1.) PNB vs. Banatao On November 16, 1962, Banatao, et al.

(plaintiffs-respondents) initiated an action for recovery of real property against Marciano Carag (one of the defendants-respondents )before the Regional Trial Court (RTC ). The disputed property was a new land formation on the banks of the Cagayan River an accretion to Lot 3192 of the Iguig Cadastre that the plaintiffs-respondents claimed as the owners of the adjoining Lot 3192. The defendants-respondents, on the other hand, were the occupants of the disputed property. While the case was pending, the defendants-respondents were able to secure homestead patents evidenced by Original Certificates of Title (OCTs) issued in their names. The OCTs were issued in 1965 and 1966, and all bear the proviso that, in accordance with the Public Land Act, the patented homestead shall neither be alienated nor encumbered for five (5) years from the date of the issuance of the patent. The defendants-respondents separately applied for loans with the Philippine National Bank (PNB or the bank) secured by real estate mortgages on their respective titled portions of the disputed property. The PNB mortgages were annotated on the defendants-respondents' respective OCTs also in the years 1965 and 1966. The trial court decided the case in favor of the plaintiffs-respondents and ordered thereturn of the disputed property to the plaintiffs-respondents. Carag appealed the trialcourt decision to the Court of Appeals (CA ).In an amended complaint, the plaintiffs-respondents also added two (2) additional causes of action, or a total of three (3) causes of action, namely: (1) recovery of real property; (2) cancellation of the OCTs; and (3) annulment of real estate mortgage. The bank was made a party to the case in view of the suit for annulment of mortgage. The records disclose that on March 29, 1973, while the case was pending before the trial court, the bank extra judicially foreclosed the property. The bank was declared the highest bidder in the ensuing public auction, resulting in the consolidation of title in the banks name; hence, the issuance on October 3, 1985 of TCT No. T -65664 in the name of the bank. On February 28, 1991, the plaintiffs-respondents and the defendants-respondents entered into a compromise agreement whereby ownership of virtually the northern half of the disputed property was ceded to the plaintiffs-respondents, while the remaining southern half was given to the defendants-respondents. In the same compromise agreement, the defendants-respondents acknowledged their indebtedness to petitioner PNB and bound themselves to pay their respective obligations to the bank, including the interests accruing thereon. Petitioner PNB, however, was not a party to the compromise agreement. The trial court rendered its decision, approving and adopting in toto the compromise agreement, and ordering the participating parties to strictly comply with its terms. The appellate court dismissed the appeal in its decision of March 30, 2001.PNB submits that its consent to the compromise agreement is necessary to secure afinal and complete determination of the claims and defenses of all the parties to thecase. The PNB further argues that when the appellate court approved in toto the trial court's judgment on the compromise agreement, it failed to consider that the bank was a mortgagee in good faith. The bank claims good faith on the position that the OCT presented to it were all clean on their faces at the time the mortgages were applied for; that there were no notices of lis pendens or any annotation of liens or encumbrances on all of them; and that it had no knowledge, actual or constructive, of facts or circumstances to warrant further inquiry into the titles of the defendantsrespondents. Issue: Whether or not the mortgage constituted on the disputed land covered by a homestead patent is valid. Ruling: We conclude from our own examination of these OCTs that the mortgages cannot but be void ab initio . On the faces of all the OCTs secured through homestead patents are inscribed the following words that echo the mandatory provisions of law: TO HAVE AND TO HOLD the said tract of land with the appurtenances thereunto x x x subject to the provisions of Sections 118, 121, 122 and 124 of Commonwealth Act No.141, as amended, which provide that except in favor of the Government or any of its branches, units or institutions, THE LAND HEREBY ACQUIRED SHALL BEINALIENABLE AND SHALL NOT BE SUBJECT TO [E]NCUMBRANCE FOR A PERIODOF FIVE (5) YEARS NEXT FOLLOWING THE DATE OF THIS PATENT , and shall not be liable for the satisfaction of any debt contracted prior to the expiration of that period; x x x. This inscription reproduces Section 118 of the Public Land Act, as amended, which contains a proscription against the alienation or encumbrance of homestead patents within five years from issue. The rationale for the prohibition, reiterated in a line of cases, first laid down in

Pascua v. Talens states that "x x x homestead laws were designed to distribute disposable agricultural lots of
the State to land-destitute citizens for their home and cultivation. It aims to preserve and keep in the family of the homesteader that portion of public land which the State had gratuitously given to him. PNB cannot claim that it is a mortgagee in good faith. The proscription against alienation or encumbrance is unmistakable even on a cursory reading of the OCTs. Thus, one who contracts with a homestead patentee is charged with knowledge of the law's proscriptive provision that must necessarily be read into the terms of any agreement involving the homestead. Under the circumstances, the PNB simply failed to observe the diligence required in the handling of its transactions and thus made the fatal error of approving the loans secured by mortgages of properties that cannot, in the first place, be mortgaged. WHEREFORE, we hereby DECLARE the mortgages constituted on OCT Nos. 24800,24801, 25217 and 25802 VOID and, for this reason, we DISMISS the petition. We AFFIRM the approval of the compromise agreement by the Court of Appeals and the disposition of the case on the basis of compromise. 2.) LOPEZ vs. CA FACTS: Benito Lopez obtained a loan for P20,000 from Prudential Bank. He executed a promissory note for the same amount. He also executed a surety bond in which he and Philamgen bound themselves to repay prudential. Lopez also executed an indemnity agreement in favor of Philamgen. He executed a deed of assignment of 4,000 shares of the Baguio Military Institution entitled "StockAssignment Separate from Certificate." With the execution of this deed of assignment, Lopez endorsed and delivered it to Philamgen.Lopez, Emilio Abello (AVP of Philamgen) and Atty. Timoteo Sumawang (AVP of Bonding Dept) that if he could not pay the loan, Abello and Pio Pedrosa (Prudential Bank) would buy the shares of stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank. Lopez obligation matured without being settled. Prudential Bank filed a case against Lopez and Philamgen. Atty. Sumawangconfronted Abello and Pedrosa regarding their commitment to buy the shares. Abello then instructed Sumawang to transfer the shares to Philamge and he made a commitment that they will buy the shares so the proceeds could be paid to the bank. The complaint was dismissed and later refilled. Lopez sent a letter to Philamgen inquiring about the formers shares of stock, pledged to Philamgen. Philamgen was then forced to pay Prudential Bank P27,785.89. Prudential executed a subrogation receipt on the same day.Philamgen brought an action against Lopez before the CIF of Manila. The court dismissed the complaint as Lopez already transferred to Philamgen the shares and the certificate of stock was already issued under the name of Philamgen. It is noteworthy that the transfer of stocks were initiated by the plaintiffs officers. To go after Lopez again would amount to double payment. The CA reversed and declared that the stock assignment was a mere pledge; that the transfer of the stocks to Philamgenwas not intended to make it the owner; that assuming that Philamgen had appropriated the stocks, this appropriation is null andvoid as a stipulation authorizing it is a pactum commissorium; and that pending payment, Philamgen is merely holding the stock as a security for the payment of Lopez' obligation.Issue: WON Philamgen can still recover from LopezHeld:Ratio: Considering the explicit terms of the deed denominated "Stock Assignment Separate from Certificate, Lopez sold, assigned and transferred unto Philamgen the stocks involved "for and in consideration of the obligations undertaken" by Philamgen "underthe terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value received". On its face, it isneither pledge nor dation in payment. The document speaks of an outright sale as there is a complete and unconditional divestitureof the incorporeal property consisting of stocks from Lopez to Philamgen. The transfer appears to have been an absoluteconveyance of the stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank. While it is aconveyance in consideration of a contingent obligation, it is not itself a conditional conveyance.It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms, conditions, andagreements stipulated" in his promissory note to Prudential Bank, the obligation of Philamgen under the surety bond would becomenull and void. Corollarily, the stock assignment, which is predicated on the obligation of Philamgen under the surety bond, would

necessarily become null and void likewise, for want of cause or consideration under Article 1352 CC. But this is not the case here because aside from the obligations undertaken by Philamgen under the surety bond, the stock assignment had other considerations referred to therein as "value received". Hence, based on the manifest terms thereof, it is an absolute transfer. Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however, We hold and rule that the transaction should not be regarded as an absolute conveyance in view of the circumstances obtaining at the time of the execution thereof. The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article1371 CC). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and inconsideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to

3.) Manila Banking Corp. v Anastacio Teodoro, Jr. andGrace TeodoroBidin, J. | 1989 Facts: April 1966, Spouses Teodoro together with Teodoro Sr executed a PN in favour of Manila Banking Corp(MBC);- Payable within 120 days (until Aug), with 12%interest per annum;- They failed to pay and left balance of 15k as of September 1969;2. May and June 1966, executed two PNs;- 8k and 1k respectively payable within 120 daysand 12% per annum;- They made partial payment but still left 8.9kbalance as of September 1969;3. It appears than in 1964, Teodoro Jr executed a Deedof Assignment of Receivables in favour of MBC fromEmergency Employment Administration;- Amounted to 44k;The deed provided it was for consideration of certain credits, loans, overdrafts and other credit accommodations extended to the spouses and Teodoro Sr as security for the payment of said sum and interest thereon; and that they release and quitclaim all its rights, title and interest in thereceivables;4. In the stipulations of fact, it was admitted by the parties:- That MBC extended loans to the spouses and Teodoro Jr because of certain contracts entered into by latter with EEA for fabrication of fishing boats and that the Philippine Fisheries Commission succeeded EEA after its abolition;- That non-payment of the PNs was due to failure of the Commission to pay spouses;-That the Bank took steps to collect from the Commission but no collection was effected;5. For failure of the spouses and Teodor Sr to pay, MBC instituted against them;- Teodoro Sr subsequently died so suit only against the spouses;6.TC favoured MBC; MFR denied;- Spouses appealed to CA but since issue purequestion of law, CA forwarded to SC; Issues:W/N the assignment of receivables has the effect of payment of all the loans contracted by the spouses; No. W/N MBC must exhaust all legal remedies against PFC before it can proceed against the spouses. No Ratio: Assignment of credit :An agreement by virtue of which the owner of a credit (assignor) by a legal cause (e.g. 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(assignee) who acquires the power to enforce it to the same extent as the assign or could have enforced it against the debtor;- May be in form of: Sale Dation in payment - when a debtor, in order to obtain a release from his debt, assigns tohis creditor a credit he has against a third person; Donation when it is by gratuitous title; Guaranty creditor gives as a collateral, to secure his own debt in favour of the assignee, without transmitting ownership;Obligations between the parties will depend upon the juridical relation which is the basis of the assignment; What is the legal effect of the Assignment (since itsvalidity is not in question):1. Assignment of receivables in 1964 did not transfer the ownership of the receivables to MBCand release the spouses from their loans;Consideration was for certain credits, loans, overdrafts and credit accommodations worth10k extended by MBC to spouses and as security for the payment of said sum and interest thereon; also quitclaim of rights to MBC of their interest in the receivables;Stipulated also that it was a continuing guaranty for future loans and correspondingly, the assignment shall extend to all accounts receivable; Contention of spouses: not mere guaranty since it was stipulated: That the assignor release and quitclaim to assignee all its rights, title and interest in the accounts receivable;That title and right of possession to account receivable is to remain in assignee and it shall have right to collect directly from the debtor; that whatever the assignor does in connection with collection of such, it does so as agent and representative and in trust of assignee;SC: character of transaction is not determined by the language in document but by intention of the parties;;- If it was intended to secure the payment of money, it must be construed as a pledge.A transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer Assignment of receivables did not result from sale or by virtue of a dation in payment; At time the deed was executed, the loans were non-existent yet;

4. NORTHERN MOTORS VS. COQUIAG.R. No. L-40018 December 15, 1975 Facts: Manila Yellow Taxicab, executed a chattel mortgage over several taxicabs in favour of Northern Motors. TROPICAL is a judgment creditor of Yellow Taxicab who assigned the judgment to ONG. On December 12 1974, Sheriff then levied upon 20taxicabs, 8 of which are security for the chattel mortgage. Northern Motors filed an intervention on December 18, 1974; however, the levied taxicabs were sold the same day at 2pm although agreement shows that it should have happened at 4pm.Indemnity bond was posted by TROPICAL, but the bond was cancelled after the sale without notice to Northern Motors. The petitioner now seek reconsideration also on the reinstatement of the bond. A second levy was made upon 35 taxicabs, 7 of which are mortgaged to Northern Motors. This is a motion for reconsideration in the SC decision pronouncing that the Mortgagee has a better right than the judgment debtor over the taxicabs. The taxies were levied and sold at an auction sale. Ong argues admits that the mortgagee has a better right that the judgment creditor, but argues that the purchaser from the auction sale must have a right superior to that of the mortgagee. The auction sale proceeded and the purchasers were of unknownaddresses, hence the 8 taxicabs cannot be recovered. The proceeds of the auction were in contest and the sheriff is deducting the expenses of the execution sale from the proceeds. Issue/s: Whether the expenses for the execution sale should be deducted from the proceeds thereof? Whether the purchaser has a better right than the creditor? Whether the bond should be reinstated? Held: 1st : No, it was already established that the levy on the property was illegal, it is therefore improper to deduct the expenses of an illegal auction from the proceeds thereof. The mortgagee can only able to collect the proceeds from the auction sale because the purchasers are of unknown addresses. The full proceeds of the sale are due to the mortgagee without any unreasonable and illegal deductions. 2nd : No, the purchaser of the auction sale merely steps in the shoes of the judgment creditor as they have been aware of the claim of the mortgagee. The mortgagee has a better right to the possession of the taxicabs, however, since the addresses of the purchasers are unknown, the proceeds of the sale must be delivered to the mortgagee 5. Rural Bank of Caloocan vs. CA FACTS: Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for a loan. Valencia arranged everything about the loan with the bank. He supplied to the latter the personal data required for Castro's loan application. After the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank. On the same day, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed another promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker. Both loans were secured by a real-estate mortgage on Castro's house and lot. Later, the sheriff of Manila sent a notice to Castro, saying that her property would be sold at public auction to satisfy the obligation covering the two promissory notes plus interest and attorney's fees. Upon request by Castro and the Valencias and with conformity of the bank, the auction sale was postponed, but was nevertheless auctioned at a later date. Castro claimed that she is a 70-year old widow who cannot read and write in English. According to her, she has only finished second grade. She needed money in the amount of P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied her to the bank to secure a loan of P3,000.00. While atthe bank, an employee handed to her several forms already prepared which she was asked to sign, with no one explaining to her the nature and contents of the documents. She also alleged that it was only when she received the letter from the sheriff that she learned that the mortgage contract which was

an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made tosign as co-maker of the promissory note without her being informed. Castro filed a suit against petitioners contending that thru mistake on her part or fraud on the part of Valencias she was induced to sign as comaker of a promissory note and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest. an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note without her being informed. Castro filed a suit against petitioners contending that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest. Castro prayed for: (1)the annulment as far as she is concerned of the promissory note (Exhibit "2")and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; and 2) for the discharge of her personal obligation with the bank by reason of adeposit of P3,383.00 with the court a quo upon the filing of her complaint. ISSUE: Whether or not respondent court correctly affirmed the lower court in declaring thepromissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vispetitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only. HELD: Yes.RATIO: While the Valencias defrauded Castro by making her sign the promissory note andthe mortgage contract, they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their consents to the contracts . In other words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts. Article 1342 of the Civil Code which provides:Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. We cannot declare the promissory note valid between the bank and Castro and the mortgage contract binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as theyaffect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias . Thus, in the case of Hill vs. Veloso , this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract. The fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory note invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract valid only up to the amount of P3,000.00 6. China Bank vs. CA Facts: On 21 August 1974, Galicano Calapatia, Jr., a stockholder of Valley Golf & Country Club, Inc.

(VGCCI), pledged his Stock Certificate 1219 to China Banking Corporation (CBC). On 16 September 1974, CBC wrote VGCCI requesting that the pledge agreement be recorded in its books. In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in CBC's

favor was duly noted in its corporate books. On 3 August 1983, Calapatia obtained a loan of P20,000.00 from CBC, payment of which was secured by the pledge agreement still existing between Calapatia and CBC. Due to Calapatia's failure to pay his obligation, CBC, on 12 April 1985, filed a petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public auction sale of the pledged stock. On 14 May 1985, CBC informed VGCCI of the foreclosure proceedings and requested that the pledged stock be transferred to its name and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote CBC expressing its inability to accede to CBC's request in view of Calapatia's unsettled accounts with the club. Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and CBC emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, CBC was issued the corresponding certificate of sale. On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. Said notice was followed by a demand letter dated 12 December 1985 for the same amount and another notice dated 22 November 1986 for P23,483.24. On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate 1219). Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership due to the sale of his share of stock in the 10 December 1986 auction. On 5 May 1989, CBC advised VGCCI that it is the new owner of Calapatia's Stock Certificate 1219 by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new certificate of stock be issued in its name. On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public auction held on 10 December 1986 for P25,000.00. On 9 March 1990, CBC protested the sale by VGCCI of the subject share of stock and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for the issuance of a new stock certificate in its name. On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied CBC's motion for reconsideration. On 20 September 1990, CBC filed a complaint with the Securities and Exchange Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages, attorney's fees and costs of litigation. On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in the main that considering that the said share is delinquent, VGCCI had valid reason not to transfer the share in the name of CBC in the books of VGCCI until liquidation of delinquency. Consequently, the case was dismissed. On 14 April 1992, Hearing Officer Perea denied CBC's motion for reconsideration. CBC appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the decision of its hearing officer; holding that CBC has a prior right over the pledged share and because of pledgor's failure to pay the principal debt upon maturity, CBC can proceed with the foreclosure of the pledged share; declaring that the auction sale conducted by VGCCI on 10 December 1986 is declared NULL and VOID; and ordering VGCCI to issue another membership certificate in the name of CBC. VGCCI sought reconsideration of the order. However, the SEC denied the same in its resolution dated 7 December 1993. The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed CBC's original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not intracorporate; nullifying the SEC orders and dismissing CBCs complaint. CBC moved for reconsideration but the same was denied by the Court of Appeals in its resolution dated 5 October 1994. CBC filed the petition for review on certiorari.

Issue: Whether CBC is bound by VGCCI's by-laws. Held: In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said third party and the shareholder was entered into. Herein, at the time the pledge agreement was executed. VGCCI could have easily informed CBC of its by-laws when it sent notice formally recognizing CBC as pledgee of one of its shares registered in Calapatia's name. CBC's belated notice of said by-laws at the time of foreclosure will not suffice. By-laws signifies the rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. In other words, by-laws are the relatively permanent and continuing rules of action adopted by the corporation for its own government and that of the individuals composing it and having the direction, management and control of its affairs, in whole or in part, in the management and control of its affairs and activities. The purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves. They are self-imposed and, although adopted pursuant to statutory authority, have no status as public law. Therefore, it is the generally accepted rule that third persons are not bound by by-laws, except when they have knowledge of the provisions either actually or constructively. For the exception to the general accepted rule that third persons are not bound by by-laws to be applicable and binding upon the pledgee, knowledge of the provisions of the VGCCI By-laws must be acquired at the time the pledge agreement was contracted. Knowledge of said provisions, either actual or constructive, at the time of foreclosure will not affect pledgee's right over the pledged share. Article 2087 of the Civil Code provides that it is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists maybe alienated for the payment to the creditor. Further, VGCCI's contention that CBC is duty-bound to know its by-laws because of Article 2099 of the Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a good father of a family, fails to convince. CBC was never informed of Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-laws. Furthermore, Section 63 of the Corporation Code which provides that "no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to any indebtedness which a subscriber or stockholder may owe the corporation arising from any other transaction." Herein, the subscription for the share in question has been fully paid as evidenced by the issuance of Membership Certificate 1219. What Calapatia owed the corporation were merely the monthly dues. Hence, Section 63 does not apply.
7.