Finals: Credtran Cases 2r5h14

Credit Transactions 1st Batch-Jess

PNB v. Se, Jr., GR 119231, 18 April 1996 Noah’s Sugar Ark Refinery issued five warehouse receipts which were negotiated and endorsed to Ramos and Zoleta who failed to pay PNB for the loans that matured where they used said quedans as security for the loans. PNB demanded to Noah’s Ark delivery of the sugars which Noah’s Ark refused to comply with alleging ownership over the sugars when Zoleta and Ramos also failed to pay Noah’s Ark on the dishonored checks. SC ruled that PNB owns the sugars. Noah’s Ark is now claiing warehouse lien over the sugars and refused to deliver to PNB until that is paid. W/N PNB is entitled to a warehouse lien? Yes, delivery of sugars shall be effected only upon payment of the storage fees. Imperative is the right of the warehouseman to demand payment of his lien at this juncture, because, in accordance with Section 29 of the Warehouse Receipts Law, the warehouseman loses his lien upon goods by surrendering possession thereof. In other words, the lien may be lost where the warehouseman surrenders the possession of the goods without requiring payment of his lien, because a warehousemans lien is possessory in nature. PNB is estopped from disclaiming liability since it anchors its claim on the warehouse receipt to which the conditions were written including the payment of the warehouse lien.

Feati Bank and Trust v CA, GR 94209, 30 April 1991 Villlaluz agreed to sell to Christiansen 2000 lauan logs at $27/cubic meter which Christiansen would sell at $37/cubic meter for a profit of $10/cubic meter. Hanmi as consignee issued an irrevocable Letter of credit through Security Pacific National Bank of Los Angeles (issuing bank) which was

mailed to FEATI Bank as notifying bank with the instruction that the LOC be forwarded to the beneficiary. One of the documents required was a certification from Han-Axel Chrisitiansen, Ship and Merchandise Broker, stating that the logs have been approved prior to shipment in accordance with the and conditions of corresponding purchase order. This was not complied with despite several demands of Villaluz. Delivery pushed through without compliance of the condition so FEATI refused to advance the payment to Villaluz. A complaint was filed making FEATI and Christiansen solidarily liable to Villaluz when Christiansen absconded. W/N FEATI is liable to Villaluz? A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary Thus the rule of strict compliance. Letters of credit are to be strictly complied with which documents, and shipping documents must be followed as stated in the letter. There is no discretion in the bank or trust company to waive any requirements. The functions assumed by a correspondent bank are classified according to the obligations taken up by it. The correspondent bank may be called a notifying bank, a negotiating bank, or a confirming bank. In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or transmit to the beneficiary the existence of the letter of credit. In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller and its liability is a primary one as if the correspondent bank itself had issued the letter of credit. In this case, FEATI was only a notifying bank its responsibility was solely to notify and/or transmit the documentary of credit to the private 1

Credit Transactions respondent which was the instruction of the issuing bank that the LOC e forwarded to the beneficiary. FEATI is not liable.

MWSS v Daway and Maynilad Water, GR 160732, 21 June 3004 MWSS granted Maynilad a 25 year concession agreement to manage water sewerage in the West Zone Area. As consideration, Maynilad would pay on various dates so Maynilad arranged for a 3-year facility with different banks led by Citycorp which led to the issuance of an irrevocable LOC. Because of the depreciation of the Philippine peso, Maynilad asked for a mechanism to make up for the losses but MWSS refused. Maynilad also filed a force majeure notice that MWSS made a formula so that Maynilad could pay the fees agreed upon. Maynilad filed for a rehabilitation order so a stay order was issued. MWSS submitted a written notice to Citicorp to demand the payment of US$98,239,640.15 to be drawn from the Irrevocable Letter of Credit. W/N WON respondent JUDGE erred in ening petitioner from seeking the payment of concession fees from the Irrevocable Letter of Credit issued by the bank. Yes. The irrevocable LOC was not included in the financial statement of Maynilad as part of its assets and liabilities. Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. The participating banks’ obligation are solidary

with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor. Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case.

Colinares and Veloso v CA, GR No. 90828, 5 September 2000 Colinares and Veloso had a contract with Carmelite Sisters for the renovation of their convent. They obtained construction materials from CM Builders and the day after applied for LOC with PBC for the payment of the materials. Petitioner signed a trust receipt as security. When demand was made, Veloso confessed that they lost money because of the Carmelite Project. While the modification for payment was ongoing, PBC filed a violation of Trust Receipts Law charging Colinares and Veloso of estafa. W/N petitioners violated the Trust Receipts Law There are two possible situations in a trust receipt transaction. The first is covered by the provision which refers to money received under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers to merchandise received under the obligation to return it (devolvera) to the owner. Transaction was a simple loan since petitioners obtained the materials a day before they obtained the loan ad signed the trust receipt. This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. 2

Credit Transactions

Velasquez v Solidbank, G.R. No. 157309, 28 March 2008 Velasquez under the business name of Wilderness Trading is engaged with the selling of sea cucumbers. Business transaction happened between Wilderness and Goldwell Trading of Korea so as payment, Goldwell opened a LOC with Bank of Seoul. Velasquez applied for credit accommodation in lieu of the two successful LOC transactions but the third transaction, a sight draft was negotiated to be drawn on the LOC and a letter of undertaking was made with Velasquez making a promise that the Bank of Seoul will accept the draft and holds himself liable if the draft will not be accepted. Solidbank advanced payment to Velasquez but Bank of Seoul failed to collect with Goldwell as it issued a stop payment order after receiving sacks that do not contain dried sea cucumbers but contained soil instead. Solidbank demanded payment to which Velazquez failed to pay. W/N Velazquez is liable under the sight draft or letter of undertaking? He is not liable under the sight draft but he is liable for the letter of the undertaking since it is a separate contract from the sight draft. The liability of petitioner under the letter of undertaking is direct and primary. It is independent from his liability under the sight draft. Liability subsists even if the sight draft was dishonored for non-acceptance or nonpayment. Petitioner is not only a mere guarantor under the letter of credit as he cannot be both the primary debtor and guarantor of his own debt. This is inconsistent with the very purpose of a guarantee which is for the creditor to proceed

against a third person if the debtor defaults in his obligation. Petitioner bound himself liable to respondent under the letter of undertaking if the sight draft is not accepted. He also warranted that the sight draft is genuine; that the respondent bank will pay it in accordance to the and that he will be held liable for the full amount of the draft upon demand. Petitioner breached his undertaking when the Bank of Seoul dishonored the sight draft and Goldwell Trading ordered a stop payment order.

Philippine Blooming Mills v CA, GR 142381, 15 Oct 2003 Ching, VP Phil. Blooming Mills (PBM) in his personal capacity and not as corporate officer signed a deed of suretyship as primary obligor and not a mere guarantor of Traders Royal Bank to warrant the due and punctual payment of Phil. Blooming Mills on the amounts PBM may now be indebted or may be hereafter indebted to TRB . Traders Royal Bank granted PBM application by Ching in his capacity as VP of LOC. In the undertaking, it states that the one who signed agree to be solidarily liable to pay on demand on the bank. PBM also obtained a trust loan and Ching signed as co-maker in the Promissory Note. PBM defaulted in payment. Upon application of PBM for suspension of payments with SEC, SEC placed all of PBM’s assets under rehabilitation receivership of Kalaw, Escaler and Associates. W/N Ching is liable for the PBM obligations contracted after execution of Deed of Suretyship?

Ching is liable for credit obligations contracted by PBM against TRB before and after the execution of the 21 July 1977 Deed of Suretyship. This is evident from the deed itself, referring to amounts PBM "may now be indebted or may 3

Credit Transactions hereafter become indebted" to TRB. The law expressly allows a suretyship for "future debts". Article 2053 of the Civil Code provides: A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured. A guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. In granting the loan to PBM, TRB required Ching’s surety precisely to insure full recovery of the loan in case PBM becomes insolvent or fails to pay in full. This was the very purpose of the surety. Thus, Ching cannot use PBM’s failure to pay in full as justification for his own reduced liability to TRB. As surety, Ching agreed to pay in full PBM’s loan in case PBM fails to pay in full for any reason, including its insolvency.TRB, as creditor, has the right under the surety to proceed against Ching for the entire amount of PBM’s loan. This is clear from Article 1216 of the Civil Code: ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Atok Finance v CA, G.R. No. 80078, 18 May 1993 Sanyu Chemical Corp. as principal along with private stockholders executed a Continuing Suretysip Agreement in favour of Atok as creditor. Sanyu Chemical assigned its trade

receivables in consideration of receipt to Atok Finance of a certain amount and assigned receivables carried a standard term of 30 days(could be extended up to 120 days as commercial practice). Atok filed an action against Sanyu, Arrieta spouses, Pablito Bermudo (stockholders) to collect a sum of money. Atok alleged that Sanyu failed to collect amount of the trade receivables and sought dismissal as claim had already prescribed under Art. 1629of CC. They contended that the Continuing Suretyship is null and void being an accessory contract, at the time it was executed; Sanyu had no pre-existing obligation due to Atok. W/N Whether the individual private respondents may be held solidarily liable with Sanyu Chemical under the provisions of the Continuing Suretyship Agreement, or whether that Agreement must be held null and void as having been executed without consideration and without a pre-existing principal obligation to sustain it. A guaranty or a suretyship agreement is an accessory contract in the sense that it is entered into for the purpose of securing the performance of another obligation which is denominated as the principal obligation. It is also true that Article 2052 of the Civil Code states that "a guarantee cannot exist without a valid obligation." Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation." Moreover, Article 2053 of the Civil Code states that a guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured." Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or a financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor 4

Credit Transactions to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor. As we understand it, this is precisely what happened in the case at bar.

1st Batch – Kylie Municipality of Gasan v Marasigan, GR 43486, 30 Sept 1936 Gasan granted Marasigan the privilege of gathering whitefish pawn. TO secure payment of license fees, Marasigan filed a bond subscribed by Sevilla & Luna, who bound themselves to pay IF Marasigan failed to comply with the contract. The Provincial Board declared contract invalid, therefore Gasan awarded the privilege to Napa, who in turn failed to pay the deposit and yielded the privilege to Marasigan. The Municipality told Marasigan that the contract was to be effective so the municipality sought to recover from Marasigan + sureties the license fee.

be valid when Gasan canceled it, so they are no longer bound to comply with the of the contract. A guaranty cannot exist without a valid obligation. It is not presumed. It must be expressed and cannot extend beyond its specified limits.

Willex Plastic Industries v CA, G.R. No. 103066. 25 April 1996 IRIC and IU (accommodation party) bound themselves solidarily, through a “continuing surety agreement” to pay obligations of every kind to Manilabank.

IRIC and Willex also executed a “continuing guaranty” in favor of IU for consideration of the sums obtained by IRIC from IU. IU paid to Manilabank the sum representing IRIC’s outstanding obligation. IU was succeeded by Atrium Capital Corp. Atrium demanded from IRIC and Willex the payment of what IU had paid to Manilabank. Neither of them paid so Atrium filed a case against IRIC and Willex.

Issue: W/N Miguel + Sevilla & Luna are bound to pay the license fee

Willex’s Argument: the continuing agreement, being an accessory contract, cannot legally exist of the absence of a valid principal obligation. Since it is not a party to either of the surety or to the loan agreement bet. IRIC, Manilabank & Interbank, so it is not liable.

Held: No. They are no longer bound to pay the license fee. The Contract between Gasan and Marasigan was ceased to

Issue: W/N, under the “continuing guaranty”, Willex may be held tly and severally liable with IRIC 5

Credit Transactions Held: Yes. Willex’s argument that is untenable. Willex agreed to be tly and severally guarantee IRIC’s obligation. The consideration necessary to a surety obligation need not to directly to the surety, as a consideration to the principal alone is sufficient . It is never necessary that a guarantor or surety should receive any part of the benefit is such there be, accruing to this principal.

Syquia v Palma, G.R. No. L-41320, 9 November 1934 BPI obtained a favorable judgment against Perfecto & Felipe Jacinto and Rafael Palma. BPI assigned and transferred said judgment to Gregorio Syquia. Widow of Syquia filed a complaint against respondents. In this case, Palma is a guarantor. Palma filed no separate answer nor special defenses available to him as guarantor, but merely ed in the answer of his co-defendants pleading that the bank had been fully paid. Issue: W/N Palma, as guarantor, is liable for the debt Held: The action as to the guarantor is premature. The judgment creditor has made no demand on Palma. ing him in the suit against the principal debtor is not the demand intended by Art. 1832. According to such, that demand can be made only after judgment on the debt, for obviously the "exhaustion of the principal's property" — the benefit of which the guarantor claims — cannot even begin to take place before judgment has been obtained. Only then can the creditor "levy upon the property of the principal" — only then can the liability of the creditor begin under article 1833 of the Civil Code.

There is no proof that Jacintos are insolvent. The judgment creditor has not exhausted his remedies against the principal debtors.

E. Zobel, Inc. v CA, GR 113931, 6 May 1998 Sps. Claveria under “Agro Brokers” defaulted upon maturity in paying Solidbank so Solidbank filed a complaint for sum of money against Sps. Claveria and E. Zobel (guarantor). E. Zobel moved to dismiss claiming that its liability as guarantor under the Continuing Agreement is extinguished pursuant to Art. 2080- ("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”) RTC held that E. Zobel signed as surety based on the provisions of the documents, thus Art. 2080 will not apply. Issue: W/N E. Zobel obligated itself to Solidbank as guarantor or surety Held: E. Zobel is a surety, thus Art. 2080 will not apply. 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. Contract of guaranty is a collateral undertaking to pay the debt of another in case the latter does not pay the debt. A surety is distinguished from a guaranty in that a guarantor is the insurer of the solvency of the debtor and thus binds 6

Credit Transactions 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. The contract clearly discloses that petitioner assumed liability to Solidbank, as a regular party to the undertaking and obligated itself as an original promissor. It bound itself tly 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. The use of the term "guarantee" does not ipso facto mean that the contract is one of guaranty. Interpretation of the contract is not with the title but with the content.

International Finance Corp. v Imperial Textile Mills IFC extended to PPIC a loan. ITM and Grantex agreed to guarantee PPIC’s obligations. PPIC defaulted despite demand so its properties in Laguna were foreclosed however the proceeds of the sale left a balance, which PPIC also failed to pay. IFC demanded payment from ITM and Grantex, as guarantors.

ITM’s argument: by the of the Guarantee Agreement, it was merely a guarantor. Ambiguity in the Agreement should be construed against IFC -- the party that drafted it. Issue: W/N ITM and Grandtex are sureties

Held: Creditor was able to show that, although the agreement was denominated as a Guarantee Agreement, the contract is a surety: “The Guarantors tly and severally, irrevocably, absolutely unconditionally guarantee, as primary obligors and not as sureties…” When the obligor undertakes to be tly and severally liable = obligation is solidary. If solidary liability was instituted to guarantee a principal obligation, contract is one of SURETYSHIP. Art 1216: The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.

Ong v Phil, Commercial Int’l Bank, G.R. 160466, 17 Jan 2005 BMC filed a petition for rehabilitation and suspension of payments with the Securities and Exchange Commission (SEC) after its properties were attached by creditors. PCIB considered BMC in default of its obligations and sought to collect payment from petitioners (president & treasurer) as sureties. PCIB filed a case of collection of a sum of money against the petitioners as sureties on 3 PNs they issued to secure BMC’s loans. Petitioners moved to dismiss - under the MOA, the creditor banks agreed to temporarily suspend any pending civil action against BMC, so the benefits of the MOA should be extended to petitioners, as BMCs sureties. 7

Credit Transactions Issues: W/N the benefits of the MOA extends to the petitioners Held: No. Art. 2063 & 2081 refer to contracts of guaranty and do not apply to suretyship contracts. In this case, petitioners are sureties of BMC’s debts. The provisions of the MOA regarding the suspension of payments by BMC and the nonfiling of collection suits by the creditor banks pertain only to the property of the principal debtor BMC. Nothing in the MOA that involves the liabilities of the sureties. o GUARANTOR insures the solvency of the debtor  Gives rise to a subsidiary obligation on the part of the guarantor.  EXCUSSION: only after the creditor has proceeded against the properties of the principal debtor

o SURETY is an insurer of the debt itself

 Gives rise to a principal/solidary obligation on the part of the surety  the benefit of excussion is not available to the surety as he is principally liable  1216: creditor can go directly against the surety although the principal debtor is solvent/able to  surety is directly, equally and absolutely bound with the principal debtor for the payment of and the debt remains unsatisfied can a guarantor can be held liable to answer pay or no demand is made on him the debt and is deemed as an original promissor and debtor from the beginning

Manila Surety v Batu Construction, GR L-9353, 21 May 1957

Batus requested the petitioner to place a surety bond in favor of RP for a construction project of Bacarra Bridge for any damage, loss, costs, charges or expenses of whatever kind in nature. The government annulled the project because of unsatisfactory work, and notified Manila Surety that it would hold it liable to the amount incurred by the government in building the bridge.

Defendant’s argument: remedy provided for in the last paragraph of article 2071 of the new Civil Code may be availed of by the guarantor only and not by a surety. Issue: W/N the last paragraph of Art. 2071 may be availed of by a Surety Art. 2071. The guarantor, even before having paid, may proceed against the principal debtor: (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years; (6) If there are reasonable grounds to fear that the principal debtor intends to abscond; (7) If the principal debtor is in imminent danger of becoming insolvent. In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor.

Held: Plaintiff's cause of action comes under par. 1 of article 2071 of the new Civil Code, because the action brought by 8

Credit Transactions Ricardo Fernandez and 105 persons is in connection with the construction of the Bacarra Bridge. However, although there is an allegation in the verified complaint that the defendants were in imminent danger of insolvency and that they were removing or disposing, or about to remove or dispose, of their properties, with intent to defraud their creditors, particularly the plaintiff Company, still such allegation was not proved, and the fact that relief prayed for in the complaint for security that shall protect it from any proceedings by the creditor and from the danger of the defendants becoming insolvent is inconsistent with the state of insolvency of the defendants or their being in imminent danger of insolvency, the order awarding 6 per cent on the sum of P35 in possession of the Provincial Treasurer owned by the defendant Gonzalo P. Amboy garnished by virtue of the writ of attachment, from the date of the garnishment until its discharge, and denying recovery of the amounts of damages claimed to have been suffered by the defendants, is affirmed, the defendants not having appealed therefrom.

NCC, the absence of express stipulation characterizing an obligation as solidary makes the obligation t. The Court likewise deemed it proper to discusses on the difference between a situation of solidary liability and a suretyship: As to credit’s remedy (same) In both a solidary obligation and a surety, the Creditor may compel the debtor or the surety to answer for the full amount of the principal debt; however As to debtor or surety’s remedy (different) In a solidary obligation, the solidary debtor can only claim from his co-debtors only the share which corresponds to each with interest for the payment already made and not the full amount In a suretyship, a surety may claim the full amount, by virtue of his right to subrogation and his right to indemnity The rights as established and granted to the guarantor by Arts. 2066 (right of indemnification) and 2067 (right of subrogation) apply to a Suretyship

Philippine Blooming Mills v CA, GR 142381, 15 Oct 2003

1st Batch-Louisse

Escano v Ortigas, GR 151953, 29 June 2007 Falcon originally obtained a loan from PD and as security thereto, Escano executed a guaranty. After making few installments, Falcon defaulted. Hence, PD filed a collection suit against Falcon as principal and Escano as guarantor on the basis of an Undertaking signed by the latter purportedly binding himself solidarily with PD. Ruling: Escaño, Silos and Matti are merely tly liable to Ortigas, and not solidarily liable to Ortigas. Under Art. 1217

In 1980, Traders Royal Bank granted PBM Letters of Credit in favor of PBM. Subsequently, Alfredo Ching in his capacity as an officer of PBM executed a Deed of Suretyship to warrant the timely payment of all present and future obligations of the company. During the course of its business, PBM obtained further loans from TRB. However, PBM defaulted, hence, TRB went after Ching and compelled the latter to settle PBM’s loan obligations. Issue: W/N AC is liable for the PBM obligations contracted after execution of Deed of Suretyship 9

Credit Transactions Ruling: Ching is liable for credit obligations by PBM ] against TRB before and after the execution of the Deed of Suretyship, as evidenced by stipulations in the Deed. Surety ensures that the principal pays the debt or performs its obligation covering a series of transactions, generally for an indefinite time or until revoked liable Article 2033: A guaranty may also be given as security for future debts… There can be no claim against the guarantor until the debt is liquidated Concept of Continuing Guaranty 1. Not limited to a single transaction, but which contemplates a future course of dealing, 2. Contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable 3. Particular words that indicate continuing guaranty: “from time to time”; “any debt”; “any transaction”; “at any time”; “or such time”

Adriano v Pangilinan, GR 137471, 16 January 2002 Adriano,owner of a parcel of land,entrusted the original owner’s copy of TCT to Angelina Salvador, a distant relative, to secure a mortgage. However, without Adriano’s consent and knowledge, Salvador mortgaged the property to a third party. Upon discovery, Adriano filed a complaint against Salvador in connection with the execution of the allegedly falsified deed of real estate mortgage. Issue: WON consent is essential in determining who must bear the loss in assailing the validity of a mortgage contract Ruling: It is clear that petitioner who is undisputedly the property owner -- did not mortgage the property himself. Neither did he authorize Salvador or anyone else to do so

Article 2085 of the Civil Code enumerates the essential requisites of a mortgage, (1) That they be constituted to secure the fulfillment of a principal obligation; (2) That the pledgor or mortgagor be the absolute owner of the thing pledged (3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally authorized for that purpose. In the case at bar, not only was it proven in the trial court that the signature of the mortgagor had been forged, but also that somebody else -- an impostor -- had pretended to be the former when the mortgagee made an ocular inspection of the subject property. It is clear that petitioner who is undisputedly the property owner -- did not mortgage the property himself. Neither did he authorize Salvador or anyone else to do so Dizon v Suntay, GR L-30817, 29 September 1972 Suntay commissioned the sale of her 3 carat diamond ring to Clarita Sison. However, far from complying with her obligation, Clarita instead of selling the jewelry pledged it with Dizon’s pawnshop. Upon discovering ehat happened, Suntay went and sought to recover the ring from Dizon but the latter refused. Issue: WON Suntay has a right to possess the pledged ring Ruling: Art. 559 of the CC states that the possession of a movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. If the possessor of a movable lost of which the owner has been unlawfully 10

Credit Transactions deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the Cavite Development v Lim, G.R. No. 131679. 1 Feb 2000 Guansing obtained a loan from CDB, as security, he mortgaged his land . However, due to his failure to pay his obligation, CDB foreclosed and sold the property in a public auction. Afterwhich, Lim, offered to purchase the property from CDB, however, after learning that the land is not ed under the name of the original mortgagor, Lim filed an action for specific performance and impugning serious misrepresentation against CDB. Issue: WoN petitioner bank should be liable to respondents for the nullity of the contract of sale between them Ruling: CDB cannot be considered a mortgagee in good faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the mortgagor's title, they cannot be excused from the duty of exercising the due diligence required of banking. A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason Art. 2085 of the Civil Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible

foreclosure sale should the mortgagor default in the payment of the loan. Exception: “Doctrine of mortgagee in good faith”: if buyer/mortgagees are in good faith, the sale is given effect by reason of public policy. Based on the rule that all persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the face of the title. If they relied upon it in good faith, the buyer/mortgagee is protected. DBP v CA, GR 118367 & 118342, 5 January 1998 Cuba ontained 3 loans from DBP, as security thereto, she executed 2 Deeds of assignment of her leasehold rights. Subsequently, Cuba defaulted, however, without any foreclosure proceeding, the bank appropriated for themselves the Leasehold right. Issue: WON the act of DBP in appropriating to itself CUBAs leasehold rights without foreclosure proceeding valid Ruling: The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period.

Bustamante v Rosel, GR 126800, 29 November 1999 11

Credit Transactions Bustamante obtained a loan from Rosel secured by a REM with a stipulation that in the event of default the lender has an option to buy the property. Bustamante defaulted. Issue: WON the stipulation automatically appropriating the subject lot to Rosel valid. Ruling. No. The stipulation constitutes pactum commissoriam The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of nonpayment of the principal obligation within the stipulated period.” In this case, the intent to appropriate the property given as collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the preagreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the collateral in the event of non-payment of the loan. This is within the concept of pactum commissorium. Such stipulation is void. 2nd Batch-Jess

Ong v Roban Lending, GR 172592, 9 July 2008 Sps. Ong obtained several loans from Roban Lending Corporation (Roban) secured by real estate mortgage on the sps. Ong’s parcels of land in Tarlac City. Both parties executed a amendment to amended real estate mortgae consolidating their loans and on the same date, spouses execute a dacion in payment agreement where spouses assigned their properties to Roban in payment of their total obligation. A MOA was executed that spouses will pay the consolidated outstanding obligations within one year or

failure to do would mean that spouses Ong agree to the dacion in payment in favour of Roban. Subsequently, Ong filed a complaint against Roan alleging that the MOA having the dacion in payment was void for being pactum commisorium. W/N the Memorandum of Agreement and Dation in Payment constitute pactum commissorium prohibited under Art.2088 NCC? The Memorandum of Agreement and Dacion in Payment constitute pactum commissorium, which is prohibited under Article 2088 of the Civil Code which provides: The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void." The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the mortgaged property without the need of any foreclosure proceedings, are: (1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. Here, the MOA and the Dacion in Payment contain no provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to it ownership of the properties. In effect, Roban automatically acquires ownership of the properties upon petitioners’ failure to pay their debt within the stipulated period. 12

Credit Transactions Uy Tong v CA, G.R. No. 77465 21 May 1988

b) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the principal obligation within the stipulated period.

Spouses use to be owners of Apt. 307 of LIgaya Bldg. with leasehold rights for 99 years over the land where the building stands. The land is ed in the name of Ligaya Investments. Ligaya Investments sold Apt. 307 and leased a portion of the land to spouses who purchased from Bayanihan Automotive 7 units of motor vehicles evidenced by a written agreement. Spouses after making a down payment of PHP7000 failed to pay the balance. After a complaint was filed, an order from CFI ordering spouses to pay the balance plus interest and failure to do so, Bayanihan awould execute a deed of absolute sale over Apt. 307. Bayanihan executed the deed of assignment but spouses refused to vacate. Bayanihan filed for recovery of possession which rendered a favorale decision so spouses filed a petion alleging that the deed of assignment is in the nature of pactum commisorium.

A perusal of the of the questioned agreement evinces no basis for the application of the pactum commissorium provision.

W/N deed of assignment is null and void because it is in the nature of a pactum commissorium and/or was borne out of the same

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio"

Pactum Commissorium has 2 elements: a) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation; and

First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks. Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the petitioners defaulted in their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the petitioners to pay the balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in this case. The petitioners elected to execute the deed of assignment pursuant to said judgment.

Guanzon v Argel, G.R. No. L-27706, 16 June 1970 Dumaraog filed an action against Guanzon for redemption of parcel of land in Antique as Dumaraog’s mother mortgaged 13

Credit Transactions to Guanzon said land. Guanzon alleged that the document was a pacto de retro and title as vendee has been consolidated. Judge Argel ordered Guanzon to make a reconveyance in favor of Dumaraog and shall be executed withn 20 days from payment of Dumaraog as document involved is one of mortgage. Dumaraog failed to pay and was given additional 10 days to deposit payment and upon application of the bill of costs, was granted. Dumaraog eventually paid but Guanzon opposed the orders given by the judge on the extension of payment and approval of bill of costs. W/N respondent Judge acted in excess of his jurisdiction and with grave abuse of discretion? Sec. 10 Rule 39 of the Rules of Court states that: SEC. 10. Judgment for specific acts; vesting title. — If a judgment directs a party to execute a conveyance of land, or to deliver deeds or other documents, or to perform any other specific act, and the party fails to comply within the time specified, the court may direct the act to be done at the costs of the disobedient party by some other person appointed by the court and the act when so done shall have like effect as if done by the party. If real or personal property is within the Philippines, the court in lieu of directing a conveyance thereof may enter judgment divesting the title of any party and vesting it in others and such judgment shall have the force and effect of a conveyance executed in due form of law. To apply that if Dumaraog failed to pay within the specified time, Sheriff would convey the land to Guanzon is wrong. As the contract between the parties is a mortgage contract, the only right of mortgagee (Guanzon) in case of nonpayment of debt is to foreclose the mortgage and have the encumbered property sold to satisfy the indebtedness. The

mortgagor’s (Dumaraog) default does not mean that the ownership will be transferred to mortgagee (Guanzon) as this is against public policy. It was correct for Judge Argel to refuse in ordering Sheriff to convey property to Guanzon as she prayed for and instead ordered Guanzon to reconvey property to Dumaraog after receiving PHP1500.

Central Bank v CA and Tolentino, G.R. No. L45710, 3 October 1985 Sulpicio M. Tolentino obtained a loan from Island Savings Bank worth P80,000 with real estate mortgage over his 100hectareland in Agusan. Only 17,000 were released for Tolentino. MonetaryBank issued a resolution stating that Island Savings Bank is suffering liquidity problems and is prohibited from making new loans and investments. Subsequently, Monetary Board provided another resolution prohibiting Bank fromdoing business due to insolvency. Island Savings Bank filed an extra-judicial foreclosure of the real estate of Tolentino in view of the non-payment of the 17k loan. Tolentino on the other hand filed for specific performance over the 63000 that was not released. RTC dismissed Tolentino’s petition and CA modified the decision that the bank can neither foreclose the mortgage nor collect 17,000. W/N Tolentino is liable to pay for the 17,000 debt and assuming he is liable, can his real estate mortgage be foreclosed to satisfy the amount?

Because of the resolution that Bank is prohibited from doing business, the only option that Tolentino could execute is 14

Credit Transactions rescission but only on the part where the obligation of the Bank was complied with, the release of 17,000 and not on the remaining 63,000 that was no complied with. Being a reciprocal obligation, Tolentino has the obligatin on his part to pay for 17,000 which he failed to do. When there is partial failure of consideration, the mortgage becomes unenforceable to the extent of such failure. Since Island Savings Bank failed to furnish the P63,000.00, the real estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt. The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to the facts of this case. Article 2089 provides: A pledge or mortgage is indivisible even though the debt may be divided among the successors in interest of the debtor or creditor. Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage, to the prejudice of other heirs who have not been paid. The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply

Paray and Espeleta v Rodriguez, GR 132287, 24 Jan. 2006 Rodriguez and Co. were owners of shares of stocks in Quirino-Leonor-Rodriguz Realty Inc. R&CO. secured loans using shares of stock to Paray. They failed to pay so upon filing of Paray for foreclosure, it was favoured upon and became final and executory. When R&CO. was informed of the scheduled public auction, they consigned various amounts with the Clerk of Court but auction still continued. R&CO. filed for the nullity of the public sale but lower court held that consignation was long overdue and was not done within a reasonable time. CA reversed RTC ruling as consignation was sufficient and should be aplplied in pursuant of the law that favoured redemption that buyer at the auction do not become owners pending the lapse of the one year period. W/N a right of redemption can be applied? W/N consignations acquitted respondents of their principal obligatons? 15

Credit Transactions No, right of redemption only applies to real properties and not to personal properties as what is involved in this case. What is involved here is a pledge contract which is an accessory contract. It is discharged if the principal obligation is extinguished. The right to retain possession of the item exists only until debt is paid acc. to Art. 2098 of the CC. Art. 2015 of the CC states that the debtor cannot ask for the return of the thing pledged against the creditor’s will unless he has paid the debt and interest. If this is not satisfied, extrajudicial sales is proper or proceed with the auction. Phrase of the 1st decision giving due course to the foreclosure and sale at public auction may give rise to the impression that such sale is judicial in character but sale so authorized is actually extrajudicial in character. The decision to proceed with the sale by public auction is in the sole discretion of the Parays because 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 . No similar option is given to pledgors under the Civil Code Consignation did not discharge them from the loan.

Yuliongsiu v PNB, GR L-19227, 17 February 1968 Yuliongsiu owned two vessels and such vessels were purchased from Phil. Shipping Commission. To pay for the balance, he obtained a loan from PNB and used the vessels as security for the loan. He executed payments on some remaining balance with two promissory notes but Yuliongsiu failed to pay the notes. An estafa case was filed against Yuliongsiu and PNB took possession of the vessels which led Yuliongsiu to file a civil action against PNB to recover

vessels.Yuliongsiu said that he needs to be declared in default first before vessel can be taken in lieu of the chattel mortgage. W/N the nature of the agreement was that of a pledge or a chattel mortgage? It was a pledge contract as what was itted by Yuliogsiu in submitting the contract. It served as a judicial ission that it was a pledge contract. The defendant bank was, pursuant to the 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. Act 3135 refers only to foreclosure of real estate mortgages. 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.

Prudential Bank v. Alviar, GR 150197, 28 July 2005 Prudential Bank granted a loan to Don Alviar and to secure such, a real estate mortgage was executed over the property 16

Credit Transactions which states in part "To secure payment of the P250,000 loan and those that may be hereafter be obtained." Promissory note was applied by Don Alviar secured byhold-out on foreign currency . Another loan was incurred by Donalco Trading which was approved and securities for the loan were the deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation equipment. Donalco paid the loan to Prudential Bank to release the mortgage on property. Prudential Bank filed for foreclosure over properties because the payment was for Alviar and not Donalco so it still owes Prudential Bank an amount over the loans as the contract included a blanket mortgage clause or dragnet clause.

W/N the real estate mortgage covered other loans? No, for the additional loans, the security of the foreign currency must first be exhausted.

A "blanket mortgage clause," also known as a "dragnet clause" is one which is specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and strictly construed." In the case at bar, the subsequent loans obtained by respondents were secured by other securities.A mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency after exhausting the security specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in the absence of a special contract excluding it from the arrangement. It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of nonpayment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot be denied, there is a need to respect the existence of the other security given.

2nd batch – Kylie Philippine Bank of Communications v CA, GR 118552, 5 February 1996 Sps. Casafranca obtained a favorable judgment against Carlos so it acquired the lot, while on the other hand, PBCom executed an extrajudicial foreclosure of mortgage for Carlos’ loan, which also acquired the lot being the highest bidder.

Casafranca, who stepped into the shoes of Carlos, offered to redeem the property from PBCom by tendering a check, but PBCom did not accept the check because if there would be any redemption, the price considered must be the price it paid for the lot during the auction sale. PBCom advised Casafranca to pay P884,281 (principal, interest, charges & taxes) PBCom applied for another extrajudicial foreclosure of mortgage as an auction sale happened. The lot was sold to Natalie Limchio for P1,184,000. Sps. Casafranca sought to nullify the sale alleging that the second foreclosure was void a it was based on a bloated and that PBCom refused to turn over the correct amount of residue after paying off the mortgage and costs of the sale. Issue: Whether or not in a foreclosure of a real estate mortgage, the penalties stipulated in two promissory notes secured by mortgage may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties. 17

Credit Transactions Held:  The Court ruled that the mortgage contract does not at all mention the penalties stipulated in the promissory notes. It can be concluded that PBCom did not intend to include the penalties on the promissory notes in the secured amount.

Issues:

A mortgage must sufficiently describe the debt sought to be secured, which description must not be so much as to mislead or deceive, and an obligation is not secured by a mortgage unless it comes fairly within the of the mortgage.

Held:

People’s Bank and Trust L017500, 16 May 1967

v

Dahican

Lumber,

GR

DALCO executed in favor of the bank, as security, 2 deeds of mortgage, which contained contained a provision extending the mortgage lien to properties to be subsequently acquired. Both mortgages were ed in the Office of the of Deeds. DALCO and DAMCO failed to pay the fifth promissory note upon its maturity. DALCO purchased various machineries, equipment, spare parts and supplies in addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so.

1. W/N "after acquired properties" covered by and subject to the deeds of mortgage subject of foreclosure 2. W/N the mortgages are valid and binding in spite of the fact that they were not ed in accordance with the provisions of the Chattel Mortgage Law? 1. Yes. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description that the mortgagor may acquire, "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties given as security. 2. the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein — which were ed as such did not have to be ed a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

Korea International Bank v. Filkor, GR 138292, 10 April 2002 Filkor was only able to pay $40K out of $140K loan from petitioner, which is secured by REM – improvements constructed on the lot it was leasing @ Cavite Export Processing Zone Authority.

18

Credit Transactions Filkor failed to pay. RTC KEB’s prayers, however, failed to order that the property mortgaged by respondent Filkor be foreclosed and sold at public auction in the event that Filkor fails to pay its obligations to petitioner. Issue: W/N petitioner’s complaint before the RTC was an action for foreclosure of REM, or an action for collection of a sum of money Held: It is an action for foreclosure of REM. The allegations raised by the petitioner requirements of Sec. 1, Rule 68 of ROC:

satisfies

the

 date and due execution of the mortgage;  its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of  the mortgaged property; a statement of the date of the note or other documentary evidence of the  obligation secured by the mortgage, the amount claimed to be unpaid thereon; and the names and  residences of all persons having or claiming an interest in the property subordinate in right to that of the  holder of the mortgage, all of whom shall be made defendants in the action.

What determines the nature of an action, as well as which court or body has jurisdiction over it, are the allegations of the complaint and the character of the relief sought. Petitioners action being one for foreclosure of real estate mortgage, it was incumbent upon the trial court to order that the mortgaged property be foreclosed and sold at public auction in the event that respondent Filkor fails to pay its outstanding obligations.

Huerta Alba Resort v CA, GR 128567, 1 September 2000 SMGI instituted an action for judicial foreclosure over 4 parcels of land allegedly mortgaged by petitioner in favor of Intercon Fund Resource Inc., saying that they are the mortgagee-assignee of a loan obtained by Huerta Alba from Intercon. Petitioners questioned the assignment on the on theground that the same was ultra vires; Later that year, Huerta Alba filed a Motion to Quash and set aside the Writ of Execution arguing that the 150-day period for the petitioner the judgment obligation had not yet lapsed. Issue: W/N Petitioner has the one-year right of redemption under Section 78 of the General Banking Law Held: Huerta Alba’s failure to seasonably invoke their right precludes them from doing so at a later stage---The principle of Estoppel may be successfully invoked if the party fails to raise the question in the early stages of the proceedings. Right of Redemption v. Equity of Redemption Right of Redemption in relation to mortgage--   

understood in the sense of a prerogative to re-acquire mortgaged property after Only exists in Extra-Judicial foreclosures Only time it is recognized in judicial foreclosure is where the mortgagee is the PNB or banking institution In accord with Article 3135: Where a mortgage is foreclosed extra judicially, the

Equity of Redemption (Applies on the case) 

Operates in judicial foreclosures

19

Credit Transactions  

Judicial foreclosure- when a sale is confirmed by an order of the court In this case, no right of redemption exists

Remedy available: Right of the debtor to extinguish the mortgage and retain ownership of the property by paying the secured debt: 1. Within 90-days from the finality of judgement. 2. After the foreclosure sale but before the confirmation of the sale Spouses Rosales and Sibug v Spouses Suba, GR 137782, 12 August 2003 Petitioners manifested their difficulty in paying and eventually failed to pay. The RTC issued a writ of execution ordering the sale of the property for the satisfaction of judgment. At the auction sale, the property was purchases by Sps Suba (respondents) as the highest bidders. Upon Petitioner’s MR on the writ of p, the RTC held that the Petitioners had no right to redeem since the case is a judicial foreclosure under Rule 68 of the Rules of Court. Issue: W/N the petitioners had a right to redeem the property subject of the auction sale Held: No. The transaction is equitable mortgage, one which reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law, and when foreclosed, execution of judgment is governed by Sections 2 and 3, Rule 68.

General Rule: there is no right of redemption in a judicial foreclosure of mortgage Exception: when the mortgagee is the Philippine National Bank or a bank or a banking institution

Grand Farms et al v CA et al, GR 91779, 7 February 1991 Grand Farms filed an annulment of the extrajudicial foreclosure proceedings over the mortgaged properties w/ damages against the respondents. After the respondents filed their answers, Grand Farms filed a request for ission of the allegation that no notice of intention to foreclose was sent by respondents to petitioners. Banco Filipino averred that that petitioners were "notified of the auction sale by the posting of notices and the publication of notice in the Metropolitan Newsweek, a newspaper of general circulation in the province where the subject properties are located. Issue: W/N personal notice is required before foreclosure? Held: Yes.  While private respondent was constituted as their attorney-in-fact by petitioners, the inclusion of paragraph (k) in the mortgage contract nonetheless rendered personal notice to the latter indispensable. We do not agree with respondent court that paragraph (k) of the mortgage contract in question was intended merely to indicate the address to which the communications stated therein should be sent. 20

Credit Transactions "k) All correspondence relative to this Mortgage, including demand letters, summons, subpoena or notifications of any judicial or extrajudical actions shall be sent to the Mortgagor at the address given above or at the address that may hereafter be given in writing by the Mortgagor to the Mortgagee” Medida v Court of Appeals, GR 98334, 8 May 1992 During pendency of 1-year redemption period, SD took a loan from City Savings Bank (CSB), secured by REM over same Cebu property. SD failed to pay such loan, hence CSB extrajudicially foreclosed and sold property SD now filing complaint for annulment of sale. CA declared 2nd REM void. Issue: w/n the 2nd REM, constituted during pendency of redemption period, is valid Held: Valid since SD still owners of property at the time mortgage was effected. During pendency of redemption period, judgment debtor remains in possession of subject property, with all rights of ownership, except right to sell property. Purchaser becomes owner only after redemption period

2nd Batch-Louisse Suico v PNB, G.R. No. 170215, 28 August 2007 Facts: Sps. Suico obtained a loan from PNB secured by a real estate mortgage. The petitioners were unable to pay, which

prompted PNB to extrajudicially foreclose the mortgage. Sps. Suico thereafter filed a complaint against PNB for Declaration of Nullity of Extrajudicial Foreclose of Mortgage, alleging that the bid grossly exceeded the amount of petitioners outstanding obligation. Hence, prayed that the excess amount be given back to them. Issue: WON PNB is obliged to deliver the excess Ruling: 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; 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.

BPI Family Savings v Golden Power Diesel Sales, GR 170169, 12 January 2011 Two parcels of land were mortgaged by CEDEC Transport Inc. with BPI to secure a loan. CEDEC defaulted upon demand hence the bank initiated the foreclosure of the properties. The one year redemption period has ed without CEDEC redeeming the property. Upon the filing of a Writ of Possession, Golden Power sought to hold the writ’s implementation on the ground that they acquired the property and that as adverse possessors, they cannot be deprived of possession. Issue: W/N Golden Power should be categorized as third persons 21

Credit Transactions Ruling: As a general rule, a purchaser is entitled to a writ of possession and upon ex parte petition, it is the ministerial duty of the court to issue a writ in favour of purchaser. The exception is stated in Section 33, Rule 39 of the Rules of Court which provides: Section 33. Deed and possession to be given at expiration of redemption period; by whom executed or given. - x x x Upon the expiration of the right of redemption, the purchaser or redemptioner shall be substituted to and acquire all the rights, title, interest and claim of the judgment obligor to the property as of the time of the levy. The possession of the property shall be given to the purchaser or last redemptioner by the same officer unless a third party is actually holding the property adversely to the judgment obligor. Respondents became successors in interest by the agreement stated in the deed of absolute sale and cannot be considered as adverse possessors from CEDEC. Respondents cannot assert that their right of possession is adverse to that of CEDEC when they have no independent right of possession other than what they acquired from CEDEC Goldenway Merchandising v Equitable PCI Bank, GR 195540, 13 March 2013 Golden obtained a loan secured by a REM from PCI Bank. However, due to default, the bank foreclosed on the mortagage and subsequelty sold to the bank as the highest bidder. Golden then offered to redeem the property but were informed that the property was already transferred in the name of PCI. Petitioner filed a complaint for specific performance with RTC claiming that it is Act No. 3135 which

should apply on the redemption period of one year and not R.A. No. 8791 that has a shorter redemption period. Issue: W/N the foregoing amendment be validly applied in this case when the real estate mortgage contract was executed in 1985 and the mortgage foreclosed when R.A. No. 8791 was already in effect? Ruling: juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. Since petitioner is a juridical person, the applicable period for the right to redeem shall be prior to the registration of the certificate of foreclosure of sale and such registration shall not be more than three months, whichever is earlier. Here, the right to redeem was only exercised AFTER the registration of the certificate of sale. Moreover, even if the mortgage was executed in 1985, it was only in 2000 that the mortgage was foreclosed making the provision applicable in this case. PCI Leasing v Trojan Metal, GR 176381, 15 December 2010 Trojan Metal Industries sought to obtain a loan from PCI Leasing instead of extending a loan the bank offered to buy the subject equipment. Subsequently, the parties entered 22

Credit Transactions into a lease agreement whereby TMI is to pay back the equipment. However, there was default, which prompted PCI to file for recovery of the outstanding obligations. Issue: WON the agreement entered into was a financial lease or a loan secured by a chattel mortgage Ruling: It was a loan secured by a chattel mortgage. Financial leasing is an extension of credit to assist an aspiring buyer in acquiring movable property P which he (the aspiring buyer) can use and eventually own. However, if the equipment already belonged to the borrower-lessee, the transaction is a loan with mortgage in the guise of a lease. Acme Shoe Rubber v CA, GR 103576, 22 Aug 1996 Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted canbe 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. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement,

the chattel mortgage would still be valid between the parties (not against third persons acting in good faith), the fact, however, that the statute has provided that the parties to the contract must execute an oath that - "x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. Makati Leasing v Wearever Textiles, GR L-58469, 16 May 1983 In order to obtain financial accommodations from petitioner, respondent discounted and assigned several receivables with the former under a Receivable Purchase Agreement, secured by a Chattel Mortgage over certain raw materials and machineries. However, Wearever defaulted thus Makati Leasing moved to extrajudicially foreclose the property. The respondent anchored their defense on the fact that the machine being attached to the ground by bolts cannot be a subject of a chattel mortgage for being a real property within the purview of Article 415. Issue: Won the property is a personal property. Ruling: Hence, 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. 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.

3rd Batch-Jess 23

Credit Transactions People’s Bank & Trust v Dahican Lumber, GR L17500, 16 May 1967 Atlantic Gulf sold all its rights in the Dahican Lumber concession to DALCO (Dahican Lumber) and to be able to obtain concession, DALCO made loans with People’s Bank (BANK) and Export-Import Bank of Washington. As security, DALCO executed a deed of mortgage in favour of the BANK covering five parcels of land in CAMSUR with all buildings and improvements and a second mortgage was executed in favour of Atlantic over the same properties to secure unpaid balance to Atlantic. DALCO pledged stocks to secure payment. DALCO and DAMCO failed to pay the fifth PN. DALCO purchased various machineries from Connel.Pursuant to the provision of the mortgage regarding “after acquired properties,” BANK requested DALCO to submit a complete list of machineries which the latter failed to comply. Atlantic and the BANK commenced foreclosure proceedings and five years after, court orered the sale of all machineries. Whether the “after acquired” machinery and equipment of defendant are included as subject of the Real Estate mortgage, thus can be foreclosed. Yes, machineries are subject to real estate mortgage. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection with the premises — that is, its lumber concession — "shall immediately be and become subject to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the time of their execution. Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or

replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of the said industry or works. the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be deemed to have been immobilized, with the result that the real estate mortgages involved herein — which were ed as such — did not have to be ed a second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.

Dy v Court of Appeals, GR 92989, 8 July 1991 Perfecto Dy and Wilfredo Dy are brothers. Wilfredo Dy purchased a truck and a farm tractor through financing extended by Libre Finance and Investment Corp. (Libra). Both were mortgaged to Libra as security for the loan.Perfecto assumed mortgage debt of his brother Wilfredo with Libra so a Deed of Absolute Sale was executed by Wilfredo in favour of Perfecto. Both truck and tractor were still in possession of Libra at the time the Deed was executed but despite offer of full payment of Perfecto of the tractor, Libra could not release properties as Libra insisted on full payment of both the truck and tractor. Their sister Carol issued a check to pay for the truck. On the other hand, GELAC Inc. has a collection case against Wilfredo and the former attained a favourable decision so a sheriff was able to seize the tractor and upon auction, was bought by Gonzales. When the Carol’s check was cleared, it was only this time that Perfecto learned about the seizure of the tractor. An action for replevin was filed against Gelac. 24

Credit Transactions W/N ownership of the farm tractor had already ed to Perfecto Dy (petitioner) when it was levied on by the sheriff pursuant to the writ of execution issued in another case in favor of Gelac Inc. Yes. The mortgagor (Wilfredo) who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected. There is no reason why Wilfredo Dy, as the chattel mortgagor cannot sell the subject tractor. There is no dispute that the consent of Libra Finance was obtained via a letter. Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale between the brothers was therefore valid and binding as between them and to the mortgagee, as well. There was constructive delivery already upon the execution of the public instrument pursuant to Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of the vendee.

Pameca Wood v CA, GR 106435, 14 July 1999 PAMECA obtained a loan from DBP and Teves as Pres of PAMECA executed a PN to be payable in instalments. A chattel mortgage was executed over PAMECA’s properties including furniture and equipments to secure the loan. PAMECA failed to pay so bank extrajudicially foreclosed the chattel mortgage but the amount from

the auction was deficient. DBP filed for a collection for the balance of payment and both RTC and CA ordered PAMECA and Teves to pay for the balance. W/N deficiency shall be paid by PAMECA? Sec. 14 of the Chattel Mortgage Law states in part: The proceeds of such sale shall be applied to the payment, first, of the costs and expenses of keeping and sale, and then to the payment of the demand or obligation secured by such mortgage, and the residue shall be paid to persons holding subsequent mortgages in their order, and the balance, after paying the mortgage, shall be paid to the mortgagor or persons holding under him on demand. It is clear from the above provision that the effects of foreclosure under the Chattel Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may no longer recover proceeds of the sale in excess of the amount of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation and costs. Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the deficiency in case of a reduction in the price at public auction.

Servicewide Specialist Inc. v CA, Gr 116363, 10 Dec 1999 In 1975, Spouses Ponce (respondents) bought on installment a Holden Torana vehicle from CR Tecson Enterprises. They 25

Credit Transactions executed a promissory note and a chattel mortgage in favor of the latter to secure payment of the note. CR Tecson executed a deed of assignment of said promissory note and chattel mortgage in favor of Filinvest Credit Corp. with the conformity of respondent spouses and the latter was aware of this fact. Spouses sold the vehicle to Conrado Tecson. Subsequently, Filnvest assigned all its rights to Servicewide without notice to the spouses. Spouses failed to pay so Servicewide filed for an action for replevin. CA ruled that Spouses were not notified of the assignment of the PN and chattel mortgage to Servicewide. the consent of the creditors’ assignee to the debtormortgagors sale of the property to another. W/N the consent of the creditor-mortgagee (FilinvestServicewide’s predecessor) when the debtor-mortgagor alienates the property to a third person and consent of creditors’ assignee to the debtor-mortgagors sale of the property to another is necessary? Spouses should have obtained the consent of Filinvest since they were already aware of the assignment when sale was made (from CR Tecson to FIlinvest).Thus, for the failure of the spouses to obtain the consent of Filinvest, the sale of the vehicle to Conrado Tecson was not binding on the former. When the credit was assigned by Filinvest to Servicewide, the spouses stood on record as the debtor-mortgagor. Art. 2128 of the Civil Code to a chattel mortgage, it appears that a mortgage credit may be alienated or assigned to a third person. Since the assignee of the credit steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignees consent is necessary in order to bind him of the alienation of the mortgaged thing

by the debtor-mortgagor. As the new assignee, Servicewide’s consent is necessary before the spouses alienation of the vehicle can be considered against third persons. In this case, however, the alienation by the spouses of the vehicle occurred prior to the assignment of credit to Servicewide, so, Spouses are not bound to obtain consent from Servicewide as it was not an assignee of the credit at the time alienation of the vehicle occurred. Mere notice of the creditor is not enough as his consent is always necessary.

RCBC v Royal Cargo, GR 179756, 20 October 2009 Terrymanila filed for voluntary insolvency while it is also a debtor of both RCBC and Royal Cargo (“Royal”) which owes PHP3M by the chattel mortgage that was executed on 1989. Royal Collection filed an action for collection of sum and Preliminary Attachment of personal property to secure satisfaction of judgment award of P296k . Terrymanila was declared insolvent and was allowed to have an auction over the properties being the highest bidder and sold properties to third persons. Royal Cargo sought to annul the sale and CA held the right of Royal Cargo to be timely informed of the foreclosure sale as it too had interests over the mortgagee Terrymanila, Inc.’s assets in accordance with Sec. 14 of the Chattel Mortgage Law. W/N foreclosure sale of chattel mortgaged properties was valid? Yes, even prior to receiving a mailed notice of the auction sale on the date of the auction sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale of the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the earliest when it received the insolvency courts Order of March 20, 26

Credit Transactions 1992 denying its Motion for Reconsideration of the February 3, 1992 Order. Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to be technically shrewd about its chances, preferring instead to seek annulment of the auction sale, which was the result of the foreclosure of the mortgage, permission to conduct which it had early on opposed before the insolvency court. Its negligence or omission to exercise its equity of redemption within a reasonable time, or even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted not to assert it.

Servicewide Specialists v CA, GR 110048, 19 November 1999 Leticia Laus owned a ColtGalant from Forune Corp. payable in installments and default of such will make it due and demandable. As security, Laus mortgaged the vehicle with Fortune and such mortgage rights was assigned with Filinvest.Filinvest transferred its right and assigned its credit with Servicewide. Laus failed to pay and refused to return the vehicle so an action for replevin was filed. Alberto Villafranca filed a third party claim saying he owns the car evidenced by the Bureau of Land Transportation's Certificate of Registration issued in his name. W/N a case for replevin may be pursued against the defendant, Alberto Villafranca, without impleading the absconding debtor-mortgagor?

In a suit for replevin, a clear right of possession must be established. A foreclosure under a chattel mortgage may properly be commenced only once there is default on the part of the mortgagor of his obligation secured by the mortgage. The replevin in this case has been resorted to in order to pave the way for the foreclosure of what is covered by the chattel mortgage. The conditions essential for such foreclosure would be to show, firstly, the existence of the chattel mortgage and, secondly, the default of the mortgagor. These requirements must be shown because the validity of the plaintiffs exercise of the right of foreclosure is inevitably dependent thereon. Since the mortgagee's right of possession is conditioned upon the actual fact of default which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required in order to allow a full and conclusive determination of the case. Laus, being an indispensable party should have been impleaded in the case.

De Barretto v Villanueva, GR L-14938, 29 December 1962 Wife Cruzado mortgaged the property to Rehabilitation Finance Corp. (RFC) to secure repayment of a loan. She failed to pay some instalments so I was foreclosed. An agreement was made between Cruzado and RFC selling back property to Rosario Cruzado with a condition that title to property shall remain under RFC until full payment of the price but she defaulted again so RFC rescinded the sale. Cruzado sold the rights of property to Villanueva who assumed the obligation with RFC. Villanueva was able to obtain a promissory note to pay and mortgaged the property 27

Credit Transactions to Magdalena to secure a loan. Villanueva deflated so Magdalena foreclosed the mortgage. Cruzado filed a recognition fo her vendor’s lien and was granted which was annotated a the back of the title. Magdalena Barreto insists that vendor’s lien can only become effective in the event of insolvency which was not proved to exist. W/N the vendor’s lien exist?

No, Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides: If there are two or more credits with respect to the same specific real property or real rights, they, shall be satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real rights." But in order to make this prorating fully effective must necessarily be convened, and the import of their claims ascertained. It is thus apparent that the full, application (of Articles 2249 and 2242 demands that there must be first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as insolvency, the settlement of decedents estate under Rule 87 of the Rules of Court, or other liquidation proceedings of similar import. It becomes evident that one preferred creditor's thirdparty claim to the proceeds of a foreclosure sale (as in the

case now before us) is not the proceeding contemplated by law for the enforcement of preferences under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority.

J.L. Bernardo v CA, GR 105827, 31 January 2000 Municipal of Nueva Ecija approved e construction of a public market. J.L. Bernardo was given the Construction Agreement as the highest bidder to construct for the market but when it was nearly completed in construction, they remained unpaid. J.L filed for specific performance and claim for contractor’s lien. They alleged that Municipality will assume payment on the demolition and clearing of the site to be remitted back to J.L. RTC gave right of possession of the market to J.L. to which CA reversed the ruling. W/N Municipality is liable to pay the contractor’s lien? No. Contractor’s lien is under the third paragraph of Art. 2242. Article 2242 only finds application when there is a concurrence of credits, i.e. when the same specific property of the debtor is subjected to the claims of several creditors and the value of such property of the debtor is insufficient to pay in full all the creditors. In such a situation, the question of preference will arise, that is, there will be a need to determine which of the creditors will be paid ahead of the others. Fundamental tenets of due process will dictate that this statutory lien should then only be enforced in the context of some kind of a proceeding where the claims of all the 28

Credit Transactions preferred creditors may be bindingly adjudicated, such as insolvency proceedings. However in this case, there was no insolvency proceeding as the action filed was one for specific performance hence the provision is inapplicable in the case at bar. Such lien cannot be enforced in the present action for there is no way of determining whether or not there exist other preferred creditors with claims over the San Antonio Public Market. The records do not contain any allegation that petitioners are the only creditors with respect to such property. The fact that no third party claims have been filed in the trial court will not bar other creditors from subsequently bringing actions and claiming that they also have preferred liens against the property involved. 3rd batch Kylie Diego v Fernando gr L-15128 Aug. 25,1960 Defendant mortgaged 2 parcels of land to plaintiff to secure a P2K loan (w/out interest). Defendant failed to pay so plaintiff demanded foreclosure of mortgage. Defendant argued that transaction between him and plaintiff was really one of antichresis – not mortgage itted fact that the loan was without interest + transfer of the possession of the properties mortgaged to the mortgagee Issue: W/N the contract was of mortgage or antichresis Held: Mortgage. if a contract of loan with security does NOT stipulate the payment of interest BUT provides for the delivery to the creditor by the debtor of the property given as security, in order that the latter may gather its fruits, WITHOUT stating that said fruits are to be applied to the payment of interest, if any, and afterwards that of the

principal, the ANTICHRESIS

CONTRACT

IS

A

MORTGAGE

AND

NOT

ANTICHRESIS (Art. 2132)  must be expressly agreed between creditor and debtor  that creditor, having been given possession of the properties given as security  is to apply their fruits to the payment of the interest, if owing, and thereafter to the principal of his credit

DBP v CA, GR 126200, 16 August 2001 MMIC purchased and delivered construction materials from Remington. The purchases remained unpaid when Remington filed a complaint for sum of money and damages against MMIC. Remington amended its complaint and included PNB, DBP, NMIC, Maricalum and Island Cement, asserting that they must be treated in law as one and the same entity by disregarding the veil of corporate fiction since they are corporations created by the government who benefited from the transactions of the properties of MMIC, and submits that the transfer of the properties was made in fraud of creditors. The presence of fraud, according to Remington, warrants the piercing of the corporate veil such that MMIC and its transferees could be considered as one and the same corporation. The transferees, therefore, are also liable for the value of the MMIC’s purchases. Issues: 1. Whether or not there is any fraud on the part of MMIC and its transferees to warrant the piercing of corporate veil.

29

Credit Transactions 2. Whether or not Remington can enforce its claim and lien to DBP

SEC placed Philfinance under receivership, and Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private respondents) were appointed as liquidators.

Held: 1. The doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. To disregard the separate juridical personality of a corporation, the wrongdoing must be established. It cannot be presumed. In this case, the Court finds that Remington failed to discharge its burden of proving bad faith on the part of MMIC and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. 2. As the extra-judicial foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the Civil Code, Remington cannot claim its pro rata share from DBP. One preferred creditor’s third-party claim to the proceeds of a foreclosure sale is not the proceeding contemplated by law for the enforcement of preferences under Art. 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro rata dividend corresponding to each, because the rights of the other creditors likewise enjoying preference under Art. 2242 cannot be ascertained.

Without the knowledge and consent of petitioner and without authority from the SEC, private respondents withdrew petitioner’s CSPI shares from his custodian banks, and sold it Northeast Corporation and included the proceeds thereof in the funds of Philfinance. Petitioner lodged a complaint. Meanwhile, SEC approved a 15% rate of recovery for Philfinance’s creditors and investors. The liquidators began the process of settling the claims against Philfinance, from its assets. SEC Decision: Petitioners status was converted into that of an ordinary creditor for the value of such shares since, the shares had already been sold and the proceeds commingled with the other assets of Philfinance Issue: Whether petitioner should be considered as a preferred (and secured) creditor of Philfinance; Held: Petitioner is NOT a preferred creditor 

 Cordova v. Reyes

Petitioner argues that he was a preferred creditor because private respondents illegally withdrew his CSPI shares from the custodian banks and sold them without his knowledge and consent and without authority from the SEC, citing Art. 2241 (2) The Court held that Article 2241 refers only to specific movable property. His claim was for the payment of money, which, as already discussed, is generic property and not specific or determinate. Therefore, he was deemed an ordinary creditor. 30

Credit Transactions Ruby Industrial v CA, G.R. No. 124185-87, 20 January 1998 Disclaimer: I couldn’t understand the case  so I looked for the doctrine in relation to rehabilitation na lang.

Rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. When a distressed company is placed under rehabilitation, the appointment of a management committee follows to avoid collusion between the previous management and creditors it might favor, to the prejudice of the other creditors. All assets of a corporation under rehabilitation receivership are held in trust for the equal benefit of all creditors to preclude one from obtaining an advantage or preference over another by the expediency of attachment, execution or otherwise. As between the creditors, the key phrase is equality in equity.

Rubberworld filed a petition for suspension of payments with SEC. SEC favorably ruled on the petition. Private respondents, claiming to be employees of petitioner corporation, filed against petitioners their respective complaints for illegal dismissal, unfair labor practice, damages and payment of separation pay, retirement benefits, 13th month pay and service incentive pay. Petitioners moved to suspend the proceedings in the above labor cases on the strength of the SEC order.

Labor Arbiter’s decision: SEC suspending all actions for claims against petitioners does not cover the claims of private respondents in the labor cases because said claims and the concomitant liability of petitioners still had to be determined, thus carrying no dissipation of the assets of petitioners. Issue: Whether or not the Respondent NLRC acted without or in excess of jurisdiction or with grave abuse of discretion amounting to lack of jurisdiction in affirming the order of Labor Arbiter

Once the corporation threatened by bankruptcy is taken over by a receiver, all the creditors ought to stand on equal footing. Not any one of them should be paid ahead of the others. This is precisely the reason for suspending all pending claims against the corporation under receivership.

Held: the applicable law is PD 902A, which provides that "upon the appointment [by the SEC] of a management committee or a rehabilitation receiver," all actions for claims against the corporation pending before any court, tribunal or board shall ipso jure be suspended.

Rubber World (Phils) Inc. v NLRC, G.R 126773, 14 April 1999

The justification for the automatic stay of all pending action is to enable the management committee/rehabilitation receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder 31

Credit Transactions or prevent the “rescue” of the debtor company. To allow such other actions to continue would only add to the burden of the management committee or rehabilitation receiver, whose time, effort and resources would be wasted in defending claims against the corporation instead of being directed toward its restructuring and rehabilitation. No exception in favor of labor claims is mentioned in the law. Since the law makes no distinction or exemptions, neither should this Court. Allowing labor cases to proceed clearly defeats the purpose of the automatic stays and severally encumbers the management committee's and resources. The said committee would need to defend against these suits, to the detriment of its primary and urgent duty to work towards rehabilitating the corporation and making it viable again. The rule otherwise would open the floodgates to other similarly situated claimants and forestall if not defeat the rescue efforts. Besides, even if the NLRC awards the claims of private respondents, as it did, its ruling could not be enforced as long as the petitioner is under the management committee.

Leca Realty v Manuela Corp, G.R. 166800 & 168924, 25 Sept 2007 In order to finance the costs of building the Metropolis Star and the Pacific Mall, respondent obtained loans from two syndicates of lenders. However, due to the Asian financial crisis in 1997, the banks stopped their lending activities to borrowers, including respondent.

Because Respondent’s malls failed to operate sufficiently, this resulted to heavy losses. It then filed a Petition for Rehabilitation. Acting upon Respondent’s petition, the Trial court issued a Stay Order, which includes the provision directing the payment in full of all istrative expenses incurred after the issuance of this Stay Order. Marilou Adea, rehabilitation receiver, submitted to the court a rehabilitation plan. Aggrieved, petitioner filed an Appeal alleging that Petitioner now contends that the Rehabilitation Plan has impaired its contract of lease with respondent over a tract of land consisting of almost three (3) hectares. Issue: W/N the approved Rehabilitation Plan drastically altered the of its lease contract with respondent Manuela, hence, should be declared void Held: Yes. It must be emphasized that there is nothing in Section 5 (c) of P.D. No. 902-A authorizing the change or modification of contracts entered into by the distressed corporation and its creditors. Court further emphasized that the “istrative expenses” mentioned in the trial court’s stay order pertains to costs associated with the general istration of an organization and include such items as utilities, rents, salaries, postages, furniture, and housekeeping charges.

Inasmuch as rents are considered istrative expenses and considering that the Stay Order directed respondent Manuela to pay the rents in full, then it must comply at the rates agreed upon. 32

Credit Transactions Chas Realty v Talavera, G.R. No. 151925, 06 February 2003

The requirement is designed to avoid a situation where a rehabilitation plan, after being developed and judicially sanctioned, cannot ultimately be realized because of the refusal of stockholders to cooperate in its implementation

Chas Petition for Rehabilitation  Proposed rehabilitation plan: repayment or restructuring of loans with Land Bank and Equitable + leasing out available spaces + completion of fourth floor of mall  Chas claiming it has sufficient assets and a workable rehabilitation plan which showed continuance of business was feasible

Angel Concepcion opposing rehabilitation plan  No approval by stockholders representing at least 2/3 of stockholders, which according to AC, is essential under the Interim Rules on Corporate Rehabilitation  Chas Response: No need to secure 2/3 consent because the rehabilitation plan did not include any extraordinary corporate actions which would require such vote

Issue: W/N 2/3 vote required for the approval of the rehabilitation plan of Chas Held: NO. None of the proposed corporate actions would require a vote of approval by the stockholders representing at least 2/3 of the outstanding capital stock. If any extraordinary corporate action is to be done under the proposed rehabilitation plan, 2/3 approval of stockholders is necessary

Where no such extraordinary acts are to be done under the rehabilitation plan, the approval of stockholders need only be a majority, and not necessarily 2/3

3rd Batch Louisse

RCBC v IAC, G.R. No. 74851, 09 December 1999 In 1984 BF Homes filed a Petition for Rehabilitation with Suspension of Payments with SEC. Subsequently, RCBC, as one of RCBC’s creditors file to extra-judically foreclose some of BF’s properties. Opposing to this, BF filed for the annulment of the Sale arguing that SEC had already assumed jurisdiction over their assets by virtue of the Petition for Rebilitation Issue: WON preferred creditors of distressed corporations stand on equal footing with all other creditors. Ruling: Secured creditors retain their preference over unsecured creditors, but enforcement of such preference is equally suspended upon the appointment of a management committee, rehabilitation receiver, board, or body. In the event that the assets of the corporation, partnership, or association are finally liquidated, however, secured and preferred credits under the applicable provisions of the Civil Code will definitely have preference over unsecured ones.

Sobrejuanite v ASB Development, G.R. 165675, 30 Sept. 2005 Spouses Sobrejuanite (Sobrejuanite) filed a Complaint for rescission of contract, against ASB Development Corporation (ASB) before the (HLURB). They alleged that they entered into a contract to sell with ASB over a condominium unit and 33

Credit Transactions a parking space and despite full payment and demands, ASB failed to deliver the property as agreed upon. ASB filed a motion to dismiss or suspend proceedings in view of the approval by the Securities and Exchange Commission (SEC) of the rehabilitation plan of ASB Group of Companies and the appointment of a rehabilitation receiver. Issue: WON petitioners’ claim should be suspended because ASB in under a rehabilitation plan Ruling: Yes. As between creditors, the key phrase is equality and equity. When a corporation threatened by bankruptcy is taken over by a receiver, all the creditors should stand on equal footing. Not anyone of them should be given any preference by paying one or some of them ahead of the others. This is precisely the reason for the suspension of all pending claims against the corporation under receivership. Instead of creditors vexing the courts with suits against the distressed firm, they are directed to file their claims with the receiver who is a duly appointed officer of the SEC. Metropolitan Bank & Trust v SLGT Holdings, G.R. 175181-82, 14 September 2007 Section 6 (C) of PD 902-A as amended provides that the suspension of all actions for claims against corporations refers solely to monetary claims. Also, the appointment of a receiver does not dissolve the corporation, nor does it interfere with the exercise of corporate rights. When there are no restraints imposed upon the respondent as it undergoes rehabilitation receivership, it should continue to perform its contractual and statutory responsibilities. SLGT’s and Dylanco’s complaints in the case at bar did not seek monetary recovery or to touch the corporate coffers of ASB ahead of others. They did not even consider themselves

as money claimants. All they ask was for the enforcement of ASB’s statutory and contractual obligations as a condominium developer. They pressed for the delivery of their units free from all liens and encumbrances and the declaration of nullity of the mortgage in question arising from the breach of Section 18 of PD 957. The complaint of respondents is not in the nature of claims that should be covered by the suspensive effect of a rehabilitation proceeding. Clarion Printing House v NLRC, G.R. No. 148372, 27 June 2005 Clarion Printing House, employed Michelle on a probationary basis as marketing assistant. Subsequently, the company filed with the SEC a Petition for Declaration of Suspension of Payment, which the SEC approved. Afterwhich, Miclat received a phone call conveying her termination without giving any justifiable reason. Aggreived, she filed a complaint for illegal dismissal against Clarion before the NLRC Issue: WON Miclat’s retrenchment was justified Section 6 of PD 902-A, as amended, read: SEC. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: (c) To appoint one or more receivers of the property, real and personal, which is the subject of the action pending before the Commission in accordance with the provisions of the Rules of Court in such other cases whenever necessary in order to preserve the rights of the parties-litigants and/or protect the interest of the investing public and creditors: Provided, however, That the Commission may in appropriate cases, appoint a rehabilitation receiver of corporations, partnerships or other associations not supervised or regulated by other government agencies who 34

Credit Transactions shall have, in addition to powers of the regular receiver under the provisions of the Rules of Court, such functions and powers as are provided for in the succeeding paragraph (d) hereof: x x x (d) To create and appoint a management committee, board or body upon petition or motu propio to undertake the management of corporations, partnership or other associations not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation, loss, wastage or destruction of assets or other properties or paralization of business operations of such corporations or entities which may be prejudicial to the interest of minority stockholders, partieslitigants of the general public: That the SEC appointed an interim receiver for the EYCO Group on its petition shows that Clarion, together with the other member-companies of the EYCO Group, was suffering business reverses justifying the retrenchment of its employees. Metropolitan Bank v ASB Holdings, G.R. 166197, 27 Feb 2007 Metrobank is a creditor bank of respondent corporations, collectively known as the ASB Group of Companies. The loans extended by Metrobank to ASB Realty and ASB Development, which were secured by real estate mortgages, amounted to P523.5 million and P1.073 ASB Group filed with the SEC a Petition For Rehabilitation With Prayer For Suspension Of Actions and Proceedings pursuant to PD 902-A, Metrobank objected to this Rehabilitation Plan, claiming that the above arrangement is not acceptable---since the proposed dacion is not acceptable to the bank, there is no

basis to release the properties which serve as collateral for the loans. Issue: W/N the approval of the Rehabilitation Plan impairs Metrobank’s lien over the mortgaged properties. Section 6 [c] of P.D. No. 902-A provides that "upon appointment of a management committee, rehabilitation receiver, board or body, pursuant to this Decree, all actions for claims against corporations, partnerships or associations under management or receivership pending before any court, tribunal, board or body shall be suspended." By that statutory provision, it is clear that the approval of the Rehabilitation Plan and the appointment of a rehabilitation receiver merely suspend the actions for claims against ASB. Metrobank’s preferred status over the unsecured creditors relative to the mortgage liens is RETAINED, but the ENFORCEMENT of such preference is SUSPENDED. Metrobank may still enforce its preference when the assets of ASB Group will be liquidated. Considering that the provisions of the loan agreements are merely suspended, there is no impairment of contracts, specifically its lien in the mortgaged properties. MWSS v Daway & Maynilad Water, G.R. 160732, 21 June 2004 MWSS granted Maynilad a 25-year Concession Agreement,however, Maynilad subsequently sought to terminate the agreement alleging that MWSS failed to comply with its obligations. Due to Maynilad’s refusal to pay, MWSS decided to collect from the L/C applied for by former. The matter was brought before the Appeals who ordered Maynilad to pay the concessions fees that had fallen due to the absence of a clause in the contract pertaining to the Event of Termination. After the order became final and 35

Credit Transactions executory, Maynilad filed a petition for rehabilitation, where the respondent judge issued the assailed stay order against all the claims of MWSS. Issue: WON the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it ened herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit Ruling: Being a solidary obligation, the letter of credit is from the jurisdiction of the rehabilitation court and therefore in ening petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law. The SC held that Sec. 6 (b) of Rule 4 of the Interim Rules does

not en the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Taking into consideration the SC’s ruling on the nature of letters of credit and the customs and usage developed over the years in the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.

36