CASE DIGEST IN CREDIT

TRANSACTIONS

Ravie D. Piansay
2014-0120

Dean Porfirio DG Panganiban, Jr.

Professor
 I
CELESTINA T. NAGUIAT, petitioner, vs. COURT OF APPEALS and AURORA QUEA?O,
respondents. G.R. No. 118375 | 2003-10-03

Doctrine: A loan contract is a real contract, not consensual, and, as such, is perfected only upon
the delivery of the object of the contract.

Facts:

Queao obtained a loan amounting to 200,000 due on 11 September 1980 evidenced by a

promissory note from Naguiat and issued for a loan secured by a real estate mortgage. in the
amount of P200,000.00, which is secured by a real estate mortgage. The loan proceeds was
endorsed by Nuguiat through two checks amounting 95,000. Aside from the PN, Nugiat issued a
Security Bank check amounting to 200,000 due on due date. On maturity date, the check was
dishonored for insufficiency of funds. Queao received a letter from Naguiats lawyer, demanding
settlement of the loan. Shortly thereafter, Queao and Ruebenfeldt met with Naguiat. At the
meeting, Queao told Naguiat that she did not receive the proceeds of the loan, adding that the
checks were retained by Ruebenfeldt, who purportedly was Naguiats agent. Naguiat applied for
the extrajudicial foreclosure of the mortgage. Queao filed the case before the RTC, seeking the
annulment of the mortgage deed. RTC declared the Deed of Real Estate Mortgage null and void
which the CA affirmed.

Issue:
Whether Queao had actually received the loan proceeds which were supposed to be covered by
the two checks Naguiat had issued or indorsed.

Held: No.
No evidence was submitted by Naguiat that the checks she issued or endorsed were actually
encashed or deposited. The mere issuance of the checks did not result in the perfection of the
contract of loan. For the Civil Code provides that the delivery of bills of exchange and mercantile
documents such as checks shall produce the effect of payment only when they have been cashed. It
is only after the checks have produced the effect of payment that the contract of loan may be
deemed perfected. Art. 1934 of the Civil Code provides: "An accepted promise to deliver
something by way of commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the delivery of the object of the
contract." A loan contract is a real contract, not consensual, and, as such, is perfected only upon
the delivery of the object of the contract. In this case, the objects of the contract are the loan
proceeds which Queao would enjoy only upon the encashment of the checks signed or indorsed
by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have certainly
presented the corresponding documentary evidence, such as the returned checks and the pertinent
bank records. Since Naguiat presented no such proof, it follows that the checks were not encashed
or credited to Queaos account.
 II
BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and ALS
MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
G.R. No. 133632 | 2002-02-15

DOCTRINE:
A simple loan is perfected upon the delivery of the object of the contract, hence a real contract

FACTS:
Ayala Investment and Development Corporation (AIDC), [BPIIC] granted a loan to Frank Roa
for the construction of a house on his lot in Muntinlupa for 500,000 with an interest of 16.25%.
Roa executed a mortgaged over said property to secure said loan. Subsequently, in 1980 the said
property was sold to ALS and Antonio Litonjua for 850,000. Buyers of the property assumed the
500,000 and paid cash of 350,000 to Frank Roa. However AIDC is not amenable to extend the
same terms to ALS and Antonio Litonjua, instead a new loan of 500,000 at 20% interest with
monthly amortization of 9,996.58 for ten years. In March 1981, private respondents executed a
mortgage deed to effect the new stipulations with the amortization to start on 01 May 1981. On
13 August 1982, ALC and Litonjua paid Roas arrearages by paying 190,601.35. Outstanding
balance from the old loan was reduced to 457,204.90, and applying the new loan of ALC and
Litonjua, BPIIC returned 7,146.87 pertaining to the excess of the proceeds of their loan against
the balance of Roas loan. In June 1984, BPIIC moved for the foreclosure of the mortgage on
the grounds that respondents failed to pay from May 1, 1981 to June 30, 1984, amounted to
P475,585.31. On 28 February 1985, ALS and Litonjua filed a case against BPIIC, alleging that
they were not in arrears, maintaining that they should not have been made to answer for the
amortization (Roas arrearages) before the actual release of their loan in August and September
1982. Further they alleged that they only received 464,351.77 out of their 500,000, hence applying
legal compensation, the balance of 35,648.23 should be applied on the initial monthly amortization.
RTC ruled in favor of ALS Management and Development Corporation and Litonjua. CA
affirmed the decision of RTC

ISSUE:
Whether a contract of loan is a consensual contract

HELD: No
A loan contract is not a consensual contract but a real contract. It is perfected only upon the
delivery of the object of the contract. In the present case, the loan contract between BPI, on the
one hand, and ALS and Litonjua, on the other, was perfected only on September 13, 1982, the
date of the second release of the loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the Court of Appeals, private
respondents obligation to pay commenced only on October 13, 1982, a month after the perfection
of the contract. We also agree with private respondents that a contract of loan involves a reciprocal
obligation, wherein the obligation or promise of each party is the consideration for that of the
other. As averred by private respondents, the promise of BPIIC to extend and deliver the loan is
upon the consideration that ALS and Litonjua shall pay the monthly amortization commencing
on May 1, 1981, one month after the supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay, if the other does not comply or is not ready
to comply in a proper manner with what is incumbent upon him. Only when a party has performed
his part of the contract can he demand that the other party also fulfills his own obligation and if
the latter fails, default sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it complied with its
obligation under the loan contract. Therefore, in computing the amount due as of the date when
BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13, 1982
and not May 1, 1981.
 III
HERMENEGILDO AGDEPPA (substituted by his heirs MAGDALENA S. AGDEPPA,
EMMANUEL S. AGDEPPA, NELIA A. UNISA, MARILYN A. LEONES, EVANGELINE
A. PIMENTEL, EDWIN S. AGDEPPA EDNA A. AGDEPPA EDNA A. ABELLA,
JOCELYN A. VICUNA, MA. THERESA S. AGDEPPA and VIVIANNE S. AGDEPPA,
petitioners, vs. EMILIANO IBE (substituted by her husband FRUCTUOSO IBE and children
LOLITA and CESAR IBE), BENJAMIN IBE and FERDINAND IBE, respondents. G.R. No.
96770 | 1993-03-30

DOCTRINE:
A material document being a public document, mere preponderance of evidence cannot destroy
its validity. Much stronger evidence is required.

FACTS:
Rosario Igarta was one of the three daughters of the deceased Joaquin Igarta and Angela Gascon.
Her two sisters were Carmen and Emiliana. Carmen married Maximo Agdeppa and they begot
Hermenegildo and Jose. The latter died in 1954 leaving three sons named Joseph, Jefferson and
Stevenson. Rosario's other sister Emiliana married Fructuoso Ibe. The couple had three children:
Benjamin, Lolita and Cesar. Rosario, an octogenarian, died single and without issue. At that time,
her nearest relatives were her sister Emiliana Ibe and her nephew Hermenegildo Agdeppa as
Carmen, the latter's mother, had predeceased Rosario. All the properties of Rosario were in the
possession of the family of her sister Emiliana Ibe to the exclusion of the heirs of her other sister,
Carmen. From time to time, however, Hermenegildo would get a share from the produce of the
properties. Hermenegildo thus expressed his desire to partition Rosario's estate in accordance
with law but the Ibes adamantly objected. Hermenegildo, together with the sons of his deceased
brother Jose named Joseph, Jefferson and Stevenson Agdeppa, filed a complaint against Emiliana
Ibe, assisted by her husband for partition of Rosario's properties. In their answer to the complaint,
the defendants alleged that some of the properties had been conveyed and transferred by Rosario
to different recipients. In support of their claim, the defendants presented the following
documents: 1.) A deed of quitclaim and transfer of ownership executed by Rosario Igarta ; 2.) A
deed of quitclaim executed by Rosario Igarta ceding all her rights to three parcels of land ; 3.) A
deed of absolute sale. Another document, denominated as a deed of quitclaim was presented to
show that Rosario Igarta renounced all her rights and interests over properties The trial court also
notes that conveying inter vivos certain properties of Rosario Igarta to Benjamin Ibe and his
children, were executed "at different hours of the same day." In view thereof, the said court
observed that the "situation does not seem to jibe with the ordinary and natural course of things
because if it were true, as alleged, that the grantor freely, voluntarily and intelligently disposed of
her properties in favor of the Ibes in more than one instance on the same day, the dispositions
should have been embodied in only one document" Court of Appeals rules that the presumption
of validity of the questioned documents have not been overcome by the circumstances
surrounding its execution. There is no showing that fraud, force or intimidation was perpetuated
on Rosario Igarta in the preparation of the documents. Neither have plaintiff-appellees shown that
the signature of Rosario Igarta appearing on said documents was forged. Forgery cannot be
presumed. It must be proved. Faced with the fact that the signature of Rosario Igarta on said
documents appears to be genuine, the provisions of said documents must be upheld.

ISSUE:
Whether or not the documents executed by Rosario Igarta conveying certain properties belonging
to her to the herein respondents were valid.
HELD:
A residence certificate, being a receipt prescribed by the government to be issued upon receipt of
money for public purposes (Moran, Comments on the Rules of Court, Vol. 6, 1980 ed., p. 101), is
a public document. As such, presentation of the same document would suffice to prove its
contents. As part of the public record, it may also be proved by the presentation of a copy attested
by the officer having legal custody of the duplicates (Sec. 25, Rule 132, Rules of Court) if, as in
this case, a certified copy of the residence certificate itself cannot be presented. Exhibit F, upon
which the trial court relied in nullifying the questioned documents, is, as correctly pointed out by
the Court of Appeals, merely a secondary evidence. It is even based on the lost pages of an abstract
of the residence certificates issued by the municipal treasurer of Sinait. The evidentiary value of
Exh. F. is therefore suspect. The questioned deeds, being public documents as they are duly
notarized (Moran, Comments on the Rules of Court, supra), therefore retain the presumption of
validity in the absence of a full, clear and convincing evidence to overcome such presumption
(Favor vs. Court of Appeals, 194 SCRA 308 [1991] citing Antonio vs. Estrella, 156 SCRA 68
[1987]). Merely preponderant evidence may not destroy such presumption because strong evidence
is required to prove a defect of a public instrument. In the case at bar, no clear and convincing
evidence had been adduced by petitioners to impugn the validity of the documents executed by
Rosario Igarta. Consequently, the validity of the said documents must be, as they are hereby,
upheld.
 V
SAURA IMPORT & EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK
OF THE PHILIPPINES, defendant-appellant. G.R. No. L-24968 | 1972-04-27
DOCTRINE:
An accepted promise to deliver something, by way of commodatum or simple loan is binding upon
the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of
the object of the contract.
FACTS:
Saura, Inc. applied to the RFC, for an industrial loan of P500,000.00 which approved by the latter
and to be secured by a mortgage. Loan documents were executed: the promissory note and the
corresponding deed of mortgage, which was duly registered. Subsequently in a meeting of RFC
board to which the President of Saura, Inc. was present, the loan was reduced to 300,000. Saura
Inc. however that the loan of 500,000 be approved. RFC accepted and approved the loan
application subject to some conditions which Saura admitted it could not comply with.
Correspondence and negotiations came to a halt and Saura, Inc. did not pursue further and instead
requested the cancellation of mortgage and was delivered to the President of Saura, Inc. Almost
nine years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter
commenced the present suit for damages, alleging failure of RFC (DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby preventing the
plaintiff from completing or paying contractual commitments it had entered into, in connection
with its jute mill project.
ISSUES
1. Whether there was there a perfected consensual contract?
2. Whether there was a real contract of loan which would warrant recovery of damages arising
out of breach of such contract?
HELD
1. Yes. There was indeed a perfected consensual contract, as recognized in Article 1934 of
the Civil Code, which provides: An accepted promise to deliver something, by way of
commodatum or simple loan is binding upon the parties, but the commodatum or simple
loan itself shall not be perfected until the delivery of the object of the contract. There was
undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding
mortgage was executed and registered. But this fact alone falls short of resolving the basic
claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled
to recover damages.
2. None. Evidently Saura, Inc. realized that it could not meet the conditions required by
RFC, and so wrote its letter asking that out of the loan agreed upon the sum of P67,586.09
be released "for raw materials and labor." This was a deviation from the terms laid down
in Resolution No. 145 and embodied in the mortgage contract, implying as it did a
diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter the negotiations which had been going on
for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in
no position to comply with RFC's conditions. So instead of doing so and insisting that the
loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled. The
action thus taken by both parties was in the nature of mutual desistance what Manresa
terms "mutuo disenso" which is a mode of extinguishing obligations. It is a concept
that derives from the principle that since mutual agreement can create a contract, mutual
disagreement by the parties can cause its extinguishment.
 VI
RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners, vs. THE
HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE,
respondents. G.R. No. L-49101 | 1983-10-24
DOCTRINE:
A mortgage contract does not become invalid by mere failure of debtor to get the mortgage
consideration on the date the mortgage was executed. A loan is a consensual contract.
FACTS:
Honesto Bonnevie filed a complaint against, mortgagee, Philippine Bank of Commerce for the
annulment of the mortgage dated 06 December 1966 execued by Spouses Jose and Josefa Lozano
and to declare null and void the extrajudicial foreclosure made on 04 September 1968. Bonnevie
alleged that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by
one who was not the owner of the mortgaged property. In addition it alleged that the property in
question was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with
the condition imposed for a valid foreclosure. Granting the validity of the mortgage and the
extrajudicial foreclosure, it finally alleged that respondent Bank should have accepted petitioner's
offer to redeem the property under the principle of equity said justice. On the other hand, the
answer of defendant Bank, raised the following affirmative defenses: (a) that the defendant has
not given its consent, much less the requisite written consent, to the sale of the mortgaged property
to plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand letters
and notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the
first time about the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on
contracts requires defendant's consent before Jose Lozano can be released from his bilateral
agreement with the former and doubly so, before plaintiff may be substituted for Jose Lozano and
Alfonso Lim; (e) that the loan of P75,000.00 which was secured by mortgage, after two renewals
remain unpaid despite countless reminders and demands; of that the property in question remained
registered in the name of Jose M. Lozano in the land records of Rizal and there was no entry,
notation or indication of the alleged sale to plaintiff; (g) that it is an established banking practice
that payments against accounts need not be personally made by the debtor himself; and (h) that it
is not true that the mortgage, at the time of its execution and registration, was without
consideration as alleged because the execution and registration of the securing mortgage, the
signing and delivery of the promissory note and the disbursement of the proceeds of the loan are
mere implementation of the basic consensual contract of loan. Subsequently, petitioner Raoul SV
Bonnevie filed a motion for intervention. The intervention was premised on the Deed of
Assignment executed by petitioner Honesto Bonnevie in favor of petitioner Raoul SV Bonnevie
covering the rights and interests of petitioner HonestoBonnevie over the subject property. The
intervention was ultimately granted in order that all issues be resolved in one proceeding to avoid
multiplicity of suits. RTC dismissed the complaint. CA affirmed the decision of the RTC
ISSUE:
Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank
was validly and legally executed
HELD: Yes
The terms of the mortgage deed itself, it is clearly seen that the mortgage deed was executed for
and on condition of the loan granted to the Lozano spouses. The fact that the latter did not collect
from the respondent Bank the consideration of the mortgage on the date it was executed is
immaterial. A contract of loan being a consensual contract, the herein contract of loan was
perfected at the same time the contract of mortgage was executed. The promissory note executed
on 12 December 1966 is only an evidence of indebtedness and does not indicate lack of
consideration of the mortgage at the time of its execution.
 VII
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T.
CASTRO, JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his
capacity as statutory receiver of Island Savings Bank, petitioners, vs. THE HONORABLE
COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents. G.R. No. L-45710 |
1985-10-03

DOCTRINE:
In reciprocal obligations, the obligation or promise of each party is the consideration for that of
the other; and when one party has performed or is ready and willing to perform his part of the
contract, the other party who has not performed or is not ready and willing to perform incurs in
delay.

FACTS:
The loan application of Sulpicio M. Tolentino for 80,000 was approved by Island Savings Bank,
which, as a security for the loan, executed on the same day a real estate mortgage over a property
owned by the latter. Said loan stipulated for a lump sum 80,000 loan, payable in semi-annual
installments for a period of 3 years, with 12% annual interest. Of the 80,000 only 17,000.00 was
released by the Bank; and Tolentino signed a PN for said amount at interest earlier stipulated,
payable within 3 years from the date of execution of the contract at semi-annual installments of
P3,459.00. The Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued a resolution which prohibits the bank from making new loans
and investments excluding extensions or renewals of already approved loans. The Monetary Board,
after finding that Island Savings Bank failed to put up the required capital to restore its solvency,
issued another resolution which prohibited Island Savings Bank from doing business in the
Philippines. Island Savings Bank, in view of non-payment of the P17,000.00 covered by the PN,
filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-
hectare land of Tolentino. The latter filed a petition for specific performance or rescission and
damages with, alleging that since Island Savings Bank failed to deliver the P63,000.00 balance of
the P80,000.00 loan, he is entitled to specific performance by ordering Island Savings Bank to
deliver the P63,000.00 with interest of 12% per annum and if said balance cannot be delivered, to
rescind the real estate mortgage. RTC finding unmeritorious the petition of Tolentino, ordering
him to pay Island Savings Bank the amount of PI7 000.00 plus legal interest and legal charges due
thereon, and lifting the restraining order so that the sheriff may proceed with the foreclosure. CA
modified the RTCs decision by affirming the dismissal of Tolentinos specific performance, but
it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the
P17,000.00 loan.

ISSUES
1. Whether the action of Sulpicio for specific performance prosper.
2. Whether Tolentino is liable to pay the P17,000.00 debt covered by the promissory note.
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?

HELD:
1. No. Since Island Savings Bank was in default in fulfilling its reciprocal obligation under
their loan agreement, Tolentino under Article 1191 of the Civil Code, may choose between
specific performance or rescission with damages in either case. But since Island Savings
Bank is now prohibited from doing further business by Monetary Board Resolution, WE
cannot grant specific performance in favor of Tolentino. When Island Savings Bank and
Tolentino entered into an P80,000.00 loan agreement, they undertook reciprocal
 obligations. In reciprocal obligations, the obligation or promise of each party is the
consideration for that of the other; and when one party has performed or is ready and
willing to perform his part of the contract, the other party who has not performed or is
not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise
of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings
Bank to furnish the P80,000.00 loan. When Sulpicio executed a real estate mortgage, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of
Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in
furnishing the entire loan started when Sulpicio executed a real estate mortgage, and lasted
for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution,
which prohibited Island Savings Bank from doing further business. Such prohibition
cannot interrupt the default of Island Savings Bank in complying with its obligation of
releasing the P63,000.00 balance because said resolution merely prohibited the Bank from
making new loans and investments, and nowhere did it prohibit island Savings Bank from
releasing the balance of loan agreements previously contracted.

2. Yes. As far as the partial release of P17,000.00, which Sulpicio accepted and executed a
promissory note to cover it, the bank was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan. The PN gave rise to Sulpicio reciprocal obligation
to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations
under the promissory note made him a party in default, hence not entitled to rescission
(Article 1191 of the Civil Code).

3. The real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy
his P 17,000.00 debt. Since Island Savings Bank failed to furnish the P63,000.00 balance
of the P8O,000.00 loan, the real estate mortgage of Sulpicio became unenforceable to such
extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100
hectares is unenforceable to the extent of 78.75 hectares.
 VIII
FRANCISCO HERRERA, plaintiff-appellant, vs. PETROPHIL CORPORATION, defendant-
appellee.
G.R. No. L-48349 | 1986-12-29

DOCTRINE:
The elements of usury are (1) a loan, express or implied; (2) an understanding between the parties
that the money lent shall or may be returned; that for such loan a greater rate or interest that is
allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt intent to
take more than the legal rate for the use of money loaned. Unless these four things concur in every
transaction, it is safe to affirm that no case of usury can be declared.

FACTS:
On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc., (Petrophil
Corporation) entered into a "Lease Agreement" whereby the former leased to the latter a portion
of his property for a period of twenty (20) years from said date. On December 31, 1969, pursuant
to the said contract, the PETROPHIL CORPORATION paid to the HERRERA advance
rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the amount it
computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a
mistake in computation, paid to the appellant the additional sum of P2,182.70, thereby reducing
the deducted amount to only P98,828.03. On October 14, 1974, the plaintiff-appellant sued the
defendant-appellee for the sum of P98,828.03, with interest, claiming this had been illegally
deducted from him in violation of the Usury Law. Plaintiff-appellant now prays for a reversal of
that judgment, insisting that the lower court erred in the computation of the interest collected out
of the rentals paid for the first eight years; that such interest was excessive and violative of the
Usury Law; and that he had neither agreed to nor accepted the defendant-appellant's computation
of the total amount to be deducted for the eight years advance rentals. The defendant maintains
that the correct amount of the discount is P98,828.03 and that the same is not excessive and above
that allowed by law.

ISSUE:
Whether or not the contract is a loan

HELD: No
As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is
clearly denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing
that the parties intended a loan rather than a lease. The provision for the payment of rentals in
advance cannot be construed as a repayment of a loan because there was no grant or forbearance
of money as to constitute an indebtedness on the part of the lessor. On the contrary, the
defendant-appellee was discharging its obligation in advance by paying the eight years rentals,
and it was for this advance payment that it was getting a rebate or discount. There is no usury in
this case because no money was given by the defendant-appellee to the plaintiff-appellant, nor
did it allow him to use its money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to
deduct from the total payments because they were being made in advance for eight years. The
discount was in effect a reduction of the rentals which the lessor had the right to determine, and
any reduction thereof, by any amount, would not contravene the Usury Law.
 IX
CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros,
plaintiff-appellee, vs. FAUSTINO LICHAUCO ET AL., defendants-appellants.
G.R. No. L-22001 | 1924-11-04

DOCTRINE:
The consideration of a mortgage, which is an accessory contract, is that of the principal contract,
from which it receives its life, and without which it cannot exist as an independent contract, even
if the obligation thereby secured is of a third person, and therefore it will be valid, if the principal
one is valid, and cannot be avoided on the ground of lack of consideration.

FACTS:

Lichauco & Company, Inc., has a loan with Filipinas Compania de Seguros (China Banking
Corporation), herein plaintiff. Spouses Faustino and Luisa Lichauco executed a mortgage in favor
of the plaintiff upon the property described in the document to secure the payment of a part of
this loan in the amount of P50,000 with interest at 9%. It was agreed that in case of non-
fulfillment of the contract, this mortgage would stand as security also for the payment of all the
costs of the suit and expenses of any kind, including attorneys fees, which by way of liquidated
damages are fixed at 5% of the principal. In addition, it states that if Faustino and Luisa should
fail to pay this amount of P50,000, the mortgage shall be in full force and effect. Lichauco & Co.,
Inc., Faustino, and Luisa F executed another document, in which, among other things, they ratified
the former mortgage and stated that the payment of the P50,000 shall continue to be secured in
the same manner and with the same property, and shall earn interest at 12%/year.

Issue: Whether the obligation of Spouses Lichauco lacked consideration, because what they
guaranteed with the mortgage was a debt of Lichauco & Co., Inc.

Held: No.
As a mortgage is an accessory contract, its consideration is the very consideration of the principal
contract, from which it receives its life, and without which it cannot exist as an independent
contract, although, as in the instant case, it may secure an obligation incurred by another (art. 1857
of the Civil Code).
 X
FILIPINAS MARBLE CORPORATION, petitioner, vs. THE HONORABLE
INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO
VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE
PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY,
CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO,
ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R. LIM, respondents.

DOCTRINE:
A mortgage is a mere accessory contract and, thus, its validity would depend on the validity of
the loan secured by it.

FACTS:
Filipinas Marble Corporation filed a complaint for the annulment of the deeds of mortgage and
deed of assignment which it executed in favor of the Development Bank of the Philippines (DBP)
to secure the $5,000,000.00 loan contending that there was no loan at all to secure since what DBP
"lent" to petitioner with its right hand, it also got back with its left hand; and that, there was failure
of consideration with regard to the execution of said deeds as the loan was never delivered to the
petitioner. The petitioner further prayed that pending the trial on the merits of the case, the trial
court immediately issue a restraining order and a writ of preliminary injunction against the sheriffs
to enjoin the latter from proceeding with the foreclosure and sale of the petitioner's properties in
Metro Manila and in Romblon. DBP in its opposition to a writ of preliminary injunction said that
under PD 385, DBP's right to foreclose is mandatory as the arrearages of petitioner had already
amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that under the
same PD, no court can issue any restraining order or injunction against it to stop the foreclosure
since Filipinas Marble's arrearages had already reached at least 20% of its total obligations; that the
alleged non-receipt of the loan proceeds by the petitioner could, at best, be accepted only in a
technical sense because the money was received by the officers of the petitioner acting in such
capacity and, therefore, irrespective of whoever is responsible for placing them in their positions,
their receipt of the money was receipt by the petitioner corporation and that the complaint does
not raise any substantial controversy as to the amount due under the mortgage as the issues raised
therein refer to the propriety of the manner by which the proceeds of the loan were expended by
the petitioner's management, the allegedly precipitate manner with which DBP proceeded with the
foreclosure, and the capacity of the DBP to be an assignee of the mining lease rights. RTC held
that it cannot enjoin DBP from complying with the mandatory provisions of the said PD It having
been shown that plaintiff's outstanding obligation amounted to P151,957,641.72 and with
arrearages reaching up to 81 % against said total obligation, the Court finds the provisions of P.D.
385 applicable to the instant case. CA upheld the trial court's decision.

ISSUES:
If there was no valid loan contract for failure of consideration, the mortgage cannot exist or stand
by itself being a mere accessory contract. Additionally, the chattel mortgage has not been
registered. Therefore, the same is null and void under Article 2125 of the New Civil Code

HELD:
A mortgage is a mere accessory contract and, thus, its validity would depend on the validity of the
loan secured by it. We, however, reject the petitioner's argument that since the chattel mortgage
involved was not registered, the same is null and void. Article 2125 of the Civil Code clearly
provides that the non-registration of the mortgage does not affect the immediate parties. It states:
Art. 2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a
mortgage may be validly constituted that the document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding
between the parties. The petitioner cannot invoke the above provision to nullify the chattel
mortgage it executed in favor of respondent DBP.
 XI
Producers Bank Of The Philippines (Now First International Bank), Petitioner, Vs. Hon. Court
Of Appeals And Franklin Vives, Respondents. G.R. No. 115324 | 2003-02-19

DOCTRINE:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.

FACTS:
Sanchez asked Franklin Vives to deposit in a bank a certain amount of money in the bank account
of Sterela Marketing and Services for purposes of its incorporation, the corporation was owned
by Doronilla. Sanchez assured Vives that he could withdraw the money from the account of Sterela
a months time. Thereafter, relying on the assurances and representations of Sanchez and
Doronilla, Vives issued a check in favor of Sterela. The check was deposited to the newly opened
savings account of Sterela Marketing and Services in the Producers Bank of the Philippines
(Producers). The passbook, given to the wife of Vives, had an instruction that no
withdrawals/deposits will be allowed unless the passbook is presented. The authorized signatories
of said account were Mrs. Vives and/or Sanchez. Subsequently, Vives learned that Sterela was no
longer holding office in the address previously given to him. Alarmed, he and his wife went to the
Producers to verify if their money was still intact. They were informed that part of the money in
account had been withdrawn by Doronilla and could not withdraw said remaining amount because
it had to answer for some postdated checks issued by Doronilla. Vives tried to get in touch with
Doronilla through Sanchez. He received a letter from Doronilla, assuring him that his money was
intact and would be returned to him. Doronilla issued a postdated check in favor Vives. However,
upon presentment thereof to the drawee bank, the check was dishonored. Vives filed an action
for recovery of sum of money in the RTC against Doronilla, Sanchez, Dumagpi and Producers.
RTC ruled in favor of Vives holding Doronila, Dumagpi and Producers jointly and severally liable
and ordered the payment thereof.

ISSUE:
Whether the transaction between Vives and Doronilla is a simple loan (mutuum)

HELD: No
A circumspect examination of the records reveals that the transaction between them was a
commodatum. Article 1933 of the Civil Code distinguishes between the two kinds of loans in this
wise: By the contract of loan, one of the parties delivers to another, either something not
consumable so that the latter may use the same for a certain time and return it, in which case the
contract is called a commodatum; or money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid, in which case the contract is simply
called a loan or mutuum. Commodatum is essentially gratuitous. Simple loan may be gratuitous
or with a stipulation to pay interest.In commodatum, the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower. The rule is that the intention of
the parties thereto shall be accorded primordial consideration in determining the actual character
of a contract. In case of doubt, the contemporaneous and subsequent acts of the parties shall be
considered in such determination. As correctly pointed out by both the Court of Appeals and the
trial court, the evidence shows that private respondent agreed to deposit his money in the savings
account of Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned within 30
days. Vives merely "accommodated" Doronilla by lending his money without consideration, as a
favor to his good friend Sanchez. It was however clear to the parties to the transaction that the
money would not be removed from Sterelas savings account and would be returned to private
respondent after thirty (30) days. Doronillas attempts to return to private respondent the amount
of P200,000.00 which the latter deposited in Sterelas account together with an
additional P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent of the parties
and because the additional P12,000.00 corresponds to the fruits of the lending of the P200,000.00.
Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the use
of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latters money deposited with petitioner.
 XII
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE V. BAGTAS, defendant.
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the late Jose V. Bagtas,
petitioner-appellant 1962-10-25 | G.R. No. L-17474

DOCTRINE:
A bailee in a contract of commodatum is liable for loss of the thing, even if it should be through
a fortuitous event: (2) If he keeps it longer than the period stipulated (3) If the thing loaned has
been delivered with appraisal of its value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event.

FACTS
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through the
Bureau of Animal Industry three bulls: a Red Sindhi with a book value of P1,176.46, a
Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one year from 8 May 1948
to 7 May 1949 for breeding purposes subject to a government charge of breeding fee of 10%
of the book value of the bulls.
On 7 May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a renewal thereof
of only one bull for another year from 8 May 1949 to 7 May 1950 and requested the return of
the other two.
On 25 March 1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay
the value of the three bulls. On 17 October 1950 he reiterated his desire to buy them at a value
with a deduction of yearly depreciation to be approved by the Auditor General. On 19 October
1950 the Director of Animal Industry advised him that the book value of the three bulls could
not be reduced and that they either be returned or their book value paid not later than 31
October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to return them.
On 20 December 1950 in the Court of First Instance of Manila the Republic of the Philippines
commenced an action against him praying that he be ordered to return the three bulls loaned
to him or to pay their book value in the total sum of P3,241.45 and the unpaid breeding fee in
the sum of P499.62.
On 26 June 1959, son of the appellant by the late defendant, returned the Sindhi and Bhagnari
bulls to Roman Remorin, Superintendent of the NVB Station, Bureau of Animal Industry,
Bayombong, Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by the Huks
in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal, Baggao,
Cagayan, where the animal was kept, and that as such death was due to force majeure she is
relieved from the duty of the returning the bull or paying its value to the appellee.

ISSUE:
Whether the estate of estate of Jose V. Bagtas liable for the bull that was unreturned and loss due
to fortuitous events.

HELD:
Yes. The contention is without merit. The loan by the appellee to the late defendant Jose V.
Bagtas of the three bulls for breeding purposes for a period of one year from 8 May 1948 to 7 May
1949, later on renewed for another year as regards one bull, was subject to the payment by the
borrower of breeding fee of 10% of the book value of the bulls. The appellant contends that the
contract was commodatum and that, for that reason, as the appellee retained ownership or title
to the bull it should suffer its loss due to force majeure. A contract of commodatum is essentially
gratuitous. If the breeding fee be considered a compensation, then the contract would be a lease
of the bull. Under article 1671 of the Civil Code the lessee would be subject to the responsibilities
of a possessor in bad faith, because she had continued possession of the bull after the expiry of
the contract. And even if the contract be commodatum, still the appellant is liable, because article
1942 of the Civil Code provides that a bailee in a contract of commodatum is liable for loss of the
thing, even if it should be through a fortuitous event: (2) If he keeps it longer than the period
stipulated (3) If the thing loaned has been delivered with appraisal of its value, unless there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event.

The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of one bull was
renewed for another period of one year to end on 8 May 1950. But the appellant kept and used
the bull until November 1953 when during a Huk raid it was killed by stray bullets. Furthermore,
when lent and delivered to the deceased husband of the appellant the bulls had each an appraised
book value, to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at
P744.46. It was not stipulated that in case of loss of the bull due to fortuitous event the late
husband of the appellant would be exempt from liability.
 XIII
ALEJANDRA MINA, ET AL., plaintiffs-appellants, vs. RUPERTA PASCUAL, ET AL.,
defendants-appellees. G.R. No. 8321 | 1913-10-14

DOCTRINE:
It is an essential feature of commodatum that the use of the thing belonging to another shall be
for a certain period.

FACTS:
Francisco is the owner of land and he allowed his brother, Andres, to erect a warehouse in that
lot. Both Francisco and Andres died. Mina was recognized as the heir of Francisco and Pascual
for Andres. Pascual sold his share of the warehouse and lot. Mina opposed because the lot is hers
because Francisco never parted with its ownership when he let Andres construct a warehouse,
hence, it was a contract of commodatum.

ISSUE:
Whether the contract between Francisco and Andres is in the nature of commodatum

HELD: No
It is an essential feature of commodatum that the use of the thing belonging to another shall be
for a certain period. The parties never fixed a definite period during which Andres could use the
lot and afterwards return it.
 XIV
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants, vs. BENITO
GONZALEZ SY CHIAM, defendants-appellee. G.R. No. 26085 August 12, 1927

DOCTRINE:
Article 1281 of the Civil Code provides: "If the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal sense of its stipulations shall be followed."
Article 1282 provides: "in order to judge as to the intention of the contracting parties, attention
must be paid principally to their conduct at the time of making the contract and subsequently
thereto.

FACTS:
Prior to 28 November, 1922, the appellants purchased of the Luzon Rice Mills, Inc., a parcel of
land with the camarin located thereon, situated in Tarlac for P25,000, promising to pay in 3
installments. The first installment of P2,000 was due on or before the 02 May 1921; the second
installment of P8,000 was due on or before 31 May 1921; the balance of P15,000 at 12% interest
was due and payable on or about the 30 November 1922. One of the conditions of purchase was
that failure of the purchaser (plaintiffs and appellants) to pay the balance of said purchase price or
any of the installments on the date agreed, the property bought would revert to the original owner.
The payments due on May 1921, aggregating P10,000. The balance of P15,000 due on said
contract of purchase was paid on or about the 01 December 1922, in the manner which will be
explained below. On the date when the balance of P15,000 with interest was paid, the vendor of
said property had issued to the purchasers TCT No. 528. Said TCT (No. 528) was transfer
certificate of title from No. 40, which shows that said land was originally registered in the name of
the vendor on the 07 November 1913. On the 07 November 1922 the representative of the vendor
of the property in question wrote a letter to the appellant Potenciana Manio, notifying the latter
that if the balance of said indebtedness was not paid, an action would be brought for the purpose
of recovering the property, together with damages for non compliance with the condition of the
contract of purchase. The appellant obtained a loan amounting to P17,500 upon condition that
the plaintiffs execute and deliver to him a pacto de retro of said property.

ISSUE:
Whether or not the contract is that of a mortgage

HELD: No
It has been the uniform theory of this court, due to the severity of a contract of pacto de retro, to
declare the same to be a mortgage and not a sale whenever the interpretation of such a contract
justifies that conclusion. There must be something, however, in the language of the contract or in
the conduct of the parties which shows clearly and beyond doubt that they intended the contract
to be a "mortgage" and not a pacto de retro. There is not a word, a phrase, a sentence or a
paragraph in the entire record, which justifies this court in holding that the said contract of pacto
de retro is a mortgage and not a sale with the right to repurchase. Article 1281 of the Civil Code
provides: "If the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal sense of its stipulations shall be followed." Article 1282 provides: "in
order to judge as to the intention of the contracting parties, attention must be paid principally to
their conduct at the time of making the contract and subsequently thereto.
 XV
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE GRIJALDO, defendant-
appellant. G.R. No. L-20240 | 1965-12-31

DOCTRINE:
By a contract of simple loan, one of the parties delivers to another ... money or other consumable
thing upon the condition that the same amount of the same kind and quality shall be paid. The
obligation is to deliver a sum of money, a generic thing. In an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the obligation.

FACTS:
Grijaldo obtained 5 loans from the Bank of Taiwan, Ltd evidenced by 5 promissory notes. All
notes are without due dates, but because the loans were due one year after they were incurred. As
a security the appellant executed a chattel mortgage on the standing crops on his land. The assets
in the Philippines of the Bank of Taiwan, Ltd. were vested in the Government of the United States.
These assets, including the loans in question, were subsequently transferred to the Republic of the
Philippines. The Republic of the Philippines made a written extrajudicial demand upon the
appellant for the payment of the loans. The record shows that the appellant had actually received
the written demand for payment, but he failed to pay. The appellee filed a complaint in to collect
from the appellant the unpaid account in question. The Justice of the Peace Of Hinigaran,
dismissed the case on the ground that the action had prescribed.

ISSUE:
Whether the obligation to pay is extinguished.

HELD: No
The obligation of Grijaldo was not to deliver a determinate thing namely, the crops to be harvested
from his land, or the value of the crops that would be harvested from his land. Rather, his
obligation was to pay a generic thing the amount of money representing the total sum of the
five loans, with interest. The transaction between the appellant and the Bank of Taiwan, Ltd. was
a series of five contracts of simple loan of sums of money. "By a contract of (simple) loan, one of
the parties delivers to another ... money or other consumable thing upon the condition that the
same amount of the same kind and quality shall be paid." (Article 1933, Civil Code) The obligation
of the appellant under the five promissory notes evidencing the loans in questions is to pay the
value thereof; that is, to deliver a sum of money a clear case of an obligation to deliver, a generic
thing. Article 1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same
kind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the
fulfillment of appellant's obligation covered by the five promissory notes, and the loss of the crops
did not extinguish his obligation to pay, because the account could still be paid from other sources
aside from the mortgaged crops.
 XVI
PHILIPPINE NATIONAL BANK, Petitioner, v. THE HON. COURT OF APPEALS and
AMBROSIO PADILLA, Respondents. G.R. No. 88880. April 30, 1991.

DOCTRINE:
Removal of Usury Law Ceiling on interest rates does not authorize banks to unilaterally and
successively increase interest rates.

FACTS:
Ambrosio Padilla, private respondents, was granted by petitioner Philippine National Bank, a
credit line, secured by a real estate mortgage, for a term of 2 years, with 18% interest per annum.
Private respondent executed in favor of the PNB a Credit Agreement, 2 promissory notes in the
amount of P900,000.00 each, and a Real Estate Mortgage Contract. Stipulations in the PN
authorizes PNB to increase the stipulated 18% interest per annum "within the limits allowed by
law at any time depending on whatever policy it [PNB] may adopt in the future; Provided, that,
the interest rate on this note shall be correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary Board." Padilla requested to the
increase in the rate of interest from 18% be fixed at 21% or 24% but was denied by PNB.

ISSUE:
Whether PNB, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.

HELD: No.
Central Bank Circular No. 905, Series of 1982 removed the Usury law ceiling on interest rates,
however, it did not authorize the PNB, or any bank for that matter, to unilaterally and successively
increase the agreed interest rates from 18% to 48% within a span of four (4) months, in violation
of P.D. 116 which limits such changes to "once every twelve months."
 XVII
ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the CULTURAL CENTER OF
THE PHILIPPINES, respondents.
G.R. No. 116285 | 2001-10-19

DOCTRINE
A stipulation about payment of an additional interest rate partakes of the nature of a penalty clause.
Penalty clauses can be in the form of penalty or compensatory interest.

FACTS
Antonio Tan, herein petitioner, obtained 2 loans from the Cultural Center of the Philiipines (CCP).
After partial payments, the petitioner was not able to pay the balance of the loan and requested
from CCP for the restructuring of the loan which was granted by the latter. Tan failed to pay any
installment on the said restructured loan. Tan requested from CCP a moratorium on his loan
obligation. No favorable response was made, instead, CCP, wrote a letter to Tan demanding full
payment of the restructured loan. CCP filed a complaint for collection of a sum of money, against
Tan after the latter failed to settle his said restructured loan obligation. Tan interposed the defense
that he merely accommodated a friend, who allegedly asked for his help to obtain a loan from
CCP. Petitioner claimed that he has not been able to locate his friend. While the case was pending
in the trial court, Tan filed a Manifestation wherein he proposed to settle his indebtedness to CCP.
However, CCP did not agree to Tans proposals and so the trial of the case ensued. Trial court
ordered Tan to pay CCP his outstanding account with the corresponding stipulated interest and
charges (penalty and interest on penalty) thereof, until fully paid. CA affirmed the decision.

ISSUES:
1. Whether there are contractual and legal bases for the imposition of the penalty and interest
on the penalty.
2. Whether interest may accrue on the penalty or compensatory interest without violating the
provisions of Article 1959 of the New Civil Code, which provides that:

HELD:

1. Yes. Article 1226 of NCC provides that:

In obligations with a penal clause, the penalty shall substitute the indemnity for damages
and the payment of interests in case of non-compliance, if there is no stipulation to the
contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is
guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only
when it is demandable in accordance with the provisions of this Code. The PNs expressly
provides for the imposition of both interest and penalties in case of default on the part of
the petitioner in the payment of the subject restructured loan. Penalty on delinquent
loans may take different forms. In GSIS v. CA, this Court has ruled that the NCC permits
an agreement upon a penalty apart from the monetary interest. If the parties stipulate this
kind of agreement, the penalty does not include the monetary interest, and as such the two
are different and distinct from each other and may be demanded separately.
Quoting Equitable Banking Corp. v. Liwanag, the GSIS case went on to state that such a
stipulation about payment of an additional interest rate partakes of the nature of a penalty
clause which is sanctioned by law, more particularly under Article 2209 of the NCC which
provides that: If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
2. Yes. Penalty clauses can be in the form of penalty or compensatory interest. Thus, the
compounding of the penalty or compensatory interest is sanctioned by and allowed
pursuant to the above-quoted provision of Article 1959 of the New Civil Code considering
that: First, there is an express stipulation in the PN permitting the compounding of interest.
Second, Article 2212 of the New Civil Code provides that "Interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent upon
this point." In the instant case, interest likewise began to run on the penalty interest upon
the filing of the complaint in court by CCP.
 XVIII
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON.
COURT OF APPEALS & SECURITY BANK & TRUST COMPANY, respondents. G.R.
No. 138677 February 12, 2002

DOCTRINE:
A penalty clause, expressly recognized by law, is an accessory undertaking to assume greater liability
on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive
force of the obligation and to provide, in effect, for what could be the liquidated damages resulting
from such a breach. The obligor would then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of damages caused by the breach. Although
a court may not at liberty ignore the freedom of the parties to agree on such terms and conditions
as they see fit that contravene neither law nor morals, good customs, public order or public policy,
a stipulated penalty, nevertheless, may be equitably reduced by the courts if it is iniquitous or
unconscionable or if the principal obligation has been partly or irregularly complied with.

FACTS:
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of
P120,000.00 from respondent Security Bank and Trust Company on on 11 May 1981. The loan
was evidenced by a promissory note with interest of 15.189% per annum, a penalty of 5% every
month on the outstanding principal and interest in case of default. The obligation matured on 8
September 1981; the bank, however, granted an extension but only up until 29 December 1981.
Despite several demands from the Security Bank, petitioners failed to settle the debt which, as of
20 May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with the
Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount. RTC
ruled in favor of the plaintiff and against the defendants, ordering the latter to pay, jointly and
severally, to the plaintiff. Petitioners interposed an appeal with the Court of Appeals, assailing the
imposition of the 2% service charge, the 5% per month penalty charge and 10% attorney's fees.
In its decision of 7 March 1996, the appellate court affirmed the judgment of the trial court except
on the matter of the 2% service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both parties filed their respective
motions for reconsideration. Petitioners prayed for the reduction of the 5% stipulated penalty for
being unconscionable. The bank, on the other hand, asked that the payment of interest and penalty
be commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.

On 28 October 1998, the Court of Appeals resolved the two motions thusly:

"We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest
thereon must commence not on the date of filing of the complaint as we have previously held in
our decision but on the date when the obligation became due. Default generally begins from the
moment the creditor demands the performance of the obligation. However, demand is not
necessary to render the obligor in default when the obligation or the law so provides. In the case
at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest
in case of non-payment from the date of default.
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case
to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of
Court, submitting thusly -

"I. The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%) percent per
annum imposed by private respondent bank on petitioners loan obligation are still
manifestly exorbitant, iniquitous and unconscionable.

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought
to be deleted by petitioners was even insufficient to fully cover and compensate for the cost of
money brought about by the radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank
would stress that only the amount of P5,584.00 had been remitted out of the entire loan of
P120,000.

ISSUE:
Whether the penalty imposed is reasonable

HELD: Yes
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its
consequences, the supervening realities, the standing and relationship of the parties, and the like,
the application of which, by and large, is addressed to the sound discretion of the court. In any
event, the interest stipulation, on its face, does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as cost of money, is not exactly the
same as that of a surcharge or a penalty. A penalty stipulation is not necessarily preclusive of
interest, if there is an agreement to that effect, the two being distinct concepts which may
separately be demanded.What may justify a court in not allowing the creditor to impose full
surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not
equally justify the non-payment or reduction of interest. Indeed, the interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core of a bank's
existence.
 XIX
LIAM LAW, plaintiff-appellee, vs. OLYMPIC SAWMILL CO. and ELINO LEE CHI,
defendants-appellants. G.R. No. L-30771 | 1984-05-28

DOCTRINE:
Usury has been legally non-existent. Interest can now be charged as lender and borrower may agree
upon.

FACTS:
Liam Law loaned P10,000, without interest, to Olympic Sawmill and Elino Lee Chi. The later
defaulted on the said loan. The debtors were asking for an extension, hence they parties executed
another loan document. The loan due date was extended by the loan amount was increased to
16,000. Again, Olympic and Elino again failed to pay their obligation (under the new terms). Liam
Law instituted a collection case. Olympic and Elino admitted the P10,000 principal obligation, but
claimed that the additional P6,000 constituted usurious interest. The trial court ordered the
Olympic and Elino to pay Liam Law the amount of P10,000.00 plus the further sum of P6,000.00
by way of liquidated damages . . . with legal rate of interest on both amounts.

ISSUE:
Whether the additional loan of P6,000 constituted usurious interest.

HELD: No.
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the
P6,000.00 obligation, it is presumed that it exists and is lawful, unless the debtor proves the
contrary. No evidentiary hearing having been held, it has to be concluded that defendants had not
proven that the P6,000.00 obligation was illegal. Moreover, for sometime now, usury has been
legally non-existent. Interest can now be charged as lender and borrower may agree upon. The
Rules of Court in regards to allegations of usury, procedural in nature, should be considered
repealed with retroactive effect.
 XX
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. G.R. No. L-59096 October 11, 1985

DOCTRINE:
Act No. 2655 Usury Law which allowed 12% interest deals only on (1) loans; (2) forbearances of
any money, goods, or credits; and (3) rate allowed in judgments.

FACTS:
The REFORMINAS (herein petitioners) filed an action against Shell and Michael., Inc. for
Recovery of Damages for injury to Person and Loss of Property. In which the Court ruled in their
favor, imposing the legal interest rate of 6% as provided in Article 2209 of the New Civil Code.
The said decision having become final on October 24, 1980, the case was remanded to the lower
court for execution and this is where the controversy started. In the computation of the "legal
interest" decreed in the judgment sought to be executed, petitioners claim that the "legal interest"
should be at the rate of twelve (12%) percent per annum, invoking in support of their aforesaid
submission, Central Bank of the Philippines Circular No. 416. Upon the other hand, private
respondents insist that said legal interest should be at the rate of six (6%) percent per annum only,
pursuant to and by authority of Article 2209 of the New Civil Code in relation to Articles 2210
and 2211 thereof.

ISSUE:
Whether the legal interest allowed in judgements referred to in Sec 1 of Act No. 2655 Usury Law
covers monetary judgment arising from recovery of damages for injury to a person and loss of
property

HELD: No
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 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.
 XXI
BANCO FILIPINO SAVINGS AND MORTGAGE BANK, petitioner, vs. HON. MIGUEL
NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and
FLORANTE DEL VALLE, respondents.

DOCTRINE:
CIRCULAR No. 494, although it has the effect of law, is not a law.

FACTS:
Florante del Valle obtained a loan secured by a real estate mortgage Banco Filipino in the sum of
P41,300.00 Pesos, payable and to be amortized within 15 years at 12% per cent interest annually.
Hence, the loan still had more than 730 days to run by January 2, 1976, the date when CIRCULAR
No. 494 was issued by the Central Bank.

Stamped on the PN evidencing the loan is an Escalation Clause, authorizing Banco Filipino to
correspondingly increase the interest rate stipulated in this contract in the event law should be
enacted increasing the lawful rates of interest that may be charged on this particular kind of loan.
The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued making the
maximum rate of interest on loans with maturity of more than 730 days, by banking institutions,
shall be 19% per annum. Except as provided in this Circular and Circular No. 493, loans or
renewals thereof shall continue to be governed by the Usury Law, as amended.

ISSUE:
Whether or not the BANCO FILIPINO can increase the interest rate on the loan from 12% to
17% per annum under the Escalation Clause.

HELD: No
It is clear from the stipulation between the parties that the Escalation Clause was dependent on an
increase of rate made by law alone. CIRCULAR No. 494, although it has the effect of law, is not
a law. Escalation clauses to be valid should specifically provide: (1) that there can be an increase
in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to
be valid, it must include a provision for reduction of the stipulated interest "in the event that the
applicable maximum rate of interest is reduced by law or by the Monetary Board."
 XXII
PHILIPPINE NATIONAL BANK, petitioner vs. The HON. INTERMEDIATE
APPELLATE COURT and SPOUSES FERMIN MAGLASANG and ANTONIA
SEDIGO, respondents. G.R. No. 75223 March 14, 1990

DOCTRINE:
The Escalation Clause is a valid provision in the loan agreement provided that (1) the increased
rate imposed or charged does not exceed the ceiling fixed by law or the Monetary Board; (2) the
increase is made effective not earlier than the effectivity of the law or regulation authorizing such
an increase; and (3) the remaining maturities of the loans are more than 730 days as of the
effectivity of the law or regulation authorizing such an increase.

FACTS:
Petitioner, PNB, extended financial assistance to the private respondents (Magsalang&Sedigo) in
the form of loans, in total of P82,682.39 as embodied in the promissory notes that the latter have
executed on various dates from February 5, 1976 to May 18, 1979, the payment of which to come
from the proceeds of sugar sales of the private respondents. The promissory notes bore 12%
interest per annum plus 1% interest as penalty charge in case of default in the payments. January
16, 1969, the private respondents mortgaged several real estate properties in favor of the petitioner
as security of their loans, which mortgage was amended on December 17, 1969, December 22,
1970 and February 12, 1975, as to the consideration thereof. December 1, 1979, the Monetary
Board of the Central Bank, by virtue of Presidential Decree No. 116, issued CB Circular No. 705
increasing the ceiling on the rate of interest on both secured and unsecured loans up to no more
than 21% per annum. In view of this development, the PNB Board of Directors revised its lending
interest rates on the medium and long-term loans effective June 1, 1980, per PNB board resolution
dated May 26, 1980. The private respondents defaulted in the payments of their loans, the
petitioner demanded not only the settlement of their outstanding obligation but also the payment
of the new interest rate of 21% per annum beginning June 1, 1980 per the PNB board resolution.
For failure of the private respondents to settle their obligation, then in the amount of P84,743.34,
the petitioner foreclosed the mortgage. Since the proceeds of the auction sale, P63,000.00 was not
enough to satisfy private respondents' outstanding obligation, the petitioner filed an action for
deficiency judgment with the Court of First Instance of Leyte against the private respondents.
Trial Court ruled in favor of the PNB. Ordering the defendants to pay the plaintiff the amount
of P21,743.34; said amount shall earn interest at 21 % per annum and 3% penalty charge starting
November 27, 1981, until the whole obligation is fully paid; Appellate Court affirmed the decision
of the trial court with modification: Ordering the defendants to pay the plaintiff the amount of
P12,551.16 which shall earn interest at 12% per annum and 1% penalty charge starting November
27, 1981 until fully paid. PNB filed a petition at Supreme Court with contention that pursuant to
Presidential Decree No. 116, the Monetary Board issued Central Bank Circular No. 705 on
December 1, 1979, prescribing the maximum rate of interest on loan transactions with maturities
of more than seven hundred thirty (730) days and shall not exceed twenty-one percent (21%) per
annum. Hence, the upward revision of interest rate as stipulated in the Promissory Notes
and Amendment of Real Estate Mortgage dated February 12, 1975, is in accordance with
Presidential Decree No. 116 promulgated on January 29, 1973 and Central Bank Circular
No. 705 issued on December 1, 1979, and the imposition of 21% rate of interest on the loan
obligations of private respondents is within the limits prescribed by law.

ISSUE
Whether or not the revised rate of interest imposed on the loans of the private respondents is
legal.
HELD
No. There is no question that PNB board resolution dated May 26, 1980 contains such de-
escalation clause, under paragraph 8 thereof, to wit: (8) To enable us to adjust interest rates in
accordance with CB Circular letter of March 19, 1980, the covering promissory note for
all short/medium/long terms loans shall include the following conditions: The Bank reserves the right
to increase the interest rate within the limits allowed by law or by the Monetary Board, provided,
that the interest rate agreed upon shall be reduced in the event that the applicable maximum
interest rate is reduced by law or by the Monetary Board: Provided, further, that the adjustment in
the interest rate shall take effect on or after the effectivity of the increase or increase in the
maximum rate of interest. Central Bank Circular No. 705, authorizing the increase from 12% to
21% was issued on December 1, 1979. The promissory notes executed by the private respondents
show that they are all payable on demand but the records do not show when payment was
demanded. Even granting that it was demanded on the effectivity of law, it is obvious that the
period of 730 days has not yet elapsed at the date the mortgaged properties were sold at the public
auction on November 27, 1981 (Certificate of Sheriff's Sale, Records of Exhibits, p. 84).
Accordingly, as of December 1, 1979, the remaining maturity days of the loans were less than 730
days. Hence, the increased rate imposed or charged is not valid.
 XXIII
PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS and
AMBROSIO PADILLA, respondents. The Chief Legal Counsel for petitioner. Ambrosio
Padilla, Mempin & Reyes Law Offices for private respondent. G.R. No. 88880 | 1991-04-30

DOCTRINE:
Removal of Usury Law Ceiling on interest rates does not authorize banks to unilaterally and
successively increase interest rates.

FACTS:
In July 1982, Ambrosio Padilla applied for, and was granted by PNB, a credit line of 321.8
million, for a term of 2 years, with 18% interest per annum. Ambrosio Padilla executed in favor
of the PNB a Credit Agreement, 2 PNs in the amount of P900,000.00 each, and a Real Estate
Mortgage Contract.

The PNs in turn, uniformly authorized the PNB to increase the stipulated 18% interest per
annum "within the limits allowed by law at any time depending on whatever policy it [PNB] may
adopt in the future; Provided, that, the interest rate on this note shall be correspondingly
decreased in the event that the applicable maximum interest rate is reduced by law or by the
Monetary Board.

Upon renewal of the loan, PNB unilaterally increased the interest rates from 18% to 32%, then
to 41% and again to 48%. It rejected the request of the plaintiff that adjustment of his interest
rate would be fixed from 18% to 24%.

ISSUE:
Whether the bank, within the term of the loan which it granted to the private respondent, may
unilaterally change or increase the interest rate stipulated therein at will and as often as it pleased.

HELD: No
Although PD. No. 116, authorizes the Monetary Board to prescribe the maximum rate or rates
of interest for loans or renewal thereof and to change such rate or rates whenever warranted by
prevailing economic and social conditions, it expressly provides that "such changes shall not be
made oftener than once every 12 months."

In this case, PNB, over the objection of the private respondent, and without authority from the
Monetary Board, within a period of only four 4 months, increased the 18% interest rate on the
private respondents loan obligation 3 times. Those increases were null and void, for if the
Monetary Board itself was not authorized to make such changes oftener than once a year, even
less so may a bank which is subordinate to the Board.
 XXIV

G.R. No. 107569 November 8, 1994

PHILIPPINE NATIONAL BANK, petitioner,
vs.
COURT OF APPEALS, REMEDIOS JAYME-FERNANDEZ and AMADO
FERNANDEZ, respondents.
DOCTRINE:
It is basic that there can be no contract in the true sense in the absence of the element of agreement,
or of mutual assent of the parties. If this assent is wanting on the part of the one who contracts,
his act has no more efficacy than if it had been done under duress or by a person of unsound
mind.
Similarly, contract changes must be made with the consent of the contracting parties. The minds
of all the parties must meet as to the proposed modification, especially when it affects an important
aspect of the agreement. In the case of loan contracts, it cannot be gainsaid that the rate of interest
is always a vital component, for it can make or break a capital venture. Thus, any change must
be mutually agreed upon, otherwise, it is bereft of any binding effect.
FACTS:
On April 7, 1982, (private respondents) as owners of a NACIDA-registered enterprise, obtained
a loan under the Cottage Industry Guaranty Loan Fund (CIGLF) from the Philippine National
Bank (PNB) in the amount of Fifty Thousand (P50,000.00) Pesos, as evidenced by a Credit
Agreement. Under the Promissory Note covering the loan, the loan was to be amortized over a
period of three (3) years to end on March 29, 1985, at twelve (12%) percent interest annually.
To secure the loan, (private respondents) executed a Real Estate Mortgage and a Chattel Mortgage.
The agreement herewith authorized the PNB to raise the rate of interest, at any time without
notice, beyond the stipulated rate of 12% but only "within the limits allowed by law."
During the term of the agreement, PNB on several occasion imposed interest rate of 25% per
annum to 30% to 42% on Private Respondents plus a penalty of 6% per annum on past dues."
Private respondents filed a suit for specific performance against petitioner PNB and the NACIDA.
The trial court dismissed private respondents' complaint.
The Court of Appeals reversed the dismissal with respect to petitioner bank, and disallowed the
increases in interest rates.
Petitioner bank now contends that "respondent Court of Appeals committed grave error when it
ruled (1) that the increase in interest rates are unauthorized.
ISSUE:
Can a creditor raise the legal interest based on a certain clause in the contract and without consent
from the debtor
HELD:
No.We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it
unbridled right tounilaterally upwardly adjust the interest on private respondents' loan. That
would completely take away from private respondents the right to assent to an important
modification in their agreement, and would negate the element of mutuality in contracts.
In Philippine National Bank v. Court of Appeals, et al., 196 SCRA 536, 544-545 (1991) we held
. . . The unilateral action of the PNB in increasing the interest rate on the private
respondent's loan violated the mutuality of contracts ordained in Article 1308 of
the Civil Code:
Art. 1308. The contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them.
In order that obligations arising from contracts may have the force or law between
the parties, there must be mutuality between the parties based on their essential
equality. A contract containing a condition which makes its fulfillment dependent
exclusively upon the uncontrolled will of one of the contracting parties, is void . .
. . Hence, even assuming that
the . . . loan agreement between the PNB and the private respondent gave the PNB
a license (although in fact there was none) to increase the interest rate at will during
the term of the loan, that license would have been null and void for being violative
of the principle of mutuality essential in contracts. It would have invested the loan
agreement with the character of a contract of adhesion, where the parties do not
bargain on equal footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it" . . . . Such a contract is a veritable
trap for the weaker party whom the courts of justice must protect against abuse
and imposition. (Citation omitted.)
 XXV
SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and
LAND BANK OF THE PHILIPPINES, respondents. G.R. No. 101771 | 1996-12-17

DOCTRINE:
Without such CB issuance, any proposed increased rate will never become effective.

FACTS:
Gilda Florendo was an employee of Land Bank from May 17, 1976 until August 16, 1984 when
she voluntarily resigned. However, before her resignation, she applied for a housing loan payable
within 25 years from Land Banks Provident Fund on July 20, 1983;

On March 19, 1985, Lankd Bank increased the interest rate on Florendos loan from 9% per
annum to 17%, the said increase to take effect on March 19, 1985

The details of the increase are embodied in Landbank's ManCom Resolution No. 85-08 and in a
Provident Fund Memorandum Circular.

Land Bank kept on demanding that Florendo pay the increased interest or the new monthly
installments based on the increased interest rate, but Florendo just as vehemently maintained that
the said increase is unlawful and unjustifiable.

ISSUE:
Whether or not Land Bank has a valid and legal basis to impose an increased interest rate on the
petitioners' housing loan?

HELD: No
The court held that there troactive enforcement of the ManCom Resolution as against petitioner-
employee is invalid since in the case at bar, there is in fact no Central Bank rule, regulation or other
issuance which would have triggered an application of the escalation clause as to petitioners factual
situation. The loan was perfected on July 20, 1983. PD No. 116 became effective on January 29,
1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976.
CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed
under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other
relevant CB issuances had already come into existence prior to the perfection of the housing loan
agreement and mortgage contract, and thus it may be said that these regulations had been taken
into consideration by the contracting parties when they first entered into their loan contract.
ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board,
cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the
mortgage contract very categorically specifies that any interest rate increase be in accordance with
prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board .
. . may prescribe.
 XXVI
INVESTORS FINANCE CORPORATION, petitioner, vs. AUTOWORLD SALES
CORPORATION, and PIO BARRETTO REALTY DEVELOPMENT
CORPORATION,respondents. G.R. No. 128990 September 21, 2000

DOCTRINE:
In usurious loans, the creditor can always recover the principal debt

FACTS:
In August 1980 Anthony Que, in behalf of AUTOWORLD, applied for a direct loan with FNCB.
However, since the Usury Law imposed an interest rate ceiling at that time, FNCB informed
Anthony Que that it was not engaged in direct lending; consequently, AUTOWORLD's request
for loan was denied. But sometime thereafter, FNCB's Assistant Vice President, Mr.
LeoncioAraullo, informed Anthony Que that although it could not grant direct loans it could
extend funds to AUTOWORLD by purchasing any of its outstanding receivables at a discount.
After a series of negotiations the parties agreed to execute an Installment Paper Purchase ("IPP")
transaction to enable AUTOWORLD to acquire the additional capital it needed. The mechanics
of the proposed "IPP" transaction was
(1) First, PioBarretto (BARRETTO) would execute a Contract to Sell a parcel of land in
favor of AUTOWORLD for P12,999,999.60 payable in sixty (60) equal monthly
installments of P216,666.66. Consequently, BARRETTO would acquire P12,999,999.60
worth of receivables from AUTOWORLD;

(2) FNCB would then purchase the receivables worth P12,999,999.60 from BARRETTO
at a discounted value of P6,980,000.00 subject to the condition that such amount would
be "flowed back" to AUTOWORLD;

(3) BARRETTO, would in turn, execute a Deed of Assignment (in favor of FNCB)
obliging AUTOWORLD to pay the installments of the P12,999,999.60 purchase price
directly to FNCB;2 and

(4) Lastly, to secure the payment of the receivables under the Deed of Assignment,
BARRETTO would mortgage the property subject of the sale to FNCB.

On 17 November 1980 FNCB informed AUTOWORLD that its Executive Committee approved
the proposed "IPP" transaction. On 9 February 1981 the parties signed three (3) contracts to
implement the "IPP" transaction:
(1) Contract to Sell whereby BARRETTO sold a parcel of land to AUTOWORLD,
situated in San Miguel, Manila, together with the improvements thereon, covered by TCT
No. 129763 for the price of P12,999,999.60 payable in sixty (60) consecutive and equal
monthly installments of P216,666.66.

(2) Deed of Assignment whereby BARRETTO assigned and sold in favor of FNCB all its
rights, title and interest to all the money and other receivables due from AUTOWORLD
under the Contract to Sell, subject to the condition that the assignee (FNCB) has the right
of recourse against the assignor (BARRETTO) in the event that the payor
(AUTOWORLD) defaulted in the payment of its obligations.

(3) Real Estate Mortgage whereby BARRETTO, as assignor, mortgaged the property
subject of the Contract to Sell to FNCB as security for payment of its obligation under the
Deed of Assignment.5
After the three (3) contracts were concluded AUTOWORLD started paying the monthly
installments to FNCB. On 18 June 1982 AUTOWORLD transacted with FNCB for the second
time obtaining a loan of P3,000,000.00 with an effective interest rate of 28% per annum. In
December 1982, after paying nineteen (19) monthly installments of P216,666.66 on the first
transaction ("IPP" worth P6,980,000.00) and three (3) monthly installments of P93,408.00 on the
second transaction (loan worth P3,000,000.00), AUTOWORLD advised FNCB that it intended
to preterminate the two (2) transactions by paying their outstanding balances in full. It then
requested FNCB to provide a computation of the remaining balances. FNCB sent
AUTOWORLD its computation requiring it to pay a total amount of P10,026,736.78, where
P6,784,551.24 was the amount to settle the first transaction while P3,242,165.54 was the amount
to settle the second transaction.

On 20 December 1982 AUTOWORLD wrote FNCB that it disagreed with the latter's
computation of its outstanding balances. On 27 December 1982 FNCB replied that it would only
be willing to reconcile its accounting records with AUTOWORLD upon payment of the amounts
demanded. Thus, despite its objections, AUTOWORLD reluctantly paid FNCB P10,026,736.78
through its UCPB account. On 5 January 1983 AUTOWORLD asked FNCB for a refund of its
overpayments in the total amount of P3,082,021.84. According to AUTOWORLD, it overpaid
P2,586,035.44 to settle the first transaction and P418,262.00 to settle the second transaction. On
11 July 1988 the Regional Trial Court of Makati ruled in favor of FNCB declaring that the parties
voluntarily and knowingly executed a legitimate "IPP" transaction or the discounting of
receivables. AUTOWORLD was not entitled to any reimbursement since it was unable to prove
the existence of a usurious loan. The Court of Appeals modified the decision of the trial court
and concluded that the "IPP" transaction, comprising of the three (3) contracts perfected on 9
February 1981, was merely a scheme employed by the parties to disguise a usurious loan. It ordered
the annulment of the contracts and required FNCB to reimburse AUTOWORLD P2,586,035.44
as excess interest payments over the 12% ceiling rate.

ISSUE:
Whether or not the 3 contract of loan is usurious

HELD:
Yes. The attending factors surrounding the execution of the three (3) contracts on 9 February 1981
clearly establish that the parties intended to transact a usurious loan. These contracts should
therefore be declared void.

While we do not dispute the appellate court's finding that the first transaction was a usurious loan,
we do not agree with the amount of reimbursement awarded to AUTOWORLD. Indeed, it erred
in awarding only the interest paid in excess of the 12% ceiling. In usurious loans, the creditor can
always recover the principal debt.35However, the stipulation on the interest is considered void thus
allowing the debtor to claim the whole interest paid. In a loan of P1,000.00 with interest at 20%
per annum or P200.00 per year, if the borrower pays P200.00, the whole P200.00 would be
considered usurious interest, not just the portion thereof in excess of the interest allowed by law.
 XXVII
PURIFICACION PASCUA, petitioner, vs. HON. JESUS Y. PEREZ, ET AL., respondents.
G.R. No. L-19554 | 1964-01-31

DOCTRINE:
Non-forfeiture of principal in usurious contracts

FACTS:
Purificacion Pascua mortgaged on December 13, 1956 two parcels of land in favor of Elisa Paraiso
Vda. de Verzosa to secure a loan of P25,000.00 on condition that mortgage may be redeemed
within one year from said date. When Pascua failed to redeem the mortgage stipulated, Verzosa
took steps to foreclose it extrajudicially thru the sheriff of Manila. At the foreclosure sale Verzosa
purchased the property for P35,000.00 and on May 8, 1959 the sheriff issued in her favor the
correspond certificate of sale. The sheriff fixed the expiration the redemption period of April 29,
1959. When Verzosa tried to take possession of the property as a result of its sale in her favor,
Pascua commenced an action before the Court of First Instance of Manila to annul the foreclosure
sale on the ground that the mortgage was null and void because it involved a usurious transaction.
On November 16, 1960, the court rendered decision finding the transaction to be usurious and
annulling the sale made by the sheriff in favor of Verzosa.

Because of the failure of Pascua to redeem the property within the period of one year from the
date of the receipt of the decision, Verzosa filed motion on praying that, since Pascua failed to
redeem the property as stated in the decision, an order be issued vesting in her the title to the
property and directing the cancellation of the notice of lis pendens that was annotated on the two
titles covering the property. And acceeding to the motion, over the opposition of Pascua, the
court a quo issued an order declaring that title to the properties mortgaged under the mortgage
deed is already vested in Elisa F. Vda. de Verzosa and the Register of Deeds of Manila is ordered,
upon payment of the proper legal fees, to cancel the notice of lis pendens.

ISSUE:
Assuming that Pascua failed to redeem the property, whether the court erred in vesting the title of
the property to Verzosa without corresponding appropriate action and without due process of law.

HELD: Yes
Note that what was ordered by the court a quo in said case was to allow petitioner to redeem the
property upon payment of the sum P20,100.00 which is contrary to its decision annulling the deed
of sale in favor of respondent. The most, therefore, that respondent could do upon failure of
petitioner to pay the above amount was to ask for the execution of the decision, and not the vesting
of title to the property in her, as the court did. The only right of respondent in the premises was
merely to collect the amount of the loan, plus the interest due thereon, which can be effected by
filing a motion for execution in the annulment case. This respondent can still do.
 XXVIII
AURELIO G. BRIONES, plaintiff-appellee, vs. PRIMITIVO P. CAMMAYO, ET
AL., defendants-appellants. G.R. No. L-23559 October 4, 1971

DOCTRINE:
Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in
Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is
allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413
states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the
debtor, with interest thereon from the date of payment." Article 1413, in speaking of "interest paid
in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a
loan of P1,000, with interest of 20% per annum or P200 for one year, if the borrower pays said
P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest
allowed by law. It is in this case that the law does not allow division. The whole stipulation as to
interest is void, since payment of said interest is illegal. The only change effected, therefore, by
Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of
that allowed by law, which the Usury Law already provided for, but to add that the same can be
recovered "with interest thereon from the date of payment."

FACTS:
On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against
Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them,
jointly and severally, the amount of P1,500.00, plus damages, attorney's fees and costs of suit.
Defendants executed the real estate mortgage as security for the loan of P1,200.00 given to
Primitivo P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that
the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged
loan of P1,500.00 as interest the sum of P300.00 for one year; although the mortgage contract,
was executed for securing the payment of P1,500.00 for a period of one year, without interest, the
truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the
sum of P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for
one year; On account of said loan of P1,200.00, Primitivo P. Cammayo paid to the plaintiff during
the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and
unlawfully refuse to acknowledge as part payment of the account but as in interest of the said loan
for an extension of another term of one year;

ISSUE:
Whether the creditor is entitled to collect from the debtor the amount representing the principal
obligation

HELD:
YES. In Go Chioco vs. Martinez, 45 Phil. 256 that even if the contract of loan is declared usurious
the creditor is entitled to collect the money actually loaned and the legal interest due thereon.
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should
be deemed void, since it is the only one that is illegal. The principal debt remaining without
stipulation for payment of interest can thus be recovered by judicial action. And in case of such
demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in
this case from the filing of the complaint). Such interest is not due to stipulation, for there was
none, the same being void. Rather, it is due to the general provision of law that in obligations to
pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209,
Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt
with interest thereon at the legal rate, from the date of filing of the complaint.
 XXIX
PHILIPPINE COMMERCIAL AND INDUSTRIAL BANK, Administrator of the Testate
Estate of the Deceased Plaintiff C. N. Hodges, plaintiff-appellant, vs. JUAN GRINO,
defendant-appellee, ANUNCIACION C. GRINO, RAMONA JILOCA VDA. DE GUSTILO
and SERAFIN TOLONES, intervenors-appellees. G.R. No. L-27205 | 1968-08-15.

FACTS:
The pivotal question to be determined in this case is whether the true contract between C.N.
Hodges and Juan Grio is that embodied in the "contract to sell" wherein it appears that Hodges
agreed to sell, and Grio agreed to buy, Lots Nos. 1368 and 1536-A, for the sum of P13,200
payable by defendant to plaintiff in installments with 1% monthly interest until fully paid, as
claimed by plaintiff, or that of loan of P11,000 secured by an equitable mortgage on the aforesaid
lots with 20% interest, or the sum of P2,200, immediately added to the capital plus 1% monthly
interest until the whole amount of P13,200 is fully paid by Grio to Hodges, as claimed by Grio
and intervenors.

ISSUES:
1. Whether or not the transaction between C.N. Hodges and Juan Grio is usurious.
2. Whether or not C.N. Hodges is entitled to payment of any interest provided for by
law.

HELD:
1. Yes. The Supreme Court ruled in the affirmative. The transaction between C.N.
Hodges and Juan Grio was indeed usurious.
2. Yes. As correctly ruled by the Court of Appeals, Grio was ordered to pay interest at
the legal rate, on the amount of P9,002.90 to be computed from the filing of the
complaint up to the time the same had been paid. Citing the case of Sajo v. Gustilo, it
was held that: 'The Usury Law, as construed by this court, permits the creditor to
recover the principal but not the stipulated usurious interest. This could well be taken
to mean a forfeiture of the right to any interest so as not, to arrive at a contradiction
in terms. Nevertheless, the court has fallen into the habit in cases of this character of
allowing the creditor the legal rate of interest on the judgment from the date of the
filing of the complaint. 'The objection of PCIB which was grounded on Article 1253
of the Civil Code which provides that 'If the debt produces interest, payment of the principal
shall not be deemed to have been made until the interests have been covered was ruled by the Court
to be unmeritorious. The Court held further that the fact that Grios motion of
August 23, 1965 involved nothing more than the satisfaction of the decision rendered
by the Court of Appeals. Indeed, after the same had become final and executory, there
was no other question left but its faithful execution.
 XXX
LETICIA Y. MEDEL, DR. RAFAEL MEDEL and SERVANDO FRANCO, petitioners, vs.
COURT OF APPEALS, SPOUSES VERONICA R. GONZALES and DANILO G.
GONZALES, JR. doing lending business under the trade name and style "GONZALES
CREDIT ENTERPRISES", respondents.

DOCTRINE:
Interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the promissory
note iniquitous or unconscionable, and, hence, contrary to morals ("contra bonos mores"), if not
against the law.

FACTS:
On November 7, 1985, Servando Franco and Leticia Medel (hereafter Servando and Leticia)
obtained a loan from Veronica R. Gonzales (hereafter Veronica), who was engaged in the money
lending business under the name "Gonzales Credit Enterprises", in the amount of P50,000.00,
payable in two months. Veronica gave only the amount of P47,000.00, to the borrowers, as she
retained P3,000.00, as advance interest for one month at 6% per month. Servando and Leticia
executed a promissory note for P50,000.00, to evidence the loan, payable on January 7, 1986. On
November 19, 1985, Servando and Liticia obtained from Veronica another loan in the amount of
P90,000.00, payable in two months, at 6% interest per month. They executed a promissory note
to evidence the loan, maturing on Janaury 19, 1986. They received only P84,000.00, out of the
proceeds of the loan. On maturity of the two promissory notes, the borrowers failed to pay the
indebtedness. On June 11, 1986, Servando and Leticia secured from Veronica still another loan in
the amout of P300,000.00, maturing in one month, secured by a real estate mortgage over a
property belonging to Leticia MakalintalYaptinchay, who issued a special power of attorney in
favor of Leticia Medel, authorizing her to execute the mortgage. Servando and Leticia executed a
promissory note in favor of Veronica to pay the sum of P300,000.00, after a month, or on July 11,
1986. However, only the sum of P275.000.00, was given to them out of the proceeds of the loan.
Like the previous loans, Servando and Medel failed to pay the third loan on maturity. On July 23,
1986, Servando and Leticia with the latter's husband, Dr. Rafael Medel, consolidated all their
previous unpaid loans totaling P440,000.00, and sought from Veronica another loan in the amount
of P60,000.00, bringing their indebtedness to a total of P500,000.00, payable on August 23, 1986.
On maturity of the loan, the borrowers failed to pay the indebtedness of P500,000.00, plus interests
and penalties, evidenced by the above-quoted promissory note. On February 20, 1990, Veronica
R. Gonzales, joined by her husband Danilo G. Gonzales, filed with the Regional Trial Court of
Bulacan, Branch 16, at Malolos, Bulacan, a complaint for collection of the full amount of the loan
including interests and other charges.

ISSUE:
Whether or not the interest is valid

HELD:
NO. We agree with petitioners that the stipulated rate of interest at 5.5% per month on the
P500,000.00 loan is excessive, iniquitous, unconscionable and exorbitant. However, we can not
consider the rate "usurious" because this Court has consistently held that Circular No. 905 of the
Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings
prescribed by the Usury Law 14 and that the Usury Law is now "legally inexistent".
 XXXI
TEODORO SANCHEZ, petitioner, vs. HON. CARLOS R. BUENVIAJE, Presiding Judge,
Branch VII, Court of First Instance of Camarines Sur, Iriga City, and ALEJO SANCHEZ,
respondents. G.R. No. L-57314 | 1983-11-29

DOCTRINE:
When the interest is declared usurious, the principal obligation is still valid, only the usurious is
declared void.

FACTS:
On August 25, 1976, Alejo Sanchez sued Teodoro Sanchez and Leonor Santilles in the Municipal
Court of Bato, Camarines Sur, for the recovery of P2,000.00 which the latter had promised to pay
in two notes. Said notes also contained stipulations for interest at the rate of 10% per month The
Municipal Court rendered judgment ordering Teodoro Sanchez only to pay to Alejo Sanchez
P2,000.00 plus interest thereon at the legal rate from the filing of the complaint.

ISSUE:
Whether in loan contracts where it is found that the interest is usurious renders the entire
contract void, i.e., both the principal and the interest.

HELD:
No, only with respect to interest, in that case, legal interest rate shall apply. It is now well-settled
that: "the Usury Law (Act No. 2655), by its letter and spirit, does not deprive the lender of his
right to recover of the borrower the money actually loaned this only in the case that the interest
collected is usurious. The law, as it is now, does not provide for the forfeiture of the capital in
favor of the debtor in usurious contract ... (Lopez and Javelona vs. El Hogar Filipino, 47 Phil.
249, 275 [1925].)
 XXXIII
SPOUSES DANILO SOLANGON and URSULA SOLANGON, petitioners, vs. JOSE
AVELINO SALAZAR, respondent.
G.R. No. 125944 | 2001-06-29

DOCTRINE:
While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets.

FACTS:
On August 22, 1986, Spouses Solangon executed a deed or real estate mortgage in favor of the
respondent to secure payment of a loan of P60,000.00 payable within a period of 4 months, with
interest thereon at the rate of 6% per month Spouses Solangon executed a deed of real estate
mortgage in which they mortgaged the same parcel of land to the respondent, to secure payment
of a loan of P136,512.00, payable within a period of 1 year, with interest thereon at the legal rate.
On December 29, 1990, the Spouses Solangon executed a deed of real estate mortgage in which
they mortgaged the same parcel of land in favor of respondent to secure payment of a loan in the
amount of P230,000.00 payable within a period of 4 months, with interest thereon at the legal rate

ISSUE:
Whether the stipulated interest rate of 72% per annum or 6% per month is not unconscionable.

HELD: No
While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in the
said circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. In the case at bench, petitioners
stand on a worse situation. They are required to pay the stipulated interest rate of 6% per month
or 72% per annum which is definitely outrageous and inordinate. Surely, it is more consonant with
justice that the said interest rate be reduced equitably. An interest of 12% per annum is deemed
fair and reasonable. The appealed decision of the CA is affirmed subject to the modification that
the interest rate of 72% per annum is ordered reduced to 12 % per annum.
 XXXV
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE INTERMEDIATE
APPELLATE COURT and RIZALDY T. ZSHORNACK respondents.
G.R. No. L-66826 | 1988-08-19

DOCTRINE:
A deposit is constituted from the moment a person receives a thing belonging to another, with the
obligation of safely keeping it and of returning the same.

FACTS:
The original parties to this case were Zshornack and COMTRUST. In 1980, BPI absorbed
COMTRUST through a corporate merger, and was substituted as party to the case.

On December 8, 1975, Zshornack entrusted to COMTRUST, thru Garcia, US

$3,000.00 cash popularly known as greenbacks for safekeeping, and that the agreement was
embodied in a document. Despite demands, the bank refused to return the money. COMTRUST
averred that the US$3,000 was credited to Zshornack's peso current account at prevailing
conversion rates.

BPI argues that the contract embodied in the document is the contract of deposit as defined in
Article 1962, NCC, which banks do not enter into. The bank alleges that Garcia exceeded his
powers when he entered into the transaction. Hence, it is claimed, the bank cannot be liable under
the contract, and the obligation is purely personal to Garcia.

ISSUE:
Whether or not the nature of contract entered into by the parties was a contract of deposit.

HELD:
The document which embodies the contract states that the US$3,000.00 was received by the bank
for safekeeping. The subsequent acts of the parties also show that the intent of the parties was
really for the bank to safely keep the dollars and to return it to Zshornack at a later time, Thus,
Zshornack demanded the return of the money.
The above arrangement is that contract defined under Article 1962, New Civil Code, which reads:

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 of 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.
 XXXIX

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA SANTOS,

petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE B. FLAMINIANO, ASST.
CITY FISCAL FELIZARDO N. LOTA and CLEMENT DAVID, respondents.
G.R. No. L-60033 | 1984-04-04

DOCTRINE:
Fixed, savings, and current deposits of-money in banks and similar institutions shall be governed
by the provisions concerning simple loan While the Bank has the obligation to return the amount
deposited, it has, however, no obligation to return or deliver the same money that was deposited

FACTS:
David, together with his sister, invested with the NSLA the sum of P1,145,546.20 on time deposits
covered by Bankers Acceptances and Certificates of Time Deposits and the sum of P13,531.94 on
savings account deposits or a total of P1,159,078.14. It appears further that David, made
investments in the aforesaid bank in the amount of US$75,000.00.

When the aforesaid bank was placed under receivership petitioners Guingona and Martin, upon
the request of David, assumed the obligation of the bank to private respondent David by executing
a joint promissory note in favor of David acknowledging an indebtedness of Pl,336,614.02 and
US$75,000.00. This PN was based on the statement of account prepared by the David. The
amount of indebtedness assumed appears to be bigger than the original claim because of the added
interest and the inclusion of other deposits of Davids sister in the amount of P116,613.20.

Guingona and Martin agreed to divide the said indebtedness, and petitioner Guingona executed
another PN whereby he personally acknowledged an indebtedness of P668,307.01 and
US$37,500.00 in favor of David. The aforesaid PNs were executed as a result of deposits made by
David and his sister Kuhne with the NSLA.

ISSUE:
Whether the transactions between David and NSLA were simple loans and not a contract of
deposit.

HELD:
It must be pointed out that when private respondent David invested his money on nine. and
savings deposits with the aforesaid bank, the contract that was perfected was a contract of simple
loan or mutuum and not a contract of deposit. Thus, Article 1980 of the New Civil Code provides
that:
Article 1980. Fixed, savings, and current deposits of-money in banks and similar
institutions shall be governed by the provisions concerning simple loan.

Hence, the relationship between the private respondent and the Nation Savings and Loan
Association is that of creditor and debtor; consequently, the ownership of the amount deposited
was transmitted to the Bank upon the perfection of the contract and it can make use of the amount
deposited for its banking operations, such as to pay interests on deposits and to pay withdrawals.
While the Bank has the obligation to return the amount deposited, it has, however, no obligation
to return or deliver the same money that was deposited. And, the failure of the Bank to return the
amount deposited will not constitute estafa through misappropriation punishable under Article
315, par. l(b) of the Revised Penal Code, but it will only give rise to civil liability over which the
public respondents have no- jurisdiction.
 XLI
MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE PHILIPPINES;
OVERSEAS BANK OF MANILA; EMERITO M. RAMOS, SUSANA B. RAMOS,
EMERITO B. RAMOS, JR., JOSEFA RAMOS DELA RAMA, HORACIO DELA RAMA,
ANTONIO B. RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA,
VICTORIA RAMOS TANJUATCO, and TEOFILO TANJUATCO, respondents. G.R. No. L-
30511 | 1980-02-14

DOCTRINE:
All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans and are to
be covered by the law on loans.

FACTS:
Serrano made a time deposit, of P150,000.00 with the respondent Overseas Bank of Manila.
Concepcion Maneja also made a time deposit, for of P200,000.00 with the same
respondent. Concepcion Maneja, married to Felixberto M. Serrano, assigned and conveyed to
petitioner Manuel M. Serrano, her time deposit of P200,000.00 with respondent Overseas Bank of
Manila.

Notwithstanding series of demands for encashment of the aforementioned time deposits from the
respondent Overseas Bank of Manila, not a single one of the time deposit certificates was honored
by respondent Overseas Bank of Manila.

Respondent Central Bank admits that it is charged with the duty of administering the banking
system of the Republic and it exercises supervision over all doing business in the Philippines, but
denies the petitioner's allegation that the Central Bank has the duty to exercise a most rigid and
stringent supervision of banks, implying that respondent Central Bank has to watch every move
or activity of all banks, including respondent Overseas Bank of Manila.

Respondent Central Bank denied that it is guarantor of the permanent solvency of any banking
institution as claimed by petitioner. Respondent Central Bank likewise denied that a constructive
trust was created in favor of petitioner and his predecessor in interest Concepcion Maneja when
their time deposits were made with the respondent Overseas Bank of Manila as during that time
the latter was not an insolvent bank and its operation as a banking institution was being salvaged
by the respondent Central Bank.

ISSUE:
Whether respondent Central Bank is jointly and severally liable.

HELD: No
Bank deposits are in the nature of irregular deposits. They are really loans because they earn
interest. All kinds of bank deposits, whether fixed, savings, or current are to be treated as loans
and are to be covered by the law on loans. Current and savings deposit are loans to a bank because
it can use the same. The petitioner here in making time deposits that earn interests with respondent
Overseas Bank of Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to honor the
time deposit is failure to pay its obligation as a debtor and not a breach of trust arising from
depositary's failure to return the subject matter of the deposit.
 XLIII
BANK OF THE PHILIPPINE ISLANDS (successor-in-interest of COMMERCIAL BANK
AND TRUST CO.), petitioner, vs. HON. COURT OF APPEALS, EASTERN PLYWOOD
CORP. and BENIGNO D. LIM, respondents.

DOCTRINE:
Fixed, savings, and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loan.

FACTS:
Eastern and Lim an officer and stockholder of Eastern, held at least one joint bank account with
the CBTC, the predecessor-in-interest of petitioner BPI. Sometime in March 1975, a joint checking
account with Lim was opened by Velasco with funds withdrawn from the account of Eastern
and/or Lim. Various amounts were later deposited or withdrawn from the joint account of Velasco
and Lim. The money therein was placed in the money market.

At the time of Velascos death, the outstanding balance of the account stood at P662,522.87. By
virtue of an Indemnity Undertaking executed by Lim for himself and as President and General
Manager of Eastern, of this amount was provisionally released and transferred to one of the
bank accounts of Eastern with CBTC.

Thereafter, Eastern obtained a loan of P73,000.00 from CBTC.For this loan, Eastern issued on
the same day a negotiable PN for P73,000.00 payable on demand to the order of CBTC. The note
was signed by Lim both in his own capacity and as President and General Manager of Eastern.
In addition, Eastern and Lim, and CBTC signed another document entitled Holdout
Agreement, wherein it was stated that as security for the Loan, Lim and Eastern have offered
CBTC and the latter accepts a holdout on said to the full extent of their alleged interests therein
as these may appear as a result of final and definitive judicial action or a settlement between and
among the contesting parties thereto.

ISSUE:
Whether or not BPI can demand payment of the loan of P73,000.00 despite the existence of the
Holdout Agreement.

HELD: Yes
It is clear that CBTC, or BPI, had every right to demand that Eastern and Lim settle their liability
under the promissory note. It cannot be compelled to retain and apply the deposit in Lim and
Velasco's joint account to the payment of the note. What the agreement conferred on CBTC was
a power, not a duty. Generally, a bank is under no duty or obligation to make the application. To
apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the
option to exercise.

Article 1980 of the Civil Code expressly provides that fixed, savings, and current deposits of money
in banks and similar institutions shall be governed by the provisions concerning simple loan.
The account was proved and established to belong to Eastern even if it was deposited in the names
of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it or to
demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply because it
already allowed the heirs of Velasco to withdraw the whole balance of the account. The petitioner
should not have allowed such withdrawal because it had admitted in the Holdout Agreement the
questioned ownership of the money deposited in the account.
 XLV
LUA KIAN, plaintiff and appellee, vs. MANILA RAILROAD COMPANY AND MANILA
PORT SERVICE, defendants and appellants.
G.R. No. L-23033 | 1967-01-05

DOCTRINE:
The legal relationship between an arrastre operator and the consignee is akin to that of a depositor
and warehouseman. As custodian of the goods discharged from the vessel, it was arrastre
operator's duty, like that of any ordinary depositary, to take good care of the goods and to turn
them over to the party entitled to their possession.

FACTS:
Lua Kian imported 2,000 cases of Carnation Milk and shipped on Board SS "GOLDEN BEAR".
Out of the aforesaid shipment of 2,000 cases, only 1,829 cases marked `LUA KIAN 1458' were
discharged from the vessel and received by Manila Port Service. Discharged from the same vessel
on the same date unto the custody of defendant were 3,171 cases of Carnation Milk marked
"CEBU UNITED 4860-PH-MANILA" consigned to Cebu United Enterprises, and on this
shipment, Cebu United Enterprises has a pending claim for short-delivery against defendant
Manila Port Service.

Defendant delivered to the plaintiff thru its broker, 1,913 cases of Carnation Milk marked "LUA
KIAN 1458".

The invoice value of the 87 cases of Carnation Milk claimed by the plaintiff to have been short-
delivered by defendant is P1,183.11 while the invoice value of the 87 cases of Carnation Milk
claimed by the defendant Manila Port Service to have been over-delivered by it to plaintiff is
P1,130.65;

The 1,913 cases of Carnation were taken by the broker at Pier 13, Shed 3, where at the time, there
were stored therein, aside from the shipment involved herein, 1000 cases of Carnation Milk bearing
the same marks and also consigned to plaintiff Lua Kian but had been discharged from SS `STEEL
ADVOCATE'. Of the shipment of 1000 cases of Carnation Milk bearing the same marks as the
shipment herein but had been discharged from S/S "STEEL ADVOCATE" and, Lua Kian as
consignee thereof filed a claim for short-delivery against defendant.
ISSUE:
Whether the defendants should not be made to answer for the undelivered cases of milk, insisting
that Manila Port Service was bound to deliver only 1,829 cases to Lua Kian and that it had there
before in fact over-delivered to the latter.

HELD:
The bill of lading in favor of Cebu United Enterprises indicated that only 3,000 cases were due to
said consignee, although 3,171 cases were marked in its favor. Accordingly, the excess 171 cases
marked "Cebu United" placed the defendant arrastre operator in a dilemma, for should it deliver
them to Lua Kian the goods could be claimed by the consignee Cebu United Enterprises whose
markings they bore, and should it deliver according to markings, to Cebu United Enterprises, it
might be sued by the consignee, Lua Kian whose bill of lading indicated that it should receive 171
cases more. The dilemma itself, however, offered the solution. The legal relationship between an
arrastre operator and the consignee is akin to that of a depositor and warehouseman. As custodian
of the goods discharged from the vessel, it was defendant arrastre operator's duty, like that of any
ordinary depositary, to take good care of the goods and to turn them over to the party entitled to
their possession. Under this particular set of circumstances, said defendant should have withheld
delivery because of the discrepancy between the bill of lading and the markings and conducted its
own investigation, not unlike that under Section 18 of the Warehouse Receipts Law, or called upon
the parties, to interplead, such as in a case under Section 17 of the same law, in order to determine
the rightful owner of the goods.
 XLVII
SPOUSES TIRSO I. VINTOLA and LORETO DY VINTOLA, defendants-appellants, vs.
INSULAR BANK OF ASIA AND AMERICA, plaintiff-appellee. G.R. No. 73271 | 1987-05-29

DOCTRINE:
The entruster does not become the real owner of the goods but merely the holder of a security
title for the advances made under the Letter of Credit. It was merely the holder of a security title
for the advances it had made to the VINTOLAS. The goods the VINTOLAS had purchased
through IBAA financing remain their own property and they hold it at their own risk.

FACTS:
Petitioner spouses Vintola owns and manages manufacturing of raw seashells into finished
products, under their business name, Dax kin International. They applied for domestic letter of
credit by respondent Insular Bank of Asia and America which was granted. Then, executed a
Trust Receipt Agreement with Insular bank stipulating that the Vintolas shall hold the goods in
trust for IBAA. Having defaulted in its payment, the Vintolas offered to return the goods to
IBAA, but the latter refused. Due to their continued refusal, IBAA charged them with estafa.
The Court acquitted the Vintolas.

ISSUE:
Whether or not IBAA became the real owners of the goods held in trust by the Vintolas.

RULING:
No. Insular bank of Asia and America did not become the holder or real owner of the goods. The
Vintolas retained ownership of the goods. The Court held that the trust receipt arrangement did
not convert the IBAA into an investor, it remained a lender and creditor. Under the law, a trust
receipt is a document wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster to sell or otherwise dispose of the goods, to
the amount owing to the entruster.
 LVI
PHILIPPINE NATIONAL BANK, petitioner, vs. HON. MARCELINO L. SAYO, JR., in his
capacity as Presiding Judge of the Regional Trial Court of Manila (Branch 45), NOAH'S ARK
SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO and WILSON T. GO,
respondents.G.R. No. 129918 | 1998-07-09

FACTS:
In accordance with Act No. 2137, the Warehouse Receipt Law, Noahs Ark Sugar Refinery
(Noahs Ark) issued the following warehouse receipts (quedans): (1) Receipt No. 18062,
covering sugar deposited by Ms. Rosa Sy on 01 March 1989; (2) Receipt No. 18080,
deposited by RNS Merchandising on 07 March 1989; (3) Receipt No. 18081, deposited by
St. Therese Merchandising on 21 March 1989 (4) Receipt No. 18086, deposited by St.
Therese Merchandising on 31 March 1989; and (5) Receipt No. 18087, deposited by RNS
Merchandising on 01 April 1989.
Receipt 18080 and 18081 were negotiated and endorsed to Luis T. Ramos and Receipt
18086, 18087 and 18062 were negotiated and endorsed to Cresencia K. Zoleta. Ramos
and Zoleta then used the quedans as a security for 2 loan agreements P15.6 million and
P23.5 million obtained by them from the Philippine National Bank (PNB). Said quedans
were indorsed by them to PNB
Zoleta and Ramos failed to pay their maturing loans on 09 January 1990. On 16 March
1990, PNB wrote to Noahs Ark demanding delivery of sugar covered by the quedans
endorsed to it by Zoleta and Ramos.
Noahs Ark refused to comply with the demand, alleging ownership thereof
According to Noahs Ark, on 01 April 1989, the defendant agreed to sell the total volume
of sugar as indicated in the quedans for a total consideration of P63 million to Rosa Sy of
RNS Merchandising and Teresita Ng of St. Therese Merchandising. The corresponding
payment was in the form of check issued to the vendees. However the checks was
dishonored by drawee bank for being drawn against insufficient funds.
Considering that the vendees and first endorsers of subject quedans did not acquire
ownership thereof, the subsequent endorsers and plaintiff itself did not acquire a better
right of ownership than the original vendees/first endorsers.
The matter reached the Court and in its decision in G.R. No. 107243, the Court ordered
the delivery of stocks of sugar covered by the subject quedan receipts to PNB and pay
actual damages amounting to P39.1 million with interest thereon and litigation and judicial
expenses amounting to P150,000
Private respondents filed an omnibus motion to deferred the proceedings until they are
heard on the warehousemans lien. On 22 August 1994, the petitioners filed a motion for
the issuance of the writ of execution and opposition to the omnibus motion of the
respondents.
The trial court granted private respondents' Omnibus Motion on December 20, 1994
and set reception of evidence on their claim for warehouseman's lien. The resolution of
the PNB's Motion for Execution was ordered deferred until the determination of private
respondents' claim.
The matter again reached the Court and in its decision in GR No. 119231, Court held that
While the PNB is entitled to the stocks of sugar as the endorsee of the quedans, delivery
to it shall be effected only upon payment of the storage fees. Imperative is the right of the
warehouseman to demand payment of his lien at this juncture, because, in accordance with
Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods
by surrendering possession thereof. In other words, the lien may be lost where the
warehouseman surrenders the possession of the goods without requiring payment of his
 lien, because a warehouseman's lien is possessory in nature.
The private respondents then filed a motion for the execution of the defendants lien as a
warehouseman on 27 November 1996.
Such motion was opposed by PNB on the following grounds:
o The lien claimed by Noah's Ark in the unbelievable amount of P734,341,595.06 is
illusory; and
o There is no legal basis for execution of defendants' lien as warehouseman unless
and until PNB compels the delivery of the sugar stocks.
On 07 April 1997, the trial court granted the motion for the execution of the
warehousemans lien in the amount of 662,548,611.50 net of the claims by the petitioners.
Hence this petition with the Court.

ISSUES:
Whether the respondents is entitled to the warehousemans lien amounting to 734,341,595.06 from
the petitioners.

HELD
We confirmed petitioner's liability for storage fees in G.R. No. 119231. However, petitioner's
status as to the quedans must first be clearly defined and delineated to be able to determine the
extent of its liability.

Petitioner insisted, both in its petition and during the oral arguments on 24 November 1997, that
it was a mere pledgee as the quedans were used to secure two loans it granted. In our decision in
G.R. No. 107243, we upheld this contention of petitioner, thus:

Zoleta and Ramos then used the quedans as security for loans obtained by them from the
Philippine National Bank (PNB) as security for loans obtained by them in the amounts of P23.5
million and P15.6 million, respectively. These quedans they indorsed to the bank.

As such, Martinez v. Philippine National Bank becomes relevant:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a
creditor only to secure the payment of a loan or debt, the transferee or endorsee does not
automatically become the owner of the goods covered by the warehouse receipt or quedan but he
merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the
obligation from the proceeds of the sale, this for the simple reason that the transaction involved
is not a sale but only a mortgage or pledge, and that if the property covered by the quedans or
warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the
transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as
lost on account of the real owner, mortgagor or pledgor.

The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to
petitioner was not to convey "title" to or ownership of the goods but to secure (by way of
pledge) the loans granted to Ramos and Zoleta by petitioner. The indorsement of the warehouse
receipts (quedans), to perfect the pledge, merely constituted a symbolical or constructive delivery
of the possession of the thing thus encumbered.

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure
the things given by way of pledge. Any stipulation to the contrary, termed pactum commissorio,
is null and void. The law requires foreclosure in order to allow a transfer of title of the good
given by way of security from its pledgor, and before any such foreclosure, the pledgor, not the
pledgee, is the owner of the goods.
The warehouseman, nevertheless, is entitled to the warehouseman's lien that attaches to the
goods invokable against anyone who claims a right of possession thereon.
The next issue to resolve is the duration of time the right of petitioner over the goods may be
held subject to the warehouseman's lien.

Sections 8, 29 and 31 of the Warehouse Receipts Law now come to fore. They provide, as
follows:
SEC. 8. Obligation of warehousemen to deliver. A warehouseman, in the absence of some lawful
excuse provided by this Act, is bound to deliver the goods upon a demand made either by the
holder of a receipt for the goods or by the depositor, if such demand is accompanied with:
(a) An offer to satisfy warehouseman's lien;
(b) An offer to surrender the receipt, if negotiable, with such indorsements as would be
necessary for the negotiation of the receipt; and
(c) A readiness and willingness to sign, when the goods are delivered, an acknowledgment that
they have been delivered, if such signature is requested by the warehouseman.

In case the warehouseman refuses or fails to deliver the goods in compliance with a demand by
the holder or depositor so accompanied, the burden shall be upon the warehouseman to
establish the existence of a lawful excuse for such refusal.
SEC. 29. How the lien may be lost. A warehouseman loses his lien upon goods; (a) By
surrendering possession thereof, or
(b) By refusing to deliver the goods when a demand is made with which he is bound to comply
under the provisions of this Act.
SEC. 31. Warehouseman need not deliver until lien is satisfied. A warehouseman having a lien
valid against the person demanding the goods may refuse to deliver the goods to him until the
lien is satisfied.

Simply put, where a valid demand by the lawful holder of the quedans for the delivery of the
goods is refused by the warehouseman, despite the absence of a lawful excuse provided by the
statute itself, the warehouseman's lien is thereafter concomitantly lost. As to what the law deems
a valid demand, Section 8 enumerates what must accompany a demand; while as regards the
reasons which a warehouseman may invoke to legally refuse to effect delivery of the goods
covered by the quedans, these are:
(1) That the holder of the receipt does not satisfy the conditions prescribed in Section 8 of the
Act. (See Sec. 8, Act No. 2137)
(2) That the warehouseman has legal title in himself on the goods, such title or right being
derived directly or indirectly from a transfer made by the depositor at the time of or subsequent
to the deposit for storage, or from the warehouseman's lien. (Sec. 16, Act No. 2137)
(3) That the warehouseman has legally set up the title or right of third persons as lawful defense
for non-delivery of the goods as follows:
(a) Where the warehouseman has been requested, by or on behalf of the person lawfully entitled
to a right of property of or possession in the goods, not to make such delivery (Sec. 10, Act No.
2137), in which case, the warehouseman may, either as a defense to an action brought against
him for nondelivery of the goods, or as an original suit, whichever is appropriate, require all
known claimants to interplead (Sec. 17, Act No. 2137);
(b) Where the warehouseman had information that the delivery about to be made was to one not
lawfully entitled to the possession of the goods (Sec. 10, Act No. 2137), in which case, the
warehouseman shall be excused from liability for refusing to deliver the goods, either to the
depositor or person claiming under him or to the adverse claimant, until the warehouseman has
had a reasonable time to ascertain the validity of the adverse claims or to bring legal proceedings
to compel all claimants to interplead (Sec. 18, Act No. 2137); and
(c) Where the goods have already been lawfully sold to third persons to satisfy a warehouseman's
lien, or have been lawfully sold or disposed of because of their perishable or hazardous nature.
(Sec. 36, Act No. 2137).
(4) That the warehouseman having a lien valid against the person demanding the goods refuses
to deliver the goods to him until the lien is satisfied. (Sec. 31, Act No. 2137)
(5) That the failure was not due to any fault on the part of the warehouseman, as by showing
that, prior to demand for delivery and refusal, the goods were stolen or destroyed by fire, flood,
etc., without any negligence on his part, unless he has contracted so as to be liable in such case,
or that the goods have been taken by the mistake of a third person without the knowledge or
implied assent of the warehouseman, or some other justifiable ground for non-delivery. (67 C.J.
532)

Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain
possession of the goods complied with Section 8 of the law. The presumption, nevertheless, would
be that the law was complied with, rather than breached, by petitioner. Upon the other hand, it
would appear that the refusal of private respondents to deliver the goods was not anchored on a
valid excuse, i.e., non-satisfaction of the warehouseman's lien over the goods, but on an adverse
claim of ownership. Private respondents justified their refusal to deliver the goods, as stated in
their Answer with Counterclaim and Third-Party Complaint in Civil Case No. 90-53023, by
claiming that they "are still the legal owners of the subject quedans and the quantity of sugar
represented therein." Under the circumstances, this hardly qualified as a valid, legal excuse. The
loss of the warehouseman's lien, however, does not necessarily mean the extinguishment of the
obligation to pay the warehousing fees and charges which continues to be a personal liability of
the owners, i.e., the pledgors, not the pledgee, in this case. But even as to the owners-pledgors, the
warehouseman fees and charges have ceased to accrue from the date of the rejection by Noah's
Ark to heed the lawful demand by petitioner for the release of the goods.

The finality of our denial in G.R. No. 119231 of petitioner's petition to nullify the trial court's
order of 01 March 1995 confirms the warehouseman's lien; however, such lien, nevertheless,
should be confined to the fees and charges as of the date in March 1990 when Noah's Ark refused
to heed PNB's demand for delivery of the sugar stocks and in no event beyond the value of the
credit in favor of the pledgee (since it is basic that, in foreclosures, the buyer does not assume the
obligations of the pledgor to his other creditors even while such buyer acquires title over the goods
less any existing preferred lien thereover). The foreclosure of the thing pledged, it might
incidentally be mentioned, results in the full satisfaction of the loan liabilities to the pledgee of the
pledgors.
The Court has therefore granted the petition and directed the court to conduct further proceedings
to:
(1) to allow petitioner to present its evidence on the matter of the warehouseman's lien;(2) to
compute the petitioner's warehouseman's lien in light of the foregoing observations; and
(3) to determine whether, for the relevant period, Noah's Ark maintained a sufficient inventory
to cover the volume of sugar specified in the quedans.
 LVII
AUGUSTO COSIO and BEATRIZ DE RAMA, petitioners, vs. CHERIE PALILEO,
respondent. G.R. No. L-18452 | 1966-05-20
FACTS
In Palileo v Cosio, 97 Phil 919, the Court held that Cosio de Rama was a mortgagee of
the property subject of this case.
That in their contract it was denominated as conditional sale to Cosio until Palileo has
fully paid the loan amounting to 12,000.
However, Palileo will continue to occupy the property and will pay the rent.
The house on the property was subsequently burned, causing the respondent to leave the
property momentarily.
The petitioner then claimed the insurance proceeds from the Associated Insurance and
Surety Company and occupied the property.
That as a result of the decision in Palileo v Cosio, the contract was declared by the court
as mortgaged and the petitioner-mortgagee were declared as possessors in bad faith and
was ordered to pay the rental.
The petitioners argue that they were given possession of the property when the previous
contract of Conditional Sale was executed.
The petitioner has cited Legaspi v Celestial saying that, inasmuch as it is not an essential
requisite of the contract of mortgage to remain in the possession of the mortgagor, the
latter may deliver said property to the mortgagee without altering the nature of the
contract, it being not an essential element of a contract of mortgage.

ISSUE
Whether the petitioners were possessors in bad faith and is liable to pay for the rentals during its
possession of the property.

HELD: Yes
In a contract of mortgage, the mortgagor, as a general rule, retains the possession of the property
mortgaged as security for the payment of the sum borrowed from the mortgagee, and pays the
latter a certain per cent thereof as interest on his principal by way of compensation for his
sacrifice in depriving himself of the use of said money and the enjoyment of its fruits, in order to
give them to the mortgagor.

Inasmuch as it is not an essential requisite of the contract of mortgage that the property
mortgaged remain in the possession of the mortgagor (Article 1857 of the Civil Code) the latter
may deliver said property to the mortgagee, without thereby altering the nature of the contract. It
not being an essential requisite of said contract of mortgage that the principal of the mortgage
credit bear interest, or that the interest, as compensation for the use of the principal and
enjoyment of its fruits, be in the form of a certain per cent thereof, such interest may be in the
form of fruits of the mortgaged property, without the contract's losing thereby its character of a
mortgage contract. (At 377-378)

We may mention, at this point, that this ruling was made in answer to the contention of the
appellant in that case that the contract was an antichresis and not a mortgage. Of course in other
cases the rule has been laid down that where by agreement the mortgaged property is delivered
to the mortgagee, such mortgagee in possession is subject to the obligation of an antichretic
creditor to apply the fruits to the payment, first, of the interest and, later, of the principal.

Now, was there an agreement in this case to permit Cosio de Rama to have possession of the
house in lieu of the payment of interest? Quite the contrary, the parties stipulated that interest (in
the form of rent) was to be paid at the rate of P250 a month, an amount which we found to be
excessive. For petitioners, therefore, to espouse the theory of a mortgagee in possession would
be for them to admit unwittingly that doubly excessive interest was collected for a loan of
P12,000 which Cosio de Rama had extended to Palileo.

Hence, Cosio was not the lawful possessor of the property in this case and is liable to pay for the
rentals from the time they took actual possession of the property.
 LVIII

IN RE: Petition for Cancellation of Adverse Claim. ANANIAS ABUSTAN, petitioner-appellee,

vs. RUPERTO FERRER and CONSUELO V. GOLEZ (spouses), oppositors-appellants.G.R.
No. L-19519 | 1964-11-28

DOCTRINE: Being merely an accessory contract, a mortgage cannot exist without the principal
obligation it seeks to guarantee

FACTS:
Spouses Ruperto Ferrer and Consuelo Golez seeks the review of the court order of the Court of
First Instance of Rizal directing the cancellation of an adverse claim to a land in Makati covered
by TCT No. 76141 issued in the name of the appellee Ananais Abustan on 04 May 1960 upon the
cancellation of TCT 30520 in the name of Vicente Gomez. On 06 April 1955, Vicente Gomez
executed a document constituting a mortgage in favor of the Ferrers, to guarantee payment of
P2,500 loan, within one year from said date. That in the case of non-payment, the Ferrers, at their
election would assume the obligation of Gomez from Meralco Loan and Savings Association
which had first mortgage over the property a deed of sale shall be executed in favor of the Ferrers.
The document was not registered due to the erroneous reference of the document to the title
number of the property. On 09 May 1956, the mortgage in favor of Meralco Loans was cancelled
and another mortgage was registered in favor of Spouses Brigido Campita and Fausta Domingo
for 3,000, this was subsequently cancelled on 08 June 1957, on which another mortgage was
registered in favor of Manila Building and Loan Association for a loan amounting to P6,000. On
04 March 1959 the Ferrers instituted Civil Case No. 4820 at the CFI of Rizal for the recovery of
the sum of money for the loan mentioned above. The case was dimissed for failure of the parties
to appear. The Ferrers instated Civil Case 5726 alleged, the failure of Gomez to pay the guaranteed
debt, the reasons why the mortgage was not registered, the execution of the first mortgaged in
favor of Manila Association, laches on the part of Manila Association for failure to require an
affidavit from Gomez stating that the property is unemcumbered; and prayed that the property be
conveyed to them as well as for damages. The case was dismissed on the ground that the dismissal
in the Case 4820 is a bar from further actions on the matter. On 04 May 1960, TCT 76141 was
issued in the name of Ananais Abustan carrying the annotation of mortgage of Manila Association
and the adverse claim of the Ferrers. On 13 July 1960, Abustan filed in Land Registration Case
No. 3861 GLRO Cadastral Record 2029 for the cancellation of the adverse claim by virtue of the
final order (dismissal) in Civil Case 5726. The claims of the Ferrers being mproperly registered in
violation of Section 112 of Act 496, because the right or interest sought to be enforced by the
spouses, Ruperto Ferrer and Consuelo Golez, had become unenforceable. The petition was
granted. The Ferrers maintain that the lower court erred (a) in holding that the deed of mortgage
constituted in their favor had became unenforceable owing to the dismissal of Civil Cases Nos.
4820 and 5726 of Rizal; (b) in not holding that the registration of the adverse claim in question
operated as a registration of the deed of real estate mortgage in their favor.

ISSUE:
Whether the registered adverse claim or mortgage of the Ferrers is still valid and enforceable.

HELD:
This appeal is clearly devoid of merit. Indeed, the dismissal of Case No. 4820 had the effect of
extinguishing the debt of Gomez in favor of the Ferrers. As a consequence, the latter lost the right
to demand the conveyance in their favor of the lot in dispute, such right being predicated upon
the default of Gomez in the payment of said debt. The extinction thereof necessarily operated to
wipe out the default, if any, and, as a consequence, the relief stipulated for such event, namely, the
conveyance of the property to the Ferrers. Regardless of the foregoing, the dismissal of Case No.
5726 extinguished the right, if it still existed, to said conveyance, which was sought to be enforced
in that case. Even if the annotation of the adverse claim amounted to the registration of a deed
of real estate mortgage - and it did not have such effect - the dismissal of Case No. 4820 had
extinguished the debt secured by the mortgage, and, accordingly, of the latter. Being merely an
accessory contract, a mortgage cannot exist without the principal obligation it seeks to guarantee
(Article 2085, Civil Code of the Philippines). So, too, even if Case No. 5726 had amounted to a
reopening of Case No. 4820, which is not a fact, the dismissal of Case No. 5726 wiped out the
right of the Ferrers under Exhibit E to the conveyance in their favor of the property in question -
regardless of its nullity under Article 2088 of the Civil Code of the Philippines - no appeal having
been taken from the order of dismissal of said Case No. 5726.
 LIX
General Insurance and Surety Corporation, petitioners, vs. Hon. Honorato B. Masakayan, Judge
of the Court of First Instance of Rizal, Branch V, Quezon City; Leondro E. Castelo and Josefa
Payumo Castelo, respondents.G.R. No. L-28764 | 1973-11-29

DOCTRINE:
Future property cannot be pledged or mortgaged.

FACTS:
By virtue of a contract to sell, Gregorio Araneta, Inc. represented by J.M. Tuason was bound to
convey plaintiff ownership over a house and lot upon full payment of the purchase price which
was payable in installment to Leondro and Josefa Castelo, herein respondent. Gregorio Araneta,
Inc. gave the possession of the property to the respondents. The respondent through the help of
General Insurance and Surety Corporation, petitioner, obtained loan from Philippine Bank of
Commerce (PBC) amounting to P4,000 documented by promissory note, wherein the petitioner
signed as an accommodation party. In view of such arrangement the petitioner and the respondent
signed an indemnity agreement, whereby the respondent mortgage the property to the petitioner,
however, it did not meet the approval of Gregorio Araneta, Inc., because the respondent has not
yet fully paid the price. The plaintiff and respondent instead executed a Deed of Sale with Right
to Repurchase (in lieu of the real estate mortgage) whereby they sold to the latter all their rights
and interest over the lot. Then another loan was obtained by the respondent from PBC again the
plaintiff as an accommodation party. The plaintiff then paid the balance to Gregorio Araneta,
Inc., and a deed of sale was executed by the latter in favor of the former and new title was issued
by the Registry of Deeds of Quezon City in favor of the plaintiff. The petitioner then filed an
unlawful detainer against the respondents, it was ruled by the RTC declared the deed of sale with
a right to repurchase as additional security for the loan with PBC and ordered the reconveyance
of the property to the respondents.

ISSUE:
Whether the respondent has sufficient rights to support the allegation that the contract was in fact
that of a real estate mortgage.

HELD: No.
No valid mortgage could have been executed between the parties as the respondents were not the
absolute owners of the land as required by Art. 2085 of the New Civil Code.
 LX
Development Bank of the Philippines, petitioner, vs. Court of Appeals, Mylo O. Quinto and
Jesusa Christine S. Chupueco, respondents.G.R. No. 109946 | 1996-02-09

DOCTRINE:
It is the registration and issuance of the certificate of title that segregate public lands from the mass
of public domain and convert it into private property.

FACTS:
The petitioner, Development Bank of the Philippines granted a loan amounting to 94,000 to Sps.
Santiago and Olivia Olidiana secured real estate mortgage on Lot 2029 with Tax Declaration No.
2335/1 which at the time subject by a free patent application/sales application with the Bureau of
Lands. Subsequently in 02 November 1978, Sps. Olidiana filed an amendment of their application
relinquishing the property to Jesusa Christine Chupuico and Mylo O. Quinto, subsequently titles
where issued on the name of both respondents. On 23 April 1979, Sps. Santiago executed
additional mortgage on said property for subsequent loan amounting to 62,000. Thereafter Sps.
Santiago became in default on their obligations. DBP filed an extrajudicial foreclosure, DBP being
the highest bidder. A certificate of sale was issued in favor of DBP, however when the affidavit
of consolidation and the certificate of sale is to be registered, it was discovered that titles were
issued on said respondents. DBP filed a motion for quieting of title and cancellation on annulment
of certificate of title. Trial court ruled that Sps. Olidiana were not yet absolute owners of the
property at the time the real estate mortgage was issued for they were not yet owners of the
property as it is a public land. Upon appeal, Court of Appeals ruled in favor of the respondents
as well, hence this instant petition.

ISSUE:
Whether the real estate mortgage over the property is valid.

HELD: No.
In Visayan Realty, Inc. v. Meer we ruled that the approval of a sales application merely authorized
the applicant to take possession of the land so that he could comply with the requirements
prescribed by law before a final patent could be issued in his favor. Meanwhile the government
still remained the owner thereof, as in fact the application could still be canceled and the land
awarded to another applicant should it be shown that the legal requirements had not been
complied with. What divests the government of title to the land is the issuance of the sales patent
and its subsequent registration with the Register of Deeds. It is the registration and issuance of the
certificate of title that segregate public lands from the mass of public domain and convert it into
private property. Since the disputed lot in the case before us was still the subject of a Free Patent
Application when mortgaged to petitioner and no patent was granted to the Olidiana spouses, Lot
No. 2029 (Pls-61) remained part of the public domain. With regard to the validity of the mortgage
contracts entered into by the parties, Art. 2085, par. 2, of the New Civil Code specifically requires
that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged. Thus,
since the disputed property was not owned by the Olidiana spouses when they mortgaged it to
petitioner the contracts of mortgage and all their subsequent legal consequences as regards Lot
No. 2029 (Pls-61) are null and void. In a much earlier case we held that it was an essential requisite
for the validity of a mortgage that the mortgagor be the absolute owner of the property mortgaged,
and it appearing that the mortgage was constituted before the issuance of the patent to the
mortgagor, the mortgage in question must of necessity be void and ineffective. For, the law
explicitly requires as imperative for the validity of a mortgage that the mortgagor be the absolute
owner of what is mortgaged.
 LXI
Northern Motors. Inc., petitioner, vs. Hon. Jorge R. Coquia, etc., et. al., respondents, Filinvest
Credit Corporation, intervenor. G.R. No. L-40018 | 1975-12-15

DOCTRINE:
The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage
credit and not for the judgment credit of the mortgagor's unsecured creditor. The mortgagee is
not obligated to file an "independent action" for the enforcement of his credit. To require him to
do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage
which is to give him preference over the mortgaged chattels for the satisfaction of his credit.

FACTS:
Respondent Honesto Ong and City Sheriff of Manila filed a motion for reconsideration of this
Courts resolution holding that a lien of Northern Luzon Motors, Inc., as chattel mortgagee, over
certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee of the
unsecured judgment creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc. On the
other hand, on the other hand, Northern Motors, Inc. in its motion for the partial reconsideration
of the same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the
bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed
that the sheriff should be required to deliver to it the proceeds of the execution sale of the
mortgaged taxicabs without deducting the expenses of execution.

ISSUES:
1. Whether the judgment creditors claim is superior to mortgagors lien over the property.
2. Whether Northern Motors Inc., is entitled to the proceeds of the sale without deductions

HELD 1: No.
Honesto Ong in his motion invokes his supposed "legal and equity status" vis-a-vis the mortgaged
taxicabs. He contends that his only recourse was to levy upon the taxicabs which were in the
possession of the judgment debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors,
Inc., as unpaid seller and mortgagee, "has still an independent legal remedy" against the mortgagor
for the recovery of the unpaid balance of the price. That contention is not a justification for
setting aside the holding that Ong had no right to levy upon the mortgaged taxicabs and that he
could have levied only upon the mortgagor's equity of redemption. The essence of the chattel
mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the
judgment credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an
"independent action" for the enforcement of his credit. To require him to do so would be a
nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him
preference over the mortgaged chattels for the satisfaction of his credit. (See art. 2087, Civil Code)

HELD 2: Yes.
We already held that the execution was not justified and that Northern Motors, Inc., as mortgagee,
was entitled to the possession of the eight taxicabs. Those cabs should not have been levied upon
and sold at public auction to satisfy the judgment credit which was inferior to the chattel mortgage.
Since the cabs could no longer be recovered because apparently they had been transferred to
persons whose addresses are unknown (see par. 12, page 4, Annex B of motion), the proceeds of
the execution sale may be regarded as a partial substitute for the unrecoverable cabs (See arts.
1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern
Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution.
 LXII
Government Service Insurance System, petitioner, vs. Court of Appeals and Mr. and Mrs.
Isabelo R. Rancho, respondents, G.R. No. L-40824 | 1989-02-23

DOCTRINES:
The facts that the loans were solely for the benefit of one party would not invalidate the
mortgage. In extrajudicial foreclosure sale, personal notice on the mortgagor is not required

FACTS:
Spouses Racho, respondents, together with the Spouses Lagasca, executed two deeds of
mortgage in favor of Government Service Insurance System (GSIS) in connection with two
loans granted by the latter in the sums of P11,500 and P3,000, respectively. They executed a
"promissory note" wherein the spouses bound themselves jointly, severally, and solidarily to
pay GSIS the loan amount with 6% interest compounded monthly, payable in 120 equal monthly
installments of P127.65 each. A parcel of land (TCT No. 38989) co-owned by said mortgagor
spouses was given as security under the said mortgage deeds. The Lagasca spouses thereafter
executed an "Assumption of Mortgage" assuming the obligation to the GSIS and to secure the
release of the mortgage covering that portion of the land belonging to the spouses Racho. Upon
failure of the mortgagors to pay the amortizations due, GSIS extrajudicially foreclosed the
mortgage and caused the mortgaged property to be sold at public auction on December 3, 1962.
More than two years thereafter, or on August 23, 1965, the spouses Racho filed a complaint
against GSIS and the Lagasca spouse praying that the extrajudicial foreclosure made on their
property be declared null and void. Spouses Racho alleged that they signed the mortgage
contracts not as sureties or guarantors for the Lagasca spouses but they merely gave their
common property to the said co-owners who were solely benefited by the loans from the GSIS.
The trial court dismissed the complaint for failure to establish a cause of action. However, the
Court of Appeals (CA) reversed and held that the spouses Racho were accommodation
mortgagors. Moreover, the foreclosure of the mortgage was void insofar as it affects the share of
the spouses Racho since GSIS foreclosed the mortgage without having given sufficient notice to
the spouses Rachos either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage. The notice published in the newspaper, `Daily Record'
and posted pursuant to Sec. 3 of Act 3135 is not the notice to which the mortgagor is entitled
upon the application being made for an extrajudicial foreclosure. Hence, the present petition for
review filed by GSIS.

ISSUES:
1. Whether the mortgage is affected by the fact that the loan is for the sole benefit of the
other party
2. Whether notice requirement for extra-judicial foreclosure complied.

HELD 1: No, mortgage still valid.

The spouses Racho signed the documents "only to give their consent to the mortgage as required
by GSIS" with the latter having full knowledge that the loans secured thereby were solely for the
benefit of the Lagasca spouses. Indeed, it would be unusual for the GSIS to arrange for and deduct
the monthly amortizations on the loans from the salary as an army officer of Flaviano Lagasca
without likewise affecting deductions from the salary of Isabelo Racho who was also an army
sergeant. Then there is also the undisputed fact, as already stated, that the Lagasca spouses
executed a so-called "Assumption of Mortgage" promising to exclude the spouses Racho and their
share of the mortgaged property from liability to the mortgagee. There is no intimation that the
former executed such instrument for a consideration, thus confirming that they did so pursuant
to their original agreement. However, it cannot be said that the spouses Racho are without liability
under the aforesaid mortgage contracts. The last paragraph of Article 2085 of the Civil Code is to
the effect that third persons who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property. So long as valid consent was given, the fact that
the loans were solely for the benefit of the Lagasca spouses would not invalidate the mortgage
with respect to the spouses Racho's share in the property. In consenting thereto, even assuming
that the spouses Racho may not be assuming liability for the debt, their share in the property shall
nevertheless secure and respond for the performance of the principal obligation. The parties to
the mortgage could not have intended that the same would apply only to the aliquot portion of
the Lagasca spouses in the property, otherwise the consent of the spouses Racho would not have
been required. The supposed requirement of prior demand on the spouses Racho would not be
in point here since the mortgage contracts created obligations with specific terms of the
compliance thereof. Moreover, the spouses Racho expressly bound themselves as solidary debtors
in the promissory note.

HELD 2: Yes. Notice requirement complied.

As to the extrajudicial foreclosure effected by GSIS, we cannot agree with the ruling of the CA
that lack of notice to the spouses Racho of the extrajudicial foreclosure sale impairs the validity
thereof. Act No. 3135, as amended, does not require personal notice on the mortgagor. (see
Bonnevie vs. Court of Appeals)
 LXIII
MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and
CONRAD C. LEVISTE, respondents. G.R. No. L-48359 | 1993-03-30

DOCTRINE:
A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the debt or value of the promissory
note which he seeks to recover in the said collection suit.

FACTS:
On October 16, 1972, Celerino Delgado obtained a 90-day loan amounting to 17,500 from Conrad
Leviste. On the same date, the former executed a chattel mortgage on Willys jeep owned by him
and acting as attorney-in-fact of Cerna, he also mortgage a Taunus car owned by the latter. The
period lapsed without Delgado paying the loan. Leviste filed a collection suit against Delgado and
Cerna, as solidary debtor. Cerna filed a motion to dismissed citing lank of cause of action against
the petitioner and the death of Delgado. Petitioner also stated that for filing a collection suit he
looses the right to foreclose the mortgage and that Levistes claim should be filed in the settlement
proceedings of the estate of Delgado. The trial court dismissed his motion. The Court of Appeals
(CA) as well has denied his petition for a special civil action of certiorari, mandamus and
prohibition with preliminary injunction on 28 June 1976. On 18 February 1977, the petitioner
again filed a second motion to dismiss on the ground that the court, now presided by a new judge,
Judge Nelly L. Romero Valdellon, acquired no jurisdiction on the case. The petition was denied
since an earlier petition, on the same grounds was already resolved. A petition for certiorari was
filed with the CA and the same was dismissed. Hence, this instant petition for review was raised.

ISSUE
1. Whether Delgado and Cerna were solidary creditors.
2. Whether upon filing of the collection, the creditor, Leviste looses its right to foreclosure
losing its right against the property of Cerna.

HELD 1: No.
Only Delgado signed the promissory note and accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor.
The law is clear that "(c)ontracts take effect only between the parties. There is also no legal
provision nor jurisprudence in our jurisdiction which makes a third person who secures the
fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the
principal obligor. A chattel mortgage may be "an accessory contract" to a contract of loan, but that
fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in
fulfilling the principal obligation that is, to pay the loan. The signatory to the principal contract of
loan remains to be primarily bound. It is only upon the default of the latter that the creditor may
have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action
for the recovery of the amount of the loan. And the liability of the third-party mortgagors extends
only to the property mortgaged. Should there be any deficiency, the creditors has recourse on the
principal debtor.

HELD 2: Yes
Granting, however, that petitioner was obligated under the mortgage contract to answer for
Delgado's indebtedness, under the circumstances, petitioner could not be held liable because the
complaint was for recovery of a sum of money, and not for the foreclosure of the security. We
agree with petitioner that the filing of collection suit barred the foreclosure of the mortgage. A
mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the debt or value of the
promissory note which he seeks to recover in the said collection suit.

Despite the merits of the case of the petitioner, the petition was dismissed on procedural ground.
The first motion which was appealed to the CA raising the same facts and circumstances was
already final. We agree with the contention of private respondent, that the action has been
barred by the principle of res judicata.
 LXIV
GUILLERMO ADRIANO, petitioner, vs. ROMULO PANGILINAN, respondents. G.R. No.
L-137471 | 2002-01-16

DOCTRINE:
Mortgage is invalid if the mortgagor is not the owner of the property mortgaged.

FACTS:
Guillermo Adriano is the owner of a certain parcel of land covered by Transfer Certificate of Title
No. 337942 with an area of 304 sq.m more or less. Adriano entrusted said title to Angelina
Salvador for the purpose of securing a mortgage loan. Without the knowledge and consent of
Adriano, Salvador mortgaged the subject property to Romulo Pangilinan, a businessman regularly
engaged in mortgaged of real properties. After a time, Adriano verified the status of his title in the
Registry of Deeds (ROD) of Marikina and was surprised that the title has an annotation in favor
of Romulo Pangilinan for a loan of 60,000. Adriano denied having executed the real estate
mortgage and alleged that his signature is a forgery. He demanded reconveyance of the property
in his name and when these demands were ignored he instituted the present suit. Pangilinan, in
his defense said that sometime in December 1990, Salvador went to him for assistance in securing
a loan over a land. Pangilian gave her the requirements. When Pangilinan conducted an ocular
inspection of the property, he met a person representing to be Adriano and gave him the original
title of the property. He verified with the ROD of Marikina the genuiness of the property and
founding its veracity and after signing the promissory note by alleged Adriano, he released the
proceeds of the loan. The trial court find in favor of the petitioner, declaring the mortgage null
and void and ordered the reconveyance of the property to Adriano. Court of Appeals reversed
the decision of the trial court. CA faulted the petitioner as negligent for entrusting and delivering
the property to Salvador. Hence this instant petition.

ISSUES:
1. Whether the mortgage is valid.
2. Who bears the loss if both parties are negligent.

HELD:
We hold that both law and equity favor petitioner. First, the relevant legal provision, Article 2085
of the Civil Code, requires that the "mortgagor be the absolute owner of the thing x x x
mortgaged." Here, the mortgagor was an impostor who executed the contract without the
knowledge and consent of the owner. Second, equity dictates that a loss brought about by the
concurrent negligence of two persons shall be borne by one who was in the immediate, primary
and overriding position to prevent it. Herein respondent who, we repeat, is engaged in the
business of lending money secured by real estate mortgages could have easily avoided the loss
by simply exercising due diligence in ascertaining the identity of the impostor who claimed to be
the owner of the property being mortgaged. Finally, equity merely supplements, not supplants, the
law. The former cannot contravene or take the place of the latter.In any event, respondent is not
precluded from availing himself of proper remedies against Angelina Salvador and her cohorts.
 LXV
UNIONBANK OF THE PHILIPPINES, petitioner, vs. THE COURT OF APPEALS and
FERMINA S. DARIO and REYNALDO S. DARIO, respondents. G.R. No. 133366 | 1999-08-
05

DOCTRINE:
Upon failure to redeem foreclosed realty, consolidation of title becomes a matter of right on the
part of the auction buyer, and the issuance of a certificate of title in favor of the purchaser becomes
ministerial upon the Register of Deeds.

FACTS:
On 17 December 1991, Sps. Leopoldo and Jessica Dario executed a deed of real estate mortgage
in favor of Unionbank to secure a 3 million loan including interest. The mortgaged covered a
Quezon City property with TCT No. 41828 in Leopoldo Darios name, and was annotated on 18
December 1991. For non-payment of the principal obligation, Unionbank extrajudicially
foreclosed the property on 12 August 1993 and sold the same at the public auction, it being the
highest bidder. On 04 October 1994, one week before the expiration of the one year redemption
period, private respondent filed a complaint with the RTC of Quezon City for the annulment of
sale and real estate mortgage and the reconveyance and prayer of retraining notice of lis pendes
was annotated on the title. On 10 October 1994, the RTC issued a TRO enjoining the restraining
the statutory redemption period. At a hearing, four days later, Unionbank moved orally for the
dismissal of the case alleging that the certification for non-forum shopping is not attached. The
RTC settled the motion in favor of Unionbank. Respondents filed a motion for reconsideration
of the dismissal of the case on 20 October 1994 praying that they may be permitted to amend their
complaint and be allowed to comply with the requirements of certification of non-forum shopping.
The RTC allowed the respondents to do so. Meanwhile, Unionbank, without notice to the
respondents, consolidated title over the foreclosed property on 24 October 1994. On December
1994, the respondents filed a amended complaint alleging the invalidity of the mortgage and of the
sale. They were alleging that they, not the mortgagors, are the true owners of the property
mortgaged and insisting on the invalidity of both the mortgage and its subsequent extrajudicial
foreclosure. They claimed that the original title, TCT No. 61571, was entrusted to a certain Atty.
Reynaldo Singson preparatory to its administrative reconstitution after a fire gutted the Quezon
City Hall building. Mortgagor Leopoldo, private respondent Fermina's son, obtained the property
from Atty. Singson, had the title reconstituted under his name without private respondents
knowledge, executed an ante- dated deed of sale in his favor and mortgaged the property to
Unionbank.

ISSUE:
Whether the right to due process of the respondents were violated in the consolidation of the
property in the name of Unionbank.

HELD: No
We disagree with the appellate court's observation that consolidation deprived private respondents
of their property without due process. It is settled that the buyer in a foreclosure sale becomes the
absolute owner of the property purchased if it is not redeemed during the period of one year after
the registration of the sale. Consolidation took place as a matter of right since there was no
redemption of the foreclosed property and the TRO expired upon dismissal of the complaint.
UNIONBANK need not have informed private respondent that it was consolidaint its title over
the property, upon the expiration of the redemption period, without the judgment debtor having
made use of his right of redemption, the ownership of the property sold becomes consolidated in
the purchaser.
 LXV
EDUARDO LUCENA and NATIVIDAD PARALES, petitioner, vs. COURT APPEALS and
RURAL BANK OF NAUJAN, INC., ROGELIO PINEDA, MARIANITO BAJA, PATRIA
ARAJA, BRAULIO BAGUS, REYNALBO MAMBIL and RAMON GARCIA, respondents.
G.R. No. L-77468 | 1999-08-25

DOCTRINE:
Foreclosure of land by rural bank shall be null and void when it fails to comply with the
requirement of notice of the sale in the barrio where the property is located. The exemption on
the publication requirements apply only when the total amount of loan including interest due
and unpaid does not exceed P3,000.00

FACTS:
Lucena and Parales are registered owners of land located in barrio of Mag-asawang Tubig,
Municipality of Naujan, Oriental Mindoro, covered by TCT No. 41512 of the Registry of Deeds
of Oriental Mindoro. On 29 October 1969, the petitioners executed a real estate mortgage in
favor of Rural Bank of Naujan (RB Naujan) to secure the petitioners loan amounting to
3,000.00. When the loan matured on 01 October 1970, the petitioner made a partial payment
amounting to 1,000.00. On 07 May 1974, after several demands, RB Nuajan extrajudically
foreclosed the property, RB Naujan being the highest bidder, who in turn acquired the property.
Prior to the auction sale, notices of foreclosure were posted in at least three conspicuous public
places in the municipality where the subject property was located, as indicated in the affidavit of
posting dated May 6, 1974. No notices were posted in the barrio where the property was
located, nor were any published in a newspaper of general circulation. The Certificate of Sale
dated May 7, 1974 issued by private respondent Deputy Sheriff Braulio Bagus was registered
with the Registry of Deeds of Oriental Mindoro only on January 9, 1975. On 26 June 1975, an
affidavit consolidation was executed by RB Naujan which was subsequently recorded and then a
new title was issued in its name on 08 July 1975. On 14 July 1975, a deed of sale was executed in
favor of herein respondents, Marianito Baja and Patricia Araja and in effect, a new title was
issued in the their name. On 12 January 1977, petitioner filed a complaint for reconveyance and
damages against private respondents before the then Court of First Instance (CFI) of Oriental
Mindoro, to recover the subject property from private respondents and to compel the latter to
compensate them for damages and losses suffered. The CFI rendered judgment in favor of the
petitioners. Both parties appealed the case with the Court of Appeals (CA). The CA reverse and
set aside the ruling of the CFI, hence the instant petition.

ISSUE:
Whether the notice requirements of foreclosure was complied.

HELD:
The foreclosure of mortgages covering loans granted by rural banks shall be exempt from the
publication in newspapers were the total amount of the loan, including interests due and unpaid,
does not exceed three thousand pesos. It shall be sufficient publication in such cases if the notices
of foreclosure are posted in at least three of the most conspicuous public places in the municipality
and barrio were the land mortgaged is situated during the period of sixty days immediately preceding the
public auction. Proof of publication as required herein shall be accomplished by affidavit of the
sheriff or officer conducting the foreclosure sale and shall be attached with the records of the case.
In the case at bar, the affidavit of posting executed by the sheriff states that notices of the public
auction sale were posted in three (3) conspicuous public places in the municipality such as (1) the
bulletin board of the Municipal Building (2) the Public Market and (3) the Bus Station. There is no
indication that notices were posted in the barrio where the subject property lies. Clearly, there was
a failure to publish the notices of auction sale as required by law.In Roxas vs. Court of Appeals, this
Court has ruled that the foreclosure and public auction sale of a parcel of land foreclosed by a
rural bank were null and void when there was failure to post notices of auction sale in the barrio
where the subject property was located. This Court finds that the same situation obtains in the
case at bar. Further still, there was a failure on the part of private respondents to publish notices
of foreclosure sale in a newspaper of general circulation. Section 5 of R.A. 720 as amended by R.A.
5939 provides that such foreclosures are exempt from the publication requirement when the total
amount of the loan including interests due and unpaid does not exceed three-thousand pesos
(P3,000.00). The law clearly refers to the total amount of the loan along with interests and not
merely the balance thereof, as stressed by the use of the word "total." At the time of foreclosure,
the total amount of petitioners' loan including interests due and unpaid was P3,006.90. Publication
of notices of auction sale in a newspaper was thus necessary.In light of private respondents'
failure to comply with the statutory requirements of notice and publication, we rule that the
foreclosure and public auction sale of petitioners' property are null and void. Hence, the Rural
Bank of Naujan did not acquire valid title to the property in question. This reversal of the Court
of Appeals disposes of the other errors assigned by petitioners.
 LXVII
RENATO CRISTOBAL and MARCELINA CRISTOBAL, petitioner, vs. THE COURT
APPEALS and RURAL BANK OF MALOLOS and ATTY. VICTORINO EVANGELISTA,
respondents. G.R. No. L-124372 | 2000-03-06

DOCTRINE:
The publication of the notice of sale in a newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirements of the law. Clearly, the respondent
appellate court did not err in finding that respondent bank had substantially complied with those
requirements.

FACTS:
Petitioners are engaged in the buying and selling of palay. To augment their capital the petitioners
obtained several loans from Rural Bank of Malolos. The first was a 30,000 loan secured by a real
estate mortgage on T-64721. Because the petitioners failed to pay the loan the bank foreclosed
the property, subsequently the petitioners failed to redeem said property, hence a consolidation of
title in the name of RB Malolos was issued. Subsequently, the petitioners through their attorney-
in-fact obtained another loan amounting to 70,000 secured by real estate mortgaged on four real
estate properties. The loan was again not paid on time, hence it was foreclosed and consolidated
in the name of RB Malolos. Petitioners, as plaintiffs below, impugned the validity of the
extrajudicial foreclosure sales on the grounds that they were not furnished a copy of the application
for foreclosure by the bank and a notice of the foreclosure sale; that the bank did not comply with
the requirements of Act No. 3135 with respect to posting of the notice of sale (for failure to
present a certificate of posting) and the publication of the sale in a newspaper of general circulation.
The trial court ruled in favor of the petitioners and declared the foreclosure sale null and void.
The respondents appealed the case to the Court of Appeals which reversed and set aside the
decision of the trial court, hence this instant petition.

ISSUE
Whether the respondents have complied with the requirement of notice of foreclosure.

HELD: Yes.
We have ruled that non-presentation of a certificate of posting does not affect the intrinsic
validity of the questioned foreclosure sale. As therein held, "a certificate of posting is not
required, much less considered indispensable, for the validity of a foreclosure sale" under Act
3135.Further, as respondent bank asserts, a mortgagor who alleges absence of a requisite has
the burden of establishing that fact. Petitioners failed in this regard. Foreclosure proceedings
have in their favor the presumption of regularity and the burden of evidence to rebut the same is
on the petitioners. In addition, as held in Olizon vs. Court of Appeals, 236 SCRA 148, 156 (1994),
we held that, the publication of the notice of sale in a newspaper of general circulation alone is
more than sufficient compliance with the notice-posting requirements of the law. Clearly, the
respondent appellate court did not err in finding that respondent bank had substantially
complied with those requirements.
 LXVIII
GODFREY BOHONAN, petitioner, vs. THE COURT APPEALS, L & R CORPORATION
and SPOUSES ROSARIO & DIONISIO CABRERA, JR., respondents. G.R. No.111654 |
1996-04-18

DOCTRINE:
The non-presentation of a certificate of posting does not affect the intrinsic validity of the
questioned foreclosure sale.

FACTS:
On 17 September 1983, Godfrey Bohonan obtained a loan for 200,000 from L & R Corporation
payable in 60 monthly installments and executed a real estate mortgage over his two lots with the
four unit apartment situated in Sta. Ana, Manila covered by TCT No. 92334 and 92335 of the
Registry of Deeds of Manila. The petitioner had failed to pay four monthly amortizations which
made the entire obligations due and demandable. Petitioner was given 10 days to pay however
failed to settle the obligation. Thus L & R sent a notice of foreclosure and filed a petition in the
Manila Sheriff's Office to commence extrajudicial foreclosure proceedings against him.
Accordingly, a notice of extrajudicial foreclosure sale under Act 3135, as amended, was made
and copies thereof sent to L & R and petitioner by the Deputy Sheriff acting for the Sheriff of
Manila. The notice was published in the 20 and 27 August and 3 September 1984 issues of The
Metropolitan Mail per affidavit of its editor-publisher. At the scheduled sale on 14 September 1984
L & R became the successful bidder with its bid of P327,615.54 and was issued a certificate of
sale. However, upon failure of petitioner to redeem his property within the one-year redemption
period provided by law, L & R executed an Affidavit of Consolidation of Ownership leading to
the issuance on 1 October 1985 of TCT Nos. 167051 and 167052 in its name and the
cancellation of petitioner's TCT Nos. 92334 and 92335. On 17 February 1987 L & R's titles were
in turn cancelled to give way to TCT Nos. 172718 and 172719 in the name of Rosario Guanzon,
married to Dionisio Cabrera Jr., who bought the property from L & R for P200,000.00. On 23
February 1997 petitioner filed a complaint against L & R and its vendees contending that the sale
between L & R and Cabrera is surrounded with fraud and to declare the foreclosure sale as null
and void. The trial court decided in favor of the petitioner, which was reversed and set aside by
the Court of Appeals. Petitioner contends that respondent Court of Appeals erred in concluding
that there was a valid foreclosure sale despite the fact that (a) he was not notified of the sale; (b)
the deputy sheriff who conducted the sale did not submit a certificate of posting to prove the
alleged posting in three (3) public places required under Act No. 3135; and, (c) the Post Office
and Finance buildings where the notice of sale was allegedly posted (in addition to the City Hall)
were not public places.

ISSUE:
Whether the requirement of notice of foreclosure sale is complied with.

HELD: Yes
We agree with respondent Court of Appeals that the records show no irregularity in the foreclosure
sale held on 14 September 1984. First, personal notice on the mortgagor is not required under Act
No. 3135 as amended. All that is required is that notice be given by posting notices of the sale for
not less than twenty (20) days in at least three (3) public places of the municipality or city where
the property is situated, and publication once a week for at least three (3) consecutive weeks in a
newspaper of general circulation in the municipality or city, if the property is worth more than
four hundred pesos. The non-presentation of a certificate of posting does not affect the intrinsic
validity of the questioned foreclosure sale. As already stated, all that is required by Sec. 3 of Act
No. 3135 is that public notice of the place and time of the sale be posted in three (3) public places
and, where the property is worth more than P400.00, published in a newspaper of general
circulation. Non-compliance constitutes a jurisdictional defect sufficient to invalidate the sale.
However, a certificate of posting is not a statutory requirement. Rather, it is significant only in the
matter of proving compliance with the required posting of notice. As to the contention that the
Post Office and Finance Buildings were not public places, besides merely alleging the same (we do
not even know which post office and what finance building petitioner was referring to), petitioner
did not question the validity of the foreclosure sale on any ground whatsoever after its termination.
On the contrary, his conduct afterwards even seems to indicate that he has no objection
whatsoever as to its validity.
 LXIX
ARMANDO S. OLIZON and ILUMINADA C. OLIZON, petitioners, vs. THE COURT
APPEALS and PRUDENTIAL BANK, respondents. G.R. No.107075 | 1994-09-01

DOCTRINE:
The publication of the notice of sale in the newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirement of the law. By such publication, a
reasonably wide publicity had been effected such that those interested might attend the public
sale, and the purpose of the law had been thereby subserved.

FACTS:
Sometime in 1967 Sps. Armando and Iluminda Olizon, petitioners obtained a loan amounting to
25,000 from Prudential Bank and as a security thereof, they executed a mortgage over a parcel of
land of 1,000 square meters covered by Transfer Certificate of Title No. 24604 of the Registry of
Deeds of Kalookan City. Apparently the petitioner failed to pay the loan when it fell due and the
respondent Prudential Bank foreclosed the property at an auction sale, the latter being the highest
bidder held on 24 March 1975 and in 05 June 1978 upon failure of Sps. Olizon to redeem the
property, Prudential Bank consolidated title in its name. On 27 November 1989, Prudential Bank
filed with the RTC a petition for a writ of possession of the property which was granted. On 08
March 1990, the petitioner by way of opposition filed a petition for the cancellation of the writ of
possession, declaring the foreclosure proceedings null and void for lack of compliance with the
notice of the auction sale and the lack of posting of the notice of the sale as required by Section 3
of Act 3135, as amended. The RTC ruled in favor of the petitioners. The same decision was
reversed by the Court of Appeals, hence this instant petition.

ISSUE:
Whether the notice requirement as required in Section 3 of Act 3135 was complied with.

HELD: Yes.
We take judicial notice of the fact that newspaper publications have more far-reaching effects
than posting on bulletin boards in public places. There is a greater probability that an
announcement or notice published in a newspaper of general circulation, which is distributed
nationwide, shall have a readership of more people than that posted in a public bulletin board,
no matter how strategic its location may be, which caters only to a limited few. Hence, the
publication of the notice of sale in the newspaper of general circulation alone is more than
sufficient compliance with the notice-posting requirement of the law. By such publication, a
reasonably wide publicity had been effected such that those interested might attend the public
sale, and the purpose of the law had been thereby subserved. Moreover, herein petitioners failed
to discharge the burden of proving by convincing evidence their allegation that there was actually
no compliance with the posting requirement. The foreclosure proceeding has in its favor the
presumption of regularity, and the burden of evidence to rebut the same is on petitioners. Where
the allegation is an essential part of the cause of action or defense in a civil case, whether posited
in an affirmative or negative form, the burden of evidence thereon lies with the pleader. Besides,
the fact alone that there was no certificate of posting attached to the sheriff's records of the
extrajudicial foreclosure sale is not sufficient to prove the lack of posting, especially in this case
where the questioned act and the record thereof are already 16 years old. It is quite unfair to now
shift to respondent bank the burden of proving the fact of posting considering the length of time
that has elapsed, aside from the fact that the sheriff who conducted the public sale and who was
responsible for the posting of the notice of sale is already out of the country, with the records
being silent on his present whereabouts or the possibility of his returning here.
 LXX
PHILIPPINE NATIONAL BANK, petitioner, vs. SPOUSES FRANCISCO and MERCED
RABAT, respondents. G.R. No.134406 | 2000-11-15

DOCTRINE:
In extrajudicial foreclosure sales, personal notice to the mortgagor is not necessary.

FACTS:
Spouses Francisco and Merced Rabat (the Rabats) obtained loan aggregating 3,517,280 due on 14
March 1983, evidenced by several promissory notes by virtue of a credit line agreement (as
amended) between the Rabats, herein respondents and Philippine National Bank (PNB), herein
petitioners. The same was secured by a real estate mortgage executed by the respondents over a
total of 21 parcels of land. The Rabats failed to settle their outstanding balance on due date. The
Rabats requested more time within which to arrive at a viable proposal for the settlement of their
account but the same was denied by PNB through a letter send to the Rabats address in San Juan,
Manila. For failure to settle the balance due, PNB filed a petition for the extrajudicial foreclosure
of the real estate mortgage executed by the Rabats. After due notice and publication, the
mortgaged parcels of land were sold at a public auction on 20 February 1987 and 14 April 1987,
PNB being the lone and highest bidder. The proceeds of the sale was not enough to satisfy the
entire obligation of Rabats, PNB sent new demand letters, upon failure of Rabats to comply with
the demand to settle their remaining outsanding obligation which then stood at 14,745,398.25,
including interest, penalties and other charges, PNB filed on 05 May 1992 a complaint for a sum
of money before the RTC of Manila. The Rabats filed an answer assailing the validity of the
auction sales for want of notice to them before and after the foreclosure sale, the publication at
San Pedro times a newspaper not of general circulation, gross inadequate and unconscionable bid
price and the validity of the accumulated interest from May 1987 up to the present. The RTC
dismissed the complaints and ordered the reconveyance of the property in favor of the
respondents, in effect invalidating the auction sale and dismissing the claim for deficiency as a
result of the nullification of the sale. The RTC ruled that personal notice is not required in
foreclosure proceedings and find San Pedro Times as a newspaper of general circulation, however
nullified the sale based on the gross inadequacy of the bid price. The RTC also held that the
respondents should not be made to answer for interest and other charges from May 1987 up to
the present. The CA upheld the nullification of the RTC however raised a different ground, lack
of personal notice to the mortgagor. Hence this instant petition.

ISSUE:
Whether the requirement of notice on extrajudicial foreclosure is complied with.

HELD: Yes.
In extrajudicial foreclosure sales, personal notice to the mortgagor is not necessary. Section 3 of
Act No. 3135 reads:Section 3. Notice shall be given by posting of the sale for not less than twenty
days in at least three public places of the municipality or city where the property is situated, and if
such property is worth more than four hundred pesos, such notice shall be published once a week
for at least three consecutive weeks in a newspaper of general circulation in the municipality or
city. Clearly personal notice to the mortgagor is not required. Second, the requirements of posting
and publication in a newspaper of general circulation were duly complied with by the PNB as
correctly found by the trial court, to which we accord great respect. A question of non-compliance
with the notice and publication requirements of an extrajudicial foreclosure sale is a factual issue
and the resolution thereof by the trial court is binding and conclusive upon us absent any showing
of grave abuse of discretion.
However, the Court has directed the CA to decide with reasonable dispatch on the basis of errors
raised by PNB (gross inadequacy of bid price) and whether the respondents are liable for interest
and other charges from May 1987 to present. These issues were the issues raised on appeal but
where not addressed by the CA.
 LXXI
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. VERONICA AGUIRRE
and THE HONORABLE COURT OF APPEALS (Ninth Division), respondents. G.R.
No.144877 | 2001-09-07

DOCTRINE:
Personal notice not required. The auction sale of the property must take place on the date
indicated in the notice of auction sale and that notice that was published, a re-scheduled auction
sale without corresponding republication of notice renders the foreclosure proceedings null and
void.

FACTS
In 1980, the Development Bank of the Philippines granted a loan amounting to 99,500 to
Veronica Aguirre and as a security thereof, a real estate mortgage over a 180-square meter lot in
Paranaque and issue two promissory notes covering the amount of the loan. Aguirre defaulted
on the loan and DBP took steps to foreclose the property. Upon the request of Aguirre, DBP
offered a restructuring of the loan and was given seven days to accept it. Upon the lapse of the
seven-day period, Aguirre did not communicated her reply prompting DBP to proceed with the
foreclosure of the mortgage. Aguirre made two payments on 24 September and 10 October
1986. The notice of the foreclosure sale, to be held on 25 September 1985 was published in
Mabuhay, a newspaper of general circulation in Bulacan and Metro Manila, for some reasons the
foreclosure sale did not push through and was conducted on 07 January 1986, DBP being the
highest bidder of 99,300.00. The outstanding balance of Aguirre that time was 247,740.70. The
respondent failed to redeem the property causing its consolidation in the name of DBP. DBP
advertised the auction sale of said property on 06 December 1988. Aguirre brought a suit
against DBP in the RTC to enjoin the auction sale and to annul the foreclosure proceedings on
the grounds that her loan was not yet due since it was restructured and that she was not notified
of the foreclosure sale. The trial court ruled in favor of the petitioner. The case was appealed to
the Court of Appeals (CA). The CA ruled that the foreclosure sale was invalid for failure to
present proof of posting of the notice of the auction sale.

ISSUE:
Whether the notice requirement was duly complied with.

HELD: No.
As this Court explained in Olizon v. Court of Appeals: [N]ewspaper publications have more far-
reaching effects than posting on bulletin boards in public places. There is a greater probability that
an announcement or notice published in a newspaper of general circulation, which is distributed
nationwide, shall have a readership of more people than that posted in a public bulletin board, no
matter how strategic its location may be, which caters only to a limited few. Hence. the publication of
the notice of sale in the newspaper of general circulation alone is more than sufficient compliance with the notice-
posting requirement of the law. By such publication, a reasonably wide publicity had been effected such
that those interested might attend the public sale, and the purpose of the law had been thereby
subserved. However, although the notice of foreclosure sale was duly published, the sale did not
take place as scheduled on September 25, 1985. Instead, it was held more than two months after
the published date of the sale or on January 7, 1986. This renders the sale void. As held in Masantol
Rural Bank, Inc. v. Court of Appeals, in which the foreclosure sale likewise took place several months
after the date indicated in the published notice of sale.
 LXXII
DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee, vs. DIONISIO
MIRANG, defendant-appellant. G.R. No. L-29130 | 1975-08-08

DOCTRINE:
The creditor-mortgagee may recover deficiency resulting from the foreclosure sale from the
debtor-mortgagor.

FACTS:
Dioniso Mirang, appellant, obtained a loan approval from the Development Bank of the
Philippines amounting to 14,000 (1,000 for the purchase of work animals and farm implements;
1,500 for the construction of farmhouse and laborers quarters; and 11,500 for development and
maintenance of 18.5 hectares of abaca land). A mortgage in favor of DBP was executed by the
appellant over his homestead. DBP released the proceeds of the loan gradually and it total up to
13,000. After then, DBP refused to make further releases due to pestilence that wrecked the
plantation being financed. The appellant failed to make amortization and as a result thereof,
DBP foreclosed the property mortgaged extrajudicially and was sold to a public auction on 30
July 1957. By that time, the appellant indebtedness reached 19,714.35 including interest
excluding expenses of sale and registration. DBP as the bidder for 2,010 acquired ownership
over the property. Mirang was not able as well to exercise his right of redemption. Mirang filed
a complaint in 29 May 1962. He raised the issue (1) whether DBP can recover the deficiency
from the auction sale; (2) whether he is exempted from paying his loan since the proceeds were
used in the cultivation of his homestead; (3) whether when the mortgagor wishes to repurchase
the property should he pay the amount paid by the purchases in the auction sale or the total
obligation incurred by him and still outstanding.

ISSUE
Whether the issues raised by the appellant has merits.

HELD:
On the first issue, it is clear that in the absence of a similar provision in Act 3135, as amended, it
cannot be concluded that the creditor loses his right given him under the Mortgage Law and
recognized in the Rules of Court, to take action for the recovery of any unpaid balance on the
principal obligation, simply because he has chosen to foreclose his mortgage extra-judicially,
pursuant to a special power of attorney given him by the mortgagor in the mortgage contract. As
stated by this Court in Medina vs. Philippine National Bank (56 Phil. 651), a case analogous to
the one at bar, the step taken by the mortgagee-bank in resorting to extra-judicial foreclosure
under Act No. 3135, was 'merely to find a proceeding for the sale, and its action cannot be taken
to mean a waiver of its right to demand the payment of the whole debt.'On the second issue,
His predicament may evoke sympathy, but it does not justify a disregard of the terms of the
contract he entered into. His obligation thereunder is neither conditional nor aleatory its terms
are clear and subject to no exception. On the final issue, the unavoidable conclusion is that the
appellant, in redeeming the foreclosed property, should pay the entire amount he owed to the
Bank on the date of the sale, with interest thereon at the rate agreed upon.
 LXXIII
DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee, vs. JOVENCIO A.
ZARAGOZA and AVELINA E. ZARAGOZA, defendants-appellants. G.R. No. L-23493 |
1978-08-23

DOCTRINE:
In extrajudicial foreclosure of mortgage, where the proceeds of the sale is insufficient to cover
the debt, the mortgagee is entitled to claim the deficiency from the debtor.

FACTS:
On December 10, 1952, appellee foreclosed extrajudicially the appellants mortgaged property and
the Sheriff posted the requisite notice of sale at public auction. The property was sold at public
auction on June 10, 1957 after numerous transfers made of the date of sale upon requests of the
appellants themselves. Because the proceeds of the sale were not sufficient to satisfy the balance
of appellants indebtedness, appellee sued the appellants for the deficiency. The trial court found
for appellee and ordered the appellants to pay the deficiency, with interest thereon at the legal rate
until fully paid plus the sum equivalent to 10% of the amount due as attorneys fees and cost of
suit.

ISSUES:
1. Whether the mortgagee is entitled to claim the deficiency in extrajudicial foreclosure of
mortgage; and
2. Whether additional interests are properly chargeable on the balance of the indebtedness
during the period from notice of sale to actual sale.

HELD
1. Yes. In extrajudicial foreclosure of mortgage, where the proceeds of the sale are insufficient
to cover the debt, the mortgagee is entitled to claim the deficiency from the debtor. While
Act No. 3135, as amended (re extrajudicial foreclosure) discloses nothing as to the
mortgagees right to recover such deficiency, neither does it expressly or impliedly prohibit
such recovery. Article 2131 of the New Civil Code expressly provides that the form, extent
and consequences of a mortgage and as to other matters not included in the Civil Code
shall be governed by the provisions of the Mortgage Law and of the Land Registration
Law. And under the Mortgage Law, the mortgagee has the right to claim for the deficiency
resulting from the price obtained in the sale of the real property at public auction and the
outstanding obligation. Moreover, if the legislature intended to foreclose the right of a
creditor to sue for deficiency resulting from the foreclosure of the security to guarantee
the obligation, it so expressly provides.
2. No Where the sale of the mortgaged property in an extrajudicial foreclosure proceedings
had been held in abeyance for four years due to the numerous transfers made of the date
of sale upon requests of the mortgage debtors themselves, the latter cannot take
advantage of the delay which was of their own making, to the prejudice of the other
party, so that prior to the completion of the foreclosure, the mortgagor is liable for the
interest on the mortgage.
 LXXIV
PRUDENTIAL BANK, plaintiff-appellee, vs. RENATO M. MARTINEZ and VIRGINIA J.
MARTINEZ, defendants-appellants. G.R. No. L-51768 | 1990-09-14

DOCTRINE:
it is true, as to the mortgagee's right to recover such deficiency. But neither do we find any
provision thereunder which expressly or impliedly prohibits such recovery.

FACTS:
Renato M. Martinez and Virginia J. Martinez, appellants obtained a loan amounting to 48,000 with
interest of 12% and partially secured by a real estate mortgage over the property of the appellants.
Appellants failed defaulted in the loan and subsequently, Prudential Bank foreclosed the mortgage,
it being the lone bidder in the auction sale for 52,760. As a result a deficiency amounting to 25,775
after deducting the attorneys fees, sheriff fees and publication expense. The appellee sued for the
said deficiency, interest thereof and attorneys fees.

ISSUES:
1. Whether the appellee is entitled for the recovery of the deficiency.
2. Whether the appellee is entitled for an award of attorneys fees.

HELD:
1. Yes. We have already ruled in several cases that in extrajudicial foreclosure of mortgage,
where the proceeds of the sale are insufficient to pay the debt, the mortgagee has the right
to recover the deficiency from the debtor. A careful scrutiny of the arguments presented
in the case at bar yields no substantial and convincing reasons for Us to depart from Our
previous ruling. Appellants' arguments merely rehashed the objections already considered
and overruled in the aforementioned cases. Thus, in Philippine Bank of Commerce v. De Vera
(supra), We declared that:A reading of the provisions of Act No. 3135, as amended (re
extrajudicial foreclosure) discloses nothing, it is true, as to the mortgagee's right to recover
such deficiency. But neither do we find any provision thereunder which expressly or
impliedly prohibits such recovery. Moreover, the fact that the mortgaged property is sold
at an amount less than its actual market value should not militate against the right to such
recovery. We fail to see any disadvantage going for the mortgagor. On the contrary, a
mortgagor stands to gain with a reduced price because he possesses the right of
redemption. When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to redeem
and thus recover the loss he claims to have suffered by the reason of the price obtained at
the auction sale.
2. Yes. We find that the award of attorney's fees is proper. It can not be disputed that the
proceedings in the extrajudicial foreclosure and the deficiency suit are altogether different.
The first is extrajudicial and summary in nature while the second is a court action. Hence,
the efforts exerted by the lawyer in these two separate courses of action should be
recognized.
 LXXV
PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. MANUEL ERNESTO
GONZALES, defendant-appelle. SATURNINO LOPEZ, buyer-appellant. G.R. No. L-21026 |
1924-02-13

DOCTRINE:
A judicial sale of real estate will not be set aside for inadequacy of price, unless the inadequacy be
so great as to shock the conscience, or unless there be additional circumstances against its
fairness.

FACTS:
On 23 November 1921, the Philippine National Bank has commenced a suit against Manuel
Ernesto Gonzales to foreclose a mortgage property securing a promissory note for 15,000. On 17
March 1922 an amended complaint against the same defendant was filed, a reproduction of the
original for the second mortgage on the said property for 15,000. The judgement for the first
cause amounted to 17,313.59 and for the second 17,755. The property was advertised for sale
covered by Transfer Certificates of Title described in Exhibit A (3,657,703 sq.m), Exhibit B
(1,335,505 sq.m.) and Exhibit C (263,765 sq.m). Exhibit C was sold at the auction sale to Mr.
Saturnino Lopez for 15,000 (3,000 less than the claim). The court has confirmed the sale declaring
that the sale complied with the requirements of the law. On 05 April 1923, defendant Gonzales
filed a complaint that the said order was not in accordance with law presenting only an
assessed valuation of the land for 45,490 from the municipal treasurer, without proof that the said
land was in fact can be sold for mor than 15,000 nor calling any witness for that matter.

ISSUE:
Whether the sale should be invalidated for gross inadequacy of price.

HELD:
The rule is well stated in Graffam and Doble vs. Burgess (117 U.S., 180), in which the syllabus
says:A judicial sale of real estate will not be set aside for inadequacy of price, unless the inadequacy
be so great as to shock the conscience, or unless there be additional circumstances against its
fairness.If the inadequacy of price paid for the purchase of real estate at a sale on an execution
be so gross as to shock the conscience, or if in addition to gross inadequacy the purchaser has
been guilty of unfairness or has taken any undue advantage, or if the owner of the property or the
party interested in it has been for any other reason misled or surprised, then the sale will be
regarded as fraudulent and void, and the party injured will be permitted to redeem the property
sold. In the instant case, there is no claim or pretense that there was any fraud or collusion, or
that in any way Gonzales was misled or deceived. The bank was personally represented at the sale,
and there is no showing whatever that, if the property was resold, it would sell for a centavo more
than the P15,000.For such reasons, the judgment of the trial court, setting aside the confirmation
of the sale, is reversed, and the sale will stand affirmed as of the date of the original confirmation
by the trial court, with costs in favor of the appellant. Such judgment to be without prejudice to
the right of Gonzales, if any, to redeem. So ordered.
 LXXVI
JALANDONI, plaintiff-appellee, vs. LEDESMA, buyer-appellant. G.R. No. XXXXXXX |
XXXX-XX-XX
 LXXVII
CESAR SULIT, petitioner, vs. COURT OF APPEALS and ILUMINADA CAYCO,
respondents. G.R. No. 119247 | 1997-02-17

DOCTRINE:
If the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact alone
will not affect the validity of the sale but simply gives the mortgagor a cause of action to recover
such surplus.

FACTS:
On 09 June 1992, Iluminada Cayco, herein respondent executed a real estate mortgage to secure
his loan with Cesar Sulit, herein petitioner amounting to 4,000,000. Upon failure of Cayco to
settle the obligation when it fell due, Sulit resorted to extrajudicial foreclosure conducted by a
Notary Public on 28 September 1993 with Sulit as the winning bidder submitting a bid
amounting to 7,000,000. On 13 December 1993, private respondent petitioned the RTC for a
writ of possession over the property. On 28 March 1994 petitioner filed a Motion to have the
auction sale of the mortgaged property set aside and to defer the issuance of the writ of
possession. She invited the attention of the court a quo to some procedural infirmities in the said
proceeding and further questioned the sufficiency of the amount of bond. In the same Motion
petitioner prayed as an alternative relief that private respondent be directed to pay the sum of P3
Million which represents the balance of his winning bid of P7 Million less the mortgage
indebtedness of P4 Million. This Motion was opposed by private respondent who contended
that the issuance of a writ of possession upon his filing of a bond was a ministerial duty on the
part of respondent Judge, to which Opposition petitioner submitted a Reply. On 11 May 1994
respondent Judge denied petitioner's Motion and directed the issuance of a writ of possession
and its immediate enforcement by deputy sheriff.

ISSUE:
Whether the mortgagee or purchaser in an extrajudicial foreclosure sale is entitled to the issuance
of a writ of possession over the mortgaged property despite his failure to pay the surplus
proceeds of the sale to the mortgagor

HELD: No
The governing law thus explicitly authorizes the purchaser in a foreclosure sale to apply for a writ
of possession during the redemption period by filing an ex parte motion under oath for that purpose
in the corresponding registration or cadastral proceeding in the case of property with Torrens title.
Upon the filing of such motion and the approval of the corresponding bond, the law also in express
terms directs the court to issue the order for a writ of possession.No discretion appears to be left
to the court. Any question regarding the regularity and validity of the sale, as well as the consequent
cancellation of the writ, is to be determined in a subsequent proceeding as outlined in Section 8,
and it cannot be raised as a justification for opposing the issuance of the writ of possession since,
under the Act, the proceeding for this is ex parte. Such recourse is available to a mortgagee, who
effects the extrajudicial foreclosure of the mortgage, even before the expiration of the period of
redemption provided by law and the Rules of Court. The rule is, however, not without exception.
Under Section 35, Rule 39 of the Rules of Court, which is made applicable to the extrajudicial
foreclosure of real estate mortgages by Section 6 of Act 3135, the possession of the mortgaged
property may be awarded to a purchaser in the extrajudicial foreclosure "unless a third party is
actually holding the property adversely to the judgment debtor." A surplus from the proceeds of
the sale equivalent to approximately 40% of the total mortgage debt, which excess is indisputably
a substantial amount. Nevertheless, it is our considered opinion, and we so hold, that equitable
considerations demand that a writ of possession should also not issue in this case. The better rule
is that if the mortgagee is retaining more of the proceeds of the sale than he is entitled to, this fact
alone will not affect the validity of the sale but simply gives the mortgagor a cause of action to
recover such surplus. This is likewise in harmony with the decisional rule that in suing for the
return of the surplus proceeds, the mortgagor is deemed to have affirmed the validity of the sale
since nothing is due if no valid sale has been made. In the early case of Caparas vs. Yatco, etc., et al.,
it was also held that where the mortgagee has been ordered by the court to return the surplus to
the mortgagor or the person entitled thereto, and the former fails to do so and flagrantly disobeys
the order, the court can cite the mortgagee for contempt and mete out the corresponding penalty
under Section 3(b) of the former Rule 64 (now Rule 71) of the Rules of Court.
 LXXVIII
(Same as LXXIV)
 LXXIX

DEVELOPMENT BANK OF THE PHILIPPINES, plaintiff-appellee, vs. LEONOR R. VDA.

DE MOLL, SEBASTIAN MOLL, JR., BACILIO MOLL, ERIBERTO MOLL, ESTRELLA
MOLL, SALVADOR MOLL, SEGUNDO MOLL and AURORA MOLL, defendants-
appellants. G.R. No. L-25802 | 1997-01-31

DOCTRINE

FACTS:
On 12 April 1947 and 15 December 1947, the Development Bank of the Philippines, appellee
granted agricultural loans in the amount of 120,000 and 22,000 respectively in favor of Sebastian
Moll, Sr. who secured said loan by 14 parcels of land comprising the property known as
Hacienda Moll. Said Sebastian Moll, Sr. subsequently died and on 14 May 1949 had his
properties extrajudicially partitioned among themselves and that they jointly and severally
assumed the liabilities of the estate and were granted additional loans, -industrial loan of 150,000,
-additional agricultural loan of 100,000 and another industrial loan of 580,000. The said
appellants failed to comply with the terms and conditions of the agreement which rendered them
in default. The appellee foreclosed mortgaged, and the bank being the sole and highest bidder
for 176,174.50 and 19,750. Appelle subsequently filed for a deficiency claim. Appellants
contends the deficiency claims as the property is valued for not less than 5,000,000.

ISSUES:
1. Whether the inadequacy of the bid price affect the validity of the sale
2. Whether the appellee is entitled for the deficiency.

HELD:
1. No. Mere inadequacy of the price obtained at the sheriff's sale unless shocking to the
conscience will not be sufficient to set aside the sale if there is no showing that, in the
event of a regular sale, a better price can be obtained. The reason is that, generally, and,
in forced sales, low prices are usually offered. When there is the right to redeem,
inadequacy of price should not be material, because the judgment debtor may reacquire
the property or also sell his right to redeem and thus recover the loss he claims to have
suffered by reason of the price obtained at the auction sale.
2. Yes. Once the auction sale of the mortgaged property is effected and the resulting
deficiency in the mortgage debt is ascertained, the mortgagee- creditor is then and there
entitled to secure a deficiency judgment which may immediately be executed, whether or
not the mortgagor is still entitled to redeem the property sold. We hold then that
appellants' right to redeem their auctioned properties could not be a bar to the present
action of appellee to recover the deficiencies which it claims to have resulted after
applying the proceeds of the foreclosure sales here involved in payment of appellants'
mortgage debt.
 LXXX

RESTITUTA V. VDA. DE GORDON, petitioner, vs. THE COURT OF APPEALS and

ROSARIO DUAZO, respondents. G.R. No. L-37831 | 1981-11-23

DOCTRINE:
Mere inadequacy of the price alone is not sufficient ground to annul the public sale.

FACTS:
Restituta V. Vda. De Gordons property was sold in a public auction conducted by the City
Treasurer of Quezon City for non payment of taxes. A public sale was conducted a sale on 03
December 1964. The property was sold to Rosario Duazo for 15,000 representing the tax,
penalty and cost. The combined assessed value of the two parcels of land is P16,800.00. The
price paid at the public sale is P10,500.00. The residential house on the land is assessed at
P45,580.00. But the assessment was made in 1961. The present value of the residential house
must be much less now considering the depreciation for over ten years.

ISSUE:
Whether the price is so grossly inadequate as to justify the setting aside of the public sale

HELD: No.
While the price of P10,500.00 is less than the total assessed value of the land and the improvement
thereon, said price cannot be considered so grossly inadequate as to be shocking to the conscience
of the court.In Director of Lands vs. Abarca, 61 Phil. 70, cited by the lower court in the order
appealed from, the Supreme Court considered the price of P877.25 as so inadequate to shock the
conscience of the court because the assessed value of the property in question was P60,000.00.
The assessed value of the land was more than sixty times the price paid at the auction sale. In the
case at bar, the price of P10,500.00 is about one sixth of the total assessed value of the two parcels
of land in question and the residential house thereon. The finding of the lower court that the house
and land in question have a fair market value of not less than P200,000.00 has no factual basis. It
cannot be said, therefore, that the price of P10,500.00 is so inadequate as to be shocking to the
conscience of the court. Mere inadequacy of the price alone is not sufficient ground to annul the
public sale. (Barrozo vs. Macaraeg, 83 Phil. 378).
 LXXXI
(See LXXIV)
 LXXXII
Juan Sumerariz And Luisa Sumerariz, Plaintiffs-Appellants, Vs. Development Bank Of The
Philippines And Philippine Surety And Insurance Co., Inc., Defendants-Appellees. G.R. No. L-
23764 | 1967-12-26

DOCTRINE:
Period not suspended by filing action to annul foreclosure sale.There is no statute or decision
which supports plaintiffs contention that the period of one year to redeem land sold at the
sheriffs sale was suspended by the institution of an action to annul the foreclosure sale.
Moreover, up to now plaintiffs have not exercised the right to redemption. Indeed, although they
have intimated their wish to redeem the property in question, they have not deposited the
amount necessary therefor.

FACTS:
On September 15, 1948, plaintiffs herein, Juan Sumerariz, and his wife, Luisa Samerariz
constituted, in favor of the Rehabilitation Finance Corporation now Development Bank of
the Philippines, and hereinafter referred to as the Bank a real estate mortgage of two (2)
parcels of land forming part of San Andres Subdivision, Manila, to guarantee a P15,000.00 loan
granted them by the Bank, payable within ten (10) years, at a given monthly amortization. In
view of plaintiffs' failure to comply with the terms and conditions of their contract, the Bank
asked the sheriff of Manila to take possession of the property and sell it at public auction. After
several postponements made upon plaintiffs' request, the sale was set for March 29, 1955. Upon
the behest of Juan Sumerariz made the day before, the Bank agreed, however, to postpone the
sale if there was a token payment of at least P100.00, before 9:00 a.m., the next day. No such
payment having been made, the Bank bought the property, on March 29, for P8,000.00, as the
highest bidder.

The Bank repeatedly notified the plaintiffs that they could redeem the property within one (1)
year, or not later than March 29, 1956, upon a down payment. Instead of exercising the right of
redemption on March 26, 1956, plaintiffs instituted Civil Case against the Bank and the sheriff of
Manila, to set aside the aforementioned foreclosure sale, upon the ground that the Bank had
failed to comply with its agreement to postpone the auction sale scheduled to be held on March
29, 1956.

July 19, 1956, while the case was pending in the trial Court, the Bank sold the property to the
Philippine Surety and Insurance Co., Inc.,

Subsequently, or on January 13, 1958, laid Court rendered a decision dismissing the complaint,
for the reason that plaintiffs had not redeemed the property within the period prescribed by law
therefor and that the Bank had thereby become its absolute owner.

On March 16, 1960, plaintiffs commenced the present action, in the Court of First Instance of
Manila, against the Bank and the Surety Co., to annul sale made to the latter by the Bank and to
be allowed to redeem the property in question.

ISSUE:
Whether or not the filing of foreclosure suspend the redemption period

HELD: No.
Under the second assignment of error, plaintiffs maintain that the period of one (1) year to
redeem the property in question was suspended by the institution of Case No. 29306, on March
26, 1956, or three (3) days before the expiration of said period.

We have not found, however, any statute or decision in support of this pretense. Moreover, up
to now plaintiffs have not exercised the right of redemption. Indeed, although they have
intimated their wish to redeem the property in question, they have not deposited the amount
necessary therefor.
 LXXXIV
UNION BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, APOLONIA
DE JESUS GREGORIO, LUCIANA DE JESUS GREGORIO, GONZALO VINCOY,
married to TRINIDAD GREGORIO VINCOY, respondents.
G.R. No. 134068 | 2001-06-25

DOCTRINE:
The one-year period is actually to be reckoned from the date of the registration of the sale. The
one-year period to redeem the property foreclosed is not suspended by the institution of an
action to annul the foreclosure sale

FACTS:

On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their

residence in favor of petitioner to secure the payment of a loan to Delco Industries (Phils.),
Incorporated in the amount of Two Million Pesos (P2,000,000.00). For failure of the
respondents to pay the loan at its date of maturity, petitioner extrajudicially foreclosured the
mortgage and scheduled the foreclosure sale on April 10, 1991.

The petitioner submitted the highest bid at the foreclosure sale.

Prior to the expiration of the redemption period on May 8, 1992, the respondents filed a
complaint for annulment of mortgage with the lower court. In their complaint, respondents
alleged that the subject property mortgaged to petitioner had in fact been constituted as a family
home

RTC rendered judgment declaring the constitution of the family home void and the mortgage
executed in favor of the petitioner valid.

Court of Appeals upheld the validity of the mortgage executed over the said property in favor of
the petitioner.

ISSUE:
Whether or not the filing of action for annulment of the mortgage tolled the running of the one-
year period of redemption
HELD: No
It cannot also be argued that the action for annulment of the mortgage filed by the respondents
tolled the running of the one-year period of redemption. In the case of Sumerariz v. Development
Bank of the Philippines, petitioners therein contended that the one-year period to redeem the
property foreclosed by respondent was suspended by the institution of an action to annul the
foreclosure sale filed three (3) days before the expiration of the period. To this we ruled that:
"We have not found, however, any statute or decision in support of this pretense.
Moreover, up to now plaintiffs have not exercised the right of redemption. Indeed,
although they have intimated their wish to redeem the property in question, they have
not deposited the amount necessary therefor. It may not be amiss to note that, unlike
Section 30 of Rule 39 of the Rules of Court, which permits the extension of the period
of redemption of mortgaged properties, Section 3 of Commonwealth Act No. 459, in
relation to Section 9 of Republic Act No. 85, which governs the redemption of property
mortgaged to the Bank does no contain a similar provision. Again this question has been
definitely settled by the previous case declaring that plaintiff's right of redemption has
 already been extinguished in view of their failure to exercise it within the statutory
period."
Also, in the more recent case of Vaca v. Court of Appeals, we declared that the pendency of an
action questioning the validity of a mortgage cannot bar the issuance of the writ of possession
after title to the property has been consolidated in the mortgagee. The implication is clear: the
period of redemption is not interrupted by the filing of an action assailing the validity of the
mortgage, so that at the expiration thereof, the mortgagee who acquires the property at the
foreclosure sale can proceed to have the title consolidated in his name and a writ of possession
issued in his favor.
 LXXXVI
BENJAMIN BELISARIO, PACITA B. PINAR, VICTORIA BELISARIO, SILVERIO
BELISARIO, FRANCISCO BELISARIO, ANATOLIA B. JACULAN, FELIPE BELISARIO
and TERESITA B. ALKUINO, petitioners, vs. THE INTERMEDIATE APPELLATE
COURT, LOURDES CABRERA, VICENTE CABRERA, JR., ROBERTO CABRERA,
MANUEL CABRERA and PNB, Cagayan de Oro Branch, respondents. G.R. No. 73503 |
1988-08-30

DOCTRINE:
General rule in redemption that in making the repurchase there must be simultaneous tender of
payment of the full amount of the repurchase price.

FACTS:
On August 3, 1948, upon the death of Rufino Belisario, the ownership of the land was extra-
judicially settled among his children (petitioners herein), namely: Benjamin, Pacita, Victoria
Silverio, Francisco, Anatolia Felipe and Teresita, all surnamed Belisario and his widow, Felipa
Lauga.

Sometime in 1950, on the strenght of a special power of attorney executed by some of the
petitioners in favor of petitioner, Benjamin Belisario, said land was mortgaged to the Philippine
National Bank (PNB) to secure a promissory note.

Petitioners-mortgagors defaulted in the payment of the loan. Consequently, the mortgage was
extra-judicially foreclosed and on January 31, 1963 the land was sold at public auction with
respondent PNB as the highest bidder.

On April 21, 1971, petitioners wrote to respondent PNB making known their "desire to redeem
and/or repurchase the said property for and in the same price as the auction sale, P3,134.76,"
and enclosed therein a postal money order in the amount of P630.00 as partial payment, with the
balance to be paid in twelve equal monthly installments. At the time petitioners offered to
redeem the subject property, the Sheriff's Certificate of Sale covering the sale at public auction to
the respondent PNB was not yet registered.

Having been apprised of the non-registration, the respondent PNB caused the registration of the
Sheriff's Certificate of Sale with the Register of Deeds of Bukidnon on July 22, 1971 and
Transfer Certificate of Title No. T-6834 was later issued in the name of respondent bank.
On August 24, 1971, respondent PNB sent a reply letter to petitioners, refusing the tender of
P630.00 as partial payment of the total obligations of P7,041.41 due from petitioners (which
included the amount of P2,027.02 allegedly paid by respondent Vicente Cabrera to respondent
PNB) and stating further that under existing regulations of the bank, payment by way of
redemption must be paid in full and not by installments. It cannot, however, be determined from
the records of the case why the amount of P2,027.02 was received from respondent Cabrera by
respondent PNB on December 12, 1967 and why the same was included in the statement of
accounts sent by respondent PNB to petitioners.

On February 8, 1973, respondent PNB sold the land in question to respondent Cabrera.
On November 20, 1974, respondent Cabrera filed an action for Recovery of Possession and
Damages against herein petitioners, together with their tenants, who were actual possessors of
the land, with the Court of First Instance (now Regional Trial Court) of Bukidnon. In turn,
petitioners filed on January 9, 1975, an action for Repurchase of Homestead against the
respondents PNB and Cabrera with the Court of First Instance of Bukidnon, being interrelated,
the two cases were heard jointly.

ISSUE:
Whether or not the absence of tender of payment is equivalent ineffectual of redemption of the
said property

HELD: Yes
The general rule in redemption is that in making a repurchase, it is not sufficient that a person
offering to redeem makes manifestation of his desire to repurchase; this statement of intention
must be accompanied by an actual and simultaneous tender of payment, which constitutes the
legal use or exercise of the right to repurchase (Angao vs. Clavano, 17 Phil. 152). Likewise, in
several cases decided by this Court (Fructo vs. Fuentes, 15 Phil. 362; Retes vs. Suelto, 20 Phil.
394; Rosales vs. Reyes, et al., 25 Phil. 495, Canuto vs. Mariano, 37 Phil. 840; Dela Cruz, et al. vs.
Resurreccion, et al., 98 Phil. 975) where the right to repurchase was held to have been properly
exercised, there was a definite finding of tender of payment having been made by the vendor.
The tender of payment must be for the full amount of the repurchase price, otherwise the offer
to redeem will be held ineffectual. (Rumbaoa vs. Arzaga, 84 Phil. 812) Bona fide redemption
necessarily imports a reasonable and valid tender of the entire repurchase price. There is no
cogent reason for requiring the vendee to accept payment by installments from the
redemptioner, as it would ultimately result in an indefinite extension of the redemption period
(Conejero, et al. vs. Court of Appeals, et al., L-21812, April 29, 1966, 16 SCRA 775, 780).

The rule that tender of payment of the repurchase price is necessary to exercise the right of
redemption finds support is civil law. Articles 1616 of the Civil Code of the Philippines, in the
absence of an applicable provision in Commonwealth Act No. 141, fumishes the guide, to wit:
"The vendor cannot avail himself of the right to repurchase without returning to the vendee the
price of the sale ... " (Uy Lee vs. Court of Appeals, L-28126, November 28, 1975, 68 SCRA 196,
204).
 LXXXVIII
VICENTA P. TOLENTINO and JOSE TOLENTINO, petitioners, vs. COURT OF
APPEALS, BANK OF THE PHILIPPINE ISLANDS, CONSUELO B. DE LA CRUZ, et al.,
respondents. G.R. No. 50405-06 | 1981-08-05

DOCTRINE:
The right of redemption is not an obligation but an absolute privilege. A bona fide tender of the
redemption price and formal offer to redeem is not essential where the redemption is being
exercised by way of judicial action. A redemption is not rendered invalid by the fact that the
sheriff accepted check rather than cash. The exercise of this right being optional no importance
can be attached to the fact that a stop payment order was issued against the check
Section 31, Rule 39 of the Rules of Court, it is expressly provided that the tender of the
redemption money may be made to the Sheriff who made the sale. And the redemption is not
rendered in valid by the fact that the said officer accepted a check for the amount necessary to
make the redemption instead of requiring payment in money.

FACTS:
Ceferino de la Cruz died and left a parcel of land leaving his as his only heirs his widow,
Consuelo de la Cruz, and their children Hilario, Tarcelo, and Godofredo, all surnamed de la Cruz
(hereinafter referred to as the De la Cruzes).

In a deed of sale executed by the De la Cruzes on April 30, 1962, the land was sold to the
spouses Jose Tolentino and Vicenta Tolentino (hereinafter referred to as the Tolentinos).

In 1963, the Tolentinos constituted a first mortgage over the land, together with two other
parcels of land in favor of the Bank of the Philippine Islands, (BPI) Davao Branch, for a loan of
P40,000. Another mortgage was constituted over the said properties in 1964 in favor of
Philippine Banking Corporation. The Tolentinos failed to pay their mortgage indebtedness to the
BPI upon maturity in the judicial foreclosure sale that followed, conducted by the City Sheriff of
Davao on July 15, 1967, BPI was the sole and highest bidder. The Sheriff's Certificate of Sale in
favor of BPI was registered only on April 2, 1969 in the Registry of Deeds of Davao.

On February 4, 1967, the De la Cruzes filed an action with the Court of First Instance of Davao
against the Tolentinos for the repurchase of the land.

On March 27, 1969, the lower court rendered a decision allowing the De la Cruzes to repurchase
the land.

In the meantime, on March 2, 1970, petitioner Vicente Tolentino went to see Mr. Ramon Lopez,
Branch Manager of BPI Davao Branch, carrying a letter of even date, offering to redeem the
homestead property covered by a check. Upon being informed that she can no longer redeem
the same for the reason that it was already conveyed to the De la Cruzes pursuant to the decision
dated March 27, 1969, Vicenta left the office of the manager. Mr. Lopez sent said letters to the
BPI's legal counsel with specific request to inform the Tolentinos that they can still redeem the
two other properties before the expiration of the redemption period. However, instead of
complying with BPI's advice, Vicente consigned with the Office of the City Sheriff of Davao a
crossed PNB check drawn against the PNB Kidapawan Branch, Cotabato, on March 31, 1970,
allegedly for the redemption of the 3 lots, including the homestead land. The following day,
however, upon advice of their counsel, Vicente issued a stop-payment order against the said
crossed check purportedly to protect her rights and to prevent BPI cashing said check without
returning all the properties which BPI had foreclosed and purchased.
Simultaneously with the consignation of the crossed check with the City Sheriff of Davao on
March 31, 1970, the Tolentinos filed a complaint (redemption case) against BPI, amended on
April 15, 1970, with the Davao Court of First Instance for the redemption of their properties.

ISSUES:
1. Whether or not Art. 1249 of the New Civil Code applies
2. Whether or not the tender of payment and cosignation before the Sheriff of Davao
were valid

HELD:
1. Yes. We agree that the act of redeeming of a property mortgaged is not an obligation
but a privilege, in the sense that the mortgagor may or may not redeem his property.
That of course is a privilege. He may choose to give up the property and have the
mortgage foreclosed, or redeem the property with the obligation of course to pay the
loan or indebtedness. But where he elects to redeem the property and he has to pay
the loan for which the mortgage was constituted, then Art. 1249 of the Civil Code
applies because it involves now the 'payment of debts.' It is only the act of redeeming
or not that is considered a privilege, but not the act of paying the obligation once the
mortgagor has elected to redeem the property, in which case the check issued or
drawn shall produce the effect of payment only when it has been cashed.
2. Under existing jurisprudence, what the redemptioner should pay, is not the amount
of the "loan for which the mortgage was constituted" as stated by the Court of
Appeals, but the auction purchase price plus 1 % interest per month on the said
amount up to the time of redemption, together with the taxes or assessment paid by
the purchaser after the purchase, if any. And in this connection, a formal offer to
redeem, accompanied by a bona fide tender of the redemption price, although proper,
is not essential where, as in the instant case, the right to redeem is exercised thru the
filing of judicial action, which as noted earlier was made simultaneously with the
deposit of the redemption price with the Sheriff, within the period of redemption.
The formal offer to redeem, accompanied by a bona fide tender of the redemption
price within the period of redemption prescribed by law, is only essential to preserve
the right of redemption for future enforcement even beyond such period of
redemption. The filing of the action itself, within the period of redemption, is
equivalent to a formal offer to redeem. Should the court allow redemption, the
redemptioners should then pay the amount already adverted to.
 XC
ARNEL SY, petitioner, vs. HONORABLE COURT OF APPEALS, STATE INVESTMENT
HOUSE, INC. and THE REGISTER OF DEEDS OF RIZAL, respondents.
G.R. No. 83139 | 1989-04-12

DOCTRINE:
The amounts to be paid to redeem a foreclosed property are the amounts due under the mortgage
deed plus interest and expenses; Petitioner is deemed subrogated by virtue of the deed of
assignment to the rights and obligations of the assignor and bound by exactly the same conditions
relative to the redemption of the property that bound the latter as debtor and mortgagor.

FACTS:
On March 2, 1979, Carlos Coquinco executed in favor of private respondent State Investment
House, Inc. (SIHI) a real estate mortgage over a land in San Juan, Metro-Manila, together with all
the improvements thereon, issued in his name, as security for the payment of a loan. For failure
of Carlos Coquinco to pay his outstanding balance the mortgaged property was extrajudicially
foreclosed by SIHI and was sold at public auctionto SIHI as the only bidder.

On May 22, 1983, SIHI filed before the Regional Trial Court (RTC) of Manila an action against
Carlos Coquinco for the collection of the deficiency of his indebtedness.

In the meantime, petitioner acquired by virtue of a deed of assignment Carlos Coquinco's right
of redemption for and in consideration of P500,000.00. Before the expiration of the one-year
redemption period, petitioner offered to redeem the foreclosed property from SIHI but the same
was rejected.

Thus, on February 20, 1984, petitioner filed an action for consignation of the aforesaid amount
with the RTC, to compel SIHI to accept the money as payment of the redemption price for the
foreclosed property, to order SIHI to surrender the title over the property and to issue a
certificate of redemption in favor of petitioner.

On February 27, 1984, a day before the expiration of the redemption period, petitioner decided
to redeem the foreclosed property directly from the Ex-Officio Regional Sheriff of Rizal, who
accepted from him the money as redemption price, and issued to him the corresponding
certificate of redemption.

On March 30,1984, SIHI filed a motion to dismiss on the ground of lack of cause of action,
alleging that the amount sought to be consigned was insufficient for purposes of redemption
pursuant to Section 78 of Rep. Act No.

ISSUE:
Whether the redemption price are the amounts due under the mortgage deed
HELD:
Yes. Moreover, petitioner by virtue of the deed of assignment of Carlos Coquincos right of
redemption must be deemed subrogated to the rights and obligations of his assignor, and bound
by exactly the same conditions, relative to the redemption of the subject property that bound the
latter as debtor and mortgagor [Gorospe v. Santos, G.R. No. L-30079, January 30, 1976, 69
SCRA 191]. Had Carlos Coquinco attempted to redeem the subject foreclosed property, he
would have had to pay the amount due under the mortgage deed . . . with interest thereon at the
rate specified in the mortgage and all costs . . . and other expenses incurred . . . by reason of the
execution [or foreclosure] and sale and as a result of the custody of said property less the income
received from the property . . . pursuant to Section 78 of the General Banking Act in order to
effect a valid redemption. Since petitioner merely stepped into the shoes of Carlos Coquinco, his
assignor, petitioner should have tendered and paid that same amount in order to redeem the
property.

Although the foreclosure and sale of the subject property was done by SIHI pursuant to Act No.
3135, as amended (whereby entities like SIHI are authorized to extrajudicially foreclose and sell
mortgaged properties only under a special power inserted in or annexed to the real estate
mortgage contract, and interested parties, like petitioner herein, are given one year from the date
of sale within which to redeem the foreclosed properties), Section 78 of the General Banking
Act, as amended, provides the amount at which the subject property is redeemable from SIHI,
which is, in this case, the amount due under the mortgage deed, or the outstanding obligation of
Carlos Coquinco plus interest and expenses
 XCII
(See XC)
 XCIV
FILIPINAS MARBLE CORPORATION, petitioner, vs. THE HONORABLE
INTERMEDIATE APPELLATE COURT, THE HONORABLE CANDIDO
VILLANUEVA, Presiding Judge of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE
PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC. (Bancom), DON FERRY,
CASIMERO TANEDO, EUGENIO PALILEO, ALVARO TORIO, JOSE T. PARDO,
ROLANDO ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R. LIM, respondents.
G.R. No. L-68010 | 1986-05-30

DOCTRINE:
An unregistered chattel mortgage is a valid one.Article 2125 of the Civil Code clearly provides
that the non-registration of the mortgage does not affect the immediate parties. It states: Art.
2125. In addition to the requisites stated in article 2085, it is indispensable, in order that a
mortgage may be validly constituted that the document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding
between the parties.

FACTS:
On January 19, 1983, petitioner Filipinas Marble Corporation filed an action for nullification of
deeds and damages with prayer for a restraining order and a writ of preliminary injunction against
the private respondents.

The petitioner alleged in substance that it applied for a loan in the amount of $5,000,000.00 with
respondent Development Bank of the Philippines (DBP) in its desire to develop the fun potentials
of its mining claims and deposits; that DBP granted the loan subject, however, to sixty onerous
conditions.

In essence, the petitioner in its complaint seeks the annulment of the deeds of mortgage and
deed of assignment which it executed in favor of DBP in order to secure the $5,000,000.00 loan
because it is petitioner's contention that there was no loan at all to secure since what DBP "lent"
to petitioner with its right hand, it also got back with its left hand; and that, there was failure of
consideration with regard to the execution of said deeds as the loan was never delivered to the
petitioner. The petitioner further prayed that pending the trial on the merits of the case, the trial
court immediately issue a restraining order and then a writ of preliminary injunction against the
sheriffs to enjoin the latter from proceeding with the foreclosure and sale of the petitioner's
properties in Metro Manila and in Romblon

Respondent DBP opposed the issuance of a writ of preliminary injunction stating that under
Presidential Decree No. 385, DBP's right to foreclose is mandatory as the arrearages of petitioner
had already amounted to P123,801,265.82 as against its total obligation of P151,957,641.72; that
under the same decree, no court can issue any restraining order or injunction against it to stop the
foreclosure since Filipinas Marble's arrearages had already reached at least twenty percent of its
total obligations; that the alleged non-receipt of the loan proceeds by the petitioner could, at best,
be accepted only in a technical sense because the money was received by the officers of the
petitioner acting in such capacity and, therefore, irrespective of whoever is responsible for placing
them in their positions, their receipt of the money was receipt by the petitioner corporation and
that the complaint does not raise any substantial controversy as to the amount due under the
mortgage as the issues raised therein refer to the propriety of the manner by which the proceeds
of the loan were expended by the petitioner's management, the allegedly precipitate manner with
which DBP proceeded with the foreclosure, and the capacity of the DBP to be an assignee of the
mining lease rights.
ISSUE:
Whether or not an unregistered chattel mortgage is a valid

HELD: Yes
We agree with the petitioner that a mortgage is a mere accessory contract and, thus, its validity
would depend on the validity of the loan secured by it. We, however, reject the petitioners
argument that since the chattel mortgage involved was not registered, the same is null and void.
Article 2125 of the Civil Code clearly provides that the non-registration of the mortgage does not
affect the immediate parties.
 XCVI
SALVADOR PIANSAY and CLAUDlA V. VDA. DE UY KIM, plaintiffs-appellants, vs.
CONRADO S. DAVID and MARCOS MANGUBAT, defendants-appellees.
G.R. No. L-19468 | 1964-10-30

DOCTRINE:
Mortgages; Chattel mortgage on a house cannot bind third persons not parties to said
contract.A contract constituting a chattel mortgage on a house cannot bind third persons not
parties to said contract or their privies.

FACTS:
On December 11, 1948, defendant herein Conrado S. David received a loan of P3,000 with
interest at 12% per annum from Claudia B. Vda. de Uy Kim, one of the plaintiffs, and to secure
the payment of the same, Conrado S. David executed a chattel mortgage on a house situated at
1259 Sande Street, Tondo, Manila

On February 10, 1953, the mortgaged house was sold at public auction to satisfy the
indebtedness to Claudia B. Vda. de Uy Kim, and the house was sold to Claudia B. Vda. de Uy
Kim in the said foreclosure proceedings;

On March 22, 1954, Claudia B. Vda. de Uy Kim sold the said house to Marcos Mangubat, and
on March 1, 1956. Marcos Mangubat filed a complaint against Conrado S. David, in the Court of
First Instance of Manila, for the collection of the loan of P2,000; that on March 24, 1956, the
complaint was amended to include the plaintiffs herein Salvador Piansay and Claudia B. Vda. de
Uy Kim as party defendants and praying that auction sale executed by the Sheriff on February
10, 1953, and the deed of absolute sale executed by Claudia B. Vda. de Uy Kim in favor of
Salvador Piansay be annulled

RTC ruled ordering Conrado S. David to pay the plaintiff the sum of P2,000, and dismissing the
complaint with respect to Claudia B. Vda. de Uy Kim, Leonardo Uy Kim and Salvador Piansay;
Court of Appeals affirmed the decision.

On July 31, 1961, Piansay and Mrs. Uy Kim, instituted the present action against David and
Mangubat. In their complaint, prayed that a writ of preliminary injunction to restrain said levy
and sale at public auction be issued and that, after appropriate proceedings, judgment be
rendered declaring that Piansay is the true and lawful owner of said house sentencing the
defendants to pay damages and making the preliminary injunction permanent.

ISSUE:
Whether or not the Chattel Mortgage can bind third person not parties to the said contract

HELD:
No. Thus, Mrs. Uy Kim had no right to foreclose the alleged chattel mortgage constituted in her
favor, because it was in reality a mere contract of an unsecured loan. It follows that the Sheriff was not
authorized to sell thehouse as a result of the foreclosure of such chattel mortgage. And as Mrs. Uy
Kim could not have acquired the house when the Sheriff sold it at public auction, she could not, in the same token,
it validly to Salvador Piansay. Conceding that the contract of sale between Mrs. Uy Kim and
Salvador Piansay was of no effect, we cannot nevertheless set it aside upon instance of Mangubat
because, as the court below opined, he is not a party thereto nor has he any interest in the
subject matter therein, as it was never sold or mortgaged to him (Emphasis supplied);
At any rate, regardless of the validity of a contract constituting a chattel mortgage on a house, as
between the parties to said contract (Standard Oil Co. of N. Y. vs. Jaramillo, 44 Phil. 632-633), the
same cannot and does not bind third persons, who are not parties to the aforementioned
contract or their privies (Leung Yee vs. Strong Machinery Co., 37 Phil. 644; Evangelista vs. Alto
Surety, G.R. No. L-11139, April 23, 1958; Navarro vs. Pineda, G.R. No. L-18456, November 30,
1963). As a consequence, the sale of the house in question in the proceedings for the
extrajudicial foreclosure of said chattel mortgage, is null and void insofar as defendant Mangubat
is concerned, and did not confer upon Mrs. Uy Kim, as buyer in said sale, any dominical right in
and to said house (De la Riva vs. Ah Yee, 60 Phil. 800), so that she could not have transmitted to
her assignee, plaintiff Piansay any such right as against defendant Mangubat. In short plaintiffs
have no cause of action against the defendants herein.
 XCVIII
MAGDALENA C. DE BARRETTO, ET AL., plaintiffs-appellants, vs. JOSE G.
VILLANUEVA, ET AL., defendants-appellees. G.R. No. L-14938 | 1961-01-28
 C
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. THE NATIONAL
LABOR RELATIONS COMMISSION, ET. AL, respondents.
G.R. No. 106655 | 1994-09-01

DOCTRINE:
The right of first preference as regards unpaid wages recognized by Article 110 does not
constitute a lien on the property of the insolvent debtor in favor of workers. It is a right to a first
preference in the discharge of the funds of the judgment debtor.

FACTS
Resort Hotel Corporation ("RHC") was the former owner and operator of the Pines Hotel in
Baguio City, where private respondents were employed. The property was hypothecated to
petitioner Development Bank of the Philippines ("DBP"). When RHC failed to comply with its
obligations, DPB foreclosed on the mortgage. Following the foreclosure, Hotel Development
Corporation ("HDC"), a subsidiary of DBP, assumed the management and operations of the
hotel. Private respondents were rehired by HDC.

On 23 October 1984, Pines Hotel, unfortunately, was razed by fire.

On 05 November 1985, private respondents filed a complaint against RHC for money claims
still outstanding in their favor at the time the foreclosure was effected. HDC and DBP were also
impleaded upon the thesis that, should RHC be bereft of sufficient property to answer for those
claims, the foreclosed property could be levied against in accordance with Article 110 of the
Labor Code.

The Labor Arbiter ruled that the foreclosure of the assets of the Resort Hotels Corporation by
the Development Bank of the Philippines had the effect of placing the workers in a situation
similar to that of establishments that are bankrupt, or those that are dissolved, hence workers
claims should be paid in full before the Development Bank of the Philippines may establish any
claim over the assets of the RHC;

That the Development Bank of the Philippines is hereby ordered to deliver the complainants
claims for separation pay, earned vacation and sick leave benefits, meal provisions service charge
share pay claims and March 1984 service charge claims.

That the Hotel Development Corporation does not have any liability to the complainants, in so
far as the claims for separation pay, earned vacation and sick leave benefits, meal provisions
service charge share pay claim and March 1984 service charge claims are concerned, hence it
should dropped from this complaint.

The NLRC, affirmed the decision of the Labor Arbiter.

ISSUE:
Whether the private respondents claim against RHC enjoys first preference over the mortgage
credit of DBP.

HELD: No
Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees
for unpaid wages either upon all of the properties or upon any particular property owned by
their employer. Claims for unpaid wages do not therefore fall at all within the category of
specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to
the extent that such claims for unpaid wages are already covered by Article 2241, number 6:
'claims for laborers' wages, on the goods manufactured or the work done;' or by Article 2242,
number 3: 'claims of laborers and other workers engaged in the construction, reconstruction or
repair of buildings, canals and other works, upon said buildings, canals or other works.' To the
extent that claims for unpaid wages fall outside the scope of Article 2241, number 6 and 2242,
number 3, they would come within the ambit of the category of ordinary preferred credits under
Article 2244."

A distinction should be made between a preference of credit and a lien. A preference applies
only to claims which do not attach to specific properties. A lien creates a charge on a particular
property. The right of first preference as regards unpaid wages recognized by Article 110 does
not constitute a lien on the property of the insolvent debtor in favor of workers. It is but a
preference of credit in their favor, a preference in application. It is a method adopted to
determine and specify the order in which credits should be paid in the final distribution of the
proceeds of the insolvents assets. It is a right to a first preference in the discharge of the funds
of the judgment debtor.