Security Transactions: Finals case digests

Atty. De Leon - Manzano

Ruiz v. Caneba
G.R. No. 84884, December 3, 1990
Ponente: Paras, J.

Facts
Private respondents Zenaida Sangalang and Adolfo Cruz are common law spouses and owners in
common of a two-storey house and lots. Petitioners, the spouses Eulalio Ruiz and Iluminada Ruiz are
the lessees of Door No. 1 of the two-storey house divided into two doors, for a monthly rental of P650.
Sometime on November 19, 1982, Eulalio Ruiz and Zenaida Sangalang executed an agreement where
it was provided that Ruiz will buy the house and lot for the sum of P175, 000 under the following
terms and conditions:
1. P65,000 down payment and will assume the balance of P31,500 with the BPI (balance
mortgage)
2. After the payment of the balance mortgage, a balance of P78,500 will be payable on or before
December 31, 1983
3. It was also stipulated that Ruiz spouses will continue paying monthly rental of P650 until the
amount of P175,000 shall have been fully satisfied.

There is no dispute that the following payments were made by Ruiz: P65,000 to Sangalang as down
payment and P21,119.62 to the Bank on the assumed mortgage. There is disagreement, however, as
to the amount paid to Sangalang on the balance of P78,500. Sangalang maintains that she received
only P33,793 while Ruiz insists that they paid P53,073.

Thus, Ruiz spouses filed a complaint for specific performance with damages against Sangalang and
Cruz. On May 15, 1986, the trial court ruled in favor of Sangalang and Cruz. Specifically, the
dispositive portion of the decision reads:

Wherefore, we hereby rule as follows:

1. Ordering plaintiffs to pay Zenaida Sangalang the amount of P20,000 moral damages
2. Ordering plaintiffs to pay defendant Sangalang, attorneys fees in the amount of P15,000 and
to pay the cots of suit; and
3. Defendant Zenaida Sangalang is hereby ordered to return to the payments made by the
plaintiffs pursuant to the Agreement.

The Ruiz spouses appealed to the CA but the same was dismissed. The Clerk of Court, in his capacity
as ex-oficio sheriff, caused the execution of the 1 st and 2nd paragraphs of the dispositive portion.
Thereafter, the Ruiz spouses filed a motion praying that a writ of execution be issued for par. 3 of the
said dispositive portion and that the sheriff be ordered to make full execution of the said decision by
off-setting and/or setting-off par. 3 as against pars. 1 and 2 thereof, which the judge granted.

As expected, the parties could not agree on the execution of the decision as regards par. 3 thereof.
While the trial court is fully aware that a decision once final and executory can no longer be amended
or revised, it opted, for the purpose of finally settling the claims of the parties, to amend the decision
in question on July 27, 1988.

The Ruizes claim that they are entitled to a refund of P121,192.62 plus 24% interest compounded
annually, the alleged legal rate under the Central Bank Circular, or a total amount of P169,414.95.
Sangalang, on the other hand, countered that she received only the amount of P120,092.62 or a
difference of P4,100 from that claimed by the Ruizes, let alone the compounded interest. Furthermore,
Sangalang insists that she is entitled to P1,500 a month rental for Door No. 2 of said house which the
Ruizes occupied after the execution of the agreement instead of confining themselves to Door No. 1
which they used to occupy and for which they have originally been paying rentals.

Issue
Whether or not there is an ambiguity in the dispositive of the May 15, 1986 decision sufficient to
warrant the questioned order of the respondent court amending subject final and executory judgment

Lesley Claudio (2A 2012) Page 1 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

Held
NO. A careful study of the decision of the trial court of May 15, 1986 shows that aside from the fact
that the refund ordered to be made by Sangalang was not specified in exact numbers, there appears
to be no ambiguity in the decision to such an extent as to warrant an amendment of the dispositive
portion. From the total amount of P139,192.62 claimed by the Ruiz spouses to have been actually paid
to Sangalang, only the amount of P15,000 in the form of dishonored checks have been discounted by
the trial court, leaving a balance of P124,192.62. Hence, it is evident that this is the amount that
Sangalang was ordered to return to the Ruizes pursuant to par. 3 of the said dispositive portion.

The only set-off specified by the trial court in the assailed May 15, 1986 decision were the lost profits
suffered by Sangalang because of the annotation of the notice of lis pendens on her title by the Ruiz
spouses which were considered compensated by the increase in value of the property due to the repair
made by the latter. Moreover, it appearing that there was in fact a part execution of pars. 1 and 2 of
the dispositive portion of the 1986 decision against the Ruizes, it is but proper that the amount to be
paid by Sangalang is the total payments made by the petitioners in the amount of P124,192,62

Where the court judgment which did not provide for the interest is already final, there is no reason to
add interest in the judgment. Interest was not demanded by the Ruizes when the case was pending
before the lower court, hence, there is no reason for this Court to grant such claim. As ruled by this
Court, such claim is groundless since the decision and orders sought to be enforced do not direct the
payment of interest and have long become final.

The petition is granted. The order of the respondent judge dated July 27, 1988 is null and void, and
respondent Sangalang is required to pay petitioners Ruiz spouses the amount of P124,192.62.
Petitioners Ruizes are required to vacate the property and pay P650 monthly as rental as agreed upon
and as required by the May 15, 1986 decision until they vacate the premises.

Eastern Shipping Lines v. CA

G.R. No. 97412 July 12, 1994
Ponente: Vitug, J.

Facts
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for delivery
vessel "SS EASTERN COMET" owned by Eastern Shipping Lines. The shipment was insured under Allied
Brokerage Corporations Marine Insurance Policy. Upon arrival of the shipment in Manila on December
12, 1981, it was discharged unto the custody of Metro Port Service, Inc. The latter excepted to one
drum, said to be in bad order, which damage was unknown to Allied Brokerage Corporation.

On January 7, 1982 Allied Brokerage Corporation received the shipment from Metro Port Service, Inc.,
one drum opened and without seal. Thereafter, Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake. Allied contended that due to the losses/damage
sustained by said drum, the consignee suffered losses due to the fault and negligence of Eastern
Shipping Lines and Metro Port.

As a consequence of the losses sustained, Allied was compelled to pay the consignee under the marine
insurance policy, so that it became subrogated to all the rights of action of said consignee against
petitioners. The trial court ruled against petitioner. The appellate court affirmed.

Issues
1. Whether or not a claim for damage sustained on a shipment of goods can be a solidary, or
joint and several, liability of the common carrier, the arrastre operator and the customs broker
2. Whether the applicable rate of interest, referred to above, is twelve percent (12%) or six
percent (6%)

Lesley Claudio (2A 2012) Page 2 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

Held
1. YES. The legal relationship between the consignee and the arrastre operator is akin to that of
a depositor and warehouseman. The relationship between the consignee and the common
carrier is similar to that of the consignee and the arrastre operator. Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in
good condition to the consignee. We do not, of course, imply by the above pronouncement
that the arrastre operator and the customs broker are themselves always and necessarily
liable solidarily with the carrier, or vice-versa, nor that attendant facts in a given case may not
vary the rule. The instant petition has been brought solely by Eastern Shipping Lines, which,
being the carrier and not having been able to rebut the presumption of fault, is, in any event,
to be held liable in this particular case. A factual finding of both the court a quo and the
appellate court, we take note, is that "there is sufficient evidence that the shipment sustained
damage while in the successive possession of appellants" (the herein petitioner among them).
Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole petitioner in this
case, is inevitable regardless of whether there are others solidarily liable with it.

2. The legal interest to be paid is 6% on the amount due computed from the decision, dated 03
February 1988, of the court a quo. 12% interest, in lieu of SIX PERCENT (6%), shall be
imposed on such amount upon finality of this decision until the payment thereof. It may not be
unwise, by way of clarification and reconciliation, to suggest the following rules of thumb for
future guidance:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-

contracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the Civil
Code govern in determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
a. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

b. When an obligation, not constituting a loan or forbearance of money,

is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum.
No interest, however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be established with
reasonable certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code)
but when such certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to run only from the
date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.

III. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its

Lesley Claudio (2A 2012) Page 3 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

satisfaction, this interim period being deemed to be by then an equivalent to a

forbearance of credit.

Central Bank vs. Morfe

No. L-38427, March 12, 1975
Ponente: Aquino, J.

Facts
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board
directed the Superintendent of Banks to take charge of its assets and forbade it to do business. On
December 9, 1969, the Board resolved to seek the courts assistance and supervision in the liquidation
of the bank. The resolution was implemented only on January 25, 1972 when the Central Bank of the
Philippines filed the corresponding petition for assistance and supervision in the CFI of Manila.

Prior to the institution of the liquidation proceeding but after the declaration of insolvency, the spouses
Job Elizes and Marcela Elizes filed a complaint in the CFI of Manila against the Fidelity Savings Bank
for the recovery of the balance of their time deposits, which was granted by that court. In another
case, the spouses Augusto Padilla and Adelaida Padilla secured a judgment against the Fidelity
Savings Bank for the balance of their time deposits plus interests.

The lower court, upon motion of the Elizes and Padilla spouses and over the opposition of the Central
Bank, directed the latter, as liquidator, to pay their time deposits as preferred credits, evidenced by
the final judgments, within the meaning of Article 2244 (14) (b) of the Civil Code, if there are enough
funds in the liquidators custody in excess of the creditors more preferred. The Central Bank appealed,
contending that the Elizes and Padilla spouses do not enjoy any preference because: (a) they were
rendered after the Fidelity Savings Bank was declared insolvent, and (2) under the charter of the
Central Bank and the General Banking Law, no final judgment can be validly obtained against an
insolvent bank.

Issue
Whether or not a final judgment for the payment of a time deposit in a savings bank, which judgment
was obtained after the bank was declared insolvent, is a preferred claim against the bank

Held
NO. It should be noted that fixed, savings, and current deposits of money in banks and similar
institutions are not true deposits. They are considered simple loans and, as such, are not preferred
credits. One purpose in prohibiting the insolvent bank from doing business is to prevent some
depositors from having an undue or fraudulent preference over other creditors and depositors. That
purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some
depositors could be maintained and judgments would be rendered for the payment of their deposits
and then such judgments would be considered preferred credits under Article 2244 (14)(b) of the Civil
Code. We are of the opinion that such judgments cannot be considered preferred and that Article 2244
(14)(b) does not apply to such judgments for the payment of the deposits in an insolvent savings
bank which were obtained after the declaration of insolvency. Considering that the deposits in
question, in their inception, were not preferred credits, it does not seem logical and just that they
should be raised to the category of preferred credits simply because the depositors, taking advantage
of the long interval between the declaration of insolvency and the filing of the petition for judicial
assistance and supervision, were able to secure judgments for the payment of their time deposits. The
lower courts orders are reversed and set aside.

Lesley Claudio (2A 2012) Page 4 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

Banzon v. Court of Appeals

G.R. No. 47258, July 13, 1989
Ponente: Fernandez, C.J.

Facts
Sometime in 1952, defendant Maximo Sta. Maria obtained several crop loans from PNB. For these
loans, Associated acted as surety for defendant Maximo Sta. Maria by filing surety bonds in favor of
PNB to guarantee and answer for the prompt and faithful repayment of said loans. In turn, plaintiff
Antonio Banzon and Emilio Naval acted as indemnitors of Associated in the indemnity agreements,
obligating themselves to indemnify and hold it harmless from any liabilities.

However, defendant Maximo Sta. Maria failed to pay his crop loan obligations in favor of PNB when the
same fell due, and accordingly, the bank demanded payment thereof from Associated as surety.
Instead of paying the bank, Associated filed a complaint in the CFI against Maximo Sta. Maria and
indemnitors Banzon and Naval. The court sentenced Sta. Maria, Banzon, and Naval to pay jointly and
severally Associated for the benefit of PNB.

Pursuant to the judgment, a corresponding writ of execution was issued and the properties of Banzon
were levied and later on sold in execution, with Associated, the judgment creditor, as the highest
bidder. The redemption period having expired, Associated obtained in due time the final certificate of
title of the properties which was registered. Demands were made to Banzon to deliver to Associate the
owners duplicate TCTs, but Banzon failed to do so, prompting Associated to file a petition for an order
directing Banzon to produce and surrender his owners duplicate TCTs.

The records show that sometime in 1965, even before ownership over the two parcels of land
belonging to the Banzons could be consolidated in the name of Associated, the spouses Pedro
Cardenas and Leonila Baluyot were able to execute upon and buy one of the two parcels of land to
satisfy a judgment debt of Associated in favor of Cardenas spouses. Cardenas was awarded the
property in full satisfaction of his judgment, and eventually succeeded in canceling Banzons title and
in having a new one issued in his name. Thereafter, a writ of possession was issued in favor of
Cardenas.

The Banzons, however, refused to vacate the premises and to remove the improvements thereon.
Because of this, an order was issued for the issuance of a writ of demolition, but the same was not
enforced for the reason that a writ of preliminary injunction was issued by the Court of Appeals.
Cardenas thereafter field a motion for the enforcement of the order of demolition and writ of
possession.

The SC restrained Cardenas spouses and Associated and their representatives from enforcing the writ
of possession and order of demolition and respondent Associated from disposing of its rights and
interests over the two lots in question. It appears that a special deputy sheriff of Rizal succeeded in
demolishing Banzons building erected on the lot in question. The SC thereafter ruled that the petition
for a permanent injunction against the disposition in any manner of the two parcels of land subject of
said case other than their reconveyances to petitioners as the rightful owners thereof as expressly
recognized insurance commissioner as liquidator of Associated is granted.

Petitioners spouses Banzon and Rosa Balmaceda filed before the CFI a complaint against the Sta.
Marias for damages allegedly arising from the deprivation of their property due to the Sta. Marias
failure and refusal to pay their obligations to PNB.

Issue
Whether or not the Sta. Marias are liable to petitioners for damages

Held
NO. What appears to us as error is the trial courts conclusion that private respondents are responsible
for the prejudice caused petitioners. As a general rule, the guarantor must first pay the outstanding
amounts due before it can exact payment from the principal debtor. Hence, since Associated had not

Lesley Claudio (2A 2012) Page 5 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

paid nor compelled private respondent to pay the bank, it had no right in law or equity to execute the
judgment against Banzon as indemnitor. While ideally, this debacle could have been avoided by
private respondents payment of their obligations to PNB, such fact of non-payment alone, without
Associateds premature action and subsequent fraudulent acts, could not possibly have resulted in the
prejudice and damage complained of. Thus, while private respondents non-payment was admittedly
the remote cause or the factor which set in motion the ensuing events, Associateds premature action
and execution were the immediate and direct causes of the damage and prejudice suffered by
petitioners. In other words, active supervening events, consisting of said premature and fraudulent
acts of the Associated Insurance and Surety, Inc., had broken the causal connection between the fact
of non-payment and the damage suffered by petitioners, so that their claim should be directed not
against private respondents but against Associated.

There is no denying that the damage and prejudice suffered by petitioners is too high a price to pay
for an act of benevolence. By now, however, they should have obtained adequate relief in accordance
with our ruling in Banzon v. Cruz:

respondent court shall at Banzons petition cause respondents Cardenases to

restore the demolished building or pay Banzon the determined value thereof

The petition for review is denied.

Atok Finance Corporation v. CA

G.R. No. 80078, May 18, 1993
Ponente: Feliciano, J.

Facts
On July 27, 1989, private respondents Sanyu Chemical Corporation as principal, and Sanyu Trading
Corporation along with individual private stockholders of Sanyu Chemical namely, private respondents
spouses Danilo Arrieta and Nenita Arrieta, Leopoldo Halili and Pabilito Bermudo as sureties, executed a
Continuing Suretyship agreement in favor of Atok Finance Corporation as creditor. Under this
Agreement, Sanyu Trading and private respondents jointly, unconditionally, and severally guarantee
to Atok Finance the full payment and discharge of any and all indebtedness of Sanyu Chemical. The
agreement also provides that the agreement is a continuing suretyship relating to any indebtedness.

On November 27, 1981, Sanyu Chemical (principal) assigned its trade receivables to Atok Finance
(Creditor). The Deed of Assignment provides that the failure to pay by the debtors of the assigned
contracts or any installment thereon upon maturity thereof shall be conclusively considered as
violation of the warranty. Moreover, the Deed of Assignment also provides that any violation of the
warranties in the assignment shall render the assignor immediately and unconditionally liable to pay
the assignee jointly and severally with the debtors under the assigned contracts.

On January 13, 1984, Atok Finance commenced an action against Sanyu chemical and private
respondents before the RTC, alleging that Sanyu Chemical had failed to collect and remit the amounts
due under the trade receivables. Private respondents contended that the Continuing Suretyship
Agreement, being an accessory contract, was null and void since, at the time of the execution, Sanyu
Chemical had no pre-existing obligation due to Atok Finance.

The trial court ruled in favor of Atok Finance. The appellate court reversed.

Issues
1. Whether the Continuing Suretyship Agreement is null and void as having been executed
without consideration and without a pre-existing principal obligation to sustain it
2. Whether private respondents are liable under the Deed of Assignment which they, along with
principal debtor Sanyu Chemical, executed in favor of petitioner, on the receivables thereby
assigned

Lesley Claudio (2A 2012) Page 6 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

Held
1. NO. It is true that a guaranty or suretyship agreement is an accessory contract in the sense
that it is entered into for the purpose of securing the performance of another obligation which
is denominated as the principal obligation. Of course, a surety is not bound under any
particular principal obligation until that principal obligation is born. But there is no theoretical
or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and
binding even before the principal obligation intended to be secured thereby is born, any more
than there would be in saying that obligations which are subject to a condition precedent are
valid and binding before the occurrence of the condition precedent. Comprehensive or
continuing surety agreements are in fact quite commonplace in present day financial and
commercial practice. A bank or a financing company which anticipates entering into a series of
credit transactions with a particular company, commonly requires the projected principal
debtor to execute a continuing surety agreement along with its sureties. By executing such an
agreement, the principal places itself in a position to enter into the projected series of
transactions with its creditor. With such suretyship agreement, there would be no need to
execute a separate surety contract or bond for each financing or credit accommodation
extended to the principal debtor. As we understand it, this is precisely what happened in the
case at bar.

2. YES. Article 1629 of the Civil Code invoked by private respondents is not material. The liability
of Sanyu Chemical to Atok Finance rests not on the breach of warranty of solvency; the
liability of Sanyu Chemical was not ex lege (ex. Art. 1629) but rather ex contractu. Under the
Deed of Assignment, the effect of non-payment by the original trade debtors was a breach of
warranty of solvency by Sanyu Chemical, resulting in turn in the assumption of solidary
liability by the assignor under the receivables assigned. In other words, the assignor Sanyu
Chemical becomes a solidary debtor under the terms of the receivables covered and
transferred by virtue of the Deed of Assignment. And because assignor Sanyu Chemical
became, under the deed of Assignment, solidary obligor under each of the assigned
receivables, the other private respondents became solidarily liable for that obligation of Sanyu
Chemical, by virtue of the operation of the Continuing Suretyship Agreement. Put a little
differently, the obligations of individual private respondent officers and stockholders of Sanyu
Chemical under the Continuing Suretyship Agreement, were activated by the resulting
obligations of Sanyu Chemical as solidary obligor under each of the assigned receivables by
virtue of the operation of the Deed of Assignment. That solidary liability of Sanyu chemical is
not subject to the limiting period set out in Article 1629 of the Civil Code. The petition is
granted.

Integrated Realty Corporation v. CA

G.R. No. 60705, June 28, 1989
Ponente: Regalado, J.

Facts
On 11 January 1967, petitioner Raul Santos made a time deposit with respondent Overseas Bank of
Manila (OBM) in the amount of P500,000, and was issued a Certificate of Time Deposit. On 6 February
1967, Santos also made a time deposit with OBM in the amount of P200,000 and was issued a
certificate of time deposit.

On 9 February 1967, petitioner Integrated Realty Corporation (IRC), through its president Raul
Santos, applied for a loan and/or credit line in the amount of P700,000 with respondent Philippine
National Bank. To secure the said loan, Santos executed a Deed of Assignment of the two time
deposits in favor of PNB. OBM gave its conformity to the assignment.

OBM, after the due dates of the time deposit certificates, did not pay PNB. Hence, PNB demanded
payment from defendants IRC and Santos and from OBM. IRC and Santos replied that the obligation
(loan) of defendant IRC was deemed paid with the irrevocable assignment of time deposit certificates.

Lesley Claudio (2A 2012) Page 7 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

PNB filed a complaint against IRC and Santos and impleaded OBM as a defendant to compel it to
redeem and pay to it Santos time deposit certificates with interest. IRC and Santos alleged that PNB
had no cause of action against them because their obligation to PNB was fully paid or extinguished
upon the irrevocable assignment of the time deposit certificates, and that they are not answerable
for the insolvency of OBM. OBM acknowledged the certificates of time deposit that it issued to Santos
and admitted its failure to pay the same due to its distressed financial situation. OBM alleged that by
reason of its state of insolvency its operations have been suspended by Central Bank since August 1,
1986, hence, the time deposits ceased to earn interest from that date. OBM also alleged that it may
not give preference to any depositor or credtior, and that payment of PNBs claim is prohibited.

The trial court ruled the IRC and Santos are jointly and solidarily liable to pay PNB. It also ordered
OMB to pay IRC and Santos whatever amounts the latter will pay to PNB with interest from date of
payment. The appellate court modified the trial courts decision by deleting the portion of the
judgment ordering OBM to pay IRC and Santos whatever amounts the latter will pay to PNB with
interest from date of payment.

Issue
Whether the liability of IRC and Santos with PNB should be deemed to have been paid by
virtue of the deed of assignment made by the former in favor of PNB

Held
NO. There are cogent reasons to conclude that the parties intended that deed of assignment to
complement the promissory notes. The deed of assignment did not operate as payment of the loan so
as to extinguish the obligations of IRC and Santos with PNB. For all intents and purposes, the deed of
assignment in this case is actually a pledge. The deed of assignment has satisfied the requirements of
a contract of pledge (1) that it be constituted to secure the fulfillment of a principal obligation; (2)
that the pledgor be the absolute owner of the thing pledged; (3) that the persons constituting the
pledge have the free disposal of their property, an din the absence thereof, that they be legally
authorized for the purpose. The further requirement that the thing pledged be placed in the
possession of the creditor, or of a third person by common agreement was complied with by the
execution of the deed of assignment in favor of PNB. It must also be emphasized that Santos, as
assignor, made an express undertaking that he would remain liable for any outstanding balance of his
obligation should PNB be unable to actually receive or collect the assigned sums resulting from any
agreements, orders, or decisions of the court or for any other cause whatsoever. The unavoidable
conclusion is that IRC and Santos should be held liable to PNB for the amount of the loan with
corresponding interest thereon.

GSIS v. CA
G.R. No. 128471, March 6, 1998
Ponente: Romero, J.

Facts
Private respondents Jose Salonga, Tan Kiat Tian, and Josefina Usman were registered co-owners pro-
indiviso of two parcels of land located at Bacoor Cavite. Sometime in 1974, the Municipal Treasure of
Cavite refused private respondents payment for real estate taxes of the property on the ground that
the tax declarations of the property were already cancelled. Upon investigation, they discovered that
new tax declarations and titles of said property were issued in the name of Queens Row Subdivision,
Inc. (QRSI).

Thereafter, private respondents sent a letter-complaint to the Public Assistance Office seeking
assistance and asking for an immediate investigation of QRSI and the Register of Deeds of Cavite. No
action, however, was taken by PAO. Hence, private respondents filed an action for declaration of
ownership and cancellation of title against QRSI, the Register of Deeds of Cavite, and the Government
Service Insurance System (GSIS).

GSIS was impleaded in the action since records show that it entered into a project and loan
agreement with QRSI wherein the former granted the latter a loan secured by a real estate mortgage

Lesley Claudio (2A 2012) Page 8 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

covering QRSIs properties in Bacoor, Cavite. Upon QRSIs default in payment, the properties were
extra-judicially foreclosed by GSIS.

The trial court ruled in favor of respondents. The Court of Appeals affirmed.

Issue
Whether or not GSIS was a mortgagee and purchaser in good faith

Held
NO. The GSIS Act grants the GSIS the power to invest its funds, directly or indirectly. Being allowed to
engage in financing, the GSIS should, therefore, exercise care and prudence in investing its funds,
such as in granting loans. Although the GSIS is categorized as a social security and insurance entity,
its ancillary function of investing funds imposes upon it the duty of exercising due diligence in dealing
with properties submitted as collateral for loans. The records fail to reveal that GSIS exercised due
diligence in ascertaining the real owners of the transfer certificate of titles of the properties. If the
GSIS had investigated the same, then it would have learned that the said TCTs were illegally obtained.
Moreover, it should have been more cautious, considering the substantial amount of the loan granted.
Thus, the GSIS cannot assert the defense of good faith, considering that it did not exercise the proper
diligence required by the situation.

If a bank failed to exercise due diligence, it is not considered a mortgagee in good faith. Petitioner is
deemed to have failed to exercise the requisite of due diligence in ascertaining if the land mortgaged
to it by QRSI covered by the TCTs was valid and free from any legal defect. This failure is tantamount
to negligence for petitioner cannot simply rely on the face of the title of the property, as its ancillary
function of investing funds requires a greater degree of diligence. It cannot, therefore, be considered
as a mortgagee and subsequent purchaser in good faith, and necessarily, private respondents are
deemed to have a better right over the property. The petition is denied.

BA Finance Corporation v. CA
G.R. No. 102998, July 5, 1996
Ponente: Vitug, J.

Facts
On May 15, 1980, spouses Reyanldo and Florencia Manahan executed a promissory note binding
themselves to pay Carmasters,Inc. To secure payment, the Manahan spouses executed a deed of
chattel mortgage over a motor vehicle, a Ford Cortina. Carmasters later assigned the promissory note
to petitioner BA Finance Corporation with the conformity of the Manahans. When the latter failed to
pay the due installments, petitioner sent demand letters. The demands not having been heeded,
petitioner filed a complaint for replevin with damages against the spouses. The service of summons
upon the spouses was caused to be served by petitioner. The original of the summons had the name
and the signature of private respondent Roberto Reyes indicating that he received a copy of the
summons and the complaint. Thereafter, the petitioner issued a certification that it had received from
the deputy sheriff of the RTC the Ford Cortina seized from private respondents. The lower court came
out with an order of seizure.

The petitioner filed a notice of dismissal and sought in another motion the withdrawal of the replevin
bond. In view of the earlier dismissal of the case for petitioners failure to prosecute, the court merely
noted the notice of dismissal but denied the motion to withdraw the replevin bond considering that the
writ of replevin had meanwhile been implemented. The private respondent filed a motion praying that
petitioner be directed to comply with the court order requiring petitioner to return the vehicle to him.
The petitioner argued that the order to return the vehicle to private respondent was a departure from
jurisprudence recognizing the right of the mortgagee to foreclose the property to respond to the
unpaid obligation secured by the chattel mortgage. The court granted petitioners motion. A few
months later, petitioner filed a motion to declare private respondent in default. The court dismissed
the case against Manahans for failure to prosecute the case against them. The trial court also
dismissed the case against private respondent for failure of petitioner to show any legal basis for said
respondents liability.

Lesley Claudio (2A 2012) Page 9 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

In its appeal to the CA, petitioner has asserted that a suit for replevin aimed at a foreclosure of the
chattel is an action quasi in rem which does not necessitate the presence of the principal obligors as
long as the court does not render any personal judgment against them. CA denied their petition.

Issue
Whether or not a mortgagee may maintain an action for replevin against any possessor of the object
of a chattel mortgage even if the latter were not a party to a mortgage

Held
NO. Replevin, as broadly understood, is both a form of principal remedy and of a provisional relief. It
may refer to the action itself, i.e., to regain the possession of personal chattels being wrongfully
detained from the plaintiff by another, or to the provisional remedy that would allow the plaintiff to
retain the thing during the pendency of the action and hold it pendente lite. As an action in rem, the
gist of the replevin action is the right of the plaintiff to obtain possession of specific personal property
by reason of his being the owner or of his having a special interest therein. Consequently, the person
in possession of the property sought to be replevied is ordinarily the proper and only necessary party
defendant, and the plaintiff is not required to so join as defendants other persons claiming a right on
the property but no in possession thereof. Where the right of the plaintiff to the possession of the
specific property is so conceded or evident, the action need only be maintained against him who
possesses the property.

In effect, then, the mortgagee, upon the mortgagors default, is constituted as an attorney in fact of
the mortgagor enabling such mortgagee to act for and in behalf of the owner. Accordingly, that the
defendant is not privy to the chattel mortgage should be inconsequential. By the fact that the object of
replevin is traced to his possession, one properly can be a defendant in an action for replevin. It is
here assumed that the plaintiffs right to possess the thing is not or cannot be disputed.

In case the right of possession on the part of the plaintiff or his authority to claim such possession or
that of his principal is put to great doubt, it cold become essential to have other persons involved and
accordingly impleaded for a complete determination and resolution of the controversy. A chattel
mortgage, unlike a pledgee, need not be in, nor entitled to, the possession of the property unless and
until the mortgagor defaults and the mortgagee thereupon seeks to foreclose thereon. Since the
mortgagees right of possession is conditioned upon the actual fact of default which itself may be
controverted, the inclusion of other parties, like the debtor or the mortgagor himself, may be required
in order to allow a full and conclusive determination of the case. When the mortgagee seeks a replevin
in order to effect the eventual foreclosure of the mortgage, it is not only the existence of, but also the
mortgagors default on, the chattel mortgage that, among other things, can properly uphold the reight
to replevy the property. The burden to establish a valid justification for that action lies within the
plaintiff. An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession,
let alone be bound by the terms of the chattel mortgage contract simply because the mortgagee
brings upon an action for replevin. The decision of the CA is affirmed.

Lesley Claudio (2A 2012) Page 10 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

Development Bank of the Philippines v. National Labor Relations Commission

G.R. No. 100264-81, January 29, 1993
Ponente: Gutierrez Jr., J.

Facts
On November 14, 1986, private respondents filed with the Provincial Extension Office of the
Department of Labor and Employment (DOLE) 17 individual complaints against Republic Hardwood
Inc. (RHI) for unpaid wages and separation pay. RHI alleged that it had ceased to operate in 1983 due
to the government ban against tree-cutting. It further alleged that in 1981, RHI failed to pay its loan
with the Development Bank of the Philippines (DBP). RHI contended that since DBP foreclosed its
mortgaged assets on September 24, 1985, then any adjudication of monetary claims in favor of its
former employees must be satisfied against DBP. Thereafter, the private respondents filed a motion to
implead DBP

The Executive Labor Arbiter rendered a decision in favor of private respondents. DBP filed an appeal to
the National Labor Relations Commission (NLRC) but it affirmed the decision of the labor arbiter.

Issue
Whether or not private respondents are entitled to separation pay

Held
YES. There is no merit to DBPs contention that the workers are not entitled to separation pay. Despite
the enormous losses incurred by RHI due to the fire that gutted the sawmill in 1981 and despite the
logging ban in 1983, the uncontroverted claims for separation pay show that most of the private
respondents still worked up to the end of 1985. RHI would still have continued its business had not
the petitioner foreclosed all of its assets and properties on September 24, 1985. Thus, the closure of
RHIs business was not primarily brought about by serious business losses. Such closure was a
consequence of DBPs foreclosure of RHIs assets. Because of the petitioners assertion that the labor
arbiter and respondent NLRC incorrectly applied the provisions of Art. 110 of the Labor Code, we are
constrained to grant the petition for certiorari.

Art. 110, prior to its amendment by RA 6715, reads:

Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or
liquidation of an employers business, his workers shall enjoy first preference as
regards wages due them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Unpaid
wages shall be paid in full before other creditors may establish any claim to a share in
the assets of the employer.

We have repeatedly stressed that before the workers preference provided by Article 110 may be
invoked, there must first be a declaration of bankruptcy or a judicial liquidation of the employers
business. The NLRC therefore, committed grave abuse of discretion when it affirmed the labor arbiters
ruling that the workers preference espoused in Article 110 may be applied even in the absence of a
declaration of bankruptcy or a liquidation order. We must also emphasize that DBPs lien on RHIs
mortgaged assets, being a mortgage credit, is a special preferred credit under Article 2242 of the Civil
Code while the workers preference is an ordinary preferred credit under Article 2244. Clearly, even if
DBP and the private respondents assert their preferred credits in a judicial proceeding, the formers
claim must first be satisfied.

Art. 110 of the Labor Code has been amended by RA 6715 and now reads:
Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or
liquidation of an employers business, his workers shall enjoy first preference as
regards their unpaid wages and other monetary claims, and any provision of law to the
contrary notwithstanding. Such unpaid wages, and monetary claims shall be paid in
full before the claims of the Government and other creditors may be paid.

Lesley Claudio (2A 2012) Page 11 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.
 Security Transactions: Finals case digests
Atty. De Leon - Manzano

We ruled in DBP v. NLRC, that the amendment expands worker preference to cover not only unpaid
wages but also other monetary claims to which even claims of Government must be deemed
subordinate. Hence, under the new law, even mortgage credits are subordinate to workers claims.

RA 6715, however, took effect only on
retroactively applied to, nor can it affect,
several years prior to its effectivity. The
discretion when it retroactively applied the
petition is granted.
March 21, 1989. The amendment cannot therefore be
the mortgage credit which was secured by the petitioner
public respondent, therefore, committed grave abuse of
amendment introduced by RA 6715 in the case at bar. The

State Investment House, Inc. v. Citibank, N.A.

G.R. Nos. 79926-27, October 17, 1991
Ponente: Narvasa, J.

Facts
The foreign banks involved in the controversy are Bank of America NT and SA, Citibank NA, and
Hongkong and Shanghai Banking Corporation. On December 11, 1981, they jointly filed with the CFI a
petitioner for involuntary insolvency of Consolidated Mines, Inc. (CMI). The petition was opposed by
State Investment House Inc. (SIHI) and State Financing Cener (SFCI), claiming that the court had no
jurisdiction to take cognizance of the petition for insolvency because petitioners are not resident
creditors of CMI in contemplation of Insolvency Law. The trial court ruled in favor of petitioner SIHI.
The appellate court reversed.

Issue
Whether or not foreign banks licensed to do business in the Philippines may be considered residents
of the Philippine Islands within the meaning of Section 20 of the Insolvency Law

Held
YES. The answer cannot be found in the Insolvency Law itself, which contains no definition of the term
resident, or an clear indication of its meaning. This Court itself has already occasion to hold that a
foreign corporation licitly doing business in the Philippines, which is a defendant in a civil suit, may not
be considered a non-resident within the scope of the legal provision authorizing attachment against a
defendant not residing in the Philippine Islands. In other words, a preliminary attachment may not be
applied for and granted solely on the asserted fact that the defendant is a foreign corporation
authorized to do business in the Philippines and is consequently and necessarily, a party who
resides out of the Philippines. Parenthetically, if it may not be considered as a party not residing in
the Philippines, or as a party who resides out of the country, then, logically, it must be considered a
party who does not reside in the Philippines, who is a resident of the country. Obviously, the
assimilation of foreign corporations authorized to do business in the Philippines to the status of
domestic corporations, subsumes their being found and operating as corporations, hence, residing in
the country. The law plainly grants to a juridical person, whether it e a bank or not or it be a foreign
or domestic corporation, as to natural persons as well, such a power to petition for the adjudication of
bankruptcy of any person, natural or juridical, provided that it is a resident corporation and joins at
least two other residents in presenting the petition to the Bankruptcy Court. The petition is denied.

Nothing is more practical than finding God,

that is falling in love in a quite absolute, final way.

Lesley Claudio (2A 2012) Page 12 of 12

THE WOMEN OF ALEITHEIA
TRUTH. HONOR. EXCELLENCE.