G.R. No.
L-49940 September 25, 1986 WITNESSES:
GEMMA R. HECHANOVA, accompanied by her husband,
NICANOR HECHANOVA, JR., and PRESCILLA R. MASA,
accompanied by her husband, FRANCISCO
MASA, petitioners,
vs.
HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II,
Court of First Instance of Iloilo, THE PROVINCIAL
SHERIFF OF ILOILO, and PIO SERVANDO, respondents.
YAP, J.:
Petitioners seek the annulment of various orders issued by the
respondent Presiding Judge of Branch II, Court of First
Instance of Iloilo, in Civil Case No. 12312 entitled "Pio
Servando versus Jose Y. Servando et al." A temporary
restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision
rendered by the respondent Judge in said case.
The case under review is for the annulment of a deed of sale
dated March 11, 1978, executed by defendant Jose Y.
Servando in favor of his co-defendants, the petitioners herein,
covering three parcels of land situated in Iloilo City. Claiming
that the said parcels of land were mortgaged to him in 1970 by
the vendor, who is his cousin, to secure a loan of P20,000.00,
the plaintiff Pio Servando impugned the validity of the sale as
being fraudulent, and prayed that it be declared null and void
and the transfer certificates of title issued to the vendees be
cancelled, or alternatively, if the sale is not annulled, to order
the defendant Jose Servando to pay the amount of
P20,000.00, plus interests, and to order defendants to pay
damages. Attached to the complaint was a copy of the private
document evidencing the alleged mortgage (Annex A), which is
quoted hereunder:
August 20, 1970
This is to certify that I, Jose Yusay Servando,
the sole owner of three parcel of land under
Tax Declaration No. 28905, 44123 and
31591 at Lot No. 1, 1863-Portion of 1863 &
1860 situated at Sto. Nino St., Arevalo,
Compania St. & Compania St., Interior Molo,
respectively, have this date mortgaged the
said property to my cousin Pio Servando, in
the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a
period not exceeding ten (10) years, the
mortgage amount bearing an interest of 10%
per annum.
I further certify that in case I fail to redeem
the said properties within the period stated
above, my cousin Pio Servando, shall
become the sole owner thereof.
(SGD.) JOSE YUSAY SERVANDO
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
The defendants moved to dismiss the complaint on the
grounds that it did not state a cause of action, the alleged
mortgage being invalid and unenforceable since it was a mere
private document and was not recorded in the Registry of
Deeds; and that the plaintiff was not the real party in interest
and, as a mere mortgagee, had no standing to question the
validity of the sale. The motion was denied by the respondent
Judge, in its order dated June 20, 1978, "on the ground that
this action is actually one for collection."
On June 23, 1978, defendant Jose Y. Servando died. The
defendants filed a Manifestation and Motion, informing the trial
court accordingly, and moving for the dismissal of the
complaint pursuant to Section 21 of Rule 3 of the Rules of
Court, pointing out that the action was for. recovery of money
based on an actionable document to which only the deceased
defendant was a party. The motion to dismiss was denied on
July 25, 1978, "it appearing from the face of the complaint that
the instant action is not purely a money claim, it being only
incidental, the main action being one for annulment and
damages."
On August 1, 1978, plaintiff filed a motion to declare
defendants in default, and on the very next day, August 2, the
respondent Judge granted the motion and set the hearing for
presentation of plaintiff's evidence ex-parte on August 24,
1978.
On August 2, 1978, or the same day that the default order was
issued, defendants Hechanova and Masa filed their Answers,
denying the allegations of the complaint and repeating, by way
of special and affirmative defenses, the grounds stated in their
motions to dismiss.
On August 25, 1978, a judgment by default was rendered
against the defendants, annulling the deed of sale in question
and ordering the Register of Deeds of Iloilo to cancel the titles
issued to Priscilla Masa and Gemma Hechanova, and to revive
the title issued in the name of Jose Y. Servando and to deliver
the same to the plaintiff.
The defendants took timely steps to appeal the decision to the
Court of Appeals by filing a notice of appeal, an appeal bond,
and a record on appeal. However, the trial court disapproved
the record on appeal due to the failure of defendants to comply
with its order to eliminate therefrom the answer filed on August
2, 1978 and accordingly, dismissed the appeal, and on
February 2, 1978, issued an order granting the writ of
execution prayed for by plaintiff.
We find the petition meritorious, and the same is hereby given
due course.
It is clear from the records of this case that the plaintiff has no
cause of action. Plaintiff has no standing to question the
validity of the deed of sale executed by the deceased
1
defendant Jose Servando in favor of his co-defendants
Hechanova and Masa. No valid mortgage has been constituted
plaintiff's favor, the alleged deed of mortgage being a mere
private document and not registered; moreover, it contains a
stipulation (pacto comisorio) which is null and void under
Article 2088 of the Civil Code. Even assuming that the property
was validly mortgaged to the plaintiff, his recourse was to
foreclose the mortgage, not to seek annulment of the sale.
WHEREFORE, the decision of the respondent court dated
August 25, 1973 and its Order of February 2, 1979 are set
aside, and the complaint filed by plaintiff dated February 4,
1978 is hereby dismissed.
SO ORDERED.
G.R. No. L-53955 January 13, 1989
THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA
TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.
BIDIN, J.:
This is an appeal from the decision* of the Court of First
Instance of Manila, Branch XVII in Civil Case No. 78178 for
collection of sum of money based on promissory notes
executed by the defendants-appellants in favor of plaintiff-
appellee bank. The dispositive portion of the appealed decision
(Record on Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered
(a) sentencing defendants, Anastacio
Teodoro, Jr. and Grace Anna Teodoro jointly
and severally, to pay plaintiff the sum of
P15,037.11 plus 12% interest per annum
from September 30, 1969 until fully paid, in
payment of Promissory Notes No. 11487,
plus the sum of P1,000.00 as attorney's fees;
and (b) sentencing defendant Anastacio
Teodoro, Jr. to pay plaintiff the sum of
P8,934.74, plus interest at 12% per annum
from September 30, 1969 until fully paid, in
payment of Promissory Notes Nos. 11515
and 11699, plus the sum of P500.00 an
attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with
Anastacio Teodoro, Sr., jointly and severally,
executed in favor of plaintiff a Promissory
Note (No. 11487) for the sum of P10,420.00
payable in 120 days, or on August 25, 1966,
at 12% interest per annum. Defendants
failed to pay the said amount inspire of
repeated demands and the obligation as of
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
2
 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).
3
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
4
 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.
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.

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.

5
 addition thereto as rent the sum of 8 pesos per month from
February of that year, and to pay the costs of the action; and
the plaintiff alleged in effect that on the 29th day of February,
1904, the defendants, Ambrosio Alinea and Eudosia
Belarmino, borrowed from him the sum of 480 pesos, payable
in January of said year 1905 under the agreement that if, at the
expiration of the said period, said amount should not be paid it
would be understood that the house and lot, the house being
constructed of strong materials, owned by the said defendants
and located in the town of San Pablo on the street of the same
name, Province of La Laguna, be considered as absolutely
sold to the plaintiff for the said sum; that the superficial extent
and boundaries of said property are described in the complaint;
and that, notwithstanding that the time for the payment of said
sum has expired and no payment has been made, the
defendants refuse to deliver to plaintiff the said property,
openly violating that which they contracted to do and depriving
him to his loss of the rents which plaintiff should received, the
same counting from February, 1905.

The defendants, after the overruling of a demurrer to the

complaint herein, answered denying generally and specifically
all the allegations contained in the complaint, except those
which were expressly admitted, and alleged that the amount
claimed included the interest; and that the principal borrowed
was only 200 pesos and that the interest was 280 pesos,
although in drawing the document by mutual consent of the
parties thereto the amount of indebtedness was made to
appear in the sum of 480 pesos; and that as their special
defense defendants alleged that they offered to pay the plaintiff
the sum of 480 pesos, but the plaintiff had refused to accept
the same, therefore they persisted in making said offer and
tender of payment, placing at the disposal of the plaintiff the
said 480 pesos first tendered; and defendants asked for the
costs of action.

After having taken the evidence of both parties and attaching

the documents presented in evidence to the record, the judge
on November 27, 1905, rendered a judgment ordering the
defendants to deliver to the plaintiff the house and lot, the
object of this litigation, and to pay the costs of the action, not
making any finding upon the question of loss or damages by
reason of the absence of proof on these points. The
defendants duly took exception to this decision, and asked for
a new trial of the case on the ground that the findings of the
court below in its decision were plainly contrary to law, which
motion was overruled and from which ruling defendants also
excepted.
G.R. No. 3227 March 22, 1907
We have in this case a contract of loan and a promise of sale
PEDRO ALCANTARA, plaintiff-appellee, of a house and lot, the price of which should be the amount
vs. loaned, if within a fixed period of time such amount should not
AMBROSIO ALINEA, ET AL., defendants-appellants. be paid by the debtor-vendor of the property to the creditor-
vendee of same.
S.D. Reyes for appellants.
J. Gerona for appellee. Either one of the contracts are perfectly legal and both are
authorized respectively by articles 1451, 1740, and 1753, and
TORRES, J.: those following, of the Civil Code. The fact that the parties
have agreed at the same time, in such a manner that the
fulfillment of the promise of sale would depend upon the
On the 13th day of March, 1905, the plaintiff filed a complaint nonpayment or return of the amount loaned, has not produced
in the Court of First Instance of La Laguna, praying that any charge in the nature and legal conditions of either contract,
judgment be rendered in his behalf ordering the defendants to or any essential defect which would tend to nullify the same.
de liver to him the house and lot claimed, and to pay him in

6
If the promise of sale is not vitiated because, according to the
agreement between the parties thereto, the price of the same
is to be the amount loaned and not repaid, neither would the
loan be null or illegal, for the reason that the added agreement
provides that in the event of failure of payment the sale of
property as agreed will take effect, the consideration being the
amount loaned and not paid. No article of the Civil Code, under
the rules or regulations of which such double contract was
executed, prohibits expressly, or by inference from any of its
provisions, that an agreement could not be made in the form in
which the same has been executed; on the contrary, article
1278 of the aforesaid code provides that "contracts shall be
binding, whatever may be the form in which they may have
been executed, provided the essential conditions required for
their validity exist." This legal prescription appears firmly
sustained by the settled practice of the courts.
The property, the sale of which was agreed to by the debtors,
does not appear mortgaged in favor of the creditor, because in
order to constitute a valid mortgage it is indispensable that the
instrument be registered in the Register of Property, in
accordance with article 1875 of the Civil Code, and the
document of contract, Exhibit A, does not constitute a
mortgage, nor could it possibly be a mortgage, for the reason
of said document is not vested with the character and
conditions of a public instrument.
By the aforesaid document, Exhibit A, said property could not
be pledged, not being personal property, and notwithstanding
the said double contract the debtor continued in possession
thereof and the said property has never been occupied by the
creditor.
Neither was there ever nay contract of antichresis by reason of
the said contract of loan, as is provided in articles 1881 and
those following of the Civil Code, inasmuch as the creditor-
plaintiff has never been in possession thereof, nor has he
enjoyed the said property, nor for one moment ever received
its rents; therefore, there are no proper terms in law, taking into
consideration the terms of the conditions contained in the
aforesaid contract, whereby this court can find that the contract
was null, and under no consideration whatever would it be just
to apply to the plaintiff articles 1859 and 1884 of the same
code.
The contract ( pactum commissorium) referred to in Law 41,
title 5, and law 12, title 12, of the fifth Partida, and perhaps
included in the prohibition and declaration of nullity expressed
in articles 1859 and 1884 of the Civil Code, indicates the
existence of the contracts of mortgage or of pledge or that
of antichresis, none of which have coincided in the loan
indicated herein.
It is a principle in law, invariably applied by the courts in the
decisions of actions instituted in the matter of compliance with
obligations, that the will of the contracting parties is the law of
contracts and that a man obligates himself to that to which he
promises to be bound, a principle in accordance with Law 1,
title 1, book 10 of the Novisima Recopilacion, and article 1091
of the Civil Code. That which is agreed to in a contract is law
between the parties, a doctrine established, among others, in
judgments of the supreme court of Spain of February 20, 1897,
and February 13, 1904.
It was agreed between plaintiff and defendants herein that if
defendants should not pay the loan of 480 pesos in January,
1905, the property belonging to the defendants and described
in the contract should remain sold for the aforesaid sum, and
such agreement must be complied with, inasmuch as there is
no ground in law to oppose the compliance with that which has
been agreed upon, having been so acknowledged by the
obligated parties.
The supreme court of Spain, applying the aforementioned laws
of Spanish origin to a similar case, establishes in its decision of
January 16, 1872, the following legal doctrine:
Basing the complaint upon the obligation signed by
the debtor, which judicially recognized his signature;
and after confessing to have received from the
plaintiff a certain amount, binding himself to return
same to the satisfaction of the plaintiff within the term
of four years, or in case of default to transfer direct
domain of the properties described in the obligation
and to execute the necessary sale; and the term
having expired and the aforesaid amount not having
been paid, said plaintiff has his right free from
impediment to claim same against the heirs of the
debtor.
The document of contract has been recognized by the
defendant Alinea and by the witnesses who signed same with
him, being therefore an authentic and efficacious document, in
accordance with article 1225 of the Civil Code; and as the
amount loaned has not been paid and continues in possession
of the debtor, it is only just that the promise of sale be carried
into effect, and the necessary instrument be executed by the
vendees.
Therefore, by virtue of the reasons given above and accepting
the findings given in the judgment appealed from, we affirm the
said judgment herein, with the costs against the appellants.
After expiration of twenty days from the date of the notification
of this decision let judgment be entered in accordance herewith
and ten days thereafter let the case be remanded to the court
from whence it came for proper action. So ordered.
G.R. No. 77465 May 21, 1988
SPOUSES UY TONG & KHO PO GIOK, petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE
BIENVENIDO C. EJERCITO, Judge of the Court of First
Instance of Manila, Branch XXXVII and BAYANIHAN
AUTOMOTIVE CORPORATION, respondents.
Platon A. Baysa for petitioner.
Manuel T. Ybarra for respondents.
CORTES, J.:
7
In the present petition, petitioners assail the validity of a deed
of assignment over an apartment unit and the leasehold rights
over the land on which the building housing the said apartment
stands for allegedly being in the nature of a pactum
commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho Po
Giok (SPOUSES) used to be the owners of Apartment No. 307
of the Ligaya Building, together with the leasehold right for
ninety- nine (99) years over the land on which the building
stands. The land is registered in the name of Ligaya
Investments, Inc. as evidenced by Transfer Certificate of Title
No. 79420 of the Registry of Deeds of the City of Manila. It
appears that Ligaya Investments, Inc. owned the building
which houses the apartment units but sold Apartment No. 307
and leased a portion of the land in which the building stands to
the SPOUSES.
In February, 1969, the SPOUSES purchased from private
respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven
(7) units of motor vehicles for a total amount of P47,700.00
payable in three (3) installments. The transaction was
evidenced by a written "Agreement" wherein the terms of
payment had been specified as follows:
That immediately upon signing of this
Agreement, the VENDEE shall pay unto the
VENDOR the amount of Seven Thousand
Seven Hundred (P7,000.00) Pesos,
Philippine Currency, and the amount of
Fifteen Thousand (P15,000.00) Pesos shah
be paid on or before March 30, 1969 and the
balance of Twenty Five Thousand
(P25,000.00) Pesos shall be paid on or
before April 30, 1969, the said amount again
to be secured by another postdated check
with maturity on April 30, 1969 to be drawn
by the VENDEE;
That it is fully understood that should the two
(2) aforementioned checks be not honored
on their respective maturity dates, herein
VENDOR will give VENDEE another sixty
(60) days from maturity dates, within which
to pay or redeem the value of the said
checks;
That if for any reason the VENDEE should
fail to pay her aforementioned obligation to
the VENDOR, the latter shall become
automatically the owner of the former's
apartment which is located at No. 307,
Ligaya Building, Alvarado St., Binondo,
Manila, with the only obligation on its part to
pay unto the VENDEE the amount of Three
Thousand Five Hundred Thirty Five
(P3,535.00) Pesos, Philippine Currency; and
in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in
favor of the VENDOR and or the Assignment
of Leasehold Rights. [emphasis supplied].
(Quoted in Decision in Civil Case No. 80420,
Exhibit "A" of Civil Case No. 1315321].
After making a downpayment of P7,700.00, the SPOUSES
failed to pay the balance of P40,000.00. Due to these unpaid
balances, BAYANIHAN filed an action for specific performance
against the SPOUSES docketed as Civil Case No. 80420 with
the Court of First Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in
favor of BAYANIHAN in a decision the dispositive portion of
which reads:
WHEREFORE, judgment is hereby
rendered, ordering the defendants, jointly
and severally, to pay the plaintiffs, the sum of
P40,000.00, with interest at the legal rate
from July 1, 1970 until full payment. In the
event of their failure to do so within thirty
(30) days from notice of this judgment, they
are hereby ordered to execute the
corresponding deed of absolute sale in favor
of the plaintiff and/or the assignment of
leasehold rights over the defendant's
apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the
payment by the plaintiff to the defendants of
the sum of P3,535.00. [emphasis supplied].
Pursuant to said judgment, an order for execution pending
appeal was issued by the trial court and a deed of assignment
dated May 27, 1972, was executed by the SPOUSES [Exhibit
"B", CFI Records, p. 127] over Apartment No. 307 of the
Ligaya Building together with the leasehold right over the land
on which the building stands. The SPOUSES acknowledged
receipt of the sum of P3,000.00 more or less, paid by
BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the
SPOUSES remained in possession of the premises.
Subsequently, they were allowed to remain in the premises as
lessees for a stipulated monthly rental until November 30,1972.
Despite the expiration of the said period, the SPOUSES failed
to surrender possession of the premises in favor of
BAYANIHAN. This prompted BAYANIHAN to file an ejectment
case against them in the City Court of Manila docketed as Civil
Case No. 240019. This action was however dismissed on the
ground that BAYANIHAN was not the real party in interest, not
being the owner of the building.
On February 7, 1979, after demands to vacate the subject
apartment made by BAYANIHAN's counsel was again ignored
by the SPOUSES, an action for recovery of possession with
damages was filed with the Court of First Instance of Manila,
docketed as Civil Case No. 121532 against the SPOUSES and
impleading Ligaya Investments, Inc. as party defendant. On
March 17, 1981, decision in said case was rendered in favor of
BAYANIHAN ordering the following:
WHEREFORE, judgment is hereby rendered
in favor of the plaintiff and against the
defendants spouses UY TONG and KHO
8
 GIOK and defendant Ligaya Investment,
Inc., dismissing defendants' counterclaim
and ordering:
1. The defendants spouses UY TONG and
KHO PO GIOK and any andlor persons
claiming right under them, to vacate,
surrender and deliver possession of
Apartment 307, Ligaya Building, located at
64 Alvarado Street, Binondo, Manila to the
plaintiff;
2. Ordering defendant Ligaya Investment,
Inc. to recognize the right of ownership and
possession of the plaintiff over Apartment
No. 307, Ligaya Building;
3. Ordering Ligaya Investment, Inc. to
acknowledge plaintiff as assignee-lessee in
liue of defendants spouses Uy Tong and Kho
Po Giok over the lot on which the building
was constructed;
4. Ordering the defendants spouses Uy Tong
and Kho Po Giok to pay to the plaintiff the
sum of P200.00 commencing from June,
1971 to November 30, 1972, or a total
amount of P3,400.00 as rental for the
apartment, and the sum of P200.00 from
December 1, 1972 until the premises are
finally vacated and surrendered to the
plaintiff, as reasonable compensation for the
use of the apartment; and
5. Ordering the defendants spouses Uy Tong
and Kho Po Giok to pay P3,000.00 as and
for attorney's fees to the plaintiff, and the
costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the
Court of Appeals. On October 2,1984, the respondent Court of
Appeals affirmed in toto the decision appealed from [Petition,
Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of
the said decision was denied by the respondent Court in a
resolution dated February 11, 1987 [Petition, Annex "C", Rollo,
pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of
the Court of Appeals rely on the following reasons:
I. The deed of assignment is null and void
because it is in the nature of a pactum
commissorium and/or was borne out of the
same.
II. The genuineness and due Prosecution of
the deed of assignment was not deemed
admitted by petitioner.
III. The deed of assignment is unenforceable
because the condition for its execution was
not complied with.
IV. The refusal of petitioners to vacate and
surrender the premises in question to private
respondent is justified and warranted by the
circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore
the contract entered into by the parties whereby petitioner Kho
Po Giok agreed that the apartment in question will
automatically become the property of private respondent
BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of
a pactum commissorium which is null and void, hence, the
deed of assignment which was borne out of the same
agreement suffers the same fate.
The prohibition on pactum commissorium stipulations is
provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of the same. Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements
for pactum commissorium to exist: (1) that there should be a
pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for an
automatic appropriation by the creditor of the thing pledged or
mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no
basis for the application of the pactum
commissorium provision. First, there is no indication of 'any
contract of mortgage entered into by the parties. It is a fact that
the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the
property by BAYANIHAN. When the SPOUSES defaulted in
their payments of the second and third installments of the
trucks they purchased, BAYANIHAN filed an action in court for
specific performance. The trial court rendered favorable
judgment for BAYANIHAN and ordered the SPOUSES to pay
the balance of their obligation and in case of failure to do so, to
execute a deed of assignment over the property involved in
this case. The SPOUSES elected to execute the deed of
assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN
because it took the intervention of the trial court to exact
fulfillment of the obligation, which, by its very nature is ". .
anathema to the concept of pacto commissorio" [Northern
Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973,
49 SCRA 392]. And even granting that the original agreement
between the parties had the badges of pactum commissorium,
the deed of assignment does not suffer the same fate as this
was executed pursuant to a valid judgment in Civil Case No.
80420 as can be gleaned from its very terms and conditions:
DEED OF ASSIGNMENT
9
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy
Tiong also known as Henry Uy and Kho Po
Giok, both of legal age, husband and wife,
respectively, and presently residing at 307
Ligaya Bldg., Alvarado St., Binondo, Manila,
and hereinafter to be known and called as
the ASSIGNORS, in favor of Bayanihan
Automotive Corporation, an entity duly
organized and existing under the laws of the
Philippines, with principal business address
at 1690 Otis St., Paco, Manila and
hereinafter to be known and called the
ASSIGNEE;
-witnesseth-
WHEREAS, the ASSIGNEE has filed a civil
complaint for "Specific Performance with
Damages" against the ASSIGNORS in the
Court of First Instance of Manila, Branch V,
said case having been docketed as Civil
Case No. 80420;
WHEREAS, the ASSIGNEE was able to
obtain a judgment against the ASSIGNOR
wherein the latter was ordered by the court
as follows, to wit:
WHEREFORE, judgment
is hereby rendered
ordering the defendants,
jointly and severally to pay
the plaintiff the sum of
P40,000.00, with interest
at the legal rate from July
31, 1970 until full payment.
In the event of their failure
to do so within thirty (30)
days from notice of this
judgment, they are hereby
ordered to execute the
corresponding deed of
absolute sale in favor of
the plaintiff and/or the
assignment of leasehold,
rights over the defendants'
apartment located at No.
307 Ligaya Building,
Alvarado Street, Binondo,
Manila, upon the payment
by the plaintiff to the
defendants the sum of P
3,535.00. The defendants
shall pay the costs.
WHEREAS, the court, upon petition by
herein ASSIGNEE and its deposit of
sufficient bond, has ordered for the
immediate execution of the said decision
even pending appeal of the aforesaid
decision;
WHEREAS, the ASSIGNORS have elected
to just execute the necessary deed of sale
and/or assignment of leasehold rights over
the apartment mentioned in the decision in
favor of the herein ASSIGNEE;
NOW, THEREFORE, for and in
consideration of the foregoing premises, the
ASSIGNORS have transferred assigned and
ceded, and by these presents do hereby
transfer, assign and cede all their rights and
interests over that place known as Apartment
No. 307 at the Ligaya Building which is
located at No. 864 Alvarado St., Binondo,
Manila, together with the corresponding
leasehold rights over the lot on which the
said building is constructed, in favor of the
hererein ASSIGNEE, its heirs or assigns.
IN WITNESS WHEREOF, We have hereunto
signed our names this 27th day of May, 1971
at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-
001620
Manila March 3, 1965
This being the case, there is no reason to impugn the validity
of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of
Appeals that their failure to deny the genuineness and due
execution of the deed of assignment was deemed an
admission thereof. The basis for this exception is the
SPOUSES' insistence that the deed of assignment having
been borne out of pactum commissorio is not subject to
ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned
ruling of the appellate court. Considering this Court's above
conclusion that the deed of assignment is not invalid, it follows
that when an action founded on this written instrument is filed,
the rule on contesting its genuineness and due execution must
be followed.
That facts reveal that the action in Civil Case No. 121532 was
founded on the deed of assignment. However, the SPOUSES,
in their answer to the complaint, failed to deny under oath and
specifically the genuineness and due execution of the said
deed. Perforce, under Section 8, Rule 8 of the Revised Rules
of Court, the SPOUSES are deemed to have admitted the
deed's genuineness and due execution. Besides, they
themselves admit that ". . . the contract was duly executed and
that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They
cannot now claim otherwise.
10
III. The SPOUSES also question the enforceability of the deed
of assignment. They contend that the deed is unenforceable
because the condition for its execution was not complied with.
What petitioners SPOUSES refer to is that portion of the
disposition in Civil Case No. 80420 requiring BAYANIHAN to
pay the former the sum of P 3,535.00. To buttress their claim of
non- compliance, they invoke the following receipt issued by
the SPOUSES to show that BAYANIHAN was P535.00 short of
the complete payment.
RECEIPT
This is to acknowledge the fact that the
amount of THREE THOUSAND (P3,000.00)
PESOS, more or less as indicated in the
judgment of the Hon. Conrado Vasquez,
Presiding Judge of the Court of First
Instance of Manila, Branch V, in Civil Case
entitled "Bayanihan Automotive Corp. v. Pho
(sic) Po Giok, etc." and docketed as Civil
Case No. 80420 has been applied for the
payment of the previous rentals of the
property which is the subject matter of the
aforesaid judgment. [emphasis supplied.]
August 21, 1971
The issue presented involves a question of fact which is not
within this Court's competence to look into. Suffice it to say that
this Court is of the view that findings and conclusion of the trial
court and the Court of Appeals on the question of whether
there was compliance by BAYANIHAN of its obligation under
the decision in Civil Case No. 80420 to pay the SPOUSES the
sum of P3,535.00 is borne by the evidence on record. The
Court finds merit in the following findings of the trial court:
... Defendants 'contention that the P
3,535.00 required in the decision in Civil
Case No. 80420 as a condition for the
execution of the deed of assignment was not
paid by the plaintiff to the defendants is
belied by the fact that the
defendants acknowledged payment of
P3,000.00, more or less, in a receipt dated
August 21, 1971. This amount was expressly
mentioned in this receipt as indicated in the
judgment of the Honorable Conrado
Vasquez, presiding Judge of the CFI of
Manila, Branch V, in Civil Case entitled
Bayanihan Automotive Corp. versus Kho Po
Giok, docketed as Civil Case No. 80420, and
also expressly mentioned as having been
applied for the payment of the previous
rentals of the property subject matter of the
said judgment. Nothing could be more
explicit. The contention that there is still a
difference of P535.00 is had to believe
because the spouses Kho Po Giok and Uy
Tong executed the deed of assignment
without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended
by the plaintiff, for it to refuse to pay this
small amount and thus gave defendants a
reason not to execute the Deed of
Assignment. is hard to believe Defendants
further confirm by the joint manifestation of
plaintiff and defendants, duly assisted by
counsel, Puerto and Associates, dated
September, 1971, Exhibit "O", wherein it was
stated that plaintiff has fully complied with its
obligation to the defendants caused upon it
(sic) by the pronouncement of the judgment
as a condition for the execution of their (sic)
leasehold rights of defendants, as evidenced
by the receipt duly executed by the
defendants, and which was already
submitted in open court for the consideration
of the sum of P3,535.00. [Emphasis
supplied]. [Decision, Civil Case No. 121532,
pp. 3-4].
This Court agrees with private respondent BAYANIHAN's
reasoning that inasmuch as the decision in Civil Case No.
80420 imposed upon the parties correlative obligations which
were simultaneously demandable so much so that if private
respondent refused to comply with its obligation under the
judgment to pay the sum of P 3,535.00 then it could not
compel petitioners to comply with their own obligation to
execute the deed of assignment over the subject premises.
The fact that petitioners executed the deed of assignment with
the assistance of their counsel leads to no other conclusion
that private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to
vacate the premises subject of this litigation on the following
grounds:
(a) The deed of assingnment is in the nature
of a pactum commissorium and, therefore,
null and void.
(b) There was no full compliance by private
respondent of the condition imposed in the
deed of assignment.
(c) Proof that petitioners have been allowed
to stay in the premises, is the very admission
of private respondent who declared that
petitioners were allowed to stay in the
premises until November 20, 1972. This
admission is very significant. Private
respondent merely stated that there was a
term-until November 30, 1972-in order to
give a semblance of validity to its attempt to
dispossess herein petitioners of the subject
premises. In short, this is one way of
rendering seemingly illegal petitioners
'possession of the premises after November
30, 1972.
The first two classifications are mere reiterations of the
arguments presented by the petitioners and which had been
passed upon already in this decision. As regards the third
ground, it is enough to state that the deed of assignment has
vested in the private respondent the rights and interests of the
SPOUSES over the apartment unit in question including the
11
leasehold rights over the land on which the building stands.
BAYANIHAN is therefore entitled to the possession thereof.
These are the clear terms of the deed of assignment which
cannot be superseded by bare allegations of fact that find no
support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit
and the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
G.R. No. 172592 July 9, 2008
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-
ONG, Petitioners,
vs.
ROBAN LENDING CORPORATION, Respondent.
*
AUSTRIA-MARTINEZ,
DECISION
CARPIO MORALES, J.:
On different dates from July 14, 1999 to March 20, 2000,
petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These
loans were secured by a real estate mortgage on petitioners
parcels of land located in Binauganan, Tarlac City and covered
by TCT No. 297840.1
On February 12, 2001, petitioners and respondent executed an
Amendment to Amended Real Estate Mortgage2consolidating
their loans inclusive of charges thereon which
totaled P5,916,117.50. On even date, the parties executed a
Dacion in Payment Agreement3 wherein petitioners assigned
the properties covered by TCT No. 297840 to respondent in
settlement of their total obligation, and a Memorandum of
Agreement4 reading:
That the FIRST PARTY [Roban Lending Corporation] and the
SECOND PARTY [the petitioners] agreed to consolidate and
restructure all aforementioned loans, which have been all past
due and delinquent since April 19, 2000, and outstanding
obligations totaling P5,916,117.50. The SECOND PARTY
hereby sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms
xxx an integral part of this document), with a promise to pay
the FIRST PARTY in full within one year from the date of the
consolidation and restructuring, otherwise the SECOND
PARTY agree to have their "DACION IN PAYMENT"
agreement, which they have executed and signed today in
favor of the FIRST PARTY be enforced[.]5
In April 2002 (the day is illegible), petitioners filed a
Complaint,6 docketed as Civil Case No. 9322, before the
Regional Trial Court (RTC) of Tarlac City, for declaration of
mortgage contract as abandoned, annulment of deeds, illegal
exaction, unjust enrichment, accounting, and damages,
alleging that the Memorandum of Agreement and the Dacion in
Payment executed are void for being pactum commissorium.7
Petitioners alleged that the loans extended to them from July
14, 1999 to March 20, 2000 were founded on several uniform
promissory notes, which provided for 3.5% monthly interest
rates, 5% penalty per month on the total amount due and
demandable, and a further sum of 25% attorneys fees
thereon,8 and in addition, respondent exacted certain sums
denominated as "EVAT/AR."9 Petitioners decried these
additional charges as "illegal, iniquitous, unconscionable, and
revolting to the conscience as they hardly allow any borrower
any chance of survival in case of default."10
Petitioners further alleged that they had previously made
payments on their loan accounts, but because of the illegal
exactions thereon, the total balance appears not to have
moved at all, hence, accounting was in order.11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and
its amendments x x x as null and void and without
legal force and effect for having been renounced,
abandoned, and given up;
b) Declaring the "Memorandum of Agreement" xxx
and "Dacion in Payment" x x x as null and void for
being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and
attorneys fees assessed and loaded into the loan
accounts of the plaintiffs with defendant as unjust,
iniquitous, unconscionable and illegal and therefore,
stricken out or set aside;
d) Ordering an accounting on plaintiffs loan accounts
to determine the true and correct balances on their
obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: --
e.1 Moral damages in an amount not less
than P100,000.00 and exemplary damages
of P50,000.00;
e.2 Attorneys fees in the amount of
P50,000.00 plus P1,000.00 appearance fee
per hearing; and
e.3 The cost of suit.12
as well as other just and equitable reliefs.
In its Answer with Counterclaim,13 respondent maintained the
legality of its transactions with petitioners, alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement
and Dacion in Payment Agreement novated the Real Estate
12
Mortgage then the allegation of Pactum Commissorium has no
more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is
recognized x x x under Art. 1245 of the Civil Code as a special
form of payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of their
monetary obligation;
The accumulated interest and other charges which were
computed for more than two (2) years would stand reasonable
and valid taking into consideration [that] the principal loan
is P4,000,000 and if indeed it became beyond the Plaintiffs
capacity to pay then the fault is attributed to them and not the
Defendant[.]14
After pre-trial, the initial hearing of the case, originally set on
December 11, 2002, was reset several times due to, among
other things, the parties efforts to settle the case
amicably.151avvphi1
During the scheduled initial hearing of May 7, 2003, the RTC
issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the
ground that he is in Manila and he is attending to a very sick
relative, without objection on the part of the defendants
counsel, the initial hearing of this case is reset to June 18,
2003 at 10:00 oclock in the morning.
Just in case [plaintiffs counsel] Atty. Concepcion cannot
present his witness in the person of Mr. Wilfredo Ong in the
next scheduled hearing, the counsel manifested that he will
submit the case for summary judgment.16(Underscoring
supplied)
It appears that the June 18, 2003 setting was eventually
rescheduled to February 11, 2004 at which both counsels were
present17 and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at
10:00 oclock in the morning. However, the counsels are
directed to be ready with their memorand[a] together with all
the exhibits or evidence needed to support their respective
positions which should be the basis for the judgment on the
pleadings if the parties fail to settle the case in the next
scheduled setting.
18
x x x x (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels
appeared but only the counsel of respondent filed a
memorandum.19
By Decision of April 21, 2004, Branch 64 of the Tarlac City
RTC, finding on the basis of the pleadings that there was
no pactum commissorium, dismissed the complaint.20
On appeal,21 the Court of Appeals22 noted that
x x x [W]hile the trial court in its decision stated that it was
rendering judgment on the pleadings, x x x what it actually
rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue,
or otherwise admits the material allegations of the adverse
partys pleading. However, a judgment on the pleadings would
not have been proper in this case as the answer tendered an
issue, i.e. the validity of the MOA and DPA. On the other hand,
a summary judgment may be rendered by the court if the
pleadings, supporting affidavits, and other documents show
that, except as to the amount of damages, there is no genuine
issue as to any material fact.23
Nevertheless, finding the error in nomenclature "to be mere
semantics with no bearing on the merits of the case", 24the
Court of Appeals upheld the RTC decision that there was
no pactum commissorium.25
Their Motion for Reconsideration26 having been
27
denied, petitioners filed the instant Petition for Review on
Certiorari,28 faulting the Court of Appeals for having committed
a clear and reversible error
I. . . . WHEN IT FAILED AND REFUSED TO APPLY
PROCEDURAL REQUISITES WHICH WOULD
WARRANT THE SETTING ASIDE OF THE
SUMMARY JUDGMENT IN VIOLATION OF
APPELLANTS RIGHT TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL
IN THIS CASE IS NECESSARY BECAUSE THE
FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD
THAT THE MEMORANDUM OF AGREEMENT (MOA)
AND THE DACION EN PAGO AGREEMENT (DPA)
WERE DESIGNED TO CIRCUMVENT THE LAW
AGAINST PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE NULL AND VOID
FOR BEING CONTRARY TO LAW AND PUBLIC
POLICY.29
The petition is meritorious.
Both parties admit the execution and contents of the
Memorandum of Agreement and Dacion in Payment. They
differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
This Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which is
prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void."
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property
13
without the need of any foreclosure proceedings, 30 are: (1)
there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the
thing mortgaged in case of non-payment of the principal
obligation within the stipulated period.31
In the case at bar, the Memorandum of Agreement and the
Dacion in Payment contain no provisions for foreclosure
proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt
within the one-year period gives respondent the right to
enforce the Dacion in Payment transferring to it ownership of
the properties covered by TCT No. 297840. Respondent, in
effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.
Respondent argues that the law recognizes dacion en pago as
a special form of payment whereby the debtor alienates
property to the creditor in satisfaction of a monetary
obligation.32 This does not persuade. In a true dacion en pago,
the assignment of the property extinguishes the monetary
debt.33 In the case at bar, the alienation of the properties was
by way of security, and not by way of satisfying the debt. 34 The
Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in
Payment, petitioners had to execute a promissory note
for P5,916,117.50 which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of
Appeals36 where this Court upheld a Memorandum of
Agreement/Dacion en Pago.37 That case did not involve the
issue of pactum commissorium.38
That the questioned contracts were freely and voluntarily
executed by petitioners and respondent is of no
moment, pactum commissorium being void for being prohibited
by law.39
Respecting the charges on the loans, courts may reduce
interest rates, penalty charges, and attorneys fees if they are
iniquitous or unconscionable.40
This Court, based on existing jurisprudence,41 finds the
monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This
Court finds too the penalty fee at the monthly rate of 5% (60%
per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to
and becoming part of the principal and likewise bearing interest
at the same rate, compounded monthly42 unconscionable
and reduces it to a yearly rate of 12% of the amount due, to be
computed from the time of demand. 43 This Court finds the
attorneys fees of 25% of the principal, interests and interests
thereon, and the penalty fees unconscionable, and thus
reduces the attorneys fees to 25% of the principal amount
only.44
The prayer for accounting in petitioners complaint requires
presentation of evidence, they claiming to have made partial
payments on their loans, vis a vis respondents denial
thereof.45 A remand of the case is thus in order.
Prescinding from the above disquisition, the trial court and the
Court of Appeals erred in holding that a summary judgment is
proper. A summary judgment is permitted only if there is no
genuine issue as to any material fact and a moving party is
entitled to a judgment as a matter of law.46 A summary
judgment is proper if, while the pleadings on their face appear
to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not
genuine.47 A genuine issue, as opposed to a fictitious or
contrived one, is an issue of fact that requires the presentation
of evidence.48 As mentioned above, petitioners prayer for
accounting requires the presentation of evidence on the issue
of partial payment.
But neither is a judgment on the pleadings proper. A judgment
on the pleadings may be rendered only when an answer fails
to tender an issue or otherwise admits the material allegations
of the adverse partys pleadings.49 In the case at bar,
respondents Answer with Counterclaim disputed petitioners
claims that the Memorandum of Agreement and Dation in
Payment are illegal and that the extra charges on the loans are
unconscionable.50Respondent disputed too petitioners
allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals Decision is
REVERSED and SET ASIDE. The Memorandum of Agreement
and the Dacion in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared
NULL AND VOID for being pactum commissorium.
In line with the foregoing findings, the following terms of the
loan contracts between the parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per
annum, is reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount
due and demandable is reduced to 12% per annum,
to be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the
principal amount only.
Civil Case No. 9322 is REMANDED to the court of origin only
for the purpose of receiving evidence on petitioners prayer for
accounting.
SO ORDERED.
G.R. No. 199420 August 27, 2014
PHILNICO INDUSTRIAL CORPORATION, Petitioner,
vs.
PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.
x-----------------------x
14
G.R. No. 199432
PRIVATIZATION AND MANAGEMENT OFFICE, Petitioner,
vs.
PHILNICO INDUSTRIAL CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
Before the Court are the consolidated Petitions for Review on
Certiorari under Rule 45 of the Rules of Court involving the
Decision1 dated January 31, 2011 and Resolution2 dated
November 18, 2011 of the Court of Appeals in CA-G.R. SP. No.
111108, which affirmed the Order3 dated August 25, 2009 of the
Regional Trial Court (R TC), Branch 64 of Makati City in Civil
Case No. 03-114.
THE PARTIES
The Petition in G.R. No. 199420 was filed by Philnico Industrial
Corporation (PIC). It is a corporation duly organized under the
laws of the Philippines and which, together withPhilnico
Processing Corporation (PPC) and Pacific Nickel Philippines,
Inc. (PNPI), form the Philnico Group. The Philnico Group is
engaged in nickel mining and refining business. PIC and PNPI
hold a Mineral Production Sharing Agreement over nickel
mining areas in Nonoc and Dinagat Islands inSurigao, while
PPC owns a nickel refinery complex also in Nonoc Island.4
The Petition in G.R. No. 199432 was filed by the Privatization
and Management Office (PMO), an attached agency of the
Department of Finance. PMO succeeded the Asset
Privatization Trust (APT), when the latters life ended on
December 31, 2000.5 The PMO serves as the marketing arm of
the Government with respect to Transferred Assets,
Government Corporations and other properties assigned to it
by the Privatization Council (PrC) for disposition. Together, the
mission of the PMO and PrC is to take title to and possession
of, conserve, provisionally manage, and dispose of assets
previouslyidentified for privatization; and, in the process,
reduce the Governments maintenance expense on
nonperforming assets, generating maximum cash recovery for
the National Government.6
ANTECEDENT FACTS
The Development Bank of the Philippines and Philippine
National Bank, by virtue of foreclosure proceedings, became
the holders of all the shares of stock in PPC (then still the
Nonoc Mining and Industrial Corporation). The banks
eventually transferred their PPC shares of stock to PMO (then
still the APT) in 1987.
On May 10, 1996, PMO, PIC (then still the Philnico Mining and
Industrial Corporation), and PPC executed a contract,
denominated as the Amended and Restated Definitive
Agreement (ARDA), which laid down the terms and conditions
of the purchase and acquisition by PIC from PMO of
22,500,000 shares of stock of PPC (representing 90% of
ownership of PPC), as well as receivables of PMO from PPC.
Under the ARDA, PIC agreed to pay PMO the peso equivalent
of US$333,762,000.00 as purchase price, payable in
installments and in accordance with the schedule also set out
in the ARDA.7
Among the provisions of the ARDA relevant to the instant
cases are Sections 2.04 and 2.07, which govern the rights and
obligations of the parties as regards the PPC shares of stock,
viz: 2.04 Security
(a) As security for the payment of the Purchase Price
in accordance with the terms of this Agreement, the
Buyer shall pledge the Shares to the Seller and
execute a pledge agreement (the "Pledge
Agreement") in favor of the Seller in substantially the
form of Annex A. The Buyer shall also pledge to the
Seller the Converted Shares and the New Shares as
security for the payment of the Purchase Price upon
the issuance of such shares in the name of the Buyer.
xxxx
2.07 Closing
(a) The closing of the sale and purchase of the
Shares and the Tranche B Receivables under this
Agreement shall take place on the Closing Date and
at such place as may be agreed between the Buyer
and the Seller upon the fulfillment of all of the
conditions precedent specified in Sections 4.01 and
4.02 (unless any such condition precedent shall have
been waived by the Buyer or the Seller, as the case
may be). At the closing, the following transactions
shall take place:
(1) the Seller shall execute and deliver to the
Buyer the necessary deed of sale
transferring to the Buyer all of the Sellers
right, title and interest in and to the Shares
and deliver to the Buyer the stock certificates
representing such shares, each duly
endorsed, or with separatestock transfer
powers attached, in favor of the Buyer
together with the duly executed resignations
of the directors of the Company named in
Schedule 6;
(2) the Company shall issue in the name of,
and deliver to, the Buyer new stock
certificates representing the Shares;
(3) the Buyer shall execute and deliver the
Pledge Agreement covering the Shares and
deliver to the Seller the stock certificates
representing such shares;
xxxx
(b) From and after the Closing Date, the Buyer shall
exercise all the rights (including the right to vote) of a
shareholder in respect of the Shares (subject to the
negative covenants contained in the Pledge
Agreement).8
15
Also worthy of note herein is Section 8 of the ARDA on default,
which states:
SECTION 8. DEFAULT AND DEFAULT REMEDIES
8.01 Events of Default
Subject to any applicable curing period, each of the following
events shall constitute an Event of Default hereunder:
(a) The Buyer shall, subject tothe provisions of
Section 2.03(b), fail to pay any two consecutive
installments on the Purchase Price in accordance with
the terms of Section 2.03.
(b) The Buyer shall fail to complywith or observe any
other material term, obligation or covenant contained
in this Agreement or in the Pledge Agreement.
(c) The Buyer shall commit any act of bankruptcy or
insolvency, or shall file any petition or action for relief
under any bankruptcy, reorganization, insolvency or
moratorium law or other law or laws for the relief of
debtors.
8.02 Consequence of Default
At any time after the happening of an Event of Default, and
provided that the same shall not have been remedied within
ninety (90) days from receipt by the Buyer of written notice
from the Seller, the Seller may declare the buyer in default and,
asa consequence thereof, exercise such rights and remedies
as it may have under this Agreement and applicable laws
(including the cancellation of these Agreement); provided that
in case of default under Section 8.01(a), the title to the Existing
Shares and the Converted Shares shall ipso facto revertto the
Seller without need of demand in case such payment default is
not remedied by the Buyer within ninety (90) days from the due
date of the second installment. (Emphasis supplied.)9
In accordance with the ARDA, PMO executed and delivered to
PIC the necessary documents to transfer the formers rights,
title, and interests to and in the PPC shares of stock to the
latter; and PPC issued new certificates for the same shares of
stock in the name of PIC and/or its nominees.
On May 2, 1997, PIC and PNPI as pledgors and PMO as
pledgee executed a Pledge Agreement10 which began with
"Whereas Clauses" that read:
WHEREAS, [PIC] and the [PMO] have entered into an
Amended and Restated Definitive Agreement, dated May 10,
1996, involving the purchase by the [PIC] from the [PMO] of
22,500,000 shares of common stock of [PPC] and certain
receivables of the [PMO] from said corporation; and
WHEREAS, to secure the obligation of [PIC] to pay the
purchase price and all other amounts due the [PMO] under the
aforesaid Definitive Agreement and the performance by [PIC]
of its other obligations thereunder and under this Pledge
Agreement, the [PIC and PNPI] have agreed to execute and
deliver thisPledge Agreement, giving unto the [PMO] a good
and valid pledge over the pledge[d] shares[.]11
Sections 3.01 and 3.02 of the Pledge Agreement expressly
acknowledged that PIC delivered its certificates of shares of
stock in PPC and that PMO received said certificates.12 Section
5 of the same Agreement covered default and the available
remedies in case thereof, thus: SECTION [5]. DEFAULT
REMEDIES, ETC.
5.01 Events of Default
The following shall be considered Events of Default under this
Pledge Agreement:
(a) [PIC] shall fail to pay when duethe obligations after
giving effect to any applicable period of grace; or
(b) [PIC] or PNPI shall fail to comply with or observe
any other material term, obligation or covenant
contained in this Pledge Agreement or the Definitive
Agreement; or
(c) [PIC] or PNPI shall commit any act of bankruptcy
or insolvency, or shall file any petition or action for
relief under any bankruptcy, reorganization,
insolvency or moratorium law or other x x x laws for
the relief of debtors; or
(d) The priority of the lien of or the security interest
granted by this Pledge Agreement shall be impaired,
or this Pledge Agreement shall cease to be a first and
preferred lien upon the Pledged Shares.
5.02 Consequences of Default
If an Event of Default shall have occurred, then at any time
thereafter, if any such event shall then be continuing after the
applicable grace period, if any, the [PMO] is hereby authorized:
(a) To sell in one or more sales, either public or
private, at any time the whole or any part of the
Pledged Shares in such order and number as the
[PMO] may elect at its place of business or elsewhere
and the [PMO] may, in all allowable cases, be the
purchaser of any or all Pledged Shares so sold and
hold the same thereafter in its own right free from any
claim of [PIC] or any right of redemption;
(b) To issue receipts and to execute and deliver any
instrument or document or do any act necessary for
the transferand assignment of all rights, title and
interest of [PIC] in the Pledged Shares to the
purchaser or purchasers thereof; and
(c) To apply, at the [PMOs] option, the proceeds of
any said sale, as well as all sums received orcollected
by the [PMO] from or on account of such Pledged
Shares to (i) the payment of expenses incurred or
paid by the [PMO] in connection with any sale,
transfer or delivery of the Pledged Shares and (ii) the
payment of the Obligations or any part thereof.13
16
In the meantime, the nickel refinery complex of PPC, which last
operated in the 1980s, had become obsolete and much of the
facilities therein were already scrap. The estimated cost in
2003 for building an entirely new refinery plant based on new
technology was about US$1 Billion. The Philnico Group, which
had already invested at least US$60 Million, was inviting and
negotiating withprospective foreign investors who could assist
in its business.
On account of the huge financial cost of building a new nickel
refinery plant, coupled with the economic problems then
affecting the AsiaPacific Region, PMO, PIC, and PPC executed
an Amendment Agreement14 on September 27, 1999 which
provided for the restructuring of the payment terms of the
entire obligation under the ARDA, the repayment of advances,
the conditions for borrowings or financing, a new cash break-
even formula, and the adoption of an investment plan.
Three years later, in a letter dated November 6, 2002, PMO
notified PIC that the latter had defaulted in the payment of its
obligations and demanded that PIC settle its unpaid
amortizations in the total amount of US$275,000.00 within 90
days, or on or about February 5, 2003, or else the PMO would
enforce the automatic reversion of the PPC shares of stock
under Section 8.02 of the ARDA. PIC replied in a letter dated
January 7, 2003 requesting PMO to set aside its notice of
default; to not rescind the sale of the PPC shares of stock; and
to give PIC an opportunity to conclude its fund-raising efforts
for its business, particularly with a group of investors from
China. In another letter dated January 22, 2003 to PIC, PMO
clearly indicated its intention to enforce Section 8.02 of the
ARDA should PIC fail to settle its outstanding obligations after
February 5, 2003.
On February 4, 2003, a day before the deadline for payment
set by PMO in its letters, PIC filed beforethe RTC a Complaint
for Prohibition against Reversion of Shares with Prayer for Writ
of Preliminary Injunction and/or Temporary Restraining Order,
Suspension of Payment and Fixing of Period of Payment,
against PMO, PPC, and the PPC Corporate Secretary.
On February 7, 2003, PIC filed an Amended Complaint raising,
among other arguments, the need for mutual restitution in case
the ARDAis rescinded by the RTC. Ultimately, PIC prayed of
the RTC that:
(a) Upon the filing of this complaint, a temporary
restraining order be issued under Sec. 5 of Rule 58 of
[the] 1997 Rules of Civil Procedure prohibiting [PMO,
PPC, and the PPC Corporate Secretary] from
reverting the 22,500,000 shares covered by Stock
Certificate Nos. 018, 022, 024, 025, 026, 027, 028,
030 and 031 x x x in the name of [PIC] to defendant
PMO.
(b) After hearing
(i) A writ of preliminary injunction be issued prohibiting
[PMO, PPC, and the PPC Corporate Secretary] from
effecting the reversion of the aforementioned shares
in favor of defendant PMO until further orders from
the Court; and thereafter,
(c) Judgment issue
(i) Making the injunction permanent and ordering the
suspension of the payment of the amortizations as
provided for in the ARDA and fixing a reasonable
period within which said payment should be due; and
(d) Or in the alternative, in the remote possibility that
the ARDA x x x be considered rescinded, mutual
restitution be ordered by the Honorable Court as
provided by the Civil Code relative to reciprocal
obligations.
[PIC] prays for such further and equitable relief as may be just
and equitable in the premises.15
After the summary hearing held on February 7, 2003, the RTC
issued a temporary restraining order (TRO), effective for 20
days, restraining PMO, PPC, and the PPC Corporate
Secretary from effecting the reversion of the 22,500,000
shares of stock of PPC.
The RTC then conducted hearings on the prayer of PIC for the
issuance of a writ of preliminary injunction. The RTC
subsequently issued an Order16 on February 27, 2003 finding
PIC entitled to the issuance of such a writ for the following
reasons:
While the failure of [PIC] to meet its amortization with respect
to the smaller portion of the purchase price cannot be denied,
said default cannot automatically result in the reversion of the
shares of stocks to PMO. The provision in the ARDA providing
for ipso facto reversion of the shares of stock is null and void
for being a pactum commissorium. x x x.
xxxx
The automatic reversion of the shares of stock is by itself
automatic appropriation of the thing pledged, which is contrary
to good morals and public policy. It would alsoresult in unjust
enrichment on the part of defendant PMO. Even in case of
rescission, mutual restitution is allowed so as not to enrich one
party to the prejudice of the other. It would be tantamount to
confiscation ofproperty without due process. The seller had the
option of foreclosing the property pledged. The seller cannot
automatically appropriate the same to himself when the
ownership is already transferred to [PIC]. Thus, even for the
time being when foreclosure of the shares pledge[d] isbeing
considered, and the question of rescission is being deliberated,
[PIC] has a right to be protected and therefore entitled to the
relief of preliminary injunction.
Regarding the provision on referral to arbitration, granting that
the case is proper for arbitration, [PIC] isnonetheless entitled to
the writ of preliminary injunction pending the arbitration
proceeding.
xxxx
One of the requirements for the issuance of the writ of
preliminary injunction is when there is an urgent and
paramount necessity for the writ to prevent an irreparable
17
damage. Irreparable means one that can not be rectified. [PIC]
is in danger of losingits investment in the project without any
recourse if PMO will be allowed the automatic reversion of the
ownership of the 22,500,000 shares. The right of [PIC] will be
prejudiced if the writ of preliminary injunction will not be issued
in the meantime.17
The RTC thus decreed:
WHEREFORE, premises considered, the Writ of Preliminary
Injunction is GRANTED.
Until further Order from this Court,and subject to [PICs] filing
of a bond in the amount of P100,000,000.00 to pay for all the
damages which [PMO, PPC, and the PPC Corporate
Secretary] may sustain by reason of the injunction if the Court
will finally decide that [PIC] is not entitled thereto, defendants
Privatization and Management Office (PMO), Philnico
Processing Corporation (PPC), and the Corporation Secretary
of PPC are enjoined from effecting the reversion to PMO of the
22,500,000 shares purchased by plaintiff Philnico Industrial
Corporation and from selling the same to any third party.18
PMO filed a Motion for Reconsideration of the RTC Order
dated February 27, 2003, insisting that the provision on ipso
factoreversion in the ARDA did not constitute pactum
commissoriumand would not result in unjust enrichment on the
part of PMO. PMO likewise filed a Motion to Dismiss on the
ground that the complaint of PIC did not state a cause of
action. In its Order19 dated June 19, 2003, the RTC found no
merit in both Motions and held that:
1. The Motion for Reconsideration is DENIED. This Court
maintains that [PIC] is entitled to the issuance of the Writ of
Preliminary Injunction.
[PIC] has already acquired ownership of the 22,500,000 shares
when the ARDA was executed between the parties. The ARDA
merely provides for the transfer of the subject shares to [PIC].
As a matter of fact, [PIC] has executed a Pledge Agreement as
a security for the payment of [PICs] obligation with defendant
PMO.
xxxx
Under the ARDA, the relationship of [PIC] and defendant PMO
is that of a pledgor and pledgee and no longer as a buyer and
seller. As such, the ipso facto reversion of the shares in the
ARDA constitutes pactum commissorium. The execution of the
Pledge Agreement is precisely made to secure the payment of
[PICs] obligation with defendant PMO. The automatic
reversion of the shares if allowed will in fact constitute
automatic appropriation of the thing pledged which is
proscribed being pactum commissorium. The automatic
appropriation itself will prejudice the investment made by [PIC]
in the said project and all improvements will inure to defendant
PMO which the law abhors. Even in case of rescission, mutual
restitution is allowed so as not to enrich one party at the
expense of the other. This forfeitureclause in the ARDA is
contrary to law, good morals and public policy.
2. With respect to the Motion To Dismiss, the same is DENIED.
Cause of action is the act or omission by which a party violates
a right of another (Sec. 2, Rule 2 of the 1997 Rules on Civil
Procedure). As already stated in the resolution of the motion
for reconsideration, the ipso facto reversion of the shares
pursuant to Section 8.02 of the ARDA constitute[s] pactum
commissorium, and therefore null and void being contrary to
morals, law and public policy. As such, the ipso facto reversion
of the shares will result inunjust enrichment on the part of
defendant PMO for the reason that all investment of [PIC] with
the said project will inure to the benefit ofdefendant PMO with
[PIC] getting nothing.
The present case does not violate the principles of autonomy
of contract[s]. [PIC] seeks to prohibit the implementation of the
ipso facto reversion clause in the ARDA, which is contrary to
law being a pactum commissorium. This is a limitation imposed
by law, which is considered to be part of a contract. Contracts
must respect the law, for the law forms part of the contract.
While the contract is the law between the parties, the Court
may stop its enforcement if it is contrary to law, morals, good
customs or public policy (San Andres vs. Rodriguez, 332
SCRA 69).
While the ARDA provides for arbitration as mode of settlement
of the dispute (Section 9.05), the present complaint involves
interpretation of the provisions of the ARDA. Interpretation of
contracts is within the domain of the Court. The ipso facto
reversion of the shares in the ARDA can never be subject of
arbitration but it is within the domain of the court to declare
whether or not the same is valid or null and void.20
In the same Order, the RTC directed PMO, PPC, and the PPC
Secretary to file their answer to the complaint of PIC. PMO no
longer challenged the RTC Orders dated February 27, 2003
and June 19, 2003 before the appellate courts. Instead, PMO
complied with the RTC directive and already filed with the said
trial court its Answer and Amended Answer to the complaint of
PIC. The RTC proceeded to pre-trial when the parties failed to
arrive at an amicable settlement. On February 6,2009, the RTC
issued its Pre-trial Order21 in which it enumerated the
respective issues for resolution submitted by PIC and PMO, to
wit:
ISSUES ([PIC])
1. Whether or not the ipso facto reversion clause in
the ARDA is valid, and, whether or not it is a specie[s]
of pactum commissoriumwhich is outlawed.
2. Whether or not [PIC] is in default under the terms of
the ARDA which clearly contemplates the actual
operation of the plant before the subsequent
installments after the third year will be due, as it even
recognizes deferment of payment of installment if the
Nonoc mining plant and refinery is not yet in full
operation and has not produced sufficient cash
equivalent for payment to seller.
3. Even assuming that the schedule of payment is not
modified by the other terms of the ARDA (as actual
operation of the plant and refinery), whether or not
[PIC] may be considered as in default considering the
fortuitous events which are unforeseen and beyond
18
 the control of [PIC] which had prevented [PIC] from
complying with its obligation under the scheduled
amortization. 4. Whether or not [PIC] is entitled to be
reimbursed what it had already paid and spent to
implement the contract, in the remote event that
APT/PMO may be allowed to exercise right [of]
rescission.
5. Whether or not plaintiff [PIC] is required to resort to
arbitration to enforce its cause of action in the
complaint.
ISSUES ([PMO])
1. Whether or not defendant PMO may be prohibited
from ipso facto reverting the shares pursuant to the
ARDA considering that [PIC] defaulted in its payment
and there is an express provision in the ARDA
providing for the said provision.
2. Whether or not the terms and modes of payments
as provided in the ARDA may be suspended or fixed
anew by reason of unforeseen events cited by [PIC].
3. Whether or not defendant PMO may be enjoined by
this Honorable Court in the performance of its
functions and duties in connection with the sale or
disposition of assets transferred to it pursuant to
Proclamation No. 50-A.22 (Emphases supplied.)
PIC filed a Manifestation and Motion praying for the
modification of the foregoing Pre-trial Order dated February 6,
2009 of the RTC by deleting Issue Nos. 1 and 5 in the
Statement of Issues of PIC. PIC posited that these two issues
were already resolved by the RTC in the Order dated June 19,
2003 and should no longer be among the issuesto be tried in
the course of subsequent proceedings.
PMO countered in its Comment/Opposition that the RTC
Orders dated February 27, 2003 and June 19, 2003 concerned
only the issuance of the Writ of Preliminary Injunction; and the
findings and conclusions of the trial court on the propriety of
the issuance of the injunctive writ are premised on initial and
incomplete evidence, which should be considered merely as
provisional. Said RTC Orders should not bind the trial court in
its determination of the merits of the caseand to hold otherwise
would result in the prejudgment of the case or disposition of
the main case without a fullblown trial. Consequently, PMO
prayed that the RTC deny the Manifestation and Motion of PIC.
PMO also successively filed an Omnibus Motion and a
Supplement to Omnibus Motion, asserting that: (1) the Writ of
Preliminary Injunction was issued in 2003 by the RTC without
jurisdiction and was therefore void, because there was no
compliance with the arbitration clause in the ARDA; (2) the
continuance of the Writ of Preliminary Injunction is causing
irreparable damage to the National Government; (3) since the
issuance of the Writ of Preliminary Injunction six years before,
PIC had effectively achieved and obtained the reliefs it had
prayed for in its complaint as it was able to suspend the
payment of monthly amortization and prevent the reversion, or
even the selling, of the PPC shares of stock in the event of
default; (4) the amount of injunction bond is insufficient and
grossly disproportionate to the enormity of the damages that
PMO stands to suffer; (5) the injunctive writ is supposed to be
a "strong arm of equity" and should not be used as an
instrument of perpetrating injustice against the National
Government; (6) in accordance with Rule 58, Section 6 of the
Rules of Court, PMO is signifying its intention to post a
counterbond that would answer for the damages PIC might
suffer by the dissolution of the Writ of Preliminary Injunction;
and (7) PMO thought it prudent to no longer assail the RTC
Orders dated February 27, 2003 and June 19, 2003 before the
appellate courts believing that such a move would only cause
further delay in the resolution of the case and cause more
irreparable damage to the
National Government. PMO sought several reliefs from the
RTC in its Omnibus Motion, quoted as follows:
(1) That the Writ of Preliminary Injunction be
dissolved;
(2) That a representative of defendant PMO be
appointed to the PPCs and PNPIs board of directors
or management; and
(3) That [PIC] be required to submit an accounting of
its books and financial reports from the year 2003 to
2008.
Other just and equitable reliefs are also prayed for.23
Following hearings and exchange ofpleadings by the parties,
the RTC collectively resolved the pending motions of PIC and
PMO in its Order dated August 25, 2009.
The RTC determined that there was sufficient basis to grant
the Manifestation and Motion of PIC to delete two issues from
the Pre-Trial Order dated February 6, 2009:
The Court will not disturb the earlier findings of the previous
judge that the ipso factoreversion clause in the ARDA is invalid
and that it constitute[s] pactum commissorium. The Court finds
no legal and factual reasons to change the previous findings of
the Honorable Delia H. Panganiban that [PIC] has already
acquired ownership of the 22,500,000 shares sold to it and that
the ARDA is merely a scheme for the transfer of the said share
to the latter. As such, the relation between [PIC] and defendant
PMO has become that ofa mortgagor and mortgagee.
Accordingly, the proviso in the ARDA for the ipso
factoreversion constitutes pactum commissorium.
The Court disagrees with [PMO] that the said finding is merely
initiatory as it was a finding on a legal issue. No other evidence
is needed to change the same. In fact, said issue was
extensively and exhaustively argued by the parties in their
respective pleadings in relation thereto. It is presumed that the
previous Presiding Judge of this Court has considered all the
arguments raised by the parties.Section 3(o) of Rule 131 of the
Revised Rules of Court provides: that all matters within an
issue raised in a case were laid before the court and passed
upon by it. In addition, based on the personal analysis of its
new Presiding Judge, the Court is judiciously convinced of the
soundness of its earlier findings. More importantly, it appears
19
from the records that defendant PMO never challenged such
finding in a higher judicial arena. Thus, this Court deems its
resolution to be incontestable at this stage. Consequently,
since the said finding has attained finality, any error that
thisCourt may have committed in resolving the said issue may
only be raised in an appeal to be made by the adverse party.
This Court also finds merit [i]n plaintiffs prayer for the deletion
of the fifth issue raised during the pre-trial of this case. The
denial of the motion to dismiss previously filed by defendant
PMO also [constitutes] as an adjudication on the issue as to
whether or not the subject matter of this case is a proper
subject of arbitration proceedings as provided for in ARDA. The
Court reached the said conclusion based on jurisprudential law
which up to this date is unchanged. Said conclusionhas also
become immutable when [PMO, PPC, and the PPCCorporate
Secretary] similarly failed to challenge the same.24
As for the Omnibus Motion and Supplement to Omnibus
Motion of PMO, the RTC only conceded to requiring PIC to
submit accounting and financial reports to PMO:
On defendant PMOs omnibus motion and its supplemental
thereto, the Court resolves the first motion in the negative. As
stated above[,] this instant case does not involve matters which
can be adjudicated through arbitration. It involves the
interpretation of contract which falls within the jurisdiction of
this Court. This Court agrees with [PIC] that there can be no
damage whenwhat is being restrained is an illegal act. It need
not be said that no right can emanate from an illegal act. In this
instant case, what is being restrained by the Writ is the
enforcement by defendant PMO of the reversion clause in the
ARDA. Having unequivocally declared such reversion clause
illegal, the Court has no reason to terminate the efficacy of the
Writ it issued. The Court notes that defendant PMO did not lift
a finger during the time that it should have done so. Thus, the
delay, if there be any, is not solely attributable to [PIC]. Having
impliedly consented thereto, defendant PMO must suffer the
consequences of its inaction. The same is true on the
allegation of insufficiency of the injunction bond filed by [PIC].
The defendant PMOs failure to question the same
withinreasonable time the amount of the injunction bond
posted by [PIC] is fatal to its cause as it galvanized the
resolution of the Court on the matter.
The Court will not act on defendant PMOs prayer for the
appointment of a representative in [PICs] Board of Director[s].
As stated by [PIC] in its opposition to the pending incident, that
it is not preventing defendant PMO to appoint a representative
[in the] former, the Court will no longer discuss the said motion.
The parties, however, are directed to notify this Court of the
appointmentby [PMO] of a representative in [PICs] Board of
Director[s]. Ondefendant PMOs motion to submit accounting
report, while it may be true that [PIC] is submitting its financial
statements to the Bureau ofInternal Revenue and the
Securities and Exchange Commission, the Court finds no legal
obstacle not to direct [PIC] to submit a copy of the said
documents to [PMO]. Lastly, on the motion of [PMO] to post
counter bond, the Court finds the same to [be] without
merit.The Court cannot allow, even if a bond is posted, [PMO]
to commit an act which it has declared to be illegal. There is no
premium for an illegal act.25
The dispositive portion of the RTC Order dated August 25,
2009 reads:
WHEREFORE, premises considered, the Court GRANTS the
following motion:
1. Manifestation [and] Motion filed by [PIC] and
hereby DELETES issues numbers 1 and 5 in pages 5
and 6 of its Pre-Trial Order of February 6, 2009.
2. The Omnibus Motion on requiring [PIC] to submit
an accounting and financial reportto the defendant
[PMO], and submit to this Court a manifestation of its
compliance thereto; and DENIESthe following:
1. The dissolution of the Writ of Preliminary
Injunction for lack of merit.
2. The appointment of a representative of
[PMO to the] Board of Directors for lack of
merit.
3. The posting of counter bond for lack of
merit.26
PMO assailed the RTC Order dated August 25,2009 before the
Court of Appeals viaa Petition for Certiorari, averring that:
I.
PUBLIC RESPONDENT COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN HOLDING THAT
THE IPSO FACTOREVERSION CLAUSE IN THE
ARDA IS A SPECIE[S] OF PACTUM
COMMISSORIUMAND SUCH DISPOSITION IS A
FINAL DETERMINATION OF THE COURT WHICH
CAN ONLY BE QUESTIONED ON APPEAL; AND
II.
PUBLIC RESPONDENT COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION IN DENYING
[PMOS] MOTION TO DISSOLVE THE WRIT OF
PRELIMINARY INJUNCTION AND MOTION TO FILE
A COUNTERBOND FOR THE DISSOLUTION
THEREOF.27
The Court of Appeals, in itsDecision dated January 31, 2011,
disagreed with the finding of the RTC that the instant case
involves a pactum commissorium, but still affirmed the denial
by the RTC of the motion of PMO to dissolve the Writ of
Preliminary Injunction issued in 2003.
According to the Court of Appeals, Section 8.02 of the ARDA
does not constitute pactum commissorium:
The elements of pactum commissoriumare: (1) that there
should be a pledge or mortgage wherein a property is pledged
or mortgaged by way of security for the payment of the
20
principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of nonpayment of the
principal obligation within the stipulated period.
In the instant case, the subject ARDA basically pertains to the
contract of sale of shares of stock. There was nothing given by
way of pledge or mortgage in said contract, through which
[PMO] could have appropriated the shares to itself should
default in the payment thereof arise.
At this point, We have to agree with [PMO] that the ARDA is
separate and distinct from the Pledge Agreement. The two
agreements have separate terms and conditions, especially
concerning the consequences of default. Under the ARDA,
[PMO] may effect the ipso factoreversion of the title over the
sharesof stock of [PIC], without need of demand. On the other
hand, under the Pledge Agreement, [PMO] may conduct a
public or private sale of the shares of stock of [PIC], wherein it
may opt to buy the same.
Furthermore, the first element of pactum commissoriumonly
holds true under the Pledge Agreement whilethe second
element with respect to the stipulation for automatic
appropriation can be found under the ARDA. Thus, it is plainly
irreconcilable how pactum commissoriumcan be made to apply
in the present case, absentthe two elements concurring in one
contract.28
Notwithstanding its aforequotedpronouncements, the Court of
Appeals still declared the ipso factoreversion clause in the
ARDA invalid:
Nevertheless, the questioned provision on automatic reversion
of shares still cannot be held valid. While the contracting
parties may establish such stipulations, clauses, terms and
conditions as they may deem convenient, they should,
however, be not contrary to law, morals, good customs, public
order, or public policy.
In a contract of sale involving shares of stock, ownership is
deemed transferred upon the issuance ofcertificate of stock.
Section 63 of the Corporation Code provides that "shares of
stock so issued are personal property and may be transferred
by delivery of the certificate or certificates indorsed by the
owner or his attorney-in-fact or other person legally authorized
to make the transfer."
The word "transfer," as contemplatedin that particular section
of the Corporation Code, means any act by which the share of
stock of one person is vested in another, that is, he is divested
and another acquires ownership of such stock.
Applying these principles, ownership over the stock of shares
was already transferred to [PIC] when it was issued new
certificates of stock. [PMO] cannot oblige [PIC] to automatically
part with its ownership over the shares in favor of the former on
the occasion of default or nonpayment, even if they have
previously agreed upon the same. Such stipulation contained
in the ARDA is contraryto law, hence, null and void.
It bears stressing that what is being declared null and void here
is the "automatic reversion of shares" clause and not the
provision for the rescission/cancellation of ARDA, as what has
been impressed by [PMO] in its arguments.
Accordingly, [PIC] is entitled to be protected of his rights
through the issuance of the Writ of Preliminary Injunction. And
it is but proper to deny the dissolution of said writ. Itshould be
of no moment that it has been in effect for several years now.
Until the matter has been settled on whether [PIC] has
substantially breached its obligation as to constitute default,
then, the shares of stock cannotas yet be foreclosed and sold,
in accordance with the terms and conditionsof the Pledge
Agreement, to satisfy [PMOs] alleged claims. 29 (Citations
omitted.)
The Court of Appeals accordingly ruled in the end:
In view of all the foregoing, We simply cannot ascribe grave
abuse of discretion to public respondent. While We may have a
different take on the matter at hand, it is axiomatic thatnot
every erroneous conclusion of law or fact is abuse of
discretion.
WHEREFORE, premises considered, the instant petition is
DENIED. The assailed Order dated 25 August 2009 issued by
public respondent, Hon. Judge Gina M. Bibat-Palamos of RTC
Makati, Branch 64, in Civil Case No. 03-114 is hereby
AFFIRMED.30 (Citation omitted.)
PIC filed a Motion for Partial Reconsideration, while PMO filed
a Motion for Reconsideration of the Decision dated January 31,
2011 of the Court of Appeals, which the appellatecourt both
denied in its Resolution dated November 18, 2011.
Hence, the instant Petitions.
In its Petition in G.R. No. 199420, PICassigned the following
errors on the part of the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS COMMITTED
GROSS ERROR, ACTED WITH GRAVE ABUSE OF
DISCRETION WHEN IT DECIDED A QUESTION OF
SUBSTANCE NOT IN ACCORD WITH LAW AND
ESTABLISHED JURISPRUDENCE BY HOLDING THAT THE
ESSENTIAL ELEMENTS OFPACTUM COMMISSORIUM,
NAMELY, 1) THAT THERE SHOULD BE A [PLEDGE] OR
[MORTGAGE] WHEREIN A PROPERTY PLEDGED OR
MORTGAGED BY WAY OF SECURITY FOR THE PAYMENT
OF THE PRINCIPAL OBLIGATION; AND 2) THAT THERE
SHOULD BE A STIPULATION FOR AN AUTOMATIC
APPROPRIATION BY THE CREDITOR OF THE THING
PLEDGED OR MORTGAGED IN THE EVENT OF
NONPAYMENT OF THE PRINCIPAL OBLIGATION WITHIN
THE STIPULATED PERIOD, MUST CONCUR OR BE
PRESENT IN ONE CONTRACT UNLIKE IN THE CASE AT
BENCH WHERE ONE ELEMENT PURPORTEDLY APPEARS
IN THE ARDA WHILE THE OTHER APPEARS INTHE
PLEDGE AGREEMENT.
21
II
THE HONORABLE COURT OF APPEALS COMMITTED
GROSS ERROR, ACTED WITH GRAVE ABUSE OF
DISCRETION AND NOT IN ACCORD WITH LAW AND
ESTABLISHED JURISPRUDENCE WHEN IT GAVE DUE
COURSE AND RULED ON [PMOS] PETITION FOR
CERTIORARI ASSAILING THE ORDER ISSUED BY THE
TRIAL COURT ON FEBRUARY 27, 2003 HOLDING THAT
THE IPSO FACTOOR AUTOMATIC REVERSION TO PMO OF
THE PLEDGED SHARES OF STOCK UNDER SECTION 8.02
OF THE ARDA IS PACTUM COMMISSORIUMWHEN SAID
ORDER HAD LONG BECOME FINAL AND THEREFORE THE
PETITION ASSAILING IT IS TIME-BARRED AND SHOULD
HAVE BEEN DISMISSED OUTRIGHT.31
On the other hand, PMO raised the following arguments in its
Petition in G.R. No. 199432:
I principal obligation within the stipulated period.34
THE HONORABLE COURT OF APPEALS ERRED IN RULING
THAT THE IPSO FACTOREVERSION CLAUSE OF THE
ARDA IS CONTRARY TO LAW IN THE ABSENCE OF ANY
LAW ALLEGEDLY VIOLATED BYTHE SAID CLAUSE.
II
THE HONORABLE COURT OF APPEALS ERRED IN
DENYING [PMOS] PRAYER FOR THE DISSOLUTION OF
THE WRIT OF PRELIMINARY INJUNCTION EVEN IF THE
PURPOSE FOR WHICH IT WAS ISSUED HAD ALREADY
BEEN MET AND ITS CONTINUED IMPLEMENTATION
DEPRIVED [PMO] OF REMEDIES UNDER THE LAW AND
THE ARDA.
III
THE DISSOLUTION OF THE WRIT AFTER THE LAPSE OF
ALMOST NINE (9) YEARS IS IN ORDER AND IN THE
INTEREST OF EQUITABLE JUSTICE.32
RULING OF THE COURT
The allegations and arguments of PIC and PMO in their
respective Petitions essentially boil down to two fundamental
issues: (1) Whether Section 8.02 of the ARDA on ipso factoor
automatic reversion of the PPC shares of stock to PMO in case
of default by PIC constitutes pactum commissorium; and (2)
Whether the Writ of Preliminary Injunction should be dissolved.
The Court resolves the first issue in the positive and the
second issue in the negative.
Section 8.02 of the ARDA constitutes pactum commissorium
and, thus, null and void for being contrary to Article 2088 of the
Civil Code.
Article 1305 of the Civil Code allowscontracting parties to
establish such stipulation, clauses, terms,and conditions
asthey may deem convenient, provided, however, that theyare
not contrary to law, morals, good customs, public order, or
public policy.
Pactum commissoriumis among the contractual stipulations
that are deemed contrary to law. It is defined as "a stipulation
empowering the creditor to appropriate the thing given as
guaranty for the fulfillment of the obligation in the event the
obligor fails to live up to his undertakings, without further
formality, such as foreclosure proceedings, and a public
sale."33 It is explicitly prohibited under Article 2088 of the Civil
Code which provides:
ART. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgage, or dispose of them. Any stipulation
to the contrary is null and void.
There are two elements for pactum commissoriumto exist: (1)
that there should be a pledge or mortgage wherein a property
is pledged or mortgaged by way of security for the payment of
the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the
thing pledged or mortgaged in the event of nonpayment of the
Both elements of pactum commissoriumare present in the
instant case: (1) By virtue of the Pledge Agreement dated May
2,1997, PIC pledged its PPC shares of stock in favor of PMO
as security for the fulfillment of the formers obligations under
the ARDA dated May 10, 1996 and the Pledge Agreement
itself; and (2) There is automatic appropriation as under
Section 8.02 of the ARDA, in the event of default by PIC, title to
the PPC shares of stock shall ipso factorevert from PIC to
PMO without need of demand.
The Court of Appeals, in ruling that there is no pactum
commissorium, adopted the position of PMO that the ARDA
and the Pledge Agreement are entirely separate and distinct
contracts. Neither contract contains both elements of pactum
commissorium: the ARDA solely has the second element, while
the Pledge Agreement only has the first element.
The Court disagrees.
In Blas v. Angeles-Hutalla,35 the Court recognized that the
agreement of the parties may be embodied in only one
contract or in two or more separate writings. In case of the
latter, the writings of the parties should be read and interpreted
together in sucha way as to render their intention effective.
The agreement between PMO and PIC isthe sale of the PPC
shares of stock by the former to the latter, to besecured by a
pledge on the very same shares of stock. The ARDA and the
Pledge Agreement herein, although executed in separate
written instruments, are integral to one another. On one hand,
Section 2.04 of the ARDA explicitly requires the execution of a
pledge agreement as security for the payment by PIC of the
purchase price for the PPC shares of stock and receivables,
and even provides the form for said pledge agreement in
Annex A thereof. Section 2.07 of the ARDA also states that the
closing of the sale and purchase of the PPCshares of stock
and receivables shall take place on the same date that PIC
shall execute and deliver the pledge agreement, together with
the certificates of shares of stock, to PMO. On the other hand,
the "Whereas Clauses" of the Pledge Agreement expressly
mentions the ARDA and explains that the Pledge Agreement is
being executed to securepayment by PIC of the purchase price
22
and all other amounts due to PMO under the ARDA, aswell as
the performance by PIC of its other obligations under the
ARDA and the Pledge Agreement itself. Clearly, itwas the
intention of the parties to enter into and execute both contracts
for a complete effectuation of their agreement.
To reiterate, the Pledge Agreement secures, for the benefit of
PMO, the performance by PIC of its obligations under both the
ARDA and the Pledge Agreement itself. It is withthe execution
of the Pledge Agreement that PIC turned over possession of its
certificates of shares of stock in PPC to PMO. As the RTC
pertinently observed in its Order dated June 19, 2003, there
had already been a shift in the relations of PMO and PIC, from
mere seller and buyer, to creditor-pledgee and debtor-pledgor.
Having enjoyed the security and benefits of the Pledge
Agreement, PMO cannot now insist on applying Section 8.02
of the ARDAand conveniently and arbitrarily exclude and/or
ignore the Pledge Agreement so as to evade the prohibition
against pactum commissorium.
More importantly, the Court, in determining the existence of
pactum commissorium, had focused more on the evident
intention of the parties, rather than the formal or written form.
In A. Francisco Realty and Development Corporation v. Court
of Appeals,36 therein petitioner similarly denied the existence of
pactum commissoriumbecause the proscribed stipulation was
found in the promissory note and not in the mortgage deed.
The Court held that:
The contention is patently without merit. To sustain the theory
of petitioner would be to allow a subversion of the prohibition in
Art. 2088.
In Nakpil v. Intermediate Appellate Court, which involved the
violation of a constructive trust, nodeed of mortgage was
expressly executed between the parties in that case.
Nevertheless, this Court ruled that an agreement whereby
property held in trust was ceded to the trustee upon failure of
the beneficiary to pay his debt to the former as secured by the
said property was void for being a pactum commissorium. It
was there held:
The arrangement entered into between the parties, whereby
Pulong Maulapwas to be "considered sold to him (respondent)
x x x" incase petitioner fails to reimburse Valdes, must then be
construed as tantamount to a pactum commissoriumwhich is
expressly prohibited by Art. 2088 of the Civil Code. For, there
was to be automatic appropriation of the property by Valdez in
the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondents manifestations, all
the elements of a pactum commissoriumwere present: there
was a creditordebtor relationship between the parties; the
property was used as security for the loan; and, there was
automatic appropriation by respondent of Pulong Maulap in
case of default of petitioner.
Similarly, the Court has struck down such stipulations as
contained in deeds of sale purporting to be pacto de retrosales
but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of
the circumstancesenumerated in Art. 1602 of the New Civil
Code is sufficient to declare a contract of sale with right to
repurchase an equitable mortgage. This is so because pacto
de retrosales with the stringent and onerous effects that
accompany them are not favored. In case of doubt, a contract
purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in
the contract providing that complete and absolute title shall be
vested on the vendee should the vendors fail to redeem the
property on the specified date. Such stipulation that the
ownership of the property would automatically pass to the
vendee in case no redemption was effected within the
stipulated period is void for being a pactum
commissoriumwhich enables the mortgagee to acquire
ownership of the mortgaged property without need of
foreclosure. Its insertion in the contract is an avowal of the
intention to mortgage rather that to sell the property.
Indeed, in Reyes v. Sierra, this Court categorically ruled that a
mortgagees mere act of registering the mortgaged property in
his own name upon the mortgagors failure to redeem the
property amounted to the exercise of the privilege of a
mortgagee in a pactum commissorium. Obviously, from the
nature of the transaction, applicants predecessor-in-interest is
a mere mortgagee, and ownership of the thing mortgaged is
retained by Basilia Beltran, the mortgagor. The mortgagee,
however, may recover the loan, although the mortgage
document evidencing the loan was nonregistrable being a
purely private instrument. Failure ofmortgagor to redeem the
property does not automatically vest ownership of the property
to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which
reads:
The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose by them. Any stipulation to the
contrary is null and void.
The act of applicant inregistering the property in his own name
upon mortgagorsfailure to redeem the property would amount
to a pactum commissoriumwhich is against good moralsand
public policy.
Thus, in the case at bar, the stipulations in the promissory
notes providing that, upon failure of respondent spouses to pay
interest, ownership of the property would be automatically
transferred to petitioner A. Francisco Realty and the deed of
sale in its favor would be registered, are in substance a pactum
commissorium. They embody the two elements of pactum
commissoriumas laid down in Uy Tong v. Court of Appeals, x x
x. (Citations omitted.)
Appreciating the ARDA together with the Pledge Agreement,
the Court can only conclude that Section 8.02 of the ARDA
constitutes pactum commissoriumand, therefore, null and void.
PMO though insists that there is no valid Pledge Agreement,
arguing that PIC could not have validly pledged the PPC
shares of stock because it is not yet the absolute owner of said
shares. According to PMO, the sale of the PPC shares of stock
to PIC is subject to the resolutory condition of nonpayment by
PIC of the installmentsdue on the purchase price.
23
Again, the Court is unconvinced.
Among the requirements of a contract ofpledge is that the
pledgor is the absolute owner of the thing pledged. 37Based on
the provisions of the ARDA, ownership of the PPC shares
ofstock had passed on to PIC, hence, enabling PIC to pledge
the very same shares to PMO. In accordance with Section
2.07(a)(1) and 2.07(a)(2) of the ARDA, PMO had transferred to
PIC all rights, title, and interests in and to the PPC sharesof
stock, and delivered to PIC the certificates for said shares for
cancellation and replacement of new certificates already in the
name ofPIC. In addition, Section 2.07(b) of the ARDA explicitly
declares that PIC asbuyer shall exercise all the rights,
including the right to vote, of a shareholder in respect of the
PPC shares of stock.
PMO cannot maintain that the ownership of the PPC shares of
stock did not pass on to PIC, but in the same breath claim that
non-payment by PIC of the installments due on the purchase
price is a resolutory condition for the contract of sale these
two arguments are actually contradictory. As the Court clearly
explained in Heirs of Paulino Atienza v. Espidol38:
Regarding the right to cancel the contract for nonpayment of
an installment, there is need to initially determine if what the
parties had was a contract of sale or a contract to sell. In a
contract of sale, the title to the property passes to the buyer
upon the delivery of the thing sold. In a contract to sell, on the
other hand, the ownership is, by agreement, retained by the
seller and is not to pass to the vendee until full payment of the
purchase price. In the contract of sale, the buyers nonpayment
of the price is a negative resolutory condition;in the contract to
sell, the buyers full payment of the price is a positive
suspensive condition to the coming into effect of the
agreement. In the first case, the seller has lost and cannot
recover the ownership of the property unless he takes action to
set aside the contract of sale.In the second case, the title
simply remains in the seller if the buyer does not comply with
the condition precedent of making payment at the time
specified in the contract. x x x. (Emphases supplied, citation
omitted.)
So that it could invoke the resolutory condition of nonpayment
of an installment, PMO must necessarily concede that its
contract with PIC was a one of sale and that ownership of the
PPC shares of stock had indeed passed on to PIC. And even
then, having lostownership of the shares, PMO cannot
automatically recover the same without taking steps to set
aside the contract of sale.
Moreover, the general rule is that in the absence of a
stipulation, a party cannot unilaterally and extrajudicially
rescind a contract. A party must invoke the right to rescind a
contract judicially.39 It is also settled that the rescission of a
contract based on Article 1191 of the Civil Code requires
mutual restitution to bring back the parties to their original
situation prior to the inception of the contract.
Rescissioncreates the obligation to return the object of the
contract. It can be carried out only when the one who demands
rescission can return whatever he may be obliged to restore.40
Even though PMO had previouslyacknowledged the need for
restitution or restoration following rescission, it also qualified
that such restitution or restoration shall still be "subject x x x to
the fair determination of the amount to be restored asmay be
deemed reasonable and substantiated."41
Section 8.02 of the ARDA provides for the ipso factoreversion
of the pledged shares of PIC to PMO in case ofdefault on the
part of the former, which as explained above, is prohibited by
Article 2088 of the Civil Code. The said Section does not
mention the broader concept of rescission of the entire ARDA.
In its Petition in G.R. No. 199432, PMO is asking the Court,
among other things, to already declare the ARDA
rescinded.1wphi1 The Court cannot grant or deny such
prayer at this point for there are questions of fact and law
which are still under litigation before the RTC.
There is no basis for dissolving the Writ of Preliminary
Injunction.
The Court emphasizes that the Writ of Preliminary Injunction
was granted in the RTC Order dated February 27, 2003; and
the Motion for Reconsideration of the issuance of saidWrit filed
by the PMO was denied in the RTC Order dated June 19, 2003
both of which are interlocutory orders. Under Rule 65 of the
Rules of Court,the PMO only had 60 days from notice to file
with the Court of Appeals a petition for certiorariassailing said
orders. However, PMO did not file such a petition and lost the
right to avail itself of the remedy.
PMO, in challenging the RTC Order dated August 25, 2009,
cannot be allowed to revive the issues of pactum
commissoriumand the arbitration clause, together with its
opposition to the Writ of Preliminary Injunction, which were
already settled and ruled upon six years before in the RTC
Orders dated February 27, 2003 and June 19, 2003. The
removal of said issues from those submitted for trial before the
R TC is thus justified. That the R TC issued the
aforementioned Orders of 2003 based only on initial and
incomplete evidence is incorrect. The issues of pactum
commisorium and arbitration clause are questions of law that
do not require the review or evaluation of evidence. The RTC,
before issuing said Orders of 2003, conducted hearings and
required the submission of pleadings, so the parties were given
the opportunity to present their arguments on said questions of
law. In particular, the ruling of the RTC that Section 8.02 of the
ARDA constitutes pactum commissorium, cannot be set aside
and the Writ of Injunction issued based on such ruling cannot
be dissolved, even if there be changes in the factual
circumstances of the parties, for as long as the applicable law
remains the same.
There are still several remaining issues in the Pre-Trial Order
dated February 6, 2009 that the RTC needs to resolve, among
others, the alleged default under the ARDA. They involve both
questions of fact and law, so their resolution requires further
hearings for presentation of evidence by the parties. Hence,
PMO cannot claim pre-judgment of its case with the issuance
by the RTC of the Orders dated February 27, 2003 and June
19, 2003. Despite the declaration that Section 8.02 of the
ARDA is null and void as it constitutes pactum commissorium,
PMO and PIC shall have the opportunity to thresh-out other
issues between them which are not resolved in these cases,
such as the issue of default, during the trial on the merits
24
before the RTC. WHEREFORE, premises considered, the II. PROVISIONS APPLICABLE ONLY TO PLEDGE
Court:
G.R. No. L-5219 February 15, 1910
(1) GRANTS the Petition for Review of PIC in G.R.
No. 199420 by declaring that Section 8.02 of the JOSE McMICKING, sheriff of Manila, plaintiff-appellee,
ARDA constitutes pactum commissorium and, thus, vs.
null and void; PEDRO MARTINEZ and GO JUNA, defendants.
GO JUNA, appellant.
(2) DENIES the Petition for Review of PMO in G.R.
No. 199432 for lack of merit; and M. Legazpi Florendo, for appellant.
Eugenio de Lara, for defendant Pedro Martinez.
(3) DIRECTS the RTC to resolve Civil Case No. 03-
114 with utmost dispatch. MORELAND, J.:

SO ORDERED. The defendant, Pedro Martinez, some time during the year
1908 obtained judgment in the Court of First Instance of the
city of Manila against one Maria Aniversario; that thereafter
execution was issued upon said judgment and the sheriff
levied upon a pailebot, Tomasa, alleged to be the property of
said Maria Aniversario; that thereupon the said defendant Go
Juna intervened and claimed a lien upon said boat by virtue of
a pledge of the same to him by the said Maria Aniversario
made on the 27th day of February, 1907, which said pledge
was evidenced by a public instrument bearing that date.

This action was brought by the sheriff against Go Juna and

Pedro Martinez to determine the rights of the parties to the
funds in his hands. Maria Aniversario was not made a party.

The said Pedro Martinez alleged as a defense that the pledge

which said document was intended to constitute had not been
made effective by delivery of the property pledged, as required
by article 1863 of the Civil Code, and that, therefore, there
existed no preference in favor of said Go Juna.

The court below found with the contention of the said Pedro
Martinez, declared a preference in his favor, and ordered the
sheriff to pay over the said funds in consonance therewith. An
appeal was taken from said judgment.

The conclusion of the court below that the property was not
delivered in accordance with the provisions of article 1863 of
the Civil Code is sustained by the proofs. His conclusion that
the pledge was ineffective against Martinez is correct. It
appears, however, that the document of pledge is a public
document which contains an admission of indebtedness. In
other words, while it is intended to be a pledge, it is also
a credit which appears in a public document. Article 1924,
paragraph 3, letter a, is therefore applicable; and, said public
document antedating the judgment of defendant Martinez,
takes preference thereover. The validity of that document in so
far as it shows an indebtedness against Maria Aniversario and
its effectiveness against her have not, however, been
determined. She is not a party to this action. No judgment can
be rendered affecting her rights or liabilities under said
instrument. If said instrument is invalid or for any other cause
unenforceable against her, it would be wholly unjust, by
declaring its preference over a debt acknowledged by and
conclusive against her, to require that said funds be paid over
to the holder of said document. That would be to require her to
pay a debt which has not only not been shown to be
enforceable against her but which, as a witness for the

25
defendant Martinez on the trial of this cause, she expressly
and vehemently repudiated as a valid claim against her. Total 280 P1,120,000
===== ========
The judgement is, therefore, reversed; and it is ordered that
the cause be returned to the court below; that the plaintiff bring 2. Angel dela Cruz delivered the said
in Maria Aniversario as a party to this action, and that she be certificates of time (CTDs) to herein plaintiff
given an opportunity to make her defense, if she have any, to in connection with his purchased of fuel
the document in question under proper procedure. No finding products from the latter (Original Record, p.
as to costs. So ordered. 208).

3. Sometime in March 1982, Angel dela Cruz

informed Mr. Timoteo Tiangco, the Sucat
G.R. No. 97753 August 10, 1992 Branch Manger, that he lost all the
certificates of time deposit in dispute. Mr.
CALTEX (PHILIPPINES), INC., petitioner, Tiangco advised said depositor to execute
vs. and submit a notarized Affidavit of Loss, as
COURT OF APPEALS and SECURITY BANK AND TRUST required by defendant bank's procedure, if
COMPANY, respondents. he desired replacement of said lost CTDs
(TSN, February 9, 1987, pp. 48-50).
Bito, Lozada, Ortega & Castillo for petitioners.
4. On March 18, 1982, Angel dela Cruz
Nepomuceno, Hofilea & Guingona for private. 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
REGALADO, J.: 282-561).

This petition for review on certiorari impugns and seeks the 5. On March 25, 1982, Angel dela Cruz
reversal of the decision promulgated by respondent court on negotiated and obtained a loan from
March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with defendant bank in the amount of Eight
modifications, the earlier decision of the Regional Trial Court of Hundred Seventy Five Thousand Pesos
Manila, Branch XLII, 2 which dismissed the complaint filed (P875,000.00). On the same date, said
therein by herein petitioner against respondent bank. depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562)
The undisputed background of this case, as found by the which stated, among others, that he (de la
court a quo and adopted by respondent court, appears of Cruz) surrenders to defendant bank "full
record: control of the indicated time deposits from
and after date" of the assignment and further
1. On various dates, defendant, a authorizes said bank to pre-terminate, set-off
commercial banking institution, through its and "apply the said time deposits to the
Sucat Branch issued 280 certificates of time payment of whatever amount or amounts
deposit (CTDs) in favor of one Angel dela may be due" on the loan upon its maturity
Cruz who deposited with herein defendant (TSN, February 9, 1987, pp. 60-62).
the aggregate amount of P1,120,000.00, as
follows: (Joint Partial Stipulation of Facts and 6. Sometime in November, 1982, Mr. Aranas,
Statement of Issues, Original Records, p. Credit Manager of plaintiff Caltex (Phils.)
207; Defendant's Exhibits 1 to 280); Inc., went to the defendant bank's Sucat
branch and presented for verification the
CTD CTD CTDs declared lost by Angel dela Cruz
Dates Serial Nos. Quantity Amount alleging that the same were delivered to
herein plaintiff "as security for purchases
made with Caltex Philippines, Inc." by said
22 Feb. 82 90101 to 90120 20 P80,000 depositor (TSN, February 9, 1987, pp. 54-
26 Feb. 82 74602 to 74691 90 360,000 68).
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 7. On November 26, 1982, defendant
5 Mar. 82 89965 to 89986 22 88,000 received a letter (Defendant's Exhibit 563)
5 Mar. 82 70147 to 90150 4 16,000 from herein plaintiff formally informing it of its
8 Mar. 82 90001 to 90020 20 80,000 possession of the CTDs in question and of
9 Mar. 82 90023 to 90050 28 112,000 its decision to pre-terminate the same.
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

26
 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 non-negotiable 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;
27
 (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.
28
In a letter dated November 26, 1982 addressed to respondent declaring it to have been a
Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote: deposit of the property as
". . . These certificates of deposit were negotiated to us by Mr. collateral security. It has
Angel dela Cruz to guarantee his purchases of fuel products" been said that a transfer of
(Emphasis ours.) 13 This admission is conclusive upon property by the debtor to a
petitioner, its protestations notwithstanding. Under the doctrine creditor, even if sufficient
of estoppel, an admission or representation is rendered on its face to make an
conclusive upon the person making it, and cannot be denied or absolute conveyance,
disproved as against the person relying thereon. 14 A party may should be treated as a
not go back on his own acts and representations to the pledge if the debt
prejudice of the other party who relied upon them. 15 In the law continues in inexistence
of evidence, whenever a party has, by his own declaration, act, and is not discharged by
or omission, intentionally and deliberately led another to the transfer, and that
believe a particular thing true, and to act upon such belief, he accordingly the use of the
cannot, in any litigation arising out of such declaration, act, or terms ordinarily importing
omission, be permitted to falsify it. 16 conveyance of absolute
ownership will not be given
If it were true that the CTDs were delivered as payment and that effect in such a
not as security, petitioner's credit manager could have easily transaction if they are also
said so, instead of using the words "to guarantee" in the letter commonly used in pledges
aforequoted. Besides, when respondent bank, as defendant in and mortgages and
the court below, moved for a bill of particularity therefore do not
therein 17 praying, among others, that petitioner, as plaintiff, be unqualifiedly indicate a
required to aver with sufficient definiteness or particularity (a) transfer of absolute
the due date or dates of payment of the alleged indebtedness ownership, in the absence
of Angel de la Cruz to plaintiff and (b) whether or not it issued a of clear and unambiguous
receipt showing that the CTDs were delivered to it by De la language or other
Cruz as payment of the latter's alleged indebtedness to it, circumstances excluding
plaintiff corporation opposed the motion. 18 Had it produced the an intent to pledge.
receipt prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not as Petitioner's insistence that the CTDs were negotiated to it begs
security. Having opposed the motion, petitioner now labors the question. Under the Negotiable Instruments Law, an
under the presumption that evidence willfully suppressed instrument is negotiated when it is transferred from one person
would be adverse if produced. 19 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
Under the foregoing circumstances, this disquisition a bill or note, who is in possession of it, or the bearer
in Intergrated Realty Corporation, et al. vs. Philippine National thereof. 22 In the present case, however, there was no
Bank, et al. 20 is apropos: 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
. . . Adverting again to the Court's
sufficed. Here, the delivery thereof only as security for the
pronouncements in Lopez, supra, we quote
purchases of Angel de la Cruz (and we even disregard the fact
therefrom:
that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his
The character of the lien. Accordingly, a negotiation for such purpose cannot be
transaction between the effected by mere delivery of the instrument since, necessarily,
parties is to be determined the terms thereof and the subsequent disposition of such
by their intention, security, in the event of non-payment of the principal obligation,
regardless of what must be contractually provided for.
language was used or
what the form of the
The pertinent law on this point is that where the holder has a
transfer was. If it was
lien on the instrument arising from contract, he is deemed a
intended to secure the
holder for value to the extent of his lien. 23 As such holder of
payment of money, it must
collateral security, he would be a pledgee but the requirements
be construed as a pledge;
therefor and the effects thereof, not being provided for by the
but if there was some
Negotiable Instruments Law, shall be governed by the Civil
other intention, it is not a
Code provisions on pledge of incorporeal rights, 24 which
pledge. However, even
inceptively provide:
though a transfer, if
regarded by itself, appears
to have been absolute, its Art. 2095. Incorporeal rights, evidenced by
object and character might negotiable instruments, . . . may also be
still be qualified and pledged. The instrument proving the right
explained by pledged shall be delivered to the creditor,
contemporaneous writing and if negotiable, must be indorsed.

29
 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 pre-trial
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
30
 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.
G.R. No. L-49120 June 30, 1988
ESTATE OF GEORGE LITTON, petitioner,
vs.
CIRIACO B. MENDOZA and COURT OF
APPEALS, respondents.
Ruben G. Bala for respondent Mendoza.
GANCAYCO, J.:
This petition for review presents two (2) main issues, to wit: (1)
Can a plaintiff in a case, who had previously assigned in favor
of his creditor his litigated credit in said case, by a deed of
assignment which was duly submitted to the court, validly enter
into a compromise agreement thereafter releasing the
defendant therein from his claim without notice to his
assignee? and (2) Will such previous knowledge on the part of
the defendant of the assignment made by the plaintiff estop
said defendant from invoking said compromise as a ground for
dismissal of the action against him?
The present case stemmed from Civil Case No. Q-
8303 1 entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action
for the collection of a sum of money representing the value of
two (2) checks which plaintiff Tan claims to have been
delivered to him by defendant Mendoza, private respondent
herein, by way of guaranty with a commission.
The record discloses that the Bernal spouses 2 are engaged in
the manufacture of embroidery, garments and cotton materials.
Sometime in September 1963, C.B.M. Products, 3 with
Mendoza as president, offered to sell to the Bernals textile
cotton materials and, for this purpose, Mendoza introduced the
Bernals to Alfonso Tan. Thus, the Bernals purchased on credit
from Tan some cotton materials worth P 80,796.62, payment of
which was guaranteed by Mendoza. Thereupon, Tan delivered
the said cotton materials to the Bernals. In view of the said
arrangement, on November 1963, C.B.M. Products, through
Mendoza, asked and received from the Bernals PBTC Check
No. 626405 for P 80,796.62 dated February 20, 1964 with the
understanding that the said check will remain in the possession
of Mendoza until the cotton materials are finally manufactured
into garments after which time Mendoza will sell the finished
products for the Bernals. Meanwhile, the said check matured
without having been cashed and Mendoza demanded the
issuance of another check 4 in the same amount without a
date.
On the other hand, on February 28, 1964, defendant Mendoza
issued two (2) PNB checks 5 in favor of Tan in the total amount
of P 80,796.62. He informed the Bernals of the same and told
them that they are indebted to him and asked the latter to sign
an instrument whereby Mendoza assigned the said amount to
Insular Products Inc. Tan had the two checks issued by
Mendoza discounted in a bank. However, the said checks were
later returned to Tan with the words stamped "stop payment"
which appears to have been ordered by Mendoza for failure of
the Bernals to deposit sufficient funds for the check that the
Bernals issued in favor of Mendoza.
Hence, as adverted to above, Tan brought an action against
Mendoza docketed as Civil Case No. Q-8303 6 while the
Bernals brought an action for interpleader docketed as Civil
Case No. 56850 7 for not knowing whom to pay. While both
actions were pending resolution by the trial court, on March 20,
1966, Tan assigned in favor of George Litton, Sr. his litigatious
credit * in Civil Case No. 56850 against Mendoza, duly
submitted to the court, with notice to the parties. 8 The deed of
assignment was framed in the following tenor:
DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married
to UY CHAY UA, residing at No. 6 Kanlaon,
Quezon City, doing business under the name
and style ALTA COMMERCIAL by way of
securing or guaranteeing my obligation to
Mr. GEORGE LITTON, SR., do by these
presents CEDE, ASSIGN, TRANSFER AND
CONVEY unto the said Mr. GEORGE
LITTON, SR., my claim against C.B.M.
Products, Inc., personally guaranteed by Mr.
Ciriaco B. Mendoza, in the amount of Eighty-
Thousand Seven Hundred Ninety Six Pesos
31
 and Sixty-two centavos (P 80,796.62) the
balance of which, in principal, and excluding,
interests, costs, damages and attorney's
fees now stands at P 76,000.00, P 4,796.62,
having already been received by the
assignor on December 23, 1965, pursuant to
the order of the court in Civil Case No.
56850, C.F.I., Manila, authorizing Alfonso
Tan to withdraw the amount of P 4,796.62
then on deposit with the court. All rights, and
interests in said net amount, plus interests
and costs, and less attorney's fees, in case
the amount allowed therefor be less than the
amounts claimed in the relief in Civil
Case 56850 (C.F.I., Manila) and Q-8503
(C.F.I., Quezon City) are by these presents
covered by this assignment.
I further undertake to hold in trust any and all
amounts which may hereafter be realized
from the aforementioned cases for the
ASSIGNEE, Mr. GEORGE LITTON, SR., and
to turn over to him such amounts in
application to my liability to him, as his
interest may then show, and I further
undertake to cooperate towards the
successful prosecution of the
aforementioned cases making available
myself, as witness or otherwise, as well as
any and all documents thereto
appertaining. ... 9
After due trial, the lower court ruled that the said PNB checks
were issued by Mendoza in favor of Tan for a commission in
the sum of P 4,847.79 and held Mendoza liable as a drawer
whose liability is primary and not merely as an indorser and
thus directed Mendoza to pay Tan the sum of P 76,000.00, the
sum still due, plus damages and attorney's fees. 10
Mendoza seasonably filed an appeal with the Court of Appeals,
dockted as C.A. G.R. No. 41900-R, arguing in the main that his
liability is one of an accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a
decision affirming in toto the decision of the lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the
said appeal, Mendoza entered into a compromise agreement
with Tan wherein the latter acknowledged that all his claims
against Mendoza had been settled and that by reason of said
settlement both parties mutually waive, release and quit
whatever claim, right or cause of action one may have against
the other, with a provision that the said compromise agreement
shall not in any way affect the right of Tan to enforce by
appropriate action his claims against the Bernal spouses. 12
On February 25, 1977, Mendoza filed a motion for
reconsideration praying that the decision of January 27, 1977
be set aside, principally anchored upon the ground that a
compromise agreement was entered into between him and Tan
which in effect released Mendoza from liability. Tan filed an
opposition to this motion claiming that the compromise
agreement is null and void as he was not properly represented
by his counsel of record Atty. Quiogue, and was instead
represented by a certain Atty. Laberinto, and principally
because of the deed of assignment that he executed in favor of
George Litton, Sr. alleging that with such, he has no more right
to alienate said credit.
While the case was still pending reconsideration by the
respondent court, Tan, the assignor, died leaving no properties
whatever to satisfy the claim of the estate of the late George
Litton, Sr.
In its Resolution dated August 30, 1977, 13 the respondent
court set aside its decision and approved the compromise
agreement.
As to the first ground invoked by Tan, now deceased, the
respondent court ruled that the non-intervention of Tan's
counsel of record in the compromise agreement does not
affect the validity of the settlement on the ground that the client
had an undoubted right to compromise a suit without the
intervention of his lawyer, citing Aro vs. Nanawa. 14
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of
the deed of assignment states that the
cession,assignment, transfer, bond
conveyance by Alfonso Tan was only by way
of securing, or guaranteeing his obligation to
GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and
dominion of the credit (Par. 2, Art. 2085, Civil
Code).
"Even considered as a litigations credit,"
which indeed characterized the claims herein
of Alfonso Tan, such credit may be validly
alienated by Tan (Art. 1634. Civil Code).
Such alienation is subject to the remedies of
Litton under Article 6 of the Civil Code,
whereby the waiver, release, or quit-claim
made by plaintiff-appellee Alfonso Tan in
favor of defendant-appellant Ciriaco B.
Mendoza, if proven prejudicial to George
Litton, Sr. as assignee under the deed of
assignment, may entitle Litton to pursue his
remedies against Tan.
The alienation of a litigatious credit is further
subject to the debtor's right of redemption
under Article 1634 of the Civil Code.
As mentioned earlier, the assignor Tan died pending resolution
of the motion for reconsideration. The estate of George Litton,
Sr., petitioner herein, as represented by James Litton, son of
George Litton, Sr. and administrator 15of the former's estate, is
now appealing the said resolution to this Court as assignee of
the amount sued in Civil Case No. Q-8303, in relation to Civil
Case No. 56850.
32
Before resolving the main issues aforementioned, the question
of legal personality of herein petitioner to bring the instant
petition for review, must be resolved.
As a rule, the parties in an appeal through a review on
certiorari are the same original parties to the case. 16 If after the
rendition of judgment the original party dies, he should be
substituted by his successor-in-interest. In this case, it is not
disputed that no proper substitution of parties was done. This
notwithstanding, the Court so holds that the same cannot and
will not materially affect the legal right of herein petitioner in
instituting the instant petition in view of the tenor of the deed of
assignment, particularly paragraph two thereof 17 wherein the
assignor, Tan, assumed the responsibility to prosecute the
case and to turn over to the assignee whatever amounts may
be realized in the prosecution of the suit.
We note that private respondent moved for the dismissal of the
appeal without notifying the estate of George Litton, Sr.
whereas the former was fully aware of the fact that the said
estate is an assignee of Tan's right in the case
litigated. 18 Hence, if herein petitioner failed to observe the
proper substitution of parties when Alfonso Tan died during the
pendency of private respondent's motion for reconsideration,
no one is to blame but private respondent himself. Moreover,
the right of the petitioner to bring the present petition is well
within the concept of a real party-in-interest in the subject
matter of the action. Well-settled is the rule that a real party-in-
interest is a party entitled to the avails of the suit or the party
who would be injured by the judgment. 19 We see the petitioner
well within the latter category.
Hence, as the assignee and successor-in-interest of Tan,
petitioner has the personality to bring this petition in
substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate
controverted claims, 20 courts encourage the same. A
compromise once approved by final order of the court has the
force of res judicata between parties and should not be
disturbed except for vices of consent or forgery. 21
In this case, petitioner seeks to set aside the said compromise
on the ground that previous thereto, Tan executed a deed of
assignment in favor of George Litton, Sr. involving the same
litigated credit.
We rule for the petitioner. The fact that the deed of assignment
was done by way of securing or guaranteeing Tan's obligation
in favor of George Litton, Sr., as observed by the appellate
court, will not in any way alter the resolution on the matter. The
validity of the guaranty or pledge in favor of Litton has not been
questioned. Our examination of the deed of assignment shows
that it fulfills the requisites of a valid pledge or
mortgage. 22 Although it is true that Tan may validly alienate the
litigatious credit as ruled by the appellate court, citing Article
1634 of the Civil Code, said provision should not be taken to
mean as a grant of an absolute right on the part of the assignor
Tan to indiscriminately dispose of the thing or the right given as
security. The Court rules that the said provision should be read
in consonance with Article 2097 of the same code. 23 Although
the pledgee or the assignee, Litton, Sr. did not ipso
facto become the creditor of private respondent Mendoza, the
pledge being valid, the incorporeal right assigned by Tan in
favor of the former can only be alienated by the latter with due
notice to and consent of Litton, Sr. or his duly authorized
representative. To allow the assignor to dispose of or alienate
the security without notice and consent of the assignee will
render nugatory the very purpose of a pledge or an assignment
of credit.
Moreover, under Article 1634, 24 the debtor has a
corresponding obligation to reimburse the assignee, Litton, Sr.
for the price he paid or for the value given as consideration for
the deed of assignment. Failing in this, the alienation of the
litigated credit made by Tan in favor of private respondent by
way of a compromise agreement does not bind the assignee,
petitioner herein.
Indeed, a painstaking review of the record of the case reveals
that private respondent has, from the very beginning, been fully
aware of the deed of assignment executed by Tan in favor of
Litton, Sr. as said deed was duly submitted to Branch XI of the
then Court of First Instance of Manila in Civil Case No. 56850
(in relation to Civil Case No. Q-8303) where C.B.M. Products is
one of the defendants and the parties were notified through
their counsel. 25 As earlier mentioned, private respondent
herein is the president of C.B.M. Products, hence, his
contention that he is not aware of the said deed of assignment
deserves scant consideration from the Court. Petitioner pointed
out at the same time that private respondent together with his
counsel were served with a copy of the deed of assignment
which allegation remains uncontroverted. Having such
knowledge thereof, private respondent is estopped from
entering into a compromise agreement involving the same
litigated credit without notice to and consent of the assignee,
petitioner herein. More so, in the light of the fact that no
reimbursement has ever been made in favor of the assignee
as required under Article 1634. Private respondent acted in
bad faith and in connivance with assignor Tan so as to defraud
the petitioner in entering into the compromise agreement.
WHEREFORE, the petition is GRANTED. The assailed
resolution of the respondent court dated August 30,1977 is
hereby SET ASIDE, the said compromise agreement being null
and void, and a new one is hereby rendered reinstating its
decision dated January 27, 1977, affirming in toto the decision
of the lower court. This decision is immediately executory. No
motion for extension of time to file a motion for reconsideration
will be granted.
SO ORDERED.
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-
appellee.
33
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
co-accused 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-
in-fact 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" & "1-Bank" 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
34
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. Plaintiff-appellant 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.
G.R. No. 126891 August 5, 1998
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK,
and THE ESTATE OF ALFONSO LIM, respondents.
PANGANIBAN, J.:
35
The duty of a corporate secretary to record transfers of stocks secured a loan from the [p]etitioner in the
is ministerial. However, he cannot be compelled to do so when amount of P40,000 payable in six (6)
the transferee's title to said shares has no prima facie validity months. To secure the payment of his loan,
or is uncertain. More specifically, a pledgor, prior to foreclosure Sy Lim executed a "Contract of Pledge"
and sale, does not acquire ownership rights over the pledged covering his three hundred (300) shares of
shares and thus cannot compel the corporate secretary to stock in Respondent Corporation. Under said
record his alleged ownership of such shares on the basis contract, Sy Lim obliged himself to pay
merely of the contract of pledge. Similarly, the SEC does not interest on his loan at the rate of 10% per
acquire jurisdiction over a dispute when a party's claim to being annum from the date of the execution of said
a shareholder is, on the face of the complaint, invalid or contract.
inadequate or is otherwise negated by the very allegations of
such complaint. Mandamus will not issue to establish a right, Under said "Contracts of Pledge,"
but only to enforce one that is already established. Respondent[s] Guiok and Sy Lim
covenanted, inter alia, that:
Statement of the Case
3. In the event of the
There are the principles, used by this Court in resolving this failure of the PLEDGOR to
Petition for Review on Certiorari before us, assailing the pay the amount within a
October 24, 1996 Decision 1 of the Court of Appeals 2 in CA- period of six (6) months
GR SP No. 40832, the dispositive portion of which reads: from the date hereof, the
PLEDGEE is hereby
IN THE LIGHT OF ALL THE FOREGOING, authorized to foreclose the
the Petition at bench is DENIED DUE pledge upon the said
COURSE and is hereby DISMISSED. With shares of stock hereby
costs against the [p]etitioner. 3 created by selling the
same at public or private
sale with or without notice
By the foregoing disposition, the Court of Appeals effectively
to the PLEDGOR, at which
affirmed the March 7, 1996 Decision 4 of the Securities and
sale the PLEDGEE may
Exchange Commission (SEC) en banc:
be the purchaser at his
option; and the PLEDGEE
WHEREFORE, in view of all the foregoing, is hereby authorized and
judgment is hereby rendered dismissing the empowered at his option
appeal on the ground that mandamus will to transfer the said shares
only issue upon a clear showing of of stock on the books of
ownership over the assailed shares of stock, the corporation to his own
[t]he determination of which, on the basis of name and to hold the
the foregoing facts, is within the jurisdiction certificate issued in lieu
of the regular courts and not with the SEC. 5 thereof under the terms of
this pledge, and to sell the
The SEC en banc upheld the August 16, 1993 Decision 6 of said shares to issue to him
SEC Hearing Officer Rolando C. Malabonga, which dismissed and to apply the proceeds
the action for mandamus filed by petitioner. of the sale to the payment
of the said sum and
The Facts interest, in the manner
hereinabove provided;
As found by the Court of Appeals, the facts of the case are as
follows: 4. In the event of the
foreclosure of this pledge
and the sale of the
. . . On January 8, 1980, Respondent- pledged certificate, any
Appellee Sy Guiok secured a loan from the surplus remaining in the
[p]etitioner in the amount of P40,000 payable hands of the PLEDGEE
within six (6) months. To secure the payment after the payment of the
of the aforesaid loan and interest thereon, said sum and interest, and
Respondent Guiok executed a Contract of the expenses, if any,
Pledge in favor of the [p]etitioner whereby he connected with the
pledged his three hundred (300) shares of foreclosure sale, shall be
stock in the Go Fay & Company Inc., paid by the PLEDGEE to
Respondent Corporation, for brevity's sake. the PLEDGOR;
Respondent Guiok obliged himself to pay
interest on said loan at the rate of 10% per
annum from the date of said contract of 5. Upon payment of the
pledge. On the same date, Alfonso Sy Lim said amount and interest
in full, the PLEDGEE will,

36
 on demand of the
PLEDGOR, redeliver to
him the said shares of
stock by surrendering the
certificate delivered to him
by the PLEDGOR or by
retransferring each share
to the PLEDGOR, in the
event that the PLEDGEE,
under the option hereby
granted, shall have caused
such shares to be
transferred to him upon
the books of the issuing
company."(idem, supra)
Respondent Guiok and Sy Lim endorsed
their respective shares of stock in blank and
delivered the same to the [p]etitioner. 7
However, Respondent Guiok and Sy Lim
failed to pay their respective loans and the
accrued interests thereon to the [p]etitioner.
In October, 1990, the [p]etitioner filed a
"Petition for Mandamus" against Respondent
Corporation, with the SEC entitled "Lim Tay
versus Go Fay & Company. Inc., SEC Case
No. 03894", praying that:
PRAYER
WHEREFORE, premises
considered, it is
respectfully prayed that an
order be issued directing
the corporate secretary of
[R]espondent Go Fay &
Co., Inc. to register the
stock transfers and issue
new certificates in favor of
Lim Tay. It is likewise
prayed that [R]espondent
Go Fay & Co., Inc[.] be
ordered to pay all
dividends due and
unclaimed on the said
certificates to [P]laintiff Lim
Tay.
Plaintiff further prays for
such other relief just and
equitable in the premises.
( page 34, Rollo)
The [p]etitioner alleged, inter alia, in his
Petition that the controversy between him as
stockholder and the Respondent Corporation
was intra-corporate in view of the obstinate
refusal of the corporate secretary of
Respondent Corporation to record the
transfer of the shares of stock of Respondent
Guiok and Sy Lim in favor of and under the
name of the [p]etitioner and to issue new
certificates of stock to the [p]etitioner.
The Respondent Corporation filed its Answer
to the Complaint and alleged, as Affirmative
Defense, that:
AFFIRMATIVE DEFENSE
7. Respondent repleads
and incorporates herein by
reference the foregoing
allegations.
8. The Complaint states no
cause of action against
[r]espondent.
9. Complainant is not a
stockholder of
[r]espondent. Hence, the
Honorable Commission
has no jurisdiction to enter
the present controversy
since their [sic] is no
intracorporate relationship
between complainant and
respondent.
10. Granting arguendo that
a pledge was constituted
over the shareholdings of
Sy Guiok in favor of the
complainant and that the
former defaulted in the
payment of his obligations
to the latter, the same did
not automatically vest [i]n
complainant ownership of
the pledged shares. ( pace
37, Rollo)
In the interim, Sy Lim died. Respondents
Guiok and the Intestate Estate of Alfonso Sy
Lim, represented by Conchita Lim, filed their
Answer-In-Intervention with the SEC
alleging, inter alia, that:
xxx xxx xxx
3. Deny specifically the
allegation under paragraph
5 of the Complaint that,
failure to pay the loan
within the contract period
automatically foreclosed
the pledged shares of
stocks and that the share
of stocks are automatically
purchased by the plaintiff,
for being false and
distorted, the truth being
37
that pursuant to the [sic] compromise and at the
paragraph 3 of the same time, had tendered
contract of pledges, payment of the loan
Annexes "A" and "B", it is secured by the subject
clear that upon failure to pledges but plaintiff
pay the amount within the refused unjustifiably to
stipulated period, the oblige and accept payment
pledgee is authorized to o[r] even agree on the
foreclose the pledge and computation of the
thereafter, to sell the same principal amount of the
to satisfy the loan. loan and interest on top of
[H]owever, to this point in a substantial amount
time, plaintiff has not offered just to settle and
performed any operative compromise the
act of foreclosing the indebtedness of
shares of stocks of [i]ntervenors;
[i]ntervenors in
accordance with the II. SPECIAL
Chattel Mortgage law, AFFIRMATIVE
[n]either was there any DEFENSES
sale of stocks by way of
public or private auction
Intervenors replead by
made after foreclosure in
way of reference all the
favor of the plaintiff to
foregoing allegations to
speak about, and
form part of the special
therefore, the respondent
affirmative defenses;
company could not be
force[d] to [sic] by way of
mandamus, to transfer the 5. This Honorable
subject shares of stocks Commission has no
from the name of your jurisdiction over the person
[i]ntervenors to that of the of the respondent and
plaintiff in the absence of nature of the action,
clear and legal basis for plaintiff having no
such; personality at all to compel
respondent by way of
mandamus to perform
4. DENY specifically the
certain corporate
allegations under
function[s];
paragraphs 6, 7 and 8 of
the complaint as to the
existence of the alleged 6. The complaint states no
intracorporate dispute cause of action;
between plaintiff and
company for being without 7. That respondent is not
proper and legal basis. In [a] real party in interest;
the first place, plaintiff is
not a stockholder of the 8. The appropriation of the
respondent corporation; subject shares of stocks
there was no foreclosure by plaintiff, without
of shares executed in compliance with the
accordance with the formality of law, amounted
Chattel Mortgage Law to "[p]actum
whatsoever; there were no commis[s]orium" therefore,
sales consummated that null and void;
would transfer to the
plaintiff the subject shares
of stocks and therefore, 9. Granting for the sake of
any demand to transfer the argument only that there
shares of stocks to the was a valid foreclosure
name of the plaintiff has no and sale of the subject
legal basis. In the second st[o]cks in favor of the
place, [i]ntervenors had plaintiff which
been in the past [i]ntervenors deny still
negotiating possible paragraph 5 of the
contract allows

38
 redemption, for which
intervenors are willing to
redeem the share of
stocks pledged;
10. Even the Chattel
Mortgage law allowed
redemption of the [c]hattel
foreclosed;
11. As a matter of fact, on
several occasions,
[i]ntervenors had made
representations with the
plaintiff for the compromise
and settlement of all the
obligations secured by the
subject pledges even
offering to pay
compensation over and
above the value of the
obligations, interest[s] and
dividends accruing to the
share of stocks but,
plaintiff unjustly refused to
accept the offer of
payment; ( pages 39-
42, Rollo)
The [r]espondents-[i]ntervenors prayed the
SEC that judgment be rendered in their
favor, as follows:
IV. PRAYER
It is respectfully prayed to
this Honorable
Commission after due
hearing, to dismiss the
case for lack of merit,
ordering plaintiff to accept
payment for the loans
secured by the subject
shares of stocks and to
pay plaintiff:
1. The sum of P50,000.00, as moral
damages;
2. the sum of P50,000.00, as attorneys fees;
and,
3. costs of suit.
Other reliefs just and
equitable [are] likewise
prayed for.
( pages 42-43, Rollo)
After due proceedings, the [h]earing [o]fficer
promulgated a Decision dismissing
[p]etitioner's Complaint on the ground that
although the SEC had jurisdiction over the
action, pursuant to the Decision of the
Supreme Court in the case of "Rural Bank of
Salinas, et al. vs. Court of Appeals, et al.,
210 SCRA 510", he failed to prove the legal
basis for the secretary of the Respondent
Corporation to be compelled to register stock
transfers in favor of the [p]etitioner and to
issue new certificates of stock under his
name ( pages 67-77, Rollo). The [p]etitioner
appealed the Decision of the [h]earing
[o]fficer to the SEC, but, on March 7, 1996,
the SEC promulgated a Decision, dismissing
[p]etitioner's appeal on the grounds that: (a)
the issue between the [p]etitioner and the
[r]espondents being one involving the
ownership of the shares of stock pledged by
Respondent Guiok and Sy Lim, the SEC had
no jurisdiction over the action filed by the
[p]etitioner; (b) the latter had no cause of
action for mandamus against the
Respondent Corporation, the right of
ownership of the [p]etitioner over the 300
shares of stock pledged by Respondent
Guiok and Sy Lim not having been as yet,
established, preparatory to the institution of
said Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had
exclusive jurisdiction over [p]etitioner's
action, the [a]ppellate [c]ourt must delve into
and ascertain: (a) whether or not there is a
need to enlist the expertise and technical
know-how of the SEC in resolving the issue
of the ownership of the shares of stock; (b)
the status of the relationships of the parties;
[and] (c) the nature of the question that is the
subject of the controversy. Where the
controversy is purely a civil matter resoluble
by civil law principles and there is no need
for the application of the expertise and
technical know-how of the SEC, then the
regular courts have jurisdiction over the
action. 8 [citations omitted]
On the issue of whether mandamus can be availed of by the
petitioner, the Court of Appeals agreed with the SEC, viz.:
. . . [T]he [p]etitioner failed to establish a
clear and legal right to the writ of mandamus
prayed for by him. . . . Mandamus will not
issue to enforce a right which is in
substantial dispute or to which a substantial
doubt exists . . . . The principal function of
the writ of mandamus is to command and
expedite, and not to inquire and adjudicate
and, therefore it is not the purpose of the writ
to establish a legal right, but to enforce one
39
 which has already been
established. 9 [citations omitted]
The Court of Appeals debunked petitioner's claim that he had
acquired ownership over the shares by virtue of novation,
holding that respondents' indorsement and delivery of the
shares were pursuant to Articles 2093 and 2095 of the Civil
Code and that petitioner's receipt of dividends was in
compliance with Article 2102 of the same Code. Petitioner's
claim that he had acquired ownership of the shares by virtue of
prescription was likewise dismissed by Respondent Court in
this wise:
The prescriptive period for the action of
Respondent[s] Guiok and Sy Lim to recover
the shares of stock from the [p]etitioner
accrued only from the time they paid their
loans and the interests thereon and [made] a
demand for their return. 10
Hence, the petitioner brought before us this Petition for Review
on Certiorari in accordance with Rule 45 of the Rules of
Court. 11
Assignment of Errors
Petitioner submits, for the consideration of this Court, these
issues: 12
(a) Whether the Securities and Exchange
Commission had jurisdiction over the
complaint filed by the petitioner; and
(b) Whether the petitioner is entitled to the
relief of mandamus as against the
respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership
of the shares "through extraordinary prescription," pursuant to
Article 1132 of the Civil Code, and through respondents'
subsequent acts, which amounted to a novation of the
contracts of pledge. Petitioner also claims that there
was dacion en pago, in which the shares of stock were
deemed sold to petitioner, the consideration for which was the
extinguishment of the loans and the interests thereon.
Petitioner likewise claims that laches bars respondents from
recovering the subject shares.
The Court's Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and
falls within the exclusive jurisdiction of the SEC, petitioner
relies heavily on Abejo v. De la Cruz, 13 which upheld the
jurisdiction of the SEC over a suit filed by an unregistered
stockholder seeking to enforce his rights. He also seeks
support from Rural Bank of Salinas, Inc. v. Court of
Appeals, 14 which ruled that the right of a transferee or an
assignee to have stocks transferred to his name was an
inherent right flowing from his ownership of the said stocks.
The registration of shares in a stockholder's name, the
issuance of stock certificates, and the right to receive dividends
which pertain to the said shares are all rights that flow from
ownership. The determination of whether or not a shareholder
is entitled to exercise the above-mentioned rights falls within
the jurisdiction of the SEC. However, if ownership of the shares
is not clearly established and is still unresolved at the time the
action for mandamus is filed, then jurisdiction lies with the
regular courts.
Sec. 5 of Presidential Decree No. 902-A sets forth the
jurisdiction of the SEC as follows:
Sec. 5. In addition to the regulatory and
adjudicative functions of the Securities and
Exchange Commission over corporations,
partnerships and other forms of associations
registered with it as expressly granted under
existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and
decide cases involving:
(a) Devices or schemes employed by or any
acts of the board of directors, business
associates, its officers or partners,
amounting to fraud and misrepresentation
which may be detrimental to the interest of
the public and/or of stockholders, partners,
members of associations or organizations
registered with the Commission;
(b) Controversies arising out of intra-
corporate or partnership relations, between
and among stockholders, members, or
associates; between any or all of them and
the corporation, partnership or association of
which they are stockholders, members or
associates, respectively; and between such
corporation, partnership or association and
the State insofar as it concerns their
individual franchise or right to exist as such
entity;
(c) Controversies in the election or
appointment of directors, trustees, officers or
managers of such corporations, partnerships
or associations.
(d) Petitions of corporations, partnerships or
associations to be declared in the state of
suspension of payments in cases where the
corporation, partnership or association
possesses property to cover all its debts but
foresees the impossibility of meeting them
when they respectively fall due or in cases
where the corporation, partnership or
association has no sufficient assets to cover
its liabilities, but is under the Management
Committee created pursuant to this
decree. 15
40
Thus, a controversy "among stockholders, partners or
associates themselves" 16 is intra-corporate in nature and falls
within the jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the
subject matter is determined by the allegations in the
complaint. 17 In the present case, however, petitioner's claim
that he was the owner of the shares of stock in question has
no prima facie basis.
In his Complaint, petitioner alleged that, pursuant to the
contracts of pledge, he became the owner of the shares when
the term for the loans expired. The Complaint contained the
following pertinent averments:
xxx xxx xxx
3. On [J]anuary 8, 1990, under a Contract of
Pledge, Lim Tay received three hundred
(300) shares of stock of Go Fay & Co., Inc.,
from Sy Guiok as security for the payment of
a loan of [f]orty [t]housand [p]esos
(P40,000.00) Philippine currency, the sum of
which was payable within six (6) months
[with interest] at ten percentum (10%) per
annum from the date of the execution of the
contract; a copy of this Contract of Pledge is
attached as Annex "A" and made part
hereof;
4. On the same date January 8, 1980, under
a similar Contract of Pledge, Lim Tay
received three hundred (300) shares of stock
of Go Pay & Co., Inc. from Alfonso Sy Lim as
security for the payment of a loan of [f]orty
[t]housand [p]esos (P40,000.00) Philippine
currency, the sum of which was payable
within six (6) months [with interest] at ten
percentum (10%) per annum from the date
of the execution of the contract; a copy of
this Contract of Pledge is attached as
Annex "B" and made part hereof;
5. By the express terms of the agreements,
upon failure of the borrowers to pay the
stated amounts within the contract period,
the pledge is foreclosed and the shares of
stock are purchased by [p]laintiff, who is
expressly authorized and empowered to
transfer the duly endorsed shares of stock
on the books of the corporation to his own
name; . . . 18 (emphasis supplied)
However, the contracts of pledge, which were made integral
parts of the Complaint, contain this common proviso:
3. In the event of the failure of the
PLEDGOR to pay the amount within a period
of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock
hereby created by selling the same at public
or private sale with or without notice to the
PLEDGOR, at which sale the PLEDGEE
may be the purchaser at his option; and the
PLEDGEE is hereby authorized and
empowered at his option, to transfer the said
shares of stock on the books of the
corporation to his own name and to hold the
certificate issued in lieu thereof under the
terms of this pledge, and to sell the said
shares to issue to him and to apply the
proceeds of the sale to the payment of the
said sum and interest, in the manner
hereinabove provided;
This contractual stipulation, which was part of the Complaint,
shows that plaintiff was merely authorized to foreclose the
pledge upon maturity of the loans, not to own them. Such
foreclosure is not automatic, for it must be done in a public or
private sale. Nowhere did the Complaint mention that petitioner
had in fact foreclosed the pledge and purchased the shares
after such foreclosure. His status as a mere pledgee does not,
under civil law, entitle him to ownership of the subject shares. It
is also noteworthy that petitioner's Complaint did not aver that
said shares were acquired through extraordinary prescription,
novation or laches. Moreover, petitioner's claim, subsequent to
the filing of the Complaint, that he acquired ownership of the
said shares through these three modes is not indubitable and
still has to be resolved. In fact, as will be shown, such
allegation-has no merit. Manifestly, the Complaint by itself did
not contain any prima facie showing that petitioner was the
owner of the shares of stocks. Quite the contrary, it
demonstrated that he was merely a pledgee, not an owner.
Accordingly, it failed to lay down a sufficient basis for the SEC
to exercise jurisdiction over the controversy. In fact, the very
allegations of the Complaint and its annexes negated the
jurisdiction of the SEC.
Petitioner's reliance on the doctrines set forth in Abejo v. De la
Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is
misplaced. In Abejo, he Abejo spouses sold to Telectronic
Systems, Inc. shares of stock in Pocket Bell Philippines, Inc.
Subsequent to such contract of sale, the corporate secretary,
Norberto Braga, refused to record the transfer of the shares in
the corporate books and instead asked for the annulment of
the sale, claiming that he and his wife had a preemptive right
over some of the shares, and that his wife's shares were sold
without consideration or consent.
At the time the Bragas questioned the validity of the sale, the
contract had already been perfected, thereby demonstrating
that Telectronic Systems, Inc. was already the prima
facie owner of the shares and, consequently, a stockholder of
Pocket Bell Philippines, Inc. Even if the sale were to be
annulled later on, Telectronic Systems, Inc. had, in the
meantime, title over the shares from the time the sale was
perfected until the time such sale was annulled. The effects of
an annulment operate prospectively and do not, as a rule,
retroact to the time the sale was made. Therefore, at the time
the Bragas questioned the validity of the tranfers made by the
Abejos, Telectronic Systems, Inc. was already a prima
facie shareholder of the corporation, thus making the dispute
between the Bragas and the Abejos "intra-corporate" in nature.
Hence, the Court held that "the issue is not on ownership of
shares but rather the non-performance by the corporate
41
secretary of the ministerial duty of recording transfers of shares
of stock of the corporation of which he is secretary." 19
Unlike Abejo, however, petitioner's ownership over the shares
in this case was not yet perfected when the Complaint was
filed. The contract of pledge certainly does not make him the
owner of the shares pledged. Further, whether prescription
effectively transferred ownership of the shares, whether there
was a novation of the contracts of pledge, and whether laches
had set in were difficult legal issues, which were unpleaded
and unresolved when herein petitioner asked the corporate
secretary of Go Fay to effect the transfer, in his favor, of the
shares pledged to him.
In Rural Bank of Salinas, Melenia Guerrero executed deeds of
assignment for the shares in favor of the respondents in that
case. When the corporate secretary refused to register the
transfer, an action for mandamus was instituted. Subsequently,
a motion for intervention was filed, seeking the annulment of
the deeds of assignment on the grounds that the same were
fictitious and antedated, and that they were in fact donations
because the considerations therefor were below the book
value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of
Salinas were already prima facie shareholders when the deeds
of assignment were questioned. If the said deeds were to be
annulled later on, respondents would still be considered
shareholders of the corporation from the time of the
assignment until the annulment of such contracts.
Second Issue: Mandamus Will Not
Issue to Establish a Right
Petitioner prays for the issuance of a writ of mandamus,
directing the corporate secretary of respondent corporation to
have the shares transferred to his name in the corporate
books, to issue new certificates of stock and to deliver the
corresponding dividends to him. 20
In order that a writ of mandamus may issue, it is essential that
the person petitioning for the same has a clear legal right to the
thing demanded and that it is the imperative duty of the
respondent to perform the act required. It neither confers
powers nor imposes duties and is never issued in doubtful
cases. It is simply a command to exercise a power already
possessed and to perform a duty already imposed. 21
In the present case, petitioner has failed to establish a clear
legal right. Petitioner's contention that he is the owner of the
said shares is completely without merit. Quite the contrary and
as already shown, he does not have any ownership rights at
all. At the time petitioner instituted his suit at the SEC, his
ownership claim had no prima facie leg to stand on. At best, his
contention was disputable and uncertain Mandamus will not
issue to establish a legal right, but only to enforce one that is
already clearly established.
Without Foreclosure and
Purchase at Auction, Pledgor
Is Not the Owner of Pledged Shares
Petitioner initially argued that ownership of the shares pledged
had passed to him, upon Respondents Sy Guiok and Sy Lim's
failure to pay their respective loans. But on appeal, petitioner
claimed that ownership over the shares had passed to him, not
via the contracts of pledge, but by virtue of prescription and by
respondents' subsequent acts which amounted to a novation of
the contracts of pledge. We do not agree.
At the outset, it must be underscored that petitioner did not
acquire ownership of the shares by virtue of the contracts of
pledge. Article 2112 of the Civil Code states:
The creditor to whom the credit has not been
satisfied in due time, may proceed before a
Notary Public to the sale of the thing
pledged. This sale shall be made at a public
auction, and with notification to the debtor
and the owner of the thing pledged in a
proper case, stating the amount for which
the public sale is to be held. If at the first
auction the thing is not sold, a second one
with the same formalities shall be held; and if
at the second auction there is no sale either,
the creditor may appropriate the thing
pledged. In this case he shall be obliged to
give an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a common
proviso, which we quote again for the sake of clarity:
3. In the event of the failure of the
PLEDGOR to pay the amount within a period
of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock
hereby created by selling the same at public
or private sale with or without notice to the
PLEDGOR, at which sale the PLEDGEE
may be the purchaser at his option; and "the
PLEDGEE is hereby authorized and
empowered at his option to transfer the said
shares of stock on the books of the
corporation to his own name, and to hold the
certificate issued in lieu thereof under the
terms of this pledge, and to sell the said
shares to issue to him and to apply the
proceeds of the sale to the payment of the
said sum and interest, in the manner
hereinabove
provided; 22
There is no showing that petitioner made any attempt to
foreclose or sell the shares through public or private auction,
as stipulated in the contracts of pledge and as required by
Article 2112 of the Civil Code. Therefore, ownership of the
shares could not have passed to him. The pledgor remains the
owner during the pendency of the pledge and prior to
foreclosure and sale, as explicitly provided by Article 2103 of
the same Code:
Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
42
 Nevertheless, the creditor may bring the
actions which pertain to the owner of the
thing pledged in order to recover it from, or
defend it against a third person.
No Ownership
by Prescription
Petitioner's argument is untenable. What is required by Article
1132 is possession in the concept of an owner. In the present
case, petitioner's possession of the stock certificates came
about because they were delivered to him pursuant to the
contracts of pledge. His possession as a pledgee cannot ripen
into ownership by prescription. As aptly pointed out by Justice
Jose C. Vitug:

Petitioner did not acquire the shares by prescription either. The Acquisitive prescription is a mode of
period of prescription of any cause of action is reckoned only acquiring ownership by a possessor through
from the date the cause of action accrued. the requisite lapse of time. In order to ripen
into ownership, possession must be in the
concept of an owner, public, peaceful and
Since a cause of action requires as an essential element not
uninterrupted. Thus, possession with a
only a legal right of the plaintiff and a correlative obligation of
juridical title, such as by a usufructory, a
the defendant, but also an act or omission of the defendant in
trustee, a lessee, agent or a pledgee, not
violation of said legal right, the cause of action does not accrue
being in the concept of an owner, cannot
until the party obligated refuses, expressly or impliedly, to
ripen into ownership by acquisitive
comply with its duty." 23Accordingly, a cause of action on a
prescription unless the juridical relation is
written contract accrues when a breach or violation thereof
first expressly repudiated and such
occurs.
repudiation has been communicated to the
other party. 25
Under the contracts of pledge, private respondents would have
a right to ask for the redelivery of their certificates of stock
Petitioner expressly repudiated the pledge, only when he filed
upon payment of their debts to petitioner, consonant with
his Complaint and claimed that he was not a mere pledgee, but
Article 2105 of the Civil Code, which reads:
that he was already the owner of the shares. Based on the
foregoing, petitioner has not acquired the certificates of stock
The debtor cannot ask for the return of the through extraordinary prescription.
thing pledged against the will of the creditor,
unless and until he has paid the debt and its
No Novation
interest, with expenses in a proper case. 24
in Favor of Petitioner

Thus, the right to recover the shares based on the written

Neither did petitioner acquire the shares by virtue of a novation
contract of pledge between petitioner and respondents would
of the contract of pledge. Novation is defined as "the
arise only upon payment of their respective loans. Therefore,
extinguishment of an obligation by a subsequent one which
the prescriptive period within which to demand the return of the
terminates it, either by changing its object or principal
thing pledged should begin to run only after the payment of the
conditions, by substituting a new debtor in place of the old one,
loan and a demand for the thing has been made, because it is
or by subrogating a third person to the rights of the
only then that respondents acquire a cause of action for the
creditor." 26 Novation of a contract must not be presumed. "In
return of the thing pledged.
the absence of an express agreement, novation takes place
only when the old and the new obligations are incompatible on
Prescription should not begin to run on the action to demand every point." 27
the return of the thing pledged while the loan still exists. This is
because the right to ask for the return of the thing pledged will
In the present case, novation cannot be presumed by (a)
not arise so long as the loan subsists. In the present case, the
respondents' indorsement and delivery of the certificates of
prescriptive period did not begin to run when the loan became
stock covering the 600 shares, (b) petitioner's receipt of
due. On the other hand, it is petitioner's right to demand
dividends from 1980 to 1983, and (c) the fact that respondents
payment that may be in danger of prescription.
have not instituted any action to recover the shares since
1980.
Petitioner contends that he can be deemed to have acquired
ownership over the certificates of stock through extraordinary
Respondents' indorsement and delivery of the certificates of
prescription, as provided for in Article 1132 of the Civil Code
stock were pursuant to paragraph 2 of the contract of pledge
which states:
which reads:

Art. 1132. The ownership of movables

2. The said certificates had been delivered
prescribes through uninterrupted possession
by the PLEDGOR endorsed in blank to be
for four years in good faith.
held by the PLEDGEE under the pledge as
security for the payment of the
The ownership of personal property also aforementioned sum and interest thereon
prescribes through uninterrupted possession accruing. 28
for eight years, without need of any other
condition. . . . .
This stipulation did not effect the transfer of ownership to
petitioner. It was merely in compliance with Article 2093 of the

43
Civil Code, 29 which requires that the thing pledged be placed
in the possession of the creditor or a third person of common
agreement; and Article 2095, 30 which states that if the thing
pledged are shares of stock, then the "instrument proving the
right pledged" must be delivered to the creditor.
Moreover, the fact that respondents allowed the petitioner to
receive dividends pertaining to the shares was not meant to
relinquish ownership thereof. As stated by respondent
corporation, the same was done pursuant to an agreement
between the petitioner and Respondents Sy Guiok and Sy Lim,
following Article 2102 of the civil Code which provides:
It the pledge earns or produces fruits,
income, dividends, or interests, the creditor
shall compensate what he receives with
those which are owing him; but if none are
owing him, or insofar as the amount may
exceed that which is due, he shall apply it to
the principal. Unless there is a stipulation to
the contrary, the pledge shall extend to the
interest and the earnings of the right
pledged.
Novation cannot be inferred from the mere fact that petitioner
has not, since 1980, instituted any action to recover the
shares. Such action is in fact premature, as the loan is still
outstanding. Besides, as already pointed out, novation is never
presumed or inferred.
No Dacion en Pago
in Favor of Petitioner
Neither can there be dacion en pago, in which the certificates
of stock are deemed sold to petitioner, the consideration for
which is the extinguishment of the loans and the accrued
interests thereon. Dacion en pago is a form of novation in
which a change takes place in the object involved in the
original contract. Absent an explicit agreement, petitioner
cannot simply presume dacion en pago.
Laches Not
a Bar to Petitioner
Petitioner submits that "the inaction of the individual
respondents with respect to the recovery of the shares of stock
serves to bar them from asserting rights over said shares on
the basis of laches." 31
Laches has been defined as "the failure or neglect, for an
unreasonable length of time, to do that which by exercising due
diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable
time, warranting a presumption that the party entitled to assert
it either has abandoned it or declined to assert it." 32
In this case, it is in fact petitioner who may be guilty of laches.
Petitioner had all the time to demand payment of the debt.
More important, under the contracts of pledge, petitioner could
have foreclosed the pledges as soon as the loans became
due. But for still unknown or unexplained reasons, he failed to
do so, preferring instead to pursue his baseless claim to
ownership.
WHEREFORE, the petition is hereby DENIED and the assailed
Decision is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 140964 January 16, 2002
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR
SAVINGS BANK and JACINTO D. JIMENEZ, petitioners,
vs.
ROBERT YOUNG, GABRIEL LA'O II, ARTHUR TAN, LOPE
JUBAN, JR., MARIA LOURDES ONGPIN, ANTONIO
ONGPIN, ELSIE DIZON, YOLANDA BAYER, CECILIA VIRAY,
MANUEL VIRAY and JOSE VITO BORROMEO, respondents.
x---------------------------------------------------------x
G.R. No. 142267 January 16, 2002
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR
SAVINGS BANK and JACINTO D. JIMENEZ, petitioners,
vs.
ROBERT YOUNG, GABRIEL LA'O II, ARTHUR TAN, LOPE
JUBAN, JR., MARIA LOURDES ONGPIN, ANTONIO
ONGPIN, ELSIE DIZON, YOLANDA BAYER, CECILIA VIRAY,
MANUEL VIRAY and JOSE VITO BORROMEO, COURT OF
APPEALS and DEPUTY SHERIFF RUBEN
NEQUINTO, respondents.
SANDOVAL-GUTIERREZ, J.:
Before this Court are two (2) consolidated petitions, the first,
docketed as G.R. No. 140964, is a petition for review
on certiorari1 of the Decision of the Court of Appeals dated
September 22, 1999 in CA-G.R. CV No. 54264 reversing the
Decision of the Regional Trial Court, Branch 142, Makati City in
Civil Case No. 92-049. The other, G. R. No. 142267, is a
petition for certiorari,2 assailing the Resolution dated March 10,
2000 of the Court of Appeals (in the same civil case) which
granted private respondents' motion for execution pending
appeal.
The undisputed facts are:
In December, 1987, respondent Robert Young, together with
his associates and co-respondents, namely: Gabriel La'O II,
Arthur Tan, Lope Juban, Jr., Maria Lourdes Ongpin, Antonio
Ongpin, Elsie Dizon, Yolanda Bayer, Cecilia Viray, Manuel
Viray and Jose Vito Borromeo, acquired by purchase Home
Bankers Savings and Trust Co., now petitioner Insular Savings
Bank ("the Bank," for brevity), from the Licaros family
for P65,000,000.00. Young and his group obtained 55% equity
in the Bank, while Jorge Go and his group owned the
remaining 45%.
44
Subsequently, the Bank granted respondents and others
individual loans in the total amount of P153,000,000.00,
secured by promissory notes.3
On December, 1990, Benito Araneta, a stockholder of the
Bank, signified his intention to purchase 99.82% of its
outstanding capital stock for P340,000,000.00, subject to the
condition that the ownership of all the shares will be
consolidated in Young's name. On February 5, 1991, Araneta
paid Young P14,000,000.00 as part of the downpayment.4
In order to carry out the intended sale to Araneta, Young
bought from Jorge Go and his group their 45% equity in the
Bank for P153,000,000.00. In order to pay this amount, Young
obtained a short-term loan of P170,000,000.00 from
International Corporate Bank ("Interbank") to finance the
purchase.
However, Araneta backed out from the intended sale and
demanded the return of his downpayment.
Meanwhile, Young's loan from Interbank became due, causing
his serious financial problem. Consequently, he engaged the
services of Asian Oceanic Investment House, Inc. ("Asian
Oceanic"), a domestic company owned and controlled by
another petitioner, Insular Life Assurance Co., Ltd. ("Insular
Life"), to look for possible sources of capital.
On August 27, 1991, through the intervention of Asian Oceanic,
Young and Insular Life entered into a Credit Agreement. 5 Under
its provisions, Insular Life extended a loan to Young in the
amount of P200,000,000.00. To secure the loan, Young, acting
in his behalf and as attorney-in-fact of the other stockholders,
executed on the same day a Deed of Pledge 6 over 1,324,864
shares which represented 99.82% of the outstanding capital
stock of the Bank. The next day, he also executed a
promissory note7 in favor of Insular Life in the same amount
with an interest rate of 26% per annum to mature 120 days
from execution. The Credit Agreement further provides that
Insular Life shall have the prior right to purchase the Schedule
I Shares (owned by Young) and the Schedule II Shares (owned
by the other stockholders of the Bank), as well as the 250,000
shares which will be issued after the additional capital
of P25,000,000.00 (payable from the proceeds of the loan)
shall have been infused.
On October 1, 1991, Insular Life and Insular Life Pension Fund
formally informed Young of their intention to acquire 30% and
12%, respectively, of the Bank's outstanding shares, subject to
due diligence audit and proper documentation.8 On October 9,
1991, Insular Life and Young, authorized to represent the other
stockholders, entered into a Memorandum of Agreement
(MOA),9 wherein Insular Life and its Pension Fund agreed to
purchase 830,860 common shares and 311,572 common
shares, respectively, for a total consideration
of P198,000,000.00. Under its terms, the MOA is subject to
Young's representations and warranties10 that, as of September
30, 1991, the Bank has (a) a total outstanding paid-in capital
of P157,714,900.00, (b) a total net worth of P114,801,539.00,
and (c) total loans with doubtful recovery of P60,000,000.00.
The MOA is also subject to these "condition precedents": 11 (1)
Young shall infuse additional capital of P50,000,000.00 into the
Bank, and (2) Insular Life and its Pension Fund shall undertake
a due diligence audit on the Bank to determine whether the
provision for P60,000,000.00 doubtful account made by Young
is sufficient.
On October 11, 1991, Insular Life, through a team of auditors
led by Mr. Wilfrido Patawaran, conducted a due diligence audit
on the Bank pursuant to the MOA. The audit revealed several
check-kiting operations which amounted to P340,000,000.00.
As a result, the Bank's Board of Directors was convened to
discuss this matter.
On October 17, 1991, a special meeting of the Bank's directors
was held. Chief Executive Officer Antonino L. Alindogan, Jr.
reported to the Board the initial findings of the audit team about
the irregularities in the Bank's "kiting operations." When asked
to explain these anomalies, Young, who was then the Bank's
President, assumed responsibility since it happened during his
incumbency. Thereupon, he offered, among others, to the Bank
the 45% of his holdings as security. He admitted that he has
compromised the interest of the Bank and thus tendered his
resignation. The Board deferred its acceptance.12
On October 21, 1991, Young signed a letter13 prepared by Atty.
Jacinto Jimenez, counsel of Insular Life, addressed to Mr.
Vicente R. Ayllon, Chairman of the Bank's Board of Directors,
stating that due to business reverses, he shall not be able to
pay his obligations under the Credit Agreement between him
and Insular Life. Consequently, Young "unconditionally and
irrevocably waive(s) the benefit of the period" of the loan (up to
December 26, 1991) and Insular "may consider (his)
obligations thereunder as defaulted." He likewise interposes no
objection to Insular Life's exercise of its rights under the said
agreement.
Forthwith, Insular Life instructed its counsel to foreclose the
pledge constituted upon the shares. The latter then sent Young
a notice informing him of the sale of the shares in a public
auction scheduled on October 28, 1991, and in the event that
the shares are not sold, a second auction sale shall be held the
next day, October 29.
On October 28, 1991, only Insular Life submitted a bid, hence,
the shares were not sold on that day. The next day, a second
auction was held. Again, Insular Life was the sole bidder. Since
the shares were not sold at the two public auctions, Insular Life
appropriated to itself, not only the original 1,324,864 shares,
but also the 250,000 shares subsequently issued by the Bank
and delivered to Insular Life by way of pledge. Thus, Insular
Life gave Young an acquittance of his entire claim.14
Thereafter, title to the said shares was consolidated in the
name of Insular Life. On November 12, 1991, the Bangko
Sentral ng Pilipinas' Supervision and Examination Sector
approved Insular Life's request to maintain its present
ownership of 99.82% of the Bank.15
From October 31, 1991 to December 27, 1991, Insular Life
invested a total of P325,000,000.00 in the Bank. Meanwhile,
on November 27, 1991, its Board of Directors, during its
meeting, accepted the resignation of Young as President.16
On January 7, 1992, Young and his associates filed with the
Regional Trial Court (RTC), Branch 142, Makati City, a
45
complaint17 against the Bank, Insular Life and its counsel, Atty.
Jacinto Jimenez, petitioners, for annulment of notarial sale,
specific performance and damages, docketed as Civil Case
No. 92-049. The complaint alleges, inter alia, that the notarial
sale conducted by petitioner Atty. Jacinto Jimenez is void as it
does not comply with the requirement of notice of the second
auction sale; that Young was forced by the officers of Insular
Life to sign letters to enable them to have control of the Bank;
that under the MOA, Insular Life should apply the purchase
price of P198,000,000.00 (corresponding to the 55% of the
outstanding capital stock of the Bank) to Young's loan
of P200,000,000.00 and pay the latter P162,000,000.00,
representing the remaining 45% of its outstanding capital
stock, which must be set-off against the loans of the other
respondents.
Petitioners filed their answer18 with counterclaim against
Young, Gabriel La'O II, Arthur Tan, Lope Juban, Jr., Antonio
Ongpin, Elsie Dizon, Yolanda Bayer and Manuel Viray,
respondents herein. Except for Young, none of the
respondents answered the counterclaim, hence, the RTC
declared them in default.
On May 10, 1995, the RTC rendered a Decision, 19 dismissing
the complaint, ordering the respondents to pay the Bank their
respective loans with interest at the rate of 30% per annum
and monthly penalty interest of 3% from the date they are due
until fully paid and dismissing petitioners' counterclaim against
Young, thus:
"Judgment is therefore rendered as follows:
1. Dismissing the complaint; and
2. Ordering the plaintiffs jointly and severally to
reimburse to the defendants the sum of P300,000.00
as attorney's fees and cost of litigation;
ON THE COUNTERCLAIMS:
Judgment is hereby rendered in favor of
counterplaintiff HOME as follows:
1. Ordering GABRIEL LA'O II to pay HOME the
following amounts:
a. the sum of P4 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from June 17, 1991 until fully
paid;
b. the sum of P6 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from September 10, 1991 until
fully paid;
c. the sum of P500,000.00 with interest at
the rate of 30% per annum and monthly
penalty interest at 3% from September 12,
1991 until fully paid;
2. Ordering ARTHUR TAN to pay to HOME the sum of
P4.2 Million with interest at the rate of 30% per
annum and monthly penalty interest at 3% from July
4, 1991 until fully paid;
3. Ordering LOPE JUBAN, JR., to pay to HOME the
sum of P3 Million with interest at the rate of 29% per
annum from May 27, 1991 to August 25, 1991, and
30% per annum from August 26, 1991 and monthly
penalty interest at 3% from May 27, 1991 until fully
paid;
4. Ordering ANTONIO ONGPIN to pay to HOME the
following amounts:
a. the sum of P445,000.00 with interest at
the rate of 32% per annum from May 25,
1991 to August 29, 1991, and 29% per
annum from August 30, 1991, and monthly
penalty interest at 3% from May 25, 1991
until fully paid;
b. the sum of P1 Million with interest at the
rate of 32% a month from May 4, 1991 to
August 29, 1991, and 29% per annum from
August 30, 1991, and monthly penalty
interest at 3% from May 4, 1991 until fully
paid;
c. the sum of P550,000.00 with interest at
the rate of 32% per annum from May 21,
1991 to August 29, 1991, and 29% per
annum from August 30, 1991 and monthly
penalty interest at 3% from May 21, 1991
until fully paid;
d. the sum of P5 Million with interest at the
rate of 32% per annum from May 16, 1991 to
August 29, 1991, and 29% per annum from
August 30, 1991 and monthly penalty
interest at 3% from May 16, 1991 until fully
paid;
e. the sum of P705,000.00 with interest at
the rate of 32% per annum from May 4, 1991
to August 29, 1991, and 29% per annum
from May 4, 1991 and monthly penalty
interest at 3% from May 4, 1991 until fully
paid;
5. Ordering ELSIE DIZON to pay to HOME the
following amounts:
a. the sum of P2 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from June 17, 1991 until fully
paid; and
b. the sum of P7.4 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from September 10, 1991 until
fully paid;
46
 6. Ordering YOLANDA BAYER to pay to HOME the
following amounts:
a. the sum of P1 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from June 17, 1991 until fully
paid; and
b. the sum of P6.9 Million with interest at the
rate of 30% per annum and monthly penalty
interest at 3% from September 10, 1991 until
fully paid;
7. Ordering MANUEL VIRAY to pay to HOME the sum
of P8.7 Million with interest at the rate of 29% per
annum from May 29, 1991 to August 26, 1991, and
30% per annum from August 27, 1991, and monthly
penalty interest at 3% from May 29, 1991 until fully
paid;
8. Ordering the above counter defendants jointly and
severally to pay to the counterplaintiff the some
of P500,000.00 as attorney's fees and cost of
litigation.
The counterclaim against YOUNG is dismissed for
lack of merit."20
Aggrieved by the RTC Decision, respondents appealed to the
Court of Appeals.
On September 22, 1999, the Court of Appeals rendered
judgment21 reversing the RTC Decision, the dispositive portion
of which reads:
"PREMISES CONSIDERED, the decision appealed
from is hereby REVERSED and SET ASIDE, and a
new one entered thereby:
1. Declaring the Credit Agreement dated August 27,
1991 and the Memorandum of Agreement dated
October 9, 1991 valid and binding between the
parties;
2. Declaring the 'delinquent' accounts of borrowers
Lope Juben, Elsie Dizon, Arthur Tan, Gabriel La' O,
Yolanda Bayer, Antonio Ongpin and Jose Vito
Borromeo as fully paid;
3. Ordering the defendant Insular Life to pay the
appellant Robert T. Young the amount of One
Hundred Sixty Two Million Pesos (P162,000,000.00)
representing the money value of 45% of the
shareholdings of Home Bankers Savings and Trust
Co., Inc.;
4. Ordering the appellee Insular Life Assurance Co.,
Ltd. to pay appellant Robert T. Young moral damages
in the amount of Five Million Pesos (P5,000,000.00);
and
5. Ordering the appellees to pay attorney's fees of
One Million Five Hundred Thousand Pesos
(P1,500,000.00) and the costs of the suit.
SO ORDERED."22
On October 14, 1999, petitioners filed a motion for
reconsideration, while respondents filed a motion for execution
pending appeal.
On December 1, 1999, the Court of Appeals issued a
Resolution23 denying petitioners' motion for reconsideration for
lack of merit, prompting them to file the instant petition for
review on certiorari (G. R. No. 140964).
On March 10, 2000, the Court of Appeals issued a
Resolution24 granting respondents' motion for execution
pending appeal. Forthwith, petitioners filed the instant petition
for certiorari (G. R. No. 142267).
On March 27, 2000, we issued a Resolution 25 ordering the
consolidation of the two petitions and directing the parties "to
maintain the STATUS QUO before the assailed (CA)
Resolution of March 10, 2000 was issued, until further orders
from this Court."
In G.R. No. 140964, petitioners ascribe to the Court of Appeals
the following errors:
1. In declaring the MOA dated October 9, 1991 valid and
enforceable between the parties despite respondent Young's
failure to comply with the terms and conditions thereof;
2. In holding that the foreclosure of the pledge held on October
29, 1992 is void; and
3. In awarding moral damages and attorney's fees in favor of
respondent Robert Young.
In G.R. No. 142267, petitioners allege that the Court of
Appeals acted with grave abuse of discretion in granting
respondent Young's motion for execution pending appeal.26
Petitioners contend that the MOA executed on October 9, 1991
is not enforceable considering that Robert Young committed
fraud, misrepresented the warranties and failed to comply with
his obligations. Hence, the Court of Appeals erred when it held
that the MOA is valid and ordered petitioners to pay for the
shares covered by the same.
In their comment, respondents simply contend that since the
MOA was prepared by counsel of petitioner Insular Life and
duly signed by them, they cannot now impugn the same and
avoid compliance with their obligations specified therein.
The Court of Appeals, in reversing the Decision of the RTC,
ruled that the MOA is binding between the parties as it was not
validly rescinded. In exercising its option to rescind the MOA,
Insular Life failed to notify Young pursuant to Article 1599 of the
Civil Code.27 Hence, the MOA is enforceable against the
parties thereto. The Appellate Court then concluded that
47
Young's loan with Insular Life is deemed fully paid based on
the representation and warranty in the MOA that "the entire
proceeds of the sale shall be used to pay off the outstanding
debt of Robert T. Young to Insular Life."
In other words, the Court of Appeals construed the MOA as
a contract of sale since it applied Article 1599 of the Civil
Code which pertains to cases where there is a breach of
warranty.1wphi1.nt
We disagree.
The Memorandum of Agreement pertinently provides:
"1. Insular Life and the Pension Fund hereby agree to
purchase from the Vendor and the Vendor agrees to
convey, transfer, assign EIGHT HUNDRED THIRTY
THOUSAND EIGHT HUNDRED SIXTY (830,860)
Common Shares and THREE HUNDRED ELEVEN
THOUSAND FIVE HUNDRED SEVENTY TWO
(311,572) Common Shares of Home Bankers Savings
and Trust Co., respectively, Insular Life and the
Pension Fund, or to such person designated by
Insular Life or the Pension Fund, for a total
consideration of ONE HUNDRED NINETY-EIGHT
MILLION PESOS (P198,000,000.00), subject to the
following terms and conditions and
representations and warranties made by the
Vendor:
A. REPRESENTATION AND WARRANTIES:
1. As of September 30, 1991, the total outstanding
paid in capital of the bank is ONE HUNDRED FIFTY
SEVEN MILLION SEVEN HUNDRED FOURTEEN
THOUSAND NINE HUNDRED PESOS
(P157,714,900.00),
2. As of September 30, 1991, the total net worth of the
bank is ONE HUNDRED FOURTEEN MILLION
EIGHT HUNDRED ONE THOUSAND FIVE
HUNDRED THIRTY NINE PESOS (P114,801,593.00),
3. As of September 30, 1991, the total loans with
doubtful recovery amounted to SIXTY MILLION
PESOS (P60,000,000.00), which includes the loans
with doubtful recovery contained in the May 1991
findings of the Central Bank and an additional
provision for certain loan accounts identified and
listed by Robert T. Young,
4. The entire proceeds of the sale shall be used to
pay off the outstanding debt of Robert T. Young to
Insular Life.
B. CONDITION PRECEDENTS:
Upon the signing of this Agreement and prior to the
execution of a Deed of Sale by the parties, the
following events shall occur:
1. The Vendor shall infuse an additional capital of
FIFTY MILLION PESOS (P50,000,000.00) into the
Bank,
2. The Vendee shall undertake a due diligence
audit on the bank for a period not exceeding 60
days from the date of the signing of this
Agreement, and the audit shall be undertaken to
determine that the provision for SIXTY MILLION
PESOS (P60,000,000.00) for doubtful account is
sufficient,
3. After signing of this Agreement and during the 60
days due diligence audit of the Vendee, as mentioned
in No. 2, the Vendor shall endorse and deliver the
stock certificates representing TWENTY FIVE (25%)
percent of the total outstanding capital stock of the
bank to the Vendee, the stock certificates shall be
returned to the Vendor at the end of the 60 days due
diligence audit and after the Vendee is satisfied that
the provision of SIXTY MILLION PESOS
(P60,000,000.00) for doubtful accounts is
sufficient."28 (Emphasis ours)
Contrary to the findings of the Court of Appeals, the foregoing
provisions of the MOA negate the existence of a perfected
contract of sale. The MOA is merely a contract to sell since
the parties therein specifically undertook to enter into a
contract of sale if the stipulated conditions are met and the
representation and warranties given by Young prove to be
true. The obligation of petitioner Insular Life to purchase, as
well as the concomitant obligation of Young to convey to it the
shares, are subject to the fulfillment of the conditions contained
in the MOA. Once the conditions, representation and
warranties are satisfied, then it is incumbent upon the parties
to perform their respective obligations under the contract.
Conversely, in the event that these conditions are not met or
complied with, no obligation on the part of either party arises.
This is in accord with Article 1181 of the Civil Code which
provides that "(i)n conditional obligations, the acquisition of
rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which
constitutes the condition." And when the obligation assumed by
a party to a contract is expressly subjected to a condition, the
obligation cannot be enforced against him unless the condition
is complied with.29
Here, the MOA provides that Young shall infuse additional
capital of P50,000,000.00 into the Bank. It likewise specifies
the warranty given by Young that the doubtful accounts of
petitioner Bank amounted to P60,000,000.00 only. However,
records show that Young failed to infuse the required additional
capital. Moreover, the due diligence audit shows that Young
was involved in fraudulent schemes like check-kiting 30 which
amounted to a staggering P344,000,000.00. This belies his
representation that the doubtful accounts of petitioner Bank
amounted only to P60,000,000.00. As a result of these
anomalous transactions, the reserves of the Bank were
depleted and it had to undergo a ten-year rehabilitation plan
under the supervision of the Central Bank.
Significantly, respondents do not dispute petitioners' assertion
that Young committed fraud, misrepresented the warranties
48
and failed to comply with his obligations under the MOA.
Accordingly, no right in favor of Young's arose and no
obligation on the part of Insular Life was created.31 In Mortel
vs. Kassco, Inc.,32 this Court held:
"In contracts subject to a suspensive condition, the
birth or effectivity of such contracts only takes place if
and when the event constituting the condition
happens or is fulfilled, and if the suspensive condition
does not take place or is not fulfilled, the parties
would stand as if the conditional obligation had
never existed."
Since no sale transpired between the parties, the Court of
Appeals erred in concluding that Insular Life purchased 55% of
the total shares of the Bank under the MOA. Consequently, its
findings that the debt of Young has been fully paid and that
Insular Life is liable to pay for the remaining 45% equity have
no basis. It must be emphasized that the MOA did not convey
title of the shares to Insular Life. If ever there was delivery of
the said shares to Insular Life, it was because they were
pledged by Young to Insular Life under the Credit Agreement.
It would be unfair on the part of Young to demand compliance
by Insular Life of its obligations when he himself was remiss in
his own. Neither can he feign ignorance of the stipulation in the
MOA since it is presumed that he read the same and was
satisfied with its provisions before he affixed his signature
therein. The fact that no deed of sale was subsequently
executed by the parties confirms the conclusion that no sale
transpired between them.
Notably, the Deed of Pledge which secured the Credit
Agreement between the parties, covered not only 1,324,864
shares which then constituted 99.82% of the total outstanding
shares of petitioner Bank, but also the 250,000 shares
subsequently issued. Consequently, when Young waived in his
letter the period granted him under the said agreement and
manifested his inability to pay his obligation (which waiver has
been declared by the RTC and the CA to be valid), the loan
extended by petitioner Insular Life became due and
demandable.33 Definitely, petitioners merely exercised the right
granted to them under the law, which is to foreclose the pledge
constituted on the shares, in satisfaction of respondent Young's
loan.1wphi1.nt
The Court of Appeals also erred in declaring that the auction
sale is void since petitioners failed to send a separate notice
for the second auction.
Article 2112 of the Civil Code provides:
"The creditor to whom the credit has not been
satisfied in due time, may proceed before a Notary
Public for the sale of the thing pledged. The sale shall
be made at a public auction, and with notification to
the debtor and the owner of the thing pledged in a
proper case, stating the amount for which the public
sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be
held; and if at the second auction there is no sale
either, the creditor may appropriate the thing pledged.
In this case he shall be obliged to give an acquittance
for his entire claim."
Clearly, there is no prohibition contained in the law against the
sending of one notice for the first and second public auction as
was done here by petitioner Insular Life. The purpose of the
law in requiring notice is to sufficiently apprise the debtor and
the pledgor that the thing pledged to secure payment of the
loan will be sold in a public auction and the proceeds thereof
shall be applied to satisfy the debt. When petitioner Insular Life
sent a notice to Young informing him of the public auction
scheduled on October 28, 1991, and a second auction on the
next day, October 29, in the event that the shares are not sold
on the first auction, the purpose of the law was achieved. We
thus reject respondents' argument that the term "second one"
refers to a separate notice which requires the same formalities
as the first notice.
Petitioners contend that the Court of Appeals likewise erred
when it declared in the fallo of its decision that the unpaid
accounts of the other respondents have been fully paid. There
is no showing how the Appellate Court reached such
conclusion. In doing so, the Court of Appeals violated the
constitutional mandate that "(n)o decision shall be rendered by
any court without expressing clearly and distinctly the facts and
the law on which it is based."34 Indeed, due process demands
that the parties to a litigation be informed of how it was decided
with an explanation of the factual and legal reasons that led to
the conclusions of the court.35 It must be observed that those
respondents did not contest petitioners' counterclaim against
them.
On the issue of damages, we find the Court of Appeals' award
of moral damages of P5,000,000.00 and attorney's fees
of P1,500,000.00 to respondents without any basis. Under
Article 2220 of the Civil Code, moral damages may be
awarded in breach of contracts where the defendant acted
fraudulently or in bad faith. Contrary to the finding of the Court
of Appeals, we find no such breach committed by petitioners,
much less any badge of fraud or bad faith on their part. It must
be stressed that moral damages are emphatically not intended
to enrich a plaintiff at the expense of the
defendant.36 Attorney's fees are not automatically awarded to
every winning litigant.37 It must be shown that any of the
instances enumerated under Art. 2208 of the Civil Code exists
to justify the award thereof.38Not one of such instances exists
here. Surprisingly, the Court of Appeals awarded the excessive
amounts of P5,000,000.00 as moral damages
and P1,500,000.00 as attorney's fees to respondents.
We now come to the issue of whether or not the Court of
Appeals committed grave abuse of discretion when it ordered
the execution of its own judgment, thus:
49
 "It can not be denied that the plaintiffs-appellants, who
are stockholders of Home, have long been deprived
of their rights as such stockholders. It has been
almost a decade since their cause of action accrued.
And to this day, no immediate relief is still in sight. On
the contrary, with Insular Life practically controlling the
fate of Home, redress may become all but nugatory.
This is the very line of reasoning this Court has
adopted in rendering its main decision. There has
been an unjust enrichment on the part of the
defendants-appellees, all to the injury and humiliation
of the plaintiffs-appellants are denied what is properly
theirs, the injury will be a continued one.
"This, we believe, is good reason enough to grant the
plaintiffs'-appellants' motion. Good reasons consist of
compelling circumstances justifying the immediate
execution lest judgment becomes illusory, or the
prevailing party may after the lapse of time become
unable to enjoy it, considering the tactics of the
adverse party who may apparently have no case
except to delay.
"The allegation by the defendants-appellees that the
plaintiff-appellant Young is a fugitive from justice
deserves scant consideration from this Court. It is a
personal attack on an adverse party that is completely
uncalled for and has no bearing whatsoever in the
present case. And even if the same is true, it is not
difficult to see that the present predicament Young
now finds himself in stemmed from the unfair, nay,
unlawful treatment he has received from the
defendants-appellees. That Young now has very little
assets should not come as a surprise to the
defendants-appellees; through their own
machinations they deprived him of the same. To now
hold the plight of Young against himself would be to
and insult to injury, especially if one is to consider that
the latter's situation was brought about by the same
party who now opposes the claim for immediate relief.
"With the grant of the instant motion, plaintiff-appellant
Young may once again reclaim his rightful place in
society, before he sinks deeper into the mire in which
he, according to the defendants-appellees, may now
be in. Contrary to the defendants'-appellees'
contentions, it is, in fact, another reason to extend our
favorable consideration to the motion. It is the least
we can do.
x x x
"In fine, it is this Court's considered opinion that the
combination of all the foregoing facts, and the
plaintiffs'-appellants' readiness and willingness to post
the requisite bond, constitute sufficient grounds to
grant immediate relief."39
We reject the Court of Appeal's ratiocination. The ruling of this
Court in Heirs of the Late Justice Jose B. L. Reyes vs. Court of
Appeals40 is instructive on this point:
"One final word. It was bad enough that the Court of
Appeals erred in ruling that the lease contract must be
judicially rescinded before respondent MMB, Inc. may
be evicted from the premises. It was worse that the
Court of Appeals immediately enforced its
decision pending appeal restoring respondent in
possession of the leased premises and worst,
appointed a special sheriff to carry out the writ of
execution. In the first place, we emphatically rule
that the Court of Appeals has no authority to
issue immediate execution pending appeal of its
own decision. Discretionary execution under Rule
29, Section 2 (a), 1997 Rules of Civil Procedure, as
amended, is allowed pending appeal of a judgment
or final order of the trial court, upon good reasons
to be stated in a special order after due hearing. A
judgment of the Court of Appeals cannot be
executed pending appeal. Once final and
executory, the judgment must be remanded to the
lower court, where a motion for its execution may
be filed only after its entry. In other words, before
its finality, the judgment cannot be executed.
There can be no discretionary execution of a
decision of the Court of Appeals. x x x."
We therefore rule that the Court of Appeals committed grave
abuse of discretion when it granted respondents' motion for
execution pending appeal.
WHEREFORE, the petitions are GRANTED. In G.R. No.
140964, the assailed Decision dated September 22, 1999 and
the Resolution dated December 1, 1999 issued by the Court of
Appeals in CA G.R. CV No. 54264 are REVERSED and SET
ASIDE.
In G.R. No. 142267, the Resolution dated March 10, 2000
issued by the Court of Appeals granting respondents' motion
for execution is declared VOID.
The Decision dated March 10, 1995 of the Regional Trial
Court, Branch 42, Makati City, in Civil Case No. 92-049,
is REINSTATED. Costs against respondents.
SO ORDERED.
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
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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.
51
WHEREFORE, the decision under appeal is modified and the respect the decision of the Court below is affirmed. No costs.
defendant absolved from the complaint, except as to his So ordered.
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

52