Credit Transactions

CASE 1: TIDCORP vs. ASPAC
G.R. No. 187403
February 12, 2014
TRADE AND INVESTMENT DEVELOPMENT CORPORATION OF THE PHILIPPINES
(Formerly PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION.)
vs.
ASIA PACES CORPORATION, PACES INDUSTRIAL CORPORATION, NICOLAS C.
BALDERRAMA, SIDDCOR INSURANCE CORPORATION (now MEGA PACIFIC
INSURANCE CORPORATION), PHILIPPINE PHOENIX SURETY AND INSURANCE, INC.,
PARAMOUNT INSURANCE CORPORATION,* AND FORTUNE LIFE AND GENERAL
INSURANCE COMPANY
FACTS: Asia Paces Corporation (ASPAC) and Paces Industrial Corporation (PICO) entered
into a sub-contracting agreement with the Electrical Projects Company of Libya (ELPCO for
the construction and erection of a double circuit bundle phase conductor transmission line
in the country of Libya. To finance its working capital requirements, ASPAC obtained loans
from foreign banks Banque Indosuez and PCI Capital (Hong Kong) Limited (PCI Capital)
which were secured by several Letters of Guarantee issued by Trade and Investment
Development Corporation of the Philippines (TIDCORP), then Philippine Export and
Foreign Loan Guarantee Corp. Under the Letters of Guarantee, TIDCORP irrevocably and
unconditionally guaranteed full payment of ASPAC’s loan obligations to Banque Indosuez
and PCI Capital in the event of default by the latter.
As a condition precedent to the issuance by TIDCORP of the Letters of Guarantee, ASPAC,
PICO, and ASPAC’s President, Nicolas C. Balderrama (Balderrama) had to execute several
Deeds of Undertaking, binding themselves to jointly and severally pay TIDCORP for
whatever damages or liabilities it may incur under the aforementioned letters. In the same
light, ASPAC, as principal debtor, entered into surety agreements (Surety Bonds) with
Paramount, Phoenix, Mega Pacific and Fortune (bonding companies), as sureties, also
holding themselves solidarily liable to TIDCORP, as creditor, for whatever damages or
liabilities the latter may incur under the Letters of Guarantee.
ASPAC eventually defaulted on its loan obligations to Banque Indosuez and PCI Capital.
Demand letters to the bonding companies were sent but to no avail. Taking into account the
moratorium request issued by the Minister of Finance of the Republic of the Philippines,
TIDCORP and its various creditor banks, such as Banque Indosuez and PCI Capital, forged
a Restructuring Agreement extending the maturity dates of the Letters of Guarantee. The
bonding companies were not privy to the Restructuring Agreement and, hence, did not give
their consent to the payment extensions. Nevertheless, following new payment schedules,
TIDCORP fully settled its obligations. Seeking payment for the damages and liabilities it had
incurred under the Letters of Guarantee and with its previous demands therefor left
unheeded, TIIDCORP filed a collection case against: (a) ASPAC, PICO, and Balderrama on
account of their obligations under the deeds of undertaking; and (b) the bonding companies
on account of their obligations under the Surety Bonds.
The RTC partially granted TIDCORP’s complaint and thereby found ASPAC, PICO, and
Balderrama jointly and severally liable to TIDCORP but absolved the bonding companies

from liability on the ground that the moratorium request and the consequent payment
extensions granted by Banque Indosuez and PCI Capital in TIDCORP’s favor without their
consent extinguished their obligations under the Surety Bonds. On appeal, the CA upheld
the ruling of RTC. Hence, this appeal filed by TIDCORP.
ISSUE: Whether or not the bonding companies’ liabilities to TIDCORP under the
Surety Bonds have been extinguished by the payment extensions granted by Banque
Indosuez and PCI Capital to TIDCORP under the Restructuring Agreement.
HELD: NO. The Court finds that the payment extensions granted by Banque Indosuez
and PCI Capital to TIDCORP under the Restructuring Agreement did not have the
effect of extinguishing the bonding companies’ obligations to TIDCORP under the
Surety Bonds, notwithstanding the fact that said extensions were made without their
consent. This is because Article 2079 of the Civil Code refers to a payment extension
granted by the creditor to the principal debtor without the consent of the guarantor or surety.
In this case, the Surety Bonds are suretyship contracts which secure the debt of ASPAC,
the principal debtor, under the Deeds of Undertaking to pay TIDCORP, the creditor, the
damages and liabilities it may incur under the Letters of Guarantee, within the bounds of the
bonds’ respective coverage periods and amounts. No payment extension was, however,
granted by TIDCORP in favor of ASPAC in this regard; hence, Article 2079 of the Civil
Code should not be applied with respect to the bonding companies’ liabilities to
TIDCORP under the Surety Bonds.
The payment extensions granted by Banque Indosuez and PCI Capital pertain to
TIDCORP’s own debt under the Letters of Guarantee wherein it (TIDCORP) irrevocably and
unconditionally guaranteed full payment of ASPAC’s loan obligations to the banks in the
event of its (ASPAC) default. In other words, the Letters of Guarantee secured ASPAC’s
loan agreements to the banks. Under this arrangement, TIDCORP therefore acted as a
guarantor, with ASPAC as the principal debtor, and the banks as creditors.
Proceeding from the foregoing discussion, it is quite clear that there are two sets of
transactions that should be treated separately and distinctly from one another
following the civil law principle of relativity of contracts "which provides that contracts
can only bind the parties who entered into it, and it cannot favor or prejudice a third person,
even if he is aware of such contract and has acted with knowledge thereof." Verily, as the
Surety Bonds concern ASPAC’s debt to TIDCORP and not TIDCORP’s debt to the banks,
the payments extensions would not deprive the bonding companies of their right to
pay their creditor (TIDCORP) and to be immediately subrogated to the latter’s
remedies against the principal debtor (ASPAC) upon the maturity date. It must be
stressed that these payment extensions did not modify the terms of the Letters of
Guarantee but only provided for a new payment scheme covering TIDCORP’s liability to the
banks. In fine, considering the inoperability of Article 2079 of the Civil Code in this
case, the bonding companies’ liabilities to TIDCORP under the Surety Bonds – except
those issued by Paramount and covered by its Compromise Agreement with
TIDCORP – have not been extinguished.

CASE 2: BUCTON vs. RURAL BANK OF EL SALVADOR, INC.
G.R. No. 179625
February 24, 2014
NICANORA G. BUCTON (deceased), substituted by REQUILDA B. YRAY, Petitioner,
vs. RURAL BANK OF EL SALVADOR, INC., MISAMIS ORIENTAL, and REYNALDO
CUYONG, Respondents, vs. ERLINDA CONCEPCION AND HER HUSBAND AND
AGNES BUCTON LUGOD, Third Party Defendants.
Doctrine: A mortgage executed by an authorized agent who signed in his own name without
indicating that he acted for and on behalf of his principal binds only the agent and not the
principal.
FACTS: Bucton is the owner of a parcel of land covered by a TCT. Concepcion borrowed
the title on the pretext that she was going to show it to an interested buyer; when in fact,
she obtained a loan in the amount of P30,000.00 from Rural Bank. As security for the loan,
Concepcion mortgaged Bucton’s house and lot to Rural bank using a SPA allegedly
executed by Bucton in favor of Concepcion. Concepcion failed to pay the loan, thus, the
house and lot were foreclosed by respondent sheriff without a Notice of Extra-Judicial
Foreclosure or Notice of Auction Sale; and Bucton’s house and lot were sold in an auction
sale in favor of Rural Bank.
During the trial, petitioner testified that a representative of respondent bank went to her
house to inform her that the loan secured by her house and lot was long overdue. 26 Since
she did not mortgage any of her properties nor did she obtain a loan from respondent bank,
she decided to go to respondent bank on June 22, 1987 to inquire about the matter. 27 It was
only then that she discovered that her house and lot was mortgaged by virtue of a forged
SPA.28 She insisted that her signature and her husband’s signature on the SPA were
forged29 and that ever since she got married, she no longer used her maiden name,
Nicanora Gabar, in signing documents.30 Petitioner also denied appearing before the notary
public, who notarized the SPA.31 She also testified that the property referred to in the SPA,
TCT No. 3838, is a vacant lot and that the house, which was mortgaged and foreclosed, is
covered by a different title, TCT No. 3839.32
To support her claim of forgery, petitioner presented Emma Nagac who testified that when
she was at Concepcion’s boutique, she was asked by the latter to sign as a witness to the
SPA;33 that when she signed the SPA, the signatures of petitioner and her husband had
already been affixed;34 and that Lugod instructed her not to tell petitioner about the SPA. 35
Respondent bank, on the other hand, presented the testimonies of its employees 36 and
respondent sheriff. Based on their testimonies, it appears that on June 8, 1982, Concepcion
applied for a loan for her coconut productionbusiness37 in the amount of P40,000.00 but
only the amount of P30,000.00 was approved;38 that she offered as collateral petitioner’s

house and lot using the SPA;39 and that the proceeds of the loan were released to
Concepcion and Lugod on June 11, 1982.40
The RTC decreed the SPA, real estate mortagage, sheriff’s sale and certificate of title null
and void. On appeal, the CA reversed the findings of the RTC. The CA found no cogent
reason to invalidate the SPA, the Real Estate Mortgage, and Foreclosure Sale as it was not
convinced that the SPA was forged. Hence, this appeal.
ISSUE: Whether or not Bucton is liable to pay the real estate mortgage entered into
by Concepcion with the Rural Bank of El Salvador.
HELD: NO, Bucton is not liable.
The Real Estate Mortgage was entered into by Concepcion in her own personal
capacity.
In this case, the authorized agent failed to indicate in the mortgage that she was acting for
and on behalf of her principal. The Real Estate Mortgage, explicitly shows on its face, that it
was signed by Concepcion in her own name and in her own personal capacity. In fact, there
is nothing in the document to show that she was acting or signing as an agent of petitioner.
Thus, consistent with the law on agency and established jurisprudence, petitioner cannot be
bound by the acts of Concepcion.
In light of the foregoing, there is no need to delve on the issues of forgery of the SPA and
the nullity of the foreclosure sale. For even if the SPA was valid, the Real Estate Mortgage
would still not bind petitioner as it was signed by Concepcion in her personal capacity and
not as an agent of petitioner. Simply put, the Real Estate Mortgage is void and
unenforceable against petitioner.
Respondent bank was negligent.
At this point, we find it significant to mention that respondent bank has no one to blame but
itself. Not only did it act with undue haste when it granted and released the loan in less than
three days, it also acted negligently in preparing the Real Estate Mortgage as it failed to
indicate that Concepcion was signing it for and on behalf of petitioner. We need not belabor
that the words "as attorney-in-fact of," "as agent of," or "for and on behalf of," are vital in
order for the principal to be bound by the acts of his agent. Without these words, any
mortgage, although signed by the agent, cannot bind the principal as it is considered to
have been signed by the agent in his personal capacity.
CASE 3: PNB vs. SPS. MANALO
G.R. No. 174433
February 24, 2014
PHILIPPINE NATIONAL BANK, Petitioner, vs. SPOUSES ENRIQUE MANALO &
ROSALINDA JACINTO, ARNOLD J. MANALO, ARNEL J. MANALO, and ARMA J.
MANALO, Respondents.

Doctrine: Although banks are free to determine the rate of interest they could impose on
their borrowers, they can do so only reasonably, not arbitrarily. They may not take
advantage of the ordinary borrowers' lack of familiarity with banking procedures and jargon.
Hence, any stipulation on interest unilaterally imposed and increased by them shall be
struck down as violative of the principle of mutuality of contracts.
FACTS: Spouses Manalo applied for an All-Purpose Credit Facility in the amount
of P1,000,000.00 with Philippine National Bank (PNB) to finance the construction of their
house. After PNB granted their application, they executed a Real Estate Mortgage in favor
of PNB over their property covered by Transfer Certificate of Title (TCT) as security for the
loan. The credit facility was renewed and increased several times over the years. As a
consequence, the parties executed a Supplement to and Amendment of Existing Real
Estate Mortgage whereby another property was added as security for the loan. It was
registered in the names of respondents Arnold, Arnel, Anthony, and Arma, all surnamed
Manalo, who were their children.
It was agreed upon that the Spouses Manalo would make monthly payments on the
interest. However, PNB claimed that their last recorded payment was made on December,
1997. Thus, PNB sent a demand letter to them on their overdue account and required them
to settle the account. PNB sent another demand letter because they failed to heed the first
demand.
After the Spouses Manalo still failed to settle their unpaid account despite the two demand
letters, PNB foreclose the mortgage. During the foreclosure sale, PNB was the highest
bidder for P15,127,000.00 of the mortgaged properties of the Spouses Manalo. The sheriff
issued to PNB the Certificate of Sale dated November 13, 2000.
After more than a year after the Certificate of Sale had been issued to PNB, the Spouses
Manalo instituted this action for the nullification of the foreclosure proceedings and
damages. They alleged that they had obtained a loan for P1,000,000.00 from a certain
Benito Tan upon arrangements made by Antoninus Yuvienco, then the General
Manager of PNB’s Bangkal Branch where they had transacted; that they had been
made to understand and had been assured that the P1,000,000.00 would be used to
update their account, and that their loan would be restructured and converted into a
long-term loan; that they had been surprised to learn, therefore, that had been declared in
default of their obligations, and that the mortgage on their property had been foreclosed and
their property had been sold; and that PNB did not comply with Section 3 of Act No. 3135,
as amended. In reply, PNB and Antoninus Yuvienco denied the allegations of the Spouses
Manalo.
After trial, the RTC rendered its decision in favor of PNB. On appeal, the CA affirmed the
decision of the RTC insofar as it upheld the validity of the foreclosure proceedings initiated
by PNB, but modified the Spouses Manalo’s liability for interest. The CA further held that
PNB could not unilaterally increase the rate of interest considering that the credit
agreements specifically provided that prior notice was required before an increase in
interest rate could be effected. It found that PNB did not adduce proof showing that the

Spouses Manalo had been notified before the increased interest rates were imposed; and
that PNB’s unilateral imposition of the increased interest rate was null and void for being
violative of the principle of mutuality of contracts enshrined in Article 1308 of the Civil Code.
Reinforcing its "contract of adhesion" conclusion, it added that the Spouses Manalo’s being
in dire need of money rendered them to be not on an equal footing with PNB. Thus, thi
appeal filed by PNB.
ISSUE: Whether or not the stipulation on interest unilaterally imposed and increased
by PNB is violative of the principle of mutuality of contracts
HELD: YES. The credit agreement executed succinctly stipulated that the loan would
be subjected to interest at a rate "determined by the Bank to be its prime rate plus
applicable spread, prevailing at the current month." This stipulation was carried over to
or adopted by the subsequent renewals of the credit agreement. PNB thereby arrogated
unto itself the sole prerogative to determine and increase the interest rates imposed on the
Spouses Manalo. Such a unilateral determination of the interest rates contravened the
principle of mutuality of contracts embodied in Article 1308 of the Civil Code.
The Court has declared that a contract where there is no mutuality between the parties
partakes of the nature of a contract of adhesion, and any obscurity will be construed against
the party who prepared the contract, the latter being presumed the stronger party to the
agreement, and who caused the obscurity. PNB should then suffer the consequences of its
failure to specifically indicate the rates of interest in the credit agreement.
PNB could not also justify the increases it had effected on the interest rates by citing the
fact that the Spouses Manalo had paid the interests without protest, and had renewed the
loan several times. We rule that the CA, citing Philippine National Bank v. Court of
Appeals, rightly concluded that "a borrower is not estopped from assailing the unilateral
increase in the interest made by the lender since no one who receives a proposal to change
a contract, to which he is a party, is obliged to answer the same and said party’s silence
cannot be construed as an acceptance thereof."
Lastly, the CA observed, and properly so, that the credit agreements had explicitly provided
that prior notice would be necessary before PNB could increase the interest rates. In failing
to notify the Spouses Manalo before imposing the increased rates of interest, therefore,
PNB violated the stipulations of the very contract that it had prepared. Hence, the varying
interest rates imposed by PNB have to be vacated and declared null and void, and in their
place an interest rate of 12% per annum computed from their default is fixed pursuant to the
ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.
CASE 4: HOMEOWNERS SAVINGS AND LOAN BANK vs. FELONIA
G.R. No. 189477
February 26, 2014
HOMEOWNERS SAVINGS AND LOAN BANK, Petitioner-Appellant, vs. ASUNCION P.
FELONIA and LYDIA C. DE GUZMAN, represented by MARIBEL FRIAS, RespondentsAppellees.

HELD: NO, it does not apply. (HSLB is not a “purchaser in good faith”.)
FACTS: Felonia and De Guzman were the registered owners of a parcel of land consisting
of 532 square meters with a five-bedroom house, covered by Transfer of Certificate of Title
(TCT) No. T-402 issued by the register of deeds of Las Piñas City. They mortgaged the
property to Delgado to secure the loan in the amount of P1,655,000.00. However, instead of
a real estate mortgage, the parties executed a Deed of Absolute Sale with an Option to
Repurchase. Felonia and De Guzman filed an action for Reformation of Contract
(Reformation case). The RTC rendered a judgment favorable to Felonia and De Guzman.
Aggrieved, Delgado elevated the case to the CA where the latter affirmed the trial court
decision. Inspite of the pendency of the Reformation case in which she was the defendant,
Delgado filed a "Petition for Consolidation of Ownership of Property Sold with an Option to
Repurchase and Issuance of a New Certificate of Title" (Consolidation case). After an exparte hearing, the RTC ordered the issuance of a new title under Delgado’s name. By virtue
of the RTC decision, Delgado transferred the title to her name. Hence, TCT No. T-402,
registered in the names of Felonia and De Guzman, was canceled and TCT No. 44848 in
the name of Delgado, was issued.
Aggrieved, Felonia and De Guzman elevated the case to the CA through a Petition for
Annulment of Judgment.
Meanwhile, Delgado mortgaged the subject property
to Homeowners Savings and Loan Bank (HSLB) using her newly registered title. Three (3)
days later, HSLB caused the annotation of the mortgage.
Felonia and De Guzman caused the annotation of a Notice of Lis Pendens on Delgado’s
title, TCT No. 44848. On 20 November1997, HSLB foreclosed the subject property and later
consolidated ownership in its favor, causing the issuance of a new title in its name, TCT No.
64668.
On 27 October 2000, the CA annulled and set aside the decision of the RTC in the
Consolidation case. The decision of the CA, declaring Felonia and De Guzman as the
absolute owners of the subject property and ordering the cancellation of Delgado’s title.
On 29 April 2003, Felonia and De Guzman, represented by Maribel Frias (Frias), claiming to
be the absolute owners of the subject property, instituted the instant complaint against
Delgado, HSLB, Register of Deeds of Las Piñas City and Rhandolfo B. Amansec before the
RTC of Las Piñas City for Nullity of Mortgage and Foreclosure Sale, Annulment of Titles of
Delgado and HSLB, and finally, Reconveyance of Possession and Ownership of the subject
property in their favor.
After trial, the RTC ruled in favor of Felonia and De Guzman as the absolute owners of the
subject property. On appeal, the CA affirmed with modifications the trial court decision.
Hence, this petition.
ISSUE: Whether or not the doctrine of mortgagee in good faith applies in the instant
case.

When the property was mortgaged to HSLB, the registered owner of the subject
property was Delgado who had in her name TCT No. 44848. Thus, HSLB cannot be
faulted in relying on the face of Delgado’s title. The records indicate that Delgado was at
the time of the mortgage in possession of the subject property and Delgado’s title did not
contain any annotation that would arouse HSLB’s suspicion. HSLB, as a mortgagee, had a
right to rely in good faith on Delgado’s title, and in the absence of any sign that might
arouse suspicion, HSLB had no obligation to undertake further investigation.
However, the rights of the parties to the present case are defined not by the determination
of whether or not HSLB is a mortgagee in good faith, but of whether or not HSLB is a
purchaser in good faith. And, HSLB is not such a purchaser.
A purchaser in good faith is defined as one who buys a property without notice that some
other person has a right to, or interest in, the property and pays full and fair price at the time
of purchase or before he has notice of the claim or interest of other persons in the
property.19
When a prospective buyer is faced with facts and circumstances as to arouse his suspicion,
he must take precautionary steps to qualify as a purchaser in good faith.
In the case at bar, HSLB utterly failed to take the necessary precautions. At the time the
subject property was mortgaged, there was yet no annotated Notice of Lis Pendens.
However, at the time HSLB purchased the subject property, the Notice of Lis Pendens was
already annotated on the title.
Lis pendens is a Latin term which literally means, "a pending suit or a pending litigation"
while a notice of lis pendens is an announcement to the whole world that a real property is
in litigation, serving as a warning that anyone who acquires an interest over the property
does so at his/her own risk, or that he/she gambles on the result of the litigation over the
property. It is a warning to prospective buyers to take precautions and investigate the
pending litigation.
Indeed, at the time HSLB bought the subject property, HSLB had actual knowledge of the
annotated Notice of Lis Pendens. Instead of heeding the same, HSLB continued with the
purchase knowing the legal repercussions a notice of lis pendens entails. HSLB took upon
itself the risk that the Notice of Lis Pendens leads to. As correctly found by the CA, "the
notice of lis pendens was annotated on 14 September 1995, whereas the foreclosure sale,
where the appellant was declared as the highest bidder, took place sometime in 1997.
There is no doubt that at the time appellant purchased the subject property, it was aware of
the pending litigation concerning the same property and thus, the title issued in its favor was
subject to the outcome of said litigation.”
The subject of the lis pendens on the title of HSLB’s vendor, Delgado, is the "Reformation
case" filed against Delgado by the herein respondents. The case was decided with finality
by the CA in favor of herein respondents. The contract of sale in favor of Delgado was
ordered reformed into a contract of mortgage. By final decision of the CA, HSLB’s vendor,

Delgado, is not the property owner but only a mortgagee. As it turned out, Delgado could
not have constituted a valid mortgage on the property. That the mortgagor be the absolute
owner of the thing mortgaged is an essential requisite of a contract of mortgage. Article
2085 (2) of the Civil Code specifically says so:
Art. 2085. The following requisites are essential to the contracts of pledge and
mortgage:
xxxx
(2) That the pledgor or mortagagor be the absolute owner of the thing pledged or
mortgaged.
Insofar as the HSLB is concerned, there is no longer any public interest in upholding the
indefeasibility of the certificate of title of its mortgagor, Delgado. Such title has been nullified
in a decision that had become final and executory. Its own title, derived from the foreclosure
of Delgado's mortgage in its favor, has likewise been nullified in the very same decision that
restored the certificate of title in respondents' name. There is absolutely no reason that can
support the prayer of HSLB to have its mortgage lien carried over and into the restored
certificate of title of respondents.
CASE 5: DBP vs. GUARIÑA CORPORATION
G.R. No. 160758
January 15, 2014
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs. GUARIÑA
AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION, Respondent.
Doctrine: The foreclosure of a mortgage prior to the mortgagor's default on the principal
obligation is premature, and should be undone for being void and ineffectual. The
mortgagee who has been meanwhile given possession of the mortgaged property by virtue
of a writ of possession issued to it as the purchaser at the foreclosure sale may be required
to restore the possession of the property to the mortgagor and to pay reasonable rent for
the use of the property during the intervening period.
FACTS: Guariña Corporation applied for a loan from DBP to finance the development of its
resort complex situated in Trapiche, Oton, Iloilo. The loan of P3,387,000.00, was approved
on August 5, 1976. Guariña Corporation executed a promissory note that would be due on
November 3, 1988. On October 5, 1976, Guariña Corporation executed a real estate
mortgage over several real properties in favor of DBP as security for the repayment of the
loan. On May 17, 1977, Guariña Corporation executed a chattel mortgage over the personal
properties existing at the resort complex and those yet to be acquired out of the proceeds of
the loan, also to secure the performance of the obligation. Prior to the release of the loan,
DBP required Guariña Corporation to put up a cash equity of P1,470,951.00 for the
construction of the buildings and other improvements on the resort complex.
The loan was released in several instalments, and Guariña Corporation used the proceeds
to defray the cost of additional improvements in the resort complex. In all, the amount
released totalled P3,003,617.49, from which DBP withheld P148,102.98 as interest.

Guariña Corporation demanded the release of the balance of the loan, but DBP refused.
Instead, DBP directly paid some suppliers of Guariña Corporation over the latter's objection.
DBP found upon inspection of the resort project, its developments and improvements that
Guariña Corporation had not completed the construction works. DBP thus demanded that
Guariña Corporation expedite the completion of the project, and warned that it would initiate
foreclosure proceedings should Guariña Corporation not do so.
Unsatisfied with the non-action and objection of Guariña Corporation, DBP initiated
extrajudicial foreclosure proceedings. A notice of foreclosure sale was sent to Guariña
Corporation. The notice was eventually published, leading the clients and patrons of
Guariña Corporation to think that its business operation had slowed down, and that its
resort had already closed.
Guariña Corporation sued DBP in the RTC to demand specific performance of the latter's
obligations under the loan agreement, and to stop the foreclosure of the mortgages.
However, DBP moved for the dismissal of the complaint, stating that the mortgaged
properties had already been sold to satisfy the obligation of Guariña Corporation at a public
auction. Due to this, Guariña Corporation amended the complaint to seek the nullification of
the foreclosure proceedings and the cancellation of the certificate of sale.
In the meantime, DBP applied for the issuance of a writ of possession by the RTC. At first,
the RTC denied the application but later granted it upon DBP's motion for reconsideration.
Aggrieved, Guariña Corporation assailed the granting of the application before the CA on
certiorari. After the CA dismissed the petition for certiorari, DBP sought the implementation
of the order for the issuance of the writ of possession. Over Guariña Corporation's
opposition, the RTC issued the writ of possession on June 16, 1982. Both the RTC and CA
ruled that the extrajudicial sale of the mortgaged properties is null and void. Hence, this
appeal by DBP.
ISSUE: Whether or not the foreclosure of a mortgage prior to the mortgagor’s default
on the principal obligation is valid.
HELD: NO, the foreclosure of the mortgage is premature and should be nullified.
The agreement between DBP and Guariña Corporation was a loan. Under the law, a
loan requires the delivery of money or any other consumable object by one party to another
who acquires ownership thereof, on the condition that the same amount or quality shall be
paid. Loan is a reciprocal obligation, as it arises from the same cause where one party is
the creditor, and the other the debtor. The obligation of one party in a reciprocal obligation is
dependent upon the obligation of the other, and the performance should ideally be
simultaneous. This means that in a loan, the creditor should release the full loan amount
and the debtor repays it when it becomes due and demandable.
By its failure to release the proceeds of the loan in their entirety, DBP had no right yet to
exact on Guariña Corporation the latter's compliance with its own obligation under the loan.
Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the

other party cannot be obliged to perform what is expected of it while the other's obligation
remains unfulfilled. In other words, the latter party does not incur delay.
Still, DBP called upon Guariña Corporation to make good on the construction works
pursuant to the acceleration clause written in the mortgage contract (i.e., Stipulation No.
26), or else it would foreclose the mortgages.
DBP's actuations were legally unfounded. It is true that loans are often secured by a
mortgage constituted on real or personal property to protect the creditor's interest in case of
the default of the debtor. By its nature, however, a mortgage remains an accessory
contract dependent on the principal obligation, such that enforcement of the
mortgage contract will depend on whether or not there has been a violation of the
principal obligation. While a creditor and a debtor could regulate the order in which they
should comply with their reciprocal obligations, it is presupposed that in a loan the lender
should perform its obligation - the release of the full loan amount - before it could demand
that the borrower repay the loaned amount. In other words, Guariña Corporation would
not incur in delay before DBP fully performed its reciprocal obligation.
Considering that it had yet to release the entire proceeds of the loan, DBP could not yet
make an effective demand for payment upon Guariña Corporation to perform its obligation
under the loan. Hence, Guariña Corporation would not be in default without the demand.

Under the circumstances, DBP's foreclosure of the mortgage and the sale of the
mortgaged properties at its instance were premature, and, therefore, void and
ineffectual.
Being a banking institution, DBP owed it to Guariña Corporation to exercise the highest
degree of diligence, as well as to observe the high standards of integrity and performance in
all its transactions because its business was imbued with public interest. Thus, DBP had to
act with great care in applying the stipulations of its agreement with Guariña Corporation,
lest it erodes such public confidence. Yet, DBP failed in its duty to exercise the highest
degree of diligence by prematurely foreclosing the mortgages and unwarrantedly
causing the foreclosure sale of the mortgaged properties despite Guariña
Corporation not being yet in default. DBP wrongly relied on Stipulation No. 26 as its
basis to accelerate the obligation of Guariña Corporation, for the stipulation was relevant to
an Omnibus Agricultural Loan, to Guariña Corporation's loan which was intended for a
project other than agricultural in nature.