Digests for Credit Finals

7/23/2019 Digests for Credit Finals

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1. SECURITY BANK AND TRUST COMPANY, Inc. vs. RODOLFO M. CUENCA

DOCTRINE: An extension granted to the debtor by the creditor without the consent of the

guarantor extinguishes the guaranty. The 1989 Loan Agreement expressly stipulated that its

purpose was to liquidate, not to renew or extend, the outstanding indebtedness. Moreover,respondent did not sign or consent to the 1989 Loan Agreeement, which had alledgedly extendedthe original P8 million credit facility. Hence, his obligation as a surety should be deemed

extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that [a]nextension granted to the debtor by the creditor without the consent of the guarantor extinguishes

the guaranty.

An essential alteration in the terms of a Loan Agreement without the consent of thesurety extinguishes the latters obligation. The submission that only the borrower, not the surety,

is entitled to be notified of any modification in the original loan accommodation is untenable-such theory is contrary to the to the principle that a surety cannot assume an obligation more

onerous than that of the principal. That the Indemnity Agreement is a continuing surety does notauthorize the lender to extend the scope of the principal obligation inordinately; A continuing

guaranty is one which covers all transaction, including those arising in the future, which arewithin the description or contemplation of the contract of guaranty, until the expiration or

termination thereof.

FACTS:

Security Bank granted a credit line in the amount of 8 million pesos in favour of Sta. Ines, acorporation engaged in logging operations and in which Rodolfo Cuenca is the President. In

order to secure payment, Sta. Ines executed a chattel mortgage over some of its machineries and

equipments and as an additional security Cuenca executed an Indemnity Agreement where hebound himself jointly and severally with Sta. Ines and without the benefit of excussion ofwhatever amount the client may be indebted to the bank by virtue of aforesaid credit

accommodation(s) including the substitutions, renewals, extensions, increases, amendments,conversions and revivals of the aforesaid credit accommodation(s). After Cuenca resigned, Sta.

Ines was able to obtained a loan of 6 million pesos, but was unable to pay the amortizationpayments and requested Security Bank a complete restructure of its indebtedness which was

approved and without prior notice to or consent of Cuenca. Despite that Sta. Ines was still unableto pay. As a result Security Bank made failed attempts to demand from Sta. Ines and Cuenca the

fulfillment of their obligation, thus a complaint was filed and a decision in favour of SecurityBank was rendered which held Cuenca liable. On appeal, Cuenca contends that the original

agreement of 8 million loan was extinguished by novation when the obligation under the 6million loan and subsequent restructuring was granted.

ISSUE:

Whether Cuenca is liable as a surety to the 6 million loan under the Indemnity Agreement?


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HELD:

NO. The Indemnity Agreement is a continuing surety and as such does not authorize the bank to

extend the scope of the principal obligation inordinately. A surety being an onerous undertaking,a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor

of the solidary debtor. The fundamental rules of fair play require the creditor to obtain theconsent of the surety to any material alteration in the principal loan agreement, or at least to

notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtainedin excess of the amount or beyond the period stipulated in the original agreement, absent any

clear stipulation showing that the latter waived his right to be notified thereof, or to give consentthereto. This is especially true where, as in this case, respondent was no longer the principal

officer or major stockholder of the corporate debtor at the time the later obligations wereincurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no

more reason to bind himself anew to the subsequent obligations.

2. Medel v. CA

Doctrine: A CB Circular cannot repeal a law. Only a law can repeal another law.

Jurisprudence provides that CB Circular did not repeal nor in a way amend the Usury Law but

simply suspended the latters effectivity (Security Bank and Trust Co vs RTC). Usury has been

legally non-existent in our jurisdiction. Interest can now be charged as lender and borrower may

agree upon.

Law: Article 2227, Civil Code

The courts shall reduce equitably liquidated damages, whether intended as an indemnity or a

penalty if they are iniquitous or unconscionable.

Note: While the Usury Law ceiling on interest rates was lifted by the CB Circular 905, nothing inthe said circular could possibly be read as granting carte blanche authority to lenders to raise

interest rates to levels which would either enslave their borrowers or lead to a haemorrhaging of

their assets (Almeda vs. CA, 256 SCRA 292 [1996]).

Facts: Defendants obtained a loan from Plaintiff in the amount P50, 000.00, payable in 2 months

and executed a promissory note. Plaintiff gave only the amount of P47, 000.00 to the borrowers

and retained P3, 000.00 as advance interest for 1 month at 6% per month.

Defendants obtained another loan from Defendant in the amount of P90, 000.00, payable in 2

months, at 6% interest per month. They executed a promissory note to evidence the loan and

received only P84, 000.00 out of the proceeds of the loan.

For the third time, Defendants secured from Plaintiff another loan in the amount of P300, 000.00,

maturing in 1 month, and secured by a real estate mortgage. They executed a promissory note in

favor of the Plaintiff. However, only the sum of P275, 000.00, was given to them out of the

proceeds of the loan.

Upon maturity of the three promissory notes, Defendants failed to pay the indebtedness.


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Defendants consolidated all their previous unpaid loans totalling P440, 000.00, and sought from

Plaintiff another loan in the amount of P60, 000.00, bringing their indebtedness to a total of

P50,000.00. They executed another promissory note in favor of Plaintiff to pay the sum of P500,

000.00 with a 5.5% interest per month plus 2% service charge per annum, with an additional

amount of 1% per month as penalty charges.

On maturity of the loan, the Defendants failed to pay the indebtedness which prompt the

Plaintiffs to file with the RTC a complaint for collection of the full amount of the loan including

interests and other charges.

Declaring that the due execution and genuineness of the four promissory notes has been duly

proved, the RTC ruled that although the Usury Law had been repealed, the interest charged on

the loans was unconscionable and revolting to the conscience and ordered the payment of the

amount of the first 3 loans with a 12% interest per annum and 1% per month as penalty.

On appeal, Plaintiff-appellants argued that the promissory note, which consolidated all the

unpaid loans of the defendants, is the law that governs the parties.

The Court of Appeals ruled in favor of the Plaintiff-appellants on the ground that the Usury Law

has become legally inexistent with the promulgation by the Central Bank in 1982 of Circular No.

905, the lender and the borrower could agree on any interest that may be charged on the loan,

and ordered the Defendants to pay the Plaintiffs the sum of P500,000, plus 5.5% per month

interest and 2& service charge per annum , and 1% per month as penalty charges.

Defendants filed the present case via petition for review on certiorari.

Issue: WON the stipulated 5.5% interest rate per month on the loan in the sum of P500, 000.00 is

usurious.

Held: No.

A stipulated rate of interest at 5.5% per month on the P500, 000.00 loan is excessive, iniquitous,

unconscionable and exorbitant, but it cannot be considered usurious because Central Bank

Circular No. 905 has expressly removed the interest ceilings prescribed by the Usury Law and

that the Usury Law is now legally inexistent.

3. Republic vs Bagtas

Doctrine:

Commodatum is essentially gratuitous. If there is compensation, then it shall be treated as alease. Lessee is liable as possessor in bad faith because the period already lapsed.

Even if this is a commodatum, the bailee is still liable for the loss of the thing, even if it should

be through a fortuitous event, as provided in Art. 1942 of the Civil Code as when the periodstipulated already expired and he is liable because the thing loaned was delivered with appraisal


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of value and there was no contrary stipulation regarding his liability in case there is a fortuitousevent.

Facts: Bagtas borrowed three bulls from the Bureau of Animal Industry for one year for breedingpurposes subject to payment of breeding fee of 10% of book value of the bull. Upon expiration,

Bagtas asked for renewal. The renewal was granted only to one bull. Bagtas offered to buy thebulls at its book value less depreciation but the Bureau refused. The Bureau said that Bagtas

should either return or buy it at book value. Bagtas proved that he already returned two of thebulls, and the other bull died during a Huk raid, hence, obligation already extinguished. He

claims that the contract is a commodatum hence, loss through fortuitous event should be borneby the owner.

Issue: WON Bagtas is liable for the death of the bull.

Held: Yes. Commodatum is essentially gratuitous. However, in this case, there is a 10% charge.If this is considered compensation, then the case at bar is a lease. Lessee is liable as possessor inbad faith because the period already lapsed.

Even if this is a commodatum, Bagtas is still liable because the fortuitous event happened whenhe held the bull and the period stipulated already expired and he is liable because the thing

loaned was delivered with appraisal of value and there was no contrary stipulation regarding hisliability in case there is a fortuitous event.

4. REPUBLIC OF THE PHILIPPINES vs. JOSE GRIJALDO

Doctrine:

"By a contract of (simple) loan, one of the parties delivers to another ... money or otherconsumable thing upon the condition that the same amount of the same kind and quality shall be

paid." (Article 1933, Civil Code)

The obligation, under the promissory notes evidencing the loans, is to pay the value thereof; thatis, to deliver a sum of money a clear case of an obligation to deliver, a generic thing. Article

1263 of the Civil Code provides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the same

kind does not extinguish the obligation.

FACTS:


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In the year 1943 appellant Jose Grijaldo obtained five loans from the branch office of the Bankof Taiwan, Ltd. in Bacolod City, in the total sum of P1,281.97 with interest at the rate of 6% per

annum, compounded quarterly. These loans are evidenced by five promissory notes executed bythe appellant in favor of the Bank of Taiwan, Ltd., as follows: On June 1, 1943, P600.00; on June

3, 1943, P159.11; on June 18, 1943, P22.86; on August 9, 1943,P300.00; on August 13, 1943,

P200.00, all notes without due dates, but because the loans were due one year after they wereincurred. To secure the payment of the loans the appellant executed a chattel mortgage on thestanding crops on his land, Lot No. 1494 known as Hacienda Campugas in Hinigiran, Negros

Occidental.

By virtue of Vesting Order No. P-4, dated January 21, 1946, and under the authority provided forin the Trading with the Enemy Act, as amended, the assets in the Philippines of the Bank of

Taiwan, Ltd. were vested in the Government of the United States. Pursuant to the PhilippineProperty Act of 1946 of the United States, these assets, including the loans in question, were

subsequently transferred to the Republic of the Philippines by the Government of the UnitedStates under Transfer Agreement dated July 20, 1954. These assets were among the properties

that were placed under the administration of the Board of Liquidators created under ExecutiveOrder No. 372, dated November 24, 1950, and in accordance with Republic Acts Nos. 8 and 477

and other pertinent laws.

On September 29, 1954 the appellee, Republic of the Philippines, represented by the Chairmanof the Board of Liquidators, made a written extrajudicial demand upon the appellant for the

payment of the account in question. The record shows that the appellant had actually received thewritten demand for payment, but he failed to pay.

On January 17, 1961 the appellee filed a complaint in the Justice of the Peace Court ofHinigaran, Negros Occidental, to collect from the appellant the unpaid account in question. The

Justice of the Peace Of Hinigaran, after hearing, dismissed the case on the ground that the actionhad prescribed. The appellee appealed to the Court of First Instance of Negros Occidental and on

March 26, 1962 the court a quo rendered a decision ordering the appellant to pay the appellee thesum of P2,377.23 as of December 31, 1959, plus interest at the rate of 6% per annum

compounded quarterly from the date of the filing of the complaint until full payment was made.The appellant was also ordered to pay the sum equivalent to 10% of the amount due as attorney's

fees and costs.

The appellant appealed directly to this Court. During the pendency of this appeal the appellantJose Grijaldo died. Upon motion by the Solicitor General this Court, in a resolution of May 13,

1963, required Manuel Lagtapon, Jacinto Lagtapon, Ruben Lagtapon and Anita L. Aguilar, who

are the legal heirs of Jose Grijaldo to appear and be substituted as appellants in accordance withSection 17 of Rule 3 of the Rules of Court.

ISSUE:

Whether or not the obligation to pay is extinguished.


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The appellant likewise maintains, in support of his contention that the appellee has no cause ofaction, that because the loans were secured by a chattel mortgage on the standing crops on a land

owned by him and these crops were lost or destroyed through enemy action his obligation to paythe loans was thereby extinguished.

HELD:

This argument is untenable. The terms of the promissory notes and the chattel mortgage that the

appellant executed in favor of the Bank of Taiwan, Ltd. do not support the claim of appellant.The obligation of the appellant under the five promissory notes was not to deliver a determinate

thing namely, the crops to be harvested from his land, or the value of the crops that would beharvested from his land. Rather, his obligation was to pay a generic thing the amount of

money representing the total sum of the five loans, with interest. The transaction between theappellant and the Bank of Taiwan, Ltd. was a series of five contracts of simple loan of sums of

money. "By a contract of (simple) loan, one of the parties delivers to another ... money or otherconsumable thing upon the condition that the same amount of the same kind and quality shall be

paid." (Article 1933, Civil Code) The obligation of the appellant under the five promissory notesevidencing the loans in questions is to pay the value thereof; that is, to deliver a sum of money

a clear case of an obligation to deliver, a generic thing. Article 1263 of the Civil Codeprovides:

In an obligation to deliver a generic thing, the loss or destruction of anything of the samekind does not extinguish the obligation.

The chattel mortgage on the crops growing on appellant's land simply stood as a security for the

fulfillment of appellant's obligation covered by the five promissory notes, and the loss of thecrops did not extinguish his obligation to pay, because the account could still be paid from other

sources aside from the mortgaged crops.

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7. CA Agro-Industrial vs CA, G.R. No. 90027 March 3, 1993

Doctrine:

The Civil Code provides that the depositary would be liable if, in performing its obligation, it is

found guilty of fraud, negligence, delay or contravention of the tenor of the agreement. In the

absence of any stipulation, the diligence of a good father of a family is to be observed.

Any stipulation exempting the depositary from any liability arising from the loss of the thingdeposited on account of fraud, negligence or delay would be void for being contrary to law and

public policy.

Facts

Petitioner (through its President) purchased 2 parcels of land from spouses Pugao for P350 K

with a downpayment of P75 K.

Per agreement, the land titles will be transferred upon full payment and will be placed in asafety deposit box (SBDB) of any bank. Moreover, the same could be withdrawn only upon

the joint signatures of a representative of the Petitioner and the Pugaos upon full payment ofthe purchase price.

Thereafter, Petitioner and spouses placed the titles in SDB of Respondent Security Bank andsigned a lease contract which substantially states that the Bank will not assume liability forthe contents of the SDB.

Subsequently, 2 renter's keys were given to the renters one to the Petitioner and the otherto the Pugaos. A guard key remained in the possession of the Respondent Bank. The SDBcan only be opened using these 2 keys simultaneously.

Afterwards, a certain Mrs. Ramos offered to buy from the Petitioner the 2 lots that wouldyield a profit of P285K.

Mrs. Ramos demanded the execution of a deed of sale which necessarily entailed theproduction of the certificates of title. Thus, Petitioner with the spouses went to Respondent

Bank to retrieve the titles.


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However, when opened in the presence of the Bank's representative, the SDB yielded nosuch certificates.

Because of the delay in the reconstitution of the title, Mrs. Ramos withdrew her earlier offerto purchase the lots; as a consequence, the Petitioner allegedly failed to realize the expectedprofit of P285K.

Hence, Petitioner filed a complaint for damages against Respondent Bank. Lower courts ruled in favour of Respondent Bank. Thus, this petition.

Issues:

1. Whether or not the disputed contract is an ordinary contract of lease?2. Whether or not the provisions of the cited contract are valid?

3. Whether or not Respondent Bank is liable for damages?

Ruling:

1.

No. SC ruled that it is a special kind of deposit because:

the full and absolute possession and control of the SDB was not given to the joint renters the Petitioner and the Pugaos.

The guard key of the box remained with the Respondent Bank; without this key, neither ofthe renters could open the box and vice versa.

In this case, the said key had a duplicate which was made so that both renters could have

access to the box.

Moreover, the renting out of the SDBs is not independent from, but related to or inconjunction with, the principal function of a contract of deposit the receiving in custodyof funds, documents and other valuable objects for safekeeping.

2. NO. SC opined that it is void.

Generally, the Civil Code provides that the depositary (Respondent Bank) would be

liable if, in performing its obligation, it is found guilty of fraud, negligence, delay orcontravention of the tenor of the agreement.

In the absence of any stipulation, the diligence of a good father of a family is to beobserved.

Hence, any stipulation exempting the depositary from any liability arising from the loss

of the thing deposited on account of fraud, negligence or delay would be void for beingcontrary to law and public policy (which is present in the disputed contract)

Said provisions are inconsistent with the Respondent Bank's responsibility as a depositary

under Section 72(a) of the General Banking Act.

3. NO. SC ruled that:

no competent proof was presented to show that Respondent Bank was aware of theprivate agreement between the Petitioner and the Pugaos that the Land titles werewithdrawable from the SDB only upon both parties' joint signatures,

and that no evidence was submitted to reveal that the loss of the certificates of title wasdue to the fraud or negligence of the Respondent Bank.


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As provided by the Warehouse Receipts Act, in case the warehouse man fails to mark it as non-negotiable, a holder of the receipt who purchase if for value supposing it to be negotiable may,

at his option, treat such receipt as imposing upon the warehouseman the same liabilities he wouldhave incurred had the receipt been negotiable. This appears to have given any warehouse receipt

not marked non-negotiable practically the same effect as a receipt which, by its terms, is

negotiable provided the holder of such unmarked receipt acquired it for value supposing it to benegotiable, circumstances which admittedly exist in the present case. Hence, the rights of theindorsee, ASIA, are superior to the vendors lien.

10. PICZON V. PICZON, GR No. L-29139, November 15, 1974

Doctrine:

Under Art.2048 of the Civil Code, a guaranty is gratuitous, unless there is a stipulation to the

contrary.

Facts: Sosing-Lobos & Co. obtained loan from Piczon Co. Esteban Piczon (president ofborrowing firm) bound himself as guarantor to pay plaintiffs-appellants the sum of P12,500 with12% interest from August 6, 1964 until said principal amount shall have been duly paid. The

parties also agreed to the use of the loan as surety cash deposit for the registration with the SEC.Consuelo Piczon (lending firm) brought action to recover the amount loaned. Court ruled in

favor of Consuelo Piczon and ordered Esteban Piczon and Sosing-Lobos to pay him as guarantorthe amount of the loan plus interest.

Issue: WON Esteban Piczon is a surety or a guarantor?

Held: Under the terms of the contract Esteban Piczon expressly bound himself only as guarantor.

A guaranty must express, and it would be violative of the law to consider a party to be bound assurety when the very word used in the agreement is guarantor.

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Held:

The Supreme Court ruled that:

(1) The bank, as creditor, can recover the balance of the indebtedness; When the Legislature

intends to bar or occlude a creditor from suing for any deficiency after foreclosing and selling the

security given for the obligation, it makes express provisions to that effect, as it did in Article2115 of the Civil Code on pledge. Hence, in the absence of a similar provision in Act 3135, asamended, it cannot be concluded that the creditor loses his right given him under the Mortgage

Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balanceon the principal obligation, simply because he has chosen to foreclose his mortgage

extrajudicially, pursuant to a special power of attorney given him by the mortgagor in themortgage contract.

(2) he is not exempted from paying the balance; Although the predicament of the mortgagor,whose failure to pay the loan was due to the fact that the plantation which was being financed

was attacked by mosaic disease, may evoke sympathy, it does not justify a disregard of the termsof the contract he entered into. His obligation thereunder is neither conditional nor aleatory; its

terms are clear and subject to no exception and;

(3) to redeem his homestead, he must pay, not merely obligation still and owing to the bank. Inthe foreclosed property, the mortgagor or debtor to the Development Bank of the Philippines

should pay the entire amount he owed the bank on the date of sale, with interest thereon at therate agreed upon, pursuant to Section 31, Com. Act 459 which provides that mortgagor or debtor

shall, within one year . . . have the right to redeem the real property by paying to the Bank all theamount he owed the latter on the date of sale, with interest on the total indebtedness at the rate

agreed upon in the obligation from said date.

17. ARNEL SY, vs. HONORABLE COURT OF APPEALS, STATE INVESTMENT

HOUSE, INC. and THE REGISTER OF DEEDS OF RIZAL

G.R. No. 83139 April 12, 1989; 172 SCRA 125

Doctrine:

Section 78 of the General Banking Act, as amended by P.D. No. 1828, states that:

... In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on real

estate which is security for any loan granted before the passage of this Act or under theprovisions of this Act, the mortgagor or debtor whose real property has been sold at public

auction, judicially or extra-judicially, for the full or partial payment of an obligation to any bank,banking or credit institution, within the purview of this Act shall have the right, within one year

after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeemthe property by paying the amount fixed by the court in the order of execution, or the amount due

under the mortgage deed, as the case may be, with interest thereon at the rate specified in themortgage and all the costs, and judicial and other expenses incurred by the bank or institution


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concerned by reason of the execution and sale and as a result of the custody of said property lessthe income received from the property.

FACTS:

Carlos Coquinco executed in favor of SIHI a real estate mortgage over a parcel of land assecurity of a loan in the amount of P1,000,000.00. For failure to pay his balance of

P1,126,220.56 the mortgaged property was extrajudicially foreclosed and sold at public auctionfor P760,000.00 to SIHI.

Sy acquired by a deed of assignment Coquinco's right of redemption for and in consideration ofP500,000.00. Before the expiration of the one-year redemption period, petitioner offered to

redeem the foreclosed property from SIHI by tendering to the latter 2 manager's checks, one forP760,000.00 representing the purchase price, and another for P91,200.00 representing interest at

the rate of 1% per month for 12 months, totaling P851,200.00. SIHI rejected this offer.

Petitioner filed an action for consignation to compel SIHI to accept the payment, to order SIHI tosurrender the title over the property and to issue a certificate of redemption in favor of petitioner.

A day before the expiration of the redemption period, petitioner decided to redeem the foreclosed

property directly from the Sheriff who accepted and issued to him the corresponding certificateof redemption.

The court dismissed petitioner's complaint holding that it stated no cause of action becausepetitioner failed to effect a valid redemption as required the General Banking Act.

ISSUE:

Whether or not a valid redemption was effected

HELD:

No, there was not.

Petitioner insists the case is governed by Act No. 3135, as amended, in relation to Section 30,Rule 39 of the Revised Rules of Court which provides in part:

SEC. 30. Time and manner of, and amounts payable on, successive redemptions. Notice to be

given and filed. The judgment debtor, or redemptioner,, may redeem the property from thepurchaser, at any time within twelve months after the sale on paying the purchaser the amount ofhis purchase, with one per centum per month interest thereon in addition, up to the time of

redemption, together with the amount of any assessments or taxes which the purchaser may havepaid thereon after purchase, and interest on such last-named amount at the same rate...

Respondent appellate court, applied the General Banking Act, held that no valid redemption was

effected because the amount was insufficient, it being less than the amount due under the real


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estate mortgage contract of Coquinco or the latter's outstanding balance, with interest mortgagecontract plus expenses incurred by SIHI by reason of the foreclosure and the sale.

It must be emphasized that Section 78 of the General Banking Act, as amended by P.D. No. 1828is applicable not only to "banks and banking institutions," but also to "credit institutions." And,

as certified by the Central Bank,* SIHI is a credit institution.

Had Coquinco attempted to redeem the subject foreclosed property, he would have had to pay

"the amount due under the mortgage deed ... with interest thereon at the rate specified in themortgage and all costs ... and other expenses incurred . . . by reason of the execution (or

foreclosure) and sale and as a result of the custody of said property less the income receivedfrom the property . . ." pursuant to the General Banking Act in order to effect a valid redemption.

Since petitioner merely stepped into the shoes of Coquinco his assignor, petitioner should havetendered and paid the same amount in order to redeem the property.

18. LIGUTAN vs. CA, GR# 138677

Doctrine:

Though penalty cannot be removed due to the agreement between the parties, except when there

is substantial performance in good faith by the obligor, the courts may equitably reduce (1) if it isiniquitous or unconscionable, (2) if the principal obligation has been partly or irregularly

complied with.

FACTS:Ligutan and dela Llana, obtained a loan from Security Bank and Trust Co. executing apromissory note binding themselves jointly and severally to pay the sum borrowed with an

interest of 15.89% per annum upon maturity, a penalty of 5% every month on the outstandingprincipal and interest in case of default, and 10% of the total amount due by way of attorneys

fees if the matter were indorsed to a lawyer for collection or if a suit were instituted to enforcepayment. The debtors failed to settle the debt. A complaint for recovery of the amount due was

filed with the RTC. The court held, among others, the borrowers were liable for a 3% per monthpenalty (instead of 5%) and 10% of the total amount of the indebtedness for attorneys fee, in

addition to the principal loan. When case was pending for appeal, debtor Ligutan and his wifemortgaged their real estate for security of the existing loan and in effect novating the contract

between them and the bank. Said Mortgage was foreclosed extrajudicially without themortgagors knowledge. Not satisfied with the decision of the appellate court, the debtors, herein

petitioners, filed a petition for review on certiorari.

ISSUE:

Whether or not the interest, penalty and attorneys fee decided are still exorbitant, iniquitous andunconscionable


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HELD:

The penalty clause is recognized in Art. 1226 of the New Civil Code. The SC said it is anaccessory undertaking (1) to assume greater liability on the part of an obligor in case of breach of

an obligation (2) to strengthen the coercive force of the obligation, and (3) to provide, in effect,for what could be the liquidated damages resulting from such a breach. Though penalty cannot

be removed due to the agreement between the parties, except when there is substantialperformance in good faith by the obligor, the courts may equitably reduce (1) if it is iniquitous or

unconscionable, (2) if the principal obligation has been partly or irregularly complied with.

In this case, the SC sees no cogent ground to modify the ruling of CA in reducing the penalty.

Penalty cannot be set aside for this has been agreed by the parties and due to the fact that debtorsrepeatedly breached their contractual obligation. Reduction was proper since debtor made a

partial fulfillment of the obligation.The SC also ruled that the interest does not appear as being excessive because:

1) the payment of interest is not exactly the same as that of a surcharge or a penalty for a penaltystipulation is not necessarily preclusive of interest; and

2) a penalty stipulation is not necessarily preclusive of interest the two being distinct conceptswhich may separately be demanded.

Hence, petition is denied.

19. SUMERARIZ V DBP

Doctrine:It may not be amiss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which

permits the extension of the period of redemption of mortgaged properties, Section 3 ofCommonwealth Act No. 459, in relation to Section 9 of Republic Act No. 85, which governs the

redemption of property mortgaged to the Bank, does not contain a similar provision.

FACTS:

Spouses Sumerariz constituted, in favor of the Rehabilitation Finance Corporation nowDevelopment Bank of the Philippines a real estate mortgage of two (2) parcels of land

forming part of San Andres Subdivision, Manila and covered by Transfer Certificate of Title No.1442, in their names, including a house to be constructed thereon, to guarantee a P15,000.00 loan

granted them by the Bank, payable within ten (10) years, at a given monthly amortization. Inview of plaintiffs' failure to comply with the terms and conditions of their contract, the Bank

asked the sheriff of Manila to take possession of the property and sell it at public auction. Afterseveral postponements made upon plaintiffs' request, the sale was set for March 29, 1955. Upon

the behest of Juan Sumerariz made the day before, the Bank agreed, however, to postpone thesale if there was a token payment of at least P100.00, before 9:00 a.m., the next day. No such

payment having been made, the Bank bought the property, on March 29, for P8,000.00, as thehighest bidder.


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Subsequently, the Bank repeatedly notified the plaintiffs that they could redeem the propertywithin one (1) year, or not later than March 29, 1956, upon a down payment of P2,806.64, the

balance payable in ten (10) years, at the rate of P166.50 per month. Instead of exercising theright of redemption, on March 26, 1956, plaintiffs instituted Civil Case No. 29306, of the Court

of First Instance of Manila, against the Bank and the sheriff of Manila, to set aside the

aforementioned foreclosure sale, upon the ground that the Bank had failed to comply with itsagreement to postpone the auction sale scheduled to be held on March 29, 1956.

On July 19, 1956, while the case was pending in the trial Court, the Bank sold the property to thePhilippine Surety and Insurance Co., Inc., hereinafter referred to as the Surety Co. Subsequently,

or on January 13, 1958, laid Court rendered a decision dismissing the complaint in case No.29306, for the reason that plaintiffs had not redeemed the property within the period prescribed

by law therefor and that the Bank had thereby become its absolute owner. Said decision was, onNovember 5, 1959, affirmed by the Court of Appeals, in CA-G.R. No. 25077-R. Plaintiffs

petitioned the Supreme Court to review by certiorari the decision of the Court of Appeals; butdenied the petition,on February 5, 1960.

ISSUE:

WON the period to redeem was suspended by the institution of a separate civil case forannulment of mortgage, foreclosure.

HELD:

YES. Although not a party in the first case, the inclusion of the Surety Co. as defendant in the

case at bar does not detract from the legal identity of both cases, because, by buying the property

from the Bank, the Surety Co. became merely the Bank's success. Neither does the absence, asparty herein, of the sheriff, who was one of the defendants in the first case, negate said identity,inasmuch as the sheriff was but a formal party in said previous case, and is virtually a party in

the present proceedings, although not explicitly mentioned as such therein.

The subject-matter of both cases is, obviously, the same the property in question. There is,

likewise, identity of the cause of action. In the first case, the issue was the validity of the auctionsale in favor of the Bank, which sale, plaintiffs contended, had been made in violation of their

agreement with the Bank. In the case at bar, plaintiffs maintain that the conveyance by the Bankto the Surety Co. is invalid, and this pretense is anchored upon the predicate that, when it took

place, the property did not belong to the Bank, the sale in its favor by the sheriff having beenmade in violation of the alleged agreement aforementioned, which predicate had been rejected

Court in the previous case. Similarly, the cause of in the first case was based upon the allegedright of the plaintiffs to the property in question, upon the ground that its sale to the Bank was

illegal. This premise is, also, the cornerstone of plaintiffs' cause of action in the case at bar.

Plaintiffs maintain that the period of one (1) year to redeem the property in question was


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suspended by the institution of Case No. 29306, on March 26, 1956, or three (3) days before theexpiration of said period. We have not found, however, any statute or decision in support of this

pretense. Moreover, up to now plaintiffs have not exercised the right of redemption. Indeed,although they have intimated their wish to redeem the property in question, they have not

deposited the amount necessary therefor. It may not be amiss to note that, unlike Section 30 of

Rule 39 of the Rules of Court, which permits the extension of the period of redemption ofmortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to Section 9 ofRepublic Act No. 85, which governs the redemption of property mortgaged to the Bank, does not

contain a similar provision. Again this question has been definitely settled by the decision in theprevious case declaring that plaintiffs' right of redemption has already been extinguished in view

of their failure to exercise it within the statutory period.

20. Cavite Development Bank v. Lim

Doctrine:

Definition of option contract: It is a preparatory contract in which one party grants to the other,for a fixed period and under specified conditions, the power to decide, whether or not to enter

into a principal contract, it binds the party who has given the option not to enter into the principalcontract with any other person during the period designated, and within that period, to enter into

such contract with the one to whom the option was granted, if the latter should decide to use theoption. It is a separate agreement distinct from the contract to which the parties may enter upon

the consummation of the option.

Exception to rule that sale of mortgaged property is void when mortgagor is not the ownerthereof: mortgagee in good faith (all persons dealing with property covered by a Torrens

Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the

face of the title)

Facts:

June 15, 1983 Rodolfo Guansing obtained a loan from CDB, to secure which he mortgaged a

parcel of land situated at La Loma and covered by TCT registered in his name.

As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. The mortgagedproperty was sold to CDB as the highest bidder at the foreclosure sale. Guansing failed to

redeem, and CDB consolidated title to the property in its name.

June 16, 1988 private respondent Lolita Chan Lim, assisted by a broker named RemediosGatpandan, offered to purchase the property from CDB.

Written Offer to Purchase:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, QuezonCity for P300,000.00 under the following terms and conditions:

(1) 10% Option Money;


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(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.

Lim paid CDB P30,000 as Option Money.

After some time following up the sale, Lim discovered that the subject property was originallyregistered in the name of Perfecto Guansing, father of mortgagor Rodolfo. Rodolfo succeeded inhaving the property registered in his name under TCT No. 300809, the same title he mortgaged

to CDB. It appears, however, that the father, Perfecto, instituted a civil case for the cancellationof his sons title. The trial court rendered a decision restoring Perfectos previous title and

cancelling TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo.This decision has since become final and executory.

Lim and her husband filed an action for specific performance and damages against CDB and itsmother-company, Far East Bank and Trust Co.

RTC in favor of Lim spouses: there was a perfected contract of sale; CDB and FEBTC liable for

damages. CA affirmed.

Issue:

W/N there was a VALID contract of sale between the parties.

Held:

NO.

There is a perfected contracted of sale

Contracts are not defined by the parties thereto but by principles of law. In determining the

nature of a contract, the courts are not bound by the name or title given to it by the contractingparties. In the case at bar, the sum of P30,000, although denominated in the offer to purchase as

"option money," is actually in the nature of earnest money or down payment when consideredwith the other terms of the offer.

Definition of option contract: It is a preparatory contract in which one party grants to the other,

for a fixed period and under specified conditions, the power to decide, whether or not to enterinto a principal contract, it binds the party who has given the option not to enter into the principal

contract with any other person during the period designated, and within that period, to enter intosuch contract with the one to whom the option was granted, if the latter should decide to use the

option. It is a separate agreement distinct from the contract to which the parties may enter uponthe consummation of the option.

After the payment of the 10% option money, the Offer to Purchase provides for the paymentonly of the balance of the purchase price, implying that the "option money" forms part of thepurchase price (i.e. earnest money).


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CDB has accepted Lims offer to purchase and considered it as good and no longer subject to afinal approval.

However, it is impossible for CDB to perform its obligation as seller to deliver and transfer

ownership of the property. Nemo dat quod non habet (One cannot give what one does not have).Ownership of the thing sold is required not during the perfection of the contract, but during

consummation.

. But it is void.

The sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must be

deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB neveracquired a valid title to the property because the foreclosure sale, by virtue of which the property

had been awarded to CDB as highest bidder, is likewise void since the mortgagor was not theowner of the property foreclosed.

Exception to rule that sale of mortgaged property is void when mortgagor is not the ownerthereof: mortgagee in good faith (all persons dealing with property covered by a Torrens

Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on theface of the title)

Private respondents are entitled to recover the P30,000 option money paid by them plus legalinterest. Also, considering CDBs negligence, the award of moral damages on the basis of Arts.

21 and 2219 of the Civil Code is proper.

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