Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19227

February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S
Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203,
valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by
installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping
Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a
year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National
Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its
equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank",
executed on the same day and duly registered with the office of the Collector of Customs for the Port of
Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining
balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note,
dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26,
1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their
respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa
thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with
defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks
totalling P184,000. The drawer thereof one of the co-accused had no funds in the drawee bank.
However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the
amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his coaccused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of
P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The
corresponding writ of execution issued to implement the order for indemnification was returned
unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant bank took physical
possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the

first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-infact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4",
transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping
Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining
installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don
Dino were sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the
three vessels or their value and damages from defendant bank. The latter filed its answer, with a
counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting
in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During
the course of the trial, defendant amended its answer reducing its claim from P202,000 to
P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of
physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without
notice to the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and (c) that the
defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account
balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the
criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us,
the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this Court hold that
Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take
possession of the chattels object thereof until after there has been default. The submission is without
merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract
3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the
plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the
payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly
registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing
therein; (Emphasis supplied)1wph1.t
Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made
thru palpable mistake, no amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession of the vessels.
While it is true that plaintiff continued operating the vessels after the pledge contract was entered into,
his possession was expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of
the present Civil Code 11being new cannot apply to the pledge contract here which was entered into
on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee
can temporarily entrust the physical possession of the chattels pledged to the pledgor without

invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely
as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make
pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual
delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v. Peterson, 7 Phil. 409
ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged
in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v.
Ganzon, the objects pledged carabaos were easily capable of actual, manual delivery unto the
pledgee. In Banco Espaol-Filipino v. Peterson, the objects pledged goods contained in a warehouse
were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the
particular transaction and would have been an unreasonable requirement. Thus, for purposes of
showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In
other words, the type of delivery will depend upon the nature and the peculiar circumstances of each
case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold
said property subject to the order of the pledgee." Considering the circumstances of this case and the
nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the
vessels thru the plaintiff, the former could take actual possession at any time during the life of the
pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not
unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the
huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case
involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o
de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas
las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en
poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al
deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util
para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiff-appellant attacks the
validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory requirements as to public sales with prior
notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of
the passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to
buy the property object of foreclosure in case of private sales; and third, that the price obtained at the
sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El
Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law
refers only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are
in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure
sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the

bank could purchase the whole or part of the property sold " free from any right of redemption on the
part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is
this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could
redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.
Regarding the third contention, on the assumption that the purchase price was unconscionable,
plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by
the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him
from defendant bank.
The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by
virtue of the taking of the vessels. But in view of the results reached above, there is no more need to
discuss the same.
On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiffappellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank
first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge
contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first
promissory note. Plaintiff-appellant did not come to court with clean hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant.
So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24137

March 29, 1926

EULOGIO BETITA, plaintiff-appellee,

vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants.
Padilla, Trenas and Magalona for appellants.
Varela and Ybiernas for appellee.
OSTRAND, J.:
This action is brought to recover the possession of four carabaos with damages in the sum of P200.
Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a
judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this judgment the defendant
Ganzon, as sheriff levied execution on the carabaos in question which were found in the possession of
one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein, Eulogio Betita,
presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as
evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of

the animals at public auction where they were purchased by the defendant Clemente Perdena for the
sum of P200, and this action was thereupon brought.
The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in
translation reads as follows:
I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay,
municipality of Balasan, Province of Iloilo, Philippine Islands, do hereby execute this
document extrajudicially and state that I am indebted to Mr. Eulogio Betita, resident of
the municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470,
Philippine currency, and was so indebted since the year 1922, and as a security to my
creditor I hereby offer four head of carabaos belonging to me exclusively (three females
and one male), the certificates of registration of said animals being Nos. 2832851,
4670520, 4670521 and 4670522, which I delivered to said Mr. Eulogio Betita.
I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be able to
pay, Mr. Eulogio Betita may dispose of the carabaos given as security for said debt.
This document is a new one or a renewal of our former document because the first carabaos mortgaged
died and were substituted for by the newly branded ones."
In testimony whereof and not knowing how to sign my name, I caused my name to be written and
marked same with my right thumb.
Estancia, May 6, 1924.
(Marked). TIBURCIA BUHAYAN
Signed in the presence of:
MIGUEL MERCURIO
TIRZO ZEPEDA
The court below held that inasmuch as this document was prior in date to the judgment under which
the execution was levied, it was a preferred credit and judgment was rendered in favor of the plaintiff
for the possession of the carabaos, without damages and without costs. From this judgment the
defendants appeal.
The judgment must be reversed unless the document above quoted can be considered either a chattel
mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not meet the
requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been recorded and,
considered as a chattel mortgage, is consequently of no effect as against third parties
(Williams vs. McMicking, 17 Phil., 408; Giberson vs.A. N. Jureidini Bros., 44 Phi., 216; Benedicto de
Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil., 753).
Neither did the document constitute a sufficient pledge of the property valid against third parties.
Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless
evidence of its date appears in a public instrument." The document in question is not public, but it is
suggested that its filing with the sheriff in connection with the terceria gave in the effect of a public

instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of
article 1865. Assuming, without conceding, that the filing of the document with the sheriff had that
effect, it seems nevertheless obvious that the pledge only became effective as against the plaintiff in
execution from the date of the filing and did not rise superior to the execution attachment previously
levied (see Civil Code, article 1227).
Manresa, in commenting on article 1865, says:
ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in
a public instrument.
This article, the precept of which did not exist in our old law, answers the necessity for not disturbing
the relationship or the status of the ownership of things with hidden or simulated contracts of pledge, in
the same way and for the identical reasons that were taken into account by the mortgage law in order
to suppress the implied and legal mortgages which produce so much instability in real property.
Considering the effects of a contract of pledge, it is easily understood that, without this warranty
demanded by law, the case may happen wherein a debtor in bad faith from the moment that he sees his
movable property in danger of execution may attempt to withdraw the same from the action of justice
and the reach of his creditors by simulating, through criminal confabulations, anterior and fraudulent
alterations in his possession by means of feigned contracts of this nature; and, with the object of
avoiding or preventing such abuses, almost all the foreign writers advise that, for the effectiveness of
the pledge, it be demanded as a precise condition that in every case the contract be executed in a public
writing, for, otherwise, the determination of its date will be rendered difficult and its proof more so,
even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking
those before whom it was executed.
Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be
constituted or formalized in a public writing, nor even in private document, but only that the certainty of
the date be expressed in the first of the said class of instruments in order that it may be valid against a
third party; and, in default of any express provision of law, in the cases where no agreement requiring
the execution in a public writing exists, it should be subjected to the general rule, and especially to that
established in the last paragraph of article 1280, according to which all contracts not included in the
foregoing cases of the said article should be made in writing even though it be private, whenever the
amount of the presentation of one or of the two contracting parties exceeds 1,500 pesetas. (Vol. 12, ed.,
p. 421.)
If the mere filing of a private document with the sheriff after the levy of execution can create a lien of
pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by
Manresa clearly be defeated. Such could not have been the intention of the authors of the Code. (See
also Ocejo, Perez & Co. vs.International Banking Corporation, 37 Phil., 631 and Tec Bi & Co. Chartered
Bank of India, Australia & China, 41 Phil., 596.)
The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had
actual possession of the property within the meaning of article 1863 of the Civil Code. But it is argued
that at the time of the levy the animals in question were in the possession of one Simon Jacinto; that
Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his landlord.

It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia
Buhayan were living together as husband and wife and had been so living for many years. Testifying as
a witness for the plaintiff, Jacinto on cross-examination made the following statements:
Q. But the caraballas in question had never been in possession of Eulogio Betita? A. The three young
ones did not get into his hands.
Q. And the others? A. Sometimes they were in the hands of Betita and at other times in the hands of
Buhayan.
Q. Those are the caraballas which formerly were mortgaged by Buhayan to Betita, isn't that so? A.
Yes, sir.
Q. And the four carabaos now in question had never been in possession of Betita, but were in your
possession? A. When I worked they were in my hands.
Q. And before you worked, these caraballas were in possession of your mistress, Tiburcia Buhayan? A.
Yes, sir.
Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals passed immediately
into your possession? A. Yes sir.
This testimony is substantially in accord with that of the defendant sheriff to the effect that he found
the animals at the place where Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as
follows:
In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the
contract of pledge, that the pledge be placed in the possession of the creditor or of a third person
appointed by common consent.
In his commentary on this article Manresa says:
This requisite is most essential and is characteristic of a pledge without which the contract cannot be
regarded as entered into or completed, because, precisely, in this delivery lies the security of the pledge.
Therefore, in order that the contract of pledge may be complete, it is indispensable that the aforesaid
delivery take place . . . . (P. 411, supra.)
It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the
actual possession of the property pledged and that a mere symbolic delivery is not sufficient. In the
present case the animals in question were in the possession of Tiburcia Buhayan and Simon Jacinto
before the alleged pledge was entered into and apparently remained with them until the execution was
levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore in
reality no change in possession.
It may further be noted that the alleged relation of landlord and tenant between the plaintiff and Simon
Jacinto is somewhat obscure and it is, perhaps, doubtful if any tenancy, properly speaking, existed. The
land cultivated by Jacinto was not the property of the plaintiff, but it appears that a part of the products
was to be applied towards the payment of Tiburcia Buhayan's debt to the plaintiff. Jacinto states that he
was not a tenant until after the pledge was made.

From what has been said it follows that the judgment appealed from must be reversed and it is ordered
and adjudged that the plaintiff take nothing by his action. Without costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18500

October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffs-appellants,

vs.
GLICERIO JAVELLANA, defendant-appellant.
Montinola, Montinola and Hontiveros for plaintiffs-appellants.
J. M. Arroyo and Fisher and DeWitt for defendant-appellant.
AVANCEA, J.:
On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25
per cent per annum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal
with a diamond in the center and surrounded with ten diamonds, a pair of diamond earrings, a small
comb with twenty-two diamonds, and two diamond rings, which the contracting parties appraised at
P4,000. This loan is evidenced by two documents (Exhibits A and 1) wherein the amount appears to be
P1,875, which includes the 25 per cent interest on the sum of P1,500 for the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M. Villaseor,
being unable to pay the loan, obtained from the defendant an extension, with the condition that the
loan was to continue, drawing interest at the rate of 25 per cent per annum, so long as the security
given was sufficient to cover the capital and the accrued interest. In the month of August, 1919, the
plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the house of the defendant
and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of
P11,000, but the defendant then informed them that the time for the redemption had already elapsed.
The plaintiffs renewed their offer to redeem the jewelry by paying the loan, but met with the same
reply. These facts are proven by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value,
upon the payment by them of the sum they owe the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he requested
the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loan and redeem the jewels, as he
needed money to purchase a certain piece of land; that one month thereafter, the plaintiff, Filomena
Sarmiento, went to his house and offered to sell him the jewels pledged for P3,000; that the defendant
then told her to come back on the next day, as he was to see his brother, Catalino Javellana, and ask him
if he wanted to take the jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento,

went back to the house of the defendant who then paid her the sum of P1,125, which was the balance
remaining of the P3,000 after deducting the plaintiff's loan.
It appearing that the defendant possessed these jewels originally, as a pledge to secure the payment of
a loan stated in writing, the mere testimony of the defendant to the effect that later they were sold to
him by the plaintiff, Filomena Sarmiento, against the positive testimony of the latter that she did not
make any such sale, requires a strong corroboration to be accepted. We do not find the testimony of
Jose Sison to be of sufficient value as such corroboration. This witness testified to having been in the
house of the defendant when Filomena went there to offer to sell the defendant the jewels, as well as
on the third day when she returned to receive the price. According to this witness, he happened to be in
the house of the defendant, having gone there to solicit a loan, and also accidentally remained in the
house of the defendant for three days, and that that was how he happened to witness the offer to sell,
as well as the receipt of the price on the third day. But not only do we find that the defendant has not
sufficiently established, by his evidence, the fact of the purchase of the jewels, but also that there is a
circumstance tending to show the contrary, which is the fact that up to the trial of this cause the
defendant continued in possession of the documents, Exhibits A and 1, evidencing the loan and the
pledge. If the defendant really bought these jewels, its seems natural that Filomena would have
demanded the surrender of the documents evidencing the loan and the pledge, and the defendant
would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.
Another point on which evidence was introduced by both parties is as to the value of the jewels in the
event that they were not returned by the defendant. In view of the evidence of record, we accept the
value of P12,000 fixed by the trial court.
From the foregoing it follows that, as the jewels in question were in the possession of the defendant to
secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from
Augusts 31, 1911, to August 31, 1912, and the defendant having subsequently extended the term of the
loan indefinitely, and so long as the value of the jewels pledged was sufficient to secure the payment of
the capital and the accrued interest, the defendant is bound to return the jewels or their value (P12,000)
to plaintiffs, and the plaintiffs have the right to demand the same upon the payment by them of the sum
of P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911.
The judgment appealed from being in accordance with this findings, the same is affirmed without
special pronouncement as to costs. So ordered.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6342

January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
LAUREANO ATENDIDO, defendants-appellant.
Nicolas Fernandez for appellee.
Gaudencio L. Atendido for appellant.
BAUTISTA, ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the defendant
to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per annum from June
26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000
payable in 120 days with interests at 6% per annum from the date of maturity. To guarantee the
payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay which were then
deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan, and to that effect the
borrower endorsed in favor of the bank the corresponding warehouse receipt. Before the maturity of
the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan
matured the borrower failed to pay either the principal or the interest and so the present action was
instituted.
Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that
the warehouse receipt covering the palay which was given as security having been endorsed in blank in
favor of the bank, and the palay having been lost or disappeared, he thereby became relieved of liability.
And, by way of counterclaim, defendant claimed that, as a corollary to his theory, he is entitled to an
indemnity which represents the difference between the value of the palay lost and the amount of his
obligation.
The case was submitted on an agreed statements of facts and thereupon the court rendered judgment
as stated in the early part of this decision.
Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court on the
ground that the question involved is purely one of law.
The only issue involved in this appeal is whether the surrender of the warehouse receipt covering the
2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of transferring
their title or ownership to said appellee, or it should be considered merely as a guarantee to secure the
payment of the obligation of appellant.
In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not that of a final

transfer of that warehouse receipt but merely as a guarantee to the fulfillment of the original obligation
of P3,000.00. In other word, plaintiff corporation had no right to dispose (of) the warehouse receipt until
after the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes of palay were not in
the first place in the actual possession of plaintiff corporation, although symbolically speaking the
delivery of the warehouse receipt was actually done to the bank."
We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as
defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations
embodied in the contract signed by appellant when he secured the loan from the appellee. There is no
question that the 2,000 cavanes of palay covered by the warehouse receipt were given to appellee only
as a guarantee to secure the fulfillment by appellant of his obligation. This clearly appears in the
contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as a
collateral security. The delivery of said palay being merely by way of security, it follows that by the very
nature of the transaction its ownership remains with the pledgor subject only to foreclose in case of
non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon maturity the
most that the pledgee can do is to sell the property and apply the proceeds to the payment of the
obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the
essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate
to himself, the thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the
pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands
to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that the
warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the
situation, the purpose of such endorsement being merely to transfer the juridical possession of the
property to the pledgee and to forestall any possible disposition thereof on the part of the pledgor. This
is true notwithstanding the provisions to the contrary of the Warehouse Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765) which
involves a similar transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a
creditor only to secure the payment of a loan or debt, the transferee or endorsee does not automatically
become the owner of the goods covered by the warehouse receipt or quedan but he merely retains the
right to keep and with the consent of the owner to sell them so as to satisfy the obligation from the
proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a
mortgage or pledge, and that if the property covered by the quedans or warehouse receipts is lost
without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the
warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner,
mortgagor or pledgor.
Wherefore, the decision appealed from is affirmed, with costs against appellant.

G.R. No. L-21069

October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee.
Rodolfo R. Velayo for and in his own behalf as defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing
appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with
interest at 12-% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate
from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the
Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo,
executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita
Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to
pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and
loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all
money it should pay or become liable to pay under the bond including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with power to sell the same in case the surety paid or
become obligated to pay any amount of money in connection with said bond, applying the proceeds to
the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the
persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution
having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought
to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to
be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay
the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that
the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the
1950 Civil Code, which recites:
Art. 2115. 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 Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the
Court of First Instance, the defense was once more overruled, and the case decided in the terms set
down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if
the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an
added protection to the latter. There was no understanding that, should the same be sold at public
auction and the value thereof should be short of the undertaking, the defendant would have no further
liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the
said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is
incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is
nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which
the creditor is entitled to a deficiency judgment for the balance should the collateral not command the
price equal to the undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation
has already been sold for only the amount of P235.00, the liability of the defendant should be limited to
the difference between the amounts of P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The
accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil
Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a
principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company
for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge
is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115
of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must
be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes
that the extinction of the principal obligation supervenes by operation of imperative law that the parties
cannot override:
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 provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and
must abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a
chattel mortgage constituted to secure the price of the personal property sold in installments, and
which originated in Act 4110 promulgated by the Philippine Legislature in 1933.
WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint,
except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per
annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So
ordered.