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G.R. No. L-24893 August 23, 1926

Involuntary Insolvency of The Gulf Plantation Co.PACIFIC COMMERCIAL COMPANY, PHILIPPINE-AMERICAN DRUG COMPANY andSTANDARD OIL COMPANY,petitioners-appellants,vs.PHILIPPINE NATIONAL BANK, creditor-appellee.H. B. Hughes, assignee.

STATEMENT

At Davao, Davao P. I., on august 24, 1918, the Gulf Plantation Company, a corporation,through its president executed to the Philippine National Bank a certain instrument knownin the record as Exhibit A, in which the Plantation Company is named and styled as thepledgor, and the Philippine National Bank as the pledges, in which it is recited that the GulfPlantation Company has obtained certain credits, loans, overdrafts, etc., from the pledgee,which the parties have mutually agreed should be guaranteed and secured, including costs,charges, and interest "of keeping the pledged property," and "all other expenditures of the

pledgee incurred in connection with this pledge." In consideration thereof, all other valuableconsideration received by the pledgor, and for the purpose of securing the payment of allsums not exceeding P165,000, the pledgor hypothecated and pledged to the pledgee andhereby delivered the possession, for the purpose of the pledge, of all the property itemizedin schedule A on the back of this pledge. The pledgor agreed without demand to pledgeand deliver to the pledgee any further and additional securities required, and to pay thetaxes and keep the property insured. That, if the pledgor shall pay to the pledgee suchsums of money as the pledgee, may advance under the terms of the pledge, then thepledged property may be turned to the pledgor, and "this pledge shall be of no further,otherwise, to remain in force, and the pledgee may dispose of the pledged property in themanner herein provided, or in accordance with the Chattel Mortgage Law, at the option ofthe pledgee." The pledgor appoints the pledgee as attorney-in-fact of the pledgor with fullpower and authority after any condition of the pledge may have been broken to enter the

premises where the pledged property is located, and take possession of it by force, ifnecessary, and seize and take actual possession of it without an order of the court, and tosell, assign and deliver the property pledged, or any part thereof, at the option of thepledgee. Provision is then made for the application of the proceeds of any sale of theproperty under the pledge. The instrument was duly executed and acknowledged before anotary public as of the date it was signed.

Schedule A, which is part of the instrument, is as follows:

Lease No. 63 of 534 hectares of public situated in the municipality of Pantucan, DavaoProvince, P. I., planted to 236,000 hemp and 700 coconut trees, valued at P430,000.

Forty-eight buildings of permanent materials valued at P5,500 situated on abovelease. Two buildings of strong materials valued at P15,000.

One thousand piculs hemp now in the plantation bodega at Pantucan all belonging tothe "Gulf Plantation, Incorporated," valued at P45,000.

Twenty three carabaos, 38 bullocks, 18 horses, valued at P6,450.

One launch "Peril" valued at P18,000; one auxiliary boat "Manuela," P9,000; onelaunch "Rigel," P800; one launch "New Kirk," P3,500 and cargo boats, P200.

The instrument contains the following endorsement:

Doc. stamps affixed P17.20

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDS

Received this 24th day of Feb., 1921,at 9.30 o'clock a. m.

Entry No. 90, page 3, Volume Day Book (Provisional).

THE PROVINCIAL GOVERNMENT OF DAVAOOFFICE OF THE REGISTER OF DEEDS

Received this 24th day of Feb., 1921.at 9.30 o'clock a. m.

March 25, 1922, an insolvency petition was filed to have the Gulf Plantation Companydeclared insolvent, and it was declared insolvent on September 16, 1922, and the courtordered the sheriff to take possession of all the assets of the insolvent estate. October 23,1922, with the consent and approval of all creditors, including the Philippine National Bank,and assignee was appointed, and on October 27, 1922, he filed an inventory of all of theproperties of the plantation company, March 17, 1923, the court made an order requiringthe assignee to render an account and to give the creditors a copy. March 20, 1923, theassignee filed his account for the period between October 1, 1922, and February 28, 1923.On January 7, 1924, the assignee filed a further account covering the period from October1, 1922, to November 30, 1923. Both of which accounts are still pending and waiting theapproval of the court. November 28, 1923, the assignee filed a petition for authority to sellat public auction all of the properties of the insolvent estate, which application is also nowpending and waiting the order of the court. November 3, 1922, the Philippine National Bankfiled a petition, to which was attached a copy of Exhibit A and made a part of it, reciting theexecution of the instrument and a breach of its conditions, and praying for the followingorder from the court:

(a) That the mortgage or pledge executed in its favor by the Gulf Plantation, Inc., a

copy of which is attached to this claim as appendix A be declared effective andmatured;

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(b) That the assignee appointed in this insolvency proceeding, or if the latter has notyet been appointed, the sheriff of the Province of Davao be authorized to sell at publicor private sale, after notice to the Philippine National Bank, all such interest, right orshare as the Gulf Plantation, Inc., has or may have in the properties described inExhibit A;

(c) That should the proceeds of the sale of the properties mentioned in appendix A begreater than the sum of P165,000, this amount of P165,000 be delivered to thePhilippine National Bank, and the balance to the assignee in insolvency; and

(d) In the event that the proceeds of the sale of the properties mentioned in AppendixA is less than the sum of P165,000 that said proceeds be delivered to the PhilippineNational Bank, and for the balance of difference not paid of the debt of the insolventcorporation to the claimant company, the Philippine National Bank be admitted as anordinary creditor in this insolvency proceeding.

February 9, 1924, the bank, through the fiscal of Davao, and in compliance with an order ofthe court, filed objections to the approval of the accounts rendered by the assignee.

In this situation, the court rendered a judgment in favor of the Philippine National Bank tothe effect that it was entitled to the possession of all of the estate of the insolventcorporation, and that in the year 1919 the bank had appointed H. B. Hughes as itsrepresentative or administrator of the properties of the Plantation Company, and requiringthe bank to pay certain preferred claims, including the income tax and the land tax, and thatthe bank was entitled to, and should have, possession of all the properties of the insolventcorporation, and to have the property sold and the proceeds of the sale applied to thesatisfaction of the claim of the bank, and upon the payment of such preferred claims, tohave the proceeds of the sale applied to the satisfaction of the claim of the bank, and thatthe creditors of the Plantation Company should share in any amount remaining after suchapplication, and dismissed the case, without costs.

From this judgment, the creditors appeal and assign the following errors:

I. The lower court erred in not finding and holding that the so-called "agreement ofpledge" executed by the insolvent Gulf Plantation Company in favor of the PhilippineNational Bank is null and void on account of its many defects.

II. The lower court erred in not finding and holding that the Philippine National Bankhas renounced its alleged preferred lien on the properties of the insolvent covered bythe pledge, by giving its consent to the appointment of and assignee and by permittingsaid assignee to take possession of said properties.

III. The lower court erred in not finding and holding that the claim of the Philippine

National Bank is an ordinary claim.

IV. The lower court erred in holding that the Philippine National Bank is entitled to thepossession of the properties of the insolvent.

V. The lower court erred in holding that the mortgage in favor of the PhilippineNational Bank is effective and due.

VI. The lower court erred in not overruling the opposition of the Philippine NationalBank dated February 9, 1924, to the accounts submitted by the assignee.

VIII. The lower court erred in dismissing the insolvency proceedings.

JOHNS,J .:

In view of the numerous recitals made in it, what is known in the record as Exhibit A mustbe construed as a pledge in both form and substance. It is very apparent from the language

used in the instrument that it was prepared on the customary blank form of a pledge for thetaking of properties under a pledge. It will be noted that it was never received or filed forany purpose until the 24th of February, 1921, which was two years and a half after it wasexecuted, and that it was then endorsed, only received in the "office of the register ofdeeds" with "Entry No. 90 page 3, Volume Day Book (Provisional)." That is to say, there isno evidence that it was ever received, filed or recorded anywhere or by anyone, either as achattel mortgaged or a pledge of personal property. Hence, the receiving of it in the officeof the register of deeds on February 24, 1921, is a nullity as to both a pledge and a chattelmortgage.

The only witness for either party was Carlos Garcia, the manager of the bank at Davao,and he was called for the sole purpose of testifying as to the amount of the bank's claim,which he placed at about P60,000, and that it was due and owing. To make Exhibit A valid

as a pledge, as to the personal property therein described , it was the duty of the bank totake the actual, physical possession of the property, and to continue and remain in suchpossessions, and to make it valid against creditors or the assignee, the bank must havebeen in such actual, physical possession at the time the Plantation Company was declaredinsolvent. Upon the question, there is no evidence in the record. Without it, Exhibit A is voidas a pledge, and the bank would not have a preference, and would not now be entitled tothe possession of the property of the Plantation Company, or to have it sold and theproceeds applied to the satisfaction of its claim.

Upon the question of pledge, article 1863 of the Civil Code provides:

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 thecreditor or, of a third person appointed by common consent.

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Section 4 of Act No. 1508, entitled "an Act providing for the mortgaging of personalproperty, and for the registration of the mortgages so executed," provides:

A chattel mortgage shall not be valid against any person except the mortgagor, hisexecutors or administrators, unless the possession of the property is delivered to andretained by the mortgagee or unless the mortgage is recorded in the office of theregister of deeds of the province in which the mortgagor resides at the time of makingthe same, or, if he resides without the Philippine Islands, in the province in which theproperty is situated.

That is to say, a chattel mortgage is not valid against any person except the mortgagor, hisexecutors or administrators, without delivery of possession of the property, unless themortgage is recorded in the office of the register of deeds of the province. It will be notedthat, in the absence of such delivery of possession on the recording of the instrument in theoffice of the register of deeds, a chattel mortgages is valid only as to the mortgagor, hisexecutors or administrators. Hence, it follows that, in the absence of such record and thedelivery of possession a chattel mortgage is void as against the creditors or the assignee ofan insolvent estate, and upon that question, there is no evidence in the record.

If it was the purpose and intent of the bank to have Exhibit A received, filed and recordedas a chattel mortgage, it was not only its duty to so instruct the register of deeds, but it wasits further duty to see that the instrument was received, filed and recorded as a chattelmortgage. Upon that point there is no evidence.

Again, in the every nature of things, a pledge or chattel mortgage is confined and limited topersonal property, and it cannot be extended or made to apply to real property.

In what is known as schedule A, attached to Exhibit A, the property is described as leaseNo. 63 of 534 hectares of public land planted to 236,000 hemp and 700 coconut treesvalued at P430,000, and forty-eight buildings of permanent materials valued at P5,500, andtwo buildings of strong materials valued at P15,000. It may well be doubted whether thatkind of property could become the subject matter of a pledge or chattel mortgage.

It will be noted that it is a pledge of a lease of public land which is planted to hemp andcoconut trees, and of forty-eight buildings of permanent materials and of two buildings ofstrong materials, clearly indicating that the buildings were attached to the soil and as suchwould be real estate.

It will also be noted that the pledge was executed in 1918, and it is very probable that theone thousand piculs of hemp have long since been sold. As to the twenty-three carabaos,thirty-eight bullocks and eighteen horses, there is no provision for the increase. Hence, thepledge, if valid for any purpose, should be confined and limited to the particular propertydescribed in the pledge, and would not include any increase.

That is to say, if it be a fact that at time the pledge was executed the bank took actual,physical possession of the property described in it, and continued to remain in suchpossession up to the time the petition for insolvency was filed, or that it was in suchpossession for more than thirty days prior to the filing of the petition, the pledge would thenbe valid as to the personal property, and the bank would then have a preference on thatproperty for the amount found due and owing upon its claim. If be a fact that the bank was

not in the actual, physical possession of the property at the time the insolvency petition wasfiled, and that the Plantation Company was in such possession as its own, then the bankwould not have a preference over any other unsecured creditor.

From what has been said, i t follows that the judgment of the lower court is reversed, andthe case remanded, with instructions for the assignee to proceed with the administration ofthe insolvent estate in the ordinary course of business and in the manner provided by law,and for such further proceedings as are not inconsistent with this opinion, with costs infavor of the appellant. So ordered.

G.R. No. L-6342 January 26, 1954

PHILIPPINE NATIONAL BANK, plaintiff-appellee,vs.LAUREANO ATENDIDO, defendants-appellant.

BAUTISTA, ANGELO,J .:

This is an appeal from a decision of the Court of First Instance of Nueva Ecija which ordersthe defendant to pay to the plaintiff the sum of P3,000, with interest thereon at the rate of6% 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 ofP3,000 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 ofpalay which were then deposited in the warehouse of Cheng Siong Lam & Co. in SanMiguel, Bulacan, and to that effect the borrower endorsed in favor of the bank thecorresponding warehouse receipt. Before the maturity of the loan, the 2,000 cavanes ofpalay disappeared for unknown reasons in the warehouse. When the loan matured theborrower failed to pay either the principal or the interest and so the present action wasinstituted.

Defendant set up a special defense and a counterclaim. As regards the former, defendantclaimed that the warehouse receipt covering the palay which was given as security havingbeen endorsed in blank in favor of the bank, and the palay having been lost ordisappeared, he thereby became relieved of liability. And, by way of counterclaim,defendant claimed that, as a corollary to his theory, he is entitled to an indemnity which

represents the difference between the value of the palay lost and the amount of hisobligation.

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5 Mar. 82 89965 to 89986 22 88,0005 Mar. 82 70147 to 90150 4 16,0008 Mar. 82 90001 to 90020 20 80,0009 Mar. 82 90023 to 90050 28 112,0009 Mar. 82 89991 to 90000 10 40,0009 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000===== ========

2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff inconnection with his purchased of fuel products from the latter (Original Record, p.208).

3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, theSucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr.Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, asrequired by defendant bank's procedure, if he desired replacement of said lost CTDs(TSN, February 9, 1987, pp. 48-50).

4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank therequired Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit ofloss, 280 replacement CTDs were issued in favor of said depositor (Defendant'sExhibits 282-561).

5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan fromdefendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos(P875,000.00). On the same date, said depositor executed a notarized Deed of

Assignment of Time Deposit (Exhibit 562) which stated, among others, that he (de laCruz) surrenders to defendant bank "full control of the indicated time deposits fromand after date" of the assignment and further authorizes said bank to pre-terminate,

set-off and "apply the said time deposits to the payment of whatever amount oramounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).

6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex(Phils.) Inc., went to the defendant bank's Sucat branch and presented for verificationthe CTDs declared lost by Angel dela Cruz alleging that the same were delivered toherein plaintiff "as security for purchases made with Caltex Philippines, Inc." by saiddepositor (TSN, February 9, 1987, pp. 54-68).

7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) fromherein plaintiff formally informing it of its possession of the CTDs in question and of itsdecision to pre-terminate the same.

8. On December 8, 1982, plaintiff was requested by herein defendant to furnish theformer "a copy of the document evidencing the guarantee agreement with Mr. Angeldela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against whichplaintiff proposed to apply the time deposits (Defendant's Exhibit 564).

9. No copy of the requested documents was furnished herein defendant.

10. Accordingly, defendant bank rejected the plaintiff's demand and claim for paymentof the value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).

11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and felldue and on August 5, 1983, the latter set-off and applied the time deposits in questionto the payment of the matured loan (TSN, February 9, 1987, pp. 130-131).

12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendantbank be ordered to pay it the aggregate value of the certificates of time deposit ofP1,120,000.00 plus accrued interest and compounded interest therein at 16% perannum, moral and exemplary damages as well as attorney's fees.

After trial, the court a quo rendered its decision dismissing the instant complaint. 3

On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of thecomplaint, hence this petition wherein petitioner faults respondent court in ruling (1) that thesubject certificates of deposit are non-negotiable despite being clearly negotiableinstruments; (2) that petitioner did not become a holder in due course of the saidcertificates of deposit; and (3) in disregarding the pertinent provisions of the Code ofCommerce relating to lost instruments payable to bearer. 4

The instant petition is bereft of merit.

A sample text of the certificates of time deposit is reproduced below to provide a betterunderstanding of the issues involved in this recourse.

SECURITY BANKAND TRUST COMPANY6778 Ayala Ave., Makati No. 90101Metro Manila, PhilippinesSUCAT OFFICEP 4,000.00CERTIFICATE OF DEPOSITRate 16%

Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

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This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after date,upon presentation and surrender of this certificate, with interest at the rate of 16% percent per annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES5

Respondent court ruled that the CTDs in question are non-negotiable instruments,nationalizing as follows:

. . . While it may be true that the word "bearer" appears rather boldly in the CTDsissued, it is important to note that after the word "BEARER" stamped on the spaceprovided supposedly for the name of the depositor, the words "has deposited" acertain amount follows. The document further provides that the amount depositedshall be "repayable to said depositor" on the period indicated. Therefore, the text ofthe instrument(s) themselves manifest with clarity that they are payable, not towhoever purports to be the "bearer" but only to the specified person indicated therein,the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruzas the person who made the deposit and further engages itself to pay said depositorthe amount indicated thereon at the stipulated date. 6

We disagree with these findings and conclusions, and hereby hold that the CTDs inquestion are negotiable instruments. Section 1 Act No. 2031, otherwise known as theNegotiable Instruments Law, enumerates the requisites for an instrument to becomenegotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwiseindicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. Theparties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr.Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in opencourt that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

xxx xxx xxx

Atty. Calida:

q In other words Mr. Witness, you are saying that per books of the bank, thedepositor referred (sic) in these certificates states that it was Angel dela Cruz?

witness:

a Yes, your Honor, and we have the record to show that Angel dela Cruz was theone who cause (sic) the amount.

Atty. Calida:

q And no other person or entity or company, Mr. Witness?

witness:

a None, your Honor. 7

xxx xxx xxx

Atty. Calida:

q Mr. Witness, who i s the depositor identified in all of these certificates of timedeposit insofar as the bank is concerned?

witness:

a Angel dela Cruz is the depositor. 8

xxx xxx xxx

On this score, the accepted rule is that the negotiability or non-negotiability of an instrumentis determined from the writing, that is, from the face of the instrument itself. 9In the

construction of a bill or note, the intention of the parties is to control, if it can be legallyascertained. 10While the writing may be read in the light of surrounding circumstances in

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order to more perfectly understand the intent and meaning of the parties, yet as they haveconstituted the writing to be the only outward and visible expression of their meaning, noother words are to be added to it or substituted in its stead. The duty of the court in suchcase is to ascertain, not what the parties may have secretly intended ascontradistinguished from what their words express, but what is the meaning of the wordsthey have used. What the parties meant must be determined by what they said. 11

Contrary to what respondent court held, the CTDs are negotiable instruments. Thedocuments provide that the amounts deposited shall be repayable to the depositor. Andwho, according to the document, is the depositor? It i s the "bearer." The documents do notsay that the depositor is Angel de la Cruz and that the amounts deposited are repayablespecifically to him. Rather, the amounts are to be repayable to the bearer of the documentsor, for that matter, whosoever may be the bearer at the time of presentment.

If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only,it could have with facility so expressed that fact in clear and categorical terms in thedocuments, instead of having the word "BEARER" stamped on the space provided for thename of the depositor in each CTD. On the wordings of the documents, therefore, theamounts deposited are repayable to whoever may be the bearer thereof. Thus, petitioner'saforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as thebank is concerned," but obviously other parties not privy to the transaction between themwould not be in a position to know that the depositor is not the bearer stated in the CTDs.Hence, the situation would require any party dealing with the CTDs to go behind the plainimport of what is written thereon to unravel the agreement of the parties thereto throughfacts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided bythe Negotiable Instruments Law and calls for the application of the elementary rule that theinterpretation of obscure words or stipulations in a contract shall not favor the party whocaused the obscurity. 12

The next query is whether petitioner can rightfully recover on the CTDs. This time, theanswer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose

not to implead in this suit for reasons of its own, delivered the CTDs amounting toP1,120,000.00 to petitioner without informing respondent bank thereof at any time.Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiationthereof for the true purpose and agreement between it and De la Cruz, as ultimatelyascertained, requires both delivery and indorsement. For, although petitioner seeks todeflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz'purchases of its fuel products. Any doubt as to whether the CTDs were delivered aspayment for the fuel products or as a security has been dissipated and resolved in favor ofthe latter by petitioner's own authorized and responsible representative himself.

In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas,Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit were negotiated to usby Mr. Angel dela Cruz to guarantee his purchases of fuel products" (Emphasis

ours.)13

This admission is conclusive upon petitioner, its protestations notwithstanding.Under the doctrine of estoppel, an admission or representation is rendered conclusive upon

the person making it, and cannot be denied or disproved as against the person relyingthereon. 14 A party may not go back on his own acts and representations to the prejudice ofthe other party who relied upon them. 15In the law of evidence, whenever a party has, byhis own declaration, act, or omission, intentionally and deliberately led another to believe aparticular thing true, and to act upon such belief, he cannot, in any litigation arising out ofsuch declaration, act, or omission, be permitted to falsify it. 16

If it were true that the CTDs were delivered as payment and not as security, petitioner'scredit manager could have easily said so, instead of using the words "to guarantee" in theletter aforequoted. Besides, when respondent bank, as defendant in the court below,moved for a bill of particularity therein 17praying, among others, that petitioner, as plaintiff,be required to aver with sufficient definiteness or particularity (a) the due date or datesofpaymentof the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether ornot it issued a receipt showing that the CTDs were delivered to it by De la Cruzaspaymentof the latter's alleged indebtedness to it, plaintiff corporation opposed themotion. 18Had it produced the receipt prayed for, it could have proved, if such truly was thefact, that the CTDs were delivered as payment and not as security. Having opposed themotion, petitioner now labors under the presumption that evidence willfully suppressedwould be adverse if produced. 19

Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al.vs. Philippine National Bank, et al.20is apropos:

. . . Adverting again to the Court's pronouncements in Lopez, supra, we quotetherefrom:

The character of the transaction between the parties is to be determined by theirintention, regardless of what language was used or what the form of the transferwas. If it was intended to secure the payment of money, it must be construed asa pledge; but if there was some other intention, it is not a pledge. However, eventhough a transfer, if regarded by itself, appears to have been absolute, its object

and character might still be qualified and explained by contemporaneous writingdeclaring it to have been a deposit of the property as collateral security. It hasbeen said that a transfer of property by the debtor to a creditor, even if sufficienton its face to make an absolute conveyance, should be treated as a pledge if thedebt continues in inexistence and is not discharged by the transfer, and thataccordingly the use of the terms ordinarily importing conveyance of absoluteownership will not be given that effect in such a transaction if they are alsocommonly used in pledges and mortgages and therefore do not unqualifiedlyindicate a transfer of absolute ownership, in the absence of clear andunambiguous language or other circumstances excluding an intent to pledge.

Petitioner's insistence that the CTDs were negotiated to it begs the question. Under theNegotiable Instruments Law, an instrument is negotiated when it is transferred from one

person to another in such a manner as to constitute the transferee the holderthereof, 21 and a holder may be the payee or indorsee of a bill or note, who is in possession

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of it, or the bearer thereof. 22In the present case, however, there was no negotiation in thesense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, forobvious reasons, mere delivery of the bearer CTDs would have sufficed. Here, the deliverythereof only as security for the purchases of Angel de la Cruz (and we even disregard thefact that the amount involved was not disclosed) could at the most constitute petitioner onlyas a holder for value by reason of his lien. Accordingly, a negotiation for such purpose

cannot be effected by mere delivery of the instrument since, necessarily, the terms thereofand the subsequent disposition of such security, in the event of non-payment of theprincipal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arisingfrom contract, he is deemed a holder for value to the extent of his lien. 23As such holder ofcollateral security, he would be a pledgee but the requirements therefor and the effectsthereof, not being provided for by the Negotiable Instruments Law, shall be governed by theCivil Code provisions on pledge of incorporeal rights, 24which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also bepledged. The instrument proving the right pledged shall be delivered to the creditor,and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of thething pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findingsof respondent court quoted at the start of this opinion show that petitioner failed to produceany document evidencing any contract of pledge or guarantee agreement between it and

Angel de la Cruz. 25Consequently, the mere delivery of the CTDs did not legally vest inpetitioner any right effective against and binding upon respondent bank. The requirementunder Article 2096 aforementioned is not a mere rule of adjective law prescribing the modewhereby proof may be made of the date of a pledge contract, but a rule of substantive lawprescribing a condition without which the execution of a pledge contract cannot affect third

persons adversely.26

On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor ofrespondent bank was embodied in a public instrument. 27With regard to this other mode oftransfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as againstthird persons, unless it appears in a public instrument, or the instrument is recorded inthe Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner,whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its

credit or the extent of its lien nor the execution of any public instrument which could affect

or bind private respondent. Necessarily, therefore, as between petitioner and respondentbank, the latter has definitely the better right over the CTDs in question.

Finally, petitioner faults respondent court for refusing to delve into the question of whetheror not private respondent observed the requirements of the law in the case of lostnegotiable instruments and the issuance of replacement certificates therefor, on the ground

that petitioner failed to raised that issue in the lower court. 28

On this matter, we uphold respondent court's finding that the aspect of alleged negligenceof private respondent was not included in the stipulation of the parties and in the statementof issues submitted by them to the trial court. 29The issues agreed upon by them forresolution in this case are:

1. Whether or not the CTDs as worded are negotiable instruments.

2. Whether or not defendant could legally apply the amount covered by the CTDsagainst the depositor's loan by virtue of the assignment (Annex "C").

3. Whether or not there was legal compensation or set off involving the amountcovered by the CTDs and the depositor's outstanding account with defendant, if any.

4. Whether or not plaintiff could compel defendant to preterminate the CTDs beforethe maturity date provided therein.

5. Whether or not plaintiff is entitled to the proceeds of the CTDs.

6. Whether or not the parties can recover damages, attorney's fees and litigationexpenses from each other.

As respondent court correctly observed, with appropriate citation of some doctrinalauthorities, the foregoing enumeration does not include the issue of negligence on the partof respondent bank. An issue raised for the first time on appeal and not raised timely in theproceedings in the lower court is barred by estoppel. 30Questions raised on appeal must bewithin the issues framed by the parties and, consequently, issues not raised in the trialcourt cannot be raised for the fir st time on appeal. 31

Pre-trial is primarily intended to make certain that all issues necessary to the disposition ofa case are properly raised. Thus, to obviate the element of surprise, parties are expected todisclose at a pre-trial conference all issues of law and fact which they intend to raise at thetrial, except such as may involve privileged or impeaching matters. The determination ofissues at a pre-trial conference bars the consideration of other questions on appeal. 32

To accept petitioner's suggestion that respondent bank's supposed negligence may beconsidered encompassed by the issues on its right to preterminate and receive the

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proceeds of the CTDs would be tantamount to saying that petitioner could raise on appealany issue. We agree with private respondent that the broad ultimate issue of petitioner'sentitlement to the proceeds of the questioned certificates can be premised on a multitude ofother legal reasons and causes of action, of which respondent bank's supposed negligenceis only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitationof issues a useless exercise. 33

Still, even assuming arguendo that said issue of negligence was raised in the court below,petitioner still cannot have the odds in its favor. A close scrutiny of the provisions of theCode of Commerce laying down the rules to be followed in case of lost instruments payableto bearer, which it invokes, will reveal that said provisions, even assuming their applicabilityto the CTDs in the case at bar, are merely permissive and not mandatory. The very firstarticle cited by petitioner speaks for itself.

Art 548. The dispossessed owner, no matter for what cause it may be, mayapply tothe judge or court of competent jurisdiction, asking that the principal, interest ordividends due or about to become due, be not paid a third person, as well as in orderto prevent the ownership of the instrument that a duplicate be issued him. (Emphasisours.)

xxx xxx xxx

The use of the word "may" in said provision shows that it is not mandatory but discretionaryon the part of the "dispossessed owner" to apply to the judge or court of competent

jurisdiction for the issuance of a duplicate of the lost instrument. Where the provision reads"may," this word shows that it is not mandatory but discretional. 34 The word "may" isusually permissive, not mandatory. 35It is an auxiliary verb indicating liberty, opportunity,permission and possibility. 36

Moreover, as correctly analyzed by private respondent, 37Articles 548 to 558 of the Code ofCommerce, on which petitioner seeks to anchor respondent bank's supposed negligence,

merely established, on the one hand, a right of recourse in favor of a dispossessed owneror holder of a bearer instrument so that he may obtain a duplicate of the same, and, on theother, an option in favor of the party liable thereon who, for some valid ground, may elect torefuse to issue a replacement of the instrument. Significantly, none of the provisions citedby petitioner categorically restricts or prohibits the issuance a duplicate or replacementinstrument sans compliance with the procedure outlined therein, and none establishes amandatory precedent requirement therefor.

WHEREFORE, on the modified premises above set forth, the petition is DENIED and theappealed decision is hereby AFFIRMED.

SO ORDERED.

G.R. No. L-18500 October 2, 1922

FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR, plaintiffs-appellants,vs.GLICERIO JAVELLANA, defendant-appellant.

Montinola, Montinola and Hontiveros for plaintiffs-appellants.

J. M. Arroyo and Fisher and DeWitt for defendant-appellant.

AVANCEA,J .:

On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 withinterest at the rate of 25 per cent per annum for the term of one year. To guarantee thisloan, the plaintiffs pledged a large medal with a diamond in the center and surrounded withten diamonds, a pair of diamond earrings, a small comb with twenty-two diamonds, and twodiamond rings, which the contracting parties appraised at P4,000. This loan is evidencedby two documents (Exhibits A and 1) wherein the amount appears to be P1,875, whichincludes the 25 per cent interest on the sum of P1,500 for the term of one year.

The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiffEusebio M. Villaseor, being unable to pay the loan, obtained from the defendant anextension, with the condition that the loan was to continue, drawing interest at the rate of 25per cent per annum, so long as the security given was sufficient to cover the capital and theaccrued interest. In the month of August, 1919, the plaintiff Eusebio M. Villaseor, incompany with Carlos M. Dreyfus, went to the house of the defendant and offered to pay theloan and redeem the jewels, taking with him, for this purpose, the sum of P11,000, but thedefendant then informed them that the time for the redemption had already elapsed. Theplaintiffs renewed their offer to redeem the jewelry by paying the loan, but met with thesame reply. These facts are proven by the testimony of the plaintiffs, corroborated byCarlos M. Dreyfus.

The plaintiffs now bring this action to compel the defendant to return the jewels

pledged, or their value, upon the payment by them of the sum they owe the defendant, withthe interest thereon.

The defendant alleges, in his defense, that upon the maturity of the loan, August 31,1912, he requested the plaintiff, Eusebio M. Villaseor, to secure the money, pay the loanand redeem the jewels, as he needed money to purchase a certain piece of land; that onemonth thereafter, the plaintiff, Filomena Sarmiento, went to his house and offered to sellhim the jewels pledged for P3,000; that the defendant then told her to come back on thenext day, as he was to see his brother, Catalino Javellana, and ask him if he wanted to takethe jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went back tothe house of the defendant who then paid her the sum of P1,125, which was the balanceremaining of the P3,000 after deducting the plaintiff's loan.

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It appearing that the defendant possessed these jewels originally, as a pledge tosecure the payment of a loan stated in writing, the mere testimony of the defendant to theeffect that later they were sold to him by the plaintiff, Filomena Sarmiento, against thepositive testimony of the latter that she did not make any such sale, requires a strongcorroboration to be accepted. We do not find the testimony of Jose Sison to be of sufficientvalue as such corroboration. This witness testified to having been in the house of the

defendant when Filomena went there to offer to sell the defendant the jewels, as well as onthe third day when she returned to receive the price. According to this witness, hehappened to be in the house of the defendant, having gone there to solicit a loan, and alsoaccidentally remained in the house of the defendant for three days, and that that was howhe happened to witness the offer to sell, as well as the receipt of the price on the third day.But not only do we find that the defendant has not sufficiently established, by his evidence,the fact of the purchase of the jewels, but also that there is a circumstance tending to showthe contrary, which is the fact that up to the tri al of this cause the defendant continued inpossession of the documents, Exhibits A and 1, evidencing the loan and the pledge. If thedefendant really bought these jewels, its seems natural that Filomena would havedemanded the surrender of the documents evidencing the loan and the pledge, and thedefendant would have returned them to plaintiff.

Our conclusion is that the jewels pledged to defendant were not sold to himafterwards.

Another point on which evidence was introduced by both parties is as to the value ofthe jewels in the event that they were not returned by the defendant. In view of theevidence of record, we accept the value of P12,000 fixed by the trial court.

From the foregoing it follows that, as the jewels in question were in the possession ofthe defendant to secure the payment of a loan of P1,500, with interest thereon at the rate of25 per cent per annum from Augusts 31, 1911, to August 31, 1912, and the defendanthaving subsequently extended the term of the loan indefinitely, and so long as the value ofthe jewels pledged was sufficient to secure the payment of the capital and the accrued

interest, the defendant is bound to return the jewels or their value (P12,000) to plaintiffs,and the plaintiffs have the right to demand the same upon the payment by them of the sumof P1,5000, plus the interest thereon at the rate of 25 per cent per annum from August 28,1911.

The judgment appealed from being in accordance with this findings, the same isaffirmed without special pronouncement as to costs. So ordered.

Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.

R E S O L U T I O N

April 4, 1923

AVANCEA,J .:

The defendant contends that the plaintiffs' action for the recovery of the jewelspledged has prescribed. Without deciding whether or not the action to recover the thingpledged may prescribe in any case, it not being necessary for the purposes of this opinion,but supposing that it may, still the defendant's contention is untenable. In the document

evidencing the loan in question there is stated: " I transfer by way of pledge the followingjewels." That this is a valid contract of pledge there can be no question. As a matter of factthe defendant does not question it, but take s it for granted. However, it is contended thatthe obligation of the defendant to return the jewels pledged must be considered as notstated in writing, for this obligation is not expressly mentioned in the document. But if thiscontract of pledge is in writing, it must necessarily be admitted that the action to enforce theright, which constitutes the essence of this contract, is covered by a written contract. Theduty of the creditor to return the thing pledged in case the principal obligation is fulfilled isessential in all contracts of pledge. This constitutes, precisely, the consideration of thedebtor in this accessory contract, so that if this obligation of the creditor to return to thingpledged, and the right of the debtor to demand the return thereof, are eliminated, thecontract would not be a contract of pledge. It would be a donation.

If the right of the plaintiffs to recover the thing pledged is covered by a writtencontract, the time for the prescription of this action is ten years, according to section 43 ofthe Code of Civil Procedure.

The defendant contends that the time of prescription of the action of the plaintiffs torecover the thing pledged must be computed from August 28, 1911, the date of the makingof the contract of loan secured by this pledge. The term of this loan is one year. However, itis contended that the action of the plaintiff to recover the thing pledged accrued on the verydate of the making of the contract, inasmuch as from that date they could have recoveredthe same by paying the loan even before the expiration of the period fixed for payment.This view is contrary to law. Whenever a term for the performance of an obligation is fixed,it is presumed to have been established for the benefit of the creditor as well as that of the

debtor, unless from its tenor or from other circumstances it should appear that the term wasestablished for the benefit of one or the other only (art. 1128 of the Civil Code.) In this caseit does not appear, either from any circumstance, or from the tenor of the contract, that theterm of one year allowed the plaintiffs to pay the debt was established in their favor only.Hence it must be presumed to have been established for the benefit of the defendant also.

And it must be so, for this is a case of a loan, with interest, wherein the term benefits theplaintiffs by the use of the money, as well as the defendant by the interest. This being so,the plaintiffs had no right to pay the loan before the lapse of one year, without the consentof the defendant, because such a payment in advance would have deprived the latter of thebenefit of the stipulated interest. It follows from this that appellant is in error when hecontents that the plaintiffs could have paid the loan and recovered the thing pledged fromthe date of the execution of the contract and, therefore, his theory that the action of theplaintiffs to recover the thing pledged accrued from the date of the execution of the contractis not tenable. 1awph!l.net

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It must, therefore, be admitted that the action of the plaintiffs for the recovery of thething pledged did not accrue until August 31, 1912, when the term fixed for the loanexpired. Computing the time from that date to that of the filing of the complaint in thiscause, October 9, 1920, it appears that the ten years fixed by the law for the prescription ofthe action have not yet elapsed.

On the other hand, the contract of loan with pledge is in writing and the action of thedefendant for the recovery of the loan does not prescribe until after ten years. It is unjust tohold that the action of the plaintiffs for the recovery of the thing pledged, after the paymentof the loan, has already prescribed while the action of the defendant for the recovery of theloan has not yet prescribed. The result of this would be that the defendant might havecollected the loan and at the same time kept the thing pledged.

The motion for reconsideration is denied.

Araullo, C.J., Malcolm, Ostrand and Romualdez, JJ., concur.

Separate Opinions

STREET,J ., concurring:

I agree, Prescription cannot become effective against the right of the pledgor toredeem so long as the written contract evidencing the debt remains in the hands of thepledgee as evidence of a valid and unbarred debt. The pledgor may always claim at leastas long a period within which to redeem as is allowed to the creditor to enforce his debt.(Gilmer vs. Morris, 80 Ala., 78; 60 Am. Rep., 85, 89.)

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-% per annum from July 13, 1954; P120.93as 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 CivilCode of the Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request ofRodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachmentobtained 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 ofP112.00; to indemnify the Company for any damage and loss of whatsoever kind andnature that it shall or may suffer, as well as reimburse the same for all money it should payor 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 tothe Surety Company "for the latter's further protection", with power to sell the same in casethe surety paid or become obligated to pay any amount of money in connection with saidbond, 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 legalexpenses 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 payP2,800.00 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 ofP235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety companybrought suit in the Municipal Court. Velayo countered with a claim that the sale of thepledged jewelry extinguished any further liability on his part under Article 2115 of the 1950Civil 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 principalobligation, interest and expenses in a proper case. If the price of the sale is morethan 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 beentitled 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 thecase 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 defendantwere delivered to the plaintiff, it was merely as an added protection to the latter.

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There was no understanding that, should the same be sold at public auction andthe value thereof should be short of the undertaking, the defendant would haveno further liability to the plaintiff. On the contrary, the last portion of the saidagreement specifies that in case the said collateral should diminish in value, theplaintiff may demand additional securities. This stipulation is incompatible withthe 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 theprincipal obligation in which the creditor is entitled to a deficiency judgment forthe balance should the collateral not command the price equal to theundertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff tosecure this obligation has already been sold for only the amount of P235.00, theliability of the defendant should be limited to the difference between the amountsof P2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision isunsound. 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 beconstituted to secure the fulfillment of a principal obligation, which in the present case isVelayo's undertaking to indemnify the surety company for any disbursements made onaccount of its attachment counterbond. Hence, the fact that the pledge is not the principalagreement is of no significance nor is it an obstacle to the application of Article 2115 of theCivil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledgedchattels must be derived from stipulation. This is incorrect, because Article 2115, in its lastportion, clearly establishes that the extinction of the principal obligation supervenes byoperation 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 tosell the articles pledged, instead of suing on the principal obligation, the creditor has waivedany 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 ofthe legal prescription contained in Article 1484(3) of the same Code, concerning the effectof a foreclosure of a chattel mortgage constituted to secure the price of the personalproperty sold in installments, and which originated in Act 4110 promulgated by thePhilippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from thecomplaint, 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 Courtbelow is affirmed. No costs. So ordered.

G.R. No. 138053 May 31, 2000

CORNELIO M. ISAGUIRRE, petitioner,

vs.

FELICITAS DE LARA, respondent.

GONZAGA-REYES,J .:

In this petition for review on certiorariunder Rule 45 of the 1997 Revised Rules of CivilProcedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998 decision1of theCourt of Appeals2and its Resolution promulgated on March 5, 1999.

The antecedent facts of the present case are as follows:

Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales Applicationover a parcel of land identified as portion of Lot 502, Guianga Cadastre, filed with theBureau of Lands on January 17, 1942 and with an area of 2,324 square meters. Upon hisdeath, Alejandro de Lara was succeeded by his wife respondent Felicitas de Lara, asclaimant. On November 19, 1954, the Undersecretary of Agriculture and Natural Resourcesamended the sales application to cover only 1,600 square meters. Then, on November 3,1961, by virtue of a decision rendered by the Secretary of Agriculture and NaturalResources dated November 19, 1954, a subdivision survey was made and the area wasfurther reduced to 1,000 square meters. On this lot stands a two-story residential-commercial apartment declared for taxation purposes under TD 43927 in the name ofrespondent's sons Apolonio and Rodolfo, both surnamed de Lara.

Sometime in 1953, respondent obtained several loans from the Philippine National Bank.When she encountered financial difficulties, respondent approached petitioner Cornelio M.Isaguirre, who was married to her niece, for assistance. On February 10, 1960, a documentdenominated as "Deed of Sale and Special Cession of Rights and Interests" was executedby respondent and petitioner, whereby the former sold a 250 square meter portion of LotNo. 502, together with the two-story commercial and residential structure standing thereon,in favor of petitioner, for and in consideration of the sum of P5,000.

Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against petitionerfor recovery of ownership and possession of the two-story building.3However, the casewas dismissed for lack of jurisdiction.

On August 21, 1969, petitioner filed a sales application over the subject property on thebasis of the deed of sale. His application was approved on January 17, 1984, resulting in

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the issuance of Original Certificate of Title No. P-11566 on February 13, 1984, in the nameof petitioner. Meanwhile, the sales application of respondent over the entire 1,000 squaremeters of subject property (including the 250 square meter portion claimed by petitioner)was also given due course, resulting in the issuance of Original Certificate of Title No. P-13038 on June 19, 1989, in the name of respondent.4

Due to the overlapping of titles, petitioner filed an action for quieting of title and damageswith the Regional Trial Court of Davao City against respondent on May 17, 1990. The casewas docketed as Civil Case No. 20124-90. After trial on the merits, the trial court rendered

judgment on October 19, 1992, in favor of petitioner, declaring him to be the lawful owner ofthe disputed property. However, the Court of Appeals reversed the trial court's decision,holding that the transaction entered into by the parties, as evidenced by their contract, wasan equitable mortgage, not a sale.5The appellate court's decision was based on theinadequacy of the consideration agreed upon by the parties, on its finding that the paymentof a large portion of the "purchase price" was made after the execution of the deed of salein several installments of minimal amounts; and finally, on the fact that petitioner did nottake steps to confirm his rights or to obtain title over the property for several years after theexecution of the deed of sale. As a consequence of its decision, the appellate court alsodeclared Original Certificate of Title No. P-11566 issued in favor of petitioner to be null and

void. On July 8, 1996, in a case docketed as G.R. No. 120832, this Court affirmed thedecision of the Court of Appeals and on September 11, 1996, we denied petitioner's motionfor reconsideration.

On May 5, 1997, respondent filed a motion for execution with the trial court, praying for theimmediate delivery of possession of the subject property, which motion was granted on

August 18, 1997. On February 3, 1998, respondent moved for a writ of possession,invoking our ruling in G.R. No. 120832. Petitioner opposed the motion, asserting that hehad the right of retention over the property until payment of the loan and the value of theimprovements he had introduced on the property. On March 12, 1998, the trial courtgranted respondent's motion for writ of possession. Petitioner's motion for reconsiderationwas denied by the trial court on May 21, 1998. Consequently, a writ of possession datedJune 16, 1998, together with the Sheriff's Notice to Vacate dated July 7, 1998, were served

upon petitioner.

Petitioner filed with the Court of Appeals a special civil action forcertiorariand prohibitionwith prayer for a temporary restraining order or preliminary injunction to annul and set asidethe March 12, 1998 and May 21, 1998 orders of the trial court, including the writ ofpossession dated June 16, 1998 and the sheriff's notice to vacate dated July 7, 1998.6

The appellate court summarized the issues involved in the case as follows: (1) whether ornot the mortgagee in an equitable mortgage has the right to retain possession of theproperty pending actual payment to him of the amount of indebtedness by the mortgagor;and (b) whether or not petitioner can be considered a builder in good faith with respect tothe improvements he made on the property before the transaction was declared to be an

equitable mortgage.

The Court of Appeals held that petitioner was not entitled to retain possession of thesubject property. It said that

. . . the mortgagee merely has to annotate his claim at the back of the certificate of titlein order to protect his rights against third persons and thereby secure the debt. Thereis therefore no necessity for him to actually possess the property. Neither should a

mortgagee in an equitable mortgage fear that the contract relied upon is not registeredand hence, may not operate as a mortgage to justify its foreclosure. In Feliza Zubiriv. Lucio Quijano, 74 Phil 47, it was ruled "that when a contract . . . is held as anequitable mortgage, the same shall be given effect as if it had complied with the formalrequisites of mortgage. . . . by its very nature the lien thereby created ought not to bedefeated by requiring compliance with the formalities necessary to the validity of avoluntary real estate mortgage, as long as the land remains in the hands of thepetitioner (mortgagor) and the rights of innocent parties are not affected.

Proceeding from the foregoing, petitioner's imagined fears that his lien would be lostby surrendering possession are unfounded.

In the same vein, there is nothing to stop the mortgagor de Lara from acquiringpossession of the property pending actual payment of the indebtedness to petitioner.This does not in anyway endanger the petitioner's right to security since, as pointedout by private respondents, the petitioner can always have the equitable mortgageannotated in the Certificate of Title of private respondent and pursue the legalremedies for the collection of the alleged debt secured by the mortgage. In this case,the remedy would be to foreclose the mortgage upon failure to pay the debt within therequired period.

It is unfortunate however, that the Court of Appeals, in declaring the transaction to bean equitable mortgage failed to specify in its Decision the period of time within whichthe private respondent could settle her account, since such period serves as thereckoning point by which foreclosure could ensue. As it is, petitioner is now in a

dilemma as to how he could enforce his rights as a mortgagee. . . .

Hence, this Court, once and for all resolves the matter by requiring the trial court todetermine the amount of total indebtedness and the period within which payment shallbe made.

Petitioner's claims that he was a builder in good faith and entitled to reimbursement for theimprovements he introduced upon the property were rejected by the Court of Appeals. Itheld that petitioner knew, or at least had an inkling, that there was a defect or flaw in hismode of acquisition. Nevertheless, the appellate court declared petitioner to have thefollowing rights:

. . . He is entitled to reimbursement for the necessary expenses which he may haveincurred over the property, in accordance with Art. 526 and Art. 452 of the Civil Code.

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Moreover, considering that the transaction was merely an equitable mortgage, then heis entitled to payment of the amount of indebtedness plus interest, and in the event ofnon-payment to foreclose the mortgage. Meanwhile, pending receipt of the totalamount of debt, private respondent is entitled to possession over the disputedproperty.

The case was finally disposed of by the appellate court in the following manner:

WHERFORE, the Petition is hereby DISMISSED, and this case is ordered remandedto the Regional Trial Court of Davao City for further proceedings, as follows:

1) The trial court shall determine

a) The period within which the mortgagor must pay his total amount of indebtedness.

b) The total amount of indebtedness owing the petitioner-mortgagee plus interestcomputed from the time when the judgment declaring the contract to be an equitablemortgage became final.

c) The necessary expenses incurred by petitioner over the property.7

On March 5, 1999, petitioner's motion for reconsideration was denied by the appellatecourt.8Hence, the present appeal wherein petitioner makes the following assignment oferrors:

A. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT THERTC ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH GRAVE

ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTIONIN ISSUING A WRIT OF POSSESSION IN FAVOR OF RESPONDENT.

A.1 The RTC patently exceeded the scope of its authority and acted with graveabuse of discretion in ordering the immediate delivery of possession of theProperty to respondent as said order exceeded the parameters of the final andexecutory decision and constituted a variance thereof.

B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THATPETITIONER IS NOT ENTITLED TO THE POSSESSION OF THE PROPERTYPRIOR TO THE PAYMENT OF RESPONDENT'S MORTGAGE LOAN.

C. THE HONORABLE COURT OF APPEALS ERRED IN RULING THATPETITIONER WAS NOT A BUILDER IN GOOD FAITH.

D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THATPETITIONER IS ENTITLED TO INTEREST COMPUTED ONLY FROM THE TIMEWHEN THE JUDGMENT DECLARING THE CONTRACT TO BE AN EQUITABLEMORTGAGE BECAME FINAL.9

Basically, petitioner claims that he is entitled to retain possession of the subject property

until payment of the loan and the value of the necessary and useful improvements he madeupon such property.10According to petitioner, neither the Court of Appeals' decision inG.R. CV No. 42065 nor this Court's decision in G.R. No. 120832 ordered immediatedelivery of possession of the subject property to respondent.

The dispositive portion of the March 31, 1995 decision of the Court of Appeals in G.R. CVNo. 42065, which was affirmed by this Court, provides that

IN VIEW OF ALL THE FOREGOING, the judgment appealed fromis REVERSED and SET ASIDEand a new one entered: (1) dismissingthe complaint;(2) declaring the "Document of Sale and Special Cession of Rights and Interests"(Exhibit B) dated February 10, 1960, to be an equitable mortgage not a sale; (3)

upholding the validity of OCT No. P-13038 in the name of Felicitas de Lara; and (3)declaring null and voidOCT No. P-11566 in the name of plaintiff Cornelio Isaguirre. Allother counterclaims for damages are likewise dismissed. Costs against theappellee.11

Petitioner argues that the abovementioned decision merely settled the following matters:(1) that the transaction between petitioner and respondent was not a sale but an equitablemortgage; (2) that OCT No. P-13038 in the name of respondent is valid; and (3) that OCTNo. P-11566 in the name of petitioner is null and void. Since the aforementioned decisiondid not direct the immediate ouster of petitioner from the subject property and the deliverythereof to respondent, the issuance of the writ of possession by the trial court on June 16,1998 constituted an unwarranted modification or addition to the final and executorydecision of this Court in G.R. No. 120832.12

We do not agree with petitioner's contentions. On the contrary, the March 31, 1995 decisionof the appellate court, which was affirmed by this Court on July 8, 1996, served as morethan adequate basis for the issuance of the writ of possession in favor of respondent sincethese decisions affirmed respondent's title over the subject property. As the sole owner,respondent has the right to enjoy her property, without any other limitations than thoseestablished bylaw.1Corollary to such right, respondent also has the right to exclude from the possessionof her property any other person to whom she has not transmitted such property.14

It is true that, in some instances, the actual possessor has some valid rights over theproperty enforceable even against the owner thereof, such as in the case of a tenant orlessee.15Petitioner anchors his own claim to possession upon his declared status as amortgagee. In his Memorandum, he argues that

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4.8 It was respondent who asserted that her transfer of the Property to petitioner wasby way of an equitable mortgage and not by sale. After her assertion was sustained bythe Courts, respondent cannot now ignore or disregard the legal effects of such

judicial declaration regarding the nature of the transaction.

xxx xxx xxx

4.13 Having delivered possession of the Property to petitioner as part of theconstitution of the equitable mortgage thereon, respondent is not entitled to the returnof the Property unless and until the mortgage loan is discharged by full paymentthereof. Petitioner's right as mortgagee to retain possession of the Property so long asthe mortgage loan remains unpaid is further supported by the rule that a mortgagemay not be extinguished even though then mortgagor-debtor may have made partialpayments on the mortgage loan:

Art. 2089. A pledge or mortgage is indivisible, even though the debt may bedivided among the successors in interest of the debtor or the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for theproportionate extinguishment of the pledge or mortgage as long as the debt isnot completely satisfied.

Neither can the creditor's heir who has received his share of the debt return thepledge or cancel the mortgage, to the prejudice of the other heirs who have notbeen paid. (Emphasis supplied.)

xxx xxx xxx

4.14 To require petitioner to deliver possession of the P roperty to respondent prior tothe full payment of the latter's mortgage loan would be equivalent to the cancellation

of the mortgage. Such effective cancellation would render petitioner's rights ineffectualand nugatory and would constitute unwarranted judicial interference.

xxx xxx xxx

4.16 The fact of the present case show that respondent delivered possession of theProperty to petitioner upon the execution of the Deed of Absolute Sale and SpecialCession of Rights and Interest dated 10 February 1960. Hence, transfer of possessionof the Property to petitioner was an essential part of whatever agreement the partiesentered into, which, in this case, the Supreme Court affirmed to be an equitablemortgage.

xxx xxx xxx

4.19 Petitioner does not have the mistaken notion that the mortgagee must be inactual possession of the mortgaged property in order to secure the debt. However, inthis particular case, the delivery of possession of the Property was an integral part ofthe contract between petitioner and respondent. After all, it was supposed to be acontract of sale. If delivery was not part of the agreement entered into by the parties in1960, why did respondent surrender possession thereof to petitioner in the first place?

4.20 Now that the Courts have ruled that the transaction was not a sale but amortgage, petitioner's entitlement to the possession of the Property should be deemedas one of the provisions of the mortgage, considering that at the time the contract wasentered into, possession of the Property was likewise delivered to petitioner. Thus,until respondent has fully paid her mortgage loan, petitioner should be allowed toretain possession of the subject property.16

Petitioner's position lacks sufficient legal and factual moorings.

A mortgage is a contract entered into in order to secure the fulfillment of a principalobligation.17It is constituted by recording the document in which it appears with the proper

Registry of Property, although, even if it is not recorded, the mortgage is neverthelessbinding between the parties.18Thus, the only right granted by law in favor of the mortgageeis to demand the execution and the recording of the document in which the mortgage isformalized.19As a general rule, the mortgagor retains possession of the mortgagedproperty since a mortgage is merely a lien and title to the property does not pass to themortgagee.20However, even though a mortgagee does not have possession of theproperty, there is no impairment of his security since the mortgage directly and immediatelysubjects the property upon which it is imposed, whoever the possessor may be, to thefulfillment of the obligation for whose security it was constituted.21If the debtor is unable topay his debt, the mortgage creditor may institute an action to foreclose the mortgage,whether judicially or extrajudicially, whereby the mortgaged property will then be sold at apublic auction and the proceeds therefrom given to the creditor to the extent necessary todischarge the mortgage loan. Apparently, petitioner's contention that "[t]o require [him] . . .to deliver possession of the Property to respondent prior to the full payment of the latter'smortgage loan would be equivalent to the cancellation of the mortgage" is without basis.Regardless of its possessor, the mortgaged property may still be sold, with the prescribedformalities, in the event of the debtor's default in the payment of his loan obligation.

Moreover, this Court cannot find any justification in the records to uphold petitioner'scontention that respondent delivered possession of the subject property upon the executionof the "Deed of Sale and Special Cession of Rights and Interests" on February 10, 1960and that the transfer of possession to petitioner must therefore be considered an essentialpart of the agreement between the parties. This self-serving assertion of petitioner wasdirectly contradicted by respondent in her pleadings.22Furthermore, nowhere in the Courtof Appeals' decisions promulgated on March 31, 1995 (G.R. CV No. 42065) and onOctober 5, 1998 (G.R. SP No. 48310), or in our own decision promulgated on July 8, 1996

(G.R. No. 120832) was it ever established that the mortgaged properties were delivered byrespondent to petitioner.

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InAlvano v. Batoon,2this Court held that "[a] simple mortgage does not give themortgagee a right to the possession of the property unless the mortgage should containsome special provision to that effect." Regrettably for petitioner, he has not presented anyevidence, other than his own gratuitous statements, to prove that the real intention of theparties was to allow him to enjoy possession of the mortgaged property until full payment ofthe loan.

Therefore, we hold that the trial court correctly issued the writ of possession in favor ofrespondent. Such writ was but a necessary consequence of this Court's ruling in G.R. No.120832 affirming the validity of the original certificate of title (OCT No. P-13038) in thename of respondent Felicitas de Lara, while at the same time nullifying the originalcertificate of title (OCT No. P-11566) in the name of petitioner Cornelio Isaguirre.Possession is an essential attribute of ownership; thus, it would be redundant forrespondent to go back to court simply to establish her right to possess subject property.Contrary to petitioner's claims, the issuance of the writ of possession by the trial court didnot constitute an unwarranted modification of our decision in G.R. No. 120832, but rather,was a necessary complement thereto.24It bears stressing that a judgment is not confinedto what appears upon the face of the decision, but also those necessarily included thereinor necessary thereto.25

With regard to the improvements made on the mortgaged property, we confirm the Court ofAppeals' characterization of petitioner as a possessor in bad faith. Based on the factualfindings of the appellate court, it is evident that petitioner knew from the very beginning thatthere was really no sale and that he held respondent's property as mere security for thepayment of the loan obligation. Therefore, petitioner may claim reimbursement only fornecessary expenses; however, he is not entitled to reimbursement for any usefulexpenses26which he may have incurred.27

Finally, as correctly pointed out by the Court of Appeals, this case should be remanded tothe Regional Trial Court of Davao City for a determination of the total amount of the loan,the necessary expenses incurred by petitioner, and the period within which respondentmust pay such amount.28However, no interest is due on the loan since there has been noexpress stipulation in writing.29

WHEREFORE, the assailed Decision of the Court of Appeals dated October 5, 1998 and it sResolution dated March 5, 1999 are hereby AFFIRMED. Respondent is entitled to deliveryof possession of the subject property. This case is hereby REMANDED to the trial court fordetermination of the amount of the loan, the necessary expenses incurred by petitioner andthe period within which the respondent must pay the same.

SO ORDERED.

G.R. No. 112160 February 28, 2000

OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner,vs.COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES andVICENTE MAOSCA,respondents.

PURISIMA,J .:

At bar is a Petition for Review on Certiorariunder Rule 45 of the Rules of Court, seeking toreview and set aside the Decision1 of the Court of Appeals in CA-G.R. CV No. 25242,which reversed the Decision2 of Branch 59 of the Regional Trial Court of Makati City in CivilCase No. M-028; the dispositive portion of which reads:

WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDEand a new one is hereby entered DISMISSING the complaint of the spousesOsmundo and Angelina Canlas. On the counterclaim of defendant Asian SavingsBank, the plaintiffs Canlas spouses are hereby ordered to pay the defendant AsianSavings Bank the amount of P50,000.00 as moral and exemplary damages, plusP15,000.00 as and for attorney'