Republic of the Philippines On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover
ed action in the Court of First Instance of Cebu to recover the three vessels or their
SUPREME COURT
Manila
EN BANC
G.R. No. L-19227 February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao, valued at
P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was
purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943,
plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was
payable at P50,000 a year, due on or before the end of the current year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To
guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as
evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the
Collector of Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed
by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was
due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes
were never paid at all by plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of
commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31,
1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no
funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the
amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted
by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was
affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for
indemnification was returned unsatisfied as plaintiff was totally insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged
vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu
Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed
a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for
P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which
rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price
thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March
15, 1951.
value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages.
After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the
facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to
P8,846.01, 8 but increasing its alleged damages to P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of
the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of
the pledged vessels by defendant bank to itself without notice to the plaintiff-pledgor as stipulated in the pledge contract was
likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining
account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved
being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a
chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there
has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge
contract —
3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff
obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this
loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the
Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied) 1äwphï1.ñët
Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no
amount of rationalization can offset it. 9
The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that
plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made
"subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11being new — cannot apply to the
pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the
proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without
invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the
pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points
to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is
also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar
nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v.
Ganzon, the objects pledged — carabaos — were easily capable of actual, manual delivery unto the pledgee. In Banco
Español-Filipino v. Peterson, the objects pledged — goods contained in a warehouse — were hardly capable of actual, manual
delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable
requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse
sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The
parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the
order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in
maritime business, such delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the
former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the
vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the
defendant bank in the huge sum of P184,000.
 The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case involving Art. 1863 of
the old Civil Code, 13 has ruled: 14

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

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

There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v.
Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure
of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's
authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that
if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the
part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were
private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have
recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to
have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an
obligation to return the P184,000 fraudulently taken by him from defendant bank.

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

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

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

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur. 1äwphï1.ñët
 Republic of the Philippines TIRZO ZEPEDA
SUPREME COURT
Manila
The court below held that inasmuch as this document was prior in date to the judgment under which the execution was levied,
it was a preferred credit and judgment was rendered in favor of the plaintiff for the possession of the carabaos, without
EN BANC damages and without costs. From this judgment the defendants appeal.

G.R. No. L-24137 March 29, 1926 The judgment must be reversed unless the document above quoted can be considered either a chattel mortgage or else a
pledge. That it is not a sufficient chattel mortgage is evident; it does not meet the requirements of section 5 of the Chattel
Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel mortgage, is consequently of no effect as
EULOGIO BETITA, plaintiff-appellee,
against third parties (Williams vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de
vs.
Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil., 753).
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-appellants.

Neither did the document constitute a sufficient pledge of the property valid against third parties. Article 1865 of the Civil Code
Padilla, Trenas and Magalona for appellants.
provides that "no pledge shall be effective as against third parties unless evidence of its date appears in a public instrument."
Varela and Ybiernas for appellee.
The document in question is not public, but it is suggested that its filing with the sheriff in connection with the terceria gave in
the effect of a public instrument and served to fix the date of the pledge, and that it therefore fulfills the requirements of article
OSTRAND, J.: 1865. Assuming, without conceding, that the filing of the document with the sheriff had that effect, it seems nevertheless
obvious that the pledge only became effective as against the plaintiff in execution from the date of the filing and did not rise
superior to the execution attachment previously levied (see Civil Code, article 1227).
This action is brought to recover the possession of four carabaos with damages in the sum of P200. Briefly stated, the facts are
as follows: On May 15, 1924, the defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the sum of
P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on the carabaos in question which Manresa, in commenting on article 1865, says:
were found in the possession of one Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein,
Eulogio Betita, presented a third party claim (terceria) alleging that the carabaos had been mortgaged to him and as evidence
ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a public
thereof presented a document dated May 6, 1924, but the sheriff proceeded with the sale of the animals at public auction
instrument.
where they were purchased by the defendant Clemente Perdena for the sum of P200, and this action was thereupon brought.

The document upon which the plaintiff bases his cause of action is in the Visayan dialect and in translation reads as follows:
I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality of Balasan, Province of Iloilo, Philippine
Islands, do hereby execute this document extrajudicially and state that I am indebted to Mr. Eulogio Betita, resident of the
municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470, Philippine currency, and was so indebted
since the year 1922, and as a security to my creditor I hereby offer four head of carabaos belonging to me exclusively (three
females and one male), the certificates of registration of said animals being Nos. 2832851, 4670520, 4670521 and 4670522,
which I delivered to said Mr. Eulogio Betita.
I hereby promise to pay said debt in the coming month of February, 1925, in case I will not be able to pay, Mr. Eulogio Betita
may dispose of the carabaos given as security for said debt.
This document is a new one or a renewal of our former document because the first carabaos mortgaged died and were
substituted for by the newly branded ones."
In testimony whereof and not knowing how to sign my name, I caused my name to be written and marked same with my right
thumb.
Estancia, May 6, 1924.
(Marked). TIBURCIA BUHAYAN
This article, the precept of which did not exist in our old law, answers the necessity for not disturbing the relationship
or the status of the ownership of things with hidden or simulated contracts of pledge, in the same way and for the
identical reasons that were taken into account by the mortgage law in order to suppress the implied and legal
mortgages which produce so much instability in real property.
Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded by law,
the case may happen wherein a debtor in bad faith from the moment that he sees his movable property in danger of
execution may attempt to withdraw the same from the action of justice and the reach of his creditors by simulating,
through criminal confabulations, anterior and fraudulent alterations in his possession by means of feigned contracts
of this nature; and, with the object of avoiding or preventing such abuses, almost all the foreign writers advise that,
for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be
executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its proof more
so, even in cases in which it is executed before witnesses, due to the difficulty to be encountered in seeking those
before whom it was executed.
Our code has not gone so far, for it does not demand in express terms that in all cases the pledge be constituted or
formalized in a public writing, nor even in private document, but only that the certainty of the date be expressed in
the first of the said class of instruments in order that it may be valid against a third party; and, in default of any
express provision of law, in the cases where no agreement requiring the execution in a public writing exists, it should
be subjected to the general rule, and especially to that established in the last paragraph of article 1280, according to
which all contracts not included in the foregoing cases of the said article should be made in writing even though it be
private, whenever the amount of the presentation of one or of the two contracting parties exceeds 1,500 pesetas.
(Vol. 12, ed., p. 421.)

If the mere filing of a private document with the sheriff after the levy of execution can create a lien of pledge superior to the
Signed in the presence of: attachment, the purpose of the provisions of article 1865 as explained by Manresa clearly be defeated. Such could not have
been the intention of the authors of the Code. (See also Ocejo, Perez & Co. vs.International Banking Corporation, 37 Phil., 631
MIGUEL MERCURIO and Tec Bi & Co. Chartered Bank of India, Australia & China, 41 Phil., 596.)
The alleged pledge is also ineffective for another reason, namely, that the plaintiff pledgee never had actual possession of the Avanceña, C. J., Street, Villamor, Johns, Romualdez and Villa-Real, JJ., concur.
property within the meaning of article 1863 of the Civil Code. But it is argued that at the time of the levy the animals in question Malcolm, J., concurs in the result.
were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the
possession of his landlord.

It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia Buhayan were living
together as husband and wife and had been so living for many years. Testifying as a witness for the plaintiff, Jacinto on cross-
examination made the following statements:

Q. But the caraballas in question had never been in possession of Eulogio Betita? — A. The three young ones did
not get into his hands.

Q. And the others? — A. Sometimes they were in the hands of Betita and at other times in the hands of Buhayan.

Q. Those are the caraballas which formerly were mortgaged by Buhayan to Betita, isn't that so? — A. Yes, sir.

Q. And the four carabaos now in question had never been in possession of Betita, but were in your possession? —
A. When I worked they were in my hands.

Q. And before you worked, these caraballas were in possession of your mistress, Tiburcia Buhayan? — A. Yes, sir.

Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals passed immediately into your
possession? — A. Yes sir.

This testimony is substantially in accord with that of the defendant sheriff to the effect that he found the animals at the place
where Tiburcia Buhayan was living. Article 1863 of the Civil Code reads as follows:

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

In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a pledge without which the contract cannot be regarded as
entered into or completed, because, precisely, in this delivery lies the security of the pledge. Therefore, in order that
the contract of pledge may be complete, it is indispensable that the aforesaid delivery take place . . . . (P.
411, supra.)

It is, of course, evident that the delivery of possession referred to in article 1863 implies a change in the actual possession of
the property pledged and that a mere symbolic delivery is not sufficient. In the present case the animals in question were in the
possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was entered into and apparently remained with
them until the execution was levied, and there was no actual delivery of possession to the plaintiff himself. There was therefore
in reality no change in possession.

It may further be noted that the alleged relation of landlord and tenant between the plaintiff and Simon Jacinto is somewhat
obscure and it is, perhaps, doubtful if any tenancy, properly speaking, existed. The land cultivated by Jacinto was not the
property of the plaintiff, but it appears that a part of the products was to be applied towards the payment of Tiburcia Buhayan's
debt to the plaintiff. Jacinto states that he was not a tenant until after the pledge was made.

From what has been said it follows that the judgment appealed from must be reversed and it is ordered and adjudged that the
plaintiff take nothing by his action. Without costs. So ordered.
 Republic of the Philippines We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as defined by law (Articles
SUPREME COURT 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations embodied in the contract signed by appellant when he
Manila secured the loan from the appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt
were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation. This clearly appears in the
contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as a collateral security. The
EN BANC
delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its ownership remains
with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By this we mean that if the obligation is not
G.R. No. L-6342 January 26, 1954 paid upon maturity the most that the pledgee can do is to sell the property and apply the proceeds to the payment of the
obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract,
for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the
vs. pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. The
LAUREANO ATENDIDO, defendants-appellant.
fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the situation,
the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to
Nicolas Fernandez for appellee. forestall any possible disposition thereof on the part of the pledgor. This is true notwithstanding the provisions to the contrary of
Gaudencio L. Atendido for appellant. the Warehouse Receipt Law.

BAUTISTA, ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Nueva Ecija which orders the defendant to pay to the plaintiff
the sum of P3,000, with interest thereon at the rate of 6% per annum from June 26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000 payable in 120 days with
interests at 6% per annum from the date of maturity. To guarantee the payment of the obligation the borrower pledged to the
bank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan,
and to that effect the borrower endorsed in favor of the bank the corresponding warehouse receipt. Before the maturity of the
loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan matured the borrower
failed to pay either the principal or the interest and so the present action was instituted.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93 Phil., 765) which involves a similar
transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is transferred or endorsed to a creditor only to
secure the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the
goods covered by the warehouse receipt or quedan but he merely retains the right to keep and with the consent of
the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the
transaction involved is not a sale but only a mortgage or pledge, and that if the property covered by the quedans or
warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee
of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner,
mortgagor or pledgor.

Wherefore, the decision appealed from is affirmed, with costs against appellant.
Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that the warehouse receipt
covering the palay which was given as security having been endorsed in blank in favor of the bank, and the palay having been
lost or disappeared, he thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary Bengzon, Padilla, Montemayor, Jugo, Reyes and Labrador, JJ., concur.
to his theory, he is entitled to an indemnity which represents the difference between the value of the palay lost and the amount
of his obligation.

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

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

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

In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S-1719 covering the 2,000
cavanes of palay by the defendant in favor of the plaintiff was not that of a final transfer of that warehouse receipt but merely as
a guarantee to the fulfillment of the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose
(of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover, the 2,000 cavanes of palay were
not in the first place in the actual possession of plaintiff corporation, although symbolically speaking the delivery of the
warehouse receipt was actually done to the bank."
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21069 October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.
Villaluz Law Office for plaintiff-appellee.
Rodolfo R. Velayo for and in his own behalf as defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo
Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-½% per annum from July 13,
1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15%
of the total award, and the costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for
P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the
Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the
Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for
all money it should pay or become liable to pay under the bond including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's
further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in
connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the
balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned
unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's
failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter
and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a
claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code,
which recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the
sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the
sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the
price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation
to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance,
the defense was once more overruled, and the case decided in the terms set down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of
jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter.
There was no understanding that, should the same be sold at public auction and the value thereof should be short of
the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the
said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional
securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of
the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which
the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to
the undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already
been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between
the amounts of P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is
of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these
contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's
undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence,
the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115
of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from
stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principal
obligation supervenes by operation of imperative law that the parties cannot override:
If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any
stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of
suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No
deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in
Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of
the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933.
WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability
for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this respect the
decision of the Court below is affirmed. No costs. So ordered.
Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,concur.
 No. 025, 059 & 099;
Dolores R. Soberano. 699 shares covered by Stock Certificates
THIRD DIVISION No. 021, 053, 022 & 097;
SPOUSES BONIFACIO and G.R. No. 132287 Julia Generoso .. 1,100 shares covered by Stock Certificates
FAUSTINA PARAY, and No. 085, 051, 086 & 084;
VIDAL ESPELETA, Present: Teresita Natividad.. 440 shares covered by Stock Certificates
Petitioners, Nos. 054 & 055[2]
QUISUMBING, J.,
Chairman,
CARPIO,
- versus - CARPIO-MORALES, and
When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans, respondents filed complaints with
TINGA, JJ.

DRA. ABDULIA C. RODRIGUEZ, Promulgated: the Regional Trial Court (RTC) of Cebu City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the
MIGUELA R. JARIOL assisted by her
husband ANTOLIN JARIOL, SR., January 24, 2006 declaration of nullity of the pledge agreements, among others. However the RTC, in its decision [3] dated 14 October 1988, dismissed the
LEONORA NOLASCO assisted by her
husband FELICIANO NOLASCO, complaint and gave due course to the foreclosure and sale at public auction of the various pledges subject of these two cases.[4] This
DOLORES SOBERANO assisted by her
husband JOSE SOBERANO, JR., JULIA
R. GENEROSO, TERESITA R. NATIVIDAD decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14
and GENOVEVA R. SORONIO assisted by
her husband ALFONSO SORONIO, August 1991.
Respondents.

x---------------------------------------------------------------------------------x
Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4 November 1991.
DECISION
However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts.
TINGA, J.:
It was claimed that respondents had attempted to tender these payments to the Parays, but had been rebuffed. The deposited amounts were

as follows:
The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a notarial sale could still

be redeemed by their owners. This notion is wrong, and we thus reverse. Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991
38,385.44 .. 14 Oct. 1991
The facts, as culled from the record, follow. Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991
Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol . 490,000.00.. 18 Oct. 1991
Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor- 88,000.00 ..18 Oct. 1991[5]

Rodriguez Realty Inc.[1] Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the

petitioners Bonifacio and Faustina Paray (Parays) the payment of certain loan obligations. The shares pledged are listed below: amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction of 4 November 1991.

Miguel Rodriguez Jariol .1,000 shares covered by Stock Certifi-

cates No. 011, 060, 061 & 062;
Abdulia C. Rodriguez . 300 shares covered by Stock Certificates Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. The
No. 023 & 093;
Leonora R. Nolasco .. 407 shares covered by Stock Certificates complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender
No. 091 & 092;
Genoveva Soronio. 699 shares covered by Stock Certificates
of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners The fundamental premise from which the appellate court proceeded was that the consignations made by respondents should be

countered that the auction sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and construed in light of the rules of redemption, as if respondents were exercising such right. In that perspective, the Court of Appeals made

that the tender of payment and consignations were made long after their obligations had fallen due. three crucial conclusions favorable to respondents: that their act of consigning the payments with the RTC should be deemed done in the

exercise of their right of redemption; that the buyer at public auction does not ipso facto become the owner of the pledged shares pending

The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays. [6] It held, among others that respondents the lapse of the one-year redemptive period; and that the collective sale of the shares of stock belonging to several individual owners

had failed to tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have without specification of the apportionment in the applications of payment deprives the individual owners of the opportunity to know of the

participated in the auction sale.[7] The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the consignations price they would have to pay for the purpose of exercising the right of redemption.

extinguished the loan obligations and the subject pledge contracts; and the auction sale of 4 November 1991 as null and void.[8] Most

crucially, the appellate court chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored The appellate courts dwelling on the right of redemption is utterly off-tangent. The right of redemption involves payments made

redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in by debtors after the foreclosure of their properties, and not those made or attempted to be made, as in this case, before the foreclosure sale.

the exercise of the right of redemption. The proper focus of the Court of Appeals should have been whether the consignations made by respondents sufficiently acquitted them of

their principal obligations. A pledge contract is an accessory contract, and is necessarily discharged if the principal obligation is

The Court of Appeals likewise found fault with the auction sale, holding that there was a need to individually sell the various extinguished.

shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the auction sale should have specified

in detail the bids submitted for each of the shares of the pledgors for the purpose of knowing the price to be paid by the different pledgors Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of Appeals, involving

upon redemption of the auctioned sales of stock. the right of redemption over pledged properties. We have no hesitation in pronouncing such theory as discreditable.

Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they were Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as

undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially,

the payment of the principal obligation by respondents. They point out that the amounts consigned could not extinguish the principal loan without intervention by the courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed before a Notary

obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argue that the essential Public to the sale of the thing pledged.[9]

procedural requisites for the auction sale had been satisfied.

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by public

We rule in favor of petitioners. auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R-20120 and 20131, which sought to annul the pledge

contracts. The final and executory judgment in those cases affirmed the pledge contracts and disposed them in the following fashion:
 The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is
WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and
it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser.
(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and effective; and

(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.[12]

Costs against the plaintiffs.

SO ORDERED.[10] 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

The phrase giving due course to the foreclosure and sale at public auction of the various pledges subject of these two cases may over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to

give rise to the impression that such sale is judicial in character. While the decision did authorize the sale by public auction, such bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the

declaration could not detract from the fact that the sale so authorized is actually extrajudicial in character. Note that the final judgment in statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of

said cases expressly did not direct the sale by public auction of the pledged shares, but instead upheld the right of the Parays to conduct such Appeals, starkly utters that the right of redemption applies to real properties, not personal properties, sold on execution.

sale at their own volition.

Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of redemption.

Indeed, as affirmed by the Civil Code,[11] the decision to proceed with the sale by public auction remains in the sole discretion of In Sibal 1. v. Valdez,[13] the Court ruled that sugar cane crops are personal property, and thus, not subject to the right of redemption. [14] No

the Parays, who could very well choose not to hold the sale without violating the final judgments in the aforementioned civil cases. If the countervailing statute has been enacted since then that would accord the right of redemption over personal property, hence the Court can

sale were truly in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the order affirm this decades-old ruling as effective to date.

directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public auction as a mandatory

recourse, and properly so since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character. Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and applying

the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with liberality, or somehow

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely construed as having been made in the exercise of the right of redemption. We also must reject the appellate courts declaration that the buyer

execution sales of real property. of at the public auction is not ipso facto rendered the owner of the auctioned shares, since the debtor enjoys the one-year redemptive period

to redeem the property. Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be redeemed by the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.

the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of redemption exist over personal property? No

law or jurisprudence establishes or affirms such right. Indeed, no such right exists. 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. This concern is obviously rendered a non-issue by the fact that there can be no right to Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though yet remains

redemption in the first place. Rule 39 of the Rules of Court does provide for instances when properties foreclosed at the same time must be whether the consignations made by respondents extinguished their respective pledge contracts in favor of the Parays so as to enjoin the

sold separately, such as in the case of lot sales for real property under Section 19. However, these instances again pertain to execution sales latter from auctioning the pledged shares.

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. 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

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 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

items should be sold if two or more things are pledged. [15] No similar option is given to pledgors under the Civil Code. Moreover, there is 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.

nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided

pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all under Article 2112 of the Code.

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 Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge

deficiency or excess there may be between the purchase price and the amount of the principal obligation. [16] agreements. They are mistaken.

A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate number or portion Petitioners point out that while the amounts consigned by respondents could answer for their respective principal loan

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, obligations, 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

since not all of the shares may be sold at the auction and correspondingly not all of the pledge contracts extinguished. The same situation annum. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on

also would lie if one or some of the owners of the pledged shares participated in the auction, bidding only on their respective pledged the other hand, challenges this interest rate as usurious.[17]

shares. However, in this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for all of the shares. There

obviously is no longer any practical reason to apportion the bid price to the respective shares, since no matter how slight or significant the The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest rate

value of the purchase price for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled to recover the was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final. Moreover, the said decision

excess or the deficiency, as the case may be. To invalidate the subject auction solely on this point serves no cause other than to celebrate pronounced that even assuming that the interest rates of the various loans were 5% per month, it is doubtful whether the interests so charged

formality for formalitys sake. were exorbitantly or excessively usurious. This is because for sometime now, usury has become legally inexistent. [18] The finality of this

1988 Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With that in
mind, there is no reason for the Court to disagree with petitioners that in order that the consignation could have the effect of extinguishing WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the decision of the

the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly interests thereon. Cebu City RTC, Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents.

SO ORDERED.
It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18, Rule 39,

which 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.[19] 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. The reference is inapropos, and even if it were applicable, the failure of the

payment to cover the interests due renders it insufficient to stay the sale.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted. Petitioners

right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any subsequent court ruling that

would enjoin the petitioners from exercising such right would have the effect of superseding a final and executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated in the

auction sale, as they are permitted to bid themselves on their pledged properties.[20] Moreover, they would have had a better right had they

matched the terms of the highest bidder.[21] Under the circumstances, with the high interest payments that accrued after several years,

respondents were even placed in a favorable position by the pledge agreements, since the creditor would be unable to recover any

deficiency from the debtors should the sale price be insufficient to cover the principal amounts with interests. Certainly, had respondents

participated in the auction, there would have been a chance for them to recover the shares at a price lower than the amount that was actually

due from them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all

respondents can recover is the amounts they had consigned.