PLEDGE/MORTGAGE

Sps. Bonifacio and Faustina Paray and Vidal Espeleta v. Dr. Abdulia Rodriguez, Miguel
Jariol, Leonora Nolasco, Dolores Soberano, Julia Generoso, Teresita Natividad, and
Genoveva Soronio

The fundamental premise from which the appellate court proceeded was that the
consignations made by respondents should be construed in light of the rules of redemption, as
if respondents were exercising such right. In that perspective, the Court of Appeals made three
crucial conclusions favorable to respondents: that their act of consigning the payments with
the RTC should be deemed done in the exercise of their right of redemption; that the buyer at
public auction does not ipso facto become the owner of the pledged shares pending the lapse
of the one-year redemptive period; and that the collective sale of the shares of stock belonging
to several individual owners without speci cation of the apportionment in the applications of
payment deprives the individual owners of the opportunity to know of the price they would
have to pay for the purpose of exercising the right of redemption.

The appellate court's dwelling on the right of redemption is utterly o -tangent. The right of
redemption involves payments made by debtors after the foreclosure of their properties, and
not those made or attempted to be made, as in this case, before the foreclosure sale. The
proper focus of the Court of Appeals should have been whether the consignations made by
respondents su ciently acquitted them of their principal obligations. A pledge contract is an
accessory contract, and is necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded
by the Court of Appeals, involving the right of redemption over pledged properties. We have no
hesitation in pronouncing such theory as discreditable.

Preliminarily, it must be clari ed that the subject sale of pledged shares was an extrajudicial
sale, speci cally a notarial sale, as distinguished from a judicial sale as typi ed by an execution
sale. Under the Civil Code, the foreclosure of a pledge occurs extrajudicially, without
intervention by the courts. All the creditor needs to do, if the credit has not been satis ed in
due time, is to proceed before a Notary Public to the sale of the thing pledged.

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of
the pledged shares by public auction. However, extrajudicial sale was stayed with the ling of
Civil Cases No. R-20120 and 20131, which sought to annul the pledge contracts. The nal and
executory judgment in those cases a rmed the pledge contracts and disposed them in the
following fashion:

WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at

bar, and '
(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and
e ective;
(2) Giving due course to the foreclosure and sale at public auction of the various pledges
subject of these two cases.
Costs against the plainti s.

SO ORDERED.

The phrase "giving due course to the foreclosure and sale at public auction of the various
pledges subject of these two cases" may give rise to the impression that such sale is judicial in
character. While the decision did authorize the sale by public auction, such declaration could

Page 1 of 11
ff
fi
ffi
ff
fi
ffi
fi
ff
fi
fi
fi
fi
 not detract from the fact that the sale so authorized is actually extrajudicial in character. Note
that the nal judgment in said cases expressly did not direct the sale by public auction of the
pledged shares, but instead upheld the right of the Parays to conduct such sale at their own
volition.

Indeed, as a rmed by the Civil Code, the decision to proceed with the sale by public auction
remains in the sole discretion of the Parays, who could very well choose not to hold the sale
without violating the nal judgments in the aforementioned civil cases. If the sale were truly in
compliance with a nal judgment or order, the Parays would have no choice but to stage the
sale for then the order directing the sale arises from judicial compulsion. But nothing in the
dispositive portion directed the sale at public auction as a mandatory recourse, and properly so
since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial
in character.

The right of redemption as a rmed under Rule 39 of the Rules of Court applies only to
execution sales, more precisely execution sales of real property.

The Court of Appeals expressly asserted the notion that pledged property, necessarily personal
in character, may be redeemed by the creditor after being sold at public auction. Yet, as a
fundamental matter, does the right of redemption exist over personal property? No law or
jurisprudence establishes or a rms such right. Indeed, no such right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does
not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of
property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it 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 bene t 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
de nitely 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.

Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be
covered by the right of redemption. In Sibal v. Valdez, the Court ruled that sugar cane crops are
personal property, and thus, not subject to the right of redemption. No countervailing statute
has been enacted since then that would accord the right of redemption over personal property,
hence the Court can a rm this decades-old ruling as e ective to date.

Since the pledged shares in this case are not subject to redemption, the Court of Appeals had
no business invoking and applying the inexistent right of redemption. We cannot thus agree
that the consigned payments should be treated with liberality, or somehow construed as
having been made in the exercise of the right of redemption. We also must reject the appellate
court's declaration that the buyer of at the public auction is not "ipso facto" rendered the
owner of the auctioned shares, since the debtor enjoys the one-year redemptive period to
redeem the property. 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.

Page 2 of 11
fi
fi
ffi
fi
fi
ffi
ffi
ffi
ff
fi
 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. This concern is obviously rendered a non-issue by
the fact that there can be no right to redemption in the rst place. 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 di erent 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 insigni cance of ascertaining the de nite 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 de ciency or excess there
may be between the purchase price and the amount of the principal obligation.

A di erent 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. However, in
this case, none of the pledgors participated in the auction, and the sole bidder cast his bid for
all of the shares. There obviously is no longer any practical reason to apportion the bid price to
the respective shares, since no matter how slight or signi cant the value of the purchase price
for the individual share is, the sale is completed, with the pledgor and the pledgee not entitled
to recover the excess or the de ciency, as the case may be. To invalidate the subject auction
solely on this point serves no cause other than to celebrate formality for formality's sake.

Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected.
The question though yet remains 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.

There is no doubt that if the principal obligation is satis ed, 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
clari es 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 satis ed in due time, the creditor may proceed with the sale by public auction under
the procedure provided under Article 2112 of the Code.

Respondents argue that their various consignations made prior to the auction sale discharged
them from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could answer for their
respective principal loan obligations, they were not su cient to cover the interests due on
these loans, which were pegged at the rate of 5% per month or 60% per annum. Before this

Page 3 of 11
ff
fi
ff
fi
fi
fi
fi
fi
ffi
fi
fi
fi
 Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by
petitioners. Soberano, on the other hand, challenges this interest rate as “usurious."

The particular pledge contracts did not form part of the records elevated to this Court.
However, the 5% monthly interest rate was noted in the statement of facts in the 14 October
1988 RTC Decision which had since become nal. Moreover, the said decision pronounced
that even assuming that the interest rates of the various loans were 5% per month, "it is
doubtful whether the interests so charged were exorbitantly or excessively usurious. This is
because for sometime now, usury has become 'legally inexistent.’” The nality of this 1988
Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest
rate had long passed. With that in mind, there is no reason for the Court to disagree with
petitioners that in order that the consignation could have the e ect of extinguishing the pledge
contracts, such amounts should cover not just the principal loans, but also the 5% monthly
interests thereon.

It bears noting that the Court of Appeals also ruled that respondents had satis ed the
requirements under Section 18, Rule 39, which 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."
The reference is inapropos, and even if it were applicable, the failure of the payment to cover
the interests due renders it insu cient to stay the sale.

The e ect of the nality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also
not be discounted. Petitioners' right to proceed with the auction sale was a rmed not only by
law, but also by a nal court judgment. Any subsequent court ruling that would enjoin the
petitioners from exercising such right would have the e ect of superseding a nal and
executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much
trouble if they simply participated in the auction sale, as they are permitted to bid themselves
on their pledged properties. Moreover, they would have had a better right had they matched
the terms of the highest bidder. Under the circumstances, with the high interest payments that
accrued after several years, respondents were even placed in a favorable position by the
pledge agreements, since the creditor would be unable to recover any de ciency from the
debtors should the sale price be insu cient to cover the principal amounts with interests.
Certainly, had respondents participated in the auction, there would have been a chance for
them to recover the shares at a price lower than the amount that was actually due from them to
the Parays. That respondents failed to avail of this bene cial resort wholly accorded them by
law is their loss. Now, all respondents can recover is the amounts they had consigned.

Enrico Villanueva and Ever Pawnshop v. Sps. Alejo and Virginia Salvador

Section 13 of Presidential Decree (P.D.) 114, otherwise known as the Pawnshop Regulation Act,
and even the terms and conditions of the pledge itself, accord the pawner a 90-day grace
period from the date of maturity of the loan obligation within which to redeem the pawn. But
even before the lapse of the 90-day period, the same Decree requires the pawnbroker to notify
the defaulting debtor of the proposed auction sale. Section 14 thereof provides:

Section 14. Disposition of pawn on default of pawner.—In the event the pawner fails to redeem
the pawn within ninety days from the date of maturity of the obligation . . ., the pawnbroker
may sell . . . any article taken or received by him in pawn: Provided, however, that the pawner

Page 4 of 11
ff
fi
fi
ffi
ffi
fi
fi
ff
ff
fi
ffi
fi
fi
fi
 shall be duly noti ed of such sale on or before the termination of the ninety-day period, the
notice particularly stating the date, hour and place of the sale.

However, over and above the foregoing prescription is the mandatory requirement for the
publication of such notice once in at least two daily newspapers during the week preceding the
date of the auction sale.1

The CA cannot really be faulted for making short shrift of petitioners’ posture respecting their
alleged compliance with the notice requirement in question. As it were, petitioner Ever
Pawnshop, as determined by the CA, only caused publication of the auction in one newspaper,
i.e., the Manila Bulletin, and on the very day of the scheduled auction sale itself, instead of a
week preceding the sale as prescribed by Section 15 of P.D. 114. Verily, a notice of an auction
sale made on the very scheduled auction day itself defeats the purpose of the notice, which is
to inform a pawner beforehand that a sale is to occur so that he may have that last chance to
redeem his pawned items.

This brings us to the issue of the award of moral damages which petitioners correctly tag as
erroneous, and, therefore, should be deleted.

While proof of pecuniary loss is unnecessary to justify an award of moral damages, the amount
of indemnity being left to the sound discretion of the court, it is, nevertheless, essential that the
claimant satisfactorily proves the existence of the factual basis of the damages9 and its causal
connection to defendant’s wrongful act or omission. This is so because moral damages, albeit
incapable of pecuniary estimation, are designed to compensate the claimant for actual injury
su ered and not to impose a penalty on the wrongdoer. There is thus merit on petitioners’
assertion that proof of moral su ering must precede a moral damage award.

The conditions required in awarding moral damages are: (1) there must be an injury, whether
physical, mental or psychological, clearly sustained by the claimant; (2) there must be a
culpable act or omission factually established; (3) the wrongful act or omission of the defendant
must be the proximate cause of the injury sustained by the claimant; and (4) the award of
damages is predicated on any of the cases stated in Article 2219 of the Civil Code.

While there need not be a showing that the defendant acted in a wanton or malevolent manner,
as this is a requirement for an award of exemplary damages, there must still be proof of
fraudulent action or bad faith for a claim for moral damages to succeed. Then, too, moral
damages are generally not recoverable in culpa contractual except when bad faith supervenes
and is proven.

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose
or some moral obliquity and conscious doing of a wrong, a breach of known duty through
some motive or interest or ill-will that partakes of the nature of the fraud. And to the person
claiming moral damages rests the onus of proving by convincing evidence the existence of bad
faith, for good faith is presumed.

As aptly pointed out by petitioners, the trial court concluded that the respondents’ "cause of
action arose merely from the negligence of the herein [petitioners].” It may be that gross

1 Section 15, Public auction of pawned articles. – No pawnbroker shall sell or otherwise dispose of any
article … received in pawn or pledge except at a public auction …. , nor shall any such article or thing be
sold or disposed of unless said pawnbroker has published a notice once in at least two daily
newspapers printed in the city or municipality during the seek preceding the date of such sale. … P.D.
114.

Page 5 of 11
ff
fi
ff
 negligence may sometimes amount to bad faith. But what is before us is a matter of simple
negligence only, it being the trial court’s categorical nding that the case came about owing to
petitioners’ mistake in renewing the loan when the sale of the article to secure the loan had
already been e ected. Wrote the trial court:

"What must have happened next was that the jewelry under the rst loan was sold, as
scheduled, on 7 May 1992. Due to an oversight, the defendants mistakenly renewed the rst
loan on 1 June 1992, issuing pawn ticket number 34932 in the process.”

The CA’s reliance on Article 2220 of the Civil Code in a rming the award of moral damages is
misplaced. Said article provides:

Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the
court should nd that, under the circumstances, such damages are justly due. The same rule
applies to breaches of contract where the defendant acted fraudulently or in bad faith.

Clear it is from the above that before moral damages may be assessed thereunder, the
defendant’s act must be vitiated by bad faith or that there is willful intent to injure. Simply put,
moral damages cannot arise from simple negligence.

The award of attorney’s fees should, likewise, be struck down, both the CA and trial court
having failed to explain respondents’ entitlement thereto. As a matter of sound practice, an
award of attorney’s fee has always been regarded as the exception rather than the rule.
Counsel’s fees are, to be sure, not awarded every time a party prevails in a suit because of the
policy that no premium should be placed on the right to litigate. Attorney’s fees, as part of
damages, are assessed only in the instances speci ed in Article 2208 of the Civil Code. And it
is necessary for the trial court to make express ndings of fact and law that would bring the
case within the exception. In short, the factual, legal or equitable justi cation for the award
must be set forth in the text of the decision. The matter of attorney’s fees cannot be touched
only in the fallo of the decision, else the award should be thrown out for being speculative and
conjectural.

Certainly not lost on the Court is the fact that petitioners, after being served with summons,
made an attempt to obviate litigation by o ering to accept tender of payment and return the
jewelry. This o er, however belated, could have saved much expense on the part of both
parties, as well as the precious time of the court itself. The respondents chose to turn down
this o er and pursue judicial recourse. With this in mind, it hardly seems fair to award them
attorneys fees at petitioners’ expense.

Union Bank of the Philippines v. Alain Juniat, Winwood Apparel, Inc., Wingyan Apparel,
Inc., and Nonwoven Fabric Philippines

To have a binding e ect on third parties, a contract of pledge must appear in a public
instrument.2

2 Article 2096 of the Civil Code provides:

A pledge shall not take e ect against third persons if a description of the thing pledged and the date of
the pledge do not appear in a public instrument.

Page 6 of 11
ff
fi
ff
ff
ff
ff
ff
fi
fi
fi
ffi
fi
fi
fi
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and
Winwood, in favor of petitioner does not bind Nonwoven.3 However, it must be pointed out that
petitioner’s primary cause of action is for a sum of money with prayer for the issuance of ex-
parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the motorized sewing machines and equipment. Thus, the fact that the Chattel
Mortgage executed in favor of petitioner was not notarized does not a ect petitioner’s cause of
action. Petitioner only needed to show that the loan of Juniat, Wingyan and Winwood remains
unpaid and that it is entitled to the issuance of the writs prayed for. Considering that writs of
attachment and replevin were issued by the RTC,52 Nonwoven had to prove that it has a better
right of possession or ownership over the attached properties. This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap
machines and boilers were pledged to Nonwoven by Juniat to guarantee his obligation.
However, under Article 2096 of the Civil Code, "a pledge shall not take e ect against third
persons if a description of the thing pledged and the date of the pledge do not appear in a
public instrument." Hence, just like the chattel mortgage executed in favor of petitioner, the
pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.

Neither can we sustain the nding of the CA that: "The machineries were ceded to THIRD
PARTY NONWOVEN by way of dacion en pago, a contract later entered into by WINWOOD/
WINGYAN and THIRD PARTY NONWOVEN.” As aptly pointed out by petitioner, no evidence
was presented by Nonwoven to show that the attached properties were subsequently sold to it
by way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to
indicate that the motorized sewing machines, snap machines and boilers were ceded to
Nonwoven as payment for the Wingyan’s and Winwood’s obligation. It bears stressing that
there can be no transfer of ownership if the delivery of the property to the creditor is by way of
security. In fact, in case of doubt as to whether a transaction is one of pledge or dacion en
pago, the presumption is that it is a pledge as this involves a lesser transmission of rights and
interests.

In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not
entitled to the proceeds of the sale of the attached properties because it failed to show that it
has a better title over the same.

Sps. Rolando and Cynthia Rodriguez v. EIB, The Clerk of Court and Ex-O cio Sheri ,
RTC of Makati, and The Registrar of Deeds, City of Makati

The extra-judicial foreclosure of the Makati property was premature.

There are three (3) elements that must be established before a creditor may proceed with the
extra-judicial foreclosure of a mortgage, thus:

"First, there must have been the failure to pay the loan obtained from the mortgagee-creditor;
second, the loan obligation must be secured by a real estate mortgage; and third, the
mortgagee-creditor has the right to foreclose the real estate mortgage either judicially or extra-
judicially.”

3Civil Code, Art. 2125. In addition to the requisites stated in Article 2085, it is indispensable, in order that
a mortgage may be validly constituted, that the document in which it appears be recorded in the
Registry of Property. If the instrument is not recorded, the mortgage is nevertheless binding between the
parties.
The persons in whose favor the law establishes a mortgage have no other right than to demand the
execution and the recording of the document in which the mortgage is formalized.

Page 7 of 11
fi
ff
ffi
ff
ff
 Subsumed in the rst and third elements is the requirement that the mortgagor-debtor be in
default. In the absence of a contractual stipulation to the contrary, the mortgagor-debtor can
only be deemed in default when the latter fails to pay despite a valid demand made by the
mortgagee-creditor. Thus:

x x x It would only be when a demand to pay had been made and was subsequently
refused that a borrower could be considered in default, and the lender could obtain the
right to collect the debt or to foreclose the mortgage.

Clearly, without a prior valid demand, the mortgagee-creditor's resort to extra-judicial

foreclosure is premature and thus, void. The Court's ruling in Development Bank of the
Philippines v. Licuanan (Licuanan) lends guidance:

The issue of whether demand was made before the foreclosure was e ected is
essential. If demand was made and duly received by the respondents and the latter still
did not pay, then they were already in default and foreclosure was proper. However, if
demand was not made, then the loans had not yet become due and demandable. This
meant that respondents had not defaulted in their payments and the foreclosure by
petitioner was premature. Foreclosure is valid only when the debtor is in default in
the payment of his obligation. (Emphasis supplied; citations omitted)

Stripped of the non-essentials, the resolution of the Petition lies in the determination of whether
Spouses Rodriguez were in default at the time of the extra-judicial foreclosure. To resolve this
issue, the Court must rst determine whether EIB's written demands were valid, for as learned
from Licuanan, Spouses Rodriguez's default must proceed from a prior valid demand for
payment of their obligation under the 1999 RCML.

In Bulatao v. Estonactoc (Bulatao), the Court explained that the characteristics of a valid
demand must mirror the characteristics of a valid payment, thus:

For there to be a valid payment, the three characteristics of payment must be present.
These are: (1) integrity of payment, which is provided for in Article 1233 of the Civil
Code: "A debt shall not be understood to have been paid unless the thing or service in
which the obligation consists has been completely delivered or rendered, as the case
may be"; (2) identity of payment, which is provided for in Article 1244: "The debtor of a
thing cannot compel the creditor to receive a di erent one, although the latter may be
of the same value as, or more valuable than that which is due. In obligations to do or
not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee's will"; and (3) indivisibility of payment, which is provided for in
Article 1248: "Unless there is an express stipulation to that e ect, the creditor cannot
be compelled partially to receive the prestations in which the obligation consists.
Neither may the debtor be required to make partial payments. However, when the debt
is in part liquidated and in part unliquidated, the creditor may demand and the debtor
may e ect the payment of the former without waiting for the liquidation of the latter."
Since integrity of payment requires that the thing or service in which the obligation
consists has been completely delivered or rendered as the case may be, the debtor
must comply in its entirety with the prestation and that the creditor is satis ed with the
same.

These characteristics of payment should mirror the demand made by the creditor in
order for the debtor to incur in delay under Article 1169 of the Civil Code. The demand

Page 8 of 11
ff
fi
fi
ff
ff
fi
ff
 must comply with the integrity, identity, and indivisibility characteristics as well. Since the
debtor cannot compel the creditor to accept an incomplete delivery or an amount less
than what is due, it follows that the creditor cannot compel the debtor to pay more than
what is due. Thus, the characteristics of integrity and identity will be violated if the
creditor demands more than what is due. (Emphasis supplied)

Hence, for the creditor's demand to be considered valid, it must: (i) speci cally relate to the
obligation that is due and demandable; and (ii) fully apprise the debtor of the amount due to the
creditor, including any accrued interest and penalties imposed on the obligation. It follows that
an incomplete demand, or one that leaves the debtor unable to make a valid payment, is
ine ective and is insu cient for the purpose of rendering the debtor in default of the obligation.

It was therefore incumbent upon EIB as mortgagor-creditor to establish that a valid demand for
payment of the loan obligation under the 1999 RCML had been made, and that Spouses
Rodriguez had failed to pay despite such demand. Thus, EIB had the burden to prove that its
written demands speci cally pertained to the obligation covered by the mortgage in question,
and that such obligation was already due and demandable. Further, these written demands
must have fully apprised Spouses Rodriguez of the total amount payable.

EIB clearly failed to overcome this burden.

EIB's written demands pertained to obligations which had been extinguished by way of
extinctive novation.

Spouses Rodriguez claim that EIB's written demands were ine ective as they pertained to
obligations which had been extinguished by the 1999 RCML. The Court agrees.

Reference to the Civil Code provisions governing novation is proper. They state:

ART. 1291. Obligations may be modi ed by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

ART. 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.

Novation is the substitution or alteration of an obligation by a subsequent one that cancels or

modi es the preceding one. Unlike other modes of extinguishing of obligations, novation is a
juridical act of dual function, in that at the time it extinguishes an obligation, it creates a new
one in lieu of the old. Novation may be total or extinctive, when there is an absolute
extinguishment of the old obligation, or partial, when there is merely a modi cation of the old
obligation.

Here, the written demands made and referred to by EIB in the Extr Judicial Foreclosure
Petition pertain not to Spouses Rodriguez's loan obligation under the 1999 RCML, but to the
individual RCMLs previously issued in favor of Cynthia and Rolando. Speci cally, the letters
dated August 12, 2002 cited by EIB in the Extra-Judicial Foreclosure Petition demanded
Spouses Rodriguez to pay the outstanding balances in RCML Account No. 7255-00017-0
(under Cynthia's name) and RCML Account No. 7255-00016-4 (under Rolando's name), in the
amounts of P3,358,024.65 and P2,344,000.00, respectively.

Page 9 of 11
ff
fi
ffi
fi
fi
ff
a­
fi
fi
fi
 Notably, these individual RCMLs were explicitly cancelled under clause 13 of the Letter-
Agreement detailing the terms of the 1999 RCML, to wit:

This facility shall cancel the RCML of Ms. Cynthia C. Rodriguez for [P]3,591,000[.00]
with Account No. 7255-00017-0 and RCML of Mr. Rolando C. Rodriguez with Account
No. 7255-00016-4. (Emphasis supplied)

In the absence of any qualifying stipulation, the term "cancel" in clause 13 should be
interpreted in its literal sense, and should be construed to e ect a complete cancellation and
extinguishment of Spouses Rodriguez's individual RCMLs and the creation of the 1999 RCML
in lieu thereof. Pursuant to clause 13, the parties changed the object of Spouses Rodriguez's
obligation through extinctive novation.

While EIB vehemently insists that the 1999 RCML was merely created with the intention of
consolidating Spouses Rodriguez's previous loans under one account, it failed to explain,
much less prove, that such was the case. Neither the Loan Agreement nor the Letter-
Agreement corresponding to the 1999 RCML bears any stipulation that supports EIB's
contention. It bears stressing that the loan documents corresponding to the 1999 RCML were
prepared solely by Urban Bank, EIB's predecessor-in-interest. If the parties intended to
consolidate Spouses Rodriguez's previous loans under the 1999 RCML, the loan documents
should have so stated.

It thus becomes clear that the prior written demands served by EIB upon Spouses Rodriguez
pertained to obligations which had been explicitly extinguished under the 1999 RCML. These
demands could not have had the e ect of placing Spouses Rodriguez in default of the
obligation arising from the 1999 RCML. Accordingly, Spouses Rodriguez were not in default at
the time of the extra-judicial foreclosure. Thus, the extra-judicial foreclosure of the Makati
property was, in law, premature, and therefore, null and void.

In view of the foregoing, the Court deems it unnecessary to pass upon the other arguments
raised by the parties with respect to terms and conditions of the 1999 RCML.

There is no basis to award moral damages and attorney' s fees.

Moral damages may be recovered on account of physical su ering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. These damages may also be awarded based on a nding of willful injury to
property.

On the other hand, attorney's fees may be awarded based on the grounds set forth under
Article 2208. However, such award presupposes the existence of factual, legal, and equitable
justi cation for no premium should be placed on the right to litigate. Thus:

x x x Even when a claimant is compelled to litigate with third persons or to incur

expenses to protect his rights, still, attorney's fees may not be awarded where no
su cient showing of bad faith could be re ected in a party's persistence in a case other
than an erroneous conviction of the righteousness of his cause. (Citations omitted)

Here, Spouses Rodriguez allege, among others, that they are entitled to moral damages and
attorney's fees on account of EIB's bad faith. Speci cally, they assert that EIB acted in bad
faith when it caused the service of the Extra-Judicial Foreclosure Petition and Notice of Sheri s
Sale at their Makati address knowing that Spouses Rodriguez had relocated to Bacolod City.

Page 10 of 11
ffi
fi
ff
fl
fi
ff
ff
fi
ff
 Spouses Rodriguez further lament that EIB demolished the improvements built on the Makati
property as it "obviously wanted to render nugatory any decision the Court may have on the
Makati property and its improvements.” However, these allegations, without more, do not
support a nding of bad faith.

Page 11 of 11
fi