PHILIPPINE NATIONAL BANK, PLAINTIFF AND APPELLEE VS. LAUREANO ATENDIDO, DEFENDANTS AND APPELLANT.

Philippine National Bank versus Atendido

The Case

This is a civil action for the collection of a sum of money, brought by the Philippine National Bank against Laureano Atendido, the borrower. The bank sues on a loan of 3,000 pesos secured by a pledge of 2,000 cavanes of palay, evidenced by a warehouse receipt endorsed in blank in favor of the bank. The palay disappeared from the warehouse before maturity, and the borrower claims that this loss released him from liability. The case matters because it fixes the nature and the consequences of a pledge of goods covered by a warehouse receipt: who owns the goods, who bears the risk of loss, and what the endorsement of the receipt really transfers.

Procedural History

The Philippine National Bank filed the action in the Court of First Instance of Nueva Ecija. The parties submitted the case on an agreed statement of facts, and the trial court rendered judgment ordering the defendant to pay the principal of 3,000 pesos, with interest at six percent per annum from June 26, 1940, plus the costs of action. The defendant appealed to the Court of Appeals, but that court certified the case to the Supreme Court on the ground that the question involved is purely one of law. The Supreme Court thus resolved the appeal directly.

Facts

On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of 3,000 pesos, payable in 120 days, with interest at six percent per annum from the date of maturity. To guarantee payment, the borrower pledged to the bank 2,000 cavanes of palay then deposited in the warehouse of Cheng Siong Lam and Company in San Miguel, Bulacan. To that effect, the borrower endorsed in favor of the bank the corresponding warehouse receipt.

Before the loan matured, the 2,000 cavanes of palay disappeared from the warehouse for unknown reasons. When the loan matured, the borrower paid neither the principal nor the interest, and so the bank instituted the present action.

The defendant set up a special defense and a counterclaim. He claimed that because the warehouse receipt had been endorsed in blank in favor of the bank and the palay had been lost, he was thereby relieved of liability. By way of counterclaim, he sought an indemnity representing the difference between the value of the palay lost and the amount of his obligation. The trial court ruled for the bank, and the defendant appealed.

Issues

• Whether or not the surrender of the warehouse receipt covering the 2,000 cavanes of palay, endorsed in blank in favor of the bank, transferred title or ownership of the goods to the bank, or should be considered merely as a guarantee to secure the payment of the borrower's obligation.
• Whether or not the loss of the pledged palay, without the fault or negligence of the pledgee, relieves the pledgor of his obligation to pay the loan.

Applicable Provisions

The decision refers to the old Civil Code, which governed the transaction. On the nature of a pledge, the Court cites Articles 1857, 1858, and 1863 of the Old Civil Code, which define the contract of pledge and its essential elements. These provisions establish that the transaction between the parties was a pledge and not a sale.

On the prohibition against the pledgee appropriating the thing pledged, Article 1859 of the Old Civil Code provides:

A pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge.

This provision is the core of the ruling: the bank could not become owner of the palay simply because the receipt was endorsed to it.

On the remedy of the pledgee upon default, Article 1872 of the Old Civil Code provides:

If the obligation is not paid upon maturity the most that the pledgee can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor.

This provision shows that the pledgee's remedy is foreclosure by sale, not ownership, and that any surplus belongs to the pledgor.

Ruling

On the first issue, the Court held that the surrender of the warehouse receipt, endorsed in blank, did not transfer ownership of the palay to the bank. The delivery was made merely as a guarantee to secure the fulfillment of the obligation. The Court relied on the express stipulation in the loan contract that the 2,000 cavanes of palay were given as a collateral security. Since the delivery was merely by way of security, ownership remained with the pledgor, subject only to foreclosure upon non-fulfillment of the obligation. The Court explained that the purpose of the endorsement in blank was merely to transfer juridical possession of the property to the pledgee and to forestall any possible disposition of it by the pledgor. This holds true notwithstanding the provisions of the Warehouse Receipt Law.

On the second issue, the Court held that because the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, the loss of the property must be borne by the pledgor. The Court quoted its recent ruling in Martinez versus Philippine National Bank:

Where a warehouse receipt or quedan is transferred or endorsed to a creditor only to secure the payment of a loan or debt, the transferee or endorsee does not automatically become the owner of the goods covered by the warehouse receipt or quedan but he merely retains the right to keep and with the consent of the owner to sell them so as to satisfy the obligation from the proceeds of the sale, this for the simple reason that the transaction involved is not a sale but only a mortgage or pledge, and that if the property covered by the quedans or warehouse receipts is lost without the fault or negligence of the mortgagee or pledgee or the transferee or endorsee of the warehouse receipt or quedan, then said goods are to be regarded as lost on account of the real owner, mortgagor or pledgor.

Accordingly, the loss of the palay did not relieve the borrower of his obligation to pay the loan.

Doctrine

A pledge is a contract of security, not of sale. The pledgor remains the owner of the thing pledged during the pendency of the obligation, and the pledgee acquires only juridical possession. The pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge. Upon default, the pledgee's remedy is to sell the property, apply the proceeds to the obligation, and return any balance to the pledgor. Where goods covered by a warehouse receipt are pledged and the receipt is endorsed in blank to the creditor merely as security, the endorsement transfers juridical possession only, not ownership, even under the Warehouse Receipt Law. If the pledged goods are lost without the fault or negligence of the pledgee, the loss falls on the pledgor as the real owner, and the obligation to pay the loan subsists.

Disposition

The Supreme Court affirmed the decision of the trial court, ordering Laureano Atendido to pay the bank 3,000 pesos with interest at six percent per annum from June 26, 1940, plus the costs of action, with costs against the appellant.

Remember This

The single line to memorize: a pledgee can never become the owner of the thing pledged, and the loss of the pledged goods without the pledgee's fault falls on the pledgor. Examiners use this case to test the nature of a pledge, the effect of endorsing a warehouse receipt in blank as security, and the rule on risk of loss.