Development Bank of the Philippines vs.
Court of Appeals Issues:
(284 SCRA 14)
Facts:
Private respondent Lydia Cuba is a grantee of a fishpond lease
agreement from the Government. She later obtained a loan from
DBP in the amounts of P109, 000, P109, 000, and P98, 700 under
the terms stated in the three promissory notes. As a security for the
said loan Cuba executed a two Deed of Assignment of her
Leasehold Rights. Then she failed to pay her loan when it became
due in accordance with the terms of the promissory notes. DBP in
turn appropriated the leasehold rights of Cuba over the fishpond,
without foreclosure proceedings, whether judicial or extrajudicial.
After appropriating the said leasehold rights DBP executed a Deed of
Conditional Sale of the Leasehold Rights in favor of respondent
Cuba over the same fishpond, to which Cuba agreed. Respondent
Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale, however she was able enter with DBP a temporary
arrangement with DBP for the Deferment Notarial Rescission of
Deed of Conditional Sale. However, a Notice of Rescission thru
Notarial Act was sent the DBP to Cuba, then it took possession of
the fishpond in question. After it took possession of the said
fishpond, DBP disposed the property in favor of Agripina Caperal
through a deed of conditional sale. Then a new fishpond lease
agreement was awarded by the Government to Caperal.
Lydia Cuba filed an action with the Regional Trial Court of
Pangasinan for the declaration of nullity of DBPs appropriation of
her leaseholds over the subject fishpond, for the annulment of the
Deed of Conditional Sale executed in her favor by DBP, the
annulment of DBPs sale of the fishpond to Caperal, and the
restoration of her rights over the said fishpond and for damages. The
RTC ruled in favor of Cuba, declaring that DBPs taking possession
and ownership of the subject property without foreclosure was
violative of Art. 2088 of the Civil Code, and that condition No. 12 of
the Assignment of the Leasehold Rights was void for being a clear
case of pactum commissorium.
Both Cuba and DBP elevated the case to the CA, with Cuba seeking
an increase in the amount of damages, while DBP questioned the
findings of fact and law of the RTC. The CA reversed the ruling of the
RTC with regards to the validity of the acts of DBP.
1. Whether or not the two Deed of Assignment executed by
Cuba in favor of DBP would operate as a mortgage or some
other contract.
2. Whether or not condition No. 12 of the Assignment of the
Leasehold Rights would operate as case of pactum
commissorium
3. Whether the act of DBP in appropriating to itself Cubas
leasehold rights over the fishpond in question without
foreclosure proceeding was contrary to Article 2088 of the
Civil Code, and therefore, invalid.
Held:
1. Lydia executed the 2 Deeds of Assignment as a security for
the loans that she obtained from DBP, according the case of
Peoples Bank and Trust Co. vs. Odom an assignment to
guaranty an obligation is in effect a mortgage. And it was
also indicated in the provisions of the promissory note
executed by Cuba, that the her assigned leasehold rights
were referred to as mortgaged properties and the instrument
itself a mortgage contract.
2&3. The act of DBP under condition No. 12 of the Assignment
of Leasehold Rights did not constitute as a case of pactum
commissorium, when appropriated for itself Cubas leasehold
rights over the subject fishpond, because condition No. 12 only
gave DBP the authority to sell the said property and use the
proceeds of the sale to satisfy Cubas obligation, it did not
operate as an automatic transfer of ownership of the said
property to DBP.
However, DBP exceeded its authority granted under condition
No. 12, when it appropriated for itself such rights without judicial
or extrajudicial foreclosure, thereby making his acts violative of
Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the
payment of a debt.
 Natalia Bustamante vs Rodito and Norma Rosel [G. R. No.
126800. November 29, 1999] 319 SCRA 413 Case Digest
Natalia Bustamante vs Rodito and Norma Rosel
Concept:
Article 1245. Dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law on sales.
Facts:
March 8, 1987. Norma Rosel entered in a loan agreement with
Natalia Bustamante with the conditions:
1. That the borrowers are the registered owners of a parcel
of land, evidenced by TRANSFER CERTIFICA TE OF TITLE No.
80667, containing an area of FOUR HUNDRED TWENTY THREE
(423) SQUARE Meters, more or less, situated along Congressional
Avenue.
2. That the borrowers were desirous to borrow the sum of
ONE HUNDRED THOUSAND (P100,000.00) PESOS from the
LENDER, for a period of two (2) years, counted from March 1, 1987,
with an interest of EIGHTEEN (18%) PERCENT per annum, and to
guaranty the payment thereof, they are putting as a collateral
SEVENTY (70) SQUARE METERS portion, inclusive of the
apartment therein, of the aforestated parcel of land, however, in the
event the borrowers fail to pay, the lender has the option to buy or
purchase the collateral for a total consideration of TWO HUNDRED
THOUSAND (P200,000.00) PESOS, inclusive of the borrowed
amount and interest therein;
3. That the lender do hereby manifest her agreement and
conformity to the preceding paragraph, while the borrowers do
hereby confess receipt of the borrowed amount.
When the loan was about to mature the respondent proposed to buy the
land for P200,000 but the petitioner refused and offered another
residential lot at road. 20 project 8, quezon city. Respondent
accepted the lot. The Respondents were not the owner but entitled
as Land developers
March 1, 1989. Petitioner tendered payment for the loan but the
respondent refused insisting that the former sign the document as
deed of absolute sale of the collateral
Respondent filed a complaint and sent a letter asking the
petitioner to sell the collateral pursuant to the loan agreement
March 5, 1990. Petitioner filed a petition for consignation and
deposited the amount of P153,000 with the City Treasurer of Quezon
City. Petitioner refused the sell the collateral and the respondent
cosigned the amount of P47,500 with the trial court. In arriving at the
amount deposited, respondents considered the principal loan of
P100,000.00 and 18% interest per annum thereon, which amounted
to P52,500.00. The principal loan and the interest taken together
amounted to P152,500.00, leaving a balance of P47,500.00
The trial court ruled in favor of the petitioner and denied the prayer
of the respondents in the execution of the deed of sale
Court of Appeals reversed the decision of the trial court
The SC found no error in the decision of the trial court, petitioner
asked for a reconsideration. Respondent filed an opposition against
petitioners motion for reconsideration. They contend that the
agreement between the parties was not a sale with right of re-
purchase, but a loan with interest at 18% per annum for a period of
two years and if petitioner fails to pay, the respondent was given the
right to purchase the property or apartment for P200,000.00, which is
not contrary to law, morals, good customs, public order or public
policy.
Issue: W/ON the petitioner failed to pay the loan at its maturity and is
the stipulation in the loan contract valid
Held: No. The respondents refused to accept payment, petitioner
consigned the amount with the trial court. We note the eagerness of
respondents to acquire the property given as collateral to guarantee
the loan. The sale of the collateral is an obligation with a suspensive
condition. It is dependent upon the happening of an event, without
which the obligation to sell does not arise. Since the event did not
occur, respondents do not have the right to demand fulfillment of
petitioners obligation, especially where the same would not only be
disadvantageous to petitioner but would also unjustly enrich
respondents considering the inadequate consideration
(P200,000.00) for a 70 square meter property situated at
Congressional Avenue, Quezon City.
No, The SC said that the stipulation is void. the intent of the creditor
appears to be evident,for the debtor is obliged to dispose of the
collateral at the preagreed consideration amounting to practically the
same amount
as the loan. In effect, the creditor acquires the collateral in the event
of non-payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.
SPOUSES WILFREDO N. ONG AND EDNA SHEILA PAGUIO-
ONG v. ROBAN LENDING CORPORATION
557 SCRA 516 (2008)
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
On various dates, petitioner Spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from respondent Roban
Lending Corporation in the total amount of P4, 000,000. These loans
were secured by real estate mortgage on Spouses Ongs parcel of
lands.
Later Spouses Ong and Roban executed several agreements an
amendment to the amended Real Estate Mortgage which
consolidated their loans amounting to P5, 916,117.50; dacion in
payment wherein spouses Ong assigned their mortgaged properties
to Roban to settle their total obligation and Memorandum of
Agreement (MOA) in which the dacion in payment agreement will be
automatically enforced in case spouses Ong fail to pay within one
year from the execution of the agreement.
Spouses Ong filed a complaint before Regional Trial Court of Tarlac
City to declare the mortgage contract, dacion in payment agreement,
and MOA void. Spouses Ong allege that the dacion in payment
agreement is pactum commissorium, and therefore void. In its
Answer with counterclaim, Roban alleged that the dacion in payment
agreement is valid because it is a special form of payment
recognized under Article 1245 of the Civil Code. RTC ruled in favor
of Roban, finding that there was no pactum commissorium.
The Court of Appeals upheld the RTC decision.
ISSUE:
Whether or not the dacion in payment agreement entered into by
Spouses Ong and Roban constitutes pactum commissorium
HELD:
The 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 that 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 without
the need of any foreclosureproceedings, 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.
Here, 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 Spouses Ongs failure to pay their debt within the
stipulated period.
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.
Here, the alienation of the properties was by way of security, and not
by way of satisfying the debt. The Dacion in Payment did not
extinguish Spouses Ongs obligation to Roban. 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
EDMUNDO T.
Estate of Litton v Mendoza and CA | 1998
1. 1963, CMB Products (with Mendoza as president) offered to sell
textile cotton materials to the Bernal spouses (engaged in
manufacture of embroidery, garments and cotton materials);
- For this purpose, Mendoza introduced the spouses to
Alfonso Tan;
2. The spouses purchased on credit from Tan cotton materials
(80k);
- Mendoza guaranteed the payment of the debt;
3. Tan then delivered the cotton materials to the spouses;
4. In view of the arrangement, CBM Products (thru Mendoza)
asked for and received a post-dated check (Feb 20, 1964) for the
payment of the spouses debt;
- It was understood that Mendoza will retain the check until
the cotton materials are finally manufactured into garments,
after which Mendoza will sell the finished products for the
spouses;
5. Meanwhile, the check matured without having been cashed so
Mendoza demanded for another check without a date;
6. Feb. 28, 1964, Mendoza issued two checks in favour of Tan
(worth 80k);
- He told the spouses of the same and told them they are
indebted to him and asked the spouses to sign an instrument
whereby Mendoza assigned the said amount to Insular
Products, Inc.;
7. Tan had the two checks discounted but were later returned with
words stop payment;
- It appears it was ordered by Mendoza for failure of the
spouses to deposit sufficient funds for the check issued by
the spouses in his favour;
8. Tan sued Mendoza while the spouses brought an action for
interpleader for not knowing whom to pay;
- Pendente lite, Tan assigned in favour of Littion, Sr his
litigatious credit (in action of spouses) against Mendoza, duly
submitted to the court, with notice to the parties;
9. TC ordered Mendoza to pay Tan 76k;
- CA affirmed (1977);
10. Meanwhile, in 1971, Mendoza entered into Compromise
Agreement with Tan wherein the latter recognized that his claims
against Mendoza had been settled and because of that, both
waives any claim against the other; with a provision that it no
way affects Tans right to go against the spouses;
11. 1977 (after CAs decision), Mendoza filed MFR saying that there
was the compromise agreement which absolved him from
liability;
- Tan opposed this saying the Compromise agreement was
null and void because of the deed of assignment executed in
favour of Litton, Sr.; he says that with such, he has no more
right to alienate said credit;
12. CA then approved the compromise agreement:
- It said that the assignment was by way of securing only his
obligation to Litton, Sr.;
- Thus, Tan retained possession and dominion over the credit
(2085);
- Although considered as a litigatious credit, such may be
validly alienated by Tan; such alienation is subject to the
remedies of Litton under 6 of CC whereby, the assignment if
proven prejudicial to Litton, may entitle Littion to pursue his
remedies against Tan;
- The alienation of a litigatious credit is further subject to the
debtors right of redemption under 1634;
W/N compromise valid. No.
Ratio:
1. Purpose of compromise: to replace and terminate controverted
claims; once approved, it has the force of res judicata (except for
vices of consent or forgery);
- Petitioner seeks to set aside the compromise agreement
since prior thereto, Tan executed a deed of assignment in
favour of Littion, Sr. involving the same litigated credit;
2. Compromise Agreement set aside:
- Fact that assignment was done by way of securing Tans
obligation in favour of Littion, Sr. does not affect the
resolution of the matter;
- Validity of pledge/guaranty in favour of Liiton has not been
questioned;
Deed of assignment fulfils the requirements of a valid pledge or
mortgage;
- Although Tan may validly alienate the litigatious credit
(1634), it does not give him (assignor/Tan) absolute right to
indiscriminately dispose of the thing;
- Said provision (1634) should be read in consonance with
2097; although the pledgee/assignee (Litton, Sr.) did not
become ipso facto become the creditor of Mendoza, the
pledge being invalid, the incorporeal right assigned by Tan in
favour of Mendoza can only be alienated by Tan with due
notice to and consent of Litton, Sr. or his duly authorized
representative;
- To allow it would render nugatory the very purpose of a
pledge or an assignment of credit;
- Also, under 1634, the debtor has the corresponding
obligation to reimburse the assignee, for the price he paid or
for the value given as consideration for the deed of
assignment; failing here, the compromise agreement does
not bind the assignee;

Notes:
- From the very beginning, Mendoza was, from the very
beginning, aware of the deed of assignment; as it was
submitted to the court where CBM was one of the
defendants;
- Having such knowledge, Mendoza is estopped from entering
into the compromise agreement involving the same litigate
credit without notice to and consent of the assignee;
- Mendoza acted in bad faith and in connivance with assignor
Tan to defraud Littion, Sr. in entering in the compromise
agreement;
Manila Banking Corp. v Anastacio Teodoro, Jr. and Grace
Teodoro
Bidin, J. | 1989
1. April 1966, Spouses Teodoro together with Teodoro Sr executed
a PN in favour of Manila Banking Corp (MBC);
- Payable within 120 days (until Aug), with 12% interest per
annum;
- They failed to pay and left balance of 15k as of September
1969;
2. May and June 1966, executed two PNs;
- 8k and 1k respectively payable within 120 days and 12% per
annum;
- They made partial payment but still left 8.9k balance as of
September 1969;
3. It appears than in 1964, Teodoro Jr executed a Deed of
Assignment of Receivables in favour of MBC from Emergency
Employment Administration;
- Amounted to 44k;
- The deed provided it was for consideration of certain credits,
loans, overdrafts and other credit accommodations extended
to the spouses and Teodoro Sr as security for the payment
of said sum and interest thereon; and that they release and
quitclaim all its rights, title and interest in the receivables;
4. In the stipulations of fact, it was admitted by the parties:
- That MBC extended loans to the spouses and Teodoro Jr
because of certain contracts entered into by latter with EEA
for fabrication of fishing boats and that the Philippine
Fisheries Commission succeeded EEA after its abolition;
- That non-payment of the PNs was due to failure of the
Commission to pay spouses;
- That the Bank took steps to collect from the Commission but
no collection was effected;
5. For failure of the spouses and Teodor Sr to pay, MBC instituted
against them;
- Teodoro Sr subsequently died so suit only against the
spouses;
6. TC favoured MBC; MFR denied;
- Spouses appealed to CA but since issue pure question of
law, CA forwarded to SC;
Issues:
W/N the assignment of receivables has the effect of payment of
all the loans contracted by the spouses; No.
W/N MBC must exhaust all legal remedies against PFC before it
can proceed against the spouses. No
Ratio:
Assignment of credit:
- An agreement by virtue of which the owner of a
credit(assignor) by a legal cause (e.g. 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(assignee) who acquires the power to
enforce it to the same extent as the assignor could have
enforced it against the debtor;
- May be in form of:
o Sale
o Dation in payment - when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he
has against a third person;
o Donation when it is by gratuitous title;
o Guaranty creditor gives as a collateral, to secure his
own debt in favour of the assignee, without transmitting
ownership;
- Obligations between the parties will depend upon the
juridical relation which is the basis of the assignment;
What is the legal effect of the Assignment (since its validity is not
in question):
1. Assignment of receivables in 1964 did not transfer the
ownership of the receivables to MBC and release the
spouses from their loans;
- Consideration was for certain credits, loans, overdrafts
and credit accommodations worth 10k extended by MBC
to spouses and as security for the payment of said sum
and interest thereon; also quitclaim of rights to MBC of
their interest in the receivables;
- Stipulated also that it was a continuing guaranty for
future loans and correspondingly, the assignment shall
extend to all accounts receivable;

Contention of spouses: not mere guaranty since it was
stipulated:
- That the assignor release and quitclaim to assignee all
its rights, title and interest in the accounts receivable;
- That title and right of possession to account receivable is
to remain in assignee and it shall have right to collect
directly from the debtor; that whatever the assignor does
in connection with collection of such, it does so as agent
and representative and in trust of assignee;
- SC: character of transaction is not determined by the
language in document but by intention of the parties;;
- If it was intended to secure the payment of money, it
must be construed as a pledge.
- 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;
Assignment of receivables did not result from sale or by
virtue of a dation in payment;
- At time the deed was executed, the loans were non-
existent yet;
- At most, it was a dation for 10k, the amount of credit with
MBC indicated in the deed; at the time of execution,
there was no obligation to be extinguished except for the
10k;
- 1292: 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;
Deed of assignment intended as collateral security for the
loans, as a continuing guaranty for whatever sums that
would be owing by spouses;
- 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 CA);
2. MBC need not exhaust all legal remedies against PFC:
- Spouses, not being released by the assignment, remain
as the principal debtors of MBC, rather than mere
guarantors;
- The deed merely guarantees said obligations;
- 2058 (creditor must have exhausted property of debtor
and resorted to all legal remedies before it can proceed
to guarantor) does not apply to them;
- Appellants are both the principal debtors and the
pledgors or mortgagors;
- MBC did try to collect but at OP, it was disapproved; so
the loan was basically unsecured;
DISMISSED.
Feliciano, J. concurring.
Justice Bidins, "the character of the transactions between the parties
is not, however, determined by the language used in the document
but by their intention not without exception;
- Deed here contains language which suggest that the parties
intended complete alienation of title to and rights over the
receivables;
- Words remise, release and quitclaim and clauses title
the title and right of possession to said accounts receivable
is to remain in said assignee" who "shall have the right to
collect directly from the debtor;
- Words agent also convey the ideas;
- But such must be taken in conjunction with and qualified by
other language showing intent of the parties that title to the
receivables shall pass to the assignee for the limited
purpose of securing another, principal obligation owed by the
assignor to the assignee;
Title moves from assignor to assignee but that title is defeasible
being designed to collateralize the principal obligation:
- Operationally: means assignee is burdened to collateralize
the principal obligation; taking the proceeds of the
receivables assigned and applying such proceeds to the
satisfaction of the principal obligation and returning any
balance remaining thereafter to the assignor;
The parties gave the deed of assignment the form of an absolute
conveyance of title over the receivables assigned, essentially for the
convenience of the assignee:
- Without such nature of absolute conveyance, the assignee
would have to foreclose the properties; he would have to
comply with documentation and registration requirements of
a pledge or chattel mortgage);
- A deed of assignment by way of security avoids the
necessity of a public sale impose by the rule on pactum
commisorium, by in effect placing the sale of the collateral
up front;
- The foregoing is applicable where the deed of assignment of
receivables combines elements of both a complete
alienation of the credits and a security arrangement to
assure payment of a principal obligation;
- Where the 2nd element is absent, the assignment would
constitute essentially a mode of payment or dacion en pago;
- in order that a deed of assignment of receivables which is in
form an absolute conveyance of title to the credits being
assigned, may be qualified and treated as a security
arrangement, language to such effect must be found in the
document itself and that language, precisely, is embodied in
the deed of assignment in the instant case;
041. Yau Chu v. Court of Appeals
G.R. No. L-78519/26 September 1989/First Division/Petition for
Review on Certiorari
Victoria Yau Chu (assisted by her husband, Michael) petitioners
Court of Appeals, Family Savings Bank , and/or CAMS Trading
Enterprises, Inc. respondents
Decision by J. Grino-Aquino, Digest by Pip
Short Version: Victoria bought cement from CAMS and secured her
payments with deeds of assignment over her time deposits in Family
Savings Bank. She assigned about P320K worth but her obligations
to CAMS came up to about P404K. CAMS requested the bank to
encash the time deposit certificates, which the bank did only after
calling up and obtaining Victorias consent. Victoria then sued the
bank and CAMS for alleged pactum commissorium. The Court ruled
against her, as the prohibition on pactum commissorium was
enacted in order to protect debtors from creditors who automatically
appropriate pledged or mortgaged property which might have a
higher value than the debt. Where the security for the debt is also
money deposited in a bank, the amount of which is even less than
the debt, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtors overdue obligation, with the latters
consent.
Facts: Since 1980, Victoria Yau Chu had been purchasing cement
on credit from CAMS. To guaranty payment for her cement
withdrawals, she executed in favor of CAMS deeds of assignment of
her time deposits in Family Savings Bank. The total amount came up
to P320K. Except for serial numbers and the dates of the time
deposit certificates, the deeds of assignment prepared by Victorias
lawyer uniformly read:
... That the assignment serves as a collateral or guarantee for
the payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from
said company, per separate contract executed between us.
In July 1980, CAMS notified the bank that Victoria had an unpaid
account with it in the sum of about P314K and requested the
encashment of the time deposit certificates assigned to it by Victoria.
As proof, it submitted to the bank a letter from Victoria admitting her
outstanding account with CAMS reaching P404.5K. The bank
verbally advised Victoria of CAMS request and after she verbally
agreed, the bank encashed the certificates and delivered about
P283K because one time deposit lacked the proper signatures.
Victoria then turned around and demanded that the bank and
CAMS restore her time deposit. When both refused, she filed a
complaint to recover the sum from them before the RTC of Makati.
The RTC dismissed the complaint for lack of merit. Court of Appeals
affirmed. Before the Supreme Court she argued that the encashment
of her time deposit certificates was pactum commissorium.
Issue: Did the encashment of Victorias time deposit certificates
amount to pactum commissorium? NO.
Ruling: Petition denied.
Ratio: Since the collateral in this case was also money, there was no
need to sell the thing pledged at public auction in order to satisfy the
pledgors obligation. All that had to be done to convert the pledgor's
time deposit certificates into cash was to present them to the bank
for encashment after due notice to the debtor.
The encashment of the deposit certificates was not
a pactum commissorium as prohibited under Article 2088 of the
Civil Code. A pactum commissorium is a provision for
the automatic appropriation of the pledged or mortgaged
property by the creditor in payment of the loan upon its
maturity. This prohibition is intended to protect the obligor, pledgor,
or mortgagor against being overreached by his creditor who holds a
pledge or mortgage over property whose value is much more than
the debt. Where, as in this case, the security for the debt is also
money deposited in a bank, the amount of which is even less
than the debt, it is not illegal for the creditor to encash the time
deposit certificates to pay the debtors overdue obligation, with
the latters consent.
Dionisio Calibo, Jr. vs Court of Appeals In this case, element number 2 is missing. Mike is not the absolute
owner of the tractor.
n 1985, Mike Abella rented a house owned by Atty. Dionisio Calibo,
Jr. Meanwhile, Dr. Pablo Abella, Mikes father, entrusted to Mike a There is no contract of agency between Pablo and Mik e.
tractor. Pablo delivered the tractor to Mike in order for the latter to It was proven in court that Pablo only left the tractor in his sons
safe-keep the same. possession only for the purpose of safekeeping. Pablo was not
In November 1986, Mike defaulted in his rental payments to Calibo. aware that his son pledged it to Calibo and he never authorized his
Calibo repeatedly demanded payments but Mike failed to pay. son to do so.
However, Mike assured Calibo that he will soon pay and Mike used There is no contract of deposit between Mik e and Calibo.
his fathers tractor as a security. Hence, Calibo took possession of
the tractor. Later, Mike advised Calibo that he can sell the tractor as There is no deposit where the principal purpose for receiving the
payment for his debts. object is not safekeeping. In this case, Calibo himself admitted in
court that Mike delivered the tractor to him as security for Mikes
Pablo learned of the foregoing and so he contacted Calibo. He debts.
offered to pay a portion of Mikes debt and in return Calibo must
return the tractor. Calibo refused and he wanted Pablo to guarantee The judgment ordering Calibo to return the tractor to Pablo was
all of Mikes debt which Pablo does not want. Eventually, to redeem affirmed by the Supreme Court.
his tractor, Pablo filed a replevin suit against Calibo, which Pablo
won.
On appeal, Calibo invoked that the replevin should not have been
granted as there was a valid contract of pledge between him and
Mike; and that Mike was Pablos agent because Pablo was aware of
the fact that Mike pledged the tractor to him. In the alternative, Calibo
invoked that if theres no contract of pledge, there is at least a
contract of deposit since Mike himself left the tractor with him in the
concept of an innkeeper.
ISSUE: Whether or not the arguments of Calibo are valid.
HELD: No.
There is no contract of pledge.
The elements of a contract of pledge are as follows:
1. the pledge is constituted to secure the fulfillment of a principal
obligation;
2. the pledgor be the absolute owner of the thing pledged; and
3. the person constituting the pledge has the free disposal of his
property, and in the absence thereof, that he be legally authorized for
the purpose.
CITIBANK vs. SABENIANO Case Digest 4. Respondent to pay petitioner the balance of her outstanding loans
CITIBANK vs. SABENIANO of P1,069,847.40 inclusive off interest.

G.R.No. 156132, October 16, 2006

FACTS: Petitioner Citibank is a banking corporation duly authorized

under the laws of the USA to do commercial banking activities n the
Philippines. Sabeniano was a client of both Petitioners Citibank and
FNCB Finance. Respondent filed a complaint against petitioners
claiming to have substantial deposits, the proceeds of which were
supposedly deposited automatically and directly to respondents
account with the petitioner Citibank and that allegedly petitioner
refused to despite repeated demands. Petitioner alleged that
respondent obtained several loans from the former and in default,
Citibank exercised its right to set-off respondents outstanding loans
with her deposits and money. RTC declared the act illegal, null and
void and ordered the petitioner to refund the amount plus interest,
ordering Sabeniano, on the other hand to pay Citibank her
indebtedness. CA affirmed the decision entirely in favor of the
respondent.

ISSUE: Whether petitioner may exercise its right to set-off

respondents loans with her deposits and money in Citibank-Geneva

RULING: Petition is partly granted with modification.

1. Citibank is ordered to return to respondent the principal amount of

P318,897.34 and P203,150.00 plus 14.5% per annum

2. The remittance of US $149,632.99 from respondents Citibank-

Geneva account is declared illegal, null and void, thus Citibank is
ordered to refund said amount in Philippine currency or its equivalent
using exchange rate at the time of payment.

3. Citibank to pay respondent moral damages of P300,000,

exemplary damages for P250,000, attorneys fees of P200,000.
PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287 (JANUARY 24,
2006)
FACTS:
Respondents were the owners of shares of stock in Quirino-Leonor-
Rodriguez Realty Inc. In 1979 to 1980,respondents secured by way
of pledge of some of their shares of stock to petitioners Bonifacio
and Faustina Paray
(Parays) the payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on accou
nt of respondents failure to pay their loans,
respondents filed complaints with RTC of Cebu City. The actions
sought the declaration of nullity of the pledgeagreements, among
others. However the RTC dismissed the complaint and gave due
course to the foreclosure andsale at public auction of the various
pledges. This decision attained finality after it was affirmed by the
Court of Appeals and the Supreme Court.Respondents then
received Notices of Sale which indicated that the pledged shares
were to be sold at publicauction. However, before the scheduled
date of auction, all of respondents caused the consignation with the
RTCClerk of Court of various amounts. It was claimed that
respondents had attempted to tender payments to the Parays,but
had been rejected.Notwithstanding the consignations, the public
auction took place as scheduled, with petitioner Vidal
Espeletasuccessfully bidding for all of the pledged shares. None of
respondents participated or appeared at the auction.Respondents
instead filed a complaint with the RTC seeking the declaration of
nullity of the concluded publicauction.
Respondents argument:
Respondents argued that their tender of payment and subsequent
consignations served to extinguish their loanobligations and
discharged the pledge contracts.
Petitioners argument:
Petitioners countered that the auction sale was conducted pursuant
to a final and executory judgment andthat the tender of payment and
consignations were made long after their obligations had fallen
due.They pointed out that the amounts consigned could not
extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They
likewise argued that theessential procedural requisites for the
auction sale had been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement with the
position of the Parays. It held thatrespondents had failed to tender or
consign payments within a reasonable period after default and that
the proper remedy of respondents was to have participated in the
auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal, ruling
that the consignations extinguished theloan obligations and the
subject pledge contracts; and the auction sale as null and void. It
(CA) chose to uphold thesufficiency of the consignations owing to an
imputed policy of the law that favored redemption and mandated a
liberalconstruction to redemption laws. The attempts at payment by
respondents were characterized as made in theexercise of the right
of redemption.CA likewise found fault with the auction sale, holding
that there was a need to individually sell the variousshares of stock
as they had belonged to different pledgors.
ISSUES:
1.
WON right of redemption exists over personal properties (such as
the subject pledged shares).
2.
WON the consignations made by respondents prior to the auction
sale are sufficient to extinguish the loanobligations and the subject
pledged contracts.
3.
WON the act of respondents in consigning the payments should be
deemed done in the exercise of their right of redemption owing to an
imputed policy of the law that favored redemption and mandated a
liberal construction toredemption laws.
4.
WON a buyer at a public auction
ipso facto
becomes the owner of the pledged shares pending the lapse of
theone-year redemptive period
5.
WON there is a need to individually sell the various shares of stock
as they had belonged to different pledgors.
HELD:1. No.
No law or jurisprudence establishes or affirms such right. Indeed, no
such right exists.The right of redemption over mortgaged real
property sold extrajudicially is established by Act No. 3135,
asamended. The said law does not extend the same benefit to
personal property. In fact, there is no law in our statutebooks which
vests the right of redemption over personal property. Act No. 1508,
or the Chattel Mortgage Law,ostensibly could have served as the
vehicle for any legislative intent to bestow a right of redemption over
personalproperty, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is definitelysilent on the
point.The right of redemption as affirmed under Rule 39 of the Rules
of Court applies only to execution sales,more precisely execution
sales of real property.It must be clarified that the subject sale of
pledged shares was an extrajudicial sale, specifically a notarialsale,
as distinguished from a judicial sale as typified by an execution sale.
Under the Civil Code, the foreclosure of apledge occurs
extrajudicially, without intervention by the courts. All the creditor
needs to do, if the credit has not beensatisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.In
this case, petitioners attempted to proceed extrajudicially with the
sale of the pledged shares by publicauction. However, extrajudicial
sale was stayed with the filing of Civil Cases which sought to annul
the pledgecontracts. The final and executory judgment in those
cases affirmed the pledge contracts and disposed them.
Said judgment did not direct the sale by public auction of the pledged
shares, but instead upheld the right of the Parays toconduct such
sale at their own volition.
2. No.
There is no doubt that if the principal obligation is satisfied, the
pledges should be terminated as well. Article2098 of the Civil Code
provides that the right of the creditor to retain possession of the
pledged item exists only untilthe debt is paid. Article 2105 of the Civil
Code further clarifies that the debtor cannot ask for the return of the
thingpledged against the will of the creditor, unless and until he has
paid the debt and its interest. At the same time, theright of the
pledgee to foreclose the pledge is also established under the Civil
Code. When the credit has not beensatisfied in due time, the creditor
may proceed with the sale by public auction under the procedure
provided under Article 2112 of the Code.In order that the
consignation could have the effect of extinguishing the pledge
contracts, such amountsshould cover not just the principal loans, but
also the monthly interests thereon.In the case at bar, while the
amounts consigned by respondents could answer for their respective
principal loanobligations, they were not sufficient to cover the
interests due on these loans, which were pegged at the rate of
5%per month or 60% per annum.
3. No.
The pledged shares in this case are not subject to redemption. Thus,
the consigned payments should notbe treated with liberality,
or somehow construed as having been made in the exercise of the
right of redemption.
4. Yes.
Obviously, since there is no right to redeem personal property, the
rights of ownership vested unto thepurchaser at the foreclosure sale
are not entangled in any suspensive condition that is implicit in
a redemptive period.
5. No.
This concern is obviously rendered a non-issue by the fact that there
can be no right to redemption in thefirst place. Rule 39 of the Rules
of Court does provide for instances when properties foreclosed at the
same timemust be sold separately, such as in the case of lot sales
for real property under Section 19. However, these instancesagain
pertain to execution sales and not extrajudicial sales. No provision in
the Rules of Court or in any law requiresthat pledged properties sold
at auction be sold separately.On the other hand, under the Civil
Code, it is the pledgee, and not the pledgor, who is given the right
tochoose which of the items should be sold if two or more things are
pledged. No similar option is given to pledgorsunder the Civil Code.
Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of
several different pledge contracts from auctioning all of the
pledgedproperties on a single occasion, or from the buyer at the
auction sale in purchasing all the pledged properties with asingle
purchase price. The relative insignificance of ascertaining the definite
apportionments of the sale price to theindividual shares lies in the
fact that once a pledged item is sold at auction, neither the pledgee
nor the pledgor canrecover whatever deficiency or excess there may
be between the purchase price and the amount of the
principalobligation.
RULING:
Decision of the Court of Appeals is SET ASIDE and the decision
of the RTC Cebu City is REINSTATED.
GR No. 199420 August 27, 2014 PHILNICO INDUSTRIAL
CORPORATION, petitioner vs. PRIVATIZATION AND
MANAGEMENT OFFICE, Respondent. x------------------------------------
-------------x GR No. 199432 PRIVATIZATION AND MANAGEMENT
OFFICE, Petitioner vs. PHILNICO INDUSTRIAL CORPORATION,
Respondent. Civil Law; Pledge; Pactum Commissorium; There are
two elements for pactum commissorium to exist and are present in
this case: (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 principal obligation
within the stipulated period. LEONARDO- DE CASTRO, J.;
FACTS: The Privatization and Management Office (PMO) is a holder
of shares of stock of Philnico Processing Corporation (PPC). The two
entities, together with Philnico Industrial Corporation (PIC) entered
into a contract known as Amended and Restated Definitive
Agreement (ARDA) which states the terms and conditions for the
sale of PMO of its shares of PPC stocks as well as receivables to
buyer PIC. As stated in the ARDA, by way of security, the PIC shall
pledge to PMO the said shares and execute a Pledge Agreement in
favor of PMO. Significantly, Sec. 8 of the said ARDA provides that in
the event of default, the title to the existing and converted shares
shall ipso facto revert to PMO without the need of demand in case
such payment default is not remedied by PIC within 90 days from the
due date of 2nd installment. In accordance with the ARDA, PMO
executed documents and transferred the title, rights and interests to
the shares of stock in favor of PIC. On May 2, 1997, P IC as pledgor
and PMO as pledgee executed a Pledge Agreement. Three years
later, PMO notified PIC that the latter had defaulted in the payment
of its obligations and demanded PIC to settle its unpaid
amortizations or else PMO would enforce the automatic reversion of
the PPC shares of stock. Thus, PIC filed before the RTC a Complaint
for Prohibition against Reversion of Shares with Prayer for Writ of
Preliminary Injunction and/ or TRO against PMO and PPC. The RTC
granted the Writ of Preliminary Injunction ruling that the ipso facto
reversion is pactum commissorium thus illegal. Upon appeal, the CA
denies the presence of pactum commissorium ruling that the ARDA
is a separate and distinct contract of sale and does not pertain to the
Pledge Agreement but still declared the ipso facto reversion as
invalid as contrary to law, morals, good customs, public order and
public policy. Hence, the instant petitions.
ISSUE: Whether or not the ipso facto reversion of the PPC shares of
stock to PMO in case of default by PIC constitutes pactum
commissorium.
HELD: AFFIRMATIVE. Pactum commissorium 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. It is explicitly prohibited
under Article 2088 of the Civil Code which provides that 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
abovementioned elements for pactum commissorium to exist are
present in this case. By virtue of the Pledge Agreement 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 facto revert
from PIC to PMO without need of demand. In contrast to CA ruling,
the ARDA and the Pledge Agreement herein, although executed in
separate written instruments, are integral to one another. The Pledge
Agreement is a way of security for PMO in lieu of the performance of
PIC of its obligations under both the ARDA and the Pledge
Agreement. It is upon the execution of the Pledge Agreement that
PIC turned over the possession of its certificates of shares of stock in
PPC to PMO. As ruled, 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 of
the ARDA and conveniently and arbitrarily exclude and/or ignore the
Pledge Agreement so as to evade the prohibition against pactum
commissorium. Moreover, the Court focused on the evident intention
of the parties rather than the formal or written form to determine the
existence of pactum commissorium. Hence, appreciating the ARDA
and the Pledge Agreement, the Court can only conclude that the ipso
facto reversion of shares of stock is a pactum commissorium and
thus, null and void.