CASE 1

DBP vs CA
FACTS:

Lydia P. Cuba is a grantee of a Fishpond Lease Agreement dated May 13, 1974 from the
Government.
Subsequently, she obtained loans from DBP and as security she executed two Deeds of Assignment
of her Leasehold Rights.
She failed to pay her loan. Without foreclosure proceedings, whether judicial or extra-judicial, DBP
appropriated the Leasehold Rights of Cuba.
After appropriating DBP, in turn, executed a Deed of Conditional Sale of the Leasehold Rights in
favor of Cuba.
After the Deed of Conditional Sale was executed in favour of Cuba, a new Fishpond Lease
Agreement was issued.
Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale.
Cuba entered with DBP a temporary arrangement dated February 23, 1982 whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional Sale, Cuba
promised to make certain payments.
DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984. After the notice,
DBP took possession of the Leasehold Rights of the fishpond.
DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to dispose of the
property.
DBP thereafter executed a Deed of Conditional Sale in favor of Agripina Caperal on August 16,
1984. Caperal was awarded a Fishpond Lease Agreement on December 28, 1984 by the Ministry of
Agriculture.

ISSUE:
WON condition no. 12 of the deed of assignment was a pactum commissorium contrary to Article 2088 of
the Civil Code.
RULING: NO
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of
security for the payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to
DBP upon CUBA's failure to pay the loan on time. It merely provided for the appointment of DBP as
attorney-in-fact with authority, among other things, to sell or otherwise dispose of the said real rights, in
case of default by CUBA, and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code, which authorizes
the mortgagee to foreclose the mortgage and alienate the mortgaged property for the payment of the
principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment by
appropriating and taking ownership of Cubas leasehold rights. An assignment to guarantee an obligation,
as in the present case, is virtually a mortgage and not an absolute conveyance of title which confers
ownership on the assignee. At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a credit or from appropriating, or disposing of, the thing given
as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from
questioning DBP's act of appropriation. Estoppel is unavailing in this case for it can not give validity to an
act that is prohibited by law or against public policy.

Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have
foreclosed the mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the
Minister, DBP declared that it "had foreclosed the mortgage and enforced the assignment of leasehold
rights on March 21, 1979 for failure of Cuba to pay their loan amortizations." This only goes to show that
DBP was aware of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of
Fisheries cancelled CUBA's original lease permit, approved the deed of conditional sale, and issued a new
permit in favor of CUBA. Said acts which were predicated on such false representation, as well as the
subsequent acts emanating from DBP's appropriation of the leasehold rights, should therefore be set aside.
CASE 2

Bustamante vs. Spouses Rosel

G.R. No. 126800
November 29, 1999

FACTS:
On March 8, 1987, Norma Rosel, herein respondent and the lender, contracted a loan with
spouses Bustamante, herein petitioners and borrowers, under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by
TRANSFER CERTIFICATE OF TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY
THREE (423) SQUARE Meters, more or less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND
(P100,000.00) PESOS from the LENDER, for a period of two (2) years, counted from March 1,
1987, with an interest of EIGHTEEN (18%) PERCENT per annum, and to guaranty the payment
thereof, they are putting as a collateral SEVENTY (70) SQUARE METERS portion, inclusive of the
apartment therein, of the aforestated parcel of land, however, in the event the borrowers fail to
pay, the lender has the option to buy or purchase the collateral for a total consideration of TWO
HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest
therein;
3. That the lender does hereby manifest her agreement and conformity to the preceding
paragraph, while the borrowers do hereby confess receipt of the borrowed amount.

On March 1, 1989, when the loan was about to mature, respondent proposed to buy the 75
square meters at P200,000 pursuant to their contract. However, petitioners refused to sell the
same and requested for extension of time to pay the loan and offered to sell another parcel of
land, but the respondents refused to both proposal. Hence, on March 1, 1989, petitioner tendered
payment of the loan to respondents which the latter refused to accept, insisting on petitioners
signing a prepared deed of absolute sale of the collateral.

On February 28, 1990, respondents filed with the Regional Trial Court of Quezon City, a
complaint for specific performance with consignation against petitioner and her spouse.
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell
the collateral pursuant to the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City
a petition for consignation, and deposited the amount of P153,000.00 with the City Treasurer of
Quezon City on August 10, 1990. When petitioner refused to sell the collateral and barangay
conciliation failed, respondents consigned the amount of P47,500.00 with the trial court. In
arriving at the amount deposited, respondents considered the principal loan of P100,000.00 and
18% interest per annum thereon, which amounted to P52,500.00. The principal loan and the
interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.

RTC Decision: In favor of the petitioners. Respondents appealed.

CA Decision: Reversed the decision of the RTC.

Issues:
WON petitioner failed to pay the loan at maturity date.
WON the stipulation in the loan contract was valid and enforceable.

Ruling:
SC granted the motion for reconsideration of the petitioners on the following grounds:

(1) The loan was due for payment on March 1, 1989. On said date, petitioner tendered
payment to settle the loan which respondents refused to accept, insisting that petitioner sell to
them the collateral of the loan. When respondents refused to accept payment, petitioner
consigned the amount with the trial court.
SC notes the eagerness of respondents to acquire the property given as collateral to
guarantee the loan. The sale of the collateral is an obligation with a suspensive condition. It is
dependent upon the happening of an event, without which the obligation to sell does not
arise. Since the event did not occur, respondents do not have the right to demand fulfillment of
petitioners obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate
consideration (P200,000.00) for a 70 square meter property situated at Congressional Avenue,
Quezon City; and
(2) A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of pactum
commissorium, which is proscribed by law.

The elements of pactum commissorium are as follows: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period.
A significant task in contract interpretation is the ascertainment of the intention of the
parties and looking into the words used by the parties to project that intention. In this case, the
intent to appropriate the property given as collateral in favor of the creditor appears to be
evident, for the debtor is obliged to dispose of the collateral at the pre-agreed consideration
amounting to practically the same amount as the loan. In effect, the creditor acquires the
collateral in the event of non payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.
CASE 3

G.R. No. 172592

July 9, 2008

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners, vs.

ROBAN LENDING CORPORATION, Respondent.

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong
and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These loans were secured by a real estate
mortgage on petitioners parcels of land located in Binauganan, Tarlac City and covered by
TCT No. 297840.1
On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real
Estate Mortgage2 consolidating their loans inclusive of charges thereon which totaled
P5,916,117.50. On even date, the parties executed a Dacion in Payment Agreement3 wherein
petitioners assigned the properties covered by TCT No. 297840 to respondent in settlement of
their total obligation, and a Memorandum of Agreement4 reading:
That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all aforementioned loans, which have been
all past due and delinquent since April 19, 2000, and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the
amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of
this document), with a promise to pay the FIRST PARTY in full within one year from the date

of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their
"DACION IN PAYMENT" agreement, which they have executed and signed today in favor of
the FIRST PARTY be enforced[.]5
In April 2002 (the day is illegible), petitioners filed a Complaint,6 docketed as Civil Case No.
9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage
contract as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting,
and damages, alleging that the Memorandum of Agreement and the Dacion in Payment
executed are void for being pactum commissorium.7
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000
were founded on several uniform promissory notes, which provided for 3.5% monthly interest
rates, 5% penalty per month on the total amount due and demandable, and a further sum of
25% attorneys fees thereon,8 and in addition, respondent exacted certain sums denominated
as "EVAT/AR."9 Petitioners decried these additional charges as "illegal, iniquitous,
unconscionable, and revolting to the conscience as they hardly allow any borrower any
chance of survival in case of default."10
Petitioners further alleged that they had previously made payments on their loan accounts, but
because of the illegal exactions thereon, the total balance appears not to have moved at all,
hence, accounting was in order.11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and its amendments x x x as null and
void and without legal force and effect for having been renounced, abandoned, and
given up;
b) Declaring the "Memorandum of Agreement" xxx and "Dacion in Payment" x x x as
null and void for being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and attorneys fees assessed and loaded
into the loan accounts of the plaintiffs with defendant as unjust, iniquitous,
unconscionable and illegal and therefore, stricken out or set aside;

d) Ordering an accounting on plaintiffs loan accounts to determine the true and correct
balances on their obligation against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs: -e.1 Moral damages in an amount not less than P100,000.00 and exemplary
damages of P50,000.00;
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance fee
per hearing; and
e.3 The cost of suit.12
as well as other just and equitable reliefs.
In its Answer with Counterclaim,13 respondent maintained the legality of its transactions with
petitioners, alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement and Dacion in Payment
Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium
has no more legal leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under Art. 1245
of the Civil Code as a special form of payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of their monetary obligation;
The accumulated interest and other charges which were computed for more than two (2)
years would stand reasonable and valid taking into consideration [that] the principal loan is
P4,000,000 and if indeed it became beyond the Plaintiffs capacity to pay then the fault is
attributed to them and not the Defendant[.]14
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset
several times due to, among other things, the parties efforts to settle the case
amicably.151avvphi1

During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the ground that he is in Manila and
he is attending to a very sick relative, without objection on the part of the defendants counsel,
the initial hearing of this case is reset to June 18, 2003 at 10:00 oclock in the morning.
Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the person of
Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will submit the
case for summary judgment.16 (Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at
which both counsels were present17 and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in the morning.
However, the counsels are directed to be ready with their memorand[a] together with all the
exhibits or evidence needed to support their respective positions which should be the basis
for the judgment on the pleadings if the parties fail to settle the case in the next scheduled
setting.
x x x x18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of
respondent filed a memorandum.19
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the
pleadings that there was no pactum commissorium, dismissed the complaint.20
On appeal,21 the Court of Appeals22 noted that
x x x [W]hile the trial court in its decision stated that it was rendering judgment on the
pleadings, x x x what it actually rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue, or otherwise admits the material
allegations of the adverse partys pleading. However, a judgment on the pleadings would not
have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA
and DPA. On the other hand, a summary judgment may be rendered by the court if the

pleadings, supporting affidavits, and other documents show that, except as to the amount of
damages, there is no genuine issue as to any material fact.23
Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing on the
merits of the case",24 the Court of Appeals upheld the RTC decision that there was no pactum
commissorium.25
Their Motion for Reconsideration26 having been denied,27 petitioners filed the instant Petition
for Review on Certiorari,28 faulting the Court of Appeals for having committed a clear and
reversible error
I. . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL REQUISITES
WHICH WOULD WARRANT THE SETTING ASIDE OF THE SUMMARY JUDGMENT
IN VIOLATION OF APPELLANTS RIGHT TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS NECESSARY
BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE MEMORANDUM OF
AGREEMENT (MOA) AND THE DACION EN PAGO AGREEMENT (DPA) WERE
DESIGNED TO CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF
AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND VOID FOR
BEING CONTRARY TO LAW AND PUBLIC POLICY.29
The petition is meritorious.
Both parties admit the execution and contents of the Memorandum of Agreement and Dacion
in Payment. They differ, however, on whether both contracts constitute pactum commissorium
or dacion en pago.
This Court finds that the Memorandum of Agreement and Dacion in Payment constitute
pactum commissorium, which is prohibited under Article 2088 of the Civil Code which
provides:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
them. Any stipulation to the contrary is null and void."
The elements of pactum commissorium, which enables the mortgagee to acquire ownership
of the mortgaged property without the need of any foreclosure proceedings,30 are: (1) there
should be a property mortgaged by way of security for the payment of the principal obligation,
and (2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated period.31
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt within the one-year period gives
respondent the right to enforce the Dacion in Payment transferring to it ownership of the
properties covered by TCT No. 297840. Respondent, in effect, automatically acquires
ownership of the properties upon petitioners failure to pay their debt within the stipulated
period.
Respondent argues that the law recognizes dacion en pago as a special form of payment
whereby the debtor alienates property to the creditor in satisfaction of a monetary obligation.32
This does not persuade. In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.33 In the case at bar, the alienation of the properties was by
way of security, and not by way of satisfying the debt.34 The Dacion in Payment did not
extinguish petitioners obligation to respondent. On the contrary, under the Memorandum of
Agreement executed on the same day as the Dacion in Payment, petitioners had to execute a
promissory note for P5,916,117.50 which they were to pay within one year.35
Respondent cites Solid Homes, Inc. v. Court of Appeals36 where this Court upheld a
Memorandum of Agreement/Dacion en Pago.37 That case did not involve the issue of pactum
commissorium.38
That the questioned contracts were freely and voluntarily executed by petitioners and
respondent is of no moment, pactum commissorium being void for being prohibited by law.39
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and
attorneys fees if they are iniquitous or unconscionable.40

This Court, based on existing jurisprudence,41 finds the monthly interest rate of 3.5%, or 42%
per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the
penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and
demandable principal plus interest, with interest not paid when due added to and becoming
part of the principal and likewise bearing interest at the same rate, compounded monthly42
unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed
from the time of demand.43 This Court finds the attorneys fees of 25% of the principal,
interests and interests thereon, and the penalty fees unconscionable, and thus reduces the
attorneys fees to 25% of the principal amount only.44
The prayer for accounting in petitioners complaint requires presentation of evidence, they
claiming to have made partial payments on their loans, vis a vis respondents denial thereof.45
A remand of the case is thus in order.
Prescinding from the above disquisition, the trial court and the Court of Appeals erred in
holding that a summary judgment is proper. A summary judgment is permitted only if there is
no genuine issue as to any material fact and a moving party is entitled to a judgment as a
matter of law.46 A summary judgment is proper if, while the pleadings on their face appear to
raise issues, the affidavits, depositions, and admissions presented by the moving party show
that such issues are not genuine.47 A genuine issue, as opposed to a fictitious or contrived
one, is an issue of fact that requires the presentation of evidence.48 As mentioned above,
petitioners prayer for accounting requires the presentation of evidence on the issue of partial
payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be
rendered only when an answer fails to tender an issue or otherwise admits the material
allegations of the adverse partys pleadings.49 In the case at bar, respondents Answer with
Counterclaim disputed petitioners claims that the Memorandum of Agreement and Dation in
Payment are illegal and that the extra charges on the loans are unconscionable.50 Respondent
disputed too petitioners allegation of bad faith.51
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE.
The Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation on
February 12, 2001 are declared NULL AND VOID for being pactum commissorium.

In line with the foregoing findings, the following terms of the loan contracts between the
parties are MODIFIED as follows:
1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount due and demandable is reduced
to 12% per annum, to be computed from the time of demand; and
3. The attorneys fees are reduced to 25% of the principal amount only.
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving
evidence on petitioners prayer for accounting.
SO ORDERED.
CASE 4
Eulogio Betita v. Simeon Ganzon, Alejo De La Flor, Clemente Pederena
G.R. No. L-24137, March 29, 1926

FACTS
May 15, 1924: Defendant de la Flor recovered a judgment against Tiburcia Buhayan for a sum of P140 with costs.
Defendant Ganzon, as sheriff, levied execution on the carabaos found in the possession of Simon Jacinto but registered
in the name of Buhayan
Betita presented a third party claim alleging that the carabaos had been mortgaged to him and presented a document
dating May 6, 1924 as evidence. But Ganzon proceeded with the sale of the carabaos at a public auction where they were
purchased by defendant Perdena for P200.
The document presented by Betita, translated, stated that Buhayan executed the document extrajudicially pursuant to a
debt of P470 to Betita since 1922. As security for such, Buhatan offered four carabaos belonging to her exclusively
(certificates of registration number enumerated and delivered to Betita). In case of nonpayment by February 1925, Betita
may dispose of the carabaos as security.
The document also stated that it was a new one or a renewal of a former document because the first mortgaged carabaos
died and were substituted by newly branded ones.
RULING OF THE LOWER COURT: Since the document was of a date prior to the judgment, it was preferred credit and
judgment was rendered in favor of Betita for possession of the carabaos.

ISSUES
W/N the document executed was one of pledge or chattel mortgage granting the plaintiff a preferred right over the
carabaos.

RULING
NO. The judgment appealed from must be REVERSED. The plaintiff must take nothing by his action.
Unless the above quoted document can be considered either a chattel mortgage or a pledge, the judgment must be
reversed.
Said document is not a sufficient chattel mortgage. It does not meet the requirements of Sec. 5 of the chattel Mortgage
Law (Act No. 1508), has not been recorded and consequently has no effect against third parties.
The document did not constitute a sufficient pledge of property valid against third parties. Art. 1865 of the (then) Civil
Code provides that no pledge shall be effective against third parties unless evidence of its date appears in a
public instrument. The document in question is not public.
Plaintiff argues that the filing with the sheriff gave it the effect of a public instrument and served to fix the date of pledge.
Assuming arguendo that such is the case, it is obvious that the pledge only became effective from the date of filing and
did not rise superior to the execution attachment.

If the mere filing of a private instrument after the levy of execution can create a lien of pledge superior to the attachment,
the purposes of Art. 1865 would be defeated.
The alleged pledge if also ineffective for another reason: plaintiff never had actual possession of the property. In a
contract of pledge, it is necessary that the creditor have possession of the pledged property. Plaintiff argues that
the animals were in the possession of Jacinto, who was the plaintiffs tenant, and that the possession of the tenant is the
possession of the landlord. However, it appears that Jacinto and Buhayan were living together as husband and wife for
many years and that possession of the carabaos passed from Buhayan to Jacinto. The possession referred to in a
contract of pledge (Art. 1863) implies a change in the actual possession of the property pledged and that a mere
symbolic delivery is not sufficient. Plaintiff never had actual possession of the carabaos. The alleged landlord-tenant
relationship was also obscure since the land cultivated by Jacinto was not the property of the plaintiff but that the fruits of
said cultivation were to be applied to Buhayans debt to the plaintiff.
Manresas comments of Art. 1865: it answers the necessity for not disturbing the status of ownership of things with hidden
or simulated contracts of pledge. Without this warranty, a debtor in bad faith from the moment that he sees his movable
property in danger of execution may attempt to withdraw the same from the action of justice and the reach of his creditors
by simulating contracts of pledge over the property. The condition that the pledge be executed in public writing is to
prevent difficulty in determining the date.

CASE 5

THE BACHRACH MOTOR CO., INC., plaintiff-appellant,

vs.
MARIANO LACSON LEDESMA, TALISAY-SILAY MILLING CO., INC., and THE PHILIPPINE NATIONAL
BANK
Topic: Validity of pledge against third persons
Applicable laws:
Article 2096, NCC. 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. (1865a)
Sec. 4. Chattel Mortgage Law. 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: Provided, however, That if the property is situated in a different province from that in
which the mortgagor resides, the mortgage shall be recorded in the office of the register of
deeds of both the province in which the mortgagor resides and that in which the property is
situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.
Facts:
1. Bachrach Motor Co. Inc (Bachrach Motors) is a creditor of Mariano LacsonLedesma who
obtained a writ of execution against the properties of Ledesma.
Any bonus, dividend, share of stock, money, or other property which that defendant is
entitle to receive from the Talisay-Silay Milling Co., (Talisay Milling) Inc., by virtue of the
fact that such defendant has mortgage his land in favor of the Philippine National Bank to
guarantee the indebtedness of the Talisay-Silay Milling Co., Inc., or which such defendant
is entitled to receive from the Talisay-Silay Milling Co., Inc., on account of being a
stockholder in the corporation or which he is entitled to receive from that corporation for
any other cause or pretext whatsoever."

2. By virtue of the mortgage instituted by Ledesma in favor of PNB to secure the obligations
ofTalisay Milling, it was granted a bonus or dividends.
(SC affirmed the judgment of the lower court, holding that the bonus had no immediate
relation to the lands in question but merely a remote and accidental one and, therefore, it
was not a civil fruit of the real properties mortgaged to the Philippine National Bank to
secure the obligation of the Talisay-Silay Milling Co., Inc., being a mere personal right of
Mariano LacsonLedesma).
Comment: Not the main issue.
3. In addition to the mortgaged instituted by Mr. Ledesma, he also instituted a pledge or
chattel mortgage on his 2,100 shares of Talisay Milling to secure the loan of the latter. The
2,100 shares later on received 6,300 shares as stock dividends. The certificate of stock
and the certificate of stock dividend were delivered to PNB.
4. Due to the failure of Talisay Milling to pay it loan to PNB it had foreclosed the 8,969 shares
(comprising the 2,100 shares; 6,300 shares as stock dividends; and the rest as shares
belonging to the wife of Ledesma). PNB, being the highest bidder, was issued a stock
certificate representing the said shares.
5. Bachrach Motors contends that it has a preferential right over stock dividends because the
pledge executed by Ledesma in favor of PNB was not in a public document.
Issue: WON Bachrach Motors has a preferred right over the stock dividends?
Ruling: No.
1. The contention is unfounded because it appears that the stock dividends in question were
pledged to the bank and the stock dividend certificate was in the possession of said bank
prior to the garnishment.
2. The pledge or chattel mortgage even if not notarized is valid against third persons.
According to article 1865 of the Civil Code, that in order that a pledge may be
effective as against third person, evidence of its date must appear in a public instrument
in addition to the delivery of the thing pledged to the creditor. This provision has been
interpreted in the sense that for the contract to affect third person, it must appear in a
public instrument in addition to delivery of the thing pledged.
However, section 4 of Act No. 1508, otherwise known as the Chattel Mortgage Law,
implicitly modified article 1865 of the Civil Code in the sense that a contract of pledge and
that of chattel mortgage, to be effective as against third persons, need not appear in
public instruments provided the thing pledged or mortgaged be delivered or placed in the
possession of the creditor.
From the date the said Act No. 1508 was in force, a contract of pledge or chattel
mortgage should be deemed legally entered into and should produce all its effects and
consequences, provided it appears to have been in some manner perfected and that the
things pledged have been delivered, and in a contrary case, and even if the creditor has
not received them or has not retained them in his custody, provided that the contract of
pledge or chattel mortgage appears in a notarial document and is inscribed in the registry
of deeds of the province."

Therefore, this court holds that the pledge of the 6,300 stock dividends is valid
against the plaintiff for the reason that the certificate was delivered to the creditor bank,
notwithstanding the fact that the contract does not appear in a public instrument.
CASE 6
CASE 7

LORETA SERRANO vs. COURT OF APPEALS and LONG LIFE PAWNSHOP, INC.
Petition for review for the credibility of witnesses and reinstating CFI Manilas decision.
Petitioner Serrano bought jewelries worth P48,500 from Niceta Ribaya in early March 1968. However,
on the 21st of March same year due to need of cash, Serrano instructed her private secretary, Josefina Rocco, to
pawn her jewelry. Rocco went to private respondent Long Life Pawnshop and pledged the jewels for P22,000
with its general owner and general manager Yu An Kiong. Then Rocco absconded with the money and the pawn
ticket pawn ticket with stipulation redeemable on presentation by bearer.
After 3 months, Gloria Duque and Amalia Celeste informed Niceta Ribaya that a pawnshop ticket issued
by Long Live was being offered for sale and told Ribaya that the jewels for sale were probably the ones pawned
by Rocco. Ribaya informed Serrano of the matter and Serrano went to Long Live Pawnshop, confirmed it was
the missing jewelries and told the Gen. Manager Yu An Kiong to hold the jewels and not permit anyone to
redeem it. Yu An Kiong agreed.
Serrano went to Manila Police to report the loss and filed a complaint for qualified theft which was later
turned to estafa against Rocco. Detective Mateo claims to have gone to the pawnshop and noted Yu An on the
report and asked Yu An to inform police if someone will redeem it. However, the next day, Yu An permitted a
Tomasa De Leon who presented the pawn ticket to redeem the jewels.
Serrano filed a case with CFI Manila for damages against Long Live for allowing redemption w/o
notifying police. RTC Ruling: Awarded damages to Serrano for P26,500 + legal interest from date of filing +
P2,000 attorneys fees + cost of suit. However, CA reversed the RTC decision.
Reason for CA decision: Yu An said that the neither petitioner nor Detective Mateo came to him and notified
him of the holding of redemption. Yu An claims he only knew about it on August 16, 1968 after a subpoena
duces tecum (subpoena for production of evidence, i.e. record of the pledge) was served by Manila Fiscal for
preliminary investigation for the estafa charge. Hence, no negligence or bad faith was imputable to Yu An.
Issue: WON CA committed a reversible error in its decision.
SC Ruling:
On Procedure:
Decision of Trial Courts on the credibility of witnesses is respected by Appelate Courts as TCs have an
opportunity to observe witness demeanor. Although SC ordinarily does not rule on the credibility, it can do so in
exceptional circumstances, as in this case where the trial court and the Court of Appeals arrived at divergent
conclusions on questions of fact and the credibility of witnesses.
-

CA rejected the credibility of the witness, Det. Mateo.

CA faulted Serrano for not reporting immediately to police when Serrano could not have known the
identity of the pawnshop since Rocco just disappeared without a trace. Failure to report at once does not
reduce credence.
CA also failed to recognize admission by Yu An in his answer that the jewelry was entrusted to Rocco by
Serrano as her employer, which is a judicial admission.
CA also did not believe on Serrano due to inconsistency of her statements as to when she went to the
pawnshop, immediately after Ribaya informed her or a few days after Ribaya informed her.

This being a civil case, it is enough that there be preponderance of evidence. Petitioners evidence was clear and
persuasive and more credible along with the testimonies of Det. Mateo who acted in regular performance of his
duties and Ribaya (both witnesses having no interest as to the outcome of the case).
On substantive legal rights:
The SC ruled that after being notified by petitioner and the police that jewelry pawned to it was either
stolen or involved in an embezzlement of the proceeds of the pledge, private respondent pawnbroker became
duty bound to hold the things pledged and to give notice to petitioner and the police of any effort to redeem
them. Such a duty was imposed by Article 21 of the Civil Code.
The circumstance that the pawn ticket stated that the pawn was redeemable by the bearer, did not
dissolve that duty. The pawn ticket was not a negotiable instrument under the Negotiable Instruments Law nor a
negotiable document of title under Articles 1507 et seq. of the Civil Code. If the third person Tomasa de Leon,
who redeemed the things pledged a day after petitioner and the police had notified Long Life, claimed to be
owner thereof, the prudent recourse of the pawnbroker was to file an interpleader suit, impleading both
petitioner and Tomasa de Leon. The respondent pawnbroker was, of course, entitled to demand payment of the
loan extended on the security of the pledge before surrendering the jewelry, upon the assumption that it had
given the loan in good faith and was not a "fence" for stolen articles and had not conspired with the faithless
Josefina Rocco or with Tomasa de Leon. Respondent pawnbroker acted in reckless disregard of that duty in the
instant case and must bear the consequences, without prejudice to its right to recover damages from Josefina
Rocco.
HELD:
1. CFI Manilas Decision is REINSTATED: Ling Live Pawnshop is liable for actual damages of P26,500
(difference in the value of the jewelry (P48,500.00) and the amount of the loan (P22,000.00).
2. Serrano is entitled to collect the balance of the loan from Rocco.
3. Ling Live Pawnshop can demand reimbursement from Rocco for the damages paid to Serrano.
CASE 8
VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners, vs.HON. COURT OF APPEALS, FAMILY
SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC.,

Facts:
Petitioner Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading and to guarantee payment, she
executed deeds of assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank in favor of
CAMS Trading.

This was prepared by her lawyer .. That the assignment serves as a collateral or guarantee for the payment of my
obligation with the said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from said company,
per separate contract executed between us.

Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the sum of P314,639.75. CAMS trading
requested to encash the time deposits and submitted a letter of MRs Chu admitting her outstanding accout of 404, 500
wih CAMS Trading. After Mrs. Chus conformity, the bank agreed to encash and delivered to Cams Trading the sum of
P283,737.75 only since the other certificates lacked signature.

After being informed of the encashment, Mrs, Chu demanded from both that her time deposit be restored. Neither
complied so she filed a complaint to recover the sum.

RTC: dismissed the complaint for lack of merit

CA: affirmed the dismissal

Hence , this petition to review.

Issues:
1. W/N CA erred in not annulling the encashment of her time deposit certificates as a pactum commissorium;
2. W/N CA erredfinding that the obligations secured by her time deposits had already been paid
Held:
1. Not a pacto commisorio.
The deeds of assignment were contracts of pledgebut, as the collateral was also money or an exchange of "peso for
peso," the provision in Article 2112 of the Civil Code for the sale of the thing pledged at public auction to convert it into
money to satisfy the pledgor's obligation, did not have to be followed. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to the bank for encashment after due notice to the debtor.

The encashment of the deposit certificates was not a pacto commissorio which is prohibited under Art. 2088 of the Civil
Code. A pacto commissorio is a provision for the automatic appropriation of the pledged or mortgaged property by the
creditor in payment of the loan upon its maturity. The prohibition against a pacto commissorio is intended to protect the
obligor, pledgor, or mortgagor against being overreached by his creditor who holds a pledge or mortgage over property
whose value is much more than the debt.

Where, as in this case, the security for the debt is also money deposited in a bank, the amount of which is even less than
the debt, it was not illegal for the creditor to encash the time deposit certificates to pay the debtors' overdue obligation,
with the latter's consent.

2. No proof.

There was no proof of payment made by her thereafter to reduce or extinguish her debt, the application of her time
deposits, which she had assigned to the creditor to secure the payment of her debt, was proper.
CASE 9
Manila Banking Corp. v AnastacioTeodoro, Jr. and Grace Teodoro
Bidin, J. | 1989

PLEDGE; PRESUMPTION IN FAVOR OF PLEDGE. 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

PLEDGE; PACTUM COMMISORIUM; PROHIBITED. The parties gave the deed of assignment the form of an
absolute conveyance of title over the receivables assigned, essentially for the convenience of the
assignee. Without such formally unlimited conveyance of title, the assignee would have to treat the deed
of assignment as no more than a deed of pledge or of chattel mortgage. In other words, in such
hypothetical case, should the assignee seek to realize upon the security given to him through the deed of
assignment (which would then have to comply with the documentation and registration requirements of a
pledge or chattel mortgage), the assignee would have to foreclose upon the securities or credits assigned
and place them on public sale and there acquire the same. It should be recalled that under the principle
which forbids a pactumcommisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from
simply taking and appropriating the personal property turned over to him as security for the payment of a
principal obligation. A deed of assignment by way of security avoids the necessity of a public sale imposed
by the rule on pactumcommisorium , by in effect placing the sale of the collateral up front.

2
3

5
6

April 1966, Spouses Teodoro together with TeodoroSr executed a PN in favour of Manila Banking Corp
(MBC);
- Payable within 120 days (until Aug), with 12% interest per annum;
- They failed to pay and left balance of 15k as of September 1969;
May and June 1966, executed two PNs;
- 8k and 1k respectively payable within 120 days and 12% per annum;
- They made partial payment but still left 8.9k balance as of September 1969;
It appears than in 1964, TeodoroJr executed a Deed of Assignment of Receivables in favour of MBC from
Emergency Employment Administration;
- Amounted to 44k;
- The deed provided it was for consideration of certain credits, loans, overdrafts and other credit
accommodations extended to the spouses and TeodoroSr as security for the payment of said sum
and interest thereon; and that they release and quitclaim all its rights, title and interest in the
receivables;
In the stipulations of fact, it was admitted by the parties:
- That MBC extended loans to the spouses and TeodoroJr because of certain contracts entered into by
latter with EEA for fabrication of fishing boats and that the Philippine Fisheries Commission
succeeded EEA after its abolition;
- That non-payment of the PNs was due to failure of the Commission to pay spouses;
- That the Bank took steps to collect from the Commission but no collection was effected;
For failure of the spouses and TeodorSr to pay, MBC instituted against them;
- TeodoroSr subsequently died so suit only against the spouses;
TC favoured MBC; MFR denied;
- Spouses appealed to CA but since issue pure question of law, CA forwarded to SC;

Issues:
W/N the assignment of receivables has the effect of payment of all the loans contracted by the
spouses; No.
W/N MBC must exhaust all legal remedies against PFC before it can proceed against the
spouses. No

Ratio:
Assignment of credit:
-

An agreement by virtue of which the owner of a credit(assignor) by a legal cause (e.g. sale, dation
in payment, exchange or donation) and without the need of the consent of the debtor, transfers his
credit and its accessory rights to another(assignee) who acquires the power to enforce it to the
same extent as the assignor could have enforced it against the debtor;
May be in form of:
o Sale
o Dation in payment - when a debtor, in order to obtain a release from his debt, assigns to his
creditor a credit he has against a third person;
o Donation when it is by gratuitous title;
o Guaranty creditor gives as a collateral, to secure his own debt in favour of the assignee,
without transmitting ownership;
Obligations between the parties will depend upon the juridical relation which is the basis of the
assignment;

What is the legal effect of the Assignment (since its validity is not in question):
1

Assignment of receivables in 1964 did not transfer the ownership of the receivables to MBC and
release the spouses from their loans;
- Consideration was for certain credits, loans, overdrafts and credit accommodations worth 10k
extended by MBC to spouses and as security for the payment of said sum and interest thereon;
also quitclaim of rights to MBC of their interest in the receivables;
- Stipulated also that it was a continuing guaranty for future loans and correspondingly, the
assignment shall extend to all accounts receivable;

Contention of spouses: not mere guaranty since it was stipulated:

-

That the assignor release and quitclaim to assignee all its rights, title and interest in the
accounts receivable;
That title and right of possession to account receivable is to remain in assignee and it shall have
right to collect directly from the debtor; that whatever the assignor does in connection with
collection of such, it does so as agent and representative and in trust of assignee;
SC: character of transaction is not determined by the language in document but by intention of
the parties;;
If it was intended to secure the payment of money, it must be construed as a pledge.
A transfer of property by the debtor to a creditor, even if sufficient on its farm to make an
absolute conveyance, should be treated as a pledge if the debt continues in existence and is not
discharged by the transfer;

Assignment of receivables did not result from sale or by virtue of a dation in payment;
-

At time the deed was executed, the loans were non-existent yet;
At most, it was a dation for 10k, the amount of credit with MBC indicated in the deed; at the
time of execution, there was no obligation to be extinguished except for the 10k;
1292: in order that an obligation may be extinguished by another which substitutes the same, it
is imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other;

Deed of assignment intended as collateral security for the loans, as a continuing guaranty for
whatever sums that would be owing by spouses;
2

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption

is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v CA);
MBC need not exhaust all legal remedies against PFC:
- Spouses, not being released by the assignment, remain as the principal debtors of MBC, rather
than mere guarantors;
- The deed merely guarantees said obligations;
- 2058 (creditor must have exhausted property of debtor and resorted to all legal remedies before
it can proceed to guarantor) does not apply to them;
- Appellants are both the principal debtors and the pledgors or mortgagors;
- MBC did try to collect but at OP, it was disapproved; so the loan was basically unsecured;

DISMISSED.

Feliciano, J. concurring.
Justice Bidins, "the character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention not without exception;
-

Deed here contains language which suggest that the parties intended complete alienation of title to
and rights over the receivables;
Words remise, release and quitclaim and clauses title the title and right of possession to said
accounts receivable is to remain in said assignee" who "shall have the right to collect directly from
the debtor;
Words agent also convey the ideas;
But such must be taken in conjunction with and qualified by other language showing intent of the
parties that title to the receivables shall pass to the assignee for the limited purpose of securing
another, principal obligation owed by the assignor to the assignee;

Title moves from assignor to assignee but that title is defeasible being designed to collateralize the
principal obligation:
-

Operationally: means assignee is burdened to collateralize the principal obligation; taking the
proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal
obligation and returning any balance remaining thereafter to the assignor;

The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables
assigned, essentially for the convenience of the assignee:

Without such nature of absolute conveyance, the assignee would have to foreclose the properties;
he would have to comply with documentation and registration requirements of a pledge or chattel
mortgage);
A deed of assignment by way of security avoids the necessity of a public sale impose by the rule
on pactumcommisorium, by in effect placing the sale of the collateral up front;
The foregoing is applicable where the deed of assignment of receivables combines elements of both
a complete alienation of the credits and a security arrangement to assure payment of a principal
obligation;
Where the 2nd element is absent, the assignment would constitute essentially a mode of payment or
dacion en pago;
in order that a deed of assignment of receivables which is in form an absolute conveyance of title to
the credits being assigned, may be qualified and treated as a security arrangement, language to
such effect must be found in the document itself and that language, precisely, is embodied in the
deed of assignment in the instant case;

CASE 10

CITIBANK vs. SABENIANO Case Digest

CITIBANK vs. SABENIANO
G.R.No. 156132, October 16, 2006
FACTS: Petitioner Citibank is a banking corporation duly authorized under the laws of the USA to do commercial
banking activities in the Philippines. Sabeniano was a client of both Petitioners Citibank and FNCB Finance.
Respondent filed a complaint against petitioners claiming to have substantial deposits, the proceeds of which were
supposedly deposited automatically and directly to respondents account with the petitioner Citibank including dollar
accounts in the Citibank branch in Geneva, Switzerland (Citibank-Geneva) and that allegedly petitioner refused to
despite repeated demands.
Petitioner alleged that respondent obtained several loansfor which she executed Promissory Notes (PNs), and
secured by (a) a Declaration of Pledge of her dollar accounts in Citibank-Geneva, and (b) Deeds of Assignment of
her money market placements with petitioner FNCB Finance. In default, Citibank exercised its right to set-off
respondents outstanding loans with her deposits and money.
RTC declared the act illegal, null and void and ordered the petitioner to refund the amount plus interest, ordering
Sabeniano, on the other hand to pay Citibank her indebtedness. CA affirmed the decision with modification entirely
in favor of the respondent further stating that Citibank failed to establish by competent evidence the alleged
indebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms.Sabeniano is declared as
without legal and factual basis.
Additionally, by 25 October 1979, respondent had a total of US$156,942.70, from which, US$149,632.99 was
transferred by Citibank-Geneva to petitioner Citibank in Manila, and was used by the latter to off-set respondent's
outstanding loans.
ISSUE: Whether petitioner may exercise its right to set-off respondents loans with her deposits and money in
Citibank-Geneva
RULING: Petition is partly granted with modification.
1. Citibank is ordered to return to respondent the principal amount of P318,897.34 and P203,150.00 plus 14.5% per
annum
2. The remittance of US $149,632.99 from respondents Citibank-Geneva account is declared illegal, null and void,
thus Citibank is ordered to refund said amount in Philippine currency or its equivalent using exchange rate at the
time of payment.
3. Citibank to pay respondent moral damages of P300,000, exemplary damages for P250,000, attorneys fees of
P200,000.
4. Respondent to pay petitioner the balance of her outstanding loans of P1,069,847.40 inclusive off interest.

CASE 11
PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287 (JANUARY 24, 2006)
FACTS:
Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez Realty Inc. In 1979 to 1980, respondents
secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray (Parays) the payment of certain
loan obligations.
When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans, respondents filed
complaints with RTC of Cebu City. The actions sought the declaration of nullity of the pledge agreements, among others. However the
RTC dismissed the complaint and gave due course to the foreclosure and sale at public auction of the various pledges. This decision
attained finality after it was affirmed by the Court of Appeals and the Supreme Court.
Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction. However,
before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It
was claimed that respondents had attempted to tender payments to the Parays, but had been rejected.
Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding
for all of the pledged shares. None of respondents participated or appeared at the auction.
Respondents instead filed a complaint with the RTC seeking the declaration of nullity of the concluded public auction.
Respondents argument:
Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and
discharged the pledge contracts.
Petitioners argument:
Petitioners countered that the auction sale was conducted pursuant to a final and executory judgment and that the tender of
payment and consignations were made long after their obligations had fallen due.
They pointed out that the amounts consigned could not extinguish the principal loan obligations of respondents since they
were not sufficient to cover the interests due on the debt. They likewise argued that the essential procedural requisites for the auction
sale had been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement with the position of the Parays. It held that respondents had failed to
tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have
participated in the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations
and the subject pledge contracts; and the auction sale as null and void. It (CA) chose to uphold the sufficiency of the consignations
owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at
payment by respondents were characterized as made in the exercise of the right of redemption.
CA likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as
they had belonged to different pledgors.
ISSUES:
1.
2.
3.

WON right of redemption exists over personal properties (such as the subject pledged shares).
WON the consignations made by respondents prior to the auction sale are sufficient to extinguish the loan obligations and the
subject pledged contracts.
WON the act of respondents in consigning the payments should be deemed done in the exercise of their right of redemption owing
to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws.

4.
5.

WON a buyer at a public auction ipso facto becomes the owner of the pledged shares pending the lapse of the one-year
redemptive period
WON there is a need to individually sell the various shares of stock as they had belonged to different pledgors.

HELD:
1.

No.
No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.
The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The
said law does not extend the same benefit to personal property. In fact, there is no law in our statute books which vests the right of
redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely
execution sales of real property.
It must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.
In this case, petitioners attempted to proceed extrajudicially with the sale of the pledged shares by public auction. However,
extrajudicial sale was stayed with the filing of Civil Cases which sought to annul the pledge contracts. The final and executory judgment
in those cases affirmed the pledge contracts and disposed them. Said judgment did not direct the sale by public auction of the pledged
shares, but instead upheld the right of the Parays to conduct such sale at their own volition.

2.

No.
There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil
Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the
Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until
he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the
Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
In order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just
the principal loans, but also the monthly interests thereon.
In the case at bar, while the amounts consigned by respondents could answer for their respective principal loan obligations, they
were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum.

3.

No.
The pledged shares in this case are not subject to redemption. Thus, the consigned payments should not be treated with
liberality, or somehow construed as having been made in the exercise of the right of redemption.

4.

Yes.
Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the
foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.

5.

No.
This concern is obviously rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of
the Rules of Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the case
of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not extrajudicial sales. No
provision in the Rules of Court or in any law requires that pledged properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the
items should be sold if two or more things are pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different
pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing

all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale
price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover
whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.
RULING:
Decision of the Court of Appeals is SET ASIDE and the decision of the RTC Cebu City is REINSTATED.

CASE 12

PRUDENTIAL BANK, Petitioner, vs.DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan,
Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July
1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure the payment of a
loan worth P250,000.00.This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents
executed the corresponding promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan
matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service charge, and that the note is
secured by a real estate mortgage as aforementioned.Significantly, the real estate mortgage contained the following
clause:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that may hereafter be obtained, the principal or all of which is hereby fixed
at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, 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 does 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 the back 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
incumbrances. . . .
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by
D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagors foreign currency savings
account with the bank under Account No. 129, and that the mortgagors passbook is to be surrendered to the bank
until the amount secured by the "hold-out" is settled.

On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were
6

President and Chairman of the Board and Vice President, respectively, PN BD#76/C-430 covering P545,000.000. As
provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923," which means that the temporary
overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a
Central Bank circular directing the discontinuance of overdrafts.

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of
P545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The letter
likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes executed by
Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on
various heavy and transportation equipment.

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty
and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan covering the two (2)

lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment was
acknowledged by petitioner who accordingly released the mortgage over the two properties.

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT
No. 438157. Per petitioners computation, respondents had the total obligation of P1,608,256.68, covering the three
(3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN BD#76/C340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged
property was set on 15 January 1980.

10

Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the
RTC of Pasig,claiming that they have paid their principal loan secured by the mortgaged property, and thus the
mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6
March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a
separate loan with the bank secured by a separate mortgage.
TRIAL COURT-On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the
extra-judicial foreclosure. Respondents sought reconsideration of the decision.On 24 August 1994, the trial court
issued an Order setting aside its earlier decision and awarded attorneys fees to respondents. It found that only the
P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand, the
P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while the P545,000.00 obligation
was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in compliance
with a Central Bank circular. According to the trial court, the "blanket mortgage clause" relied upon by petitioner
applies only to future loans obtained by the mortgagors, and not by parties other than the said mortgagors, such as
Donalco Trading, Inc., for which respondents merely signed as officers thereof.
COURT OF APPEALS-The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys
fees.It ruled that while a continuing loan or credit accommodation based on only one security or mortgage is a
common practice in financial and commercial institutions, such agreement must be clear and unequivocal. In the
instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the
appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations of G.B. Alviar
Realty and Development, Inc.
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals as
grounds herein.
Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the
promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that PN
BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states that there is
a need to pierce the veil of corporate fiction.
ISSUE:
(i) the validity of the "blanket mortgage clause" or the "dragnet clause";
(ii) the coverage of the "blanket mortgage clause"; and consequently,
(iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans.
HELD:At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage clause"
was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by respondents on
behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of
corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage
contract states that the mortgage covers "as well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,

principal or secondary." Well-settled is the rule that a corporation has a personality separate and distinct from that of
its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is
shown that they have exceeded their authority.However, the legal fiction that a corporation has a personality separate
and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an
illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues.PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not
within the contemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that respondents
are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the
promissory note that the loan was for house construction and personal consumption, there is no proof showing that the
loan was indeed for respondents personal consumption. Besides, petitioner agreed to the terms of the promissory
note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long
standing that it is, should have insisted that the note be made in the name of respondents themselves, and not to
Donalco Trading Inc., and that they sign the note in their personal capacity and not as officers of the corporation.
A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is specifically
phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly
construed."Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of
which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new
security on each new transaction.A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional security documents, thereby saving
time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.Indeed, it has been settled in a
long line of decisions that mortgages given to secure future advancements are valid and legal contracts,and the
amounts named as consideration in said contracts 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.
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and
to secure the payment of the same and those that may hereafter be obtained, the principal or all of which is
hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, 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 does 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 the back
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 incumbrances. . . .(Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to
secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and advancements that may
be obtained by the respondents. The terms of the above provision being clear and unambiguous, there is neither need
nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage clauses," are of a
different factual milieu from the instant case. There, the subsequent loans were not covered by any security other than
that for the mortgage deeds which uniformly contained the "dragnet clause."
In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out TOD CA 3923" and
eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and transportation
equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the critical issue is whether the "blanket
mortgage" clause applies even to subsequent advancements for which other securities were intended, or particularly,
to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a
"dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such other debt is secured by another mortgage.The contrary
thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified
therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special
contract excluding it from the arrangement.
The latter school represents the better position. The parties having conformed to the "blanket mortgage clause" or
"dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that subsequent loans
need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. In other words,
the sufficiency of the first security is a corollary component of the "dragnet clause." But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually requiring other securities for the subsequent
loans. Thus, when the mortgagor takes another loan for which another security was given it could not be inferred that
such loan was made in reliance solely on the original security with the "dragnet clause," but rather, on the new
security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry whether the
second loan was made in reliance on the original security containing a "dragnet clause." Accordingly, finding a
different security was taken for the second loan no intent that the parties relied on the security of the first loan could
be inferred, so it was held. The rationale involved, the court said, was that the "dragnet clause" in the first security
instrument constituted a continuing offer by the borrower to secure further loans under the security of the first security
instrument, and that when the lender accepted a different security he did not accept the offer.
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to
provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent advance was made because (1) the second note was secured
by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel
mortgage; (2) there was no reference in the second note or chattel mortgage indicating a connection between the real
estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name alone, whereas the
second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4)
there was no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage
in making the advance.
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a
mortgage containing a "dragnet clause" will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied,
there is a need to respect the existence of the other security given for PN BD#76/C-345. The foreclosure of the
mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not
covered by the security for the second promissory note. As held in one case, where deeds absolute in form were
executed to secure any and all kinds of indebtedness that might subsequently become due, a balance due on a note,
after exhausting the special security given for the payment of such note, was in the absence of a special agreement to
the contrary, within the protection of the mortgage, notwithstanding the giving of the special security.This is
recognition that while the "dragnet clause" subsists, the security specifically executed for subsequent loans must first
be exhausted before the mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of
adhesion, to which respondents only participation was the affixing of their signatures or "adhesion" thereto.A contract
of adhesion is one in which a party imposes a ready-made form of contract which the other party may accept or reject,
but which the latter cannot modify.
The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which,
according to jurisprudence must be strictly construed against the party responsible for its preparation.If the parties
intended that the "blanket mortgage clause" shall cover subsequent advancement secured by separate securities,
then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken

contra proferentum, that is, construed against the party who caused the ambiguity which could have avoided it by the
exercise of a little more care.To be more emphatic, any ambiguity in a contract whose terms are susceptible of
different interpretations must be read against the party who drafted it,which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise
contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner and with even
more reason since having been accomplished by respondents in the presence of petitioners personnel and approved
by its manager, they could not have been unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have
not yet paid the P250,000.00, and gave no credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to foreclosure proceedings for
the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN
BD#76/C-345, has been exhausted, subject of course to defenses which are available to respondents.

CASE 13

TITLE: PEOPLES BANK V DAHICAN LUMBER

PONENTE:DIZON, J
DATE: May16, 1967
SUBJECT MATTER: Chattel mortgage-subject matter: machinery

I.FACTS (SHORTER VERSION) you may refer the longer version of the facts below for reference of the
accurate parties
A. Dahican lumber company (DAMCO) obtained several loans amounting to 250,000pesos from Peoples bank
(BANK) and, together with DALCO, another loan amounting to$250,000 from Export-Import bank secured by
five promissory notes through peoples bank. Inboth loans, DAMCO executed and registered respective
mortgages with inclusion of after acquired properties. DAMCO and DALCO failed to satisfy the fifth
promissory note in favor of Export bank so Peoples bank paid it and subsequently filed an action for the
foreclosure ofthe mortgaged properties of DAMCO including the after acquired machinery, equipmentand spare
parts upon the latter's failure to fulfill its obligation.
B. Contention of the Petitioner
Peoples bank asserted that the after acquired machinery and equipment of DAMCO are subject to the deed of
mortgage executed by DAMCO. Hence, these can beincluded in the foreclosure proceedings.
C. Contentions of the Respondent
DALCO argued that the mortgages were void as regards the after acquired propertiesbecause they were not
registered in accordance with the chattel mortgage law. Moreover,provision of the fourth paragraph of each of
said mortgages did not automatically makesubject to such mortgages the "after acquired properties", the only
meaning thereof beingthat the mortgagor was willing to constitute a lien over such properties.
II.ISSUES TO BE RESOLVED
WON the "after acquired properties" were subject to the deeds of mortgage mentioned heretofore. Assuming that they are
subject thereto.

WON the mortgages are valid and binding on the properties aforesaid in spite of the fact that they were not registered in
accordance with the provisions of the Chattel Mortgage Law.

III.RULING OFTHE SUPREME COURT

Yes. Judgment rendered in favor of Plaintiff Peoples bank. The acquired machinery
andequipment are included in the executed mortgages.It is not disputed in the case at bar that the
"after acquired properties" were purchased byDALCO in connection with, and for use in the
development of its lumber concession and thatthey were purchased in addition to, or in replacement
of those already existing in the premiseson July 13, 1950.
In Law, therefore, they must be deemed to have beenimmobilized, with theresult that the real
estate mortgages involved herein which were registered as such did nothave to be registered a
second time as chattel mortgages in order to bind the "after acquired properties" and affect third
parties.

Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property
of every nature and description taken in exchange or replacement, as well as all buildings,
machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire,
construct, install, attach; or use in, to upon, or in connection with the premises - that is, its
lumber concession - "shall immediately be and become subject to the lien" of both mortgages in
the same manner and to the same extent as if already included therein at the time of their
execution. Such stipulation is neither unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the original value of the properties given as
security.
Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by owner of
the tenement for an industry or works which may be carried on in a building or on a piece of
land, and shall tend directly to meet the needs of the said industry or works.On the strength of
the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were
placed in the real properties mortgaged to plaintiffs, they came within the operation of Art. 415,
paragraph 5 and Art. 2127 of the New Civil Code".
In the present case, the characterization of the "after acquired properties" as real property
was made not only by one but by both interested parties. There is, therefore, more reason to
hold that such consensus impresses upon the properties the character determined by the parties
who must now be held in estoppel to question it.

Facts: Longer Version

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do
business in the Philippines sold and assigned all its rights in the Dahican Lumber concession to Dahican
Lumber Company - hereinafter referred to as DALCO - for the total sum of $500,000.00, of which only the
amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the
People's Bank & Trust Company amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO
obtained, through the BANK, a loan of $250,000.00 from the Export-Import Bank of Washington D.C.,
evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both DALCO
and the Dahican America Lumber Corporation, a foreign corporation and a stockholder of DALCO,
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the
BANK a deed of mortgage covering five parcels of land situated in the province of Camarines Norte together
with all the buildings and other improvements existing thereon and all the personal properties of the mortgagor
located in its place of business in the municipalities of Mambulao and Capalonga, Camarines Norte. On the
same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure
payment of the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00.
Both deeds contained a provision extending the mortgage lien to properties to be subsequently acquired by the
mortgagor.
Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto
DALCO and DAMCO pledged to the BANK 7,296 shares of stock of DALCO and 9,286 shares of DAMCO to
secure the same obligation.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the
same to the Export-Import Bank of Washington D.C., and the latter assigned to the former its credit and the first
mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the
overdue promissory note.c
After July 13, 1950 - the date of execution of the mortgages mentioned above - DALCO purchased various
machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already
owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore
regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties
but the latter failed to do so. In connection with these purchases, there appeared in the books of DALCO as due
to Connell Bros. Company (Philippines) - a domestic corporation who was acting as the general purchasing
agent of DALCO -the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.chan
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a
resolution agreeing to rescind the alleged sales of equipment, spare parts and supplies by CONNELL and
DAMCO to it.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be
cancelled but CONNELL and DAMCO refused to do so. As a result, on February 12, 1953; ATLANTIC and the
BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO
and DAMCO.
Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the
action to the Court of First Instance of Manila.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment

and supplies of DALCO, and the same were subsequently sold for a total consideration of P175,000.00 which
was deposited in court pending final determination of the action. By a similar agreement one-half (P87,500.00)
of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties"
(those not claimed by DAMCO and CONNELL), and the other half as representing those obtained from the sale
of the "after acquired properties".

CASE 14

Ajax Marketing vs CA

FACTS:

The spouses Marcial See and Lilian Tan constituted three real estate mortgages over their property in Paco, Manila in
favor of and for the following amounts: 1.) Ylang-Ylang Merchandising Co. for P250,000, 2.) Ajax Marketing Co.
(formerly Ylang-Ylang Merchandising Co.) for P150,000,and 3.) Ajax Marketing and Development Corp. for P600,000.
All the mortgages are on the same property, annotated on the back of the title. The 3 loans with an aggregate amount of
P1,000,000 were restructured and consolidated into 1 loan, where Ajax Marketing and Devt. Corp. executed a promissory
note. On its face, the promissory note has these words typewritten: secured by REM and 9. Collateral. This is
wholly/partly secured by: (x) real estate. Subsequent thereto, the property was extra-judicially foreclosed in favor of
Metrobank for the P1,000,000 promissory note.

ISSUES:

1.

Whether there was novation.

2.

Whether the consolidation of the three (3) loans granted separately to three entities into a single loan of P1.0 Million
was a mere restructuring.

3.

Whether 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.

HELD:

1. 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 promissory note. The provisions of the

promissory note 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, the promissory note 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.

2. 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. The promissory note 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.

3. 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.1
CASE 15

Topic: Real Mortgage

G.R. NO. L-13313, APRIL 28, 1960 (107 PHIL 791)

AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF HINIGARAN
vs
ESTANISLAO YULO YUSAY, ET AL.

FACTS:

1. Rafaela Yulo executed in favor of the cooperative a mortgage for P33,626.29, due from
her, her mother, sisters, brothers, and others, which amount she assumed to pay to the
cooperative.
2. A motion was presented to the court by Agricultural Credit Cooperative Association of
Hinigaran (movant) demanding the surrender of the owner's duplicate certificate of title so
that it may annotate said mortgage at the back of the certificate.
3. Estanislao Yusay, a part owner of the lot, opposed the petition on the ground that he is
owner of a part of the property in question; that the granting of the motion would operate
to his prejudice, as he has not participated in the mortgage cited in the motion; that
Rafaela Yulo is dead; that the motion is not verified and movant's rights have lapsed by
prescription. Finally it is argued that his opposition raises a controversial matter which the
court has no jurisdiction to pass upon. The existence of the mortgage is not disputed, and
neither is the fact that the mortgagor Rafaela Yulo is part owner of the lot. The oppositors
(Estanislao joined by Margarita, Maria, Elena and Pilar, all surnamed Yulo) do not dispute
that she is such a part owner, and their main objection to the petition is that as part
owners of the property, the annotation of the mortgage on the common title will affect
their rights.
4. The matter was brought to the CFI, and it ordered the Register of Deeds to register the
mortgage.

ISSUE: Whether the validity or effectivity of a mortgage may be determined during its
registration

HELD: No. Affirmed.

RATIO:

In his Brief before this Court, counsel for appellants argue that the mortgage sought to be
registered was not recorded before the closing of the intestate proceedings of the deceased
mortgagor, but was so recorded only four months after the termination of said proceedings, so
that the claim of movant has been reduced to the character of a mere money claim, not a
mortgage, hence the mortgage may not be registered.

In the first place, the proceeding to register the mortgage does not purport to
determine the supposed invalidity of the mortgage or its effect. Registration is a mere

ministerial act by which a deed, contract or instrument is sought to be inscribed in

the records of the Office of the Register of Deeds and annotated at the back of the
certificate of title covering the land subject of the deed.

The registration of a lease or mortgage, or the entry of a memorial of a lease or

mortgage on the register, is not a declaration by the state that such an instrument is
a valid and subsisting interest in land; it is merely a declaration that the record of the
title appears to be burdened with the lease or mortgage described, according to the
priority set forth in the certificate. The mere fact that a lease or mortgage was
registered does not stop any party to it from setting up that it now has no force or
effect.

The court below, in ordering the registration and annotation of the mortgage,
did not pass on its invalidity or effect. As the mortgage is admittedly an act of the
registered owner, all that the judge below did and could do, as a registration court, is
to order its registration and annotation on the certificate of title covering the land
mortgaged. By said order the court did not pass upon the effect or validity of the
mortgage - these can only be determined in an ordinary case before the courts, not
before a court acting merely as a registration court, which did not have the
jurisdiction to pass upon the alleged effect or invalidity.

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CASE 16