6.a - Common Provisions.docx

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Credit 6.a Common Provisions Page 1 of44

G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee,

vs.

ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

BIDIN, J .:

This is an appeal from the decision* of the Court of Fir st Instance of Manila, Branch XVII in

Civil Case No. 78178 for collection of sum of money based on promissory notes executed

by the defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of

the appealed decision (Record on Appeal, p. 33) reads as follows:

WHEREFORE judgment is hereby rendered (a) sentencing defendants,

Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly and severally, to pay

plaintiff the sum of P15,037.11 plus 12% interest per annum from September 30,

1969 until fully paid, in payment of Promissory Notes No. 11487, plus the sum of

P1,000.00 as attorney's fees; and (b) sentencing defendant Anastacio Teodoro,Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from

September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515

and 11699, plus the sum of P500.00 an attorney's fees.

With Costs against defendants.

The facts of the case as found by the trial court are as follows:

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and

severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the

sum of P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest

per annum. Defendants failed to pay the said amount inspire of repeated

demands and the obligation as of September 30, 1969 stood at P 15,137.11including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father)

and Anastacio Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory

Notes (Nos. 11515 and 11699) for P8,000.00 and P1,000.00 respectively,

payable in 120 days at 12% interest per annum. Father and Son made a partial

payment on the May 3, 1966 promissory Note but none on the June 20, 1966

Promissory Note, leaving still an unpaid balance of P8,934.74 as of September

30, 1969 including accrued interest and service charge.

The three Promissory Notes stipulated that any interest due if not paid at the end

of every month shall be added to the total amount then due, the whole amount to

bear interest at the rate of 12% per annum until fully paid; and in case ofcollection through an attorney-at-law, the makers shall, jointly and severally, pay

10% of the amount over-due as attorney's fees, which in no case shall be leas

than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed

of Assignment of Receivables from the Emergency Employment Administration in

the sum of P44,635.00. The Deed of Assignment provided that it was for and in

consideration of certain credits, loans, overdrafts and other credit

accommodations extended to defendants as security for the payment of said sum

and the interest thereon, and that defendants do hereby remise, release and

quitclaim all its rights, title, and interest in and to the accounts receivables.

Further.

(1) The title and right of possession to said accounts receivable is to

remain in the assignee, and it shall have the right to collect the same

from the debtor, and whatsoever the Assignor does in connection with

the collection of said accounts, it agrees to do as agent and

representative of the Assignee and in trust for said Assignee ;

xxx xxx xxx

(6) The Assignor guarantees the existence and legality of said

accounts receivable, and the due and punctual payment thereof unto

the assignee, ... on demand, ... and further, that Assignor warrants the

solvency and credit worthiness of each and every account.

(7) The Assignor does hereby guarantee the payment when due on all

sums payable under the contracts giving rise to the accounts

receivable ... including reasonable attorney's fees in enforcing any

rights against the debtors of the assigned accounts receivable and will

pay upon demand, the entire unpaid balance of said contract in the

event of non-payment by the said debtors of any monthly sum at its

due date or of any other default by said debtors;

xxx xxx xxx

(9) ... This Assignment shall also stand as a continuing guarantee for

any and all whatsoever there is or in the future there will be justly

owing from the Assignor to the Assignee ...

In their stipulations of Fact, it is admitted by the parties that plaintiff extended

loans to defendants on the basis and by reason of certain contracts entered into

by the defunct Emergency Employment Administration (EEA) with defendants for

the fabrication of fishing boats, and that the Philippine Fisheries Commission

succeeded the EEA after its abolition; that non-payment of the notes was due to

the failure of the Commission to pay defendants after the latter had complied with


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their contractual obligations; and that the President of plaintiff Bank took steps to

collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action

was instituted on November 13, 1969, originally against the Father, Son, and the

latter's wife. Because the Father died, however, during the pendency of the suit,

the case as against him was dismiss under the provisions of Section 21, Rule 3

of the Rules of Court. The action, then is against defendants Son and his wife for

the collection of the sum of P 15,037.11 on Promissory Note No. 14487; and

against defendant Son for the recovery of P 8,394.7.4 on Promissory Notes Nos.

11515 and 11699, plus interest on both amounts at 12% per annum from

September 30, 1969 until fully paid, and 10% of the amounts due as attorney's

fees.

Neither of the parties presented any testimonial evidence and submitted the case

for decision based on their Stipulations of Fact and on then, documentary

evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff claim is

already considered paid by the Deed of Assign. judgment of Receivables by the

Son; and (2) whether or not it is plaintiff who should directly sue the Philippine

Fisheries Commission for collection.' (Record on Appeal, p. 29- 32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8,

1972, defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was

denied by the trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June

23, 1972, defendants filed with the lower court their notice of appeal together with the

appeal bond (Record on Appeal, p. 38). The record of appeal was forwarded to the Court of

Appeals on August 22, 1972 (Record on Appeal, p. 42).

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment

of error, that is

THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL

REMAKING OF THE CONTRACT BETWEEN THE PARTIES, IN

VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR

EXCESS OF JURISDICTION.

As the appeal involves a pure question of law, the Court of Appeals, in its resolution

promulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on

Appeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).

In the resolution of May 30, 1980, the First Division of this Court ordered that the case be

docketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the

Court and to determine whether supervening events may have rendered the case moot and

academic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES within

thirty days from notice, and in case they fail to make the proper manifestation within the

required period, (2) to consider the case terminated and closed with the entry of judgment

accordingly made thereon (Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal review interposed by

defendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment of

receivables has the effect of payment of all the loans contracted by appellants from

appellee bank; and (2) whether or not appellee bank must first exhaust all legal remedies

against the Philippine Fisheries Commission before it can proceed against appellants for

collections of loan under the promissory notes which are plaintiffs bases in the action for

collection in Civil Case No. 78178.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as the

assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and

without the need of the consent of the debtor, transfers his credit and its accessory rights to

another, known as the assignee, who acquires the power to enforce it to the same extent

as the assignor could have enforced it against the debtor. ... It may be in the form of a sale,

but at times it may constitute a dation in payment, such as when a debtor, in order to obtain

a release from his debt, assigns to his creditor a credit he has against a third person, or it

may constitute a donation as when it is by gratuitous title; or it may even be merely by way

of guaranty, as when the creditor gives as a collateral, to secure his own debt in favor of

the assignee, without transmitting ownership. The character that it may assume determines

its requisites and effects. its regulation, and the capacity of the parties to execute it; and in

every case, the obligations between assignor and assignee will depend upon the judicial

relation which is the basis of the assignment: (Tolentino, Commentaries and Jurisprudence

on the Civil Code of the Philippines, Vol. 5, pp. 165-166).

There is no question as to the validity of the assignment of receivables executed by

appellants in favor of appellee bank.

The issue is with regard to its legal effects.

I

It is evident that the assignment of receivables executed by appellants on January 24, 1964

did not transfer the ownership of the receivables to appellee bank and release appellants

from their loans with the bank incurred under promissory notes Nos. 11487,11515 and

11699.

The Deed of Assignment provided that it was for and in consideration of certain credits,loans, overdrafts, and their credit accommodations in the sum of P10,000.00 extended to


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appellants by appellee bank, and as security for the payment of said sum and the interest

thereon; that appellants as assignors, remise, release, and quitclaim to assignee bank all

their rights, title and interest in and to the accounts receivable assigned (lst paragraph). It

was further stipulated that the assignment will also stand as a continuing guaranty for future

loans of appellants to appellee bank and correspondingly the assignment shall also extend

to all the accounts receivable; appellants shall also obtain in the future, until the

consideration on the loans secured by appellants from appellee bank shall have been fullypaid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in

consideration of their indebtedness to appellee bank, not mere guaranty, in view of the

following provisions of the deed of assignment:

... the Assignor do hereby remise, release and quit-claim unto said assignee all

its rights, title and interestin the accounts receivable described hereunder.

(Emphasis supplied by appellants, first par., Deed of Assignment).

... that the title and right of possession to said account receivable is to remain in

said assignee and it shall have the right to collect directly from the debtor, and

whatever the Assignor does in connection with the collection of said accounts, it

agrees to do so as agent and representative of the Assignee and it trustfor said

Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record on Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the

language used in the document but by their intention. Thus, the Court, quoting from the

American Jurisprudence (68 2d, Secured Transaction, Section 50) said:

The characters of the transaction between the parties is to be determined by their

intention, regardless of what language was used or what the form of the transfer

was. If it was intended to secure the payment of money, it must be construed as

a pledge. However, even though a transfer, if regarded by itself, appellate to

have been absolute, its object and character might still be qualified and explained

by a contemporaneous writing declaring it to have been a deposit of the property

as collateral security. It has been Id that a transfer of property by the debtor to a

creditor, even if sufficient on its farm to make an absolute conveyance, should be

treated as a pledge if the debt continues in existence and is not discharged by

the transfer, and that accordingly, the use of the terms ordinarily exporting

conveyance, of absolute ownership will not be given that effect in such a

transaction if they are also commonly used in pledges and mortgages and

therefore do not unqualifiedly indicate a transfer of absolute ownership, in the

absence of clear and ambiguous language or other circumstances excluding an

intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot

be said to have been constituted by virtue of a dation in payment for appellants' loans with

the bank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the

subject of the suit for collection in Civil Case No. 78178. At the time the deed of assignment

was executed, said loans were non-existent yet. The deed of assignment was executed on

January 24, 1964 (Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh.

'A), promissory note 11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June

20, 1966 (Exh. "C"). At most, it was a dation in payment for P10,000.00, the amount of

credit from appellee bank indicated in the deed of assignment. At the time the assignment

was executed, there was no obligation to be extinguished except the amount ofP10,000.00. Moreover, in order that an obligation may be extinguished by another which

substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the

old and the new obligations be on every point incompatible with each other (Article 1292,

New Civil Code).

Obviously, the deed of assignment was intended as collateral security for the bank loans of

appellants, as a continuing guaranty for whatever sums would be owing by defendants to

plaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the

presumption is in favor of pledge, the latter being the lesser transmission of rights and

interests (Lopez v. Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of

lease of two buildings as well as her rights, title and interest in the land on which the

buildings were constructed to secure an overdraft from a bank amounting to P110,000.00

which was increased to P150,000.00, then to P165,000.00 was considered by the Court to

be documents of mortgage contracts inasmuch as they were executed to guarantee the

principal obligations of the defendant consisting of the overdrafts or the indebtedness

resulting therefrom. The Court ruled that an assignment to guarantee an obligation is in

effect a mortgage and not an absolute conveyance of title which confers ownership on the

assignee (People's Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the

Philippine Fisheries Commission before it can proceed against appellants for collection of

loans under their promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the

assignment of receivables, appellants remain as the principal debtors of appellee bank

rather than mere guarantors. The deed of assignment merely guarantees said obligations.

That the guarantor cannot be compelled to pay the creditor unless the latter has exhausted

all the property of the debtor, and has resorted to all the legal remedies against the debtor,

under Article 2058 of the New Civil Code does not therefore apply to them. It is of course of

the essence of a contract of pledge or mortgage that when the principal obligation becomes

due, the things in which the pledge or mortgage consists may be alienated for the payment

to the creditor (Article 2087, New Civil Code). In the instant case, appellants are both the


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principal debtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the

other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment

Agency (EEA) which issued the receivables had been abolished, the collection had to be

coursed through the Office of the President which disapproved the same (Record on

Appeal, p. 16). The receivable became virtually worthless leaving appellants' loans from

appellee bank unsecured. It is but proper that after their repeated demands made on

appellants for the settlement of their obligations, appellee bank should proceed against

appellants. It would be an exercise in futility to proceed against a defunct office for the

collection of the receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the

trial court is affirmed in toto.

SO ORDERED.

Separate Opinions

FELICIANO,J ., concurring:

I quite agree with the general reasoning of and the results reached by my distinguished

brother Bidin in respect of both of the principal issues he addressed in his opinion.

I would merely wish to add a few lines in respect of the point made by Bidin, J., that "the

character of the transactions between the parties is not, however, determined by the

language used in the document but by their intention.' This statement is basically not

exceptionable, so far as it goes. It might, however, be borne in mind that the intent of the

parties to the transaction is to be determined in the first instance, by the very language

which they use. The deed of assignment contains language which suggest that the parties

intended to effect a complete alienation of title to and rights over the receivables which are

the subject of the assignment. This language is comprised of works like "remise," "releaseand quitclaim" and clauses like "the title and right of possession to said accounts receivable

is to remain in said assignee" who "shall have the right to collect directly from the debtor."

The same intent is also suggested by the use of the words "agent and representative of the

assignee" in reffering to the assignor.

The point that appears to me to be worth making is that although in its form, the deed of

assignment of receivables partakes of the nature of a complete alienation of the

receivables assigned, such form should be taken in conjunction with, and indeed must be

qualified and controlled by, other language showing an intent of the parties that title to the

receivables shall pass to the assignee for the limited purpose ofsecuring another, principal;

obligationowed by the assignor to the assignee. Title moves from assignor to asignee but

that title is defeasible being designed to collateralize the principal obligation. Operationally,

what this means is that the assignee is burdened with an obligation of taking the proceeds

of the receivables assigned and applying such proceeds to the satisfaction of the principal

obligation and returning any balance remaining thereafter to the assignor.

The parties gave the deed of assignment the form of an absolute conveyance of title over

the receivables assigned, essentially for the convenience of the assignee. Without such

formally unlimited conveyance of title, the assignee would have to treat the deed of

assignment as no more than a deed of pledge or of chattel mortgage. In other words, in

such hypothetical case, should the assignee seek to realize upon the security given to him

through the deed of assignment (which would then have to comply with the documentation

and registration requirements of a pledge or chattel mortgage), the assignee would have to

foreclose upon the securities or credits assigned and place them on public sale and there

acquire the same. It should be recalled that under the principle which forbids a pactum

commisorium Article 2088, Civil Code), a mortgagee or pledgee is prohibited from simply

taking and appropriating the personal property turned over to him as security for the

payment of a principal obligation. A deed of assignment by way of security avoids the

necessity of a public sale impose by the rule onpactum commisorium, by in effect placing

the sale of the collateral up front. (Emphasis supplied)

The foregoing is applicable where, as in the present instance, the deed of assignment of

receivables combines elements of both a complete or absolute alienation of the credits

being assigned and a security arrangement to assure payment of a principal obligation.

Where the second element is absent, that is, where there is nothing to indicate that the

parties intended the deed of assignment to function as a security device, it would of course

follow that the simple absolute conveyance embodied in the deed of assignment would be

operative; the assignment would constitute essentially a mode of payment ordacion en

pago. Put a little differently, in order that a deed of assignment of receivables which is in

form an absolute conveyance of title to the credits being assigned, may be qualified and

treated as a security arrangement, language to such effect must be found in the document

itself and that language, precisely, is embodied in the deed of assignment in the instant

case. Finally, it might be noted that that deed simply follows a form in standard use in

commercial banking


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March 13, 1911

G.R. No. 5741

ESTANISLAUA ARENAS, ET AL., plaintiffs-appellees,

vs.

FAUSTO O. RAYMUNDO, defendant-appellant.

A.D. Gibbs, for appellant.

Gabriela La O, for appellees.

TORRES,J .:

This is an appeal field by the defendant from a judgment of conviction rendered by the Hon.

Judge Araullo.

On the date of August 31, 1908, the attorneys for the plaintiffs, Estanislaua Arenas and

Julian La O, brought suit against Fausto O. Raymundo, alleging, as a cause of action, that

Estanislaua Arenas was the owner and proprietor of the jewelry described below with the

respective value thereof:

Two gold tamborin rosaries, without bow or reliquary at P40 each P80

One ladys comb for fastening the hair, made of gold and silver, adorned with

pearls of ordinary size and many small pearls, one of which is missing80

One gold ring set with a diamond of ordinary size 1,000

One gold bracelet with five small diamonds and eight brillantitos dealmendras

700

One pair of goldpicaporte earrings with two diamonds of ordinary size and

two small ones1,100

The plaintiffs alleged that the said jewelry, during the last part of April or the beginning of

May, 1908, was delivered to Elena de Vega to sell on commission, and that the latter, in

turn, delivered it to Conception Perello, likewise to sell on commission, but that Perello,

instead of fulfilling her trust, pledged the jewelry in the defendants pawnshop , situated at

No. 33 Calle de Ilaya, Tondo, and appropriated to her own use the money thereby

obtained; that on July 30, 1908, Conception Perello was prosecuted forestafa, convicted,

and the judgment became final; that the said jewelry was then under the control and in thepossession of the defendant, as a result of the pledge by Perello, and that the former

refused to deliver it to the plaintiffs, the owners thereof, wherefore counsel for the plaintiffs

asked that judgment be rendered sentencing the defendant to make restitution of the said

jewelry and to pay the costs.

In the affidavit presented by the attorney for the plaintiffs dated September 2, 1908, after a

statement and description of the jewelry mentioned, it is set forth that the defendant was

retaining it for the reason given in the complaint, and that it was not sequestrated for the

purpose of satisfying any tax or fine or by reason of any attachment issued in compliance

with any judgment rendered against the plaintiffs property.

In discharge of the writ of seizure issued for the said jewelry on the 2nd of September,

1908, aforementioned, the sheriff of this city made the return that he had, on the same

date, delivered one copy of the bond and another of the said writ to the defendant

personally and, on the petition and designation of the attorney for the plaintiffs, proceeded

to seize the jewelry described in the writ, taking it out of the defendants control, and held it

in his possession during the five days prescribed by law.

On the 15th of the same month and year, five days having elapsed without the defendants

having given bond before the court, the sheriff made delivery of all the jewelry described in

the said order to the attorney for the plaintiff to the latters entire satisfaction, who with the

sheriff signed the return of the writ.

After the demurrer to the complaint had been overruled the defendant answered, setting

forth that he denied each and all of the allegations thereof which were not specifically

admitted, explained, or qualified, and as a special defense alleged that the jewelry, the

subject matter of the complaint was pledged on his pawnshop by Conception Perello, the

widow of Pazos, as security for a loan of P1,524, with the knowledge, consent, and

mediation of Gabriel La O, a son of the plaintiffs, as their agent, and that, in consequence

thereof, the said plaintiffs were estopped from disavowing the action of the said Perello; the

defendant therefore prayed that the complaint be dismissed and that the jewelry seized at

the instance of the plaintiffs, or the amount of the loan made thereon, together with the

interest due, be returned to the defendant, with the costs of the suit against the plaintiffs.

The case came up for hearing on March 17, 1909, and after the presentation of oral

testimony by both parties, the count, on June 23 of the same year, rendered judgment

sentencing the defendant to restore to the plaintiff spouses the jewelry described in the

complaint, the right being reserved to the defendant to institute his action against the

proper party. The counsel for the defendant excepted to this judgment, asked that the same

be set aside, and a new trial granted. This motion was denied, exceptions was taken by the

appellant, and the proper bill of exceptions was duly approved certified to, and forwarded to

the clerk of this court.

This is an action for the replevin of certain jewelry delivered by its owner for sale on

commission, and pledged without his knowledge by Concepcion Perello in the pawnshop of

the defendant, Fausto O. Raymundo, who refuses to deliver the said jewelry unless first

redeemed.


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The said Concepcion Perello, who appropriated to herself the money derived from the

pledging of the jewels before mentioned, together with others, to the prejudice of their

owner Estanislaua Arenas, was prosecuted in the Court of First Instance of this City in

cause No. 3955 and sentenced on July 30, 1908, to the penalty of one year eight months

and twenty-one days ofprision correccional, to restore to the offended party the jewelry

specified in the complaint, or to pay the value thereof, amounting to P8,660, or, in case of

insolvency, to suffer the corresponding subsidiary imprisonment, and to pay the costs. Thisjudgment is attested by the certified copy attached under letter D to folio 26 of the record of

the proceedings in the case of the same plaintiff against Antonio Matute the pledgee of

the other jewelry also appropriated by the said Concepcion Perello which record forms a

part of the evidence in this cause.

Perello having pledged the jewelry in question to the defendant Raymundo, and not having

redeemed it by paying him the amount received, it follows that the convicted woman, now

serving the sentence imposed upon her, could not restore the jewelry as ordered in that

judgment, which has become final by the defendants acquiescence.

Article 120 of the Penal Code prescribes:

The restitution of the thing itself must be made, if be in the possession of a third person,

who had acquired it in a legal manner, reserving, however, his action against the proper

person.

Restitution shall be made, even though the thing may be in the possession of a third

person, who had acquired it in a legal manner, reserving, however, his action against the

proper person.

This provision is not applicable to a case in which the third person has acquired the thing in

the manner and with the requisites established by law to make it unrecoverable.

The provisions contained in the first two paragraphs of the preinserted article are based on

the uncontrovertible principle of justice that the party injured through a crime has, as

against all others, a preferential right to be indemnified, or to have restored to him the thing

of which he was unduly deprived by criminal means.

In view of the harmonious relation between the different codes in force in these Islands, it is

natural and logical that the aforementioned provision of the Penal Code, based on the rule

established in article 17 of the same, to wit, that every person criminally liable for a crime or

misdemeanor is also civilly liable, should be in agreement and accordance with the

provisions of article 464 of the Civil Code which prescribes:

The possession of personal property, acquired in good faith, is equivalent to a title thereto.

However, the person who has lost personal property or has been illegally deprived thereof

may recover it from whoever possesses it.

If the possessor of personal property, lost or stolen, has acquired it in good faith at a public

sale, the owner can not recover it without reimbursing the price paid therefor.

Neither can the owner of things pledged in pawnshops, established with the authorization

of the Government, recover them, whosoever may be the person who pledged them,

without previously refunding to the institution the amount of the pledge and the interest due.

With regard to things acquired on exchange, or at fairs or markets or from a merchant

legally established and usually employed in similar dealings, the provisions of the Code of

Commerce shall be observed.

On January 2, 1908, this court had occasion to decide, among other cases, two which were

entirely analogous to the present one. They were No. 3889, Varela vs. Matute, and No.

3890, Varela vs. Finnick(9 Phil. 479, 482).

In the decisions in both cases it appears that Nicolasa Pascual received various jewels

from Josefa Varela to sell on commission and that, instead of fulfilling the trust or returning

the jewels to their owner, she pledged some of them in the pawnshop of Antonio Matute

and others in that of H.J. Finnick and appropriated to herself the amounts that she

received, to the detriment of the owner of the jewelry.

Tried estafa in cause No. 2429, the said Pascual was convicted and sentenced to the

penalty of one year and eleven months ofprision correccional, to restore to Varela, the

jewelry appropriated, or to pay the value thereof, and, in case of insolvency, to subsidiary

imprisonment; this judgment became final, whereupon the defendant began to serve her

sentence. The case just cited is identical to that of Concepcion Perello.

Josefa Varela, in separate incidental proceedings, demanded the restitution or delivery of

possession of the said jewelry; the pledgees, the pawnbrokers, refused to comply with her

demand, alleging, among other reasons, that they were entitled to possession. The two

cases were duly tried, and the Court of First Instance pronounced judgment, supporting the

plaintiffs claims in each. Both cases were appealed by the defendants, Matute and Finnick,

and this court affirmed the judgments on the same grounds, with costs, and the decisions

on appeal established the following legal doctrines:

1. Crimes against property; criminal and civil liability. Where, in a proceeding instituted by

reason of a crime committed against property, the criminal liability of the accused has been

declared, it follows that he shall also be held civilly liable therefor, because every person

who is criminally responsible on account of a crime or misdemeanor is also civilly liable.

2. Id.; Recovery of property unlawfully in possession. Whoever may have been deprived

this property in consequence of a crime is entitled to the recovery thereof, even if such

property is in the possession of a third party who acquired it by legal means other than

those expressly stated in article 464 of the Civil Code.


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3. Personal property; title by possession. In order that the possession of personal

property may be considered as a title thereto it is indispensable that the same shall have

been acquired in good faith.

4. Id.; Ownership; prescription. The ownership of personal property prescribes in the

manner and within the time fixed by articles 1955 and 1962, in connection with article 464,

of the Civil Code.

In the cause prosecuted against Perello, as also in the present suit, it was not proven that

Estanislaua Arenas authorized the former to pawn the jewelry given to her by Arenas to sell

on commission. Because of the mere fact of Perellos having been convicted and

sentenced for estafa, and for the very reason that she is now serving her sentence must be

complied with, that is, the jewelry misappropriated must be restored to its owner, inasmuch

as it exists and has not disappeared this restitution must be made, although the jewelry is

found in the pawnshop of Fausto O. Raymundo and the latter had acquired it by legal

means. Raymundo however retains his right to collect the amounts delivered upon the

pledge, by bringing action against the proper party. This finding is in accord with the

provisions of the above article 120 of the Penal Code and first paragraph of article 464 of

the Civil Code.

The aforementioned decision, No. 3890, Varela vs. Finnick, recites among other

considerations, the following:

The exception contained in paragraph 3 of said article is not applicable to the present case

because a pawnshop does not enjoy the privilege established by article 464 of the Civil

Code. The owner of the loan office of Finnick Brothers, notwithstanding the fact that he

acted in good faith, did not acquire the jewels at a public sale; it is not a question of public

property, securities, or other such effects, the transfer, sale, or disposal of which is subject

to the provisions of the Code of Commerce. Neither does a pawnshop enjoy the privilege

granted to a monte de piedad; therefore, Josefa Varela, who lost said jewels and was

deprived of the same in consequence of a crime, is entitled to the recovery thereof from the

pawnshop of Finnick Brothers, where they were pledged; the latter can not lawfully refuse

to comply with the provisions of article 120 of the Penal Code, as it is a question of jewels

which has been misappropriated by the commission of the crime of estafa, and the

execution of the sentence which orders the restitution of the jewels can not be avoided

because of the good faith with which the owner of the pawnshop acquired them, inasmuch

as they were delivered to the accused, who was not the owner nor authorized to dispose of

the same.

Even supposing that the defendant Raymundo had acted in good faith in accepting the

pledge of the jewelry in litigation, even then he would not be entitled to retain it until the

owner thereof reimburse him for the amount loaned to the embezzler, since the said owner

of the jewelry, the plaintiff, did not make any contract with the pledgee, that would obligate

him to pay the amount loaned to Perello, and the trial record does not disclose any

evidence, even circumstantial, that the plaintiff Arenas consented to or had knowledge of

the pledging of her jewelry in the pawnshop of the defendant.

For this reason, and because Conception Perello was not the legitimate owner of the

jewelry which she pledged to the defendant Raymundo, for a certain sum that she received

from the latter as a loan, the contract of pledge entered the jewelry so pawned can not

serve as security for the payment of the sum loaned, nor can the latter be collected out of

the value of the said jewelry.

Article 1857 of the Civil Code prescribes as one of the essential requisites of the contractsof pledge and of mortgage, that the thing pledged or mortgaged must belong to the person

who pledges or mortgages it. This essential requisite for the contract of pledge between

Perello and the defendant being absent as the former was not the owner of the jewelry

given in pledge, the contract is as devoid of value and force as if it had not been made, and

as it was executed with marked violation of an express provision of the law, it can not

confer upon the defendant any rights in the pledged jewelry, nor impose any obligation

toward him on the part of the owner thereof, since the latter was deprived of her possession

by means of the illegal pledging of the said jewelry, a criminal act.

Between the supposed good faith of the defendant Raymundo and the undisputed good

faith of the plaintiff Arenas, the owner of the jewelry, neither law nor justice permit that the

latter, after being the victim of the embezzlement, should have to choose one of the two

extremes of a dilemma, both of which, without legal ground or reason, are injurious andprejudicial to her interest and rights, that is, she must either lose her jewelry or pay a large

sum received by the embezzler as a loan from the defendant, when the plaintiff Arenas is

not related to the latter by any legal or contractual bond out of which legal obligations arise.

It is true that the plaintiffs son, attorney Gabriel La O, intervened and gave his consent

when the Concepcion Perello pawned the jewelry in litigation with Fausto Raymundo for

P1,524? In view of the evidence offered by the trial record, the answer is, of course, in the

negative.

The parents of the attorney Gabriel La O being surprised by the disagreeable news of the

disappearance of various jewels, amounting in value to more than P8,600, delivered to

Elena Vega for sale on commission and misappropriated by Conception Perello, who

received them from Vega for the same purpose, it is natural that the said attorney, acting in

representation of his parents and as an interested party, should have proceeded to

ascertain the whereabouts of the embezzled jewelry an to enter into negotiations with the

pawnshop of Fausto O. Raymundo, in whose possession he had finally learned were to be

found a part of the embezzled jewels, as he had been informed by the said Perello herself;

and although, at first, at the commencement of his investigations, he met with opposition on

the part of the pledgee Raymundo, who objected to showing him the jewels that he desired

to see in order to ascertain whether they were those embezzled and belonging to his

mother, the plaintiff Arenas, thanks to the intervention of attorney Chicote and to the fact

that they succeeded in obtaining from the embezzler, among other papers, the pawn ticket

issued by Raymundos pawnshop, Exhibit E, of the date of May 4, 1908, folio 19 of the

record in the case against Matute, Gabriel La O succeeded in getting the defendant to

show him the jewelry described in the said ticket together with other jewels that did not

belong to La Os mother, that had been given the defendant by Ambrosia Capistrano,Perellos agent, in pledge or security for a loan of P170.


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Gabriel La O, continuing the search for other missing jewelry belonging to his mother,

found that Fausto O. Raymundo was in possession of it and had received it from the same

embezzler as security for a debt, although the defendant Raymundo would not exhibit it

until he issued the pawn tickets corresponding to such jewels; therefore, at Raymundos

request, Perello, by means of the document Exhibit C, signed by herself and bearing date

of June 10, 1908, folio 28 of the record, authorized her son Ramon to get from the

defendant, in her name, the pawn tickets of the said other jewelry, for which such ticketshad not yet been issued; Raymundo then wrote out the tickets Exhibits L, LL, and M, all

dated June 22, 1908, and found on folios 20, 21 and 22 of the record of the aforesaid

proceedings against Matute in the presence of the attorney Gabriel La O, who kept the

said three pawn tickets, after he had made sure that the jewels described therein and which

Raymundo, taking them out of his cabinet, exhibited to him at the time, were among those

embezzled from his mother.

So that, when the three aforementioned pawn tickets, Exhibits L, LL, and M, from the

pawnshop of the defendant were made out, the latter already, and for some time previous,

had in his possession as a pledge the jewelry described in them, and the plaintiffs son

naturally desiring to recover his parents jewelry, was satisfied for the time being with

keeping the three pawn tickets certifying that such jewelry was pawned to the defendant.

Moreover, the record discloses no proof that the attorney Gabriel La O consented to or took

any part in the delivery of the jewelry in question to the defendant as a pledge, and both the

said defendant, Raymundo, and the embezzler Perello, averred in their respective

testimony that the said attorney La O had no knowledge of and took no part in the pledging

of the jewelry, and Perello further stated that she had received all the money loaned to her

by the defendant Raymundo. (Folios 13 to 14, and 76 to 80 of the record in the case

against Matute.)

The business of pawnshops, in exchange for the high and onerous interest which

constitutes its enormous profits, is always exposed to the contingency of receiving in

pledge or security for the loans, jewels and other articles that have been robbed, stolen, or

embezzled from their legitimate owners; and as the owner of the pawnshop accepts the

same and asks for money on it, without assuring himself whether such bearer is or is notthe owner thereof, he can not, by such procedure, expect from the law better and more

preferential protection than the owner of the jewels or other articles, who was deprived

thereof by means of a crime and is entitled to be excused by the courts.

Antonio Matute, the owner of another pawnshop, being convinced that he was wrong,

refrained from appealing from the judgment wherein he was sentenced to return, without

redemption, to the plaintiffs, another jewel of great value which had been pledged to him by

the same Perello. He undoubtedly had in mind some of the previous decisions of this court,

one of which was against himself.

For the foregoing reasons, whereby the errors attributed to the judgment of the Court of

First Instance have been discussed and decided upon, and the said judgment being in

harmony with the law, the evidence and the merits of the case, it is proper, in our opinion,

to affirm the same, as we hereby do, with the costs against the appellant. So ordered.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,

vs.

THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, *J .:

This is a petition for review by way of certiorari of the decision1

of the Court of Appeals in

CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino

Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio

Reyes, defendants-appellants," which affirmed in toto the decision of the Court of First

Instance of Manila in favor of plaintiff- appellee, the herein private respondent Maxima

Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia,

went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia

who arranged everything about the loan with the bank and who supplied to the latter the

personal data required for Castro's loan application. On December 11, 1959, after the bank

approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia

spouses, signed a promissory note corresponding to her loan in favor of the bank.

On the same day, December 11, 1959, the Valencia spouses obtained from the bank an

equal amount of loan for P3,000.00. They signed a promissory note (Exhibit "2")

corresponding to their loan in favor of the bank and had Castro affixed thereon her

signature as co-maker.

The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and

lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of

the Register of Deeds of Manila.

On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff BasilioMagsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her

property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to

satisfy the obligation covering the two promissory notes plus interest and attorney's fees.

Upon request by Castro and the Valencias and with conformity of the bank, the auction sale

that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when April

10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the

property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11,

1961, which was the next succeeding business day following the special holiday.

Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff

on February 13, 1961, when she learned for the first time that the mortgage contract

(Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for


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P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2")

without her being informed of this.

On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners

Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as

defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the

charge, amongst others, that thru mistake on her part or fraud on the part of Valencias shewas induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a

mortgage on her house and lot to secure the questioned note. At the time of filing her

complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in

full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she

is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it

exceeds P3,000.00; for the discharge of her personal obligation with the bank by reason of

a deposit of P3,383.00 with the court a quoupon the filing of her complaint; for the

annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of

Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.

In their answers, petitioners interposed counterclaims and prayed for the dismissal of said

complaint, with damages, attorney's fees and costs.2

The pertinent facts arrived from the stipulation of facts entered into by the parties as stated

by respondent Court of Appeals are as follows:

Spawning the present litigation are the facts contained in the following stipulation of facts

submitted by the parties themselves:

1. That the capacity and addresses of all the parties in this case are admitted .

2. That the plaintiff was the registered owner of a residential house and lot located at Nos.

1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty (150)square meters, more or less, covered by T.C.T. No. 7419 of the Office of the Register of

Deeds of Manila;

3. That the signatures of the plaintiff appearing on the following documents are genuine:

a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959

in the amount of P3,000.00 attached as Annex A of this partial stipulation of facts;

b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural

Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial stipulation of

facts;

c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11,

1959, signed only by the defendants, Severino Valencia and Catalina Valencia, attached as

Annex C, of this partial stipulation of facts;

d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for

the amount of P3000.00, signed by the spouses Severino Valencia and Catalina Valencia

as borrowers, and plaintiff Maxima Castro, as a co-maker, attached as Annex D of thispartial stipulation of facts;

e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in

favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached herein

as Annex E of this partial stipulation of facts;

All the parties herein expressly reserved their right to present any evidence they may desire

on the circumstances regarding the execution of the above-mentioned documents.

4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a

notice of sheriff's sale, address to the plaintiff, dated February 13, 1961, announcing that

plaintiff's property covered by TCT No. 7419 of the Register of Deeds of the City of Manila,

would be sold at public auction on March 10, 1961 to satisfy the total obligation of

P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale

and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as

Annexes F and F-1, respectively, of this stipulation of facts;

5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and

Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the Sheriff of

Manila postponed the auction sale scheduled for March 10, 1961 for thirty (30) days and

the sheriff re-set the auction sale for April 10, 1961;

6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon

agreement of the parties.)

8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property

covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and the

corresponding certificate of sale was issued to him as per Annex G of this partial stipulation

of facts;

9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of

Consolidation of Ownership, a copy of which is hereto attached as Annex H of this partial

stipulation of facts;

10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed

of sale in favor of the defendant, Arsenio Reyes, in the amount of P7,000.00, a copy of

which is attached as Annex I of this partial stipulation of facts;


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11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title

No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title

No. 7419 which was in the name of plaintiff, Maxima Castro, which was cancelled;

12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per

T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds of Manila

and the same was annotated in the back of T.C.T. No. 67299 as per Annex J of this partialstipulation of facts; and

13. That the parties hereby reserved their rights to present additional evidence on matters

not covered by this partial stipulation of facts.

WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be

approved and admitted by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court of

Appeals the statement thereof, as follows:

In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow

who cannot read and write the English language; that she can speak the Pampango dialect

only; that she has only finished second grade (t.s.n., p. 4, December 11, 1964); that in

December 1959, she needed money in the amount of P3,000.00 to invest in the business

of the defendant spouses Valencia, who accompanied her to the defendant bank for the

purpose of securing a loan of P3,000.00; that while at the defendant bank, an employee

handed to her several forms already prepared which she was asked to sign on the places

indicated, with no one explaining to her the nature and contents of the documents; that she

did not even receive a copy thereof; that she was given a check in the amount of P2,882.85

which she delivered to defendant spouses; that sometime in February 1961, she received a

letter from the Acting Deputy Sheriff of Manila, regarding the extrajudicial foreclosure sale

of her property; that it was then when she learned for the first time that the mortgage

indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00;

that upon investigation of her lawyer, it was found that the papers she was made to sign

were:

(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1);

(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2);

(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia

spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).

The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request

of defendant spouses Valencia who needed more time within which to pay their loan of

P3,000.00 with the defendant bank; plaintiff claims that when she filed the complaint she

deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of

P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April

3, 1961 (Exh. D).

As additional evidence for the defendant bank, its manager declared that sometime in

December, 1959, plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p

4, January 27, 1966). She wept, there to inquire if she could get a loan from the bank. The

claims he asked the amount and the purpose of the loan and the security to he given andplaintiff said she would need P3.000.00 to be invested in a drugstore in which she was a

partner (t.s.n., p. 811. She offered as security for the loan her lot and house at Carola St.,

Sampaloc, Manila, which was promptly investigated by the defendant bank's inspector.

Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia A

date was allegedly set for plaintiff and the defendant spouses for the processing of their

application, but on the day fixed, plaintiff came without the defendant spouses. She signed

the application and the other papers pertinent to the loan after she was interviewed by the

manager of the defendant. After the application of plaintiff was made, defendant spouses

had their application for a loan also prepared and signed (see Exh. 13). In his interview of

plaintiff and defendant spouses, the manager of the bank was able to gather that plaintiff

was in joint venture with the defendant spouses wherein she agreed to invest P3,000.00 as

additional capital in the laboratory owned by said spouses (t.s.n., pp. 16-17)3

The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the

Court of First Instance of Manila, the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:

(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;

(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the

amount thereof exceeds the sum of P3,000.00 representing the principal obligation of

plaintiff, plus the interest thereon at 12% per annum;

(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property

held on April 11, 1961, as well as all the process and actuations made in pursuance of or in

implementation thereto;

(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan,

Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of

April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of

Court be applied to the payment thereof;

(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes

the purchase price the latter paid for the mortgaged property at the public auction, as well

as reimburse him of all the expenses he has incurred relative to the sale thereof;


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(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay

defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding

12% interest thereon per annum from December 11, 1960 until fully paid; and

Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino

D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum of P600.00

by way of attorney's fees, as well as costs.

In view of the conclusion that the court has thus reached, the counterclaims of defendant

Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed,

as a corollary

The Court further denies the motion of defendant Arsenio Reyes for an Order requiring

Maxima Castro to deposit rentals filed on November 16, 1963, resolution of which was held

in abeyance pending final determination of the case on the merits, also as a consequence

of the conclusion aforesaid.4

Petitioners Bank and Jose Desiderio moved for the reconsideration5of respondent court's

decision. The motion having been denied,6they now come before this Court in the instant

petition, with the following Assignment of Errors, to wit:

I

THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF

THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS

THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK

DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR

COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL

CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE

EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO.

II

THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING

PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT

OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE

VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE

RES INTER ALIOS ACTA RULE.

III

THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS

FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE

REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH

PETITIONER BANK.

IV

THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS

AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES

OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS MUCH AS IT

WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT

ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD WAS MADEPOSSIBLE.

V

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT

BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER

AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID

RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK.

VI

THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING

UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON

THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE

THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF

FURTHER NOTICE THEREOF.

The issue raised in the first three (3) assignment of errors is whether or not respondent

court correctly affirmed the lower court in declaring the promissory note (Exhibit 2) invalid

insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage

contract (Exhibit 6) valid up to the amount of P3,000.00 only.

Respondent court declared that the consent of Castro to the promissory note (Exhibit 2)

where she signed as co-maker with the Valencias as principal borrowers and her

acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property tosecure the amount of P6,000.00 was obtained by fraud perpetrated on her by the Valencias

who had abused her confidence, taking advantage of her old age and ignorance of her

financial need. Respondent court added that "the mandate of fair play decrees that she

should be relieved of her obligation under the contract" pursuant to Articles 247and

13328

of the Civil Code.

The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and

the mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only

which was equivalent to her personal loan to the bank.

Petitioners argued that since the Valencias were solely declared in the decision to be

responsible for the fraud against Castro, in the light of the res inter alios acta rule, a finding

of fraud perpetrated by the spouses against Castro cannot be taken to operate prejudiciallyagainst the bank. Petitioners concluded that respondent court erred in not giving effect to


12/44


the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in declaring

that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan

of P3,000.00.

The records of the case reveal that respondent court's findings of fraud against the

Valencias is well supported by evidence. Moreover, the findings of fact by respondent court

in the matter is deemed final. 9The decision declared the Valencias solely responsible forthe defraudation of Castro. Petitioners' contention that the decision was silent regarding the

participation of the bank in the fraud is, therefore, correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the

Valencias. For one, no claim was made on this in the lower court. For another, petitioners

did not submit proof to support its contention.

At any rate, We observe that while the Valencias defrauded Castro by making her sign the

promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented

to the bank Castro's personal qualifications in order to secure its consent to the loan. This

must be the reason which prompted the bank to contend that it was defrauded by the

Valencias. But to reiterate, We cannot agree with the contention for reasons above-

mentioned. However, if the contention deserves any consideration at all, it is in indicating

the admission of petitioners that the bank committed mistake in giving its consent to the

contracts.

Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted

by the Valencias both Castro and the bank committed mistake in giving their consents to

the contracts. In other words, substantial mistake vitiated their consents given. For if Castro

had been aware of what she signed and the bank of the true qualifications of the loan

applicants, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code which provides:

Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such

misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and

the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for

while the contracts may not be invalidated insofar as they affect the bank and Castro on the

ground of fraud because the bank was not a participant thereto, such may however be

invalidated on the ground of substantial mistake mutually committed by them as a

consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the

case ofHill vs. Veloso,10

this Court declared that a contract may be annulled on the ground

of vitiated consent if deceit by a third person, even without connivance or complicity with

one of the contracting parties, resulted in mutual error on the part of the parties to the

contract.

Petitioners argued that the amended complaint fails to contain even a general averment of

fraud or mistake, and its mention in the prayer is definitely not a substantial compliance

with the requirement of Section 5, Rule 8 of the Rules of Court. The records of the case,

however, will show that the amended complaint contained a particular averment of fraud

against the Valencias in full compliance with the provision of the Rules of Court. Although,

the amended complaint made no mention of mistake being incurred in by the bank and

Castro, such mention is not essential in order that the promissory note (Exhibit 2) may bedeclared of no binding effect between them and the mortgage (Exhibit 6) valid up to the

amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a

mere consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud

particularly averred in the complaint, having been proven, is deemed sufficient basis for the

declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the

bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.

The second issue raised in the fourth assignment of errors is who between Castro and the

bank should suffer the consequences of the fraud perpetrated by the Valencias.

In attributing to Castro an consequences of the loss, petitioners argue that it was her

negligence or acquiescence if not her actual connivance that made the fraud possible.

Petitioners' argument utterly disregards the findings of respondent Court of Appeals

wherein petitioners' negligence in the contracts has been aptly demonstrated, to wit:

A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-

appellee to several interviews. If this were true why is it that her age was placed at 61

instead of 70; why was she described in the application (Exh. B-1-9) as drug manufacturer

when in fact she was not; why was it placed in the application that she has income of

P20,000.00 when according to plaintiff-appellee, she his not even given such kind of

information -the true fact being that she was being paid P1.20 per picul of the sugarcane

production in her hacienda and 500 cavans on the palay production.11

From the foregoing, it is evident that the bank was as much , guilty as Castro was, of

negligence in giving its consent to the contracts. It apparently relied on representations

made by the Valencia spouses when it should have directly obtained the needed data from

Castro who was the acknowledged owner of the property offered as collateral. Moreover,

considering Castro's personal circumstances her lack of education, ignorance and old

age she cannot be considered utterly neglectful for having been defrauded. On the

contrary, it is demanded of petitioners to exercise the highest order of care and prudence in

its business dealings with the Valencias considering that it is engaged in a banking

businessa business affected with public interest. It should have ascertained Castro's

awareness of what she was signing or made her understand what obligations she was

assuming, considering that she was giving accommodation to, without any consideration

from the Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the

bank to believe that they were authorized to speak and bind her. She cannot now be


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permitted to deny the authority of the Valencias to act as her agent for one who clothes

another with apparent authority as her agent is not permitted to deny such authority.

The authority of the Valencias was only to follow-up Castro's loan application with the bank.

They were not authorized to borrow for her. This is apparent from the fact that Castro went

to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been

understood by the Bank to be a grant of an authority to the Valencia to borrow in her behalf,it should have required a special power of attorney executed by Castro in their favor. Since

the bank did not, We can rightly assume that it did not entertain the notion, that the

Valencia spouses were in any manner acting as an agent of Castro.

When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a

promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan,

the Valencias acted for their own behalf. Considering however that for the loan in which the

Valencias appeared as principal borrowers, it was the property of Castro that was being

mortgaged to secure said loan, the Bank should have exercised due care and prudence by

making proper inquiry if Castro's consent to the mortgage was without any taint or defect.

The possibility of her not knowing that she signed the promissory note (Exhibit 2) as co-

maker with the Valencias and that her property was mortgaged to secure the two loans

instead of her own personal loan only, in view of her personal circumstances ignorance,lack of education and old age should have placed the Bank on prudent inquiry to protect

its interest and that of the public it serves. With the recent occurrence of events that have

supposedly affected adversely our banking system, attributable to laxity in the conduct of

bank business by its officials, the need of extreme caution and prudence by said officials

and employees in the discharge of their functions cannot be over-emphasized.

Question is, likewise, raised as to the propriety of respondent court's decision which

declared that Castro's consignation in court of the amount of P3,383.00 was validly made. It

is contended that the consignation was made without prior offer or tender of payment to the

Bank, and it therefore, not valid. In holding that there is a substantial compliance with the

provision of Article 1256 of the Civil Code, respondent court considered the fact that the

Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum,

while the amount consigned was only P3,000.00 plus 12% interest; that at the time ofconsignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the

mortgage property had already been scheduled for April 10, 1961 for non-payment of the

obligation, and that despite the fact that the Bank already knew of the deposit made by

Castro because the receipt of the deposit was attached to the record of the case, said Bank

had not made any claim of such deposit, and that therefore, Castro was right in thinking

that it was futile and useless for her to make previous offer and tender of payment directly

to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest. Under the

foregoing circumstances, the consignation made by Castro was valid. if not under the strict

provision of the law, under the more liberal considerations of equity.

The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public

auction of the mortgaged property that was held on April 11, 1961.

Petitioners contended that the public auction sale that was held on April 11, 1961 which

was the next business day after the scheduled date of the sale on April 10, 1961, a special

public holiday, was permissible and valid pursuant to the provisions of Section 31 of the

Revised Administrative Code which ordains:

Pretermission of holiday. Where the day, or the last day, for doing any act required or

permitted by law falls on a holiday, the act may be done on the next succeeding businessday.

Respondent court ruled that the aforesaid sale is null and void, it not having been carried

out in accordance with Section 9 of Act No. 3135, which provides:

Section 9. Notice shall be given by posting notices of the sale for not less than twenty

days in at least three public places of the municipality or city where the property is situated,

and if such property is worth more than four hundred pesos, such notice shall also be

published once a week for at least three consecutive weeks in a newspaper of general

circulation in the municipality or city.

We agree with respondent court. The pretermission of a holiday applies only "where the

day, or the last day for doing any act required or permitted by lawfalls on a holiday," or

when the last day of a given period for doing an act falls on a holiday. It does not apply to a

day fixed by an office or officer of the government for an act to be done, as distinguished

from a period of time within which an act should be done, which may be on any day within

that specified period. For example, if a party is required by law to file his answer to a

complaint within fifteen (15) days from receipt of the summons and the last day falls on a

holiday, the last day is deemed moved to the next succeeding business day. But, if the

court fixes the trial of a case on a certain day but the said date is subsequently declared a

public holiday, the trial thereof is not automatically transferred to the next succeeding

business day. Since April 10, 1961 was not the day or the last day set by law for the

extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the

deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business

day without the notices of the sale on that day being posted as prescribed in Section 9, Act

No. 3135.

WHEREFORE, finding no reversible error in the judgment under review, We affirm the

same in toto. No pronouncement as to cost.

SO ORDERED


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G.R. No. 125055 October 30, 1998

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,

vs.

COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P.

JAVILLONAR,respondents.

MENDOZA,J .:

This is a petition for review on certiorariof the decision rendered on February 29, 1996 by

the Court of Appeals1reversing, in toto, the decision of the Regional Trial Court of Pasig

City in Civil Case No. 62290, as well as the appellate court's resolution of May 7, 1996

denying reconsideration.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million

to private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of

which the latter executed the following documents: (a) a promissory note, dated November

27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of

mortgage over realty covered by TCT No. 58748, together with the improvements thereon;

and (c) an undated deed of sale of the mortgaged property in favor of the mortgagee,

petitioner A. Francisco Realty.2

The interest on the said loan was to be paid in four installments: half of the total amount

agreed upon (P900,000.00) to be paid in advance through a deduction from the proceeds

of the loan, while the balance to be paid monthly by means of checks post-dated March 27,

April 27, and May 27, 1992. The promissory note expressly provided that upon "failure of

the MORTGAGOR (private respondents) to pay the interest without prior arrangement with

the MORTGAGEE (petitioner), full possession of the property will be transferred and the

deed of sale will be registered.3

For this purpose, the owner's duplicate of TCT No. 58748

was delivered to petitioner A. Francisco Realty.

Petitioner claims that private respondents failed to pay the interest and, as a consequence,

it registered the sale of the land in its favor on February 21, 1992. As a result, TCT No.

58748 was cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of

petitioner A. Francisco Realty.4

Private respondents subsequently obtained an additional loan of P2.5 Million from

petitioner on March 13, 1992 for which they signed a promissory note which reads:

PROMISSORY NOTE

For value received I promise to pay A. FRANCISCO REALTY AND

DEVELOPMENT CORPORATION, the additional sum of Two Million FiveHundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with

interest at the rate of four percent (4%) a month until fully paid and if after the

said date this note and/or the other promissory note of P7.5 Million remains

unpaid and/or unsettled, without any need for prior demand or notification, I

promise to vacate voluntarily and willfully and/or allow A.FRANCISCO REALTY

AND DEVELOPMENT CORPORATION to appropriate and occupy for their

exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig,

Metro Manila.5

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly

interest from May 1992, plus surcharges. As respondent spouses refused to vacate,

petitioner filed the present action for possession before the Regional Trial Court in Pasig

City.6

In their answer, respondents admitted liability on the loan but alleged that it was not their

intent to sell the realty as the undated deed of sale was executed by them merely as an

additional security for the payment of their loan. Furthermore, they claimed that they were

not notified of the registration of the sale in favor of petitioner A. Francisco Realty and that

there was no interest then unpaid as they had in fact been paying interest even subsequent

to the registration of the sale. As an alternative defense, respondents contended that the

complaint was actually for ejectment and, therefore, the Regional Trial Court had nojurisdiction to try the case. As counterclaim, respondents sought the cancellation of TCT

No. PT-85569 as secured by petitioner and the issuance of a new title evidencing their

ownership of the property.7

On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive

portion of which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is

hereby rendered declaring as legal and valid, the right of ownership of A.

Francisco Realty Find Development Corporation, over the property subject of this

case and now registered in its name as owner thereof, under TCT No. 85569 of

the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde

VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further

committing acts of dispossession or from withholding possession from plaintiff of

the said property as herein described and specified.

Claim for damages in all its forms, however, including attorney's fees, are hereby

denied, no competent proofs having been adduced on record, in support

thereof.8

Respondent spouses appealed to the Court of Appeals which reversed the decision of the

trial court and dismissed the complaint against them. The appellate court ruled that the

Regional Trial Court had no jurisdiction over the case because it was actually an action for

unlawful detainer which is exclusively cognizable by municipal trial courts. Furthermore, it


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ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for being

in fact a pactum commissorium which is prohibited by Art. 2088 of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals

denied the motion in its resolution, dated May 7, 1996. Hence, this petition for review

on certiorariraising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT

THE REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE

COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT

THE CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE

CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER

ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for

unlawful detainer, as contra-distinguished from accion publiciana. As

contemplated by Rule 70 of the Rules of Court, an action for unlawful

detainer which falls under the exclusive jurisdiction of the Metropolitan

or Municipal Trial Courts, is defined as withholding from by a person

from another for not more than one year, the possession of the land or

building to which the latter is entitled after the expiration or termination

of the supposed rights to hold possession by virtue of a contract,

express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs.

Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or

unlawful detainer within the expiration of the 1 year period, the case

may still be filed under the plenary action to recover possession by

accion publiciana before the Court of First Instance (now the Regional

Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language,

the case at bar is a legitimate ejectment case filed within the 1 year

period from the jurisdictional demand to vacate. Thus, the Regional

Trial Court has no jurisdiction over the case. Accordingly, under

Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the

exclusive original jurisdiction over forcible entry and unlawful detainer

case. (Sen Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990])9

We think the appellate court is in error. What really distinguishes an action for unlawful

detainer from a possessory action (accion publiciana) and from a reivindicatory action

(accion reivindicatoria) is that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the

two forms of an ejectment suit that may be filed to reco

Documents

6.a - Common Provisions.docx