INTRODUCTION TO CREDIT TRANSACTIONS

PANTALEON v AMERICAN EXPRESS INTERNATIONAL,

INC
Ponente: Tinga, J.
Date: May 8, 2009
RATIO DECIDENDI: Moral damages avail in cases of breach
of contract where the defendant acted fraudulently or in bad
faith.
QUICK FACTS: Petitioner purchased items when he was in
the States using his AmEx credit card. During three
particular instances, clearance of his purchase took too long
and under those circumstances caused him moral shock,
mental anguish, serious anxiety, wounded feelings and
social humiliation.
FACTS:
Name of Offended party (petitioner): Polo S. Pantaleon
Name of respondent: American Express International, Inc.
-The petitioner, lawyer Polo Pantaleon, his wife, daughter
and son joined an escorted tour of Western Europe
organized by Trafalgar Tours of Europe, Ltd., in October of
1991.
-The tour group arrived in Amsterdam in the afternoon of 25
October 1991, the second to the last day of the tour. As the
group had arrived late in the city, they failed to engage in
any sight-seeing so they agreed that they would start early
the next day to see the entire city before ending the tour.

decided to buy a 2.5 karat diamond brilliant cut, and she

found a diamond close enough in approximation. Mrs.
Pantaleon also selected for purchase a pendant and a chain,
all of which totaled U.S. $13,826.00.
-Pantaleon presented his American Express credit card
together with his passport to the Coster sales clerk. This
occurred at around 9:15 a.m., or 15 minutes before the tour
group was slated to depart from the store. The sales clerk
took the cards imprint, and asked Pantaleon to sign the
charge slip. The charge purchase was then referred
electronically to respondents Amsterdam office at 9:20 a.m.
-clearance took too long. At 9:40am, Pantaleon asked the
store clerk to cancel the sale to avoid further delaying and
inconveniencing the tour group. At around 10:00 a.m, 30
minutes after the tour group was supposed to have left the
store, Coster decided to release the items even without
respondents approval of the purchase.
-due to the delay, the city tour of Amsterdam was to be
canceled due to lack of remaining time. The spouses
Pantaleon allegedly offered their apologies but were met by
their tourmates with stony silence and visible irritation. Mrs.
Pantaleon ended up weeping, while her husband had to take
a tranquilizer to calm his nerves.

-The following day, the last day of the tour, the group
arrived at the Coster Diamond House. The group had agreed
that the visit to Coster should end by 9:30 a.m. to allow
enough time to take in a guided city tour of Amsterdam.

-two instances similar to the Castor incident happened.

purchased golf equipment amounting to US $1,475.00
using his AmEx card, but he cancelled his credit card
purchase and borrowed money instead from a friend,
after more than 30 minutes had transpired without
the purchase having been approved.
used the card to purchase childrens shoes worth
$87.00 at a store in Boston, and it took 20 minutes
before this transaction was approved by respondent.

- While in the diamond house, led to the stores showroom

to allow them to select items for purchase. Mrs. Pantaleon

Petitioners: after coming back to Manila, sent a letter

demanding an apology for the "inconvenience, humiliation

and embarrassment he and his family thereby suffered" for

respondents refusal to provide credit authorization for the
aforementioned purchases.
Respondent: refused to give an apology, sent a letter
stating among others that the delay in authorizing the
purchase from Coster was attributable to the circumstance
that the charged purchase of US $13,826.00 "was out of the
usual charge purchase pattern established."
RTC: petitioner instituted an action for damages. Petitioner
won.
Court awarded
P500,000.00 as moral damages,
P300,000.00 as exemplary damages, P100,000.00 as
attorneys fees, and P85,233.01 as expenses of
litigation.
normal approval time for purchases was "a matter of
seconds." Based on that standard, respondent had
been in clear delay with respect to the three subject
transactions.
CA: reversed the award of damages in favor of Pantaleon,
holding that respondent had not breached its obligations to
petitioner.
delay was not attended by bad faith, malice, or gross
negligence.
respondent "had exercised diligent efforts to effect the
approval" of the purchases, which were "not in
accordance with the charge pattern" petitioner had
established for himself
Facts:
Vives (will be the creditor in this case) was asked by his
friend Sanchez to help the latters friend, Doronilla
(will be the debtor in this case) in incorporating
Doronillas business Strela. This help
basically involved Vives depositing a certain amount of
money in Strelas bank account for purposes of

incorporation (rationale: Doronilla had to show that he

had sufficient funds for incorporation). This amount
shall later be returned to Vives.
Relying on the assurances and representations of Sanchez
and Doronilla, Vives issued a check of P200,00 in favor
of Strela and deposited the same into Strelas newlyopened bank account (the passbook was given to the wife
of Vives and the passbook had an instruction that no
withdrawals/deposits will be allowed unless the passbook
is presented).
Later on, Vives learned that Strela was no longer holding
office in the address previously given to him. He later
found out that the funds had already been withdrawn
leaving only a balance of P90,000. The Vives spouses
tried to withdraw the amount, but it was unable to since
the balance had to answer for certain postdated checks
issued by Doronilla.
Doronilla made various tenders of check in favor of Vives
in order to pay his debt. All of which were dishonored.
Hence, Vives filed an action for recovery of sum against
Doronilla, Sanchez, Dumagpi and Producers Bank.
TC & CA: ruled in favor of Vives.
Issue/s:
(1) WON the transaction is a commodatum or a mutuum.
COMMODATUM.
(2) WON the fact that there is an additional P 12,000
(allegedly representing interest) in the amount to be
returned to Vives converts the transaction from
commodatum to mutuum. NO.
(3) WON Producers Bank is solidarily liable to Vives,
considering that it was not privy to the transaction
between Vives and Doronilla. YES.
Held/Ratio:
(1) The transaction is a commodatum.
CC 1933 (the provision distinguishing between the two
kinds of loans) seem to imply that if the subject of the

contract is a consummable thing, such as money, the

contract would be a mutuum. However, there are instances
when a commodatum may have for its object a consummable
thing. Such can be found in CC 1936 which states that
consummable 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. In
this case, the intention of the parties was merely for
exhibition. Vives agreed to deposit his money in
Strelas account specifically for purpose of making it
appear that Streal had sufficient capitalization for
incorporation, with the promise that the amount should
be returned withing 30 days.
(2) CC 1935 states that the bailee in commodatum acquires
the use of the thing loaned but not its fruits. In this
case, the additional P 12,000 corresponds to the fruits
of the lending of the P 200,000.
(3) Atienza, the Branch Manager of Producers Bank, allowed
the withdrawals on the account of Strela despite the rule
written in the passbook that neither a deposit, nor a
withdrawal will be permitted except upon the production
of the passbook (recall in this case that the passbook
was in the possession of the wife of Vives all along).
Hence, this only proves to show that Atienza allowed the
withdrawals because he was party to Doronillas scheme
of defrauding Vives. By virtue of CC 2180, PNB, as
employer, is held primarily and solidarily liable for
damages caused by their employees acting within the scope
of their assigned tasks. Atienzas acts, in helpong
Doronilla, a customer of the bank, were obviously done in
furtherance of the business of the bank, even though in
the process, Atienza violated some rules.

SIMPLE LOAN OR COMMODATUM

Consolidated Bank vs CA
GR No. 114286, 19 April 2001
356 SCRA 671

FACTS
Continental Cement Corp obtained from Consolidated Bank
letter of credit used to purchased 500,000 liters of bunker fuel oil.
Respondent Corporation made a marginal deposit to petitioner. A
trust receipt was executed by respondent corporation, with
respondent Gregory Lim as signatory. Claiming that respondents
failed to turn over the goods or proceeds, petitioner filed a complaint
for sum of money before the RTC of Manila. In their answer,
respondents aver that the transaction was a simple loan and not a
trust receipt one, and tht the amount claimed by petitioner did not
take into account payments already made by them. The court
dismissed the complaint, CA affirmed the same.
ISSUE
Whether or not the marginal deposit should not be deducted
outright from the amount of the letter of credit.
HELD
No. petitioner argues that the marginal deposit should be
considered only after computing the principal plus accrued interest
and other charges. It could be onerous to compute interest and other
charges on the face value of the letter of credit which a bank issued,
without first crediting or setting off the marginal deposit which the
borrower paid to it-compensation is proper and should take effect by
operation of law because the requisited in Art. 1279 are present and
should extinguish both debts to the concurrent amount. Unjust
enrichment.
UCPB vs Spouses Beluso
GR No. 159912, August 17, 2007
Ponente: Chico-Nazario, J.
Facts:

1. Petition for Review on Certiorari declaring

void the interest rate provided in the
promissory notes executed by the respondents
Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut
Planters Bank (UCPB)
2. UCPB granted the spouses Beluso a Promissory
Notes Line under a Credit Agreement whereby
the latter could avail from the former credit
of up to a maximum amount of P1.2 Million
pesos for a term ending on 30 April 1997. The
spouses Beluso constituted, other than their
promissory notes, a real estate mortgage over
parcels of land in Roxas City, covered by
Transfer Certificates of Title No. T-31539 and
T-27828, as additional security for the
obligation.
The Credit Agreement was
subsequently amended to increase the amount of
the Promissory Notes Line to a maximum of
P2.35 Million pesos and to extend the term
thereof to 28 February 1998.
3. On 30 April 1997, the payment of the principal
and interest of the latter two promissory
notes were debited from the spouses Belusos
account with UCPB; yet, a consolidated loan
for P1.3 Million was again released to the
spouses Beluso under one promissory note with
a due date of 28 February 1998. To completely
avail themselves of the P2.35 Million credit
line extended to them by UCPB, the spouses
Beluso executed two more promissory notes for
a total of P350,000.00. However, the spouses
Beluso alleged that the amounts covered by
these last two promissory notes were never
released or credited to their account and,
thus, claimed that the principal indebtedness
was only P2 Million.
4. The spouses Beluso, however, failed to make any
payment of the foregoing amounts.
5. On 2 September 1998, UCPB demanded that the
spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorneys fees, but
the spouses Beluso failed to comply therewith.
On 28 December 1998, UCPB foreclosed the

properties mortgaged by the spouses Beluso to

secure their credit line, which, by that time,
already ballooned to P3,784,603.00.
6. On 9 February 1999, the spouses Beluso filed a
Petition for Annulment, Accounting and Damages
against UCPB with the RTC of Makati City.
7. Trial court declared in its judgment that:
a. the interest rate used by [UCPB] void
b. the foreclosure and Sheriffs Certificate
of Sale void
c. UCPB is ordered to return to [the spouses
Beluso] the properties subject of the
foreclosure
d. UCPB to pay [the spouses Beluso] the amount
of P50,000.00 by way of attorneys fees
e. UCPB to pay the costs of suit.
f. Spouses Beluso] are hereby ordered to pay
[UCPB] the sum of P1,560,308.00.
8. Court of Appeals affirmed Trial court's
decision subject to the modification that
defendant-appellant UCPB is not liable for
attorneys fees or the costs of suit.
ISSUES:
1. Whether or not interest rate stipulated was void
Yes, stipulated interest rate is void because it
contravenes on the principle of mutuality of contracts
and it violates the Truth in lending Act.
The provision stating that the interest shall be at the
rate indicative of DBD retail rate or as determined by
the Branch Head is indeed dependent solely on the will
of petitioner UCPB.
Under such provision, petitioner
UCPB has two choices on what the interest rate shall be:
(1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head. As UCPB is given
this
choice,
the
rate
should
be
categorically
determinable in both choices.
If either of these two
choices presents an opportunity for UCPB to fix the rate
at will, the bank can easily choose such an option, thus
making the entire interest rate provision violative of
the principle of mutuality of contracts.

In addition, the promissory notes, the copies of which

were presented to the spouses Beluso after execution, are
not sufficient notification from UCPB.
As earlier
discussed, the interest rate provision therein does not
sufficiently indicate with particularity the interest
rate to be applied to the loan covered by said promissory
notes which is required in TRuth in Lending Act
2. Whether or not Spouses Beluso are subject to 12%
interest and compounding interest stipulations even
if declared amount by UCPB was excessive.
Yes.
Default commences upon judicial or extrajudicial
demand.[26] The excess amount in such a demand does not
nullify the demand itself, which is valid with respect to
the proper amount. There being a valid demand on the
part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount
and, therefore, the interests and the penalties began to
run at that point. As regards the award of 12% legal
interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed,
thus: There being no valid stipulation as to interest,
the legal rate of interest shall be charged. [27]
It
seems that the RTC inadvertently overlooked its noninclusion in its computation. It must likewise uphold the
contract stipulation providing the compounding of
interest. The provisions in the Credit Agreement and in
the promissory notes providing for the compounding of
interest were neither nullified by the RTC or the Court
of Appeals, nor assailed by the spouses Beluso in their
petition with the RTC. The compounding of interests has
furthermore been declared by this Court to be legal.
3. Whether or not foreclosure was void
No. The foreclosure proceedings are valid since there was
a valid demand made by UCPB upon the spouses Beluso.
Despite being excessive, the spouses Beluso are
considered in default with respect to the proper amount
of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be
applied to the extent of the amounts to which UCPB is
rightfully entitled.

Hermojina Estores vs. Spouses Arturo and

Laura Supangan
G.R. No. 175139 April 18, 2012
DEL CASTILLO, J.:
Facts:
1. In Oct. 1993, Hermojina Estores and Spouses
Supangan entered into a Conditional Deed of
Sale where Estores offered to sell, and Spouses
offered to buy a parcel of land in Cavite for
P4.7M.
2. After almost 7 years and despite the payment
of P3.5M by the Spouses, Estores still failed to
comply with her obligation to handle the
peaceful transfer of ownership as stated in 5
provisions in the contract.
3. In a letter in 2000, Spouses demanded the
return of the amount within 15 days from
receipt
4. In reply, Estores promised to return the same
within 120 days
5. Spouses agreed but imposed an interest of 12%
annually
6. Estores still failed despite demands
7. Spouses filed a complaint with the RTC against
Estores and Roberto Arias (allegedly acted as
Estores agent)
8. In Answer, Estores said they were willing to pay
the principal amount but without the interest
as it was not agreed upon
a. That since the Conditional Deed of Sale
provided only for the return of the

downpayment in case of breach, they

cant be liable for legal interest as well
9. RTC ruled saying that the Spouses are entitled
to the interest but only at 6% per annum and
also entitled to attys fees
10. On appeal, CA said that the issue to resolve is
a. whether it is proper to impose interest for
an obligation that does not involve a loan
or forbearance of money in the absence
of stipulation of the parties
11. CA affirmed RTC
a. That interest should start on date of
formal demand by Spouses to return the
money not when contract was executed
as stated by the RTC
b. That Arias not be solidarily liable as he
acted as agent only and did not expressly
bind himself or exceeded his authority
12. Estores contends:
a. Not bound to pay interest because the
deed only provided for the return of the
downpayment in case of failure to
comply with her obligations
b. That atty fees not proper because both
RTC and CA sustained her contention that
12% interest was uncalled for so it
showed that Spouses did not win
13. Spouses contend:
a. It is only fair that interest be imposed
because Estores failed to return the
amount upon demand and used the
money for her benefit

b. Estores failed to relocate the house

outside the perimeter of the subject lot
and complete the necessary documents
c. As to the fees, they claim that they were
forced to litigate when Estores unjustly
held the amount
Issue:
Is the imposition of interest and attorneys fees is
proper? YES
Interest based on Art 2209 of CC (6%) or under
Central Bank Circular 416 (12%)? 12%
Held:
Interest may be imposed even in the absence of stipulation
in the contract.
Article 2210 of the Civil Code expressly provides that [i]nterest
may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.
Estores failed on her obligations despite demand.
o She admitted that the conditions were not fulfilled
and was willing to return the full amount of P3.5M
but hasnt done so
o She is now in default
The interest at the rate of 12% is applicable in the instant
case.
Gen Rule: the applicable interest rate shall be computed in
accordance with the stipulation of the parties
Exc: if no stipulation, applicable rate of interest shall be 12%
per annum

o When obligation arises out of a loan or forbearance

of money, goods or credits
In other cases, it shall be 6%
In this case, no stipulation was made
Contract involved in this case is not a loan but a
Conditional Deed of Sale.
o No question that the obligations were not met and
the return of money not made
Even if transaction was a Conditional Deed of Sale, the
stipulation governing the return of the money can be
considered as a forbearance of money which requires
12% interest
In Crismina Garments, Inc. v. Court of Appeals, Forbearance-contractual obligation of lender or creditor to refrain during a
given period of time, from requiring the borrower or debtor to
repay a loan or debt then due and payable.
o In such case, forbearance of money, goods or credits
will have no distinct definition from a loan.
o however, the phrase forbearance of money, goods or
credits is meant to have a separate meaning from a
loan, otherwise there would have been no need to add
that phrase as a loan is already sufficiently defined in the
Civil Code
o Forbearance of money, goods or credits should therefore
refer to arrangements other than loan agreements, where
a person acquiesces to the temporary use of his money,
goods or credits pending happening of certain events or
fulfillment of certain conditions.
Estores unwarranted withholding of the money amounts to
forbearance of money which can be considered as an involuntary
loan so rate is 12% starting in Sept. 2000
The award of attorneys fees is warranted.

no doubt that the Spouses were forced to litigate to protect their

interest, i.e., to recover their money. The amount of P50,000.00
more appropriate
G.R. No. L-59096 October 11, 1985
PACITA F. REFORMINA and HEIRS OF FRANCISCO
REFORMINA,
petitioners,
vs.
THE HONORABLE VALERIANO P. TOMOL, JR., as
Judge of the Court of First Instance, Branch XI, CEBU
CITY, SHELL REFINING COMPANY (PHILS.), INC.,
and MICHAEL, INCORPORATED, respondents.
FACTS
This is a a Petition for Review on certiorari of the
Resolution of CFI-Cebu Judge Tomol for an action for
Recovery of Damages for injury to Person and Loss of
Property.
On June 7, 1972, judgment was rendered by the Court of
First instance of Cebu in Civil Case No. R-11279, 2 the
dispositive portion of which reads
WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and third party defendants and against the
defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and
Michael, Incorporated to pay jointly and severally the
following persons:
(g) Plaintiffs Pacita and Francisco Reformina the sum of
P131,084.00 which is the value of the boat F B Pacita Ill
together with its accessories, fishing gear and equipment
minus P80,000.00 which is the value of the insurance
recovered and the amount of P10,000.00 a month as the
estimated monthly loss suffered by them as a result of the
fire of May 6, 1969 up to the time they are actually paid or
already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the filing of the complaint until
paid and to pay attorney's fees of P5,000.00 with costs
against defendants and third party plaintiffs.
On appeal to the then Court of Appeals, the trial court's
judgment was modified to reads as follows

WHEREFORE. the judgment appealed from is modified

such that defendants-appellants Shell Refining Co. (Phils.),
Inc. and Michael, Incorporated are hereby ordered to
pay ... The two (2) defendants- appellants are also directed
to pay P100,000.00 with legal interests from the filing of
the complaint until paid as compensatory and moral
damages and P41,000.00 compensation for the value of the
lost boat with legal interest from the filing of the
complaint until fully paid to Pacita F.Reformina and the
heirs of Francisco Reformina. The liability of the two
defendants for an the awards is solidary.
Petitioners' motion for the reconsideration of the
questioned Resolution having been denied, they now come
before Us through the instant petition praying for the
setting aside of the said Resolution and for a declaration
that the judgment in their favor should bear legal interest
at the rate of twelve (12%) percent per annum pursuant to
Central Bank Circular No. 416 dated July 29, 1974.
ISSUE
How much, by way of legal interest, should a judgment
debtor pay the judgment creditor?
WON legal interest meant 6% as provided for under Article
2209 of the Civil Code .
What kind of judgment is covered under USURY Law?
RULING
Article 2209 of the Civil Code is applicable in case at bar. It
must be noted that the decision herein sought to be
executed is one rendered in an Action for Damages for
injury to persons and loss of property and does not involve
any loan, much less forbearances of any money, goods or
credits. As correctly argued by the private respondents, the
law applicable to the said case is Article 2209 of the New
Civil Code which reads
Art. 2209. If the obligation consists in the payment of a sum
of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall
be the payment of interest agreed upon, and in the absence

of stipulation, the legal interest which is six percent per

annum.
The above provision remains untouched despite the grant
of authority to the Central Bank by Act No. 2655, as
amended. To make Central Bank Circular No. 416
applicable to any case other than those specifically
provided for by the Usury Law will make the same of
doubtful constitutionality since the Monetary Board will be
exercising legislative functions which was beyond the
intendment of P.D. No. 116.
Central Bank Circular No. 416 which provides
By virtue of the authority granted to it under Section 1 of
Act 2655, as amended, otherwise known as the "Usury
Law" the Monetary Board in its Resolution No. 1622 dated
July 29, 1974, has prescribed that the rate of interest
for the loan or forbearance of any money, goods, or
credits and the rate allowed in judgments, in the
absence of express contract as to such rate of
interest, shall be twelve (12%) per cent per annum.
This Circular shall take effect immediately. (Italics supplied)
The judgments spoken of and referred to are Judgments in
litigations involving loans or forbearance of any 'money,
goods or credits. Any other kind of monetary judgment
which has nothing to do with, nor involving loans or
forbearance of any money, goods or credits does not fall
within the coverage of the said law for it is not within the
ambit of the authority granted to the Central Bank.

Sps. Juico v. China Banking Corp, G. R. No. 187678,

April 10, 2013. (Include Concurring Opinion) - Gab
SPS Juico vs CHINA BANK
DOCTRINE : the escalation clause is void if it grants
respondent the power to impose an increased rate of

interest without a written notice to petitioners and their

written consent.
Concurring doctrine by CJ Sereno
these points must be considered by creditors and debtors in the
drafting of valid escalation clauses. Firstly, as a matter of equity
and consistent with P.O. No. 1684, the escalation clause must be
paired with a de-escalation clause. 9 Secondly, so as not to violate
the principle of mutuality, the escalation must be pegged to the
prevailing market rates, and not merely make a generalized
reference to "any increase or decrease in the interest rate" in the
event a law or a Central Bank regulation is passed. Thirdly,
consistent with the nature of contracts, the proposed modification
must be the result of an agreement between the parties. In this way,
our credit system would be facilitated by firm loan provisions that
not only aid fiscal stability, but also avoid numerous disputes and
litigations between creditors and debtors.
Spouses Ignacio F. Juico and Alice P. Juico (petitioners) obtained a
loan from China Banking Corporation (respondent) as evidenced
by two Promissory Notes both dated October 6, 1998 and numbered
507-001051-34and 507-001052-0,5 for the sums of !!6,216,000 and
P4, 139,000, respectively. The loan was secured by a Real Estate
Mortgage (REM) over petitioners property located at 49
Greensville St., White Plains, Quezon City
respondent demanded the full payment of the outstanding balance
with accrued monthly interests.
As of February 23, 2001, the amount due on the two promissory
notes totaled P19,201,776. On the same day, the mortgaged
property was sold at public auction, with respondent China bank as
highest bidder for the amount of P10,300,000.
petitioners received 8a demand letter9 dated May 2, 2001 from
respondent for the payment ofP8,901,776.63, the amount of
deficiency after applying the proceeds of the foreclosure sale
respondent prayed that judgment be rendered ordering the
petitioners to pay jointly and severally: (1)P8,901,776.63
representing the amount of deficiency, plus interests at the legal

rate, from February 23, 2001 until fully paid; (2) an additional
amount equivalent to 1/10 of 1% per day of the total amount, until
fully paid, as penalty; (3) an amount equivalent to 10% of the
foregoing amounts as attorneys fees; and (4) expenses of litigation
and costs of suit.
Ms. Annabelle Cokai Yu, its Senior Loans Assistant stated that as of
now the outstanding balance of petitioners was P15,190,961.48. Yu
reiterated that the interest rate changes every month based on the
prevailing market rate. she notified petitioners of the prevailing
rate by calling them monthly .It was increased unilaterally
RTC: ordered Spouses to pay bank 9M plus the interest which
amounted to 15M.CA AFFIRMED
PETITIONER: They insist that the increase in interest rates were
unilaterally imposed by the bank and thus violate the principle of
mutuality of contracts.
Issue: whether the increase in interest rates is void for violating the
mutuality of contracts
HELD:Yes
RATIO:
Article 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
Article 1956 of the Civil Code likewise ordains that "no interest shall
be due unless it has been expressly stipulated in writing."
The binding effect of any agreement between parties to a contract is
premised on xxx (2) that there must be mutuality between the
parties based on their essential equality. Any contract which
appears to be heavily weighed in favor of one of the parties so as to
lead to an unconscionable result is void. Any stipulation regarding
the validity or compliance of the contract which is left solely to the
will of one of the parties, is likewise, invalid
Escalation clauses refer to stipulations allowing an increase in the
interest rate agreed upon by the contracting parties. This Court has
long recognized that there is nothing inherently wrong with
escalation clauses

Nevertheless, an escalation clause "which grants the creditor an

unbridled right to adjust the interest independently and upwardly,
completely depriving the debtor of the right to assent to an
important modification in the agreement" is void. A stipulation of
such nature violates the principle of mutuality of contracts. In a
case,SC said that petitioners assent to the modifications in the
interest rates cannot be implied from their lack of response to the
memos sent by respondent
It is now settled that an escalation clause is void where the creditor
unilaterally determines and imposes an increase in the stipulated
rate of interest without the express conformity of the debtor. Such
unbridled right given to creditors to adjust the interest
independently and upwardly would completely take away from the
debtors the right to assent to an important modification in their
agreement and would also negate the element of mutuality in their
contracts.
More recently in Solidbank Corporation v. Permanent Homes,
Incorporated,39 we upheld as valid an escalation clause which
required a written notice to and conformity by the borrower to the
increased interest rate
In Polotan, Sr. v. CA ,On petitioners contention that the interest
rate was unilaterally imposed and based on the standards and rate
formulated solely by respondent credit card company, we held:
Cardholder hereby authorizes Security Diners to correspondingly
increase the rate of such interest in the event of changes in
prevailing market rates x x x" is an escalation clause. However, it
cannot be said to be dependent solely on the will of private
respondent as it is also dependent on the prevailing market rates.
Thus, it was valid because it wasnt solely potestative as it was
based on the market rates(something outside the control of
respondent)
Here, the interest rates would vary as determined by prevailing
market rates. Evidently, the parties intended the interest on
petitioners loan, including any upward or downward adjustment,

to be determined by the prevailing market rates and not dictated by

respondents policy.
HOWEVER, SC hold that the escalation clause here is still
void because it grants respondent the power to impose an
increased rate of interest without a written notice to
petitioners and their written consent. Respondents monthly
telephone calls to petitioners advising them of the prevailing
interest rates would not suffice. A detailed billing statement based
on the new imposed interest with corresponding computation of the
total debt should have been provided by the respondent to enable
petitioners to make an informed decision. An appropriate form
must also be signed by the petitioners to indicate their
conformity to the new rates. Compliance with these requisites
is essential to preserve the mutuality of contracts. For indeed, onesided impositions do not have the force of law between the parties,
because such impositions are not based on the parties essential
equality.
In the absence of consent on the part of the petitioners to the
modifications in the interest rates, the adjusted rates cannot bind
them. Hence, we consider as invalid the interest rates in excess of
15%, the rate charged for the first year.
Based on the August 29, 2000 demand letter of China Bank,
petitioners total principal obligation under the two promissory
notes which they failed to settle is P10,355,000. However, due to
China Banks unilateral increases in the interest rates from 15% to
as high as 24.50% and penalty charge of 1/10 of 1% per day or
36.5% per annum for the period November 4, 1999 to February 23,
2001, petitioners balance ballooned to P19,201,776.63. Note that
the original amount of principal loan almost doubled in only 16
months. The Court also finds the penalty charges imposed excessive
and arbitrary, hence the same is hereby reduced to 1% per month or
12% per annum.
EASTERN SHIPPING LINES, INC., petitioner, vs. HON.
COURT OF APPEALS AND MERCANTILE INSURANCE
COMPANY, INC., respondents.

VITUG, J.:
FACTS:
This is an action against defendants shipping company,
arrastre operator and broker-forwarder for damages
sustained by a shipment while in defendants' custody, filed
by the insurer-subrogee who paid the consignee the value
of such losses/damages.
the losses/damages were sustained while in the respective
and/or successive custody and possession of defendants
carrier (Eastern), arrastre operator (Metro Port) and broker
(Allied Brokerage).
As a consequence of the losses sustained, plaintiff was
compelled to pay the consignee P19,032.95 under the
aforestated marine insurance policy, so that it became
subrogated to all the rights of action of said consignee
against defendants.
DECISION OF LOWER COURTS: * trial court: ordered
payment of damages, jointly and severally * CA: affirmed
trial court.
ISSUES AND RULING:
(a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several,
liability of the common carrier, the arrastre operator and the
customs broker;
YES, it is solidary. Since it is the duty of the ARRASTRE to
take good care of the goods that are in its custody and to
deliver them in good condition to the consignee, such
responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the

obligation to deliver the goods in good condition to the

consignee.
The common carrier's duty to observe the requisite diligence
in the shipment of goods lasts from the time the articles are
surrendered to or unconditionally placed in the possession
of, and received by, the carrier for transportation until
delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts.
1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161
SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863).
When the goods shipped either are lost or arrive in
damaged condition, a presumption arises against the carrier
of its failure to observe that diligence, and there need not
be an express finding of negligence to hold it liable.
(b) whether the payment of legal interest on an award for
loss or damage is to be computed from the time the
complaint is filed or from the date the decision appealed
from is rendered; and
FOLLOW THESE VERY IMPORTANT RULES (GUIDANCE BY
THE SUPREME COURT)
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 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.
(c) whether the applicable rate of interest, referred to
above, is twelve percent (12%) or six percent (6%).

SIX PERCENT (6%) on the amount due computed from the

decision, dated 03 February 1988, of the court a quo (Court
of Appeals) AND A TWELVE PERCENT (12%) interest, in lieu
of SIX PERCENT (6%), shall be imposed on such amount
upon finality of the Supreme Court decision until the
payment thereof.
RATIO: when the judgment awarding a sum of money
becomes final and executory, the monetary award shall earn
interest at 12% per annum from the date of such finality
until its satisfaction, regardless of whether the case involves
a loan or forbearance of money. The reason is that this
interim period is deemed to be by then equivalent to a
forbearance of credit.
NOTES: the Central Bank Circular imposing the 12%
interest per annum applies only to loans or forbearance of
money, goods or credits, as well as to judgments involving
such loan or forbearance of money, goods or credits, and
that the 6% interest under the Civil Code governs when the
transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the
performance of obligations in general. Observe, too, that in
these cases, a common time frame in the computation of
the 6% interest per annum has been applied, i.e., from the
time the complaint is filed until the adjudged amount is fully
paid.

Dario Nacar vs
Gallery Frames

Dario Nacar filed a labor case against Gallery Frames and

its owner Felipe Bordey, Jr. Nacar alleged that he was
dismissed without cause by Gallery Frames on January 24,
1997. On October 15, 1998, the Labor Arbiter (LA) found
Gallery Frames guilty of illegal dismissal hence the Arbiter
awarded Nacar P158,919.92 in damages consisting of
backwages and separation pay.
Gallery Frames appealed all the way to the Supreme Court
(SC). The Supreme Court affirmed the decision of the Labor
Arbiter and the decision became final on May 27, 2002.
After the finality of the SC decision, Nacar filed a motion
before the LA for recomputation as he alleged that his
backwages should be computed from the time of his illegal
dismissal (January 24, 1997) until the finality of the SC
decision (May 27, 2002) with interest. The LA denied the
motion as he ruled that the reckoning point of the
computation should only be from the time Nacar was
illegally dismissed (January 24, 1997) until the decision of
the LA (October 15, 1998). The LA reasoned that the said
date should be the reckoning point because Nacar did not
appeal hence as to him, that decision became final and
executory.
ISSUE: Whether or not the Labor Arbiter is correct.

HELD: No. There are two parts of a decision when it comes

to illegal dismissal cases (referring to cases where the
dismissed employee wins, or loses but wins on appeal). The
first part is the ruling that the employee was illegally
dismissed. This is immediately final even if the employer
appeals but will be reversed if employer wins on appeal.
The second part is the ruling on the award of backwages
and/or separation pay. For backwages, it will be computed
from the date of illegal dismissal until the date of the
decision of the Labor Arbiter. But if the employer appeals,
then the end date shall be extended until the day when the
appellate courts decision shall become final. Hence, as a
consequence, the liability of the employer, if he loses on
appeal, will increase this is just but a risk that the
employer cannot avoid when it continued to seek recourses
against the Labor Arbiters decision. This is also in
accordance with Article 279 of the Labor Code.
Anent the issue of award of interest in the form of actual or
compensatory damages, the Supreme Court ruled that the
old case of Eastern Shipping Lines vs CA is already
modified by the promulgation of the Bangko Sentral ng
Pilipinas Monetary Board Resolution No. 796 which lowered
the legal rate of interest from 12% to 6%. Specifically, the
rules on interest are now as follows:
1. Monetary Obligations ex. Loans:

a. If stipulated in writing:

3. Compounded Interest

a.1. shall run from date of judicial demand (filing of the

case)

This is applicable to both monetary and non-monetary

obligations

a.2. rate of interest shall be that amount stipulated

6% per annum computed against award of damages

(interest) granted by the court. To be computed from the
date when the courts decision becomes final and executory
until the award is fully satisfied by the losing party.

b. If not stipulated in writing

b.1. shall run from date of default (either failure to pay upon
extra-judicial demand or upon judicial demand whichever is
appropriate and subject to the provisions of Article 1169 of
the Civil Code)
b.2. rate of interest shall be 6% per annum
2.

Non-Monetary Obligations (such as the case at bar)

4. The 6% per annum rate of legal interest shall be applied

prospectively:
Final and executory judgments awarding damages prior to
July 1, 2013 shall apply the 12% rate;

a. If already liquidated, rate of interest shall be 6% per

annum, demandable from date of judicial or extra-judicial
demand (Art. 1169, Civil Code)

Final and executory judgments awarding damages on or

after July 1, 2013 shall apply the 12% rate for unpaid
obligations until June 30, 2013; unpaid obligations with
respect to said judgments on or after July 1, 2013 shall still
incur the 6% rate.

b. If unliquidated, no interest

MACALINAO V. BPI, 600 SCRA 67

Except: When later on established with certainty. Interest

shall still be 6% per annum demandable from the date of
judgment because such on such date, it is already deemed
that the amount of damages is already ascertained.

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% monthly interest to 2%.

one maybe totally just and equitable in another. In the instant

On appeal of the case, the Court of Appeals reversed the

case, Macalinao made partial payments to BPI .Therefore, the

decision of the RTC holding that petitioner Macalinao freely

interest rate and penalty charge of 3% per month or 36% per

availed herself of the credit card facility offered by respondent

annum should be reduced to 2% per month or 24% per annum.

Bank of the Philippine Islands to general public; contracts of

adhesion are not invalid per se. Petitioner assailed the appellate

ANITA A.

courts decision alleging that the interest rate and penalty

PHILIPPINE

LEDDA,

Petitioner, v. BANK
ISLANDS,

OF

THE

Respondent.

charges are unconscionable and iniquitous at 36% per annum.

CARPIO,

J.:

ISSUE: Whether or not the interest rate and penalty charges

FACTS:

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

As one of BPIs valued clients, Anita Ledda (Ledda) was

issued a pre-approved BPI credit card. Thereafter, Ledda
used the credit card for various purchases of goods and
services and cash advances. Ledda defaulted in the
payment of her credit card obligation. Consequently, BPI
sent her demand letters but to no avail. Thus, BPI filed an
action for collection of sum of money against Ledda. The
RTC gave due course to BPIs complaint and ordered Ledda
to

pay

her

obligation.

unconscionable; courts must consider the circumstances of

each case since what may be iniquitous and unconscionable in

On appeal to the CA, Ledda argued that the document

containing the Terms and Conditions governing the use of

REMEDIAL

LAW:

actionable

document

the BPI credit card is an actionable document contemplated

in Sec.7, Rule 8 of the Rules of Court. Hence, the document

BPIs cause of action is primarily based on Leddas (1)

should have been set forth in and attached in BPIs

acceptance of the BPI credit card, (2) usage of the BPI

complaint. Ledda also averred that since there was no

credit card to purchase goods, avail services and secure

written agreement to pay a higher interest, the interest rate

cash advances, and (3) non-payment of the amount due for

to be imposed is only 6% pursuant to Article 2209 of the

such credit card transactions, despite demands. In other

Civil

words, BPIs cause of action is not based only on the

Code.

The

CA

rejected

Leddas

arguments.

document
ISSUES:

containing

the

Terms

and

Conditions

accompanying the issuance of the BPI credit card in favor

of Ledda. Therefore, the document containing the Terms

I. Whether or not the document containing the Terms and

and Conditions governing the use of the BPI credit card is

Conditions governing the use of credit card is an actionable

not an actionable document contemplated in Section 7,

document?

Rule 8 of the 1997 Rules of Civil Procedure.As such, it is

not required by the Rules to be set forth in and attached to

II. Whether or not the imposable interest rate is 6%?

the

HELD:

SECOND ISSUE: The imposable interest is 12% per

The

petition

is

partially

meritorious.

complaint.

annum.
FIRST ISSUE: The document containing the Terms and
Conditions governing the use of the BPI credit card is not
an

actionable

CIVIL

LAW:

interest;

forbearance

of

money

document.
Since there is no dispute that Ledda received, accepted and

used the BPI credit card issued to her and that she

DEL

CASTILLO,

J.:

defaulted in the payment of the total amount arising from

the use of such credit card,Ledda is liable to pay BPI

FACTS:

P322,138.58 representing the principal amount of her

unpaid credit card obligation. Ledda must also pay interest

Petitioner Jocelyn M. Toledo, who was then the Vice-

on the total unpaid credit card amount at the rate of 12%

President of the College Assurance Plan (CAP) Phils., Inc.,

per annum since her credit card obligation consists of a

obtained several loans from respondent Marilou M. Hyden.

loan or forbearance of money. We reject Leddas contention

that, since there was no written agreement to pay a higher

Jocelyn had been religiously paying Marilou the stipulated

interest rate, the interest rate should only be 6%. Ledda

monthly interest. However, the total principal amount

erroneously invokes Article 2209 of the Civil Code. Article

ofP290,000.00 remained unpaid. A document entitled

2209 refers to indemnity for damages and not interest on

"Acknowledgment of Debt" for the amount ofP290,000.00

loan or forbearance of money, which is the case here.

was signed by Jocelyn with two of her subordinates as

witnesses. Also on said occasion, Jocelyn issued checks to

In accordance with Eastern Shipping Lines, Inc., the 12%

Marilou representing renewal payment of her five previous

legal interest shall be reckoned from the date BPI

loans.

extrajudicially demands from Ledda the payment of her

overdue

credit

card

obligation.

Jocelyn ordered the stop payment on the remaining checks

and filed with the RTC of Cebu City a complaintagainst

Petition is PARTIALLY GRANTED.

Marilou for Declaration of Nullity and Payment, Annulment,

JOCELYN M. TOLEDO , Petitioner, v. MARILOU M.

Sum

HYDEN,

of

Money,

Injunction

and

Damages.

Respondent.
Jocelyn averred that Marilou forced, threatened and

intimidated her into signing the "Acknowledgment of Debt"

and at the same time forced her to issue the postdated

HELD:

The

petition

is

without

merit.

checks.She further claimed that the application of her total

payment

ofP528,550.00

to

interest

alone

is

illegal,

CIVIL

LAW;

LOANS;

INTEREST

unfounded, unjust, oppressive and contrary to law because

there was no written agreement to pay interest. Marilou filed

First Issue: The 6% to 7% interest per month paid by

an Answer alleging that Jocelyn voluntarily obtained the

Jocelyn is not excessive under the circumstances of this

said loans knowing fully well that the interest rate was at 6%

case. It was clearly shown that before Jocelyn availed of

to 7% per month. In fact, a 6% to 7% advance interest was

said loans, she knew fully well that the same carried with it

already deducted from the loan amount given to Jocelyn.

an interest rate of 6% to 7% per month, yet she did not

complain. In fact, when she availed of said loans, an

The trial court ruled in favor of Marilou which was affirmed

advance interest of 6% to 7% was already deducted from

by

the loan amount, yet she never uttered a word of protest.

the

CA.

ISSUES:

After years of benefiting from the proceeds of the loans

bearing an interest rate of 6% to 7% per month and paying

I. Whether or not the imposition of interest at the rate of six

for the same, Jocelyn cannot now go to court to have the

percent (6%) to seven percent (7%) is contrary to law,

said interest rate annulled on the ground that it is excessive,

morals, good customs, public order or public policy.

iniquitous,

unconscionable,

exorbitant,

and

absolutely

revolting to the conscience of man."This is so because

II. Whether or not the "Acknowledgment of Debt" is an

among the maxims of equity are (1) he who seeks equity

inexistent contract that is void from the very beginning

must do equity, and (2) he who comes into equity must

pursuant

come with clean hands.The latter is a frequently stated

to Article

1409

of

the

New

Civil

Code.

maxim which is also expressed in the principle that he who

into.Next, Jocelyn issued five checks in favor of Marilou.

has done inequity shall not have equity.It signifies that a

More significantly, Jocelyn already availed herself of the

litigant may be denied relief by a court of equity on the

benefits of the "Acknowledgment of Debt," the validity of

ground that his conduct has been inequitable, unfair and

which

she

now

impugns.

dishonest, or fraudulent, or deceitful as to the controversy in

issue."

Clearly, by her own acts, Jocelyn isestoppedfrom impugning

the validity of the "Acknowledgment of Debt." Courts have

REMEDIAL

LAW;

ESTOPPEL

no power to relieve parties from obligations voluntarily

assumed, simply because their contracts turned out to be

Second Issue: The document "Acknowledgment of Debt" is

disastrous or unwise investments."

valid and binding. It is provided, as one of the conclusive

DEPOSIT

presumptions under Rule 131, Section 2(a), of the Rules of

Court that, "Whenever a party has, by his own declaration,
act or omission, intentionally and deliberately led another to
believe a particular thing to be true, and to act upon such
belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it."This is
known

as

the

principle

ofestoppel.

Here, it is uncontested that Jocelyn had in fact signed the

"Acknowledgment of Debt" in April 1998 and two of her
subordinates served as witnesses to its execution, knowing
fully well the nature of the contract she was entering

CA-Agro Industrial Devt Corp vs CA

219 SCRA 426
Facts:
On July 3, 1979, petitioner (through its President- Sergio Aguirre)
and the Spouses Ramon and Paula Pugao entered into an agreement
whereby the former purchase two parcel of lands from the latter. It
was paid of downpayment while the balance was covered by there
postdated checks. Among the terms and conditions embodied in the
agreement were the titles shall be transferred to the petitioner
upon full payment of the price and the owner's copies of the
certificate of titles shall be deposited in a safety deposit box of any
bank. Petitioner and the Pugaos then rented Safety Deposit box of
private respondent Security Bank and Trust Company.

Thereafter, a certain Margarita Ramos offered to buy from the

petitioner. Mrs Ramos demand the execution of a deed of sale
which necessarily entailed the production of the certificate of
titles. In view thereof, Aguirre, accompanied by the Pugaos, then
proceed to the respondent Bank to open the safety deposit box and
get the certificate of titles. However, when opened in the presence
of the Bank's representative, the box yielded no such certificate.
Because of the delay in the reconstitution of the title, Mrs Ramos
withdrew her earlier offer to purchase.

open the box. On the other hand, the respondent bank could not
likewise open the box without the renter's key. The Court further
assailed that the petitioner is correct in applying American
Jurisprudence. Herein, the prevailing view is that the relation
between the a bank renting out safe deposits boxes and its
customer with respect to the contents of the box is that of a bail
or/ and bailee, the bailment being for hire and mutual benefits.
That prevailing rule has been adopted in Section 72 of the General
Banking Act.

Hence this petition.

Section 72. In addition to the operations specifically authorized

elsewhere in this Act, banking institutions other that building and
loan associations may perform the following services:

Issue:

(a) Receive in custody funds, document and valuable objects and

rents safety deposits taxes for the safeguard of such effects.

Whether or not the contract of rent between a commercial bank

and another party for the use of safety deposit box can be
considered alike to a lessor-lessee relationship.

xxx xxx xxx

The bank shall perform the services permitted under subsections
(a) (b) and (c) of this section as depositories or as agents.

Ruling:
The petitioner is correct in making the contention that the contract
for the rent of the deposit box is not a ordinary contract of lease as
defined in Article 1643 of the Civil Code. However, the Court do not
really subscribe to its view that the same is a contract of deposit
that is to be strictly governed by the provisions in 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

YHT Realty Corporation et al vs. CA

G.R. No. 126780
February 17, 2005
2nd Division
J. Tinga
FACTS:
Respondent McLoughlin would always stay at
Tropicana Hotel every time he is here in the Philippines
and would rent a safety deposit box. The safety
deposit box could only be opened through the use of 2
keys, one of which is given to the registered guest, and
the other remaining in the possession of the
management of the hotel.

McLoughlin allegedly placed the following in his

safety deposit box 2 envelopes
containing US
Dollars, one envelope containing Australian Dollars,
Letters, credit cards, bankbooks and a checkbook.
On 12 December 1987, before leaving for a brief
trip, McLoughlin took some items from the safety box
which includes the ff: envelope containing Five
Thousand US Dollars (US$5,000.00), the other
envelope containing Ten Thousand Australian Dollars
(AUS$10,000.00), his passports and his credit cards.
The other items were left in the deposit box. Upon
arrival, he found out that a few dollars were missing
and the jewelry he bought was likewise missing.
Eventually, he confronted Lainez and Paiyam
who admitted that Tan opened the safety deposit box
with the key assigned to him. McLoughlin went up to
his room where Tan was staying and confronted her.
Tan admitted that she had stolen McLouglins key and
was able to open the safety deposit box with the
assistance of Lopez, Paiyam and Lainez. Lopez also
told McLoughlin that Tan stole the key assigned to
McLouglin while the latter was asleep.
McLoughlin insisted that it must be the hotel
who must assume responsibility for the loss he
suffered. Lopez refused to accept responsibility relying
on the conditions for renting the safety deposit box
entitled Undertaking For the Use of Safety Deposit
Box
ISSUE: WON the "Undertaking for the Use of Safety
Deposit Box" admittedly executed by private
respondent is null and void.
HELD: YES
Article 2003 was incorporated in the New Civil
Code as an expression of public policy precisely to

apply to situations such as that presented in this case.

The hotel business like the common carriers business
is imbued with public interest. Catering to the public,
hotelkeepers are bound to provide not only lodging for
hotel guests and security to their persons and
belongings. The twin duty constitutes the essence of
the business. The law in turn does not allow such duty
to the public to be negated or diluted by any contrary
stipulation in so-called undertakings that ordinarily
appear in prepared forms imposed by hotel keepers on
guests for their signature.
In an early case (De Los Santos v. Tan Khey), CA
ruled that to hold hotelkeepers or innkeeper liable for
the effects of their guests, it is not necessary that they
be actually delivered to the innkeepers or their
employees. It is enough that such effects are within
the hotel or inn. With greater reason should the
liability of the hotelkeeper be enforced when the
missing items are taken without the guests knowledge
and consent from a safety deposit box provided by the
hotel itself, as in this case.
Paragraphs (2) and (4) of the undertaking
manifestly contravene Article 2003, CC for they allow
Tropicana to be released from liability arising from any
loss in the contents and/or use of the safety deposit
box for any cause whatsoever. Evidently, the
undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety
deposit box whether or not negligence was incurred by
Tropicana or its employees. The New Civil Code is
explicit that the responsibility of the hotel-keeper shall
extend to loss of, or injury to, the personal property of
the guests even if caused by servants or employees of
the keepers of hotels or inns as well as by strangers,
except as it may proceed from any force majeure.41 It
is the loss through force majeure that may spare the

hotel-keeper from liability. In the case at bar, there is

no showing that the act of the thief or robber was done
with the use of arms or through an irresistible force to
qualify the same as force majeure.

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 petitioners liability in case of

TRIPLE-V

FOOD

SERVICES

INC.

vs.

FILIPINO

loss, she had thereby waived her rights.

MERCHANTS INSURANCE COMPANY, GR. No. 160554,

February 21, 2005

ISSUE: Whether or not petitioner Triple-V Food Services, Inc.

is liable for the loss.

FACTS: Mary Jo-Anne De Asis dined at petitioner's Kamayan

Restaurant. De Asis was using a Mitsubishi Galant Super

HELD: The Supreme Court ruled in the affirmative. In a

Saloon Model 1995 issued by her employer Crispa Textile Inc..

contract of deposit, a person receives an object belonging to

On said date, De Asis availed of the valet parking service of

another with the obligation of safely keeping it and returning

petitioner and entrusted her car key to petitioner's valet counter.

the same. A deposit may be constituted even without any

Afterwards, a certain Madridano, valet attendant, noticed that

consideration. It is not necessary that the depositary receives a

the car was not in its parking slot and its key no longer in the

fee before it becomes obligated to keep the item entrusted for

box where valet attendants usually keep the keys of cars

safekeeping and to return it later to the depositor. Petitioner

entrusted to them. The car was never recovered. Thereafter,

cannot evade liability by arguing that neither a contract of

Crispa filed a claim against its insurer, herein respondent

deposit nor that of insurance, guaranty or surety for the loss of

Filipino

the car was constituted when De Asis availed of its free valet

Merchants

Insurance

Company,

Inc.

Having

indemnified Crispa for the loss of the subject vehicle, FMICI,

parking service.

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

Durban Apartments Corporation v Pioneer

Insurance and Surety Corporation

Facts: Pioneer Insurance and Surety Corporation, by

right of subrogation, filed a Complaint for Recovery of
Damages against Durban Apartment Corporation.
Pioneer Insurance and Surety Corporation is the
insurer of Jeffrey S. See,s 2001 Suzuki Grand Vitara.
Loss occured when Sees Vitara was carnapped while it
was in the possession of petitioner Durban Apartment
Hotel.
Issue: WON there exist a contract of deposit
Held: there exist a contract of necessary deposit
Article 1962, in relation to Article 1998, of the Civil Code
defines a contract of deposit and a necessary deposit made by
persons in hotels or inns:
Art. 1962. A deposit is constituted from the
moment a person receives a thing belonging to
another, with the obligation of safely keeping it and
returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract,
there is no deposit but some other contract.
Art. 1998. The deposit of effects made by
travelers in hotels or inns shall also be regarded as
necessary. The keepers of hotels or inns shall be
responsible for them as depositaries, provided that
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the part
of the latter, they take the precautions which said
hotel-keepers or their substitutes advised relative to
the care and vigilance of their effects.
Facts shows that the contract of depost was perfected
from Sees delivery, when he handed over to

Justimbaste the keys to his vehicle, which Justimbaste

receive with the obligation of the safely keeping and
returning it. Evidence was show that Justimbaste
issued a valet parking customer claim stub.

LETTERS OF CREDIT

Transfield Philippines vs
Luzon Hydro Electric Corp.
GR No 146717, Nov 22, 2004
MARCH 15, 2014LEAVE A COMMENT

The independent nature of the letter of credit

may be: (a) independence in toto where the
credit is independent from the justification
aspect and is a separate obligation from the
underlying

agreement

like

for

instance

typical standby; or (b) independence may be

only as to the justification aspect like in a
commercial

letter

of

credit

or

repayment

standby, which is identical with the same

obligations under the underlying agreement.
In both cases the payment may be enjoined if
in the light of the purpose of the credit the
payment

of

the

credit

would

constitute

fraudulent abuse of the credit.

Facts: Transfield Philippines (Transfield) entered into
a

turn-key

contract

with

Luzon

Hydro

Corp.

(LHC).Under

the

contract,

Transfield

were

to

Held: Transfields argument that any dispute must

construct a hydro-electric plants in Benguet and

first be resolved by the parties, whether through

Ilocos. Transfield was given the sole responsibility

negotiations or arbitration, before the beneficiary is

for the design, construction, commissioning, testing

entitled to call on the letter of credit in essence

and completion of the Project. The contract provides

would convert the letter of credit into a mere

for a period for which the project is to be completed

guarantee.

and also allows for the extension of the period

provided that the extension is based on justifiable

The independent nature of the letter of credit may

grounds such as fortuitous event. In order to

be: (a) independence in toto where the credit is

guarantee performance by Transfield, two stand-by

independent from the justification aspect and is a

letters of credit were required to be opened. During

separate obligation from the underlying agreement

the construction of the plant, Transfield requested

like

for extension of time citing typhoon and various

independence may be only as to the justification

disputes delaying the construction. LHC did not give

aspect like in a commercial letter of credit or

due course to the extension of the period prayed for

repayment standby, which is identical with the same

but referred the matter to arbitration committee.

obligations under the underlying agreement. In both

Because of the delay in the construction of the

cases the payment may be enjoined if in the light of

plant, LHC called on the stand-by letters of credit

the purpose of the credit the payment of the credit

because of default. However, the demand was

would constitute fraudulent abuse of the credit.

for

instance

typical

standby;

or

(b)

objected by Transfield on the ground that there is

still

pending

arbitration

on

their

request

for

extension of time.

Jurisprudence has laid down a clear distinction

between a letter of credit and a guarantee in that
the settlement of a dispute between the parties is

Issue: Whether or not LHC can collect from the

not a pre-requisite for the release of funds under a

letters of credit despite the pending arbitration case

letter of credit. In other words, the argument is

incompatible with the very nature of the letter of

credit. If a letter of credit is drawable only after

insurers

of

settlement of the dispute on the contract entered

whomsoever.

the

goods,

or

any

other

person

into by the applicant and the beneficiary, there

would be no practical and beneficial use for letters
of credit in commercial transactions.
The engagement of the issuing bank is to pay the
seller or beneficiary of the credit once the draft and
the required documents are presented to it. The socalled independence principle assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not. Under this
principle, banks assume no liability or responsibility
for the form, sufficiency, accuracy, genuineness,
falsification or legal effect of any documents, or for
the general and/or particular conditions stipulated in
the documents or superimposed thereon, nor do
they assume any liability or responsibility for the
description, quantity, weight, quality, condition,
packing, delivery, value or existence of the goods
represented by any documents, or for the good faith
or acts and/or omissions, solvency, performance or
standing of the consignor, the carriers, or the

Feati Bank and Trust

Company v Court of Appeals
G.R. No. 94209 April
30, 1991
MARCH 15, 2014LEAVE A COMMENT

In case of a notifying bank, the correspondent

bank assumes no liability except to notify
and/or

transmit

to

the

beneficiary

the

existence of the letter of credit.

A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a
draft under the letter of credit. Its liability is
dependent upon the stage of the negotiation.
If before negotiation, it has no liability with
respect to the seller but after negotiation, a
contractual

relationship

will

then

prevail

between the negotiating bank and the seller.

In

the

case

correspondent

of

bank

confirming
assumes

bank,
a

the

direct

obligation to the seller and its liability is a

primary one as if the correspondent bank

the logs. Because of the absence of the certification

itself had issued the letter of credit.

by Christiansen, the Feati Bank and Trust company

Facts: Bernardo Villaluz entered into a contract of

refused to advance the payment on the letter of

sale with Axel Christiansen in which Villaluz agreed

credit until such credit lapsed. Since the demands

to deliver to Christiansen 2,000 cubic meters of

by

lauan logs at $27.00 per cubic meter FOB. On the

certification proved futile, he filed an action for

arrangements made and upon the instructions of

mandamus

consignee, Hanmi Trade Development, Ltd., the

Christiansen and Feati Bank and Trust Company

Security Pacific National Bank of Los Angeles,

before

California issued an irrevocable letter of credit

Christiansen however left the Philippines and Villaluz

available at sight in favor of Villaluz for the sum of

filed an amended complaint making Feati Bank and

$54,000.00, the total purchase price of the lauan

Trust Company.

Villaluz

the

for
and
Court

Christiansen
specific
of

to

execute

performance

First

Instance

the

against
of

Rizal.

logs.
Issue: Whether or not Feati Bank is liable for
The letter of credit was mailed to the Feati Bank and

Releasing the funds to Christiansen

Trust Company with the instruction to the latter that

it forward the enclosed letter of credit to the

Held: In commercial transactions involving letters of

beneficiary. The letter of credit also provided that

credit, the functions assumed by a correspondent

the draft to be drawn is on Security Pacific National

bank are classified according to the obligations

Bank and that it be accompanied by certain

taken up by it. The correspondent bank may be

documents. The logs were thereafter loaded on a

called a notifying bank, a negotiating bank, or a

vessel

confirming bank.

but

Christiansen

refused

to

issue

the

certification required in paragraph 4 of the letter of

credit, despite repeated requests by the private

In case of a notifying bank, the correspondent bank

respondent. The logs however were still shipped and

assumes no liability except to notify and/or transmit

received by consignee, to whom Christiansen sold

to the beneficiary the existence of the letter of

A notifying bank is not a privy to the contract of sale

credit.

between the buyer and the seller, its relationship is

only with that of the issuing bank and not with the

A negotiating bank, on the other hand, is a

beneficiary to whom he assumes no liability. It

correspondent bank which buys or discounts a draft

follows therefore that when the petitioner refused to

under the letter of credit. Its liability is dependent

negotiate with the private respondent, the latter has

upon

no cause of action against the petitioner for the

the

stage

of

the

negotiation.

If

before

negotiation, it has no liability with respect to the

seller

but

relationship

after
will

negotiation,
then

prevail

enforcement of his rights under the letter.

contractual

between

the

negotiating bank and the seller.

Since the Feati was only a notifying bank, its

responsibility was solely to notify and/or transmit
the documentary of credit to the private respondent

In the case of a confirming bank, the correspondent

and its obligation ends there.

bank assumes a direct obligation to the seller and its

liability is a primary one as if the correspondent

At the most, when the petitioner extended the loan

bank itself had issued the letter of credit.

to the private respondent, it assumed the character

of a negotiating bank. Even then, the petitioner will

In this case, the letter merely provided that the

still not be liable, for a negotiating bank before

petitioner forward the enclosed original credit to

negotiation has no contractual relationship with the

the beneficiary. (Records, Vol. I, p. 11) Considering

seller. Whether therefore the petitioner is a notifying

the aforesaid instruction to the petitioner by the

bank or a negotiating bank, it cannot be held liable.

issuing bank, the Security Pacific National Bank, it is

Absent any definitive proof that it has confirmed the

indubitable that the petitioner is only a notifying

letter of credit or has actually negotiated with Feati,

bank and not a confirming bank as ruled by the

the refusal by the petitioner to accept the tender of

courts below.

the private respondent is justified.

TRUST RECEIPTS

initial payment, the spouses defaulted. PBC wrote

Colinares v CA G.R. No.

90828. September 5, 2000

to Petitioners demanding that the amount be paid

MARCH 15, 2014LEAVE A COMMENT

lost P19,195.83 in the Carmelite Monastery Project

within seven days from notice. Instead of complying

with PBCs demand, Veloso confessed that they

The ownership of the merchandise continues

to be vested in the person who had advanced
payment until he has been paid in full, or if
the merchandise has already been sold, the
proceeds of the sale should be turned over to
him by the importer or by his representative
or successor in interest.
Facts: Melvin Colinares and Lordino Veloso (hereafter
Petitioners) were contracted for a consideration
of P40,000 by the Carmelite Sisters of Cagayan de
Oro

City

to

renovate

the

latters

Camaman-an,

Cagayan

de

Oro

convent

City.

at

Colinares

applied for a commercial letter of credit with the

Philippine Banking Corporation, Cagayan de Oro City
branch (hereafter PBC) in favor of CM Builders
Centre.

PBC

approved

the

letter

of

credit

for P22,389.80 to cover the full invoice value of the

goods. Petitioners signed a pro-forma trust receipt
as security.
PBC

debited P6,720

from

Petitioners

marginal

deposit as partial payment of the loan. After the

and requested for a grace period of until 15 June

1980 to settle the account. Colinares proposed that
the

terms

of

payment

of

the

loan

be

modified P2,000 on or before 3 December 1980,

and P1,000 per month . Pending approval of the
proposal, Petitioners paid P1,000 to PBC on 4
December

1980,

and

thereafter P500

on

11

February 1981, 16 March 1981, and 20 April 1981.

Concurrently
attorneys

with

fees

by

the

separate

PBCs

legal

demand
counsel,

for
PBC

continued to demand payment of the balance. On

14 January 1983, Petitioners were charged with the
violation of P.D. No. 115 (Trust Receipts Law) in
relation to Article 315 of the Revised Penal Code
During trial, petitioner Veloso insisted that the
transaction was a clean loan as per verbal
guarantee of Cayo Garcia Tuiza, PBCs former
manager. He and petitioner Colinares signed the
documents without reading the fine print, only
learning of the trust receipt implication much later.
When he brought this to the attention of PBC, Mr.

Tuiza assured him that the trust receipt was a mere

the bank and only released to the importer in trust

formality. The Trust Receipts Law does not seek to

subsequent to the grant of the loan.

enforce payment of the loan, rather it punishes the

dishonesty and abuse of confidence in the handling

The bank acquires a security interest in the goods

of money or goods to the prejudice of another

as holder of a security title for the advances it had

regardless of whether the latter is the owner. Here,

made to the entrustee. The ownership of the

it is crystal clear that on the part of Petitioners there

merchandise continues to be vested in the person

was neither dishonesty nor abuse of confidence in

who had advanced payment until he has been paid

the handling of money to the prejudice of PBC.

in full, or if the merchandise has already been sold,

Petitioners continually endeavored to meet their

the proceeds of the sale should be turned over to

obligations, as shown by several receipts issued by

him by the importer or by his representative or

PBC acknowledging payment of the loan.

successor in interest. To secure that the bank shall

be paid, it takes full title to the goods at the very

Issue: Whether or not the transaction of Colinares

beginning and continues to hold that title as his

falls within the ambit of the Law on Trust Receipt

indispensable security until the goods are sold and

the vendee is called upon to pay for them; hence,

Held: Colinares received the merchandise from CM

the importer has never owned the goods and is not

Builders Centre on 30 October 1979. On that day,

able to deliver possession. In a certain manner, trust

ownership

already

receipts partake of the nature of a conditional sale

transferred to Petitioners who were to use the

where the importer becomes absolute owner of the

materials for their construction project. It was only a

imported merchandise as soon as he has paid its

day later, 31 October 1979, that they went to the

price. There are two possible situations in a trust

bank to apply for a loan to pay for the merchandise.

receipt transaction. The first is covered by the

This situation belies what normally obtains in a pure

provision which refers to money received under the

trust receipt transaction where goods are owned by

obligation

over

the

merchandise

was

involving

the

duty

to

deliver

it

(entregarla) to the owner of the merchandise sold.

The second is covered by the provision which refers

to merchandise received under the obligation to
return it (devolvera) to the owner. Failure of the
entrustee to turn over the proceeds of the sale of
the goods, covered by the trust receipt to the
entruster or to return said goods if they were not
disposed of in accordance with the terms of the trust
receipt shall be punishable as estafa under Article
315 (1) of the Revised Penal Code, without need of
proving intent to defraud.

who had failed to settle his obligation in accordance with the

terms and conditions of the corresponding deed of mortgage.
In his answer, Barbosa admitted that he constituted the deed of
mortgage for the only purpose of guaranteeing as surety
and/or guarantor the payment of the above mentioned debt
of Mr. Alfredo Brillantes in favor of the Southern Motors.
However, he claims that the plaintiff has no right of action
against him because the plaintiff has not yet exhausted all
recourses to collect from the true debtor Mr. Alfredo Brillantes.
Furthermore, Southern Motors has not yet resorted to all the
legal remedies against the true debtor Mr. Alfredo Brillantes,
notwithstanding the fact that said Mr. Alfredo Brillantes is
solvent and has many properties within the Province of Iloilo.

ANTHONY NG vs PEOPLE
GUARANTY AND SURETYSHIP

EN BANC
[G.R. No. L-9306. May 25, 1956.]
SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs.
ELISEO BARBOSA, Defendant-Appellant.
FACTS:
Southern Motors Inc. brought this action against Barbosa for
the foreclosure of a real estate mortgage which the latter
constituted as security for the payment of the sum of of
P2,889.53 due to said Plaintiff from one Alfredo Brillantes,

ISSUE:
Whether the mortgage in question could be foreclosed although
Plaintiff had not exhausted, and did not intend to exhaust, the
properties of his principal debtor, Alfredo Brillantes
RULING:
Defendants affirmative defense is devoid of merit for:

chanrobl esvirtuallawlibrary

1. The deed of mortgage executed by him specifically

provides:
chanrobl esvirtuallawlibrary

That if said Mr. Alfredo Brillantes or herein mortgagor, his

heirs, executors, administrators and assigns shall well and truly
perform the full obligations above-stated according to the terms
thereof, then this mortgage shall be null and void, otherwise it
shall remain in full force and effect, in which event herein
mortgagor authorizes and empowers herein mortgagee-

company to take any of the following actions to enforce said

payment;.
(a)
Foreclose, judicially or extrajudicially, the chattel
mortgage above referred to and/or also this mortgage, applying
the proceeds of the purchase price at public sale of the real
property herein mortgaged to any deficiency or difference
between the purchase price of said chattel at public auction and
the amount of P2,889.53, together with its interest hereby
secured; or
chan roblesvirtualawlibrary

(b) Simply foreclose this mortgage judicially in accordance

with the provisions of section 2, Rule 70, Rules of Court, or
extra- judicially under the provisions of Act No. 3135 and Act
No. 4118, to satisfy the full amount of P2,889.53, together with
its interest of 12 per cent per annum.
2. The right of guarantors, under Article 2058 of the Civil
Code of the Philippines, to demand exhaustion of the property
of the principal debtor, exists only when a pledge or a
mortgage has not been given as special security for the
payment of the principal obligation. Guarantees, without any
such pledge or mortgage, are governed by Title XV of said
Code, whereas pledges and mortgages fall under Title XVI of
the same Code, in which the following provisions, among
others, are found:

ART. 2126. The mortgage directly and immediately subjects

the property upon which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for whose security it
was constituted.
3. It has been held already (Saavedra vs. Price, 68 Phil., 688),
that a mortgagor is not entitled to the exhaustion of the
property of the principal debtor.
4. Although an ordinary personal guarantor not a mortgagor
or pledgor may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
EN BANC
[G.R. No. L-9306. May 25, 1956.]
SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs.
ELISEO BARBOSA, Defendant-Appellant.
FACTS:

chanroblesvirtuallawlibrary

ART. 2087. 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 may be alienated for the
payment to the creditor.

Southern Motors Inc. brought this action against Barbosa for

the foreclosure of a real estate mortgage which the latter
constituted as security for the payment of the sum of of
P2,889.53 due to said Plaintiff from one Alfredo Brillantes,

who had failed to settle his obligation in accordance with the

terms and conditions of the corresponding deed of mortgage.
In his answer, Barbosa admitted that he constituted the deed of
mortgage for the only purpose of guaranteeing as surety
and/or guarantor the payment of the above mentioned debt
of Mr. Alfredo Brillantes in favor of the Southern Motors.
However, he claims that the plaintiff has no right of action
against him because the plaintiff has not yet exhausted all
recourses to collect from the true debtor Mr. Alfredo Brillantes.
Furthermore, Southern Motors has not yet resorted to all the
legal remedies against the true debtor Mr. Alfredo Brillantes,
notwithstanding the fact that said Mr. Alfredo Brillantes is
solvent and has many properties within the Province of Iloilo.
ISSUE:
Whether the mortgage in question could be foreclosed although
Plaintiff had not exhausted, and did not intend to exhaust, the
properties of his principal debtor, Alfredo Brillantes
RULING:
Defendants affirmative defense is devoid of merit for:

chanrobl esvirtuallawlibrary

1. The deed of mortgage executed by him specifically

provides:
chanrobl esvirtuallawlibrary

That if said Mr. Alfredo Brillantes or herein mortgagor, his

heirs, executors, administrators and assigns shall well and truly
perform the full obligations above-stated according to the terms
thereof, then this mortgage shall be null and void, otherwise it
shall remain in full force and effect, in which event herein
mortgagor authorizes and empowers herein mortgagee-

company to take any of the following actions to enforce said

payment;.
(a)
Foreclose, judicially or extrajudicially, the chattel
mortgage above referred to and/or also this mortgage, applying
the proceeds of the purchase price at public sale of the real
property herein mortgaged to any deficiency or difference
between the purchase price of said chattel at public auction and
the amount of P2,889.53, together with its interest hereby
secured; or
chan roblesvirtualawlibrary

(b) Simply foreclose this mortgage judicially in accordance

with the provisions of section 2, Rule 70, Rules of Court, or
extra- judicially under the provisions of Act No. 3135 and Act
No. 4118, to satisfy the full amount of P2,889.53, together with
its interest of 12 per cent per annum.
2. The right of guarantors, under Article 2058 of the Civil
Code of the Philippines, to demand exhaustion of the property
of the principal debtor, exists only when a pledge or a
mortgage has not been given as special security for the
payment of the principal obligation. Guarantees, without any
such pledge or mortgage, are governed by Title XV of said
Code, whereas pledges and mortgages fall under Title XVI of
the same Code, in which the following provisions, among
others, are found:
chanroblesvirtuallawlibrary

ART. 2087. 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 may be alienated for the
payment to the creditor.

ART. 2126. The mortgage directly and immediately subjects

the property upon which it is imposed, whoever the possessor
may be, to the fulfillment of the obligation for whose security it
was constituted.
3. It has been held already (Saavedra vs. Price, 68 Phil., 688),
that a mortgagor is not entitled to the exhaustion of the
property of the principal debtor.
4. Although an ordinary personal guarantor not a mortgagor
or pledgor may demand the aforementioned exhaustion, the
creditor may, prior thereto, secure a judgment against said
guarantor, who shall be entitled, however, to a deferment of the
execution of said judgment against him until after the
properties of the principal debtor shall have been exhausted to
satisfy the obligation involved in the case.
G.R. No. 138544
October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs.
RODOLFO M. CUENCA, respondent.
PANGANIBAN, J.:

effective til November 30, 1981 to assist the latter in meeting the
additional capitalization requirements of its logging operations.
To secure payment, it executed a chattel mortgage over some of its
machineries and equipments. And as an additional security, its
President and Chairman of the Board of Directors Rodolfo Cuenca,
executed an Indemnity agreement in favor of Security Bank whereby
he bound himself jointly and severally with Sta. Ines.
Specific stipulations:
The bank reserves the right to amend any of the
aforementioned terms and conditions upon written notice to
the Borrower.
As additional security for the payment of the loan, Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17
December 1980 solidary binding himself:
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly
and severally with the client (SIMC) in favor of the bank for
the payment, upon demand and without the benefit of
excussion of whatever amount x x x the client may be
indebted to the bank x x x by virtue of aforesaid credit
accommodation(s) including the substitutions, renewals,
extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .

petitioner bank cannot hold herein respondent liable for loans

obtained in excess of the amount or beyond the period stipulated in
the original agreement, absent any clear stipulation showing that the
latter waived his right to be notified thereof, or to give consent
thereto.

1985: Cuenca resigned as President and Chairman of the Board of

Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of Cuenca in Sta. Ines were sold at a public auction to
Adolfo Angala. Before and after this, Sta Ines availed of its credit
line.

FACTS:
Defendant-appellant Sta. Ines Melale (Sta. Ines/SIMC) is a
corporation engaged in logging operations. It was a holder of a
Timber License Agreement issued by the DENR

Sta Ines encountered difficulty in making the amortization payments

on its loans and requested SBTC for a complete restructuring of
its indebtedness. SBTC accommodated SIMCs request and
signified its approval in a letter dated 18 February 1988 wherein
SBTC and Sta. Ines, without notice to or the prior consent of ]
Cuenca, agreed to restructure the past due obligations of defendant-

On 10 November 1980, Security Bank and Trust Co. granted

appellant Sta. Ines a credit line in the amount of (P8,000,000.00)

appellant Sta. Ines. To formalize their agreement to restructure the

loan obligations of Sta. Ines, Security Bank and Sta. Ines executed a
Loan Agreement dated 31 October 1989
Sta Ines made payments up to (P1,757,000.00) The defaulted in the
payment of its restructured loan obligations to SBTC despite
demands made upon appellant SIMC and CUENCA,
SBTC filed a complaint for collection of sum of resulting after trial on
the merits in a decision by the court a quo, from which Cuenca
appealed
CA: Released Cuenca from liability because 1989 Loan Agreement
novated the 1980 credit accommodation which extinguished the
Indemnity Agreement for which Cuenca was liable solidarily. No
notice/consent to restructure. Since with expiration date, liable only
up to that date and up to that amount (8M). Amounted to extension.of
time with no notice to suret therefore released from liability.
ISSUES:
(a) whether the 1989 Loan Agreement novated the original credit
accommodation and Cuencas liability under the Indemnity
Agreement YES
(b) whether Cuenca waived his right to be notified of and to give
consent to any substitution, renewal, extension, increase,
amendment, conversion or revival of the said credit accommodation.
NO
HELD: Petition of Bank no merit.CA affirmed.
RATIO:
A. Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article
1292 of the Civil Code, Novation of a contract is never presumed.
Indeed, the following requisites must be established: (1) there is a
previous valid obligation; (2) the parties concerned agree to a new

contract; (3) the old contract is extinguished; and (4) there is a valid
new contract.16
We reject these contentions. Clearly, the requisites of novation are
present in this case. The 1989 Loan Agreement extinguished the
obligation18 obtained under the 1980 credit accomodation. This is
evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the
principal portion of the Borrowers present total outstanding
Indebtedness to the Lender (the "Indebtedness") while the Second
Loan shall be applied to liquidatethe past due interest and penalty
portion of the Indebtedness.
Since the 1989 Loan Agreement had extinguished the original
credit accommodation, the Indemnity Agreement
1) NOT mere renewal/ Extension
1989 Loan Agreement expressly stipulated that its purpose was to
"liquidate," not to renew or extend, the outstanding indebtedness.
Moreover, respondent did not sign or consent to the 1989 Loan
Agreement, which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed
extinguished, "[a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. x x
x."
2) Binding Nature of the Credit Approval Memorandum
Bank objects to the appellate courts reliance on that document,
contending that it was not a binding agreement because it was not
signed by the parties. It adds that it was merely for its internal use.
Indeed, it cannot take advantage of that document by agreeing to be
bound only by those portions that are favorable to it, while denying
those that are disadvantageous.
B. NO Waiver of Consent

In the Indemnity Agreement, while respondent held himself liable for

the credit accommodation or any modification thereof, such clause
should be understood in the context of the P8 million limit and the
November 30, 1981 term. It did not give the bank or Sta. Ines any
license to modify the nature and scope of the original credit
accommodation, without informing or getting the consent of
respondent who was solidarily liable.

or before the aforementioned expiry date and not exceeding the total
of P8 million.

A contract of surety "cannot extend to more than what is stipulated. It

is strictly construed against the creditor, every doubt being resolved
against enlarging the liability of the surety." 31 Likewise, the Court has
ruled that "it is a well-settled legal principle that if there is any doubt
on the terms and conditions of the surety agreement, the doubt
should be resolved in favor of the surety x x x. Ambiguous contracts
are construed against the party who caused the ambiguity.32In the
absence of an unequivocal provision that respondent waived his right
to be notified of or to give consent to any alteration of the credit
accommodation, we cannot sustain petitioners view that there was
such a waiver.

It is a common banking practice to require the JSS ("joint and

solidary signature") of a major stockholder or corporate officer, as an
additional security for loans granted to corporations. There are at
least two reasons for this. First, in case of default, the creditors
recourse, which is normally limited to the corporate properties under
the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.

It should also be observed that the Credit Approval Memorandum

clearly shows that the bank did not have absolute authority to
unilaterally change the terms of the loan accommodation. At
most, the alleged basis of respondents waiver is vague and
uncertain. It confers no clear authorization on the bank or Sta. Ines
to modify or extend the original obligation without the consent of the
surety or notice thereto.
1) NOT Continuing Surety

NO PROVISION: each suretyship is a continuing one which shall

remain in full force and effect until this bank is notified of its
revocation.
2) Special Nature of the JSS

Following this practice, it was therefore logical and reasonable for

the bank to have required the JSS of respondent, who was the
chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still
agree to act as surety in the 1989 Loan Agreement, because at that
time, he was no longer an officer or a stockholder of the debtorcorporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.

That the Indemnity Agreement is a continuing surety does not

authorize the bank to extend the scope of the principal obligation
inordinately.
To repeat, in the present case, the Indemnity Agreement was subject
to the two limitations of the credit accommodation: (1) that the
obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on

PALMARES VS. COURT OF APPEALS

Topic: Surety vs. Guaranty
Facts: Pursuant to a promissory note, MB Lending Corporation
extended a loan to spouses Azarraga together with Estrella

Palmares (co-maker) in the amount of P30,000.00. Palmares and the

Azarraga spouses were able to pay a total of P16,3000.00 but no
payments were made after the last payment on September 26, 1991.
Because of this, MB Lending Corporation filed a complaint against
Palmares to the exclusion of the principal debtors allegedly by
reason of insolvency of the spouses.
Palmares contends that the provisions of the second and third
paragraph of the promissory note are conflicting that while the
second paragraph seems to define her liability as that of a surety
which is joint and solidary with the principal maker, on the other
hand, under the third paragraph her liability is actually that of a mere
guarantor because she bound herself to fulfill the obligation only in
case the principal debtor should fail to do so, which is the essence of
a contract of guaranty. Therefore, to reconcile these provisions,
Palmares avers that she is only a guarantor because the words
jointly and severally liable used in the second paragraph are
technical and legal terms, which are not fully appreciated by an
ordinary layman while the words used in the third paragraph are
easier to comprehend. Moreover, petitioner submits that she cannot
as yet be compelled to pay the loan because the principal debtors
cannot be considered in default in the absence of a judicial or
extrajudicial demand. Finally, it is argued that the interest charged on
the loan in exorbitant, iniquitous or unconscionable. More
importantly, immediately after the loan matured, Palmares informed
the private respondent of her desire to settle the obligation.
Regional Trial Court ruled in favor of Palmares while the Court of
Appeals reversed the decision of the RTC.
Issue: Where the party signs a promissory note as a co-maker and
binds herself to be jointly and severally liable with the principal
debtor in case the latter defaults in the payment of the loan, is such
undertaking of the former deemed to be that of a surety as an insurer
of the debt, or a guarantor who warrants the solvency of the debtor?
Ruling: It is a cardinal rule in the interpretation of contracts that if the
terms of a contract are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulation shall
control. In the case at bar, petitioner expressly bound herself to be

jointly and severally liable with the principal maker of the note. The
terms of the contract are clear, explicit and unequivocal that
petitioners liability is that of a surety.
A surety is an insurer of the debt, whereas a guarantor is an insurer
of the solvency of the debtor. A suretyship is an undertaking that the
debt shall be paid; a guaranty, an undertaking that the debtor shall
pay. Stated differently, a surety promises to pay the principal's debt if
the principal will not pay, while a guarantor agrees that the creditor,
after proceeding against the principal, may proceed against the
guarantor if the principal is unable to pay. A surety binds himself to
perform if the principal does not, without regard to his ability to do so.
A guarantor, on the other hand, does not contract that the principal
will pay, but simply that he is able to do so. In other words, a surety
undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay
if, by the use of due diligence, the debt cannot be made out of the
principal debtor.
The undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. It
has not been shown that respondent corporation agreed to proceed
against Palmares only if and when the defaulting principal has
become insolvent. There can be no doubt that the stipulation
contained in the third paragraph of the contract merely elucidated on
and made more specific the obligation of the petitioner as generally
defined in the second paragraph thereof. Also, several attendant
factors in that genre lend support to the finding that petitioner is a
surety. For one, when the petitioner was informed about the failure of
the principal debtor to pay the loan, she immediately offered to settle
the account with the respondent corporation. For another, petitioner
presented the receipts of the payments already made which were all
issued in her name and of the Azarraga spouses. This can only be
construed to mean that the payments made by the principal debtors
were considered by respondent corporation as creditable directly
upon account and inuring to the benefit of petitioner.
Petitioners contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default
is unmeritorious because of paragraph G of the promissory note

which states: should I fail to pay in accordance with the above

schedule of payment, I hereby waive my right to notice and demand.
Hence, demand by the creditor is no longer necessary in order that
delay may exist and such waiver equally binds Palmares. Even if it
were otherwise, demand on the sureties is not necessary before
bringing suit against them, since the commencement of the suit is a
sufficient demand.
This notwithstanding, however, The Court find that the penalty
charge of 3% per month is highly inequitable and unreasonabl

Escano and Silos vs. Ortigas

Facts:
This case stemmed from a loan agreement
between Private Development Corporation of the
Philippines (PDCP) and Falcon Minerals Inc. (Falcon).
Three of latters stockholders (one of which is herein
respondent Ortigas) executed an Assumption of
Solidary Liability whereby they agreed to assume in
their individual capacity for the due and punctual
payment of the same loan.
Two years later, an agreement developed to
cede control of Falcon to petitioners Escao, Silos and
Matti. A contact (herein referred to as the Undertaking)
was executed between the three stockholders and the
petitioners whereby the former assigned their shares
of stocks in Falcon to the latter. Under the contract,
petitioners were being referred to as the SURITIES and
the stockholders were referred to as OBLIGORS.
Among the stipulations was a provision stating that in
the event that any of OBLIGORS is for any reason
made to pay any amount to PDCP and/or PAIC,

SURETIES shall reimburse OBLIGORS for said amount/s

within seven (7) calendar days from such payment.
Later on, Falcon was not able to satisfy payment
to PDCP even after foreclosure of their chattel
mortgage. Thus, PDCP filed a complaint for sum of
money with the RTC against the stockholders and the
petitioners.
Because of that case, petitioner Escao entered
into a settlement with PDCP wherein he paid Php
1,000,000. Respondent Ortigas also entered into a
compromise agreement with PDCP without the
knowledge and consent of the petitioners for Php
1,300,000. Also, petitioner Silos likewise did the same
for Php 500,000.
In the meantime, respondent Ortigas filed a
motion for Summary Judgement against petitioners on
the ground that petitioners need to reimburse him of
the Php 1,300,000 (plus attorneys fees) which he paid
in his compromise agreement based on the stipulation
under the Undertaking. The trial court then granted his
motion ordering petitioners to pay Ortigas JOINTLY AND
SEVERALLY the amount demanded by respondent
Ortigas.
On appeal, the CA affirmed the trial courts
decision and thus this petition.
On the petitioners part, they dispute that they
are liable to Ortigas on the basis of the Undertaking, a

document which they do not disavow and have in fact

annexed to their petition. Further, if they are indeed
liable, they are only JOINTLY liable and not solidary
because the Undertaking did not provide for express
solidarity.
Ortigas in turn argues that petitioners, as well
as Matti, are JOINTLY AND SEVERALLY liable for the
Undertaking, as the language used in the agreement
clearly shows that it is a surety agreement between
the obligors (Ortigas group) and the sureties (Escao
group). Ortigas points out that the Undertaking uses
the word SURETIES although the document, in
describing the parties. It is further contended that the
principal objective of the parties in executing the
Undertaking cannot be attained unless petitioners are
solidarily liable because the total loan obligation
cannot be paid or settled to free or release the
OBLIGORS if one or any of the SURETIES default from
their obligation in the Undertaking.

ISSUES:
1. Whether or not petitioners are liable to
respondent
2. Whether or not petitioners are JOINTLY
liable
HELD:
1. YES, because of the tenor of the Undertaking is
clear that the purpose of which was for

petitioners to relieve the burden on Ortigas and

his fellow Obligors as soon as possible, and not
only after Ortigas had been subjected to a final
and executory adverse judgement.
There is no argument to support petitioners
position on the import of the phrase made to
pay in the Undertaking, other than an unduly
literalist reading that is clearly inconsistent with
the thrust of the document. Under the Civil
Code, the various stipulations of a contract shall
be interpreted together, attributing to the
doubtful ones that sense which may result from
all of them taken jointly. Likewise applicable is
the provision that if some stipulation of any
contract should admit of several meanings, it
shall be understood as bearing that import
which is most adequate to render it effectual. As
a means to effect the general intent of the
document to relieve Ortigas from liability to
PDCP, it is his interpretation, not that of
petitioners, that holds sway with this Court.
2. YES, the petitioners are JOINTLY liable.

a.

In the absence of express and

indubitable terms characterizing the
obligation as solidary, the presumption
is that the obligation is only joint (Art.
1207 of the NCC)
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. We rule and so hold
that he failed to discharge such burden.

b.

Art. 2047. By guaranty a person, called the

guarantor, binds himself to the creditor to
fulfill the obligation of the principal debtor in
case the latter should fail to do so.
If a person binds himself solidarily with
the principal debtor, the Section 4,
Chapter 3, Title I of this Book shall be
observed. In such case the contract
is called a suretyship.
As provided in Article 2047, in a surety
agreement, the surety undertakes to be
bound solidarily with the principal
debtor. Thus, a surety agreement is an
ancillary contract as it presupposes the
existence of a principal contract. It appears

that Ortigass argument rests solely on the

solidary nature of the obligation of the surety
under Article 2047. In tandem with the
nomenclature
SURETIES
accorded
to
petitioners and Matti in the Undertaking,
however, this argument can only be
viable if the 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.
Again, as indicated by Article 2047, a
suretyship requires a principal debtor
to whom the surety is solidarily bound
by way of an ancillary obligation of
segregate identity from the obligation
between the principal debtor and the
creditor. The suretyship does bind the
surety to the creditor, inasmuch as the latter
is vested with the right to proceed against
the former to collect the credit in lieu of
proceeding against the principal debtor for
the same obligation. At the same time, there
is also a legal tie created between the surety
and the principal debtor to which the creditor
is not privy or party to. The moment the
surety fully answers to the creditor for the
obligation created by the principal debtor,
such obligation is extinguished. At the same

time, the surety may seek reimbursement

from the principal debtor for the amount
paid, for the surety does in fact become
subrogated to all the rights and remedies of
the creditor.
Note that Article 2047 itself specifically calls
for the application of the provisions on joint
and solidary obligations to suretyship
contracts. Article 1217 of the Civil Code
thus comes into play, recognizing the
right of reimbursement from a codebtor (the principal debtor, in case of
suretyship) in favor of the one who paid
(i.e.,
the
surety).[45]
However,
a
significant distinction still lies between
a joint and several debtor, on one hand,
and a surety on the other. Solidarity
signifies that the creditor can compel any
one of the joint and several debtors or the
surety alone to answer for the entirety of the
principal debt. The difference lies in the
respective faculties of the joint and
several debtor and the surety to seek
reimbursement for the sums they paid
out to the creditor.
Dr. Tolentino explains the differences
between a solidary co-debtor and a surety:
A guarantor who binds himself in
solidum with the principal debtor

under the provisions of the second

paragraph does not become a
solidary co-debtor to all intents and
purposes. There is a difference
between a solidary co-debtor
and a fiador in solidum(surety).
The latter, outside of the
liability he assumes to pay the
debt before the property of the
principal
debtor
has
been
exhausted, retains all the other
rights, actions and benefits
which pertain to him by reason
of the fiansa; while a solidary
co-debtor has no other rights
than those bestowed upon him
in Section 4, Chapter 3, Title I,
Book IV of the Civil Code.
The second paragraph of [Article
2047] is practically equivalent to
the contract of suretyship. The civil
law suretyship is, accordingly,
nearly
synonymous
with
the
common law guaranty; and the
civil
law
relationship
existing
between the co-debtors liablein
solidum is similar to the common
law suretyship.[46]
In the case of joint and several
debtors, Article 1217 makes plain that

the solidary debtor who effected the

payment to the creditor may claim
from his co-debtors only the share
which corresponds to each, with
the interest for the payment already
made. Such solidary debtor will not be
able to recover from the co-debtors
the full amount already paid to the
creditor, because the right to recovery
extends only to the proportional share
of the other co-debtors, and not as to
the particular proportional share of the
solidary debtor who already paid. In
contrast, even as the surety is
solidarily bound with the principal
debtor to the creditor, the surety who
does pay the creditor has the right to
recover the full amount paid, and not
just any proportional share, from the
principal debtor or debtors. Such right
to full reimbursement falls within the
other rights, actions and benefits
which pertain to the surety by reason
of the subsidiary obligation assumed
by the surety.
What is the source of this right to full
reimbursement by the surety? We find the
right under Article 2066 of the Civil
Code,
which
assures
that
[t]he
guarantor who pays for a debtor must
be indemnified by the latter, such

indemnity comprising of, among others,

the total amount of the debt. Further,
Article 2067 of the Civil Code likewise
establishes that [t]he guarantor who
pays is subrogated by virtue thereof to
all the rights which the creditor had
against the debtor.
Articles 2066 and 2067 explicitly pertain to
guarantors, and one might argue that the
provisions should not extend to sureties,
especially in light of the qualifier in Article
2047 that the provisions on joint and several
obligations should apply to sureties. We
reject that argument, and instead adopt Dr.
Tolentinos observation that [t]he reference in
the second paragraph of [Article 2047] to the
provisions of Section 4, Chapter 3, Title I,
Book IV, on solidary or several obligations,
however, does not mean that suretyship is
withdrawn from the applicable provisions
governing guaranty. For if that were not the
implication, there would be no material
difference between the surety as defined
under Article 2047 and the joint and several
debtors, for both classes of obligors would be
governed by exactly the same rules and
limitations.
Accordingly, the rights to indemnification and
subrogation as established and granted to
the guarantor by Articles 2066 and 2067

extend as well to sureties as defined under

Article 2047. These rights granted to the
surety who pays materially differ from those
granted under Article 1217 to the solidary
debtor who pays, since the indemnification
that pertains to the latter extends only [to]
the share which corresponds to each [codebtor]. It is for this reason that the Court
cannot accord the conclusion that because
petitioners are identified in the Undertaking
as SURETIES, they are consequently joint and
severally liable to Ortigas.
In order for the conclusion espoused by
Ortigas to hold, in light of the general
presumption favoring joint liability, the Court
would have to be satisfied that among the
petitioners and Matti, there is one or some of
them who stand as the principal debtor to
Ortigas and another as surety who has the
right to full reimbursement from the principal
debtor or debtors. No suggestion is made by
the parties that such is the case, and
certainly the Undertaking is not revelatory of
such intention. If the Court were to give full
fruition to the use of the term SURETIES as
conclusive indication of the existence of a
surety agreement that in turn gives rise to a
solidary obligation to pay Ortigas, the
necessary implication would be to lay down a
corresponding set of rights and obligations

as between the SURETIES which petitioners

and Matti did not clearly intend.
PLEDGE

DEVELOPMENT BANK OF THE

PHILIPPINES vs. COURT OF APPEALS
G.R. No. 118367. January 5, 1998
FACTS:
Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement
No. 2083 (new) dated May 13, 1974 from the Government; Cuba
obtained loans from the Development Bank of the Philippines in the
amounts of P109,000.00; P109,000.00; and P98,700.00 under the
terms stated in the Promissory Notes dated September 6, 1974;
August 11, 1975; and April 4, 1977; As security for said loans, plaintiff
Lydia P. Cuba executed two Deeds of Assignment of her Leasehold
Rights; Plaintiff failed to pay her loan on the scheduled dates thereof
in accordance with the terms of the Promissory Notes; Without
foreclosure proceedings, whether judicial or extra-judicial, defendant
DBP appropriated the leasehold Rights of plaintiff Lydia Cuba over
the fishpond in question; After defendant DBP has appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question, defendant DBP, in turn, executed a Deed of Conditional
Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question; In the negotiation for repurchase, plaintiff
Lydia Cuba addressed two letters to the Manager DBP, Dagupan
City dated November 6, 1979 and December 20, 1979. DBP
thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982; After the Deed of Conditional Sale
was executed in favor of plaintiff Lydia Cuba, a new Fishpond Lease

Agreement No. 2083-A dated March 24, 1980 was issued by the
Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only,
excluding her husband; Plaintiff Lydia Cuba failed to pay the
amortizations stipulated in the Deed of Conditional Sale; After plaintiff
Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary
arrangement whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba
promised to make certain payments as stated in temporary
Arrangement dated February 23, 1982; Defendant DBP thereafter
sent a Notice of Rescission thru Notarial Act dated March 13, 1984,
and which was received by plaintiff Lydia Cuba; After the Notice of
Rescission, defendant DBP took possession of the Leasehold Rights
of the fishpond in question; That after defendant DBP took
possession of the Leasehold Rights over the fishpond in question,
DBP advertised in the SUNDAY PUNCH the public bidding dated
June 24, 1984, to dispose of the property; That the DBP thereafter
executed a Deed of Conditional Sale in favor of defendant Agripina
Caperal on August 6, 1984; Thereafter, defendant Caperal was
awarded Fishpond Lease Agreement No. 2083-A on December 28,
1984 by the Ministry of Agriculture and Food.

ISSUE: Whether the act of DBP in appropriating to itself CUBA's

leasehold rights over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and,
therefore, invalid.

notes was the execution "Assignments of Leasehold Rights" where

CUBA assigned her leasehold rights and interest on a 44-hectare
fishpond, together with the improvements thereon. As pointed out by
CUBA, the deeds of assignment constantly referred to the assignor
(CUBA) as "borrower"; the assigned rights, as mortgaged properties;
and the instrument itself, as mortgage contract. Moreover, under
condition No. 22 of the deed, it was provided that "failure to comply
with the terms and condition of any of the loans shall cause all other
loans to become due and demandable and all mortgages shall be
foreclosed." And, condition No. 33 provided that if "foreclosure is
actually accomplished, the usual 10% attorney's fees and 10%
liquidated damages of the total obligation shall be imposed." There
is, therefore, no shred of doubt that a mortgage was intended. In
People's Bank & Trust Co. vs. Odom, this Court had the occasion to
rule that an assignment to guarantee an obligation is in effect as
mortgage.

SPOUSES WILFREDO N. ONG AND EDNA SHEILA PAGUIOONG v. ROBAN LENDING CORPORATION
557 SCRA 516 (2008), SECOND DIVISION (Carpio Morales,
J.)
In a true dacion en pago, the assignment of the property
extinguishes the monetary debt.

IS

FACTS: On various dates, petitioner Spouses Wilfredo N. Ong

and Edna Sheila Paguio-Ong obtained several loans from
respondent Roban Lending Corporation in the total amount of P4,
000,000. These loans were secured by real estate mortgage on
Spouses Ongs parcel of lands.

HELD: We agree with CUBA that the assignment of leasehold rights

was a mortgage contract. Simultaneous with the execution of the

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

AN ASSIGNMENT TO GUARANTEE
VIRTUALLY A MORTGAGE;

AN

OBLIGATION

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 automatic appropriation 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 foreclosure proceedings 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
Estate of Litton v Mendoza and CA | 1998
1. 1963, CMB Products (with Mendoza as president) offered to sell
textile cotton materials to the Bernal spouses (engaged in
manufacture of embroidery, garments and cotton materials);
- For this purpose, Mendoza introduced the spouses to Alfonso
Tan;
2. The spouses purchased on credit from Tan cotton materials (80k);
- Mendoza guaranteed the payment of the debt;
3. Tan then delivered the cotton materials to the spouses;

4. In view of the arrangement, CBM Products (thru Mendoza) asked for

and received a post-dated check (Feb 20, 1964) for the payment
of the spouses debt;
- It was understood that Mendoza will retain the check until the
cotton materials are finally manufactured into garments, after
which Mendoza will sell the finished products for the spouses;
5. Meanwhile, the check matured without having been cashed so
Mendoza demanded for another check without a date;
6. Feb. 28, 1964, Mendoza issued two checks in favour of Tan (worth
80k);
- He told the spouses of the same and told them they are indebted
to him and asked the spouses to sign an instrument whereby
Mendoza assigned the said amount to Insular Products, Inc.;
7. Tan had the two checks discounted but were later returned with
words stop payment;
- It appears it was ordered by Mendoza for failure of the spouses
to deposit sufficient funds for the check issued by the spouses
in his favour;
8. Tan sued Mendoza while the spouses brought an action for
interpleader for not knowing whom to pay;
- Pendente lite, Tan assigned in favour of Littion, Sr his litigatious
credit (in action of spouses) against Mendoza, duly submitted
to the court, with notice to the parties;
9. TC ordered Mendoza to pay Tan 76k;
- CA affirmed (1977);
10. Meanwhile, in 1971, Mendoza entered into Compromise Agreement
with Tan wherein the latter recognized that his claims against
Mendoza had been settled and because of that, both waives any
claim against the other; with a provision that it no way affects
Tans right to go against the spouses;
11. 1977 (after CAs decision), Mendoza filed MFR saying that there
was the compromise agreement which absolved him from liability;
- Tan opposed this saying the Compromise agreement was null
and void because of the deed of assignment executed in
favour of Litton, Sr.; he says that with such, he has no more
right to alienate said credit;
12. CA then approved the compromise agreement:
- It said that the assignment was by way of securing only his
obligation to Litton, Sr.;

- Thus, Tan retained possession and dominion over the credit

(2085);
- Although considered as a litigatious credit, such may be validly
alienated by Tan; such alienation is subject to the remedies of
Litton under 6 of CC whereby, the assignment if proven
prejudicial to Litton, may entitle Littion to pursue his remedies
against Tan;
- The alienation of a litigatious credit is further subject to the
debtors right of redemption under 1634;
W/N compromise valid. No.
Ratio:
1. Purpose of compromise: to replace and terminate controverted
claims; once approved, it has the force of res judicata (except for
vices of consent or forgery);
- Petitioner seeks to set aside the compromise agreement since
prior thereto, Tan executed a deed of assignment in favour of
Littion, Sr. involving the same litigated credit;
2. Compromise Agreement set aside:
- Fact that assignment was done by way of securing Tans
obligation in favour of Littion, Sr. does not affect the resolution
of the matter;
- Validity of pledge/guaranty in favour of Liiton has not been
questioned;
Deed of assignment fulfils the requirements of a valid pledge or
mortgage;
- Although Tan may validly alienate the litigatious credit (1634), it
does not give him (assignor/Tan) absolute right to
indiscriminately dispose of the thing;
- Said provision (1634) should be read in consonance with 2097;
although the pledgee/assignee (Litton, Sr.) did not become
ipso facto become the creditor of Mendoza, the pledge being
invalid, the incorporeal right assigned by Tan in favour of
Mendoza can only be alienated by Tan with due notice to and
consent of Litton, Sr. or his duly authorized representative;
- To allow it would render nugatory the very purpose of a pledge
or an assignment of credit;
- Also, under 1634, the debtor has the corresponding obligation to
reimburse the assignee, for the price he paid or for the value

given as consideration for the deed of assignment; failing

here, the compromise agreement does not bind the assignee;
Notes:
- From the very beginning, Mendoza was, from the very beginning,
aware of the deed of assignment; as it was submitted to the
court where CBM was one of the defendants;
- Having such knowledge, Mendoza is estopped from entering into
the compromise agreement involving the same litigate credit
without notice to and consent of the assignee;
- Mendoza acted in bad faith and in connivance with assignor Tan
to defraud Littion, Sr. in entering in the compromise
agreement;

CITIBANK vs. SABENIANO Case Digest

CITIBANK vs. SABENIANO
G.R.No. 156132, October 16, 2006
FACTS: Petitioner Citibank is a banking corporation duly
authorized under the laws of the USA to do commercial banking
activities in the Philippines. Sabeniano was a client of both
Petitioners Citibank and FNCB Finance. Respondent filed a
complaint against petitioners claiming to have substantial
deposits, the proceeds of which were supposedly deposited
automatically and directly to respondents account with the
petitioner Citibank including dollar accounts in the Citibank
branch in Geneva, Switzerland (Citibank-Geneva) and that
allegedly petitioner refused to despite repeated demands.
Petitioner alleged that respondent obtained several loans for
which she executed Promissory Notes (PNs), and secured by (a)
a Declaration of Pledge of her dollar accounts in CitibankGeneva, and (b) Deeds of Assignment of her money market
placements with petitioner FNCB Finance. In default, Citibank
exercised its right to set-off respondents outstanding loans with
her deposits and money.

RTC declared the act illegal, null and void and ordered the
petitioner to refund the amount plus interest, ordering Sabeniano,
on the other hand to pay Citibank her indebtedness. CA affirmed
the decision with modification entirely in favor of the respondent
further stating that Citibank failed to establish by competent
evidence the alleged indebtedness of plaintiff-appellant, the setoff of P1,069,847.40 in the account of Ms. Sabeniano is declared
as without legal and factual basis.
Additionally, by 25 October 1979, respondent had a total of
US$156,942.70, from which, US$149,632.99 was transferred by
Citibank-Geneva to petitioner Citibank in Manila, and was used
by the latter to off-set respondent's outstanding loans.
ISSUE: Whether petitioner may exercise its right to set-off
respondents loans with her deposits and money in CitibankGeneva
RULING: Petition is partly granted with modification.
1. Citibank is ordered to return to respondent the principal amount
of P318,897.34 and P203,150.00 plus 14.5% per annum
2. The remittance of US $149,632.99 from respondents CitibankGeneva account is declared illegal, null and void, thus Citibank is
ordered to refund said amount in Philippine currency or its
equivalent using exchange rate at the time of payment.
3. Citibank to pay respondent moral damages of P300,000,
exemplary damages for P250,000, attorneys fees of P200,000.
4. Respondent to pay petitioner the balance of her outstanding
loans of P1,069,847.40 inclusive off interest.
PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287 (JANUARY 24,
2006)

FACTS:
Respondents were the owners of shares of stock in Quirino-LeonorRodriguez Realty Inc. In 1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina
Paray (Parays) the payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on account of
respondents failure to pay their loans, respondents filed complaints with
RTC of Cebu City. The actions sought the declaration of nullity of the pledge
agreements, among others. However the RTC dismissed the complaint and
gave due course to the foreclosure and sale at public auction of the various
pledges. This decision attained finality after it was affirmed by the Court of
Appeals and the Supreme Court.
Respondents then received Notices of Sale which indicated that the
pledged shares were to be sold at public auction. However, before the
scheduled date of auction, all of respondents caused the consignation with
the RTC Clerk of Court of various amounts. It was claimed that respondents
had attempted to tender payments to the Parays, but had been rejected.
Notwithstanding the consignations, the public auction took place as
scheduled, with petitioner Vidal Espeleta successfully bidding for all of the
pledged shares. None of respondents participated or appeared at the
auction.
Respondents instead filed a complaint with the RTC seeking the
declaration of nullity of the concluded public auction.

Petitioners countered that the auction sale was conducted pursuant

to a final and executory judgment and that the tender of payment and
consignations were made long after their obligations had fallen due.
They pointed out that the amounts consigned could not extinguish
the principal loan obligations of respondents since they were not sufficient to
cover the interests due on the debt. They likewise argued that the essential
procedural requisites for the auction sale had been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement with the
position of the Parays. It held that respondents had failed to tender or
consign payments within a reasonable period after default and that the
proper remedy of respondents was to have participated in the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal, ruling
that the consignations extinguished the loan obligations and the subject
pledge contracts; and the auction sale as null and void. It (CA) chose to
uphold the sufficiency of the consignations owing to an imputed policy of the
law that favored redemption and mandated a liberal construction to
redemption laws. The attempts at payment by respondents were
characterized as made in the exercise of the right of redemption.
CA likewise found fault with the auction sale, holding that there was
a need to individually sell the various shares of stock as they had belonged
to different pledgors.

ISSUES:
Respondents argument:
Respondents argued that their tender of payment and subsequent
consignations served to extinguish their loan obligations and discharged the
pledge contracts.
Petitioners argument:

1. WON right of redemption exists over personal properties (such as the

subject pledged shares).

2. WON the consignations made by respondents prior to the auction sale

are sufficient to extinguish the loan obligations and the subject pledged
contracts.
3. WON the act of respondents in consigning the payments should be
deemed done in the exercise of their right of redemption owing to an

imputed policy of the law that favored redemption and mandated a

liberal construction to redemption laws.
4. WON a buyer at a public auction ipso facto becomes the owner of the
pledged shares pending the lapse of the one-year redemptive period
5. WON there is a need to individually sell the various shares of stock as
they had belonged to different pledgors.

HELD:
1. No.
No law or jurisprudence establishes or affirms such right. Indeed,
no such right exists.
The right of redemption over mortgaged real property sold
extrajudicially is established by Act No. 3135, as amended. The said law
does not extend the same benefit to personal property. In fact, there is no
law in our statute books which vests the right of redemption over personal
property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial
sale of mortgaged personal property, but the statute is definitely silent on the
point.
The right of redemption as affirmed under Rule 39 of the Rules of
Court applies only to execution sales, more precisely execution sales of real
property.
It must be clarified that the subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as distinguished from a judicial
sale as typified by an execution sale. Under the Civil Code, the foreclosure
of a pledge occurs extrajudicially, without intervention by the courts. All the
creditor needs to do, if the credit has not been satisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.

pledge contracts and disposed them. Said judgment did not direct the sale
by public auction of the pledged shares, but instead upheld the right of the
Parays to conduct such sale at their own volition.

2. No.
There is no doubt that if the principal obligation is satisfied, the
pledges should be terminated as well. Article 2098 of the Civil Code provides
that the right of the creditor to retain possession of the pledged item exists
only until the debt is paid. Article 2105 of the Civil Code further clarifies that
the debtor cannot ask for the return of the thing pledged against the will of
the creditor, unless and until he has paid the debt and its interest. At the
same time, the right of the pledgee to foreclose the pledge is also
established under the Civil Code. When the credit has not been satisfied in
due time, the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
In order that the consignation could have the effect of extinguishing
the pledge contracts, such amounts should cover not just the principal loans,
but also the monthly interests thereon.
In the case at bar, while the amounts consigned by respondents
could answer for their respective principal loan obligations, they were not
sufficient to cover the interests due on these loans, which were pegged at
the rate of 5% per month or 60% per annum.

3. No.
The pledged shares in this case are not subject to redemption.
Thus, the consigned payments should not be treated with liberality, or
somehow construed as having been made in the exercise of the right of
redemption.

4. Yes.
In this case, petitioners attempted to proceed extrajudicially with
the sale of the pledged shares by public auction. However, extrajudicial sale
was stayed with the filing of Civil Cases which sought to annul the pledge
contracts. The final and executory judgment in those cases affirmed the

Obviously, since there is no right to redeem personal property, the

rights of ownership vested unto the purchaser at the foreclosure sale are not
entangled in any suspensive condition that is implicit in a redemptive period.

5. No.
This concern is obviously rendered a non-issue by the fact that
there can be no right to redemption in the first place. Rule 39 of the Rules of
Court does provide for instances when properties foreclosed at the same
time must be sold separately, such as in the case of lot sales for real
property under Section 19. However, these instances again pertain to
execution sales and not extrajudicial sales. No provision in the Rules of
Court or in any law requires that pledged properties sold at auction be sold
separately.
On the other hand, under the Civil Code, it is the pledgee, and not
the pledgor, who is given the right to choose which of the items should be
sold if two or more things are pledged. No similar option is given to pledgors
under the Civil Code. Moreover, there is nothing in the Civil Code provisions
governing the extrajudicial sale of pledged properties that prohibits the
pledgee of several different pledge contracts from auctioning all of the
pledged properties on a single occasion, or from the buyer at the auction
sale in purchasing all the pledged properties with a single purchase price.

The relative insignificance of ascertaining the definite apportionments of the

sale price to the individual shares lies in the fact that once a pledged item is
sold at auction, neither the pledgee nor the pledgor can recover whatever
deficiency or excess there may be between the purchase price and the
amount of the principal obligation.

RULING:
Decision of the Court of Appeals is SET ASIDE and the decision of
the RTC Cebu City is REINSTATED.