raw sea shells into finished products, applied for and were granted a domestic letter of credit by the Insular Bank of Asia and America (IBAA), Cebu City. 1 in the amount of P40,000.00. The Letter of Credit authorized the bank to negotiate for their account drafts drawn by their supplier, one Stalin Tan, on Dax Kin International for the purchase of puka and olive seashells. In consideration thereof, the VINTOLAS, jointly and severally, agreed to pay the bank "at maturity, in Philippine currency, the equivalent, of the aforementioned amount or such portion thereof as may be drawn or paid, upon the faith of the said credit together with the usual charges." On the same day, August 20, 1975, having received from Stalin Tan the puka and olive shells worth P40,000.00, the VINTOLAS executed a Trust Receipt agreement with IBAA, Cebu City. Under that Agreement, the VINTOLAS agreed to hold the goods in trust for IBAA as the "latter's property with liberty to sell the same for its account, " and

"in case of sale" to turn over the proceeds as soon as received to (IBAA) the due date indicated in the document was October 19, 1975. Having defaulted on their obligation, IBAA demanded payment from the VINTOLAS in a letter dated January 1, 1976. The VINTOLAS, who were unable to dispose of the shells, responded by offering to return the goods. IBAA refused to accept the merchandise, and due to the continued refusal of the VINTOLAS to make good their undertaking, IBAA charged them with Estafa for having misappropriated, misapplied and converted for their own personal use and benefit the aforesaid goods. During the trial of the criminal case the VINTOLAS turned over the seashells to the custody of the Trial Court. On April 12, 1982, the then Court of First Instance of Cebu, Branch VII, acquitted the VINTOLAS of the crime charged, after finding that the element of misappropriation or conversion was inexistent. Concluded the Court: Finally, it should be mentioned that under the trust receipt, in the event of default and/or non-fulfillment on the part of the accused of their undertaking, the bank is entitled to take possession of the goods or to recover its equivalent value together with the usual charges. In either case, the remedy of the Bank is civil and not criminal in nature. ... 2 Shortly thereafter, IBAA commenced the present civil

action to recover the value of the goods before the Regional Trial Court of Cebu, Branch XVI. Holding that the complaint was barred by the judgment of acquittal in the criminal case, said Court dismissed the complaint. However, on IBAA's motion, the Court granted reconsideration and: 1. Order(ed)defendants jointly and severally to pay the plaintiff the sum of Seventy Two Thousand Nine Hundred Eighty Two and 27/100 (P72,982.27), Philippine Currency, plus interest of 14% per annum and service charge of one (1%) per cent per annum computed from judicial demand and until the obligation is fully paid; 2. Ordered defendants jointly and severally to pay attorney's fees to the plaintiff in the sum of Four Thousand (P4,000.00) pesos, Philippine Currency, plus costs of the suit. 3 The VINTOLAS rest their present appeal on the principal allegation that their acquittal in the Estafa case bars IBAA's filing of the civil action because IBAA had not reserved in the criminal case its right to enforce separately their civil liability. They maintain that by intervening actively in the prosecution of the criminal case through a private prosecutor, IBAA had chosen to file the civil action impliedly with the criminal action, pursuant to Section 1, Rule 111 of the 1985 Rules on Criminal Procedure, reading:

Section 1. Institution of criminal and civil action. When a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged is impliedly instituted with the criminal action, unless the offended party expressly waives the civil action or reserves his right to institute it separately. ... and that since the judgment in the criminal case had made a declaration that the facts from which the civil action might arise did not exist, the filing of the civil action arising from the offense is now barred, as provided by Section 3-b of Rule 111 of the same Rules providing: (b) Extinction of the penal action does not carry with it extinction of the civil, unless the extinction proceeds from a declaration in a final judgment that the fact from which the civil might arise did not exist. In other cases, the person entitled to the civil action may institute it in the jurisdiction in the manner provided by law against the person who may be liable for restitution of the thing and reparation or indemnity for the damage suffered. Further, the VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as, through no fault of their own, they were unable to dispose of the seashells, and that they have relinguished possession thereof to the IBAA, as owner of the goods, by depositing them with the Court. The foregoing submission overlooks the nature and mercantile usage of the transaction involved. A letter of

credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the Letter of Credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. Thus, Section 4 of P.D. No. 115 defines a trust receipt transaction as: ... any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in this Decree as the entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instrument thereof to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent to any one of the following: 1. In the case of goods or documents, (a) to sell the

goods or procure their sale, ... A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. "It secures an indebtedness and there can be no such thing as security interest that secures no obligation." 4 As defined in our laws: (h) "Security Interest"means a property interest in goods, documents or instruments to secure performance of some obligations of the entrustee or of some third persons to the entruster and includes title, whether or not expressed to be absolute, whenever such title is in substance taken or retained for security only. 5 As elucidated in Samo vs. People 6 "a trust receipt is considered as a security transaction intended to aid in financing importers and retail dealers who do not have sufficient funds or resources to finance the importation or purchase of merchandise, and who may not be able to acquire credit except through utilization, as collateral of the merchandise imported or purchased." Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the goods. It was merely the holder of a security title for the advances it had made to the VINTOLAS The goods the VINTOLAS had purchased through IBAA financing remain their own property and they hold it at their own risk. The trust receipt arrangement did not convert the IBAA into an investor; the latter remained a lender and creditor.

... for the bank has previously extended a loan which the L/C represents to the importer, and by that loan, the importer should be the real owner of the goods. If under the trust receipt, the bank is made to appear as the owner, it was but an artificial expedient, more of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it wants, which it cannot do, just to give consistency with the purpose of the trust receipt of giving a stronger security for the loan obtained by the importer. To consider the bank as the true owner from the inception of the transaction would be to disregard the loan feature thereof. ... 7 Since the IBAA is not the factual owner of the goods, the VINTOLAS cannot justifiably claim that because they have surrendered the goods to IBAA and subsequently deposited them in the custody of the court, they are absolutely relieved of their obligation to pay their loan because of their inability to dispose of the goods. The fact that they were unable to sell the seashells in question does not affect IBAA's right to recover the advances it had made under the Letter of Credit. In so arguing, the VINTOLAS conveniently close their eyes to their application for a Letter of Credit wherein they expressly obligated themselves in these terms: IN CONSIDERATION THEREOF, I/we promise and agree to pay you at maturity in Philippine Currency the equivalent of the above amount or such portion thereof as may be drawn or paid upon the faith of said credit together with the usual charges. ... (Exhibit "A")

They further agreed that their marginal deposit of P8,000.00, later increased to P11,000.00 be applied, without further proceedings or formalities to pay or reduce our obligation under this letter of credit or its corresponding Trust Receipt. (Emphasis supplied) 8 The foregoing premises considered, it follows that the acquittal of the VINTOLAS in the Estafa case is no bar to the institution of a civil action for collection. It is inaccurate for the VINTOLAS to claim that the judgment in the estafa case had declared that the facts from which the civil action might arise, did not exist, for, it will be recalled that the decision of acquittal expressly declared that "the remedy of the Bank is civil and not criminal in nature." This amounts to a reservation of the civil action in IBAA's favor, for the Court would not have dwelt on a civil liability that it had intended to extinguish by the same decision. 9 The VINTOLAS are liable ex contractu for breach of the Letter of Credit Trust Receipt, whether they did or they did not "misappropriate, misapply or convert" the merchandise as charged in the criminal case. 10 Their civil liability does not arise ex delicto, the action for the recovery of which would have been deemed instituted with the criminal-action (unless waived or reserved) and where acquittal based on a judicial declaration that the criminal acts charged do not exist would have extinguished the civil action. 11 Rather, the civil suit instituted by IBAA is based ex contractu and as such is distinct and independent from any criminal proceedings and may proceed regardless of the result of

the latter. Under the situational circumstances of the parties, they are governed by Article 31 of the Civil Code, explicitly providing: Art. 31. When the civil action is based on an obligation not arising from the act or omission complained of as a felony, such civil action may proceed independently of the criminal proceedings and regardless of the result of the latter. WHEREFORE, finding no reversible error in the judgment appealed from, the same is hereby AFFIRMED. No costs. SO ORDERED. Yap (Chairman), Narvasa, Sarmiento, JJ., concur. Feliciano, J., is on leave. G.R. No. 75954 October 22, 1992 PEOPLE OF THE PHILIPPINES, petitioner, vs. HON. DAVID G. NITAFAN, Presiding Judge, Regional Trial Court, Branch 52, Manila, and K.T. LIM alias MARIANO LIM, respondents. Cruz, Gancayco, and

Failing in his argument that B.P. 22, otherwise known as the "Bouncing Check Law", is unconstitutional, 1 private respondent now argues that the check he issued, a memorandum check, is in the nature of a promissory note, hence, outside the purview of the statute. Here, his argument must also fail. The facts are simple. Private respondent K.T. Lim was charged before respondent court with violation of B.P. 22 in an Information alleging That on . . . January 10, 1985, in the City of Manila . . . the said accused did then and there wilfully, unlawfully and feloniously make or draw and issue to Fatima Cortez Sasaki . . . Philippine Trust Company Check No. 117383 dated February 9, 1985 . . . in the amount of P143,000.00, . . . well knowing that at the time of issue he . . . did not have sufficient funds in or credit with the drawee bank . . . which check . . . was subsequently dishonored by the drawee bank for insufficiency of funds, and despite receipt of notice of such dishonor, said accused failed to pay said Fatima Cortez Sasaki the amount of said check or to make arrangement for full payment of the same within five (5) banking days after receiving said notice. 2 On 18 July 1986, private respondent moved to quash the Information of the ground that the facts charged did not constitute a felony as B.P. 22 was unconstitutional and that the check he issued was a memorandum check which was in the nature of a promissory note, perforce,

BELLOSILLO, J.:

civil in nature. On 1 September 1986, respondent judge, ruling that B.P. 22 on which the Information was based was unconstitutional, issued the questioned Order quashing the Information. Hence, this petition for review on certiorari filed by the Solicitor General in behalf of the government. Since the constitutionality of the "Bouncing Check Law" has already been sustained by this Court in Lozano v. Martinez 3 and the seven (7) other cases decided jointly with it, 4 the remaining issue, as aptly stated by private respondent in his Memorandum, is whether a memorandum check issued postdated in partial payment of a pre-existing obligation is within the coverage of B.P. 22. Citing U.S. v. Isham, 5 private respondent contends that although a memorandum check may not differ in form and appearance from an ordinary check, such a check is given by the drawer to the payee more in the nature of memorandum of indebtedness and, should be sued upon in a civil action. We are not persuaded. A memorandum check is in the form of an ordinary check, with the word "memorandum", "memo" or "mem" written across its face, signifying that the maker or drawer engages to pay the bona fide holder absolutely, without any condition concerning its presentment. 6 Such a check is an evidence of debt against the drawer, and although

may not be intended to be presented, 7 has the same effect as an ordinary check, 8 and if passed to the third person, will be valid in his hands like any other check. 9 From the above definition, it is clear that a memorandum check, which is in the form of an ordinary check, is still drawn on a bank and should therefore be distinguished from a promissory note, which is but a mere promise to pay. If private respondent seeks to equate memorandum check with promissory note, as he does to skirt the provisions of B.P. 22, he could very well have issued a promissory note, and this would be have exempted him form the coverage of the law. In the business community a promissory note, certainly, has less impact and persuadability than a check. Verily, a memorandum check comes within the meaning of Sec. 185 of the Negotiable Instruments Law which defines a check as "a bill of exchange drawn on a bank payable on demand." A check is also defined as " [a] written order or request to a bank or persons carrying on the business of banking, by a party having money in their hands, desiring them to pay, on presentment, to a person therein named or bearer, or to such person or order, a named sum of money," citing 2 Dan. Neg. Inst. 528; Blair v. Wilson, 28 Gratt. (Va.) 170; Deener v. Brown, 1 MacArth. (D.C.) 350; In re Brown, 2 Sto. 502, Fed. Cas. No. 1,985. See Chapman v. White, 6 N.Y. 412, 57 Am. Dec 464. 10 Another definition of check is that is "[a] draft drawn upon a bank and payable on demand, signed by the maker or drawer, containing an unconditional promise

to pay a sum certain in money to the order of the payee," citing State v. Perrigoue, 81 Wash, 2d 640, 503 p. 2d 1063, 1066. 11 A memorandum check must therefore fall within the ambit of B.P. 22 which does not distinguish but merely provides that "[a]ny person who makes or draws and issues any check knowing at the time of issue that he does not have sufficient funds in or credit with the drawee bank . . . which check is subsequently dishonored . . . shall be punished by imprisonment . . ." (Emphasis supplied ). 12 Ubi lex no distinguit nec nos distinguere debemus. But even if We retrace the enactment of the "Bouncing Check Law" to determine the parameters of the concept of "check", We can easily glean that the members of the then Batasang Pambansa intended it to be comprehensive as to include all checks drawn against banks. This was particularly the ratiocination of Mar. Estelito P. Mendoza, co-sponsor of Cabinet Bill No. 9 which later became B.P. 22, when in response to the interpellation of Mr. Januario T. Seo, Mr. Mendoza explained that the draft or order must be addressed to a bank or depository, 13 and accepted the proposed amendment of Messrs. Antonio P. Roman and Arturo M. Tolentino that the words "draft or order", and certain terms which technically meant promissory notes, wherever they were found in the text of the bill, should be deleted since the bill was mainly directed against the pernicious practice of issuing checks with insufficient or no funds, and not to drafts which were not drawn against

banks. 14 A memorandum check, upon presentment, is generally accepted by the bank. Hence it does not matter whether the check issued is in the nature of a memorandum as evidence of indebtedness or whether it was issued is partial fulfillment of a pre-existing obligation, for what the law punishes is the issuance itself of a bouncing check 15 and not the purpose for which it was issuance. The mere act of issuing a worthless check, whether as a deposit, as a guarantee, or even as an evidence of a pre-existing debt, is malum prohibitum. 16 We are not unaware that a memorandum check may carry with it the understanding that it is not be presented at the bank but will be redeemed by the maker himself when the loan fall due. This understanding may be manifested by writing across the check "Memorandum", "Memo" or "Mem." However, with the promulgation of B.P. 22, such understanding or private arrangement may no longer prevail to exempt it from penal sanction imposed by the law. To require that the agreement surrounding the issuance of check be first looked into and thereafter exempt such issuance from the punitive provision of B.P. 22 on the basis of such agreement or understanding would frustrate the very purpose for which the law was enacted to stem the proliferation of unfunded checks. After having effectively reduced the incidence of worthless checks changing hands, the country will once again experience the limitless circulation of bouncing checks in the guise of

memorandum checks if such checks will be considered exempt from the operation of B.P. 22. It is common practice in commercial transactions to require debtors to issue checks on which creditors must rely as guarantee of payment. To determine the reasons for which checks are issued, or the terms and conditions for their issuance, will greatly erode the faith the public responses in the stability and commercial value of checks as currency substitutes, and bring about havoc in trade and in banking communities. 17 WHEREFORE, the petition is GRANTED and the Order of respondent Judge of 1 September 1986 is SET ASIDE. Consequently, respondent Judge, or whoever presides over the Regional Trial Court of Manila, Branch 52, is hereby directed forthwith to proceed with the hearing of the case until terminated. SO ORDERED. Gutierrez, Jr., Cruz, Feliciano, Padilla, Bidin, GrioAquino, Medialdea, Regalado, Davide, Jr., Romero, Nocon, Bellosillo and Melo, JJ., concur. Narvasa, C.J., is on leave. G.R. No. 172020 December 6, 2010

DECISION VILLARAMA, JR., J.: Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the Decision1 dated January 11, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed the Joint Decision2 dated August 26, 1998 of the Regional Trial Court (RTC) of Cebu City, Branch 13 in Civil Case Nos. R-22608 and CEB-112. The Facts Respondent-spouses Norberto and Milagros Castaares are engaged in the business of exporting shell crafts and other handicrafts. Between 1977 and 1978, respondents obtained from petitioner Traders Royal Bank various loans and credit accommodations. Respondents executed two real estate mortgages (REMs) dated April 18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T-37536, T-37535, T-37192 and T37191). As evidenced by Promissory Note No. BD-77113 dated May 10, 1977, petitioner released only the amount of P35,000.00 although the mortgage deeds indicated the principal amounts as P86,000.00 and P60,000.00.3 Respondents were further granted additional funds on various dates under promissory notes4 they executed in favor of the petitioner:

TRADERS ROYAL BANK, Petitioner, vs. NORBERTO CASTAARES and MILAGROS CASTAARES, Respondents.

Type of Loan

Date Granted

Amount

Packing Credit May 10, 1977 P19,000.00 Packing Credit May 18, 1977 P25,000.00 Packing Credit June 23, 1977 P12,500.00 Packing Credit August 19, 1977 P 2,900.00 Packing Credit April 4, 1978 P18,000.00 Packing Credit April 19, 1978 P23,000.00 On June 22, 1977, petitioner transferred the amount of P1,150.00 from respondents current account to their savings account, which was erroneously posted as P1,500.00 but later corrected to reflect the figure P1,150.00 in the savings account passbook. By the second quarter of 1978, the loans began to mature and the letters of credit against which the packing advances were granted started to expire. Meanwhile, on December 7, 1979, petitioner, without notifying the respondents, applied to the payment of respondents outstanding obligations the sum of $4,220.00 or P30,930.49 which was remitted to the respondents thru telegraphic transfer from AMROBANK, Amsterdam by one Richard Wagner. The aforesaid entries in the passbook of respondents and the $4,220.00 telegraphic transfer were the subject of respondents letter-complaint5 dated September 20, 1982 addressed to the Manager of the Regional Office of the Central Bank of the Philippines. For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with the extrajudicial foreclosure of the real estate mortgages.6 Thereafter, a Certificate of Sale7 covering all the

mortgaged properties was issued by Deputy Sheriff Wilfredo P. Borces in favor of petitioner as the lone bidder for P117,000.00 during the auction sale conducted on November 24, 1981. Said certificate of sale was registered with the Office of the Register of Deeds on February 4, 1982. On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming that after applying the proceeds of foreclosure sale to the total unpaid obligations of respondents (P200,397.78), respondents were still indebted to petitioner for the sum of P83,397.68.8 Respondents filed their Answer With Counterclaim on December 27, 1982.9 On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of the sums of P2,584.27 debited from their savings account passbook and the equivalent amount of $4,220.00 telegraphic transfer, and in addition, $55,258.85 representing the damage suffered by the respondents from letters of credit left unnegotiated because of petitioners refusal to pay the $4,220.00 demanded by the respondents.10 The cases were consolidated before Branch 13, RTC of Cebu City. Ruling of the RTC In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner, as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case No. R-22608 in favor of the plaintiff and against the defendants directing the defendants jointly and solidarily to pay plaintiff the sum of P83,397.68 with legal rate of interest to be computed from November 24, 1981 (the date of the auction sale) until full payment thereof. They are likewise directed to pay plaintiff attorneys fees in the sum of P10,000.00 plus litigation expenses in the amount of P2,500.00. With cost against defendants. In CEB-112, judgment is hereby rendered dismissing the complaint. With cost against the plaintiff. SO ORDERED.
12

With respect to the passbook entries, the trial court stated that no objection thereto was made by the respondents until five years later when in a letter dated August 10, 1982, respondents counsel asked petitioner to be enlightened on the matter. Neither did respondents protest the application of the balance (P1,150.00) in the passbook to his account with petitioner. More important, respondent Norberto Castaares in his testimony admitted that the matter was already clarified to him by petitioner and that the latter had the right to apply his deposit to his loan accounts. Admittedly, his complaint has to do more with the lack of consent on his part and the non-issuance of official receipt. However, he did not follow up his request for official receipt as he did not want to be going back and forth to the bank.14 CA Ruling With the trial courts denial of their motion for reconsideration, respondents appealed to the CA. Finding merit in respondents arguments, the appellate court set aside the trial courts judgment under its Decision15 dated January 11, 2006, thus: WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us GRANTING the appeal filed in this case and REVERSING AND SETTING ASIDE the Joint Decision dated August 26, 1998, Regional Trial Court, 7th Judicial Region, Branch 13, in Civil Case No. R-22608 and Civil Case No. CEB-112. With regard to Civil Case No. R-22608, the real estate

The trial court found that despite respondents insistence that the REM covered only a separate loan for P86,000.00 which they believed petitioner committed to lend them, the evidence clearly shows that said REM was constituted as security for all the promissory notes. No separate demand was made for the amount of P86,000.00 stated in the REM, as the demand was limited to the amounts of the promissory notes. The trial court further noted that respondents never questioned the judgment for extrajudicial foreclosure, the certificate of sale and the deficiency in that case.13

mortgage dated April 18, 1977 is hereby DECLARED as valid in part as to the amount of P35,000.00 actually released in favor of appellants, while the real estate mortgage dated January 26, 1978 is hereby declared as null and void. Furthermore, in Civil Case No. CEB-112, TRB is hereby ordered to release the amount of US$4,220.90 to the appellants at its current rate of exchange. No pronouncement as to costs. SO ORDERED.16 The CA held that the RTC overlooked the fact that there were no adequate evidence presented to prove that petitioner released in full to the respondents the proceeds of the REM loan. Citing Filipinas Marble Corporation v. Intermediate Appellate Court17 and Naguiat v. Court of Appeals,18 the appellate court declared that where there was failure of the mortgagee bank to deliver the consideration for which the mortgage was executed, the contract of loan was invalid and consequently the accessory contract of mortgage is likewise null and void. In this case, only P35,000.00 out of the P86,000.00 stated in the REM dated April 18, 1977 was released to respondents, and hence the REM was valid only to that extent. For the same reason, the second REM was null and void since no actual loan proceeds were released to the respondents-mortgagors. The REMs are not connected to the subsequent promissory notes because these were signed by respondents for the sole purpose of securing packing credits and export advances. Further citing Acme Shoe, Rubber and Plastic Corp. v. Court of

Appeals,19 the CA stated that the rule is that a pledge, real estate mortgage or antichresis may exceptionally secure after-incurred obligations only as long as these debts are accurately described therein. In this case, neither of the two REMs accurately described or even mentioned the securing of future debts or obligations.20 The CA thus held that petitioners remedy would be to file a collection case on the unpaid promissory notes which were not secured by the REMs. As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for withholding and applying the said amount to respondents loan account. Said transaction was separate and distinct from the contract of loan between petitioner and respondents. Petitioner had no authority to convert the said telegraphic transfer into cash since the participation of respondents was necessary to sign and indorse the disbursement voucher and check. Moreover, petitioner was not transparent in its actions as it did not inform the respondents of its intention to apply the proceeds of the telegraphic transfer to their loan account and worse, it did not even present an official receipt to prove payment. Section 5 of Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act, provides that there shall be no restriction on the withdrawability by the depositor of his deposit or the transferability of the same abroad except those arising from contract between the depositor and the bank.21 The Petition

Petitioner raised the following grounds in the review of the CA decision: I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE MORTGAGE DATED 18 APRIL 1977 IS VALID ONLY IN PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED TO HAVE BEEN ACTUALLY RELEASED TO RESPONDENTS OUT OF THE SUM OF PHP86,000.00. II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID THE REAL ESTATE MORTGAGE DATED 26 JANUARY 1978 IN THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE RESPONDENTS. III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO BASIS IN WITHHOLDING AND SUBSEQUENTLY APPLYING IN PAYMENT OF RESPONDENTS OVERDUE ACCOUNT IN THE TELEGRAPHIC TRANSFER IN THE AMOUNT OF U.S.$4,220.00.22 Petitioner contends that the CA overlooked the specific stipulation in the REMs that the mortgage extends not only to the amounts specified therein but also to loans or credits subsequently granted, which include the packing credits and export advances obtained by the respondents. Moreover, the amounts indicated on the REMs need not exactly be the same amounts that should

be released and covered by checks or credit memos, the same being only the maximum sum or "ceiling" which the REM secures, as explained by petitioners witness, Ms. Blesy Nemeo. Her testimony does not prove that the proceeds of the loans were not released in full, as no credit memos in the specific amounts received by the respondents can be presented. Petitioner argues that the rulings cited by the CA do not at all support its conclusion that the promissory notes were totally unrelated to the REMs. In the Acme case, the pronouncement was that the after-incurred obligations must, at the time they are contracted, only be accurately described in a proper instrument as in the case of a promissory note. The confusion was brought by the use in the CA decision of the word "therein" which is not found in the text of the Acme ruling. Besides, it is way too impossible that future loans can be accurately described, as the CA opined, at the time that a deed of real estate mortgage is executed. The CAs reliance on the case of Filipinas Marble Corporation, is likewise misplaced as it finds no application under the facts obtaining in the present case. The misappropriation by some individuals of the loan proceeds secured by petitioner was the consideration which compelled this Court to rule that there was failure on the part of DBP to deliver the consideration for which the mortgage was executed. Similarly, the case of Naguiat is inapplicable in that there was evidence that an agent of the creditor withheld from the debtor the checks representing the proceeds of the loan pending delivery of additional collateral.

Finally, petitioner reiterates that it had the right by way of set-off the telegraphic transfer in the sum of $4,220.00 against the unpaid loan account of respondents. Citing Bank of the Philippine Islands v. Court of Appeals,23 petitioner asserts that they are bound principally as both creditors and debtors of each other, the debts consisting of a sum of money, both due, liquidated and demandable, and are not claimed by a third person. Hence, the RTC did not err in holding that petitioner validly applied the amount of P30,930.20 (peso equivalent of $4,220.00) to the loan account of the respondents. Our Ruling We rule for the petitioner. The subject REMs contain the following provision: That, for and in consideration of certain loans, overdrafts and other credit accommodations obtained, from the Mortgagee by the Mortgagor and/or SPS. NORBERTO V. CASTAARES & MILAGROS M. CASTAARES and to secure the payment of the same, the principal of all of which is hereby fixed at EIGHTY-SIX THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may hereafter extend to the Mortgagor x x x, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the Mortgagee x x x.24 (Emphasis supplied.)

The above stipulation is also known as "dragnet clause" or "blanket mortgage clause" in American jurisprudence that would subsume all debts of past and future origins. It has been held as a valid and legal undertaking, the amounts specified as consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge or mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the amount named in the mortgage until the full amount of all advancements shall have been paid.25 A "dragnet clause" operates as a convenience and accommodation to the 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 services, recording fees, et cetera.26 While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.27 In holding that the REMs were null and void, the CA opined that the full amount of the principal loan stated in the deed should have been released in full, sustaining the position of the respondents that the promissory notes were not secured by the mortgage and unrelated to it.

However, a reading of the afore-quoted provision of the REMs shows that its terms are broad enough to cover packing credits and export advances granted by the petitioner to respondents. That the respondents subsequently availed of letters of credit and export advances in various amounts as reflected in the promissory notes, buttressed the claim of petitioner that the amounts of P86,000.00 and P60,000.00 stated in the REMs merely represent the maximum total loans which will be secured by the mortgage. This must be so as respondents confirmed that the mortgage was constituted for the purpose of obtaining additional capital as dictated by the needs of their export business. Significantly, no complaint was made by the respondents as to the nonrelease of P86,000.00 and P60,000.00, in full, simultaneous or immediately following the execution of the REMs -- under a single promissory note each equivalent to the said sums -- and no demand for the said specific amounts was ever made by the petitioner. Even the letter-complaint sent by respondents to the Central Bank almost a year after the extrajudicial foreclosure sale mentioned only the questioned entries in their passbook and the $4,220.00 telegraphic transfer. Considering that respondents deemed it a serious "banking malpractice" for petitioner not to release in full the loan amount stated in the REMs, it can only be inferred that respondents themselves understood that the P86,000.00 and P60,000.00 indicated in the REMs was intended merely to fix a ceiling for the loan accommodations which will be secured thereby and not the actual principal loan to be released at one time. Thus, the RTC did not err in

upholding the validity of the REMs and ordering the respondents to pay the deficiency in the foreclosure sale to satisfy the remaining mortgage indebtedness. The cases relied upon by the CA are all inapplicable to the present controversy.lawph!1 In Filipinas Marble Corporation, we held that pending the outcome of litigation between DBP which together with Bancom officers were alleged by the petitioner-mortgagor to have misspent and misappropriated the $5 million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against foreclosures by government financial institutions, cannot be automatically applied. Foreclosure of the mortgaged properties for the whole amount of the loan was deemed prejudicial to the petitioner, its employees and their families since the true amount of the loan which was applied for the benefit of the petitioner can be determined only after a trial on the merits.28 No such act of misappropriation by corporate officers appointed by the mortgagee is involved in this case. Besides, the respondents never denied receiving the amounts under the promissory notes which were all covered by the REMs and the very obligations subject of the extrajudicial foreclosure. As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower courts finding that the lender did not remit and the borrower did not receive the proceeds of the loan. Hence, we held the mortgage contract, being just an accessory contract, as null and void for absence of consideration.29 In this case,

however, respondents admitted they received all the amounts under the promissory notes presented by the petitioner. The consideration in the execution of the REMs consist of those credit accommodations to fund their export transactions. Respondents as an afterthought raised issue on the nature of the amounts of principal loan indicated in the REMs long after these obligations have matured and the mortgage foreclosed due to their failure to fully settle their outstanding accounts with petitioner. Having expressly agreed to the terms of the REMs which are phrased to secure all such loans and advancements to be obtained from petitioner, although the principal amount stated therein were not released at one time and under several, not just one, subsequently issued promissory notes, respondents may not be allowed to complain later that the amounts they received were unrelated to the REMs. On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner to the loan account of respondents, we hold that the CA erred in holding that petitioner had no authority to do so by way of compensation or set off. In this case, the parties stipulated on the manner of such set off in case of nonpayment of the amount due under each promissory note. The subject promissory notes thus provide: In case of non-payment of this note or any installments thereof at maturity, I/We jointly and severally, agree to pay an additional amount equivalent to two per cent (2%)

per annum of the amount due and demandable as penalty and collection charges, in the form of liquidated damages, until fully paid; and the further sum of ten per cent (10%) thereof in full, without any deduction, as and for attorneys fees whether actually incurred or not, exclusive of costs and judicial/extrajudicial expenses; moreover, I/We, jointly and severally, further empower and authorize the TRADERS ROYAL BANK, at its option, and without notice, to set-off or to apply to the payment of this note any and all funds, which may be in its hands on deposit or otherwise belonging to anyone or all of us, and to hold as security therefor any real or personal property, which may be in its possession or control by virtue of any other contract.30 (Emphasis supplied.) Agreements for compensation of debts or any obligations when the parties are mutually creditors and debtors are allowed under Art. 1282 of the Civil Code even though not all the legal requisites for legal compensation are present. Voluntary or conventional compensation is not limited to obligations which are not yet due.31 The only requirements for conventional compensation are (1) that each of the parties can fully dispose of the credit he seeks to compensate, and (2) that they agree to the extinguishment of their mutual credits.32 Consequently, no error was committed by the trial court in holding that petitioner validly applied, by way of compensation, the $4,220.00 telegraphic transfer remitted by respondents foreign client through the petitioner. WHEREFORE, the petition is GRANTED. The Decision

dated January 11, 2006 of the Court of Appeals in CAG.R. CV No. 67257 is REVERSED and SET ASIDE. The Joint Decision dated August 26, 1998 of the Regional Trial Court of Cebu City, Branch 13 in Civil Case Nos. R22608 and CEB-112 is REINSTATED and UPHELD. No pronouncement as to costs. SO ORDERED. G.R. No. 34385 September 21, 1931

These two actions were commenced in the Court of First Instance of Manila on April 16, 1930, for the purpose of securing from the defendant the possession of two drug stores located in the City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the plaintiffs. In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties. In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof they became entitled to the possession of the chattels and to foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary bonds, the court issued in

ALEJANDRA TORRES, ET AL., plaintiff-appellees, vs. FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B. Henson, defendant-appellant. x---------------------------------------------------------x G.R. No. 34386 September 21, 1931

SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees, vs. FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B. Henson, defendant-appellant. Duran, Lim and Tuason for appellant. Guevara, Francisco and Recto for appellees. JOHNSON, J.:

each case an order directing the sheriff of the City of Manila to take immediate possession of said drug stores. The defendant filed practically the same answer to both complaints. He denied generally and specifically the plaintiffs' allegations, and set up the following special defenses: (1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in the description of the property mortgaged; and (2) That the chattels which the plaintiffs sought to recover were not the same property described in the mortgage. The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and P100,000 in the second case. Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of the parties. After hearing the evidence adduced during the trial and on July 17, 1930, the Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion (a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores Farmacia Henson at Nos.

101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows: En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y 37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el Sheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en ambas causas. From the judgment the defendant appealed, and now makes the following assignments of error: I. The lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattels mortgaged and in failing to hold that the chattel mortgages were null and void for lack of particularity in the description of the chattels mortgaged. II. The lower court erred in refusing to allow the defendant to introduce evidence tending to show that the stock of merchandise found in the two drug stores was not in existence or owned by the mortgagor at the time of the execution of the mortgages in question.

III. The lower court erred in holding that the administrator of the deceased is now estopped from contesting the validity of the mortgages in question. IV. The lower court erred in failing to make a finding on the counterclaims of the defendant. With reference to the first assignment of error, we deem it unnecessary to discuss the question therein raised, inasmuch as according to our view on the question of estoppel, as we shall hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped from questioning the validity of these chattel mortgages. In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No. 1508, which reads as follows: A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary

notwithstanding. In order to give a correct construction to the abovequoted provision of our Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body was undoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of business, it would be practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic development of the country. In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given effect, and courts will not follow the letter of a statute when it leads away from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the Act. On this subject,

Sutherland, the foremost construction, says:

authority

on

statutory

The Intent of Statute is the Law. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and the primary rule of construction is to ascertain and give effect to that intent. The intention of the legislature in enacting a law is the law itself, and must be enforced when ascertained, although it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the legislature and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives life to a legislative enactment. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes best with the content and promotes in the fullest manner the apparent policy and objects of the legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.) A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding . . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.) Cobbey, a well-known authority on Chattel Mortgages,

recognizes the validity of stipulations relating to afteracquired and substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all afteracquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.) In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendantappellant to introduce evidence tending to show that the goods seized by the sheriff were in the nature of after-

acquired property. With reference to the third assignment of error, we agree with the lower court that, from the facts of record, the defendant-appellant is estopped from contenting the validity of the mortgages in question. This feature of the case has been very ably and fully discussed by the lower court in its decision, and said discussion is made, by reference, a part of this opinion. As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it may be said that in view of the conclusions reached by the lower court, which are sustained by this court, the lower court committed no error in not making any express finding as to said counterclaims. As a matter of form, however, the counter-claims should have been dismissed, but as the trial court decided both cases in favor of the plaintiffs and confirmed and ratified the orders directing the sheriff to take possession of the chattels on behalf of the plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims. For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in accordance with the facts and the law, and the same should be and is hereby affirmed, with costs. So ordered. Avancea, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur.

G.R. No. L-17500

May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF MANILA, plaintiffsappellants, vs. DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and CONNELL BROS. CO. (PHIL.), defendants-appellants. Angel S. Gamboa for defendants-appellants. Laurel Law Offices for plaintiffs-appellants. DIZON, J.: On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do business in the Philippines hereinafter referred to as ATLANTIC sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company hereinafter referred to as DALCO for the total sum of $500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank & Trust Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO and the Dahican America Lumber Corporation, a foreign corporation and a stockholder of DALCO, hereinafter referred to as

DAMCO, all payable to the BANK or its order. As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the BANK the latter acting for itself and as trustee for the ExportImport Bank of Washington D.C. a deed of mortgage covering five parcels of land situated in the province of Camarines Norte together with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained the following provision extending the mortgage lien to properties to be subsequently acquired referred to hereafter as "after acquired properties" by the mortgagor: All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools equipment and other property which the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this mortgage furnish the Mortgagee with an accurate

inventory of such substituted and subsequently acquired property. Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations. Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory note. After July 13, 1950 the date of execution of the mortgages mentioned above DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO as due to Connell Bros. Company (Philippines) a domestic corporation who was acting as the general purchasing agent of DALCO thereinafter called CONNELL the sum of P452,860.55

and to DAMCO, the sum of P2,151,678.34. On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO and DAMCO, on the one hand and between DALCO and CONNELL, on the other. On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO from removing its properties. The court granted both remedies and appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in its order of February 21, 1953, discharged the Receiver. On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging several affirmative defenses and a counterclaim. On March 4 of the same year, CONNELL, filed a motion

for intervention alleging that it was the owner and possessor of some of the equipments, spare parts and supplies which DALCO had acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs claimed were covered by the lien. In its order of March 18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was reinstated. On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and asserting affirmative defenses and a counterclaim. Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action to the Court of First Instance of Manila where it was docketed as Civil Case No. 20987. On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement onehalf (P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered judgment as follows: IN VIEW WHEREFORE, the Court: 1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7% interest per annum from July 13, 1950, Plus another sum of P100,000.00 with 5% interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's fees; 2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4% interest per annum from July 3, 1950, plus 10% on both principal as attorney's fees; 3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both with legal interest from the date of the filing of the respective answers of those parties, 10% of the principals as attorney's fees; 4. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the recognized expenses, one-half thereof be adjudicated unto plaintiffs, the court no longer specifying the share of each because of that announced intention under the stipulation of facts to "pool their resources"; as to the other one-half, the same should be adjudicated unto both plaintiffs, and

defendant Dahican American and Connell Bros. in the proportion already set forth on page 9, lines 21, 22 and 23 of the body of this decision; but with the understanding that whatever plaintiffs and Dahican American and Connell Bros. should receive from the P175,000.00 deposited in the Court shall be applied to the judgments particularly rendered in favor of each; 5. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros., and Dahican American Lumber Co., pro-rata. On the following day, the Court issued the following supplementary decision: IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following paragraph 6: 6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the sale at public auction of the lands object of the mortgages to satisfy the said mortgages and costs of foreclosure. From the above-quoted decision, all the parties appealed. Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were subject to the deeds of mortgage mentioned heretofore; that said properties were acquired from suppliers other than

DAMCO and CONNELL; that even granting that DAMCO and CONNELL were the real suppliers, the rescission of the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after acquired properties" as well as those obtained from the sale of the "undebated properties" in the total sum of P175,000.00 should have been awarded exclusively to plaintiffs by reason of the mortgage lien they had thereon; that damages should have been awarded to plaintiffs against defendants, all of them being guilty of an attempt to defraud the former when they sought to rescind the sales already mentioned for the purpose of defeating their mortgage lien, and finally, that defendants should have been made to bear all the expenses of the receivership, costs and attorney's fees. On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that plaintiffs had no cause of action against them because the promissory note sued upon was not yet due when the action to foreclose the mortgages was commenced; secondly, in not holding that the mortgages aforesaid were null and void as regards the "after acquired properties" of DALCO because they were not registered in accordance with the Chattel Mortgage Law, the court erring, as a consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph of each of said mortgages did not automatically make subject to such mortgages the "after

acquired properties", the only meaning thereof being that the mortgagor was willing to constitute a lien over such properties; fourthly, in not ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a Receiver and in holding that the damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in value of the "after acquired properties" placed under receivership was damnum absque injuria and, consequently, in not awarding, to said parties the corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of sentencing plaintiffs to pay attorney's fees. Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as appellants submit a total of seventeen. However, the multifarious issues thus before Us may be resolved, directly or indirectly, by deciding the following issues: Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of foreclosure?; secondly, assuming that they are subject thereto, are the mortgages valid and binding on the properties aforesaid inspite of the fact that they were not registered in accordance with the provisions of the Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after acquired

properties", what is the effect thereon, if any, of the rescission of sales entered into, on the one hand, between DAMCO and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to foreclose the mortgages premature? A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises that is, its lumber concession "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties, We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the inevitable wear and tear but with the understanding express or implied that they shall be replaced with others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. Indeed, if such properties were of the nature already referred to, it

would be poor judgment on the part of the creditor who does not see to it that a similar provision is included in the contract. B. But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after acquired properties" of DALCO, the same are void and ineffectual because they were not registered in accordance with the Chattel Mortgage Law. In support of this and of the proposition that, even if said mortgages were valid, they should not prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged chattels specifically, nor were they registered in accordance with the Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien" over the "after acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should not prejudice creditors and other third persons such as DAMCO and CONNELL. The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states that all property of every nature, building, machinery etc. taken in exchange or replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage in the same manner and to the same extent as if now included therein". No clearer language could have been chosen. Conceding, on the other hand, that it is the law in this

jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, We say that such law does not apply to this case. As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no doubt that the provisions of said code must govern their interpretation and the question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under consideration. Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code". We find the above ruling in agreement with our decisions

on the subject: (1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old) gives the character of real property to machinery, liquid containers, instruments or replacements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and which are expressly adapted to meet the requirements of such trade or industry. (2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted on a sugar central includes not only the land on which it is built but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to the mortgagor, installed after the constitution thereof . It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein which were registered as such did not have to be registered a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after acquired properties" did not become immobilized because DALCO did not own the whole area of its lumber concession all over which said properties were scattered. The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the former, the Davao Sawmill Company, Inc., had repeatedly treated the machinery therein involved as personal property by executing chattel mortgages thereon in favor of third parties, while in the present case the parties had treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that "the characterization of the property as chattels by the appellant is indicative of intention and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis supplied). In the present case, the characterization of the "after acquired properties" as real property was made not only by one but by both interested parties. There is, therefore, more reason to hold that such consensus impresses upon the properties the character determined by the parties who must now be held in estoppel to question it. Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S. 58) where it was held that while under the general law of Puerto Rico,

machinery placed on property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the owner, it then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used in the development of its lumber concession, and agreed further that the same shall become immediately subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the record that DAMCO and CONNELL had full notice of such stipulation and had never thought of disputed validity until the present case was filed. Consequently all of them must be deemed barred from denying that the properties in question had become immobilized. What We have said heretofore sufficiently disposes all the arguments adduced by defendants in support their contention that the mortgages under foreclosure are void, and, that, even if valid, are ineffectual as against DAMCO and CONNELL. Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after acquired properties" but also the right to rescind

the sales thereof to DALCO. This contention it is obvious would have validity only if it were true that DAMCO and CONNELL were the suppliers or vendors of the "after acquired properties". According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case bar because DALCO, in violation of its obligation under the mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the proceedings, however, when defendants moved to dissolve the order of receivership and the writ of preliminary injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire properties," and engaged the services of auditors to examine the books of DALCO so as to bring out the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 V4) show that neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items were supplied by different parties, neither of whom appeared to be DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers in order to collect and justify such service charge.

Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of DALCO, their claim to be the suppliers of the "after acquired required properties" would seem to be preposterous. The most that can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is clear that, as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the record showing that both DAMCO and CONNELL had known and admitted from the beginning that the "after acquired properties" of DALCO were meant to be included in the first and second mortgages under foreclosure. The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no consequence and does not make the rescission valid and legally effective. It must be stated clearly, however, in justice to Belden, that, as a member of the Board of

Directors of DALCO, he opposed the resolution of December 15, 1952 passed by said Board and the subsequent rescission of the sales. Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature because the promissory note sued upon did not fall due until April 1 of the same year, concluding from this that, when the action was commenced, the plaintiffs had no cause of action. Upon this question the lower court says the following in the appealed judgment; The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace, conceded an extension of time to pay up to 1 April, 1953 while the action was filed on 12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date of the filing of the complaint, it should follow that the debtor thereby lost the benefit to the period. x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code); and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate, P1,200,000 excluding interest while the aggregate price of the "afteracquired" chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the properties were sold afterwards for only P175,000.00,

page 47, Vol. IV, and the Court understanding that when the law permits the debtor to enjoy the benefits of the period notwithstanding that he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient guaranty, must concede that the causes of action for collection of the notes were not premature. Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding that, when the action was commenced, DALCO was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the evidence particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 in the words of the Chairman of the Board DALCO was "without funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal). The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired properties" should have been awarded exclusively to the plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among said parties, whether or not the distribution should be pro-rata or otherwise; whether or not plaintiffs are entitled to damages; and, lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties on a prorata basis or exclusively by one or some of them are of a secondary nature as they are already impliedly resolved by what has been said heretofore.

As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated properties", it is clear, in view of our opinion sustaining the validity of the mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the mortgages under foreclosure. On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected in cases of contracts intended to defraud them; and that any third person who induces another to violate his contract shall be liable for damages to the other contracting party. Similar liability is demandable under Arts. 20 and 21 which may be given retroactive effect (Arts. 225253) or under Arts. 1902 and 2176 of the Old Civil Code. The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired jointly with CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear. However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the

difference between the alleged total obligation secured by the mortgages amounting to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds obtained from the sale of "after acquired properties", and of those that were not claimed neither by DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject to the mortgages under foreclosure has not been effected, and considering further the lack of evidence showing that the true value of all the properties already sold was not realized because their sale was under stress, We feel that We do not have before Us the true elements or factors that should determine the amount of damages that plaintiffs are entitled recover from defendants. It is, however, our considered opinion that, upon the facts established, all the expenses of the Receivership, which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and severally, in the same manner that all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the appealed judgment. In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover from the defendants, the record of this case shall be remanded below for the corresponding proceedings. Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs. Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal,

Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur. G.R. No. L-25729 November 24, 1926

which, is hereby ordered to endorse said insurance policies to the plaintiff, with the costs of the proceedings against the defendants, with the exception of J.P. Heilbronn Co., Inc. It is so ordered. In support of his appeal, the appellant assigns the following supposed errors as committed by the lower court in its judgment, to wit: (1) The court erred in overruling the demurrer filed by this defendant to the complaint in this action; (2) the trial court erred in giving the plaintiff corporation possession of the property mortgaged to this appellant without following the necessary proceedings or complying with the provisions of the law; (3) the trial court erred in issuing the writ of preliminary injunction against the appellant and E. E. Elser, restraining the former from receiving from the latter, or the latter from delivering to the former, the amount of the insurance policies covering the property mortgaged to the appellant, which was damaged by the fire that occurred in the establishment of the Magallanes Press, Inc; (4) the trial court erred in giving to the unnecessary intervention of the Magallanes Press, Inc., in the execution of the deed Exhibit C an interpretation which is neither based upon law nor upon the contract; (5) the trial court erred in ordering the suspension of the foreclosure of the appellant's mortgage on the property of the Magallanes Press, Inc.; (6) the trial court erred, under the facts proven in this case, in applying article 1297 of the Civil Code; (7) the trial court erred in finding in its decision that the defendant Jose Ma. Memije should not have executed the documents Exhibits C and D without

THE BELGIAN CATHOLIC MISSIONARIES, INC., plaintiff-appellee, vs. MAGALLANES PRESS, INC., ET AL., defendants. JOSE MARIA MEMIJE, appellant. Antonio M. Opisso, Romualdez Hermanos and Luciano de la Rosa for appellant. Cavanna, Aboitiz & Agan for appellee.

VILLA-REAL, J.: This is an appeal by Jose Marie Memije from a judgment of the Court of First Instance of Manila the dispositive part of which is as follows: For all the foregoing, the court is of the opinion that the plaintiff has a right to the relief prayed for in its complaint. Wherefore, judgment is rendered declaring that Exhibits C and D, that is, the mortgage deeds in question in this proceeding, in so far as they prejudice the rights of the plaintiff, are null and void; that the preliminary injunction issued in this case against the defendant Jose Ma. Memije is final and absolute; and that the plaintiff recover the amount of the fire insurance policies of the defendant "Magallanes Press, Inc.," which, or the representatives of

taking into account the rights of the plaintiff corporation, The Belgian Catholic Missionaries, Inc; (8) the trial court erred in declaring Exhibits C and D null and void in so far as they prejudice the rights of the plaintiff, over whose credit that of the herein appellant is preferential; in declaring the writ of preliminary injunction issued against the defendant Jose Ma. Memije final and absolute; in giving judgment for the plaintiff to recover the amount of the fire insurance policies of the defendant the Magallanes Press, Inc; and (9) the trial court erred in not making any pronouncement as to the counterclaim and cross-complaint of the defendant Jose Ma. Memije in this action, nor taking the same into consideration and rendering judgment thereon in favor of said defendant. The oral evidence has not been forwarded to this court so that we are compelled to base our opinion exclusively upon the documentary evidence and the facts found and stated by the trial court in its judgment. It appears that on December 1, 1921, the Magallanes Press, through its manager H. Camena, executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P3,472.92, with interest at 10 per cent per annum, payable at the rate of P250 a month, plus the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due,

and the maker shall pay the payee an additional sum equivalent to 15 per cent of the total balance, for attorney's fee and expenses of collection, forfeiting all right of exemption. On the same date, December 1, 1921, the said Magallanes Press, through its managers H. Camena, also executed a promissory note in favor of J. P. Heilbronn & Co., Inc., for the sum of P10,715.77, with interest at 12 per cent per annum, payable at the rate of P500 a month, together with the interest earned on the unpaid balance, until the whole amount of the indebtedness shall have been paid, the first payment to be made on January 1, 1922, with the condition that upon the failure to pay any monthly installment or the interest earned on the unpaid balance, the whole amount of the indebtedness shall become due, and the maker shall pay the payee an additional sum equal to 15 per cent of the total balance for attorney's fee and expenses of collection, forfeiting all right of exemption. To secure the payment of said promissory notes which amounted to a total of P14,188.69, H. Camena, as general manager of the Magallanes Press, executed a chattel mortgage on all of the printing machinery and its accessories, belonging to the said Magallanes Press, in favor of J. P. Heilbronn & Co., Inc. One June 19, 1922, the Magallanes Press Co., Inc., successor to the Magallanes Press, with all the latter's rights and obligations, through its duly authorized

president, E. F. Clemente, executed a chattel mortgage on the same printing machinery ad its accessories in favor of the Belgian Catholic Missionaries Co., Inc., which the Magallanes Press had mortgaged to J. P. Heilbronn & Co., Inc., to secure the payment of a loan of P30,500, with interest at 12 per cent per annum, which the said Magallanes Press & Co., Inc., had obtained from the Belgian Catholic Missionaries Co., Inc., the duration of the mortgage loan being one year from the execution of the mortgage deed. In December, 1922 the appellant Jose Ma. Memije made a loan in the sum of P2,000 to E. F. Clemente which was paid on account of the indebtedness of the Magallanes Press to J. P. Heilbronn & co., Inc., together with the sum of P1,641 which A. F. Mendoza owed said E. F. Clemente. On the occasion of the issuance of the writ of attachment in civil cause No. 23818 of the Court of First Instance of Manila, entitled Jose Ma. Cavanna vs. the Magallanes Press Co., Inc., the defendant Jose Ma. Memije, on February 21, 1923, filed an intervention in said case. All the promissory note executed by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., having been overdue for non-payment of the installments as well as the respective chattel mortgage, the said J. P. Heilbronn & Co., Inc., transferred all its mortgage credit against the Magallanes Press to Jose Ma. Memije in consideration of the sum of P8,280.90, the balance of said mortgage

credit. On March 14, 1923, Enrique Clemente, as manager of the Megallane Press Co., Inc., executed a deed in favor of Jose Ma. Memije by virtue of which the chattel mortgage which was given by the Magallanes Press in favor of J. P. Heilbronn & Co., Inc., and transferred by the latter to Jose Ma. Memije, was made to cover an additional loan of P5,895.79, which included the sum of P2,000 which said Jose Ma. Memije had advanced said Enrique Clemente in December, 1922. On April 21, 1923, a fire occurred in the building where the pointing machinery, its accessories and other personal property of the Magallanes Press Co., Inc., were located and which were covered by said chattel mortgages. Said property was insured, and the insurance policies covering it were endorsed to J. P. Heilbronn & Co., Inc., upon the execution of the chattel mortgage thereon in favor of the latter. When J. P. Heilbronn & Co., Inc., transferred its mortgage credit to Jose Ma. Memije it, in turn, endorsed said insurance policies to him. The insurance companies were disposed to pay the respective insurance policies, which amounted to P7,686.45, but due to the issuance of the abovementioned writ of preliminary injunction, payment could not be made. Due to the filing of the complaint in the present case on May 9, 1923, and the issuance of the writ of preliminary injunction on May 10th of the same year, Jose Ma.

Memije was unable to collect the amount of the insurance policies, and when he was summoned under the complaint on May 14, 1923, he made demand on the Magallanes Press Co., Inc., for the payment of his mortgage credit on the same date the manager of said corporation, E. F. Clemente, permitted the secretary of the said corporation to place the property covered by the mortgage into the hands of the said Jose Ma. Memije in order that the same might be sold, but the sale could not be consummated due to the issuance of the said writ of preliminary injunction. The first question raised by the defendant and appellant has reference to the overruling of the demurrer filed by him to complaint. One of the grounds of said demurrer was that the complaint in this case did not allege facts sufficient to constitute a cause of action against the said defendant, in that, notwithstanding the fact that the said complaint was instituted to annul the document of transfer of the mortgage credit Exhibit C, it was not alleged in the said complaint that the defendant Jose Ma. Memije had any intention to defraud the interests of the plaintiff corporation, which was absolutely impossible due to the nature of the transaction and the preferential character of the mortgage credit of J. P. Heilbronn & Co., Inc. As to this paragraph of the complaint, the plaintiff company having known of the existence of a chattel mortgage in favor of J. P. Heilbronn & Co., Inc., the latter,

either as the first or as the second mortgage, had a perfect right to transfer its mortgage credit, without the knowledge or consent of any other mortgagee, inasmuch as whoever acquired it, would have exactly the same status as the transferor with the same rights and obligations. The fact, therefore, that the Magallanes Press Co., Inc., had consented to the transfer of the mortgage credit of J. P. Heilbronn & Co., Inc., to Jose Ma. Memije, does not constitute a fraud that an vitiate the said transfer, inasmuch as the order of preference of the mortgages has not been altered, and its allegations does not constitute a cause of action to annul the said transfer. In regard to the allegation contained in the ninth paragraph of the complaint, it is very clear that the increase made by Jose Ma. Memije in the mortgage credit acquired by him from J.P. Heilbronn & Co., Inc., and the extension made by the Magallanes Press, Inc., of the mortgage to said additional credit without the knowledge or consent of the plaintiff company, as second mortgagee, prejudices the credit of the latter, inasmuch as the security for the payment of said credit was reduced as to it, and, therefore, constitute a fraud that vitiates the contract of extension of the mortgage evidence by the deed Exhibit D, rendering it void.lawphil.net The facts allege in paragraph 9 of the complaint are sufficient to constitute a cause of action of nullity, and the lower court did nor err in overruling the demurrer filed by the defendant Jose Ma. Memije.

In regard to the second assignment of error, it appears that the defendant Jose Ma. Memije having attempted to foreclose the mortgage, by which the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., was secured, in order to recover not only the original credit but also the increase, the Belgian Catholic Missionaries Co., Inc., filed a complaint, with a petition for a writ of preliminary injunction against the sheriff, in whose hands the foreclosure of the mortgage was placed. The writ of preliminary injunction having been issued, upon the filing of a bond in the sum of P15,000, and there being no person more interested in the conservation and custody of the property covered by the mortgage than said plaintiff company, being the largest creditor, it applied and obtained from the court the possession of the same. Contrary to the contention of the appellant, this case is not one of replevin but simply a proceeding instituted by the plaintiff for the deposit of the property in litigation, upon the filing of a bond, said plaintiff, acting as a receiver by authority of the court, being the person most interested in the conservation and care of the same (sec. 174, Act No. 190; 11 C. J., 726). The lower court, therefore, did not err in authorizing the plaintiff company to take possession of the personal property in litigation upon the filing of a bond sufficient to secure the conservation or value thereof. The third assignment of error raises the question as to the preference of right between the plaintiff company and

the defendant over the mortgaged property and the amount of the insurance policies covering a part thereof which was destroyed by fire. As we have seen in the statement of the pertinent facts necessary for the clear and accurate solution of the questions of law involved in the present appeal, the firm of J. P. Heilbronn & Co., Inc., had a mortgage credit against the Magallanes Press for the sum of P14,186.69, secured by a first chattel mortgage. The plaintiff company, the Belgian Catholic Missionaries Co., Inc., also had a mortgage credit for the amount of P30,500, secured by a second mortgage on the same personal property. After this second mortgage had been executed, the payment of the mortgage credit of J.P. Heilbronn & Co., Inc., became due, which credit had been reduced to the sum of P8,280,90 through partial payments, and the herein defendant-appellant Jose Ma. Memije acquired said mortgage credit and increased it by P5,895.59 of which increase P2,000 was a previous loan. There is no question but that J. P. Heilbronn & Co., Inc., at the time of the transfer of this mortgage rights to Jose Ma. Memije, had a preferential right over that of the Belgian Catholic Missionaries Co., Inc., for the remainder of the amount of the mortgage credit, that is, P8,280.90. The plaintiff company had a preferential right to the rest of the value of the mortgaged property after deducting the remaining mortgage credit of J. P. Heilbronn & Co., Inc. The increase of P5,895.59 made by the defendant Jose

Ma. Memije in favor of the Magallanes Press Co., Inc., and the extension of the mortgage thereto, are not only subordinate to the mortgage credit of the plaintiff company, being subsequent in time and in registration, but said increase in the security is also void. The increase of the mortgage security becomes a new mortgage in itself, inasmuch as the original mortgage did not contain any stipulation in regard to the increase of the mortgage credit, and even if it did, said increase would take effect only from the date of the increase. A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage (11 C. J., 448; 5 R. C. L., 420-421). In accordance with the provisions of section 5 of Act No. 1508, known as the Chattle Mortgage Law, the parties to the original deeds swore that the same was mortgaged "to secure the obligations specified therein and for no other purpose." Neither the increase in question, nor the extension of the mortgage to secure the payment of the same is specified in the deed, consequently said extension is void. "Where the statute provides that the parties to a chattel mortgage must make oath that the debt is a just debt, honestly due and owing from the mortgagor to the mortgagee, it is obvious that a valid mortgage cannot be made to secure a debt to be thereafter contacted." (11 C. J., 448.) Briefly, therefore, we have the following: (a) That Jose Ma. Memije has a preferential right to the value of the chattels mortgage and the amount of the

insurance policies up to the sum of P8,280.90; (b) That the plaintiff corporation, the Belgian Catholic Missionaries Co., Inc., has a right to the remainder of the value of said chattels and the insurance policies up to the amount of P30,500, after deducting the preferential credit of Jose Ma. Memije; (c) That as to the increase of P5,895.59, the right of the defendant Jose Ma. Memije is that of an ordinary creditor. In regard to the damages claimed by the defendant in his counterclaim and which is the subject-matter of his remaining assignments of error, said defendant has a right to interest at 12 per cent on the P8,280.90 the amount of the mortgage credit acquired by him from J. P. Heilbronn & Co., Inc., from February 26, 1923, the date of the acquisition until fully paid. For the foregoing reasons, the judgment appealed from is revoked and it is ordered the another be entered declaring all the mortgages overdue, and the mortgage credit of Jose Ma. Memije preferential over that of the Belgian Catholic Missionaries Co., Inc., up to the amount of P8,280.90, with interest at the rate of 12 per cent per annum from February 26, 1923, until fully paid; the mortgage credit of the Belgian Catholic Missionaries Co., Inc., for the sum of P30,500 with interest at the rate of 12 per cent per annum, from June 19, 1922, until fully paid, plus the sum of P3,000 for attorney's fees, over the additional credit of Jose Ma. Memije for P5,895.59; and

ordering the foreclosure of the said mortgages by selling the mortgaged property at public auction, to the proceeds of which shall be added the amount of the insurance policies and the above-mentioned credits in the order of preference above established, without special pronouncement as to costs. So ordered. Avancea, C. J., Johnson, Street, Ostrand and Johns, JJ., concur.

Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x. "In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind

[G.R. No. 103576. August 22, 1996]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents. DECISION VITUG, J.: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review on certiorari.

and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage."[1] In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00.[2] These borrowings were on due date also fully paid. On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity.[3] Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals[4] which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. The instant petition interposed by petitioner

corporation was initially denied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon.[5] Except in criminal cases where the penalty of reclusion perpetua or death is imposed[6] which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice. Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal

commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property - in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit - upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation,[7] but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character[8] of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.[9] While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described,[10] a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security

itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law.[11] Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith[12]), the fact, however, that the statute has provided that the parties to the contract must execute an oath that "x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud."[13]

makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.,[14] the Court said "x x x A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage."[15] The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan,[16] there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it."[17] This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of Appeals,[19] we have

said: "Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent bank as an artificial person."[20] While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation. Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his socalled "One Final Word;" viz: "In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable

Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction."[21] (Italics supplied.) The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor;[22] thus: "(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due to the courts of justice and judicial officers and x x x (to) insist on similar conduct by others.' This respectful attitude towards the court is to be observed, `not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance.' And it is `through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers x x x.'"[23] The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED. Kapunan and Hermosisima, Jr., JJ., concur. Padilla, J., took no part in view of lessor-lessee relationship with respondent bank. Bellosillo, J., on leave. G.R. No. L-44552 November 7, 1938

ONG LIONG TIAK, plaintiff-appellant, vs. LUNETA MOTOR COMPANY and the SHERIFF OF MANILA, defendant-appellees. Felipe S. Abeleda for appellant. Jose Agbulos for appellees.

DIAZ, J.: Ong Liong Tiak appealed from the decision rendered by the Court of First Instance of Manila in civil case No. 47997 of said court, overruling and dismissing his complaint, wherein he sought an injunction against the defendant and a judgment in his favor for damages in the sum of P500, plus the costs. In his brief, Ong Liong Tiak, the appellant, makes the following enumeration of the errors alleged by him to have been committed by the lower court in rendering its decision appealed from, to wit:

1. The trial court erred in holding that the indebtedness of Jeronimo Angeles to Macondray and Co., Inc., was also guaranteed by the chattel mortgage executed by S. Arellano Choa Siong in favor of the Luneta Motor Co. 2. The trial court erred in holding that the automobile in question was still encumbered at the time it was sold by S. Arellano Choa Siong to the plaintiff-appellant. 3. The trial court erred in not finding as a fact that the chattel mortgage over the automobile in question was extinguished upon payment of the last promissory note. 4. The trial court erred in not holding that the automobile in question was, at the time of the levy on execution by the defendant sheriff, the exclusive property of the plaintiff-appellant. It is undisputed that about August 21, 1933, S. Arellano Choa Siong, the registered owner of Chrysler Sedan automobile, motor No. 4253, serial No. 6524936, transferred the ownership thereof to the plaintiffappellant, to which effect he endorsed his certificate of registration, Exhibit A, in favor of the latter. lawphi1.net S. Arellano Choa Siong purchased said automobile from the Luneta Motor Co. about June 11, 1931. However, instead of paying the price thereof, which was P1,800 he executed eighteen promissory notes for P100 each in favor of the vendor, binding himself to redeem one after another, every month. To secure the payment of said

eighteen promissory notes and that of articles he might take from his creditor, such as gasoline, tires, automobile accessories, etc., and to secure also the payment of any other obligation that he might contract with it, he constituted a mortgage on the automobile in question, executing to that effect in favor of the Luneta Motor Co., the instrument of mortgage, Exhibit 2, one of the clauses of which reads as follows: . . . it being expressly agreed further that this mortgage shall also serve as security for the payment to the said mortgagee in addition to the aforesaid notes of the purchase price or cost of any and all gasoline, tires, automobile accessories or parts, and repairs furnished or made by the said mortgagee at any time up to the date this mortgage is completely satisfied as and when the same becomes due, and of any other indebtedness of the mortgagor in favor of the mortgagee incurred in any other manner whatever. (Emphasis ours.) About the months of October and November, 1932, one Jeronimo Angeles obtained from Macondray & Co., Inc. paints and other merchandise of the total value of P407. For the payment of this amount, S. Arellano Choa Siong acted as surety up to the sum of P300, having paid the sum of balance P160 on account, on March 30, 1933, thereby leaving a balance against him in the sum of P140. In this state of affairs, Macondray & Co., Inc., assigned its credit against S. Arellano Choa Siong, who offered no objection thereto. On the contrary, he paid P40 on account, shortly thereafter, thereby

leaving a balance of P100. About April 4, 1933, S. Arellano Choa Siong made the last payment of the eighteen promissory notes which he had executed in favor of the defendant-appellee. However, as there still existed in its favor a credit of P100 for the paints and other merchandise taken by Jeronimo Angeles from Macondray & Co., Inc. under the personal guaranty of S. Arellano Choa Siong, which sum was assigned to it by said Macondray & Co., Inc. without any objection on the part of S. Arellano Choa Siong, the defendant-appellee refused to cancel the instrument of mortgage Exhibit 2. On the contrary, it foreclosed to mortgage constituted in its favor, causing the sheriff to attach the abovementioned automobile. It is for the purpose of setting aside said attachment that the plaintiff filed his complaint in this case, seeking what has already been set forth hereinbefore. Taking into account the circumstances of the case, and particularly the obligation assumed by S. Arellano Choa Siong, according to the terms of the above-quoted clause of the instrument of mortgage Exhibit 2, this court holds that the lower court committed one of the errors attributed to it by the appellant. It was right in holding that, by interpreting the terms of Exhibit 2, the automobile in question is still remained subject to the lien stated in said instrument, inasmuch as the account, which S. Arellano Choa Siong accepted and bound himself to pay for Jeronimo Angeles, had not been completely settled. Instruments of mortgage, as said Exhibit 2, are binding, while they subsist, not only upon the parties executing

them but also upon those who later, by purchase or otherwise, acquire the properties referred to therein. The right of those who so acquire said properties should not and can not be superior to that of the creditor who has in his favor an instrument of mortgage executed for the formalities of the law, in good faith, and without the least indication of fraud. This is all the more true in the present case, because, when the plaintiff purchased the automobile in question on august 22, 1933, he knew, or at least, it is presumed that he knew, by the mere fact that the instrument of mortgage, Exhibit 2, was registered in the office of the register of deeds of Manila, that said automobile was subject to a mortgage lien. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had. For all the foregoing consideration, finding as this court finds that the decision appealed from is in accordance with law, the same is hereby affirmed, with the costs to the appellant. So ordered. Avancea C.J., Villa-Real, Abad Santos, Imperial and Laurel, JJ., concur. G.R. No. 150197 July 28, 2005 PRUDENTIAL BANK, Petitioner, vs. DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

DECISION Tinga, J.: Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank seeks the reversal of the Decision1 of the Court of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents. Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a loan worth P250,000.00.2 This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is secured by a real estate mortgage as aforementioned.3 Significantly, the real estate mortgage contained the following clause: That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________

hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .4 On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagors foreign currency savings account with the bank under Account No. 129, and that the mortgagors passbook is to be surrendered to the bank until the amount secured by the "hold-out" is settled.5 On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice

President,6 respectively, PN BD#76/C-430 covering P545,000.000. As provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923," which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts.7 On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment.8 On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over the two properties.9 On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property

covered by TCT No. 438157. Per petitioners computation, respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was set on 15 January 1980.10 Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by a separate mortgage.12 On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extra-judicial foreclosure.13 Respondents sought reconsideration of the decision.14 On 24 August 1994, the trial court issued an Order setting aside its earlier decision and awarded attorneys fees to respondents.15 It found that only the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan, being

a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with a Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by petitioner applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof. On appeal to the Court of Appeals, petitioner made the following assignment of errors: I. The trial court erred in holding that the real estate mortgage covers only the promissory note BD#75/C-252 for the sum of P250,000.00. II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the real estate mortgage by expressed agreement. III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered by the real estate mortgage. IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion. V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees for P20,000.00.16

The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees.17 It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.18 The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc.19 Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals as grounds herein. Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage.20 Thus, it claims that it acted within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,21 Tad-Y v. Philippine National Bank,22 Quimson v.

Philippine National Bank,23 C & C Commercial v. Philippine National Bank,24 Mojica v. Court of Appeals,25 and China Banking Corporation v. Court of Appeals,26 all of which upheld the validity of mortgage contracts securing future advancements. Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C-345 in the real estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner states that there is no law or rule which prohibits an obligation from being covered by more than one security.27 Besides, respondents even continued to withdraw from the same foreign currency account even while the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage that principally secured all of respondents promissory notes.28 As for PN BD#76/C-345, which the Court of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the "dragnet clause" of the real estate mortgage covers all the obligations of the respondents.29 Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that there is a need to pierce the veil of corporate fiction.30

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and political personalities.31 There was no oppressive use of superior bargaining power in the execution of the promissory notes and the real estate mortgage.32 For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that expressly provide for a different form of security.33 They reiterate the holding of the trial court that the "blanket mortgage clause" would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties.34 Respondents also place a premium on the finding of the lower courts that the real estate mortgage clause is a contract of adhesion and must be strictly construed against petitioner bank.35 The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket mortgage clause" or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans. At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage clause" was obtained by respondents for Donalco Trading, Inc.

Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage contract states that the mortgage covers "as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary." Wellsettled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority.36 However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the promissory note that the loan was for house construction and personal consumption, there is no proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner agreed to the terms of the promissory note. If

respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation. Now on the main issues. A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed."38 Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction.39 A "dragnet clause" operates as a convenience and accommodation to the 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 services, recording fees, et cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to secure future advancements are valid and legal contracts,41 and the amounts named as consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.42

The "blanket mortgage clause" in the instant case states: That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . . .43 (Emphasis supplied.) Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may be obtained by the respondents.

The terms of the above provision being clear and unambiguous, there is neither need nor excuse to construe it otherwise. The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage clauses," are of a different factual milieu from the instant case. There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the "dragnet clause." In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket mortgage" clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-345. Under American jurisprudence, two schools of thought have emerged on this question. 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.44 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,45 such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement.46 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 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.47 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.48 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.49 It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for the second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.50 This is recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to. One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents only participation was

the affixing of their signatures or "adhesion" thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject, but which the latter cannot modify.52 The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be strictly construed against the party responsible for its preparation.53 If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care.54 To be more emphatic, any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it,55 which is the petitioner in this case. Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of petitioners personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts. Petitioner, however, is not without recourse. Both the

Court of Appeals and the trial court found that respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to defenses which are available to respondents. WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is AFFIRMED. Costs against petitioner. SO ORDERED. G.R. No. 168736 April 19, 2006

dated November 5, 2003 which modified the Decision2 of the Regional Trial Court (RTC) of Quezon City, Branch 105 in Civil Case No. Q-97-32130 dated January 27, 1999, as well as the Resolution3 dated June 28, 2005 denying the motion for reconsideration thereof. The facts of the case are as follows: Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the amount of P1,500,000.00 from respondents, spouses Renato and Filipina Cuyco, payable within one year at 18% interest per annum, and secured by a Real Estate Mortgage4 over a parcel of land with improvements thereon situated in Cubao, Quezon City covered by TCT No. RT-43723 (188321).5 Subsequently, petitioners obtained additional loans from the respondents in the aggregate amount of P1,250,000.00, broken down as follows: (1) P150,000.00 on May 30, 1992; (2) P150,000.00 on July 1, 1992; (3) P500,000.00 on September 5, 1992; (4) P200,000.00 on October 29, 1992; and (5) P250,000.00 on January 13, 1993.6 Petitioners made payments amounting to P291,700.00,7 but failed to settle their outstanding loan obligations. Thus, on September 10, 1997, respondents filed a complaint8 for foreclosure of mortgage with the RTC of Quezon City, which was docketed as Civil Case No. Q97-32130. They alleged that petitioners loans were secured by the real estate mortgage; that as of August

SPOUSES ADELINA S. CUYCO and FELICIANO U. CUYCO, Petitioners, vs. SPOUSES RENATO CUYCO and FILIPINA CUYCO, Respondents. DECISION YNARES-SANTIAGO, J.: This petition for review on certiorari assails the Decision1 of the Court of Appeals (CA) in CA G.R. CV No. 62352

31, 1997, their indebtedness amounted to P6,967,241.14, inclusive of the 18% interest compounded monthly; and that petitioners refusal to settle the same entitles the respondents to foreclose the real estate mortgage. Petitioners filed a motion to dismiss9 on the ground that the complaint states no cause of action which was denied by the RTC10 for lack of merit. In their answer,11 petitioners admitted their loan obligations but argued that only the original loan of P1,500,000.00 was secured by the real estate mortgage at 18% per annum and that there was no agreement that the same will be compounded monthly. On January 27, 1999, the RTC rendered judgment12 in favor of the respondents, the dispositive portion of which reads: WHEREFORE, in the light of the foregoing, the Court renders judgment on the Complaint in favor of the plaintiffs and hereby orders the defendants to pay to the Court or to the plaintiffs the amounts of P6,332,019.84, plus interest until fully paid, P25,000.00 as attorneys fees, and costs of suit, within a period of one hundred and twenty (120) days from the entry of judgment, and in case of default of such payment and upon proper motion, the property shall be ordered sold at public auction to satisfy the judgment. Further, defendants[] counterclaim is dismissed.

SO ORDERED.13 Petitioners appealed to the CA reiterating their previous claim that only the amount of P1,500,000.00 was secured by the real estate mortgage.14 They also contended that the RTC erred in ordering the foreclosure of the real estate mortgage to satisfy the total indebtedness of P6,532,019.84, as of January 10, 1999, plus interest until fully paid, and in imposing legal interest of 12% per annum on the stipulated interest of 18% from the filing of the case until fully paid.15 On November 5, 2003, the CA partially granted the petition and modified the RTC decision insofar as the amount of the loan obligations secured by the real estate mortgage. It held that by express intention of the parties, the real estate mortgage secured the original P1,500,000.00 loan and the subsequent loans of P150,000.00 and P500,000.00 obtained on July 1, 1992 and September 5, 1992, respectively. As regards the loans obtained on May 31, 1992, October 29, 1992 and January 13, 1993 in the amounts of P150,000.00, P200,000.00 and P250,000.00, respectively, the appellate tribunal held that the parties never intended the same to be secured by the real estate mortgage. The Court of Appeals also found that the trial court properly imposed 12% legal interest on the stipulated interest from the date of filing of the complaint. The dispositive portion of the Decision reads: WHEREFORE, the instant appeal is PARTIALLY

GRANTED. The assailed decision of the Regional Trial Court of Quezon City, Branch 105, in Civil Case No. Q97-32130 is hereby MODIFIED to read: "WHEREFORE, in the light of the foregoing, the Court renders judgment on the Complaint in favor of the plaintiffs and hereby orders the defendants to pay to the Court or to the plaintiffs the amount of P2,149,113.92[,] representing the total outstanding principal loan of the said defendants, plus the stipulated interest at the rate of 18% per annum accruing thereon until fully paid, within a period of one hundred and twenty days from the entry of judgment, and in case of default of such payment and upon motion, the property, subject of the real estate mortgage contract, shall be ordered sold at public auction in satisfaction of the mortgage debts.1avvphil.net Defendants are further, ordered to pay the plaintiffs the following: 1. the legal interest at the rate of 12% per annum on the stipulated interest of 18% per annum, computed from the filing of the complaint until fully paid; 2. the sum of P25,000.00 as and for attorneys fees; and 3. the costs of suit." SO ORDERED.16 Hence, the instant petition for review on the sole issue:

WHETHER OR NOT PETITIONERS MUST PAY RESPONDENTS LEGAL INTEREST OF 12% PER ANNUM ON THE STIPULATED INTEREST OF 18% PER ANNUM, COMPUTED FROM THE FILING OF THE COMPLAINT UNTIL FULL PAID.17 Petitioners contend that the imposition of the 12% legal interest per annum on the stipulated interest of 18% per annum computed from the filing of the complaint until fully paid was not provided in the real estate mortgage contract, thus, the same has no legal basis. We are not persuaded. While a contract is the law between the parties,18 it is also settled that an existing law enters into and forms part of a valid contract without the need for the parties expressly making reference to it.19 Thus, the lower courts correctly applied Article 2212 of the Civil Code as the basis for the imposition of the legal interest on the stipulated interest due. It reads: Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. The foregoing provision has been incorporated in the comprehensive summary of existing rules on the computation of legal interest enunciated by the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,20 to wit:

1. When an obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable certainty. Accordingly, where the demand is established with reasonable certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged. 3. When the judgment of the court awarding a sum of

money becomes final and executory, the rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. (Emphasis supplied) In the case at bar, the evidence shows that petitioners obtained several loans from the respondent, some of which as held by the CA were secured by real estate mortgage and earned an interest of 18% per annum. Upon default thereof, respondents demanded payment from the petitioners by filing an action for foreclosure of the real estate mortgage. Clearly, the case falls under the rule stated in paragraph 1. Applying the rules in the computation of interest, the principal amount of loans subject of the real estate mortgage must earn the stipulated interest of 18% per annum, which interest, as long as unpaid, also earns legal interest of 12% per annum, computed from the date of the filing of the complaint on September 10, 1997 until finality of the Courts Decision. Such interest is not due to stipulation but due to the mandate of the law21 as embodied in Article 2212 of the Civil Code. From such date of finality, the total amount due shall earn interest of 12% per annum until satisfied.22 Certainly, the computed interest from the filing of the complaint on September 10, 1997 would no longer be true upon the finality of this Courts decision. In

accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals, we derive the following formula23 for the RTCs guidance: TOTAL AMOUNT DUE = [principal + interest + interest on interest] - partial payments made Interest = principal x 18 % per annum x no. of years from due date until finality of judgment Interest on interest = Interest computed as of the filing of the complaint (September 10, 1997) x 12% x no. of years until finality of judgment Total amount due as of the date of finality of judgment will earn an interest of 12% per annum until fully paid. In Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing Corporation,24 this Court held that the total amount due on the contracts of loan may be easily determined by the trial court through a simple mathematical computation based on the formula specified above. Mathematics is an exact science, the application of which needs no further proof from the parties. As regards what loans were secured by the real estate mortgage, respondents contended that all five additional loans were intended by the parties to be secured by the real estate mortgage. Thus, the CA erred in ruling that only two of the five additional loans were secured by the

real estate mortgage when the documents evidencing said loans would show at least three loans were secured by the real estate mortgage, namely: (1) P150,000.00 obtained on May 31, 1992; (2) P150,000.00 obtained on July 1, 1992; and (3) P500,000.00 obtained on September 5, 1992.25 In their Reply, petitioners alleged that their petition only raised the sole issue of interest on the interest due, thus, by not filing their own petition for review, respondents waived their privilege to bring matters for the Courts review that do not deal with the sole issue raised. Procedurally, the appellate court in deciding the case shall consider only the assigned errors, however, it is equally settled that the Court is clothed with ample authority to review matters not assigned as errors in an appeal, if it finds that their consideration is necessary to arrive at a just disposition of the case.26 Moreover, as an exception to the rule that findings of facts of the CA are conclusive and binding on the Court,27 an independent evaluation of facts may be done by it when the findings of facts are conflicting,28 as in this case. The RTC held that all the additional loans were secured by the real estate mortgage, thus: There is, therefore, a preponderance of evidence to show that the parties agreed that the additional loans would be

against the mortgaged property. It is of no moment that the Deed of Mortgage (Exh. B) was not amended and thereafter annotated at the back of the title (Exh. C) because under Article 2125 of the Civil Code, if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. It is extremely difficult for the court to perceive that the plaintiffs required the defendants to execute a mortgage on the first loan and thereafter fail to do so on the succeeding loans. Such contrary behavior is unlikely.29 The CA modified the RTC decision holding that: However, the real estate mortgage contract was supplemented by the express intention of the mortgagors (defendants-appellants) to secure the subsequent loans they obtained from the mortgagees (plaintiffs-appellees), on 01 July 1992, in the amount of P150,000.00, and on 05 September 1992, in the amount of P500,000.00. The mortgagors (defendants-appellants) intention to secure a larger amount than that stated in the real estate mortgage contract was unmistakable in the acknowledgment receipts they issued on the said loans. The acknowledgment receipts read: "July 1, [1]992 "Received from Mr. & Mrs. Renato Q. Cuyco PCIB Ck # 498243 in the amount of P150,000.00 July 1/92 as additional loan against mortgaged property TCT No. RT43723 (188321) Q.C.

(SGD) Adelina S. Cuyco" "Sept. 05/92 "Received from Mr. R. Cuyco the amount of P500,000.00 (five hundred thousand) PCIB Ck # 468657 as additional loan from mortgage property TCT RT-43723. (SGD) Adelina S. Cuyco" In such case, the specific amount mentioned in the real estate mortgage contract no longer controls. By express intention of the mortgagors (defendants-appellants) the real estate mortgage contract, as supplemented, secures the P1,500,000.00 loan obtained on 25 November 1991; the P150,000.00 loan obtained on 01 July 1992; and the P500,000.00 loan obtained on 05 September 1992. All these loans are subject to stipulated interest of 18% per annum provided in the real estate mortgage contract. With respect to the other subsequent loans of the defendants-appellants in the amount of P150,000.00, obtained on 31 May 1992; in the amount of P200,000.00, obtained on 29 October 1992; and, in the amount of P250,000.00, obtained on 13 January 1993, nothing in the records remotely suggests that the mortgagor (defendants-appellants), likewise, intended the said loans to be secured by the real estate mortgage contract. Consequently, we rule that the trial court did err in declaring said loans to be secured by the real estate mortgage contract.30

As a general rule, a mortgage liability is usually limited to the amount mentioned in the contract.31 However, the amounts named as consideration in a contract of mortgage do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered. This stipulation is valid and binding between the parties and is known in American Jurisprudence as the "blanket mortgage clause," also known as a "dragnet clause." 32 A "dragnet clause" operates as a convenience and accommodation to the 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 services, recording fees, et cetera.33 While a real estate mortgage may exceptionally secure future loans or advancements, these future debts must be sufficiently described in the mortgage contract. An obligation is not secured by a mortgage unless it comes fairly within the terms of the mortgage contract.34 The pertinent provisions of the November 26, 1991 real estate mortgage reads: That the MORTGAGOR MORTGAGEE in the sum THOUSAND PESOS (sic) Currency, receipt whereof is is indebted unto the of ONE MILLION FIVE (1,500,000.00) Philippine hereby acknowledged and

confessed, payable within a period of one year, with interest at the rate of eighteen percent (18%) per annum; That for and in consideration of said indebtedness, the MORTGAGOR does hereby convey and deliver by way of MORTGAGE unto said MORTGAGEE, the latters heirs and assigns, the following realty together with all the improvements thereon and situated at Cubao, Quezon City, and described as follows: xxxx PROVIDED HOWEVER, that should the MORTGAGOR duly pay or cause to be paid unto the MORTGAGEE or his heirs and assigns, the said indebtedness of ONE MILLION FIVE HUNDRED THOUSAND PESOS (1,500,000.00), Philippine Currency, together with the agreed interest thereon, within the agreed term of one year on a monthly basis then this MORTGAGE shall be discharged, and rendered of no force and effect, otherwise it shall subsist and be subject to foreclosure in the manner and form provided by law. It is clear from a perusal of the aforequoted real estate mortgage that there is no stipulation that the mortgaged realty shall also secure future loans and advancements. Thus, what applies is the general rule above stated. Even if the parties intended the additional loans of P150,000.00 obtained on May 30, 1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on

September 5, 1992 to be secured by the same real estate mortgage, as shown in the acknowledgement receipts, it is not sufficient in law to bind the realty for it was not made substantially in the form prescribed by law. In order to constitute a legal mortgage, it must be executed in a public document, besides being recorded. A provision in a private document, although denominating the agreement as one of mortgage, cannot be considered as it is not susceptible of inscription in the property registry. A mortgage in legal form is not constituted by a private document, even if such mortgage be accompanied with delivery of possession of the mortgage property.35 Besides, by express provisions of Section 127 of Act No. 496, a mortgage affecting land, whether registered under said Act or not registered at all, is not deemed to be sufficient in law nor may it be effective to encumber or bind the land unless made substantially in the form therein prescribed. It is required, among other things, that the document be signed by the mortgagor executing the same, in the presence of two witnesses, and acknowledged as his free act and deed before a notary public. A mortgage constituted by means of a private document obviously does not comply with such legal requirements.36 What the parties could have done in order to bind the realty for the additional loans was to execute a new real estate mortgage or to amend the old mortgage conformably with the form prescribed by the law. Failing to do so, the realty cannot be bound by such additional

loans, which may be recovered by the respondents in an ordinary action for collection of sums of money. Lastly, the CA held that to discharge the real estate mortgage, payment only of the principal and the stipulated interest of 18% per annum is sufficient as the mortgage document does not contain a stipulation that the legal interest on the stipulated interest due, attorneys fees, and costs of suit must be paid first before the same may be discharged.37 We do not agree. Section 2, Rule 68 of the Rules of Court provides: SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment. (Emphasis added) Indeed, the above provision of the Rules of Court provides that the mortgaged property may be charged not

only for the mortgage debt or obligation but also for the interest, other charges and costs approved by the court. Thus, to discharge the real estate mortgage, petitioners must pay the respondents (1) the total amount due, as computed in accordance with the formula indicated above, that is, the principal loan of P1,500,000.00, the stipulated interest of 18%, the interest on the stipulated interest due of 12% computed from the filing of the complaint until finality of the decision less partial payments made, (2) the 12% legal interest on the total amount due from finality until fully satisfied, (3) the reasonable attorneys fees of P25,000.00 and (4) the costs of suit, within the period specified by the Rules. Should the petitioners default in the payment thereof, the property shall be sold at public auction to satisfy the judgment. WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals in CA G.R. CV No. 62352 dated November 5, 2003, which modified the Decision of the Regional Trial Court of Quezon City, Branch 105, in Civil Case No. Q-97-32130, is AFFIRMED with the MODIFICATIONS that petitioners are ordered to pay the respondents (1) the total amount due, as computed by the RTC in accordance with the formula specified above, (2) the legal interest of 12% per annum on the total amount due from such finality until fully paid, (3) the reasonable amount of P25,000.00 as attorneys fees, and (4) the costs of suit, within a period of not less than 90 days nor more than 120 days from the entry of judgment, and in case of default of such payment the property shall

be sold at public auction to satisfy the judgment. SO ORDERED. CONSUELO YNARES-SANTIAGO

G.R. No. L-23768

August 23, 1968

JOSE GARRIDO, plaintiff-appellant, vs. PILAR G. TUASON, defendant-appellee. Pedro Bernardino Flores for plaintiff-appellant. David S. Ignacio for defendant-appellee. CONCEPCION, C.J.: Appeal from a decision of the Court of First Instance of Manila, certified to us by the Court of Appeals, only questions of law being raised by plaintiff-appellant. On October 17, 1959, Jose Garrido commenced Civil Case No. 71763 of the Municipal Court of Manila, for the foreclosure of a chattel mortgage, executed in his favor by defendant, Pilar G. Tuason, to guarantee the payment of a debt in the sum of P1,000, as well as for the recovery of attorney's fees and the costs. After appropriate proceedings, decision was rendered, on November 14, 1959, ordering the defendant to pay to plaintiff "the sum of P1,000 with interest thereon at the rate of 1% per

month from June 30, 1959 until the whole amount is fully paid, plus the sum of P100 for attorney's fees, and the costs." In compliance with a writ of execution, issued on December 9, 1959, after this decision had become final, a car of the defendant was, on January 2, 1960, sold, by the Provincial Sheriff of Rizal, at public auction, to the plaintiff, as the highest bidder, for the sum of P550. On January 28, 1960, plaintiff filed two (2) motions, namely: one, praying that the sum of P165, allegedly spent by him to carry out said writ of execution, be added to the unsatisfied portion of the aforementioned decision, presumably as part of the costs, and another, for an alias writ of execution for the sum of P1,290.58, as the aggregate outstanding balance allegedly due under said decision. Both motions were denied in an order dated February 27, 1960. Plaintiff's motion for reconsideration of this order was denied on March 19, 1960.1wph1.t Soon later, or on April 1, 1960, plaintiff commenced Civil Case No. 76462, of said court, against the same defendant whose husband was included, as her codefendant, on May 27, 1960 for the recovery of said alleged balance of P1,290.58. On motion of said defendants, plaintiff's complaint in said case No. 76462 was dismissed by the Municipal Court, on August 31, 1960. Plaintiff appealed to the Court of First Instance of Manila, which, in due course rendered its decision, on April 17, 1961, dismissing the case, without pronouncement as to costs, upon the ground that,

pursuant to Article 2115 of the Civil Code of the Philippines, plaintiff has no cause of action against the defendants. Hence, this appeal by the plaintiff. Article 2115 of said Code reads:1wph1.t ... The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. The Court of First Instance must have applied this precept in view of Article 2141 of the same Code, pursuant to which the provisions thereof on pledge shall be applicable to chattel mortgages "insofar as they are not in conflict with the Chattel Mortgage Law." We have already held, however,1 that said Article 2115 is inconsistent with the provisions of the Chattel Mortgage Law,2 and that, accordingly, the chattel mortgage creditor may maintain an action3 for the deficiency. Then, again, said Court would seem to have acted under the impression, that, since Case No. 71763 was one for the foreclosure of a chattel mortgage, the decision therein rendered was for such foreclosure; but such was not the nature of said decision, for it merely ordered the

defendant to pay the sum of P1,000, with interest thereon, in addition to attorney's fees and the costs. It did not order the sale of the property mortgaged to the plaintiff or of any other particular property, for the satisfaction of his credit against the defendant. It did not purport to enforce plaintiff's lien over the mortgaged property. In other words, it was an ordinary money judgment, to which said Articles 2115 and 2141 were absolutely irrelevant. The municipal court erred, therefore, in denying plaintiff's motion of January 28, 1960, for the issuance of an alias writ of execution in Case No. 71763, less than five (5) years having elapsed since the decision therein was rendered on November 14, 1959. As a consequence, plaintiff could have and should have appealed from the order of denial of said motion; but, he did not do so, and, instead, he brought the case at bar, thereby allowing said order to become final. Thus, the principle of res adjudicata bars the present action, which, accordingly, was dismissed properly. WHEREFORE, the decision appealed from is hereby affirmed, with costs against plaintiff-appellant. It is so ordered.1wph1.t Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.