CREDIT
TRANSACTION
Reviewer II
Security
Transactions
Att.
Anthony Peralta
by Olive
Cachapero
LETTERS OF CREDIT
|
TRANSFIELD PHILIPPINES, INC. V. LUZON HYDRO
CORPORATION AUSTRALIA, ET. AL., (2004)
Letters of Credit
: General Concepts, Code of Commerce, Art. 567, Art. 568, Art. 2
Nature
and use of letters of credit (credits)
·
The relationship between the beneficiary and the
issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right.
·
Nor
is it a third-party beneficiary contract, because the issuer must honor
drafts drawn against a letter regardless of problems subsequently arising in
the underlying contract. Since the bank’s customer cannot draw on the
letter, it does not function as an assignment by the customer to the
beneficiary.
·
Nor,
if properly used, is it a contract of suretyship or guarantee, because
it entails a primary liability following a default.
·
Finally, it is not
in itself a negotiable instrument, because it is not payable to order or
bearer and is generally conditional, yet the draft presented under it is often
negotiable.
ü In
commercial transactions, a letter of credit is a financial
device developed by merchants as a convenient and relatively safe mode of
dealing with sales of goods to satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods before he is paid, and a buyer,
who wants to have control of the goods before paying.
ü The
use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of
goods.
ü However,
credits are also used in non-sale settings where they serve to reduce the
risk of nonperformance. Generally, credits in the non-sale settings
have come to be known as standby credits.
Commercial credits
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Standby credits
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involve the payment of money
under a contract of sale
|
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become payable upon the
presentation by the seller-beneficiary of documents that show he has taken
affirmative steps to comply with the sales agreement.
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the credit is payable upon
certification of a party's nonperformance of the agreement.
Ø The documents that accompany the beneficiary's draft
tend to show that the applicant has not performed.
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The beneficiary of a commercial
credit must demonstrate by documents that he has performed his contract.
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The beneficiary of the standby
credit must certify that his obligor has not performed the contract.
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A letter of credit is a written
instrument whereby the writer requests or authorizes the addressee to pay money
or deliver goods to a third person and assumes responsibility for payment of
debt therefor to the addressee. A letter of credit, however, changes its nature
as different transactions occur and if carried through to completion ends up as
a binding contract between the issuing and honoring banks without any regard or
relation to the underlying contract or disputes between the parties thereto.
Independence
principle
·
Thus, the engagement of the issuing bank is to pay
the seller or beneficiary of the credit once the draft and the required
documents are presented to it. The so-called “independence principle”
assures the seller or the beneficiary of prompt payment independent of any
breach of the main contract and precludes the issuing bank from determining
whether the main contract is actually accomplished or not.
·
Under this principle, banks assume no liability or
responsibility for the form, sufficiency, accuracy, genuineness, falsification
or legal effect of any documents, or for the general and/or particular
conditions stipulated in the documents or superimposed thereon, nor do they
assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or omissions,
solvency, performance or standing of the consignor, the carriers, or the
insurers of the goods, or any other person whomsoever.
The independent nature of the letter of credit may
be:
a) independence in toto where the credit is independent from
the justification aspect and is a separate obligation from the underlying
agreement like for instance a typical standby; or
b) independence
may be only as to the justification aspect like in a commercial letter of
credit or repayment standby, which is identical with the same obligations under
the underlying agreement. In both cases the payment may be enjoined if in
the light of the purpose of the credit the payment of the credit would
constitute fraudulent abuse of the credit.
Issue:
Can the beneficiary invoke the independence
principle? YES.
ü In
a letter of credit transaction, such as in this case, where the credit is
stipulated as irrevocable, there is a definite undertaking by the issuing bank
to pay the beneficiary provided that the stipulated documents are presented and
the conditions of the credit are complied with. Precisely, the independence
principle liberates the issuing bank from the duty of ascertaining compliance
by the parties in the main contract.
ü As
the principle’s nomenclature clearly suggests, the obligation under the letter
of credit is independent of the related and originating contract. In
brief, the letter of credit is separate and distinct from the underlying
transaction.
Held:
Given the nature of letters of credit, petitioner’s
argument—that it is only the issuing bank that may invoke the independence
principle on letters of credit—does not impress this Court. To say that the
independence principle may only be invoked by the issuing banks would render
nugatory the purpose for which the letters of credit are used in commercial
transactions. As it is, the independence doctrine works to the benefit
of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties
desiring to enter into commercial transactions, not for the benefit of the
issuing bank but mainly for the benefit of the parties to the original
transactions.
Ø With
the letter of credit from the issuing bank, the party who applied for and
obtained it may confidently present the letter of credit to the beneficiary as
a security to convince the beneficiary to enter into the business
transaction.
Ø The
other party to the business transaction, i.e.,
the beneficiary of the letter of credit, can be rest assured of being empowered
to call on the letter of credit as a security in case the commercial
transaction does not push through, or the applicant fails to perform his part
of the transaction. It is for this reason that the party who is entitled
to the proceeds of the letter of credit is appropriately called “beneficiary.”
Respondent banks had squarely raised the
independence principle to justify their releases of the amounts due under the
Securities. Owing to the nature and purpose of the standby letters of
credit, this Court rules that the respondent banks were left with little or no
alternative but to honor the credit and both of them in fact submitted that it
was “ministerial” for them to honor the call for payment.
“Fraud
exception” principle
Citing Dolan’s treatise on letters of credit,
petitioner argues that the independence principle is not without limits and it
is important to fashion those limits in light of the principle’s purpose, which
is to serve the commercial function of the credit.
Issue:
Would injunction then be the proper remedy to
restrain the alleged wrongful draws on the Securities?
Most writers agree that fraud is an exception to
the independence principle. Professor Dolan opines that the
untruthfulness of a certificate accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to support an injunction against
payment. The remedy for fraudulent abuse is
an injunction. However, injunction should not be granted
unless:
a) there
is clear proof of fraud;
b) the
fraud constitutes fraudulent abuse of the independent purpose of the letter of
credit and not only fraud under the main agreement; and
c) irreparable
injury might follow if injunction is not granted or the recovery of damages
would be seriously damaged.
Before a writ of preliminary injunction may be issued,
there must be a clear showing by the complaint that there exists a right to be
protected and that the acts against which the writ is to be directed are
violative of the said right. It
must be shown that the invasion of the right sought to be protected is material
and substantial, that the right of complainant is clear and unmistakable and
that there is an urgent and paramount necessity for the writ to prevent serious
damage.
TRUST RECEIPTS
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COLINARES & VELOSO V. CA,
(2000)
Trust Receipts: Rights
of Purchaser, Sec. 11
Section
4, P.D. No. 115, the Trust
Receipts Law
Trust receipt transaction
- any transaction by and between a person referred to as the entruster,
and another person referred to as the entrustee, whereby the entruster
who owns or holds absolute title or security interest over certain specified
goods, documents or instruments, releases the same to the possession of the
entrustee upon the latter’s execution and delivery to the entruster of a signed
document called a “trust receipt” wherein the entrustee binds himself to hold the
designated goods, documents or instruments with the obligation to turn over to
the entruster the proceeds thereof to the extent of the amount owing to the
entruster or as appears in the trust receipt or the goods, documents or
instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt.
2
possible situations in a trust receipt transaction.
1.
Money received
under the obligation involving the duty to deliver it (entregarla) to the owner of the merchandise sold.
Estafa
Failure of the entrustee to turn over the proceeds
of the sale of the goods, covered by the trust receipt to the entruster or to
return said goods if they were not disposed of in accordance with the terms of
the trust receipt shall be punishable as estafa under Article 315 (1) of the
RPC, without need of proving
intent to defraud
GUARANTY
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TUPAZ IV & TUPAZ V. CA & BPI,
(2005)
Guaranty: Benefit
of Excussion, Art. 2058 to 2064, Art. 2081
Under Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may be held liable for
the obligation. Petitioner likewise admits that the questioned provision is a solidary
guaranty clause, thereby clearly distinguishing it from a
contract of surety. It, however, described the guaranty as solidary between the
guarantors; this would have been correct if two (2) guarantors had signed
it. The clause “we jointly and severally agree and undertake” refers to
the undertaking of the two (2) parties who are to sign it or to the liability
existing between themselves. It does not refer to the undertaking between
either one or both of them on the one hand and the petitioner on the other with
respect to the liability described under the trust receipt. xxx
Jose Tupaz bound himself
personally liable for El Oro Corporation’s debts.
1.
First, excussion is not a pre-requisite to secure
judgment against a guarantor. The guarantor can still demand deferment of the
execution of the judgment against him until after the assets of the principal
debtor shall have been exhausted.
2. Second, the benefit of excussion may be waived. Under the trust receipt
dated 30 September 1981, petitioner Jose Tupaz waived excussion when he agreed
that his “liability in [the] guaranty shall be DIRECT AND IMMEDIATE, without
any need whatsoever on xxx [the] part [of respondent bank] to take any steps or
exhaust any legal remedies xxx.” The clear import of this stipulation is that
petitioner Jose Tupaz waived the benefit of excussion under his guarantee.
SURETY
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SECURITY BANK V. CUENCA,
(2000)
Surety: Obligations
Secured, Art. 2053
Being an onerous undertaking, a surety agreement is strictly
construed against the creditor, and every doubt is resolved in favor of the
solidary debtor. The fundamental
rules of fair play require the creditor to obtain the consent of the surety to
any material alteration in the principal loan agreement, or at least to notify
it thereof. Hence, petitioner
bank cannot hold herein respondent liable for loans obtained in excess of the
amount or beyond the period stipulated in the original agreement, absent any
clear stipulation showing that the latter waived his right to be notified
thereof, or to give consent thereto. This
is especially true where, as in this case, respondent was no longer the
principal officer or major stockholder of the corporate debtor at the time the
later obligations were incurred. He
was thus no longer in a position to compel the debtor to pay the creditor and
had no more reason to bind himself anew to the subsequent obligations.
Continuing Surety
Issue:
Contending that the Indemnity Agreement was in the
nature of a continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989 Loan
Agreement. Correct? NO.
Held:
That the Indemnity Agreement is a continuing surety
does not authorize the bank to extend the scope of the principal obligation
inordinately.
In Dino v. CA, the Court
held that “a continuing guaranty is one which covers all transactions,
including those arising in the future, which
are within the description or contemplation of the contract of guaranty, until
the expiration or termination thereof.”
To repeat, in the
present case, the Indemnity Agreement was subject to the two limitations of the
credit accommodation:
1.
that the obligation should not
exceed P8 million, and
2. that
the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard
to loans obtained on or before the aforementioned expiry date and not exceeding
the total of P8 million.
In Dino, the surety Agreement
specifically provided that “each suretyship is a continuing one which shall
remain in full force and effect until
this bank is notified of its revocation.” Since the bank had not been
notified of such revocation, the surety was held liable even for the subsequent obligations of the principal
borrower.
PALMARES V. CA & M. B. LENDING CORPORATION,
(1998)
Surety distinguished from Guaranty, Art.
2047
Where a party signs a promissory
note as a co-maker and binds herself to be jointly and severally
liable with the principal debtor in case the latter defaults in the
payment of the loan, is such undertaking of the former deemed to be that of a
surety as an insurer of the debt, or of a guarantor who warrants the solvency
of the debtor? SURETY.
The Civil Code pertinently provides:
Art. 2047.
By guaranty,
a person called the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If
a person binds himself solidarily with the principal debtor, the provisions of
Section 4, Chapter 3, Title I of this Book shall be observed. In such case the
contract is called a suretyship.
In the case at bar, petitioner expressly bound
herself to be jointly and severally or solidarily liable with the principal
maker of the note. The terms of the contract are clear, explicit and
unequivocal that petitioner's liability is that of a surety. Her pretension that the
terms "jointly and severally or solidarily liable" contained in the
second paragraph of her contract are technical and legal terms which could not
be easily understood by an ordinary layman like her is diametrically opposed to
her manifestation in the contract that she "fully understood the contents"
of the promissory note and that she is "fully aware" of her solidary
liability with the principal maker.
Petitioner would like to make capital of the fact that
although she obligated herself to be jointly and severally liable with the
principal maker, her liability is deemed restricted by the provisions of the
third paragraph of her contract wherein she agreed "that M.B. Lending
Corporation may demand payment of the above loan from me in case the principal
maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which
makes her contract one of guaranty and not suretyship. The purported
discordance is more apparent than real.
Suretyship
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Guaranty
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A surety is an insurer of the debt
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guarantor is an insurer of the solvency of the debtor
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A suretyship is an undertaking
that the debt shall be paid
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a guaranty is an undertaking
that the debtor shall pay
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surety promises to pay the
principal's debt if the principal will
not pay
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a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the
guarantor if the principal is unable
to pay
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A surety binds himself to
perform if the principal does not,
without regard to his ability to do so
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A guarantor does not contract
that the principal will pay, but simply that he is able to do so.
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a surety undertakes directly for
the payment and is so responsible at once if the principal debtor makes default
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a guarantor contracts to pay if,
by the use of due diligence, the debt cannot
be made out of the principal debtor
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Note: Quintessentially, the undertaking to pay upon default of the
principal debtor does not automatically remove it from the ambit of a contract
of suretyship. It has not been shown, either in the contract or the pleadings,
that respondent corporation agreed to proceed against herein petitioner only if and when the defaulting principal has become
insolvent. A contract of suretyship is that wherein one lends his credit by
joining in the principal debtor's obligation, so as to render himself directly
and primarily responsible with him, and without reference to the solvency of
the principal.
Suretyship
A surety is bound equally and absolutely with the principal, and
as such is deemed an original promissor and debtor from the beginning. This is
because in suretyship there is but one contract, and the surety is bound by the
same agreement which binds the principal. In
essence, the contract of a surety starts with the agreement, which is precisely
the situation obtaining in this case before the Court.
A surety is usually bound with his principal by the same
instrument, executed at the same time and upon the same consideration; he is an
original debtor, and his liability is immediate and direct. Thus, it has been
held that where a written agreement on the same sheet of paper with and
immediately following the principal contract between the buyer and seller is
executed simultaneously therewith, providing that the signers of the agreement
agreed to the terms of the principal contract, the signers were
"sureties" jointly liable with the buyer. A surety usually enters
into the same obligation as that of his principal, and the signatures of both
usually appear upon the same instrument, and the same consideration usually
supports the obligation for both the principal and the surety
E. ZOBEL, INC. V. CA,
(1998)
Surety distinguished from Guaranty, Art.
2047
A contract of surety is an accessory promise by which a
person binds himself for another already bound, and agrees with the creditor to
satisfy the obligation if the debtor does not.
A contract of guaranty, on the other
hand, is a collateral undertaking to pay the debt of another in case the
latter does not pay the debt.
Surety
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Guarantor
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usually bound with his principal by the same
instrument, executed at the same time, and on the same consideration
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guarantor's own separate undertaking, in which
the principal does not join. It is usually entered into before or after that
of the principal, and is often supported on a separate consideration from
that supporting the contract of the principal.
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He is an original promissor and debtor from the
beginning, and is held, ordinarily, to know every default of his principal
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The original contract of his principal is not his
contract, and he is not bound to take notice of its non-performance.
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Usually, he will not be discharged, either by the
mere indulgence of the creditor to the principal, or by want of notice of the
default of the principal, no matter how much he may be injured thereby
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He is often discharged by the mere indulgence of
the creditor to the principal, and is usually not liable unless notified of
the default of the principal.
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the insurer of the solvency of the debtor and
thus binds himself to pay if the principal is unable to pay
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Held:
Based on the aforementioned definitions, it appears
that the contract executed by petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is a contract of surety. The terms of the contract
categorically obligates petitioner as "surety" to induce
SOLIDBANK to extend credit to respondent spouses. The contract clearly disclose
that petitioner assumed liability to SOLIDBANK, as a regular party to the
undertaking and obligated itself as an original promissor. It bound itself
jointly and severally to the obligation with the respondent spouses. In fact,
SOLIDBANK need not resort to all other legal remedies or exhaust respondent
spouses' properties before it can hold petitioner liable for the obligation.
Stipulation
“agrees
t guarantee, and hereby guarantee, the payment…”
The use of the term "guarantee"
does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in business
transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation. As
aptly observed by the trial court, the interpretation of a contract is not
limited to the title alone but to the contents and intention of the parties.
PHILIPPINE BLOOMING MILLS, INC. & CHING V. CA,
(2003)
Surety distinguished from Guaranty, Art.
2047
Ching is liable for
credit obligations contracted by PBM against TRB before and after the
execution of the Deed of
Suretyship. This is
evident from the tenor of the deed itself, referring to amounts PBM “may
now be indebted or may hereafter become indebted” to TRB.
The law expressly allows a suretyship for “future debts”. Article
2053 of the Civil Code provides:
A
guaranty may also be given as security
for future debts, the amount of which is not yet known; there can be no
claim against the guarantor until the debt is liquidated. A conditional obligation may also be
secured.
Furthermore, this Court has ruled in Diño v. CA:
Under
the Civil Code, a guaranty may be given to secure even future debts, the amount
of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or
suretyship. A continuing
guaranty is one which is not limited to a single transaction, but which
contemplates a future course of dealing, covering a series of transactions,
generally for an indefinite time or until revoked.
Ø It is prospective in its operation and is
generally intended to provide security with respect to future transactions
within certain limits, and contemplates a succession of liabilities, for which,
as they accrue, the guarantor becomes liable.
Ø Otherwise stated, a continuing
guaranty is one which covers all transactions, including those arising
in the future, which are within the
description or contemplation of the contract of guaranty, until the
expiration or termination thereof.
Ø How : A guaranty shall be
construed as continuing when by the terms thereof it is evident that the object
is to give a standing credit to the principal debtor to be used from time to
time either indefinitely or until a certain period; especially if the right to
recall the guaranty is expressly reserved. Hence, where the contract states that the
guaranty is to secure advances to be made “from time to time,” it will
be construed to be a continuing one.
Examples: In other jurisdictions,
it has been held that the use of particular words and expressions such as
payment of “any debt,” “any indebtedness,” or “any sum,” or the guaranty of
“any transaction,” or money to be furnished the principal debtor “at any time,”
or “on such time” that the principal debtor may require, have been construed to
indicate a continuing guaranty.
IFC V. IMPERIAL TEXTILE MILLS, INC., (2005).
Surety distinguished from Guaranty, Art.
2047
The Court does not find any ambiguity in the provisions of the Guarantee Agreement. When
qualified by the term “jointly and severally,” the use of the word
“guarantor” to refer to a “surety” does not violate the law.
As Article 2047 provides, a suretyship
is created when a guarantor binds itself solidarily with the principal
obligor. Likewise, the phrase in the Agreement -- “as primary obligor and
not merely as surety” -- stresses that ITM is being placed on the same level as
PPIC. Those words emphasize the nature of their liability, which the law
characterizes as a suretyship.
The use of the word “guarantee” does not ipso facto make
the contract one of guaranty. This Court has recognized that
the word is frequently employed in business transactions to describe the
intention to be bound by a primary or an independent obligation. The very terms
of a contract govern the obligations of the parties or the extent of the
obligor’s liability. Thus, this Court has ruled in favor of suretyship,
even though contracts were denominated as a “Guarantor’s Undertaking” or a
“Continuing Guaranty.”
Suretyship as merely an accessory or a collateral to a principal
obligation
·
a suretyship is merely an
accessory or a collateral to a principal obligation.
·
Although a surety contract is secondary to the
principal obligation, the liability of the surety is direct, primary and
absolute; or equivalent to that of a regular party to the undertaking.
·
A surety becomes liable to the debt and duty of the
principal obligor even without possessing a direct or personal interest in the
obligations constituted by the latter.
ESCANO & SILOS V. ORTIGAS, JR.,
(2007)
Surety distinguished from Joint and
Solidary Obligations, Art. 2047, Art. 2066, Art. 2067, Art. 1217
“SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs’ said guaranties to PDCP and PAIC…”
Ø Petitioners submit that they could only be held jointly, not solidarily, liable to
Ortigas, claiming that the Undertaking did not provide for express solidarity.”
Ø Ortigas in turn argues that petitioners, as well as Matti, are jointly and
severally liable for the Undertaking, as the language used in the agreement
“clearly shows that it is a surety agreement” between the obligors
(Ortigas group) and the sureties (Escaño group). Ortigas points out that the
Undertaking uses the word “SURETIES” in describing the parties.
Held: The Undertaking does not contain any express
stipulation that the petitioners agreed “to bind themselves jointly and
severally” in their obligations to the Ortigas group, or any such terms to that
effect. Hence, such obligation established in the Undertaking is presumed only
to be joint.
As provided in Article
2047 in a surety agreement the surety undertakes to be bound solidarily
with the principal debtor. Thus, a surety agreement is an ancillary
contract as it presupposes the existence of a principal contract. It appears
that Ortigas’s argument rests solely on the solidary nature of the obligation
of the surety under Article 2047.
A suretyship requires a principal debtor to whom
the surety is solidarily bound by way of an ancillary obligation of segregate
identity from the obligation between the principal debtor and the creditor. The
suretyship does bind the surety to the creditor, inasmuch as the latter is
vested with the right to proceed against the former to collect the credit in
lieu of proceeding against the principal debtor for the same obligation. At the
same time, there is also a legal tie created between the surety and the
principal debtor to which the creditor is not privy or party to. The moment the
surety fully answers to the creditor for the obligation created by the
principal debtor, such obligation is extinguished. At the same time, the surety
may seek reimbursement from the principal debtor for the amount paid,
for the surety does in fact “become subrogated to all the rights and
remedies of the creditor.”
Note that Article 2047 itself specifically calls
for the application of the provisions on joint and solidary obligations to
suretyship contracts. Article 1217 of the Civil Code thus comes into play,
recognizing the right of reimbursement from a co-debtor (the principal debtor,
in case of suretyship) in favor of the one who paid (i.e., the surety).
Note: A guarantor who binds himself in solidum with
the principal debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes.
Surety
|
Solidary co-debtor
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outside of the
liability he assumes to pay the debt before the property of the principal
debtor has been exhausted
|
Solidarity signifies that the creditor can compel
any one of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt.
|
has the right to recover the full amount paid,
and not just any proportional share, from the principal debtor or debtors.
|
“may claim from his co-debtors only the
share which corresponds to each, with the interest for the payment
already made.”
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Subsidiary
|
solidary
|
Accordingly, the rights to indemnification and
subrogation as established and granted to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined under
Article 2047. These rights granted to the surety who pays materially differ
from those granted under Article 1217 to the solidary debtor who pays, since
the “indemnification” that pertains to the latter extends “only [to] the share
which corresponds to each [co-debtor].” It is for this reason that the Court
cannot accord the conclusion that because petitioners are identified in the
Undertaking as “SURETIES,” they are consequently joint and severally liable to
Ortigas.
PLEADGE & MORTGAGE
|
DBP V. CA, (1998)
Pactum Commissorium, Art. 2087, Art. 2088:
Effects on Pledge or Mortgage
Par.12. After the Notice of Rescission,
defendant DBP took possession of the Leasehold Rights of the fishpond in
question
Elements
of pactum commissorium:
1.
there should be a property mortgaged by way of
security for the payment of the principal obligation, and
2.
there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period.
Condition
no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBA’s failure to pay the loan on time. It merely provided for the appointment
of DBP as attorney-in-fact with authority, among other things, to sell or
otherwise dispose of the said real rights, in case of default by CUBA, and to
apply the proceeds to the payment of the loan. DBP, however, exceeded the authority
vested by condition no. 12 of the deed of assignment. It had without foreclosure
proceedings, whether judicial or extrajudicial, appropriated the leasehold
rights of Cuba over the fishpond in question.” At any rate, DBP’s act of
appropriating CUBA’s leasehold rights was violative of Article 2088 of the Civil Code, which forbids a creditor from
appropriating, or disposing of, the thing given as security for the payment of
a debt. Instead
of taking ownership of the questioned real rights upon default by CUBA, DBP
should have foreclosed the mortgage, as has been stipulated in condition no. 22
of the deed of assignment. But,
as admitted by DBP, there was no such foreclosure.
Article 2088 of the Civil Code which provides as
follows:
ART. 2088. The creditor cannot appropriate the
things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is
null and void.
BUSTAMANTE V. ROSEL,
(1999)
Pactum Commissorium, Art. 2087, Art. 2088:
Effects on Pledge or Mortgage
“in the
event the borrowers fail to pay, the lender has the option to buy or purchase
the collateral for a total consideration of P200K, inclusive of the
borrowed amount and interest therein.”
A scrutiny of the
stipulation of the parties reveals a subtle intention of the creditor to
acquire the property given as security for the loan. This is embraced in the concept of pactum commissorium, which is
proscribed by law. The intent to
appropriate the property given as collateral in favor of the creditor appears
to be evident, for the debtor is obliged to dispose of the collateral at the
pre-agreed consideration amounting to practically the same amount as the
loan. In effect, the
creditor acquires the collateral in the event of non payment of the loan. This
is within the concept of pactum
commissorium. Such
stipulation is void.
ONG. V. ROBAN LENDING CORPORATION,
(2008)
Pactum Commissorium, Art. 2087, Art. 2088:
Effects on Pledge or Mortgage
“The SECOND PARTY hereby
signed another promissory note with a promise to pay the FIRST PARTY in full
within one year from the date of the consolidation and restructuring, otherwise
the SECOND PARTY agree to have their “DACION IN PAYMENT” agreement, which they
have executed and signed today in favor of the FIRST PARTY be enforced”
Issue: Whether the contract
constitutes pactum commissorium or dacion en pago.
Held: Pactum Commissorium.
In the case at bar, the MOA and the Dacion in
Payment contain no provisions for foreclosure proceedings nor
redemption. Under the MOA, the failure by the petitioners to pay
their debt within the one-year period gives respondent the right to enforce the
Dacion in Payment transferring to it ownership of the properties covered by the
TCT. Respondent, in effect, automatically acquires ownership of the properties
upon petitioners’ failure to pay their debt within the stipulated period.
Ø Respondent argues that the law recognizes dacion en pago as
a special form of payment whereby the debtor alienates property to the creditor
in satisfaction of a monetary obligation.
This does not persuade. In a true dacion
en pago, the assignment of the property extinguishes the monetary debt. In
the case at bar, the alienation of the properties was by way of security, and
not by way of satisfying the debt. The Dacion in Payment did not extinguish
petitioners’ obligation to respondent. On the contrary, under the
MOA executed on the same day as the Dacion in Payment, petitioners had to
execute a promissory note which they were to pay within one year.
That the questioned contracts were freely and
voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being
void for being prohibited by law.
PLEDGE
|
ESTATE OF LITTON V. MENDOZA & CA,
(1988)
Pledge:
Ownership of Collateral, Art. 2103, Art. 2102, Art. 2101, Art. 1951,
Art. 2108, Art. 2112, Art. 2097
(see full text for the facts)
The
fact that the deed of assignment was done by way of securing or guaranteeing 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 in favor of Litton has not been questioned. Our examination
of the deed of assignment shows that it fulfills the requisites of a valid
pledge or mortgage.
Rule
Although 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 the assignor Tan to indiscriminately
dispose of the thing or the right given as security. The Court rules that the
said provision should be read in consonance with Article 2097 of the same code. Although the pledgee or the assignee,
Litton, Sr. did not ipso factobecome
the creditor of private respondent Mendoza, the pledge being valid, the
incorporeal right assigned by Tan in favor 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 the
security without notice and consent of the assignee will render nugatory the
very purpose of a pledge or an assignment of credit.
Moreover, under Article
1634, the debtor has a
corresponding obligation to reimburse the assignee, Litton, Sr. for the price
he paid or for the value given as consideration for the deed of assignment.
Failing in this, the alienation of the litigated credit made by Tan in favor of
private respondent by way of a compromise agreement does not bind the assignee,
petitioner herein.
Note: Private respondent has, from the very beginning, been fully
aware of the deed of assignment executed by Tan in favor of Litton, Sr. Having
such knowledge thereof, private respondent is estopped from entering into a
compromise agreement involving the same litigated credit without notice to
and consent of the assignee, petitioner herein. More so, in the light of
the fact that no reimbursement has ever been made in favor of the assignee as
required under Article 1634. Private respondent acted in bad faith and in
connivance with assignor Tan so as to defraud the petitioner in entering into
the compromise agreement.
MANILA BANKING CORPORATION V. TEODORO, JR.
AND TEODORO, (1989). (INCLUDE CONCURRING OPINION)
Pledge:
Right to Payment, Art. 2102, Art. 2118
(see full text for the facts)
The
assignment of receivables executed by appellants did not transfer the ownership
of the receivables to appellee bank and release appellants from their loans
with the bank incurred under promissory notes.
The
Deed of Assignment provided that it was for and in consideration of certain
credits, loans, overdrafts, and their credit accommodations extended to
appellants by appellee bank, and as security for the payment of said sum and
the interest thereon; that appellants as assignors, remise, release, and
quitclaim to assignee bank all their rights, title and interest in and to the
accounts receivable assigned. It was further stipulated that the assignment
will also stand as a continuing guaranty
for future loans of appellants to appellee bank and correspondingly the
assignment shall also extend to all the accounts receivable; appellants shall
also obtain in the future, until the consideration on the loans secured by
appellants from appellee bank shall have been fully paid by them.
The
position of appellants, however, is that the deed of assignment is a quitclaim
in consideration of their indebtedness to appellee bank, not mere guaranty, in
view of the following provisions of the deed of assignment:
...
the Assignor do hereby remise,
release and quit-claim unto
said assignee all its rights,
title and interest in 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 assignee and it shall have the right
to collect directly from the debtor, and whatever the Assignor does in
connection with the collection of said accounts, it agrees to do so as agent and representative of the Assignee and it trust for said Assignee.
The character of the transactions between the parties is not,
however, determined by the language used in the document but by their
intention. 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 the bank evidenced by promissory note
which are the subject of the suit for collection in a Civil Case. At the time
the deed of assignment was executed, said loans were non-existent yet.
Obviously, the deed of assignment was intended as collateral security for the bank loans of appellants, as a
continuing guaranty for whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.
Assignment
of credit is an agreement by virtue of
which the owner of a credit, known as the assignor, by a legal cause, such as
sale, dation in payment, exchange or donation, and without the need of the
consent of the debtor, transfers his credit and its accessory rights to another,
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.
CHU V. COURT OF APPEALS ET AL.,
1989
Pledge:
Right to Payment, Art. 2102, Art. 2118
As the collateral was also money or an exchange of "peso
for peso," the provision in Article
2112 of the Civil Code for the sale of the thing pledged at public auction
to convert it into money to satisfy the pledgor's obligation, did not have to
be followed. All that had to be done to convert the pledgor's time deposit
certificates into cash was to present them to the bank for encashment after due
notice to the debtor.
CITIBANK, N.A. & INVESTOR FINANCE
CORPORATION V. SABENIANO, (2006)
Pledge:
Right to Payment, Art. 2102, Art. 2118
The liquidation of respondent’s outstanding loans
were valid in so far as petitioner Citibank used respondent’s savings account
with the bank and her money market placements with petitioner FNCB Finance; but
illegal and void in so far as petitioner Citibank used respondent’s dollar
accounts with Citibank-Geneva.
Without the Declaration of Pledge,
petitioner Citibank had no authority to demand the remittance of respondent’s
dollar accounts with Citibank-Geneva and to apply them to her outstanding
loans. It cannot effect
legal compensation under Article 1278 of the Civil Code since, 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; and as
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.
Therefore, this Court declares that the
remittance of respondent’s dollar accounts from Citibank-Geneva and the
application thereof to her outstanding loans with petitioner Citibank was
illegal, and null and void.
PARAY & ESPELETA V. RODRIGUEZ, ET AL.,
(2006)
Right of Redemption
Issue: WON the pledged shares
of stock auctioned off in a notarial sale could still be redeemed by their
owners.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies
only to execution sales, more precisely execution sales of real
property.
Does the right of redemption
exist over personal property? No law or
jurisprudence establishes or affirms such right. Indeed, no such right
exists.
The right to redeem property is a bare statutory
privilege to be exercised only by the persons named in the statute.
The right of redemption over mortgaged real
property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books
which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial
sale of mortgaged personal property, but the statute is definitely silent on
the point. And Section 39 of the 1997
Rules of Civil Procedure, extensively relied upon by the Court of Appeals,
starkly utters that the right of redemption applies to real properties, not
personal properties, sold on execution.
Obviously, since there is no right to redeem
personal property, the rights of ownership vested unto the purchaser at the
foreclosure sale are not entangled in any suspensive condition that is implicit
in a redemptive period.
Issue #2: The Court of Appeals also found fault with the
apparent sale in bulk of the pledged shares, notwithstanding the fact that
these shares were owned by several people, on the premise the pledgors would be
denied the opportunity to know exactly how much they would need to shoulder to
exercise the right to redemption.
Held: Rule 39 of the Rules of Court does provide for
instances when properties foreclosed at the same time must be sold separately,
such as in the case of lot sales for real property under Section 19. However,
these instances again pertain to execution sales and not extrajudicial sales.
No provision in the Rules of Court or in any law requires that pledged
properties sold at auction be sold separately.
On the other hand, under the Civil Code, it is the
pledgee, and not the pledgor, who is given the right to choose which of the
items should be sold if two or more things are pledged. No similar option is
given to pledgors under the Civil Code. Moreover, there is nothing in the Civil
Code provisions governing the extrajudicial sale of pledged properties that
prohibits the pledgee of several different pledge contracts from auctioning all
of the pledged properties on a single occasion, or from the buyer at the
auction sale in purchasing all the pledged properties with a single purchase
price. The relative insignificance of ascertaining the definite apportionments
of the sale price to the individual shares lies in the fact that once a pledged
item is sold at auction, neither the pledgee nor the pledgor can recover
whatever deficiency or excess there may be between the purchase price and the
amount of the principal obligation.
A different ruling though would obtain if at the
auction, a bidder expressed the desire to bid on a determinate number or
portion of the pledged shares. In such a case, there may lie the need to
ascertain with particularity which of the shares are covered by the bid price,
since not all of the shares may be sold at the auction and correspondingly not
all of the pledge contracts extinguished. The same situation also would lie if
one or some of the owners of the pledged shares participated in the auction,
bidding only on their respective pledged shares.
Issue #3: Whether the consignations made by respondents
extinguished their respective pledge contracts in favor of the Parays so as to
enjoin the latter from auctioning the pledged shares.
Held: There is no doubt that if the principal obligation
is satisfied, the pledges should be terminated as well. Article 2098 of the
Civil Code provides that the right of the creditor to retain possession of the
pledged item exists only until the debt is paid. Article 2105 of the Civil Code
further clarifies that the debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has paid the debt
and its interest. At the same time, the right of the pledgee to foreclose the
pledge is also established under the Civil Code. When the credit has not been
satisfied in due time, the creditor may proceed with the sale by public auction
under the procedure provided under Article 2112 of the Code.
Section 18, Rule 39 provides that the judgment
obligor may prevent the sale by paying the amount required by the execution and
the costs that have been incurred therein. However, the provision applies only
to execution sales, and not extra-judicial sales, as evidenced by the use of
the phrases “sale of property on execution” and “judgment obligor.”
