People’s Bank and Trust Co. v. Odom | Gab
Gibbs
February 25, 1937
PEOPLE BANK AND TRUST COMPANY, Plaintiff-Appellee, v.
W. J. ODOM, Defendant-Appellant
Imperial, J.
NATURE: Appeal
SUMMARY: W. J. Odom entered into a contract with A. D. Gibbs
whereby Gibbs authorized Odom to construct 2 buildings upon Gibbs’
land. Odom then leased out various parts of the 2 buildings, with one
of the lessees being People’s Bank and Trust Co. (PBTC). Due to the
contracts entered into with PBTC, Odom obtained an overdraft from
PBTC, the amount of which was increased multiple times. Odom also
executed various securities for the overdraft, with its various amount
increases. After drawing funds upon PBTC through overdrafts, as of
January 4, 1934, Odom’s account showed a balance against him of
P138,403.68, including stipulated interest up to said date. PBTC then
brought an action with the Manila CFI to recover from Odom the
balance of the overdraft and to foreclose the mortgage of properties to
guarantee his obligation. The CFI later ordered Odom to pay to PBTC
P138,403.68, with 9% interest per annum from January 4, 1934 until
fully paid, plus P500 as attorney's fees and the costs. After Odom
appealed to the SC, the SC affirmed the CFI’s judgment, except the
part ordering the public sale of the mortgaged rights, with costs to
Odom.
DOCTRINE (related to topic):
 An assignment to guarantee an obligation is, in effect, a
mortgage, not an absolute conveyance of title, which
confers ownership on the assignee.
FACTS:
 W. J. Odom entered into a contract with A. D.
(Exhibit E) whereby Gibbs authorized Odom to construct 2
buildings with 3 floors each upon Gibbs’ land.
o The Sugar News Co. Building was completely
constructed and its 1st floor was occupied by the
People’s Bank and Trust Co. (PBTC), but the 2 upper
floors were not fully equipped; the Edward J. Nell Co.
Building was then under construction.
o Under the contract, Odom bore all the expenses of
consideration of the Sugar News Co. Building and
Gibbs assigned to him all the rents which the building
may produce for 8 years from: (1) November 1, 1926
as to the 1st floor then already occupied and (2) as to the
other floors to be equipped, from the date they are fully
equipped.
o As to the Edward J. Nell Co. Building, the parties
agreed that Odom would bear all the expenses of
construction until it is fully completed and in
consideration thereof, Gibbs assigned to him all the rent
which it may produce for 8 years, 3 months from the
date of the termination of its construction; this period
was to be counted from the completion of each floor in
the event that the floors comprising the building should
not be completed and equipped at the same time.
 Due to the contracts entered into with PBTC, Odom obtained
an overdraft from PBTC of P110,000.
o To secure this overdraft, Odom assigned to the
PBTC all his rights, title, and interest in the
contracts of lease with the Sugar News Co., Manila
Machinery and Supply Co., Inc., and T. Yamamoto
of the various parts of the Sugar News Company
Building and the rights, title, and interest which he
had acquired in the land on which the said building
 was constructed under the contract he had with A. D.
Gibbs.
o Also as security, Odom assigned to the PBTC an
insurance policy for P100,000 issued by the
Manufacturers Life Insurance Company. (Exhibit
C)
 Odom’s overdraft was increased to P150,000.
o To secure the payment thereof, Odom assigned to
PBTC by guaranty the same securities which he had
given for the overdraft of P110,000. (Exhibit B)
 The overdraft was again increased to P165,000.
o To guarantee the payment thereof, Odom assigned
to PBTC his rights, title, and interest in the contracts
of lease with Edward J. Nell Co., El Progreso, Inc.,
and France & Goulette of various parts of the
Edward J. Nell Company Building, in whatever
contracts of lease of any portion of the same building
which he may enter in the future, and the rights, title,
and interest which he had in the land occupied by the
building according to his contract with A. D. Gibbs.
(Exhibit D)
o Odom also assigned to PBTC his right to collect the
rents of the Edward J. Nell Company Building.
(Exhibit F)
 Pursuant to the aforesaid contracts, Odom drew funds upon
PBTC through overdrafts.
 January 4, 1934: Odom’s account showed a balance against
him of P138,403.68, including stipulated interest up to said
date.
 PBTC then brought an action with the Manila CFI to recover
from Odom the balance of the overdraft and to foreclose the
mortgage of properties to guarantee his obligation.
 The CFI ordered Odom to pay to PBTC P138,403.68, with 9%
interest per annum from January 4, 1934 until fully paid, plus
P500 as attorney's fees and the costs.
o The judgment also decreed that the principal and
interest should be paid within 3 months, failing which
the mortgaged properties will be sold at public auction,
consisting of the rights, title, and interest of Odom in
the contracts of lease of the 2 buildings and his rights,
title, and interest in the land on which the 2 buildings
are constructed, and that the proceeds of the sale should
be applied to the payment of the amount of the
judgment.
 Odom appealed from said CFI’s judgment to the SC.
ISSUE #1:
 W/N Exhibit D took the place of Exhibits B and C (NO)
RATIO #1:
 Exhibit D was executed, according to the contract itself, as a
result of the increase of the overdraft to P165,000 and the
additional guaranty given by Odom, consisting of the
assignment of guaranty of his rights in his contracts of lease of
the Edward J. Nell Company Building and of his rights in the
land occupied by the same building.
 Clause 3 of Exhibit D stipulated that Exhibit C was
incorporated therein and also constituted a guaranty of the
payment of the overdraft as increased to P165,000.
 Due to these facts, it is evident that the intention of the parties
was neither to set aside the previous contracts nor to substitute
Exhibit D therefor.
ISSUE #2:
  W/N the CFI should have held that the obligation
contracted by Odom was with a term and the parties not
having fixed the date of payment, PBTC should have first
brought an action to fix said date under CC, Art. 1128 1
(NO)
RATIO #2:
 Exhibit D is a complement of Exhibits B and C, hence, Exhibit
D’s language and the intention of the parties must be
interpreted in relation to and jointly with Exhibits B and C
under CC, Art. 1285.
 It was expressly stipulated in Exhibits B and C that the
obligation contracted by Odom shall expire and be due upon
demand of the PBTC and since Exhibit C was incorporated in
Exhibit D and Odom was required by the PBTC to pay all his
indebtedness, the obligation was without a term and it became
due and demandable.
 Thus, CC, Art. 1128 is inapplicable.
ISSUE #3 (MAIN):
 W/N Exhibits B, C, and D are mortgages or assignment of
rights (MORTGAGES)
RATIO #3:
 Exhibits B, C, and D were really mortgages inasmuch as they
were executed to guarantee the principal obligations of the
Odom, consisting of the overdrafts of the indebtedness
resulting therefrom.
 It appears in each of Exhibits B, C, and D that the Odom
assigned to the PBTC all his rights in the contracts of lease,
1
When it is to be inferred from the nature and circumstances of the obligation that it
was intended to grant the debtor time to pay and the term is not otherwise stated, the
courts should fix the date of the maturity of the obligation.
in the land, and in the insurance policy to guarantee his
indebtedness resulting from the overdrafts.
 An assignment to guarantee an obligation is, in effect, a
mortgage, not an absolute conveyance of title, which
confers ownership on the assignee. (Title Guaranty & Surety
Co. v. Witmire; Polhemus v. Trainer; Campbell v. Woodstock
Iron Co.; Dunham v. Whitehead; Woodward v. Crump)
 In Exhibits C and D, it was stipulated that if Odom should
comply with all the conditions of the contracts and should
pay his indebtedness, together with interest, the assignments
would become null and void; otherwise, they would remain
in full force.
o If the parties' intention was that the assignments are
absolute and not by guaranty or mortgage, the
stipulation would not have been made because it
would be inconsistent with the will of the contracting
parties.
ISSUE #4:
 W/N Odom’s civil liability has ceased, with him now not
owing PBTC anything (NO)
RATIO #4:
 The assignments Odom made not being absolute and PBTC
having established that Odom has not paid his total overdraft,
he is not yet relieved of his obligation.
ADDITIONAL DISCUSSION:
 Under the contracts, PBTC was authorized to collect the rents
of the 2 buildings during the period which might be that fixed
in the contract between the Odom and Gibbs.
 o The SC said “might” because the contracts of lease
have not been put in evidence, hence, it could point out
the duration thereof with precision.
 However, the PBTC liquidated the account of the Odom up to
January 4, 1934 only and in the appealed judgment, it was
decreed that the mortgaged rights be sold at public auction
should Odom fail to pay his indebtedness within 3 months.
 If the indebtedness has already been paid with the rents which
the PBTC failed to account for, then there would be no ground
to take the aforementioned step. If the indebtedness has not yet
been fully paid, neither would it be proper to sell any of the
rights in the mortgage contracts of lease because the latter have
already matured, according to the contract with Gibbs.
o Thus, it is necessary to provide for the one and the other
case.
 As to the insurance policy, nothing can be said about it as the
appealed judgment was silent thereon.

DISPOSITION
 The appealed judgment was affirmed, except the part ordering
the public sale of the mortgaged rights, with costs to Odom.
Lopez v CA | CM
June 29, 1982
GUERRERO, J.:
Summary: Lopez obtained a loan from prudential bank. He executed
a promissory note, a surety bond with Philamgen as surety and an
indemnity agreement in favour of Philamgen as well as a deed of
assignment of stocks over Philamgen. Lopez delivered the stock
certificate to Philamgen. It was understood that Abello of Philamgen
and Pedrosa of Prudential would buy the shares and pay to Prudential
if Lopez failed to pay on the loan. Lopez failed to pay. The stocks
were transferred to Philamgen. Philamgen paid the bank. Philamgen is
now claiming vs Lopez. Philamgen claims the stocks were merely
pledged. Lopez claims that there was a dation in payment. SC held that
it was merely pledged and Philamgen must return the stocks to Lopez
upon satisfaction under the Indemnity Agreement.
Doctrine: The character 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 to secure the
payment of money, it must be construed as a pledge
FACTS:
 On June 2, 1959, petitioner Benito H. Lopez obtained a loan
in the amount of P20,000.00 from the Prudential Bank and
Trust Company.
 He executed a promissory note for the same amount, in favor
of the said Bank, binding himself to repay the said sum one (1)
year after the said date, with interest at the rate of 10% per
annum.
 He executed Surety Bond No. 14164 in which he, as
principal, and Philippine American General Insurance Co.,
Inc. (PHILAMGEN) as surety, bound themselves jointly and
severally in favor of Prudential Bank for the payment of the
sum of P20,000.00.
 Lopez also executed in favor of Philamgen an indemnity
agreement whereby he agreed "to indemnify the Company and
keep it indemnified and hold the same harmless from and
against any and all damages, losses, costs, stamps, taxes,
penalties, charges and expenses of whatever kind and nature
which the Company shall or may at any time sustain or incur in
consequence of having become surety upon the bond." 
 Lopez executed a deed of assignment of 4,000 shares of the
Baguio Military Institution entitled "Stock Assignment
Separate from Certificate"2
 With the execution of this deed of assignment, Lopez
endorsed the stock certificate and delivered it to
Philamgen.
 The loan of P20,000.00 was approved conditioned upon the
posting of a surety bond. Thus, Lopez persuaded Emilio
Abello, Assistant Executive Vice-President of Philamgen and
member of the Bond Under writing Committee to request Atty.
Timoteo J. Sumawang, Assistant Vice- President and Manager
of the Bonding Department, to accommodate him in putting
up the bond against the security of his shares of stock with
the Baguio Military Institute, Inc. It was their understanding
that if he could not pay the loan, Vice-President Abello and
Pio Pedrosa of the Prudential Bank would buy the shares of
stocks and out of the proceeds thereof, the loan would be paid
to the Prudential Bank.
2
That for and in consideration of the obligations undertaken by the ASSIGNEE-SURETY COMPANY under the terms and
conditions of SURETY BOND NO. 14164, issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK &
TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND PESOS ONLY (P20,000.00), Philippine
Currency, and for value received, the ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio military Institute, Inc. standing in the name of
said Assignor on the books of said Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do hereby
irrevocably constitutes and appoints THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC. as attorney to
transfer the said stock on the books of the within named military institute with full power of substitution in the premises.
 On June 2, 1960, Lopez' obligation matured without it being
settled. Prudential Bank sometime in August, 1961 filed a case
against Lopez and Philamgen to enforce payment on the
promissory note plus interest.
 Vice-President Abello then instructed Atty. Sumawang to
transfer the shares of stock to Philamgen and made a
commitment that thereafter he (Abello) and Pio Pedrosa will
buy the shares of stock from it so that the proceeds could be
paid to the bank, and in the meantime Philamgen will not pay
the bank because it did not want payment under the terms of
the bank.
 The complaint was thereafter dismissed. But when no payment
was still made by the principal debtor or by the surety, the
Prudential Bank filed on November 8, 1963 another complaint
for the recovery of the P20,000.00.
 Lopez’s letter:
Dear Mr. Sumawang: This is with reference to yours of the
13th instant advising me of a complaint filed against us by
Prudential Bank & Trust Co. regarding my loan of
P20,000.00. In this connection, I would like to know what
happened to my shares of stocks of Baguio Military
Academy which were pledged to your goodselves to secure
said obligation. These shares of stock I think are more than
enough to answer for said obligation.
 Philamgen was forced to pay the Prudential Bank the sum of
P27,785.89
 Philamgen brought an action vs. Benito H. Lopez for
reimbursement of the said amount.
 CFI dismissed the complaint holding:
The contention of the plaintiff that the stock of the
defendant were merely pledged to it by the defendant is
not borne out by the evidence. On the contrary, the
shares of stock of the defendant were actually
transferred to the plaintiff Philamgen
Now that these shares of stock had already been
transferred in the name of the Philamgen, it would seem
that the remedy of the Philamgen is to go after Messrs.
Abello and Pedrosa on their promise to pay for the said
stocks.
 CA promulgated a decision in favor of the Philamgen, and
declared that the stock assignment was a mere pledge that the
transfer of the stocks in the name of Philamgen was not
intended to make it the owner thereof; that assuming that
Philamgen had appropriated the stocks, this appropriation is
null and void as a stipulation authorizing it is apactum
commissorium; and that pending payment, Philamgen is merely
holding the stock as a security for the payment of Lopez'
obligation
ISSUE 1/ HELD: what is the juridical nature of the transaction-a
dation in payment or a pledge? PLEDGE
RATIO:
ON ITS FACE, IT LOOKS LIKE SALE
 Considering the explicit terms of the deed denominated "Stock
Assignment Separate from Certificate", hereinbefore
copied verbatim, Lopez sold, assigned and transferred unto
Philamgen the stocks involved "for and in consideration of the
obligations undertaken" by Philamgen "under the terms and
conditions of the surety bond executed by it in favor of the
Prudential Bank" and "for value received".
 On its face, it is neither pledge nor dation in payment. The
document speaks of an outright sale as there is a complete and
unconditional divestiture of the incorporeal property consisting
of stocks from Lopez to Philamgen.

BUT IT IS A PLEDGE
 Notwithstanding the express terms of the "Stock Assignment
Separate from Certificate", however, We hold and rule that the
transaction should not be regarded as an absolute
conveyance in view of the circumstances obtaining at the
time of the execution thereof.
 Lopez executed a promissory note for P20,000.00, plus interest
at the rate of ten (10%) per cent per annum, in favor of said
Bank. He likewise posted a surety bond to secure his full and
faithful performance of his obligation under the promissory
note with Philamgen as his surety. In return for the undertaking
of Philamgen under the surety bond, Lopez executed on the
same day not only an indemnity agreement but also a stock
assignment.
 The indemnity agreement and the stock assignment must
be considered together as related transactions because in
order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally
considered. (Article 1371, New Civil Code).
 Thus, considering that the indemnity agreement connotes a
continuing obligation of Lopez towards Philamgen while the
stock assignment indicates a complete discharge of the same
obligation, the existence of the indemnity agreement whereby
Lopez had to pay a premium of P1,000.00 for a period of one
year and agreed at all times to indemnify Philamgen of any and
all kinds of losses which the latter might sustain by reason of it
becoming a surety, is inconsistent with the theory of an
absolute sale for and in consideration of the same
undertaking of Philamgen.
 There would have been no necessity for the execution of the
indemnity agreement if the stock assignment was really
intended as an absolute conveyance. Hence, there are strong
and cogent reasons to conclude that the parties intended said
stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of
Philamgen should it be required to pay Lopez' loan to
Prudential Bank.
o The character 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 to secure the
payment of money, it must be construed as a pledge;
but if there was some other intention, it is not a pledge.
However, even though a transfer, if regarded by itself,
appears 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 of the property as collateral security. It has been
said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an
absolute conveyance, should be treated as a pledge if
the debt continues in existence and is not discharged by
the transfer, and that accordingly, the use of the terms
ordinarily importing conveyance, of absolute ownership
will not be given that effect in such a transaction if they
are also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and
unambiguous language or other circumstances
excluding an intent to pledge.
 We agree with the holding of the respondent Court of
Appeals that the stock assignment, Exhibit C, is in truth
and in fact, a pledge. Indeed, the facts and circumstances
leading to the execution of the stock assignment, Exhibit C,
and the admission of Lopez prove that it is in fact a pledge.
 The appellate court is correct in ruling that the following
requirements of a contract of pledge have been satisfied:
(1) that it be constituted to secure the fulfillment of a principal
obligation;
(2) that the pledgor be the absolute owner of the thing pledged;
and
(3) that the person constituting the pledge has the free disposal
of the property, and in the absence thereof, that he be legally
authorized for the purpose. (Article 2085, New Civil Code).
 Article 2087 of the New Civil Code providing that it is also the
essence of these contracts (pledge, mortgage, and antichresis)
that when the principal obligation becomes due, the things
in which the pledge or mortgage consists may be alienated
for the payment to the creditor, further supports the appellate
court's ruling
o In addition to the requisites prescribed in article 2085, it
is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the
possession of the creditor, or of a third person by
common agreement. (Art. 2093, N.C.C.) Incorporeal
rights, including shares of stock may also be pledged
(Art. 2095, N.C.C.)
o All these requisites are found in the transaction between
the parties leading to the execution of the Stock
Assignment, Exhibit C. And that it is a pledge was
admitted by the defendant in his letter of November 18,
1963, Exhibit G, already quoted above, where he asked
what had happened to his shares of stock "which were
pledged to your goodselves to secure the said
obligation".
 It is not a dation in payment. According to Article 1245 of the
New Civil Code, dation in payment, whereby property is
alienated to the creditor in satisfaction of a debt in money, shall
be governed by the law of sales.
o Dation in payment is the delivery and transmission
of ownership of a thing by the debtor to the creditor
as an accepted equivalent of the performance of the
obligation. The property given may consist, not only of
a thing, but also of a real right (such as a usufruct) or of
a credit against a third person. Thus, it has been held
that the assignment to the creditor of the interest of the
debtor in an inheritance in payment of his debt, is valid
and extinguishes the debt.
o The modern concept of dation in payment considers it
as a novation by change of the object, and this is to our
mind the more juridically correct view.
o Our Civil Code, however, provides in this article that,
where the debt is in money, the law on sales shall
govern; in this case, the act is deemed to be a sale, with
the amount of the obligation to the extent that it is
extinguished being considered as the price.
o Does this mean that there can be no dation in payment
if the debt is not in money? We do not think so. It is
precisely in obligations which are not money debts, in
which the true juridical nature of dation in payment
becomes manifest. There is a real novation with
immediate performance of the new obligation. The fact
that there must be a prior agreement of the parties on
the delivery of the thing in lieu of the original prestation
shows that there is a novation which, extinguishes the
original obligation, and the delivery is a mere
performance of the new obligation.
o The dation in payment extinguishes the obligation to
the extent of the value of the thing delivered, either as
agreed upon by the parties or as may be proved, unless
 the parties by agreement, express or implied, or by their
silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished.
 We find that the debt or obligation at bar has not matured on
June 2, 1959 when Lopez "alienated" his 4,000 shares of stock
to Philamgen. Such fact being adverse to the nature and
concept of dation in payment, the same could not have been
constituted when the stock assignment was executed.
 In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge,
the latter being the lesser transmission of rights and
interests.
 Petitioner's argument that even assuming, arguendo that the
transaction was at its inception a pledge, it gave way to a
dation in payment when the obligation secured came into
existence and private respondent had the stocks transferred to it
in the corporate books and took a stock certificate in its name,
is without merit. The transfer of title to incorporeal property is
generally an essential part of the delivery of the same in
pledge. It merely constitutes evidence of the pledgee's right of
property in the thing pledged.
 By the contract of pledge, the pledgor does not part with his
general right of property in the collateral. The general property
therein remains in him, and only a special property vests in the
pledgee. The pledgee does not acquire an interest in the
property, except as a security for his debt. Thus, the pledgee
holds possession of the security subject to the rights of the
pledgor; he cannot acquire any interest therein that is adverse
to the pledgor's title. Moreover, even where the legal title to
incorporeal property which may be pledged is transferred to a
pledgee as collateral security, he takes only a special property
therein Such transfer merely performs the office that the
delivery of possession does in case of a pledge of corporeal
property.
 The pledgee has been considered as having a lien on the
pledged property. The extent of such lien is measured by the
amount of the debt or the obligation that is secured by the
collateral, and the lien continues to exist as long as the pledgee
retains actual or symbolic possession of the property, and the
debt or obligation remains unpaid. Payment of the debt
extinguishes the lien.
 Though a pledgee of corporation stock does not become
personally liable as a stockholder of the company, he may have
the shares transferred to him on the books of the corporation if
he has been authorized to do so.
ISSUE2/ HELD: WON there was novation (NO)
NO NOVATION
 In his second assignment of error, petitioner contends that there
was a novation of the obligation by substitution of debtor.
 SC: We do not agree.
 Under Article 1291 of the New Civil Code, obligations may be
modified by: (1) changing their object or principal condition;
(2) substituting the person of the debtor; (3) subrogating a third
person in the rights of the creditor. And in order that an
obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal
terms, or that the old and the new obligations be on every point
incompatible with each other. (Article 1292, N.C.C.)
 Commenting on the second concept of novation, that is,
substituting the person of the debtor, Manresa opines, thus:
 In this kind of novation it is not enough to
extend the juridical relation to a third person; it
is necessary that the old debtor be released from
 the obligation, and the third person or new
debtor take his place in the relation. Without
such release, there is no novation
 In the case at bar, the undertaking of Messrs. Emilio Abello
and Pio Pedrosa that they would buy the shares of stock so that
Philamgen could be reimbursed from the proceeds that it paid
to Prudential Bank does not necessarily imply the
extinguishment of the liability of petitioner Lopez. Since it was
not established nor shown that Lopez would be released from
responsibility, the same does not constitute novation
 In fine, We hold and rule that the transaction entered into by
and between petitioner and respondent under the Stock
Assignment Separate From Certificate in relation to the Surety
Bond No. 14164 and the Indemnity Agreement, all executed
and dated June 2, 1959, constitutes a pledge of the 40,000
shares of stock by the petitioner-pledgor in favor of the private
respondent-pledgee, and not a dacion en pago. It is also Our
ruling that upon the facts established, there was no novation of
the obligation by substitution of debtor.
 The promise of Abello and Pedrosa to buy the shares not
having materialized and no action was taken against the two by
Philamgen who chose instead to sue Lopez on the Indemnity
Agreement, it is quite clear that this respondent Philam has
abandoned its right and interest over the pledged properties and
must, therefore, release or return the same to the petitioner-
pledgor Lopez upon the latter's satisfaction of his obligation
under the Indemnity Agreement.
 It must also be made clear that there is no double payment nor
unjust enrichment in this case because We have ruled that the
shares of stock were merely pledged.

DISPOSITION. AFFIRMED.
THE MANILA BANKING CORPORATION vs. ANASTACIO
TEODORO, JR. and GRACE ANNA TEODORO
G.R. No. L-53955 January 13, 1989
Bidin, J.
1. April 1966, Spouses Teodoro together with Teodoro Sr executed a
PN in favour of Manila Banking Corp (MBC);
- Payable within 120 days (until Aug), with 12% interest per
annum;
- They failed to pay and left balance of 15k as of September
1969;
2. May and June 1966, executed two PNs;
- 8k and 1k respectively payable within 120 days and 12% per
annum;
- They made partial payment but still left 8.9k balance as of
September 1969;
3. It appears than in 1964, Teodoro Jr executed a Deed of Assignment
of Receivables in favour of MBC from Emergency Employment
Administration;
- Amounted to 44k;
- The deed provided it was for consideration of certain credits,
loans, overdrafts and other credit accommodations extended to
the spouses and Teodoro Sr as security for the payment of said
sum and interest thereon; and that they release and quitclaim all
its rights, title and interest in the receivables;
4. In the stipulations of fact, it was admitted by the parties:
- That MBC extended loans to the spouses and Teodoro Jr
because of certain contracts entered into by latter with EEA for
fabrication of fishing boats and that the Philippine Fisheries
Commission succeeded EEA after its abolition;
- That non-payment of the PNs was due to failure of the
Commission to pay spouses;
- That the Bank took steps to collect from the Commission but
no collection was effected;
5. For failure of the spouses and Teodor Sr to pay, MBC instituted
against them;
- Teodoro Sr subsequently died so suit only against the spouses;
6. TC favoured MBC; MFR denied;
- Spouses appealed to CA but since issue pure question of law,
CA forwarded to SC;
Issues:
W/N the assignment of receivables has the effect of payment of all the
loans contracted by the spouses; NO.
W/N MBC must exhaust all legal remedies against PFC before it can
proceed against the spouses. NO.
Ratio:
Assignment of credit:
- An agreement by virtue of which the owner of a
credit(assignor) by a legal cause (e.g. sale, dation in payment,
exchange or donation) and without the need of the consent of
the debtor, transfers his credit and its accessory rights to
another(assignee) who acquires the power to enforce it to the
same extent as the assignor could have enforced it against the
debtor;
- May be in form of:
o Sale
o Dation in payment - when a debtor, in order to obtain a
release from his debt, assigns to his creditor a credit he has
against a third person;
o Donation – when it is by gratuitous title;
o Guaranty – creditor gives as a collateral, to secure his own
debt in favour of the assignee, without transmitting
ownership;
- Obligations between the parties will depend upon the juridical
relation which is the basis of the assignment;
What is the legal effect of the Assignment (since its validity is not
in question):
1. Assignment of receivables in 1964 did not transfer the
ownership of the receivables to MBC and release the spouses
from their loans;
- Consideration was for certain credits, loans, overdrafts and
credit accommodations worth 10k extended by MBC to
spouses and as security for the payment of said sum and
interest thereon; also quitclaim of rights to MBC of their
interest in the receivables;
- Stipulated also that it was a continuing guaranty for future
loans and correspondingly, the assignment shall extend to
all accounts receivable;
Contention of spouses: not mere guaranty since it was
stipulated:
- That the assignor release and quitclaim to assignee all its
rights, title and interest in the accounts receivable;
- That title and right of possession to account receivable is to
remain in assignee and it shall have right to collect directly
from the debtor; that whatever the assignor does in
connection with collection of such, it does so as agent and
representative and in trust of assignee;
- SC: character of transaction is not determined by the
language in document but by intention of the parties;;
- If it was intended to secure the payment of money, it must
be construed as a pledge.
- A transfer of property by the debtor to a creditor, even if
sufficient on its farm to make an absolute conveyance,
should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer;
Assignment of receivables did not result from sale or by virtue
of a dation in payment;
- At time the deed was executed, the loans were non-existent
yet;
- At most, it was a dation for 10k, the amount of credit with
MBC indicated in the deed; at the time of execution, there
was no obligation to be extinguished except for the 10k;
- 1292: in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the
new obligations be on every point incompatible with each
other;
Deed of assignment intended as collateral security for the
loans, as a continuing guaranty for whatever sums that would
be owing by spouses;
- In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge,
the latter being the lesser transmission of rights and
interests (Lopez v CA);
2. MBC need not exhaust all legal remedies against PFC:
- Spouses, not being released by the assignment, remain as
the principal debtors of MBC, rather than mere guarantors;
- The deed merely guarantees said obligations;
- 2058 (creditor must have exhausted property of debtor and
resorted to all legal remedies before it can proceed to
guarantor) does not apply to them;
- Appellants are both the principal debtors and the pledgors
or mortgagors;
 -MBC did try to collect but at OP, it was disapproved; so the
loan was basically unsecured;
DISMISSED.
Feliciano, J. concurring.
Justice Bidin’s, "the character of the transactions between the parties is
not, however, determined by the language used in the document but by
their intention” – not without exception;
- Deed here contains language which suggest that the parties
intended complete alienation of title to and rights over the
receivables;
- Words ‘remise’, ‘release’ and ‘quitclaim’ and clauses ‘ title the
title and right of possession to said accounts receivable is to
remain in said assignee" who "shall have the right to collect
directly from the debtor’;
- Words ‘agent’ also convey the ideas;
- But such must be taken in conjunction with and qualified by
other language showing intent of the parties that title to the
receivables shall pass to the assignee for the limited
purpose of securing another, principal obligation owed by the
assignor to the assignee;
Title moves from assignor to assignee but that title is defeasible being
designed to collateralize the principal obligation:
- Operationally: means assignee is burdened to collateralize the
principal obligation; taking the proceeds of the receivables
assigned and applying such proceeds to the satisfaction of the
principal obligation and returning any balance remaining
thereafter to the assignor;
The parties gave the deed of assignment the form of an absolute
conveyance of title over the receivables assigned, essentially for the
convenience of the assignee:
- Without such nature of absolute conveyance, the assignee
would have to foreclose the properties; he would have to
comply with documentation and registration requirements of a
pledge or chattel mortgage);
- A deed of assignment by way of security avoids the necessity
of a public sale impose by the rule on pactum commisorium, by
in effect placing the sale of the collateral up front;
- The foregoing is applicable where the deed of assignment of
receivables combines elements of both a complete alienation of
the credits and a security arrangement to assure payment of a
principal obligation;
- Where the 2nd element is absent, the assignment would
constitute essentially a mode of payment or dacion en pago;
- in order that a deed of assignment of receivables which is in
form an absolute conveyance of title to the credits being
assigned, may be qualified and treated as a security
arrangement, language to such effect must be found in the
document itself and that language, precisely, is embodied in the
deed of assignment in the instant case.
Integrated Realty Corporation vs PNB
Doctrine
While it is true that under Art 1956 of the Civil Code no interest shall
be due unless it has been expressly stipulated in writing, this applies
only to interest for the use of money. It does not comprehend interests
paid as damages. Legal interest, in the nature of damages for
noncompliance with an obligation to pay a sum of money, is
recoverable from the date of judicial or extrajudicial demand.
Summary
Santos and IRC made two time deposits with OBM amounting to
P700k. They used the time deposits as a security for the P700k loan
and/or credit line obtained from PNB. A Deed of Assignment was later
executed in favor of PNB. OBM failed to pay PNB upon the maturity
date of the time deposits. Thus, PNB filed a complaint to collect from
IRC, Santos and OBM. The Court held that IRC and Santos are still
liable to pay because the deed of assignment cannot be considered a
payment. As a general rule, it will only constitute payment if there was
an express agreement on the part of the creditor, which was lacking in
this case. OBM, on the other hand, is not liable to pay the interests on
the two time deposits during the suspension of its operations.
However, it is liable for the damages incurred due to the delay in
payment because OBM’s operations were not yet suspended at the
time of demand; hence, no valid reason for the non-compliance.
Facts
 Santos made two time deposits with defendant OBM in the
amount of P500k and P200k (P700k total)
ISSUE/RATIO
 Defendant IRC, through its president Santos applied for a loan
and/or credit line in the amount of P700k with plaintiff bank.
To secure the loan, Santos executed a Deed of Assignment of
the two time deposits in favor of PNB. OBM gave its
conformity to the assignment.
 OBM, after the due dates of the time deposit certificates, failed
to pay PNB. Thus, PNB demanded payment from IRC and
Santos and also from OBM. IRC and Santos, however, denied
liability and alleged that the obligation was deemed paid with
the irrevocable assignment of the time deposit certificates.
 Therefore, PNB filed a complaint to collect from IRC and
Santos the loan of P700k with interest as well as attorney’s
fees. It also impleaded OBM as a defendant to compel it to
redeem and pay the time deposit certificates with interest.
 OBM initially denied knowledge of the time deposit
certificates alleging that those do not appear in their books of
account. it eventually acknowledged the time deposits and
admitted that their failure to pay was due to its distressed
financial situation. As a defense, it alleged that it does not have
the capacity to pay by reason of its insolvency.
 Trial court – ruled in favor of PNB and order IRC and Santos
to pay the P700k loan plus interest. It also ordered OBM to pay
IRC and Santos “whatever amounts the latter will pau to the
plaintiff with interest from the date of payment”
 CA – modified the decision and deleted the portion of the
judgment ordering OBM to pay IRC and Santos.
I. Whether the liability of IRC and Santos with PNB should be
deemed to have been paid by virtue of the deed of assignment by
the former in favor of PNB – NO
(1) The court agrees with the CA that the deed of assignment does not
constitute “payment” of their obligation. It will only be considered a
payment if there was an express agreement on the part of the creditor
to receive it as such. Hence, IRC and Santos are still liable to pay the
amount.
(2) It would not have been necessary on the part of IRC and Santos to
execute promissory noted in favor of PNB if the assignment of the
time deposits was intended as an absolute conveyance. In this case, the
deed of assignment is actually pledge.
(3) Elements of a contract of pledge:
a. That it be constituted to secure the fulfillment of a principal
obligation
b. That the pledgor be the absolute owner of the thing pledged
c. That the persons constituting the pledge have the free disposal of the
property and in the absence thereof, that they be legally authorized for
the purpose.
(4) In this case, the requirements have been satisfied. The additional
requirement that the thing pledged must be placed in the possession of
the creditor was also complied with by the execution of the deed of
assignment in favor of PNB
(5) It must also be noted that Santos, as assignor, made a express
undertaking1 that he would remain liable for any outstanding balance
of his obligation should PNB fail to collect the assigned sums. The
term “for any cause whatsoever” is broad enough to include the
present situation.
II. Whether the one and one-half percent interest imposed by PNB
is illegal – NO
(1) It was presumably done in accordance with ordinary banking
procedures. IRC and Santos failed to overcome such presumption of
regularity as to business transactions.
(2) Furthermore, they are estopped from questioning its validity for the
first time in this petition.
III. Whether OBM should be held liable for interests on the time
deposits of IRC and Santos from the time it ceased operations
until it resumed its business – NO
(1) It should be deemed read into every contract of deposit that the
obligation to pay interest on the deposit ceases the moment the
operation of the bank is completely suspended by the duly constituted
authority, the Central Bank.
(2) Thus, the bank is exempted from paying the interests during the
whole period of factual stoppage of its operations by orders of the CB.
In addition, this exemption should also be applicable to all other
obligations of the bank which could not be paid during the period of its
actual complete closure.
IV. Whether OBM should reimburse them for whatever amounts
they may be adjudged to pay PNB by way of compensation for
damages incurred, pursuant to Art 1170 and 2201 of the Civil
Code – YES
(1) At the time the PNB demanded from OBM payment of the
amounts due on the time deposits which matured in January 11, 1968
and February 6, 1968, there was no obstacle yet which would prevent
OBM’s faithful compliance. It was only on July 31, 1968 when OBM
was excluded from clearing with the CB. In addition, OBM’s
operations were suspended only on August 2, 1968 (few months after
the demand was made) 1 Stipulation in the Deed of assignment – “It is
also understood that herein assignor/s shall remain liable for any
outstanding balance of his/their obligation if the Bank is unable to
actually receive or collect the above assigned sums, monies, or
properties resulting from any agreements, orders or decisions of the
court or for any other cause whatsoever.”
(2) For having incurred in delay, OBM should be liable for damages.
When Santos invested his money in time deposits, it should be
considered a simple loan or mutuum, not a contract of deposit.
(3) While it is true that under Art 1956 of the Civil Code no interest
shall be due unless it has been expressly stipulated in writing, this
applies only to interest for the use of money. It does not comprehend
interests paid as damages.
(4) The applicable rule is that legal interest, in the nature of damages
for non-compliance with an obligation to pay a sum of money, is
recoverable from the date of judicial or extrajudicial demand. In this
case, the measure of such damages shall be the interest agreed upon in
the certificates of deposit (6.5%).
DISPOSITIVE
Judgments is rendered ordering:
1. Integrated Realty Corporation and Raul L. Santos to pay Philippine
National Bank, jointly and severally, the total amount of seven
hundred thousand pesos (P700,000.00), with interest thereon at the rate
of nine percent (9%) per annum from the maturity dates of the two
promissory notes on January 11 and February 6, 1968, respectively,
plus one and one-half percent (114%) additional interest per annum
effective February 28, 1968 and additional penalty interest of one
percent (1%) per annum of the said amount of seven hundred thousand
pesos (P700,000.00) from the time of maturity of said loan up to the
time the said amount of seven hundred thousand pesos (P700,000.00)
is fully paid to Philippine National Bank.
2. 0 Integrated Realty Corporation and Raul L. Santos to pay solidarily
Philippine National Bank ten percent (10%) of the amount of seven
hundred thousand pesos (P700,000.0) as and for attorney's fees.
3. Overseas Bank of Manila to pay Integrated Realty Corporation and
Raul L. Santos the sum of seven hundred thousand pesos
(P700,000.00) due under Time Deposit Certificates Nos. 2308 and
2367, with interest thereon of six and one-half percent (61/2%) per
annum from their dates of issue on January 11, 1967 and February 6,
1967, respectively, until the same are fully paid, except that no interest
shall be paid during the entire period of actual cessation of operations
by Overseas Bank of Manila;
4. Overseas Bank of Manila to pay Integrated Realty Corporation and
Raul L. Santos six and one-half per cent (6 1/2%) interest in the
concept of damages on the principal amounts of said certificates of
time deposit from the date of extrajudicial demand by PNB on March
1, 1968, plus legal interest of six percent (6%) on said interest from
April 6, 1968, until full payment thereof, except during the entire
period of actual cessation of operations of said bank.
5. Overseas Bank of Manila to pay Integrated Realty Corporation and
Raul L, Santos ten thousand pesos (P10,000.00) as and for attorney's
fees.
041. Yau Chu v. Court of Appeals
G.R. No. L-78519/26 September 1989/First Division/Petition for
Review on Certiorari
Victoria Yau Chu (assisted by her husband, Michael) – petitioners
Court of Appeals, Family Savings Bank, and/or CAMS Trading
Enterprises, Inc. – respondents
Decision by J. Grino-Aquino, Digest by Pip
Short Version: Victoria bought cement from CAMS and secured her
payments with deeds of assignment over her time deposits in Family
Savings Bank. She assigned about P320K worth but her obligations to
CAMS came up to about P404K. CAMS requested the bank to encash
the time deposit certificates, which the bank did only after calling up
and obtaining Victoria’s consent. Victoria then sued the bank and
CAMS for alleged pactum commissorium. The Court ruled against her,
as the prohibition on pactum commissorium was enacted in order to
protect debtors from creditors who automatically appropriate pledged
or mortgaged property which might have a higher value than the debt.
Where the security for the debt is also money deposited in a bank, the
amount of which is even less than the debt, it is not illegal for the
creditor to encash the time deposit certificates to pay the debtors’
overdue obligation, with the latter’s consent.
Facts: Since 1980, Victoria Yau Chu had been purchasing cement on
credit from CAMS. To guaranty payment for her cement withdrawals,
she executed in favor of CAMS deeds of assignment of her time
deposits in Family Savings Bank. The total amount came up to P320K.
Except for serial numbers and the dates of the time deposit certificates,
the deeds of assignment prepared by Victoria’s lawyer uniformly read:
... That the assignment serves as a collateral or guarantee for the
payment of my obligation with the said CAMS TRADING
ENTERPRISES, INC. on account of my cement withdrawal from
said company, per separate contract executed between us.
In July 1980, CAMS notified the bank that Victoria had an unpaid
account with it in the sum of about P314K and requested the
encashment of the time deposit certificates assigned to it by Victoria.
As proof, it submitted to the bank a letter from Victoria admitting her
outstanding account with CAMS reaching P404.5K. The bank verbally
advised Victoria of CAMS’ request and after she verbally agreed, the
bank encashed the certificates and delivered about P283K because one
time deposit lacked the proper signatures.
Victoria then turned around and demanded that the bank and
CAMS restore her time deposit. When both refused, she filed a
complaint to recover the sum from them before the RTC of Makati.
The RTC dismissed the complaint for lack of merit. Court of Appeals
affirmed. Before the Supreme Court she argued that the encashment of
her time deposit certificates was pactum commissorium.
Issue: Did the encashment of Victoria’s time deposit certificates
amount to pactum commissorium? NO.
Ruling: Petition denied.
Ratio: Since the collateral in this case was also money, there was no
need to sell the thing pledged at public auction in order to satisfy the
pledgor’s obligation. 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.
The encashment of the deposit certificates was not a pactum
commissorium as prohibited under Article 2088 of the Civil Code.
A pactum commissorium is a provision for
the automatic appropriation of the pledged or mortgaged property
by the creditor in payment of the loan upon its maturity. This
prohibition 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, the security for the debt is also money
deposited in a bank, the amount of which is even less than the
debt, it is not illegal for the creditor to encash the time deposit
certificates to pay the debtors’ overdue obligation, with the latter’s
consent.

Voting: Narvasa, Cruz and Medialdea, JJ., concur.

Gancayco, J., no part.