CREDIT TRANSACTIONS rentals should be paid and that there should be an advance pay-
__________________________________________ ment of rentals for the first eight years of the contract, which ESSO
LOAN
GENERAL PROVISIONS
Concept of Loan
ARTICLE 1933. By the contract of loan, one of the parties delivers
to another, either something not consumable so that the latter may
use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable
thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply
called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
Note:
COMMODATUM MUTUUM
Its purpose is temporary use. Its purpose is consumption.
As a general rule, its object is Its object is a consumable
a non-consumable thing. As thing.
an exception, a consumable
thing if its purpose is merely
for exhibition.
The bailor retains the owner- The bailor loses ownership, it
ship of the thing. Mere pos- is transferred to the bailee.
session is transferred to the
bailee.
The very same thing is re- A thing of equivalent value is
turned. returned.
Generally, the bailor, being The bailee ears the loss since
the owner, bears the loss the ownership is transferred
under the principle of res perit to him.
domino.
Its nature is either gratuitous
Its nature is essentially gratui- or onerous.
tous.
ARTICLE 1934. An accepted promise to deliver something by way
of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract.
Cases:
FRANCISCO HERRERA v. PETROPHIL CORPORATION
G.R. No. L-48349, December 29, 1986, Cruz, J.
No usury exists in a lease agreement. In the absence of
a loan or forbearance of money, usury cannot exist.
Facts:
Herrera and ESSO Standard, (later substituted by Petrophil Corp.)
entered into a lease agreement, where Herrera leased to ESSO a
portion of his property for 20 years with a condition that monthly
paid. However, ESSO deducted the amount of P101,010.73 as
interest or discount for the eight years advance rental.
ESSO informed Herrera that there had been a mistake in the com-
putation of the interest and paid an additional sum of P2,182.70;
thus, it was reduced to P98, 828.03. With such deduction, Herrera
sued ESSO for the sum of P98,828.03, with interest, claiming that
this had been illegally deducted to him in violation of the Usury
Law. ESSO argued that amount deducted was not usurious inter-
est but rather a discount given to it for paying the rentals in ad-
vance.
Issue:
Whether the amount deducted is a usurious interest.
Ruling:
NO. The amount deducted is not a usurious interest and is in fact
a discount for the agreement between Herrera and ESSO, the
agreement being one of lease rather than a loan.
There is no usury in this case because no money was given by the
ESSO to Herrera, nor did ESSO allow Herrera to use its money
already in Herrera’s possession. There was neither loan nor for-
bearance but a mere discount which Herrera allowed ESSO to
deduct from the total payments because they were being made in
advance for eight years. The discount was in effect a reduction of
the rentals which the lessor had the right to determine, and any
reduction thereof, by any amount, would not contravene the Usury
Law.
The difference between a discount and a loan or forbearance is
that the former does not have to be repaid. The loan or forbear-
ance is subject to repayment and is therefore governed by the
laws on usury.
It has been held that the elements of usury are:
(1) a loan, express or implied;
(2) an understanding between the parties that the money lent
shall or may be returned;
(3) that for such loan a greater rate or interest that is allowed
by law shall be paid, or agreed to be paid, as the case
may be; and
(4) a corrupt intent to take more than the legal rate for the
use of money loaned.
Unless these four things concur in every transaction, it is safe to
affirm that no case of usury can be declared.
POLO S. PANTALEON v. AMERICAN EXPRESS
INTERNATIONAL, INC.
G.R. No. 174269, May 8, 2009, Tinga, J.
Generally, the relationship between a credit card provid-
er and its card holders is that of creditor-debtor, with the card
company as the creditor extending loans and credit to the card
holder, who as debtor is obliged to repay the creditor. This rela-
tionship already takes exception to the general rule that as be-
tween a bank and its depositors, the bank is deemed as the debtor
while the depositor is considered as the creditor.
Facts:
An incident in Amsterdam happened which involved the delay of
American Express (AmEx) Card to approve Pantaleon’s credit
card purchases worth US$13,826.00 at the Coster store.
Because of his plight, Pantaleon filed a complaint for moral and
exemplary damages before the RTC against AmEx. He said that
he and his family experienced inconvenience and humiliation due
to the delays in credit authorization. The RTC rendered a decision
Page 1 of 63
in favor of Pantaleon. The CA, however, reversed the award of
damages, holding that AmEx had not breached its obligations to
Pantaleon, noting that the delay was not attended by bad faith
malice or gross negligence as the purchase at Coster deviated
from Pantaleon's established charge purchase pattern.
Issue:
Whether AmEx is guilty of mora solvendi (or delay on the part of
the debtor in complying with its obligation).
Ruling:
No. It is NOT liable.
Generally, the relationship between a credit card provider and its
card holders is that of creditor-debtor, with the card company as
the creditor extending loans and credit to the card holder, who as
debtor is obliged to repay the creditor. This relationship already
takes exception to the general rule that as between a bank and its
depositors, the bank is deemed as the debtor while the depositor
is considered as the creditor.
The first relates merely to an agreement providing for credit facility
to the cardholder. The latter involves the actual credit on loan
agreement involving three contracts (sales, loan and promise to
pay).
From the loan agreement perspective, the contractual relationship
begins to exist only upon the meeting of the offer and acceptance
of the parties involved. When cardholders use their credit cards to
pay for their purchases, they merely offer to enter into loan agree-
ments with the credit card company. Only after the latter approves
the purchase requests that the parties enter into binding loan con-
tracts (Art. 1319, NCC). Before the credit card issuer accepts this
offer, no obligation relating to the loan agreement exists between
them. Every time that Pantaleon used his AMEX credit card to pay
for his purchases, what the stores transmitted to AMEX were his
offers to execute loan contracts.
The three requisites for a finding of default are: (a) that the obliga-
tion is demandable and liquidated; (b) the debtor delays perfor-
mance; and (c) the creditor judicially or extrajudicially requires the
debtors performance
Thus, AmEx having no obligation to approve the purchase re-
quests of its credit cardholders, Pantaleon cannot claim that AmEx
defaulted in its obligation.
____________________________________________________
Correlate: Art. 1316
ARTICLE 1316. Real contracts, such as deposit, pledge, and
commodatum, are not perfected until the delivery of the object of
the obligation.
Cases:
REPUBLIC OF THE PHILIPPINES v. JOSE V. BAGTAS
G.R. No. L-46240, November 3, 1939, Imperial, J.
A contract of commodatum is essentially gratuitous. A
breeding fee can be considered as a compensation rendering the
contract to lose its gratuitous character and become a contract of
lease.
Facts:
Jose V. Bagtas borrowed three bulls from the Republic of the Phil-
ippines through the Bureau of Animal Industry for a period of one
year for breeding. The government charged 10% of their book
value as breeding fee. When the contract expired, Bagtas asked
for the agreement’s renewal. The Secretary of Agriculture and
Natural Resources approved the renewal of only one bull for an-
other year and asked for the other two to be returned. Bagtas then
wrote to the Director of Animal Industry that he would pay the val-
ue for three bulls. He even reiterated his desire to buy them but
asked for a reduced price. The Director of Animal Industry advised
him that the reduction could not be done and that the bulls either
be returned or their book value be paid.
Bagtas failed to pay the book value of the three bulls or return
them thus the Republic of the Philippines commenced an action
against him with the CFI for specific performance. The CFI ruled in
favor of the Republic. When Jose died his surviving spouse Feli-
cidad continued the case. She filed a motion alleging that two of
the bulls were already returned while the third bull died from a
gunshot wound inflicted by a Huk raid. She prayed for injunction
and the quashal of the writ of execution.
Issue:
Whether Bagtas is liable for the loss of the bull.
Ruling:
YES. Bagtas is liable for the loss of the bull because the contract
ceased to be a commodatum.
A contract of commodatum is essentially gratuitous. If the breeding
fee be considered a compensation, then the contract would be a
lease of the bull. Under Art. 1671 of the Civil Code, the lessee
would be subject to the responsibilities of a possessor in bad faith,
because she had continued possession of the bull even after the
expiry of the contract. Even granting that the contract is commoda-
tum, still the appellant is liable, because Art. 1942 of the Civil Code
provides that a bailee in a contract of commodatum. . . is liable for
loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated...;
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event;
The original period of the loan was from 8 May 1948 to 7 May
1949. The loan of one bull was renewed for another period of one
year to end on 8 May 1950 but the appellant kept and used the
bull until November 1953 when during a Huk raid it was killed by
stray bullets. Furthermore, when lent and delivered to Jose, the
bulls had each an appraised book value, to wit: the Sindhi, at
P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
P744.46. Also, there was no stipulation that in case of loss of the
bull due to fortuitous event Jose would be exempt from liability.
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN
PROVINCE v. COURT OF APPEALS, HEIRS OF EGMIDIO
OCTAVIANO AND JUAN VALDEZ
G.R. No. 80294-95, September 21, 1988, Gancayco, J.
The failure to return the subject matter of commodatum
to the bailor does not mean adverse possession on the part of the
bailee. A bailee only holds in trust the property which is the subject
matter of commodatum.
Facts:
Vicar filed an application for registration of title over Lots 1, 2, 3,
and 4 situated in Benguet as they are sites of the Catholic Church
building, convents, high school building, school dormitories, etc.
The Heirs of Juan Valdez and Egmidio Octaviano filed an opposi-
tion on Lots 2 and 3, asserting their right over these lots. The land
registration court confirmed the Vicar’s application.
The Heirs appealed the decision to the CA. The CA reversed the
decision of the land registration court and dismissed Vicar’s appli-
cation for Lots 2 and 3. The Vicar, then, filed with the SC a petition
for review in certiorari against the said decision.
Page 2 of 63
Issue:
Whether the bailee’s failure to return the subject matter of commo-
datum to the bailor constitutes adverse possession on the part of
the borrower.
Ruling:
NO. The Heirs were able to prove that their predecessors' house
was borrowed by Vicar after the church and the convent were
destroyed. They never asked for the return of the house, but when
they allowed its free use, they became bailors in commodatum and
the petitioner the bailee. The bailee’s failure to return the subject
matter of commodatum to the bailor did not mean adverse pos-
session on the part of the borrower. The bailee held in trust the
property subject matter of commodatum. The adverse claim of
Vicar came only in 1951 when it declared the lots for taxation pur-
poses. The action of Vicar by such adverse claim could not ripen
into title by way of ordinary acquisitive prescription because of the
absence of just title.
MARGARITA QUINTOS and ANGEL A. ANSALDO v. BECK
G.R. No. 80294-95, September 21, 1988, Gancayco, J.
A contract whereby one grants the use of a furniture to
another with the former reserving his ownership over the same, is
one of commodatum.
Facts:
Beck was a tenant of Quintos and he occupied Quintos’ house on
M.H. Del Pilar Street. On the novation of the contract of lease
between the two, Quintos allowed Beck to use the furniture de-
scribed in their contract. Quintos then sold the property to Maria
Lopez and Rosario Lopez.
They, along with Quintos notified Beck to vacate the house under
one of the clauses of the contract. Quintos required Beck to return
all the furniture Beck had for her in the house. Beck wrote to Quin-
tos stating she can claim the furniture in the ground floor of the
house. He then wrote another letter stating that the he could not
give up the three gas heaters and four electric lamps for he would
use them until the lease is due to expire. Quintos refused to get
the furniture because she could not have all of them. When the
lease contract expired, Beck deposited with the Sheriff all the furni-
ture belonging to Quintos.
Issue:
Whether Beck complied with his obligation to return the furniture
upon Quintos’ demand.
Ruling:
NO. The contract entered into between the parties is one of com-
madatum, because under it the Quintos gratuitously granted the
use of the furniture to Beck, reserving for herself the ownership
thereof; by this contract Beck bound himself to return the furniture
to Quintos, upon the latter’s demand. The obligation voluntarily
assumed by Beck to return the furniture upon the Quintos’ de-
mand, means that he should return all of them to Quintos at the
latter's residence or house. Beck did not comply with this obliga-
tion when he merely placed them at the disposal of Quintos, re-
taining for his benefit the three gas heaters and the four eletric
lamps. Hence, Quintos was not under any duty to accept the offer
to return the furniture since the same is not complete.
COLITO T. PAJUYO v. COURT OF APPEALS and EDDIE GUE-
VARRA
G.R. No. 146364, June 3, 2004, Carpio, J.
A contract of commodatum is essentially gratuitous.
There is no commodatum if the bailee is not required to pay rent
for his use of the house but is obligated to maintain the property in
good condition. The imposition of such condition makes a contract
different from a commodatum.
Facts:
Pajuyo paid a certain Pedro Perez for rights over a lot in Barrio
Payatas, Quezon City where he constructed a house and there
lived with his family for 6 years. Pajuyo and Guevarra executed a
Kasunduan where Pajuyo allowed Guevarra to live in the house for
free provided that the latter would keep it clean and in order. Gue-
varra promised that he would voluntarily leave the house upon the
demand of Pajuyo.
Nine years after the Kasunduan, Pajuyo demanded the return of
the house as he needed it. Guevarra refused to vacate. Thus,
Pajuyo filed an ejectment case against Guevarra. In his answer,
Guevarra claimed that Pajuyo had no right over the lot where the
house stands because it is within the 150 hectares set aside for
socialized housing. He even claimed that in his 9 years of stay
there, Pajuyo never showed up. The MTC ruled in favor of Pajuyo.
The RTC affirmed the decision of the MTC. The CA reversed the
decision of the RTC on the ground that both parties are illegal
settlers on the property and have no legal right so that the Court
should leave the present situation with respect to possession of
the property as it is, and ruling further that the contractual relation-
ship of Pajuyo and Guevarra was that of a commodatum.
Issue:
Whether the contractual relationship of Pajuyo and Guevarra was
one of commodatum.
Ruling:
NO. In a contract of commodatum, one of the parties delivers to
another something not consumable so that the latter may use the
same for a certain time and return it. An essential feature of com-
modatum is that it is gratuitous. Another feature of commodatum is
that the use of the thing belonging to another is for a certain peri-
od. Thus, the bailor cannot demand the return of the thing loaned
until after expiration of the period stipulated, or after accomplish-
ment of the use for which the commodatum is constituted. If the
bailor should have urgent need of the thing, he may demand its
return for temporary use. If the use of the thing is merely tolerated
by the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium. Under
the Civil Code, precarium is a kind of commodatum.
The Kasunduan reveals that the accommodation accorded by
Pajuyo to Guevarra was not essentially gratuitous. While the
Kasunduan did not require Guevarra to pay rent, it obligated him to
maintain the property in good condition. The imposition of this
obligation makes the Kasunduan a contract different from a com-
modatum. The effects of the Kasunduan are also different from
that of a commodatum. Case law on ejectment has treated rela-
tionship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the
termination of the lease. The tenant’s withholding of the property
would then be unlawful. This is a settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevar-
ra is one of commodatum, Guevarra as bailee would still have the
duty to turn over possession of the property to Pajuyo, the bailor.
The obligation to deliver or to return the thing received attaches to
contracts for safekeeping, or contracts of commission, administra-
tion and commodatum. These contracts certainly involve the obli-
gation to deliver or return the thing received.
____________________________________________________
COMMODATUM
SEC. 1 - Nature of Commodatum
Page 3 of 63
ARTICLE 1935. The bailee in commodatum acquires the use of
the thing loaned but not its fruits; if any compensation is to be paid
by him who acquires the use, the contract ceases to be a commo-
datum.
Exception:
ARTICLE 1940. A stipulation that the bailee may make
use of the fruits of the thing loaned is valid.
ARTICLE 1939. Commodatum is purely personal in character.
Consequently:
(1) The death of either the bailor or the bailee extinguishes
the contract;
(2) The bailee can neither lend nor lease the object of the
contract to a third person. HOWEVER, the members of
the bailee’s household may make use of the thing loaned,
unless there is a stipulation to the contrary, or unless the
nature of the thing forbids such use.
Object of Commodatum - Exception
ARTICLE 1936. Consumable goods may be the subject of com-
modatum if the purpose of the contract is not the consumption of
the object, as when it is merely for exhibition.
Object of Commodatum - Others
ARTICLE 1937. Movable or immovable property may be the
object of commodatum.
Who may be a Bailor
ARTICLE 1938. The bailor in commodatum need not be the
owner of the thing loaned.
SEC. 2 - Obligations of the Bailee
ARTICLE 1941. The bailee is obliged to pay for the ordinary ex-
penses for the use and preservation of the thing loaned.
ARTICLE 1945. When there are two or more bailees to whom a
thing is loaned in the same contract, they are liable solidarily.
Liability of Bailee for Fortuitous Events (DALLS)
ARTICLE 1942. The bailee is liable for the loss of the thing, even if
it should be through a fortuitous event:
(1) If he devotes the thing to any purpose different from that
for which it has been loaned;
(2) If he keeps it longer than the period stipulated, or after
the accomplishment of the use for which the commoda-
tum has been constituted;
(3) If the thing loaned has been delivered with appraisal of
its value, unless there is a stipulation exempting the bail-
ee from responsibility in case of a fortuitous event;
(4) If he lends or leases the thing to a third person, who is
not a member of his household;
(5) If, being able to save either the thing borrowed or his own
thing, he chose to save the latter.
Correlate Art. 1174 - General Rule
ARTICLE 1174. Except in cases (1) expressly specified by
the law or (2) when it is otherwise declared by stipulation,
or (3) when the nature of obligation requires the assump-
tion of risk, NO person shall be responsible for those
events which, could not be foreseen, or which, though
foreseen, were inevitable.
Wear and Tear
ARTICLE 1943. The bailee does not answer for the deterioration
of the thing loaned due only to the use thereof and without his
fault.
Right of Retention
ARTICLE 1944. The bailee cannot retain the thing loaned on the
ground that the bailor owes him something, even though it may be
by reason of expenses.
HOWEVER, the bailee has a right of retention for damages men-
tioned in article 1951.
Exception:
ARTICLE 1951. The bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suffer
by reason thereof.
SEC. 3 - Obligations of the Bailor
ARTICLE 1947. The bailor may demand the thing at will, and the
contractual relation is called a precarium, in the following cases:
(1) If neither the duration of the contract nor the use to which
the thing loaned should be devoted, has been stipulated;
or
(2) If the use of the thing is merely tolerated by the owner.
ARTICLE 1948. The bailor may demand the immediate return of
the thing if the bailee commits any act of ingratitude specified in
article 765.
ARTICLE 765. The donation may also be revoked at the
instance of the donor, by reason of ingratitude in the fol-
lowing cases:
(1) If the donee should commit some offense against the
person, the honor or the property of the donor, or of
his wife or children under his parental authority;
(2) If the donee imputes to the donor any criminal of-
fense, or any act involving moral turpitude, even
though he should prove it UNLESS the crime or the
act has been committed against the donee himself,
his wife, or children under his authority;
(3) If he unduly refuses him support when the donee is
legally or morally bound to give support to the donor.
Note: Commodatum partakes the nature of a donation be-
cause they are both essentially gratuitous. (De Leon, 2013)
ARTICLE 1952. The bailor cannot exempt himself from the pay-
ment of expenses or damages by abandoning the thing to the
bailee.
When to Return Object - Exceptions
ARTICLE 1946. The bailor cannot demand the return of the thing
loaned till (1) after the expiration of the period stipulated, or (2)
after the accomplishment of the use for which the commodatum
has been constituted. HOWEVER, if in the meantime, he should
have urgent need of the thing, he may demand its return or tempo-
rary use.
In case of temporary use by the bailor, the contract of commoda-
tum is suspended while the thing is in the possession of the bailor.
Liability for Extraordinary Expenses
ARTICLE 1949. The bailor shall refund the extraordinary expens-
es during the contract for the preservation of the thing loaned,
provided the bailee brings the same to the knowledge of the bailor
before incurring them, except when they are so urgent that the
reply to the notification cannot be awaited without danger.
Page 4 of 63
If the extraordinary expenses arise on the occasion of the actual
use of the thing by the bailee, even though he acted without fault,
they shall be borne equally by both the bailor and the bailee, un-
less there is a stipulation to the contrary.
Liability for Other Expenses
ARTICLE 1950. If, for the purpose of making use of the thing, the
bailee incurs expenses other than those referred to in articles 1941
(ordinary expenses) and 1949 (extraordinary expenses), he is not
entitled to reimbursement.
Interest
_____________________________________________________
ARTICLE 1956. No interest shall be due UNLESS it has been
expressly stipulated in writing.
SIMPLE LOAN
Concept of Loan
ARTICLE 1953. A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and
quality.
Correlate:
ARTICLE 1249. The payment of debts in money shall be
made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce
the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the original obli-
gation shall be held in abeyance.
ARTICLE 1250. In case an extraordinary inflation or defla-
tion of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the ob-
ligation shall be the basis of payment, unless there is an
agreement to the contrary.
R.A. 8183
Section 1. All monetary obligations shall be settled in the
Philippine currency which is legal tender in the Philippines.
However, the parties may agree that the obligation or
transaction shall be settled in any other currency at the
time of payment.
Note: In case of extraordinary inflation, payment shall be
made at the value of the currency at the time of the crea-
tion of the obligation.
Loan of money can be payable in kind if there is an
agreement between the parties.
ARTICLE 1955. The obligation of a person who borrows money
shall be governed by the provisions of articles 1249 and 1250 of
this Code.
If what was loaned is a fungible thing other than money, the debtor
owes another thing of the same kind, quantity and quality, even if it
should change in value.
In case it is impossible to deliver the same kind, its value at the
time of the perfection of the loan shall be paid.
ARTICLE 1954. A contract whereby one person transfers the
ownership of non-fungible things to another with the obligation on
the part of the latter to give things of the same kind, quantity, and
quality shall be considered a barter.
Correlate:
ARTICLE 1468. If the consideration of the contract con-
sists partly in money, and partly in another thing, the
transaction shall be characterized by the manifest inten-
tion of the parties. If such intention does not clearly ap-
pear, it shall be considered a barter if the value of the
thing given as a part of the consideration exceeds the
amount of the money or its equivalent; otherwise, it is a
sale.
Correlate:
ARTICLE 2209. If the obligation consist of payment of
sum of money, and the debtor incurs in delay, the indem-
nity of damages, there being no stipulation to the contra-
ry, shall be the (1) payment of interest agreed upon, and
(2) absence of stipulation, the legal interest, which is six
per cent per annum.
ARTICLE 2212. Interest due shall earn legal interest from
the time it is judicially demanded, although the obligation
may be silent upon this point.
ARTICLE 1169. Those obliged to deliver or to do some-
thing incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their
obligation.
However, the demand by the creditor shall not be neces-
sary in order that delay may exist:
(1) When the obligation or the law expressly so declare;
or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time
when the thing is to be delivered or the service is to
be rendered was a controlling motive for the estab-
lishment of the contract; or
(3) When demand would be useless, as when the obli-
gor has rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a prop-
er manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by
the other begins.
C.B. 905, effective January 1, 1983
C.B. 799 Series of 2013, effective July 1, 2013
Subject: Rate of interest in the absence of stipula-
tion
Section 1. The rate of interest for the loan or for-
bearance of any money, goods or credits and the
rate allowed in judgments in the absence of an
express contract as to such rate of interest, shall
be six per cent per annum.
Note:
GR: No interest is adjudged on unliquidated claims.
XPN:
 If the unliquidated claim is established with
reasonable certainty, interest will begin to run
from the time the claim is extrajudicially de-
manded. Otherwise, interest will run from the
time the court judgment is made.
Page 5 of 63
 Cases:
ADVOCATES FOR TRUTH IN LENDING, INC. and EDUARDO
B. OLAGUER v. BANGKO SENTRAL MONETARY BOARD
G.R. No. 192986, January 15, 2013, Reyes, J.
The power of the CB to effectively suspend the Usury
Law pursuant to P.D. No. 1684 has long been recognized and
upheld in many cases. CB Circular No. 905 did not repeal nor in
anyway amend the Usury Law but simply suspended the latter’s
effectivity.
Facts:
―Advocates for Truth in Lending, Inc.‖ (AFTIL) is a nonprofit, non-
stock corporation organized to engage in pro bono concerns and
activities relating to money lending issues. AFTIL filed this petition,
joined by its founder and president, Eduardo B. Olaguer, suing as
a taxpayer and a citizen. R.A. No. 265, which created the Central
Bank (CB) of the Philippines on June 15, 1948, empowered the
CB-MB to, among others, set the maximum interest rates which
banks may charge for all types of loans and other credit opera-
tions, within limits prescribed by the Usury Law.
On March 17, 1980, the Usury Law was amended by Presidential
Decree (P.D.) No. 1684, giving the CB-MB authority to prescribe
different maximum rates of interest which may be imposed for a
loan or renewal thereof or the forbearance of any money, goods or
credits, provided that the changes are effected gradually and an-
nounced in advance.
Issue:
1. Whether CB-MB have the authority to prescribe the maximum
rates of interest for all kinds of credit transactions and forbear-
ance of money, goods or credit beyond the limits prescribed in
the Usury Law.
2. Whether CB-MB exceeded its authority when it issued CB
Circular No. 905.
3. Whether the lifting of the ceilings for interest rates authorize
stipulations charging excessive, unconscionable, and iniqui-
tous interest.
Ruling:
1. YES. It does have authority.
Under RA 265, the Monetary Board may, within the limits pre-
scribed in the Usury Law fix the maximum rates of interest which
banks may charge for different types of loans and for any other
credit operations, or may fix the maximum differences which may
exist between the interest or rediscount rates of the Central Bank
and the rates which the banks may charge their customers if the
respective credit documents are not to lose their eligibility for re-
discount or advances in the Central Bank.
Any modifications in the maximum interest rates permitted for the
borrowing or lending operations of the banks shall apply only to
future operations and not to those made prior to the date on which
the modification becomes effective.
In order to avoid possible evasion of maximum interest rates set
by the Monetary Board, the Board may also fix the maximum rates
that banks may pay to or collect from their customers in the form of
commissions, discounts, charges, fees or payments of any sort.
Under PD 1684, in the exercise of the authority herein granted, the
Monetary Board may prescribe higher maximum rates for loans of
low priority, such as consumer loans or renewals thereof as well
as such loans made by pawnshops, finance companies and other
similar credit institutions although the rates prescribed for these
institutions need not necessarily be uniform. The Monetary Board
is also authorized to prescribe different maximum rate or rates for
different types of borrowings, including deposits and deposit sub-
stitutes, or loans of financial intermediaries.
2. NO. It did not exceed its authority.
The power of the CB to effectively suspend the Usury Law pursu-
ant to P.D. No. 1684 has long been recognized and upheld in
many cases. A CB Circular cannot repeal a law, [for] only a law
can repeal another law;" that "by virtue of CB Circular No. 905, the
Usury Law has been rendered ineffective; and Usury has been
legally non-existent in our jurisdiction. Hence, CB Circular No. 905
did not repeal nor in anyway amend the Usury Law but simply
suspended the latter’s effectivity.
According to the Court, by lifting the interest ceiling, CB Circular
No. 905 merely upheld the parties’ freedom of contract to agree
freely on the rate of interest. It cited Art. 1306 of the NCC, under
which the contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, pro-
vided they are not contrary to law, morals, good customs, public
order, or public policy.
3. NO. It does not give such authorization.
Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to morals, if
not against the law. Indeed, under Art. 1409 of the Civil Code,
these contracts are deemed inexistent and void ab initio, and
therefore cannot be ratified, nor may the right to set up their illegal-
ity as a defense be waived.
Nonetheless, the nullity of the stipulation of usurious interest does
not affect the lender’s right to recover the principal of a loan, nor
affect the other terms thereof. Thus, in a usurious loan with mort-
gage, the right to foreclose the mortgage subsists, and this right
can be exercised by the creditor upon failure by the debtor to pay
the debt due. The debt due is considered as without the stipulated
excessive interest, and a legal interest of 12% per annum will be
added in place of the excessive interest formerly imposed.
COMMONWEALTH INSURANCE CORPORATION v. COURT
OF APPEALS and RIZAL COMMERCIAL BANKING
CORPORATION G.R. No. 130886, January 29, 2004, Austria-
Martinez, J.
When a surety fails to pay upon demand by the credi-
tor, it becomes liable to pay legal interest over and above its prin-
cipal obligation under the surety agreement. An entity’s liability as
a surety is different from its liability under the law. The increased
liability is not because of the contract but because of the default
and the necessity of judicial collection.
Facts:
Jigs Manufacturing Corporation (JIGS) and Elba Industries, Inc.
(ELBA) are sister companies which obtained a loan from RCBC.
Such loan was evidenced by promissory notes and secured by
surety bonds executed by Commonwealth Insurance Corporation
(CIC). JIGS and ELBA defaulted in the payments of their loan.
RCBC sent a written demand to CIC for the payment of the two
loans. CIC responded and paid RCBC.
However, there was still a substantial balance unpaid. Despite the
final demand of RCBC, CIC did not comply with its obligation to
pay. Hence, RCBC filed a complaint for a sum of money before
the RTC. CIC contended that it cannot be liable for any amount in
excess of what is provided for in the surety agreement. The RTC
ruled that CIC, JIGS and ELBA are solidarily liable to pay RCBC.
Upon appeal to the CA, the CA held that a surety’s obligation is
primary; he can be sued alone for the entire obligation. If the sure-
ty fails to pay the obligation upon demand, it will be liable for the
payment of interest.
Issue:
Whether CIC should be held liable to pay legal interest over and
above its principal obligation under the surety agreement.
Page 6 of 63
Ruling:
YES. If a surety upon demand fails to pay, he can be held liable
for interest, even if in thus paying, its liability becomes more than
the principal obligation. CIC’s liability as a surety is different from
its liability under the law. The increased liability is not because of
the contract but because of the default and the necessity of judi-
cial collection.
In the present case, there is no dispute that CIC’s obligation con-
sists of a loan or forbearance of money. No interest has been
agreed upon in writing between CIC and RCBC. Applying the rule
enunciated in the case of Eastern Shipping Lines v. CA (July 12,
1994), the CA correctly imposed the rate of interest at 12% per
annum to be computed from the time the extra-judicial demand
was made. This is in accordance with the provisions of Article
1169 of the Civil Code and of the settled rule that where there has
been an extra-judicial demand before action for performance was
filed, interest on the amount due begins to run not from the date
of the filing of the complaint but from the date of such extra- judi-
cial demand. RCBC’s extra- judicial demand for the payment of
JIGS’ obligation was made on October 30, 1984; while the extra-
judicial demand for the payment of ELBA’s obligation was made
on December 17, 1984.
ELIZABETH EUSEBIO-CALDERON v. PEOPLE OF THE
PHILIPPINES
G.R. No. 158495, October 21, 2004, Ynares-Santiago, J.
In the absence of a stipulation as to interest, the loan
due will now earn interest at the legal rate of 12% per annum as
laid down in the case of Eastern Shipping Lines, Inc. v. Court of
Appeals (July 12, 1994).
Facts:
Calderon was charged with Estafa in three different informations.
Calderon issued checks which were dishonored having been
drawn against a Closed Account and inspite of repeated demands
by the bank, Calderon failed and refused to deposit. The RTC
rendered a joint decision finding Calderon guilty beyond reasona-
ble doubt of three counts of Estafa but ruled that her liability for
the interest checks was only civil. Calderon appealed the judg-
ment. The CA reversed and set aside the RTC’s decision and
acquitted Calderon of the crimes charged on the ground that her
guilt has not been proven beyond reasonable doubt. However,
she was held civilly liable.
Issue:
Whether Calderon is liable to pay interest in the principal loan
despite the dismissal of the interest checks.
Ruling:
YES. The civil liability of petitioner includes only the principal
amount of the loan. With respect to the interest checks she is-
sued, the same are void. There was no written proof of the paya-
ble interest except for the verbal agreement that the loan shall
earn 5% interest per month.
However, while there can be no stipulated interest, there can be
legal interest. It is elementary that in the absence of a stipulation
as to interest, the loan due will now earn interest at the legal rate
of 12% per annum as laid down in the case of Eastern Shipping
Lines, Inc. v. Court of Appeals (July 12, 1994).
Hence, Calderon is liable for the payment of legal interest per
annum to be computed from December 20, 1994, the date when
she received the demand letter. After the judgment becomes final
and executory until the obligation is satisfied, the amount due
shall earn interest at 12% per year, the interim period being
deemed equivalent to a forbearance of credit.
EASTERN SHIPPING LINES, INC. v. HON. COURT OF
APPEALS and MERCANTILE INSURANCE COMPANY, INC.
G.R. No. 97412, July 12, 1994, Vitug, J.
When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal interest,
whether the case is due to breach of obligation or loan shall be
12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance
of credit.
Facts:
This is an action against Eastern Shipping Company, arrastre
operator (Metro Port) and broker-forwarder (Allied Brokerage
Corporation) for damages sustained by a shipment while in its
custody, filed by the insurer-subrogee (Mercantile Insurance
Company) who paid the consignee the value of such loss-
es/damages. As a consequence of the losses sustained, Mercan-
tile was compelled to pay the consignee P19,032.95 under the
afore stated marine insurance policy, so that it became subrogat-
ed to all the rights of action of said consignee against defendants
who failed and refused to pay the same. The RTC ruled that
Eastern, Metro Port and Allied Brokerage are solidarily liable to
pay. The CA affirmed the RTC decision. Hence, the instant peti-
tion.
Issue:
Whether Eastern Shipping Lines is liable to pay legal interest.
Ruling:
YES. The Supreme Court laid down the following guidelines:
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-
delicts is breached, the contravenor can be held lia-
ble for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining
the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is im-
posed, as follows:
1. When the obligation is breached, and it con-
sists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due
should be that which may have been stipulat-
ed in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipula-
tion, the rate of interest shall be 12% per an-
num to be computed from default, i.e., from
judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an inter-
est on the amount of damages awarded may
be imposed at the discretion of the court at
the rate of 6% per annum. No interest, how-
ever, shall be adjudged on unliquidated claims
or damages except when or until the demand
can be established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall
begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so
reasonably established at the time the de-
mand is made, the interest shall begin to run
Page 7 of 63
 only from the date the judgment of the court is
made (at which time the quantification of
damages may be deemed to have been rea-
sonably ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a
sum of money becomes final and executory,
the rate of legal interest, whether the case
falls under paragraph 1 or paragraph 2,
above, shall be 12% per annum from such fi-
nality until its satisfaction, this interim period
being deemed to be by then an equivalent to
a forbearance of credit.
In this case, the legal interest to be paid is 6% on the amount due
computed from the decision, dated 3 February 1988, of the CA. A
12% interest, in lieu 6%, shall be imposed on such amount upon
finality of this decision until the payment thereof.
LETICIA Y. MEDEL DR. RAFAEL MEDEL and SERVANDO
FRANCO v. COURT OF APPEALS, Spouses VERONICA R.
GONZALES and DANILO G. GONZALES, JR.
G.R. No. 131622, November 27, 1998, Pardo, J.
With the Usury Law being legally inexistent by virtue of
CB Circular 905, interest can now be charged as lender and bor-
rower may agree upon. The 5.5% interest rate per month in this
case although not usurious, is iniquitous or unconscionable, and,
hence, contrary to morals, if not against the law. The stipulation is
void.
Facts:
In this case, there were three loan transactions on November 7
and 19, 1985 and on June 11, 1986. Servando and Medel ob-
tained a loan from Veronica who was engaged in the money lend-
ing business under the name "Gonzales Credit Enterprises" as
evidenced by promissory notes. On maturity of the first two prom-
issory notes, the borrowers failed to pay their indebtedness. Con-
sequently, like the previous loans, Servando and Medel failed to
pay the third loan on maturity.
Servando and Medel with the latter's husband, Dr. Rafael Medel,
consolidated all their previous unpaid loans totaling P440,000.00,
and sought from Veronica another loan in the amount of
P60,000.00, bringing their indebtedness to a total of P500,000.00,
payable on August 23, 1986. In the promissory note it was stipu-
lated that Servando and Medel’s loan would earn interest at 5.5%
per month plus 2% service charge per annum until fully paid ac-
cording to the amortization schedule contained therein.
Issue:
Whether the stipulated rate of interest at 5.5% per month on the
loan of P500,000.00 is usurious.
Ruling:
NO. The stipulated rate of interest at 5.5% per month is exces-
sive, iniquitous, unconscionable and exorbitant. However it is not
usurious because as consistently held, Circular No. 905 of the
Central Bank, adopted on December 22, 1982, has expressly
removed the interest ceilings of the Usury Law and that the Usury
Law is now ―legally inexistent‖. Interest can now be charged as
lender and borrower may agree upon.
The interest of 5.5% per month, or 66% per annum, stipulated
upon by the parties in the promissory note is iniquitous or uncon-
scionable, and, hence, contrary to morals ("contra bonos mores"),
if not against the law. The stipulation is void. The courts shall
reduce equitably liquidated damages, whether intended as an
indemnity or a penalty if they are iniquitous or unconscionable.
SPOUSES SILVESTRE and CELIA PASCUAL v. RODRIGO V.
RAMOS
G.R. No. 144712, July 4, 2002, Davide, Jr., C.J.
With the suspension of the Usury Law and the removal
of interest ceiling, the parties are free to stipulate the interest to
be imposed on loans. An agreed 7% interest rate per month is
valid. The Supreme Court is not in a position to impose upon
parties contractual stipulations different from what they have
agreed upon.
Facts:
Spouses Pascual executed a Deed of Absolute Sale with Right to
Repurchase over two parcel of lands for P150,000.00 in favor of
Ramos. The Pascuals did not exercise their right to repurchase
within the stipulated one year period, thus, Ramos prayed that the
ownership or title over the subject lands and improvements there-
on be consolidated in his favor. The RTC found that the transac-
tion between the parties was actually a loan in the amount of
P150,000.00, the payment of which is secured by a mortgage of
the property. Further, the RTC declared the interest of 7% to be
too onerous, reducing the interest rate to 5%. The CA affirmed the
RTC decision.
Issue:
Whether the RTC erred in reducing the interest rate from 7% to
5%.
Ruling:
YES. The Pascuals never raised as a defense or as basis for their
counterclaim the nullity of the stipulated interest. Their own evi-
dence clearly shows that they have agreed on, and have in fact
paid interest at, the rate of 7% per month. When Ramos moved
for a reconsideration of the RTC decision pointing out that the
interest rate to be used should be 7% per month, the Pascuals
never lifted a finger to oppose the claim.
The ruling in Medel v. Court of Appeals (1998) is not applicable to
the present case. In that case, the excessiveness of the stipulated
interest at the rate of 5.5 % per month was put in issue by the
defendants in the Answer. In the case at bar, there is no other
stipulation for the payment of an extra amount except interest on
the principal loan.
With the suspension of the Usury Law and the removal of interest
ceiling, the parties are free to stipulate the interest to be imposed
on loans. Absent any evidence of fraud, undue influence, or any
vice of consent exercised by Ramos on the Pascuals, the interest
agreed upon is binding upon them. This Court is not in a position
to impose upon parties contractual stipulations different from what
they have agreed upon.
SPOUSES FELIMON and MARIA BARRERA v. SPOUSES
EMILIANO and MARIA CONCEPCION LORENZO
G.R. No. 130994, September 18, 2002, Sandoval-Guttierez, J.
The agreed interest rate must be stipulated in writing to
be imposed. If the loan remains unpaid despite the lapse of the
period agreed upon, 12% per annum shall be imposed as the
interest rate beyond the agreed period, being the legal interest.
Facts:
Spouses Barrera borrowed a sum of money from Spouses Laza-
ro. The loan was secured by a real estate mortgage. A month and
a half later, the Lazaro spouses needed money and informed
Spouses Barrera that they would transfer the loan to spouses
Lorenzo. Spouses Barrera executed another real estate mort-
gage. The mortgage contract provides, among others, that the
new loan shall be payable within three (3) months, or until August
14, 1991; that it shall earn interest at 5% per month; and that
Page 8 of 63
should petitioners fail to pay their loan within the said period, the
mortgage shall be foreclosed. When Spouses Barrera failed to
pay their loan in full on August 14, 1991, Spouses Lorenzo al-
lowed them to complete their payment until December 23, 1993.
On this date, they made a total payment of P687,000.00. Spouses
Lorenzo wrote Spouses Barrera a demand letter for the payment
of P325, 000.00 plus interest otherwise they would foreclose the
mortgage. Spouses Barrera claimed that they have overpaid their
obligation and demanded the return of their land title and refund
of their excess payment.
Spouses Barrera filed for before the RTC for the return of their
money. The RTC ruled in favor of Spouses Barrera. Upon appeal,
the CA reversed the RTC decision.
Issue:
Whether the 5% stipulated monthly interest on the loan was only
for 3 months, or from May 14, 1991 up to August 14, 1991.
Ruling:
YES. It is clear from the stipulations that the loan shall be payable
within 3 months, or from May 14, 1991 up to August 14, 1991.
During such period, the loan shall earn an interest of 5% per
month. Furthermore, the contract shall have no force and effect
once the loan shall have been fully paid within the three-month
period, otherwise, the mortgage shall be foreclosed extrajudicially.
Records show that upon maturity of the loan on August 14, 1991,
petitioners failed to pay their entire obligation. Instead of exercis-
ing their right to have the mortgage foreclosed, respondents al-
lowed petitioners to pay the loan on a monthly installment basis
until December, 1993. It bears emphasis that there is no written
agreement between the parties that the loan will continue to bear
5% monthly interest beyond the agreed three-month period. Art.
1956 mandates that no interest shall be due unless it has been
expressly stipulated in writing. Thus, beyond such period, the
interest to be imposed is 12% per annum, being the legal interest.
FIRST FIL-SIN LENDING CORPORATION v. GLORIA D.
PADILLO
G.R. No. 160533. January 12, 2005, Ynares-Santiago, J.
When the loan obligation clearly and unambiguously
provides that interest rates shall be imposed on a per annum
basis, such is controlling. Absent any proof of vice of consent, the
promissory notes and disclosure statements remain the best evi-
dence to ascertain the real intent of the parties.
Facts:
Gloria Padillo filed an action for sum of money against First Fil-Sin
before the RTC of Manila. She alleged that she only agreed to
pay interest at the rates of 4.5% and 5% per annum, respectively,
for the two loans she obtained from First Fil-Sin, and not 4.5%
and 5% per month. Padillo sought to recover the amounts she
allegedly paid in excess of her actual obligations. Further, she
also questioned the validity of the 1% per day penalty charge.
Issues:
1. Whether the interest must be on a per annum basis.
2. Whether the 1% per day penalty charge is valid.
Ruling:
1. YES. Perusal of the promissory notes and the disclosure
statements pertinent to the July 22, 1997 and September 7,
1997 loan obligations of Padillo clearly and unambiguously pro-
vide for interest rates of 4.5% per annum and 5% per annum,
respectively. Nowhere was it stated that the interest rates shall
be applied on a monthly basis. The checks issued by respond-
ent do not clearly and convincingly prove that the real intent of
the parties is to apply the interest rates on a monthly basis. Ab-
sent any proof of vice of consent, the promissory notes and dis-
closure statements remain the best evidence to ascertain the
real intent of the parties. Notably, petitioner even admitted that
it was solely responsible for the preparation of the loan docu-
ments, and that it failed to correct the pro forma note p.a. to per
month. Since the mistake is exclusively attributed to petitioner,
the same should be charged against it.
2. NO. As regards the penalty charges, SC agrees with CA in
ruling that the 1% penalty per day of delay is highly uncon-
scionable. Applying Art. 1229 of the Civil Code, courts shall eq-
uitably reduce the penalty when the principal obligation has
been partly or irregularly complied with, or if it is iniquitous or
unconscionable.
HERMOJINA ESTORES v. SPOUSES ARTURO and LAURA
SUPANGAN
G.R. No. 175139, April 18, 2012, Del Castillo, J.
The unlawful withholding of money by a vendor which
rightfully belongs to a vendee amounts to an involuntary loan
which can be considered as a forbearance of money. A vendor is
liable for interests notwithstanding the absence of the stipulation
to pay the same if he does not comply with her obligation and was
already in default when a demand was made upon him.
Facts:
Hermojina Estores and Spouses Supangan entered into a condi-
tional Deed of Sale. It was stated in the deed that if the vendor
(Estores) would fail to fulfill the conditions, the money paid as
down payment must be returned. On the contrary if it is the ven-
dee (spouses) who would fail in fulfilling the conditions, a forfei-
ture of 25% of the down payment shall be effected.
In this case vendor, Estores failed to fulfill the conditions imposed
upon her. Spouses demanded for the return of P3.5 million paid
amount. Petitioner Estores is amenable to the return of the
amount but disagreed for the imposition of 12% interest demand-
ed by the spouses for according to her it the same was not stipu-
lated.
Issue:
Whether the imposition of interest is proper notwithstanding the
absence of stipulation.
Ruling:
YES. Interest may be imposed even in the absence of a stipula-
tion in the contract. Article 2210 of the Civil Code expressly pro-
vides that ―[i]nterest may, in the discretion of the court, be allowed
upon damages awarded for the breach of contract‖. In this case,
Estores failed to comply with her obligation despite demand.
In Crismina Garments, Inc. v. Court of Appeals, forbearance was
defined as a "contractual obligation of lender or creditor to refrain
during a given period of time, from requiring the borrower or debt-
or to repay a loan or debt then due and payable." A loan where a
debtor is given a period within which to pay a loan or debt. For-
bearance of money, goods or credits should therefore refer to
arrangements other than loan agreements, where a person ac-
quiesces to the temporary use of his money, goods or credits
pending happening of certain events or fulfillment of certain condi-
tions. When an obligation arises out of a loan or forbearance of
money, goods, or credit, the applicable interest rate shall be 12%
per annum.
In this case, Estores’ unwarranted withholding of the money which
rightfully pertains to the spouses amounts to forbearance of mon-
ey which can be considered as an involuntary loan so the appli-
cable rate is 12% which started to run from September 2000
when Spouses Supangan made a demand upon Estores.
Page 9 of 63
 ILEANA DR. MACALINAO v. BANK OF THE PHILIPPINE
ISLANDS
G.R. No. 175490, September 17, 2009, Velasco, Jr., J.
Stipulated interest rates of 3% per month and higher
are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the
law.
Facts:
Macalinao is a card holder of a BPI credit facility. Upon failure of
Macalinao to pay for its balance when it became due, BPI de-
manded payment of 3% per month interest and an additional 3%
per month penalty charge. The propriety of the stated interest
rates were questioned all the way up to the SC.
Issue:
Whether the imposition of 3% per month interest and penalty
charge are valid.
Ruling:
NO. It should be reduced to 2% per month or 24% per annum. SC
need not unsettle the principle it had affirmed in a plethora of
cases that stipulated interest rates of 3% per month and higher
are excessive, iniquitous, unconscionable and exorbitant. Such
stipulations are void for being contrary to morals, if not against the
law. While C.B. Circular No. 905 effectively removed the ceiling
on interest rates for both secured and unsecured loans, regard-
less of maturity, nothing in the said circular could possibly be read
as granting carte blanche authority to lenders to raise interest
rates to levels which would either enslave their borrowers or lead
to a hemorrhaging of their assets. Since the stipulation on the
interest is void, it is as if there is no express contract therein.
Hence, the court may reduce it as reason and equity demands.
The same is true with respect to the penalty charge. Art. 1229 of
the Civil Code provides that ―[t]he judge shall equitably reduce the
penalty when the principal obligation has been partly or irregularly
complied with by the debtor. Even if there has been no perfor-
mance, the penalty may also be reduced by the courts if it is iniq-
uitous or unconscionable.
Thus, under the circumstances, the SC found it equitable to re-
duce the interest rate pegged by the CA at 1.5% monthly to 1%
monthly and penalty charge fixed by the CA at 1.5% monthly to
1% monthly or a total of 2% per month or 24% per annum in line
with the prevailing jurisprudence and in accordance with Art. 1229
of the Civil Code.
DARIO NACAR v. GALLERY FRAMES
G.R. No. 189871, August 13, 2013, Peralta, J.
With respect to the award of interest in the form of ac-
tual or compensatory damages, the old case of Eastern Shipping
Lines v. CA (July 12, 1994) is already modified by the promulga-
tion of the Bangko Sentral ng Pilipinas Monetary Board Resolu-
tion No. 796 which lowered the legal rate of interest from 12% to
6%.
Facts:
Dario Nacar filed a labor case against Gallery Frames alleging he
was illegally dismissed. On The Labor Arbiter (LA) found Gallery
Frames guilty of illegal dismissal hence the Arbiter awarded
Nacar P158,919.92 in damages consisting of backwages and
separation pay. Gallery Frames appealed all the way to the Su-
preme Court (SC). The Supreme Court affirmed the decision of
the Labor Arbiter and the decision became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion before
the LA for recomputation as he alleged that his backwages should
be computed from the time of his illegal dismissal (January 24,
1997) until the finality of the SC decision (May 27, 2002) with
interest. The LA denied the motion as he ruled that the reckoning
point of the computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of the LA
(October 15, 1998). The LA reasoned that the said date should be
the reckoning point because Nacar did not appeal hence as to
him, that decision became final and executory
Issue:
Whether the Labor Arbiter is correct specifically as to the reckon-
ing and imposition of interest.
Ruling:
NO. The award of backwages shall be computed from the date of
illegal dismissal until the date of the decision of the Labor Arbiter
but if the employer appeals, then the end date shall be extended
until the day when the appellate court’s decision shall become
final. Hence, as a consequence, the liability of the employer, if he
loses on appeal, will increase – this is just but a risk that the em-
ployer cannot avoid when it continued to seek recourses against
the Labor Arbiter’s decision. This is also in accordance with Arti-
cle 279 of the Labor Code.
With respect to the award of interest in the form of actual or com-
pensatory damages, the Supreme Court ruled that the old case of
Eastern Shipping Lines v. CA (July 12, 1994) is already modified
by the promulgation of the Bangko Sentral ng Pilipinas Monetary
Board Resolution No. 796 which lowered the legal rate of interest
from 12% to 6%.
Thus, from the foregoing, in the absence of an express stipulation
as to the rate of interest that would govern the parties, the rate of
legal interest for loans or forbearance of any money, goods or
credits and the rate allowed in judgments shall no longer be 12%
per annum − as reflected in the case of Eastern Shipping Lines
but will now be 6% per annum effective July 1, 2013. It should be
noted, nonetheless, that the new rate could only be applied pro-
spectively and not retroactively. Consequently, the 12% per an-
num legal interest shall apply only until June 30, 2013. Come July
1, 2013 the new rate of 6% per annum shall be the prevailing rate
of interest when applicable.
ECE REALTY AND DEVELOPMENT, INC v. HAYDYN
HERNANDEZ
G.R. No. 212689, August 11, 2014, Reyes, J.
By virtue of CB Circular 799, the rate of interest to be
imposed from finality of judgments which is deemed a forbear-
ance of credit, is now back at 6%, the rate provided for in Article
2209 of the Civil Code.
Facts:
ECE Realty breached its contract with Hernandez when it failed to
deliver the condominium unit purchased by the latter notwith-
standing the downpayment given by Hernandez. Hernandez filed
a complaint against ECE. The RTC and CA ruled in favor of Her-
nandez. The only issue now is propriety of the imposition of 12%
interest per annum from the finality of decision until the satisfac-
tion of the monetary obligation.
Issue:
Whether the applicable interest rate from finality of judgement
until satisfaction is 12%.
Ruling:
NO. The applicable interest rate is 6% per annum. There is no
doubt that ECE incurred in delay in delivering the subject condo-
minium unit, for which reason the trial court was justified in award-
ing interest to the respondent from the filing of his complaint.
There being no stipulation as to interest, under Art. 2209, the
Page 10 of 63
imposable rate is 6% by way of damages. Thus, from the finality
of the judgment awarding a sum of money until it is satisfied, the
award shall be considered a forbearance of credit, regardless of
whether the award in fact pertained to one.
Since July 1, 2013, the rate of 12% per annum from finality of the
judgment until satisfaction has been brought back to 6%, pursuant
to CB Circular No. 799. Thus, the rate of interest to be imposed
from finality of judgments is now back at 6%, the rate provided in
Art. 2209 of the Civil Code.
PHILIPPINE NATIONAL BANK v. THE HON. COURT OF
APEALS and AMBROSIO PADILLA
G.R. No. 88880, April 30, 1991, Griro-Aquino, J.
Despite the suspension of the Usury Law, banks are
not authorized to unilaterally and successively increase interest
rates. The increased interest rates unilaterally imposed by a bank
is in violation of the principle of mutuality of contracts under Art.
1308 of the Civil Code.
Facts:
Ambrosio Padilla applied for and was granted a credit line of
P321.8 million by PNB for a term of 2 years at 18% interest per
annum. The same was secured by a real estate mortgage and 2
promissory notes executed in favor of PNB by Padilla. The credit
agreement and the promissory notes, in effect, provide that Pa-
dilla agrees to be bound by ―increases to the interest rates stipu-
lated, provided it is within the limits provided for by law‖.
Conflict in this case arose when PNB unilaterally increased the
interest rate from 18% to: (1) 32% [July 1984]; (2) 41% [October
1984]; and (3) 48% [November 1984], or 3 times within the span
of a single year. This was done despite the numerous letters of
request made by Padilla that the interest rate be increased only to
21% or 24%. Padilla then filed a complaint against PNB with the
RTC. The latter dismissed the case for lack of merit. Appeal by
Padilla to CA resulted in a judgment in his favor. Hence, the peti-
tion for certiorari under Rule 45 of ROC filed by PNB with SC.
Issue:
Whether the bank may validly increase the stipulated interest rate
on loans contracted with third persons as often as necessary and
against the protest of such persons, despite the removal of the
ceiling on interest.
Ruling:
NO. Although under Sec. 2 of PD 116 the Monetary Board is au-
thorized to prescribe the maximum rate of interest for loans and to
change such rates whenever warranted by prevailing economic
and social conditions, by express provision, it may not do so ―of-
tener than once every 12 months‖. If the Monetary Board cannot,
much less can PNB effect increases on the interest rates more
than once a year. Based on the credit agreement and promissory
notes executed between the parties, although Padilla did agree to
increase on the interest rates allowed by law, no law was passed
warranting Petitioner to affect increase on the interest rates on the
existing loan of Padilla for the months of July to November of
1984. Neither there being any document executed and delivered
by Padilla to affect such increase.
For escalation clauses to be valid and warrant the increase of the
interest rates on loans, there must be:
(1) increase was made by law or by the Monetary Board;
(2) stipulation must include a clause for the reduction of the stipu-
lated interest rate in the event that the maximum interest is
lowered by law or by the Monetary board. (de-escalation
clause)
In this case, PNB merely relied on its own Board Resolutions,
which are not laws nor resolutions of the Monetary Board. Despite
the suspension of the Usury Law, this does not authorize banks to
unilaterally and successively increase interest rates in violation of
Sec. 2 PD 116. Increases unilaterally imposed by PNB were in
violation of the Mutuality of Contracts under Art. 1308 of the Civil
Code. This provides that the validity and compliance of the parties
to the contract cannot be left to the will of one of the contracting
parties. Increases made are therefore void. Increase on the stipu-
lated interest rates made by PNB also contravenes Art. 1956. It
provides that, ―no interest shall be due unless it has been ex-
pressly stipulated in writing‖. Padilla never agreed in writing to pay
interest imposed by PNB in excess of 24% per annum. Interest
rate imposed by PNB, as correctly found by CA, is indubitably
excessive.
SPOUSES MARIANO and GILDA FLORENDO v. COURT OF
APPEALS and LAND BANK OF THE PHILIPPINES
G.R. NO. 101771, DECEMBER 17, 1996, Panganiban, J.
A contract containing a condition which makes its ful-
fillment dependent exclusively upon the uncontrolled will of one of
the contracting parties is void. The unilateral increase of increase
rate made by a bank violates the principle of mutuality of con-
tracts under Art. 1308 of the Civil Code.
Facts:
Gilda Florendo was an employee of Land Bank from May 17,
1976 until August 16, 1984 when she voluntarily resigned. How-
ever, before her resignation, she applied for a housing loan of
P148,000.00, payable within 25 years from Land Bank’s Provident
Fund on July 20, 1983. On March 19, 1985, Land Bank increased
the interest rate on Florendo’s loan from 9% per annum to 17%,
the said increase to take effect on March 19, 1985.
Spouses Florendo protested the increase in a letter dated June
11, 1985 to which Land Bank replied through a letter. Thereafter,
Land Bank kept on demanding that Florendo pay the increased
interest or the new monthly installments based on the increased
interest rate, but Spouses Florendo vehemently maintained that
the said increase is unlawful and unjustifiable. Because of Land
Bank’s repeated demands, Spouses Florendo were forced to file
the instant suit for injunction and damages.
Issue:
Whether the respondent bank has a valid and legal basis to im-
pose an increased interest rate on the Florendo's housing loan.
Ruling:
NONE. In Banco Filipino Savings & Mortgage Bank vs. Navarro
152 SCRA 346 (1987), the Supreme Court in essence ruled that
in general there is nothing inherently wrong with escalation claus-
es. In IBAA vs. Spouses Salazar 159 SCRA 133 (1988), the Court
reiterated the rule that escalation clauses are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the
value of money in long term contracts.
However, the unilateral determination and imposition of increased
interest rates by Land Bank is obviously violative of the principle
of mutuality of contracts ordained in Article 1308 of the Civil Code.
SPOUSES IGNACIO F. JUICO and ALICE P. JUICO v. CHINA
BANKING CORPORATION
G.R. No. 187678, April 10, 2013, Villarama, Jr., J.
There is nothing inherently wrong with escalation
clauses. There is no escalation if the interest rates to be imposed
would vary as determined by prevailing market rates. Neverthe-
less, such is void if it grants to the bank the power to impose an
increased rate of interest without the written notice and consent of
the debtor.
Facts:
Page 11 of 63

Spouses Juico obtained a loan from China Banking Corporation in
the amount of P6,216,000 and P4,139,000. The loan was secured
by a real estate mortgage over their property located at Quezon
City. When the spouses defaulted in the payment of their obliga-
tion, the mortgaged property was sold at public auction, with Chi-
na bank as the highest bidder for the amount of P10,300,000.
Thereafter, Spouses Juico received a demand letter dated May 2,
2001 from China Banking Corporation for the payment of
P8,901,776.63, the amount of deficiency after applying the pro-
ceeds of the foreclosure sale.
In its complaint, China Banking prayed that judgment be rendered
ordering Spouses Juico to pay (1)P8,901,776.63 representing the
amount of deficiency, plus interests at the legal rate, from Febru-
ary 23, 2001 until fully paid; (2) an additional amount equivalent to
1/10 of 1% per day of the total amount, until fully paid, as penalty.
The RTC ordered Spouses Juicoto pay the bank P9,000,000 plus
interest which amounted to P15,000,000. The CA affirmed said
decision. Spouses Juico contend that the interest rates were uni-
laterally imposed by the bank and thus violate the principle of
mutuality of contracts. They argue that the escalation clause in
the promissory notes does not give respondent the unbridled
authority to increase the interest rate unilaterally.
Issue:
Whether the interest rates imposed upon the Spouses Juico by
China Banking Corporation are valid.
Ruling:
NO. Article 1308 provides that the contract must bind both con-
tracting parties; its validity or compliance cannot be left to the will
of one of them. Article 1956 of the Civil Code likewise ordains that
"no interest shall be due unless it has been expressly stipulated in
writing."
It has long been recognized that there is nothing inherently wrong
with escalation clauses. Nevertheless, an escalation clause is
void where the creditor unilaterally determines and imposes an
increase in the stipulated rate of interest without the express con-
formity of the debtor. Such unbridled right given to creditors to
adjust the interest independently and upwardly would completely
take away from the debtors the right to assent to an important
modification in their agreement and would also negate the ele-
ment of mutuality in their contracts.
Here, the escalation clause in the promissory notes authorizing
the bank to adjust the rate of interest on the basis of a law or
regulation issued by the Central Bank of the Philippines, should
be read together with the statement after the first paragraph
where no rate of interest was fixed as it would be based on pre-
vailing market rates. While the latter is not strictly an escalation
clause, its clear import was that interest rates would vary as de-
termined by prevailing market rates. Evidently, the parties intend-
ed the interest on the spouses’ loan, including any upward or
downward adjustment, be determined by the prevailing market
rates and not dictated by the bank’s policy.
There is no indication that the spouses were coerced into agree-
ing with the provisions of the promissory notes. Spouses did not
protest to the new rates imposed on their loan even when their
property was foreclosed. This notwithstanding, the escalation
clause is still void because it granted to the bank the power to
impose an increased rate of interest without a written notice to
spouses and their written consent.
____________________________________________________
Other matters in Simple Loan
ARTICLE 1957. Contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury
shall be void.
The borrower may recover in accordance with the laws on usury.
ARTICLE 1958. In the determination of the interest, if it is payable
in kind, its value shall be appraised at the current price of the
products or goods at the time and place of payment.
ARTICLE 1959. Without prejudice to the provisions of article 2212,
interest due and unpaid shall not earn interest.
However, the contracting parties may by stipulation capitalize the
interest due and unpaid, which as added principal, shall earn new
interest.
ARTICLE 1960. If the borrower pays interest when there has been
no stipulation therefor, the provisions of this Code concerning
solutio indebiti, or natural obligations, shall be applied, as the case
may be.
ARTICLE 1961. Usurious contracts shall be governed by the Usu-
ry Law and other special laws, so far as they are not inconsistent
with this Code.
____________________________________________________
DEPOSIT
DEPOSIT IN GENERAL AND ITS DIFFERENT KINDS
Concept
ARTICLE 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same.
If the safekeeping of the thing delivered is not the principal pur-
pose of the contract, there is no deposit but some other contract.
Note: Its principal purpose is for the safekeeping of the
thing. As a rule, the depository cannot use it unless using it
is necessary for its preservation.
If safekeeping is not its principal purpose, it is a commoda-
tum or mutuum. It could also be a lease.
Nature
ARTICLE 1963. An agreement to constitute a deposit is binding
(consensual contract), BUT the deposit itself is not perfected until
the delivery of the thing (real contract).
Gratuitous
ARTICLE 1965. A deposit is a gratuitous contract, (1) EXCEPT
when there is an agreement to the contrary, or (2) UNLESS the
depositary is engaged in the business of storing goods.
Note: As to necessary expenses:
General Rule: The depositary is obliged to incur such ex-
penses if it is a gratuitous deposit.
Exception: The depositary is not obliged to incur
such expenses if it is an onerous deposit because
it is deemed included in the payment.
Object
ARTICLE 1966. Only movable things may be the object of a
deposit.
Page 12 of 63
 Note: Immovable things can be its objection if it is a Judi-
cial Deposit.
Cases:
OVERSEAS BANK OF MANILA v. COURT OF APPEALS, IN-
TEGRATED REALTY CORPORATION, and RAUL L. SANTOS
G.R. No. L-60907, June 28, 1989, Regalado, J.
While it is true that under Article 1956 of the Civil Code
no interest shall be due unless it has been expressly stipulated in
writing, this applies only to interest for the use of money. It does
not comprehend interest paid as damages.
Facts:
Raul Santos made two time deposits with Overseas Bank of Ma-
nila (OBM) in the amount of P500,000.00 and P200,000.00. Inte-
grated Realty Corporation (IRC) thru its President Raul Santos,
applied for a loan and/or credit line in the amount of P700,000.00
with Philippine National Bank (PNB). To secure the said loan,
Santos executed a Deed of Assignment of the two time deposits
with OBM. OBM after the due dates of the time deposit certifi-
cates, did not pay PNB. The latter demanded payment from IRC
and Santos and from OBM. IRC and Santos replied that the obli-
gation (loan) of IRC was deemed paid with the irrevocable as-
signment of the time deposit certificates.
PNB filed a complaint to collect from IRC and Santos the loan of
P 700,000.00. It impleaded OBM as a defendant to compel it to
redeem and pay to it Santos' time deposit certificates with inter-
est.
The trial court ruled in favor of PNB ordering IRC and Santos to
pay PNB the total amount of P700,000 plus interest. CA promul-
gated its appealed decision, with a modification and the deletion
of that portion of the judgment of the trial court ordering OBM to
pay IRC and Santos whatever amounts they will pay to PNB with
interest from the date of payment. IRC and Santos now claim that
OBM should reimburse them for whatever amounts they may be
adjudged to pay PNB by way of compensation for damages in-
curred.
Issue:
Whether there was a contract of deposit between Santos and
OBM.
Ruling:
NO. OBM and Santos entered into a contract of simple loan and
not deposit. When PNB demanded from OBM payment of the
amounts due on the two time deposits which matured on January
11, 1968 and February 6, 1968, respectively, there was as yet no
obstacle to the faithful compliance by OBM of its liabilities there-
under. Consequently, for having incurred in delay in the perfor-
mance of its obligation, OBM should be held liable for damages.
Distinction must be made between the interest which the deposits
should earn from their existence until the bank ceased to operate,
and that which they may earn from the time the bank’s operations
were stopped until the date of payment of the deposits. As to the
first-class, it should be paid because such interest has been
earned in the ordinary course of the bank’s business and before
the latter has been declared in a state of liquidation. Moreover,
the bank being authorized by law to make use of the deposits with
the limitation stated, to invest the same in its business and other
operations, it may be presumed that it bound itself to pay interest
to the depositors as in fact it paid interest prior to the dates of the
said claims. As to the interest which may be charged from the
date the bank ceased to do business because it was declared in a
state of liquidation, said interest should not be paid.
While it is true that under Art. 1956 of the Civil Code no interest
shall be due unless it has been expressly stipulated in writing, this
applies only to interest for the use of money. It does not compre-
hend interest paid as damages. OBM contends that it had agreed
to pay interest only up to the dates of maturity of the certificates of
time deposit and that respondent Santos is not entitled to interest
after the maturity dates had expired, unless the contracts are
renewed. This is true with respect to the stipulated interest, but
the obligations consisting as they did in the payment of money,
under Art. 1108 of the Civil Code, he has the right to recover
damages resulting from the default of OBM and the measure of
such damages is interest at the legal rate of six percent (6%) per
annum on the amounts due and unpaid at the expiration of the
periods respectively provided in the contracts. In fine, OBM is
being required to pay such interest, not as interest income stipu-
lated in the certificates of time deposit, but as damages for failure
and delay in the payment of its obligations which thereby com-
pelled IRC and Santos to resort to the courts.
The applicable rule is that legal interest, in the nature of damages
for non-compliance with an obligation to pay a sum of money, is
recoverable from the date judicial or extra-judicial demand is
made, which latter mode of demand was made by PNB, after the
maturity of the certificates of time deposit. The measure of such
damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon in the certificates of deposit
which is six and one-half percent (6.5%). Such interest due or
accrued shall further earn legal interest from the time of judicial
demand.
BANK OF THE PHILIPPINE ISLANDS v. THE INTERMEDIATE
APPELLATE COURT and ZSHORNACK
G.R. No. L-66826, August 19, 1988, Cortes, J.
When the subsequent acts of the parties show that their
intent was really for the bank to safely keep the dollars and to
return it to the depositor at a later time, the contract entered into
by them is one of deposit.
Facts:
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in
COMTRUST (BPI absorbed COMTRUST through a corporate
merger and was substituted as party to the case) a dollar savings
account and a peso current account.
An application for a dollar draft was accomplished by Virgilio Gar-
cia, Assistant Branch Manager of COMTRUST Quezon City, pay-
able to a certain Leovigilda Dizon in the amount of $1,000.00. In
the application, Garcia indicated that the amount was to be
charged to dollar savings account of the Zshornacks; the charges
for commission, documentary stamp tax and others were to be
charged to Current Acct. No. 210465-29, again, the current ac-
count of the Zshornacks. There was no indication of the name of
the purchaser of the dollar draft.
On the same date, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Di-
zon in the sum of US $1,000 drawn on the Chase Manhattan
Bank, New York, with an indication that it was to be charged to
the dollar savings account.
When Zshornack noticed the withdrawal of US$1,000.00 from his
account, he demanded an explanation from the bank. In answer,
COMTRUST claimed that the peso value of the withdrawal was
given to Atty. Ernesto Zshornack, Jr., brother of Rizaldy, on Octo-
ber 27, 1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Cor-
poration payable to Ernesto.
RTC and CA ruled that BPI is liable for the unauthorized with-
drawal of US$1,000.00 from Zshornack’s dollar account.
In the second cause of action, the complaint filed alleged that
Zshornack entrusted to COMTRUST, thru Garcia, US $3,000.00
cash (popularly known as ―greenbacks‖) for safekeeping, and that
the agreement was embodied in a document, a copy of which was
attached to and made part of the complaint.
Page 13 of 63

Issue:
Whether the contract between petitioner and respondent bank is a
deposit.
Held:
YES. The document which embodies the contract states that the
US$3,000.00 was received by the bank for safekeeping. The
subsequent acts of the parties also show that their intent was
really for the bank to safely keep the dollars and to return it to
Zshornack at a later time. Thus, Zshornack demanded the return
of the money on May 10, 1976, or over five months later. The
parties did not intend to sell the US dollars to the Central Bank
within one business day from receipt. Otherwise, the contract of
depositum would never have been entered into at all.
Nevertheless, Zshornack cannot recover since the mere safe-
keeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which
is not authorized by CB Circular No. 20, it must be considered as
one which falls under the general class of prohibited transactions.
Hence, Zhornack is considered in pari delicto with the bank.
____________________________________________________
ARTICLE 1964. A deposit may be constituted judicially or extraju-
dicially.
ARTICLE 1967. An extrajudicial deposit is either voluntary or nec-
essary.
_____________________________________________________
VOLUNTARY DEPOSIT
SEC. 1 - General Provisions
ARTICLE 1968. A voluntary deposit is that wherein the delivery is
made by the will of the depositor.
A deposit may also be made by two or more persons each of
whom believes himself entitled to the thing deposited with a third
person, who shall deliver it in a proper case to the one to whom it
belongs.
ARTICLE 1969. A contract of deposit may be entered into orally or
in writing.
ARTICLE 1971. If the deposit has been made by a capacitated
person with another who is not, the depositor shall only have an
action to recover the thing deposited while it is still in the posses-
sion of the depositary, or to compel the latter to pay him the
amount by which he may have enriched or benefited himself with
the thing or its price.
However, if a third person who acquired the thing acted in bad
faith, the depositor may bring an action against him for its recov-
ery.
Note: Where there are several depositors claiming to be
entitled to the thing deposited, the action to compel the de-
positors to settle their conflicting claims among themselves
would be in the nature of an interpleader. (De Leon, 2013)
SEC. 2 - Obligations of the Depositary
ARTICLE 1974. The depositary may change the way of the depos-
it if under the circumstances he may reasonably presume that the
depositor would consent to the change if he knew of the facts of
the situation. However, before the depositary may make such
change, he shall notify the depositor thereof and wait for his deci-
sion, unless delay would cause danger.
ARTICLE 1975. The depositary holding certificates, bonds, securi-
ties or instruments which earn interest shall be bound to collect the
latter when it becomes due, and to take such steps as may be
necessary in order that the securities may preserve their value and
the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes.
ARTICLE 1976. Unless there is a stipulation to the contrary, the
depositary may commingle grain or other articles of the same kind
and quality, in which case the various depositors shall own or have
a proportionate interest in the mass.
No deposit with third person
ARTICLE 1973. Unless there is a stipulation to the contrary, the
depositary cannot deposit the thing with a third person.
If deposit with a third person is allowed, the depositary is liable for
the loss if he deposited the thing with a person who is manifestly
careless or unfit.
The depositary is responsible for the negligence of his employees.
When there is permission to use
ARTICLE 1977. The depositary cannot make use of the thing de-
posited without the express permission of the depositor.
Otherwise, he shall be liable for damages.
However, when the preservation of the thing deposited requires its
use, it must be used but only for that purpose.
Purpose
ARTICLE 1978. When the depositary has permission to use the
thing deposited, the contract loses the concept of a deposit and
becomes a loan or commodatum, except where safekeeping is still
the principal purpose of the contract.
The permission shall not be presumed, and its existence must be
proved.
Fortuitous Events (SUDA)
ARTICLE 1979. The depositary is liable for the loss of the thing
through a fortuitous event:
(1) If it is so stipulated;
(2) If he uses the thing without the depositor’s permission;
(3) If he delays its return;
(4) If he allows others to use it, even though he himself
may have been authorized to use the same.
Bank deposits are loans
ARTICLE 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions
concerning simple loan.
Cases:
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERE-
SITA SANTOS v. THE CITY FISCAL OF MANILA, HON. JOSE
B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA
and CLEMENT DAVID
G.R. No. L-60033, April 4, 1984, Makasiar, Actg. C.J.
Bank deposits are in the nature of irregular deposits.
They are really loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans.
Page 14 of 63

Facts:
Clement David charged Guingona, Martin, and Santos with estafa
and violation of Central Bank Circular No. 364 and related Central
Bank regulations on foreign exchange transactions.
David invested with the Nation Savings and Loan Association,
(NSLA) the sum of P1,145,546.20 on nine deposits, P13,531.94
on savings account deposits (jointly with his sister, Denise
Kuhne), US$10,000.00 on time deposit, US$15,000.00 under a
receipt and guarantee of payment and US$50,000.00 under a
receipt that David was induced into making the aforestated in-
vestments by Robert Marshall, an Australian national who was
allegedly a close associate of petitioner Guingona Jr., then NSLA
President, Martin, then NSLA Executive Vice-President of NSLA
and Santos, then NSLA General Manager; that on March 21,
1981 NSLA was placed under receivership by the Central Bank,
so that David filed claims therewith for his investments and those
of his sister; that on July 22, 1981 David received a report from
the Central Bank that only P305,821.92 of those investments
were entered in the records of NSLA; that, therefore, the re-
spondents in I.S. No. 81-31938 misappropriated the balance of
the investments, at the same time violating Central Bank Circular
No. 364 and related Central Bank regulations on foreign ex-
change transactions; that after demands, petitioner Guingona Jr.
paid only P200,000.00, thereby reducing the amounts misappro-
priated to P959,078.14 and US$75,000.00."
At the inception of the preliminary investigation before respondent
Lota, petitioners moved to dismiss the charges against them for
lack of jurisdiction because David's claims allegedly comprised a
purely civil obligation which was itself novated. Fiscal Lota denied
the motion to dismiss.
But, after the presentation of David's principal witness, the peti-
tioners filed the instant petition because: (a) the production of the
Promissory Notes, Banker's Acceptance, Certificates of Time
Deposits and Savings Account allegedly showed that the transac-
tions between David and NSLA were simple loans, i.e., civil obli-
gations on the part of NSLA which were novated when Guingona,
Jr. and Martin assumed them; and (b) David's principal witness
allegedly testified that the duplicate originals of the aforesaid in-
struments of indebtedness were all on file with NSLA, contrary to
David's claim that some of his investments were not recorded.
Issue:
Whether there was a contract of deposit between David and the
bank.
Ruling:
NONE. When David invested his money on nine savings deposits
with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit.
Under Art. 1980 of the New Civil Code, ―[f]ixed, savings, and cur-
rent deposits of-money in banks and similar institutions shall be
governed by the provisions concerning simple loan.‖
In the case of Serrano v. Central Bank of the Philippines (96
SCRA 102 [1980]), it was ruled that bank deposits are in the na-
ture of irregular deposits. They are really loans because they earn
interest.
Hence, the relationship between Clement David and the Nation
Savings and Loan Association is that of creditor and debtor; con-
sequently, the ownership of the amount deposited was transmit-
ted to the Bank upon the perfection of the contract and it can
make use of the amount deposited for its banking operations,
such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited,
it has, however, no obligation to return or deliver the same money
that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropria-
tion punishable under the Revised Penal Code, but it will only give
rise to civil liability over which the public respondents have no
jurisdiction.
BANK OF THE PHILIPPINE ISLANDS and GRACE ROMERO v.
COURT OF APPEALS and EDVIN F. REYES
G.R. No. 116792, March 29, 1996, Puno, J.
The elements of legal compensation are all present in
the case at bar. Bank deposits, being in the nature of a loan, the
obligors bound principally are at the same time creditors of each
other. BPI stands as a debtor of Reyes, a depositor. At the same
time, BPI is the creditor of Reyes with respect to the dishonored
U.S. Treasury Warrant which the latter illegally transferred to his
joint account. The debts involved consist of a sum of money. They
are due, liquidated, and demandable.
Facts:
Edvin F. Reyes opened a joint savings account with his wife,
Sonia at BPI Cubao. Reyes also held a joint AND/OR Savings
Account with his grandmother, Emeteria Fernandez, at the same
BPI branch. He regularly deposited in this account the U.S.
Treasury Warrants payable to the order of Emeteria as her
monthly pension. Emeteria died on December 28, 1989 without
the knowledge of the U.S. Treasury Department. She was still
sent U.S. Treasury Warrant in the amount of U.S. $377.003 or
P10,556.00.
Reyes deposited the said U.S. treasury check of Fernandez to his
joint savings account with his wife. Two months after Reyes trans-
ferred the funds of his joint account with Fernandez amounting to
P13,112.91 to his joint account with his wife. The U.S. Treasury
Warrant was dishonored as it was discovered that Fernandez
died three days prior to its issuance. The U.S. Department of
Treasury requested the bank for a refund. For the first time the
bank came to know of the death of Fernandez.
Reyes was informed that the treasury check was the subject of a
claim by Citibank NA, correspondent of BPI. He verbally author-
ized them to debit from his other joint account the amount stated
in the dishonored U.S. Treasury Warrant. On the same day, BPI
debited the amount of P10,556.00 from spouses Reyes’ joint
account.
Reyes demanded from BPI the restitution of the debited amount.
He claimed that because of the debit, he failed to withdraw his
money when he needed them. He then filed a suit for Damages
against BPI before the RTC. BPI, averred that Reyes gave them
his express verbal authorization to debit the questioned amount.
RTC dismissed the complaint for lack of cause of action. On ap-
peal, the CA reversed the RTC’s decision.
Issue:
Whether a creditor-debtor relationship exists between Reyes and
BPI for legal compensation to be proper.
Ruling:
YES; therefore, legal compensation is proper. Compensation shall
take place when two persons, in their own right, are creditors and
debtors of each other. Art. 1290 of the Civil Code provides that
when all the requisites mentioned in Art. 1279 are present, com-
pensation takes effect by operation of law, and extinguishes both
debts to the concurrent amount. Legal compensation operates
even against the will of the interested parties and even without the
consent of them. Since this compensation takes place ipso jure,
its effects arise on the very day on which all its requisites concur.
When used as a defense, it retroacts to the date when its requi-
sites are fulfilled.
Art. 1279 states that in order that compensation may be proper, it
is necessary:
Page 15 of 63
 (1) That each one of the obligors be bound principally, and
that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or con-
troversy, commenced by third persons and communicat-
ed in due time to the debtor.
The elements of legal compensation are all present in the case at
bar. The obligors bound principally are at the same time creditors
of each other. BPI stands as a debtor of Reyes, a depositor. At
the same time, BPI is the creditor of Reyes with respect to the
dishonored U.S. Treasury Warrant which the latter illegally trans-
ferred to his joint account. The debts involved consist of a sum of
money. They are due, liquidated, and demandable.
CITIBANK, N.A. (Formerly First National City Bank) and IN-
VESTORS’ FINANCE CORPORATION, doing business under
the name and style of FNCB Finance v. MODESTA R.
SABENIANO
G.R.No.156132, February 6, 2007, Chico-Nazario, J.
Although all the Philippine branches of Citibank should
be treated as one unit with its head office, the Court was not per-
suaded that these Philippine branches are likewise a single unit
with the Geneva branch. It would be stretching the principle way
beyond its intended purpose. Therefore, the off-setting or com-
pensation of Sabeniano’s loans with Citibank-Manila using her
dollar accounts with Citibank-Geneva cannot be effected. The
parties cannot be considered principal creditor of the other. As for
the dollar accounts, Sabeniano was the creditor and Citibank-
Geneva was the debtor; and as for the outstanding loans, Citi-
bank, particularly Citibank-Manila, was the creditor and respond-
ent was the debtor. Since legal compensation was not possible,
Citibank could only use respondent’s dollar accounts with Citi-
bank-Geneva to liquidate her loans if she had expressly author-
ized it to do so by contract.
Facts:
Sabeniano had a savings account with Citibank-Manila; money
market placements with FNCB Finance; and dollar accounts with
the Geneva branch of Citibank-Geneva. At the same time, Sabe-
niano had outstanding loans with Citibank, incurred at Citibank-
Manila, the principal amounts aggregating to P1,920,000.00, all of
which had become due and demandable.
Despite repeated demands by Citibank, Sabeniano failed to pay
her outstanding loans. Thus, Citibank used Sabeniano’sdeposits
with Citibank and money market placements with FNCB and Citi-
bank-Geneva to off-set and liquidate her outstanding obligations.
Sabeniano, however, denied having any outstanding loans with
Citibank. She likewise denied that she was duly informed of the
off-setting or compensation thereof made by Citibank using her
deposits and money market placements.
Thus, Sabeniano sought to recover her deposits and money mar-
ket placements. She instituted a complaint for accounting, sum of
money and damages against petitioners before the RTC of Makati
City. RTC rendered a decision declaring as illegal, null and void
the setoff effected by Citibank and ordering it to refund the said
amount to the Sabeniano.
The CA affirmed the ruling of the RTC as to the validity of the
setoff. Petitioners filed the instant Petition for Review on Certiorari
under Rule 45. After giving due course to the instant Petition, the
Court promulgated its Decision, now subject of petitioners’ Motion
for Partial Reconsideration.
Issue:
Whether the off-setting or compensation of Sabeniano’s outstand-
ing loan balance with her dollar deposits in Citibank-Geneva was
valid.
Ruling:
NO. Although all the Philippine branches of Citibank should be
treated as one unit with its head office, the Court was not per-
suaded that these Philippine branches are likewise a single unit
with the Geneva branch. It would be stretching the principle way
beyond its intended purpose. Therefore, the off-setting or com-
pensation of Sabeniano’s loans with Citibank-Manila using her
dollar accounts with Citibank-Geneva cannot be effected. The
parties cannot be considered principal creditor of the other. As for
the dollar accounts, Sabeniano was the creditor and Citibank-
Geneva was the debtor; and as for the outstanding loans, Citi-
bank, particularly Citibank-Manila, was the creditor and respond-
ent was the debtor. Since legal compensation was not possible,
Citibank could only use respondent’s dollar accounts with Citi-
bank-Geneva to liquidate her loans if she had expressly author-
ized it to do so by contract.
____________________________________________________
Where the thing deposited is delivered closed and sealed
ARTICLE 1981. When the thing deposited is delivered closed and
sealed, the depositary (1) must return it in the same condition,
and he (2) shall be liable for damages should the seal or lock be
broken through his fault.
Fault on the part of the depositary is presumed, unless there is
proof to the contrary.
As regards the value of the thing deposited, the statement of the
depositor shall be accepted, when the forcible opening is imputa-
ble to the depositary, should there be no proof to the contrary.
However, the courts may pass upon the credibility of the depositor
with respect to the value claimed by him.
When the seal or lock is broken, with or without the depositary’s
fault, he (3) shall keep the secret of the deposit.
ARTICLE 1982. When it becomes necessary to open a locked box
or receptacle, the depositary is presumed authorized to do so,
(1) if the key has been delivered to him; or (2) when the instruc-
tions of the depositor as regards the deposit cannot be executed
without opening the box or receptacle.
Proof of Ownership
ARTICLE 1984. The depositary cannot demand that the depositor
prove his ownership of the thing deposited.
Nevertheless, should he discover that the thing has been stolen
and who its true owner is, he must advise the latter of the deposit.
If the owner, in spite of such information, does not claim it within
the period of one month, the depositary shall be relieved of all
responsibility by returning the thing deposited to the depositor.
If the depositary has reasonable grounds to believe that the thing
has not been lawfully acquired by the depositor, the former may
return the same.
Note: An action for interpleader is the proper remedy when a
third person is the true owner of the deposited thing and
such was discovered to be stolen from such person.
Proof of ownership cannot be demanded in order to prevent
fraud on the part of the depositary.
Thing deposited admits division
Page 16 of 63
ARTICLE 1985. When there are two or more depositors, if they are
not solidary, and the thing admits of division, each one cannot
demand more than his share.
When there is solidarity or the thing does not admit of division, the
provisions of articles 1212 and 1214 shall govern. However, if
there is a stipulation that the thing should be returned to one of the
depositors, the depositary shall return it only to the person desig-
nated.
ARTICLE 1212. Each one of the solidary creditors may do
whatever may be useful to the others, but not anything
which may be prejudicial to the latter.
ARTICLE 1214. The debtor may pay any one of the soli-
dary creditors; but if any demand, judicial or extrajudicial,
has been made by one of them, payment should be made
to him.
Note: In a contract of deposit, compensation as a
mode of extinguishing an obligation under Art.
1287 is not proper.
ARTICLE 1287. Compensation shall not be proper when
one of the debts arises from a depositum or of a bailee in
commodatum.
Neither can compensation be set up against a creditor
who has a claim for support due by gratuitous title.
Obligation to return upon demand
ARTICLE 1988. The thing deposited must be returned to the de-
positor upon demand, even though a specified period or time for
such return may have been fixed.
This provision shall not apply when the thing is judicially attached
while in the depositary’s possession, or should he have been noti-
fied of the opposition of a third person to the return or the removal
of the thing deposited.
In these cases, the depositary must immediately inform the de-
positor of the attachment or opposition.
Persons to whom return must be made
ARTICLE 1972. The depositary is obliged to keep the thing safely
and to return it, when required, to the depositor, or to his heirs
and successors, or to the person who may have been desig-
nated in the contract.
His responsibility, with regard to the safekeeping and the loss of
the thing, shall be governed by the provisions of Title I of this
Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe.
ARTICLE 1970. If a person having capacity to contract accepts a
deposit made by one who is incapacitated, the former shall be
subject to all the obligations of a depositary, and may be com-
pelled to return the thing by the guardian, or administrator, of
the person who made the deposit, or by the latter himself if he
should acquire capacity.
ARTICLE 1986. If the depositor should lose his capacity to con-
tract after having made the deposit, the thing cannot be returned
EXCEPT to the persons who may have the administration of
his property and rights.
Note: The depositary may not return the thing to the
owner should he knew of the identity of the latter. He is
not authorized to return the thing unceremoniously to the
alleged owner without the knowledge of the depositor.
His duty is merely to advise the owner of the deposit.
If the depositor insists on his ownership as against the
true owner, the depositary may file an interpleader suit
against both of them to avoid responsibility. If the identi-
ty of the true owner cannot be ascertained, the deposi-
tary may return the thing to the depositor (Pineda,
2006).
Place of Return
ARTICLE 1987. If at the time the deposit was made a place was
designated for the return of the thing, the depositary must take the
thing deposited to such place; but the expenses for transportation
shall be borne by the depositor.
If no place has been designated for the return, it shall be made
where the thing deposited may be, even if it should not be the
same place where the deposit was made, provided that there was
no malice on the part of the depositary.
Other obligations of a Depositary
ARTICLE 1983. The thing deposited shall be returned with all its
products, accessories and accessions.
Should the deposit consist of money, the provisions relative to
agents in article 1896 shall be applied to the depositary.
ARTICLE 1989. Unless the deposit is for a valuable consideration,
the depositary who may have justifiable reasons for not keeping
the thing deposited may, even before the time designated, return it
to the depositor; and if the latter should refuse to receive it, the
depositary may secure its consignation from the court.
ARTICLE 1990. If the depositary by force majeure or government
order loses the thing and receives money or another thing in its
place, he shall deliver the sum or other thing to the depositor.
ARTICLE 1991. The depositor’s heir who in good faith may have
sold the thing which he did not know was deposited, shall only be
bound to return the price he may have received or to assign his
right of action against the buyer in case the price has not been
paid him.
____________________________________________________
SEC. 3 - Obligations of the Depositor
ARTICLE 1992. If the deposit is gratuitous, the depositor is obliged
to reimburse the depositary for the expenses he may have in-
curred for the preservation of the thing deposited.
ARTICLE 1993. The depositor shall reimburse the depositary for
any loss arising from the character of the thing deposited, unless
at the time of the constitution of the deposit the former was not
aware of, or was not expected to know the dangerous character of
the thing, or unless he notified the depositary of the same, or the
latter was aware of it without advice from the depositor.
Right of retention
ARTICLE 1994. The depositary may retain the thing in pledge
until the full payment of what may be due him by reason of the
deposit.
Extinguishment
ARTICLE 1995. A deposit is extinguished:
(1) Upon the loss or destruction of the thing deposited;
(2) In case of a gratuitous deposit, upon the death of either
the depositor or the depositary.
_____________________________________________________
Page 17 of 63

NECESSARY DEPOSIT
ARTICLE 1996. A deposit is necessary:
(1) When it is made in compliance with a legal obligation;
(2) When it takes place on the occasion of any calamity, such
as fire, storm, flood, pillage, shipwreck, or other similar
events. (miserable deposit)
Note: In addition to those mentioned are: by travelers in ho-
tels or inn with regard to their effects (Art. 1998), and pas-
sengers in common carriers (Art. 1754). (Jurado, 2009)
ARTICLE 1997. The deposit referred to in No. 1 of the preceding
article shall be governed by the provisions of the law establishing
it, and in case of its deficiency, by the rules on voluntary deposit.
The deposit mentioned in No. 2 of the preceding article shall be
regulated by the provisions concerning voluntary deposit and by
article 2168.
ARTICLE 2186. When during fire, flood, storm, or other
calamity, property is saved from destruction by another
person without knowledge of the owner, the latter is bound
to pay the former just compensation.
ARTICLE 2002. The hotel-keeper is not liable for compensation if
the loss is due to the acts of the guest, his family, servants or visi-
tors, or if the loss arises from the character of the things brought
into the hotel.
Note: There is a complete exemption from liability of hotel.
ARTICLE 1999. The hotel-keeper is liable for the vehicles, animals
and articles which have been introduced or placed in the annexes
of the hotel.
Note: It means that it does not necessarily have to be with-
in the premises of the hotel or owned by the hotel, as long
as it is the hotel who manages such place.
Hotel-keeper’s liability
ARTICLE 1998. The deposit of effects made by travelers in hotels
or inns shall also be regarded as necessary. The keepers of hotels
or inns shall be responsible for them as depositaries, provided that
notice was given to them, or to their employees, of the effects
brought by the guests and that, on the part of the latter, they take
the precautions which said hotel-keepers or their substitutes ad-
vised relative to the care and vigilance of their effects.
Correlate:
ARTICLE 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not
liable for the articles brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the re-
sponsibility of the former as set forth in articles 1998 to
2001 is suppressed or diminished shall be void.
Note: Requisites in order to hold the hotel management li-
able for the loss of the deposited thing:
1. Notify the management of the character of the goods
deposited.
Rationale: In order to allow the management to
promptly and account for the deposited thing. Also,
to prevent fraud on depositor’s part.
2. The depositor (guest) must exercise ordinary dili-
gence over is deposited property.
Note: If the negligence of the guest is merely contributory,
the hotel is not exempted from liability although it is miti-
gated. However, if the proximate cause of the loss is the
depositor’s (guest) negligence, the management is not lia-
ble.
Liability by the hotel or innkeeper commences as soon as
there is evident intention on the part of the travellers to
avail himself of the accommodations of the hotel or inn. It
does not matter whether compensation has already been
paid or not, whether the guest has already partaken of food
and drink or not (Paras, 2008).
Rule on Common Carriers regarding baggage deposited
therein
As depositaries, the degree of diligence required to be ob-
served by Common Carriers regarding baggage deposited
therein is extraordinary diligence.
Hotel-keeper when exempt from liability
ARTICLE 2000. The responsibility referred to in the two preceding
articles shall include the loss of, or injury to the personal property
of the guests caused by the servants or employees of the keepers
of hotels or inns as well as by strangers; but not that which may
proceed from any force majeure.
The fact that travelers are constrained to rely on the vigilance of
the keeper of the hotel or inn shall be considered in determining
the degree of care required of him.
Correlate:
ARTICLE 2001. The act of a thief or robber, who has en-
tered the hotel is not deemed force majeure, unless it is
done with the use of arms or through an irresistible force.
Right of retention of hotel-keeper
ARTICLE 2004. The hotel-keeper has a right to retain the things
brought into the hotel by the guest, as a security for credits on
account of lodging, and supplies usually furnished to hotel guests.
Note: This is in the nature of the pledge created by op-
eration of law. The act of obtaining food or accommoda-
tion in a hotel or inn without paying therefor constitutes
estafa (RPC, Art. 135, Sec. (2)(e).
Where goods are brought to the inn with notice or
knowledge on the part of the innkeeper that they are the
property of a third person, no lien attaches, except under
a statute extending lien to property under control of
guest (Rabuya, 2017).
____________________________________________________
GUARANTY
NATURE AND EXTENT OF GUARANTY
ARTICLE 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
Note: A contract of guaranty insures the solvency of the
principal debtor. As differentiated from a surety which con-
templates a situation where the principal debtor is solvent
but he does not opt to pay his obligations.
Correlate:
Page 18 of 63

ARTICLE 1403. The following contracts are unenforcea-
ble, UNLESS they are ratified:
(1) x x x
(2) Those that do not comply with the Statute of
Frauds as set forth in this number. In the follow-
ing cases an agreement hereafter made shall
be unenforceable by action, UNLESS the
same, or some note or memorandum thereof,
be in writing, and subscribed by the party
charged, or by his agent; evidence, therefore,
of the agreement cannot be received without
the writing, or a secondary of its contents:
(a) x x x
(b) A special promise to answer for the
debt, default, or miscarriage of an-
other;
Distinctions between a guarantor and a surety
Cases:
FINMAN GENERAL ASSURANCE CORPORATION v.
ABDULGANI SALIK, BALABAGAN AMPILAN ALI KUBA
GANDHI PUA, DAVID MALANAO, THE ADMINISTRATOR,
PHILIPPINE OVERSEAS AND EMPLOYMENT
ADMINISTRATION, THE SECRETARY OF LABOR AND
EMPLOYMENT
G.R. No. 84084 August 20, 1990, Paras, J.
Where the surety bound itself solidarily with the princi-
pal obligor, the former is so dependent on the principal debtor that
the surety is considered in law as being the same party as the
debtor in relation to whatever is adjudged touching the obligation
of the latter.
Facts:
Abdulgani Salik et al., private respondents, allegedly applied with
Pan Pacific Overseas Recruiting Services, Inc. and were assured
employment abroad by a certain Mrs. Normita Egil. In considera-
tion thereof, they allegedly paid fees totaling P30,000.00. But
despite numerous assurances of employment abroad, they were
not employed. Accordingly, they filed a joint complaint with the
POEA against Pan Pacific for Violation of Articles 32 and 34(a) of
the Labor Code, as amended, with claims for refund of a total
amount of P30,000.00.
The POEA motu proprio impleaded and summoned surety Fin-
man General Assurance Corporation, in the latter's capacity as
Pan Pacific's bonding company. Finman was deemed in default
for failing to answer, but was nevertheless notified of the sched-
uled hearing. Again they failed to appear. Thus, ex-parte proceed-
ings ensued.
The Secretary of Labor and Employment issued an order which
directed Pan Pacific and Finman to pay jointly and severally the
claims of Salik et al. A motion for reconsideration having been
denied, Finman instituted the instant petition for certiorari.
Issue:
Whether the Secretary of Labor and Employment is correct in
directing Finman to pay jointly and severally with Pan Pacific the
claims of respondents on the basis of the suretyship agreement
between Finman and Pan Pacific and POEA.
Ruling:
YES . The nature of Finman's obligation under the suretyship
agreement makes it privy to the proceedings against its principal
(Pan Pacific). As such Finman is bound, in the absence of collu-
sion, by a judgment against its principal even though it was not a
party to the proceedings. Furthermore, where the surety bound
itself solidarily with the principal obligor the former is so depend-
ent on the principal debtor "that the surety is considered in law as
being the same party as the debtor in relation to whatever is ad-
judged touching the obligation of the latter."
Applying the foregoing principles to the case at bar, it can be said
even if Finman was not impleaded in the instant case, still it (Fin-
man) can be held jointly and severally liable for all claims arising
from recruitment violation of Pan Pacific. Moreover, as correctly
stated by the Solicitor General, Salik et.al have a legal claim
against Pan Pacific and its insurer for the placement and pro-
cessing fees they paid, so much so that in order to provide a
complete relief to respondents, Finman had to be impleaded in
the case.
COMMONWEALTH INSURANCE CORPORATION v. COURT
OF APPEALS and RIZAL COMMERCIAL BANKING
CORPORATION
G.R. No. 130886, January 29, 2004, Austria-Martinez, J.
When a surety fails to pay upon demand by the credi-
tor, it becomes liable to pay legal interest over and above its prin-
cipal obligation under the surety agreement. An entity’s liability as
a surety is different from its liability under the law. The increased
liability is not because of the contract but because of the default
and the necessity of judicial collection.
Facts:
Jigs Manufacturing Corporation (JIGS) and Elba Industries, Inc.
(ELBA) are sister companies which obtained a loan from RCBC.
Such loan was evidenced by promissory notes and secured by
surety bonds executed by Commonwealth Insurance Corporation
(CIC). JIGS and ELBA defaulted in the payments of their loan.
RCBC sent a written demand to CIC for the payment of the two
loans. CIC responded and paid RCBC. However, there was still a
substantial balance unpaid. Despite the final demand of RCBC,
CIC did not comply with its obligation to pay. Hence, RCBC filed a
complaint for a sum of money before the RTC. CIC contended
that it cannot be liable for any amount in excess of what is provid-
ed for in the surety agreement. The RTC ruled that CIC, JIGS and
ELBA are solidarily liable to pay RCBC. Upon appeal to the CA,
the CA held that a surety’s obligation is primary; he can be sued
alone for the entire obligation. If the surety fails to pay the obliga-
tion upon demand, it will be liable for the payment of interest.
Issue:
Whether CIC should be held liable to pay legal interest over and
above its principal obligation under the surety agreement.
Ruling:
YES. If a surety upon demand fails to pay, he can be held liable
for interest, even if in thus paying, its liability becomes more than
the principal obligation. CIC’s liability as a surety is different from
its liability under the law. The increased liability is not because of
the contract but because of the default and the necessity of judi-
cial collection.
CIC's liability under the suretyship contract is different from its
liability under the law. There is no question that as a surety, peti-
tioner should not be made to pay more than its assumed obliga-
tion under the surety bonds. However, petitioner's liability for the
payment of interest is not by reason of the suretyship agreement
itself but because of the delay in the payment of its obligation
under the said agreement.
THE MANILA INSURANCE COMPANY, INC., v. SPOUSES
ROBERTO and AIDA AMURAO
G.R. No. 179628, January 16, 2013, Del Castillo, J.
A surety's liability is joint and several, limited to the
amount of the bond, and determined strictly by the terms of con-
tract of suretyship in relation to the principal contract between the
Page 19 of 63
obligor and the obligee. It bears stressing, however, that although
the contract of suretyship is secondary to the principal contract,
the surety's liability to the obligee is nevertheless direct, primary,
and absolute.
Facts:
On March 7, 2000, respondent-spouses Roberto and Aida Amu-
rao entered into a Construction Contract Agreement (CCA) with
Aegean Construction and Development Corporation (Aegean) for
the construction of a six-storey commercial building in Tomas
Morato corner E. Rodriguez Avenue, Quezon City. To guarantee
its full and faithful compliance with the terms and conditions of the
CCA, Aegean posted performance bonds secured by The Manila
Insurance Company, Inc. (petitioner) and Intra Strata Assurance
Corporation (Intra Strata). On November 15, 2001, due to the
failure of Aegean to complete the project, respondent spouses
filed with the RTC a Complaint against petitioner and Intra Strata
to collect on the performance bonds they issued respectively.
Petitioner, on the other hand, filed a Motion to Dismiss on the
grounds that the Complaint states no cause of action and that the
filing of the Complaint is premature due to the failure of respond-
ent-spouses to implead the principal contractor, Aegean. The
RTC, however, denied the motion in an Order. During the pre-
trial, petitioner and Intra Strata discovered that the CCA entered
into by respondent-spouses and Aegean contained an arbitration
clause. Hence, they filed separate Motions to Dismiss on the
grounds of lack of cause of action and lack of jurisdiction.The
RTC denied both motions. The CA likewise dismissed the peti-
tions and ruled that petitioner is a solidary debtor instead of a
solidary guarantor. Hence this petition imputing error on the part
of the CA in treating petitioner as a solidary debtor instead of a
solidary guarantor. Manila Insurance argues that while a surety is
bound solidarily with the obligor, this does not make the surety a
solidary co-debtor. A surety or guarantor is liable only if the debtor
is himself liable. Respondent-spouses on the other hand, insist
that Manila Insurance as a surety is directly and equally bound
with the principal.
Issue:
Whether Manila Insurance is liable as a surety.
Ruling:
YES. A contract of suretyship is defined as "an agreement where-
by a party, called the surety, guarantees the performance by an-
other party, called the principal or obligor, of an obligation or un-
dertaking in favor of a third party, called the obligee. It includes
official recognizances, stipulations, bonds or undertakings issued
by any company. The Court has consistently held that a surety's
liability is joint and several, limited to the amount of the bond, and
determined strictly by the terms of contract of suretyship in rela-
tion to the principal contract between the obligor and the obligee.
It bears stressing, however, that although the contract of surety-
ship is secondary to the principal contract, the surety's liability to
the obligee is nevertheless direct, primary, and absolute.
____________________________________________________
Nature
ARTICLE 2048. A guaranty is gratuitous, UNLESS there is a
stipulation to the contrary.
ARTICLE 2049. A married woman may guarantee an obligation
without the husband’s consent, but shall not thereby bind the con-
jugal partnership, except in cases provided by law.
Liability of a Guarantor
ARTICLE 2050. If a guaranty is entered into without the knowledge
or consent, or against the will of the principal debtor, the provisions
of articles 1236 and 1237 shall apply.
ARTICLE 1236. The creditor is not bound to accept pay-
ment or performance by a third person who has no inter-
est in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor
what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover
only insofar as the payment has been beneficial to the
debtor.
ARTICLE 1237. Whoever pays on behalf of the debtor
without the knowledge or against the will of the latter, can-
not compel the creditor to subrogate him in his rights, such
as those arising from a mortgage, guaranty, or penalty.
Note: the nature of guaranty here is unilateral. (De Leon,
2013)
The rules on the liability of the guarantor can be summa-
rized as follows:
General Rule: As to its extent, it is limited to what is stipu-
lated by the parties. It can be less than the principal obliga-
tion; however, it cannot exceed the principal obligation.
Exception: If the guarantor incurs delay, he may be
made to pay more by reason of damages.
ARTICLE 2051. A guaranty may be conventional, legal or judicial,
gratuitous, or by onerous title.
It may also be constituted, not only in favor of the principal debtor,
but also in favor of the other guarantor, with the latter’s consent, or
without his knowledge, or even over his objection.
Accessory obligation
ARTICLE 2052. A guaranty cannot exist without a valid obligation.
Nevertheless, a guaranty may be constituted to guarantee the
performance of a voidable or an unenforceable contract.
It may also guarantee a natural obligation.
Continuing guaranty
General Rule: A guaranty covers the amount stipulated on
its face.
Exception: A continuing guarantee which covers fu-
ture debts.
ARTICLE 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated.
A conditional obligation may also be secured.
Note: A continuing guaranty covers future debts of the
principal debtor; however, the creditor can only claim upon
it when the debt has been liquidated, in other words, at that
time when the amount of the debt has been made certain.
General Rule: A guarantee is always prospective.
Exception: Unless otherwise agreed upon by the
parties.
To word a continuing guaranty, the following stipulation
must be stated in the contract: ―any and all existing debts
including those which may be incurred in the future…‖
Cases:
Page 20 of 63

RIZAL COMMERCIAL BANKING CORPORATION v. HON. JO-
SE P. ARRO, Judge of the Court of First Instance of Davao,
and RESIDORO CHUA
G.R. No. L-49401, July 30, 1982, De Castro, J.
A guaranty may also be given as security for future
debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated.
Facts:
Residoro Chua and Enrique Go, Sr. executed a comprehensive
surety agreement to guaranty among others, any existing indebt-
edness of Davao Agricultural Industries Corporation (referred to
as Borrower, and as Daicor), and/or induce the bank (PNB) at any
time or from time to time thereafter, to make loans or advances or
to extend credit in other manner to, or at the request, or for the
account of the Borrower, either with or without security, or to pur-
chase on discount, or to make any loans or advances evidenced
or secured by any notes, bills, receivables, drafts, acceptances,
checks or other evidences of indebtedness upon which the Bor-
rower is or may become liable, provided that the liability shall not
exceed at any one time the aggregate principal sum of
P100,000.00. On April 29, 1977, a promissory note in the amount
of P100,000.00 was issued in favor of petitioner RCBC payable
on June 13, 1977. Said note was signed by Enrique Go, Sr. in his
personal capacity and in behalf of Daicor. The promissory note
was not fully paid despite repeated demands; hence, on June 30,
1978, RCBC filed a complaint for a sum of money against Daicor,
Enrique Go, Sr. and Residoro Chua.
A motion to dismiss was filed by respondent Residoro Chua on
the ground that the complaint states no cause of action as against
him. It was alleged in the motion that he cannot be held liable
under the promissory note because it was only Enrique Go, Sr.
who signed the same in behalf of Daicor and in his own personal
capacity. In an opposition, RCBC alleged that by virtue of the
execution of the comprehensive surety agreement, Chua is liable
because said agreement covers not merely the promissory note
subject of the complaint, but is continuing; and it encompasses
every other indebtedness the Borrower may, from time to time
incur with petitioner bank.
Issue:
Whether Chua is liable to pay the obligation evidence by the
promissory note dated April 29, 1977 which he did not sign, in the
light of the provisions of the comprehensive surety agreement
which PNB and Chua had earlier executed on October 19, 1976.
Ruling:
YES. The agreement was executed obviously to induce petitioner
to grant any application for a loan Daicor may desire to obtain
from petitioner bank. The guaranty is a continuing one which shall
remain in full force and effect until the bank is notified of its termi-
nation. At the time the loan of P100,000.00 was obtained from
petitioner by Daicor, for the purpose of having an additional capi-
tal for buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was ad-
mittedly in full force and effect. The loan was, therefore, covered
by the said agreement, and private respondent, even if he did not
sign the promissory note, is liable by virtue of the surety agree-
ment. The only condition that would make him liable thereunder is
that the Borrower "is or may become liable as maker, endorser,
acceptor or otherwise". There is no doubt that Daicor is liable on
the promissory note evidencing the indebtedness.
JACINTO UY DIÑO and NORBERTO UY v. HON. COURT OF
APPEALS and METROPOLITAN BANK AND TRUST
COMPANY
G.R. No. 89775, November 26, 1992, Davide, Jr., J.
Under the Civil Code, a guaranty may be given to se-
cure even future debts, the amount of which may not known at the
time the guaranty is executed. This is the basis for contracts de-
nominated as continuing guaranty or suretyship.
Facts:
In 1977, Uy Tiam Enterprises and Freight Services (UTEFS), thru
its representative Uy Tiam, applied for and obtained credit ac-
commodations (letter of credit and trust receipt accommodations)
from the Metropolitan Bank and Trust Company (Metrobank) in
the sum of P700,000.00. To secure the aforementioned credit
accommodations Norberto Uy and Jacinto Uy Diño executed
separate Continuing Suretyships dated 25 February 1977 where-
by Norberto Uy agreed to pay Metrobank any indebtedness of
UTEFS up to the aggregate sum of P300,000.00 while Jacinto Uy
Diño agreed to be bound up to the aggregate sum of
P800,000.00. Having paid the obligation under the above letter of
credit in 1977, UTEFS, through Uy Tiam, obtained another letter
of credit from Metrobank in 1979 but without the participation of
Norberto Uy and Jacinto Uy Diño as they did not sign the docu-
ment denominated as "Commercial Letter of Credit and Applica-
tion." Also, they were not asked to execute any suretyship to
guarantee its payment. Neither did Metrobank nor UTEFS inform
them that the 1979 Letter of Credit has been opened and that the
Continuing Suretyships separately executed in February, 1977
shall guarantee its payment. UTEFS did not acquiesce to the
obligatory stipulations in the trust receipt. As a consequence,
Metrobank sent letters to the said principal obligor and its sure-
ties, Norberto Uy and Jacinto Uy Diño, demanding payment of the
amount due.
Petitioners vehemently deny such liability on the ground that the
Continuing Suretyship Agreements were automatically extin-
guished upon payment of the principal obligation secured thereby,
i.e., the letter of credit obtained by Uy Tiam in 1977. They further
claim that they were not advised by either Metrobank or Uy Tiam
that the Continuing Suretyship Agreements would stand as secu-
rity for the 1979 obligation. Moreover, it is posited that to extend
the application of such agreements to the 1979 obligation would
amount to a violation of Article 2052 of the Civil Code which ex-
pressly provides that a guaranty cannot exist without a valid obli-
gation. Petitioners further argue that even granting, for the sake of
argument, that the Continuing Suretyship Agreements still sub-
sisted and thereby also secured the 1979 obligations incurred by
Uy Tiam, they cannot be held liable for more than what they guar-
anteed to pay because it is axiomatic that the obligations of a
surety cannot extend beyond what is stipulated in the agreement.
Meanwhile, Metrobank invoked the terms and conditions embod-
ied in the comprehensive suretyships separately executed by
sureties-defendants and argued that sureties- movants bound
themselves as solidary obligors of defendant Uy Tiam to both
existing obligations and future ones. It relied on Art. 2053 of the
new Civil Code which provides: "A guaranty may also be given as
security for future debts, the amount of which is not yet known; . .
. ." It was further asserted that the agreement was in full force and
effect at the time the letter of credit was obtained in 1979 as sure-
ties-defendants did not exercise their right to revoke it by giving
notice to the bank.
Issue:
Whether the petitioners are liable as sureties for the obligation
contracted by Uy Tiam with Metrobank on 30 May 1979 under
and by virtue of the Continuing Suretyship Agreements signed on
25 February 1977.
Ruling:
YES. Under the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not known at the time
the guaranty is executed. This is the basis for contracts denomi-
nated as continuing guaranty or suretyship.
Page 21 of 63
A continuing guaranty is one which is not limited to a single trans-
action, but which contemplates a future course of dealing, cover-
ing a series of transactions, generally for an indefinite time or until
revoked. It is prospective in its operation and is generally intended
to provide security with respect to future transactions within cer-
tain limits, and contemplates a succession of liabilities, for which,
as they accrue, the guarantor becomes liable.
In the case at bar, the stipulations unequivocally reveal that the
suretyship agreement are continuing in nature. Petitioners do not
deny this; in fact, they candidly admitted it. Neither have they
denied the fact that they had not revoked the suretyship agree-
ments. Petitioners maintain, however, that their Continuing Sure-
tyship Agreements cannot be made applicable to the 1979 obliga-
tion because the latter was not yet in existence when the agree-
ments were executed in 1977; under Art. 2052 of the Civil Code, a
guaranty "cannot exist without a valid obligation." The Supreme
Court do not agree. First of all, the succeeding article provides
that "[a] guaranty may also be given as security for future debts,
the amount of which is not yet known." Secondly, Article 2052
speaks about a valid obligation, as distinguished from a void obli-
gation, and not an existing or current obligation.
____________________________________________________
ARTICLE 2054. A guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount and
the onerous nature of the conditions.
Should he have bound himself for more, his obligations shall be
reduced to the limits of that of the debtor.
Guaranty must be express
ARTICLE 2055. A guaranty is not presumed; it must be express
and cannot extend to more than what is stipulated therein.
If it be simple or indefinite, it shall comprise not only the principal
obligation, but also all its accessories, including the judicial costs,
provided with respect to the latter, that the guarantor shall only be
liable for those costs incurred after he has been judicially required
to pay.
Note: A guarantor is not liable for the judicial costs incurred
by the debtor.
Cases:
TRADERS INSURANCE and SURETY COMPANY, v. DY ENG
GIOK, PEDRO LOPEZ DEE and PEDRO E. DY-LIACCO
G.R. No.L-9073, November 17, 1958, Reyes, J.B.L., J.
In the absence of express stipulation, a guaranty or
suretyship operates prospectively and not retroactively; that is to
say, it secures only the debts contracted after the guaranty takes
effect. A guaranty is not presumed, but must be express, and can
not extend to more than what is stipulated.
Facts:
From 1948 to 1952 the corporation "Destilleria Lim Tuaco & Co.,
Inc." had one Dy Eng Giok as its provincial sales agent, with the
duty of turning over the proceeds of his sales to the principal, the
distillery company. As of August 3, 1951, the agent Dy Eng Giok
had an outstanding running account in favor of his principal in the
sum of P12,898.61. On August 4, 1951, a surety bond was exe-
cuted by Dy Eng Giok, as principal and appellant Traders Insur-
ance and Surety Co., as solidary guarantor, whereby they bound
themselves, jointly and severally, in the sum of P10,000.00 in
favor of the Destilleria Lim Tuaco& Co., Inc.. On the same date,
by Eng Giok, as principal, with Pedro Lopez Dee and Pedro Dy-
Liacco, as counterboundsmen, subscribed an indemnity agree-
ment in favor of appellant Surety Company, whereby, in consider-
ation of its surety bond, the three agreed to be obligated to the
surety company.
From August 4, 1951 to August 3, 1952, agent Dy Eng Giok con-
tracted obligations in favor of the Destilleria Lim Tuaco& Co., in
the total amount of P41,449.93; and during the same period, he
made remittances amounting to P41,864.49. The distillary com-
pany, however, applied said remittances first to Dy Eng Giok's
outstanding balance prior to August 4, 1951 (before the surety-
ship agreement was executed) in the sum of P12,898.61; and the
balance of P28,965.88 to Dy's obligations between August 4,
1951 and August 3, 1952. It then demanded payment of the re-
mainder (P12,484.05) from the agent, and later, from the appel-
lant Surety Company. The latter paid P10,000.00 (the maximum
of its bond) on July 17, 1953, apparently, without questioning the
demand; and then sought reimbursement from Dy Eng Giok and
his counter guarantors, appellees herein. Upon their failure to
pay, it began the present action to enforce collection.
Issue:
Whether the counter- guarantors Pedro Lopez Dee and Pedro Dy-
Liacco are liable for the payment of the outstanding balance of Dy
Eng Giok which were contracted prior to the execution of the
surety agreement.
Ruling:
NO. There are two reasons why the remittances by Dy Eng Giok
in the sum of P41,864.49 should be applied to the obligation of
P41,449.93 contracted by him during the period covered by the
suretyship agreement, Annex A.
First, in the absence of express stipulation, a guaranty or surety-
ship operates prospectively and not retroactively; that is to say, it
secures only the debts contracted after the guaranty takes effect.
This rule is a consequence of the statutory directive that a guar-
anty is not presumed, but must be express, and can not extend to
more than what is stipulated. To apply the payments made by the
principal debtor to the obligations he contracted prior to the guar-
anty is, in effect, to make the surety answer for debts incurred
outside of the guaranteed period, and this can not be done with-
out the express consent of the guarantor. Note that the suretyship
agreement, Annex A, did not guarantee the payment of any out-
standing balance due from the principal debtor, Dy Eng Giok; but
only that he would turn over the proceeds of the sales to the "Des-
tilleria Lim Tuaco & Co., Inc.", and this he has done, since his
remittances during the period of the guaranty exceed the value of
his sales. There is no evidence that these remittances did not
come from his sales.
Second, since the obligations of Dy Eng Giok between August 4,
1951 to August 4, 1952, were guaranteed, while his indebtedness
prior to that period was not secured, then in the absence of ex-
press application by the debtor, or of any receipt issued by the
creditor specifying a particular imputation of the payment (Art.
1252, Civil Code), any partial payments made by him should be
imputed or applied to the debts that were guaranteed, since they
are regarded as the more onerous debts from the standpoint of
the debtor (Art. 1254, Civil Code).
It is thus clear that the payment voluntarily made by appellant was
improper since it was not liable under its bond; consequently, it
can not demand reimbursement from the counterbondsmen but
only from Dy Eng Giok, who was anyway benefited pro tanto by
the Surety Company's payment.
____________________________________________________
Qualifications of guarantor
ARTICLE 2056. One who is obliged to furnish a guarantor shall
present a person who possesses integrity, capacity to bind him-
self, and sufficient property to answer for the obligation which he
guarantees.
Page 22 of 63
The guarantor shall be subject to the jurisdiction of the court of the
place where this obligation is to be complied with.
Note: Qualifications:
1. Integrity
2. Capacity to bind
3. Sufficient Property to answer for the obligation
These qualifications are material only at the time the guar-
anty is effective, it must only exist at the time of the perfec-
tion of the contract (Estate of Hemady v Luzon Surety, GR
No. L-8437, November 28 1956). The guarantor cannot,
therefore, raise the defense that he has been absolved
from his liability as such upon loss of one of the qualifica-
tions.
The creditor can naturally waive the requirements, for right
in general is waivable (Paras, 2008).
ARTICLE 2057. If the guarantor should be convicted in first in-
stance of a crime involving dishonesty or should become insolvent,
the creditor may demand another who has all the qualifications
required in the preceding article. The case is excepted where the
creditor has required and stipulated that a specified person should
be the guarantor.
_____________________________________________________
EFFECTS OF GUARANTY
SEC. 1 - Effects of Guaranty between Guarantor and Creditor
Benefit of excussion
ARTICLE 2058. 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.
Note: This is in connection with Art. 1117 (Accion Pauliana)
and Art. 1381 (rescissible contracts)
Excussion may only be invoked after legal remedies after
legal remedies against principal debtor have been expand-
ed. The creditor must first obtain a judgment against the
principal debtor before assuming to run after the alleged
guarantor, for obviously the exhaustion of the principal’s
property, cannot even begin to take place before judgment
has been obtained (Rabuya, 2017)
When excussion not available (RUSIA)
ARTICLE 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
(3) In case of insolvency of the debtor;
(4) When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representa-
tive;
(5) If it may be presumed that an execution on the property of
the principal debtor would not result in the satisfaction of
the obligation (or otherwise, useless).
Note: In addition to those mentioned above are: (1) in the
case of a judicial bondsman, and (2) when the guarantor
has constituted in favor of the creditor a pledge or mort-
gage as additional security. (Jurado, 2009)
When and how to set up Benefit of Excussion
ARTICLE 2060. In order that the guarantor may make use of the
benefit of excussion, he (1) must set it up against the creditor upon
the latter’s demand for payment from him, and (2) point out to the
creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt.
ARTICLE 2061. The guarantor having fulfilled all the conditions
required in the preceding article, the creditor who is negligent in
exhausting the property pointed out shall suffer the loss, to the
extent of said property, for the insolvency of the debtor resulting
from such negligence.
ARTICLE 2062. In every action by the creditor, which must be
against the principal debtor alone, EXCEPT in the cases men-
tioned in article 2059, the former shall ask the court to notify the
guarantor of the action.
The guarantor may appear so that he may, if he so desire, set up
such defenses as are granted him by law.
The benefit of excussion mentioned in article 2058 shall always be
unimpaired, even if judgment should be rendered against the prin-
cipal debtor and the guarantor in case of appearance by the latter.
Note: If the guarantor has defenses against the creditor, he
may file a motion for intervention. He thus becomes an in-
tervenor. Although he is now an intervenor, the benefit of
excussion still exists.
Cases:
PACIONARIA C. BAYLON v. THE HONORABLE COURT OF
APPEALS (Former Ninth Division) and LEONILA TOMACRUZ
G.R. No. 109941, August 17, 1999, Gonzaga-Reyes, J.
The liability of the guarantor is only subsidiary. All the
properties of the principal debtor must first be exhausted before
his own is levied upon. Thus, the creditor may hold the guarantor
liable only after judgment has been obtained against the principal
debtor and the latter is unable to pay.
Facts:
Petitioner Baylon introduced private respondent Leonila
Tomacruz, the co-manager of her husband at PLDT, to Luanzon.
Baylon told Tomacruz that Luanzon has been engaged in busi-
ness as a contractor for 20 years invited Tomacruz to lend Lu-
anzon money at a monthly interest rate of 5%, to be used as capi-
tal for the latter's business. Pursuaded, Tomacruz, agreed to lend
Luanzon money in the amount of P150,000. Luanzon issued and
signed a promissory note acknowledging receipt of the P150,000
from Tomacruz and obliging herself to pay the former the said
amount on or before August 22, 1987. Baylon signed the promis-
sory note, affixing her signature under the word "guarantor."
Luanzon did not heed when Tomacruz made a written demand
upon her for payment. Thus, on May 8, 1989, Tomacruz filed a
case for the collection of a sum of money with the RTC against
Luanzon and Baylon, impleading Mariano Baylon, husband of
petitioner, as an additional defendant. However, summons was
never served upon Luanzon. In her answer, Baylon denied having
guaranteed the payment of the promissory note issued by Lu-
anzon. She claimed that private Tomacruz gave Luanzon the
money, not as a loan, but rather as an investment in Art Enter-
prises and Construction, Inc. - the construction business of Lu-
anzon. Furthermore, petitioner avers that, granting arguendo that
there was a loan and petitioner guaranteed the same, private
respondent has not exhausted the property of the principal debtor
nor has she resorted to all the legal remedies against the principal
debtor as required by law.
Issue:
Whether Baylon is liable even though Tomacruz has not exhaust-
ed the property of the principal debtor Luanzon nor has she re-
sorted to all the legal remedies against the principal debtor as
required by law.
Ruling:
Page 23 of 63

NO. Tomacruz must first obtain a judgment against Luanzon be-
fore assuming to run after the alleged guarantor. The liability of
the guarantor is only subsidiary. All the properties of the principal
debtor must first be exhausted before his own is levied upon.
Thus, the creditor may hold the guarantor liable only after judg-
ment has been obtained against the principal debtor and the latter
is unable to pay, for obviously the exhaustion of the principals
property - the benefit of which the guarantor claims - cannot even
begin to take place before judgment has been obtained. This rule
is embodied in Art. 2062 of the Civil Code which provides that the
action brought by the creditor must be filed against the principal
debtor alone, except in some instances when the action may be
brought against both the debtor and the principal debtor.
In the present case, it is premature to even determine whether or
not Baylon is liable as a guarantor and whether she is entitled to
the concomitant rights as such, like the benefit of excussion, since
the most basic prerequisite is wanting - that is, no judgment was
first obtained against the principal debtor Luanzon. It is useless to
speak of a guarantor when no debtor has been held liable for the
obligation which is allegedly secured by such guarantee. Although
the principal debtor Luanzon was impleaded as defendant, there
is nothing in the records to show that summons was served upon
her. Thus, the trial court never even acquired jurisdiction over the
principal debtor. Private respondent must first obtain a judgment
against the principal debtor before assuming to run after the al-
leged guarantor.
____________________________________________________
ARTICLE 2063. A compromise between the creditor and the prin-
cipal debtor benefits the guarantor but does not prejudice him.
That which is entered into between the guarantor and the creditor
benefits but does not prejudice the principal debtor.
Sub-guarantor - guarantor of a guarantor
ARTICLE 2064. The guarantor of a guarantor shall enjoy the bene-
fit of excussion, both with respect to the guarantor and to the prin-
cipal debtor.
Benefit of Division
ARTICLE 2065. Should there be several guarantors of only one
debtor and for the same debt, the obligation to answer for the
same is divided among all.
The creditor cannot claim from the guarantors except the shares
which they are respectively bound to pay, unless solidarity has
been expressly stipulated.
The benefit of division against the co-guarantors ceases in the
same cases and for the same reasons as the benefit of excussion
against the principal debtor.
SEC. 2 - Effects of Guaranty Between the Debtor and the Guaran-
tor
Indemnity in favor of guarantor
ARTICLE 2066. The guarantor who pays for a debtor must be
indemnified by the latter.
The indemnity comprises (TIED):
(1) The total amount of the debt;
(2) The legal interests thereon from the time the payment
was made known to the debtor, even though it did not
earn interest for the creditor;
(3) The expenses incurred by the guarantor after having no-
tified the debtor that payment had been demanded of him;
(4) Damages, if they are due.
Subrogation
ARTICLE 2067. The guarantor who pays is subrogated by virtue
thereof to all the rights which the creditor had against the debtor.
If the guarantor has compromised with the creditor, he cannot
demand of the debtor more than what he has really paid.
ARTICLE 2068. If the guarantor should pay without notifying the
debtor, the latter may enforce against him all the defenses which
he could have set up against the creditor at the time the payment
was made.
ARTICLE 2069. If the debt was for a period and the guarantor paid
it before it became due, he cannot demand reimbursement of the
debtor until the expiration of the period unless the payment has
been ratified by the debtor.
Note: A guarantor cannot exercise the right of subroga-
tion until the principal obligation has been fully extin-
guished (Rabuya, 2017).
Double payment
ARTICLE 2070. If the guarantor has paid without notifying the
debtor, and the latter not being aware of the payment, repeats the
payment, the former has no remedy whatever against the debtor,
but only against the creditor. Nevertheless, in case of a gratuitous
guaranty, if the guarantor was prevented by a fortuitous event from
advising the debtor of the payment, and the creditor becomes
insolvent, the debtor shall reimburse the guarantor for the amount
paid.
When guarantor may proceed even before payment (SIEDLAI)
Note: As a general rule, a guarantor cannot seek reim-
bursement from the principal debtor before having paid the
creditor.
ARTICLE 2071. The guarantor, even before having paid, may
proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a peri-
od longer than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is (1) to obtain re-
lease from the guaranty, or (2) to demand a security that shall
protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor.
Note: In these cases, the guarantor may proceed against the
principal debtor not by purposes of reimbursement, but to
have security in case the latter does not pay.
Cases:
SPECIAL STEEL PRODUCTS, INC. v. LUTGARDO VILLAREAL
and FREDERICK SO
G.R. No. 143304, July 8, 2004, Sandoval-Gutierrez, J.
Page 24 of 63

A guaranty is distinguished from a surety in that a guar-
antor is the insurer of the solvency of the debtor and thus binds
himself to pay if the principal is unable to pay, while a surety is the
insurer of the debt, and he obligates himself to pay if the principal
does not pay.
Facts:
Villareal worked for Special Steel Products, Inc., as assistant
sales manager. He obtained a car loan from the Bank of Com-
merce, with Special Steel as surety, where they jointly and sever-
ally agreed to pay the bank in installments. Consequently, Vil-
lareal resigned and joined another company as executive vice-
president. Because of this, he was ordered to render an account-
ing of various Christmas giveaways he received. Villareal then
demanded from Special Steel payment of his separation benefits,
commissions, vacation and sick leave benefits, and 13th month
pay. Special Steel refused and demanded security for Villareal’s
alleged due and demandable debt.
Issue:
Whether Special Steel can withhold monetary benefits as surety
of its employees.
Ruling:
NO. A guaranty is distinguished from a surety in that a guarantor
is the insurer of the solvency of the debtor and thus binds himself
to pay if the principal is unable to pay, while a surety is the insurer
of the debt, and he obligates himself to pay if the principal does
not pay.
The contract executed by Special Steel and Villareal (in favor of
the Bank of Commerce) is a contract of surety. It is denominated
as a continuing suretyship agreement. Special Steel could not just
unilaterally withhold Villareal’s wages or benefits to recompense
for whatever amount it paid as security as a preliminary remedy
under Art. 2071. It must file an action against respondent Villareal.
Thus, the Appellate Court aptly ruled that Special Steel may only
protect its right as surety by instituting an action to demand a
security.
____________________________________________________
ARTICLE 2072. If one, at the request of another, becomes a guar-
antor for the debt of a third person who is not present, the guaran-
tor who satisfies the debt may sue either the person so requesting
or the debtor for reimbursement.
SEC. 3 - Effects of Guaranty as Between Co-Guarantors
ARTICLE 2073. When there are two or more guarantors of the
same debtor and for the same debt, the one among them who has
paid may demand of each of the others the share which is propor-
tionally owing from him.
If any of the guarantors should be insolvent, his share shall be
borne by the others, including the payer, in the same proportion.
The provisions of this article shall not be applicable, unless the
payment has been made in virtue of a judicial demand or unless
the principal debtor is insolvent.
Note: This contemplates that the whole debt has been
paid.
ARTICLE 2074. In the case of the preceding article, the co-
guarantors may set up against the one who paid, the same de-
fenses which would have pertained to the principal debtor against
the creditor, and which are not purely personal to the debtor.
ARTICLE 2075. A sub-guarantor, in case of the insolvency of the
guarantor for whom he bound himself, is responsible to the co-
guarantors in the same terms as the guarantor.
_____________________________________________________
EXTINGUISHMENT OF GUARANTY
ARTICLE 2076. The obligation of the guarantor is extinguished at
the same time as that of the debtor, and for the same causes as all
other obligations.
Correlate:
ARTICLE 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor
and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code.
ARTICLE 2077. If the creditor voluntarily accepts immovable or
other property in payment of the debt, even if he should afterwards
lose the same through eviction, the guarantor is released.
Note: Even in case of eviction because by accepting the
immovable (dacion en pago), principal obligation is extin-
guished, thus, the accessory contract is extinguished as
well.
ARTICLE 2078. A release made by the creditor in favor of one of
the guarantors, without the consent of the others, benefits all to the
extent of the share of the guarantor to whom it has been granted.
ARTICLE 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty.
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of time referred to herein.
ARTICLE 2080. The guarantors, even though they be solidary, are
released from their obligation whenever by some act of the creditor
they cannot be subrogated to the rights, mortgages, and prefer-
ences of the latter.
Cases:
PHILIPPINE NATIONAL BANK v. EUGENIO VERAGUTH, et al.
G.R. No. L-26833, April 1, 1927, Villamor, J.
A material alteration of the principal contract, effected
without the knowledge and consent of the surety, completely dis-
charges the surety from all liability.
Facts:
"La Union de Agricultores de Negros y Panay, Inc.," (La Union)
obtained from the Philippine National Bank (PNB) a credit of
P40,000, secured by Veraguth, et al. by means of a bond. PNB
granted La Union another credit of P30,000 at 8% per annum, also
secured by a bond. It is admitted by both parties that the granting
of credit by PNB of P30,000 in current account to the La Union is
an increase of the credit of P40,000 and that the payment of in-
crease was secured jointly and severally by the bond by Silverio,
et al., who bound themselves to pay PNB the sum of P30,000 in
addition to the credit of P40,000.
Page 25 of 63

When La Union discontinued business with PNB, the former had a
total of P41,432.55 unpaid (overdraft plus interest). PNB seeks to
recover from the defendants Veraguth et al. jointly and severally
the sum of P41,432.55, plus interest on the sum of P34,241.77, at
8% per annum from February 16, 1925, until fully paid. The de-
fendants deny indebtedness and allege that the obligation of
P40,000 plus interest at 8% per annum, secured by the first bond,
has been extinguished by the payments made by La Union and
that not having subscribed to the second bond, they cannot be
held liable for ―total‖ unpaid obligation.
Issue:
Whether Veraguth, et al. are liable for the second bond.
Ruling:
NO. The Civil Code provides: "Guaranty shall not be presumed; it
must be express and cannot be extended beyond its specified
limits." The increase in the credit of P40,000 secured by the de-
fendants by an additional P30,000 without their consent, consti-
tutes a material change in the principal contract. A material altera-
tion of the principal contract, effected by the creditor and principal
debtor without the knowledge and consent of the surety, complete-
ly discharges the surety from all liability on the contract of surety-
ship.
It appearing from from the second bond that defendants did not
sign for the additional credit of P30,000 obtained by La Union, their
liability cannot be extended to the payment of the said additional
credit of P30,000. Also, La Union had made partial payments to
PNB on the debt of which was principal and interest from February
7, 1919 until June 30, 1922. The credit of P40,000 secured by the
Veraguth et al. has already been settled by La Union. Therefore,
the solidary sureties have already been relieved of the obligation
contracted by them.
SPOUSES VICKY TAN TOH and LUIS TOH v. SOLID
BANK CORPORATION, FIRST BUSINESS PAPER
CORPORATION, KENNETH NG LI and MA. VICTORIA NG
LI
G.R. No. 154183, August 7, 2003, Bellosillo, J.
Extensions of due dates granted to the debtor by the
creditor without the consent of the guarantor extinguishes the
guaranty.
Facts:
Solid Bank extended a credit facility worth P10 million in favor of
First Business Paper Corporation (FBPC). Spouses Toh (Chair-
man and Vice-President of FBPC) and spouses Li (President and
General Manager of FBPC) signed the Continuing Guaranty pre-
pared by Solid Bank. The contract was a surety agreement and
provided for the solidary liability of the signatories in consideration
of loans for the account of FBPC. The surety agreement also con-
tained an acceleration clause waiving rights of the sureties against
delay and gave future consent to the Bank’s action to extend the
time of payment without notice to the sureties. FBPC started to
avail of the credit facility.
The Bank learned that spouses Li had fraudulently departed from
their conjugal home and claimed payment plus interests from
FBPC, invoking the Continuing Guaranty. The Bank filed a com-
plaint for sum of money.
Issue:
Whether the petitioner-spouses Li are liable for their obligations as
sureties of FBPC.
Ruling:
NO. The extensions of the letters of credit made by respondent
Bank without observing the restrictions for exercising the privilege
constitute illicit extensions prohibited under the Civil Code which
provides that an extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty.
This act of the Bank is not a mere failure or delay on its part to
demand payment after the debt has become due, as was the case
in unpaid five letters of credit which the Bank did not extend, but
comprises separate and binding agreements to extend the due
date admitted by the Bank itself. As a result of these illicit exten-
sions, petitioner-spouses are relieved of their obligations as sure-
ties of respondent FBPC under Art. 2079 of the Civil Code.
The attached properties of FBPC, except for two of them, were
abandoned by the Bank. The consequence of these omissions is
to discharge the surety, under Art. 2080 of the Civil Code, or at the
very least, mitigate the liability of the surety up to the value of the
property released. The negligence of the Bank in failing to safe-
keep the security results in the material alteration of the principal
contract and consequently releases the surety.
____________________________________________________
ARTICLE 2081. The guarantor may set up against the creditor all
the defenses which pertain to the principal debtor and are inherent
in the debt; but not those that are purely personal to the debtor.
____________________________________________________
PLEDGE, MORTGAGE, ANTICHRESIS
Provisions Common to Pledge and Mortgage
Requisites
ARTICLE 2085. The following requisites are essential to the con-
tracts of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a
principal obligation;
(2) That the pledgor or mortgagor be the absolute owner of
the thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage
have the free disposal of their property, and in the ab-
sence thereof, that they be legally authorized for the pur-
pose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property.
NOTE: Accomodation Mortgagor is a third person who is
not a party to the principal obligation who secures the latter
by pledging or mortgaging their property. They are consid-
ered as a real guarantor and they enjoy no benefit of excus-
sion. Moreover, they have a personal right against the per-
son whose obligation they secured.
Cases:
DEVELOPMENT BANK OF THE PHILIPPINES v. COURT OF
APPEALS, MYLO O. QUINTO and JESUSA CHRISTINE S.
CHUPUICO
G.R. No. 109946, February 9, 1996, Bellosillo, J.
It is an essential requisite for the validity of a mortgage
that the mortgagor be the absolute owner of the property mort-
gaged. A property remains to be owned by the government while
the same is still a subject of a free patent application.
Facts:
Page 26 of 63
Development Bank of the Philippines (DBP) granted a loan to the
Olidiana spouses. To secure the loan, the Olidiana spouses exe-
cuted a real estate mortgage on a lot. At the time of the mortgage,
the property was the subject of a Free Patent. They waived their
rights over lots in favor of respondents Jesusa Christine Chupuico
and Mylo O. Quinto. Free Patents over the lots were granted to
respondents who later obtained Original Certificates of Title cover-
ing the properties.
An additional loan was extended by DBP to the Olidiana spouses
who executed an additional mortgage on the same parcels of land
already covered by the first mortgage. The Olidianas failed to
comply with the terms and conditions of their promissory notes and
mortgage contracts. DBP extrajudicially foreclosed their mort-
gaged properties which were sold at public auction and awarded to
DBP. When DBP tried to register the sale in its name it discovered
that the lots are covered by OCTs in the name of Chupuico and
Quinto. DBP filed an action for Quieting of Title and Cancellation
or Annulment of Certificate of Title against respondents.
Issue:
Whether the foreclosure of the property vested valid title to DBP.
Ruling:
NO. DBP did not acquire valid title over the land in dispute be-
cause it was public land when mortgaged to the bank. The ap-
proval of a sales application merely authorized the applicant to
take possession of the land so that he could comply with the re-
quirements prescribed by law before a final patent could be issued
in his favor. The government still remained the owner, the applica-
tion could still be canceled if the requirements are not complied
with. Since the disputed lot was still the subject of a Free Patent
Application when mortgaged to DBP and no patent was granted to
the Olidiana spouses, the subject lot remained part of the public
domain.
Art. 2085(2) of the New Civil Code requires that the pledgor or
mortgagor be the absolute owner of the thing pledged or mort-
gaged. Since the disputed property was not owned by the Olidiana
spouses when they mortgaged it to DBP, the contracts of mort-
gage and all their subsequent legal consequences as regards the
subject lot are null and void. The law explicitly requires as impera-
tive for the validity of a mortgage that the mortgagor be the abso-
lute owner of what is mortgaged.
CIRCE S. DURAN and ANTERO S. GASPAR v. INTERMEDIATE
APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and
RESTITUTO TIANGCO
G.R. No. L-64159, September 10, 1985, Relova, J.
Although a mortgagor was not the absolute owner of the
mortgaged property at the time the mortgage was constituted,
such mortgage is valid insofar as an innocent purchaser for value
is concerned.
Facts:
Circe S. Duran owned two parcels of land. She left the Philippines
in 1954 and returned in 1966. In 1963, a Deed of Sale of the two
lots was made in favor of Circe's mother, Fe S. Duran who, in
1965, mortgaged the property to Erlinda B. Marcelo-Tiangco.
When Circe learned about the mortgage, she wrote the Register of
Deeds saying she had not given her mother any authority to sell or
mortgage her properties. Failing to get an answer from the regis-
trar, she returned to the Philippines. Fe failed to redeem the mort-
gaged properties and foreclosure proceedings were initiated by
Erlinda. The property was sold and the Certificate of Sale was
issued in favor of the latter.
Circe claims that the Deed of Sale in favor of her mother Fe is a
forgery, and that at the time of its execution in 1963 she was in the
United States. Erlinda alleges that Circe’s signatures in the Deed
are genuine and the mortgage made by Fe is valid.
Issue:
Whether Erlinda is a buyer in good faith for value, rendering the
mortgage valid.
Ruling:
YES. While it is true that under Art. 2085 of the Civil Code, it is
essential that the mortgagor be the absolute owner of the property
mortgaged, and while as between the daughter and the mother, it
was the daughter who still owned the lots, still insofar as innocent
third persons are concerned the owner was already Fe inasmuch
as she had already become the registered owner. Erlinda had the
right to rely upon what appeared in the certificate of title, and did
not have to inquire further. The forged document of sale may be-
come the root of a valid title if the certificate has already been
transferred from the name of the true owner to the name indicated
by the forger. The fact that at the time of the foreclosure sale the
mortgagees may have already known of the plaintiffs' claim is
immaterial. What is important is that at the time the mortgage was
executed, the mortgagees in good faith believed Fe to be the own-
er.
Where innocent third persons relying on the correctness of the
certificate of title issued, acquire rights over the property, the court
cannot disregard such for that would impair public confidence in
the certificate of title. Every person dealing with registered land
may rely on the certificate of title. There is no need to go behind
the certificate to determine the condition of the property. A mort-
gagee has the right to rely on what appears in the certificate of title
and, in the absence of anything to excite suspicion, he is under no
obligation to look beyond the certificate and investigate the title of
the mortgagor appearing on the face of said certificate.
DOMINADOR DIZON, doing business under the firm name
"Pawnshop of Dominador Dizon" v. LOURDES G. SUNTAY
G.R. No.L-30817, September 29, 1972, Fernando, J.
When a person engaged in a business where ordinary
prudence is needed to ascertain whether an individual who is of-
fering a thing through pledge is entitled to do so does not exercise
the diligence to ascertain such, he should be the last to complain if
thereafter the right of the true owner of such thing should be rec-
ognized.
Facts:
Lourdes G. Suntay is the owner of a 3-carat diamond ring which
was delivered to Clarita R. Sison for sale on commission. Upon
receiving the ring, Clarita delivered the receipt to Lourdes. After
the lapse of a considerable time without Clarita having returned
the ring, Lourdes made demands but Clarita could not comply
because the ring was pledged by Melia Sison with Dominador
Dizon's pawnshop. When Lourdes found out about the pledge, she
filed a case for Estafa. Lourdes asked for the return of her ring but
Dominador refused.
Issue:
Whether Lourdes can recover the ring from Dominador.
Ruling:
YES. The possession of movable property acquired in good faith is
equivalent to a title. Nevertheless, one who has lost any movable
or has been unlawfully deprived thereof may recover it from the
person in possession of the same. If the possessor of a lost mova-
ble of which the owner has been unlawfully deprived, has acquired
it in good faith at a public sale, the owner cannot obtain its return
without reimbursing the price paid therefor. The right of the owner
Page 27 of 63
cannot be defeated even by proof that there was good faith in the
acquisition by the possessor. The right of the owner to recover
personal property acquired in good faith by another, is based on
his being dispossessed without his consent.
Dominador cannot invoke estoppel to bar Lourdes from recovering
the ring. He is engaged in a business where ordinary prudence is
needed to ascertain whether an individual who is offering a jewelry
through pledge is entitled to do so. If no such care be taken, he
should be the last to complain if thereafter the right of the true
owner of such jewelry should be recognized. He ought to have
been on his guard before accepting the pledge in question. Evi-
dently, there was no such precaution availed of.
MILA SALES LLANTO, YOLANDA SALES CABILLO, OSCAR
SALES, ACQUILINA SALES, FRANCISCO SALES, ALBERTO
SALES, GLORIA SALES ALIPIO, EDUARDO SALES,
EMERCIA-NA SALES ALGIRE, ELENITA SALES SERRANO,
and CONRADO SALES v. ERNESTO ALZONA, DOMINADOR
ALZONA, ESTELA SALES PELONGCO, and the REGISTER OF
DEEDS OF CALAMBA, LAGUNA
G.R. No. 150730, January 31, 2005, Austria-Martinez, J.
If the mortgagor is not the owner of the mortgaged prop-
erty, the mortgage contract and any foreclosure sale arising there-
from are given effect insofar as the mortgagee in good faith is
concerned.
Facts:
Bernardo Sales and Maria Sales were husband and wife. They
have twelve children, eleven of whom are the present petitioners
while the remaining child, Estela Sales Pelongco is one of the
respondents. Maria was the registered owner of a certain parcel of
land. She and Bernardo, together with some of their children, lived
on the land. Maria died in 1986 while Bernardo died in 1997.
In 1990, a real estate mortgage was purportedly executed by Ma-
ria, who was already deceased at that time, and husband Bernar-
do in favor of Dominador Alzona and his brother Ernesto. The
mortgage was foreclosed and sold in a mortgage sale where Ern-
esto Alzona was the highest bidder. Petitioners caused the inscrip-
tion of an adverse claim on the title to the property and filed before
the RTC a complaint for Annulment of Mortgage and of Auction
Sale, with Reconveyance of Title and Damages.
Issue:
Whether Ernesto and Dominador are mortgagees in good faith.
Ruling:
YES. The mortgagor should be the absolute owner of the property
to be mortgaged; otherwise, the mortgage is void. However, if the
mortgagee is in good faith, the mortgage is valid even if the mort-
gagor was not the absolute owner of the mortgaged property.
Persons dealing with property covered by a Torrens Certificate of
Title are not required to go beyond what appears on the face of the
title.
Ernesto and Dominador, to be considered mortgagees in good
faith, should take the precaution expected of a prudent man which
they did in the present case. Ernesto conducted a credit investiga-
tion before he approved the loan. He sufficiently established that
he acted in good faith by exercising due diligence in ascertaining
the status of the property mortgaged and the identity of the owners
and occupants of the said property; that it was the persons who
represented themselves as Bernardo and Maria who perpetrated
the fraud. Ernesto can no longer be faulted if he was led into be-
lieving that the old man and woman with whom he did business
are Bernardo and Maria. Ernesto and Dominador Alzona are mort-
gagees in good faith and as such, they are entitled to the protec-
tion of the law.
ROSANA EREÑA v. VIDA DANA QUERRER-KAUFFMAN
G.R. No. 165853, June 22, 2006, Callejo, Sr., J.
In a real estate mortgage contract, it is essential that the
mortgagor be the absolute owner of the property to be mortgaged;
otherwise, the mortgage is void.
Facts:
Vida Dana Querrer-Kauffman is the owner of a residential lot with
a house constructed thereon at Talon, Las Piñas City. The owner’s
duplicate copy of the title as well as the tax declaration covering
the property, were kept in a safety deposit box in the house. It was
subsequently found out that the owner’s duplicate title and the tax
declarations, including pieces of jewelry were missing. Kauffman
who was then in the United States, returned to the Philippines and
went to the Register of Deeds of Las Piñas City with her sister.
They discovered that the lot had been mortgaged to RosanaEreña
on August 1, 1997. It appeared that a "Vida Dana F. Querrer" had
signed the Real Estate Mortgage as owner-mortgagor, together
with Jennifer V. Ramirez, as attorney-in- fact. Ramirez is the
daughter of Kaufmann’s live -in partner to whom she first entrusted
the key to her house and who later on entrusted the same to his
sister, Bernal. Kauffman filed a complaint against Ereña, Bernal
and Jennifer Ramirez for Nullification of Deed of Real Estate Mort-
gage and Damages with prayer for a Temporary Restraining Order
and Preliminary Mandatory Injunction. Ereña interposed the de-
fense of being a mortgagee in good faith. RTC rendered judgment
in favor of the defendants and ordered the dismissal of the com-
plaint. The court ruled that, although the plaintiff adduced proof
that she owned the property and that her signatures on the Special
Power of Attorney and in the Real Estate Mortgage were forged,
nevertheless, defendant Ereña adduced evidence that she was a
mortgagee in good faith. CA rendered judgment in favor of Kauff-
man, since in a real estate mortgage contract, it is essential that
the mortgagor be the absolute owner of the property to be mort-
gaged; otherwise, the mortgage is void. Ereña thus filed the instant
petition and that Kauffman failed to prove that she is the owner of
the property and even assuming that Kauffman is the real owner,
that Ereña is a mortgagee in good faith.
Issue:
Whether the real estate mortgage is valid.
Ruling:
NO. In a real estate mortgage contract, it is essential that the
mortgagor be the absolute owner of the property to be mortgaged;
otherwise, the mortgage is void. Here, the trial and appellate
courts found that Kauffman adduced clear and convincing evi-
dence that she is the owner of the property and that the signature
on the Special Power of Attorney and Real Estate Mortgage are
not her genuine signatures.
With regard to Ereña’s contention that she is an innocent purchas-
er for value which rights shall be protected, the SC ruled that she
is not the innocent purchaser for value protected by law. The inno-
cent purchaser for value protected by law is one who purchases a
titled land by virtue of a deed executed by the registered owner
himself, not by a forged deed, as the law expressly states. Such is
not the situation of the petitioner, who has been the victim of im-
postors pretending to be the registered owners but who are not
said owners. In a forged mortgage, as in this case, the doctrine of
"mortgagee in good faith" cannot be applied and will not benefit a
mortgagee no matter how large is his or her reservoir of good faith
and diligence. Such mortgage is void and cannot prejudice the
registered owner whose signature to the deed is falsified. When
the instrument presented is forged, even if accompanied by the
owner’s duplicate certificate of title, the registered owner does not
lose his title, and neither does the assignee in the forged deed
acquire any right or title to the property. An innocent purchaser for
Page 28 of 63
value is one who purchases a titled land by virtue of a deed exe-
cuted by the registered owner himself, not a forged deed.
SPOUSES NILO RAMOS and ELIADORA RAMOS v. RAUL
OBISPO and FAR EAST BANK AND TRUST COMPANY
G.R. No. 193804, February 27, 2013, Villarama, J.
The validity of an accommodation mortgage is allowed
under Article 2085 of the Civil Code which provides that "third
persons who are not parties to the principal obligation may secure
the latter by pledging or mortgaging their own property." An ac-
commodation mortgagor, ordinarily, is not himself a recipient of the
loan, otherwise that would be contrary to his designation as such.
Facts:
It was alleged that petitioners Spouses Ramos executed a Real
Estate Mortgage (REM) in favor of respondent Far East Bank and
Trust Company (FEBTC)-Fairview Branch, over their property. The
notarized REM secured credit accommodations extended to
Obispo in the amount of P1,159,096.00. On even date, the REM
was registered and annotated on the aforesaid title.
Spouses Ramos denied having executed an accommodation
mortgage and claimed to have executed the REM to secure only
their P250,000.00 loan and not the P1,159,096.00 personal in-
debtedness of Obispo. They claimed it was Obispo who filled up
the REM form contrary to their instructions and faulted FEBTC for
being negligent in not ascertaining the authority of Obispo and
failing to furnish petitioners with copies of mortgage documents.
Obispo initially gave them P100,000.00 and the balance was given
a few months later. After supposedly completing payment of the
amount of P250,000.00 to Obispo, petitioners discovered that the
REM secured a bigger amount.
Because of the alleged fraud committed upon them by Obispo who
made them sign the REM form in blank, petitioners sought to have
the REM annulled and their title over the mortgaged property re-
leased by FEBTC. RTC ruled in favor of Spouses Ramos. CA
reversed the trial court’s decision and dismissed the complaint,
holding that petitioners were third-party mortgagors under Article
2085 of the Civil Code and that they failed to present any evidence
to prove their allegations. Hence, the present petition.
Issue:
Whether the real estate mortgage is valid.
Ruling:
YES. The validity of an accommodation mortgage is allowed under
Article 2085 of the Civil Code which provides that "third persons
who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property." An accommodation
mortgagor, ordinarily, is not himself a recipient of the loan, other-
wise that would be contrary to his designation as such. In this
case, petitioners’ testimonial evidence failed to convince that
Obispo deceived them as to the debt secured by the REM.
Petitioners’ factual allegations are not firmly supported by the evi-
dence on record and even inconsistent with ordinary experience
and common sense. While petitioners admitted they knew it was
from FEBTC they will secure a loan, it was unbelievable for them
to simply accept the P250,000.00 loan proceeds without seeing
any document or voucher evidencing release of such amount by
the bank containing the details of the transaction such as monthly
amortization, interest rate and added charges. It is difficult to be-
lieve petitioners’ simplistic explanation that they requested docu-
ments from Obispo but the latter would not give them any.
Another disturbing fact is why, despite having signed the REM
contract in their name as mortgagors, petitioners did not go directly
to the bank to pay their loan. Such strongly suggests that there
was no such loan account in their name and it was really Obispo
who was the borrower and petitioners were merely accommoda-
tion mortgagors.
_____________________________________________________
ARTICLE 2086. The provisions of article 2052 are applicable to a
pledge or mortgage.
Correlate:
ARTICLE 2052. A guaranty cannot exist without a valid ob-
ligation.
Nevertheless, a guaranty may be constituted to guarantee
the performance of a voidable or an unenforceable con-
tract.
It may also guarantee a natural obligation.
Essence of pledge or mortgage - alienation of property in case of
default by debtor
ARTICLE 2087. It is also of the essence of these contracts 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.
NOTE: A personal guarantor, those undertaking to secure
a principal debt of another as guarantor or surety, is entitled
to the benefit of excussion. A real guarantor, those subject-
ing their properties as security for the fulfillment of a princi-
pal obligation, is not entitled to the benefit of excussion be-
cause of Article 2087.
Pactum Commissorium
ARTICLE 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.
Note: It is different from dacion en pago (dation in payment)
where there is no automatic appropriation of property. In this
special type of payment, there must still be an agreement
between the creditor and debtor that the obligation is imme-
diately extinguished by reason of the performance of a
prestation different from that due.
The prohibition on pactum commissorium likewise applies to
an equitable mortgage. Pactum commissorium does not,
however, apply in a pacto de recto sale since the proper
remedy therein is consolidation of title; thus, there is no au-
tomatic appropriation of property because of this remedy.
Requisites of Pactum Commissorium:
1.) There is a mortgage or pledge securing a principal
obligation
2.) There is a stipulation allowing automatic appropria-
tion upon non-performance of the secured obliga-
tion
What are prohibited are those stipulations executed or made
simultaneously with the original contract, and not those sub-
sequently entered into.
Cases:
SPOUSES UY TONG & KHO PO GIOK v. HONORABLE COURT
OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO,
Judge of the Court of First Instance of Manila, Branch XXXVII
and BAYANIHAN AUTOMOTIVE CORPORATION
G.R. No. 77465, May 21, 1988, Cortes, J.
Page 29 of 63
 The intervention of a trial court to exact fulfillment of the
obligation is by its very nature, anathema to pactum commissori-
um.
Facts:
Petitioner spouses Uy Tong and Kho Po Giok used to be the own-
ers of Apartment No. 307 of the Ligaya Building, together with the
leasehold right for 99 years over the land on which the building
stands. The spouses purchased from private respondent Baya-
nihan seven units of motor vehicles which was evidenced by a
written Agreement containing a stipulation that if the spouses
should fail to pay their obligation to the Bayanihan, the latter shall
become automatically the owner of the former's apartment which is
located at No. 307, Ligaya Building and in such event the spouses
shall execute the corresponding Deed of Absolute Sale in favor of
Bayanihan and/or the Assignment of Leasehold Rights.
The spouses failed to pay their obligation so Bayanihan filed an
action for specific performance where spouses were ordered to
pay their balance and in case of failure to do so, to execute a deed
of assignment over the property involved. The spouses elected to
execute the deed of assignment pursuant to said judgment. An
order for execution of the deed of assignment was issued by the
trial court. Notwithstanding said execution, the spouses remained
in the possession of premises as lessees for a given period.
Upon expiration of the said period, the spouses failed to surrender
the possession of the premises in favor of Bayanihan. An action
for recovery of possession with damages was filed against the
spouses. The CFI ruled in favor of Bayanihan.
CA affirmed CFI’s ruling. Hence, the present petition. The spouses
contended that 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.
Issue:
Whether the deed of assignment is null void, being in the nature of
a pactum commissorium.
Ruling:
NO. A perusal of the terms of the questioned agreement evinces
no basis for the application of the pactum commissorium provision.
There are two requisites or elements for pactum commisorium to
exist, namely:
1. There should be a pledge, mortgage, or antichre-
sis of property by way of security for the payment of
the principal obligation; and
2. There should be a stipulation for an automatic ap-
propriation by the creditor of the property in the
event of non-payment of the obligation within the
stipulated period.
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 motor vehicles. Second, there is no case of au-
tomatic appropriation of the property by Bayanihan. When the
spouses defaulted in their installment payments, Bayanihan filed
an action in court for specific performance.
Clearly, there was no automatic vesting of title on Bayanihan be-
cause it took the intervention of the trial court to exact fulfillment of
the obligation, which by its very nature is anathema to pactum
commissorium. 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 the action for specific performance
filed by Bayanihan.
A. FRANCISCO REALTY AND DEVELOPMENT
CORPORATION v. COURT OF APPEALS and SPOUSES
ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR
G.R. No. 125055, October 30, 1998, Mendoza, J.
There are two elements of pactum commissorium, to wit:
(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.
Facts
A. Francisco Realty granted a loan of P7.5 million to spouses
Javillonar in consideration of which the latter executed the follow-
ing documents: (a) a promissory note, stating an interest charge of
4% per month for six months; (b) a real estate mortgage (covering
the subject property) and (c) an undated deed of sale of the mort-
gaged property in favor of the mortgagee, A. Francisco Realty.
The promissory note expressly provided that upon failure spouses
Javillonar to pay the interest without prior arrangement with A.
Francisco Realty, full possession of the property will be transferred
and the deed of sale will be registered. A. Franciso Realty claims
that spouses Javillonar failed to pay the interest and, as a conse-
quence, it registered the sale of the land in its favor. Another prom-
issory note was executed by the spouses for the additional loan
they obtained from A. Franciso Realty in the amount of P2.5 mil-
lion. The promissory note provided that if after due date their
(spouses) loan remains unpaid, they will vacate the subject prop-
erty without any need for prior demand or notification.
Upon maturity date, the spouses failed to pay. Because of their
refusal to vacate, A. Francisco Realty filed an action for posses-
sion. RTC ruled in favor of A. Francisco Realty and upheld its right
of ownership over the subject property. CA reversed RTC’s ruling
and declared that the deed of sale was void for being in fact a
pactum commissorium which is prohibited by Art. 2088 of the Civil
Code. A. Francisco Realty denied that the promissory notes con-
tain a pactum commissorium and contended that pactum
commissorium is a forfeiture clause in a deed of mortgage. Hence,
the proscribed stipulation should be found in the mortgage deed
itself.
Issue:
Whether the stipulations in the promissory notes are in a nature of
pactum commissorium.
Ruling:
Yes. The contention of A. Francisco Realty is patently without
merit. To sustain the theory of petitioner would be to allow a sub-
version of the prohibition in Art. 2088. The stipulations in the prom-
issory 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 since they embody the two elements of pactum
commissorium, to wit: (1) that there should be a pledge or mort-
gage wherein a property is pledged or mortgaged by way of secu-
rity for the payment of the principal obligation; and (2) that there
should be a stipulation for an automatic appropriation by the credi-
tor of the thing pledged or mortgaged in the event of non-payment
of the principal obligation within the stipulated period. Thus, the
subject transaction is void.
THELMA P. OLEA v. COURT OF APPEALS, ELENA VDA. DE
PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND
MONSERRAT PACIENTE
G.R. No. 109696, August 14, 1995, Bellosillo, J.
Page 30 of 63
 The rule is settled that where in a contract of sale with
pacto de retro the vendor remains in physical possession of the
land sold as lessee or otherwise, the contract should be consid-
ered an equitable mortgage. A 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 is void for being pactum commissorium which enables the
mortgagee to acquire ownership of the mortgaged property without
need of foreclosure.
Facts:
Spouses Filoteo Pacardo and Severa de Pacardo executed a
Deed of Sale Con Pacto de Retro over their lot for a consideration
of P950.00 in favor of Maura Palabrica, predecessor-in-interest of
Thelma Olea. The deed was subject to a condition that if the
spouses will repurchase the property within three years, the sale
shall become null and void and of no force and effect whatsoever.
After the execution of the sale, the Pacardo spouses as vendors
remained in possession of the land and continued the cultivation
thereof.
Since the sale on 27 January 1947 up to August 1987, or for a
period of about 40 years, the spouses delivered annually one-third
(1/3) of the produce of the land to Maura Palabrica and kept for
themselves the remaining two-thirds (2/3). Despite the lapse of
three (3) years, the Pacardo spouses did not repurchase the land
but faithfully continued to give 1/3 of the produce to Maura Pa-
labrica. Maura Palabrica caused the registration of the Sale Con
Pacto de Retro with the Register of Deeds of Iloilo and its annota-
tion on the TCT covering the subject lot. Maura Palabrica thereaf-
ter sold said for P40,000.00 to one of her daughters, petitioner
Thelma Olea. When the 1/3 of the produce was refused to be giv-
en to Olea by the spouses’ successor-in-interests (private re-
spondents), Olea filed a complaint against Elena Pacardo and the
spouses Jesus and Elizabeth Palencia for recovery of possession
with damages.
Private respondents Elena Vda. De Pacardo and Jesus and Eliza-
beth Palencia filed their answer alleging that their parents intended
the disputed transaction to be an equitable mortgage and not a
sale with right to repurchase. The trial court rendered judgment
dismissing the complaint. CA affirmed trial court’s decision. Hence,
the instant petition.
Issue:
Whether the contract entered into is a contract of sale with pacto
de retro or an equitable mortgage.
Ruling:
The contract was an equitable mortgage. The rule is settled that
where in a contract of sale with pacto de retro the vendor remains
in physical possession of the land sold as lessee or otherwise, the
contract should be considered an equitable mortgage. The same
presumption applies when the vendee was given the right to ap-
propriate the fruits thereof in lieu of receiving interest on the loan.
Petitioner Olea, 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 prop-
erty 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 commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of fore-
closure. Its insertion in the contract is an avowal of the intention to
mortgage rather than to sell the property. Consequently, there was
no valid sale to Maura Palabrica. Ownership over the property was
not transferred to her for she was merely a mortgagee. There be-
ing no title to the land that Palabrica acquired from the spouses
Filoteo and SeveraPacardo, it follows that Palabrica had no title to
the same land which could be conveyed to Olea.
FORT BONIFACIO DEVELOPMENT CORPORATION v.YLLAS
LENDING CORPORATION and JOSE S. LAURAYA, in his offi-
cial capacity as President
G.R. No. 158997, October 6, 2008, J. Carpio
A lease contract may be terminated without judicial in-
tervention. Resort to judicial action is necessary only in the ab-
sence of a special provision granting the power of cancellation. A
lease contract may contain a forfeiture clause provided it is not
contrary to law, morals, good customs, or public policy.
Facts:
Fort Bonifacio Development Corporations (FBDC) executed a
lease contract in favor of Tirreno, Inc. (Tirreno) over a unit which
was used by Tirreno for Savoia Ristorante and La Strega Bar. In
the lease contract, there is a stipulation (Section 22) that if Tirreno
has unpaid or unsettled rentals, charges and/or damages upon the
expiration of the lease, FBDC shall have the right to retain posses-
sion of or sell the properties of Tirreno used or situated in the
leased premises, the proceeds of which will be applied against the
unpaid obligations. Tirreno began to default in its lease payments.
FBDC and Tirreno entered into a settlement agreement but de-
spite the execution of the same, FBDC found need to send Tirreno
a written notice of termination due to Tirreno’s alleged failure to
settle its outstanding obligations. FBDC entered and occupied the
leased premises. FBDC also appropriated the equipment and
properties left by Tirreno pursuant to the stipulation in their lease
contract.
On the other hand, Yllas Lending Corporation (Yllas) caused the
sheriff of Branch 59 of the trial court to serve an alias writ of sei-
zure against FBDC. FBDC found out that Yllas filed a complaint for
Foreclosure of Chattel Mortgage with Replevin, against Tirreno
and others. The properties covered by the said chattel mortgage
included the furniture, fixtures and equipment of Savoia Ristorante
and La Strega Bar. The sheriff delivered the seized properties to
respondents. Before the trial court, FBDC argued that when re-
spondents and Tirreno entered into the chattel mortgage agree-
ment on 9 November 2000, Tirreno no longer owned the mort-
gaged properties as FBDC already enforced its lien on 29 Sep-
tember 2000.
In deciding against FBDC, the trial court declared that Section 22
of the lease contract between FBDC and Tirreno is void under
Article 2088 of the Civil Code.
Issue:
Whether Section 22 of the lease contract between FBDC and
Tirreno is void under Article 2088 (pactum commissorium) of the
Civil Code.
Ruling:
NO. A lease contract may be terminated without judicial interven-
tion. Resort to judicial action is necessary only in the absence of a
special provision granting the power of cancellation. A lease con-
tract may contain a forfeiture clause. In Country Bankers Insur-
ance Corp. v. Court of Appeals (G.R. No. 85161, 9 September
1991), SC allowed the forfeiture of the lessees’ advance deposit of
lease payment. Such a deposit may also be construed as a guar-
antee of payment, and thus answerable for any unpaid rent or
charges still outstanding at any termination of the lease.
In the same manner, SC allowed FBDC’s forfeiture of Tirreno’s
properties in the leased premises. By agreement between FBDC
and Tirreno, the properties are answerable for any unpaid rent or
charges at any termination of the lease. Such agreement is not
contrary to law, morals, good customs, or public policy. Forfeiture
of the properties is the only security that FBDC may apply in case
of Tirreno’s default in its obligations.
Page 31 of 63

PHILNICO INDUSTRIAL CORPORATION v. PRIVATIZATION
AND MANAGEMENT OFFICE
G.R. No. 199420, August 27, 2014, Leonardo-De Castro, J.
There are two elements of pactum commissorium, to wit:
(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.
Facts:
Philnico Industrial Corporation (PIC) and Privatization And Man-
agement Office (PMO) have entered into an Amended and Re-
stated Definitive Agreement (ARDA) involving the purchase by PIC
from the PMO of 22,500,000 shares of common stock of Philnico
Processing Corporation (PPC) and certain receivables of PMO
from said corporation. Section 8.02 of ARDA provided that in case
of default, the title to the Existing Shares and the Converted
Shares shall ipso facto revert to 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.
To secure the obligation of PIC, it executed and delivered a
Pledge Agreement, giving unto PMO a good and valid pledge over
the pledged shares. Thereafter, PMO notified PIC that the latter
had defaulted in the payment of its obligations and demanded that
PIC settle its unpaid amortizations within 90 days or else the PMO
would enforce the automatic reversion of the PPC shares of stock
under Section 8.02 of the ARDA.
Before the RTC, PIC prayed for the issuance of writ of preliminary
injunction which was granted by the trial court since the provision
in the ARDA providing for ipso facto reversion of the shares of
stock is null and void for being a pactum commissorium.
CA ruled otherwise and agreed with PMO that the ARDA is sepa-
rate and distinct from the Pledge Agreement. The two agreements
have separate terms and conditions, especially concerning the
consequences of default. Thus, it is plainly irreconcilable how
pactum commissorium can be made to apply in the present case,
absent the two elements concurring in one contract.
Issue:
Whether Section 8.02 of the ARDA on ipso facto or automatic
reversion of the PPC shares of stock to PMO in case of default by
PIC constitutes pactum commissorium.
Ruling:
YES. Both elements of pactum commissorium are 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 former’s 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 de-
mand. The agreement between PMO and PIC is the sale of the
PPC shares of stock by the former to the latter, to be secured 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.
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 with the execution of
the Pledge Agreement that PIC turned over possession of its cer-
tificates of shares of stock in PPC to PMO. Having enjoyed the
security and benefits of the Pledge Agreement, PMO cannot now
insist on applying Section 8.02 of the ARDA and 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. Appreciating
the ARDA together with the Pledge Agreement, the Court can only
conclude that Section 8.02 of the ARDA constitutes pactum com-
missorium and, therefore, null and void.
_____________________________________________________
Indivisibility of pledge and mortgage
ARTICLE 2089. A pledge or mortgage is indivisible, even though
the debt may be divided among the successors in interest of the
debtor or of the creditor.
Therefore, the debtor’s heir who has paid a part of the debt cannot
ask for the proportionate extinguishment of the pledge or mortgage
as long as the debt is not completely satisfied.
Neither can the creditor’s heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is excepted the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment
of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied.
Note: Indivisibility of pledge or mortgage subsist while the
mortgage is subsisting.
Paying piecemeal and asking one by one the properties
mortgage is prohibited but not if there was already a public
sale since the mortgage is already extinguished, hence,
partial redemption is allowed.
ARTICLE 2090. The indivisibility of a pledge or mortgage is not
affected by the fact that the debtors are not solidarily liable.
All kinds of obligations can be secured by pledge or mortgage
ARTICLE 2091. The contract of pledge or mortgage may secure
all kinds of obligations, be they pure or subject to a suspensive or
resolutory condition.
Promise to constitute pledge or mortgage creates no real rights
ARTICLE 2092. A promise to constitute a pledge or mortgage
gives rise only to a personal action between the contracting par-
ties, without prejudice to the criminal responsibility incurred by him
who defrauds another, by offering in pledge or mortgage as unen-
cumbered, things which he knew were subject to some burden, or
by misrepresenting himself to be the owner of the same.
_____________________________________________________
PLEDGE
Additional requisite
ARTICLE 2093. In addition to the requisites prescribed in article
2085, it is necessary, in order to constitute the contract of pledge,
that the thing pledged be placed in the possession of the cred-
itor, or of a third person by common agreement.
Note: If Art. 2093 is not complied with, the pledge is void.
Page 32 of 63
 GR: Pledgor is the owner and the delivery of the thing is
necessary.
XPN: The constructive delivery of the thing when impracti-
cal.
Objects of pledge
ARTICLE 2094. All movables which are within commerce may be
pledged, provided they are susceptible of possession.
ARTICLE 2095. Incorporeal rights, evidenced by negotiable in-
struments, bills of lading, shares of stock, bonds, warehouse re-
ceipts and similar documents may also be pledged.
The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed (in favor of the pledg-
ee).
Case:
CALTEX (PHILIPPINES), INC. v. COURT OF APPEALS and
SECURITY BANK AND TRUST COMPANY
G.R. No. 97753, August 10, 1992, Regalado, J.
When an instrument is merely delivered as a security
and not as payment, the holder can only be considered as a holder
for value to the extent of lien and as a holder for value of such
security, the same shall be considered as a pledge. Negotiable
instruments containing incorporeal rights may be pledged but such
pledge shall not affect third persons if there is no proof as to the
date of the pledge.
Facts:
Security Bank issued 280 Certificates of Time Deposits (CTDs) in
favor of one Angel dela Cruz who deposited with the former the
aggregate amount of P1.2 Million. Dela Cruz delivered the CTDs
to Caltex in connection with his purchase of fuel products. Later
on, Dela Cruz informed the manager of Security Bank that he lost
all the CTDs. The manager told him to execute and submit a nota-
rized Affidavit of Loss if he desired replacement of said lost CTDs.
Dela Cruz executed and delivered the required affidavit, thus 280
replacement CTDs were issued in his favor. Dela Cruz then exe-
cuted a notarized Deed of Assignment of Time Deposit, surrender-
ing to the bank full control of the CTDs and to set-off and apply
said CTDs to the payment of what is due on the loan obtained by
him upon maturity.
The Credit Manager of Caltex went to the bank and presented for
verification the CTDs declared lost by Dela Cruz alleging that the
same were delivered to them as security of the purchased fuel
products. Caltex then informed the bank of its possession of the
CTDs and of its decision to pre-terminate them. When asked by
the bank of any document evidencing such guarantee agreement,
Caltex was unable to show anything, thus the bank rejected Cal-
tex’s demand for payment of the value of the CTDs. Caltex then
filed a complaint against the bank for the payment of the CTDs.
RTC dismissed the complaint and the same was affirmed by the
CA.
Issue:
Whether Caltex can rightfully recover on the CTDs.
Ruling:
NO. The CTDs were delivered by Dela Cruz to Caltex merely as
security and not as payment. The admission of the Credit Manager
of Caltex, that the CTDs were negotiated to them by Dela Cruz to
guarantee his purchases of fuel products, is conclusive upon Cal-
tex. Thus, it is estopped from asserting claims against the bank.
Thus, being delivered as a security, this could at the most consti-
tute petitioner only as a holder for value to the extent of his lien. As
such holder of collateral security, he would be a pledgee, thus the
requirements and the effects thereof shall be governed by the Civil
Code provisions on pledge of incorporeal rights, which provide:
Art. 2095. Incorporeal rights, evidenced by
negotiable instruments, . . . may also be
pledged. The instrument proving the right
pledged shall be delivered to the creditor, and
if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect
against third persons if a description of the
thing pledged and the date of the pledge do
not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not in-
dorsed, the factual findings of CA showed that Caltex failed to
produce any document evidencing any contract of pledge or guar-
antee agreement between it and Dela Cruz. Consequently, the
mere delivery of the CTDs did not legally vest in Caltex any right
effective against and binding upon the bank. The requirement
under Article 2096 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 with-
out which the execution of a pledge contract cannot affect third
persons adversely.
_____________________________________________________
Public instrument
ARTICLE 2096. A pledge shall not take effect against third per-
sons if a description of the thing pledged and the date of the
pledge do not appear in a public instrument.
Note: This provision will only apply if third persons exist,
otherwise, pledge will still remain valid as between the
pledgor and the pledgee.
Alienation by the pledgor of the thing pledged
ARTICLE 2097. With the consent of the pledgee, the thing pledged
may be alienated by the pledgor or owner (to third persons), sub-
ject to the pledge.
The ownership of the thing pledged is transmitted to the ven-
dee or transferee as soon as the pledgee consents to the aliena-
tion, but the latter shall continue in possession.
Right of retention (possession)
ARTICLE 2098. The contract of pledge gives a right to the credi-
tor to retain the thing in his possession or in that of a third person
to whom it has been delivered, until the debt is paid.
Correlate:
ARTICLE 2102. If the pledge earns or produces fruits, in-
come, dividends, or interests, the creditor shall compen-
sate what he receives with those which are owing him; but
if none are owing him, or insofar as the amount may ex-
ceed 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 earnings of the right
pledged.
In case of a pledge of animals, their offspring shall pertain
to the pledgor or owner of animals pledged, but shall be
subject to the pledge, if there is no stipulation to the contra-
ry.
Other rights of the creditor/pledgee
ARTICLE 2099. The creditor shall (1) take care of the thing
pledged with the diligence of a good father of a family; he has a (2)
Page 33 of 63
right to the reimbursement of the expenses made for its preserva-
tion, and is (3) liable for its loss or deterioration, in conformity with
the provisions of this Code.
ARTICLE 2103. Unless the thing pledged is expropriated, the
debtor continues to be the owner thereof.
Nevertheless, the creditor may bring the actions which pertain to
the owner of the thing pledged in order to recover it from, or de-
fend it against a third person.
ARTICLE 2108. If, without the fault of the pledgee, there is danger
of destruction, impairment, or diminution in value of the thing
pledged, he may cause the same to be sold at a public sale.
The proceeds of the auction shall be a security for the principal
obligation in the same manner as the thing originally pledged.
ARTICLE 2109. If the creditor is deceived on the substance or
quality of the thing pledged, he may either (1) claim another thing
in its stead, or (2) demand immediate payment of the principal
obligation.
Note: The remedies are alternative and not cumulative.
Only one may be chosen. The law used the conjunctive
―or‖.
Other obligations of creditor/pledgee
ARTICLE 2100. (General Rule) The pledgee cannot deposit the
thing pledged with a third person, (Exception) unless there is a
stipulation authorizing him to do so.
The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged.
ARTICLE 2104. (General Rule) The creditor cannot use the thing
pledged, without the authority of the owner, and if he should do so,
or should misuse the thing in any other way, the owner may ask
that it be judicially or extrajudicially deposited.
(Exception) When the preservation of the thing pledged requires
its use, it must be used by the creditor but only for that purpose.
ARTICLE 2105. The debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has
paid the debt and its interest, with expenses in a proper case.
Note: The pledgee cannot deposit the thing pledged with
a third person unless there is a stipulation authorizing
him to do so. If deposit with a third person is allowed,
the pledgee is liable for the loss if he deposited the thing
with a person who is manifestly careless or unfit. The
pledgee is also responsible for the acts of his agents or
employees with respect to the thing pledged.
Rights and obligations of pledgor
ARTICLE 2101. The pledgor has the same responsibility as a
bailor in commodatum in the case under article 1951.
ARTICLE 1951. The bailor who, knowing the flaws of the
thing loaned, does not advise the bailee of the same, shall
be liable to the latter for the damages which he may suf-
fer by reason thereof.
ARTICLE 2106. If through the negligence or willful act of the
pledgee, the thing pledged is in danger of being lost or impaired,
the pledgor may require that it be deposited (Art. 2104) with a third
person.
Note: With the fault of the pledgee
ARTICLE 2107. If there are reasonable grounds to fear the de-
struction or impairment of the thing pledged, without the fault of the
pledgee, the pledgor may demand the return of the thing, upon
offering another thing in pledge, provided the latter is of the same
kind as the former and not of inferior quality, and without prejudice
to the right of the pledgee under the provisions of the following
article.
The pledgee is bound to advise the pledgor, without delay, of any
danger to the thing pledged.
Note: Without the fault of the pledgee
If the obligation is with a term, there can be no demand of
the property until after the term had arrived. The prescrip-
tive period for the recovery of the property begins from the
time the debt is extinguished by payment and demand for
return of the property is made.
_____________________________________________________
EXTINGUISHMENT OF PLEDGE
Thing is returned to pledgor
ARTICLE 2110. If the thing pledged is returned by the pledgee to
the pledgor or owner, the pledge is extinguished.
Any stipulation to the contrary shall be void.
If subsequent to the perfection of the pledge, the thing is in the
possession of the pledgor or owner, there is a prima facie pre-
sumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the pos-
session of a third person who has received it from the pledgor or
owner after the constitution of the pledge.
Note: It is presumed that the accessory obligation of
pledge has been remitted when the thing pledged, after
its delivery to the creditor, is found in the possession of
the debtor, or of a third person who owns the thing
(NCC, Art. 1274).
Statement in writing by pledgee
ARTICLE 2111. A statement in writing by the pledgee that he
renounces or abandons the pledge is sufficient to extinguish the
pledge.
For this purpose, neither the acceptance by the pledgor or owner,
nor the return of the thing pledged is necessary, the pledgee be-
coming a depositary.
Note: This is an exception to the extinguishment of pledge
if the thing is returned by the pledgee.
Procedure for sale
ARTICLE 2112. 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.
Who may bid
ARTICLE 2113. At the public auction, the pledgor or owner may
bid.
Page 34 of 63

He shall, moreover, have a better right if he should offer the same
terms as the highest bidder.
The pledgee may also bid, but his offer shall not be valid if he is
the only bidder.
NOTE: To prevent by-bidding or puffing, the pledgee cannot
bid alone in a public auction.
ARTICLE 2114. All bids at the public auction shall offer to pay the
purchase price at once.
If any other bid is accepted, the pledgee is deemed to have been
received the purchase price, as far as the pledgor or owner is
concerned.
Effect of sale of thing pledged
ARTICLE 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 ex-
penses 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.
Exception:
Legal pledges
ARTICLE 2121. Pledges created by operation of law, such
as those referred to in articles 546, 1731, and 1994, are
governed by the foregoing articles on the possession, care
and sale of the thing as well as on the termination of the
pledge. However, after payment of the debt and expenses,
the remainder of the price of the sale shall be delivered to
the obligor.
Correlate:
ARTICLE 546. Necessary expenses shall be re-
funded to every possessor; but only the possessor
in good faith may retain the thing until he has been
reimbursed therefor.
Useful expenses shall be refunded only to the pos-
sessor in good faith with the same right of retention,
the person who has defeated him in the possession
having the option of refunding the amount of the
expenses or of paying the increase in value which
the thing may have acquired by reason thereof.
ARTICLE 1731. He who has executed work upon a
movable has a right to retain it by way of pledge un-
til he is paid.
ARTICLE 1994. The depositary may retain the thing
in pledge until the full payment of what may be due
him by reason of the deposit.
If the price of the sale is less, neither shall the creditor be entitled
to recover the deficiency, notwithstanding any stipulation to the
contrary.
Note: By electing to sell the thing pledged instead of su-
ing on the principal obligation, the creditor waives any
other remedy and must abide by the results of the sale.
Case:
MANILA SURETY and FIDELITY COMPANY, INC. v. RODOFLO
R. VELAYO
G.R. No. L-21069, October 26, 1967, Reyes, J.B.L., J.
By electing to sell the articles pledged, instead of suing
on the principal obligation, a creditor waives any other remedy,
and must abide by the results of the sale. No deficiency is recov-
erable.
Facts:
Manila Surety & Fidelity Co., upon request of Rodolfo Velayo,
executed a bond for the dissolution of writ of attachment obtained
by one Jovita Granados in a suit against Velayo. Velayo undertook
to pay the surety company an annual premium, loss and damages
to be suffered, and reimbursement for what it has paid under the
bond. As ―collateral and by way of pledge‖ Velayo also delivered
four pieces of jewelry to the surety company ―for latter’s further
protection‖, with power to sell the same in case the surety be-
comes obligated to pay any amount of money under the bond,
applying the proceeds to the payment of any amounts it will be
liable to pay, and turning the balance, if any, to the persons enti-
tled, after deducting the legal expenses and costs.
Judgment having been rendered against Velayo, and execution
having returned unsatisfied, the surety company was forced to pay
P2,800.00 that it later sought to recoup from Velayo. Upon Ve-
layo’s failure to do so, the surety caused the pledged jewelry to be
sold, realizing a net product of P235.00 only. Upon Velayo’s failure
to pay the balance, the surety company filed a case before the
Municipal Court. Velayo argued that the sale of the pledged jewel-
ry extinguished any further liability on his part under Article 2115 of
the Civil Code. The Municipal Court ruled against him, but the
same was overruled by the Court of First Instance. CFI ruled that
the main agreement between the parties is the Indemnity Agree-
ment and if the pieces of jewelry were delivered to the surety com-
pany, it was merely an added protection to the latter. The status of
the pledge is only that of a mortgage given as 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, thus Velayo would have to pay the
deficiency.
Issue:
Whether the sale of the pledged jewelry extinguishes any further
liability of Velayo.
Ruling:
YES. Article 2115 of the Civil Code provides that ―[t]he 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 princi-
pal obligation, interest and expenses in a proper case. If the price
of the sale is more than said amount, the debtor shall not be enti-
tled 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 last portion of the said provision clearly establishes that the
extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override. 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. Moreover, the
accessory character is of the essence of pledge and mortgage.
Under Article 2085 of the Civil Code, an essential requisite of the-
se contracts is that they be constituted to secure the fulfillment of a
principal obligation, which in the present case is Velayo's under-
taking to indemnify the surety company for any disbursements
made on account of its attachment counter bond. 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.
_____________________________________________________
Page 35 of 63
ARTICLE 2116. After the public auction, the pledgee shall prompt- In any of the foregoing cases, any money, fruits, or other
ly advise the pledgor or owner of the result thereof. benefit to be received by the vendee as rent or otherwise
shall be considered as interest which shall be subject to the
ARTICLE 2117. Any third person who has any right in or to the usury laws.
thing pledged may satisfy the principal obligation as soon as the
latter becomes due and demandable. PACTO DE RECTO REAL ESTATE
SALE MORTGAGE
ARTICLE 2118. If a credit which has been pledged becomes due Principal contract Accessory contract
before it is redeemed, the pledgee may collect and receive the
amount due. Redemption may be par- Indivisible
tial
He shall apply the same to the payment of his claim, and deliver
the surplus, should there be any, to the pledgor. Subject matter may be Subject matter is only
real or personal property real property
Note: This constitutes three parties.
There is title of title and
ARTICLE 2119. If two or more things are pledged, the pledgee ownership of the property, There is no transfer of
may choose which he will cause to be sold, unless there is a stipu- although conditional title and possession of
lation to the contrary. the property
After the consolidation of
He may demand the sale of only as many of the things as are ownership, the vendee
necessary for the payment of the debt. may now appropriate the
property There is no automatic
ARTICLE 2120. If a third party secures an obligation by pledging appropriation of the
his own movable property under the provisions of article 2085 he property; otherwise, it
shall have the same rights as a guarantor under articles 2066 to would be a pactum
2070, and articles 2077 to 2081. commissorium
He is not prejudiced by any waiver of defense by the principal
obligor.

Continuation on legal pledge

ARTICLE 2122. A thing under a pledge by operation of law may be

sold only after demand of the amount for which the thing is re-
tained.
Cases:
The public auction shall take place within one month after such
INNOCENTE LEONARDO, LORENZO LEONARDO,
demand.
VISITACION LEONARDO, ASUNCION AND MARGARITA
LEONARDO BERNAL v. COURT OF APPEALS and TROYANO
If, without just grounds, the creditor does not cause the public sale
V. LEONARDO
to be held within such period, the debtor may require the return
G.R. No. 82457, March 22, 1993, Nocon, J.
of the thing.

ARTICLE 2123. With regard to pawnshops and other establish- There is a a pacto de retro sale when there is a categor-
ments, which are engaged in making loans secured by pledges, ical admission of the exercise of the right to repurchase a property
the special laws and regulations concerning them shall be ob- and tendering for that purpose the repurchase payment for the
served, and subsidiarily, the provisions of this Title. said property.

_____________________________________________________ Facts:

Inocente Leonardo, the registered owner of a parcel of land, and

REAL ESTATE MORTGAGE
Real estate mortgage versus equitable mortgage
ARTICLE 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases: (IPERTI)
(1) When the price of a sale with right to repurchase is un-
usually inadequate;
(2) When the vendor remains in possession as lessee or
otherwise;
(3) When upon or after the expiration of the right to repur-
chase another instrument extending the period of redemp-
tion or granting a new period is executed;
(4) When the purchaser retains for himself a part of the
purchase price;
(5) When the vendor binds himself to pay the taxes on the
thing sold;
(6) In any other case where it may be fairly inferred that
the real intention of the parties is that the transaction shall
secure the payment of a debt or the performance of any
other obligation.
his wife, Cristina, mortgaged such including its poultry building with
the Development Bank of the Philippines (DBP) to secure a loan.
DBP sent a demand letter for the payment of their outstanding
loan, otherwise, the subject property will be foreclosed. Thus, Ino-
cente executed in favor of his son, Troyano Leonardo, a Deed of
Sale with Assumption of a Real Estate Mortgage plus a Right to
Repurchase.
Troyano then filed a Petition of Consolidation of Ownership with
the Court of First Instance against the spouses Inocente and Cris-
tina Leonardo for the latter’s failure to exercise their right to repur-
chase the subject property within the period agreed upon.
Inocente wrote a letter to Troyano, tendering their repurchase
payment for the one-half portion of the lot. Troyano, however,
rejected Inocente’s offer. Thus, the spouses alleged that the con-
solidation in favor of Troyano could not be legally effected because
they have already tendered the purchase price and that the Deed
did not express the true intention of the parties inasmuch as the
entire lot and not merely one-half portion shall be the subject of the
repurchased agreement.
The spouses died, and were survived by their children, Lorenzo,
Visitacion, Asuncion and Margarita. They alleged that Troyano

Page 36 of 63
cannot validly consolidate the ownership of the subject property
because the contract executed between them was one of mort-
gage and not a pacto de retro sale. The CFI granted Troyano’s
petition, and the same was affirmed by the CA.
Issue:
Whether the agreement entered into between the Inocente and
Troyano was one of sale.
Ruling:
YES. The contract entered into by the parties is one of sale with
assumption of real estate mortgage with right to re-purchase and
not an equitable mortgage because it is clear from the terms of the
contract entered into between the parties.
Said contract provides that Inocente, as the vendor, has the power
to redeem the subject property within the period agreed upon.
Thus, when Troyano received the letter of his father, signifying his
intention to exercise his right to repurchase one- half portion of the
subject property, the period to repurchase, as per their contract,
had already expired.
The record is clear that Inocente Leonardo understood the nature
of the contract he entered into when he categorically admitted in
his letter to Troyano that he is exercising his right to repurchase
the subject property and tendering for that purpose his repurchase
payment for said property.
Moreover, the children of Inocente denied the true nature of their
agreement only after Troyano filed his petition for consolidation of
ownership with the trial court, by alleging that the contract is one of
equitable mortgage.
NOTE: Article 1606, paragraph 3 presupposes an issue re-
garding the nature of the parties’ contract and such contract
was ultimately adjudged as a pacto de recto sale. As an ef-
fect thereof, an additional 30 days to redeem the subject of
sale is granted to the vendor a retro from the judgment of
the court. On the other hand, the vendee a retro may consol-
idate the ownership of the property to himself if the endor a
retro fails to redeem the property.
However, if the contract is an equitable mortgage, the proper
remedy of the vendee a retro, who actually is an equitable
mortgagee, is to foreclose the property and not consolidation
of ownership.
STAR TWO INCORPORATION v. PAPER CITY COPORATION
OF THE PHILIPPINES
G.R. No. 169211, March 6, 2013,
FACTS:
From 1990-1991, Paper City, a domestic corporation engaged in
the manufacture of paper products, applied for and was granted
the four following loans totaling to ₱110,000,000.00 by RCBC:
₱10,000,000.00 on 8 January 1990, ₱14,000,000.00 on 19 July
1990, ₱10,000,000.00 on 28 June 1991, and ₱16,615,000.00 on
28 November 1991. These were secured by four Deeds of Contin-
uing Chattel Mortgage on its machineries and equipments in its
power plants.
On 25 August 1992, a unilateral Cancellation of Deed of Continu-
ing Chattel Mortgage on Inventory of Merchandise/Stocks-in-Trade
was executed by RCBC over the merchandise and stocks-in-trade
covered by the continuing chattel mortgages.
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor
banks with RCBC instituted as the trustee bank) entered into a
Mortgage Trust Indenture (MTI) with Paper City. In the MTI, Paper
City acquired an additional loan of ₱170,000,000.00 from the cred-
itor banks. The old loan (₱110M) was partly secured by various
parcels of land situated in Valenzuela City. The new loan (₱170M)
would also be secured by the same mortgage on the aforemen-
tioned parcels of land and additional real and personal properties
which includes the machineries and equipments of Paper City.
Three supplemental indentures were made in the MTI all including
other improvements, machineries and equipments located in the
existing plant site.
Paper City was able to comply with its loan obligations until July
1997 because of an economic crisis. RCBC extrajudicially fore-
closed eight parcels of land included in the MTI and the inden-
tures. Paper City had an outstanding obligation of
₱901,801,484.10. The creditor banks purchased said properties by
virtue of a public sale.
Paper City filed a complaint assailing the validity of the public auc-
tion alleging that the extra-judicial sale of the properties and plants
was null and void due to lack of prior notice and attendance of
gross and evident bad faith on the part of the creditor banks.
In the meantime, Paper City and Union Bank entered into a Com-
promise Agreement. While negotiations with the other creditor
banks was pending, Paper City filed with the trial court a Manifes-
tation with Motion to Remove and/or Dispose Machinery reasoning
that the machineries located inside the foreclosed land and build-
ing were deteriorating. It posited that since the machineries were
not included in the foreclosure of the real estate mortgage, it is
appropriate that it be removed from the building and sold to a third
party.
RTC denied such prayer and ruled that the machineries and
equipments were included in the annexes and form part of the
MTI. Further, the machineries and equipments are covered by the
Certificate of Sale issued as a consequence of foreclosure, the
certificate stating that the properties described therein with im-
provements thereon were sold to creditor banks to the defendants
at public auction.
Paper City; MR: Granted. court justified the reversal of its order on
the finding that the disputed machineries and equipments are
chattels by agreement of the parties through their inclusion in the
four (4) Deeds of Chattel Mortgage. It further ruled that the deed of
cancellation executed by RCBC on 25 August 1992 was not valid
because it was done unilaterally and without the consent of Paper
City and the cancellation only refers to the merchandise/stocks-in-
trade and not to machineries and equipments.
RCBC; upon appeal: It argued that (i) Paper City gave its con-
formity to consider the subject machineries and equipment as real
properties when the president and Executive Vice President of
Paper City signed the Mortgage Trust Indenture; (ii) under Chattel
Mortgage Law, consent of the mortgagor (Paper City) is not re-
quired in order to cancel a chattel mortgage; (iii) It is of the conten-
tion of RCBC that Paper City’s unreasonable delay of ten (10)
years in assailing that the disputed machineries and equipments
were personal amounted to estoppel and ratification of the charac-
terization that the same were real properties.
Paper City; upon appeal: It alleged that (i) the disputed properties
remained within the purview of the existing chattel mortgages
which in fact were acknowledged by RCBC in the MTI; (ii) the
subject machineries and equipments were not included in the fore-
closure of the mortgage on real properties particularly the eight (8)
parcels of land; and (iii) the Certificate of Sale of the Foreclosed
Property referred only to "lands and improvements" without any
specification and made no mention of the inclusion of the subject
properties.
CA affirmed the RTC decision. It reasoned that nowhere from any
of the MTIs executed by the parties can we find the alleged "ex-
press" agreement adverted to by petitioner. There is no provision
in any of the parties’ MTI, which expressly states to the effect that
the parties shall treat the equipments and machineries as real
property. It was also ruled that the subject machineries and
equipments were not included in the extrajudicial foreclosure sale.
Page 37 of 63
ISSUE:
Whether or not the subject machineries and equipment were con-
sidered real properties and should therefore be included in the
extra-judicial foreclosures which, in turn, were sold to the banks.
Ruling:
YES, those subject machineries are included.
Repeatedly, the parties stipulated that the properties mortgaged by
Paper City to RCBC are various parcels of land including the build-
ings and existing improvements thereon as well as the machiner-
ies and equipments.
Article 2127 of the Civil Code provides:
Art. 2127. The mortgage extends to the natural acces-
sions, to the improvements, growing fruits, and the
rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of
the property mortgaged, or in virtue of expropriation
for public use, with the declarations, amplifications and
limitations established by law, whether the estate re-
mains in the possession of the mortgagor, or it passes
into the hands of a third person.
Thus, machineries and accessories installed at the time the mort-
gage, as well as all the buildings, machinery and accessories be-
longing to the mortgagor, installed after the constitution are part of
the mortgage.
Contrary to the finding of the CA, the Extra-Judicial Foreclosure of
Mortgage includes the machineries and equipments of respondent.
Considering that the Indenture which is the instrument of the mort-
gage that was foreclosed exactly states through the Deed of
Amendment that the machineries and equipments listed in Annex-
es "A" and "B" form part of the improvements listed and located on
the parcels of land subject of the mortgage, such machineries and
equipments are surely part of the foreclosure of the "real estate
properties, including all improvements thereon" as prayed for in
the petition. The real estate mortgages which specifically included
the machineries and equipments were subsequent to the chattel
mortgages. Without doubt, the real estate mortgages superseded
the earlier chattel mortgages.
The real estate mortgage over the machineries and equipments is
even in full accord with the classification of such properties by the
Civil Code of the Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all
kinds adhered to the soil;
xxxx
(5) Machinery, receptacles, instruments or implements
intended by the owner of the tenement for an industry
or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the
needs of the said industry or works
LUISA BRIONES-VASQUEZ v. COURT OF APPEALS and
HEIRS OF MARIA MENDOZA VDA. DE OCAMPO
G.R. No. 144882, February 4, 2005, Azcuna, J.
In an equitable mortgage, consolidation of ownership is
not the remedy for failure of the mortgagor to pay the obligation,
but the foreclosure of the property. If the mortgagee does not
exercise the right to foreclosure, the ownership retains with the
mortgagor.
Facts:
Maria Mendoza Vda. De Ocampo entered into an agreement de-
nominated as a pacto de retro sale, wherein she acquired a parcel
of land from Luisa Briones. De Ocampo died, thus, her heirs filed a
petition of consolidation of ownership, alleging that the seller was
not able to exercise her privilege to redeem the property. RTC
declared that the contract was a pacto de retro sale and that Brio-
nes could still redeem the property within 30 days from the finality
of its judgment. On appeal, the CA declared that the contract was
one of an equitable mortgage.
Issue:
Whether the contract entered into between the parties was one of
pacto de retro sale.
Ruling:
NO. The contract entered into between the parties was one of
equitable mortgage. Since the decision of the CA, which was final
and executory, pronounced that is an equitable mortgage, Article
2088 of the Civil Code shall apply. It provides that ―[t]he 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 essence of pacto commissorio, which is prohibited by Article
2088 of the Civil Code, is that ownership of the security will pass to
the creditor by the mere default of the debtor. The only right of a
mortgagee in case of non-payment of a debt secured by mortgage
would be to foreclose the mortgage and have the encumbered
property sold to satisfy the outstanding indebtedness. The mort-
gagor’s default does not operate to vest in the mortgagee the
ownership of the encumbered property, for any such effect is
against public policy. The only proper remedy is to cause the fore-
closure of the mortgage in equity and if the mortgagee in equity
desires to obtain title to the mortgaged property, the mortgagee in
equity may buy it at the foreclosure sale.
The heirs do not appear to have caused the foreclosure of the
mortgage much less have they purchased the property at a fore-
closure sale, on the ground of non-payment of the obligation. Brio-
nes, therefore, retains ownership of the subject property.
_____________________________________________________
Object of mortgage
ARTICLE 2124. Only the following property may be the object of a
contract of mortgage:
(1) Immovables;
(2) Alienable real rights in accordance with the laws, imposed
upon immovables.
Nevertheless, movables may be the object of a chattel mortgage.
Case:
PRUDENTIAL BANK v. HONORABLE DOMINGO D. PANIS,
Presiding Judge of Branch III, Court of First Instance of Zam-
bales and Olongapo City; FERNANDO MAGCALE and
TEODULA BALUYUT-MAGCALE
G.R. No. L-50008, August 31, 1987, Paras, J.
A building separate and distinct from the land on which it
has been constructed is an immovable property, and may be
mortgaged.
Facts:
Spouses Fernando and Teodula Magcale secured a loan from
Prudential Bank. To secure payment of this loan, they executed in
favor of the bank a Deed of Real Estate Mortgage over a residen-
tial building with warehouse spaces. The mortgage also included
the right to occupy the lot and the information about the sales
patent applied for by the spouses for the lot on which the building
stood. After securing the first loan, the spouses secured another
Page 38 of 63
loan from the bank. To secure payment, another real estate mort-
gage was executed over the same properties. The Secretary of
Agriculture then issued a Miscellaneous Sales Patent over the
land which was later on mortgaged to the bank. The spouses then
failed to pay for the loan and the deeds of Real Estate Mortgage
were extrajudicially foreclosed and sold in public auction despite
opposition from the spouses. The CFI declared that the deeds of
Real Estate Mortgage were null and void.
Issue:
Whether a valid real estate mortgage can be constituted on the
building erected on the land belonging to another.
Ruling:
YES. Under Article 415 of the Civil Code, the inclusion of "building"
separate and distinct from the land can only mean that a building
is by itself an immovable property. Thus, while it is true that a
mortgage of land necessarily includes, in the absence of stipula-
tion of the improvements thereon, buildings, still a building by itself
may be mortgaged apart from the land on which it has been built.
Such a mortgage would be still a real estate mortgage for the
building would still be considered immovable property even if dealt
with separately and apart from the land. In the same manner, the
SC has also established that possessory rights over said proper-
ties before title is vested on the grantee, may be validly transferred
or conveyed as in a deed of mortgage.
It is therefore without question that the original mortgage was exe-
cuted before the issuance of the final patent and before the gov-
ernment was divested of its title to the land, an event which takes
effect only on the issuance of the sales patent and its subsequent
registration in the Office of the Register of Deeds. Under the fore-
going considerations, it is evident that the mortgage executed by
spouse on their own building which was erected on the land be-
longing to the government is to all intents and purposes a valid
mortgage.
_____________________________________________________
Purpose of registration
ARTICLE 2125. In addition to the requisites stated in article 2085,
it is indispensable, in order that a mortgage may be validly consti-
tuted, that the document in which it appears be recorded in the
Registry of Property.
If the instrument is not recorded, the mortgage is nevertheless
binding between the parties.
The persons in whose favor the law establishes a mortgage have
no other right than to demand the execution and the recording of
the document in which the mortgage is formalized.
Case:
MOBIL OIL PHILIPPINES, INC. v. RUTH DIOCARES, ET AL.
G.R. No. L-26371, September 30, 1969, Fernando, J.
The fact that the document is not recorded will not make
the mortgage not binding between the parties.
Facts:
Mobil Oil Philippines, Inc. alleged that Ruth Diocares and Lope
Diocares entered into a contract of loan and real estate mortgage
over two parcels of land. The agreement also provided that in case
of failure of Diocares to pay any of the installments due and pur-
chase their petroleum requirements from Mobil Oil, the latter has
the right to foreclose that mortgage or recover the payment of the
entire obligation or its remaining unpaid balance. Diocares failed to
pay their outstanding balance and to purchase on cash basis the
minimum amount of petroleum. Mobil Oil, therefore, prayed that
Diocares be ordered to pay the outstanding balance of the loan
and in default of such payment, that the mortgaged properties be
sold and the proceeds applied to the payment of obligation of Dio-
cares.
The foreclosure sought by Mobil Oil was denied as the lower court
held that such foreclosure of mortgage cannot be granted because
there is no allegation in the complaint nor does it appear from the
copy of the loan and real estate mortgage contract attached that
the mortgage had been registered. The said loan agreement alt-
hough binding among the parties merely created a personal obli-
gation but did not establish a real estate mortgage. Thus, the doc-
ument should be registered under Article 2125 of the Civil Code.
Issue:
Whether a real estate mortgage should be registered first before
the property can be foreclosed.
Ruling:
NO. Under Article 2125, even if the instrument was not recorded,
"the mortgage is nevertheless binding between the parties." The
law cannot be any clearer. Effect must be given to it as written.
The mortgage subsists; the parties are bound. As between them,
the mere fact that there is as yet no compliance with the require-
ment that it be recorded cannot be a bar to foreclosure. The failure
of the instrument to be recorded does not result in the mortgage
being any less "binding between the parties."
_____________________________________________________
Effect of mortgage
ARTICLE 2126. The mortgage directly and immediately subjects
the property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted.
Case:
PHILIPPINE NATIONAL BANK v. RBL ENTERPRISES, INC.;
RAMON B. LACSON SR. and Spouses EDWARDO and
HERMINIA LEDESMA
G.R. No. 149569, May 28, 2004, Panganiban, J.
A real estate mortgage is a real right following the prop-
erty, such that in subsequent transfers by the mortgagor, the trans-
feree must respect the mortgage. A registered mortgage lien is
Page 39 of 63
considered inseparable from the property inasmuch as it is a right
in rem. The mortgage creates a real right or a lien which, after
being recorded, follows the chattel wherever it goes.
Facts:
Respondents Ramon Lacson and Sps. Edwardo and Herminia
Ledesma opened a prawn hatchery in San Enrique, Negros Occi-
dental, and for this purpose, leased from Nelly Bedrejo a parcel of
land where the operations were conducted. Lacson and Sps.
Ledesma applied for and was approved a loan of P2,000,000.00,
by petitioner Philippine National Bank (PNB). A real estate mort-
gage over two parcels of land, located at Bago City, Negros Occi-
dental, and another real estate and chattel mortgage over the
buildings, culture tanks and other hatchery facilities located in the
leased property of Nelly Bedrejo were executed in favor of PNB.
PNB partially released the sum of P1,000,000.00. However, during
the mid- part of the construction of the improvements, PNB re-
fused to release the balance of P1,000,000.00 because the re-
spondents failed to comply with the bank’s requirement that Nelly
Bedrejo should execute an undertaking or a lessor’s conformity.
For said alleged failure to comply with the additional requirement
and the demand of PNB to pay the released amount of
P1,000,000.00, PNB foreclosed the mortgaged properties.
The RTC ruled that PNB’s partial release of the loan had estopped
it from requiring the respondents to secure the lessor’s signature.
The CA affirmed the RTC’s findings adding that Bedrejo, being a
non-party to the Mortgage Contract could not be compelled to affix
her signature.
Issue:
Whether PNB’s non-release of the loan was justified.
Ruling:
NO. The records show that all the real estate and chattel mortgag-
es were registered with the Register of Deeds of Bago City, Ne-
gros Occidental, and annotated at the back of the mortgaged titles.
Thus, PNB had ample security to protect its interest. Even if the
mortgaged property is in the possession of the debtor, the creditor
is still protected. To protect the latter from the former’s possible
disposal of the property, the chattel mortgage is made effective
against third persons by the process of registration. Article 2126 of
the Civil Code describes the real nature of a mortgage: it is a real
right following the property, such that in subsequent transfers by
the mortgagor, the transferee must respect the mortgage. A regis-
tered mortgage lien is considered inseparable from the property
inasmuch as it is a right in rem. The mortgage creates a real right
or a lien which, after being recorded, follows the chattel wherever it
goes. Moreover, if the parties truly intended to suspend the re-
lease of the balance until the lessor’s conformity to the Mortgage
Contract would have been obtained, such condition should have
been plainly stipulated either in that Contract or in the Credit
Agreement. For these reasons, PNB’s constituted a breach of its
reciprocal obligation under the Loan Agreement.
_____________________________________________________
Extent of mortgage and exception
ARTICLE 2127. The mortgage extends:
(1)to the natural accessions,
(2)to the improvements, growing fruits, and the rents or income not
yet received when the obligation becomes due, and
(3)to the amount of the indemnity granted or owing to the proprie-
tor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains
in the possession of the mortgagor, or it passes into the hands
of a third person.
Case:
PHILIPPINE NATIONAL BANK v. SPOUSES BERNARD and
CRESENCIA MARANON
G.R. No. 189316, June 1, 2013, Reyes, J.
In case of non-payment of a secured debt, foreclosure
proceedings shall cover not only the hypothecated property but all
its accessions and accessories as well.
Facts:
Sps. Rodolfo and Emilie Montealegre mortgaged a 152-square
meter parcel of land located at Cuadra-Smith Streets, Downtown,
Bacolod erected with a building leased by various tenants, to peti-
tioner PNB as security for their loan. When Spouses Montealegre
failed to pay the loan, PNB initiated foreclosure proceedings. In the
auction sale, PNB emerged as the highest bidder. Before the expi-
ration of the redemption period, Spouses Marañon filed before the
RTC a complaint for Annulment of Title, Reconveyance and Dam-
ages against Spouses Montealegre, PNB, the Register of Deeds
of Bacolod City and the Ex-Officio Provincial Sheriff of Negros
Occidental, alleging that Sps. Montealegre falsified a deed of sale
bearing the forged signatures of Spouse Marañon, to effect the
transfer of title to the property in Emilie Montealegre’s name.
While the trial proceedings were ongoing, Paterio Tolete, one of
the tenants of the building erected on the subject lot deposited his
rental payments amounting to P144,000.00 with the Clerk of Court
of Bacolod City. Sps. Marañon and PNB both claim the rentals.
The RTC ruled that PNB is not a mortgagee in good faith because
as a financial institution imbued with public interest, it should have
looked beyond the certificate of title. CA affirmed the RTC’s judg-
ment ratiocinating that not being parties to the mortgage transac-
tion between PNB and Spouses Montealegre, Spouses Marañon
cannot be deprived of the fruits of the subject lot as the same will
amount to deprivation of property without due process of law.
Issue:
Whether the fruits of the building located on the subject property
belong to PNB.
Ruling:
NO. Rent being an accessory penalty, follows the principal. In fact,
when the principal property is mortgaged, the mortgage shall in-
clude all natural or civil fruits and improvements found thereon
when the secured obligation becomes due. Article 2127 of the Civil
Code provides that the mortgage extends to the natural acces-
sions, to the improvements, growing fruits, and the rents or income
not yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue of expropriation
for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession
of the mortgagor, or it passes into the hands of a third person.
Consequently, in case of non-payment of the secured debt, fore-
closure proceedings shall cover not only the hypothecated proper-
ty but all its accessions and accessories as well.
However, Article 2127 is predicated on the presumption that the
ownership of accessions and accessories also belongs to the
mortgagor as the owner of the principal. After all, it is an indispen-
sable requisite of a valid real estate mortgage that the mortgagor
be the absolute owner of the encumbered property. In the instant
case, PNB’s mortgagors, Spouses Montealegre, are not the true
owners of the subject lot much less of the building which produced
the disputed rent. The foreclosure proceedings could not have,
thus, included the building found on the subject lot and the rent it
yields. PNB’s lien as a mortgagee in good faith pertains to the
subject lot alone because the rule that improvements shall follow
the principal in a mortgage under Article 2127 of the Civil Code
does not apply under the premises. Accordingly, since the building
Page 40 of 63
was not foreclosed, it remains a property of Spouses Marañon and
is excluded from any consolidation of title made by PNB over the
subject lot.
_____________________________________________________
ARTICLE 2128. The mortgage credit may be alienated or assigned
to a third person, in whole or in part, with the formalities required
by law.
ARTICLE 2129. The creditor may claim from a third person in
possession of the mortgaged property, the payment of the part of
the credit secured by the property which said third person pos-
sesses, in the terms and with the formalities which the law estab-
lishes.
Prohibition against alienation
ARTICLE 2130. A stipulation forbidding the owner from alienating
the immovable mortgaged shall be void.
Rationale: It is against public policy.
Case:
PABLO P. GARCIA v. YOLANDA VALDEZ VILLAR
G.R. No. 158891, June 27, 2012, Leonardo-De Castro, J.
Under Art. 2130 of the Civil Code, a stipulation forbid-
ding the owner from alienating an immovable mortgaged shall be
void.
Facts:
Lourdes Galas with her daughter, Ophelia G. Pingol, as co-maker,
mortgaged the subject property located at Malindang St., Quezon
City, to Yolanda Villar as security for a loan in the amount of
P2,200,000.00. Sometime thereafter, Galas, again with Pingol as
her co-maker, mortgaged the same subject property to Pablo Gar-
cia to secure her loan of P 1,800,000.00. Galas subsequently sold
the subject property to Villar for P1,500,000.00. Both Villar’s and
Garcia’s mortgages were carried over and annotated at the back
of Villar’s new TCT. Garcia filed a Complaint for Foreclosure of
Real Estate Mortgage with Damages. Garcia claimed that when
Villar purchased the subject property, Galas was relieved of her
contractual obligation and the characters of creditor and debtor
were merged in the person of Villar. Therefore, Garcia argued, that
he, as the second mortgagee, was subrogated to Villar’s original
status as first mortgagee, which is the creditor with the right to
foreclose. The RTC declared that the direct sale of the subject
property to Villar, the first mortgagee, could not operate to deprive
Garcia of his right as a second mortgagee. The CA reversed the
RTC and ruled that the sale of the subject property to Villar was
valid as it found nothing in the records that would show that Galas
violated the Deed of Real Estate Mortgage.
Issue:
Whether the sale of the subject property to Villar is valid.
Ruling:
YES. The deed did not proscribe the sale or alienation of the sub-
ject property during the life of the mortgages. Garcia’s insistence
that Villar should have judicially or extrajudicially foreclosed the
mortgage to satisfy Galas’s debt is misplaced. The Deed of Real
Estate Mortgage merely provided for the options Villar may under-
take in case Galas or Pingol fail to pay their loan. Nowhere was it
stated in the Deed that Galas could not opt to sell the subject
property to Villar, or to any other person. Such stipulation would
have been void anyway, as it is not allowed under Article 2130 of
the Civil Code, to wit: ―A stipulation forbidding the owner from al-
ienating the immovable mortgaged shall be void.‖
While it is true that the annotation of the first mortgage to Villar on
Galas’s TCT contained a restriction on further encumbrances
without the mortgagee’s prior consent, this restriction was nowhere
to be found in the Deed of Real Estate Mortgage. As this Deed
became the basis for the annotation on Galas’s title, its terms and
conditions take precedence over the standard, stamped annotation
placed on her title. If it were the intention of the parties to impose
such restriction, they would have and should have stipulated such
in the Deed of Real Estate Mortgage itself.
_____________________________________________________
ARTICLE 2131. The form, extent and consequences of a mort-
gage, both as to its constitution, modification and extinguishment,
and as to other matters not included in this Chapter, shall be gov-
erned by the provisions of the Mortgage Law and of the Land Reg-
istration Law.
_____________________________________________________
FORECLOSURE
Correlate:
Act No. 3135 - An Act to Regulate the Sale of Property un-
der Special Powers inserted in or annexed to Real Estate
Mortgage
Section 1. When a sale is made under a special power in-
serted in or attached to any real-estate mortgage hereaf-
ter made as security for the payment of money or the ful-
fillment of any other obligation, the provisions of the follow-
ing election shall govern as to the manner in which the sale
and redemption shall be effected, whether or not provision
for the same is made in the power.
Note: Deed of real estate mortgage must have an
attachment or a special power of attorney inserted
to sell or dispose of the property extrajudicially, oth-
erwise, the property may only be foreclosed judicial-
ly.
Sec. 2. Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case
the place within said province in which the sale is to be
made is subject to stipulation, such sale shall be made in
said place or in the municipal building of the municipality in
which the property or part thereof is situated.
Sec. 3. Notice shall be given by posting notices of the sale
for not less than twenty days in at least three public places
of the municipality or city where the property is situated,
and if such property is worth more than four hundred pe-
sos, such notice shall also be published once a week for at
least three consecutive weeks in a newspaper of general
circulation in the municipality or city.
Note: The law requires ―three consecutive weeks‖
and not twenty one (21) continuous days.
The requisites of ―newspaper of general circulation‖
are as follows:
1. It is published in regular intervals;
2. It has a bona fide list of paying subscrib-
ers;
3. It does not cater to specific group or
class.
Sec. 4. The sale shall be made at public auction, between
the hours or nine in the morning and four in the afternoon;
and shall be under the direction of the sheriff of the prov-
Page 41 of 63
ince, the justice or auxiliary justice of the peace of the mu-
nicipality in which such sale has to be made, or a notary
public of said municipality, who shall be entitled to collect a
fee of five pesos each day of actual work performed, in ad-
dition to his expenses.
Sec. 5. At any sale, the creditor, trustee, or other persons
authorized to act for the creditor, may participate in the
bidding and purchase under the same conditions as any
other bidder, unless the contrary has been expressly pro-
vided in the mortgage or trust deed under which the sale is
made.
Sec. 6. In all cases in which an extrajudicial sale is made
under the special power hereinbefore referred to, the debt-
or, his successors in interest or any judicial creditor or
judgment creditor of said debtor, or any person having a
lien on the property subsequent to the mortgage or deed of
trust under which the property is sold, may redeem the
same at any time within the term of one year from and
after the date of the sale (from the registration of the cer-
tificate of sale in the R.D.); and such redemption shall be
governed by the provisions of sections four hundred and
sixty-four to four hundred and sixty-six, inclusive, of the
Code of Civil Procedure, in so far as these are not incon-
sistent with the provisions of this Act.
Exception:
The right of redemption mentioned above does not
apply when the mortgagor is a juridical entity and
the mortgagee is a bank, which thereafter fore-
closed the mortgage pursuant to:
R.A. 8791 - An Act Providing for the Regulation of
the Organization and Operations of Banks, Quasi-
Banks, Trust Entities, and for other purposes
SECTION 47. Foreclosure of Real Estate Mortgage.
xxxx
Notwithstanding Act 3135, juridical persons whose
property is being sold pursuant to an extrajudicial
foreclosure, shall have the right to redeem the
property in accordance with this provision until, but
not after, the registration of the certificate of fore-
closure sale with the applicable Register of Deeds
which in no case shall be more than three (3)
months after foreclosure, whichever is earlier.
Sec. 7. In any sale made under the provisions of this Act,
the purchaser may petition the Court of First Instance of
the province or place where the property or any part there-
of is situated, to give him possession thereof during the
redemption period, furnishing bond in an amount equiva-
lent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that
the sale was made without violating the mortgage or with-
out complying with the requirements of this Act.
Note: The issuance of writ of possession is minis-
terial except when there is a third party having an
adverse claim over the foreclosed property.
The writ of possession may be requested during the
period of redemption or after.
If it is requested during the period of re-
demption, the bond (as mentioned above) is
required and it must be only upon the two
(2) grounds provided in Sec. 8 of this Act
(Green Asia Construction v. CA, 2006).
If it is requested after the period of redemp-
tion, such writ becomes a matter of right and
the bond is no longer necessary.
Such petition shall be made under oath and filed in form of
an ex parte motion in the registration or cadastral proceed-
ings if the property is registered, or in special proceedings
in the case of property registered under the Mortgage Law
or under section one hundred and ninety-four of the Admin-
istrative Code, or of any other real property encumbered
with a mortgage duly registered in the office of any register
of deeds in accordance with any existing law, and in each
case the clerk of the court shall, upon the filing of such peti-
tion, collect the fees specified in paragraph eleven of sec-
tion one hundred and fourteen of Act Numbered Four hun-
dred and ninety-six, as amended by Act Numbered Twen-
ty-eight hundred and sixty-six, and the court shall, upon
approval of the bond, order that a writ of possession issue,
addressed to the sheriff of the province in which the prop-
erty is situated, who shall execute said order immediately.
Sec. 8. The debtor may, in the proceedings in which pos-
session was requested, but not later than thirty days after
the purchaser was given possession, petition that the sale
be set aside and the writ of possession cancelled,
specifying the damages suffered by him, because (1) the
mortgage was violated or (2) the sale was not made in ac-
cordance with the provisions hereof, and the court shall
take cognizance of this petition in accordance with the
summary procedure provided for in section one hundred
and twelve of Act Numbered Four hundred and ninety-six;
and if it finds the complaint of the debtor justified, it shall
dispose in his favor of all or part of the bond furnished by
the person who obtained possession.
Either of the parties may appeal from the order of the
judge in accordance with section fourteen of Act Numbered
Four hundred and ninety-six; but the order of possession
shall continue in effect during the pendency of the appeal.
Sec. 9. When the property is redeemed after the purchaser
has been given possession, the redeemer shall be entitled
to deduct from the price of redemption any rentals that said
purchaser may have collected in case the property or any
part thereof was rented; if the purchaser occupied the
property as his own dwelling, it being town property, or
used it gainfully, it being rural property, the redeemer may
deduct from the price the interest of one per centum per
month provided for in section four hundred and sixty-five of
the Code of Civil Procedure.
A.M. No. 99-10-05-0 - Procedure in Extra-Judicial Foreclo-
sure of Mortgage
In line with the responsibility of an Executive Judge under
Administrative Order No. 6, dated June 30, 1975, for the
management of courts within his administrative area, in-
cluded in which is the task of supervising directly the work
of the Clerk of Court, who is also the Ex-Office Sheriff, and
his staff, and the issuance of commissions to notaries pub-
lic and enforcement of their duties under the law, the fol-
lowing procedures are hereby prescribed in extrajudicial
foreclosure of mortgages:
1. All applications for extra-judicial foreclosure of mort-
gage whether under the direction of the sheriff or a
notary public, pursuant to Act 3135, as amended by
Act 4118, and Act 1508, as amended, shall be filed
with the Executive Judge, through the Clerk of court
who is also the Ex-Officio Sheriff.
2. Upon receipt of an application for extra-judicial fore-
closure of mortgage, it shall be the duty of the Clerk
of Court to:
Page 42 of 63
 a) receive and docket said application and to
stamp thereon the corresponding file number,
date and time of filing;
b) collect the filing fees therefore pursuant to rule
141, Section 7(c), as amended by A.M. No. 00-2-
01-SC, and issue the corresponding official re-
ceipt;
c) examine, in case of real estate mortgage fore-
closure, whether the applicant has complied with
all the requirements before the public auction is
conducted under the direction of the sheriff or a
notary public, pursuant to Sec. 4 of Act 3135, as
amended;
d) sign and issue the certificate of sale, subject to
the approval of the Executive Judge, or in his ab-
sence, the Vice-Executive Judge. No certificate of
sale shall be issued in favor of the highest bidder
until all fees provided for in the aforementioned
sections and in Rule 141, Section 9(1), as
amended by A.M. No. 00-2-01-SC, shall have
been paid; Provided, that in no case shall the
amount payable under Rule 141, Section 9(1), as
amended, exceed P100,000.00;
e) after the certificate of sale has been issued to the
highest bidder, keep the complete records, while
awaiting any redemption within a period of one
(1) year from date of registration of the certificate
of sale with the Register of Deeds concerned, af-
ter which, the records shall be archived.
Notwithstanding the foregoing provision, ju-
ridical persons whose property is sold pur-
suant to an extra-judicial foreclosure, shall
have the right to redeem the property until,
but not after, the registration of the certifi-
cate of foreclosure sale which in no case
shall be more than three (3) months after
foreclosure, whichever is earlier, as provid-
ed in Section 47 of Republic Act No. 8791
(as amended, Res. Of August 7, 2001).
Where the application concerns the extrajudicial
foreclosure of mortgages of real estates and/or
chattels in different locations covering one indebt-
edness, only one filing fee corresponding to such
indebtedness shall be collected. The collecting
Clerk of Court shall, apart from the official receipt of
the fees, issue a certificate of payment indicating
the amount of indebtedness, the filing fees collect-
ed, the mortgages sought to be foreclosed, the real
estates and/or chattels mortgaged and their respec-
tive locations, which certificate shall serve the pur-
pose of having the application docketed with the
Clerks of Court of the places where the other prop-
erties are located and of allowing the extrajudicial
foreclosures to proceed thereat.
3. The notices of auction sale in extrajudicial foreclo-
sure for publication by the sheriff or by a notary
public shall be published in a newspaper of general
circulation pursuant to Section 1, Presidential Decree
No. 1079, dated January 2, 1977, and non-
compliance therewith shall constitute a violation of
Section 6 thereof.
4. The Executive Judge shall, with the assistance of the
Clerk of Court, raffle applications for extrajudicial
foreclosure of mortgage under the direction of the
sheriff among all sheriffs, including those assigned to
the Office of the Clerk of Court and Sheriffs IV as-
signed in the branches.
5. The name/s of the bidder/s shall be reported by the
sheriff or the notary public who conducted the sale to
the Clerk of Court before the issuance of the certifi-
cate of sale.
Rules of Court - Rule 68 Foreclosure of Real Estate Mort-
gage
Section 1. Complaint in action for foreclosure.
In an action for the foreclosure of a mortgage or other en-
cumbrance upon real estate, the complaint shall set forth
the date and due execution of the mortgage; its assign-
ments, if any;
1. the names and residences of the mortgagor and the
mortgagee; a description of the mortgaged property;
2. a statement of the date of the note or other documentary
evidence of the obligation secured by the mortgage, the
amount claimed to be unpaid thereon; and
3. the names and residences of all persons having or claim-
ing an interest in the property subordinate in right to that
of the holder of the mortgage, all of whom shall be made
defendants in the action.
Section 2. Judgment on foreclosure for payment or sale.
If upon the trial in such action the court shall find the facts
set forth in the complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage debt or obli-
gation, including interest and other charges as approved by
the court, and costs, and shall render judgment for the sum
so found due and order that the same be paid to the court
or to the judgment obligee within a period of not less than
ninety (90) days nor more than one hundred twenty (120)
days from the entry of judgment, and that in default of such
payment the property shall be sold at public auction to sat-
isfy the judgment.
Section 3. Sale of mortgaged property; effect.
When the defendant, after being directed to do so as pro-
vided in the next preceding section, fails to pay the amount
of the judgment within the period specified therein, the
court, upon motion, shall order the property to be sold in
the manner and under the provisions of Rule 39 and other
regulations governing sales of real estate under execution.
Such sale shall not affect the rights of persons holding prior
encumbrances upon the property or a part thereof, and
when confirmed by an order of the court, also upon motion,
it shall operate to divest the rights in the property of all the
parties to the action and to vest their rights in the purchas-
er, subject to such rights of redemption as may be allowed
by law.
Upon the finality of the order of confirmation or upon the
expiration of the period of redemption when allowed by law,
the purchaser at the auction sale or last redemptioner, if
any, shall be entitled to the possession of the property un-
less a third party is actually holding the same adversely to
the judgment obligor.
The said purchaser or last redemptioner may secure a writ
of possession, upon motion, from the court which ordered
the foreclosure.
Section 4. Disposition of proceeds of sale.
The amount realized from the foreclosure sale of the mort-
gaged property shall, after deducting the costs of the sale,
be paid to the person foreclosing the mortgage, and when
there shall be any balance or residue, after paying off the
mortgage debt due, the same shall be paid to junior en-
cumbrancers in the order of their priority, to be ascertained
Page 43 of 63
by the court, or if there be no such encumbrancers or there
be a balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the person
entitled to it.
Section 5. How sale to proceed in case the debt is not all
due.
If the debt for which the mortgage or encumbrance was
held is not all due as provided in the judgment as soon as a
sufficient portion of the property has been sold to pay the
total amount and the costs due, the sale shall terminate;
and afterwards as often as more becomes due for principal
or interest and other valid charges, the court may, on mo-
tion, order more to be sold.
But if the property cannot be sold in portions without preju-
dice to the parties, the whole shall be ordered to be sold in
the first instance, and the entire debt and costs shall be
paid, if the proceeds of the sale be sufficient therefor, there
being a rebate of interest where such rebate is proper.
Section 6. Deficiency judgment.
If upon the sale of any real property as provided in the next
preceding section there be a balance due to the plaintiff af-
ter applying the proceeds of the sale, the court, upon mo-
tion, shall render judgment against the defendant for any
such balance for which, by the record of the case, he may
be personally liable to the plaintiff, upon which execution
may issue immediately if the balance is all due at the time
of the rendition of the judgment; otherwise; the plaintiff
shall be entitled to execution at such time as the balance
remaining becomes due under the terms of the original
contract, which time shall be stated in the judgment.
Section 7. Registration.
A certified copy of the final order of the court confirming the
sale shall be registered in the registry of deeds.
If no right of redemption exists, the certificate of title in the
name of the mortgagor shall be cancelled, and a new one
issued in the name of the purchaser.
Where a right of redemption exists, the certificate of title in
the name of the mortgagor shall not be cancelled, but the
certificate of sale and the order confirming the sale shall be
registered and a brief memorandum thereof made by the
registrar of deeds upon the certificate of title.
In the event the property is redeemed, the deed of redemp-
tion shall be registered with the registry of deeds, and a
brief memorandum thereof shall be made by the registrar
of deeds on said certificate of title.
If the property is not redeemed, the final deed of sale exe-
cuted by the sheriff in favor of the purchaser at the foreclo-
sure sale shall be registered with the registry of deeds;
whereupon the certificate of title in the name of the mort-
gagor shall be cancelled and a new one issued in the name
of the purchaser.
Section 8. Applicability of other provisions.
The provisions of sections 31, 32 and 34 of Rule 39 shall
be applicable to the judicial foreclosure of real estate mort-
gages under this Rule insofar as the former are not incon-
sistent with or may serve to supplement the provisions of
the latter.
Correlate:
Rules of Court - Rule 39 Execution, Satisfaction
and Effect of Judgments
Section 15. Notice of sale of property on execu-
tion.
Before the sale of property on execution, notice
thereof must be given as follows:
(a) In case of perishable property, by posting writ-
ten notice of the time and place of the sale in three
(3) public places, preferably in conspicuous areas
of the municipal or city hall, post office and public
market in the municipality or city where the sale is
to take place, for such time as may be reasonable,
considering the character and condition of the pro-
perty;
(b) In case of other personal property, by posting
a similar notice in the three (3) public places above-
mentioned for not less than five (5) days;
(c) In case of real property, by posting for twenty
(20) days in the three (3) public places abovemen-
tioned a similar notice particularly describing the
property and stating where the property is to be
sold, and if the assessed value of the property ex-
ceeds fifty thousand (P50,000.00) pesos, by publis-
hing a copy of the notice once a week for two (2)
consecutive weeks in one newspaper selected by
raffle, whether in English, Filipino, or any major re-
gional language published, edited and circulated or,
in the absence thereof, having general circulation in
the province or city;
(d) In all cases, written notice of the sale shall be
given to the judgment obligor, at least three (3)
days before the sale, except as provided in para-
graph (a) hereof where notice shall be given the
same manner as personal service of pleadings and
other papers as provided by section 6 of Rule 13.
Section 27. Who may redeem real property so
sold.
Real property sold as provided in the last preceding
section, or any part thereof sold separately, may be
redeemed in the manner hereinafter provided, by
the following persons:
(a) The judgment obligor; or his successor in inte-
rest in the whole or any part of the property;
(b) A creditor having a lien by virtue of an attach-
ment, judgment or mortgage on the property sold,
or on some part thereof, subsequent to the lien un-
der which the property was sold. Such redeeming
creditor is termed a redemptioner.
Section 28. Time and manner of, and amounts
payable on, successive redemptions; notice to be
given and filed.
The judgment obligor, or redemptioner, may re-
deem the property from the purchaser, at any time
within one (1) year from the date of the registration
of the certificate of sale, by paying the purchaser
the amount of his purchase, with the per centum
per month interest thereon in addition, up to the
time of redemption, together with the amount of any
assessments or taxes which the purchaser may
have paid thereon after purchase, and interest on
such last named amount at the same rate; and if
the purchaser be also a creditor having a prior lien
to that of the redemptioner, other than the judgment
under which such purchase was made, the amount
of such other lien, with interest.
Page 44 of 63
Property so redeemed may again be redeemed wi-
thin sixty (60) days after the last redemption upon
payment of the sum paid on the last redemption,
with two per centum thereon in addition and the
amount of any assessments or taxes which the last
redemptioner may have paid thereon after redemp-
tion by him, with interest on such last named
amount, and in addition, the amount of any liens
held by said last redemptioner prior to his own, with
interest. The property may be again, and as often
as a redemptioner is so disposed, redeemed from
any previous redemptioner within sixty (60) days af-
ter the last redemption, on paying the sum paid on
the last previous redemption, with two per centum
thereon in addition, and the amounts of any as-
sessments or taxes which the last previous redemp-
tioner paid after the redemption thereon, with inte-
rest thereon, and the amount of any liens held by
the last redemptioner prior to his own, with interest.
Written notice of any redemption must be given to
the officer who made the sale and a duplicate filed
with the registry of deeds of the place, and if any
assessments or taxes are paid by the redemptioner
or if he has or acquires any lien other than that
upon which the redemption was made, notice
thereof must in like manner be given to the officer
and filed with the registry of deeds; if such notice be
not filed, the property may be redeemed without
paying such assessments, taxes, or liens.
Section 29. Effect of redemption by judgment
obligor, and a certificate to be delivered and re-
corded thereupon; to whom payments on redemp-
tion made.
If the judgment obligor redeems he must make the
same payments as are required to effect a redemp-
tion by a redemptioner, whereupon, no further re-
demption shall be allowed and he is restored to his
estate. The person to whom the redemption pay-
ment is made must execute and deliver to him a
certificate of redemption acknowledged before a no-
tary public or other officer authorized to take ack-
nowledgments of conveyances of real property.
Such certificate must be filed and recorded in the
registry of deeds of the place in which the property
is situated and the registrar of deeds must note the
record thereof on the margin of the record of the
certificate of sale. The payments mentioned in this
and the last preceding sections may be made to the
purchaser or redemptioner, or for him to the officer
who made the sale.
Section 31. Manner of using premises pending re-
demption; waste restrained.
Until the expiration of the time allowed for redemp-
tion, the court may, as in other proper cases, re-
strain the commission of waste on the property by
injunction, on the application of the purchaser or the
judgment obligee, with or without notice; but it is not
waste for a person in possession of the property at
the time of the sale, or entitled to possession after-
wards, during the period allowed for redemption, to
continue to use it in the same manner in which it
was previously used, or to use it in the ordinary
course of husbandry; or to make the necessary re-
pairs to buildings thereon while he occupies the
property.
Section 32. Rents, earnings and income of proper-
ty pending redemption.
The purchaser or a redemptioner shall not be enti-
tled to receive the rents, earnings and income of the
property sold on execution, or the value of the use
and occupation thereof when such property is in the
possession of a tenant.
All rents, earnings and income derived from the
property pending redemption shall belong to the
judgment obligor until the expiration of his period of
redemption.
Section 33. Deed and possession to be given at
expiration of redemption period; by whom executed
or given.
If no redemption be made within one (1) year from
the date of the registration of the certificate of sale,
the purchaser is entitled to a conveyance and pos-
session of the property; or, if so redeemed whenev-
er sixty (60) days have elapsed and no other re-
demption has been made, and notice thereof given,
and the time for redemption has expired, the last
redemptioner is entitled to the conveyance and
possession; but in all cases the judgment obligor
shall have the entire period of one (1) year from the
date of the registration of the sale to redeem the
property.
The deed shall be executed by the officer making
the sale or by his successor in office, and in the lat-
ter case shall have the same validity as though the
officer making the sale had continued in office and
executed it.
Upon the expiration of the right of redemption, the
purchaser or redemptioner shall be substituted to
and acquire all the rights, title, interest and claim of
the judgment obligor to the property as of the time
of the levy.
The possession of the property shall be given to the
purchaser or last redemptioner by the same officer
unless a third party adversely to the judgment obli-
gor.
Section 34. Recovery of price if sale not effective;
revival of judgment.
If the purchaser of real property sold on execution,
or his successor in interest, fails to recover the pos-
session thereof, or is evicted therefrom, in conse-
quence of irregularities in the proceedings concern-
ing the sale, or because the judgment has been re-
versed or set aside, or because the property sold
was exempt from execution, or because a third per-
son has vindicated his claim to the property, he may
on motion in the same action or in a separate action
recover from the judgment obligee the price paid,
with interest, or so much thereof as has not been
delivered to the judgment obligor, or he may, on
motion, have the original judgment revived in his
name for the whole price with interest, or so much
thereof as has been delivered to the judgment obli-
gor.
The judgment so revived shall have the same force
and effect as an original judgment would have as of
the date of the revival and no more.
Page 45 of 63

EXTRAJUDICIAL FORECLO- JUDICIAL FORECLOSURE
SURE
Personal notice on the mort- Personal notice on the mort-
gagor is not required. gagor and junior encumbranc-
ers is required.
Posting of notice of sale for 20 Posting of notice for 20 days.
days published on 3 public
places in the city or municipality
where the property is located.
Publication for 3 consecutive
weeks in a newspaper of gen- Publication for 2 consecutive
eral circulation (strict compli- weeks in a newspaper of gen-
ance is required). eral circulation.
Right of redemption: 1 year
from the issuance of the certifi- Equity of redemption: 90 to 120
cate of registration days
Exception: GBL sec. 47 Exception: 1 year if the
where the mortgagor is a juridi- mortgagee is the bank
cal entity and the mortgagee is
a bank
Right to recover deficiency, but
must be filed in a separate Deficiency judgment is allowed
claim (prescriptive period: 10 where the right to recover defi-
years) ciency can be claimed within
the same proceeding. No need
for a separate action.
Cases:
GODFREY BOHANAN v. COURT OF APPEALS, L & R COR-
PORATION and Spouses ROSARIO & DIONISIO CABRERA, Jr.
G.R. No. 111654, April 18, 1996, Bellosillo, J.
A certificate of posting is not required, much less con-
sidered indispensable, for the validity of a foreclosure sale. All that
is required is that notice be given by posting notices of the sale for
not less than twenty days in at least three public places of the
municipality or city where the property is situated, and publication
once a week for at least three consecutive weeks in a newspaper
of general circulation in the municipality or city.
Facts:
Petitioner Godfrey Bohanan obtained a loan of P200,000.00 from
private respondent L & R Corporation, payable in 60 equal monthly
installments. To secure payment, Bohanan executed a deed mort-
gaging his two lots with a four-unit apartment building thereon
situated in Sta. Ana, Manila. Bohanan was remissed in his fourth
amortization.
Consequently, the remaining unpaid obligation (P194,169.15)
became due and demandable and he was given a grace period of
ten days within which to pay but he failed. Thus, L & R sent a no-
tice of foreclosure and filed a petition in the Manila Sheriff’s Office
to commence extrajudicial foreclosure proceedings against him.
Accordingly, a notice of extrajudicial foreclosure sale was made
and copies thereof sent to L & R and to petitioner Bohanan. The
notice was published thrice in The Metropolitan Mail per affidavit of
its editor-publisher. Thereafter, L & R became the successful bid-
der and was issued a certificate of sale. Upon failure to redeem,
the TCT’s were issued in L & R Corporation’s name. Sometime
thereafter, Dionisio Cabrera bought the property from L & R for
P200,000.00.
Petitioner Bohonan then filed a complaint for annulment of sale
with injunction and damages. Bohonan asserts that the foreclosure
is void for the non -presentation of a certificate of posting by the
deputy sheriff. The RTC declared the foreclosure null and void.
The CA reversed the RTC and concluded that there was no irregu-
larity in the conduct of the foreclosure sale.
Issue:
Whether the non-presentation of a certificate of posting would
render the foreclosure proceeding invalid.
Ruling:
NO. The non-presentation of a certificate of posting does not affect
the intrinsic validity of the questioned foreclosure sale.
First, personal notice on the mortgagor is not required under Act
No. 3135 as amended. All that is required is that notice be given
by posting notices of the sale for not less than twenty days in at
least three public places of the municipality or city where the prop-
erty is situated, and publication once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city, if the property is worth more than four hundred
pesos. Therefore, any discussion into the factual issue of whether
petitioner received a notice of foreclosure sale would be an exer-
cise in futility since it would not have any bearing at all on the al-
leged validity or invalidity of the foreclosure sale in question. Se-
cond, a certificate of posting is not required, much less considered
indispensable, for the validity of a foreclosure sale.
Second, a certificate of posting is not a statutory requirement.
Rather, it is significant only in the matter of proving compliance
with the required posting of notice.
ATTY. LEO N. CAUBANG v. JESUS G. CRISOLOGO and NAN-
ETTE B. CRISOLOGO
G.R. No. 174581, February 4, 2015, Peralta, J.
Statutory requirements of posting and publication are
mandated and imbued with public policy considerations. Failure to
advertise a mortgage foreclosure sale in compliance with the
statutory requirements constitutes a jurisdictional defect, and any
substantial error in a notice of sale will render the notice insuffi-
cient and will consequently vitiate the sale.
Facts:
Respondent spouses Jesus and Nannette Crisologo obtained
loans in the amount of P200,000.00 and P1,500,000.00 from
PDCP Development Bank Inc. As security for both loans, the
spouses Crisologo mortgaged their property. After payment of the
first few installments on the other loans, the spouses defaulted in
the amortizations. Despite several demands made by the bank,
the spouses still failed to pay. There were subsequent offers be-
tween spouses Crisologo and PDCP. However, for failure to settle
the debt which had ballooned to P3,041,287.00, the Davao branch
of the bank recommended the foreclosure of the mortgage to its
head office. PDCP Bank filed a Petition for the Extrajudicial Fore-
closure of the Mortgage. Petitioner Leo Caubang, as Notary Pub-
lic, prepared the Notices of Sale, announcing the foreclosure of the
real estate mortgage and the sale of the mortgaged property at
public auction. He caused the posting of said notices in three pub-
lic places: the Barangay Hall of Matina, City Hall of Davao, and
Bangkerohan Public Market. Publication was, likewise, made in
the Oriental Daily Examiner, one of the local newspapers in Davao
City. PDCP being the highest and only bidder was issued with the
Certificate of Sale during the auction. Spouses Crisologo filed a
Complaint for Nullity of Extrajudicial Foreclosure and Auction Sale
and Damages against PDCP Bank and Caubang. The Davao RTC
rendered a Decision nullifying the extrajudicial foreclosure of the
real estate mortgage for failure to comply with the publication re-
quirement. The CA affirmed.
Issue:
Page 46 of 63
Whether the foreclosure is void for failure to comply with the publi-
cation requirement.
Ruling:
YES. Under Section 3 of Act No. 3135, ―Notice shall be given by
posting notices of the sale for not less than twenty days in at least
three public places of the municipality or city where the property is
situated, and if such property is worth more than four hundred
pesos, such notices shall also be published once a week for at
least three consecutive weeks in a newspaper of general circula-
tion in the municipality or city.‖
In the case at hand, Caubang never made an effort to inquire as to
whether the Oriental Daily Examiner was indeed a newspaper of
general circulation, as required by law. It was shown that the Ori-
ental Daily Examiner is not even on the list of newspapers accred-
ited to publish legal notices, as recorded in the Davao RTC’s Of-
fice of the Clerk of Court. It also has no paying subscribers and it
would only publish whenever there are customers.
The principal object of a notice of sale in a foreclosure of mortgage
is not so much to notify the mortgagor as to inform the public gen-
erally of the nature and condition of the property to be sold, and of
the time, place, and terms of the sale. Notices are given to secure
bidders and prevent a sacrifice of the property. Therefore, statuto-
ry provisions governing publication of notice of mortgage foreclo-
sure sales must be strictly complied with and slight deviations
therefrom will invalidate the notice and render the sale, at the very
least, voidable. Certainly, the statutory requirements of posting
and publication are mandated and imbued with public policy con-
siderations. Failure to advertise a mortgage foreclosure sale in
compliance with the statutory requirements constitutes a jurisdic-
tional defect, and any substantial error in a notice of sale will ren-
der the notice insufficient and will consequently vitiate the sale.
GUILLERMINA BALUYUT v. EULOGIO POBLETE, SALUD
POBLETE and THE HON.COURT OF APPEALS
G.R. NO. 144435, February 6, 2007, Austria-Martinez, J.
The publication of the notice of sale in a newspaper of
general circulation alone is more than sufficient compliance with
the notice-posting requirement of the law.
Facts:
Petitioner, Guillermina Baluyut loaned from the spouses Eulogio
and Salud Poblete the sum of P850,000.00. To secure the pay-
ment of her obligation, she conveyed to the Poblete spouses, by
way of a real estate mortgage contract, a house and lot she owns
located in Barrio Mapuntod, then Municipality of Mandaluyong,
Province of Rizal. Upon maturity of the loan, Baluyut failed to pay
her indebtedness. The Poblete spouses subsequently decided to
extrajudicially foreclose the real estate mortgage. The mortgaged
property was sold on auction by the Provincial Sheriff of Rizal to
the Poblete spouses who were the highest bidders, as evidenced
by a Certificate of Sale. Baluyut failed to redeem the subject prop-
erty within the period required by law prompting Eulogio Poblete to
execute an Affidavit of Consolidation of Title. Baluyut remained in
possession of the subject property and refused to vacate the
same. Hence, Eulogio and the heirs of Salud filed a Petition for the
issuance of a writ of possession with the RTC of Pasig.
Subsequently, the trial court issued an order granting the writ of
possession. However, before Eulogio and the heirs of Salud could
take possession of the property, Baluyut filed an action for annul-
ment of mortgage, extrajudicial foreclosure and sale of the subject
property. Baluyut alleged that the sheriff is required to submit an
Affidavit of Posting of Notices to the clerk of court and to the judge
before he is allowed to schedule an auction sale. There being no
records of the foreclosure proceedings involving the subject prop-
erty in the Office of the Clerk of Court, the foreclosure is void.
The RTC and CA ruled in favor of private respondents stating that
the absence of the Affidavit of Posting is not required for the validi-
ty of the foreclosure.
Issue:
Whether the failure of the sheriff in executing and affidavit of post-
ing of notices is indispensable to render the extrajudicial foreclo-
sure valid.
Ruling:
NO. The governing law, insofar as the extrajudicial foreclosure
proceedings are concerned, is Act No. 3135, as amended by Act
No. 4118. Unlike in the amended provisions of Section 5, R.A. No.
720 (which refers specifically and exclusively to the foreclosure of
mortgages covering loans granted by rural banks), nowhere in the
above-quoted provision of Act No. 3135, as amended, or in any
Section thereof, is it required that the sheriff must execute an affi-
davit to prove that he published notices of foreclosure in accord-
ance with the requirements of law.
In the absence of contrary evidence, the presumption prevails that
the sheriff performed his official duty of posting the notices of sale.
The publication of the notice of sale in a newspaper of general
circulation alone is more than sufficient compliance with the notice-
posting requirement of the law. By such publication, a reasonably
wide publicity had been effected such that those interested might
attend the public sale, and the purpose of the law had been there-
by subserved. In the instant case, the aforesaid objective was
attained since there was sufficient publicity of the sale through the
newspaper publication. There is completely no showing that the
property was sold for a price far below its value as to insinuate any
bad faith, nor was there any showing or even an intimation of col-
lusion between the sheriff who conducted the sale and respondent
bank. This being so, the alleged non-compliance with the posting
requirement, even if true, will not justify the setting aside of the
sale.
_____________________________________________________
Recovery of deficiency
Note: In both judicial and extrajudicial foreclosure, when a
third person is the mortgagor, he is not liable for any defi-
ciency in the absence of a contrary stipulation.
Action for recovery of judgment -- If the deficiency is em-
bodied in a judgment, it is referred to as deficiency judg-
ment. The action prescribes ten (10) years from the time
the right of action accrues (NCC, Art. 1142(2)).
Cases:
PRUDENTIAL BANK v. RENATO M. MARTINEZ and VIRGINIA
J. MARTINEZ
G.R. No. L-51768, September 14, 1990, Medialdea, J.
Under the Mortgage Law, which is still in force, the
mortgagee has the right to claim for the deficiency resulting from
the price obtained in the sale of the real property at public auction
and the outstanding obligation at the time of the foreclosure pro-
ceedings.
Facts:
Defendants Renato Martinez and Virginia Martinez obtained a loan
from the plaintiff in the total sum of P48,000.00 and in considera-
tion thereof executed promissory notes promising to pay jointly
and severally, the sum of P48,000.00 on or before January 27,
1971 with interest thereon at 12% per annum, partially secured by
a real estate mortgage on a property. The loan became due and
Renato and Virginia Martinez defaulted despite Prudential Bank’s
Page 47 of 63
demand letters. As a consequence therefore, the mortgage was e
xtra-judicially foreclosed. However, after deducting therefrom the
attorney's fees, registration fees, sheriffs fees, and publication
expense, there still remained a balance of P25,775.10 due to Pru-
dential Bank. A case for sum of money to recover a deficiency of
P25,775.10 with daily interest thereon of P15.35 was filed by Peti-
tioner Bank. The RTC ordered the Defendants to pay the deficien-
cy. This ruling was reversed by the CA.
Issue:
Whether Prudential Bank has the right to recover the deficiency
from the respondents when the proceeds of the extrajudicial fore-
closure are insufficient to pay the debt.
Ruling:
YES. There is no provision under Act No. 3135 which expressly or
impliedly prohibits such recovery. Under the Mortgage Law, which
is still in force, the mortgagee has the right to claim for the defi-
ciency resulting from the price obtained in the sale of the real
property at public auction and the outstanding obligation at the
time of the foreclosure proceedings. The Rules of Court, Sec. 6,
Rule 70 also provides that if there be a balance due to the plaintiff
after applying the proceeds of the sale, the court, upon motion,
should render a judgment against the defendant for any such bal-
ance for which, by the record of the case, he may be personally
liable to the plaintiff.
While it is true that this refers to a judicial foreclosure, the underly-
ing principle is the same - that the mortgage is but a security and
not a satisfaction of indebtedness. Let it be noted that when the
legislature intends to foreclose the right of a creditor to sue for any
deficiency resulting from the foreclosure of the security given to
guarantee the obligation, it so expressly provides. It is then clear
that in the absence of a similar provision in Act No. 3135, as
amended, it cannot be concluded that the creditor loses his right
given him under the Mortgage Law and recognized in the Rules of
Court, to take action for the recovery of any unpaid balance on the
principal obligation, simply because he has chosen to foreclose his
mortgage extra-judicially pursuant to a special power of attorney
given him by the mortgagor in the mortgage contract.
Moreover, the fact that the mortgaged property is sold at an
amount less than its actual market value should not militate
against the right to such recovery. We fail to see any disadvantage
going for the mortgagor. On the contrary, a mortgagor stands to
gain with a reduced price because he possesses the right of re-
demption. When there is the right to redeem, inadequacy of price
should not be material, because the judgment debtor may reac-
quire the property or also sell his right to redeem and thus recover
the loss he claims to have suffered by the reason of the price ob-
tained at the auction sale.
BPI FAMILY SAVINGS BANK, INC., v. MA. ARLYN T. AVENIDO
and PACIFICO A. AVENIDO
G.R. No. 17581, December 7, 2011, Leonardo-De Castro, J.
It is settled that if the proceeds of the sale are insuffi-
cient to cover the debt in an extrajudicial foreclosure of mortgage,
the mortgagee is entitled to claim the deficiency from the debtor.
Facts:
Pursuant to a Mortgage Loan Agreement, spouses
Avenido obtained from BPI Family a loan in the amount of
P2,000,000.00, secured by a real estate mortgage on a parcel of
land. The spouses Avenido failed to pay their loan obligation de-
spite demand, prompting BPI Family to institute before the Sheriff
of Bais City extrajudicial foreclosure proceedings over the mort-
gaged property. Notwithstanding the foreclosure sale, a substan-
tial amount of the loan obligation remains unpaid. BPI Family filed
with the RTC a Complaint for Collection of Deficiency of Mortgage
Obligation with Damages against the spouses Avenido. It prayed
that the RTC order the spouses Avenido to pay the deficiency of
their mortgage obligation amounting to P794,765.43, plus legal
interest thereon from the date of the filing of the Complaint until full
payment. In their Answer with Special/Affirmative Defenses and
Counterclaims, spouses Avenido averred that they had already
paid a substantial amount to BPI Family but due to the imposition
by BPI Family of unreasonable charges and penalties on their
principal obligation, their payments seemed insignificant. RTC
dismissed both the complaint and counterclaim. On appeal, CA
affirmed the decision of the RTC. Motion for reconsideration filed
by BPI Family was denied. Hence, this Petition for Review on
Certiorari.
Issue:
Whether BPI Family is still entitled to collect the deficiency mort-
gage obligation from the spouses Avenido plus interest.
Ruling:
YES. It is settled that if the proceeds of the sale are insufficient to
cover the debt in an extrajudicial foreclosure of mortgage, the
mortgagee is entitled to claim the deficiency from the debtor. While
Act No. 3135, as amended, does not discuss the mortgagees right
to recover the deficiency, neither does it contain any provision
expressly or impliedly prohibiting recovery. If the legislature had
intended to deny the creditor the right to sue for any deficiency
resulting from the foreclosure of a security given to guarantee an
obligation, the law would expressly so provide. Absent such a
provision in Act No. 3135, as amended, the creditor is not preclud-
ed from taking action to recover any unpaid balance on the princi-
pal obligation simply because he chose to extrajudicially foreclose
the real estate mortgage.
_____________________________________________________
Redemption
Case:
SPOUSES FRANCISCO D. YAP and WHELMA S. YAP v.
SPOUSES ZOSIMO DY, SR. and NATIVIDAD CHIU DY,
SPOUSES MARCELINO MAXINO and REMEDIOS L. MAXINO,
PROVINCIAL SHERIFF OF NEGROS ORIENTAL and
DUMAGUETE RURAL BANK, INC.
and
DUMAGUETE RURAL BANK, INC. (DRBI) herein represented
by Mr. William D.S. Dichoso v. SPOUSES ZOSIMO DY, SR. and
NATIVIDAD CHIU DY, SPOUSES MARCELINO MAXINO and
REMEDIOS MAXINO, and SPOUSES FRANCISCO D. YAP and
WHELMA S. YAP
G.R. No. 171868 - G.R. No. 171991, July 27, 2011, Villarama,
Jr., J.
A debtor who has paid a part of the debt cannot ask for
the proportionate extinguishment of the mortgage as long as the
debt is not completely satisfied. However, this rule does not apply
where the aggregate number of the lots which comprise the collat-
erals for the mortgage had already been foreclosed and sold at
public auction.
Facts:
The spouses Tomas Tirambulo and Salvacion Estorco (Tirambu-
los) are the registered owners of several parcels of land (herein
referred to as Lot 1, 3, 4, 5, 6, 8 and 846) located in Ayungon,
Negros Oriental. Tirambulos executed a Real Estate Mortgage
over Lots 1, 3, 4, 5, 6, 8 and 846 in favor of the Rural Bank of
Dumaguete, Inc., predecessor of Dumaguete Rural Bank, Inc.
(DRBI), to secure the two loans extended to them by the bank.
Subsequently, the Tirambulos sold all seven mortgaged lots to the
Page 48 of 63
spouses Zosimo Dy, Sr. and Natividad Chiu (the Dys) and the
spouses Marcelino C. Maxino and Remedios Lasola (the Maxinos)
without the consent and knowledge of DRBI and this sale was
embodied in a Deed of Absolute Sale. The Tirambulos failed to
pay their loan and this prompted DRBI to extrajudicially foreclose
the mortgages and had Lots 1, 4, 5, 6 and 8 sold at public auction.
DRBI emerged as the highest bidder. It later on sold some of the
lots to the spouses Francisco D. Yap and Whelma D. Yap (the
Yaps) under a Deed of Sale with Agreement to Mortgage.
Roughly a month before the one-year redemption period was set
to expire, the Dys and the Maxinos attempted to redeem Lots 1, 3
and 6. They tendered the amount of P40,000.00 to DRBI and the
Yaps, but both refused. Thus, the Dys and the Maxinos went to the
Office of the Sheriff of Negros Oriental and paid P50,625.29 to
effect the redemption. The Clerk of Court and Provincial Sheriff,
issued a Certificate of Redemption in favor of the Dys and the
Maxinos only for Lots 1 and 6, and stated in said certificate that
Lot 3 is not included in the foreclosure proceedings.
The Yaps refused to take delivery of the redemption price. Thus,
the Dys and the Maxinos instead tender the redemption money as
a consignation. Meanwhile, the Yaps requested DRBI to consoli-
date its title over the foreclosed properties by requesting the Pro-
vincial Sheriff to execute the final deed of sale in favor of the bank
so that the latter can transfer the titles of the two foreclosed prop-
erties to them. Consequently, the Yaps filed Civil Case for consoli-
dation of ownership, annulment of certificate of redemption, and
damages against the Dys, the Maxinos, the Provincial Sheriff of
Negros Oriental and DRBI.
The RTC held that the Dys and the Maxinos failed to exercise their
rights of redemption properly and timely. On appeal, the CA re-
versed the amended decision of the RTC. It ruled that the redemp-
tion made by Spouses Dy and Spouses Maxino with regards to Lot
No 1 and 6 as valid. Hence, the consolidated petitions assailing
the appellate court’s decision.
Issue:
Whether the Dys and Maxinos validly redeem Lots 1 and 6.
Ruling:
YES. The requisites of a valid redemption are present in the case
at bar.
The requisites for a valid redemption are: (1) the redemption must
be made within twelve (12) months from the time of the registration
of the sale in the Office of the Register of Deeds; (2) payment of
the purchase price of the property involved, plus 1% interest per
month thereon in addition, up to the time of redemption, together
with the amount of any assessments or taxes which the purchaser
may have paid thereon after the purchase, also with 1% interest
on such last named amount; and (3) written notice of the redemp-
tion must be served on the officer who made the sale and a dupli-
cate filed with the Register of Deeds of the province.
There is no issue as to the first and third requisites. It is undisput-
ed that the Dys and the Maxinos made the redemption within the
12-month period from the registration of the sale. The Dys and
Maxinos effected the redemption on May 24, 1984, when they
deposited P 50,373.42 with the Provincial Sheriff, and on June 19,
1984, when they deposited an additional P83,850.50. Both dates
were well within the one-year redemption period reckoned from the
June 24, 1983 date of registration of the foreclosure sale. Like-
wise, the Provincial Sheriff who made the sale was properly noti-
fied of the redemption since the Dys and Maxinos deposited with
him the redemption money after both DRBI and the Yaps refused
to accept it.
The second requisite, the proper redemption price, is the main
subject of contention of the opposing parties.
The Court did not subscribe to the Yaps’ argument on the doctrine
of indivisibility of the mortgage since the same does not apply
once the mortgage is extinguished by a complete foreclosure
thereof as in the instant case. Furthermore, under Article 2089, it is
apparent that what the law proscribes is the foreclosure of only a
portion of the property or a number of the several properties mort-
gaged corresponding to the unpaid portion of the debt where be-
fore foreclosure proceedings partial payment was made by the
debtor on his total outstanding loan or obligation. This also means
that the debtor cannot ask for the release of any portion of the
mortgaged property or of one or some of the several lots mort-
gaged unless and until the loan thus, secured has been fully paid,
notwithstanding the fact that there has been a partial fulfillment of
the obligation. Hence, it is provided that the debtor who has paid a
part of the debt cannot ask for the proportionate extinguishment of
the mortgage as long as the debt is not completely satisfied.
That the situation obtaining in the case at bar is not within the
purview of the aforesaid rule on indivisibility is obvious since the
aggregate number of the lots which comprise the collaterals for the
mortgage had already been foreclosed and sold at public auction.
There is no partial payment nor partial extinguishment of the obli-
gation to speak of. The aforesaid doctrine, which is actually in-
tended for the protection of the mortgagee, specifically refers to
the release of the mortgage which secures the satisfaction of the
indebtedness and naturally presupposes that the mortgage is
existing. Once the mortgage is extinguished by a complete fore-
closure thereof, said doctrine of indivisibility ceases to apply since,
with the full payment of the debt, there is nothing more to secure.
Nothing in the law prohibits the piecemeal redemption of proper-
ties sold at one foreclosure proceeding. Clearly, the Dys and Max-
inos can effect the redemption of even only two of the five proper-
ties foreclosed. And since they can effect a partial redemption,
they are not required to pay the P216,040.93 considering that it is
the purchase price for all the five properties foreclosed.
_____________________________________________________
Writ of possession
Cases:
SPOUSES JOSE O. GATUSLAO and ERMILA LEONILA LIMSI-
ACO-GATUSLAO v. LEO RAY V. YANSON
G.R. No. 191540, January 21, 2015, Del Castillo, J.
Until the foreclosure sale of the property in question is
annulled by a court of competent jurisdiction, the issuance of a writ
of possession remains the ministerial duty of the trial court.
Facts:
Ermila Leonila Limsiaco-Gatuslao is the daughter of the late Feli-
cisimo Limsiaco (Limsiaco) who died intestate. Limsiaco was the
registered owner of two parcels of land with improvements in the
City of Bacolod. Limsiaco mortgaged the said lots along with the
house standing thereon to Philippine National Bank (PNB). Upon
Limsiaco’s failure to pay, PNB extrajudicially foreclosed on the
mortgage and caused the properties’ sale at a public auction
where it emerged as the highest bidder. When the one-year re-
demption period expired without Limsiaco’s estate redeeming the
properties, PNB caused the consolidation of titles in its name.
Ultimately, the Registry of Deeds of Bacolod City cancelled TCT in
the name of Limsiaco and issued another in the name of PNB.
PNB consequently conveyed the subject properties to Yanson. A
corresponding TCT was issued in favor of the latter. As a conse-
quence of the sale, Yanson filed with the RTC an Ex-Parte Motion
for Writ of Possession pursuant to Section 7 of Act No. 3135.
Spouses Gatuslao argued that the Yanson is not entitled to the
issuance of an ex-parte writ of possession under Section 7 of Act
No. 3135 since he was not the buyer of the subject properties at
the public auction sale and only purchased the same through a
subsequent sale made by PNB. They asserted that the intestate
estate of Limsiaco has already instituted an action for annulment
of foreclosure of mortgage and auction sale affecting the contested
Page 49 of 63
properties. They argued that the existence of the said civil suit
bars the issuance of the writ of possession and that whatever
rights and interests Yanson may have acquired from PNB by virtue
of the sale are still subject to the outcome of the said case.
RTC granted the issuance of the writ of possession. It likewise
denied the motion for reconsideration filed by Spouses Gatuslao.
Hence, this petition.
Issues:
1. Whether the pendency of an action for annulment of
foreclosure of mortgage and of the corresponding sale at
public auction of the subject properties operates as a bar
to the issuance of a writ of possession.
2. Whether Yanson is entitled to the issuance of writ of pos-
session.
Ruling:
1. NO. It is settled that a pending action for annulment of
mortgage or foreclosure sale does not stay the issuance
of the writ of possession. The trial court, where the appli-
cation for a writ of possession is filed, does not need to
look into the validity of the mortgage or the manner of its
foreclosure. The purchaser is entitled to a writ of posses-
sion without prejudice to the outcome of the pending an-
nulment case.
Clearly then, until the foreclosure sale of the property in
question is annulled by a court of competent jurisdiction,
the issuance of a writ of possession remains the ministerial
duty of the trial court. The same is true with its implementa-
tion; otherwise, the writ will be a useless paper judgment –
a result inimical to the mandate of Act No. 3135 to vest
possession in the purchaser immediately.
2. YES. Yanson, as a transferee or successor-ininterest of
PNB by virtue of the contract of sale between them, is
considered to have stepped into the shoes of PNB. As
such, he is necessarily entitled to avail of the provisions
of Section 7 of Act No. 3135, as amended, as if he is
PNB.
Verily, one of the rights that PNB acquired as purchaser of
the subject properties at the public auction sale, which it
could validly convey by way of its subsequent sale of the
same to respondent, is the availment of a writ of posses-
sion.
SPOUSES FELIPE YULIENCO and FLORA YULIENCO v. HON.
COURT OF APPEALS (4TH DIVISION); HON. LUCAS P. BER-
SAMIN in his official capacity as Presiding Judge of the
Regional Trial Court, Branch 96, NCR, Quezon City; DEPUTY
SHERIFF JOSE G. MARTINEZ of Branch 96, RTC, Quezon
City; and ADVANCE CAPITAL CORPORATION
G.R. No. 141365, November 27, 2002, Quisumbing, J.
Well established is the rule that after the consolidation of
title in the buyer’s name, for failure of the mortgagor to redeem,
the writ of possession becomes a matter of right. Its issuance to a
purchaser in an extrajudicial foreclosure is merely a ministerial
function. As such, the court granting the writ cannot be charged
with having acted without jurisdiction or with grave abuse of discre-
tion.
Facts:
Felipe and Flora Yulienco were the registered owners of a residen-
tial house and Quezon City. Spouses Yulienco obtained a loan
from Advance Capital Corporation (ACC) evidenced by a promis-
sory note and secured by deeds of real estate mortgage over their
properties in Makati City, Benguet, and Quezon City. When
spouses Yulienco failed to pay the loan in full, ACC filed a petition
for extrajudicial foreclosures of the properties with the Ex-Officio
Sheriff of Quezon City.
To forestall the foreclosure of their properties, spouses Yulienco
filed a petition for injunction, reformation, and damages with prayer
for temporary restraining order and/or preliminary injunction
against ACC with the Regional Trial Court of Makati City question-
ing the validity of the promissory notes and real estate mortgages.
The same was granted and a TRO was issued which effectively
cancelled the foreclosure proceedings. Upon the expiration of the
TRO, ACC filed a letter-request with the Office of the Clerk of
Court and Ex-Officio Sheriff of Quezon City to proceed with the
auction sale of the Quezon City property. This was granted.
The public auction was held and the Quezon City property was
sold to ACC as the highest bidder. On the same date, the Sheriffs
Certificate of Sale was annotated on the TCT. Thereafter, when
the spouses failed to redeem the foreclosed property, ACC caused
the consolidation of its ownership. Accordingly, the Register of
Deeds of Quezon City cancelled the TCT in the name of spouses
Yulienco and issued another in ACC’s name. Thereafter, ACC filed
with the RTC of Quezon City, a petition for the issuance of a writ of
possession over the subject property.
In their comment, spouses Yulienco alleged, that it would be im-
proper for the court to issue a writ of possession pending the out-
come of Special Civil Case before the Makati RTC for injunction,
reformation, and damages assailing the validity of the loan and the
mortgage.
Hon. Lucas Bersamin, the presiding judge of the RTC of Quezon
City granted the petition for writ of possession. The motion for
reconsideration filed by spouses Yulienco was denied. On appeal,
denied the petition. Hence, the instant petition for review on
certiorari.
Issues:
1. Whether the Court of Appeals committed reversible error
in affirming the RTC decision granting the writ of posses-
sion to ACC.
2. Whether a pending case for annulment of the foreclosure
sale should bar the issuance of a writ of possession.
Ruling:
1. NO. Well established is the rule that after the consolida-
tion of title in the buyer’s name for failure of the mortgag-
or to redeem, the writ of possession becomes a matter of
right. Its issuance to a purchaser in an extrajudicial fore-
closure is merely a ministerial function. The writ of pos-
session issues as a matter of course upon the filing of the
proper motion and the approval of the corresponding
bond. The judge issuing the writ following these express
provisions of law neither exercises his official discretion
nor judgment. As such, the court granting the writ cannot
be charged with having acted without jurisdiction or with
grave abuse of discretion.
2. NO. The Court have disallowed injunction prohibiting is-
suance of a writ of possession, just as the Court have
held that its issuance may not be stayed by a pending ac-
tion for annulment of mortgage or the foreclosure itself.
Until the foreclosure sale of the property in question is
annulled by a court of competent jurisdiction, spouses
Yulienco are bereft of valid title and right to prevent the
issuance of a writ of possession to ACC. Until then, it is
the trial courts ministerial function to grant the possessory
writ to said corporation.
Page 50 of 63
GREEN ASIA CONSTRUCTION AND DEVELOPMENT CORPO-
RATION and SPS. RENATO and DELIA LEGASPI v. THE
HONORABLE COURT OF APPEALS and PCI LEASING AND
FINANCE, INC.
G.R. No. 163735, November 24, 2006, Quisumbing, J.
Any question regarding the validity of the mortgage or its
foreclosure cannot be a legal ground for refusing the issuance of a
writ of possession. Indeed, regardless of whether or not there is a
pending suit for annulment of the mortgage or the foreclosure
itself, the purchaser is entitled to a writ of possession.
Facts:
Green Asia Construction and Development Corporation (GACDC),
represented by its president, Renato Legaspi, obtained a loan from
PCI Leasing and Finance, Inc. (PCILFI) secured by real estate
mortgage executed in favor of PCILFI by spouses Renato and
Delia Legaspi. The mortgage covered three parcels of land located
in Barrio Balibago, Angeles City.
When GACDC failed to pay the loan on maturity, the mortgage
was foreclosed extrajudicially. PCILFI was the highest bidder at
the foreclosure sale. A certificate of sale was accordingly issued to
PCILFI and duly registered with the Registry of Deeds of Angeles
City. Thereafter, PCILFI filed a petition for the issuance of a writ of
possession with the Regional Trial Court of Angeles City. The
same was granted.
On a separate date, GACDC filed an urgent omnibus motion and a
supplement to the urgent omnibus motion, praying for the setting
aside of the certificate of sale, cancellation of the writ of posses-
sion, and the suspension of the implementation of the said writ of
possession. RTC dismissed the petition. On appeal, CA affirmed
the RTC ruling. Hence this petition.
Issues:
Whether appeal is an appropriate remedy in actions for the issu-
ance of writ of possession pursuant to the provisions of Act 3135,
as amended.
Ruling:
YES. Clearly, the remedy of petitioners from the assailed orders of
the trial court was to file a petition to set aside the sale and cancel
the writ of possession on the following grounds: (1) that the mort-
gage was not violated; and (2) that the sale was not made in ac-
cordance with the provisions of Act No. 3135. Under Section 8 of
Act No. 3135, the aggrieved party may thereafter appeal from any
disposition by the court on the matter.
In this case however, what petitioners filed with the trial court were
an urgent omnibus motion and a supplement to the urgent omni-
bus motion to set aside the sale and cancel the writ of possession.
In the said motions, petitioners alleged there was no basis for the
extrajudicial foreclosure because the mortgage was void.
Any question regarding the validity of the mortgage or its foreclo-
sure cannot be a legal ground for refusing the issuance of a writ of
possession. Indeed, regardless of whether or not there is a pend-
ing suit for annulment of the mortgage or the foreclosure itself, the
purchaser is entitled to a writ of possession. Petitioners should
have filed a separate and independent action for annulment of the
mortgage or the foreclosure. The remedy under Section 8 of Act
No. 3135 is inapplicable in this case.
SPOUSES RUBEN SANTIAGO and INOCENCIA SANTIAGO v.
MERCHANTS RURAL BANK OF TALAVERA, INC.
G.R. No. 147820, March 18, 2005, Callejo, Sr., J.
The law does not require that a petition for a writ of pos-
session may be granted only after documentary and testimonial
evidence shall have been offered to and admitted by the court.
Facts:
The Merchants Rural Bank alleged in its petition that spouses
Ruben and Inocencia Santiago executed a "Deed of Real Estate
Mortgage," in its favor, over the said properties and all the im-
provements thereon, as security for the payment of the separate
loans. When the spouses failed to pay their loan, Merchants Rural
Bank foreclosed the real estate mortgage extrajudicially. As the
highest bidder in the auction sale, Merchants Rural Bank was
issued certificates of sale over the properties. These certificates
were registered with the Register of Deeds. When the spouses
failed to redeem the property within the prescribed period, the titles
over the property were then consolidated in favor of Merchants
Rural Bank. Thereafter, Merchants Rural Bank of Talavera, Inc.
filed an Ex Parte Petition with the Regional Trial Court (RTC) of
Cabanatuan City, for the issuance of a writ of possession over the
two parcels of land. RTC granted the petition and issued the cor-
responding writ of possession. Although aware of the said petition,
the spouses failed to file their comment thereon. Instead, they
requested Merchants Rural Bank to give them more time to repur-
chase their properties.
Later, the trial court granted the petition and ordered the clerk of
court to issue a writ of possession in favor of Merchants Rural
Bank and further directed the Sheriff to order the spouses to va-
cate the subject properties. Thereafter, the spouses filed a petition
for a writ of certiorari with the CA to nullify the Order of the RTC
and the writ of possession arguing that Merchants Rural Bank
failed to adduce evidence for the issuance of a writ of possession.
The CA dismissed the petition for lack of merit. It, likewise, denied
the spouses’ motion for reconsideration of the decision. Hence,
this petition for review on certiorari.
Issue:
Whether evidence is necessary for the issuance of a writ of pos-
session.
Ruling:
NO. Section 7 of Act No. 3135 merely requires that a petition for
the issuance of a writ of possession shall be in the form of an ex
parte motion. Upon the filing of the said petition, the payment of
the requisite fees and the approval of the trial court if such petition
is filed during the period for the redemption of the property, the
court shall order that a writ of possession be issued.
The law does not require that a petition for a writ of possession
may be granted only after documentary and testimonial evidence
shall have been offered to and admitted by the court. As long as
the verified petition states the facts sufficient to entitle the petition-
er to the relief requested, the court shall issue the writ prayed for.
The petitioners need not offer any documentary and testimonial
evidence for the court to grant the petition.
_____________________________________________________
ANTICHRESIS
Concept
ARTICLE 2132. By the contract of antichresis the creditor acquires
the right to receive the fruits of an immovable of his debtor, with
the obligation to apply them to the payment of the interest, if ow-
ing, and thereafter to the principal of his credit.
ARTICLE 2133. The actual market value of the fruits at the time of
the application thereof to the interest and principal shall be the
measure of such application.
Page 51 of 63
Must be in writing
ARTICLE 2134. The amount of the principal and of the interest
shall be specified in writing; otherwise, the contract of antichresis
shall be void.
Obligation to pay taxes
ARTICLE 2135. The creditor, unless there is a stipulation to the
contrary, is obliged to pay the taxes and charges upon the estate.
He is also bound to bear the expenses necessary for its preserva-
tion and repair.
The sums spent for the purposes stated in this article shall be
deducted from the fruits.
ARTICLE 2136. The debtor cannot reacquire the enjoyment of the
immovable without first having totally paid what he owes the credi-
tor.
But the latter, in order to exempt himself from the obligations im-
posed upon him by the preceding article, may always compel the
debtor to enter again upon the enjoyment of the property, except
when there is a stipulation to the contrary.
ARTICLE 2137. The creditor does not acquire the ownership of the
real estate for non-payment of the debt within the period agreed
upon.
Every stipulation to the contrary shall be void. But the creditor may
petition the court for the payment of the debt or the sale of the real
property. In this case, the Rules of Court on the foreclosure of
mortgages shall apply.
ARTICLE 2138. The contracting parties may stipulate that the
interest upon the debt be compensated with the fruits of the prop-
erty which is the object of the antichresis, provided that if the value
of the fruits should exceed the amount of interest allowed by the
laws against usury, the excess shall be applied to the principal.
(1885a)
Note: The fruits of the immovable which is the object of
the antichresis must be appraised at their actual market
value at the time of the application. The property deliv-
ered stands as a security for the payment of the obliga-
tion of the debtor in antichresis. Hence, the debtor can-
not demand its return until the debt is totally paid.
Pactum Commisorium applicable
ARTICLE 2139. The last paragraph of article 2085, and articles
2089 to 2091 are applicable to this contract.
_____________________________________________________
CHATTEL MORTGAGE
Concept
ARTICLE 2140. By a chattel mortgage, personal property is rec-
orded in the Chattel Mortgage Register as a security for the per-
formance of an obligation. If the movable, instead of being record-
ed, is delivered to the creditor or a third person, the contract is a
pledge and not a chattel mortgage.
Correlate:
Mortgagor must not sell, encumber or remove the mort-
gaged chattel without the consent of mortgagee
Art. 319. Removal, sale or pledge of mortgaged property.
— The penalty or arresto mayor or a fine amounting to
twice the value of the property shall be imposed upon:
1. Any person who shall knowingly remove any per-
sonal property mortgaged under the Chattel Mort-
gage Law to any province or city other than the one
in which it was located at the time of the execution of
the mortgage, without the written consent of the
mortgagee, or his executors, administrators or as-
signs.
2. Any mortgagor who shall sell or pledge personal
property already pledged, or any part thereof, under
the terms of the Chattel Mortgage Law, without the
consent of the mortgagee written on the back of the
mortgage and noted on the record hereof in the of-
fice of the Register of Deeds of the province where
such property is located.
Cases:
MAKATI LEASING and FINANCE CORPORATION v. WEA-
REVER TEXTILE MILLS, INC., and HONORABLE
COURT OF APPEALS
G.R. No.L-58469, May 16, 1983, De Castro, J.
A machinery which is movable in its nature and be-
comes immobilized only by destination or purpose, may be con-
sidered as personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby. This is really
because one who has so agreed is estopped from denying the
existence of the chattel mortgage.
Facts:
In order to obtain financial accommodations from Makati Leasing
and Finance Corporation (MLFC), Wearever Textile Mills, Inc.,
(WTMI) discounted and assigned several receivables with the
former under a Receivable Purchase Agreement. To secure the
collection of the receivables assigned, Wearever Textile Mills exe-
cuted a Chattel Mortgage over certain raw materials inventory as
well as machinery described as Artos Aero Dryer Stentering
Range.
Upon WTMI’s default, MLFC filed a petition for extrajudicial fore-
closure of the properties mortgage to it but the Deputy Sheriff was
not able to effect the seizure of the machinery. MLFC thereafter
filed a complaint for judicial foreclosure with the Court of First In-
stance of Rizal. Acting on MLFC’s application for replevin, the
lower court issued a writ of seizure, the enforcement of which was
however subsequently restrained upon WTMI's filing of a motion
for reconsideration.
Later, the CFI order the lifting the restraining order for the en-
forcement of the writ of seizure and an order to break open the
premises of WTMI to enforce said writ. Motion for reconsideration
was likewise denied.
On appeal, CA set aside the Orders of the lower court and ordered
the return of the drive motor seized by the sheriff. It ruled that ma-
chinery in suit cannot be the subject of replevin, much less of a
chattel mortgage, because it is a real property pursuant to Article
415 of the new Civil Code. The motion for reconsideration filed by
MLFC was likewise denied.
Issue:
Whether the machinery in suit, considered as real property under
the law, be a proper subject of a chattel mortgage.
Ruling:
YES. A similar, if not identical issue was raised in Tumalad v. Vi-
cencio (41 SCRA 143, September 30, 1971), where Supreme
Court ruled that a house of strong materials may be considered as
personal property for purposes of executing a chattel mortgage
thereon as long as the parties to the contract so agree and no
Page 52 of 63
innocent third party will be prejudiced thereby. Hence, there is
absolutely no reason why a machinery, which is movable in its
nature and becomes immobilized only by destination or purpose,
may not be likewise treated as such. This is really because one
who has so agreed is estopped from denying the existence of the
chattel mortgage.
It must be pointed out that the characterization of the subject ma-
chinery as chattel by the WTMI is indicative of intention and im-
presses upon the property the character determined by the parties.
As stated in Standard Oil Co. of New York v. Jaramillo (44 SCRA
630, March 16, 1923) it is undeniable that the parties to a contract
may by agreement treat as personal property that which by nature
would be real property, as long as no interest of third parties would
be prejudiced thereby.
ASSOCIATED INSURANCE AND SURETY COMPANY INC v.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, ISABEL
IYA v. ADRIANO VALINO, LUCIA VALINO and ASSOCIATED
INSURANCE and SURETY COMPANY, INC.,
G.R. Nos. L-10837-38, May 30, 1958, Felix, J.
A building such as a house is considered as real proper-
ty and cannot be divested of its character as realty by the fact that
the land on which it was built belongs to another. Since personal
properties can only be the subject of a chattel mortgage, a chattel
mortgage over a building is null and void.
Facts:
Spouses Adriano and Lucia Valino were the owners of a house of
strong materials constructed on a lot in Grace Park Subdivision,
Caloocan, Rizal. The lot was purchased on installment basis from
the Philippine Realty Corp. To enable Lucia to purchase rice on
credit from the NARIC, Lucia filed a bond in the sum of P11,000
subscribed by Associated Insurance. As counter-guaranty, spous-
es Valino executed an alleged chattel mortgage on the house in
favor of Associated Insurance which was duly registered with the
Chattel Mortgage Register. For this transaction, the land was still
in the name of Philippine Realty Corp. Thereafter, the spouses
Valino completed payment of the land and were issued a certifi-
cate of title in their name. Subsequently, however, they executed a
real estate mortgage on the house and lot in favor of Isabel Iya to
secure their indebtedness of P12,000. The real estate mortgage
was registered and annotated at the back of the title.
Lucia failed to pay her obligation to NARIC so Associated Insur-
ance was compelled to pay the same due to the bond. The surety
company demanded reimbursement from the spouses Valino but
they failed to pay. The surety company foreclosed the chattel
mortgage over the house. It was subsequently sold at public auc-
tion with the surety company as the highest bidder. The surety
company then learned of the real estate mortgage over the house
and lot in favor of Iya. It then filed a case against the spouses
Valino and Iya, asking for the exclusion of the residential house
from the real estate mortgage and the recognition of its right of
ownership by virtue of the public sale in its favor. Iya moved for the
dismissal of the case and the nullification of the public sale alleg-
ing that the foreclosure in favor of the surety company was null
and void. Iya filed a civil case against the Valinos and the surety
company asking for payment of the debt with interest and damag-
es. In the alternative, she prayed for foreclosure of the house and
lot in her favor to satisfy the obligation.
The CFI ruled in favor of Associated Insurance and Surety, holding
that the chattel mortgage was preferred and superior over the real
estate mortgage of Isablel Iya. Since the Valinos were not yet the
owners of the land at the time of the first encumbrance, the build-
ing was still a personal property and the chattel mortgage over it
was proper. The CFI ordered the exclusion of the property from
the foreclosure prayed for by Iya although she could exercise the
right of junior encumbrance.
Issue:
Whether the chattel mortgage over the property was validly consti-
tuted.
Ruling:
NO. The chattel mortgage was not validly constituted. The building
is a real property and cannot be subject of chattel mortgage.
Act 3952 holds that personal properties could only be the subject
of chattel mortgage. In this case, since the building/house of the
spouses Valino cannot be considered as personal property, the
execution of the chattel mortgage is a nullity. Even if the mortgage
was properly registered, it produces no effect as far as the building
is concerned.
The contention that the surety acquired ownership over the proper-
ty by reason of the sale must fail. A mortgage creditor who pur-
chases real properties at an extrajudicial foreclosure sale thereof
by virtue of a chattel mortgage constituted in his favor, which
mortgage has been declared null and void with respect to said real
properties, acquires no right thereto by virtue of said sale.
The chattel mortgage being null and void, Isabel Iya has a right to
foreclose not only the land but also the building. This, however, is
without prejudice to any right Associated Insurance and Surety
may have against the spouses Valino on account of the void chat-
tel mortgage.
ACME SHOE, RUBBER & PLASTIC CORPORATION AND
CHUA PAC v. HON. COURT OF APPEALS, PRODUCERS
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY
G.R. No. 103576, August 22, 1996, Vitug, J.
A chattel mortgage cannot cover after -incurred obliga-
tions since Section 5 of the Chattel Mortgage Law requires an
affidavit of good faith stating that the mortgage is made for the
purpose of securing the obligation specified in the conditions
thereof, and for no other purpose. This makes it obvious that the
debt referred to in the law is current, not an obligation that is yet
merely contemplated.
Facts:
Chua Pac, as president and general manager of Acme Corp.,
executed in behalf of the company a chattel mortgage in favor of
Producers Bank of the Philippines as a security for a corporate
loan of P3,000,000.00. A provision in the chattel mortgage pro-
vides that the mortgage shall also stand as security for future obli-
gations that Acme may incur without the necessity of executing a
new contract. The P3,000,000.00 loan was paid by Acme. In 1984,
the bank extended another loan to Acme for P1,000,000.00 cov-
ered by four promissory notes for P250,000 each. The loan was
not settled at maturity.
Producers applied for an extra judicial foreclosure of the mortgage.
Acme filed an action for injunction with the RTC which was dis-
missed. The court found that Acme was bound by the provisions of
the chattel mortgage. It ordered the foreclosure of the mortgage.
Upon appeal, the CA affirmed the decision.
Issue:
Whether the chattel mortgage covers after-incurred obligations.
Ruling:
NO. A chattel mortgage cannot cover after-incurred obligations.
While a pledge, real estate mortgage, or antichresis may excep-
tionally secure after-incurred obligations so long as these future
debts are accurately described, a chattel mortgage, however, can
Page 53 of 63
only cover obligations existing at the time the mortgage is consti-
tuted.
Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment
that can be compelled upon, the security itself, however, does not
come into existence or arise until after a chattel mortgage agree-
ment covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old con-
tract conformably with the form prescribed by the Chattel Mortgage
Law. Refusal on the part of the borrower to execute the agreement
so as to cover the after-incurred obligation can constitute an act of
default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of fore-
closure can only cover the debts existing at the time of constitution
and during the life of the chattel mortgage sought to be foreclosed.
In the chattel mortgage involved in this case, the only obligation
specified in the chattel mortgage contract was the P3,000,000.00
loan which petitioner corporation later fully paid. By virtue of Sec-
tion 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated.
NORTHERN MOTORS, INC. v. THE HONORABLE JORGE R.
COQUIA, Executive Judge of the Court of First Instance of
Manila, HONESTO ONG, THE SHERIFF OF MANILA, DOMINA-
DOR Q. CACPAL, The Acting Executive Sheriff of Manila,
and/or his duly authorized deputy sheriff or representative,
FILINVEST CREDIT CORPORATION, intervenor
G.R. No. L-40018, August 29, 1975, Aquino, J.
After a chattel mortgage is executed, there remains in
the mortgagor a mere right of redemption. To levy upon the mort-
gagor's incorporeal right or equity of redemption, it is not neces-
sary for a sheriff to take physical possession of the mortgaged
properties.
Facts:
Manila Yellow Taxicab Co. purchased on installment from North-
ern Motors 200 Holden Torana cars. It made a down payment of
P1,000 on each car. It executed chattel mortgages on the cars in
favor of Northern Motors Inc. as security for the promissory notes
covering the balance of the price. The notes and mortgages for
172 cars were assigned to Filinvest Credit Corp.
Tropical Commercial Co. obtained a judgment for P167,311.27
against Manila Yellow Taxicab Co. P110,000 of the judgment was
assigned to Honesto Ong. To satisfy the judgment, the sheriff
levied upon 20 taxi cabs, 8 of which were mortgaged to Northern
Motors, 12 assigned to Filinvest. Northern Motors and Filinvest
filed their third-party claims with the sheriff. Tropical Commercial
posted indemnity bonds. The cars were subsequently sold at pub-
lic auction and the lower court cancelled the indemnity bonds with-
out notice. The sheriff made an additional levy on 35 cars to satisfy
the unpaid balance. 7 were mortgaged to Northern Motors, 28 with
Filinvest.
The lower court refused to reinstate the indemnity bonds and ruled
that the chattel mortgagee Northern Motors was not entitled to the
possession of the mortgaged taxicabs by the mere fact of the exe-
cution of the mortgage and that the mortgage lien followed the
chattel whoever might be its actual possessor. Northern Motors
filed a petition for certiorari to annul the decision of the lower court
which the SC denied, hence the motion for reconsideration.
Northern Motors contends that as chattel mortgagee and unpaid
vendor it has the better right to the possession of the mortgaged
taxicabs.
Issue:
Whether Northern Motors (mortgagee) has a better right to the
possession of the taxi cabs as against an unsecured judgment
creditor.
Ruling:
YES, the mortgagee and unpaid vendor Northern Motors has a
better right to the possession of the taxi cabs as against the unse-
cured judgment creditor.
Inasmuch as the condition of the chattel mortgages had already
been broken and Northern Motors, Inc. had in fact instituted an
action for replevin so that it could take possession of the mort-
gaged taxicabs, it has a superior, preferential and paramount right
to have possession of the mortgaged taxicabs and to claim the
proceeds of the execution sale.
The sheriff wrongfully levied upon the mortgaged taxicabs and
erroneously took possession of them. He could have levied only
upon the right or equity of redemption pertaining to the Manila
Yellow Taxicab Co., Inc. as chattel mortgagor and judgment debt-
or, because that was the only leviable or attachable property right
of the company in the mortgaged taxicabs. Jurisprudence holds
that after a chattel mortgage is executed, there remains in the
mortgagor a mere right of redemption. To levy upon the mortgag-
or's incorporeal right or equity of redemption, it was not necessary
for the sheriff to have taken physical possession of the mortgaged
taxicabs.
In this case what the sheriff could have sold at public auction was
merely the mortgagor's right or equity of redemption. The sheriff
and the judgment creditor are deemed to have constructive notice
of the chattel mortgages on the taxicabs. As a consequence of the
registration of the mortgages, Northern Motors, Inc. had the sym-
bolical possession of the taxicabs.
If the judgment creditor, Tropical Commercial Co., Inc., or the as-
signee, Ong, bought the mortgagor's equity of redemption at the
auction sale, then it would step into the shoes of the mortgagor,
Manila Yellow Taxicab Co., Inc. and be able to redeem the vehi-
cles from Northern Motors, Inc., the mortgagee, by paying the
mortgage debt.
Inasmuch as what remains to the mortgagor is only the equity of
redemption, it follows that the right of the judgment or attaching
creditor, who purchased the mortgaged chattel at an execution
sale, is subordinate to the lien of the mortgagee who has in his
favor a valid chattel mortgage. It is neither right nor just that the
lien of a secured creditor should be rendered nugatory by a wrong-
ful execution engineered by an unsecured creditor.
Motion for reconsideration is granted. The sheriff is directed to
deliver to Northern Motors the proceeds of the first auction sale
and the seven taxi cabs levied upon which are mortgaged with
Northern Motors.
FILINVEST CREDIT CORPORATION v. HON. COURT OF
APPEALS and SPOUSES EDILBERTO and
MARCIANA TADIAMAN
G. R. No. 115902, September 27, 1995, Davide, Jr., J.
The award of damages is proper as when a mortgagee
acted in bad faith for failure to follow Rule 60 of the Rules of Court
which provides that only the sheriff or proper officers of the court
can seize the property subject of the writ by having the mortga-
gee’s employees represent themselves as special sheriffs of a
court.
Facts:
Spouses Tadiaman purchased on installment a 10-wheeler Isuzu
cargo truck from Jordan Enterprises. They executed a promissory
note for 196,680 payable in 24 monthly installments. To secure the
note, they executed a chattel mortgage over the truck in favor of
Page 54 of 63
Jordan Enterprises. The notes and mortgage were subsequently
assigned to Filinvest Credit Corporation.
Spouses Tadiaman defaulted in the payment and Filinvest filed an
action for replevin and damages. A writ of replevin was issued and
the truck was seized by persons who represented themselves to
be special sheriffs of the court, but who turned out to be employ-
ees of Filinvest. Spouses Tadiaman filed a counter bond and the
trial court ordered the return of the truck. Filinvest employed delay-
ing tactics so the spouses Tadiaman recovered the truck only after
2 weeks. They found the truck to be ―cannibalized‖, finding that
there were missing parts and that other parts were completely
changed with worn-out spare parts. The spouses filed a counter-
claim for damages.
The trial court ordered the spouses to pay Filinvest the balance of
the promissory note with interest. It also granted the counterclaim
for damages of the spouses. Filinvest appealed the award of dam-
ages to the CA but the CA affirmed the decision. The CA ruled that
Filinvest is liable for damages not because it commenced an ac-
tion for replevin to recover possession of the truck prior to its fore-
closure, but because of the manner it carried out the seizure of the
vehicle. Hence the appeal to the SC.
Filinvest contends that the only restriction on the mode by which
the mortgagee shall secure possession of the mortgaged property
after breach of condition is that he must act in an orderly manner
and without creating a breach of the peace, subjecting himself to
an action for trespass.
Issue:
Whether Filinvest secured possession of the mortgaged property
in good faith.
Ruling:
Filinvest did not validly obtain possession of the mortgaged prop-
erty in good faith. Although it instituted an action for replevin and
obtained a writ of replevin, it failed to follow Rule 60 of the Rules of
Court, that the only the sheriff or proper officer of the court may
take possession of the property. It acted in bad faith by having its
employees pretend to be special sheriffs of the court to seize the
truck. By its acts, it is liable for damages.
If a mortgagee cannot obtain possession of a mortgaged property
for its sale on foreclosure, it must bring a civil action either to re-
cover such possession as a preliminary step to the sale or to ob-
tain judicial foreclosure.
Replevin is the appropriate action to recover possession prelimi-
nary to the extrajudicial foreclosure of a chattel mortgage. Filinvest
did in fact institute such an action and obtained a writ of replevin.
And, by filing it, Filinvest admitted that it cannot acquire posses-
sion of the mortgaged vehicle in an orderly or peaceful manner.
Upon the default by the mortgagor in his obligations, Filinvest, as a
mortgagee, had the right to the possession of the property mort-
gaged preparatory to its sale in a public auction. However, for
employing subterfuge in seizing the truck by misrepresenting its
employees as deputy sheriffs and then hiding and cannibalizing it,
Filinvest committed bad faith in violation of Article 19 of the Civil
Code which provides: Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith. The award
of damages was proper.
MANOLO P. CERNA v. HON. COURT OF APPEALS and
CONRAD C. LEVISTE
G.R. No.L-48359, March 30, 1993, Campos, Jr., J.
There is no legal provision nor jurisprudence in our ju-
risdiction which makes a third person who secures the fulfillment of
another's obligation by mortgaging his own property to be solidarily
bound with the principal obligor.
A mortgagee who files a suit for collection abandons the
remedy of foreclosure of the chattel mortgage constituted over the
personal property as security for the debt or value of the promisso-
ry note which he seeks to recover in the said collection suit.
Facts:
Celerino Delgado and Conrad Leviste entered into a loan agree-
ment for P17,500 with interest evidenced by a promissory note. On
the same day, Delgado also executed a chattel mortgage over a
Willy’s jeep owned by him. Acting as attorney-in-fact of Manolo
Cerna, he also mortgaged a Tanaus car owned by Cerna. Delgado
failed to pay the loan. Leviste filed a collection suit with the CFI of
Rizal against Delgado and Cerna as solidary debtors. Cerna filed
his Motion to Dismiss on the grounds of lack of cause of action
and death of Delgado. He also alleged that since Leviste opted to
collect on the note, he could no longer foreclose the mortgage.
The CFI denied his motion to dismiss. The CA also denied his
motion to dismiss on the ground that he was not able to prove
Delgado’s death and the consequent settlement proceedings of
the latter’s estate. He also failed to prove his claim that the special
power of attorney in favor of Delgado was forged. This decision of
the CA became final. He filed a second motion to dismiss but was
denied by the trial court. The CA again denied his motion to dis-
miss, hence the appeal to the SC.
The CA ruled that the mortgage contract prima facie shows that it
created a solidary obligation between Delgado and Cerna against
Leviste. Cerna contends that since he did not sign as joint obligor
in the promissory note signed by Delgado, there is no cause of
action and that Leviste opted to collect from the promissory note,
abandoning his right to foreclose on the chattel mortgage.
Issues:
1. Whether Cerna was solidarily liable with Delgado for
the payment of the loan.
2. Whether the filing of the collection suit barred fore-
closure of the mortgage.
Ruling:
1. NO. Cerna was not solidarily liable with Delgado for
the payment of the loan.
The contract of loan, as evidenced by the promissory note, was
signed by Delgado only. Cerna had no part in the said contract.
Thus, nowhere could it be seen from the agreement that petitioner
was solidarily bound with Delgado for the payment of the loan.
Only Delgado signed the promissory note and accordingly, he was
the only one bound by the contract of loan. Nowhere did it appear
in the promissory note that Cerna was a co-debtor. The law is
clear that contracts take effect only between the parties.
Cerna is not solidarily liable even if he was allegedly a co-
mortgagor of the principal debtor, Delgado. There is solidarily lia-
bility only when the obligation expressly so states, or when the law
or the nature of the obligation requires solidarity. There is also no
legal provision nor jurisprudence in our jurisdiction which makes a
third person who secures the fulfillment of another's obligation by
mortgaging his own property to be solidarily bound with the princi-
pal obligor.
It is true that the contract stated that the chattel mortgage was
signed by Delgado for himself and by Delgado as attorney-in-fact
of Cerna but this alone does not make petitioner a co-mortgagor
especially so since only Delgado signed the chattel mortgage as
mortgagor. The Special Power of Attorney did not make petitioner
Page 55 of 63
a mortgagor. All it did was to authorize Delgado to mortgage cer-
tain properties belonging to petitioner and this is in compliance
with the requirement in Article 2085 of the Civil Code which states
that an essential requisite to the contract of mortgage is that the
persons constituting the pledge or mortgage have the free disposal
of their property, and in the absence thereof, that they be legally
authorized for the purpose.
In effect, petitioner lent his car to Delgado so that the latter may
mortgage the same to secure his debt. Thus, from the contract
itself, it was clear that only Delgado was the mortgagor regardless
of the fact the he used properties belonging to a third person to
secure his debt.
2. YES. By filing the collection suit against Delgado
and Cerna, Leviste cannot foreclose on the mort-
gage.
Granting arguendo that Cerna is liable to answer for Delgado’s
indebtedness, Cerna could not be held liable because the com-
plaint was for recovery of a sum of money, and not for the foreclo-
sure of the security. We agree with Cerna that the filing of collec-
tion suit barred the foreclosure of the mortgage. A mortgagee who
files a suit for collection abandons the remedy of foreclosure of the
chattel mortgage constituted over the personal property as security
for the debt or value of the promissory note which he seeks to
recover in the said collection suit.
Hence, Leviste, having chosen to file the collection suit, could not
now run after petitioner for the satisfaction of the debt. This is even
more true in this case because of the death of the principal debtor,
Delgado. Leviste was pursuing a money claim against a deceased
person.
A person holding a mortgage against the estate of a deceased
person may abandon such security and prosecute his claim before
the committee, and share in the distribution of the general assets
of the estate. It provides also that he may, at his own election,
foreclose the mortgage and realize upon his security. But the law
does not provide that he may have both remedies. If he elects one
he must abandon the other. If he fails in one he fails utterly.
INDUSTRIAL FINANCE CORPORATION v. HON. PEDRO A.
RAMIREZ, Judge of the Court of First Instance of Manila, and
CONSUELO ALCOBA
G. R. No. L-43821, May 26, 1977, Aquino, J.
Under Art. 1484 of the Civil Code, it is only when there
has been a foreclosure that the mortgagor is not liable for any
deficiency. The rule is that in installment sales, if the action insti-
tuted is for specific performance and the mortgaged property is
subsequently attached and sold, the sale thereof does not amount
to a foreclosure of the mortgage. Hence, the seller-creditor is enti-
tled to a deficiency judgment.
Facts:
Consuelo Alcoba bought Arnaldo Dizon’s 1966 model Chevrolet
car for P13,157.89 payable in installments secured by a chattel
mortgage on the car. That same day, Dizon assigned for P10,000
all his rights and interest in the chattel mortgage to Industrial Fi-
nance. After four payments, Alcoba defaulted and because of the
acceleration clause, the whole obligation became due and de-
mandable. Industrial Finance sued her with the complaint named
as ―replevin with damages‖.
In its complaint, Industrial Finance prayed for alternative reliefs.
The first was recovery of the mortgaged car by replevin. It wanted
to extrajudicially foreclose the chattel mortgage but the sheriff first
had to seize the cars by replevin. It then prayed that if recovery is
not possible by replevin, Alcoba should be ordered to pay the
balance of the purchase price plus interest and damages. There
was no prayer for the foreclosure of the mortgage.
The lower court issued the writ of replevin but the sheriff was una-
ble to seize the mortgaged car. Consequently, there was no extra-
judicial foreclosure of the mortgage since possession of the car by
the sheriff was necessary.
Alcoba failed to appear at the pre-trial and was declared in default.
The trial court ordered her to pay P7,678.05 plus interest. She did
not appeal and the decision became final. The sheriff levied upon
the mortgaged car which was in the possession of Aco Motor Ser-
vice. At the execution sale, Industrial bought the car for P4,000.
However, in order to take possession of the car, the corporation
had to pay P4,250 to the Aco Motor Service to satisfy its lien for
the repair and storage of the car.
Industrial Finance sustained a loss at the execution sale. It asked
for another alias writ of execution to satisfy the balance of Alcoba’s
obligation but the lower court denied such. It treated the execution
sale as a "virtual foreclosure of the chattel mortgage" which, alt-
hough not beneficial to the mortgagee, barred it from recovering
the deficiency under Art. 1484 of the Civil Code. Industrial Finance
filed a petition for certiorari with the SC.
Issue:
Whether Industrial Finance is barred from recovering the deficien-
cy under Art. 1484 of the Civil Code.
Ruling:
NO. According to Art. 1484, it is only when there has been a fore-
closure that the mortgagor is not liable for any deficiency. In this
case, there was no foreclosure. The mortgagee evidently chose
the remedy of specific performance. It levied upon the car by virtue
of an execution and not as an incident of a foreclosure proceeding.
It is entitled to an alias writ of execution for the portion of the
judgment that has not been satisfied.
The rule is that in installment sales, if the action instituted is for
specific performance and the mortgaged property is subsequently
attached and sold, the sale thereof does not amount to a foreclo-
sure of the mortgage. Hence, the seller-creditor is entitled to a
deficiency judgment
PCI LEASING AND FINANCE INC v. TROJAN METAL INDUS-
TRIES INCORPORATED, WALFREDO DIZON, ELIZABETH
DIZON and JOHN DOE
G. R. NO. 17638, December 15, 2010, Carpio, J.
Financial leasing contemplates the extension of credit to
assist a buyer in acquiring movable property which he can use and
eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties was a loan
with mortgage in the guise of a lease.
Facts:
Trojan Metal Industries (TMI) sought a loan from PCI Leasing
(PCI). Instead, PCI offered to buy various equipment TMI owned.
TMI agreed and they executed deeds of sale evidencing the same
for a consideration of P2,800,000. PCI and TMI then entered into a
lease agreement whereby TMI leased from PCI the various
equipment it previously owned. Pursuant to the agreement, TMI
issued postdated checks representing 24 monthly installments.
The agreement required TMI to give PCI a guaranty deposit of
P1,000,000.00 which would serve as security for the performance
of TMI’s obligations under the lease agreement. Further, spouses
Dizon as officers of TMI, executed in favor of PCI a Continuing
Guaranty where they agreed to pay the obligations in case TMI
defaulted.
Page 56 of 63
To obtain an additional loan from another financing company, TMI
used the leased equipment as temporary collateral. PCI consid-
ered this mortgage a violation of the lease agreement. PCI sent a
demand letter for payment of its obligations. It then filed a case for
recovery of sum of money and personal property with prayer for
writ of replevin. The RTC issued the writ of replevin and PCI re-
covered the properties and subsequently sold them to a third par-
ty. TMI claimed that that the sale with lease agreement was a
mere scheme to facilitate the financial lease between the parties.
The RTC ruled in favor of PCI, entitling it to possession of the
machineries and to rentals from TMI.
The CA ruled that the sale with lease agreement was in fact a loan
secured by a chattel mortgage. The CA held that since PCI sold
the equipment for P1,020,000.00 and TMI paid it a guaranty de-
posit of P1,030,000.00, it had in its hands P2,050,000 as against
TMI’s remaining obligation of P888,424.48. The excess should be
refunded to TMI in accordance with the Chattel Mortgage Law.
Issue:
Whether the sale with the lease agreement was a financial lease.
Ruling:
NO. The sale with lease agreement was a loan secured by a chat-
tel mortgage.
In a true financial leasing, a finance company purchases on behalf
of a cash-strapped lessee the equipment the latter wants to buy
but, due to financial limitations, is incapable of doing so. The fi-
nance company then leases the equipment to the lessee in ex-
change for the latter’s periodic payment of a fixed amount of rent-
al. In this case, however, TMI already owned the subject equip-
ment before it transacted with PCI. Therefore, the transaction be-
tween the parties in this case cannot be deemed to be in the na-
ture of a financial leasing as defined by law.
Financial leasing contemplates the extension of credit to assist a
buyer in acquiring movable property which he can use and even-
tually own. If the movable property already belonged to the bor-
rower-lessee, the transaction between the parties was a loan with
mortgage in the guise of a lease.
In the present case, since the transaction between PCILF and TMI
involved equipment already owned by TMI, it cannot be consid-
ered as one of financial leasing, as defined by law, but simply a
loan secured by a mortgage on the various equipment owned by
TMI.
Had the true transaction between the parties been expressed in a
proper instrument, it would have been a simple loan secured by a
chattel mortgage, instead of a simulated financial leasing. Thus,
upon TMI’s default, PCILF was entitled to seize the mortgaged
equipment, not as owner but as creditor-mortgagee for the pur-
pose of foreclosing the chattel mortgage. PCILF’s sale to a third
party of the mortgaged equipment and collection of the proceeds
of the sale can be deemed in the exercise of its right to foreclose
the chattel mortgage as creditor-mortgagee.
_____________________________________________________
ARTICLE 2141. The provisions of this Code on pledge, insofar as
they are not in conflict with the Chattel Mortgage Law, shall be
applicable to chattel mortgages.
_____________________________________________________
CONCURRENCE AND PREFERENCE OF CREDIT
Extent of debtor’s liability
ARTICLE 2236. The debtor is liable with all his property, present
and future, for the fulfillment of his obligations, subject to the ex-
emptions provided by law.
Correlate:
Rules of Court - Rule 39 Execution, Satisfaction and Ef-
fect of Judgment
Section 6. Execution by motion or by independent
action. — A final and executory judgment or order
may be executed on motion within five (5) years
from the date of its entry. After the lapse of such
time, and before it is barred by the statute of limita-
tions, a judgment may be enforced by action. The
revived judgment may also be enforced by motion
within five (5) years from the date of its entry and
thereafter by action before it is barred by the statute
of limitations.
Section 13. Property exempt from execution. —
Except as otherwise expressly provided by law, the
following property, and no other, shall be exempt
from execution:
(a) The judgment obligor's family home as provided
by law, or the homestead in which he resides,
and land necessarily used in connection there-
with;
(b) Ordinary tools and implements personally used
by him in his trade, employment, or livelihood;
(c) Three horses, or three cows, or three carabaos,
or other beasts of burden, such as the judgment
obligor may select necessarily used by him in his
ordinary occupation;
(d) His necessary clothing and articles for ordinary
personal use, excluding jewelry;
(e) Household furniture and utensils necessary for
housekeeping, and used for that purpose by the
judgment obligor and his family, such as the
judgment obligor may select, of a value not ex-
ceeding one hundred thousand pesos;
(f) Provisions for individual or family use sufficient
for four months;
(g) The professional libraries and equipment of judg-
es, lawyers, physicians, pharmacists, dentists,
engineers, surveyors, clergymen, teachers, and
other professionals, not exceeding three hundred
thousand pesos in value;
(h) One fishing boat and accessories not exceeding
the total value of one hundred thousand pesos
owned by a fisherman and by the lawful use of
which he earns his livelihood;
(i) So much of the salaries, wages, or earnings of
the judgment obligor for his personal services
within the four months preceding the levy as are
necessary for the support of his family;
(j) Lettered gravestones;
(k) Monies, benefits, privileges, or annuities accruing
or in any manner growing out of any life insur-
ance;
(l) The right to receive legal support, or money or
property obtained as such support, or any pen-
sion or gratuity from the Government;
(m) Properties specially exempted by law.
But no article or species of property mentioned in
this section shall be exempt from execution issued
upon a judgment recovered for its price or upon a
judgment of foreclosure of a mortgage thereon.
ARTICLE 2237. Insolvency shall be governed by special laws
insofar as they are not inconsistent with this Code.
Page 57 of 63
Assets of conjugal or ACP not among assets to be taken by as-
signee
ARTICLE 2238. So long as the conjugal partnership or absolute
community subsists, its property shall not be among the assets to
be taken possession of by the assignee for the payment of the
insolvent debtor’s obligations, except insofar as the latter have
redounded to the benefit of the family. If it is the husband who is
insolvent, the administration of the conjugal partnership or abso-
lute community may, by order of the court, be transferred to the
wife or to a third person other than the assignee.
ARTICLE 2239. If there is property, other than that mentioned in
the preceding article, owned by two or more persons, one of whom
is the insolvent debtor, his undivided share or interest therein shall
be among the assets to be taken possession of by the assignee
for the payment of the insolvent debtor’s obligations.
Property held in trust by insolvent excluded from insolvency pro-
ceeding
ARTICLE 2240. Property held by the insolvent debtor as a trustee
of an express or implied trust, shall be excluded from the insolven-
cy proceedings.
Preferred claims over specific movable
ARTICLE 2241. With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
(1)Duties, taxes and fees due thereon to the State or any subdivi-
sion thereof;
(2)Claims arising from misappropriation, breach of trust, or mal-
feasance by public officials committed in the performance of
their duties, on the movables, money or securities obtained by
them;
(3)Claims for the unpaid price of movables sold, on said movables,
so long as they are in the possession of the debtor, up to the
value of the same; and if the movable has been resold by the
debtor and the price is still unpaid, the lien may be enforced on
the price; this right is not lost by the immobilization of the thing
by destination, provided it has not lost its form, substance and
identity; neither is the right lost by the sale of the thing together
with other property for a lump sum, when the price thereof can
be determined proportionally;
(4)Credits guaranteed with a pledge so long as the things pledged
are in the hands of the creditor, or those guaranteed by a chattel
mortgage, upon the things pledged or mortgaged, up to the val-
ue thereof;
(5)Credits for the making, repair, safekeeping or preservation of
personal property, on the movable thus made, repaired, kept or
possessed;
(6)Claims for laborers’ wages, on the goods manufactured or the
work done;
(7)For expenses of salvage, upon the goods salvaged;
(8)Credits between the landlord and the tenant, arising from the
contract of tenancy on shares, on the share of each in the fruits
or harvest;
(9)Credits for transportation, upon the goods carried, for the price
of the contract and incidental expenses, until their delivery and
for thirty days thereafter;
(10)Credits for lodging and supplies usually furnished to travelers
by hotel keepers, on the movables belonging to the guest as
long as such movables are in the hotel, but not for money
loaned to the guests;
(11)Credits for seeds and expenses for cultivation and harvest
advanced to the debtor, upon the fruits harvested;
(12)Credits for rent for one year, upon the personal property of the
lessee existing on the immovable leased and on the fruits of the
same, but not on money or instruments of credit;
(13)Claims in favor of the depositor if the depositary has wrongfully
sold the thing deposited, upon the price of the sale.
In the foregoing cases, if the movables to which the lien or prefer-
ence attaches have been wrongfully taken, the creditor may de-
mand them from any possessor, within thirty days from the unlaw-
ful seizure.
Note: paid pro-rata; claiming over specific movable to
which there lien attaches; do not follow the order of prefer-
ence except for (1) duties and taxes
If there is deficiency after the government has been paid,
the creditors now move to be part of 2244 (ordinary claims)
with respect to other properties not impressed with liens
(free properties)
If there is deficiency after the government has been paid,
the government now move part of 2244 which shall be fol-
lowed according to the order enumerated therein. They are
not preferred anymore.
If the proceeds exceed the debts, the excess now moves
as part of the free properties in 2244.
Cases:
MAGDALENA C. DE BARRETO et al v. JOSE G. VILLANUEVA
et al.
G. R. No. L-14938, December 29, 1962, Reyes, J.B.L., J.
Under the Civil Code, only taxes enjoy absolute prefer-
ence. All the remaining thirteen classes of preferred creditors en-
joy no priority among themselves but must be paid pro rata – in
proportion to the amount of their respective credits. However, in
order to make this fully effective, the preferred creditors must nec-
essarily be convened and the import of their claims ascertained.
Application of the law demands that there must first be some pro-
ceedings where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, settlement of the dece-
dent’s estate or other similar liquidation proceedings.
Facts:
Rosario Cruzado sold all her rights, title and interest in a house
and lot to Pura Villanueva for P19,000. Villanueva paid P1,500 in
advance and executed a promissory note for the balance. Howev-
er, she only paid P5,000. Rosario Cruzado obtained a judgment
against Villanueva for the unpaid balance. However, Villanueva
was able to secure a clean certificate of title and mortgaged the
property to Magdalena de Barreto to secure a loan of P30,000.
The mortgage was duly recorded.
Villanueva defaulted on the mortgage loan in favor of de Barreto
so de Barreto foreclosed the mortgage in her favor, obtained
judgment and upon its finality, asked for execution. Cruzado filed a
motion for recognition of her ―vendor’s lien‖ invoking Articles 2242,
2243 and 2249 of the Civil Code on Preference of Credits. After
hearing, the lower court ordered her ―vendor’s lien‖ to be annotat-
ed at the back of the certificate of title, with the proviso that in case
of sale under the foreclosure decree the vendor's lien and the
mortgage credit of de Barretto should be paid pro rata from the
proceeds. This was affirmed by the Supreme Court, hence a mo-
tion for reconsideration.
De Barreto insists that the ―vendor’s lien‖ under the Civil Code can
only become effective in the event of the insolvency of the vendee
which is not present in this case.
Issue:
Whether the mortgagee’s right is superior to the unrecorded claim
of the vendor for the balance of the purchase price, rights and
interests over the mortgaged property.
Ruling:
Page 58 of 63
YES, the mortgagee’s right is superior to the unrecorded claim of
the vendor.
Under the Civil Code, only taxes enjoy absolute preference. All the
remaining thirteen classes of preferred creditors enjoy no priority
among themselves but must be paid pro rata – in proportion to the
amount of their respective credits. However, in order to make this
fully effective, the preferred creditors must necessarily be con-
vened and the import of their claims ascertained. Application of the
law demands that there must first be some proceedings where the
claims of all the preferred creditors may be bindingly adjudicated,
such as insolvency, settlement of the decedent’s estate or other
similar liquidation proceedings.
It becomes evident that one preferred creditor's third-party claim to
the proceeds of a foreclosure sale is not the proceeding contem-
plated by law for the enforcement of preferences under Art. 2242,
unless the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute be-
tween two creditors will not enable the Court to ascertain the pro-
rata dividend corresponding to each, because the rights of the
other creditors likewise enjoying preference under Art. 2242 can-
not be ascertained.
In the absence of insolvency proceedings (or other equivalent
general liquidation of the debtor's estate), the conflict between the
parties must be decided pursuant to the well-established principle
concerning registered lands; that a purchaser in good faith and for
value (as de Barreto is) takes registered property free from liens
and encumbrances other than statutory liens and those recorded
in the certificate of title. There being no insolvency or liquidation,
the claim of Cruzado as unpaid vendor, did not require the charac-
ter and rank of a statutory lien co-equal to the mortgagee's record-
ed encumbrance, and must remain subordinate to the latter.
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONOR A
ANG, respondents.
G.R. No. 108031, March 1, 1995, J.
Facts:
On 21 March 1977 private respondent Leonor A. Ang started em-
ployment as Executive Secretary with Tropical Philippines Wood
Industries, Inc. (TPWII), a corporation engaged in the manufacture
and sale of veneer, plywood and sawdust panel boards. In 1982
she was promoted to the position of Personnel Officer.
In September 1983 petitioner Development Bank of the Philip-
pines, as mortgagee of TPWII, foreclosed its plant facilities and
equipment. Nevertheless TPWII continued its business operations
interrupted only by brief shutdowns for the purpose of servicing its
plant facilities and equipment. In January 1986 petitioner took
possession of the foreclosed properties. From then on the compa-
ny ceased its operations. As a consequence private respondent
was on 15 April 1986 verbally terminated from the service.
On 14 December 1987 aggrieved by the termination of her em-
ployment, private respondent filed with the Labor Arbiter a com-
plaint for separation pay, 13th month pay, vacation and sick leave
pay, salaries and allowances against TPWII, its General Manager,
and petitioner.
After hearing the Labor Arbiter found TPWII primarily liable to pri-
vate respondent but only for her separation pay and vacation and
sick leave pay because her claims for unpaid wages and 13th
month pay were later paid after the complaint was filed. The Gen-
eral Manager was absolved of any liability. But with respect to
petitioner, it was held subsidiarily liable in the event the company
failed to satisfy the judgment. The Labor Arbiter rationalized that
the right of an employee to be paid benefits due him from the
properties of his employer is superior to the right of the latter's
mortgage, citing this Court's resolution in PNB v. Delta Motor
Workers Union.
On 16 November 1992 public respondent National Labor Relations
Commission affirmed the ruling of the Labor Arbiter.
Issue:
Whether public respondent committed grave abuse of discretion in
holding that Art. 110 of the Labor Code, as amended, which refers
to worker preference in case of bankruptcy or liquidation of an
employer's business is applicable to the present case notwith-
standing the absence of any formal declaration of bankruptcy or
judicial liquidation of TPWII.
Held:
Yes. The public respondent gravely abused its discretion in affirm-
ing the decision of the Labor Arbiter. Art. 110 should not be treated
apart from other laws but applied in conjunction with the pertinent
provisions of the Civil Code and the Insolvency Law to the extent
that piece-meal distribution of the assets of the debtor is avoided.
Art. 110, then prevailing, provides:
Art. 110. Worker preference in case of bankruptcy. — In the event
of bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for ser-
vices rendered during the period prior to the bankruptcy or liquida-
tion, any provision to the contrary notwithstanding. Unpaid wages
shall be paid in full before other creditors may establish any claim
to a share in the assets of the employer.
In the present case, there is as yet no declaration of bankruptcy
nor judicial liquidation of TPWII. Hence, it would be premature to
enforce the worker's preference.
The additional ratiocination of public respondent that "under Article
110 of the Labor Code complainant enjoys a preference of credit
over the properties of TPWII being held in possession by DBP," is
a dismal misconception of the nature of preference of credit, a
subject matter which we have already discussed in clear and sim-
ple terms and even distinguished from a lien in Development Bank
of the Philippines v. NLRC —
. . . A preference applies only to claims which do not attach to
specific properties. A lien creates a charge on a particular proper-
ty. The right of first preference as regards unpaid wages recog-
nized by Article 110 does not constitute a lien on the property of
the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a method
adopted to determine and specify the order in which credits should
be paid in the final distribution of the proceeds of the insolvent's
assets. It is a right to a first preference in the discharge of the
funds of the judgment debtor . . . In the words of Republic v. Peral-
ta, supra: Article 110 of the Labor Code does not purport to create
a lien in favor of workers or employees for unpaid wages either
upon all of the properties or upon any particular property owned by
their employer. Claims for unpaid wages do not therefore fall at all
within the category of specially preferred claims established under
Articles 2241 and 2242 of the Civil Code, except to the extent that
such claims for unpaid wages are already covered by Article 2241,
number 6: "claims for laborers: wages, on the goods manufactured
or the work done;" or by Article 2242, number 3, "claims of labor-
ers and other workers engaged in the construction reconstruction
or repair of buildings, canals and other works, upon said buildings,
canals and other works . . . . To the extent that claims for unpaid
wages fall outside the scope of Article 2241, number 6, and 22421
number 3, they would come within the ambit of the category of
ordinary preferred credits under Article 2244.
Note: Art. 110 only modifies preference under 2244 and not
the other provisions
The present controversy could have been easily settled by public
respondent had it referred to ample jurisprudence which already
Page 59 of 63
provides the solution. Stare decisions et non quiet movere. Once a
case is decided by this Court as the final arbiter of any justifiable
controversy one way, then another case involving exactly the
same point at issue should be decided in the same manner. Public
respondent had no choice on the matter. It could not have ruled
any other way. This Court having spoken in a string of cases
against public respondent, its duty is simply to obey judicial prece-
dents. Any further disregard, if not defiance, of our rulings will be
considered a ground to hold public respondent in contempt.
REPUBLIC OF THE PHILIPPINES, represented by the Bureau
of Customs and the Bureau of Internal Revenue v.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE
COURT OF FIRST INSTANCE OF MANILA, BRANCH XVII,
QUALITY TABACCO CORPORATION, FRANCISCO,
FEDERACION OBRERO DE LA INDUSTRIA TABAQUERA Y
OTROS TRABAJADORES DE FILIPINAS (FOITAF) USTC
EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO
G.R. No. L-56568 May 20, 1987, J. Feliciano
Facts:
The Republic of the Philippines seeks the review on certiorari of
the Order entitled "In the Matter of Voluntary Insolvency of Quality
Tobacco Corporation, Quality Tobacco Corporation, Petitioner,"
and of the Order dated 19 January 1981 of the same court denying
the motion for reconsideration of the earlier Order filed by the Bu-
reau of Internal Revenue and the Bureau of Customs for the Re-
public, in the CFI of Manila.
In its questioned Order of 17 November 1980, the trial court held
that the above-enumerated claims of USTC and FOITAF (hereaf-
ter collectively referred to as the "Unions") for separation pay of
their respective members embodied in final awards of the NLRC to
be preferred over the claims of the Bureau of Customs and the
Bureau of Internal Revenue.
The Solicitor General, in seeking the reversal of the questioned
Orders, argues that Article 110 of the Labor Code is not applicable
as it speaks of "wages," a term which he asserts does not include
the separation pay claimed by the Unions. "Separation pay," the
Solicitor General contends, is given to a laborer for a separation
from employment computed on the basis of the number of years
the laborer was employed by the employer; it is a form of penalty
or damage against the employer in favor of the employee for the
latter's dismissal or separation from service. ―
Article 97 (f) of the Labor Code defines "wages" in the following
terms:
Wage' paid to any employee shall mean the remuneration or earn-
ings, however designated, capable of being expressed in terms of
money, whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the same, which
is payable by an employer to an employee under a written or un-
written contract of employment for work done or to be done, or for
services rendered or to be rendered, and includes the fair and
reasonable value, as determined by the Secretary of Labor, of
board, lodging, or other facilities customarily furnished by the em-
ployer to the employee. 'Fair and reasonable value' shall not in-
clude any profit to the employer or to any person affiliated with the
employer.(emphasis supplied)
Issue:
Whether the claims of separation pay of their respective members
embodied in final awards of the NLRC were to be preferred over
the claims of the Bureau of Customs and the Bureau of Internal
Revenue
Ruling:
YES. We are unable to subscribe to the view urged by the Solicitor
General. We note, in this connection, that in Philippine Commer-
cial and Industrial Bank (PCIB) vs. National Mines and Allied
Workers Union, the Solicitor General took a different view and
there urged that the term "wages" under Article 110 of the Labor
Code may be regarded as embracing within its scope severance
pay or termination or separation pay. In PCIB, this Court agreed
with the position advanced by the Solicitor General. We see no
reason for overturning this particular position. We continue to be-
lieve that, for the specific purposes of Article 110 and in the con-
text of insolvency termination or separation pay is reasonably re-
garded as forming part of the remuneration or other money bene-
fits accruing to employees or workers by reason of their having
previously rendered services to their employer; as such, they fall
within the scope of "remuneration or earnings — for services ren-
dered or to be rendered — ." Liability for separation pay might
indeed have the effect of a penalty, so far as the employer is con-
cerned. So far as concerns the employees, however, separation
pay is additional remuneration to which they become entitled be-
cause, having previously rendered services, they are separated
from the employer's service. The relationship between separation
pay and services rendered is underscored by the fact that separa-
tion pay is measured by the amount (i.e., length) of the services
rendered. This construction is sustained both by the specific terms
of Article 110 and by the major purposes and basic policy embod-
ied in the Labor Code. 6 It is also the construction that is suggested
by Article 4 of the Labor Code which directs that doubts — assum-
ing that any substantial rather than merely frivolous doubts remain-
in the interpretation of the provisions of the labor Code and its
implementing rules and regulations shall be "resolved in favor of
labor."
The resolution of the issue of priority among the several claims
filed in the insolvency proceedings instituted by the Insolvent can-
not, however, rest on a reading of Article 110 of the labor Code
alone. Article 110 of the Labor Code, in determining the reach of
its terms, cannot be viewed in isolation. Rather, Article 110 must
be read in relation to the provisions of the Civil Code concerning
the classification, concurrence and preference of credits, which
provisions find particular application in insolvency proceedings
where the claims of all creditors, preferred or non-preferred, may
be adjudicated in a binding manner. It is thus important to begin by
outlining the scheme constituted by the provisions of the Civil
Code on this subject.
Those provisions may be seen to classify credits against a particu-
lar insolvent into three general categories, namely:
(a) special preferred credits listed in Arts. 2241 and 2242,
(b) ordinary preferred credits listed in Art. 2244; and
(c) common credits under Art. 2245.
Turning first to special preferred credits under Articles 2241 and
2242, it should be noted at once that these credits constitute liens
or encumbrances on the specific movable or immovable property
to which they relate. Article 2243 makes clear that these credits
"shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions governing
insolvency." It should be emphasized in this connection that "du-
ties, taxes and fees due [on specific movable property of the insol-
vent] to the State or any subdivision thereof" (Article 2241 [1]) and
"taxes due upon the [insolvent's] land or building (2242 [1])"stand
first in preference in respect of the particular movable or immova-
ble property to which the tax liens have attached. Article 2243 is
quite explicit: "[T]axes mentioned in number 1, Article 2241 and
number 1, Article 2242 shall first be satisfied. " The claims listed in
numbers 2 to 13 in Article 2241 and in numbers 2 to 10 in Articles
2242, all come after taxes in order of precedence; such claims
enjoy their privileged character as liens and may be paid only to
the extent that taxes have been paid from the proceeds of the
specific property involved (or from any other sources) and only in
respect of the remaining balance of such proceeds. What is more,
these other (non-tax) credits, although constituting liens attaching
to particular property, are not preferred one over another inter se.
Page 60 of 63
Provided tax liens shall have been satisfied, non-tax liens or spe-
cial preferred credits which subsist in respect of specific movable
or immovable property are to be treated on an equal basis and to
be satisfied concurrently and proportionately. Put succinctly, Arts.
2241 and 2242 jointly with Articles 2246 to 2249 establish a two-
tier order of preference. The first tier includes only taxes, duties
and fees due on specific movable or immovable property. All other
special preferred credits stand on the same second tier to be satis-
fied, pari passu and pro rata, out of any residual value of the spe-
cific property to which such other credits relate.
Credits which are specially preferred because they constitute
liens (tax or non-tax) in turn, take precedence over ordinary
preferred credits so far as concerns the property to which the
liens have attached. The specially preferred credits must be dis-
charged first out of the proceeds of the property to which they
relate, before ordinary preferred creditors may lay claim to any part
of such proceeds.
If the value of the specific property involved is greater than the
sum total of the tax liens and other specially preferred credits, the
residual value will form part of the "free property" of the insolvent
— i.e., property not impressed with liens by operation of Articles
2241 and 2242. If, on the other hand, the value of the specific
movable or immovable is less than the aggregate of the tax liens
and other specially preferred credits, the unsatisfied balance of the
tax liens and other such credits are to the treated as ordinary cred-
its under Article 2244 and to be paid in the order of preference
there set up.
In contrast with Articles 2241 and 2242, Article 2244 creates no
liens on determinate property which follow such property. What
Article 2244 creates are simply rights in favor of certain creditors to
have the cash and other assets of the insolvent applied in a certain
sequence or order of priority.
Only in respect of the insolvent's "free property" is an order of
priority established by Article 2244. In this sequence, certain taxes
and assessments also figure but these do not have the same kind
of overriding preference that Articles 2241 No. 1 and 2242 No. I
create for taxes which constituted liens on the taxpayer's property.
Under Article 2244,
(a) taxes and assessments due to the national govern-
ment, excluding those which result in tax liens under Articles 2241
No. 1 and 2242 No. 1 but including the balance thereof not satis-
fied out of the movable or immovable property to which such liens
attached, are ninth in priority;
(b) taxes and assessments due any province, excluding those
impressed as tax liens under Articles 2241 No. 1 and 2242 No. 1,
but including the balance thereof not satisfied out of the movable
or immovable property to which such liens attached, are tenth in
priority; and
(c) taxes and assessments due any city or municipali-
ty, excluding those impressed as tax liens under Articles 2241 No.
I and 2242 No. 2 but including the balance thereof not satisfied out
of the movable or immovable property to which such liens at-
tached, are eleventh in priority.
It is within the framework of the foregoing rules of the Civil Code
that the question of the relative priority of the claims of the Bureau
of Customs and the Bureau of Internal Revenue, on the one hand,
and of the claims of the Unions for separation pay of their mem-
bers, on the other hand, is to be resolved. A related vital issue is
what impact Article 110 of the labor Code has had on those provi-
sions of the Civil Code.
Note: Art. 110 of the Labor Code does NOT give abso-
lute preference over the laborers. It is the government
who still has the absolute preference. If there is a bal-
ance after paying the government, that’s the only time
Art. 110 may be applied.
_____________________________________________________
Preferred claims over specific immovable
ARTICLE 2242. With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and liens
shall be preferred, and shall constitute an encumbrance on the
immovable or real right:
(1)Taxes due upon the land or building;
(2)For the unpaid price of real property sold, upon the immovable
sold;
(3)Claims of laborers, masons, mechanics and other workmen, as
well as of architects, engineers and contractors, engaged in the
construction, reconstruction or repair of buildings, canals or oth-
er works, upon said buildings, canals or other works;
(4)Claims of furnishers of materials used in the construction, re-
construction, or repair of buildings, canals or other works, upon
said buildings, canals or other works;
(5)Mortgage credits recorded in the Registry of Property, upon the
real estate mortgaged;
(6)Expenses for the preservation or improvement of real property
when the law authorizes reimbursement, upon the immovable
preserved or improved;
(7)Credits annotated in the Registry of Property, in virtue of a judi-
cial order, by attachments or executions, upon the property af-
fected, and only as to later credits;
(8)Claims of co-heirs for warranty in the partition of an immovable
among them, upon the real property thus divided;
(9)Claims of donors or real property for pecuniary charges or other
conditions imposed upon the donee, upon the immovable do-
nated;
(10)Credits of insurers, upon the property insured, for the insur-
ance premium for two years.
Claims in art. 2241 and 2242 are considered pledges and mort-
gages under insolvency - taxes to be paid first (absolute prefer-
ence); #2 and onwards do not have any preference
ARTICLE 2243. The claims or credits enumerated in the two pre-
ceding articles shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of legal provi-
sions governing insolvency. Taxes mentioned in No. 1, article
2241, and No. 1, article 2242, shall first be satisfied.
Ordinary preferred credits - claims with respect to free property of
the insolvent; paid in order of preference
ARTICLE 2244. With reference to other property, real and person-
al, of the debtor, the following claims or credits shall be preferred
in the order named:
(1)Proper funeral expenses for the debtor, or children under his or
her parental authority who have no property of their own, when
approved by the court;
(2)Credits for services rendered the insolvent by employees, la-
borers, or household helpers for one year preceding the com-
mencement of the proceedings in insolvency;
(3)Expenses during the last illness of the debtor or of his or her
spouse and children under his or her parental authority, if they
have no property of their own;
(4)Compensation due the laborers or their dependents under laws
providing for indemnity for damages in cases of labor accident,
or illness resulting from the nature of the employment;
(5)Credits and advancements made to the debtor for support of
himself or herself, and family, during the last year preceding the
insolvency;
(6)Support during the insolvency proceedings, and for three
months thereafter;
(7)Fines and civil indemnification arising from a criminal offense;
(8)Legal expenses, and expenses incurred in the administration of
the insolvent’s estate for the common interest of the creditors,
when properly authorized and approved by the court;
(9)Taxes and assessments due the national government, other
than those mentioned in articles 2241, No. 1, and 2242, No. 1;
Page 61 of 63
(10)Taxes and assessments due any province, other than those
referred to in articles 2241, No. 1, and 2242, No. 1;
(11)Taxes and assessments due any city or municipality, other
than those indicated in articles 2241, No. 1, and 2242, No. 1;
(12)Damages for death or personal injuries caused by a quasi-
delict;
(13)Gifts due to public and private institutions of charity or benefi-
cence;
(14)Credits which, without special privilege, appear in (a) a public
instrument; or (b) in a final judgment, if they have been the sub-
ject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instru-
ments and of the judgments, respectively.
Common credits
ARTICLE 2245. Credits of any other kind or class, or by any other
right or title not comprised in the four preceding articles, shall en-
joy no preference.
R.A. 10142 - Financial Rehabilitation and Insolvency Act of
2010 (FRIA ACT)
Note: FRIA covers both test in determining insolvency -
1. Equity/Illiquidity Test - assets are not sufficient all ob-
ligations as they fall due
2. Balance Sheet - obligations are greater than their
assets
Suspension of payment under Insolvency law - applies
ONLY to natural person as debtor; remedy is available
Banks, insurance, government - not covered by FRIA Act
Remedies:
1. Rehabillitation - voluntary (debtor himseof file for or
involuntary
2. OCRA - among themselves, the creditors agree how
to distribute obligations
3. Liquidation - voluntary (Sec. 91) or involuntary (Sec.
94)
4. Suspension of payment - even if individual or natural,
if he is not a citizen, he is not covered by the FRIA
Act
_____________________________________________________
Order of preference of credits
ARTICLE 2246. Those credits which enjoy preference with respect
to specific movables, exclude all others to the extent of the value
of the personal property to which the preference refers.
ARTICLE 2247. If there are two or more credits with respect to the
same specific movable property, they shall be satisfied pro rata,
after the payment of duties, taxes and fees due the State or any
subdivision thereof.
ARTICLE 2248. Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the extent
of the value of the immovable or real right to which the preference
refers.
ARTICLE 2249. If there are two or more credits with respect to the
same specific real property or real rights, they shall be satisfied
pro rata, after the payment of the taxes and assessments upon the
immovable property or real right.
ARTICLE 2250. The excess, if any, after the payment of the cred-
its which enjoy preference with respect to specific property, real or
personal, shall be added to the free property which the debtor may
have, for the payment of the other credits.
ARTICLE 2251. Those credits which do not enjoy any preference
with respect to specific property, and those which enjoy prefer-
ence, as to the amount not paid, shall be satisfied according to the
following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid
pro rata regardless of dates.
_____________________________________________________
Bar Questions answered by Dean Paguirigan
2015
XVI.
Donna pledged a set of diamond ring and earrings to Jane for
P200,000.00 She was made to sign an agreement that if she can-
not pay her debt within six months, Jane could immediately appro-
priate the jewelry for herself. After six months, Donna failed to pay.
Jane then displayed the earrings and ring set in her jewelry shop
located in a mall. A buyer, Juana, bought the jewelry set for
P300,000.00.
a) Was the agreement which Donna signed with Jane valid? Ex-
plain with legal basis. (2%)
b) Can Donna redeem the jewelry set from Juana by paying the
amount she owed Jane to Juana? Explain with legal basis. (2%)
c) Give an example of a pledge created by operation of law. (2%)
SUGGESTED ANSWER:
a) appropriate the jewelry upon default of Donna is considered
pactum commissorium and it is considered void by law. (Article
2088)
b) No, Donna cannot redeem it from Juana because the pledge
contract is between her and Jane. Juana is not a party to the
pledge contract. (Article 1311, Civil Code)
c) One example of a pledge created by operation of law is the right
of the depositary to retain the thing deposited until the depositor
shall have paid him whatever may be due to the depositary by
reason of the deposit. (1994) Another is the right of the agent to
retain the thing which is the object of the agency until the principal
reimburses him the expenses incurred in the execution of the
agency. (Article 1914, Civil Code)
2016
VII.
Due to the continuous heavy rainfall, the major streets in Manila
became flooded. This compelled Cris to check-in at Square One
Hotel. As soon as Crisgot off from his Toyota Altis, the Hotel’s
parking attendant got the key of his car and gave him a valet park-
ing customer’s claim stub. The attendant parked his car at the
basement of the hotel. Early in the morning, Cris was informed by
the hotel manager that his car was carnapped. (4%)
(A) What contract, if any, was perfected between Cris and the
Hotel when Cris surrendered the key of his car to the Hotel’s park-
ing attendant?
(B) What is the liability, if any, of the Hotel for the loss of Cris’ car?
SUGGESTED ANSWER:
a) The contract between Cris and Square One Hotel is one of
necessary deposit. Deposit of effects made by travelers or guests
in hotels or inns is considered a necessary deposit. This includes
not only the personal effects brought inside the hotel premises but
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also vehicles or animals and articles which have been introduced
or placed in the annexes of the hotel.

b) In the case of Durban Apartments vs. Pioneer Insurance, the

Supreme Court held the hotel liable for the loss of the vehicle of
the guest after its valet parking attendant parked the vehicle in
front of a bank near the hotel premises. The court ruled that the
bank’s parking area became an annex of the hotel when the man-
agement of the bank allowed the hotel to park vehicles there on
the night in question. The contract of deposit was perfected when
the guest surrendered the keys to his vehicle to the parking at-
tendant and the hotel is under obligation of safely keeping and
returning it. Ultimately, Square One Hotel is liable for the loss of
the vehicle.

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