PNB v Mallorca
deliver the co-owner's duplicate copy of TCT 24256 to the Register
Facts:
Way back in 1950, Ruperta Lavilles mortgaged a 48.965 square
meter-parcel of land situated in Passi, Iloilo (Lot 1504, Passi
Cadastral Survey) to the PNB as security for a loan of P1,800.00. The
lot was covered by Transfer Certificate of Title 27070 in the name of
Ruperta Lavilles. The mortgage was duly recorded.
On January 12, 1958, while the mortgage above-described was in full
force and effect, and without PNB's knowledge and consent, Ruperta
Lavilles sold the appellant Primitiva Mallorca 20,000 square meters
of the mortgaged land.
On January 17, 1958, Mallorca moved the Iloilo cadastral court to
have the sale to her duly annotated on the title, 3and, for the purpose,
to require PNB to surrender the owner's copy of TCT 27070 to the
Register of Deeds.
The court order of February 3, 1958 directed PNB to deliver said
TCT 27070 to the Register of Deeds, and warned that "[t]he mortgage
in favor of the Philippine National Bank is duly registered in the
Office of the Register of Deeds and to whomsoever the land is sold
the vendee will assume the responsibility of complying with the
provisions of the mortgage."
The Register of Deeds then cancelled TCT 27070, issued a new one,
TCT 24256, making two co-owner's copies of the title — one each
for Ruperta Lavilles and for Primitiva Mallorca. PNB's mortgage lien
was annotated on both copies.
Ruperta Lavilles failed to pay her mortgage debt. PNB, on April 16,
1958 foreclosed the mortgage extrajudicially. On May 12, 1958, a
certificate of sale was issued to PNB as the highest bidder in the
foreclosure sale. This certificate of sale was registered with the
Register of Deeds of Iloilo.
In March, 1959 Mallorca sued PNB to enforce her right of
redemption with damages.4
On February 9, 1960, judgment was rendered in the case just stated,
dismissing the claim for damages but declaring Mallorca "entitled to
exercise her right of redemption with respect to the 20,000 square
meters sold to her by Ruperta Lavilles within the period specified by
law."
Primitiva Mallorca failed to exercise her right of redemption as
decreed by the court.
Thus, the final deed of sale in favor of PNB, dated February 19,
1962, was presented to the Register of Deeds on April 10, for
registration. The latter refused to register without Mallorca's co-
owner's copy of TCT 24256. By letter of May 18, 1962, the Register
of Deeds required Mallorca to surrender said copy. She did not
comply.
And so, PNB lodged the present petition for consolidation of title in
the cadastral court. The bank prayed that Mallorca's co-owner's copy
of TCT 24256 be declared null and void, and that the Register of
Deeds be directed to cancel the same and to issue a new title in the
name of PNB, upon payment of the legal fees.
By order of August 18, 1962, the court a quo required Mallorca "to
of Deeds within a period of five (5) days."
RTC sitting as Cadastral Court: Directed Mallorca to surrender the
copy of the TCT to the ROD.
CA: certified to SC as issues were pure questions of law
Issue: Appellant's stand is that her undivided interest consisting of
20,000 square meters of the mortgaged lot, remained unaffected by
the foreclosure and subsequent sale to PNB.
Held:
Appellant's position clashes with precepts well-entrenched in law. By
Article 2126 of the Civil Code, 7 a "mortgage directly and
immediately subjects the property upon which it is imposed, whoever
the possessor may be, to the fulfillment of the obligation for whose
security it was constituted." Sale or transfer cannot affect or release
the mortgage. A purchaser is necessarily bound to acknowledge and
respect the encumbrance to which is subjected the purchased thing
and which is at the disposal of the creditor "in order that he, under the
terms of the contract, may recover the amount of his credit
therefrom."8 For, a recorded real estate is a right in rem, a lien on the
property whoever its owner may be. 9 Because the personality of the
owner is disregarded; the mortgage subsists notwithstanding changes
of ownership; the last transferee is just as much of a debtor as the first
one; and this, independent of whether the transferee knows or not the
person of the mortgagee.10 So it is, that a mortgage lien
is inseparable from the property mortgaged. All subsequent
purchasers thereof, must respect the mortgage, whether the transfer to
them be with or without the consent of the mortgagee. For, the
mortgage, until discharge, follows the property.11
And then, militating against appellant's cause is one other special
feature of a real mortgage — its indivisibility. 12This Court has
understood mortgage indivisibility in the sense that each and every
parcel under mortgage answers for the totality of the debt. 13
It does not really matter that the mortgagee, as in this case, did not
oppose the subsequent sale. Naturally, because the sale was without
PNB's knowledge. Even if such knowledge is chargeable to PNB, its
failure to object to the sale could not have any impairing effect upon
its rights as mortgagee. After all, a real mortgage is merely an
encumbrance; it does not extinguish the title of the debtor, whose
right to dispose — a principal attribute of ownership — is not thereby
lost.14 And, on the assumption that PNB recognized the
efficaciousness of the sale by Ruperta Lavilles of a portion of the
mortgaged land to Primitiva Mallorca, which Lavilles "had the right
to make" and which anyway PNB "cannot oppose", PNB cannot be
prejudiced thereby, for, at all events, "such sale could not affect the
mortgage, as the latter follows the property whoever the possessor
may be."15
On Primitiva Mallorca's part, she cannot rightfully deny the mortgage
lien on the portion of the land she purchased. First. Registration of
the mortgage in the Register of Deeds is notice to all persons of the
existence thereof.16Second. By express provision of Section 39 of the
Land Registration Act, "every subsequent purchaser of registered
land who takes a certificate of title for value in good faith shall hold
the same free of all encumbrance except those noted on said
certificate."17 Clear implication exists that if an encumbrance is so
noted, that purchaser is bound thereby. Third. Mallorca herself
1
petitioned the court to order PNB to deliver the owner's copy of TCT
27070 to the Register of Deeds for annotation of Mallorca's interest,
as heretofore adverted to. And the court, in giving its stamp of
approval to the petition, expressly directed that "to whomsoever the
land is sold the vendee will assume the responsibility of complying
with the provisions of the mortgage." Fourth. Mallorca's own co-
owner's copy of the title issued to her carried PNB's mortgage
lien. Fifth. The fact that Mallorca failed to exercise her right of
redemption, which she sought to enforce in a judicial court, ends her
interest to the land she claims, and, doubtless, estops her from
denying PNB's mortgage lien thereon.

2
Yau Chu v CA
Facts:
Since 1980, the petitioner, Victoria Yau Chu, had been purchasing
cement on credit from CAMS Trading Enterprises, Inc. (hereafter
"CAMS Trading" for brevity). To guaranty payment for her cement
withdrawals, she executed in favor of Cams Trading deeds of
assignment of her time deposits in the total sum of P320,000 in the
Family Savings Bank (hereafter the Bank). Except for the serial
numbers and the dates of the time deposit certificates, the deeds of
assignment, which were prepared by her own lawyer, uniformly
provided —
... That the assignment serves as a collateral or guarantee for
the payment of my obligation with the said CAMS
TRADING ENTERPRISES, INC. on account of my cement
withdrawal from said company, per separate contract executed
between us.
The encashment of the deposit certificates was not a pacto
commissorio which is prohibited under Art. 2088 of the Civil Code.
A pacto commissorio is a provision for the automatic appropriation
of the pledged or mortgaged property by the creditor in payment of
the loan upon its maturity. The prohibition against a pacto
commissorio is intended to protect the obligor, pledgor, or mortgagor
against being overreached by his creditor who holds a pledge or
mortgage over property whose value is much more than the debt.
Where, as in this case, the security for the debt is also money
deposited in a bank, the amount of which is even less than the debt, it
was not illegal for the creditor to encash the time deposit certificates
to pay the debtors' overdue obligation, with the latter's consent.
Whether the debt had already been paid as now alleged by the debtor,
is a factual question which the Court of Appeals found not to have
been proven for the evidence which the debtor sought to present on
appeal, were receipts for payments made prior to July 18, 1980.

On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had
an unpaid account with it in the sum of P314,639.75. It asked that it
be allowed to encash the time deposit certificates which had been
assigned to it by Mrs. Chu. It submitted to the Bank a letter dated
July 18, 1980 of Mrs. Chu admitting that her outstanding account
with Cams Trading was P404,500. After verbally advising Mrs. Chu
of the assignee's request to encash her time deposit certificates and
obtaining her verbal conformity thereto, the Bank agreed to encash
the certificates.It delivered to Cams Trading the sum of P283,737.75
only, as one time deposit certificate (No. 0048120954) lacked the
proper signatures. Upon being informed of the encashment, Mrs. Chu
demanded from the Bank and Cams Trading that her time deposit be
restored. When neither complied, she filed a complaint to recover the
sum of P283,737.75 from them. The case was docketed in the
Regional Trial Court of Makati, Metro Manila (then CFI of Rizal,
Pasig Branch XIX), as Civil Case No. 38861.

RTC: In a decision dated December 12, 1983, the trial court

dismissed the complaint for lack of merit.

CA: Affirmed RTC

Issue:

1. In not annulling the encashment of her time deposit certificates as

a pactum commissorium; and

2. In not finding that the obligations secured by her time deposits had
already been paid.

Held:

We find no merit in the petition for review.

The Court of Appeals found that the deeds of assignment were

contracts of pledge, but, as the collateral was also money or an
exchange of "peso for peso," the provision in Article 2112 of the
Civil Code for the sale of the thing pledged at public auction to
convert it into money to satisfy the pledgor's obligation, did not have
to be followed. All that had to be done to convert the pledgor's time
deposit certificates into cash was to present them to the bank for
encashment after due notice to the debtor.

3
Spouses Ong v Roban Lending
Facts:
On different dates from July 14, 1999 to March 20, 2000,
petitioner-spouses Wilfredo N. Ong and Edna Sheila Paguio-
Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These loans were
secured by a real estate mortgage on petitioners parcels of land
located in Binauganan, TarlacCity and covered by TCT No. 297840.
[1]
On February 12, 2001, petitioners and respondent executed
[2]
an Amendment to Amended Real Estate Mortgage consolidating
their loans inclusive of charges thereon which
totaled P5,916,117.50. On even date, the parties executed a Dacion in
Payment Agreement[3] wherein petitioners assigned the properties
covered by TCT No. 297840 to respondent in settlement of their total
obligation, and a Memorandum of Agreement[4] reading:
That the FIRST PARTY [Roban
Lending Corporation] and the SECOND PARTY
[the petitioners] agreed to consolidate and
restructure all aforementioned loans, which have
been all past due and delinquent since April 19,
2000, and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY hereby
sign [sic] another promissory note in the amount
of P5,916,117.50 (a copy of which is hereto
attached and forms xxx an integral part of this
document), with a promise to pay the FIRST
PARTY in full within one year from the date of
the consolidation and restructuring, otherwise the
SECOND PARTY agree to have their DACION
IN PAYMENT agreement, which they have
executed and signed today in favor of the FIRST
PARTY be enforced[.][5]
In April 2002 (the day is illegible), petitioners filed a
[6]
Complaint, docketed as Civil Case No. 9322, before the Regional
Trial Court (RTC) of Tarlac City, for declaration of mortgage contract
as abandoned, annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that the Memorandum
of Agreement and the Dacion in Payment executed are void for
being pactum commissorium.[7]
Petitioners alleged that the loans extended to them from
July 14, 1999 to March 20, 2000 were founded on several uniform
promissory notes, which provided for 3.5% monthly interest rates,
5% penalty per month on the total amount due and demandable, and a
further sum of 25% attorneys fees thereon, [8] and in addition,
respondent exacted certain sums denominated as EVAT/AR.
[9]
Petitioners decried these additional charges as illegal, iniquitous,
unconscionable, and revolting to the conscience as they hardly allow
any borrower any chance of survival in case of default. [10]
Petitioners further alleged that they had previously made
payments on their loan accounts, but because of the illegal exactions
thereon, the total balance appears not to have moved at all, hence,
accounting was in order.[11]
RTC: Ruled in favor of lending. No pacto in this case.
CA: Affirmed RTC
On appeal,[21] the Court of Appeals[22] noted that
x x x [W]hile the trial court in its
decision stated that it was rendering judgment
on the pleadings, x x x what it actually
rendered was a summary judgment. A
judgment on the pleadings is proper when the
answer fails to tender an issue, or otherwise
admits the material allegations of the adverse
partys pleading. However, a judgment on the
pleadings would not have been proper in this
case as the answer tendered an issue, i.e. the
validity of the MOA and DPA. On the other
hand, a summary judgment may be rendered
by the court if the pleadings, supporting
affidavits, and other documents show that,
except as to the amount of damages, there is
no genuine issue as to any material fact.[23]
Issue: whether both contracts constitute pactum
commissorium or dacion en pago.
Held: The petition is meritorious.
This Court finds that the Memorandum of Agreement and
Dacion in Payment constitute pactum commissorium, which is
prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the
things given by way of pledge or mortgage,
or dispose of them. Any stipulation to the
contrary is null and void.
The elements of pactum commissorium, which enables the
mortgagee to acquire ownership of the mortgaged property without
4
the need of any foreclosure proceedings,[30]are: (1) there should be a
3. The attorneys fees are reduced to 25% of the
property mortgaged by way of security for the payment of the
principal amount only.
principal obligation, and (2) there should be a stipulation for

automatic appropriation by the creditor of the thing mortgaged in

case of non-payment of the principal obligation within the stipulated

period.[31]

In the case at bar, the Memorandum of Agreement and the

Dacion in Payment contain no provisions for foreclosure proceedings

nor redemption. Under the Memorandum of Agreement, the failure

by the petitioners to pay their debt within the one-year period gives

respondent the right to enforce the Dacion in Payment transferring to

it ownership of the properties covered by TCT No. 297840.

Respondent, in effect, automatically acquires ownership of the

properties upon petitioners failure to pay their debt within the

stipulated period.

Respondent argues that the law recognizes dacion en

pago as a special form of payment whereby the debtor alienates

property to the creditor in satisfaction of a monetary obligation.

[32]
This does not persuade. In a true dacion en pago, the assignment

of the property extinguishes the monetary debt. [33] In the case at bar,

the alienation of the properties was by way of security, and not by

way of satisfying the debt. [34] The Dacion in Payment did not

extinguish petitioners obligation to respondent. On the contrary,

under the Memorandum of Agreement executed on the same day as

the Dacion in Payment, petitioners had to execute a promissory note

for P5,916,117.50 which they were to pay within one year.[35]

In line with the foregoing findings, the following terms of

the loan contracts between the parties are MODIFIED as follows:

1. The monthly interest rate of 3.5%, or 42% per

annum, is reduced to 12% per annum;

2. The monthly penalty fee of 5% of the total

amount due and demandable is reduced to

12% per annum, to be computed from the time of DBP v CA and CUBA

demand; and Facts:

5
 These two consolidated cases stemmed from a complaint [1] filed
against the Development Bank of the Philippines (hereafter DBP) and
Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May
1985 with the Regional Trial Court of Pangasinan, Branch 54. The
said complaint sought (1) the declaration of nullity of DBPs
appropriation of CUBAs rights, title, and interests over a 44-hectare
fishpond located in Bolinao, Pangasinan, for being violative of
Article 2088 of the Civil Code; (2) the annulment of the Deed of
Conditional Sale executed in her favor by DBP; (3) the annulment of
DBPs sale of the subject fishpond to Caperal; (4) the restoration of
her rights, title, and interests over the fishpond; and (5) the recovery
of damages, attorneys fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of
their respective pleadings, the trial court conducted a pre-trial where
CUBA and DBP agreed on the following facts, which were embodied
in the pre-trial order:[2]
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond
Lease Agreement No. 2083 (new) dated May 13,
1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the
Development Bank of the Philippines in the
amounts of P109,000.00; P109,000.00;
and P98,700.00 under the terms stated in the
Promissory Notes dated September 6, 1974; August
11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba
executed two Deeds of Assignment of her Leasehold
Rights;
4. Plaintiff failed to pay her loan on the scheduled dates
thereof in accordance with the terms of the
Promissory Notes;
5. Without foreclosure proceedings, whether judicial or
extra-judicial, defendant DBP appropriated the
Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question;
6. After defendant DBP has appropriated the Leasehold
Rights of plaintiff Lydia Cuba over the fishpond in
question, defendant DBP, in turn, executed a Deed
of Conditional Sale of the Leasehold Rights in
favor of plaintiff Lydia Cuba over the same
fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba
addressed two letters to the Manager DBP,
Dagupan City dated November 6, 1979 and
December 20, 1979. DBP thereafter accepted the
offer to repurchase in a letter addressed to plaintiff
dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in
favor of plaintiff Lydia Cuba, a new Fishpond
Lease Agreement No. 2083-A dated March 24,
1980 was issued by the Ministry of Agriculture and
Food in favor of plaintiff Lydia Cuba only,
excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations
stipulated in the Deed of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the
amortization as stated in Deed of Conditional Sale,
she entered with the DBP a temporary arrangement
whereby in consideration for the deferment of the
Notarial Rescission of Deed of Conditional Sale,
plaintiff Lydia Cuba promised to make certain
payments as stated in temporary Arrangement
dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission
thru Notarial Act dated March 13, 1984, and which
was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took
possession of the Leasehold Rights of the fishpond
in question;
13. That after defendant DBP took possession of the
Leasehold Rights over the fishpond in question,
DBP advertised in the SUNDAY PUNCH the
public bidding dated June 24, 1984, to dispose of
the property;
14. That the DBP thereafter executed a Deed of
Conditional Sale in favor of defendant Agripina
Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond
Lease Agreement No. 2083-A on December 28,
1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs
14 and 15 of the pre-trial order. [3]
Trial was thereafter had on other matters.
RTC: The trial court resolved the issue in favor of CUBA by
declaring that DBPs taking possession and ownership of the property
without foreclosure was plainly violative of Article 2088 of the Civil
Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
It disagreed with DBPs stand that the Assignments of Leasehold
Rights were not contracts of mortgage because (1) they were given as
security for loans, (2) although the fishpond land in question is still a
public land, CUBAs leasehold rights and interest thereon are
alienable rights which can be the proper subject of a mortgage; and
(3) the intention of the contracting parties to treat the Assignment of
Leasehold Rights as a mortgage was obvious and unmistakable;
hence, upon CUBAs default, DBPs only right was to foreclose the
Assignment in accordance with law.
CA: In favor of both.
CUBA and DBP interposed separate appeals from the decision to the
Court of Appeals. The former sought an increase in the amount of
damages, while the latter questioned the findings of fact and law of
the lower court.
In its decision [5] of 25 May 1994, the Court of Appeals ruled
that (1) the trial court erred in declaring that the deed of assignment
was null and void and that defendant Caperal could not validly
acquire the leasehold rights from DBP; (2) contrary to the claim of
DBP, the assignment was not a cession under Article 1255 of the
Civil Code because DBP appeared to be the sole creditor to CUBA -
cession presupposes plurality of debts and creditors; (3) the deeds of
assignment represented the voluntary act of CUBA in assigning her
property rights in payment of her debts, which amounted to a
novation of the promissory notes executed by CUBA in favor of
DBP; (4) CUBA was estopped from questioning the assignment of
6
the leasehold rights, since she agreed to repurchase the said rights
under a deed of conditional sale; and (5) condition no. 12 of the deed
of assignment was an express authority from CUBA for DBP to sell
whatever right she had over the fishpond. It also ruled that CUBA
was not entitled to loss of profits for lack of evidence, but agreed
with the trial court as to the actual damages of P1,067,500. It,
however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorneys
fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act
of DBP in appropriating Cubas leasehold rights and interest under
Fishpond Lease Agreement No. 2083; (2) the deeds of assignment
executed by Cuba in favor of DBP; (3) the deed of conditional sale
between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of
Caperal, and the assignment of leasehold rights executed by Caperal
in favor of DBP. It then ordered DBP to turn over possession of the
property to Caperal as lawful holder of the leasehold rights and to pay
CUBA the following amounts: (a) P1,067,500 as actual
damages; P50,000 as moral damages; and P50,000 as attorneys fees.
Issue: The principal issue presented was whether the act of DBP in
appropriating to itself CUBAs leasehold rights over the fishpond in
question without foreclosure proceedings was contrary to Article
2088 of the Civil Code and, therefore, invalid.
Held:
We agree with CUBA that the assignment of leasehold rights was a
mortgage contract.
It is undisputed that CUBA obtained from DBP three separate
loans totalling P335,000, each of which was covered by a promissory
note. In all of these notes, there was a provision that: In the event of
foreclosure of the mortgage securing this notes, I/We further bind
myself/ourselves, jointly and severally, to pay the deficiency, if
any. [7]
Simultaneous with the execution of the notes was the execution
of Assignments of Leasehold Rights [8] where CUBA assigned her
leasehold rights and interest on a 44-hectare fishpond, together with
the improvements thereon. As pointed out by CUBA, the deeds of
assignment constantly referred to the assignor (CUBA) as borrower;
the assigned rights, as mortgaged properties; and the instrument
itself, as mortgage contract. Moreover, under condition no. 22 of the
deed, it was provided that failure to comply with the terms and
condition of any of the loans shall cause all other loans to become
due and demandable and all mortgages shall be foreclosed. And,
condition no. 33 provided that if foreclosure is actually
accomplished, the usual 10% attorneys fees and 10% liquidated
damages of the total obligation shall be imposed. There is, therefore,
no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the
assignment was by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed
two Deeds of Assignment of her Leasehold Rights.
In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the
occasion to rule that an assignment to guarantee an obligation is in
effect a mortgage.
We find no merit in DBPs contention that the assignment
novated the promissory notes in that the obligation to pay a sum of
money the loans (under the promissory notes) was substituted by the
assignment of the rights over the fishpond (under the deed of
assignment). As correctly pointed out by CUBA, the said assignment
merely complemented or supplemented the notes; both could stand
together. The former was only an accessory to the latter. Contrary to
DBPs submission, the obligation to pay a sum of money remained,
and the assignment merely served as security for the loans covered by
the promissory notes. Significantly, both the deeds of assignment and
the promissory notes were executed on the same dates the loans were
granted. Also, the last paragraph of the assignment stated: The
assignor further reiterates and states all terms, covenants, and
conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all
intent and purposes, an integral part hereof.
Neither did the assignment amount to payment
by cession under Article 1255 of the Civil Code for the plain and
simple reason that there was only one creditor, the DBP. Article 1255
contemplates the existence of two or more creditors and involves the
assignment of all the debtors property.
Nor did the assignment constitute dation in payment under
Article 1245 of the civil Code, which reads: Dation in payment,
whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law on sales. It bears stressing
that the assignment, being in its essence a mortgage, was but a
security and not a satisfaction of indebtedness.[10]
We do not, however, buy CUBAs argument that condition no.
12 of the deed of assignment constituted pactum commissorium. Said
condition reads:
12. That effective upon the breach of any condition of this
assignment, the Assignor hereby appoints the Assignee his Attorney-
in-fact with full power and authority to take actual possession of the
property above-described, together with all improvements thereon,
subject to the approval of the Secretary of Agriculture and Natural
Resources, to lease the same or any portion thereof and collect
rentals, to make repairs or improvements thereon and pay the same,
to sell or otherwise dispose of whatever rights the Assignor has or
might have over said property and/or its improvements and perform
any other act which the Assignee may deem convenient to protect its
interest. All expenses advanced by the Assignee in connection with
purpose above indicated which shall bear the same rate of interest
aforementioned are also guaranteed by this Assignment. Any amount
received from rents, administration, sale or disposal of said property
may be supplied by the Assignee to the payment of repairs,
improvements, taxes, assessments and other incidental expenses and
obligations and the balance, if any, to the payment of interest and
then on the capital of the indebtedness secured hereby. If after
disposal or sale of said property and upon application of total
amounts received there shall remain a deficiency, said Assignor
hereby binds himself to pay the same to the Assignee upon demand,
together with all interest thereon until fully paid. The power herein
granted shall not be revoked as long as the Assignor is indebted to
the Assignee and all acts that may be executed by the Assignee by
virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there
should be a property mortgaged by way of security for the payment
of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in
case of non-payment of the principal obligation within the stipulated
period.[11]
Condition no. 12 did not provide that the ownership over the
leasehold rights would automatically pass to DBP upon CUBAs
failure to pay the loan on time. It merely provided for the
7
appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of
default by CUBA, and to apply the proceeds to the payment of the
loan. This provision is a standard condition in mortgage contracts and
is in conformity with Article 2087 of the Civil Code, which
authorizes the mortgagee to foreclose the mortgage and alienate the
mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no.
12 of the deed of assignment. As admitted by it during the pre-trial, it
had [w]ithout foreclosure proceedings, whether judicial or
extrajudicial, appropriated the [l]easehold [r]ights of plaintiff Lydia
Cuba over the fishpond in question. Its contention that it limited itself
to mere administration by posting caretakers is further belied by the
deed of conditional sale it executed in favor of CUBA. The deed
stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of
assignment executed in its favor by the herein vendees [Cuba
spouses] the former acquired all the rights and interest of the latter
over the above-described property;
issued a new permit in favor of CUBA. Said acts which were
predicated on such false representation, as well as the subsequent acts
emanating from DBPs appropriation of the leasehold rights, should
therefore be set aside. To validate these acts would open the
floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this
Court had not hesitated to nullify the consequent auction sale for
failure to comply with the requirements laid down by law, such as
Act No. 3135, as amended. [15] With more reason that the sale of
property given as security for the payment of a debt be set aside if
there was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived
from the operation of the fishpond in question and apply the said
income in accordance with condition no. 12 of the deed of
assignment which provided: Any amount received from rents,
administration, may be applied to the payment of repairs,
improvements, taxes, assessment, and other incidental expenses and
obligations and the balance, if any, to the payment of interest and
then on the capital of the indebtedness.

The title to the real estate property [sic] and all improvements
thereon shall remain in the name of the Vendor until after the
purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had

appropriated and taken ownership of CUBAs leasehold rights merely
on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of
assignment to justify its act of appropriating the leasehold rights. As
stated earlier, condition no. 12 did not provide that CUBAs default
would operate to vest in DBP ownership of the said rights. Besides,
an assignment to guarantee an obligation, as in the present case, is
virtually a mortgage and not an absolute conveyance of title which
confers ownership on the assignee.[12]
At any rate, DBPs act of appropriating CUBAs leasehold rights
was violative of Article 2088 of the Civil Code, which forbids a
creditor from appropriating, or disposing of, the thing given as
security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her
leasehold rights from DBP did not estop her from questioning DBPs
act of appropriation. Estoppel is unavailing in this case.As held by
this Court in some cases,[13] estoppel cannot give validity to an act
that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088
of the Civil Code and to public policy, cannot be deemed validated by
estoppel.
Instead of taking ownership of the questioned real rights upon
default by CUBA, DBP should have foreclosed the mortgage, as has
been stipulated in condition no. 22 of the deed of assignment. But, as
admitted by DBP, there was no such foreclosure. Yet, in its letter
dated 26 October 1979, addressed to the Minister of Agriculture and
Natural Resources and coursed through the Director of the Bureau of
Fisheries and Aquatic Resources, DBP declared that it had foreclosed
the mortgage and enforced the assignment of leasehold rights on
March 21, 1979 for failure of said spouses [Cuba spouces] to pay
their loan amortizations.[14] This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.
Calibo v CA
In view of the false representation of DBP that it had already
foreclosed the mortgage, the Bureau of Fisheries cancelled CUBAs Facts:
original lease permit, approved the deed of conditional sale, and
8
 The facts of the case, as summarized by respondent court, are
undisputed.
on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U.
Abella purchased an MF 210 agricultural tractor with Serial No.
00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which
he used in his farm in Dagohoy, Bohol.
Sometime in October or November 1985, Pablo Abellas son, Mike
Abella rented for residential purposes the house of defendant-
appellant Dionisio R. Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out his aforementioned tractor
from his farm in Dagohoy, Bohol, and left it in the safekeeping of his
son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the
garage of the house he was leasing from Calibo.
Since he started renting Calibos house, Mike had been religiously
paying the monthly rentals therefor, but beginning November of
1986, he stopped doing so. The following month, Calibo learned that
Mike had never paid the charges for electric and water consumption
in the leased premises which the latter was duty-bound to
shoulder. Thus, Calibo confronted Mike about his rental arrears and
the unpaid electric and water bills. During this confrontation, Mike
informed Calibo that he (Mike) would be staying in the leased
property only until the end of December 1986. Mike also assured
Calibo that he would be settling his account with the latter, offering
the tractor as security. Mike even asked Calibo to help him find a
buyer for the tractor so he could sooner pay his outstanding
obligation.
In January 1987 when a new tenant moved into the house formerly
leased to Mike, Calibo had the tractor moved to the garage of his
fathers house, also in Tagbilaran City.
Apprehensive over Mikes unsettled account, Calibo visited him in his
Cebu City address in January, February and March, 1987 and tried to
collect payment. On all three occasions, Calibo was unable to talk to
Mike as the latter was reportedly out of town. On his third trip to
Cebu City, Calibo left word with the occupants of the Abella
residence thereat that there was a prospective buyer for the
tractor. The following week, Mike saw Calibo in Tagbilaran City to
inquire about the possible tractor buyer. The sale, however, did not
push through as the buyer did not come back anymore. When again
confronted with his outstanding obligation, Mike reassured Calibo
that the tractor would stand as a guarantee for its payment. That was
the last time Calibo saw or heard from Mike.
After a long while, or on November 22, 1988, Mikes father, Pablo
Abella, came to Tagbilaran City to claim and take possession of the
tractor. Calibo, however, informed Pablo that Mike left the tractor
with him as security for the payment of Mikes obligation to
him. Pablo offered to write Mike a check for P2,000.00 in payment of
Mikes unpaid lease rentals, in addition to issuing postdated checks to
cover the unpaid electric and water bills the correctness of which
Pablo said he still had to verify with Mike. Calibo told Pablo that he
would accept the P2,000.00-check only if the latter would execute a
promissory note in his favor to cover the amount of the unpaid
electric and water bills. Pablo was not amenable to this proposal. The
two of them having failed to come to an agreement, Pablo left and
went back to Cebu City, unsuccessful in his attempt to take
possession of the tractor.[1]
RTC + CA:On November 25, 1988, private respondent instituted an
action for replevin, claiming ownership of the tractor and seeking to
recover possession thereof from petitioner. As adverted to above, the
trial court ruled in favor of private respondent; so did the Court of
Appeals when petitioner appealed.
Issue: W/N Abella is the lawful possessor of the tractor
Held: Essentially, petitioner claims that the tractor in question
was validly pledged to him by private respondents son Mike Abella
to answer for the latters monetary obligations to petitioner. In the
alternative, petitioner asserts that the tractor was left with him, in the
concept of an innkeeper, on deposit and that he may validly hold on
thereto until Mike Abella pays his obligations.
Petitioner maintains that even if Mike Abella were not the
owner of the tractor, a principal-agent relationship may be implied
between Mike Abella and private respondent. He contends that the
latter failed to repudiate the alleged agency, knowing that his son is
acting on his behalf without authority when he pledged the tractor to
petitioner. Petitioner argues that, under Article 1911 of the Civil
Code, private respondent is bound by the pledge, even if it were
beyond the authority of his son to pledge the tractor, since he allowed
his son to act as though he had full powers.
On the other hand, private respondent asserts that respondent
court had correctly ruled on the matter.
In a contract of pledge, the creditor is given the right to retain
his debtors movable property in his possession, or in that of a third
person to whom it has been delivered, until the debt is paid. For the
contract to be valid, it is necessary that: (1) the pledge is constituted
to secure the fulfillment of a principal obligation; (2) the pledgor be
the absolute owner of the thing pledged; and (3) the person
constituting the pledge has the free disposal of his property, and in
the absence thereof, that he be legally authorized for the purpose. [2]
As found by the trial court and affirmed by respondent court,
the pledgor in this case, Mike Abella, was not the absolute owner of
the tractor that was allegedly pledged to petitioner. The tractor was
owned by his father, private respondent, who left the equipment with
him for safekeeping. Clearly, the second requisite for a valid pledge,
that the pledgor be the absolute owner of the property, is absent in
this case. Hence, there is no valid pledge.
He who is not the owner or proprietor of the property pledged or
mortgaged to guarantee the fulfillment of a principal obligation,
cannot legally constitute such a guaranty as may validly bind the
property in favor of his creditor, and the pledgee or mortgagee in
such a case acquires no right whatsoever in the property pledged or
mortgaged.[3]
El Banco Espanol-Filipino v Peterson
9
Facts:
On March 4, 1905, Banco Espanol Filipino (BEP) executed a contract
of loan in favor of Francisco Reyes for P141 702.00. Reyes was
already indebted to the bank for P84 415.00. His total debt was
therefore P226 117.38.
To secure payment of the P141k and the P84k, Reyes executed a
public instrument
1. Mortgaging several of his properties
2. Pledging part of his personal property to BEP (P90 591.75 worth
of wines, liquors and canned goods), which were stored at a
warehouse he rented in Manila
BEP and Reyes agreed that the goods should be delivered to Ramon
Garcia (depositary) for safekeeping. Reyes turned over the goods to
R. Garcia by giving him the warehouse keys.
On September 29, 1905, BEP and Reyes substituted Luis Sierra in
place of R. Garcia as the depositary.
and that the pledgee (BEP), itself, received and collected the proceeds
of the goods as they were sold.
The legality of the pledge was not affected by the fact that the goods
remained in the warehouse formerly rented by Reyes the pledgor.
This is because after the pledge had been agreed upon, and after the
depository appointed with common consent of the parties had taken
possession of the said property, Reyes could no longer dispose of the
same because BEP was the only party allowed to do so through Sierra
and Rodriguez.
The symbolic transfer of the goods through delivery of the keys to the
warehouse where the goods were stored was sufficient evidence to
show that Sierra, the depositary appointed by both BEP and
Rodriguez, was legally placed in possession of the goods.
Since the contract of pledge was valid, BEP had a better right to the
goods compared to J. Garcia. The Court ordered either the return of
the improperly levied goods, or the payment of their value, P30 000.

On October 19, 1905, Juan Garcia (yes, related to Ramon) brought an

action against Francisco Reyes and Ramon Agtarat. CFI Manila ruled
against Reyes and Agtarat for P15 000.00.

On the same day, Sheriff James Peterson entered the warehouse

where the goods pledged to BEP were stored under the custody of the
depositary, Sierra. Peterson levied upon P30 000 worth of the goods
pledged to the bank, depriving the latter of possession of the same, as
stipulated in the March 4 contract of loan.

Issues:
Was the contract of pledge between BEP and Reyes to secure a loan
valid?
Was Reyes still in possession of the pledged property, thereby making
the contract defective?

Held:

The contract was valid. Reyes was no longer in possession of the

pledged property. BEP had symbolic possession of the same.

The contract complies with all the requisites of a valid pledge

contract, as prescribed by the Civil Code:
1. The property was pledged to secure a debt
2. The date of execution, the terms of the pledge, and the property
pledged appeared in a public instrument
3. The property pledged was placed in the hands of a third person (in
this case, Sierra) by common consent of the debtor and creditor,
under the supervision of an agent (in this case, Rodriguez) of the
bank

Reyes, after the pledge, parted with the possession of his personal
property, which was delivered to a third person (R. Garcia, and
subsequently, Sierra) who would take care of them for BEP.

Sierra was the third person appointed by common consent of BEP

(creditor) and Reyes (debtor), to hold possession over the goods
pledged in favor of the bank under the direct supervision of
Rodriguez, an agent specifically appointed by the bank.

The contract in question was, therefore, a perfect contract of pledge

under articles 1857 and 1863 of the Civil Code, it having been
conclusively shown that the pledgee (BEP) took charge and
possession of the goods pledged through a depositary (Sierra) and a
special agent (Rodriguez) appointed by it, each of whom had a Betita v Ganzon
duplicate key to the warehouse wherein the said goods were stored,
10
Facts:
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.
RTC: In favor of Betita. 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.
Issue: Whether or not the carabaos be recovered
Held:
In favor of Buhayan.
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,
11
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:
Q. But the caraballas in question had never been in
possession of Eulogio Betita? — A. The three young ones
did not get into his hands.
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.

Q. And the others? — A. Sometimes they were in the hands

of Betita and at other times in the hands of Buhayan.

Q. Those are the caraballas which formerly were

mortgaged by Buhayan to Betita, isn't that so? — A. Yes,
sir.

Q. And the four carabaos now in question had never been in

possession of Betita, but were in your possession? — A.
When I worked they were in my hands.

Q. And before you worked, these caraballas were in

possession of your mistress, Tiburcia Buhayan? — A. Yes,
sir.

Q. Do you mean to say that from the possession of Tiburcia

Buhayan the animals passed immediately into your
possession? — A. Yes sir.

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 Fort Bonifacio v Yllas Lending
indispensable that the aforesaid delivery take place . . . . (P.
411, supra.)

12
FACTS: FORT BONIFACIO DEVELOPMENT CORP. ( FBDC)
executed a lease contract in favor of Tirreno, Inc. over a unit at the
Bonifacio Global City in Taguig, Metro Manila. The parties had the
lease contract notarized on the day of its execution. Tirreno used the
leased premises for Savoia Ristorante and La Strega Bar.
Due to Tirreno’s alleged failure to settle its outstanding obligations,
FBDC entered and occupied the leased premises. FBDC also
appropriated the equipment and properties left by Tirreno pursuant to
Section 22 of their Contract of Lease as partial payment for Tirreno’s
outstanding obligations.
In 2002, Yllas Lending Corporation caused the sheriff of the trial
court to serve an alias writ of seizure against FBDC. FBDC found out
that in 2001, respondents filed a complaint for Foreclosure of Chattel
Mortgage with Replevin, against Tirreno, et al. In their complaint,
Yllas alleged that they lent a sum of money to Tirreno et al and in
2000 executed a Deed of Chattel Mortgage in favor of Yllas as
security for the loan. The Chattel Mortgage covered properties of the
Tirreno’s restaurant and bar.
On the same day, FBDC served on the sheriff an affidavit of title and
third party claim.
Despite FBDC’s service upon him of an affidavit of title and third
party claim, the sheriff proceeded with the seizure of certain items
from FBDC’s premises. The sheriff delivered the seized properties to
Yllas.
FBDC questioned the propriety of the seizure and delivery of the
properties to respondents without an indemnity bond before the trial
court, which decided against FBDC. It stated that:
1. Section 22 of the lease contract between FBDC and Tirreno is
void under Article 2088 of the Civil Code.
2. FBDC should have filed a separate complaint against respondents
instead of filing a motion to intervene. (The trial court quoted Bayer
Phils. v. Agana )
FBDC filed a MR, which was denied. Hence this petition to review
pure questions of law.
ISSUE:
1. WON FBDC has no right of ownership over the subject properties
because Section 22 of the contract of lease is void for being a pledge
and a pactum commissorium;
2. WON the proper remedy of FBDC as third party claimant over the
subject properties is to file a separate action; and
3. WON the trial court is should have required respondents to file an
indemnity bond for FBDC’s protection
4. WON FBDC can terminate the lease contract without judicial
intervention
HELD: Petition granted
1.NO. Respondents, as well as the trial court, contend that Section 22
constitutes a pactum commissorium, a void stipulation in a pledge
contract. FBDC, on the other hand, states that Section 22 is merely
a dacion en pago.
Section 22 of the Lease Contract between FBDC and Terrano states:
Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the Lease
Period without the rentals, charges and/or damages, if any, being fully
paid or settled, the LESSOR shall have the right to retain possession
of the properties of the LESSEE used or situated in the Leased
Premises and the LESSEE hereby authorizes the LESSOR to offset
the prevailing value thereof as appraised by the LESSOR against any
unpaid rentals, charges and/or damages. If the LESSOR does not
want to use said properties, it may instead sell the same to third
parties and apply the proceeds thereof against any unpaid rentals,
charges and/or damages.
Articles 2085 and 2093 of the Civil Code enumerate the requisites
essential to a contract of pledge:
(1) the pledge is constituted to secure the fulfillment of a principal
obligation;
(2) the pledgor is the absolute owner of the thing pledged;
(3) the persons constituting the pledge have the free disposal of their
property or have legal authorization for the purpose; and
(4) the thing pledged is placed in the possession of the creditor, or of
a third person by common agreement. Article 2088 of the Civil Code
prohibits the creditor from appropriating or disposing the things
pledged, and any contrary stipulation is void.
Section 22, as worded, gives FBDC a means to collect payment from
Tirreno in case of termination of the lease contract or the expiration
of the lease period and there are unpaid rentals, charges, or damages.
The existence of a contract of pledge, however, does not arise just
because FBDC has means of collecting past due rent from Tirreno
other than direct payment.
The fourth requisite, that the thing pledged is placed in the
possession of the creditor, is absent. There is non-compliance with
the fourth requisite even if Tirreno’s personal properties are found in
FBDC’s real property. Tirreno’s personal properties are in FBDC’s
real property because of the Contract of Lease, which gives Tirreno
possession of the personal properties. Since Section 22 is not a
contract of pledge, there is no pactum commissorium.
On the other hand, Article 1245 of the Civil Code defines dacion en
pago, or dation in payment, as the alienation of property to the
creditor in satisfaction of a debt in money. Philippine National Bank
v. Pineda held that dation in payment requires delivery and
transmission of ownership of a thing owned by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation. There is no dation in payment when there is no transfer of
ownership in the creditor’s favor, as when the possession of the thing
is merely given to the creditor by way of security.
2. NO. The Bayer ruling is inapplicable to the present case. The third
party in Bayer filed his claim during execution; in the present case,
FBDC filed for intervention during the trial.
13
The timing of the filing of the third party claim is important because
the timing determines the remedies that a third party is allowed to
file. A third party claimant under Section 16 of Rule 39 (Execution,
Satisfaction and Effect of Judgments) 17 of the 1997 Rules of Civil
Procedure may vindicate his claim to the property in a separate
action, because intervention is no longer allowed as judgment
has already been rendered. We allow FBDC’s intervention in the
present case because FBDC satisfied the requirements of Section 1,
Rule 19 (Intervention) of the 1997 Rules of Civil Procedure, which
reads as follows:
Section 1. Who may intervene. — A person who has a legal interest in
the matter in litigation, or in the success of either of the parties, or an
interest against both, or is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the
court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The court shall consider whether or not the
intervention will unduly delay or prejudice the adjudication of the
rights of the original parties, and whether or not the intervenor’s
rights may be fully protected in a separate proceeding.
Although intervention is not mandatory, nothing in the Rules
proscribes intervention.
3. YES. Pursuant to Section 14 of Rule 57, the sheriff is not
obligated to turn over to respondents the properties subject of this
case in view of respondents’ failure to file a bond.
The bond in Section 14 of Rule 57 (proceedings where property is
claimed by third person) is different from the bond in Section 3 of the
same rule (affidavit and bond).
Under Section 14 of Rule 57, the purpose of the bond is to indemnify
the sheriff against any claim by the intervenor to the property seized
or for damages arising from such seizure, which the sheriff was
making and for which the sheriff was directly responsible to the third
party.
Section 3, Rule 57, on the other hand, refers to the attachment bond
to assure the return of defendant’s personal property or the payment
of damages to the defendant if the plaintiff’s action to recover
possession of the same property fails, in order to protect the
plaintiff’s right of possession of said property, or prevent the
defendant from destroying the same during the pendency of the suit.
Because of the absence of the indemnity bond in the present case,
FBDC may also hold the sheriff for damages for the taking or
keeping of the properties seized from FBDC.
4. YES. A lease contract may be terminated without judicial
intervention. Consing v. Jamandre upheld the validity of a
contractually-stipulated termination clause:
This stipulation is in the nature of a resolutory condition, for upon the
exercise by the [lessor] of his right to take possession of the leased
property, the contract is deemed terminated. This kind of contractual
stipulation is not illegal, there being nothing in the law proscribing
such kind of agreement.
xxx
Judicial permission to cancel the agreement was not, therefore
necessary because of the express stipulation in the contract of [lease]
that the [lessor], in case of failure of the [lessee] to comply with the
terms and conditions thereof, can take-over the possession of the
leased premises, thereby cancelling the contract of sub-lease. Resort
to judicial action is necessary only in the absence of a special
provision granting the power of cancellation.14
A lease contract may contain a forfeiture clause. In the same manner,
we allow FBDC’s forfeiture of Tirreno’s properties in the leased
premises. By agreement between FBDC and Tirreno, the properties
are answerable for any unpaid rent or charges at any termination of
the lease. Such agreement is not contrary to law, morals, good
customs, or public policy. Forfeiture of the properties is the only
security that FBDC may apply in case of Tirreno’s default in its
obligations.
NOTES:
1. A chattel mortgagee, unlike a pledgee, need not be in, nor entitled
to, the possession of the property, unless and until the mortgagor
defaults and the mortgagee thereupon seeks to foreclose thereon.
Since the mortgagee’s right of possession is conditioned upon the
actual default which itself may be controverted, the inclusion of other
parties, like the debtor or the mortgagor himself, may be required in
order to allow a full and conclusive determination of the case. When
the mortgagee seeks a replevin in order to effect the eventual
foreclosure of the mortgage, it is not only the existence of, but also
the mortgagor’s default on, the chattel mortgage that, among other
things, can properly uphold the right to replevy the property. The
burden to establish a valid justification for that action lies with the
plaintiff [-mortgagee]. An adverse possessor, who is not the
mortgagor, cannot just be deprived of his possession, let alone be
bound by the terms of the chattel mortgage contract, simply
because the mortgagee brings up an action for replevin.
FBDC exercised its lien to Tirreno’s properties even before
respondents and Tirreno executed their Deed of Chattel Mortgage.
FBDC is adversely affected by the disposition of the properties seized
by the sheriff. Moreover, FBDC’s intervention in the present case will
result in a complete adjudication of the issues brought about by
Tirreno’s creation of multiple liens on the same properties and
subsequent default in its obligations.
14
Peoples Bank Trust Co v Dahican
FACTS
A. Dahican lumber company (DAMCO) obtained
several loans amounting to 250,000 pesos from People’s bank
(BANK) and ,together with DALCO, another loan amounting to
$250,000 from Export-Import bank secured by five promissory
notes through people’s bank. In both loans, DAMCO executed
and registered respective mortgages with inclusion of “after
acquired properties”. DAMCO and DALCO failed to satisfy the
fifth promissory note in favor of Export bank so People’s bank
paid it and subsequently filed an action for the foreclosure of the
mortgaged properties of DAMCO including the after acquired
machinery, equipment and spare parts upon the latter's failure to
fulfill its obligation.
see no useful purpose in discussing the matter extensively. Suffice it
to say that the stipulation referred to is common, and We might say
logical, in all cases where the properties given as collateral are
perishable or subject to inevitable wear and tear or were intended to
be sold, or to be used — thus becoming subject to the inevitable wear
and tear — but with the understanding — express or implied — that
they shall be replaced with others to be thereafter acquired by the
mortgagor. Such stipulation is neither unlawful nor immoral, its
obvious purpose being to maintain, to the extent allowed by
circumstances, the original value of the properties given as security.
Indeed, if such properties were of the nature already referred to, it
would be poor judgment on the part of the creditor who does not see
to it that a similar provision is included in the contract.

B. Contention of the Petitioner

People’s bank asserted that the “after acquired”
machinery and equipment of DAMCO are subject to the deed of
mortgage executed by DAMCO. Hence, these can be included in
the foreclosure proceedings.

C. Contentions of the Respondent

DALCO argued that the mortgages were void as regards the

after acquired properties because they were not registered in
accordance with the chattel mortgage law. Moreover, provision
of the fourth paragraph of each of said mortgages did not
automatically make subject to such mortgages the "after
acquired properties", the only meaning thereof being that the
mortgagor was willing to constitute a lien over such properties.

ISSUES TO BE RESOLVED

Whether the “after acquired” machinery and equipment of

DAMCO are included as subject of the Real Estate mortgage,
thus can be foreclosed.

RULING OF THE SUPREME COURT

Judgment rendered in favor of Plaintiff People’s bank. The

after acquired machinery and equipment are included in the
executed mortgages.
It is not disputed in the case at bar that the "after acquired
properties" were purchased by DALCO in connection with, and for
use in the development of its lumber concession and that they were
purchased in addition to, or in replacement of those already existing
in the premises on July 13, 1950. In Law, therefore, they must be
deemed to have been immobilized, with the result that the real estate
mortgages involved herein — which were registered as such — did
not have to be registered a second time as chattel mortgages in order
to bind the "after acquired properties" and affect third parties.

Under the fourth paragraph of both deeds of mortgage, it is

crystal clear that all property of every nature and description taken in
exchange or replacement, as well as all buildings, machineries,
fixtures, tools, equipments, and other property that the mortgagor
may acquire, construct, install, attach; or use in, to upon, or in
connection with the premises — that is, its lumber concession —
"shall immediately be and become subject to the lien" of both
mortgages in the same manner and to the same extent as if already
included therein at the time of their execution. As the language thus
used leaves no room for doubt as to the intention of the parties, We
15
Prudential Bank v Alviar
FACTS
- Spouses Don A. Alviar and Georgia B. Alviar, are the
owners of a parcel of land in San Juan covered by Transfer
Certificate of Title (TCT) No. 438157
- They executed a deed of real estate mortgage in favor of
Prudential Bank to secure the payment of a loan worth
P250,000.00 and executed a promissory note (1st), PN
BD#75/C-252, covering the said loan and includes a
dragnet clause1.
- Don Alviar subsequently executed another promissory
note (2nd), PN BD#76/C-345 for P2,640,000.00, secured
by a hold-out on the mortgagors foreign currency savings
account with the bank.
- Spouses Alviar then executed for Donalco Trading, Inc.,
another promissory note (3rd) PN BD#76/C-430
covering P545,000.000. The loan is secured by Clean-
Phase out which means that the temporary overdraft
incurred by Donalco Trading, Inc. with Prudential Bak is to
be converted into an ordinary loan in compliance with a
Central Bank circular.
- Prudential Bank then wrote Donalco Trading, Inc.,
informing the latter of its approval of a straight loan of
P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 temporary
overdraft.
- Spouses Alviar then paid Prudential Bank P2,000,000.00,
to be applied to the obligations of G.B. Alviar Realty and
Development, Inc. and for the release of the real estate
mortgage. (separate loan)
- Prudential Bank moved for the extrajudicial foreclosure of
the mortgage on the property covered by TCT No. 438157
(1st PN). Per the bank's computation, respondents had the
total obligation of P1,608,256.68, covering the three (3)
promissory notes, to wit: PN BD#75/C-252 for
P250,000.00, PN BD#76/C-345 for P382,680.83, and PN
BD#76/C-340 for P545,000.00, plus assessed past due
interests and penalty charges.
- Spouses Alviar filed a complaint for damages with a prayer
for the issuance of a writ of preliminary injunction with
RTC Pasig, claiming that they have paid their principal loan
secured by the mortgaged property, and thus the mortgage
should not be foreclosed.
- Prudential Bank averred that the payment of P2,000,000.00
was not a payment made by the spouses Alviar, but by G.B.
Alviar Realty and Development Inc., which has a separate
loan with the bank secured by a separate mortgage.
1 "That for and in consideration of certain loans, overdraft and other
credit accommodations obtained from the Mortgagee by the
Mortgagor and/or ________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to secure the payment of
the same and those that may hereafter be obtained, the principal or
all of which is hereby fixed at Two Hundred Fifty Thousand
(P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including
interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as
appears in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of mortgage unto
the Mortgagee, its successors or assigns, the parcels of land which
are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements
now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute
owner free from all liens and encumbrances"
- RTC: Dismissed the complaint and ordered the Sheriff to
proceed with the extra-judicial foreclosure but upon
reconsideration, issued an order setting aside its earlier
decision and awarded attorneys fees to respondents.
- RTC found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157. On the
other hand, the P382,680.83 loan is secured by the foreign
currency deposit account of Don A. Alviar, while the
P545,000.00 obligation was an unsecured loan, being a
mere conversion of the temporary overdraft.
- The blanket mortgage clause relied upon by the bank
applies only to future loans obtained by the mortgagors,
and not by parties other than the said mortgagors, such as
Donalco Trading, Inc.
- CA: Affirmed the Order of the trial court but deleted the
award of attorneys fees. It ruled that while a continuing
loan or credit accommodation based on only one security or
mortgage is a common practice in financial and commercial
institutions, such agreement must be clear and unequivocal.
- In the instant case, the parties executed different
promissory notes agreeing to a particular security for each
loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is
improper.
- The Court of Appeals, however, found that respondents
have not yet paid the P250,000.00 covered by PN
BD#75/C-252 (1st) since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of
G.B. Alviar Realty and Development, Inc.
ISSUE/S
1. W/N the blanket mortgage clause or the dragnet clause is valid
Thus, the critical issue is whether the blanket mortgage clause applies
even to subsequent advancements for which other securities were
intended, or particularly, to PN BD#76/C-345.
Held:
A blanket mortgage clause, also known as a dragnet clause in
American jurisprudence, is one which is specifically phrased to
subsume all debts of past or future origins. Such clauses are carefully
scrutinized and strictly construed.[38] Mortgages of this character
enable the parties to provide continuous dealings, the nature or extent
of which may not be known or anticipated at the time, and they avoid
the expense and inconvenience of executing a new security on each
new transaction.[39] A dragnet clause operates as a convenience and
accommodation to the borrowers as it makes available additional
funds without their having to execute additional security documents,
thereby saving time, travel, loan closing costs, costs of extra legal
services, recording fees, et cetera.[40] Indeed, it has been settled in a
long line of decisions that mortgages given to secure future
advancements are valid and legal contracts, [41] and the amounts
16
named as consideration in said contracts do not limit the amount for
which the mortgage may stand as security if from the four corners of
the instrument the intent to secure future and other indebtedness can
[42]
be gathered.
The blanket mortgage clause in the instant case states:
That for and in consideration of certain
loans, overdraft and other credit accommodations
obtained from the Mortgagee by the Mortgagor
and/or ________________ hereinafter referred
to, irrespective of number, as DEBTOR, and to
secure the payment of the same and those that
may hereafter be obtained, the principal or all
of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee
may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee,
whether direct or indirect, principal or
secondary as appears in the accounts, books and
records of the Mortgagee, the Mortgagor does
hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list
inserted on the back of this document, and/or
appended hereto, together with all the buildings
and improvements now existing or which may
hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the
absolute owner free from all liens and
incumbrances. . . .[43] (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and
respondents intended the real estate mortgage to secure not only
the P250,000.00 loan from the petitioner, but also future credit
facilities and advancements that may be obtained by the respondents.
The terms of the above provision being clear and unambiguous, there
is neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of
dragnet clauses or blanket mortgage clauses, are of a different factual
milieu from the instant case. There, the subsequent loans were not
covered by any security other than that for the mortgage deeds which
uniformly contained the dragnet clause.
In the case at bar, the subsequent loans obtained by
respondents were secured by other securities, thus: PN BD#76/C-345,
executed by Don Alviar was secured by a hold-out on his foreign
currency savings account, while PN BD#76/C-430, executed by
respondents for Donalco Trading, Inc., was secured by Clean-Phase
out TOD CA 3923 and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed
of Guarantee in favor of A.U. Valencia and Co., and by a chattel
mortgage on various heavy and transportation equipment. The matter
of PN BD#76/C-430 has already been discussed. Thus, the critical
issue is whether the blanket mortgage clause applies even to
subsequent advancements for which other securities were intended,
or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought
have emerged on this question. One school advocates that a dragnet
clause so worded as to be broad enough to cover all other debts in
addition to the one specifically secured will be construed to cover a
different debt, although such other debt is secured by another
mortgage.[44] The contrary thinking maintains that a mortgage with
such a clause will not secure a note that expresses on its face that it is
otherwise secured as to its entirety, at least to anything other than a
deficiency after exhausting the security specified therein, [45] such
deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the
arrangement.[46]
The latter school represents the better position. The parties having
conformed to the blanket mortgage clause or dragnet clause, it is
reasonable to conclude that they also agreed to an implied
understanding that subsequent loans need not be secured by other
securities, as the subsequent loans will be secured by the first
mortgage. In other words, the sufficiency of the first security is a
corollary component of the dragnet clause. But of course, there is no
prohibition, as in the mortgage contract in issue, against contractually
requiring other securities for the subsequent loans. Thus, when the
mortgagor takes another loan for which another security was given it
could not be inferred that such loan was made in reliance solely on
the original security with the dragnet clause, but rather, on the new
security given. This is the reliance on the security test.
17
Hence, based on the reliance on the security test, the California court amount not covered by the security for the second promissory note.

in the cited case made an inquiry whether the second loan was made As held in one case, where deeds absolute in form were executed to

in reliance on the original security containing a dragnet clause. secure any and all kinds of indebtedness that might subsequently

Accordingly, finding a different security was taken for the second become due, a balance due on a note, after exhausting the special

loan no intent that the parties relied on the security of the first loan security given for the payment of such note, was in the absence of a

could be inferred, so it was held. The rationale involved, the court special agreement to the contrary, within the protection of the

said, was that the dragnet clause in the first security instrument mortgage, notwithstanding the giving of the special security. [50] This

constituted a continuing offer by the borrower to secure further loans is recognition that while the dragnet clause subsists, the security

under the security of the first security instrument, and that when the specifically executed for subsequent loans must first be exhausted
[47]
lender accepted a different security he did not accept the offer. before the mortgaged property can be resorted to.

In another case, it was held that a mortgage with a dragnet

clause is an offer by the mortgagor to the bank to provide the security

of the mortgage for advances of and when they were made. Thus, it

was concluded that the offer was not accepted by the bank when a

subsequent advance was made because (1) the second note was

secured by a chattel mortgage on certain vehicles, and the clause

therein stated that the note was secured by such chattel mortgage; (2)

there was no reference in the second note or chattel mortgage

indicating a connection between the real estate mortgage and the

advance; (3) the mortgagor signed the real estate mortgage by her

name alone, whereas the second note and chattel mortgage were

signed by the mortgagor doing business under an assumed name; and

(4) there was no allegation by the bank, and apparently no proof, that

it relied on the security of the real estate mortgage in making the

advance.[48]

Indeed, in some instances, it has been held that in the absence of

clear, supportive evidence of a contrary intention, a mortgage

containing a dragnet clause will not be extended to cover future

advances unless the document evidencing the subsequent advance

refers to the mortgage as providing security therefor. [49]

It was therefore improper for petitioner in this case to seek

foreclosure of the mortgaged property because of non-payment of all

the three promissory notes. While the existence and validity of the

dragnet clause cannot be denied, there is a need to respect the

existence of the other security given for PN BD#76/C-345. The

foreclosure of the mortgaged property should only be for

the P250,000.00 loan covered by PN BD#75/C-252, and for any

18
PNB v Spouses Maranon
Law or Provision Cited: Art. 2127 of the Civil Code: “The mortgage
extends to the natural accessions, to the improvements, growing
fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to
the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations,
amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands
of a third person”.
Facts:
Spouses Rodolfo and Emilie Montealegre (Spouses Montealegre)
mortgaged a 152 square meter land (subject lot) to PNB as a security
for a loan. The property was under the name of Emilie Montealegre
under TCT 15612. The subject lot was erected with a building leased
to various tenants. Subsequently, Spouses Montealegre failed to pay
the loan and PNC initiated a foreclosure proceedings on the
mortgaged properties including the subject lot. In the auction sale,
PNB emerged as the highest bidder and a corresponding Certificate
of Sale was issued to them.
Before the expiration of the redemption period, Spouses
Maranon filed before the RTC a complaint for the Annulment of
Title, Reconveyance and Damages against Spouses Montealegre,
PNB and the Provincial Sheriff. Spouses Maranon alleged that they
are the true registered owners of by subject lot by virtue of TCT No.
T-129577 which was illegally cancelled by TCT 156512 under the
name of Emilie who used a falsified Deed of Sale bearing the forged
signatures of Spouses Maranon to effect the transfer of title to the
property in her name. In its answer PNB contend that they are
mortgagee in good faith and that its mortgage lien on the property
was registered thus valid and binding against the whole world.
While the trial proceedings were ongoing Paterio Tolete,
one of the tenants of the building erected in the subject lot deposited
his rental payments with the Clerk of Court.
RTC decided in favor of Spouses Maranon after finding
that the signatures of the Spouses Maranon in the Deed of Sale
presented by Spouses Montealegre to cause the cancellation of the
former’s title were forged. RTC concluded the sale null and void and
PNC was adjudged to be mortgagee in good faith whose lien on the
subject lot must be respected. Neither parties sought any
reconsideration nor appeal.
Thereafter, Spouses Maranon filed subsequent motions for
the release of the rental payments deposited with the Clerk of Court
and paid to PNB by Tolete for having been adjudged as the real
owner of the subject lot. RTC granted the motions on the ground that
as they were the true registered owners of the lot, they are entitled to
its fruits.
PNB moved for reconsideration of RTC’s ruling contending
that its mortgage lien should be carried over to the new title
reconveying the lot to Spouses Maranon. They further argued that
since the redemption period already expired, the PNB is now the
rightful owner of the lots and its fruits. PNC denied its motion for
reconsideration.
PNB then brought the case to CA. CA affirmed RTC’s
decision. CA held that since Spouses Maranon is not a party to the
mortgage transaction between PNB and Spouses Montealegre,
Spouses Maranon cannot be deprived of the fruits of the subject lot as
the same will amount to deprivation of property without due process
of law. It further held that PNB is not a mortgagee in good faith
because as a financial institution, it should have looked beyond the
certificate titles and conducted an inspection on the circumstances
surrounding the transfer of title.
Hence, this petition.
Issue: Whether or not PNB has the right to the fruits of the
mortgaged lot.
Held: Petition denied.
Ruling: No. PNB is not entitled to the fruits of the mortgaged lot.
The protection afforded to PNB as a mortgagee in good faith refers to
the right to have its mortgage lien carried over and annotated to the
new certificate title issued to the Spouses Maranon. Thereafter, to
enforce such lien thru foreclosure proceedings in case of non-
payment of debt. However, this rule does not govern real estate
mortgages and foreclosures attend by fraudulent transfers to the
mortgagor. Rent as an accessory follows the principal. According to
Article 2127 of the Civil Code, when the principal property is
mortgaged, the mortgage shall include all natural or civil fruits and
improvements found thereon when the secured obligation becomes
due. Hence, on case of non-payment of the secured debt the
foreclosure proceedings shall cover not only the property but all its
accessions and accessories as well. However, the rule is not without
qualifications. In Castro v CA, the Court explained that Article 2127
is predicated on the presumption that the ownership of accessions and
accessories also belongs to the mortgagor as owner of the principal.
All improvements subsequently introduced or owned by the
mortgagor on the encumbered property are deemed to form part of
the mortgage. That the improvements are to be considered so
incorporated only if so owned by the mortgagor. Corollary, any
evidence sufficiently overthrowing the presumption that the
mortgagor owns the mortgaged property precludes the application of
Article 2127. Otherwise stated, the provision is irrelevant and
inapplicable to mortgages and their resultant foreclosures if the
mortgagor is later on found or declared to be not the true owner of the
property, as in the instant case.
Since PNB’s mortgagors, are not owners of the subject lot
much less of the building which produced the disputed rent, the
foreclosure proceedings could not have included the building found
in the subject lot and the rent it yields. PNB’s lien as a mortgagee in
good faith pertains on the subject lot alone because the rule that
improvements shall follow the principal in a mortgage under Article
2127 does not apply in this case. The building was not foreclosed and
it remained as a property of Spouses Maranon and is not effected by
non-redemption and is excluded from any consolidation of title made
by PNB over the subject lot. There is technically no juridical tie
created by a valid mortgage contract that binds PNB to the subject lot
19
because its mortgagor was not the true owner. But by virtue of the
mortgagee in good faith principle, the law allows PNB to enforce its
lien. Hence, PNB has no basis in claiming the rent paid.

20
Tumalad v Vicencio purchaser thereof is not entitled, as a matter of
right, to possession of the same. Thus, while it is
true that the Rules of Court allow the purchaser
FACTS: Vicencio and Simeon executed a chattel mortgage in
to receive the rentals if the purchased property is
favor of plaintiffs Tumalad over their house, which was being
occupied by tenants, he is, nevertheless,
rented by Madrigal and company. This was executed to
accountable to the judgment-debtor or mortgagor
guarantee a loan, payable in one year with a 12% per annum
as the case may be, for the amount so received
interest. The mortgage was extrajudicially foreclosed upon failure to
and the same will be duly credited against the
pay the loan. The house was sold at a public auction and the
redemption price when the said debtor or
plaintiffs were the highest bidder. A corresponding certificate of
mortgagor effects the redemption. Differently
sale was issued. Thereafter, the plaintiffs filed an action for
stated, the rentals receivable from tenants,
ejectment against the defendants, praying that the latter vacate the
although they may be collected by the purchaser
house as they were the proper owners.
during the redemption period, do not belong to
the latter but still pertain to the debtor of
ISSUE: WHETHER OR NOT THE SUBJECT MATTER OF THE mortgagor. The rationale for the Rule, it seems,
MORTGAGE, A HOUSE OF STRONG MATERIALS, BE THE is to secure for the benefit of the debtor or
OBKECT OF A CHATTEL MORTGAGE? mortgagor, the payment of the redemption
amount and the consequent return to him of his
HELD: Certain deviations have been allowed from the general properties sold at public auction. (Emphasis
doctrine that buildings are immovable property such as when supplied)
through stipulation, parties may agree to treat as personal
property those by their nature would be real property. This is The Hamada case reiterates the previous ruling in Chan vs. Espe.36
partly based on the principle of estoppel wherein the principle is
predicated on statements by the owner declaring his house as chattel,
Since the defendants-appellants were occupying the house at the time
a conduct that may conceivably stop him from subsequently
of the auction sale, they are entitled to remain in possession during
claiming otherwise.
the period of redemption or within one year from and after 27 March
1956, the date of the auction sale, and to collect the rents or profits
In the case at bar, though there be no specific statement referring to
during the said period.
the subject house as personal property, yet by ceding, selling or
transferring a property through chattel mortgage could only have
meant that defendant conveys the house as chattel, or at least, It will be noted further that in the case at bar the period of redemption
intended to treat the same as had not yet expired when action was instituted in the court of origin,
such, so that they should not now be allowed to make an and that plaintiffs-appellees did not choose to take possession under
inconsistent stand by claiming otherwise. Section 7, Act No. 3135, as amended, which is the law selected by
the parties to govern the extrajudicial foreclosure of the chattel
mortgage. Neither was there an allegation to that effect. Since
Chattel mortgages are covered and regulated by the Chattel Mortgage
plaintiffs-appellees' right to possess was not yet born at the filing of
Law, Act No. 1508.28 Section 14 of this Act allows the mortgagee to
the complaint, there could be no violation or breach thereof.
have the property mortgaged sold at public auction through a public
Wherefore, the original complaint stated no cause of action and was
officer in almost the same manner as that allowed by Act No. 3135,
prematurely filed. For this reason, the same should be ordered
as amended by Act No. 4118, provided that the requirements of the
dismissed, even if there was no assignment of error to that effect. The
law relative to notice and registration are complied with. 29 In the
Supreme Court is clothed with ample authority to review palpable
instant case, the parties specifically stipulated that "the chattel
errors not assigned as such if it finds that their consideration is
mortgage will be enforceable in accordance with the provisions of
necessary in arriving at a just decision of the cases. 37
Special Act No. 3135 ... ." 30(Emphasis supplied).

It follows that the court below erred in requiring the mortgagors to

Section 6 of the Act referred to 31 provides that the debtor-mortgagor
pay rents for the year following the foreclosure sale, as well as
(defendants-appellants herein) may, at any time within one year from
attorney's fees.
and after the date of the auction sale, redeem the property sold at the
extra judicial foreclosure sale. Section 7 of the same Act 32 allows the
purchaser of the property to obtain from the court the possession
during the period of redemption: but the same provision expressly
requires the filing of a petition with the proper Court of First Instance
and the furnishing of a bond. It is only upon filing of the proper
motion and the approval of the corresponding bond that the order for
a writ of possession issues as a matter of course. No discretion is left
to the court. 33 In the absence of such a compliance, as in the instant
case, the purchaser can not claim possession during the period of
redemption as a matter of right. In such a case, the governing
provision is Section 34, Rule 39, of the Revised Rules of
Court 34 which also applies to properties purchased in extrajudicial
foreclosure proceedings.35 Construing the said section, this Court
stated in the aforestated case of Reyes vs. Hamada. Diego v Fernando

Facts:
In other words, before the expiration of the 1-
year period within which the judgment-debtor or
mortgagor may redeem the property, the
21
 Segundo Fernando, defendant, executed a Deed of Mortgage in
favor of the plaintiff, Cecilio Diego over two parcels of lands to
secure a loan of P2,000.00 without interest, payable within four years
from the date of the execution of the instrument. After the execution,
the possession of the mortgaged properties was turned over to Diego.
For failure to pay the loan after four years, Diego filed an
action for foreclosure of mortgage. Fernando contended that the true
transaction between him and Diego was one of antichresis and not of
mortgage and that the plaintiff had already received a total of 120
cavans of palay from the the properties given as security, which, are
at the rate of P10 per cavan, represented the value of P5,200, his debt
had already been paid with the plaintiff owing him a refund of
P2,720.
those of an antichretic creditor: In the present case, the parties having
agreed that the loan was to be without interest, and the appellant not
having expressly waived his right to the fruits of the properties
mortgaged during the time they were in appellee's possession, the
latter, like an antichretic creditor, must account for the value of the
fruits received by him, and deduct it from the loan obtained by
appellant. According to the findings of the trial court, appellee had
received a net share of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present action; at the rate of
P9.00 per cavan (a rate admitted by the parties), the total value of the
fruits received by appellee is P495.00. Deducting this amount from
the loan of P2,000.00 received by appellant from appellee, the former
has only P1,505.00 left to pay the latter.

The lower court ruled in favor of the plaintiff stating that there
was nothing in the deed of mortgage to show that it was not a true
contract of mortgage and that the fact that the possession of the
properties were turned over to the mortgagee did not alter the
transaction; that the parties intended that the mortgagee would collect
the fruits of the properties as interest on the loan, which agreement is
common.

Issue: Whether the contract between the parties is one of mortgage or

antichresis

Held: The contract between the parties is one of mortgage.

Fernando alleged that the fact that the loan was without interest
and that the possession of the properties were transferred to Diego
reveals the true transaction between them as one of antichresis.
However, the Court ruled that it is not an essential contract of
mortgage that the possession of the properties will be retained by the
mortgagor. And that to be antichresis, it must be expressly agreed
between creditor and debtor that the former, having been given
possession of the properties given as security, is to apply their fruits
to the payment of the interest, if owing, and thereafter to the principal
of his credit (Art. 2132, Civil Code) so that if a contract of loan with
security does not stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the property given as
security, in order that the latter may gather its fruits, without stating
that said fruits are to be applied to the payment of interest, if any, and
afterwards that of the principal, the contract is a mortgage and not
antichresis.

However, the Court further ruled that the above conclusion

does not mean that Diego, having received the fruits of the properties
will be allowed to appropriate them for himself and not be required to
account for them to Fernando because the contract of mortgage
clearly provided that the loan was without interest within four years
from the date of the instrument and that there was no evidence that
the parties intended to supersede such stipulation.

The true position off the appellee herein under his contract with
appellant is a "mortgage in possession" that is "one who has lawfully
acquired actual or constructive possession of the premises mortgaged
to him, standing upon his rights as mortgagee and not claiming under Legaspi v Celestial
another title, for the purpose of enforcing his security upon such
property or making its income help to pay his debt". As such Facts:
mortgagee in possession, his rights and obligations are, similar to
22
 The plaintiffs brought an action against the defendant in the
justice of peace court praying that the judgment be rendered, ordering
that the defendant pay the sum of P556.160. The defendant answered
the complaint admitting that he was disposed to pay the said debt but
assailed that the contract entered between him and the plaintiffs was
one of antichresis and that the latter were bound to account of the
products of the salt beds (mortgaged properties). The justice of peace
ordered the defendant to pay the said debt with legal interest from the
date when the action was filed.
Plaintiffs then filed another complaint in the Court of First
Instance praying that the same defendant Damaso Celestial be
ordered to pay them the sum of P7,637, with the legal interest thereon
from the date of the filing of the complaint, until fully paid, and the
costs of the suit, and that, upon his failure to do so, the mortgage
constituted by said defendant in their favor to secure the payment of
the loan in question be ordered foreclosed. The defendant answered
the complaint stating that he never refused to pay the debt but the
plaintiffs should have rendered to the defendant an account of the
said product of the mortgaged properties so that they may be applied
to the payment of the loan.
Plaintiffs contended that the salt gathered from the 60 salt beds
was for the exclusive use, benefit and enjoyment of the plaintiffs who
were not obliged to submit to the defendant a liquidation of the salt
produced and gathered, in order that the same may be deducted from
the principal.
mortgage contract. It is stipulated in the contracts under consideration
that, during the term thereof and while the total amount of the loan
remains unpaid by the debtor, the salt beds constituted as security for
the payment of said loan, shall be administered by the creditors who
shall destine one-half of the products thereof for the maintenance and
support of the croppers and the improvements of the property,
keeping the other half for themselves. It appears, therefore, that the
debtor, instead of paying a certain per cent of the principal of the loan
as compensation for the sacrifice made by the creditors in depriving
themselves of the use of their principal and the enjoyment of its
fruits, so as to give them to the debtor, has delivered to them the
property constituted as a security for the payment of the loan, so that
they may administer and use it, enjoying its fruits, by way of
compensation for their said sacrifice in lending said debtor their
money. Therefore, the contracts, which are the subject matter of this
action, have all the essential requisites of a mortgage, enumerated in
article 1857 of the Civil Code and, consequently, are mortgage
contracts.
From the foregoing considerations, this court is of the opinion
and so holds, that when a contract of loan with security does not
stipulate the payment of interest but provides for the delivery to the
creditor by the debtor of the real property constituted as security for
the payment thereof, in order that the creditor may administer the
same and avail himself of its fruits, without stating that said fruits are
to be applied to the payment of interest, if any, and afterwards to that
of the principal of the credit, the contract shall be considered to be
one of mortgage and not of antichresis.

Issue: Whether the contract between the parties is that of mortgage or

antichresis

Held:

There were two contracts that were entered into by the parties.
One was entitled “Contract of Antichresis” and the other as “Contract
of Mortgage”. However, the Court noted that in both contracts, the
defendant Damaso Calestial, as debtor, agrees to turn over to the
plaintiffs, as creditors, the possession of the salt beds so that the
latter, after paying the expenses for the production, administration
and harvest of the salt with one-half of the produce, may keep the
other half of the use, benefit and enjoyment. It is not stipulated that
the net produce of the salt beds shall first be applied to the payment
of the interest, if any, and afterwards to that of the principal of their
credit. Both contracts merely provide that the creditors shall keep
one-half of the products. Therefore, they are not contracts of
antichresis, as defined by article 1881 of the Civil Code.

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 of money 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 property PAMECA v CA
mortgage, without the contract's longing thereby its character of a

23
FACTS: PAMECA loaned P2M from DBP and executed
a promissory note, secured by its inventory of furniture
and equipment. PAMECA defaulted thus DBP
extrajudicially foreclosed on the chattels. DBP was the
only bidder so it was able to buy said property for
P322K. Subsequently for the deficiency, it filed a
complaint against PAMECA and its solidary debtors,
according to the promissory note it signed.
ISSUE: Whether an action can be instituted for
deficiency of a debt after a foreclosure of the chattel
mortgage.
RULING: Yes. Chattel Mortgage Law expressly entitles
the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs. Since
the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds, there is a
corollary obligation on the part of the debtor-mortgagee
to pay the deficiency in case of a reduction in the price at
public auction.
Cordova v Reyes
JL Bernardo v CA
1990, San Antonio municipal Government (of Nueva
Ecija) approved the construction of the San Antonio
Public Market. It was supposed to be funded by the
Economic Support Fund Secretariat (ESFS).
Under the ESFS grant-loan-equity program, the
market would be funded by a grant from ESFS, loan
extended by ESFS and equity (or counterpart funds)
from the municipality.
Petitioners claimed they entered into a business
venture to participate in the bidding of the public
market.
So, JL Construction (sole proprietorship owned
by Bernardo) thru Santiago Sugay submitted its bid
together with other qualified bidders. They won and
were awarded the contract. A construction agreement
was then entered into by the municipality (thru
respondent Salonga, then the incumbent mayor) and JL
Bernardo Construction.
Petitioners claim that under the contract, the
municipality agreed to assume the expenses for the
demolition, clearing and site filling of the construction
site worth 1.15 million pesos and to give cash equity of
767 thousand pesos, both amounts to be remitted
directly to petitioners.
Petitioners then allege that these amounts
became due but the municipality refused to pay despite
repeated demands and despite the market being 98%
complete. They say that Salonga induced them to
advance expenses by making representations that the
municipality had the financial capability to reimburse
them.
1991, petitioners filed for breach of contract,
specific performance and collection of sum of money,
with prayer of preliminary attachment and enforcement
of contractor’s lien against the municipality and Salonga
in his official and personal capacity.
1995, RTC granted the preliminary attachment.
It also granted JL Bernardo Construction the right to
possession of the market and operate the same. It gave
credence to the alleged fraud.
With regard to the contractor’s lien, the RTC
said that since petitioners have not been reimbursed for
the cash equity and for the demolition, clearing and site
expenses, they stand in the position of an unpaid
contractor, then they are an unpaid contractor which
entitles them to Articles 2242 and 2243 of the CC, to a
lien worth 2.6 million pesos (as of Aug 1, 1991),
excluding other damages.
It explained that although the usual way is to
enforce a lien is by a decree for the sale of the property
and the application of the proceeds to the debt, it is
more practical to permit petitioners to operate the
market and apply their claims the income (rentals and
goodwill of prospective stallholders) derived therefrom.
MR was denied so petitioners certioraried to CA
which favoured them. CA said Article 2242 is applicable
in the context of insolvency proceedings, as expressly
stated in Article 2243. Even if petitioners are entitled to
possession, the same right cannot be expanded to the
right to use the building. The grant for petitioners to
operate the market amounts to GAD.
24
 Petitioners now in SC assailing CA’s decision determined whether there are other preferred
with regard to the contractor’s lien. creditors with claims over the market;
- The allegations do not show that petitioners are
the only creditors with respect to such property;
- Although no third party claims have been filed,
Issue:
it will not bar other creditors from filing
W/N petitioners can operate the market and apply the subsequent actions and claim they have
proceeds to their credit. No. preferred liens;
3. Since it is not alleged that petitioners have rights as
mortgagee under the contract, they could only
obtain possession and use of the market by means
Held and Ratio:
of preliminary attachment upon such property, in
1. 2241 and 2242 enumerates certain credits which the event that they obtain favourable judgment
enjoy preference with respect to specific personal from the trial court:
a. Under the rules, a writ of attachment (over
or real property of the debtor.
a. Petitioners’ claimed contractor’ lien is granted registered real property) is enforced by the
under 3rd paragraph of 2242 which provides that sheriff by filing with the registry of deeds a copy
the claims of contractors engaged in the of the order of attachment, together with a
construction, reconstruction or repair of description of the property, and by leaving a
buildings or other works shall be preferred with copy of such order, description and notice with
respect to the specific building or other the occupant, if any;
b. If a favourable judgment is obtained by the
immovable property constructed;
b. BUT, 2242 applies only when there is a attaching party and an execution is issued, the
concurrence of credits; i.e. when the same sheriff may satisfy the judgment by selling so
specific property of the debtor is subjected to much of the property to satisfy the judgment;
c. Only in the event that petitioners are able to
the claims of several creditors and the value of
purchase the property will they then acquire
such is insufficient to pay in full all creditors;
- In such case, the question of preference will the possession and use of the same;
d. Trial court’s decision clearly was not in line with
arise, that is, to whom of the creditors shall
procedure so it committed grave abuse of
be first;
c. Due process dictates that this statutory lien discretion.
should be enforced only in the context of a
proceeding where the claims of all preferred
CA AFFIRMED in so far as it nullifies the contractor’s
creditors may be bindingly adjudicated; such as
lien. CA REVERSED in nullifying the writ of attachment
insolvency proceedings;
by the trial court.
d. 2243 explicitly states this; that the claims and
liens in 2241 and 2242 shall be considered as
mortgages or pledges of real or personal
property, or liens within the purview of legal
provisions governing insolvency;
2. Petitioners’ suit is not in the nature of insolvency
proceedings:
- It’s basically specific performance and damages;
Atlantic v Herbal Cove
- Thus, although they are unpaid contractors and
are entitled to contractor’s lien, such lien cannot
be invoked in the present action for it cannot be
25
Facts:This is a Petition for Review on Certiorari1 under
Rule 45 of the Rules of Court, challenging the May 30,
2000 Decision of the Court of Appeals.
On June 20, 1996, [respondent] and [petitioner] entered
into a Construction Contract whereby the former agreed
to construct four (4) units of [townhouses] and one (1)
single detached unit for an original contract price of
P15,726,745.19 which was later adjusted to
P16,726,745.19 as a result of additional works. The
contract period is 180 days commencing [on] July 7,
1996 and to terminate on January 7, 1997. [Petitioner]
claimed that the said period was not followed due to
reasons attributable to [respondent], namely: suspension
orders, additional works, force majeure, and unjustifiable
acts of omission or delay on the part of said
[respondent]. [Respondent], however, denied such claim
and instead pointed to [petitioner] as having exceeded
the 180 day contract period aggravated by defective
workmanship and utilization of materials which are not in
compliance with specifications.
"On November 21, 1997, [petitioner] filed a complaint for
sum of money with damages with the Regional Trial
Court of Makati wherein the defendant, Herbal Cove
Realty Corporation was ordered to pay sums of money
to the plaintiff.
On the same day, [petitioner] filed a notice of lis
pendens for annotation of the pendency of Civil Cases.
RTC Judge Ranada] dismissed the Complaint as against
[respondent] for [petitioner's] failure to comply with a
condition precedent to the filing of a court action.
"[Petitioner] filed a Motion for Reconsideration and
Respondent] filed its Opposition thereto. Judge Ranada]
granted [respondent's] Motion to Cancel Notice of Lis
Pendens. "[Petitioner] filed a Motion for Reconsideration
of the Order to which [respondent] filed an Opposition.
But upon motion, [Judge Ranada,] reversed his previous
Order and reinstated the notices of lis pendens,
Article 2242 of the Civil Code and the proper mode for its
enforcement as follows:
"Articles 2241 and 2242 of the Civil Code
enumerates certain credits which enjoy
preference with respect to specific personal or
real property of the debtor. Specifically, the
contractor's lien claimed by the petitioners is
granted under the third paragraph of Article
2242 which provides that the claims of
contractors engaged in the construction,
reconstruction or repair of buildings or other
works shall be preferred with respect to the
specific building or other immovable property
constructed.
"However, Article 2242 finds application when
there is a concurrence of credits, i.e., when the
same specific property of the debtor is subjected
to the claims of several creditors and the value
of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation,
the question of preference will arise, that is,
there will be a need to determine which of the
creditors will be paid ahead of the
others.Fundamental tenets of due process will
dictate that this statutory lien should then only
be enforced in the context of some kind of a
proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as
insolvency proceedings."14 (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code nor
the enforcement of the lien thereunder is applicable
here, because petitioner's Complaint failed to satisfy the
foregoing requirements. Nowhere does it show that
respondent's property was subject to the claims of other
creditors or was insufficient to pay for all concurring
debts. Moreover, the Complaint did not pertain to
insolvency proceedings or to any other action in which
the adjudication of claims of preferred creditors could be
ascertained.

The CA reinstated the former's July 30, 1998

Order6 granting Herbal Cove's Motion to Cancel the
Notice of Lis Pendens. Hence this present petition.

Issue Whether or not money claims representing cost of

materials [for] and labor [on] the houses constructed on
a property [are] a proper lien for annotation of lis
pendens on the property title[.]

Ruling: NO. The annotation of the Notice of Lis

Pendens would be unjustified, because a complaint for
collection and damages is not the proper mode for the
enforcement of a contractor's lien.

In J.L. Bernardo Construction v. Court of Appeals,13 the PBC v Basic Polyprinters

Court explained the concept of a contractor's lien under
26
FACTS: Respondent Basic Polyprinters and Packaging
Corporation (Basic Polyprinters) was a domestic
corporation engaged in the business of printing
greeting cards, gift wrappers, gift bags, calendars,
posters, labels and other novelty items.
Basic Polyprinters, along with the eight other
corporations belonging to the Limtong Group of
Companies filed a joint petition for suspension of
paymentswith approval of the proposed rehabilitation
in the RTC (docketed as SEC Case No. 031-04). The 4
RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC on
October 25, 2005, and directed the petitioning
5
corporations tofile their individual petitions for
suspension of payments and rehabilitation in the
appropriate courts.
Basic Polyprinters brought its individual
petition, averring therein that: (a) its business since
6
incorporation had been very viable and financially
profitable; (b) it had obtained loans from various
banks, and had owed accounts payable to various
creditors; (c) the Asian currency crisis, devaluation of
the Philippine peso, and the current state of affairs of
the Philippine economy, coupled with: (i) high interest
rates, penalties and charges by its creditors; (ii) low
demand for gift items and cards due to the economic
recession and the use of cellular phones; (iii) direct
competition from stores like SM, Gaisano, Robinson
and other malls; and (iv) the fire of July 19, 2002 that
had destroyed its warehouse containing inventories
worth P264,000,000.00, resulting in difficulty of
meeting its obligations; (d) its operations would be
hampered and would render rehabilitation difficult
should its creditors enforce their claims through legal
actions, including foreclosure proceedings; (e)
included in its overall Rehabilitation Program was the
full payment of its outstanding loans in favor of
petitioner Philippine Bank of Communications
(PBCOM), RCBC, Land Bank, EPCI Bank and AUB
via repayment over 15 years with moratorium of two-
years for the interestand five years for the principal at
5% interest per annumand a dacion en pagoof its
affiliate property in favor of EPCI Bank; and (f) its
assets worth P15,374,654.00 with net liabilities
amounting toP13,031,438.00. 7
RTC issued the stay order dated August 31, 2006. It 8
appointed Manuel N. Cacho III as the rehabilitation
receiver, and required all creditors and interested
parties, including the Securities and Exchange
Commission (SEC), to file their comments.
After the initial hearing and evaluation of the
comments and opposition of the creditors, including
PBCOM, the RTC gave due course to the petition and
referred it to the rehabilitation receiver for evaluation
and recommendation.
RTC issued an order approving the rehabilitation plan.
CA affirmed the questioned order of the RTC,
agreeing with the finding of the rehabilitation receiver
that there were sufficient evidence, factors and actual
opportunities in the rehabilitation plan indicating that
Basic Polyprinters could be successfully rehabilitated
in due time.
ISSUE: Whether the approval of the rehabilitation
plan was proper.
HELD: APPROPRIATE.
Rehabilitation is the process of restoring "the debtor
to a position of successful operation and solvency, if it
is shown that its continuance of operation is
economically feasible and its creditors can recover by
way of the present value of payments projected in the
plan more if the corporation continues as a going
concern that if it is immediately liquidated." It
21
contemplates a continuance ofcorporate life and
activities in an effort to restore and reinstate the
corporation to its former position of successful
operation and solvency.
Republic Act No. 10142 (Financial Rehabilitation and
Insolvency Act (FRIA) of 2010), a law that is
applicable hereto, has defined a corporate debtor as
26
a corporation duly organized and existing under
Philippine laws that has become insolvent. The term
27
insolventis defined in Republic Act No. 10142 as "the
financial condition of a debtor that is generally unable
to pay its or his liabilities as they fall due in the
ordinary course of business or has liabilities that are
greater than its or his assets."
28
As such, the contention that rehabilitation becomes
inappropriate because of the perceived insolvency of
BasicPolyprinters was incorrect.
A material financial commitment becomes significant
in gauging the resolve, determination, earnestness
27
and good faith ofthe distressed corporation in
financing the proposed rehabilitation plan. This
30

commitment may include the voluntary undertakings

ofthe stockholders or the would-be investors of the
debtor-corporation indicating their readiness,
willingness and ability to contribute funds or property
to guarantee the continued successful operation of
the debtor corporation during the period of
rehabilitation.

The commitment to add P10,000,000.00 working

capital appeared to be doubtful considering that the
insurance claim from which said working capital would
be sourced had already been written-off by Basic
Polyprinters’s affiliate, Wonder Book Corporation. A
34

claim that has been written-off is considered a bad

debt or a worthless asset, and cannot be deemed a
35

material financial commitment for purposes of

rehabilitation. At any rate, the proposed
additional P10,000,000.00 working capital was
insufficient to cover at least half ofthe shareholders’
deficit that amounted to P23,316,044.00 as of June
30, 2006.

We observe, too, that Basic Polyprinters’s proposal to

enter into the dacion en pagoto create a source of
"fresh capital" was not feasible because the object
thereof would not be its own property but one
belonging to its affiliate, TOL Realty and Development
Corporation, a corporation also undergoing
rehabilitation. Moreover, the negotiations (for the
return of books and magazines from Basic
Polyprinters’s trade creditors) did not partake of a
voluntary undertaking because no actual financial
commitments had been made thereon.

Worthy of note here is that Wonder Book Corporation

was a sister company of Basic Polyprinters, being one
of the corporations that had filed the joint petition for
suspension of payments and rehabilitation in SEC
Case No. 031-04 adverted to earlier. Both of them
submitted identical commitments in their respective
rehabilitation plans. As a result, as the Court observed
in Wonder Book, the commitments by Basic
37

Polyprinters could not be considered as firm

assurances that could convince creditors, future
investors and the general public of its financial and
operational viability.

BPI v Sarabia

FACTS:

28
 Sarabia Hotel obtained a special loan
package from Far East Bank and Trust Company
(FEBTC) in order to finance the construction of a
five-storey hotel building (New Building) for the
purpose of expanding its hotel business. An
additional credit in addition to the loan was
approved by FEBTC in the same year. The
foregoing debts were secured by real estate
mortgages over several parcels of land owned by
Sarabia and a comprehensive surety agreement
dated September 1, 1997 signed by its stockholders.
By virtue of a merger, Bank of the Philippine
Islands (BPI) assumed all of FEBTC’s rights against
Sarabia.
Sarabia started to pay interests on its loans.
However, largely because of the delayed completion
of the New Building, Sarabia incurred various cash
flow problems. Thus, despite the fact that it had
more assets than liabilities at that time, it,
nevertheless, filed a Petition for corporate
rehabilitation (rehabilitation petition) with prayer
for the issuance of a stay order before the RTC as it
foresaw the impossibility to meet its maturing
obligations to its creditors when they fall due.
The RTC approved Sarabia’s rehabilitation
plan as recommended by the Receiver, finding the
same to be feasible. It observed that the
recommended rehabilitation plan was also practical
in terms of the interest rate pegged at 6.75% p.a.
since it is based on Sarabia’s ability to pay and the
creditors’ perceived cost of money. More
significantly, the RTC did not give credence to
BPI’s opposition to the Receiver’s recommended
rehabilitation plan as neither BPI nor the Receiver
was able to substantiate the claim that BPI’s cost of
funds was at the 10% p.a. threshold. In this regard,
the RTC gave more credence to the Receiver’s
determination of fixing the interest rate at 6.75%
p.a.
The CA affirmed the RTC’s ruling with the
modification of reinstating the surety obligations of
Sarabia’s stockholders to BPI as an additional
safeguard for the effective implementation of the
approved rehabilitation plan. It also upheld the
6.75%. p.a. interest rate on Sarabia’s loans, finding
the said rate to be reasonable given that BPI’s
interests as a creditor were properly accounted for.
BPI mainly argues that the approved
rehabilitation plan did not give due regard to its
interests as a secured creditor in view of the
imposition of a fixed interest rate of 6.75% p.a. and
the extended loan repayment period.
ISSUE:
Whether or not the CA correctly affirmed Sarabia’s
rehabilitation plan as approved by the RTC, with the
modification on the reinstatement of the surety
obligations of Sarabia’s stockholders.
RULING:
Yes.
Recognizing the volatile nature of every
business, the rules on corporate rehabilitation have
been crafted in order to give companies sufficient
leeway to deal with debilitating financial
predicaments in the hope of restoring or reaching a
sustainable operating form if only to best
accommodate the various interests of all its
stakeholders, may it be the corporation’s
stockholders, its creditors and even the general
public. In this light, case law has defined corporate
rehabilitation as an attempt to conserve and
administer the assets of an insolvent corporation in
the hope of its eventual return from financial stress
to solvency. It contemplates the continuance of
corporate life and activities in an effort to restore
and reinstate the corporation to its former position
of successful operation and liquidity. Verily, the
purpose of rehabilitation proceedings is to enable
the company to gain a new lease on life and thereby
allow creditors to be paid their claims from its
earnings. Thus, rehabilitation shall be undertaken
when it is shown that the continued operation of the
corporation is economically more feasible and its
creditors can recover, by way of the present value of
payments projected in the plan, more, if the
corporation continues as a going concern than if it is
immediately liquidated.
Among other rules that foster the foregoing
policies, Section 23, Rule 4 of the Interim Rules of
Procedure on Corporate Rehabilitation (Interim
Rules) states that a rehabilitation plan may be
29
approved even over the opposition of the creditors
holding a majority of the corporation’s total
liabilities if there is a showing that rehabilitation is
feasible and the opposition of the creditors is
manifestly unreasonable. Also known as the “cram-
down” clause, this provision, which is currently
incorporated in the FRIA, is necessary to curb the
majority creditors’ natural tendency to dictate their
own terms and conditions to the rehabilitation,
absent due regard to the greater long-term benefit of
all stakeholders. Otherwise stated, it forces the
creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery.
It is within the parameters of the aforesaid
provision that the Court examines the approval of
Sarabia’s rehabilitation.
i. Feasibility of Sarabia’s rehabilitation.
In order to determine the feasibility of a
proposed rehabilitation plan, it is imperative that a
thorough examination and analysis of the distressed
corporation’s financial data must be conducted. If
the results of such examination and analysis show
that there is a real opportunity to rehabilitate the
corporation in view of the assumptions made and
financial goals stated in the proposed rehabilitation
plan, then it may be said that a rehabilitation is
feasible. In this accord, the rehabilitation court
should not hesitate to allow the corporation to
operate as an on-going concern, albeit under the
terms and conditions stated in the approved
rehabilitation plan. On the other hand, if the results
of the financial examination and analysis clearly
indicate that there lies no reasonable probability that
the distressed corporation could be revived and that
liquidation would, in fact, better subserve the
interests of its stakeholders, then it may be said that
a rehabilitation would not be feasible. In such case,
the rehabilitation court may convert the proceedings
into one for liquidation.
First, Sarabia has the financial capability to
undergo rehabilitation. Despite its financial
constraints, Sarabia likewise continues to be
profitable with its hotelier business as its operations
have not been disrupted. Second, Sarabia has the
ability to have sustainable profits over a long period
of time. Third, the interests of Sarabia’s creditors
are well-protected. Therefore, based on the above-
stated reasons, the Court finds Sarabia’s
rehabilitation to be feasible.
ii. Manifes unreasonableness of BPI ’s opposition.
Anent the matter of th imposition 6.75% p.a.
interest rate, it must be pointed out that oppositions
which push for high interests rates are generally
frowned upon in rehabilitation proceedings given
that the inherent purpose of a rehabilitation is to
find ways and means to minimize the expenses of
the distressed corporation during the rehabilitation
period. It is the objective of a rehabilitation
proceeding to provide the best possible framework
for the corporation to gradually regain or achieve a
sustainable operating form. Hence, if a creditor,
whose interests remain well-preserved under the
existing rehabilitation plan, still declines to accept
interests pegged at reasonable rates during the
period of rehabilitation, and, in turn, proposes rates
which are largely counter-productive to the
rehabilitation, then it may be said that the creditor’s
opposition is manifestly unreasonable.
In this case, the Court finds BPI’s opposition
on the approved interest rate to be manifestly
unreasonable considering that: (a) the 6.75% p.a.
interest rate already constitutes a reasonable rate of
interest which is concordant with Sarabia’s
projected rehabilitation; and (b) on the contrary,
BPI’s proposed escalating interest rates remain
hinged on the theoretical assumption of future
fluctuations in the market, this notwithstanding the
fact that its interests as a secured creditor remain
well-preserved.
30