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G.R. No. L-19227 February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant, vs.PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R. B. de los Reyes and C. E.Medina for defendant-appellee.

BENGZON, J.P., J.:

Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao, valued atP109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which waspurchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943,plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was

payable at P50,000 a year, due on or before the end of the current year.2

On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. Toguarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank,as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of

the Collector of Customs for the Port of Cebu.3

Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewedby the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, wasdue on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948.These two notes

were never paid at all by plaintiff on their respective due dates. 4

On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification ofcommercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31,1948, seven Bank of the Philippine Islands checks totallingP184,000. The drawer thereof one of the co-accused hadno funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdrawthe amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused wereconvicted by the trial court and sentenced to indemnify the defendant bankin the sum of P184,000. On appeal, the convictionwas affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the

order for indemnification was returned unsatisfied asplaintiff was totally insolvent. 5

Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of threepledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, theCebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract,executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant

bank for P30,042.72. 6

The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission whichrescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price

thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March15, 1951.

On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or theirvalue and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages.After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most ofthe facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 toP8,846.01, 8 but increasing its alleged damages to P35,000.

The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession ofthe vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private saleof the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contractwas likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as hisremaining account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminalcases.

When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved

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being more than P200,000.00.

In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is achattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until afterthere has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is apledge contract

3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and

received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract,Exhibit "A" & Exhibit "1-Bank", was executedand duly registered with the Office of the Collector of Customs for the Port ofCebu on the date appearing therein; (Emphasis supplied)1wph1.t

Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake,

no amount of rationalization can offset it.9

The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true thatplaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made

"subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11 being new cannot apply tothe pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting theproposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor withoutinvalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the

pledgee.12

Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. Hepoints to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then thereis also Banco Espaol-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of thepeculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings.In Betita v. Ganzon, the objects pledged carabaos were easily capable of actual, manual delivery unto the pledgee. InBanco Espaol-Filipino v. Peterson, the objects pledged goods contained in a warehouse were hardly capable ofactual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been anunreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys tothe warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances ofeach case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said propertysubject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e.,vessels used in maritime business, such delivery is sufficient.

Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff,the former could take actual possession at any time during the life of the pledge to make more effective its security. Its takingof the vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defraudedthe defendant bank in the huge sum of P184,000.

The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863

of the old Civil Code, 13 has ruled: 14

Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y noquedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o seanacreedor, deudor y Sociedad, convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y elderecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambosconvinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este

articulo.

In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the private sale ofthe pledged vessels in favor of the defendant bank itself. It is contended first, that the cases holding that the statutoryrequirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longerauthoritative in view of the passage of Act 3135, as amended;second, that the charter of defendant bank does not allow it tobuy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable.

There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v.Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure

of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's

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authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only statesthat if the sale is public, the bank could purchase the whole or part of the property sold "free from any right of redemption onthe part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale wereprivate and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could haverecovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy wasto have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an

obligation to return the P184,000 fraudulently taken by him from defendant bank.

The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue of the takingof the vessels. But in view of the results reached above, there is no more need to discuss the same.

On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure andsale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted inthe payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands.

WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,concur.1wph1.t

G.R. No. L-24893 August 23, 1926

Involuntary Insolvency of The Gulf Plantation Co. PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN DRUGCOMPANY and STANDARD OIL COMPANY, petitioners-appellants, vs. PHILIPPINE NATIONAL BANK, creditor-appellee.

H. B. Hughes, assignee.

Simon R. Cruz for appellants.Dionisio de Leon for appellee.

-->STATEMENT virtual law library

At Davao, Davao P. I., on august 24, 1918, the Gulf Plantation Company, a corporation, through its president executed to thePhilippine National Bank a certain instrument known in the record as Exhibit A, in which the Plantation Company is namedand styled as the pledgor, and the Philippine National Bank as the pledges, in which it is recited that the Gulf PlantationCompany has obtained certain credits, loans, overdrafts, etc., from the pledgee, which the parties have mutually agreedshould be guaranteed and secured, including costs, charges, and interest "of keeping the pledged property," and "all otherexpenditures of the pledgee incurred in connection with this pledge." In consideration thereof, all other valuable considerationreceived by the pledgor, and for the purpose of securing the payment of all sums not exceeding P165,000, the pledgorhypothecated and pledged to the pledgee and hereby delivered the possession, for the purpose of the pledge, of all theproperty itemized in schedule A on the back of this pledge. The pledgor agreed without demand to pledge and deliver to thepledgee any further and additional securities required, and to pay the taxes and keep the property insured. That, if thepledgor shall pay to the pledgee such sums of money as the pledgee, may advance under the terms of the pledge, then thepledged property may be turned to the pledgor, and "this pledge shall be of no further, otherwise, to remain in force, and thepledgee may dispose of the pledged property in the manner herein provided, or in accordance with the Chattel MortgageLaw, at the option of the pledgee." The pledgor appoints the pledgee as attorney-in-fact of the pledgor with full power andauthority after any condition of the pledge may have been broken to enter the premises where the pledged property is

located, and take possession of it by force, if necessary, and seize and take actual possession of it without an order of thecourt, and to sell, assign and deliver the property pledged, or any part thereof, at the option of the pledgee. Provision is thenmade for the application of the proceeds of any sale of the property under the pledge. The instrument was duly executed andacknowledged before a notary public as of the date it was signed.

Schedule A, which is part of the instrument, is as follows:

Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, Davao Province, P. I., planted to 236,000hemp and 700 coconut trees, valued at P430,000.virtualawlibrary virtual law library

Forty-eight buildings of permanent materials valued at P5,500 situated on above lease. Two buildings of strong materials

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valued at P15,000.virtualawlibrary virtual law library

One thousand piculs hemp now in the plantation bodega at Pantucan all belonging to the "Gulf Plantation, Incorporated,"valued at P45,000.virtualawlibrary virtual law library

Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450.virtualawlibrary virtual law library

One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; one launch "Rigel," P800; one launch "New

Kirk," P3,500 and cargo boats, P200.

The instrument contains the following endorsement:

Doc. stamps affixed P17.20

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDSReceived this 24th day of Feb.,1921,at 9.30 o'clock a. m.

Entry No. 90, page 3, Volume Day Book (Provisional).

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDSReceived this 24th day of Feb.,1921.at 9.30 o'clock a. m.

March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Company declared insolvent, and it was declaredinsolvent on September 16, 1922, and the court ordered the sheriff to take possession of all the assets of the insolventestate. October 23, 1922, with the consent and approval of all creditors, including the Philippine National Bank, and assigneewas appointed, and on October 27, 1922, he filed an inventory of all of the properties of the plantation company, March 17,1923, the court made an order requiring the assignee to render an account and to give the creditors a copy. March 20, 1923,the assignee filed his account for the period between October 1, 1922, and February 28, 1923. On January 7, 1924, theassignee filed a further account covering the period from October 1, 1922, to November 30, 1923. Both of which accountsare still pending and waiting the approval of the court. November 28, 1923, the assignee filed a petition for authority to sell atpublic auction all of the properties of the insolvent estate, which application is also now pending and waiting the order of thecourt. November 3, 1922, the Philippine National Bank filed a petition, to which was attached a copy of Exhibit A and made apart of it, reciting the execution of the instrument and a breach of its conditions, and praying for the following order from thecourt:

(a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a copy of which is attached to this claim asappendix A be declared effective and matured; virtual law library

(b) That the assignee appointed in this insolvency proceeding, or if the latter has not yet been appointed, the sheriff of theProvince of Davao be authorized to sell at public or private sale, after notice to the Philippine National Bank, all such interest,right or share as the Gulf Plantation, Inc., has or may have in the properties described in Exhibit A; virtual law library

(c) That should the proceeds of the sale of the properties mentioned in appendix A be greater than the sum of P165,000, thisamount of P165,000 be delivered to the Philippine National Bank, and the balance to the assignee in insolvency; and virtuallaw library

(d) In the event that the proceeds of the sale of the properties mentioned in Appendix A is less than the sum of P165,000 thatsaid proceeds be delivered to the Philippine National Bank, and for the balance of difference not paid of the debt of theinsolvent corporation to the claimant company, the Philippine National Bank be admitted as an ordinary creditor in thisinsolvency proceeding.

February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order of the court, filed objections to theapproval of the accounts rendered by the assignee.virtualawlibrary virtual law library

In this situation, the court rendered a judgment in favor of the Philippine National Bank to the effect that it was entitled to thepossession of all of the estate of the insolvent corporation, and that in the year 1919 the bank had appointed H. B. Hughes asits representative or administrator of the properties of the Plantation Company, and requiring the bank to pay certainpreferred claims, including the income tax and the land tax, and that the bank was entitled to, and should have, possession ofall the properties of the insolvent corporation, and to have the property sold and the proceeds of the sale applied to thesatisfaction of the claim of the bank, and upon the payment of such preferred claims, to have the proceeds of the sale appliedto the satisfaction of the claim of the bank, and that the creditors of the Plantation Company should share in any amountremaining after such application, and dismissed the case, without costs.virtualawlibrary virtual law library

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From this judgment, the creditors appeal and assign the following errors:

I. The lower court erred in not finding and holding that the so-called "agreement of pledge" executed by the insolvent GulfPlantation Company in favor of the Philippine National Bank is null and void on account of its many defects.virtualawlibraryvirtual law library

II. The lower court erred in not finding and holding that the Philippine National Bank has renounced its alleged preferred lienon the properties of the insolvent covered by the pledge, by giving its consent to the appointment of and assignee and by

permitting said assignee to take possession of said properties.virtualawlibrary virtual law library

III. The lower court erred in not finding and holding that the claim of the Philippine National Bank is an ordinaryclaim.virtualawlibrary virtual law library

IV. The lower court erred in holding that the Philippine National Bank is entitled to the possession of the properties of theinsolvent.virtualawlibrary virtual law library

V. The lower court erred in holding that the mortgage in favor of the Philippine National Bank is effective anddue.virtualawlibrary virtual law library

VI. The lower court erred in not overruling the opposition of the Philippine National Bank dated February 9, 1924, to theaccounts submitted by the assignee.virtualawlibrary virtual law library

VIII. The lower court erred in dismissing the insolvency proceedings.

JOHNS, J.:virtual law library

In view of the numerous recitals made in it, what is known in the record as Exhibit A must be construed as a pledge in bothform and substance. It is very apparent from the language used in the instrument that it was prepared on the customaryblank form of a pledge for the taking of properties under a pledge. It will be noted that it was never received or filed for anypurpose until the 24th of February, 1921, which was two years and a half after it was executed, and that it was thenendorsed, only received in the "office of the register of deeds" with "Entry No. 90 page 3, Volume Day Book (Provisional)."That is to say, there is no evidence that it was ever received, filed or recorded anywhere or by anyone, either as a chattelmortgaged or a pledge of personal property. Hence, the receiving of it in the office of the register of deeds on February 24,1921, is a nullity as to both a pledge and a chattel mortgage.virtualawlibrary virtual law library

The only witness for either party was Carlos Garcia, the manager of the bank at Davao, and he was called for the solepurpose of testifying as to the amount of the bank's claim, which he placed at about P60,000, and that it was due and owing.To make Exhibit A valid as a pledge, as to the personal property therein described , it was the duty of the bank to take theactual, physical possession of the property, and to continue and remain in such possessions, and to make it valid againstcreditors or the assignee, the bank must have been in such actual, physical possession at the time the Plantation Companywas declared insolvent. Upon the question, there is no evidence in the record. Without it, Exhibit A is void as a pledge, andthe bank would not have a preference, and would not now be entitled to the possession of the property of the PlantationCompany, or to have it sold and the proceeds applied to the satisfaction of its claim.virtualawlibrary virtual law library

Upon the question of pledge, article 1863 of the Civil Code provides:

In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the contract of pledge, thatthe pledge, be placed in the possession of the creditor or, of a third person appointed by common consent.

Section 4 of Act No. 1508, entitled "an Act providing for the mortgaging of personal property, and for the registration of themortgages so executed," provides:

A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless thepossession of the property is delivered to and retained by the mortgagee or unless the mortgage is recorded in the office ofthe register of deeds of the province in which the mortgagor resides at the time of making the same, or, if he resides withoutthe Philippine Islands, in the province in which the property is situated.

That is to say, a chattel mortgage is not valid against any person except the mortgagor, his executors or administrators,without delivery of possession of the property, unless the mortgage is recorded in the office of the register of deeds of theprovince. It will be noted that, in the absence of such delivery of possession on the recording of the instrument in the office ofthe register of deeds, a chattel mortgages is valid only as to the mortgagor, his executors or administrators. Hence, it follows

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that, in the absence of such record and the delivery of possession a chattel mortgage is void as against the creditors or theassignee of an insolvent estate, and upon that question, there is no evidence in the record.virtualawlibrary virtual law library

If it was the purpose and intent of the bank to have Exhibit A received, filed and recorded as a chattel mortgage, it was notonly its duty to so instruct the register of deeds, but it was its further duty to see that the instrument was received, filed andrecorded as a chattel mortgage. Upon that point there is no evidence.virtualawlibrary virtual law library

Again, in the every nature of things, a pledge or chattel mortgage is confined and limited to personal property, and it cannot

be extended or made to apply to real property.virtualawlibrary virtual law library

In what is known as schedule A, attached to Exhibit A, the property is described as lease No. 63 of 534 hectares of publicland planted to 236,000 hemp and 700 coconut trees valued at P430,000, and forty-eight buildings of permanent materialsvalued at P5,500, and two buildings of strong materials valued at P15,000. It may well be doubted whether that kind ofproperty could become the subject matter of a pledge or chattel mortgage.virtualawlibrary virtual law library

It will be noted that it is a pledge of a lease of public land which is planted to hemp and coconut trees, and of forty-eightbuildings of permanent materials and of two buildings of strong materials, clearly indicating that the buildings were attachedto the soil and as such would be real estate.virtualawlibrary virtual law library

It will also be noted that the pledge was executed in 1918, and it is very probable that the one thousand piculs of hemp havelong since been sold. As to the twenty-three carabaos, thirty-eight bullocks and eighteen horses, there is no provision for theincrease. Hence, the pledge, if valid for any purpose, should be confined and limited to the particular property described inthe pledge, and would not include any increase.virtualawlibrary virtual law library

That is to say, if it be a fact that at time the pledge was executed the bank took actual, physical possession of the propertydescribed in it, and continued to remain in such possession up to the time the petition for insolvency was filed, or that it wasin such possession for more than thirty days prior to the filing of the petition, the pledge would then be valid as to thepersonal property, and the bank would then have a preference on that property for the amount found due and owing upon itsclaim. If be a fact that the bank was not in the actual, physical possession of the property at the time the insolvency petitionwas filed, and that the Plantation Company was in such possession as its own, then the bank would not have a preferenceover any other unsecured creditor.virtualawlibrary virtual law library

From what has been said, it follows that the judgment of the lower court is reversed, and the case remanded, withinstructions for the assignee to proceed with the administration of the insolvent estate in the ordinary course of business andin the manner provided by law, and for such further proceedings as are not inconsistent with this opinion, with costs in favorof the appellant. So ordered.

Avance a, C. J., Street, Villamor, Ostrand, Romualdez and Villa-Real, JJ., concur.

G.R. No. L-6342 January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.LAUREANO ATENDIDO, defendants-appellant.

Nicolas Fernandez for appellee.Gaudencio L. Atendido for appellant.

BAUTISTA, ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the defendant to pay to the

plaintiff the sum of P3,000, with interest thereon at the rate of 6% per annum from June 26, 1940, and the costs of action.

On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000 payable in 120 days withinterests at 6% per annum from the date of maturity. To guarantee the payment of the obligation the borrower pledged to thebank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel,Bulacan, and to that effect the borrower endorsed in favor of the bank the corresponding warehouse receipt. Before thematurity of the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan maturedthe borrower failed to pay either the principal or the interest and so the present action was instituted.

Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that the warehouse receiptcovering the palay which was given as security having been endorsed in blank in favor of the bank, and the palay havingbeen lost or disappeared, he thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a

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corollary to his theory, he is entitled to an indemnity which represents the difference between the value of the palay lost andthe amount of his obligation.

The case was submitted on an agreed statements of facts and thereupon the court rendered judgment as stated in the earlypart of this decision.

Defendant took the case on appeal to the Court of Appeals but later it was certified to this Court on the ground that thequestion involved is purely one of law.

The only issue involved in this appeal is whether the surrender of the warehouse receipt covering the 2,000 cavanes of palaygiven as a security, endorsed in blank, to appellee, has the effect of transferring their title or ownership to said appellee, or itshould be considered merely as a guarantee to secure the payment of the obligation of appellant.

In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S-1719 covering the2,000 cavanes of palay by the defendant in favor of the plaintiff was not that of a final transfer of that warehouse receipt butmerely as a guarantee to the fulfillment of the original obligation of P3,000.00. In other word, plaintiff corporation had no rightto dispose (of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes ofpalay were not in the first place in the actual possession of plaintiff corporation, although symbolically speaking the deliveryof the warehouse receipt was actually done to the bank."

We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as defined by law(Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations embodied in the contract signed by

appellant when he secured the loan from the appellee. There is no question that the 2,000 cavanes of palay covered by thewarehouse receipt were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation. Thisclearly appears in the contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as acollateral security. The delivery of said palay being merely by way of security, it follows that by the very nature of thetransaction its ownership remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By thiswe mean that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the property and apply theproceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). Thisis the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, thething given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of thething pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should beborne by the pledgor. The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bankdoes not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the propertyto the pledgee and to forestall any possible disposition thereof on the part of the pledgor. This is true notwithstanding theprovisions to the contrary of the Warehouse Receipt Law.

In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765) which involves a similartransaction, this Court held:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure thepayment of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by thewarehouse receipt or quedan but he merely retains the right to keep and with the consent of the owner to sell them so as tosatisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale butonly a mortgage or pledge, and that if the property covered by the quedans or warehouse receipts is lost without the fault ornegligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goodsare to be regarded as lost on account of the real owner, mortgagor or pledgor.

Wherefore, the decision appealed from is affirmed, with costs against appellant.

Bengzon, Padilla, Montemayor, Jugo, Reyes and Labrador, JJ., concur.

G.R. No. 97753 August 10, 1992

CALTEX (PHILIPPINES), INC., petitioner, vs.COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,respondents.

Bito, Lozada, Ortega & Castillo for petitioners.

Nepomuceno, Hofilea & Guingona for private.

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REGALADO, J.:

This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by respondent court on

March 8, 1991 in CA-G.R. CV No. 23615 1affirming with modifications, the earlier decision of the Regional Trial Court of

Manila, Branch XLII, 2which dismissed the complaint filed therein by herein petitioner against respondent bank.

The undisputed background of this case, as found by the courta quo and adopted by respondent court, appears of record:

1. On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of timedeposit (CTDs) in favor of one Angel dela Cruz who deposited with herein defendant the aggregate amount ofP1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant'sExhibits 1 to 280);

CTDCTDDatesSerial Nos.QuantityAmount

22 Feb. 82 90101 to 90120 20 P80,00026 Feb. 82 74602 to 74691 90 360,0002 Mar. 82 74701 to 74740 40 160,0004 Mar.82 90127 to 90146 20 80,0005 Mar. 82 74797 to 94800 4 16,0005 Mar. 82 89965 to 89986 22 88,0005 Mar. 82 70147 to90150 4 16,0008 Mar. 82 90001 to 90020 20 80,0009 Mar. 82 90023 to 90050 28 112,0009 Mar. 82 89991 to 90000 1040,0009 Mar. 82 90251 to 90272 22 88,000 Total 280 P1,120,000===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection with his purchased of fuelproducts from the latter (Original Record, p. 208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all thecertificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss,as required by defendant bank's procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required Affidavit of Loss (Defendant'sExhibit 281). On the basis of said affidavit of loss, 280 replacement CTDs were issued in favor of said depositor (Defendant'sExhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in the amount of Eight Hundred

Seventy Five Thousand Pesos (P875,000.00). On the same date, said depositor executed a notarized Deed of Assignment ofTime Deposit (Exhibit 562) which stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of theindicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and"apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity(TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank'sSucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were deliveredto herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp.54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein plaintiff formally informing it ofits possession of the CTDs in question and of its decision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a copy of the documentevidencing the guarantee agreement with Mr. Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligationagainst which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letterdated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latterset-off and applied the time deposits in question to the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

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12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it theaggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at16% per annum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint.3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this petitionwherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-negotiable despite being

clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit;and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer.4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the issues involvedin this recourse.

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP4,000.00CERTIFICATE OF DEPOSITRate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND ONLY, SECURITYBANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date, uponpresentation and surrender of this certificate, with interest at the rate of 16% per centper annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES5

Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is important to note that after theword "BEARER" stamped on the space provided supposedly for the name of the depositor, the words "has deposited" acertain amount follows. The document further provides that the amount deposited shall be "repayable to said depositor" onthe period indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are payable, not towhoever purports to be the "bearer" but only to the specified person indicated therein, the depositor. In effect, the appelleebank acknowledges its depositor Angel dela Cruz as the person who made the deposit and further engages itself to pay said

depositor the amount indicated thereon at the stipulated date.6

We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments.Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument tobecome negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonablecertainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with

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regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, the depositor referred (sic) in these certificatesstates that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was the one who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time deposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing,

that is, from the face of the instrument itself.9In the construction of a bill or note, the intention of the parties is to control, if it

can be legally ascertained. 10 While the writing may be read in the light of surrounding circumstances in order to moreperfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outwardand visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the courtin such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their wordsexpress, but what is the meaning of the words they have used. What the parties meant must be determined by what they

said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the amountsdeposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." Thedocuments do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to

him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be thebearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with facility soexpressed that fact in clear and categorical terms in the documents, instead of having the word "BEARER" stamped on thespace provided for the name of the depositor in each CTD. On the wordings of the documents, therefore, the amountsdeposited are repayable to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness merely declared thatAngel de la Cruz is the depositor "insofar as the bank is concerned," but obviously other parties not privy to the transactionbetween them would not be in a position to know that the depositor is not the bearer stated in the CTDs. Hence, the situationwould require any party dealing with the CTDs to go behind the plain import of what is written thereon to unravel theagreement of the parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to beavoided by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of

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obscure words or stipulations in a contract shall not favor the party who caused the obscurity.12

The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the negative. The recordsreveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDsamounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner,although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it and Dela Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact,the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether

the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of thelatter by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit Manager, wrote:". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel products"

(Emphasis ours.) 13This admission is conclusive upon petitioner, its protestations notwithstanding. Under the doctrine ofestoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or

disproved as against the person relying thereon. 14 A party may not go back on his own acts and representations to the

prejudice of the other party who relied upon them. 15In the law of evidence, whenever a party has, by his own declaration,act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he

cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it.16

If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could have easily

said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when respondent bank, as defendant inthe court below, moved for a bill of particularity therein 17praying, among others, that petitioner, as plaintiff, be required toaver with sufficient definiteness or particularity (a) the due date or dates ofpaymentof the alleged indebtedness of Angel dela Cruz to plaintiff and (b) whether or not it issued a receipt showing that the CTDs were delivered to it by De la Cruz as

paymentof the latter's alleged indebtedness to it, plaintiff corporation opposed the motion.18Had it produced the receiptprayed for, it could have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security.Having opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be

adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine National Bank, et

al.20is apropos:

. . . Adverting again to the Court's pronouncements inLopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their intention, regardless of what language wasused or what the form of the transfer was. If it was intended to secure the payment of money, it must be construed as apledge; but if there was some other intention, it is not a pledge. However, even though a transfer, if regarded by itself,appears to have been absolute, its object and character might still be qualified and explained by contemporaneous writingdeclaring it to have been a deposit of the property as collateral security. It has been said that a transfer of property by thedebtor to a creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a pledge if the debtcontinues in inexistence and is not discharged by the transfer, and that accordingly the use of the terms ordinarily importingconveyance of absolute ownership will not be given that effect in such a transaction if they are also commonly used inpledges and mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the absence of clearand unambiguous language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments Law, aninstrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee

the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession of it, or the bearerthereof. 22In the present case, however, there was no negotiation in the sense of a transfer of the legal title to the CTDs infavor of petitioner in which situation, for obvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, thedelivery thereof only as security for the purchases of Angel de la Cruz (and we even disregard the fact that the amountinvolved was not disclosed) could at the most constitute petitioner only as a holder for value by reason of his lien.Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, theterms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, mustbe contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a

holder for value to the extent of his lien.23As such holder of collateral security, he would be a pledgee but the requirements

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therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil

Code provisions on pledge of incorporeal rights, 24which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the rightpledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledgedo not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at thestart of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee

agreement between it and Angel de la Cruz. 25Consequently, the mere delivery of the CTDs did not legally vest in petitionerany right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not amere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule ofsubstantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons

adversely. 26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a

public instrument. 27With regard to this other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in apublic instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lienholder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrumentwhich could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latterhas definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private respondent observedthe requirements of the law in the case of lost negotiable instruments and the issuance of replacement certificates therefor,

on the ground that petitioner failed to raised that issue in the lower court.28

On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private respondent was not

included in the stipulation of the parties and in the statement of issues submitted by them to the trial court.29The issues

agreed upon by them for resolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDs against the depositor's loan by virtue of theassignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amount covered by the CTDs and the depositor'soutstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing enumerationdoes not include the issue of negligence on the part of respondent bank. An issue raised for the first time on appeal and not

raised timely in the proceedings in the lower court is barred by estoppel. 30Questions raised on appeal must be within theissues framed by the parties and, consequently, issues not raised in the trial court cannot be raised for the first time on

appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly raised. Thus,

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to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all issues of law and fact whichthey intend to raise at the trial, except such as may involve privileged or impeaching matters. The determination of issues at

a pre-trial conference bars the consideration of other questions on appeal.32

To accept petitioner's suggestion that respondent bank's supposed negligence may be considered encompassed by theissues on its right to preterminate and receive the proceeds of the CTDs would be tantamount to saying that petitioner couldraise on appeal any issue. We agree with private respondent that the broad ultimate issue of petitioner's entitlement to theproceeds of the questioned certificates can be premised on a multitude of other legal reasons and causes of action, of which

respondent bank's supposed negligence is only one. Hence, petitioner's submission, if accepted, would render a pre-trialdelimitation of issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still cannot have theodds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the rules to be followed in case oflost instruments payable to bearer, which it invokes, will reveal that said provisions, even assuming their applicability to theCTDs in the case at bar, are merely permissive and not mandatory. The very first article cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or court of competentjurisdiction, asking that the principal, interest or dividends due or about to become due, be not paid a third person, as well asin order to prevent the ownership of the instrument that a duplicate be issued him. (Emphasis ours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the "dispossessedowner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of the lost instrument. Where

the provision reads "may," this word shows that it is not mandatory but discretional.34 The word "may" is usually permissive,

not mandatory. 35It is an auxiliary verb indicating liberty, opportunity, permission and possibility.36

Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code of Commerce, on which petitionerseeks to anchor respondent bank's supposed negligence, merely established, on the one hand, a right of recourse in favor ofa dispossessed owner or holder of a bearer instrument so that he may obtain a duplicate of the same, and, on the other, anoption in favor of the party liable thereon who, for some valid ground, may elect to refuse to issue a replacement of theinstrument. Significantly, none of the provisions cited by petitioner categorically restricts or prohibits the issuance a duplicateor replacement instrument sans compliance with the procedure outlined therein, and none establishes a mandatoryprecedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is herebyAFFIRMED.

SO ORDERED.

Narvasa, C.J., Padilla and Nocon, JJ., concur.

G.R. No. L-18500 October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffs-appellants, vs.GLICERIO JAVELLANA,defendant-appellant.

Montinola, Montinola and Hontiveros for plaintiffs-appellants. J. M. Arroyo and Fisher and DeWitt for defendant-appellant.

AVANCEA, J.:

On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with interest at the rate of 25 per cent perannum for the term of one year. To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the center andsurrounded with ten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and two diamond rings,which the contracting parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A and 1) wherein theamount appears to be P1,875, which includes the 25 per cent interest on the sum of P1,500 for the term of one year.

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The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff Eusebio M. Villaseor, being unableto pay the loan, obtained from the defendant an extension, with the condition that the loan was to continue, drawing interestat the rate of 25 per cent per annum, so long as the security given was sufficient to cover the capital and the accrued interest.In the month of August, 1919, the plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the house of thedefendant and offered to pay the loan and redeem the jewels, taking with him, for this purpose, the sum of P11,000, but thedefendant then informed them that the time for the redemption had already elapsed. The plaintiffs renewed their offer toredeem the jewelry by paying the loan, but met with the same reply. These facts are proven by the testimony of the plaintiffs,corroborated by Carlos M. Dreyfus.

The plaintiffs now bring this action to compel the defendant to return the jewels pledged, or their value, upon thepayment by them of the sum they owe the defendant, with the interest thereon.

The defendant alleges, in his defense, that upon the maturity of the loan, August 31, 1912, he requested the plaintiff,Eusebio M. Villaseor, to secure the money, pay the loan and redeem the jewels, as he needed money to purchase a certainpiece of land; that one month thereafter, the plaintiff, Filomena Sarmiento, went to his house and offered to sell him thejewels pledged for P3,000; that the defendant then told her to come back on the next day, as he was to see his brother,Catalino Javellana, and ask him if he wanted to take the jewels for that sum; that on the next day the plaintiff, FilomenaSarmiento, went back to the house of the defendant who then paid her the sum of P1,125, which was the balance remainingof the P3,000 after deducting the plaintiff's loan.

It appearing that the defendant possessed these jewels originally, as a pledge to secure the payment of a loan statedin writing, the mere testimony of the defendant to the effect that later they were sold to him by the plaintiff, FilomenaSarmiento, against the positive testimony of the latter that she did not make any such sale, requires a strong corroboration tobe accepted. We do not find the testimony of Jose Sison to be of sufficient value as such corroboration. This witness testifiedto having been in the house of the defendant when Filomena went there to offer to sell the defendant the jewels, as well ason the third day when she returned to receive the price. According to this witness, he happened to be in the house of thedefendant, having gone there to solicit a loan, and also accidentally remained in the house of the defendant for three days,and that that was how he happened to witness the offer to sell, as well as the receipt of the price on the third day. But notonly do we find that the defendant has not sufficiently established, by his evidence, the fact of the purchase of the jewels, butalso that there is a circumstance tending to show the contrary, which is the fact that up to the trial of this cause the defendantcontinued in possession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If the defendant reallybought these jewels, its seems natural that Filomena would have demanded the surrender of the documents evidencing theloan and the pledge, and the defendant would have returned them to plaintiff.

Our conclusion is that the jewels pledged to defendant were not sold to him afterwards.

Another point on which evidence was introduced by both parties is as to the value of the jewels in the event that theywere not returned by the defendant. In view of the evidence of record, we accept the value of P12,000 fixed by the trial court.

From the foregoing it follows that, as the jewels in question were in the possession of the defendant to secure thepayment of a loan of P1,500, with interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to August 31,1912, and the defendant having subsequently extended the term of the loan indefinitely, and so long as the value of thejewels pledged was sufficient to secure the payment of the capital and the accrued interest, the defendant is bound to returnthe jewels or their value (P12,000) to plaintiffs, and the plaintiffs have the right to demand the same upon the payment bythem of the sum of P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28, 1911.

The judgment appealed from being in accordance with this findings, the same is affirmed without specialpronouncement as to costs. So ordered.

Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.

R E S O L U T I O N

April 4, 1923

AVANCEA, J.:

The defendant contends that the plaintiffs' action for the recovery of the jewels pledged has prescribed. Withoutdeciding whether or not the action to recover the thing pledged may prescribe in any case, it not being necessary for thepurposes of this opinion, but supposing that it may, still the defendant's contention is untenable. In the document evidencingthe loan in question there is stated: "I transfer by way of pledge the following jewels." That this is a valid contract of pledge

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there can be no question. As a matter of fact the defendant does not question it, but take s it for granted. However, it iscontended that the obligation of the defendant to return the jewels pledged must be considered as not stated in writing, forthis obligation is not expressly mentioned in the document. But if this contract of pledge is in writing, it must necessarily beadmitted that the action to enforce the right, which constitutes the essence of this contract, is covered by a written contract.The duty of the creditor to return the thing pledged in case the principal obligation is fulfilled is essential in all contracts ofpledge. This constitutes, precisely, the consideration of the debtor in this accessory contract, so that if this obligation of thecreditor to return to thing pledged, and the right of the debtor to demand the return thereof, are eliminated, the contract wouldnot be a contract of pledge. It would be a donation.

If the right of the plaintiffs to recover the thing pledged is covered by a written contract, the time for the prescription ofthis action is ten years, according to section 43 of the Code of Civil Procedure.

The defendant contends that the time of prescription of the action of the plaintiffs to recover the thing pledged must becomputed from August 28, 1911, the date of the making of the contract of loan secured by this pledge. The term of this loanis one year. However, it is contended that the action of the plaintiff to recover the thing pledged accrued on the very date ofthe making of the contract, inasmuch as from that date they could have recovered the same by paying the loan even beforethe expiration of the period fixed for payment. This view is contrary to law. Whenever a term for the performance of anobligation is fixed, it is presumed to have been established for the benefit of the creditor as well as that of the debtor, unlessfrom its tenor or from other circumstances it should appear that the term was established for the benefit of one or the otheronly (art. 1128 of the Civil Code.) In this case it does not appear, either from any circumstance, or from the tenor of thecontract, that the term of one year allowed the plaintiffs to pay the debt was established in their favor only. Hence it must bepresumed to have been established for the benefit of the defendant also. And it must be so, for this is a case of a loan, withinterest, wherein the term benefits the plaintiffs by the use of the money, as well as the defendant by the interest. This being

so, the plaintiffs had no right to pay the loan before the lapse of one year, without the consent of the defendant, becausesuch a payment in advance would have deprived the latter of the benefit of the stipulated interest. It follows from this thatappellant is in error when he contents that the plaintiffs could have paid the loan and recovered the thing pledged from thedate of the execution of the contract and, therefore, his theory that the action of the plaintiffs to recover the thing pledgedaccrued from the date of the execution of the contract is not tenable.1awph!l.net

It must, therefore, be admitted that the action of the plaintiffs for the recovery of the thing pledged did not accrue untilAugust 31, 1912, when the term fixed for the loan expired. Computing the time from that date to that of the filing of thecomplaint in this cause, October 9, 1920, it appears that the ten years fixed by the law for the prescription of the action havenot yet elapsed.

On the other hand, the contract of loan with pledge is in writing and the action of the defendant for the recovery of theloan does not prescribe until after ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the thingpledged, after the payment of the loan, has already prescribed while the action of the defendant for the recovery of the loan

has not yet prescribed. The result of this would be that the defendant might have collected the loan and at the same timekept the thing pledged.

The motion for reconsideration is denied.

Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.

Separate Opinions

STREET, J., concurring:

I agree, Prescription cannot become effective against the right of the pledgor to redeem so long as the written contractevidencing the debt remains in the hands of the pledgee as evidence of a valid and unbarred debt. The pledgor may always

claim at least as long a period within which to redeem as is allowed to the creditor to enforce his debt. (Gilmer vs. Morris, 80Ala., 78; 60 Am. Rep., 85, 89.)

G.R. No. L-21069 October 26, 1967MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs.RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

REYES, J.B.L., J.:

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo

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Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from July13, 1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond forP2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the

Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnifythe Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse thesame for all money it should pay or become liable to pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for thelatter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount ofmoney in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, andturning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having beenreturned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and uponthe latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayocountered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of

the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale areequal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more thansaid amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less,neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance,the defense was once more overruled, and the case decided in the terms set down at the start of this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelrymentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was nounderstanding that, should the same be sold at public auction and the value thereof should be short of the undertaking, thedefendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies thatin case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation isincompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor lessthan that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiencyjudgment for the balance should the collateral not command the price equal to the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been soldfor only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts ofP2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory characteris of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of thesecontracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo'sundertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence,the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived fromstipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principalobligation supervenes by operation of imperative law that the parties cannot override:

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If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation tothe contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead ofsuing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. Nodeficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in

Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the priceof the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in1933.

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

Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. 138053 May 31, 2000

CORNELIO M. ISAGUIRRE, petitioner,vs.

FELICITAS DE LARA, respondent.

GONZAGA-REYES, J.:

In this petition for review on certiorariunder Rule 45 of the 1997 Revised Rules of Civil Procedure, petitioner Cornelio M.

Isaguirre assails the October 5, 1998 decision 1 of the Court of Appeals 2 and its Resolution promulgated on March 5, 1999.

The antecedent facts of the present case are as follows:

Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Application over a parcel of land identified asportion of Lot 502, Guianga Cadastre, filed with the Bureau of Lands on January 17, 1942 and with an area of 2,324 squaremeters. Upon his death, Alejandro de Lara was succeeded by his wife respondent Felicitas de Lara, as claimant. OnNovember 19, 1954, the Undersecretary of Agriculture and Natural Resources amended the sales application to cover only1,600 square meters. Then, on November 3, 1961, by virtue of a decision rendered by the Secretary of Agriculture andNatural Resources dated November 19, 1954, a subdivision survey was made and the area was further reduced to 1,000square meters. On this lot stands a two-story residential-commercial apartment declared for taxation purposes under TD43927 in the name of respondent's sons Apolonio and Rodolfo, both surnamed de Lara.

Sometime in 1953, respondent obtained several loans from the Philippine National Bank. When she encountered financialdifficulties, respondent approached petitioner Cornelio M. Isaguirre, who was married to her niece, for assistance. OnFebruary 10, 1960, a document denominated as "Deed of Sale and Special Cession of Rights and Interests" was executedby respondent and petitioner, whereby the former sold a 250 square meter portion of Lot No. 502, together with the two-story

commercial and residential structure standing thereon, in favor of petitioner, for and in consideration of the sum of P5,000.

Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against petitioner for recovery of ownership and

possession of the two-story building. 3 However, the case was dismissed for lack of jurisdiction.

On August 21, 1969, petitioner filed a sales application over the subject property on the basis of the deed of sale. Hisapplication was approved on January 17, 1984, resulting in the issuance of Original Certificate of Title No. P-11566 onFebruary 13, 1984, in the name of petitioner. Meanwhile, the sales application of respondent over the entire 1,000 squaremeters of subject property (including the 250 square meter portion claimed by petitioner) was also given due course,

resulting in the issuance of Original Certificate of Title No. P-13038 on June 19, 1989, in the name of respondent.4

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Due to the overlapping of titles, petitioner filed an action for quieting of title and damages with the Regional Trial Court ofDavao City against respondent on May 17, 1990. The case was docketed as Civil Case No. 20124-90. After trial on themerits, the trial court rendered judgment on October 19, 1992, in favor of petitioner, declaring him to be the lawful owner ofthe disputed property. However, the Court of Appeals reversed the trial court's decision, holding that the transaction entered

into by the parties, as evidenced by their contract, was an equitable mortgage, not a sale.5 The appellate court's decisionwas based on the inadequacy of the consideration agreed upon by the parties, on its finding that the payment of a largeportion of the "purchase price" was made after the execution of the deed of sale in several installments of minimal amounts;and finally, on the fact that petitioner did not take steps to confirm his rights or to obtain title over the property for severalyears after the execution of the deed of sale. As a consequence of its decision, the appellate court also declared OriginalCertificate of Title No. P-11566 issued in favor of petitioner to be null and void. On July 8, 1996, in a case docketed as G.R.No. 120832, this Court affirmed the decision of the Court of Appeals and on September 11, 1996, we denied petitioner'smotion for reconsideration.

On May 5, 1997, respondent filed a motion for execution with the trial court, praying for the immediate delivery of possessionof the subject property, which motion was granted on August 18, 1997. On February 3, 1998, respondent moved for a writ ofpossession, invoking our ruling in G.R. No. 120832. Petitioner opposed the motion, asserting that he had the right ofretention over the property until payment of the loan and the value of the improvements he had introduced on the property.On March 12, 1998, the trial court granted respondent's motion for writ of possession. Petitioner's motion for reconsiderationwas denied by the trial court on May 21, 1998. Consequently, a writ of possession dated June 16, 1998, together with theSheriff's Notice to Vacate dated July 7, 1998, were served upon petitioner.

Petitioner filed with the Court of Appeals a special civil action forcertiorari and prohibition with prayer for a temporaryrestraining order or preliminary injunction to annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial

court, including the writ of possession dated June 16, 1998 and the sheriff's notice to vacate dated July 7, 1998.6

The appellate court summarized the issues involved in the case as follows: (1) whether or not the mortgagee in an equitablemortgage has the right to retain possession of the property pending actual payment to him of the amount of indebtedness bythe mortgagor; and (b) whether or not petitioner can be considered a builder in good faith with respect to the improvementshe made on the property before the transaction was declared to be an equitable mortgage.

The Court of Appeals held that petitioner was not entitled to retain possession of the subject property. It said that

. . . the mortgagee merely has to annotate his claim at the back of the certificate of title in order to protect his rights againstthird persons and thereby secure the debt. There is therefore no necessity for him to actually possess the property. Neithershould a mortgagee in an equitable mortgage fear that the contract relied upon is not registered and hence, may not operateas a mortgage to justify its foreclosure. InFeliza Zubiri v. Lucio Quijano, 74 Phil 47, it was ruled "that when a contract . . . is

held as an equitable mortgage, the same shall be given effect as if it had complied with the formal requisites of mortgage. . . .by its very nature the lien thereby created ought not to be defeated by requiring compliance with the formalities necessary tothe validity of a voluntary real estate mortgage, as long as the land remains in the hands of the petitioner (mortgagor) and therights of innocent parties are not affected.

Proceeding from the foregoing, petitioner's imagined fears that his lien would be lost by surrendering possession areunfounded.

In the same vein, there is nothing to stop the mortgagor de Lara from acquiring possession of the property pending actualpayment of the indebtedness to petitioner. This does not in anyway endanger the petitioner's right to security since, aspointed out by private respondents, the petitioner can always have the equitable mortgage annotated in the Certificate of Titleof private respondent and pursue the legal remedies for the collection of the alleged debt secured by the mortgage. In thiscase, the remedy would be to foreclose the mortgage upon failure to pay the debt within the required period.

It is unfortunate however, that the Court of Appeals, in declaring the transaction to be an equitable mortgage failed to specifyin its Decision the period of time within which the private respondent could settle her account, since such period serves asthe reckoning point by which foreclosure could ensue. As it is, petitioner is now in a dilemma as to how he could enforce hisrights as a mortgagee. . . .

Hence, this Court, once and for all resolves the matter by requiring the trial court to determine the amount of totalindebtedness and the period within which payment shall be made.

Petitioner's claims that he was a builder in good faith and entitled to reimbursement for the improvements he introduced uponthe property were rejected by the Court of Appeals. It held that petitioner knew, or at least had an inkling, that there was adefect or flaw in his mode of acquisition. Nevertheless, the appellate court declared petitioner to have the following rights:

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. . . He is entitled to reimbursement for the necessary expenses which he may have incurred over the property, in accordancewith Art. 526 and Art. 452 of the Civil Code. Moreover, considering that the transaction was merely an equitable mortgage,then he is entitled to payment of the amount of indebtedness plus interest, and in the event of non-payment to foreclose themortgage. Meanwhile, pending receipt of the total amount of debt, private respondent is entitled to possession over thedisputed property.

The case was finally disposed of by the appellate court in the following manner:

WHERFORE, the Petition is hereby DISMISSED, and this case is ordered remanded to the Regional Trial Court of DavaoCity for further proceedings, as follows:

1) The trial court shall determine

a) The period within which the mortgagor must pay his total amount of indebtedness.

b) The total amount of indebtedness owing the petitioner-mortgagee plus interest computed from the time when the judgmentdeclaring the contract to be an equitable mortgage became final.

c) The necessary expenses incurred by petitioner over the property.7

On March 5, 1999, petitioner's motion for reconsideration was denied by the appellate court.8 Hence, the present appealwherein petitioner makes the following assignment of errors:

A. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THE RTC ACTED WITHOUT OR IN EXCESSOF ITS JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OFJURISDICTION IN ISSUING A WRIT OF POSSESSION IN FAVOR OF RESPONDENT.

A.1 The RTC patently exceeded the scope of its authority and acted with grave abuse of discretion in ordering the immediatedelivery of possession of the Property to respondent as said order exceeded the parameters of the final and executorydecision and constituted a variance thereof.

B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS NOT ENTITLED TO THEPOSSESSION OF THE PROPERTY PRIOR TO THE PAYMENT OF RESPONDENT'S MORTGAGE LOAN.

C. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER WAS NOT A BUILDER IN GOODFAITH.

D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT PETITIONER IS ENTITLED TO INTERESTCOMPUTED ONLY FROM THE TIME WHEN THE JUDGMENT DECLARING THE CONTRACT TO BE AN EQUITABLE

MORTGAGE BECAME FINAL. 9

Basically, petitioner claims that he is entitled to retain possession of the subject property until payment of the loan and the

value of the necessary and useful improvements he made upon such property.10 According to petitioner, neither the Court ofAppeals' decision in G.R. CV No. 42065 nor this Court's decision in G.R. No. 120832 ordered immediate delivery ofpos