CREDIT AND TRANSACTIONS (PLEDGE)
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two
(2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the
M/S Don Dino, valued at P63,000.00, and operated the FS-203,
valued at P210,672.24, which was purchased by him from the
Philippine Shipping Commission, by installment or on account. As of
January or February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the balance of
the purchase price was payable at P50,000 a year, due on or before
the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the
defendant Philippine National Bank, Cebu Branch. To guarantee its
payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its
equity in the FS-203 to the defendant bank, as evidenced by
the pledge contract, Exhibit "A" & "1-Bank", executed on the same
day and duly registered with the office of the Collector of Customs
for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in
the sum of P20,000. The remaining balance was renewed by the
execution of two (2) promissory notes in the bank's favor. The first
note, dated December 18, 1947, for P20,000, was due on April 16,
1948 while the second, dated February 26, 1948, for P10,000, was
due on June 25, 1948. These two notes were never paid at all by
plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against
plaintiff and two other accused for estafa thru falsification of
commercial documents, because plaintiff had, as last indorsee,
deposited with defendant bank, from March 11 to March 31,
1948, seven Bank of the Philippine Islands checks totalling P184,000.
The drawer thereof — one of the co-accused — had no funds in the
drawee bank. However, in connivance with one employee of
defendant bank, plaintiff was able to withdraw the amount credited
to him before the discovery of the defraudation on April 2, 1948.
Plaintiff and his co-accused were convicted by the trial court
and sentenced to indemnify the defendant bank in the sum of
P184,000. On appeal, the conviction was affirmed by the Court of
Appeals on October 31, 1950. The corresponding writ of execution
issued to implement the order for indemnification was returned
unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the criminal action,
defendant bank took physical possession of three pledged vessels
while they were at the Port of Cebu, and on April 29, 1948, after the
first note fell due and was not paid, the Cebu Branch Manager of
defendant bank, acting as attorney-in-fact of plaintiff pursuant to
the terms of the pledge contract, executed a document of sale,
Exhibit "4", transferring the two pledged vessels and plaintiff's
equity in FS-203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant
bank to the Philippine Shipping Commission which rescinded the
sale to plaintiff on September 8, 1948, for failure to pay the
remaining installments on the purchase price thereof. 7 The other
two boats, the M/S Surigao and the M/S Don Dino were sold by
defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of
First Instance of Cebu to recover the three vessels or their value and
damages from defendant bank. The latter filed its answer, with a
counterclaim for P202,000 plus P5,000 damages. After issues were
joined, a pretrial was held resulting in a partial stipulation of facts
dated October 2, 1958, reciting most of the facts above-narrated.
During the course of the trial, defendant amended its answer
reducing its claim from P202,000 to P8,846.01, 8 but increasing its
alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960
ruling: (a) that the bank's taking of physical possession of the vessels
on April 6, 1948 was justified by the pledge contract, Exhibit "A" &
"1-Bank" and the law; (b) that the private sale of the pledged vessels
by defendant bank to itself without notice to the plaintiff-pledgor as
stipulated in the pledge contract was likewise valid; and (c) that the
defendant bank should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums
against the indemnity which plaintiff was ordered to pay to it in the
criminal cases.
When his motion for reconsideration and new trial was denied,
plaintiff brought the appeal to Us, the amount involved being more
than P200,000.00.
In support of the first assignment of error, plaintiff-appellant
would have this Court hold that Exhibit "A" & "1-Bank" is a chattel
mortgage contract so that the creditor defendant could not take
possession of the chattels object thereof until after there has been
default. The submission is without merit. The parties stipulated as a
fact that Exhibit "A" & "1-Bank" is a pledge contract —
3. That a credit line of P50,000.00 was extended to
the plaintiff by the defendant Bank, and the plaintiff
obtained and received from the said Bank the sum of
P50,000.00, and in order to guarantee the payment of this
loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank",
was executed and duly registered with the Office of the
Collector of Customs for the Port of Cebu on the date
appearing therein; (Emphasis supplied)1äwphï1.ñët
Necessarily, this judicial admission binds the plaintiff. Without
any showing that this was made thru palpable mistake, no amount
of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the
actual possession of the vessels. While it is true that plaintiff
continued operating the vessels after the pledge contract was
entered into, his possession was expressly made "subject to the
order of the pledgee." 10 The provision of Art. 2110 of the present
Civil Code 11being new — cannot apply to the pledge contract here
which was entered into on June 30, 1947. On the other hand, there
is an authority supporting the proposition that the pledgee can
temporarily entrust the physical possession of the chattels pledged
to the pledgor without invalidating the pledge. In such a case, the
pledgor is regarded as holding the pledged property merely as
trustee for the pledgee. 12
CREDIT AND TRANSACTIONS (PLEDGE)
Plaintiff-appellant would also urge Us to rule that constructive
delivery is insufficient to make pledge effective. He points to Betita
v. Ganzon, 49 Phil. 87 which ruled that there has to be actual
delivery of the chattels pledged. But then there is also Banco
Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery
would suffice. An examination of the peculiar nature of the things
pledged in the two cases will readily dispel the apparent
contradiction between the two rulings. In Betita v. Ganzon, the
objects pledged — carabaos — were easily capable of actual,
manual delivery unto the pledgee. In Banco Español-Filipino v.
Peterson, the objects pledged — goods contained in a warehouse —
were hardly capable of actual, manual delivery in the sense that it
was impractical as a whole for the particular transaction and would
have been an unreasonable requirement. Thus, for purposes of
showing the transfer of control to the pledgee, delivery to him of the
keys to the warehouse sufficed. In other words, the type of delivery
will depend upon the nature and the peculiar circumstances of each
case. The parties here agreed that the vessels be delivered by the
"pledgor to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of this case
and the nature of the objects pledged, i.e., vessels used in maritime
business, such delivery is sufficient.
estate mortgages. 15 So, whatever formalities there are in Act 3135
do not apply to pledge. Regarding the bank's authority to be the
purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended
by Acts 2747 and 2938 only states that if the sale is public, the bank
could purchase the whole or part of the property sold " free from
any right of redemption on the part of the mortgagor or pledgor."
This even argues against plaintiff's case since the import thereof is
this if the sale were private and the bank became the purchaser, the
mortgagor or pledgor could redeem the property. Hence, plaintiff
could have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.
Regarding the third contention, on the assumption that the
purchase price was unconscionable, plaintiff's remedy was to have
set aside the sale. He did not avail of this. Moreover, as pointed out
by the lower court, plaintiff had at the time an obligation to return
the P184,000 fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages
allegedly suffered by plaintiff-appellant by virtue of the taking of the
vessels. But in view of the results reached above, there is no more
need to discuss the same.

Since the defendant bank was, pursuant to the terms of pledge

On the whole, We cannot say the lower court erred in
contract, in full control of the vessels thru the plaintiff, the former
disposing of the case as it did. Plaintiff-appellant was not all-too-
could take actual possession at any time during the life of the pledge
innocent as he would have Us believe. He did defraud the defendant
to make more effective its security. Its taking of the vessels
bank first. If the latter countered with the seizure and sale of the
therefore on April 6, 1948, was not unlawful. Nor was it unjustified
pledged vessels pursuant to the pledge contract, it was only to
considering that plaintiff had just defrauded the defendant bank in
protect its interests after plaintiff had defaulted in the payment of
the huge sum of P184,000.
the first promissory note. Plaintiff-appellant did not come to court
with clean hands.
The stand We have taken is not without precedent. The
Supreme Court of Spain, in a similar case involving Art. 1863 of the
WHEREFORE, the appealed judgment is, as it is hereby,
old Civil Code, 13 has ruled: 14
affirmed. Costs against plaintiff-appellant. So ordered.

Que si bien la naturaleza del contrato de prenda

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
consiste en pasar las cosas a poder del acreedor o de un
Castro, Angeles and Fernando, JJ., concur.1äwphï1.ñët
tercero y no quedar en la del deudor, como ha sucedido
en el caso de autos, es lo cierto que todas las partes
interesadas, o sean acreedor, deudor y Sociedad,
convinieron que continuaran los coches en poder del
deudor para no suspender el trafico, y el derecho de no
uso de la prenda pertenence al deudor, y el de dejar la
cosa bajo su responsabilidad al acreedor, y ambos
convinieron por creerlo util para las partes contratantes, y
estas no reclaman perjuicios no se infringio, entre otros
este articulo.

In the second assignment of error imputed to the lower court

plaintiff-appellant attacks the validity of the private sale of the
pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory
requirements as to public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer authoritative in
view of the passage of Act 3135, as amended; second, that the
charter of defendant bank does not allow it to buy the property
object of foreclosure in case of private sales; and third, that the price
obtained at the sale is unconscionable.

There is no merit in the claims. The rulings in Philippine

National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v.
Paredes, 45 Phil. 178 are still authoritative despite the passage of
Act 3135. This law refers only, and is limited, to foreclosure of real
CREDIT AND TRANSACTIONS (PLEDGE)
G.R. No. L-24137 March 29, 1926
EULOGIO BETITA, plaintiff-appellee,
vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE
PEDRENA, defendants-appellants.
OSTRAND, J.:
This action is brought to recover the possession of four carabaos
with damages in the sum of P200. Briefly stated, the facts are as
follows: On May 15, 1924, the defendant Alejo de la Flor recovered a
judgment against Tiburcia Buhayan for the sum of P140 with costs.
Under this judgment the defendant Ganzon, as sheriff levied
execution on the carabaos in question which were found in the
possession of one Simon Jacinto but registered in the name of
Tiburcia Buhayan. The plaintiff herein, Eulogio Betita, presented a
third party claim (terceria) alleging that the carabaos had been
mortgaged to him and as evidence thereof presented a document
dated May 6, 1924, but the sheriff proceeded with the sale of the
animals at public auction where they were purchased by the
defendant Clemente Perdena for the sum of P200, and this action
was thereupon brought.
The document upon which the plaintiff bases his cause of action is in
the Visayan dialect and in translation reads as follows:
I, Tiburcia Buhatan, of age, widow and resident of the sitio of
Jimamanay, municipality of Balasan, Province of Iloilo, Philippine
Islands, do hereby execute this document extrajudicially and state
that I am indebted to Mr. Eulogio Betita, resident of the municipality
of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470,
Philippine currency, and was so indebted since the year 1922, and as
a security to my creditor I hereby offer four head of carabaos
belonging to me exclusively (three females and one male), the
certificates of registration of said animals being Nos. 2832851,
4670520, 4670521 and 4670522, which I delivered to said Mr.
Eulogio Betita.
I hereby promise to pay said debt in the coming month of February,
1925, in case I will not be able to pay, Mr. Eulogio Betita may
dispose of the carabaos given as security for said debt.
This document is a new one or a renewal of our former document
because the first carabaos mortgaged died and were substituted for
by the newly branded ones."
In testimony whereof and not knowing how to sign my name, I
caused my name to be written and marked same with my right
thumb.
Estancia, May 6, 1924.
(Marked). TIBURCIA BUHAYAN
Signed in the presence of:
MIGUEL MERCURIO
TIRZO ZEPEDA
The court below held that inasmuch as this document was prior in
date to the judgment under which the execution was levied, it was a
preferred credit and judgment was rendered in favor of the plaintiff
for the possession of the carabaos, without damages and without
costs. From this judgment the defendants appeal.
The judgment must be reversed unless the document above quoted
can be considered either a chattel mortgage or else a pledge. That it
is not a sufficient chattel mortgage is evident; it does not meet the
requirements of section 5 of the Chattel Mortgage Law (Act No.
1508), has not been recorded and, considered as a chattel mortgage,
is consequently of no effect as against third parties
(Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini
Bros., 44 Phi., 216; Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and
Provincial Sheriff of Occidental Negros, 46 Phil., 753).
Neither did the document constitute a sufficient pledge of the
property valid against third parties. Article 1865 of the Civil Code
provides that "no pledge shall be effective as against third parties
unless evidence of its date appears in a public instrument." The
document in question is not public, but it is suggested that its filing
with the sheriff in connection with the terceria gave in the effect of a
public instrument and served to fix the date of the pledge, and that
it therefore fulfills the requirements of article 1865. Assuming,
without conceding, that the filing of the document with the sheriff
had that effect, it seems nevertheless obvious that the pledge only
became effective as against the plaintiff in execution from the date
of the filing and did not rise superior to the execution attachment
previously levied (see Civil Code, article 1227).
Manresa, in commenting on article 1865, says:
ART. 1865. A pledge will not be valid against a third party if
the certainty of the date is not expressed in a public
instrument.
This article, the precept of which did not exist in our old
law, answers the necessity for not disturbing the
relationship or the status of the ownership of things with
hidden or simulated contracts of pledge, in the same way
and for the identical reasons that were taken into account
by the mortgage law in order to suppress the implied and
legal mortgages which produce so much instability in real
property.
Considering the effects of a contract of pledge, it is easily
understood that, without this warranty demanded by law,
the case may happen wherein a debtor in bad faith from
the moment that he sees his movable property in danger
of execution may attempt to withdraw the same from the
action of justice and the reach of his creditors by
simulating, through criminal confabulations, anterior and
fraudulent alterations in his possession by means of
feigned contracts of this nature; and, with the object of
avoiding or preventing such abuses, almost all the foreign
writers advise that, for the effectiveness of the pledge, it
be demanded as a precise condition that in every case the
contract be executed in a public writing, for, otherwise,
the determination of its date will be rendered difficult and
its proof more so, even in cases in which it is executed
before witnesses, due to the difficulty to be encountered
in seeking those before whom it was executed.
CREDIT AND TRANSACTIONS (PLEDGE)
Our code has not gone so far, for it does not demand in This testimony is substantially in accord with that of the defendant
express terms that in all cases the pledge be constituted or sheriff to the effect that he found the animals at the place where
formalized in a public writing, nor even in private Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as
document, but only that the certainty of the date be follows:
expressed in the first of the said class of instruments in
order that it may be valid against a third party; and, in In addition to the requisites mentioned in article 1857, it
default of any express provision of law, in the cases where shall be necessary, in order to constitute the contract of
no agreement requiring the execution in a public writing pledge, that the pledge be placed in the possession of the
exists, it should be subjected to the general rule, and creditor or of a third person appointed by common
especially to that established in the last paragraph of consent.
article 1280, according to which all contracts not included
in the foregoing cases of the said article should be made in
In his commentary on this article Manresa says:
writing even though it be private, whenever the amount of
the presentation of one or of the two contracting parties
exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.) This requisite is most essential and is characteristic of a
pledge without which the contract cannot be regarded as
entered into or completed, because, precisely, in this
If the mere filing of a private document with the sheriff after the
delivery lies the security of the pledge. Therefore, in order
levy of execution can create a lien of pledge superior to the
that the contract of pledge may be complete, it is
attachment, the purpose of the provisions of article 1865 as
indispensable that the aforesaid delivery take place . . . .
explained by Manresa clearly be defeated. Such could not have been
(P. 411, supra.)
the intention of the authors of the Code. (See also Ocejo, Perez &
Co. vs.International Banking Corporation, 37 Phil., 631 and Tec Bi &
Co. Chartered Bank of India, Australia & China, 41 Phil., 596.) It is, of course, evident that the delivery of possession referred to in
article 1863 implies a change in the actual possession of the
property pledged and that a mere symbolic delivery is not sufficient.
The alleged pledge is also ineffective for another reason, namely,
In the present case the animals in question were in the possession of
that the plaintiff pledgee never had actual possession of the
Tiburcia Buhayan and Simon Jacinto before the alleged pledge was
property within the meaning of article 1863 of the Civil Code. But it
entered into and apparently remained with them until the execution
is argued that at the time of the levy the animals in question were in
was levied, and there was no actual delivery of possession to the
the possession of one Simon Jacinto; that Jacinto was the plaintiff's
plaintiff himself. There was therefore in reality no change in
tenant; and that the tenant's possession was the possession of his
possession.
landlord.

It may further be noted that the alleged relation of landlord and

It appears, however, from the evidence that though not legally
tenant between the plaintiff and Simon Jacinto is somewhat obscure
married, Simon Jacinto and Tiburcia Buhayan were living together as
and it is, perhaps, doubtful if any tenancy, properly speaking,
husband and wife and had been so living for many years. Testifying
existed. The land cultivated by Jacinto was not the property of the
as a witness for the plaintiff, Jacinto on cross-examination made the
plaintiff, but it appears that a part of the products was to be applied
following statements:
towards the payment of Tiburcia Buhayan's debt to the plaintiff.
Jacinto states that he was not a tenant until after the pledge was
Q. But the caraballas in question had never been in made.
possession of Eulogio Betita? — A. The three young ones
did not get into his hands.
From what has been said it follows that the judgment appealed from
must be reversed and it is ordered and adjudged that the plaintiff
Q. And the others? — A. Sometimes they were in the take nothing by his action. Without costs. So ordered.
hands of Betita and at other times in the hands of
Buhayan.
Avanceña, C. J., Street, Villamor, Johns, Romualdez and Villa-Real, JJ.,
concur.
Q. Those are the caraballas which formerly were Malcolm, J., concurs in the result.
mortgaged by Buhayan to Betita, isn't that so? — A. Yes,
sir.

Q. And the four carabaos now in question had never been

in possession of Betita, but were in your possession? — A.
When I worked they were in my hands.

Q. And before you worked, these caraballas were in

possession of your mistress, Tiburcia Buhayan? — A. Yes,
sir.

Q. Do you mean to say that from the possession of

Tiburcia Buhayan the animals passed immediately into
your possession? — A. Yes sir.
CREDIT AND TRANSACTIONS (PLEDGE)
G.R. No. L-6342 January 26, 1954
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
LAUREANO ATENDIDO, defendants-appellant.
BAUTISTA, ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of
Nueva Ecija which orders the defendant to pay to the plaintiff the
sum of P3,000, with interest thereon at the rate of 6% per annum
from June 26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine
National Bank a loan of P3,000 payable in 120 days with interests at
6% per annum from the date of maturity. To guarantee the payment
of the obligation the borrower pledged to the bank 2,000 cavanes of
palay which were then deposited in the warehouse of Cheng Siong
Lam & Co. in San Miguel, Bulacan, and to that effect the borrower
endorsed in favor of the bank the corresponding warehouse receipt.
Before the maturity of the loan, the 2,000 cavanes of palay
disappeared for unknown reasons in the warehouse. When the loan
matured the borrower failed to pay either the principal or the
interest and so the present action was instituted.
Defendant set up a special defense and a counterclaim. As regards
the former, defendant claimed that the warehouse receipt covering
the palay which was given as security having been endorsed in blank
in favor of the bank, and the palay having been lost or disappeared,
he thereby became relieved of liability. And, by way of counterclaim,
defendant claimed that, as a corollary to his theory, he is entitled to
an indemnity which represents the difference between the value of
the palay lost and the amount of his obligation.
The case was submitted on an agreed statements of facts and
thereupon the court rendered judgment as stated in the early part
of this decision.
Defendant took the case on appeal to the Court of Appeals but later
it was certified to this Court on the ground that the question
involved is purely one of law.
The only issue involved in this appeal is whether the surrender of
the warehouse receipt covering the 2,000 cavanes of palay given as
a security, endorsed in blank, to appellee, has the effect of
transferring their title or ownership to said appellee, or it should be
considered merely as a guarantee to secure the payment of the
obligation of appellant.
In upholding the view of appellee, the lower court said: "The
surrendering of warehouse receipt No. S-1719 covering the 2,000
cavanes of palay by the defendant in favor of the plaintiff was not
that of a final transfer of that warehouse receipt but merely as a
guarantee to the fulfillment of the original obligation of P3,000.00.
In other word, plaintiff corporation had no right to dispose (of) the
warehouse receipt until after the maturity of the promissory note
Exhibit A. Moreover, the 2,000 cavanes of palay were not in the first
place in the actual possession of plaintiff corporation, although
symbolically speaking the delivery of the warehouse receipt was
actually done to the bank."
We hold this finding to be correct not only because it is in line with
the nature of a contract of pledge as defined by law (Articles 1857,
1858 & 1863, Old Civil Code), but is supported by the stipulations
embodied in the contract signed by appellant when he secured the
loan from the appellee. There is no question that the 2,000 cavanes
of palay covered by the warehouse receipt were given to appellee
only as a guarantee to secure the fulfillment by appellant of his
obligation. This clearly appears in the contract Exhibit A wherein it is
expressly stated that said 2,000 cavanes of palay were given as a
collateral security. The delivery of said palay being merely by way of
security, it follows that by the very nature of the transaction its
ownership remains with the pledgor subject only to foreclose in case
of non-fulfillment of the obligation. By this we mean that if the
obligation is not paid upon maturity the most that the pledgee can
do is to sell the property and apply the proceeds to the payment of
the obligation and to return the balance, if any, to the pledgor
(Article 1872, Old Civil Code). This is the essence of this contract, for,
according to law, a pledgee cannot become the owner of, nor
appropriate to himself, the thing given in pledge (Article 1859, Old
Civil Code). If by the contract of pledge the pledgor continues to be
the owner of the thing pledged during the pendency of the
obligation, it stands to reason that in case of loss of the property,
the loss should be borne by the pledgor. The fact that the
warehouse receipt covering the palay was delivered, endorsed in
blank, to the bank does not alter the situation, the purpose of such
endorsement being merely to transfer the juridical possession of the
property to the pledgee and to forestall any possible disposition
thereof on the part of the pledgor. This is true notwithstanding the
provisions to the contrary of the Warehouse Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine
National Bank, 93 Phil., 765) which involves a similar transaction,
this Court held:
In conclusion, we hold that where a warehouse receipt or
quedan is transferred or endorsed to a creditor only to
secure the payment of a loan or debt, the transferee or
endorsee does not automatically become the owner of the
goods covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent of
the owner to sell them so as to satisfy the obligation from
the proceeds of the sale, this for the simple reason that
the transaction involved is not a sale but only a mortgage
or pledge, and that if the property covered by the quedans
or warehouse receipts is lost without the fault or
negligence of the mortgagee or pledgee or the transferee
or endorsee of the warehouse receipt or quedan, then said
goods are to be regarded as lost on account of the real
owner, mortgagor or pledgor.
Wherefore, the decision appealed from is affirmed, with costs
against appellant.
Bengzon, Padilla, Montemayor, Jugo, Reyes and Labrador,
JJ., concur.
CREDIT AND TRANSACTIONS (PLEDGE)
G.R. No. L-21069 October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil
Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila
Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-½% per
annum from July 13, 1954; P120.93 as premiums with interest at the same
rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of
the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article
2115 of the Civil Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon
request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution
of a writ of attachment obtained by one Jovita Granados in a suit against
Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to
pay the surety company an annual premium of P112.00; to indemnify the
Company for any damage and loss of whatsoever kind and nature that it shall
or may suffer, as well as reimburse the same for all money it should pay or
become liable to pay under the bond including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four
pieces of jewelry to the Surety Company "for the latter's further protection",
with power to sell the same in case the surety paid or become obligated to
pay any amount of money in connection with said bond, applying the
proceeds to the payment of any amounts it paid or will be liable to pay, and
turning the balance, if any, to the persons entitled thereto, after deducting
legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against
Rodolfo Velayo, and execution having been returned unsatisfied, the surety
company was forced to pay P2,800.00 that it later sought to recoup from
Velayo; and upon the latter's failure to do so, the surety caused the pledged
jewelry to be sold, realizing therefrom a net product of P235.00 only.
Thereafter and upon Velayo's failure to pay the balance, the surety company
brought suit in the Municipal Court. Velayo countered with a claim that the
sale of the pledged jewelry extinguished any further liability on his part
under Article 2115 of the 1950 Civil Code, which recites:
Art. 2115. The sale of the thing pledged shall extinguish the
principal obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said
amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding
any stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment
against him. Appealed to the Court of First Instance, the defense was once
more overruled, and the case decided in the terms set down at the start of
this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec.
Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the
parties is the Indemnity Agreement and if the pieces of jewelry
mentioned by the defendant were delivered to the plaintiff, it was
merely as an added protection to the latter. There was no
understanding that, should the same be sold at public auction and
the value thereof should be short of the undertaking, the
defendant would have no further liability to the plaintiff. On the
contrary, the last portion of the said agreement specifies that in
case the said collateral should diminish in value, the plaintiff may
demand additional securities. This stipulation is incompatible with
the idea of pledge as a principal agreement. In this case, the
status of the pledge is nothing more nor less than that of a
mortgage given as a collateral for the principal obligation in which
the creditor is entitled to a deficiency judgment for the balance
should the collateral not command the price equal to the
undertaking.
It appearing that the collateral given by the defendant in favor of
the plaintiff to secure this obligation has already been sold for
only the amount of P235.00, the liability of the defendant should
be limited to the difference between the amounts of P2,800.00
and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the
appealed decision is unsound. The accessory character is of the essence of
pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an
essential requisite of these contracts is that they be constituted to secure the
fulfillment of a principal obligation, which in the present case is Velayo's
undertaking to indemnify the surety company for any disbursements made
on account of its attachment counterbond. Hence, the fact that the pledge is
not the principal agreement is of no significance nor is it an obstacle to the
application of Article 2115 of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale
of the pledged chattels must be derived from stipulation. This is incorrect,
because Article 2115, in its last portion, clearly establishes that the extinction
of the principal obligation supervenes by operation of imperative law that
the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled
to recover the deficiency notwithstanding any stipulation to the
contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By
electing to sell the articles pledged, instead of suing on the principal
obligation, the creditor has waived any other remedy, and must abide by the
results of the sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but
an extension of the legal prescription contained in Article 1484(3) of the
same Code, concerning the effect of a foreclosure of a chattel mortgage
constituted to secure the price of the personal property sold in installments,
and which originated in Act 4110 promulgated by the Philippine Legislature
in 1933.
WHEREFORE, the decision under appeal is modified and the defendant
absolved from the complaint, except as to his liability for the 1954 premium
in the sum of P120.93, and interest at 12-1/2% per annum from June 13,
1954. In this respect the decision of the Court below is affirmed. No costs. So
ordered.
Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro,
Angeles and Fernando, JJ.,concur.
CREDIT AND TRANSACTIONS (PLEDGE)
SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL
ESPELETA, Petitioners,
vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her
husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her
husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by
her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA
R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her
husband ALFONSO SORONIO, Respondents.
DECISION
TINGA, J.:
The assailed decision of the Court of Appeals took off on the premise
that pledged shares of stock auctioned off in a notarial sale could
still be redeemed by their owners. This notion is wrong, and we thus
reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal
capacities, of shares of stock in a corporation known as the Quirino-
Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to
1980, respondents secured by way of pledge of some of their shares
of stock to petitioners Bonifacio and Faustina Paray ("Parays") the
payment of certain loan obligations. The shares pledged are listed
below:
Miguel Rodriguez Jariol ….1,000 shares covered by Stock Certifi-
cates No. 011, 060, 061 & 062;
Abdulia C. Rodriguez …. 300 shares covered by Stock Certificates No.
023 & 093;
Leonora R. Nolasco ….. 407 shares covered by Stock Certificates No.
091 & 092;
Genoveva Soronio…. 699 shares covered by Stock Certificates No.
025, 059 & 099;
Dolores R. Soberano…. 699 shares covered by Stock Certificates No.
021, 053, 022 & 097;
Julia Generoso ….. 1,100 shares covered by Stock Certificates No.
085, 051, 086 & 084;
Teresita Natividad….. 440 shares covered by Stock Certificates Nos.
054 & 0552
When the Parays attempted to foreclose the pledges on account of
respondents’ failure to pay their loans, respondents filed complaints
with the Regional Trial Court (RTC) of Cebu City. The actions, which
were consolidated and tried before RTC Branch 14, Cebu City,
sought the declaration of nullity of the pledge agreements, among
others. However the RTC, in its decision3 dated 14 October 1988,
dismissed the complaint and gave "due course to the foreclosure
and sale at public auction of the various pledges subject of these
two cases."4 This decision attained finality after it was affirmed by
the Court of Appeals and the Supreme Court. The Entry of Judgment
was issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the
pledged shares were to be sold at public auction on 4 November
1991. However, before the scheduled date of auction, all of
respondents caused the consignation with the RTC Clerk of Court of
various amounts. It was claimed that respondents had attempted to
tender these payments to the Parays, but had been rebuffed. The
deposited amounts were as follows:
Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco …. 277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio … 425,353.50 .. 14 Oct. 1991
38,385.44 .. 14 Oct. 1991
Julia R. Generoso …….. 638,385.00 .. 25 Oct. 1991
Teresita R. Natividad …. 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano ….. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol …. 490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 19915
Notwithstanding the consignations, the public auction took place as
scheduled, with petitioner Vidal Espeleta successfully bidding the
amount of P6,200,000.00 for all of the pledged shares. None of
respondents participated or appeared at the auction of 4 November
1991.
Respondents instead filed on 13 November 1991 a complaint
seeking the declaration of nullity of the concluded public auction.
The complaint, docketed as Civil Case No. CEB-10926, was assigned
to Branch 16 of the Cebu City RTC. Respondents argued that their
tender of payment and subsequent consignations served to
extinguish their loan obligations and discharged the pledge
contracts. Petitioners countered that the auction sale was
conducted pursuant to the final and executory judgment in Civil
Cases Nos. R-20120 and 20131, and that the tender of payment and
consignations were made long after their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement
with the position of the Parays.6 It held, among others that
respondents had failed to tender or consign payments within a
reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.7 The Court
of Appeals Eighth Division however reversed the RTC on appeal,
ruling that the consignations extinguished the loan obligations and
the subject pledge contracts; and the auction sale of 4 November
1991 as null and void.8 Most crucially, the appellate court chose to
uphold the sufficiency of the consignations owing to an imputed
policy of the law that favored redemption and mandated a liberal
construction to redemption laws. The attempts at payment by
respondents were characterized as made in the exercise of the right
of redemption.
The Court of Appeals likewise found fault with the auction sale,
holding that there was a need to individually sell the various shares
CREDIT AND TRANSACTIONS (PLEDGE)
of stock as they had belonged to different pledgors. Thus, it was
observed that the minutes of the auction sale should have specified
in detail the bids submitted for each of the shares of the pledgors for
the purpose of knowing the price to be paid by the different
pledgors upon redemption of the auctioned sales of stock.
Petitioners now argue before this Court that they were authorized
to refuse as they did the tender of payment since they were
undertaking the auction sale pursuant to the final and executory
decision in Civil Cases Nos. R-20120 and 20131, which did not
authorize the payment of the principal obligation by respondents.
They point out that the amounts consigned could not extinguish the
principal loan obligations of respondents since they were not
sufficient to cover the interests due on the debt. They likewise argue
that the essential procedural requisites for the auction sale had
been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded
was that the consignations made by respondents should be
construed in light of the rules of redemption, as if respondents were
exercising such right. In that perspective, the Court of Appeals made
three crucial conclusions favorable to respondents: that their act of
consigning the payments with the RTC should be deemed done in
the exercise of their right of redemption; that the buyer at public
auction does not ipso facto become the owner of the pledged shares
pending the lapse of the one-year redemptive period; and that the
collective sale of the shares of stock belonging to several individual
owners without specification of the apportionment in the
applications of payment deprives the individual owners of the
opportunity to know of the price they would have to pay for the
purpose of exercising the right of redemption.
The appellate court’s dwelling on the right of redemption is utterly
off-tangent. The right of redemption involves payments made by
debtors after the foreclosure of their properties, and not those
made or attempted to be made, as in this case, before the
foreclosure sale. The proper focus of the Court of Appeals should
have been whether the consignations made by respondents
sufficiently acquitted them of their principal obligations. A pledge
contract is an accessory contract, and is necessarily discharged if the
principal obligation is extinguished.
Nonetheless, the Court is now confronted with this rather new
fangled theory, as propounded by the Court of Appeals, involving
the right of redemption over pledged properties. We have no
hesitation in pronouncing such theory as discreditable.
Preliminarily, it must be clarified that the subject sale of pledged
shares was an extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by an execution sale.
Under the Civil Code, the foreclosure of a pledge occurs
extrajudicially, without intervention by the courts. All the creditor
needs to do, if the credit has not been satisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.9
In this case, petitioners attempted as early as 1980 to proceed
extrajudicially with the sale of the pledged shares by public auction.
However, extrajudicial sale was stayed with the filing of Civil Cases
No. R-20120 and 20131, which sought to annul the pledge contracts.
The final and executory judgment in those cases affirmed the pledge
contracts and disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing the complaints at bar, and –
(1) Declaring the various pledges covered in Civil Cases
Nos. R-20120 and R-20131 valid and effective; and
(2) Giving due course to the foreclosure and sale at public
auction of the various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.10
The phrase "giving due course to the foreclosure and sale at public
auction of the various pledges subject of these two cases" may give
rise to the impression that such sale is judicial in character. While
the decision did authorize the sale by public auction, such
declaration could not detract from the fact that the sale so
authorized is actually extrajudicial in character. Note that the final
judgment in said cases expressly did not direct the sale by public
auction of the pledged shares, but instead upheld the right of the
Parays to conduct such sale at their own volition.
Indeed, as affirmed by the Civil Code,11 the decision to proceed with
the sale by public auction remains in the sole discretion of the
Parays, who could very well choose not to hold the sale without
violating the final judgments in the aforementioned civil cases. If the
sale were truly in compliance with a final judgment or order, the
Parays would have no choice but to stage the sale for then the order
directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a
mandatory recourse, and properly so since the sale of pledged
property in public auction is, by virtue of the Civil Code, extrajudicial
in character.
The right of redemption as affirmed under Rule 39 of the Rules of
Court applies only to execution sales, more precisely execution sales
of real property.
The Court of Appeals expressly asserted the notion that pledged
property, necessarily personal in character, may be redeemed by the
creditor after being sold at public auction. Yet, as a fundamental
matter, does the right of redemption exist over personal property?
No law or jurisprudence establishes or affirms such right. Indeed, no
such right exists.
The right to redeem property sold as security for the satisfaction of
an unpaid obligation does not exist preternaturally. Neither is it
predicated on proprietary right, which, after the sale of property on
execution, leaves the judgment debtor and vests in the purchaser.
Instead, it is a bare statutory privilege to be exercised only by the
persons named in the statute.12
The right of redemption over mortgaged real property sold
extrajudicially is established by Act No. 3135, as amended. The said
law does not extend the same benefit to personal property. In fact,
there is no law in our statute books which vests the right of
redemption over personal property. Act No. 1508, or the Chattel
CREDIT AND TRANSACTIONS (PLEDGE)
Mortgage Law, ostensibly could have served as the vehicle for any
legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point.
And Section 39 of the 1997 Rules of Civil Procedure, extensively
relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold
on execution.
Tellingly, this Court, as early as 1927, rejected the proposition that
personal property may be covered by the right of redemption.
In Sibal 1.º v. Valdez,13 the Court ruled that sugar cane crops are
personal property, and thus, not subject to the right of
redemption.14 No countervailing statute has been enacted since
then that would accord the right of redemption over personal
property, hence the Court can affirm this decades-old ruling as
effective to date.
Since the pledged shares in this case are not subject to redemption,
the Court of Appeals had no business invoking and applying the
inexistent right of redemption. We cannot thus agree that the
consigned payments should be treated with liberality, or somehow
construed as having been made in the exercise of the right of
redemption. We also must reject the appellate court’s declaration
that the buyer of at the public auction is not "ipso facto" rendered
the owner of the auctioned shares, since the debtor enjoys the one-
year redemptive period to redeem the property. Obviously, since
there is no right to redeem personal property, the rights of
ownership vested unto the purchaser at the foreclosure sale are not
entangled in any suspensive condition that is implicit in a
redemptive period.
The Court of Appeals also found fault with the apparent sale in bulk
of the pledged shares, notwithstanding the fact that these shares
were owned by several people, on the premise the pledgors would
be denied the opportunity to know exactly how much they would
need to shoulder to exercise the right to redemption. This concern is
obviously rendered a non-issue by the fact that there can be no right
to redemption in the first place. Rule 39 of the Rules of Court does
provide for instances when properties foreclosed at the same time
must be sold separately, such as in the case of lot sales for real
property under Section 19. However, these instances again pertain
to execution sales and not extrajudicial sales. No provision in the
Rules of Court or in any law requires that pledged properties sold at
auction be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not
the pledgor, who is given the right to choose which of the items
should be sold if two or more things are pledged.15 No similar option
is given to pledgors under the Civil Code. Moreover, there is nothing
in the Civil Code provisions governing the extrajudicial sale of
pledged properties that prohibits the pledgee of several different
pledge contracts from auctioning all of the pledged properties on a
single occasion, or from the buyer at the auction sale in purchasing
all the pledged properties with a single purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale
price to the individual shares lies in the fact that once a pledged
item is sold at auction, neither the pledgee nor the pledgor can
recover whatever deficiency or excess there may be between the
purchase price and the amount of the principal obligation.16
A different ruling though would obtain if at the auction, a bidder
expressed the desire to bid on a determinate number or portion of
the pledged shares. In such a case, there may lie the need to
ascertain with particularity which of the shares are covered by the
bid price, since not all of the shares may be sold at the auction and
correspondingly not all of the pledge contracts extinguished. The
same situation also would lie if one or some of the owners of the
pledged shares participated in the auction, bidding only on their
respective pledged shares. However, in this case, none of the
pledgors participated in the auction, and the sole bidder cast his bid
for all of the shares. There obviously is no longer any practical
reason to apportion the bid price to the respective shares, since no
matter how slight or significant the value of the purchase price for
the individual share is, the sale is completed, with the pledgor and
the pledgee not entitled to recover the excess or the deficiency, as
the case may be. To invalidate the subject auction solely on this
point serves no cause other than to celebrate formality for
formality’s sake.
Clearly, the theory adopted by the Court of Appeals is in shambles,
and cannot be resurrected. The question though yet remains
whether the consignations made by respondents extinguished their
respective pledge contracts in favor of the Parays so as to enjoin the
latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the
pledges should be terminated as well. Article 2098 of the Civil Code
provides that the right of the creditor to retain possession of the
pledged item exists only until the debt is paid. Article 2105 of the
Civil Code further clarifies that the debtor cannot ask for the return
of the thing pledged against the will of the creditor, unless and until
he has paid the debt and its interest. At the same time, the right of
the pledgee to foreclose the pledge is also established under the
Civil Code. When the credit has not been satisfied in due time, the
creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
Respondents argue that their various consignations made prior to
the auction sale discharged them from the loan and the pledge
agreements. They are mistaken.
Petitioners point out that while the amounts consigned by
respondents could answer for their respective principal loan
obligations, they were not sufficient to cover the interests due on
these loans, which were pegged at the rate of 5% per month or 60%
per annum. Before this Court, respondents, save for Dolores
Soberano, do not contest this interest rate as alleged by petitioners.
Soberano, on the other hand, challenges this interest rate as
"usurious."17
The particular pledge contracts did not form part of the records
elevated to this Court. However, the 5% monthly interest rate was
noted in the statement of facts in the 14 October 1988 RTC Decision
which had since become final. Moreover, the said decision
pronounced that even assuming that the interest rates of the
various loans were 5% per month, "it is doubtful whether the
interests so charged were exorbitantly or excessively usurious. This
is because for sometime now, usury has become ‘legally
inexistent.’"18 The finality of this 1988 Decision is a settled fact, and
thus the time to challenge the validity of the 5% monthly interest
rate had long passed. With that in mind, there is no reason for the
Court to disagree with petitioners that in order that the consignation
could have the effect of extinguishing the pledge contracts, such
amounts should cover not just the principal loans, but also the 5%
monthly interests thereon.
CREDIT AND TRANSACTIONS (PLEDGE)
It bears noting that the Court of Appeals also ruled that respondents
had satisfied the requirements under Section 18, Rule 39, which
provides that the judgment obligor may prevent the sale by paying
the amount required by the execution and the costs that have been
incurred therein.19 However, the provision applies only to execution
sales, and not extra-judicial sales, as evidenced by the use of the
phrases "sale of property on execution" and "judgment obligor." The
reference is inapropos, and even if it were applicable, the failure of
the payment to cover the interests due renders it insufficient to stay
the sale.

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

Finally, we cannot help but observe that respondents may have

saved themselves much trouble if they simply participated in the
auction sale, as they are permitted to bid themselves on their
pledged properties.20 Moreover, they would have had a better right
had they

matched the terms of the highest bidder.21 Under the

circumstances, with the high interest payments that accrued after
several years, respondents were even placed in a favorable position
by the pledge agreements, since the creditor would be unable to
recover any deficiency from the debtors should the sale price be
insufficient to cover the principal amounts with interests. Certainly,
had respondents participated in the auction, there would have been
a chance for them to recover the shares at a price lower than the
amount that was actually due from them to the Parays. That
respondents failed to avail of this beneficial resort wholly accorded
them by law is their loss. Now, all respondents can recover is the
amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the

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

SO ORDERED.