DIOSDADO YULIONGSIU vs.

PHILIPPINE NATIONAL BANK (Cebu Branch)

Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The
M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated
the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping
Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to
the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase
price was payable at P50,000 a year, due on or before the end of the current year. 2

On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine
National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S
Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract,
Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the
Collector of Customs for the Port of Cebu. 3

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The
remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor.
The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the
second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were
never paid at all by plaintiff on their respective due dates. 4

On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for
estafa thru falsification of commercial documents, because plaintiff had, as last indorsee,
deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine
Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds
in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was
able to withdraw the amount credited to him before the discovery of the defraudation on April 2,
1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify
the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court
of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the
order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 5

Meanwhile, together with the institution of the criminal action, defendant bank took
physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29,
1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank,
acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a
document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-
203, to defendant bank for P30,042.72.

The FS-203 was subsequently surrendered by the defendant bank to the Philippine
Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to
pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S
Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.

On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to
recover the three vessels or their value and damages from defendant bank. The latter filed its
answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a
pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of
the facts above-narrated. During the course of the trial, defendant amended its answer reducing its
claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to P35,000.

The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking
of physical possession of the vessels on April 6, 1948 was justified by the pledge contract,
Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant
bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was
likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums against the indemnity which
plaintiff was ordered to pay to it in the criminal cases.

When his motion for reconsideration and new trial was denied, plaintiff brought the appeal
to Us, the amount involved being more than P200,000.00.

In support of the first assignment of error, plaintiff-appellant would have this Court hold
that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could
not take possession of the chattels object thereof until after there has been default. The
submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a
pledge contract —

3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and
the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to
guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was
executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on
the date appearing therein; (Emphasis supplied)1äwphï1.ñët

Necessarily, this judicial admission binds the plaintiff. Without any showing that this was
made thru palpable mistake, no amount of rationalization can offset it. 9

The defendant bank as pledgee was therefore entitled to the actual possession of the
vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was
entered into, his possession was expressly made "subject to the order of the pledgee." 10 The
provision of Art. 2110 of the present Civil Code 11 being new — cannot apply to the pledge
contract here which was entered into on June 30, 1947. On the other hand, there is an authority
supporting the proposition that the pledgee can temporarily entrust the physical possession of the
chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is
regarded as holding the pledged property merely as trustee for the pledgee. 12

Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to

make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be
actual delivery of the chattels pledged. But then there is also Banco Español-Filipino v. Peterson,
7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of
the things pledged in the two cases will readily dispel the apparent contradiction between the two
rulings. In Betita v. Ganzon, the objects pledged — carabaos — were easily capable of actual,
manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the objects pledged —
goods contained in a warehouse — were hardly capable of actual, manual delivery in the sense
that it was impractical as a whole for the particular transaction and would have been an
unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee,
delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will
depend upon the nature and the peculiar circumstances of each case. The parties here agreed that
the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of this case and the nature of the objects
pledged, i.e., vessels used in maritime business, such delivery is sufficient.

Since the defendant bank was, pursuant to the terms of pledge contract, in full control of
the vessels thru the plaintiff, the former could take actual possession at any time during the life of
the pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948,
was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the
defendant bank in the huge sum of P184,000.

The stand We have taken is not without precedent. The Supreme Court of Spain, in a
similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14

Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del
acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo
cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que
continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso
de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y
ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no
se infringio, entre otros este articulo.

In the second assignment of error imputed to the lower court plaintiff-appellant attacks the
validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is
contended first, that the cases holding that the statutory requirements as to public sales with prior
notice in connection with foreclosure proceedings are waivable, are no longer authoritative in
view of the passage of Act 3135, as amended; second, that the charter of defendant bank does not
allow it to buy the property object of foreclosure in case of private sales; and third, that the price
obtained at the sale is unconscionable.

There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil.
763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of
Act 3135. This law refers only, and is limited, to foreclosure of real estate mortgages. 15 So,
whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority
to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and
2938 only states that if the sale is public, the bank could purchase the whole or part of the
property sold " free from any right of redemption on the part of the mortgagor or pledgor." This
even argues against plaintiff's case since the import thereof is this if the sale were private and the
bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff
could have recovered the vessels by exercising this right of redemption. He is the only one to
blame for not doing so.

Regarding the third contention, on the assumption that the purchase price was
unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this.
Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the
P184,000 fraudulently taken by him from defendant bank.
 The last assignment of error has to do with the damages allegedly suffered by plaintiff-
appellant by virtue of the taking of the vessels. But in view of the results reached above, there is
no more need to discuss the same.

On the whole, We cannot say the lower court erred in disposing of the case as it did.
Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the
defendant bank first. If the latter countered with the seizure and sale of the pledged vessels
pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in
the payment of the first promissory note. Plaintiff-appellant did not come to court with clean
hands.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-
appellant. So ordered.

EULOGIO BETITA, vs. SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE

PEDRENA

This action is brought to recover the possession of four carabaos with damages in the sum of
P200. Briefly stated, the facts are as follows: On May 15, 1924, the defendant Alejo de la Flor
recovered a judgment against Tiburcia Buhayan for the sum of P140 with costs. Under this
judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which
were found in the possession of one Simon Jacinto but registered in the name of Tiburcia
Buhayan. The plaintiff herein, Eulogio Betita, presented a third party claim (terceria) alleging that
the carabaos had been mortgaged to him and as evidence thereof presented a document dated
May 6, 1924, but the sheriff proceeded with the sale of the animals at public auction where they
were purchased by the defendant Clemente Perdena for the sum of P200, and this action was
thereupon brought.

The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in
translation reads as follows:

I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality of
Balasan, Province of Iloilo, Philippine Islands, do hereby execute this document extrajudicially
and state that I am indebted to Mr. Eulogio Betita, resident of the municipality of Estancia,
Province of Iloilo, Philippine Islands, in the sum of P470, Philippine currency, and was so
indebted since the year 1922, and as a security to my creditor I hereby offer four head of carabaos
belonging to me exclusively (three females and one male), the certificates of registration of said
animals being Nos. 2832851, 4670520, 4670521 and 4670522, which I delivered to said Mr.
Eulogio Betita.

I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be
able to pay, Mr. Eulogio Betita may dispose of the carabaos given as security for said debt.

This document is a new one or a renewal of our former document because the first carabaos
mortgaged died and were substituted for by the newly branded ones."

In testimony whereof and not knowing how to sign my name, I caused my name to be written and
marked same with my right thumb.
The court below held that inasmuch as this document was prior in date to the judgment under
which the execution was levied, it was a preferred credit and judgment was rendered in favor of
the plaintiff for the possession of the carabaos, without damages and without costs. From this
judgment the defendants appeal.

The judgment must be reversed unless the document above quoted can be considered either a
chattel mortgage or else a pledge. That it is not a sufficient chattel mortgage is evident; it does not
meet the requirements of section 5 of the Chattel Mortgage Law (Act No. 1508), has not been
recorded and, considered as a chattel mortgage, is consequently of no effect as against third
parties (Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216;
Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46
Phil., 753).

Neither did the document constitute a sufficient pledge of the property valid against third parties.
Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties
unless evidence of its date appears in a public instrument." The document in question is not
public, but it is suggested that its filing with the sheriff in connection with the terceria gave in the
effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills
the requirements of article 1865. Assuming, without conceding, that the filing of the document
with the sheriff had that effect, it seems nevertheless obvious that the pledge only became
effective as against the plaintiff in execution from the date of the filing and did not rise superior
to the execution attachment previously levied (see Civil Code, article 1227).

Manresa, in commenting on article 1865, says:

ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not
expressed in a public instrument.

This article, the precept of which did not exist in our old law, answers the necessity for not
disturbing the relationship or the status of the ownership of things with hidden or simulated
contracts of pledge, in the same way and for the identical reasons that were taken into account by
the mortgage law in order to suppress the implied and legal mortgages which produce so much
instability in real property.

Considering the effects of a contract of pledge, it is easily understood that, without this warranty
demanded by law, the case may happen wherein a debtor in bad faith from the moment that he
sees his movable property in danger of execution may attempt to withdraw the same from the
action of justice and the reach of his creditors by simulating, through criminal confabulations,
anterior and fraudulent alterations in his possession by means of feigned contracts of this nature;
and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise
that, for the effectiveness of the pledge, it be demanded as a precise condition that in every case
the contract be executed in a public writing, for, otherwise, the determination of its date will be
rendered difficult and its proof more so, even in cases in which it is executed before witnesses,
due to the difficulty to be encountered in seeking those before whom it was executed.

Our code has not gone so far, for it does not demand in express terms that in all cases the pledge
be constituted or formalized in a public writing, nor even in private document, but only that the
certainty of the date be expressed in the first of the said class of instruments in order that it may
be valid against a third party; and, in default of any express provision of law, in the cases where
no agreement requiring the execution in a public writing exists, it should be subjected to the
general rule, and especially to that established in the last paragraph of article 1280, according to
which all contracts not included in the foregoing cases of the said article should be made in
writing even though it be private, whenever the amount of the presentation of one or of the two
contracting parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.)

If the mere filing of a private document with the sheriff after the levy of execution can create a
lien of pledge superior to the attachment, the purpose of the provisions of article 1865 as
explained by Manresa clearly be defeated. Such could not have been the intention of the authors
of the Code. (See also Ocejo, Perez & Co. vs. International Banking Corporation, 37 Phil., 631
and Tec Bi & Co. Chartered Bank of India, Australia & China, 41 Phil., 596.)

The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never
had actual possession of the property within the meaning of article 1863 of the Civil Code. But it
is argued that at the time of the levy the animals in question were in the possession of one Simon
Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession
of his landlord.

It appears, however, from the evidence that though not legally married, Simon Jacinto and
Tiburcia Buhayan were living together as husband and wife and had been so living for many
years. Testifying as a witness for the plaintiff, Jacinto on cross-examination made the following
statements:

This testimony is substantially in accord with that of the defendant sheriff to the effect that he
found the animals at the place where Tiburcia Buhayan was living. Article 1863 of the Civil Code
reads as follows:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute
the contract of pledge, that the pledge be placed in the possession of the creditor or of a third
person appointed by common consent.

In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a pledge without which the contract cannot
be regarded as entered into or completed, because, precisely, in this delivery lies the security of
the pledge. Therefore, in order that the contract of pledge may be complete, it is indispensable
that the aforesaid delivery take place . . . . (P. 411, supra.)

It is, of course, evident that the delivery of possession referred to in article 1863 implies a change
in the actual possession of the property pledged and that a mere symbolic delivery is not
sufficient. In the present case the animals in question were in the possession of Tiburcia Buhayan
and Simon Jacinto before the alleged pledge was entered into and apparently remained with them
until the execution was levied, and there was no actual delivery of possession to the plaintiff
himself. There was therefore in reality no change in possession.

It may further be noted that the alleged relation of landlord and tenant between the plaintiff and
Simon Jacinto is somewhat obscure and it is, perhaps, doubtful if any tenancy, properly speaking,
existed. The land cultivated by Jacinto was not the property of the plaintiff, but it appears that a
part of the products was to be applied towards the payment of Tiburcia Buhayan's debt to the
plaintiff. Jacinto states that he was not a tenant until after the pledge was made.

From what has been said it follows that the judgment appealed from must be reversed and it is
ordered and adjudged that the plaintiff take nothing by his action. Without costs. So ordered.

PHILIPPINE NATIONAL BANK, vs. LAUREANO ATENDIDO,

This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the
defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of 6% per
annum from June 26, 1940, and the costs of action.

On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of
P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To
guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay
which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan,
and to that effect the borrower endorsed in favor of the bank the corresponding warehouse
receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown
reasons in the warehouse. When the loan matured the borrower failed to pay either the principal
or the interest and so the present action was instituted.

Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed
that the warehouse receipt covering the palay which was given as security having been endorsed
in blank in favor of the bank, and the palay having been lost or disappeared, he thereby became
relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary to his
theory, he is entitled to an indemnity which represents the difference between the value of the
palay lost and the amount of his obligation.

The case was submitted on an agreed statements of facts and thereupon the court rendered
judgment as stated in the early part of this decision.

Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court
on the ground that the question involved is purely one of law.

The only issue involved in this appeal is whether the surrender of the warehouse receipt covering
the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of
transferring their title or ownership to said appellee, or it should be considered merely as a
guarantee to secure the payment of the obligation of appellant.

In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt
No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not
that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment of the
original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose (of)
the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover, the
2,000 cavanes of palay were not in the first place in the actual possession of plaintiff corporation,
although symbolically speaking the delivery of the warehouse receipt was actually done to the
bank."

We hold this finding to be correct not only because it is in line with the nature of a contract of
pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the
stipulations embodied in the contract signed by appellant when he secured the loan from the
appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt
were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation.
This clearly appears in the contract Exhibit A wherein it is expressly stated that said 2,000
cavanes of palay were given as a collateral security. The delivery of said palay being merely by
way of security, it follows that by the very nature of the transaction its ownership remains with
the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By this we mean
that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the
property and apply the proceeds to the payment of the obligation and to return the balance, if any,
to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract, for, according
to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in
pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the
owner of the thing pledged during the pendency of the obligation, it stands to reason that in case
of loss of the property, the loss should be borne by the pledgor. The fact that the warehouse
receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the
situation, the purpose of such endorsement being merely to transfer the juridical possession of the
property to the pledgee and to forestall any possible disposition thereof on the part of the pledgor.
This is true notwithstanding the provisions to the contrary of the Warehouse Receipt Law.

In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765)
which involves a similar transaction, this Court held:

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.

Wherefore, the decision appealed from is affirmed, with costs against appellant.

MANILA SURETY and FIDELITY COMPANY, INC., vs. RODOLFO R. VELAYO,

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435)
sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum
of P2,565.00 with interest at 12-½% per annum from July 13, 1954; P120.93 as premiums with
interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the
total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil
Code of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo
Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one
Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo
undertook to pay the surety company an annual premium of P112.00; to indemnify the Company
for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as
reimburse the same for all money it should pay or become liable to pay under the bond including
costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the
Surety Company "for the latter's further protection", with power to sell the same in case the surety
paid or become obligated to pay any amount of money in connection with said bond, applying the
proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if
any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-
15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that
it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the
pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and
upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court.
Velayo countered with a claim that the sale of the pledged jewelry extinguished any further
liability on his part under Article 2115 of the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or
not the proceeds of the sale are equal to the amount of the principal obligation, interest and
expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be
entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to
the Court of First Instance, the defense was once more overruled, and the case decided in the
terms set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement
and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was
merely as an added protection to the latter. There was no understanding that, should the same be
sold at public auction and the value thereof should be short of the undertaking, the defendant
would have no further liability to the plaintiff. On the contrary, the last portion of the said
agreement specifies that in case the said collateral should diminish in value, the plaintiff may
demand additional securities. This stipulation is incompatible with the idea of pledge as a
principal agreement. In this case, the status of the pledge is nothing more nor less than that of a
mortgage given as a collateral for the principal obligation in which the creditor is entitled to a
deficiency judgment for the balance should the collateral not command the price equal to the
undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this
obligation has already been sold for only the amount of P235.00, the liability of the defendant
should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound.
The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the
1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the
fulfillment of a principal obligation, which in the present case is Velayo's undertaking to
indemnify the surety company for any disbursements made on account of its attachment
counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance
nor is it an obstacle to the application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels
must be derived from stipulation. This is incorrect, because Article 2115, in its last portion,
clearly establishes that the extinction of the principal obligation supervenes by operation of
imperative law that the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency
notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the
articles pledged, instead of suing on the principal obligation, the creditor has waived any other
remedy, and must abide by the results of the sale. No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the
legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a
foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in
installments, and which originated in Act 4110 promulgated by the Philippine Legislature in
1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from the
complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at
12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is
affirmed. No costs. So ordered.

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, vs. DRA.
ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN
JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO,
DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R.
GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her
husband ALFONSO SORONIO,

The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock
auctioned off in a notarial sale could still be redeemed by their owners. This notion is wrong, and
we thus reverse.

The facts, as culled from the record, follow.

Respondents were the owners, in their respective personal capacities, of shares of stock in a
corporation known as the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years
1979 to 1980, respondents secured by way of pledge of some of their shares of stock to
petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations. The
shares pledged are listed below:

When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay
their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The
actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the
declaration of nullity of the pledge agreements, among others. However the RTC, in its decision3
dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale
at public auction of the various pledges subject of these two cases."4 This decision attained
finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of
Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be
sold at public auction on 4 November 1991. However, before the scheduled date of auction, all of
respondents caused the consignation with the RTC Clerk of Court of various amounts. It was
claimed that respondents had attempted to tender these payments to the Parays, but had been
rebuffed. The deposited amounts were as follows:

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner
Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares.
None of respondents participated or appeared at the auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of
the concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was
assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment
and subsequent consignations served to extinguish their loan obligations and discharged the
pledge contracts. Petitioners countered that the auction sale was conducted pursuant to the final
and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment
and consignations were made long after their obligations had fallen due.

The Cebu City RTC dismissed the complaint, expressing agreement with the position of the
Parays.6 It held, among others that respondents had failed to tender or consign payments within a
reasonable period after default and that the proper remedy of respondents was to have participated
in the auction sale.7 The Court of Appeals Eighth Division however reversed the RTC on appeal,
ruling that the consignations extinguished the loan obligations and the subject pledge contracts;
and the auction sale of 4 November 1991 as null and void.8 Most crucially, the appellate court
chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that
favored redemption and mandated a liberal construction to redemption laws. The attempts at
payment by respondents were characterized as made in the exercise of the right of redemption.

The Court of Appeals likewise found fault with the auction sale, holding that there was a need to
individually sell the various shares of stock as they had belonged to different pledgors. Thus, it
was observed that the minutes of the auction sale should have specified in detail the bids
submitted for each of the shares of the pledgors for the purpose of knowing the price to be paid
by the different pledgors upon redemption of the auctioned sales of stock.

Petitioners now argue before this Court that they were authorized to refuse as they did the tender
of payment since they were undertaking the auction sale pursuant to the final and executory
decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the payment of the
principal obligation by respondents. They point out that the amounts consigned could not
extinguish the principal loan obligations of respondents since they were not sufficient to cover the
interests due on the debt. They likewise argue that the essential procedural requisites for the
auction sale had been satisfied.

We rule in favor of petitioners.

The fundamental premise from which the appellate court proceeded was that the consignations
made by respondents should be construed in light of the rules of redemption, as if respondents
were exercising such right. In that perspective, the Court of Appeals made three crucial
conclusions favorable to respondents: that their act of consigning the payments with the RTC
should be deemed done in the exercise of their right of redemption; that the buyer at public
auction does not ipso facto become the owner of the pledged shares pending the lapse of the one-
year redemptive period; and that the collective sale of the shares of stock belonging to several
individual owners without specification of the apportionment in the applications of payment
deprives the individual owners of the opportunity to know of the price they would have to pay for
the purpose of exercising the right of redemption.

The appellate court’s dwelling on the right of redemption is utterly off-tangent. The right of
redemption involves payments made by debtors after the foreclosure of their properties, and not
those made or attempted to be made, as in this case, before the foreclosure sale. The proper focus
of the Court of Appeals should have been whether the consignations made by respondents
sufficiently acquitted them of their principal obligations. A pledge contract is an accessory
contract, and is necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by
the Court of Appeals, involving the right of redemption over pledged properties. We have no
hesitation in pronouncing such theory as discreditable.

Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale,
specifically a notarial sale, as distinguished from a judicial sale as typified by an execution sale.
Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without intervention by
the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.9

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the
pledged shares by public auction. However, extrajudicial sale was stayed with the filing of Civil
Cases No. R-20120 and 20131, which sought to annul the pledge contracts. The final and
executory judgment in those cases affirmed the pledge contracts and disposed them in the
following fashion:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at

bar, and –

(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and
effective; and
(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject
of these two cases.

Costs against the plaintiffs.

SO ORDERED.

The phrase "giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases" may give rise to the impression that such sale is judicial in character.
While the decision did authorize the sale by public auction, such declaration could not detract
from the fact that the sale so authorized is actually extrajudicial in character. Note that the final
judgment in said cases expressly did not direct the sale by public auction of the pledged shares,
but instead upheld the right of the Parays to conduct such sale at their own volition.

Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction
remains in the sole discretion of the Parays, who could very well choose not to hold the sale
without violating the final judgments in the aforementioned civil cases. If the sale were truly in
compliance with a final judgment or order, the Parays would have no choice but to stage the sale
for then the order directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a mandatory recourse, and properly so
since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in
character.

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution
sales, more precisely execution sales of real property.

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in
character, may be redeemed by the creditor after being sold at public auction. Yet, as a
fundamental matter, does the right of redemption exist over personal property? No law or
jurisprudence establishes or affirms such right. Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not
exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property
on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory
privilege to be exercised only by the persons named in the statute.12

The right of redemption over mortgaged real property sold extrajudicially is established by Act
No. 3135, as amended. The said law does not extend the same benefit to personal property. In
fact, there is no law in our statute books which vests the right of redemption over personal
property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle
for any legislative intent to bestow a right of redemption over personal property, since that law
governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent
on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the
Court of Appeals, starkly utters that the right of redemption applies to real properties, not
personal properties, sold on execution.

Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be
covered by the right of redemption. In Sibal 1.º v. Valdez,13 the Court ruled that sugar cane crops
are personal property, and thus, not subject to the right of redemption.14 No countervailing
statute has been enacted since then that would accord the right of redemption over personal
property, hence the Court can affirm this decades-old ruling as effective to date.

Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no
business invoking and applying the inexistent right of redemption. We cannot thus agree that the
consigned payments should be treated with liberality, or somehow construed as having been made
in the exercise of the right of redemption. We also must reject the appellate court’s declaration
that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned
shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously,
since there is no right to redeem personal property, the rights of ownership vested unto the
purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a
redemptive period.

The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares,
notwithstanding the fact that these shares were owned by several people, on the premise the
pledgors would be denied the opportunity to know exactly how much they would need to
shoulder to exercise the right to redemption. This concern is obviously rendered a non-issue by
the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of Court
does provide for instances when properties foreclosed at the same time must be sold separately,
such as in the case of lot sales for real property under Section 19. However, these instances again
pertain to execution sales and not extrajudicial sales. No provision in the Rules of Court or in any
law requires that pledged properties sold at auction be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the
right to choose which of the items should be sold if two or more things are pledged.15 No similar
option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code
provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of
several different pledge contracts from auctioning all of the pledged properties on a single
occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a
single purchase price. The relative insignificance of ascertaining the definite apportionments of
the sale price to the individual shares lies in the fact that once a pledged item is sold at auction,
neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be
between the purchase price and the amount of the principal obligation.16

A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a
determinate number or portion of the pledged shares. In such a case, there may lie the need to
ascertain with particularity which of the shares are covered by the bid price, since not all of the
shares may be sold at the auction and correspondingly not all of the pledge contracts
extinguished. The same situation also would lie if one or some of the owners of the pledged
shares participated in the auction, bidding only on their respective pledged shares. However, in
this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for all
of the shares. There obviously is no longer any practical reason to apportion the bid price to the
respective shares, since no matter how slight or significant the value of the purchase price for the
individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover
the excess or the deficiency, as the case may be. To invalidate the subject auction solely on this
point serves no cause other than to celebrate formality for formality’s sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected.
The question though yet remains whether the consignations made by respondents extinguished
their respective pledge contracts in favor of the Parays so as to enjoin the latter from auctioning
the pledged shares.

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as
well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of
the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies
that the debtor cannot ask for the return of the thing pledged against the will of the creditor,
unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to
foreclose the pledge is also established under the Civil Code. When the credit has not been
satisfied in due time, the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.

Respondents argue that their various consignations made prior to the auction sale discharged them
from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could answer for their
respective principal loan obligations, they were not sufficient to cover the interests due on these
loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court,
respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners.
Soberano, on the other hand, challenges this interest rate as "usurious."17

The particular pledge contracts did not form part of the records elevated to this Court. However,
the 5% monthly interest rate was noted in the statement of facts in the 14 October 1988 RTC
Decision which had since become final. Moreover, the said decision pronounced that even
assuming that the interest rates of the various loans were 5% per month, "it is doubtful whether
the interests so charged were exorbitantly or excessively usurious. This is because for sometime
now, usury has become ‘legally inexistent.’"18 The finality of this 1988 Decision is a settled fact,
and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With
that in mind, there is no reason for the Court to disagree with petitioners that in order that the
consignation could have the effect of extinguishing the pledge contracts, such amounts should
cover not just the principal loans, but also the 5% monthly interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements
under Section 18, Rule 39, which provides that the judgment obligor may prevent the sale by
paying the amount required by the execution and the costs that have been incurred therein.19
However, the provision applies only to execution sales, and not extra-judicial sales, as evidenced
by the use of the phrases "sale of property on execution" and "judgment obligor." The reference is
inapropos, and even if it were applicable, the failure of the payment to cover the interests due
renders it insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also
not be discounted. Petitioners’ right to proceed with the auction sale was affirmed not only by
law, but also by a final court judgment. Any subsequent court ruling that would enjoin the
petitioners from exercising such right would have the effect of superseding a final and executory
judgment.

Finally, we cannot help but observe that respondents may have saved themselves much trouble if
they simply participated in the auction sale, as they are permitted to bid themselves on their
pledged properties.20 Moreover, they would have had a better right had they

matched the terms of the highest bidder.21 Under the circumstances, with the high interest
payments that accrued after several years, respondents were even placed in a favorable position
by the pledge agreements, since the creditor would be unable to recover any deficiency from the
debtors should the sale price be insufficient to cover the principal amounts with interests.
Certainly, had respondents participated in the auction, there would have been a chance for them to
recover the shares at a price lower than the amount that was actually due from them to the Parays.
That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss.
Now, all respondents can recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET
ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18 November 1992 is
REINSTATED. Costs against respondents.

SO ORDERED.