CREDIT TRANSACTION CONCEPCION V. COURT OF APPEALS, ET. AL.
(Conventional Interest)
GARCIA vs. THIO
(Obligation to Deliver)
 A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract.
 Art. 1934. An accepted promise to deliver something by way of commodatum
or simple loan is binding upon the parties, but the commodatum or simple loan
itself shall not be perfected until the delivery of the object of the contract.
 Upon delivery of the object of the contract of loan (in this case the money
received by the debtor when the checks were encashed) the debtor acquires
ownership of such money or loan proceeds and is bound to pay the creditor an
equal amount.
 Delivery is the act by which the res or substance thereof is placed within the
actual or constructive possession or control of another. Although respondent did
not physically receive the proceeds of the checks, these instruments were
placed in her control and possession under an arrangement whereby she
actually re-lent the amounts to Santiago.
BPI FAMILY BANK V. FRANCO
(Simple Loan)
 Article 1980 of the Civil Code: Fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the provisions concerning
loan.
 As there is a debtor-creditor relationship between a bank and its depositor, BPI-
FB ultimately acquired ownership of Franco’s deposits, but such ownership is
coupled with a corresponding obligation to pay him an equal amount on
demand. Although BPI-FB owns the deposits in Franco’s accounts, it cannot
prevent him from demanding payment of BPI-FB’s obligation by drawing checks
against his current account, or asking for the release of the funds in his savings
account. Thus, when Franco issued checks drawn against his current account,
he had every right as creditor to expect that those checks would be honored by
BPI-FB as debtor.
PEOPLE V. PUIG AND PORRAS
(Simple Loan)
 Depositors who place their money with the bank are considered creditors of the
bank. The bank acquires ownership of the money deposited by its clients,
making the money taken by respondents as belonging to the bank.
 The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
 Article 1953. A person who receives a loan of money or any other fungible
thing acquires the ownership thereof, and is bound to pay to the creditor an
equal amount of the same kind and quality.
 Article 1980. (supra)
 In summary, the Bank acquires ownership of the money deposited by its
clients; and the employees of the Bank, who are entrusted with the possession
of money of the Bank due to the confidence reposed in them, occupy positions
of confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.
 FACTS: Home Savings Bank and Trust Company granted to the Concepcions a
loan. The Concepcions, in turn, executed in favor of the bank a promissory
note and a REM over their property. The loan was payable in equal quarterly
amortizations for a period of fifteen (15) years and carried an interest rate of
sixteen percent (16%) per annum.
 Escalation Clause: The promissory note provided that the Concepcions had
authorized - "x x x the Bank to correspondingly increase the interest rate
presently stipulated in this transaction without advance notice to me/us in the
event the Central Bank of the Philippines raises its rediscount rate to member
banks, and/or the interest rate on savings and time deposit, and/or the interest
rate on such loans and/or advances."
 In accordance with the above provision, the bank unilaterally increased the
interest rate from 16% to 38%.
 General Rule (GR): The validity of escalation clauses in contracts is upheld by
the SC.
 Reason for validity: (a) to maintain fiscal stability and (b) to retain the value
of money in long term contracts.
 Principle of mutuality of contracts:
 ART. 1308. The contract must bind both contracting parties; its validity
or compliance cannot be left to the will of one of them.
 A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the
contracting parties, is void.
 An escalation clause that gives a creditor an unbridled right
to unilaterallyand upwardly adjust the interest on private
respondentthe debtor’s loan would completely take away from the
debtor the right to assent to an important modification in their
agreement, and would negate the element of mutuality in
contracts.
 Basis of the increase of interest rates in this case: on account of the revailing
business and economic condition.
PD 1684 “Usury Law”: SEC. 7-a. Parties to an agreement pertaining to a loan or
forbearance of money, goods or credits may stipulate that the rate of interest
agreed upon may be increased in the event that the applicable maximum rate of
interest is increased by law or by the Monetary Board: Provided, That such
stipulation shall be valid only if there is also a stipulation in the agreement that the
rate of interest agreed upon shall be reduced in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board: xxx.'
RULING: Even if we were to consider that petitioners were bound by their
agreement allowing an increase in the interest rate despite the lack of advance
notice to them, the escalation should still be subject, as so contractually stipulated,
to a corresponding increase by the Central Bank of its rediscount rate to member
banks, or of the interest rate on savings and time deposit, or of the interest rate on
such loans and advances. There are no sufficient valid justifications aptly shown for
the unilateral increases by private respondent bank of the interest rates on the loan.
FRIAS V. SAN DIEGO-SISON
(Conventional Interest ) *example of forbearance
 Parties: Petitioner Frias as the property owner and Respondent Dra. Flora
San Diego-Sison, entered into a Memorandum of Agreementover the subject
property.
 MOA:
Petitioner received P3M from respondent with the following agreement:
 That respondent has a period 6 months from the date of the execution of
this contract within which to notify petitioner of her intention to purchase
the land at the price ofP6.4M. Upon notice to the petitioner of
respondent’s intention to purchase the same, the latter has a period of
another 6 months within which to pay the remaining balance of P3.4
million.
 In the event that on the sixth month the respondent would decide NOT to
purchase the property, the petitioner has a period of another 6 months
within which to pay the sum of P3 million pesos provided that the said
amount shall earn compounded bank interest for the last 6 months
only. Under this circumstance, the amount of P3 million given by the
respondent shall be treated as a loan.
 Respondent decided not to purchase the property and demanded the return of
her money with 36% interest.
 Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential Bank,
the interest rate for loans in 1991 ranged from 25% to 32% per annum. The
CA reduced the interest rate to 25% instead of the 32% awarded by the trial
court which petitioner no longer assailed.
Monetary Interest:
The payment of regular interest constitutes the price or cost of the use of money
and thus, until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount. It has
been held that for a debtor to continue in possession of the principal of the loan and
to continue to use the same after maturity of the loan without payment of the
monetary interest, would constitute unjust enrichment on the part of the debtor at
the expense of the creditor.
SC: Affirmed the ruling of the CA as to the 25% interest rate. Thus, the interest rate
of 25% per annum awarded by the CA to a P2 million loan is fair and reasonable.
SPOUSES JUICO V. CHINA BANKING CORP.
(Conventional Interest; Escalation Clause)
(Include Concurring Opinion)
 Bank: that the interest rate changes every month based on the prevailing
market rate and notified petitioners of the prevailing rate by calling them thru a
telephone monthly before their account becomes past due. When asked if there
was any written authority from petitioners for respondent to increase the
interest rate unilaterally, respondent answered that petitioners signed a
promissory note indicating that they agreed to pay interest at the prevailing
rate.
 China Bank unilaterally increased the interest rates from 15% to as high as
24.50%.
RULES on Escalation Clauses:
a) Escalation clauses are not void per se. Escalation clauses refer to
stipulations allowing an increase in the interest rate agreed upon by the
contracting parties. This Court has long recognized that there is nothing
inherently wrong with escalation clauses which are valid stipulations in
commercial contracts to maintain fiscal stability and to retain the value of
money in long term contracts. Hence, such stipulations are not void per se.
b) Escalation clauses violating the principle of mutuality of contracts are void.
Nevertheless, an escalation clause "which grants the creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of
the right to assent to an important modification in the agreement" is void. A
stipulation of such nature violates the principle of mutuality of contracts. Thus, this
Court has previously nullified the unilateral determination and imposition by creditor
banks of increases in the rate of interest provided in loan contracts.
 Banco Filipino Savings & Mortgage Bank v. Navarro: While escalation
clauses in general are considered valid, we ruled that Banco Filipino may
not increase the interest on respondent borrower’s loan, pursuant to
Circular No. 494 issued by the Monetary Board, because said circular is not
a law although it has the force and effect of law and the escalation clause
has no de-escalation clause.
 De-escalation Clause: provision for reduction of the stipulated interest
"in the event that the applicable maximum rate of interest is reduced by
law or by the Monetary Board."
It is now settled that an escalation clause is void where the creditor unilaterally
determines and imposes an increase in the stipulated rate of interest without the
express conformity of the debtor. Such unbridled right given to creditors to adjust
the interest independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their agreement and
would also negate the element of mutuality in their contracts.34 While a ceiling on
interest rates under the Usury Law was already lifted under Central Bank Circular
No. 905, nothing therein "grants lenders carte blanche authority to raise interest
rates to levels which will either enslave their borrowers or lead to a hemorrhaging of
their assets."
Ecalation clause in this case: I/We hereby authorize the CHINA BANKING
CORPORATION to increase or decrease as the case may be, the interest rate/service
charge presently stipulated in this note without any advance notice to me/us in the
event a law or Central Bank regulation is passed or promulgated by the Central
Bank of the Philippines or appropriate government entities, increasing or decreasing
such interest rate or service charge.
RULING: At no time did petitioners protest the new rates imposed on their loan
even when their property was foreclosed by respondent. This notwithstanding, we
hold that the escalation clause is still VOID because it grants respondent the power
to impose an increased rate of interest without a written notice to petitioners and
their written consent. Respondent’s monthly telephone calls to petitioners advising
them of the prevailing interest rates would not suffice. A detailed billing statement
based on the new imposed interest with corresponding computation of the total debt
should have been provided by the respondent to enable petitioners to make an
informed decision. An appropriate form must also be signed by the petitioners to
indicate their conformity to the new rates. Compliance with these requisites is
 essential to preserve the mutuality of contracts. For indeed, one-sided impositions
do not have the force of law between the parties, because such impositions are not
based on the parties’ essential equality.
Effect: Modifications in the rate of interest for loans pursuant to an escalation clause
must be the result of an agreement between the parties. Unless such important
change in the contract terms is mutually agreed upon, it has no binding effect. In
the absence of consent on the part of the petitioners to the modifications in the
interest rates, the adjusted rates cannot bind them.
NOTE: The lender and the borrower should agree on the imposed rate, and such
imposed rate should be in writing. Escalation clauses are not basically wrong or
legally objectionable as long as they are not solely potestative but based on
reasonable and valid grounds.
Concurring Opinion:
Points to consider in drafting a valid escalation clause: (DAP)
1) Firstly, as a matter of equity and consistent with P.O. No. 1684, the
escalation clause must be paired with a de-escalation clause.
2) Secondly, so as not to violate the principle of mutuality, the escalation
must be pegged to theprevailing market rates, and not merely make a
generalized reference to "any increase or decrease in the interest rate" in
the event a law or a Central Bank regulation is passed.
3) Thirdly, consistent with the nature of contracts, the proposed modification
must be the result of anagreement between the parties.
EASTERN SHIPPING LINES, INC. V. CA (1994)
(Compensatory, Penalty or Indemnity Interest)
Rules on Interest:
 Interest upon an obligation which calls for the payment of money, absent a
stipulation, is thelegal rate. Such interest normally is allowable from the date
of demand, judicial or extrajudicial. The trial court opted for judicial demand as
the starting point.
 But then upon the provisions of Article 2213 of the Civil Code, interest "cannot
be recovered upon unliquidated claims or damages, except when the demand
can be established with reasonable certainty. Here, interest should be counted
from the date of the decision (when the amount of damages are ascertained).
 Art. 2209, CC. — If the obligation consists in the payment of a sum of money,
and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of interest agreed upon, and in
the absence of stipulation, the legal interest which is six percent per annum.
Rules of thumb (on the award of interests):
*NOTE: The legal rate of 12% has been amended to 6%. See Circular No. 799 (amending Circular
No. 905) effective July 1, 2013, and the case of NACAR V. GALLERY FRAMES AND/OR BORDEY
(2013). Therefore, there is no need to distinguish now the obligations breached as the legal interest
applicable is 6%.
1) When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,
delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
2) With regard particularly to an award of interest in the concept of ACTUAL AND
COMPENSATORY DAMAGES, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
a. Obligation breached: consists in the payment of a sum of money, i.e., a loan or
forbearance of money
Interest Due:
i) that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded.
ii) In the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code. (amended to 6%)
b) Obligation breached: not constituting a loan or forbearance of money,
Interest due: may be imposed at the discretion of the court at the rate of
6% per annum.
 No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with
reasonable certainty.
 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code)
 When such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at
which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
c) When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit. (amended to 6%)
LIGUTAN V. CA, (2002)
(Compensatory, Penalty or Indemnity Interest)
The essence or rationale for the payment of interest, quite often referred to as cost
of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. What
may justify a court in not allowing the creditor to impose full surcharges and
penalties, despite an express stipulation therefor in a valid agreement, may not
equally justify the non-payment or reduction of interest. Indeed, the interest
prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.
 Here, the stipulated interest of 15.189% on the forbearance of money
was upheld by the court as reasonable.
 GSIS v. CA
(Compensatory, Penalty or Indemnity Interest)
 It has already been settled that the Usury Law applies only to interest
by way of compensation for the use or forbearance of money. Interest
by way of damages is governed by Article 2209 of the Civil Code of the
Philippines which provides:
 Art. 2209. If the obligation consists in the payment of a sum of
money, and the debtor incurs in delay, the indemnity for damages,
there being no stipulation to the contrary, shall be the payment of the
interest agreed upon,...
In the Bachrach case the Supreme Court ruled that the Civil Code permits the
agreement upon a penalty apart from the interest. Should there be such an
agreement, the penalty does not include the interest, and as such the two are
different and distinct things which may be demanded separately. Reiterating the
same principle in the later case of Equitable Banking Corp., where this Court held
that the stipulation about payment of such additional rate partakes of the nature of
a penalty clause, which is sanctioned by law.
SIGA-AN V. VILLANUEVA, (2009)
(Compensatory, Penalty or Indemnity Interest)
Interests:
 Monetary interest is a compensation fixed by the parties for the use
or forbearance of money.
 Compensatory interest - imposed by law or by courts as penalty or
indemnity for damages.
The right to interest arises only by virtue of a contract or by virtue of damages for
delay or failure to pay the principal loan on which interest is demanded.
Article 1956 of the Civil Code, which refers to monetary interest, specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing.
I. Hence, payment of monetary interest is allowed only if:
1) there was an express stipulation for the payment of interest; and
2) the agreement for the payment of interest was reduced in writing.
 The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest
without any stipulation therefor in writing is prohibited by law.
 Monetary interest is due only when these requirements are present.
II. However, there are instances in which an interest may be imposed even in the
absence of express stipulation, verbal or written, regarding payment of
interest. Article 2209 of the Civil Code states that if the obligation consists in the
payment of a sum of money, and the debtor incurs delay, a legal interest of 12%
(now 6%) per annum may be imposed as indemnity for damages if no stipulation
on the payment of interest was agreed upon. (Compensatory interest)
· This interest may be imposed only as a penalty or damages for breach of
contractual obligations. It cannot be charged as a compensation for the use or
forbearance of money. This applies only to compensatory interest and not to
monetary interest.
Solutio Indebiti
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when
there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied.
Article 2154 provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it
arises. We have held that the principle of solutio indebiti applies in case of
erroneous payment of undue interest.
HELD: It was duly established that respondent paid interest to petitioner.
Respondent was under no duty to make such payment because there was no
express stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
ESTORES V. SPOUSES SUPANGAN, (2012)
(Compensatory, Penalty or Indemnity Interest)
*Forbearance of money
ISSUE: Whether it is proper to impose interest for an obligation that does not involve a loan
or forbearance of money in the absence of stipulation of the parties.
HELD:
YES. Interest may be imposed even in the absence of stipulation in the contract.
Article 2210 of the Civil Code expressly provides that “[i]nterest may, in the discretion of
the court, be allowed upon damages awarded for breach of contract.” In this case, there is
no question that petitioner is legally obligated to return the P3.5 million because of her failure
to fulfill the obligation under the Conditional Deed of Sale, despite demand. Petitioner
enjoyed the use of the money from the time it was given to her until now. Thus, she is
already in default of her obligation from the date of demand.
Forbearance is defined as a “contractual obligation of lender or creditor to refrain during a
given period of time, from requiring the borrower or debtor to repay a loan or debt then due
and payable.” This definition describes a loan where a debtor is given a period within which
to pay a loan or debt. In such case, “forbearance of money, goods or credits” will have no
distinct definition from a loan. We believe however, that the phrase “forbearance of money,
goods or credits” is meant to have a separate meaning from a loan, otherwise there would
have been no need to add that phrase as a loan is already sufficiently defined in the Civil
Code.
Forbearance of money, goods or credits should therefore refer to arrangements other
than loan agreements, where a person acquiesces to the temporary use of his money, goods
or credits pending happening of certain events or fulfillment of certain conditions.
In this case, the respondent-spouses parted with their money even before the conditions
were fulfilled. They have therefore allowed or granted forbearance to the seller (petitioner)
to use their money pending fulfillment of the conditions. They were deprived of the use of
their money for the period pending fulfillment of the conditions and when those conditions
were breached, they are entitled not only to the return of the principal amount paid, but also
to compensation for the use of their money. And the compensation for the use of their
money, absent any stipulation, should be the same rate of legal interest applicable to a loan
since the use or deprivation of funds is similar to a loan.
NACAR V. GALLERY FRAMES AND/OR BORDEY, (2013)
(Compensatory, Penalty or Indemnity Interest)
*Amending the Eastern Shipping Doctrine
*Important: because this case discusses the amendment of the legal interest in loan
and forbearance of money, credits or goods from 12% to 6% effective July 1, 2013.
Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its Resolution No. 796,
approved the amendment of Section 2 of Circular No. 905, Series of 1982 and,
accordingly, issued Circular No. 799, Series of 2013, effective July 1, 2013, the
pertinent portion of which reads:
Section 1. The rate of interest for the loan or forbearance of any money, goods or
credits and the rate allowed in judgments, in the absence of an express contract as
to such rate of interest, shall be six percent (6%) per annum.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or
forbearance of any money, goods or credits and the rate allowed in judgments shall
no longer be 12% per annum but will now be 6% per annum effective July 1, 2013.
 It should be noted, nonetheless, that the new rate could only be applied
prospectively and not retroactively. Consequently, the 12% per annum legal
interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate of
6% per annum shall be the prevailing rate of interest when applicable.
To recapitulate and for future guidance, the guidelines laid down in the case of
Eastern Shipping Lines are accordingly modified to embody BSP-MB Circular No.
799, as follows:
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
New guidelines in the award of interest:
1.) When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 6% per annum to be computed
from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2.) When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or damages, except when or until the
demand can be established with reasonable certainty. Accordingly, where the
demand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil
Code), but when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages
may be deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the amount finally
adjudged.
3.) When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1
or paragraph 2, above, shall be6% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a
forbearance of credit.
Application in this case: The interest of 12% per annum of the total monetary
awards, computed from May 27, 2002 to June 30, 2013 and 6% per annum from
July 1, 2013 until their full satisfaction, is awarded.
UCPB V. SAMUEL AND BELUSO
(Finance Charges, R.A. No. 3765, Sec. 4. Sec. 6)
*better read the full text
Validity of the interest rates
 The provision stating that the interest shall be at the “rate indicative of DBD
retail rate or as determined by the Branch Head” is indeed dependent solely on
the will of petitioner UCPB. Clearly, a rate “as determined by the Branch Head”
gives the latter unfettered discretion on what the rate may be. The Branch
Head may choose any rate he or she desires. As regards the rate “indicative of
the DBD retail rate,” the same cannot be considered as valid for being akin to a
“prevailing rate” or “prime rate” allowed by this Court in Polotan. The interest
rate in Polotan reads:
o The Cardholder agrees to pay interest per annum at 3% plus the prime
rate of Security Bank and Trust Company. x x x.
 In this provision in Polotan, there is a fixed margin over the reference rate:
3%. Thus, the parties can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case at bar does not specify
any margin above or below the DBD retail rate. UCPB can peg the interest at
any percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.
Liability for Violation of Truth in Lending Act
RA 3765, otherwise known as the “Truth in Lending Act.”
Section 6(a) of the Truth in Lending Act which mandates the filing of an action to
recover such penalty must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit
transaction fails to disclose to any person any information in violation of
this Act or any regulation issued thereunder shall be liable to such person
in the amount of P100 or in an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000 on any credit
transaction. Action to recover such penalty may be brought by such
person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction.
Rationale: to protect the public from hidden or undisclosed charges on their loan
obligations, requiring a full disclosure thereof by the lender.
Section 4 of the Truth in Lending Act clearly provides that the disclosure statement
must be furnished prior to the consummation of the transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is
extended, prior to the consummation of the transaction, a clear statement in
writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:
1. the cash price or delivered price of the property or service to be
acquired;
2. the amounts, if any, to be credited as down payment and/or
trade-in;
3. the difference between the amounts set forth under clauses (1)
and (2)
4. the charges, individually itemized, which are paid or to be paid by
such person in connection with the transaction but which are not
incident to the extension of credit;
5. the total amount to be financed;
6. the finance charge expressed in terms of pesos and centavos; and
7. the percentage that the finance bears to the total amount to be
financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation.
Rationale: to protect users of credit from a lack of awareness of the true cost
thereof, proceeding from the experience that banks are able to conceal such true
cost by hidden charges, uncertainty of interest rates, deduction of interests from the
loaned amount, and the like. The law thereby seeks to protect debtors by
permitting them to fully appreciate the true cost of their loan, to enable them to
give full consent to the contract, and to properly evaluate their options in arriving at
business decisions.
The promissory notes, the copies of which were presented to the spouses Beluso
after execution, are not sufficient notification from UCPB. As earlier discussed, the
interest rate provision therein does not sufficiently indicate with particularity the
interest rate to be applied to the loan covered by said promissory notes.
ADVOCATES FOR TRUTH IN LENDING, INC. AND OLAGUER V. BS-MB
(Usury)
Relevant Laws:
 Act No. 2655, or the Usury Law of 1916.
 R.A. No. 265 - created the Central Bank (CB) of the Philippines on June 15,
1948, empowered the CB-MB to, among others, set the maximum interest rates
which banks may charge for all types of loans and other credit operations,
within limits prescribed by the Usury Law.
 P.D. No. 1684 – Amended the Usury Law was amended on March 17, 1980,
giving the CB-MB authority to prescribe different maximum rates of interest
which may be imposed for a loan or renewal thereof or the forbearance of any
money, goods or credits, provided that the changes are effected gradually and
announced in advance.
 CB Circular No. 905, Series of 1982 – issued by the CB-MB, effective on
January 1, 1983. Section 1 of the Circular, under its General Provisions,
removed the ceilings on interest rates on loans or forbearance of any money,
goods or credits.
 RA 7653 – established BSP to replace CB. Repealed RA 265.
CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but
simply suspended the latter’s effectivity. By virtue of CB Circular No. 905, the
Usury Law has been rendered ineffective and legally non-existent in our jurisdiction.
Interest can now be charged as lender and borrower may agree upon.
Effect of PD 1684 and CB 905 suspending the effectivity of the Usury Law
1. Lifted interest ceiling.
2. Upheld the parties’ freedom of contract to agree freely on the rate of
interest.
The BSP-MB has authority to enforce CB Circular No. 905
Under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all loans or renewals thereof or the
forbearance of any money, goods or credits, including those for loans of low priority
such as consumer loans, as well as such loans made by pawnshops, finance
companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings,
including deposits and deposit substitutes, or loans of financial intermediaries.
The lifting of the ceilings for interest rates does not authorize stipulations
charging excessive, unconscionable, and iniquitous interest
It is settled that nothing in CB Circular No. 905 grants lenders a carte blanche
authority to raise interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or
unconscionable interests have been invariably struck down for being (void) contrary
to morals, if not against the law.
Nonetheless, the nullity of the stipulation of usurious interest does not affect the
lender’s right to recover the principal of a loan, nor affect the other terms
thereof. Thus, in a usurious loan with mortgage, the right to foreclose the mortgage
subsists, and this right can be exercised by the creditor upon failure by the debtor
to pay the debt due. The debt due is considered as without the stipulated excessive
interest, and a legal interest of 12% (now 6%) per annum will be added in place of
the excessive interest formerly imposed.
BPI V. IAC AND ZSHORNACK
(Voluntary Deposit)
Zshornack delivered to the bank US $3,000 for safekeeping. BPI argues that the
contract embodied in the document is the contract of depositum (as defined in
Article 1962, New Civil Code), which banks do not enter into. Zshornack demanded
the return of the money on May 10, 1976, or over five months later.
Article 1962, New Civil Code:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely keeping
it and of returning the same. If the safekeeping of the thing delivered is
not the principal purpose of the contract, there is no deposit but some
other contract.
Since the mere safekeeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which is not authorized
by CB Circular No. 20, it must be considered as one which falls under the general
class of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is
void, having been executed against the provisions of a mandatory/prohibitory law.
TRIPLE-V FOOD SERVICES, INC. V. FILIPINO MERCHANTS INSURANCE Co.,
Inc.,
(Voluntary Deposit)
In a contract of deposit, a person receives an object belonging to another with
the obligation of safely keeping it and returning the same. A deposit may be
constituted even without any consideration. It is not necessary that the depositary
receives a fee before it becomes obligated to keep the item entrusted for
safekeeping and to return it later to the depositor.
THE ROMAN CATHOLIC BISHOP OF JARO V. DE LA PENA
(Obligation to Safekeep - Way of the Deposit)
By placing the money in the bank and mixing it with his personal funds, respondent
did not thereby assume an obligation different from that under which he would have
lain if such deposit had not been made, nor did he thereby make himself liable to
repay the money at all hazards. The fact that he placed the trust fund in the bank in
his personal account does not add to his responsibility. Such deposit did not make
him a debtor who must respond at all hazards. There was no law prohibiting him
from depositing it as he did and there was no law which changed his responsibility
by reason of the deposit.
CA AGRO-INDUSTRIAL DEVELOPMENT CORP. V. CA AND SECURITY BANK
(Obligation to Safekeep - Way of the Deposit)
ISSEUE: Is the contractual relation between a commercial bank and another party
in a contract of rent of a safety deposit box with respect to its contents placed by
the latter one of bailor and bailee or one of lessor and lessee? BAILOR-BAILEE
RELATIONSHIP.
In Tolentino vs. Gonzales, the Court held that the owner of the property loses his
control over the property leased during the period of the contract — and Article
1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments
which earn interest shall be bound to collect the latter when it becomes due, and to
take such steps as may be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit boxes.
Prevailing rule in the United States:
Where a safe-deposit company leases a safe-deposit box or safe and the lessee
takes possession of the box or safe and places therein his securities or other
valuables, the relation of bailee and bailor is created between the parties to the
transaction as to such securities or other valuables; the fact that the safe-deposit
company does not know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safe-deposit box or safe
does not change that relation. That access to the contents of the safe-deposit box
can be had only by the use of a key retained by the lessee (whether it is the sole
key or one to be used in connection with one retained by the lessor) does not
operate to alter the foregoing rule. The argument that there is not, in such a case, a
delivery of exclusive possession and control to the deposit company, and that
therefore the situation is entirely different from that of ordinary bailment, has been
generally rejected by the courts, usually on the ground that as possession must be
either in the depositor or in the company, it should reasonably be considered as in
the latter rather than in the former, since the company is, by the nature of the
contract, given absolute control of access to the property, and the depositor cannot
gain access thereto without the consent and active participation of the company.
HELD:
We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is NOT an ordinary contract of lease as defined in Article 1643 of the
Civil Code. However, We do not fully subscribe to its view that the same is a
contract of deposit that is to be strictly governed by the provisions in the Civil Code
on deposit. The contract in the case at bar is a special kind of deposit.
 Not lease: It cannot be characterized as an ordinary contract of lease
under Article 1643 because the full and absolute possession and
control of the safety deposit box was not given to the joint renters —
the petitioner and the Pugaos. The guard key of the box remained with
the respondent Bank; without this key, neither of the renters could
open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said
key had a duplicate which was made so that both renters could have
access to the box.
 Not deposit under 1975: the first paragraph of such provision
cannot apply to a depositary of certificates, bonds, securities or
instruments which earn interest if such documents are kept in a rented
safety deposit box. It is clear that the depositary cannot open the box
without the renter being present.
Prevailing view: Bailment
The prevailing rule is that the relation between a bank renting out safe-deposit
boxes and its customer with respect to the contents of the box is that of a bailor
and bailee, the bailment being for hire and mutual benefit. In our jurisdiction, the
prevailing rule in the US has been adopted. Section 72 of the General Banking
Act pertinently provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in
this Act, banking institutions other than building and loan associations may
perform the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent
safety deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b)
and (c) of this section as depositories or as agents. . . .
Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function.
A contract of deposit may be entered into orally or in writing. The depositary's
responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would
be liable if, in performing its obligation, it is found guilty of fraud, negligence, delay
or contravention of the tenor of the agreement. In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to
be observed. Hence, any stipulation exempting the depositary from any liability
arising from the loss of the thing deposited on account of fraud, negligence or delay
would be void for being contrary to law and public policy.
It is not correct to assert that the Bank has neither the possession nor control of the
contents of the box since in fact, the safety deposit box itself is located in its
premises and is under its absolute control; moreover, the respondent Bank keeps
the guard key to the said box. As stated earlier, renters cannot open their
respective boxes unless the Bank cooperates by presenting and using this guard
key. Clearly then, to the extent above stated, the foregoing conditions in the
contract in question are void and ineffective. It has been said:
With respect to property deposited in a safe-deposit box by a customer of a
safe-deposit company, the parties, since the relation is a contractual one,
may by special contract define their respective duties or provide for
increasing or limiting the liability of the deposit company, provided such
contract is not in violation of law or public policy. It must clearly appear
that there actually was such a special contract, however, in order to vary
the ordinary obligations implied by law from the relationship of the parties;
liability of the deposit company will not be enlarged or restricted by words
of doubtful meaning. The company, in renting safe-deposit boxes, cannot
exempt itself from liability for loss of the contents by its own fraud or
negligence or that of its agents or servants, and if a provision of the
contract may be construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a safe-deposit
box cannot limit its liability for loss of the contents thereof through its own
negligence, the view has been taken that such a lessor may limits its
liability to some extent by agreement or stipulation.
Thus, we reach the same conclusion which the CA arrived at, that is, that the
petition should be dismissed, but on grounds quite different from those relied upon
by the CA. In the instant case, the respondent Bank's exoneration cannot, contrary
to the holding of the CA, be based on or proceed from a characterization of the
impugned contract as a contract of lease, but rather on the fact that no competent
proof was presented to show that respondent Bank was aware of the agreement
between the petitioner and the Pugaos to the effect that the certificates of title were
withdrawable from the safety deposit box only upon both parties' joint signatures,
and that no evidence was submitted to reveal that the loss of the certificates of title
was due to the fraud or negligence of the respondent Bank. This in turn flows from
this Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1) renter's key, it
was obvious that either of them could ask the Bank for access to the safety deposit
box and, with the use of such key and the Bank's own guard key, could open the
said box, without the other renter being present.
YHT REALTY CORPORATION V. CA
(Necessary Deposit - Hotel or Inns, Art. 1998 to 2004)
Issue: Whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers holding
the establishment or its employees free from blame for such loss in light of Article
2003 of the Civil Code which voids such waivers. NO.
Art. 2003. The hotel-keeper cannot free himself from responsibility by
posting notices to the effect that he is not liable for the articles brought by
the guest. Any stipulation between the hotel-keeper and the guest whereby
the responsibility of the former as set forth in Articles 1998 to 2001 is
suppressed or diminished shall be void.
Catering to the public, hotelkeepers are bound to provide not only lodging for hotel
guests and security to their persons and belongings. The law in turn does not allow
such duty to the public to be negated or diluted by any contrary stipulation in so-
called “undertakings” that ordinarily appear in prepared forms imposed by hotel
keepers on guests for their signature.
To hold hotelkeepers or innkeeper liable for the effects of their guests, it is not
necessary that they be actually delivered to the innkeepers or their employees. It is
enough that such effects are within the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the missing items are taken without
the guest’s knowledge and consent from a safety deposit box provided by the hotel
itself.
Rule: The New Civil Code is explicit that the responsibility of the hotel-keeper shall
extend to loss of, or injury to, the personal property of the guests even if caused by
servants or employees of the keepers of hotels or inns as well as by strangers,
except as it may proceed from any force majeure. It is the loss through force
majeure that may spare the hotel-keeper from liability.
PNB V. SE, ET. AL.
(Warehouse Receipts - General Bonded Warehouses, Act No. 3893, as amended)
Act No. 2137, the Warehouse Receipts Law
Sec. 27. What claims are included in the warehouseman’s lien. - Subject to the
provisions of section thirty, a warehouseman shall have lien on goods deposited or
on the proceeds thereof in his hands, for all lawful charges for storage and
preservation of the goods; also for all lawful claims for money advanced, interest,
insurance, transportation, labor, weighing coopering and other charges and
expenses in relation to such goods; also for all reasonable charges and expenses for
notice, and advertisement of sale, and for sale of the goods where default has been
made in satisfying the warehouseman’s lien.
Sec. 31. Warehouseman need not deliver until lien is satisfied. - A
warehouseman having a lien valid against the person demanding the goods
may refuse to deliver the goods to him until the lien is satisfied.
Petitioner is in estoppel in disclaiming liability for the payment of storage fees due
the private respondents as warehouseman while claiming to be entitled to the sugar
stocks covered by the subject Warehouse Receipts on the basis of which it anchors
its claim for payment or delivery of the sugar stocks. The unconditional presentment
of the receipts by the petitioner for payment against private respondents on the
strength of the provisions of the Warehouse Receipts Law (R.A. 2137) carried with it
the admission of the existence and validity of the terms, conditions and stipulations
written on the face of the Warehouse Receipts, including the unqualified recognition
of the payment of warehouseman’s lien for storage fees and preservation expenses.
Petitioner may not now retrieve the sugar stocks without paying the lien due private
respondents as warehouseman.
Rule: While the PNB is entitled to the stocks of sugar as the endorsee of the
quedans, delivery to it shall be effected only upon payment of the storage fees.
Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law,
the warehouseman loses his lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the warehouseman surrenders the
possession of the goods without requiring payment of his lien, because a
warehouseman’s lien is possessory in nature.
LETTERS OF CREDIT
TRANSFIELD PHILIPPINES, INC. V. LUZON HYDRO CORPORATION
AUSTRALIA, ET. AL., (2004)
Letters of Credit : General Concepts, Code of Commerce, Art. 567, Art. 568, Art. 2
Nature and use of letters of credit (credits)
 The relationship between the beneficiary and the issuer of a letter of credit
is not strictly contractual, because both privity and a meeting of the minds are
lacking, yet strict compliance with its terms is an enforceable right.
 Nor is it a third-party beneficiary contract, because the issuer must honor
drafts drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank’s customer cannot draw on the letter, it
does not function as an assignment by the customer to the beneficiary.
 Nor, if properly used, is it a contract of suretyship or guarantee, because it
entails a primary liability following a default.
 Finally, it is not in itself a negotiable instrument, because it is not payable to
order or bearer and is generally conditional, yet the draft presented under it is
often negotiable.
 In commercial transactions, a letter of credit is a financial device
developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods before he is paid, and a
buyer, who wants to have control of the goods before paying.
 The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of
goods.
 However, credits are also used in non-sale settings where they serve
to reduce the risk of nonperformance. Generally, credits in the non-sale
settings have come to be known as standby credits.
Commercial credits Standby credits
involve the payment of money under a
contract of sale
become payable upon the presentation the credit is payable upon certification of
by the seller-beneficiary of documents a party's nonperformance of the
that show he has taken affirmative agreement.
steps to comply with the sales Ø The documents that accompany the
agreement. beneficiary's draft tend to show that the
applicant has not performed.
The beneficiary of a commercial credit The beneficiary of the standby credit
must demonstrate by documents that must certify that his obligor has not
he has performed his contract. performed the contract.
A letter of credit is a written instrument whereby the writer requests or authorizes
the addressee to pay money or deliver goods to a third person and assumes
responsibility for payment of debt therefor to the addressee. A letter of credit,
however, changes its nature as different transactions occur and if carried through to
completion ends up as a binding contract between the issuing and honoring banks
without any regard or relation to the underlying contract or disputes between the
parties thereto.
Independence principle
 Thus, the engagement of the issuing bank is to pay the seller or beneficiary of
the credit once the draft and the required documents are presented to it. The
so-called “independence principle” assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and precludes
the issuing bank from determining whether the main contract is actually
accomplished or not.
 Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the
documents or superimposed thereon, nor do they assume any liability or
responsibility for the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for
the good faith or acts and/or omissions, solvency, performance or standing of
the consignor, the carriers, or the insurers of the goods, or any other person
whomsoever.
The independent nature of the letter of credit may be:
 independence in toto where the credit is independent from the
justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or
 independence may be only as to the justification aspect like in a
commercial letter of credit or repayment standby, which is identical
with the same obligations under the underlying agreement. In both
cases the payment may be enjoined if in the light of the purpose of the
credit the payment of the credit would constitute fraudulent abuse of
the credit.
Issue: Can the beneficiary invoke the independence principle? YES.
 In a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing
bank to pay the beneficiary provided that the stipulated documents are
presented and the conditions of the credit are complied with. Precisely, the
independence principle liberates the issuing bank from the duty of
ascertaining compliance by the parties in the main contract.
 As the principle’s nomenclature clearly suggests, the obligation under the
letter of credit is independent of the related and originating contract. In
brief, the letter of credit is separate and distinct from the underlying
transaction.
Held: Given the nature of letters of credit, petitioner’s argument—that it is only the
issuing bank that may invoke the independence principle on letters of credit—does
not impress this Court. To say that the independence principle may only be invoked
by the issuing banks would render nugatory the purpose for which the letters of
credit are used in commercial transactions. As it is, the independence doctrine
works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions.
 With the letter of credit from the issuing bank, the party who applied for
and obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the
business transaction.
  The other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the
letter of credit as a security in case the commercial transaction does not
push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the
letter of credit is appropriately called “beneficiary.”
Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and purpose
of the standby letters of credit, this Court rules that the respondent banks were left
with little or no alternative but to honor the credit and both of them in fact
submitted that it was “ministerial” for them to honor the call for payment.
“Fraud exception” principle
Citing Dolan’s treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of
the principle’s purpose, which is to serve the commercial function of the credit.
Issue: Would injunction then be the proper remedy to restrain the alleged wrongful
draws on the Securities?
Most writers agree that fraud is an exception to the independence principle.
Professor Dolan opines that the untruthfulness of a certificate accompanying a
demand for payment under a standby credit may qualify as fraud sufficient to
support an injunction against payment. The remedy for fraudulent abuse is an
injunction. However, injunction should not be granted unless:
a) there is clear proof of fraud;
b) the fraud constitutes fraudulent abuse of the independent purpose
of the letter of credit and not only fraud under the main
agreement; and
c) irreparable injury might follow if injunction is not granted or the
recovery of damages would be seriously damaged.
Before a writ of preliminary injunction may be issued, there must be a clear showing
by the complaint that there exists a right to be protected and that the acts against
which the writ is to be directed are violative of the said right. It must be shown that
the invasion of the right sought to be protected is material and substantial, that the
right of complainant is clear and unmistakable and that there is an urgent and
paramount necessity for the writ to prevent serious damage.
TRUST RECEIPTS
COLINARES & VELOSO V. CA, (2000)
Trust Receipts: Rights of Purchaser, Sec. 11
Section 4, P.D. No. 115, the Trust Receipts Law
Trust receipt transaction - any transaction by and between a person referred to
as the entruster, and another person referred to as the entrustee, whereby the
entruster who owns or holds absolute title or security interest over certain specified
goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter’s execution and delivery to the entruster of a signed
document called a “trust receipt” wherein the entrustee binds himself to hold the
designated goods, documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to the entruster
or as appears in the trust receipt or the goods, documents or instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt.
2 possible situations in a trust receipt transaction.
 Money received under the obligation involving the duty to deliver it
(entregarla) to the owner of the merchandise sold.
 Merchandise received under the obligation to “return” it (devolvera) to
the owner.
Estafa
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered
by the trust receipt to the entruster or to return said goods if they were not
disposed of in accordance with the terms of the trust receipt shall be punishable as
estafa under Article 315 (1) of the RPC, without need of proving intent to defraud
GUARANTY
TUPAZ IV & TUPAZ V. CA & BPI, (2005)
Guaranty: Benefit of Excussion, Art. 2058 to 2064, Art. 2081
Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner
likewise admits that the questioned provision is a solidary guaranty clause, thereby
clearly distinguishing it from a contract of surety. It, however, described the
guaranty as solidary between the guarantors; this would have been correct if two
(2) guarantors had signed it. The clause “we jointly and severally agree and
undertake” refers to the undertaking of the two (2) parties who are to sign it or to
the liability existing between themselves. It does not refer to the undertaking
between either one or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. xxx
Jose Tupaz bound himself personally liable for El Oro Corporation’s debts.
1. First, excussion is not a pre-requisite to secure judgment against a
guarantor. The guarantor can still demand deferment of the execution of
the judgment against him until after the assets of the principal debtor shall
have been exhausted.
2. Second, the benefit of excussion may be waived. Under the trust receipt
dated 30 September 1981, petitioner Jose Tupaz waived excussion when
he agreed that his “liability in [the] guaranty shall be DIRECT AND
IMMEDIATE, without any need whatsoever on xxx [the] part [of respondent
bank] to take any steps or exhaust any legal remedies xxx.” The clear
import of this stipulation is that petitioner Jose Tupaz waived the benefit of
excussion under his guarantee.
SURETY
SECURITY BANK V. CUENCA, (2000)
Surety: Obligations Secured, Art. 2053
Being an onerous undertaking, a surety agreement is strictly construed against the
creditor, and every doubt is resolved in favor of the solidary debtor. The
fundamental rules of fair play require the creditor to obtain the consent of the
surety to any material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for
loans obtained in excess of the amount or beyond the period stipulated in the pretension that the terms "jointly and severally or solidarily liable" contained in the
original agreement, absent any clear stipulation showing that the latter waived his second paragraph of her contract are technical and legal terms which could not be
right to be notified thereof, or to give consent thereto. This is especially true where, easily understood by an ordinary layman like her is diametrically opposed to her
as in this case, respondent was no longer the principal officer or major stockholder manifestation in the contract that she "fully understood the contents" of the
of the corporate debtor at the time the later obligations were incurred. He was thus promissory note and that she is "fully aware" of her solidary liability with the
no longer in a position to compel the debtor to pay the creditor and had no more principal maker.
reason to bind himself anew to the subsequent obligations.
Petitioner would like to make capital of the fact that although she obligated herself
Continuing Surety to be jointly and severally liable with the principal maker, her liability is deemed
Issue: Contending that the Indemnity Agreement was in the nature of a continuing restricted by the provisions of the third paragraph of her contract wherein she
surety, petitioner maintains that there was no need for respondent to execute agreed "that M.B. Lending Corporation may demand payment of the above loan
another surety contract to secure the 1989 Loan Agreement. Correct? NO. from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment
of the note," which makes her contract one of guaranty and not suretyship. The
Held: That the Indemnity Agreement is a continuing surety does not authorize the purported discordance is more apparent than real.
bank to extend the scope of the principal obligation inordinately.
Suretyship Guaranty
In Dino v. CA, the Court held that “a continuing guaranty is one which covers all A surety is an insurer of the debt guarantor is an insurer of
transactions, including those arising in the future, which are within the description the solvency of the debtor
or contemplation of the contract of guaranty, until the expiration or termination A suretyship is an undertaking that a guaranty is an undertaking that
thereof.” the debt shall be paid the debtor shall pay
surety promises to pay the principal's a guarantor agrees that the creditor,
To repeat, in the present case, the Indemnity Agreement was subject to the two
debt if the principal will not pay after proceeding against the principal,
limitations of the credit accommodation:
may proceed against the guarantor if the
1. that the obligation should not exceed P8 million, and principal is unable to pay
2. that the accommodation should expire not later than November 30,
A surety binds himself to perform if the A guarantor does not contract that the
1981. Hence, it was a continuing surety only in regard to loans obtained on
principaldoes not, without regard to his principal will pay, but simply that he is
or before the aforementioned expiry date and not exceeding the total of P8
ability to do so able to do so.
million.
a surety undertakes directly for the a guarantor contracts to pay if, by the
In Dino, the surety Agreement specifically provided that “each suretyship is a payment and is so responsible at once if use of due diligence, the debt cannot be
continuing one which shall remain in full force and effect until this bank is notified of the principal debtor makes default made out of the principal debtor
its revocation.” Since the bank had not been notified of such revocation, the surety
was held liable even for the subsequent obligations of the principal borrower. Note: Quintessentially, the undertaking to pay upon default of the principal debtor
does not automatically remove it from the ambit of a contract of suretyship. It has
PALMARES V. CA & M. B. LENDING CORPORATION, (1998) not been shown, either in the contract or the pleadings, that respondent corporation
Surety distinguished from Guaranty, Art. 2047 agreed to proceed against herein petitioner only if and when the defaulting principal
has become insolvent. A contract of suretyship is that wherein one lends his
Where a party signs a promissory note as a co-maker and binds herself to be credit by joining in the principal debtor's obligation, so as to render himself directly
jointly and severally liable with the principal debtor in case the latter defaults in the and primarily responsible with him, and without reference to the solvency of the
payment of the loan, is such undertaking of the former deemed to be that of a principal.
surety as an insurer of the debt, or of a guarantor who warrants the solvency of the
debtor?SURETY. Suretyship
A surety is bound equally and absolutely with the principal, and as such is deemed
The Civil Code pertinently provides: an original promissor and debtor from the beginning. This is because in suretyship
Art. 2047. By guaranty, a person called the guarantor binds himself to the there is but one contract, and the surety is bound by the same agreement which
creditor to fulfill the obligation of the principal debtor in case the latter should fail to binds the principal. In essence, the contract of a surety starts with the agreement,
do so. which is precisely the situation obtaining in this case before the Court.

If a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.
In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are
clear, explicit and unequivocal that petitioner's liability is that of a surety. Her
A surety is usually bound with his principal by the same instrument, executed at the
same time and upon the same consideration; he is an original debtor, and his
liability is immediate and direct. Thus, it has been held that where a written
agreement on the same sheet of paper with and immediately following the principal
contract between the buyer and seller is executed simultaneously therewith,
providing that the signers of the agreement agreed to the terms of the principal
contract, the signers were "sureties" jointly liable with the buyer. A surety usually
enters into the same obligation as that of his principal, and the signatures of both
usually appear upon the same instrument, and the same consideration usually
supports the obligation for both the principal and the surety
ZOBEL, INC. V. CA, (1998)
Surety distinguished from Guaranty, Art. 2047
A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the
debtor does not.
the trial court, the interpretation of a contract is not limited to the title alone but to
the contents and intention of the parties.
PHILIPPINE BLOOMING MILLS, INC. & CHING V. CA, (2003)
Surety distinguished from Guaranty, Art. 2047
Ching is liable for credit obligations contracted by PBM against TRB before and after
the execution of the Deed of Suretyship. This is evident from the tenor of the deed
itself, referring to amounts PBM “may now be indebted or may
hereafter become indebted” to TRB.

A contract of guaranty, on the other hand, is a collateral undertaking to pay the The law expressly allows a suretyship for “future debts”. Article 2053 of the Civil
debt of another in case the latter does not pay the debt. Code provides:
A guaranty may also be given as security for future debts, the amount of which
Surety Guarantor is not yet known; there can be no claim against the guarantor until the debt is
usually bound with his principal by the guarantor's own separate undertaking, liquidated. A conditional obligation may also be secured.
same instrument, executed at the same in which the principal does not join. It is
time, and on the same consideration usually entered into before or after that Furthermore, this Court has ruled in Diño v. CA:
of the principal, and is often supported Under the Civil Code, a guaranty may be given to secure even future debts, the
on a separate consideration from that amount of which may not be known at the time the guaranty is executed. This is
supporting the contract of the principal. the basis for contracts denominated as continuing guaranty or
He is an original promissor and debtor The original contract of his principal is suretyship. A continuing guaranty is one which is not limited to a single
from the beginning, and is held, not his contract, and he is not bound to transaction, but which contemplates a future course of dealing, covering a series of
ordinarily, to know every default of his take notice of its non-performance. transactions, generally for an indefinite time or until revoked.
principal  It is prospective in its operation and is generally intended to provide
Usually, he will not be discharged, either He is often discharged by the mere security with respect to future transactions within certain limits, and
by the mere indulgence of the creditor to indulgence of the creditor to the contemplates a succession of liabilities, for which, as they accrue, the
the principal, or by want of notice of the principal, and is usually not liable unless guarantor becomes liable.
default of the principal, no matter how notified of the default of the principal.  Otherwise stated, a continuing guaranty is one which covers all
much he may be injured thereby transactions, including those arising in the future, which are within the
description or contemplation of the contract of guaranty, until the
the insurer of the debt, and he the insurer of the solvency of the debtor
expiration or termination thereof.
obligates himself to pay if the and thus binds himself to pay if the
 How : A guaranty shall be construed as continuing when by the terms
principal does not pay. principal is unable to pay
thereof it is evident that the object is to give a standing credit to the
principal debtor to be used from time to time either indefinitely or until a
certain period; especially if the right to recall the guaranty is expressly
Held: Based on the aforementioned definitions, it appears that the contract reserved. Hence, where the contract states that the guaranty is to secure
executed by petitioner in favor of SOLIDBANK, albeit denominated as a advances to be made “from time to time,” it will be construed to be a
"Continuing Guaranty," is a contract of surety. The terms of the contract continuing one.
categorically obligates petitioner as "surety" to induce SOLIDBANK to extend credit
to respondent spouses. The contract clearly disclose that petitioner assumed liability Examples: In other jurisdictions, it has been held that the use of particular words
to SOLIDBANK, as a regular party to the undertaking and obligated itself as an and expressions such as payment of “any debt,” “any indebtedness,” or “any sum,”
original promissor. It bound itself jointly and severally to the obligation with the or the guaranty of “any transaction,” or money to be furnished the principal debtor
respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies “at any time,” or “on such time” that the principal debtor may require, have been
or exhaust respondent spouses' properties before it can hold petitioner liable for the construed to indicate a continuing guaranty.
obligation. IFC V. IMPERIAL TEXTILE MILLS, INC., (2005).
Surety distinguished from Guaranty, Art. 2047
Stipulation
“agrees to guarantee, and hereby guarantee, the payment…” The Court does not find any ambiguity in the provisions of the Guarantee
Agreement. When qualified by the term “jointly and severally,” the use of the
The use of the term "guarantee" does not ipso facto mean that the contract is one word “guarantor” to refer to a “surety” does not violate the law.
of guaranty. Authorities recognize that the word "guarantee" is frequently As Article 2047 provides, a suretyship is created when a guarantor binds
employed in business transactions to describe not the security of the debt but an itself solidarily with the principal obligor. Likewise, the phrase in the Agreement --
intention to be bound by a primary or independent obligation. As aptly observed by “as primary obligor and not merely as surety” -- stresses that ITM is being placed
on the same level as PPIC. Those words emphasize the nature of their liability,
which the law characterizes as a suretyship.
The use of the word “guarantee” does not ipso facto make the contract one of
guaranty. This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation. The very terms of a contract govern the obligations of the
parties or the extent of the obligor’s liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a “Guarantor’s
Undertaking” or a “Continuing Guaranty.”
Suretyship as merely an accessory or a collateral to a principal obligation
 a suretyship is merely an accessory or a collateral to a principal obligation.
 Although a surety contract is secondary to the principal obligation, the
liability of the surety is direct, primary and absolute; or equivalent to that
of a regular party to the undertaking.
 A surety becomes liable to the debt and duty of the principal obligor even
without possessing a direct or personal interest in the obligations
constituted by the latter.
ESCANO & SILOS V. ORTIGAS, JR., (2007)
Surety distinguished from Joint and Solidary Obligations, Art. 2047, Art. 2066, Art.
2067, Art. 1217
“SURETIES hereby irrevocably agree and undertake to assume all of OBLIGORs’ said
guaranties to PDCP and PAIC…”
 Petitioners submit that they could only be held jointly, not solidarily, liable to
Ortigas, claiming that the Undertaking did not provide for express solidarity.”
 Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the agreement
“clearly shows that it is a surety agreement” between the obligors (Ortigas
group) and the sureties (Escaño group). Ortigas points out that the Undertaking
uses the word “SURETIES” in describing the parties.
Held: The Undertaking does not contain any express stipulation that the petitioners
agreed “to bind themselves jointly and severally” in their obligations to the Ortigas
group, or any such terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint.
As provided in Article 2047 in a surety agreement the surety undertakes to be
bound solidarily with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears that
Ortigas’s argument rests solely on the solidary nature of the obligation of the surety
under Article 2047.
A suretyship requires a principal debtor to whom the surety is solidarily bound by
way of an ancillary obligation of segregate identity from the obligation between the
principal debtor and the creditor. The suretyship does bind the surety to the
creditor, inasmuch as the latter is vested with the right to proceed against the
former to collect the credit in lieu of proceeding against the principal debtor for the
same obligation. At the same time, there is also a legal tie created between the
surety and the principal debtor to which the creditor is not privy or party to. The
moment the surety fully answers to the creditor for the obligation created by the
principal debtor, such obligation is extinguished. At the same time, the surety may
seek reimbursement from the principal debtor for the amount paid, for the surety
does in fact “become subrogated to all the rights and remedies of the creditor.”
Note that Article 2047 itself specifically calls for the application of the provisions on
joint and solidary obligations to suretyship contracts. Article 1217 of the Civil Code
thus comes into play, recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid (i.e., the
surety).
Note: A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all
intents and purposes.
Surety Solidary co-debtor
outside of the liability he assumes to pay Solidarity signifies that the creditor can
the debt before the property of the compel any one of the joint and several
principal debtor has been exhausted debtors or the surety alone to answer
for the entirety of the principal debt.
has the right to recover the full amount “may claim from his co-debtors only
paid, and not just any proportional the share which corresponds to
share, from the principal debtor or each, with the interest for the payment
debtors. already made.”
Subsidiary solidary
Accordingly, the rights to indemnification and subrogation as established and
granted to the guarantor byArticles 2066 and 2067 extend as well to sureties as
defined under Article 2047. These rights granted to the surety who pays materially
differ from those granted under Article 1217 to the solidary debtor who pays, since
the “indemnification” that pertains to the latter extends “only [to] the share which
corresponds to each [co-debtor].” It is for this reason that the Court cannot accord
the conclusion that because petitioners are identified in the Undertaking as
“SURETIES,” they are consequently joint and severally liable to Ortigas.
PLEADGE & MORTGAGE
DBP V. CA, (1998)
Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage
Par.12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question
Elements of pactum commissorium:
1. there should be a property mortgaged by way of security for the payment
of the principal obligation, and
2. there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA’s failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among
other things, to sell or otherwise dispose of the said real rights, in case of default by
CUBA, and to apply the proceeds to the payment of the loan. DBP, however,
exceeded the authority vested by condition no. 12 of the deed of assignment. It
had without foreclosure proceedings, whether judicial or extrajudicial, appropriated
the leasehold rights of Cuba over the fishpond in question.” At any rate, DBP’s act
of appropriating CUBA’s leasehold rights was violative of Article 2088 of the Civil
Code, which forbids a creditor from appropriating, or disposing of, the thing given
as security for the payment of a debt. Instead of taking ownership of the questioned
real rights upon default by CUBA, DBP should have foreclosed the mortgage, as has
been stipulated in condition no. 22 of the deed of assignment. But, as admitted by
DBP, there was no such foreclosure.
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of
pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.
BUSTAMANTE V. ROSEL, (1999)
Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage
“in the event the borrowers fail to pay, the lender has the option to buy or purchase
the collateral for a total consideration of P200K, inclusive of the borrowed amount
and interest therein.”
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor
to acquire the property given as security for the loan. This is embraced in the
concept of pactum commissorium, which is proscribed by law. The intent to
appropriate the property given as collateral in favor of the creditor appears to be
evident, for the debtor is obliged to dispose of the collateral at the pre-agreed
consideration amounting to practically the same amount as the loan. In effect, the
creditor acquires the collateral in the event of non payment of the loan. This is
within the concept of pactum commissorium. Such stipulation is void.
ONG. V. ROBAN LENDING CORPORATION, (2008)
Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage
“The SECOND PARTY hereby signed another promissory note with a promise to pay
the FIRST PARTY in full within one year from the date of the consolidation and
restructuring, otherwise the SECOND PARTY agree to have their “DACION IN
PAYMENT” agreement, which they have executed and signed today in favor of the
FIRST PARTY be enforced”
Issue: Whether the contract constitutes pactum commissorium or dacion en pago.
Held: Pactum Commissorium.
In the case at bar, the MOA and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the MOA, the failure by the
petitioners to pay their debt within the one-year period gives respondent the right
to enforce the Dacion in Payment transferring to it ownership of the properties
covered by the TCT. Respondent, in effect, automatically acquires ownership of the
properties upon petitioners’ failure to pay their debt within the stipulated period.
 Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of
a monetary obligation.
This does not persuade. In a true dacion en pago, the assignment of the property
extinguishes the monetary debt. In the case at bar, the alienation of the properties
was by way of security, and not by way of satisfying the debt. The Dacion in
Payment did not extinguish petitioners’ obligation to respondent. On the contrary,
under the MOA executed on the same day as the Dacion in Payment, petitioners had
to execute a promissory note which they were to pay within one year.
That the questioned contracts were freely and voluntarily executed by petitioners
and respondent is of no moment, pactum commissorium being void for being
prohibited by law.
PLEDGE
ESTATE OF LITTON V. MENDOZA & CA, (1988)
Pledge: Ownership of Collateral, Art. 2103, Art. 2102, Art. 2101, Art. 1951, Art.
2108, Art. 2112, Art. 2097
(see full text for the facts)
The fact that the deed of assignment was done by way of securing or guaranteeing
Tan's obligation in favor of George Litton, Sr., as observed by the appellate court,
will not in any way alter the resolution on the matter. The validity of the guaranty or
pledge in favor of Litton has not been questioned. Our examination of the deed of
assignment shows that it fulfills the requisites of a valid pledge or mortgage.
Rule
Although it is true that Tan may validly alienate the litigatious credit as ruled by the
appellate court, citing Article 1634 of the Civil Code, said provision should not be
taken to mean as a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security. The Court rules
that the said provision should be read in consonance with Article 2097 of the same
code. Although the pledgee or the assignee, Litton, Sr. did not ipso factobecome
the creditor of private respondent Mendoza, the pledge being valid, the incorporeal
right assigned by Tan in favor of the former can only be alienated by the latter with
due notice to and consent of Litton, Sr. or his duly authorized representative. To
allow the assignor to dispose of or alienate the security without notice and consent
of the assignee will render nugatory the very purpose of a pledge or an assignment
of credit.
Moreover, under Article 1634, the debtor has a corresponding obligation to
reimburse the assignee, Litton, Sr. for the price he paid or for the value given as
consideration for the deed of assignment. Failing in this, the alienation of the
litigated credit made by Tan in favor of private respondent by way of a compromise
agreement does not bind the assignee, petitioner herein.
Note: Private respondent has, from the very beginning, been fully aware of the
deed of assignment executed by Tan in favor of Litton, Sr. Having such knowledge
thereof, private respondent is estopped from entering into a compromise agreement
involving the same litigated credit without notice to and consent of the
assignee,petitioner herein. More so, in the light of the fact that no reimbursement
has ever been made in favor of the assignee as required under Article 1634. Private
respondent acted in bad faith and in connivance with assignor Tan so as to defraud
the petitioner in entering into the compromise agreement.
MANILA BANKING CORPORATION V. TEODORO, JR. AND TEODORO, (1989).
(INCLUDE CONCURRING OPINION)
Pledge: Right to Payment, Art. 2102, Art. 2118
The assignment of receivables executed by appellants did not transfer the
ownership of the receivables to appellee bank and release appellants from their
loans with the bank incurred under promissory notes.
The Deed of Assignment provided that it was for and in consideration of certain
credits, loans, overdrafts, and their credit accommodations extended to appellants
by appellee bank, and as security for the payment of said sum and the interest
thereon; that appellants as assignors, remise, release, and quitclaim to assignee
bank all their rights, title and interest in and to the accounts receivable assigned. It
was further stipulated that the assignment will also stand as a continuing
guaranty for future loans of appellants to appellee bank and correspondingly the
assignment shall also extend to all the accounts receivable; appellants shall also
obtain in the future, until the consideration on the loans secured by appellants from
appellee bank shall have been fully paid by them.
The position of appellants, however, is that the deed of assignment is a quitclaim in
consideration of their indebtedness to appellee bank, not mere guaranty, in view of
the following provisions of the deed of assignment:
... the Assignor do hereby remise, release and quit-claim unto said assignee all
its rights, title and interest in the accounts receivable described hereunder.
(Emphasis supplied by appellants, first par., Deed of Assignment).
... that the title and right of possession to said account receivable is to remain in
said assignee and it shall have the right to collect directly from the debtor, and
whatever the Assignor does in connection with the collection of said accounts, it
agrees to do so as agent and representative of the Assignee and it trust for said
Assignee.
The character of the transactions between the parties is not, however, determined
by the language used in the document but by their intention. Definitely, the
assignment of the receivables did not result from a sale transaction. It cannot be
said to have been constituted by virtue of a dation in payment for appellants' loans
with the bank evidenced by promissory note which are the subject of the suit for
collection in a Civil Case. At the time the deed of assignment was executed, said
loans were non-existent yet. Obviously, the deed of assignment was intended
as collateral security for the bank loans of appellants, as a continuing guaranty
for whatever sums would be owing by defendants to plaintiff, as stated in stipulation
No. 9 of the deed.
Assignment of credit is an agreement by virtue of which the owner of a credit,
known as the assignor, by a legal cause, such as sale, dation in payment, exchange
or donation, and without the need of the consent of the debtor, transfers his credit
and its accessory rights to another, known as the assignee, who acquires the power
to enforce it to the same extent as the assignor could have enforced it against the
debtor.
CHU V. COURT OF APPEALS ET AL., 1989
Pledge: Right to Payment, Art. 2102, Art. 2118
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.
CITIBANK, N.A. & INVESTOR FINANCE CORPORATION V. SABENIANO,
(2006)
Pledge: Right to Payment, Art. 2102, Art. 2118
The liquidation of respondent’s outstanding loans were valid in so far as petitioner
Citibank used respondent’s savings account with the bank and her money market
placements with petitioner FNCB Finance; but illegal and void in so far as petitioner
Citibank used respondent’s dollar accounts with Citibank-Geneva.
Without the Declaration of Pledge, petitioner Citibank had no authority to demand
the remittance of respondent’s dollar accounts with Citibank-Geneva and to apply
them to her outstanding loans. It cannot effect legal compensation under Article
1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva
is a distinct and separate entity. As for the dollar accounts, respondent was the
creditor and Citibank-Geneva is the debtor; and as for the outstanding loans,
petitioner Citibank was the creditor and respondent was the debtor. The parties in
these transactions were evidently not the principal creditor of each other.
Therefore, this Court declares that the remittance of respondent’s dollar accounts
from Citibank-Geneva and the application thereof to her outstanding loans with
petitioner Citibank was illegal, and null and void.
PARAY & ESPELETA V. RODRIGUEZ, ET AL., (2006)
Right of Redemption
Issue: WON the pledged shares of stock auctioned off in a notarial sale could still
be redeemed by their owners.
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.
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 is a bare statutory privilege to be exercised only by
the persons named in the statute.
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.
Obviously, since there is no right to redeem personal property, the rights of judicial sales, as evidenced by the use of the phrases “sale of property on
ownership vested unto the purchaser at the foreclosure sale are not entangled in execution” and “judgment obligor.”
any suspensive condition that is implicit in a redemptive period.

Issue #2: 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.

Held: Rule 39 of the Rules of Court does provide for instances when properties
foreclosed at the same time must be sold separately, such as in the case of lot sales
for real property under Section 19. However, these instances again pertain to
execution sales and not extrajudicial sales. No provision in the Rules of Court or in
any law requires that pledged properties sold at auction be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who
is given the right to choose which of the items should be sold if two or more things
are pledged. No similar option is given to pledgors under the Civil Code. Moreover,
there is nothing in the Civil Code provisions governing the extrajudicial sale of
pledged properties that prohibits the pledgee of several different pledge contracts
from auctioning all of the pledged properties on a single occasion, or from the buyer
at the auction sale in purchasing all the pledged properties with a single purchase
price. The relative insignificance of ascertaining the definite apportionments of the
sale price to the individual shares lies in the fact that once a pledged item is sold at
auction, neither the pledgee nor the pledgor can recover whatever deficiency or
excess there may be between the purchase price and the amount of the principal
obligation.

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.

Issue #3: 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.

Held: 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.

Section 18, Rule 39 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. However, the provision applies only to execution sales, and not extra-