4. [G.R. No. 133632.

February 15, 2002]

BPI INVESTMENT CORPORATION, petitioner, vs. HON. COURT OF APPEALS and
ALS MANAGEMENT & DEVELOPMENT CORPORATION, respondents.
Facts:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala
Investment and Development Corporation (AIDC), for the construction of a house on his
lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to
secure the loan. Sometime in 1980, Roa sold the house and lot to private respondents
ALS and Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed
the P500,000 balance of Roas indebtedness with AIDC. The latter was not willing to
extend the old interest rate to private respondents and proposed to grant them a new
loan of P500,000 to be applied to Roas debt and secured by the same property, at an
interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58
and penalty interest at the rate of 21% per annum per day from the date the amortization
became due and payable. In March 1981, respondents executed a mortgage deed with
the provision that payment of the monthly amortization shall commence on May 1, 1981.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on
the ground that they failed to pay the mortgage indebtedness. A notice of sheriffs sale
was published after.
On February 28, 1985, ALS and Litonjua filed against BPIIC. They alleged that they
made an overpayment as of June 30, 1984. They maintained that they should not be
made to pay amortization before the actual release of the P500,000 loan in August and
September 1982. Further, out of the P500,000 loan, only the total amount
of P464,351.77 was released to private respondents. Hence, applying the effects of legal
compensation, the balance of P35,648.23 should be applied to the initial monthly
amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831
and 52093, thus:

WHEREFORE, judgment is hereby rendered in favor of ALS Management and

Development Corporation and Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua was
only in the principal sum of P464,351.77, with interest at 20% plus service charge of 1%
per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten
(10) years or one hundred twenty (120) months. The amortization schedule attached as
Annex A to the Deed of Mortgage is correspondingly reformed as aforestated.

The Court further finds that ALS and Litonjua suffered compensable damages when BPI
caused their publication in a newspaper of general circulation as defaulting debtors, and
therefore orders BPI to pay ALS and Litonjua the following sums:

a) P300,000.00 for and as moral damages;

b) P50,000.00 as and for exemplary damages;

c) P50,000.00 as and for attorneys fees and expenses of litigation.

SO ORDERED.[3]

In its decision, the Court of Appeals reasoned that a simple loan is perfected only
upon the delivery of the object of the contract. The contract of loan between BPIIC and
ALS & Litonjua was perfected only on September 13, 1982, the date when BPIIC
released the purported balance of the P500,000 loan after deducting therefrom the value
of Roas indebtedness. Thus, payment of the monthly amortization should commence
only a month after the said date, as can be inferred from the stipulations in the contract.
This, despite the express agreement of the parties that payment shall commence
on May 1, 1981. From October 1982 to June 1984, the total amortization due was
only P194,960.43. Evidence showed that private respondents had an overpayment,
because as of June 1984, they already paid a total amount of P201,791.96. Therefore,
there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause the
publication in newspapers concerning private respondents delinquency in the payment
of their loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence
this petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL
CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS.
COURT OF APPEALS, 125 SCRA 122.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that
because a simple loan is perfected upon the delivery of the object of the contract, the
loan contract in this case was perfected only on September 13, 1982. Petitioner claims
that a contract of loan is a consensual contract, and a loan contract is perfected at the
time the contract of mortgage is executed.
According to private respondents, a perfected loan agreement imposes reciprocal
obligations, where the obligation or promise of each party is the consideration of the
other party. In this case, the consideration for BPIIC in entering into the loan contract is
the promise of private respondents to pay the monthly amortization. For the latter, it is
the promise of BPIIC to deliver the money. In reciprocal obligations, neither party incurs
in delay if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Therefore, private respondents conclude, they did not incur
in delay when they did not commence paying the monthly amortization on May 1, 1981,
as it was only on September 13, 1982 when petitioner fully complied with its obligation
under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but
a real contract. It is perfected only upon the delivery of the object of the contract.
A perfected consensual contract, as shown above, can give rise to an action for
damages.
In the present case, the loan contract between BPI, on the one hand, and ALS and
Litonjua, on the other, was perfected only on September 13, 1982, the date of the
second release of the loan. Following the intentions of the parties on the commencement
of the monthly amortization, as found by the Court of Appeals, private respondents
obligation to pay commenced only on October 13, 1982, a month after the perfection of
the contract.[7]
Only when a party has performed his part of the contract can he demand that the
other party also fulfills his own obligation and if the latter fails, default sets in.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and
its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as to the
award of damages. The award of moral and exemplary damages in favor of private
respondents is DELETED, but the award to them of attorneys fees in the amount
of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private
respondents P25,000 as nominal damages. Costs against petitioner.

9. G.R. No. L-46240 November 3, 1939

MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.

The plaintiff brought this action to compel the defendant to return her certain furniture
which she lent him for his use. She appealed from the judgment of the Court of First
Instance of Manila which ordered that the defendant return to her the three has heaters
and the four electric lamps found in the possession of the Sheriff of said city, that she
call for the other furniture from the said sheriff of Manila at her own expense, and that
the fees which the Sheriff may charge for the deposit of the furniture be paid pro rata by
both parties, without pronouncement as to the costs.

The defendant was a tenant of the plaintiff and as such occupied the latter's house on M.
H. del Pilar street, No. 1175. On January 14, 1936, upon the novation of the contract of
lease between the plaintiff and the defendant, the former gratuitously granted to the
latter the use of the furniture described in the third paragraph of the stipulation of facts,
subject to the condition that the defendant would return them to the plaintiff upon the
latter's demand. The plaintiff sold the property to Maria Lopez and Rosario Lopez and on
September 14, 1936, these three notified the defendant of the conveyance, giving him
sixty days to vacate the premises under one of the clauses of the contract of lease.
There after the plaintiff required the defendant to return all the furniture transferred to
him for them in the house where they were found. On November 5, 1936, the
defendant, through another person, wrote to the plaintiff reiterating that she may call for
the furniture in the ground floor of the house. On the 7th of the same month, the
defendant wrote another letter to the plaintiff informing her that he could not give up the
three gas heaters and the four electric lamps because he would use them until the 15th
of the same month when the lease in due to expire. The plaintiff refused to get the
furniture in view of the fact that the defendant had declined to make delivery of all of
them. On November 15th, before vacating the house, the defendant deposited
with the Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue, in the custody of the said sheriff.

In their seven assigned errors the plaintiffs contend that the trial court incorrectly applied
the law: in holding that they violated the contract by not calling for all the furniture on
November 5, 1936, when the defendant placed them at their disposal; in not ordering the
defendant to pay them the value of the furniture in case they are not delivered; in holding
that they should get all the furniture from the Sheriff at their expenses; in ordering them
to pay-half of the expenses claimed by the Sheriff for the deposit of the furniture; in
ruling that both parties should pay their respective legal expenses or the costs; and in
denying pay their respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to decide
whether the defendant complied with his obligation to return the furniture upon the
plaintiff's demand; whether the latter is bound to bear the deposit fees thereof, and
whether she is entitled to the costs of litigation.lawphi1.net

The contract entered into between the parties is one of commadatum, because under it
the plaintiff gratuitously granted the use of the furniture to the defendant, reserving for
herself the ownership thereof; by this contract the defendant bound himself to return the
furniture to the plaintiff, upon the latters demand (clause 7 of the contract, Exhibit A;
articles 1740, paragraph 1, and 1741 of the Civil Code). The obligation voluntarily
assumed by the defendant to return the furniture upon the plaintiff's demand, means that
he should return all of them to the plaintiff at the latter's residence or house. The
defendant did not comply with this obligation when he merely placed them at the
disposal of the plaintiff, retaining for his benefit the three gas heaters and the four eletric
lamps. The provisions of article 1169 of the Civil Code cited by counsel for the parties
are not squarely applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get the furniture when
they were offered to her.

As the defendant had voluntarily undertaken to return all the furniture to the plaintiff,
upon the latter's demand, the Court could not legally compel her to bear the expenses
occasioned by the deposit of the furniture at the defendant's behest. The latter, as
bailee, was not entitled to place the furniture on deposit; nor was the plaintiff under a
duty to accept the offer to return the furniture, because the defendant wanted to retain
the three gas heaters and the four electric lamps.

As to the value of the furniture, we do not believe that the plaintiff is entitled to the
payment thereof by the defendant in case of his inability to return some of the furniture
because under paragraph 6 of the stipulation of facts, the defendant has neither agreed
to nor admitted the correctness of the said value. Should the defendant fail to deliver
some of the furniture, the value thereof should be latter determined by the trial Court
through evidence which the parties may desire to present.

The costs in both instances should be borne by the defendant because the plaintiff is the
prevailing party (section 487 of the Code of Civil Procedure). The defendant was the one
who breached the contract of commodatum, and without any reason he refused to return
and deliver all the furniture upon the plaintiff's demand. In these circumstances, it is just
and equitable that he pay the legal expenses and other judicial costs which the plaintiff
would not have otherwise defrayed.

The appealed judgment is modified and the defendant is ordered to return and deliver to
the plaintiff, in the residence to return and deliver to the plaintiff, in the residence or
house of the latter, all the furniture described in paragraph 3 of the stipulation of facts
Exhibit A. The expenses which may be occasioned by the delivery to and deposit of the
furniture with the Sheriff shall be for the account of the defendant. the defendant shall
pay the costs in both instances. So ordered.
10. People v Puig & Porras
Facts
A case of Qualified Theft was filed against the respondents. This was filed by the Iloilo
provincial prosecutor, for the private complainant, Rural Bank of Potoan. It was alleged
in the complaint that Puig was the cashier and Porras was the Bookkeeper in the said
bank, and that they took away money amounting to P15,000 without the consent of the
bank owner, to the prejudice of the bank. However, the RT' dismissed the complaint for
insufficiency of the information ruling that the real parties in interest are the depositors)
clients and not the bank because the bank does not acquire ownership of the money
deposited in it. It also denied the MR.
Issue:
Whether or not the bank was the owner and thus, the real party in interest/
Held & Rationale
Yes. Under Art. 1980 of the Civil Code, “fixed savings, and current deposits of money in
banks shall be governed by the provisions concerning simple loans.5 And, Art #2$7
provides that 5a person who receives a loan of money acquires the ownership thereof,
and is bound to pay to the creditor an equal amount of the same kind and *uality.5 Thus,
it posits that the depositors who place their money with the bank are considered
creditors of the ban . The bank acquires ownership of the money deposited by its
clients, making the money taken by respondents as belonging to the bank. Allegations in
the Information that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it as owner of the
money deposits, as sufficient to make out a case of Qualified Theft

16. GR No. 138677 | Ligutan v Court of Appeals | Vitug

FACTS:

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained a loan in the amount of
P120,000.00 from Security Bank and Trust Co. The obligation matured and the bank
granted an extension. Despite several demands from the Bank, petitioners failed to
settle the debt which then amounted to P114,416.10. The Bank sent a final demand
letter however petitioners still defaulted on their obligation. The Bank then filed a
complaint for recovery of the due amount. Petitioners instead of presenting their
evidence had the schedule reset for two consecutive occasions. On the third hearing
date, the trial court resolved to consider the case submitted for decision.

Two years later petitioners filed a motion for reconsideration which was denied by the
trial court. Petitioners then interposed an appeal with the Court of Appeals, the appellate
court affirmed the judgement of the trial court except the 2% service charge which was
deleted pursuant to Central Bank Circular No. 763. The two parties filed their motions for
reconsiderations and the Court of Appeals resolved the two motions: that the payment of
interest and penalty commence on the date when the obligation became due and a
penalty of 3% per month would suffice. The petitioners filed an omnibus motion for
reconsideration which was then denied by the Court of Appeals.
 ISSUE:

Whether or not the 15.189% interest and the penalty of 3% per month (36% per annum)
is exorbitant, iniquitous, and unconscionable.

RULING:

Petition is DENIED.

HELD:

The question of whether a penalty is reasonable or iniquitous can be partly subjective

and partly objective. Its resolution will depend on such factors as, but not confined to, the
type, extent and purpose of the penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court.

The Court of Appeals, exercising its good judgement has reduced the penalty interest
from 5% a month to 3% a month. Given the circumstances and the repeated acts of
breach by petitioners of their contractual obligation, the Court sees no cogent ground to
modify the ruling of the appellate court.

The stipulated interest of 15.189% per annum, does not appear as being excessive. The
essence or rationale for the payment of interest, quite often referred to as cost of money,
is not exactly the same as that as a surcharge or a penalty. A penalty stipulation is not
necessarily preclusive of interest, if there is an agreement to that effect, the two being
distinct concepts which may separately be demanded. The interest prescribed in loan
financing arrangements is a fundamental part of the banking business and the core of a
banks existence.

22.
Facts
· Maurice Peaches McLoughlin is an Australian businessman-philanthropist who used
to stay at the Sheraton Hotel during his trips to the Philippines prior to 1984. He met
Brunhilda Mata-Tan who befriended him and showed him around. Tan convinced
Mcloughlin to transfer to the Tropicana from the Sheraton where afterwards he stayed
during his trips from Dec 1984 to Sept 1987.
· On 30 Oct 1987, McLoughlin arrived from Australia and registered with Tropicana. He
rented a safety deposit box as his usual practice. The box required two keys, the guest
had one and one from the management. He placed US $10,000 in one envelope and
US$5,000 in another , AU$10,000 in another envelope and other envelopes with his
passport and credit cards. On 12 Dec 1987, he took from the box the envelope with
US$5,000 and the one with AU$10,000 to go to Hong Kong for a short visit, because he
was not checking out. When he arrived in HK, the envelope with US$5,000 only
contained US$3,000, but because he had no idea if the safety deposit box has been
tampered, he thought it was just bad accounting.
· After returning to Manila, he checked out of the Tropicana on 18 Dec 1987 and left
for Australia. When he arrived he discovered that the envelope with US$10,000 was
short of US$5,000. He also noticed that the jewelry he bought in Hong Kong which he
 stored in the safety deposit box upon his return to Tropicana was likewise missing,
except for a diamond bracelet.
· He went back to the PH on 4 Apr 1988 and asked Lainez (who had custody of the
management key) if some money was missing or returned to her, to which the latter
answered there was not. He again registered at the Tropicana and rented a safety
deposit box. He placed an envelope containing US$15,000, another of AU$10,000. On
16 Apr, he opened his safety deposit box and noticed that US$2,000 and AU$4,500 was
missing from the envelopes.
· He immediately confronted Lainez and Payam who admitted that Tan opened the
safety deposit box with the key assigned to McLoughlin. McLoughlin went up to his
room where Tan was staying and confronted her. Tan admitted that she had stolen
McLoughlin’s key and was able to open the safety deposit box with the assistance of
Lopez, Payam and Lainez. Lopez also told McLoughlin that Tan stole the key assigned
to McLoughlin while the latter was asleep.
· McLoughlin requested the management for an investigation of the incident. Lopez
got in touch with Tan and arranged for a meeting with the police and McLoughlin. When
the police did not arrive, Lopez and Tan went to the room of McLoughlin at
Tropicana and thereat, Lopez wrote on a piece of paper a promissory note.
· He made Lopez and Tan sign a promissory note for him for the loss. However, Lopez
refused liability on behalf of the hotel, reasoning that McLoughlin signed an "Undertaking
for the Use of Safety Deposit Box" which disclaims any liability of the hotel for things put
inside the box.
· On 17 May 1988 McLoughlin went back to AU and consulted his lawyers. They wrote
a letter addressed to Pres. Cory Aquino which was pushed back to the DOJ and the
Western Police District. He went back from the PH to AU several times more to attend
business and follow up but the matter was only filed on 3 Dec 1990 since he was not
there to personally follow up.
· McLoughlin filed an action against YHT Realty Corporation, Lopez, Lainez, Payam
and Tan.
· The RTC rendered judgment in favor of McLoughlin. The CA modified only the
amount of damages awarded.
· Tan and Lopez, however, were not served with summons, and trial proceeded with
only Lainez, Payam and YHT Realty Corporation as defendants.
(a) whether the loss of money and jewelry is supported by the evidence. YES.
Where the credibility of a witness is an issue, the established rule is that great respect is
accorded to the evaluation of the credibility of witnesses by the trial court. The trial court
is in the best position to assess the credibility of witnesses and their testimonies
because of its unique opportunity to observe the witnesses firsthand and note their
demeanor, conduct and attitude under grilling examination.
(b) whether there was gross negligence on the part of the innkeepers
Payam and Lainez, who were employees of Tropicana, had custody of the master key of
the management when the loss took place. They even admitted that they assisted Tan
on three separate occasions in opening McLoughlin’s safety deposit box.
The management contends that McLoughlin made its employees believe that Tan
was his spouse for she was always with him most of the time. The evidence on
record is bereft of any showing that McLoughlin introduced Tan to the management as
his wife. Mere close companionship and intimacy are not enough to warrant such
conclusion. They should have confronted him as to his relationship with Tan considering
that the latter had been observed opening McLoughlin’s safety deposit box a number of
times at the early hours of the morning.
 Art 2180, par (4) of the same Code provides that the owners and managers of an
establishment or enterprise are likewise responsible for damages caused by their
employees in the service of the branches in which the latter are employed or on the
occasion of their functions. Given the fact that the loss of McLoughlin’s money was
consummated through the negligence of Tropicana’s employees both the employees
and YHT, as owner of Tropicana, should be held solidarily liable pursuant to Art 2193.
WON the "Undertaking for the Use of the Safety Deposit Box" is null and void.
Yes, it is null and void. Art. 2003[1] is controlling. This is an expression of public policy
that the hotel business like common carriers are imbued with public interest. This
responsibility cannot be waived away by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms imposed by hotel keepers on
guests for their signature.
The CA (former case) even ruled before that hotelkeepers are liable even though the
effects are not delivered to them or their employees, but it is enough that the effects are
within the hotel or inn.
Pars. 2 and 4 of the undertaking manifestly contravene Art. 2003 of the NCC.
Meanwhile, the defense that Art. 2002 exempts the hotel-keeper from liability if the loss
is due to the acts of the guest, family or visitors falls because the hotel is guilty of
negligence as well. This provision presupposes that the hotel-keeper is not guilty of
concurrent negligence or has not contributed in any degree to the occurrence of the loss.
dispositive
· Damages awarded by the lower court sustained
· US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of payment;
· Air fares for a total of 11 trips + transpo expense
· Hotel payments
· Moral 50K
· ED 10K
· AF 200K

[1] Art. 2003. The hotel-keeper cannot free himself from responsibility by posting notices
to the effect that he is not liable for the Arts brought by the guest. Any stipulation
between the hotel-keeper and the guest whereby the responsibility of the former as set
forth in Arts 1998 to 2001[37] is suppressed or diminished shall be void.

28. [G.R. No. 113931. May 6, 1998]

E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS, CONSOLIDATED BANK

AND TRUST CORPORATION, and SPOUSES RAUL and ELEA R. CLAVERIA,
respondents.

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five Thousand
Pesos (P2, 875,000.00) to finance the purchase of two (2) maritime barges and one
tugboat[3] which would be used in their molasses business. The loan was granted
subject to the condition that respondent spouses execute a chattel mortgage over the
three (3) vessels to be acquired and that a continuing guarantee be executed by Ayala
International Philippines, Inc., now herein petitioner E. Zobel, Inc. in favor of
SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty[4] were executed.

Respondent spouses defaulted in the payment of the entire obligation upon maturity.
Hence, on January 31,1991, SOLIDBANK filed a complaint for sum of money with a
prayer for a writ of preliminary attachment, against respondents spouses and petitioner.
The case was docketed as Civil Case No. 91-55909 in the Regional Trial Court of
Manila.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor of
the loan was extinguished pursuant to Article 2080 of the Civil Code of the Philippines. It
argued that it has lost its right to be subrogated to the first chattel mortgage in view of
SOLIDBANK's failure to register the chattel mortgage with the appropriate government
agency.

SOLIDBANK opposed the motion contending that Article 2080 is not applicable because
petitioner is not a guarantor but a surety.

On February 18, 1993, the trial court issued an Order, portions of which reads:

"After a careful consideration of the matter on hand, the Court finds the ground of the
motion to dismiss without merit. The document referred to as 'Continuing Guaranty'
dated August 21,1985 (Exh. 7) states as follows:

'For and in consideration of any existing indebtedness to you of Agro Brokers, a single
proprietorship owned by Mr. Raul Claveria for the payment of which the undersigned is
now obligated to you as surety and in order to induce you, in your discretion, at any
other manner, to, or at the request or for the account of the borrower, x x x '

"The provisions of the document are clear, plain and explicit.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety. Even though the title of the
document is 'Continuing Guaranty', the Court's interpretation is not limited to the title
alone but to the contents and intention of the parties more specifically if the language is
clear and positive. The obligation of the defendant Zobel being that of a surety, Art. 2080
New Civil Code will not apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and Zobel) to the plaintiff it is
requesting that the chattel mortgage on the vessels and tugboat be waived and/or
rescinded by the bank inasmuch as the said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting the claim of the defendant now that the
chattel mortgage is an essential condition of the guaranty. In its letter, it said that
because of the Continuing Guaranty in favor of the plaintiff the chattel mortgage is
rendered unnecessary and redundant.

"With regard to the claim that the failure of the plaintiff to register the chattel mortgage
with the proper government agency, i.e. with the Office of the Collector of Customs or
with the Register of Deeds makes the obligation a guaranty, the same merits a scant
consideration and could not be taken by this Court as the basis of the extinguishment of
the obligation of the defendant corporation to the plaintiff as surety. The chattel
mortgage is an additional security and should not be considered as payment of the debt
in case of failure of payment. The same is true with the failure to register, extinction of
the liability would not lie.

"WHEREFORE, the Motion to Dismiss is hereby denied and defendant E. Zobel, Inc., is
ordered to file its answer to the complaint within ten (10) days from receipt of a copy of
this Order."[5]

Petitioner moved for reconsideration but was denied on April 26,1993.[6]

Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.

On July 13,1993, the Court of Appeals rendered the assailed decision the dispositive
portion of which reads:

"WHEREFORE, finding that respondent Judge has not committed any grave abuse of
discretion in issuing the herein assailed orders, We hereby DISMISS the petition."

A motion for reconsideration filed by petitioner was denied for lack of merit on February
15,1994.

Petitioner now comes to us via this petition arguing that the respondent Court of Appeals
erred in its finding: (1) that Article 2080 of the New Civil Code which provides: "The
guarantors, even though they be solidary, are released from their obligation whenever by
some act of the creditor they cannot be subrogated to the rights, mortgages, and
preferences of the latter," is not applicable to petitioner; (2) that petitioner's obligation to
respondent SOLIDBANK under the continuing guaranty is that of a surety; and (3) that
the failure of respondent SOLIDBANK to register the chattel mortgage did not extinguish
petitioner's liability to respondent SOLIDBANK.

We shall first resolve the issue of whether or not petitioner under the "Continuing
Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.

A contract of surety is an accessory promise by which a person binds himself for another
already bound, and agrees with the creditor to satisfy the obligation if the debtor does
not.[7] A contract of guaranty, on the other hand, is a collateral undertaking to pay the
debt of another in case the latter does not pay the debt.[8]

Strictly speaking, guaranty and surety are nearly related, and many of the principles are
common to both. However, under our civil law, they may be distinguished thus: A surety
is usually bound with his principal by the same instrument, executed at the same time,
and on the same consideration. He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal. Usually, he will
not be discharged, either by the mere indulgence of the creditor to the principal, or by
want of notice of the default of the principal, no matter how much he may be injured
thereby. On the other hand, the contract of guaranty is the guarantor's own separate
undertaking, in which the principal does not join. It is usually entered into before or after
that of the principal, and is often supported on a separate consideration from that
supporting the contract of the principal. The original contract of his principal is not his
contract, and he is not bound to take notice of its non-performance. He is often
discharged by the mere indulgence of the creditor to the principal, and is usually not
liable unless notified of the default of the principal.[9]

Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer of
the solvency of the debtor and thus binds himself to pay if the principal is unable to pay
while a surety is the insurer of the debt, and he obligates himself to pay if the principal
does not pay.[10]

Based on the aforementioned definitions, it appears that the contract executed by

petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a
contract of surety. The terms of the contract categorically obligates petitioner as "surety"
to induce SOLIDBANK to extend credit to respondent spouses. This can be seen in the
following stipulations.

"For and in consideration of any existing indebtedness to you of AGRO BROKERS, a

single proprietorship owned by MR. RAUL P. CLAVERIA, of legal age, married and with
business address x x x (hereinafter called the Borrower), for the payment of which the
undersigned is now obligated to you as surety and in order to induce you, in your
discretion, at any time or from time to time hereafter, to make loans or advances or to
extend credit in any other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make any loans or advances
evidenced or secured by any notes, bills receivable, drafts, acceptances, checks or other
instruments or evidences of indebtedness x x upon which the Borrower is or may
become liable as maker, endorser, acceptor, or otherwise, the undersigned agrees to
guarantee, and does hereby guarantee, the punctual payment, at maturity or upon
demand, to you of any and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other indebtedness of every
kind which is now or may hereafter become due or owing to you by the Borrower,
together with any and all expenses which may be incurred by you in collecting all or any
such instruments or other indebtedness or obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to make or cause any and all such payments to
be made strictly in accordance with the terms and provisions of any agreement (g),
express or implied, which has (have) been or may hereafter be made or entered into by
the Borrower in reference thereto, regardless of any law, regulation or decree, now or
hereafter in effect which might in any manner affect any of the terms or provisions of any
such agreements(s) or your right with respect thereto as against the Borrower, or cause
or permit to be invoked any alteration in the time, amount or manner of payment by the
Borrower of any such instruments, obligations or indebtedness; x x x " (Italics Ours)

One need not look too deeply at the contract to determine the nature of the undertaking
and the intention of the parties. The contract clearly disclose that petitioner assumed
liability to SOLIDBANK, as a regular party to the undertaking and obligated itself as an
original promissor. It bound itself jointly and severally to the obligation with the
respondent spouses. In fact, SOLIDBANK need not resort to all other legal remedies or
exhaust respondent spouses' properties before it can hold petitioner liable for the
obligation. This can be gleaned from a reading of the stipulations in the contract, to wit:

'x x x If default be made in the payment of any of the instruments, indebtedness or other
obligation hereby guaranteed by the undersigned, or if the Borrower, or the undersigned
should die, dissolve, fail in business, or become insolvent, x x x , or if any funds or other
property of the Borrower, or of the undersigned which may be or come into your
possession or control or that of any third party acting in your behalf as aforesaid should
be attached of distrained, or should be or become subject to any mandatory order of
court or other legal process, then, or any time after the happening of any such event any
or all of the instruments of indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and payable by the
undersigned forthwith without demand of notice, and full power and authority are hereby
given you, in your discretion, to sell, assign and deliver all or any part of the property
upon which you may then have a lien hereunder at any broker's board, or at public or
private sale at your option, either for cash or for credit or for future delivery without
assumption by you of credit risk, and without either the demand, advertisement or notice
of any kind, all of which are hereby expressly waived. At any sale hereunder, you may,
at your option, purchase the whole or any part of the property so sold, free from any right
of redemption on the part of the undersigned, all such rights being also hereby waived
and released. In case of any sale and other disposition of any of the property aforesaid,
after deducting all costs and expenses of every kind for care, safekeeping, collection,
sale, delivery or otherwise, you may apply the residue of the proceeds of the sale and
other disposition thereof, to the payment or reduction, either in whole or in part, of any
one or more of the obligations or liabilities hereunder of the undersigned whether or not
except for disagreement such liabilities or obligations would then be due, making proper
allowance or interest on the obligations and liabilities not otherwise then due, and
returning the overplus, if any, to the undersigned; all without prejudice to your rights as
against the undersigned with respect to any and all amounts which may be or remain
unpaid on any of the obligations or liabilities aforesaid at any time (s)"

'Should the Borrower at this or at any future time furnish, or should be heretofore have
furnished, another surety or sureties to guarantee the payment of his obligations to you,
the undersigned hereby expressly waives all benefits to which the undersigned might be
entitled under the provisions of Article 1837 of the Civil Code (beneficio division), the
liability of the undersigned under any and all circumstances being joint and several;"
(Italics Ours)

The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation.[11] As aptly observed by the trial court,
the interpretation of a contract is not limited to the title alone but to the contents and
intention of the parties.

Having thus established that petitioner is a surety, Article 2080 of the Civil Code, relied
upon by petitioner, finds no application to the case at bar. In Bicol Savings and Loan
Association vs. Guinhawa,[12] we have ruled that Article 2080 of the New Civil Code
does not apply where the liability is as a surety, not as a guarantor.

But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register the
chattel mortgage did not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract. The pertinent portions of the
contract so provides:
"x x x the undersigned (petitioner) who hereby agrees to be and remain bound
upon this guaranty, irrespective of the existence, value or condition of any
collateral, and notwithstanding any such change, exchange, settlement,
compromise, surrender, release, sale, application, renewal or extension, and
notwithstanding also that all obligations of the Borrower to you outstanding and
unpaid at any time (s) may exceed the aggregate principal sum herein above
prescribed.

'This is a Continuing Guaranty and shall remain in full force and effect until written
notice shall have been received by you that it has been revoked by the
undersigned, but any such notice shall not be released the undersigned from any
liability as to any instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have any interest, at
the time of the receipt of such notice. No act or omission of any kind on your part
in the premises shall in any event affect or impair this guaranty, nor shall same be
affected by any change which may arise by reason of the death of the
undersigned, of any partner (s) of the undersigned, or of the Borrower, or of the
accession to any such partnership of any one or more new partners." (Italics
supplied)

In fine, we find the petition to be without merit as no reversible error was

committed by respondent Court of Appeals in rendering the assailed decision.

WHEREFORE, the decision of the respondent Court of Appeals is hereby

AFFIRMED. Costs against the petitioner.

34. G.R. No. L-49120 June 30, 1988

ESTATE OF GEORGE LITTON, petitioner,

vs.
CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.

Ruben G. Bala for respondent Mendoza.

GANCAYCO, J.:

This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a
case, who had previously assigned in favor of his creditor his litigated credit in
said case, by a deed of assignment which was duly submitted to the court, validly
enter into a compromise agreement thereafter releasing the defendant therein
from his claim without notice to his assignee? and (2) Will such previous
knowledge on the part of the defendant of the assignment made by the plaintiff
estop said defendant from invoking said compromise as a ground for dismissal of
the action against him?

The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs.
Ciriaco B. Mendoza," an action for the collection of a sum of money representing
the value of two (2) checks which plaintiff Tan claims to have been delivered to
him by defendant Mendoza, private respondent herein, by way of guaranty with a
commission.
The record discloses that the Bernal spouses2 are engaged in the manufacture of
embroidery, garments and cotton materials. Sometime in September 1963, C.B.M.
Products, 3 with Mendoza as president, offered to sell to the Bernals textile cotton
materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan.
Thus, the Bernals purchased on credit from Tan some cotton materials worth P
80,796.62, payment of which was guaranteed by Mendoza. Thereupon, Tan
delivered the said cotton materials to the Bernals. In view of the said arrangement,
on November 1963, C.B.M. Products, through Mendoza, asked and received from
the Bernals PBTC Check No. 626405 for P 80,796.62 dated February 20, 1964 with
the understanding that the said check will remain in the possession of Mendoza
until the cotton materials are finally manufactured into garments after which time
Mendoza will sell the finished products for the Bernals. Meanwhile, the said check
matured without having been cashed and Mendoza demanded the issuance of
another check 4 in the same amount without a date.

On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB
checks5 in favor of Tan in the total amount of P 80,796.62. He informed the
Bernals of the same and told them that they are indebted to him and asked the
latter to sign an instrument whereby Mendoza assigned the said amount to Insular
Products Inc. Tan had the two checks issued by Mendoza discounted in a bank.
However, the said checks were later returned to Tan with the words stamped "stop
payment" which appears to have been ordered by Mendoza for failure of the
Bernals to deposit sufficient funds for the check that the Bernals issued in favor
of Mendoza.

Hence, as adverted to above, Tan brought an action against Mendoza docketed as

Civil Case No. Q-8303 6 while the Bernals brought an action for interpleader
docketed as Civil Case No. 56850 7 for not knowing whom to pay. While both
actions were pending resolution by the trial court, on March 20, 1966, Tan
assigned in favor of George Litton, Sr. his litigatious credit * in Civil Case No.
56850 against Mendoza, duly submitted to the court, with notice to the parties. 8
The deed of assignment was framed in the following tenor:

DEED OF ASSIGNMENT

I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6

Kanlaon, Quezon City, doing business under the name and style ALTA
COMMERCIAL by way of securing or guaranteeing my obligation to Mr. GEORGE
LITTON, SR., do by these presents CEDE, ASSIGN, TRANSFER AND CONVEY unto
the said Mr. GEORGE LITTON, SR., my claim against C.B.M. Products, Inc.,
personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of Eighty-
Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62)
the balance of which, in principal, and excluding, interests, costs, damages and
attorney's fees now stands at P 76,000.00, P 4,796.62, having already been
received by the assignor on December 23, 1965, pursuant to the order of the court
in Civil Case No. 56850, C.F.I., Manila, authorizing Alfonso Tan to withdraw the
amount of P 4,796.62 then on deposit with the court. All rights, and interests in
said net amount, plus interests and costs, and less attorney's fees, in case the
amount allowed therefor be less than the amounts claimed in the relief in Civil
Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by these presents
covered by this assignment.

I further undertake to hold in trust any and all amounts which may hereafter be
realized from the aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON,
SR., and to turn over to him such amounts in application to my liability to him, as
his interest may then show, and I further undertake to cooperate towards the
successful prosecution of the aforementioned cases making available myself, as
witness or otherwise, as well as any and all documents thereto appertaining. ...9

After due trial, the lower court ruled that the said PNB checks were issued by
Mendoza in favor of Tan for a commission in the sum of P 4,847.79 and held
Mendoza liable as a drawer whose liability is primary and not merely as an
indorser and thus directed Mendoza to pay Tan the sum of P 76,000.00, the sum
still due, plus damages and attorney's fees. 10

Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A.
G.R. No. 41900-R, arguing in the main that his liability is one of an accommodation
party and not as a drawer.

On January 27, 1977, the Court of Appeals rendered a decision affirming in toto
the decision of the lower court. 11

Meanwhile, on February 2, 1971, pending the resolution of the said appeal,

Mendoza entered into a compromise agreement with Tan wherein the latter
acknowledged that all his claims against Mendoza had been settled and that by
reason of said settlement both parties mutually waive, release and quit whatever
claim, right or cause of action one may have against the other, with a provision
that the said compromise agreement shall not in any way affect the right of Tan to
enforce by appropriate action his claims against the Bernal spouses.12

On February 25, 1977, Mendoza filed a motion for reconsideration praying that the
decision of January 27, 1977 be set aside, principally anchored upon the ground
that a compromise agreement was entered into between him and Tan which in
effect released Mendoza from liability. Tan filed an opposition to this motion
claiming that the compromise agreement is null and void as he was not properly
represented by his counsel of record Atty. Quiogue, and was instead represented
by a certain Atty. Laberinto, and principally because of the deed of assignment
that he executed in favor of George Litton, Sr. alleging that with such, he has no
more right to alienate said credit.

While the case was still pending reconsideration by the respondent court, Tan, the
assignor, died leaving no properties whatever to satisfy the claim of the estate of
the late George Litton, Sr.

In its Resolution dated August 30, 1977, 13 the respondent court set aside its
decision and approved the compromise agreement.

As to the first ground invoked by Tan, now deceased, the respondent court ruled
that the non-intervention of Tan's counsel of record in the compromise agreement
does not affect the validity of the settlement on the ground that the client had an
undoubted right to compromise a suit without the intervention of his lawyer, citing
Aro vs. Nanawa.14

As to the second ground, respondent court ruled as follows:

... it is relevant to note that Paragraph 1of the deed of assignment states that the
cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way
of securing, or guaranteeing his obligation to GEORGE LITTON, SR.

Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art.
2085, Civil Code).

"Even considered as a litigations credit," which indeed characterized the claims

herein of Alfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil
Code).

Such alienation is subject to the remedies of Litton under Article 6 of the Civil
Code, whereby the waiver, release, or quit-claim made by plaintiff-appellee
Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven
prejudicial to George Litton, Sr. as assignee under the deed of assignment, may
entitle Litton to pursue his remedies against Tan.

The alienation of a litigatious credit is further subject to the debtor's right of

redemption under Article 1634 of the Civil Code.

As mentioned earlier, the assignor Tan died pending resolution of the motion for
reconsideration. The estate of George Litton, Sr., petitioner herein, as represented
by James Litton, son of George Litton, Sr. and administrator15 of the former's
estate, is now appealing the said resolution to this Court as assignee of the
amount sued in Civil Case No. Q-8303, in relation to Civil Case No. 56850.

Before resolving the main issues aforementioned, the question of legal

personality of herein petitioner to bring the instant petition for review, must be
resolved.

As a rule, the parties in an appeal through a review on certiorari are the same
original parties to the case. 16 If after the rendition of judgment the original party
dies, he should be substituted by his successor-in-interest. In this case, it is not
disputed that no proper substitution of parties was done. This notwithstanding,
the Court so holds that the same cannot and will not materially affect the legal
right of herein petitioner in instituting the instant petition in view of the tenor of
the deed of assignment, particularly paragraph two thereof 17 wherein the
assignor, Tan, assumed the responsibility to prosecute the case and to turn over
to the assignee whatever amounts may be realized in the prosecution of the suit.

We note that private respondent moved for the dismissal of the appeal without
notifying the estate of George Litton, Sr. whereas the former was fully aware of the
fact that the said estate is an assignee of Tan's right in the case litigated. 18
Hence, if herein petitioner failed to observe the proper substitution of parties
when Alfonso Tan died during the pendency of private respondent's motion for
reconsideration, no one is to blame but private respondent himself. Moreover, the
right of the petitioner to bring the present petition is well within the concept of a
real party-in-interest in the subject matter of the action. Well-settled is the rule that
a real party-in-interest is a party entitled to the avails of the suit or the party who
would be injured by the judgment. 19 We see the petitioner well within the latter
category.

Hence, as the assignee and successor-in-interest of Tan, petitioner has the

personality to bring this petition in substitution of Tan.

Now, the resolution of the main issues.

The purpose of a compromise being to replace and terminate controverted claims,

20 courts encourage the same. A compromise once approved by final order of the
court has the force of res judicata between parties and should not be disturbed
except for vices of consent or forgery. 21

In this case, petitioner seeks to set aside the said compromise on the ground that
previous thereto, Tan executed a deed of assignment in favor of George Litton, Sr.
involving the same litigated credit.

We rule for the petitioner. The fact that the deed of assignment was done by way
of securing or guaranteeing Tan's obligation in favor of George Litton, Sr., as
observed by the appellate court, will not in any way alter the resolution on the
matter. The validity of the guaranty or pledge in favor of Litton has not been
questioned. Our examination of the deed of assignment shows that it fulfills the
requisites of a valid pledge or mortgage. 22 Although it is true that Tan may
validly alienate the litigatious credit as ruled by the appellate court, citing Article
1634 of the Civil Code, said provision should not be taken to mean as a grant of an
absolute right on the part of the assignor Tan to indiscriminately dispose of the
thing or the right given as security. The Court rules that the said provision should
be read in consonance with Article 2097 of the same code. 23 Although the
pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor of
private respondent Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be alienated by the latter with due
notice to and consent of Litton, Sr. or his duly authorized representative. To allow
the assignor to dispose of or alienate the security without notice and consent of
the assignee will render nugatory the very purpose of a pledge or an assignment
of credit.

Moreover, under Article 1634, 24 the debtor has a corresponding obligation to

reimburse the assignee, Litton, Sr. for the price he paid or for the value given as
consideration for the deed of assignment. Failing in this, the alienation of the
litigated credit made by Tan in favor of private respondent by way of a
compromise agreement does not bind the assignee, petitioner herein.

Indeed, a painstaking review of the record of the case reveals that private
respondent has, from the very beginning, been fully aware of the deed of
assignment executed by Tan in favor of Litton, Sr. as said deed was duly
submitted to Branch XI of the then Court of First Instance of Manila in Civil Case
No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products is one of
the defendants and the parties were notified through their counsel. 25 As earlier
mentioned, private respondent herein is the president of C.B.M. Products, hence,
his contention that he is not aware of the said deed of assignment deserves scant
consideration from the Court. Petitioner pointed out at the same time that private
respondent together with his counsel were served with a copy of the deed of
assignment which allegation remains uncontroverted. Having such knowledge
thereof, private respondent is estopped from entering into a compromise
agreement involving the same litigated credit without notice to and consent of the
assignee, petitioner herein. More so, in the light of the fact that no reimbursement
has ever been made in favor of the assignee as required under Article 1634.
Private respondent acted in bad faith and in connivance with assignor Tan so as
to defraud the petitioner in entering into the compromise agreement.

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent

court dated August 30,1977 is hereby SET ASIDE, the said compromise agreement
being null and void, and a new one is hereby rendered reinstating its decision
dated January 27, 1977, affirming in toto the decision of the lower court. This
decision is immediately executory. No motion for extension of time to file a motion
for reconsideration will be granted.

SO ORDERED.

39. ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs.HON.
COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY

G.R. No. 103576 August 22, 1996

FACTS:
Petitioner Chua Pac, the president and general manager of co-petitioner Acme executed
a chattel mortgage in favor of private respondent Producers Bank as a security for a loan
of P3,000,000. A provision in the chattel mortgage agreement was to this effect:

"In case the MORTGAGOR executes subsequent promissory note or notes either as a
renewal of the former note, as an extension thereof, or as a new loan, or is given any
other kind of accommodations such as overdrafts, letters of credit, acceptances and bills
of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall
also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage
shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage."

In due time, the loan of P3,000,000.00 was paid. Subsequently it obtained additional
loan totalling P2,700,000.00 which was also duly paid.

Another loan was again extended (P1,000,000.00) covered by four promissory notes for
P250,000.00 each, but went unsettled prompting the bank to apply for an extrajudicial
foreclosure with the Sheriff.
ISSUE:
Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred?

HELD:
No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that
are yet to be contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old contract conformably with
the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation can constitute an act
of default on the part of the borrower of the financing agreement whereon the promise is
written but, of course, the remedy of foreclosure can only cover the debts extant at the
time of constitution and during the life of the chattel mortgage sought to be foreclosed.

40.
46. G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS,
respondents.

It appears that in order to obtain financial accommodations from herein petitioner Makati
Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc.,
discounted and assigned several receivables with the former under a Receivable
Purchase Agreement. To secure the collection of the receivables assigned, private
respondent executed a Chattel Mortgage over certain raw materials inventory as well as
a machinery described as an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure
of the properties mortgage to it. However, the Deputy Sheriff assigned to implement the
foreclosure failed to gain entry into private respondent's premises and was not able to
effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint
for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as
Civil Case No. 36040, the case before the lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's
filing of a motion for reconsideration. After several incidents, the lower court finally
issued on February 11, 1981, an order lifting the restraining order for the enforcement of
the writ of seizure and an order to break open the premises of private respondent to
enforce said writ. The lower court reaffirmed its stand upon private respondent's filing of
a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by
herein private respondent, set aside the Orders of the lower court and ordered the return
of the drive motor seized by the sheriff pursuant to said Orders, after ruling that the
machinery in suit cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code, the same
being attached to the ground by means of bolts and the only way to remove it from
respondent's plant would be to drill out or destroy the concrete floor, the reason why all
that the sheriff could do to enfore the writ was to take the main drive motor of said
machinery. The appellate court rejected petitioner's argument that private respondent is
estopped from claiming that the machine is real property by constituting a chattel
mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been denied,
petitioner has brought the case to this Court for review by writ of certiorari. It is
contended by private respondent, however, that the instant petition was rendered moot
and academic by petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.

The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by
the receipt duly signed by respondent's representative. 1 Considering that petitioner has
reserved its right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by such return may
not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the
machinery in suit is real or personal property from the point of view of the parties, with
petitioner arguing that it is a personality, while the respondent claiming the contrary, and
was sustained by the appellate court, which accordingly held that the chattel mortgage
constituted thereon is null and void, as contended by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where
this Court, speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal

property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they should not now be allowed to make an
inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented
lot to which defendants-appellants merely had a temporary right as lessee, and although
this can not in itself alone determine the status of the property, it does so when
combined with other factors to sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as personality. Finally, unlike in the Iya cases,
Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the
defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity
of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the
herein defendants-appellants, having treated the subject house as personality.
Examining the records of the instant case, We find no logical justification to exclude the
rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved in
the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree and
no innocent third party will be prejudiced thereby, there is absolutely no reason why a
machinery, which is movable in its nature and becomes immobilized only by destination
or purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court
of Appeals lays stress on the fact that the house involved therein was built on a land that
did not belong to the owner of such house. But the law makes no distinction with respect
to the ownership of the land on which the house is built and We should not lay down
distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon the property the
character determined by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement
treat as personal property that which by nature would be real property, as long as no
interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property
but was merely required and dictated on by herein petitioner to sign a printed form of
chattel mortgage which was in a blank form at the time of signing. This contention lacks
persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the
status of the subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental memorandum
in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be
a ground for rendering said contract voidable, or annullable pursuant to Article 1390 of
the new Civil Code, by a proper action in court. There is nothing on record to show that
the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify
the same. On the other hand, as pointed out by petitioner and again not refuted by
respondent, the latter has indubitably benefited from said contract. Equity dictates that
one should not benefit at the expense of another. Private respondent could not now
therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited
therefrom,

From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent. Moreover,
the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied
upon by said court is not applicable to the case at bar, the nature of the machinery and
equipment involved therein as real properties never having been disputed nor in issue,
and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case
bears more nearly perfect parity with the instant case to be the more controlling
jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are
hereby reversed and set aside, and the Orders of the lower court are hereby reinstated,
with costs against the private respondent.

SO ORDERED.

52. Suico v. Philippine National Bank

Herein petitioners, Spouses Esmeraldo and Elizabeth Suico, obtained a loan from the
Philippine National Bank (PNB) secured by a real estate mortgage[1] on real properties
in the name of the former. The petitioners were unable to pay their obligation prompting
the PNB to extrajudicially foreclose the mortgage over the subject properties before the
City Sheriff of Mandaue City under EJF Case No. 92-5-15.
The petitioners thereafter filed a Complaint against the PNB before the Regional Trial
Court (RTC) of Mandaue City, Branch 55, docketed as Civil Case No. MAN-2793 for
Declaration of Nullity of Extrajudicial Foreclosure of Mortgage.[2]
The Complaint alleged that on 6 May 1992, PNB filed with the Office of the Mandaue
City Sheriff a petition for the extrajudicial foreclosure of mortgage constituted on the
petitioners properties (subject properties) for an outstanding loan obligation amounting to
P1,991,770.38 as of 10 March 1992. The foreclosure case before the Office of the
Mandaue City Sheriff, which was docketed as EJF Case No. 92-5-15, covered the
following properties:
Petitioners claimed that during the foreclosure sale of the subject properties held on 30
October 1992, PNB, as the lone bidder, offered a bid in the amount of P8,511,000.00. By
virtue of the said bid, a Certificate of Sale of the subject properties was issued by the
Mandaue City Sheriff in favor of PNB. PNB did not pay to the Sheriff who conducted the
auction sale the amount of its bid which was P8,511,000.00 or give an accounting of
how said amount was applied against petitioners outstanding loan, which, as of 10
March 1992, amounted only to P1,991,770.38. Since the amount of the bid grossly
exceeded the amount of petitioners outstanding obligation as stated in the extrajudicial
foreclosure of mortgage, it was the legal duty of the winning bidder, PNB, to deliver to
the Mandaue City Sheriff the bid price or what was left thereof after deducting the
amount of petitioners outstanding obligation. PNB failed to deliver the amount of their bid
to the Mandaue City Sheriff or, at the very least, the amount of such bid in excess of
petitioners outstanding obligation.
One year after the issuance of the Certificate of Sale, PNB secured a Certificate of Final
Sale from the Mandaue City Sheriff and, as a result, PNB transferred registration of all
the subject properties to its name.
Owing to the failure of PNB as the winning bidder to deliver to the petitioners the amount
of its bid or even just the amount in excess of petitioners obligation, the latter averred
that the extrajudicial foreclosure conducted over the subject properties by the Mandaue
City Sheriff, as well as the Certificate of Sale and the Certificate of Finality of Sale of the
subject properties issued by the Mandaue City Sheriff, in favor of PNB, were all null and
void.

Petitioners, in their Complaint in Civil Case No. MAN-2793, prayed for

a) Declaring the Nullity of Extra-judicial Foreclosure of Mortgage under EJF Case No.
92-5-15 including the certificate of sale and the final deed of sale of the properties
affected
PNB filed a Motion to Dismiss[5] Civil Case No. MAN-2793 citing the pendency of
another action between the same parties, specifically Civil Case No. CEB-15236 before
the RTC of Cebu City entitled, PNB v. Sps. Esmeraldo and Elizabeth Suico where PNB
was seeking the payment of the balance of petitioners obligation not covered by the
proceeds of the auction sale held on 30 October 1992. PNB argued that these two cases
involve the same parties. Petitioners opposed the Motion to Dismiss filed by PNB.[6]
Subsequently, the Motion to Dismiss Civil Case No. MAN-2793 was denied in the Order
of the RTC dated 15 July 1997;[7] thus, PNB was constrained to file its Answer.[8]
PNB disputed petitioners factual narration. PNB asserted that petitioners had other loans
which had likewise become due. Petitioners outstanding obligation of P1,991,770.38 as
of 10 March 1992 was exclusive of attorneys fees, and other export related obligations
which it did not consider due and demandable as of said date. PNB maintained that the
outstanding obligation of the petitioners under their regular and export- related loans was
already more than the bid price of P8,511,000.00, contradicting the claim of surplus
proceeds due the petitioners. Petitioners were well aware that their total principal
outstanding obligation on the date of the auction sale was P5,503,293.21
PNB admitted the non-delivery of the bid price to the sheriff and the execution of the final
deed of sale, but claimed that it had not transferred in its name all the foreclosed
properties because the petition to register in its name Transfer Certificates of Title (TCT)
No. 37029 and No. 13196 were still pending.
On 2 February 1999, the RTC rendered its Decision[9] in Civil Case No. MAN-2793 for
the declaration of nullity of the extrajudicial foreclosure of mortgage, the dispositive
portion of which states:
WHEREFORE, based on the foregoing, judgment is rendered in favor of [herein
petitioners] Sps. Esmeraldo & Elizabeth Suico and against [herein respondent],
Philippine National Bank (PNB), declaring the nullity of Extrajudicial Foreclosure of
Mortgage under EJF Case No. 92-5-15, including the certificate of sale and the final
deed of sale of the subject properties; ordering the cancellation of the certificates of titles
and tax declaration already in the name of [respondent] PNB, if any, and revert the same
back to the [petitioners] name; ordering [respondent] PNB to cause a new foreclosure
proceeding, either judicially or extra-judicially.
Furnish parties thru counsels copy of this order.[10]
In granting the nullification of the extrajudicial foreclosure of mortgage, the RTC
reasoned that given that petitioners had other loan obligations which had not yet
matured on 10 March 1992 but became due by the date of the auction sale on 30
October 1992, it does not justify the shortcut taken by PNB and will not excuse it from
paying to the Sheriff who conducted the auction sale the excess bid in the foreclosure
sale. To allow PNB to do so would constitute fraud, for not only is the filing fee in the
said foreclosure inadequate but, worse, the same constitutes a misrepresentation
regarding the amount of the indebtedness to be paid in the foreclosure sale as posted
and published in the notice of sale.[11] Such misrepresentation is fatal because in an
extrajudicial foreclosure of mortgage, notice of sale is jurisdictional. Any error in the
notice of sale is fatal and invalidates the notice.[12]
When the PNB appealed its case to the Court of Appeals,[13] the appellate court
rendered a Decision[14] dated 12 April 2005, the fallo of which provides:
WHEREFORE, premises considered, the instant appeal is GRANTED. The questioned
decision of the Regional Trial Court of Mandaue City, Branch 55 dated February 2, 1999
is hereby REVERSED and SET ASIDE. Accordingly, the extra judicial foreclosure of
mortgage under EJF 92-5-15 including the certificate of sale and final deed of sale
executed appurtenant thereto are hereby declared to be valid and binding.[15]
In justifying reversal, the Court of Appeals held:
A careful scrutiny of the evidence extant on record would show that in a letter dated
January 12, 1994, [petitioners] expressly admitted that their outstanding principal
obligation amounted to P5.4 Million and in fact offered to redeem the properties at P6.5
Million. They eventually increased their offer at P7.5 Million as evidenced by that letter
dated February 4, 1994. And finally on May 16, 1994, they offered to redeem the
foreclosed properties by paying the whole amount of the obligation by installment in a
period of six years. All those offers made by the [petitioners] not only contradicted their
very assertion that their obligation is merely that amount appearing on the petition for
foreclosure but are also indicative of the fact that they have admitted the validity of the
extra judicial foreclosure proceedings and in effect have cured the impugned defect.
Thus, for the [petitioners] to insist that their obligation is only over a million is unworthy of
belief. Oddly enough, it is evident from their acts that they themselves likewise believe
otherwise.
Even assuming that indeed there was a surplus and the [PNB] is retaining more than the
proceeds of the sale than it is entitled, this fact alone will not affect the validity of the sale
but simply gives the [petitioners] a cause of action to recover such surplus. In fine, the
failure of the [PNB] to remit the surplus, if any, is not tantamount to a non-compliance of
statutory requisites that could constitute a jurisdictional defect invalidating the sale. This
situation only gives rise to a cause of action on the part of the [petitioners] to recover the
alleged surplus from the [PNB]. This ruling is in harmony with the decisional rule that in
suing for the return of the surplus proceeds, the mortgagor is deemed to have affirmed
the validity of the sale since nothing is due if no valid sale has been made.[16]
Petitioners filed a Motion for Reconsideration[17] of the foregoing Decision, but the Court
of Appeals was not persuaded. It maintained the validity of the foreclosure sale and, in
its Amended Decision dated 28 September 2005, it merely directed PNB to pay the
deficiency in the filing fees, holding thus:

WHEREFORE, Our decision dated April 12, 2005 is hereby AMENDED. [Herein
respondent PNB] is hereby required to pay the deficiency in the filing fees due on the
petition for extra judicial foreclosure sale to be based on the actual amount of mortgage
debts at the time of filing thereof. In all other respects, Our decision subject of herein
petitioners] motion for reconsideration is hereby AFFIRMED.[18]

Unflinching, petitioners elevated the case before this Court via the present Petition for
Review essentially seeking the nullification of the extrajudicial foreclosure of the
mortgage constituted on the subject properties. Petitioners forward two reasons for
declaring null and void the said extrajudicial foreclosure: (1) the alleged defect or
misrepresentation in the notice of sheriffs sale; and/or (2) failure of PNB to pay and
tender the price of its bid or the surplus thereof to the sheriff.
Petitioners argue that since the Notice of Sheriffs Sale stated that their obligation was
only P1,991,770.38 and PNB bidded P8,511,000.00, the said Notice as well as the
consequent sale of the subject properties were null and void.

It is true that statutory provisions governing publication of notice of mortgage foreclosure

sales must be strictly complied with, and that even slight deviations therefrom will
invalidate the notice and render the sale at least voidable.[19] Nonetheless, we must not
also lose sight of the fact that the purpose of the publication of the Notice of Sheriffs
Sale is to inform all interested parties of the date, time and place of the foreclosure sale
of the real property subject thereof. Logically, this not only requires that the correct date,
time and place of the foreclosure sale appear in the notice, but also that any and all
interested parties be able to determine that what is about to be sold at the foreclosure
sale is the real property in which they have an interest.[20]

Considering the purpose behind the Notice of Sheriffs Sale, we disagree with the finding
of the RTC that the discrepancy between the amount of petitioners obligation as
reflected in the Notice of Sale and the amount actually due and collected from the
petitioners at the time of the auction sale constitute fraud which renders the extrajudicial
foreclosure sale null and void.

Notices are given for the purpose of securing bidders and to prevent a sacrifice of the
property. If these objects are attained, immaterial errors and mistakes will not affect the
sufficiency of the notice; but if mistakes or omissions occur in the notices of sale, which
are calculated to deter or mislead bidders, to depreciate the value of the property, or to
prevent it from bringing a fair price, such mistakes or omissions will be fatal to the
validity of the notice, and also to the sale made pursuant thereto.[21]

All these considered, we are of the view that the Notice of Sale in this case is valid.
Petitioners failed to convince this Court that the difference between the amount stated in
the Notice of Sale and the amount of PNBs bid resulted in discouraging or misleading
bidders, depreciated the value of the property or prevented it from commanding a fair
price.

The cases cited by the RTC in its Decision do not apply herein. San Jose v. Court of
Appeals[22] refers to a Notice of Sheriffs Sale which did not state the correct number of
the transfer certificates of title of the property to be sold. This Court considered the
oversight as a substantial and fatal error which resulted in invalidating the entire notice.
The case of Community Savings and Loan Association, Inc. v. Court of Appeals[23] is
also inapplicable, because the said case refers to an extrajudicial foreclosure tainted
with fraud committed by therein petitioners, which denied therein respondents the right
to redeem the property. It actually has no reference to a Notice of Sale.

We now proceed to the effect of the non-delivery by PNB of the bid price or the surplus
to the petitioners.

The following antecedents are not disputed:

For failure to pay their loan obligation secured by a real estate mortgage on the subject
properties, PNB foreclosed the said mortgage. In its petition for foreclosure sale under
ACT No. 3135 filed before the Mandaue City Sheriff, PNB stated therein that petitioners
total outstanding obligation amounted to P1,991,770.38.[24] PNB bidded the amount of
P8,511,000.00. Admittedly, PNB did not pay its bid in cash or deliver the excess either to
the City Sheriff who conducted the bid or to the petitioners after deducting the difference
between the amount of its bid and the amount of petitioners obligation in the Notice of
Sale. The petitioners then sought to declare the nullity of the foreclosure, alleging that
their loan obligation amounted only to P1,991,770.38 in the Notice of Sale, and that PNB
did not pay its bid in cash or deliver to petitioner the surplus, which is required under the
law.[25]

On the other hand, PNB claims that petitioners loan obligation reflected in the Notice of
Sale dated 10 March 1992 did not include their other obligations, which became due at
the date of the auction sale on 10 October 1992; as well as interests, penalties, other
charges, and attorneys fees due on the said obligation.[26]

Pertinent provisions under Rule 39 of the Rules of Court on extrajudicial foreclosure sale
provide:

SEC. 21. Judgment obligee as purchaser. When the purchaser is the judgment obligee,
and no third-party claim has been filed, he need not pay the amount of the bid if it does
not exceed the amount of his judgment. If it does, he shall pay only the excess.
(Emphasis supplied.)

SEC. 39. Obligor may pay execution against obligee. After a writ of execution against
property has been issued, a person indebted to the judgment obligor may pay to the
sheriff holding the writ of execution the amount of his debt or so much thereof as may be
necessary to satisfy the judgment, in the manner prescribed in section 9 of this Rule,
and the sheriffs receipt shall be a sufficient discharge for the amount so paid or directed
to be credited by the judgment obligee on the execution.

Conspicously emphasized under Section 21 of Rule 39 is that if the amount of the loan is
equal to the amount of the bid, there is no need to pay the amount in cash. Same
provision mandates that in the absence of a third-party claim, the purchaser in an
execution sale need not pay his bid if it does not exceed the amount of the judgment;
otherwise, he shall pay only the excess.[27]

The raison de etre is that it would obviously be senseless for the Sheriff or the Notary
Public conducting the foreclosure sale to go through the idle ceremony of receiving the
money and paying it back to the creditor, under the truism that the lawmaking body did
not contemplate such a pointless application of the law in requiring that the creditor must
bid under the same conditions as any other bidder. It bears stressing that the rule holds
true only where the amount of the bid represents the total amount of the mortgage
debt.[28]

The question that needs to be addressed in this case is: considering the amount of
PNBs bid of P8,511,000.00 as against the amount of the petitioners obligation of
P1,991,770.38 in the Notice of Sale, is the PNB obliged to deliver the excess?

Petitioners insist that the PNB should deliver the excess. On the other hand PNB
counters that on the date of the auction sale on 30 October 1992, petitioners other loan
obligation already exceeded the amount of P1,991,770.38 in the Notice of Sale.

Rule 68, Section 4 of the Rules of Court provides:

SEC. 4. Disposition of proceeds of sale.- The amount realized from the foreclosure sale
of the mortgaged property shall, after deducting the costs of the sale, be paid to the
person foreclosing the mortgage, and when there shall be any balance or residue, after
paying off the mortgage debt due, the same shall be paid to junior encumbrancers in the
order of their priority, to be ascertained by the court, or if there be no such
encumbrancers or there be a balance or residue after payment to them, then to the
mortgagor or his duly authorized agent, or to the person entitled to it.
Under the above rule, the disposition of the proceeds of the sale in foreclosure shall be
as follows:

(a) first, pay the costs

(b) secondly, pay off the mortgage debt

(c) thirdly, pay the junior encumbrancers, if any in the order of priority

(d) fourthly, give the balance to the mortgagor, his agent or the person entitled to it.[29]

Based on the foregoing, after payment of the costs of suit and satisfaction of the claim of
the first mortgagee/senior mortgagee, the claim of the second mortgagee/junior
mortgagee may be satisfied from the surplus proceeds. The application of the proceeds
from the sale of the mortgaged property to the mortgagors obligation is an act of
payment, not payment by dacion; hence, it is the mortgagees duty to return any surplus
in the selling price to the mortgagor. Perforce, a mortgagee who exercises the power of
sale contained in a mortgage is considered a custodian of the fund and, being bound to
apply it properly, is liable to the persons entitled thereto if he fails to do so. And even
though the mortgagee is not strictly considered a trustee in a purely equitable sense, but
as far as concerns the unconsumed balance, the mortgagee is deemed a trustee for the
mortgagor or owner of the equity of redemption.[30]

Thus it has been held that if the mortgagee is retaining more of the proceeds of the sale
than he is entitled to, this fact alone will not affect the validity of the sale but simply give
the mortgagor a cause of action to recover such surplus.[31]

In the case before us, PNB claims that petitioners loan obligations on the date of the
auction sale were already more than the amount of P1,991,770.38 in the Notice of Sale.
In fact, PNB claims that on the date of the auction sale, petitioners principal obligation,
plus penalties, interests, attorneys fees and other charges were already beyond the
amount of its bid of P8,511,000.00.

After a careful review of the evidence on record, we find that the same is insufficient to
support PNBs claim. Instead, what is available on record is petitioners Statement of
Account as prepared by PNB and attached as Annex A[32] to its Answer with
counterclaim.[33] In this Statement of Account, petitioners principal obligation with
interest/penalty and attorneys fees as of 30 October 1992 already amounted to
P6,409,814.92.

Although petitioners denied the amounts reflected in the Statement of Account from
PNB, they did not interpose any defense to refute the computations therein. Petitioners
mere denials, far from being compelling, had nothing to offer by way of evidence. This
then enfeebles the foundation of petitioners protestation and will not suffice to overcome
the computation of their loan obligations as presented in the Statement of Account
submitted by PNB.[34]

Noticeably, this Statement of Account is the only piece of evidence available before us
from which we can determine the outstanding obligations of petitioners to PNB as of the
date of the auction sale on 10 October 1992.

It did not escape the attention of this Court that petitioners wrote a number of letters to
PNB almost two years after the auction sale,[35] in which they offered to redeem the
property. In their last letter, petitioners offered to redeem their foreclosed properties for
P9,500,000.00. However, these letters by themselves cannot be used as bases to
support PNBs claim that petitioners obligation is more than its bid of P8,500,000.00,
without any other evidence. There was no computation presented to show how
petitioners obligation already reached P9,500,000.00. Petitioners could very well have
offered such an amount on the basis of the value of the foreclosed properties rather than
their total obligation to PNB. We cannot take petitioners offer to redeem their properties
in the amount of P9,500,000.00 on its face as an admission of the amount of their
obligation to PNB without any supporting evidence.

Given that the Statement of Account from PNB, being the only existing documentary
evidence to support its claim, shows that petitioners loan obligations to PNB as of 30
October 1992 amounted to P6,409,814.92, and considering that the amount of PNBs bid
is P8,511,000.00, there is clearly an excess in the bid price which PNB must return,
together with the interest computed in accordance with the guidelines laid down by the
court in Eastern Shipping Lines v. Court of Appeals,[36] regarding the manner of
computing legal interest, viz:
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an

interest on the amount of damages awarded may be imposed at the discretion of the
court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the quantification of damages may
be deemed to have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of credit.

In Philippine National Bank v. Court of Appeals,[37] it was held that:

The rate of 12% interest referred to in Cir. 416 applies only to:

Loan or forbearance of money, or to cases where money is transferred from one person
to another and the obligation to return the same or a portion thereof is adjudged. Any
other monetary judgment which does not involve or which has nothing to do with loans
or forbearance of any, money, goods or credit does not fall within its coverage for such
imposition is not within the ambit of the authority granted to the Central Bank. When an
obligation not constituting a loan or forbearance of money is breached then an interest
on the amount of damages awarded may be imposed at the discretion of the court at the
rate of 6% per annum in accordance with Art. 2209 of the Civil Code. Indeed, the
monetary judgment in favor of private respondent does not involve a loan or forbearance
of money, hence the proper imposable rate of interest is six (6%) per cent.

Using the above rule as yardstick, since the responsibility of PNB arises not from a loan
or forbearance of money which bears an interest rate of 12%, the proper rate of interest
for the amount which PNB must return to the petitioners is only 6%. This interest
according to Eastern Shipping shall be computed from the time of the filing of the
complaint. However, once the judgment becomes final and executory, the "interim period
from the finality of judgment awarding a monetary claim and until payment thereof, is
deemed to be equivalent to a forbearance of credit. Thus, in accordance with the
pronouncement in Eastern Shipping, the rate of 12% per annum should be imposed, to
be computed from the time the judgment becomes final and executory until fully
satisfied.

It must be emphasized, however, that our holding in this case does not preclude PNB
from proving and recovering in a proper proceeding any deficiency in the amount of
petitioners loan obligation that may have accrued after the date of the auction sale.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated 12

April 2005 is MODIFIED in that the PNB is directed to return to the petitioners the
amount of P2,101,185.08 with interest computed at 6% per annum from the time of the
filing of the complaint until its full payment before finality of judgment. Thereafter, if the
amount adjudged remains unpaid, the interest rate shall be 12% per annum computed
from the time the judgment became final and executory until fully satisfied. Costs against
private respondent.