82. Arenas v.

Raymundo, 19 Phil 46 (1911)

FACTS : Estanislaua Arenas was the owner and proprietor of the jewelry, alleged that the
jewelries was delivered to Elena de Vega to sell on commission, and that the latter, in turn,
delivered it to Conception Perello, likewise to sell on commission, but that Perello, instead of
fulfilling her trust, pledged the jewelry in the defendant's pawnshop and appropriated to her
own use the money thereby obtained.
Conception Perello was prosecuted for estafa, convicted, and the judgment became final;
that the said jewelry was then under the control and in the possession of the defendant, as a
result of the pledge by Perello, and that the former refused to deliver it to the plaintiffs
(owner), wherefore counsel for the plaintiffs asked that judgment be rendered sentencing the
defendant to make restitution of the said jewelry and to pay the costs.
The trial court rendered judgment sentencing the defendant to restore to the plaintiff spouses
the jewelry described in the complaint, the right being reserved to the defendant to institute
his action against the proper party. The counsel for the defendant excepted to this judgment,
asked that the same be set aside, and a new trial granted. This motion was denied,
exceptions was taken by the appellant, and the proper bill of exceptions was duly approved
certified to, and forwarded to the clerk of this court.
ISSUE : WON defendant Raymundo is entitled to retain the thing pledge.
HELD : The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other
considerations, the following:
The exception contained in paragraph 3 of said article is not applicable to the present
case because a pawnshop does not enjoy the privilege established by article 464 of
the Civil Code. The owner of the loan office of Finnick Brothers, notwithstanding the
fact that he acted in good faith, did not acquire the jewels at a public sale; it is not a
question of public property, securities, or other such effects, the transfer, sale, or
disposal of which is subject to the provisions of the Code of Commerce. Neither does
a pawnshop enjoy the privilege granted to a monte de piedad; therefore, Josefa
Varela, who lost said jewels and was deprived of the same in consequence of a
crime, is entitled to the recovery thereof from the pawnshop of Finnick Brothers,
where they were pledged; the latter can not lawfully refuse to comply with the
provisions of article 120 of the Penal Code, as it is a question of jewels which has
been misappropriated by the commission of the crime of estafa, and the execution of
the sentence which orders the restitution of the jewels can not be avoided because of
the good faith with which the owner of the pawnshop acquired them, inasmuch as
they were delivered to the accused, who was not the owner nor authorized to
dispose of the same.
Even supposing that the defendant Raymundo had acted in good faith in accepting the
pledge of the jewelry in litigation, even then he would not be entitled to retain it until the
owner thereof reimburse him for the amount loaned to the embezzler, since the said owner of
the jewelry, the plaintiff, did not make any contract with the pledgee, that would obligate him
to pay the amount loaned to Perello, and the trial record does not disclose any evidence,
even circumstantial, that the plaintiff Arenas consented to or had knowledge of the pledging
of her jewelry in the pawnshop of the defendant.

For this reason, and because Conception Perello was not the legitimate owner of the jewelry
which she pledged to the defendant Raymundo, for a certain sum that she received from the
latter as a loan, the contract of pledge entered the jewelry so pawned can not serve as
security for the payment of the sum loaned, nor can the latter be collected out of the value of
the said jewelry.
Article 1857 of the Civil Code prescribes as one of the essential requisites of the contracts of
pledge and of mortgage, that the thing pledged or mortgaged must belong to the person who
pledges or mortgages it. This essential requisite for the contract of pledge between Perello
and the defendant being absent as the former was not the owner of the jewelry given in
pledge, the contract is as devoid of value and force as if it had not been made, and as it was
executed with marked violation of an express provision of the law, it can not confer upon the
defendant any rights in the pledged jewelry, nor impose any obligation toward him on the part
of the owner thereof, since the latter was deprived of her possession by means of the illegal
pledging of the said jewelry, a criminal act.
Between the supposed good faith of the defendant Raymundo and the undisputed good faith
of the plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that the latter,
after being the victim of the embezzlement, should have to choose one of the two extremes
of a dilemma, both of which, without legal ground or reason, are injurious and prejudicial to
her interest and rights, that is, she must either lose her jewelry or pay a large sum received
by the embezzler as a loan from the defendant, when the plaintiff Arenas is not related to the
latter by any legal or contractual bond out of which legal obligations arise.

83. Rural Bank of Caloocan v. CA, 104 SCRA 151 (1981)

FACTS:
Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply
for a loan. Valencia arranged everything about the loan with the bank. He supplied to the latter the
personal data required for Castro's loan application. After the bank approved the loan for the
amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note
corresponding to her loan in favor of the bank. On the same day, the Valencia spouses obtained
from the bank an equal amount of loan for P3,000.00. They signed another promissory note
(Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her
signature as co-maker.
Both loans were secured by a real-estate mortgage on Castro's house and lot. Later, the sheriff of
Manila sent a notice to Castro, saying that her property would be sold at public auction to satisfy
the obligation covering the two promissory notes plus interest and attorney's fees. Upon request
by Castro and the Valencias and with conformity of the bank, the auction sale was postponed, but
was nevertheless auctioned at a later date.
Castro claimed that she is a 70-year old widow who cannot read and write in English. According
to her, she has only finished second grade. She needed money in the amount of P3,000.00 to
invest in the business of the defendant spouses Valencia, who accompanied her to the bank to
secure a loan of P3,000.00. While at the bank, an employee handed to her several forms already
prepared which she was asked to sign, with no one explaining to her the nature and contents of
the documents. She also alleged that it was only when she received the letter from the sheriff that

she learned that the mortgage contract which was an encumbrance on her property was for
P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory
note without her being informed.
Castro filed a suit against petitioners contending that thru mistake on her part or fraud on the part
of Valencias she was induced to sign as co-maker of a promissory note and to constitute a
mortgage on her house and lot to secure the questioned note. At the time of filing her complaint,
respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her
personal loan plus interest.
Castro prayed for:
(1) the annulment as far as she is concerned of the promissory note (Exhibit "2") and
mortgage (Exhibit "6") insofar as it exceeds P3,000.00; and
(2) for the discharge of her personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her complaint.
ISSUE:
Whether or not respondent court correctly affirmed the lower court in declaring the promissory
note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the
mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only.
HELD:
Yes.
RATIO:
While the Valencias defrauded Castro by making her sign the promissory note and the mortgage
contract, they also misrepresented to the bank Castro's personal qualifications in order to secure
its consent to the loan. Thus, as a result of the fraud upon Castro and the misrepresentation to the
bank inflicted by the Valencias both Castro and the bank committed mistake in giving their
consents to the contracts. In other words, substantial mistake vitiated their consents given. For if
Castro had been aware of what she signed and the bank of the true qualifications of the loan
applicants, it is evident that they would not have given their consents to the contracts.
Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless
such misrepresentation has created substantial mistake and the same is mutual.
We cannot declare the promissory note valid between the bank and Castro and the mortgage
contract binding on Castro beyond the amount of P3,000.00, for while the contracts may not be
invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank
was not a participant thereto, such may however be invalidated on the ground of substantial
mistake mutually committed by them as a consequence of the fraud and misrepresentation
inflicted by the Valencias.

Thus, in the case of Hill vs. Veloso, this Court declared that a contract may be annulled on the
ground of vitiated consent if deceit by a third person, even without connivance or complicity with
one of the contracting parties, resulted in mutual error on the part of the parties to the contract.
The fraud particularly averred in the complaint, having been proven, is deemed sufficient basis
for the declaration of the promissory note invalid insofar as it affects Castro vis-a-vis the bank,
and the mortgage contract valid only up to the amount of P3,000.00.
84. Cavite Development Bank v. Spouses Lim, 324 SCRA 346 (2000)
Facts:

June 15, 1983 Rodolfo Guansing obtained a loan from CDB, to secure which he mortgaged
a parcel of land situated at La Loma and covered by TCT registered in his name.

As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. The
mortgaged property was sold to CDB as the highest bidder at the foreclosure sale. Guansing
failed to redeem, and CDB consolidated title to the property in its name.

June 16, 1988 private respondent Lolita Chan Lim, assisted by a broker named Remedios
Gatpandan, offered to purchase the property from CDB.

Written Offer to Purchase:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon
City for P300,000.00 under the following terms and conditions:
(1) 10% Option Money;
(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.

Lim paid CDB P30,000 as Option Money.

After some time following up the sale, Lim discovered that the subject property was
originally registered in the name of Perfecto Guansing, father of mortgagor Rodolfo. Rodolfo
succeeded in having the property registered in his name under TCT No. 300809, the same
title he mortgaged to CDB. It appears, however, that the father, Perfecto, instituted a civil
case for the cancellation of his sons title. The trial court rendered a decision restoring
Perfectos previous title and cancelling TCT No. 300809 on the ground that the latter was
fraudulently secured by Rodolfo. This decision has since become final and executory.

Lim and her husband filed an action for specific performance and damages against CDB and
its mother-company, Far East Bank and Trust Co.

RTC in favor of Lim spouses: there was a perfected contract of sale; CDB and FEBTC liable
for damages. CA affirmed.

Issue: W/N there was a VALID contract of sale between the parties.

Held: NO.

Ratio:
There is a perfected contracted of sale

Contracts are not defined by the parties thereto but by principles of law. In determining the
nature of a contract, the courts are not bound by the name or title given to it by the
contracting parties. In the case at bar, the sum of P30,000, although denominated in the offer
to purchase as "option money," is actually in the nature of earnest money or down payment
when considered with the other terms of the offer.

Definition of option contract: It is a preparatory contract in which one party grants to the
other, for a fixed period and under specified conditions, the power to decide, whether or not
to enter into a principal contract, it binds the party who has given the option not to enter into
the principal contract with any other person during the period designated, and within that
period, to enter into such contract with the one to whom the option was granted, if the latter
should decide to use the option. It is a separate agreement distinct from the contract to which
the parties may enter upon the consummation of the option.

After the payment of the 10% option money, the Offer to Purchase provides for the payment
only of the balance of the purchase price, implying that the "option money" forms part of the
purchase price (i.e. earnest money).

CDB has accepted Lims offer to purchase and considered it as good and no longer subject to
a final approval.

However, it is impossible for CDB to perform its obligation as seller to deliver and transfer
ownership of the property. Nemo dat quod non habet (One cannot give what one does not
have). Ownership of the thing sold is required not during the perfection of the contract, but
during consummation.

. But it is void.

The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing
must be deemed a nullity for CDB did not have a valid title to the said property. To
be sure, CDB never acquired a valid title to the property because the foreclosure
sale, by virtue of which the property had been awarded to CDB as highest bidder,
is likewise void since the mortgagor was not the owner of the property foreclosed.

Exception to rule that sale of mortgaged property is void when mortgagor is not the owner
thereof: mortgagee in good faith (all persons dealing with property covered by a Torrens
Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on
the face of the title)

However, CDB CANNOT be considered a mortgagee in good faith. While petitioners are not
expected to conduct an exhaustive investigation on the history of the mortgagors title, they
cannot be excused from the duty of exercising the due diligence required of banking
institutions. It is standard practice for banks, before approving a loan, to send representatives
to the premises of the land offered as collateral and to investigate who are the real owners
thereof, noting that banks are expected to exercise more care and prudence than private
individuals in their dealings, even those involving registered lands, for their business is
affected with public interest.

Private respondents are entitled to recover the P30,000 option money paid by them plus legal
interest. Also, considering CDBs negligence, the award of moral damages on the basis of
Arts. 21 and 2219 of the Civil Code is proper.

85. Bustamante v. Rosel, 319 SCRA 413 (1999)

Facts: Respondent ROSEL (lender) entered into a loan agreement with petitioner
BUSTAMANTE (borrower) and her late husband, under, among others, the condition that the
Rosel is given the option to buy at a certain price the property given as collateral in the event the
borrower fails to pay. When the loan was about to mature, Rosel proposed to buy at the pre-set
price of 200K the collateral given to guarantee the payment of the loan, but Bustamante refused
to sell. When Bustamante tendered payment of the loan to Rosel which it refused to accept,
insisting on petitioners signing a prepared deed of absolute sale of the collateral. Rosel consigned
the amount of 47,500 with the trial court with which Rosel filed a complaint for specific
performance.
Issue: WON the stipulation in the loan contract was valid and enforceable.
Held:
1. Stipulation embraced in concept of pactum commisorium Bustamante did not fail to
pay the loan when Rosel refused to accept payment, Bustamante consigned the amount
with the trial court. 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.
2. Intent to appropriate property as collateral appears to be evident the debtor is obliged to
dispose of the collateral at the pre-agreed consideration amounting to practically the same
amount of the loan. In effect, the creditor acquires collateral in event of non-payment of
the loan. This is within the concept of PC, thus stipulation is void.
ELEMENTS OF PACTUM COMMISSORIUM
a. There should be a property mortgaged by way of security for the payment of the principal
obligation;

b. There should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in the case of non-payment of the principal obligation within the stipulated
period.
86. Alcantara v. Alinea, 8 Phil 110 (1907)
Facts: Defendant Alinea borrowed from plaintiff Alcantara P480 with the stipulation that if at the
expiration of the period of payment said debt should not be paid, it would be understood that the
house and lot described in the contract belonging to the defendant be considered as absolutely
sold to the plaintiff for said sum. The defendant failed to pay, so plaintiff filed an action for the
delivery of said house and lot to him by the defendant who refused to do so. The trial court
decided for the plaintiff. Defendant appealed.
Issue: WON the stipulation was pactum commissorium
Held: No. Pactum commissorium presumed the exsistence of mortgage, pledge or antichresis.
There is no pactum commissorium when the parties agreed to a contract of loan and a promise of
sale of house and lot.
The contract is a loan and a promise of sale of house and lot, the price of which should be the
amount loaned, if within fixed period of time such amount should not be paid. Either one of the
contracts is perfectly legal or both are authorized. The fact that the parties have agreed at the
same time in such manner that the fulfillment of the promise of sale would depend upon the
nonpayment or return of the amount loaned, has not produced any change in the nature and legal
conditions of either contracts, or any essential defect which would nullify the same.
87. Mahoney v. Tuason, 39 Phil 952 (1919)
Facts: P. Blanc, the owner of the jewels, entered into a contract of pledge, delivering
to the creditor Mariano Tuason several jewels and other merchandise for the purpose
of securing the fulfillment of the obligation which he (Blanc) had contracted in favor
of the latter who had guaranteed the payment of a considerable amount of money
which Blanc owed to the Chartered Bank. Creditor Tuason paid to the Chartered Bank
the sum of sixteen thousand pesos (P16,000) which the debtor Blanc owed and failed
to pay, and that the latter did not reimburse Tuason the amount paid to the bank
together with interests thereon.
Issue: W/N Tuason can appropriate the things given by way of pledge?
Ruling: No. Tuason is entitled to retain and appropriate to himself the merchandise
received in pledge is null and indefensible, because he can only recover his credit,
according to law, from the proceeds of the sale of the same. Art. 2088.

88. Reyes v. De Leon, 20 SCRA 369 (1967)

Spouses Lanuza sold their two-story house to petitioner and Aurelia Navarro together with the
leasehold rights to the lot, a television set and a refrigerator in consideration of the sum of P3,000,
with a right to repurchase such properties for the same amount for a period of 3 months (this was
made even without the signature of the wife nor registration to the Registry of Deeds). Such

period was extended to 12 July 1961 (this time with the wifes signature). However, after the
execution of the Deed of Sale, the Spouses mortgaged the same house in favor of Martin de Leon
to secure the payment of P2,720 within one year (this was registered in the Registry of Deeds).
When the spouses failed to pay their obligation, de Leon filed a petition for extra-judicial
foreclosure of mortgage, while on the other hand Reyes and Navarro filed a petition for the
consolidation of ownership of the house on the ground that the period of redemption expired on
July 12, 1961 without the vendees exercising their right of repurchase.

On October 23, the house was sold to De Leon as the only bidder at the sheriffs sale, in which
the former immediately took possession of the property. He also intervened in court and asked for
the dismissal of the petition filed by Reyes and Navarro on the ground that the unrecorded pacto
de retro sale could not affect his rights as a third party. He further argued that the sale in
question is not only voidable but void ab initio for having been made by Lanuza without the
consent of his wife.

ISSUE: Who has the right over the contested property?

RULING: It is de Leon who has the right over the property.

Although it is true that a conveyance of real property of the conjugal partnership made by the
husband without the consent of his wife is merely voidable, Article 173 of the Civil Code gives
the wife ten years within which to bring an action for annulment, and as such it could also be
ratified as the wife did in the case at bar when she signed the annotation that the redemption
period is extended up to 12 July 1961. Furthermore, a provision in the Deed of Sale in question
which states that if the Lanuzas fail to pay said amount of P3,000.00 within the stipulated period
of three months, their right to repurchase the said properties shall be forfeited and the ownership
thereto automatically pass to Mrs. Maria Bautista Vda. de Reyes without any Court
intervention and they can take possession of the same is contrary to the nature of a true pacto de
retro sale under which a vendee acquires ownership of the thing sold immediately upon execution
of the sale, subject only to the vendor's right of redemption, since what has been established is an
odious pactum commissorium which enables the mortgages to acquire ownership of the
mortgaged properties without need of foreclosure proceedings. Therefore, such sale is a nullity,
being contrary to law.

Another point made by the Supreme Court is that the mortgage was first registered than the Deed
of Sale. By following the principle of prior tempore potior jure (he who is first in time is
preferred in right), the latter cannot prevail over the registered mortgage of De Leon.

89. PNB v. Agudelo, 58 Phil 655 (1933)

-Nothing in the mortgage deeds to show that Garrucho (mortgagor) is agent of the owner or that
he obtained the loan on behalf of the owners
-It appears that Garrucho acted in his personal capacity-He executed the PNs under his own
signature without authority from the principal, therefore, PNs not binding upon them
-His SPA does not authorize him to constitute a mortgage to secure his personal obligations,
therefore he exceeded his authority
-Exception in Art. 1717 where agent contracts in his own name with things belonging to the
principal binds the latter requires that agent did not exceed his authority
90. Central Bank v. CA, 139 SCRA 46 (1985)
Tolentino made a loan from Island Savings Bank secured by a mortgage. The Bank did not
release the whole amount but only a portion thereof. Later, the Bank experienced liquidity
problems and the Monetary Board of Central Bank prohibited it from making new loans and
much later, from doing business in the Philippines. Thereafter, the Acting Superintendent of
Central Bank took charge of its assets. Upon expiration of the loan term, the Bank filed
extrajudicial foreclosure of the mortgage. Was there a perfected contract of loan when only a
portion of the amount was delivered?
The Supreme Court held that there was only partial delivery. As such, the contract is deemed
perfect only in so far as what has been delivered. The mortgage cannot be entirely foreclosed,
except for up to the amount of the actual amount released, but the Bank can recover the interest of
the partial loan. Tolentino cannot anymore demand the remaining amount of the loan from the
Bank because he defaulted on his payment. His liability offsets the liability of the Bank to him.
91. Dayrit v. CA, 36 SCRA 548 (1970)
FACTS:
Dayrit, Sumbillo and Angeles entered into a contract with Mobil Oil
Phil, entitled LOAN & MORTGAGE AGREEMENT. Defendants violated the LOAN
& MORTGAGE AGREEMENT because they only paid one installment. They also
failed to buy the quantities required in the Sales Agreement.
The plaintiff made a demand, Dayrit answered acknowledging his liability.
Trial Court ruled in favor of plaintiff and also ruled that each of the three
defendants shall pay 1/3 of the cost. No appeal had been taken so the
decision became final and executor.
Mobil filed for the execution of the judgment. Dayrit opposed alleging that
they had an agreement with Mobil, that he would not appeal anymore but
Mobil would release the mortgage upon payment of his 1/3 share.

Mobil claimed that the agreement was that it would only release the
mortgage if the whole principal mortgaged debt plus the whole accrued
interest were fully paid.
ISSUE: Whether or not the CFI erred in ordering the sale at public auction of
the mortgaged properties to answer for the entire principal obligation of
Dayrit, Sumbillo and Angeles.