041. Yau Chu v.

Court of Appeals
G.R. No. L-78519/26 September 1989/First Division/Petition for Review on Certiorari
Victoria Yau Chu (assisted by her husband, Michael) – petitioners
Court of Appeals, Family Savings Bank, and/or CAMS Trading Enterprises, Inc. –
respondents
Decision by J. Grino-Aquino, Digest by Pip

Short Version: Victoria bought cement from CAMS and secured her payments with
deeds of assignment over her time deposits in Family Savings Bank. She assigned about
P320K worth but her obligations to CAMS came up to about P404K. CAMS requested the
bank to encash the time deposit certificates, which the bank did only after calling up
and obtaining Victoria’s consent. Victoria then sued the bank and CAMS for alleged
pactum commissorium. The Court ruled against her, as the prohibition on pactum
commissorium was enacted in order to protect debtors from creditors who automatically
appropriate pledged or mortgaged property which might have a higher value than the
debt. Where the security for the debt is also money deposited in a bank, the amount of
which is even less than the debt, it is not illegal for the creditor to encash the time
deposit certificates to pay the debtors’ overdue obligation, with the latter’s consent.

Facts: Since 1980, Victoria Yau Chu had been purchasing cement on credit from CAMS.
To guaranty payment for her cement withdrawals, she executed in favor of CAMS deeds
of assignment of her time deposits in Family Savings Bank. The total amount came up to
P320K. Except for serial numbers and the dates of the time deposit certificates, the
deeds of assignment prepared by Victoria’s lawyer uniformly read:

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

In July 1980, CAMS notified the bank that Victoria had an unpaid account with it in
the sum of about P314K and requested the encashment of the time deposit certificates
assigned to it by Victoria. As proof, it submitted to the bank a letter from Victoria
admitting her outstanding account with CAMS reaching P404.5K. The bank verbally
advised Victoria of CAMS’ request and after she verbally agreed, the bank encashed the
certificates and delivered about P283K because one time deposit lacked the proper
signatures.

Victoria then turned around and demanded that the bank and CAMS restore her time
deposit. When both refused, she filed a complaint to recover the sum from them before
the RTC of Makati. The RTC dismissed the complaint for lack of merit. Court of Appeals
affirmed. Before the Supreme Court she argued that the encashment of her time deposit
certificates was pactum commissorium.

Issue: Did the encashment of Victoria’s time deposit certificates amount to

pactum commissorium? NO.

Ruling: Petition denied.

Ratio: Since the collateral in this case was also money, there was no need to sell the
thing pledged at public auction in order to satisfy the pledgor’s obligation. All that had
to be done to convert the pledgor's time deposit certificates into cash was to present
them to the bank for encashment after due notice to the debtor.
 The encashment of the deposit certificates was not a pactum
commissorium as prohibited under Article 2088 of the Civil Code. A pactum
commissorium is a provision for the automatic appropriation of the pledged or
mortgaged property by the creditor in payment of the loan upon its maturity.
This prohibition is intended to protect the obligor, pledgor, or mortgagor against being
overreached by his creditor who holds a pledge or mortgage over property whose value
is much more than the debt. Where, as in this case, the security for the debt is
also money deposited in a bank, the amount of which is even less than the
debt, it is not illegal for the creditor to encash the time deposit certificates to
pay the debtors’ overdue obligation, with the latter’s consent.

Voting: Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., no part.

ERVICEWIDE SPECIALISTS, INCORPORATED, petitioner, vs. THE HON. COURT OF

APPEALS, JESUS PONCE, and ELIZABETH PONCE, respondents. G.R. No. 116363.
December 10, 1999

Doctrine:

In case of assignment of credit, only notice to but not the consent of the debtor-
mortgagor is necessary to bind the latter.
The assignee’s consent is necessary in order to bind him of the alienation of the
mortgaged thing by the debtor- mortgagor.
Article Applicable:

Article 2141 states that the provisions concerning a contract of pledge shall be
applicable to a chattel mortgage, such as the one at bar, insofar as there is no
conflict with Act No. 1508, the Chattel Mortgage Law
Facts: - Respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a
Holden Torana vehicle from C. R. Tecson Enterprises. - They executed a promissory
note and a chattel mortgage on the vehicle dated in favor of the C. R. Tecson
Enterprises to secure payment of the note - The mortgage was registered both in
the Registry of Deeds and the Land Transportation Office - C. R. Tecson Enterprises,
in turn, executed a deed of assignment of said promissory note and chattel
mortgage in favor of Filinvest Credit Corporation with the conformity of respondent
spouses - In 1976, respondent spouses transferred and delivered the vehicle to
Conrado R. Tecson by way of sale with assumption of mortgage - Subsequently, in
1978, Filinvest assigned all its rights and interest over the same promissory note
and chattel mortgage to petitioner Servicewide Specialists Inc. without notice to
respondent spouses - Due to the failure of respondent spouses to pay the
installments under the promissory note from October 1977 to March 1978,
and despite demands to pay the same or to return the vehicle, petitioner was
constrained to file before the Regional Trial Court of Manila on May 22, 1978 a
complaint for replevin with damages against them.
Contention of the RESPONDENT/DEFENDANT (SPS. PONCE) - Respondent spouses
denied any liability claiming they had already returned the car to Conrado Tecson
pursuant to the Deed of Sale with Assumption of Mortgage - They filed a third party
complaint against Conrado Tecson praying that in case they are adjudged liable to
petitioner, Conrado Tecson should reimburse them.
Ruling of Lower Court: Found respondent spouses jointly and solidarily liable to
petitioner, however, the third party defendant Conrado Tecson was ordered to
reimburse the respondent spouses for the sum that they would pay to petitioners.
Ruling of CA: The CA reversed and set aside the RTC’s decision on the principal
ground that respondent spouses were not notified of the assignment of the
promissory note and chattel mortgage to petitioner.
Issue/s:

Whether the assignment of a credit requires notice to the debtor in order to bind
him? –YES
Whether the consent of the creditor- mortgagee necessary when the debtor-
mortgagor alienates the property to a third person? - YES

Ruling:

In case of assignment of credit, only notice to but not the consent of the debtor-
mortgagor is necessary to bind the latter
When the credit was assigned to petitioner, only notice to but not the consent of the
debtor-mortgagor was necessary to bind the latter.

Applying Article 1627 of the Civil Code, the assignment made to petitioner includes
the accessory rights such as the mortgage. Article 2141, on the other hand, states
that the provisions concerning a contract of pledge shall be applicable to a chattel
mortgage, such as the one at bar, insofar as there is no conflict with Act No. 1508,
the Chattel Mortgage Law. As provided in Article 2096 in relation to Article 2141 of
the Civil Code, a thing pledged may be alienated by the pledgor or owner with the
consent of the pledgee.
This provision is in accordance with Act No. 1508 which provides that a mortgagor
of personal property shall not sell or pledge such property, or any part thereof,
mortgaged by him without the consent of the mortgagee in writing on the back of
the mortgage and on the margin of the record thereof in the office where such
mortgage is recorded.
Although this provision in the chattel mortgage has been expressly repealed by
Article 367 of the Revised Penal Code, yet under Article 319 (2) of the same Code,
the sale of the thing mortgaged may be made provided that the mortgagee gives
his consent and that the same is recorded.
A mortgage credit may be alienated or assigned to a third person
The assignee’s consent is necessary in order to bind him of the alienation of the
mortgaged thing by the debtor- mortgagor
In any case, applying by analogy Article 2128 of the Civil Code to a chattel
mortgage, it appears that a mortgage credit may be alienated or assigned to a third
person. Since the assignee of the credit steps into the shoes of the creditor-
mortgagee to whom the chattel was mortgaged, it follows that the assignee’s
consent is necessary in order to bind him of the alienation of the mortgaged thing
by the debtormortgagor.
This is tantamount to a novation. As the new assignee, petitioner’s consent is
necessary before respondent spouses’ alienation of the vehicle can be considered
as binding against third persons. Petitioner is considered a third person with respect
to the sale with mortgage between respondent spouses and third party defendant
Conrado
Tecson.

DISPOSITIVE PORTION: WHEREFORE, the decision of the Court of Appeals is

REVERSED and SET ASIDE. The decision of the Regional Trial Court is AFFIRMED and
REINSTATED