Estate of Litton v Mendoza and CA | 1998

1.

1963, CMB Products (with Mendoza as president)offered to sell textile cotton

materials to the Bernalspouses (engaged in manufacture of embroidery,garments
and cotton materials);-

For this purpose, Mendoza introduced the spousesto Alfonso Tan;2.

The spouses purchased on credit from Tan cottonmaterials (80k);-

Mendoza guaranteed the payment of the debt;3.

Tan then delivered the cotton materials to thespouses;4.

In view of the arrangement, CBM Products (thruMendoza) asked for and

received a post-dated check
(Feb 20, 1964) for the payment of the spouses debt;
-

It was understood that Mendoza will retain thecheck until the cotton materials are
finallymanufactured into garments, after whichMendoza will sell the finished
products for thespouses;5.

Meanwhile, the check matured without having beencashed so Mendoza

demanded for another checkwithout a date;6.

Feb. 28, 1964, Mendoza issued two checks in favourof Tan (worth 80k);-

He told the spouses of the same and told themthey are indebted to him and
asked the spousesto sign an instrument whereby Mendoza assignedthe said
amount to Insular Products, Inc.;7.

Tan had the two checks discounted but were later

returned with words stop payment;
-

It appears it was ordered by Mendoza for failureof the spouses to deposit

sufficient funds for thecheck issued by the spouses in his favour;8.

Tan sued Mendoza while the spouses brought anaction for interpleader for not
knowing whom to pay;-

Pendente lite, Tan assigned in favour of Littion, Srhis litigatious credit (in action of
spouses) againstMendoza, duly submitted to the court, with noticeto the
parties;9.
TC ordered Mendoza to pay Tan 76k;-

CA affirmed (1977);10.

Meanwhile, in 1971, Mendoza entered intoCompromise Agreement with Tan

wherein the latterrecognized that his claims against Mendoza had beensettled
and because of that, both waives any claimagainst the other; with a provision that
it no way
affects Tans right to go against the
spouses;11.

1977 (after CAs decision), Mendoza fi

led MFR sayingthat there was the compromise agreement whichabsolved him
from liability;-

Tan opposed this saying the Compromiseagreement was null and void because
of the deedof assignment executed in favour of Litton, Sr.;he says that with such,
he has no more right toalienate said credit;12.

CA then approved the compromise agreement:-

It said that the assignment was by way of securing only his obligation to Litton,
Sr.;-

Thus, Tan retained possession and dominion overthe credit (2085);-

Although considered as a litigatious credit, suchmay be validly alienated by Tan;

such alienationis subject to the remedies of Litton under 6 of CCwhereby, the
assignment if proven prejudicial toLitton, may entitle Littion to pursue his
remediesagainst Tan;-

The alienation of a litigatious credit is further

subject to the debtors right of redemption under
1634;W/N compromise valid. No.Ratio:1.

Purpose of compromise: to replace and terminatecontroverted claims; once

approved, it has the forceof res judicata (except for vices of consent orforgery);-

Petitioner seeks to set aside the compromiseagreement since prior thereto, Tan
executed adeed of assignment in favour of Littion, Sr.involving the same litigated
credit;2.

Compromise Agreement set aside:-

Fact that assignment was done by way of

securing Tans obligation in fav
our of Littion, Sr.does not affect the resolution of the matter;-

Validity of pledge/guaranty in favour of Liiton hasnot been questioned;Deed of

assignment fulfils the requirements of a validpledge or mortgage;-

Although Tan may validly alienate the litigatiouscredit (1634), it does not give
him (assignor/Tan)absolute right to indiscriminately dispose of thething;-

Said provision (1634) should be read inconsonance with 2097; although

thepledgee/assignee (Litton, Sr.) did not becomeipso facto become the creditor
of Mendoza, thepledge being invalid, the incorporeal rightassigned by Tan in
favour of Mendoza can only bealienated by Tan with due notice to and consentof
Litton, Sr. or his duly authorizedrepresentative;-

To allow it would render nugatory the verypurpose of a pledge or an assignment

of credit;-

Also, under 1634, the debtor has thecorresponding obligation to reimburse

theassignee, for the price he paid or for the valuegiven as consideration for the
deed of assignment; failing here, the compromiseagreement does not bind the
assignee;Notes:-

From the very beginning, Mendoza was, from thevery beginning, aware of the
deed of assignment;as it was submitted to the court where CBM wasone of the
defendants;-

Having such knowledge, Mendoza is estoppedfrom entering into the compromise

agreement

involving the same litigate credit without notice toand consent of the assignee;-

Mendoza acted in bad faith and in connivancewith assignor Tan to defraud

Littion, Sr. inentering in the compromise agreement;

Manila Banking Corp. v Anastacio Teodoro, Jr. andGrace TeodoroBidin, J. |

1989
1.

April 1966, Spouses Teodoro together with Teodoro Srexecuted a PN in favour of

Manila Banking Corp(MBC);-

Payable within 120 days (until Aug), with 12%interest per annum;-
They failed to pay and left balance of 15k as of September 1969;2.

May and June 1966, executed two PNs;-

8k and 1k respectively payable within 120 daysand 12% per annum;-

They made partial payment but still left 8.9kbalance as of September 1969;3.

It appears than in 1964, Teodoro Jr executed a Deedof Assignment of

Receivables in favour of MBC fromEmergency Employment Administration;-

Amounted to 44k;-

The deed provided it was for consideration of certain credits, loans, overdrafts
and other creditaccommodations extended to the spouses andTeodoro Sr as
security for the payment of saidsum and interest thereon; and that they
releaseand quitclaim all its rights, title and interest in thereceivables;4.

In the stipulations of fact, it was admitted by theparties:-

That MBC extended loans to the spouses andTeodoro Jr because of certain

contracts enteredinto by latter with EEA for fabrication of fishingboats and that
the Philippine FisheriesCommission succeeded EEA after its abolition;-

That non-payment of the PNs was due to failureof the Commission to pay
spouses;-

That the Bank took steps to collect from theCommission but no collection was
effected;5.

For failure of the spouses and Teodor Sr to pay, MBCinstituted against them;-

Teodoro Sr subsequently died so suit only againstthe spouses;6.

TC favoured MBC; MFR denied;-

Spouses appealed to CA but since issue purequestion of law, CA forwarded to

SC;
Issues:W/N the assignment of receivables has the effect of payment of all
the loans contracted by the spouses;No.W/N MBC must exhaust all legal
remedies againstPFC before it can proceed against the spouses.
NoRatio:Assignment of credit
:-

An agreement by virtue of which the owner of acredit(assignor) by a legal cause

(e.g. sale, dationin payment, exchange or donation) and withoutthe need of the
consent of the debtor, transfershis credit and its accessory rights
toanother(assignee) who acquires the power toenforce it to the same extent as
the assignorcould have enforced it against the debtor;-

May be in form of:

o

Sale
o

Dation in payment - when a debtor, in orderto obtain a release from his debt,
assigns tohis creditor a credit he has against a thirdperson;
o

Donation

when it is by gratuitous title;

o

Guaranty

creditor gives as a collateral, tosecure his own debt in favour of the

assignee,without transmitting ownership;-

Obligations between the parties will depend uponthe juridical relation which is the
basis of theassignment;What is the legal effect of the Assignment (since
itsvalidity is not in question):1.

Assignment of receivables in 1964 did nottransfer the ownership of the

receivables to MBCand release the spouses from their loans;-

Consideration was for certain credits, loans,overdrafts and credit

accommodations worth10k extended by MBC to spouses and assecurity for the
payment of said sum andinterest thereon; also quitclaim of rights toMBC of their
interest in the receivables;-

Stipulated also that it was a continuingguaranty for future loans

andcorrespondingly, the assignment shall extendto all accounts receivable;
Contention of spouses: not mere guarantysince it was stipulated:
-

That the assignor release and quitclaim toassignee all its rights, title and interest
in theaccounts receivable;-

That title and right of possession to accountreceivable is to remain in assignee

and itshall have right to collect directly from thedebtor; that whatever the assignor
does inconnection with collection of such, it does soas agent and representative
and in trust of assignee;-

SC: character of transaction is notdetermined by the language in document butby

intention of the parties;;-

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

pledge.-

A transfer of property by the debtor to acreditor, even if sufficient on its farm to

makean absolute conveyance, should be treated asa pledge if the debt continues
in existenceand is not discharged by the transfer;Assignment of receivables did
not result from saleor by virtue of a dation in payment;-

At time the deed was executed, the loanswere non-existent yet;

At most, it was a dation for 10k, the amountof credit with MBC indicated in the
deed; atthe time of execution, there was no obligationto be extinguished except
for the 10k;-

1292: in order that an obligation may beextinguished by another which

substitutes thesame, it is imperative that it be so declared inunequivocal terms,
or that the old and thenew obligations be on every pointincompatible with each
other;Deed of assignment intended as collateralsecurity for the loans, as a
continuing guarantyfor whatever sums that would be owing byspouses;-

In case of doubt as to whether a transactionis a pledge or a dation in payment,

thepresumption is in favor of pledge, the latterbeing the lesser transmission of
rights andinterests (Lopez v CA);2.

MBC need not exhaust all legal remedies againstPFC:-

Spouses, not being released by theassignment, remain as the principal debtorsof

MBC, rather than mere guarantors;-

The deed merely guarantees saidobligations;-

2058 (creditor must have exhausted propertyof debtor and resorted to all legal
remediesbefore it can proceed to guarantor) does notapply to them;-

Appellants are both the principal debtors andthe pledgors or mortgagors;-

MBC did try to collect but at OP, it wasdisapproved; so the loan was
basicallyunsecured;DISMISSED.Feliciano, J. concurring.
Justice Bidins, "the character of the transactions betw
eenthe parties is not, however, determined by the language
used in the document but by their intention
not withoutexception;-

Deed here contains language which suggest thatthe parties intended complete
alienation of title toand rights over the receivables;-

Words remise, release and quitclaim andclauses title

the title and right of possession tosaid accounts receivable is to remain in
saidassignee" who "shall have the right to collect
directly from the debtor;
-

Words agent also convey the

ideas;-

But such must be taken in conjunction with andqualified by other language

showing intent of theparties that title to the receivables shall pass tothe assignee
for the
limited purpose
of
securinganother, principal obligation
owed by the assignorto the assignee;
In 1985, Mike Abella rented a house owned by Atty. Dionisio Calibo, Jr.
Meanwhile, Dr. Pablo Abella, Mikes father, entrusted to Mike a tractor. Pablo
delivered the tractor to Mike in order for the latter to safe-keep the same.
In November 1986, Mike defaulted in his rental payments to Calibo. Calibo
repeatedly demanded payments but Mike failed to pay. However, Mike assured
Calibo that he will soon pay and Mike used his fathers tractor as a security.
Hence, Calibo took possession of the tractor. Later, Mike advised Calibo that he
can sell the tractor as payment for his debts.
Pablo learned of the foregoing and so he contacted Calibo. He offered to pay a
portion of Mikes debt and in return Calibo must return the tractor. Calibo refused
and he wanted Pablo to guarantee all of Mikes debt which Pablo does not want.
Eventually, to redeem his tractor, Pablo filed a replevin suit against Calibo, which
Pablo won.
On appeal, Calibo invoked that the replevin should not have been granted as
there was a valid contract of pledge between him and Mike; and that Mike was
Pablos agent because Pablo was aware of the fact that Mike pledged the tractor
to him. In the alternative, Calibo invoked that if theres no contract of pledge,
there is at least a contract of deposit since Mike himself left the tractor with him in
the concept of an innkeeper.
ISSUE: Whether or not the arguments of Calibo are valid.
HELD: No.
There is no contract of pledge.
The elements of a contract of pledge are as follows:
1. the pledge is constituted to secure the fulfillment of a principal obligation;
2. the pledgor be the absolute owner of the thing pledged; and
3. the person constituting the pledge has the free disposal of his property, and in
the absence thereof, that he be legally authorized for the purpose.
In this case, element number 2 is missing. Mike is not the absolute owner of the
tractor.
There is no contract of agency between Pablo and Mike.
It was proven in court that Pablo only left the tractor in his sons possession only
for the purpose of safekeeping. Pablo was not aware that his son pledged it to
Calibo and he never authorized his son to do so.
There is no contract of deposit between Mike and Calibo.
There is no deposit where the principal purpose for receiving the object is not
safekeeping. In this case, Calibo himself admitted in court that Mike delivered the
tractor to him as security for Mikes debts.
The judgment ordering Calibo to return the tractor to Pablo was affirmed by the
Supreme Court.

Facts:
This is a case involving Citibank, N.A., a banking corporation duly registered under US Laws
and islicensed to do commercial banking and trust functions in the Philippines and Investor's
FinanceCorporation (aka FNCB Finance), and affiliate company of Citibank, mainly handling
money market placements(MMPs are short term debt instruments that give the
owner an unconditional right to receive astated, fixed sum of money on a specified
date).Modesta R. Sabeniano was a client of both petitioners Citibank and FNCB
Finance.Unfortunately, the business relations among the parties subsequently went
awry. Subsequently, Sabeniano filed a complaintwith the RTC against petitioners as
she claims to have substantial deposits and money market placementswith the petitioners and
other investment companies, the proceeds of which were supposedly depositedautomatically
and directly to her account with Citibank. Sabeniano alleged that Citibank et al refused toreturn
her deposits and the proceeds of her money market placements despite her repeated
demands, thus,the civil case for "Accounting, Sum of Money and Damages.

In their reply, Citibank et al admitted that Sabeniano had deposits and money market
placements withthem, including dollar accounts in other Citibank branches. However, they also
alleged that respondentlater obtained several loans from Citibank, executed through
Promissory Notes and secured by a pledgeon her dollar accounts, and a deed of assignment
against her MMPS with FNCB Finance. WhenSabeniano defaulted, Citibank exercised its right
to off-set or compensate respondent's outstanding loanswith her deposits and money market
placements, pursuant to securities she executed. Citibank supposedlyinformed Sabeniano of
the foregoing compensation through letters, thus, Citibank et al were surprisedwhen six years
later, Sabeniano and her counsel made repeated requests for the withdrawal ofrespondent's
deposits and MMPs with Citibank, including her dollar accounts with Citibank-Geneva andher
money market placements with petitioner FNCB Finance. Thus, petitioners prayed for the
dismissalof the Complaint and for the award of actual, moral, and exemplary damages, and
attorney's fees.The case was eventually decided after 10 years with the Judge declaring the
offsetting done as illegal andthe return of the amount with legal interest, while Sabeniano was
ordered to pay her loans to Citibank.The ruling was then appealed. Th
e CA modified the decision but only to the extent of Sabenianos loans
which it ruled that Citibank failed to establish the indebtedness and is also without legal and
factual basis.The case was thus appealed to the SC.Issue: Whether or not there was a valid off
setting/compensation of loan vis a vis thea.)Deposits and b.) MMPs.Held:General
Requirement of Compensation:Art. 1278. Compensation shall take place when two persons, in
their own right, are creditors anddebtors of each other.Art. 1279. In order that compensation
may be proper, it is necessary;(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;(2) That both debts consist in a
sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;(3) That the two debts be due;(4)
That they be liquidated and demandable;(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the
debtor.1. Yes. As already found by this Court, petitioner Citibank was the creditor of
respondent for heroutstanding loans. At the same time, respondent was the creditor of
petitioner Citibank, as far as herdeposit account was concerned, since bank deposits, whether
fixed, savings, or current, should beconsidered as simple loan or
mutuum
by the depositor to the banking institution.
122
Both debts consist insums of money. By June 1979, all of respondent's PNs in the second
set had matured and became
http://www.lawphil.net/judjuris/juri2006/oct2006/gr_156132_2006.html - fnt122

demandable, while respondent's savings account was demandable anytime. Neither was there
anyretention or controversy over the PNs and the deposit account commenced by a third
person andcommunicated in due time to the debtor concerned. Compensation takes place by
operation of law.2. Yes, but technically speaking Citibank did not effect a legal compensation or
off-set under Article 1278of the Civil Code, but rather, it partly extinguished respondent's
obligations through the application of thesecurity given by the respondent for her
loans.Respondent's money market placements were with petitioner FNCB Finance, and after
several roll-overs,they were ultimately covered by PNs No. 20138 and 20139, which, by 3
September 1979, the date thecheck for the proceeds of the said PNs were issued, amounted
to P1,022,916.66, inclusive of the principal

amounts and interests.

As to these money market placements, respondent was thecreditor and
petitioner FNCB Finance the debtor (thereby implying that moneymarket
placement is a simple loan or mutuum); while, as to the outstanding
loans,petitioner Citibank was the creditor and respondent the debtor.
Consequently, legalcompensation, under Article 1278 of the Civil Code, would not apply since
the first requirement for avalid compensation, that each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the other, was not met.What
petitioner Citibank actually did was to exercise its rights to the proceeds of respondent's
moneymarket placements with petitioner FNCB Finance by virtue of the Deeds of Assignment
executed byrespondent in its favor. Petitioner Citibank was only acting upon the authority
granted to it under theforegoing Deeds when it finally used the proceeds of PNs No. 20138 and
20139, paid by petitioner FNCBFinance, to partly pay for respondent's outstanding loans.
Strictly speaking, it did not effect a legalcompensation or off-set under Article 1278 of the Civil
Code, but rather, it partly extinguishedrespondent's obligations through the application of the
security given by the respondent for her loans.Although the pertinent documents were entitled
Deeds of Assignment, they were, in reality, more of a pledge by respondent to petitioner
Citibank of her credit due from petitioner FNCB Finance by virtue ofher money
market placements with the latter. According to Article 2118 of the Civil Code

ART. 2118. If a credit has been pledged becomes due before it is redeemed, the pledgee
maycollect and receive the amount due. He shall apply the same to the payment of his claim,
anddeliver the surplus, should there be any, to the pledgor.

PARAY v. RODRIGUEZ, ET AL., G.R. No. 132287 (JANUARY 24, 2006)

FACTS:
Respondents were the owners of shares of stock in Quirino-Leonor-Rodriguez
Realty Inc. In 1979 to 1980,respondents secured by way of pledge of some of
their shares of stock to petitioners Bonifacio and Faustina Paray
(Parays) the payment of certain loan obligations.
When the Parays attempted to foreclose the pledges on accou
nt of respondents failure to pay their loans,
respondents filed complaints with RTC of Cebu City. The actions sought the
declaration of nullity of the pledgeagreements, among others. However the RTC
dismissed the complaint and gave due course to the foreclosure andsale at
public auction of the various pledges. This decision attained finality after it was
affirmed by the Court of Appeals and the Supreme Court.Respondents then
received Notices of Sale which indicated that the pledged shares were to be sold
at publicauction. However, before the scheduled date of auction, all of
respondents caused the consignation with the RTCClerk of Court of various
amounts. It was claimed that respondents had attempted to tender payments to
the Parays,but had been rejected.Notwithstanding the consignations, the public
auction took place as scheduled, with petitioner Vidal Espeletasuccessfully
bidding for all of the pledged shares. None of respondents participated or
appeared at the auction.Respondents instead filed a complaint with the RTC
seeking the declaration of nullity of the concluded publicauction.
Respondents argument:

Respondents argued that their tender of payment and subsequent consignations

served to extinguish their loanobligations and discharged the pledge contracts.
Petitioners argument:

Petitioners countered that the auction sale was conducted pursuant to a final and
executory judgment andthat the tender of payment and consignations were made
long after their obligations had fallen due.They pointed out that the amounts
consigned could not extinguish the principal loan obligations of respondents
since they were not sufficient to cover the interests due on the debt. They
likewise argued that theessential procedural requisites for the auction sale had
been satisfied.
Ruling of RTC:
The RTC dismissed the complaint, expressing agreement with the position of
the Parays. It held thatrespondents had failed to tender or consign payments
within a reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale.
Ruling of CA:
The Court of Appeals however reversed the RTC on appeal, ruling that the
consignations extinguished theloan obligations and the subject pledge contracts;
and the auction sale as null and void. It (CA) chose to uphold thesufficiency of
the consignations owing to an imputed policy of the law that favored redemption
and mandated a liberalconstruction to redemption laws. The attempts at payment
by respondents were characterized as made in theexercise of the right
of redemption.CA likewise found fault with the auction sale, holding that there
was a need to individually sell the variousshares of stock as they had belonged
to different pledgors.
ISSUES:
1.
WON right of redemption exists over personal properties (such as the subject
pledged shares).

2.
WON the consignations made by respondents prior to the auction sale are
sufficient to extinguish the loanobligations and the subject pledged contracts.
3.
WON the act of respondents in consigning the payments should be deemed
done in the exercise of their right of redemption owing to an imputed policy of the
law that favored redemption and mandated a liberal construction toredemption
laws.
4.
WON a buyer at a public auction
ipso facto
becomes the owner of the pledged shares pending the lapse of theone-year
redemptive period

5.
WON there is a need to individually sell the various shares of stock as they had
belonged to different pledgors.
HELD:1. No.
No law or jurisprudence establishes or affirms such right. Indeed, no such right
exists.The right of redemption over mortgaged real property sold extrajudicially is
established by Act No. 3135, asamended. The said law does not extend the
same benefit to personal property. In fact, there is no law in our statutebooks
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 personalproperty, since that
law governs the extrajudicial sale of mortgaged personal property, but the statute
is definitelysilent on the point.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.It must be clarified that the subject sale of pledged shares
was an extrajudicial sale, specifically a notarialsale, as distinguished from a
judicial sale as typified by an execution sale. Under the Civil Code, the
foreclosure of apledge occurs extrajudicially, without intervention by the courts.
All the creditor needs to do, if the credit has not beensatisfied in due time, is to
proceed before a Notary Public to the sale of the thing pledged.In this case,
petitioners attempted to proceed extrajudicially with the sale of the pledged
shares by publicauction. However, extrajudicial sale was stayed with the filing of
Civil Cases which sought to annul the pledgecontracts. The final and executory
judgment in those cases affirmed the pledge contracts and disposed them.
Said judgment did not direct the sale by public auction of the pledged shares, but
instead upheld the right of the Parays toconduct such sale at their own volition.
2. No.
There is no doubt that if the principal obligation is satisfied, the pledges
should be terminated as well. Article2098 of the Civil Code provides that the right
of the creditor to retain possession of the pledged item exists only untilthe debt is
paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for
the return of the thingpledged against the will of the creditor, unless and until he
has paid the debt and its interest. At the same time, theright of the pledgee to
foreclose the pledge is also established under the Civil Code. When the credit
has not beensatisfied in due time, the creditor may proceed with the sale by
public auction under the procedure provided under Article 2112 of the Code.In
order that the consignation could have the effect of extinguishing the pledge
contracts, such amountsshould cover not just the principal loans, but also the
monthly interests thereon.In the case at bar, while the amounts consigned by
respondents could answer for their respective principal loanobligations, they
were not sufficient to cover the interests due on these loans, which were pegged
at the rate of 5%per month or 60% per annum.
3. No.
The pledged shares in this case are not subject to redemption. Thus, the
consigned payments should notbe treated with liberality, or somehow construed
as having been made in the exercise of the right of redemption.
4. Yes.

Obviously, since there is no right to redeem personal property, the rights of

ownership vested unto thepurchaser at the foreclosure sale are not entangled in
any suspensive condition that is implicit in a redemptive period.
5. No.
This concern is obviously rendered a non-issue by the fact that there can be no
right to redemption in thefirst place. Rule 39 of the Rules of Court does provide
for instances when properties foreclosed at the same timemust be sold
separately, such as in the case of lot sales for real property under Section 19.
However, these instancesagain pertain to execution sales and not extrajudicial
sales. No provision in the Rules of Court or in any law requiresthat 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 tochoose
which of the items should be sold if two or more things are pledged. No similar
option is given to pledgorsunder 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 pledgedproperties on a single occasion, or from the buyer at the auction sale
in purchasing all the pledged properties with asingle purchase price. The relative
insignificance of ascertaining the definite apportionments of the sale price to
theindividual shares lies in the fact that once a pledged item is sold at auction,
neither the pledgee nor the pledgor canrecover whatever deficiency or excess
there may be between the purchase price and the amount of the
principalobligation.
RULING:
Decision of the Court of Appeals is SET ASIDE and the decision of the RTC
Cebu City is REINSTATED.

GR No. 199420 August 27, 2014 PHILNICO INDUSTRIAL CORPORATION,

petitioner vs. PRIVATIZATION AND MANAGEMENT OFFICE, Respondent.
x-------------------------------------------------x GR No. 199432 PRIVATIZATION AND
MANAGEMENT OFFICE, Petitioner vs. PHILNICO INDUSTRIAL
CORPORATION, Respondent. Civil Law; Pledge; Pactum Commissorium; There
are two elements for pactum commissorium to exist and are present in this case:
(1) that there should be a pledge or mortgage wherein a property is pledged or
mortgaged by way of security for the payment of the principal obligation; and (2)
that there should be a stipulation for an automatic appropriation by the creditor of
the thing pledged or mortgaged in the event of nonpayment of the principal
obligation within the stipulated period. LEONARDO- DE CASTRO, J.; FACTS:
The Privatization and Management Office (PMO) is a holder of shares of stock of
Philnico Processing Corporation (PPC). The two entities, together with Philnico
Industrial Corporation (PIC) entered into a contract known as Amended and
Restated Definitive Agreement (ARDA) which states the terms and conditions for
the sale of PMO of its shares of PPC stocks as well as receivables to buyer PIC.
As stated in the ARDA, by way of security, the PIC shall pledge to PMO the said
shares and execute a Pledge Agreement in favor of PMO. Significantly, Sec. 8 of
the said ARDA provides that in the event of default, the title to the existing and
converted shares shall ipso facto revert to PMO without the need of demand in
case such payment default is not remedied by PIC within 90 days from the due
date of 2nd installment. In accordance with the ARDA, PMO executed documents
and transferred the title, rights and interests to the shares of stock in favor of PIC.
On May 2, 1997, P IC as pledgor and PMO as pledgee executed a Pledge
Agreement. Three years later, PMO notified PIC that the latter had defaulted in
the payment of its obligations and demanded PIC to settle its unpaid
amortizations or else PMO would enforce the automatic reversion of the PPC
shares of stock. Thus, PIC filed before the RTC a Complaint for Prohibition
against Reversion of Shares with Prayer for Writ of Preliminary Injunction and/ or
TRO against PMO and PPC. The RTC granted the Writ of Preliminary Injunction
ruling that the ipso facto reversion is pactum commissorium thus illegal. Upon
appeal, the CA denies the presence of pactum commissorium ruling that the
ARDA is a separate and distinct contract of sale and does not pertain to the
Pledge Agreement but still declared the ipso facto reversion as invalid as
contrary to law, morals, good customs, public order and public policy. Hence, the
instant petitions.
ISSUE: Whether or not the ipso facto reversion of the PPC shares of stock to
PMO in case of default by PIC constitutes pactum commissorium.
HELD: AFFIRMATIVE. Pactum commissorium is defined as a stipulation
empowering the creditor to appropriate the thing given as guaranty for the
fulfillment of the obligation in the event the obligor fails to live up to his
undertakings, without further formality, such as foreclosure proceedings, and a
public sale. It is explicitly prohibited under Article 2088 of the Civil Code which
provides that the creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void. The
abovementioned elements for pactum commissorium to exist are present in this
case. By virtue of the Pledge Agreement PIC pledged its PPC shares of stock in
favor of PMO as security for the fulfillment of the formers obligations under
the ARDA dated May 10, 1996 and the Pledge Agreement itself; and (2) There is
automatic appropriation as under Section 8.02 of the ARDA, in the event of
default by PIC, title to the PPC shares of stock shall ipso facto revert from PIC to
PMO without need of demand. In contrast to CA ruling, the ARDA and the Pledge
Agreement herein, although executed in separate written instruments, are
integral to one another. The Pledge Agreement is a way of security for PMO in
lieu of the performance of PIC of its obligations under both the ARDA and the
Pledge Agreement. It is upon the execution of the Pledge Agreement that PIC
turned over the possession of its certificates of shares of stock in PPC to PMO.
As ruled, there had already been a shift in the relations of PMO and PIC, from
mere seller and buyer, to creditor-pledgee and debtor-pledgor. Having enjoyed
the security and benefits of the Pledge Agreement, PMO cannot now insist on
applying Section 8 of the ARDA and conveniently and arbitrarily exclude and/or
ignore the Pledge Agreement so as to evade the prohibition against pactum
commissorium. Moreover, the Court focused on the evident intention of the
parties rather than the formal or written form to determine the existence of
pactum commissorium. Hence, appreciating the ARDA and the Pledge
Agreement, the Court can only conclude that the ipso facto reversion of shares of
stock is a pactum commissorium and thus, null and void.