THE MANILA BANKING CORPORATION vs. ANASTACIO TEODORO, JR. and GRACE ANNA TEODOROG.R. No. L-53955 January 13, 1989Bidin, J.

1. April 1966, Spouses Teodoro together with Teodoro Sr executed a PN in favour of Manila Banking Corp (MBC);- Payable within 120 days (until Aug), with

12% interest per annum;- They failed to pay and left balance of 15k as

of September 1969;2. May and June 1966, executed two PNs;

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

- They made partial payment but still left 8.9k balance as of September 1969;

3. It appears than in 1964, Teodoro Jr executed a Deed of Assignment of Receivables in favour of MBC from Emergency Employment Administration;- Amounted to 44k;- The deed provided it was for consideration

of certain credits, loans, overdrafts and other credit accommodations extended to the spouses and Teodoro Sr as security for the payment of said sum and interest thereon; and that they release and quitclaim all its rights, title and interest in the receivables;

4. In the stipulations of fact, it was admitted by the parties:- That MBC extended loans to the spouses

and Teodoro Jr because of certain contracts entered into by latter with EEA for fabrication of fishing boats and that the Philippine Fisheries Commission succeeded EEA after its abolition;

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

- That the Bank took steps to collect from the Commission but no collection was effected;

5. For failure of the spouses and Teodor Sr to pay, MBC instituted against them;- Teodoro Sr subsequently died so suit only

against the spouses;6. TC favoured MBC; MFR denied;

- Spouses appealed to CA but since issue pure question of law, CA forwarded to SC;

Issues:

W/N the assignment of receivables has the effect of payment of all the loans contracted by the spouses; NO.W/N MBC must exhaust all legal remedies against PFC before it can proceed against the spouses. NO.

Ratio:Assignment of credit:

- An agreement by virtue of which the owner of a credit(assignor) by a legal cause (e.g. sale, dation in payment, exchange or donation) and without the need of the consent of the debtor, transfers his credit and its accessory rights to another(assignee) who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor;

- May be in form of:o Saleo Dation in payment - when a debtor, in

order to obtain a release from his debt, assigns to his creditor a credit he has against a third person;

o Donation – when it is by gratuitous title;o Guaranty – creditor gives as a collateral,

to secure his own debt in favour of the assignee, without transmitting ownership;

- Obligations between the parties will depend upon the juridical relation which is the basis of the assignment;

What is the legal effect of the Assignment (since its validity is not in question):1. Assignment of receivables in 1964 did not

transfer the ownership of the receivables to MBC and release the spouses from their loans;- Consideration was for certain credits,

loans, overdrafts and credit accommodations worth 10k extended by MBC to spouses and as security for the payment of said sum and interest thereon; also quitclaim of rights to MBC of their interest in the receivables;

- Stipulated also that it was a continuing guaranty for future loans and correspondingly, the assignment shall extend to all accounts receivable;

Contention of spouses: not mere guaranty since it was stipulated:

- That the assignor release and quitclaim to assignee all its rights, title and interest in the accounts receivable;

- That title and right of possession to account receivable is to remain in assignee and it shall have right to collect directly from the debtor; that whatever the assignor does in connection with collection of such, it does so as agent and representative and in trust of assignee;

- SC: character of transaction is not determined by the language in document but by intention of the parties;;

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

- A transfer of property by the debtor to a creditor, even if sufficient on its farm to make an absolute conveyance, should be treated as a pledge if the debt continues in existence and is not discharged by the transfer;

Assignment of receivables did not result from sale or by virtue of a dation in payment;- At time the deed was executed, the

loans were non-existent yet;- At most, it was a dation for 10k, the

amount of credit with MBC indicated in the deed; at the time of execution, there was no obligation to be extinguished except for the 10k;

- 1292: in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other;

Deed of assignment intended as collateral security for the loans, as a continuing guaranty for whatever sums that would be owing by spouses;- In case of doubt as to whether a

transaction is a pledge or a dation in payment, the presumption is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v CA);

2. MBC need not exhaust all legal remedies against PFC:- Spouses, not being released by the

assignment, remain as the principal debtors of MBC, rather than mere guarantors;

- The deed merely guarantees said obligations;

- 2058 (creditor must have exhausted property of debtor and resorted to all legal remedies before it can proceed to guarantor) does not apply to them;

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

- MBC did try to collect but at OP, it was disapproved; so the loan was basically unsecured;

DISMISSED.

Feliciano, J. concurring.Justice Bidin’s, "the character of the transactions between the parties is not, however, determined by the language used in the document but by their intention” – not without exception;

- Deed here contains language which suggest that the parties intended complete alienation of title to and rights over the receivables;

- Words ‘remise’, ‘release’ and ‘quitclaim’ and clauses ‘ title the title and right of possession to said accounts receivable is to remain in said assignee" who "shall have the right to collect directly from the debtor’;

- Words ‘agent’ also convey the ideas;- But such must be taken in conjunction with

and qualified by other language showing intent of the parties that title to the receivables shall pass to the assignee for the limited purpose of securing another, principal obligation owed by the assignor to the assignee;

Title moves from assignor to assignee but that title is defeasible being designed to collateralize the principal obligation:

- Operationally: means assignee is burdened to collateralize the principal obligation; taking the proceeds of the receivables assigned and applying such proceeds to the satisfaction of the principal obligation and returning any balance remaining thereafter to the assignor;

The parties gave the deed of assignment the form of an absolute conveyance of title over the receivables assigned, essentially for the convenience of the assignee:

- Without such nature of absolute conveyance, the assignee would have to foreclose the properties; he would have to comply with documentation and registration requirements of a pledge or chattel mortgage);

- A deed of assignment by way of security avoids the necessity of a public sale impose by the rule on pactum commisorium, by in effect placing the sale of the collateral up front;

- The foregoing is applicable where the deed of assignment of receivables combines elements of both a complete alienation of the credits and a security arrangement to assure payment of a principal obligation;

- Where the 2nd element is absent, the assignment would constitute essentially a mode of payment or dacion en pago;

- in order that a deed of assignment of receivables which is in form an absolute conveyance of title to the credits being assigned, may be qualified and treated as a security arrangement, language to such effect must be found in the document itself and that language, precisely, is embodied in the deed of assignment in the instant case.

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., vs. THE COURT OF APPEALS and MAXIMA CASTROG.R. No. L-32116 April 2l, 1981De Castro, J.

Facts:On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged everything about the loan with the bank and who supplied to the latter the personal data required for Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank. On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed a promissory

note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker. The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila. On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest and attorney's fees. Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business day following the special holiday. Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this. On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest. In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal obligation with the

bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost.

Issue:THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO. 

Held:At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. This must be the reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent to the contracts. Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts.

Pursuant to Article 1342 of the Civil Code, which provides: Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, 10 this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract.

PEDRO ALCANTARA vs. AMBROSIO ALINEA, ET AL.March 22, 1907 G.R. No. 3227Torres, J.

FACTS:On February 29. 1904, Ambrosio Alinea and Eudosia Belarmino, herein defendants, borrowed money from Pedro Alcantara, herein plaintiff, amounting to 480 pesos, payable in January 1905. The parties further agreed that if said amount should not be paid at the expiration of the stated date it would be understood that the house and lot owned by the defendants located in the town of San Pablo, Laguna be considered as absolutely sold to the plaintiff for the said sum. The time for payment for the said sum has expired and no payment has been made. The defendants refuse to deliver the house property to plaintiff. Hence, the plaintiff’s action.

ISSUE: Whether or not the contract was one of pactum commissorium.

RULING:We have in this case a contract of loan and a promise of sale of a house and lot, the price of which should be the amount loaned, if within a fixed period of time such amount should not be paid by the debtor-vendor of the property to the creditor-vendee of same.

The property, the sale of which was agreed to by the debtors, does not appear mortgaged in favorof the creditor, because in order to constitute a valid

mortgage it is indispensable that the instrument be registered in the Register of Property, in accordance with article 1875 of the Civil Code. Said property could not be pledged as well, not being personal property, and notwithstanding the said double contract the debtor continued in possession thereof and the said property has never been occupied by the creditor. Neither was there ever nay contract of antichresis by reason of the said contract of loan, as is provided in articles 1881 and those following of the Civil Code, inasmuch as the creditor-plaintiff has never been in possession thereof, nor has he enjoyed the said property, nor for one moment ever received its rents; therefore, there are no proper terms in law, taking into consideration the terms of the conditions contained in the aforesaid contract, whereby this court can find that the contract was null, and under no consideration whatever would it be just to apply to the plaintiff articles 1859 and 1884 of the same code.

The pactum commissorium referred to in Law 41, title 5, and law 12, title 12, of the fifth Partida, and perhaps included in the prohibition and declaration of nullity expressed in articles 1859 and 1884 of the Civil Code, indicates the existence of the contracts of mortgage or of pledge or that of antichresis, none of which have coincided in the loan indicated herein.

The document of contract has been recognized by the defendant Alinea and by the witnesses whosigned same with him, being therefore an authentic and efficacious document, in accordance with article 1225 of the Civil Code; and as the amount loaned has not been paid and continues in possession of the debtor, it is only just that the promise of sale be carried into effect, and the necessary instrument be executed by the vendees.

A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION vs. COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONARG.R. No. 125055 October 30, 1998Mendoza, J.

Facts: A. Francisco Realty granted a loan of P7.5 M to spouses Javillonar, in consideration of which,the latter executed a promissory note, a real estate mortgage over a certain property, and adeed of sale of said mortgaged property in favor of A.

Francisco. Upon maturity, Javillonar spouses failed to pay, and as a consequence, A. Francisco registered the sale of the mortgaged property, for which a new TCT was issued.A. Francisco demanded possession of the mortgaged realty. Spouses refused to vacate. Hence, A. Francisco filed a case for possession before the RTC. The spouses admitted that they owed money in favor of A. Francisco but they also alleged that it was not their intention to sell the realty as the deed of sale executed by them wasmerely an additional security for the payment of their loan. RTC adjudged in favor of A. Francisco. On appeal, CA reversed RTC decision and dismissed the complaint against thespouses holding that the deed of sale was void, being in the nature of a pactum commissorium prohibited by law. Hence, this petition with the SC.

Issue: Whether or not the deed of sale executed by the spouses was void, being in the nature of pactum commissorium.

Held: Yes. Art. 2088 of the Civil Code provides that the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is void. What is envisioned by this article is a provision in the deed of mortgage providing forthe automatic conveyance of the mortgaged property in case of the failure of the debtor to pay the loan. A pactum commissorium is a forfeiture clause in a deed of mortgage. Theproscribed stipulation of automatic conveyance must be found in the mortgage deed itself. In the case at bar, the stipulations in the promissory note provide that, upon failure of spouses to pay interest, ownership of the property would be automatically transferred to A. Francisco and the deed of sale in its favor would be registered.

These stipulations are in substance a pactum commissorium. They embody the two elements of pactum commissorium, to wit: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgagedby way of security for the payment of the principal obligation;

(2) that there should be a stipulation for an automatic appropriation by the creditor of thething pledged or mortgaged in the event of non-payment

of the principal obligation withinthe stipulated period.

VICENTE C. REYES vs. FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO SIERRA, CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOSG.R. No. L-28658 October 18, 1979De Castro, J.