Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 132287 January 24, 2006

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners,

vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL, SR., LEONORA
NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband
JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted
by her husband ALFONSO SORONIO, Respondents.

DECISION

TINGA, J.:

The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a
notarial sale could still be redeemed by their owners. This notion is wrong, and we thus reverse.

The facts, as culled from the record, follow.

Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the
Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 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. The shares pledged are listed below:

Miguel Rodriguez Jariol .1,000 shares covered by Stock Certifi-

cates No. 011, 060, 061 & 062;

Abdulia C. Rodriguez . 300 shares covered by Stock Certificates

No. 023 & 093;

Leonora R. Nolasco .. 407 shares covered by Stock Certificates

No. 091 & 092;

Genoveva Soronio. 699 shares covered by Stock Certificates

No. 025, 059 & 099;

Dolores R. Soberano. 699 shares covered by Stock Certificates

No. 021, 053, 022 & 097;

Julia Generoso .. 1,100 shares covered by Stock Certificates

No. 085, 051, 086 & 084;

Teresita Natividad.. 440 shares covered by Stock Certificates

Nos. 054 & 0552

When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans, respondents
filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were consolidated and tried before
RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others. However the RTC,
in its decision3 dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale at
public auction of the various pledges subject of these two cases."4 This decision attained finality after it was affirmed by
the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4
November 1991. 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 these payments to the
Parays, but had been rebuffed. The deposited amounts were as follows:

Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991

Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991

Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991

38,385.44 .. 14 Oct. 1991

Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991

Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991

Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991

520,216.39 ..11 Nov. 1991

Miguela Jariol . 490,000.00.. 18 Oct. 1991

88,000.00 ..18 Oct. 19915

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully
bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the
auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public
auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC.
Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant to
the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and
consignations were made long after their obligations had fallen due.

The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays. 6 It held, among
others 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. 7 The Court of Appeals Eighth Division
however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject
pledge contracts; and the auction sale of 4 November 1991 as null and void.8 Most crucially, the appellate court 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.

The Court of Appeals 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. Thus, it was observed that the minutes of the auction
sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose of knowing
the price to be paid by the different pledgors upon redemption of the auctioned sales of stock.

Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they
were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131,
which did not authorize the payment of the principal obligation by respondents. They point 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 argue that the essential procedural requisites for the auction sale had been satisfied.

We rule in favor of petitioners.

The fundamental premise from which the appellate court proceeded was that the consignations made by respondents
should be construed in light of the rules of redemption, as if respondents were exercising such right. In that perspective,
the Court of Appeals made three crucial conclusions favorable to respondents: that their act of consigning the payments
with the RTC should be deemed done in the exercise of their right of redemption; that the buyer at public auction does not
ipso facto become the owner of the pledged shares pending the lapse of the one-year redemptive period; and that the
collective sale of the shares of stock belonging to several individual owners without specification of the apportionment in
the applications of payment deprives the individual owners of the opportunity to know of the price they would have to pay
for the purpose of exercising the right of redemption.

The appellate courts dwelling on the right of redemption is utterly off-tangent. The right of redemption involves payments
made by debtors after the foreclosure of their properties, and not those made or attempted to be made, as in this case,
before the foreclosure sale. The proper focus of the Court of Appeals should have been whether the consignations made
by respondents sufficiently acquitted them of their principal obligations. A pledge contract is an accessory contract, and is
necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of Appeals,
involving the right of redemption over pledged properties. We have no hesitation in pronouncing such theory as
discreditable.

Preliminarily, 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. 9

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by public
auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R-20120 and 20131, which sought to
annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed
them in the following fashion:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and
 (1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and effective;
and

(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these
two cases.

Costs against the plaintiffs.

SO ORDERED.10

The phrase "giving due course to the foreclosure and sale at public auction of the various pledges subject of these two
cases" may give rise to the impression that such sale is judicial in character. While the decision did authorize the sale by
public auction, such declaration could not detract from the fact that the sale so authorized is actually extrajudicial in
character. Note that the final judgment in said cases expressly 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.

Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in the sole
discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the
aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would have no
choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged
property in public auction is, by virtue of the Civil Code, extrajudicial in character.

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.

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be
redeemed by the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of redemption
exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally.
Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and
vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.12

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. And Section 39 of the
1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption
applies to real properties, not personal properties, sold on execution.

Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of
redemption. In Sibal 1. v. Valdez,13 the Court ruled that sugar cane crops are personal property, and thus, not subject to
the right of redemption.14 No countervailing statute has been enacted since then that would accord the right of redemption
over personal property, hence the Court can affirm this decades-old ruling as effective to date.

Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and
applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with
liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must reject the
appellate courts declaration that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned
shares, since the debtor enjoys the one-year redemptive period to redeem the property. 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.

The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares, notwithstanding the fact that
these shares were owned by several people, on the premise the pledgors would be denied the opportunity to know
exactly how much they would need to shoulder to exercise the right to redemption. 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.15 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. 16

A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate number or
portion of the pledged shares. In such a case, there may lie the need to ascertain with particularity which of the shares are
covered by the bid price, since not all of the shares may be sold at the auction and correspondingly not all of the pledge
contracts extinguished. The same situation also would lie if one or some of the owners of the pledged shares participated
in the auction, bidding only on their respective pledged shares. However, in this case, none of the pledgors participated in
the auction, and the sole bidder cast his bid for all of the shares. There obviously is no longer any practical reason to
apportion the bid price to the respective shares, since no matter how slight or significant the value of the purchase price
for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover the excess or the
deficiency, as the case may be. To invalidate the subject auction solely on this point serves no cause other than to
celebrate formality for formalitys sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though yet
remains whether the consignations made by respondents extinguished their respective pledge contracts in favor of the
Parays so as to enjoin the latter from auctioning the pledged shares.

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.

Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the
pledge agreements. They are mistaken.

Petitioners point out that 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. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as
alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."17

The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest
rate was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final. Moreover,
the said decision pronounced that even assuming that the interest rates of the various loans were 5% per month, "it is
doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for sometime now,
usury has become legally inexistent."18 The finality of this 1988 Decision is a settled fact, and thus the time to challenge
the validity of the 5% monthly interest rate had long passed. With that in mind, there is no reason for the Court to disagree
with petitioners that 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 5% monthly interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18,
Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount required by the execution
and the costs that have been incurred therein.19 However, the provision applies only to execution sales, and not extra-
judicial sales, as evidenced by the use of the phrases "sale of property on execution" and "judgment obligor." The
reference is inapropos, and even if it were applicable, the failure of the payment to cover the interests due renders it
insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted.
Petitioners right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any
subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of superseding a
final and executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated
in the auction sale, as they are permitted to bid themselves on their pledged properties. 20 Moreover, they would have had
a better right had they matched the terms of the highest bidder.21 Under the circumstances, with the high interest
payments that accrued after several years, respondents were even placed in a favorable position by the pledge
agreements, since the creditor would be unable to recover any deficiency from the debtors should the sale price be
insufficient to cover the principal amounts with interests. Certainly, had respondents participated in the auction, there
would have been a chance for them to recover the shares at a price lower than the amount that was actually due from
them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss.
Now, all respondents can recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the decision of
the Cebu City RTC, Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 74073 September 13, 1991

HONESTO ONG, RENATO LLOBRERA, AVELINO DE GRACIA, JR., ALFONSO ONG, and SANTIAGO OCAMPO,
petitioners,
vs.
HON. INTERMEDIATE APPELLATE COURT, HON. RICARDO D. DIAZ, as Judge of the RTC of Manila, Branch XXVII
and CONSOLIDATED BANK AND TRUST CORPORATION (SOLID BANK), respondents.

Joaquin P. Yuseco, Jr. for petitioners.

C.M. De los Reyes & Associates for SOLID BANK

PARAS, J.:

This is a petition for review on certiorari seeking to reverse and set aside: (a) the decision * of the Intermediate Appellate
Court dated January 31, 1986 in AC-G.R. SP No. 05490 entitled "Honesto Ong, et al. v. Hon. Ricardo D. Diaz, et al."
which dismissed the petition for lack of merit and (b) the resolution dated March 26, 1986 denying the motion for
reconsideration.

The undisputed facts of the case are as follows:

On July 27, 1977, Madrigal Shipping Co., Inc. applied for and was granted a loan by the Consolidated Bank and Trust
Corporation (Solidbank for short) in the amount of P2,094,000.00 payable on or before July 27, 1978 at ten (10%) percent
interest per annum as evidenced by Promissory Note No. 57884 (Rollo, p. 61).

To secure the fulfillment of the obligations of Madrigal Shipping Co., Inc. to the Solidbank, and credit accommodations
which the former may from time to time obtain from the latter both parties executed a document denominated as "Pledge
Agreement" dated December 4, 1978 (Rollo, pp. 77-78).

Under the said Pledge Agreement, Madrigal Shipping, Co., Inc. gave additional securities or collaterals in the form of a
pledge in favor of the bank, its barge and tugboat particularly described, as follows:

"Tugboat CARBPM" of 27/42 gross tonnage 13.87 net tonnage, one (1) deck, no mast, 13.77 mt.
long, 4.32 mt. broad, 1.73 mt. steep, with Certificate of Ownership No. 1283 and Certificate of
Registration No. 6886.

MSC Barge No. 601, of 372.28 gross tonnage, 361.96 net tonnage, 120 mt. long, 32 mt. broad,
10 ft. deep, with Certificate of Ownership No. 6213, Certificate No. 127-68. (Ibid.)

Madrigal Shipping Co., Inc. failed to pay its obligation to the Solidbank. The creditor bank had to sell the pledged
properties. Nevertheless, when the pledgee bank was to sell the pledged properties, it found out that the tugboat and the
barge had surreptitiously been taken from the Tanque Bodega, Pasig River, Manila, where the vessels were moored and
towed to Pier 2, North Harbor, Manila, without the knowledge and consent of the Solidbank (Rollo, p. 62).

Meanwhile, on August 1, 1979, petitioner Honesto Ong bought one (1) MSC Barge No. 601 with 300 net tonnage, the
same barge which was subject of the pledge from Santiago S. Ocampo, a successful bidder in a public auction by virtue
of a writ of execution issued by the National Labor Relations Commission (NLRC) in a case entitled "Union de Marinos v.
Madrigal Shipping Co., Inc.". (Rollo, Annex "A", p. 23).

On August 6, 1979, private respondent (Solidbank) filed a complaint against Honesto Ong, et al. for Replevin with
Damages before the defunct Court of First Instance (now Regional Trial Court) and was docketed as Civil Case No.
125651 (Rollo, pp. 42-46).

On August 7, 1979, the respondent court (CFI) issued an order for the seizure of the above described personal property
upon posting of a bond in the sum of P1,000,000.00 (Rollo, p. 23; pp. 75-76).

On August 8, 1979, petitioner Honesto Ong filed a Motion to Lift Order of Seizure, claiming great and irreparable damage
would be suffered by him if the Court would not recall the above stated order. In the same motion, petitioner Honesto Ong
maintained that he purchased in good faith MSC Barge No. 601 and even offered to post a counterbond in an amount to
be determined by respondent Court of First Instance (Rollo, p. 24).

On August 13, 1979, private respondent Solidbank, filed an opposition to lift order of seizure and accused the petitioner
Honesto Ong of being a purchaser in bad faith. In its opposition, the private respondent outlined numerous circumstances
pointing to an alleged conspiracy where the petitioners resorted to foul schemes to place the subject barge beyond the
reach of the plaintiff Solidbank (Rollo, p. 9).

On August 31, 1979, the petitioners, Honesto Ong and Alfonso Ong filed their answer, and set forth their specific denials
and affirmative defenses to the complaint filed by Solidbank (Rollo, pp. 156-164).
On September 7, 1979, a reply and answer to the counterclaim was filed by the private respondent Solidbank, where
additional issues and matters were averred as against the petitioners (Rollo, p. 24).

On September 25, 1979, the respondent court (CFI) issued an order lifting the order of seizure and ordered the sheriff to
return the MSC Barge No. 601 to the petitioner-defendant Honesto Ong (Rollo, p. 166).

On September 28, 1979, a motion for reconsideration was filed by the private respondent Bank (Rollo, p. 115).

On December 16, 1980, after an opposition to the motion for reconsideration and a reply to the opposition had been filed
by the parties, the Court of First Instance denied the motion for reconsideration but ordered the petitioners Alfonso Ong
and Honesto Ong to post a counterbond of P400,000.00 executed to the herein plaintiff-private respondent. The pertinent
part of the order and its dispositive portion reads:

The alleged Pledge Agreement between plaintiff and Madrigal Shipping Company covering the
vessel (barge) in question was not registered in the registry of vessels. Considering that plaintiff
does not charge private defendants with knowledge of such pledge (see par. 8, complaint), said
defendants, being third persons, cannot be said to be bound by said pledge. Plaintiff therefore,
vis-a-vis private defendants and third persons, cannot be considered, at this stage of the action,
to be entitled to possession of the vessel for purposes of maintaining the efficacy of the writ of
replevin earlier issued and pursuant to the law applicable and pertinent to the matter, the
defendants, Alfonso L. Ong and Honesto Ong, are ordered to put up a counterbond of
P400,000.00 which is double the value of the subject vessel (barge), executed to the herein
plaintiff if such delivery be adjudged in favor of the plaintiff.

WHEREFORE, the motion for reconsideration is hereby DENIED for lack of merit.

SO ORDERED. (Rollo, p. 50) (Emphasis supplied).

On January 1, 1981, Solidbank filed a motion to release the properties subject matter of replevin for failure of the
petitioners to post the required counterbond (Rollo, p. 10).

On March 3, 1981, a motion for clarification and opposition to the motion to release properties was filed by the petitioners
(Rollo, p. 25).

On February 21, 1983, the respondent Court (CFI) issued an order stating that its order dated December 16, 1981 is clear
and needs no clarification, and that the order requiring the petitioners to post a counterbond is reiterated. The dispositive
portion reads:

WHEREFORE, the defendants, Alfonso Ong and Honesto Ong, are hereby ordered to put up a
counterbond of P400,000.00 executed in favor of the plaintiff within ten (10) days from receipt of
this order. Otherwise, the plaintiffs motion to release properties subject matter of replevin will be
granted. (Rollo, p. 26).

On April 21, 1983, a motion for reconsideration to the above stated order was filed by the petitioners Ong (Ibid.).

On October 27, 1983, the respondent court (CFI) issued an order directing petitioners Alfonso Ong and Honesto Ong to
deliver and release the barge in question. In the same order, the motion for reconsideration filed by the petitioners was
denied for lack of merit. Plaintiff's motion, in short, dated January 22, 1981 was granted. The dispositive portion of the
order reads:

WHEREFORE, defendants Alfonso Ong and Honesto Ong are hereby ordered to deliver and/or
release the barge in question (MSC Barge No. 601) to herein plaintiff from receipt (hereof) of this
order.

SO ORDERED. (Rollo, pp. 51-53).

On June 11, 1984, the new counsel filed a second motion for reconsideration in behalf of the petitioners to the above
stated order (Rollo, pp. 167-170). And on June 21, 1984, a supplement to the second motion for reconsideration was filed
again by the counsel of the petitioners (Rollo, pp. 172-175).

Acting on the second motion for reconsideration and supplement filed by the defendants Ongs, as well as, the opposition
interposed by the plaintiff Solidbank the lower court denied the second motion for reconsideration. (Rollo, p. 65)

The defendants Alfonso Ong and Honesto Ong filed with the Intermediate Appellate Court a petition for certiorari docketed
as AC-G.R. No. 05490 (Rollo, Ibid.).

On January 31, 1986, the Intermediate Appellate Court rendered a decision, dismissing the petition for lack of merit, the
dispositive portion reading:

WHEREFORE, the petition is hereby DISMISSED for lack of merit. The restraining order
previously issued is dissolved, lifted and set aside. No costs.

SO ORDERED. (Rollo, p. 34).

Petitioner Ong's motion for reconsideration of said decision was denied. (Rollo, p. 48)
Hence, this petition.

This Court, in its resolution dated April 6, 1987 gave due course to the petition and required both parties to file their
respective memoranda (rollo, petition, pp. 7-20- Resolution, p. 100).

The main issues in this case are: (1) whether or not the contract of pledge entered into by and between Solidbank and
Madrigal Shipping Co., Inc. is binding on the petitioners Ong (2) whether or not there is a necessity for the Ongs to post a
counterbond in the amount of P400,000.00.

I.

Undoubtedly, petitioners rely heavily on the fact that the contract of pledge by and between Solidbank and Madrigal
Shipping Co., Inc. was not recorded under Sections 804 and 809 of the Tariff and Customs Code and argue that it is not
binding on third persons like the petitioners.

It is, however, stated under Article 2096 of the Civil Code that for a pledge to take effect against third persons, it should be
in a public instrument which must contain the description of the thing pledged and the date of the pledge.

In the case of Bachrach Motor Co. v. Lacson Ledesma, 64 Phil. 681 (1937), Art. 2096 has been interpreted in the sense
that for the contract to affect third persons, apart from being in a public instrument, possession of the thing pledged must
in addition be delivered to the pledgee.

All these requirements have been complied with, in the case at bar. The pledge agreement is a public instrument, the
same having been notarized and under the notarial seal of Vicente A. Casim, as Doc. No. 1487; Page No. 179; Book V
and Series of 1978. Subject of the pledge (MSC Barge No. 601) was delivered to the Solidbank which had it moored at
Tanque Bodega, Pasig River, Manila, where it was guarded by a security guard. (Rollo, pp. 69-70).

Undeniably, Madrigal Shipping co., Inc., owner of MSC Barge No. 601, pledged said vessel and tugboat to secure the
shipping company's obligation to the creditor bank (Solidbank) in the amount of P2,094,000.00, and no payment was
made by Madrigal Shipping Co., Inc., as pledgor. Therefore the Solidbank has the light of retention of the barge in
question pledged to it until it is paid. The Civil Code expressly provides;

Art. 2090. The contract of pledge gives right to the creditor to retain the thing in his possession or
in that of a third person to whom it has been delivered, until the debt is paid.

Applying these concepts in the case at bar, the pledgee is obviously a lawful and rightful possessor of the personal
property pledged.

II.

As to the second issue of whether or not there is necessity for the Ongs to post a counterbond, the provisions of the Rules
are clear. This Court has explained that a defendant in a replevin suit, (petitioners Ong in this case) may demand the
return of possession of the property replevined by filing a redelivery bond executed to the plaintiff in double the value of
the property as stated in the plaintiff s affidavit, within the periods specified in Sections 5 and 6 of Rule 60 of the Rules of
Court. Under Section D, petitioner may "at any time before the delivery of the property to the plaintiff' require the return of
the property; in Section 6, he may do so, "within five (5) days after the taking of the property by the officer." Both these
periods are mandatory in character. Thus, a lower court which approves a counterbond filed beyond the statutory periods,
acts in excess of jurisdiction (Yang v. Valdez, 177 SCRA 143 [1989]).

As correctly explained by the Intermediate Appellate Court (.now Court of Appeals):

... The intent of the law requiring the posting of the bond by the applicant is clear and manifest,
which is to cover and insulate the defendant's interest from undue damage. ...

To forestall the possession by the plaintiff of the property our procedural law provides that the
defendant must post a counterbond and must furnish the plaintiff with the copy of the undertaking.
(Chan vs. Villanueva, L-3420. April 30, 1982; Sections 5 & 6, Rule 60, Revised Rules of Court)
Again, if only for the purpose of emphasis, this is required to protect the plaintiff, should his action
be adjudged meritorious. We need not mention, that this procedure was purposely formulated to
allow the defendant to continue possessing the property. Not to require him to post any bond
would likewise, be counter to the objectives and intent sought by the framers of the law. In short,
whoever holds the property must post the bond to stand as security to the non-holder pending the
final determination of the case. (Rollo, pp. 33-34)

Verily, respondent Appellate Court aptly observed that the questioned orders reveal that the Court a quo exercised
prudence in the highest degree. Solidbank was required and has already posted a bond in favor of the Ongs should the
suit for replevin be declared improper. Conversely, petitioner Ong must post a bond if he seeks the continued possession
of the property, in favor of Solidbank should the suit for replevin prosper.

Under the circumstances, the court a quo's orders which were affirmed by the Court of Appeals cannot be faulted.

PREMISES CONSIDERED, the petition is DISMISSED for lack of merit, and the assailed decision dated January 31,
1986 of the Intermediate Appellate Court is AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-78519 September 26, 1989

VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,

vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES, INC., respondents.

Francisco A. Lara, Jr. for petitioner.

D. T. Ramos and Associates for respondent Family Savings Bank.

Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:

This is a petition for review on certiorari to annul and set aside the Court of Appeals' decision dated October 28, 1986 in
CA-G.R. CV No. 03269 which affirmed the decision of the trial court in favor of the private respondents in an action to
recover the petitioners' time deposits in the respondent Family Savings Bank.

Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMS Trading Enterprises, Inc.
(hereafter "CAMS Trading" for brevity). To guaranty payment for her cement withdrawals, she executed in favor of Cams
Trading deeds of assignment of her time deposits in the total sum of P320,000 in the Family Savings Bank (hereafter the
Bank). Except for the serial numbers and the dates of the time deposit certificates, the deeds of assignment, which were
prepared by her own lawyer, uniformly provided

... 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.

On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it in the sum of P314,639.75.
It asked that it be allowed to encash the time deposit certificates which had been assigned to it by Mrs. Chu. It submitted
to the Bank a letter dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams Trading was
P404,500. After verbally advising Mrs. Chu of the assignee's request to encash her time deposit certificates and obtaining
her verbal conformity thereto, the Bank agreed to encash the certificates.It delivered to Cams Trading the sum of
P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper signatures. Upon being informed of
the encashment, Mrs. Chu demanded from the Bank and Cams Trading that her time deposit be restored. When neither
complied, she filed a complaint to recover the sum of P283,737.75 from them. The case was docketed in the Regional
Trial Court of Makati, Metro Manila (then CFI of Rizal, Pasig Branch XIX), as Civil Case No. 38861.

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit.

Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal of her complaint.

In this petition for review, she alleges that the Court of Appeals erred:

1. In not annulling the encashment of her time deposit certificates as a pactum commissorium;
and

2. In not finding that the obligations secured by her time deposits had already been paid.

We find no merit in the petition for review.

The Court of Appeals found that the deeds of assignment were contracts of pledge, but, 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.

Whether the debt had already been paid as now alleged by the debtor, is a factual question which the Court of Appeals
found not to have been proven for the evidence which the debtor sought to present on appeal, were receipts for payments
made prior to July 18, 1980. Since the petitioner signed on July 18, 1980 a letter admitting her indebtedness to be in the
sum of P404,500, and there is 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.
The Court of Appeals did not commit a reversible error in holding that it was so.

WHEREFORE, the petition for review is denied. Costs against the appellant.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

A.M. No. P-O1-1449 February 24, 2003

CLEMENTINO IMPERIAL, petitioner,

vs.
MARIANO F. SANTIAGO, JR., Sheriff IV, RTC, Branch 139, Makati City, respondent.

DECISION

PER CURIAM:

In a sworn letter-complaint dated November 26, 1998,1 Clementino Imperial, President and Chairman of the Board of
Laoang Shipping Corporation, charged respondent Mariano F. Santiago, Jr., Sheriff IV of the Regional Trial Court of
Makati City (Branch 139) with Grave Abuse of Authority and Grave Misconduct for the illegal foreclosure of a pledge on
the vessel M/V Angela Ceferina.

In his Comment dated April 29, 1999, respondent denies the alleged illegal foreclosure. He stressed that the foreclosure
and auction sale was done in a legal and appropriate manner and that he issued a Certificate of Sale dated July 9, 1998
attesting that by virtue of a contract of pledge executed on November 7, 1995 by Richard Tang Tepace, for and in behalf
of Laoang Shipping Corporation, respondent sold the vessel M/V Angela Ceferina in a public auction held on July 9, 1998
to Zoilo Uy, the highest bidder for Three Million Five Hundred Thousand Pesos (P3,500,000.00), conducted in front of the
main entrance of the Gusali ng Katarungan, Zobel St., Makati City.2

In his Reply, dated June 14, 1999, complainant contends that the alleged valid foreclosure is belied by a Certification
dated November 15, 1998 of Atty. Engracio M. Escasinas, Jr., Clerk of Court VII and Ex-Officio Sheriff, stating that: per
records of the court, the alleged foreclosure of pledge does not appear to have been filed or properly docketed in the
record; the prescribed filing and commission on sale fees does not appear to have been paid; the public sale of the vessel
could not physically be done in front of the Gusali ng Katarungan in Makati since the vessel could not be brought to said
location; the pledge cannot be legally foreclosed in Makati City since it was executed in the City of Manila; the pledge
does not conform to the legal requirements; the alleged publication of the notice of the Sheriffs sale did not pass through
the raffle required before publication by any newspaper could be had; there is no record in the Office of the Clerk of Court
and Ex-Officio Sheriff of the raffle first being done because no petition had been filed with the said office; the posting of
Sheriffs sale does not appear to have been certified to and does not comply with the requirements of Certification of the
posting of Affidavit; Richard Tepace is no longer the President of Laoang Shipping Corporation since he was ousted as
hold-over president on April 6, 1998; Laoang Shipping Corporation which appears in the Registration of Ownership to be
the owner of the vessel, with address at Laoang, N. Samar, was never notified; there was no notice made to MARINA
where the vessel is registered; respondent could not feign that he advised Zoilo Uy to pay the necessary fees required by
the Office of the Clerk of Court after the auction sale; respondent issued a Certificate of Sale to Zoilo Uy dated July 9,
1998 without ensuring that the said fees were actually and properly paid; and respondent conspired with Richard Tepace
and Zoilo Uy to deprive him (complainant) of his vessel by way of a false Certificate of Sale. 3

On January 22, 2001, the administrative case was re-docketed as a regular administrative matter and referred to then
Executive Judge Florentino A. Thason, Jr., RTC (Branch 139) Makati City for investigation, report and recommendation. 4
In a Resolution, dated March 19, 2001, the Court referred the case to the then First Vice Executive Judge Leticia P.
Morales, RTC (Branch 140) Makati City in lieu of Judge Tuason, Jr. because of the administrative case filed by him
against respondent, docketed as A.M. OCA IPI No. 00-791-P.5

After conducting the necessary investigation, Judge Morales submitted her Report dated May 26, 2002. She found
respondent guilty of Grave Abuse of Authority and Grave Misconduct. She pointed out that respondent evidently treated
an extra-judicial foreclosure based on mortgage and a foreclosure based on a pledge as similar, if not the same; that such
error cannot be treated as insignificant since the law treats the two securities as different, and it was inexcusable
negligence, if not gross ignorance of the law on the part of the respondent to ignore such statutory differences. Judge
Morales added that even the foreclosure proceeding adopted by the respondent was invalid inasmuch as the Certification
of the Clerk of Court VII affirmed the non-existence of the foreclosure, the filing and recording, as well as payment of the
necessary fees; and, that respondent in fact admitted his negligence as regards the payment of the necessary filing and
docket fees. However, Judge Morales did not recommend a specific penalty to be meted out to the respondent. 6

In its Memorandum dated August 30, 2002, the Office of the Court Administrator (OCA) adopted the findings of the
Investigating Judge and recommended to the Court the dismissal of respondent from the service.

The Court agrees with the OCA.

Respondent claims that he conducted a valid foreclosure on the vessel M/V Angela Ceferina as supported by an Affidavit
of Publication,7 Certificate of Posting8 and Certificate of Sale.9 However, a close scrutiny of the extant evidence reveals
otherwise.

The procedure for foreclosure of a pledge is set forth under Article 2112 of the Civil Code, to wit:

"Art. 2112. The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public to the
sale of the thing pledged. This sale shall be made at a public auction, and with notification to the debtor and the owner of
the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction the thing
is not sold, a second one with the same formalities shall be held; and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for his entire claim."
(Underscoring supplied)

Although it is only on February 12, 2001 that the Court in A.M. No. 01-1-01-0 clarified that the procedure in the foreclosure
of pledge before a notary public does not require the submission of a petition for extra-judicial foreclosure before the
Executive Judge of the appropriate Regional Trial Court, through the Clerk of Court/Ex-Officio Sheriff, it is expressly
provided for in Article 2112, as above-quoted, that only a notary public can conduct a public auction after proper notice is
sent to the debtor and owner of the thing pledged.

The fault of respondent could have been regarded as simple ignorance of the proper procedure or an error of judgment on
his part but respondent sheriff betrayed himself and confirmed the charges against him when he testified during the
investigation conducted by the Investigating Judge:

"Q - As a Sheriff, you know that in pledges, only the Notary Public can

conduct foreclosure, not the Sheriff?

"A - What I know, I can.

"Q - In this case, you conducted this alleged foreclosure and auction sale concerning the vessel
mortgaged under R.A. - (interrupted)

"A - Pledge Contract.

"Q - How long have you been a Sheriff?

"A - Nine (9) to ten (10) years.

"Q- So, you can distinguish between Pledge and Chattel mortgage?

"A - Yes.

"Q.- You know that in Pledges, only lawyers can conduct the foreclosure?

"A - As far as I know, I can also conduct foreclosure.

"Q.- In this case, you issued a Certificate of Sale on the same day, July 9, 1998, allegedly on the same
day when the auction sale was made?

"A - Auction sale was in the morning.

"Q - So, you issued the certificate of Sale even knowing that there was no docket fees paid?

"A - Thats why I issued the certificate of Sale and told them to pay the required fees.

"Q - So, what you did, you first issued the Certificate of Sale and you told them to pay the legal fees?

"A - Yes.

"Q - When you issued the Certificate of Sale, the Certificate of Sale was not signed by Engracio
Escasinas, Jr.?

"A - Yes.

"Q - And he has not even seen that Certificate of Sale?

"A - Yes.

"Q.- Nor the Certificate of Sale was even forwarded to the Office of the Clerk of Court?

"A - Yes, sir. I told when they should pay - (interrupted)

"Q - No, no, no. My question is, this Certificate of Sale was not even forwarded to the Office of the Clerk
of Court?

"A - Yes.

"ATTY. SIRUELO:

That will be all.

"COURT:

"Q - As a matter of procedure, do you not forward the sale to the Clerk of Court?
 "A - I told them, maam, to go to the Office of the Clerk of Court to pay considering that the Certificate of
Sale will be registered.

"Q - As a Sheriff, is it not your duty to bring the Certificate of Sale there to be noted by Atty. Engracio
Escasinas, Jr.?

"A - Its my fault, maam. I forgot to do it because of other tasks.10

In claiming that he followed the procedure required in the foreclosure of a chattel mortgage, and in admitting before the
Investigating Judge that he is well-aware that the proper requirement of law is that a petition for foreclosure of mortgage,
real estate or chattel, must be filed first with the Clerk of Court before foreclosure or auction may commence,11 he sealed
his fate. This is because the records lay bare the following facts:

1. Respondent totally ignored the specific reference in paragraph 4 of the Pledge Agreement12 that Article
2112 of the Civil Code is the applicable law.

2. No petition for foreclosure of chattel mortgage was ever filed before the Clerk of Court.13 Despite the
lack of petition, respondent proceeded with the auction sale.

3. The prescribed filing and commission on sale fees were not paid14 yet respondent signed the certificate
of sale merely because he trusted that Tepace will pay the fees. The explanation of respondent that: "its
only on my good faith and thats only my procedure because others usually pay" 15, is absolutely weak and
completely absurd.

4. The certificate of sale was not even forwarded to the Office of the Clerk of Court, and bears only the
signature of respondent.16

5. When the Investigating Judge inquired why he did not recall the certification since no fees were paid,
respondent replied that he simply forgot the transaction.17 Forgetfulness or failure to remember is never a
rational or acceptable explanation.18

6. Respondent failed to controvert the amounts received by him totalling One Hundred Sixty-Five
Thousand Pesos (P165,000.00), as shown by the unofficial receipt issued and signed by him, to wit:

"PETITION FOR PUBLIC AUCTION PARTIAL RECEIPT

1. PUBLICATION P 20,000.00

2. POSTING P 5,000.00

3. NOTARIAL FEES P 35,000.00

4. JUDICIAL FUNDS P 70,000.00

5. SHERIFFS FEES P 35,000.00

RECEIVED the described amount from Mr. & Mrs. Uy for the implementation of the Extra-Judicial Foreclosure of M/V
Ceferina."19

Respondent and his counsel, Atty. Salvador D. Abong, did not appear in the subsequent investigation despite being fully
notified and given the opportunity to explain on the amounts received. When the Investigating Judge required Process
Server Aldwin Atilon to call respondent, the latter refused to come. Respondent instead told Atilon that the case should be
submitted for resolution because he does not intend to present additional evidence other than the ones previously
submitted and those admitted by him during the investigation.20

Per Certification of the Clerk of Court, respondent did not remit said amounts nor did he secure the approval of the court.

Evidently, respondent grievously failed to comply with the requirements of Rule 141 of the Rules of Court, as follows:

"SEC. 3. Persons authorized to collect legal fees. - Except as otherwise provided in this rule, the officers and persons
hereinafter mentioned, together with their assistants and deputies, may demand, receive, and take the several fees
hereinafter mentioned and allowed for any business by them respectively done by virtue of their several offices, and no
more. All fees so collected shall be forthwith remitted to the Supreme Court. The fees collected shall accrue to the general
fund. However, all increases in the legal fees prescribed in amendments to this rule shall pertain to the Judiciary
Development Fund as established by law. The persons herein authorized to collect legal fees shall be accountable
officers and shall be required to post bond in such amount as prescribed by law.

"SEC. 9. Sheriff, and other persons serving processes.-

xxx xxx xxx

"(h) For advertising a sale, besides cost of publication, fifty (P50.00) pesos;

xxx xxx xxx

"(I) For money collected by him by order, execution, attachment, or any other process, judicial or extrajudicial, the
following sums, to wit:

"1. On the first four thousand (P4,000.00) pesos, four (4%) per centum.

"2. On all sums in excess of four thousand (P4,000.00) pesos two (2%) per centum.

"In addition to the fees hereinabove fixed, the party requesting the process of any court. preliminary, incidental, or final,
shall pay the sheriffs expenses in serving or executing the process, or safeguarding the property levied upon, attached or
seized, including kilometrage for each kilometer of travel, guards fees, warehousing and similar charges, in an amount
estimated by the sheriff, subject to the approval of the court. Upon approval of said estimated expenses, the interested
party shall deposit such amount with the clerk of court and ex-officio sheriff, who shall disburse the same to the deputy
sheriff assigned to effect the process, subject to liquidation within the same period for rendering a return on the process.
Any unspent amount shall be refunded to the party making the deposit.1awphi1.nt A full report shall be submitted by the
deputy sheriff assigned with his return, and the sheriffs expenses shall be taxed as costs against the judgment debtor."21
(Underscoring supplied)

It is clear that under the rule, sheriffs are authorized to collect certain specified fees in specified amounts. The sheriff has
to estimate the expenses to be incurred and upon the approval of the estimated expenses by the court, the interested
party has to deposit the amount with the Clerk of Court and the Ex-Officio Sheriff. These expenses shall then be
disbursed to the executing Sheriff subject to his liquidation within the same period for rendering a return on the process or
writ. Any unspent amount shall be refunded to the party who made the deposit.

Respondent did not prepare an estimate of expenses to be incurred in the auction, for which he should have sought the
approval of the Court. He did not render an accounting. He did not remit and report the amounts he received. 22 He
blatantly disregarded general auditing and accounting rules when he did not issue an official receipt for the total amount
he received. His willful failure to offer any explanation on what happened to the money he received leads to the
inescapable conclusion that he misappropriated the same for his own personal use. 23

The Court has once held that when a judges inefficiency springs from a failure to consider so basic and elemental a rule,
a law or a principle in the discharge of his duties, he is either too incompetent and undeserving of the position and title he
holds or he is too vicious that the oversight or omission was deliberately done in bad faith and with grave abuse of judicial
authority.24 There is no reason not to apply the same principle to respondent.

By his conduct, respondent gravely abused his authority to conduct auction sales. Respondent cannot feign ignorance of
the proper procedure to follow in case of pledge considering that he has been a sheriff for more than 10 years. 25 He
wielded authority where he had none and admitted disregarding the procedure in the foreclosure of a chattel mortgage.
Respondent knew his action to be wrong yet persisted in doing the same. Such grave abuse of authority amounts to grave
misconduct.

Misconduct is a transgression of some established and definite rule of action, more particularly, unlawful behavior or gross
negligence by the public officer. To warrant dismissal from the service, the misconduct must be grave, serious, important,
weighty, momentous and not trifling. The misconduct must imply wrongful intention and not a mere error of judgment. The
misconduct must also have a direct relation to and be connected with the performance of his official duties amounting
either to maladministration or willful, intentional neglect or failure to discharge the duties of the office. 26 There must also
be reliable evidence showing that the judicial acts complained of were corrupt or inspired by an intention to violate the
law.27 All of these requisites are met in this case.1a\^/phi1.net

Respondent grossly violated the yardstick of public service imposed in Section 1, Article XI of our Constitution that a
public office is a public trust; that public officers and employees must serve with the highest degree of responsibility,
integrity, loyalty and efficiency; and that they must at all times remain accountable to the people. No other office in the
government service exacts a greater demand for moral righteousness and uprightness from an employee than in the
judiciary.28

The Court will not tolerate any Court employees conduct, act or omission that violates the norm of public accountability
and diminishes or tends to diminish the faith of the people in the judiciary.29 By the very nature of their functions, sheriffs
must conduct themselves with propriety and decorum, and above all else, be above suspicion.30 The Court has repeatedly
stressed that high standards are expected of sheriffs, thus:

"At the grassroots of our judicial machinery, sheriffs and deputy sheriffs are indispensably in close contact with the
litigants, hence, their conduct should be geared towards maintaining the prestige and integrity of the court, for the image
of a court of justice is necessarily mirrored in the "conduct, official or otherwise, of the men and women who work thereat,
from the judge to the least and lowest of its personnel; hence, it becomes the imperative sacred duty of each and
everyone in the court to maintain its good name and standing as a temple of justice."31

Respondents conduct fell far too short of the standard required of court employees. He allowed himself to be a pawn for
fraud and deceit, sowing injustice in exchange for One Hundred Sixty-Five Thousand Pesos (P165,000.00).

Grave misconduct is a malevolent act which threatens the very existence of the system of administration of justice.
Because of his misconduct, respondent does not deserve to stay a minute longer in the judicial service as he seriously
lacks the integrity, uprightness and honesty demanded of an employee in the judiciary. 32

Clearly grave in character, said act is tainted by the element of corruption punishable under Section 46 (b), (4) of Book V
of the Executive Order No. 292, otherwise known as the Administrative Code of 1987. Under Section 23, Rule XIV of the
Omnibus Civil Service Rules and Regulations, Grave Misconduct is punishable with dismissal even in the first
offense.1awphi1.nt This penalty is reiterated in Civil Service Memorandum Circular No, 30, Series of 1989, 33 the
prevailing rule at the time of the commission of the complained acts in 1998.
Section 9, Rule XIV of. the Omnibus Rules and the aforecited circulars likewise provide that the penalty of dismissal from
the service shall carry with it cancellation of civil service eligibility, forfeiture of leave credits and retirement benefits, and
disqualification from any employment in the government service, unless otherwise provided in the decision, per Section 58
of Civil Service Memorandum Circular No. 19, Series of 1999.

WHEREFORE, Mariano F. Santiago, Jr., Sheriff IV of the Regional Trial Court of Makati City (Branch 139) is found
GUILTY of GRAVE MISCONDUCT. He is DISMISSED from service with prejudice to re-employment in any government
agency and government-owned or controlled corporation and with forfeiture of all retirement benefits, except accrued
leave credits.

This decision shall take effect immediately.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 176246 February 13, 2009

PREMIERE DEVELOPMENT BANK, Petitioner,

vs.
CENTRAL SURETY & INSURANCE COMPANY, INC., Respondent.

DECISION

NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision1 in CA-G.R. CV No. 85930,
which reversed and set aside the decision of the Regional Trial Court (RTC), Branch 132, Makati City in Civil Case No.
0051306.2

On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety) obtained an industrial loan of
P6,000,000.00 from petitioner Premiere Development Bank (Premiere Bank) with a maturity date of August 14, 2000. This
P6,000,000.00 loan, evidenced by Promissory Note (PN) No. 714-Y,3 stipulates payment of 17% interest per annum
payable monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y provides for a penalty charge
of 24% interest per annum based on the unpaid amortization/installment or the entire unpaid balance of the loan. In all,
should Central Surety fail to pay, it would be liable to Premiere Bank for: (1) unpaid interest up to maturity date; (2) unpaid
penalties up to maturity date; and (3) unpaid balance of the principal.

To secure payment of the P6,000,000.00 loan, Central Surety executed in favor of Premiere Bank a Deed of Assignment
with Pledge4 covering Central Suretys Membership Fee Certificate No. 217 representing its proprietary share in Wack
Wack Golf and Country Club Incorporated (Wack Wack Membership). In both PN No. 714-Y and Deed of Assignment,
Constancio T. Castaeda, Jr. and Engracio T. Castaeda, president and vice-president of Central Surety, respectively,
represented Central Surety and solidarily bound themselves to the payment of the obligation.

Parenthetically, Central Surety had another commercial loan with Premiere Bank in the amount of P40,898,000.00
maturing on October 10, 2001. This loan was, likewise, evidenced by a PN numbered 376-X5 and secured by a real estate
mortgage over Condominium Certificate of Title No. 8804, Makati City. PN No. 376-X was availed of through a renewal of
Central Suretys prior loan, then covered by PN No. 367-Z.6 As with the P6,000,000.00 loan and the constituted pledge
over the Wack Wack Membership, the P40,898,000.00 loan with real estate mortgage was transacted by Constancio and
Engracio Castaeda on behalf of Central Surety.

It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding payment of the
P6,000,000.00 loan, to wit:

August 22, 2000

CENTRAL SURETY AND INSURANCE CO.

2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City

Attention: Mr. Constancio T. Castaneda, Jr.

President

Mr. Engracio T. Castaneda

Vice President

-------------------------------------------------

Gentlemen:

This has reference to your overdue loan of P6.0 Million.

We regret to inform you that despite efforts to restructure the same, you have failed up to this time, to submit the required
documents and come up with equity necessary to implement the restructuring scheme.

In view thereof, we regret that unless the above loan is settled on or before five (5) days from the date hereof, we shall
exercise our option to have the Stock Certificate No. 217 with Serial No. 1793 duly issued by Wack Wack Golf and
Country Club, Inc. transferred in the name of Premiere Development Bank in accordance with the terms and conditions of
the Deed of Assignment with Pledge executed in favor of Premiere Development Bank.

We shall appreciate your prompt compliance.

Very truly yours,

(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head7

Posthaste, Central Surety responded and sent the following letter dated August 24, 2000:

24 August 2000

Mr. Ignacio R. Nebrida, Jr.

Senior Asst. Vice President/
Business Development Group Head
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City

Sir:

With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira that we are intending to settle
the account by the end of September. As of 14 August 2000 we made payment to your bank as per receipt attached.

As you may know, present conditions have been difficult for the insurance industry whose performance is so closely linked
to the nations economic prosperity; and we are now asking for some consideration and leeway on your very stiff and
immediate demands.

Kindly extend to us your favorable approval.

Very truly yours,

(sgd.)
ENGRACIO T. CASTANEDA
Vice-President8

Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check No. 081149 dated September
22, 2000 in the amount of P6,000,000.00 and payable to Premiere Bank. The check was received by Premiere Banks
Senior Account Manager, Evangeline Veloira, with the notation "full payment of loan-Wack Wack," as reflected in Central
Suretys Disbursement Voucher.10 However, for undisclosed reasons, Premiere Bank returned BC Check No. 08114 to
Central Surety, and in its letter dated September 28, 2000, demanded from the latter, not just payment of the
P6,000,000.00 loan, but also the P40,898,000.00 loan which was originally covered by PN No. 367-Z.11 In the same letter,
Premiere Bank threatened foreclosure of the loans respective securities, the pledge and real estate mortgage, should
Central Surety fail to pay these within ten days from date, thus:

28 September 2000

CENTRAL SURETY & INSURANCE CO.

By: Constancio T. Castaeda Jr. President
Engracio T. Castaeda Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City

RE: YOUR COMMERCIAL LOAN OF P40,898,000.00 &

P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

**************************************************

Dear Sirs:

We write on behalf of our client, Premiere Development Bank, in connection with your above-captioned loan account.

While our client has given you all the concessions, facilities and opportunities to service your loans, we regret to inform
you that you have failed to settle the same despite their past due status.

In view of the foregoing and to protect the interest of our client, please be advised that unless the outstanding balances of
your loan accounts as of date plus interest, penalties and other fees and charges are paid in full or necessary
arrangements acceptable to our client is made by you within ten (10) days from date hereof, we shall be constrained
much to our regret, to file foreclosure proceedings against the collateral of the loan mortgaged to the Bank or pursue such
action necessary in the premises.

We trust, therefore, that you will give this matter your preferential attention.

Very truly yours,

(sgd.)
PACITA M. ARAOS12
(italics supplied)

The very next day, on September 29, 2000, Central Surety, through its counsel, wrote Premiere Bank and re-tendered
payment of the check:

29 September 2000

PREMIERE BANK
EDSA cor. Magallanes Avenue
Makati City

Attention: Mr. Ignacio R. Nebrida, Jr.

Senior Asst. Vice President/
Business Development Group Head

Re : Promissory Note No. 714-Y

Sir:

This is further to our clients letter to you dated 24 August 2000, informing you that it would settle its account by the end of
September 2000.

Please be advised that on 20 September 2000 our client delivered to your bank BC cheque no. 08114 payable to
Premiere Bank in the amount of SIX MILLION PESOS (P6,000,000.00), which was received by your Senior Account
Manager, Ms. Evangeline Veloira. However, for unexplained reasons the cheque was returned to us.

We are again tendering to you the said cheque of SIX MILLION PESOS (P6,000,000.00), in payment of PN#714-Y.
Please accept the cheque and issue the corresponding receipt thereof. Should you again refuse to accept this cheque,
then I shall advise my client to deposit it in court for proper disposition.

Thank you.

Very truly yours,

(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company13
(italics supplied)

On even date, a separate letter with another BC Check No. 08115 in the amount of P2,600,000.00 was also tendered to
Premiere Bank as payment for the Spouses Engracio and Lourdes Castaedas (Spouses Castaedas) personal loan
covered by PN No. 717-X and secured by Manila Polo Club, Inc. membership shares.

On October 13, 2000, Premiere Bank responded and signified acceptance of Central Suretys checks under the following
application of payments:

13 October 2000

ATTY. EPIFANIO E. CUA

2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City

Dear Atty. Cua:

Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients with the enclosed check nos.
0008114 and 0008115 for the total of P8,600,000.00.

As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as full settlement of the obligation
under Account Nos. PN #714-Y and PN # 717-X, as the amount is insufficient.

In accordance with the terms and conditions of the Promissory Notes executed by your clients in favor of Premiere
Development Bank, we have applied the two (2) checks to the due obligations of your clients as follows:

1) Account No.: COM 235-Z14 P1,044,939.45

2) Account No.: IND 717-X P1,459,693.15

3) Account No.: COM 367-Z15 P4,476,200.18

4) Account No.: COM 714-Y P1,619,187.22

 TOTAL P8,600,000.00

We are enclosing Xerox copy each of four (4) official receipts covering the above payments. The originals are with us
which your clients or their duly authorized representative may pick-up anytime during office hours.

We shall appreciate the settlement in full of the accounts of your client or necessary arrangements for settlement thereof
be made as soon as possible to put the accounts on up to-date status.

Thank you.

Very truly yours,

(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and
Control Department16

Significantly, the P8,600,000.00 check payments were not applied in full to Central Suretys P6,000,000.00 loan under PN
No. 714-Y and the Spouses Castaedas personal loan of P2,600,000.00 under PN No. 717-X. Premiere Bank also
applied proceeds thereof to a commercial loan under PN No. 235-Z taken out by Casent Realty and Development
Corporation (Casent Realty),17 and to Central Suretys loan originally covered by PN No. 367-Z, renewed under PN No.
376-X, maturing on October 20, 2001.

Strongly objecting to Premiere Banks application of payments, Central Suretys counsel wrote Premiere Bank and
reiterated Central Suretys demand for the application of the check payments to the loans covered by PN Nos. 714-X and
714-Y. Additionally, Central Surety asked that the Wack Wack Membership pledge, the security for the P6,000,000.00
loan, should be released.

In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC, Atty. Pacita Araos,
responded and refused to accede to Central Suretys demand. Premiere Bank insisted that the PN covering the
P6,000,000.00 loan granted Premiere Bank sole discretion respecting: (1) debts to which payments should be applied in
cases of several obligations by an obligor and/or debtor; and (2) the initial application of payments to other costs,
advances, expenses, and past due interest stipulated thereunder.

As a result, Central Surety filed a complaint for damages and release of security collateral, specifically praying that the
court render judgment: (1) declaring Central Suretys P6,000,000.00 loan covered by PN No. 714-Y as fully paid; (2)
ordering Premiere Bank to release to Central Surety its membership certificate of shares in Wack Wack; (3) ordering
Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages, attorneys fees, and
expenses of litigation; and (4) directing Premiere Bank to pay the cost of suit.

On July 12, 2005, the RTC rendered a decision dismissing Central Suretys complaint and ordering it to pay Premiere
Bank P100,000.00 as attorneys fees. The RTC ruled that the stipulation in the PN granting Premiere Bank sole discretion
in the application of payments, although it partook of a contract of adhesion, was valid. It disposed of the case, to wit:

Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right in contending that it had the
right to apply [Central Suretys] payment to the most onerous obligation or to the one it sees fit to be paid first from among
the several obligations. The application of the payment to the other two loans of Central Surety namely, account nos.
COM 367-Z and IND 714-Y was within [Premiere Banks] valid exercise of its right according the stipulation.lawphil.net
However, [Premiere Bank] erred in applying the payment to the loan of Casent Realty and to the personal obligation of Mr.
Engracio Castaeda despite their connection with one another. Therefore, [Premiere Bank] cannot apply the payment
tendered by Central Surety to the other two entities capriciously and expressly violating the law and pertinent Central
Bank rules and regulations. Hence, the application of the payment to the loan of Casent Realty (Account No. COM 236-Z)
and to the loan of Mr. Engracio Castaeda (Account No. IND 717-X) is void and must be annulled.

As to the issue of whether or not [Central Surety] is entitled to the release of Membership Fee Certificate in the Wack
Wack Golf and Country Club, considering now that [Central Surety] cannot compel [Premiere Bank] to release the subject
collateral.

With regard to the issue of damages and attorneys fees, the court finds no basis to grant [Premiere Banks] prayer for
moral and exemplary damages but deems it just and equitable to award in its favor attorneys fees in the sum of Php
100,000.00.

WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering [Central Surety] to pay [Premiere
Bank] Php 100,000.00 as attorneys fees.18 (emphasis supplied)

On appeal by Central Surety, the CA reversed and set aside the trial courts ruling. The appellate court held that with
Premiere Banks letter dated August 22, 2000 specifically demanding payment of Central Suretys P6,000,000.00 loan, it
was deemed to have waived the stipulation in PN No. 714-Y granting it the right to solely determine application of
payments, and was, consequently, estopped from enforcing the same. In this regard, with the holding of full settlement of
Central Suretys P6,000,000.00 loan under PN No. 714-Y, the CA ordered the release of the Wack Wack Membership
pledged to Premiere Bank.

Hence, this recourse by Premiere Bank positing the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE AND PALPABLE ERROR
WHEN IT APPLIED THE PRINCIPLE OF WAIVER AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS THE
DEMAND LETTER SENT TO [CENTRAL SURETY] IS CONCERNED NULLIFYING THE APPLICATION OF PAYMENTS
EXERCISED BY [PREMIERE BANK]

WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE COURT OF APPEALS
COULD PREVAIL OVER THE CLEAR AND UNMISTAKABLE STATUTORY AND CONTRACTUAL RIGHT OF
[PREMIERE BANK] TO EXERCISE APPLICATION OF PAYMENT AS WARRANTED BY THE PROMISSORY NOTE

EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE SUBJECT LOAN OF
RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-WACK SHARES COULD BE RELEASE[D] DESPITE THE
CROSS DEFAULT AND CROSS GUARANTEE PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE AND
RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY [CENTRAL SURETY], CASENT REALTY AND
SPS. CASTAEDA.

WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION OF THE SUBJECT TWO
CHECK PAYMENTS BY [CENTRAL SURETY].

WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL SURETY] IS ESTOPPED FROM
CONTESTING THE STIPULATIONS OR PROVISIONS OF THE PROMISSORY NOTES AUTHORIZING [PREMIERE
BANK] TO MAKE SUCH APPLICATION OF PAYMENTS

WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE BANK] IS ENTITLED TO AN
AWARD OF DAMAGES AS OCCASIONED BY THE MALICIOUS FILING OF THIS SUIT.19

At the outset, we qualify that this case deals only with the extinguishment of Central Suretys P6,000,000.00 loan secured
by the Wack Wack Membership pledge. We do not dispose herein the matter of the P2,600,000.00 loan covered by PN
No. 717-X subject of BC Check No. 08115.

We note that both lower courts were one in annulling Premiere Banks application of payments to the loans of Casent
Realty and the Spouses Castaeda under PN Nos. 235-Z and 717-X, respectively, thus:

It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership certificate are only Central Surety,
as debtor and [Premiere Bank], as creditor. Thus, when the questioned stipulation speaks of "several obligations", it only
refers to the obligations of [Central Surety] and nobody else.

[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No. 714-Y secured by Wack Wack
membership certificate; and 2.) Account No. 367-Z secured by Condominium Certificate of Title. The two loans are
secured by separate and different collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership
certificate answers only for that account and nothing else. The collateral for Account No. 367-Z, which is the
Condominium Certificate of Title, is answerable only for the said account.

The fact that the loan obligations of [Central Surety] are secured by separate and distinct collateral simply shows that
each collateral secures only a particular loan obligation and does not cover loans including future loans or advancements.

As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty, not by [Central Surety]. Although
Mr. Engracio Castaeda is the vice-president of [Central Surety], and president of Casent Realty, it does not follow that
the two corporations are one and the same. Both are invested by law with a personality separate and distinct from each
other.

Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent evidence showing that the latter is
being used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the
legitimate issues, or when it is merely an adjunct, a business conduit or an alter ego of [Central Surety] or of another
corporation; or used as a cloak to cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or
for the protection of creditors.1avvphi1

Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses Castaeda under Account No.
IND 717-X. Settled is the rule that a corporation is invested by law with a personality separate and distinct from those of
the persons composing it. The corporate debt or credit is not the debt or credit of the stockholder nor is the stockholders
debt or credit that of the corporation.

The mere fact that a person is a president of the corporation does not render the property he owns or possesses the
property of the corporation, since that president, as an individual, and the corporation are separate entities. 20

In fact, Premiere Bank did not appeal or question the RTCs ruling specifically annulling the application of the
P6,000,000.00 check payment to the respective loans of Casent Realty and the Spouses Castaeda. Undoubtedly,
Premiere Bank cannot be allowed, through this petition, to surreptitiously include the validity of its application of payments
concerning the loans to Casent Realty and the Spouses Castaeda.

Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:

1. Whether Premiere Bank waived its right of application of payments on the loans of Central Surety.

2. In the alternative, whether the P6,000,000.00 loan of Central Surety was extinguished by the
encashment of BC Check No. 08114.

3. Corollarily, whether the release of the Wack Wack Membership pledge is in order.
The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right to apply payments

At the hub of the controversy is the statutory provision on application of payments, specifically Article 1252 of the Civil
Code, viz.:

Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of
making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application
of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to
debts which are not yet due.

If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract.

The debtors right to apply payment is not mandatory. This is clear from the use of the word "may" rather than the word
"shall" in the provision which reads: "He who has various debts of the same kind in favor of one and the same creditor,
may declare at the time of making the payment, to which of the same must be applied."

Indeed, the debtors right to apply payment has been considered merely directory, and not mandatory,21 following this
Courts earlier pronouncement that "the ordinary acceptation of the terms may and shall may be resorted to as guides in
ascertaining the mandatory or directory character of statutory provisions."22

Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular payment that he
tenders to the creditor. But likewise granted in the same provision is the right of the creditor to apply such payment in case
the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: "If the debtor accepts from the creditor a
receipt in which an application of payment is made, the former cannot complain of the same." It is the directory nature of
this right and the subsidiary right of the creditor to apply payments when the debtor does not elect to do so that make this
right, like any other right, waivable.

Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals or good customs, or
prejudicial to a third person with a right recognized by law.23

A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever account he
chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the creditor, who
may make such application as he chooses. But if neither party has exercised its option, the court will apply the payment
according to the justice and equity of the case, taking into consideration all its circumstances. 24

Verily, the debtors right to apply payment can be waived and even granted to the creditor if the debtor so agrees.25 This
was explained by former Senator Arturo M. Tolentino, an acknowledged expert on the Civil Code, thus:

The following are some limitations on the right of the debtor to apply his payment:

xxxx

5) when there is an agreement as to the debts which are to be paid first, the debtor cannot vary this agreement. 26

Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was held that:

The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978 loan. Planters refused.
Planters notes it was expressly provided in the security agreement on the 1981 loan that Planters had a legal right to
direct application of payments in its sole discretion. Appellees do not refute this. Hence, the debtors had no right by
agreement to direct the payments. This also precludes the application of the U.S. Rule, which applies only in absence of a
statute or specific agreement. Thus the trial court erred. Planters was entitled to apply the Hi-Plains payments as it saw
fit.27

In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts of loan,
securities by way of pledges, and suretyship agreements. In at least two (2) promissory notes between the parties,
Promissory Note No. 714-Y and Promissory Note No. 376-X, Central Surety expressly agreed to grant Premiere Bank the
authority to apply any and all of Central Suretys payments, thus:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due
or not. Any such application of deposits or payments shall be conclusive and binding upon us.

This proviso is representative of all the other Promissory Notes involved in this case. It is in the exercise of this express
authority under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere Bank applied
payments made by Central Surety, as it deemed fit, to the several debts of the latter.

All debts were due; There was no

waiver on the part of petitioner

Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note No. 714-Y dated August
20, 1999, in the amount of P6,000,000.00 and secured by the pledge of the Wack Wack Membership, was past the due
and demand stage. By its terms, Premiere Bank was entitled to declare said Note and all sums payable thereunder
immediately due and payable, without need of "presentment, demand, protest or notice of any kind." The subsequent
demand made by Premiere Bank was, therefore, merely a superfluity, which cannot be equated with a waiver of the right
to demand payment of all the matured obligations of Central Surety to Premiere Bank.

Moreover, this Court may take judicial notice that the standard practice in commercial transactions to send demand letters
has become part and parcel of every collection effort, especially in light of the legal requirement that demand is a
prerequisite before default may set in, subject to certain well-known exceptions, including the situation where the law or
the obligations expressly declare it unnecessary. 28

Neither can it be said that Premiere Bank waived its right to apply payments when it specifically demanded payment of the
P6,000,000.00 loan under Promissory Note No. 714-Y. It is an elementary rule that the existence of a waiver must be
positively demonstrated since a waiver by implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant
circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the
right. Mere silence on the part of the holder of the right should not be construed as a surrender thereof; the courts must
indulge every reasonable presumption against the existence and validity of such waiver. 29

Besides, in this case, any inference of a waiver of Premiere Banks, as creditor, right to apply payments is eschewed by
the express provision of the Promissory Note that: "no failure on the part of [Premiere Bank] to exercise, and no delay in
exercising any right hereunder, shall operate as a waiver thereof."

Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver that the Court of Appeals
ascribed to the demand made by Premiere Bank upon Central Surety to pay the amount of P6,000,000.00, in the face of
both the express provisions of the law and the agreements entered into by the parties. After all, a diligent creditor should
not needlessly be interfered with in the prosecution of his legal remedies. 30

When Central Surety directed the application of its payment to a specific debt, it knew it had another debt with Premiere
Bank, that covered by Promissory Note 367-Z, which had been renewed under Promissory Note 376-X, in the amount of
P40.898 Million. Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the same provision as in
Promissory Note No 714-Y which grants the Premiere Bank authority to apply payments made by Central Surety, viz.:

In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere Bank] to apply without
notice and in any manner it sees fit, any or all of my/our deposits and payments to any of my/our obligations whether due
or not. Any such application of deposits or payments shall be conclusive and binding upon us. 31

Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso that:

the bank shall be entitled to declare this Note and all sums payable hereunder to be immediately due and payable, without
need of presentment, demand, protest or notice of nay kind, all of which I/We hereby expressly waive, upon occurrence of
any of the following events: x x x (ii) My/Our failure to pay any amortization or installment due hereunder; (iii) My/Our
failure to pay money due under any other document or agreement evidencing obligations for borrowed money x x x.32

by virtue of which, it follows that the obligation under Promissory Note 367-Z had become past due and demandable, with
further notice expressly waived, when Central Surety defaulted on its obligations under Promissory Note No. 714-Y.

Mendoza v. Court of Appeals33 forecloses any doubt that an acceleration clause is valid and produces legal effects. In
fact, in Selegna Management and Development Corporation v. United Coconut Planters Bank, 34 we held that:

Considering that the contract is the law between the parties, respondent is justified in invoking the acceleration clause
declaring the entire obligation immediately due and payable. That clause obliged petitioners to pay the entire loan on
January 29, 1999, the date fixed by respondent.

It is worth noting that after the delayed payment of P6,000,000.00 was tendered by Central Surety, Premiere Bank
returned the amount as insufficient, ostensibly because there was, at least, another account that was likewise due.
Obviously, in its demand of 28 September 2000, petitioner sought payment, not just of the P6,000,000.00, but of all these
past due accounts. There is extant testimony to support this claim, as the transcript of stenographic notes on the
testimony of Atty. Araos reveals:

Atty. Opinion: Q. But you accepted this payment of Six Million (P6,000,000.00) later on when together with this was paid
another check for 1.8 Million?

Witness: A. We accepted.

Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to four (4) accounts mentioned
in Exhibit "J." Is that correct?

Atty. Tagalog: We can stipulate on that. Your Honor.

Court: This was stipulated?

Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those are the applications of
payments made by the defendant Bank on those loan accounts.

Atty. Opinion: Q. Were these accounts due already when you made this application, distribution of payments?
Witness: A. Yes sir.35

Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on the payment of its obligations.
In fact, the record shows that after marking its evidence, Central Surety proceeded to offer its evidence immediately. Only
on the rebuttal stage did Central Surety present a witness; but even then, no evidence was adduced of payment of any
other obligation. In this light, the Court is constrained to rule that all obligations of Central Surety to Premiere Bank were
due; and thus, the application of payments was warranted.

Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its more onerous obligations,
Premiere Bank cannot be faulted for exercising the authority granted to it under the Promissory Notes, and applying
payment to the obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited only to the
transactions entered into by the parties to this case, the Court will not disturb the finding of the lower court that Premiere
Bank rightly applied the payments that Central Surety had tendered. Corollary thereto, and upon the second issue, the
tender of the amount of P6,000,000.00 by Central Surety, and the encashment of BC Check No. 08114 did not totally
extinguish the debt covered by PN No. 714-Y.

Release of the pledged

Wack Wack Membership

Contract of Adhesion

To the extent that the subject promissory notes were prepared by the Premiere Bank and presented to Central Surety for
signature, these agreements were, indeed, contracts of adhesion. But contracts of adhesion are not invalid per se.
Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited.
The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent.

In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield the unwary or
weaker party from deceptive schemes contained in ready-made covenants.36 Thus, Article 24 of the Civil Code pertinently
states:

In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral
dependence, ignorance, indigence, mental weakness, tender age or other handicap, the courts must be vigilant for his
protection.

But in this case, Central Surety does not appear so weak as to be placed at a distinct disadvantage vis--vis the bank. As
found by the lower court:

Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in assuming that the [Central
Surety] could not have been cheated or misled in agreeing thereto, it could have negotiated with the bank on a more
favorable term considering that it has already established a certain reputation with the [Premiere Bank] as evidenced by
its numerous transactions. It is therefore absurd that an established company such as the [Central Surety] has no
knowledge of the law regarding bank practice in loan transactions.

The Dragnet Clause.

The factual circumstances of this case showing the chain of transactions and long-standing relationship between
Premiere Bank and Central Surety militate against the latters prayer in its complaint for the release of the Wack Wack
Membership, the security attached to Promissory Note 714-Y.

A tally of the facts shows the following transactions between Premiere Bank and Central Surety:

Date Instrument Amount Stipulation

covered

August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of P 15 M As security for PN 714-Y

Assignment and/or such Promissory Note/s
with Pledge which the ASSIGNOR /
PLEDGOR shall hereafter
execute in favor of the
ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that the security, which
peculiarly specified an amount at P15,000,000.00 (notably greater than the amount of the promissory note it secured),
was intended to guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the said deed is
explicit:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the amount
of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note attached
hereto and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR
shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby transfers, assigns,
conveys, endorses, encumbers and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporate covered by
Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August
27, 1996 in the name of the ASSIGNOR." (Emphasis made in the Petition.)

Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central Surety as follows:

Date Instrument Amount Stipulation

Notarized, Sept. Continuing P40,898,000. In consideration of the loan
22, 1999 Guaranty/Comprehensive 00 and/or any credit
Surety Agreement accommodation which you
(petitioner) have extended
and/or will extend to Central
Surety and Insurance Co.

And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior Promissory Note 367-Z, in the
amount of P40,898,000.00. In all, the transactions that transpired between Premiere Bank and Central Surety manifest
themselves, thusly:

Date Amount
Instrument Stipulation
covered

August 20, 1999 PN 714-Y P6M

August 29, 1999 Deed of Assignment with P 15 M As security for PN 714-Y and/or
Pledge such Promissory Note/s which
the ASSIGNOR / PLEDGOR
shall hereafter execute in favor of
the ASSIGNEE/PLEDGEE

Notarized, Continuing P40,898,000. In consideration of the loan

Sept. 22, 1999 Guaranty/Comprehensive 00 and/or any credit accommodation
Surety Agreement which you (petitioner) have
extended and/or will extend to
Central Surety and Insurance Co.

October 10, 2000 Promissory Note 376-X P40,898,000.

(PN 367-Z) 00

From the foregoing, it is more than apparent that when, on August 29, 1999, the parties executed the Deed of Assignment
with Pledge (of the Wack Wack Membership), to serve as security for an obligation in the amount of P15,000,000.00
(when the actual loan covered by PN No. 714-Y was only P6,000,000.00), the intent of the parties was for the Wack Wack
Membership to serve as security also for future advancements. The subsequent loan was nothing more than a fulfillment
of the intention of the parties. Of course, because the subsequent loan was for a much greater amount (P40,898,000.00),
it became necessary to put up another security, in addition to the Wack Wack Membership. Thus, the subsequent surety
agreement and the specific security for PN No. 367-X were, like the Wack Wack Membership, meant to secure the
ballooning debt of the Central Surety.

The above-quoted provision in the Deed of Assignment, also known as the "dragnet clause" in American jurisprudence,
would subsume all debts of respondent of past and future origins. It is a valid and legal undertaking, and the amounts
specified as consideration in the contracts do not limit the amount for which the pledge or mortgage stands as security, if
from the four corners of the instrument, the intent to secure future and other indebtedness can be gathered. A pledge or
mortgage given to secure future advancements is a continuing security and is not discharged by the repayment of the
amount named in the mortgage until the full amount of all advancements shall have been paid. 37

Our ruling in Prudential Bank v. Alviar38 is instructive:

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. . . .

xxxx

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-
345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account, while PN BD#76/C-
430, 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 non-
payment 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.

The security clause involved in the case at bar shows that, by its terms:

As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the ASSIGNEE/PLEDGEE in the amount
of FIFTEEN MILLION PESOS (15,000,000.00) Philippine Currency in accordance with the Promissory Note attached
hereto and made an integral part hereof as Annex "A" and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR
shall hereafter execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby transfers, assigns,
conveys, endorses, encumbers and delivers by way of first pledge unto the ASSIGNEE/PLEDGEE, its successors and
assigns, that certain Membership fee Certificate Share in Wack Wack Golf and Country Club Incorporated covered by
Stock Certificate No. 217 with Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August
27, 1996 in the name of the ASSIGNOR."
it is comparable with the security clause in the case of Prudential, viz.:

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. . . .

and there is no substantive difference between the terms utilized in both clauses securing future advances.

To recall, the critical issue resolved in Prudential was whether the "blanket mortgage" clause applies even to subsequent
advancements for which other securities were intended. We then declared that the special security for subsequent loans
must first be exhausted in a situation where the creditor desires to foreclose on the "subsequent" loans that are due.
However, the "dragnet clause" allows the creditor to hold on to the first security in case of deficiency after foreclosure on
the special security for the subsequent loans.

In Prudential, we disallowed the petitioners attempt at multiple foreclosures, as it foreclosed on all of the mortgaged
properties serving as individual securities for each of the three loans. This Court then laid down the rule, thus:

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.

However, this does not prevent the creditor from foreclosing on the security for the first loan if that loan is past due,
because there is nothing in law that prohibits the exercise of that right. Hence, in the case at bench, Premiere Bank has
the right to foreclose on the Wack Wack Membership, the security corresponding to the first promissory note, with the
deed of assignment that originated the "dragnet clause." This conforms to the doctrine in Prudential, as, in fact,
acknowledged in the decisions penultimate paragraph, viz.:

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.

In any event, even without this Courts prescription in Prudential, the release of the Wack Wack Membership as the
pledged security for Promissory Note 714-Y cannot yet be done as sought by Central Surety. The chain of contracts
concluded between Premiere Bank and Central Surety reveals that the Wack Wack Membership, which stood as security
for Promissory Note 714-Y, and which also stands as security for subsequent debts of Central Surety, is a security in the
form of a pledge. Its return to Central Surety upon the pretext that Central Surety is entitled to pay only the obligation in
Promissory Note No. 714-Y, will result in the extinguishment of the pledge, even with respect to the subsequent
obligations, because Article 2110 of the Civil Code provides:

(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any stipulation to the contrary is
void.

This is contrary to the express agreement of the parties, something which Central Surety wants this Court to undo. We
reiterate that, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts if they
consented to the same freely and voluntarily.39

Attorneys Fees

The final issue is the propriety of attorneys fees. The trial court based its award on the supposed malice of Central Surety
in instituting this case against Premiere Bank. We find no malice on the part of Central Surety; indeed, we are convinced
that Central Surety filed the case in the lower court in good faith, upon the honest belief that it had the prerogative to
choose to which loan its payments should be applied.

Malicious prosecution, both in criminal and civil cases, requires the presence of two elements, to wit: (a) malice and (b)
absence of probable cause. Moreover, there must be proof that the prosecution was prompted by a sinister design to vex
and humiliate a person; and that it was initiated deliberately, knowing that the charge was false and baseless. Hence, the
mere filing of what turns out to be an unsuccessful suit does not render a person liable for malicious prosecution, for the
law could not have meant to impose a penalty on the right to litigate.40 Malice must be proved with clear and convincing
evidence, which we find wanting in this case.

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court of Appeals in CA-G.R.
CV No. 85930 dated July 31, 2006, as well as its Resolution dated January 4, 2007, are REVERSED and SET ASIDE.
The Decision of the Regional Trial Court of Makati City, Branch 132, in Civil Case No. 00-1536, dated July 12, 2005, is
REINSTATED with the MODIFICATION that the award of attorneys fees to petitioner is DELETED. No pronouncement as
to costs.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 139436 January 25, 2006

ENRICO B. VILLANUEVA and EVER PAWNSHOP, Petitioners,

vs.
SPS. ALEJO SALVADOR and VIRGINIA SALVADOR, Respondents.

DECISION

GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari under Rule 45 of the Rules of Court is the July
16, 1999 decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 49965, which affirmed in toto an earlier decision2 of
the Regional Trial Court (RTC) at Pasig in Civil Case No. 62334.

The pertinent facts:

On December 20, 1991, herein respondents, the spouses Alejo Salvador and Virginia Salvador (Salvadors, collectively),
secured a loan of P7,650.00 from petitioner Ever Pawnshop owned and managed by co-petitioner Enrico B. Villanueva
(Villanueva). On January 23, 1992, the Salvadors took out a second loan of P5,400.00 pledging, just like in the first loan
transaction, jewelry items. Pawnshop Ticket No. 29919, covering the first loan, indicated April 10, 1992 as the last day to
redeem the jewelries pawned, whereas the redemption period for the items given as security for the second loan under
Pawnshop Ticket No. 30792 fell on May 22, 1992.

The separate redemption periods came and went, but the Salvadors failed to redeem the pawned pieces of jewelry.
Nonetheless, on June 1, 1992, their son paid Ever Pawnshop P7,000.00, the amount to be applied against the first loan of
P7,650.00. On account of this development, Pawnshop Ticket No. 29919 was cancelled and replaced by Pawnshop
Ticket No. 34932. Vis--vis the second loan, Ever Pawnshop agreed to the extension of the maturity date to June 30,
1992, provided the Salvadors pay 20% of their second loan obligation on or before June 4, 1992, failing which the
securing items shall be auctioned as scheduled. Unlike in the first loan, however, a new pawn ticket was not issued for the
second loan.

In the meantime, Ever Pawnshop issued a notice announcing the public auction sale on June 4, 1992 of all January 1 to
31, 1992 unredeemed pledges. The notice appeared in the Classified Ads Section of the Manila Bulletin on June 4, 1992,
the very day of the auction itself.

On July 1, 1992, the Salvadors repaired to the pawnshop in a bid to renew the second loan by tendering the aforesaid
20% of the amount due thereon, only to be informed that the pledged jewelry had already been auctioned as scheduled
on June 4, 1992. As found by the CA, however, pieces of the pawned jewelry items were still in the shop, 3 indicating that
Ever Pawnshop either bought some of the unredeemed pledges or did not sell them.

A month after, Mrs. Salvador attempted to redeem the jewelry items pledged for the first loan, as renewed, but all she got
in response were unclear information as to their whereabouts.

On August 7, 1992, Mr. Salvador tendered payment of the amount due on both loans, with a demand for the return of the
jewelry thus pledged. Ever Pawnshop, however, refused to accept the tender.

Such was the state of things when, on August 11, 1992, at the RTC-Pasig City, the Salvadors filed a complaint for
damages against Villanueva and Ever Pawnshop arising from the sale without notice of the two (2) sets of jewelry pledged
as security for both loans. The complaint, docketed as Civil Case No. 62334, was eventually raffled to Branch 164 of the
court.

Barely two days after Villanueva et al., received summons, their counsel informed the Salvadors of his clients willingness
to accept payment heretofore tendered for the redemption of the jewelry pledged to secure the first loan. The Salvadors,
however, turned down this belated offer.

Answering, Villanueva and Ever Pawnshop, as defendants a quo, averred, inter alia, that by letters dated March 23, 1992
and May 5, 1992, Ever Pawnshop reminded the Salvadors of the maturity dates and redemption period of their loans. Also
alleged in the answer with counterclaim for damages was the publication in the June 4, 1992 issue of the Manila Bulletin
of the notice of public auction of all unredeemed pledges from January 1 to 31, 1992.

Eventually, in a decision4 dated January 25, 1995, the trial court, on its finding that the set of jewelry covered by the
renewed first and second loans were sold without the necessary notice, rendered judgment for the Salvadors, to wit:

WHEREFORE, the Court hereby renders judgment in favor of the plaintiffs [Salvadors] and against the defendants
[Villanueva and Ever Pawnshop]. Defendants are hereby ordered to pay to the plaintiffs:

1. The sum of P20,000.00 by way of moral damages;

 2. The sum of P5,400.00 as the value of the jewelry sold under the second loan;

3. The sum of P5,000.00 as and for attorneys fees; and

4. The costs of suit.

Defendants are also ordered to restore to the possession of the [Salvadors] the jewelry that they pawned under the first
loan, covered by pawn ticket nos. 29919 and 34932, upon payment by the plaintiffs of the redemption price due last 10
August 1992.

The counterclaim of the defendants is dismissed.

SO ORDERED. (Words in bracket added.)

Therefrom, petitioners went on appeal to the CA whereat their recourse was docketed as CA-G.R. CV No. 49965.

As stated at the threshold hereof, the CA, in its decision of July 16, 1999, affirmed in toto that of the trial court, the
affirmance being predicated on the following main justifications:

As the trial court correctly pointed out, the May 5, 1992 "List of Notified Clients" (Exhs. 6, 6-A, 6-B ) . . . including the
names of the [respondents] and Ticket Nos. 29919 and 30792 is not proof that notices were actually sent to
[respondents]. While the list contains 132 names, only 98 [postage] stamps were purchased, hence, it cannot be
determined who among the 132 people were sent notices.

And as surmised by the trial court, the set of jewelry pledged to secure the first loan must have been auctioned, as
scheduled on May 7, 1992, but that by mistake the pledge was renewed (on June 1, 1992), that is why it was only after
the [petitioners] received the summons in late August 1992 when probably they recovered the pledged jewelry that they
expressed willingness to accept the [respondents] tender of payment for the redemption of said pledge jewelry securing
the first (renewed) loan.

Admittedly, the [respondents] did not pay their loans on maturity. But [petitioners] breached their contractual and legal
obligation to inform the [respondents] of the public auction of the jewelry securing it.

Furthermore, [petitioners] failed to comply with the requirements . . . that the notice must be published during the week
preceding the sale in two daily newspapers of general circulation in the city or municipality. The paid notice of public
auction to be held on June 4, 1992 by Ever Pawnshop was published only on even date, and only in one newspaper, the
Manila Bulletin. And particularly with respect to the second loan, why was the jewelry pledged to secure it included in the
June 4, 1992 auction when plaintiffs had up to that date to pay 20% of the amount due thereunder as a condition to its
renewal?

xxx xxx xxx

Anent the questioned award of moral damages: Even assuming that [respondents] failure to pay their obligation on
maturity amounts to contributory negligence, that does not abate the award of moral damages in their favor given the
[petitioners] failure to comply with the contractual and statutory requirements before the pledged jewelry was auctioned
which failure amounts to misconduct contemplated in Article 2220 of the New Civil Code basis of the award thereof
(Laguna Tayabas Bus Company v. Cornista 11 SCRA 181- 182 (Words in bracket added)

Hence, this petition on the following issues:

1. Whether the items of jewelry under the first loan were actually sold by the petitioners;

2. Whether valid notice of the sale of the pledged jewelry was effected;

3. Whether the award of P20,000.00 as moral damages and P5,000.00 as attorneys fees are proper; and

4. Whether the trial and appellate courts erred in ordering both the petitioners to pay damages.

Under the first issue, petitioners fault the CA in holding that the jewelry pledged under the first loan was sold by them.

Doubtless, the first issue raised by petitioners relates to the correctness of the factual finding of the CA confirmatory of
that of the trial court on the disposition of the set of jewelry covered by Pawnshop Ticket No. 34932. Such issue is
beyond the province of the Court to review since it is not its function to analyze or weigh all over again the evidence or
premises supportive of such factual determination.5 The Court has consistently held that the findings of the CA must be
accorded great weight and shall not be disturbed on appeal, save for the most compelling and cogent reasons, 6 like when
manifest error has been committed.7

As nothing in the record indicates any of such exceptions, the factual conclusion of the CA that petitioners indeed sold the
jewelry items given to secure the first loan must be affirmed.

Indeed, petitioner pawnshop expressed willingness to accept tender of payment and to return the pawned jewelry only
after being served with summons. Apparently, Ever Pawnshop had found a way to recover said jewelry by that time. If, as
aptly observed by the CA, the jewelry had never been sold, as petitioners so allege, but had been in their possession all
along, they could have provided a plausible explanation for the initial refusal to accept tender of payment and to return the
jewelry. Petitioners belated overture to accept payment after spurning the initial offer to pay can only be due to the fact
that, when respondents offered to pay the first time around, they (petitioners) no longer had possession of the jewelry
items in question, having previously disposed of them.

Moving on to the second issue, petitioners argue that the respondents were effectively put on notice of the sale of the
pledged jewelries, the maturity date and expiry date of redemption period of the two loans being indicated on the face of
each of the covering pawnshop tickets. Pressing the point, petitioners invite attention to the caveat printed on the dorsal
side of the tickets stating that the pledged items shall be auctioned off in the event they are not redeemed before the
expiry date of the redemption period.

We are not persuaded by petitioners faulty argument.

Section 13 of Presidential Decree (P.D.) 114, otherwise known as the Pawnshop Regulation Act, and even the terms and
conditions of the pledge itself, accord the pawner a 90-day grace period from the date of maturity of the loan obligation
within which to redeem the pawn. But even before the lapse of the 90-day period, the same Decree requires the
pawnbroker to notify the defaulting debtor of the proposed auction sale. Section 14 thereof provides:

Section 14. Disposition of pawn on default of pawner.In the event the pawner fails to redeem the pawn within ninety
days from the date of maturity of the obligation . . ., the pawnbroker may sell . . . any article taken or received by him in
pawn: Provided, however, that the pawner shall be duly notified of such sale on or before the termination of the ninety-day
period, the notice particularly stating the date, hour and place of the sale.

However, over and above the foregoing prescription is the mandatory requirement for the publication of such notice once
in at least two daily newspapers during the week preceding the date of the auction sale. 8

The CA cannot really be faulted for making short shrift of petitioners posture respecting their alleged compliance with the
notice requirement in question. As it were, petitioner Ever Pawnshop, as determined by the CA, only caused publication of
the auction in one newspaper, i.e., the Manila Bulletin, and on the very day of the scheduled auction sale itself, instead of
a week preceding the sale as prescribed by Section 15 of P.D. 114. Verily, a notice of an auction sale made on the very
scheduled auction day itself defeats the purpose of the notice, which is to inform a pawner beforehand that a sale is to
occur so that he may have that last chance to redeem his pawned items.

This brings us to the issue of the award of moral damages which petitioners correctly tag as erroneous, and, therefore,
should be deleted.

While proof of pecuniary loss is unnecessary to justify an award of moral damages, the amount of indemnity being left to
the sound discretion of the court, it is, nevertheless, essential that the claimant satisfactorily proves the existence of the
factual basis of the damages9 and its causal connection to defendants wrongful act or omission. This is so because moral
damages, albeit incapable of pecuniary estimation, are designed to compensate the claimant for actual injury suffered and
not to impose a penalty on the wrongdoer.10 There is thus merit on petitioners assertion that proof of moral suffering must
precede a moral damage award.11

The conditions required in awarding moral damages are: (1) there must be an injury, whether physical, mental or
psychological, clearly sustained by the claimant; (2) there must be a culpable act or omission factually established; (3) the
wrongful act or omission of the defendant must be the proximate cause of the injury sustained by the claimant; and (4) the
award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.12

While there need not be a showing that the defendant acted in a wanton or malevolent manner, as this is a requirement
for an award of exemplary damages,13 there must still be proof of fraudulent action or bad faith for a claim for moral
damages to succeed.14 Then, too, moral damages are generally not recoverable in culpa contractual except when bad
faith supervenes and is proven.15

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of known duty through some motive or interest or ill-will that partakes of the
nature of the fraud.16 And to the person claiming moral damages rests the onus of proving by convincing evidence the
existence of bad faith, for good faith is presumed.17

As aptly pointed out by petitioners, the trial court concluded that the respondents "cause of action arose merely from the
negligence of the herein [petitioners]."18 It may be that gross negligence may sometimes amount to bad faith. 19 But what is
before us is a matter of simple negligence only, it being the trial courts categorical finding that the case came about owing
to petitioners mistake in renewing the loan when the sale of the article to secure the loan had already been effected.
Wrote the trial court:

"What must have happened next was that the jewelry under the first loan was sold, as scheduled, on 7 May 1992. Due to
an oversight, the defendants mistakenly renewed the first loan on 1 June 1992, issuing pawn ticket number 34932 in the
process."20 [Emphasis supplied]

The CAs reliance on Article 2220 of the Civil Code in affirming the award of moral damages is misplaced. Said article
provides:

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under
the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant
acted fraudulently or in bad faith.

Clear it is from the above that before moral damages may be assessed thereunder, the defendants act must be vitiated
by bad faith or that there is willful intent to injure. Simply put, moral damages cannot arise from simple negligence.
The award of attorneys fees should, likewise, be struck down, both the CA and trial court having failed to explain
respondents entitlement thereto. As a matter of sound practice, an award of attorneys fee has always been regarded as
the exception rather than the rule. Counsels fees are, to be sure, not awarded every time a party prevails in a suit
because of the policy that no premium should be placed on the right to litigate. Attorneys fees, as part of damages, are
assessed only in the instances specified in Article 2208 of the Civil Code. 21 And it is necessary for the trial court to make
express findings of fact and law that would bring the case within the exception. In short, the factual, legal or equitable
justification for the award must be set forth in the text of the decision. 22 The matter of attorneys fees cannot be touched
only in the fallo of the decision, else the award should be thrown out for being speculative and conjectural. 23

Certainly not lost on the Court is the fact that petitioners, after being served with summons, made an attempt to obviate
litigation by offering to accept tender of payment and return the jewelry. This offer, however belated, could have saved
much expense on the part of both parties, as well as the precious time of the court itself. The respondents chose to turn
down this offer and pursue judicial recourse. With this in mind, it hardly seems fair to award them attorneys fees at
petitioners expense.

The final issue relating to the question of whether or not both respondents are liable for damages has, for all intent and
purposes, been rendered moot and academic by the disposition just made. We need not dwell on it any further. Besides,
this particular issue has only made its debut in the present recourse. And it is a well-entrenched rule that issues not raised
below cannot be resolved on review in higher courts.24 A question that was never raised in the court below cannot be
allowed to be raised for the first time on appeal without offending basic rules of fair play, justice and due process. 25

WHEREFORE, with the MODIFICATION that the awards of moral damages and attorneys fees are deleted, the decision
under review is hereby AFFIRMED.

No pronouncement as to cost.

SO ORDERED.