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01 PEOPLE vs. CONCEPCION, 44 Phil. 126

FACTS:
Venancio Concepcion, President of the Philippine National Bank and a member of the
Board thereof, authorized an extension of credit in favor of "Puno y Concepcion, S. en C.” to the
manager of the Aparri branch of the Philippine National Bank. "Puno y Concepcion, S. en C."
was a co-partnership where Concepcion is a partner. Subsequently, Concepcion was charged
and found guilty in the Court of First Instance of Cagayan with violation of section 35 of Act No.
2747. Section 35 of Act No. 2747 provides that the National Bank shall not, directly or indirectly,
grant loans to any of the members of the board of directors of the bank nor to agents of the
branch banks. Counsel for the defense argue that the documents of record do not prove that
authority to make a loan was given, but only show the concession of a credit. They averred that
the granting of a credit to the co-partnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, is not a "loan" within the meaning of
section 35 of Act No. 2747.

ISSUE:
Whether or not the granting of a credit of P300,000 to the co-partnership "Puno y
Concepcion, S. en C." by Venancio Concepcion, President of the Philippine National Bank, a
"loan" within the meaning of section 35 of Act No. 2747.

HELD:
The Supreme Court ruled in the affirmative. The "credit" of an individual means his
ability to borrow money by virtue of the confidence or trust reposed by a lender that he will
pay what he may promise. A "loan" means the delivery by one party and the receipt by the
other party of a given sum of money, upon an agreement, express or implied, to repay the sum
loaned, with or without interest. The concession of a "credit" necessarily involves the granting
of "loans" up to the limit of the amount fixed in the "credit,"

02 REPUBLIC v. BAGTAS, 116 SCRA 262

FACTS:
On May 8, 1948, Jose Bagtas borrowed from the Bureau of Animal Industry three bulls
for one year for breeding purposes upon payment of a breeding fee of 10% of the book value of
the bulls. After one year, the contract was renewed but only for one bull. Bagtas offered to buy
the bulls at book value less depreciation, but the Bureau told him that he should either return
the bulls or pay for their book value. Bagtas failed to pay the book value, so the Republic filed
an action with the CFI Manila to order the return of the bulls or the payment of the book value.
Felicidad Bagtas, the surviving spouse and administratrix of the decedent’s estate, said that the
two bulls have already been returned in 1952, and that the remaining one died of gunshot
during a Huk raid. It was established that the two bulls were returned, thus, there is no more
obligation on the part of Bagtas. With regards the bull not returned, Felicidad maintained that
the obligation is extinguished since the contract is that of a commodatum and that the loss
through fortuitous event should be borne by the owner.
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ISSUE:
Whether or not the contract entered into between Bagtas and the Republic is that of
commodatum making Bagtas not liable for the death of the bull.

HELD:
A contract of commodatum is essentially gratuitous. If the breeding fee be considered
compensation, then the contract would be a lease of the bull. Under article 1671 of the Civil
Code the lessee would be subject to the responsibilities of a possessor in bad faith because she
had continued possession of the bull after the expiry of the contract. Even if the contract
be commodatum, still Bagtas is liable because article 1942 of the Civil Code provides that a
bailee in a contract of commodatum is liable for loss of the things even if it should be through a
fortuitous event if he keeps it longer than the period stipulated or if the thing loaned has been
delivered with appraisal of its value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event. The loan of one bull was renewed for another period
of one year but Bagtas kept and used the bull more than one year where during a Huk raid it
was killed by stray bullets. Furthermore, when lent and delivered to the deceased husband of
Bagtas, the bulls had each an appraised book value. It was not stipulated that in case of loss of
the bull due to fortuitous event the late husband of the appellant would be exempt from
liability.

03 PRODUCERS BANK OF THE PHILIPPINES vs. COURT OF APPEALS, GR No. 115324

FACTS:
Sometime in 1979, private respondent Franklin Vives, upon request of his friend Angeles
Sanchez and relying on the assurance that he could withdraw his money within a month’s time,
issued a check in the amount of Two Hundred Thousand Pesos in favor of Sterela Marketing and
Services owned by one Col. Arturo Doronilla. Subsequently, private respondent and his wife
found out that Sterela can’t be found on the address previously given to then, so they went to
petitioner Producer’s Bank of the Philippines to verify if their money was still intact. They were
informed that part of the amount had been withdrawn by Doronilla and that the latter
instructed the bank to debit from the savings account the amount and deposit it in his current
account Private respondent filed an action for recovery of sum of money against Doronilla,
Sanchez, Dumagpi and petitioner. The trial court ruled in favour of herein private respondents.
On appeal of the case, the appellate court affirmed the decision of the RTC. Petitioner contends
that the transaction between private respondent and Doronilla is a simple loan (mutuum) since
all the elements of a mutuum are present: first, what was delivered by private respondent to
Doronilla was money, a consumable thing; and second, the transaction was onerous as
Doronilla was obliged to pay interest. Hence, petitioner argues that it cannot be held liable
because it is not privy to the transaction between the latter and Doronilla. Private respondent,
on the other hand, argues that the transaction between him and Doronilla is not a mutuum but
an accommodation, since he did not actually part with the ownership of his P200,000.00 but
retained some degree of control over his money through his wife who was made a signatory to
the savings account and in whose possession the savings account passbook was given.
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HELD:
Supreme Court held that the contract is commodatum. Although in view of Article 1933
of the Civil Code, the object in commodatum is non-consumable, but Article 1936 of the Civil
Code provides “Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.” Thus, if
consumable goods are loaned only for purposes of exhibition or when the intention of the
parties is to lend consumable goods and to have the very same goods returned at the end of
the period agreed upon, the loan is commodatum and not a mutuum. The evidence shows that
private respondent merely "accommodated" Doronilla by lending his money without
consideration, as a favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterela’s savings account and would be
returned to private respondent after thirty (30) days.

04 CAROLYN M. GARCIA vs. RICA MARIE S. THIO, GR. No. 154878, March 16, 2007

FACTS:
Sometime in February 1995, respondent Rica Marie S. Thio received from petitioner
Carolyn M. Garccia a crossed check in the amount of $100,000.00 payable to the order of
Marilou Santiago. Thereafter, Carolyn received from Rica payments of the sum due. In June
1995, Rica received another check in the amount of P500,000.00 from Carolyn and payable to
the order of Marilou. Payments were made by Rica representing interests. There was failure to
pay the principal amount hence a complaint for sum of money with damages was filed by
Carolyn. Rica contended that she had no obligation to petitioner as it was Marilou who was
indebted as she was merely asked to deliver the checks to the latter and that the check
payments she issued were merely intended to accommodate Marilou. The RTC ruled in favor of
Carolyn but the CA reversed on the ground that there was no contract between Rica and
Carolyn as there is nothing in the record that shows that respondent received money from
petitioner and that the checks received by respondent, being crossed, may not be encashed but
only deposited in the bank by the payee thereof, that is, by Marilou Santiago herself.

ISSUE:
Whether or not there was a contract of loan between petitioner and respondent.

HELD:
There Court ruled in the affirmative. 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 of the Civil
Code provides that “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. It is undisputed that the checks were delivered to respondent.
However, these checks were crossed and payable not to the order of respondent but to the
order of a certain Marilou Santiago. The Supreme Court agrees with petitioner that delivery is
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arrangement whereby she actually re-lent the amounts to Santiago. Hence, Rica is the debtor
and not Marilou.

05 COLITO T. PAJUYO vs. COURT OF APPEALS, GR. No. 146364, June 3, 2004

FACTS:
In June 1979, petitioner Colito T. Pajuyo purchased the rights over a property from
Pedro Perez. Thereafter, he constructed a house therein and he and his family lived there.
Later, Pajuyo agreed to let private respondent Eddie Guevarra to live in the house for free
provided that the latter maintain the cleanliness and orderliness of the house. They also agreed
that Guevarra should leave the premises upon demand. Subsequently, when Pajuyo told
Guevarra that he needed the house, Guevarra refused, hence an ejectment case was filed.
Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set aside for socialized housing. The
MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and
not the lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by
tolerance. Thus, Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s
continued possession of the house illegal. Aggrieved, Guevarra appealed to the Regional Trial
Court which only affirmed the MTC decision. At the CA, the latter reversed the RTC decision.
The Court of Appeals ruled that the Kasunduan is not a lease contract but
a commodatum because the agreement is not for a price certain. Since Pajuyo admitted that he
resurfaced only in 1994 to claim the property, the appellate court held that Guevarra has a
better right over the property under Proclamation No. 137. At that time, Guevarra was in
physical possession of the property.

ISSUE:
Whether or not the contract between petitioner and private respondent is one of
commodatum.

HELD:
The Supreme Court held that the contract is not a commodatum. “In a contract of
commodatum, one of the parties delivers to another something not consumable so that the
latter may use the same for a certain time and return it. An essential feature of commodatum is
that it is gratuitous. Another feature is that the use of the thing belonging to another is for a
certain period. Thus, the bailor cannot demand the return of the thing loaned until after the
expiration of the period stipulated, or after accomplishment of the use for which the
commodatum is constituted. If the bailor should have urgent need of the thing, he may demand
its return for temporary use. If the use of the thing is merely tolerated by the bailor, he can
demand the return of the thing at will, in which case the contractual relation is called a
precarium. The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra
was not essentially gratuitous. While the Kasunduan did not require Guevarra to pay rent, it
obligated him to maintain the property in good condition. The imposition of this obligation
makes the Kasunduan a contract different from a commodatum. The effects of
the Kasunduan are also different from that of a commodatum.
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06 QUINTOS vs. BECK, 69 Phil 108

FACTS:
Beck is a tenant of defendant Margarita Quintos. As such, Beck occupied Quintos’
house. Quintos granted Beck the use of the furniture found on the leased house, among these
were three gas heaters and 4 electric lamps, subject to the condition that the defendant would
return them to the plaintiff upon the latter's demand. Quintos sold the pieces of furniture to
Maria Lopez and Rosario Lopez and thereafter notified Beck of the conveyance. Beck informed
Quintos that the latter can get the furniture at the ground floor of the house, however, at a
later date, Beck told Quintos that he will return only the other furniture but not the gas heaters
and the electric lamps as he is to return them only after the expiration of the lease contract.
When the lease contract expires, Beck deposited the furniture to the sheriff’s warehouse.
Quintos refused to get the furniture in view of the fact that the defendant had declined to
make delivery of all of them. Consequently, Quintos brought an action to compel Beck to return
her certain furniture which she lent him for his use. The trial court ruled in favour of Beck
holding that Quintos failed to comply with her obligation to get the furniture when they were
offered to her. On appeal of the case, the Court of First Instance of Manila affirmed the lower
court’s decision. Hence, this petition.

ISSUE:
Whether or not the trial court erred in ruling that Quintos failed to comply with her
obligation to get the furniture when they were offered to her.

HELD:
The contract entered into between the parties is one of commadatum. Under it the
plaintiff gratuitously granted the use of the furniture to the defendant, reserving for herself the
ownership thereof. By this contract the defendant bound himself to return the furniture to the
plaintiff, upon the latter’s demand. The obligation voluntarily assumed by the defendant to
return the furniture upon the plaintiff's demand, means that he should return all of them to the
plaintiff at the latter's residence or house. The defendant did not comply with this obligation
when he merely placed them at the disposal of the plaintiff, retaining for his benefit the three
gas heaters and the four electric lamps. The trial court, therefore, erred when it came to the
legal conclusion that the plaintiff failed to comply with her obligation to get the furniture when
they were offered to her.

07 FRIAS vs. SAN DIEGO-SISON, GR. No. 155223, April 4, 2007

FACT:
Petitioner Bobie Rose V. Frias owned a house and lot which she acquired from Island
Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of Sale. She entered
into a MOA with respondent Flora San Diego-Sison. In the MOA, they had agreed among others
that in the event that on the 6thmonth of the 6-month period to purchase land, respondent would
decide not to purchase, the petitioner has a period of another 6 months to pay P3M provided
that the said amount shall earn compounded bank interest for the last six months only.
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respondent and orders the payment of P2M plus compounded interest at 32% interest per
annum pursuant to the MOA. Petitioner appeals to CA. The CA affirms RTC decision with
modification with regard to the interest from32% to 25%. Petitioner opposed to the said decision
contending that the interest is contrary to the parties’ Memorandum of Agreement; that the
agreement provides that if respondent would decide not to purchase the property, petitioner
has the period of another six months to pay the loan with compounded bank interest for the
last six months only; that the CA’s ruling that a loan always bears interest otherwise it is not a
loan is contrary to Art. 1956 of the New Civil Code which provides that no interest shall be due
unless it has been expressly stipulated in writing.

ISSUE:
Whether or not the compounded bank interest should be limited to six months as
contained in the MOA.

HELD:
The agreement stipulated in the MOA that the amount given shall bear compounded bank
interest for the last six months only (referring to the second six-month period), does not mean
that interest will no longer be charged after the second six-month period since such stipulation
was made on the logical and reasonable expectation that such amount would be paid within
the date stipulated. Considering that the petitioner failed to pay the amount given which under
the MOA shall be considered as a loan, the monetary interest for the last six months continued
to accrue until the actual payment of the loaned amount. The payment of regular interest
constitutes the price or cost of the money use 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.

08 LIGUTAN vs. COURT OF APPEALS, GR. No. 138677, February 12, 2002

FACTS:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan from private
respondent Security Bank and Trust Company. Petitioners executed a promissory note to pay
the sum loaned with an interest of 15.189% per annum upon maturity and to pay a penalty of
5% every month on the outstanding principal and interest in case of default. On maturity of the
obligation, petitioners failed to settle the debt despite several demands from the bank.
Consequently, the bank filed a complaint for recovery of the due amount. After trial of the case,
the Trial court ruled in favour of the Bank, ordering petitioners to pay the respondent the sum
of P114,416.00 with interest thereon at the rate of 15.189% per annum and 5% per month
penalty charge among others. On appeal of the case, petitioners prayed for the reduction of the
5% stipulated penalty for being unconscionable. The Court of Appeals ruled that in the interest
of justice and public policy, a penalty of 3% per month or 36% per annum would suffice. But
still, petitioners dispute the said decision.

ISSUE:
Whether or not the 15.189% interest and the penalty of three (3%) percent per month
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HELD:
The question of whether a penalty is reasonable or iniquitous can be partly subjective
and partly objective. Its resolution would depend on such factors as, but not necessarily
confined to, the type, extent and purpose of the penalty, the nature of the obligation, the mode
of breach and its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound discretion
of the court. The essence or rationale for the payment of interest is not exactly the same as
that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of interest.
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.
The Court of Appeals, exercising its good judgment in the instant case, has rightly reduced the
penalty interest from 5% a month to 3% a month.

09 GSIS vs. COURT OF APPEALS, GR. No. L-52478, October 20, 1986

FACTS:
In 1961, herein private respondents spouses Nemencio R. Medina and Josefina G.
Medina applied with the herein petitioner Government Service Insurance System for a loan of
P600,000.00. The approved loan amount was only P350,000.00 at the rate of interest of 9% per
annum compounded monthly and the rate of 9%/12% per month for any installment or
amortization that remains due and unpaid. The approved loan amount was further reduced to
P295,000.00. The Medinas accepted the reduced amount and executed a promissory note and
a real estate mortgage in favor of GSIS. Subsequently, upon application by the Medinas, the
GSIS approved an additional loan of P230,000.00 on the security of the same mortgaged
properties to bear interest at 9% per annum compounded monthly and repayable in ten years.
However, in 1965, the Medinas defaulted in the payment of the monthly amortization on their
loan despite several demands from petitioner. Hence, the GSIS imposed 9%/12% interest on
instalments that are due and unpaid. The Medinas opposed to this contending that the interest
rates on the loan accounts are usurious. After trial of the case, the trial court ordered the
Medinas full payment of their obligation to the GSIS plus interest at 9% per annum. Aggrieved,
the Medinas appealed before the Court of Appeals but the latter affirmed the lower court’s
decision.

ISSUE:
Whether or not the interest rates on the loan accounts of respondent-appellee Medina
spouses are usurious.

HELD:
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 that “if the obligation consists in
the payment of a sum of money, and the debtor incurs in delay, the indemnity for damages,
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and distinct things which may be demanded separately. The stipulation about payment of such
additional rate partakes of the nature of a penalty clause, which is sanctioned by law.

10 EASTERN SHIPPING LINES, INC. vs. CA, GR. No. 97412, July 12, 1994

FACTS:
Two fiber drums of riboflavin were shipped from Yokohama, Japan on board the vessel
owned by herein petitioner Eastern Shipping Lines. When it arrives in Manila, it was put unto
the custody of Metro Port Service, Inc. The latter excepted to one drum which is said to be in
bad order and which damage was unknown to Eastern Shipping Lines. Later, Allied Brokerage
Corporation received the shipment from Metro Port Service, Inc. With one drum damaged,
Allied Brokerage Corporation made deliveries to the consignee's warehouse. The latter
excepted to one drum that is damaged. Eastern Shipping Lines averred that due to the one
drum that is damaged and due to the fault and negligence of Metro Port Service, Inc. and Allied
Brokerage Corporation, the consignee suffered losses. The two failed and refused to pay the
claims for damages. Consequently, Eastern Shipping Lines was compelled to pay the consignee
being subrogated to all the rights of action of said consignee against Metro Port Service, Inc.
and Allied Brokerage Corporation. Trial ensued and on appeal of the case, the appellate court
affirmed the decision of the trial court ordering Metro Port Service and Allied Brokerage to pay
Eastern Shipping Lines, jointly and severally, the amount of P19,032.95, with the present legal
interest of 12% per annum from the date of filing of the complaints, until fully paid. Metro Port
Service and Allied Brokerage opposed especially as to the payment of interest contending that
the legal interest on an award for loss or damage should be 6% in view of Article 2209 of the
Civil Code.

ISSUE:
Whether or not the payment of legal interest on an award for loss or damage is twelve
percent (12%) or six percent (6%).

HELD:
Article 2209 of the New Civil Code provides that 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. 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:
1. When the obligation is breached, and it consists in the payment of a sum 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 12% per annum to be computed from
default 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
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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 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.

11 SIGA-AN vs. VILLANUEVA, GR. No. 173227, January 20, 2009

FACTS:
Herein respondent Alicia Villanueva is engaged in supplying office materials and
equipments to the Philippine Navy Office (PNO) where herein Sebastian Siga-an works as a
military officer and comptroller. Villanueva alleged that Siga-an offered to loan her the amount
of P540,000.00. Having needed capital for her business transactions with the PNO, Villanueva
accepted petitioner’s proposal. The loan agreement was not reduced in writing and there was
no stipulation as to the payment of interest for the loan. Villanueva issued two checks worth
P500,000.00 and P200,000.00. Siga-an wanted to apply the payment of P540,000.00 to the
principal amount and the excess amount of P160,000.00 would be applied for the interest. He
demanded from Villanueva to pay additional interest with a threat to block or disapprove her
transactions with the PNO if she would not comply with his demand thus respondent paid
additional amounts as interests for the loan. Villanueva asked Siga-an for receipt but petitioner
refused to give as it was not necessary as there was mutual trust and confidence between
them. The total amount paid by Villanueva totalled P1,200,000.00. When Villanueva was
advised by her lawyer that she made an overpayment, she sent a demand letter to Siga-an
asking for the return of the excess amount of P660,000.00. Siga-an just ignored Villanueva’s
claim for reimbursement. Hence, Villanueva instituted a complaint for sum of money against
herein petitioner Sebastian Siga-an. After trial of the case, the Trial Court ordered petitioner
Siga-an to refund the excess amount to Villanueva pursuant to the principle of solutio indebiti.
On appeal of the case, the appellate court affirmed the decision of the RTC. Petitioner filed a
motion for reconsideration but this was denied. Hence, the instant petition.

ISSUE:
Whether or not there was interest due to petitioner.

HELD:
There was no interest due to petitioner. 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. Payment of monetary interest is allowed only if there was an
express stipulation for the payment of interest; and 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, the collection of interest without any stipulation therefore in writing is
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case because it was not duly proven that respondent defaulted in paying the loan. Also, as
earlier found, no interest was due on the loan because there was no written agreement as
regards payment of interest.

12 CARPO vs. CHUA & DY NG, GR. Nos. 150773 & 153599, September 30, 2005

FACTS:
Herein petitioner spouses David Carpo and Rechilda Carpo contracted a loan from
Eleanor Chua and Elma Dy Ng for a certain sum of money payable within six (6) months with an
interest rate of six percent (6%) per month secured by a mortgaged of the spouses Carpo of
their residential house and lot. Petitioners failed to pay the loan upon demand. Consequently,
the real estate mortgage was extrajudicially foreclosed, mortgaged property sold at a public
auction, and the house and lot was awarded to respondents, who were the only bidders.
Unable to exercise their right of redemption by petitioners, a certificate of sale was issued in
the name of respondents. However, petitioners continued to occupy the said house and lot,
thus respondents file a petition for writ of possession which was granted by the Trial Court.
Petitioners filed a complaint for annulment of real estate mortgage and the consequent
foreclosure proceedings claiming that the rate of interest stipulated in the principal loan
agreement is clearly null and void for being excessive, iniquitous, unconscionable and
exorbitant. Consequently, they also argue that the nullity of the agreed interest rate affects the
validity of the real estate mortgage.

ISSUE:
Whether or not the agreed rate of interest of 6% per month or 72% per annum is so
excessive, iniquitous, unconscionable and exorbitant that it should have been declared null and
void.

HELD:
In a long line of cases, the Supreme Court has invalidated similar stipulations on interest
rates for being excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom
of contract principle embodied in Article 1306 of the Civil Code, contracting parties may
establish such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public policy. In
the ordinary course, the codal provision may be invoked to annul the excessive stipulated
interest. In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set by jurisprudence, this stipulation is similarly invalid.

13 MACALINAO V. BPI, 600 SCRA 67

FACTS:
Petitioner Ileana Macalinao defaulted on the payment of her BPI credit card dues. There
was a stipulation in a contract that the charges and/or balance shall earn 3% per month and
additional penalty fee of another 3% per month. The Regional Trial Court reduced the 3%
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are not invalid per se. Petitioner assailed the appellate court’s decision alleging that the interest
rate and penalty charges are unconscionable and iniquitous at 36% per annum.

ISSUE:
Whether or not the interest rate and penalty charges are unconscionable and iniquitous
at 36% per annum.

HELD:
The interest rate and penalty charges are unconscionable and iniquitous at 36% per
annum. The Supreme Court held that the interest rate and penalty charge of 3% per month or
the 36% per annum should be reduced to 2% per month or 24% per annum. In a long line of
cased decided by the Supreme Court, it considered the 36% per annum to be excessive and
unconscionable. Citing Article1229, in exercising this power to determine what is iniquitous and
unconscionable; courts must consider the circumstances of each case since what may be
iniquitous and unconscionable in one maybe totally just and equitable in another. In the
instant case, Macalinao made partial payments to BPI .Therefore, the interest rate and penalty
charge of 3% per month or 36% per annum should be reduced to 2% per month or 24% per
annum.

14 ARTHUR F. MENCHAVEZ V. MARLYN M. BERMUDEZ

FACTS:
Petitioner Arthur Menchavez (Menchavez) and Marlyn Bermudez (Bermudez) entered
into a loan agreement covering the amount of PhP500,000.00 with interest fixed at 5% per
month or 60% per annum as evidenced by a promissory note executed by Bermudez.
Thereafter, Menchavez entered into a verbal compromise agreement with Bermudez
regarding the delay in payment and the accumulated interest. Under the agreement, Bermudez
would deliver eleven (11) postdated checks as payment. When Menchavez presented the
checks for payment, eight (8) of these checks were dishonored for having been drawn against
insufficient funds.
Thus, Menchavez filed a case for B.P. 22 before the MeTC. The MeTC acquitted
Bermudez. The MeTC ruled that Bermudez had already paid the sum of PhP 925,000, or PhP
425,000 over the PhP 500,000 loan.
Menchavez appealed the civil aspect of the case to the RTC. The RTC partially granted
the petition. On appeal, the RTC was reversed by the CA.
Hence, this petition. Menchavez argues that aside from the original loan agreement,
Bermudez should also pay the amounts of the checks covered in the compromise agreement.
He also avers that Bermudez voluntarily agreed to pay the 5% interest per month; hence, the
same is valid.

ISSUES:
I. Whether or not the obligation based on the compromise agreement is separate and
independent from Bermudezs original loan obligation?
II. Whether or not the 5% per month stipulated interest is valid?
 12

CIVIL LAW: unjust enrichment; unconscionable interest; freedom of the parties to stipulate
FIRST ISSUE: It cannot be argued that there are two separate validly subsisting
obligations to be fulfilled by Bermudez.
It is beyond cavil that if a party fails or refuses to abide by a compromise agreement, the
other party may either enforce the compromise or regard it as rescinded and insist upon his
original demand. To allow petitioner to recover under the terms of the compromise agreement
and to further seek enforcement of the original loan transaction would constitute unjust
enrichment. The compromise agreement was entered into precisely to extinguish the obligation
under the loan transaction, not to create two sources of obligation for respondent. There is
unjust enrichment under Article 22 of the Civil Code when (1) a person is unjustly benefited;
and (2) such benefit is derived at the expense of or with damages to another.
SECOND ISSUE: The 60% per annum interest rate cannot be countenanced.
Castro v. Tan is instructive. The Court, in said case, tagged the 5% monthly interest rate
agreed upon as "excessive, iniquitous, unconscionable and exorbitant, contrary to morals, and
the law."
Parties may be free to contract and stipulates as they see fit, but that is not an absolute
freedom. Art. 1306 of the Civil Code provides. "The contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy." While petitioner harps on
the voluntariness with which the parties agreed upon the 5% per month interest rate,
voluntariness does not make the stipulation on interest valid. The 5% per month, or 60% per
annum, rate of interest is, indeed, iniquitous, and must be struck down.
Petition is DENIED.

15 DARIO NACAR V. GALLERY FRAMES AND/OR FELIPE BORDEY, JR.

FACTS:
On October 15, 1998, the Labor Arbiter rendered a Decisionin favor of petitioner and
found that he was dismissed from employment without a valid or just cause. Thus, petitioner
was awarded backwages and separation pay in lieu of reinstatement in the amount
ofP158,919.92.
Respondents appealed to the NLRC, but it was dismissed for lack of merit. Accordingly,
the NLRC sustained the decision of the Labor Arbiter. Respondents filed a motion for
reconsideration, but it was denied. Dissatisfied, respondents filed a Petition for Review on
Certiorari before the CA but it was likewise denied. Respondents then sought relief before the
Supreme Court. Finding no reversible error on the part of the CA, this Court denied the petition
in the Resolution dated April 17, 2002.
An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002. The case was, thereafter, referred back to the Labor Arbiter for
execution. Petitioner filed a Motion for Correct Computation, praying that his backwages be
computed from the date of his dismissal on January 24, 1997 up to the finality of the Resolution
of the Supreme Court on May 27, 2002. Upon recomputation, the Computation and
Examination Unit of the NLRC arrived at an updated amount in the sum ofP471,320.31.
Respondents filed a Motion to Quash Writ of Execution, arguing, among other things,
 13

that after the decision becomes final and executory, the same cannot be altered or amended
anymore. LA denied the motion but the decision was reversed by the NLRC on appeal.
Petitioner appealed to the CA but was denied, stating that since petitioner no longer
appealed the October 15, 1998 Decision of the Labor Arbiter, which already became final and
executory, a belated correction thereof is no longer allowed. The CA stated that there is
nothing left to be done except to enforce the said judgment. Consequently, it can no longer be
modified in any respect, except to correct clerical errors or mistakes. Thus, petitioner filed this
petition for review on certiorari.

ISSUE:
Whether or not a re-computation in the course of execution of the labor arbiter's
original computation of the awards made is legally proper.

HELD:
Yes.
Labor Law- computation of backwages
A source of misunderstanding in implementing the final decision in this case proceeds
from the way the original labor arbiter framed his decision. The decision consists essentially of
two parts.
The first is that part of the decision that cannot now be disputed because it has been
confirmed with finality. This is the finding of the illegality of the dismissal and the awards of
separation pay in lieu of reinstatement, backwages, attorney's fees, and legal interests. The
second part is the computation of the awards made.
Clearly implied from this original computation is its currency up to the finality of the
labor arbiter's decision. As we noted above, this implication is apparent from the terms of the
computation itself, and no question would have arisen had the parties terminated the case and
implemented the decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all counts - i.e., on
the finding of illegality as well as on all the consequent awards made. Hence, the petitioner
appealed the case to the NLRC which, in turn, affirmed the labor arbiter's decision. By law, the
NLRC decision is final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on jurisdictional
grounds through a timely filed Rule 65 petition for certiorari. The CA decision, finding that NLRC
exceeded its authority in affirming the payment of 13th month pay and indemnity, lapsed to
finality and was subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal dismissal
portion of the original labor arbiter's decision, the implementing labor arbiter ordered the
award re-computed; he apparently read the figures originally ordered to be paid to be the
computation due had the case been terminated and implemented at the labor arbiter's level. It
was at this point that the present case arose. Focusing on the core illegal dismissal portion of
the original labor arbiter's decision, the implementing labor arbiter ordered the award re-
computed; he apparently read the figures originally ordered to be paid to be the computation
due had the case been terminated and implemented at the labor arbiter's level.
Thus, the labor arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the case on the merits.
 14

deleted - specifically, the proportionate 13th month pay and the indemnity awards. Hence, the
CA issued the decision now questioned in the present petition.
We see no error in the CA decision confirming that a re-computation is necessary as it
essentially considered the labor arbiter's original decision in accordance with its basic
component parts as we discussed above. To reiterate, the first part contains the finding of
illegality and its monetary consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of the labor arbiter's
original decision.
By the nature of an illegal dismissal case, the reliefs continue to add up until full
satisfaction, as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute an
alteration or amendment of the final decision being implemented. The illegal dismissal ruling
stands; only the computation of monetary consequences of this dismissal is affected, and this is
not a violation of the principle of immutability of final judgments. That the amount respondents
shall now pay has greatly increased is a consequence that it cannot avoid as it is the risk that it
ran when it continued to seek recourses against the Labor Arbiter's decision.
CA Decision reversed and set aside.

16 BANK OF THE PHILIPPINE ISLANDS VS IAC, 164 SCRA 630

FACTS:
Arthur and Vivienne Canlas opened a joint current account in CBTC now Bank of the
Philippine Islands. However, the bank teller erroneously placed the old account number of Mr.
Canlas on the new account. Consequently, the subsequent deposits made by the spouses
Canlas were not reflected in the new account. It was found out only when a check issued by
Viviene was dishonored due to insufficiency of funds. Thus, the spouses Canlas instituted a suit
for damages. The bank on the other hand alleged that it should not be held liable merely on
account of the inadvertence of its employees.

ISSUE:
Whether or not the Bank of the Philippine Islands is liable.

HELD:
The Supreme Court ruled in the affirmative. There is no merit in petitioner's argument
that it should not be considered negligent, much less held liable for damages on account of the
inadvertence of its bank employee for Article 1173 of the Civil Code only requires it to exercise
the diligence of a good father of family. The bank is not expected to be infallible but it must
bear the blame for not discovering the mistake of its teller despite the established procedure
requiring the papers and bank books to pass through a battery of bank personnel whose duty it
is to check and countercheck them for possible errors. Apparently, the officials and employees
tasked to do that did not perform their duties with due care.
 15

17 BISHOP OF JARO VS DELA PENA, 26 Phil 144

FACTS:
In 1898, Fr. Agustin Dela Pena deposited in his personal account a sum of money
entrusted to him for the construction of a leper hospital. Thereafter, Father De la Peña was
arrested by the military authorities as a political prisoner. While under detention, Fr. Dela Pea
made an order on said bank in favor of the United States Army officer under whose charge he
was then for the sum thus deposited in said bank. The arrest of Father De la Peña and the
confiscation of the funds in the bank were the result of the claim of the military authorities that
he was an insurgent and that the funds thus deposited had been collected by him
for revolutionary purposes. The money was taken from the bank by the military authorities by
virtue of such order and was turned over to the Government.

ISSUE:
Whether or not Father de la Peña is liable for the loss of the money under his trust.

HELD:
The Supreme Court ruled in the negative. Father De la Peña's liability is determined by
those portions of the Civil Code which relate to obligations. Although the Civil Code states that
"a person obliged to give something is also bound to preserve it with the diligence pertaining to
a good father of a family". It also provides, following the principle of the Roman law, major
casus est, cui humana infirmitas resistere non potest, that "no one shall be liable for events
which could not be foreseen, or which having been foreseen were inevitable, with the
exception of the cases expressly mentioned in the law or those in which the obligation so
declares."

18 TRIPLE-V FOOD SERVICES INC. vs. FILIPINO MERCHANTS INSURANCE COMPANY, GR. No.
160554, February 21, 2005

FACTS:
Mary Jo-Anne De Asis dined at petitioner's Kamayan Restaurant. De Asis was using a
Mitsubishi Galant Super Saloon Model 1995 issued by her employer Crispa Textile Inc.. On said
date, De Asis availed of the valet parking service of petitioner and entrusted her car key to
petitioner's valet counter. Afterwards, a certain Madridano, valet attendant, noticed that the
car was not in its parking slot and its key no longer in the box where valet attendants usually
keep the keys of cars entrusted to them. The car was never recovered. Thereafter, Crispa filed a
claim against its insurer, herein respondent Filipino Merchants Insurance Company, Inc. Having
indemnified Crispa for the loss of the subject vehicle, FMICI, as subrogee to Crispa's rights, filed
with the RTC at Makati City an action for damages against petitioner Triple-V Food Services, Inc.
Petitioner claimed that the complaint failed to adduce facts to support the allegations of
recklessness and negligence committed in the safekeeping and custody of the subject vehicle.
Besides, when De Asis availed the free parking stab which contained a waiver of petitioner’s
liability in case of loss, she had thereby waived her rights.
 16

HELD:
The Supreme Court ruled in the affirmative. 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. Petitioner cannot evade liability by arguing
that neither a contract of deposit nor that of insurance, guaranty or surety for the loss of the
car was constituted when De Asis availed of its free valet parking service.

19 CA AGRO-INDUSTRIAL DEVELOPMENT CORP. VS CA, 291 SCRA 426

FACTS:
Petitioner CA Agro-Industrial Development Corp. and the spouses Ramon and Paula
Pugao rented a Safety Deposit Box Security Bank and Trust Company. Certificates of title of
parcels of land were then stored therein. Thereafter, a certain Mrs. Margarita Ramos offered to
buy two lots from petitioner. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the Bank to open the safety deposit box and
get the certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. By virtue of which, petitioner filed an
action against the bank for the loss. The bank, however, contended that they are not liable for
the loss because, aside from the waiver signed by the petitioner, what transpired between
them is a contract of lease and not deposit.

ISSUE:
Whether or not 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.

HELD:
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, the Court 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. 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.

20 YHT REALTY CORPORATION VS. CA, GR. No. 126780, February 17, 2005
 17

would stay in Tropicana Inn which is owned by YHT Realty Corp. After series of transactions
with the inn as depositary of his belongings, he noticed that his money and several jewelries
would be either reduced or lost. He then decided to file an action against Tropicana and its inn-
keepers. However, the latter argued that they have no liability with regard to the loss by virtue
of the undertaking signed by Mcloughlin. Such undertaking is a waiver of the inn’s liability in
case of any loss. The RTC and CA both decided that such undertaking is null and void as contrary
to the express provisions of the law. Hence, the petition.

ISSUE:
Whether or not the subject undertaking is null and void

HELD:
The court ruled in the affirmative. Art. 2003 of the Civil Code provides that, 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.

21 E.ZOBEL INC. vs. COURT OF APPEALS, GR. No. 113931, May 6, 1998

FACT:
Private respondent spouses Raul and Elea Claveria, doing business under the name
"Agro Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) to finance the purchase of two maritime barges and one tugboat which
would be used in their molasses business. The loan was granted subject to the condition that
respondent spouses will execute a chattel mortgage over the three vessels to be acquired and
that a continuing guarantee be executed by Ayala International Philippines, Inc., now petitioner
E. Zobel, Inc. in favor of SOLIDBANK. Respondent spouses defaulted in the payment of the
entire obligation upon maturity. Hence, SOLIDBANK filed a complaint for sum of money with a
prayer for a writ of preliminary attachment against respondent spouses and petitioner.
Petitioner moved for dismissal. The trial court denied the motion to dismiss and required
petitioner to file an answer. Petitioner assailed the trial court’s order. The appellate court
dismissed the petition.

ISSUE:
Whether or not petitioner E. Zobel Inc., under the continuing guaranty obligated itself to
SOLIDBANK as a guarantor or a surety.

Held:
Petitioner under the continuing guaranty obligated itself to SOLIDBANK as a surety. A
surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the
debtor and thus binds himself to pay if the principal is unable to pay, it is the guarantor's own
separate undertaking, in which the principal does not join while a surety is the insurer of the
debt, and he obligates himself to pay if the principal does not pay and is usually bound with his
 18

severally to the obligation with the respondent spouses. The use of the term "guarantee" does
not ipso facto mean that the contract is one of guaranty. Authorities recognize that the word
"guarantee" is frequently employed in business transactions to describe not the security of the
debt but an intention to be bound by a primary or independent obligation. The trial court has
observed that the interpretation of a contract is not limited to the title alone but to the
contents and intention of the parties.

22 INTERNATIONAL FINANCE CORP. vs. IMPERIAL TEXTILE MILLS INC. GR. No. 160324, Nov.
15, 2005

FACTS:
Petitioner International Finance Corporation (IFC) and respondent Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement wherein IFC extended to PPIC a
loan payable in 16 semi-annual installments with interest at the rate of 10% per annum on the
principal amount of the loan advanced and outstanding from time to time. A guarantee
agreement was executed with Imperial Textile Mills, Inc. (ITM), Grand Textile Manufacturing
Corporation (Grandtex) and IFC as parties. ITM and Grandtex agreed to guarantee PPIC’s
obligations under the loan agreement. There was a reschedule of payments as requested by
PPIC. Despite the rescheduling of the installment payments, however, PPIC defaulted. Hence,
IFC served a written notice of default to PPIC demanding the latter to pay the outstanding
principal loan and all its accrued interests. Despite such notice, PPIC failed to pay the loan and
its interests. IFC, together with DBP, applied for the extrajudicial foreclosure of mortgages on
the real estate, buildings, machinery, equipment plant and all improvements owned by PPIC.
IFC and DBP were the only bidders during the auction sale. PPIC failed to pay the remaining
balance, thus, IFC demanded ITM and Grandtex, as guarantors of PPIC, to pay the outstanding
balance. However, despite the demand made by IFC, the outstanding balance remained
unpaid. Consequently, IFC filed a complaint against PPIC and ITM for the payment of the
outstanding balance plus interests and attorney’s fees. The trial court held PPIC liable for the
payment of the outstanding loan plus interests and attorney’s fees. However, the trial court
relieved ITM of its obligation as guarantor. On appeal of the case, the Court of Appeals reversed
the decision of the trial court. The CA, however, held that ITM’s liability as a guarantor would
arise only if and when PPIC could not pay. Since PPIC’s inability to comply with its obligation
was not sufficiently established, ITM could not immediately be made to assume the liability.
Hence, this petition.

Issue:
Whether or not ITM is a surety, and thus solidarily liable with PPIC for the payment of
the loan.

Held:
ITM is a surety, and thus solidarily liable with PPIC for the payment of the loan. As
Article 2047 provides, a suretyship is created when a guarantor binds itself solidarily with the
principal obligor. While referring to ITM as a guarantor, the agreement specifically stated that
the corporation was “jointly and severally” liable. It further stated that ITM was a primary
 19

the law characterizes as a suretyship. Therefore, ITM bound itself to be solidarily liable with
PPIC for the latter’s obligations under the loan agreement with IFC.

23 PHIL. BLOOMING MILLS INC. vs. CA., GR. No. 142381, Oct. 15, 2003

FACTS:
Petitioner Philippine Blooming Mills, Inc. (PBM) obtained a loan from Traders Royal Bank
(TRB). Ching, the Senior Vice-President of PBM, signed Deed of Suretyship in his personal
capacity and not as mere guarantors but as primary obligors. PBM and Ching filed a petition
for suspension of payments with the SEC, and eventually placed under rehabilitation
receivership. Consequently, TRB dismissed complaint as to PBM. Ching then alleged that the
Deed of Suretyship executed in 1977 could not answer for obligations not yet in existence at
the time of its execution. It could not answer for debts contracted by petitioner PBM in 1980
and 1981. No accessory contract of suretyship could arise without an existing principal
contract of loan.

Issue:
Whether or not Ching is liable for credit obligations contracted by Philippine Blooming
Mills Inc. against Traders Royal Bank before and after the execution of the Deed of Suretyship.

Held:
Ching is liable for credit obligations contracted by Philippine Blooming Mills Inc. against
Traders Royal Bank before and after the execution of the Deed of Suretyship. This is evident
from the tenor of the deed itself, referring to amounts to PBM may now be indebted or may
hereafter become indebted to Traders Royal Bank. The law expressly allows a suretyship for
future debts. Article 2053 provides that a guaranty may also be given as security for future
debts, the amount of which is not yet known, there can be no claim against the guarantor until
the debt is liquidated.

24 ESCANO and SILOS vs. ORTIGAS, Jr., GR. No. 151953, June 29, 2007

FACTS:
Private Development Corporation of the Philippines (PDCP) entered into a loan
agreement with Falcon Minerals, Inc. whereby PDCP agreed to make available and lend to
Falcon a sum certain. Respondent Rafael Ortigas, Jr., et al., stockholder officers of Falcon,
executed an Assumption of Solidary Liability whereby they agreed to assume in their individual
capacity, solidary liability with Falcon for the due and punctual payment of the loan contracted
by Falcon with PDCP. Two separate guaranties were executed to guarantee the payment of the
same loan by other stockholders and officers of Falcon, acting in their personal and individual
capacities. One Guaranty was executed by petitioner Salvador Escaño, while the other by
petitioners Mario M. Silos, Ricardo C. Silverio, et al. Two years later, an agreement developed to
cede control of Falcon to Escaño, Silos and Joseph M. Matti. Thus, contracts were executed
whereby Ortigas, George A. Scholey, Inductivo and the heirs of then already deceased George
 20

those related to the loan with PDCP. Thus, an Undertaking was executed by the concerned
parties with Escaño, Silos and Matti identified in the document as “sureties,” on one hand, and
Ortigas, Inductivo and the Scholeys as “obligors,” on the other. However, Falcon subsequently
defaulted in its payments. After PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,000,000, which Falcon did not satisfy despite demand. In order to
recover the indebtedness, PDCP filed a complaint for sum of money against Falcon, Ortigas,
Escaño, Silos, Silverio and Inductivo. Ortigas filed together with his answer a cross-claim against
his co-defendants Falcon, Escaño and Silos, and also manifested his intent to file a third-party
complaint against the Scholeys and Matti. The cross-claim lodged against Escaño and Silos was
predicated on the 1982 Undertaking, wherein they agreed to assume the liabilities of Ortigas
with respect to the PDCP loan. Escaño, Ortigas and Silos each sought to seek a settlement with
PDCP. The first to come to terms with PDCP was Escaño, who entered into a compromise
agreement. In exchange, PDCP waived or assigned in favor of Escaño 1/3 of its entire claim in
the complaint against all of the other defendants in the case. Then Ortigas entered into his own
compromise agreement with PDCP, allegedly without the knowledge of Escaño, Matti and Silos.
Thereby, Ortigas agreed to pay PDCP P1.3M as full satisfaction of the PDCP’s claim against
Ortigas. Silos and PDCP entered into a Partial Compromise Agreement whereby he agreed to
pay P500k in exchange for PDCP’s waiver of its claims against him. In the meantime, after
having settled with PDCP, Ortigas pursued his claims against Escaño, Silos and Matti, on the
basis of the 1982 Undertaking. He initiated a third-party complaint against Matti and Silos,
while he maintained his cross-claim against Escaño. RTC issued the Summary Judgment,
ordering Escaño, Silos and Matti to pay Ortigas, jointly and severally, the amount of P1.3M, as
well as P20K in attorney’s fees. The trial court ratiocinated that none of the third-party
defendants disputed the 1982 Undertaking.

ISSUE:
Whether or not petitioners are solidarily liable to respondent Ortigas.

Held:
Petitioners are not solidarily liable to respondent Ortigas. In case there is a concurrence
of two or more creditors or of two or more debtors in one and the same obligation, Article 1207
of the Civil Code states that among them, there is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires solidarity.” Article
1210 supplies further that the indivisibility of an obligation does not necessarily give rise to
solidarity. Nor does solidarity of itself imply indivisibility. Thus, the presumption is that the
obligation is only joint. It thus becomes incumbent upon the party alleging that the obligation is
indeed solidary in character to prove such fact with a preponderance of evidence. 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.
Ortigas, as the party alleging that the obligation is in fact solidary, bears the burden to
overcome the presumption of jointness of obligations. He has failed to discharge such burden.
The term “surety” has a specific meaning under our Civil Code. 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
 21

obligations established in the Undertaking do partake of the nature of a suretyship as defined

under Article 2047 in the first place. That clearly is not the case here, notwithstanding the use
of the nomenclature “sureties” in the Undertaking.

25 TUPAZ IV and TUPAZ v. CA and BPI, GR. No. 145578, Nov. 18, 2005

FACTS:
Petitioners Jose Tupaz IV and Petronila Tupaz were Vice-President for Operations and
Vice-President/Treasurer, respectively, of El Oro Engraver Corporation. El Oro Corporation had
a contract with the Philippine Army to supply the latter with survival bolos. Petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Island for two
commercial letters of credit to finance the purchase of the raw materials for the survival bolos.
The letters of credit were in favor of El Oro Corporation’s suppliers, Tanchaoco Manufacturing
Incorporated and Maresco Rubber and Retreading Corporation. Respondent bank granted
petitioners’ application and issued two letters of credit. Simultaneously, petitioners signed trust
receipts in favor of respondent bank. On September 30, 1981, petitioner Jose Tupaz signed, in
his personal capacity, a trust receipt corresponding to one letter of credit while on October 9,
1981, both petitioners signed, in their capacities as officers of El Oro Corporation, a trust
receipt corresponding to the other. After Tanchaoco Incorporated and Maresco Corporation
delivered the raw materials to El Oro Corporation, respondent bank paid the former. When
petitioners did not comply with their undertaking under the trust receipts after respondent
bank’s several demands, the latter charged petitioners with estafa under the Trust Receipts
Law. The trial court acquitted petitioners of estafa on reasonable doubt however it found
petitioners solidarily liable with El Oro Corporation for the balance of El Oro Corporation’s
principal debt under the trust receipts. Petitioners appealed to the Court of Appeals contending
that their acquittal operates to extinguish their civil liability and so they are not personally liable
for El Oro Corporation’s debts. The Court of Appeals affirmed the trial court’s ruling. Hence, this
petition.

ISSUE:
Whether or not petitioners are solidarily liable with El Oro Corporation.

HELD:
In the trust receipt dated 9 October 1981, petitioners signed as officers of El Oro
Corporation. By so signing that trust receipt, petitioners did not bind themselves personally
liable for El Oro Corporation’s obligation. Hence, for the trust receipt dated 9 October 1981,
petitioners are not personally liable for El Oro Corporation’s obligation. For the trust receipt
dated 30 September 1981, petitioner Jose Tupaz signed alone in his personal capacity, he did
not indicate that he was signing as El Oro Corporation’s Vice-President for Operations. Hence,
petitioner Jose Tupaz bound himself personally liable for El Oro Corporation’s debts. Not being
a party to the trust receipt dated 30 September 1981, petitioner Petronila Tupaz is not liable
under such trust receipt.
 22

26 Development Bank of the Philippines vs. Court of Appeals

Facts:
Private respondent Lydia Cuba is a grantee of a fishpond lease agreement from the
Government. She later obtained a loan from DBP in the amounts of P109, 000, P109, 000, and
P98, 700 under the terms stated in the three promissory notes. As a security for the said loan
Cuba executed a two Deed of Assignment of her Leasehold Rights. Then she failed to pay her
loan when it became due in accordance with the terms of the promissory notes. DBP in turn
appropriated the leasehold rights of Cuba over the fishpond, without foreclosure proceedings,
whether judicial or extrajudicial. After appropriating the said leasehold rights DBP executed a
Deed of Conditional Sale of the Leasehold Rights in favor of respondent Cuba over the same
fishpond, to which Cuba agreed. Respondent Cuba failed to pay the amortizations stipulated in
the Deed of Conditional Sale, however she was able enter with DBP a temporary arrangement
with DBP for the Deferment Notarial Rescission of Deed of Conditional Sale. However, a Notice
of Rescission thru Notarial Act was sent the DBP to Cuba, then it took possession of the
fishpond in question. After it took possession of the said fishpond, DBP disposed the property in
favor of Agripina Caperal through a deed of conditional sale. Then a new fishpond lease
agreement was awarded by the Government to Caperal.
Lydia Cuba filed an action with the Regional Trial Court of Pangasinan for the declaration
of nullity of DBP’s appropriation of her leaseholds over the subject fishpond, for the annulment
of the Deed of Conditional Sale executed in her favor by DBP, the annulment of DBP’s sale of
the fishpond to Caperal, and the restoration of her rights over the said fishpond and for
damages. The RTC ruled in favor of Cuba, declaring that DBP’s taking possession and ownership
of the subject property without foreclosure was violative of Art. 2088 of the Civil Code, and that
condition No. 12 of the Assignment of the Leasehold Rights was void for being a clear case of
pactum commissorium.
Both Cuba and DBP elevated the case to the CA, with Cuba seeking an increase in the
amount of damages, while DBP questioned the findings of fact and law of the RTC. The CA
reversed the ruling of the RTC with regards to the validity of the acts of DBP.

Issues:
1. Whether or not the two Deed of Assignment executed by Cuba in favor of DBP would
operate as a mortgage or some other contract.
2. Whether or not condition No. 12 of the Assignment of the Leasehold Rights would
operate as case of pactum commissorium
3. Whether the act of DBP in appropriating to itself Cuba’s leasehold rights over the
fishpond in question without foreclosure proceeding was contrary to Article 2088 of the
Civil Code, and therefore, invalid.

Held:
1. Lydia executed the 2 Deeds of Assignment as a security for the loans that she obtained
from DBP, according the case of People’s Bank and Trust Co. vs. Odom an assignment
to guaranty an obligation is in effect a mortgage. And it was also indicated in the
provisions of the promissory note executed by Cuba, that the her assigned leasehold
rights were referred to as mortgaged properties and the instrument itself a mortgage
 23

leasehold rights over the subject fishpond, because condition No. 12 only gave DBP the
authority to sell the said property and use the proceeds of the sale to satisfy Cuba’s
obligation, it did not operate as an automatic transfer of ownership of the said property to
DBP.
However, DBP exceeded its authority granted under condition No. 12, when it appropriated
for itself such rights without judicial or extrajudicial foreclosure, thereby making his acts
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.

27 Bustamante vs Rosel Digest

FACTS:
Respondent Rosel entered into a loan agreement with petitioner spouses Bustamante
wherein the latter borrowed P100,000 payable in 2 years. To guarantee payment, the spouses
put as collateral 70 sq m of their lot inclusive of the apartment therein. In the event of
borrowers default, contract states the lender has the option to buy or purchase the collateral
for P200,000.
When the loan was about to mature on March 1, 1989, respondents proposed to buy
the said portion at the pre-set price. Petitioners, however, refused and requested for extension
of time to pay the loan. On the due date, petitioners tendered payment of the loan to
respondents which the latter refused to accept. On March 4, 1990, respondents sent a demand
letter asking petitioner to sell the collateral pursuant to the option to buy embodied in the loan
agreement. Prior to that, they filed with the RTC an action for specific performance in February.
Issue: Is the respondent justified in compelling petitioners to sell the portion of the lot pursuant
to the stipulation in the loan?

HELD:
No as doing so is tantamount to pactum commissorium. The elements of pactum
commissorium are as follows: (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.
In this case, 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.

28 SPOUSES WILFREDO N. ONG AND EDNA SHEILA PAGUIO-ONG v. ROBAN LENDING

CORPORATION
FACTS:
In a true dacion en pago, the assignment of the property extinguishes the monetary
debt.
 24

Later Spouses Ong and Roban executed several agreements – an amendment to the
amended Real Estate Mortgage which consolidated their loans amounting to P5, 916,117.50;
dacion in payment wherein spouses Ong assigned their mortgaged properties to Roban to settle
their total obligation and Memorandum of Agreement (MOA) in which the dacion in payment
agreement will be automatically enforced in case spouses Ong fail to pay within one year from
the execution of the agreement.
Spouses Ong filed a complaint before Regional Trial Court of Tarlac City to declare the
mortgage contract, dacion in payment agreement, and MOA void. Spouses Ong allege that the
dacion in payment agreement is pactum commissorium, and therefore void. In its Answer with
counterclaim, Roban alleged that the dacion in payment agreement is valid because it is a
special form of payment recognized under Article 1245 of the Civil Code. RTC ruled in favor of
Roban, finding that there was no pactum commissorium. The Court of Appeals upheld the RTC
decision.

ISSUE:
Whether or not the dacion in payment agreement entered into by Spouses Ong and
Roban constitutes pactum commissorium

HELD:
The Court finds that the Memorandum of Agreement and Dacion in Payment constitute
pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides
that 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.
The elements of pactum commissorium, which enables the mortgagee to acquire
ownership of the mortgaged property without the need of any foreclosure proceedings, are: (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 automaticappropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation within the stipulated
period.
Here, Memorandum of Agreement and the Dacion in Payment contain no provisions
for foreclosureproceedings nor redemption. Under the Memorandum of Agreement, 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 TCT
No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon
Spouses Ong’s failure to pay their debt within the stipulated period.
In a true dacion en pago, the assignment of the property extinguishes the monetary
debt.
Here, 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 Spouses Ong’s obligation to
Roban. On the contrary, under the Memorandum of Agreement executed on the same day as
the Dacion in Payment, petitioners had to execute a promissory note for P5, 916, 117.50 which
they were to pay within one year EDMUNDO T.
 25

29 Manila Banking vs Teodoro

FACTS:
Defendants, together with Anastacio Teodoro, Sr., jointly and severally, executed in
favor of plaintiff a promissory note for the sum of P10,420. Defendants failed to pay the said
amount inspite of repeated demands and the obligation as of September 30, 1969 stood at P
15,137.11. The defendants executed in favor of plaintiff two PNS for P8,000 and P1,000. They
made partial payments but none were paid, leaving an unpaid balance of P8,934.74 as of
September 30, 1969 including.
It appears that the Son executed in favor of plaintiff a Deed of Assignment of
Receivables from the Emergency Employment Administration in the sum of P44,635.00. The
Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts and other credit accommodations extended to defendants as security for the
payment of said sum and the interest thereon, and that defendants do hereby remise, release
and quitclaim all its rights, title, and interest in and to the accounts receivables. Further, title to
the AR is to remain in the assignee.
Plaintiff extended loans to defendants on the basis and by reason of certain contracts
entered into by the defunct Emergency Employment Administration (EEA) with defendants for
the fabrication of fishing boats, and that the Philippine Fisheries Commission succeeded the
EEA after its abolition; that non-payment of the notes was due to the failure of the Commission
to pay defendants after the latter had complied with their contractual obligations; and that the
President of the Bank took steps to collect from the Commission, but no collection was
effected.
The action was instituted against the defendants for the collection of sum on the PNs.
The trial court rendered judgment adverse to the defendants.

ISSUE:
WON the assignment of receivables has the effect of payment of all the loans

HELD:
No

RATIO:
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. ... It may be in the form of a sale, but at
times it may constitute a dation in payment, such as when a debtor, in order to obtain a release
from his debt, assigns to his creditor a credit he has against a third person, or it may constitute
a donation as when it is by gratuitous title; or it may even be merely by way of guaranty, as
when the creditor gives as a collateral, to secure his own debt in favor of the assignee, without
transmitting ownership. The character that it may assume determines its requisites and effects.
its regulation, and the capacity of the parties to execute it; and in every case, the obligations
between assignor and assignee will depend upon the judicial relation which is the basis of the
 26

that the assignment of receivables executed did not transfer the ownership of the receivables
to appellee bank and release appellants from their loans with the bank incurred under the PNs.
The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations in the sum of P10,000.00 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. 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 the PNs which are the subject of the suit for collection in Civil Case
No. 78178. At the time the deed of assignment was executed, said loans were non-existent yet.
The deed of assignment was executed on January 24, 1964, while promissory note No. 11487 is
dated April 25, 1966, promissory note 11515, dated May 3, 1966, promissory note 11699, on
June 20, 1966. At most, it was a dation in payment for P10,000.00, the amount of credit from
appellee bank indicated in the deed of assignment. At the time the assignment was executed,
there was no obligation to be extinguished except the amount of P10,000.00. Moreover, in
order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations
be on every point incompatible with each other (Article 1292 CC).
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. In case of doubt as to whether a transaction
is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests.

30 Medida vs. Court of Appeals and Sps. Dolino

FACTS:
Private respondents, Spouses Dolino, alarmed of losing their right of redemption over
the subject parcel of land from Juan Gandiocho, purchaser of the aforesaid lot at a foreclosure
sale of the previous mortgage in favor of Cebu City Development Bank, went to Teotimo
Abellana, President of the City Savings Bank (formerly known as Cebu City Savings and Loan
Association, Inc.), to obtain a loan of P30, 000. Prior thereto, their son Teofredo filed a similar
loan application and the subject lot was offered as security. Subsequently they executed a
promissory note in favor of CSB.
The loan became due and demandable without the spouses Dolino paying the same,
 27

which was also registered. No redemption was being effected by Sps. Dolino, their title to the
property was cancelled and a new title was issued in favor of CSB.
Sps. Dolino then filed a case to annul the sale at public auction and for the cancellation
of certificate of sale issued pursuant thereto, alleging that the extrajudicial foreclosure sale was
in violation of Act 3135, as amended. The trial court sustained the validity of the loan and the
real estate mortgage, but annulled the extrajudicial foreclosure on the ground that it failed to
comply with the notice requirement of Act 3135.
Not satisfied with the ruling of the trial court, Sps. Dolino interposed a partial appeal to
the CA, assailing the validity of the mortgage executed between them and City Savings Bank,
among others. The CA ruled in favor of private respondents declaring the said mortgage as void.
ISSUE:
Whether or not a mortgage, whose property has been extrajudicially foreclosed and
sold at a corresponding foreclosure sale, may validly execute a mortgage contract over the
same property in favor of a third party during the period of redemption.

HELD:
It is undisputed that the real estate mortgage in favor of petitioner bank was executed
by respondent spouses during the period of redemption. During the said period it cannot be
said that the mortgagor is no longer the owner of the foreclosed property since the rule up to
now is the right of a purchaser of a foreclosure sale is merely inchoate until after the period of
redemption has expired without the right being exercised. The title to the land sold under
mortgage foreclosure remains in the mortgagor or his grantee until the expiration of the
redemption period and the conveyance of the master deed.
The mortgagor remains as the absolute owner of the property during the redemption
period and has the free disposal of his property, there would be compliance with Article. 2085
of the Civil Code for the constitution of another mortgage on the property. To hold otherwise
would create an inequitable situation wherein the mortgagor would be deprived of the
opportunity, which may be his last recourse, to raise funds to timely redeem his property
through another mortgage.

31 HUERTA ALBA RESORT INC V. COURT OF APPEALS

Facts
 SMGI (“Respondents”) filed a complaint for judicial foreclosure of mortgage on Oct 19,
1989
o They sought to foreclose 4 parcels of land mortgaged by Huerta (“petitioner”) to
Intercon Fund Resource Inc (Intercon)
o Respondent instituted this as mortgagee-assignee (Intercon assigned their rights
at some point.)
o The loan was P8.5M, secured by the subject parcels of land.
 In its answer, petitioner questioned
o Assignment of Intercon of the mortgage right (they said it was ultra vires)
o The correctness of charges.
 Petitioner lost and was ordered to pay the loan, plus interest and charges, within 150
 28

 After these rulings, respondent filed with the original RTC a motion of execution, which
was granted.
o Thus, a notice of levy and execution was issued by the Sheriff
o He issued a notice of Sheriff’s sale for the auction of subject properties.
 Petitioner then filed a motion to quash and set aside the writ of execution, saying that
the trial court acted with GAD.
 It argued that the record of the case was still with the CA, and thus the writ was
premature
o The 150 days period had not yet lapsed
o There was no default because respondent had not yet demanded for payment.
 RTC denied this, saying that the judgment had become final and executor
o Execution thereof was a matter of right
o Writ of execution thus was its ministerial duty
 Guess what? Petitioner appealed to the CA.
 While the appeal was pending, the auction sale proceeded and Respondent won the
bidding.
o The certificate of sale was issued to it, and registered with the RoD.
 After this, petitioner presented a “motion for clarification,” asking the trial court if the
12 month period for redemption would apply
o RTC ruled that the period of redemption would have to follow the rule on
judicially foreclosed property (see Rule 68)
o [The sale] shall operate to divest the rights in the property of all the parties to
the action and to vest their rights in the purchaser, subject to such rights of
redemption as may be allowed by law.
 Thus, petitioner filed a motion to set aside this order, saying that it altered the earlier
decision
o First decision declared that satisfaction of judgment would be governed by the
sale of real estate under execution (not Rule 68).
 Remember the CA? All this happened while the case was pending there, diba? They held
that the 150 day period of redemption should be computed from the date of
notification of entry of judgment – thus, it had expired on Sept. 11, 1994.
o The appeal was dismissed because the subject was already moot and academic.
 They also dismissed the MR
o Even if it is true that Sec 78 of RA 337 (mentioned above) prescribes a period of
one year from the auction sale to redeem the property, petitioner never averred
in its pleadings that it was entitled to this provision
 Issue of whether SMGI was a credit institution was never brought
squarely before the court.
 SMGI then filed a petition for writ of possession – it was here that Huerta first claimed
the right to redeem under the General Banking Act
o Original mortgagee, they said, was a credit institution, and the assignment to
SMGI did not remove the transaction from the coverage of Sec 78 of RA 337.
o Thus, they should have one year to redeem from registration of the auction sale.
o Thus, they said, the issuance of titles to SMGI was premature.
 RTC denied the petition for writ of possession – they agreed (for the first time EVER)
 29

Issue
 w/n Huerta has the one year right of redemption under Sec 78 of RA 337 – No.

Held
 Various decisions show that Huerta has been adjudged to have only the Equity of
Redemption, not the Right of Redemption (Court cited Limpin v. IAC)
o Right of Redemption – exists only in extrajudicial mortgage.
 No right recognized in judicial foreclosure unless mortgagee is PNB or a
banking institution
 Mortgagor has one year from registration of sheriff’s certificate of sale to
redeem the property.
o This does not exist in judicial foreclosure of the mortgagee is not a banking
institution
 The case here is mentioned above (Rule 68).
 What exists only now is the Equity of Redemption – right of the
mortgagor to extinguish the mortgage and retain ownership by paying
the debt within the 90 day period after judgment becomes final.
 Rule 68, Sec 2 – [court] shall render judgment for the sum so
found due and order the same to be paid into court within a
period of not less than ninety (90) days from the date of the
service of such order, and that in default of such payment the
property be sold to realize the mortgage debt and costs.'
 This is the equity of redemption – it may even be exercised beyond the
90 day period from date of service of the order, as long as its before the
order of confirmation of the sale. (After such order of confirmation, there
is no more redemption possible)
 Petitioner did not seasonably invoke its purported right under Sec 78 of RA 337
o Earliest opportunity – when it submitted its answer to the complaint for
foreclosure (essentially, they should have filed a counterclaim).
 What is a Counterclaim? (in case he asks)
o A cause of action existing in favor of the defendant against the plaintiff.
o It will, if established, defeat/qualify the judgment or relief to which the plaintiff
is entitled.
o Distinct/independent cause of action
o Defendant, in respect to the counterclaim, becomes an actor
 There exist 2 simultaneous actions, each party is at the same time a
plaintiff and a defendant
 Represents the right of the defendant to have the claims of the parties
counterbalanced
 Counterclaim is essentially an independent action, and should be treated
as such. (tested by the same rules, etc.)
 The point? – Huerta should have asserted their right under Sec 78 of RA 337 as a
counterclaim in its answer.
o Counterclaims allow the whole controversy between parties to be disposed of in
 30

 Was Intercon a credit institution? – this was never squarely brought

before the court.
 The claim of benefits under Sec 78 is in the nature of a compulsory
counterclaim that should have been in the answer to the complaint.
 Failure of Huerta to assert this alleged right precludes it from doing so at the late stage
of litigation
o Estoppel may successfully be invoked.
o A party who failed to invoke his claim in the main case, while having opportunity
to do so, will be precluded from invoking this claim subsequently.
o Huerta should have alleged at the very start that Intercon was a credit
institution, in order for Sec 78 to apply.
32 SPS. ESMERALDO AND ELIZABETH SUICO vs. PHILIPPINE NATIONAL BANK AND HON.
COURT OF APPEALS

FACTS:
1. Spouses Suico obtained a loan from PNB secured by a real estate mortgage on real
properties in the name of the former.
2. Sps. Suico failed to pay the obligation prompting PNB to extrajudicially foreclose the
mortgage over the subject properties.
3. Petitioners, thereafter filed a complaint alleging that the extrajudicial foreclosure
conducted and the Certificate of Sale and the Certificate of Finality sale are null and
void;
a. During the foreclosure sale, PNB was the lone bidder.
b. The amount of bid is P8,511,000.00.
c. Petitioners alleged that the outstanding obligation is only P1,991,770.38.
d. Since the amount of the bid grossly exceeded the amount of petitioners’
outstanding obligation as stated in the extrajudicial foreclosure of mortgage, it
was the legal duty of the winning bidder, PNB, to deliver to the Mandaue City
Sheriff the bid price or what was left thereof after deducting the amount of
petitioners’ outstanding obligation.
e. PNB failed to deliver the amount of their bid to the Mandaue City Sheriff or, at
the very least, the amount of such bid in excess of petitioners’ outstanding
obligation.
4. PNB moved to dismiss citing the pendency of another action between the same
properties where PNB was seeking payment of the balance of petitioner’s obligation not
covered by the proceeds of the auction sale.
5. RTC denied the Motion to Dismiss.
6. PNB asserted, in its answer, that petitioners had other loans which had likewise become
due. PNB maintained that the outstanding obligation of the petitioners under their
regular and export- related loans was already more than the bid price of P8,511,000.00,
contradicting the claim of surplus proceeds due the petitioners. Petitioners were well
aware that their total principal outstanding obligation on the date of the auction sale
was P5,503,293.21.
7. RTC – declared the extrajudicial foreclosure null and void.
a. RTC reasoned that given that petitioners had other loan obligations which had
 31

excess bid in the foreclosure sale. To allow PNB to do so would constitute fraud,
for not only is the filing fee in the said foreclosure inadequate but, worse, the
same constitutes a misrepresentation regarding the amount of the indebtedness
to be paid in the foreclosure sale as posted and published in the notice of
sale.[11] Such misrepresentation is fatal because in an extrajudicial foreclosure of
mortgage, notice of sale is jurisdictional. Any error in the notice of sale is fatal
and invalidates the notice.
8. CA – reversed.
a. Petitioners offered to redeem the properties several times from 6.5M to 7.5M.
b. All those offers made by the [petitioners] not only contradicted their very
assertion that their obligation is merely that amount appearing on the petition
for foreclosure but are also indicative of the fact that they have admitted the
validity of the extra judicial foreclosure proceedings and in effect have cured the
impugned defect.
c. Even assuming that indeed there was a surplus and the [PNB] is retaining more
than the proceeds of the sale than it is entitled, this fact alone will not affect the
validity of the sale but simply gives the [petitioners] a cause of action to recover
such surplus.
d. Such failure of PNB does not constitute jurisdictional defect.

ISSUE:
Whether or not the extrajudicial foreclosure is valid.

HELD:
YES
Petitioners argue that since the Notice of Sheriff’s Sale stated that their obligation was
only P1,991,770.38 and PNB biddedP8,511,000.00, the said Notice as well as the consequent
sale of the subject properties were null and void.
It is true that statutory provisions governing publication of notice of mortgage
foreclosure sales must be strictly complied with, and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable.
Nonetheless, we must not also lose sight of the fact that the purpose of the publication
of the Notice of Sheriff’s Sale is to inform all interested parties of the date, time and place of
the foreclosure sale of the real property subject thereof.
Logically, this not only requires that the correct date, time and place of the foreclosure
sale appear in the notice, but also that any and all interested parties be able to determine that
what is about to be sold at the foreclosure sale is the real property in which they have an
interest.
Notices are given for the purpose of securing bidders and to prevent a sacrifice of the
property. If these objects are attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which are
calculated to deter or mislead bidders, to depreciate the value of the property, or to prevent it
from bringing a fair price, such mistakes or omissions will be fatal to the validity of the notice,
and also to the sale made pursuant thereto.
Petitioners failed to convince this Court that the difference between the amount stated
 32

Considering the amount of PNB’s bid of P8,511,000.00 as against the amount of the
petitioners’ obligation of P1,991,770.38 in the Notice of Sale, is the PNB obliged to deliver the
excess? YES.
Section 21 of Rule 39 emphasized that if the amount of loan is equal to the bid, there is
no need to pay the amount in cash. Same provision mandates that in the absence of a third-
party claim, the purchaser in an execution sale need not pay his bid if it does not exceed the
amount of the judgment; otherwise, he shall pay only the excess.
The ratio is that it would be senseless for the Sheriff conducting the foreclosure sale to
go through the ceremony of receiving money and giving it back to the creditor.
Under Rule 68, Section 4, the disposition of the proceeds of the sale in foreclosure shall
be as follows:
(a) first, pay the costs
(b) secondly, pay off the mortgage debt
(c) thirdly, pay the junior encumbrancers, if any in the order of priority
(d) fourthly, give the balance to the mortgagor, his agent or the person
entitled to it.
Based on the foregoing, after payment of the costs of suit and satisfaction of the
claim of the first mortgagee/senior mortgagee, the claim of the second
mortgagee/junior mortgagee may be satisfied from the surplus proceeds. The
application of the proceeds from the sale of the mortgaged property to the mortgagor’s
obligation is an act of payment, not payment by dacion; hence, it is the mortgagee’s
duty to return any surplus in the selling price to the mortgagor.
Perforce, a mortgagee who exercises the power of sale contained in a mortgage
is considered a custodian of the fund and, being bound to apply it properly, is liable to
the persons entitled thereto if he fails to do so. And even though the mortgagee is not
strictly considered a trustee in a purely equitable sense, but as far as concerns the
unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of
the equity of redemption.
Thus it has been held that if the mortgagee is retaining more of the proceeds of
the sale than he is entitled to, this fact alone will not affect the validity of the sale but
simply give the mortgagor a cause of action to recover such surplus.
Given that the Statement of Account from PNB, being the only existing
documentary evidence to support its claim, shows that petitioners’ loan obligations to
PNB as of 30 October 1992 amounted to P6,409,814.92, and considering that the
amount of PNB’sbid is P8,511,000.00, there is clearly an excess in the bid price which
PNB must return, together with the interest computed in accordance with the
guidelines laid down by the court in Eastern Shipping Lines v. Court of Appeals.
6% interest – from the time of filing the complaint
12% interest – once the judgment becomes final and executory.
It must be emphasized, however, that our holding in this case does not preclude PNB
from proving and recovering in a proper proceeding any deficiency in the amount of
petitioners’ loan obligation that may have accrued after the date of the auction sale.

33 ACME SHOE RUBBER AND PLASTIC CORP V. CA

 33

Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic
Corporation, executed a chattel mortgage in favor of Producers Bank of the Philippines, as a
security for a corporate loan in the amount of P3M. The chattel mortgage contained a clause
that provided for the mortgage to stand as security for all other obligations contracted before,
during and after the constitution of the mortgage.
The P3M was paid. Subsequently, the corporation obtained additional financial
accommodations totalling P2.7M. This was also paid on the due date. Again, the bank extended
another loan to the corporation in the amount of P1M, covered by four promissory notes.
However, the corporation was unable to pay this at maturity. Thereupon, the bank applied for
an extra-judicial foreclosure of mortgage.
For its part, the corporation filed an action for injunction with prayer for damages. The
lower court ultimately dismissed the case and ordered the extra-judicial foreclosure of
mortgage. Hence, this appeal.
ISSUE:
W/N extra-judicial foreclosure of the chattel mortgage is proper
If not proper, W/N the corporation is entitled to damages as a result of the extra-judicial
foreclosure

HELD:
Contracts of Security
Contracts of security are either personal or real. In contracts of personal security, such
as a guaranty or suretyship, the faithful performance of the obligation by the principal debtor is
secured by the personal commitment of another (the guarantor or surety). In contracts of real
security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an
encumbrance of property -- in pledge, the placing of movable property in the possession of the
creditor; in chattel mortgage by the execution of the corresponding and substantially in teh
form prescribed by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and thereafter to the
principal of his credit -- upon the essential condition that if the obligation becomes due and the
debtor defaults, then the property encumbered can be alienated for the payment of the
obligation, but that should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character of the agreement. As the law so puts it,
once the obligation is complied with, then the contract of security becomes, ipso facto, null and
void.
After-incurred Obligations
While a pledge, real estate mortgage, or antichresis may exceptionaly secure after-
incurred obligations so long as these future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the mortgage is constituted. Although
a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be
a binding commitment that can be compelled upon, the security itself, however, does not come
into existence or arise until after a chattel mortgage agreement covered the newly contracted
debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the Chattel Mortgage Law. Refusal on the part of borrower to execute the
 34

the remedy of foreclosure can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be foreclosed.
In the case at bar, the chattel mortgage was terminated when payment for the P3M
loan was made so there was no chattel mortgage to even foreclose at the time the bank
instituted the extra-judicial foreclosure.
Damages
In its complaint, the corporation asked for moral damages sustained "as a result of the
unlawful action taken by the respondent bank against it." The court said –
"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having existence
only in legal contemplation, has no feelings, no emotions, no senses; therefore it cannot
experience physical suffering and mental anguish. Mental suffering can be experienced only by
one having a nervous system and it flows from real ills and sorrows and griefs of life -- all of
which cannot be suffered by respondent bank as an artificial person.
"Although Chua Pac was included in the case, he was only so named as a party in
representation of the corporation."

34 PEOPLE’S BANK & TRUST COMPANY & ATLANTIC GULF AND PACIFIC CO. OF MANILA V.
DAHICAN LUMBER COMPANY, ET AL., (1967)

FACTS:
As security for the payment of the loans, DALCO executed in favor of the BANK a deed
of mortgage covering 5 parcels of land together with all the buildings and other improvements
existing thereon and all the personal properties of the mortgagor located in its place of
business. DALCO executed a second mortgage on the same properties in favor of ATLANTIC to
secure payment of the unpaid balance of the sale price of the lumber concession. Both deeds
contained the following provision extending the mortgage lien to properties to be subsequently
acquired — referred to hereafter as "after acquired properties" — by the mortgagor:
DALCO failed to pay. After the date of execution of the mortgages, DALCO purchased
various machineries, equipment, spare parts and supplies. Pursuant to the provision of the
mortgage deeds quoted theretofore regarding "after acquired properties," the BANK requested
DALCO to submit complete lists of said properties but the latter failed to do so. ATLANTIC and
the BANK, commenced foreclosure proceedings against DALCO and DAMCO.
ATLANTIC and the BANK: that the "after acquired properties" were subject to the deeds
of mortgage.
DALCO and DAMCO: the mortgages were null and void as regards the "after acquired
properties" of DALCO because they were not registered in accordance with the Chattel
Mortgage Law, hence said properties were subject to the mortgage lien in favor of plaintiffs.

ISSUE:
Are the so-called "after acquired properties" covered by and subject to the deeds of
mortgage subject of foreclosure? YES.
Assuming that they are subject thereto, are the mortgages valid and binding on the
 35

Defendants DALCO and DAMCO contend that, granting without admitting, that the
deeds of mortgage in question cover the "after acquired properties" of DALCO, the same are
void and ineffectual because they were not registered in accordance with the Chattel Mortgage
Law. In support of this and of the proposition that, even if said mortgages were valid, they
should not prejudice them, the defendants argue (1) that the deeds do not describe the
mortgaged chattels specifically, nor were they registered in accordance with the Chattel
Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof constitutes
"mere executory agreements to give a lien" over the "after acquired properties" upon their
acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should
not prejudice creditors and other third persons such as DAMCO and CONNELL.

HSELD:
The stipulation under consideration strongly belies defendants contention. As adverted
to hereinbefore, it states that all property of every nature, building, machinery etc. taken in
exchange or replacement by the mortgagor "shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included therein".
No clearer language could have been chosen.
Registration of the chattel mortgage
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third
persons, a chattel mortgage must be registered and must describe the mortgaged chattels or
personal properties sufficiently to enable the parties and any other person to identify them, We
say that such law does not apply to this case.
Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by owner of
the tenement for an industry or works which may be carried on in a building or on a piece of
land, and shall tend directly to meet the needs of the said industry or works.
It is not disputed in the case at bar that the "after acquired properties" were purchased
by DALCO in connection with, and for use in the development of its lumber concession and that
they were purchased in addition to, or in replacement of those already existing in the premises.
In Law, therefore, they must be deemed to have been immobilized, with the result that the
REMs involved herein — which were registered as such — did not have to be registered a
second time as chattel mortgages in order to bind the "after acquired properties" and affect
third parties.
What We have said heretofore sufficiently disposes all the arguments adduced by
defendants in support their contention that the mortgages under foreclosure are void, and,
that, even if valid, are ineffectual as against DAMCO and CONNELL.
Right to rescind the sales
Now to the question of whether or not DAMCO CONNELL have rights over the "after
acquired properties" superior to the mortgage lien constituted thereon in favor of plaintiffs. It is
defendants' contention that in relation to said properties they are "unpaid sellers"; that as such
they had not only a superior lien on the "after acquired properties" but also the right to rescind
the sales thereof to DALCO.
This contention — it is obvious — would have validity only if it were true that DAMCO
and CONNELL were the suppliers or vendors of the "after acquired properties". The most that
can be claimed on the basis of the evidence is that DAMCO and CONNELL probably financed
 36

execution of the rescission of sales mentioned heretofore appears to be but a desperate

attempt to better or improve DAMCO and CONNELL's position by enabling them to assume the
role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties".
The attempt, of course, is utterly ineffectual, not only because they are not the "unpaid sellers"
they claim to be but also because there is abundant evidence in the record showing that both
DAMCO and CONNELL had known and admitted from the beginning that the "after acquired
properties" of DALCO were meant to be included in the first and second mortgages under
foreclosure.
As regard the proceeds obtained from the sale of the of after acquired properties" and
the "undebated properties", it is clear, in view of our opinion sustaining the validity of the
mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs
in payment of the money obligations secured by the mortgages under foreclosure.

35 MAKATI LEASING AND FINANCE CORPORATION V. WEAREVER TEXTILE MILLS

122 SCRA 296

FACTS:
To be able to secure financial accommodations from the petitioner, the private
respondent discounted and assigned several receivables under a Receivable Purchase
Agreement. To secure the collection of the receivables, a chattel mortgage was executed
over machinery found in the factory of the private respondent.
As the private respondent failed to pay, the mortgage was extrajudicially foreclosed.
Nonetheless, the sheriff was unable to seize the machinery. This prompted petitioner to
file an action for replevin.
The CA reversed the decision of the trial court and ordered the return of the drive
motor, after ruling that the machinery may not be the subject of a chattel mortgage, given that
it was an immovable under the provisions of Article 415. The same was attached to the ground
by means of bolts and the only way to remove it from the plant would be to drill the ground.

HELD:
There is no logical justification to exclude the rule out that the machinery may be
considered as personal property, and subject to a chattel mortgage. If a house may be
considered as personal property for purposes of executing a chattel mortgage, what more a
machinery, which is movable by nature and
becomes immobilized only by destination or purpose, may not be likewise treated as such.

36 PERFECTO DY, JR. petitioner, vs. COURT OF APPEALS, GELAC TRADING INC., and ANTONIO
V. GONZALES, Respondents.

FACTS:
Wilfredo Dy purchased a truck and a farm tractor through LIBRA which was also
mortgaged with the latter, as a security to the loan.
Petitioner, expresses his desire to purchased his brother’s tractor in a letter to LIBRA
 37

When petitioner finally fulfilled its obligation to pay the tractor, LIBRA would only
release the same only if he would also pay for the truck. In order to fulfill LIBRA’s condition,
petitioner convinced his sister to pay for the remaining truck, to which she released a check
amounting to P22,000. LIBRA however, insisted that the check must be first cleared before it
delivers the truck and tractor.
Meanwhile, another case penned “Gelac Trading Inc vs. Wilfredo Dy” was pending in
Cebu as a case to recover for a sum of money (P12,269.80). By a writ of execution the court in
Cebu ordered to seize and levy the tractor which was in the premise of LIBRA, it was sold in a
public auction to which it was purchased by GELAC. The latter then sold the tractor to Antonio
Gonzales.
RTC rendered in favor of petitioner.
CA dismissed the case, alleging that it still belongs to Wilfredo Dy.

ISSUE:
Whether or not there was a consummated sale between Petitioner and LIBRA?

HELD:
NO. The mortgagor who gave the property as security under a chattel mortgage did not
part with the ownership over the same. He had the right to sell it although he was under the
obligation to secure the written consent of the mortgagee. And even if no consent was
obtained from the mortgagee, the validity of the sale would still not be affected.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by
the vendee from the moment it is delivered to him in any of the ways specified in Articles 1497
to 1501 or in any other manner signing an agreement that the possession is transferred from
the vendor to the vendee. In the instant case, actual delivery of the subject tractor could not be
made. However, there was constructive delivery already upon the execution of the public
instrument pursuant to Article 1498 and upon the consent or agreement of the parties when
the thing sold cannot be immediately transferred to the possession of the vendee.
The payment of the check was actually intended to extinguish the mortgage obligation
so that the tractor could be released to the petitioner. It was never intended nor could it be
considered as payment of the purchase price because the relationship between Libra and the
petitioner is not one of sale but still a mortgage. The clearing or encashment of the check which
produced the effect of payment determined the full payment of the money obligation and the
release of the chattel mortgage. It was not determinative of the consummation of the sale. The
transaction between the brothers is distinct and apart from the transaction between Libra and
the petitioner. The contention, therefore, that the consummation of the sale depended upon
the encashment of the check is untenable.

37 SERVICEWIDE SPECIALIST IN V. COURT OF APPEALS

FACTS:
1. Leticia Laus purchased on credit a Colt Galant xxx from Fortune Motors (Phils.)
Corporation and executed a promissory note for the amount of P56,028.00, inclusive of 12%
annual interest, payable within a period of 48 months. In case of default in the payment of any
installment, the total principal sum, together with the interest, shall become immediately due
 38

mortgage rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit Corporation
with the consent of the mortgagor-debtor Laus.
3. Filinvest in turn assigned the credit in favor of Servicewide Specialists, Inc.
4. Laus failed to pay the monthly installment for April 1977 and the succeeding 17
months. Servicewide demanded payment of the entire outstanding balance with interests
but Laus failed to pay despite formal demands.
5. As a result of Laus’ failure to settle her obligation, or at least to surrender possession
of the motor vehicle for foreclosure, Servicewide instituted a complaint for replevin, impleading
Hilda Tee and John Dee in whose custody the vehicle was believed to be at the time of the filing
of the suit. Plaintiff alleged, among others, that it had superior lien over the mortgaged vehicle.
The court approved the replevin bond.
6. Alberto Villafranca filed a third party claim contending that he is the absolute owner
of the subject motor vehicle after purchasing it from a certain Remedios Yang free from all lien
and emcumbrances; and that on July 1984, the said automobile was taken from his residence
by Deputy Sheriff Bernardo Bernabe pursuant to the seizure order issued by the court a quo.
7. Upon motion of the plaintiff below, Villafranca was substituted as defendant
and summons was served upon him. Villafranca moved for the dismissal of the complaint on
the ground that there is another action pending between the same parties before the Makati
RTC. The court granted the the motion but subsequently set aside the order of dismissal.
For failure to file his Answer as required by the court a quo, Villafranca was declared in default
and plaintiff’s evidence was received ex parte.
8. The lower court later on dismissed the complaint for insufficiency of evidence. Its
motion for reconsideration having been denied, petitioner appealed to CA on the ground that a
suit for replevin aimed at the foreclosure of a chattel is an action quasi in rem, and does not
require the inclusion of the principal obligor in the Complaint.
9. CA affirmed the RTC decision. It also denied petitioner’s MR, hence, the present
petition for review on certiorari under Rule 45.

ISSUE:
W/N a case for replevin may be pursued against the defendant, Alberto Villafranca,
without impleading the absconding debtor-mortgagor

HELD:
No. Rule 60 of the Revised Rules of Court requires that an applicant for replevin must
show that he “is the owner of the property claimed, particularly describing it, or is entitled to
the possession thereof.” Where the right of the plaintiff to the possession of the specified
property is so conceded or evident, the action need only be maintained against him who so
possesses the property. In rem action est per quam rem nostram quae ab alio possidetur
petimus, et semper adversus eum est qui rem possidet.
However, in case the right of possession on the part of the plaintiff, or his authority to
claim such possession or that of his principal, is put to great doubt (a contending party may
contest the legal bases for plaintiff’s cause of action or an adverse and independent claim of
ownership or right of possession may be raised by that party), it could become essential to
have other persons involved and impleaded for a complete determination and resolution of
the controversy.
 39

possession is conditioned upon the actual fact of default which itself may be controverted, the
inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to
allow a full and conclusive determination of the case. Laus, being an indispensable party, should
have been impleaded in the complaint for replevin and damages. An indispensable party is one
whose interest will be affected by the court’s action in the litigation, and without whom no final
determination of the case can be had. Petition DENIED.

38 PAMECA Wood Treatment Plant, Inc. v. Court of Appeals

FACTS:
PAMECA loaned P2M from DBP and executed a promissory note, secured by its
inventory of furniture and equipment. PAMECA defaulted thus DBP extrajudicially foreclosed on
the chattels. DBP was the only bidder so it was able to buy said property for P322K.
Subsequently for the deficiency, it filed a complaint against PAMECA and its solidary debtors,
according to the promissory note it signed.

ISSUE:
Whether an action be instituted for deficiency of a debt after foreclosure of the chattel
mortgage.

RULING:
Yes. Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage
Law bars the creditor-mortgagee from retaining the excess of the sale proceeds, there is a
corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a
reduction in the price at public auction.

39 RCBC V. ROYAL CARGO CORP.

FACTS:
Terrymanila Inc. filed a petition for voluntary insolvency with RTC of Bataan. One of its
creditors was RCBC (P3M secured by chattel mortgage)
Royal Cargo Corporation, another creditor of Terrymanila, filed an action before the RTC
of Manila for collection of sum of money and preliminarily attached "some" of Terrymanila's
personal properties to secure the satisfaction of judgment award of P296,662.16, exclusive of
interests and atty's fees.
Bataan RTC declared Terry insolvent
Manila RTC judgment in favor of Royal Cargo
In the meantime, RCBC sought in the insolvency proceedings at Bataan RTC permission
to extrajudicially foreclose the chattel mortgage - granted
Provincial Sheriff scheduled the public auction sale of mortgaged personal properties in
Bataan. At the auction sale, RCBC was the sole bidder, and purchased them for P1.5M.
Royal Cargo filed a petition for annulment of auction sale before Manila RTC, against
 40

- Basis: Act No. 1508, Sec. 14

Manila RTC judged in favor of Royal Cargo
CA affirmed and increased atty's fees and awarded exemplary damages and interest on
principal amount

ISSUES/HELD:
(1) WON Royal Cargo should have been notified of the foreclosure sale - NO
Petitioner: Chattel Mortgage Law only allows an attaching creditor or judgment creditor
to "redeem" the mortgage, BEFORE the holding of the auction.
SC: Agrees. Sec. 13 of the Chattel Mortgage Law allows the would-be redemptioner to
redeem the mortgaged property only BEFORE its sale.
The redemption cited in Sec. 13 partakes of an equity of redemption, which is the right
of the mortgagor to redeem the mortgaged property after his default in the performance of
conditions of the mortgage, but before the sale of property, to clear it from encumbrance of
the mortgage.
Royal Cargo attached Terry's equity of redemption.
Thus it had to be informed of the date of sale of mortgaged assets for it to exercise such equity
of redemption over some of those foreclosed properties.
Royal Cargo was aware of the auction sale
- It was informed about the Order of the insolvency court that granted leave to RCBC to
foreclose the chattel mortgage.
- Its negligence or omission to exercise its equity of redemption within a reasonable
time, or even on the day of auction sale, warrants a presumption that it had either abandoned
it or opted not to assert it
Royal Cargo was not prejudiced by the auction sale
- Terry had sufficient, unencumbered assets to cover obligations owing to its other
creditors
RCBC had a superior lien over the mortgaged assets
- The right of those who acquire properties should not and cannot be superior to that of
a creditor, who has in his favor an instrument of mortgage, executed with the formalities of
law, in good faith, and without the least indication of fraud
- Right of Royal Cargo was subordinate to the lien of the mortgagee, who has in his favor
a valid chattel mortgage
(2) WON RCBC was guilty of constructive fraud in failing to provide Royal Cargo with a
10-day notice - NO
Foreclosure suits may be initiated even during insolvency proceedings, as long as leave
must first be obtained from the insolvency court, as what RCBC did.

40 DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961)

FACTS:
Rosario Cruzado sold all her right, title, and interest and that of her children in the house
and lot herein involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and
executed a promissory note for the balance. However, the buyer could only pay P5,500 On
 41

mortgaged the property to appellant Barretto to secure a loan of P30K, said mortgage having
been duly recorded.
Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the
mortgage in her favor, obtained judgment, and upon its becoming final asked for execution.
Cruzado filed a motion for recognition for her "vendor's lien" invoking Articles 2242, 2243, and
2249 of the new Civil Code. After hearing, the court below ordered the "lien" annotated on the
back of the title, with the proviso that in case of sale under the foreclosure decree the vendor's
lien and the mortgage credit of appellant Barretto should be paid pro rata from the proceeds.
Appellants insist that:
1. The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the
Philippines, can only become effective in the event of insolvency of the vendee, which has not
been proved to exist in the instant case; and .
2. That the Cruzado is not a true vendor of the foreclosed property.
Article 2242 of the new Civil Code enumerates the claims, mortgage and liens that
constitute an encumbrance on specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same specific real property or real rights, they shall be satisfied pro-rata after the
payment of the taxes and assessment upon the immovable property or real rights.

HELD:
Application of the above-quoted provisions to the case at bar would mean that the
herein appellee Rosario Cruzado as an unpaid vendor of the property in question has the right
to share pro-rata with the appellants the proceeds of the foreclosure sale.

ISSUE:
Appellant’s argument: inasmuch as the unpaid vendor's lien in this case was not
registered, it should not prejudice the said appellants' registered rights over the property.

HELD:
There is nothing to this argument. Note must be taken of the fact that article 2242 of
the new Civil Code enumerating the preferred claims, mortgages and liens on immovables,
specifically requires that. Unlike the unpaid price of real property sold. mortgage credits, in
order to be given preference, should be recorded in the Registry of Property. If the legislative
intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price
of real property sold, the lawmakers could have easily inserted the same qualification which
now modifies the mortgage credits. The law, however, does not make any distinction between
registered and unregistered vendor's lien, which only goes to show that any lien of that kind
enjoys the preferred credit status.
As to the point made that the articles of the Civil Code on concurrence and preference
of credits are applicable only to the insolvent debtor, suffice it to say that nothing in the law
shows any such limitation. If we are to interpret this portion of the Code as intended only for
insolvency cases, then other creditor-debtor relationships where there are concurrence of
credits would be left without any rules to govern them, and it would render purposeless the
 42

Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be
reconsidered and set aside, and a new one entered declaring that their right as mortgagees
remain superior to the unrecorded claim of herein appellee for the balance of the purchase
price of her rights, title, and interests in the mortgaged property.
We have reached the conclusion that our original decision must be reconsidered and set
aside:
Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no
priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the
respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real
rights, they, shall be satisfied pro-rata after the payment of the taxes and assessments upon the
immovable property or real rights."
The full application of Articles 2249 and 2242 demands that there must be first some
proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such
as:
1. insolvency,
2. the settlement of decedents estate under Rule 87 of the Rules of Court, or
3. other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
The claims or credits enumerated in the two preceding articles" shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency.
And the rule is further clarified in the Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is
settled by Article 2243. The preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Insolvency Law."
Rule
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds
of a foreclosure sale (as in the case now before us) is not the proceeding contemplated by law
for the enforcement of preferences under Article 2242, unless the claimant were enforcing a
credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between
two creditors will not enable the Court to ascertain the pro-rata dividend corresponding to
each, because the rights of the other creditors likewise" enjoying preference under Article 2242
can not be ascertained.

HELD:
There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor,
did not require the character and rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.

41 JL Bernardo Construction vs CA

Facts:
 43

program, the funding for the market would be composed of a (a) grant from ESFS, (b)
loan extended by ESFS to the Municipality of San Antonio, and (c) equity or counterpart
funds from the Municipality.
 It is claimed by petitioners Santiago & Edwin A. Sugay, Fernando S.A. Erana and J.L.
Bernardo Construction, that they entered into a business venture for the purpose of
participating in the bidding for the public market.
 On April 20, 1990, J.L. Bernardo Construction, submitted its bid together with other
qualified bidders. After evaluating the bids, municipal awarded the contract to
petitioners where a Construction Agreement was entered
 It is claimed by petitioners that under this Construction Agreement, the Municipality
agreed to assume the expenses for the demolition, clearing and site filling of the
construction site in the amount of P1,150,000 and, in addition, to provide cash equity of
P767,305.99 to be remitted directly to petitioners.
 Petitioners allege that, although the whole amount of the cash equity became due, the
Municipality refused to pay the same, despite repeated demands and notwithstanding
that the public market was more than ninety-eight percent (98%) complete as of July 20,
1991. Petitioners maintain that Salonga induced them to advance the expenses for the
demolition, clearing and site filling work by making representations that the
Municipality had the financial capability to reimburse them later on. However,
petitioners claim that they have not been reimbursed for their expenses.
 J.L. Bernardo Construction, et. al, filed a complaint for breach of contract, specific
performance, and collection of a sum of money, with prayer for preliminary attachment
and enforcement of contractors lien against Municipality of San Antonio, and Salonga, in
his personal and official capacity as municipal mayor.
Ruling of courts:
 RTC issued the writ of preliminary attachment prayed for by plaintiffs. It also granted J.L.
Bernardo Construction the right to maintain possession of the public market and to
operate the same.
 CA reversed: Construction Agreement was only between Juanito Bernardo and the
Municipality of San Antonio, and since there is no sworn statement by Juanito Bernardo
alleging that he had been deceived or misled by Mayor Salonga or the Municipality of
San Antonio, it is apparent that the applicant has not proven that the defendants are
guilty of inceptive fraud in contracting the debt or incurring the obligation

ISSUE:
Whether CA erred in reversing the RTC’s grant of a contractors lien in favor of
petitioners

RULING:
 No, SC upheld the CA’s ruling reversing the trial courts grant of a contractors lien in
favor of petitioners
 A statutory lien cannot be enforced in an action for specific performance and
damages.
 Art. 2242, NCC provides that the claims of contractors engaged in the construction,
reconstruction or repair of buildings or other works shall be preferred with respect to
 44

such property of the debtor is insufficient to pay in full all the creditors. In such a
situation, the question of preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others. This statutory lien should only
be enforced in the context of some kind of a procedure where the claims of all preferred
creditors may be bindingly adjudicated, such as in insolvency proceedings
 Due process dictates that a statutory lien should only be enforced in the context of
some kind of proceeding where the claims of all preferred creditors may be
bindingly adjudicated, such as insolvency proceedings
o Art 2243: the claims and liens enumerated in 2241 and 2242 shall be
considered mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency

42 Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342

FACTS:
Private respondents are original owners of a parcel of land in Ozamis City. They
mortgaged said land to DBP. When private respondents defaulted on their obligation,
petitioner foreclosed the mortgage on the land and emerged as sole bidder in the ensuing
auction sale.
On April 6, 1984, DBP & PR entered into a deed of conditional sale where DBP agreed to
convey the foreclosed property to them.
On April 6, 1990, upon completing the payment of the full repurchase price DBP, private
respondents demanded the execution of the deed of conveyance in their favor.
However, DBP denied the execution & delivery because it had become illegally
impossible in view of sec. 6 of RA 6657 (CARL) that upon effectivity of this act, any sale lease,
management contract / transfer of possession of private / lands executed by the original land
owner in violation of this act shall be null & void.

ISSUE:
WON the execution & delivery of conveyance is illegally impossible? NO

HELD:
According to Manresa, it is a rule that if the obligation depends upon a suspensive
condition, the demandability as well as the acquisition or effectivity of the rights arising from
the obligation is suspended pending the happening or fulfillment of the fact or event which
constitutes the condition. Once the event which constitutes the condition is fulfilled resulting in
the effectivity of the obligation, its effects retroact to the moment when the essential elements
which gave birth to the obligation have taken place. Applying this precept to the case, the full
payment by the appellee on April 6, 1990 retroacts to the time the contract of conditional sale
was executed on April 6, 1984. From that time, all elements of the contract of sale were
present. Consequently, the contract of sale was perfected. As such, the said sale does not come
under the coverage of R.A. 6657.
Under Art 1181, in conditional obligations, the acquisition of rights as well as the
extinguishment or loss of those already acquired depend upon the happening of the event
 45

The deed of conditional sale between petitioner & PR was executed on April 6 1984.
Since PR had religiously paid the agreed installment on the property until April 6, 1990, PR is
entitled for the land.
The laws RA 6657, was enacted on June 10, 1988 as well as E.O. 407 after the execution
of the deed of conditional sale, thus, these laws cannot have retroactive effect or to the time
the contract had on April 6 1984.
Petitioner cannot invoke the last paragraph of sec.6 to set aside its obligations already
existing prior to its enactment because the original owner in this case is not DBP but PR. DBP
only acquired land through foreclosure proceedings but agreed thereafter to recovery it to
private respondents conditionally.

43 JOSE C. CORDOVA VS. REYES DAWAY LIM BERNARDO

FACTS:
Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine
Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity Sports Plaza
Incorporated (CSPI) and shares of stock of various other corporations. He was issued a
confirmation of sale.[4] The CSPI shares were physically delivered by Philfinance to the former
Filmanbank[5] and Philtrust Bank, as custodian banks, to hold these shares in behalf of and for
the benefit of petitioner.[6]
On June 18, 1981, Philfinance was placed under receivership by public respondent
Securities and Exchange Commission (SEC). Thereafter, private respondents Reyes Daway Lim
Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private respondents) were
appointed as liquidators.[7] Sometime in 1991, without the knowledge and consent of
petitioner and without authority from the SEC, private respondents withdrew the CSPI shares
from the custodian banks.[8] On May 27, 1996, they sold the shares to Northeast Corporation
and included the proceeds thereof in the funds of Philfinance. Petitioner learned about the
unauthorized sale of his shares only on September 10, 1996. [9] He lodged a complaint with
private respondents but the latter ignored it[10] prompting him to file, on May 6, 1997,[11] a
formal complaint against private respondents in the receivership proceedings with the SEC, for
the return of the shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for Philfinance’s
creditors and investors.[12] On May 13, 1997, the liquidators began the process of settling the
claims against Philfinance, from its assets.[13]
On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it
reconsidered this decision in a resolution dated September 24, 1999 and granted the claims of
petitioner. It held that petitioner was the owner of the CSPI shares by virtue of a confirmation
of sale (which was considered as a deed of assignment) issued to him by Philfinance. But since
the shares had already been sold and the proceeds commingled with the other assets of
Philfinance, petitioner’s status was converted into that of an ordinary creditor for the value of
such shares. Thus, it ordered private respondents to pay petitioner the amount of P5,062,500
representing 15% of the monetary value of his CSPI shares plus interest at the legal rate from
the time of their unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24, 1999
 46

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner of
the CSPI shares but the recovery of such shares had become impossible. It also declared that
the clarificatory order merely harmonized the dispositive portion with the body of the
resolution. Petitioner’s motion for reconsideration was denied.
Hence this petition raising the following issues:
1) whether petitioner should be considered as a preferred (and secured)
creditor of Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or merely
15% thereof like all other ordinary creditors of Philfinance and
3) whether petitioner is entitled to legal interest.[14]
To resolve these issues, we first have to determine if petitioner was indeed a creditor of
Philfinance.
There is no dispute that petitioner was the owner of the CSPI shares. However, private
respondents, as liquidators of Philfinance, illegally withdrew said certificates of stock without
the knowledge and consent of petitioner and authority of the SEC. [15] After selling the CSPI
shares, private respondents added the proceeds of the sale to the assets of
Philfinance.[16] Under these circumstances, did the petitioner become a creditor of
Philfinance? We rule in the affirmative.
The SEC, after holding that petitioner was the owner of the shares, stated:
Petitioner is seeking the return of his CSPI shares which, for the present, is
no longer possible, considering that the same had already been sold by the
respondents, the proceeds of which are ADMITTEDLY commingled with the
assets of PHILFINANCE.
This being the case, [petitioner] is now but a claimant for the value of
those shares. As a claimant, he shall be treated as an ordinary creditor in so far
as the value of those certificates is concerned. [17]
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly abusive
and illicit contrivance employed by private respondents against petitioner, we,
nevertheless, concur with public respondent that the return of petitioner’s CSPI
shares is well-nigh impossible, if not already an utter impossibility, inasmuch as
the certificates of stocks have already been alienated or transferred in favor of
Northeast Corporation, as early as May 27, 1996, in consequence whereof the
proceeds of the sale have been transmuted into corporate assets of Philfinance,
under custodia legis, ready for distribution to its creditors and/or investors. Case
law holds that the assets of an institution under receivership or liquidation shall
be deemed in custodia legis in the hands of the receiver or liquidator, and shall
from the moment of such receivership or liquidation, be exempt from any order,
garnishment, levy, attachment, or execution.
Concomitantly, petitioner’s filing of his claim over the subject CSPI shares
before the SEC in the liquidation proceedings bound him to the terms and
conditions thereof. He cannot demand any special treatment [from] the
liquidator, for this flies in the face of, and will contravene, the Supreme Court
dictum that when a corporation threatened by bankruptcy is taken over by a
receiver, all the creditors shall stand on equal footing. Not one of them should
 47

We agree with both the SEC and the CA that petitioner had become an ordinary creditor
of Philfinance.
Certainly, petitioner had the right to demand the return of his CSPI shares. [19] He in fact
filed a complaint in the liquidation proceedings in the SEC to get them back but was confronted
by an impossible situation as they had already been sold. Consequently, he sought instead to
recover their monetary value.
Petitioner’s CSPI shares were specific or determinate movable properties. [20] But after
they were sold, the money raised from the sale became generic [21] and were commingled with
the cash and other assets of Philfinance. Unlike shares of stock, money is a generic thing. It is
designated merely by its class or genus without any particular designation or physical
segregation from all others of the same class.[22] This means that once a certain amount is
added to the cash balance, one can no longer pinpoint the specific amount included which then
becomes part of a whole mass of money.
It thus became impossible to identify the exact proceeds of the sale of the CSPI shares
since they could no longer be particularly designated nor distinctly segregated from the assets
of Philfinance. Petitioner’s only remedy was to file a claim on the whole mass of these assets,
to which unfortunately all of the other creditors and investors of Philfinance also had a claim.
Petitioner’s right of action against Philfinance was a “claim” properly to be litigated in
the liquidation proceedings.[23] In Finasia Investments and Finance Corporation v. CA,[24] we
discussed the definition of “claims” in the context of liquidation proceedings:
We agree with the public respondent that the word ‘claim’ as used in Sec.
6(c) of P.D. 902-A,[25] as amended, refers to debts or demands of a pecuniary
nature. It means "the assertion of a right to have money paid. It is used in special
proceedings like those before [the administrative court] on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured, unsecured. [26]
Undoubtedly, petitioner had a right to the payment of the value of his shares. His
demand was of a pecuniary nature since he was claiming the monetary value of his shares. It
was in this sense (i.e. as a claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are applicable to the
liquidation proceedings.[27] The next question is, was petitioner a preferred or ordinary creditor
under these provisions?
Petitioner argues that he was a preferred creditor because private respondents illegally
withdrew his CSPI shares from the custodian banks and sold them without his knowledge and
consent and without authority from the SEC. He quotes Article 2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following claims
or liens shall be preferred:
xxx xxx xxx
(2) Claims arising from misappropriation, breach of trust, or malfeasance by
 48

He asserts that, as a preferred creditor, he was entitled to the entire monetary value of his
shares.
Petitioner’s argument is incorrect. Article 2241 refers only to specific movable
property. His claim was for the payment of money, which, as already discussed, is generic
property and not specific or determinate.
Considering that petitioner did not fall under any of the provisions applicable to
preferred creditors, he was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title not comprised in
the four preceding articles, shall enjoy no preference.
This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be paid pro rata regardless of
dates.
Like all the other ordinary creditors or claimants against Philfinance, he was entitled to a rate of
recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner would have given petitioner an
unfair advantage or preference over the other creditors. [28] Petitioner counters that he was
entitled to 12% legal interest per annum under Article 2209 of the Civil Code from the time he
was deprived of the shares until fully paid.
The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc. v.
[29]
CA:
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:
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 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.
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 of the judgment of the court is made (at which time
 49

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 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.[30] (Emphasis supplied)
Under this ruling, petitioner was not entitled to legal interest of 12% per annum (from
demand) because the amount owing to him was not a loan[31] or forbearance of money.[32]
Neither was he entitled to legal interest of 6% per annum under Article 2209 of the Civil
[33]
Code since this provision applies only when there is a delay in the payment of a sum of
money.[34] This was not the case here. In fact, petitioner himself manifested before the CA that
the SEC (as liquidator) had already paid him P5,062,500 representing 15% of P33,750,000.[35]
Accordingly, petitioner was not entitled to interest under the law and current
jurisprudence.
Considering that petitioner had already received the amount of P5,062,500, the
obligation of the SEC as liquidator of Philfinance was totally extinguished. [36]
We note that there is an undisputed finding by the SEC and CA that private respondents
sold the subject shares without authority from the SEC. Petitioner evidently has a cause of
action against private respondents for their bad faith and unauthorized acts, and the resulting
damage caused to him.[37]

44 RUBY INDUSTRIAL CORP V. CA

FACTS:
On 28 October 1988, the SEC Hearing Panel approved the BENHAR/RUBY Rehabilitation
Plan. The minority stockholders, thru private respondent Lim, appealed the approval to the SEC
en banc. On 15 November 1988, the SEC en banc temporarily enjoined the implementation of
the BENHAR/RUBY Plan. On 20 December 1988, after the expiration of the TRO, the SEC en
banc granted the writ of preliminary injunction against the enforcement of the BENHAR/RUBY
Plan.
Before the SEC Hearing Panel approved the BENHAR/RUBY Plan on 28 October 1988,
BENHAR had already implemented part of the plan by paying off Far East Bank & Trust
Company (FEBTC), one of RUBY's secured creditors. Thus, by 30 May 1988, FEBTC had already
executed a deed of assignment of credit and mortgage rights in favor of BENHAR. Moreover,
despite the SEC en banc's TRO and injunction, BENHAR still paid RUBY's other secured creditors
who, in turn, assigned their credits in favor of BENHAR.

ISSUE:
WON BENHAR is guilty of indirect contempt

HELD:
YES. Even the SEC en banc, in its 30 July 1993 Order affirming the approval of the
Revised BENHAR/RUBY Plan, has acknowledged the invalidity of the subject deeds of
assignment. However, to justify its approval of the plan and the appointment of BENHAR to the
new management committee, it gave the lame excuse that BENHAR became RUBY's creditor for
 50

"While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar were
all declared null and void, the Revised Rehabilitation Plan, as herein approved by the
Commission, shows that Benhar will assign its credit lines/loan proceeds or will act as financier
whereby it re-lends the contracted loan to Ruby thereby converting Benhar as a creditor of the
petitioner corporation once the Rehabilitation Plan is implemented. In fact, as of 31 March
1990, it appears that Benhar had made some advance payments to some creditors of Ruby
further strengthening its status as a creditor. We cannot, therefore, see any reason why Benhar
should not sit in the management team to oversee the implementation of the Plan."
For its part, the Court of Appeals noted that the approved Revised BENHAR/RUBY Plan
gave undue preference to BENHAR. The records, indeed, show that BENHAR's offer to lend its
credit facility in favor of RUBY is conditioned upon the payment of the amount it advanced to
RUBY's creditors, thus:
"FUND SOURCING
xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by Benhar
in favor of Ruby, under pre-arrangement with China Banking Corporation or by any other
creditor-banks, and upon payment by Ruby of such amount already advanced by Benhar."
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit facility to
be extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an effort to
restore and reinstate the corporation to its former position of successful operation and
solvency. When a distressed company is placed under rehabilitation, the appointment of a
management committee follows to avoid collusion between the previous management and
creditors it might favor, to the prejudice of the other creditors. All assets of a corporation under
rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of attachment,
execution or otherwise. As between the creditors, the key phrase is equality in equity. Once the
corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to
stand on equal footing. Not any one of them should be paid ahead of the others. This is
precisely the reason for suspending all pending claims against the corporation under
receivership. LAW 107 :: CREDIT TRANSACTIONS (Russ + Awi + Joyce + Happy + Judith) Page 18
of 22
Parenthetically, BENHAR is a domestic corporation engaged in importing and selling
vehicle spare parts with an authorized capital stock of thirty million pesos. Yet, it offered to
lend its credit facility in the amount of sixty to eighty millions pesos to RUBY. It is to be noted
that BENHAR is not a lending or financing corporation and lending its credit facilities, worth
more than double its authorized capitalization, is not one of the powers granted to it under its
Articles of Incorporation. Significantly, Henry Yu, a director and a majority stockholder of RUBY
is, at the same time, a stockholder of BENHAR, a corporation owned and controlled by his
family. These circumstances render the deals between BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee and to dispute that it will
become a creditor of RUBY only on account of the proposed assignment of its credit facility to
RUBY, BENHAR avers that as early as 27 December 1988, it already lent one million pesos
(P1,000,000.00) to RUBY for the latter's working capital.
The submission deserves scant consideration. To start with, this argument was raised by
 51

appeal—in this case, in a motion for reconsideration—for being offensive to the basic rules of
fair play, justice and due process.
Moreover, when RUBY initiated its petition for suspension of payments with the SEC,
BENHAR was not listed as one of RUBY's creditors. BENHAR is a total stranger to RUBY. If at all,
BENHAR only served as a conduit of RUBY. As aptly stated in the challenged Court of Appeals
decision:
"Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority
stockholders, is to contract the loan for Ruby and, serving the role of a financier, relend the
same to Ruby. Benhar is merely extending its credit line facility with China Bank, under which
the bank agrees to advance funds to the company should the need arise. This is unlikely a loan
in which the entire amount is made available to the borrower so that it can be used and
programmed for the benefit of the company's financial and operational needs. Thus, it is
actually China Bank which will be the source of the funds to be relent to Ruby. Benhar will not
shell out a single centavo of its own funds. It is the assets of Ruby which will be mortgaged in
favor of Benhar. Benhar's participation will only make the rehabilitation plan more costly and,
because of the mortgage of its (Ruby's) assets to a new creditor, will create a situation which is
worse than the present.
x x x."

45 RCBC vs. IAC

FACTS:
On September 28, 1984, BF Homes filed a “Petition for Rehabilitation and for
Declaration of Suspension of Payments” with the SEC.
RCBC, one of the creditors listed in BF Homes’ inventory of creditors and liabilities, on
October 26, 1984, requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real
estate mortgage on some properties of BF Homes. BF Homes opposed the auction sale and the
SEC ordered the issuance of a writ of preliminary injunction upon petitioners filing of a bond.
Presumably unaware of the filing of the bond on the very day of the auction sale, the sheriff
proceeded with the public auction sale in which RCBC was the highest bidder for the properties
auctioned. But because of the proceedings in the SEC, the sheriff withheld the delivery to RCBC
of the certificate of sale covering the auctioned properties.
On March 13, 1985, despite the SEC case, RCBC filed with RTC an action for mandamus
against the provincial sheriff of Rizal to compel him to execute in its favor a certificate of sale of
the auctioned properties.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
Consequently, the trial court granted RCBC’s “motion for judgment on the pleading”
ordering respondents to execute and deliver to petitioner the Certificate of Auction Sale.
On appeal, the SC affirmed CA’s decision (setting aside RTC’s decision dismissing the
mandamus case and suspending issuance to RCBC of new land titles until the resolution of the
SEC case) ruling that “whenever a distressed corporation asks the SEC for rehabilitation and
suspension of payments, preferred creditors may no longer assert such preference but stand on
equal footing with other creditors.” Hence, this Motion for Reconsideration.

ISSUE # 1:
 52

HELD:
YES. The issue of whether or not preferred creditors of distressed corporations stand on
equal footing with all other creditors gains relevance and materiality only upon the
appointment of a management committee, rehabilitation receiver, board, or body. Insofar as
petitioner RCBC is concerned, the provisions of Presidential Decree No. 902-A are not yet
applicable and it may still be allowed to assert its preferred status because it foreclosed on the
mortgage prior to the appointment of the management committee on March 18, 1985.
The Court, therefore, grants the motion for reconsideration on this score. It is thus
adequately clear that suspension of claims against a corporation under rehabilitation is counted
or figured up only upon the appointment of a management committee or a rehabilitation
receiver.
The holding that suspension of actions for claims against a corporation under
rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with
the SEC – may, to some, be more logical and wise but unfortunately, such is incongruent with
the clear language of the law. To insist on such ruling, no matter how practical and noble,
would be to encroach upon legislative prerogative to define the wisdom of the law– plainly
judicial legislation.

ISSUE # 2:
WON an order of suspension of payments as well as actions for claims applies only to
claims of unsecured creditors and cannot extend to creditors holding a mortgage, pledge, or
any lien on the property

HELD:
NO. SC, in this case, laid down the ff. rules:
1. All claims against corporations, partnerships, or associations that are pending before
any court, tribunal, or board, without distinction as to whether or not a creditor is secured or
unsecured, shall be suspended effective upon the appointment of a management committee,
rehabilitation receiver, board, or body in accordance with the provisions of Presidential Decree
No. 902-A.
2. Secured creditors retain their preference over unsecured creditors, but enforcement
of such preference is equally suspended upon the appointment of a management committee,
rehabilitation receiver, board, or body. In the event that the assets of the corporation,
partnership, or association are finally liquidated, however, secured and preferred credits under
the applicable provisions of the Civil Code will definitely have preference over unsecured ones.
In other words, once a management committee, rehabilitation receiver, board or body is
appointed pursuant to P.D. 902-A, all actions for claims against a distressed corporation
pending before any court, tribunal, board or body shall be suspended accordingly.
This suspension shall not prejudice or render ineffective the status of a secured creditor
as compared to a totally unsecured creditor. P.D. 902-A does not state anything to this effect.
What it merely provides is that all actions for claims against the corporation, partnership or
association shall be suspended. This should give the receiver a chance to rehabilitate the
corporation if there should still be a possibility for doing so. (This will be in consonance with
Alemar’s, BF Homes, Araneta, and RCBC insofar as enforcing liens by preferred creditors are
 53

preference over the unsecured creditors (still maintaining PCIB ruling), subject only to the
provisions of the Civil Code on Concurrence and Preferences of Credit (our ruling in State
Investment House, Inc. vs. Court of Appeals, 277 SCRA 209 [1997]).
The majority ruling in our 1992 decision that preferred creditors of distressed
corporations shall, in a way, stand on equal footing with all other creditors, must be read and
understood in the light of the foregoing rulings. All claims of both a secured or unsecured
creditor, without distinction on this score, are suspended once a management committee is
appointed. Secured creditors, in the meantime, shall not be allowed to assert such preference
before the Securities and Exchange Commission. It may be stressed, however, that this shall
only take effect upon the appointment of a management committee, rehabilitation receiver,
board, or body, as opined in the dissent.