Pledge&Mortgage Full Text

5/28/2018 Pledge&Mortgage Full Text

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G.R. No. L-49120 June 30, 1988

ESTATE OF GEORGE LITTON, petitioner, vs. CIRIACO B. MENDOZA and COURT OFAPPEALS, respondents.

Ruben G. Bala for respondent Mendoza.

GANCAYCO, J .:

This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, whohad previously assigned in favor of his creditor his litigated credit in said case, by a deed ofassignment which was duly submitted to the court, validly enter into a compromise agreementthereafter releasing the defendant therein from his claim without notice to his assignee? and (2)Will such previous knowledge on the part of the defendant of the assignment made by theplaintiff estop said defendant from invoking said compromise as a ground for dismissal of theaction against him?

The present case stemmed from Civil Case No. Q-8303 1entitled "Alfonso Tan vs. Ciriaco B.

Mendoza," an action for the collection of a sum of money representing the value of two (2)checks which plaintiff Tan claims to have been delivered to him by defendant Mendoza, privaterespondent herein, by way of guaranty with a commission.

The record discloses that the Bernal spouses2are engaged in the manufacture of embroidery,garments and cotton materials. Sometime in September 1963, C.B.M. Products, 3with Mendozaas president, offered to sell to the Bernals textile cotton materials and, for this purpose,Mendoza introduced the Bernals to Alfonso Tan. Thus, the Bernals purchased on credit fromTan some cotton materials worth P 80,796.62, payment of which was guaranteed by Mendoza.Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the saidarrangement, on November 1963, C.B.M. Products, through Mendoza, asked and received fromthe Bernals PBTC Check No. 626405 for P 80,796.62 dated February 20, 1964 with theunderstanding that the said check will remain in the possession of Mendoza until the cottonmaterials are finally manufactured into garments after which time Mendoza will sell the finishedproducts for the Bernals. Meanwhile, the said check matured without having been cashed andMendoza demanded the issuance of another check 4in the same amount without a date.

On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 infavor of Tan in the total amount of P 80,796.62. He informed the Bernals of the same and toldthem that they are indebted to him and asked the latter to sign an instrument whereby Mendozaassigned the said amount to Insular Products Inc. Tan had the two checks issued by Mendoza

discounted in a bank. However, the said checks were later returned to Tan with the wordsstamped "stop payment" which appears to have been ordered by Mendoza for failure of theBernals to deposit sufficient funds for the check that the Bernals issued in favor of Mendoza.

Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil CaseNo. Q-8303 6while the Bernals brought an action for interpleader docketed as Civil Case No.56850 7for not knowing whom to pay. While both actions were pending resolution by the trialcourt, on March 20, 1966, Tan assigned in favor of George Litton, Sr. his litigatious credit * inCivil Case No. 56850 against Mendoza, duly submitted to the court, with notice to the parties. 8The deed of assignment was framed in the following tenor:

DEED OF ASSIGNMENT

I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon,Quezon City, doing business under the name and style ALTA COMMERCIAL by way of


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securing or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these presentsCEDE, ASSIGN, TRANSFER AND CONVEY unto the said Mr. GEORGE LITTON, SR., myclaim against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco B. Mendoza, in theamount of Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P80,796.62) the balance of which, in principal, and excluding, interests, costs, damages andattorney's fees now stands at P 76,000.00, P 4,796.62, having already been received by theassignor on December 23, 1965, pursuant to the order of the court in Civil Case No. 56850,

C.F.I., Manila, authorizing Alfonso Tan to withdraw the amount of P 4,796.62 then on depositwith the court. All rights, and interests in said net amount, plus interests and costs, and lessattorney's fees, in case the amount allowed therefor be less than the amounts claimed in therelief in Civil Case 56850 (C.F.I., Manila) and Q-8503 (C.F.I., Quezon City) are by thesepresents covered by this assignment.

I further undertake to hold in trust any and all amounts which may hereafter be realized from theaforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to himsuch amounts in application to my liability to him, as his interest may then show, and I furtherundertake to cooperate towards the successful prosecution of the aforementioned casesmaking available myself, as witness or otherwise, as well as any and all documents thereto

appertaining. ...9

After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favorof Tan for a commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whoseliability is primary and not merely as an indorser and thus directed Mendoza to pay Tan the sumof P 76,000.00, the sum still due, plus damages and attorney's fees. 10

Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No.41900-R, arguing in the main that his liability is one of an accommodation party and not as adrawer.

On January 27, 1977, the Court of Appeals rendered a decision affirming in totothe decision ofthe lower court. 11

Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza enteredinto a compromise agreement with Tan wherein the latter acknowledged that all his claimsagainst Mendoza had been settled and that by reason of said settlement both parties mutuallywaive, release and quit whatever claim, right or cause of action one may have against the other,with a provision that the said compromise agreement shall not in any way affect the right of Tanto enforce by appropriate action his claims against the Bernal spouses.12

On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision ofJanuary 27, 1977 be set aside, principally anchored upon the ground that a compromiseagreement was entered into between him and Tan which in effect released Mendoza fromliability. Tan filed an opposition to this motion claiming that the compromise agreement is nulland void as he was not properly represented by his counsel of record Atty. Quiogue, and wasinstead represented by a certain Atty. Laberinto, and principally because of the deed ofassignment that he executed in favor of George Litton, Sr. alleging that with such, he has nomore right to alienate said credit.

While the case was still pending reconsideration by the respondent court, Tan, the assignor,died leaving no properties whatever to satisfy the claim of the estate of the late George Litton,

Sr.

In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision andapproved the compromise agreement.


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As to the first ground invoked by Tan, now deceased, the respondent court ruled that the non-intervention of Tan's counsel of record in the compromise agreement does not affect the validityof the settlement on the ground that the client had an undoubted right to compromise a suitwithout the intervention of his lawyer, citingAro vs. Nanawa.14

As to the second ground, respondent court ruled as follows:

... it is relevant to note that Paragraph 1of the deed of assignment states that thecession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of securing, orguaranteeing his obligation to GEORGE LITTON, SR.

Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, CivilCode).

"Even considered as a litigations credit," which indeed characterized the claims herein ofAlfonso Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code).

Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby

the waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in favor of defendant-appellant Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr. as assignee under thedeed of assignment, may entitle Litton to pursue his remedies against Tan.

The alienation of a litigatious credit is further subject to the debtor's right of redemption underArticle 1634 of the Civil Code.

As mentioned earlier, the assignor Tan died pending resolution of the motion forreconsideration. The estate of George Litton, Sr., petitioner herein, as represented by JamesLitton, son of George Litton, Sr. and administrator15of the former's estate, is now appealing thesaid resolution to this Court as assignee of the amount sued in Civil Case No. Q-8303, inrelation to Civil Case No. 56850.

Before resolving the main issues aforementioned, the question of legal personality of hereinpetitioner to bring the instant petition for review, must be resolved.

As a rule, the parties in an appeal through a review on certiorari are the same original parties tothe case. 16If after the rendition of judgment the original party dies, he should be substituted byhis successor-in-interest. In this case, it is not disputed that no proper substitution of parties wasdone. This notwithstanding, the Court so holds that the same cannot and will not materiallyaffect the legal right of herein petitioner in instituting the instant petition in view of the tenor of

the deed of assignment, particularly paragraph two thereof17

wherein the assignor, Tan,assumed the responsibility to prosecute the case and to turn over to the assignee whateveramounts may be realized in the prosecution of the suit.

We note that private respondent moved for the dismissal of the appeal without notifying theestate of George Litton, Sr. whereas the former was fully aware of the fact that the said estate isan assignee of Tan's right in the case litigated. 18Hence, if herein petitioner failed to observethe proper substitution of parties when Alfonso Tan died during the pendency of privaterespondent's motion for reconsideration, no one is to blame but private respondent himself.Moreover, the right of the petitioner to bring the present petition is well within the concept of areal party-in-interest in the subject matter of the action. Well-settled is the rule that a real party-

in-interest is a party entitled to the avails of the suit or the party who would be injured by thejudgment. 19We see the petitioner well within the latter category.

Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring


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this petition in substitution of Tan.

Now, the resolution of the main issues.

The purpose of a compromise being to replace and terminate controverted claims, 20 courtsencourage the same. A compromise once approved by final order of the court has the force ofres judicatabetween parties and should not be disturbed except for vices of consent or forgery.21

In this case, petitioner seeks to set aside the said compromise on the ground that previousthereto, Tan executed a deed of assignment in favor of George Litton, Sr. involving the samelitigated credit.

We rule for the petitioner. The fact that the deed of assignment was done by way of securing orguaranteeing Tan's obligation in favor of George Litton, Sr., as observed by the appellate court,will not in any way alter the resolution on the matter. The validity of the guaranty or pledge infavor of Litton has not been questioned. Our examination of the deed of assignment shows thatit fulfills the requisites of a valid pledge or mortgage. 22Although it is true that Tan may validly

alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code,said provision should not be taken to mean as a grant of an absolute right on the part of theassignor Tan to indiscriminately dispose of the thing or the right given as security. The Courtrules that the said provision should be read in consonance with Article 2097 of the same code.23Although the pledgee or the assignee, Litton, Sr. did not ipso facto become the creditor ofprivate respondent Mendoza, the pledge being valid, the incorporeal right assigned by Tan infavor of the former can only be alienated by the latter with due notice to and consent of Litton,Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate thesecurity without notice and consent of the assignee will render nugatory the very purpose of apledge or an assignment of credit.

Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse theassignee, Litton, Sr. for the price he paid or for the value given as consideration for the deed ofassignment. Failing in this, the alienation of the litigated credit made by Tan in favor of privaterespondent by way of a compromise agreement does not bind the assignee, petitioner herein.

Indeed, a painstaking review of the record of the case reveals that private respondent has, fromthe very beginning, been fully aware of the deed of assignment executed by Tan in favor ofLitton, Sr. as said deed was duly submitted to Branch XI of the then Court of First Instance ofManila in Civil Case No. 56850 (in relation to Civil Case No. Q-8303) where C.B.M. Products isone of the defendants and the parties were notified through their counsel. 25 As earlier

mentioned, private respondent herein is the president of C.B.M. Products, hence, his contentionthat he is not aware of the said deed of assignment deserves scant consideration from theCourt. Petitioner pointed out at the same time that private respondent together with his counselwere served with a copy of the deed of assignment which allegation remains uncontroverted.Having such knowledge thereof, private respondent is estopped from entering into acompromise agreement involving the same litigated credit without notice to and consent of theassignee, petitioner herein. More so, in the light of the fact that no reimbursement has everbeen made in favor of the assignee as required under Article 1634. Private respondent acted inbad faith and in connivance with assignor Tan so as to defraud the petitioner in entering into thecompromise agreement.

WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court datedAugust 30,1977 is hereby SET ASIDE, the said compromise agreement being null and void,and a new one is hereby rendered reinstating its decision dated January 27, 1977, affirming intoto the decision of the lower court. This decision is immediately executory. No motion for


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extension of time to file a motion for reconsideration will be granted.

SO ORDERED.

Narvasa, Cruz and Grio-Aquino, JJ, concur.

G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee, vs. ANASTACIO TEODORO,JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

BIDIN,J .:

This is an appeal from the decision* of the Court of First Instance of Manila, Branch XVII in Civil

Case No. 78178 for collection of sum of money based on promissory notes executed by thedefendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealeddecision (Record on Appeal, p. 33) reads as follows:

WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr.and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12%interest per annum from September 30, 1969 until fully paid, in payment of Promissory NotesNo. 11487, plus the sum of P1,000.00 as attorney's fees; and (b) sentencing defendantAnastacio Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annumfrom September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and11699, plus the sum of P500.00 an attorney's fees.

With Costs against defendants.

The facts of the case as found by the trial court are as follows:

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and severally,executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payablein 120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay thesaid amount inspire of repeated demands and the obligation as of September 30, 1969 stood atP 15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and AnastacioTeodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699)for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum.Father and Son made a partial payment on the May 3, 1966 promissory Note but none on the


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June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September30, 1969 including accrued interest and service charge.

The three Promissory Notes stipulated that any interest due if not paid at the end of everymonth shall be added to the total amount then due, the whole amount to bear interest at the rateof 12% per annum until fully paid; and in case of collection through an attorney-at-law, themakers shall, jointly and severally, pay 10% of the amount over-due as attorney's fees, which in

no case shall be leas than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignmentof Receivables from the Emergency Employment Administration in the sum of P44,635.00. TheDeed of Assignment provided that it was for and in consideration of certain credits, loans,overdrafts and other credit accommodations extended to defendants as security for thepayment of said sum and the interest thereon, and that defendants do hereby remise, releaseand quitclaim all its rights, title, and interest in and to the accounts receivables. Further.

(1) The title and right of possession to said accounts receivable is to remain in the assignee,and it shall have the right to collect the same from the debtor, and whatsoever the Assignor

does in connection with the collection of said accounts, it agrees to do as agent andrepresentative of the Assignee and in trust for said Assignee ;

xxx xxx xxx

(6) The Assignor guarantees the existence and legality of said accounts receivable, and the dueand punctual payment thereof unto the assignee, ... on demand, ... and further, that Assignorwarrants the solvency and credit worthiness of each and every account.

(7) The Assignor does hereby guarantee the payment when due on all sums payable under thecontracts giving rise to the accounts receivable ... including reasonable attorney's fees inenforcing any rights against the debtors of the assigned accounts receivable and will pay upondemand, the entire unpaid balance of said contract in the event of non-payment by the saiddebtors of any monthly sum at its due date or of any other default by said debtors;

xxx xxx xxx

(9) ... This Assignment shall also stand as a continuing guarantee for any and all whatsoeverthere is or in the future there will be justly owing from the Assignor to the Assignee ...

In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to

defendants on the basis and by reason of certain contracts entered into by the defunctEmergency Employment Administration (EEA) with defendants for the fabrication of fishingboats, and that the Philippine Fisheries Commission succeeded the EEA after its abolition; thatnon-payment of the notes was due to the failure of the Commission to pay defendants after thelatter had complied with their contractual obligations; and that the President of plaintiff Banktook steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action was institutedon November 13, 1969, originally against the Father, Son, and the latter's wife. Because theFather died, however, during the pendency of the suit, the case as against him was dismissunder the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against

defendants Son and his wife for the collection of the sum of P 15,037.11 on Promissory NoteNo. 14487; and against defendant Son for the recovery of P 8,394.7.4 on Promissory NotesNos. 11515 and 11699, plus interest on both amounts at 12% per annum from September 30,1969 until fully paid, and 10% of the amounts due as attorney's fees.


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Neither of the parties presented any testimonial evidence and submitted the case for decisionbased on their Stipulations of Fact and on then, documentary evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff claim is already consideredpaid by the Deed of Assign. judgment of Receivables by the Son; and (2) whether or not it isplaintiff who should directly sue the Philippine Fisheries Commission for collection.' (Record onAppeal, p. 29- 32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972,defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied bythe trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972,defendants filed with the lower court their notice of appeal together with the appeal bond(Record on Appeal, p. 38). The record of appeal was forwarded to the Court of Appeals onAugust 22, 1972 (Record on Appeal, p. 42).

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment oferror, that is

THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THECONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TOLACK OR EXCESS OF JURISDICTION.

As the appeal involves a pure question of law, the Court of Appeals, in its resolutionpromulgated on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record onAppeal was forwarded to this Court on March 31, 1980 (Rollo, p. 1).

In the resolution of May 30, 1980, the First Division of this Court ordered that the case bedocketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the Courtand to determine whether supervening events may have rendered the case moot andacademic, the Court resolved (1) to require the parties to MOVE IN THE PREMISES withinthirty days from notice, and in case they fail to make the proper manifestation within therequired period, (2) to consider the case terminated and closed with the entry of judgmentaccordingly made thereon (Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal review interposed bydefendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment ofreceivables has the effect of payment of all the loans contracted by appellants from appelleebank; and (2) whether or not appellee bank must first exhaust all legal remedies against thePhilippine Fisheries Commission before it can proceed against appellants for collections of loanunder the promissory notes which are plaintiffs bases in the action for collection in Civil CaseNo. 78178.

Assignment of credit is an agreement by virtue of which the owner of a credit, known as theassignor, by a legal cause, such as sale, dation in payment, exchange or donation, and withoutthe need of the consent of the debtor, transfers his credit and its accessory rights to another,known as the assignee, who acquires the power to enforce it to the same extent as the assignor

could have enforced it against the debtor. ... It may be in the form of a sale, but at times it mayconstitute a dation in payment, such as when a debtor, in order to obtain a release from hisdebt, assigns to his creditor a credit he has against a third person, or it may constitute adonation as when it is by gratuitous title; or it may even be merely by way of guaranty, as when


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the creditor gives as a collateral, to secure his own debt in favor of the assignee, withouttransmitting ownership. The character that it may assume determines its requisites and effects.its regulation, and the capacity of the parties to execute it; and in every case, the obligationsbetween assignor and assignee will depend upon the judicial relation which is the basis of theassignment: (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines,Vol. 5, pp. 165-166).

There is no question as to the validity of the assignment of receivables executed by appellantsin favor of appellee bank.

The issue is with regard to its legal effects.

I

It is evident that the assignment of receivables executed by appellants on January 24, 1964 didnot transfer the ownership of the receivables to appellee bank and release appellants from theirloans with the bank incurred under promissory notes Nos. 11487,11515 and 11699.

The Deed of Assignment provided that it was for and in consideration of certain credits, loans,overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellantsby appellee bank, and as security for the payment of said sum and the interest thereon; thatappellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title andinterest in and to the accounts receivable assigned (lst paragraph). It was further stipulated thatthe assignment will also stand as a continuing guaranty for future loans of appellants toappellee bank and correspondingly the assignment shall also extend to all the accountsreceivable; appellants shall also obtain in the future, until the consideration on the loanssecured by appellants from appellee bank shall have been fully paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim inconsideration of their indebtedness to appellee bank, not mere guaranty, in view of the followingprovisions of the deed of assignment:

... the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, titleand interestin the accounts receivable described hereunder. (Emphasis supplied by appellants,first par., Deed of Assignment).

... that the title and right of possession to said account receivable is to remain in said assigneeand it shall have the right to collect directly from the debtor, and whatever the Assignor does inconnection with the collection of said accounts, it agrees to do so as agent and representative

of the Assignee and it trustfor said Assignee ...(Ibid. par. 2 of Deed of Assignment).' (Record onAppeal, p. 27)

The character of the transactions between the parties is not, however, determined by thelanguage used in the document but by their intention. Thus, the Court, quoting from theAmerican Jurisprudence (68 2d, Secured Transaction, Section 50) said:

The characters of the transaction between the parties is to be determined by their intention,regardless of what language was used or what the form of the transfer was. If it was intended tosecure the payment of money, it must be construed as a pledge. However, even though atransfer, if regarded by itself, appellate to have been absolute, its object and character might still

be qualified and explained by a contemporaneous writing declaring it to have been a deposit ofthe property as collateral security. It has been Id that a transfer of property by the debtor to acreditor, even if sufficient on its farm to make an absolute conveyance, should be treated as apledge if the debt continues in existence and is not discharged by the transfer, and that


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accordingly, the use of the terms ordinarily exporting conveyance, of absolute ownership will notbe given that effect in such a transaction if they are also commonly used in pledges andmortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in theabsence of clear and ambiguous language or other circumstances excluding an intent topledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be

said to have been constituted by virtue of a dation in payment for appellants' loans with thebank evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of thesuit for collection in Civil Case No. 78178. At the time the deed of assignment was executed,said loans were non-existent yet. The deed of assignment was executed on January 24, 1964(Exh. "G"), while promissory note No. 11487 is dated April 25, 1966 (Exh. 'A), promissory note11515, dated May 3, 1966 (Exh. 'B'), promissory note 11699, on June 20, 1966 (Exh. "C"). Atmost, it was a dation in payment for P10,000.00, the amount of credit from appellee bankindicated in the deed of assignment. At the time the assignment was executed, there was noobligation to be extinguished except the amount of P10,000.00. Moreover, in order that anobligation may be extinguished by another which substitutes the same, it is imperative that it beso declared in unequivocal terms, or that the old and the new obligations be on every point

incompatible with each other (Article 1292, New Civil Code).

Obviously, the deed of assignment was intended as collateral security for the bank loans ofappellants, as a continuing guaranty for whatever sums would be owing by defendants toplaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumptionis in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v.Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts oflease of two buildings as well as her rights, title and interest in the land on which the buildingswere constructed to secure an overdraft from a bank amounting to P110,000.00 which wasincreased to P150,000.00, then to P165,000.00 was considered by the Court to be documentsof mortgage contracts inasmuch as they were executed to guarantee the principal obligations ofthe defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Courtruled that an assignment to guarantee an obligation is in effect a mortgage and not an absoluteconveyance of title which confers ownership on the assignee (People's Bank & Trust Co. v.Odom, 64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against thePhilippine Fisheries Commission before it can proceed against appellants for collection of loansunder their promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by theassignment of receivables, appellants remain as the principal debtors of appellee bank ratherthan mere guarantors. The deed of assignment merely guarantees said obligations. That theguarantor cannot be compelled to pay the creditor unless the latter has exhausted all theproperty of the debtor, and has resorted to all the legal remedies against the debtor, underArticle 2058 of the New Civil Code does not therefore apply to them. It is of course of the

essence of a contract of pledge or mortgage that when the principal obligation becomes due,the things in which the pledge or mortgage consists may be alienated for the payment to thecreditor (Article 2087, New Civil Code). In the instant case, appellants are both the principaldebtors and the pledgors or mortgagors. Resort to one is, therefore, resort to the other.


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Appellee bank did try to collect on the pledged receivables. As the Emergency EmploymentAgency (EEA) which issued the receivables had been abolished, the collection had to becoursed through the Office of the President which disapproved the same (Record on Appeal, p.16). The receivable became virtually worthless leaving appellants' loans from appellee bankunsecured. It is but proper that after their repeated demands made on appellants for thesettlement of their obligations, appellee bank should proceed against appellants. It would be anexercise in futility to proceed against a defunct office for the collection of the receivables

pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trialcourt is affirmed in toto.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr. and Cortes, JJ., concur.

Separate Opinions

FELICIANO, J., concurring:

I quite agree with the general reasoning of and the results reached by my distinguished brotherBidin in respect of both of the principal issues he addressed in his opinion.

I would merely wish to add a few lines in respect of the point made by Bidin, J., that "thecharacter of the transactions between the parties is not, however, determined by the languageused in the document but by their intention.' This statement is basically not exceptionable, so faras it goes. It might, however, be borne in mind that the intent of the parties to the transaction isto be determined in the first instance, by the very language which they use. The deed ofassignment contains language which suggest that the parties intended to effect a completealienation of title to and rights over the receivables which are the subject of the assignment.This language is comprised of works like "remise," "release and quitclaim" and clauses like "thetitle and right of possession to said accounts receivable is to remain in said assignee" who"shall have the right to collect directly from the debtor." The same intent is also suggested by

the use of the words "agent and representative of the assignee" in reffering to the assignor.

The point that appears to me to be worth making is that although in its form, the deed ofassignment of receivables partakes of the nature of a complete alienation of the receivablesassigned, such form should be taken in conjunction with, and indeed must be qualified andcontrolled by, other language showing an intent of the parties that title to the receivables shallpass to the assignee for the limited purposeof securing another, principal; obligation owed bythe assignor to the assignee. Title moves from assignor to asignee but that title is defeasiblebeing designed to collateralize the principal obligation. Operationally, what this means is thatthe assignee is burdened with an obligation of taking the proceeds of the receivables assignedand applying such proceeds to the satisfaction of the principal obligation and returning any

balance remaining thereafter to the assignor.

The parties gave the deed of assignment the form of an absolute conveyance of title over thereceivables assigned, essentially for the convenience of the assignee. Without such formally


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unlimited conveyance of title, the assignee would have to treat the deed of assignment as nomore than a deed of pledge or of chattel mortgage. In other words, in such hypothetical case,should the assignee seek to realize upon the security given to him through the deed ofassignment (which would then have to comply with the documentation and registrationrequirements of a pledge or chattel mortgage), the assignee would have to foreclose upon thesecurities or credits assigned and place them on public sale and there acquire the same. Itshould be recalled that under the principle which forbids a pactum commisoriumArticle 2088,

Civil Code), a mortgagee or pledgee is prohibited from simply taking and appropriating thepersonal property turned over to him as security for the payment of a principal obligation. Adeed of assignment by way of security avoids the necessity of a public sale impose by the ruleon pactum commisorium, by in effect placing the sale of the collateral up front. (Emphasissupplied)

The foregoing is applicable where, as in the present instance, the deed of assignment ofreceivables combines elements of both a complete or absolute alienation of the credits beingassigned and a security arrangement to assure payment of a principal obligation. Where thesecond element is absent, that is, where there is nothing to indicate that the parties intended thedeed of assignment to function as a security device, it would of course follow that the simple

absolute conveyance embodied in the deed of assignment would be operative; the assignmentwould constitute essentially a mode of payment or dacion en pago. Put a little differently, inorder that a deed of assignment of receivables which is in form an absolute conveyance of titleto the credits being assigned, may be qualified and treated as a security arrangement, languageto such effect must be found in the document itself and that language, precisely, is embodied inthe deed of assignment in the instant case. Finally, it might be noted that that deed simplyfollows a form in standard use in commercial banking.

G.R. No. L-78519 September 26, 1989

VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners, vs. HON.COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING ENTERPRISES,INC., respondents.

Francisco A. Lara, Jr. for petitioner.

D. T. Ramos and Associates for respondent Family Savings Bank.

Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J .:

This is a petition for review on certiorari to annul and set aside the Court of Appeals' decisiondated October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision of the trial courtin favor of the private respondents in an action to recover the petitioners' time deposits in therespondent Family Savings Bank.


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Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit from CAMSTrading Enterprises, Inc. (hereafter "CAMS Trading" for brevity). To guaranty payment for hercement withdrawals, she executed in favor of Cams Trading deeds of assignment of her timedeposits in the total sum of P320,000 in the Family Savings Bank (hereafter the Bank). Exceptfor the serial numbers and the dates of the time deposit certificates, the deeds of assignment,which were prepared by her own lawyer, uniformly provided

... That the assignment serves as a collateral or guarantee for the payment of my obligation withthe said CAMS TRADING ENTERPRISES, INC. on account of my cement withdrawal from saidcompany, per separate contract executed between us.

On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account with it inthe sum of P314,639.75. It asked that it be allowed to encash the time deposit certificates whichhad been assigned to it by Mrs. Chu. It submitted to the Bank a letter dated July 18, 1980 ofMrs. Chu admitting that her outstanding account with Cams Trading was P404,500. Afterverbally advising Mrs. Chu of the assignee's request to encash her time deposit certificates andobtaining her verbal conformity thereto, the Bank agreed to encash the certificates.It deliveredto Cams Trading the sum of P283,737.75 only, as one time deposit certificate (No.

0048120954) lacked the proper signatures. Upon being informed of the encashment, Mrs. Chudemanded from the Bank and Cams Trading that her time deposit be restored. When neithercomplied, she filed a complaint to recover the sum of P283,737.75 from them. The case wasdocketed in the Regional Trial Court of Makati, Metro Manila (then CFI of Rizal, Pasig BranchXIX), as Civil Case No. 38861.

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack of merit.

Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the dismissal ofher complaint.

In this petition for review, she alleges that the Court of Appeals erred:

1. In not annulling the encashment of her time deposit certificates as a pactumcommissorium;and

2. In not finding that the obligations secured by her time deposits had already been paid.

We find no merit in the petition for review.

The Court of Appeals found that the deeds of assignment were contracts of pledge, but, as the

collateral was also money or an exchange of "peso for peso," the provision in Article 2112 of theCivil Code for the sale of the thing pledged at public auction to convert it into money to satisfythe pledgor's obligation, did not have to be followed. All that had to be done to convert thepledgor's time deposit certificates into cash was to present them to the bank for encashmentafter due notice to the debtor.

The encashment of the deposit certificates was not a pacto commissorio which is prohibitedunder Art. 2088 of the Civil Code. A pacto commissorio is a provision for the automaticappropriation of the pledged or mortgaged property by the creditor in payment of the loan uponits maturity. The prohibition against a pacto commissorio is intended to protect the obligor,pledgor, or mortgagor against being overreached by his creditor who holds a pledge or

mortgage over property whose value is much more than the debt. Where, as in this case, thesecurity for the debt is also money deposited in a bank, the amount of which is even less thanthe debt, it was not illegal for the creditor to encash the time deposit certificates to pay thedebtors' overdue obligation, with the latter's consent.


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Whether the debt had already been paid as now alleged by the debtor, is a factual questionwhich the Court of Appeals found not to have been proven for the evidence which the debtorsought to present on appeal, were receipts for payments madeprior to July 18, 1980. Since thepetitioner signed on July 18, 1980 a letter admitting her indebtedness to be in the sum ofP404,500, and there is no proof of payment made by her thereafter to reduce or extinguish herdebt, the application of her time deposits, which she had assigned to the creditor to secure thepayment of her debt, was proper. The Court of Appeals did not commit a reversible error in

holding that it was so.

WHEREFORE, the petition for review is denied. Costs against the appellant.

SO ORDERED.

Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., took no part.

G.R. No. 156132 February 6, 2007

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE

CORPORATION, doing business under the name and style of FNCB Finance, Petitioners,vs. MODESTA R. SABENIANO,Respondent.R E S O L U T I O N

CHICO-NAZARIO, J .:

On 16 October 2006, this Court promulgated its Decision1 in the above-entitled case, thedispositive portion of which reads

IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed

Decision of the Court of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as alreadymodified by its Resolution, dated 20 November 2002, is hereby AFFIRMED WITHMODIFICATION, as follows

1. PNs No. 23356 and 23357 are DECLAREDsubsisting and outstanding. Petitioner Citibank isORDEREDto return to respondent the principal amounts of the said PNs, amounting to ThreeHundred Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos(P318,897.34) and Two Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00),respectively, plus the stipulated interest of Fourteen and a half percent (14.5%) per annum,beginning 17 March 1977;

2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollarsand Ninety-Nine Cents (US$149,632.99) from respondents Citibank-Geneva accounts topetitioner Citibank in Manila, and the application of the same against respondents outstandingloans with the latter, is DECLARED illegal, null and void. Petitioner Citibank is ORDERED to


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refund to respondent the said amount, or its equivalent in Philippine currency using theexchange rate at the time of payment, plus the stipulated interest for each of the fiduciaryplacements and current accounts involved, beginning 26 October 1979;

3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of ThreeHundred Thousand Pesos (P300,000.00); exemplary damages in the amount of Two HundredFifty Thousand Pesos (P250,000.00); and attorneys fees in the amount of Two Hundred

Thousand Pesos (P200,000.00); and

4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans,which, from the respective dates of their maturity to 5 September 1979, was computed to be inthe sum of One Million Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and FortyCentavos (P1,069,847.40), inclusive of interest. These outstanding loans shall continue to earninterest, at the rates stipulated in the corresponding PNs, from 5 September 1979 until paymentthereof.

Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to Clarify and/orConfirm Decision with Notice of Judgment on 20 October 2006; while, petitioners Citibank, N.A.

and FNCB Finance2filed their Motion for Partial Reconsideration of the foregoing Decision on 6November 2006.

The facts of the case, as determined by this Court in its Decision, may be summarized asfollows.

Respondent was a client of petitioners. She had several deposits and market placements withpetitioners, among which were her savings account with the local branch of petitioner Citibank(Citibank-Manila3 ); money market placements with petitioner FNCB Finance; and dollaraccounts with the Geneva branch of petitioner Citibank (Citibank-Geneva). At the same time,respondent had outstanding loans with petitioner Citibank, incurred at Citibank-Manila, theprincipal amounts aggregating to P1,920,000.00, all of which had become due and demandableby May 1979. Despite repeated demands by petitioner Citibank, respondent failed to pay heroutstanding loans. Thus, petitioner Citibank used respondents deposits and money marketplacements to off-set and liquidate her outstanding obligations, as follows

Respondents outstanding obligation (principal and interest as of 26 October 1979) P 2,156,940.58Less:

Proceeds from respondents money market placements with petitionerFNCB Finance (principal and interest as of 5 September 1979) (1,022,916.66)Deposits in respondents bank accounts with petitioner Citibank (31,079.14)Proceeds of respondents money market placements and dollar accounts

with Citibank-Geneva (peso equivalent as of 26 October 1979) (1,102,944.78)Balance of respondents obligationP 0.00

Respondent, however, denied having any outstanding loans with petitioner Citibank. Shelikewise denied that she was duly informed of the off-setting or compensation thereof made bypetitioner Citibank using her deposits and money market placements with petitioners. Hence,respondent sought to recover her deposits and money market placements.

Respondent instituted a complaint for "Accounting, Sum of Money and Damages" againstpetitioners, docketed as Civil Case No. 11336, before the Regional Trial Court (RTC) of MakatiCity. After trial proper, which lasted for a decade, the RTC rendered a Decision4on 24 August

1995, the dispositive portion of which reads

WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:


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(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitionerCitibank] of plaintiffs [respondent Sabeniano] dollar deposit with Citibank, Switzerland, in theamount of US$149,632.99, and ordering the said defendant [petitioner Citibank] to refund thesaid amount to the plaintiff with legal interest at the rate of twelve percent (12%) per annum,compounded yearly, from 31 October 1979 until fully paid, or its peso equivalent at the time ofpayment;

(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitionerCitibank] in the amount of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff[respondent Sabeniano] to pay said amount, however, there shall be no interest and penaltycharges from the time the illegal setoff was effected on 31 October 1979;

(3) Dismissing all other claims and counterclaims interposed by the parties against each other.

Costs against the defendant Bank.

All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals, docketedas CA-G.R. CV No. 51930. On 26 March 2002, the appellate court promulgated its Decision, 5

ruling entirely in favor of respondent, to wit

Wherefore, premises considered, the assailed 24 August 1995 Decisionof the court a quo ishereby AFFIRMED with MODIFICATION, as follows:

1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of theplaintiff-appellants dollar deposit with Citibank, Switzerland, in the amount of US$149,632.99,and ordering defendant-appellant Citibank to refund the said amount to the plaintiff-appellantwith legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31October 1979 until fully paid, or its peso equivalent at the time of payment;

2. As defendant-appellant Citibank failed to establish by competent evidence the allegedindebtedness of plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms. Sabenianois hereby declared as without legal and factual basis;

3. As defendants-appellants failed to account the following plaintiff-appellants money marketplacements, savings account and current accounts, the former is hereby ordered to return thesame, in accordance with the terms and conditions agreed upon by the contending parties asevidenced by the certificates of investments, to wit:

(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17

March 1977, P318,897.34 with 14.50% interest p.a.;

(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17March 1977, P203,150.00 with 14.50 interest p.a.;

(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02June 1977, P500,000.00 with 17% interest p.a.;

(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02June 1977, P500,000.00 with 17% interest per annum;

(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with the AyalaInvestment & Development Corporation (AIDC) with legal interest at the rate of twelve percent(12%) per annum compounded yearly, from 30 September 1976 until fully paid;


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4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum ofFIVE HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVEHUNDRED THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDREDTHOUSAND PESOS (P100,000.00) as attorneys fees.

Acting on petitioners Motion for Partial Reconsideration, the Court of Appeals issued aResolution,6dated 20 November 2002, modifying its earlier Decision, thus

WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLYGRANTED as Sub-paragraph (V) paragraph 3 of the assailed Decisionsdispositive portion ishereby ordered DELETED.

The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.

Since the Court of Appeals Decision, dated 26 March 2002, as modified by the Resolution of thesame court, dated 20 November 2002, was still principally in favor of respondent, petitionersfiled the instant Petition for Review on Certiorariunder Rule 45 of the Revised Rules of Court.After giving due course to the instant Petition, this Court promulgated on 16 October 2006 its

Decision, now subject of petitioners Motion for Partial Reconsideration.1awphi1.net

Among the numerous grounds raised by petitioners in their Motion for Partial Reconsideration,this Court shall address and discuss herein only particular points that had not been consideredor discussed in its Decision. Even in consideration of these points though, this Court remainsunconvinced that it should modify or reverse in any way its disposition of the case in its earlierDecision.

As to the off-setting or compensation of respondents outstanding loan balance with her dollardeposits in Citibank-Geneva

Petitioners take exception to the following findings made by this Court in its Decision, dated 16October 2006, disallowing the off-setting or compensation of the balance of respondentsoutstanding loans using her dollar deposits in Citibank-Geneva

Without the Declaration of Pledge, petitioner Citibank had no authority to demand theremittance of respondents dollar accounts with Citibank-Geneva and to apply them to heroutstanding loans. It cannot effect legal compensation under Article 1278 of the Civil Codesince, petitioner Citibank itself admitted that Citibank-Geneva is a distinct and separate entity.As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the debtor; andas for the outstanding loans, petitioner Citibank was the creditor and respondent was the

debtor. The parties in these transactions were evidently not the principal creditor of each other.

Petitioners maintain that respondents Declaration of Pledge, by virtue of which she supposedlyassigned her dollar accounts with Citibank-Geneva as security for her loans with petitionerCitibank, is authentic and, thus, valid and binding upon respondent. Alternatively, petitionersaver that even without said Declaration of Pledge, the off-setting or compensation made bypetitioner Citibank using respondents dollar accounts with Citibank-Geneva to liquidate thebalance of her outstanding loans with Citibank-Manila was expressly authorized by respondentherself in the promissory notes (PNs) she signed for her loans, as well as sanctioned by Articles1278 to 1290 of the Civil Code. This alternative argument is anchored on the premise that allbranches of petitioner Citibank in the Philippines and abroad are part of a single worldwide

corporate entity and share the same juridical personality. In connection therewith, petitionersdeny that they ever admitted that Citibank-Manila and Citibank-Geneva are distinct andseparate entities.


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Petitioners call the attention of this Court to the following provision found in all of the PNs 7executed by respondent for her loans

At or after the maturity of this note, or when same becomes due under any of the provisionshereof, any money, stocks, bonds, or other property of any kind whatsoever, on deposit orotherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in transit or in theirpossession, may without notice be applied at the discretion of the said bank to the full or partial

payment of this note.

It is the petitioners contention that the term "Citibank, N.A." used therein should be deemed torefer to all branches of petitioner Citibank in the Philippines and abroad; thus, giving petitionerCitibank the authority to apply as payment for the PNs even respondents dollar accounts withCitibank-Geneva. Still proceeding from the premise that all branches of petitioner Citibankshould be considered as a single entity, then it should not matter that the respondent obtainedthe loans from Citibank-Manila and her deposits were with Citibank-Geneva. Respondentshould be considered the debtor (for the loans) and creditor (for her deposits) of the sameentity, petitioner Citibank. Since petitioner Citibank and respondent were principal creditors ofeach other, in compliance with the requirements under Article 1279 of the Civil Code,8then the

former could have very well used off-setting or compensation to extinguish the partiesobligations to one another. And even without the PNs, off-setting or compensation was stillauthorized because according to Article 1286 of the Civil Code, "Compensation takes place byoperation of law, even though the debts may be payable at different places, but there shall bean indemnity for expenses of exchange or transportation to the place of payment."

Pertinent provisions of Republic Act No. 8791, otherwise known as the General Banking Law of2000, governing bank branches are reproduced below

SEC. 20. Bank Branches.Universal or commercial banks may open branches or other officeswithin or outside the Philippines upon prior approval of the Bangko Sentral.

Branching by all other banks shall be governed by pertinent laws.

A bank may, subject to prior approval of the Monetary Board, use any or all of its branches asoutlets for the presentation and/or sale of the financial products of its allied undertaking or itsinvestment house units.

A bank authorized to establish branches or other offices shall be responsible for all businessconducted in such branches and offices to the same extent and in the same manner as thoughsuch business had all been conducted in the head office. A bank and its branches and offices

shall be treated as one unit.

x x x x

SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in thePhilippines through the establishment of branches shall be governed by the provisions of theForeign Banks Liberalization Act.

The conduct of offshore banking business in the Philippines shall be governed by the provisionsof Presidential Decree No. 1034, otherwise known as the "Offshore Banking System Decree."

x x x x

SEC. 74. Local Branches of Foreign Banks.In case of a foreign bank which has more thanone (1) branch in the Philippines, all such branches shall be treated as one (1) unit for the


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purpose of this Act, and all references to the Philippine branches of foreign banks shall be heldto refer to such units.

SEC. 75. Head Office Guarantee.In order to provide effective protection of the interests of thedepositors and other creditors of Philippine branches of a foreign bank, the head office of suchbranches shall fully guarantee the prompt payment of all liabilities of its Philippine branch.

Residents and citizens of the Philippines who are creditors of a branch in the Philippines of aforeign bank shall have preferential rights to the assets of such branch in accordance withexisting laws.

Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law, lays downthe policies and regulations specifically concerning the establishment and operation of localbranches of foreign banks. Relevant provisions of the said statute read

Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to operate in thePhilippine banking system through any of the following modes of entry: (i) by acquiring,purchasing or owning up to sixty percent (60%) of the voting stock of an existing bank; (ii) by

investing in up to sixty percent (60%) of the voting stock of a new banking subsidiaryincorporated under the laws of the Philippines; or (iii) by establishing branches with full bankingauthority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided,further, That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) ofthe voting stock of only one (1) domestic bank or new banking subsidiary.

Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall guaranteeprompt payment of all liabilities of its Philippine branches.

It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly statesthat the bank and its branches shall be treated as one unit. It should be pointed out, however,that the said provision applies to a universal9 or commercial bank,10 duly established andorganized as a Philippine corporation in accordance with Section 8 of the same statute,11andauthorized to establish branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the same categorical statement asregards to foreign banks and their branches in the Philippines. What Section 74 of the said lawprovides is that in case of a foreign bank with several branches in the country, all such branchesshall be treated as one unit. As to the relations between the local branches of a foreign bankand its head office, Section 75 of the General Banking Law of 2000 and Section 5 of the ForeignBanks Liberalization Law provide for a "Home Office Guarantee," in which the head office of the

foreign bank shall guarantee prompt payment of all liabilities of its Philippine branches. Whilethe Home Office Guarantee is in accord with the principle that these local branches, togetherwith its head office, constitute but one legal entity, it does not necessarily support the view thatsaid principle is true and applicable in all circumstances.

The Home Office Guarantee is included in Philippine statutes clearly for the protection of theinterests of the depositors and other creditors of the local branches of a foreign bank. 12Sincethe head office of the bank is located in another country or state, such a guarantee is necessaryso as to bring the head office within Philippine jurisdiction, and to hold the same answerable forthe liabilities of its Philippine branches. Hence, the principle of the singular identity of that thelocal branches and the head office of a foreign bank are more often invoked by the clients in

order to establish the accountability of the head office for the liabilities of its local branches. It isunder such attendant circumstances in which the American authorities and jurisprudencepresented by petitioners in their Motion for Partial Reconsideration were rendered.


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Now the question that remains to be answered is whether the foreign bank can use the principlefor a reverse purpose, in order to extend the liability of a client to the foreign banks Philippinebranch to its head office, as well as to its branches in other countries. Thus, if a client obtains aloan from the foreign banks Philippine branch, does it absolutely and automatically make theclient a debtor, not just of the Philippine branch, but also of the head office and all otherbranches of the foreign bank around the world? This Court rules in the negative.

There being a dearth of Philippine authorities and jurisprudence on the matter, this Court, justas what petitioners have done, turns to American authorities and jurisprudence. Americanauthorities and jurisprudence are significant herein considering that the head office of petitionerCitibank is located in New York, United States of America (U.S.A.).

Unlike Philippine statutes, the American legislation explicitly defines the relations among foreignbranches of an American bank. Section 25 of the United States Federal Reserve Act 13statesthat

Every national banking association operating foreign branches shall conduct the accounts ofeach foreign branch independently of the accounts of other foreign branches established by it

and of its home office, and shall at the end of each fiscal period transfer to its general ledger theprofit or loss accrued at each branch as a separate item.

Contrary to petitioners assertion that the accounts of Citibank-Manila and Citibank-Genevashould be deemed as a single account under its head office, the foregoing provision mandatesthat the accounts of foreign branches of an American bank shall be conducted independently ofeach other. Since the head office of petitioner Citibank is in the U.S.A., then it is bound to treatits foreign branches in accordance with the said provision. It is only at the end of its fiscal periodthat the bank is required to transfer to its general ledger the profit or loss accrued at eachbranch, but still reporting it as a separate item. It is by virtue of this provision that the CircuitCourt of Appeals of New York declared in Pan-American Bank and Trust Co. v. National CityBank of New York14 that a branch is not merely a tellers window; it is a separate businessentity.

The circumstances in the case of McGrath v. Agency of Chartered Bank of India, Australia &China15are closest to the one at bar. In said case, the Chartered Bank had branches in severalcountries, including one in Hamburg, Germany and another in New York, U.S.A., and yetanother in London, United Kingdom. The New York branch entered in its books credit in favor offour German firms. Said credit represents collections made from bills of exchange delivered bythe four German firms. The same four German firms subsequently became indebted to theHamburg branch. The London branch then requested for the transfer of the credit in the name

of the German firms from the New York branch so as to be applied or setoff against theindebtedness of the same firms to the Hamburg branch. One of the question brought before theU.S. District Court of New York was "whether or not the debts and the alleged setoffs theretoare mutual," which could be answered by determining first whether the New York and Hamburgbranches of Chartered Bank are individual business entities or are one and the same entity. Indenying the right of the Hamburg branch to setoff, the U.S. District Court ratiocinated that

The structure of international banking houses such as Chartered bank defies one rigorousdescription. Suffice it to say for present analysis, branches o r agencies of an internat ionalbank h ave been held to be independent ent i t ies for a variety of p urpos es (a) depositspayable only at branch where made; Mutaugh v. Yokohama Specie Bank, Ltd., 1933, 149 Misc.

693, 269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S.319; (b) checks need be honored only when drawn on branch where deposited; Chrzanowska v.Corn Exchange Bank, 1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728,122 N.E. 877; subpoena duces tecum on foreign banks record barred; In re Harris,


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D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch separate for collection of forwardedpaper; Pan-American Bank and Trust Company v. National City Bank of New York, 2 Cir., 1925,6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in lawthere is nothing innately unitary about the organizat ion of internat ional banking

inst i tu t ions.

Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v. National City

Bank of New York, 1928, 250 N.Y. 69, 164 N.E. 745, as authority for the proposition thatChartered Bank, not the Hamburg or New York Agency, is ultimately responsible for theamounts owing its German customers and, conversely, it is to Chartered Bank that the Germanfirms owe their obligations. The Sokoloffcase, aside from its violently different fact situation, iscentered on the legal problem of default of payment and consequent breach of contract by abranch bank. It does n ot stand for the prin cip le that in every instance an internat ionalbank w ith branches is but o ne legal ent ity for al l purpos es.The defendant concedes in itsbrief (p. 15) that there are purposes for which the various agencies and branches of CharteredBank may be treated in law as separate entities. I fail to see the applicability of Sokoloffeitheras a guide to or authority for the resolution of this problem. The facts before me and the casescatalogued supralend weight to the view that we are dealing here with Agencies independent of

one another.

x x x x

I hold that for instant purposes the Hamburg Agency and defendant were independent businessentities, and the attempted setoff may not be utilized by defendant against its debt to theGerman firms obligated to the Hamburg Agency.

Going back to the instant Petition, although this Court concedes that all the Philippine branchesof petitioner Citibank should be treated as one unit with its head office, it cannot be persuadedto declare that these Philippine branches are likewise a single unit with the Geneva branch. Itwould be stretching the principle way beyond its intended purpose.

Therefore, this Court maintains its original position in the Decision that the off-setting orcompensation of respondents loans with Citibank-Manila using her dollar accounts withCitibank-Geneva cannot be effected. The parties cannot be considered principal creditor of theother. As for the dollar accounts, respondent was the creditor and Citibank-Geneva was thedebtor; and as for the outstanding loans, petitioner Citibank, particularly Citibank-Manila, wasthe creditor and respondent was the debtor. Since legal compensation was not possible,petitioner Citibank could only use respondents dollar accounts with Citibank-Geneva toliquidate her loans if she had expressly authorized it to do so by contract.

Respondent cannot be deemed to have authorized the use of her dollar deposits with Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the PNs 16for her loanswhich all contained the provision that

At or after the maturity of this note, or when same becomes due under any of the provisionshereof, any money, stocks, bonds, or other property of any kind whatsoever, on deposit orotherwise, to the credit of the undersigned on the books of CITIBANK, N.A. in transit or in theirpossession, may without notice be applied at the discretion of the said bank to the full or partialpayment of this note.

As has been established in the preceding discussion, "Citibank, N.A." can only refer to the localbranches of petitioner Citibank together with its head office. Unless there is any showing thatrespondent understood and expressly agreed to a more far-reaching interpretation, thereference to Citibank, N.A. cannot be extended to all other branches of petitioner Citibank all


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over the world. Although theoretically, books of the branches form part of the books of the headoffice, operationally and practically, each branch maintains its own books which shall only belater integrated and balanced with the books of the head office. Thus, it is very possible toidentify and segregate the books of the Philippine branches of petitioner Citibank from those ofCitibank-Geneva, and to limit the authority granted for application as payment of the PNs torespondents deposits in the books of the former.

Moreover, the PNs can be considered a contract of adhesion, the PNs being in standard printedform prepared by petitioner Citibank. Generally, stipulations in a contract come about afterdeliberate drafting by the parties thereto, there are certain contracts almost all the provisions ofwhich have been drafted only by one party, usually a corporation. Such contracts are calledcontracts of adhesion, because the only participation of the party is the affixing of his signatureor his "adhesion" thereto. This being the case, the terms of such contract are to be construedstrictly against the party which prepared it.17

As for the supposed Declaration of Pledge of respondents dollar accounts with Citibank-Geneva as security for the loans, this Court stands firm on its ruling that the non-productionthereof is fatal to petitioners cause in light of respondents claim that her signature on such

document was a forgery. It bears to note that the original of the Declaration of Pledge is withCitibank-Geneva, a branch of petitioner Citibank. As between respondent and petitionerCitibank, the latter has better access to the document. The constant excuse forwarded bypetitioner Citibank that Citibank-Geneva refused to return possession of the original Declarationof Pledge to Citibank-Manila only supports this Courts finding in the preceding paragraphs thatthe two branches are actually operating separately and independently of each other.

Further, petitioners keep playing up the fact that respondent, at the beginning of the trial,refused to give her specimen signatures to help establish whether her signature on theDeclaration of Pledge was indeed forged. Petitioners seem to forget that subsequently,respondent, on advice of her new counsel, already offered to cooperate in whatever manner soas to bring the original Declaration of Pledge before the RTC for inspection. The exchange ofthe counsels for the opposing sides during the hearing on 24 July 1991 before the RTC revealsthe apparent willingness of respondents counsel to undertake whatever course of actionnecessary for the production of the contested document, and the evasive, non-committal, anduncooperative attitude of petitioners counsel.18

Lastly, this Courts ruling striking down the Declaration of Pledge is not entirely based onrespondents allegation of forgery. In its Decision, this Court already extensively discussed whyit found the said Declaration of Pledge highly suspicious and irregular, to wit

First of all, it escapes this Court why petitioner Citibank took care to have the Deeds ofAssignment of the PNs notarized, yet left the Declaration of Pledge unnotarized. This Courtwould think that petitioner Citibank would take greater cautionary measures with the preparationand execution of the Declaration of Pledge because it involved respondents "all present andfuture fiduciary placements" with a Citibank branch in another country, specifically, in Geneva,Switzerland. While there is no express legal requirement that the Declaration of Pledge had tobe notarized to be effective, even so, it could not enjoy the same prima faciepresumption ofdue execution that is extended to notarized documents, and petitioner Citibank must dischargethe burden of proving due execution and authenticity of the Declaration of Pledge.

Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge

was actually executed. The photocopy of the Declaration of Pledge submitted by petitionerCitibank before the RTC was undated. It presented only a photocopy of the pledge because italready forwarded the original copy thereof to Citibank-Geneva when it requested for theremittance of respondents dollar accounts pursuant thereto. Respondent, on the other hand,


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was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the date 24 September 1979. Respondent, however, presented herpassport and plane tickets to prove that she was out of the country on the said date and couldnot have signed the pledge. Petitioner Citibank insisted that the pledge was signed before 24September 1979, but could not provide an explanation as to how and why the said date waswritten on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed byrespondent personally before him, he could not give the exact date when the said signing took

place. It is important to note that the copy of the Declaration of Pledge submitted by therespondent to the RTC was certified by an officer of Citibank-Geneva, which had possession ofthe original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by thepresumption that the written document is truly dated. Since it is undeniable that respondent wasout of the country on 24 September 1979, then she could not have executed the pledge on thesaid date.

Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printedform. It was constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. Itshould be noted, however, that in the space which should have named the pledgor, the name ofpetitioner Citibank was typewritten, to wit

The pledge right herewith constituted shall secure all claims which the Bank now has or in thefuture acquires against Citibank, N.A., Manila (full name and address of the Debtor), regardlessof the legal cause or the transaction (for example current account, securities transactions,collections, credits, payments, documentary credits and collections) which gives rise thereto,and including principal, all contractual and penalty interest, commissions, charges, and costs.

The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was amistake made by whoever filled-out the form? Yes, it could be a possibility. Nonetheless,considering the value of such a document, the mistake as to a significant detail in the pledgecould only be committed with gross carelessness on the part of petitioner Citibank, and raisedserious doubts as to the authenticity and due execution of the same. The Declaration of Pledgehad passed through the hands of several bank officers in the country and abroad, yet,surprisingly and implausibly, no one noticed such a glaring mistake.

Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimedthat the signature was a forgery. When a document is assailed on the basis of forgery, the bestevidence rule applies

Basic is the rule of evidence that when the subject of inquiry is the contents of a document, noevidence is admissible other than the original document itself except in the instances mentioned

in Section 3, Rule 130 of the Revised Rules of Court. Mere photocopies of documents areinadmissible pursuant to the best evidence rule. This is especial ly true when the iss ue is thatof forgery.

As a rule, forgery cannot be presumed and must be proved by clear, positive and convincingevidence and the burden of proof lies on the party alleging forgery. The best evidence of aforged signature in an instrument is the instrument itself reflecting the alleged forged signature.The fact of forgery can only be established by a comparison between the alleged forgedsignature and the authentic and genuine signature of the person whose signature is theorizedupon to have been forged. Without the original document containing the alleged forgedsignature, one cannot make a definitive comparison which would establish forgery. A

comparison based on a mere xerox copy or reproduction of the document under controversycannot produce reliable results.

Respondent made several attempts to have the original copy of the pledge produced before the


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RTC so as to have it examined by experts. Yet, despite several Orders by the RTC, petitionerCitibank failed to comply with the production of the original Declaration of Pledge. It is admittedthat Citibank-Geneva had possession of the original copy of the pledge. While petitionerCitibank in Manila and its branch in Geneva may be separate and distinct entities, they are stillincontestably related, and between petitioner Citibank and respondent, the former had moreinfluence and resources to convince Citibank-Geneva to return, albeit temporarily, the originalDeclaration of Pledge. Petitioner Citibank did not present any evidence to convince this Court

that it had exerted diligent efforts to secure the original copy of the pledge, nor did it proffer thereason why Citibank-Geneva obstinately refused to give it back, when such document wouldhave been very vital to the case of petitioner Citibank. There is thus no justification to allow thepresentation of a mere photocopy of the Declaration of Pledge in lieu of the original, and thephotocopy of the pledge presented by petitioner Citibank has nil probative value. In addition,even if this Court cannot make a categorical finding that respondents signature on the originalcopy of the pledge was forged, it is persuaded that petitioner Citibank willfully suppressed thepresentation of the original document, and takes into consideration the presumption that theevidence willfully suppressed would be adverse to petitioner Citibank if produced.

As far as the Declaration of Pledge is concerned, petitioners failed to submit any new evidence

or argument that was not already considered by this Court when it rendered its Decision.

As to the value of the dollar deposits in Citibank-Geneva ordered refunded to respondent

In case petitioners are still ordered to refund to respondent the amount of her dollar accountswith Citibank-Geneva, petitioners beseech this Court to adjust the nominal values ofrespondents dollar accounts and/or her overdue peso loans by using the values of thecurrencies stipulated at the time the obligations were established in 1979, to address thealleged inequitable consequences resulting from the extreme and extraordinary devaluation ofthe Philippine currency that occurred in the course of the Asian crisis of 1997. Petitioners basetheir request on Article 1250 of the Civil Code which reads, "In case an extraordinary inflation ordeflation of the currency stipulated should supervene, the value of the currency at the time ofthe establishment of the obligation shall be the basis of payment, unless there is an agreementto the contrary."

It is well-settled that Article 1250 of the Civil Code becomes applicable only when there isextraordinary inflation or deflation of the currency. Inflation has been defined as the sharpincrease of money or credit or both without a corresponding increase in business transaction.There is inflation when there is an increase in the volume of money and credit relative toavailable goods resulting in a substantial and continuing rise in the general price level. 19 InSingson v. Caltex (Philippines), Inc.,20 this Court already provided a discourse as to what

constitutes as extraordinary inflation or deflation of currency, thus

We have held extraordinary inflation to exist when there is a decrease or increase in thepurchasing power of the Philippine currency which is unusual or beyond the common fluctuationin the value of said currency, and such increase or decrease could not have been reasonablyforeseen or was manifestly beyond the contemplation of the parties at the time of theestablishment of the obligation.

An example of extraordinary inflation, as cited by the Court in Filipino Pipe and FoundryCorporation vs. NAWASA, supra, is that which happened to the deutschmarkin 1920. Thus:

"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, thevalue of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbledto 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas & Victor R. Abola, Economics, An


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Introduction[Third Edition]).

As reported, "prices were going up every week, then every day, then every hour. Women werepaid several times a day so that they could rush out and exchange their money for something ofvalue before what little purchasing power was left dissolved in their hands. Some workers triedto beat the constantly rising prices by throwing their money out of the windows to their waitingwives, who would rush to unload the nearly worthless paper. A postage stamp cost millions of

marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York: Simonand Schuster, 1975, p. 19, cited in "Economics, An Introduction"by Villegas & Abola, 3rd ed.)

The supervening of extraordinary inflation is never assumed. The party alleging it must lay downthe factual basis for the application of Article 1250.

Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records andstatistics submitted by plaintiff-appellant proved that there has been a decline in the purchasingpower of the Philippine peso, but this downward fall cannot be considered "extraordinary" butwas simply a universal trend that has not spared our country. Similarly, in Huibonhoa vs. Courtof Appeals, the Court dismissed plaintiff-appellant's unsubstantiated allegation that the Aquino

assassination in 1983 caused building and construction costs to double during the period July1983 to February 1984. In Serra vs. Court of Appeals, the Court again did not consider thedecline in the peso's purchasing power from 1983 to 1985 to be so great as to result in anextraordinary inflation.

Like the Serraand Huibonhoacases, the instant case also raises as basis for the application ofArticle 1250 the Philippine economic crisis in the early 1980s --- when, based on petitioner'sevidence, the inflation rate rose to 50.34% in 1984. We hold that there is no legal or factualbasis to support petitioner's allegation of the existence of extraordinary inflation during thisperiod, or, for that matter, the entire time frame of 1968 to 1983, to merit the adjustment of therentals in the lease contract dated July 16, 1968. Although by petitioner's evidence there was adecided decline in the purchasing power of the Philippine peso throughout this period, we arehard put to treat this as an "extraordinary inflation" within the meaning and intent of Article 1250.

Rather, we adopt with approval the following observations of the Court of Appeals onpetitioner's evidence, especially the NEDA certification of inflation rates based on consumerprice index:

xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in anysingle year; (b) the highest official inflation rate recorded was in 1984 which reached only50.34%; (c) over a twenty one (21) year period, the Philippines experienced a single-digit

inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975, 1976, 1977, 1978, 1983 and1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982, 1984 and1989) when the Philippines experienced double-digit inflation rates, the average of those rateswas only 20.88%; (e) while there was a decline in the purchasing power of the Philippinecurrency from the period 1966 to 1986, such cannot be considered as extraordinary; rather, it isa normal erosion of the value of the Philippine peso which is a characteristic of most currencies.

"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in thepast three to four decades. Unfortunate as this trend may be, it is certainly distinct from thephenomenon contemplated by Article 1250.

Moreover, this Court has held that the effects of extraordinary inflation are not to be appliedwithout an official declaration thereof by competent authorities.

The burden of proving that there had been extraordinary inflation or deflation of the currency is


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upon the party that alleges it. Such circumstance must be proven by competent evidence, and itcannot be merely assumed. In this case, petitioners presented no proof as to how much, forinstance, the price index of goods and services had risen during the intervening period.21All theinformation petitioners provided was the drop of the U.S. dollar-Philippine peso exchange rateby 17 points from June 1997 to January 1998. While the said figure was based on the statisticsof the Bangko Sentral ng Pilipinas (BSP), it is also significant to note that the BSP did notcategorically declare that the same constitute as an extraordinary inflation. The existence of

extraordinary inflation must be officially proclaimed by competent authorities, and the onlycompetent authority so far recognized by this Court to make such an official proclamation is theBSP.22

Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997,already declare that there had been extraordinary inflation. It should be recalled that thePhilippines likewise experienced economic crisis in the 1980s, yet this C

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