LETTERS OF CREDIT

TRANSFIELD PHILIPPINES, INC. V. LUZON HYDRO CORPORATION AUSTRALIA,

ET. AL., (2004)
Letters of Credit : General Concepts, Code of Commerce, Art. 567, Art. 568, Art. 2
Nature and use of letters of credit (credits)
The relationship between the beneficiary and the issuer of a letter of credit
is not strictly contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right.
Nor is it a third-party beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently arising in the underlying
contract. Since the banks customer cannot draw on the letter, it does not function as
an assignment by the customer to the beneficiary.
Nor, if properly used, is it a contract of suretyship or guarantee, because it entails a
primary liability following a default.
Finally, it is not in itself a negotiable instrument, because it is not payable to order or
bearer and is generally conditional, yet the draft presented under it is often negotiable.

In commercial transactions, a letter of credit is a financial device developed by

merchants as a convenient and relatively safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the goods before
paying.
The use of credits in commercial transactions serves to reduce the risk of nonpayment of
the purchase price under the contract for the sale of goods.
However, credits are also used in non-sale settings where they serve to reduce the risk
of nonperformance. Generally, credits in the non-sale settings have come to be known
as standby credits.

Commercial credits Standby credits

involve the payment of money under a
contract of sale
 become payable upon the presentation by the credit is payable upon certification of a
the seller-beneficiary of documents that party's nonperformance of the agreement.
show he has taken affirmative steps to
The documents that accompany the
comply with the sales agreement. beneficiary's draft tend to show that the
applicant has not performed.
The beneficiary of a commercial credit The beneficiary of the standby credit must
must demonstrate by documents that he certify that his obligor has not performed
has performed his contract. the contract.

A letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility
for payment of debt therefor to the addressee. A letter of credit, however, changes its
nature as different transactions occur and if carried through to completion ends up as a
binding contract between the issuing and honoring banks without any regard or relation
to the underlying contract or disputes between the parties thereto.

Independence principle
Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the
credit once the draft and the required documents are presented to it. The so-called
independence principle assures the seller or the beneficiary of prompt payment
independent of any breach of the main contract and precludes the issuing bank from
determining whether the main contract is actually accomplished or not.
Under this principle, banks assume no liability or responsibility for the form,
sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for
the general and/or particular conditions stipulated in the documents or superimposed
thereon, nor do they assume any liability or responsibility for the description, quantity,
weight, quality, condition, packing, delivery, value or existence of the goods represented
by any documents, or for the good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the carriers, or the insurers of the goods, or
any other person whomsoever.

The independent nature of the letter of credit may be:

a) independence in toto where the credit is independent from the justification aspect
and is a separate obligation from the underlying agreement like for instance a typical
standby; or
b) independence may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under the
underlying agreement. In both cases the payment may be enjoined if in the light of the
purpose of the credit the payment of the credit would constitute fraudulent abuse of the
credit.

Issue: Can the beneficiary invoke the independence principle? YES.

In a letter of credit transaction, such as in this case, where the credit is stipulated as
irrevocable, there is a definite undertaking by the issuing bank to pay the beneficiary
provided that the stipulated documents are presented and the conditions of the credit
are complied with. Precisely, the independence principle liberates the issuing bank from
the duty of ascertaining compliance by the parties in the main contract.
As the principles nomenclature clearly suggests, the obligation under the letter of credit
is independent of the related and originating contract. In brief, the letter of credit is
separate and distinct from the underlying transaction.

Held: Given the nature of letters of credit, petitioners argumentthat it is only the
issuing bank that may invoke the independence principle on letters of creditdoes not
impress this Court. To say that the independence principle may only be invoked by the
issuing banks would render nugatory the purpose for which the letters of credit are used
in commercial transactions. As it is, the independence doctrine works to the benefit of
both the issuing bank and the beneficiary.

Letters of credit are employed by the parties desiring to enter into commercial
transactions, not for the benefit of the issuing bank but mainly for the benefit of the
parties to the original transactions.
 With the letter of credit from the issuing bank, the party who applied for and obtained it
may confidently present the letter of credit to the beneficiary as a security to convince
the beneficiary to enter into the business transaction.
The other party to the business transaction, i.e., the beneficiary of the letter of credit,
can be rest assured of being empowered to call on the letter of credit as a security in
case the commercial transaction does not push through, or the applicant fails to perform
his part of the transaction. It is for this reason that the party who is entitled to the
proceeds of the letter of credit is appropriately called beneficiary.

Respondent banks had squarely raised the independence principle to justify their
releases of the amounts due under the Securities. Owing to the nature and purpose of
the standby letters of credit, this Court rules that the respondent banks were left with
little or no alternative but to honor the credit and both of them in fact submitted that it
was ministerial for them to honor the call for payment.

Fraud exception principle

Citing Dolans treatise on letters of credit, petitioner argues that the independence
principle is not without limits and it is important to fashion those limits in light of the
principles purpose, which is to serve the commercial function of the credit.

Issue: Would injunction then be the proper remedy to restrain the alleged wrongful
draws on the Securities?

Most writers agree that fraud is an exception to the independence principle. Professor
Dolan opines that the untruthfulness of a certificate accompanying a demand for
payment under a standby credit may qualify as fraud sufficient to support an injunction
against payment. The remedy for fraudulent abuse is an injunction. However,
injunction should not be granted unless:
a) there is clear proof of fraud;
b) the fraud constitutes fraudulent abuse of the independent purpose of the letter of
credit and not only fraud under the main agreement; and
c) irreparable injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged.

Before a writ of preliminary injunction may be issued, there must be a clear showing by
the complaint that there exists a right to be protected and that the acts against which the
writ is to be directed are violative of the said right. It must be shown that the invasion of
the right sought to be protected is material and substantial, that the right of complainant
is clear and unmistakable and that there is an urgent and paramount necessity for the
writ to prevent serious damage.

TRUST RECEIPTS

COLINARES & VELOSO V. CA, (2000)

Trust Receipts: Rights of Purchaser, Sec. 11

Section 4, P.D. No. 115, the Trust Receipts Law

Trust receipt transaction - any transaction by and between a person referred to as
the entruster, and another person referred to as the entrustee, whereby the entruster
who owns or holds absolute title or security interest over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon
the latters execution and delivery to the entruster of a signed document called a trust
receipt wherein the entrustee binds himself to hold the designated goods, documents
or instruments with the obligation to turn over to the entruster the proceeds thereof to
the extent of the amount owing to the entruster or as appears in the trust receipt or the
goods, documents or instruments themselves if they are unsold or not otherwise
disposed of, in accordance with the terms and conditions specified in the trust receipt.

2 possible situations in a trust receipt transaction.

1. Money received under the obligation involving the duty to deliver it (entregarla) to
the owner of the merchandise sold.
2. Merchandise received under the obligation to return it (devolvera) to the owner.

Estafa
Failure of the entrustee to turn over the proceeds of the sale of the goods, covered by
the trust receipt to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt shall be punishable as estafa under Article
315 (1) of the RPC, without need of proving intent to defraud

GUARANTY

TUPAZ IV & TUPAZ V. CA & BPI, (2005)

Guaranty: Benefit of Excussion, Art. 2058 to 2064, Art. 2081

Under Article 2058 of the Civil Code, the defense of exhaustion (excussion) may be
raised by a guarantor before he may be held liable for the obligation. Petitioner likewise
admits that the questioned provision is a solidary guaranty clause, thereby clearly
distinguishing it from a contract of surety. It, however, described the guaranty as
solidary between the guarantors; this would have been correct if two (2) guarantors had
signed it. The clause we jointly and severally agree and undertake refers to the
undertaking of the two (2) parties who are to sign it or to the liability existing between
themselves. It does not refer to the undertaking between either one or both of them on
the one hand and the petitioner on the other with respect to the liability described under
the trust receipt. xxx

Jose Tupaz bound himself personally liable for El Oro Corporations debts.
1. First, excussion is not a pre-requisite to secure judgment against a guarantor. The
guarantor can still demand deferment of the execution of the judgment against him until
after the assets of the principal debtor shall have been exhausted.
2. Second, the benefit of excussion may be waived. Under the trust receipt dated 30
September 1981, petitioner Jose Tupaz waived excussion when he agreed that his
liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without any need
whatsoever on xxx [the] part [of respondent bank] to take any steps or exhaust any legal
remedies xxx. The clear import of this stipulation is that petitioner Jose Tupaz waived
the benefit of excussion under his guarantee.

SURETY

SECURITY BANK V. CUENCA, (2000)

Surety: Obligations Secured, Art. 2053

Being an onerous undertaking, a surety agreement is strictly construed against the

creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental
rules of fair play require the creditor to obtain the consent of the surety to any material
alteration in the principal loan agreement, or at least to notify it thereof. Hence,
petitioner bank cannot hold herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement, absent any clear
stipulation showing that the latter waived his right to be notified thereof, or to give
consent thereto. This is especially true where, as in this case, respondent was no longer
the principal officer or major stockholder of the corporate debtor at the time the later
obligations were incurred. He was thus no longer in a position to compel the debtor to
pay the creditor and had no more reason to bind himself anew to the subsequent
obligations.

Continuing Surety
 Issue: Contending that the Indemnity Agreement was in the nature of a continuing
surety, petitioner maintains that there was no need for respondent to execute another
surety contract to secure the 1989 Loan Agreement. Correct? NO.

Held: That the Indemnity Agreement is a continuing surety does not authorize the bank
to extend the scope of the principal obligation inordinately.

In Dino v. CA, the Court held that a continuing guaranty is one which covers all
transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination thereof.

To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation:
1. that the obligation should not exceed P8 million, and
2. that the accommodation should expire not later than November 30, 1981. Hence,
it was a continuing surety only in regard to loans obtained on or before the
aforementioned expiry date and not exceeding the total of P8 million.

In Dino, the surety Agreement specifically provided that each suretyship is a continuing
one which shall remain in full force and effect until this bank is notified of its revocation.
Since the bank had not been notified of such revocation, the surety was held liable even
for the subsequent obligations of the principal borrower.

PALMARES V. CA & M. B. LENDING CORPORATION, (1998)

Surety distinguished from Guaranty, Art. 2047

Where a party signs a promissory note as a co-maker and binds herself to be jointly and
severally liable with the principal debtor in case the latter defaults in the payment of the
loan, is such undertaking of the former deemed to be that of a surety as an insurer of
the debt, or of a guarantor who warrants the solvency of the debtor?SURETY.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4,
Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship.

In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear,
explicit and unequivocal that petitioner's liability is that of a surety. Her pretension that
the terms "jointly and severally or solidarily liable" contained in the second paragraph of
her contract are technical and legal terms which could not be easily understood by an
ordinary layman like her is diametrically opposed to her manifestation in the contract
that she "fully understood the contents" of the promissory note and that she is "fully
aware" of her solidary liability with the principal maker.

Petitioner would like to make capital of the fact that although she obligated herself to be
jointly and severally liable with the principal maker, her liability is deemed restricted by
the provisions of the third paragraph of her contract wherein she agreed "that M.B.
Lending Corporation may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which
makes her contract one of guaranty and not suretyship. The purported discordance is
more apparent than real.

Suretyship Guaranty
A surety is an insurer of the debt guarantor is an insurer of the solvency of
the debtor
A suretyship is an undertaking that a guaranty is an undertaking that
the debt shall be paid the debtor shall pay
 surety promises to pay the principal's debt a guarantor agrees that the creditor, after
if the principal will not pay proceeding against the principal, may
proceed against the guarantor if the
principal is unable to pay
A surety binds himself to perform if the A guarantor does not contract that the
principaldoes not, without regard to his principal will pay, but simply that he is able
ability to do so to do so.
a surety undertakes directly for the a guarantor contracts to pay if, by the use
payment and is so responsible at once if of due diligence, the debt cannot be made
the principal debtor makes default out of the principal debtor

Note: Quintessentially, the undertaking to pay upon default of the principal debtor does
not automatically remove it from the ambit of a contract of suretyship. It has not been
shown, either in the contract or the pleadings, that respondent corporation agreed to
proceed against herein petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship is that wherein one lends his credit by joining in the
principal debtor's obligation, so as to render himself directly and primarily responsible
with him, and without reference to the solvency of the principal.

Suretyship
A surety is bound equally and absolutely with the principal, and as such is deemed an
original promissor and debtor from the beginning. This is because in suretyship there is
but one contract, and the surety is bound by the same agreement which binds the
principal. In essence, the contract of a surety starts with the agreement, which is
precisely the situation obtaining in this case before the Court.

A surety is usually bound with his principal by the same instrument, executed at the
same time and upon the same consideration; he is an original debtor, and his liability is
immediate and direct. Thus, it has been held that where a written agreement on the
same sheet of paper with and immediately following the principal contract between the
buyer and seller is executed simultaneously therewith, providing that the signers of the
agreement agreed to the terms of the principal contract, the signers were "sureties"
jointly liable with the buyer. A surety usually enters into the same obligation as that of his
principal, and the signatures of both usually appear upon the same instrument, and the
same consideration usually supports the obligation for both the principal and the surety

E. ZOBEL, INC. V. CA, (1998)

Surety distinguished from Guaranty, Art. 2047

A contract of surety is an accessory promise by which a person binds himself for

another already bound, and agrees with the creditor to satisfy the obligation if the debtor
does not.

A contract of guaranty, on the other hand, is a collateral undertaking to pay the debt of
another in case the latter does not pay the debt.

Surety Guarantor
usually bound with his principal by the guarantor's own separate undertaking, in
same instrument, executed at the same which the principal does not join. It is
time, and on the same consideration usually entered into before or after that of
the principal, and is often supported on a
separate consideration from that
supporting the contract of the principal.
He is an original promissor and debtor The original contract of his principal is not
from the beginning, and is held, ordinarily, his contract, and he is not bound to take
to know every default of his principal notice of its non-performance.
Usually, he will not be discharged, either He is often discharged by the mere
by the mere indulgence of the creditor to indulgence of the creditor to the principal,
the principal, or by want of notice of the and is usually not liable unless notified of
default of the principal, no matter how the default of the principal.
much he may be injured thereby
the insurer of the debt, and he the insurer of the solvency of the debtor
 obligates himself to pay if the and thus binds himself to pay if the
principal does not pay. principal is unable to pay

Held: Based on the aforementioned definitions, it appears that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is
a contract of surety. The terms of the contract categorically obligates petitioner as
"surety" to induce SOLIDBANK to extend credit to respondent spouses. The contract
clearly disclose that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself jointly and
severally to the obligation with the respondent spouses. In fact, SOLIDBANK need not
resort to all other legal remedies or exhaust respondent spouses' properties before it
can hold petitioner liable for the obligation.

Stipulation
agrees t guarantee, and hereby guarantee, the payment

The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation. As aptly observed by the trial court, the
interpretation of a contract is not limited to the title alone but to the contents and
intention of the parties.
PHILIPPINE BLOOMING MILLS, INC. & CHING V. CA, (2003)
Surety distinguished from Guaranty, Art. 2047

Ching is liable for credit obligations contracted by PBM against TRB before and after the
execution of the Deed of Suretyship. This is evident from the tenor of the deed itself,
referring to amounts PBM may now be indebted or may hereafter become indebted
to TRB.
 The law expressly allows a suretyship for future debts. Article 2053 of the Civil Code
provides:
A guaranty may also be given as security for future debts, the amount of which is not
yet known; there can be no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured.

Furthermore, this Court has ruled in Dio v. CA:

Under the Civil Code, a guaranty may be given to secure even future debts, the amount
of which may not be known at the time the guaranty is executed. This is the basis for
contracts denominated as continuing guaranty or suretyship. A continuing guaranty is
one which is not limited to a single transaction, but which contemplates a future course
of dealing, covering a series of transactions, generally for an indefinite time or until
revoked.
It is prospective in its operation and is generally intended to provide security with
respect to future transactions within certain limits, and contemplates a succession of
liabilities, for which, as they accrue, the guarantor becomes liable.
Otherwise stated, a continuing guaranty is one which covers all transactions, including
those arising in the future, which are within the description or contemplation of the
contract of guaranty, until the expiration or termination thereof.
How : A guaranty shall be construed as continuing when by the terms thereof it is
evident that the object is to give a standing credit to the principal debtor to be used from
time to time either indefinitely or until a certain period; especially if the right to recall the
guaranty is expressly reserved. Hence, where the contract states that the guaranty is to
secure advances to be made from time to time, it will be construed to be a continuing
one.

Examples: In other jurisdictions, it has been held that the use of particular words and
expressions such as payment of any debt, any indebtedness, or any sum, or the
guaranty of any transaction, or money to be furnished the principal debtor at any
time, or on such time that the principal debtor may require, have been construed to
indicate a continuing guaranty.
IFC V. IMPERIAL TEXTILE MILLS, INC., (2005).
Surety distinguished from Guaranty, Art. 2047

The Court does not find any ambiguity in the provisions of the Guarantee Agreement.
When qualified by the term jointly and severally, the use of the word guarantor to
refer to a surety does not violate the law.
As Article 2047 provides, a suretyship is created when a guarantor binds
itself solidarily with the principal obligor. Likewise, the phrase in the Agreement -- as
primary obligor and not merely as surety -- stresses that ITM is being placed on the
same level as PPIC. Those words emphasize the nature of their liability, which the law
characterizes as a suretyship.

The use of the word guarantee does not ipso facto make the contract one of guaranty.
This Court has recognized that the word is frequently employed in business transactions
to describe the intention to be bound by a primary or an independent obligation. The
very terms of a contract govern the obligations of the parties or the extent of the
obligors liability. Thus, this Court has ruled in favor of suretyship, even though
contracts were denominated as a Guarantors Undertaking or a Continuing Guaranty.

Suretyship as merely an accessory or a collateral to a principal obligation

a suretyship is merely an accessory or a collateral to a principal obligation.
Although a surety contract is secondary to the principal obligation, the liability of the
surety is direct, primary and absolute; or equivalent to that of a regular party to the
undertaking.
A surety becomes liable to the debt and duty of the principal obligor even without
possessing a direct or personal interest in the obligations constituted by the latter.

ESCANO & SILOS V. ORTIGAS, JR., (2007)

 Surety distinguished from Joint and Solidary Obligations, Art. 2047, Art. 2066, Art. 2067,
Art. 1217

SURETIES hereby irrevocably agree and undertake to assume all of OBLIGORs said
guaranties to PDCP and PAIC

Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,
claiming that the Undertaking did not provide for express solidarity.
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable
for the Undertaking, as the language used in the agreement clearly shows that it is a
surety agreement between the obligors (Ortigas group) and the sureties (Escao
group). Ortigas points out that the Undertaking uses the word SURETIES in describing
the parties.

Held: The Undertaking does not contain any express stipulation that the petitioners
agreed to bind themselves jointly and severally in their obligations to the Ortigas
group, or any such terms to that effect. Hence, such obligation established in the
Undertaking is presumed only to be joint.

As provided in Article 2047 in a surety agreement the surety undertakes to be bound

solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract as
it presupposes the existence of a principal contract. It appears that Ortigass argument
rests solely on the solidary nature of the obligation of the surety under Article 2047.
A suretyship requires a principal debtor to whom the surety is solidarily bound by way of
an ancillary obligation of segregate identity from the obligation between the principal
debtor and the creditor. The suretyship does bind the surety to the creditor, inasmuch as
the latter is vested with the right to proceed against the former to collect the credit in lieu
of proceeding against the principal debtor for the same obligation. At the same time,
there is also a legal tie created between the surety and the principal debtor to which the
creditor is not privy or party to. The moment the surety fully answers to the creditor for
the obligation created by the principal debtor, such obligation is extinguished. At the
same time, the surety may seek reimbursement from the principal debtor for the amount
paid, for the surety does in fact become subrogated to all the rights and remedies of
the creditor.

Note that Article 2047 itself specifically calls for the application of the provisions on joint
and solidary obligations to suretyship contracts. Article 1217 of the Civil Code thus
comes into play, recognizing the right of reimbursement from a co-debtor (the principal
debtor, in case of suretyship) in favor of the one who paid (i.e., the surety).

Note: A guarantor who binds himself in solidum with the principal debtor under the
provisions of the second paragraph does not become a solidary co-debtor to all intents
and purposes.

Surety Solidary co-debtor

outside of the liability he Solidarity signifies that the
assumes to pay the debt creditor can compel any one of
before the property of the the joint and several debtors or
principal debtor has been the surety alone to answer for
exhausted the entirety of the principal
debt.
has the right to recover the full may claim from his co-
amount paid, and not just any debtors only the share which
proportional share, from the corresponds to each, with
principal debtor or debtors. the interest for the payment
already made.
Subsidiary solidary

Accordingly, the rights to indemnification and subrogation as established and granted to

the guarantor byArticles 2066 and 2067 extend as well to sureties as defined under
Article 2047. These rights granted to the surety who pays materially differ from those
granted under Article 1217 to the solidary debtor who pays, since the indemnification
that pertains to the latter extends only [to] the share which corresponds to each [co-
 debtor]. It is for this reason that the Court cannot accord the conclusion that because
petitioners are identified in the Undertaking as SURETIES, they are consequently joint
and severally liable to Ortigas.

PLEADGE & MORTGAGE

DBP V. CA, (1998)

Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage

Par.12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question

Elements of pactum commissorium:

1. there should be a property mortgaged by way of security for the payment of the
principal obligation, and
2. there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period.

Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBAs failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. DBP, however, exceeded the
authority vested by condition no. 12 of the deed of assignment. It had without
foreclosure proceedings, whether judicial or extrajudicial, appropriated the leasehold
rights of Cuba over the fishpond in question. At any rate, DBPs act of appropriating
CUBAs leasehold rights was violative of Article 2088 of the Civil Code, which forbids a
creditor from appropriating, or disposing of, the thing given as security for the payment
of a debt. Instead of taking ownership of the questioned real rights upon default by
CUBA, DBP should have foreclosed the mortgage, as has been stipulated in condition
no. 22 of the deed of assignment. But, as admitted by DBP, there was no such
foreclosure.

Article 2088 of the Civil Code which provides as follows:

ART. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

BUSTAMANTE V. ROSEL, (1999)

Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage

in the event the borrowers fail to pay, the lender has the option to buy or purchase the
collateral for a total consideration of P200K, inclusive of the borrowed amount and
interest therein.

A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept
of pactum commissorium, which is proscribed by law. The intent to appropriate the
property given as collateral in favor of the creditor appears to be evident, for the debtor
is obliged to dispose of the collateral at the pre-agreed consideration amounting to
practically the same amount as the loan. In effect, the creditor acquires the collateral in
the event of non payment of the loan. This is within the concept of pactum
commissorium. Such stipulation is void.

ONG. V. ROBAN LENDING CORPORATION, (2008)

Pactum Commissorium, Art. 2087, Art. 2088: Effects on Pledge or Mortgage

The SECOND PARTY hereby signed another promissory note with a promise to pay
the FIRST PARTY in full within one year from the date of the consolidation and
 restructuring, otherwise the SECOND PARTY agree to have their DACION IN
PAYMENT agreement, which they have executed and signed today in favor of the
FIRST PARTY be enforced

Issue: Whether the contract constitutes pactum commissorium or dacion en pago.

Held: Pactum Commissorium.

In the case at bar, the MOA and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the MOA, the failure by the petitioners
to pay their debt within the one-year period gives respondent the right to enforce the
Dacion in Payment transferring to it ownership of the properties covered by the TCT.
Respondent, in effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation.

This does not persuade. In a true dacion en pago, the assignment of the property
extinguishes the monetary debt. In the case at bar, the alienation of the properties was
by way of security, and not by way of satisfying the debt. The Dacion in Payment did not
extinguish petitioners obligation to respondent. On the contrary, under the MOA
executed on the same day as the Dacion in Payment, petitioners had to execute a
promissory note which they were to pay within one year.

That the questioned contracts were freely and voluntarily executed by petitioners and
respondent is of no moment, pactum commissorium being void for being prohibited by
law.
 PLEDGE

ESTATE OF LITTON V. MENDOZA & CA, (1988)

Pledge: Ownership of Collateral, Art. 2103, Art. 2102, Art. 2101, Art. 1951, Art. 2108,
Art. 2112, Art. 2097
(see full text for the facts)

The fact that the deed of assignment was done by way of securing or guaranteeing
Tan's obligation in favor of George Litton, Sr., as observed by the appellate court, will
not in any way alter the resolution on the matter. The validity of the guaranty or pledge
in favor of Litton has not been questioned. Our examination of the deed of assignment
shows that it fulfills the requisites of a valid pledge or mortgage.

Rule
Although it is true that Tan may validly alienate the litigatious credit as ruled by the
appellate court, citing Article 1634 of the Civil Code, said provision should not be taken
to mean as a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security. The Court rules that
the said provision should be read in consonance with Article 2097 of the same
code. Although the pledgee or the assignee, Litton, Sr. did not ipso factobecome the
creditor of private respondent Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be alienated by the latter with due notice
to and consent of Litton, Sr. or his duly authorized representative. To allow the assignor
to dispose of or alienate the security without notice and consent of the assignee will
render nugatory the very purpose of a pledge or an assignment of credit.

Moreover, under Article 1634, the debtor has a corresponding obligation to reimburse
the assignee, Litton, Sr. for the price he paid or for the value given as consideration for
the deed of assignment. Failing in this, the alienation of the litigated credit made by Tan
in favor of private respondent by way of a compromise agreement does not bind the
assignee, petitioner herein.
Note: Private respondent has, from the very beginning, been fully aware of the deed of
assignment executed by Tan in favor of Litton, Sr. Having such knowledge thereof,
private respondent is estopped from entering into a compromise agreement involving
the same litigated credit without notice to and consent of the assignee,petitioner herein.
More so, in the light of the fact that no reimbursement has ever been made in favor of
the assignee as required under Article 1634. Private respondent acted in bad faith and
in connivance with assignor Tan so as to defraud the petitioner in entering into the
compromise agreement.

MANILA BANKING CORPORATION V. TEODORO, JR. AND TEODORO, (1989).

(INCLUDE CONCURRING OPINION)
Pledge: Right to Payment, Art. 2102, Art. 2118
(see full text for the facts)

The assignment of receivables executed by appellants did not transfer the ownership of
the receivables to appellee bank and release appellants from their loans with the bank
incurred under promissory notes.

The Deed of Assignment provided that it was for and in consideration of certain credits,
loans, overdrafts, and their credit accommodations extended to 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. 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 fully paid by
them.
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 interest in 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 trust for said Assignee.

The character of the transactions between the parties is not, however, determined by
the language used in the document but by their intention. 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 which are the subject of the suit for collection in a Civil
Case. At the time the deed of assignment was executed, said loans were non-existent
yet. 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.

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.

CHU V. COURT OF APPEALS ET AL., 1989

Pledge: Right to Payment, Art. 2102, Art. 2118
As the collateral was also money or an exchange of "peso for peso," the provision
in Article 2112 of the Civil Code for the sale of the thing pledged at public auction to
convert it into money to satisfy the pledgor's obligation, did not have to be followed. All
that had to be done to convert the pledgor's time deposit certificates into cash was to
present them to the bank for encashment after due notice to the debtor.

CITIBANK, N.A. & INVESTOR FINANCE CORPORATION V. SABENIANO, (2006)

Pledge: Right to Payment, Art. 2102, Art. 2118

The liquidation of respondents outstanding loans were valid in so far as petitioner

Citibank used respondents savings account with the bank and her money market
placements with petitioner FNCB Finance; but illegal and void in so far as petitioner
Citibank used respondents dollar accounts with Citibank-Geneva.

Without the Declaration of Pledge, petitioner Citibank had no authority to demand the
remittance of respondents dollar accounts with Citibank-Geneva and to apply them to
her outstanding loans. It cannot effect legal compensation under Article 1278 of the
Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is a distinct
and separate entity. As for the dollar accounts, respondent was the creditor and
Citibank-Geneva is the debtor; and as for the outstanding loans, petitioner Citibank was
the creditor and respondent was the debtor. The parties in these transactions were
evidently not the principal creditor of each other.

Therefore, this Court declares that the remittance of respondents dollar accounts from
Citibank-Geneva and the application thereof to her outstanding loans with petitioner
Citibank was illegal, and null and void.

PARAY & ESPELETA V. RODRIGUEZ, ET AL., (2006)

Right of Redemption
Issue: WON the pledged shares of stock auctioned off in a notarial sale could still be
redeemed by their owners.

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only
to execution sales, more precisely execution sales of real property.

Does the right of redemption exist over personal property? No law or jurisprudence
establishes or affirms such right. Indeed, no such right exists.

The right to redeem property is a bare statutory privilege to be exercised only by the
persons named in the statute.

The right of redemption over mortgaged real property sold extrajudicially is established
by Act No. 3135, as amended. The said law does not extend the same benefit to
personal property. In fact, there is no law in our statute books which vests the right of
redemption over personal property. Act No. 1508, or the Chattel Mortgage Law,
ostensibly could have served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial sale of
mortgaged personal property, but the statute is definitely silent on the point.
And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the
Court of Appeals, starkly utters that the right of redemption applies to real properties,
not personal properties, sold on execution.

Obviously, since there is no right to redeem personal property, the rights of ownership
vested unto the purchaser at the foreclosure sale are not entangled in any suspensive
condition that is implicit in a redemptive period.

Issue #2: The Court of Appeals also found fault with the apparent sale in bulk of the
pledged shares, notwithstanding the fact that these shares were owned by several
people, on the premise the pledgors would be denied the opportunity to know exactly
how much they would need to shoulder to exercise the right to redemption.

Held: Rule 39 of the Rules of Court does provide for instances when properties
foreclosed at the same time must be sold separately, such as in the case of lot sales for
real property under Section 19. However, these instances again pertain to execution
sales and not extrajudicial sales. No provision in the Rules of Court or in any law
requires that pledged properties sold at auction be sold separately.

On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is
given the right to choose which of the items should be sold if two or more things are
pledged. No similar option is given to pledgors under the Civil Code. Moreover, there is
nothing in the Civil Code provisions governing the extrajudicial sale of pledged
properties that prohibits the pledgee of several different pledge contracts from
auctioning all of the pledged properties on a single occasion, or from the buyer at the
auction sale in purchasing all the pledged properties with a single purchase price. The
relative insignificance of ascertaining the definite apportionments of the sale price to the
individual shares lies in the fact that once a pledged item is sold at auction, neither the
pledgee nor the pledgor can recover whatever deficiency or excess there may be
between the purchase price and the amount of the principal obligation.

A different ruling though would obtain if at the auction, a bidder expressed the desire to
bid on a determinate number or portion of the pledged shares. In such a case, there
may lie the need to ascertain with particularity which of the shares are covered by the
bid price, since not all of the shares may be sold at the auction and correspondingly not
all of the pledge contracts extinguished. The same situation also would lie if one or
some of the owners of the pledged shares participated in the auction, bidding only on
their respective pledged shares.
Issue #3: Whether the consignations made by respondents extinguished their
respective pledge contracts in favor of the Parays so as to enjoin the latter from
auctioning the pledged shares.

Held: There is no doubt that if the principal obligation is satisfied, the pledges should be
terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to
retain possession of the pledged item exists only until the debt is paid. Article 2105 of
the Civil Code further clarifies that the debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has paid the debt and its
interest. At the same time, the right of the pledgee to foreclose the pledge is also
established under the Civil Code. When the credit has not been satisfied in due time,
the creditor may proceed with the sale by public auction under the procedure provided
under Article 2112 of the Code.

Section 18, Rule 39 provides that the judgment obligor may prevent the sale by paying
the amount required by the execution and the costs that have been incurred therein.
However, the provision applies only to execution sales, and not extra-judicial sales, as
evidenced by the use of the phrases sale of property on execution and judgment
obligor.