Republic of the Philippines execution issued to implement the order for indemnification was returned unsatisfied
SUPREME COURT as plaintiff was totally insolvent. 5
Manila
EN BANC
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, ReginoHermosisima& E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant DiosdadoYuliongsiu 1 was the owner of two (2) vessels,
namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at
P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased
by him from the Philippine Shipping Commission, by installment or on account. As of
January or February, 1943, plaintiff had paid to the Philippine Shipping Commission
only the sum of P76,500 and the balance of the purchase price was payable at
P50,000 a year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant
Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged
the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as
evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day
and duly registered with the office of the Collector of Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of
P20,000. The remaining balance was renewed by the execution of two (2) promissory
notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was
due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was
due on June 25, 1948. These two notes were never paid at all by plaintiff on their
respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two other
accused for estafa thru falsification of commercial documents, because plaintiff had,
as last indorsee, deposited with defendant bank, from March 11 to March 31,
1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer
thereof — one of the co-accused — had no funds in the drawee bank. However, in
connivance with one employee of defendant bank, plaintiff was able to withdraw the
amount credited to him before the discovery of the defraudation on April 2, 1948.
Plaintiff and his co-accused were convicted by the trial court and sentenced to
indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was
affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of
Meanwhile, together with the institution of the criminal action, defendant bank
took physical possession of three pledged vessels while they were at the Port of
Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu
Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to
the terms of the pledge contract, executed a document of sale, Exhibit "4",
transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant
bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the
Philippine Shipping Commission which rescinded the sale to plaintiff on September 8,
1948, for failure to pay the remaining installments on the purchase price thereof. 7 The
other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank
to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance of
Cebu to recover the three vessels or their value and damages from defendant bank.
The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages.
After issues were joined, a pretrial was held resulting in a partial stipulation of facts
dated October 2, 1958, reciting most of the facts above-narrated. During the course of
the trial, defendant amended its answer reducing its claim from P202,000 to
P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the
bank's taking of physical possession of the vessels on April 6, 1948 was justified by
the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the
pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as
stipulated in the pledge contract was likewise valid; and (c) that the defendant bank
should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account
balance, or set-off these sums against the indemnity which plaintiff was ordered to
pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought
the appeal to Us, the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this
Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the
creditor defendant could not take possession of the chattels object thereof until after
there has been default. The submission is without merit. The parties stipulated as a
fact that Exhibit "A" & "1-Bank" is a pledge contract —
3. That a credit line of P50,000.00 was extended to the plaintiff by the
defendant Bank, and the plaintiff obtained and received from the said Bank
the sum of P50,000.00, and in order to guarantee the payment of this loan,
the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly
registered with the Office of the Collector of Customs for the Port of Cebu on
the date appearing therein; (Emphasis supplied)1äwphï1.ñët
 Necessarily, this judicial admission binds the plaintiff. Without any showing that
this was made thru palpable mistake, no amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession
of the vessels. While it is true that plaintiff continued operating the vessels after the
pledge contract was entered into, his possession was expressly made "subject to the
order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11being
new — cannot apply to the pledge contract here which was entered into on June 30,
1947. On the other hand, there is an authority supporting the proposition that the
pledgee can temporarily entrust the physical possession of the chattels pledged to the
pledgor without invalidating the pledge. In such a case, the pledgor is regarded as
holding the pledged property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is
insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which
ruled that there has to be actual delivery of the chattels pledged. But then there is
also BancoEspañol-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery
would suffice. An examination of the peculiar nature of the things pledged in the two
cases will readily dispel the apparent contradiction between the two rulings. In Betita
v. Ganzon, the objects pledged — carabaos — were easily capable of actual, manual
delivery unto the pledgee. In BancoEspañol-Filipino v. Peterson, the objects pledged
— goods contained in a warehouse — were hardly capable of actual, manual delivery
in the sense that it was impractical as a whole for the particular transaction and would
have been an unreasonable requirement. Thus, for purposes of showing the transfer
of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In
other words, the type of delivery will depend upon the nature and the peculiar
circumstances of each case. The parties here agreed that the vessels be delivered by
the "pledgor to the pledgor who shall hold said property subject to the order of the
pledgee." Considering the circumstances of this case and the nature of the objects
pledged, i.e., vessels used in maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full
control of the vessels thru the plaintiff, the former could take actual possession at any
time during the life of the pledge to make more effective its security. Its taking of the
vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified
considering that plaintiff had just defrauded the defendant bank in the huge sum of
P184,000.
The stand We have taken is not without precedent. The Supreme Court of
Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Quesibien la naturaleza del contrato de prendaconsiste en
pasarlascosas a poder del acreedor o de un tercero y no quedar en la del
deudor, como ha sucedido en el caso de autos, es lo
ciertoquetodaslaspartesinteresadas, o seanacreedor, deudor y Sociedad,
convinieronquecontinuaran los coches en poder del deudorpara no
suspender el trafico, y el derecho de no uso de la prendapertenence al
deudor, y el de dejar la cosabajosuresponsabilidad al acreedor, y ambos
convinieronporcreerloutilparalaspartescontratantes, y estas no
reclamanperjuicios no se infringio, entre otrosestearticulo.
In the second assignment of error imputed to the lower court plaintiff-appellant
attacks the validity of the private sale of the pledged vessels in favor of the defendant
bank itself. It is contended first, that the cases holding that the statutory requirements
as to public sales with prior notice in connection with foreclosure proceedings are
waivable, are no longer authoritative in view of the passage of Act 3135, as
amended; second, that the charter of defendant bank does not allow it to buy the
property object of foreclosure in case of private sales; and third, that the price
obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v. De
Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative
despite the passage of Act 3135. This law refers only, and is limited, to foreclosure
of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not
apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure
sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the
sale is public, the bank could purchase the whole or part of the property sold " free
from any right of redemption on the part of the mortgagor or pledgor." This even
argues against plaintiff's case since the import thereof is this if the sale were private
and the bank became the purchaser, the mortgagor or pledgor could redeem the
property. Hence, plaintiff could have recovered the vessels by exercising this right of
redemption. He is the only one to blame for not doing so.
Regarding the third contention, on the assumption that the purchase price was
unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of
this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation
to return the P184,000 fraudulently taken by him from defendant bank.
The last assignment of error has to do with the damages allegedly suffered by
plaintiff-appellant by virtue of the taking of the vessels. But in view of the results
reached above, there is no more need to discuss the same.
On the whole, We cannot say the lower court erred in disposing of the case as
it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did
defraud the defendant bank first. If the latter countered with the seizure and sale of
the pledged vessels pursuant to the pledge contract, it was only to protect its interests
after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-
appellant did not come to court with clean hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs
against plaintiff-appellant.So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro,
Angeles and Fernando, JJ., concur.1äwphï1.ñët
G.R. No. L-24137 March 29, 1926
EULOGIO BETITA, plaintiff-appellee,
vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-
appellants.
Padilla, Trenas and Magalona for appellants.
Varela and Ybiernas for appellee.
OSTRAND, J.:
This action is brought to recover the possession of four carabaos with damages in the
sum of P200. Briefly stated, the facts are as follows: On May 15, 1924, the defendant
Alejo de la Flor recovered a judgment against TiburciaBuhayan for the sum of P140
with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on
the carabaos in question which were found in the possession of one Simon Jacinto
but registered in the name of TiburciaBuhayan. The plaintiff herein, EulogioBetita,
presented a third party claim (terceria) alleging that the carabaos had been
mortgaged to him and as evidence thereof presented a document dated May 6, 1924,
but the sheriff proceeded with the sale of the animals at public auction where they
were purchased by the defendant Clemente Perdena for the sum of P200, and this
action was thereupon brought.
The document upon which the plaintiff bases his cause of action is in the Visayan
dialect and in translation reads as follows:
I, TiburciaBuhatan, of age, widow and resident of the sitio of Jimamanay, municipality
of Balasan, Province of Iloilo, Philippine Islands, do hereby execute this document
extrajudicially and state that I am indebted to Mr.EulogioBetita, resident of the
municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470,
Philippine currency, and was so indebted since the year 1922, and as a security to
my creditor I hereby offer four head of carabaos belonging to me exclusively (three
females and one male), the certificates of registration of said animals being Nos.
2832851, 4670520, 4670521 and 4670522, which I delivered to said
Mr.EulogioBetita.
I hereby promise to pay said debt in the coming month of February, 1925, in case I
will not be able to pay, Mr.EulogioBetita may dispose of the carabaos given as
security for said debt.
This document is a new one or a renewal of our former document because the first
carabaos mortgaged died and were substituted for by the newly branded ones."
In testimony whereof and not knowing how to sign my name, I caused my name to be
written and marked same with my right thumb.
Estancia, May 6, 1924.
(Marked). TIBURCIA BUHAYAN
Signed in the presence of:
MIGUEL MERCURIO
TIRZO ZEPEDA
The court below held that inasmuch as this document was prior in date to the
judgment under which the execution was levied, it was a preferred credit and
judgment was rendered in favor of the plaintiff for the possession of the carabaos,
without damages and without costs. From this judgment the defendants appeal.
The judgment must be reversed unless the document above quoted can be
considered either a chattel mortgage or else a pledge. That it is not a sufficient chattel
mortgage is evident; it does not meet the requirements of section 5 of the Chattel
Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel
mortgage, is consequently of no effect as against third parties
(Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi.,
216; Benedicto de Tarrosa vs. F. M. Yap Tico& Co. and Provincial Sheriff of
Occidental Negros, 46 Phil., 753).
Neither did the document constitute a sufficient pledge of the property valid against
third parties. Article 1865 of the Civil Code provides that "no pledge shall be effective
as against third parties unless evidence of its date appears in a public instrument."
The document in question is not public, but it is suggested that its filing with the sheriff
in connection with the terceria gave in the effect of a public instrument and served to
fix the date of the pledge, and that it therefore fulfills the requirements of article 1865.
Assuming, without conceding, that the filing of the document with the sheriff had that
effect, it seems nevertheless obvious that the pledge only became effective as
against the plaintiff in execution from the date of the filing and did not rise superior to
the execution attachment previously levied (see Civil Code, article 1227).
Manresa, in commenting on article 1865, says:
ART. 1865. A pledge will not be valid against a third party if the certainty of
the date is not expressed in a public instrument.
This article, the precept of which did not exist in our old law, answers the
necessity for not disturbing the relationship or the status of the ownership of
things with hidden or simulated contracts of pledge, in the same way and for
the identical reasons that were taken into account by the mortgage law in
order to suppress the implied and legal mortgages which produce so much
instability in real property.
Considering the effects of a contract of pledge, it is easily understood that,
without this warranty demanded by law, the case may happen wherein a
debtor in bad faith from the moment that he sees his movable property in
 danger of execution may attempt to withdraw the same from the action of
justice and the reach of his creditors by simulating, through criminal
confabulations, anterior and fraudulent alterations in his possession by
means of feigned contracts of this nature; and, with the object of avoiding or
preventing such abuses, almost all the foreign writers advise that, for the
effectiveness of the pledge, it be demanded as a precise condition that in
every case the contract be executed in a public writing, for, otherwise, the
determination of its date will be rendered difficult and its proof more so, even
in cases in which it is executed before witnesses, due to the difficulty to be
encountered in seeking those before whom it was executed.
Our code has not gone so far, for it does not demand in express terms that
in all cases the pledge be constituted or formalized in a public writing, nor
even in private document, but only that the certainty of the date be
expressed in the first of the said class of instruments in order that it may be
valid against a third party; and, in default of any express provision of law, in
the cases where no agreement requiring the execution in a public writing
exists, it should be subjected to the general rule, and especially to that
established in the last paragraph of article 1280, according to which all
contracts not included in the foregoing cases of the said article should be
made in writing even though it be private, whenever the amount of the
presentation of one or of the two contracting parties exceeds 1,500 pesetas.
(Vol. 12, ed., p. 421.)
If the mere filing of a private document with the sheriff after the levy of execution can
create a lien of pledge superior to the attachment, the purpose of the provisions of
article 1865 as explained by Manresa clearly be defeated. Such could not have been
the intention of the authors of the Code. (See also Ocejo, Perez & Co. vs.International
Banking Corporation, 37 Phil., 631 and Tec Bi & Co. Chartered Bank of India,
Australia & China, 41 Phil., 596.)
The alleged pledge is also ineffective for another reason, namely, that the plaintiff
pledgee never had actual possession of the property within the meaning of article
1863 of the Civil Code. But it is argued that at the time of the levy the animals in
question were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's
tenant; and that the tenant's possession was the possession of his landlord.
It appears, however, from the evidence that though not legally married, Simon Jacinto
and TiburciaBuhayan were living together as husband and wife and had been so
living for many years. Testifying as a witness for the plaintiff, Jacinto on cross-
examination made the following statements:
Q. But the caraballas in question had never been in possession of
EulogioBetita? — A. The three young ones did not get into his hands.
Q. And the others? — A. Sometimes they were in the hands of Betita and at
other times in the hands of Buhayan.
Q. Those are the caraballas which formerly were mortgaged by Buhayan to
Betita, isn't that so? — A. Yes, sir.
Q. And the four carabaos now in question had never been in possession of
Betita, but were in your possession? — A. When I worked they were in my
hands.
Q. And before you worked, these caraballas were in possession of your
mistress, TiburciaBuhayan? — A. Yes, sir.
Q. Do you mean to say that from the possession of TiburciaBuhayan the
animals passed immediately into your possession? — A. Yes sir.
This testimony is substantially in accord with that of the defendant sheriff to the effect
that he found the animals at the place where TiburciaBuhayan was living. Article 1863
of the Civil Code reads as follows:
In addition to the requisites mentioned in article 1857, it shall be necessary,
in order to constitute the contract of pledge, that the pledge be placed in the
possession of the creditor or of a third person appointed by common
consent.
In his commentary on this article Manresa says:
This requisite is most essential and is characteristic of a pledge without
which the contract cannot be regarded as entered into or completed,
because, precisely, in this delivery lies the security of the pledge. Therefore,
in order that the contract of pledge may be complete, it is indispensable that
the aforesaid delivery take place . . . . (P. 411, supra.)
It is, of course, evident that the delivery of possession referred to in article 1863
implies a change in the actual possession of the property pledged and that a mere
symbolic delivery is not sufficient. In the present case the animals in question were in
the possession of TiburciaBuhayan and Simon Jacinto before the alleged pledge was
entered into and apparently remained with them until the execution was levied, and
there was no actual delivery of possession to the plaintiff himself. There was therefore
in reality no change in possession.
It may further be noted that the alleged relation of landlord and tenant between the
plaintiff and Simon Jacinto is somewhat obscure and it is, perhaps, doubtful if any
tenancy, properly speaking, existed. The land cultivated by Jacinto was not the
property of the plaintiff, but it appears that a part of the products was to be applied
towards the payment of TiburciaBuhayan's debt to the plaintiff. Jacinto states that he
was not a tenant until after the pledge was made.
From what has been said it follows that the judgment appealed from must be
reversed and it is ordered and adjudged that the plaintiff take nothing by his action.
Without costs.So ordered.
G.R. No. L-6342 January 26, 1954
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
LAUREANO ATENDIDO, defendants-appellant.
Nicolas Fernandez for appellee.
Gaudencio L. Atendido for appellant.
BAUTISTA, ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Nueva Ecija which
orders the defendant to pay to the plaintiff the sum of P3,000, with interest thereon at
the rate of 6% per annum from June 26, 1940, and the costs of action.
On June 26, 1940, LaureanoAtendido obtained from the Philippine National Bank a
loan of P3,000 payable in 120 days with interests at 6% per annum from the date of
maturity. To guarantee the payment of the obligation the borrower pledged to the
bank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng
Siong Lam & Co. in San Miguel, Bulacan, and to that effect the borrower endorsed in
favor of the bank the corresponding warehouse receipt. Before the maturity of the
loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse.
When the loan matured the borrower failed to pay either the principal or the interest
and so the present action was instituted.
Defendant set up a special defense and a counterclaim. As regards the former,
defendant claimed that the warehouse receipt covering the palay which was given as
security having been endorsed in blank in favor of the bank, and the palay having
been lost or disappeared, he thereby became relieved of liability. And, by way of
counterclaim, defendant claimed that, as a corollary to his theory, he is entitled to an
indemnity which represents the difference between the value of the palay lost and the
amount of his obligation.
The case was submitted on an agreed statements of facts and thereupon the court
rendered judgment as stated in the early part of this decision.
Defendant took the case on appeal to the Court of Appeals but later it was certified to
this Court on the ground that the question involved is purely one of law.
The only issue involved in this appeal is whether the surrender of the warehouse
receipt covering the 2,000 cavanes of palay given as a security, endorsed in blank, to
appellee, has the effect of transferring their title or ownership to said appellee, or it
should be considered merely as a guarantee to secure the payment of the obligation
of appellant.
In upholding the view of appellee, the lower court said: "The surrendering of
warehouse receipt No. S-1719 covering the 2,000 cavanes of palay by the defendant
in favor of the plaintiff was not that of a final transfer of that warehouse receipt but
merely as a guarantee to the fulfillment of the original obligation of P3,000.00. In other
word, plaintiff corporation had no right to dispose (of) the warehouse receipt until after
the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes of palay
were not in the first place in the actual possession of plaintiff corporation, although
symbolically speaking the delivery of the warehouse receipt was actually done to the
bank."
We hold this finding to be correct not only because it is in line with the nature of a
contract of pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but
is supported by the stipulations embodied in the contract signed by appellant when he
secured the loan from the appellee. There is no question that the 2,000 cavanes of
palay covered by the warehouse receipt were given to appellee only as a guarantee
to secure the fulfillment by appellant of his obligation. This clearly appears in the
contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were
given as a collateral security. The delivery of said palay being merely by way of
security, it follows that by the very nature of the transaction its ownership remains
with the pledgor subject only to foreclose in case of non-fulfillment of the obligation.
By this we mean that if the obligation is not paid upon maturity the most that the
pledgee can do is to sell the property and apply the proceeds to the payment of the
obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil
Code). This is the essence of this contract, for, according to law, a pledgee cannot
become the owner of, nor appropriate to himself, the thing given in pledge (Article
1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the
owner of the thing pledged during the pendency of the obligation, it stands to reason
that in case of loss of the property, the loss should be borne by the pledgor. The fact
that the warehouse receipt covering the palay was delivered, endorsed in blank, to
the bank does not alter the situation, the purpose of such endorsement being merely
to transfer the juridical possession of the property to the pledgee and to forestall any
possible disposition thereof on the part of the pledgor. This is true notwithstanding the
provisions to the contrary of the Warehouse Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil.,
765) which involves a similar transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is
transferred or endorsed to a creditor only to secure the payment of a loan or
debt, the transferee or endorsee does not automatically become the owner
of the goods covered by the warehouse receipt or quedan but he merely
retains the right to keep and with the consent of the owner to sell them so as
to satisfy the obligation from the proceeds of the sale, this for the simple
reason that the transaction involved is not a sale but only a mortgage or
pledge, and that if the property covered by the quedans or warehouse
receipts is lost without the fault or negligence of the mortgagee or pledgee or
the transferee or endorsee of the warehouse receipt or quedan, then said
goods are to be regarded as lost on account of the real owner, mortgagor or
pledgor.
Wherefore, the decision appealed from is affirmed, with costs against appellant.
Bengzon, Padilla, Montemayor, Jugo, Reyes and Labrador, JJ., concur.
G.R. No. L-21069 October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No.
49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity
Co., Inc. the sum of P2,565.00 with interest at 12-½% per annum from July 13, 1954;
P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys'
fees in an amount equivalent to 15% of the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the
Civil Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of
Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of
attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the
Court of First Instance of Manila. Velayo undertook to pay the surety company an
annual premium of P112.00; to indemnify the Company for any damage and loss of
whatsoever kind and nature that it shall or may suffer, as well as reimburse the same
for all money it should pay or become liable to pay under the bond including costs
and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of
jewelry to the Surety Company "for the latter's further protection", with power to sell
the same in case the surety paid or become obligated to pay any amount of money in
connection with said bond, applying the proceeds to the payment of any amounts it
paid or will be liable to pay, and turning the balance, if any, to the persons entitled
thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo
Velayo, and execution having been returned unsatisfied, the surety company was
forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the
latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing
therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay
the balance, the surety company brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged jewelry extinguished any further
liability on his part under Article 2115 of the 1950 Civil Code, which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are equal to the amount
of the principal obligation, interest and expenses in a proper case. If the
price of the sale is more than said amount, the debtor shall not be entitled to
the excess, unless it is otherwise agreed. If the price of the sale is less,
neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against him.
Appealed to the Court of First Instance, the defense was once more overruled, and
the case decided in the terms set down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal pp.
71-72):
It is thus crystal clear that the main agreement between the parties is the
Indemnity Agreement and if the pieces of jewelry mentioned by the
defendant were delivered to the plaintiff, it was merely as an added
protection to the latter. There was no understanding that, should the same
be sold at public auction and the value thereof should be short of the
undertaking, the defendant would have no further liability to the plaintiff. On
the contrary, the last portion of the said agreement specifies that in case the
said collateral should diminish in value, the plaintiff may demand additional
securities. This stipulation is incompatible with the idea of pledge as a
principal agreement. In this case, the status of the pledge is nothing more
nor less than that of a mortgage given as a collateral for the principal
obligation in which the creditor is entitled to a deficiency judgment for the
balance should the collateral not command the price equal to the
undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff
to secure this obligation has already been sold for only the amount of
P235.00, the liability of the defendant should be limited to the difference
between the amounts of P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed
decision is unsound. The accessory character is of the essence of pledge and
mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of
these contracts is that they be constituted to secure the fulfillment of a principal
obligation, which in the present case is Velayo's undertaking to indemnify the surety
company for any disbursements made on account of its attachment counterbond.
Hence, the fact that the pledge is not the principal agreement is of no significance nor
is it an obstacle to the application of Article 2115 of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the
pledged chattels must be derived from stipulation. This is incorrect, because Article
2115, in its last portion, clearly establishes that the extinction of the principal
obligation supervenes by operation of imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled to recover
the deficiency notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By electing
to sell the articles pledged, instead of suing on the principal obligation, the creditor
has waived any other remedy, and must abide by the results of the sale. No
deficiency is recoverable.

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

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

Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro,

Angeles and Fernando, JJ.,concur.
 No. 021, 053, 022 & 097;
THIRD DIVISION Julia Generoso .. 1,100 shares covered by Stock Certificates
SPOUSES BONIFACIO and G.R. No. 132287 No. 085, 051, 086 & 084;
FAUSTINA PARAY, and TeresitaNatividad.. 440 shares covered by Stock Certificates
VIDAL ESPELETA, Present: Nos. 054 & 055[2]
Petitioners,
QUISUMBING, J., When the Parays attempted to foreclose the pledges on account of respondents
Chairman, failure to pay their loans, respondents filed complaints with the Regional Trial Court
CARPIO, (RTC) of Cebu City. The actions, which were consolidated and tried before RTC
- versus - CARPIO-MORALES, and Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements,
TINGA, JJ. among others. However the RTC, in its decision [3] dated 14 October 1988, dismissed
the complaint and gave due course to the foreclosure and sale at public auction of the
DRA. ABDULIA C. RODRIGUEZ, Promulgated: various pledges subject of these two cases.[4] This decision attained finality after it
MIGUELA R. JARIOL assisted by her was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment
husband ANTOLIN JARIOL, SR., January 24, 2006 was issued on 14 August 1991.
LEONORA NOLASCO assisted by her
husband FELICIANO NOLASCO, Respondents then received Notices of Sale which indicated that the pledged shares
DOLORES SOBERANO assisted by her were to be sold at public auction on 4 November 1991. However, before the
husband JOSE SOBERANO, JR., JULIA scheduled date of auction, all of respondents caused the consignation with the RTC
R. GENEROSO, TERESITA R. NATIVIDAD Clerk of Court of various amounts. It was claimed that respondents had attempted to
and GENOVEVA R. SORONIO assisted by tender these payments to the Parays, but had been rebuffed. The deposited amounts
her husband ALFONSO SORONIO, were as follows:
Respondents.
Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991
x---------------------------------------------------------------------------------x Leonora R. Nolasco .277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio425,353.50 .. 14 Oct. 1991
DECISION 38,385.44 .. 14 Oct. 1991
Julia R. Generoso ..638,385.00 .. 25 Oct. 1991
TINGA, J.: Teresita R. Natividad .264,375.00 .. 11 Nov. 1991
Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991
The assailed decision of the Court of Appeals took off on the premise that pledged 520,216.39 ..11 Nov. 1991
shares of stock auctioned off in a notarial sale could still be redeemed by their MiguelaJariol . 490,000.00.. 18 Oct. 1991
owners. This notion is wrong, and we thus reverse. 88,000.00 ..18 Oct. 1991[5]
Notwithstanding the consignations, the public auction took place as scheduled, with
The facts, as culled from the record, follow. petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of
the pledged shares. None of respondents participated or appeared at the auction of 4
Respondents were the owners, in their respective personal capacities, of shares of November 1991.
stock in a corporation known as the Quirino-Leonor-Rodriguez Realty
Inc.[1] Sometime during the years 1979 to 1980, respondents secured by way of Respondents instead filed on 13 November 1991 a complaint seeking the declaration
pledge of some of their shares of stock to petitioners Bonifacio and FaustinaParay of nullity of the concluded public auction. The complaint, docketed as Civil Case No.
(Parays) the payment of certain loan obligations. The shares pledged are listed CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued
below: that their tender of payment and subsequent consignations served to extinguish their
loan obligations and discharged the pledge contracts. Petitioners countered that the
Miguel Rodriguez Jariol .1,000 shares covered by Stock Certifi- auction sale was conducted pursuant to the final and executory judgment in Civil
cates No. 011, 060, 061 & 062; Cases Nos. R-20120 and 20131, and that the tender of payment and consignations
Abdulia C. Rodriguez . 300 shares covered by Stock Certificates were made long after their obligations had fallen due.
No. 023 & 093;
Leonora R. Nolasco .. 407 shares covered by Stock Certificates The Cebu City RTC dismissed the complaint, expressing agreement with the position
No. 091 & 092; of the Parays.[6] It held, among others that respondents had failed to tender or
GenovevaSoronio. 699 shares covered by Stock Certificates consign payments within a reasonable period after default and that the proper remedy
No. 025, 059 & 099; of respondents was to have participated in the auction sale.[7] The Court of Appeals
Dolores R. Soberano. 699 shares covered by Stock Certificates Eighth Division however reversed the RTC on appeal, ruling that the consignations
extinguished the loan obligations and the subject pledge contracts; and the auction
sale of 4 November 1991 as null and void.[8] Most crucially, the appellate court chose
to uphold the sufficiency of the consignations owing to an imputed policy of the law
that favored redemption and mandated a liberal construction to redemption laws. The
attempts at payment by respondents were characterized as made in the exercise of
the right of redemption.
The Court of Appeals likewise found fault with the auction sale, holding that
there was a need to individually sell the various shares of stock as they had belonged
to different pledgors. Thus, it was observed that the minutes of the auction sale
should have specified in detail the bids submitted for each of the shares of the
pledgors for the purpose of knowing the price to be paid by the different pledgors
upon redemption of the auctioned sales of stock.
Petitioners now argue before this Court that they were authorized to refuse
as they did the tender of payment since they were undertaking the auction sale
pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131,
which did not authorize the payment of the principal obligation by respondents. They
point out that the amounts consigned could not extinguish the principal loan
obligations of respondents since they were not sufficient to cover the interests due on
the debt. They likewise argue that the essential procedural requisites for the auction
sale had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was that
the consignations made by respondents should be construed in light of the rules of
redemption, as if respondents were exercising such right. In that perspective, the
Court of Appeals made three crucial conclusions favorable to respondents: that their
act of consigning the payments with the RTC should be deemed done in the exercise
of their right of redemption; that the buyer at public auction does not ipso
facto become the owner of the pledged shares pending the lapse of the one-year
redemptive period; and that the collective sale of the shares of stock belonging to
several individual owners without specification of the apportionment in the
applications of payment deprives the individual owners of the opportunity to know of
the price they would have to pay for the purpose of exercising the right of redemption.
The appellate courts dwelling on the right of redemption is utterly off-tangent.
The right of redemption involves payments made by debtors after the foreclosure of
their properties, and not those made or attempted to be made, as in this case, before
the foreclosure sale. The proper focus of the Court of Appeals should have been
whether the consignations made by respondents sufficiently acquitted them of their
principal obligations. A pledge contract is an accessory contract, and is necessarily
discharged if the principal obligation is extinguished.
Nonetheless, the Court is now confronted with this rather new fangled
theory, as propounded by the Court of Appeals, involving the right of redemption over
pledged properties. We have no hesitation in pronouncing such theory as
discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares was
an extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale
as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge
occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if
the credit has not been satisfied in due time, is to proceed before a Notary Public to
the sale of the thing pledged.[9]
In this case, petitioners attempted as early as 1980 to proceed extrajudicially
with the sale of the pledged shares by public auction. However, extrajudicial sale was
stayed with the filing of Civil Cases No. R-20120 and 20131, which sought to annul
the pledge contracts. The final and executory judgment in those cases affirmed the
pledge contracts and disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered
dismissing the complaints at bar, and
(1) Declaring the various pledges covered in Civil Cases Nos. R-
20120 and R-20131 valid and effective; and
(2) Giving due course to the foreclosure and sale at public auction
of the various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED.[10]
The phrase giving due course to the foreclosure and sale at public auction of
the various pledges subject of these two cases may give rise to the impression that
such sale is judicial in character. While the decision did authorize the sale by public
auction, such declaration could not detract from the fact that the sale so authorized is
actually extrajudicial in character. Note that the final judgment in said cases expressly
did not direct the sale by public auction of the pledged shares, but instead upheld the
right of the Parays to conduct such sale at their own volition.
Indeed, as affirmed by the Civil Code,[11] the decision to proceed with the
sale by public auction remains in the sole discretion of the Parays, who could very
well choose not to hold the sale without violating the final judgments in the
aforementioned civil cases. If the sale were truly in compliance with a final judgment
or order, the Parays would have no choice but to stage the sale for then the order
directing the sale arises from judicial compulsion. But nothing in the dispositive
portion directed the sale at public auction as a mandatory recourse, and properly so
since the sale of pledged property in public auction is, by virtue of the Civil Code,
extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court
applies only to execution sales, more precisely execution sales of real property.
The Court of Appeals expressly asserted the notion that pledged property,
necessarily personal in character, may be redeemed by the creditor after being sold
at public auction. Yet, as a fundamental matter, does the right of redemption exist
over personal property? No law or jurisprudence establishes or affirms such right.
Indeed, no such right exists.
 The right to redeem property sold as security for the satisfaction of an
unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary
right, which, after the sale of property on execution, leaves the judgment debtor and
vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by
the persons named in the statute.[12]
The right of redemption over mortgaged real property sold extrajudicially is
established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books which vests
the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage
Law, ostensibly could have served as the vehicle for any legislative intent to bestow a
right of redemption over personal property, since that law governs the extrajudicial
sale of mortgaged personal property, but the statute is definitely silent on the point.
And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the
Court of Appeals, starkly utters that the right of redemption applies to real properties,
not personal properties, sold on execution.
Tellingly, this Court, as early as 1927, rejected the proposition that personal
property may be covered by the right of redemption. In Sibal 1. v. Valdez,[13] the Court
ruled that sugar cane crops are personal property, and thus, not subject to the right of
redemption.[14] No countervailing statute has been enacted since then that would
accord the right of redemption over personal property, hence the Court can affirm this
decades-old ruling as effective to date.
Since the pledged shares in this case are not subject to redemption, the
Court of Appeals had no business invoking and applying the inexistent right of
redemption. We cannot thus agree that the consigned payments should be treated
with liberality, or somehow construed as having been made in the exercise of the right
of redemption. We also must reject the appellate courts declaration that the buyer of
at the public auction is not ipso facto rendered the owner of the auctioned shares,
since the debtor enjoys the one-year redemptive period to redeem the property.
Obviously, since there is no right to redeem personal property, the rights of ownership
vested unto the purchaser at the foreclosure sale are not entangled in any suspensive
condition that is implicit in a redemptive period.
The Court of Appeals also found fault with the apparent sale in bulk of the
pledged shares, notwithstanding the fact that these shares were owned by several
people, on the premise the pledgors would be denied the opportunity to know exactly
how much they would need to shoulder to exercise the right to redemption. This
concern is obviously rendered a non-issue by the fact that there can be no right to
redemption in the first place. Rule 39 of the Rules of Court does provide for instances
when properties foreclosed at the same time must be sold separately, such as in the
case of lot sales for real property under Section 19. However, these instances again
pertain to execution sales and not extrajudicial sales. No provision in the Rules of
Court or in any law requires that pledged properties sold at auction be sold
separately.
On the other hand, under the Civil Code, it is the pledgee, and not the
pledgor, who is given the right to choose which of the items should be sold if two or
more things are pledged.[15] No similar option is given to pledgors under the Civil
Code. Moreover, there is nothing in the Civil Code provisions governing the
extrajudicial sale of pledged properties that prohibits the pledgee of several different
pledge contracts from auctioning all of the pledged properties on a single occasion, or
from the buyer at the auction sale in purchasing all the pledged properties with a
single purchase price. The relative insignificance of ascertaining the definite
apportionments of the sale price to the individual shares lies in the fact that once a
pledged item is sold at auction, neither the pledgee nor the pledgor can recover
whatever deficiency or excess there may be between the purchase price and the
amount of the principal obligation.[16]
A different ruling though would obtain if at the auction, a bidder expressed
the desire to bid on a determinate number or portion of the pledged shares. In such a
case, there may lie the need to ascertain with particularity which of the shares are
covered by the bid price, since not all of the shares may be sold at the auction and
correspondingly not all of the pledge contracts extinguished. The same situation also
would lie if one or some of the owners of the pledged shares participated in the
auction, bidding only on their respective pledged shares. However, in this case, none
of the pledgors participated in the auction, and the sole bidder cast his bid for all of
the shares. There obviously is no longer any practical reason to apportion the bid
price to the respective shares, since no matter how slight or significant the value of
the purchase price for the individual share is, the sale is completed, with the pledgor
and the pledgee not entitled to recover the excess or the deficiency, as the case may
be. To invalidate the subject auction solely on this point serves no cause other than to
celebrate formality for formalitys sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and
cannot be resurrected. The question though yet remains whether the consignations
made by respondents extinguished their respective pledge contracts in favor of the
Parays so as to enjoin the latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges
should be terminated as well. Article 2098 of the Civil Code provides that the right of
the creditor to retain possession of the pledged item exists only until the debt is paid.
Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return
of the thing pledged against the will of the creditor, unless and until he has paid the
debt and its interest. At the same time, the right of the pledgee to foreclose the pledge
is also established under the Civil Code. When the credit has not been satisfied in
due time, the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.
Respondents argue that their various consignations made prior to the
auction sale discharged them from the loan and the pledge agreements. They are
mistaken.
Petitioners point out that while the amounts consigned by respondents could
answer for their respective principal loan obligations, they were not sufficient to cover
the interests due on these loans, which were pegged at the rate of 5% per month or
60% per annum. Before this Court, respondents, save for Dolores Soberano, do not
contest this interest rate as alleged by petitioners. Soberano, on the other hand,
challenges this interest rate as usurious.[17]
The particular pledge contracts did not form part of the records elevated to
this Court. However, the 5% monthly interest rate was noted in the statement of facts
in the 14 October 1988 RTC Decision which had since become final. Moreover, the
said decision pronounced that even assuming that the interest rates of the various
loans were 5% per month, it is doubtful whether the interests so charged were
exorbitantly or excessively usurious. This is because for sometime now, usury has
become legally inexistent.[18] The finality of this 1988 Decision is a settled fact, and
thus the time to challenge the validity of the 5% monthly interest rate had long
passed. With that in mind, there is no reason for the Court to disagree with petitioners
that in order that the consignation could have the effect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the 5%
monthly interests thereon.

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

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

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

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

WHEREFORE, the petition is GRANTED. The assailed decision of the Court

of Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch 16,
dated 18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.