G.R. No.

L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee,
vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.
Formoso & Quimbo Law Office for plaintiff-appellee.
Serafin P. Rivera for defendants-appellants.

BIDIN, J.:
This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII
in Civil Case No. 78178 for collection of sum of money based on promissory notes
executed by the defendants-appellants in favor of plaintiff-appellee bank. The
dispositive portion of the appealed decision (Record on Appeal, p. 33) reads as follows:
WHEREFORE judgment is hereby rendered (a) sentencing defendants,
Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to
pay plaintiff the sum of P15,037.11 plus 12% interest per annum from
September 30, 1969 until fully paid, in payment of Promissory Notes No.
11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing
defendant Anastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74,
plus interest at 12% per annum from September 30, 1969 until fully paid,
in payment of Promissory Notes Nos. 11515 and 11699, plus the sum of
P500.00 an attorney's fees.
With Costs against defendants.
The facts of the case as found by the trial court are as follows:
On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly
and severally, executed in favor of plaintiff a Promissory Note (No. 11487)
for the sum of P10,420.00 payable in 120 days, or on August 25, 1966, at
12% interest per annum. Defendants failed to pay the said amount inspire
of repeated demands and the obligation as of September 30, 1969 stood
at P 15,137.11 including accrued interest and service charge.
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr.
(Father) and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two

Promissory Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00
respectively, payable in 120 days at 12% interest per annum. Father and
Son made a partial payment on the May 3, 1966 promissory Note but
none on the June 20, 1966 Promissory Note, leaving still an unpaid
balance of P8,934.74 as of September 30, 1969 including accrued interest
and service charge.
The three Promissory Notes stipulated that any interest due if not paid at
the end of every month shall be added to the total amount then due, the
whole amount to bear interest at the rate of 12% per annum until fully
paid; and in case of collection through an attorney-at-law, the makers
shall, jointly and severally, pay 10% of the amount over-due as attorney's
fees, which in no case shall be leas than P200.00.
It appears that on January 24, 1964, the Son executed in favor of plaintiff
a Deed of Assignment of Receivables from the Emergency Employment
Administration in the sum of P44,635.00. The Deed of Assignment
provided that it was for and in consideration of certain credits, loans,
overdrafts and other credit accommodations extended to defendants as
security for the payment of said sum and the interest thereon, and that
defendants do hereby remise, release and quitclaim all its rights, title, and
interest in and to the accounts receivables. Further.
(1) The title and right of possession to said accounts
receivable is to remain in the assignee, and it shall have the
right to collect the same from the debtor, and whatsoever the
Assignor does in connection with the collection of said
accounts, it agrees to do as agent and representative of the
Assignee and in trust for said Assignee ;
xxx xxx xxx
(6) The Assignor guarantees the existence and legality of
said accounts receivable, and the due and punctual payment
thereof unto the assignee, ... on demand, ... and further, that
Assignor warrants the solvency and credit worthiness of
each and every account.
(7) The Assignor does hereby guarantee the payment when
due on all sums payable under the contracts giving rise to
the accounts receivable ... including reasonable attorney's

fees in enforcing any rights against the debtors of the

assigned accounts receivable and will pay upon demand, the
entire unpaid balance of said contract in the event of nonpayment by the said debtors of any monthly sum at its due
date or of any other default by said debtors;
xxx xxx xxx
(9) ... This Assignment shall also stand as a continuing
guarantee for any and all whatsoever there is or in the future
there will be justly owing from the Assignor to the
Assignee ...
In their stipulations of Fact, it is admitted by the parties that plaintiff
extended loans to defendants on the basis and by reason of certain
contracts entered into by the defunct Emergency Employment
Administration (EEA) with defendants for the fabrication of fishing boats,
and that the Philippine Fisheries Commission succeeded the EEA after its
abolition; that non-payment of the notes was due to the failure of the
Commission to pay defendants after the latter had complied with their
contractual obligations; and that the President of plaintiff Bank took steps
to collect from the Commission, but no collection was effected.
For failure of defendants to pay the sums due on the Promissory Note, this
action was instituted on November 13, 1969, originally against the Father,
Son, and the latter's wife. Because the Father died, however, during the
pendency of the suit, the case as against him was dismiss under the
provisions of Section 21, Rule 3 of the Rules of Court. The action, then is
against defendants Son and his wife for the collection of the sum of P
15,037.11 on Promissory Note No. 14487; and against defendant Son for
the recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699,
plus interest on both amounts at 12% per annum from September 30,
1969 until fully paid, and 10% of the amounts due as attorney's fees.
Neither of the parties presented any testimonial evidence and submitted
the case for decision based on their Stipulations of Fact and on then,
documentary evidence.
The issues, as defined by the parties are: (1) whether or not plaintiff claim
is already considered paid by the Deed of Assign. judgment of
Receivables by the Son; and (2) whether or not it is plaintiff who should

directly sue the Philippine Fisheries Commission for collection.' (Record

on Appeal, p. 29- 32).
On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June
8, 1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which
was denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On
June 23, 1972, defendants filed with the lower court their notice of appeal together with
the appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the
Court of Appeals on August 22, 1972 (Record on Appeal, p. 42).
In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single
assignment of error, that is
THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL
REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN
VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION.
As the appeal involves a pure question of law, the Court of Appeals, in its resolution
promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record
on Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).
In the resolution of May 30, 1980, the First Division of this Court ordered that the case
be docketed and declared submitted for decision (Rollo, p. 33).
On March 7, 1988, considering the length of time that the case has been pending with
the Court and to determine whether supervening events may have rendered the case
moot and academic, the Court resolved (1) to require the parties to MOVE IN THE
PREMISES within thirty days from notice, and in case they fail to make the proper
manifestation within the required period, (2) to consider the case terminated and closed
with the entry of judgment accordingly made thereon (Rollo, p. 40).
On April 27, 1988, appellee moved for a resolution of the appeal review interposed by
defendants-appellants (Rollo, p. 41).
The major issues raised in this case are as follows: (1) whether or not the assignment of
receivables has the effect of payment of all the loans contracted by appellants from
appellee bank; and (2) whether or not appellee bank must first exhaust all legal
remedies against the Philippine Fisheries Commission before it can proceed against
appellants for collections of loan under the promissory notes which are plaintiffs bases
in the action for collection in Civil Case No. 78178.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as

the assignor, by a legal cause, such as sale, dation in payment, exchange or donation,
and without the need of the consent of the debtor, transfers his credit and its accessory
rights to another, known as the assignee, who acquires the power to enforce it to the
same extent as the assignor could have enforced it against the debtor. ... It may be in
the form of a sale, but at times it may constitute a dation in payment, such as when a
debtor, in order to obtain a release from his debt, assigns to his creditor a credit he has
against a third person, or it may constitute a donation as when it is by gratuitous title; or
it may even be merely by way of guaranty, as when the creditor gives as a collateral, to
secure his own debt in favor of the assignee, without transmitting ownership. The
character that it may assume determines its requisites and effects. its regulation, and
the capacity of the parties to execute it; and in every case, the obligations between
assignor and assignee will depend upon the judicial relation which is the basis of the
assignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. 5, pp. 165-166).
There is no question as to the validity of the assignment of receivables executed by
appellants in favor of appellee bank.
The issue is with regard to its legal effects.
I
It is evident that the assignment of receivables executed by appellants on January 24,
1964 did not transfer the ownership of the receivables to appellee bank and release
appellants from their loans with the bank incurred under promissory notes Nos.
11487,11515 and 11699.
The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended
to appellants by appellee bank, and as security for the payment of said sum and the
interest thereon; that appellants as assignors, remise, release, and quitclaim to
assignee bank all their rights, title and interest in and to the accounts receivable
assigned (lst paragraph). It was further stipulated that the assignment will also stand as
a continuing guaranty for future loans of appellants to appellee bank and
correspondingly the assignment shall also extend to all the accounts receivable;
appellants shall also obtain in the future, until the consideration on the loans secured by
appellants from appellee bank shall have been fully paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in

consideration of their indebtedness to appellee bank, not mere guaranty, in view of the
following provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto said
assignee all its rights, title and interest in the accounts receivable
described hereunder. (Emphasis supplied by appellants, first par., Deed of
Assignment).
... that the title and right of possession to said account receivable is to
remain in said assignee and it shall have the right to collect directly from
the debtor, and whatever the Assignor does in connection with the
collection of said accounts, it agrees to do so as agent and representative
of the Assignee and it trust for said Assignee ...(Ibid. par. 2 of Deed of
Assignment).' (Record on Appeal, p. 27)
The character of the transactions between the parties is not, however, determined by
the language used in the document but by their intention. Thus, the Court, quoting from
the American Jurisprudence (68 2d, Secured Transaction, Section 50) said:
The characters of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the form
of the transfer was. If it was intended to secure the payment of money, it
must be construed as a pledge. However, even though a transfer, if
regarded by itself, appellate to have been absolute, its object and
character might still be qualified and explained by a contemporaneous
writing declaring it to have been a deposit of the property as collateral
security. It has been Id that a transfer of property by the debtor to a
creditor, even if sufficient on its farm to make an absolute conveyance,
should be treated as a pledge if the debt continues in existence and is not
discharged by the transfer, and that accordingly, the use of the terms
ordinarily exporting conveyance, of absolute ownership will not be given
that effect in such a transaction if they are also commonly used in pledges
and mortgages and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and ambiguous language or
other circumstances excluding an intent to pledge. (Lopez v. Court of
Appeals, 114 SCRA 671 [1982]).
Definitely, the assignment of the receivables did not result from a sale transaction. It
cannot be said to have been constituted by virtue of a dation in payment for appellants'
loans with the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which

are the subject of the suit for collection in Civil Case No. 78178. At the time the deed of
assignment was executed, said loans were non-existent yet. The deed of assignment
was executed on January 24, 1964 (Exh. "G"), while promissory note No. 11487 is
dated April 25, 1966 (Exh. 'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'),
promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was a dation in
payment for P10,000.00, the amount of credit from appellee bank indicated in the deed
of assignment. At the time the assignment was executed, there was no obligation to be
extinguished except the amount of P10,000.00. Moreover, in order that an obligation
may be extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other (Article 1292, New Civil Code).
Obviously, the deed of assignment was intended as collateral security for the bank
loans of appellants, as a continuing guaranty for whatever sums would be owing by
defendants to plaintiff, as stated in stipulation No. 9 of the deed.
In case of doubt as to whether a transaction is a pledge or a dation in payment, the
presumption is in favor of pledge, the latter being the lesser transmission of rights and
interests (Lopez v. Court of Appeals, supra).
In one case, the assignments of rights, title and interest of the defendant in the
contracts of lease of two buildings as well as her rights, title and interest in the land on
which the buildings were constructed to secure an overdraft from a bank amounting to
P110,000.00 which was increased to P150,000.00, then to P165,000.00 was considered
by the Court to be documents of mortgage contracts inasmuch as they were executed
to guarantee the principal obligations of the defendant consisting of the overdrafts or the
indebtedness resulting therefrom. The Court ruled that an assignment to guarantee an
obligation is in effect a mortgage and not an absolute conveyance of title which confers
ownership on the assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
II
As to whether or not appellee bank must have to exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collection
of loans under their promissory notes, must also be answered in the negative.
The obligation of appellants under the promissory notes not having been released by
the assignment of receivables, appellants remain as the principal debtors of appellee
bank rather than mere guarantors. The deed of assignment merely guarantees said
obligations. That the guarantor cannot be compelled to pay the creditor unless the latter
has exhausted all the property of the debtor, and has resorted to all the legal remedies

against the debtor, under Article 2058 of the New Civil Code does not therefore apply to
them. It is of course of the essence of a contract of pledge or mortgage that when the
principal obligation becomes due, the things in which the pledge or mortgage consists
may be alienated for the payment to the creditor (Article 2087, New Civil Code). In the
instant case, appellants are both the principal debtors and the pledgors or mortgagors.
Resort to one is, therefore, resort to the other.
Appellee bank did try to collect on the pledged receivables. As the Emergency
Employment Agency (EEA) which issued the receivables had been abolished, the
collection had to be coursed through the Office of the President which disapproved the
same (Record on Appeal, p. 16). The receivable became virtually worthless leaving
appellants' loans from appellee bank unsecured. It is but proper that after their repeated
demands made on appellants for the settlement of their obligations, appellee bank
should proceed against appellants. It would be an exercise in futility to proceed against
a defunct office for the collection of the receivables pledged.
WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of
the trial court is affirmed in toto.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

G.R. No. L-5741

March 13, 1911

ESTANISLAUA ARENAS, ET AL., plaintiffs-appellees,

vs.
FAUSTO O. RAYMUNDO, defendant-appellant.
A.D. Gibbs, for appellant.
Gabriela La O, for appellees.
TORRES, J.:
This is an appeal field by the defendant from a judgment of conviction rendered by the Hon.
Judge Araullo.
On the date of August 31, 1908, the attorneys for the plaintiffs, Estanislaua Arenas and Julian La
O, brought suit against Fausto O. Raymundo, alleging, as a cause of action, that Estanislaua
Arenas was the owner and proprietor of the jewelry described below with the respective value
thereof:

Two gold tamborin rosaries, without bow or

reliquary at P40 each

One lady's comb for fastening the hair, made of

gold and silver, adorned with pearls of ordinary
size and many small pearls, one of which is
missing

One gold ring set with a diamond of ordinary

size

One gold bracelet with five small diamonds and

eight brillantitos de almendras

One pair of gold picaporte earrings with two

diamonds of ordinary size and two small ones

P80

80

1,000

700

1,100

The plaintiffs alleged that the said jewelry, during the last part of April or the beginning of May,
1908, was delivered to Elena de Vega to sell on commission, and that the latter, in turn, delivered
it to Conception Perello, likewise to sell on commission, but that Perello, instead of fulfilling her
trust, pledged the jewelry in the defendant's pawnshop, situated at No. 33 Calle de Ilaya, Tondo,
and appropriated to her own use the money thereby obtained; that on July 30, 1908, Conception
Perello was prosecuted for estafa, convicted, and the judgment became final; that the said
jewelry was then under the control and in the possession of the defendant, as a result of the
pledge by Perello, and that the former refused to deliver it to the plaintiffs, the owners thereof,
wherefore counsel for the plaintiffs asked that judgment be rendered sentencing the defendant to
make restitution of the said jewelry and to pay the costs.
In the affidavit presented by the attorney for the plaintiffs dated September 2, 1908, after a
statement and description of the jewelry mentioned, it is set forth that the defendant was
retaining it for the reason given in the complaint, and that it was not sequestrated for the purpose
of satisfying any tax or fine or by reason of any attachment issued in compliance with any
judgment rendered against the plaintiffs' property.
In discharge of the writ of seizure issued for the said jewelry on the 2nd of September, 1908,
aforementioned, the sheriff of this city made the return that he had, on the same date, delivered

one copy of the bond and another of the said writ to the defendant personally and, on the petition
and designation of the attorney for the plaintiffs, proceeded to seize the jewelry described in the
writ, taking it out of the defendant's control, and held it in his possession during the five days
prescribed by law.
On the 15th of the same month and year, five days having elapsed without the defendant's having
given bond before the court, the sheriff made delivery of all the jewelry described in the said
order to the attorney for the plaintiff to the latter's entire satisfaction, who with the sheriff signed
the return of the writ.
After the demurrer to the complaint had been overruled the defendant answered, setting forth that
he denied each and all of the allegations thereof which were not specifically admitted, explained,
or qualified, and as a special defense alleged that the jewelry, the subject matter of the complaint
was pledged on his pawnshop by Conception Perello, the widow of Pazos, as security for a loan
of P1,524, with the knowledge, consent, and mediation of Gabriel La O, a son of the plaintiffs, as
their agent, and that, in consequence thereof, the said plaintiffs were estopped from disavowing
the action of the said Perello; the defendant therefore prayed that the complaint be dismissed and
that the jewelry seized at the instance of the plaintiffs, or the amount of the loan made thereon,
together with the interest due, be returned to the defendant, with the costs of the suit against the
plaintiffs.
The case came up for hearing on March 17, 1909, and after the presentation of oral testimony by
both parties, the count, on June 23 of the same year, rendered judgment sentencing the defendant
to restore to the plaintiff spouses the jewelry described in the complaint, the right being reserved
to the defendant to institute his action against the proper party. The counsel for the defendant
excepted to this judgment, asked that the same be set aside, and a new trial granted. This motion
was denied, exceptions was taken by the appellant, and the proper bill of exceptions was duly
approved certified to, and forwarded to the clerk of this court.
This is an action for the replevin of certain jewelry delivered by its owner for sale on
commission, and pledged without his knowledge by Concepcion Perello in the pawnshop of the
defendant, Fausto O. Raymundo, who refuses to deliver the said jewelry unless first redeemed.
The said Concepcion Perello, who appropriated to herself the money derived from the pledging
of the jewels before mentioned, together with others, to the prejudice of their owner Estanislaua
Arenas, was prosecuted in the Court of First Instance of this City in cause No. 3955 and
sentenced on July 30, 1908, to the penalty of one year eight months and twenty-one days of
prision correccional, to restore to the offended party the jewelry specified in the complaint, or to
pay the value thereof, amounting to P8,660, or, in case of insolvency, to suffer the corresponding
subsidiary imprisonment, and to pay the costs. This judgment is attested by the certified copy
attached under letter D to folio 26 of the record of the proceedings in the case of the same
plaintiff against Antonio Matute the pledgee of the other jewelry also appropriated by the said
Concepcion Perello which record forms a part of the evidence in this cause.
Perello having pledged the jewelry in question to the defendant Raymundo, and not having
redeemed it by paying him the amount received, it follows that the convicted woman, now

serving the sentence imposed upon her, could not restore the jewelry as ordered in that judgment,
which has become final by the defendant's acquiescence.
Article 120 of the Penal Code prescribes:
The restitution of the thing itself must be made, if be in the possession of a third person,
who had acquired it in a legal manner, reserving, however, his action against the proper
person.
Restitution shall be made, even though the thing may be in the possession of a third
person, who had acquired it in a legal manner, reserving, however, his action against the
proper person.
This provision is not applicable to a case in which the third person has acquired the thing
in the manner and with the requisites established by law to make it unrecoverable.
The provisions contained in the first two paragraphs of the preinserted article are based on the
uncontrovertible principle of justice that the party injured through a crime has, as against all
others, a preferential right to be indemnified, or to have restored to him the thing of which he
was unduly deprived by criminal means.
In view of the harmonious relation between the different codes in force in these Islands, it is
natural and logical that the aforementioned provision of the Penal Code, based on the rule
established in article 17 of the same, to wit, that every person criminally liable for a crime or
misdemeanor is also civilly liable, should be in agreement and accordance with the provisions of
article 464 of the Civil Code which prescribes:
The possession of personal property, acquired in good faith, is equivalent to a title
thereto. However, the person who has lost personal property or has been illegally
deprived thereof may recover it from whoever possesses it.
If the possessor of personal property, lost or stolen, has acquired it in good faith at a
public sale, the owner can not recover it without reimbursing the price paid therefor.
Neither can the owner of things pledged in pawnshops, established with the authorization
of the Government, recover them, whosoever may be the person who pledged them,
without previously refunding to the institution the amount of the pledge and the interest
due.
With regard to things acquired on exchange, or at fairs or markets or from a merchant
legally established and usually employed in similar dealings, the provisions of the Code
of Commerce shall be observed.
On January 2, 1908, this court had occasion to decide, among other cases, two which were
entirely analogous to the present one. They were No. 3889, Varela vs. Matute, and No. 3890,
Varela vs. Finnick (9 Phil., 479, 482).

In the decisions in both cases it appears that Nicolasa Pascual received various jewels from
Josefa Varela to sell on commission and that, instead of fulfilling the trust or returning the jewels
to their owner, she pledged some of them in the pawnshop of Antonio Matute and others in that
of H.J. Finnick and appropriated to herself the amounts that she received, to the detriment of the
owner of the jewelry.
Tried estafa in cause No. 2429, the said Pascual was convicted and sentenced to the penalty of
one year and eleven months of prision correccional, to restore to Varela, the jewelry
appropriated, or to pay the value thereof, and, in case of insolvency, to subsidiary imprisonment;
this judgment became final, whereupon the defendant began to serve her sentence. The case just
cited is identical to that of Concepcion Perello.
Josefa Varela, in separate incidental proceedings, demanded the restitution or delivery of
possession of the said jewelry; the pledgees, the pawnbrokers, refused to comply with her
demand, alleging, among other reasons, that they were entitled to possession. The two cases were
duly tried, and the Court of First Instance pronounced judgment, supporting the plaintiff's claims
in each. Both cases were appealed by the defendants, Matute and Finnick, and this court affirmed
the judgments on the same grounds, with costs, and the decisions on appeal established the
following legal doctrines:
1. Crimes against property; criminal and civil liability. Where, in a proceeding
instituted by reason of a crime committed against property, the criminal liability of the
accused has been declared, it follows that he shall also be held civilly liable therefor,
because every person who is criminally responsible on account of a crime or
misdemeanor is also civilly liable.
2. Id.; Recovery of property unlawfully in possession. Whoever may have been
deprived this property in consequence of a crime is entitled to the recovery thereof, even
if such property is in the possession of a third party who acquired it by legal means other
than those expressly stated in article 464 of the Civil Code.
3. Personal property; title by possession. In order that the possession of personal
property may be considered as a title thereto it is indispensable that the same shall have
been acquired in good faith.
4. Id.; Ownership; prescription. The ownership of personal property prescribes in the
manner and within the time fixed by articles 1955 and 1962, in connection with article
464, of the Civil Code.
In the cause prosecuted against Perello, as also in the present suit, it was not proven that
Estanislaua Arenas authorized the former to pawn the jewelry given to her by Arenas to sell on
commission. Because of the mere fact of Perello's having been convicted and sentenced for
estafa, and for the very reason that she is now serving her sentence must be complied with, that
is, the jewelry misappropriated must be restored to its owner, inasmuch as it exists and has not
disappeared this restitution must be made, although the jewelry is found in the pawnshop of
Fausto O. Raymundo and the latter had acquired it by legal means. Raymundo however retains

his right to collect the amounts delivered upon the pledge, by bringing action against the proper
party. This finding is in accord with the provisions of the above article 120 of the Penal Code and
first paragraph of article 464 of the Civil Code.
The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other considerations,
the following:
The exception contained in paragraph 3 of said article is not applicable to the present case
because a pawnshop does not enjoy the privilege established by article 464 of the Civil
Code. The owner of the loan office of Finnick Brothers, notwithstanding the fact that he
acted in good faith, did not acquire the jewels at a public sale; it is not a question of
public property, securities, or other such effects, the transfer, sale, or disposal of which is
subject to the provisions of the Code of Commerce. Neither does a pawnshop enjoy the
privilege granted to a monte de piedad; therefore, Josefa Varela, who lost said jewels and
was deprived of the same in consequence of a crime, is entitled to the recovery thereof
from the pawnshop of Finnick Brothers, where they were pledged; the latter can not
lawfully refuse to comply with the provisions of article 120 of the Penal Code, as it is a
question of jewels which has been misappropriated by the commission of the crime of
estafa, and the execution of the sentence which orders the restitution of the jewels can not
be avoided because of the good faith with which the owner of the pawnshop acquired
them, inasmuch as they were delivered to the accused, who was not the owner nor
authorized to dispose of the same.
Even supposing that the defendant Raymundo had acted in good faith in accepting the pledge of
the jewelry in litigation, even then he would not be entitled to retain it until the owner thereof
reimburse him for the amount loaned to the embezzler, since the said owner of the jewelry, the
plaintiff, did not make any contract with the pledgee, that would obligate him to pay the amount
loaned to Perello, and the trial record does not disclose any evidence, even circumstantial, that
the plaintiff Arenas consented to or had knowledge of the pledging of her jewelry in the
pawnshop of the defendant.
For this reason, and because Conception Perello was not the legitimate owner of the jewelry
which she pledged to the defendant Raymundo, for a certain sum that she received from the latter
as a loan, the contract of pledge entered the jewelry so pawned can not serve as security for the
payment of the sum loaned, nor can the latter be collected out of the value of the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential requisites of the contracts of
pledge and of mortgage, that the thing pledged or mortgaged must belong to the person who
pledges or mortgages it. This essential requisite for the contract of pledge between Perello and
the defendant being absent as the former was not the owner of the jewelry given in pledge, the
contract is as devoid of value and force as if it had not been made, and as it was executed with
marked violation of an express provision of the law, it can not confer upon the defendant any
rights in the pledged jewelry, nor impose any obligation toward him on the part of the owner
thereof, since the latter was deprived of her possession by means of the illegal pledging of the
said jewelry, a criminal act.

Between the supposed good faith of the defendant Raymundo and the undisputed good faith of
the plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that the latter, after
being the victim of the embezzlement, should have to choose one of the two extremes of a
dilemma, both of which, without legal ground or reason, are injurious and prejudicial to her
interest and rights, that is, she must either lose her jewelry or pay a large sum received by the
embezzler as a loan from the defendant, when the plaintiff Arenas is not related to the latter by
any legal or contractual bond out of which legal obligations arise.
It is true that the plaintiffs' son, attorney Gabriel La O, intervened and gave his consent when the
Concepcion Perello pawned the jewelry in litigation with Fausto Raymundo for P1,524? In view
of the evidence offered by the trial record, the answer is, of course, in the negative.
The parents of the attorney Gabriel La O being surprised by the disagreeable news of the
disappearance of various jewels, amounting in value to more than P8,600, delivered to Elena
Vega for sale on commission and misappropriated by Conception Perello, who received them
from Vega for the same purpose, it is natural that the said attorney, acting in representation of his
parents and as an interested party, should have proceeded to ascertain the whereabouts of the
embezzled jewelry an to enter into negotiations with the pawnshop of Fausto O. Raymundo, in
whose possession he had finally learned were to be found a part of the embezzled jewels, as he
had been informed by the said Perello herself; and although, at first, at the commencement of his
investigations, he met with opposition on the part of the pledgee Raymundo, who objected to
showing him the jewels that he desired to see in order to ascertain whether they were those
embezzled and belonging to his mother, the plaintiff Arenas, thanks to the intervention of
attorney Chicote and to the fact that they succeeded in obtaining from the embezzler, among
other papers, the pawn ticket issued by Raymundo's pawnshop, Exhibit E, of the date of May 4,
1908, folio 19 of the record in the case against Matute, Gabriel La O succeeded in getting the
defendant to show him the jewelry described in the said ticket together with other jewels that did
not belong to La O's mother, that had been given the defendant by Ambrosia Capistrano,
Perello's agent, in pledge or security for a loan of P170.
Gabriel La O, continuing the search for other missing jewelry belonging to his mother, found that
Fausto O. Raymundo was in possession of it and had received it from the same embezzler as
security for a debt, although the defendant Raymundo would not exhibit it until he issued the
pawn tickets corresponding to such jewels; therefore, at Raymundo's request, Perello, by means
of the document Exhibit C, signed by herself and bearing date of June 10, 1908, folio 28 of the
record, authorized her son Ramon to get from the defendant, in her name, the pawn tickets of the
said other jewelry, for which such tickets had not yet been issued; Raymundo then wrote out the
tickets Exhibits L, LL, and M, all dated June 22, 1908, and found on folios 20, 21 and 22 of
the record of the aforesaid proceedings against Matute in the presence of the attorney Gabriel
La O, who kept the said three pawn tickets, after he had made sure that the jewels described
therein and which Raymundo, taking them out of his cabinet, exhibited to him at the time, were
among those embezzled from his mother.
So that, when the three aforementioned pawn tickets, Exhibits L, LL, and M, from the pawnshop
of the defendant were made out, the latter already, and for some time previous, had in his
possession as a pledge the jewelry described in them, and the plaintiffs' son naturally desiring to

recover his parent's jewelry, was satisfied for the time being with keeping the three pawn tickets
certifying that such jewelry was pawned to the defendant.
Moreover, the record discloses no proof that the attorney Gabriel La O consented to or took any
part in the delivery of the jewelry in question to the defendant as a pledge, and both the said
defendant, Raymundo, and the embezzler Perello, averred in their respective testimony that the
said attorney La O had no knowledge of and took no part in the pledging of the jewelry, and
Perello further stated that she had received all the money loaned to her by the defendant
Raymundo. (Folios 13 to 14, and 76 to 80 of the record in the case against Matute.)
The business of pawnshops, in exchange for the high and onerous interest which constitutes its
enormous profits, is always exposed to the contingency of receiving in pledge or security for the
loans, jewels and other articles that have been robbed, stolen, or embezzled from their legitimate
owners; and as the owner of the pawnshop accepts the same and asks for money on it, without
assuring himself whether such bearer is or is not the owner thereof, he can not, by such
procedure, expect from the law better and more preferential protection than the owner of the
jewels or other articles, who was deprived thereof by means of a crime and is entitled to be
excused by the courts.
Antonio Matute, the owner of another pawnshop, being convinced that he was wrong, refrained
from appealing from the judgment wherein he was sentenced to return, without redemption, to
the plaintiffs, another jewel of great value which had been pledged to him by the same Perello.
He undoubtedly had in mind some of the previous decisions of this court, one of which was
against himself.
For the foregoing reasons, whereby the errors attributed to the judgment of the Court of First
Instance have been discussed and decided upon, and the said judgment being in harmony with
the law, the evidence and the merits of the case, it is proper, in our opinion, to affirm the same, as
we hereby do, with the costs against the appellant. So ordered.
Arellano, C.J., and Mapa, J., concur.
Carson, Moreland, and Trent, JJ., concur in the result.
G.R. No. L-32116 April 2l, 1981
RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in
CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al.,
defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants,"

which affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the
herein private respondent Maxima Castro.
On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural
Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about
the loan with the bank and who supplied to the latter the personal data required for Castro's loan
application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00,
Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in
favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of
loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the
bank and had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150
square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of
Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a
notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419
would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory
notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was
scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was
subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No.
7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business
day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February
13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an
encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as
co-maker of the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and
Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No.
46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on
her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note
(Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time
of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full
payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of
the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the
discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a
quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by
T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and
cost.

In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with
damages, attorney's fees and costs. 2
The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent
Court of Appeals are as follows:
Spawning the present litigation are the facts contained in the following stipulation of facts
submitted by the parties themselves:
1. That the capacity and addresses of all the parties in this case are admitted .
2. That the plaintiff was the registered owner of a residential house and lot located at
Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty
(150) square meters, more or less, covered by T.C.T. No. 7419 of the Office of the
Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following documents are genuine:
a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7,
1959 in the amount of P3,000.00 attached as Annex A of this partial stipulation of facts;
b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural
Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial stipulation of
facts;
c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11,
1959, signed only by the defendants, Severino Valencia and Catalina Valencia, attached
as Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for
the amount of P3000.00, signed by the spouses Severino Valencia and Catalina Valencia
as borrowers, and plaintiff Maxima Castro, as a co-maker, attached as Annex D of this
partial stipulation of facts;
e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro,
in favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached
herein as Annex E of this partial stipulation of facts;
All the parties herein expressly reserved their right to present any evidence they may
desire on the circumstances regarding the execution of the above-mentioned documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a
notice of sheriff's sale, address to the plaintiff, dated February 13, 1961, announcing that
plaintiff's property covered by TCT No. 7419 of the Register of Deeds of the City of
Manila, would be sold at public auction on March 10, 1961 to satisfy the total obligation of
P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale
and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as
Annexes F and F-1, respectively, of this stipulation of facts;

5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and
Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the Sheriff of
Manila postponed the auction sale scheduled for March 10, 1961 for thirty (30) days and
the sheriff re-set the auction sale for April 10, 1961;
6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon
agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property
covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and
the corresponding certificate of sale was issued to him as per Annex G of this partial
stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of
Consolidation of Ownership, a copy of which is hereto attached as Annex H of this partial
stipulation of facts;
10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final
deed of sale in favor of the defendant, Arsenio Reyes, in the amount of P7,000.00, a copy
of which is attached as Annex I of this partial stipulation of facts;
11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title
No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title
No. 7419 which was in the name of plaintiff, Maxima Castro, which was cancelled;
12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per
T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds of
Manila and the same was annotated in the back of T.C.T. No. 67299 as per Annex J of
this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present additional evidence on matters
not covered by this partial stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be
approved and admitted by this Honorable Court.
As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the
statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow
who cannot read and write the English language; that she can speak the Pampango
dialect only; that she has only finished second grade (t.s.n., p. 4, December 11, 1964);
that in December 1959, she needed money in the amount of P3,000.00 to invest in the
business of the defendant spouses Valencia, who accompanied her to the defendant
bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank,
an employee handed to her several forms already prepared which she was asked to sign
on the places indicated, with no one explaining to her the nature and contents of the
documents; that she did not even receive a copy thereof; that she was given a check in

the amount of P2,882.85 which she delivered to defendant spouses; that sometime in
February 1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding
the extrajudicial foreclosure sale of her property; that it was then when she learned for
the first time that the mortgage indebtedness secured by the mortgage on her property
was P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was found that
the papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);
(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);
(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants
Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the
request of defendant spouses Valencia who needed more time within which to pay their
loan of P3,000.00 with the defendant bank; plaintiff claims that when she filed the
complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of
her loan of P3,000.00 with the defendant bank, plus interest at the rate of 12% per
annum up to April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager declared that sometime in
December, 1959, plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p
4, January 27, 1966). She wept, there to inquire if she could get a loan from the bank.
The claims he asked the amount and the purpose of the loan and the security to he given
and plaintiff said she would need P3.000.00 to be invested in a drugstore in which she
was a partner (t.s.n., p. 811. She offered as security for the loan her lot and house at
Carola St., Sampaloc, Manila, which was promptly investigated by the defendant bank's
inspector. Then a few days later, plaintiff came back to the bank with the wife of
defendant Valencia A date was allegedly set for plaintiff and the defendant spouses for
the processing of their application, but on the day fixed, plaintiff came without the
defendant spouses. She signed the application and the other papers pertinent to the loan
after she was interviewed by the manager of the defendant. After the application of
plaintiff was made, defendant spouses had their application for a loan also prepared and
signed (see Exh. 13). In his interview of plaintiff and defendant spouses, the manager of
the bank was able to gather that plaintiff was in joint venture with the defendant spouses
wherein she agreed to invest P3,000.00 as additional capital in the laboratory owned by
said spouses (t.s.n., pp. 16-17) 3
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First
Instance of Manila, the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;

(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the
amount thereof exceeds the sum of P3,000.00 representing the principal obligation of
plaintiff, plus the interest thereon at 12% per annum;
(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property
held on April 11, 1961, as well as all the process and actuations made in pursuance of or
in implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan,
Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of
April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of
Court be applied to the payment thereof;
(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes
the purchase price the latter paid for the mortgaged property at the public auction, as well
as reimburse him of all the expenses he has incurred relative to the sale thereof;
(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay
defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding
12% interest thereon per annum from December 11, 1960 until fully paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses
Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum
of P600.00 by way of attorney's fees, as well as costs.
In view of the conclusion that the court has thus reached, the counterclaims of defendant
Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby
dismissed, as a corollary
The Court further denies the motion of defendant Arsenio Reyes for an Order requiring
Maxima Castro to deposit rentals filed on November 16, 1963, resolution of which was
held in abeyance pending final determination of the case on the merits, also as a
consequence of the conclusion aforesaid. 4
Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The
motion having been denied, 6 they now come before this Court in the instant petition, with the following
Assignment of Errors, to wit:
I
THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF
THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR
AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK
DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR
COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL
CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING
THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.

II
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING
PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL
ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD
PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN
UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS
FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE
REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH
PETITIONER BANK.
IV
THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS
AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE
CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN
AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR
ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE PERPETRATION OF
SAID FRAUD WAS MADE POSSIBLE.
V
THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT
BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER
AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID
RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.
VI
THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING
UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE
ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE
THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF
FURTHER NOTICE THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly
affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect
respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount
of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed
as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage contract
(Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was obtained by fraud
perpetrated on her by the Valencias who had abused her confidence, taking advantage of her old age and

ignorance of her financial need. Respondent court added that "the mandate of fair play decrees that she
should be relieved of her obligation under the contract" pursuant to Articles 24 7 and 1332 8 of the Civil
Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage
contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her
personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the
fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the
spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded
that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect
Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent of
Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud against the Valencias is well
supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed final.
The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners'
contention that the decision was silent regarding the participation of the bank in the fraud is, therefore,
correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For
one, no claim was made on this in the lower court. For another, petitioners did not submit proof to support
its contention.
At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory
note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's
personal qualifications in order to secure its consent to the loan. This must be the reason which prompted
the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the
contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it
is in indicating the admission of petitioners that the bank committed mistake in giving its consent to the
contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias
both Castro and the bank committed mistake in giving their consents to the contracts. In other words,
substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and
the bank of the true qualifications of the loan applicants, it is evident that they would not have given their
consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.
We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage
contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be
invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a
participant thereto, such may however be invalidated on the ground of substantial mistake mutually

committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus,
in the case of Hill vs. Veloso, 10 this Court declared that a contract may be annulled on the ground of
vitiated consent if deceit by a third person, even without connivance or complicity with one of the
contracting parties, resulted in mutual error on the part of the parties to the contract.
Petitioners argued that the amended complaint fails to contain even a general averment of fraud or
mistake, and its mention in the prayer is definitely not a substantial compliance with the requirement of
Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the amended
complaint contained a particular averment of fraud against the Valencias in full compliance with the
provision of the Rules of Court. Although, the amended complaint made no mention of mistake being
incurred in by the bank and Castro, such mention is not essential in order that the promissory note
(Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to
the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere
consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred
in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory note
(Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6)
valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank should
suffer the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners'
negligence in the contracts has been aptly demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiffappellee to several interviews. If this were true why is it that her age was placed at 61
instead of 70; why was she described in the application (Exh. B-1-9) as drug
manufacturer when in fact she was not; why was it placed in the application that she has
income of P20,000.00 when according to plaintiff-appellee, she his not even given such
kind of information -the true fact being that she was being paid P1.20 per picul of the
sugarcane production in her hacienda and 500 cavans on the palay production. 11
From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving
its consent to the contracts. It apparently relied on representations made by the Valencia spouses when it
should have directly obtained the needed data from Castro who was the acknowledged owner of the
property offered as collateral. Moreover, considering Castro's personal circumstances her lack of
education, ignorance and old age she cannot be considered utterly neglectful for having been
defrauded. On the contrary, it is demanded of petitioners to exercise the highest order of care and
prudence in its business dealings with the Valencias considering that it is engaged in a banking business
a business affected with public interest. It should have ascertained Castro's awareness of what she was
signing or made her understand what obligations she was assuming, considering that she was giving
accommodation to, without any consideration from the Valencia spouses.
Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe
that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the

Valencias to act as her agent for one who clothes another with apparent authority as her agent is not
permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were
not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the
promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an
authority to the Valencia to borrow in her behalf, it should have required a special power of attorney
executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain
the notion, that the Valencia spouses were in any manner acting as an agent of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory
note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for
their own behalf. Considering however that for the loan in which the Valencias appeared as principal
borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should
have exercised due care and prudence by making proper inquiry if Castro's consent to the mortgage was
without any taint or defect. The possibility of her not knowing that she signed the promissory note (Exhibit
2) as co-maker with the Valencias and that her property was mortgaged to secure the two loans instead of
her own personal loan only, in view of her personal circumstances ignorance, lack of education and old
age should have placed the Bank on prudent inquiry to protect its interest and that of the public it
serves. With the recent occurrence of events that have supposedly affected adversely our banking
system, attributable to laxity in the conduct of bank business by its officials, the need of extreme caution
and prudence by said officials and employees in the discharge of their functions cannot be overemphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that
Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the
consignation was made without prior offer or tender of payment to the Bank, and it therefore, not valid. In
holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code,
respondent court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00
plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12% interest; that at
the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the
mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and
that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of the
deposit was attached to the record of the case, said Bank had not made any claim of such deposit, and
that therefore, Castro was right in thinking that it was futile and useless for her to make previous offer and
tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest.
Under the foregoing circumstances, the consignation made by Castro was valid. if not under the strict
provision of the law, under the more liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the
mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next
business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was
permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which
ordains:

Pretermission of holiday. Where the day, or the last day, for doing any act required or
permitted by law falls on a holiday, the act may be done on the next succeeding business
day.
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in
accordance with Section 9 of Act No. 3135, which provides:
Section 9. 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 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.
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last
day for doing any act required or permitted by law falls on a holiday," or when the last day of a given
period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the
government for an act to be done, as distinguished from a period of time within which an act should be
done, which may be on any day within that specified period. For example, if a party is required by law to
file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls
on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes the
trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof
is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day
or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date
fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business
day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No
pronouncement as to cost.
SO ORDERED.
Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

G.R. No. 3227

March 22, 1907

PEDRO ALCANTARA, plaintiff-appellee,

vs.
AMBROSIO ALINEA, ET AL., defendants-appellants.
S.D. Reyes for appellants.
J. Gerona for appellee.
TORRES, J.:
On the 13th day of March, 1905, the plaintiff filed a complaint in the Court of First Instance of
La Laguna, praying that judgment be rendered in his behalf ordering the defendants to de liver to

him the house and lot claimed, and to pay him in addition thereto as rent the sum of 8 pesos per
month from February of that year, and to pay the costs of the action; and the plaintiff alleged in
effect that on the 29th day of February, 1904, the defendants, Ambrosio Alinea and Eudosia
Belarmino, borrowed from him the sum of 480 pesos, payable in January of said year 1905 under
the agreement that if, at the expiration of the said period, said amount should not be paid it would
be understood that the house and lot, the house being constructed of strong materials, owned by
the said defendants and located in the town of San Pablo on the street of the same name,
Province of La Laguna, be considered as absolutely sold to the plaintiff for the said sum; that the
superficial extent and boundaries of said property are described in the complaint; and that,
notwithstanding that the time for the payment of said sum has expired and no payment has been
made, the defendants refuse to deliver to plaintiff the said property, openly violating that which
they contracted to do and depriving him to his loss of the rents which plaintiff should received,
the same counting from February, 1905.
The defendants, after the overruling of a demurrer to the complaint herein, answered denying
generally and specifically all the allegations contained in the complaint, except those which were
expressly admitted, and alleged that the amount claimed included the interest; and that the
principal borrowed was only 200 pesos and that the interest was 280 pesos, although in drawing
the document by mutual consent of the parties thereto the amount of indebtedness was made to
appear in the sum of 480 pesos; and that as their special defense defendants alleged that they
offered to pay the plaintiff the sum of 480 pesos, but the plaintiff had refused to accept the same,
therefore they persisted in making said offer and tender of payment, placing at the disposal of the
plaintiff the said 480 pesos first tendered; and defendants asked for the costs of action.
After having taken the evidence of both parties and attaching the documents presented in
evidence to the record, the judge on November 27, 1905, rendered a judgment ordering the
defendants to deliver to the plaintiff the house and lot, the object of this litigation, and to pay the
costs of the action, not making any finding upon the question of loss or damages by reason of the
absence of proof on these points. The defendants duly took exception to this decision, and asked
for a new trial of the case on the ground that the findings of the court below in its decision were
plainly contrary to law, which motion was overruled and from which ruling defendants also
excepted.
We have in this case a contract of loan and a promise of sale of a house and lot, the price of
which should be the amount loaned, if within a fixed period of time such amount should not be
paid by the debtor-vendor of the property to the creditor-vendee of same.
Either one of the contracts are perfectly legal and both are authorized respectively by articles
1451, 1740, and 1753, and those following, of the Civil Code. The fact that the parties have
agreed at the same time, in such a manner that the fulfillment of the promise of sale would
depend upon the nonpayment or return of the amount loaned, has not produced any charge in the

nature and legal conditions of either contract, or any essential defect which would tend to nullify
the same.
If the promise of sale is not vitiated because, according to the agreement between the parties
thereto, the price of the same is to be the amount loaned and not repaid, neither would the loan
be null or illegal, for the reason that the added agreement provides that in the event of failure of
payment the sale of property as agreed will take effect, the consideration being the amount
loaned and not paid. No article of the Civil Code, under the rules or regulations of which such
double contract was executed, prohibits expressly, or by inference from any of its provisions, that
an agreement could not be made in the form in which the same has been executed; on the
contrary, article 1278 of the aforesaid code provides that "contracts shall be binding, whatever
may be the form in which they may have been executed, provided the essential conditions
required for their validity exist." This legal prescription appears firmly sustained by the settled
practice of the courts.
The property, the sale of which was agreed to by the debtors, does not appear mortgaged in favor
of the creditor, because in order to constitute a valid mortgage it is indispensable that the
instrument be registered in the Register of Property, in accordance with article 1875 of the Civil
Code, and the document of contract, Exhibit A, does not constitute a mortgage, nor could it
possibly be a mortgage, for the reason of said document is not vested with the character and
conditions of a public instrument.
By the aforesaid document, Exhibit A, said property could not be pledged, not being personal
property, and notwithstanding the said double contract the debtor continued in possession thereof
and the said property has never been occupied by the creditor.
Neither was there ever nay contract of antichresis by reason of the said contract of loan, as is
provided in articles 1881 and those following of the Civil Code, inasmuch as the creditorplaintiff has never been in possession thereof, nor has he enjoyed the said property, nor for one
moment ever received its rents; therefore, there are no proper terms in law, taking into
consideration the terms of the conditions contained in the aforesaid contract, whereby this court
can find that the contract was null, and under no consideration whatever would it be just to apply
to the plaintiff articles 1859 and 1884 of the same code.
The contract ( pactum commissorium) referred to in Law 41, title 5, and law 12, title 12, of the
fifth Partida, and perhaps included in the prohibition and declaration of nullity expressed in
articles 1859 and 1884 of the Civil Code, indicates the existence of the contracts of mortgage or
of pledge or that of antichresis, none of which have coincided in the loan indicated herein.
It is a principle in law, invariably applied by the courts in the decisions of actions instituted in the
matter of compliance with obligations, that the will of the contracting parties is the law of

contracts and that a man obligates himself to that to which he promises to be bound, a principle
in accordance with Law 1, title 1, book 10 of the Novisima Recopilacion, and article 1091 of the
Civil Code. That which is agreed to in a contract is law between the parties, a doctrine
established, among others, in judgments of the supreme court of Spain of February 20, 1897, and
February 13, 1904.
It was agreed between plaintiff and defendants herein that if defendants should not pay the loan
of 480 pesos in January, 1905, the property belonging to the defendants and described in the
contract should remain sold for the aforesaid sum, and such agreement must be complied with,
inasmuch as there is no ground in law to oppose the compliance with that which has been agreed
upon, having been so acknowledged by the obligated parties.
The supreme court of Spain, applying the aforementioned laws of Spanish origin to a similar
case, establishes in its decision of January 16, 1872, the following legal doctrine:
Basing the complaint upon the obligation signed by the debtor, which judicially
recognized his signature; and after confessing to have received from the plaintiff a certain
amount, binding himself to return same to the satisfaction of the plaintiff within the term
of four years, or in case of default to transfer direct domain of the properties described in
the obligation and to execute the necessary sale; and the term having expired and the
aforesaid amount not having been paid, said plaintiff has his right free from impediment
to claim same against the heirs of the debtor.
The document of contract has been recognized by the defendant Alinea and by the witnesses who
signed same with him, being therefore an authentic and efficacious document, in accordance with
article 1225 of the Civil Code; and as the amount loaned has not been paid and continues in
possession of the debtor, it is only just that the promise of sale be carried into effect, and the
necessary instrument be executed by the vendees.
Therefore, by virtue of the reasons given above and accepting the findings given in the judgment
appealed from, we affirm the said judgment herein, with the costs against the appellants.
After expiration of twenty days from the date of the notification of this decision let judgment be
entered in accordance herewith and ten days thereafter let the case be remanded to the court from
whence it came for proper action. So ordered.
Arellano, C.J., Mapa, Johnson, and Tracey, JJ., concur.
G.R. No. 125055 October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.

MENDOZA, J.:
1

reversing, in toto,
the decision of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as the appellate
court's resolution of May 7, 1996 denying reconsideration.
This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court of Appeals

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private
respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the
following documents: (a) a promissory note, dated November 27, 1991, stating an interest charge of 4%
per month for six months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with
the improvements thereon; and (c) an undated deed of sale of the mortgaged property in favor of the
mortgagee, petitioner A. Francisco Realty. 2
The interest on the said loan was to be paid in four installments: half of the total amount agreed upon
(P900,000.00) to be paid in advance through a deduction from the proceeds of the loan, while the balance
to be paid monthly by means of checks post-dated March 27, April 27, and May 27, 1992. The promissory
note expressly provided that upon "failure of the MORTGAGOR (private respondents) to pay the interest
without prior arrangement with the MORTGAGEE (petitioner), full possession of the property will be
transferred and the deed of sale will be registered. 3 For this purpose, the owner's duplicate of TCT No.
58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered
the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in
lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco Realty. 4
Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13,
1992 for which they signed a promissory note which reads:
PROMISSORY NOTE
For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT
CORPORATION, the additional sum of Two Million Five Hundred Thousand Pesos
(P2,500,000.00) on or before April 27, 1992, with interest at the rate of four percent (4%)
a month until fully paid and if after the said date this note and/or the other promissory
note of P7.5 Million remains unpaid and/or unsettled, without any need for prior demand
or notification, I promise to vacate voluntarily and willfully and/or allow A.FRANCISCO
REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for their
exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro
Manila. 5
Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from
May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner filed the present action
for possession before the Regional Trial Court in Pasig City. 6
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the
realty as the undated deed of sale was executed by them merely as an additional security for the payment
of their loan. Furthermore, they claimed that they were not notified of the registration of the sale in favor of

petitioner A. Francisco Realty and that there was no interest then unpaid as they had in fact been paying
interest even subsequent to the registration of the sale. As an alternative defense, respondents
contended that the complaint was actually for ejectment and, therefore, the Regional Trial Court had no
jurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as
secured by petitioner and the issuance of a new title evidencing their ownership of the property. 7
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which
reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is hereby
rendered declaring as legal and valid, the right of ownership of A. Francisco Realty Find
Development Corporation, over the property subject of this case and now registered in its
name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated
at No. 56 Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further
committing acts of dispossession or from withholding possession from plaintiff of the said
property as herein described and specified.
Claim for damages in all its forms, however, including attorney's fees, are hereby denied,
no competent proofs having been adduced on record, in support thereof. 8
Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and
dismissed the complaint against them. The appellate court ruled that the Regional Trial Court had no
jurisdiction over the case because it was actually an action for unlawful detainer which is exclusively
cognizable by municipal trial courts. Furthermore, it ruled that, even presuming jurisdiction of the trial
court, the deed of sale was void for being in fact a pactum commissorium which is prohibited by Art. 2088
of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the
motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the
following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY
THE PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE
CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER ARTICLE 2088
OF THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as
contra-distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of
Court, an action for unlawful detainer which falls under the exclusive jurisdiction of the
Metropolitan or Municipal Trial Courts, is defined as withholding from by a person from

another for not more than one year, the possession of the land or building to which the
latter is entitled after the expiration or termination of the supposed rights to hold
possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa, 81 Phil. 54;
Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful
detainer within the expiration of the 1 year period, the case may still be filed under the
plenary action to recover possession by accion publiciana before the Court of First
Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain
language, the case at bar is a legitimate ejectment case filed within the 1 year period
from the jurisdictional demand to vacate. Thus, the Regional Trial Court has no
jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial
Courts are vested with the exclusive original jurisdiction over forcible entry and unlawful
detainer case. (Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9
We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a
possessory action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the
first is limited to the question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms
of an ejectment suit that may be filed to recover possession of real property. Aside from
the summary action of ejectment, accion publiciana or the plenary action to recover the
right of possession and accion reivindicatoria or the action to recover ownership which
includes recovery of possession, make up the three kinds of actions to judicially recover
possession.
Illegal detainer consists in withholding by a person from another of the possession of a
land or building to which the latter is entitled after the expiration or termination of the
former's right to hold possession by virtue of a contract, express or implied. An ejectment
suit is brought before the proper inferior court to recover physical possession only or
possession de facto and not possession de jure, where dispossession has lasted for not
more than one year. Forcible entry and unlawful detainer are quieting processes and the
one-year time bar to the suit is in pursuance of the summary nature of the action. The use
of summary procedure in ejectment cases is intended to provide an expeditious means of
protecting actual possession or right to possession of the property. They are not
processes to determine the actual title to an estate. If at all, inferior courts are
empowered to rule on the question of ownership raised by the defendant in such suits,
only to resolve the issue of possession. Its determination on the ownership issue is,
however, not conclusive. 10
The allegations in both the original and the amended complaints of petitioner before the trial court clearly
raise issues involving more than the question of possession, to wit: (a) the validity of the Transfer of
ownership to petitioner; (b) the alleged new liability of private respondents for P400,000.00 a month from
the time petitioner made its demand on them to vacate; and (c) the alleged continuing liability of private
respondents under both loans to pay interest and surcharges on such. As petitioner A. Francisco Realty
alleged in its amended complaint:
5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the
defendant spouses agreed to execute a Deed of Mortgage over the property with the
express condition that if and when they fail to pay monthly interest or any infringement

thereof they agreed to convert the mortgage into a Deed of Absolute Sale in favor of the
plaintiff by executing Deed of Sale thereto, copy of which is hereto attached and
incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and
transfer to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale
together with the original owner's copy of Transfer Certificate of Title No. 58748 of the
Registry of Rizal, copy of which is hereto attached and made an integral part herein as
Annex "B";
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5
Million with the same condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per
agreement of the parties, plaintiff recorded and registered the Absolute Deed of Sale in
its favor on and was issued Transfer Certificate of Title No. PT-85569, copy of which is
hereto attached and incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the
plaintiff, copy of which is hereto attached and incorporated herein as Annex "C", plaintiff
demanded the surrender of the possession of the above-described parcel of land
together with the improvements thereon, but defendants failed and refused to surrender
the same to the plaintiff without justifiable reasons thereto; Neither did the defendants pay
the interest of 4% a month from May, 1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail
to pay the interest due and that the Deed of Sale be registered in favor of plaintiff, the
defendants shall pay a monthly rental of P400,000.00 a month until they vacate the
premises, and that if they still fail to pay as they are still failing to pay the amount of
P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical
possession of the said property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved
more than a simple claim for the immediate possession of the subject property. Such issues range across
the full scope of rights of the respective parties under their contractual arrangements. As held in an
analogous case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of
Hagonoy, Bulacan extended far beyond the issues generally involved in unlawful detainer
suits. The litigants therein did not raise merely the question of who among them was
entitled to the possession of the fishpond of Federico Suntay. For all judicial purposes,
they likewise prayed of the court to rule on their respective rights under the various
contractual documents their respective deeds of lease, the deed of assignment and
the promissory note upon which they predicate their claims to the possession of the
said fishpond. In other words, they gave the court no alternative but to rule on the validity
or nullity of the above documents. Clearly, the case was converted into the determination
of the nature of the proceedings from a mere detainer suit to one that is "incapable of

pecuniary estimation" and thus beyond the legitimate authority of the Justice of the Peace
Court to rule on. 12
Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of
petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here on the validity
of the said title.
A counterclaim is considered a complaint, only this time, it is the original defendant who
becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same
footing and is to be tested by the same rules as if it were an independent action. Hence,
the same rules on jurisdiction in an independent action apply to a counterclaim (Vivar v.
Vivar, 8 SCRA 847 (1963); Calo v. Ajar International, Inc. v. 22 SCRA 996 (1968); Javier
v. Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason, Philippine Courts and
Their Jurisdictions, 1993 ed., p. 203). 13
On the second issue, the Court of Appeals held that, even "on the assumption that the trial court has
jurisdiction over the instant case," petitioner's action could not succeed because the deed of sale on
which it was based was void, being in the nature of a pactum commissorium prohibited by Art. 2088 of the
Civil Code which provides:
Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage,
or dispose of them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies,
however, that the promissory notes contain a pactum commissorium. It contends that
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the
deed of mortgage providing for the automatic conveyance of the mortgaged property in
case of the failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54
Phil. 361). A pactum commissorium is a forfeiture clause in a deed of mortgage
(Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641;
Report of the Code Commission, 156).
Thus, before Article 2088 can find application herein, the subject deed of mortgage must
be scrutinized to determine if it contains such a provision giving the creditor the right "to
appropriate the things given by way of mortgage without following the procedure
prescribed by law for the foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN
SHORT, THE PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE
DEED ITSELF. 14
The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion
of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust, no deed of
mortgage was expressly executed between the parties in that case: Nevertheless, this Court ruled that an
agreement whereby property held in trust was ceded to the trustee upon failure of the beneficiary to pay
his debt to the former as secured by the said property was void for being a pactum commissorium. Itwas
there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be
"considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes,
must then be construed as tantamount to a pactum commissorium which is expressly
prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation of
the property by Valdez in the event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondent's manifestations, all the elements of a pactum
commissorium were present: there was a creditor-debtor relationship between the
parties; the property was used as security for the loan; and, there was automatic
appropriation by respondent of Pulong Maulap in case of default of petitioner. 16
Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be
pacto de retro sales but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of the circumstances
enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract of sale
with right to repurchase an equitable mortgage. This is so because pacto de retro sales
with the stringent and onerous effects that accompany them are not favored. In case of
doubt, a contract purporting to be a sale with the right to repurchase shall be construed
as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that
complete and absolute title shall be vested on the vendee should the vendors fail to
redeem the property on the specified date. Such stipulation that the ownership of the
property would automatically pass to the vendee in case no redemption was effected
within the stipulated period is void for being a pactum commissorium which enables the
mortgagee to acquire ownership of the mortgaged property without need of foreclosure.
Its insertion in the contract is an avowal of the intention to mortgage rather that to sell the
property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of registering the
mortgaged property in his own name upon the mortgagor's failure to redeem the property amounted to
the exercise of the privilege of a mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a
mere mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the
mortgagor. The mortgagee, however, may recover the loan, although the mortgage
document evidencing the loan was nonregistrable being a purely private instrument.
Failure of mortgagor to redeem the property does not automatically vest ownership of the
property to the mortgagee, which would grant the latter the right to appropriate the thing
mortgaged or dispose of it. This violates the provision of Article 2088 of the New Civil
Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure
to redeem the property would to a pactum commissorium which is against good morals
and public policy. 19

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent
spouses to pay interest, ownership of the property would be automatically transferred to petitioner A.
Francisco Realty and the deed of sale in its favor would be registered, are in substance a pactum
commissorium. They embody the two elements of pactum commissorium as laid down in Uy Tong v. Court
of Appeals, 20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of
the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgagee, or dispose of the same. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist:
(1) that there should be a pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal obligation; and (2) that
there should be a stipulation for an automatic appropriation by the creditor of the thing
pledged or mortgaged in the event of non-payment of the principal obligation within the
stipulated period. 21
The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A.
Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared
void, as prayed for by respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioner's
complaint against respondent spouses on the ground that the stipulations in the promissory notes are
void for being a pactum commissorium, but REVERSED insofar as it ruled that the trial court had no
jurisdiction over this case. The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No.
PT-85569 issued to petitioner and ISSUE a new one in the name of respondent spouses.
SO ORDERED.
Melo, Puno and Martinez, JJ., concur.

G.R. No. L-28658 October 18, 1979

VICENTE C. REYES, applicant-appellee,
vs.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA,
AURELIO SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA
SANTOS, oppositors-appellants.

DE CASTRO, J.:

Appeal from the decision dated December 29, 1966 of the Court of First Instance of
Rizal Branch 1, Pasig, which declared applicant Vicente Reyes the true and rightful
owner of the land covered by Plan Psu-189753 and ordered the registration of his title
thereto.
On January 3, 1961, Vicente Reyes filed an application for registration of his title to a
parcel of land situated in Antipolo, Rizal and covered by Plan Psu-189753 of the Bureau
of Lands. In his application, he declared that he acquired the land by inheritance from
his father who died sometime in 1944. Applicant is one of the heirs of the deceased
Vicente Reyes Sr. but the other heirs executed a deed of quit claim in favor of the
applicant.
The notice of initial hearing was published in the Official Gazette, and a copy thereof
was posted in a conspicuous place in the land in question and in the municipal building
of Antipolo, Rizal. An opposition was filed by the Director of Lands, Francisco Sierra and
Emilio Sierra. An Order of General Default was issued on June 28, 1962. A motion to set
aside an interlocutory default order was filed by Alejandra, Felimon, Aurelio, Apolonio,
Constancio, Cirilo, all surnamed Sierra and Antonia Santos, thru counsel, and the trial
court issued an Order on February 4, 1966 amending the general order of default so as
to include the aforementioned movants as oppositors.
The case was set for hearing, and after trial the court rendered a decision, the
dispositive portion of which reads as follows:
IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente
Reyes the true and rightful owner of the land covered by Plan, Psu189753 and orders the registration of his title thereto, provided that the
title to be issued shall be subject to a public easement of right of-way over
a 2.00 meter-wide strip of the land along Lucay Street for the latter's
widening and improvement.
As soon as this decision is final let, the corresponding degree be issued in
favor of VICENTE REYES, widower, Pilipino, of legal age and resident of
1851 P. Guevarra Street, Santa Cruz, Manila. (P. 25, Record on Appeal).
Oppositors appealed from the aforesaid decision, with the following assignment of
errors:
I

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT

ARTICLES 1134 AND 1137 OF THE NEW CIVIL CODE ARE
APPLICABLE TO THIS INSTANT CASE ALTHOUGH THERE WAS NO
FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST
BIDDER.
II
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
APPLICANT-APPELLEE AND HIS PREDECESSOR-IN-INTEREST HAD
BEEN IN CONSTRUCTIVE POSSESSION OF THE LAND FROM APRIL
19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT THAT
THEY HAD PAID THE REALTY TAXES.
III
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
BECAUSE OPPOSITORS-APPELLANTS AND THEIR PREDECESSORSIN-INTEREST HAD NOT TAKEN ANY ACTIVE INTEREST TO PAY
REALTY TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND
HIS PREDECESSOR-IN-INTEREST THAT PAID THE REALTY 'TAXES
FROM THE SAME PERIOD, THIS CONSTITUTES STRONG
CORROBORATING EVIDENCE OF APPLICANT'S ADVERSE
POSSESSION.
IV
THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT
DOCUMENT EXH. "D" EXECUTED BY BASILIA BELTRAN IN 1926 WAS
ALREADY A CONVEYANCE OF THE LAND I N QUESTION TO VICENTE
REYES AND THE FAILURE OF BASILIA BELTRAN AND HER
CHILDREN TO REDEEM THE SAME, COULD BE CONSIDERED AS IF
THE LAND HAD ALREADY BEEN SOLD TO HIM. (p. 2 1, Rollo.)
The land applied for was originally owned by Basilia Beltran's parents, and upon their
death in 1894, Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow,
borrowed from applicant's father, Vicente Reyes, Sr. the amount of P100.00 and
secured the loan with the piece of land in question, AS evidenced by exhibit "D" quoted
hereunder:
SA KAALAMAN NANG LAHAT NA BUMASA AT

NAKAKITA NITONG KASULATAN:

Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan
ito, bilang katibayan nang pag papahintulot sa aming Ina na si Bacilia
Beltran na ipananagutan kay G. Vicente Reyes sa inutang ha halagang
isang daan piso (P100.00) na walang anopamang pakinabang; ang isang
lagay na lupa sa kallehon Sukay, Antipolo, Rizal, naliligiran nang mga
lupang may titulo Torrents, expendientes Nos. 770, 1831, lote 1, 645 at
1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y
aring naiwan ng ama naming namatay na si Melecio Sierra.
Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing
pag-aaral' o lupa wala kaming kinalaman, sapagkat ipinauubaya nang
lubusan sa arming Ina ang kapamahalaan.
Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap
nang saksing magpapatotoo.
Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.
Lagda
ni
Bacilia
Beltran
Gregor
io
Sierra
Saksi:
------------------------------------------------Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes
up to the time of his death in 1944, after which, his children continued paying the taxes.
Basilia Beltran died in 1938 before Reyes could recover from the loan.

Applicant, in seeking the registration of the land, relied on his belief that the property
belongs to his father who bought the same from Basilia Beltran, as borne out by his
testimony during the trial on direct examination.
Q. Mr. Reyes, do you claim to be the owner of this property included or described in your
application?
A Yes, sir.
Q How did you acquire this property'?
A. Since 1926 we were the ones paying the land taxes.
Q. From whom did you acquire this property?
A. Basilia Beltran.
Q. Do you mean to say that you yourself bought this property.
A. My father was the one who bought the property.
Q. What is the name of your father?
A. Vicente C. Reyes.
Q. Where is he now?
A. He is already dead.
Q. Can you inform this Honorable Court, if you know, how your father acquired this property?
A. Since 1926 my father bought that land.
Q. Was that transaction evidenced by a document?
A. Yes, there is a document.
Q. From whom did your father allegedly purchase the property?
A. Basilia Beltran.
From the above-quoted testimony of applicant, it is evident that he considered the document marked Exhibit "D as contract of Sale and not
as a mortgage. Oppositors contended that the words "isinangla," "na ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla
o ipagbili," etc., manifest that the document should be treated as a mortgage, antichresis, or pactum commission and not as an absolute sale
or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants).
The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the time of the execution of the contract
must prevail, that is, the borrowing and lending of money with security. The use of the word Debt (utang) in an agreement helps to point out
that the transaction was intended to be a loan with mortgage, because the term "utang" implies the existence of a creditor-debtor
relationship. The ' Court has invariably upheld the validity of an agreement or understanding whereby the lender of money has taken a deed
to the land as security for repayment of the loan. Thus:
The fact that the real transaction between the parties was a borrowing and lending, will, whenever, or however, it may
appear, show that a deed, absolute on its face was intended as a security for money; and whenever it can be

ascertained to be a security for money, it is only a mortgage, however artfully it may be disguised. (Villa vs. Santiago,
38 Phil. 163).
The whole case really turns on the question of whether the written instrument in controversy was a mortgage or a
conditional sale. ... The real intention of the parties at the time the written instrument was made must concern in the
interpretation given to it by the courts. ... The correct test, where it can be applied, is the continued existence of a debt
or liability between the parties. If such exists, the conveyance may be held to be merely a security for the debt or an
indemnity against the liability. (Cuyugan vs. Santos, 34 Phil. 112).
The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3, paragraphs 446-447 which are likewise applicable
to the facts of the case at bar:
446. To show that instruments apparently absolute are only securities. ... It is an established doctrine that a court of
equity will treat a deed, absolute in form, as a mortgage, when it is executed as security for loan of money, The court
looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security and not
of sale, it will give effect to the actual contract of the parties.
447. Same-Real intention of the parties to be ascertained ... As we have shown in the preceding section, the intention
of the parties must govern and it matters not what peculiar form the transaction may have taken. The inquiry always is,
Was a security for the loan of money or other property intended? ... A debt owing to the mortgagee, or a liability
incurred for the grantor, either pre-existing or created at the time the deed is made, is essential to give the deed the
character of a mortgage. The relation of debtor and creditor must appear. The existence of the debt is one on the
tests. ... In construing the deed to be a mortgage, its character as such must have existed from its very inception, created at the time the conveyance was made.
The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil. 781, quoting 3 Pomeroy's Equity
Jurisdiction, Section .1195, wherein it was stated:
... The doctrine has been firmly established from an early day that when the character of a mortgage has attached at
the commencement of the transaction, so that the instrument, whatever be its form, is regarded in equity as a
mortgage, that character of mortgage must and will always continue. If the instrument is in its essence a mortgage, the
parties cannot by any stipulations, however express and positive, render it anything but a mortgage or deprive it of the
essential attributes belonging to a mortgage in equity.
Concerning the legal effects of such contract, Pomeroy observes:
... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are clothed with all the rights, are
subject to all liabilities, and are entitled to all the remedies of ordinary mortgagors and mortgagees. The grantee may
maintain an action for the foreclosure of the grantor equity of redemption; the grantor may maintain an action to redeem
and to compel a reconvayance upon his payment of the debt secured. If the grantee goes into possession, and as such
is liable to account for the rents and profits.
Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere mortgagee, and ownership of the thing mortgaged
is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan, although the mortgage document evidencing
the loan was non-registrable being a purely private instrument. Failure of mortgagor to redeem the property does not automatically vest
ownership of the property to the mortgagee, which would grant the latter the right to appropriate the thing mortgaged or dispose of it. This
violates the provision of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any stipulation to
the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would amount to a pactum
commissorium which is against good morals and public policy.
In declaring applicant as the "true and rightful owner of the land in question," the trial court held that applicant and his predecessor-ininterest acquired ownership over the property by means of prescription having been in constructive possession of the land applied for since
1926, applying Arts, 1134 and 1137 of the New Civil Code:
Art. 1134. - Ownership and other real rights over immovable property are acquired by ordinary prescription through
possession of ten years.

Art. 1137. - Ownership and other real rights over immovables also prescribe through uninterrupted adverse possession
thereof for thirty years, without need of title or good faith.
Applicant in his testimony on cross-examination, admitted that he and his father did not take possession of the property but only made use of
the same for the purpose of spending vacation there, which practice they discontinued for the last 23 years. Possession of the property must.
be in the concept of an owner. This is a fundamental principle of the law of prescription in this jurisdiction. In the case at bar, the possession
of applicant was not adverse, nor continuous.
An applicant for registration of title must prove his title and should not rely on the absence or weakness of the evidence of the oppositors. For
purposes of prescription, there is just title when adverse claimant came into possession of the property through one of the modes recognized
by law for the acquisition of ownership (Art. 1129, New Civil Code). Just title must be proved and is never presumed (Art. 1131, New Civil
Code). Mortgage does not constitute just title on the part of the mortgagee. since ownership is retained by the mortgagor. When possession
is asserted to convert itself into ownership, a new right is sought to be created, and the law becomes more exacting and requires positive
proof of title. Applicant failed to present sufficient evidence to prove that he is entitled to register the property. The trial court's finding that
since applicant and his father had been continuously paying the realty taxes, that fact "constitutes strong corroborating evidence of
applicant's adverse possession," does not carry much weight. Mere failure of the owner to pay the taxes does not warrant a conclusion that
there was abandonment of a right to the property. The payment of taxes on property does not alone constitute sufficient evidence of title.
(Elumbaring vs. Elumbaring, 12 Phil. 389)
The belief of applicant that he owns the property in question which he inherited from his father cannot overthrow the fact that the transaction
is a mortgage. The doctrine "once a mortgage always a mortgage" has been firmly established whatever be its form. (Macapinlac vs.
Gutierrez Rapide, supra) The parties cannot by any stipulation, however express and positive, render it anything but a mortgage. No right
passes to applicant except that of a mortgage since one cannot acquire a right from another who was not in possession thereof A derivative
right cannot rise higher than its source.
Applicant having failed to show by sufficient evidence a registrable title to the land in question, the application for registration should be
dismissed.
WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered ordering the registration of the title of the land
in question in the name of the oppositors- appellants. The said oppositors-appellants are hereby directed to pay the applicant- appellee
within ninety (90) days from the finality of this decision, the debt in the amount of P100.00 plus interest at the rate of six per cent (6%) per
annum from April 19, 1926 until paid. No pronouncement as to costs.
SO ORDERED.

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO,
Judge of the Court of First Instance of Manila, Branch XXXVII and BAYANIHAN
AUTOMOTIVE CORPORATION, respondents.
Platon A. Baysa for petitioner.
Manuel T. Ybarra for respondents.

CORTES, J.:
In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit and the leasehold rights over the land on
which the building housing the said apartment stands for allegedly being in the nature of a pactum commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of Apartment No. 307 of the Ligaya
Building, together with the leasehold right for ninety- nine (99) years over the land on which the building stands. The land is registered in the
name of Ligaya Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of the City of Manila. It
appears that Ligaya Investments, Inc. owned the building which houses the apartment units but sold Apartment No. 307 and leased a portion
of the land in which the building stands to the SPOUSES.
In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven (7) units of motor
vehicles for a total amount of P47,700.00 payable in three (3) installments. The transaction was evidenced by a written "Agreement" wherein
the terms of payment had been specified as follows:
That immediately upon signing of this Agreement, the VENDEE shall pay unto the VENDOR the amount of Seven
Thousand Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the amount of Fifteen Thousand (P15,000.00)
Pesos shah be paid on or before March 30, 1969 and the balance of Twenty Five Thousand (P25,000.00) Pesos shall
be paid on or before April 30, 1969, the said amount again to be secured by another postdated check with maturity on
April 30, 1969 to be drawn by the VENDEE;
That it is fully understood that should the two (2) aforementioned checks be not honored on their respective maturity
dates, herein VENDOR will give VENDEE another sixty (60) days from maturity dates, within which to pay or redeem
the value of the said checks;
That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR, the latter shall
become automatically the owner of the former's apartment which is located at No. 307, Ligaya Building, Alvarado St.,
Binondo, Manila, with the only obligation on its part to pay unto the VENDEE the amount of Three Thousand Five
Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency; and in such event the VENDEE shall execute the
corresponding Deed of absolute Sale in favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis
supplied]. (Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No. 1315321].
After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00. Due to these unpaid balances,
BAYANIHAN filed an action for specific performance against the SPOUSES docketed as Civil Case No. 80420 with the Court of First
Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and severally, to pay the plaintiffs, the
sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full payment. In the event of their failure to do
so within thirty (30) days from notice of this judgment, they are hereby ordered to execute the corresponding deed of
absolute sale in favor of the plaintiff and/or the assignment of leasehold rights over the defendant's apartment located
at 307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants of the
sum of P3,535.00. [emphasis supplied].
Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a deed of assignment dated May 27,
1972, was executed by the SPOUSES [Exhibit "B", CFI Records, p. 127] over Apartment No. 307 of the Ligaya Building together with the
leasehold right over the land on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or less, paid
by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of the premises. Subsequently, they were
allowed to remain in the premises as lessees for a stipulated monthly rental until November 30,1972.
Despite the expiration of the said period, the SPOUSES failed to surrender possession of the premises in favor of BAYANIHAN. This
prompted BAYANIHAN to file an ejectment case against them in the City Court of Manila docketed as Civil Case No. 240019. This action was
however dismissed on the ground that BAYANIHAN was not the real party in interest, not being the owner of the building.
On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's counsel was again ignored by the SPOUSES,
an action for recovery of possession with damages was filed with the Court of First Instance of Manila, docketed as Civil Case No. 121532
against the SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981, decision in said case was rendered
in favor of BAYANIHAN ordering the following:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants spouses UY TONG and
KHO GIOK and defendant Ligaya Investment, Inc., dismissing defendants' counterclaim and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons claiming right under them, to
vacate, surrender and deliver possession of Apartment 307, Ligaya Building, located at 64 Alvarado Street, Binondo,
Manila to the plaintiff;
2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership and possession of the plaintiff over
Apartment No. 307, Ligaya Building;
3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in liue of defendants spouses Uy Tong
and Kho Po Giok over the lot on which the building was constructed;
4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff the sum of P200.00 commencing
from June, 1971 to November 30, 1972, or a total amount of P3,400.00 as rental for the apartment, and the sum of
P200.00 from December 1, 1972 until the premises are finally vacated and surrendered to the plaintiff, as reasonable
compensation for the use of the apartment; and
5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as and for attorney's fees to the
plaintiff, and the costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October 2,1984, the respondent Court of Appeals
affirmed in toto the decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A motion for reconsideration of the said decision was
denied by the respondent Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the following reasons:
I. The deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out
of the same.
II. The genuineness and due Prosecution of the deed of assignment was not deemed admitted by petitioner.
III. The deed of assignment is unenforceable because the condition for its execution was not complied with.
IV. The refusal of petitioners to vacate and surrender the premises in question to private respondent is justified and
warranted by the circumstances obtaining in the instant case.
I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties whereby petitioner Kho Po Giok agreed
that the apartment in question will automatically become the property of private respondent BAYANIHAN upon her mere failure to pay her
obligation. This agreement, according to the petitioners is in the nature of a pactum commissorium which is null and void, hence, the deed of
assignment which was borne out of the same agreement suffers the same fate.
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of the same. Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage
wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and (2) that there should be a
stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum commissorium provision. First, there is
no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the SPOUSES defaulted in their payments of the
second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court
rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their obligation and in case of failure to do

so, to execute a deed of assignment over the property involved in this case. The SPOUSES elected to execute the deed of assignment
pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the
obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L32674, February 22, 1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the badges of pactum
commissorium, the deed of assignment does not suffer the same fate as this was executed pursuant to a valid judgment in Civil Case No.
80420 as can be gleaned from its very terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po Giok, both of legal age, husband
and wife, respectively, and presently residing at 307 Ligaya Bldg., Alvarado St., Binondo, Manila, and hereinafter to be
known and called as the ASSIGNORS, in favor of Bayanihan Automotive Corporation, an entity duly organized and
existing under the laws of the Philippines, with principal business address at 1690 Otis St., Paco, Manila and
hereinafter to be known and called the ASSIGNEE;
-witnessethWHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with Damages" against the
ASSIGNORS in the Court of First Instance of Manila, Branch V, said case having been docketed as Civil Case No.
80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR wherein the latter was ordered by
the court as follows, to wit:
WHEREFORE, judgment is hereby rendered ordering the defendants, jointly and severally to pay
the plaintiff the sum of P40,000.00, with interest at the legal rate from July 31, 1970 until full
payment. In the event of their failure to do so within thirty (30) days from notice of this judgment,
they are hereby ordered to execute the corresponding deed of absolute sale in favor of the
plaintiff and/or the assignment of leasehold, rights over the defendants' apartment located at No.
307 Ligaya Building, Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the
defendants the sum of P 3,535.00. The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient bond, has ordered for the
immediate execution of the said decision even pending appeal of the aforesaid decision;
WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of sale and/or assignment of leasehold
rights over the apartment mentioned in the decision in favor of the herein ASSIGNEE;
NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNORS have transferred assigned
and ceded, and by these presents do hereby transfer, assign and cede all their rights and interests over that place
known as Apartment No. 307 at the Ligaya Building which is located at No. 864 Alvarado St., Binondo, Manila, together
with the corresponding leasehold rights over the lot on which the said building is constructed, in favor of the hererein
ASSIGNEE, its heirs or assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May, 1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620
Manila March 3, 1965

This being the case, there is no reason to impugn the validity of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the genuineness and due execution of the
deed of assignment was deemed an admission thereof. The basis for this exception is the SPOUSES' insistence that the deed of assignment
having been borne out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling of the appellate court. Considering this Court's above conclusion that
the deed of assignment is not invalid, it follows that when an action founded on this written instrument is filed, the rule on contesting its
genuineness and due execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment. However, the SPOUSES, in their answer
to the complaint, failed to deny under oath and specifically the genuineness and due execution of the said deed. Perforce, under Section 8,
Rule 8 of the Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and due execution. Besides,
they themselves admit that ". . . the contract was duly executed and that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now
claim otherwise.
III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the deed is unenforceable because the
condition for its execution was not complied with. What petitioners SPOUSES refer to is that portion of the disposition in Civil Case No.
80420 requiring BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance, they invoke the following
receipt issued by the SPOUSES to show that BAYANIHAN was P535.00 short of the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00) PESOS, more or less as indicated
in the judgment of the Hon. Conrado Vasquez, Presiding Judge of the Court of First Instance of Manila, Branch V, in
Civil Case entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and docketed as Civil Case No. 80420 has
been applied for the payment of the previous rentals of the property which is the subject matter of the aforesaid
judgment. [emphasis supplied.]
(Sgd.) Pho (sic) Po Glok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not within this Court's competence to look into. Suffice it to say that this Court is of
the view that findings and conclusion of the trial court and the Court of Appeals on the question of whether there was compliance by
BAYANIHAN of its obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is borne by the
evidence on record. The Court finds merit in the following findings of the trial court:
... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a condition for the
execution of the deed of assignment was not paid by the plaintiff to the defendants is belied by the fact that the
defendants acknowledged payment of P3,000.00, more or less, in a receipt dated August 21, 1971. This amount was
expressly mentioned in this receipt as indicated in the judgment of the Honorable Conrado Vasquez, presiding Judge of
the CFI of Manila, Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil
Case No. 80420, and also expressly mentioned as having been applied for the payment of the previous rentals of the
property subject matter of the said judgment. Nothing could be more explicit. The contention that there is still a
difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy Tong executed the deed of
assignment without first demanding from the plaintiff the payment of P535.00. Indeed, as contended by the plaintiff, for
it to refuse to pay this small amount and thus gave defendants a reason not to execute the Deed of Assignment. is hard
to believe Defendants further confirm by the joint manifestation of plaintiff and defendants, duly assisted by counsel,
Puerto and Associates, dated September, 1971, Exhibit "O", wherein it was stated that plaintiff has fully complied with
its obligation to the defendants caused upon it (sic) by the pronouncement of the judgment as a condition for the
execution of their (sic) leasehold rights of defendants, as evidenced by the receipt duly executed by the defendants,
and which was already submitted in open court for the consideration of the sum of P3,535.00. [Emphasis supplied].
[Decision, Civil Case No. 121532, pp. 3-4].
This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in Civil Case No. 80420 imposed upon the
parties correlative obligations which were simultaneously demandable so much so that if private respondent refused to comply with its
obligation under the judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own obligation to execute

the deed of assignment over the subject premises. The fact that petitioners executed the deed of assignment with the assistance of their
counsel leads to no other conclusion that private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this litigation on the following grounds:
(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and void.
(b) There was no full compliance by private respondent of the condition imposed in the deed of assignment.
(c) Proof that petitioners have been allowed to stay in the premises, is the very admission of private respondent who
declared that petitioners were allowed to stay in the premises until November 20, 1972. This admission is very
significant. Private respondent merely stated that there was a term-until November 30, 1972-in order to give a
semblance of validity to its attempt to dispossess herein petitioners of the subject premises. In short, this is one way of
rendering seemingly illegal petitioners 'possession of the premises after November 30, 1972.
The first two classifications are mere reiterations of the arguments presented by the petitioners and which had been passed upon already in
this decision. As regards the third ground, it is enough to state that the deed of assignment has vested in the private respondent the rights
and interests of the SPOUSES over the apartment unit in question including the leasehold rights over the land on which the building stands.
BAYANIHAN is therefore entitled to the possession thereof. These are the clear terms of the deed of assignment which cannot be
superseded by bare allegations of fact that find no support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
G.R. No. 109696 August 14, 1995
THELMA P. OLEA, petitioner,
vs.
COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND MONSERRAT PACIENTE,
respondents.

BELLOSILLO, J.:
This is a petition for review of the decision of the Court of Appeals affirming that of the court a quo which dismissed the complaint of
petitioner for recovery of possession on the ground that the action had already prescribed and that the deed of sale with right to repurchase
on which petitioner based her claim was an equitable mortgage.
On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of Sale Con Pacto de Retro over Lot No. 767 of the
Passi Cadastre covered by Transfer Certificate of Title No. 26424 in their name for a consideration of P950.00 in favor of Maura Palabrica,
predecessor in interest of petitioner, subject to the condition that
. . . if we, the said spouses, Filoteo Pacardo and Severa de Pacardo, our heirs, assigns, successors-in-interest,
executors and administrators shall and will truly repurchase the above-described parcel of land from the said Maura
Palabrica, her heirs, assigns, successors-in-interest after THREE YEARS counting from the date of the execution of
this instrument, to wit, on January 27, 1950 in cash payment in the sum of Five Hundred Pesos, Philippine currency,
plus Four Hundred and Fifty Pesos (P450), also lawful currency, in cash or eighteen (18) cavans of palay (Provincial
Measurement) at our option, then this sale shall become null and void and of no force and effect whatsoever. On the
contrary, the same will become irrevocable, definite and final and will vest complete and absolute title on the vendee
upon the premises.

The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public
Victorio Tagamolila on the same day the contract was executed in the Municipality of Passi, Province of
Iloilo. The vendors also delivered to the vendee their owner's copy of the title.

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).
On 27 January 1950, 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 Palabrica. When the spouses died, their
son Filoteo Jr., took over the possession and assumed the cultivation of the land and, like his parents,
gave 1/3 of the produce to Maura Palabrica and later to her daughter, petitioner herein, who would
eventually buy from her the lot subject of the litigation.
On 22 September 1966 Maura Palabrica caused the registration of the Sale Con Pacto de Retro with the
Register of Deeds of Iloilo and its annotation on Transfer Certificate of Title No. 26424 covering the
subject lot.
On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of her daughters, petitioner
Thelma Olea. From then on it was petitioner who received the one-third (1/3) share of the annual produce
of the land from Filoteo Pacardo, Jr., until he died in August 1987. His widow Elena Vda. de Pacardo
however refused to give to petitioner the one-third (1/3) share of the produce. After Elena transferred
residence to another barangay the spouses Jesus and Elizabeth Palencia took over the possession and
cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is one of the children of
spouses Filoteo and Severina Pacardo. The Palencias delivered the share of the produce not to petitioner
but to respondent Elena Pacardo.
Hence, on 25 January 1989, petitioner filed a complaint against Elena Pacardo and the spouses Jesus
and Elizabeth Palencia for recovery of possession with damages. She alleged that she was the owner of
Lot No. 767 having acquired the same from her mother Maura Palabrica through a deed of sale, who in
turn acquired the lot from the spouses Filoteo and Severa Pacardo through a pacto de retro sale, and that
due to the failure of the spouses to redeem the property three (3) years thereafter ownership thereof
passed on to Maura Palabrica who later caused the registration of the Sale Con Pacto de Retro with the
Registry of Deeds of Iloilo and its annotation on TCT No. 26424.
Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth 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. Respondent Monserrat Paciente, another daughter of the vendor-spouses Filoteo and
Severa Pacardo, filed an answer in intervention raising likewise as defense that the Sale Con Pacto de
Retro was indeed an equitable mortgage.
On 19 February 1991 the trial court rendered judgment dismissing the complaint. Petitioner appealed to
the Court of Appeals which on 16 December 1992 affirmed the judgment of the trial court.
In the instant recourse, petitioner assails the Court of Appeals for its conclusions and findings allegedly
grounded entirely on speculations, surmises, conjectures and misapprehension of facts. 2 Petitioner
submits that the terms and conditions of the Sale Con Pacto de Retro between her mother Maura
Palabrica and the Pacardos on 27 January 1947 are clear and leave no room for interpretation; that the
parties to the transaction have specified that the consideration of the sale was P950.00 and the
repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18) cavans of palay at the option

of the vendor-spouses in case they repurchased the property three (3) years afterwards; and that the
Court of Appeals erred in holding that the repurchase price was only P450.00 or eighteen cavans of palay.
Petitioner also asserts that the failure of her mother, the vendee Maura Palabrica, to consolidate
ownership under Art. 1607 of the New Civil Code should not be a ground for considering the sale to be an
equitable mortgage because both parties have stipulated in the contract that when the spouses should fail
to repurchase Lot No. 767 on 27 January 1950 complete and absolute title would forthwith be vested in
Maura Palabrica; and that even granting that Art. 1607 of the New Civil Code, which took effect 30 August
1950, be granted retroactive effect Maura Palabrica had already acquired a vested right of ownership
over the land as of 27 January 1950 which Art. 1607 can no longer invalidate under Art. 2252 of the New
Civil Code. Moreover, petitioner submits that the Pacardo spouses remained in possession of the land
they sold to Palabrica because of their good relations with each other and the latter consented that the
spouses would be the ones to till the land.
We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with right
to repurchase shall be presumed to be an equitable mortgage in any of the following cases: (a) when the
price of the sale is unusually inadequate; (b) when the vendor remains in possession as lessee or
otherwise; (c) when upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed; (d) when the purchaser retains for himself
a part of the purchase price; (e) when the vendor binds himself to pay the taxes on the thing sold; and, (f)
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. Being remedial in nature,
Art. 1602 may be applied retroactively to cases prior to the effectivity of the New Civil Code 3 Hence it may
apply to the instant case where the deed of sale with right to repurchase was executed on 27 January
1947.
It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro
sale when its terms are ambiguous or the circumstances surrounding its execution or its performance are
incompatible or inconsistent with the theory that it is a sale. 4 Even when a document appears on its face
to be a sale with pacto de retro the owner of the property may prove that the contract is really a loan with
mortgage by raising as an issue the fact that the document does not express the true intent and
agreement of the parties. In this case, parol evidence then becomes competent and admissible to prove
that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And
upon proof of the truth of such allegations, the court will enforce the agreement or understanding in
consonance with the true intent of the parties at the time of execution of the contract. 5 This principle is
applicable even if the purported Sale Con Pacto de Retro was registered in the name of the transferee
and a new certificate of title was issued in the name of the latter. 6
There is no dispute that when Maura Palabrica "bought" the land on 27 January 1947 the vendors, the
Pacardo spouses, remained in possession of the property and cultivated the same. Their son continued
the cultivation when the spouses died, which cultivation was continued later by his widow Elena Vda. de
Pacardo and then by his sister Elizabeth Palencia. During the direct examination, petitioner admitted
Q. And who later on cultivated this lot 767 if you know?
A. When the Pacardos sold to my mother, it was the spouses who
cultivated the land. When Filoteo Pacardo Sr. could no longer till, it was
Filoteo Pacardo Jr. who took over. 7

Defendant-intervenor Monserrat Paciente also testified

Q. Do you know whether any transaction was had between your mother
Severa Pacardo and Maura Palabrica involving this Lot No. 767?
A. There was a transaction. Every year, dues was (sic) paid to this land
when the land was mortgaged. It was a 1/3 transaction, 1/3 was given to
them and 2/3 were taken by us.
Q. When did you come to know that alleged transaction between your
parents and the late Maura Palabrica?
A. When I came to the age of reason, it was told to me by my parents. 8
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. 9 The same presumption applies when the vendee was given the right to appropriate the fruits
thereof in lieu of receiving interest on the loan. 10
Moreover, the terms of the document itself can aid in arriving at the true nature of the transaction. Where
the contract contains a stipulation, as in this case, that upon payment by the vendor of the purchase price
within a certain period the document shall become null and void and have no legal force or effect, the
purported sale should be considered a mortgage contract. In pacto de retro sale the payment of the
repurchase price does not merely render the document null and void but there is the obligation on the part
of the vendee to sell back the property. 11
It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602
of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable
mortgage. 12 This is so because pacto de retro sales with the stringent and onerous effects that
accompany them are not favored. In case of doubt, a contract purporting to be a sale with right to
repurchase shall be construed as an equitable mortgage. 13
Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and
absolute title shall be vested on the vendee should the vendors fail to redeem the property on the
specified date. Such stipulation that the ownership of the property would automatically pass to the vendee
in case no redemption was effected within the stipulated period is void for being a pactum commissorium
which enables the mortgagee to acquire ownership of the mortgaged property without need of
foreclosure. Its insertion in the contract is an avowal of the intention to mortgage rather than to sell the
property. 14
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 being no title to the land that Palabrica acquired
from the spouses Filoteo and Severa Pacardo, it follows that Palabrica had no title to the same land which
could be conveyed to petitioner. 15 Hence there is no legal basis for petitioner to recover possession of the
property.
It is clear from the contract that the amount loaned to the Pacardo spouses was P950.00 and Lot No. 767
was mortgaged as security. The spouses were allowed under the contract to pay the amount of the loan

on 27 January 1950 by tendering the amount of the P500.00 in cash and P450.00 cash or 18 cavans of
palay at their option. The trial court made its factual finding that from 1947 when the purported sale was
executed to 1972 alone, the spouses and their successors in interest delivered a total of 1,166 cavans of
palay to Maura Palabrica. The delivery of 1/3 of the annual produce to Palabrica and later to petitioner
continued until 1987. Under the last paragraph of Art. 1602, this produce received by the alleged vendee
as rent or otherwise should be considered as interest.
There is no dispute that the Pacardo spouses or their successors in interest failed to pay the amount of
the loan on 27 January 1950 as stipulated in the contract although they continued to deliver the produce
to Palabrica and petitioner until 1987 by way of interest on the loan. Even if we treat petitioner's action to
recover possession of Lot No. 767 as one for the enforcement of her right as mortgagee, the same has
already prescribed. Art. 1142 of the New Civil Code provides that a mortgage action prescribes after ten
(10) years. Since 27 January 1950 when the Pacardo spouses failed to pay the loan up to 1989 when the
action for recovery of possession was filed, thirty-nine (39) years had already elapsed. As a result,
petitioner is not only barred by prescription from instituting her action; she is also guilty of estoppel by
laches.
WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals dated 16
December 1992 sustaining that of the Regional Trial Court of Iloilo City is AFFIRMED. Costs against
petitioner.
SO ORDERED.
G.R. No. L-41395 July 31, 1986
ALMARIO T. SALTA, HONORABLE CONSTANTE A. ANCHETA, in his capacity as Presiding Judge of the Circuit Criminal Court, 5th
Judicial District, HONORABLE CATALINO BALAGTAS, in his capacity as District State Prosecutor, and PEOPLE OF THE
PHILIPPINES, petitioners,
vs.
COURT OF APPEALS and RENATO D. TAYAG, respondents,
G.R. No. L-42973 July 3l, 1986
PATROCINIO DAYRIT, petitioner,
vs.
HONORABLE COURT OF APPEALS, HONORABLE CONSTANTE A. ANCHETA, in his capacity as Presiding Judge of the Circuit
Criminal Court, 5th Judicial District, San Fernando, Pampanga, ALMARIO T. SALTA, and PEOPLE OF THE PHILIPPINES,
respondents.

GUTIERREZ, JR., J.:

Before us in these petitions for review are the decisions of the Court of Appeals in CA-G.R. No. SP-03464 entitled "Patrocinio Dayrit v.
Honorable Constante Ancheta, et al.," and CA-G.R. No. SP-03475 entitled "Renato D. Tayag v. Hon. Constante A. Ancheta, et al." These
cases are considered jointly because the conflicting decisions of the Court of Appeals in the two cases involve the same action of respondent
Constante A. Ancheta in his capacity as presiding judge of the Circuit Criminal Court, Fifth Judicial District at Malolos, Bulacan.
On April 22, 1970, Almario T. Salta was charged by the Philippine National Bank before the Provincial Fiscal of Bulacan for violation of
Republic Act No. 3019 (Anti-Graft and Corrupt Practices Act). The complaint was docketed as I.S. No. 3934.
On December 18, 1970, Salta filed a complaint with the Office of the Provincial Fiscal of Bulacan against Patrocinio Dayrit, Renato Tayag
and others, docketed as I.S. No. 3934-A. In support of his complaint and as part of his defense in I.S. No. 3934, Salta submitted his affidavit
taken December 15, 1970.

After conducting an investigation, the Provincial Fiscal of Bulacan dismissed both cases (I.S. Nos. 3934 and 3934-A) on the ground that the
Philippine National Bank refused to submit documents considered by the fiscal as material.
The Philippine National Bank moved that the dismissal of I.S. No. 3934 be reconsidered. The then Department of Justice assigned District
State Prosecutor Pascual C. Kliatchko to reinvestigate the case against Salta. Salta, likewise appealed the order of the Provincial Fiscal of
Bulacan which dismissed I.S. No. 3934-A. Prosecutor Kliatchko reinvestigated both complaints.
Prosecutor Kliatchko conducted hearings after which: a) a prima facie case was found in I.S. No. 3934 and an information was filed against
Salta with the Circuit Criminal Court at Malolos Bulacan docketed as CCC-V-668, and b) the case against Dayrit, et al. (I.S. No. 3934) was
"with the approval of the Department of Justice" dismissed.
On January 17, 1973, while CCC-V-668 was pending trial before Judge Constante A. Ancheta of the Circuit Criminal Court at Malolos,
Bulacan, Salta filed a complaint against Patrocinio Dayrit, Renato Tayag, Adoracion Tayag and Montano Bundad directly with Judge Ancheta
for violation of the Anti-Graft Law. The complaint, docketed as Case No. CCC-V-668-A, alleged the same grounds and issues raised by Salta
in the earlier complaint against Dayrit, Tayag and the others filed with the Provincial Fiscal of Bulacan. The complaint had been dismissed by
both the Provincial Fiscal and District State Prosecutor Kliatchko.
On the other hand, the Philippine National Bank charged Salta before the Provincial Fiscal in Pampanga for alleged violations of the AntiGraft Act committed by Salta in the PNB Guagua Branch where he was transferred after his Malolos assignment. After an investigation, the
Provincial Fiscal of Pampanga found a prima facie case against Salta and filed the corresponding information with the Circuit Criminal Court
presided by Judge Ancheta. The case was docketed as CCC-V-656.
On January 19, 1973, Judge Ancheta issued an order ruling that "unless otherwise restrained by higher courts, the requisite preliminary
investigation thereon on Salta's complaint shall be conducted on January 24 and 25, 1973." Judge Ancheta further held that "until such time
when the preliminary investigation shall have been terminated, the hearings on the merits of the criminal case No. CCC-V-668 is hereby
suspended."
The scheduled preliminary investigation was postponed upon motions of respondents Adoracion S. Tayag, Renato D. Tayag, Montano
Bundad and Patrocinio Dayrit. Subsequently, these respondents filed their respective motions to dismiss, premised on the principle that
under Section 13, Rule 112 of the Revised Rules of Court, the judge may take cognizance of and conduct preliminary investigation of a
complaint filed directly with him only if there has been no "... previous preliminary examination and investigation conducted by fiscal ... ."
Judge Ancheta denied the motion to dismiss. A joint motion for reconsideration filed by the respondents was likewise denied. The judge then
reset the preliminary investigation.
On March 12, 1973, respondents Renato Tayag, Adoracion S. Tayag, Patrocinio Dayrit, Hector Gonzales and Montano Bundad filed with this
Court a petition for certiorari and prohibition with preliminary injunction. The case was docketed as G. R. No. L-36460. The petitioner
questioned the jurisdiction of the Circuit Criminal Court presided by Judge Ancheta to conduct a preliminary investigation of the complaint
filed by Salta against Tayag, Dayrit and others (CCC-V-668-A) when the previous Identical complaint filed by Salta with the Provincial Fiscal
of Bulacan had already been dismissed by the fiscal and, later, by the district state prosecutor for insufficiency of evidence.
On June 7, 1973, this Court issued a minute resolution dismissing the petition for lack of merit.
On June 21, 1973, Judge Ancheta acquitted Salta in Criminal Case Nos. CCC-V-668 and CCC-V-656.
On March 22, 1974, Judge Ancheta issued a resolution in connection with the preliminary investigation he conducted in CCC-V-668-A, to wit:
As far as respondents RENATO TAYAG and PATROCINIO DAYRIT are concerned, we find that a prima facie case has
been established against them, sufficient to support an indictment. Pursuant to the mandate of Sec. 13, Rule 112 of the
Revised Rules of Court let a Warrant of Arrest for RENATO TAYAG and PATROCINIO DAYRIT be issued. The bail bond
of P 8,000.00 each is hereby fixed for their provisional liberty.
The District State Prosecutor of this Court is hereby directed to file the requisite Information in consonance with the
findings made and conclusions reached within TEN (10) days from receipt of this Resolution.
This March 22, 1974 resolution of Judge Ancheta was the subject matter of two separate petitions for certiorari filed by Tayag and Dayrit with
the Court of Appeals. The petition filed by Tayag was docketed as CA-G.R. No. SP-03475 while that of Dayrit was docketed as CA-G.R. No.
SP-03464.

The Dayrit petition was dismissed for lack of jurisdiction. On the other hand, the Tayag petition was granted and the resolutions and orders
complained of were set aside and declared as null and void.
A motion for reconsideration filed by Dayrit was denied. Likewise, a motion for reconsideration filed by Salta in CA-G.R. No. SP-03475 was
denied. Hence, both Dayrit and Salta filed the present petitions for certiorari.
The main issue in both petitions is whether or not Judge Ancheta had jurisdiction to conduct the preliminary investigation over Salta's
complaint against petitioner Dayrit in G.R. No. L-42973 and Renato Tayag, the respondent in G.R. No. L-41395.
We have in the past viewed with disfavor the unseemly interest of Judges of Circuit Criminal Courts to conduct preliminary investigations in
cases they will later try. We stated in Collector of Customs v. Villaluz (71 SCRA 357) that the authority given to regular Courts of First
Instance to conduct preliminary investigations is likewise conferred on Circuit Criminal Courts. However, we made it clear that even as said
courts may have such authority, they must concentrate on hearing and deciding criminal cases filed before them instead of discharging a
function that could very well be handled b the provincial or city fiscal.
A preliminary investigation is intended to protect the accused from the inconvenience, expense, and burden of defending himself in a formal
trial until the reasonable probability of his guilt has first been ascertained in a fairly summary proceeding by a competent officer. It is also
intended to protect the State from having to conduct useless and expensive trials (U.S. v. Marfori, 35 Phil. 666; U.S. v. Grant & Kennedy, 18
Phil. 122). Section 1, Rule 112 of the present Rules of Court states that it is conducted for the purpose of determining whether there is
sufficient ground to engender a well-founded belief that a crime cognizable by the court has been committed and that the respondent is
probably guilty thereof and should be held for trial. The preliminary investigation proper is, therefore, not a judicial function. It is a part of the
prosecution's job, a function of the executive.
Necessity and practical considerations constrained the Government to assign this non-judicial function to justice of the peace or municipal
courts and to a very limited extent to courts of first instance. There are not enough fiscals and prosecutors to investigate crimes in all
municipalities all over the country. Moreover, the preliminary examination for the issuance of a warrant of arrest which only a judge could
conduct subject to the qualification in the 1973 Bill of Rights, is usually integrated with the preliminary investigation proper when conducted
by a court. (See Collector of Customs v. Villaluz supra at pp. 385-396 for the historical background of this procedure).
Wherever there are enough fiscals or prosecutors to conduct preliminary investigations, courts are counseled to leave this job which is
essentially executive to them. The fact that a certain power is granted does not necessarily mean that it should be indiscriminately exercised.
Cognizant of the above, Section 37 of Batas Pambansa Blg. 129 reiterates the removal from Judges of Metropolitan Trial Courts in the
National Capital Region the authority to conduct preliminary investigations. There are enough fiscals and prosecutors in the region to do the
job. Similarly, Section 2 of Rule 112 of the 1985 Rules on Criminal Procedure no longer authorizes Regional Trial Judges to conduct
preliminary investigations.
The respondent Judge conducted the questioned preliminary investigation pursuant to Section 13, Rule 112 of the Revised Rules of Court, to
wit:
SEC. 13. Preliminary examination and investigation by the judge of the Court of First Instance.-Upon complaint filed
directly with the Court of First Instance without previous preliminary examination and investigation conducted by the
fiscal, the judge thereof shall either refer the complaint to the justice of the peace referred to in the second paragraph of
section 2 hereof for preliminary examination and investigation, or himself conduct both preliminary examination and
investigation simultaneously in the manner provided in the preceding petitions and should he find reasonable ground to
believe that the defendant has comitted the offense charged, he shall issue a warrant for his arrest, and thereafter refer
the case to the fiscal for the filing of the corresponding information.
In the instant cases, the complaint filed by Salta directly before Judge Araneta was the subject of two previous
preliminary investigations conducted by first, the provincial fiscal of Bulacan and second, District State Prosecutor
Kliatchko, representing the then Department of Justice. The complaint was dismissed by both investigators.
Under these circumstances, respondent Judge Ancheta had no authority to conduct another preliminary investigation
against Dayrit and Tayag, more so since it is admitted that the complaint alleged exactly the same grounds and issues
earlier charged against them. As we ruled in the case of People V. Hechanova (54 SCRA 101):
Relative to Section 13, Rule 112 of the New Rules of Court, it is stated thereby with pristine clarity that the complaints
over which a judge of a court of first instance may conduct preliminary examination and investigation are those 'filed
directly' before it, 'without previous preliminary examination and investigation conducted by the fiscal ... (Emphasis
supplied).

Even if we assume that there had been no prior investigations and granting that Judge Ancheta had jurisdiction to conduct another
preliminary investigation, the record shows that he behaved in such a manner that the respondents, among them Tayag and Dayrit, were
virtually deprived of due process of law. We agree with the then Court of Appeals in CA-G.R. No. SP-03475 which observed:
Petitioner deplores the fact that respondent judge has shown extreme bias in favor of the private respondent and
against the herein petitioner and his fellow witnesses for the Philippine National Bank, the aggrieved party. We find
indeed a considerable number of circumstances that lend substance to this claim. Taken singly, these circumstances
may at best be termed harsh as applied to the petitioner, but taken together in their entirety they paint a picture in which
one can discern that the private respondent received all the protection in his trial while the petitioner and his fellow
witnesses were virtually subjected to intimidation by the prospect of their prosecution.
When the respondent judge accepted the counter-complaints of the private respondent, which indisputably covered the
same subject matter as those investigated previously by the fiscals, the respondent judge should have reacted in a
different manner. Even assuming that he had the requisite jurisdiction, he should have treated the subsequent
preliminary investigations as prejudicial matters to be heard before the trial of respondent Salta, which should have
been held in abeyance. If he then found a prima facie case against the respondents, then he should have had the
respondents included as the co-accused of Salta in the two cases (Malolos and Guagua). As it is, the trial of Salta was
heard first and said accused was acquitted in the two cases, in the Malolos case on a mere demurrer to the evidence. If
during the Salta's trial the respondent judge found the prosecution witnesses timid, it could only have been the
consequence of the unfair and unusual procedure he had followed.
The procedure followed was just one circumstance. Other evidence of partiality can be gleaned from the records. For
instance, he did not consider the evidence of herein petitioner saying that these 'partakes of defenses which will
become pertinent in a trial on the merits. This is an error. If in fact said evidences were enough to overcome the judge's
prima facie findings, respondent judge did not have to proceed to a 'trial on the merits' and he could have just declared
the cases dismissed for insufficiency of evidence. A trial under the circumstances would be a superfluity that could only
do unjust harm to the petitioner, aside from wasting the time and money of the government. Then, there are the
decisions promulgated by respondent judge acquitting the private respondent Salta, Truly, after acquitting Salta,
making all those pronouncements, respondent judge at that stage should have voluntarily inhibited himself from
investigating the charges, based on the same set of facts, instituted by Salta against the petitioner and others. His
insistence that he should investigate the complaints of Salta exposed him, and with good reason, to charges of
partiality in favor of Salta. He could not have resolved the complaints with an unprejudiced mind. His indefensible
attitude resulted in the deprivation of petitioner and the others of their right to due process.
Respondent judge also directed that the petitioner be arrested, fixing a bail bond of P8,000.00 for the latter's
provisional liberty, even before the filing of the information. At the same time, he directed the District State Prosecutor
'to file the requisite Information in consonance with the findings made and conclusions reached herein, within ten (10)
days from receipt of this Resolution.' The implication of such an unjust order is that the District State Prosecutor would
be guilty of contempt of court if he disobeyed the instruction of the court. This is irregular. It is elementary that a court
cannot order the prosecution to submit to such a dictation.
xxx xxx xxx
... [P]etitioner makes a serious claim which should not escape our attention and scrutiny. This is the charge made by
petitioner in his Motion for Reconsideration of April 13, 1974, in which it was alleged:
(e) That this Court lacks that impartiality which is so essential and vital in the dispensation of justice, thereby vitiating
the entire proceedings, is established by the fact, recently discovered by respondent Renato D. Tayag, much to his
dismay and consternation, that the Presiding Judge of the Court had been seen on numerous occasions and in the
unlikeliest of places, before and after the dismissal of the two (2) criminal cases against Salta, consorting, fraternizing
and socializing, directly and indirectly, with said Salta. . .
Later, petitioner amplified in his above complaint with a tender and offer of proof on August 22, 1974:
(b) During the pendency of CCC-V-656 (Guagua case) and CCC-V-668 (Malolos case), as well as during the pendency
of the preliminary investigations filed by complainant Salta against respondent Tayag, et al., the Presiding Judge has
been a frequent guest, not a few but on many instances, of complainant Salta and not only in one province but in three
(3) provinces, whereas Salta gave food and drinks to the Presiding Judge, particularly in restaurants in Malolos, San
Fernando and Balanga. Respondent reiterates that he is not, as yet, making formal charges against the Presiding
Judge. He merely desires to adduce evidence that there was 'extrinsic fraud' utilized by complainant Salta in obtaining
the resolutions against respondents and which factor deprived the respondents of their right to due process, to a fair

and impartial trial, thus vitiating the entire proceedings of the above-entitled investigations-rendering the resolutions
thereof as null and void and of no legal force and effect.'
The petitioner never had a chance to present his evidence, hence, his tender and offer of proof. The petitioner claims
(and this has not been disputed) 'that the respondent judge, motu propio, suppressed the issuance of the subpoena
directed to the employees of the court and to the wife of the Presiding Judge on the ground that the matters sought to
be proven in the hearing are irrelevant and immaterial. The Court, invoking the inherent power of the court to control its
own processes, directed the clerk of court not to issue subpoena. In the case of the court's employees, the reason
adduced was irrelevancy and immateriality. In the case of the wife of the Presiding Judge, the reason adduced (as
appears in the TSN, but not in the July 18, 1974 order) is that a wife cannot testify against the husband without the
latter's consent and, in the case of complainant Salta and his wife, in view of the opposition of complainant's counsel,
the latter's Motion to Quash subpoena was granted on grounds of irrelevancy and immateriality of the evidence sought
to be elicited.
We find the charge of petitioner to be very material and relevant. After receiving the Motion for Reconsideration of April
13, 1974, in which the charge was first made, respondent Judge should have lost no time in disqualifying himself and in
requesting that another judge be named to take over the proceedings. The records show that he dilly-dallied on the
motion for reconsideration and when he finally resolved it on September 9, 1974, it was with a defense of himself
against the charges all explicatio non petita, uncalled for under the situation.
Indeed, Judge Ancheta was heedless of his duty to be impartial in conducting the preliminary investigation of the cases against Dayrit and
Tayag. We remind Judge Ancheta of what we said in the case of Mateo, Jr. v. Villaluz (50 SCRA 18):
xxx xxx xxx
... There is relevance to what was said by Justice Sanchez in Pimentel v. Salanga, (21 SCRA 160) drawing' attention of
all judges to appropriate guidelines in a situation where their capacity to try and decide a case fairly and judiciously
comes to the fore by way of challenge from any one of the parties. A judge may not be legally prohibited from sitting in
a litigation. But when suggestion is made of record that he might be induced to act in favor of one party or with bias or
prejudice against a litigant arising out of a circumstance reasonably capable of inciting such a state of mind, he should
conduct a careful self-examination. He should exercise his discretion in a way that the people's faith in the courts of
justice is not impaired. A salutary norm is that he reflect on the probability that a losing party might nurture at the back
of his mind the thought that the judge had unmeritoriously tilted the scales of justice against him. That passion on the
part of a judge may be generated because of serious charges of misconduct against him by a suitor or his counsel, is
not altogether remote. He is a man, subject to the frailties of other men. He should, therefore, exercise great care and
caution before making up his mind to act or withdraw from a suit where that party or counsel is involved. He could in
good grace inhibit himself where that case could be heard by another judge and where no appreciable prejudice would
be occasioned to others involved therein. On the result of his decisions to sit or not to sit may depend to a great extent
the all important confidence in the impartiality of the judiciary. If after reflection he should resolve to voluntarily desist
from sitting in a case where his motives or fairness might be seriously impugned, his action is to be interpreted as
giving meaning and substance to the second paragraph of Section 1, Rule 137. He serves the cause of the law who
forestalls carriage of justice.' (Ibid, 167-168).
The death of Renato D. Tayag, private respondent in G.R. No. L-41395 has rendered the said petition moot and academic. This however,
does not preclude this Court from cautioning trial judges on their obligation to observe "the cold neutrality of an impartial judge" at all times to
satisfy the requirements of due process.
WHEREFORE, the petition in G.R. No. L-42973 is GRANTED. The questioned decision of the then Court of Appeals is hereby REVERSED
and SET ASIDE. The resolution of Judge Ancheta dated March 22, 1974 is likewise SET ASIDE. The petition in G.R. No. L-41395 is
DISMISSED for having become moot and academic.
SO ORDERED.

G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in
his capacity as statutory receiver of Island Savings Bank, petitioners,

vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO,
respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the
Court of Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the
decision dated February 15, 1972 of the Court of First Instance of Agusan, which
dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific
performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal
department, approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who,
as a security for the loan, executed on the same day a real estate mortgage over his
100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305,
and which mortgage was annotated on the said title the next day. The approved loan
application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that
Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to
develop his other property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made
by the Bank; and Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory
note for P17,000.00 at 12% annual interest, payable within 3 years from the date of
execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An
advance interest for the P80,000.00 loan covering a 6-month period amounting to
P4,800.00 was deducted from the partial release of P17,000.00. But this pre-deducted
interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by
the Bank that there was no fund yet available for the release of the P63,000.00 balance
(p. 47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the
release of the P63,000.00 balance (p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island
Savings Bank was suffering liquidity problems, issued Resolution No. 1049, which
provides:

In view of the chronic reserve deficiencies of the Island Savings Bank

against its deposit liabilities, the Board, by unanimous vote, decided as
follows:
1) To prohibit the bank from making new loans and investments [except
investments in government securities] excluding extensions or renewals of
already approved loans, provided that such extensions or renewals shall
be subject to review by the Superintendent of Banks, who may impose
such limitations as may be necessary to insure correction of the bank's
deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to
put up the required capital to restore its solvency, issued Resolution No. 967 which
prohibited Island Savings Bank from doing business in the Philippines and instructed
the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank
(pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00
covered by the promissory note, filed an application for the extra-judicial foreclosure of
the real estate mortgage covering the 100-hectare land of Sulpicio M. Tolentino; and the
sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First
Instance of Agusan for injunction, specific performance or rescission and damages with
preliminary injunction, alleging that since Island Savings Bank failed to deliver the
P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by
ordering Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum
from April 28, 1965, and if said balance cannot be delivered, to rescind the real estate
mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued
a temporary restraining order enjoining the Island Savings Bank from continuing with
the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the
dismissal of the petition of Sulpicio M. Tolentino and the setting aside of the restraining

order, filed by the Central Bank and by the Acting Superintendent of Banks (pp. 65-76,
rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision,
finding unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island
Savings Bank the amount of PI 7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino,
modified the Court of First Instance decision by affirming the dismissal of Sulpicio M.
Tolentino's petition for specific performance, but it ruled that Island Savings Bank can
neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31.
rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance
prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by
the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his
real estate mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan
agreement on April 28, 1965, they undertook reciprocal obligations. In reciprocal
obligations, the obligation or promise of each party is the consideration for that of the
other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1
[1969]); and when one party has performed or is ready and willing to perform his part of
the contract, the other party who has not performed or is not ready and willing to
perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to
furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate
mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan.
From such date, the obligation of Island Savings Bank to furnish the P80,000.00 loan
accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965,
and lasted for a period of 3 years or when the Monetary Board of the Central Bank

issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank
from doing further business. Such prohibition made it legally impossible for Island
Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of
the Monetary Board to take over insolvent banks for the protection of the public is
recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, the
validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default
of Island Savings Bank in complying with its obligation of releasing the P63,000.00
balance because said resolution merely prohibited the Bank from making new loans and
investments, and nowhere did it prohibit island Savings Bank from releasing the balance
of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill
an engagement does not discharge the obligation of the contract, nor does it constitute
any defense to a decree of specific performance (Gutierrez Repide vs. Afzelius and
Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the
contract by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the prededucted interest amounting to P4,800.00 for the supposed P80,000.00 loan covering a
6-month period cannot be taken as a waiver of his right to collect the P63,000.00
balance. The act of Island Savings Bank, in asking the advance interest for 6 months on
the supposed P80,000.00 loan, was improper considering that only P17,000.00 out of
the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted
interest was an exercise of his right to it, which right exist independently of his right to
demand the completion of the P80,000.00 loan. The exercise of one right does not
affect, much less neutralize, the exercise of the other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral
cannot exempt it from complying with its reciprocal obligation to furnish the entire
P80,000.00 loan. 'This Court previously ruled that bank officials and employees are
expected to exercise caution and prudence in the discharge of their functions (Rural
Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's
officials and employees that before they approve the loan application of their customers,
they must investigate the existence and evaluation of the properties being offered as a
loan security. The recent rush of events where collaterals for bank loans turn out to be
non-existent or grossly over-valued underscore the importance of this responsibility. The
mere reliance by bank officials and employees on their customer's representation
regarding the loan collateral being offered as loan security is a patent non-performance
of this responsibility. If ever bank officials and employees totally reIy on the

representation of their customers as to the valuation of the loan collateral, the bank shall
bear the risk in case the collateral turn out to be over-valued. The representation made
by the customer is immaterial to the bank's responsibility to conduct its own
investigation. Furthermore, the lower court, on objections of' Sulpicio M. Tolentino, had
enjoined petitioners from presenting proof on the alleged over-valuation because of their
failure to raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The
lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9, which states
that "defenses and objections not pleaded either in a motion to dismiss or in the answer
are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme
Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their
loan agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose
between specific performance or rescission with damages in either case. But since
Island Savings Bank is now prohibited from doing further business by Monetary Board
Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M,
Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only
for the P63,000.00 balance of the P80,000.00 loan, because the bank is in default only
insofar as such amount is concerned, as there is no doubt that the bank failed to give
the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino
accepted and executed a promissory note to cover it, the bank was deemed to have
complied with its reciprocal obligation to furnish a P17,000.00 loan. The promissory note
gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00 loan
when it falls due. His failure to pay the overdue amortizations under the promissory note
made him a party in default, hence not entitled to rescission (Article 1191 of the Civil
Code). If there is a right to rescind the promissory note, it shall belong to the aggrieved
party, that is, Island Savings Bank. If Tolentino had not signed a promissory note setting
the date for payment of P17,000.00 within 3 years, he would be entitled to ask for
rescission of the entire loan because he cannot possibly be in default as there was no
date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal
obligations, that is, Island Savings Bank failed to comply with its obligation to furnish the
entire loan and Sulpicio M. Tolentino failed to comply with his obligation to pay his
P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a
breach of their reciprocal obligations, the liability of the first infractor shall be equitably
tempered by the courts. WE rule that the liability of Island Savings Bank for damages in

not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino for
damages, in the form of penalties and surcharges, for not paying his overdue
P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt
shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should
account for the interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be
entirely foreclosed to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that
of the principal contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the
debtor, the consideration of his obligation to pay is the existence of a debt. Thus, in the
accessory contract of real estate mortgage, the consideration of the debtor in furnishing
the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in
relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no
consideration was then in existence, as there was no debt yet because Island Savings
Bank had not made any release on the loan, does not make the real estate mortgage
void for lack of consideration. It is not necessary that any consideration should pass at
the time of the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA
122 [1983]). lt may either be a prior or subsequent matter. But when the consideration is
subsequent to the mortgage, the mortgage can take effect only when the debt secured
by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583,
cited in the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial
failure of consideration, the mortgage becomes unenforceable to the extent of such
failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974 ed. CJS, p.
138). Where the indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for more than the
actual sum due (Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th
ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00
loan, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such
extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering
100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering
the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25
hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil
Code is inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided
among the successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not 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 have received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of other heirs
who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted
presupposes several heirs of the debtor or creditor which does not obtain in this case.
Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY
11, 1977 IS HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12%
INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST
22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST
22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE
MORTGAGE COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY
HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY
DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR
OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.
G.R. No. 134330

March 1, 2001

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,

vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON,
respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision1 and Resolution2 in CA-G.R. No.
53865 of the Court of Appeals3 dated May 21, 1998 and June 29, 1998, respectively, which
modified the Decision4 dated April 30, 1996 of the Regional Trial Court of Roxas City, Branch
19 in a suit5 for Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two
hundred eighty eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and
described in Transfer Certificate of Title (TCT for brevity) No. T-7493. She leased a portion of
the said tract of land to respondents spouses Marcos and Arsenia Eslabon in connection with the
said spouses' sugar plantation business. The lease contract was effective for a period of seven (7)
years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from respondent
Philippine National Bank (PNB for brevity) secured by a real estate mortgage on their own four
(4) residential houses located in Roxas City, as well as on the agricultural land owned by
Eduarda Belo. The assent of Eduarda Belo to the mortgage was acquired through a special power
of attorney which she executed in favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial
foreclosure proceedings against the mortgaged properties were instituted by respondent PNB. At
the auction sale on June 10, 1991, respondent PNB was the highest bidder of the foreclosed
properties at Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public
auction of her agricultural land on June 10, 1991 as well as the registration of the Certificate of
Sheriff's Sale in its favor on July 1, 1991, and the one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and
Florencia Belo under a deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for
the redemption of the agricultural land in the amount of Four Hundred Eighty Four Thousand

Four Hundred Eighty Two Pesos and Ninety Six Centavos (P484,482.96), which includes the bid
price of respondent PNB, plus interest and expenses as provided under Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It
contended that the redemption price should be the total claim of the bank on the date of the
auction sale and custody of property plus charges accrued and interests amounting to Two
Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy Eight and Seventy Two
Centavos (P2,779,978.72).6 Petitioners spouses disagreed and refused to pay the said total claim
of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City,
Civil Case No. V-6182 which is an action for declaration of nullity of mortgage, with an
alternative cause of action, in the event that the accommodation mortgage be held to be valid, to
compel respondent PNB to accept the redemption price tendered by petitioners spouses Belo
which is based on the winning bid price of respondent PNB in the extrajudicial foreclosure in the
amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00)
plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
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77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised
Charter (PD 694, as amended), the proper rate of interest to be charged during the
redemption period is the rate specified in the mortgage contract based on Sec. 25 7 of PD
694 and the mortgage contract which incorporates by reference the provisions of the PNB
Charters. Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as
amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest
collectible during the redemption period is the rate specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the
property under the provisions of the General Banking Act, no redemption was validly
effected;8
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After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the
alternative cause of action of spouses Belo, the decretal portion of which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of
plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and against defendants
Philippine National Bank and Spouses Marcos and Arsenia Eslabon:

1. Making the injunction issued by the court permanent, insofar as the property of
Eduarda Belo covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M.
Belo to redeem only Eduarda Belo's property situated in Brgy. Timpas, Panitan,
Capiz, and covered by Transfer Certificate of Title No. T-7493 by paying only its
bid price of P447,632.00, plus interest and other charges provided for in Section
30, Rule 39 of the Rules of Court, less the loan value, as originally appraised by
said defendant Bank, of the foreclosed four (4) residential lots of defendants
Spouses Marcos and Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants
Philippine National Bank and spouses Marcos and Arsenia Eslabon.
With costs against defendants.
SO ORDERED.9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the
Court of Appeals. In its Decision rendered on May 21, 1998, the appellate court, while upholding
the decision of the trial court on the validity of the real estate mortgage on Eduarda Belo's
property, the extrajudicial foreclosure and the public auction sale, modified the trial court's
finding on the appropriate redemption price by ruling that the petitioners spouses Belo should
pay the entire amount due to PNB under the mortgage deed at the time of the foreclosure sale
plus interest, costs and expenses.10
Petitioners spouses Belo sought reconsideration11 of the said Decision but the same was denied
by the appellate court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage contract
obligating Eduarda Belo as co-mortgagor, considering that it has not been sufficiently
established that Eduarda Belo's assent to the special power of attorney and to the
mortgage contract was tainted by any vitiating cause. Moreover, in tendering an offer to
redeem the property (Exhibit "20", p. 602 Record) after its extrajudicial foreclosure, she
has thereby admitted the validity of the mortgage, as well as the transactions leading to its
inception. Eduarda Belo, and the appellees as mere assignees of Eduarda's right to
redeem the property, are therefore estopped from questioning the efficacy of the mortgage
and its subsequent foreclosure.12

The appellate court further declared that petitioners spouses Belo are obligated to pay the total
bank's claim representing the redemption price for the foreclosed properties, as provided by
Section 25 of P.D No. 694, holding that:
On the other hand, the court's ruling that the appellees, being the assignee of the right of
repurchase of Eduarda Belo, were bound by the redemption price as provided by Section
25 of P.D. 694, stands. The attack on the constitutionality of Section 25 of P.D. 694
cannot be allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123
SCRA 794 [1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has
regarded the said provision of law with respect, using the same in determining the proper
redemption price in foreclosure of mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for qualification, as the
appellees would have us rule. The said rule, as amended, makes no specific distinction as
to assignees or transferees of the mortgagor of his redemptive right. In the absence of
such distinction by the law, the Court cannot make a distinction. As admitted assignees of
Eduarda Belo's right of redemption, the appellees succeed to the precise right of Eduarda
including all conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code)
will extend to apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from
the rule embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection
given to government lending institutions, particularly, the Philippine National Bank.
(Dulay v. Carriaga, supra)13
Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the
assignment of errors to the following:
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II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT
ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS
IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY
EDUARDA BELO IN FAVOR OF RESPONDENT ESLABON WAS NULL
AND VOID:

(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT

MARCOS ESLABON UNDER SAID INVALID SPECIAL POWER OF
ATTORNEY IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
PNB ACTED IN BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS
ESLABONS TO OBTAIN THE CONSENT OF EDUARDA BELO, PETITIONERS'
PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
PNB WAS NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS
COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO,
PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE
LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY
HOLDING THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE
CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD
PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB
AGAINST THE RESPONDENTS-DEBTORS ESLABONS, PETITIONERS SHALL
SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO
REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD
PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION,
PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR
IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX
DUE PRIOR TO THE FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing out the
following facts which the appellate court allegedly failed to fully interpret and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an
accommodation mortgagor and that she has no personal liability to respondent PNB.
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2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind
Eduarda Belo as accommodation mortgagor authorized the agent Eslabons to borrow and
mortgage her agricultural land for her (Eduarda Belo) use and benefit. Instead, said PNB
SPA Form No. 74 was used by debtors Eslabons and PNB to bind Eduarda Belo as
accommodation mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without
specifying the amount of the loan to be granted by respondent PNB to the respondentsdebtors Eslabons upon assurance by the PNB manager that the SPA was merely a
formality and that the bank will not lend beyond the value of the four (4) [Roxas City]
residential lots located in Roxas City mortgaged by respondents-debtors Eslabons (see
Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the
Eslabons, did not make demands upon her for payment, did not advise her of Eslabons'
default. The pre-auction sale notice intended for Eduarda Belo was addressed and
delivered to the address of the debtors Eslabons residence at Baybay Roxas City, not to
the Belo Family House which is the residence of Eduarda Belo located in the heart of
Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio
"admitted that through oversight, no demand letters were sent to Eduarda Belo, the
accommodation mortgagor" (see p. 7, RTC Decision).
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5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan
which was unpaid at the time of the extrajudicial foreclosure sale was only P789,897.00.
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6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's
agricultural land expressly reserved the right to question the legality of the
accommodation mortgage in the event that said tender to redeem was rejected by PNB
(Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or not the Special
Power of Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure
proceedings and the subsequent auction sale involving Eduarda Belo's property are valid.
Second, assuming they are valid, whether or not the petitioners are required to pay, as
redemption price, the entire claim of respondent PNB in the amount of P2,779,978.72 as of the
date of the public auction sale on June 10, 1991.

On the first issue, the petitioners contend that the SPA is void for the reason that the amount for
which the spouses Eslabon are authorized to borrow from respondent bank was unlimited; and
that, while the SPA states that the amount loaned is for the benefit of Eduarda Belo, it was in fact
used for the benefit of the respondents spouses Eslabon. For the said reasons petitioners contend
that the mortgage contract lacks valid consent, object and consideration; that it violates a concept
in the law of agency which provides that the contract entered into by the agent must always be
for the benefit of the principal; and, that it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the
subsequent auction sale of Eduarda Belo's property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to
petitioners' failure to appeal the same after the trial court rendered its decision affirming their
validity. After the trial court rendered its decision granting petitioners their alternative cause of
action, i.e., that they can redeem the subject property on the basis of the winning bid price of
respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause of
action. If they felt aggrieved by the trial court's decision upholding the validity of the said two
(2) documents, then they should have also partially appealed therefrom but they did not. It is an
abuse of legal remedies for petitioners to belatedly pursue a claim that was settled with finality
due to their own shortcoming. As held in Caliguia v. National Labor Relations Commission,16
where a party did not appeal from the Labor Arbiter's decision denying claims for actual, moral
and exemplary damages and instead moved for immediate execution, the decision then became
final as to him and by asking for its execution, he was estopped from relitigating his claims for
damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature,
especially when affirmed by the Court of Appeals, deserve to be respected and affirmed by the
Supreme Court, provided it is supported by substantial evidence. 17 The finding of facts of the
trial court to the effect that Eduarda Belo was not induced by the manager of respondent PNB
but instead that she freely consented to the execution of the SPA is given the highest respect as it
was affirmed by the appellate court. In the case at bar, the burden of proof was on the petitioners
to prove or show that there was alleged inducement and misrepresentation by the manager of
respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only agreed to sign
the SPA after she was assured that the spouses Eslabon would not borrow more than the value of
their own four (4) residential lots in Roxas City was properly objected to by respondent PNB.18
Also their contention that Eduarda Belo signed the SPA in blank was properly objected to by
respondent PNB on the ground that the best evidence was the SPA. There is also no proof to
sustain petitioners' allegation that respondent PNB acted in bad faith and connived with the
debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage through
fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would use her
property as additional mortgage collateral for loans inasmuch as the mortgage contract states that

"the consideration of this mortgage is hereby initially fixed at P229,000.00."19 The mortgage
contract sufficiently apprises Eduarda Belo that the respondents spouses Eslabon can apply for
more loans with her property as continuing additional security. If she found the said provision
questionable, she should have complained immediately. Instead, almost ten (10) years had passed
before she and the petitioners sought the annulment of the said contracts.
Third, after having gone through the records, this Court finds that the courts a quo did not err in
holding that the SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and
the Real Estate Mortgage executed by the respondents spouses in favor of respondent PNB are
valid. It is stipulated in paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon
spouses "to make, sign, execute and deliver any contract of mortgage or any other documents of
whatever nature or kind . . . which may be necessary or proper in connection with the loan herein
mentioned, or with any loan which my attorney-in-fact may contract personally in his own
name . . .20 This portion of the SPA is quite relevant to the case at bar. This was the main reason
why the SPA was executed in the first place inasmuch as Eduarda Belo consented to have her
land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was not meant to
make her a co-obligor to the principal contract of loan between respondent PNB, as lender, and
the spouses Eslabon, as borrowers. The accommodation real estate mortgage over her property,
which was executed in favor of respondent PNB by the respondents spouses Eslabon, in their
capacity as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA
to authorize respondents spouses Eslabons to execute a mortgage on her land. Petitioners
themselves even acknowledged that the relation created by the SPA and the mortgage contract
was merely that of mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to
authorize the spouses Eslabon to mortgage Eduarda Belo's land as additional collateral of the
Eslabon spouses' loan from respondent PNB. Thus, the petitioners' contention that the SPA is
void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was
able to collect the rentals on her leased property from the Eslabons.21
An accommodation mortgage is not necessarily void simply because the accommodation
mortgagor did not benefit from the same. The validity of an accommodation mortgage is allowed
under Article 2085 of the New Civil Code which provides that "(t)hird 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,
otherwise that would be contrary to his designation as such. It is not always necessary that the
accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should it
first be determined before the execution of the SPA for it has been held that:
"(real) mortgages given to secure future advancements are valid and legal contracts; that
the amounts named as consideration in said contract do not limit the amount for which

the mortgage may stand as security if from the four corners of the instrument the intent to
secure future and other indebtedness can be gathered. A mortgage given to secure
advancements is a continuing security and is not discharged by repayment of the amount
named in the mortgage, until the full amount of the advancements are paid."22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent
PNB manifesting her intent to redeem the property is a waiver of her right to question the
validity of the SPA and the mortgage contract as well as the foreclosure and the sale of her
subject property. Petitioners claim that her letter was not an offer to redeem as it was merely a
declaration of her intention to redeem. Respondent PNB's answer to her letter would have carried
certain legal effects. Had respondent PNB accepted her letter-offer, it would have surely bound
the bank into accepting the redemption price offered by Eduarda Belo. If it was her opinion that
her SPA and the mortgage contract were null and void, she would not have manifested her intent
to redeem but instead questioned their validity before a court of justice. Her offer was a
recognition on her part that the said contracts are valid and produced legal effects. Inasmuch as
Eduarda Belo is estopped from questioning the validity of the contracts, her assignees who are
the petitioners in the instant case, are likewise estopped from disputing the validity of her SPA,
the accommodation real estate mortgage contract, the foreclosure proceedings, the auction sale
and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent
PNB maintains that Section 25 of Presidential Decree No. 694 should apply, thus:
SECTION 25. Right of redemption of foreclosed property Right of possession during
redemption period. Within one year from the registration of the foreclosure sale of real
estate, the mortgagor shall have the right to redeem the property by paying all claims of
the Bank against him on the date of the sale including all the costs and other expenses
incurred by reason of the foreclosure sale and custody of the property as well as charges
and accrued interests.23
Additionally, respondent bank seeks the application to the case at bar of Section 78 of the
General Banking Act, as amended by P.D. No. 1828, which states that
. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on
real estate which is security for any loan granted before the passage of this Act or under
the provisions of this Act, the mortgagor or debtor whose real property has been sold at
public auction, judicially or extrajudicially, for the full or partial payment of an obligation
to any bank, banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in
the order of execution, or the amount due under the mortgage deed, as the case may be,

with interest thereon at the rate specified in the mortgage, and all the costs, and judicial
and other expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the income
received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's purchase
together with the interest thereon and on all other related expenses should be paid as redemption
price in accordance with Section 6 of Act No. 3135 which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtor, his successor 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; 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 Procedure25 , in so far as these
are not inconsistent with the provisions of this Act.
Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive redemptions;
notice to be given and filed. The judgment obligor, or redemptioner, may redeem 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,
within one 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. (Italic supplied)
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This Court finds the petitioners' position on that issue to be meritorious.

There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor.
The Pre-trial Order and respondent PNB's brief contain a declaration of this fact. The dispute
between the parties is whether Section 25 of P.D. No. 694 applies to an accommodation
mortgagor, or her assignees. The said legal provision does not make a distinction between a
debtor-mortgagor and an accommodation mortgagor as it uses the broad term "mortgagor". The
appellate court thus ruled that the provision applies even to an accommodation mortgagor

inasmuch as the law does not make any distinction. We disagree. Where a word used in a statute
has both a restricted and a general meaning, the general must prevail over the restricted unless
the nature of the subject matter or the context in which it is employed clearly indicates that the
limited sense is intended.26 It is presumed that the legislature intended exceptions to its language
which would avoid absurd consequences of this character.27 In the case at bar, the qualification to
the general rule applies. The same provision of Section 25 of P.D. No. 694 provides that "the
mortgagor shall have the right to redeem the property by paying all claims of the Bank against
him". From said provision can be deduced that the mortgagor referred to by that law is one from
whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a
borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim against
accommodation mortgagor Eduarda Belo inasmuch as she only mortgaged her property to
accommodate the Eslabon spouses who are the loan borrowers of the PNB. The principal
contract is the contract of loan between the Eslabon spouses, as borrowers/debtors, and the PNB
as lender. The accommodation real estate mortgage (which secures the loan) is only an accessory
contract. It is our view and we hold that the term "mortgagor" in Section 25 of P.D. No. 694
pertains only to a debtor-mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If
the words of a statute are susceptible of more than one meaning, the absurdity of the result of one
construction is a strong argument against its adoption, and in favor of such sensible
interpretation.28 We test a law by its result. A law should not be interpreted so as not to cause an
injustice. There are laws which are generally valid but may seem arbitrary when applied in a
particular case because of its peculiar circumstances. We are not bound to apply them in slavish
obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and
unjust to accommodation mortgagors and their assignees. Forcing an accommodation mortgagor
like Eduarda Belo to pay for what the principal debtors (Eslabon spouses) owe to respondent
bank is to punish her for the accommodation and generosity she accorded to the Eslabon spouses
who were then hard pressed for additional collateral needed to secure their bank loan.
Respondents PNB and spouses Eslabons very well knew that she merely consented to be a mere
accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be
made to pay the entire liability of the principal debtors, Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial foreclosure and public
auction sale of Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended
by P.D. No. 385. The notice of extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it
sent to Eduarda Belo did not mention P. D. No. 694 as the basis for redemption. As aptly ruled by
the trial court

In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for

value of their redemption rights, PNB should have at least advised them that redemption
would be governed by its Revised Charter or PD 69, and not by Act 3135 and the Rules
of Court, as commonly practiced . . . This practice of defendant Bank is manifestly unfair
and unjust to these redemptioners who are caught by surprise and usually taken aback by
the enormous claims of the Bank not shown in the Notice of Extrajudicial Sale or the
Certificate of Sheriff's Sale as in this case.31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately
foreclose this mortgage judicially in accordance with the Rules of Court or extrajudicially in
accordance with Act No. 3135, as amended and Presidential Decree No. 385 . . .32 Since the
mortgage contract in this case is in the nature of a contract of adhesion as it was prepared solely
by respondent, it has to be interpreted in favor of petitioners. The respondent bank however tries
to renege on this contractual commitment by seeking refuge in the 1989 case of Sy v. Court of
Appeals33 wherein this Court ruled that the redemption price is equal to the total amount of
indebtedness to the bank's claim inasmuch as Section 78 of the General Banking Act is an
amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure
procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also
stipulated that Act No. 3135 is the controlling law in case of foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in which the
sale and redemption shall be effected." Clearly, the fundamental principle that contracts
are respected as the law between the contracting parties finds application in the present
case, specially where they are not contrary to law, morals, good customs and public
policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the
General Banking Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the
redemption price, does not apply here inasmuch as in the said cases the redemptioners were the
debtors themselves or their assignees, and not an accommodation mortgagor or the latter's
assignees such as in the case at bar. In the said cases, the debtor-mortgagors were required to pay
as redemption price their entire liability to the bank inasmuch as they were obligated to pay their
loan which is a principal obligation in the first place. On the other hand, accommodation
mortgagors as such are not in anyway liable for the payment of the loan or principal obligation of
the debtor/borrower The liability of the accommodation mortgagors extends only up to the loan
value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they
be allowed to redeem their mortgaged property by paying only the winning bid price thereof
(plus interest thereon) at the public auction sale.

One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification
and yet in the end appears to disregard the same when it finds its provisions unfavorable to it.
This is unfair to the other contracting party who in good faith believes that respondent PNB
would comply with the contractual agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by
P.D. No. 1828, is inapplicable to accommodation mortgagors in the redemption of their
mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of
respondent PNB against the principal debtors, spouses Eslabon, they can only exercise their right
of redemption with respect to the parcel of land belonging to Eduarda Belo, the accommodation
mortgagor. Thus, they have to pay the bid price less the corresponding loan value of the
foreclosed four (4) residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to
their assignor, Eduarda Belo, would violate the principle of indivisibility of mortgage contracts.
We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
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 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.
There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and
the other mortgage on the property of Eduarda Belo both secure the loan obligation of
respondents spouses Eslabon to respondent PNB. However, we are not persuaded by the
contention of the respondent PNB that the indivisibility concept applies to the right of

redemption of an accommodation mortgagor and her assignees. The jurisprudence in Philippine

National Bank v. Agudelo37 is enlightening to the case at bar, to wit:
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However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot
No. 878 . . . . This acknowledgment, however, does not extend to lots Nos. 207 and
61 . . . inasmuch as, although it is true that a mortgage is indivisible as to the contracting
parties and as to their successors in interest (Article 1860, Civil code), it is not so with
respect to a third person who did not take part in the constitution thereof either
personally or through an agent x x x. Therefore, the only liability of the defendantappellant Paz Agudelo y Gonzaga is that which arises from the aforesaid
acknowledgment but only with respect to the lien and not to the principal obligation
secured by the mortgage acknowledged by her to have been constituted on said lot No.
878 . . . . Such liability is not direct but a subsidiary one.38
xxx

xxx

xxx

Wherefore, it is hereby held that the liability contracted by the aforesaid defendantappellant Paz Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the
agent), limited to lot No. 87.
xxx

xxx

xxx

From the wording of the law, indivisibility arises only when there is a debt, that is, there is a
debtor-creditor relationship. But, this relationship is wanting in the case at bar in the sense that
petitioners are assignees of an accommodation mortgagor and not of a debtor-mortgagor. Hence,
it is fair and logical to allow the petitioners to redeem only the property belonging to their
assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses,
petitioners being total strangers to said lots lack legal personality to redeem the same. Fair
play and justice demand that the respondent PNB's interest of recovering its entire bank claim
should not be at the expense of petitioners, as assignees of Eduarda Belo, who is not indebted to
it. Besides, the letter39 sent by respondent PNB to Eduarda Belo states that "your (Belo)
mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at public
auction . . . .". It further states that "You (Belo) have, therefore, one year from July 1, 1991
within which to redeem your mortgaged property/ies, should you desire to redeem it."
Respondent PNB never mentioned that she was bound to redeem the entire mortgaged properties
including the four (4) residential properties of the spouses Eslabon. The letter was explicit in
mentioning Eduarda Belo's property only. From the said statement, there is then an admission on

the part of respondent PNB that redemption only extends to the subject property of Eduarda Belo
for the reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to
redeem only the property, covered and described in Transfer Certificate of Title No. T-7493Capiz registered in the name of Eduarda Belo, by paying only the bid price less the
corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses
Marcos and Arsenia Eslabon, consistent with the Decision of the Regional Trial Court of Roxas
City in Civil Case No. V-6182.
SO ORDERED.
G.R. No. 118585 September 14, 1995
AJAX MARKETING & DEVELOPMENT CORPORATION, ANTONIO TAN, ELISA TAN, TAN YEE, and SPS. MARCIAL SEE and LILIAN
TAN, petitioners,
vs.
HON. COURT OF APPEALS, METROPOLITAN BANK AND TRUST COMPANY, and THE SHERIFF OF MANILA, respondents.

FRANCISCO, J.:
In its March 30, 1994 decision, public respondent Court of Appeals affirmed the trial court's judgment upholding the validity of the extrajudicial foreclosure of the real estate property of petitioners spouses Marcial See and Lilian Tan, located at Paco District, Manila covered
1

Petitioners' motion for

reconsideration was denied; hence, this petition for review on certiorari raising the following assignments
of errors:
by TCT 105233, by private respondent Metropolitan Bank and Trust Company (Metrobank).

FIRST: The Honorable Court of Appeals erred in holding that the consolidation of the
three (3) loans granted separately to three entities into a single loan of P1.0 Million was a
mere restructuring and did not effect a novation of the loan as to extinguish the accessory
mortgage contracts.
SECOND: The Honorable Court of Appeals erred in not holding that the consolidated
loan of P1.0 Million was not accompanied by the execution of a new REM, as was done
by the Bank in the earlier three (3) loans, and hence, was, to all legal intents/purposes,
unsecured.
THIRD: The Honorable Court of Appeals erred in holding that the inclusion in the extrajudicial foreclosure of the admittedly unsecured loan of P970,000.00 is a mere error that
does not invalidated said foreclosure, contrary to the pronouncement in C & C
Commercial Corp. vs. PNB, 175 SCRA 1.
FOURTH: The Honorable Court of Appeals erred in not declaring as null and void the
extra-judicial foreclosure undertaken by Metrobank on the property of Sps. Marcial See
and Lilian Tan. 2

The facts as found by public respondent Court of Appeals are as follows:

It is not disputed that Ylang-Ylang Merchandising Company, a partnership between
Angelita Rodriguez and Antonio Tan, obtained a loan in the amount of P250,000.00 from
the Metropolitan Bank and Trust Company, and to secure payment of the same, spouses
Marcial See and Lilian Tan constituted a real estate mortgage in favor of said bank over
their property in the District of Paco, Manila, covered by TCT No. 105233 of the Registry
of Deeds of Manila. The mortgage was annotated at the back of the title.
Subsequently, after the partnership had changed its name to Ajax Marketing Company
albeit without changing its composition, it obtained a loan in the sum of P150,000.00 from
Metropolitan Bank and Trust Company. Again to secure the loan, spouses Marcial See
and Lilian Tan executed in favor of said bank a second real estate mortgage over the
same property. As in the first instance, the mortgage was duly annotated at the back of
TCT No. 105233.
On February 19, 1979, the partnership (Ajax Marketing Company) was converted into a
corporation denominated as Ajax Marketing and Development Corporation, with the
original partners (Angelita Rodriguez and Antonio Tan) as incorporators and three (3)
additional incorporators, namely, Elisa Tan, the wife of Antonio Tan, and Jose San Diego
and Tessie San Diego. Ajax Marketing and Development Corporation obtained from
Metropolitan Bank and Trust Company a loan of P600,000.00, the payment of which was
secured by another real estate mortgage executed by spouses Marcial See and Lilian
Tan in favor of said bank over the same realty located in the District of Paco, Manila.
Again, the third real estate mortgage was annotated at the back of TCT No. 105233.
In December 1980, the three (3) loans with an aggregate amount of P1,000,000.00 were
re-structured and consolidated into one (1) loan and Ajax Marketing and Development
Corporation, represented by Antonio Tan as Board Chairman/President and in his
personal capacity as solidary co-obligor, and Elisa Tan as Vice-President/Treasurer and
in her personal capacity as solidary co-obligor, executed a Promissory Note (PN) No. BDS-3605. 3
In their interrelated first and second assignment of errors, petitioners argue that a novation occurred when
their three (3) loans, which are all secured by the same real estate property covered by TCT No. 105233
were consolidated into a single loan of P1 million under Promissory Note No. BDS-3605, thereby
extinguishing their monetary obligations and releasing the mortgaged property from liability.
Basic principles on novation need to be stressed at the outset. Novation is the extinguishment of an
obligation by the substitution or change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, or by substituting another in place
of the debtor, or by subrogating a third person in the rights of the creditor. 4 Novation, unlike other modes
of extinction of obligations, is a juridical act with a dual function, namely, it extinguishes an obligation and
creates a new one in lieu of the old. It can be objective, subjective, or mixed. Objective novation occurs
when there is a change of the object or principal conditions of an existing obligation while subjective
novation occurs when there is a change of either the person of the debtor, or of the creditor in an existing
obligation. 5 When the change of the object or principal conditions of an obligation occurs at the same time
with the change of either in the person of the debtor or creditor a mixed novation occurs. 6

The well settled rule is that novation is never presumed. 7 Novation will not be allowed unless it is clearly
shown by express agreement, or by acts of equal import. Thus, to effect an objective novation it is
imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that
the new obligation be on every point incompatible with the new one. 8 In the same vein, to effect a
subjective novation by a change in the person of the debtor it is necessary that the old debtor be released
expressly from the obligation, and the third person or new debtor assumes his place in the relation. 9
There is no novation without such release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety. 10
The attendant facts herein do not make a case of novation. There is nothing in the records to show the
unequivocal intent of the parties to novate the three loan agreements through the execution of PN No.
BDS-3065. The provisions of PN No. BDS-3065 yield no indication of the extinguishment of, or an
incompatibility with, the three loan agreements secured by the real estate mortgages over TCT No.
105233. On its face, PN No. BDS-3065 has these words typewritten: "secured by REM" and "9.
COLLATERAL. This is wholly/partly secured by: (x) "real estate", 11 which strongly negate petitioners'
asseveration that the consolidation of the three loans effected the discharge of the mortgaged real estate
property. Otherwise, there would be no sense placing these material provisions. Moreover; the real estate
mortgages contained this common provision, to wit:
That for and in consideration of credit accommodations obtained from the MORTGAGEE
(Metropolitan Bank and Trust Company), by the MORTGAGOR and/or AJAX MKTG.
DEV. CORP./AJAX MARKETING COMPANY/YLANG-YLANG MERCHANDISING
COMPANY detailed as follows:
Nature Date Granted Due Date Amount or Line
Loans and/or P 600,000.00
Advances in 150,000.00
current account 250,000.00
and to secure the payment of the same and those that may hereafter be obtained
including the renewals or extension thereof.
xxx xxx xxx
the principal of all of which is hereby fixed at (P600,000.00/ P150,000.00/
P250,000.00) . . .as well as those that the MORTGAGEE may have previously extended
or may later extend to the MORTGAGOR, including interest and expenses or any other
obligation owing to the MORTGAGEE, whether direct or indirect, principal or secondary,
as appears in the accounts, books and records of the MORTGAGEE, the MORTGAGOR
hereby transfer and convey by way of mortgage unto the MORTGAGEE, its successors
or assigns, the parcels of land which are described in the list inserted on page three of
this document and/or appended hereto, together with all the buildings and improvements
now existing or which may hereafter be erected or constructed thereon, of which the
MORTGAGOR declares that he/it is the absolute owner free from all liens and
encumbrances. However, if the MORTGAGOR shall pay to the MORTGAGEE, its

successors or assigns, the obligation secured by this mortgage when due, together with
interest, and shall keep and perform all and singular the covenants and agreements
herein contained for the MORTGAGOR to keep and perform, then the mortgage shall be
void; otherwise, it shall remain in full force and effect. 12
The foregoing shows that petitioners agreed to apply the real estate property to secure
obligations that they may thereafter obtain including their renewals or extensions with the
principals fixed at P600,000.00, P150,000.00, and P250,000.00 which when added have an
aggregate sum of P1.0 million. PN No. BDS-3605 merely restructured and renewed the three
previous loans to expediently make the loans current. There was no change in the object of the
prior obligations. The consolidation of the three loans, contrary to petitioners' contention, did not
release the mortgaged real estate property from any liability because the mortgage annotations at
the back of TCT No. 105233, in fact, all remained uncancelled, thus indicating the continuing
subsistence of the real estate mortgages.
Neither can it be validly contended that there was a change, or substitution in the persons of either the
creditor (Metrobank) or more specifically the debtors (petitioners) upon the consolidation of the loans in
PN No. BDS 3605. The bare fact of petitioners' conversion from a partnership to a corporation, without
sufficient evidence, either testimonial or documentary, that they were expressly released from their
obligations, did not make petitioner AJAX, with its new corporate personality, a third person or new debtor
within the context of a subjective novation. If at all, petitioner AJAX only became a co-debtor or surety.
Without express release of the debtor from the obligation, any third party who may thereafter assume the
obligation shall be considered merely as co-debtor or surety. Novation arising from a purported change in
the person of the debtor must be clear and express because, to repeat, it is never presumed. Clearly
then, from the aforediscussed points, neither objective nor subjective novation occurred here.
Anent the third assigned error, petitioners posit that the extra-judicial foreclosure is invalid as it included
two unsecured loans: one, the consolidated loan of P1.0 million under PN BDS No. 3605, and two, the
P970,000.00 loan under PN BDS No. 3583 subsequently extended by Metrobank.
An action to foreclose a mortgage is usually limited to the amount mentioned in the mortgage, but where
on the four corners of the mortgage contracts, as in this case, the intent of the contracting parties is
manifest that the mortgaged property shall also answer for future loans or advancements then the same
is not improper as it is valid and binding between the parties. 13 For merely consolidating and expediently
making current the three previous loans, the loan of P1.0 million under PN BDS No. 3605, secured by the
real estate property, was correctly included in the foreclosure's bid price. The inclusion of the unsecured
loan of P970,000.00 under PN BDS NO. 3583, however, was found to be improper by public respondent
which ruling we shall not disturb for Metrobank's failure to appeal therefrom. Nonetheless, the inclusion of
PN BDS No. 3583 in the bid price did not invalidate the foreclosure proceedings. As correctly pointed out
by the Court of Appeals, the proceeds of the auction sale should be applied to the obligation pertaining to
PN BDS No. 3605 only, plus interests, expenses and other charges accruing thereto. It is Metrobank's
duty as mortgagee to return the surplus in the selling price to the mortgagors. 14
Lastly, petitioners cite as supporting authority C & C Commercial Corp. v. Philippine National Bank 15
where this Court enjoined the foreclosure proceedings for including unsecured obligations. Petitioners'
reliance on the C & C Commercial Corp. v. Philippine National Bank case is misplaced. In that case, the
foreclosure sale included previously incurred unsecured obligations in favor of PNB which were not in the
contemplation of the mortgage contract, whereas in the instant case, the mortgages were one in providing

that the mortgaged real estate property shall also secure future advancements or loans, as well as
renewals or extensions of the same.
Prescinding from the above discussions, the fourth assignment of error obviously needs no further
discussion.
WHEREFORE, the decision appealed from is hereby AFFIRMED in toto.

G.R. No. L-19227

February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

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

able to withdraw the amount credited to him before the discovery of the defraudation on April 2,
1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify
the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court
of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the
order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant bank took
physical possession of three pledged vessels while they were at the Port of Cebu, and on April
29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant
bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed
a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the Philippine
Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to
pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S
Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to
recover the three vessels or their value and damages from defendant bank. The latter filed its
answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a
pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of
the facts above-narrated. During the course of the trial, defendant amended its answer reducing
its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's
taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract,
Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant
bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was
likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums against the indemnity which
plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought the appeal
to Us, the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this Court hold
that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could
not take possession of the chattels object thereof until after there has been default. The
submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a
pledge contract

3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant
Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00,
and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" &
Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of
Customs for the Port of Cebu on the date appearing therein; (Emphasis
supplied)1wph1.t
Necessarily, this judicial admission binds the plaintiff. Without any showing that this was
made thru palpable mistake, no amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession of the
vessels. While it is true that plaintiff continued operating the vessels after the pledge contract
was entered into, his possession was expressly made "subject to the order of the pledgee." 10 The
provision of Art. 2110 of the present Civil Code 11 being new cannot apply to the pledge
contract here which was entered into on June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can temporarily entrust the physical possession of the
chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is
regarded as holding the pledged property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to
make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be
actual delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v. Peterson,
7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of
the things pledged in the two cases will readily dispel the apparent contradiction between the two
rulings. In Betita v. Ganzon, the objects pledged carabaos were easily capable of actual,
manual delivery unto the pledgee. In Banco Espaol-Filipino v. Peterson, the objects pledged
goods contained in a warehouse were hardly capable of actual, manual delivery in the sense
that it was impractical as a whole for the particular transaction and would have been an
unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee,
delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will
depend upon the nature and the peculiar circumstances of each case. The parties here agreed that
the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of this case and the nature of the objects
pledged, i.e., vessels used in maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full control of
the vessels thru the plaintiff, the former could take actual possession at any time during the life
of the pledge to make more effective its security. Its taking of the vessels therefore on April 6,
1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the
defendant bank in the huge sum of P184,000.

The stand We have taken is not without precedent. The Supreme Court of Spain, in a
similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder
del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de
autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad,
convinieron que continuaran los coches en poder del deudor para no suspender el trafico,
y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su
responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes
contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiff-appellant attacks the
validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory requirements as to public sales with prior
notice in connection with foreclosure proceedings are waivable, are no longer authoritative in
view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not
allow it to buy the property object of foreclosure in case of private sales; and third, that the price
obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44
Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage
of Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So,
whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority
to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and
2938 only states that if the sale is public, the bank could purchase the whole or part of the
property sold " free from any right of redemption on the part of the mortgagor or pledgor." This
even argues against plaintiff's case since the import thereof is this if the sale were private and the
bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff
could have recovered the vessels by exercising this right of redemption. He is the only one to
blame for not doing so.
Regarding the third contention, on the assumption that the purchase price was
unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this.
Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the
P184,000 fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages allegedly suffered by plaintiffappellant by virtue of the taking of the vessels. But in view of the results reached above, there is
no more need to discuss the same.

On the whole, We cannot say the lower court erred in disposing of the case as it did.
Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the
defendant bank first. If the latter countered with the seizure and sale of the pledged vessels
pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in
the payment of the first promissory note. Plaintiff-appellant did not come to court with clean
hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiffappellant. So ordered.

G.R. No. L-24893

August 23, 1926

Involuntary Insolvency of The Gulf Plantation Co.

PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN DRUG COMPANY
and STANDARD OIL COMPANY, petitioners-appellants,
vs.
PHILIPPINE NATIONAL BANK, creditor-appellee.
H. B. Hughes, assignee.
Simon R. Cruz for appellants.
Dionisio de Leon for appellee.
STATEMENT
At Davao, Davao P. I., on august 24, 1918, the Gulf Plantation Company, a corporation, through
its president executed to the Philippine National Bank a certain instrument known in the record
as Exhibit A, in which the Plantation Company is named and styled as the pledgor, and the
Philippine National Bank as the pledges, in which it is recited that the Gulf Plantation Company
has obtained certain credits, loans, overdrafts, etc., from the pledgee, which the parties have
mutually agreed should be guaranteed and secured, including costs, charges, and interest "of
keeping the pledged property," and "all other expenditures of the pledgee incurred in connection
with this pledge." In consideration thereof, all other valuable consideration received by the
pledgor, and for the purpose of securing the payment of all sums not exceeding P165,000, the
pledgor hypothecated and pledged to the pledgee and hereby delivered the possession, for the
purpose of the pledge, of all the property itemized in schedule A on the back of this pledge. The
pledgor agreed without demand to pledge and deliver to the pledgee any further and additional
securities required, and to pay the taxes and keep the property insured. That, if the pledgor shall
pay to the pledgee such sums of money as the pledgee, may advance under the terms of the
pledge, then the pledged property may be turned to the pledgor, and "this pledge shall be of no
further, otherwise, to remain in force, and the pledgee may dispose of the pledged property in the

manner herein provided, or in accordance with the Chattel Mortgage Law, at the option of the
pledgee." The pledgor appoints the pledgee as attorney-in-fact of the pledgor with full power and
authority after any condition of the pledge may have been broken to enter the premises where the
pledged property is located, and take possession of it by force, if necessary, and seize and take
actual possession of it without an order of the court, and to sell, assign and deliver the property
pledged, or any part thereof, at the option of the pledgee. Provision is then made for the
application of the proceeds of any sale of the property under the pledge. The instrument was duly
executed and acknowledged before a notary public as of the date it was signed.
Schedule A, which is part of the instrument, is as follows:
Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao
Province, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000.
Forty-eight buildings of permanent materials valued at P5,500 situated on above lease.
Two buildings of strong materials valued at P15,000.
One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the
"Gulf Plantation, Incorporated," valued at P45,000.
Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450.
One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; one launch
"Rigel," P800; one launch "New Kirk," P3,500 and cargo boats, P200.
The instrument contains the following endorsement:
Doc. stamps affixed P17.20
THE PROVINCIAL GOVERNMENT OF DAVAO
OFFICE OF THE REGISTER OF DEEDS
Received this 24th day of Feb., 1921,
at 9.30 o'clock a. m.
Entry No. 90, page 3, Volume Day Book (Provisional).
THE PROVINCIAL GOVERNMENT OF DAVAO
OFFICE OF THE REGISTER OF DEEDS
Received this 24th day of Feb., 1921.
at 9.30 o'clock a. m.

March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Company declared
insolvent, and it was declared insolvent on September 16, 1922, and the court ordered the sheriff
to take possession of all the assets of the insolvent estate. October 23, 1922, with the consent and
approval of all creditors, including the Philippine National Bank, and assignee was appointed,
and on October 27, 1922, he filed an inventory of all of the properties of the plantation company,
March 17, 1923, the court made an order requiring the assignee to render an account and to give
the creditors a copy. March 20, 1923, the assignee filed his account for the period between
October 1, 1922, and February 28, 1923. On January 7, 1924, the assignee filed a further account
covering the period from October 1, 1922, to November 30, 1923. Both of which accounts are
still pending and waiting the approval of the court. November 28, 1923, the assignee filed a
petition for authority to sell at public auction all of the properties of the insolvent estate, which
application is also now pending and waiting the order of the court. November 3, 1922, the
Philippine National Bank filed a petition, to which was attached a copy of Exhibit A and made a
part of it, reciting the execution of the instrument and a breach of its conditions, and praying for
the following order from the court:
(a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a copy
of which is attached to this claim as appendix A be declared effective and matured;
(b) That the assignee appointed in this insolvency proceeding, or if the latter has not yet
been appointed, the sheriff of the Province of Davao be authorized to sell at public or
private sale, after notice to the Philippine National Bank, all such interest, right or share
as the Gulf Plantation, Inc., has or may have in the properties described in Exhibit A;
(c) That should the proceeds of the sale of the properties mentioned in appendix A be
greater than the sum of P165,000, this amount of P165,000 be delivered to the Philippine
National Bank, and the balance to the assignee in insolvency; and
(d) In the event that the proceeds of the sale of the properties mentioned in Appendix A is
less than the sum of P165,000 that said proceeds be delivered to the Philippine National
Bank, and for the balance of difference not paid of the debt of the insolvent corporation to
the claimant company, the Philippine National Bank be admitted as an ordinary creditor
in this insolvency proceeding.
February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order of the
court, filed objections to the approval of the accounts rendered by the assignee.
In this situation, the court rendered a judgment in favor of the Philippine National Bank to the
effect that it was entitled to the possession of all of the estate of the insolvent corporation, and
that in the year 1919 the bank had appointed H. B. Hughes as its representative or administrator
of the properties of the Plantation Company, and requiring the bank to pay certain preferred

claims, including the income tax and the land tax, and that the bank was entitled to, and should
have, possession of all the properties of the insolvent corporation, and to have the property sold
and the proceeds of the sale applied to the satisfaction of the claim of the bank, and upon the
payment of such preferred claims, to have the proceeds of the sale applied to the satisfaction of
the claim of the bank, and that the creditors of the Plantation Company should share in any
amount remaining after such application, and dismissed the case, without costs.
From this judgment, the creditors appeal and assign the following errors:
I. The lower court erred in not finding and holding that the so-called "agreement of
pledge" executed by the insolvent Gulf Plantation Company in favor of the Philippine
National Bank is null and void on account of its many defects.
II. The lower court erred in not finding and holding that the Philippine National Bank has
renounced its alleged preferred lien on the properties of the insolvent covered by the
pledge, by giving its consent to the appointment of and assignee and by permitting said
assignee to take possession of said properties.
III. The lower court erred in not finding and holding that the claim of the Philippine
National Bank is an ordinary claim.
IV. The lower court erred in holding that the Philippine National Bank is entitled to the
possession of the properties of the insolvent.
V. The lower court erred in holding that the mortgage in favor of the Philippine National
Bank is effective and due.
VI. The lower court erred in not overruling the opposition of the Philippine National
Bank dated February 9, 1924, to the accounts submitted by the assignee.
VIII. The lower court erred in dismissing the insolvency proceedings.

JOHNS, J.:
In view of the numerous recitals made in it, what is known in the record as Exhibit A must be
construed as a pledge in both form and substance. It is very apparent from the language used in
the instrument that it was prepared on the customary blank form of a pledge for the taking of
properties under a pledge. It will be noted that it was never received or filed for any purpose until
the 24th of February, 1921, which was two years and a half after it was executed, and that it was
then endorsed, only received in the "office of the register of deeds" with "Entry No. 90 page 3,

Volume Day Book (Provisional)." That is to say, there is no evidence that it was ever received,
filed or recorded anywhere or by anyone, either as a chattel mortgaged or a pledge of personal
property. Hence, the receiving of it in the office of the register of deeds on February 24, 1921, is
a nullity as to both a pledge and a chattel mortgage.
The only witness for either party was Carlos Garcia, the manager of the bank at Davao, and he
was called for the sole purpose of testifying as to the amount of the bank's claim, which he
placed at about P60,000, and that it was due and owing. To make Exhibit A valid as a pledge, as
to the personal property therein described , it was the duty of the bank to take the actual, physical
possession of the property, and to continue and remain in such possessions, and to make it valid
against creditors or the assignee, the bank must have been in such actual, physical possession at
the time the Plantation Company was declared insolvent. Upon the question, there is no evidence
in the record. Without it, Exhibit A is void as a pledge, and the bank would not have a preference,
and would not now be entitled to the possession of the property of the Plantation Company, or to
have it sold and the proceeds applied to the satisfaction of its claim.
Upon the question of pledge, article 1863 of the Civil Code provides:
In addition to the requisites mentioned in article 1857, it shall be necessary, in order to
constitute the contract of pledge, that the pledge, be placed in the possession of the
creditor or, of a third person appointed by common consent.
Section 4 of Act No. 1508, entitled "an Act providing for the mortgaging of personal property,
and for the registration of the mortgages so executed," provides:
A chattel mortgage shall not be valid against any person except the mortgagor, his
executors or administrators, unless the possession of the property is delivered to and
retained by the mortgagee or unless the mortgage is recorded in the office of the register
of deeds of the province in which the mortgagor resides at the time of making the same,
or, if he resides without the Philippine Islands, in the province in which the property is
situated.
That is to say, a chattel mortgage is not valid against any person except the mortgagor, his
executors or administrators, without delivery of possession of the property, unless the mortgage
is recorded in the office of the register of deeds of the province. It will be noted that, in the
absence of such delivery of possession on the recording of the instrument in the office of the
register of deeds, a chattel mortgages is valid only as to the mortgagor, his executors or
administrators. Hence, it follows that, in the absence of such record and the delivery of
possession a chattel mortgage is void as against the creditors or the assignee of an insolvent
estate, and upon that question, there is no evidence in the record.

If it was the purpose and intent of the bank to have Exhibit A received, filed and recorded as a
chattel mortgage, it was not only its duty to so instruct the register of deeds, but it was its further
duty to see that the instrument was received, filed and recorded as a chattel mortgage. Upon that
point there is no evidence.
Again, in the every nature of things, a pledge or chattel mortgage is confined and limited to
personal property, and it cannot be extended or made to apply to real property.
In what is known as schedule A, attached to Exhibit A, the property is described as lease No. 63
of 534 hectares of public land planted to 236,000 hemp and 700 coconut trees valued at
P430,000, and forty-eight buildings of permanent materials valued at P5,500, and two buildings
of strong materials valued at P15,000. It may well be doubted whether that kind of property
could become the subject matter of a pledge or chattel mortgage.
It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut
trees, and of forty-eight buildings of permanent materials and of two buildings of strong
materials, clearly indicating that the buildings were attached to the soil and as such would be real
estate.
It will also be noted that the pledge was executed in 1918, and it is very probable that the one
thousand piculs of hemp have long since been sold. As to the twenty-three carabaos, thirty-eight
bullocks and eighteen horses, there is no provision for the increase. Hence, the pledge, if valid
for any purpose, should be confined and limited to the particular property described in the
pledge, and would not include any increase.
That is to say, if it be a fact that at time the pledge was executed the bank took actual, physical
possession of the property described in it, and continued to remain in such possession up to the
time the petition for insolvency was filed, or that it was in such possession for more than thirty
days prior to the filing of the petition, the pledge would then be valid as to the personal property,
and the bank would then have a preference on that property for the amount found due and owing
upon its claim. If be a fact that the bank was not in the actual, physical possession of the property
at the time the insolvency petition was filed, and that the Plantation Company was in such
possession as its own, then the bank would not have a preference over any other unsecured
creditor.
From what has been said, it follows that the judgment of the lower court is reversed, and the case
remanded, with instructions for the assignee to proceed with the administration of the insolvent
estate in the ordinary course of business and in the manner provided by law, and for such further
proceedings as are not inconsistent with this opinion, with costs in favor of the appellant. So
ordered.

Avancea, C. J., Street, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.
G.R. No. L-6342

January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.
LAUREANO ATENDIDO, defendants-appellant.
Nicolas Fernandez for appellee.
Gaudencio L. Atendido for appellant.
BAUTISTA, ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the
defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per
annum from June 26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of
P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To
guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay
which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan,
and to that effect the borrower endorsed in favor of the bank the corresponding warehouse
receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown
reasons in the warehouse. When the loan matured the borrower failed to pay either the principal
or the interest and so the present action was instituted.
Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed
that the warehouse receipt covering the palay which was given as security having been endorsed
in blank in favor of the bank, and the palay having been lost or disappeared, he thereby became
relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary to his
theory, he is entitled to an indemnity which represents the difference between the value of the
palay lost and the amount of his obligation.
The case was submitted on an agreed statements of facts and thereupon the court rendered
judgment as stated in the early part of this decision.
Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court
on the ground that the question involved is purely one of law.
The only issue involved in this appeal is whether the surrender of the warehouse receipt covering
the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of

transferring their title or ownership to said appellee, or it should be considered merely as a

guarantee to secure the payment of the obligation of appellant.
In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt
No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not
that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment of
the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose
(of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover,
the 2,000 cavanes of palay were not in the first place in the actual possession of plaintiff
corporation, although symbolically speaking the delivery of the warehouse receipt was actually
done to the bank."
We hold this finding to be correct not only because it is in line with the nature of a contract of
pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the
stipulations embodied in the contract signed by appellant when he secured the loan from the
appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt
were given to appellee only as a guarantee to secure the fulfillment by appellant of his
obligation. This clearly appears in the contract Exhibit A wherein it is expressly stated that said
2,000 cavanes of palay were given as a collateral security. The delivery of said palay being
merely by way of security, it follows that by the very nature of the transaction its ownership
remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By
this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is
to sell the property and apply the proceeds to the payment of the obligation and to return the
balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract,
for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the
thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor
continues to be the owner of the thing pledged during the pendency of the obligation, it stands to
reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that
the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not
alter the situation, the purpose of such endorsement being merely to transfer the juridical
possession of the property to the pledgee and to forestall any possible disposition thereof on the
part of the pledgor. This is true notwithstanding the provisions to the contrary of the Warehouse
Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765)
which involves a similar transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or
endorsed to a creditor only to secure the payment of a loan or debt, the transferee or
endorsee does not automatically become the owner of the goods covered by the
warehouse receipt or quedan but he merely retains the right to keep and with the consent

of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this
for the simple reason that the transaction involved is not a sale but only a mortgage or
pledge, and that if the property covered by the quedans or warehouse receipts is lost
without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee
of the warehouse receipt or quedan, then said goods are to be regarded as lost on account
of the real owner, mortgagor or pledgor.
Wherefore, the decision appealed from is affirmed, with costs against appellant.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.

REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on March 8, 1991 in
1

affirming with modifications, the earlier decision of the Regional Trial Court of Manila,
Branch XLII, which dismissed the complaint filed therein by herein petitioner against respondent bank.
CA-G.R. CV No. 23615
2

The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat
Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz
who deposited with herein defendant the aggregate amount of P1,120,000.00, as follows:
(Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207;
Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000

9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in
connection with his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat
Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco
advised said depositor to execute and submit a notarized Affidavit of Loss, as required by
defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February
9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the
required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss,
280 replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant
bank in the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On
the same date, said depositor executed a notarized Deed of Assignment of Time Deposit
(Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant
bank "full control of the indicated time deposits from and after date" of the assignment
and further authorizes said bank to pre-terminate, set-off and "apply the said time
deposits to the payment of whatever amount or amounts may be due" on the loan upon
its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.)
Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff
"as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN,
February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from
herein plaintiff formally informing it of its possession of the CTDs in question and of its
decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the
former "a copy of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against which plaintiff
proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of
the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell
due and on August 5, 1983, the latter set-off and applied the time deposits in question to
the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant
bank be ordered to pay it the aggregate value of the certificates of time deposit of
P1,120,000.00 plus accrued interest and compounded interest therein at 16% per
annum, moral and exemplary damages as well as attorney's fees.
After trial, the court a quo rendered its decision dismissing the instant complaint.

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence
this petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit
are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a
holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of
the Code of Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of
the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of
PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE
P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said
depositor 731 days. after date, upon presentation and surrender of this
certificate, with interest at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as
follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued,
it is important to note that after the word "BEARER" stamped on the space provided
supposedly for the name of the depositor, the words "has deposited" a certain amount
follows. The document further provides that the amount deposited shall be "repayable to
said depositor" on the period indicated. Therefore, the text of the instrument(s)
themselves manifest with clarity that they are payable, not to whoever purports to be the
"bearer" but only to the specified person indicated therein, the depositor. In effect, the
appellee bank acknowledges its depositor Angel dela Cruz as the person who made the
deposit and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are
negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law,
enumerates the requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security
Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the
CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank,
the depositor referred (sic) in these certificates states that it was Angel
dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz
was the one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?

witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of
time deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the
9

In the construction of a bill or note, the intention of the parties is to control, if it can
be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order
to more perfectly understand the intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning, no other words are to be added to
it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may
have secretly intended as contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by what they said. 11
face of the instrument itself.

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

instruments, a valid negotiation thereof for the true purpose and agreement between it and De la Cruz, as
ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect
this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel
products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a
security has been dissipated and resolved in favor of the latter by petitioner's own authorized and
responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex
Credit Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to
guarantee his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon
petitioner, its protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon. 14 A party may not go back on his own acts and representations to the
prejudice of the other party who relied upon them. 15 In the law of evidence, whenever a party has, by his
own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act, or
omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager
could have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides,
when respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a)
the due date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b)
whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the
receipt prayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as
payment and not as security. Having opposed the motion, petitioner now labors under the presumption
that evidence willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine
National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character of the transaction between the parties is to be determined
by their intention, regardless of what language was used or what the
form of the transfer was. If it was intended to secure the payment of
money, it must be construed as a pledge; but if there was some other
intention, it is not a pledge. However, even though a transfer, if regarded
by itself, appears to have been absolute, its object and character might
still be qualified and explained by contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been
said that a transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should be treated
as a pledge if the debt continues in inexistence and is not discharged by
the transfer, and that accordingly the use of the terms ordinarily importing
conveyance of absolute ownership will not be given that effect in such a
transaction if they are also commonly used in pledges and mortgages

and therefore do not unqualifiedly indicate a transfer of absolute

ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable
Instruments Law, an instrument is negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of
a bill or note, who is in possession of it, or the bearer thereof. 22 In the present case, however, there was
no negotiation in the sense of a transfer of the legal title to the CTDs in favor of petitioner in which
situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery
thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the
amount involved was not disclosed) could at the most constitute petitioner only as a holder for value by
reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition of such security, in the
event of non-payment of the principal obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract,
he is deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would
be a pledgee but the requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal
rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be
pledged. The instrument proving the right pledged shall be delivered to the creditor, and if
negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent
court quoted at the start of this opinion show that petitioner failed to produce any document evidencing
any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the
mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon
respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law
prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of
substantive law prescribing a condition without which the execution of a pledge contract cannot affect
third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank
was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code
specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the
Registry of Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as
purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its

lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the better right over the
CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the
issuance of replacement certificates therefor, on the ground that petitioner failed to raised that issue in the
lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by
them to the trial court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against
the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered
by the CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the
maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the
foregoing enumeration does not include the issue of negligence on the part of respondent bank. An issue
raised for the first time on appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and,
consequently, issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are
properly raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial
conference all issues of law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial conference bars the
consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent
that the broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can
be premised on a multitude of other legal reasons and causes of action, of which respondent bank's
supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trial
delimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down
the rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and
not mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the
judge or court of competent jurisdiction, asking that the principal, interest or dividends
due or about to become due, be not paid a third person, as well as in order to prevent the
ownership of the instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of
the "dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a
duplicate of the lost instrument. Where the provision reads "may," this word shows that it is not mandatory
but discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating
liberty, opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce,
on which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the
one hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he
may obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who,
for some valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of
the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein, and none establishes a
mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed
decision is hereby AFFIRMED.
SO ORDERED.

G.R. No. L-18500

October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffsappellants,

vs.
GLICERIO JAVELLANA, defendant-appellant.
Montinola, Montinola and Hontiveros for plaintiffs-appellants.
J. M. Arroyo and Fisher and DeWitt for defendant-appellant.
AVANCEA, J.:

On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the
rate of 25 per cent per annum for the term of one year. To guarantee this loan, the plaintiffs
pledged a large medal with a diamond in the center and surrounded with ten diamonds, a pair of
diamond earrings, a small comb with twenty-two diamonds, and two diamond rings, which the
contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A
and 1) wherein the amount appears to be P1,875, which includes the 25 per cent interest on the
sum of P1,500 for the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M.
Villaseor, being unable to pay the loan, obtained from the defendant an extension, with the
condition that the loan was to continue, drawing interest at the rate of 25 per cent per annum, so
long as the security given was sufficient to cover the capital and the accrued interest. In the
month of August, 1919, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus,
went to the house of the defendant and offered to pay the loan and redeem the jewels, taking with
him, for this purpose, the sum of P11,000, but the defendant then informed them that the time for
the redemption had already elapsed. The plaintiffs renewed their offer to redeem the jewelry by
paying the loan, but met with the same reply. These facts are proven by the testimony of the
plaintiffs, corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their
value, upon the payment by them of the sum they owe the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he
requested the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loan and redeem the
jewels, as he needed money to purchase a certain piece of land; that one month thereafter, the
plaintiff, Filomena Sarmiento, went to his house and offered to sell him the jewels pledged for
P3,000; that the defendant then told her to come back on the next day, as he was to see his
brother, Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the
next day the plaintiff, Filomena Sarmiento, went back to the house of the defendant who then
paid her the sum of P1,125, which was the balance remaining of the P3,000 after deducting the
plaintiff's loan.
It appearing that the defendant possessed these jewels originally, as a pledge to secure the
payment of a loan stated in writing, the mere testimony of the defendant to the effect that later
they were sold to him by the plaintiff, Filomena Sarmiento, against the positive testimony of the
latter that she did not make any such sale, requires a strong corroboration to be accepted. We do
not find the testimony of Jose Sison to be of sufficient value as such corroboration. This witness
testified to having been in the house of the defendant when Filomena went there to offer to sell
the defendant the jewels, as well as on the third day when she returned to receive the price.
According to this witness, he happened to be in the house of the defendant, having gone there to
solicit a loan, and also accidentally remained in the house of the defendant for three days, and

that that was how he happened to witness the offer to sell, as well as the receipt of the price on
the third day. But not only do we find that the defendant has not sufficiently established, by his
evidence, the fact of the purchase of the jewels, but also that there is a circumstance tending to
show the contrary, which is the fact that up to the trial of this cause the defendant continued in
possession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If the
defendant really bought these jewels, its seems natural that Filomena would have demanded the
surrender of the documents evidencing the loan and the pledge, and the defendant would have
returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.
Another point on which evidence was introduced by both parties is as to the value of the jewels
in the event that they were not returned by the defendant. In view of the evidence of record, we
accept the value of P12,000 fixed by the trial court.
From the foregoing it follows that, as the jewels in question were in the possession of the
defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of 25 per
cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendant having
subsequently extended the term of the loan indefinitely, and so long as the value of the jewels
pledged was sufficient to secure the payment of the capital and the accrued interest, the
defendant is bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs
have the right to demand the same upon the payment by them of the sum of P1,5000, plus the
interest thereon at the rate of 25 per cent per annum from August 28, 1911.
The judgment appealed from being in accordance with this findings, the same is affirmed without
special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.
RESOLUTION
April 4, 1923
AVANCEA, J.:
The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has
prescribed. Without deciding whether or not the action to recover the thing pledged may
prescribe in any case, it not being necessary for the purposes of this opinion, but supposing that it
may, still the defendant's contention is untenable. In the document evidencing the loan in
question there is stated: "I transfer by way of pledge the following jewels." That this is a valid
contract of pledge there can be no question. As a matter of fact the defendant does not question
it, but take s it for granted. However, it is contended that the obligation of the defendant to return

the jewels pledged must be considered as not stated in writing, for this obligation is not expressly
mentioned in the document. But if this contract of pledge is in writing, it must necessarily be
admitted that the action to enforce the right, which constitutes the essence of this contract, is
covered by a written contract. The duty of the creditor to return the thing pledged in case the
principal obligation is fulfilled is essential in all contracts of pledge. This constitutes, precisely,
the consideration of the debtor in this accessory contract, so that if this obligation of the creditor
to return to thing pledged, and the right of the debtor to demand the return thereof, are
eliminated, the contract would not be a contract of pledge. It would be a donation.
If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time
for the prescription of this action is ten years, according to section 43 of the Code of Civil
Procedure.
The defendant contends that the time of prescription of the action of the plaintiffs to recover the
thing pledged must be computed from August 28, 1911, the date of the making of the contract of
loan secured by this pledge. The term of this loan is one year. However, it is contended that the
action of the plaintiff to recover the thing pledged accrued on the very date of the making of the
contract, inasmuch as from that date they could have recovered the same by paying the loan even
before the expiration of the period fixed for payment. This view is contrary to law. Whenever a
term for the performance of an obligation is fixed, it is presumed to have been established for the
benefit of the creditor as well as that of the debtor, unless from its tenor or from other
circumstances it should appear that the term was established for the benefit of one or the other
only (art. 1128 of the Civil Code.) In this case it does not appear, either from any circumstance,
or from the tenor of the contract, that the term of one year allowed the plaintiffs to pay the debt
was established in their favor only. Hence it must be presumed to have been established for the
benefit of the defendant also. And it must be so, for this is a case of a loan, with interest, wherein
the term benefits the plaintiffs by the use of the money, as well as the defendant by the interest.
This being so, the plaintiffs had no right to pay the loan before the lapse of one year, without the
consent of the defendant, because such a payment in advance would have deprived the latter of
the benefit of the stipulated interest. It follows from this that appellant is in error when he
contents that the plaintiffs could have paid the loan and recovered the thing pledged from the
date of the execution of the contract and, therefore, his theory that the action of the plaintiffs to
recover the thing pledged accrued from the date of the execution of the contract is not tenable.
1awph!l.net
It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing
pledged did not accrue until August 31, 1912, when the term fixed for the loan expired.
Computing the time from that date to that of the filing of the complaint in this cause, October 9,
1920, it appears that the ten years fixed by the law for the prescription of the action have not yet
elapsed.

On the other hand, the contract of loan with pledge is in writing and the action of the defendant
for the recovery of the loan does not prescribe until after ten years. It is unjust to hold that the
action of the plaintiffs for the recovery of the thing pledged, after the payment of the loan, has
already prescribed while the action of the defendant for the recovery of the loan has not yet
prescribed. The result of this would be that the defendant might have collected the loan and at the
same time kept the thing pledged.
The motion for reconsideration is denied.
Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.
G.R. No. L-21069

October 26, 1967

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

vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee.
Rodolfo R. Velayo for and in his own behalf as defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435)
sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum
of P2,565.00 with interest at 12-% per annum from July 13, 1954; P120.93 as premiums with
interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of
the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil
Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by
one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila.
Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the
Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as
well as reimburse the same for all money it should pay or become liable to pay under the bond
including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the
Surety Company "for the latter's further protection", with power to sell the same in case the
surety paid or become obligated to pay any amount of money in connection with said bond,

applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning
the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec.
App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that
it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the
pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and
upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court.
Velayo countered with a claim that the sale of the pledged jewelry extinguished any further
liability on his part under Article 2115 of the 1950 Civil Code, which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether
or not the proceeds of the sale are equal to the amount of the principal obligation, interest
and expenses in a proper case. If the price of the sale is more than said amount, the debtor
shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is
less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any
stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed
to the Court of First Instance, the defense was once more overruled, and the case decided in the
terms set down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the Indemnity
Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the
plaintiff, it was merely as an added protection to the latter. There was no understanding
that, should the same be sold at public auction and the value thereof should be short of
the undertaking, the defendant would have no further liability to the plaintiff. On the
contrary, the last portion of the said agreement specifies that in case the said collateral
should diminish in value, the plaintiff may demand additional securities. This stipulation
is incompatible with the idea of pledge as a principal agreement. In this case, the status of
the pledge is nothing more nor less than that of a mortgage given as a collateral for the
principal obligation in which the creditor is entitled to a deficiency judgment for the
balance should the collateral not command the price equal to the undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to secure
this obligation has already been sold for only the amount of P235.00, the liability of the

defendant should be limited to the difference between the amounts of P2,800.00 and
P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed decision is unsound.
The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of
the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure
the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to
indemnify the surety company for any disbursements made on account of its attachment
counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance
nor is it an obstacle to the application of Article 2115 of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the pledged
chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last
portion, clearly establishes that the extinction of the principal obligation supervenes by operation
of imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the
legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a
foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in
installments, and which originated in Act 4110 promulgated by the Philippine Legislature in
1933.
WHEREFORE, the decision under appeal is modified and the defendant absolved from the
complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at
12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is
affirmed. No costs. So ordered.
Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ., concur.