MCMICKING VS.

MARTINEZ debt which has not only been shown to be enforceable against her but which, as a
witness for the defendant Martinez on the trial of this cause, she expressly and
FACTS: Sometime during the year 1908, Pedro Martinez, defendant, obtained vehemently repudiated as a valid claim against her. Where a pledge in the form of
judgment in the CFI of the city of Manila against one Maria Aniversario. Thereafter a public instrument, duly executed as such, contains an admission of the
execution was issued upon said judgment and the sheriff levied upon a pailebot indebtedness in a specified amount to secure which debt said pledge was made,
(“pilots boat”) alleged to be the property of said Maria Aniversario. Defendant Go and said pledge is void for failure to deliver to the creditor, or to a third person
Juna intervened and claimed a lien upon said boat by virtue of a pledge of the agreed upon, the property pledged, said indebtedness is, nevertheless, one
same to him by the said Maria Aniversario made on the 27th day of February, appearing in a public instrument under article 1924 of the Civil Code, and such
1907, which said pledge was evidenced by a public instrument bearing that date. debt takes preference over a judgment secured against the pledgor subsequent to
This action was brought by the sheriff against Go Juna and Pedro Martinez to the date of said public instrument. The judgment is, therefore, reversed; and it is
determine the rights of the parties to the funds in his hands. Maria Aniversario was ordered that the cause be returned to the court below; that the plaintiff bring in
not made a party. Pedro Martinez alleged as a defense that the pledge which said Maria Aniversario as a party to this action, and that she be given an opportunity to
document was intended to constitute had not been made effective by delivery of make her defense, if she has any, to the document in question under proper
the property pledged, as required by article 1863 of the Civil Code, and that, procedure. POLICY: A pledge (not a chattel mortgage) of personal property to
therefore, there existed no preference in favor of said Go Juna. The court declared secure an indebtedness is without force or effect unless the property pledged is
a preference in favor of Pedro Martinez, and ordered the sheriff to pay over the delivered to the pledgee or to some third person agreed upon.
said funds in consonance therewith. An appeal was taken from said judgment
CALTEX VS CA
ISSUE:
FACTS:
Whether or not there was a pledge. NO
On various dates, Security Bank issued 280 Certificates of Time Deposit (CTD) in
HELD: favor of Angel Dela Cruz who deposited with the bank an aggregate amount of
P1.12M. Dela Cruz then delivered the CTDs to Caltex for the purchase of fuel
The court concluded that the property was not delivered in accordance with the products. Dela Cruz informed the bank that he lost all the CTDs in dispute. He was
provisions of article 1863 of the Civil Code. The pledge was ineffective against told to execute an Affidavit of Loss, and was issued 280 replacement CTDs after
Martinez. It appears, however, that the document of pledge is a public document complying with the requirement.
which contains an admission of indebtedness. In other words, while it is intended
to be a pledge, it is also a credit which appears in a public document. Article 1924, Dela Cruz obtained a loan in the amount of P875,000 from the bank and executed
paragraph 3, letter a, is therefore applicable; and, said public document antedating a notarized Deed of Assignment of Time Deposit, which surrenders to Security
the judgment of defendant Martinez, takes preference thereover. The validity of Bank the full control of the CTDs and to apply the said time deposits to the
that document in so far as it shows an indebtedness against Maria Aniversario and payment of the amount due upon loan maturity.
its effectiveness against her have not, however, been determined. She is not a
party to this action. No judgment can be rendered affecting her rights or liabilities Caltex informed Security Bank that it is in possession of the CTDs and decided to
under said instrument. If said instrument is invalid or for any other cause pre-terminate the same but the bank refused such claim for payment of the value
unenforceable against her, it would be wholly unjust, by declaring its preference of the CTDs. The loan of Dela Cruz with the bank then matured and fell due, thus,
over a debt acknowledged by and conclusive against her, to require that said funds the bank set-off and applied the time deposits to the loan. This prompted Caltex to
be paid over to the holder of said document. That would be to require her to pay a file a complaint praying that the bank pay for the CTDs.
 Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . .
ISSUE/S: may also be pledged. The instrument proving the right pledged shall be
delivered to the creditor, and if negotiable, must be indorsed.
Is the pledge between Dela Cruz and Caltex valid? YES.
Art. 2096. A pledge shall not take effect against third persons if a
Can Caltex as holder in due course rightfully recover on the CTDs? NO. description of the thing pledged and the date of the pledge do not appear
in a public instrument.
RULING:
Aside from the fact that the CTDs were only delivered but not indorsed, petitioner
Although the CTDs are bearer instruments, a valid negotiation thereof for the true failed to produce any document evidencing any contract of pledge or guarantee
purpose and agreement between Caltex and De la Cruz, as ultimately ascertained, agreement between it and Angel de la Cruz. Consequently, the mere delivery of
requires both delivery and indorsement. CTDs were in reality delivered to it as a the CTDs did not legally vest in petitioner any right effective against and binding
security for De la Cruz' purchases of its fuel products. Any doubt as to whether the upon the bank. The requirement under Article 2096 aforementioned is not a mere
CTDs were delivered as payment for the fuel products or as a security has been rule of adjective law prescribing the mode whereby proof may be made of the date
dissipated and resolved in favor of the latter by petitioner's own authorized and of a pledge contract, but a rule of substantive law prescribing a condition without
responsible representative himself. which the execution of a pledge contract cannot affect third persons adversely.

Under the Negotiable Instruments Law, an instrument is negotiated when it is On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor
transferred from one person to another in such a manner as to constitute the of the bank was embodied in a public instrument. With regard to this other mode of
transferee the holder thereof, and a holder may be the payee or indorsee of a bill transfer, the Civil Code specifically declares:
or note, who is in possession of it, or the bearer thereof.
Art. 1625. An assignment of credit, right or action shall produce no effect
In the present case, however, there was no negotiation in the sense of a transfer of as against third persons, unless it appears in a public instrument, or the
the legal title to the CTDs in favor of petitioner in which situation, for obvious instrument is recorded in the Registry of Property in case the assignment
reasons, mere delivery of the bearer CTDs would have sufficed. Here, the delivery involves real property.
thereof only as security for the purchases of Angel de la Cruz (and we even
disregard the fact that the amount involved was not disclosed) could at the most Respondent bank duly complied with this statutory requirement. Contrarily,
constitute petitioner only as a holder for value by reason of his lien. Accordingly, a petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
negotiation for such purpose cannot be effected by mere delivery of the instrument proved the amount of its credit or the extent of its lien nor the execution of any
since, necessarily, the terms thereof and the subsequent disposition of such public instrument which could affect or bind private respondent. Necessarily,
security, in the event of non-payment of the principal obligation, must be therefore, as between petitioner and respondent bank, the latter has definitely the
contractually provided for. better right over the CTDs in question.

As such holder of collateral security, he would be a pledgee but the requirements ESTATE OF G. LITTON VS. MENDOZA AND COURT OF APPEALS
therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of FACTS: In 1963, CMB Products, with Mendoza as president, offered to sell textile
incorporeal rights: cotton materials to the Bernal spouses, who were engaged in manufacture of
embroidery, garments and cotton materials. For this purpose, Mendoza introduced was null and void because of the deed of assignment executed in favour of Litton,
the spouses to Alfonso Tan. Sr.; he says that with such, he has no more right to alienate said credit;

The spouses purchased on credit from Tan cotton materials amounting to 80,000. The compromise agreement was approved:
Mendoza guaranteed the payment of the debt. a. It said that the assignment was by way of securing only his obligation to Litton,
Sr.;
Tan then delivered the cotton materials to the spouses. In view of the arrangement, b. Thus, Tan retained possession and dominion over the credit (2085);
CBM Products (thru Mendoza) asked for and received a post-dated check for the c. Although considered as a litigatious credit, such may be validly alienated by Tan;
payment of the spouses’ debt. such alienation is subject to the remedies of Litton under 6 of CC whereby, the
It was understood that Mendoza will retain the check until the cotton materials are assignment if proven prejudicial to Litton, may entitle Littion to pursue his remedies
finally manufactured into garments, after which Mendoza will sell the finished against Tan;
products for the spouses. Meanwhile, the check matured without having been d. The alienation of a litigatious credit is further subject to the debtor’s right of
cashed so Mendoza demanded for another check without a date. redemption under 1634;

Feb. 28, 1964, Mendoza issued two checks in favour of Tan. He told the spouses ISSUE:
of the same and told them they are indebted to him and asked the spouses to sign
an instrument whereby Mendoza assigned the said amount to Insular Products, Can a plaintiff in a case, who had previously assigned in favor of his creditor his
Inc.. litigated credit in said case, by a deed of assignment which was duly submitted to
the court, validly enter into a compromise agreement thereafter releasing the
Tan had the two checks discounted but were later returned with words ‘stop defendant therein from his claim without notice to his assignee? NO.
payment’. It appears it was ordered by Mendoza for failure of the spouses to
deposit sufficient funds for the check issued by the spouses in his favour. HELD:

Tan sued Mendoza while the spouses brought an action for interpleader for not The purpose of compromise is to replace and terminate controverted claims. Once
knowing whom to pay. Pendente lite, Tan assigned in favour of Littion, Sr his approved, it has the force of res judicata (except for vices of consent or forgery).
litigatious credit (in action of spouses) against Mendoza, duly submitted to the Petitioner seeks to set aside the compromise agreement since prior thereto, Tan
court, with notice to the parties. executed a deed of assignment in favour of Littion, Sr. involving the same litigated
credit.
The Trial Court ordered Mendoza to pay Tan 76k, which was affirmed by the Court
of Appeals. Fact that assignment was done by way of securing Tan’s obligation in favour of
Littion, Sr. does not affect the resolution of the matter. Also, the validity of
Mendoza entered into Compromise Agreement with Tan wherein the latter pledge/guaranty in favour of Liiton has not been questioned. Deed of assignment
recognized that his claims against Mendoza had been settled and because of that, fulfils the requirements of a valid pledge or mortgage.
both waives any claim against the other; with a provision that it no way affects
Tan’s right to go against the spouses. 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
Mendoza filed MFR saying that there was the compromise agreement which taken to mean as a grant of an absolute right on the part of the assignor Tan to
absolved him from liability Tan opposed this saying the Compromise agreement 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 Yuliongsu commenced an action for recovery on the pledged items, and alleges,
code. Although the pledgee or the assignee, Litton, Sr. did not ipso facto become among others, that the contract executed was a chattel mortgage so the creditor
the creditor of private respondent Mendoza, the pledge being valid, the incorporeal defendant could not take possession of the chattel object thereof until after there
right assigned by Tan in favor of the former can only be alienated by the latter with has been default.
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 ISSUE/S:
of the assignee will render nugatory the very purpose of a pledge or an assignment
of credit. 1. Whether the contract entered into was a pledge or a chattel mortgage. PLEDGE
2. Whether the constructive delivery is insufficient to make pledge effective. NO
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 RULING:
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 The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract —
agreement does not bind the assignee, petitioner herein.
3. That a credit line of P50,000.00 was extended to the plaintiff by the
YULIONGSU V. PNB defendant Bank, and the plaintiff obtained and received from the said
Bank the sum of P50,000.00, and in order to guarantee the payment of
FACTS: Diosdado Yuliongsu (Yuliongsu) was the owner of 2 vessels: M/S Surigao this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was
and M/S Don Dino, and also operated FS 203, which was purchased from executed and duly registered with the Office of the Collector of Customs
Philippine Shipping Commission by installment or on account. Yuliongsu paid but for the Port of Cebu on the date appearing therein;
left a balance of Php 50,000. Thereafter, he obtained a loan from the defendant
bank and to guarantee payment, Yuliongsu pledged the 2 vessels and the equity Necessarily, this judicial admission binds the plaintiff. Without any showing that this
on FS 203, as evidenced by a pledge contract. was made thru palpable mistake, no amount of rationalization can offset it.

Petitioner made a partial payment and the remaining balance was renewed by the The defendant bank as pledgee was therefore entitled to the actual possession of
execution of 2 promissory notes in the bank’s favor. However, these two notes the vessels. While it is true that plaintiff continued operating the vessels after the
were never paid at all by petitioner on their respective due dates. Respondent bank pledge contract was entered into, his possession was expressly made "subject to
filed a criminal case against plaintiff charging the latter with estafa through the order of the pledgee."
falsification of commercial documents, and the trial court convicted the petitioner
and was sentenced to indemnify the defendant. The corresponding writ of Constructive delivery of the object is sufficient
execution issued to implement the order for indemnification was returned
unsatisfied as plaintiff was totally insolvent. While petitioner invokes the ruling in Betita v. Ganzon, where objects pledged
(carabaos) were easily capable of actual, manual, delivery unto the pledgee, the
Meanwhile, together with the institution of the criminal action, the respondent bank same cannot be sustained here.
took physical possession of the 2 vessels and transferred the equity on FS-203 to The Supreme Court held in Banco Español-Filipino v. Peterson, where the objects
it. Subsequently, the 2 vessels were sold by PNB to third parties. (goods contained in a warehouse) pledged were hardly capable of actual, manual
delivery in the sense that it was impractical as a whole for the particular transaction
and would have been an unreasonable requirement. Thus, for purposes of
showing the transfer of control to the pledgee, delivery to him of the keys to the RELEVANCE: The registration of shares in a stockholder's name, the issuance of
warehouse sufficed. stock certificates, and the right to receive dividends which pertain to the said
shares are all rights that flow from ownership. The determination of whether or not
In other words, the type of delivery will depend upon the nature and the peculiar a shareholder is entitled to exercise these rights falls within the jurisdiction of the
circumstances of each case. The parties here agreed that the vessels be delivered SEC. However, if ownership of the shares is not clearly established and is still
by the “pledgee to the pledgor who shall hold said property subject to the order of unresolved at the time the action for mandamus is filed, then jurisdiction lies with
the pledgee.” Considering the circumstances of this case and the nature of the the regular courts.
objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.
RULING:
Since the respondent bank was, pursuant to the terms of the pledge contract, in full
control of the vessels thru the petitioner, the former could take actual possession at The contracts of pledge contain this common proviso:
any time during the life of the pledge to make more effective its security. Its taking
of the vessels therefore was not unlawful nor was it unjustified considering that 3. In the event of the failure of the PLEDGOR to pay the amount within a
petitioner has just defrauded the respondent bank. period of six (6) months from the date hereof, the PLEDGEE is hereby
authorized to foreclose the pledge upon the said shares of stock hereby
LIM TAY v. CA, GO FAY AND CO. INC., SY GUIOK, and THE ESTATE OF created by selling the same at public or private sale with or without notice
ALFONSO LIM to the PLEDGOR, at which sale the PLEDGEE may be the purchaser at
his option; and the PLEDGEE is hereby authorized and empowered at his
FACTS: option, to transfer the said shares of stock on the books of the corporation
to his own name and to hold the certificate issued in lieu thereof under the
Sy Guiok and Sy Lim secured a loan from Lim Tay in the amount of P40,000. This terms of this pledge, and to sell the said shares to issue to him and to
was secured by a contract of pledge whereby the former pledged their 300 shares apply the proceeds of the sale to the payment of the said sum and
of stock each in Go Fay & Company in favour of the latter. However, they failed to interest, in the manner hereinabove provided;
pay their respective loans. Hence, Lim Tay filed a petition for mandamus against
Go Fay & Company with the SEC praying that an order be issued directing the This contractual stipulation, which was part of the Complaint, shows that Lim Tay
corporate secretary of the said corporation to register the stock transfers and issue was merely authorized to foreclose the pledge upon maturity of the loans, not to
new certificates in favor of Lim Tay. own them. Such foreclosure is not automatic, for it must be done in a public or
private sale. Nowhere did the Complaint mention that Lim Tay had in fact
Lim Tay alleged that, pursuant to the contracts of pledge, he became the owner of foreclosed the pledge and purchased the shares after such foreclosure. His status
the shares when the term for the loans expired. Go Fay & Company opposed as a mere pledgee does not, under civil law, entitle him to ownership of the subject
contending among others that the default of payment of Sy Guiok and Sy Lim did shares.
not automatically vest in Lim Tay the ownership of the pledged shares.
Without Foreclosure and Purchase at Auction, Pledgor Is Not the Owner of
ISSUE: Pledged Shares

Whether Lim Tay is the owner of the shares previously subjected to pledge, for him There is no showing that Lim Tay made any attempt to foreclose or sell the shares
to cause the registration of said shares in his own name? NO. through public or private auction, as stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code. Therefore, ownership of the shares
could not have passed to him. The pledgor remains the owner during the pendency ownership of all the shares will be consolidated in Young's name. Araneta paid
of the pledge and prior to foreclosure and sale, as explicitly provided by Article Young P14,000,000.00 as part of the downpayment.
2103 of the same Code: Unless the thing pledged is expropriated, the debtor
continues to be the owner thereof. In order to carry out the intended sale to Araneta, Young bought from Jorge Go
and his group their 45% equity in the Bank In order to pay this amount, Young
Nevertheless, the creditor may bring the actions which pertain to the owner of the obtained a short-term loan of P170,000,000.00 from International Corporate Bank
thing pledged in order to recover it from, or defend it against a third person. ("Interbank") to finance the purchase.

No Ownership by Prescription and Laches However, Araneta backed out from the intended sale and demanded the return of
his downpayment.
The right to recover the shares based on the written contract of pledge between
petitioner and respondents would arise only upon payment of their respective Young's loan from Interbank became due, causing his serious financial problem.
loans. Therefore, the prescriptive period within which to demand the return of the Consequently, he engaged the services of Asian Oceanic Investment House, Inc.
thing pledged should begin to run only after the payment of the loan and a demand ("Asian Oceanic"), a domestic company owned and controlled by another
for the thing has been made, because it is only then that respondents acquire a petitioner, Insular Life Assurance Co., Ltd. ("Insular Life"), to look for possible
cause of action for the return of the thing pledged. sources of capital.

It is in fact Lim Tay who may be guilty of laches. Lim Tay had all the time to On August 27, 1991, through the intervention of Asian Oceanic, Young and Insular
demand payment of the debt. More important, under the contracts of pledge, Lim Life entered into a Credit Agreement. Under its provisions, Insular Life extended a
Tay could have foreclosed the pledges as soon as the loans became due. But for loan to Young in the amount of P200,000,000.00. To secure the loan, Young,
still unknown or unexplained reasons, he failed to do so, preferring instead to acting in his behalf and as attorney-in-fact of the other stockholders, executed on
pursue his baseless claim to ownership. the same day a Deed of Pledge over 1,324,864 shares which represented 99.82%
of the outstanding capital stock of the Bank. The next day, he also executed a
INSULAR LIFE V YOUNG promissory note in favor of Insular Life in the same amount with an interest rate of
26% per annum to mature 120 days from execution.
FACTS:
On October 9, 1991, Insular Life and Young, authorized to represent the other
Respondent Robert Young and his associates acquired by purchase Home stockholders, entered into a Memorandum of Agreement (MOA), wherein Insular
Bankers Savings and Trust Co., now petitioner Insular Savings Bank. Young and Life and its Pension Fund agreed to purchase 830,860 common shares and
his group obtained 55% equity in the Bank, while Jorge Go and his group owned 311,572 common shares, respectively, for a total consideration of
the remaining 45%. P198,000,000.00. Under its terms, the MOA is subject to Young's representations
and warranties that, as of September 30, 1991, the Bank has
Subsequently, the Bank granted respondents and others individual loans in the (a) a total outstanding paid-in capital of P157,714,900.00,
total amount of P153,000,000.00, secured by promissory notes. (b) a total net worth of P114,801,539.00, and
(c) total loans with doubtful recovery of P60,000,000.00.
Benito Araneta, a stockholder of the Bank, signified his intention to purchase
99.82% of its outstanding capital stock for subject to the condition that the The MOA is also subject to these "condition precedents":
 (1) Young shall infuse additional capital of P50,000,000.00 into the Bank, and
(2) Insular Life and its Pension Fund shall undertake a due diligence audit on the 1. What is the nature of the MOA, a contract of sale or a contract to sell?
Bank to determine whether the provision for P60,000,000.00 doubtful account 2. Is the notarial sale void?
made by Young is sufficient.
RULING:
On October 21, 1991, Young signed a letter stating that due to business reverses,
he shall not be able to pay his obligations under the Credit Agreement between 1. The MOA is a contract to sell.
him and Insular Life. Consequently, Young "unconditionally and irrevocably The provisions of the MOA negate the existence of a perfected contract of sale.
waive(s) the benefit of the period" of the loan (up to December 26, 1991) and The MOA is merely a contract to sell since the parties therein specifically
Insular "may consider (his) obligations thereunder as defaulted." He likewise undertook to enter into a contract of sale if the stipulated conditions are met and
interposes no objection to Insular Life's exercise of its rights under the said the representation and warranties given by Young prove to be true. The obligation
agreement. of petitioner Insular Life to purchase, as well as the concomitant obligation of
Young to convey to it the shares, are subject to the fulfillment of the conditions
Forthwith, Insular Life instructed its counsel to foreclose the pledge constituted contained in the MOA. Once the conditions, representation and warranties are
upon the shares. The latter then sent Young a notice informing him of the sale of satisfied, then it is incumbent upon the parties to perform their respective
the shares in a public auction scheduled on October 28, 1991, and in the event obligations under the contract. Conversely, in the event that these conditions are
that the shares are not sold, a second auction sale shall be held the next day, not met or complied with, no obligation on the part of either party arises.
October 29.
Here, the MOA provides that Young shall infuse additional capital of
The shares were not sold on the two auctions. Since the shares were not sold at P50,000,000.00 into the Bank. It likewise specifies the warranty given by Young
the two public auctions, Insular Life appropriated to itself, not only the original that the doubtful accounts of petitioner Bank amounted to P60,000,000.00 only.
1,324,864 shares, but also the 250,000 shares subsequently issued by the Bank However, records show that Young failed to infuse the required additional capital.
and delivered to Insular Life by way of pledge. Thus, Insular Life gave Young an
acquittance of his entire claim. Since no sale transpired between the parties, the Court of Appeals erred in
concluding that Insular Life purchased 55% of the total shares of the Bank under
Thereafter, title to the said shares was consolidated in the name of Insular Life. the MOA. Consequently, its findings that the debt of Young has been fully paid and
that Insular Life is liable to pay for the remaining 45% equity have no basis. It must
Young and his associates filed with the RTC complaint against the Bank, Insular be emphasized that the MOA did not convey title of the shares to Insular Life. If
Life and its counsel, Atty. Jacinto Jimenez, petitioners, for annulment of notarial ever there was delivery of the said shares to Insular Life, it was because they were
sale, specific performance and damages. pledged by Young to Insular Life under the Credit Agreement.
2. No, the notarial sale is not void.
The complaint alleges that the notarial sale is void as it does not comply with the
requirement of notice of the second auction sale. Article 2112 of the Civil Code provides:
Petitioners contend that the MOA executed on October 9, 1991 is not enforceable
considering that Robert Young committed fraud, misrepresented the warranties The creditor to whom the credit has not been satisfied in due time, may proceed
and failed to comply with his obligations. before a Notary Public for the sale of the thing pledged. The sale shall be made at
a public auction, and with notification to the debtor and the owner of the thing
ISSUE/S: pledged in a proper case, stating the amount for which the public sale is to be held.
If at the first auction the thing is not sold, a second one with the same formalities Velayo countered that the sale of the pledged jewelry extinguished any further
shall be held; and if at the second auction there is no sale either, the creditor may liability on his part under Article 2115 of the 1950 Civil Code.
appropriate the thing pledged. In this case he shall be obliged to give an
acquittance for his entire claim. ISSUE: Whether Velayo is obliged to pay the balance. NO.

Clearly, there is no prohibition contained in the law against the sending of one HELD:As stated in Article 2085 of the 1950 Civil Code, an essential requisite of
notice for the first and second public auction as was done here by petitioner Insular these contracts is that they be constituted to secure the fulfillment of a
Life. The purpose of the law in requiring notice is to sufficiently apprise the debtor principal obligation, which in the present case is Velayo's undertaking to
and the pledgor that the thing pledged to secure payment of the loan will be sold in indemnify the surety company for any disbursements made on account of its
a public auction and the proceeds thereof shall be applied to satisfy the debt. attachment counterbond. Hence, the fact that the pledge is not the principal
When petitioner Insular Life sent a notice to Young informing him of the public agreement is of no significance nor is it an obstacle to the application of
auction scheduled on October 28, 1991, and a second auction on the next day, Article 2115 of the Civil Code.
October 29, in the event that the shares are not sold on the first auction, the
purpose of the law was achieved. We thus reject respondents' argument that the
Article 2115, in its last portion, clearly establishes that the extinction of the principal
term "second one" refers to a separate notice which requires the same formalities
obligation supervenes by operation of imperative law that the parties cannot
as the first notice.
override:
MANILA SURETY and FIDELITY COMPANY, INC., vs. RODOLFO R. VELAYO
FACTS: If the price of the sale is less, neither shall the creditor be entitled to
recover the deficiency notwithstanding any stipulation to the contrary.
Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for
P2,800.00 for the dissolution of a writ of attachment against him. Velayo undertook By electing to sell the articles pledged, instead of suing on the principal
to pay the surety company an annual premium of P112.00. obligation, the creditor has waived any other remedy, and must abide by the
results of the sale. No deficiency is recoverable.
As "collateral security and by way of pledge" Velayo also delivered four pieces of
jewelry to the Surety Company "for the latter's further protection", with power to sell It is well to note that the rule of Article 2115 is by no means unique. It is but an
the same in case the surety paid or become obligated to pay any amount of money extension of the legal prescription contained in Article 1484(3) of the same Code,
in connection with said bond, applying the proceeds to the payment of any concerning the effect of a foreclosure of a chattel mortgage constituted to secure
amounts it paid or will be liable to pay, and turning the balance, if any, to the the price of the personal property sold in installments, and which originated in Act
persons entitled thereto, after deducting legal expenses and costs. 4110 promulgated by the Philippine Legislature in 1933.

Judgment having been rendered agaisnt Velayo, and execution having been
returned unsatisfied, the surety company was forced to pay P2,800.00 that it later
sought to recoup from Velayo; and upon the latter's failure to do so, the surety
caused the pledged jewelry to be sold, realizing therefrom a net product of
P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety
company brought suit in the Municipal Court.