THE MANILA BANKING CORPORATION vs.

ANASTACIO TEODORO, JR. and GRACE ANNA

TEODORO
G.R. No. L-53955 January 13, 1989
Bidin, 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 Sale
o 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 Bidins, "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 CASTRO
G.R. No. L-32116 April 2l, 1981
De 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. 3227
Torres, 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
plaintiffs 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. JAVILLONAR
G.R. No. 125055 October 30, 1998
Mendoza, 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 SANTOS
G.R. No. L-28658 October 18, 1979
De Castro, J.